A2 Milk expects earnings ‘broadly in line with plan’ as profit shoots up
We also reiterate our guidance that first-half 2023 growth is expected to be significantly higher than second-half 2023 growth.
David Bortolussi, CEO
A2 Milk said it expects its earnings to remain “broadly in line with plan” and that recently approved exports of infant formula to the United States were not expected to have a material impact on its result for the 2023 year.
Chief executive David Bortolussi told the annual meeting the recent relative weakness of the kiwi dollar had the effect of inflating both revenue and the cost of doing business, including hedge losses.
In addition, increased interest rates in Australia and New Zealand have improved the company’s interest income on term deposits.
“Having regard to year-to-date currency movements, and should currency remain at prevailing levels for the remainder of 2023, full-year revenue is likely to increase to low double-digit growth compared to previous guidance of high single-digit growth,” Bortolussi said.
“We also reiterate our guidance that first-half 2023 growth is expected to be significantly higher than secondhalf 2023 growth.
“In this context ebitda is expected to remain broadly in line with plan and US infant formula sales are not expected to have a material impact in full year 2023,” the CEO said.
Ebitda margin as a percentage of sales was expected to be similar to the prior year, compared with previous guidance of a modest improvement, due mainly to the currency impact on revenue, he said.
A2 Milk’s earnings before interest, tax, depreciation and amortisation (ebitda) of $196.2m were up 59 per cent for the 2022 year and net profit shot up by 42.3 per cent to $114.7m.
Jarden said the trading update for the year ahead was in line with its estimates but implied a downgrade from consensus forecasts.
At a net profit level, a downgrade may be more muted given net interest earnings, the broker said.
Jarden noted A2 Milk’s comment on ebitda margins being similar to the previous comparative year.
“The company has attributed this to higher costs due to a weaker New Zealand dollar and, in our view, there is also likely some margin dilution factored in from the US FDA [Food and Drug Administration] entry.”
Separately, the company said chair David Hearn intended to step down as a board member next November.
The board had concluded that Pip Greenwood, who has been on the board for more than three years, would succeed him at that time.
Bortolussi said the significant steps the company took last calendar year to address excess infant formula inventory had proven effective.
“Importantly, channel inventory is at target levels, product freshness is amongst the best in the industry and market pricing has improved.
“The second key point is that there are tangible signs that our refreshed growth strategy is already having an impact,” the chief executive said.
“We’re focused on capturing the full potential of the China market opportunity and have significantly increased our brand investment and improved our execution which has seen us achieve new highs in brand health and record market shares.”
Bortolussi said the outlook for 2023 was positive.
“We are expecting continued revenue and earnings growth in 2023 and, subject to current trading conditions and business momentum remaining favourable, we are on track to deliver on our medium-term financial ambition.”
The company has previously said it aims to achieve $2 billion in revenue within five years.
In August, a2 Milk reported revenue growth of 19.8 per cent for the June year to $1.44 billion.
Early this month, the FDA said it would allow the sale of a2 Milk infant formula in the US, to alleviate a shortage arising from an Abbott Nutrition product recall.
The FDA said a2 Milk’s a2 “Platinum” formula for babies up to 6 months old, and a2 Platinum followon formula for 6-12 months, would be allowed for sale.
A2 Milk has been in the US for seven years following a similar strategy it used in Australia — building brand awareness through the sale of fresh a2 milk — which contains just the a2 beta protein as opposed to standard milk, which has both the a1 and a2 beta proteins.
The New Zealand-founded a2 Milk maintains that its products can help those consumers who have trouble digesting standard milk.