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

Good morning, and welcome to the a2 Milk Company's 2024 Annual Meeting of Shareholders. My name is Pip Greenwood, and I'm delighted to have taken the role as Chair of the Board since the annual meeting last year. We are joined today by shareholders present in Auckland as well as online. I confirm there is a quorum of shareholders, and I'd like to now declare the meeting open. Before we start, I'd like to introduce my fellow directors and management who are here with us today. First up, David Bortolussi, our Managing Director and CEO. Next to him is Dave Muscat, our Chief Financial Officer; and next to Dave is Kate Mitchell, one of our directors. Warwick Every-Burns, one our directors. And next to Warwick is Sandra Yu. Next to Sandra is Tonet Rivera, also known to us as Antonio Rivera. And next to Tonet is Jaron McVicar. I was teasing Jaron, he's got the longest title in the company. He's our Chief Legal and Sustainability Officer and Company Secretary. Also present with us today are auditors from Ernst & Young, our external legal advisers and our share register, MUFG Corporate Markets, formerly known as Link Market Services. We have received apologies from our Shanghai-based Director, David Wang, who regrettably cannot join us for this meeting. Today, you will hear from me as Chair of the Board and from our Managing Director and CEO, David Bortolussi. After this, we will then put forward the resolutions as described in the Notice of Meeting and respond to questions put to us by shareholders. With the formalities taken care of, it is now my pleasure, on behalf of the Board, to update you, our shareholders, on a2's progress over the last year. I'll start with progress against our strategy. During FY '24, we continue to focus on execution and delivering against the strategic objectives we shared back in October 2021. Our strategy remains firmly focused on realizing the potential of the a2 brand with a focus on people, planet, consumers and, of course, our shareholders. In FY '24, driven by our extraordinary teams, we made great strides in lifting capability across the organization, investing in a more sustainable future, expanding distribution in China and across new markets, delivering new and improved products to our consumers, and we reported another strong financial performance. I'll now cover off a few of our key achievements. FY '24 was a milestone year for China, our China label product following the reregistration in June 2023 and of our upgraded China label infant milk formula product. Given the positive signs we are seeing -- we have seen, including strong consumer offtake and healthy metrics, we are pleased that the transition has been successful. As a proud New Zealand company, we are delighted that are our now largest market, China, our consumers continue to highly value the A1 protein-free proposition and our products, New Zealand providence. Being the pioneer of A1 protein-free helps us differentiate our products in a very competitive market. It is especially pleasing that in FY '24 we achieved, for the first time, a top 5 brand position in China infant milk formula market with our English and China label products combined. Our liquid milk businesses in Australia and the U.S., both under new leadership, have also progressed well in FY '24 with innovation delivering positive results, and we continue to progress our [ passion ] for long-term U.S.A. FDA approval to import infant milk formula into the States. In August, we announced that we resolved our arbitration dispute with Synlait in September, supported Synlait by participating in its equity raise, which has been completed. Synlait continues to be an important supply chain partner for us. As we look ahead, obtaining access to additional China label registrations and developing our own nutritional manufacturing capability are critical components of the company's supply chain transformation strategy. The company continues to explore opportunities to achieve this through investment in its own supply chain and through acquisitions and commercial partnerships. While we do not have any new information to share with you today, I can say that we continue to make good progress in this regard, and that remains a top priority for your management and Board. As mentioned earlier, the a2 Milk Company has made considerable progress against its strategic objectives. Given this progress, our strong cash flow and balance sheet position, the Board believes that time is right to introduce a dividend policy, demonstrating the company's commitment to shareholder returns and effective capital management. David Bortolussi will provide more details on our dividend policy shortly in his address. The Board remains conscious of the company's significant cash balance, which has been prioritized for supply chain transformation, growth opportunities and risk mitigation. As the company continues to execute its strategy, the Board will continue to review capital management options, which may result in further the capital returns to shareholders, most likely in the form of special dividends. Turning now to our Board. It is an honor and a privilege for me to serve on the Board over the last 5 years and now in the last year at your Chair. And taking up the role as Chair, my commitment to Board renewal and succession planning has been a focus. The Board and I are dedicated to ensuring that our Board continues to benefit from diverse perspectives in skills and experience to support management and achieving our strategic objectives. To this end, we recently announced the appointment of Tonet to our Board, who is standing for election today. Tonet as we know him, is a highly capable individual with deep experience and expertise gained over many years as a supply chain leader, including leading the global supply chain of a multinational infant nutrition company. You will hear from Tonet later in this meeting. More recently and after the notice of meeting was circulated to shareholders, we announced the appointment of Lain Jager as a Director, who brings extensive international agribusiness leadership experience through his former role as CEO of Zespri, one of New Zealand's most successful companies. Lain's appointment will be effective 1 December and he will stand for election by shareholders at next year's annual meeting. We also announced the resolution of David Wang as a Director of the company, and we thank David for his valuable contribution to the Board. And last but not least, further to those changes, we announced that after 8 years as a Director and a Chair of our People and Remuneration Committee, Warwick Every-Burns will be retiring from the a2 Milk Board at the conclusion of this meeting. I'd like to take the time to acknowledge Warwick for his invaluable input as a Director and as Chair of our People and Remuneration Committee. We thank you, Warwick, for your significant contribution to the Board and we wish you all the best. You will be missed, and I will personally miss you. Before Warwick departs, we've given Warwick the opportunity to say a few parting words. So I ask you, Warwick, if you'd like to come up to the podium.

Thank you, Pip. I'm sure the last thing you want to hear is a long speech from a retiring director. So I can assure you, you won't be. But I did want to say a few words, and I appreciate the opportunity of doing that. I joined the Board of the a2 Milk Company over 8 years ago. At that time, I'd spent much of the previous 10 years of my life and my career in the United States. And to be very honest, I wasn't familiar with the a2 company or the science and marketing that supported its brand propositions way back then. So my initial response when I was approached was that I wasn't interested. And fortunately, fortunately, and I mean this sincerely, the then CEO of the company, Geoff Babidge, who many of you will remember, suggested that we should at least have a chat. And Jeff's pretty persuasive sort of guy. So I met with Jeff and that was immediately a turning point for me. I was just immediately impressed, first of all, by his enthusiasm, his determination and what could only be described as his total passion and belief in the whole a2 story. It was simple, it was compelling, and right then I knew I wanted to be part of the journey as we look to grow and expand our product and geographic footprint. It felt like a mission to bring a2 to the world, and that might sound a little kind of romantic, but that is very much a part of this company is this kind of almost irrational passion for the whole a2 story and how important it is to all of us that we do actually bring a2 to the world. Change has been a constant throughout my tenure. During these years, the board has been refreshed. The executive team has been refreshed, and we have grown our product portfolio and our geographic footprint, yet we've only just scratched the surface. I've thoroughly enjoyed my time on the a2 Board and will genuinely miss it. The a2 company has an amazing executive team led by David Bortolussi, incredible employees throughout the organization and under Pip Greenwood a fully engaged, supportive and talented Board and becoming more talented, I have to say. It's a bit like -- I think, it was at the Prime Minister of New Zealand who said the net result of people moving from New Zealand to Australia was that the IQ of both countries increased. And it may be a bit the same with the a2 Milk company. So under Pip, we have a fully engaged, supportive and talented Board, and I thank each and every one of you for making my time on this Board so fulfilling and enjoyable. The combination of talent, strategic focus, executional excellence and passion will, I feel, sure see this company thrive in the decades ahead. And finally, and very sincerely, I want to thank you, our shareholders, for your much appreciated support over the years. I will continue to be one of you and look forward to the ongoing growth and success of our company. Thank you.

Will you be coming back to the meeting?

Oh, absolutely.

Thanks, Warwick.

Thank you.

I think as you've heard, the past year has been a really busy time for the a2 Milk Company, and I'd like to thank our Managing Director and CEO, David Bortolussi, for his leadership and for the entire a2 Milk team across New Zealand, China, Australia and the U.S. for the way and what you deliver for our consumers and live our values every day. I'd also like to take the time to thank all my fellow directors for their stewardship of the company. And finally, to our shareholders, thank you for your ongoing support and investment in the a2 Milk Company. In closing, the Board and I are excited about the future of our company given their considerable growth we've made and the opportunities we are set to capitalize on as we continue to advance our strategy. I would now invite David to address the meeting. Thanks, David.

Thank you, Pip. Good morning, everyone, and thank you for joining us today at our annual meeting. My name is David Bortolussi, and I'm the Managing Director and CEO of The a2 Milk Company. Over the past year, we've been focused on executing our strategy and improving our financial results in a challenging market. Today, I'll provide you with an update on the progress we've made over the last year. In terms of our key achievements, we are pleased to present our FY '24 results to the market in August, where we reported strong growth in revenue, EBITDA and EPS. We grew total infant milk formula, which I will refer to as IMF from now on, sales by 4.6% despite a double-digit decline in the China IMF market, and we became a top 5 brand in the category. We also achieved another record high in China label IMF market share in a year of significant disruption due to the market-wide transition to the new China GB standards. Importantly, after several periods of decline, we stabilized our English label IMF sales and achieved growth in the second half. And lastly, as Pip outlined earlier, we resolved our Synlait arbitration disputes and participated in Synlait recapitalization whilst progressing our own supply chain transformation. I'll now provide a summary of our FY '24 results. Revenue for the period was NZD 1.68 billion, up 5.2% on FY '23.-- earnings before interest, tax, depreciation and amortization or EBITDA was NZD 234 million, up 6.9% on FY '23 with a slightly improved EBITDA margin of 14%. Our net profit after tax was NZD 168 million, up 7.7% with EPS up 9.2% or $0.232 per share. Our net cash position at the end of the period was NZD 969 million, up NZD 212 million compared to June 23, and our operational cash conversion improved to 126%. Revenue growth for the year was again driven by our China and other Asia segment, which was up 14% and now represents over 2/3 of our total sales. As expected, our ANZ segment was down 15%, reflecting the change of our English label IMF distribution strategy with sales shifting from the daigou channel to the cross-border e-commerce channel or CBEC and the off-line to online or O2O channel as we refer to it. U.S. sales were up 8% with Mataura Valley Milk or MVM. Sales were down 11%. From a category perspective, we grew total IMF sales by 4.6%; and China label sales, up 9.5%; English label sales, broadly flat. Sales in our liquid milk businesses both grew and were up 3% in Australia and 7% in the U.S. Sales of other nutritionals, which is made up of plain and fortified milk powders, UHT and fresh milk exports to China also grew by more significant 37%. Our strong financial results are underpinned by important operational achievements executed by our exceptional team, which really did an amazing job in FY '24. We've summarized some of our achievements in FY '24 on this page, but most of those I'll cover in subsequent pages, so I won't dwell on this page now. Before I talk to our operational achievements, I wanted to share some context around the China market conditions in FY '24. Our China segment and IMF category each represent close to 70% of our total sales. Therefore, China market conditions are extremely important in considering the performance of our company. Since we refreshed our growth strategy in 2021, the China IMF market has been more challenging due to a greater than expected reduction in the number of newborns. More recently, the rate of decline has, however, improved being down 6% in the calendar year of 2023, which is our most recent data and with a more positive outlook for this calendar year end '24, due mainly to the impact of COVID delays on births and also the Year of the Dragon, which is a positive year for this throughout history. In FY '24, the total China IMF market declined by 10.7% in value with the decline in keynote cities greater than BCD or lower-tier cities. This decline was driven by the reduction in number of newborns, the GB transition impacts, increased competition and challenging macroeconomic conditions. China label IMF market declined by 12.5% for these reasons but the English label IMF market outperformed, up 3.8% in value, which was driven by various factors, including consumer value perceptions and innovation in the category. Within the total China IMF market, the a2 protein segment grew rapidly and now accounts for 18% of total market value. And brand concentration continues to increase among the top 5 players, which now account for over 50% of the total market. In the context of a challenging market, we are extremely pleased with how our China label business performed in FY '24. It was a critical year for our China label IMF business with the launch and transition of our a2 Zhichu product under the new GB standards. For those not familiar with this process, due to the expiry of our registration and changes in relevant Chinese regulations. We needed to reformulate, reregister and relaunch our entire a2 Zhichu product range, whilst phasing out the previous product range, which is an enormous task. It's actually hard to explain how complicated and challenging such a transition is to manage. Our team and our partners executed superbly and achieved record market share at the same time, a remarkable achievement, acknowledged by many in the industry. In saying that, I'd like to take this opportunity to extend our gratitude to China's state administration for market regulation or SAMR as it's often referred to, New Zealand's Ministry for Primary Industries, our strategic partners in China, being China National Agricultural Development Group and China State Farm Agri business. and our manufacturing partner, Synlait and their majority shareholder at Bright Dairy. I also want to thank our a2 team for the extraordinary efforts in delivering this outcome during the year. We're also very pleased to see an improvement in our English label IMF performance in FY '24 with the total market returning to growth and our sales growing in the second half. The English label channel was disrupted significantly during COVID and has experienced material declines, particularly in the daigou channel. In recent years, our distribution strategy is focused more on the CBEC and O2O channels. Our team has been executing various initiatives to drive growth over the past couple of years, including forming new strategic partnerships, capturing growth in emerging e-commerce channels, improving customer service through drop shipping, investing in marketing activations and supporting a healthy trade ecosystem for all of our distribution partners. So it's very pleasing to see this coming through in our results. And in fact, we achieved our highest English label market share since April 2021. In terms of market share, we are very proud that a2 has now become a top 5 brand in the total China IMF market with a value share of 7.3%, which was up 1.4 percentage points in the year. This includes being the #6 brand in China label IMF with almost 5% share and the clear #2 player in the English label market with around 20% share, both of which were improvements on last year. Our market share growth is critical as we've been growing share in a declining China IMF market to drive absolute growth in sales, so that share gains are really important. Turning now to our recent Double 11 results. We generally don't promote heavily during this period, but rather focus on new user acquisition, whilst maintaining a healthy trade ecosystem for -- to avoid channel conflict. This year, the major platforms commenced the Double 11 sales period earlier, so on the 14th of October, and increased the number of key sales events from 3 to 5, including category days. Whilst it's therefore not a strictly comp event, we were pleased with our results shown in this slide in terms of year-on-year growth, share of early-stage product sales and platform rankings, which held or improved. Shifting now to take a closer look at our other nutritionals and liquid milk businesses. Other nutritional sales grew 37%, driven by a more dedicated team, focus, improved supply, prior year innovation gaining traction and further innovation delivered in FY '24 with new fortified and organic milk powders. Liquid milk sales grew 4.8% with lactose-free growth in Australia and grass-fed growth in the U.S. being the key drivers. In terms of product innovation, we continue to make good progress in developing our innovation pipeline and bringing new products to market. During the year, we launched a number of new products. As mentioned earlier, in IMF, we launched our a2 Zhichu range with great success. In English label IMF, we expanded our portfolio with a2 Gentle Gold, which is targeted at the Australian and Southeast Asian markets. I'll come back to our future portfolio expansion in IMF shortly. Outside of IMF, we also launched our new fortified milk powder range, targeting adults in the fast-growing senior segment. We are developing additional new fortified products targeting the kids and seniors segment for launch in the coming year. In addition to product innovation, we continue to pursue opportunities to enter and expand our presence in new and emerging markets. We have actively expanded our reach and product portfolio. In Korea, we are expanding retail distribution with UHT and IMF. In Singapore, we are arranging fresh milk in major retailers. And in Vietnam, we have launched our IMF and macro milk portfolio. Planet leadership is a central part of our growth strategy, and we are pleased to have released our first climate statement in August as part of our annual reporting materials. In terms of progress, during the year, against our sustainability goals, I wanted to highlight 2 key milestones. Firstly, the electrification of the boiler at MVM, which has been a primary driver in helping us to reduce our Scope 1 and Scope 2 emissions by 45% and with further reductions expected in the coming year. And secondly, our investment in AgriZeroNZ, which we were pleased to have the opportunity to join this year alongside other industry stakeholders and the New Zealand government. Moving now to a brief strategy update. Our growth strategy is focused on 5 key priorities, which haven't changed since 2021. These priorities are investing in people and planet leadership, capturing the full potential of the China IMF market, ramping up product innovation and entering new markets, transforming our supply chain and accelerating the path of profitability for the U.S. and MDM. Supply chain transformation is a key priority. We have resolved our disputes with Synlait, supported their equity raise, and they remain an important supplier of a2. We are, however, focused on developing our own nutritional manufacturing capability and increasing market access through additional controlled China label IMF registrations through MVM or otherwise. In doing so, we continue to explore options to accelerate this through M&A and joint venture opportunities, mainly in New Zealand and China. The next slide shows how we are tracking towards our medium-term goals reflected in our measures of success. Overall, we are making good progress against the plan with a few changes that we outlined as part of our full year results back in August. In terms of financial performance, after refreshing our growth strategy, from FY '21, we have grown group revenue by NZD 469 million at a revenue compound annual growth rate of 11.6% and improved our EBITDA margin to 14% from a post COVID low of 10%. Overall, we have -- we are on track to achieve our medium-term revenue ambition of $2 billion in sales by FY '27 or later, with EBITDA margins in the teens, targeting year-on-year improvement. The expansion of our IMF portfolio is critical to support the long-term sales growth of the company. We thought it would be helpful to conceptualize how we're thinking about growth in our IMF portfolio over the next few years. For simplicity, we presented this chart based on the market definitions of price segments. So from top to bottom, being ultra-premium, super premium, premium and mainstream. And from left to right, you can see the indicative positioning of our current China -- sorry, our current English label products with 3.3% market share being a2 Platinum and the recently launched a2 Gentle Gold, with a further product to be positioned in the premium to super premium segment targeted to launch in the second half of FY '25. We then show our China label a2 Zhichu product playing in the ultra-premium segment with 4% market share. Our ambition is to have another 3 or more China label registrations over time, subject to market access and SAMR approval. This page, obviously focuses on our China-orientated IMF portfolio. But as noted, we're progressing our application for long-term approval to import IMF into the U.S. And to that end, we recently submitted our new infant formula notification to the U.S. FDA, which is a significant body of work, and we expect an outcome at some stage during the next calendar year. Moving to the next slide. And as Pip noted earlier, I'm very pleased, today, to announce that the Board has approved the establishment of a dividend policy. The policy targets a payout ratio of between 60% and 80% of normalized net profit after tax. The policy will commence immediately with the first interim dividend expected to be declared in February next year based on the company's interim result in line with the bottom end of the range, i.e., 60%. Dividends are expected to be declared on a semiannual basis in February and August each year at a level consistent with the payout ratio range. In determining future dividends, a number of factors will be taken into consideration, including market conditions, current and future earnings, cash flows, capital requirements and the company's financial position. We intend to impute and frank dividends to the maximum extent possible, subject to available credit, noting that imputation credits are limited. Any additional capital returns in the future are likely to be informed of special dividends because our buyback capacity is limited. The declaration and payment of all dividends will be subject to Board approval at the time and we'll provide further details in relation to our first dividend at our interim results announcement in February next year. Turning now to FY '25 and the company's outlook. With reference to the full year guidance we provided on 19 August this year, our year-to-date trading is ahead of plan and guidance. China label IMF sales are broadly in line with plan, taking into account the supply constraints. We're making good progress to rectify shortages of early-stage China label IMF products with production returning to normal levels during the first quarter of '25, i.e. the September quarter and trade stock returning to target levels ahead of Chinese New Year supported by airfreight. English label IMF sales are slightly above plan due to stronger English label category growth and recent Double 11 performance, which I mentioned earlier. Liquid milk sales are slightly above plan due to growth in core products and lactose-free in Australia and grassfed in the U.S. Other nutritional sales are below plan due to significant competitive discounting and promotional activity impacting milk powder sales. However, new high-priced fortified products are performing well. MVM external ingredient sales are significantly higher than planned in prior year due to higher GDT prices, currency impacts and changes in product mix, which, in combination, that has an immaterial impact on earnings and are slightly dilutive to gross margin and EBITDA margin expressed as a percentage of sales. Having regard to year-to-date trading and outlook, full year reported revenue is likely to increase to mid- to high single-digit growth on prior year compared to previous guidance of mid-single-digit growth. Full year EBITDA percent margin is still expected to be broadly in line with prior year. In terms of phasing, first half of '25 revenue growth percentage on prior year is expected to be broadly similar to the second half. However, as noted in the full year guidance, gross margins and EBITDA margins as a percent of sales will be lower in the first half than the second half due to the impact of higher air freight in the first half. So that's it for me. I hope my presentation provided you with a good summary of our performance in FY '24. And I look forward to answering any questions you may have after the formal part of the business of the annual meeting. So thank you very much for your time, and I'll hand back to our Chair. Thanks, Pip.

Thanks, David. We'll now turn to the formal part of the meeting and the matters that require resolution as outlined in the Notice of Meeting with a poll to be conducted for each of the resolutions. The poll will be conducted at the end of each resolution, and your ballot papers and online voting card will be collated by our share registry. If you don't have a ballot card, put your hand up and get one from our share registry. The resolution set out in the notice of meeting are considered as ordinary resolutions which means that to be passed, they require the approval of a simple majority of the votes of the shareholders entitled to vote in voting on the resolution. Shareholders here in Auckland, you will be able to cast your votes by filling out the ballot form I mentioned earlier that you received at the -- you should have received at the registration desk, and they'll be collected at the end of the formal part of the meeting. Those attending online will be able to vote by clicking the "Get a Voting Card" box on the online portal. If you require further information and guidance on the voting process, please refer to the notice of meeting. There will be an opportunity for shareholders to ask questions both on each of the resolutions being put to the meeting today and more generally, at the end of formal business. When I call for questions, for those of you who are attending in person, please raise your hand and wait for a microphone to be delivered to you by one of our team. Please clearly state your name prior to asking your question. We will also be responding to questions from shareholders attending virtually via the online portal. For shareholders attending via this portal, please submit your questions on the resolution resolutions or general business now. If we're unable to get through all the questions today within the time allocated, we'll respond individually after the meeting. The first item of business is to receive and consider the company's financial statements for the year ended 30 June 2024, together with the directors and auditors reports. The annual report containing the financial statements and the auditor's report for the 12 months ended 30 June 2024 has been circulated to shareholders. Are there any questions related to the annual report or the financial statements? All right. It's a bit hard for me to see everybody. I don't think there's any questions in the room. Are there any questions online? No, I don't think so. We will now move to the resolutions. Resolution 1 relates to the auditors' fees and expenses. Pursuant to the company's act, the company wishes to authorize the directors of the company to fix the fees and expenses of the company's auditors, Ernst & Young, for the ensuing year. Are there any questions in relation to this resolution? Do we have any questions in the room? No, I don't see any questions. We've got any questions online?

We do not have any questions online at this time.

Thank you. I now propose that the directors of the company be authorized to fix the fees and expenses of the company's auditor, Ernst & Young, for the ensuing year, and I put the motion to vote. Thank you. The next resolution concerns the reelection of David, our CEO. David is retiring by rotation in accordance with the company's constitution in the NZX Listing Rules and offers himself for reelection. The Board recommends David to you as an executive non-independent director and unanimously supports his reelection. I will now invite David to address the meeting.

It's a pleasure to stand before you today to speak to my reelection as a director. The a2 Milk Company is an amazing brand and business, and it really is a privilege to lead the company as your Managing Director and CEO. I'm proud of our team's achievements and we have been executing our strategy since I joined the company back in 2021. More specifically, over the last 3 financial years, so from FY '21 to FY '24, we have increased brand investment by 66% and improved brand health significantly. We've grown our China label business by 57%. We've transformed our English label distribution channels from being 70% daigou-related to 80% e-commerce led. We've increased our share of the total China IMF market from 4.7% and to 7.3%, becoming a top 5 brand in the category. We've grown our other nutritionals business by 86% and our liquid milk business by 30%. We've entered new markets and launched new products. We've more than halved our losses in the U.S., and we've invested significantly in our people and planet initiatives. All of this has driven a total revenue growth of 40% and EBITDA growth of 90%, while our key market in China has been in significant decline. I understand our share price volatility has been frustrating for all of our shareholders. But if we focus on the fundamentals and continue to invest in our brand and drive sales and earnings growth, we will create value over time. In the meantime, I'm delighted that we've been able to introduce the dividend for our shareholders. So with your support, I look forward to continuing to serve as a Director of The a2 Milk Company and continuing to grow and improve your business. Thank you very much.

Thank you, David. Are there any questions from shareholders for David or on the resolution, I should say? I don't think that there are any in the room. Are there any online, [ Chante ]?

We do not have any questions at this time.

Thank you. I now propose that David Bortolussi be reelected as a Director of the company, and I put the motion to vote. Thank you. Moving on to our next resolution that concerns the -- sorry, the election of Antonio Rivera as a Director. Tonet is known to us join the Board as a Non-Executive Director in October this year and is retiring in accordance with the company's constitution and NZX listing rules and offers himself for election. The Board recommends Tonet to you as an independent director and unanimously supports his election. I will now invite Tonet to address the meeting.

Thank you, Pip. Good morning, everyone. My name is Antonio Rivera, though many know me as Tonet. It is with great pleasure and a deep sense of responsibility that I stand before you today. I am honored to be considered for the role of Director at the a2 Milk company, a company that has consistently demonstrated a commitment to innovation, quality and dairy for good. Allow me to share a bit about my background. I hold a Bachelor of Science degree in Industrial Engineering from the University of the Philippines over the past 35 years. My career has been focused on all aspects of end-to-end supply chain management. My journey has taken me across the globe, providing me with 17 years of international leadership experience. From 2002 to 2017, I had the privilege of working with Mead Johnson Nutrition, one of the world's leading infant formula companies, where I finished my tenure as the Senior Vice President of Global Supply Chain, leading the entire supply chain from global procurement to worldwide manufacturing and engineering to distribution to 40 countries. Prior to this, I served as Vice President of Supply Chain for Asia and Europe, managing operations across those diverse and dynamic regions. Since retiring from executive roles in 2017, I have continued to contribute to the industry as a supply chain consultant. I am excited about the opportunity to bring my experience and passion for supply chain excellence to The a2 Milk Company. In particular, I am keen to contribute towards a2's supply chain transformation that will involve further potential -- that will unlock further potential for the a2 brand. Then we can increase market access and drive innovation, enhance operational efficiency and deliver the highest quality products to our consumers. Thank you for your time, your trust and your support. I look forward to the opportunity to serve as your director and contribute to the continued growth and success of The a2 Milk Company. Thank you very much, and as they say in my country, [Foreign Language].

Thanks, Tonet. Have we got any -- we've got one question online. But before I go to that, are there any questions in the room around Tonet's election? No, I don't think so. So we've got a question online about could we comment on the recruitment process that led to his appointment to the Board, was a headhunter involved? Did the full board interview Tonet? And did they interview any other candidates? Did Tonet know any of our directors before engaging with the recruitment process? I can assure shareholders that we appointed a leading global recruitment company to assist us with the search for Tonet. We had representatives of that search firm based in Sydney and in Shanghai involved in the process. We had a short list of, I think, 4 candidates. We went through a long list. We then had a short list of 4 candidates and many other directors -- I think most of the directors interviewed 3 of those candidates and Tonet was the standout candidate of that process. Tonet has worked with Sandra before. but we were very concerned and clear that we needed to ensure that we ran a rigorous process. And I can say that I am absolutely delighted that Tonet wants to represent -- wants to sit on this board. In his very first meeting, his depth of knowledge and relation to infant formula supply chain is unique and he added value from the moment -- from his very first meeting. So welcome Tonet to the Board.

Thank you.

Okay. No other questions online?

We do not have any other questions at this time.

Brilliant. I now promote -- propose that Tonet Rivera be elected as a Director of the company, and I put the motion to vote. Thank you. Moving on to the next resolution, the grant of performance rights to David. In 2022, to align with recent practices for New Zealand and Australian executive remuneration, the Board reviewed the company's remuneration practices. The Board committed to submitting the CEO's long-term incentive plan as a resolution on an advisory basis to the annual meeting, which is the subject of this resolution today. The company's LTI plan is designed to reward performance and support of the achievement of the company's growth strategy by targeting profitable long-term revenue and EPS growth, which requires appropriate investment. An overview of the key terms of the proposed grant of rights to David is set out in the notice of meeting. The Board considers the performance hurdles of the LTI plan sufficiently challenging and align with shareholder value creation. I and the Board recommends you vote in favor of this resolution, and we unanimously support this grant of performance rights to David. Are there any questions from shareholders concerning this resolution? Do we have a question in the room to start with? No. Do we have any questions online?

We have had a few questions on this topic, so we will ask a representative question. Why doesn't a2 publish a remuneration report or provide shareholders with a say on pay as part of the AGM?

We don't produce a remuneration report, because that is actually a requirement of Australian companies and we are a New Zealand company. What we have done is we have done a GAAP analysis of our disclosures in our annual report and have improved over the last period our rem disclosures in the annual report. And we are, as I've just said, putting David's LTI plan to shareholders. Is there any other questions, Chante?

We have no further questions at this time.

I now propose that the acquisition of 538,336 performance rights by the company's Managing Director and CEO, David Bortolussi, by grant under the company's long-term incentive plan be approved, and I put the motion to vote. That concludes the resolutions presented to shareholders for vote. Please now submit your vote for resolution. For those attending in person here in Auckland, representatives from our share register will now collect your voting cards. For those attending the meeting online, voting will close shortly. The results of the polls will be released to the NZX and ASX following this meeting. I'll just let representatives from our share register just collect the voting cards. Thank you. Okay. We'll now move to general business. And I'd like to offer the opportunity for shareholders to raise any general questions.

The idea of purchasing something that are compatible with the a2 ideals and patching them over to a2.

Thanks, John. I'll hand that question over to David.

We do consider various growth opportunities to expand the front end and brand portfolio of our business. But for the time being, we've been prioritizing our supply chain transformation, which is a big focus of our organization. And also, it's reflective of the strength of the a2 brand that we've invested in and built for so many years, we think it is -- that it's best to kind of expand our portfolio underneath the a2 brand, and there are complications in transitioning conventional dairy products to A1-free. So there's a whole lot of issues associated with that. So we're mindful of opportunities. We're aware of what Fonterra is contemplating. But at the moment, it's not a high priority for us, although I will say that we don't -- we try not to comment specifically on M&A and strategic initiatives like that. But we're very much focused on developing and expanding the potential of a2 brand transforming our supply chain.

Any other questions in the room? And we've got a few, yes. The lady in the second row.

Thank you. [ Beryl Plummer ] Shareholders' Association [ Group ]. It occurs to me, you're still very exposed to the China market and the fluctuations birth rate and things like that. And an obvious sort of addition to your portfolio might be the protein whey, body building type products. Is there a difference between A1 and a2 in those products. Does it make a difference to people if they get an a2 whey? And is it a place where you could move into another section of the market which might have a bit broader base?

Yes. So I'll come back to that specifically. But in terms of dependent upon China, yes, we fully acknowledge that, but it's equally our biggest growth opportunity. So when we think about diversification around that, we think of your question, which relates to kind of category expansion of around our products and also geographic diversification over time. So we're mindful of both and we're working on that. More specifically to your question around whey protein, products and supplements in that space that you were talking about. So the a2 brand is -- and the a2 proposition is based, as you probably know, it's more -- is around being A1-free in terms of the beta casein protein. So we're very much focused on the beta casein element rather than the whey protein element. So there may be some benefits in developing high protein-related products for different applications. But the complication in that is to extract a lot of beta casein protein for those products is difficult and quite expensive because obviously, whey is a byproduct of cheese manufacturing and there's a lot of whey waste stream and whey protein in the market. And that's why that's kind of been a very high-growth industry over the last decade or more. So it's something we're mindful of, but it's not an immediate priority at the moment. What we are focused on is developing fortified milk powder products to develop our other nutritionals business, which is a key area of focus and potentially supplements over time.

Thanks, Beryl. Next question?

Thank you, [ Robert Morgan ]. First time I've been to this shareholders meeting. A couple of questions. The first one, which you've alluded to, David, making products, as a consumer for -- you have the milk powder and then you have the milk itself. Is there a reason why you wouldn't go into something like yogurt mixes, [indiscernible] these sachet mixes and [ surely ] in milk powder, is there anything -- any reason why a2 will not consider that?

We have and will continue to consider that in terms of our category expansion opportunities, particularly in say, for example, the Australian market where our liquid milk brand is so strong. It's the #1 brand in the Australian market. An expansion into more traditional dairy categories like yogurt and cheese and cream and butter are opportunities for us. So we're mindful of that. We'd like to progressively explore those opportunities over time. But it's -- one of the constraints we have, actually, to be practical, is actually the supply chain capability to produce that. So for example, in the U.S. market, that sort of outsourced contract manufacturing capability is readily available, whereas in the Australian market, it's often tied up with the brand owners and there's not a lot of excess capacity. So it's something that we will explore and potentially invest in over time. I do note in the China market that the liquid yogurt market, whether it ambient or chilled has been a big growth category over time as well, and that's something will be considered over time as well. But for the moment, we're very focused on our infant product expansion, to expand our portfolio, which I highlighted in my presentation, expanding other nutritionals, fortified milk powders, which you can see some examples that we've launched recently, and there's more to come, targeting kids and seniors then potentially supplements and other categories, including the traditional dairy.

Thanks, Robert. And you had a second question. Do you want to move on?

I missed the shareholder's meeting a few years ago. Just with the tariffs, which have been talked about in the media with the U.S. And also, you've noted that the birth rate in China is a -- the rates are going down. What are the barriers for considering going back into Britain where you were 3, 4 years ago or Europe as reentering those markets?

Do you want to take that, David?

Yes. It's possible. I wasn't with the company back then. The A1-free category and a2 proposition is not significant in the U.K. and Europe. There are some regulatory and marketing claims related issues that kind of add further complication to it. So it is possible, over time, that we may do that, perhaps in partnership with somebody else. But for the near to medium term, again, we've got -- we're a relatively small company. We've got to be really focused on what we do in terms of our execution. So we're prioritizing the China market, to maximize the potential of that, expand our adjacent categories in new markets over time, sorry. The new markets that we're expanding into, in terms of our immediate priorities, in Southeast Asia, we're already in South Korea. We've entered Vietnam during this year. You can see we're expanding our sort of distribution in Singapore and other markets as well. So we're thinking that Southeast Asia is a priority for us outside of China and also the Middle East as well. And then in relation to the U.S., our liquid milk business has continued to grow there, and we're getting closer to breakeven there. And we've got enforcement discretion from the FDA to import infant milk formula. And as I noted in my presentation, we've just lodged our long-term application for infant milk into the U.S. So probably, it's really Asia, Middle East and the U.S. that are kind of the priority for us outside of China. Perhaps one day, we might go back to the U.K. and Europe, but it's not on our high priority list at the moment. But thank you for your question.

Any other questions in the room?

[ Gordon Wallace ], really, I want to expand a little bit on this check here. You haven't spoken about the South Island, your manufacturing plant there, how it's going. I've then I've got another question after that, if that's all right.

Sure. Yes, no problem. Happy to expand on. So Mataura Valley Milk, which is in Southland, near Gore, we have invested in building capability there for nutritional production. So it's a great asset, like, it's a very high-quality drying -- nutritional drying facility. We've been investing under Chopin Zhang's leadership, who is our Chief Supply Chain Officer as one of the most experienced global leaders in nutritional supply chain, which very fortunately joined us 2 years ago. He's been working with us to build capability for nutritional product manufacturing at MVM. We've been in-sourcing a2 branded related product to be produced there. So first of all, skim and whole milk powder in a pouch, which you can see around the room, and then also the supply of milk powder for fortification into our tub products as well, which I shared on the screen today as well. In addition to that, we've -- under the Synlait arrangements, which are different now, but at the time, we had the opportunity to in-source Stage 4 English label product from Synlait. And so we started making the base powder for English label Stage 4 at MVM last year, making nutritional base powder's a very technical product and capability required. So we're building experience around that small product at the moment, and that's being packaged at new milk or a subsidiary of Lactalis here in Auckland. In addition to that, we're making infant grade skim milk powder, which is going to Yashili's facility in the North Island and they're manufacturing our Gentle Gold product, the English label product as well. So we've been trying to in-source what we can and develop nutritional manufacturing capability at MVM Unfortunately, a significant part of the business is still related to commodity or ingredients in the market. And the facility is not set up, really, to be producing that on scale to be profitable. So at best, we kind of break even on that. And when you're adding the overheads, unfortunately, we're still losing money at MVM. We have invested in growing our milk pool there and also expanding the conversion of conventional to A1-free from our milk pool as well. So there's a lot going on there. But financially, I appreciate, as shareholders, that the results of MVM still don't look attractive because we're losing more than NZD 20 million of EBITDA.

Yes. So I was glad you brought that up because I know you're investing, but you've got to do it, of course, to get the reward. And I was wondering about supply, that you can get supply, because you do have other people in the -- not the -- share milk -- the milking side of it.

It's very -- I mean, in most regions in New Zealand are very competitive milk supply. Southland is no different to that. We have expanded our milk supply to over 100 million liters and we also have some commercial arrangements as well in terms of organic supply, for example, through another player down there as well. So we're building supply, building capability. And hopefully, over time, we'd have more in opportunity to produce more branded products at a higher margin internally. No, it's a great question, yes.

And with Synlait, because of the troubles they've had, what about -- because you're getting a lot of volume from there. Are the farmers starting to come back? Or do you feel, on that side, it's looking a little bit better?

So -- I mean, it's probably more of a question for Synlait directly, but from what I understand that the -- just at a high level -- the capital the recapitalization of inlay and some of the initiatives that they've taken in terms of rewarding farmers more has stabilized that situation much more than it was when Synlait was having capital structure issues at the time. So we believe -- but it's more a question for Synlait, we believe it's in a much better position. And also, the other thing to bear in mind is that our A1-free milk pool as part of Synlait's Canterbury milk pool is very significant and significantly more than what we need. So we don't feel there's any concern over the supply of A1-free milk.

That's what I was wondering about, supply.

Yes. So it's very low risk. Yes.

But the farmer supply -- contract directly with Synlait, not with us.

Of course. But then -- and the next down the line to ship it out.

Just one more question on Gordon and then I think we'll give others opportunities.

This will be the last. The Anchor joint venture you got with Fonterra, that licensing must be nearly time to -- with a2 Milk, the arrangement you have, the licensing. It must be about time to come up. And also, with them selling the brands, does that bother you? Or what do you look at that side of it? Because you do a lot through a2, Anchor.

Yes, so we -- I don't think we've publicly disclosed the exact term of that, but it was recently renewed for a period of time. But we're mindful of what Fonterra's changes that they're going through at the moment. And we know Fonterra well. We're in a dialogue around various things with them. So I don't feel that, that's a major concern for us at the moment, but we'll monitor the situation. Yes. And we'd love to be able to develop our business, our a2-branded business here in New Zealand more. It's just how the company's evolved, so.

Thanks for your questions, Gordon. Is there any other questions in the room before I move to online. I think we've got a number of questions online. So I'll hand over to [ Chante ], do you want to take us through those questions?

We have a question from [ Anthony Bernardo ]. "a2's share price was significantly higher 5 years ago. Can you please comment on management performance in light of the share price decline?"

We think our share price has been volatile in response to effects that are really outside of our control. I think the most recent one is that obviously, the geopolitical uncertainty from events in the States and the birth rates levels in China, some of the China stimulus. So I think all we can do is focus on the things that are within our control. And I think -- as David mentioned earlier in his address, we're really pleased with the performance since David became CEO in 2021. The revenue has grown by NZD 469 million, a CAGR of 11.6% per annum, and our EBITDA margin has improved from 14% to -- up from post COVID, levels of 10%. Is there any other questions? I think there are a couple of more there.

We have a question from Stephen Mayne. "The 5 most valuable U.S. big tech stocks, Microsoft, Apple, Amazon, Alphabet and NVIDIA are together worth more than AUD 20 trillion. Could the CEO comment on how reliant we are on big technology? And what would we do if any of them suddenly put their prices up by 30%?"

Yes. So we -- of course, we use technology in terms of our enterprise research -- ERP systems that we run the company on. We have data centers. We use Microsoft Office and things like that. But in terms of overall spend and investment and the sensitivity of any changes in those arrangements, it's not a material exposure for our company at all compared to other risks and opportunities that we face. So I'm not particularly concerned about that at the moment, yes.

We have a question from Stephen Mayne. "Our friends at Fonterra recently announced that they are ditching their dual listing on the ASX to save money. How much extra does it cost to be dual listed in Australia and New Zealand? And if we were to delist from one of those exchanges, which would make more sense given the current split of the register and trading data? Restaurant technology company, TASQ, shifted its HQ and primary listing from New Zealand to Australia last year and was then taken over by a U.S. firm. Have we looked at doing the same?

I'll answer that. We have no intention at the moment to delist from either the NZD or the ASX. We're a proud New Zealand company. We have shareholders in New Zealand, but we also have a reasonable-sized business in Australia and a large number of Australian investors, so there's no intention to delist. In terms of the listing fees, I think they're relatively immaterial. I don't know them off the top of my head. I'm looking at Jaron who's nodding. They are relatively immaterial in the scheme of things.

We have another question from Stephen Mayne. "We are very reliant on China for export sales. If a major tariff-based trade war broke out between China and the incoming Trump administration, it seems likely, are there any potential downsides for our business? Also, the incoming U.S. Health Minister, Robert Kennedy, has some pretty wild ideas about processed food suppliers such as Pepsi and McDonald's. If the world's biggest consumer market pivoted to government-driven healthier diets, is that all upside for us? How important is the U.S. market for a2 Milk?"

Do you want to take that, David?

Sure. Careful what I say. So in terms of the tariff -- potential tariff and trade implications of the change in the U.S. government, directly, our U.S. business is a domestic business. We're planning on exporting more infant formula product to the U.S. over time. I don't think the -- I mean, it's not -- it's certainly not material now. And it's unlikely to have an impact on New Zealand to U.S. tariffs. In terms of the U.S. and China and tariffs that may impact there, it's too hard to tell how that may play out. But the cross-border trade between the U.S. and China in the infant category, is not that great because if you look at the 2 major players in the U.S. the Mead Johnson and Abbott, Mead Johnson sold its China business to private equity a few years ago, and Abbott has exited the market as well. So it's not as though tariffs would potentially restrict the -- retaliatory tariffs would sort of open up more market share opportunity for us in China. Indirect impacts like potential -- it's quite possible that in response to that, the China government may stimulate investment and consumption in the domestic economy. There could be impacts on foreign exchange rates, which could have an impact on us. But it's way too early to have any perspective on those and what the impacts may be. So it's too early, yes. There was another -- part of that question, which relates to U.S. FDA. I think any focus on more natural, nutritious products, including our a2 proposition can only be beneficial for our company. And the only other thing I would note that with FDA, if there's any changes, material changes in there, it could potentially have an impact on our FDA application to import infant milk formula. But again, we see no sign of that.

We have a question from [ Eva Cuding ] in relation to Mr. Bortolussi's appointment as a director. What would you say are the pros and especially cons of having a non-independent director?

It's not actually something there. We spend a lot of time on the Board thinking about. David's a key member of our team. We don't see any cons in having him on the board. We are a very well-functioning team and really enjoy the perspectives that David brings to the Board. And one of my key perspective as the Chair is making sure that we have diverse thought and experience on our Board and David really adds to that, so I don't see any cons.

We have a question from [ Ivan Litvinov ]. David, would you be able to comment on the success of the adult and seniors products? So far, do you see this as a substantial opportunity in terms of market size?

So, so far, we have introduced our English label, fortified tub products, Immune and Move, one with a lactoferrin content in the other with FORTIGEL. They're sort of targeting adult and senior market. To date, they're performing really well. I mentioned in my address that the -- our higher priced fortified products, and I was referring to those, are actually performing well. What is not -- we're still in growth, but what is not performing as well for us at the moment is our more basic milk powder in a pouch because just the competitive dynamics, the pricing of milk powder has been impacted more. So that's going well to date and what we've got planned in terms of the senior segment is in the China label part of our business. We are planning to launch new products next year, targeting the seniors market as well. So we're focusing on that. It's a large part of the market. It's growing rapidly at double-digit growth rates at the moment. It is very competitive already, and the margin structures are generally quite a lot lower than infant as well. So we will work towards capturing the opportunity there, but probably don't think about it being anywhere near as big as our infant opportunity from a sales or a margin point of view.

We have a question from [ Ramesh Catamaran ]. Is there any positive impact on New Zealand's Free Trade Agreement with the Gulf nations, which was recently signed by New Zealand and the Gulf Corporation Council?

Do you want me to take that? I think we do see the Gulf nations as an area of opportunity for us.

Yes, next year, sort of priority region. The Free Trade Agreement is helpful, but there are also -- in our category, there are also regulatory differences between markets. And so when you look at the Gulf region, various countries have different standards and things like that. So it's not only about tariffs, it's also regulatory alignment between countries as well. So we're thinking that's hopefully an opportunity over time to develop our infant business and our fortified milk powder products. The basic milk powder, again, is a competitive category. So I think it's got opportunity for us in time. It's going to take time to capture that. It's not our highest priority at the moment. And certainly, the Free Trade Agreement is helpful.

We have a question from [ Ivan Litvinov ]. "David, would you be able to provide some further insight on the status of the FDA approval and assuming it is granted in 2025, the next steps for market entry?"

So many of you may not be aware, but when the when the U.S. had its infant supply crisis back in '22, they introduced what was called enforcement discretion on the FDA rules, which allowed new entrants to the market externally to sell their products in the market, subject to a short process of approval with the FDA for a period of several years. We were one of the last to be granted access for various reasons, but we're one of the last to be granted access. And so we haven't been able to develop a significant business there as yet. But what we're focused on is getting long-term FDA approval of infant. Those submissions needed to be submitted towards the end of this year. We actually submitted ours in November. It's a very big piece of work to actually make that submission. Hopefully, it's subject to FDA review and approval, but hopefully, we'll get that approved next year at some stage. Under the original ED regime, the approval needs to come -- I think they need to make a decision by October next year. So we'll see how that develops. In the meantime, with our enforcement discretion product, which is basically our a2 Platinum English label product, we have been testing and learning different sales and marketing techniques. We're doing some work with -- on Amazon at the moment under 3P system. We've also got listing with Walmart online, and we've been trying some regional suppliers as well. But we're in that stage where the major accounts are -- there's a degree of reluctance to commit to our business until we've received longer-term approval. So once we receive longer-term approval, we'll start to develop, hopefully, a small but meaningful business for us going forward. And it's a very different market in the U.S.

Thanks, David. Any further questions?

We have no further questions online.

Thanks so much. Thanks for all those questions, both in the room and online. So on behalf of the Board, I'd like to thank you for joining us today and engaging in such important matters for us, for you, your shareholders and for the company, and thanks for your support over the last year. For those that are here, we've got the traditional refreshments outside, and you can have a cup of tea with some a2 milk. So look forward to seeing you outside the room. I'll now formally declare the meeting closed. Thanks so much, everyone.