A2 Milk (ASX: A2M) has reported a sharp (45.3%) decline in earnings amid challenging market conditions in China, elevated costs and a ramp up in marketing expenses.
Financials at a glance:
Revenue of NZ$659m, down -2.6%
Gross margin of 46.2% compared to 50.3% a year ago
Net profit after tax of NZ$56.1m, down -53.3%
Earnings per share halved to 8.02 cents.
Operating revenue in China and other Asian markets -6%
The profit result was slightly below Bloomberg estimates of NZ$60m.
“Despite challenging market conditions in China and COVID-19 volatility, we are making good progress stabilising the business,” said Managing Director and CEO David Bortolussi.
The gross margin percentage of 46.2% reflects headwinds including elevated raw milk and freight expenses, an adverse product sales mix and the inclusion of Mataura Valley Milk production.
For the first time in A2's history, the company reported a higher percentage of infant formula sales from China (40%) compared to ANZ resellers (38%).
Outside of margins, A2 is aggressively increasing its marketing spend to increase brand awareness in China. Group marketing investments rose 37% in the first-half to NZ$93m.
China reported an -18.1% decrease in births in 2020 and a further -11.5% decrease in 2021. The cumulative impact of lower birth rates has shrunk the size of China’s infant formula market by approximately -5%, in volume terms in the first half of FY22.
A2’s China label infant nutrition sales fell -11.4% to NZ$118.7m (18% of Group sales). The decline was largely driven by planned efforts to rebalance inventory by contrasting sales to distributors in the first quarter.
A2 observed an improvement in brand health metrics following a significant marketing campaign in the second quarter.
However, the diagou channel, which management noted the company would be relying less on in future, is also showing signs of recovery.
ANZ revenues fell -10.7%, weighed by a decline in reseller/daigou and retail sales.
The outlook remains encouraging, with the efforts taken to rebalance excess inventory resulting in a 20-50% reseller market pricing increase since July 2021.
A2 said that "there was positive momentum with 2Q22 significantly higher than 1Q22".
A2's North American business has never turned a profit.
The region contributed a -NZ$16.4m in earnings, NZ$4.8m higher than last year.
The Americas continues to remain a volatile business segment, A2 is targeting a path to profitability by FY25-26.
“Our sales outlook for FY22 has improved but is not expected to translate into higher earnings as we significantly increase brand reinvestment consistent with our growth strategy,” said Bortolussi.
Revenue in the second half is expected to be “significantly higher” compared to FY21.
Ongoing covid impacts to the supply chain was flagged as a “key risk” in the second half.
Finance Writer & Social Media
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