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A2 Milk reported a 27% increase in full-year profit, but warned of a more difficult year ahead.
Shares of a2 Milk Company fell 8.4%, the biggest drop in the market, after specialty milk marketers warned of a “harder” year ahead.
A2 Milk reported a 10% increase in sales to $1.59 billion, in line with April guidance. But the company expects sales growth to be in the “low single digits” this year, which is below expectations.
The company’s shares fell 45 cents to a one-year low of $4.90 in Monday morning trading on the NZX.
Infant formula companies like A2 Milk are under pressure as competition intensifies as the world’s largest market shrinks as the number of newborns declines. China’s data show that the number of newborns fell by 10% to 9.6 million last year, and A2 milk is expected to decline further this calendar year.
“This is just a reduction in the pool to sell the product, and they don’t expect it to turn around this year,” said Grant Davis, an investment adviser at Hamilton Hindin Green & Co.
“The market is probably selling because of weaker earnings forecasts for next year.”
Davis said the market consensus would be in the high single digits next year, compared to the company’s forecast of low-single-digit sales growth.
Finance and Expenditure Committee
Reserve Bank Governor Adrian Orr talks about the risks of a Chinese economic slowdown.
A2 Milk’s managing director David Bortorsi said A2 Milk’s growth in China was “very encouraging” against the backdrop of challenging socio-demographic, macroeconomic and infant formula market conditions.
The company increased sales of infant formula in China by 8.4%, despite an overall market decline of 14%.
“As a result of declining birth rates and increasing competition, China’s IMF market is becoming increasingly difficult,” Bortrussi said.
“IMF market conditions in China are uncertain, but are likely to be even tougher in FY24, with another double-digit drop in market values expected.”
Still, he said a2 Milk is well-positioned to continue investing this year to grow its market share and position itself stronger when the market recovers.
According to the company, market conditions in the 2021-2023 fiscal year were more difficult than expected, with UK-labeled infant formula market values down 25% and China-labeled market values down 16%.
A2 Milk’s annual profit increased 27% to $155.6 million in the year ended June.
The company’s profit margin before interest, taxes, depreciation and amortization rose slightly to 13.8% from 13.6%, and it expects its profit margin to remain about the same this year at 13.8%.
The company is targeting improved annual profit margins, but warned that it was unlikely to achieve more than a “10x” profit margin given market conditions and outlook.
A2 Milk needed to spend more on marketing to support its growth in China, with the rise of consumer and digital marketing driving marketing expenses up 13% to $260.2 million.
Revenue from the “China and Rest of Asia” market reached $1 billion for the first time, accounting for 63% of total revenue.