A2 lifts first-half profit, seals Fonterra partnership

A2 Milk’s first-half profit has risen sharply, as it unveils a new supply deal with Fonterra, the world’s largest dairy exporter.

A2 CEO Geoff Babidge, soon to be replaced by former Jetstar chief Jayne Hrdlicka, Pic: Hollie Adams

Strong growth of its infant formula products in the Australian and China market have boosted the net profit of the A2 milk company by 150 per cent to $NZ98.5 million for the six months to the end of December.

The ASX and NZX-listed, New Zealand-based dairy products marketing company (A2M), reported a 70 per cent increase in revenues during its first half to $NZ434.7 million.

A2 shares jumped 25 per cent in New Zealand trade.

Strong sales in China, particularly of its a2 Platinum brand infant formula, helped to boost its Asian sales by more than 200 per cent to $NZ114 million, driving a 252 per cent increase in earnings before interest, depreciation and tax to $NZ48.3 million.

This compares with a 47 per cent increase in its sales in Australia and New Zealand to $NZ304 million over the half, generating a 65 per cent increase in EBITDA to $NZ116.4 million.

The fast-growing company also announced a supply, sales and marketing deal with New Zealand milk giant Fonterra.

This will include the manufacture of products at Fonterra’s factory in Darnum in Victoria for sale by A2 Milk in South East Asia and the Middle East.

A2 Milk has an existing agreement with New Zealand based Synlait Milk to supply infant formula product but the rapid growth of the company has seen a demand for a significant increase in supply and distribution.

The company described the deal with Fonterra as a “comprehensive strategic relationship encompassing a range of supply, distribution, sales and marketing arrangements in targeted markets.”

Synlait Milk last year successfully applied for registration in China for the A2 Milk infant formula products to comply with stricter new regulations which came into force on January 1 this year.

A2 Milk managing director Geoffrey Babidge, soon to be replaced by former Jetstar chief Jayne Hrdlicka, said today that the strong financial performance reflected “the growing strength of our brand proposition, the successful execution of in-market growth strategies and the continued strong performance of our supply chain.”

“Consumer interest in the benefits of dairy-based products, free of the A1 beta casein protein type, continues to grow.

“Our distribution networks grew significantly in the first half of the year, particularly in China and the United States.”

He said the company was pleased with its continuing strong growth in market share in the infant formula market in China “along with our success in adapting to the evolving regulatory environment in that market.”

The company did particularly well out of the annual November 11 “Singles Day” online sales shopping festival last year in China where its A2 Platinum product ranked in the top three of all major online sales platforms.

The company said it was also expanding its sales to more than 6,700 bricks and mortar mother and baby stores in China.

While the company performed well in China and Australia, Mr Babidge said it was also stepping up its marketing plans in the US and the UK, where it sells fresh milk, and South East Asia.

The company was admitted to the ASX 100 index in December last year.

The company reported an increase in net operating cash flow from $NZ38 million in the last six months of 2016 to $NZ116.4 million in the December 2017 half.

It also doubled its cash on hand over the period from $NZ121 million at the end of June 2017 to $NZ240 million at the end of December.

Mr Babidge said the company had laid the foundations for “further strong expansion in the second half.”