ATM - A2 Milk Corporation Limited

[Beagle]

Earnings growth for FY2018 to FY2020.

2 x 1.2 x 1.2 = 288%

A 288% incremental increase in the A2 cow herd in just three years is quite a few female calves to born. If half the cows born are female we are talking about:

2 x 288% = a 576% increase in A2 cows to be born.

And 'new' cows won't be ready top calve (compound in accounting terms) until 24 months is up, at the very earliest. So all the required growth needed to have started two years ago. You can't just rack the growth up year by year in cows by putting them on a spreadsheet Beagle. And I still have yet to factor in the removing of the old cows at the other end of their production life. One day you should venture south of the Bombay Hills, and have a look at a real cow. Then you will find out why your attempt to create one on your 3D printer hasn't worked!

SNOOPY

I used to work on my Uncle's 5,000 acre sheep and beef farm in Gore, (that's Southland in case you don't know) to pay my way through University. Back in those days there was no work life balance and you worked 10 hours a day six days a week and went to Church on Sunday morning and were too tired on Sunday afternoon to do anything but rest. Ten weeks each summer. I flew home with a cheque for $600 for 600 hours work. Thankfully around 1980 $600 went a little further than it does today. I'm not making those growth numbers up my hound friend, they're the average of analysts on 4 traders so my experience or lack of in recent times is irrelevant.

[Beagle]

Learning to be happy with whatever gain you make,whether it be optimal or not is a great attitude to have. Anybody basing their happiness on optimal sharemarket gains are in a very sad place IMO (Have been in that position myself in the past)

Ain't that the God's honest truth mate.

[Hectorplains]

Don't underestimate the role of the Daigou, trade with China is not a linear process. Bellamy's made this mistake last year and halved their share price.

This AFR article from Jan outlines what happened:


Bellamy's big China mistake
by Angus Grigg
Jumping at shadows is easy to do in China and judging from Wednesday's announcement, Bellamy's Australia did exactly this last year.
The infant formula maker appears to have been spooked by rumours, which began in April, suggesting China's Customs Bureau was set to tighten up on products coming into the country via courier, mail and the suitcases of tourists.
That's the so-called "Daigou" or personal shopper channel, which had been the main route into China for Bellamy's and plenty of other foreign products.
For a period in May it appeared authorities were serious about crimping this channel, as parcels were searched and additional import taxes demanded

But the crackdown didn't last.

Unfortunately for Bellamy's it had already changed tact.
According to the company's "Business Update", from April last year it decided to "restructure its rout to market".
This meant rather than encouraging the Daigou to clean out supermarket shelves in Australia and send the infant formula to China via courier, Bellamy's wanted to sell directly to "Chinese re-sellers" like JD.com and Alibaba's Tmall.
In hindsight that was a terrible decision.


Data gleamed from JD.com shows Bellamy's attempted to stimulate demand in China in late June by cutting prices by 10 per cent.
This clearly didn't work, but worse for the company the discounting appears to have annoyed the Daigou in Australia, who found their margins under pressure.
By October, as stocks continued to build up in China, the discounting went crazy. Prices on JD.com, the country's largest retailer, were cut by a further 30 per cent to levels similar to those in Australia.
That meant there was no margin for the Daigou, who quickly switched to other brands. This would have been tolerable if the product was moving in China, but this was clearly not the case as the discounting resumed after slower than expected sales during the Singles Day shopping festival in mid-November.


That now leaves the price of Bellamy's in China lower than in Australia.
"The mistake they made was treating China and Australia as two separate markets," said one Daigou who asked not to be named.
"It's the one market."
She went on to explain that as soon as retail outlets in either Australia or China start discounting, those buying from the Daigou demand the price reduction be passed on to them.


"If a brand is continually running discounts then the Daigou will lose confidence in this brand and switch to another," she said.
For mothers in China this switch has been to A2's infant formula range, which now commands the premium once enjoyed by Bellamy's.
Worse for Bellamy's the discounting in China has spread to Australia, where both Coles and Woolworths are offering sizeable discounts.
This leaves Bellamy's facing the worst of all situations.


Its attempt to move away from the Daigou channel, in an effort to regain control of its brand, has actually left it with less control.
It is now at the mercy of China's big e-commerce retailers whose main priority is to clear excess stock rather than rebuild the brand.

[Snoopy]

We are deviating from the thread ... however - almonds are not nuts ... i.e. the warning is justified (they probably use the same mill as well for nuts - and traces of nuts might be mixed with the almonds).

Well I knew that peanuts were not nuts, but had not heard anything similar about almonds. A quick lookup on Mr Google yields this:

http://www.todayifoundout.com/index....-are-not-nuts/

------

"Almonds are not nuts. In fact, an almond is the seed of the fruit of the almond tree. This tree bears fruits with a “stone-like” seed within."

"Fruits with these characteristics are called “drupes”. Specifically, a drupe is a fruit that has an outer fleshy part surrounding a shell that contains a seed. Other drupes include fruits from walnut trees and coconut trees."

"The seed inside the almond fruit is what is commonly referred to as an almond “nut”, even though it’s not a nut. A nut is a hard shelled fruit that has an indehiscent seed; more simply, a hard shelled fruit that doesn’t open to release its seed(s). An example of a true nut would be an acorn or chestnut."

"Other “nuts” that aren’t include Brazil nuts, Cashews, Walnuts, Coconuts, Macadamia nuts, Peanuts, and Pistachios, among others."

------

So while BP is absolutely correct, it looks like almost everything else you can buy in the bulk bin section of the supermarket that mascarade as nuts, are not nuts either!

SNOOPY

[Snoopy]

I'm not making those growth numbers up my hound friend, they're the average of analysts on 4 traders so my experience or lack of in recent times is irrelevant.

The outrageous growth predictions made me think that whoever drew them up had never been on a farm.
I would suggest Beagle, that the average analyst on 4 traders knows a lot less about farming than you do! Just because an analyst wrote it down, that doesn't make it right.

SNOOPY

[BlackPeter]

The outrageous growth predictions made me think that whoever drew them up had never been on a farm.
I would suggest Beagle, that the average analyst on 4 traders knows a lot less about farming than you do! Just because an analyst wrote it down, that doesn't make it right.

SNOOPY

Snoopy, you are right that it takes time to breed new herds. However - what we both don't know is how much A2-milk they currently sell as "standard" milk in these 25kg paper bags. I asked this question re A2 supply several times (during AGM's and in site visits) ... and while they never come up with hard figures (apparently commercially sensitive) the message is always that their A2 supply is lots.

As well - standard herds supply a mix of A1 and A2-milk. If you need more A2 milk, in the first instance there is no need to breed more A2-cows, but you just need to sort and separate your cows - and within days you can turn a large "standard milk herd" into a A1-milk herd (and keep selling the milk as standard milk) and an A2-milk herd (producing premium A2 product).

You don't need to breed - just two seperate paddocks and separate milking equipment for the two milk sorts.

It is not like A2 being something new ... many herds always supplied mainly A2-milk (e.g. Jersey or Dexter) and even most NZ high performance herds produce to roughly 50% A2. If you want to sell that as A2, than you just need to make sure you separate the A1-cows .... and this is just some testing and organisation .... no need for lots of (time consuming) breeding.

Obviously - over time you will want to move your herd to "pure" A2. Saves the time and effort to test (and if necessary separate) every new heifer.

[Pipi]

You are definitely right BP, there are a lot of A2 cows out there, they either have been DNA tested and identified but the farmer can't get it picked up, so it just goes into the normal milk supply or they haven't been DNA tested yet, which would not take long.

[Snoopy]

As well - standard herds supply a mix of A1 and A2-milk. If you need more A2 milk, in the first instance there is no need to breed more A2-cows, but you just need to sort and separate your cows - and within days you can turn a large "standard milk herd" into a A1-milk herd (and keep selling the milk as standard milk) and an A2-milk herd (producing premium A2 product).

You don't need to breed - just two separate paddocks and separate milking equipment for the two milk sorts.

It is not like A2 being something new ... many herds always supplied mainly A2-milk (e.g. Jersey or Dexter) and even most NZ high performance herds produce to roughly 50% A2. If you want to sell that as A2, than you just need to make sure you separate the A1-cows .... and this is just some testing and organisation .... no need for lots of (time consuming) breeding.

The short answer BP, is that you are right. The problem is that your solution of 'two separate paddocks' and 'separate sets of milking equipment' is not going to work in practice for most dairy farms. That would be far too capital intensive and time intensive. Going from milking twice a day to milking four times a day would drive most farmers spare. I am not aware of a single farm taking up your suggestion, sensible though it is in theory. I guess you could flush your existing milking equipment out even more thoroughly than is the case now. But you would probably have to market that milk as "A2 (may contain traces of A1)" which kind of defeats the point.

SNOOPY

[Beagle]

So farmers who want to join in the supply of A2 milk will do deals with other farmers to rationalise the nature of their herds...no big deal is it to get more raw material.
The bottleneck has been in the processing and we have this from Synlait to consider - my emphasis added.

Synlait delivering on growth strategy and reports $38.2m
8:30am, 19 Sep 2017 | FLLYR
Synlait (NZX: SML; ASX: SM1) has reported their strongest performance yet with a net profit after tax of $38.2 million, double digit growth in profit margins and revenue increasing 39% to $759 million.
The results for the financial year ending 31 July 2017 (FY17) were achieved alongside several initiatives to prepare for future growth.
“Our shareholders supported this growth focus in September 2016 when we successfully raised $97.6 million to invest in our business,” said Graeme Milne, Chairman.
Mr Milne said Synlait’s current balance sheet is in a very good position with net debt down from $214 million to $83 million, and along with retained earnings, the company is in a good position to fund its growth strategy.
Demand for higher margin products continued to rise, with finished infant formula volumes growing 17% to 18,776 MT and margins before tax increasing by $10 million.
“We will continue to grow both top and bottom lines at pace. We see considerable opportunities to solidify our current ingredient and infant formula positions, and to enter new categories. A more profitable, more diversified and lower risk business is our goal and we will make good progress towards this in FY18,” said Mr Milne.
Innovating across the value chain has allowed Synlait to develop strong customer partnerships with category-leading customers and according to Managing Director and CEO John Penno, FY17 was a year of consolidation ahead of an expected period of solid growth.
“We own and control every step in our value chain, right from differentiating the milk supply behind the farm gate through to managing market access for our customers. We guarantee an unrelenting focus on quality, integrity and value in this system, offering a powerful point of difference for our customers and their consumers,” said Mr Penno.
“Our attention is on accelerating our infant formula business, and preparing to launch into new high returning dairy categories. We are also working to reinvigorate our ingredients business, and add value by systematically moving our milk products into consumer packaged formats.”
Synlait’s partnership with The a2 Milk Company has continued to grow in volume and value and both companies remain confident that registration of their infant formula with the China Food and Drug Administration (CFDA) will be received before 1 January 2018.
“We continue to be excited about the potential of our partnership with Munchkin Inc. and their range of Grass Fed™ infant formula products. Once we’ve completed the United States Food and Drug Administration (FDA) registration, it will be one of a very small number of imported infant formulas in that market,” said Mr Penno.
Synlait confirmed that their total average milk price for the 2016 / 2017 dairy season is $6.30 kgMS, consisting of a $6.16 kgMS average base price and a seasonal and average value added premium payment of $0.14 kgMS.
Synlait’s forecast milk price of $6.50 kgMS for the current 2017 / 2018 dairy season remains unchanged.
Mr Penno said the increase from FY16’s $3.91 kgMS will be well received by Synlait’s Canterbury milk suppliers and the premium payments totalling $8.9 million (FY16: $5.7 million) reward milk suppliers that create value behind the farm gate with programmes like a2 Milk™, Grass Fed™ and Lead With Pride™.
“Our milk suppliers go above and beyond by designing their farm practices to meet the needs of our customers. We’re coming out of a period of low prices and I want to acknowledge the relentless work they’ve done to adapt their business during this time and their on-going commitment to making the most from milk with us,” said Mr Penno.
Underpinning the expansion of Synlait’s infant formula business is the acquisition of a second site in Auckland to double blending and consumer packaging capacity and a substantial investment to double the capacity of their wetmix kitchens in Dunsandel.
“Investing in Synlait Auckland and our wetmix facility at Synlait Dunsandel will relieve any capacity constraints for the second half of FY18.” said Mr Penno.
“We are also investing in three high specification sachet packaging lines in Dunsandel. In the same way we offer our customers finished infant formula in retail-ready packaging, we will offer a range of modern sachet formats,” added Mr Penno.
To bring new product options and ever-improving product quality, Synlait’s increasing scale and earnings will see investment in research and category development rise from 1% of revenue to 1.5% in coming years.

“Focusing on new product development for existing and new customers and markets, improving production processes and reducing production costs will lift our earnings in the short to medium term,” said Mr Penno.
Building a world-class leadership team in FY17 saw the appointment of several international executives bring a range of highly sought after expertise to Synlait’s Senior Leadership Team.
“The added strength and capability in our leadership team positions us well to continue delivering on our ambitious plans. As well as a strategic focus on the future, we’re starting to see the benefits that a high calibre leadership team can bring to new and evolving areas of our organisation,” said Mr Penno.
“Alongside our preparation for another phase of rapid growth, we’ve achieved a solid increase in profit and balance sheet strength in FY17. We intend to increase margins and operational efficiency, as well as canned infant formula volumes in FY18 to 30,000 MT – 35,000 MT, as a result of our preparation in FY17.”
“We expect to announce further plans in due course. These plans will allow us to keep up with medium to long term infant formula demand, as well as signal new high-returning product categories we intend to move into in the coming years.”

[Snoopy]

So farmers who want to join in the supply of A2 milk will do deals with other farmers to rationalise the nature of their herds...no big deal is it to get more raw material.

Sounds unlikely. I wonder what farmer would seek out less profitable A1 cows to swim deliberately against the tide? If I was a farmer I would be gradually shifting to A2 myself via 'in house breeding' over a roughly ten year period. That would be the path of least effort.

SNOOPY