A2 Milk Company delivers stellar growth and beats first half guidance

The A2 Milk Company Ltd (ASX:A2M) share price could be on the move today after beating its first half sales and earnings guidance…

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The A2 Milk Company Ltd (ASX: A2M) share price will be on watch on Thursday following the release of its half year results this morning.

What happened in the first half?

For the six months ended December 31, a2 Milk Company delivered revenue of NZ$806.7 million and EBITDA of NZ$263.2 million. This was an increase of 31.6% and 20.5%, respectively, over the corresponding period. The latter equates to an EBITDA margin of 32.6%.

This compares favourably to management's guidance of revenue in the range of NZ$780 million to NZ$800 million with an EBITDA margin of 31% to 32%. Management advised that its stronger EBITDA margin was driven by an improved gross margin, which is benefiting from a continued mix shift to infant formula, as well as improved price yield.

On the bottom line, net profit after tax came in 21.1% higher than the prior corresponding period to NZ$184.9 million and earnings per share rose 20.6% to 25.15 NZ cents.

Operating cash flow was solid at NZ$160.6 million, leaving the company with a closing cash balance of NZ$618.4 million.

What were the drivers of the result?

The key driver of its growth was its infant nutrition sales once again. It reported a 33.1% lift in Group infant nutrition sales to NZ$659.2 million for the first half. This was thanks partly to strong growth in China label infant nutrition, with sales doubling to NZ$146.7 million after its distribution expanded to 18,300 stores.

Management notes that some of these sales (~$8 million) have been brought forward from the second half. This was due to distributors requesting additional product in advance of the Chinese New Year.

Also contributing to the company's growth was its Liquid Milk business. Liquid Milk sales across the company increased 28.7% to NZ$104.4 million during the first half. Australian Liquid Milk sales rose 11.3% to NZ$74.7 million and U.S. Liquid Milk sales more than doubled. The latter was driven by improved sales velocity in established stores as well as an expanded store footprint to 17,500 stores.

Outlook.

The company expects strong revenue growth across its key regions in the second half. This is expected to be supported by its increased marketing investment in China and the USA as well as the ongoing development of organisational capability to support the execution of its strategy.

However, it acknowledges that there is uncertainty around the potential impact to supply chains and consumer demand in China resulting from coronavirus outbreak.

But for now, demand for its products remains even stronger than it was expecting.

Management explained: "Given the essential nature of our products for many Chinese families, demand is strong, particularly through online and reseller channels, with revenue for the first two months of 2H20 above expectations. However, this is a dynamic situation and at this stage we are unable to quantify the impact, either positively or negatively, for the full year."

Notwithstanding this uncertainty, management continues to forecast a full year EBITDA margin in the range of 29% to 30% due to its higher marketing spend and increased cost of goods sold.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of A2 Milk. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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