Earnings call: a2 Milk Posts Growth Amidst Market Challenges, Eyes Expansion

The a2 Milk Company Limited (ATM.NZ) has reported a positive interim financial performance for the first half of the fiscal year 2024, with a 3.7% increase in revenue and a 5% rise in EBITDA. Despite facing market challenges, the company has strengthened its position in the China market and is on track with its growth strategy, aiming for a medium-term revenue target of approximately $2 billion by FY '26 or later.

Key Takeaways

• Revenue increased by 3.7% to $812 million, with net profit after tax at $85 million.
• EBITDA margin for FY '24 expected to be consistent with FY '23 levels.
• Market share in China's infant milk formula (IMF) market grew to 6.4%.
• China label net revenue rose by 10.4%, defying a market decline.
• New product launches in China received positive consumer feedback.
• U.S. revenue grew by 8.6% to $56.9 million, with a focus on reaching profitability by FY '25 or '26.
• MVM reported net sales revenue of $43.5 million, targeting profitability acceleration by FY '26.
• New partnership established in the O2O space in China, with exploration of M&A and JV options for future growth.

Company Outlook

• Revenue growth guidance for FY '24 has improved, with a medium-term ambition to reach $2 billion in revenue by FY '26 or later.
• The company plans to expand product offerings in the premium and super-premium categories in Australia and Southeast Asia.
• Manufacturing capabilities in New Zealand are expected to progress within the calendar year.

Bearish Highlights

• Challenges include lower newborn numbers and slower growth in penetration and consumption in BCD cities.
• English label and channel shares have not fully recovered as expected.
• The $2 billion sales target by FY '26 may be delayed to FY '27 or later due to market conditions.

Bullish Highlights

• Achieved a top 5 brand position in the China market.
• Stabilized English label sales and launched new products in China.
• Growth in ANZ liquid milk market share to 11.3% and lactose-free product growth.

Misses

• The China label market declined by 15.2%, though the company's net revenue in this segment grew.

Q&A Highlights

• The company discussed a partnership with a sophisticated IT company in China for O2O channel development, ensuring inventory transparency.
• Plans to focus on commercial relationships in China, adhering to SAMR guidelines for licensing.
• M&A and JV options are being considered for future investments.

The a2 Milk Company Limited has demonstrated resilience in its interim financial results, with notable growth in revenue and EBITDA. The company's strategic focus on sustainability, China market expansion, product innovation, and supply chain transformation has contributed to its strong performance, particularly in the China label segment. With new product launches and marketing initiatives, a2 Milk is working towards its goal of becoming a leading brand in the global dairy market. Despite some setbacks, the company remains optimistic about its future, supported by its strategies for growth and profitability.

InvestingPro Insights

The a2 Milk Company Limited (ATM.NZ) continues to draw attention with its interim financial performance and strategic positioning. According to InvestingPro data, the company holds a market capitalization of 85.65 million USD, which, while modest, reflects its focused growth strategy. In terms of valuation, the P/E ratio stands at -8.70, indicating that investors may be expecting future growth despite current earnings not justifying the stock price.

From a liquidity standpoint, the a2 Milk Company Limited appears to be in a strong position. An InvestingPro Tip notes that the company holds more cash than debt on its balance sheet, suggesting financial stability and the ability to invest in growth initiatives. Additionally, the company's liquid assets exceed short-term obligations, which is crucial for maintaining operations and funding new market opportunities.

Investors looking to delve deeper into the financial health and future prospects of the a2 Milk Company Limited can explore more InvestingPro Tips. With an additional 10 tips available on InvestingPro, including insights into profitability and stock performance, there is a wealth of information to help make informed investment decisions. To access these insights, use coupon code PRONEWS24 for an additional 10% off a yearly or biyearly Pro and Pro+ subscription at https://www.investing.com/pro/ATM.

Full transcript - None (ACOPF) Q2 2024:

Operator: Thank you for standing by, and welcome to the a2 Milk Company Limited First Half '24 Results Call. [Operator Instructions]. There will be a presentation followed by a question-and-answer session. [Operator Instructions]. I would now like to hand the conference over to Mr. David Akers, Head of Investor Relations and Sustainability. Please go ahead.

David Akers: Good morning, everyone. Thanks for joining the call today. Starting on Slide 3. On the call today, we have David Bortolussi, our Managing Director and CEO; and David Muscat, our CFO. We have also our, leaders from our regions, Li Xiao, Yohan Senaratne, Eleanor Khor and Kevin Bush. The team will present our results and outlook and there'll be time for questions at the end. I'll hand over now to David Bortolussi.

David Bortolussi: Thank you, David. Good morning, everyone, and thank you for joining the call. I'd like to get through today, so I'll start with a few key messages. Firstly, we are pleased to report a positive interim results today with revenue growth of 3.7%, EBITDA up 5% for total loan debt sales by another [Technical Difficulty] resulted in a achieving the important milestone framing a top 5 brand in the China [indiscernible].Doing so, our brand health metrics reached new hires at [Technical Difficulty] during the period, we successfully launched our new [indiscernible] China label product, and we are pleased to confirm that the transition [indiscernible]. Encouragingly, after several periods of declines, our English label sales stabilized in the first half of '24 compared to the second half of '23. We also have additional English label products coming to market shortly, which Johan will cover later in the presentation. Finally, our revenue growth guidance for FY '24 has improved relative to our prior outlook statement. Moving to Slide 5, which summarizes our financial results. Revenue for the period was $812 million, up 3.7%. EBITDA was $113 million, up 5% with an EBITDA margin of 13.9%, up 0.2 percentage points. Our net profit after tax was $85 million, up 15.6% and our EPS was up 18.6% to $0.11. Our net cash position at the end of the period was $792 million, up $35 million compared to June 23, and our operational cash conversion improved to 87%. Revenue growth in the half was again driven by our China segment, which was up 16.5%, while our ANZ segment sales were down 24%, reflecting the change in our distribution strategy that we've communicated previously. U.S. sales were up 8.6%, while MVM sales were down 4.7%. From a category perspective, we grew total IMF sales by 1.5%, with China label sales up 10.4% and English label sales down 6.9%. Liquid milk sales in ANZ in the U.S. were up 1.5% and 7%, respectively, and other nutritionals were up 48.5%.Moving to Slide 6. In addition to our financial results, I'm particularly proud of what our team has achieved operationally in the half. We grew total China IMF sales in a market that was down almost 14%, achieved the top 5 brand position in the market and improved our key business health indicators. In China label IMF, we have achieved record market share and new hires in brand health and launched our new GB registered IMF products successfully. In English label, we stabilized sales in the adjacent part and developed our O2O distribution partnership with Yuhan, which is the market leader in the channel. We also progressed development of 2 new IMF products with MVM and a new commercial supply chain partner, targeting launch of the first product in the second half of FY '24. We also commenced production of a2 Platinum Stage 4 product with MVM and another new commercial supply chain partner. Over the page on Slide 7. We accelerated growth in other nutritionals and developed 2 new fortified tub products to be launched shortly. In ANZ liquid milk, we continue to develop our lactose-free penetration in Australia and progressed the major upgrade of our own facility. In the U.S., we significantly improved profitability, commenced distribution of IMF products while investing in long-term FDA approval. And lastly, we advanced our sustainability program with the commissioning of new Delan's first high-pressure electrode-boiler at MVM powered by certified renewable energy and achieved our animal welfare certification and farm environmental plan targets. Turning to the next slide. The major highlight of the half was the successful launch of our new GB registered China label IMF product, which has been an enormous project for our China team and our strategic partner, China State Farm. Following the approval received from SAMR in June 23 in commencing production, we started shipping to distributors in October and retailers and major platforms from November. We did an advanced soft launch through our flagship online stores in October to make the product available to our consumers who wanted to transition earlier. Following strong support from the trade in December, we accelerated the transition to support distributors and retailers ahead of Chinese New Year, which improved the phasing of our results. At this point, Stages 1, 2 and 3 have largely transitioned in all major channels with limited old product available. We will maintain availability of some old products online for a short period of time for those consumers, particularly early-stage users who would prefer to delay switching. In December, we commenced execution of a significant launch campaign, which continued through to Chinese New Year to communicate the arrival of our new upgraded product. The campaign was extensive and integrated across all sales and marketing channels, and [indiscernible] share more on this later in the presentation. Slide 9 highlights that the GB registration process to date has resulted in a 20% reduction in the number of products in the China label IMF market for the shift towards local brands. The 2 charts on the left show that the total number of China label product has gone from 438 in December '22 to 353 in December '23, with a reduction predominantly from imported products. However, the shift is far less pronounced from a market value or sales perspective highlighted in the two charts on the right, which illiterate the impact on the MBS channel as an example. Looking at Slide 10. Since we refreshed our growth strategy in 2021, the China market has evolved in could be more challenging [Technical Difficulty] in China for the calendar '23 period reflected an improvement in trajectory over the past several years. We're also encouraged by the recent market volume trend the state in product, which has improved. Calendar year '24, we expect a fine number of new bond based on our assessment of various factors and data points, including delayed [indiscernible] COVID '19. Recent [Marie] staff present indicated supplement initiatives and historical first rate in prior year of the Dragon. Beyond '24, the longer-term birth rating is more difficult to predict. The overall China IMF market declined again in the first half of '20, down 10.7% in volume and 13.6% in value, with a similar value decline in Q&A and BCD cities. The market decline is due to a number of factors, including the cumulative impact of lower new volumes, increased competitive intensity and promotional activity as well as macroeconomic conditions impacting retail sales. The market is also seeing increased brand concentration towards top 5 players and the shift towards local Chinese brands, partly due to the new GB registration process, and top players are increasingly leveraging a broader product portfolio. We have also recently seen a shift in market sales from China label to English label channels and within English label channels over a longer period from Dago to CBEC and O2O channels. Moving to the next slide. Against this challenging backdrop, we've been relatively successful. Our brand position, finishing and growth strategy have resulted in significant share gains over the past few years. We are the pioneer of the A1 free category and our high-quality product and distinctive brand for New Zealand resonates well with consumers. We've increased our marketing investment from just under $170 million in FY '21 to over $260 million in the past calendar year to reach more consumers in a targeted manner. Our in-market execution has been exceptionally strong in partnership with our strategic partner, China State Farm. And we are one of the only companies that can leverage a one-brand 2-label approach with strong positions in both China label and English label. In addition, key segment trends continue to support our growth strategy, as outlined on Slide 12. Our China label product competes in the ultra-premium segment, which represents well over half the total market and increasing as a proportion. And secondly, the A2 protein segment continues to gain share in the category. The segment has grown rapidly and accounts for 20% of the MBS channel and 17% of the [Daigou] channel. The other important trend, which I'll come back to shortly, relates to brand concentration. This is translating into favorable brand health metrics and market share gains. On Slide 13, you can see the continued increase in our China brand health metrics. The slide also shows the significant growth in our market share in China label channels and that our total English label market share has also increased. Moving to Slide 14. We are very proud that A2 is now a top 5 brand in the China IMF market overall, with a significant further share of 6.4% at the end of the first half of '24 on an MAT basis. This includes being the clear #2 player in the English label IMF market with over 20% share and a 4.1% share in China label as a top 10 brand. Slide 15 shows in detail the evolution of brand concentration in the market over the past few years. The top 5 brands now represent 52% of the market compared to 45% in FY '21, and the top 10 brands account for 74% of the market compared to 66% in FY '21. This is an important trend, and there are strong drivers that should see brand concentration increase further over time, consistent with how other IMF markets have developed around the world. Moving now to Slide 16 and our outlook for FY '24. I'll make a few comments here, but also direct you to our results commentary and outlook announcement released this morning, where we have the full version of our updated FY '24 outlook. Our revenue growth guidance for FY '[Technical Difficulty] we now expect growth of low to mid-single-digit percent with IMF, other nutritionals and U.S. sales up, ANZ liquid milk sales flat and MVM sales down. In terms of the shape of our P&L versus last year, we're expecting gross margin as subscribe marketing investment as a percentage of revenue to be similar to administration and other expenses as a percentage of revenue to be similar to down. Overall, we expect this to result in our EBITDA margin in FY '24 being broadly in line with FY '23. We also expect cash conversion to be higher than FY '23 and CapEx to increase to approximately $30 million to support the upgrade of our Carbon milk processing facility. I want to spend some time now recapping on some of the elements of our strategy and provide an update on our medium-term revenue ambition. Slide 17 shows our growth strategy on a page, which is focused on 5 key priorities, which we have refined slightly in the detail to better indicate our current priorities. Firstly, investing in people and planet leadership, particularly in relation to our capability and sustainability objectives. Secondly, capturing the full potential in China IMF, particularly expansion into lower tier cities and online channels. Thirdly, ramping up product innovation, including portfolio expansion in English label IMF, China label IMF and other nutritionals for kids, adults and seniors as well as leveraging the portfolio into new markets. Fourthly, transforming our supply chain, particularly accessing additional China label IMF registrations and developing our own nutritional manufacturing capability through MVM and/or other commercial and acquisition opportunities, primarily in New Zealand and China over time and finally, accelerating the past profitability for our U.S. and MVM businesses. Moving to Slide 18. This slide shows how we are tracking towards our medium-term goals reflected in our measures of success. Overall, we are making solid progress against the plan we outlined back in October 21 with a few changes here from our full year results. Engagement in CBEC share have changed to work in progress. I'll come back to our medium-term revenue ambition shortly. On the positive side, Australian household penetration, U.S. premium milk share, China other nutritionals growth and supply chain efficiency have improved. Slide 19 highlights the significant market share we have gained in the China IMF market since FY '21, increasing from 4.9% to 6.4% through execution of our growth strategy. In doing so, we have grown our China label IMF sales by over 50% and stabilized our English label IMF sales, resulting in H2 becoming a top 5 brand overall. We have also transformed our IMF channel mix, continuing to focus on more controlled channels away from the Daigou channel. As a result, our China label, CBEC and O2O channels now represent 90% of our IMF sales compared to 60% in FY '21. The company has also grown other nutritional products outside of the IMF category by 67% and its combined liquid milk business in ANZ in the U.S. by 27% over the period. However, the China IMF market size has reduced significantly, down 24%, driven primarily by a 25% reduction in the number of newborns, which is more than expected at the time of announcing our refreshed growth strategy back in October '21. In particular, English label channels have not recovered at the speed and to the extent initially assumed with the Daigou channel down 55%, which was a key channel for the company. In summary, whilst the market is showing some early signs of stabilization, it will take longer for the recovery than initially assumed. Moving to Slide 20. In October 21. As part of our refreshed growth strategy, we defined our medium-term financial ambition to grow revenue from $1.2 billion in FY '21 to approximately $2 billion by FY '26 or later and to target EBITDA margins in the teens. At the time, we stated that defining a specific time line to achieve these financial goals was challenging given the pace and degree of change in the China IMF market, including from the prolonged COVID-19 impact and reduction in the number of Chinese newborns. From FY '21 to date, we have grown group revenue by $415 million and increased our EBITDA margin by 3.6 percentage points, resulting in revenue and EBITDA growth of 34% and 82%, respectively, over the period. Our China label IMF growth is on track with significant share gains. English label IMF growth is behind plan due to the market decline, particularly in the Daigou channel and lower share gains to date. Achieving the company's medium-term revenue ambition of approximately $2 billion by FY '26, would require an additional $380 million in revenue growth on calendar '23 over the next 2.5 years. This growth would represent a compound annual growth rate of approximately 9% with higher growth required in FY '25 and '26 based on the company's revenue guidance through FY '24. So whilst it remains possible for the company to achieve its medium-term revenue ambition of approximately $2 billion by FY '26, at this stage, it is likely to be achieved by FY '27 or later. The company continues to target EBITDA margins in the teens with year-on-year improvement. I'll now hand over to Dave, who will cover our financial results for the half in more detail.

David Muscat: Thanks, David, and good morning, everyone. Moving to Slide 22 and a summary of our group income statement. We delivered net sales revenue for the half of $811 million, up 3.7% on the prior corresponding period. This reflected strong growth in the China and other Asia and U.S.A. segments, partially offset by a decrease in the ANZ segment and MVM. I'll come back to the segment sales shortly. Moving down through the income statement. Gross margin of 46.7% was in line with FY '23. However, it was down 0.9 percentage points on first half '23, driven by higher input costs is and the adverse impact of sales mix, offsetting price rises and margin improvement initiatives. Our distribution costs were largely in line with PCP as a percentage of sales with higher freight and warehousing costs associated with the China label transition, offset by U.S. freight rate savings. Marketing expenses were higher to support the execution of our growth strategy in China and to support the new GB China label product launch and transition. Our administrative and other expenses were lower due to reduced FX hedge losses, the timing of project-related spend, lower LTI expenses and cost savings, offsetting higher salary and wage costs associated with capability investment. I should point out that the net foreign exchange impact to first half '24 EBITDA compared to the prior period was not material. Interest income increased, reflecting our net cash position and higher market interest rates and overall, our net profit after tax for the half increased 15.6% to $85 million. Slide 23 presents our segment performance and show significant growth in our China and other Asian segment of 16.5%, led by China label IMF market share growth and the deliberate shift of English label distribution from the Daigou channel to more controlled channels in China, such as CBEC and O2O. This deliberate channel shift explains most of the reduction in the ANZ segment. The USA segment delivered 8.6% sales growth and, importantly, improved EBITDA by 31.8%. The decrease in NBM's external sales of 4.7% reflects reduced GDT auction prices compared to last year, offsetting higher volumes. And finally, the EBITDA improvement in the corporate segment was mainly driven by foreign exchange gains that were fully offset at a group level by foreign exchange losses in the other segments. Moving to Slide 24, which summarizes our performance from a category perspective, our total IMF sales were up 1.5% in a very challenging market with 90% of our IMF sales now made through the China and other Asia segment. This slide also shows the accelerating growth of the other nutritionals category with a 48.5% increase in sales in first half '24. This category includes plain and fortified milk powders and liquid milk exported into China and other Asia markets. On Slide 25, you can see our gross margin percentage of 46.7% was 0.9 percentage points down compared to first half '23, but up on second half '23 and in line with full year '23. The gross margin decrease versus first half '23 reflected higher product costs, driven by inflationary pressures on input costs and also partly driven by the increased cost of the new China label IMF product due to upgraded formulation and packaging. The margin decline also reflected adverse foreign exchange impacts, mainly due to the appreciation of the New Zealand dollar against the RMB and also adverse sales mix impacts. Price rises and other cost mitigating initiatives partly helped to offset the adverse impacts. Moving to Slide 26. Consistent with our growth strategy, our marketing investment has increased significantly, while our SG&A investment has remained reasonably consistent. Marketing investment in first half '24 was higher than both first half '23 and second half '23, reflecting the continued step-up in China investment and increased support for the transition to our new GB registered China label product. Xiao will provide more color in his section. SG&A remained relatively stable in absolute terms and improved as a percentage of sales versus PCP despite our continued investment in innovation and building capability. Moving to the next slide, which covers our cash flow. Net operating cash flow of $62.1 million and cash conversion of 87% were both higher than the corresponding period, with the prior period impacted by catch-up payments from COVID-19 delays outside of the company's control. Total net cash at the end of the period was $792 million, 12% higher than first half '23. On Slide 28, our balance sheet remains strong. Cash and term deposits at the end of the period was $792.1 million. This was slightly lower than second half '23, reflecting operating cash inflow net of MVM bank borrowing repayments, including external borrowings, our net cash balance increased by $35 million from June 23. Inventory increased on full year '23 as expected due to the new GB registered China label product transition with an improvement in English label stock levels that were high at the end of high start of the half due to prior period supply issues. That completes the financial overview. And so now I'll hand over to Li Xiao to take you through the strong performance of our China label business.

Li Xiao: Thank you, Dave. It has been a milestone period for us in China. The China IMF market and the broader environment have been very challenging, but we have performed strongly. Most importantly, we launched our new GP registered China label [indiscernible] product and the transition is ahead of plan. We continue to reach new highs in brand health metrics and market share. BCD cities remain the biggest driver of off-line growth in first half 2014, and this resulted in strong NBS share growth. In our domestic online business, our growth operate off-line and our share involved is not higher than MBS with our biggest share gains in very stations. We also delivered strong growth across liquid milk and other nutritional products. Turning to Slide 31. The China IMF market has been very challenging again with the overall China label market declining 15.2% in value. Despite this, we grew our China label net revenue by 10.4% to $299 million, underpinned by further increases in market share across both MBS and the door channel. The strong performance was supported by capital execution of the launch and the transition of our new GB registered China label MF product. Moving to the next slide. We have shown this slide a number of times now, and the trends are continuing. The charts on the left show the significant market decline in the MBS and the door channels in the total MF category as well as in the ultra-premium segment. The chart on the right shows average market selling price for MF from the end of 2021. This clearly highlights the decline in average selling price in the market continued, and the gap between G&A and the BCD has closed. We are proud to share the next is our new true range. The new product has significant formula upgrades with increased levels of high purity lactoferrin and contained innate nutritional group of HMO OPM and OPO. We also significantly upgrade the packaging with the innovation for the lead bond and the scrapper. This was carefully chosen based on in-depth consumer insights work. The product has been well received by the market, including 7.3 million positive mentions in consumer feedback and stronger profitability on formulation, functionality, infinite experiences and the user recommendation on GD, Tmall, TikTok and Red. Slide 34 to 37 shows some of the mini launch and support activities executed by the team. Slide 34 shows the significant campaign launch across traditional and digital channels as well as an example of auto home advertising, targeting high traffic and high-impact areas, including over 200 shopping malls in more than 100 cities. Slide 35. Showcased our engagement across our MBS store network. The team rolled out new point of sale material costs around 23,000 stores and achieved secondary display in 20% of the stores. We also carry out over 300 road show events, 3,400 mama class and 350 installed events to support the campaign, representing a significant contribution from our installed promotional team. Moving to Slide 36. Throughout the campaign focus on emphasizing product benefits, messaging and showcase endorsements to develop an enhanced product trust. Slide 37. Showcased some of our activities across online channels and platforms to drive brand power and enhance new user recruitment, including events with JD (NASDAQ:JD).com, Tmall and the TikTok. Moving to Slide 38. Our hard work has again translated into new heights in our brand metrics. Total value is up to 68%, and unprompted line [indiscernible] on the topper of [indiscernible] lines is also increasing. Over trial and the loyalty metrics are also continuing to increase as we target more precise marketing lower in the funnel. The consistent improvement give us a lot of confidence in the brand and our positioning. Slide 39. Shows over performance in MBS for the period. Our record market share in MBS was driven by over growth in BCD cities. Our overall market share grew to 3.5%. In China cities, our share was consistent at 7.4%, while in BCD cities, we increased our share to 2.9%. We are particularly encouraged by our BCD performance and continue to be focused on capturing our opportunity in these lower-tier cities, where we have a relatively low share. Moving to Slide 40. Our overall distribution was broadly stable, notwithstanding the significant store closure at the market level as trade margin for operator headcount under significant pressure. People in new stores as well as achieving some modest like-for-like growth in mature stores. You can see the slides that there was also a big impact from the activity stores. Based on news and data, we increased our numerical distribution from 27% to 28% of stores and most importantly, our BTB distribution from 47% to 48%. Turn to online growth again operate off-line growth, and our market share is now higher than do than MBS. We increased our overall do share to new high of 3.6%. We also achieved a strong growth within the Kido platform of Tmall, gd.com by unlocking growth in other platforms, such as Douyin. Slide 42. Show that we are leading share in China or among domestic and international brands. MBS, we were top fifth share inner and involve the #3 share inner. To illustrate the point of our share gains, Slide 43, shows that we have gained share in virtually all stages across MBS and the door. In MBS, we had higher share growth in early stages. In door, we delivered share growth across all stages with continued strong share gains in early stages. A healthy indicator that the channel is growing rather than consumer switching from offline. Now I will hand over to Yohan to take you through the English label MF.

Yohan Senaratne: Thank you, Xiao, and good morning, everyone. In the English label IMF, the key highlights were that we invested in a significant brand campaign supporting continued growth in consumer awareness. We also further simplified and delayered our route to market through use of drop shipping from Tier 1 distributors to consumers, which helps to shorten lead times from manufacturer to consumer. We also expanded O2O channel distribution through a key strategic partnership. And lastly, we have accelerated our innovation efforts and will introduce new products to the market in 2H24.Let's go through the results itself on Slide 45. The overall English label IMF market in value declined slightly by 0.1%. The baggage channel was down 18.6%, offset by a 3.4% growth in CBEC and a 6.8% growth in O2O. Our net sales revenue was down 7.2% on 1.23 to $264.5 million. CBEC revenues increased 19.9% compared to 1.23 and now represents 80% of all EL sales. Whilst ANZ IMF revenue decreased 50.7% versus 1.23, it was broadly flat versus 2.23, reflecting a more stable channel environment. On 1.24 saw a further refinement in our route-to-market model with a shift to drop-ship fulfillment model by Tier 1 distributors to service pop, C2C and O2O store networks, improving service to consumers. We are starting to see signs of stabilization in the English label market. The charts on Slide 46 shows channel growth rates in Q&A cities on the left versus BCD cities on the right. In both charts, you can see that the rates of market declines have reduced in the 6 months to the end of December compared to FY '23. Total English label, CBEC and O2O is in growth for the 6 months to December in BCD cities. In BCD CDs, English label is in growth in CBEC and O2O, but this has been more than offset by continued decline in the Daigou channel. Slide 47 provides some background on the partnership we have developed with the market-leading O2O distributor Yuou O2O operations extend across month time, China's premier O2O only National Key Accounts and Yonsa, our O2O drop shipping service for smaller stores. Through this partnership, we have grown our share in Montan by over 50% and increased our distribution in Yonsa's store network by over 50%. With the evolving dynamics in English local channels and our increasing focus on O2O, we are pleased to be partnering with Yuou. Slide 48 shows a stabilization in our overall English label market share. Kantar Panel data shows our total English label share across all channels at 20.6%, with steady growth over the past 3 periods. Our CBEC channel share according to Smart Path is 21.4%, and our O2O and Daigou share is at 20.5%. Both have declined slightly since FY '23, but remain above FY '22 levels. It's important to note differences in movements between total English legal market share and channel market shares, mainly due to scope and sample size limitations at a channel level. We are really excited to be launching additional products in 2024. Slide 49 shows our new IMF product, at a2 Gentle Gold. This new range has been developed in partnership with MVM and a new commercial supply chain partner, Yashili New Zealand, a subsidiary of Mengniu. This product extends our addressable market within the premium price range. It will broaden our English local IMF portfolio to appeal to more consumers. A2 Gentle Gold will be positioned in the premium segment, while an additional English label products will be positioned above a2 Platinum in FY '25. A2 Gentle Gold will be launched in Australian retail channels, emerging markets in Southeast Asia and selected channels in China. We are also excited to be launching additional products in the adult and senior consumer segments also into half '24. A2 Immune is fortified with lactoferrin to support a healthy immune system. A2 Move is formulated with Fortigel, which is clinically proven to support bone joint and muscle health. Both new products are made with pure and natural New Zealand A2 milk. With signs of stabilization in the English label IMF channels and an expanded portfolio in IMF and in the adult and senior segments, we're optimistic about half '24 and beyond. With that, I'll now hand over to our Managing Director for ANZ and Strategy, Eleanor Khor.

Eleanor Khor: Thanks, Yohan, and hello, everyone. By way of quick update on ANZ liquid milk, a key focus for us this year has been continuing to drive our lactose-free product, in particular, through targeted digital campaigns as well as retailer sampling, out-of-home advertising and leveraging our field sales team to strengthen our presence at shelf. Pleasingly, we've seen our market share continue to grow as a result of these initiatives with our lactose-free share growing from 7.2% at the end of FY '23 to 11.3% at the end of the half. We've also expanded our consumer base with household penetration of A2 milk increasing from 14.2% to 15.1%, providing us with more opportunities to stay top of mind with our consumers. In terms of net sales revenue, in the first half, we delivered growth of 1.5% to $93.3 million. Given the currently challenging macroeconomic environment and the outperformance of private label brands, we were pleased to continue to grow the liquid milk business in Australia and maintain our market share flat at 11.3%, with growth in lactose-free offsetting some decline in our core range. With that, I'll now hand over to Kevin to share key messages on our USA business.

Kevin Bush: Thanks, Eleanor. A quick update on the U.S. business today as well. It's been a big part of the team as we're really focusing on achieving our goals. Key impacts for the half can be summarized as follows: Household penetration was broadly stable at 2.2% with higher loyalty rates versus competitors. We experienced a decline in brown awareness with lower marketing spend, but this is stabilizing. We achieved growth in market value share in the premium milk category to the grocery channel. And importantly, we improved profitability and reduced reported losses significantly. Turning to Slide 54. I'm looking at the result itself. We grew revenue 8.6% to $56.9 million, which is up on the prior corresponding period as well as second half '23. Revenue growth was mainly driven by lower trade spend due to reduced promotional depth and frequency and innovation. Our EBITDA loss of $8.3 million was lower compared to second half '23. We achieved this through reduced promotional activity, improved input costs and distribution rates, lower marketing spend and reduced SG&A costs, partly offset by higher costs incurred with respect to pursuing long-term FDA approval. We commenced distribution of IMF with selected retailers in-store and online, including recently with Amazon (NASDAQ:AMZN). We are continuing to pursue longer-term FDA approval to import a2 Platinum and are currently focused on completing clinical trials and preparing the new Infant Formula Notification to be filed by October 2024. Accelerating the path to profitability in the U.S.A. by FY '25, FY '26 remains a key priority for us, and we expect to make further progress on this objective this year. And with that, I'll hand back to David Bortolussi.

David Bortolussi: Thanks, Kevin. A few quick points on MVM before we move to Q&A. MVM reported net sales revenue of $43.5 million, broadly in line with the first half of '23 as the reduction in GDT prices offset higher external sales volumes. EBITDA was a loss of $15.3 million compared to a reported loss of $13.4 million in the first half of '23. Slightly higher EBITDA loss was due to lower 8 sales driven by timing, additional product development trial costs and capability-building initiatives as well as farm milk price changes. Importantly, we commenced production of a2 Platinum Stage 4 IMF base powder, partnering with a new commercial supply chain partner, New Zealand New milk, a subsidiary of Lactalis. Accelerating MVM's path to profitability by FY '26 remains a priority for us. I'll pause there. And with that, I pass back to David Akers for Q&A.

David Akers: Thanks, David. I'll ask that when we take questions, [Operator Instructions]. Darcy, can you please open for questions?

Operator: Your first question comes from Tom Kierath from Barrenjoey.

Tom Kierath: Just a couple of questions on the China label transition. Just want to understand if there's any kind of benefit in the half from stocking up the channel. I know that you did it quite late in the period firstly. And then secondly, was there any margin drag at the start of the period when you had -- I guess, you're getting rid of the old stock? I just want to understand what the margin looks like, excluding that impact potentially.

David Bortolussi: Sure. Thanks, Tom. I'll take the first question and Dave might talk about the margin. So in terms of the transition and benefit in the first half, not really. Our stock levels at the end of December were in line with what we normally planned. So we had thought that the transition previously post 11/11 might leave that transition not progressing as smoothly as hoped, but it did turn out pretty well. So stock levels in the trade in our distributors at the end of the half were in line with our normal targets. So you shouldn't think that there's any benefit or any I guess, associated with that. So Dave, you want to comment on margin?

David Muscat: Yes. So I think on the margin, it's actually the opposite. Xiao and the team did such a great job with the transition and it being a soft changeover that there really wasn't a margin drag in the first part of the half. And if anything, you simply had the higher cost of the new China label coming through at the back end of the half. But the old label margins, there's really no impact there. And no write-offs [indiscernible].

Operator: Your next question comes from David Errington from Bank of America (NYSE:BAC).

David Errington: Can I follow on from Thomas' question on -- because it seems to me that the terrific improvement, I suppose, in your sales outlook for this year. The majority, I'm assuming, has all come from the successful transition and also the stabilization of English label, but probably the majority is from the China label transition being such a success if you could confirm that. But my question is trying to understand why you have done such a great job, whereas others appear maybe be lacking a little bit. And I'm looking at Slide 9, I think Slide 9 is really interesting, where the number of imported has just fallen away significantly. So probably, you're now really, if not the number you're #2, I suppose, but you're dominating that. And then when you combine that with Slide 33, where why you've been so well received in the market, where everything is just coming back, you're getting a lot of positive sentiment. The question I'm asking is what is the problem with the others at the moment with the GB registration, particularly the international guys? Is it that their product is just not getting through? What are you hearing in the marketplace that has been allowed you to have such a strong performance relative to competitors that just aren't getting it done. Can you give us a bit of feedback as to what you're hearing in the market because it's a really, really positive point, I think, out of this whole result?

David Bortolussi: Yes. Thanks, David. I might just briefly address your first part of your question. And then the other two components relating to why we've been successful in the transition and how we're comparing or competing against the competition. I might hand over to Xiao to talk to that. But firstly, in terms of the outlook and your comment is China label driving that improvement in our outlook. We sort of are of the view that the impact on China label was largely phasing. It may well do better than we expect, but most of the impact was phasing between first half and second half. Like in our initial guidance, we're cautious about the transition and bringing up new product to market just after double 11 and having to establish new product arrangements with all of our customers in store and online is a challenging task to do. And so we were a bit cautious about the ex-factory sales in that last 4 to 6 weeks, which fortunately proved out to flow through well. I do note that when you look at the full year English label, you mentioned that as well. Our performance and the outlook for English label has probably improved since our full year guidance given previously. And also the growth in other nutritionals has been pretty strong as well. So it's a combination of factors. It's not just due to the transition of China label. But having said that, I'm going to hand over to Xiao to comment on why our China label transition has been successful and why we're continuing to gain share in the market.

Li Xiao: Yes. So I will contribute -- I mean, the guaranty transition to several factors. I mean we have the game plan ready by June 2023. Well, I mean because we are late in the SAMR approval, we get the opportunity, I mean, to really optimize the plant. I mean, by learning from all what the competition doing, are they working or not working. So until the last moment of the launch, we still optimize the plant, and this is probably the best game plan that we have. And then secondly, I mean, I think we upgrade the formula and also the package. So this is a new galaxy digital product, we have a much simplified sharpened and stronger new product proposition benefit claim as well as the product package and the formula upgrades. So it turned out to be a very successful, I mean, clear, simple, convincing message they will accept it by the consumer comparing with the O2O. And the server is the successful campaign and the integration. This we already covered a lot. I mean, in the previous slide that this is the biggest campaign. We increased our investment level and it's a much better integration in terms of marketing and the sales online or off-line. And probably, I mean, the fourth factor will contribute to the over stable price before the transition, while you see a lot of our MSC competitor, their price is collapsing before the transition which makes the price gap versus the old product under the new China label much bigger, and it did make the transition even more challenging. While in our case, it's a much more smooth transition in terms of the price gap. And lastly, I will contribute this success to the team, which is high morale and the share goal and everybody is a line because this is our only baby in China level. We don't have any chance, I mean, to make it feel. So hopefully, answer your question?

David Errington: This did. It's been an outstanding success. And I suppose, David, just finally, the one concern I would have and maybe you'd like to address this is taking greater control of your supply chain which is what one of your key strategic objectives is. But when you look at Mataura Valley, it's in losses, and it seems to be getting a little worse. As you transition more product to Mataura Valley, what concern would this have that you're going to dilute returns and dilute margins for your growth products, particularly in English label as you take more control of your supply chain?

David Bortolussi: David, so the economics of MVM are largely dependent upon the mix of product that we put through MVM with nutritional products, particularly infant milk formula being somewhat profitable, obviously, than lesser products or commodity products. And having said that, [indiscernible] great job improving the efficiency of the site as well, which you're not seeing in the numbers because we're investing in capability and product trial costs, which are now category are very expensive. So as we transition more product to MVM, particularly on innovation and growth opportunities, we see that as ending the economics significantly of MVM and benefiting the total group as we capture on consolidation of the margin capture of vertical margin within MVM as well. So when we look at, for example, our first new product launch of Gentle Gold, which is the first new infant true new infant product we've launched in 10 years. When we look at the product economics of that and production cost of the end-to-end system between MVM and Yashili, it's very competitive. It's very similar to our current arrangements adjusted for formulation because it sits underneath a2 Platinum. So we're confident that even with our existing arrangements, which are leveraging an owned facility with commercial partnerships with Yashili and new milk that we can be competitive and improve the economics of MVM, but at the same time, delivering end-to-end product cost to our business and margin structures that make sense versus current arrangements. So it really depends on how much nutritional volume that we put through MVM.

Operator: Your next question comes from Richard Barwick CLSA.

Richard Barwick: David. Yes. So obviously, we talked a bit about the near-term outlook for revenue. And obviously, you've upped your expectations for FY '24. But you're taking a more subdued view on medium-term sales. So effectively, you may still hit that $2 billion revenue in '26, but more likely now 27% or later. So what's changed? Because I'm thinking back at the AGM, you're still pointing to 26, you've got a better near-term outlook, and yet you pushed out the long term. So just trying to reconcile the moving parts there.

David Bortolussi: Yes. Richard, that's a great question. Back in '21, we laid out our plan with an ambition to achieve that, and we said that the timing was difficult to determine. I guess versus our original plan the newborns have been lower than we expected and other variables that we model around probably penetration and consumption to use, particularly in BCD cities, haven't increased as much as we'd originally expected, even though they still have increased. So when what we do is like many companies do, we go through an annual planning and update cycle, a strategic update and long-term planning exercise on an annual basis, and we do that typically around this period, like in the second and third quarter leading into our budget cycle in the fourth quarter. And when we look at the assumptions at the moment with the current information that we have in front of us, achieving $2 billion in sales by FY '26 was getting more stretching. And I always said, when we right back in '21, I said it was difficult to determine the timing and if and when it ever become apparent that was the timing may change, whether that be sooner or later than I've let the market know straight away. So as we work through that, we just think we're at a halfway point now, 2.5 years in of what was a 5-or-more-year plan, we thought we'd share that with the market. It's still possible. A lot of things would have to go right for us to hit that number in '26, but we think it's more likely now to be '27 or later. So I mean, it's really our share growth in the market, as you can see, is in line, if not ahead of our original expectations, like we're really performing well, particularly in China label. English label share, like both the channel has not recovered to the extent that we originally expected. And nor as our share to be fair, we haven't gained as much share in English label as we'd originally hoped. But as Yohan said, we're more optimistic going forward. But essentially, despite our share gains, the market in total has contracted more than we expected and achieving our goals by '26 is becoming more stretching. So rather than hold on to those targets and the market doubting that, we thought it'd be fair at this point just to give an update, and so that look it's more likely to be '27 or later than '26 later.

Richard Barwick: Okay. Understood. Fair enough. No, there's no dispute to you guys in terms of what you're doing in a tough market as has been outstanding, but it's just a question mark over how tough the month is. So my second question was on Synlait.

David Bortolussi: Sorry, just going back to -- So I wouldn't see this as being like a significant change moment for us. It's more just incrementally over time. It's got incrementally worse than we expected in terms of the market. And we've just got to the point now when we look out through those years. It's just a little bit more stretching than we'd hope.

Richard Barwick: Yes. Understood. Yes, just a quick one on Synlait, David. So they've got some pretty well-publicized balance sheet concerns. Two questions on Synlait. What can you do to ensure that there's no disruption around your near-term supply with Synlait depending on how things unfold there. And then perhaps more importantly, from a SAMR license perspective, how important is it that a2 maintains a continued ownership stake in Synlait?

David Bortolussi: So from an operational point of view, Richard, I think, I won't comment specifically on our arbitration case, but it's well known that, that was in response to service levels being below contractual levels in our view over an extended period. But thankfully, since then and more recently, service levels in Synlait have improved. So we don't have any major operational concerns with Synlait at the moment. And so we've always had a really strong operational relationship with Synlait. So I don't think you should be concerned about that at the moment. In terms of the SAMR license, the requirements under the regulations of the brand owner and the manufacturing facility need to demonstrate close association. And that is not specifically defined in the regulations but certainly, our stake of 20% is demonstrates that. And we are aware of cases in the market where that equity ownership can be as low as 1% in demonstrating close association. So I assume that you're perhaps thinking that if Synlait capital structure concerns were addressed in a different way to their current plan of selling dairy works and perhaps with syndicate support around that, that they may be considering other options potentially an equity right, which we're not aware of. And you might be worried about the impact on our SAMR license of any dilution to the A2 stake. I assume that's where that's coming from. And if that is the case, we haven't made any discipline. We don't know whether in planning that. We haven't made any hypothetical decisions in relation to that. But even if that was the case, and our equity stake was diluted in any way, we don't think that is a regulatory concern in relation to our SAMR license.

Richard Barwick: Okay. Well, I actually think even in a more bearish scenario if Synlait was to go into administration, how important was it again for you to come out the other side with an equity stake.

David Bortolussi: Yes. So administration itself is a couple of points the administration itself is not necessarily a regulatory issue. The license attaches to the factory, however, and whatever form that continues. All I would say is that the requirements are to demonstrate post association, and that's not specifically defined. But we would always make sure that we follow whatever Sam requires in relation to the regulatory requirements.

Operator: Your next question comes from Marcus Curley from UBS.

Marcus Curley: Two questions, David. Just on Gentle Gold, I just wondered if you could talk to the opportunity there. How big an opportunity or how big of the market do you see that being in terms of the premium category? And I suppose a super-premium product launch that you're referring to at some stage next, does this go a long way to close the gap on [indiscernible] in the English label category?

David Bortolussi: Marcus, great questions. I might actually just ask Yohan to address that. Any leads that part of our business.

Yohan Senaratne: Sure. Thanks, Marcus. Relating to your question on a2 Gentle Gold, of course, the primary audience for that product is Australia and markets in Southeast Asia. And so if we look at the Australian market, upwards of 35% of the total Australian market is at the premium price point. So a premium price point, we're talking about trillion dollars, 29 to $37. And of course, our product, our Platinum product in Australia is sold for above that. And so what we're trying to do with Gentle Gold is to broaden the audience for a2 Infant Formula and Gentle Gold plays in that more premium price point. So it opens the addressable market for us in Australia. There are also markets in Southeast Asia for which a product such as Gentle Gold priced at lower than Platinum is more appropriate. And this new product is a key element to help us achieve our ambitions associated with emerging markets growth. So this is envisaged to be one of the key products that we were used to expand in Southeast Asia. But it's not the only part of our new product development plans in IMF. So yes, as you said, we've got platinum. We've got a2 Gentle gold, slightly below in the premium segment, and we're looking to bring to market a product more premium than platinum, primarily for Chinese market. And yes, that will represent a stronger ingredient set with more functional benefits. And as you said, it is to be able to more effectively compete with some of our multinationals in the English label space who are able to bring multiple products to market, leveraging their global country. And so this will help us to upgrade our consumers in English label in China from platinum to our super premium products.

Marcus Curley: Do you see any risk to a2 Platinum through the Daigou channel from Gentle Gold, i.e., being offered in at a lower price point, and it creates cannibalization to that offering?

Yohan Senaratne: Yes. So the product will be available for sale in Australian retail markets, and there is definitely the potential for Daigou to take the product. And I think the way we look at it is it's a potential broadening of the audience base and even we're planning to launch the Gentle Gold product in selected China channels. But primarily, the product is for the Australian market. And I think that particularly when you consider the volumes involved and look at some of our competitors, even with say, the likes of optimal, there's a gold product and a profit or a product, this would be not similar to that.

Marcus Curley: Okay. And then secondly, David, you've obviously got a new manufacturing agreement on Stage 4 and now with the new English label product, but no announcement on manufacturing capability within this result. Would you be expecting to make decisions on particularly canning, I should say, inside of the next 6 or 12 months?

David Bortolussi: Yes, Marcus, I know we've been working on this for some time, and the market would like to have some clarity, but we want to make sure we make the right decision going forward. And we're evaluating a bunch of options in New Zealand and elsewhere. But in terms of timing, we're hoping to make progress during this calendar year. We'd obviously love it to be sooner rather than later, but I think this calendar year is a reasonable expectation.

Operator: Your next question comes from Sam Teeger from Citi.

Sam Teeger: David, excellent results for the first half. Would it be good to explore the initial label outperformance versus China label? Do you see this as the start of the longer-term trend, how much of this shift do you think is Chinese consumers trading down from the higher price trying to label to the lower price in this label given the weakness in the consumer over there more broadly? Or any other factors you think about driving this shift?

David Bortolussi: Yes, Sam, it's a good question. I think it's probably too early to tell, but we're encouraged by the recent trajectory of the channel and also our business. And within the channel, the CBEC and O2O channel outperforming the Daigou channel, which has been going on for some time now, but they're obviously becoming a much more significant part of the overall English label mix. These are the drivers of the English label channel being flat for the period. There's a few things. It's hard to know with certainty, obviously, but the things that we think are driving it is, firstly, I think consumers are becoming more comfortable post COVID with a cross-border trade. So at the time, during COVID were concerns about contamination, there was interruption of service levels and things like that because Moore's going through those control channels to serve ourselves better. So I think there's that component. Secondly, I think that definitely, the macroeconomic conditions, as you mentioned, are causing some trading down across categories and infants no exception to that. So relative to other propositions in the market, I think English label is perhaps becoming a more attractive value proposition Thirdly, I think the China label transition, again, this is hard to get a read on. We'll have to see some tracking from the market later. But because of the China label GB transition over the last 18 months, I mean, that's really forced 84% of the market overall. Those parents and caregivers to really change their product in China label and it's prompting them to reconsider which China label product or English label product, they may purchase going forward and perhaps particularly in relation to Stage 3 rather than early stage product, perhaps they're considering English label more than they have done in the past. And then finally, I think there's also drivers within the category because when you look at the major players in the category, where we're doing a slightly better job ourselves, but also it's fair to say that optimal, particularly in English label is doing a strong job at the moment and has been for several years, perhaps less so within China label. But Nestle has also through innovation, particularly in the specialty category has grown well in English label as well. So they're probably the 3 or 4 key drivers that we see influencing the stability of the English label channel at the moment and makes us a little bit more optimistic around the channel performance going forward. And then when we layer on our innovation coming to market and the work that we're doing and particularly in seatback and our new O2O distribution partnership with you, we feel better about the future in English label. So early days.

Sam Teeger: Great. Yes. You said in the past that English label is higher margin than China label. But in terms of dollars, like for 110 is an EBITDA dollar for China label still more than English label?

David Bortolussi: Dave, do you want to comment on margins?

David Muscat: I think the differential now, Sam, isn't so great because if you think about the mix of our business now, it's [indiscernible] and on. I think we've always said that that's reasonably consistent with China labels, always Daigou was the higher margin.

Sam Teeger: Got it. Makes sense. And sorry, just lastly, any comments you want to make about how the sell-through of the new China label product is going versus your expectations? The selling has gone very well, but any sell-through comments would be appreciated.

David Bortolussi: It's probably a bit too early. I mean, the transition has gone well, and we've obviously run out of -- pretty much run out of old judger product in the trade. So it is naturally moving across pretty rapidly to our new product. In terms of -- we want to look also this closely around the retention of existing users and the attraction of new users to the category through the stages. So it's a bit early to -- we get some information by channel in store and online to make some assessment of that, but it's too early to do that. It's varies by channel. It's fragmented at the moment. Perhaps we'll be able to provide a better update later in the year at the full year in relation to that. But so far, there's no major concerns like its gone well. Transition has gone well, certainly in terms of ship and no major concerns on sell-out as well.

Operator: Your next question comes from Stephen Ridgewell from Craigs Investment Partners.

Stephen Ridgewell: Yes. I just got two questions. Firstly, on the nutritionals category. Can you give us a little bit of a better sense around the drivers of the record growth in that segment or first half '24 does seem to have been going faster than market expectations. And then do you expect to see relatively strong growth in the category continue in the second half and beyond? And then just at a high level, how do margins compare for the other nutritionals compared to formula, please?

David Bortolussi: Yes. Again, I might ask Yohan to comment on that. He looks after most of our other nutritionals category, which is weighted towards English label at the moment, but we certainly got some strong plans in China label as well.

Yohan Senaratne: Yes. So in terms of your question around the progress in first half '24, I think that there are multiple products within the other nutritional portfolio. We have the milk powder, UHT products as well. If we look at milk powder, what we've seen is a strong growth in both China label and English label milk powder, recovery in our English sole channels and our transition across to CBEC has helped us improve our share in English label and plus in China label, we've secured more ranging in off-line channel. So that's driven the growth that we've had in the powder products. And then similarly, in the China label side for UHT, we've also increased our ranging there as well, and it's performing particularly well in the ultra-premium price Tier 4 UHT for kids. So that's, if you like, the base business. And as you would have seen in the slides as well, we have NPD coming. So the first round of NPD we'll be seeing in second half '24 will be around fortified milk powders. And fortified milk powder, this is a high-growth sub-segment within milk powder. And so our first products into that space of the immune and move products, which you can see are expanding into those spaces.Perhaps the other thing to note, just in terms of the PCP, we're cycling quite a soft comparable period in the first half '23, but it's great to see the trajectory improving for these products, and we expect that to continue.

David Bortolussi: So perhaps I necessarily assume that the growth will be the -- don't necessarily assume that rate of growth will be the same going forward. And the other part of your question was on margins. I prefer David, Dave.

David Muscat: I mean, I suppose it really depends on the mix of the business. So right now, it's skewed heavily to plain not powders, and we're hoping to move into fortified milk powders. We are moving to fortified milk powders over time and not bring higher margins, but the margins are quite low relative to the rest of our business for the current mix of business that we have today.

Stephen Ridgewell: That's great. And then second question is on gross margin. So you've guided for a similar gross margin. But I guess I just wanted to -- just given the price increases we've seen at the retail level at least in the new formula place them and with translation with a smaller package size. I guess should we not expect to be seeing pets a slightly more positive outlook for gross margin, even allowing for input cost increases? Any comments you can give us on that outlook for gross margin, please?

David Muscat: I think net-net, so if you think about the upgraded formulation, the upgraded packaging, less, I suppose, to slightly smaller team and the pricing that we've taken. We've probably recouped the absolute increase per tin related to that increase. But on a margin percentage basis, it probably actually comes with a little bit of dilution that we should see in the second half, but that will slightly be tempered by some of the ingredients savings that we're starting to see come through. But in terms of your specific question about China label going forward, it's probably a small amount of margin dilution, net-net with the price rise and the increased cost of product.

Operator: Your next question comes from Phil Kimber from E&P Capital.

Phil Kimber: Just a question on MVM and U.S. because they're actually going to be quite key drivers of EBITDA improvement over the next few years. So on MVM, how quickly -- I mean, do these new products materially move the dial? And maybe if you can talk about what some of these trial costs were, I mean, how material they were in the first half for MVM? And then on the U.S., getting to breakeven or profitability in that business, is that dependent on you getting the FDA approval and getting decent improvement in infant milk formula sales in that market? Or is that not the key driver for the U.S. profitability?

David Bortolussi: Yes, Phil. So on MVM, the trial costs were -- I mean, think of probably the capability of building and the trial costs equating for a fair chunk of the difference between the two periods results, a couple of million dollars there, plus you got some farm gate pricing impacts. The new product that we are developing. So the Stage 4 product we're making the base powder at MVM. So there will be a reasonable pickup in relation to that, albeit relatively small volumes overall. On the Gentle Gold and the new product that we're also developing in the premium category, at the moment, just so that we stage the development capability building with we're just supplying the A1 free skim milk powder to actually to recon and produce the product. The intention is after that is to in-source a bit of production resources back into MVM initially for Gentle Gold and then subsequently for the super-premium product, and that will have a more material impact on MVM's profitability per time of production. Ultimately, the scale of that will depend upon how successful those products are in the market and the mix of our overall portfolio sales between that good data best product range, including Platinum and that which is produced at MVM. So it's probably too early to assess the impact on that. In addition to that kind of product mix, [indiscernible] and the team are working very hard on efficiency improvement, continuous improvement initiatives at MVM as well as overall utilization and building milk pool and to drive improvements in profitability as well. So as we said back in '21, our goal still remains notwithstanding that we've adjusted our 27 targets. We're still working very hard to get MVM to break even in FY '26, which remains our goal. That may change over time, but that's our goal, and that's what we're working towards [Technical Difficulty] The U.S., you can see in the results, again, we've made really strong progress in the half and reducing the losses by 1/3 from 12 to 8. [Technical Difficulty]. We are strongly that we can get our liquid milk business to break even. And then FDA is an investment at the moment in the longer term, to hopefully develop a medical presence in the U.S. with our interim product that will make a positive contribution to our U.S. business. Now what the uncertainty for me is, and we've talked about this before is the extent to which we're going to need to invest the returns on the margin structures and infra, as we know, they're relatively attractive. But how much of that we're going to have to invest in marketing to build awareness and trial and loyalty in the brand going forward. We think we've got some distinctive aspects as part of our proposition, but we're mindful that we're going up against some of a really competitive base in the U.S. with entrenched positions as well. So the longer-term economics beyond breakeven to be determined, but we're very committed to get the U.S. to breakeven by 25 or 26, which is consistent with our original plan.

Operator: Your next question comes from Matt Montgomerie from PostBar.

Matt Montgomerie: David, well done on a solid result. First question is just around consolidation within the industry. Just wondering, I guess post new product transition, how enduring you think this theme is and, I guess, to what extent like the concentration of the market could get to over what time line?

David Bortolussi: I think I think the China market because of its size and complexities is probably going to be more fragmented than other markets around the world from a market structure point of view. I mean, in the U.S., of one extreme and the second largest market in the world for various historical and current reasons, you've got you've got Mead Johnson, Abbott and Perrigo having approximately 95% of the market between them and various new entrants in the category, having the remaining 5% or 6% at the moment. Other markets around the world, there are typically 2 or 3 major brands in the category. So it's hard to be specific about where we think it's going to end up and state and over what time period. So this trend towards brand concentration in the category makes entire sense from a consumer point of view, from a regulatory point of view and from a competitive point of view as well to have fewer, stronger, more relevant brands in the market with the highest food taking quality standards as well. So I think it's just going to be an ongoing trend, and you've seen the trend at the moment, it's probably not unreasonable to assume that kind of trend continues. You've got reregistration periods that come into that every 5 years that may have an influence as well. Probably too early to determine, but I am convinced that the market will definitely at a brand concentration level, which is probably the most important from our point of view and from a market structure point of view. Brand concentration, that's the size of each individual brand and the concentration index associated with that will improve over time. And then also, we've seen early signs of corporate consolidation with some of the major players investing in each other or and in the past as well with [indiscernible] as well. So I think brand concentration and corporate consolidation will be continued themes in the development of the China for milk market structure over time.

Matt Montgomerie: Great. And I think you made a comment at the start of your comments around birth for 2024. The line was a bit scratchy. I was just wondering if you could flesh out any thoughts you have on '24 births and where they may land.

David Bortolussi: Yes. I mean, I think we've said that we're still in the belief that calendar '24 birth will be higher than calendar '23, which has been recently released. When we think about -- and we've done some work on this ourselves, but we think about the delayed impact of COVID on family planning, plus the trend in marriage stats during '23, which are up. When we look at some of the pregnancy indicators that we have, which are some of them are anecdotal, some sort of informal but I won't go into the specifics around that at the moment. I think a combination of those plus government initiatives and this because obviously, the birth rate is an important policy objective as well. We just think that a combination of all that as well as the -- perhaps the cultural impact of the year of the Dragon, which historically has been a more productive year than other years. But the combination of those factors, we feel like '24, the number of newborns will be up on '23. Where it goes after that, difficult to tell at this stage. I mean, there are such a social demographic reasons why at constant fertility rates would still then decline a little bit over time. But we think that hopefully, this is the start of some stabilization and recovery in the category.

Operator: Your next question comes from Lisa Deng from Goldman Sachs (NYSE:GS).

Lisa Deng: Congratulations on a good result. I have two questions. First is about phasing on the first half versus second half. We made a commentary in the presentation about the pull forward or the accelerated campaign in December improved phase. What does that mean exactly? Is it phasing of sales? Or like profit? How do we interpret that?

David Bortolussi: There was more sales. And I guess it was going back to our original guidance for the full year. With the transition of our China label product late in the -- largely been executed late in the fourth quarter, we were concerned at the time that transition with all about -- can count platform may have not been as smooth as it was. And so from our own internal numbers point of view, we'd risk-adjusted that and indicated to the market in connection with our full year guidance for the infant category in China label that we thought that would be more second half weighted. So when I made the comment about phasing, it was more that we didn't experience that. And therefore, the phasing over the half improved. But having said that, I think China label phasing is not necessarily going to be a significant difference now having brought that forward. And if anything, on a like-for-like basis, you would then assume that China label phasing would be more even rather than just our second half weighted, if you know what I mean.

Lisa Deng: Yes. Got it. That's clear. Second question is then on the EBITDA margin outlook. I think we said it be broadly in line, which is unchanged. But if we talked about like the GP margin being moderately dilutive into the second half because of the new label and then also the transition into feedback and O2O being lower margin from Daigou. And then there is also a lot of marketing campaigns done in the third quarter and then the new product launch? Like are we still comfortable about saying that the EBITDA margin is broadly in line for the full year?

David Bortolussi: Lisa, I think Dave's comments before, probably more so in relation to China label specifically. But our guidance, which is hopefully clearly articulated in our release in the presentation is that we're expecting gross margins to be similar. FY '23 and '24. And then we provided some guidance around the shape of our marketing spend and admin costs for SG&A as well. So overall, we're still confident that our EBITDA margin will be broadly in line with '23.

David Muscat: So is the other thing that we got to have covered is MVM internal sales were very low in the first half of this year due to us, I suppose, pulling forward the purchase of products in advance of the season shutting down. So the internal sales were very low in first half '24 and should be higher in the second half, particularly as we talked talk about some of these IMF projects. That will help to offset some of that tunnel label impact.

Operator: Your next question comes from Adrian Allbon from Jarden.

Adrian Allbon: Just wondering on your new partnership in the O2O space for distributor. Can you give us a sense of how like -- I mean I'm not necessarily how they try to make it work, but just how does relationship works? Like how they are renewed or work for you in the situation?

David Bortolussi: Yohan, answer for that?

Yohan Senaratne: Sure. So I guess, Yuou is probably the best way I could describe is consider it more like another first tier distributor. So the relationship is a commercial relationship with relation to the distribution of our product into their channels, first being, Montime which is a national key account that they operate, plus they have the Yuncang which is a drop ship model for smaller O2O. So in terms of the model, it's a commercial distribution agreement but specifically related to the channels that they operate.

David Bortolussi: And maybe it didn't come out that well in our presentation discussion, but Yuou were really one of the founding organizations that develop the O2O channel in China, and they're a very sophisticated IT orientated company like the tech is impressive. So they're very capable in the channel. We're the market leader and we're thankful to develop early days at a good punch.

Adrian Allbon: And do they hold inventory on their own account lock in?

Yohan Senaratne: Yes. So like a Tier 1 distributor, they purchased inventory from us.

Adrian Allbon: Okay. And then like presumably, you get to transparency on the inventory level as well as part of the agreement?

Yohan Senaratne: Yes, as part of the agreement. They are started transparency requirements as well. So that we can have visibility of flooding in and out.

Adrian Allbon: Okay. That's good. And then just like maybe a submission for [indiscernible]. I guess, just coming back to the supply chain estimation but I guess, you're forming these new close associations plus usually in any other Indian multichip stuff -- look, I'm thinking on the China label side, do they have like brand slots or the SMAR approached that you could potentially further that relationship with? Is that part of something? Or would that run against, I guess, recent guidance from the SAMR themselves that you need to have ownership directly when you licenses in the future?

David Bortolussi: Yes. Adrian, that's not currently our plan. New milk registrations in the facility, which separately utilized and Yashili have two registrations, but in the [indiscernible] registration, which are utilized as well. So there is one baking in the pot, if you like it initially, but I think they've probably got other plans for that. So that's not our intention at the moment. It's a commercial relationship focused on the table.

Adrian Allbon: Okay. Can you just talk more broadly about some of the recent direction from SAMR in terms of what it means for new SAMR licenses in terms of what your interpretation is of while we look at it publicly in condo will a third-party manufacturing in a relationship is a bit tough, but what's the view on that?

David Bortolussi: Well, domestically, within China OEM or ODM relationships are not possible in the infant category. There have been variations of that internationally. But the important thing for the brand owner and the manufacturing facilities to demonstrate close association. And I mentioned earlier that, that's not specifically defined. It's more an assessment by SAMR on the facts and circumstances as you go through license approvals or renewals. And we've seen cases where that close association is typically demonstrated through a degree of equity ownership in part or all of the facility, and we've seen various forms of that internationally as well as locally. So it's not a hard-and-fast rule, and it's a careful assessment of what's appropriate in the circumstances and working in a cooperative way with some to achieve your objectives. So we are definitely reviewing. As I've said in the past, we are reviewing M&A and JV options likely within in New Zealand and elsewhere. It's too early for us. I mean, there's lots of things that we're looking at. And hopefully, we'll make meaningful progress on that this year and be able to announce something, but it's one of those things when you -- in terms of those types of investments, you can't say anything until something is completely done. So we're still progressing things.

Operator: There are no further questions at this time. I'll now hand back to Mr. Bortolussi for closing remarks.

David Bortolussi: Thank you, everybody, for joining the call. I know for a long presentation, but hopefully, through that, you've got a good understanding of our current performance and outlook. And obviously, we've had the opportunity to discuss some of the questions you had, myself and the team look forward to catching up with most of you during the course of this week and next. So anyway, thanks for joining the call. That's it for now. Thank you.

Operator: Thank you that does conclude our conference for today. Thank you for participating. You may now disconnect.

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