Investors this week took the phenomenal result for a2 Milk in their stride, but it may have produced a few blinks round the nation’s dairy farms, particularly with the farmer-suppliers of Fonterra.
Take – for example – a2 Milk’s earnings per share of 52.39c and contrast them with Fonterra’s 17c per share in 2019, or its net profit of $385.8m versus Fonterra’s loss of $605m.
There are other mind-blowing figures from a2 Milk: total revenue of $1.73bn, up 32.8%; ebitda of $549.7m, a rise of 32.9%; and operating cash flow of $427.4m. Not to mention a cash mountain it has built up of $854.2m.
As one commentator has put it, a2 Milk with its record growth intrinsically linked to the China market, is a success story New Zealanders should both celebrate and learn from.
Even its Dunedin founders through its early years from 2000, Dr Corrin McLachlan and Howard Paterson, might be astonished at its latest result.
The company is now NZ’s second biggest on the NZX by market capitalisation. It markets milk: so what makes it so different from other companies selling basically the same product?
a2 Milk sells a premium dairy product, through the selection of cattle with milk free of the A1 beta-casein protein property, which has been linked through scientific research to digestive discomfort for some consumers. This selective process leaves milk with only the A2 beta-casein hence the brand name.
The company markets its a2 milk as a premium, unique proposition, emphasising the science-based differentiation as a potential solution to the digestive problems experienced by some consumers of other milk. And it has made its own specialised infant formula a key element in its sales drive, recording group infant nutrition revenue of $1.42bn in its latest year, a rise of 33.8%.
The company protected its intellectual property expertly by wrapping around dozens of patent families. These have afforded them the time and market structure to monetise their first mover advantage. Some key patents have rolled-off and there are a2 copycats available.
Nevertheless, it still holds a number of patents that extend to 2030-2050 – and the astute and ongoing investment in brand building has subordinated the significance of patents as their most powerful shield.
In the last 12 months a2 Milk has invested $194.3m in marketing, targeting opportunities in China and the USA, an increase of 45.1%.
It reported the overall result reflects the continued growth in the infant nutrition segment with sales totalling $1.42bn for the period – an increase of 33.8% on the previous corresponding period.
In line with its strategy, the growth in China label infant nutrition products was significant, with sales effectively doubling to $337.7m.
“We achieved this while also continuing to achieve growth in our English label infant nutrition products with growth of 21.2%. Our revenue in the third quarter was well above expectations due to the impact of changes in consumer purchase behaviour arising from the COVID-19 situation. This included an increase in pantry stocking particularly via online and reseller channels.
“In our view, a proportion of consumer pantry stocking driven by COVID-19 unwound in the fourth quarter. However, this will remain a dynamic situation and we will continue to monitor changes in consumer behaviour moving forward.We again achieved solid growth in our liquid milk businesses in Australia and the USA”.
The company says it finished the year with inventory of $147.3m. This was higher than previous years, in part reflecting the growing business, as well as the decision to carry a higher level of inventory as a safety buffer given the uncertainties of Covid-19. Additionally, at the end of the period, it recognised a provision for a quantity of finished stock that is on-hold awaiting further testing to ensure it fully meets its standard of specification.
Notwithstanding uncertainties because of Covid-19, overall for FY21, the company anticipates continued strong revenue growth supported by the continued investment in marketing and organisational capability. FY21 ebitda margin is expected to be in the order of 30% to 31% reflecting:
• Higher raw and packaging material costs partially offset by price increases
• Increase of marketing investment
• FX benefit of previous year not expected to be replicated
• 3Q20 Covid-19 benefits not replicated
As for that cash mountain, the company says its priority is investment in growth initiatives ahead of returning capital to shareholders.
It is also assessing investing in manufacturing capacity to complement existing supply chain relationships (it has a stake in Synlait which its major supplier of infant formula).
“We have refocused our relationship with Fonterra and look forward to potential new opportunities to provide some meaningful benefits to both companies in the medium term”.
Fonterra’s farmer-shareholders, pondering a2 Milk’s results, might welcome a few more of those “meaningful benefits” on their own account.
The A2 Milk Company is in talks to buy a controlling stake in Southland dairy company Mataura Valley Milk for $270 million.
The announcement was made to the NZX on Friday morning and comes only days after A2 announced a record full-year profit after tax of $386m, an increase of 34 per cent on the previous year.
A2 hopes to buy a 75.1 per cent interest in Mataura Valley for $270m and is undertaking due diligence under a period of exclusivity. The offer would value the business at about $385m.