a2 Milk Company share price on watch after delivering more strong growth in FY 2020

The A2 Milk Company Ltd (ASX:A2M) share price will be on watch on Wednesday after delivering further strong growth in FY 2020…

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The A2 Milk Company Ltd (ASX: A2M) share price will be on watch on Wednesday after the release of its highly anticipated full year results this morning.

How did a2 Milk Company perform in FY 2020?

The fresh milk and infant formula company was on form again in FY 2020 and delivered further strong top and bottom line growth.

For the 12 months ended 30 June 2020, a2 Milk Company delivered a 32.8% increase in revenue to NZ$1,730 million. This compares to its revenue guidance range of NZ$1,700 million to NZ$1,750 million.

Also coming in on target was its earnings before interest, tax, depreciation, and amortisation (EBITDA) margin. The company finished the period with an EBITDA margin of 31.7%, compared to its guidance range of 31% to 32%.

This was despite the company investing NZ$194.3 million in marketing in FY 2020 targeting opportunities in China and the USA, which was an increase of 45.1%.

It led to a2 Milk Company reporting a 32.9% increase in EBITDA to NZ$549.7 million in FY 2020.

On the bottom line, the company posted net profit after tax of NZ$385.8 million and earnings per share of 52.39 NZ cents. This represents an increase of 34.1% and 33.5%, respectively, year on year. The former is roughly in line with consensus estimate of NZ$389 million.

A2 Milk Company’s free cash flow was strong once again. It generated operating cash flow of NZ$427.4 million, which led to the company ending the period with a closing cash balance of NZ$854.2 million.

The company also had inventory worth NZ$147.3 million on hand at the end of the period. Management notes that this was higher than prior years. This reflects its growing business and its decision to carry a higher level of inventory as a safety buffer given the uncertainties of COVID-19.

What were the drivers of its growth?

The biggest generator of revenue for the company was of course its infant nutrition business. It reported a 33.8% increase in infant nutrition revenue to NZ$1,420 million in FY 2020.

This was driven by strong growth in China label infant nutrition, with sales more than doubling to NZ$337.7 million. During the year the company’s distribution network expanded to ~19.1k stores in the key market. Despite this strong growth, a2 Milk Company ended the period with just a 2% mother and baby value share in China. This was up from 1.7% at the end of the first half and 1.3% at the end of FY 2019.

Management commented: “It was pleasing to see our expanded market share in this strategically important sales channel given heightened competitive activity across 2H20 and we continued to invest in driving demand across e-commerce platforms. There has been a concerted effort throughout the year to better track and understand the effectiveness of our digital marketing tools with an increased focus on data analytics to further refine and optimise our approach. This will continue in FY21.”

Also supporting its top line growth was its USA milk business, which reported revenue growth of 91.2% after its distribution expanded to ~20.3k stores.

Outlook.

Management notes that there continues to be uncertainty resulting from COVID-19 and the potential for moderation of economic activity. It warned that this could impact consumer behaviour in its core markets.

Nevertheless, it continues to anticipate strong revenue growth in FY 2021, supported by its sustained investment in marketing and organisational capability.

However, due partly to higher raw material costs, increased marketing investment, and non-repeating foreign exchange and COVID-19 benefits, the company expects its EBITDA margin to soften slightly to between 30% and 31% in FY 2021.

Looking further ahead, the board believes this level of EBITDA margin is appropriate for the medium term.

It commented: “the Board considers it appropriate that the Company target an EBITDA margin in the order of 30% in the medium-term. This assumes the market performance and mix of our products remains broadly consistent and the competitive environment evolves as anticipated. We will keep the balance between growth and investment under constant review.”

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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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