A2 Milk, hit by strong Kiwi, to use Australian cash for global expansion

A2 Milk Co [NZX: ATM], which markets milk with a protein variant said to have health benefits, will ramp up its expansion in the US, the UK and Asia using cash generated in its biggest market of Australia after a year in which a strong kiwi slashed the value of sales and earnings.

Profit tumbled to $10,000 in the 12 months ended June 30, from $4.1 million a year earlier, the Auckland-based company said in a statement. Sales rose 17 percent to $111 million and would have been some $14 million higher if not for the strength of the New Zealand dollar against its Australian counterpart.

A2's cash flow comes from its success in Australia, where it now claims 9 percent of the fresh milk market sold through the grocery channel. Australian sales from continuing operations climbed 16 percent to $106.9 million in the latest year, accounting for 96 percent of total revenue, while earnings rose 25 percent to $4.5 million, helping make up for losses in China and the UK. Managing director Geoffrey Babidge calls the Australian market A2's "big cash generator", which will bankroll its push into new markets.

"Our strategy is about increasing Australian profits fully funding initiatives in other markets," Babidge told BusinessDesk. "That's our core proposition."

Growth in Australian market share gave A2 confidence to launch a thickened cream product, which is performing to expectations and the range could be widened to include ice cream, he said. The company has also trialled sales of fresh Australian milk into China, in reasonably small volumes, which the company sells the milk free on board to Chinese distributors, who can reap enough of the premium in the Chinese market to make up for the increased transport costs.

A bigger opportunity will be sales of UHT milk from Australia into China, Babidge said.

A2's sales push for its Platinum brand infant formula in China was thwarted this year by changes to Chinese registration rules. New Zealand New Milk, which has been packing the product for A2, did achieve registration in July but sales of A2's products won't ramp up until its main partner, Synlait Milk, gains registration, which Babidge hopes will be in September.

"We're very much joined at the hip with Synlait," he said. That relationship "provides more certainty and longevity going forward." A2 has made only two small shipments to China of A2 Platinum, the last in April. Once Synlait gains registration shipments would start in earnest, likely in the first half of the current year.

The company sees a "big revenue opportunity" in the US market, where it plans to invest $20 million over three years. Its US push will be through a wholly owned subsidiary, with manufacture and packaging of A2 milk outsourced to contract packers. It has shortlisted two candidates.

The company has also identified sources of milk with the A2 protein variant though work still needed to be done to separate out those cows from local herds. A "very managed, regional launch" in the US is likely to be in the second half of 2015, Babidge said.

The company will also increase investment in the UK market, where it recorded a wider loss of $2.2 million in the latest year, on sales of $1.1 million. A2 had some $16 million cash on hand at the end of the year, down from $20 million at the start of the year.

The shares last traded at 65 cents and have declined 19 percent this year. The stock is rated a 'buy', based on the consensus of four analysts polled by Reuters, with a median price target of 86 cents.

(BusinessDesk)