The A2 Milk Company Ltd (ASX: A2M) share price will be on watch this morning following the release of the dairy and infant formula company's half year results.
Here is a summary of how a2 Milk Company performed in the first half compared to the prior corresponding period:
- Total revenue increased 41% to NZ$613.1 million.
- EBITDA rose 52.7% to NZ$218.4 million.
- Net profit after tax jumped 55.1% to NZ$152.7 million.
- Basic earnings per share of 20.9 NZ cents, up 52.9%.
- Operating cash flow of NZ$112.3 million.
- Outlook: Strong revenue growth but lower EBITDA margin.
What were the drivers of this result?
The majority of the company's revenue was generated in the ANZ market. The ANZ business segment revenue increased 37.5% to NZ$418.4 million and EBITDA was up 64.9% to NZ$192 million.
Supporting this growth was its China segment, which saw its revenue rise 50.1% to NZ$171.7 million and EBITDA increase 41.6% on the prior corresponding period.
Once again it has been the company's infant formula products driving the majority of its growth.
During the first half group infant formula revenue increased 45.3% to NZ$495.5 million. This was driven by an 82.6% increase in China label revenue, which took its consumption market share in the country to 5.7%. In Australia the company has maintained its leadership position and grown its market share to 35.7%.
The company's Liquid Milk business had a solid half. Australian fresh milk revenue grew 11.7%, bringing its market share to 10.8%. In the United States the company's milk revenue more than doubled after its distribution network grew to over 10,000 stores.
What else happened in the half?
The company advised that it is now focused on delivering continued and significant growth through its step-changing strategic investment in consumer insight, brand development, and organisational capability.
This involves accelerating its investment in building brand equity through enhanced marketing campaigns in its key markets of China, US and Australia, as well as continued investments in R&D and further development of its intellectual property.
As a result, its investment in marketing in the first half increased by 75% to NZ$45.5 million. The rate of investment in marketing will increase further in the second half as the company increases in-market brand building activities.
Outlook.
According to the release, management expects group revenue growth in the second half to be broadly in line with the first half.
However, the increased investment in brand building in the second half is expected to push its second half EBITDA margins lower.
As a result, management expects its full year EBITDA as a percentage of sales to be approximately 31% to 32%. As a comparison, in the first half the company's EBITDA margin was 35.6%.
What now?
Although I thought this was yet another impressive half from a2 Milk, its outlook for the second half could weigh on investor sentiment today.
Whilst I feel that its investment in brand building is a smart thing to do and should support its long term growth, the market is often short sighted with such moves. As a result, I suspect there's a small chance its shares could drop lower when the market opens. Though it is worth noting that at the time of writing the company's NZ-listed shares are up 7%, so thankfully this doesn't appear to be the case.
Investors might want to keep an eye on Bellamy's Australia Ltd (ASX: BAL) shares today as well after a2 Milk's result demonstrated that demand for infant formula products remains strong.
