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UPDATE: A2 Milk's premium payout attracts farmer interest

UPDATE: A2 Milk's premium payout attracts farmer interest with lower dairy prices this year

(Recast with company comment)

By Fiona Rotherham

Feb. 25 (BusinessDesk) - A2 Milk Co, which markets milk with a protein variant said to have health benefits, says it’s had more interest from farmers interested in supplying the company since dairy prices have dropped this year.

A2 Milk pays a premium of around 5 to 7 percent to its small number of farmer suppliers in New Zealand, Australia, and the UK, which has become more attractive as the farmgate milk price for standard milk has dropped markedly this season. Dairy exporter Fonterra Cooperative Group is due to update tomorrow morning its forecast milk price which was reduced to $4.70 per kilogram of milk solids in December compared to $8.40/kgMS last season.

A2 deputy chair David Hearn, who will take over the chairmanship ahead of a secondary listing on the ASX, said the price it pays farmers is not based on commodity prices so the gap between what it offers and the farmgate milk price becomes wider as dairy prices drop.

A2 Milk's share price rose 10 percent to 56 cents after reporting an 81 percent drop in first-half profit after incurring costs for its planned ASX listing, lodged today, and for hiring consultants on its global growth strategy. The ASX listing is expected to happen later next month.

Net profit dropped to $125,000, or 0.02 cents per share, in the six months ended Dec. 31, from $643,000, or 0.11 cents, a year earlier, the Auckland-based company said in a statement. That included $762,000 in one-time costs associated with the Australian listing, and a $1.4 million increase in other operating costs to $5.3 million, which was largely selling and consulting costs linked to business growth, it said. Some $6.5 million of the profit was channelled into expanding in the UK and China.

Earnings before interest, tax, depreciation and amortisation climbed 27 percent to $3.3 million as revenue rose 38 percent to $74.8 million, largely in line with Forsyth Barr's estimate for sales of $75.2 million and Ebitda of $3 million.

Chief executive Geoffrey Babidge said during the first half the Australian business had a stellar result, performing ahead of expectations. Fresh milk sales of A2 milk increased in Australia and New Zealand by 39 percent compared to the previous corresponding period to $72.8 million. Latest data shows A2 fresh milk has gained a 9.3 percent market share by value in the Australian grocery channel.

Babidge said a stand out in the result was sales growth of A2 Platinum infant formula in Australia and New Zealand to $16.07 million, though he warned the growth rate was likely to slow in the second half because it was off a low base in the previous period.

In the UK progress is being made on implementing a revised business model improving distribution in the specialty milk category of major retailers. Although its Chinese unit reported a 41 percent drop in sales after the world's most populous nation implemented a new regulatory regime for infant formula, Babidge said its new distribution arrangements in China should see a big ramp up in sales in the second half.

The planned rollout on the West Coast of the US is going according to plan and should be fully launched to major retailers by the end of June, he said. The cost of the foray into the US is forecast to be US$20 million over the next three years and the company is basing its US headquarters in Boulder, Colorado.

“Boulder is the epicentre in the US of the healthy, natural food industry which means we will be well-placed in that part of the world to accessing a deep pool of talent and obviously it is in the middle, and while we’re starting in a regional market, the plans is to be national,” Hearn said.

The board didn't declare an interim dividend and has offered no guidance for the full year, though it has said revenue for the 2016 financial year is forecast at $230 million.


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