A2 Milk Company Ltd [ASX:A2M] shares spiked on Monday after the baby formula and fresh milk company revealed its half-year results.
Despite bottom-line earnings slumping 52% in the first half of fiscal 2022, management’s expectations that strong sales growth will return in the coming months may have stoked Monday’s rally.
However, A2M did flag ‘challenging’ market dynamics in China, a key driver of sales.
Source: Tradingview.com
Let’s look at the ASX announcement in more detail.
A2M financial highlights
Here are the key results from A2M’s 1H22 results:
- Net profit (after tax) down 53.3% to NZ$56 million
- EBITDA down 45.3% to NZ$98 million
- Revenue down 2.5% to NZ$661 million
- Gross margin percentage shrunk to 46.2%
A2M said its interim results were ‘in line with expectations’.
With the stock rallying strongly today, it could suggest the market was expecting much worse.
The market may have also been buoyed by A2M’s message that it’s seeing ‘early signs of positive improvement from growth strategy execution.’
‘Challenging’ China market dynamics
A2 Milk focused plenty of its results release on China’s market conditions.
A2M relayed that ‘following an 18.1% decrease in births in 2020, there was a further 11.5% decrease in 2021 to 10.6 million.’
A2M attributed the falling birth rate to a 5% decline in the overall IMF China market in volume terms.
As A2M explained:
‘Although market performance varied by channel and segment, overall, market value also decreased by 3.3% in 1H22 due to the lower number of births, an increase in competitive intensity and promotional activity impacting average pricing, partially offset by a continuation of the premiumisation trend as well as a mix shift to higher-priced China label channels.
‘Local competitors continue to gain market share against the traditional multinational brands, driven both by the strength of local brands, as well as an overall mix shift from cross-border to domestic channels.’
A2M to up investment
What does a company do when faced with growing competition and a waning market?
Boost marketing.
In 1H22, A2M raised marketing by 37.3%, which A2M admitted lowered its EBITDA.
Regarding its marketing efforts in China, A2M commented:
‘Brand health metrics improved following a significant marketing campaign in 2Q22. Based on the Company’s most recent tracking (Jan-22), brand health through the funnel remained strong with total brand / China label brand awareness, trial and loyalty improving, while English label awareness and other metrics remained relatively flat. This outcome was supported by an increase in 1H22 in China brand investment of 47.7% vs pcp and was weighted to 2Q22.’
A2M said it will ‘step up’ invested in 2H22, with FY22 investment now expected to be around $220 million.
Optimistic outlook from management
Despite the unfavourable result, CEO David Bortolussi believes the company is making great strides:
‘Despite challenging market conditions in China and COVID-19 volatility, we are making good progress stabilising the business. The growth strategy we announced in October last year to respond to a rapidly changing China market has been completed and implementation is underway with good early progress across a range of initiatives.
‘We remain confident in the long-term China infant milk formula market, and we are growing share in our China label business in-store and online with strong consumer offtake and share growth. The actions we took to address excess infant milk formula inventory last year are proving effective, and we are seeing improvements in English label channel inventory levels, market pricing and product freshness.
‘While English label sales were down during the half, we have seen an improvement in trajectory in the ANZ reseller / daigou channel. Our brand health is strong, and we will continue to increase brand investment, content generation, and activation to drive awareness and conversion.’
A2M outlook
Although A2M is yet to provide any firm guidance for FY2022 due to ongoing uncertainty, today’s announcement was not short on confident (if tentative) projections.
An official statement read:
‘The Company’s outlook for 2H22 revenue has improved. It is still expected to be significantly higher than 2H21, and with growth now expected on 1H22 and for FY22, ahead of initial expectations due mainly to growth in China label and English label IMF.’
A2M admitted, however, that it was unlikely any revenue improvement would translate into higher earnings.
This is due to the company taking on a higher marketing spend this year.
Investors reluctant to take action on A2M just yet may wish to look elsewhere on the ASX instead.
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Regards,
Kiryll Prakapenka,
For Money Morning
