A2 Milk surges as pricing rebounds

The A2 Milk Company has upgraded its expected margins for 2020, sending its shares 11 per cent higher

A2 Milk CEO Jayne Hrdlicka. Picture: Stuart McEvoy

A2 Milk chief executive Jayne Hrdlicka says the company is “demonstrating results behind our words” after unexpectedly upgrading its expected margins for 2020 underpinned by continued strong pricing in the China market and cost cutting, sending its shares 11 per cent higher.

A2 yesterday broke with tradition and did not provide earnings for the first quarter of 2020 but said first-half revenue was expected to be between $780 million to $800 million, which at the midpoint of the guidance range is 29 per cent up on last year.

A2 has become one of the most closely watched stocks on the market as its share price has fallen significantly over the past three months amid growing concerns about its hefty marketing spend and pricing for its booming infant formula products in China.

After languishing below the $12 mark for the past month the shares rocketed back over $14 Tuesday to touch a high of $14.20 before they closed at $13.34.

The boost came about after A2 said its full year EBITDA margin percentage would be in the range of 29 to 30 per cent.

READ MORE: US fund Ruane, Cunniff & Goldfarb stands by A2 strategy

At its August results the company said the margin was expected to be broadly consistent with the second-half earnings margin in 2019 of 28.2 per cent as it stepped up marketing spending in 2020. This is what had disappointed investors.

Ms Hrdlicka told the company’s annual general meeting in Auckland yesterday that the better-than-expected forecast was underpinned by “improved price yield” and lower costs, including a favourable currency translation.

This was despite A2’s international peers such as US healthcare giant Abbott and multinationals Nestle, Reckitt Benckiser, Danone and Beingmate recently noting pricing and promotional pressure in the Chinese market during the third quarter.

“We have a very strong brand and that gives you the ability to invest behind the brand, while capturing a lot of engagement from the consumer,’’ she said.

“It is a combination of price plus good cost management and price management.”

A2 added yesterday that the earnings margin percentage in the first half would be in the range of 31-32 per cent as marketing investment of $200 million this year would be weighted more towards the second half.

The full-year marketing spend has been pulled back slightly from $212 million to $200 million. Although this is up from the $135 million A2 spent on marketing in the year ended June 30.

That decision is likely to appease some investors, who have questioned the amount of money the company has been spending on building internal infrastructure and consultants over the past year.

But A2 investor, the New York-based value manager Ruane, Cunniff & Goldfarb, told The Australian this week there were “right and wrong ways to utilise consultants.

“We trust Jayne — an ex-consultant herself — to know the difference,’’ said RCG’s investment analyst Will Pan. Ms Hrdlicka previously worked for Bain & Co.

A2 is expecting 84 per cent growth of China label infant nutrition revenue to $135 million, 54 per cent growth of cross-border e-commerce infant nutrition sales to $155 million, 9 per cent growth of ANZ English infant nutrition sales to $350 million, 110 per cent growth of US sales to $27 million and 12 per cent growth of Australian fresh milk sales to $75 million.

“We are really thrilled with the significant growth in China-based channels,’’ Ms Hrdlicka said, noting the company continued to win strong business from daigou traders who buy products in Australia and ship them into China.

“We are demonstrating results behind our words. The underlying profitability of the business continues to improve and underpins our growth plans.”

The current growth trajectory of the business indicates that the cross border e-commerce and China-label channels in China could generate more revenue for A2 than in its core Australia and New Zealand markets in the next 3 years.

There have been concerns expressed in recent months by Australian shoppers on consumer websites and anecdotally about the supply of A2’s core fresh milk offering in Australian supermarkets.

Ms Hrdlicka said the company was addressing the issue.

“Our fresh milk sales are quite strong in Australia and we are working to ensure we have supply across the country and have full stock levels,’’ she said.

The company on Tuesday also outlined a two-year extension of its manufacturing and supply arrangements with New Zealand supplier Synlait.