It’s the beta-casein and premium product that makes a big difference between a2 Milk and Fonterra

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.

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