ATM - A2 Milk Corporation Limited

[nextbigthing]

Nestlé and all the other mainstream dairy operators are in the same position as Fonterra. All of them sell milk containing A1, and to turn around now and espouse A2 milk would involve huge conversion costs plus an admission that the A1 milk they're currently selling is hazardous.

For some years, a2MC and its predecessor A2 Corporation tried to avoid an expensive all-out confrontation with mainstream dairy by not emphasising that A1 milk is dangerous, and just saying A2 is a healthier and preferable choice. But this is changing, for two reasons. Firstly, the science is now becoming more and more incontrovertible, that A1 milk is hazardous. So there's no risk of a2MC being sued by its rivals for saying so. And secondly, some Australian rivals of a2MC foolishly made the mistake of advertising that their milk contained some A2 milk and therefore had the benefits of A2. This forced a2MC to come out openly and say a mixture of A1 and A2 is no good - you have to have pure A2 milk with no A1 to avoid the health risks.

They could continue to run it as a premium priced alternative, using their size to dominate.

[MAC]

Well it seems the US website is all ready, just add cows. Good though to see the wheels turning first thing in the new year already.

“A2 milk is coming to America soon – we’re busy working with our local farmers to select pure bred cows to bring you fresh and natural a2 milk”

http://www.a2milk.com/

[NZSilver]

Here we go, UHT milk now selling in China at Y28 (NZ$5.86) per litre. ATM advice was “easily supply 10 million litres (to China) within two years and 20 million after that with fresh milk being the flagship”

http://item.jd.com/1288669.html

Fresh milk now retailing in China for Y59 (NZ$12.35) was previously Y49 (NZ$10.26). ATM advice is “could be pushing toward three million litres for 2015, according to its Asian general manager, Phil Wohlsen” and “expects demand to at least *double each year.”

http://item.jd.com/1199167.html

Well let’s see.

http://www.theaustralian.com.au/busi...c202509ea753bc

http://adf.farmonline.com.au/news/ma...2/2713426.aspx

more of the same http://www.farmonline.com.au/news/ag...px?storypage=2

[NZSilver]

Here we go, UHT milk now selling in China at Y28 (NZ$5.86) per litre. ATM advice was “easily supply 10 million litres (to China) within two years and 20 million after that with fresh milk being the flagship”

http://item.jd.com/1288669.html

Fresh milk now retailing in China for Y59 (NZ$12.35) was previously Y49 (NZ$10.26). ATM advice is “could be pushing toward three million litres for 2015, according to its Asian general manager, Phil Wohlsen” and “expects demand to at least *double each year.”

http://item.jd.com/1199167.html

Well let’s see.

http://www.theaustralian.com.au/busi...c202509ea753bc

http://adf.farmonline.com.au/news/ma...2/2713426.aspx

more of the same http://www.farmonline.com.au/news/ag...px?storypage=2

[kizame]

Well it seems the US website is all ready, just add cows. Good though to see the wheels turning first thing in the new year already.

“A2 milk is coming to America soon – we’re busy working with our local farmers to select pure bred cows to bring you fresh and natural a2 milk”

http://www.a2milk.com/

Awesome! This is one of my pics for this year and beyond.

[NT001]

They could continue to run it (A2 Milk) as a premium priced alternative, using their size to dominate.

It’s been suggested previously that Fonterra or some other mainstream milk producer might want to take over a2MC in order to market A2 Milk as an alternative to standard milk for consumers, especially those who experience digestive discomfort from drinking normal milk containing A1. The theory is that this might allow the buyer to gain a market niche and to some extent limit the damage to mainstream milk caused by the A1 debate.

This scenario has its surface attractions, but it would involve a raft of difficulties.

For a start, it could not be done without acknowledging that the BCM7 peptide generated by A1 milk presents health problems. Not something the mainstream industry wants to do, certainly not Fonterra which is on record as rejecting the the A2 proposition as scientifically flawed.

According to Prof Woodford’s book “Devil in the Milk”, Fonterra is said to have a fallback strategy that it could adopt if necessary to confront A2. But he notes that Fonterra sees A2 as a risk rather than an opportunity for the NZ dairy industry, which he says “seems a huge pity”.

This position could only change if Fonterra did a major scientific back-flip. Of course nothing is impossible, and the scientific evidence against A1 beta-casein is certainly going to increase the pressure – in fact it is building up already in a quiet way that doesn’t get attention in the media.

But there are problems.

1. The takeover cost: a2MC’s market capitalisation is currently close to $400m and likely to increase, especially if there is takeover talk. Would it be worth it just to offer an alternative digestion-friendly niche product at a steep premium price that will always deter the majority of consumers? Even if consumers know that A2 milk is better for them, most of them won’t understand why and will continue buying the standard A1-contaminated mix at half the price.

2. Converting output to A2. There’s a difficult decision to be made – is it intended that A2 would just be a niche line, or would it be pushed to become a mainline product? It’s not too hard for a few dedicated farmers to create pure A2 herds for a relatively small player like a2MC by swapping their unwanted A1 cows for A2 ones, as some have already done in NZ, Australia, Britain and the US, but larger-scale conversion is another matter. It would take years. NZ is actually well placed to do it, as most of its breeding bulls are already pure A2, but it would take a lot to convince debt-ridden farmers that converting their herds to A2 is an appropriate idea at this time. It would involve significant loss of production as they cull their A1 cows, and extra work in managing split herds in the milking sheds.

3. Political considerations. Farmers who decided against switching to A2 would object to A2 being promoted as “safer” and more “consumer-friendly” than their product and meriting a premium price. There’s no sign of a desire by grassroots Fonterra suppliers to convert to A2 although a small handful are doing so. Fonterra’s commercial decisions are made by a board of directors elected by its farmers at large, and will reflect broad farmer sentiment.

4. Economic damage. One of the main reasons Fonterra opposes the A2 hypothesis is that it is based on the assertion that standard milk presents health risks. If Fonterra were to adopt the A2 line, it would effectively be announcing to global consumers that it has concluded standard milk is risky. Remember Sanlu, melamine, and the botulism scare and the economic and reputational damage these affairs caused Fonterra. There would be a costly global consumer backlash against Fonterra products, reducing NZ’s dairy income while other producers such as Nestle would of course mount campaigns defending the safety of their products. It would be incredibly hard to spin such a decision in favour of NZ’s dairy production.

5. Scientific advances. Just as the global public eventually came to realise that smoking can be lethal, the links between A1 milk and medical problems such as autism, diabetes, heart disease and cot death will gradually become more widely recognised. A dairy producer would need a clever strategy indeed to manage this market dilemma. At present they all choose to just ignore it, knowing that food safety authorities in NZ, Australia and Europe still continue to say incorrectly that it’s not an issue. It will become an issue.

Any dairy outfit contemplating a takeover of a2MC would have to have a well-thought-out plan as to what to do with it.

That’s not to rule out some offshore dairy operators adopting A2 Milk as a niche product, but I think not by means of a takeover. There are people in the industry who buy the A2 proposition and see merit in offering it as a premium specialty. But this could be done under licence. Interestingly, the current chairman of Dairy UK, the British dairy industry organisation, is actually a member of a2MC’s British board and a supporter of A2 as a niche player in the market. That seems to make more sense.

[kizame]

1. The takeover cost: a2MC’s market capitalisation is currently close to $400m and likely to increase, especially if there is takeover talk. Would it be worth it just to offer an alternative digestion-friendly niche product at a steep premium price that will always deter the majority of consumers? Even if consumers know that A2 milk is better for them, most of them won’t understand why and will continue buying the standard A1-contaminated mix at half the price.

Yes why wouldn't it be worth it?
If Fonterra picked up A2 mc at say 600million,if the sales to date in Aus are anything to go by,what could happen with the rest of the world?
Why would it not be a great strategy to let the company run as a seperate entity and continue its growth story,the big advantage to Fonterra is that they gain NEW fresh milk markets otherwise out of reach,plus the opportunity factor for alternate products such as cheeses,yoghurts etc.AND they get the filip on any loss of sales to A2,therefor being no loss of sales.
In my very simple way of thinking,I would have thought it would be very advantageous.
They wouldn't be backing down on their view that A1 is a totally healthy product,they would be adding a premium alternate way of thinking to their stable.
Plus if we think there is huge potential with this company,why on earth would they not.I think maybe they could be left OUT STANDING IN THEIR FIELD while someone else snaps it up, maybe.

[Snoopy]

It does seem that from today’s announcement that a confident plan is now in place for the Chinese regulatory changes and inventories will cover any disruption, I’ve taken some further confidence from this and recent news coverage.

I like to invest in companies with good management and bold goals, it just seems to focus a company internally and drives a positive culture.

$280M in revenues by 2016
$60M and a 1% market share in Chinese infant formula sales by 2016
A 1.8% market share in UK milk sales by 2016
A 10% market share in Australian milk sales, recently pulled forward to mid-2015.

And of course there are new initiatives presently rolling out in Australia, UHT, yoghourt, cream products, and the entry into the US is just kicking off.

Can anyone explain why inventories have jumped from $0.742m as at 30-06-2013 to $5.583m as at 30-06-2014 (AR2014 note 8)?

Is it only related to the production interruptions at Synlait affecting the A2 infant formula market in China that Mac refers to above? Or is there something else?

SNOOPY

[Snoopy]

I would have thought it would be the infant formula stock which was a product only launched end of 2013. Regardless of Synlait production runs I expect they only ship stock periodically in order to save on freight costs, meaning that stock will be held on hand.

Net jump in inventory for the year was:

$5.583m - $0.742m = $4.841m

If all that increase relates to China Infant Formula, then based on forecast 2016 sales of $60m, $4.841m is only around one month of stock. Not a lot in 2016 context. However, I don't know what A2's China 2014 sales were. Was $4.841m significant in 2014 China sales terms?

SNOOPY

[blobbles]

Here we go, UHT milk now selling in China at Y28 (NZ$5.86) per litre. ATM advice was “easily supply 10 million litres (to China) within two years and 20 million after that with fresh milk being the flagship”

http://item.jd.com/1288669.html

Fresh milk now retailing in China for Y59 (NZ$12.35) was previously Y49 (NZ$10.26). ATM advice is “could be pushing toward three million litres for 2015, according to its Asian general manager, Phil Wohlsen” and “expects demand to at least *double each year.”

http://item.jd.com/1199167.html

Well let’s see.

http://www.theaustralian.com.au/busi...c202509ea753bc

http://adf.farmonline.com.au/news/ma...2/2713426.aspx

So at around $180m in revenue next year (not including any sales in US/UK). A solid revenue increase on the cards then. Good work ATM!