A2 Milk beats expectations in December half, warns of challenges in China market

The dairy group beat expectations and continues to grow its market share in a challenging Chinese market, but pushed out longer-term targets as birthrates fall.

A2 Milk had a better first half than markets had expected. Picture: Mark Wilson

A2 Milk has upgraded its annual revenue guidance after a better-than-expected first half, as the dairy company warned that its key infant formula market remained challenging despite early signs of stabilising.

The New Zealand-based company told investors it was now a top five infant milk formula brand in China at a time when the market was shrinking as a result of falling birthrates in the country, which fell 5.6 per cent to 9 million in 2023.

A2 Milk increased its first-half profit by nearly 16 per cent to $NZ85.3m — 15 per cent better than market expectations. Underlying earnings rose 5 per cent to $NZ113.3m ($106.3m) while revenue jumped 4 per cent to $NZ812.1m.

The result was driven by a better-than-expected transition to new GB registered China label infant milk formula, which made up nearly 17 per cent of net sales. Revenue rose 3.7 per cent to $NZ812.1m.

The overall China IMF market dropped nearly 11 per cent in volume and 14 per cent in value in the half. The decline in top tier cities fell by 14 per cent in the period, and value slid by more than 13 per cent.

A2 Milk chief executive David Bortolussi said the company increased its IMF sales in a market that was down double-digits, with China label sales up significantly. This came as market spend jumped significantly to $137m over the six months to December 31.

“Our product transition of our new GB registered China label product which transitioned in the second quarter went better than we expected. We had factored some risk associated with that transition, which thankfully did not happen,” he said.

Kevin Bush, executive general manager of Australia and New Zealand for A2 Milk. Picture: Aaron Francis/NCA NewsWire

A2 Milk also upgraded its revenue outlook for the remainder of the 2024 financial year from low single digit growth to low to mid-single digit revenue growth because of a modest increase in the number of babies being born in China.

The bullish update triggered a 12.5 per cent jump in the group’s share price to a 10-month high of $5.68 on Monday.

Mr Bortolussi said that the brand’s marketing and ultra-premium positioning has helped the company to continue its market share in China at the expense of a shrinking pie driven by a falling birthrate.

“We were the pioneers in the A1 free category, the leaders of the category and communicating that proposition which has resonated really well with consumers,” he said.

“The A2 brand has really developed quite well over time and our brand health metrics have grown strongly over time, so it’s a combination of our ultra-premium positioning made and of course from formulation made from New Zealand A2 milk which is highly regarded.”

The company also extended the time frame to achieve $NZ2bn ($1.88bn) revenue by the 2026 financial year until the following fiscal year or even later because of fewer births in China than when it first set the ambition in October 2021.

Mr Bortolussi said that while the company had continued to grow revenue and that the market in China is showing early signs of stabilisation, it’s going to take longer for the market to recover than it had expected in 2021.

“When we now look at forward modelling, while it’s still possible that we may get there by FY26, it’s probably more likely now that we’ll get there in FY27 or later,” he said.

“It’s not as though there’s any particular event or anything, it’s just that the rolling impact of the newborns penetration consumption rates has led us to believe that it’s probably too much of a stretch.”

Mr Bortolussi added that to achieve the medium-term revenue ambition would require an additional $NZ380m in revenue growth on calendar year 2023 over the next 2.5 years, which would translate into revenue growth of 9 per cent with higher growth required in the 2025 and 2026 financial years, based on the company’s revenue guidance for 2024 fiscal year.

In the short-term, A2 Milk said signs suggested that there could be a higher number of newborns in 2024, including delayed births due to Covid-19, recent marriage rates, pregnancy indicators, government initiatives and historical birth rates prior to the “Year of the Dragon”.

The rolling impact of fewer newborns in prior years reduced China IMF market Stage 3 sales (the largest segment of the IMF market) in particular, which declined by nearly 19 per cent in the six months to December 31.

Over the six months to June, A2 Milk will launch its first new English label formula product in 10 years called A2 Gentle Gold, which will be aided at the premium end of the market.

In addition to an improved revenue growth guidance for the coming six months, A2 Milk expects its underlying earnings margin to be broadly in line with a year ago and capital expenditure to increase to $NZ30m, up on its $26m forecast in August.

A2 Milk shares closed