Following a 22 per cent growth in revenue to $54 million in the first half of the 2014 financial year, dairy company A2 Corporation has announced that entry into the US fresh milk market will be its “next priority growth initiative”.

The move by A2 Corporation sees the Company exporting a technology, rather than food product. The major Australian dairy groups have successfully concentrated on exporting their products into Asian markets, such as China, Japan and India.

Strong growth story for A2 in Australia

In the six months to December 2013, A2 Corporation saw increased market share in Australia to 8 per cent by value in grocery and revenue growth in the Australian market of 28.3 per cent. The launch of ‘a2 Platinum’ infant formula to consumers in China, Australian and New Zealand took place during the first half of the 2014 financial year and new arrangements to accelerate development of the business in the UK were progressed with acquisition of the UK joint venture completed on 1 January 2014.

“The continuing strong performance of the Australian business together with momentum building around our priority initiatives in the UK and infant formula were the highlights of the first half,” said Geoffrey Babidge, Managing Director of A2 Corporation. “Our confidence in the development of the Group over recent times has enabled the Company to advance North America as the next priority growth initiative,” he said.

The appreciation of the NZD to the AUD reduced Group revenue growth by approximately $6.4m on the prior corresponding period. A second shipment of infant formula to China took place in November 2013 following our first shipment in June.

Cash on hand at 31 December 2013 was $13,156,000. The movement over the period primarily reflected operating cash inflows from Australia of $6.2m which contributed to funding the working capital build for infant formula ($4.4m), launch costs for infant formula ($2.7m) and cash investment in the UK joint venture ($4.5m).

US market entry

The Company said the launch of ‘a2’ brand fresh milk into the US had been under consideration for some time but would be the next growth initiative, now the UK business was established and showing growth from a small base.

A2 Corporation said it had “strong intellectual property rights and know-how” in the US market and consumer research confirmed the attractiveness of the A2 proposition. In addition, the Company said the industry and market dynamics in the US were considered favourable to a market entry strategy for its product.

The plan would involve the Company establishing its activities through a wholly owned US subsidiary and recruiting a small management team with in-market experience. As part of the development, ‘a2’ brand milk will be showcased at a major natural food exhibition to be held in California in March 2014.

Strategic Agenda

A2 Corporation said its strategic agenda for the 2013 financial year centred on the increasing profits from the Australian business funding revenue growth in the priority markets of the UK and China. To the extent revenue growth in the UK was tracking behind plan, the Company said this was offset by enhanced performance in Australia and additional product and market opportunities being pursued.

During the first half of the 2014 financial year the management structure was reorganised into regional and corporate functions and strengthened with additional experienced executives recruited to assist the new market initiatives. This included the appointments of Susan Massasso as Chief Marketing Officer, Philip Wohlsen as General Manager Asia and recently Scott Wotherspoon as Chief Executive Officer in the UK.

The structure and composition of the Board also changed, with the recent election of Ms Julia Hoare and Mr David Hearn as non-executive directors.

Australian growth factors

The Company reported that ‘a2’ brand sales in Australia continued to grow strongly with an increase on the prior corresponding period in AUD of 28.3 per cent. A2 Corporation said it continued “to be a leader in marketing activities within the milk market in Australia”.

These activities together with public relations, health care professional engagement and social media activity continued to build awareness in the A2 proposition and the brand. The Company estimated the market share of ‘a2’ brand fresh milk to approximate 8 per cent by value in the grocery channel (latest quarter Coles, Woolworths scan) in December 2013.

Growth in volume and continued improvement in efficiencies at the Company’s milk processing facility in Sydney, NSW resulted in an improved gross margin as a percentage of sales when compared to the performance over last year. A2 Corporation said it continued to focus on enhancements to supply chain processes and building milk supply to cater for ongoing growth. As part of this, from November 2013, Brownes Food Operations commenced processing ‘a2’ brand fresh milk in Western Australia under a supply and contract pack arrangement. The Company said it continued to assess ways to enhance processing capability in conjunction with its other contract processors in Victoria and Queensland.

In September 2013 the Company commenced the distribution of ‘a2 Platinum’ infant formula to grocery and pharmacy stores in Australia and New Zealand supported by a launch advertising campaign from October. Early sales performance in Australia was positive, however sales in New Zealand were modest given limited grocery distribution achieved to date.

The Company continued to assess opportunities to broaden the portfolio of ‘a2’ brand products and in January 2014 launched ‘a2 Thickened Cream’ into the grocery trade in Australia in conjunction with a contract packing agreement with the highly regarded Australian dairy company, Regal Cream Products.

United Kingdom

The Company reported that momentum within the UK business continued to build during the half with sales and distribution increasing progressively particularly during the second quarter. The objective had been to build consumer trial and rate of sale in key grocery accounts to support existing ranging and justify more substantial distribution over time.

During the half the business achieved increased distribution within the Tesco chain, achieved growth through the online Ocado business and grew rate of sale faster than at any time since launch. In addition, the Company’s objective to focus on building distribution in the south east of England was progressed with ranging extending to around 250 grocery stores within the M25 motorway region. A print and outdoor advertising campaign focusing on digestive benefits of ‘a2’ fresh milk was undertaken in November and was a positive for the brand. Further marketing and communication initiatives are under development led by A2 Corporation’s recently appointed Chief Marketing Officer.

In November 2013 A2 Corporation announced a change in the structure and operation of the UK business whereby the Company would fully acquire the interest of Muller Wiseman Dairies (MWD) in the joint venture for nominal consideration and enter into a supply and contract pack agreement with MWD on a cost plus basis.

This transaction was concluded on 1 January 2014 and will enable the Company to “move in a more focused way” on building distribution and sales whilst continuing to leverage the scale and operational capabilities of MWD.

The UK board of directors was changed with the appointment of William (Billy) Keane, the former Managing Director of Robert Wiseman Dairies and current Chairman of Dairy UK as a second Non- Executive Director. David Hearn continues as A2C appointed Non-Executive Chairman and Geoffrey Babidge as the third Director. The Company also recently announced the appointment of Scott Wotherspoon as Chief Executive Officer of the UK business who brings strong skills in sales, marketing and entrepreneurial businesses to the Group.

The Company said it was “committed to the successful development of what is currently a small but growing UK fresh milk business” and was “encouraged by the progress of recent initiatives”. Following the acquisition of MWD’s shareholding, A2C will solely manage, fund and benefit from the ongoing development of the business. The Company said investment in the UK business during calendar 2014 is likely to be in the order of £5m.

A2 Platinum infant formula into China

During the half, the first sales of ‘a2 Platinum’ infant formula to consumers took place in China.

A key focus was to support A2 Corporation’s distributor, China State Farm (CSF) in developing initial communication strategies through a joint marketing structure and CSF’s recruitment of sub distributors in key provinces in China. This support included regular visits to China by Group management, attendance at launch meetings with potential sub distributors and participation in a formal launch ceremony held in the Great Hall of the People in Beijing in October 2013.

A further priority was to participate with A2 Corporation’s contract supplier, Synlait Milk Limited (Synlait) in establishing the ‘a2 Platinum’ supply chain. This incorporated the integrated management of receiving A2 milk from farm, production of ‘a2’ milk powder, blending and packaging of finished product and delivery to customer. As a consequence of implementing the new processes and an ingredient supply shortage, A2 Corporation experienced delays in a planned shipment to China and Australia in December.

The launch to consumers in China commenced during November 2013 targeting baby maternity stores, high end supermarkets and on-line sales.

A2 Corporation said the regulatory environment for infant formula in China continues to evolve, given the Chinese Government’s aim to improve product quality and bring confidence back to the industry. These changes are currently focused on regulating participants operating in the domestic market and registering manufacturers exporting into China. The Company said it would continue to closely monitor and respond to developments.

The regional management structure for Asia was established to support the development of the infant formula business initially in China and in other Asian markets and the launch of additional products such as UHT milk. At the recent shareholders meeting, approval was given for the Company to enter into a UHT supply agreement with Freedom Foods Group Limited and Associates. Planning for UHT milk products continued to progress.