A2 Milk staying clear of coronavirus fallout — for now

A2 Milk said its business was unaffected by the outbreak of coronavirus in China but that it was unclear what the impact would be over the second half.

The alternative milk company said net profit leapt 21.1 per cent to $184.9 million in the first half to December 31, well ahead of market expectations.

Its earnings before interest, tax depreciation and amortisation (ebitda) came to $263.2m, up 20.5 per cent, against market expectations of around $247m.

A2 Milk’s total revenue lifted by 31.6 per cent to $806.7m, compared with its own guidance of $780m to $800m for the half.

Group infant nutrition revenue came to $659.2m, up 33.1 per cent and there was strong growth in China

label infant nutrition, with sales doubling to $146.7m.

Chief executive Geoff Babidge said the situation in China was dynamic but that demand for a2 Milk’s products remained strong.

“In January and February, revenue was above expectations,” he told the Herald. its distribution partner, state owned China State Farm.

“The nature of our product means that there is inherent demand — so it’s not discretionary to that extent.

“So our main focus is in ensuring that our product is available for the various channels of distribution.

“Clearly, to date, that strategy has been working very well,” he said.

Babidge stressed that it was difficult to assess whether there would be an impact from the outbreak — positive or negative — over the second half. “Product is flowing, and products such as ours are getting priority for clearance at ports.”

A handful of big food companies, including multinational Nestle, have delved into offering a1 beta-free infant formula that a2 Milk has specialised in, but Babidge said the competition had had “no significant impact” on its sales in China. Market share in infant formula in China — as measured by Kantar — rose to 6.6 per cent in December from 5.4 per cent a year earlier.

In the United States, which the company expects will provide the next leg of growth, revenue doubled and distribution grew to 17,500 stores.

Babidge, an a2 Milk veteran, stepped back into the job when Jayne Hrdlicka left the company last year after a short stint.

He said he would remain in the job “for as long as the board would like” but that he expected a decision to be made on his likely successor in the second half of this year.

With $618.4m sitting in the bank, a2 Milk — which has since its inception been solely a marketer of a1 betafree products — said it was looking at manufacturing in its own right, due to the increased scale of its infant nutrition business. For the full 2020 year ending in June, the company said it anticipated continued strong revenue growth across its key regions supported by increased marketing investment in China and in the US.

A2 Milk’s gross margin increased to 57.2 per cent, reflecting a continued shift to infant formula.

A2 Milk’s fresh milk business in Australia grew by 11.3 per cent to $74.7m, taking its market share to a record 11.3 per cent.

In the US, where a2 Milk is making a big push, revenue more than doubled to $28m. The company has a target of US$100m in annualised sales for the US.

The company’s share price, which has a history of big moves up and down, rallied sharply on the back of the news. The stock closed yesterday xxx x x x x up XXX per cent.