A2 Milk chief executive David Bortolussi has outlined a new way forward for the company – one that will involve product innovation and slimmer margins.
It will also mean relatively lower levels of sales growth compared with the explosive rates seen in the immediate past.
In an investor day update, the milk and infant formula company said it was targeting sales revenue of $2 billion over the next five years or more, compared with $1.2 billion over the past financial year.
That implies a compound annual growth rate of 10 per cent a year over the next five years, compared with 30 to 60 per cent gains in revenue seen in the former high flier’s recent past.
The company said its sales margins would probably be in the “teens” in the medium term – the market was expecting something in the early 20 per cent area.
Salt Funds managing director Matt Goodson said the margin forecast was disappointing “but obviously there is a fair bit of water to go under the bridge yet”.
The slimmer margin forecast saw a2 Milk’s share price drop by 85c or 12 per cent to $6.29, and compared with last year’s peak of $21.51.
A2 Milk’s net profit came to $80.6m, down 79.2 per cent from the previous year’s profit.
The company’s sales have been disrupted, particularly in the important unofficial daigou sales channel from Australia to China – it’s biggest and most lucative market – because ofCovid-19 and the rising popularity of China’s domestic infant formula brands.
“The market landscape has experienced unprecedented change over the past 12 months, requiring us to adapt,” Bortolussi said in material prepared for presentation at today’s investor day.
“As a result, we have adapted our growth strategy to achieve the full potential of our business.
“Importantly, our brand is strong, we have a relatively small share in China infant milk formula and significant opportunity to capture.”
Although the China infant formula market remained the largest and most attractive in the world, 2021 marked an inflection point where volume growth started to decline, Bortolussi said.
“We have had massive market disruptions over the past 12 months or so, which has required us to review our strategy,” Bortolussi said.
“The biggest opportunities that we have is to capture the full potential of our China market – in English label and China label.”
A2 Milk’s English label product is more likely to be sold through the reseller “daigou” market or the cross border e-commerce channel, while China label product is more likely to arrive in the PRC via the normal export routes.
A2 Milk appears to have taken on board criticism in the market that it has relied on too few products for too long as Bortolussi said the company plans to ramp up its product innovation.
“There is enormous opportunity there,” he said. We have been very successful with a very simple portfolioin the past but we have an opportunity to stretch our brand to innovate and grow the business.”
Bortolussi told the Herald the company had accelerated its plan to take its loss-making US operation and Mataura Valley Milk on a path to profitability.
“We have been suitably bold with our ambition but not ridiculously optimistic,” he said.
“We have a strong brand and a strong balance sheet to executive.
“Most of our competitors have multiple brands and products in the market.
“First of all we need to gain access to additional product registration [in China].
“That’s the most challenging thing that we are going to work on, and then on product innovation to bring them to market.”
Sales over the past quarter were an improvement on the heavily disrupted fourth quarter, but were still down on the same quarter a year earlier.
In China, infant formula companies were facing a declining birth rate and a market that was declining in volume and value for the first time in decades.
“The market has softened considerably and the company has seen an increased level of competition, and competitive intensity in terms of pricing and promotional activity has increased quite significantly,” he said.
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