A2 Milk faces muted revenue, margin prospects

CHINA – A2 Milk Co. has signaled a cautious outlook for the new fiscal year, attributing it to ongoing difficulties in China’s infant-formula market.

In its financial results for the year ending 30 June 2024, the Auckland-based dairy company indicated that its long-term goal of reaching NZ$2 billion (US$1.2 billion) in revenue remains uncertain, although the target has not been entirely ruled out.

In fiscal 2024, A2 Milk reported a 5.2% increase in revenue, reaching NZ$1.68 billion. However, the company anticipates that the upcoming year will deliver similar growth in the “mid-single-digit” range.

The EBITDA margin, which rose by 20 basis points to 14% in the past year, is also expected to remain “broadly similar” in fiscal 2025. A2 Milk noted that the margin would likely be under pressure in the first half of the year before recovering in the final six months.

The company highlighted that conditions in the Chinese infant-milk formula (IMF) market remain challenging, with a further market value decline expected in FY-25.

A2 Milk cited declining birth rates in China, which have been falling for several years, as a significant factor affecting sales.

The number of newborns in China dropped by 5.6% in 2023 to nine million. Despite a slight improvement in trajectory, the company expects a longer-term decline due to socio-demographic trends.

“The market decline reflected the cumulative impact of fewer newborns, increased competitive intensity, and challenging macroeconomic conditions,” A2 Milk stated in its results commentary.

Elsewhere in the fiscal 2024 results, A2 Milk reported a 6.9% increase in EBITDA to NZ$234.3 million, while net profit after tax rose by 7.7% to NZ$167.6 million.

Despite this, the company’s gross margin fell by 60 basis points to 45.8%. A2 Milk expects the gross margin for fiscal 2025 to be “broadly similar” to 2024, with potential downside in the first half due to airfreight costs and an anticipated recovery in the second half.

Looking ahead, A2 Milk reiterated its long-term revenue forecast, originally set in 2021, to reach NZ$2 billion by fiscal 2026 “or later.”

 However, the company acknowledged that achieving this target is now more likely by FY-27 or later, given the unexpected contraction in the China IMF market.

CEO and managing director David Bortolussi expressed optimism about the company’s position, despite the challenges: “We continued to execute well against our growth strategy, primarily focused on the China market, delivering positive FY-24 results with strong revenue and EBITDA growth.”

Bortolussi added that the A2 brand has continued to gain market share in China’s IMF market, where it is now a top-five brand, despite the overall market being down by double digits.

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