New Zealand's a2 Milk Co sales surge in China

Feb 28 2020 – New Zealand’s a2 Milk Co Ltd on Thursday unveiled a 21% rise in half-year profit. Sales of its China label infant formula products doubled ahead of expectations in January and February.

“The reality is that those increased sales are a result of the impact of the coronavirus on a product such as ours, which is not discretionary. Where we clearly have a strong brand franchise, where people have a view as to the high quality of the product,” a2 Milk chief executive Geoff Babidge said.

The Auckland-headquartered company said that it was pleased its investments to deepen understanding of consumer and channel trends and the increased levels of investment in marketing and capability development are translating into accelerated growth in its China label business.

Its half-year net profit of NZ$184.9 million ($116.73 million) was driven by doubling sales in China of infant nutrition products marketed under its own brand, while expansion in the United States likewise led to a doubling in milk revenue there.

Mr Babidge said there is no way to tell if the higher sales in the second half are due to new mothers trying the a2 Platinum brand or to more consumers stockpiling essential items, or both.

“Online and reseller and daigou channels are also performing strongly into the market at this time. How that plays out in coming months and whether that trend will continue, or be offset in months to come is clearly very difficult to predict.”

The company recorded an EBITDA (earnings before interest, tax, depreciation and amortisation) margin of 32.6 per cent, which it said was “better than expected”.  a2 said it was expecting “continued strong revenue growth” in the current financial year, and that full year EBITDA margin was expected to be 29-30 per cent.

Mr Babidge returned to the role of CEO on an interim basis late last year following the unexpected departure of former CEO Jayne Hrdlicka.

Ophir Asset Management Director Andrew Mitchell said a2 is perceived as a very high quality brand in China and its products have inelastic demand.

“We are not surprised that a2 Milk is seeing increasing demand due to COVID-19, given it has the most flexible channels to market and is therefore positioned to take share from competitors who may rely on domestic manufacturing or single sales channels,” he said.

Fonterra Co-Operative Group – a key partner of a2 Milk – said on Thursday the “current situation is very fluid and uncertain” and it has already contracted a high percentage of 2020 financial year’s milk supply to help manage impacts of coronavirus.