For your convenience, I thought I’d summarise the a2 Milk Investor Call held after, and with regard to the market shocking Updated FY21 Outlook.
The meeting started off with Geoff Babbage saying that they had hinted at the softening Daigou channel prior to the announcement, and then went on to say that they had not expected such a significant and extended lockdown in Australia.
They expect a soft first half year with no growth, and they expect this to be temporary if COVID19 issues stabilize in Australia.
Geoff then spoke about previously announced performance, saying that other parts of the business are performing strongly. China label up 77% on pcp. Mother and Baby Store (MBS) share increased significantly in August, with the MAT (which is a large market) share increasing from 2% in June to 2.2% [in Q4?].
Plans always assumed a better H2, especially FY21 – more so that previous years.
Inventory peaked in July, as they planned to build inventory for contingency of production issues. They plan to reduce cover over FY21.
Questions And Answers
JP Morgan opened the Q&A by asking how much they expected Daigou business to be down based on H1. Geoff told him that shareholders need to work their own assumptions out themselves, that the Daigou is an important part of ANZ sales, and that they’ve already given guidance on total revenue. He basically refused to answer the question.
JP Morgan then asked how they managed to improve EBITDA margins in their forecasts. Discretionary spending, marketing spend on things like outdoor activities, stock provisions, etc. enabled them to slightly lift margins from 30% to 31%.
Forsyth Barr asked if the change in guidance only had changes to H1 factored in. Geoff said that H2 guidance hasn’t changed very much, but assumes higher China direct sales and [lesser?] Diagou sales.
Forsyth Barr then asked what they’re doing to reroute the supply chain. As I understood, Peter (?) inferred that Daigou inventory wasn’t specified to that channel as it’s just stock that people buy in shops, therefore it can’t be rerouted. He then said that they’re redeploying funds for incentive programmes for Daigou’s.
Wilsons asked if their corporate Daigou was building inventory in H2 FY20, as the half didn’t suffer from Daigou issues when other peers were. Peter commented on pantry destocking.
Wilsons then asked if the lingering effect of COVID19 was factored into H2 FY21. Geoff said that they’re assuming there’s an improvement.
UBS asked about performance in the direct seaback channel. Geoff referenced an inventory issue, which is now being released but there’s a delay. Peter said they were pleased with seaback shares.
UBS asked if they were seeing inventory build for those customers. Peter said that it happens next month.
UBS asked if the pricing strategy will chance. Peter (?) said that pricing wasn’t changing.
Bank of America asked the directors to verify that the directors selldown wasn’t insider trading. Geoff said it was all above board and they only just came to the view of the change in guidance at the weekend, but have been thinking about it for a few weeks.
Bank of America then asked if it was just a problem in the Daigou. Geoff said it’s Daigou and pantry destocking, as previously mentioned.
Morning Star ask if consumer behaviour in China is changing. Peter said that the brand was strong.
Morning Star asked if there will be a rebound in H2 or if it will go down. Peter (?) said it was a hard one to guess if there would be a significant restocking, but said they were factoring in that there will be softness in Daigou in H2.
Jardens asked what the strategy was going forward. They said that they will carefully manage inventory into channels.
Jardens asked about the separation of the sales channels. Peter basically said that all is well.
Macquarie asked about how one channel knocked the whole business. Geoff (?) said that customers of the Daigou channel may switch to another brand.
Macquarie repeated Morning Star’s question about whether there will be a rebound in H2. They said that the updated guidance expected a bit of a restock, but not as much to cover the whole year.
K2 Asset Management asked if a buyback was on the cards due to the reduced share price. A2 said that capital allocation was purely for growing the business, not buying back shares.
Morgans asked how FY21 H1 might look. A2 said that EBITDA (margin?) across H1 and H2 to be steady.
Morgan Stanley asked if there was increased competition from the change to the Daigou and info on MBS. They said they weren’t seeing anything in Daigou. a2 would not give any info on the number of MBS stores stocking product.
The closing remarks from Geoff were that they didn’t expect this and that they have been transparent in their announcements. He reiterated that the Daigou channel issues will be temporary and the other aspects of the business are strong.