The A2 Milk Company Limited

Thank you for standing by and welcome to the A2 Milk Company Limited first half 24 results call. All participants are in a listen only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you'll need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Mr. David Akers, Head of Investor Relations and Sustainability. Please go ahead.

Good morning, everyone. Thanks for joining the call today. Starting on slide three. On the call today, we have David Ward-Lucy, our Managing Director and CEO, and Dave Musk at our CFO. We also have leaders from our regions, Lee Zhao, Johansson Aratne, Eleanor Corr, and Kevin Bush. The team will present our results and outlook, and there'll be time for questions at the end. I'll hand over now to David Ward-Lucy.

Thank you, David. Good morning, everyone, and thanks for joining us all. I'd like to get through today, so I'll start with a few key messages. Firstly, we're pleased to report a positive interim result today, with revenue growth at 3.7%, EBITDA up 5%. We're in total IMF sales, despite another double-digit decline in the China IMF sales. The result of the NAICS will actually be an important milestone, becoming a top five brand in the China Atlantis market overall, including China Laser. In doing so, our brand health metrics reach new highs, supported by record levels. During the period, we successfully launched our new GDP registered China label product, and we are pleased to confirm that the transition is ahead of plan. Encouragingly, after several periods of decline, English label sales stabilised in the first half of 24 compared to the second half of 23. We also have additional English label products coming to market shortly, which Johan will cover later in the presentation. Finally, our revenue growth guidance for FY24 has improved relative to our prior outlook statements. Moving to slide five, which summarises our financial results. Revenue for the period was $812 million, up 3.7%. EBITDA was $113 million, up 5%, with an EBITDA margin of 13.9%, up 0.2 percentage points. Our net profit after tax was $85 million, up 15.6%, and our EPS was up 18.6% to 11.8 cents. Our net cash position at the end of the period was $792 million, up $35 million compared to June 23, and our operational cash conversion improved to 87%. Revenue growth in the half was again driven by our China segment, which was up 16.5%, while our ANZ segment sales were down 24%, reflecting the change in our distribution strategy that we've communicated previously. US sales were up 8.6%, while NPM sales were down 4.7%. From a category perspective, we grew total IMF sales by 1.5%, with China label sales up 10.4%, and English label sales down 6.9%. Liquid milk sales in ANZ and the US were up 1.5% and 7% respectively, and other nutritionals were up 48.5%. Moving to slide six, In addition to our financial results, I'm particularly proud of what our team has achieved operationally in the half. We grew total China IMF sales in a market that was down almost 14%, achieved the top five brand position in the market and improved our key business health indicators. In China label IMF, we've achieved record market share and new highs in brand health and launched our new GB registered IMF product successfully. In English Label, we stabilized sales on the adjacent half and developed our O2O distribution partnership with UO, which is the market leader in the channel. We also progressed development of two new IMF products with MVM and a new commercial supply chain partner, targeting launch of the first product in the second half of FY24. We also commenced production of A2 Platinum Stage 4 product with MVM and another new commercial supply chain partner. Over the page on slide 7, we accelerated growth in other nutritionals and developed two new fortified tub products to be launched shortly. In ANZ liquid milk, we continued to develop our lactose-free penetration in Australia and progressed the major upgrade of our Kyogren facility. In the US, we significantly improved profitability, commenced distribution of IMF product while investing in long-term FDA approval. And lastly, we advanced our sustainability program with the commissioning of New Zealand's first high-pressure electrode boiler at MVM, powered by certified renewable energy, and achieved our animal welfare certification and farm environmental plan targets. Turning to the next slide, the major highlight of the half was the successful launch of our new GB registered China label IMF product, which has been an enormous project for our China team and our strategic partner, China State Farms. Following the approval received from Samar in June 23 and commencing production, we started shipping to distributors in October and retailers and major platforms from November. We did an advanced soft launch through our flagship online stores in October to make the product available to our consumers who wanted to transition earlier. Following strong support from the trade, in December we accelerated the transition to support distributors and retailers ahead of China's New Year, which improved the phasing of our results. At this point, stages one, two, and three have largely transitioned in all major channels with limited old product available. We'll maintain availability of some old product online for a short period of time for those consumers, particularly early stage users, who would prefer to delay switching. In December, we commenced execution of a significant launch campaign, which continued through to Chinese New Year to communicate the arrival of our new upgraded product. The campaign was extensive and integrated across all sales and marketing channels, Michelle will share more on this later in the presentation. Slide 9 highlights that the GB registration process to date has resulted in a 20% reduction in the number of products in the China label IMS market with a shift towards local brands. The two charts on the left show that the total number of China label products has gone from 438 in December 22 to 353 in December 23 with a reduction predominantly from imported products. The shift is far less pronounced from a market value or sales perspective, highlighted in the two charts on the right, which illustrate the impact on the NBS panel as an example. If we stop 10, since we refreshed our growth strategy in 2021, the China IMF market has evolved significantly. It would be more challenging to expect it, but it's now changing. The number of newborns in China for the calendar 23 period reflects an improvement in trajectory over the past several years. We're also encouraged by the recent market volume trend for stage one product, which has improved. Calendar year 24, we expect a high number of newborns based on our assessment of various factors and data points, including delayed birth due to COVID-19, recent marriage stats, pregnancy indicators, government initiatives, and historical birth rates in prior Year of the Dragon. Beyond 24, the longer-term birth rate is more difficult to predict. The overall China IMF market declined again in the first half of 24, down 10.7% in volume and 13.6% in value. There's a similar value decline in Q&A and BCD cities. The market decline is due to a number of factors, including the cumulative impact of lower newborns, increased competitive intensity... and promotional activity, as well as macroeconomic positions impacting retail sales. The market is also seeing increased brand concentrations towards top five players and a shift towards local Chinese brands, partly due to the new GB registration process, and top players are increasingly leveraging a broader product portfolio. We've also recently seen a shift in market sales from China-labeled to English-labeled channels, and within English-labeled channels over a longer period from Daigo to CBEC and O2O channels. Moving to the next slide, against this challenging backdrop, we've been relatively successful. Our brand position, finishing and growth strategy have resulted in significant share gains over the past few years. We are the pioneer of the A13 category and our high quality product and distinctive brand from New Zealand resonates well with consumers. We've increased our marketing investment from just under $170 million in FY21 to over $260 million in the past calendar year to reach more consumers in a targeted manner. Our in-market execution has been exceptionally strong in partnership with our strategic partner, China State Farm. And we are one of the only companies that can leverage a one-brand, two-label approach with strong positions in both China label and English label. In addition, key segment trends continue to support our growth strategy as outlined on slide 12. Our China label products compete in the ultra-premium segment, which represents well over half the total market and increasing as a proportion. And secondly, the A2 protein segment continues to gain share in the category. The segment has grown rapidly and accounts for 20% of the MBS channel and 17% of the Dole channel. The other important trend, which I'll come back to shortly, relates to brand concentration. This is translating into favorable brand health metrics and market share gains. On slide 13, you can see the continued increase in our China brand health metrics. The slide also shows the significant growth in our market share in China-labeled channels, and that our total English label market share has also increased. Moving to slide 14, we're very proud that A2 is now a top five brand in the China IMF market overall with a significant value share of 6.4% at the end of the first half of 24 on an MAT basis. This includes being the clear number two player in the English label IMF market with over 20% share and a 4.1% share in China label as a top 10 brand. Slide 15 shows in detail the evolution of brand concentration in the market over the past few years. The top five brands now represent 52% of the market compared to 45% in FY21, and the top 10 brands account for 74% of the market compared to 66% in FY21. This is an important trend, And there are strong drivers that should see brand concentration increase further over time, consistent with how other IMF markets have developed around the world. Moving now to slide 16 on our outlook for FY24. I'll make a few comments here, but also direct you to our results commentary and outlook announcement released this morning, where we have the full version of our updated FY24 outlook. Our revenue growth guidance for FY24... We're now expecting growth of low to mid single digit percent with IMF, other nutritionals and US sales up, ANZ liquid milk sales flat and MPM sales down. In terms of the shape of our P&L versus last year, we're expecting gross margin as described to be similar. Marketing investment as a percentage of revenue to be similar to up. Administration and other expenses as a percentage of revenue to be similar to down. Overall, we expect this to result in our EBITDA margin in FY24 being broadly in line with FY23. We also expect cash conversion to be higher than FY23 and capex to increase to approximately $30 million to support the upgrade of our Caribbean milk processing facility. I want to spend some time now recapping on some of the elements of our strategy and provide an update on our medium-term revenue ambitions. Slide 17 shows our growth strategy on a page which is focused on five key priorities, which we have refined slightly in the detail to better indicate our current priorities. Firstly, investing in people and planet leadership, particularly in relation to our capability and sustainability objectives. Secondly, capturing the full potential in China IMF, particularly expansion into lower tier cities and online channels. Thirdly, ramping up product innovation. including portfolio expansion in English-labeled IMF, China-labeled IMF and other nutritionals for kids, adults and seniors, as well as leveraging the portfolio into new markets. Fourthly, transforming our supply chain, particularly accessing additional China-labeled IMF registrations and developing our own nutritional manufacturing capability through MVM and or other commercial and acquisition opportunities, primarily in New Zealand and China over time. And finally, accelerating the path to profitability for our US and MVM businesses. Moving to slide 18, this slide shows how we are tracking towards our medium-term goals reflected in our measures of success. Overall, we are making solid progress against the plan we outlined back in October 21, with a few changes here from our full-year results. Engagement and CBEX share have changed to work in progress. I'll come back to our medium-term revenue ambition shortly. On the positive side, Australian household penetration, US premium milk share, China other nutritionals growth and supply chain efficiency have improved. Slide 19 highlights the significant market share we have gained in the China IMF market since FY21, increasing from 4.9% to 6.4% through execution of our growth strategy. In doing so, we have grown our China label IMF sales by over 50%, and stabilised our English label IMF sales, resulting in A2 becoming a top five brand overall. We have also transformed our IMF channel mix, continuing to focus on more controlled channels away from the DAIGO channel. As a result, our China label, CBEC and O2O channels now represent 90% of our IMF sales compared to 60% in FY21. The company has also grown other nutritional products outside of the IMF category by 67%, and its combined liquid milk business in ANZ and the US by 27% over the period. However, the China IMF market size has reduced significantly, down 24%, driven primarily by a 25% reduction in the number of newborns, which is more than expected at the time of announcing our refreshed growth strategy back in October 2021. In particular, English-labeled channels have not recovered at the speed and to the extent initially assumed, with the Daigo channel down 55%, which was a key channel for the company. In summary, whilst the market is showing some early signs of stabilisation, it will take longer for the recovery than initially assumed. Moving to slide 20, in October 2021, as part of our refreshed growth strategy, we defined our medium-term financial ambition to grow revenue from $1.2 billion in FY21, to approximately $2 billion by FY26 or later and to target EBITDA margins in the teens. At the time, we stated that defining a specific timeline to achieve these financial goals was challenging given the pace and degree of change in the China IMF market, including from the prolonged COVID-19 impact and reduction in the number of Chinese newborns. From FY21 to date, we've grown group revenue by $415 million and increased our EBITDA margin by 3.6 percentage points, resulting in revenue and EBITDA growth of 34% and 82% respectively over the period. Our China-label IMF growth is on track with significant share gains. English-label IMF growth is behind plans due to the market decline, particularly in the DAIGO channel, and lower share gains to date. Achieving the company's medium-term revenue ambition of Approximately $2 billion by FY26 would require an additional $380 million in revenue growth on calendar 23 over the next two and a half years. This growth would represent a compound annual growth rate of approximately 9%, with higher growth required in FY25 and 26 based on the company's revenue guidance for FY24. So whilst it remains possible for the company to achieve its medium-term revenue ambition of approximately $2 billion by FY26, At this stage, it is likely to be achieved by FY27 or later. The company continues to target EBITDA margins in the teens with year-on-year improvement. I'll now hand over to Dave, who will cover our financial results for the half in more detail.