A2 milk company profits up 8%, squashes beef with Synlait

Monday, 19 August 2024

Today on The Detail Emile Donovan talks to Sam Dickie, a senior portfolio manager at Fisher Funds, to talk about the company’s roller coaster ride, and how one of its greatest strengths has become its greatest weakness.

A2 Milk Company profits rose almost 8% in the last year and the company announced it has squashed its beef with competitor Synlait.

The infant formula company’s full-year net profit for the year ending June 30, 2024 came in at $167.6 million, up 7.7% on last year’s $155.6m.

Revenue for the year was up 5.2% and came in $1.68 billion while earnings before interest, tax, depreciation and amortisation (ebitda) were up 6.9% on last year’s $234.3m.

Managing director and chief executive officer David Bortolussi said rising revenue was driven by ongoing growth in the China and Asia where revenue was up 14.1% and partially offset a 14.6% revenue decrease in Australia and New Zealand. Revenue in the United States was up 8.2%.

“This was achieved despite the declining market and continued volatility. Consumer demand for a2 remained strong with market value share improving both in-store and online, supported by the upgraded formulation and packaging,” Bortolussi said.

“The number of newborns in China declined 5.6% in 2023 to 9 million reflecting an improvement in trajectory over the past several years with a positive outlook for 2024, but with longer term decline expected due to socio-demographic trends,” he said.

“The market decline reflected the cumulative impact of fewer newborns, increased competitive intensity and challenging macroeconomic conditions.“

A2 Milk Company managing director and chief executive David Bortolussi.

Board chair Pip Greenwood said: “Being the pioneer of A1 protein free helps us differentiate our products in a competitive market. It is especially pleasing that we have now achieved a top 5 position in the China IMF [infant milk formula] market with our China and English label products combined.

“Our liquid milk businesses in Australia and the USA also progressed well in 2024 with innovation delivering positive results and we continue to progress our application for long-term US Food and Drug Administration approval to import IMF into the USA,“ Greenwood said.

Synlait disputes ‘conditionally resolved’

A2 also reached a conditional settlement with Synlait so the latter can continue its exclusive IMF manufacturing deal.

The company announced on Friday that it had conditionally resolved various disputes with Synlait Milk including manufacturing exclusivity and pricing disputes.

Synlait announced on Friday that: “A one-off settlement payment from A2 Milk Company to Synlait in the order of $24.75 million will be made.”

The settlement is conditional on Synlait completing its equity raise and refinancing its existing banking facilities, Bortolussi said in Friday’s announcement.

“A2 Milk Company’s decision to support Synlait’s recapitalisation plan reflects the strategic importance to A2 of the continued stability of production at Synlait’s Dunsandel manufacturing site,” he said.

Last year, A2 moved to cancel its exclusive manufacturing and supply agreement with Synlait to move more production to its own factory.

In last week’s settlement, Synlait accepted the cancelling of its exclusive IMF manufacturing and supply rights in China, Australia and New Zealand from January 1 2025.

Synlait’s obligation to procure a minimum annual volume of IMF from A2 will continue to apply.

Bortolussi said the settlement does not impact the company’s full-year result.

2025 outlook

Bortolussi said 2025’s full-year result is likely to be a few points down as China’s market continued to tighten.

“China IMF market conditions remain challenging and the Company expects a further market value decline in 2025.”

“At this stage, the company is expecting mid single-digit revenue growth in full-year 2025 versus full-year 2024, with growth affected by IMF supply constraints which are expected to be resolved in the first half of 2025,” he said.

Ebitda margins are likely to similar to this year, with the first half of next year likely to be down compared with this year.

Bortolussi said next year is likely to bring more financial challenges, including “challenging macroeconomic conditions, China IMF category dynamics and competitive intensity, further supply related risks, cross border trade, foreign exchange movements, changes in interest rates, farmgate milk pricing and other commodity prices and changes in the regulatory environment”.

“These challenges and risks could materially impact expected revenue and earnings outcomes,“ he said.