A2 Milk Company’s rapid earnings and market transformation in the past year has been “considerably in excess of management expectations” says chairman David Hearn, with pre-tax profits continuing to soar in 2016-17.
A2’s leaping infant formula sales in China helped lift pre-tax profits by 536 per cent in the September quarter following a $29.1 million full-year net profit and 100pc revenue rise in 2015-16.
Now riding in the wake of its booming baby formula sales, A2 is poised to launch its first adult nutrition products early in 2017.
Mr Hearn told this week’s annual general meeting the word “transformational” was often overused, but in A2’s case it was probably an understatement, given the specialist dairy company’s “quantum shifts in market presence, in consumer awareness, in revenues and ultimately in earnings”.
He said the New Zealand-listed milk company of just two years ago had little resemblance to the nutrition market-focused business now dual listed on the Australian Securities Exchange (ASX).
The Australian-based dairy business, which sells milk and formula containing only the A2 beta-casein protein in Australia, the UK, US and Asia, plans to have a dividend policy to reward shareholders by the end of the current financial year.
Two thirds of its shareholders are based in Australia.
“We started 2015-16 as a predominantly Australia-focused brand with a growing presence in the liquid milk market and an encouraging but still undeveloped position in infant formula,” Mr Hearn said.
“A year later the outstanding progress of the business has transformed our financial position.”
He said the October 2015 equity raising, which was quickly oversubscribed, had enabled the business to rev up its infant formula strategy, in turn resulting in its formula brand, Platinum, quickly becoming the key factor in the company’s success.
Almost a third of A2’s profits now come from infant formula sales with about 60pc of those formula sales going to direct to China or through “grey” cross-border e-commerce sales, including product bought in Australian stores and sent to Chinese buyers.
A2 expects infant formula to stay its biggest revenue earner in the short-term, but managing director, Geoff Babidge said a new growth platform was set to make its mark when four new adult nutrition powder products are launched.
“The opportunity in a variety of segments in adult nutrition could potentially be bigger than infant formula,” he said.
Chinese demand for A2 Platinum powder products has been a key revenue driver despite A2 milk also achieving positive earnings in China and gaining traction in the US milk market where it launched in April 2015 and the UK where earnings were much stronger in the past six months and sales 50pc up on the prior year.
China’s “Singles Day” sales on November 11 had doubled this year, contributing handsomely to a 96pc jump in A2 Milk’s revenue for the first four months of 2016-17.
Net profit after tax in the same period has jumped from just over $3m a year ago to $20.8m.
Sales of A2’s Platinum Stage 3 rated in the top 10 of total Singles Day products offered on the Chinese e-commerce website JD.com.
A2 has been keen to note it’s Chinese business is “not going off the boil”, with Mr Hearn using first quarter figures from 2016-17 to reaffirm performance was still healthy, although not necessarily an indicator of the full year ahead.
Other nutritional formula producers, notably Bega Cheese in partnership with Blackmores, have not been able to meet their sales expectations after launching into China early this year.
In Australia A2 infant formula also performed strongly in the grocery and pharmacy sectors in 2015-16, with demand heightened by Asian buyers snapping up stocks for re-sale to family and commercial contacts overseas.
Domestic A2 milk sales grew 4pc.