The A2 Milk Company Limited

Morning everyone and thank you for joining us today. My name is David Bortolissi. I'm the Managing Director and CEO of the A2 Milk Company. Today I'm joined on the call by our CFO, Dave Muscat, and our business unit leaders, Kevin Bush, Eleanor Core, Lee Zhao, and Joanne Sineratna. As you will have seen from this morning's announcement, we have a lot to cover on today's call. In terms of format, Dave and I will provide an overview of the company's FY25 results. We will then move on to our supply chain transformation update, and finish with our FY26 outlook and capital management update incorporating the transaction impacts. In the interest of time, we won't present our regional and product performance as we normally do, which is a shame as there are so many great achievements during the year that the team would like to share with you, but our business unit leaders are on the call to discuss any questions you may have in Q&A at the end. Starting on slide four, we reported an exceptionally strong FY25 result today. We continue to execute our growth strategy, which has seen us deliver record sales of $1.9 billion and double-digit growth in revenue, EBITDA and EPS. We moved from a top five to a top four brand position in the China IMF market, with strong growth in both English label and China label, driven by successful early stage new user recruitment. We continue to ramp up innovation with a range of new products launched, targeting growth opportunities in the infant, kids and seniors nutrition segments, as well as expanding our English label reach further into emerging markets, launching IMF in Vietnam. And lastly, as you know, we introduced the dividend policy for the first time in November, and we've now declared dividends totaling 20 cents per share for FY25, with a payout ratio of 71%. Turning to the next slide, from humble beginnings in the year 2000 when the company was first formed in New Zealand by Corey McLaughlin, who was a scientist, and his business partner, Howard Patterson, we've now grown into an international business operating in Australia, China, New Zealand, North America, South Korea, and Vietnam, and have a product portfolio that spans all life stages from infants to kids through to adults and now seniors. It's therefore fitting that we celebrate our 25th year since formation by acknowledging the achievements of our team today and all of those before us that have built the A2 Milk Company into what it is today, reporting record sales with growth across all of our markets and categories, and announcing a major step forward in our supply chain transformation. Moving to slide six, which summarises our financial results for FY25. We delivered full-year revenue growth of 13.5%, with higher growth in the second half, up 16.8%. Importantly, earnings grew at a faster rate. EBITDA was up 17%, and net profit after tax and EPS were up 21%, with strong cash conversion. Slide 7 outlines our segment and product category performance. Our growth continues to be driven by our China and other Asia segment, led this year by English-label IMF and other nutritionals. Our ANZ segment sales were flat, with growth in our Australian liquid milk business offsetting declines in the DIGO channel. Our US business continued its strong growth, and MDM experienced a significant increase in external ingredient sales, mainly due to higher GDT pricing and milk volumes. From a category perspective, our total IMF sales grew by 10%, with English Label, the standout performer, up 7-10%, driven by growth in our CBEC and O2O channels, and a shift in the market towards English Label. China Label was up 3.3% with record market share, which is a very good result in a market that declined by 5.6% and having to manage supply constraints during the year. Other nutritionals continued to grow at a faster rate, up 23%, supported by new kids' and seniors' milk powder products launched during the year. Slide eight lists many of the key operational highlights our team achieved during the year that supported our financial results, which are covered in more detail throughout the presentation, which unfortunately I won't have time to go through today. Turning to slide nine, we continue to progress our sustainability agenda with a clear roadmap now in place to guide us towards planet-positive outcomes and net zero by 2040. Our MVM boiler conversion has almost eliminated our Scope 1 emissions, with the MVM plant now operating on 100% certified renewable energy. We've also reduced our Scope 3 emissions intensity by a third since our 2021 baseline year and are proud to be part of AgriZero in New Zealand. We continue to support on-farm initiatives for the A2 Sustainability Fund, funding 19 on-farm projects to advance outcomes aligned to our sustainability goals. and packaging performance continues to improve, and we achieved a beyond-best-practice rating by APCO this year, which we are proud of. All of these actions reflect our purpose of pioneering the future of dairy for good. Moving now to slide 10, pleasingly, the China IMF market has shown signs of stabilisation, supported by the higher number of newborns during the Year of the Dragon last year, and increased early-stage IMF demand. English label growth is outperforming China label, gaining momentum through a shift in consumer preference, product innovation, premiumization, and growth in online channels. The A2 type protein category continues to grow ahead of market, and brand concentration continues with the top five brands gaining share. Lastly, as most of you know, the China central government recently announced a subsidy program to support the cost of childcare in China. This is a positive initiative for families and the industry, which is encouraging. However, at this stage, it's too early to assess the potential impact. Turning to market share on slide 11, our overall China IMF market share continued to reach record levels, resulting in A2 rising to the number four brand position in the world's largest IMF market with 8% overall market share. This is a major milestone for our company, which launched its first IMF product only 12 years ago, competing against the global leaders in the category and strong domestic players. Moving to the next slide, today's result reflects the momentum we have built by staying disciplined in executing our growth strategy. And there remains so much opportunity for us to capture in the China IMF market and through expanding into adjacent categories in China and into new markets. Supply chain transformation will play a critical role in enabling us to realise this opportunity, which I'll cover shortly. As you can see on slide 13, we're tracking well towards our medium-term financial and non-financial goals and remain on track to achieve the majority of our targets. Moving to slide 14, our strong FY25 performance has brought us much closer to our medium-term revenue ambition of $2 billion, and we have delivered a revenue CAGR of 12% since FY21 over the past four years. Our English-label IMF and ANZ liquid milk businesses are back on track, and our emerging market outlook has improved following the launch of IMF into Vietnam this year, which we're excited about. I'll pause there and hand over to Dave to take you through the financials in more detail.

Thanks, David. Good morning, everyone. I'll start on slide 16 with a summary of our group P&L. As David has already mentioned, we delivered net sales revenue of $1.9 billion, up 13.5% on prior year. Our gross margin of 46.1% was up slightly, driven by lower IMF ingredients costs, favourable FX and the cycling of MVM accelerated depreciation, partly offset by the cost of air freight used to mitigate IMF supply constraints, net of Sinle support. We continue to invest in marketing with spend up 13.7% while maintaining a similar reinvestment rate of 17% of sales. The focus remained firmly on China. supporting new user recruitment during the Year of the Dragon and the launch of new products, including A2 Genesis. China continues to represent the majority of our marketing spend, accounting for over 90% of total marketing expenses. SG&A declined as a percentage of sales, reflecting improved operating leverage. However, it increased in absolute terms as we continue to invest in supply chain and China capability, science and innovation. This was partly offset by reduced FX losses and cost reduction initiatives. We declared a final FY25 dividend of 11.5 cents per share, totaling approximately $83 million. This equates to a payout ratio of 75% of MPAT, which is to be fully franked and partially imputed. The dividend will be paid on the 3rd of October, 2025. Slide 17 and 18 summarize our segment and product performances, with the key drivers covered throughout the presentation. Moving on to slide 19, operating cash inflows, excluding interest and tax, were 259 million, representing operating cash conversion of 95%, which was in line with guidance but lower than FY24. FY25 cash conversion was lower due to one-off working capital impacts. Namely, China-labeled stock build associated with FY25 China-labeled GB product transition, which inflated FY24 cash conversion, withheld payments from Sinlei in FY24 that were subsequently paid in FY25, and more recently a reduction in Sinle Purchase Order deposit payment terms that commenced in FY25. Investing activity outflows included our additional investment in Sinle to support their recapitalisation and cash flows from financing activities including the payment of our inaugural dividend. Our closing net cash at the end of the period was $1.61 billion, up $92.2 million on 30 June 2024. Turning to slide 20, our balance sheet continued to strengthen during the year, driven by growth in our cash balances just outlined. Inventory was down approximately $40 million on last year, reflecting lower IMF stock levels following stronger early-stage demands and compounded by supply constraints at Sinle in the fourth quarter. It's important to note that while A2's own stock levels dropped at the end of the last quarter, we focused on maintaining stock levels of distributors and retailers to ensure that consumer demand was met. We expect that our own stock levels will recover progressively during the year. We close the year with higher prepayments, reflecting changes to Sinle supply terms following the dispute resolution, delays in Sinle IMF stock deliveries, and increased inventory deposits as we expanded our product portfolio and strategic partner network. That concludes the FY25 results overview. I'll hand back to David.

Thanks, Dave. We'll now move forward in the presentation to slide 34 in our supply chain transformation update. I'm pleased to announce today two transactions that will transform our supply chain and market access, enabling us to build a better, high-growth, lower-risk end-to-end business with significant value creation. The first transaction is the acquisition of 100% of the shares in Yashili, New Zealand, from Mungnu Group, which has a fully integrated nutritional manufacturing facility located in Pocono, New Zealand, that I'll refer to as H2 Pocono. Importantly, it has two existing China-label registrations and already produces two of our English-label IMF products. The second transaction we announced today relates to the divestment of A2's 75% shareholding and China Animal Husbandry Group's 25% shareholding in MVM to Open Country. We've been working on this strategy for several years and have considered many options. I can confirm that what we have announced today is without doubt our preferred strategic and operational outcome. And before I get into the details of our transformation update, I wanted to publicly thank our A2 team, our advisors and counterparties involved in the various projects for what we have collectively achieved today. Only they know how much effort has gone into delivering this outcome, which I hope will be a positive for all of those involved. Turning to the next slide, there is a clear strategic rationale for the combined transaction. The acquisition of A2 Pocono firstly provides a pathway to greater China label market access and enables strategic and operational control of product registrations and supply chain. Secondly, it supports growth in our core IMF business through access to two to three product registrations over time, enabling innovation to capture more market share than we currently can today with only one China label product. Thirdly, it accelerates the development of a world-class integrated drying, blending and canning nutritional manufacturing capability, utilising an A1 protein-free milk pool developed by Frontera and A2 over recent years in the Waikato. Fourthly, it optimises our asset footprint and capacity utilisation through the divestment of MBM, where A2 will continue to be a commercial partner of A1 protein-free ingredients from MBM. And finally, it generates attractive financial returns through minimising the net investment required to achieve our objectives and through accelerating vertical margin capture and China-labeled brand contribution. On the next page, we've illustrated how the transactions deliver on various aspects of our growth strategy. We have referred to this strategic initiative as our supply chain transformation, but it is a much broader enabler of our growth strategy through market access, portfolio expansion and innovation. Turning to slide 37, which provides a summary of the financial returns. From a headline perspective, the combined transactions will deliver an internal rate of return greater than our cost of capital, with return on investment capital achieving cost of capital in FY29. I'll now step through each of the transactions in more detail, starting with the A2 Pocono acquisition. Slide 39 provides a summary of the key terms of the acquisition. We are purchasing the facility for $282 million on a debt and cash-free basis. The transaction is unconditional and expected to complete on the 1st of September. Importantly, the facility is approved to produce two China Labor products with one additional potential slot available for use subject to regulatory approvals. We will immediately commence the amendment application process for the two existing China Labor registered products to bring them under the A2 brand, which is expected to take up to 12 months. In the unlikely event that we do not receive the necessary regulatory approvals within this timeline, we have the right, but not the obligation, to unwind the transaction. Slide 40 provides an overview of the A2 Pocono facility. The facility is ideally located for milk sourcing and North Island import and export logistics. facility has milk receiving spray drying blending canning and warehousing capability and has a proven track record as a high quality imf manufacturer already producing two of a2 english label products being gentle gold and our recently launched genesis product turning to the next page the china label registered market makes up approximately 81 of china's total imf market access to the china label market is exclusively through samar registered products linked to approved manufacturing facilities with a limit of three product registrations per facility. The opportunity to increase A2's China label portfolio assists with capturing the potential for future growth in lower tier cities, the domestic online channel, and the super premium price segment where we're currently under index. Further to this, as outlined on slide 42, of the top 10 players in the China IMF market, A2 is the only brand in the top 10 with a single China label product. It's obviously challenging to capture the full potential of our brand in a large and complex market with one product. Continuing on to the next slide, the acquisition is expected to increase A2's product registrations from one to three in the near term, which will enable us to expand our product portfolio to develop differentiated consumer and trade propositions to drive market penetration in a way that complements our English label portfolio. Turning to slide 44, in short term we will change the milk base of the existing products to our pure and natural A1 protein free milk from New Zealand and as previously mentioned we will apply for regulatory approval to amend the two registrations to bring them under the A2 brand. The existing products fit well with our current GER2 product as a portfolio. Over the medium term we have plans to reformulate and upgrade the existing products to enhance our consumer proposition and we'll work to seek approval for a third slot which is expected to take several years. Slide 45 provides an indicative timeline for A2 Platinum insourcing from Sinle and the launch of our new China Label products subject to regulatory approvals. The timeline is indicative of the financial year in which the relevant item will occur, not necessarily beginning and ending within the timeframe. Just to manage expectations, the nature and timing of product innovation is commercially sensitive. We're providing this high-level plan in the context of making a significant investment and we'll provide milestone, but not detailed, updates to the market as we implement our plans. Moving to slide 46, in addition to the initial acquisition cost, we will also invest approximately $100 million in a multi-year capital investment program to lift capability and capacity at the facility and to de-risk potential future regulatory changes. This will include the installation of a new services electrode boiler to reduce our environmental impact in support of our sustainability goals. We also plan to almost double the size of our team at A2 Pocono over time, adding more than 100 new roles, providing significant development opportunities to our existing and future team members. Turning to slide 47, access to an A1 protein-free raw milk pool is essential to the production of A2 branded products at the newly acquired facility. To this end, we have entered into a long-term supply agreement with Fonterra for A1 protein-free raw milk from the highly regarded Waikato region in the North Island, sufficient to meet the company's needs. This leverages the milk pool we have developed together with Fonterra over recent years, provides supply flexibility and is mutually beneficial for Fonterra A1 protein-free farmer suppliers, Fonterra farmer shareholders and the A2 milk company. So to conclude this section of the acquisition, we are excited to secure a world-class asset to help us build our supply chain of the future and start the next chapter in our growth story. Now let's move on to the MVM divestment. Turning to slide 49, alongside the announcement of our agreement to acquire A2 Pocono, we are today also announcing the divestment of MVM to optimise our asset footprint and capacity utilisation whilst retaining access to high-quality A1 protein-free ingredients through a commercial supply agreement. The divestment will see full ownership of MVM transfer from A2 and China Animal Husbandry Group to Open Country. A2 is expected to receive net proceeds of approximately $100 million on a debt and cash-free basis with the divestment conditional on China Animal Husbandry Group completing the requisite China regulatory filing with completion expected to occur by the 31st of October. The company expects to recognise a non-cash loss on sale for MVM of approximately $130 million during the first half of FY26, with MVM treated as discontinued operations until completion of the divestment. It's been a difficult decision for us to exit MVM and we sincerely appreciate the commitment that MVM Farmer Supplies, our team members, the local Gore community and China Animal Husbandry Group have made over many years to develop the facility from a greenfield site in 2016 to what it is today. And with that, I'll now hand over to Dave to take you through the financials and give more details.