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

Thank you for standing by, and welcome to the a2 Milk Company Limited FY '22 Results Release. [Operator Instructions] I would now like to hand the conference over to Mr. David Akers, Head of Investor Relations. Please go ahead.

Hi, everyone. Thanks for joining the call today. We hope everyone is keeping well. As COVID-19 restrictions have eased, we've started to be taking a more traditional approach to our results and roadshow this week. We're very pleased to be hosting this call from Auckland today. Turning to Slide 3 of the agenda. On the call today, we have David Bortolussi, our Managing Director and Chief Executive Officer; Mark Sherwin, Chief Financial Officer; Li Xiao, our Chief Executive for Greater China; Yohan Senaratne, Executive General Manager, International; Kevin Bush, our Executive General Manager for ANZ; Blake Waltrip, Chief Executive for USA; and Rebecca Culbertson, Investor Relations Manager. To start the presentation, let me hand over to David Bortolussi, who will start on Slide 4.

Thanks, David. Good morning, everyone, and thank you for joining us. You'll see that we've released quite a lot of information this morning through our results materials and additional announcements. I want to start by summarizing the 5 key points I want you to take away from our presentation, which is summarized on Page 4. Firstly, the steps we took last year to address excess inventory had proven effective. Importantly, channel inventory is at target levels, product freshness is amongst the best in the industry and market pricing has improved significantly. The actions we took last year were critical to restoring channel economics and have provided the foundation for growth this year. The second key point is that we have made strong early progress executing our refreshed growth strategy that we shared with you at our Investor Day last year. Our strategy is very much focused on capturing the full potential of our China market opportunity. Importantly, the increase in brand investment and other aspects of our strategy have driven our brand health metrics to new highs, and we have achieved record market shares. Thirdly, as a result of this and improved execution, our FY '22 results delivered double-digit sales and earnings growth, which is particularly good given the market headwinds and COVID-related challenges we've had to manage over the year. Next, in terms of outlook. We see this as a positive for FY '23 with continued sales and earnings growth. Pleasingly, our FY '22 results and FY '23 outlook means we're also on track to deliver our medium-term sales and EBITDA margin ambition I shared with you at our Investor Day last year. Finally, with this confidence and after reviewing our strong balance sheet position, we have also announced today that we intend to execute an on-market share buyback of up to $150 million. In addition to this, we also announced today the appointment of David Wang to our Board who brings additional China market and manufacturing capability, who will be a great addition to our Board. And consistent with corporate governance best practice, the company's Deputy Chair, Julia Hoare, has announced her intention to step down as a director after our interim results this year after 9 years of exceptional contribution to the Board. Julia will be very much missed in our organization, and we certainly have some big shoes to fill. Before I move further into the presentation, I wanted to acknowledge, in particular, the achievements of all of our a2 team and our strategic partners in China and Synlait in New Zealand over the past year to deliver this result today as well as our shareholders for your support and patience while we have returned the company to growth this year. Moving on into the presentation. Slide 5 shows the incredible growth journey the company has been on over the past decade, disrupted in FY '21 by COVID-19-related demand and supply volatility, but returning to growth in FY '22. Moving to Slide 6. Our FY '22 result is in line with our expectations. Group revenue increased 19.8% or 11.2%, excluding the impact of the MVM acquisition. EBITDA was up 59%, with an EBITDA margin of 13.6%. Net profit after tax was up 42% to $114.7 million, including the noncontrolling interest as a result of the China Animal Husbandry Group owning a 25% in MVM. Backing out that noncontrolling interest, which is a loss in MVM, our net profit after tax was $122.6 million for the year. Our group result was driven by strong performance across our regions and product groups. China label IMF was up 12.2%, with record high market shares in MBS and DOL. English label IMF was up 11.6%, with market share increases in CBEC in the second half and O2O throughout the year. We lost share in the Daigou channel, but our trajectory is improving. ANZ milk was up 2% with record market share and U.S. milk was up 30% with increased share in grocery. And FY '22 was our first year, including MVM for 11 months in the result. There are some key operational highlights we're particularly proud of. Our brand health metrics have reached new highs following significant investment during the year. We deliberately shifted away from our main English label resellers to more transparent, performance-based and exclusive partners, which is progressing well, and we have increased our support for the Daigou channel. We've stepped up innovation with the most new product launches in the company's history, with more to come as we continue to build our pipeline. And lastly, we have significantly increased our sustainability targets, initiatives and impact across the business. Moving to our outlook for FY '23 on Slide 7. We've included the full outlook statement in our results announcement, and I encourage analyst investments to read that in its entirety. In summary, we're expecting high single-digit revenue growth in FY '23, with first half growth expected to be significantly higher than second half growth. We're expecting revenue growth in China label IMF, English label IMF and U.S. milk in FY '23, ANZ milk to be broadly in line with last year and MVM to be down on FY '22 on an annualized basis, bearing in mind that MVM was with us for 11 months during the year, not 12. Gross margins are expected to be broadly in line with FY '22 with cost pressures offset by pricing, product mix and cost initiatives. We are planning to increase brand investment further in FY '23, skewed marginally towards the first half due to campaign timing, which is different to last year. Our SG&A will step up again in FY '23. Consistent with our strategy, we will be investing more in capability, science, innovation and sustainability as well as doing our best to manage inflationary impacts across the business. Overall, we're expecting EBITDA growth in FY '23 with a modest improvement in EBITDA margin, slightly skewed to the second half due to marketing phasing compared to last year. The last point to make on outlook is operational cash conversion will be significantly lower in FY '23 due to the reversal of timing benefits in working capital experience in FY '22 and an increase in inventory levels. Slide 8 shows our refreshed growth strategy on the page. We first shared this with you in October last year. It remains unchanged, except for an updated purpose and vision, which I'll cover off on the next slide. You'll see in the results announcement and in this presentation that we've provided an update on our performance against our strategic priorities. And in the annual report, we've also gone into considerable detail on how we're tracking against our goals for people, planet, consumers and shareholders. Moving to Slide 9. Following the completion of our strategy refresh in 2021, we engaged our whole team in the process to refresh our purpose to align on why our company exists and to create an inspiring vision for the future we want to help create. Our refreshed purpose is to pioneer the future of dairy for good, and our vision is to create an A1-free world where dairy nourishes all people and our planet. A2 has always been an extremely purpose-driven company, but this refreshed purpose and vision has been incredibly well received by our team and one that I'm personally excited about. I look forward to exploring this more with you during the roadshow during the rest of this week. Slide 10 highlights some of our achievements in sustainability over the past 12 months as we pioneer the future of dairy for good. We've committed to more ambitious targets, particularly in emissions reduction and sustainable packaging. Several investors will also be interested to review the detail we've published on TCFD in our annual report, having now also incorporated MVM into our emissions reporting. And we've also commenced the pilot assessment for nature risk as we start the journey to become nature positive over time. We've invested significantly this year to reduce our emissions. A few key highlights include: firstly, and really importantly, committing to a new high-pressure electric boiler at MVM, supplied by 100% renewable energy, which will be a first in the New Zealand dairy industry. And we will virtually eliminate our significant Scope 1 emissions following the acquisition of MVM. The project has been supported by co-investment from the New Zealand government's investment in decarbonizing industry funds, which we very much appreciate. Other highlights were contributing to Synlait’s Boiler 2 conversion to biomass of the Dunsandel plant. Launching our New Zealand Farm Sustainability Fund with Lincoln University, a program replicating farmer grants program in Australia with Landcare, and we have explored further on-farm commercial trials utilizing Sea Forest's SeaFeed product, a methane inhibitor from asparagopsis seaweed. For packaging, we aligned our Australian packaging covenant targets to extend to all markets, which is a leading rating with APCO earlier this year, which we still have a lot of -- where we still have a lot of more work to do. Finally, the team and I are proud of the contribution a2 has been able to make to support the communities in which we operate, with proactive programs to support children and families in China, ANZ, and the U.S. as well as making a number of additional contributions to support those in need in times of crisis. In order to build a sustainable growth business, we need to continue to deliver on our financial ambition. So I'm pleased to show here on Slide 11, we're on track to achieve our ambition to grow to $2 billion in sales and improve our EBITDA margins over time. In the chart on the left, you can see our F '21, first half '22 LTM and FY '22 performance in sales and our medium-term ambition. You can also see our EBITDA margin for those periods, along with our medium-term EBITDA margin ambition in the teens highlighted in green. The middle section in this slide is a reminder of the drivers to get to $2 billion in sales, where we are tracking on H1. The incremental revenue growth in total is $0.8 billion, is expressed in the same way as we did back in October last year at our Investor Day, i.e., of the FY '21 base of $1.2 billion. If we were to achieve our ambition by FY '26, it would imply a full year revenue CAGR of 8.5% from FY '22. FY '22 demonstrated solid progress towards that ambition with positive leading indicators in brand health metrics and market share, providing a good foundation for future growth. Slide 12 provides an overview of our performance against our nonfinancial measures of success and key leading indicators. I won't go through this in depth now, but I wanted you to know that the measures we announced in October last year are the same measures we are tracking and holding ourselves accountable to. Overall, we are on track. Before handing over to Mark, I'm going to cover 2 more areas upfront. Our China label GB registration process and the on-market share buyback we announced today. On Slide 13, we provide an update on our new China GB registration process. We have been working closely with Synlait for a considerable time on this project. While the new GB registration process is progressing, timing is uncertain and subject to SAMR approval. However, it's important to note that MPI has cooperation arrangements in place with SAMR, which, amongst other things, positions New Zealand well in relation to the registration process. Our current China label IMF product registration expires in late September 22. We have applied with Synlait for the renewal of this existing registration and anticipate receiving it in the next month, consistent with SAMR's practice with other brands in similar situations. This would, in effect, allow Synlait to manufacture our product -- our current registered product up until the end of the grace period in February next year when the new GB standard applies. The current registered product, manufactured up until this date, is allowed to be sold in the market after that date. There's not much else I can add at this stage other than to say that we'll update the market when we receive our extension and as the process evolves. The last topic I will cover is our share buyback on Page 14. Our capital management framework prioritizes investment in growth initiatives and maintaining balance sheet flexibility ahead of capital returns to shareholders. However, there is capital that is surplus for achieving these priorities. We look at effective ways to return funds to shareholders. As you know, our balance sheet is in a strong position, and this provides the capacity to return capital at this point in time. The Board has reviewed alternative options and determined that an on-market share buyback is the most appropriate form of capital management at this time. We, therefore, intend to commence an on-market share buyback of up to $150 million towards the end of September. The buyback also reflects the improved confidence we have in our strategy, execution and outlook. That's enough for me for now. I'm going to hand over to Mark to take you through the financial results in more detail, and then to the rest of my team to take you through the business performance. Over to you, Mark.

Thanks, David, and good morning, everyone. I'll start on Slide 16, which summarizes the key numbers behind our results. Group revenue came in at $1.44 billion, up 19.8% for the year. This reflected a strong performance in IMF as well as incremental sales from the first half inclusion of MVM and strong U.S. liquid milk growth, particularly in the second half. We delivered gross margin of 46%, which was up 3.7 percentage points from FY '21. There are 2 aspects to this increase that I would like to call out. Firstly, adjusting for the first-time inclusion of the MVM business, FY '22 gross margin increases to 50.9%. And secondly, the business has cycled significant stock write-downs that occurred in FY '21. Adjusting for these items, on a like-for-like basis, our gross margin percent in FY '22 was broadly consistent with prior year. This reflects the benefit of price increases both annualized and new, reduced trade spend and favorable foreign exchange. And this has been offset by higher raw material costs, including the impact of elevated milk prices and logistics costs, which have been impacted by COVID-19. Distribution costs were higher due to our uplift in sales, along with elevated in-market freight rates in the U.S.A., in particular. Our marketing investment increased significantly, up 36% to $230 million, largely to support our growth strategy in China. Administration and other costs have increased, primarily reflecting ongoing capability build, including to support the ongoing growth of our China business, an increase in employee incentive costs and higher professional service fees. And the company's effective tax rate for the period was 36.7%. Our net profit after tax was therefore $114.7 million, which represents a 42.3% increase. And note that this figure includes the minority interest share of losses in MVM. Our diluted EPS was up 51.8% to $0.165 per share. Slide 17 highlights the strong growth in our China and other Asia segment, up 24.5% in revenue and substantial growth in EBITDA, reflecting in part stock write-downs that occurred in FY '21. While [ ANZ ] revenue was down 4.8%, this reflects a review of our English label IMF route-to-market structure, resulting in a shift of IMF volume to our CBEC channel, which resides within our China and other Asia segments. USA revenue grew 30%, supported by new innovation and the FY '22 result also includes MVM for the first time. Slide 18 shows the breakdown of revenue by product and segment category. IMF was up 11.9% overall, driven primarily by China and other Asia IMF growth of 24.5%. Liquid milk for the group was also up double digits, which is an excellent result and largely driven by gains in the U.S. Slide 19 provides further details behind our gross margin performance. After adjusting for the first-time inclusion of MVM and FY '21 stock write-downs, our product and IMF label mix have remained relatively consistent year-on-year, with minor impacts on gross margin through the period. Turning to Slide 20. This slide shows a significant uplift in our marketing investment and also the increase in administration and other expenses. We invested $182 million in marketing in China during FY '22, by far our largest single year investment, reflecting our confidence in the brand, its performance and its potential in China. Adding to my earlier comments on administration and other expenses, the increase half and half mostly reflects capability builds through the period. Slide 21. Our balance sheet is very strong. We closed the year with total cash and term deposits of $887.3 million or net cash of $816.5 million, excluding debt of $70.8 million. The significant increase in property plan and equipment reflects acquired assets as part of the company's recent acquisition of MVM. Turning to Slide 22. This shows cash flow for the year. Our cash flow from operating activities was extremely strong as we benefited from a favorable movement in working capital. This was mainly due to an increase in trade and other payables related to the timing of fourth quarter '22 brand investment and inventory orders, combined with delayed invoicing and payments processing in China. Our high operating cash conversion of 114% primarily reflects the benefits of this movement in working capital. Our operating cash flow also includes a decline in tax payments, reflecting refunds received and deductions for the FY '21 stock write-off claim during the year. I'll stop there and hand over to the regional head to take you through our regional and product performance. Over to you, Li Xiao.

Thank you, Mark. I will take you through the market dynamics for China IMF. The birth rate decreased in '21 by 11.5% and is expected to decline in '22. As a result, market volume was down 4.3% and the market value decreased by 3.1%. The market also saw the continuing shift towards China label from English label, but to a lesser extent. Growth rates varied between Key&A and the BCD cities, Key&A sales by value decreased by 7.1%, while BCD sales by value were broadly flat. There are 3 important points to note for the China label channels. Firstly, there is a continuing mix shift to the premium segment; second, there is a rapid growth in the a2 protein category, grew by 108% in full year '22; thirdly, there is an increasing preference for strong brands, resulting in brand consolidation. English label channels are showing signs of stabilization, with rate of decline by value down 9% compared to the decline of 33% in full year '21. Despite challenging market dynamics, our growth in full year '22 in China label and in English label IMF was encouraging. Moving to Slide 25. Our key messages for China are summarized on this slide. This year, we continue to execute on our strategic priorities. We invested and nurtured our brands with a strong focus on integrated marketing campaign and a new user recruitment. We expanded our key account coverage to major regional accounts. Off-line distribution expanded in lower-tier cities. We also invested highly in digital marketing and e-commerce capability, and we leveraged this capability to drive growth in UHT. We are pleased with the impact from this progress. We achieved new highs in brand health metrics, delivered record market share in MBS, Key&A, BCD and across all stages. Numeric and weighted distribution and same-store sales growth increased. We delivered record market share in DOL and double-digit growth in UHT. It was a good year. I'm very proud of my team. With all those achievements, there is a lot to talk about, but we don't have enough time on this call, unfortunately. Slide 26 to 31 provides detail on all the key points I have discussed, including the results, store expansion, like-for-like sales and increasing shares. Slide 26 show the China label IMF result and how that's been driven by the execution of our refreshed growth strategy. Slide 27 highlights, again, some of the dynamics supporting our growth. Slide 28 shows the expanding store footprint, improvement in like-for-like sales, numeric and the weighted distribution. Slide 29 has our market share in MBS up to 3% overall, with 7.1% in Key&A and 2.3% in BCD. Slide 30 shows our sales growth in DOL in priority platforms and our overall share, which increased to 2.5%. Slide 31 is important as it highlights the positive growth in units of early-stage products in MBS and DOL. It also shows growth in share across all stages across MBS and the DOL. We show on Slides 22 and 23 some of our integrated marketing campaigns and our below-the-line investment. Slide 34 highlights how we partner with operation Smile to provide corrective surgeries and nutrition products to 300 children, a collaboration that we are very proud of, which went down to win the ADMEN, gold award. Our marketing investment and how we executed with our campaign has led to a big uplift in our brand health metrics, shown on Slide 35. In particular, I'd like to draw your attention to the increase in top-of-mind awareness from 6% in '21 to 9% now and spontaneous awareness from 16% in '21 to 21% now. I'd also like to point out Slide 36, which shows the strength of the brand from trial to loyalty. It has been a very good year for us in China. The IMF category had headwinds, but we are getting just stronger. Now I will hand over to Yohan.

Thanks, Li Xiao. Moving to Slide 37. This slide provides all the key messages for English label and the slides after this provides a supporting detail. In the gray box on the left, you can see the strategic priorities we shared with you at the Investor Day and are progressing well against these. Firstly, as David mentioned in the opening slides, we have rebalanced channel inventory and actively simplified our route-to-market. We are focused on developing more transparent, performance-based and exclusive distribution partnerships, and this will put us in a more sustainable and stronger position for the future. Leading to this change in approach, we have also taken more control of marketing communication by increasing brand support to resellers and directly engaging with Daigou. We have also invested significantly in digital marketing and e-commerce capability. Linked to simplification and development of our route-to-market, we've also clarified our route-to-market for O2O, which means that we can also leverage the team in China and the team in ANZ to drive growth. And we've also been focused on the refresh of our a2 Platinum infant formula and [indiscernible]. The impact of this progress has been significant. Inventory levels have reached targeted levels. And overall, pricing has increased. Inventory freshness is amongst the best in the industry. There's also been a reduction of unauthorized cross-channel sales from ANZ resellers to CBEC platforms. We have delivered material improvements in brand engagements and share of voice. We are also achieving growth in the O2O channel and are delivering innovation in our core markets. Slide 38 shows how the underlying sales and market share have been impacted by the shift in our route-to-market approach. Following our review, we focused on developing more transparent, performance-based, exclusive and channel compliant distribution partnerships. As a result, significant ANZ volumes ultimately being on sale to CBEC platforms were rerouted through authorized CBEC platform distributors. Overall, English label sales have stabilized and, in fact, up 11.6% if you combined ANZ and CBEC English label sales. Slide 39 shows more supporting evidence of English label stabilization. You can see on the left that BCD cities are leading there, and actually are back in growth for second half '22. This slide also highlights the channel mix shift from Daigou to CBEC and O2O as well as the emergence of ultra-premium segment in FY '22, which is an opportunity for growth for us. A few call-outs on Slide 40. We've been consistent in showing you the 12-month MAT share for CBEC. And whilst our share has stabilized at 19.5%, if you look at it on a 6-month basis, it was 18.5% in the first half, but up to 20.7% in the second half. For Daigou in the middle chart, market share has declined again, but our trajectory has improved in the second half. In first half '21 and second half '21, our decline was 2% plus. But this has reduced in the second half of '22 to a less than 1% decline. Clearly not the direction we want yet, but in an improving trajectory. Conversely, our share in O2O is a solid 18.6% for the year and 19.5% for the second half. Slide 41 is a big feature of our improving performance. Freshness has improved significantly as has overall pricing. On Slide 42, we're pleased that following 2 marketing campaigns in FY '22, that our brand awareness has responded positively, ticking up to 29%. If we move to Slide 43, we will share some color on how we supported the Daigou channel through events and outreach. We feel very much committed to this channel. The Daigou is critical to driving new user recruitment and brand promotion. Our team is working closely with our Daigou community to drive growth. On Slide 44, some highlights from 6/18 in terms of activation and outperformance, with [ offtake ] in major platforms up 21% versus last year. And finally, on Slide 45, we are very proud to have been the first English label IMF brand to offer product delivery during the Shanghai lockdown. So FY '22 was a very encouraging year for us in English label, channel inventory rebalanced, route-to-market significantly improved. Direct Daigou engagement was enhanced. Digital and online capability was strengthened, and now we're relaunching a2 Platinum with the new formulation and refreshed [indiscernible] coming back. I'm going to hand over now to Kevin.

Thank you, Yohan. Moving to Slide 46. This slide outlines the strategic priorities for ANZ milk and our progress. We continue to invest in major broadcast media partnerships and further optimize our brand integration. We focused on expanding channel distribution outside of supermarkets into convenience, and we launched 3 new products, including a2 Milk UHT and Cream on Top in FY '22 and a2 Milk Lactose Free, launching in the first quarter of fiscal '23. In addition to launching new products, we are committed to introducing recycled content into bottle manufacturing and continuing our investment in Smeaton Grange and Kyabram facilities. As a result of these initiatives, we achieved great results during the period. We achieved top 3 branded SKUs in the category in grocery, with improvement in key brand health metrics and increased our market value share to 12.4% from 12.2% in FY '21. We expanded distribution in 7/11 and launched our products in Coles Express and achieved national distribution for our UHT product and have strong early retailer demand for our new Lactose Free product. The completed works at Smeaton Grange, which expect to finish in the first quarter of this year, will increase the capacity on site by approximately 30%, which is fantastic. On Slide 47, outlines the underlying sales and market share outcomes that were achieved during the period, despite the headwinds of low in-home consumption levels with less COVID-19 stay-at-home restrictions. Moving over to Slide 48. I mentioned before the very recent launch of a2 Milk Lactose Free. This product has a distinctive positioning in the market. It's the only lactose-free product that is also A1 protein free. It's made from fresh milk, unlike some other products in the category and of course, it tastes better. Really excited about this opportunity and delighted to offer a product that we think will bring consumers back into the category. Over to Blake now.

Thanks, Kevin. Slide 49 summarizes the key points for USA liquid milk. The key progress updates include launching a new marketing campaign to drive increased awareness and new consumers to the brand, while continuing with key PR activities to engage with consumers and drive them to trial. We had some great innovations with a2 Milk Half and Half and HERSHEY'S a2 Milk co-brand. Both of these new products have been accepted in over 6,000 stores, with velocities exceeding expectations. We achieved growth in market value share in the premium milk category for the grocery channel, delivered improvements in brand awareness and household penetration increased from 2.1% to 2.3%. And as we grew -- as we did that, we grew average velocities within key accounts. The Slide 50 summarizes our performance for the year. We're pleased that revenue grew 30%, with a particularly good result in the second half, driven by growth in our core business and primarily in the grocery and mass channels. Our EBITDA loss was higher, though, mainly due to a significant increase in freight costs, coupled with fuel surcharges from higher diesel prices and higher raw milk costs. We're still maniacally working hard on our path to profitability, which remains a key strategic focus. With that, I'm going to hand it back to David.

Thanks for that, Blake. I know that was a whistle-stop presentation and a lot to digest, but we really wanted to give you some color around the results as well as an update on how we're going to execute against our strategy and provide sufficient time for Q&A. Slide 51 has a page on the MVM result, which was slightly better than expected due to favorable GDT pricing and FX. I'm not going to go into that in detail, but the path to profitability is also a key focus for MVM as we focus on in-sourcing a2 products, developing future product innovation and building capability to produce finished product. I'll pass back to David Akers to move on to Q&A now.

Thanks, David. We'll open the call for questions now. I'll ask that you please limit yourself to 2 questions and then rejoin the queue. Darcy, can you please announce the first participant in the queue?

Your first question comes from David Errington from Bank of America.

David, you must be really feeling pretty good about life at the moment. It's terrific set of results. But can I delve a little bit into the China label, and maybe Xiao Li could give a little bit more because what I see it's a terrific outcome where your sales, though the market is down, you've been able to deliver market share growth of 2.2% to 3%. Now there's 3 -- and that's also in the trend where your Key&A cities are down. Your B, C and D, where you underpenetrated are up. So it just looks to me that China label was an outstanding result this period. Can Xiao Li talk -- there seems to be -- correct me if I'm wrong, there's 3 key buckets to this improved performance. It looks like significant increase in brand awareness through your advertising. Can you elaborate on what the key muscle points were there? And the industry trends toward the a2 seems to be stepping up a lot. Can you give us a bit of an update on that because that seems to be working in your favor, not a competitive threat? It seems to be increasing awareness of a2 -- it seems to be like the ice cream -- you put one ice -- you put 2 ice cream shops next door, it actually brings people to the area. And the other one is the premiumization, which I was skeptical towards given the tough Chinese condition. So can Xiao Li give a little bit more detail because you skipped over those muscle points because it looks to me that China was just a terrific result in that second half?

Yes. Thanks, David. I'll hand over straight to Li Xiao to take you through the 3 points...

Yes. So the -- I mean the market is very tough. But I mean, there is a certain -- I mean driving forces working to our advantage. The first one is, as we shared in the October Investor Day that we are going to step up our investment, building our brand and nurture our brand because, at the moment, I mean this is a critical successful factor that the stronger brand resonate with consumer will ultimately become stronger. So we are benefiting from this step-up investment. And also we increased our investments on the social seeding, we call the social horizon, I mean, the digital marketing plus, I mean, the medical marketing because these practice help us, I mean, to further engage, educate all consumer and address through the brand funnel from -- I mean total awareness to un-aided [indiscernible] engagement and ultimately to try and purchase. And also in October, I mean, Investor Day, we mentioned about -- I mean our initiative for lower-tier city expansion replicates our activation playbook of [ NKA to the RKA. ] We talked about our intensive attack in the high potential programs. All these good initiatives, I mean strategy -- refreshed strategy has been well executed in the second half. It's like the roadshow increased by 9% -- I mean the whole year to 932 events and also the Mama Class, which is important for consumer deeper education, is increased by 37%. And also we have 128 flagship store plus 4,900 [indiscernible] all these well executed strategy actually contributed to our success. And also, I mean, in our campaign -- marketing campaign, you see we have a much clear, simple -- I mean, message -- balance functional message with the emotional message. So this optimized media mix, plus a clear, simple message, [indiscernible]. And that's why you see the big uplift. I mean on the un-aided awareness which is -- I mean what we like to drive consumer engagement rather than only aware. So if you look at a2 segment, I think we have all the competition in the product. So in the last year, there's 68 -- I mean 82 products launched by our competition. So I think it helps to educate, I mean, the consumer. And as David mentioned, that our vision is to build an A1-free world, I mean, where dairy nourish our people and the planet. This is a good news because, I mean, with the more education, we are seeing more consumers coming to the category which is [indiscernible] as a category leader and also the pioneer.

Thanks for that, Xiao. So David, like it is easy to get caught up in the headlines of low birth rate and the market being down [indiscernible] overall. But as you highlight, when you look at the segments in which we play in, from a premiumization point of view, the trend continues. And the ultra-premium segment was up 9% for the period and over half of the market now. And the a2 protein category was up 108%. I'm sure our share went down from 65% to 41%, but we want to advocate and educate the change in promoting the A1 free category. And we're playing in a good space at the moment, and we're gaining share, which is terrific.

Yes, that's the message I was thinking. You're in a bit of a sweet spot in that part. And David, just quickly on changing tactically, but your English label, you did change your approach going from an existing reseller to a CBEC distribution, more strategic ones. Did that -- was that a headwind in this period with that change? I can understand why you want to do it, but did it come as a bit of a headwind that will unlock in '23 or is it not really that material?

Not really. Like it was -- I mean Yohan and team managed that exceptionally well that transition that's been going on really right throughout the whole half, and it started back with Strategy Day well -- even prior to that in terms of developing our strategy and our approach to this. But with growing English label sales by 12% during the period, which is terrific and a big turnaround, obviously, from last year when we were down 51%. So I think it's sort of been a relatively seamless execution. Still a bit more work to be done on it. I think we're better set up for the future in managing the channels to market, which are English label, how they find their way to the ultimate consumer in China. And we will be -- we'll have far less indirect cross-channel selling. Because what was going on, David, was a lot of the product that was going through the reseller channel was being sold indirectly through different layers onto the CBEC platform, and that was creating some challenges for us in managing the overall ecosystem. Now it won't be perfect going forward, but we think that with the approach that we've got now, we'll stream the product through the channels more effectively. And with adjusted pricing and everything across the board to try and make sure, as far as possible, we provide a level playing field for all of our participants in our business system.

You seem to have a lot more control of your business now, David?

Well -- yes, I think a lot more visibility and control. I mean there's a lot of things that are outside our control. But what we can control, David, I think we're in better shape.

Your next question comes from Tom Kierath from Barrenjoey.

Just a couple of quick ones. Just on logic in doing an -- sorry, an on-market buyback as opposed to doing an off-market buyback or introducing dividends. Just given the [indiscernible] over $500 million of franking credits that you've got at the moment?

Yes, Thomas. Mark here. Thanks for the question. So look, the Board has reviewed a number of mechanisms, as you'd expect, including dividend -- special dividend off-market, on-market. And all of those may play in the New Zealand and Australian content in the business. For this particular return, we've chosen the on-market for a couple of key reasons. First of all, it's really similar in the New Zealand and Australian context. It's simple, relatively simple. And it's EPS accretive. But also we feel it demonstrates the improved confidence that the Board has in the strategy, the execution and the outlook. So that's the reason for the on-market. The off-market, of course, is perhaps something that's a little more familiar in Australian context, I won't go into the details here now, but other than to say that from a New Zealand perspective, there are some additional complexities that can come into play with the off-market. It doesn't mean it's not something we'll consider in the future. And then, of course, you're absolutely right. From a dividend perspective, there's substantial franking credits that are sitting with the business. And again, I'll just emphasize that we've chosen this way forward for this point in time, it doesn't mean that those returns may not be available in that mechanism in the future.

Right. That's helpful. And then secondly, just on the [indiscernible] point, with the change in reseller that happened in the half, I think that [ recently did about ] $150 million. Do you think -- are you confident that you can grow the Daigou business like year-over-year? I know that English -- saying English label is up, but is that all going to be kind of feedback? Or do you think that you can actually replace that reseller and grow the Daigou business year-over-year?

I think Tom, the point I guess I was trying to make is the -- there was a lot of cross-channel selling going on. So what we've done -- one of the main impacts that you'll see is -- that you'll see shift towards reported sales in CBEC, which reported in our China and other Asia segment. So you see a more true representation, which region those sales line from our effectiveness and executing there. I think Yohan touched on a number of these points in terms of what we're doing to reengage with -- proactively engaged with our retailers in the first instance, and then also engage directly from the company's point of view with the individual Daigou as well and supporting them with content generation and sales plan opportunities and different things that we're doing across the board. And one of the big -- I think that's a big step for us actually because in the past, we haven't done that directly. I think Yohan and the team is doing a great job there. And one of the leading indicators we look at there is our share of voice, which has increased significantly over the last 6 to 9 months. And for me, that's a leading indicator of potential improvements in market share. So it's hard to predict exactly how the Daigou channel will evolve. You'll see in our materials that has been under pressure, obviously, due to the COVID-19-related impact. But what we're really focused on is improving -- growing our business and improving our share within the channel because it's a really important channel for us in terms of new user acquisition and getting our brand message across in a really effective way.

Your next question comes from Larry Gandler from Crédit Suisse.

Very comprehensive presentation, appreciate that. A couple of questions from me. First, looking at your price increase slide, it does look like it's -- this is on Slide 41. It does look like it's drifting up, David. Just wondering if you can give us an indication as to how strongly do you think unit pricing will move up in F '23, given there's a lot of cost of goods pressures coming through in freight, things like that?

I mean you're referring to the English label pricing that we included in showing the recovery in that and a little bit of volatility recently. But I might ask Yohan to talk about English label pricing -- I mean it's -- just in the market and how we see that evolving?

Yes. So I guess if we first look at how things evolve in FY '22, you're right, there has been an increase in the first half. We knew there was a challenge associated with trade inventory and that was having an impact on market pricing. But as we progressed into the second half, that has improved markedly, which you can see. As we got forward, in FY '23, of course, the -- one of the key things will be with our new Platinum product. There is an increase in the RRP associated with that product. And what we would expect to see is that would proportionately be reflected in the different layers of the value chain that you have on Slide 41. So we would expect that the market pricing would increase. What we want to do, though, is be careful around how we -- continue to be careful around how we allocate supply to make sure that we are able to maintain margins at the different layers of the value chain. So we'll continue to do that. But yes, you would likely see an increase if -- for no other reason, but because the RRP of the new product is higher than the old label Platinum product.

And higher -- we wouldn't be talking double-digit higher being more modest than I imagine?

Well, if we took RRP, just to give you an example of RRP. So if you -- in Australia, if you look at the RRP of our new product, which is on shelf now, Stage 1 and Stage 2 have increased by around 6%. And then Stage 3 and Stage 4 have increased by close to the 13%. That, of course, is driven by a combination of factors. There's, of course, increases in costs associated with manufacturer of the product, plus the reformulation as well, which has had an impact. But yes, that's the increase in the RRP of the English old products, new label versus old label.

Which is not available to the market?

Not available to the market.

If I can ask a second question on O2O. I don't really understand that whole supply chain. If you could just educate me on how that supply chain works and maybe some of the factors for successful execution there?

Got it. Got it. So perhaps just to explain about O2O, maybe the best analogy I could use would be similar to a car showroom, right? So in China, the -- under the O2O model, there'll be showrooms of English label products where there'll be point-of-sale materials. And a consumer will walk into these showrooms to discuss the product and then ultimately put through an order. But like a car showroom, the car may not be -- is not available for sale there, the order is actually put through the cross-border e-commerce protocol and is ultimately delivered via that protocol to the consumer's home address. So -- of course, the benefits of that model is that, there is a physical aspect to it, which in English label, the cross-border e-commerce typically doesn't exist, but it still works under the cross-border e-commerce protocol itself.

[indiscernible] channels as you've got those dedicated stores at MBS...

Yes. So there -- even within O2O, there are different classes or segments of O2O that we look at. So one element is what we would call our national key accounts for [indiscernible] MBS stores that would have our channel label product, but also offer our English products as an O2O offer alongside us. And if you recall back to our investor presentation, when we conducted the pilot for these, we saw actually that the net overall sales in those stores actually increased when selling both English label and China label together. That's one store model, then there's also what we call classic cross-border e-commerce O2O. These are stores like, [ Mum time. ] These are major key accounts, where they are specifically dedicated to selling a cross-border product via the O2O mechanism. And then lastly, what we refer to as say, the long tail of O2O stores. These are quite small networks, maybe 1, 2, 3, 4 stores in the network that operates under the O2O model. These are different segments, and we -- in that presentation, I alluded to using the ANZ and the CBEC teams to attack this segment. And that, as you can imagine, there are certain parts -- certain elements of that segmentation that are most appropriate through our China team, particularly national key accounts where we have China label relationships, and we want to leverage that, of course. But there are other parts in the model -- other parts of the channel that are better attacked differently.

Okay. Great. That helps. It sounds like there does need to be some collaboration between [indiscernible] team and your team in penetrating those retail establishments?

Absolutely, right? Because it's -- as I said, there are different segments of the opportunity.

[indiscernible] growing significant...

28% last year...

Yes, I noticed that...

[indiscernible].

Your next question comes from Matt Montgomerie from Forsyth Barr.

I'm just checking you can hear me, okay?

Yes, I can, Matt. Thank you.

Firstly, well done on a solid result. Just a couple of questions. Firstly, on the EBITDA margin guidance for '23. You're guiding to modest improvement on FY '22 despite the second half being down given the increase in marketing spend as you guided. Given this marketing spend makeup, how big do you think we should think about the intensity as a percentage of sales? Is it more appropriate to look at it on a full year basis as a reasonable base to head into '23 and beyond as opposed to the 2H '22 number that you reported?

Consistent with our strategy, we are going to quite step up this year, we are going to progressively invest in our brand and above the line and below the line. [indiscernible] we plan to increase it, we haven't given any specific guidance on the reinvestment rate. If we gave that, we'd be probably telling in the number or close to because we've given some guidance on our top line being up by high single digit. So while a little bit of flexibility around that. If things going well, and we're seeing continued good response to our marketing campaign, then we might invest more. If things aren't working so well, then we'll make some adjustments and work on the effectiveness of the spend as well. So we're not providing anything specific in relation to that. The one thing we did know though, however, is the phasing of it because it's quite different between the 2 halves in terms of how that's going to show up because we had a [indiscernible] in the second half of FY '22. And more evenly balanced between the 2 halves in '23, but slightly skewed to the first half whereas Yohan said, we're launching our English label refreshed product, and we're also -- got more work to do on our brand and then positioning work in China as well. So the first half marketing spend will be weighted that way, and it's one of the key drivers of the -- why we set out EBITDA margin would be [indiscernible] second half versus the first half. I hope that helps to provide some color.

No, that's great. And then maybe on CapEx, there's a couple of comments through the release around guidance for '23, excluding any substantive investments to further develop the New Zealand and China's supply chain capability. Similar comments were made at the Investor Day in 2021. Just wondering if you could please expand on these comments and how you're thinking about that going forward, particularly given the way the market's moved in the past 10 months and the development of your strategy, et cetera?

Yes. So I just want to be referring this, we called out what the $25 million per [indiscernible] CapEx, which is slightly elevated because of some of the work we got going on at the moment in Australia [indiscernible] as well. But what we're saying is that we're not including any substantive investment in developing our supply chain in New Zealand and China. That $25 million doesn't include that. I mean as you know, when we acquired MVM, we committed to installing laboratory capability. And we've also made it pretty clear that we intend to invest in blending and canning capability at the site as well. And that's work in progress at the moment, going through the planning phase on that. So that could end up being quite a significant CapEx investment over time. I don't expect a lot of that would fall into this coming financial year just because of the lead time on execution of that. In addition to that, we are looking at other opportunities in New Zealand and China to accelerate our supply chain capability, whether that be in blending and canning capability [indiscernible] within New Zealand and China. And also part of our strategy was also to -- importantly, to gain greater access to China label registration. Now one other new for that is to -- which is our baseline plan to continue with the MVM capability build and apply for China label registration as well, once that's in place with the support and assistance of our [indiscernible] partner, China Animal Husbandry Group in that regard. That's going to take some time. And when you go back to our strategy materials, you'll see that our portfolio was -- it's very focused on -- it would be great to have the opportunity to innovate more in China label beyond our new formulation, which is coming shortly. To appeal to greater segments in the population as well as manage trade different channels, et cetera. So we'd very much like to have -- and we're currently working on gaining greater access to China label registrations over time. The other opportunities to do that is through M&A. So we could potentially acquire a facility with China label registrations and over time, reformulate, rebrand, et cetera, we're going to be really careful how we do that and understanding compliance with some processes, et cetera. There are opportunities for that in New Zealand and in China and other companies have done before. So what we're saying is we're not including in that CapEx -- that organic CapEx figure or potentially any M&A acquisition costs down the track. It's just not included in that. We're just highlighting that. And of course, if we're entering through the M&A transactions, we would update the market at the time of [indiscernible].

Your next question comes from Adrian Allbon from Jarden.