The A2 Milk Company Limited

Good morning everyone and thank you for joining us today. My name is David Bortoglisi. I'm the Managing Director and CEO of the Atu Milk Company. Today I'm joined on a call by our CFO, Dave Muscat, and our business unit leaders, Lu Xiao, Yohan Sanaratna and Eleanor Kaur. The team and I will present the results from Outlook and as always there will be time at the end for questions. During the presentation we'll focus on continuing operations which excludes MBM that we divested during the half and occasionally refer to underlying results which excludes Atu Pocono. We've excluded A2 Pocono from underlying earnings, given that the site is currently underutilised and incurring manufacturing losses and transformation costs which are short-term in nature. Starting on slide four, we've had a very positive first half of the year, reporting significant revenue in EBITDA growth and underlying EBITDA margin improvement. In our IMF business, we achieved revenue growth of 13.6%, which was well ahead of category growth. We grew English label IMF by 21%, with strong performance in the CVEC and O2O channels, supported by growth in our new A2 Genesis products and from Vietnam. In China Label we delivered 6.5% revenue growth and achieved record market share in both the NBS and DOL channels. Our other nutritionals revenue growth accelerated to 43% on a like-for-like basis, driven by our recent kids and seniors innovation. and we recently entered the paediatric supplements category and launched a new kids UHT product. Johan and Shau will speak to these new product innovations in more detail later. Our liquid milk business continues to perform strongly with growth of 18.5% driven by our core product range with much higher growth in our lactose free and graft fed product innovations. We significantly advanced our supply chain transformations and long-term milk supply agreement with Fonterra, which were all announced and completed during the half. And we've made significant progress against key H2 Pocono transformation streams, including advancing our China-level registration amendment process, upgrading the facility and expanding our team. Our strong first-half performance has enabled us to upgrade our full-year guidance and declare an interim dividend at the high end of our policy range. Moving to slide 5, which summarises our financial results. We delivered double digit revenue and EBITDA growth of 18.8% and 18.4% respectively with our EBITDA margins consistent with prior year on a continuing basis. On an underlying basis, excluding ATU Pocono, our EBITDA was up nearly 26% and our EBITDA margin was up 0.9 percentage points to 16.6%. Net profit after tax and EPS were both up just over 19% on an underlying basis and we're pleased to declare our dividend of 11.5 cents per share. Turning now to slide 6, at a group level our sales growth was driven by core products and recent innovation, with some benefit from FX and the inclusion of A2 Pocono sales which are first half weighted. Our growth continues to be driven by our China and other Asia segments, led by English label IMF and other nutritionals supported by China label IMF growth. Our ANZ segment sales were up primarily driven by growth in Australian liquid milk, with stabilisation of IMF sales in the Daigo Channel. Our US business continued its strong performance, driven by growth in our core product and grass-fed liquid milk. I've already covered our product performance up front, so I'll move to the next page. So turning to slide 7, the China IMF market returned to growth in the half, up 3.6%, supported by a higher number of newborns during 2024, which was the year of the dragon. While the number of newborns in 2025 are lower than the dragon year, there are positive indicators in 2026 with last year's marriage registrations up 11% and the China central government recently stating that birth rate stabilisation is a national priority. From a product perspective, the China label market has stabilised, supported by price recovery and stable volumes. English label growth continues to outperform China label, supported by product innovation and premiumisation. And finally the A2 Protein and Ultra Premium segments continue to outperform the category to our advantage. Turning to market share on slide 8, we remain a top four brand in the China IMF market and continue to gain market share to 8.2%. Within this we achieved record high China label market share of 5.6% and we remain well positioned in English label as the second largest player in the market with just under 20% market share. Turning now to FY26 and the company's outlook on slide 9, I'm pleased to say that we've had a very good start to the financial year, with revenue trending ahead of our previous expectations across all product categories and markets. As a result, we've increased our FY26 guidance for revenue growth from low double digit percent to mid double digit percentage growth versus FY25 continuing operations. We've also tightened our EBITDA margin range to approximately which is at the higher end of our previous guidance and expect our net profit after tax to be up on FY25 reported. As previously announced, the Board intends to declare a $300 million special dividend subject to regulatory approvals being received in connection with amendments to the two existing A2 Pocono China label registrations for use under the A2 brand. The amendment process is currently underway and is progressing well. Moving to slide 10, we continue to execute against our growth strategy which was recently updated after completing our supply chain transformation transactions. We adjusted our transform supply chain priority to focus on execution of our important transformation program at A2 Pocono and on building capability to support future innovation and growth. And we've placed more emphasis on entering new markets which is now called out as one of our key priorities. We're tracking well towards our medium term financial and non-financial goals. and remain on track to achieve the majority of our targets which are outlined on slide 11. Turning to slide 12, our strong first half result and upgraded FY26 revenue guidance means that we now expect to achieve our medium term revenue ambition of $2 billion in FY26. This is a year ahead of our amended plan and in line with our original 2021 investor day timing expectations. Marketing category growth drivers remain on track Our emerging market strategy continues to advance with encouraging early performance in Vietnam as we continue to assess broader opportunities across Southeast Asia and the Middle East. And from an EBITDA margin perspective, the A2 Pocono acquisition is expected to support margin improvement going forward as we discussed at our full year results last year when we announced the transactions. Moving now to slide 13, covering our supply chain transformation in a bit more detail. To recap, during the half we successfully announced and completed the acquisition of A2 Pocono facility and the sale of MBM, as well as a long-term A1 protein-free milk supply agreement with Fonterra. These transactions mark a key milestone in our supply chain transformation which has been years in the making. Essentially, these transactions enabled us to secure greater market access to the China label IMF market with strategic control over our registration. support growth in our core IMF business through portfolio expansion and innovation, accelerate the development of nutritional manufacturing capability and capture a vertical margin and generate attractive overall financial returns. Turning to the next slide which provides a transformation program update, a dedicated transformation office led by a transformation expert was established prior to the A2 Pocono acquisition to provide governance, planning and execution support to our Pocono supply chain and wider A2 team. Key transformation initiatives of A2 Pocono are progressing as planned, including the China regulatory approval process, blending and canning trials, capital investment activities, ERP implementation and product development. And recruitment in manufacturing leadership and operations has well progressed to support execution of the plan. Overall, the program is tracking well with some areas ahead of expectations. So that's the end of my introductory comments and before I hand over to Dave to take you through the financials in more detail, I wanted to publicly thank our global A2 team for their outstanding contribution in delivering the results we've shared with the market today as well as for their exceptional work in our supply chain transformation. We're only a small team but we've achieved a lot so far this year. Over to you Dave.

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 $992.6 million, 18.8% on prior year. Our gross margin of 48.9% was down 1.1 percentage points due to manufacturing losses at A2 Pocono, which is currently underutilised ahead of our planned A2 Platinum transition from Sinle in the first half of 27, which will significantly increase production levels and improve A2 Pocono's financial results. Excluding these temporary A2 Pocono losses, our gross margin percentage was slightly up, reflecting lower IMF ingredients costs and a net FX benefit. Distribution costs were up due to higher freight rates and volumes related to liquid milk. Marketing investment increased in support of our China growth strategy, including awareness building campaigns to support our recently launched products, including A2 Genesis and Kids and Seniors Fortified Powders. Given the second half weighting of marketing expenses, our reinvestment rate was slightly SG&A was higher due to investment in capability in support of growth in China and the supply chain, including A2 Pocono transformation costs. Our PQ tax rate improved due to reduced losses in our US business and utilisation of A2 Pocono losses. Reported impact was $8.4 million, including a loss from discontinued operations of $103.7 million that was almost solely due to the MBM non-cash divestment loss of $103 million. As David mentioned earlier, we have declared an interim dividend of 11.5 cents per share, totalling approximately 83.4 million. This equates to a payout ratio of approximately 74% of MPAT and is towards the higher end of our policy range. The dividend will be fully franked and unimputed and will be paid on the 2nd of April. Slides 17 and 18 summarise our segment and product performances with the key drivers covered throughout the presentation. It should be noted that 8.2 Pocono is included in the China and other Asia segment. Moving on to slide 19, our closing cash balance at the end of the period was $896.9 million, down $164.3 million versus June 25, mainly due to the supply chain transaction net outflows of $168.7 million associated with the 8.2 Pocono acquisition and MBM divestment. Operating cash inflows, excluding interest and tax, were $140.7 million, representing operating cash conversion of 91%, which was in line with expectations and reflecting an inventory rebuild following similarly manufacturing challenges late in FY25, which temporarily reduced IMF inventory at June 25 and into the first half of FY26. Investing activity outflows included the previously mentioned supply chain transaction net outflows, capital expenditure and the reduction in term deposits. Cash flows from financing activities included the repayment of MBM's external banking facility prior to divestment. Turning to slide 20, our balance sheet remains strong as we invest in our supply chain transformation and continue to execute against our growth strategy. Inventory was up approximately $34 million, reflecting the inventory rebuild previously referenced, with trade tables also increasing accordingly as we continue to progress towards target levels. Intangible assets were 105 million primarily due to the goodwill associated with the A2 Pocono acquisition and the reduction in other liabilities primarily relates to the reduction in external MVM loans associated with the divestment they completed during the half. That concludes the first half 26 financial overview. I'll now hand over to Zhao to take you through the performance of our China-labeled business.

Thank you Dave. We delivered China-labeled MF revenue growth of 6.5%. This was supported by strong execution, China MF market stabilization, and favorable foreign exchange. This is a pleasing result, given growth during the period was partially constrained by market shifts towards industry-level under supply. We achieved record China-labeled MF market share. and is supported by strong new user recruitment in FY25, which is now graduating into later stages. Outside IMF, other nutritionals also deliver growth, driven by recent senior and case innovation that resonates well with consumers. Turning to the next slide, overall, we continue to gain share in China label with total market share reaching a new high of 5.6%, as well as brand health. Performance was strong across both our MBS and DAO channels, with each reaching record shares as we continue to execute well in our key channels. Moving to slide 24, new user recruitment remains a key focus. In mid-December, we launched a targeted marketing campaign in China, partnering with the well-known My Little Pony franchise. The campaign was designed to attract new users for the year of the horse. designed maternity gift pack and a fully integrated campaign across online and offline channels, including social media, which has generated strong consumer engagement and user-generated content. Since launch, our brand has moved from nice to first in first share on Little Red Book, and the state-of-the-art new user recruitment has increased versus pre-campaign levels. Turning to slide 25 and taking a closer look at our case and the senior nutritional products which are performing well. Our case milk powder product has supported a turnaround in China-level stage four performance with the product now leading international brands in key channels. This reflects strong consumer acceptance supported by competitive formulation, good taste, and appealing package. In senior nutrition, We are building share in the ultra-premium segment with a steady online growth supported by targeted seasonal campaigns and a new user recruitment through family gifting. Across both categories, we continue to leverage the strengths of the E2 brand in MF to attract new users and expand our work offering to other life stages. Slide 26 provides an overview of our new K-Spotify UHT product, which we have recently soft launched into Costco and select online platforms. This is our first locally sourced UHT product in China, which enables improved freshness under high-support formulation, addressing the area of strong consumer interest. Moving to slide 37, our focus on innovation has seen expand our other nutritional portfolios through entry into a new category. The pediatric supplement category is a rapidly growing market with approximately $8 billion in retail sales value and is an attractive adjacency to our core infant formula business. It is the fragmented category where we believe the A2 brand can be successful. Continuing to the next slide, slide 28 provides an overview of our new China label pediatric supplements range, known as A2 Zhi Yi, which will be progressively rolled out during the second half of the financial year. We have four products in the range, which are focused on high growth area and formulated to provide functional benefits aligned to what the A2 brand is known for by consumers. The locally manufactured products have a new and innovative packaging to maximize consumer and the trade appeal. Near-term sales are not expected to be material. However, the long-term potential of the category could be significant. I will now hand over to Johan to take you through the English label.