a2 Milk (ASX:A2M) - CEO, Geoffrey Babidge
CEO, Geoffrey Babidge
Source: Australia – Global News
Market Herald logo

Subscribe

Be the first with the news that moves the market
  • a2 Milk (A2M) has reported strong revenue growth and lowered costs as the company’s strategies to navigate the COVID-19 crisis begin to bear fruit
  • The company has performed strongly in the year to date, with revenues in the three months to March coming in above expectations
  • Annual revenues for the 2020 financial year are now expected to be in the region of $1.7 to $1.75 billion
  • The company has taken a cautious approach during the pandemic, halting recruitment and cutting costs which has led to solid savings
  • A weak NZ dollar and changing consumer habits have increased high-margin sales and revenues — a boon to the company’s bottom line
  • A2M says it will be keeping an eagle eye on the balance between growth and investment, just to make sure it keeps tracking consistently upward
  • a2 Milk is up 2.5 per cent in early trade, with shares priced at $18.77 each

Dairy producer a2 Milk (A2M) has reported strong revenue growth and lowered costs as the company’s strategies to navigate the COVID-19 crisis begin to bear fruit.

Strong revenues

The company has performed strongly in the year to date, with revenues in the three months to March coming in above expectations. The company attributes this to changes in consumer behaviour during the COVID-19 pandemic, including “pantry stocking”, more commonly known as panic buying.

These increased sales have largely come via online and reseller sales. A2M can’t put a timeline on when this increased demand may wind down, but the quarterly boost has led to an upward revision of the company’s full-year EBITDA, issued in February. That’s a lot of pantry stocking.

Annual revenues for the 2020 financial year are now expected to be in the region of $1.7 to $1.75 billion. This reflects an annual EBITDA margin around 31 to 32 per cent, a significant enough increase compared to the company’s medium-term goal of 30 per cent.

Got milk?

There are a few factors at play — apart from panic buying — here; partly fortuitous and partly strategic.

The company introduced a range of measures to ride out any negative impacts of the pandemic. A heavy reduction in staff travel and a halt on recruitment has seen the company make big savings on employee overheads and wages. A2M does admit that these savings will be relatively short-lived as it does expect the world to return to normal at some point.

Similarly, the company has enjoyed a big boost from favourable exchange rates, which are also expected to settle back to normal after the COVID-19 crisis passes. The New Zealand dollar has sunk considerably compared to US currency, bolstering Chinese revenues, which are paid in US dollars.

The pantry stocking of A2M’s nutritional products, such as infant milk formula, has also brought increased returns to the company’s bottom line. These high-margin products, selling at volume, have adjusted the company’s business balance, and balance sheet. Again, it is expected this new consumer habit will wind down as COVID-19 panic reverts to normalcy.

Outlook

The only thing A2M is certain of going forward is that there are no certainties. The company has been cautious not to wildly subvert its business model to appease the pantry stockers or make unsustainable changes to its production or supply chains.

The company continues to operate with a 30 per cent EBITDA margin in mind, despite stronger recent results, and is spending in line with past “normal” projections, rather than shouting the bar after a successful flutter.

A2M still anticipates revenue growth (in line with a big marketing push) in key markets like China and the U.S. The company projects its planned $200 million annual spend will be executed, despite the COVID-19 crisis.

The company does understand, though, that demand, revenue and earnings are all likely to be affected as the pandemic crisis further unfolds. The company continues to tip-toe through the pandemic minefield — a prudent approach which appears both wise and fruitful so far.

A2M says it will be keeping an eagle eye on the balance between growth and investment, just to make sure it keeps tracking consistently upward, rather than riding the COVID rollercoaster.

A2 Milk is up 2.5 per cent in early trade, with shares priced at $18.77 each as at 10:45 am AEST.

A2M by the numbers
More From The Market Herald

" ACCC approves Woolworths (ASX:WOW) and MyDeal (ASX:MYD) acquisition

The ACCC is not opposed on the deal the MyDeal (ASX:MYD) takeover by Woolworths (ASX:WOW).
The Market Herald Video

" FDA defers A2 Milk Company (ASX:A2M) application to supply baby formula to the US

The US Food and Drug Administration (FDA) has deferred The A2 Milk Company’s (ASX:A2M) request for…
Beston Global Food (ASX:BFC) - CEO, Fabrizio Jorge

" Beston Global Food Company (ASX:BFC) progresses KCG partnership

Beston Global Food Company (ASX:BFC) has made progress on entering into a strategic partnership with Thailand…
The Market Herald Video

" Pure Foods Tasmania (ASX:PFT) raises $2.55m to accelerate growth

Pure Foods Tasmania (ASX:PFT) has successfully completed its placement and raised $2.55 million.