A2 Milk first-half profit soars 150 per cent, aligns itself with Fonterra in new supply deal

A2 managing director Geoff Babidge. Photo / File

A2 Milk more than doubled first-half profit on strong infant formula sales and has aligned itself with Fonterra Cooperative Group which will see the two companies partner up on a range of products.

Net profit rose to $98.5 million in the six months ended December 31 from $39.4m a year earlier as sales climbed to $434.6m from $256m, Auckland-based, Sydney-headquartered a2 said.

The milk marketing firm used its first-half result to unveil a strategic partnership with Fonterra, with the world's biggest dairy exporter agreeing to exclusively supply a2 with A1 protein-free milk products in bulk powder and consumer packaged forms, in exchange for an exclusive licensing agreement to produce, sell and market a2 branded fresh milk for end sale in the New Zealand market.

The two companies will establish an A1 protein-free milk pool in New Zealand and a new A1 protein-free milk pool in Australia, and Fonterra also gets exclusive supply rights for some products in new markets for a2 in South East Asia and the Middle East up to a specified volume. The companies are also evaluating selling new a2-branded products such as butter and cheese in Australia, New Zealand and China.

"Fonterra's high quality milk pools, our global supply chain, our manufacturing capabilities and knowledge, and our in-market sales and distribution expertise is being combined with a2MC's brand strength to unlock new opportunities in a wide range of international markets," Fonterra chief executive Theo Spierings said in a separate statement.

"We continue to see a strong future for dairy based on our existing range of products, including recent additions such as organic, low-lactose and high protein milk choices that consumers seek out for a premium. The a2MC products promoted by this partnership sit well within our overall portfolio of products."

The tie-up comes as a2 benefits from strong Chinese demand for its infant formula products, which has seen it repeatedly upgrade its earnings outlook and pushed its share price soar by 270 per cent to $9.29 over the past 12 months.

A2 managing director Geoff Babidge said he expects continued revenue growth in nutritional products in Australia, New Zealand and China in the second half, along with further growth in fresh milk in the United States.

Gross margin was 49.8 per cent in the first half, which he said was higher than expected "primarily due to the higher proportion of infant formula sales, currency movements and favourable net selling prices relative to plan. This was partially offset by product cost increases and margin mix within nutritionals. Subject to currency movements and realisation of throughput efficiencies, the company expects the gross margin percentage to be broadly consistent in the second half."

"As advised at the annual meeting in November 2017, earnings growth in the second half will be tempered by a higher marketing expense, with a half-on-half increase now likely to be in the range of $35-$40m given the timing and scope of marketing programmes in China and the United States. This increased brand investment will further support future growth in these key markets."

Babidge said the company launched a formula for children aged over three years in Australia and China in August 2017, which "has performed above expectations", and another new milk powder product will be launched by the end of financial year, with others planned for calendar 2018.

The company began selling a2-branded fresh milk in Singapore in the year, and is now making weekly shipments and considering broadening the product range in that country.

In the first half, a2 settled a court case in Australia with its rival Lion Group over the science behind health-related claims about its milk.

Babidge said the company "expects broader interest in the A1 protein-free category over time", and "given its pioneering heritage, its comprehensive suite of intellectual property and a business model focused solely on products free of the A1 protein type, the company is well positioned to respond."

A2's board didn't declare an interim dividend, and said it was continuing to consider implementing a dividend policy along with an on-market share buyback as it evaluates the best use of its available capital.

The board is also reviewing opportunities to invest directly in blending and canning capability as part of its longer-term nutritional products sourcing plan, it said.