The A2 Milk Company Limited

Thank you for standing by and welcome to the A2 Milk Company FY24 results presentation. 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, Group Head of Investor Relations. Please go ahead.

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

Thanks, David. Good morning, everyone, and thank you for joining the call. We're pleased to present our FY24 results, which delivered strong growth in revenue, EBITDA, and EPS. We grew total IMF sales despite a double-digit decline in the China IMF market, becoming a top five brand. We also achieved another record high in China label market share in a year of market-wide transition to new GB product. Encouragingly, after several periods of decline, we stabilised our English label sales and achieved growth in the second half. And pleasingly, we announced on Friday that we have resolved our Sinle arbitration disputes, subject to Sinle completing its equity raise and refinancing. Moving to slide five, which summarises our financial results. Revenue for the period was $1.68 billion, up 5.2%. EBITDA was $234 million, up 6.9%, with an EBITDA margin of 14%. Our net profit after tax was $168 million, up 7.7%, and EPS was up 9.2%, to 23.2 cents. Net cash at the end of the period was $969 million, up $212 million compared to June 23, and our operational cash conversion improved to 126%. Revenue growth for the year was again driven by our China segment, which was up 14%, while our ANZ segment was down 15%, reflecting the change in our English label distribution strategy. US sales were up 8%, while NBM sales were down 11%. From a category perspective, we grew total IMF sales by 4.6%, with China label sales up 9.5% and English label sales flat. Sales in our liquid milk businesses both grew, up 3% in ANZ and 7% in the US. And lastly, sales in our other nutritionals category also grew more substantially by 37%. Moving to slide six, beyond our financial results, I'm very pleased with what our team has achieved this year from an operational perspective. and I've called out some of those over the next couple of pages, including growing our IMF sales by 4.6% when the market was down over 10%, launching and transitioning our upgraded China label product successfully, gaining share in VCD cities and online, improving China brand health, developing our distribution partnership with Yuo, launching our new English label product, A2 Gentle Gold, and accelerating growth in other nutritionals. And on the next page, the more highlights, continuing to drive lactose-free growth in Australia, improving U.S. profitability significantly, completing our growth study for FDA approval, expanding our English label supply chain partners, and making significant progress on our sustainability program. Moving to slide eight, since we refreshed our strategy in 2021, the China IMF market has been more challenging than we expected. but is showing some improvement in trajectory, as indicated by the chart on the right-hand side of the page, for the total market and its China label and English label components. In FY24, the total China IMF market declined by 10.7% in value, with the decline in key and A cities greater than BCD. The China label IMF market declined by 12.5% in value terms, driven by the combination of volume pressure and higher promotional activity during the GB transition period. English label IMF outperformed the overall market significantly, up 3.8% in value. The A2 type protein segment grew rapidly and now accounts for 18% of the total market value, and brand concentration continues to increase among the top players, particularly the top five. Turning to the next page, we are extremely pleased with how our China label business has performed in FY24. It was a critical year with the launch and transition to our upgraded A2 Jirtu product. It's difficult to explain how complicated and challenging such a transition is to manage, and our team and partners executed perfectly and achieved record market share at the same time. An amazing achievement. Li Zhao will talk to this in more detail shortly. Moving to page 10, we are also pleased to see an improvement in English label performance, with the total market returning to growth and A2 sales growing in the second half. Johan and the rest of our team have been executing various initiatives to drive growth over the past couple of years, and it's pleasing to see this coming through in our results. In fact, we achieved our highest English label market share since April 2021. Moving to the next page, and we're very proud that A2 has become a top five brand in the total China IMF market, with a value share of 7.3%, up 1.4 percentage points for the year. This includes being a top 10 brand in the China label IMF market with almost 5% share and the clear number two player in the English label market with over 20% share, both of which improved in FY24. Turning to slide 12 and taking a closer look at our other nutritionals and liquid milk businesses. Other nutritional sales grew 37% driven by more dedicated team structure, improved supply and innovation. Liquid milk sales grew 4.8% with lactose-free growth in Australia and grass-fed growth in the US being key drivers. Eleanor and Kevin will cover our liquid milk businesses in more detail shortly. So in summary, our results in FY24 were in line with our expectations and reflected strong execution by our team. Moving now to slide 13 and our outlook for FY25. I'll make a few comments here but also direct you to our results commentary and outlook released this morning where we have the full version of our FY25 outlook. In terms of market growth, we're expecting a further decline in the China IMF market in FY25. The company is expecting mid-single digit revenue growth in FY25, with growth affected by IMF supply constraints, which are expected to be resolved in the first half. Gross margins are expected to be broadly similar to FY24, with the first half down, impacted by air freight, and the second half up. Brand reinvestment rates are expected to be similar, and SG&A is expected to be similar to down as a percent of sales. Overall, EBITDA margins as a percentage of revenue expected to be broadly similar to FY24, with the first half down and the second half up compared to prior year. Cash conversion is expected to be less than 100%, mainly due to the Sinle settlement, and CapEx is expected to be approximately $20 million. Moving now to a brief strategy update. Slide 14 shows our growth strategy on a page which is focused on five key priorities. Our strategy hasn't changed and is focused on capturing the full potential of the China market with supply chain transformation a key priority. Moving to slide 15, this slide shows how we are tracking towards our medium-term goals reflected in our measures of success. Overall, we're making solid progress against the plan with a few changes here since our update at the half. In the people section, we have added gender pay gap as a measure and marked it as work in progress, so we have more work to do here to reduce the gap. Under market share, we have marked O2O and Daigo share as work in progress, given its decline from FY23 to FY24. Australian fresh milk share has improved, while US share is work in progress. In innovation, the only change is US sales from new products. While this was positive for the year, it was slightly lower than what we had been targeting. Under supply chain, we've marked service as work in progress given the challenges we are currently experiencing with IMF supply. Under shareholders, our expectation for US and MDM profitability has moved out to FY27, and we've marked the US as work in progress until we have more clarity on our IMF opportunity and potential investment levels. Moving to slide 16, which is another slide we've been reporting our progress against, We've defined our medium-term financial ambition to grow revenue from $1.2 billion in FY21 to approximately $2 billion by FY27 or later, and to target EBITDA margins in the teens with year-on-year improvement. From FY21 to date, we've grown revenue by $469 million and improved our EBITDA margin to 14%. Our China-labeled IMF growth is on track with significant share gains. English-labeled IMF growth is behind plan due to the market decline, particularly in the Daigo channel, and lower share gains to date. that is showing signs of improvement. Overall, we are on track to deliver our medium-term revenue ambition by FY27 or later, with EBITDA margin improvement a key focus. Turning to slide 17, we thought it might be helpful to conceptualize how we are thinking about the growth in our IMF portfolio over the next few years. For simplicity, we presented this chart based on China market definitions of price segments being ultra-premium, super-premium, premium, and mainstream. From left to right, you can see the indicative positioning of our current English label products, the 3.3% market share being A2 Platinum and our recently launched A2 Gentle Gold, with a third of product to be positioned in the premium to super premium segment targeted to launch in FY25. We then show our China label A2 Jertu product playing in the ultra premium segment with 4% market share. Our ambition is to have at least another three China label registrations over time. In connection with the Sinle dispute resolution, we expect to access an additional China label registration slot at Sinle's Dun Sandal site, subject to SAMR approval. And additional China label registrations are being explored through our supply chain transformation strategy. This brings me to slide 18. The resolution of disputes with Sinle improves IMF supply chain certainty and flexibility for A2. In essence, we have conditionally resolved our Sinle arbitration disputes relating to exclusivity, pricing, and other matters. subject to Sinle completing its proposed equity raise and refinancing. We have also agreed to support and subscribe for shares under Sinle's equity raise on terms to be agreed, which will be set out in Sinle's notice of meeting. Hopefully our announcement on Friday was clear, but I'm happy to clarify any questions you may have during Q&A. Turning to page 19, we are very conscious of the significant amount of cash we have on our balance sheet at year end. Our capital allocation framework prioritises investment in growth initiatives ahead of returning capital to shareholders, Consistent with this, priority has been given to transforming and de-risking our supply chain to enable future growth focused on investment in New Zealand and China. We're continuing to explore M&A and JV opportunities, which may require significant capital investment. Once our supply chain transformation is further developed and other investment opportunities are considered, to the extent there is a capital surplus to achieving our priorities, the board will make a disciplined assessment of the potential return of capital to shareholders and the most appropriate option to do so. And lastly, on page 20, I wanted to highlight the significant progress we've made this year towards achieving our planet-related goals through our sustainability program, particularly in relation to emissions reduction. There have been two key milestones during the year. Firstly, the electrification of the boiler at MVM, which has reduced scope one and two emissions by 45%, with more to come this year. And secondly, our investment in AgriZero, which we're pleased to have the opportunity to join this year alongside other industry stakeholders and governments. I'll now hand over to Dave to cover our financials in more detail.