A2's shares hit record on 1H results, Fonterra deal

A2 Milk chief executive Geoff Babidge says the deal presents his company with a range of opportunities.

A2 Milk

[NZX:ATM] shares spiked 16 percent to a record after the company has announced a sweeping strategic agreement with dairy giant Fonterra [NZX:FSF] at the same time as it reported a 150% jump in first-half net profit.

The shares jumped to a record $10.80 in the first two minutes of trading this morning.

While A2 Milk has gone from strength to strength on the burgeoning sales of its Platinum infant formula, Fonterra has struggled to perform.

Fonterra also spent years of effort to dispute the science behind A2 Milk – A2 claims its milk, which is free from A1 proteins, is easier to digest.

Most New Zealand and Australian milk contains both the A1 and A2 proteins.

Fonterra also passed up opportunities to buy A2 before its performance – and value – started to skyrocket.

A2's market capitalisation is now $6.8 billion.

A2 reported a $98.5 million net profit for the six months ended December, up from $39.4 million in the same period a year earlier.

It says Fonterra will exclusively supply A1 protein-free milk products in both build powder form and consumer packaged form to A2 Milk.

As part of this, it has granted Fonterra exclusive supply rights for certain nutritional products destined for sale in certain A2 Milk new priority markets in South East Asia and the Middle East up to a specified volume.

“In return for these rights, A2 Milk has become a strategic customer of Fonterra with allocation of production capacity as volume grows and competitive commercial terms,” the company says.

“The products will be manufactured at Fonterra’s Darnum factory in Victoria, Australia and packaged into consumer packaged form at Fonterra’s facility in Hamilton,” it says.

To support the agreement, a new A1 protein-free milk pool will be developed in Australia in conjunction with A2 Milk.

Exclusive licence
A2 Milk has also awarded Fonterra an exclusive licence to produce, distribute and market A2 branded fresh milk in the New Zealand market and to supply this milk Fonterra and A2 Milk will establish another A1 protein-free milk pool in New Zealand.

Synlait Milk [NZX:SML] already manufactures A2’s infant formula from its Dunsandal plant in Canterbury and manages the A1 protein-free milk pool supply.

A2 says the two companies will seek to establish distribution and sales arrangements where Fonterra has resources and execution capability to assist A2 Milk’s market entry strategies in its new priority markets.

The services may relate to any of importation, registration, warehousing and sales and distribution.

A2 Milk has also granted Fonterra an exclusive period to explore producing A2 branded butter and cheese and a milk pool of A2 fresh milk in China.

“Given A2 Milk is now considering investment in blending and canning capabilities, A2 Milk and Fonterra have also agreed to explore the potential establishment of a jointly-owned facility as an extension of the arrangements," it said in a statement.

A2 chief executive Geoff Babidge says the comprehensive strategic relationship presents his company with “a range of significant medium and long-term opportunities.”

A2 Milk’s results show revenue rose 70% to $434.7 million in the latest six months while earnings before interest, tax, depreciation and amortisation rose 123% to $143 million.

Operating cashflow was $116.4 million, taking A2’s cash balance to $240.2 million.

(Additional reporting BusinessDesk)


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Lost for words - simply a stunning report!

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Does Fonterra ever get anything right? Time to change the Board and the Executive Team. They should have bought A2 Milk shares when they were a lot cheaper

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No losses to book ......moving on....oppps no balance sheet left

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Love these moments when the servant becomes the master.

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One of (many) Fonterra screw-ups now coming home to bite it in the behind. No longer a minnow, I suspect Fonterra went cap in hand to A2 to strike a deal.

Probably looking at NZ's future largest dairy company. Can't come soon enough!

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O.K. so it's a brand-sharing/contract-processing arrangement, such as Fonterra has been entering into around the world for quite a while.
The difference here is that it is another NZ company which is the counter-party ; that has not been a feature of most of the previous branding/processing arrangements.
And it is no doubt driven by the observation of a former Fonterra added-value strategist, that Fonterra possessed no added-value brands.
It would be fascinating to learn of the deliberations which have brought the parties together into a win-win.
And one wonders whether other NZ dairy operators may also have attractive brand -images.

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So.... does Fonterra do all the hard work establishing new markets, researching and developing new products only to have A2 pull the rug out from under their feet and not renew the "licences" later on?

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That would be a backward move by both parties, assuming , that is , that the market pull is really there, and solid.

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In contrast to other commenters, I think Fonterra was smart to avoid purchasing A2 Milk. I'm not sure that getting involved now is smart either. As Livestock Improvement and CRV Ambreed have provided exclusively A2-producing genetics for several years now (AFAIK) and dairy cattle have short lifespans, we must be close to the point where all NZ milk is A2-protein only. To that extent, the value that A2 Milk has built up is not on a solid foundation. They have some brand equity, but it was built on a point of difference they will shortly cease to have (at least domestically). If I was Fonterra, rather than co-operating with A2 Milk, I would look to eliminate them once they don't have a point of difference given that they also don't have the scale to compete without one. That said, this arrangement could be an embrace intended to end that way.

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Cam with your thinking you would make a good Fonterra CEO.

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You mean , in former times, right?

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The NZ raw milk supply is nowhere near being largely A2: the pool of A2 milk is tiny.
When A2 milk is worth significantly more to the farmer , then the change will come. It is true that there are more A2 Bulls available recently , but their semen attracts no significant premium. Many current bulls still carry the A1 gene.
There will likely develop a market for polled, A2, high Milk Index ( low BW) bulls/semen for the local market at first,but possibly for export markets later as well. The polled gene will go some way to assuaging some misgivings about animal welfare issues. Very few polled bulls are available , but the number is increasing.

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Geoff Babidge says more than 30% of the NZ herd is A2 - and that man never overstates things

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Interesting. One wonders why then A2 Corp. was apparently unable to access that milk, assuming that it could access the processing capacity with which to deal with that milk pool. A failure inherent in the provisions of the DIRA?

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Assuming that it is true that 30% of the cows in NZ are A2A2 , it does not mean that 30% of the available milk supply does not have A1 protein in it.

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30% of the national herd does not mean 30% of complete herds or farms. To get the premium for A2 the entire herd has to be A2 not mixed, given the age of dairy cows and cull rates of 15 to 20% I wouldn't expect too many exclusive herds yet but that could ramp up over the next few years.

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Isn't the Darnum plant 51% owned by Beingmate?

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Its a stretch to say A2 is worth $6.8 billion, when net profit is only $98 million for the past six month period.

What the ill informed forget is sharemarket capitalisations are only driven by a small shareholding transfer, which is unlikely to translate to the wider value of the company as a whole.

Fonterra's model was driven by increasing volume, which was never going to work long term, that they invested heavily into; with Ferrier & Ven Der Heyden largely responsible for this direction. This has constrained their balance sheet, and limited its capacity to develop or purchase value added brands. Like a big ship, it takes time to change direction.

Dairy Farmers can only blame themselves, given performance is related to the people you elect to the board and company management.

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I was there when Fonterra rejected A2M in 2000.

A2M had the science and foresight but not the money at that time. Fonterra had everything except foresight and strategic thinking - arrogance they had a plenty and boy, gave they paid big time for their arrogance!

Sanlu and Beingmate - close of $1 billion of investments in ?????

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Sanlu and Beingmate are "the price of doing business in China", so says the Chairman of Fonterra Board of Directors.

Who knows what kind of arrangement really went down with these "investments"? Maybe just and efficient way to pay the right people out for access to Chinese markets? The fake botulism scare had a smell that led all the way back to China and began somewhere near the intelligence services Wellington offices.

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NZDB wanted no part of A2 & went out of way to kill it as its existence raised questions
As they say the rest is history

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It will be easier soon to buy A2 Milk from any NZ grocery and/or stores. Hoping it becomes a bit cheaper too.

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I cannot think of any good reason why a premium product , that has a marketing edge, would be cheaper than your run- of - the - mill commodity milk.

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Not cheap as compared to A1 laced milk but cheaper hopefully than what's being sold as A2 milk now.

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Shocking!
Milk , laced with A1 protein.
Deadly.
How is this permissible?

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So what will this deal mean for Synlait?

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It means that all future growth in the supply of A2 milk is not destined to be processed by Synlait.

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Synlait has exclusive supply contracts for Australia, New Zealand and China. A2 has 5.4% of the Chinese market

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Fonterra has the rights to A2 fresh liquid milk in NZ.
Synlait may have exclusive rights only for infant formula?

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Yes, infant formula is the only product Synlait produces for A2

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Great deal for Fonterra. A2 should have negotiated much harder as Beingmate’s Sam Xie did. Funny how Theo was so complicit back then but suddenly a much clearer headed negotiator now?

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Enough said.

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It is difficult to assess whether one party benefits more than the other until the figures are disclosed!

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It's more about the size of the pie , than about how it is sliced.
If they get it right , it doesn't matter . . . . plenty to go round , one hopes.

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When does A2's patents on A2 milk run out?

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You need to be asking what it is that they have a patent on?
From Wikipedia:-
"A1 and A2 beta-casein are genetic variants of the beta-casein milk protein that differ by one amino acid. The A1 beta-casein type is the most common type found in cow's milk in Europe (excluding France), the USA, Australia and New Zealand. A genetic test, developed by the a2 Milk Company, determines whether a cow produces A2 or A1 type protein in its milk. The test allows the company to certify milk producers as producing milk that does not metabolise to β-casomorphin 7.[3]"

The gene involved is also known as L1 L2 but A2 is a trademarked description.

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Let us never forget the late Dr Corran McLachlan, the brilliant New Zealand Scientist that battled Fonterra and many others including Government Departments and senior Politicians to bring the results of his many years of research to fruition!

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