A2 posts 22% gain in first-half sales, commits to US market push

A2 Corp [NZX: ATM], whose shares have soared 564 percent in the past three years, reported a 22 percent increase in first-half sales, while increased marketing costs restrained earnings, and said the US will be its next target market.

Profit was $643,000 in the six months ended Dec. 31, from $554,000 a year earlier, the Auckland-based company said in a statement. Sales rose to $54 million from $44.3 million and its gross margin rose 35 percent to $19.9 million.

A2 holds and commercialises patents, trademarks and proprietary processes relating to milk containing A2 beta-casein type milk protein. It cites studies that A1 beta-casein found in most milk may lead to health problems for some consumers. Investors have cheered the company's growth strategy and A2 shares climbed 4.3 percent to 97 cents on the NZX today, matching the record reached earlier this month and up from about 14 cents in February 2011.

Global expansion is being funded from returns in the Australian market, which made up 97 percent of sales in the first half and generated about $2.3 million of segment earnings before interest, tax, depreciation and amortisation. More than 84 percent of Australian sales come from three customers.

A2 has grabbed about 8 percent of Australia's market share by value in grocery and expects to achieve 10 percent market share ahead of schedule.

In the same period, marketing expenses jumped 142 percent to $5.4 million in support of A2 fresh milk sales in Australia and the launch of A2 Platinum infant formula in China, Australia and New Zealand.

Sales in New Zealand were $1.7 million and EBITDA was $978,000.

A2's other marketing push is into the UK where it bought out its joint venture partner as of last month. All up, the company had about $13 million cash on hand as at Dec. 31. Operating cash inflows from Australia of $6.2 million contributed to $4.4 million of working capital and $2.7 million launch costs for infant formula and a cash investment for the UK joint venture of $4.5 million, the company said today.

"We're reinvesting our strong and increasing profits out of the Australian business in key opportunities in the UK and China," managing director Geoffrey Babidge told BusinessDesk. "We have adequate funding to continue our initiatives."

He declined to give full-year guidance. The strategy for entering the US market hasn't yet been finalised and Babidge said it was too early to comment on the likely funding commitment to that market.

The strategy in China, where A2 sells infant formula made under contract in New Zealand by Synlait Milk, has been to emphasise the integrity of the supply chain and the high quality of ingredients. In the US, consumers "are very interested in product innovation and health," and milk will be sourced locally.

The company has been building a databank of A2 cows in the US in preparation for entering the market and is attending the influential Anaheim Natural Products Expo in California next month. A2 plans to establish a US subsidiary and hire a small management team.

"There's a very strong appetite - the demographic is ideally suited," Babidge said.

(BusinessDesk)