The a2 Milk Company announced double digit revenue and earnings growth for FY23, but MD and CEO David Bortolussi lowered expectations to low single-digit revenue growth in FY24 due to challenging economic conditions in China, including its record low birth rate.
Snapshot
- Revenue up 10.1% to $1,592.9m
- EBITDA up 11.8% to $219.3m
- NPAT up 26.9% to $155.6m
(EBITDA: Earnings Before Interest and Taxes Depreciation and Amortisation; NPAT: Net Profit After Tax)
A2 Milk’s 10.1 per cent growth in revenue to $1,592.9m was driven by a 37.9 per cent growth in the China & Other Asia market segment, USA up 27.1 per cent and Matura Valley Milk (MVM) up 9.2 per cent. There was a 30.2 per cent decrease in the ANZ segment, mainly due to an intentional change in English label distribution strategy.
Bertolussi said an important FY23 milestone for the company was the China & Other Asia segment revenue exceeding $1 billion (representing 62.9 per cent of total revenue) for the first time.
Revenue growth slowed to 3.0% in 2H23 mainly due to a sharp decline in English label IMF Daigou market value in 2H23 and cycling higher lockdown-driven sales in 4Q22. Higher revenue growth of 18.6% in 1H23 was mainly due to China label IMF sales cycling lower sales in 1H22 due to channel rebalancing and US sales benefiting from 2H22 new product launches.
Gross margin percentage of 46.5% was 0.5 ppts higher reflecting benefits from a2 Platinum English label refresh positioning and distribution model changes and the cycling of other nutritional stock write-downs recognised in the prior year, partially offset by unfavourable foreign exchange on cost of goods sold.
Increases in farmgate milk pricing, raw materials, and other inflationary pressures were mitigated by price rises and other cost saving initiatives. Gross margins in 2H23 were also impacted by the timing of MVM sales, which were weighted to the second half.
Foreign exchange rates were volatile during the year. Group revenue benefited from favourable foreign exchange movements in the order of $40 million, primarily in 1H23. However, the combined realised and unrealised foreign exchange impact on cost of goods sold, administrative and other expenses on EBITDA was not material in part due to hedging, the company said.
The market decline reflected the decrease in newborns overall, socio-demographic differences between Key&A (upper tier cities in China) and BCD cities (lower tier cities in China), challenging macroeconomic conditions impacting retail sales, and increased competitive intensity and promotional activity driven by excess industry capacity and the commencement of the market-wide transition to new GB (“Guo Biao”, national standards of China) standards.
The number of newborns in China declined by 10 per cent in CY22 to 9.6 million, which is likely to decline further in CY23 having regard to various factors and data points, including socio-demographics, prevailing youth unemployment rates, recent marriage numbers, and pregnancy indicators. The Company still expects a post COVID-19 recovery in birth rates in the medium-term with the longer-term birth rate inherently uncertain.
The lower birth rate in CY22 along with the rolling impact of fewer births in prior years reduced China IMF (infant milk formula) market Stage 3 sales (the biggest segment of the IMF market) in particular which declined by 20.6 per cent in 2H23 and accelerated to be down 23.5 per cent in 4Q23.
China label market value declined 14.9 per cent in FY23 with 2H23 down 17.3 per cent. The mother and baby stores (MBS) channel was down 12.7 per cent in FY23 and domestic online (DOL) was down 4.5 per cent.
Bertolussi said, “In the context of challenging socio-demographic, macroeconomic and IMF market conditions, a2MC’s growth in FY23 in China label IMF of 27.8 per cent and total IMF of 8.4 per cent was very encouraging.”
In other markets:
- The Australia and New Zealand (ANZ) segment result was driven by lower IMF sales to ANZ resellers / Daigou due to an intentional change in a2MC’s distribution strategy, partially offset by the positioning and pricing benefit associated with the a2 Platinum refresh. Overall, ANZ sales volumes were down with segment revenue of $371.7 million, down 30.2 per cent, and EBITDA of $93.5 million, down 46 per cent.
- With Daigou channel market value down 39.5 per cent in FY2317 and the change to the Company’s English label distribution strategy in 2H22, IMF reseller and retail sales decreased 50.6 per cent to $162.5 million. The Company has proactively changed its English label distribution model to more controlled channels and to more transparent and performance-based distribution partnerships in all channels.
- Australian liquid milk sales were up by 7.1 per cent to $184.1 million, with 2H23 growth of 8.5 per cent, driven by a full 6-month contribution from price increases taken in 1H23 in response to higher raw milk prices and other input and logistics cost increases, favourable foreign currency movements plus continued strong performance from the launch of a2 Milk Lactose Free
- Accelerating MVM’s path to profitability by FY26 is a priority. Revenue of $113.9 million and an EBITDA loss of $26.5 million were recorded for the period.
- US profitability improved through a combination of higher revenue growth from both core range and new products, as well as cost reduction initiatives. As a result, USA revenue increased 27.1 per cent to $105.1 million while EBITDA losses were reduced to $23.3 million compared with a loss of $36.7 million in FY22.
