UPDATE: A2 Milk eyes infant formula for sales growth

UPDATE: A2 Milk eyes infant formula for sales growth after ASX listing costs result in loss

(Recasts, adds CEO comment, share price)

By Fiona Rotherham

Aug. 20 (BusinessDesk) - A2 Milk Co sees more upside for infant formula, which underpinned full-year sales growth for the specialty milk marketing company, although costs for a secondary listing on the ASX resulted in an annual loss. The shares dropped 9.1 percent.

The Auckland-based company reported a net loss of $2.09 million in the year ended June 30, compared to a profit of $10,000 a year earlier. That included a $1.68 million charge relating to its ASX listing. Revenue jumped 40 percent to $155 million and earnings before interest, tax, depreciation, amortisation and one-time costs rose 35 percent to $4.18 million, reflecting a record performance in Australia.

The shares sank 7 cents to 70 cents, the lowest level in a month.

Managing director Geoffrey Babidge said sales growth for A2 Platinum infant formula accounted for 27 percent of total turnover within two years of its launch. The infant formula is expected to keep expanding with estimated sales of A$13 million in the first two months of the 2016 financial year.

A2 expects 2016 revenue to rise to $267 million, and Ebitda to advance to $12 million. That growth is predicated on its dominant Australian segment, which is expected to account for $216 million of total 2016 revenue. The first two months of trading for 2016 is already significantly ahead of forecast, the company said.

A2's fresh milk has achieved market share of 9.3 percent by value in the Australian grocery trade and A2 Platinum is the fastest-growing infant formula brand in Australia with a 12 percent grocery market share, the company said.

Higher-than-expected sales led to stock shortages in the second half of this year, and the increased demand for infant formula and whole milk powder products prompted A2 to secure new long-term milk supply contracts in New Zealand with annual milk supply doubling to more than 100 million litres.

Babidge said A2 will look at selling fresh milk in New Zealand this year once the remaining licence with Fresha Dairy expires in 2017, and he expects A2’s speciality milk to attract a similar interest on a per capita basis as it has in Australia under new distribution.

The company is looking at expanding into other Asian markets and to sell more fresh milk into China using Australian exports, and has more e-commerce initiatives planned after launching an A2 Milk Co store on T-mall selling infant formula direct to Chinese consumers which Babidge said were becoming a more significant distribution component, in line with the general trend.

Babidge also said the board had allocated an increased spend this year on studies in China and other markets to further build the scientific case for A2’s benefits.

A2's Ebitda result included $7.8 million and $4.3 million in establishment costs for the UK and US respectively.

In the US the roll-out in southern California went to plan and expansion to northern California should be completed by year’s end. Two of the largest food specialty chains in the US - Sprout Farmers markets with 154 stores and The Fresh Market with 168 stores - are distributing the brand nationally and the company is talking to other retailers currently selling its milk in California that want to expand nationally.

Sales in the UK were slower than planned but fresh milk is now ranged in the specialty milk segment of a number of key supermarket operators and the company plans to launch UHT milk and infant formula into that market this financial year. The UK Ebidta loss is forecast to reduce by 50 percent to 2 million pounds in the 2016 financial year.

A2 didn't provide an update on a potential takeover after Australian-based Freedom Foods and US-based Dean Foods' expression of interest was rejected by the board.

The company deferred a planned June capital raising following the expression of interest. Freedom Foods, which is effectively controlled by the Perich family who are major suppliers of A2 milk, holds a 19.1 percent blocking stake.

A2’s cash flows have fallen to $6.09 million from $15.9 million the previous year and its debt to equity ratio risen to 51.6 percent from 30.7 per cent. Babidge said the cash flow reduction was due to building up its infant formula inventory and that future growth is not limited without further fund raising.

(BusinessDesk)

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