WELLINGTON (Reuters) - Chinese demand for infant formula and growing market share in the United States helped New Zealand's a2 Milk Company Ltd post a 55 percent jump in half-year profit on Wednesday, smashing expectations and sending its shares higher. The record profit sets up the dairy producer for more growth in the second half despite an economic slowdown in its largest market, China, where a trade dispute with the United States has hurt domestic demand.
The result suggests global dairy producers may have found a sweet spot in the Chinese market even as a downturn in consumer spending impacts sales of everything from smartphones to vitamins.
Managing Director and CEO Jayne Hrdlicka said a2 was not experiencing slowing demand in China and there was healthy underlying demand for its products.
"All stages of our infant formula business saw growth in the first half and the outlook for the second half continues to be attractive," Hrdlicka told reporters after announcing the results.
Net profit was NZ$152.7 million ($105.1 million) for the six months to Dec. 31, the first half of the company's financial year, up 55.1 percent from NZ$98.5 million in the same period a year earlier, the company said in a statement.
a2 shares rose more than 8 percent to an 11-month high of NZ$13.95, more than recovering Tuesday's falls after Australian vitamin maker Blackmores Ltd flagged weaker Chinese sales.
The company's shares gained 38 percent in 2018, outperforming a 4.9 percent rise in the benchmark S&P/NZX 50 index.
"The results are well above most analyst expectations. They are talking about more significant growth in the second half as well, so its looking good," said Grant Williamson, director at Hamilton Hindin Greene.
BRAND AWARENESS
Chinese parents have embraced a2's infant milk powder that is marketed as easier to digest than conventional milk because it lacks the A1 caesin protein.
Chinese families have also shown a preference for foreign milk and infant formula after a series of scandals in which local milk was detected to have been contaminated with the industrial chemical melamine.
a2 has lifted its market share in China by pushing into smaller cities. It said its share in the key infant formula markets in China grew to 5.7 percent, from 5.1 percent in June last year.
Sales in the United States more than doubled and strong demand was also recorded in Australia for its liquid milk, infant formula and other nutritional products.
a2's success in China comes in the face of tougher competition from the likes of Nestle SA, which has also launched A1-free infant formulas there.
Hrdlicka said there was still a lot of scope to grow brand awareness in China and the company would be reinvesting resources into marketing activities in the second half.
"Market investment in the second half will be double that in the first half ... most of that would go to brand awareness activities," she said.
The company said total revenue for the half year jumped 41 percent to NZ$613.1 million, while revenue from China and other Asia markets grew about 50 percent.
Revenue growth in the second half is expected to be broadly in line with the first half, the company said in a statement.
In a separate release, New Zealand dairy giant Fonterra said it was signing up farms to supply milk for a2 in the 2019/2020 season.
(Reporting by Praveen Menon; Additional reporting by Nikhil Kurian Nainan and Niyati Shetty in Bengaluru; Editing by Stephen Coates)
