The a2 Milk Company Limited (ATM) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the a2 Milk Company Limited FY '21 Results Release. [Operator Instructions] I would now like to hand the conference over to Mr. David Akers. Please go ahead.

Hi, everyone. Thanks for joining the call today. Given the lockdown restrictions in various geographies, we're all dialing in from different locations. We're cognizant that COVID-19 restrictions will likely be affecting you as well and hope you and your families are safe. On the call today, we have David Bortolussi, our Managing Director and Chief Executive Officer; and Race Strauss, our Chief Financial Officer. David and Race will present the full year results, some additional updates and our outlook, and there will be time at the end for questions. And with that, let me hand over to David Bortolussi.

Thanks, David, and good morning, everyone. There's no hiding from the fact that this past financial year has been a very challenging year for a2. The company was impacted by unprecedented levels of uncertainty and volatility due to the prolonged impact of COVID-19 and a rapidly changing China infant nutrition market. That said, there are areas of the business that performed well, with market share gains in our China label infant nutrition business and Australian fresh milk businesses. However, we were impacted by China market growth reducing significantly and disruption to cross-border English label infant nutrition and other nutritional sales which we have updated the market on previously and taken actions to address. We have commenced our growth strategy review. And while I can see many opportunities to drive growth and create value in the future, the near-term outlook in FY '22 is challenging, and it will take time to recover due to a soft outlook for the China infant nutrition market and the ongoing impact of COVID-19 on our English label business. Moving to Slide 5 and a summary of our results and additional updates we've announced today. Group revenue came in at $1.21 billion, with an EBITDA margin of 11.1%, excluding MVM costs. Both of these are within the guidance range we provided in May, and Race will take you through the financials in more detail in a moment. We've responded to the challenges that we've had this year and focused on a number of key initiatives in the second half. In particular, we've taken aggressive action to address excess inventory issues, which I'll provide an update on shortly; rebuilt the executive team and reorganized the Australia (sic) [ Asia ] Pacific organization to provide more management focus on our key businesses; increased our planned investment in our brand in China to drive demand; commenced our growth strategy review, which we'll provide an update to the market; and completed the MVM acquisition in partnership with China Animal Husbandry Group; and review capital management options. I often get asked about our brand health, which we track regularly. Our brand health is strong overall. China label has improved consistently. And while English label metrics weakened somewhat in the earlier part of the year, there was some improvement in the fourth quarter on the back of our China marketing campaign. Turning to Slide 6. Given the significance of the actions taken in the fourth quarter, we thought it was important to provide an update on this upfront. Channel inventory dynamics are improving as a result of the actions we took. Our own inventory has reduced, reflecting the stock write-down and related initiatives, and the age of stock we are selling to customers of both China and English label has improved significantly. As far as inventory in the channel is concerned, China label inventory is approaching target levels with some further rebalancing required in the first quarter. For English label, the inventory across CBEC and daigou has improved and is at target levels. The combination of these actions, while swapping longer-dated stock with distributors, is improving our product freshness at retail for our consumers, particularly compared to what it would otherwise have been if we hadn't taken the action. Visible market pricing in CBEC and some daigou channels has improved, however, there is still some aged stock from last year being sold by certain wholesale traders and online platforms, which is holding back some of our price recovery. Whilst it is difficult to tell with certainty, we are expecting that this will clear in the first half, probably by the end of the 11/11 peak trading event. I'll now hand back to Race to take you through the financials.

Thanks, David, and good morning, everyone. I hope everyone is keeping safe and well. Turning to Slide 8 and the key financials. As David already noted, FY '21 was a challenging year, impacted by unprecedented levels of uncertainty and volatility due to COVID-19. Revenue for the year was particularly impacted by the challenges in English label as well as actions taken in the second half to address the excess channel inventory. To pull out some key points relating to the financial results of the business. Breaking down the revenue results, group revenue declined by 30%. Importantly, our China business label delivered growth of 15%. China label now represents the highest revenue of all segments of the group. The English label result was poor with CBEC decreasing 51% and daigou sales decreasing 52%. As you are aware, a number of initiatives have been put in place to address this and rebalance the inventory levels in the trade. Fresh milk in Australia performed very well, growing over 10% as well as gaining share. Revenue in the U.S. decreased by 3.7%. However, the losses were substantially reduced by $17 million. Gross margin decreased significantly, primarily due to the $109 million stock write-down. I'll touch on gross margin in a bit more detail on the next slide. The shape of the P&L was impacted by a number of costs below gross margin. Distribution costs were higher. This was due to the increased shipping rates and U.S. freight, which have also been impacted by various COVID-19-related restrictions. And we have incurred higher warehousing costs due to the higher levels of inventory held throughout the year. Marketing investment was lower than FY '20, but broadly in line for China and Australia. In other words, the lower spend reflects the change in approach in the U.S. for the year. Employee costs were lower overall, mainly due to the reduction in incentive benefits. However, this was partly offset by our continued investment in our people. We added people in China and further improved our corporate capability. Admin and other costs were lower as a result of reduced consulting costs offset by the ERP implementation cost and a significant increase in insurance premiums. I also want to point out that our effective tax rate was marginally higher than last year due to the proportional increase of the U.S. losses and the MVM acquisition costs, which are not tax deductible. Our NPAT was therefore $81 million, which represents a 79% decline from prior year. Coming back to gross margins on Slide 9. The decrease in FY '21 was primarily due to the stock write-down. However, there were some additional factors as well. Liquid milk represented a higher proportion of sales relative to infant attrition compared to last year. And within infant nutrition, the reduced amount of the higher-margin English label products have impacted our gross margin. Additionally, we experienced adverse foreign currency movements, particularly in the second half. And COGs was a bit higher, driven by the increase in milk prices. The underlying gross margin, if you back out the one-off stock write-down was 51.3%. Moving to Slide 10. Our balance sheet remains in a strong position with closing cash position at $875.2 million. Operating cash flow for the year was $89 million, significantly behind the prior year due to the lower sales and the fact that the inventory was not converted into cash due to the stock write-off. The business made a number of key strategic investments during the year, including the Kyvalley milk processing facility, the ERP implementation and the Synlait capital raise. Despite these investments, the business was still able to generate a net positive cash flow of $21 million. Post year-end, we utilized $268 million to complete the acquisition of MVM. I'll now hand back to David.

Thanks, Race. I'll take you through the regional performance for infant nutrition, and then I'll hand back to Race to take you through liquid mild for ANZ in the U.S. and other nutritionals. The China infant nutrition market structure is changing rapidly after many years of strong growth. In volume terms, the market decreased in FY '21, primarily driven by a significant reduction in the birth rate, impacting early-stage products, partially offset by an increase in product penetration. Value growth was flat as premiumization was not enough to offset the decrease in volume and was partially offset by increased promotional activity. Competitive intensity has increased, and local players continue to gain share against the traditional multinational brands, driven both by the strength of local brands in domestic channels as well as an overall mix shift from cross-border to domestic channels. Our China label infant nutrition sales grew 15% for the year. However, sales in the second half decreased 7%. This reflected the impact of the actions we took from the fourth quarter to reduce channel inventory, recycling of a higher comparative period as well as a lower birth rate and increasing competition just mentioned. While our ex-factory sales reduced, it is important to note that our retail sales, that is our sales from mother and baby stores to consumers, as measured by Nielsen, were stronger than our ex-factory sales and ahead of MBS market growth resulting in an increase in share. We invested in the brand and via in-store activation, particularly in the fourth quarter, which we've illustrated in the next slide. The MBS channel continues to be a great opportunity for us to engage with our consumers and increase our distribution and gain market share. On Slide 14, we highlight some of the key activities during the year in terms of brand comps as well as investment in point-of-sale materials, promotional people, mama classes and large-scale roadshows, which our China team executed exceptionally well. Our 12-month rolling market value share in MBS was 2.5% at the end of June versus 2.4% at the end of December and 2% at the beginning of the financial year. Distribution has also increased to nearly 23,000 stores, and we have increased the proportion of the marketing investment allocated to China. Turning to Slide 16. We've spoken several times about the challenges in our English label channels and I won't label the points here. We believe that the actions taken in the fourth quarter will put us in a better position for FY '22 than we would otherwise have been in. We're also improving the way we operate to gain better control of inventory and increasing channel visibility. There's been a reduction in overall inventory as well as an improvement in product freshness and market pricing has improved since our May announcement. Slide 17 shows our market value share in CBEC and daigou. The challenges we have experienced in English label channels clearly put pressure on our share. I also want to point out, as I'm sure it will come up in Q&A, we are again showing Kantar data. Kantar data has been expanded and covers a broader range of consumers, which we think is more representative of the business in the market. While limitations still exists, it remains the only comprehensive source for daigou sales and share data. I'll hand over again to Race to take you through the other original updates.

Thanks, David. So moving to Slide 18. It was another good year for the Australian fresh milk business with double-digit revenue growth in a mature category as we have continued to invest behind the brand. We're also pleased to have achieved another record market share of 12.2%. As the brand over-indexes in retail versus out-of-home, the first half benefited from the impact of COVID-19 restrictions, growing at 17%, with growth in the second half, reducing to a more moderate 6% as restrictions were lifted. This consistent performance over a number of years highlights the importance of continued brand investment alongside high-quality products to drive awareness, loyalty, sales and shares. Same is mentioned on Slide 19. So some of the investment activities and also the in-store executional excellence delivered by our passionate team. Turning to Slide 20. It was an extremely difficult year in our other nutritional segment. Revenue was down 38%, also impacted by the challenges in the daigou and reseller channel. We are examining our product and channel approach as part of the growth strategy review to drive demand and ensure other opportunities are explored to maximize the full potential of this segment. We shifted our execution approach in the United States in FY '21 with lower marketing investment and increased price investment with the objective of improving conversion, household penetration and shelf presence. The business leveraged trade investments to being priced to an affordable premium as well as increasing range, facings and improving the overall shelf positioning. Overall, for the year, revenue decreased by 3.7% with an improved EBITDA result. Revenue in the second half was down 23%. This does reflect a reduction in distribution due to the exit of a club channel customer across a number of regions in the U.S. as well as unfavorable foreign exchange and the phasing of trade spend being more weighted to the second half. Volume growth for the year was up 13% or 26% up, if you exclude the major club customer. Slide 22 shows some of the key marketing, trade and PR activities undertaken to build the brand and to engage with consumers. Despite spending less in marketing and more in trade and price activities, we ranked in the top 2 brands in the category for brand loyalty and realized an increase in prompted brand awareness. And Slide 23 shows our national footprint with distribution now up to 26,800 stores. Turning to Slide 25. Post year-end, we completed the acquisition of the 75% interest in Mataura Valley Milk. In so doing, we're pleased to have formed a partnership with China Animal Husbandry Group. The strategic rationale for this acquisition is very strong, but it will take some time to realize all the benefits this acquisition brings. It had previously been expected that post the acquisition, MVM would process additional third-party volumes. However, due to the changing dynamics in the market, this has been significantly reduced. In addition, we have now revised down volume assumptions that our products will be transferred to MVM during this transitional period. This will increase the EBITDA loss expected from MVM in FY '22 to $20 million for the 11 months compared to $10 million that we indicated previously. We still expect MVM will return a positive EBITDA during FY '25. MVM is exploring further business development opportunities, and will seek to work with additional third parties to improve its financial performance. I'd draw your attention to Slide 26, which is one we've shown before, to highlight our capital allocation framework. I won't go through this in detail now, but of course, I'm happy to address any questions. The key point is that the framework prioritizes investment in growth initiatives ahead of returning capital to shareholders. We indicated in our May announcement that the Board would consider a potential share buyback and that we provide an update in our results. Capital planning is an ongoing activity for management and the Board, and our current capital planning process is considering how to maximize the value of our strong capital position in line with our growth strategy. The Board is currently of the view that there is greater opportunity to create value by investing in the business and through potential acquisitions to complement existing operations rather than returning capital to shareholders. We also consider it prudent to maintain a conservative cash reserve in these uncertain times. This is particularly relevant in the context of volatile consumer markets, which continue to be impacted by COVID-19. The Board has therefore decided not to undertake any capital returns at this time. It's important to note that while several mechanisms are available when considering the return of excess capital to shareholders, the effectiveness of these options is impacted by our ownership structure and taxation profile. For any potential on-market share buyback, consideration would need to be given to the company's available subscribe capital, which at the end of '21 was in the order of $175 million. Handing back to David now.

Thanks, Race. As you know, in May, we also announced we were commencing a growth strategy review to consider how best to respond to the change in China market dynamics. The review is underway, and we will update the market on 27 October through a virtual event with our wider leadership team. The review is focusing on the China infant nutrition opportunity, particularly how to maximize our China label growth and involve our English label distribution channels. It's also focusing on rethinking our product portfolio and developing an innovation pipeline as well as capturing adjacent growth opportunities. Further aspect that we are focusing on is how we enhance our brand positioning and comps to ensure continued distinctiveness and relevance to Chinese mothers. Turning to Slide 29. In FY '21, we made significant progress in our sustainability agenda. We're proud of what we are doing in this space for our people in animal welfare and farm environmental plans and through various community support programs. We've made a number of commitments and invested in initiatives to operate in a way that creates a positive impact on the planet, particularly in relation to addressing coal-fired boilers at Synlait and MVM. We plan to provide further details on our goals and strategy at our Investor Day in October. Slide 30 shows our executive leadership team. There were some vacant positions when I started, and I've also bolstered the team recently to build capability and provide more dedicated management focus on our key businesses and global functions. Hopefully, you'll be able to meet and engage with the team virtually at our Investor Strategy Day in October. Turning lastly to our outlook. Over the past year, it's been necessary for the company to provide specific guidance updates in response to market dynamics and company-specific factors, materially impacting our outlook at that time. In our announcement released this morning, you will see that we have provided qualitative outlook in relation to FY '22 to provide the market with the company's expectations in relation to the potential shape of our results this coming year. We appreciate given the challenging result this year and continuing uncertainty and volatility that a detailed qualitative outlook is necessary, and we've tried to be helpful in this respect. I don't propose to read out the outlook in its entirety, but we'll summarize key aspects of it now. I would encourage you all to review and consider the full statement we have provided, which takes precedent over my comments now. So in summary, we expect the following in relation to FY '22. We expect the China infant nutrition market will reduce in value due mainly to a sharp decline in the birth rate. Our China label business will grow sales and achieve a modest increase in share. A wide range of outcomes is possible for our English label business and that the company is targeting sales stabilization. Our Australian and U.S. milk businesses will deliver modest growth. We've quantified the sales and earnings impact, including MVM, which as Race just mentioned, was a greater loss than expected due to lower volume assumptions. From a phasing perspective, first half '22 group sales to be marginally lower, and our second half sales to be significantly higher than PCP, respectively. Gross margin percent to be broadly similar to FY '21 levels, excluding the impact of stock write-downs, but before taking into account the MVM in FY '22, a planned increase in our marketing and capability investments, MVM and other factors will increase total SG&A significantly. In terms of EBITDA, it's difficult to predict with precision the wide range of outcomes possible with respect to FY '21 levels before the impact of stock write-downs. And finally, from a net profit after tax perspective, the market should expect an increase in depreciation and a higher effective tax rate in the range of 37% to 39% due mainly to the inclusion of MVM. That takes me to the end of the presentation. So I'll pass back to David Akers to move us on to Q&A.

Thanks very much, David. I'll ask that we open up for questions now. [Operator Instructions] Rachel, can you please open up for the first question?

[Operator Instructions] Your first question comes from Larry Gandler with Credit Suisse.

Can you hear me?

Yes, I can, Larry.

And my second question relates to the English label. Just wondering if you could talk to how you think it's positioned now and how you want it positioned in the market given that Chinese consumers are more prepared to buy locally made products and perhaps buying that on the basis that they're additives and improved quality. So where does that position the English label? What's the differentiating feature for that brand today? Or where do you want to get to?

Well, I think our English label business has been and continues to be positioned well. But we have one of the most premium brands in the market. The quality of our product is New Zealand sourced. And the overall a2 proposition, which we have leadership on the market, has always been a compelling proposition together with somewhat of a lifestyle positioning around the brand as well. So that still holds true. I guess what's happened to us this COVID-19 has disrupted our cross-border businesses. We have lost the activity and support of a proportion of thousands of daigou that have helped build the brand successfully. And that's the area that we -- I think from a product and brand positioning point of view, I think the proposition still holds. We've just lost that push marketing, and we've got to work creatively to think about how we can continue to generate that demand pool for the product going forward. I think over time, you mentioned product formulation, and that leads me to kind of innovation. We've had a very, very narrow portfolio that's been incredibly successful over time. And we haven't had the need to innovate. But going forward, we'll share some thoughts on this in our strategy day. We definitely need to innovate going forward in formulation and breadth of our portfolio as well to drive growth.

Your next question comes from Chelsea Leadbetter with Forsyth Barr.

Maybe if I can start with China label and conscious the fourth quarter had quite a few moving parts in it, but obviously quite a big step down versus recent kind of trends. I guess I'm kind of interested in how much of that is actually your intended work to reduce channel inventory. And maybe if you can give us any color on how we should be thinking about the increased marketing spend that is going through that area and what's that's actually driving? I'm just trying to get a little bit more context on what the underlying exit run rate, if you like.

Yes, Chelsea, the most of that decline is due to the -- well, there's a few things going on in the China label business. Overall, the 15% growth was strong for the year. But as you pointed out, the second half was =the reported number was down 7%. There's a lot going on there and driving that result. So we're obviously cycling COVID in the previous year that led to a spike in demand. The market is slowing and competition is getting more difficult as I was just discussing. Inventory rebalancing in the second half and particularly in the fourth quarter did have an impact. We haven't quantified that explicitly, but we did pull back on our shipments into distributors and our distributor shipments out to some extent to retail. And there's a little bit of that rebalancing that needs to happen into the -- what we're still working on in the first quarter of this year. The MBS sales at retail, as measured by Nielsen, were pretty healthy for the period. They were significantly higher. So they were like something in the high teens, I think, for the second half, which was greater than channel sales as measured by Nielsen. So that's why our share obviously went up in the second half. So the combination of our rebalancing has really had an impact on that post cycling a tough comp. But what's encouraging is that our retail sales, which is the most important thing in MBS and also in daigou has been done pretty positive throughout the period. I also highlight currency, currencies had not an immaterial impact. The second half was down 7%. But if you did it on a constant currency basis, it was down 2% as well. So there's a lot going on in that second half for our China label business. Hopefully, that provides you a bit more color.

Yes. No, I appreciate it. And just a second question for me. MVM, I appreciate you've given us a bit of context on your revised thought process here. What I'm trying to understand is, it has changed a couple of times now. How confident are you in the revised assumption sets around what you're transitioning of your product to that facility? And maybe just how we think about sort of the path from FY '22 to get you to profitability as you sort of continue to articulate when we get to FY '25 and also the CapEx spend potentially along that way?

Sure. Yes, I'll hand to Race on this in a moment. He's been pretty close to this transaction over the period. But I'll just reemphasize the importance -- the long-term importance of that acquisition and the partnership we have there. So for me, I'm supportive of the acquisition. I think it makes entire sense for the future and future-proofing our business. Strategically, the partnership we have with China Animal Husbandry Group in relation to MVM is really important for us from a market access point of view, insight in terms of the market and relationships, et cetera. That's a really important partnership that we have forged with China Animal Husbandry Group in addition to State Farm -- China State Farm, which we already have a partnership with them, as you know, probably know that both of those entities are part of CNADC, which is a really important state-owned enterprise. So that's extremely important. Secondly, the diversification of our supply chain risk. We've had this great relationship with Synlait, which continues. But having all of our registration and production in one facility in Dunsandel is a level of concentration that we're not comfortable with in the long term. We hope that we are able to develop a dual source proposition with Synlait over time. And this will also provide us the opportunity to get closer to manufacturing and innovation opportunities for us going forward. So the strategic rationale still holds strong. But in the meantime, volume impacts have impacted the near-term financial outlook for MVM. But I'll let Race perhaps answer some of the other questions that you raised.

Yes, Chelsea. So look, you're absolutely right. The big issue that we've got with MVM, like the issue that we have, the market being down in IMF means that the third-party sales that they have also come down. So that's one big issue that the assumptions that we had and the volumes that they have, their forward orders have come down significantly for their third parties. Secondly, we are very clear what we were going to transfer during this transitional period. But unfortunately, as our volumes have dropped, we're unable to make the quantity of the transfer that we thought. So those 2 issues is what's really driven down the assumptions. In terms of the path to profitability, it is the same. We are confident that we can get this business to profitability. As David said, the strategic intent is absolutely there, and we do believe that we can and navigate to get this business to profitability using our volume. In terms of CapEx, yes, we've been very clear that we will invest in terms of building capabilities, particularly in the labs and things like that. The business over time, we will continue to invest. But of course, we will adjust our investment in line with the market. And therefore, our plans will adjust as they have for further expansion, of course, we wouldn't do until the market has recovered. So hopefully, that answers your question.

Your next question comes from David Errington with Bank of America.

Maybe Race, this might be to you, although David, you might want to provide a bit of color, too. But my first question is on margin and the outlook for margin going forward. Race, I think your gross margin, if we exclude the write-down, went from 56% to 51%. And if I read it correctly, you're basically saying that that 51% is going to sustain in 52 -- '22. And that's largely because of COGs increases, mix, et cetera. And so we expect the gross margin. But then what was worries -- not worries me, but it's a statement reality, but your cost of doing business in '22 is going to be sizably higher because you have to increase marketing spend back to '20 levels, which is roughly was at about $25 million. Employee costs are going to have to return. You've got Mataura Valley costs that are going to go in there. So you're probably looking about a $50 million increase in your cost of doing business on a flat gross margin. Is that the right way to read through to capture your commentary with regard to your outlook?

Yes. Thanks, David, and I hope you will. Let me try and help you there. So gross margin, yes, so if we take the FY '21 gross margins and you add back the obsolete stock provision, you'll get to about what the underlying number is. But then you do have to overlay MVM on top of that, which will take that margin down by 3% or 4% because we, of course, have to consolidate MVM. So that's the first thing. In terms of then sort of the other investments, you're right that we will be increasing our marketing costs, as we've certainly said. With regards to overheads, we will get some reversal of costs like the ERP and the Indian acquisition costs. However, they will be more than offset when we have to put back the incentive-type costs. We expect there'll be a little bit of travel. So actually, our gross margin -- our overheads will be higher than FY '21.

Well, to clarify, I think if we do gross margin, because I'm not that smart. I'm pretty basic as David will attest. But I think the gross margin in '20 was 56%. Excluding the write-down, it dropped to 51%. So what you're basically saying is you're going to get $80 million of sales from MVM, but your gross margin is going to drop to 47%. That's basically what you're saying on gross margins. And then we can do the calculations on your cost of doing business line. Is that -- that's pretty well to summarize, not putting words in your mouth, but that's basically what you're saying, what's going to happen?

You're a little low on the gross margin, I'd go up a little bit. But in principle, yes, your logic is right. Your math is slightly wrong. I'll lift it a little bit.

A little bit, yes. So yes. Okay.

And David, most of the reduction in the underlying business is mix driven. There's a little bit of COGS pressure, but most of it is mix. And what you've just worked through then is roughly right.

Yes. Okay. Okay. The second question, David, and this is a bit more of a generic one. And well, it's not generic, it's getting to the guts of the future of a2. And obviously, investors are wondering whether we're catching the falling knife or whether you're actually going to stabilize this business and to grow. It looks as though, as you're saying, you're working hard to stabilize it. First half is going to be tough. But then you're expecting a significant improvement in the second half. I know that you're going to give us a bit of an outlook, and you've kind of got some ideas. Clearly, I know you've too well. You've got ideas and plans and you want to keep that to yourself till October. But can you give us a few sniffs as to 2 or 3 key points as to why you believe -- why you want us to -- not why you want us, but why we should believe that second half is going to be sizably better. You've said that the China market is really tough. You said that it increased competition. You said all of this. It's really tough now. It's a different market. So why should you get a better second half in terms of sales performance? Why should we -- 2 or 3 key points. I know it's -- you're going to try to keep it till October. But I think we deserve a little bit of a pre sway, if you like or life or a precursor as to why we think '22 is going to be -- is going to -- second half is going to be better?

Well, it's a great question, David. The second half of this year, obviously, was impacted by market conditions and also the channel inventory issues we had and inventory rebalancing. So in effect, when you look to the second half of this coming financial year, we are cycling hopefully, what should prove to be a softer comp in FY '21. And when I look into the second half of this current financial year, there are -- we've got -- in essence, we've got 4 businesses. 3 of them are performing pretty well at the moment and one of them -- well, in accordance with plan, and one of them is challenging. So our China label domestic business has grown 15% during the period. And if you adjust for -- if you look at retail sales and adjust the currency, it's actually better than that, but the market is slowing a bit. But the China label domestic business continues to grow well. Our domestic milk business in Australia and New Zealand is growing well. It's a market-leading position there and continues to grow. COVID, as we come out of restrictions, hopefully, for many reasons, for milk sale purposes. But hopefully, as we come out of that, that will take a bit of -- that will be a bit of a headwind as in-home consumption goes out of home. The U.S. business is expected to continue to grow top line. Our real challenge, as you know, is a cross-border English label business, and we're focusing on stabilizing that. But if we can stabilize that and achieve the growth that we're expecting in the other markets, then we should be able to deliver that growth in the second half. We've also got MVM sales, which are a little bit second half wisely coming in as well. So hopefully, we should be able to deliver that second half, and that's why we've clarified that phasing to the market. The big issue for us, the big uncertainty for us and it could -- we're targeting stabilization. That's what our plans are built on. But as we've called out in our outlook statement, there is a wide range of outcomes in relation to our English label business. And as you know, it's a high-margin business. It could be positive or it could be negative around that stabilization goal. So that could swing quite significantly and that given the operational leverage in the business, it can have a pretty significant impact on the underlying results. And we've seen how much that's impacted us in the past financial year. So I hope that gives you a little bit more color on the second half, but also highlights both the risk and the opportunity associated with our English label business. We're starting to see now, David -- I'll just add one final comment. All the pain that we took in May on our stock write-downs, that was very painful for us and our shareholders, but we're starting to see that starting to have an impact in terms of inventory getting back into more balance, stock freshness improving, particularly our sales into our distributors and then starting to progressively flow through to product freshness on shelf. And the price in the secondary market pricing, which is an important indicator for engagement of daigou and other participants in the channel in our business is starting to improve as well. There's still some old stock from last year, the June-July peak orders that we've talked about in the past, still clearing through the channel, that's still deep in the channel, that's frustrating, and it's holding back some visible price movement. But hopefully, that will clear as we move into the 11/11 event and then hopefully, we'll get stronger price recovery. So I'm hoping all that -- it could be possible that we end up with a better result in the second half in English label, but it's really hard to predict.

Your next question comes from Anna Guan with Goldman Sachs.

My first one is a sort of a follow-up on the inventory comments earlier. Just looking at the quantum of the write-down, the write-offs this year, it looks like a majority of it has gone towards and sort of -- whilst English label products, I should say. Just thinking, sort of, can you give some color in terms of -- based on your early look into the China label inventory level at the moment, can you give us a feel with further sort of write-off there, please?

I might hand over to Race for any further comments. But yes, you're right, mostly the write-off are in relation to our English label business and our inventory levels in distributors for English label in our daigou reseller account, so corporate daigou accounts and also with our CBEC platform in terms of our distributors, in Hong Kong and China and also the platform inventory. So Tmall and JD and all the other platforms that we deal with, they look to be well balanced at the moment and very close to our targeted levels. So we don't have any concern there. My concern I was just talking to David about then is that stock that was sold last year is still in the channels and still being sold on C2C platforms and even B2C as well. So that's the concern there, but that's deep in the channel, and that needs to clear in the second half. Our China label inventory, we've made some progress on that, but it's taken time to execute the swaps of inventory to improve freshness and also to pull back on our shipments in and get that into balance. It's not far away from our targeted levels. But I hope we've made progress on that in the July and currently in the August month, and I'd hope by the end of the first quarter that that's the targeted levels. And that reduction in sales associated with those shipments are factored into our guidance for the year going forward.

And Anna, just to help you with the allocation, about $19 million of the write-off provision was allocated to China label. The rest was all the English label.

Right. Okay. So $50 million towards China segment and out of that $50 million, $19 million was China label. So the residual 30 would be CBEC related?

Correct. Yes.

Yes. Okay. That's very helpful. And then my final question is on marketing in China. Can you give us some color in terms of how you're thinking about allocating marketing spend in China? Perhaps if you can talk about sort of that online or digital or social media versus off-line And also off the back of maybe June '18 sales event, have you had any observations in terms of changes in marketing efficiency there?

So we will -- China, we're planning on increasing our total level of marketing and nearly all of that increase is going to go to China market. In terms of mix of -- channel mix of that marketing, we'll definitely be upweighting our digital spend and all the components that go with that. We will also be incrementally increasing our off-line, below-the-line spend in terms of our -- the areas that I highlighted in the presentation in terms of all the trade work that we do in promotional people and mama classes and trade shows and point of sale and investment in flagship stores, et cetera, which is really important in terms of engaging with our consumers at point of sale. So the above-the-line work that we do drives awareness and engagement in the brand to be one of the few brands when a mother enters a mother and baby store where it's kind of top of mind, but it's really important at that stage to have the in-store execution to convert that opportunity at point of sale. So that's why we attack it as many brands do from both above the line and below the line, and we're dialing up our investment.

Yes. And then just that efficiency question around perhaps your operation on the back of June '18 sales. Have you noticed any particular changes there?

No, it's part in relation to June '18 because we actually -- we pulled back on our level of promotional activity in 6/'18. We achieved a pretty good result in that respect, but we were trying to get inventory balanced. And we didn't want to heavily promote and fuel further price reduction because of the balance between CBEC and daigou sales. So we're conscious of that. We got that a little bit out of whack in the second quarter of last year. So we wanted to manage that carefully. But in terms of that fourth quarter above-the-line campaign, we've dialed back our traditional spend on TV, et cetera, and we've actually dialed up our digital spend. And we found that we've improved our reach and our impact across China. And that delivered a better result in terms of our brand health metrics, which is probably the most objective way of measuring that in the fourth quarter. We got both an improvement in our China label brand health as well as our English label in the fourth quarter.

Next question comes from Tom with Barrenjoey.

Just a question on -- I think you mentioned pricing was improving in the market for your products in China. Can you just talk to like month-to-month sales trend book? Have they kind of bottomed now do you think? And is that improved pricing indicative of better underlying trading performance there?

When I was referring to the price, I was referring to CBEC pricing on the major platforms, but also B2C and C2C pricing that we see in Taobao and even on [ 30day ], we kind of track that as well, but also the wholesale pricing on Hipac and [Indiscernible] and as well. So we're just looking at multiple kind of different elements of the supply chain, what is happening with our secondary market pricing. And we've seen that CBEC during the second half, we -- through not overinvesting in promotional activity, et cetera, we've seen that remain reasonably stable and high. And we've seen our pricing and daigou reseller market improve, particularly in Stage 2 and 4, and we're starting to see some recovery in Stage 1 and 3 as well. So we're starting to see that improve. Our rate of sale, it's probably not meaningful time to be commenting on at this stage because of the stock rebalancing that we've done has just had such dramatic shifts in our English label business that it's probably not that meaningful for you. The only thing I would say is that our retail sales. Generally, our distributor sales and our retail sales are better than our shipments in. So that gives me some encouragement for the year ahead.

Yes. Okay. Cool. That's helpful. And just the second one, in terms of kind of share loss or competitive intensity, is it the domestic Chinese brands that are proving tougher? Or are you noticing the big foreign brands kind of increasing investment and improving pricing, et cetera? What is the comment on that?

Yes, the competitive intensity and activity across the market both from a marketing investment point of view as well as promotional activity is pretty much across the board. In terms of -- so both domestic players as well as traditional multinational companies. In terms of share gain from a multinational point of view, look, we're one of the few brands that have held and marginally increased share over the period. Many of our international competitors have lost a bit of share during the period. The domestic players have picked up substantial share, in particularly the 2 key market leaders that you're aware of. So they've had a pretty significant gain. If you have to look at Nielsen and Smartpath, Nielsen data and Smartpath out of DOL as well, you can see pretty significant shifts in share and that I think value share for the year is up, I think, roughly about 5% and driven about up a couple of points as well. So they're pretty significant share movements over the course of the year.

Your next question comes from Marcus Curley with UBS.

David, I just wondered if you could quantify, if you can, the level of channel tightening that you've done in the English label product in the second half. Obviously, it'd be quite helpful when we think about the comparative comp heading into '22.

We haven't -- Marcus, we haven't clarified that specifically because I think there's -- you've almost got to look at it across the full year. And with the benefit of hindsight, probably there was a bit more that went in in the first half and even the second half of '20 and then we've tightened a bit in the second half. So David asked me about what gives us confidence in the second half growth that we're predicting, and we said that would be significant, and we wouldn't say that unless we expected greater than 10% growth on PCP in the second half. But that should hopefully give you some indication, but it's really -- it's probably a little bit misleading to say we'll pull back x -- I mean we could quote teens or dollars into distributors, but it's probably a little bit misleading because of the balancing across the year because we took out some in the second half that probably there was more that went in, in the first half. So it's -- I'd probably prefer not to do that.

And then just secondly, can you talk a little bit to what you think has happened in terms of your sell-out performance in English label over the course of the half. And I suppose, when we look at your guidance comments for the first half of this year, it would suggest that you're expecting that to weaken? And if that's the case, could you give some color in terms of what's driving that?

The CBEC in the second half so our sales were down 65% [indiscernible] and [indiscernible] was only down about 12%. And the Smartpath measure of our sales at retail for the platform to Smartpath track in English label is down 14%. So if you're looking at distributor sellout and Smartpath sellout in the teens, but our sell-in was down materially, like at 65%. So I don't have that kind of -- that's probably more of an impact than it was in the daigou area, but that might give you some color on what the underlying sales rate might be. The only thing I would say -- just a word of caution around Smartpath though, Smartpath, I mean, it is probably the most -- it is the most objective measure of sales in e-commerce. But one of the things just to be cautious about with our business is that there's a degree -- and we'll get more control over this over time, but there's a degree of cross-channel sales between daigou resell, our retail sales, ex Australia and New Zealand. We think there's a degree of channel -- cross-channel sales from those sales into the CBEC platforms as well. Because when you look at CBEC platform overall, that was up marginally, and our share was only down marginally, but our shipments were down quite a lot. So there's a degree -- we think there's a degree of stock coming across from other channels into CBEC and then being sold out again. So as all this stock kind of unravels in this first half of this year, we should hopefully see more clarity around those numbers. And that's why we sort of noted in our release that this may put pressure on our CBEC share going forward. So it's -- I apologize, like it is pretty messy in terms of data points at the moment as all the stock kind of clears through the system.

Yes. I suppose my point here is I'm just trying to understand where the potential downside comes from an English label. You're mentioning here sellout metrics, which are down mid-teens in the second half. Your sell-in was down 50%, 60%. Where's the downside to sell in as we head into next year, given that gap?

Well, the downside is -- I mean the bigger downside is the impact of the birth rate, which is -- could have a significant impact on our business, including English label. And unless we can reengage the daigou effectively, they have been incredibly supportive and effective in building our brand over time. So unless we can get the channel economics right, reengage the daigou to support and push our brand, then the impact on Stage 1, 2 and the rolling impact on our English label business could be quite significant. So in our announcement, we said and I just think -- I was talking about it before is that we have lost share in daigou, but particularly in Stage 1, which is a concern. And that's something that we need to focus on. And part of our strategic review is focusing on how do we -- how we manage the overall channel evolution of the daigou business, but also how do we reengage and activate our new user recruitment as well, which the daigou channel has been so successful for us in the past, but our Stage 1 share is down quite a lot.

Your next question comes from Adrian Allbon with Jarden.

Just wondering on the China label side, can you just give us an update like -- obviously, you would have had to restate your KPIs as your distributors, what sort of a level of -- is there any level of increase required in terms of support for them to resubscribe to volume growth?

Look, I think over the past, my understanding like over the past year or 2, we have been working on restructuring out the number of distributors and the territories in which they serve and then also trying to get the incentives right between front margin and back margin and trying to put a little bit more on the back margin and hold our distributors more accountable for the activity in the market. So there's nothing really specific that I would that I'd be prepared to share that's not commercially sensitive around our goals and plans with our distributors around that, but just only to say that we are incentivizing the more for growth and activity to build -- to acquire new accounts and build our distribution and to activate those accounts and generate same-store sales.

Right. Okay. And so -- and has that sort of getting netted off against your sales? Was that not below the line sort of up of the...