The a2 Milk Company’s boss Geoff Babidge says distribution is starting to resume in Chin, but a resurgence in coronavirus infections would slow the flow of infant formula in its key market.
Mr Babidge told The Australian Financial Review there were uncertainties facing a2 Milk – such as a possible U-turn in the number of COVID-19 cases in China – but the company was in a good position as a provider of essential products.
«We are unique and in a fortunate position in these somewhat exceptional times,» Mr Babidge said.
A2 Milk is one of the few companies that has been a beneficiary of the crisis unleashed by COVID-19.
Mr Babidge’s comments came as a2 Milk upgraded full-year earnings guidance, saying it continued to win market share and sales as supply worries pushed consumers to stockpile baby formula during the third quarter.
The dual-listed company gained 31¢ to $18.62 on Wednesday on the ASX after indicating it continued to experience strong revenue growth across all key regions, particularly in infant nutrition products sold in China and Australia.
Mr Babidge said the China business unit is also benefiting from currency translation benefits due to the depreciation of the New Zealand dollar against the US dollar.
He noted that the push into the US with liquid milk was not on hold, but had been affected by the pandemic.
«We are closely monitoring that US supermarkets are putting in place restrictions on number of people going into the stores, which might create some choppiness during coming months. These are things we will manage, through,» he said.
While most companies are making downgrades due to the uncertain outlook, a2 Milk is on track for as much as a 35 per cent gain in earnings before interest, taxes, depreciation, and amortisation (EBITDA) in fiscal 2020.
Mr Babidge commended both the New Zealand and Australian governments for swift action in dealing with COVID-19 but noted there will be «bumps along the way» as economies reopen.
He warned the outlook for both revenue and earnings remained uncertain, and there was significant uncertainty around the potential impact on supply chains and consumer demand in core markets for the rest of the year.
While a2 Milk is not not expecting any issues with its manufacturing partner Synlait, it has built up an inventory position as a buffer. Mr Babidge added there were some question marks around the availability of shipping containers.
But ongoing sales growth across key regionswas supported by increased levels of marketing in China and the US, with a2 Milk spending $NZ200 million ($194 million) this year on marketing, more than half of that going towards ads in China.
Revenue for the year is tipped to to be in the range of $NZ1.7 billion to $NZ1.75 billion. while the EBITDA margin is now anticipated to be above previous estimates in the range of 31 per cent to 32 per cent. This has been boosted by stockpiling, currency movements, lower costs for staff travel and a delay in planned recruitment due to COVID-19 restrictions.
Mr Babidge is targeting an EBITDA margin «in the order of 30 per cent in the medium term», compared with a target of 30 per cent-plus previously.
Morgans analyst Belinda Moore said a2 Milk’s margin guidance implied EBITDA of $NZ527 million to $NZ560 million, up 27.4 per cent to 35.4 per cent on the previous corresponding period. This is ahead of consensus of $NZ522 million.
She noted that some of the factors contributing to the upgrad, such as stockpiling and reduced travel spend, were not likely to recur, and these costs would eventually return to the business.