A2 Milk (ASX:A2M) share price on watch after half year earnings collapse

A2 Milk had a tough half and saw its earnings collapse…

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Key points

  • A2 Milk has released its half year results
  • The struggling infant formula company reported sales growth thanks to a major acquisition
  • But that acquisition couldn't stop the company's half year earnings more than halving

The A2 Milk Company Ltd (ASX: A2M) share price will be on watch this morning.

This follows the release of the struggling infant formula company's half year results today.

A2 Milk share price on watch after posting big earnings decline

  • Revenue down 2.5% over the prior corresponding period to NZ$661 million
  • EBITDA down 45.3% to NZ$98 million
  • Net profit after tax (NPAT) down 53.3% to NZ$56 million
  • Net cash of NZ$667 million

What happened during the first half?

For the six months ended 31 December, A2 Milk reported a 2.5% decline in revenue to NZ$661 million. This was driven by a 10.5% reduction in infant nutrition revenue to NZ$471 million, a 0.2% lift in Liquid milk revenue to NZ$125 million, and a 143.3% jump in other revenue to NZ$65 million. Other revenue includes revenue from its Mataura Valley Milk (MVM) business, which was acquired at the end of FY 2021. MVM revenue was down 8.2% year on year.

Management advised that its first half revenue was impacted by a number of factors, including the lower birth rate and rapidly changing market dynamics in China.

As was widely expected, A2 Milk's margins were crunched during the period. Management advised that this reflects gross margin pressures, such as adverse product mix and cost headwinds, together with higher marketing investments. The latter ultimately led to the company's EBITDA margin falling to a lowly 14.8%.

As a result, the company posted a 53.3% decline in net profit after tax to NZ$56.1 million. This has fallen short of the market consensus estimate of NZ$60 million, which may not bode well for the A2 Milk share price today.

Management commentary

Despite this poor result, A2 Milk Company's Managing Director and CEO, David Bortolussi, believes the company is making progress:

He said: "Despite challenging market conditions in China and COVID-19 volatility, we are making good progress stabilising the business. The growth strategy we announced in October last year to respond to a rapidly changing China market has been completed and implementation is underway with good early progress across a range of initiatives."

"We remain confident in the long-term China infant milk formula market, and we are growing share in our China label business in-store and online with strong consumer offtake and share growth. The actions we took to address excess infant milk formula inventory last year are proving effective, and we are seeing improvements in English label channel inventory levels, market pricing and product freshness."

While English label sales were down during the half, we have seen an improvement in trajectory in the ANZ reseller / daigou channel. Our brand health is strong, and we will continue to increase brand investment, content generation, and activation to drive awareness and conversion," Bortolussi concluded.

Outlook

Due to the uncertainty the company is facing, it is not providing any guidance for FY 2022. However, it has provided observations on key drivers and important issues that may impact its results.

And while management believes that its revenue could be stronger in the second half, this won't necessarily translate into stronger earnings.

It explained: "The Company's outlook for 2H22 revenue has improved. It is still expected to be significantly higher than 2H21, and with growth now expected on 1H22 and for FY22, ahead of initial expectations due mainly to growth in China label and English label IMF. However, this revenue improvement is not expected to translate into higher earnings as the Company significantly increases brand and other reinvestment consistent with its growth strategy."

FY 2022's marketing investment is now expected to be in the order of NZ$220 million, which is higher than FY 2020 peak levels. This is being done to drive the execution of its growth strategy.

We'll see how the market feels about this when A2 Milk shares commence trade later this morning.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended A2 Milk. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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