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

Thank you for standing by, and welcome to the a2 Milk Company Limited HY '23 Results Release. [Operator Instructions] I would now like to hand the conference over to Mr. David Akers, Head of Investor Relations and Sustainability. Please go ahead.

Thank you, Ashley. Starting on Slide 3. On the call today, we have David Bortolussi, our Managing Director and Chief Executive Officer; and Dave Muscat, our Chief Financial Officer. We also have the leaders from our regions, Li Xiao, Yohan, Kevin and Blake. The team will present the results and our outlook, and there'll be time for questions at the end. I'll hand over now to David Bortolussi.

Thanks, David. Good morning, everyone, and thanks for joining the call. Before we get into our presentation, I'd like to start by acknowledging the significant impact from the recent flooding and cyclone in parts of New Zealand and those affected by these events. The loss of life, impacts on livelihoods, damage to homes, infrastructure and local communities has been devastating. Farming communities, including some farmers supplying our A1 protein-free milk and also some of our own teams have been impacted, and we're in regular communication with our partners and pharmacists to provide support where needed. We appreciate all the work the emergency services, Ministry for Primary Industries and the broader farming community are doing. We've also had many farmers in Victoria and prior to that in New South Wales impacted both flooding events recently. Farming communities are very much at the backbone of our business, and we'll continue to support our farmers and the communities in which we operate through these difficult times. So with that said, I'll move on now to Slide 4 and move on into our interim results presentation. It's been another busy half for the a2 Milk Company, and there's a lot for us to share and cover today. This slide summarizes the key messages in relation to our interim results. Firstly, I'm pleased to announce that our first half result was in line with our expectations with double-digit revenue and earnings growth. In particular, we're pleased to note that we delivered total IMF sales growth of 18% despite a very challenging China IMF market, which was down 12.5%. Our overall growth was driven by China label IMF sales, and we achieved record market shares in the MBS and DOL channels. We've also just received the results from our brand health tracker, and pleasingly, China brand health reached new highs driven by increased investment and higher impact marketing campaigns. We've also continued focusing on building a strong innovation pipeline with recent new product launches in all categories supporting growth. Finally, as announced on Friday last week, our new China label IMF registration process remains on track. Moving to Slide 5. The results we're reporting today are in line with our expectations. Revenue for the half was $783 million, which is up 18.6%. EBITDA was $107.8 million, up 10.5%, representing a margin of 13.8%. Our net profit after tax, including the noncontrolling interest relating to China Animal Husbandry Group, 25% interest in MVM was $68.5 million or $73.8 million, excluding CAHG's proportional MVM loss. Our closing net cash position was $707 million, so the balance sheet is in a strong position, which is also after completing 60% of our on-market share buyback in the half. This slide also provides a high-level summary of regional and product revenue performance, which the team will cover off in more detail in the presentation. The key messages are that we achieved revenue growth in all major product segments, driven by continued improvement in execution against our refreshed growth strategy and that this growth plus our distribution model changes have led to a significant shift in revenue from our ANZ to China and other Asia segment. I want to spend some time now discussing what we're seeing in China IMF market and how we're positioning ourselves. Clearly, the market has been impacted by a further decline in the number of births. There was a further 10% decline in the last calendar year, which follows a 12% decline the year before. In the first half of '23, the overall China IMF market declined 11% in volume and 12.5% in value terms. This reflected the decrease in birth and the rolling impact of fewer births in prior years reducing Stage 3 IMF sales, which is the largest segment of the market. We're also seeing a variance in growth rates between Key&A and BCD cities, but the market declines are now nationwide with Key&A market value sales decreasing by 15.4% and BCD market value declining by 10.1%. Looking at the category from a China label and English label perspective, China label market value declined 12.2% with the MBS channel down 9.8%, but DOL up or domestic online up 4.4%. English label market decline again exceeded the overall market down 15.7%. However, the market shift from English label channels to China label channels was less pronounced than in prior periods. Within English label channels, daigou continues to experience strong declines, down almost 40% in the half; O2O was down 14.5%; but conversely, CBEC was up just under 12%, creating a significant mix shift across English label channels. We predicted many of these shifts in developing our strategy, but the extent and speed of change has been very challenging to manage, particularly when COVID-19-related impacts are layered on top. Moving to Slide 7. This slide shows that our IMF sales mix has evolved significantly over time and is now almost 50-50 between China and English labels. We also highlight here the positive trends supporting our growth. Within China label channels, we continue to be supported by the mix shift to the ultra premium segment where our a2 [indiscernible] brand is positioned; the rapid growth of the a2 protein segment, which continues to outpace the market and represents over 10% of the category; and increasing brand concentration with the market moving towards the top 10 brands, which have gained 6% share over the past couple of years with a2 being one of those brands. Turning to Slide 8 and our outlook for FY '23. We expect the increasingly challenging China IMF market dynamics to continue due to the following key factors: fewer births in calendar year '22 and the rolling impact from fewer births in prior years on later-stage IMF products; the evolving English label channel dynamics; and a degree of disruption from the market transitioning from the current new China label GB registered product during this calendar year. Despite challenges in the China IMF market, we're expecting low double-digit revenue growth in FY '23, supported by growth in China label IMF, ANZ fresh milk and our U.S. liquid milk sales. English label IMF revenue is expected to be broadly in line with FY '22. MVM sales are expected to be down on FY '22 reported sales due to higher in-sourcing and lower GDT pricing. It is also important to note that the positive impact of foreign exchange rates and revenue growth is less than what we expected when we provided our last outlook update in November last year. Our outlook for gross margin percentage is slightly higher than in FY '22. EBITDA is expected to grow in FY '22, while EBITDA margin percent is expected to be similar to FY '22. Distribution costs are expected to be higher in the second half of '23 compared to the first half due to higher costs associated with China label stock build and transition. Marketing investment, along with SG&A, expected to be significantly higher than FY '22 as the company continues to invest in its brand, capability, science, innovation and sustainability consistent with our growth strategy. As Dave will shortly note, as we called out at the end of the full year result in August last year, our FY '22 cash conversion was high due to the timing of payments in China, which was impacted by COVID-19. In the second half of '23, we also need to manage the timing of the working capital built to China label. So overall, we're expecting cash conversion in FY '23 to be significantly lower than FY '22, returning to more normalized levels in the future. Slide 9 shows our strategy on the page. We first shared this with you back in October 21, with incremental changes since then when we updated our purpose and vision. Otherwise, it remains unchanged and it is how we articulate internally and externally our purpose, vision, goals and strategic priorities. Moving to Slide 10. We've expanded the presentation on this slide slightly to show you the nonfinancial measures of success as well as the financial measures and how we are tracking. We've also shown how this ladders up to the overall goals for people, planet, consumers and shareholders, which also forms the basis of our group performance scorecard and our integrated reporting. Slide 11 is another one we've used regularly. With our interim results today and FY '23 outlook, we are on track to achieve our medium-term ambition to grow sales to $2 billion and to improve EBITDA margins over time in the teens. One change here is that we have noted that English label IMF is a work in progress, mainly due to challenging market and channel dynamics, but I would also note that China label IMF is ahead of plan. Next, I'd like to highlight how our focus on innovation recently has gained momentum. We launched a number of new products in the past 6 months, our refreshed a2 Platinum English label IMF range, our Lactose Free milk in Australia, China label a2 Nutrition for Mothers, our upgraded a2 Smart Nutrition and our new full cream milk powder in a tub. We've also recently commenced the trial in the U.S. for protein and collagen nutritional powder range on Amazon, and we'll be launching a2 Milk Grassfed in the U.S. in March. I'm especially pleased with how the team has managed the phase-in of the refreshed a2 Platinum IMF range and the phase out of the previous range successfully across English label channels within the half without significant market disruption or inventory exposure. Moving to the update on our important China label new GB registration process on Slide 13. We were pleased last week to receive confirmation that the MPI audit process on behalf of SAMR will commence this week at Synlait's Dunsandel facility, following completion of the dossier review process in December. We've been working closely with Synlait in relation to the process, including building stock of existing China label product, which has been completed to plan prior to the 21 February manufacturing industry cutoff date tomorrow to assist with our transition program in the second half of '23 and the first half of '24. Finally, I want to highlight the continued progress we're making in sustainability. In keeping with our purpose and vision, we're determined to pioneer the future of dairy for good. This is especially evident in our goals for the people and planet. We're continuing to invest to significantly reduce our Scope 1, 2 and 3 greenhouse gas emissions. In the half, we progressed the installation of a new 100% renewable energy supplied high-pressure electrode boiler at MVM, which is due to be completed in October this year. The team has already received a number of awards for this project, and it was -- it's really a market-leading implementation in the New Zealand market. We also commenced the preparation for a methane inhibitor feasibility study in Victoria, working with Sea Forest CRS and utilizing their SeaFeed product, which is a methane inhibitor from the asparagopsis seaweed. We remain committed to making a meaningful contribution to be nature-positive and making meaningful change in packaging. We're also proud of our partnerships and continue to support communities in need during the half. I'll now hand over to our new CFO, David Muscat, who joined us in October to take you through our group financials in more detail.

Thanks, David, and good morning, everyone. Moving to Slide 16 and a summary of our group income statement. Net sales revenue was $782 million for the half, up 18.7% on the corresponding period. Our China and other Asia segment grew substantially, up 54% with strong underlying performances in both China label and English label IMF. This segment now makes up 60% of our total revenue compared to 46% in the prior period. The USA segment was up 61.8% and MVM up 18.4%. The ANZ segment declined 24.6%, which, as I'll discuss shortly, reflected the challenging China IMF market along with the actions we've taken to continue refining our English label distribution model with sales more weighted to the authorized CBEC platform. As we updated the market in November, it's also important to call out the FX -- that FX had a favorable impact on revenue in first half '23. Due to New Zealand dollar weakness during the half, foreign exchange movements led to an increase in revenue in the order of $35 million and to an offsetting increase in cost of doing business, including our hedge losses, resulting in a minimal impact at the EBITDA level. Going down the income statement. Gross margin of 47.6% was up 1.3 percentage points, reflecting the benefits from the a2 Platinum refresh positioning and distribution model changes, price rises and the cycling of other nutritional stock write-downs in the first half of '22. This was offset by increases in COGS that included unfavorable FX. Distribution costs were slightly lower, reflecting the mix benefit from lower sales to ANZ resellers compared to CBEC and lower U.S. freight rates in the current period. We significantly increased our investment in marketing and SG&A compared to the prior corresponding period, in line with our plans to execute against our refreshed growth strategy. Higher interest rates led to higher interest income and the effective tax rate was in line with FY '22, impacted by unrecognized tax losses for the U.S. and for MVM. Net profit after tax for the half was $68.5 million or $73.8 million after noncontrolling interest in MVM, a loss of $5.3 million for the half. Slide 17 summarizes our segment revenue and EBITDA performance versus first half of '22. As mentioned earlier, the China and other Asia segment is up 54% on the prior period and is now our largest segment in terms of sales and EBITDA. Moving to Slide 18, which summarizes our first half '23 performance versus first half '22 from a product perspective. In all categories, IMF, liquid milk and other Nutrition, we achieved double-digit growth. IMF was an especially strong performance given the 12.5% value decline in the China IMF market overall. Moving to Slide 19. Consistent with our growth strategy, our marketing and capability investment has increased significantly. Marketing investment is up 46% compared to the first half of '22, which reflects our continued focus on China, timings of campaigns and new product launches. Administrative and other expenses increased 15.8% to $115 million. This reflected further investment in capability and innovation, normalized LTI expenses, foreign exchange losses and higher travel following COVID-19 disruptions. On Slide 20, the balance sheet remains strong. Cash and term deposits at the end of the period was $777 million, with a consolidated net cash position of $707 million. It's important to note that as we manage our China label IMF transition, we needed to build China label IMF stock during the half. From a balance sheet perspective, this has resulted in our inventory being higher and our other current assets being higher, primarily due to prepayments for China label stock. Another key point to note from a cash perspective is that we utilized $90 million in cash to complete 60% of our on-market share buyback in the half, which we plan to resume. The final item I'd like to call out with regards to the balance sheet is that trade and other payables are lower. This is mainly due to the timing of annual rebate payments in the first half and also, as David mentioned earlier, due to FY '22 catch-up payments in China. This is related to COVID-19 impacts in FY '22 and was outside of our control. It was called out previously that this would unwind in the first half of '23, and we're pleased to have caught up in this important area. Moving to the next slide, which includes our cash flow. Again, the key call-outs for cash flow were the points I made on the balance sheet, where operating cash flow reflects the unwinding of working capital benefits from the second half of '22 and stock building of China label IMF in the current period. Both drivers are temporary, and we should see a return to more normalized cash conversion in the future. With that, I'll hand over to Li Xiao to take you through the strong performance of our China label IMF business.

Thank you, Dave. It has been another very busy 6 months in China. But as David mentioned at the start of the presentation, the China IMF market has been very challenging. We are fighting strongly and getting ourselves very fit. So when this one passes, you will see we will be in an excellent position. Today, I want to give you a few of the highlights from the first half 23 for China label. Some of the progress we have made recently includes launching of our new brand proposition, a2 Milk Base Matters, coupled with more disruptive PR and greater integration. We have increased activation coverage for regional key accounts. We increased offline distribution in lower-tier cities and further refined approach to new user recruitments. We have also increased our level of investment in digital and online and expand it into emerging online channels. This is having a very positive impact on the business, which I will take you through now. Turning to Slide 24. The overall China IMF market was down 12.2%. MBS was down 9.8%, while DOL was up 4.4%. But our China label sales for the half were up 43.5%, reflecting the strong execution against our strategy, some benefits from pricing and the revalue helps from foreign exchange. Basing our results, I also want to point out that the first half '23 revenue includes some increased sales late in the half to mitigate potential COVID-19-related disruptions in China and also relatively early Chinese New Year. Growth with the corresponding period also reflects cycling of actions taken in first half 2022 to rebalance channel inventory. Moving to Slide 25. Here, you can see we continue to expand our distribution footprint. We increased our numerical distribution from 23% to 26% and our weighted distribution from 44% to 47%. We are also pleased to have again improved our like-for-like growth in mature stores. On the next slide, you can see our share in MBS has increased to 3.2%. We still over-indexed in Key&A cities with share going to 7.4%, but we are growing faster in BCD cities with a 32% increase to 2.5% share for the half. We are particularly encouraged by our BCD performance and continue to be focused on capturing our opportunity in these lower-tier cities. Turning to Slide 27. Our online growth outpaced offline sales growth. We significantly increased our overall DOL share to a new high of 3% and really close the gap between our MBS and the DOL share. We also achieved strong growth within the key DOL platforms of Tmall and JD, while unlocking growth potential in other platforms, Douyin of TikTok, in particular. I never thought I would be selling product on TikTok, but here we are. It's lucky I have a very talented team to execute on these online platforms. So to put all that in context, Slide 28 shows that we are in the top 3 share gainer among domestic and international brands in both MBS and the DOL channels. Slide 29 shows that we have gained share in all stages across MBS and the DOL. It's important to us that we recruit new users across all stages. And given our strong loyalty performance through the brand funnel, early-stage new user comment is especially important. Slide 30 shows that China label performed strongly in Double 11. We increased sales by 76% online compared to last year, improved our ranking from 10th to 8th in Tmall DOL flagship store compared to June 18 and maintained our #2 position in TikTok from June 18. On Slide 31, we explained the relaunch of our brand proposition. In FY '22, we have a successful campaign highlighting the functional benefits of a2 China label and A2 Platinum English label IMF. So in second quarter '23, we relaunched our brand proposition to further emphasize the benefit of a2 protein. This was integrated across channels. The campaign received a gold award at the China International Advertisement Festival. Again, I'm very lucky to have such a talented team. Moving to Slide 32. With the brand proposition relaunch and all our other activities in the half, we are very pleased to see this hard work translates into new highs in our brand metrics. Total awareness is up to 63% and the trial and the loyalty has also increased. Now I will pass to Yohan.

Thank you, Xiao, and good morning, everyone. We are also pleased with our performance in English label given the significant challenges in the market in the first half. I will quickly highlight some of the progress we've made in the business. A major focus in the half was the transition to our refreshed a2 platinum range across all English label channels, which we supported with a digital-focused consumer campaign in China together with offline events and reseller marketing support in Australia. Another major focus was the refinement we continue to make in our English label distribution model. We also built capability by embedding dedicated teams to focus on O2O coverage growth, leveraging our China offline network and activations. Let's go through the results itself on Slide 34. The overall English label market in value declined by 15.7% in 1 half '23. This was driven by a sharp decline of 39.5% in the daigou channel. O2O channels serviced by ANZ resellers were also impacted. Conversely, the CBEC market benefited from the shift to online channels, achieving double-digit growth. Our net sales revenue was up 1.0% to $285 million with a major shift within English label channels, reflecting the continued refinement of our English label distribution model and the deliberate shift in sales to CBEC authorized distributors from ANZ resellers. While our ANZ IMF revenue decreased 39.2% to $109.4 million, sales from CBEC and other labels increased by 71.5% to $175.6 million. This also reflected some benefit from pricing from the refreshed a2 Platinum. Given the evolving market dynamics and challenges, we're pleased that our market share has improved in CBEC and stabilized in daigou. Slide 35 shows we've increased share in CBEC to 22.1% and marginally increased share in daigou to 19% after 4 consecutive periods of market share loss. The CBEC market value share would have been elevated to some extent by sales of both old and new label a2 Platinum during the transition between the two in 1 half '23, and O2O share is stable. Moving to Slide 36. As you all know, Double 11 is an important selling event and has the potential to be a difficult event to manage given the product transition and distribution model refinements we were making. We're pleased to have performed well in Double 11. We increased sales by 4.8%, maintained our #1 ranking in CBEC IMF flagship stores and achieved #2 SKU in both JD and Tmall Global EL Top Seller List. We also achieved #1 ranking in English label IMF stores on TikTok. Slide 37 shows some of the activities we undertook to support the launch of the refreshed a2 Platinum range. The images on the left show the direct engagement and support for the daigou community in Sydney and Melbourne, and. The images on the right, our China consumer campaign, including video testimonials from key opinion leaders and WeChat content campaign via the daigou channel. We've built our own in-house capability managing these channels to continue delivering against our strategy. I'll now hand over to Kevin.

Thanks, Yohan. Starting on Slide 38, ANZ liquid milk. The key point to make overall is that, as we called out the decline in first half '22, our sales benefited from COVID-19 lockdowns. This is because the vast majority of our sales are derived from in-home consumption. With COVID-19 restrictions ceasing in second half '22 and coupled with pressure on household consumption from interest rate rises and inflation in the first half '23, we experienced challenging market conditions. That said, we're pleased with the progress we've made delivering against our strategy, including the increased distribution of a2 Milk UHT, the successful launch of a2 Milk Lactose Free, bringing new users to the brand and have commenced preparation work for an on-farm seaweed feasibility study to support methane emissions reduction. Taking a look at our results on Slide 39. Sales increased 5.6% to $92 million. In response to higher raw milk prices and other input and logistics costs and net of cost reductions, our prices increased in response to the higher costs. Our sales growth was supported by new products and some favorable foreign exchange movements. That said, the challenges included overall category volume declines, with the prior corresponding period benefiting from lockdowns and, in this period, inflationary pressure leading to consumers trading down. Reflecting this, our market share declined to 11.4%, but I will point out that this is still at a very healthy level and above our share before COVID-19 and the associated lockdowns in Australia. In fact, over that COVID-19 period while the market volume for liquid milk has decreased 3.7%, our sales were up 2.7%, driving market volume share to increase from 6.6% to 7.1%. Slide 40 highlights something that we've been really excited about, the launch of our new Lactose Free Milk, which has exceeded our expectations. We launched this product in August 2022 in New South Wales and Victoria and achieved a 12.3% market share and top status in Australian grocery in 2022 as new product development launch of the year in the dairy milk category. And with that, I'll hand over to Blake.

Thanks, Kevin. Slide 41, as you'll see, outlines progress made during the period against our strategic priorities in the U.S.A. In particular, we've been most pleased with the progress in 3 key areas: firstly, in demonstrating progress on the path to profitability; secondly, in building distribution and consumer engagement on both a2 Milk Half and Half and Hershey's a2 Milk in both extended shelf life and UHT formats; thirdly, the robust portfolio of innovation, including a new nutritional powder trial and a new milk line from 3Q 23. Now turning to Slide 42, you'll see that our revenue has increased by 62% to $52.4 million, and we achieved a significant improvement in our EBITDA loss. Sales growth was driven by modest growth in core liquid milk, increased distribution of new products and favorable foreign exchange movements. Our earnings improvement reflected revenue growth, improved distribution rates and lower marketing spend. Our market value share in the premium milk category for the grocery channel increased to 2.3%. Now moving to Slide 43, we'll talk a bit about the USA IMF opportunity. During that period -- during the period, we also received confirmation from the FDA that our application for enforcement discretion to import, sell and distribute IMF products from New Zealand into the U.S.A. had been approved. We continue to assess this opportunity. We intend to pursue longer-term FDA approval of a2 Platinum while we are also carefully considering market entry options. There are some major challenges given the market structure and development since the initial IMF supply shortages in 2022 as well as the regulatory approval process, but I'm hopeful we'll be able to navigate through this to create a meaningful opportunity for our U.S. business in the future. I'll now hand it back over to David.

Thanks, Blake. Quickly on MVM to round out the first half results. The sales increase versus PCP reflected 6 months under our ownership versus 5 months in the first half of '22. The EBITDA loss of $13.4 million reflects the current production mix with MVM, primarily selling lower-value milk powders on the commodity market compared to a reported loss of $10 million in the first half of '22 for 5 months or a loss of $14.4 million on a 6-month basis. MVM has continued to progress its transition to in-source additional full cream milk powder from Synlait and is prioritizing in-sourcing skim milk powder in certain existing English label IMF products. MVM will also focus on driving future innovation in nutritional products for H2. Accelerating MVM's path to profitability by FY '26 or earlier remains a key strategic priority for us. That takes me to the end of the presentation. And just before we open up the Q&A, I'd like to express my thanks to our team at the a2 Milk Company and our partners for all the efforts and achievements in the half, particularly our China team and our important strategic partner, China State Farm, during the December and January period when COVID was at its most challenging. With that, I'll now pass back to David Akers for Q&A.

Thanks, David. I'll ask that when we take questions, they're limited to 2 questions, and then please rejoin the queue. Ashley, can you please open up for questions?

[Operator Instructions] Your first question today comes from Sophie Carran with Goldman Sachs.

First, just around the transition to the new China label product. Can you just give us a little bit more color around the expected timing of the launch? How much of an inventory buffer you've built up? And then looking at the market, how much you've already seen transition to the new product?

So in terms of the timing of the transition and inventory, so I mean it's a long extensive process, which we've been working for some time now with really closely with Synlait. We went through the dossier review process in December. The audit is obviously starting this week at Synlait's Dunsandel facility. It's hard to be certain how long that audit process will take. It depends on the interaction between both parties on that. But I mean, I think it would be reasonable at this stage to expect that we would be hopefully through the order process by the end of the March quarter. And then hopefully, during the fourth quarter, we would receive approval from SAMR, but there's a long way to go through that. That would then enable us to move into production with Synlait perhaps like in the fourth quarter and into the first quarter of next financial year with the transition to our new product during the first half of '24. I won't go into the specifics of the inventory that we've built. But suffice to say that we've built enough industry, which has been completed to plan with Synlait having regard to our demand forecast for the period and supply from Synlait to cover us through that transition in an orderly way. And that's some of the sort of cash flow impacts that David talked about in terms of how that's impacting our balance sheet and cash flow during the year. So -- and from a market transition, you asked about that. I mean, there have been -- I mean, there are hundreds of brands and labels which are subject to the new GB registration process at the moment. There have been both approvals of -- more so of China's domestic players and manufacturing facilities, but there also have been approvals of multinationals China facilities as well as international facilities. From a New Zealand perspective, to my knowledge, nobody has been approved as yet, although a couple of order processes have also commenced and ours is commencing shortly. So from a market point of view, Xiao, do you just want to comment quickly on the market? We're just starting to see new GB product transitioning in the market, but we expect that to accelerate through the balance of this year, I expect.

Yes. We probably are seeing -- I mean, the local brand is faster, I mean, in taking a long -- being closer to the market and get early approval on -- compared to us earlier. But for most of the M&C, I think we are on the almost the same page, yes. And everybody is building a certain amount of inventory before the approval in precaution for the transition period. So probably we are pretty on par with the M&C well. I mean local brands enjoy the benefits earlier.

And Sophie, we've indicated in our outlook statement like this is a major event for the whole market transitioning from ultimately GB product during the course of this calendar year. So we think we're well prepared for that in good shape, and our performance in our China label business would suggest that as well. But it's going to be a challenging period for the industry and ourselves whenever we get through.

That's helpful. And then just my second question is around the marketing investment. Can you just talk about some of the key areas of investment and then the phasing of that spend, first half to second half? Do you still expect that to be slightly first half weighted?

We haven't provided explicit guidance on our marketing investment in first half versus second half. You're probably referring back to -- at August, we've tried to elevate that up a little bit. We've said that we expect marketing investment to increase significantly year-on-year. I mean, it will be broadly similar to our first half, but it really -- it just depends on a variety of factors and whether we are able to -- we've got plans for our marketing for the year, and we may need to tweak those around a bit depending on the situation. For example, we've had COVID impacting timing and marketing and things like that, but it's going to be -- it will be broadly similar, which would represent a significant increase in our marketing investment. There could be up, down or sideways, we'll see how that plays out.

Your next question comes from Tom Kierath with Barrenjoey.

Just a question on the revenue guidance, which implies a pretty big slowdown in the second half. The China label business looks like it's going really strongly. I'm just interested on what you're seeing in daigou and whether you're expecting that to be quite weak this half. I just would have thought with orders reopening, et cetera, you actually see a bit of growth there. But have you seen that? How are you thinking about that business?

I'm on the daigou channel in our business, and I might just hand over to Yohan to have a discussion around that, Tom.

Yes, I guess in terms of daigou, obviously, the last few months have been particularly challenging with all the COVID disruptions for the channel. As you said, I'm quite excited about the prospects of international students arriving to Australia and New Zealand. I guess the only aspect of that is it may take a bit of time for that to show up in IMF and daigou activity. So for example, tourism hopefully will resume. But if you look at slight movement, say, for Melbourne Airport, while 6 of the major mainland Chinese airlines have resumed flights to Melbourne, the supply capacity is only still expected to be around 50% in March. So there's still a way to go. And whilst the changes in the international student policies by the Chinese government may result in some flows of international students to Australia, I guess the question is how many will be able to arrive in time for the first semester. So -- and then lastly to that is, I guess, the question of whether the next generation of daigou will operate the same as pre-pandemic with daigou. So I guess, in a nutshell, Tom, I'm excited by the prospect, but also I think we're also mindful of the fact it may take some time for that business to renew itself.

Yes. Okay. And just maybe on that point, you guys have done a lot of work understanding who is actually consuming the product. Do you think that the daigou customer is incremental and those sales will be incremental? Or do you think it will effectively cannibalize the China label business when it does come back?

I think that there are some distinctions between the China label consumer and the English label consumer. And some of the past work that we presented, say, in the Investor Day presentation as well. The research shows that there are distinct consumer sets that go for China label and English label. And in fact, when we look at selling our English label and China label products side-by-side as an O2O offering in offline stores, we see overall sales actually growing. So I don't necessarily see it as a cannibalistic situation, but rather a different customer segment that we can approach via the English label products.

Tom, I'd add to that, doing consumer research [indiscernible], we don't see a lot of switching between the 2 labels. And then also within the English label channel, I mean on the one hand is consumer pool and brand marketing that we do, but there's no doubt that the daigou from a push point of view can actually drive our business well, and we've seen that work very well in the past. So I think we can very much be incremental. I guess at this stage, we're not clear about the potential impact of that honestly. But if it does read, I would assume that a fair chunk of that will be.

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

The -- can I just -- can I clarify your comment following on from Tommy's question about the sales. Can you give a bit more detail with regard to how much your sales increased latter part of that second half or the first half, I mean, because of COVID? And relative to Chinese New Year, was that a meaningful number that -- and also the foreign exchange? Can you give us a bit of -- so as we can work out what the underlying growth was in China label?

Yes. I'll try and help you with that. So on the -- at the end of the second quarter, I mean, definitely, there was -- COVID was obviously -- pretty extreme impact after restrictions were lifted, and then we had the early Chinese New Year. So we -- again, we performed well during that period. Our sales lifted late in the fourth quarter. And also, we wanted to ship a little bit more in just to make sure that we're well covered because who knows how logistics would have potentially been interrupted. But versus our fourth quarter performance last year, which we spoke about last time we caught up on this, we think that was more material when we look at our share numbers. So we think that's more substantive. But I mean it's -- no doubt there was something at the end of the second quarter, but we don't think it's that material. Whereas the fourth quarter, we think that when we look at our share numbers, it did bump up off-trend trajectory during that quarter. And we think that part of that would have been pulling forward in effect through pantry loading. Because when the China lockdown happened, there was a degree of panic buying at that point. So part of that would have been going toward our existing consumers, but other brands in the market were short of inventory at that time and retailers. So we would have switched some consumers into our brand. Maybe we retained some of them, I hope, but some of them might have reverted back to the other brand, particularly in Stage 3, where mothers and parents are generally more willing to -- for their infants to switch between brands. So we think that was more material. In terms of currency, we quantified in our announcement that the currency impact that happened in the first impact -- first half versus PCP was in the order of $35 million. And if we break that down, around $5 million was associated with MVM, which has kind of different economics associated with it. The other 30% is roughly split 50-50 between transaction and translation. And so the main transaction exposure we faced is in our China label business. So half of that roughly $15 million is attributable to the China label business. Does that help?

It does, it does. And I suppose my second part question, the part that you -- I remember Li Xiao and Yohan talking, your #1 focus in the -- for the next year or 2 was your brand health metrics, and that sales will come after that. You must be absolutely thrilled with that brand metrics the way that's going. Maybe a bit of a comment from Li Xiao and Yohan about the sustainability of that growth in brand health. And the second point to that is, look, where does daigou fit in with all of this? Is daigou just -- I'm struggling, David, with the strategy with daigou. I know that you want it, but can you really have it with a growth in CBEC -- direct CBEC. I'm just wondering where daigou fits in with this whole overall strategy, because I'm just a bit confused where it all fits in at the moment.

I just want to make a couple of remarks, and then I'll hand over to Xiao and Yohan. So on brand health, we are very pleased with the impact that we're having. We're investing a lot more in our brand, as you've seen in the half in absolute terms and reinvestment rate. I think we're having an impact, as you can see, the metrics that we're sharing. So we're really pleased with that and appears to be a sustained improvement as well right through the funnel and also in MBS as well. So delighted about that, and I think that's really driving the consumer pull for our brand. I'll let Xiao comment in a second on the sustainability of that and any other comments you'd like to make. The daigou channel, I think that we -- it can coexist, like I don't think it's an or. It still can be an and for us. As long as we maintain the balance of channel economics between CBEC and daigou as well, but I'll let Yohan comment on that. So Xiao, do you want to comment on the sustainability of our brand health metrics and perhaps what your -- what -- maybe some of the drivers of the -- in terms of executing what lifted the investment, but also how we've gone about that and why we think that's sustainable?

Yes. So first, I mean I appreciate, I mean, the support from investors and the global leadership team that we step up the marketing investments. But I mean, that's not only the successful driver. Actually, we keep on optimizing, I mean, our way of communication to the consumer. So in the first half of this year, I mean we started with a new brand proposition, a2 Milk Base Matters. That's, I mean, a very -- I mean a more powerful positioning, I mean, combined a2 category education to grow the pipe as well as emphasize, I mean, the a2 brand seniority as a leader, as a pioneer in the segment. And also, I mean, now this is achieved by a highly integrated campaign for both online, offline, all the touching points we communicate to consumers in the same message. And the message you see are cutting through our, I mean, leading position in those top platforms like a red BBV and I mean, other [indiscernible], which is where consumers seek, I mean, opinion. So these are -- I mean, we are -- actually, if you look at our success in the past, you see that we keep on improving the marketing brand metrics result. It's like -- I mean, our total brand awareness jump in the first half by -- from 57% to 63% under the -- a2 awareness improved from 21% to 23%. The trial -- past 3-month trial improved from 17% to 24% -- sorry, 17% to 21%. Under the brand used most often, from 13% to 15%. So you see that, I mean, it's not only like a total awareness. Total awareness come and goes, I mean, with your budget and investment. But I mean, what is encouraging is, I mean, your loyalty rate and also those trial path, I mean, what we call the what-are-most recommendation. We also see our Net Promoter Score also update quite a bit. So I would be more optimistic. I mean this is going to sustain not because we are increasing investment, but it's -- we keep on learning, I mean, doing an optimized our approach, I mean, to have generate, I mean, bigger impact with, I mean, less budget, if that answers the question.

Absolutely. Now it's a great result, Li Xiao.

Yes. Regarding, I guess, the daigou question that you had, David. And to David's earlier point, if we look at the English label market, notwithstanding that the challenges that daigou has faced, particularly in the last few months, it's still a material part of the overall English label market. There's a role for the daigou channel to play in terms of driving word of mouth. But increasingly, yes, the CBEC market and the O2O market is becoming more and more effective in terms of news recruitment and retaining customers as well. And so in terms of our approach, of course, we are improving and increasing our in-house capability in the CBEC and O2O channels. But at the same time, also setting up our direct engagement with the daigou channel, which, as I said, still has a role to play and can exist alongside those channels as well. So I wouldn't say that there's no reason to focus on the daigou channel. It's still quite an important channel for us in English label.

Your next question comes from Richard Barwick with CLSA.

I just want to ask around the -- your longer-term targets for the FY '26 targets. So you say that you are on track and the revenue growth would back that up. But the composition is shaping up to be a little bit different, at least at this stage with obviously a lot of success in China label, but less so in the English label. So this could have implications as far as margins go because of the Chinese label delivering a lower EBITDA margin. So just wanted to hear your thoughts, David, around the composition. So as you track towards the $2 billion, is there any reason to change the way you've outlined the, I guess, the growth from the different segments?

That's a good question, Richard. I think -- but we always expected China label growth to exceed English label, and that was factored into our longer-term plan at the time. Relative to where we are at the moment, and that could change significantly in the out years, China label has outperformed our initial expectations vis-à-vis, that plan. So China label is ahead, and English label is slightly behind our plan. But we've still got a long way to go in that, and there's a lot of things that we need to do on product innovation, in particular, and there's a lot of opportunity for us to innovate in English label to drive growth. And I think Yohan and the team have done a great job reshaping our distribution model and our engagement with all channels and investment in capability as well to execute. From a margin point of view, I think even back then, we made it clear that it's well understood by the market that English label is greater margin than China label and other parts of our portfolio. So that would -- all things being equal, would be dilutive to margin. But if we can drive growth in China label, the margin differential is not that significant that it would impact our ability to deliver on our ambition that we shared back in the market in October '21.

And just to clarify that last comment you made, you're talking EBITDA margin there.

Yes. The same EBITDA margin, yes.

Yes. Okay. And then I guess just sort of following on from that...

Well, I'm sorry, I mean, we'll get leverage eventually. I mean we've increased our marketing investment quite significantly. I'm not saying we need to increase that dramatically more in terms of the reinvestment rate. And we've had a big step-up in SG&A investment in a variety of areas, which I called out in my presentation. But we'll eventually get leverage out of that as well. So even though we may have some pressure on growth margins from a mix point of view and also, we've got our China label transition coming up, which, like the rest of the industry, we're taking the opportunity to upgrade our product, which is higher cost, and we need to manage the implications with our margin, et cetera, I still think there's opportunity for us to get leverage in SG&A to hopefully manage the overall equation back down to EBITDA margin.

Right. Well, that's sort of going to be my next question as well. If -- with China label doing -- so ahead of schedule, doing better than expected, does the ultimate EBITDA margin for China label, are you more optimistic there? I mean, how should we be thinking about that? I mean, you've -- yes, you've been very clear that English label margin is greater than Chinese label. As you say, that's well understood. But then it gets pretty vague after that. Are you more optimistic on the ultimate Chinese label EBITDA margin, I guess, is my question.

Probably -- I mean, you're right, our reporting is a mix of geographic segment and then you've got a product overlay to that. And plus, we've got big shifts between English label to CBEC and also reseller volumes, which are going up there direct as well. So yes, it's a bit of noise. I appreciate that's difficult to understand. But I think as the China label -- we've got a very -- we've got a small, highly -- relatively small, highly capable, agile team in China, which gets great leverage out of our strategic partnerships and distributors. And again, I think that we will get leverage in cost structures, even though gross margins may come under some pressure over time. But we've got ways in which we can think about managing that going forward. So I think ultimately, we'll -- we should hopefully be on track or if not potentially above on English -- sorry, in China label if we get that kind of growth and leverage.

Your next question comes from Adrian Allbon with Jarden. Apologies. Your next question comes from Sam Teeger with Citi.

I understand why inventory has increased. But at 31st December, what proportion of the safety stock is on your balance sheet versus what is still significantly?

We haven't disclosed that, Sam, but it's -- the ramp-up in production was sort of from really in that sort of November to February period. So there's some on our balance sheet. I don't know, Dave, if you want to give any more clarity on that. But essentially, the -- from -- you're probably familiar with the manufacturing process, but we've placed the purchase orders in the manufacturer. It sits in Key&A a period of time and then it sells -- it's a sale to us and then it comes on our balance sheet. But Dave, do you -- anything further you want to add to that?

Yes. I think probably the bigger impact to December is the increase in prepayments. You'll see our prepayments are up by $40 million, about $10 million of that is insurance, but the rest -- the $30 million relates to prepayments related to the ramp. So the ramp will continue, obviously, until tomorrow, but the bigger impact to the December balance sheet is probably coming through prepayments with a portion coming through inventory. And the transition stock will have obviously the maximum impact on us in March, April.

Okay, cool. And look, over the last year, we've seen three major foreign brands in Abbott, Reckitt, FrieslandCampina either exit sale or scale back their China operations. And appreciate the size and opportunity of the China market, but do you see these examples suggesting it just might be too challenging for foreign brands to make reasonable returns in China over the long term? And I guess how much of your recent success in China do you think is a function of the foreign players pulling back? And just kind of clarifying Richard's question from earlier. In the Investor Day, you gave that medium-term margin target in the teens and a low to mid-20s margin target for the long term. Apologies if I missed that, but in the presentation today, I can only see the mid-teens target reference and nothing about the low to mid-20s over the long term. So just wondering, does that still apply?

Well, if you go back to that particular slide in our '21 investor presentation in October. So we said that it's probably going to be in the teen and possibly in the low 20s, depending on the mix of business and the scale, particularly the scale of recovery in English label, which we talked about at the time. So really the most probable outcome, which we built our plans on and guided market through is EBITDA margins in the teens. It would require either a significantly greater growth in the existing shape of our business or a greater mix of English label and overall nutritionals to get into the 20s. So I think at the moment, it's reasonable to assume that we are -- indeed, we're communicating that we're targeting EBITDA margins in the teens. And we want to see that improve over time. The pathway to improvement probably won't be linear, but we're definitely focused on improving our EBITDA margins over time. In terms of the exit about multinationals and there are other things going on in the market up there, but I think it comes down -- there was a period of time, obviously, with the multinational brands where we're appealing for certain reasons. I think it's really become a very sophisticated market where both the domestic and international competitors have -- in certain circumstances cases have great brands and capabilities to execute. And ultimately, it depends on how well the brand and the formulation and overall consumer proposition stacks up with consumers and how that performs in the marketplace. It's become very much like across the scene of pharmaceutical and the consumer goods category. And I don't think that's necessarily -- I mean, there are some advantages that local players have. But generally, it's a relatively even playing field. So I think the -- some of those brands that have exited are probably more -- the reason why they've exited is either more specific to their corporate situation or the brand equity and other factors driving their performance in the market. There's no doubt we would have picked up probably some share from that. I mean we've seen the top 10 brands. We highlighted the increase in share of the top 10 brands gaining in the marketplace over time. It's only natural that we're going to see further consolidation. So -- well, brand concentration increasing at the individual brand level. And then probably corporate consolidation over time, which we're already seeing up in China as well. So it is still one of the most fragmented in the milk formulary category or market in the world, and I think that trend is going to continue. So as long as we can continue to invest in our brand, maintain those really strong and hopefully improve even further those strong brand health metrics in the market and hopefully, over time, be able to enable more product innovation in the market, certainly in English label because that's within our scope at the moment. As we've talked about before, we're really keen to find a pathway to accelerate our access to additional China label registration slots to enable us to develop product and try that to market as well. And I think as we get through this, this challenging period that we've got ahead of us, we saw it coming 2 or 3 years ago. Our plan was deliberate to double down on China, to invest throughout this cycle and hopefully come out of the back end of this in a very strong position that will enable us to hopefully get towards being a top 5 brand in the market, which is our ambition. And if we can achieve that, that really opens up the opportunity for us to be more meaningful to consumers across their life cycle in different categories as well. So that's kind of how we're thinking about it at the moment. The future will be a bit different to that, but that's our plan.

Your next question comes from Matt Montgomerie with Forsyth Barr.

Maybe firstly on Slide 29. The Stage 3 MBS share data between Stage 1 and 2 sort of puzzled me for some time. Firstly, why is this the case? And I guess related to that, on that slide or on a similar side, you referenced refining your approach for new user acquisition going forward to improve that early-stage share. So I guess, what are the learnings from the investments that have been put in place to drive that? And what are the specific changes being made to drive that new user recruitment? I guess, similar to what David asked before, but just trying to get into a bit more detail, noting there are the a2 products around and other brands who are also spending a lot on different marketing initiatives, et cetera?

Yes. I might bring Xiao into the conversation. On Page 29, Xiao I think the question for Matt is really looking at the profile of our share in MBS, early stage versus Stage 3 and what are we -- why is it that profile. And you might actually contrast that to DOL as well. And then what are we doing to drive new acquisition really in both channels, but I guess the question mainly relates to MBS.

Yes. So the -- I mean, because of our strong, I mean, brand equity that we enjoy the advantage that if we get, I mean, more new user, I mean most of them flow through the funnel because of our brand loyalty is well above the industry average. So that has, obviously, our focus, I mean get new user early stage into the pipeline, balancing -- I mean the other action is, I mean, a technical share gain from our competition. So that's like a balance game. So if you look at DOL, I mean, DOL, as an online channel, we used to have the, I mean, the tendency that they harvest, I mean, or cannibalized by discount over your -- I mean, in your ecosystem. So we have a very, I mean, cautious, I mean, balance, I mean, to make sure that online is growing, driven by the early stage rather than the late stage. But for MBS, I think it's less concerned because most of the new user recruitment activation, like we shared before, mama class, [indiscernible] promotion goal, I mean all those activations actually is focused on offline new user recruitment, plus I mean some technical, I mean, promotion to gain share from your Stage 3 competitors. But if you see this, I mean, in the recent 6 months, probably that early-stage growth is not as strong as, I mean, the past 12 months or 24 months. It's because, I mean, in China national lockdown, if you noticed that in the first half, it's much more serious than the previous period. I mean, it's like -- just because of -- I mean, the annual congress party because of the -- I mean we are very cautious, I mean, to get infection before a lot of important meetings. There's much more national lockdown and the impact on the offline, which is, I mean, probably not to our best advantage, where most of our activation is focused on offline new user recruitment. But I'm very confident you are going to see that we are catching up when this reopen and resolve the zero COVID policy. but don't worry, this is always #1 priority of the company, to bring more new users to the pipeline. Did I answer your question?

Yes. No, that's good. And then maybe secondly on the -- your share overall, David, of the a2 market. I appreciate this slide, which I think is the first time you presented on the category share of the overall market, but we're just curious. So interested to hear your thoughts or idea on where that sits today.

So our cash share -- I mean our strategy, stepping back from that is in consistent with our purpose vision, is to really tell the a2 Protein story exceptionally well to market more broadly and act as a catalyst for a change and really grow the A1, 3 segment as much as we can. So where we want to grow the pie. So it's not surprising that we have led the market and driven exceptional growth in the a2 Protein category and that our share has reduced over time. In the MBS channel, our share has gone. I think most recently at the end of -- it might be 6 months, it went from 41% -- I think 31% share. I come back and clarify this later. And then in domestic online, it's lower, but it includes slightly different categories in the way that it's measured over time. So the reported numbers in the 20, but it's sort of impacted by the [ goat ] category and things like that, which are not really specifically a2 Protein. So our share has declined, but the category is growing rapidly, and our business overall is growing ahead -- well ahead of category at the moment, and that's consistent with our strategy and how this is likely to play out.

The next question comes from Larry Gandler with Credit Suisse.

David, with regards to the market volume decline of 11%, I think the demographic analysis suggested previously, it was running down 5% or 6%. Is it fair to say that the other 5% or 6% is due to the lockdowns? And if you feel that's the case, are there -- what sort of signs should we be looking at to see if we're going to get maybe a sort of over-delivery in subsequent periods? Maybe should we be looking at marriage registrations or something? Are you seeing any green shoots there?

Yes. Larry, it's -- well, it's difficult to be -- as -- the new bonds in the category of how it's likely to play out. I mean, again, back in our Strategy Day, we laid out different scenarios or a range of scenarios that may play out in terms of the evolution of the birth rate over time. And what we're seeing at the moment is very consistent with what we predicted in there. I know we didn't give you the sort of specific point estimate of that, but it is very consistent with that. And that's largely, in our minds, driven by the demographic factors and social factors that we've talked about previously. And we note that this is a concern for the -- for China more broadly, and there are various actions being taken by government in other areas to stimulate the birth rate. In terms of COVID impacts and how that may play out as well, a couple of things that we think are kind of important from a timing point of view. I think it's worth going back and having a look at the impact of the vaccination program on early-stage growth in the marketplace because at the time, there were some -- health care professionals were advising mothers to be -- not to be pregnant within a certain time frame after being vaccinated. So there was a bit of a delayed impact on that. And actually, in the market, you can see that, for example, if I look at Kantar, I don't have volume growth in front of me. But in the first half or second half of '22, we actually saw a positive growth in Stage 1. So I think there was a period of time where the vaccination impacted the birth rate, and then it started to come back and it's come off again recently. And I think then there was sort of the initial COVID impact of vaccinations. And then I think with restrictions lifting in China and many people testing positive, I think, equally, there's been some advise around being cautious about falling pregnant soon after having COVID. So I think we're in for just -- I guess, summarizing that is, I think, we're in for a period of just some ups and downs. I think, hopefully, the birth rate will start to stabilize soon. And then we may get some improvement in the course of past calendar '24 before it then comes up a little bit more and then hopefully gets back to a more normalized level. So it's difficult to predict, but we do follow it very closely, including some of the things that you mentioned around marriage statistics and maternity center bookings and all that sort of stuff. So anyway, that's how I think it will probably play out if that's any help to you.

Yes, I did manage to follow it. One thing that struck me is I think quite interesting is that you think the 11% decline is largely driven by the things you predicted, meaning demographics, nobody predicted COVID. So -- and COVID seems to have been less of an impact on that 11% volume decline is what you're concluding.

Well, I think on average over time, I don't have to go back, and we're going to see China model this intensely. So I think COVID is not a long-term factor. It presents more volatility. I mean maybe some people for family planning have changed their decision on timing or what they want to achieve. But I think, largely, you would expect that the vast majority of people will be more a timing issue rather than a permanent change. I think the overriding impact of vast majority is driven by the demographic and social factors that we've talked about previously.

And maybe just throwing one other factor there. And economic, China's economy slowed. Has that been a factor you are observing amongst your consumers and your research in their choice to use infant formula?

Yes. I guess -- I mean when I say social, I probably mean social demographic economic. I mean, one of the big concerns that many parents-to-be in China have is the cost of raising a child, and it's well publicized around that. And I think the government is -- and other parties have taken various initiatives to alleviate that burden over time as well. So I think the -- a combination of those costs and then perhaps more challenging economic conditions at the moment will definitely be one of those factors that might be influencing birthrate at the moment and in this. Hopefully, we'll see the China economy recover and get back to strong growth soon.

Your next question comes from Stephen Ridgewell with Craigs Investment Partners.

And congratulations on the results and particularly the share gains in the tough market. You blew it over the half. My first question is on the revenue guidance. [indiscernible] to me around about $50 million of revenue growth in the second half of '23 versus the first half. Can you give us a rough split, David, of what you're expecting to drive that growth half-on-half? That's pretty clear you're not expecting much growth in English label, but a split between China label and fresh would be helpful.

Yes. So I mean, we're expecting -- we actually guided to English label being broadly flat, but we do expect growth in China label continue to sort of -- I mean, it's hard to be specific about that. We've -- I mean, I've tried to give overall guidance in low double digit. And if I just step back, we previously guided to high single digit. And primarily, I mean, not only, but primarily because of the currency impact that we were seeing last year sort of prior to our November update at the AGM, we moved that by -- to low double digit. Currency rates has since come back to closer -- much closer to prior period for the full year in effect, and so we've quantified that. So then if it happened to stay around that level, we wouldn't have a material currency variation. We quantify that currency variation as being $35 million. So if you go back to our previous guidance and add that on, then I can see how you kind of get back to a quite low double digit and that would imply that kind of growth. But we're expecting growth in China level. I think Li Xiao and the team and everybody that supports our China label business is doing an excellent job at the moment. We've factored in a reasonable degree of growth. I'm going to be careful how -- even if there is really strong demand, we're going to have a certain amount of inventory to manage through this transition period. So that's one kind of governing, I guess, constraining factor, and we've allowed for some upside as you would expect. But we won't really necessarily, at this point, to be thinking about pushing that too hard. Our inventory levels in China label are in good shape. English label, we're guiding to be broadly in line. The U.S., we still believe we'll get some growth in the U.S., but most of that growth occurred in the second half of last year, if you have a look at it, which was mainly the innovation growth that we had that fully impacted the second half. So the growth in half on half from first half into second half '23 would be to a lesser extent. In ANZ, we're expecting reasonable growth coming particularly from the -- like the 3 innovations, we see great potential in that over time. I mean that's $140 million category at scan, and probably total market is $160 million. It's growing rapidly at the moment on our regional things, so that will be a $200 million category over time. We've got a big opportunity to grow share in that over time and to bring consumers back from plant-based alternatives to lactose-free A1 3 dairy. So reasonable growth there. MVM, that will be -- that's going to be impacted partly by the extensive in-sourcing that we do, which will step up quite a bit in the second half. So that will -- that might be -- it depends on [indiscernible] with MVM for the commodity pricing as well. And then in other nutritional products, which we don't spend a lot of time on talking about on these calls, we're expecting growth in that as well in the second half as well. So it will be a lower growth -- much lower growth environment than we experienced in the first half. And there are reasons why we were so high in the first half, and some of that relates to the prior period actions as well. But I hope that gives you some color around that, too.

That is helpful. And maybe just following up. You alluded earlier to some of the -- your competitors have alluded to pantry stocking as best in November, December. You did make some comments on the call earlier. I mean when you think about the second half, does that affected into your thinking for the formula growth rates in the second half early on for a bit of pantry destocking? If so, have you seen any evidence of that in the last couple of months?

I'll look a little bit. I think it was David Errington who asked a little bit about that as well. I mean, again, we don't -- I mean, it's very hard to tell. We think there might have been some. I don't think it will necessarily be that material in terms of the shifting between the halves of that. I think, as I mentioned before, the prior period actions were taken in the first half of last year when we rebalanced China label inventory in the channel. And then the fourth quarter, what we kind of characterize as outperformance during that Shanghai lockdown period was probably more material. So I don't think I've factored too much of it. You might want to make some allowance for that. We'll see how our share evolves post. But definitely, when we looked at our share post that fourth quarter, we saw it sort of spike up and then come off and then gradually recovered after that. So not particularly material, but we won't see it quite then.

And then just my second question is on EBITDA kind of margin guidance. And I think one of the first questions was asked [indiscernible] but -- so you're guiding for revenue growth in the second half, but for that to not translate into much operating leverage. I mean, can you just a little bit more color on where you expect the cost pressure to be in the second half? And David, you called out some distribution costs. Just wondering, are there any kind of allowances in your thinking for kind of inventory write-downs and particularly thinking about China label and the amount of inventory you've got the channel to allow for that semi transition? And then at a high level, to what extent do you think those costs you're expecting the second half kind of more one-off? And to what extent would you expect them to be recurring?

David, I might bring, David Muscat into this discussion as well. Dave, do you want to comment on -- so factor on those components and EBITDA evolution?

Yes. I think for the second half, I mean we talked about COGS pressures. We will still expect to see some inflationary pressures sort of coming through there. The impacts from the China transition shouldn't have much of an impact on our gross margins. For the full year, we have upgraded our gross margin guidance to be slightly up on last year versus flat previously. In terms of marketing, David spoke to that before. And in terms of SG&A, we do expect to see increase into the second half again through the capability build and the innovation that will lead to, I suppose, revenue growth and margin improvement into the future. And the step change is probably likely to be pretty consistent with the first half. But as David said, we are investing into our business at the moment. We are increasing the size of the China team. We're working on future developments with regard to innovation. So that is increasing our SG&A. But as David said before, we hope to leverage that into the future as we sort of get closer to 2026.

I think in terms of -- just in terms of a one-off nature, some of the distribution costs that we're going to incur in the second half relate to the stock build in additional warehousing logistics and handling associated with it. So some of that would be -- you can kind of characterize that as one-off. It will probably -- it will still sort of go into the first half of '24. In terms of stock provisions and write-down risk, we were concerned about that with the English label transition. But unfortunately, that was well managed. And we're through all of that now, and we didn't incur much at all in relation to that. We've got a small division at the moment in relation to our China label transition, but I think that will become clearer later as we work through. It's a much more complicated process in terms of transition and inventory management and the timing of the registration production, et cetera. So we've got a small provision at the moment. Obviously, we'll reassess that as we go through the year. But we're not planning for any major write-downs or transition costs in that regard. It's possible we're not planning.

Yes, David said, in terms of the P&L, you'll see it's likely to be in the distribution, which you see we've upgraded our guidance around that, but not to a great extent to gross margin.

Yes.

That is all the time we have for questions today. I'll now hand back to Mr. Bortolussi for closing remarks.

Thanks, everybody, for joining us today. It's been a good discussion. I hope you've got value out of the presentation. I guess, in summary, I think our team and our partners, I think we've performed really well during this period, and it's been building for some time now. And in essence, I think we're in good shape heading into a particularly challenging period ahead in the next year or two, especially around this English label channel dynamics and also China label transition that's happening, which is a big market-wide, once and 5-year event that's happening in the coming year. But I do feel that our team is really executing well, our brand is in good shape, and we're well placed to emerge stronger out of the back of this. So anyway, I look forward to catching up with many of you on the call throughout our roadshow and exploring some of these topics that we touched on today and anything else that's of interest to you. So anyway, we'll see you during the next week or two. Talk then. Bye.

That does conclude our conference for today. Thank you for participating. You may now disconnect.