ATM - A2 Milk Corporation Limited

[Snoopy]

The revenue growth from the three opened markets UK, China and US, are all at the very bottom of the curve, and in a couple of years those intercompany charges will seem much much less as a percentage of gross.

I hope when you guys are making your growth forecats in other markets you are taking out the inflated fake growth that was achieved in Australia due to the supermarket milk price wars.

I notice that ATM quote their achievements by measuring their market share in terms of gross market value. If the price of an ordinary one litre of milk goes from $2 to $1 and sales remain constant then the gross value of those sales in the market halves. If the price of A2 milk representing say 2% of market share by volume does not change, that means:

1/ The gross market value of retail milk sales approximately halves.
2/ By value, the gross market share of A2 milk will double, with no increase in A2 volume.
3/ That in turn means that A2 will roughly double their market share percentage, by selling exactly the same amount of milk.

Since this milk price war between Coles and Woolies started early in CY2011 just as A2 was getting established, I believe that A2s growth by volume is probably only about half the market share growth by value.

That means that if A2 goes into a new market which doesn't start a milk price war when they appear on the scene, the market share gains with time are likely to be only half what has been seen in Australia, all things being equal. In other markets we know that all things are not equal because there is no duopoloy which guarantees that once A2 milk was established that the single other player had to follow suit. It therefore seems logical that annual growth in other new overseas markets is likely to be only half that seen in Australia. But all you growth gurus are already aware of that, so have built it into your growth modelling - right?

SNOOPY

[MAC]

Gawd, it’s all so misguided and in so many colourful ways, it flummoxes one actually as to where to start to even consider putting it all straight.

I think Snoopy, and I am genuinely sorry to have to admit it, but after over a year now of not getting it, despite many having kindly trying to help you with it, I really don’t think there is any hope for you mate.

[Ginger_steps_]

Gawd, it’s all so misguided and in so many colourful ways, it flummoxes one actually as to where to start to even consider putting it all straight.

I think Snoopy, and I am genuinely sorry to have to admit it, but after over a year now of not getting it, despite many having kindly trying to help you with it, I really don’t think there is any hope for you mate.

Is there any weight to the milk war pricing/market share comments? To a newbie like myself, this may make sense. On second thought however, the milk price has been $1 per litre here for 2 years at least, in which time a2's growth has steadily gained - so i've answered my own question i guess!

[MAC]

Is there any weight to the milk war pricing/market share comments? To a newbie like myself, this may make sense. On second thought however, the milk price has been $1 per litre here for 2 years at least, in which time a2's growth has steadily gained - so i've answered my own question i guess!

Hi Ginger,

I think you answered your own question, ATM seems to have prospered in Australia during the price wars, don't you reckon, I moved back to NZ two years ago now, but at that time the price wars going were exactly at the time when a2 was really taking off.

This chart which I kept tells the story better;

regards, Mac

A2retail.jpg

[Snoopy]

I moved back to NZ two years ago now, but at that time the price wars going were exactly at the time when a2 was really taking off.

This chart which I kept tells the story better;

There is something wrong with that chart. It doesn't show the relative popularity of each kind of milk and how it changes with time. If sales for each of Homebrand, Pauls and Dairy Farmers were roughly constant over that time, and the price drop only applied to a (say) 25% market share held by Homebrand, then the drop in market value overall with the price war might be something like 12.5%.

However:

1/ I suspect the market share of Homebrand was higher than 25% before the price war.
2/ I suspect that many buyers of ordinary Branded milk switched to Homebrand when the big pricing differential opened up.

OK, perhaps it was an exaggeration to say that the overall fresh milk market shrunk by 50% in dollar value with the price war. I would have to know what the home brand market share was over the period to determine that. But I don't think it is unreasonable to suggest the overall market size shrunk by 30%. That plus the greater difficulty in penetrating overseas markets with A2 milk, due to those markets being non duopoly, would suggest to me that a volume growth rate in the UK and USA of around half that 'headline rate' achieved in Australia is reasonable. It is for this reason, the extra delay, that I believe A2 will run out of expansion capital within two or three years. I would expect a cash issue at 40c will be made to those who still want to be part of the A2 milk company dream well before then.

There is also the stunning debut of health software firm Orion which presumably will knock ATM out of the NZX50 at the next review period. Forget what AMP have been doing. At that point index funds will be forced to sell too and in the short to medium term, that means the ATM share price will only head one way.

SNOOPY

[Snoopy]

I think you answered your own question, ATM seems to have prospered in Australia during the price wars,

I agree with the above, but it neatly sidsteps the point I was making. The milk price wars started in Januray 2011. A2 was certainly in Australia at that time. IIRC 2011 was the first year A2 made an EBITDA positive return in Australia. The market shrunk early in CY2011, but ATM was already on their growth trajectory by then. ATM deliberately talked up their growth rate by highlighting the market share they had by value. If they had talked about their market share increase by volume, the shareholders would still have been impressed, but less impressed.

The price chart posted by Mac is clear proof that if market share by value is 10%, then market share by volume is less than 5%. Don't get me wrong, 5% is still impressive. But ATM chose to hype their market share by value. There is nothing wrong with that, if you are looking at dollar returns. But, it would be incorrect to use a timeline for a market share by value figure in Australia, to extrapolate a timeline for market share by value figure in other markets (UK, USA). That is because Australia's milk market overall was fundamentally altered by the supermarket price war back then in a way other overseas markets are not being disrupted now.

SNOOPY

[winner69]

I agree with the above, but it neatly sidsteps the point I was making. The milk price wars started in Januray 2011. A2 was certainly in Australia at that time. IIRC 2011 was the first year A2 made an EBITDA positive return in Australia. The market shrunk early in CY2011, but ATM was already on their growth trajectory by then. ATM deliberately talked up their growth rate by highlighting the market share they had by value. If they had talked about their market share increase by volume, the shareholders would still have been impressed, but less impressed.

The price chart posted by Mac is clear proof that if market share by value is 10%, then market share by volume is less than 5%. Don't get me wrong, 5% is still impressive. But ATM chose to hype their market share by value. There is nothing wrong with that, if you are looking at dollar returns. But, it would be incorrect to use a timeline for a market share by value figure in Australia, to extrapolate a timeline for market share by value figure in other markets (UK, USA). That is because Australia's milk market overall was fundamentally altered by the supermarket price war back then in a way other overseas markets are not being disrupted now.

SNOOPY

But it is that high market share by value that drives whatever underlying profitability in Australia is.

Not that transparent the A2 accounts but I would hazard it a guess that the profit margin is anything between 3% to 10% (the accounts show 3.1% before tax)

Even at say a 10% profit margin they need Coles to be selling it at $4.99 for 2 litres else there wouldn't be any cash left to reinvest for growth.

[winner69]

Mac, do you get those prices in your chart off the Coles online shopping site?

Seem pretty static over h last few years

[Ginger_steps_]

Thanks MAC - then the growth is REEEAL AZ bro!

[Snoopy]

But it is that high market share by value that drives whatever underlying profitability in Australia is.

Not that transparent the A2 accounts but I would hazard it a guess that the profit margin is anything between 3% to 10% (the accounts show 3.1% before tax)

Even at say a 10% profit margin they need Coles to be selling it at $4.99 for 2 litres else there wouldn't be any cash left to reinvest for growth.

Yes value not volume is what is important for profitability. Volume is interesting in that the volume demand for fresh milk is only elastic to some extent. There is only so much milk a Weetbix can absorb. I don't have an issue with ATM reporting results by value. I would guess that accounting rules require them to do just that.

My only issue is using the 'value growth' pattern in Australia to forecast the 'value growth' pattern in other markets.

SNOOPY