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A2 Milk shares fall 15% despite solid result

Wednesday 21st August 2019

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A2 Milk shares fell 15 percent despite another strong lift in annual revenue and net profit as a massive marketing push helped it make further inroads in its core China and the US markets. It also announced plans to exit the UK. 

Net profit in the year ended June 30 rose 47 percent to $287.7 million on total revenue of $1.3 billion, up 41.4 percent on the year. 

Earnings before interest, tax, depreciation and amortisation were up 46.1 percent at $413.6 million at a margin of 31.7 percent. A2's gross margin widened to 54.7 percent from 50.3 percent, as higher prices were partially offset by currency movements – notably a weaker Australian dollar. 

The result was slightly below Forsyth Barr's expected full-year revenue of $1.35 billion and ebitda of $446.4 million. 

The shares fell 14.7 percent to $14.38 but are still up 51 percent so far this year. Hamilton Hindin Greene investment advisor Grant Davies said the result was "not a huge miss on the whole." The share price may have fallen due to the outlook regarding margin, he said.

Looking ahead, A2 said full-year ebitda as a percentage of sales is expected to be broadly consistent with the 28.2 percent it recorded in the second half of the 2019 financial year. Economists had been expecting it to be around 32 percent. 

"Our results were underpinned by growing brand awareness, expanding product distribution and strengthening in-market execution in our two most important regions of Greater China and the US," said chief executive Jayne Hrdlicka. This was supported by an 83.7 percent lift in marketing spending to $135.3 million, primarily increases in advertising spend in China and the US.

In China, A2's share of the infant nutrition market strengthened to 6.4 percent with group infant formula revenue of $1.06 billion, up 46.9 percent. The China segment business revenues alone were $405.7 million, up $73.6 percent. 

Its US milk revenue more than doubled and distribution expanded to 13,100 stores. Its Australian fresh milk revenue lifted 10.7 percent and it now has a record market share of 11.2 percent. 

A2 also announced it was pulling out of the UK liquid milk business. While it has grown in volume and revenue every year since it entered the market in 2012 "our company has evolved considerably, and the UK opportunity is not of sufficient scale when compared to the significant growth potential in Greater China and the US," Hrdlicka said. 

It will exit the UK liquid milk operations in the first half of the current financial year but said the decision "does not preclude us from pursuing UK or European markets at some stage in the future for liquid milk or other nutritional products." 

The company had operating cash flow of $289.1 million and a closing cash balance of $464.8 million and said it continues to consider the "appropriate use of available capital in the context of supporting our very significant growth ambitions." 

A2 said it's ebidta as a percentage of sales forecast will reflect a further increase in full-year marketing investment to around 12 percent of sales and continued investment in organisational capability to support future growth. It expects gross margin to be broadly consistent with the 2019 financial year. 


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