The A2 Milk Company Limited

Good morning, everyone, and thank you for joining us today for the A2 Milk Company's interim results presentation, the first half of FY25. My name is David Bortolussi. I'm the Managing Director and CEO, and today I'm joined on the call by our CFO, Dave Musket, and leaders from our regions, Li Zhao, Johan Sinaratnan, and Eleanor Corr. The team and I will present the results and outlook, and as always, there will be time at the end for questions. Starting on slide four, I'm very pleased to share the results of our team's execution of our growth strategy, which has delivered another period of strong operational and financial performance. We experienced significant supply constraints during the period, which we've overcome, and continue to focus on driving growth in China and other markets within and outside of the infant category. Our ongoing focus on brand investment, product innovation and supply chain transformation have enabled us to continue to grow in challenging market conditions. Our solid first half results and positive momentum going into the second half have resulted in us upgrading our FY25 full year guidance, which I'll cover in more detail later. In our infant milk formula business, which I'll refer to as IMF, we delivered double-digit revenue growth in English Label and achieved record market share in China Label. We launched new products targeting all life stages from infants to seniors, and today we are pleased to declare our first-ever dividend following the announcement of our dividend policy at our annual meeting last year. Moving to slide five, which summarises our financial results, We delivered 10% revenue growth, which was at the top end of our guidance range. EBITDA was up a lesser 5% due to significant air freight costs incurred to mitigate supply constraints, which have now been resolved. Excluding this impact, EBITDA would have been up 12%, with an EBITDA margin of 14.2%. Net profit after tax and EPS grew by around 7.5%, which was impacted by air freight and also by accelerated depreciation of the MBM coal boiler. Excluding these impacts, net profit after tax would have been up 18%. Cash conversion was over 100%, and we declared an interim dividend of $0.085 per share, fully imputed and fully franked. Slide 6 outlines our segment and product category performance. The growth continues to be driven by our China segment, led by double-digit revenue growth in English-labeled IMF and other nutritionals. The decline in our ANZ segment, which was primarily due to lower IMF sales driven by a further decline in the DAGO channel, was partially offset by growth in our Australian liquid milk business. Our US business continued to grow, driven by liquid milk, with an ongoing focus on improving profitability. And MVM experienced a significant increase in external ingredient sales, mainly due to higher GDP pricing. From a category perspective, our total IMS sales grew by 7% in a market that declined 6%, with English Label being the standout performer, highlighting the portfolio benefits of having a one-brand, two-label model. Our liquid milk business continued to perform well in both ANZ and the US, with both achieving market share gains and double-digit growth, and our focus on other nutritionals generated a further 17% growth. Beyond our financials, our results were supported by important operational achievements delivered by our exceptional team, which we have highlighted on slide 7 and are covered throughout today's presentation. Moving to slide eight and focusing on our key market in China, the rate of decline in the China IMS market improved during the half, driven by an increase in China newborns, which increased for the first time since 2016. The China label market was down, mainly due to the cumulative impact of fewer newborns in the past. Average pricing in the market has been stabilising following completion of the new GB transition period, but consumer trading down pressure remains, particularly in later stage products. Growth in the English label market was encouraging and was driven by post-COVID market recovery, formulation innovation, a continued shift to online channels and the degree of switching between China label and English label. While English label represents a smaller proportion of the total market, A2 is well positioned to benefit in this category given the positive market trends and our position as the second largest player in the market with around 20% market share. Finally, the A2 protein segment continued to drive growth in the category, and brand concentration amongst the top five increased again. Moving now to slide nine, and despite the supply constraints we had in the half, we maintained our top five brand position in the market, and importantly, the A2 brand was the number three absolute share gainer in the market, which is a remarkable achievement. The next slide summarizes our updated guidance for FY25. with the full version contained in our results commentary and outlook announcements. Our strong first half results and ongoing momentum have led us to raise our FY25 revenue guidance to low to mid double digit percent growth on FY24. Since the annual meeting, when we updated our previous guidance, and following a positive double 11 period, we have experienced stronger than expected demand for A2 platinum, which has continued into the new year. In addition to stronger demand for English-label IMF, we are also experiencing higher liquid milk sales, particularly in the US Club Channel. We also wanted to call out the impact FX rates may have on the shape of our results, inflating both revenue and cost, and the impact of higher GDC pricing increasing MVM external ingredient sales. We also adjusted our EBITDA percent margin guidance and now expect it to increase slightly in FY25 versus FY24. Turning to the next page, we continue to focus on executing our growth strategy, particularly realising the full potential of our China IMF opportunity, driving growth through innovation in IMF, liquid milk and adjacent categories, entering new and emerging markets, transforming our supply chain and achieving profitability in our US and MDM businesses. On slide 12, we are making good progress against our measures of success. And for those measures that are marked as work in progress, we have a range of initiatives in place to move them towards our goals. Moving to slide 13, we continue to progress our supply chain transformation during the half, primarily through commercial partnerships. We launched our first HMO English label IMF formulation and commenced China-based manufacturing for the first time for our new fortified seniors nutrition range using A2 milk powder produced at MDM. As we look ahead, accelerating access to additional China label IMF registrations to support future growth and developing our own nutritional manufacturing capability remains critical to the company's supply chain transformation strategy. While we're not sharing any new information with you today, we continue to progress opportunities with the intent of making meaningful progress this year. Turning to the next slide, our first half results have laid a solid foundation for FY25 to move significantly closer to our median term revenue ambition of $2 billion. We also remain committed to improving our EBITDA margins and are pleased to provide upgraded earnings guidance today. I'll now hand over to Dave, who'll take you through the financials in more detail.

Thanks, David, and good morning, everyone. I'll start on slide 16 with a summary of our group P&L. We delivered net sales revenue of $893 million, up 10% on prior year. This reflected double-digit growth in English Label IMF, other nutritionals, and both of our liquid milk businesses in ANZ and the US, and significant growth in MVM external ingredient sales. Our gross margin of 44.8% was down almost two percentage points, mainly due to two non-recurring items. Firstly, incremental air freight of $8 million associated with the China-level supply constraints, and secondly, the remaining coal boiler accelerated depreciation of $5 million. We increased our marketing investment again, focused on China, with spend up 6.7%, which contributed to improved brand health measures and supported sales growth. with some spend being deferred into the second half as a result of the first half supply constraints. Our SG&A was up around 10% due to foreign exchange impacts. However, excluding these impacts, SG&A was up only 2% as investment in key talent and capability was partly offset by cost savings. As David outlined earlier, we declared an interim dividend of $0.085 per share, totaling approximately $62 million. This equates to a payout ratio of 67% of NPAT, which is aligned to the dividend policy we announced in November 2024. The dividend will be paid on the 4th of April and will be fully imputed and fully franked. Slide 17 and 18 summarize our performance and product performances with the key drivers covered throughout today's presentation. Moving on to slide 19. We achieved net operating cash inflow of $78.8 million and cash conversion of 106%, which was supported by favourable working capital timing benefits linked to the timing of inventory and marketing-related payments. Investing activity outflows of $90.5 million represented incremental term deposits of $50 million and our additional investment in Sinle of $32.8 million in support of their recapitalisation. Our total net cash at the end of the period was $1 billion, up $45.1 million since the 30th of June, 2024. Turning to slide 20, our balance sheet remains strong. Inventory and receivables were both up on June, driven by MBM milk production seasonality. Our non-current assets increased by $49 million, mainly due to the previously mentioned investment in Simlay, and trade and other payables were higher due to the timing of inventory orders and marketing activities. and was also impacted by MVM seasonality. That completes the financial overview. I'll now hand over to Li Zhao to take you through the performance of our China label business.

Thank you, Dave. Starting on slide 22, the China market under the broader environment continues to be challenging. We have performed strongly under navigated supply constraints. during the half we prioritize online and certain offline accounts to limit the impact of supply constraint on sales and the new user recruitment and with the help of our supply chain team we largely restore our trade inventory level to target level ahead of chinese new year despite these challenges we achieved a record high china label mf market share of 5.3 percent on the mat basis Outside of IMF, we also continue to grow other nutritionals with a new locally produced senior 45 reporter range launched during the half. Turning to slide 23 and looking at some of our key market share metrics, we are pleased with our strong performance in the dollar channel, particularly with GD, achieving record high market share of 4.1%. We continue to hold our national MBS value share and maintain our share in Q&A and the BCD cities during the period of supply constraints while online channels were prioritized. Our focus on consumer education and the new user recruitment resulted in share gain in early stage products and our average selling price remained resilient. Turn to slide 24, we increased our marketing investment during the period to support three targeted campaigns aimed at lifting the awareness of A1 protein-free benefits and reinforcing A2 uniqueness and superiority in this growing category. This investment has underpinned our market share growth and increase in our brand health metrics. Moving to slide 25, we continue to diversify our product range outside of MS, and during the half, launched our new 45 milk powder range, targeting the fast-growing senior market, with the three SKU focus on supporting top senior health needs. In addition, we are ready to enter the China-labeled case milk powder market in the second half to capitalize on the growing segment That concludes the China market update. I will now hand over to Johan to take you through our English label business.

Thank you, Ja, and good morning, everyone. Looking at slide 26, after a number of challenging years, our English label continues to perform well, and as mentioned earlier, was a standout in the half with revenue growth of 13%. This was supported by positive market trends, combined with a focus on increasing distribution via CBEC and O2O channels. Declines in the ANZ market were consistent with recent trends, with the DIGO channel now only accounting for less than 5% of our total IMF business. Our A2 Gentle Gold sales in Australia were in line with plans, and we built on A2MC's existing presence in emerging markets with the launch of A2 Platinum IMS in Vietnam and registered A2 Gentle Gold for launch in H2. Moving to slide 27, following a period of significant disruption as a result of COVID-19, the English-label IMS market has recovered and grown for the second consecutive half. English Label now accounts for 18% of the China IMF overall market, up from a low of 14% in FY22, but below pre-COVID levels of 23% in FY20. Macroeconomic factors are driving a mixed shift between China Label and English Label, with consumers seeking more affordable options and new formulations are driving growth. We observed significant uplift in consumer demand for EL post-111, driven by O2O within lower-tier cities and in early-stage products. This is reflected in point-of-sale data we gather from our offline and online channels. We note that market metrics remain subject to limitations, such as small panel size and under-representation of some high-growth channels, such as O2O in lower-tier cities. Turning to slide 28, our marketing investment was focused on A2 platinum with a refreshed TBC and a heavy focus on social media platforms and customer advocacy through testimonials to reinforce the digestion benefits of our A2 milk-based formulation. Moving to slide 29, I'm excited to introduce to you our newest IMF formulation, A2 Genesis. which is our most premium English-labeled IMF formulation. Genesys is produced in partnership with Yashali in New Zealand, with initial selling to Hong Kong and CBEC channels occurring during January 2025. We now have our full launch campaign underway, and we look forward to updating you on Genesys' performance at the full year result in August. I'll now hand over to our Managing Director for ANZ and Strategy, Eleanor Call.

Thanks, Johann, and hello, everyone. Turning to slide 30, market conditions remain challenging in Australia as cost of living pressures continue, leading to increased price-based competition and overall market value sales decline. Despite the challenging macroeconomic environment, we continue to perform well, achieving 11.2% revenue growth and reaching a key milestone of over $100 million in liquid milk sales in Australia for the half. Underpinning this performance has been market share gains in both A2 milk and A2 milk lactose-free, with lactose-free achieving a record high market share of 15.8%. Outside our sales performance, we made progress in our sustainability goals, introducing recycled bottles into our Smith & Grange facility, and worked to upgrade our Kyabrin facility is on track to complete at the end of the financial year, providing us with increased manufacturing capacity for future growth. And with that, I'll hand back to David Bortolussi.

Thanks, Eleanor. Turning to slide 31, I'll cover our US business on behalf of Kevin Bush, who's unable to join us today. Kevin and our team's relentless focus on profitability improvement continued in the half, with EBITDA losses reducing a further 42%. This is the same half last year, supported by double-digit revenue growth. Our core A2 milk brand has proved resilient in an extremely competitive market and was supported by the success of our relatively new A2 milk grass-fed product. We've seen our market value share in the premium milk segment increase at 2.4% from 2.2% in FY24. Long-term approval of our infant formula is on track with our new infant formula notification, or NISN as it's often referred to, submitted on time in the second quarter of FY25. We believe we are the first of the current enforcement discretion process brands to have completed the growth study and this critical step, with our submission currently under review by SBA. And finally, a few quick points on MBM on slide 32 before we move to Q&A. MVM reported higher net sales revenue reflecting higher GDP pricing and increased milk volumes processed. EBITDA losses improved due to higher internal sales and a continued cost and productivity focus across the site. Achieving profitability remains a key priority and our team continues to actively pursue various initiatives to reach this objective. I'll pause there and with that I'll hand over to our operator Travis for the Q&A.

Thank you. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star then 2. If you're using a speakerphone, please pick up the handset to ask your question. We ask that questions be limited to two per person to allow everyone an opportunity. Please rejoin the question queue for any follow-up questions. The first question today comes from Tom Girath from Baron Joey. Please go ahead. Tom, your line is open if you'd like to ask your question. I might move on to the next questioner. It comes from Sam Tego from Citi. Please go ahead.

Hi, David. This is a great result. Congratulations. Thanks, Sam. Just wondering under what scenarios can you see the market shifting back towards trying to label at the expense of English Label in the future. I guess even if the consumer improves, it seems that English Label will always have the latest innovation, given this channel is uncovered by the SAMR regime. And, you know, given the backdrop of English Label outperforming, how do you think about acquiring more SAMR slots if the market's shifting away from China Label?

We're still... very confident in the growth potential of China level over time I think we're seeing obviously a degree of recovery in the English label channel which will at some stage reach a new normal but there's still the vast majority of the market is focused on China level and strong loyalty amongst Chinese consumers for the local registered brands particularly in lower tier cities which is a key focus of ours going forward and relating that back to our supply chain transformation strategy I think it's still very important for us notwithstanding the English label trends at the moment to expand our portfolio to be able to capture the full potential of our opportunity in China. As you know, we've only got one registered product there at the moment. We have the opportunity to expand that with Sydney, but having a portfolio of China-labeled products, like what we're developing in English-labeled, will allow us to realise our full potential there.

Sure, and then just as a follow-on, we've just won China-labeled products currently. What do you see as your market share ceiling in China label? And then on this topic, just any update around points of distribution would be helpful. I think you're at 29,000 in the full year. Where are you now? And what's your longer-term target?

We don't necessarily think about a ceiling because ourselves, I guess the most similar brand would be Friso Prestige. Both brands continue to push new limits in terms of the share of single registrations, but we will at some stage hit a ceiling, as you suggest. We're just not in a position to quantify that, and we continue to see share gains in the market, which are really encouraging. The second part of your question was?

Yeah, just on distribution, I think at the full year you said 29,000.

Yeah, we did increase distribution numbers. You can see it actually showing up in our, if you've got access to the Nielsen data, our numeric and weighted distribution increasing during the period. But our store count increased by roughly 800 during the period. Is there a longer term target there? Well, back in October 21 when we shared our refreshed strategy. We had 30,000 to 35,000 doors as our target, so we're obviously at the lower end of that range now. We don't necessarily have a target range. It's sort of in that order because there's been pretty significant store closures and rationalisation in the MBS channel. What's most important to us is weighted distribution. and I guess the breadth of that across cities from T&A through to BCD, which we're seeing improvements in all the time. So probably the most important thing is to focus on our weighted distribution over time.

All right. Thank you so much.

Thanks, Sam.

Thank you. The next question comes from Tom Kirath from Baron Joey. Please go ahead.

Morning, guys. Apologies there. A couple of questions on genesis. Just be interested to know when specifically the big launch of that product happens and maybe just on timing of when you see the revenues kind of dropping. Is it going to happen in this half? Is it more a 26 or 27 story that you see the uplift from the sales there?

your hand respond to that sure so uh tom i think that firstly we have ranged it um on selected channels but that was during the chinese new year and more to test the operations of it all um the big launch will happen from march onwards but of course the drive will be to to um get awareness and consideration up so we wouldn't reasonably expect that that volume would happen straight away it takes a bit of time people have to get familiar with the product see testimonials etc So we would expect that while, yes, the activity might start in March, the offtake may take longer and may go into more, you know, into the future rather than just in the half.

So, Tom, less material in the fourth quarter, but we're hoping for more substantive sales in FY26.

And what are the kind of medium-term aspirations for the product? Like, are there examples of others that have gone into HMO where you... Is it 10%, 20%, 30% incremental? How do you guys think about it in a medium-term sense?

Sure. I guess what I look at is some of the other SKUs that have launched in the past two to three years, and they've been able to capture anywhere in the order of one to three percentage points of share of the market. So it's always hard to tell these things, but that's a one-data point that I look at.

Great. Luke, do you have a question?

Again, if it's helpful, the total HMO market, if you look at English label products that include the HMO ingredient, it totals almost 30% of the market now.

Wow.

Okay. Great. Thanks, Johan.

Thank you. The next question comes from Matt Montgomery from Forsyth Bar. Please go ahead.

Hi, guys. Good morning. Well done on a good set of numbers. Just on guidance and your... bullet points for the increases across them. Could you please quantify, I guess, the split between the different drivers? And then on English labels specifically, sorry, CBEC English labels, is it fair to assume that you're guiding to similar growth rates in the second half that you've experienced in the first half?

Yeah, hey Matt, it's Dave. Just in terms of the revenue upgrade, we've quite deliberately laid out the four dot points at the top of that in order of magnitude. So English Label is the largest driver. It's not the majority, but it's the largest driver. But we've tried to give you, I suppose, as much insight as we can by listing them in order of magnitude. In terms of second half, obviously we're guiding to an uplifted growth rate in the second half, and that's partly driven or in a large part driven by English label, so you would expect to see a step up in growth in the second half of English label.

Yeah, that's useful. And then just on China label, supply constraints have clearly washed through, and from memory it was mainly a Q1 impact there. Are you able to just comment on, I guess, the exit run rate in terms of market share metrics or anything like that, and then, I guess, ultimately the flow through into the second half now?

Matt, so in terms of exit run rates, so if you have a look at our MBS share, you'll see that it took a bit of a dip partway through the half, which you would have expected. But then as we came out the back end of that, our share returned to almost historical highs of 3.7 and 3.6 around that in November and December. So we're seeing quite a good recovery in MBS share. Also, in terms of Sam's question on distribution, so as we've come back into stock, we've been able to expand our distribution, particularly in the second quarter, into lower tier cities. So we're feeling good about the outlook going into the next half now that we're back in stock and particularly due to the share gains in early stage product in stage one and two have been really encouraging. So that really sets us up well for the future, particularly as those stage one users kind of graduate into stage two. So they're kind of positive signs. Together with Sinle and the ATU team, together it's been a really big effort to recover the supply constraints that we had and to mitigate the impact in market. And we're really pleased with how that's worked out now with the benefit of hindsight. You may ask us what was the impact of that. It's inherently difficult to quantify the impact on sales or new user acquisition. But we're in a good position now.

Perfect. Thank you.

Thank you. The next question comes from Phil Kimber from E&P Capital. Please go ahead.

Hi, guys. My first question is just maybe touching in a little bit more detail on your performance of Stage 1. It looks like that was very strong, even with the China label supply constraints. Can you talk a little bit more, give some more colour around Stage 1, both English label and China label, and then maybe historically... Have you seen much in the way of drop-off rates between stage one and then stage two and stage three, or is that a really good guide for what's coming over the next 18 months to two years? Thanks.

David, I might ask Lijiao to comment on China level and then Lijiao to comment on English level.

Yeah. So, I mean, even with the supply constraint challenge, Our statements are doing pretty well because we are shifting our supplier priority auditions to the online peer account to maximize the opportunity. And also, luckily, we kind of ramp up the production average, I mean, the early stage, to catch up the market demand in the in the second quarter. And also, I mean, you can see that historically we have always had that focus on the early stage consumer recruitment, which is, I mean, expanding your pipeline for your future growth. So all these efforts are paying off, even though we could have grown more if there's no supply constraints. So, I mean, also, I mean, if you are tracking the A2, what we call the brand health tracking, I mean, we typically have the heritage and strengths of higher retention and then overcompetition. So, I would be positive, I mean, on the consumer retention, I mean, from Stage 1 to 2. Stage 3 at the moment is a little bit challenging because of market microenvironment, and we are seeing some trading down, and some consumer may become more price sensitive, which could be a potential challenge. But otherwise, I mean, overall, overall, I mean, brand strength, year retention is, I mean, kind of well above the market average, yeah.

And perhaps in the English-label market, one improvement overall has been post-COVID-19, more openness to consider English-label products by Chinese consumers, and then combine that with the overall macroeconomic situation where value for money propositions are favoured. That's definitely having a positive impact on the English-label market overall and for us as well. And also it is interesting to note just the level of innovation that's coming through in English Label and hence the importance of new propositions like Genesis for us going forward.

Thank you. And my second question was just around the lower tier cities. I understand you talked there about cost of living challenges. Are you finding that it is a big sort of handbrake on your growth, which is still very good, that you don't have a lower price China label product for those cities? And is that sort of the highest priority of when you're looking at new China label registrations?

So within the lower tier cities, so we're fortunate that we have both labels, our China label ultra premium product as well as our English label. more of a premium product. And we're experiencing – so we sort of – if you have a look at the data that we disclosed, on the MBS channel in the lower tier cities, we held share there. But that's probably constrained a bit by the stock availability that we had during the period, and I would hope that that will come back going forward. And then in English label, the data, you only really get a measure from that from Kantar data, and the Kantar data appears to be understating our growth in lower tier cities, particularly through the O2O channel, where we're experiencing significant growth in English label as we expand there as well. So we've got the benefit of the portfolio as it stands today, but definitely going forward, we're very keen to expand our portfolio to give us more products to be able to compete effectively across the market, including in lower tier cities. But that doesn't necessarily mean having a significantly lower priced China label product. There's different propositions and slightly different price points that may enable that and different distribution models. So we're thinking about that quite holistically. It doesn't mean to say that we're necessarily going to have a lower priced product.

Okay. Thank you.

Thank you. The next question comes from Adrian Orbon from Jarden. Please go ahead.

Oh, good morning, team. The first question, just on the A2 Genesis product, like it looks and is sort of priced very similar to a China label kind of product. Can you just give us a little bit more depth around your thinking around that and whether when you sort of come to the launch, whether you are expecting any sort of in China label?

Sure. So in terms of pricing for Genesis, it's, of course, a little higher than our platinum products, but not as high as what you would have for ultra premium China label products. So in the high 200s rather than in the 300s per unit. And the reason for that, of course, is, you know, HMO products are a premium proposition, and therefore, you know, that's the prevailing price point that we see for other English-labeled HMO-containing products. But it is definitely different, you know, to other China-labeled products, and pricing for English-labeled products overall tends to be lower than China-labeled imported products. So that's roughly why it's sitting... ahead of Platinum, but below China Label.

And in terms of... Sorry, Adrian, the call broke. Your voice just broke up a little bit. Last part of your question relating to potential cannibalisation of China Label, was it?

Yes, and particularly given the actual launch of the TIN looks very much like a China Label.

Yeah, it's a similar, there's some common elements there, but they're, you know, that addresses some of the pain points that our consumers have around, you know, the scoop and live is much more convenient for them than the fine dust cap. But in terms of the potential cannibalization, you know, we are seeing a little bit of a mix shift at the moment and a degree of switching, but the level of interaction between our China label and English label products and brand is quite limited. We don't disclose it, but it is quite low. So it's not a major consideration, but we will have regard to that. There's more of a dynamic within the labels than there is across the labels.

Okay, that's good. Thank you. And maybe the second question, like when you sort of track back to your strategy in 21 and you sort of had the target of mid-teens EBITDA margin and you're on your improvement, I guess A lot has happened since then. The market's a lot worse for English Label than you're expecting. You're probably launching different and more SKUs, and your supply chain strategy has sort of probably morphed into something different to what you maybe may have been anticipating at the time. Are you able to just sort of talk about some of the, like, how do that compare to the track now? Like, are we sort of a better or worse kind of profile, if you can? Like, it's just quite difficult for me. Also, I've done so many moving parts. Yeah.

I think we go back to 21 and the plan that we laid out, then the assumptions behind that. I think the big difference is the mix of China label and English label. And probably the... Sorry, stepping back a step is probably the... the growth or decline in the total market was worse than expected. And then particularly within English Label, we factored in a degree of recovery in the English Label channel as well as share improvement. And it's only recently that we're starting to see the channel come back. And, you know, now share is, when you look at the market metrics that I was leading to before, probably doesn't indicate how well we're starting to do now, particularly in the O2O channel. But that's probably the biggest difference. And that means that we're probably not where we would ideally like to be in terms of EBITDA margins. But having said that, with this recovery in English label and hopefully as we transform our supply chain and gain more market access to China and internalize production and capture more vertical margin, we should hopefully get more substantive improvement in our EBITDA margins.

Okay, but I guess the profile's a bit more back-weighted given it's the toughest starting point is probably the point.

Yeah, so I think with today's result and our outlook for FY25, we're obviously moving a lot closer to our $2 billion sales target. But in terms of EBITDA margin, so it's fair that we're behind where we'd ideally like to be, but back end waited as that supply chain transformation comes through, which will be a, that'll take several years to have impact as we either internalize into MVM and or other facilities over time and capture that margin benefit going forward. In terms of the sales number, I would just, we put it in the presentation, just a note there, but I just also just, you know, the impact of internalization will decrease MBM external ingredient sales. It's something to keep in mind around that as you're modeling the business.

Okay, cool. Thank you.

Thank you. The next question comes from Josephine Ford from Bank of America. Please go ahead.

Good morning. Good morning team, David and team. Congratulations on the result. Just probably following on from Tom's question on the new English label product A2 Genesis, can you just talk to the growth of HMO market, how far ahead of competitors you are with introducing that product and then perhaps go through how the partnership with New Zealand works? Is that required since you're producing it out of MVN, please?

Johan, do you want to address the

HMO growth, and I'll talk about Yashuli in a minute. Sure. So perhaps in terms of the evolution of HMO, it's an ingredient that has gained a lot more interest in China. The introduction of HMO-containing products probably started in earnest maybe about three years ago with some of the European products. coming into market. The one thing to note about HMOs is that the regulation of HMOs is different in different markets, and Europe and Hong Kong have different regulations to China GB standards. There are two HMOs currently approved for use in China label formulations, but there are more HMOs approved for use in Europe and Hong Kong. And so what we've seen is as HMOs being approved for use in GB, that's also spurred more interest in HMOs overall. So we've seen some of the products that have launched in the past few years gain a lot more traction and premiumized the EL market so that the average EL market ASP has actually grown over the past couple of years in particular. And that's driven by some of those NPDs coming into market. And so our objective is to bring the old goodness of A2 milk, but combined with the latest formulations with HMOs to market to complement the platinum product, which has done so well for so many years.

With Aptamol and Nestle in particular? Aptamol and Nestle in particular, yeah. So just to clarify the... the production process on the product. So for both Gentle Gold and Genesis, we developed those two products with Yashili New Zealand. The role that MBM plays in that supply chain is to produce A1 protein-free or A2 milk skim, different grade skim that is then used in the production process of those products at Yashili New Zealand. The only base formula we make at MBM at the moment is stage 4 A2 platinum, which is blended and canned by New Milk, which is a subsidiary of Lactalis in New Zealand as well. I hope that clarifies. Over time, we'd hope that we can produce more base powder at MBM, but that's how the production process works at the moment.

Yeah, thank you. And whilst, I guess, combined with the English label market shifting, you guys are positioned quite nicely as the number two player, so that's quite positive. Perhaps a follow-up question maybe on China Label. You've gained record market share in China Label from 4.9% to 5.3% all through a very difficult period in your supply chain. Can you just talk to how you were able to perhaps manage to do that with the strength of your brand and maybe some color around market consolidation in those lower tier brands and also at the retailer level?

Yeah. So, I mean, the In the first half, first quarter, we are pretty challenged by the supply constraint. And thanks to the SINLEI and the supply chain team, they are quickly, I mean, catch up the production, run up, while we operate all the products. I mean, the supply to the prioritized title, which is the domestic online, EC, and the national key account. And also we kind of quickly shift our activation support, I mean, to the early stage. I mean, leveraging the Dragon years baby boom. I mean, hopefully to get a more early stage new user, I mean, expanded our total consumer baseline. So that's what we did. And then when the product come back to a normal supply in the second quarter, we started expanding our distribution to the lower tier cities, and also we launched, I mean, as the presentation shows, I mean, two major, I mean, campaigns, I mean, to build whether momentum for English label, but as well as, I mean, amplify the A2C priority, I mean, supporting the child label, I mean, into the peak season. So, I mean, with all these, I mean, we didn't share in the presentation, but also our brand health metrics, I mean, also TPAL improving, I mean, in the first half, which gave us solid support to the new user recruitment, as well as the China label brand pool to the business. So that's how we achieved this result in the first half. Quite a lot of effort, hardworking of the team, as well as we take the right move to tackle the challenge. And most of the growth is driven by the domestic online and the national key accounts. But hopefully in the second half, we can focus more on the lower tier city expansion.

The only thing I'd add to that, Josephine, is that our brand health has improved in China level as well as English level as well, which is really important for the lower tier cities.

Great. Thanks very much and congratulations again. Thank you.

Thank you. The next question comes from Lisa Deng from Goldman Sachs. Please go ahead.

Hi. Yeah, congratulations on a great first half. So just two questions from me. The first is, can we get a little bit more granular understanding of the latest competitive landscape for both CL and EL, please? Just because I think we're at 12 to 15 months post the GB transition. We're hearing a lot of the players are now stabilising their operations and looking to step more into super premium, just given the volume challenges overall in the market. So can we maybe talk a little bit about competitor landscape things?

Can you talk to the local competitors landscape and then maybe particularly on China level and Yaren can add anything on English level for now too?

Yes. So overall you see the first trend is the further consolidation of the market. So now, I mean, the top 10 brands contribute 78% of the, I mean, the total MF market. I mean, there's 75, I mean, a year ago. Yeah. So that's the first is consolidation. And then secondly, you'll see, I mean, the strong just become stronger that even among the top 10, you'll see that the top five brands are taking share from the rest of the top 10 and also the rest of the other small tail player. Yeah. And then if you look at, I mean, who is the winner, who is the loser, I mean, there's a mixed story. I mean, subject to their different performance, even for one brand, they have a different performance online, offline, yeah. So if you mix them together, you'll see that, I mean, A2 is among the, I mean, combined English label and the China label, rank as the fifth biggest brand. While being the third share gainer, combined the China label and the English label. Ely is doing pretty well by offering improved formula, but very valuable money choice and a big portfolio. Followed by Nestle. who is, I mean, all the growth is coming from their PHP specialty formula, which is with the increasing, I mean, allergic baby in China. So they're really get, I mean, right on the right segment. Then it's us, and followed by the optimal. It's still growing, but probably, I mean, China-level, they are struggling, while partially offset by the English-level. Feihe is doing okay online. while they're kind of losing share offline, but combined, they still have a kind of marginal growth in share, I mean, maintained as a market leader. And then, I mean, Friso is still growing, but the speed is slowing down, I mean, challenged by this trade-off market situation. And also, together with us, that's the most premium, ultra-premium product. Wise looks like, I mean, stabilized, but actually they are still going through internal struggles with too much inventory. Matt Johnson still dropping, and most of the rest of the top 10 is dropping. So that's the market overall situation for China level.

Great. A follow-up from me is about P&L autonomy for China. So I just wanted to understand as English label becomes a larger part, who has ultimate P&L autonomy for English label being sold in China? Is it Li Xiao or is it Johan? Like for example, if I had one pool of money for marketing, how do I decide whether it goes towards China label or English label?

So we run the business as one brand and one business, Lisa. So we make those collective decisions and Johan and Ligia work very closely together with the team in terms of our sales and marketing plan and the level of investment that we make. For what it's worth, we're on one global bonus scheme and there's no reason not to optimize the outcome for the total company and brand. So you shouldn't be concerned about that whatsoever.

One global bonus scheme. Okay, thanks.

Thank you. The next question comes from Richard Barwick from CLSA. Please go ahead.

Good morning, David and team. Can I ask around your potential uses of capital? So obviously it sounds like you're inching closer to the acquisition of one or more China label. I think previously you said that we should expect it to be in the hundreds of millions of dollars. Can you just give us any sort of update that you can there in terms of what we should be broadly expecting? And then I'd also be interested to get an update on... any capital requirements at MVM? Because I mean, there has been sort of blending and canning talked about in the past, but just wondering where you are with that given the new products coming in and the bigger role that MVM's playing.

Yeah. So Richard, I have said that it could require hundreds of millions. It depends on what we actually execute and the role that MVM plays in that as well. So if it was a standalone acquisition of an integrated facility, That may well be hundreds of millions of dollars if it was a blending and canning operation that was attached to MVM. It may be a lesser amount if we're investing in MVM and blending and canning. That could be $150 to potentially up to $200 million. It may have been misinterpreted in the past that they're all additive. They are dependent variables depending on the strategy that we actually execute. So I can't provide at this stage any further clarity on that until we're actually in a position to announce what we're doing and then the role that MBM may play in that and the level of investment associated with that. So I appreciate the analyst community and investors have some concern over that and seeking clarity that everything will hopefully be clear in the passage of time.

And just to be clear on that one, David, So what you're saying now is they are not additive, so it's one or the other.

It could be investment in MVM or investment in... Sorry, Richard, it's more nuanced than that. So it depends on the actual strategy to be executed, depending on the capital that's required to facilitate that, yeah.

OK, all right.

Then my second question is around... Richard, at the end of the day, I would hope that at the end of this... In executing our strategy, I would hope that there is significant excess capital that we can return to shareholders in time, but we just need to take the time to execute the right strategy for our business and we'll be able to quantify the impact of that and then hopefully, and we'll make that decision at the time depending on what we do, hopefully we'll be in a position to return more capital to shareholders in time.

Okay, that's helpful. Thank you. The second question, David, is around the longer term goals. You've got the green dots and orange triangles up there. So the sales ambition, you're still looking for the $2 billion revenue target in FY27. Can you, I guess, update, there's a lot of new products coming in. So does that not have an impact? on an FY27 type basis. Is that what you're saying here? And then in terms of the EBITDA margins, again, you're sort of talking that in the teens, but obviously you've got with the English label, if that's sort of having a bit of a surprise recovery, then that surely is additive to that margin outcome. So again, in the context of that sort of FY27 basis, just a little bit more clarification there would be great.

So maybe this will help. So if you look at our guidance for FY25, I mean, I'm not saying this is the number, but broadly, we're getting pretty close to $1.9 billion. um so obviously 100 million or so short of the two billion um just bear in mind though um the what i mentioned before about the internalization impact on mbm uh external sales um so there's there's over 100 million dollars of external sales and mbm of ingredients products and a significant portion of that could be impacted by internalization because you obviously can't keep producing that but the nutritional If we're reducing nutritional volumes at a much greater scale, then that will be reduced significantly over time. In terms of the role that innovation will play in achieving that, yes, we have factored that in. at some stage, hopefully access to additional China label brands, which may or may not have a material impact on our 27 targets, but we're hoping that we're able to access those sooner rather than later that will have some impact as well. So all of that's in our mix. It's very hard to be specific about that. We still stand by our $2 billion sales target by FY27 or later. That's what we're striving to achieve. In terms of EBITDA margins, it's really the comments that I made before around we're not quite where we'd like to be. We would have liked to see more substantive improvement in our EBITDA margins over time, but the size and shape of the business is not exactly as we planned, which is always the case. But going forward with additional English label market recovery, hopefully share improvement in English label as well, plus the benefit of supply chain transformation that should bring incremental China label brand contributions. We're expanding the portfolio as well as internalization benefits of margin capture that should fuel growth. increased margins over time. And the last comment I would make on that, you just need to temper that, not just add all that through the P&L if you're modeling the business, because there's also downward pressure on pricing in China generally in a difficult market. And also innovation is often lower margin, particularly in the early stages because of the scale impacts of production on cost of goods.

Yeah okay so new products come through additive to sales obviously but less so from a margin perspective.

Yeah, yeah. I mean, obviously we have a very simple portfolio at the moment, particularly on China Lab, a huge brand that is one product range with four SKUs, which is really simple to produce and from a manufacturing scheduling and scale point of view. But as we expand the portfolio over time to drive incremental growth, then the portfolio becomes a little bit more complex to manufacture, the same for English Label as well, no matter where we produce it in the future.

Yeah, yeah, yeah. Okay, understood. Thank you. That's really helpful.

Thank you. The next question comes from Marcus Curley from UBS. Please go ahead.

David, just extending that with the first question, can you talk a little bit about the gross margin on Genesis relative to A2 platinum? It sounds like it's going to start lower and maybe end up Could you just talk about the progression there?

Our expectations at the moment, it will start lower for the reason I just indicated. And just at the pure gross margin level, we hope that it comes up close to A2 platinum. It may not be exactly the same level, but in terms of dollar margin. It should be there or thereabouts, so the percentage margins may be a little bit less, but we're striving, hopefully over time, to get that close to platinum.

Secondly, it sounds like within the result, O2O was potentially a bigger feature. I just wondered if you could talk a little bit to what the growth rate was, what portion of the business it is. And is that principally occurring through the new, or not so new, I suppose, partnership these days?

Yeah, so we don't disclose all that, but Johan can give you sort of perspective on the shape of it.

Yeah, so definitely our O2O business grew quite strongly. O2O generally represents about a third of our business. in overall, but it's been growing quite well, particularly in lower tier cities. So we've had a strategy of partnering with major players in that space for, you know, long-tail O2O, such as O2O and such as Euro, and we've continued to grow that relationship, but also leveraging EL and CL together and leveraging our China label distributors as well to sell EL as an O2O product. So that's where we've seen particularly strong growth over the half, and it's consistent with what we stated as our strategy for English label.

Johan, is it, or David, is it higher than the English label for the period, so it's growing faster, or is it similar?

Faster, yeah, correct. Correct, it's growing faster. Yeah. Yeah, and Mark, when you look at the, if you've got access to Kantar data, it shows that it's been completely the opposite, which we can't reconcile. It's really, I think it's the coverage of Kantar in lower tier cities versus Guinea. I think it's an explanation.

You're probably saying I shouldn't access it then, David.

That's quite expensive.

Thank you. Thank you.

Thank you. The next question comes from Julia from Morgan Stanley. Please go ahead.

Morning guys, thanks for taking my question. Just on the comment you made in the presentation around the establishment of a global R&D centre with China State Farm, could you just talk to maybe the timeline around that and some of the key priorities of that venture given all the discussion we've had today on product innovation?

Sure Julie. So we've signed an agreement with State Farm and part of the CNADC group to establish an We expect to make good progress on that during the course of this year. There's no specific timelines that have been put in place for that, but we do intend to move forward with that. Perhaps by mid-year we'll be starting to take more action around that. The focus of it is both on the A1 protein-free science and continuing to invest in and build that out as well as the standards around that as well, and then thinking about product innovation linked to that and plus other innovative ingredients in the market that we can generate Synergistic benefits between the A2 milk as well as combining with certain ingredients can give enhanced benefits as well, and so we'll be researching that as well. All of this is in the spirit of developing more beneficial products for our Chinese consumers and investing in our position in the market. So I hope that gives you some indication. It'll be partly by our own team with State Farm, but also we'll have a lot of, channeling a lot of our commercial and strategic partnerships with ingredients houses, research labs, universities, et cetera, through this vehicle as well.

Got it. Thanks. And then just secondly on the launch of the senior fortified milk powder, can you just talk to the reasoning for putting production onshore in China and maybe some of the early reads on market dynamics that you're getting in that segment?

I'll cover the reason and maybe share a little bit about the early read on the on sales. So we are able... With the China production, there's benefits in terms of both. So capability, because Howell has been a... long-standing infant milk formula manufacturer that has applied really they've got a very strong you know quality capability R&D labs etc that we can work with and production capability so they've got the capability to that's readily available for us to leverage they've got capacity and then also from a supply chain point of view it allows us to have flexibility in market because we have quite long lead times out of New Zealand and Australia to the China market and this allows us to to blend and pack closer to market and be more responsive to the demands in the market and to maintain the freshness of our product so there's a number of reasons why and also from a cost point of view the entering cost is probably more beneficial to us than a production in Australia and New Zealand and full export So there's a number of benefits why that's appropriate. We still have, obviously, a lot of manufacturing in New Zealand and Australia as well, which is still relevant. It's just for this particular product, we think it makes sense. Shau, do you want to comment on how well the market's initial, it's fairly early days, but initial rates?

Yeah. So, I mean, if you look at, I mean, this senior powder market, I mean, China already have a 300 million population above, I mean, 60 years old. And this is a new aging generation population. with, I mean, much more affluent power and a different lifestyle from the previous generation. So that's going to be a big market. At the moment, it's like a 1.5 billion market size growing in double digits. And we believe, I mean, with the government attention and also the consumer attention on their health, well-being, I mean, they're going to be increasing, I mean, expanded as attractive market segmentation. So, I mean, this senior powder is our first attempt, I mean, to launch our premium product. aimed at improving the senior people's gas, bone, and immunity. That's three different individual solutions focused on the different functional benefits. So we launched the product at the end of December, and luckily January is the Chinese New Year. that typically younger people send gifts to their parents or the senior people. And our product, the sales is pretty strong. I mean, the first month of launch, we sold out all the products so that we have to kind of catch up the production quickly. I mean, in February and March. I mean, everything is sold out. So it's still too early, I mean, to say. And all the stock is probably... because of our less, I mean, we kind of underestimate the amount. But I see, I mean, it's a pretty strong leading indic signal as a new product launched in the first month.

Great. Thanks, guys.

Thank you. The next question comes from Steven Ridgewell from Craig's IP. Please go ahead.

Good morning. Hold on to the result and outlook, guys. First question is on Genesis. Johan, you called out earlier that 30% of the English label market is now HMO and new products in that category have grabbed kind of 1% to 3% share when they've been launched. I mean, I'm just interested from the data you see, to what extent have those share gains for the new HMO variants kind of cannibalised sales for other non-HMO products from those same brands and to what extent do you think incremental sales growth on the back of those HMO launches?

Fantastic. Well, I guess, so first thing is the overall English label market is growing, right? So there's definitely consumer, shall I say, new to, particularly in stage one and stage two, so new to category, consumers are now thinking more of English label products. And I think that when they're thinking about products rather than just going just English label or China label, they're definitely looking at the proposition itself and then choosing from it. And if you look at who's growing their overall market share, you can see that Actimal and Nestle are growing their overall market share. And those are the players that have been most prolific in releasing HMO ingredient products in English label, and they've definitely benefited overall. So I think that it can be incremental in an overall sense, because when consumers are looking for it, they're looking for the best formulation. It's not just... English label, it's also the ingredient itself. And so I think that the HMO-containing products are gaining more share of new category overall.

That's helpful. And then maybe just to follow up, I mean, in terms of the planning for, you know, EBITDA contribution, you know, from Genesis, you know, you expect, you know, allowing for product launch costs. would you expect to sort of be incurring some kind of loss in the second half, you know, from Genesis sort of perhaps ramping up into something more positive over FY26 or FY27? So sort of some kind of broad outline of your thinking on any contribution for that product would be helpful, thanks.

Yeah, I guess, you know, in order to launch it, we do have to drive awareness, right? And that will not come with accompanying revenue straight up. So if you look at pure timing of, Spend versus revenue, it would have to be the spend comes first and the revenue comes later. So it will be the case that there will be front-ended marketing spend starting from March in earnest. But then we do expect the volumes to follow, perhaps not in the shortest of short terms, but then as awareness of the product grows. So then that spend versus revenue ratio should then improve.

So in the second half, Stephen will probably invest more than the gross model land of margin contribution from Genesis, but it's not likely to be that material. So I don't think it's going to drag our earnings down a lot, but it's likely to be incrementally more. But then going into 26, we're hopeful of a more sustained contribution.

Cool. That's helpful. Thank you. And then the second question is just on the China Kids Fortified Milk Powder. which you're launching in the second half. Can you just give us a broad indication of sales contribution expected from that product? And then maybe just thinking longer term, you've called out that market as being worth over a billion. What are your market share aspirations in that category, please?

Well, they're sort of one and the same question, Stephen. So we're not providing... We're really encouraged by the opportunity in the kids segment, but we're not going to provide guidance at this very early stage in terms of contribution from that particular initiative. But when we look at the kids segment, the kids fortified segment has been growing share and taking share away from stage four. So if you think about mothers and caregivers when they're thinking about transition from stage three to, as a child is growing up, they can either continue with a more infant formula-oriented product proposition like stage four, or go to fortified powders, or to UHT and liquid milk plus solids, obviously. This Fortify category has been growing rapidly and taking share from stage four and particularly the local players have been driving a lot of the innovation and share gain in this space as well. So it's a big and growing market and obviously has a longer period of use than stage four as well. We're hopeful that we gain meaningful share in this product, in this segment, and perhaps we may be able to follow on with more innovation as well. We've already got smart nutrition in the category from an English label point of view, which is ticking on quite nicely, reasonable margins and growing quite well at the moment as well. So it's definitely a great opportunity for us.

Cool. That's all from me. Thank you.

Thank you. At this time, we're showing no further questions. I'll hand the conference back to David Bordelucci for any closing remarks.

Thanks, everybody, for joining us today. We appreciate your questions, and no doubt we'll continue the discussions with our analyst community investors over the coming couple of weeks as we conduct our roadshow. But thanks very much for joining us today. Cheers.