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.