A2 Milk Company Ltd
NZX:ATM
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A2 Milk Company Ltd
Earnings Call Analysis
Q4-2023 Analysis
A2 Milk Company Ltd
The company's commitment to capturing the full potential of the China Infant Milk Formula (IMF) remains central to their strategy, showing dedication to innovation across various nutritional products. There has been an internal refresh of their BOLD values and behavior standards, a move that's critical to guiding the company's ethos and execution of its strategic plans.
The measures of success have seen minimal changes, maintaining most of the original targets and metrics. The medium-term ambitions are firmly set on achieving $2 billion in sales with EBITDA margins in the teens, marking a shift from the former expectation of potentially reaching low to mid-20s percentages. The company has acknowledged challenging market conditions and is focused on year-on-year margin improvement.
Securing the SAMR approval for China label IMF business was a notable achievement, considering the domestic registered market represents a significant portion at 85%. The company's focus is also on driving product innovation through launching new offerings like a2 Platinum IMF range, lactose-free milk, and enhanced nutritional products. Additionally, they're making strides in sustainability, advancing projects like farm methane inhibitor studies and high-pressure electrode boiler installations to reduce emissions.
The company has achieved a 10% increase in net sales revenue, reaching $1.59 billion, thanks to robust growth in China and Other Asia as well as the U.S. segments. Gross margins have improved to 46.5%, and net profit after tax rose notably by 26.9%, with earnings per share (EPS) also experiencing a significant hike of 28.7% to $0.212 per share. This strong financial performance can be partly attributed to successful English label repositioning and efficient distribution strategies.
Across all product categories, sales have been on the up with IMF sales going up by 8.4% and other nutritional products experiencing double-digit growth. Gross margin percentage saw an uplift, benefiting from strategic moves like a2 Platinum English label refresh and distribution model changes, along with various cost mitigation efforts that balanced out inflationary pressures.
In alignment with their growth ambitions, the company ramped up its marketing and capability investment by 13%. Particularly in China, the marketing spend surged by 19%, indicating a pronounced focus on consumer engagement and digital marketing efforts.
The balance sheet shows robust health with $802 million in cash and term deposits. The company is cognizant of the increased inventory levels due to strategic stock building for the China label IMF and timing with their supplier Synlait, and it plans to reduce this inventory strategically in FY '24.
Cash flow activities were somewhat marred by external COVID-19 related delays, with an operating cash flow recorded at $111 million. Notably, total cash and term deposits saw a reduction by $85 million due to the company's share buyback program, a move that reflects confidence in the company's value.
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Thank you for standing by, and welcome to The a2 Milk Company Limited FY '23 Results Call. [Operator Instructions]
I would now like to hand the conference over to David Akers. Please go ahead.
Thank you. Good morning, everyone. Thanks for joining the call today. Starting on Slide 3. On the call today, we have Dave Bortolussi, our Managing Director and CEO; and Dave Muscat, our CFO.
We also have the leaders from our regions: Li Xiao, Yohan Senaratne, Eleanor Khor and Kevin Bush. The team will present FY '23 group and regional results as well as our outlook for FY '24, and there'll be time for questions at the end.
I'll hand over now to David Bortolussi.
Thanks, David. Good morning, everyone, and thank you for joining the call. It's been a big year for a2. We've certainly got a lot of ground to cover today, [indiscernible] quickly.
Firstly, I'm pleased to report that our FY '23 results are in line with our guidance of double-digit revenue and earnings growth. The result was driven by strong growth in our China segment. Sales increased by 38%, and we achieved record market share in our China label IMF.
In the past year, we stepped up marketing investment by $13 million to $260 million, which was a record level of brand investment for the company, and we're seeing this increased investment translating into a new high in our China brand health metrics.
Total IMF sales grew by over 8% in the market that declined by 14%, which is a remarkable achievement, resulting in a2 being a top 3 absolute share gainer in the China label and English label market overall. And of course, a key highlight for the year was the successful reregistration of our China label IMF product by SAMR, which we are very pleased about.
Moving to Slide 5, which summarizes our financial results. Revenue for the year was $1.59 billion, up 10%. EBITDA was $219 million, up 11.8%, with an EBITDA margin of 13.8%. And net profit after tax, including the noncontrolling interest related to China Animal Husbandry Group's 25% interest in MVM was $144.8 million or $155.6 million, excluding cash-proportional MVM loss. Our EPS was up 28.7% to $0.212.
And our closing net cash position was $757 million, which was after completing our on-market share buyback, through which we acquired $149 million of our own shares. As expected, our cash conversion was 58%, significantly lower than last year, and David will explain this shortly. This slide also shows the breakdown of our revenue growth, which was driven by our China segment, achieving strong growth in China label and CBEC sales, while ANZ sales were down, reflecting the change in our distribution strategy and a market shift towards CBEC. U.S. and MVM sales also increased during the year. In line with our guidance, second half growth was slower, mainly due to a sharp decline in the daigou channel and cycling of higher lockdown-driven sales in China in the fourth quarter of FY '22, which we have highlighted previously.
Moving to Slide 6. Despite the challenges we have experienced in the market, I'm proud of our team's many achievements during the year, which include gaining record market share in China local IMF in-store and online; reaching new highs in China brand health; receiving SAMR approval, which is a significant process to go through; increasing English label share in CBEC and in the combined daigou and O2O channels; and our 618 and Double 11 performance, which was strong.
During the year, we also ramped up innovation; improved or maintained our key business health indicators, such as market pricing, early-stage share, channel inventory and product freshness. We're also very pleased to extend our strategic partnership with China State Farm and CNADC Group and have accelerated our supply chain transformation and MVM utilization initiatives.
In the U.S., we were granted FDA enforcement discretion and progressed our long-term FDA IMF approval whilst also reducing our operating losses. And from a sustainability perspective, we advanced our program significantly, which I'll cover shortly.
Turning to the next slide, which demonstrates the impact of our growth strategy is having in market. On the left-hand side of Slide 7, you can see the significant year-on-year improvement in our China health brand metrics. Unprompted awareness increased to 23%, and our key loyalty metric, branded used most often, increased to 16% in our segment. The slide also shows the significant growth in our market share in China local channels, with MBS share increasing to 3.4% and DOL increasing to 3.3%. It also shows our share in English label channels recovering, with CBEC increasing to 22.6% and the combined O2O and daigou channel increasing to 20.8%.
Moving to the next slide, you can see that all of this has been achieved in a very challenged market in China, which has been mainly driven by the cumulative impact of fewer newborns as well as the market-wide transition to the new GB product. The charts on the left show the significant market declines in the MBS and DOL channels from July '21 through to June '23, with a decline in the ultra-premium segment for the first time.
The chart on the right shows average market selling crisis for IMF from December '21 to the end of FY '23. This clearly highlights the decline in ASPs in the market coinciding with the beginning of the GB transition process around Double 11 last year as brands increase their promotional activity and discounting to clear old GB inventory.
Slide 9 highlights how significantly the English label market has been impacted by contraction in the daigou channel over the past 5 years, including a further sharp decline this year of 39%, which impacted our sales in the second half. This has resulted in the daigou channel as a proportion of total English label sales more than halving from 57% in FY '19 to 27% in FY '23. It also highlights the shift towards the CBEC channel, with more English label users preferring to shop online, which is where we have been investing in our execution capability and growing share. This is all consistent with our distribution strategy to ship to more controlled channels in CBEC and O2O.
Notwithstanding these market challenges, there are several key segment trends which continue to support our growth strategy, as outlined on Slide 10. Firstly, our China label products compete in the ultra-premium segment, which now represents well over half the total market. Secondly, the continued growth in the a2 protein segment, which has grown rapidly in China label product in particular, now accounting for 13% and 15% of the MBS and DOL channels, respectively. Thirdly, brand concentration is increasing, with the top 10 brands continue to gain share of the market and the concentration within the top 10 also increasing. Despite the significant challenges in the China IMF market, we are well placed from a strategic perspective, and our execution continues to improve.
Moving to our outlook for FY '24 on Slide 11. I'll make a few comments here that I'll also direct you to our results commentary and outlook announcement made today where we have the full version of our outlook, which includes more detail. From a market context perspective, we expect FY '24 to become more challenging, with a further double-digit decline in value in the China IMF market. This is mainly due to, firstly, volume declines due to the rolling impact of fewer newborns in recent years on later-stage IMF products and a lower number of newborns expected this calendar year due to the lag impact of COVID-19 prior to an expected increase in the 2024 calendar year; and secondly, lower ASPs due to the market-wide transition from old to new GB product, excess manufacturing capacity and challenging macroeconomic conditions.
The company will continue to execute its growth strategy in FY '24, focusing on growing share in IMF as well as commercializing other opportunities in adjacent categories and new markets. We expect to continue to gain market share in IMF, with growth dependent on the standard market share gains in a declining market. China label is expected to outperform English label and overall IMF growth is expected to be second half-weighted as we manage our new China label transition primarily in the first half and noting English label is cycling a relatively strong prior period in the first half of '23.
We're expecting growth in other nutritional products and modest growth in ANZ and U.S. liquid milk. MVM sales are expected to decline significantly, which inflows in a2 product and lower GDT market pricing. With this market context, we're expecting to achieve low single-digit revenue growth in FY '24.
Gross margin is expected to be similar to FY '23, with cost of goods sold headwinds and channel and project -- sorry, channel and product mix impact, offset by price increases and cost mitigation initiatives.
Stepping down the P&L. We're planning for a further increase in brand investment in line with sales to support our China label product launch and growth strategy. SG&A is expected to be similar to FY '23. Overall, we're expecting EBITDA margin to be broadly in line with FY '23. I'll touch on a few additional topics now before handing over to the team.
Slide 12 shows our strategy on the page. We first shared this with you in October '21, with a few incremental changes since then. Capturing the full potential of China IMF is central to our strategy, but we are also focused on driving innovation to capture growth opportunities in other nutritional products, including kids, contingents and new markets. Internally, we have recently undertaken an extensive process to refresh our BOLD values and standards of behavior, which are included here at the bottom of the page, underpinning our strategy and execution, which has been very well received internally by our team. Otherwise, it remains unchanged and is how we articulate internally and externally our purpose, vision, goals and strategic priority, which you will see reflected in our integrated reporting.
Moving to Slide 13. This slide shows our measures of success. It's had some incremental changes since we first developed it, but the metrics and targets are largely unchanged. There have been a few progress changes from the half. U.S. premium milk share and household penetration as well as our supply chain efficiency metrics that changed to work in progress. We've combined O2O and daigou share due to sample size and data classification reasons, and we have changed MVM's profitability improvement to back on track. We've also included our medium-term ambition on this slide for sales and EBITDA margin for completeness, which I'll cover on the next page.
And moving to Slide 14. We're still on track to achieve our medium-term ambition to grow sales to $2 billion and improve EBITDA margins in the teens over time. Our ambition previously noted that target EBITDA margins would probably be in the teens. That would possibly be in the low to mid-20s subject to market conditions, English label market recovery and market share gains. Notwithstanding our significant market share gains, given the challenging market conditions and significant decline in market value over the past 2 years, it is even more unlikely that EBITDA margins will exceed 20% over the medium to long term. As such, we reiterate that our medium-term EBITDA margin goal is to be in the teens, targeting year-on-year improvement.
Moving to the next slide. Our strategy is largely focused on realizing the full potential of our China opportunity. Maintaining market access and continuing to grow our China label IMF business is obviously critical to our strategy, with the domestic registered market accounting for 85% of the total market. After all of the work we put in the registration process, it was very pleasing to receive SAMR approval in June. This was a highlight for the year, and our new GB transition continues to be the high-priority initiative for our team.
Production of our new product commenced in late June. Transitioning market is planned to occur later in the first half, and the launch will be supported by a significant marketing campaign in the half and into next year.
Overall, the registration process is likely to lead to a significant reduction in the number of China label products in the market. So far, there are approximately 280 or 65% product registrations approved to date under the new GB standard. On behalf of The a2 Milk Company, I would again like to publicly acknowledge and thank SAMR, MPI and our China strategic partners, CNADC Group and China State Farm, and our manufacturing partner, Synlait and its major shareholder, Bright Dairy, for their support through the process.
Next, I'd like to highlight our increased innovation efforts, which will support further growth. We launched a number of new products in FY '23: a refreshed a2 Platinum IMF range, our lactose-free milk in Australia, our upgraded a2 Smart Nutrition and our new full cream milk powder in a tub and, lastly, our grass-fed premium product in the U.S. We will continue to build our innovation pipeline over time, capturing opportunities not only in IMF but also in exciting categories in new markets.
Finally, I want to highlight the continued progress we're making in sustainability. In keeping with our purpose, we're determined to pioneer the future of dairy for good, and 1 of our 5 strategic priorities is to invest in people and planet leadership. We've continued to invest in -- to reduce emissions within our supply chain. Importantly, we have progressed the installation of a high-pressure electrode boiler at MVM and complete electrification of the site, which is the first in New Zealand. We've also commenced an on-farm methane inhibitor feasibility study in Victoria and are scoping additional studies.
We're expanding our targets across climate and nature, entered into research partnership with Lincoln University, expanded our farmer grant programs. We are also committed to make meaningful change in packaging, which requires further work.
That's all I wanted to cover upfront. I'll now hand over to our CFO, Dave Muscat, to take us through the group financials in more detail.
Thanks, David, and good morning, everyone. Moving to Slide 19 and a summary of our group income statement. Net sales revenue was $1.59 billion for the year, up 10% on last year, reflecting the strong growth in the China and Other Asia and U.S. segments, partially offset by a decrease in the ANZ segment.
Moving down to the income statement. Our gross margin of 46.5% was up on last year, driven by English label platinum relaunch positioning and distribution model changes and the cycling of prior year stock write-downs. Our distribution costs were higher in absolute terms but lower as a percentage of sales, reflecting a mix benefit from lower sales to ANZ resellers compared to CBEC plus improvement in U.S. freight rates.
Our marketing and other SG&A increased materially in line with our growth strategy, which I'll come back to later. And net interest income was also up materially due to high interest rates. Net profit after tax for the year was $155.6 million after noncontrolling interest in MVM, up 26.9% on last year. And finally, EPS was up 28.7% to $0.212 per share, reflecting the earnings growth and the lower weighted average number of shares due to our share buyback.
Slide 20 summarizes our segment performance and illustrates the outstanding performance of our China and Other Asia segments, up 38% on prior year and now by far our largest segment in terms of both revenue and EBITDA.
Our ANZ segment was down 30.2%, mainly reflecting the further sharp market decline in the ANZ daigou channel and the changes to our distribution model to more controlled channels, which Yohan will publish later.
Moving to Slide 21, which summarizes our performance from a product perspective. We again achieved growth in all product categories, with IMF sales up 8.4%. Pleasingly, our other nutritionals, which includes a2-branded plain and fortified milk powders and UHT products, grew by double digits during the year.
On Slide 22, you can see our gross margin percentage improve to 46.5%. The increase reflected benefits from our a2 Platinum English label refresh positioning and the distribution model changes that we implemented in FY '22. It also reflected the cycling of other nutritional stock write-downs recognized during the prior year. Price rises and other cost mitigation initiatives offset the impact of increased raw material prices and other inflationary pressures on cost of goods sold. It's also worth noting that gross margins in the second half were impacted by the timing of lower MVM sales, thus the second half-weighted.
Moving to Slide 23. Consistent with our growth strategy, our marketing and capability investment has increased significantly. Marketing investment for the group was up 13% for the year. In China, we increased our marketing spend by 19%, with uplifts from both consumer and digital marketing. Xiao will talk to some of the marketing highlights next.
Our spend in the second half was slightly down on the first half. However, it was in line with the plan due to the phasing of marketing spend. As a percentage of revenue, marketing investment was up for the year at 16.4%. This slide also shows that our SG&A expenses increased in the period and get in line with our growth strategy, with the investment focused on the China markets, innovation and supply chain transformation. We are also beginning to see some operating leverage in [indiscernible], with SG&A spend flattening to 14.4% of revenue.
On Slide 24, the balance sheet remains strong. Cash and term deposits at the end of the period were $802 million, with a consolidated net cash position of $757 million. As this fall out at the half year, inventory increased on the prior year, mainly due to stock building of China label IMF inventory and a sharp decline in the daigou channel and timing of Synlait supply, which resulted in higher English label stock at the end of the year. But that channel inventory and product freshness remain the target level across the business. And as mentioned in the outlook, we are taking steps to incrementally reduce the inventory product in FY '24.
Moving to the next slide that shows our cash flow. Operating cash flow of $111 million and cash conversion of 58% were lower than prior year due to catch-up payments that were impacted by COVID-19 delays that were outside of the company's control as well as the payment for China label stock build to support its new GB transition. Total cash and term deposits reduced by $85 million to $802 million as a result of the share buyback.
With that, I'll hand over to Li Xiao to take you through the strong performance of our China label business.
Thank you, Dave. It has been another very busy and dynamic year in China. The China IMF market has been very challenging. We are fighting strongly and are performing much better than the market. Today, I want to give you a few of the highlights for the year for China label.
The biggest highlight is the reregistration of China label product. I'm proud of what the team has delivered through the year. We continue to reach new highs in brand health metrics. We grew share within focused accounts and outperformed the market overall.
BCD cities remain the biggest driver for off-line growth in FY '23, and this resulted in strong MBS share growth. In domestic online, our growth outpaced off-line, with our biggest share gain in early stage. We also delivered strong double-digit growth in UHT, which outperformed our expectations.
Turning to Slide 28. As David mentioned, the China IMF market has been very tough. China label market value declined by 14.9% for the year and was down 17.3% in the second half. The MBS channel was down 12.7%, and the DOL was down 4.5%. Despite that, our China label IMF sales increased by 27.8% to $559.3 million, with second half '23 sales up 16%.
Our strong performance was supported by significant marketing investments in brand building campaigns. In the first half, we launched our a2 Milk Base Matters campaign and the launch of Authentic Purity campaign in the fourth quarter. It was the first major campaign that communicates our macromilk product portfolio, with a2 fresh milk as flagship products while amplifying a2 Milk Base Matters and umbrella of a2 dairy products, including IMF, which are made from precious a2 protein milk only and New Zealand, Australian country origin.
We implemented innovative consumer marketing campaigns cost effectively and with high coverage efficiency. For example, as shown on Slide 30, we used caravan tour also for wider city coverage to drive brand awareness and a trial in BCD cities. We expect shopping mall roadshow events in Key&A cities. We also delivered a corporate social responsibility campaign. With Operation Smile, we engaged consumers and support an important cause, as highlighted on Slide 31.
Slide 32 shows some of the leading industrial awards we have won for our innovative marketing from ADMEN, Little Red Book, the China International Advertising Festival Media-Enterprise Cooperation and the IAI. We are not only increasing our marketing investment but also being innovative and disruptive in activation or campaign to improve the effectiveness and efficiency. We were recognized as best practice by the FMCG industry and the competition.
Moving to Slide 33. We are very pleased to see all our hard work translating into new heights in our brand metrics. Total awareness is up to 63%. Unprompted and the top of mind awareness is also increasing. We use more preset target marketing approach to drive consumer trial and purchase through the decision funnel.
Slide 34 shows our performance in MBS for the year. Our record market share was driven by our performance in BCD cities. Our national MBS market share for China label grew to 3.4%. In Key&A cities, our share increased to 7.5% and in BCD cities increased to 2.7%. 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 lower share.
Moving to Slide 35. The most noticeable thing on this slide is the significant amount of the activity in stores and the slight reduction in our total store count. This reflects the challenges the MBS retail market is facing, and we continue to support our customers through this period and remain one of the most profitable trade margin brands in the category. Based on internal distribution data, we grew in new stores, and our like-for-like performance in mature store was strong, in part supported by bulk closures. Based on Nielsen data, we increased our numerical distribution from 25% to 27% of stores and, importantly, our weighted distribution from 44% to 47%.
Turning to Slide 36. Our online growth, again, outpaced off-line growth. We continue to close the gap for MBS share. We increased our overall DOL share to a new high of 3.3%. We also achieved strong growth within the Kibo platform of Tmall and JD, while unlocking growth in other platforms Douyin or TikTok in particular.
So to put all that in context, Slide 37 shows that we are a leading share gainer in China label IMF among domestic and international brands. In MBS, we were top 5 gainer and, in DOL, #2 share gainer.
To illustrate the quality of the performance further, Slide 38 shows that we have gained share in all stages of MBS and the DOL. The MBS, our MAT performance was in Stage 3. While in DOL, share growth was driven by early-stage sales, which is a healthy indicator that we are growing through new users rather than channel switching.
Slide 39 shows that China label performed strongly in June 18. We increased sales volume by 14%, improved our ranking from 16 to 6 in Tmall flagship stores and from 11 to 10 in JD self-run store. The share of sales volume in Stage 1 and 2 increased from 29% to 39%, a strong result overall without heavily promoting our brand during the sales event.
Now I will pass to Yohan.
Thank you, Xiao, and good morning, everyone. It was a very challenging year for English label given the significant challenges in the market. I will quickly highlight some of the progress we've made in the business.
A major focus during the year was the transition to our refreshed a2 Platinum range across all English label channels. Due to the further decline in the daigou channel, we had to pivot further to the more controlled channels in CBEC and O2O, including directly managing third-party POP stores in CBEC and refining our O2O distribution by leveraging our China off-line network.
Overall, despite challenges, channel inventory is at targeted levels, and we continue to hold a strong share of voice within the daigou channel. I'm also pleased to note that we grew our market share in CBEC and in the combined O2O and daigou channels.
Let's go through the results itself on Slide 41. The overall English label market in value declined by 14%. The daigou channel was down 39.5%, and O2O was down 17.9%. Conversely, the CBEC market grew 8.3%. Our net sales revenue was down 6.1% to $548.7 million, with a major shift within English label channels reflecting the continued refinement of our English label distribution model and the deliberate shift in sales to CBEC-authorized distributors from ANZ resellers.
Slide 42 illustrates the significant sales shift in channels. Daigou had shrunk significantly in absolute terms and as a proportion of total sales, while CBEC has increased to 44% of English label market value.
On Slide 43, we show our multichannel marketing campaigns across ANZ and China during the year.
Slide 44 shows how we are focused on building digital marketing and e-commerce capability to further improve execution, which is having an impact, particularly on new user recruitment. This is across major platforms as well as emerging platforms.
And Slide 45 highlight the case study in the O2O channel from one of our key account partnerships with Momtime, which is the largest O2O retailer in our category.
Taking a look at our share outcomes on Slide 46. We're very pleased to show share growth again in CBEC as well as in the combined O2O and daigou channel. Whilst our English label focus going forward is likely to be on CBEC and O2O, given the recent evolving dynamics, we will continue to support the daigou channel through multichannel consumer marketing campaigns and retailer trade support programs.
Finally, on Slide 47, we show our performance in 618, where we grew sales volume and held very strong rankings across platforms.
With that, I'll now hand over to our Managing Director for ANZ and Strategy, Eleanor Khor.
Thank you, Yohan, and hello, everyone. So whilst I ask the investment community, I'm [indiscernible] the leader of our ANZ business. By way of key evidence for the ANZ liquid milk business, FY '23 saw the launch of a2 lactose-free product, which was the most successful grocery fresh milk product launch in Australia in FY '23.
The launch of lactose-free [indiscernible] reviewed consumption of our core range following the [indiscernible] of COVID-19 restrictions, which benefited higher new sales, and the impact of more challenging market, we continued to believe that the [indiscernible] preference. Overall, and in Slide 49, we delivered net sales revenue growth of 7.1% to $184.1 million. Growth in [indiscernible] was 8.5%, supported by price increase in the first half of FY '23 and strong performance of our lactose-free product. Our market value share of 11.3% was down on last year, but similar to prepandemic levels.
As a business, we're very proud of the success and contribution of a2 lactose-free to our results, with sales performing ahead of expectations and with distribution expanding in our initial launch markets to Victoria and New South Wales into Queensland, South Australia and Tasmania.
And with that, I'll now hand over to Kevin to share key messages from our U.S. business.
Thanks, Eleanor. I am also delighted to take on a new role this year as the MD in our U.S. business. The team has been focused on building distribution, with consumer event on both a2 Milk Half and Half and Hershey's a2 Milk in both ESL and UHT formats. We are developing a robust portfolio of innovation, which includes a2 Milk grass-fed, which was launched in the third quarter.
While our household penetration is steady 2.3% and with high royalty rates versus competitors, our brand awareness dropped, reflecting our decision to reduce marketing spend and prioritize investment in China. That said, brand awareness has stabilized since the first half. Pleasingly, we achieved growth in market value share in the premium milk category for the grocery channel.
Turning to Slide 51 and looking at the result itself. Revenue increased by 27% to $105.1 million, the first time we have delivered over $100 million in sales. Sales growth included modest growth in core liquid milk volumes, contribution from new products while pricing and favorable FX also supporting the outcome. We achieved a significant improvement in our EBITDA loss. Accelerating the path to profitability in U.S. [Indiscernible] by FY '25, FY '26 remains a key strategic priority for us, which we expect to make further progress on this year.
And with that, I'll hand back to David Bortolussi.
Thanks, Kevin. A few points on MVM before we move to Q&A. We delivered net sales revenue of $114 million in FY '23, the first full year under our ownership. We reported an EBITDA loss of $26.5 million, slightly higher than last year on a pro forma basis due to GDT and FX volatility, reduced demand from third-party customers in China, increased investment in capability, significant product development trials and investments to support future nutritional powder production.
We've accelerated the execution of our supply chain transformation strategy, including increasing raw A1-free milk supply, completing the in-sourcing of all a2 Milk whole and skim milk powder products; completing production trials for in-sourcing a certain IMF product with manufacturing to commence in the first half of '24; and commencing production trials for a new English label IMF range, all with MVM and new blending and canning partners prior to installing similar capability at MVM.
We'll pause there. And with that, I'll hand back to David Akers for Q&A.
Thanks, David. For us, when we take questions that they are limited to 2 questions, and then please rejoin the queue.
Carlos, can you please open for questions?
[Operator Instructions] The first question today comes from David Errington from Bank of America.
David, maybe I'll start off with a very broad question. I'm probably as confused as an analyst as I've been in my career. As a company, when I look at your metrics, your market share, your brand awareness, your company probably has never performed better. You're operating really off the top shelf. And your management team, my colleague, Julia de Sterke said to me, as a management team, we gained a lot of confidence in your performance today on these operating metrics that you've gained. So curiosity, management team.
But then when I look at your stock, your stock is down 10%, and it's probably at all-time lows because of the outlook statement that you've given, and it's pretty much predicated on the basis of the current market outlook.
Now as a CEO, can you give us investors a guide as to how you're looking at this? Are you looking at this as a cyclical situation where we, as investors, have to wear the next 6 to 12 months of industry restructuring because you've got this excess stock that people have to clear, you've got fixed capacity that people have to clear? You've got some challenges there in the market as we go through this registration. But how are you viewing this? Is this a structural decline? Or is it cyclical? Because if it's cyclical, you've got so much leverage to turn this around and really make this a fantastic investment opportunity. But if it's structural, you guys are running against the wind at a rate of knots. Doing a great job, by the way, but running against the wind at a rate of knots.
Can you give us a bit of a strategy overview? Because to me, that's the most important thing on our minds as to where H2 is going to be going in the next 12, 18 months, maybe 24 months.
Thanks, David. So let me just comment first on the market outlook and then how we see our performance within that. So I think from a market point of view, we've been very clear, and we've been talking about this for a long time. I think it's well understood by the market, hopefully. But the -- from the market growth point of view, we're seeing a significant decline in the market at the moment, driven by 2 factors. One is the cumulative impact of fewer newborns over time. And the second part is a reduction in ASPs in the market at the moment.
So in relation to the number of newborns, I think there are well understood sociodemographic drivers behind a slow decline in the newborns over time that the market has experienced for some time. But on top of that -- so that's a more incremental decline. On top of that, we've seen a cyclical or COVID-related reduction in the number of newborns recently, which we expect to be at its peak really this year, late this year and early into next year, and then we start -- and we hopefully see a recovery of the newborn rate going to FY -- sorry, to calendar '24. And that's due in part to when restrictions were lifted in China. Prior to women falling pregnant again, there was a -- not to -- actually a time past between contracting COVID.
So that's sort of something that's happened around the world. So we expect newborn to increase next year. And where that eventually ends up in terms of the number of newborns in the market is to be determined, but we expect there to be a recovery and then to settle at a new point. There may be some incremental pressure on that going forward, but we know that the government is taking many steps to promote the birth rate going forward. And hopefully, that will stabilize the long-term outlook for births in China.
Second, so there's a cyclical impact, and there is a structural trend there as well. In terms of the ASP impact, I think that is more cyclical because we're seeing a very disruptive year currently in this calendar year because the whole market for China label product, which accounts for 85% of the total IMF market in China, is having to go through phasing out and phasing in their new product under the new GB standard, and that's a very significant event for the industry, and we've highlighted in our presentation the impact that, that has had on ASPs in the marketplace. We're seeing that the new product that's been introduced into the market is at higher ASP. And hopefully, after that stock is split out of the market, we'll see a return to premiumization within the IMF category. So hopefully, that is cyclical.
In terms of our performance, our brand health has gone to new highs. It's never been -- so driving across all that metric, it's up 30%. We've increased the investment behind that. We're gaining share in both labels in China label and English label in all channels. We are the #3 share gain in the market overall.
So in terms of our own performance, I think it's been pretty exceptional during the period, and I'm really proud of what the team achieved. So in essence, in the near term, it is really a share gain for us in a declining market. And we're really well positioned to gain churn to continue to grow into next year, and that's reflected in our guidance of low single-digit growth in sales. And by the way, that shouldn't really be a big surprise to the market because in effect -- well, not only in the market context that I just talked about, but our guidance to FY '23, which was roughly 10%, that implies 3% growth in the second half period on period and also 3.5% on the adjacent half. So to be guiding into next year, with that market backdrop, us having to transition our China label product and cycling daigou declines in the channel and our business shouldn't be much of a surprise to the market.
No, I think so. But yes, I think probably the market is a bit tougher, David, than what we've been factoring in, but everyone can come to their own conclusions. But again, your performance in this backdrop is outstanding. That's my opinion only. But my second question -- I suppose that I don't want to take up too much time. But I'm just wondering how you can maintain the EBITDA margins relatively flat this year when in fact, you're looking at low single-digit sales growth, flat gross margin, and you're obviously going to have to increase brand awareness significantly again. I'm just wondering how you can keep EBITDA margins flat. You must be looking to take costs out of the SG&A line. Is that true?
Because I would have thought there'd be more pressure on SG&As going forward, just with cost inflation, et cetera. I'm just wondering how you can hold on to your EBITDA margin in a flat gross margin world and also with only low single digits.
Yes. So we should -- we'll get a little bit of leverage out of SG&A to support that. So where we're guiding to gross margins being similar. That is a plus, and we intend to increase our investment in brand again in line with sales. So where we expect to get some leverage is in SG&A. But overall, I mean, it will depend partly on the top line because we are obviously a high-margin business in the infant category. But overall, we're guiding to EBITDA margins being broadly in line with last year, and we should be able to achieve that.
Okay. Well done in your operating performance, David. And let's hope the market turns for you.
The next question comes from Marcus Curley from UBS.
Just a couple of questions. Just first on the English label performance. You mentioned in the presentation, yet no sign of daigou recovery as yet. I just wondered if you can provide a little bit more color in terms of what you're specifically doing and whether you think that there is -- what level of chance do you think there is of a recovery at some stage over the course of the next 12 months, given the -- as you say, the customer base is rebuilding.
Marcus, I might hand over to Yohan to talk about that, if that's okay. He can talk more specifically about what we're doing.
Marcus, so I guess in terms of the English label market and the daigou channel, what we've seen, I think you all saw of the slides, is a change over the pandemic period of consumer sentiment and consumer behavior, right? So historically, CBEC channel was a transactional channel for those that have already been recruited into the brand via the daigou channel. But the next generation of consumers are quite comfortable commencing and completing their purchase journey online. And you can see that in the channel split of English label sales, biasing more towards CBEC and away from daigou. So that trend has been sustained now for a number of years.
In terms of the future for daigou, I think it will continue to be challenging. It's great to see that international students have returned to Australia, and international students have historically been a source of new daigou. The other element is tourism, and it was also great to see that Australia was put back onto the list of approved locations for tour -- Chinese tour groups to come to Australia that -- the tourism sector will take a little while to catch up to prepandemic levels, and there may be some benefits of that to the daigou channel. But I think the bigger challenge for the daigou channel is actually the change in consumer behavior and movement towards online channels.
In terms of what we're doing, of course, yes, we're biasing our investment towards CBEC and O2O to drive share in those channels. But also we're supporting the daigou channel. What we're observing is that this generation of -- the international [indiscernible] and potential daigou are not exactly the same as previous generations. As an example, they see themselves versus daigou and more as perhaps influencers, more brand ambassadors. And the challenge for us is to find ways in which we can meet them in the way they want to sell, and we're running trials and looking at different ways in which to engage with the daigou model, and we'll continue to work with the daigou community but recognize that there has been a change in the behavior [indiscernible].
Then Marcus...
Basically just then secondly, just -- sorry.
You go.
And then just secondly, on the gross margin promise, David, obviously, you called out in the release a few headwinds and some tailwinds. I just wondered if you could comment around the scale of some of those headwinds. Obviously, the tailwinds seem like they could be quite material given where dairy ingredients costs are today. And specifically, have you allowed for any greater levels of promotional discount activity for the China label business as you transition from the new to the old product?
Great question, Marcus. I'll hand over to Muscat, to give you a bit more color on margins.
Yes. Yes, you're right. There's quite a lot of noise now in March next year, and that comes through the outlook segment. I think probably the larger element in terms of those headwinds is the, as we said at the half is the CL reformulation and packaging changes, which will come through as we relaunch or as we launch the re-registered product.
Ingredients prices were actually a negative for us, will be a negative for us in FY '24. And one thing that very important, if you don't understand is that there is quite a significant lag between the prices that you see in the market, the commodity prices versus when we see it in our home. So right now, in terms of the prices on IMF, the prices deliveries that we've got from SAMR, we're seeing some benefit on milk prices. We are not seeing any benefit yet on ingredients prices. And that's partly also tied into the fact that raw material levels have been quite long with SAMR, partly driven by the COVID disruptions and the war in Ukraine that has meant that they've procured more stock and also with the decline in some of our purchase orders related to English label, they get long too.
So the ingredient benefits won't come through probably until the back end of this year or even into the start of next year.
They're probably the 2 biggest headwinds. And like I said, we are seeing some of the benefit of the low of GDT prices come through within the cons of our IMF products.
And David, any allowance for...
Sorry, sorry. Yes, that's all embedded into our -- So at the moment, our GB transition in terms of stock build and everything is all on track. And in terms of our execution of the transition, that's all embedded into our guidance.
But is the strategy there to look to discount end of life stock? Or are you sort of comfortable whether sort of transitioning old to new?
Marcus, this is David back in. So we -- even though you can see what's happened to ASPs in the market, we have illustrated, we don't expect to have that same level of pressure on our transition. It will be, our brand is very strong. Our product is in high demand. We'll manage our transition carefully.
So sure, there will be additional promotion of discounting activity and stock movements to manage the transition, and there may be some inventory write-offs of which we already have a small provision for.
So we think that we've got all that covered, and we think that all things are going well, we'll manage that transition smoothly in the first half initially or early part of the next -- the second half.
The next question comes from Peter Marks from Barrenjoey.
I just got a question on the FY '24 margin guidance. It's actually the opposite of David's before. Because when I look at it, I think presumably, the U.S. and the MVM losses should improve into FY '24, which should give a bit of natural margin improvement to the group. And on top of that, you're guiding gross margins flat and marketing to sales flat. So shouldn't there actually be a bit of an improvement in the overall group EBITDA margins?
Yes, it's Dave Muscat. Yes, I think -- so yes, so -- and that's when you say that's embedded into our outlook statements with respect to gross margins. But on the flip side, you've got, as I discussed before, the CL and the ingredients pressures, but also you've got the mix of channels. So with Daigou, we expected to come down significantly in the first half, that's a negative for us. And also, CL is slightly less profitable than AL as well. So there's some mix impacts coming through offsetting some of the benefits of the expected improvement in losses in the U.S. and in ANZ.
Okay. And then just on MVM, is -- was there some sales that slipped out of the second half and purely into FY '24? And what was the profit impact of that?
No, I don't really -- no, there was no sales. If anything, ourselves in the second half of '23, we're quite high.
No, from commodity point of view, we're trying to clear the season. So no, nothing material there.
Yes. And then on the -- also just on the China label outlook. Were the pricing or the discounting pressure significant in the second half of '23? Like did you have to discount in response? Because it looks like -- from that chart, it looks like China and high tier cities were actually like the pricing impact wasn't that bad. And I guess, going forward, do you think that the worst of that pressure will be in the first half of '24?
In relation to the half that we just had, no. We -- I mean, as I said, our brand is very strong. We go and the team have managed that the pressure from the market very well. Our pricing has been similar in the market. If anything, our ASPs in the market are as strong as it's ever been and potentially up in some channels as well, which is really important to us because the product in the market, obviously is a key influence on trade margins and distributed margins as well. So it's -- the brand is in really good shape heading into this transition in the first half. So I hope that sort of helps and cover around it.
The next question comes from Stephen Ridgewell from Craigs.
My first question is just on the medium-term margin targets. And I guess, can you please clarify the reference to the medium-term margin target to be in the teens. Should we interpret it to be kind of mid-teens or high teens, which there's quite a debate in the market at the moment. And then, to the extent that you are expecting EBITDA margin improvement to occur, roughly when should we expect this to occur, just keeping in mind you plan to go multi-brand from 2024 calendar year onwards and the brand investments you have to make to support that. Can you just give us a sense of how are you in the teens looking, as margin improvements towards more medium to longer term?
Thanks, Stephen. We haven't provided specific guidance of we're in the teens. We've just not clear that our goal was to be in the teens, and we're targeting year-on-year improvement. I mean, clearly, with our guidance going to FY '24 with the challenges that the industry is facing next year. We're guiding to margins being broadly in line with last year.
So we will -- of course, we will try and target an improvement in that, but that's our guidance as it stands at the moment. And we hope to improve margins going forward year-on-year. But we're not -- we haven't provided any guidance as exactly the extent of that improvement within the team nor the timing thereof. There's a number of factors that will influence that going forward.
I mean, Dave Muscat just talked about some of the -- from both a kind of, I guess, a margin dilution and accretion point of view. So David was just talking about the impact of the new China label product, which is likely to be lower margin than the current product. So in our China label business, we've guided saying that we expect that to continue to form our English label business. So there's a product margin and mix impact of that from a dilutionary point of view. You raised innovation.
Some innovation may be accretive, but it's equally quite possible that innovation going forward in infant milk and other categories may have a dilutionary impact on margins going forward. But on the other hand, we're got MVM as we continue to in-source and reduce the profitability -- sorry, improve the profitability, reduce the losses on MVM, that will show up in margin improvement from an accretion point of view. And we've also got the U.S. losses which were clearly indicated to the market that we plan to address those and bring the U.S. to breakeven going forward as well.
And then lastly, I'd take from an accretion point of view, over time, we expect to get more leverage from our SG&A spend as well, potentially brand investment, but certainly from SG&A going forward as well. So all in all, we're confident that there is an EBITDA margin improvement opportunity for us, and we're very focused on capturing that. We know how important that is to our shareholders. But we're not giving specific guidance in terms of the extent of it, more the specific timing of it other than that we are targeting year-on-year improvement.
And just my second question was just on store count in China. The contraction and the retail store count was a little bit of a surprise. To me, I appreciate the big drop that the inventory at South is shrinking is not yet being there, if you believe. But just interested to know management's thoughts if the slow SAMR, our new China label, when the later brands to get approved may also partly been behind us. We had heard some tilts that might be an issue. And then are you able to make any comments on whether you would expect to see increased store distribution count in the year ahead, please?
Xiao, would you like to answer that question? The question relates to the reduction in our distribution during this period and then also in terms of number of stores and store count and the market changes, which are happening around that. But also as we move to our new China label registration, is that likely to rate any pressure in terms of our distribution growth ambition?
Yes. Most of the -- I mean, store count is coming from, I mean, the store closure, we see, I mean, even faster store closure, I mean, after COVID-19. And I mean, that impact our country distribution account -- distribution numbers. But I think, on the other hand, you see that our numerical distribution tracked by Nielsen is increased from 25% to 27%. I mean we are showing growth on the Nielsen data, we see the reflection, all store closure actually is less, much less than the market.
And then if you look at, I mean, the weighted distribution, which is a more important indicator, that our weighted distribution is improving from 44% to 47%, which is the quality of, I mean, distribution rather than the quantity of the distribution.
So I mean, looking at the challenging MF situation, I mean in short term, there is a challenge on the store number. But I mean, we are pretty positive that, I mean, we are keep on expanding on quality store expansion to the lower tier city. And hopefully, I mean, when the market stabilized, we are going to see, I mean, this growth again.
And also on the other side, you see -- I mean, store count is not the only way to go to the lower-tier city like in the recent our expansion through Tiktok, which is almost 60% of their consumer coming from lower tier city as well as for the multiple channel can enable our expansion into the lower tier city. Thank you.
The next question comes from Richard Barwick from CLSA.
First question is around the FY '26 targets as well. I guess, let's talk about revenue for starters. So I know that the way they've been expressed is always FY '26 or beyond. And I just think given the birthrate for calendar year '23 is shaping up to be weaker than expected and certainly weaker than where, I guess, we all were thinking back when you introduced the targets at the Strategy Day in '21. How are you feeling about the, I guess, the '26 or beyond? Is this the $2 billion revenue, do you think that's more likely a '26 outcome or a '27 outcome?
Richard, your opening comments are fair. I think the market conditions have clearly been more challenging than we expected. Equally, our execution since October '21, I think this, in many ways, is ahead of expectations. So our growth over the 2 years is high at that time. We would have had to deliver the 10.7% CAGR over a 5-year period if we achieved it in FY '26. To date, I think it's 14.9%. So the 3-year CAGR to get to our ambition in FY '26 will be 7.9% growth.
Now against that, we've got -- we've got headwinds on market conditions. We also have -- don't think about MVM, it is kind of with an internalization reduction in sales. So it doesn't have that target challenging. At this stage, our Board and management team are committed to achieving it as soon as possible. As you would expect, we've set ourselves with internal targets to achieve it by FY '26, but our guidance to the market is by FY '26 or later.
So if it becomes apparent to us we're not going to achieve it by '26, then we thought you know that. But in the meantime, we're still targeting what we've said. I hope that we can get there by FY '26, but there's no guarantees.
Okay. All right. And I guess part of that is, yes, you're right, the 3-year CAGR is 7.9%, but you're obviously guiding to lower than that this year. So the implication being the CAGR into '25 is...
Are higher in the years, obviously. But I don't think that's not impossible. There's a lot of things in terms of execution. We're clearly executing well with 1 brand and 2 labels. Our channel structure has evolved significantly. We've had to do a big pivot from Daigou to more controlled CBEC and Daigou channels. The English label, the share of total IMF market is stabilizing. We've got innovation coming our way over time. And our China business in particular is executing extremely well and begin our share over time. So it's not -- I mean, it's still quite possible that we'll get there by '26, and that's certainly what we're focused on. But again, I'll reiterate that our guidance is by FY '26 or later.
Yes. Understood. And just a clarification question for my second one. On English label inventory, there's a comment within the -- some of the releases, the higher inventory at year-end, obviously showing up on the balance sheet. But then, I think Yohan actually made the comment, that said that the channel inventory was at targeted levels. So I guess there could be a little bit of a disconnect between what's sitting on your books versus what's within -- through the new customers. So just a little bit of color there.
No problem, Richard. We're very careful with the thing between channel inventory and our own inventory. Our channel inventory in English label and China label is at target levels. So please don't be concerned about that at all.
Our company inventory does vary from time to time. On English label, we were slightly higher at period end for 2 reasons. One is that the decline in the Daigou channel impacted us in the second half. And also, there were some supply delays coming from SAMR as well. So it was slightly higher at period in, which will unwind shortly.
China label was slightly higher just from ordinary course and speed because of the stock build and phase out and phase in of the new product, but that's all tracking to plan as well.
And then on top of that, you may notice in our outlook statements that we have indicated and the cash flow comment there that we are incrementally reducing our stock cover, which we think is prudent at the moment and also because the way that we've evolved our distribution model over time. We're much closest market in more control, more visibility and SAMR service levels have improved as well. So we've got more confidence in running with less stock. So we plan on adjusting that incrementally as well.
So I mean, take away from this, to look at our stock at the end of June, a bit higher than we would expect as a cash flow release opportunity there, but don't be concerned about our inventory position either in the channel or on our books.
The next question comes from Phil Kimber from E&P Capital.
Can I just, I mean, where you're talking about that in channel inventories levels that you're talking about there. How is that sort of consistent with the ASPs coming down? I would have thought is, if in channel inventory levels are where they need to -- where they should be, there wouldn't be ASP pressure.
Probably distinguish between ASPs in the market and our ASPs. So in the market, particularly in China label, just the chart that we've put in the presentation on Page 8, that's come down significantly, less so in English label in the market linked to the GB transition that we've talked about.
Our ASPs in the market in both China label and English label have been the same or improved over the period as well. So it's quite different for us, which is indicative of the strength of our brand and how we're executing.
So yes, the comment I was making earlier about ASPs were market-based ASPs.
So when you talk about in channel inventory, you're talking about your in channel inventory, what about just generally, is the general channels, now we're including all the brands out there, is the market overstocked in China? And whilst your levels are okay, everyone else's are. So I'm just trying to understand how long that pricing pressure could be?
Yes. So in terms of market inventory, it's very difficult for us to have any reliable measures on the level of total inventory being onto the channel. What is happening, though, is obviously the transition, the phase-out and phase-in of new product. And it's pretty evident in the market, the clearance activities that are happening around that, which is driving down particularly China label old GB pricing in the market over this period as they transition, as the competition transitions to the new GB product.
And what we're seeing generally is that the new GB product, ASP significantly higher than the outgoing, which you would expect. So I can't comment on exactly the level of inventory in the trade levels.
Okay. And then my second 1 just relates to Slide 20, and you effectively getting asked questions on it before. And that's as you grow, David, DI margins this year 13 -- or FY '23, 13.8%. You've given a teens long medium-term guidance. But if I look at ANZ, China and other Asia, I mean, collectively those stood at 25%.
So 25% down to, let's call it, 14%. Clearly, U.S.A and ANZ are massive drags. And you're talking about then going to breakeven. So it doesn't make a positive margin, but at least not a negative margin. Are you expecting that therefore, materially further margin decline in ANZ and China?
I'm just trying to work the math out there, because they are currently doing 25% as we see.
I mean, I think Dave Muscat talked briefly just before about going into '24. But there will be -- I mean, there's some pressure on gross margins in the -- I guess, in the core business and with MVM as we reduce the losses there, that will help support those gross margins going forward. And then at the EBITDA level, you've got U.S. losses, which we should mitigate over the next several years, consistent with our plan. So yes, over time, with -- if you think about our core IMF business, whilst there are accretion opportunities I talked about before, the new registration, our upgraded product and packaging, net of price increases and other things that we may do to help mitigate that, is likely to be a lower-margin product.
Our China label business, we expect to outperform our English label business. So overall, we expect some pressure on margins going forward. Compensating that are some accretion factors I mentioned, including MVM and U.S.
Next question comes from Matt Montgomerie from Forsyth Barr.
I might start just on China label. We've gone through a little bit of the market share gains, are relatively constructive across IMF and DOL channels. Are you able to provide a little bit more color with respect to where you think they actually coming from? Do you think it's simply because the market is consolidating and you're taking share as a result? Or are you able to see that you are taking here against current established brands? And particularly, I'd be interested in lower tier cities, given that's the sort of medium-term China label growth driver.
I'd like to sort of share those comments, and I hand over to Xiao afterwards just to comment on low tier demonstration. But if you think about the overall market, Matt, so we're well positioned in terms of playing in the ultra-premium segment, which only defined by a few percent relative to the overall market. And the a2 category, if you like, grew quite rapidly during the period as well. So we're well positioned in the market. Obviously, that reflects a lot of other new entrants into the category as well. So we're well positioned in the market. We're gaining significant share.
When you look at our share gains in China label and English label. In English label, we improved share. We're the #2 player there, particularly in the Asia segment. We picked up a lot of share there. And in China label, we're about #8 player in China label, and we gained share significantly in MBS and overall.
So we've indicated in 1 of the pages in the deck, you can see how our share going to play relative to the competition in MBS and DOL. But when we look at it overall, based on Kantar information, which is the best source we have, it's not always reliable because there are data limitations to it. But overall, based on Kantar data, we're the number 3 absolute share gain in the market overall.
So our share gain, I think is pretty -- is pretty clear in terms of the impact that we're having in the market. And in terms of BCD penetration, I'll let Xiao talk about share gains there, we've indicated what it is in the presentation. I just want to give a bit of an indication.
Yes. So we see that in the Key & A, our market share, I mean, going from 7.1% to 7.5%, which is a 10%, I mean, the growth. While I mean the key growth driver coming from the lower-tier city, I mean, we are growing by 20% in the lower tier city market share to 2.7%. And you can see that, I mean, the driver of BCD expansion penetration was coming from the brand, because you see that even with this challenging market situation, I mean, the ultra-premium segment is still taking more than half of the share and you can see that consumer and still, I mean, turning up to the ultra-premium segment. It's just an -- I mean, the ultra-premium segment is topping. I mean it's topping slower than the total market. And I mean that one reason for consumers to purchase the brand is critical.
And then secondly, I mean, as David mentioned, while we are -- I mean, in this tough environment, we are holding our, I mean, the ASP stable, I mean, to protect the trade economy so that being -- I mean, one of the most profitable, I mean, the trade margin brand among either MEC or the local is going to give us, I mean, a big driver, I mean, for the treat recommendation.
And lastly, I mean as our activation shows that activated store, I mean, is important than just get store distribution there. So we are -- I mean, innovate, I mean like the kind of brand [Rosa]. I mean, which is a cost-effective acquisition going to the lower-tier city [indiscernible] as a brand explorer. I think these are brand to treat recommendation from the treat economy plus activated store expansion into the lower tier city is our key growth driver, which is -- I mean, the lower tier city contributes 85% of the total IMF market, and we are still relatively small there. So that's the key growth driver in the future.
Thanks, Xiao. Matt, the only other thing I'd add is that just from the momentum point of view. I mean, we're obviously quoting annual share numbers on an MAT basis mainly throughout the deck. But nearly in China label and English label and by channel in terms of share momentum, we're pretty much finishing the year higher than those averages, as you would expect. Because we need to gain a bit of the share going into next year to deliver our plan. But MBS, for example, 3.4% [indiscernible] June number was 3.8%, in BCD, which you're asking about, the average was 2.7% for the month of June was 3% share. So we've got really good momentum at the moment.
Great. That's very useful color. I might just change tack into sort of capital management. You've got a comment on the release with respect to prioritizing investment in growth opportunities, specifically the supply chain transformation ahead of returning further capital to shareholders. But outside of that, I haven't seen much else. I acknowledge it's got '24 CapEx guidance, but I just appreciate comments that you can make with respect to the advancement that the company has made on the just due diligence and potential scope for investment over the next couple of years. I guess quantum and timing would be appreciated. It's been part of the strategy for a while.
Sure. So on the -- we've got incremental expansion at Fonterra's Darnum facility in Victoria, which was mentioned that the bigger investment is work in relation to MVM and blending and counting laboratory facilities there. Depending on the scope of that $100 million plus in investment over time, over the next several years as we work towards driving in a fully integrated facility there and one that we can hopefully get registered the China label purposes as well.
We're also keeping balance sheet strength as we look for other ways to accelerate our access to China label registrations going forward, primarily in New Zealand, but we are considering other options, and that could include in the major JV, alliance options. I can't comment specifically on those if we ever have anything to announce or certainly that the market now immediately. So that's why we are keeping the balance sheet strength at the moment.
It's not necessarily for in relation to expanding our brand portfolio or front-end related growth-driven acquisitions is more to transform our supply chain to enable us to realize the full potential of the a2 brand with more products and developing our own supply chain capability going forward.
When we complete that program of work and have more, I guess, transparency and clarity over our future capital needs at that point. And along the journey, we'll always continue to review our capital management program, and we will consider ways to return capital to our shareholders at that point.
I just have a follow up. But I mean, even with a reasonable to grow CapEx over the next couple of years, you could see the cash guidance being north of $1 billion quite quickly. That just feel to me as though you're going to be spending $500 million plus in this [indiscernible] suddenly?
As I said, we are considering inorganic options as well. So mergers and acquisitions, joint ventures, alliances that could, not saying they will, but they could absorb a significant amount of capital that we're preserving the flexibility to do that with the exact path in which we navigate securing access to our China label registrations in the future, is not certain, and we're considering a lot of different options at the moment. But as that becomes more clearer through the passage of time and the execution of initiatives, then we'll be in a much better position to make more definitive judgments around the capital needs of the business going forward and how to return that to shareholders.
So we fully acknowledge that we have a significant cash balance in the business. We're not hanging on to that for any other reasons other than we believe that we should deploy that to enhance the future value of H2 going forward, primarily focused on supply chain transformation.
The next question comes from Sam Teeger from Citi.
Well, good morning, David and team, well done in the strong results and challenging positions. Just wanted to check in terms of the outlook for low single-digit growth in FY '24, would it be unreasonable to assume earnings decline in the first half given the China label transition?
We haven't provided explicit guidance on that, Sam. All we've said is that second half, the sales number is weighted to the second half, primarily because of the China label transition and also cycling of the English local numbers in the first half and the big decline that impacted us in the second half. So we haven't provided explicit guidance on that. I mean, you can make certain assumptions that could lead you to that. We're not necessarily planning for that, but we've given the guidance. We'll see how this first half plays out. There's a lot of uncertainties at the moment. There's a broad range of outcomes. We'll be in a better position to give a little bit more color on that at the AGM in November.
Got it. And what's holding you back from allocating more resources to the U.S. infant formula opportunity now that you have that FDA enforcement discretion?
Most of the resources on that, Sam, are focused on achieving the longer-term approval with the FDA, which is quite a process, which we can explore that offline, but there's an enormous amount of effort that goes into that. In terms of capitalizing on our enforcement discretion opportunity, we have produced a small amount of stock, and we're trialing certain distribution, which is in the first half of this year, both offline and online, and we'll learn from that as we progress the longer-term approval. But the reality is that when enforcement discretion was granted to the market by FDA, there was an obvious crisis of supply in the market at that time. And the vast majority of that crisis has dissipated now and the market has gone back to more normal conditions.
So that crisis is over at the moment. And I guess we're in that awkward stage between having temporary approval and hopefully long-term approval. And so, from gaining significant distribution in the market, we'll have to wait to the next round of range reviews and resets by customers in the future. And once we have that permanent approval going forward, we'll be in a much more secure position to engage in longer-term business development.
I hope that makes sense. But certainly, if there are opportunities in the meantime, we will test and learn and explore those over time.
The next question comes from Lisa Deng from Goldman Sachs.
First question is on the channel mix shift in China label and what that does to basically product -- sorry, profitability. Can you please let us know what the DOL versus MBS sort of profit is like? And then also in the lower-tier cities versus the higher tier cities as well?
Lisa, I'll answer that one. The -- I mean, first of all, it's actually sensitive, as you would expect. But all I can say is that the margins between the channels and the cities are similar. But the movement in that channel mix or city mix is not a material impact on the profitability of our business. It's more so between China label and English label, which we're exploring before.
Okay. Got it. And then in terms of the step-up in A&M, if we just look at the, I think, sort of total A&M dollar for China label into next year? What's the split between above the line and below the line, roughly, please?
I can't classify. I hope that's....
Like caravans in channel activation below the line and celebrity endorsement.
I mean, Lisa, how we think about it is how -- where are we targeting and activating through the with the funnel. So if I think about the lower down the funnel initiatives in offline and online. So if you look at the caravan, the mobile caravan is an example of offline activation, trade activation. So if we include that together with Brand Ambassadors, In-store, Mama Classes and other Roadshows, et cetera.
And if we also add to that the performance-based online e-commerce spend that we do as well, which is targeting the lower end of the funnel as well. All of that accounts for roughly about 60% or more of our investment. So that's the lower in the funnel. What we have done in, and the rest is obviously higher up in the plan in terms of consumer awareness and through various mechanisms that we market that we've dialed that up a lot over time. So our consumer marketing, particularly digital marketing through social channels as well, we've really increased that over time as well.
And the guide for an increase into FY '24, is that mainly the towards the end of channel, sorry, the funnel or towards the top end of the funnel that you talked to?
It's both, as you would expect, we've got a fairly significant consumer campaign schedule plan for the first half and leading into the second half as well around our new channel label relaunch. So there's a whole -- it's a bit sensitive at the moment, because we've got certain events planned for the launch. But yes, it is a big sort of consumer program in our plans for the first half. If you reflect on our guidance, just I'll bring you back to that because we're guiding to low single-digit revenue growth. And in terms of brand investment, we're saying that we intend to increase brand investment, which is entirely consistent with our strategy, but we've also set in line with sales.
So at this stage, we're not guiding to a substantial increase in brand investment. We will manage that as best we can to follow sales, but we'll think about the allocation of that towards our China level. Like what we did when we launched our a2 Platinum Refresh last year. We prioritize then towards that as well and coming into this year, we'll prioritize supporting our China label transition.
In terms for the first half weighted as well?
In terms of the investment? Well, it might be more balanced than you think because the program, if you think about -- we're not saying exactly when we're transitioning. But given the manufacturing didn't start until the end of the fiscal year, then you would expect that transition to be later in the first half. So the marketing campaign will go in the second quarter, but into the first quarter of next year as well. So it will be more balanced than you might think it will be.
The next question comes from Adrian Allbon from Jarden.
Just first question. Just on your FY '24 guidance of low single-digit top line. Just within Infant, are you expecting any volume gain within that? Or is that all prices mix?
There may be volume gains within that, Adrian. If you think about our guidance, we've also got MVM through GDT pricing coming down, plus internalization as well. You might have to think about the impact of that and therefore, but what that means for the low single-digit guidance in respect to the rest of the business. So we are planning for China label to grow and to outperform English label. But specifically on the guidance on Infant we're not providing specific numbers on that.
Okay. And then just one, just related then. I guess, like if I look at some of the introductions of these new GBs on the China label side of the business, but most seem to be coming with a reduction in the PEC size in various kind of -- some are 800, some are even all the way down to 700. But can you allude to any -- can you sort of give us some -- a sense of what a2 is planning on doing on that front?
Yes, yes. And you would imagine that we would consider pricing and PEC size in connection with the new products coming to market. And if you look closely in the deck, we'd better shop out the size of the package. So it's commercially intensive at the moment. That will be obvious in the next few months when the product is in market. So apologies, I'd like to be able to let you know that, but it's essentially in the market.
Okay. All right. And just, I guess, the other question, like in the PEC, you talked about this new English label range. What -- like I imagine a lot of this is commercially in result, but can you give us an indication of what you'd be sort of -- what are the characteristics you're targeting with that second range on the English label side?
So I'm not trying to avoid your question, Adrian, but anything to do with innovation and product positioning and all that, but it's very sensitive in the market. So again, that will be obvious when we launch the project -- product later in FY '24. I'm not going to say whether that -- what's the unique selling points about, where the position in the market, is it higher or lower than platinum, what's the formulation, et cetera. It's all very sensitive in the market. So apologies. We can talk about that more hopefully the full year results next year.
Okay. And then, I guess, related to that. Would that -- on your FY '26 slide, which is 14, you've got English label IMF at orange. Would that be -- like what would be the sort of work steps to turn that to green? Would that be one of them?
English label in terms of our goals and scorecard around that, that's what you're referring to?
Yes, just like that. Yes. I think -- I mean, obviously, the China label is green and the English label is orange. I understand that obviously, the target has been much tougher than you expected. What would be -- what do we need to sort of see to turn it to green?
Well, if we think back to when we did our October strategy update. So we had the FY '21 base in gross terms prior to the risk adjustment, we had $400 million growth in China label, $300 million in English label. We are ahead of plan on China label, and we are behind plan on English label. What we have done and what we will do is that we have significantly changed our distribution model. So we've moved significantly from a dependence on the Daigou channel through the more controlled channels in CBEC and O2O, and we have changed our distributor base as well.
And we have much more transparent performance-based partnerships in place. So we feel very good about our distribution model in English label. What -- and the Platinum refresh has worked well and a very successful initiative relative to what otherwise may have been if we haven't refreshed the range. And what we're now focused on is innovation within English label and expanding the portfolio for us to capture more opportunities in the market going forward. And it's also -- this is on the backdrop of the English label channel suffering significant contraction overall.
And pleasingly, I think, we're starting to see the English label channel stabilize at around 15%. It was actually very similar during the period to the China label declines as well. So I think we've got the right foundations there. And hopefully, we may see some recovery in the Daigou that we're not necessarily planning that at the moment. So I think it's really going to be what the distribution in place, I'm going to fuel the growth through innovation.
Okay. At this time, we're showing no further questions. I'll hand the conference back to Dave Bortolussi for any closing remarks.
Thanks very much for joining the call. Our analyst community and thus we look forward to catching up with you on the rest of the roadshow during the course of this week and early into next week. So -- and some of the analysts will get some workshops this afternoon, we can explore different topics. So I look forward to catching up to all. Cheers.
Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.