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A2 Milk share price (ASX:A2M) on watch after profit slashed in HY22

A2 Milk Company Ltd (ASX: A2M) share price will be on watch today after profits plunger in first half of FY22. 

The A2 Milk Company Ltd (ASX: A2M) share price will be on watch today after profits plunged 53% in the first half of FY22.

A2 Milk share price on watch

The A2 Milk share price is down 49% over the past year as two-years of closed borders dramatically impacted its operations.

Key financial results for the half ending 31 December include:

  • Revenue of $660.5 million, down 2.5% year-on-year (YoY)
  • EBITDA of $97.6 million, falling 45.3% YoY
  • Net Profit After Tax of $56.1 million, plunging 53.3% YoY

The refreshed growth strategy outlined at the investor day in October has yet to deliver tangible results.

A2 Milk recorded negative growth across its key infant milk formula (IMF) segments and geographic regions.

China label sales fell 11.3% after building too much stock in earlier periods. The subsequent inventory unwinding meant lower sales in the current period but positions the business for growth in the second half.

A2 Milk also lost market share in its daigou channel, impacting current and future distribution.

The China IMF market contracted 3.3% due to an 18.1% decrease in births during 2020.

“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”

Similarly, English and other label IMF sales were down 9.8% due to lower market share.

North America continues to be a problem despite increasing its store count and releasing the new Hershey’s chocolate milk range.

Overall, revenue was down 8.2% after including five months of revenue form the Mataura Valley Milk (MVM) acquisition.

Operating leverage unwinds

A2 Milk struggled again on costs, with elevated freight and milk prices impacting margins.

Wesfarmers Ltd (ASX: WES) and Temple & Webster Group Ltd (ASX: TPW) also cited similar heads in their half-year reports.

Moreover, operational costs such as brand investment, staff incentives, legal fees and insurance costs weighed on earnings.

As a result, earnings have fallen 63% since the same period two years ago.

What’s next for the A2 Milk share price?

The A2 Milk share price will be supported by growth in China and English label IMF in the second half.

But the uplift in revenue will not translate into earnings:

“…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 biggest near-term headwind is supply. After building up too much inventory previously, the business now may not have enough due to supply chain disruptions.

No concrete forecasts were provided for revenue or EBITDA.

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