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Home / Business

A2 Milk looks to US for growth after doubling net profit

Jamie Gray
By Jamie Gray
Business Reporter·NZ Herald·
22 Aug, 2018 05:00 PM4 mins to read

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Jayne Hrdlicka, A2 Milk chief executive and managing director. Photo / File

Jayne Hrdlicka, A2 Milk chief executive and managing director. Photo / File

The a2 Milk Co is looking to the United States as its next source of significant growth after more than doubling its net profit for the year.

It was another record profit for the alternative milk company - $195.7 million for the June 30 year - driven by sharp increase in infant formula sales in Australia and China.

The result was up 166 per cent on the previous year's profit of $90.6m, which in turn was triple the year before that.

Revenue came to $922.7m – an increase of 68 per cent over the previous corresponding period - and slightly above what it had already been telegraphed to the market.

A2 said its infant formula share strengthened to 5.1 per cent in China and on 32 per cent in Australia.

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There was substantial physical distribution growth to about 10,000 stores in China and 6000 stores in the US, it said.

A2 has also made inroads into Australia's fresh milk market, were it now accounts for 9.8 per cent of the market.

Chief executive Jayne Hrdlicka, who took over from the retiring Geoff Babidge in July, said she was pleased with the company's early progress in the US.

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"We are are not as far advanced in the United States as we are in China, and we would look to the US as being a place of significant future growth," she told the Herald.

She said a2 was building "real, genuine" consumer support in the US fresh milk market.

The timing as to when a2 Milk's starts to offer a broader range of products in the US was "still open to question".

"It's safe to say that we have two of the world's biggest consumer markets in the US and China, and we have good underlying momentum in both," she said.

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Most cows carry both A1 and A2-type proteins, but a2 Milk specialises in milk containing just the A2 variety, which it says can help people who have trouble digesting standard milk.

A2 Milk's early success came in the form of Australian fresh milk market, and then in infant formula, which acted as a springboard for its foray into China where it remains popular in the unofficial "daigou" trade channels.

The result - which was slightly above market expectations - was well received by the market, the share price rallying 70 cents to $11.83.

In March, the share price peaked at $14.10 before news that world food giant Nestle had launched a competing a2 product in China sent it tumbling.

But in a conference call to analysts, Hrdlicka said competition had not had a material effect on a2 Milk's earnings.

Craigs Invesment Partners head of private wealth research, Mark Lister said it appeared the market was comfortable with the change of chief executive.

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"The result has definitely added a level of comfort, and the progress that they are making and the leadership handover seems to be getting the tick from investors as well," Lister said.

Increased investment in brand and market development resulted in rapid growth of infant formula and the expansion of the liquid milk business in each of the company's established markets, the company said.

A2 Platinum formula sales revenue was $724.2m, an increase of 84 per cent on the previous year.

The United States business continued to grow sales in key accounts, following expansion into the Northeast and in the natural products stores.

In the United Kingdom, improvement in rates of sale and expanding distribution brought gains in revenue.

Hrdlicka said the company anticipates further growth in revenue, particularly in nutritional products in Australia and New Zealand, China, and liquid milk in the United States.

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Marketing expenditure as a percentage of sales in 2019 is expected to be higher than 2018, given continued investment in the Australian market, "re-phasing" of second-half activities in China, and investment to support US market expansion, she said.

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