A2 Milk : Half Yearly Report and Accounts

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INTERIM REPORT

THE a2 MILK COMPANY LIMITED

ARBN: 158 331 965

For personal use only

G R O U P

P E R F O R M A N C E

$661m	$98m
Revenue		2.5%	EBITDA		45.3%
$56m	8.02c
NPAT including	Earnings per share
non-controlling		50.4%
interest		53.3%
$667m	$98m
Net cash	Operating cash flow

P R O D U C T	O P E R A T I N G
S E G M E N T	S E G M E N T
R E V E N U E	R E V E N U E

$471m	$283m	$32m
Infant nutrition	Australia and	USA		5.2%
	10.5%	New Zealand
						10.7%
$125m	$306m	$39m
Liquid milk	0.2%	China and Other	Mataura Valley
$65m	Asia		6.0%	Milk
Other*		143.3%

* Includes MVM

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	N T S
personal		C O N T E
For

Operating and financial review	2
Financial statements	10
Directors' declaration	10
Auditor's review report	11
Consolidated statement of comprehensive income	13
Consolidated statement of changes in equity	14
Consolidated statement of financial position	17
Consolidated statement of cash flows	18
Notes to the interim financial statements	19
Corporate directory	30

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OPERATING AND FINANCIAL REVIEW

For personal use only

FINANCIAL RESULTS FOR THE HALF YEAR ENDED 31 DECEMBER 2021 (NZD$)

Interim results in line with expectations

Early signs of positive improvement from growth strategy execution

The a2 Milk Company ("the Company", "a2MC") today announces that its 1H22 result was in line with the Company's expectations, placing the Company in a strong position to execute its strategy and deliver revenue growth in FY22 in a challenging and volatile market.

In October 2021, the Company announced its refreshed growth strategy which has been adapted to the rapidly changing infant milk formula ("IMF") market dynamics in China. The Company also outlined its medium-term indicative sales and EBITDA margin ambition. With its growth strategy review completed, the Company has moved into the execution phase focused on implementing its strategic priorities and related initiatives, which is in its early stages and progressing well.

The actions taken by the Company in 4Q21 and 1Q22 to address excess inventory are also proving effective with channel inventory levels reducing to targeted levels, product freshness improving and market pricing increasing across English label and China label IMF, enabling healthier channel economics for participants in the a2MC business system.

Key points1

• Market conditions continued to be challenging with the China IMF market declining by 3.3% in value during 1H22 due mainly to the cumulative impact of a lower birth rate, while the Australian and US (premium) liquid milk markets were in growth. COVID-19 and other external factors continued to impact the Company's supply chain
• Interim results in line with the Company's expectations and expecting to deliver revenue growth in FY22
• Revenue was marginally lower than 1H21 in line with guidance, down 2.5% to $660.5 million on the prior corresponding period ("pcp"), up 24.8% on 2H21
• • As disclosed in the Company's announcement on 26 August 2021, China label IMF sales were constrained by a2MC in 1Q22 to rebalance distributor inventory levels with sales down 11.4% for 1H22 vs pcp. However, consumer offtake growth in store and online was up double-digits with higher market share
  • English and other label IMF sales were down 9.8% in 1H22 vs pcp with lower market share, but with an improvement in sales trajectory during the half particularly in the ANZ reseller channel
  • ANZ liquid milk sales were up with higher market share, while USA liquid milk sales were down
• Earnings before interest tax depreciation and amortisation (EBITDA2) was down 45.3% on pcp to $97.6 million
• EBITDA to sales margin of 14.8% in 1H22 compared to 26.4% in 1H21; EBITDA to sales margin excluding MVM of 17.3%
• Net profit after tax ("NPAT") including the non-controlling interest was down 53.3% to $56.1 million on pcp
• Closing net cash was $667.2 million, now incorporating
  $80.0 million of MVM debt, with high operational cash conversion during 1H22
• Mataura Valley Milk ("MVM") acquisition and strategic partnership with China Animal Husbandry Group ("CAHG") completed in July 2021 and fully consolidated into the results. Commenced planning for a laboratory and blending and canning capability at MVM and accelerated actions to insource certain a2MC product
• Brand health metrics improved following a significant marketing campaign in 2Q22 with total brand / China label metrics improving and English label metrics remaining relatively flat. Brand investment increased in 1H22 by 37.3% vs pcp to $92.5 million in line with the Company's growth strategy
• Growth strategy refresh to respond to the rapidly changing China IMF market dynamics completed and implementation underway with good early progress across key initiatives
• 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 (the Outlook section below has further detail including key industry and business risks)

1. All figures are in New Zealand Dollars (NZ$) unless otherwise stated.
2. Earnings before interest, tax, depreciation and amortisation (EBITDA) is a non- GAAP measure. However, the Company believes that it assists in providing investors with a comprehensive understanding of the underlying performance of the business. A reconciliation of EBITDA to net profit after tax is shown on page 9.

Group financial performance3,4

	As foreshadowed in the Company's FY21 Results
	Commentary in August 2021, 1H22 revenue was marginally
onlylower than 1H21, decreasing 2.5% to $660.5 million. 1H22
	revenue was impacted by a number of factors, including the
	lower birth rate and rapidly changing market dynamics in
	China. The Company's 1H22 revenue also reflects strategic
	actions taken by the Company in the first half to rebalance
	channel inventory for China label IMF. This was offset by the
	inclusion of five months of revenue from MVM for the first
	time. Excluding MVM, revenue was 8.2% lower compared
	to 1H21.
useGross margin percentage5 decreased to 46.2% with
personal	underlying gross margin of 50.7% excluding MVM. The lower
1H22 gross margin was due to the inclusion of MVM, adverse
product mix and cost headwinds, particularly raw milk and
	freight costs partially offset by price increases.
	EBITDA decreased by 45.3% to $97.6 million. This reflected
	lower revenue and gross margin as well as a 37.3% increase
	in marketing investment vs pcp. Administrative and Other
	Expenses increased by 31.1% compared to pcp due to
	capability investment, re-instatement of short-term and
	long-term incentives, professional services fees, legal fees and
	higher insurance costs. This resulted in an EBITDA margin of
	14.8% including MVM and 17.3% excluding MVM.
	Net profit after tax and including the non-controlling
	interest was $56.1 million, a decrease of 53.3% on pcp.
	The balance sheet remains in a strong position with
	closing cash of $747.2 million. The lower balance reflects
	the $268.5 million of capital invested in the acquisition of
	MVM which was completed in July 2021. The Group is now
For	consolidating MVM debt which was $80.0 million at period
end as a result of the ownership structure, and therefore
had net cash of $667.2 million. Operating cash flow was
$98.4 million. Excluding interest and tax, this represented

130% cash conversion6.

1. All figures are in New Zealand Dollars (NZ$) unless otherwise stated.
2. All comparisons are with the 6 months ended 31 December 2020 (1H21), unless otherwise stated.
3. Gross margin percentage is calculated as sales less cost of goods sold, divided by sales.
4. Cash conversion defined as Operating cash flow before interest and tax/
   EBITDA.

Inventory at the end of the period was $127.9 million, higher than at the end of FY21, due to the inclusion of MVM. The actions taken in 4Q21 and 1Q22 to address excess English label and China label IMF channel inventory respectively, are proving to be effective with price stabilisation in the CBEC channel, significant price recovery in the ANZ reseller channel and an improvement in China label trade economics. Targeted levels of channel inventory in English label and China label channels were achieved and maintained during the period.

It is, however, likely that both a2MC and channel inventory will need to be increased incrementally in 2H22 to manage COVID-19 supply chain volatility following the omicron outbreak globally and due to product innovation launches and changeovers.

China IMF market dynamics

As noted in the Company's previous announcements in May and August 2021, the China IMF market is rapidly changing and continues to be impacted by China's lower birth rate.

Following an 18.1% decrease in births in 2020, there was a further 11.5% decrease in 2021 to 10.6 million7. In volume terms, the overall IMF market in China decreased8 by 5.0% in 1H22 driven by the reduction in the birth rate impacting early- stage products, partially offset by strong growth in Stage 4.

Although market performance varied by channel and segment, overall, market value also decreased8 by 3.3% in 1H22 due to the lower number of births, an increase in competitive intensity and promotional activity impacting average pricing, partially offset by a continuation of the premiumisation trend as well as a mix shift to higher-priced China label channels.

Key&A cities reported a market value decrease of 6.6% whilst in BCD cities, market value was broadly flat, highlighting a divergence of the impact of the lower birth rate across city tiers.

Local competitors continue to gain market share against the traditional multinational brands, driven both by the strength of local brands, as well as an overall mix shift from cross-border to domestic channels.

In 1H22, the ultra-premium segment (where the Company's China label product competes) performed above market and was in growth, while the premium segment performed below market. The A2 protein segment also performed significantly above market.

Despite the challenging China IMF market dynamics, a2MC performance in 1H22 in China label IMF was encouraging and performance in English label IMF was stabilising.

1. Source: China National Bureau of Statistics.
2. Kantar Worldpanel 0-6 years old Baby & Kids panel: National IMF market tracking (Key&A + BCD cities) for the 26 weeks ending 31 December 2021.

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