Jayne Hrdlicka has wasted no time in making her mark on a2 Milk.
After just one year after in charge of one of New Zealand's most intriguing companies, she has already cemented in some far-reaching changes.
To the disappointment of some, she has shifted the goal posts so that the company invests more in its already explosive growth.
Even so, this week's result for the June year would be the envy of any company, anywhere.
It cracked the $1 billion revenue barrier for the first time and reported a 47 per cent leap in net profit to a record $287.7m.
Earnings before interest, tax, depreciation and amortisation (ebitda) jumped by 46.1 per cent to $413.6m.
Once again, much to the envy of any other NZX-listed company, a2 Milk has close to half a billion dollars cash on its balance sheet.
Not bad for company that started off as one of market's smallest and then nearly went bust.
Now, it level pegs with the power behemoth Meridian as one of the market's biggest companies by market capitalisation.
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.
Much of a2 Milk's initial success was driven out of Australia, where it now accounts for 11 per cent of the fresh milk market.
Its success across the Tasman acted as a springboard for its highly successful foray into the vast and lucrative Chinese infant formula market, helped by its popularity in the unofficial "daigou", or grey market, trading channels into the mainland.
It's the company that the market loves to love, yet the share price slumped by 15 per cent when its result came out.
Free fall
A2 Milk has in the past tended to err on the conservative side with its earnings guidances.
Come reporting time, its results have exceeded expectations, usually resulting in a spike in the share price, but this week's result represented a deviation from the script, in more ways than one. This time, there was no positive surprise and, if anything, the surprise was on the negative side.
So has there been a change in the way a2 Milk communicates with the market?
"I guess that's probably been the case," Hrdlicka told the Weekend Herald.
"We were very clear at the half year about what to expect from us and we have delivered exactly that.
"We intend to be quite transparent with the market.
"We intend to deliver on what we say we will and to make sure that the market is appropriately updated," she said.
"It is an important part of our investor management strategy to ensure that we deliver on what we say we are going to do," she said.
"It may be an adjustment process — a different CEO and a different approach.
"As a company we have never been more specific as were in the second half, and we did that for a reason."
Daigou, which involves individuals and businesses buying formula in Australia and sending it to China, remains an important platform for a2 Milk, but there has been a shift.
Hrdlicka said the company had worked hard to provide consumers with what they want, when they want it.
"We have doubled down on that over the 12 months.
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"We are a flexible, adaptive organisation that quickly adjusts to the changing dynamics around us," she said.
"We have proved that in the way that we have adapted in the last six months in the way that we have managed daigou."
So, has there been a shift?
"The other channels are growing faster, but the daigou channels continue to grow," she said.
"We will remain in the daigou so long as it is important to customers."
Big shift
For analysts, the big shift in a2 Milk was in its plan to spend more on growth, which again was another deviation from the past.
A key measure for a2 Milk — its ebitda to sales margin — came to 31.7 per cent in the year but supporting slides pointed to that figure dropping to 28 per cent for the year ahead, which caught the market by surprise.
A2 Milk said the lower ebitda to sales forecast reflected increased full-year marketing investment to about 12 per cent of sales, and continued investment in its capability to support future growth.
Oyvinn Rimer, a long-time a2 Milk observer and research analyst at Harbour Asset Management, which has a stake in a2 Milk, said this week's result heralded a change in tack.
"The key reason for that is that a2 Milk perceives this as a key inflection point where they have a very significant market opportunity available in the longer term, but they have to act now," he said.
"So they are investing a lot more today, next year and probably the year thereafter, for the longer term, to build a brand that is a leader in its space," Rimer said.
"It's not just on marketing — this is broad-based institutional capability so they are investing heavily in people.
"Let's by honest. Before Jayne came on board there were under 200 people working in this company, when it had a market capitalisation $10b.
"That's almost unheard of, and it was not sustainable for that level of growth.
"So now they are building infrastructure across the board to build scaffolding around the requirements for the future.
"They are putting down the foundations to become a lot bigger in the next five to 10 years after what has been an underinvestment in infrastructure.
"That goes straight to ebitda so the margin will take a hit to pursue this growth as aggressively they are," he said.
Rimer said he supported a2 Milk's move to invest more.
"Strategically, they surprised me by how forward-looking they are, and how focused they are in building the right foundation to support their growth aspirations," he said.
The result, and the share price reaction, represented a "re-set" of short-term expectations.
"But I think the market has not digested yet the upside potential for the longer term."
Great expectations
Castle Point Funds co-founder Richard Stubbs said a2 Milk's result was a good example of market expectations running too high.
A2 Milk has long enjoyed first-mover advantage in the A1 beta-free space, but there are plenty of others entering that space — most notably international food giant Nestle.
The global powerhouse Nestle has launched an A1-free infant formula series in China, trading under the Illuma brand, which is produced by Nestle's Wyeth.
Hrdlicka's move to invest more would have taken into account the fact that competition was likely to intensify, Stubbs said.
"A2 Milk is undoubtedly going to experience pressure going forward.
"It is now a significant player in markets where it has very large competitors.
Milford Asset Management's Sam Trethewey said the result showed that the cost of future revenue growth would be higher.
"At the core of what a2 Milk does is its very strong brand," he said.
"It is known as the Louis Vitton of infant formula and the brand perception of Chinese parents is very, very high.
"Brand perception and brand awareness is the key one to monitor going forward.
"And that's the reason why they are spending this additional money," he said.
Looking ahead, the US is the next big thing for a2 Milk where it hopes to replicate.
Hrdlicka says almost all parts of the business broke records but the only negative was the move to close down its UK operation.
She said that was more a reflection of the opportunities available elsewhere.
For the moment the company's focus is on Australia and New Zealand, Greater China, and the United States.
It's early days but the US market is looking promising.
For the year, US business revenues rose to$34.6m, up 160.7 per cent.
A2 Milk reported ebitda of $44m in the US — which was larger than expected — but the company is spending more there.
By the end of the year, a2 Milk's distribution was over 13,100 stores, driven mostly by national distribution within the Kroger supermarket chain and by adding three new regions within Costco.
The company's share price is notoriously volatile, peaking at $18.02 and finishing the week at $14.80.
Even at that price, the market is still pricing in expectations of a huge lift in earnings.
Castle Point's Stubbs says the market still likes a2 Milk but this week's result could prove a turning point.
"It will have to work harder to maintain growth, but it has certainly executed well to date," Stubbs said.
"The market will be watching to see if it can continue to do so, because there is a lot of growth assumed in its current share price."
