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Stepping
it up.
The a2 Milk Company Limited
2019 Annual Report
ARBN: 158 331 965
C O N T E N T S
FY19 highlights
Our Chair
CEO’s year in review
Regional and product financial summary
Building a sustainable future
Corporate governance
Our directors
Our executive leadership team
Governance
Remuneration
Financial statements
Other information
2
5
7
14
17
37
38
40
41
45
51
97
Stepping it up 1
FY19
highlights
6.4%
infant nutrition value
share in China and
market leading brand
in Australia
No.1
premium milk brand
in Australia at 11.2%
value share
13%
of 2nd half revenue
invested in marketing;
over $135m (~10.4%)
invested in FY19
64%
increase in store
distribution in China;
ranging in approximately
16k stores at year end
161%
increase in US revenue
coupled with 118% increase
in store distribution;
ranging reaching 13k
stores as at year end
$1.3bn
Revenue
41%
$414m
EBITDA
46%
39c
Basic earnings per share
45%
2 The a2 Milk Company
2019 Annual Report
Stepping it up 3
Our
Chair
Dear Shareholder, I am
delighted to present
to you another year of
outstanding achievement
by your company, a year
characterised by using
our financial strength
to invest significantly
for the future.
In delivering its FY19 result, the company has
sustained its strong growth trajectory with
an impressive result that reflects the strength
of our brand, a highly disciplined focus on
growth, and the talent and commitment of
our people. The company’s strong financial
performance has enabled us to progress
our objective of building a world-class dairy
nutrition company, centred on a unique and
compelling brand proposition.
Not only are we larger and more financially
robust, we are now clearer on our strategic
priorities. However, it is only natural given
how young we are as a business that we
still have more to do.
The senior management team led by our
Managing Director and CEO, Jayne Hrdlicka,
has put considerable effort during the
year into ensuring that we maintain our
momentum in the marketplace, in particular
within our focus regions of China and the
US; whilst also strengthening our strategic
foundations as we continue to realise
the great potential of your company. Of
focus were the following strategically
important initiatives:
• a major new in-depth research and
analysis programme to understand our
consumers, channels and customers both
in China and the US;
• sharpening our future strategic plans by
completing a comprehensive blueprint for
further growth;
• commencing an acceleration of
significant investment in our brand and
organisational capability to better prepare
us for future growth; and
• advancing our strategic, environmental,
sustainability and governance agenda
to keep pace with our growing
opportunities and impact.
These four areas not only create a stronger
base for our business as we work to deliver
our long-term potential, but also clarify
our intent to make a broader impact in the
wider world we operate in.
The year also marks the retirement
of Peter Hinton from the Board as
foreshadowed at the company’s 2018
Annual Meeting. We would like to thank
Peter for his exceptional and longstanding
commitment to The a2 Milk Company,
originally as advisor to and partner of
Dr Corrie McLachlan, the company’s
founder, and subsequently as an adviser
and director of the company. We wish Peter
all the best as he pursues interests outside
of The a2 Milk Company and corporate
governance roles.
The company was pleased to welcome
Pip Greenwood as an independent
non-executive director of the company
with effect from 1 July 2019, following
Peter’s retirement. We are delighted to
have a person of Pip’s considerable talent
and experience join the Board. A resolution
to elect Ms Greenwood will be put to you,
our shareholders, at the company’s next
Annual Meeting in November 2019.
I also wish to acknowledge how well
Jayne has transitioned into her role as
Managing Director and CEO over the course
of the year. She has done an excellent
job in steering the business to continued
commercial success, and at the same time
has led the company in investing for the
next wave of sustainable growth.
The company enjoys a robust balance sheet
which, combined with its continued strong
cash generation, gives us the flexibility to
support our growth potential in the future.
The Board and management continue
to evaluate a broad range of investment
options designed to support our future
growth aspirations. As a consequence,
we do not anticipate paying dividends
in the near-term.
Jayne has completed a comprehensive
Year in Review that outlines our operational
and financial performance for the year. A
further update on our performance will
be provided at the Annual Meeting, on
19 November 2019 in Auckland.
On behalf of the Board, I would like to thank
our management and staff across all regions
for their continued hard work and dedication
to the company during the year and the
outstanding results they have achieved.
In summary, the Board enters the next
financial year mindful of the challenges of
continued growth and excited about the
significant opportunities that lie ahead of us.
David Hearn
Chair
20 August 2019
Step-changing
investment to deliver
broader leadership
‘18-
‘19
Global branded
dairy nutrition
leaders making
a difference to
people’s lives
through further
market expansion,
innovation and
smart partnerships
Multi-product
geographic diversity
‘12-
‘17
Shift from dairy
focus to broader
nutritional product
portfolio with the
emergence of
significant infant
formula business
and broader global
market footprint
Branded domestic
fresh milk focus
‘07-
‘12
Shift from licensing
to branded
operating business
model with regional
business structure
and Australia focus
IP Creators
‘00-
‘07
Emerging beta casein
science, IP development
and licensing model
approach
FY07
$7.6m
Revenue
NZ$
FY12
$62.5m
FY17
$550m
FY19
$1.3bn
4 The a2 Milk Company
2019 Annual Report
Stepping it up 5
C E O ’ S Y E A R I N R E V I E W
A
record
year.
We have delivered strong financial
results and record market shares in
our core markets.
The year saw the company
step-change its investments in consumer
understanding, brand and capability.
6 The a2 Milk Company
2019 Annual Report
CEO’s year in review
Stepping it up 7
Results highlights for the year
ended 30 June 20191
Total revenue of
$1.3 billion
↑ 41.4%2
EBITDA to sales margin of
31.7%
EBITDA3 of
$413.6 million
↑ 46.1%
Operating cash flow of
$289.1 million
and a closing cash balance of
$464.8 million
Net profit after tax of
$287.7 million
↑ 47.0%
Basic earnings per share
(EPS) of
39.25 cents
↑ 45.4%
Step-changing marketing
investment of
$135.3 million
representing 10.4% of sales and
an increase of 83.7%
Infant nutrition market
share strengthened to
6.4%4 in China
with Group infant formula revenue
of $1.1 billion ↑ 46.9%
US milk revenue more than
doubled and distribution
expanded to
13,100 stores
Australian fresh milk
revenue growth of 10.7%5
and record market share of
11.2%6
Significant investment
in organisational
depth and breadth
to support continued
growth and
resilience
1 All figures are in New Zealand Dollars (NZ$) unless otherwise stated. 2 All comparisons are with the 12 months ended 30 June 2018 (FY18), unless otherwise
stated. 3 Earnings before interest, tax, depreciation and amortisation (EBITDA) is a non-GAAP measure. However, the company believes that it assists in
providing investors with a comprehensive understanding of the underlying performance of the business. A reconciliation of EBITDA to net profit after tax
is shown on page 104. 4 Kantar infant formula market tracking of Tier 1 and Key A, B, C and D cities for 12 months ending 14 July 2019 by value.
5 Local currency (AUD). 6 Aztec Australian Grocery Weighted Scan 12 months ending 30 June 2019.
I have really enjoyed my first year as CEO. We
are proud of all we have achieved as a team this
year but also conscious of how much there is yet
to be done, as we continue to build our business.
This year we focused on playing to our strengths and sharpening our strategic
thinking. This enabled us to begin step-changing investment to support our
considerable growth ambition.
The company delivered record financial and market share results for 2019.
This was enabled by strong revenue growth across our key product segments
of liquid milk, infant nutrition and other nutritional milk products, and across
each of our key regions. Pleasingly, our results were underpinned by growing
brand awareness, expanding product distribution and strengthening in-market
execution in our two most important regions of Greater China and the US.
We have focused on really getting to know our consumers and sales channels
in our core markets of China and the US. The a2 Milk Company’s unique brand
proposition intrinsically leverages macro consumer factors, which include a
growing consumer demand for health and wellness products; a growing focus
on food safety, naturalness and provenance; the growing middle class in Asia;
and the rapid pace of digitalisation. While in each of our markets our consumers
are quite different, our global brand proposition resonates strongly with our
consumers and is unique relative to the competition.
We have also invested heavily in increasing our capability and capacity to
support the development and delivery of comprehensive growth plans for
our most important strategic priorities.
In effect much of our effort in FY19 was spent balancing our dual priorities of
sustaining our growth momentum in the year while at the same time deepening
our local consumer and market knowledge, investing to build capability and
creating detailed blueprints to deliver future growth.
Our business results were driven by strong
performance across our portfolio. The
continued growth of our infant nutrition
products was a strong contributor to the
results with sales totalling $1.1 billion for
the year – an increase of 46.9% on the
prior year. This was driven by share gains in
China and Australia. We achieved pleasing
growth in our liquid milk businesses in
particular within Australia and the USA –
with total fresh milk growth of 22.9% and
revenue of $174.9 million across the Group.
We grew sales of other nutritional milk
products by 17.3%, delivering total sales
of $65.8 million. This was driven by milk
powders and supported by new products
launched towards the end of FY18 and in
the fourth quarter of FY19.
Our gross margin remains strong and has
improved to 54.7%. The improvement was
driven by a price increase partially offset
by currency movements – most notably
a weaker Australian dollar.
Our balance sheet is strong with no debt
and a substantial cash balance. The closing
cash position reflects growth in revenue
and earnings, partially offset by increased
working capital, and our increased equity
investment in Synlait Milk in August 2018.
Net operating cash flow for the year
was $289.1 million, with cash on hand
at 30 June 2019 of $464.8 million. Our
balance sheet continues to strengthen,
which is important as we work our way
through the delivery requirements of our
long-term strategy. We continue to consider
the appropriate use of available capital in the
context of supporting our very significant
growth ambitions.
We have enhanced our approach to
inventory management, enabling us to
adjust more quickly to demand changes by
increasing our inventory cover. We finished
the year with $108.5 million of inventory, up
69.2% from the prior corresponding period
and 49.0% from the first half.
Strategic progress
We have made significant progress
refining our blueprint for growth
and prioritised the strategic growth
opportunities as follows:
1. maximise growth from existing
products in core markets;
2. broaden our product portfolio
in core markets; and
3. expand in other targeted markets.
To enable the successful delivery of these
strategic priorities we have made significant
investments during the year. Comprehensive
work has been undertaken to ensure we
fully understand our consumer and sales
channels and better define the growth
opportunities emanating from these.
Following on from this we are step-changing
our marketing investment, with clarity on
opportunities to drive efficiencies within
the path to purchase; and we are building
capability to execute more broadly on our
strategic growth blueprints.
Our core markets – Australia and
New Zealand (ANZ), Greater China and the
US represent our most significant growth
opportunities in the medium term. The
growth will come from both our existing
product ranges and innovation within
these markets. For example, the launch
of a2 Smart Nutrition™ – a fortified milk
drink targeting children 4-12 years of age –
enables us to migrate consumers when they
grow out of infant nutrition in China.
In addition, we continued to selectively
explore new market opportunities. As a part
of this we undertook increased consumer
research and in-market activity in Vietnam,
Korea and the city of Hong Kong. Alongside
the ongoing work we are doing with
Fonterra, the focus continues to be milk
powder products in Vietnam, testing a fresh
milk presence in Singapore and Korea, and
infant formula in the city of Hong Kong.
8 The a2 Milk Company
2019 Annual Report
CEO’s year in review
Stepping it up 9
We have made significant progress
refining our blueprint for growth
and prioritised the strategic growth
opportunities as follows:
1. maximise growth from existing
products in core markets;
2. broaden our product portfolio
in core markets; and
3. expand in other targeted markets.
a2 Platinum® infant nutrition revenue grew
35.3% and remains the market brand
leader in grocery and pharmacy channels.
We remain the highest brand advertiser
within both the milk and infant formula
categories, which continues to drive growth
in brand awareness and consumer loyalty.
Fonterra: In August 2018, the a2 Milk™
brand, under licence to Fonterra, was
launched in New Zealand with national
advertising and distribution and is
performing well relative to plan. We have
also begun sourcing direct ingredients
from Fonterra with increased supply during
the second half of calendar 2019. The
relationship with Fonterra remains strong.
Our joint teams are actively working
together to commercialise the next wave
of opportunities which will come from
our partnership; and we continue to be
encouraged by the potential.
China State Farm: In August 2018, we
renewed our strategic arrangements with
China State Farm Holding Shanghai Co.,
Ltd. (CSF), extending our arrangements
for a further three-year period from
6 December 2018. CSF is our exclusive
import agent for our China label products
and has been a strong partner for our
infant nutrition products into mainland
China since launch in 2013. In addition to
importation services it has provided local
market regulation consulting and product
traceability quality control for our business.
Regional performance
Australia and New Zealand
segment goes from strength
to strength
ANZ business revenue was $842.7 million,
up 28.3%, and EBITDA of $388.2 million
represented an increase of 48.1%.
The Australian fresh milk business continues
to strengthen with 10.7%2 revenue growth
and a record 11.2% market share3, up from
9.8% for the same period a year ago, and
10.8% at the end of 1H19.
a2 Milk™ was the fastest growing major
fresh milk brand in Australian supermarkets
and remains the leading premium milk
brand and the only brand ranged in
all major Australian supermarkets. Our
second half performance was especially
strong, driven by effective and consistent
marketing investment.
Building sustainable brand
leadership via step-changing
marketing investment and
continued investment in
intellectual property and
research and development
We have significantly increased our
investment in building brand value with a
goal to accelerate brand awareness and trial
in both China and the US. Our investment
in marketing for the full year increased by
83.7% to $135.3 million, primarily as a
result of increases in advertising spend in
China and the US.
During the year we also invested in better
understanding both Chinese and US
consumer archetypes, channel dynamics and
ways of improving brand awareness. Using
these insights, we stepped up the rate and
quantum of marketing investment in the
second half in activities to drive awareness
and encourage trial of our products. These
activities are an important part of delivering
on our growth ambition.
Research and development programmes
continue to be a priority, including
independent clinical studies. A clinical trial
amongst 5 to 6-year-old children in China
was published in July 2019. The study
analysed results from 75 Chinese children
with mild to moderate milk discomfort or
lactose intolerance (confirmed via a urinary
galactose test) and reported that replacing
conventional milk with a2 Milk™ “reduced
gastrointestinal symptoms associated with
milk intolerance” in many subjects and led
to “corresponding improvements in aspects
of cognitive performance” as measured
using the Subtle Cognitive Impairment Test
(SCIT)1. The study was independently peer
reviewed and published in the US based
Journal of Pediatric Gastroenterology and
Nutrition. Further company sponsored
clinical research has progressed during
the year.
Significant investment in
capability development
During the year we invested strongly in both
internal and external capability.
In April we welcomed Xiao Li as Chief
Executive of Greater China who is building
the capability and executional capacity of
our team in China to support our growth
momentum. In addition to Xiao Li, the China
based team continues to grow and now
represents over 20% of our global team.
We made a number of other senior
appointments, including new roles, with the
addition of Lisa Burquest as Chief People
Officer, Melanie Kansil as Chief Commercial
Officer and Phil Rybinski as Chief Technical
Officer. We also further increased our
capability in the second half with pivotal
resourcing in the marketing, new product
development, innovation and people
capability functions.
These roles build upon the existing strong
and experienced group of executives in the
organisation, just as the other new starters
to the company have added to our growing
global team capability.
We also made additional external resource
investments to broaden our in-market and
technical capabilities and augment our
capacity as an organisation. This has helped
sustain our momentum by giving us quick
access to much needed skills and capacity.
Strategic partnerships
Key strategic partnerships are a critical
element of our business model. There were
a number of major developments in this
area during the year.
Synlait: In July 2018 we reaffirmed our
supply agreement with Synlait for infant
formula and other nutritional products.
We continue to be very well supported by
Synlait in meeting increased demand and
our teams continue to work closely together
to grow our respective businesses.
In August 2018, we also announced
increasing our total shareholding in Synlait
to approximately 17.4%. This investment
enables us to further protect our relationship
with an important supply chain partner.
1 Xiaoyang S, Zailing L. Effects of Conventional
Milk Versus Milk Containing Only A2 ß-Casein
on Digestion in Chinese Children. J Pediatr
Gastroenterol Nutr. 2019 Jul 9.
2 In constant currency.
3 Aztec Australian Grocery Weighted Scan
12 months ending 30 June 2019 vs prior year.
Note, the latest market share reporting database
was updated in 1H19 and for prior year to
include Costco, Aldi (SA and WA) sales.
10 The a2 Milk Company
2019 Annual Report
CEO’s year in review
Stepping it up 11
China regulatory dynamic
A number of important regulatory changes
were introduced during the year with
respect to e-commerce and cross border
trade in general. This included new
e-commerce law and a new CBEC policy
framework containing implementation
guidance for future CBEC trade.
These regulatory changes initially resulted in
some orders being pulled forward into the
third quarter. However, the overall impact
has been minimal.
A number of announcements relating to
regulation in China were made towards
the end of the second half, including from
China’s State Administration for Market
Regulation (“SAMR”) and other ministries
and bureaus, outlining measures to
ensure successful implementation of the
e-commerce legislation which, following a
three-month grace period, became effective
from April 2019.
We welcome measures that protect the
rights and safety of consumers and the
overall integrity of e-commerce channels
and will continue to work closely with our
partners through this process.
China business momentum
continues to build
China segment business revenues rose to
$405.7 million, up 73.6%, with EBITDA
of $123.9 million, up 52.4% resulting
from increased distribution, higher
like-for-like sales velocity and continued
market share gains.
Our Kantar infant formula consumption
value share increased to 6.4%4 in the latest
12-month data for Tier 1 and Key A, B, C
and D cities, up from 4.8% in the same
period prior year, and up from 5.4% at the
end of the first half5.
During the year we invested in expanded
Kantar market share coverage to include
city tiers B, C and D and are pleased to
report considerable momentum in lower
tier cities. Our multi-channel strategy
remains important to our success in building
household penetration amongst different
types of consumers and across different
city tiers. Through the eyes of the consumer
each channel plays an important role and
the combined effect is synergistic. Pleasing
progress was made across all channels
this year.
The cross border e-commerce channel
(CBEC) remains a strong pathway to the
Chinese consumer for the infant formula
category, enabling consumers across all
regions (including those in lower tier cities)
to more easily access international brands.
We performed well during the online
seasonal events and continue to perform
strongly across all CBEC platforms.
Mother and Baby Stores (MBS) provide
Chinese parents with a more interactive
shopping experience to view brands
on offer and receive information about
selected products. This channel continues
to be an important priority in expanding
our brand accessibility and consumer trial.
Consequently significant investment was
made in-store to drive education and
visibility to shoppers. During the year, we
focused on improving in-store productivity
within the channel with strong results.
Sales velocity growth within existing stores
was a stronger contributor than growth
coming from new store additions. During
the year sales of China label infant nutrition
approximately doubled and the number
of MBS stores was ~16,400 as at the end
of June, representing a 64% increase in
stores from end of FY18. Improving in-store
productivity and increasing store distribution
will both continue to be important focuses
in the coming year.
Modern supermarkets and Chinese
label e-commerce retail channels are
lesser contributors to our position at
this stage relative to CBEC and MBS
but also play important roles for target
consumer segments.
The deep consumer and sales channel
insights developed during the year give
us confidence that we will benefit from
accelerated investment in brand building
and marketing in FY20 and beyond. The
business is well positioned with strong
offline and online distribution in place to
benefit from step-changing marketing
investment, which is expected to build
further brand awareness and trial within the
China market. This was a priority investment
focus in FY19 and will continue to be a
priority in FY20.
United States business
building scale
US segment business revenues rose to
$34.6 million, up 160.7%, with an EBITDA
loss of $44.0 million resulting from increased
investment in distribution growth and
brand awareness.
US revenue has grown by over 100% during
each of the last three years via a focused
effort to increase brand awareness, driving
in-store velocity increases and expanded
distribution. While distribution continues
to grow at pace, we are also focused on
improving in-store productivity.
By the end of the year, our distribution
exceeded 13,100 stores. This 118% increase
was driven by gaining national distribution
within the Kroger supermarket chain,
adding three new regions within Costco,
the successful addition of Vons (Southern
California) and other Albertson’s/Safeway
divisions, and further Walmart distribution
expansion. We also experienced a significant
increase in the rate of distribution growth
in January 2019, driven by building brand
awareness and new store planogram reset
timings within the respective retail chains.
Pleasingly, recent research data indicates the
US brand development is progressing well.
The a2 Milk™ brand is successfully growing
category consumption, sourcing volume
across multiple product segments and
trading up consumers from conventional
milk. The brand is also experiencing high
levels of consumer loyalty.
We increased levels of marketing investment
in the second half to support continued
velocity growth. We also delivered on our
commitment to deploy approximately
US$27 million of planned investment in
the year.
The company remains confident of the
opportunity for continued growth in the
US given the high consumer propensity
for premium wellness products and strong
retailer support.
Growth of UK liquid milk
remains challenging
UK segment revenues grew to $21.6 million,
up 12.7%, with EBITDA of $4.4 million,
driven by increased wholesale sales of
infant formula.
The UK liquid milk business commenced
in 2012 and has grown in volume and
revenue every year. Since then, our company
has evolved considerably, and the UK
opportunity is not of sufficient scale when
compared to the significant growth potential
in Greater China and the US.
Subsequent to year end the Board has
therefore decided to exit UK liquid milk
operations during 1H20, to focus instead
on strengthening our position in our core
regions. UK infant nutrition customers have
been transferred to our China and other
Asia segment from FY20.
It is important to note that this decision
does not preclude us from pursuing
UK or European markets at some stage
in the future for liquid milk or other
nutritional products.
Outlook
We anticipate continued growth in revenue
across our key regions supported by
increasing brand and marketing investment
in China and the US.
Full year FY20 EBITDA as a percentage
of sales is expected to be broadly
consistent with 2H19 EBITDA margin
(28.2%) reflecting:
•
increased full year marketing investment
to ~12 per cent of sales;
• continued investment in organisational
capability to support future growth; and
• gross margin percentage expected to be
broadly consistent with FY19.
Jayne Hrdlicka
Managing Director and CEO
20 August 2019
4 Kantar Infant Formula market tracking of Tier 1
and Key A, B, C and D cities for 12 months
ending 14 July 2019 by value, vs 12 months
ending 14 July 2018.
5 Kantar Infant Formula market tracking of Tier 1
and Key A, B, C and D cities for 12 months
ending 30 December 2018 by value.
12 The a2 Milk Company
2019 Annual Report
CEO’s year in review
Stepping it up 13
Regional and
product financial
summary *
Australia and New Zealand
Greater China and other Asia
Total Group
FY19 REVENUE ‘000s
$1,304,496
Liquid milk:
Infant nutrition:
Other nutritional:
174,916
1,063,816
65,764
% change
+41.4%
Liquid milk:
Infant nutrition:
Other nutritional:
+22.9
+46.9
+17.3
FY19 REVENUE ‘000s
% change
$842,695
+28.3%
FY19 REVENUE ‘000s
% change
$405,667
+73.6%
Liquid milk:
133,704
Infant nutrition: 652,864
Other nutritional: 56,127
Liquid milk:
Infant nutrition:
Other nutritional:
+8.2
+35.3
+10.9
Liquid milk:
2,906
Infant nutrition: 393,124
9,637
Other nutritional:
Liquid milk:
Infant nutrition:
Other nutritional:
+90.8
+73.4
+76.2
United States
UK
FY19 REVENUE ‘000s
% change
$34,560
+160.7%
Liquid milk:
34,560
Liquid milk:
+160.7
FY19 REVENUE ‘000s
% change
$21,574
+12.7%
Liquid milk:
Infant nutrition:
3,746
17,828
Liquid milk:
Infant nutrition:
– 6.7
+17.9
* NZ$
14 The a2 Milk Company
2019 Annual Report
Stepping it up 15
CEO’s year in review B U I L D I N G A
S U S TA I N A B L E F U T U R E
Towards an
integrated
approach.
We are taking a strategic approach to
ensure sustainability is an integrated
part of our business strategy and
operations, consistent with the guiding
principles of integrated reporting; rather
than adopting a prescriptive framework.
16 The a2 Milk Company
2019 Annual Report
Building a sustainable future
Stepping it up 17
MACRO CONSUMER FACTORS
Growing consumer
demand for health and
wellness products
A growing awareness of the link between food and
overall health – many consumers believe what they
eat has a direct effect on how they feel. Coupled with
rising disposable incomes, and increased demand for
both protein and gut health, this trend is propelling the
global demand for premium products that provide high
quality nutrition.
Global digestive health products market
to reach US$57 billion by 2025.
Growing focus on food
safety, naturalness
and provenance
Consumers are increasingly conscious of food safety and
product origins – demanding more transparency on where
and how their food is produced. This is driving significant
demand for naturally healthy, premium quality and
sustainable food choices. There is strong trust in the quality
and safety of Australian and New Zealand products and
innovation globally, particularly in Asia.
More than one in three Chinese
consumers buy Australian or New Zealand
products online.
Our world
Macro factors shaping
consumer demand and
creating new opportunity.
There are several macro
factors at play in the global
consumer economy which
are changing historical
purchase behaviour
patterns and disrupting the
traditional food industry.
Our brand proposition is well positioned
in this changing landscape and we
believe we are well placed to continue
to grow and evolve in a fast-paced
world, where the consumer is more
educated and discerning.
We see four distinct and interconnected
macro factors most relevant to us
in the consumer economy globally:
growing consumer demand for health
and wellness products; growing
focus on food safety, naturalness and
provenance; rise of the middle class in
Asia; and rapid pace of digitalisation.
As a company we set out every day to
make a fundamental difference in people’s
lives by enhancing their wellness and
enjoyment. Our core values and purpose
underpin our unique brand proposition,
that stands for something special in the
eyes of our consumers. We are seeing these
inter-connected macro factors at play in the
biggest and fastest economies in the world,
our priority markets of China and the US;
and believe this strengthens the appeal of
our brand proposition.
Rise of the
middle class in Asia
Asia’s unprecedented growth is creating large-scale
opportunities for individuals, businesses and nations.
The emerging middle class will continue to desire
higher quality, value added, safe and nutritious
foods – and view imported brands as aspirational.
By 2030, more than half of the world’s
food will be consumed in the
Asia region.
Rapid pace of
digitalisation
The rise of digital connectivity and innovation, and
e-commerce generally, has been called the fourth
industrial revolution. It is quickly transforming the
shopping experience; fusing information, access, and
convenience. This is opening new direct-to-consumer
channels and an interesting mix of traditional and
digital channel innovation. All of which ultimately
brings consumers greater access and choice.
E-commerce is expected
to grow 20% globally in 2019.
18 The a2 Milk Company
2019 Annual Report
Building a sustainable future
Stepping it up 19
Our
business
Defines who we are and what
we do in order to create value
for our consumers, people,
commercial stakeholders
and the community in
which we operate.
WHO WE ARE
Our purpose:
We enrich lives
by harnessing
the nutritional
wonders of nature.
Our values:
Bold passion
Pioneering spirit
Driven to realise our amazing
potential as a company and
as individuals.
Unconventional open-minded
thinking that re-imagines the
possibilities; outcome driven.
Humility
Respect
Integrity
We’re never done growing,
discovering; and have a
willingness to continually
iterate and learn.
Seek to understand and
appreciate difference in all
its forms.
We do the right thing for our
consumers, partners, people
...and our cows.
WHAT WE DO
Pure and natural
a2 MilkTM
The foundation of our company
and our products
Infant’s and children’s
nutritional products
Delivering our proposition
where it matters most
Other unique
products
Identify new ways of delivering
naturally inspired wellness
WHERE WE PLAY
Australia and
New Zealand
Our home ground –
quality, trust and channel
pathways into China
Greater
China
Our highest, proven
opportunity for
future growth
US
Our chance to
build a second
growth engine
Other
markets
Developing other
select markets
20 The a2 Milk Company
2019 Annual Report
Building a sustainable future
Stepping it up 21
HOW WE CREATE VALUE
There are six core elements, or sources of capital, embedded in our
value creation model. Our strategy depends on success across each
given the inter-connected nature of our business model.
Unique, premium
brand and IP
Intellectual capital
Passionate and
thriving team
Human capital
Capital smart
approach
Financial capital
Our trusted brand, our proprietary
know-how and A2 protein expertise
are our most valuable assets. We’re
committed to maintaining and growing
these assets with ongoing investment.
Through ongoing science and research
and development programmes, we’re
deepening our expertise and advancing
global understanding of the potential
health benefits of a2 MilkTM.
Our premium brand is growing
in awareness, has loyal consumer
followings and is a trusted brand of
varying scale in our key markets across
the world.
We invest significantly behind our brand
trade mark development and protection
across all products and markets as
well as focused investment in building
brand awareness to deepen loyalty and
increase the equity in our brand.
82.4% increase
in investment in
marketing, R&D and IP
$142.3 million in FY19,
representing 10.9%
of sales
Through a purpose driven culture
underpinned by our values, we aim to
create an environment that provides
our people with opportunities to thrive.
Our success is the result of our diverse,
skilled and engaged workforce, aligned
and focused to deliver on our purpose
and strategy. Through our diversity
comes creativity and thinking that goes
beyond the conventional. This is how
we overcome challenges and unlock
extraordinary opportunity.
Our team must continue to represent
diversity in all its forms, reflecting the
markets in which we operate and
the consumers we serve today and
tomorrow. To achieve this, we’re bringing
in the right people to enhance culture
and build strength in what we stand for.
We equip our people leaders with the
tools to foster a safe and fair workplace,
with equal opportunity for all.
Our Diversity Policy empowers and
equips our people leaders to foster a
diverse and competent workplace. We
are particularly focused on enhancing
gender balance in our workforce, having
set a target of a minimum of 40%
women and men in leadership positions.
Achieved our target
of minimum 40% of
women across all
leadership levels by
1 July 2019
Our business model is built on deep and
long-term strategic partnerships both
commercially and operationally. Our farms
and processing partners are some of
our longest-standing relationships.
Together we have built a very successful
community of businesses – big and
small. This ecosystem underpins our
“capital smart” business model and has
given us the ability to grow rapidly, while
also building a strong balance sheet
for continued growth.
The company’s robust balance sheet
position and unique proposition provide a
strong platform for continued growth. We
make considered decisions about the use
of our capital, making decisions to invest
where it is strategic to do so.
Our significant growth ambition is
enabled by our capacity to make step-
changing investment in consumer insights,
brand development and organisational
capability. We are directing significant
investment to deliver continued strong
revenue growth while deepening our
brand engagement and consumer loyalty.
Revenue increased
41% to $1.3 billion
in FY19
Innovative and
ethical supply
chain
Manufacturing capital
Complementing our own fresh milk
production capability, we have worked
closely with our suppliers to develop
a reliable and responsible sourcing
and manufacturing supply chain over
time. We believe this is critical to our
long-term success. Our framework
for building a resilient supply chain
includes:
• strategic partnerships aligned to
our values;
• an unwavering commitment to
safety and quality;
• a sustainable approach to energy
and packaging;
• direct investment where important
in core strategic partners; and
• ethical sourcing of our products,
which includes our commitment
towards best practice standards in
animal welfare on our farms.
Our strategic supply chain partners
share our ambition on quality,
environmental and ethical values.
This includes food safety and quality
management programmes audited
by accredited third party agencies.
It is important to recognise the unique
role that farmers play in our supply
chain and our business’ success, and
we pay a premium to all farmers
for our milk, recognising their hard
work to maintain our very high herd
management and quality standards.
Premium paid to all
our farmers over
and above farm
gate pricing
Responsible use of
natural resources
Natural capital
Access to natural resources and a thriving
agricultural sector is fundamental to our
business. We recognise that climate change
and pressures on agricultural and food systems
present a systemic challenge for our world – and
we’re committed to finding unique and high
impact solutions across our value chain to help
address these challenges.
Globally, food production systems are facing a
transformational challenge to meet the demands
of a growing population within environmental
limits. Appropriately meeting this challenge
will enable us to continue providing premium
a2 Milk™ based products to our consumers and
long-term value to our shareholders.
Through our own actions and in partnership
with our supply chain, we are mapping our
environmental impact, starting with a high level
analysis of greenhouse gas (‘GHG’) emissions
from our direct operations, third party processing
and on-farm activities. We are working with our
supply chain to understand our impact in more
detail. Based on early insights, we’re focusing
our efforts on greenhouse gas emissions, water
and soil quality, energy, waste and biodiversity.
We support the global ambition of the Paris
Agreement and a 2050 net zero emissions
target, as do Synlait and Fonterra. We are
already taking steps to limit our environmental
footprint where we can, set targets for our
supply chain impacts and will be offsetting
the GHG emissions from our direct, third party
processing and on-farm operations from FY19.
Enriching
community
wellbeing
Social capital
We take our responsibility to the
communities we serve very seriously.
We play an important role in supporting
the healthy development of some of the
world’s youngest and most vulnerable
people. We support and promote that
breastfeeding is better for infant nutrition
but that our products have a legitimate
role to play in circumstances where this
is not possible. Our communications
strategy supports not only brand
development but educating parents and
adults about the benefits of our products
and our support of breastfeeding as the
primary form of infant nutrition.
We recognise our responsibility to
support the resilience of our farming
communities, including through events
such as the drought in Australia. We have
worked with our strategic partners to
deliver drought support payments directly
to farms to provide some financial relief
during the recent drought.
As we continue to grow, we are
committed to doing more to support
people and our farmers across each of
our key communities. An example of
this is our partnership with Landcare
Australia. We intend to be involved with
similar community initiatives across all
our key regions going forward.
We are also working on new metrics and
targets to measure our impact over time.
100% carbon neutral
across our supply chain
Direct and indirect emissions in FY19 to be
offset with carbon credits sourced from
projects in our key local markets
(ANZ, US and China)
Landcare Australia
partnership with
over $350k committed
to on-farm grants
since 2017
22 The a2 Milk Company
2019 Annual Report
Building a sustainable future
Stepping it up 23
Our
impact
Our integrated approach
to being a responsible
company in the wider
world we operate in.
The interrelationship between our world
and our business determines our ability to
create and sustain value. As we grow, we
are focused on having a positive impact on
the world in which we operate, recognising
that with scale comes greater responsibility.
We are committed to providing our stakeholders
with credible, transparent and timely information
on our material issues and sustainability
performance; where we have made significant
accomplishments and where we have room
to improve.
We are working to set targets and measure our
performance across the six sources of capital
that we have identified that affect our ability
to create and sustain value. The following case
studies are intended to provide an indication of
our sustainability progress against our promises,
how far along the journey we are and the value
this adds to our business.
R FACT O R S
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24 The a2 Milk Company
2019 Annual Report
Building a sustainable future
Stepping it up 25
Putting
people first
Heritage
Our company roots are embedded in a
pioneering spirit that sought to make a
fundamental difference in people’s lives –
putting both our consumers and our team
first in all we do.
For our team we are working to ensure that as we increase our
capability and head count to support our growth, we protect
our company culture, increase our diversity and maintain our
agility. Our team journey in the last year has included:
• appointing our first Chief People Officer to drive our people
•
strategy;
investing significantly in both capability and capacity in our
core markets and head office;
• defining our core purpose, values and behaviours to assist
in recruiting and onboarding new employees to better
understand our culture;
• building basic cloud based support systems and tools to
•
enhance our people experience; and
implementing regular pulse checks across multiple
dimensions of employee satisfaction and we will use this
data to continue to improve the experience of our people,
which in turn will enhance the delivery of our strategy.
In the process we have also made a marked improvement
in the gender balance of our Board and Senior Leadership
Team. This coupled with our ethnic diversity has increased the
richness of our debate and discussions; however we recognise
there is more work to do in this area.
We have articulated and refined our purpose and values
through the input of our teams around the world. We all share
a deep passion to remain a purpose-driven and values-based
company. We seek to enrich lives by harnessing the nutritional
wonders of nature with bold passion, pioneering spirit; and
always operating with humility, respect and integrity. The
power of aligned purpose and values cannot be overstated.
It provides a unifying energy that brings our people and
strategic partners together as we scale at speed; and positions
our business for success in the long term.
We are mindful that our world is characterised by rapid
change and disruption and that good governance and
compliance are essential. Our success depends on being agile
and more innovative than ever before and we must always
strike the right balance between speed and taking the time
to properly assess and mitigate our risks.
Building strength through our people
Unlocking our potential and capacity
through capability building
To enable our strategy, we continue to focus on ensuring the
right operating model and organisational design. This has
allowed us to most effectively deploy the skilled talent we
have today and has informed our investment strategy for new
talent and capability. Our workforce grew by 27% in FY19,
to deliver the capability needed in our growth markets but also
to enhance the development of key corporate areas including
new product development, marketing, legal, commercial and
people teams.
stralia, NZ and Pacific Islands: 1 7 %
ericas: 23%
Asian: 45 %
dle Eastern: 2 %
m
A
u
A
3%
n: 1
d Mid
a
e
p
ro
u
E
n
a
n
a
c
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r
f
A
3
0
-
5
0
:
6
7
%
Age
group
Female
composition
T
o
t
a
l
e
S
e
n
i
o
r
l
e
a
d
e
r
s
:
4
5
%
m
p
l
o
y
e
e
s
:
5
4
%
Our people:
composition
and diversity
%
1
%
1
5
ars: 1
+ ye
2-5 years: 2
O
ver 50: 19%
U
nder 30: 14%
8 %
s : 6
r
a
y e
0 - 2
Length
of service
While we are committed to enhancing all aspects of diversity
as we build our capability and capacity, we are particularly
focused on delivering on our gender diversity goals. In FY19
we achieved our targets of at least 40% females and males in
senior executive and manager roles. From 1 July 2019 we have
achieved the target across all leadership levels of the company
with Pip Greenwood joining the board and bringing the board
composition to 50/50 female/male. We are proud to have
achieved these targets three years ahead of schedule. We are
now focused on maintaining them and working on further
areas of diversity improvement.
As at 30 June 20191
Directors2
Senior Executives3
Managers
Sub-total for senior
leaders4
Other staff
Total
Female
2
5
18
25
Female
(%)
33%
42%
49%
45%
Male
4
7
19
30
Male
(%)
67%
58%
51%
55%
98
123
57%
54%
75
105
43%
46%
We will continue to build a diverse and inclusive community of
great people throughout The a2 Milk Company, at all levels of
the organisation. Our Diversity Policy is available on our website
at www.thea2milkcompany.com/about-us/corporate-governance.
Embedding global ethical and
compliance systems
Doing the right thing for our customers,
people and partners
Across our value chain, we intend to operate ethically, including
with respect for human rights and in compliance with all local
requirements, including anti-bribery and corruption.
We are investing in our people and systems to continue to build
capability to meet our strict product quality and food safety
standards and embed monitoring and compliance systems
specific to the regulatory environments in each market in which
we operate.
In FY20 we will be undertaking an assessment of human
rights and other ethical risks in our value chain and ensuring
alignment of our supply chain management approach with our
fundamental values of respect and integrity.
45%
females in
senior leadership
41%
increase in China workforce;
over 20% of the global team
now located in Greater China
27%
increase in total
workforce for expanded
capability and capacity
1 All these figures include permanent full-time, permanent part-time and
fixed term employees, but exclude independent contractors.
2 Includes executive director Jayne Hrdlicka (CEO) and excludes
Pip Greenwood, who commenced on 1 July 2019.
3 Defined as the CEO and Senior Leadership Team.
4 Senior leaders is the total of Directors, Senior Executives and Managers.
Please note that the CEO appears in both Directors and Senior Executives.
26 The a2 Milk Company
2019 Annual Report
Building a sustainable future
Stepping it up 27
Carbon neutral across
our supply chain
Sustainability right
from the farm gate
As a modern company with deep strategic relationships
across our supply chain, we recognise that our environmental
responsibility must include our end-to-end activity. For the
reporting period we will be offsetting the estimated share
of our farming community, manufacturing and transport
providers. We will achieve this by purchasing verified carbon
offsets sourced from projects in our key local markets in
which we operate (ANZ, US, China). In FY20 our goal is to
have our offset investments tie back to our environmental
farming programmes. This will be designed to ensure we are
not only helping our farmers reduce their greenhouse gas
emissions but also to seek to add value in others ways – such
as identifying new revenue streams and opportunities for
community engagement.
Our direct operations comprise only 1% of the emissions
of our extended supply chain family but we will continue
to find ways to reduce our own impact while we work
with our partners to help reduce theirs.
Greenhouse gas emissions
footprint of our supply chain
On-farm emissions: 75%
Third party processing and freight: 24%
Direct emissions: 1%
(includes our own processing and corporate operations)
Includes Scope 1, 2 and 3 emissions and further notes on page 31.
Our responsibility to the natural environment, our communities and
a resilient supply chain starts at the farm gate. We’re investing in
developing new programmes to improve soil health, water quality,
GHG emissions, biodiversity and animal welfare; and working
alongside farmers to innovate on-farm.
We take our animal welfare responsibilities seriously and have
continued to work with our farmers to meet globally recognised
standards set by the World Organisation for Animal Health and
eliminate practices that contravene the Five Freedoms. In 2019 we
are elevating our animal welfare programme to a Five Provisions
based globally certified programme.
To support the economic and environmental sustainability of our
farms, since 2017 we have been awarding grants to farmers to
contribute to investments in solar power generation, soil quality
and waste-water recycling projects, through our partnership with
Landcare. In 2019, one of our grants enabled the family-run Cleary
Farm to install new systems for reusing dairy wastewater for irrigation.
The project has reduced reliance on chemical fertilisers, minimised
water, improved pasture growth and soil quality, and reduced
operating costs.
In 2019, one of our key farms, Moxey Farms in New South Wales
implemented new technology that converts cow manure into
electricity and natural fertiliser, utilising a bio-digestion process which
generates methane to be used for power generation.
Our US farms are creating new economic streams and diverting
waste from landfill by combining solid waste from their dairy
processes with food waste from local schools, garden waste from the
community and leftovers from local arenas; which is then treated and
converted into saleable compost.
Animal welfare programme
in place across all farms
and aligned to the World Organisation for Animal Health’s Five Freedoms
78% of current farms with
an environmental plan
Smarter packaging
Packaging is a key issue for consumer food companies. We
know that we can and must reduce our packaging footprint,
whilst maintaining our premium product quality and integrity.
One of the first steps in tackling packaging waste has been
establishing baselines in FY18, so that we can track our
progress against our global packaging targets. Already, over
95% of our product packaging globally is recyclable. We’re
also expanding our use of recycled content in our packaging,
and removing unnecessary single-use plastic.
In the UK our new fresh milk cartons are carbon neutral and
use over 80% less plastic than the previous design. At least
80% of the carton material is sourced from sustainable
forests certified by the Forestry Stewardship Council and
the International Sustainability & Carbon Certification.
Importantly, changes to our packaging are being made with
an acute focus on product safety and integrity. We are also
maintaining our focus on the strict labeling and branding
requirements in the markets within which we operate. In
FY19 we successfully completed the transition to updated
packaging, incorporating a new global brand logo for
a2 Platinum® infant formula and the transition of the newly
registered China label packaging, in compliance with China's
labelling and branding requirements.
We have also introduced unique QR codes on packaging for
all infant formula products and we continue to undertake
product verification audits by food traceability experts Oritain.
> 95% of product
packaging is recyclable
100% of infant formula
has a unique QR code
Innovation and efficiency
in our processing
An exciting feature of our industry is the capacity for
advances in technology that allow us to continuously improve
and innovate our product processing. We’re improving
efficiency and minimising our environmental impact, with
an uncompromising focus on quality.
We are implementing a circular economy approach at our
own fresh milk processing facility in New South Wales
and have achieved over 95% of waste diversion from our
production process. Liquid waste products are sent back
to farms for beneficial use as organic fertiliser following
treatment on-site by our 80kL waste-water treatment system.
We have optimised lighting through LED installation and
have achieved, what we believe to be, best in class water
efficiency with 0.5L of water per litre of milk produced.
We are working alongside our strategic partners to drive
rapid innovation in their processing operations too. Synlait,
who processes our infant formula products in New Zealand,
has installed the first large-scale electric boiler in the country
as part of its commitment to reduce off-farm greenhouse
gas emissions by 50% by 2028. Our third party Australian
warehouses are utilising rooftop solar power generation,
electric forklifts and rainwater harvesting for freight vehicle
washing and maintenance.
Our commitment to quality is also demonstrated by our
industry certification within our supply chain – ISO 9001
for our infant nutrition products and Safe Food Quality
Programme (Global Food Safety Initiative) for our own fresh
milk processing facility.
Best in class water efficiency
at our own fresh milk production facility in New South Wales
95% diversion of waste
from landfill at our own fresh milk production facility
in New South Wales
What’s next?
Our commitment demonstrates new demand for
carbon farming projects. We intend to work with
farmers and communities in our markets to support the
development of new and innovative projects that deliver
emissions reductions, along with other on-farm benefits
and new revenue streams for our farming communities.
What’s next?
By 2021, all farms supporting and supplying The a2 Milk Company will
be governed by a third party certified framework for animal welfare
globally, and have environmental plans covering the four material
issues of GHG emissions, soil quality, water quality and biodiversity.
What’s next?
We’re working to set global packaging targets. Meanwhile,
we are conducting a full life cycle analysis of the environmental
impact of our Stage 3 infant formula with our partner Synlait in
New Zealand. Elsewhere, we are engaging with our packaging
suppliers to develop high quality and lower impact alternatives.
What’s next?
Although we have made small steps there is much more to
do. We are working to identify renewable energy generation
options for our direct operations and within our supply chain.
28 The a2 Milk Company
2019 Annual Report
Building a sustainable future
Stepping it up 29
Our
metrics
Unique, premium
brand and IP
Intellectual capital
Metric
% revenue invested in
marketing/R&D/IP
China consumption
– % value market share
FY19
10.9%
FY18
8.5%
YoY
variance
+2.4pts
6.4%
4.8%
+1.6pts
US consumption – revenue
$34.6m
$13.3m
+160.7%
Capital smart
approach
Financial capital
Metric
Revenue
FY19
FY18
YoY
variance
$1,304.5m $922.7m +41.4%
Return on capital employed4
61.2%
70.4% –9.2pts
Operating cash flow
$289.1m $231.1m +25.1%
Passionate and
thriving team
Human capital
Metric
Female Directors1
% of total
Senior Executives2
% of total
Managers
% of total
Sub-total for
senior leaders3
% of total
Other staff
% of total
Total
% of total
FY19
FY18
2
33%
5
42%
18
49%
25
45%
98
57%
123
54%
1
17%
1
10%
18
49%
20
38%
79
62%
99
55%
YoY
variance
+100%
+400%
0%
+25%
+24%
+24%
Heritage Australia, NZ and
17%
24%
–7pts
Pacific Islands
Asian
Americas
European
Africa and
Middle East
45%
23%
13%
2%
46%
13%
15%
2%
–1pt
+10pts
–2pts
–
Responsible use of
natural resources
Natural capital
Metric
% recyclability of packaging5
FY19
95.5%
YoY
variance
FY18
94.6%
+0.9pt
GHG Emissions6
Total
519,068
409,464
+26.8%
Scope 17
Scope 28
Scope 39
Direct operations10
(Scope 1, 2 and 3)
Third party
processing
and freight
On-farm11
198
1,507
187
1,502
+5.9%
+0.3%
517,362
407,775
+26.9%
5,095
3,930
+29.6%
122,976
103,869
+18.4%
390,997
301,665
+29.6%
0.5L/L milk
95%
–
–
–
–
Water efficiency12
Waste diversion13
Includes executive director Jayne Hrdlicka (CEO) and excludes Pip Greenwood, who commenced on 1 July 2019.
1
2 Senor executives are defined as the CEO and Senior Leadership Team.
3 Sub-total for Senior Leaders is the total of Directors, Senior Executives and Managers.
4 Calculated using average capital employed, including cash and investment in Synlait Milk Limited.
5 Based on recyclability of end use product, calculated on unit sales volumes in relevant year. Rates are based on the potential to recycle rather than actual
recyclability rates in end use markets. All material in our packaging is technically recyclable, however we have accounted for lack of infrastructure to recycle
aluminium in particular markets.
6 Greenhouse gas emissions, calculated as tonnes of carbon dioxide equivalent (tCO2e), have been estimated using the approach recommended by The GHG
Protocol. Emissions and conversions factors were sourced from the National Greenhouse Accounts Factors for Australia, the UK DEFRA GHG conversion factors
and a range of other country-specific sources. Where required, non-direct emissions sources have been estimated using default and/or extrapolated emissions
intensity rates to provide a more complete picture of our Scope 1, 2 and 3 carbon footprint. Total emissions calculations exclude packaging for FY19. We expect
data quality to improve over time as we continue to work with our partners.
Includes FY18 natural gas estimations for the US office, based on FY19 GJ/month averages.
Includes FY18 electricity estimations for the US office, based on FY19 kWh/month averages.
7
8
9 Due to the nature of Scope 3 emissions occurring outside of areas of our direct control, this represents a conservative estimate of our Scope 3 emissions.
Key emissions sources include: on-farm emissions, energy consumed within third party processing and warehouse facilities, fuel consumed in freight logistics
and business travel, as well as emissions associated with waste, recycling and water consumption. Where required, estimations have been made where data was
not able to be directly sourced. This includes assumptions and extrapolations from available data. Moving forward, we will endeavour to source as much actual
data as possible to improve data quality.
10 Includes our own fresh milk processing facility and corporate operations.
11 Calculated using actuals and industry estimations based on milk unit sales for all farms in Australia, NZ, the US and the UK, excluding Synlait for which emissions
are calculated based on our proportion of total output.
12 Water efficiency per litre of milk produced at our operated Smeaton Grange fresh milk processing facility.
13 Waste diversion from landfill at our operated Smeaton Grange fresh milk processing facility.
30 The a2 Milk Company
2019 Annual Report
Building a sustainable future
Stepping it up 31
Risk
management
Effective risk management
is an essential part
of actively growing
and developing a
successful business.
Effective risk management anticipates risk and
develops strategies to manage risk to drive
informed and consistent decision making and
the effective and efficient allocation of capital
and resources. Our risk management programme
assists us in identifying, assessing, monitoring
and managing our business risk, and recognising
material changes to our risk profile.
Our Risk Management Policy outlines the
programme we have implemented to ensure
appropriate risk management within our systems
and culture. A copy of the Risk Management
Policy is available at www.thea2milkcompany.
com/about-us/corporate-governance.
Identifying and responding to risk
Our risk assessment process begins with the
identification of key sources of risk relevant to the
activities of the business. This approach facilitates
a comprehensive assessment of potential risk to
the business and allows appropriate management
strategies to be subsequently employed.
The following table identifies significant sources
of risk for the business, including key economic,
environmental and social sustainability risks with
the potential to materially impact our ability to
achieve our objectives; and also how we are
responding to those risks.
Sources of risk
Sale of nutritional food products
We supply food products for human consumption, including complex nutritional
products for consumption by infants and children. As a result, the business is
inherently exposed to potential product quality, food safety and/or food integrity
events (including counterfeiting or tampering) that may cause injury to consumers,
and disruption to business activities, and could result in overall damage to our
brand and reputation.
High growth business in competitive markets
Our business has experienced significant growth in recent years, driven
predominately by the success of our liquid milk and infant formula businesses in
Australia, China and the US. Our strategic growth priorities seek to ensure we
continue to deliver long-term growth in existing and new markets. As a result,
we are inherently exposed to:
•
increasing competitive intensity, which could lead to an erosion of our market
share positions in core markets; and
• potential infringements of our IP rights resulting from third party conduct or
claims against such IP, which may lead to protracted litigation and/or erosion of
our brand assets.
Doing business in international markets
Due to our expanding footprint, our business is exposed to various risks associated
with conducting business in international markets including in Australia, China
and the US. As a result, we are inherently exposed to:
• dynamic political and regulatory environments in which government actions
influence or restrict international trade in products. This can occur through
the use of tariffs, quotas, price controls, taxes and non-tariff barriers such as
product registrations, competition and consumer laws; and
litigious environments that could result in claims against the company from
consumers and other market participants.
•
Reliance on strategic partnerships
Our success is underpinned by key relationships with strategic partners, including
key supply and distribution partners. As a result, the business is inherently exposed
to the operations of key partners changing in a material and adverse way, or as
the result of one or more partners reducing their support for us. This could impact
our ability to maintain supply to our customers, and to maintain our position in
existing markets or enter new markets.
How we are responding
We have a range of product quality and food safety systems, protocols and technologies in
place to minimise risk in this area, including:
• food safety and quality management systems;
• high quality third party manufacturing partners;
• positive release protocols (comprehensive testing of product quality and protein integrity
prior to the release of every batch of finished product);
• testing of distributed products in selected markets;
• employment of product innovation and technology to improve product security;
• product recall and crisis management systems; and
• consumer support systems.
Our strategic growth priorities are aided by:
• significant and ongoing investment in brand building activities globally;
• new and unique product offerings in selected markets;
• continued investment in developing and further broadening our trademark and patent portfolio including
building exclusivity in trademarks in existing and future markets and expansion of the company’s suite of
patent families;
• monitoring of third party applications and activity;
• monitoring infringement of our IP and taking necessary action to protect it; and
• documenting and embedding proprietary know-how across quality systems and processes.
Our efforts to effectively navigate the complexities of international markets are supported by:
• strong and experienced local management teams in our core markets of ANZ, China and the US;
• sophisticated expert monitoring of evolving regulatory requirements in all markets in which we operate;
• a multi-product, multi-channel route to market strategy for the sale of infant formula into China;
• close partnership with our infant formula manufacturer, Synlait Milk, which holds:
-
SAMR product registration1 for the importation of the company’s China label infant formula through
to September 2022; and
- GACC2 registration for its Dunsandel manufacturing facility, allowing canned infant formula to be
exported to China.
Potential exposures are mitigated through the proactive management of partner relationships centred on
shared long-term value creation, which includes:
• a focus on developing strong, long-term commercial relationships with multiple supply chain partners;
• due diligence on supply chain partners before entering commercial agreements;
• a long-term partnership with dairy nutritionals manufacturer, Synlait Milk, governed by a formal
manufacturing agreement, and complemented by the company’s equity interest in Synlait Milk;
• a strategic relationship with Fonterra Co-operative Group Limited, providing multi-site and geographic
diversification for our growing nutritionals business;
• contracts providing access to milk pools that exceed our current usage requirements; and
• multiple milk processors contracted in Australia and the US, mitigating reliance on a single processor
in these regions.
32 The a2 Milk Company
2019 Annual Report
Building a sustainable future
Stepping it up 33
1 Registration achieved by Synlait Milk and given by China’s State Administration for Market Regulation (SAMR) in September 2017 for the company’s
China label infant formula. SAMR requires registration to be held in the name of the manufacturer as opposed to the brand owner.
2 General Administration of Customs of the People’s Republic of China.
Risk
management
continued
Sources of risk
How we are responding
Climate change and reliance on natural resources
The business is exposed to short-term and long-term climate and environment
related risks. These risks are inherent in the dairy industry and consumer
marketplace and include:
• physical climate-related risks such as increased frequency and severity of
extreme weather events, including the impacts of droughts on milk supply
and input costs for farmers, as well as supply chain disruptions;
• transitional climate-related risks such as future regulatory obligations
and carbon price exposure in our supply chain;
• environmental concerns regarding agricultural practices, including GHG
emissions; water, soil and air quality; and biodiversity impacts; and animal
welfare; and
• changing consumer preferences and calls for greater transparency and
responsibility regarding the environmental impact of consumer products.
Such risks could negatively affect our brand reputation; result in greater
regulation, consent or licensing requirements; or result in other restrictions
or disruptions being imposed on our operations.
Reliance on talent and culture
We rely on the talent of our people and the effectiveness of our culture for
success. Therefore, keeping our people safe is a top priority. The competitive
nature of the job market and our positioning as a high-growth business also
contribute to risks associated with managing our talent and culture:
• actual or potential harm to all workers and other persons at the workplace
(including from non-compliance with applicable laws and regulations). In
addition to any harm itself, this could also result in financial penalties, drop in
staff morale and productivity, increased insurance costs and damage to our
reputation;
loss of key management personnel, in addition to the loss itself, could also
have a material effect on our operating and financial performance; and
•
• resource constraints resulting from business growth out-pacing
talent acquisition.
Rapid change in information technology (IT)
The rapid change in IT provides both opportunities and risks. Incidents of
cyber-attack and the release of data have become an increasing threat for all
companies. The cyber security and data environment is continuously evolving
and, as a result, we are inherently exposed to inadequate IT security leading to
a compromise of our IT system and potential data theft, data loss or corruption.
Such a compromise could result in economic or reputational loss.
We are responding to increased demand for transparency on the identification and management of
climate-related risks by moving towards alignment of our 2018/19 corporate disclosures with the
Taskforce on Climate-Related Financial Disclosures (TCFD), with the intention of adopting the full TCFD
recommendations over the next three years.
We are managing our exposure to natural resource reliance by:
• setting baselines, annual reporting and short-term and long-term reduction targets for GHG emissions
(aligned with the Paris Agreement), energy and water consumption, waste-to-landfill and product
packaging within our direct operations and our supply chain;
• building long-term supply arrangements with partners promoting positive environmental and social
sustainability activities and initiatives and implementing environmental plans on all farms by 2021;
• sourcing milk from diversified milk pools across and within New Zealand, Australia, the USA and the UK;
• sourcing milk from farms in close proximity to our processing facilities, reducing the need to transport
•
milk over long distances from other areas; and
implementing a best practice globally certified animal welfare standard across our operations, aligned
to the Five Provisions and Animal Welfare Aims.
We are committed to the safety of our people and have established systems and processes to identify,
control, report, investigate and monitor health and safety risks across the business.
Believing that well managed, engaged and effective teams create long-term business success, our efforts are
aided by:
• an effective employee retention strategy, combining both short-term and long-term financial incentives
with career development opportunities to motivate and engage key personnel;
increasing the depth and capability of the senior management pool to support future growth; and
•
• succession planning to ensure continuity of knowledge, skills and experience.
We remain focused on further strengthening our governance, processes and technology controls to
continue to protect the integrity and privacy of data and maintain compliance with regulatory requirements.
We continue to invest in increased cyber security systems and protections, including restricted and
segregated access to sensitive company and stakeholder data, implementation of regional specific
cyber security audits and cyber security insurance.
34 The a2 Milk Company
2019 Annual Report
Building a sustainable future
Stepping it up 35
C O R P O R AT E G O V E R N A N C E
Contents
Our directors
Our executive leadership team
Governance
Remuneration
38
40
41
45
36 The a2 Milk Company
2019 Annual Report
Corporate governance
Stepping it up 37
Our
directors
David Hearn
Chair and non-executive
Director
Master of Arts
Director since February 2014
David has been a director
of the company since
5 February 2014, and Chair
since 30 March 2015. He
is also a member of the
Nomination Committee.
David has experience and skills
in executive management,
sales and marketing and
strategy development in fast
moving consumer goods
(FMCG) in international
markets. He has held senior
executive roles including
Chief Executive Officer or
Managing Director roles for
FMCG companies including
Goodman Fielder Limited,
UB Snack Foods Europe/Asia,
Del Monte UK and Smith’s
Crisps and for the marketing
services group, Cordiant
Communications Group.
In addition to his Company
directorship, David is also
a director of Lovat Partners
Limited, Robin Partington
& Partners Limited and
Committed Capital Limited.
David resides in the
United Kingdom.
Julia Hoare
Deputy Chair and
Independent,
non-executive Director
Bachelor of Commerce, FCA,
Chartered Member of the
Institute of Directors (NZ)
Director since November 2013
Jayne Hrdlicka
Managing Director and
Chief Executive Officer
Bachelor of Arts (Hons)
Economics and Mathematics;
Master of Business
Administration (Dartmouth)
Director since July 2018
Jayne commenced as Managing
Director and CEO of the
company on 16 July 2018.
Jayne is a senior executive with
extensive experience in strategy
formulation and execution,
insight into customer-
centricity and innovation and,
importantly, an understanding
of operating in a disruptive
environment.
Prior to joining the company,
Jayne was most recently
employed for five years in
the role of CEO of the Jetstar
Group, a wholly owned
subsidiary of Qantas Limited,
having previously led the
business transformation of
Qantas Airlines from 2010
to 2012. Jayne also served
as a Non-Executive Director
of Woolworths Limited from
2010 to 2016. In her earlier
career, Jayne was a partner at
Bain & Company, where she
was focused on consumer
orientated businesses. Jayne is
also the current non-executive
President of Tennis Australia
Limited.
Jayne resides in Australia.
Julia has been a director of the
company since 19 November
2013, and Deputy Chair since 30
March 2015. She is also Chair of
the Audit and Risk Management
Committee and a member of the
Nomination Committee.
Prior to joining the Board, Julia had
extensive chartered accounting
experience in Australia, the UK
and NZ and was a partner with
PwC NZ for 20 years. She is also
a member of the New Zealand
External Reporting Advisory
Panel (XRAP), a body designed
to support the standard setting
process of the New Zealand
External Reporting Board (XRB),
and the New Zealand Institute of
Directors National Council.
In addition to her Company
directorship, Julia is Deputy
Chair of Watercare Services
Limited, and a director of Port of
Tauranga Limited, AWF Madison
Group Limited and Auckland
International Airport Limited.
She is also a member of The
New Zealand Sustainable Finance
Forum Leadership Group, the
aim of which is to identify
genuine, practical ways to
ensure the financial system is
supporting and not hindering
the economic transition required
for New Zealand to meet its
international commitments under
the Paris Agreement Sustainable
Development Goals.
Julia resides in New Zealand.
Warwick Every-Burns
Independent,
non-executive Director
Advanced Management
Program (Harvard)
Jesse Wu
Independent,
non-executive Director
Master of Business
Administration (Duke)
Pip Greenwood
Independent,
non-executive Director
Bachelor of Laws (LL.B.),
University of Canterbury (NZ)
Director since August 2016
Director since May 2017
Director since July 2019
Peter Hinton
Independent,
non-executive Director
Bachelor of Commerce;
Bachelor of Laws (Hons);
Master of Laws (Harvard)
Pip has been a director of the
company from 1 July 2019. She
is also Chair of the Nomination
Committee and a member of
the Remuneration Committee.
Currently Pip is also a director
on the boards of Westpac New
Zealand, Spark New Zealand
and Fisher & Paykel Healthcare.
She was previously a senior
partner at law firm Russell
McVeagh, where she spent over
10 years on the firm’s board
including acting as the firm’s
board Chair and interim CEO.
Pip brings extensive commercial
and board experience to
The a2 Milk Company board. A
leader in the field of corporate
law and in the New Zealand
business community, Pip is
also known for her work
promoting greater diversity
in the workplace. She is the
recipient of numerous industry
awards including being named
New Zealand “Dealmaker of
the Year” at the Australasian
Law Awards 2018, an accolade
she has won five times; and
she has twice been recognised
as a finalist at the Women of
Influence Awards.
Pip resides in New Zealand.
Warwick has been a
director of the company since
23 August 2016. He is also
Chair of the Remuneration
Committee and a member
of the Audit and Risk
Management Committee.
Warwick has been a career
Consumer Packaged Goods
(CPG) executive of global
scale. His executive roles have
included a successful career with
The Clorox Company of the
USA as Senior Vice President,
International, based in the
USA and prior to that as VP
Asia Pacific. His earlier roles
included Managing Director of
NationalPak Limited (the Glad
Products Company ultimately
acquired by Clorox) and a long
career with Unilever PLC where
he was based in Australia.
Warwick is a Non-Executive
Director of one of the leading
international wine companies,
the ASX listed Treasury Wine
Estates Limited.
Warwick brings a combination of
international CPG Executive and
non-executive director experience
in markets of particular relevance
to the company in China,
North America and Europe.
His strong skills and interest in
business development in new
and emerging markets, brand
management and human
resource management are of
significant value to the company.
Warwick resides in Australia.
Jesse has been a director of the
company since 16 May 2017.
He is also a member of the
Audit and Risk Management
Committee and the
Remuneration Committee.
Jesse began his career with
Procter & Gamble and PepsiCo,
before joining Johnson &
Johnson’s consumer business.
He was appointed International
Vice President, Asia/Pacific in
2003 and Company Group
Chair, Global Markets in 2008.
Prior to his last executive
position, he was Worldwide
Chair of the Johnson & Johnson
Consumer Group (which had
annual revenues of US$14bn).
Jesse serves on the Board of
Visitors at Duke University’s
Fuqua School of Business.
He is a two-time recipient of
the Magnolia Award from
the Shanghai Municipal
Government, given in
recognition of his contributions
to Shanghai’s economic
development. In addition,
Jesse serves on the board of
Aptar Group Inc, a leader in
global dispensing systems, as
well as Shanghai Kehua
Bio-Engineering co., Ltd.
Over his career Jesse has
managed significant scale
and complexity in the areas
of manufacturing, distribution,
sales and marketing,
in both developed and
emerging markets.
Jesse resides in China.
Peter was a director of the
company from 16 February
2016 until his retirement on
30 June 2019.
Peter was a partner at law
firm Simpson Grierson in
New Zealand until December
2016 and is a highly regarded
commercial lawyer, investor and
businessman with substantial
experience in New Zealand and
international markets.
Geoffrey Babidge
Former Managing
Director and Chief
Executive Officer
Bachelor of Economics
Geoffrey was a Director of the
company from 22 July 2010
until his retirement as Managing
Director and CEO effective from
16 July 2018.
Geoffrey has over 30 years
senior management experience
working in the Australian
FMCG industry. Prior to this
he was a practising chartered
accountant and partner at
Price Waterhouse.
38 The a2 Milk Company
2019 Annual Report
Our directors
Stepping it up 39
Our executive
leadership team
Governance
Jayne Hrdlicka
Managing Director and Chief
Executive Officer (CEO)
Bachelor of Arts (Hons) Economics
and Mathematics (Colorado College)
Master of Business Administration
(Dartmouth)
Peter Nathan
Chief Executive Asia Pacific
Bachelor of Business (Marketing)
Xiao Li
Chief Executive Greater China
Bachelor of Arts in Business Admin,
English (Heilongjiang University)
Master, EMBA (China Europe
International Business School)
Blake Waltrip
Chief Executive USA
BA Economics (University
of California at San Diego)
Masters of Business Administration
(Anderson Graduate School of
Management, UCLA)
Craig Louttit
Chief Financial Officer
Bachelor of Commerce, CA
Jaron McVicar
General Counsel and
Company Secretary
Bachelor of Laws
Susan Massasso
Chief Marketing Officer
Bachelor of Commerce – Accounting
and Marketing (University of Sydney)
Detailed profiles for the executive
leadership team are available on
the Company’s website at
www.thea2milkcompany.com/about-us/
corporate-governance.
We are committed to maintaining the highest
standards of corporate governance. Our corporate
governance framework has been established to
ensure that directors, officers and employees fulfil
their functions responsibly, whilst protecting and
enhancing the interests of shareholders.
Lisa Burquest
Chief People Officer
Bachelor of Business, Logistics,
Materials and Supply Chain
Management
Melanie Kansil
Chief Commercial Officer
AB, Physics (Harvard University, USA)
Masters of Business Administration
(Stanford University Graduate School
of Business, USA)
Shareef Khan
Chief Operations Officer
Bachelor of Science, CSCP, APICS
Phil Rybinski
Chief Technical Officer
BASc, Food Science and Technology
(University of Melbourne)
Masters of Business Administration
(Southern Cross)
Eleanor Khor
Head of Strategy
Bachelor of Commerce/Bachelor
of Laws (Hons)
University of Melbourne
We believe that good corporate governance
adds to the performance of the Company,
creates shareholder value and engenders the
confidence of the investment market.
Our corporate governance framework has
been developed with regard to:
• the NZX Corporate Governance Code;
and
• the ASX Corporate Governance Council’s
Corporate Governance Principles and
Recommendations (ASX Principles)
(third Edition). The ASX Principles
(fourth Edition) have been finalised
and take effect for the Company from
1 July 2020. However, the Board intends
to progressively adopt the ASX Principles
(fourth Edition) during the financial year
ending 30 June 2020.
For the financial year ended 30 June 2019
our corporate governance framework
complied with the recommendations in the
NZX Corporate Governance Code and the
ASX Principles (third Edition), except where
noted below.
ASX Principles
Recommendation 2.5 of the ASX Principles
states that the Chair of the Board should be
an independent director and, in particular,
should not be the same person as the
CEO (recommendation 2.9 of the NZX
Corporate Governance Code recommends
that where the Chair of the Board is not
independent, the Chair and CEO should be
different people).
The roles of Chair and CEO are not exercised
by the same individual. During the financial
year from 16 July 2018, the role of CEO
was held by the Managing Director,
Jayne Hrdlicka.
However, the Board does not consider
the Company’s Chair, David Hearn, to be an
independent director in this financial year for
the purposes of the ASX Principles. This is
because the CEO previously had the capacity
to call on David from time to time to support
the Company’s business in Europe and the
UK in a limited executive role. This executive
role ceased in December 2018.
Considering his limited executive role during
the first half of this financial year, the Board
considers it appropriate that David should
retain his non-independent status for now.
David brings to the Board invaluable
perspective on the development of
consumer products markets globally.
The Board is confident that he exercises
an independent view and judgement in
his role as Chair and that the CEO has full
executive control and accountability in
the organisation.
The Board considers there is an appropriate
level of independent view and judgement
exercised by directors, including by
Julia Hoare as Deputy Chair, who is the
lead independent director.
Director independence
The Board Charter provides that the Board
will, where practicable, comprise a majority
of independent directors.
Director independence is initially assessed
upon each director’s appointment and
reviewed each year, or as required when a
new personal interest or conflict of interest
is disclosed. For this purpose, each director
is required to bring an independent view
and judgement to the Board and to declare
all actual or potential conflicts of interest on
an ongoing basis.
Any issue concerning a director’s ability to
properly act as a director must be discussed
at a Board meeting as soon as practicable,
and a director may not participate in
discussions or resolutions pertaining to any
matter in which the director has a material
personal interest.
In determining the independence of its
directors, the Board considers guidance for
independence, set out in the ASX Principles,
the NZX Listing Rules and the NZX Corporate
Governance Code. Based on those rules and
recommendations, a director is considered
to be independent by the Board if he or she
is a non-executive director and free of any
interest, position, association or relationship
that could reasonably influence, or could
reasonably be perceived to influence, in a
material respect his or her capacity to bring
an independent view to decisions in relation
to the Company, act in the best interests of
the Company and represent the interests of
the Company’s security holders generally.
Based on these measures, the Board
considers that the non-executive directors,
Julia Hoare, Warwick Every-Burns, Jesse Wu
and Pip Greenwood are independent
directors, and Peter Hinton was an
independent director.
Corporate Governance
Statement
Our Corporate Governance Statement,
approved by the Board, can be found
on the Company’s website at
www.thea2milkcompany.com/about-us/
corporate-governance.
40 The a2 Milk Company
2019 Annual Report
Governance
Stepping it up 41
Our Board
Role of the Board and
delegation of authority
The Board is responsible for the overall
governance and operations of the Company,
guiding the Company’s strategic direction,
monitoring risk, and overseeing the activities
of management. All issues of substance
affecting the Company are considered by
the Board, with advice from external advisers
as required.
The role and responsibilities of the
Board are set out in the Board Charter,
available on the Company’s website at
www.thea2milkcompany.com/about-us/
corporate-governance.
The Board delegates certain functions
to its three Committees (Audit and Risk
Management Committee, Remuneration
Committee and Nomination Committee).
The diagram below illustrates our corporate
governance framework:
Audit and Risk Management
Committee (ARMC)
The principal purpose of this committee is
to assist the Board in fulfilling its corporate
governance and oversight responsibilities in
relation to the Group’s risk management and
internal control systems, accounting policies
and practices, internal and external audit
functions and corporate reporting.
Remuneration Committee
(REM)
Assists the Board in establishing appropriate
policies for remuneration across the Group
and reviews the remuneration of the Chief
Executive Officer and other senior executives
as the Board may determine.
Nomination Committee (NOM)
Assists the Board by considering nominations
to the Board to provide an appropriate mix
of expertise, diversity, skills and experience
on the Board, and reports to the Board
on progress on the implementation of
the Company’s diversity policy.
These Board committees are governed by
charters detailing their specific functions
and responsibilities. The charter for each
committee is reviewed by the Board
annually. Copies of the committee charters
are available at www.thea2milkcompany.
com/about-us/corporate-governance.
Board size, skills and structure
During the reporting period, the Board
comprised six directors (four independent
non-executive directors and two executive
directors, one of whom (the Chair) ceased
to be an executive during the period). The
Company’s constitution provides for a
minimum of four directors and a maximum
of eight, of which at least two must be
New Zealand residents to comply with the
NZX Listing Rules.
Governance framework
Independent
assurance(i)
Group
Company
Secretary(ii)
Board of
Directors
Accountability
and reporting
Delegation and
oversight
Board
committees
(ARMC, REM,
NOM)
Delegation and
oversight(iii)
Accountability
and reporting
CEO/MD(iv)
Delegation and
oversight
Accountability
and reporting
Executive
leadership
team(v)
(i)
Internal audit/external audit/legal
and other professional advice.
(ii) Accountability and reporting of
corporate governance and Board
related matters.
(iii) Board delegates all matters except
those reserved for the Board or its
committees.
(iv) Responsible for day to day
(v)
operations; leads the executive team.
Implements strategy and business
plans; directs performance and
behaviour of workforce.
The Board has developed a board skills matrix which sets out the diversity of skills and
experience that it has. The matrix, set out in its collective form reflecting current Board
composition, is as follows:
Skills and experience
Executive leadership – experience as a senior executive in one or
more substantial commercial businesses
Non-executive board membership – experience as a non-
executive director of a number of listed or other widely-held
companies
Governance – experience in setting and implementing corporate
governance policies, practices and standards
Consumer products and nutritional industries – experience
as a senior executive in, or as a professional advisor to, consumer
products or nutritional industry businesses
E-commerce – experience as a senior executive in, or as a
professional advisor to, businesses engaged in e-commerce
activities
Food safety – technical or managerial experience relating
to food, food product development and development
and/or implementation and management of safe practices
for the sourcing, production, transport and distribution of
perishable foods
Sustainability – experience in identifying economic, social and
environmentally sustainable developments, and setting and
monitoring sustainability aspirations
International markets – experience as a senior executive in, or as
a professional advisor to, businesses that operate outside Australia
and New Zealand, particularly those international markets in which
the Company operates, and an understanding of how to succeed
in different cultural, regulatory and business environments
Accounting, taxation and finance – experience in financial
accounting, taxation, external and/or internal audit and reporting
Risk management – experience in identifying and mitigating risk
Remuneration – experience in developing and/or implementing
executive remuneration programmes, including incentive-based
remuneration
Board
representation
(out of six directors)
83% (5)
83% (5)
67% (4)
67% (4)
Board committees
The Board’s three standing committees
facilitate and assist the Board in fulfilling its
responsibilities. Other committees may be
established from time to time with specific
responsibilities as delegated by the Board.
The composition of the committees as at,
and throughout the financial year ended,
30 June 2019, was as follows:
Members
Independent
Non-
executive
Audit and Risk Management Committee
Julia Hoare
(Chair)
Warwick
Every-Burns
83% (5)
Jesse Wu
33% (2)
Nomination Committee
Peter Hinton
(Chair)
Julia Hoare
David Hearn
50% (3)
Remuneration Committee
Warwick
Every-Burns
(Chair)
100% (6)
Peter Hinton
Jesse Wu
*
20% (1)
100% (6)
83% (5)
* David Hearn ceased to be an executive director on
18 December 2019.
Peter Hinton retired as a director on
30 June 2019. Pip Greenwood, appointed
as a director on 1 July 2019, was also
appointed Chair of the Nomination
Committee and member of the
Remuneration Committee from that date.
42 The a2 Milk Company
2019 Annual Report
Governance
Stepping it up 43
Our Board
Attendance at Board and committee meetings
Director attendance at Board and committee meetings during the year ended 30 June 2019
is set out below.
Meetings of
the Board
Audit and Risk
Management
Committee
Remuneration
Committee
Nomination
Committee
Held Attended Held Attended Held Attended Held Attended
David Hearn
(Chair)
Julia Hoare
(Deputy Chair)
Jayne Hrdlicka
(Managing
Director and
CEO)
Geoffrey
Babidge1
(Managing
Director and
CEO)
Peter Hinton
Warwick
Every-Burns
Jesse Wu
12
12
12
12
10
10
2
2
12
12
12
11
12
12
–
6
–
–
–
6
6
–
6
–
–
–
6
6
–
–
–
–
4
4
4
–
–
–
–
4
4
4
3
3
–
–
3
–
–
3
3
–
–
3
–
–
Held: Meetings held during the period for which the person was a director or committee member.
1 Retired as Managing Director and CEO on 16 July 2018.
Corporate governance policies
The following policies, each of which
has been prepared having regard
to the ASX Principles and the NZX
Corporate Governance Code, are
available on the Company’s website at
www.thea2milkcompany.com/about-us/
corporate-governance:
• Code of Ethics;
• Continuous Disclosure Policy;
• Diversity Policy. The Company’s diversity
policy is discussed on pages 26-27 of this
Annual Report;
• Risk Management Policy. The Company’s
risk management policy is discussed on
page 32 of this Annual Report;
• Securities Trading Policy; and
• Shareholder Communication Policy.
The Board regularly reviews the performance
and effectiveness of the Company’s
corporate governance policies and
procedures and, if appropriate, amends
those policies and procedures or adopts
new policies or procedures to uphold
the integrity of the Company’s corporate
governance framework.
Remuneration
All employees have a fixed remuneration
package. Selected senior executives and
managers also have variable remuneration
in the form of a short-term incentive (STI) as
part of their remuneration package. Certain
selected senior executives and managers
may also have long-term incentives (LTI) as
part of their remuneration package.
Remuneration packages for senior executives
are structured so that a significant portion of
remuneration is at risk but can be earned by
the achievement of superior performance.
The LTI is designed to drive sustained
performance over time and to both attract
and retain the best possible talent.
An appropriate remuneration mix is
determined for each position, taking into
consideration the executive’s role and level
of responsibility.
Employees, not participating in the STI or
LTI plans, may receive a bonus of 3% to 5%
of fixed remuneration, subject to individual
performance and the Company achieving
its financial objectives for the year.
Fixed remuneration
Employees’ fixed remuneration is based
on a matrix of an individual’s skills and
experience, their individual performance
and their current level of remuneration
relative to the market. Fixed remuneration
is reviewed on an annual basis with
reference to independent external surveys;
and where appropriate, is adjusted based
on consideration of individual performance
and, market remuneration movement.
The Remuneration Committee reviews and
approves all changes to fixed remuneration.
Variable remuneration
The STI and LTI programmes provide the
potential for employees to receive payment
over and above fixed remuneration.
These programmes are discretionary, and
appropriate to the results delivered by the
Group and the individual performance of the
employee, based on the principle of reward
for performance.
Short-Term Incentive plan (STI)
The STI is focused on performance goals
that align with Company direction;
driving outcomes, differentiating high
performance and rewarding delivery over
the financial year.
STI values are calculated as a percentage
of fixed remuneration.
STI values and performance targets are
approved by the Board at the start of each
financial year. For the year ended 30 June
2019 the range of maximum STI payments
available to participants is between 12%
and 120% of fixed pay, with the STI payable
up to the maximum subject to achievement
of financial targets and specific agreed
personal objectives, aligning with the
strategic objectives of the Company.
Performance against financial targets
is compared with agreed business unit
or Group budgets, and achievement of
personal objectives is tracked and discussed
throughout the performance period as part
of the Company’s performance management
process. Personal targets include: brand
development; safety; leadership behaviours;
and delivery of key projects.
STI payments are determined and paid
annually following the finalisation of the
audited Company results.
We recognise that our success depends
on the quality and contribution of our
people. Our remuneration philosophy for
all employees and executives aims to:
•
link rewards to the creation of sustainable
value for shareholders;
• attract, develop and retain talented
•
employees and executives;
initiate and execute the Company’s
business plans and strategy as endorsed
by the Board;
• reward the delivery of superior
performance;
• have a balanced mix of short-term and
long-term remuneration components;
• be consistent with and supportive
of the Company’s ethical framework
and commitment to good corporate
governance; and
• ensure that remuneration arrangements
are competitive, fair, and reflect the
external labour market.
Remuneration policies and
practices
The Remuneration Committee is
responsible for establishing the policies and
practices of the Company regarding the
remuneration of directors and other senior
executives of the Group and reviewing all
components of the Group’s remuneration
practices relevant to its employees. The
Remuneration Committee Charter sets
out the objectives, responsibilities and
authority of the Remuneration Committee
in relation to remuneration matters. The
Charter stipulates that the Committee will
make recommendations to the Board, but
all decision-making authority in relation to
remuneration remains with the Board.
The Board’s policy for remunerating
the CEO and other senior executives is
to provide market-based remuneration
packages comprising a blend of fixed and
variable at-risk incentive-based remuneration
with clear links between individual and
Company performance, and reward.
The Remuneration Committee reviews the
remuneration packages of the CEO and
other senior executives at least annually.
44 The a2 Milk Company
2019 Annual Report
Remuneration
Stepping it up 45
Non-executive
director
165,000
120,000
Company
Remuneration paid to non-executive directors of the Group for the year ended 30 June 2019 was as follows:
Board fees
Committee fees
Total fees
Audit and Risk
Management
Remuneration
Nomination
Other
benefits
received
Total
remuneration
$
David Hearn (Chair)1
142,500
Julia Hoare
(Deputy Chair)
Peter Hinton
Warwick Every-Burns
Jesse Wu2
Total
Subsidiary companies
William Keane3
Total
187,500
142,500
142,500
180,000
795,000
46,884
841,884
$
–
34,000
–
16,500
16,500
67,000
–
67,000
$
–
–
16,500
34,000
16,500
67,000
–
67,000
$
–
$
$
$
142,500
89,045
231,545
11,000
232,500
22,000
–
–
181,000
193,000
213,000
–
–
–
–
232,500
181,000
193,000
213,000
33,000
962,000
89,045
1,051,045
–
46,884
–
46,884
33,000
1,008,884
89,045
1,097,929
1 Other benefits received include the annual non-cash accounting charge for options issued under the LTI plan of $44,755; and consultancy fees of $44,290
payable to Lovat Partners Limited, an entity controlled by David Hearn providing services solely to the Company, for consultancy services rendered during the first
half of the year and charged at commercial rates, separate from the director’s fees reported above. The value of options exercised by David Hearn during the year
was $1,454,657.
2 Jesse Wu received $37,500 in the period for additional Board duties.
3 William Keane is included as a director of The a2 Milk Company Limited (UK). No other director of a subsidiary company was remunerated in their capacity
as a director.
Remuneration
Long-Term Incentive plan (LTI)
The LTI has been established to:
• assist in the reward and retention of
•
selected senior executives and managers;
link the reward available to senior
executives and managers to shareholder
value creation; and
• align the interests of senior executives
and managers and shareholders by
providing senior executives and managers
with an equity interest in the Company.
Participation in the LTI plan is by invitation
only, at the sole and absolute discretion
of the Board. The Company may grant
performance rights (Awards) to eligible
participants under the plan.
Each Award granted represents a right to
receive one fully paid share in the Company
once the Award vests and is exercised.
The number of Awards and the vesting
conditions for Awards issued under the
LTI Plan are determined by and at the sole
discretion of the Board. No dividends are
paid on performance rights.
The grants of performance rights, in this and
previous years, vest subject to an Earnings
Per Share (EPS) performance hurdle. The
diluted EPS growth performance hurdle
was chosen as a performance measure
appropriate to the Company, with progress
easily tracked against agreed performance
targets; encouraging employee engagement
and aligning with shareholder objectives.
Further details on the LTI can be found at
Note F2 to the financial statements.
The Board may forfeit performance rights for
fraud, dishonesty or wilful breach of duties.
Revised LTI programme in FY20
During FY19 a revised remuneration policy
for the Group was finalised. The policy
supports a high performance remuneration
framework with a comparatively lower
fixed pay component and higher at-risk
component than was contained in the
previous framework. This review resulted
in the temporary suspension of the LTI
programme in the 2019 financial year.
The revised programme is expected to
commence in the first half of the 2020
financial year.
Managing executive
performance
Robust processes are in place for supporting
and evaluating the performance of the CEO
and other senior executives and managers.
The Board and CEO determine and
agree annual targets and objectives
for the Company based on the
Company’s strategic plan, supported by a
comprehensive and collaborative forecasting
and budgeting process. The CEO is
accountable to the Board for the delivery
of the agreed objectives.
The objectives agreed between the Board
and the CEO are discussed and cascaded to
each member of the executive team, and
captured in individual performance delivery
documents and STI agreements. The CEO
uses the performance delivery documents
to facilitate individual conversations with
each member of the executive team
periodically throughout the performance
period. The periodic performance discussions
are documented and form the basis of
the annual performance review that each
executive undertakes with the CEO, and that
the CEO undertakes with the Board, at the
end of the performance period.
The outcome of the executive’s performance
over the course of the year contributes to
considerations surrounding changes to fixed
remuneration and the awarding of variable
remuneration and incentives.
For the financial year ended 30 June 2019,
each member of the executive team who
was an employee for the duration of the
reporting period had at least one periodic
performance discussion documented.
Directors’ remuneration
Non-executive directors’ remuneration is
paid in the form of directors’ fees. The fees
paid to directors are structured to reflect the
respective responsibilities and workloads of
their Board and Committee positions.
The annual aggregate non-executive
directors’ remuneration pool, applying from
1 January 2019, is capped at $1,365,000
(previously $950,000), and was approved
by shareholders at the Company’s Annual
Meeting held on 20 November 2018.
Directors’ fees
structure
Base board fees:
Chair of the Board
(refer below)
$ annual
from 1
Jan 19
$ annual
to 31
Dec 18
165,000
120,000
Deputy Chair
210,000
165,000
Audit and Risk Management Committee:
Chair
35,000
33,000
Committee member
16,500
16,500
Remuneration Committee:
Chair
35,000
33,000
Committee member
16,500
16,500
Nomination Committee:
Chair
22,000
22,000
Committee member
11,000
11,000
The Chair, David Hearn, was previously
regarded as an executive director on account
of his executive role in relation to the
Group’s business in Europe and the UK. He
received consultancy fees for services to the
Company in Europe and the UK through
Lovat Partners Limited, an entity controlled
by him. However, he was never an employee
of the Company. This executive role ceased
in December 2018.
Prior to the Company’s admission to
the Official List of the ASX on 31 March
2015, 5,000,000 options over unissued
ordinary shares were issued to Lovat
Partners Limited under the Company’s LTI
Plan. Each option has an exercise price of
NZ$0.63. At 30 June 2019, 1,000,000 of
these options are yet to vest and 2,200,000
have vested but are not yet exercised.
The consultancy fees received for the year
ended 30 June 2019, and the annual
accounting charge to profit or loss for
the options issued under the LTI Plan, are
included in the schedule of non-executive
directors’ remuneration as other benefits.
The current level of Chair’s fees recognises
the contribution to total remuneration of
these other benefits.
46 The a2 Milk Company
2019 Annual Report
Remuneration
Stepping it up 47
Remuneration
Remuneration of CEO
– Jayne Hrdlicka
Jayne commenced her role as Managing
Director and CEO of the Company on
16 July 2018. Details of the remuneration
arrangements under her employment
agreement are set out below.
Term
There is no fixed term; employment is
ongoing until terminated by either Jayne
or the Company in accordance with her
employment agreement, which includes
a six months’ notice period for resignation
or termination of employment by
the Company.
Total fixed remuneration
A$1,500,000 per annum, including
superannuation, subject to annual review.
STI
An annual STI payment of up to a maximum
of 120% of total fixed remuneration may
be achieved, based on the achievement of
performance objectives measured against
key performance indicators determined by
the Board on an annual basis.
LTI
On an annual basis, Jayne will be invited
to take up performance rights under the
Company’s current LTI Plan Rules, which
apply to all senior management.
Commencing in the 2020 financial
year, Jayne will be offered performance
rights equivalent to 150% of Total Fixed
Remuneration (subject to adjustment
from time to time at the discretion of the
Board in order to have reasonable regard
to equivalent entitlements provided by
peer companies).
Subject to the discretion of the Board or
unless employment is terminated by the
Company other than for fault, cessation of
employment will result in the forfeiture of all
unvested performance rights. The Board may
also forfeit performance rights for fraud,
dishonesty or wilful breach of duties.
At the discretion of the Board, performance
rights may be subject to accelerated vesting
if the Company is subject to a change
of control.
Adjustments to the number of performance
rights, or the number of the Company's
ordinary shares to which they relate, may
be made following any bonus issue of
the Company's ordinary shares or other
reorganisation of its capital.
Annual leave
Statutory entitlements together with one
week per annum of additional paid leave.
Other terms
The employment agreement also includes
standard terms covering expenses, conflicts
of interest, confidentiality, intellectual
property and moral rights, and restraints
upon termination.
Remuneration paid in the
financial year
The remuneration paid to Jayne Hrdlicka
in the financial year was as follows:
Fixed remuneration
Transition benefit paid
STI paid
2019
A$
1,500,000
586,666
–
Total remuneration received
2,086,666
The STI for the 2019 financial year will be
paid after the publication of the audited
results for the year.
The potential STI for the 2019 financial year
is up to 120% of her FY19 annual fixed
remuneration (or A$1,800,000).
Fixed remuneration was paid for the
period from 1 July 2019, reflecting work
undertaken by Jayne prior to her formally
commencing in the role of CEO on
16 July 2019, in order to ensure a smooth
transition of the role from Geoffrey Babidge.
Performance rights
On commencement of her employment,
Jayne was granted 245,787 performance
rights, equivalent to 175% of her Total Fixed
Remuneration ($2,625,000). Vesting of
these rights will be subject to the Company
achieving a compound annual growth
(CAGR) in its diluted earnings per share,
measured over three consecutive financial
years to 30 June 2021, on a straight-line
basis. 50% of the performance rights will
vest if diluted EPS CAGR of 15% is achieved,
to a maximum of 100% if diluted EPS CAGR
of 25% or more is achieved.
Transition benefits
On a one-off basis, Jayne received
the following transition benefits as
compensation for forfeitures of her
former employer’s STI and LTI entitlements
as a result of her resigning to take up
employment with the Company:
• an A$586,666 cash payment (calculated
at approximately 67% of her forfeited STI
cash benefit); and
• 599,254 time-based rights to acquire
ordinary shares in the Company
(calculated at approximately 80% of
Jayne’s forfeited STI and LTI scrip benefit,
based on the 90 day VWAP of shares in
the Company and her previous employer
as at the date that her appointment
was announced to the market, being
13 December 2017) vesting in four
tranches during the period from
28 August 2018 to 24 August 2019.
The time-based rights are not subject to
performance hurdles but are otherwise
issued on terms similar to Jayne’s
performance rights, including continuing
employment.
As at 30 June 2019, 508,340 time-based
rights had vested, of which 357,232
resultant shares were subsequently sold.
Remuneration of the former
CEO – Geoffrey Babidge
Geoffrey’s employment as CEO under
an executive service agreement with the
Company commenced in 2010 and ceased
upon his retirement on 16 July 2018.
The remuneration paid to Geoffrey Babidge
in the financial year was as follows:
Fixed remuneration
Exit payments
STI paid
2019
A$
41,667
860,906
555,000
Total remuneration received
1,457,573
Fixed remuneration was paid for the period
1 July to retirement on 16 July 2018.
Exit payments upon retirement were
paid in accordance with the terms of his
employment agreement (including statutory
leave entitlements, and six months’ notice
period termination payment).
The STI paid of $555,000 refers to the STI
earned for FY18. The potential STI was up to
$600,000, equivalent to 60% of his annual
fixed remuneration of $1,000,000.
48 The a2 Milk Company
2019 Annual Report
Remuneration
Stepping it up 49
F I N A N C I A L S TAT E M E N T S
Contents
Directors’ approval of the financial statements
Independent auditor’s report
Consolidated statement of comprehensive income
Consolidated statement of changes in equity
Consolidated statement of financial position
Consolidated statement of cash flows
Notes to the financial statements
52
53
56
57
58
59
60
50 The a2 Milk Company
2019 Annual Report
Financial statements
Stepping it up 51
Directors’ approval of the financial statements
for the year ended 30 June 2019
Independent auditor’s report
for the year ended 30 June 2019
The directors of The a2 Milk Company Limited are pleased to present the consolidated financial statements for
The a2 Milk Company Limited (the Company) and its subsidiaries (together the Group) for the year ended 30 June 2019.
The directors are responsible for preparing and presenting financial statements in accordance with New Zealand law and
generally accepted accounting practice, which present fairly the financial position of the Group as at 30 June 2019 and the
results of its operations and cash flows for the period ended on that date.
The directors consider the financial statements of the Group to have been prepared using accounting policies which have
been consistently applied and supported by reasonable judgements and estimates and that all relevant financial reporting
and accounting standards have been followed.
The directors believe that proper accounting records have been kept which enable, with reasonable accuracy, the
determination of the financial position of the Group and facilitate compliance of the financial statements with the Financial
Markets Conduct Act 2013.
The directors consider that they have taken adequate steps to safeguard the assets of the Group, and to prevent and
detect fraud and other irregularities. Internal control procedures are also considered to be sufficient to provide a reasonable
assurance as to the integrity and reliability of the financial statements.
There are reasonable grounds to believe that the Company and the Group entities identified in Note E2 will be able to meet
any obligations or liabilities to which they are or may become subject to by virtue of the Deed of Cross Guarantee between
the Company and those Group entities pursuant to ASIC Corporations (Wholly-owned Companies) Instrument 2016/785.
Signed on behalf of the Board by:
Signed on behalf of the Board by:
David Hearn
Chair
Jayne Hrdlicka
Jayne Hrdlicka
Managing Director and CEO
Managing Director and CEO
20 August 2019
Ernst & Young
200 George Street
Sydney NSW 2000 Australia
GPO Box 2646 Sydney NSW 2001
Tel: +61 2 9248 5555
Fax: +61 2 9248 5959
ey.com/au
Independent auditor’s report to the Shareholders of The a2 Milk Company Limited
Opinion
We have audited the financial statements of The a2 Milk Company Limited (“the company”) and its subsidiaries
(together “the Group”) on pages 56 to 95, which comprise the consolidated statement of financial position of the
Group as at 30 June 2019, and the consolidated statement of comprehensive income, consolidated statement of
changes in equity and consolidated statement of cash flows for the year then ended of the Group, and the notes to
the consolidated financial statements including a summary of significant accounting policies.
In our opinion, the consolidated financial statements on pages 56 to 95 present fairly, in all material respects, the
consolidated financial position of the Group as at 30 June 2019 and its consolidated financial performance and
cash flows for the year then ended in accordance with New Zealand equivalents to International Financial Reporting
Standards and International Financial Reporting Standards.
This report is made solely to the company's shareholders, as a body. Our audit has been undertaken so that we
might state to the company's shareholders those matters we are required to state to them in an auditor's report
and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to
anyone other than the company and the company's shareholders, as a body, for our audit work, for this report, or
for the opinions we have formed.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (New Zealand). Our responsibilities
under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial
Statements section of our report.
We are independent of the Group in accordance with Professional and Ethical Standard 1 (revised) Code of Ethics
for Assurance Practitioners issued by the New Zealand Auditing and Assurance Standards Board, and we have
fulfilled our other ethical responsibilities in accordance with these requirements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Ernst & Young has provided market research services in relation to brand health tracking and has also provided
sustainability reporting advisory services to the Group. Partners and employees of our firm may deal with the
Group on normal terms within the ordinary course of trading activities of the business of the Group. We have no
other relationship with, or interest in, the Group.
Key audit matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of
the consolidated financial statements of the current year. These matters were addressed in the context of our audit
of the consolidated financial statements as a whole, and in forming our opinion thereon, but we do not provide a
separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is
provided in that context.
We have fulfilled the responsibilities described in the Auditor’s responsibilities for the audit of the financial
statements section of the audit report, including in relation to these matters. Accordingly, our audit included the
performance of procedures designed to respond to our assessment of the risks of material misstatement of the
financial statements. The results of our audit procedures, including the procedures performed to address the
matters below, provide the basis for our audit opinion on the accompanying consolidated financial statements.
A member firm of Ernst & Young Global Limited
Liability limited by a scheme approved under Professional Standards Legislation
52 The a2 Milk Company
2019 Annual Report
Financial statements
Stepping it up 53
Independent auditor’s report
for the year ended 30 June 2019
Discounts and rebates provided to customers
Why significant
How our audit addressed the key audit matter
Directors’ responsibilities for the financial statements
Revenue and associated trade receivables are
recognised net of trade discounts, volume rebates
and promotional allowances owed to customers
based on their individual contractual
arrangements. The recognition and measurement
of rebates and promotional allowances, including
the establishment of an appropriate accrual at year
end, involves judgment and estimation, particularly
relating to the expected level of rebate claims by
the customers. This was considered a key audit
matter given the value of the trade discounts,
rebates and promotional allowances provided to
customers, together with the level of judgment
involved in estimating this variable consideration
at year end.
Disclosures regarding revenue and the related
rebates, discounts and promotional allowances are
included in note B2 to the financial statements.
Our audit procedures included the following:
► Considered the appropriateness of the Group’s
revenue recognition accounting policies as
they relate to trade discounts, promotional
allowances and rebates, including the Group’s
initial adoption of NZ IFRS 15 during the
period.
► Evaluated the Group’s processes and controls
over the recording of trade discounts,
promotional allowances and rebates.
► Selected a sample of customer contracts and
determined whether rebates were calculated
in accordance with the agreed terms and
inquired of management as to the existence of
any non-standard agreements or side
arrangements with customers.
► Selected a sample of customer discounts and
rebates recorded and assessed whether the
timing and value of amounts recognised were
in accordance with NZ IFRS.
► Compared a sample of customer claims for
variable consideration and payments made
subsequent to year end to recorded accruals.
► Considered the year end ageing profile of
trade discounts and rebates and inquired as to
the likelihood of aged balances being settled.
Information other than the financial statements and auditor’s report
The directors of the company are responsible for the Annual Report, which includes information other than the
consolidated financial statements and auditor’s report.
Our opinion on the consolidated financial statements does not cover the other information and we do not express
any form of assurance conclusion thereon.
In connection with our audit of the consolidated financial statements, our responsibility is to read the other
information and, in doing so, consider whether the other information is materially inconsistent with the
consolidated financial statements or our knowledge obtained during the audit, or otherwise appears to be
materially misstated.
If, based upon the work we have performed, we conclude that there is a material misstatement of this other
information, we are required to report that fact. We have nothing to report in this regard.
The directors are responsible, on behalf of the entity, for the preparation and fair presentation of the consolidated
financial statements in accordance with New Zealand equivalents to International Financial Reporting Standards
and International Financial Reporting Standards, and for such internal control as the directors determine is
necessary to enable the preparation of financial statements that are free from material misstatement, whether due
to fraud or error.
In preparing the consolidated financial statements, the directors are responsible for assessing on behalf of the
entity the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern
and using the going concern basis of accounting unless the directors either intend to liquidate the Group or cease
operations, or have no realistic alternative but to do so.
Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole
are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes
our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in
accordance with International Standards on Auditing (New Zealand) will always detect a material misstatement
when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the
aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of
these consolidated financial statements.
A further description of the auditor’s responsibilities for the audit of the financial statements is located at the
External Reporting Board’s website: https://www.xrb.govt.nz/standards-for-assurance-practitioners/auditors-
responsibilities/audit-report-1/. This description forms part of our auditor’s report.
The engagement partner on the audit resulting in this independent auditor’s report is Lisa Nijssen-Smith.
Ernst & Young
Sydney
20 August 2019
A member firm of Ernst & Young Global Limited
Liability limited by a scheme approved under Professional Standards Legislation
A member firm of Ernst & Young Global Limited
Liability limited by a scheme approved under Professional Standards Legislation
54 The a2 Milk Company
2019 Annual Report
Financial statements
Stepping it up 55
Consolidated statement of comprehensive income
for the year ended 30 June 2019
Consolidated statement of changes in equity
for the year ended 30 June 2019
Sales
Cost of sales
Gross margin
Other revenue
Distribution expenses
Administrative expenses
Marketing expenses
Other expenses
Operating profit
Interest income
Finance costs
Net finance income
Profit before tax
Income tax expense
Profit after tax for the year
Other comprehensive income
Items that may be reclassified to profit or loss:
Foreign currency translation loss
Items not to be reclassified to profit or loss:
Listed investment fair value (loss)/gain
Total comprehensive income
Earnings per share
Basic (cents per share)
Diluted (cents per share)
The accompanying notes form part of these financial statements.
Notes
B1
2019
$’000
2018
$’000
1,304,336
922,354
(590,584)
(458,005)
713,752
464,349
B1
B3
B3
B3
B5
C6
B4
B4
160
(31,290)
(71,161)
(135,301)
(64,608)
411,552
4,277
(118)
4,159
415,711
(127,970)
323
(26,825)
(47,262)
(73,647)
(35,937)
281,001
2,369
(138)
2,231
283,232
(87,548)
287,741
195,684
(4,319)
(74)
(62,390)
221,032
108,741
304,351
39.25
38.78
27.00
26.30
Year ended 30 June 2019
Foreign
currency
translation
reserve
$’000
Fair value
revaluation
reserve
$’000
Employee
equity
settled
payments
reserve
$’000
Total
reserves
$’000
Retained
earnings
$’000
Share
capital
$’000
Total
equity
$’000
Balance 1 July 2018
(11,022)
122,113
12,351
123,442
290,701
141,566
555,709
Profit for the period (net of tax)
–
Foreign currency translation
differences – foreign operations
(4,250)
–
–
Listed investment
– fair value movement
Income tax
Total comprehensive income
for the period
Transactions with owners
in their capacity as owners:
Issue of ordinary shares
Share issue costs
Share-based payments
Total transactions with owners
–
(62,390)
(69)
–
(4,319)
(62,390)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
8,184
8,184
–
287,741
(4,250)
(62,390)
(69)
–
–
–
(66,709)
287,741
–
–
–
–
–
287,741
(4,250)
(62,390)
(69)
221,032
–
–
8,184
8,184
–
–
–
–
2,970
(41)
–
2,929
2,970
(41)
8,184
11,113
Balance 30 June 2019
(15,341)
59,723
20,535
64,917
578,442
144,495
787,854
Year ended 30 June 2018
Foreign
currency
translation
reserve
$’000
Fair value
revaluation
reserve
$’000
Employee
equity
settled
payments
reserve
$’000
Total
reserves
$’000
Retained
earnings
$’000
Share
capital
$’000
Total
equity
$’000
Balance 1 July 2017
(10,948)
13,372
9,739
12,163
95,017
134,302
241,482
Profit for the period (net of tax)
Foreign currency translation
differences – foreign operations
Listed investment
– fair value movement
Income tax
Total comprehensive income
for the period
Transactions with owners in their
capacity as owners:
Issue of ordinary shares
Share issue costs
Share-based payments
Total transactions with owners
–
(101)
–
27
–
–
108,741
–
(74)
108,741
–
–
–
–
–
–
195,684
(101)
108,741
27
–
–
–
108,667
195,684
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2,612
2,612
–
–
2,612
2,612
–
–
–
–
7,316
(52)
–
7,264
195,684
(101)
108,741
27
304,351
7,316
(52)
2,612
9,876
Balance 30 June 2018
(11,022)
122,113
12,351
123,442
290,701
141,566
555,709
The accompanying notes form part of these financial statements.
56 The a2 Milk Company
2019 Annual Report
Financial statements
Stepping it up 57
Consolidated statement of financial position
as at 30 June 2019
Consolidated statement of cash flows
for the year ended 30 June 2019
Notes
2019
$’000
2018
$’000
restated
Notes
2019
$’000
2018
$’000
Assets
Current assets
Cash and short-term deposits
Trade and other receivables
Prepayments
Inventories
Total current assets
Non-current assets
Property, plant and equipment
Intangible assets
Other financial assets
Deferred tax assets
Total non-current assets
Total assets
Liabilities
Current liabilities
Trade and other payables
Customer contract liabilities
Income tax payable
Total current liabilities
Non-current liabilities
Trade and other payables
Total non-current liabilities
Total liabilities
Net assets
Equity attributable to owners of the Company
Share capital
Retained earnings
Reserves
Total equity
The accompanying notes form part of these financial statements.
D3
C1
C2
C4
C5
C6
B5
C3
B2
C3
D5
D6
464,805
340,455
Payments to suppliers and employees
Cash flows from operating activities
Receipts from customers
Interest received
Taxes paid
Net cash inflow from operating activities
Cash flows from investing activities
Payments for property, plant and equipment
Payments for intangible assets
Payment for listed investment
Net cash outflow from investing activities
Cash flows from financing activities
Proceeds from issue of equity shares
Net cash inflow from financing activities
Net increase in cash and short-term deposits
Cash and short-term deposits at the beginning of the year
Effect of exchange rate changes on cash
Cash and short-term deposits at the end of the year
The accompanying notes form part of these financial statements.
52,748
49,693
108,453
675,699
10,296
12,985
286,807
7,683
317,771
993,470
59,131
36,015
64,101
499,702
9,701
15,092
186,862
4,861
216,516
716,218
160,248
108,934
1,431
43,710
205,389
227
227
205,616
787,854
144,495
578,442
64,917
787,854
898
50,557
160,389
120
120
160,509
555,709
141,566
290,701
123,442
555,709
1,317,930
(899,238)
4,277
(133,901)
289,068
(2,653)
(709)
(162,335)
(165,697)
2,929
2,929
126,300
340,455
(1,950)
464,805
927,703
(629,652)
2,369
(69,312)
231,108
(2,526)
(2,320)
(16,073)
(20,919)
7,264
7,264
217,453
121,020
1,982
340,455
D4
C4
C5
C6
D5
D3
58 The a2 Milk Company
2019 Annual Report
Financial statements
Stepping it up 59
Notes to the financial statements
Notes to the financial statements – Basis of preparation
for the year ended 30 June 2019
Contents
A
B
Basis of preparation
Group performance
B1 Operating segments
B2
B3
B4
B5
C
C1
C2
C3
C4
C5
Revenue
Expenses
Earnings per share (EPS)
Income taxes
Operating assets and liabilities
Trade and other receivables
Inventories
Trade and other payables
Property, plant and equipment
Intangible assets
C6 Other financial assets
D
Capital and financial risk management
D1 Capital management
D2
Financial risk management
D3 Cash and short-term deposits
D4 Cash flow information
D5
D6
Share capital
Reserves
D7 Capital expenditure commitments
D8 Operating lease commitments
D9 Contingent liabilities
E
Group structure
E1 Consolidated entities
E2 Deed of cross guarantee
F
F1
F2
F3
F4
Other disclosures
Related party transactions
Share-based payments
Auditor’s remuneration
Subsequent events
A. Basis of preparation
Accounting policy: Foreign currency
The a2 Milk Company Limited (the Company) is a for-profit
entity incorporated and domiciled in New Zealand. The
consolidated financial statements of the Company for the year
ended 30 June 2019 comprise the Company and its subsidiaries
(together referred to as the Group).
The Company is registered in New Zealand under the Companies
Act 1993, and is a FMC reporting entity under the Financial
Markets Conduct Act 2013. The Company is also registered as
a foreign company in Australia under the Corporations Act 2001
(Cth, Australia). The shares of The a2 Milk Company Limited are
publicly traded on the New Zealand Stock Exchange (NZX), the
Australian Securities Exchange (ASX) and Chi-X Australia (Chi-X).
The Group’s reporting currency is the New Zealand dollar.
The principal activity of the Company is the sale of branded products
in targeted markets made with milk from cows that produce milk
naturally containing only the A2 protein type.
The consolidated financial statements were authorised for issue
by the directors on 20 August 2019.
The consolidated financial report:
• has been prepared in accordance with Generally Accepted
Accounting Practice in New Zealand;
• complies with the New Zealand Equivalents to International
Financial Reporting Standards (NZ IFRS);
• complies with International Financial Reporting Standards (IFRS)
adopted by the International Accounting Standards Board (IASB);
is presented in New Zealand dollars, which is the Company’s
functional currency, with all values rounded off to the nearest
thousand dollars, unless otherwise stated; and
•
• has been prepared in accordance with the historical cost
convention and, except for listed investments, does not take
into account changing money values or fair values of assets.
Significant accounting policies have been:
•
included in the relevant note to which each policy relates, other
than the accounting policy for foreign currency, set out below;
and
• except for the adoption of NZ IFRS 15: Revenue from Contracts
with Customers, noted below, consistently applied to all periods
presented in these consolidated financial statements.
Transactions
Foreign currency transactions are initially translated to the respective
functional currencies of Group companies at the rate of exchange
at the date of the transaction. Monetary assets and liabilities
denominated in foreign currencies are translated to the functional
currency at the exchange rate ruling at the reporting date. Foreign
exchange differences are generally recognised in profit or loss in the
statement of comprehensive income.
Foreign operations translation to reporting currency
The assets and liabilities including goodwill and fair value
adjustments arising on consolidation of foreign operations are
translated into New Zealand currency at rates of exchange
current at the reporting date, while revenues and expenses are
translated at approximately the exchange rates ruling at the date
of the transaction. Exchange differences arising on translation
are recognised in other comprehensive income and accumulated
within equity in the foreign currency translation reserve.
Judgements, estimates and assumptions
The preparation of financial statements in conformity with
NZ IFRS requires management to make judgements, estimates
and assumptions.
• This may affect the application of policies and reported amounts
of assets, liabilities, income and expenses. Actual results may
differ from these estimates.
• Estimates and underlying assumptions are reviewed on
an ongoing basis.
•
• Revisions to accounting estimates are recognised in the period in
which the estimate is revised and in any future periods affected.
Information about significant areas of estimation uncertainty and
critical judgements in applying accounting policies that have the
most significant effect on the amount recognised in the financial
statements are described in the following notes:
– Note B5: Deferred tax assets and liabilities – Recovery
of deferred tax assets
– Note C2: Inventories – Estimation of net realisable value
– Note C5: Intangible assets – Goodwill and intangibles
Page
61
64
66
68
69
70
74
74
75
76
77
80
81
81
85
85
86
86
87
87
87
88
89
91
92
95
95
60 The a2 Milk Company
2019 Annual Report
Financial statements
Stepping it up 61
Notes to the financial statements – Basis of preparation
for the year ended 30 June 2019
Changes in significant accounting policies
New standards and interpretations not yet adopted
The Group has applied all of the new and revised Standards and Interpretations issued by the New Zealand External Reporting Board that are
relevant to the Group’s operations and effective for the current accounting period. Their application has not had any material impact on the
Group’s assets, profits or earnings per share for the year ended 30 June 2019.
Adoption of NZ IFRS 15: Revenue from Contracts with Customers
The Group has adopted this standard from 1 July 2018, using the full retrospective method.
The adoption of the standard had no impact on the Group’s consolidated total equity, retained earnings, earnings per share or cash flows;
with the following adjustments made to the presentation of the Group’s consolidated statement of financial position as at 30 June 2018.
30 June 2018
Trade and other receivables (current)
Total current assets
Trade and other payables (current)
Customer contract liabilities (current)
Total current liabilities
As reported
$’000
Adjustments
$’000
59,131
499,702
108,934
898
160,389
(6,360)
(6,360)
(7,258)
898
(6,360)
Before
adoption of
NZ IFRS 15
$’000
65,491
506,062
116,192
–
166,749
Certain new accounting standards have been published that are relevant to the Group’s operations but are not yet mandatory for the
30 June 2019 accounting period. The Group’s current assessment of the impact of these is set out below.
Accounting standard Requirement
Impacts in future periods
NZ IFRS 16: Leases
NZ IFRS 16 will become mandatory for the Group’s
annual reporting period ending 30 June 2020,
replacing the existing leases standard.
The new standard removes the distinction between
operating and finance leases, recognising all lease
assets and liabilities on balance sheet, with limited
exceptions for short-term leases and low value assets.
As a right-to-use asset and a lease liability will be
recognised for operating leases, the change will result
in a more front-loaded expense pattern for operating
leases as compared to current straight-lining, with lease
expense allocated to interest and depreciation.
The right-to-use asset and lease liabilities will be
determined based on the present value of future lease
payments (see Note D8).
Based on information currently available, the Group
estimates that it will recognise right-to-use assets and
lease liabilities of $8 million as at 1 July 2019, using the
modified retrospective transition method. The
cumulative effect of the adoption of NZ IFRS 16 will be
recognised as an adjustment to the opening balance of
retained earnings at 1 July 2019, with no restatement
of comparative information.
Trade receivables are now recognised and measured at the transaction price in accordance with NZ IFRS 15, reflecting adjustments for variable
consideration such as rebates. Previously, items of variable consideration were recognised as accruals. Customer contract liabilities refer to
payments in advance received from customers, previously recognised in accruals.
Additional disclosures of the Group’s revenue accounting policies as required by the standard are disclosed in Note B2.
There are no other standards that are not yet effective and that are expected to have a material impact on the Group in the current or future
reporting periods.
62 The a2 Milk Company
2019 Annual Report
Financial statements
Stepping it up 63
Notes to the financial statements – Group performance
for the year ended 30 June 2019
Management monitors the operating results of its business units
separately for the purpose of making decisions about resource
allocation and performance assessment. Segment performance is
assessed on segment EBITDA and is measured in conformity with
the accounting policies adopted for preparing and presenting the
financial statements of the Group.
In previous periods the Group was organised into three reportable
operating segments. Comparative information for the year ended
30 June 2018 has been restated to reflect the change to four
reportable operating segments. The measurement bases for
reportable segment results in the current and prior period remain
the same.
B. Group performance
This section explains the results and performance of the Group
for the year, including segment information, earnings per share
and taxation.
The Group’s key performance measures are segment revenue and
segment results before interest, tax, depreciation and amortisation
(Segment EBITDA, a non-GAAP measure). Further information and
analysis of performance can be found in the CEO’s year in review
report, which forms part of this Annual Report.
B1. Operating segments
Operating segments are identified on the basis of internal reports
about components of the Group that are regularly reviewed by the
chief operating decision maker in order to allocate resources to the
segment and assess its performance.
For management purposes, the Group is organised into business
units based on geographical location, and a corporate function.
From 1 January 2019 the Group is organised into four reportable
operating segments as follows:
• The Australia and New Zealand segment receives external
revenue from infant formula, milk and other dairy products along
with royalty and licence fee income.
• The China and other Asia segment receives external revenue from
infant formula, milk and other dairy products.
• The USA segment receives external revenue from milk sales.
• The UK segment receives external revenue from infant formula
and milk sales.
B1. Operating segments (continued)
2019
Consolidated sales
Other revenue
Australia and
New Zealand
$’000
China and
other Asia
$’000
842,543
405,659
152
8
USA
$’000
34,560
–
UK
$’000
21,574
–
Total
$’000
1,304,336
160
Reportable segment revenue
842,695
405,667
34,560
21,574
1,304,496
Reportable segment results
(Segment EBITDA)
Corporate EBITDA
Group EBITDA
388,234
123,878
(43,980)
4,396
Reconciliation to consolidated statement of comprehensive income
Interest income
Depreciation and amortisation
Income tax expense
Consolidated profit after tax
2018
Consolidated sales
Other revenue
Australia and
New Zealand
$’000
China and
other Asia
$’000
656,309
233,646
321
2
Reportable segment revenue
656,630
233,648
USA
$’000
13,257
–
13,257
472,528
(58,918)
413,610
4,277
(2,176)
(127,970)
287,741
Total
$’000
922,354
323
UK
$’000
19,142
–
19,142
922,677
Reportable segment results
(Segment EBITDA)
Corporate EBITDA
Group EBITDA
262,189
81,275
(28,567)
929
Reconciliation to consolidated statement of comprehensive income
Interest income
Depreciation and amortisation
Income tax expense
Consolidated profit after tax
315,826
(32,789)
283,037
2,369
(2,174)
(87,548)
195,684
Two customers within the Australian and New Zealand segment each contributed revenue in excess of 10% of Group revenue of
$258,623,000 (2018: $185,008,000); and $132,235,000 (2018: $131,374,000).
64 The a2 Milk Company
2019 Annual Report
Financial statements
Stepping it up 65
Notes to the financial statements – Group performance
for the year ended 30 June 2019
B1. Operating segments (continued)
Other segment information
2019
Additions to non-current assets
Depreciation and amortisation
2018
Additions to non-current assets
Depreciation and amortisation
Australia and
New Zealand
$’000
China and
other Asia
$’000
USA
$’000
UK
$’000
Corporate
$’000
2,118
1,312
1,789
1,233
178
218
268
548
38
91
4
80
36
25
7
40
992
530
2,778
273
Total
$’000
3,362
2,176
4,846
2,174
The majority of the Group’s revenue is generated from customers, and the majority of its non-current assets (other than financial instruments
and deferred tax assets) are located outside of its country of domicile (New Zealand).
B2. Revenue
Disaggregation of revenue
In the following table, revenue is disaggregated by geographical location (reportable segments) and major product types.
2019
Infant formula
Liquid milk
Other
2018
Infant formula
Liquid milk
Other
Australia and
New Zealand
$’000
China and
other Asia
$’000
652,864
133,704
56,127
842,695
Australia and
New Zealand
$’000
482,467
123,564
50,599
656,630
USA
$’000
–
34,560
–
UK
$’000
17,828
3,746
–
Total
$’000
1,063,816
174,916
65,764
393,124
2,906
9,637
405,667
34,560
21,574
1,304,496
China and
other Asia
$’000
226,656
1,523
5,469
233,648
USA
$’000
–
13,257
–
13,257
UK
$’000
15,125
4,017
–
19,142
Total
$’000
724,248
142,361
56,068
922,677
B2. Revenue (continued)
Contract balances
The following table provides information about receivables and
contract liabilities from contracts with customers.
Receivables
Customer contract liabilities
Note
C1
2019
$’000
44,513
(1,431)
2018
$’000
53,476
(898)
Customer contract liabilities are payments received in advance
from customers. The amount of $898,000 recognised in customer
contract liabilities at 30 June 2018 was recognised as revenue in the
year ended 30 June 2019.
Remaining performance obligations at 30 June 2019 have an original
expected duration of one year or less. No further information on
these performance obligations is provided, as allowed by NZ IFRS 15.
Recognition and measurement
Sales of products
The Group sells branded milk products made with milk from cows
that are specially selected to produce milk that naturally contains
only the A2 protein type, to wholesale customers.
A sale is recognised when control of the product has transferred,
being when the product is delivered to the customer and there is no
unfulfilled obligation that could affect the customer’s acceptance
of the product. Delivery occurs when the product has been shipped
to the location specified by the customer and the customer accepts
the product.
Revenue from sales is recognised based on arrangements as agreed
with the customer. These arrangements are applied on an order by
order basis and do not commit the customers to purchase a specified
quantity or type of product; nor do they commit the Group to deliver
a specified quantity or type of product. The arrangements set out
the terms and conditions that apply to the parties each time an
order is placed by a customer and accepted by the Group, creating
a sale contract for that order. The terms and conditions cover, as
appropriate to the customer, pricing, settlement of liabilities, return
policies and any other negotiated performance obligations.
Revenue is recognised after off-setting items of variable
consideration such as rebates agreed with customers.
Settlement terms range from cash-on-delivery or prepaid terms
to various credit terms not exceeding 60 days from end of month.
These terms reflect assessment of customer credit risk and
industry practice.
Customer contract liabilities refer to payments in advance received
from customers, with subsequent delivery to customer, and
recognition of revenue, generally occurring within a week of receipt
of the payment.
For credit customers a receivable is recognised when the products
are delivered, being the point in time that the consideration is
unconditional because only the passage of time is required before
payment is due.
Interest revenue
Interest revenue is accrued on a time basis, by reference to the
principal and the effective interest rate applicable, which is
the rate that exactly discounts estimated future cash receipts
through the expected life of the financial asset to that asset’s net
carrying amount.
66 The a2 Milk Company
2019 Annual Report
Financial statements
Stepping it up 67
Notes to the financial statements – Group performance
for the year ended 30 June 2019
B3. Expenses
Administrative expenses
Salary and wage costs
Equity-settled share-based payments (refer Note F2)
Travel costs
Other administrative expenses
Other expenses
Audit fees
Bad and doubtful debts
Professional service fees
Directors’ fees and expenses
Legal expenses
Patents, trademarks, and research and development
Occupancy expenses
Depreciation and amortisation
Promotion and merchandising
Insurance
Net foreign exchange (gain)
Impairment of intangible assets
Other operating expenses
Finance costs
Other finance costs
2019
$’000
45,721
8,184
7,343
9,913
71,161
2019
$’000
701
(17)
27,628
1,012
4,911
6,995
2,195
2,176
476
5,333
(198)
2,059
11,337
64,608
118
118
2018
$’000
32,140
2,612
5,893
6,617
47,262
2018
$’000
609
29
8,957
968
5,301
4,367
2,071
2,174
987
3,469
(1,634)
–
8,639
35,937
138
138
B4. Earnings per share (EPS)
Profit attributable to members of the Company used in calculating basic and diluted EPS ($’000)
Weighted average number of ordinary shares (‘000) for basic EPS
Effect of dilution due to partly paid ordinary shares, share options
and time-based and performance rights (‘000)
Weighted average number of ordinary shares (‘000) for diluted EPS
Basic EPS (cents)
Diluted EPS (cents)
Recognition and measurement
2019
287,741
2018
195,684
733,145
724,685
8,772
741,917
39.25
38.78
19,278
743,963
27.00
26.30
Basic EPS is calculated as net profit attributable to members of the parent, adjusted to exclude any costs of servicing equity
(other than dividends), divided by the weighted average number of ordinary shares outstanding during the financial year.
Diluted EPS adjusts basic EPS for the dilutive effect of employee share rights and options that may be converted into ordinary shares
in the Company.
68 The a2 Milk Company
2019 Annual Report
Financial statements
Stepping it up 69
Notes to the financial statements – Group performance
for the year ended 30 June 2019
B5. Income taxes
2019
$’000
2018
$’000
B5. Income taxes (continued)
Deferred tax balances
Income tax recognised in profit or loss
Current tax
Deferred tax origination and reversal of temporary differences
Adjustments in respect of current income tax of previous year
Total tax expense
The prima facie income tax on pre-tax accounting profit from operations reconciles to:
Profit from operations
Income tax expense calculated at 28% (2018: 28%)
Difference in income tax rates: UK (19%; 2018: 19.75%), Australia (30%),
USA (24%; 2018: 34.42%), and China (25%)
Non-deductible expenses
Prior period adjustment to tax expense
Deferred tax impact to tax expense for permanent establishments
Unutilised foreign tax credits forfeited
Deferred tax asset not recognised
Total tax expense
Income tax recognised directly in equity
Deferred tax
Tax benefit in Other Comprehensive Income (OCI)
133,985
(2,891)
(3,124)
127,970
415,711
116,399
6,430
5,680
(4,243)
114
1,429
2,161
127,970
69
69
92,167
(2,880)
(1,739)
87,548
283,232
79,305
3,195
2,168
(1,640)
(66)
2,009
2,577
87,548
(27)
(27)
Deferred tax assets are only recognised in the financial statements to the extent that it is probable that sufficient taxable profits will be
available, against which the tax asset can be utilised.
2019
Gross deferred tax assets
Patents
Accrued expenses
Tax losses
Other
Gross deferred tax liabilities
Property, plant and equipment
Foreign exchange (gains)/losses
Net deferred tax
Charge to profit or loss
Charge to OCI
2018
Gross deferred tax assets
Patents
Accrued expenses
Tax losses
Other
Gross deferred tax liabilities
Property, plant and equipment
Foreign exchange (gains)/losses
Net deferred tax
Charge to profit or loss
Charge to OCI
Opening
balance
$’000
Charge in
period
$’000
Closing
balance
$’000
72
7,562
284
189
8,107
(424)
–
(424)
7,683
99
3,937
471
985
5,492
(530)
(101)
(631)
4,861
(27)
3,625
(187)
(796)
2,615
106
101
207
2,822
2,891
(69)
2,822
Opening
balance
$’000
Charge in
period
$’000
Closing
balance
$’000
99
3,937
471
985
5,492
(530)
(101)
(631)
4,861
114
1,913
327
21
2,375
(662)
241
(421)
1,954
(15)
2,024
144
964
3,117
132
(342)
(210)
2,907
2,880
27
2,907
70 The a2 Milk Company
2019 Annual Report
Financial statements
Stepping it up 71
Notes to the financial statements – Group performance
for the year ended 30 June 2019
B5. Income taxes (continued)
Deferred tax balances (continued)
Net deferred tax balances recognised in the financial statements
Net deferred tax assets
Net deferred tax liabilities
Net deferred tax
Tax losses
The Group has the following estimated gross tax losses at balance date not recognised:
United Kingdom
United States of America
Australia
Total
Imputation and franking credits
2019
$’000
7,683
–
7,683
2019
$’000
52,620
31,582
273
84,475
2018
$’000
4,861
–
4,861
2018
$’000
41,676
24,411
527
66,614
The Company is a New Zealand company which has elected to maintain an Australian franking credit account. The imputation credit and
franking credit balances represent the sum of the imputation credit and franking credit account balances of all Group companies stated
on an accrual basis. The ability to use the imputation and franking credits is dependent upon the ability of Group companies to declare
dividends. The franking credit account balance is stated in NZD, with the balance available for distribution dependant on future exchange
rate movements.
Imputation and franking credits available within the Group, and ultimately available to the shareholders of the Company:
Imputation credits
Franking credits
2019
$’000
44,190
251,973
2018
$’000
25,692
131,458
B5. Income taxes (continued)
Recognition and measurement
Income tax expense represents the sum of the tax currently payable
and deferred tax.
Current and deferred tax are recognised as an expense or income in
profit or loss, except when they relate to items credited or debited
in other comprehensive income, in which case that tax is recognised
in other comprehensive income; or where they arise from the initial
accounting for a business combination.
The tax currently payable is based on taxable profit for the year. The
Group’s liability for current tax is calculated using tax rates that have
been enacted or substantively enacted by the balance sheet date,
and any adjustment to tax payable in respect of previous years.
Deferred tax is recognised on differences between the carrying
amount of assets and liabilities in the financial statements and
the corresponding tax bases used in the computation of taxable
profit, and is accounted for using the balance sheet liability
method. Deferred tax liabilities are generally recognised for all
taxable temporary differences, and deferred tax assets are generally
recognised for all deductible temporary differences to the extent
Key estimates and judgements
Recovery of deferred tax assets
that it is probable that taxable profits will be available in the future
against which those deductible temporary differences can be utilised.
Deferred tax assets and liabilities are measured at the tax rates that
are expected to apply in the period in which the liability is settled
or the asset realised, based on tax rates (and tax laws) that have
been enacted or substantively enacted by the balance sheet date.
The measurement of deferred tax liabilities and assets reflects the
tax consequences that would follow from the manner in which the
Group expects, at the reporting date, to recover or settle the carrying
amount of its assets and liabilities.
Deferred tax assets and liabilities are offset when there is a legally
enforceable right to set off current tax assets against current tax
liabilities and when they relate to income taxes levied by the same
taxation authority and the Group intends to settle its current tax
assets and liabilities on a net basis.
The carrying amount of deferred tax assets is reviewed at each
reporting date for recoverability. Likewise, unrecognised tax assets
(not booked to balance sheet) are re-assessed at each reporting date,
and recognised, to the extent that future taxable profits are deemed
likely to allow the asset to be recovered.
Deferred tax assets are recognised for unused tax losses, unused tax credits and deductible temporary differences, to the extent that
it is probable that future taxable profits will be available against which they can be used.
Judgement is required when deferred tax assets are reviewed at each reporting date. Deferred tax assets may be reduced to the extent
that it is no longer probable that future taxable profits will be available.
Assumptions about the generation of future taxable profits depend on management’s estimates of future cash flows. Changes in
expectations for the future performance of the business may impact the amount of deferred tax assets recoverable and recognised
on the statement of financial position and the amount of other tax losses and temporary differences not yet recognised.
72 The a2 Milk Company
2019 Annual Report
Financial statements
Stepping it up 73
Notes to the financial statements – Operating assets and liabilities
for the year ended 30 June 2019
C. Operating assets and liabilities
This section provides details of the Group’s operating assets, and liabilities incurred as a result of trading activities, used to generate the
Group’s performance.
C3. Trade and other payables
Trade and other payables – current
Trade payables
Accruals
Employee entitlements
Trade and other payables – non-current
Employee entitlements
Recognition and measurement
2019
$’000
84,152
70,042
6,054
2018
$’000
66,076
36,604
6,254
160,248
108,934
2019
$’000
227
2018
$’000
120
Trade and other payables are initially recognised at fair value, and subsequently carried at amortised cost using the effective interest rate
method. They represent liabilities recognised when the Group becomes obligated to make future payments resulting from the purchase
of goods and services. The amounts are unsecured.
Employee entitlements
Provision is made for benefits accruing to employees in respect of wages and salaries, annual leave, and long service leave when it is probable
that settlement will be required and they are capable of being measured reliably.
Provisions made in respect of employee benefits expected to be settled within 12 months are measured at their nominal values using the
remuneration rate expected to apply at the time of settlement.
Provisions made in respect of employee benefits which are not expected to be settled within 12 months are measured as the present value
of the estimated future cash outflows to be made by the Group in respect of services provided by employees up to the reporting date.
C1. Trade and other receivables
Trade receivables from contracts with customers
Allowance for impairment
Other receivables
2019
$’000
44,513
(20)
8,255
52,748
2018
$’000
53,476
(37)
5,692
59,131
The Group’s exposure to credit risks and impairment losses related to trade and other receivables are disclosed in Note D2: Financial risk
management.
Recognition and measurement
Trade receivables from contracts with customers are recognised initially at their transaction price. Other receivables are recognised initially at
fair value. Subsequent to initial recognition, they are measured at amortised cost using the effective interest rate method, less any lifetime
expected credit losses.
C2. Inventories
Raw materials
Finished goods
Goods in transit
Total inventories at the lower of cost and net realisable value
2019
$’000
9,933
59,556
38,964
108,453
2018
$’000
5,051
50,641
8,409
64,101
During the year, $1,550,000 (2018: $1,296,000) was recognised as an expense in cost of sales for inventories written down to net
realisable value.
Recognition and measurement
Inventories are valued at the lower of cost and net realisable value. Cost is calculated using standard costing or weighted average methods.
Standard costs are regularly reviewed and, if necessary, revised to reflect actual costs.
Net realisable value represents the estimated selling price in the ordinary course of business, less estimated costs of completion and the
estimated costs necessary to make the sale.
Key estimates and judgements
Recovery of inventory
Estimation of net realisable value includes assessment of expected future turnover of inventory held for sale and the expected future
selling price of such inventory. Changes in trading and economic conditions, and changes in country specific regulations, may impact these
estimations in future periods.
74 The a2 Milk Company
2019 Annual Report
Financial statements
Stepping it up 75
Notes to the financial statements – Operating assets and liabilities
for the year ended 30 June 2019
C4. Property, plant and equipment
2019
Carrying amount 1 July 2018
Additions
Depreciation
Net foreign currency exchange differences
Carrying amount 30 June 2019
Cost
Accumulated depreciation
Carrying amount 30 June 2019
2018
Carrying amount 1 July 2017
Additions
Depreciation
Net foreign currency exchange differences
Carrying amount 30 June 2018
Cost
Accumulated depreciation
Carrying amount 30 June 2018
Recognition and measurement
Office and
computer
$’000
Furniture and
fittings
$’000
Leasehold
improvements
$’000
Plant and
equipment
$’000
Total property,
plant and
equipment
$’000
322
213
(197)
(8)
330
1,166
(836)
330
254
50
(49)
(5)
250
435
(185)
250
803
112
(400)
(19)
496
1,397
(901)
496
8,322
2,278
(1,104)
(276)
9,220
15,811
(6,591)
9,220
9,701
2,653
(1,750)
(308)
10,296
18,809
(8,513)
10,296
Office and
computer
$’000
Furniture and
fittings
$’000
Leasehold
improvements
$’000
Plant and
equipment
$’000
Total property,
plant and
equipment
$’000
249
230
(164)
7
322
975
(653)
322
266
42
(64)
10
254
394
(140)
254
672
374
(274)
31
803
1,316
(513)
803
7,171
1,880
(976)
247
8,322
14,058
(5,736)
8,322
8,358
2,526
(1,478)
295
9,701
16,743
(7,042)
9,701
All items of property, plant and equipment are stated at cost less accumulated depreciation and impairment. Cost includes expenditure that
is directly attributable to the acquisition of the item.
Depreciation is calculated on a straight-line basis so as to write off the net cost of the asset over its expected useful life to its estimated
residual value. The estimated useful lives, residual values and depreciation methods are reviewed at each year end, with the effect of any
changes in estimate accounted for on a prospective basis. The following estimated useful lives are used in the calculation of depreciation:
Plant and equipment
Furniture and fittings
10 to 15 years
5 to 10 years
Office and computer equipment
2 to 10 years
Leasehold improvements
2 to 10 years
The carrying value of an item of property, plant and equipment is derecognised either upon disposal or when no future economic benefits are
expected from the asset. Any gain or loss arising from the derecognition (representing the difference between the net disposal proceeds and
the carrying amount of the asset) is included in profit or loss when the asset is derecognised.
C5. Intangible assets
2019
Carrying amount 1 July 2018
Additions
Transfers
Amortisation
Impairment
Net foreign currency
exchange differences
Carrying amount 30 June 2019
Cost
Accumulated amortisation
Carrying amount 30 June 2019
2018
Carrying amount 1 July 2017
Additions
Amortisation
Net foreign currency
exchange differences
Carrying amount 30 June 2018
Cost
Accumulated amortisation
Carrying amount 30 June 2018
Patents
$’000
Trademarks
$’000
Software
$’000
Project
development
$’000
949
155
–
(269)
–
–
835
1,294
(459)
835
2,811
503
–
–
(127)
–
3,187
3,187
–
3,187
320
50
137
(157)
–
(9)
341
1,954
(1,613)
341
803
1
(137)
–
–
(2)
665
4,284
(3,619)
665
Patents
$’000
Trademarks
$’000
Software
$’000
Project
development
$’000
852
128
(31)
–
949
1,139
(190)
949
780
2,031
–
–
2,811
2,811
–
2,811
560
20
(277)
17
320
1,819
(1,499)
320
1,048
141
(388)
2
803
4,453
(3,650)
803
Goodwill
$’000
10,209
–
–
–
Total
$’000
15,092
709
–
(426)
(1,932)
(2,059)
(320)
7,957
7,957
–
7,957
Goodwill
$’000
10,041
–
–
168
10,209
10,209
–
10,209
(331)
12,985
18,676
(5,691)
12,985
Total
$’000
13,281
2,320
(696)
187
15,092
20,431
(5,339)
15,092
Trademarks are allocated to the following cash-generating units (CGUs) for the purpose of impairment testing: Australia and New Zealand
$268,000 (2018: $185,000); China and other Asia $2,817,000 (2018: $2,446,000); and USA $102,000 (2018: $70,000).
During the year the total value of research and development costs expensed was $3,392,000 (2018: $3,629,000).
Recognition and measurement
The costs of intangible assets other than goodwill are capitalised where there is sufficient evidence to support the probability of the
expenditure generating future economic benefits for the Group.
Patents
Patents are considered to have a finite life and are amortised on a straight-line basis over the lifetime of the patent.
Trademarks
Trademarks are not subject to amortisation as they are considered to have an indefinite life and are tested for impairment annually and
whenever there is an indication that the asset may be impaired.
Software
Software is amortised on a straight-line basis over two to three years.
76 The a2 Milk Company
2019 Annual Report
Financial statements
Stepping it up 77
Notes to the financial statements – Operating assets and liabilities
for the year ended 30 June 2019
C5. Intangible assets (continued)
C5. Intangible assets (continued)
Recognition and measurement (continued)
Recognition and measurement
Annual impairment testing as at 30 June 2019
Impairment of UK CGU goodwill and intangible assets
Project development costs
Impairment testing of non-financial assets
Project development expenditure is capitalised only when the
Group can demonstrate: the technical feasibility of completing
the intangible asset so that it can be available for use or sale; the
potential for the asset to generate future economic benefits on
completion; and the ability to measure reliably the expenditure
attributable to the asset during its development. Amortisation
commences when the asset is available for use.
Project development costs are amortised over a maximum useful
life of five years.
Goodwill
Goodwill is recognised on business acquisitions, representing the
excess of the cost of acquisition over the Group’s interest in the net
fair value of the identifiable assets, liabilities and contingent liabilities
of the business recognised at the date of acquisition.
Goodwill is initially recognised as an asset at cost and is subsequently
measured at cost less any accumulated impairment losses. For the
purposes of impairment testing, goodwill acquired in a business
combination is, from the date of acquisition, allocated to the Group’s
cash-generating units that are expected to benefit from the synergies
of the combination.
Impairment testing for cash-generating units (CGUs)
containing goodwill
Goodwill allocation
For the purposes of impairment testing, goodwill is allocated to the
Group’s CGUs which represent the lowest level within the Group at
which goodwill is monitored by internal management as follows:
CGUs
Australia and New Zealand
UK
2019
$’000
7,957
–
7,957
2018
$’000
8,245
1,964
10,209
The movement in goodwill is attributable to impairment of UK
goodwill and foreign exchange movements on the Australia and
New Zealand goodwill.
Assets that have an indefinite useful life, such as goodwill
and trademarks, are not amortised but are tested annually for
impairment. Assets that are subject to amortisation are reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. An impairment
loss is recognised for the amount by which the asset’s carrying
amount exceeds its recoverable amount. The recoverable amount is
the higher of the asset’s fair value less costs to sell and value in use.
For the purposes of assessing impairment, assets are grouped at the
lowest levels for which there are separately identifiable cash flows
(cash-generating units).
Impairment losses are recognised in the statement of comprehensive
income. They are allocated first to reduce the carrying amount of
any goodwill allocated to the CGU, and then to reduce the carrying
amount of the other assets in the CGU on a pro-rata basis.
An impairment loss in respect of goodwill is not reversed.
Non-financial assets other than goodwill that have been impaired are
reviewed for possible reversal at each reporting date. An impairment
loss is reversed only to the extent that the asset’s carrying amount
does not exceed the carrying amount that would have been
determined, net of depreciation or amortisation, if no impairment
loss had been recognised.
Key estimates and judgements
Goodwill and intangibles
Judgements are made with respect to identifying and valuing
intangible assets on acquisitions of new businesses.
The Group assesses whether goodwill and intangibles with
indefinite useful lives are impaired at least annually. These
calculations involve judgements to estimate the recoverable
amount of the cash-generating units to which the goodwill
and intangibles with indefinite useful lives are allocated.
Based on current forecasts the UK CGU is not expected to achieve
a cash break-even position in the near term, causing the CGU to be
impaired.
From 1 July 2019, infant formula sales previously reported in the UK
CGU will be allocated to the China and other Asia segment.
The recoverable amount of the UK CGU at 30 June 2019 has been
determined based on a value-in-use calculation using risk adjusted
cash flow projections based on financial estimates provided by
senior management. The discount rate applied in this calculation
was 7.4%.
The following assets of the UK CGU have been written off as
impaired: goodwill; and UK specific trademarks. Other UK CGU
assets, including working capital and property, plant and equipment,
have been assessed as fully recoverable, with no impairment booked
on these items. The total impairment charge included in other
expenses relating to goodwill and trademarks in the UK segment
is $2,059,000.
As at 30 June 2019, the recoverable amount of the Group’s CGUs,
other than the UK CGU, exceeds their carrying amounts. The
directors believe that no reasonably possible change in any of the
key assumptions would cause the recoverable amount of these
CGUs to be less than their carrying values. Based on this assessment,
with the exception of the UK CGU, no impairment write downs are
considered necessary.
The recoverable amount of goodwill and trademarks has been
determined on a value-in-use basis using a discounted cash flow
approach, and projections based on financial budgets approved by
the Board, and four-year forward plans supplied by management.
Key assumptions
• Discount rates (pre-tax): 7.4% to 9.0% (2018: 8.0% to 9.0%)
• Terminal growth rate: 2.0%. (2018: 2.0%)
Sensitivity to change in assumptions
The calculation of value in use is most sensitive to the following
assumptions:
• Gross margins
• Discount rates
• Revenue growth during the forecast period
• Growth rates used to extrapolate cash flows beyond the forecast
period (terminal growth rate)
Gross margins – Gross margins are based on budgeted margins for
FY20, and estimates for future years, adjusted where appropriate to
account for expected future trading conditions. Consideration has
been given to the growth profile of each CGU when forecasting
future margin returns.
Discount rates – Discount rates represent the risks specific to each
CGU, taking into consideration the time value of money and
individual risks of the underlying cash flows expected from the
CGU being assessed. CGU specific risk is incorporated by applying
individual beta factors. The discount rate calculation is based on
the specific circumstances of the Group and its CGUs and is derived
from its weighted average cost of capital (WACC). The WACC
considers both debt and equity. The cost of equity is derived from
the expected return on investment by the Group’s investors. Noting
that the Group had no debt at 30 June 2019, the cost of debt is
based on the capital structure that could be expected from a similar
market participant.
Revenue growth – Revenue projections have been constructed with
reference to the FY20 budget and four-year forward looking plans,
and adjusted for recent performance trends across the regions
(where necessary).
Terminal growth rate – A terminal growth rate of 2.0% has
been used for future cash flow growth beyond the four-year
forecast period.
The terminal value (being the total value of expected cash flows
beyond the forecast period) is discounted to present values using
the discount rate specific to each CGU.
78 The a2 Milk Company
2019 Annual Report
Financial statements
Stepping it up 79
Notes to the financial statements – Operating assets and liabilities
for the year ended 30 June 2019
Notes to the financial statements – Capital and financial risk management
for the year ended 30 June 2019
C6. Other financial assets
Listed investment at fair value
286,807
186,862
2019
$’000
2018
$’000
The listed investment is in Synlait Milk Limited (Synlait). Synlait
is a dairy processing company (listed on the New Zealand Stock
Exchange and Australian Securities Exchange) with which the Group
has an ongoing Nutritional Powders Manufacturing and Supply
Agreement. No dividends were received from this investment during
the year (2018: $nil)
In August 2018 the Company made a further investment in Synlait,
acquiring 14,840,527 shares for $162,335,000, increasing its total
holding in Synlait to 17.394%.
A fair value loss of $62,390,000 (2018: profit $108,741,000) was
recognised for the year.
Recognition and measurement
This listed investment is a long-term investment classified as a
financial asset measured at fair value through other comprehensive
income. The Group does not control or have significant influence
over the investee.
Unrealised gains or losses arising from changes in fair value are
recognised through other comprehensive income in the Fair Value
Revaluation Reserve within equity.
D. Capital and financial risk management
This section outlines how the Group manages its capital structure
and its exposure to financial risk, and provides details of its balance
sheet liquidity and access to financing facilities.
Policies and procedures are reviewed periodically to reflect both
changes in market conditions and changes in the nature and volume
of Group activities.
D1. Capital management
The Group’s primary capital management objective is to optimise its
use of capital to generate value for stakeholders. The Group is not
subject to externally imposed capital requirements, and currently has
no debt.
The Board and management continue to evaluate a broad range
of investment options designed to support the Company’s future
growth aspirations and, as a consequence, do not anticipate paying
dividends in the near-term.
The Group’s capital structure may be modified by payment of
dividends to shareholders, returning capital to shareholders, or
issuing new shares.
The Company’s Board of Directors reviews the capital structure at
least twice a year.
D2. Financial risk management
Financial risk management objectives
Exposure to credit risk, market risk (including currency risk and
equity price risk), and liquidity risk arises in the normal course of the
Group’s business.
The Group’s financial risk management processes and procedures
seek to minimise the potential adverse impacts that may arise from
the unpredictability of financial markets.
The Group’s corporate finance function provides treasury services
to the business, co-ordinates access to domestic and international
financial markets, and monitors and manages liquidity and the
financial risks relating to the operations of the Group through
internal risk reports which analyse exposures by degree and
magnitude of these risks.
The Group does not enter into or trade financial instruments,
including derivative financial instruments, for speculative or hedging
purposes. Specific risk management objectives and policies are set
out below.
The Group uses various methods to measure different types of risk
exposures. These methods include ageing analysis for credit risk, and
sensitivity analysis in the case of foreign exchange risk and equity
price risk.
Credit risk management
Credit risk is the risk of financial loss to the Group if a customer
or the counterparty to a financial instrument fails to meet its
contractual obligations, and arises principally from the Group’s
receivables from customers.
Maximum exposures to credit risk
at balance date:
Cash and short-term deposits
(counterparty risk)
2019
$’000
2018
$’000
464,805
340,455
Trade receivables (customer credit risk)
44,513
53,476
509,318
393,931
80 The a2 Milk Company
2019 Annual Report
Financial statements
Stepping it up 81
Notes to the financial statements – Capital and financial risk management
for the year ended 30 June 2019
D2. Financial risk management (continued)
Counterparty risk
D2. Financial risk management (continued)
Market risk
At balance date, the Group’s bank accounts were held with banks with acceptable credit ratings determined by recognised credit agencies,
including National Australia Bank Limited, Bank of New Zealand Limited, HSBC Bank, Great Western Bank and Lloyds Bank. The Group does
not have any other concentrations of counterparty credit risk.
Market risk is the risk that changes in market prices will affect the Group’s income or the value of its holdings in financial instruments. The
Group’s activities expose it primarily to the financial risks of changes in foreign currency exchange rates to the NZ dollar. The Group’s holding
of a listed investment also exposes it to equity price risk.
Customer credit risk
The Group’s exposure to customer credit risk is influenced mainly by the individual characteristics of each customer. The majority of sales are
to major retailers and other significant customers with established credit worthiness and minimum levels of default. Other sales are made
cash on delivery.
New customers are analysed individually for creditworthiness; taking into account credit ratings where available, financial position, previous
trading experience and other factors.
In monitoring customer credit risk, customers are assessed individually by their debtor ageing profile. Monitoring of receivable balances on
an ongoing basis minimises the exposure to bad debts. Historically, bad debt write-offs have been negligible.
There are significant concentrations of business within the Group. In 2019 37% of sales with credit terms were to three customers.
(2018: 36% of sales to three customers). There is no history of default for these customers.
The provision for impairment is recognised based on an assessment of lifetime expected credit loss.
Ageing of trade receivables at the reporting date:
Impairment
2019
$’000
Restated Gross
2018
$’000
Impairment
2018
$’000
Not past due
Past due up to 90 days
Past due 91 to 180 days
Past due 181 days to one year
More than one year
Rebates and other items of variable consideration payable:
Within 90 days
Within 91 to 180 days
Gross
2019
$’000
76,031
7,861
–
–
–
83,892
(37,777)
(1,602)
44,513
–
(20)
–
–
–
(20)
–
–
(20)
69,489
5,639
191
–
–
75,319
–
(20,337)
(1,506)
53,476
The average credit period on sales is 22 days (2018: 25 days). No interest is charged on trade receivables outstanding.
Movement in impairment allowance for expected credit loss
Balance at beginning of year
Amount charged to the statement of comprehensive income
Provisions reversed
Net foreign currency exchange differences
2019
$’000
37
(17)
–
–
20
–
–
(37)
–
–
(37)
–
–
(37)
2018
$’000
96
29
(91)
3
37
Market risk exposures are monitored by management on an ongoing basis and there has been no change during the year to the Group’s
exposure to market risks or the way it manages and measures risk.
Foreign currency risk management
The Group’s exposure to foreign currency risk arises principally from its operations in Australia, the US, the United Kingdom, and China; and
the resultant movements in the currencies of those countries against the NZ dollar. The Group does not hedge this risk, but may transfer cash
balances from time to time between currencies to reduce exposure or to match underlying liabilities.
Expressed in NZ dollars, the table below indicates exposure and sensitivity to movements in exchange rates on the profit or loss of the Group
based on closing exchange rates as at 30 June, applied to the Group’s financial assets/(liabilities) at 30 June. Exchange rates and assets and
liabilities held in foreign currencies will fluctuate over the course of normal operations.
The analysis is performed consistently from year to year.
2019
Movement on exchange rate
AUS Dollar
US Dollar
GB Pounds
Chinese Yuan Renminbi
2018
Movement on exchange rate
AUS Dollar
US Dollar
GB Pounds
Chinese Yuan Renminbi
Net exposure on
reporting date
Impact on pre-tax
profit or (loss)
$’000
–
8,981
(16,964)
(44)
79
$’000
+10%
998
(1,886)
(5)
9
Net exposure on
reporting date
Impact on pre-tax
profit or (loss)
$’000
–
165
(10,790)
63
(4,676)
$’000
+10%
18
(1,199)
7
(520)
$’000
–10%
(816)
1,541
4
(7)
$’000
–10%
(15)
981
(6)
425
As the foreign currency denominated monetary financial instruments of the Group consist only of cash, and trade and other receivables and
payables, foreign exchange movements do not have any impact on equity other than the above-mentioned impact on profit or loss.
Exchange rates
The following significant exchange rates applied during the year:
AUS Dollar
US Dollar
GB Pounds
Chinese Yuan Renminbi
Average rate
Reporting date spot rate
2019
0.9401
0.6724
0.5200
4.5911
2018
0.9192
0.7107
0.5267
4.6241
2019
0.9552
0.6679
0.5268
4.5944
2018
0.9219
0.6779
0.5180
4.4818
82 The a2 Milk Company
2019 Annual Report
Financial statements
Stepping it up 83
Notes to the financial statements – Capital and financial risk management
for the year ended 30 June 2019
Fair values
Fair value hierarchy
Financial instruments carried at fair value are classified by valuation
method based on the following hierarchy:
Level 1:
quoted prices (unadjusted) in active markets for identical
assets or liabilities
Level 2:
inputs other than quoted prices included within Level 1
that are observable for the asset or liability, either directly
(i.e. as prices) or indirectly (i.e. derived from prices)
Level 3:
inputs for the asset or liability that are not based on
observable market data (unobservable inputs)
The listed investment, classified as a financial asset measured at fair
value through other comprehensive income, is the only financial
instrument carried by the Group at fair value, with a Level 1
valuation method applied. Carrying amount (equalling fair value)
is applied consistently in the current and prior year to assets and
liabilities not recognised in the statement of financial position at
fair value.
The following methods and assumptions are used in estimating
the fair values of financial instruments:
•
listed investment – closing share price as at 30 June 2019
on the New Zealand Stock Exchange; and
• cash and short-term deposits, trade and other receivables and
payables – carrying amount equals fair value
D2. Financial risk management (continued)
Equity price risk
The Group is exposed to equity price risk on its listed investment
classified and measured at fair value through other comprehensive
income (FVOCI). This risk is not hedged.
The Group monitors this risk exposure by comparing the movement
in the quoted share price of this long-term investment against
movements in the NZX index over the same period.
As at 30 June 2019, the exposure to the listed investment at FVOCI
was $286,807,000 (2018: $186,862,000). A 10% increase or
decrease in the share price of this listed investment would result in
an increase or decrease of $28,681,000 (2018: $18,686,000) in the
fair value revaluation reserve through other comprehensive income,
with no effect on profit or loss.
Liquidity risk management
Liquidity risk is the risk that the Group will be unable to meet its
obligations as they fall due. This risk is managed by establishing a
target minimum liquidity level, ensuring that ongoing commitments
are managed with respect to forecast available cash inflows.
The Group holds significant cash reserves which enable it to meet its
obligations as they fall due, and to support operations in the event
of unanticipated external events.
The Group has no borrowings. (2018: Nil).
Contractual maturities of financial liabilities
The Group’s financial liabilities consist entirely of trade payables and
accruals.
Financial liabilities
Trade payables
Accruals
2019
$’000
84,152
70,042
2018
$’000
66,076
36,604
154,194
102,680
These financial liabilities are all payable within three months (2018:
three months), with no interest payable.
D3. Cash and short-term deposits
Cash at banks and on hand
Short-term deposits
2019
$’000
193,472
271,333
464,805
2018
$’000
154,750
185,705
340,455
Bank balances and cash comprise cash held by the Group. Interest is earned at floating rates based on daily bank deposit rates. The carrying
value of cash assets approximates their fair value.
Cash at banks and on hand includes AUD 40,470,000 (2018: AUD 91,338,000), GBP 3,267,000 (2018: GBP 4,922,000), USD 14,310,000
(2018: USD 17,093,000), and RMB 112,997,000 (2018: RMB 30,788,000).
Recognition and measurement
Cash and cash equivalents in the statement of financial position comprise cash at bank and on hand and short-term deposits with an original
maturity of three months or less that are readily convertible to known amounts of cash, and which are subject to an insignificant risk of
changes in value.
D4. Cash flow information
Reconciliation of after tax profit with net cash flows from operating activities
Net profit for the year
Adjustments for non-cash items:
Depreciation and amortisation
Impairment of goodwill, and trademarks
Share-based payments
Net foreign exchange gain
Deferred tax
Changes in working capital:
Trade and other receivables
Prepayments
Inventories
Trade and other payables
Customer contract liabilities
Income tax payable
Net cash inflow from operating activities
2019
$’000
287,741
2,176
2,059
8,184
(1,730)
(2,822)
6,383
(13,678)
(44,352)
51,421
533
(6,847)
289,068
2018
$’000
195,684
2,174
–
2,612
(2,537)
(2,907)
7,383
(58)
(35,664)
44,862
–
19,559
231,108
84 The a2 Milk Company
2019 Annual Report
Financial statements
Stepping it up 85
Notes to the financial statements – Capital and financial risk management
for the year ended 30 June 2019
D5. Share capital
Movements in contributed equity:
Fully paid ordinary shares:
Balance at beginning of year
Movements in the period:
Exercise of options
Vesting of performance rights
Vesting of time-based rights
Partly paid shares fully paid
Share issue costs
3,000,998
1,890
–
508,340
1,500,000
–
5,009,338
–
–
1,080
(41)
2,929
4,231,000
320,000
–
7,250,000
–
11,801,000
730,039,067
8,750,000
(7,250,000)
1,500,000
2,666
–
–
4,650
(52)
7,264
141,566
–
–
–
Balance at end of year
735,048,405
144,495
Partly paid ordinary shares:
Balance at beginning of year
Partly paid shares fully paid
Balance at end of year
1,500,000
(1,500,000)
–
–
–
–
Total ordinary shares on issue
735,048,405
144,495
731,539,067
141,566
Holders of fully paid ordinary shares are entitled to receive dividends as may be declared from time to time and are entitled to one vote per
share at shareholders’ meetings.
The Company does not have authorised capital or par value in respect of its issued shares.
D6. Reserves
Details of the following reserve accounts are set out in the Consolidated statement of changes in equity.
Employee equity settled payments reserve
The employee equity settled payments reserve is used to record the value of share-based payments provided to employees and contractors,
including key management personnel.
Fair value revaluation reserve
The fair value revaluation reserve is used to record movements in the fair value of listed investments classified as financial assets measured
at fair value through other comprehensive income.
Foreign currency translation reserve
The foreign currency translation reserve is used to record exchange differences arising from the translation of the financial statements
of foreign operations.
2019
2018
Number of
shares
Share capital
$’000
Number
of shares
Share capital
$’000
730,039,067
141,566
718,238,067
134,302
D7. Capital expenditure commitments
As at 30 June 2019, there were no capital expenditure commitments (2018: $nil).
D8. Operating lease commitments
The Group has entered into operating leases for office and industrial premises, and motor vehicles. There are no financial restrictions placed
upon Group entities by entering into these leases. The Group has the option, under some leases, to lease the assets for additional terms. All
lease contracts contain market review clauses in the event that the Company exercises its option to renew.
Future minimum rentals payable under non-cancellable operating leases
Not longer than one year
Longer than one year and not longer than five years
Longer than five years
Recognition and measurement
2019
$’000
2,505
4,064
3,576
10,145
2018
$’000
2,126
3,726
–
5,852
The determination of whether an arrangement is or contains a lease is based on the substance of the arrangement at inception date,
whether fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use
the asset, even if that right is not explicitly specified in an arrangement.
Group as a lessee
Leases under which a significant proportion of the risks and rewards remain with the lessor are classified as operating leases.
Operating lease payments are recognised as an operating expense in the statement of comprehensive income on a straight-line basis over
the lease term. Operating lease incentives are recognised as a liability when received and subsequently reduced by allocating lease payments
between rental expense and reduction of the liability.
D9. Contingent liabilities
As at 30 June 2019, there were no material contingent liabilities (2018: $nil).
86 The a2 Milk Company
2019 Annual Report
Financial statements
Stepping it up 87
Notes to the financial statements – Group structure
for the year ended 30 June 2019
E. Group structure
E2. Deed of cross guarantee
This section provides details of the Group structure and the entities included in the consolidated financial statements.
E1. Consolidated entities
Details of the Company’s subsidiaries at 30 June 2019 are as follows:
Parties to Deed of
Cross Guarantee
(Note E2)*
Principal place
of business
Proportion of
ownership interest
2019
2018
Pursuant to ASIC Corporations (Wholly-owned Companies) Instrument 2016/785, the Australian-incorporated wholly owned subsidiaries
listed in Note E1 as parties to the Deed of Cross Guarantee are relieved from the Corporations Act 2001 requirements for preparation, audit
and lodgement of financial reports and directors’ reports in Australia.
It is a condition of the ASIC Corporations Instrument that the Company and each of the subsidiaries listed enter into a Deed of Cross
Guarantee. The effect of the Deed is that each party guarantees to each creditor of each other party payment in full of any debt in the event
of winding up of the other party under certain provisions of the Corporations Act 2001. If a winding up occurs under other provisions of the
Act, the guarantee will only apply if after six months after a resolution or order for winding up any creditor has not been paid in full.
A consolidated statement of comprehensive income and statement of financial position, comprising the Company and controlled entities
which are parties to the Deed of Cross Guarantee (each party being a member of the closed group), after eliminating all transactions between
parties to the Deed of Cross Guarantee, at 30 June 2019, are set out as follows:
Parent entity:
The a2 Milk Company Limited
Subsidiaries:
The a2 Milk Company (Export) Limited
a2 Holdings UK Limited
a2 Infant Nutrition Limited
The a2 Milk Company (New Zealand) Limited
a2 Australian Investments Pty. Limited
a2 Botany Pty Ltd
The a2 Milk Company (Australia) Pty Ltd
a2 Exports Australia Pty Limited
a2 Infant Nutrition Australia Pty Ltd
–
–
#
–
The a2 Milk Company (Nutrition) Pty Limited
##
The a2 Milk Company Limited
The a2 Milk Company LLC
The a2 Milk Company
The a2 Milk Company Limited
a2 Infant Nutrition (Shanghai) Co., Ltd
The a2 Milk Company (Singapore) Pte. Ltd
–
–
–
–
–
–
New Zealand
–
–
Consolidated statement of comprehensive income and retained earnings
for the year ended 30 June 2019
New Zealand
New Zealand
New Zealand
New Zealand
Australia
Australia
Australia
Australia
Australia
Australia
UK
USA
USA
Canada
China
Singapore
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
–
100%
100%
100%
100%
100%
100%
Revenue
Expenses
Finance income (net)
Profit before tax
Income tax expense
Profit after tax
Other comprehensive income
Total comprehensive income for the year
Retained earnings at beginning of the year
Transfers to and from reserves
Retained earnings at the end of the year
2019
$’000
1,254,926
(844,540)
4,121
414,507
(123,919)
290,588
(4,212)
286,376
323,797
4,212
614,385
2018
$’000
896,611
(617,080)
3,180
282,711
(85,679)
197,032
569
197,601
126,765
(569)
323,797
* Each party to the Deed of Cross Guarantee is a member of the “closed group” under the ASIC Corporations (Wholly-owned Companies) Instrument 2016/785.
There are no other members of the “extended closed group”.
# a2 Infant Nutrition Limited is the subject of an ASIC declaration under section 601CK(7) of the Corporations Act 2001 (Commonwealth of Australia) to the effect
that it is not required to prepare and lodge a balance sheet, cash flow statement, and profit and loss statement with ASIC subject to it satisfying the conditions
to the declaration, which includes a requirement that it comply with section 6 of ASIC Corporations (Wholly-owned Companies) Instrument 2016/785 with
appropriate changes.
## The a2 Milk Company (Nutrition) Pty Limited was incorporated on 24 September 2018, and became a party to the Deed of Cross Guarantee on
22 November 2018. There were no other entities over which the Company gained or lost control during the year.
All subsidiaries have a balance date of 30 June, except for The a2 Milk Company LLC, and a2 Infant Nutrition (Shanghai) Co., Ltd which have a balance date
of 31 December.
Recognition and measurement
Subsidiaries
Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed to, or has rights to, variable returns from
its involvement with the entity and has the ability to affect those returns through its powers over the entity. The financial statements of
subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.
Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies in line with those
of the Group.
Transactions eliminated on consolidation
Intragroup balances, and any unrealised gains and losses or income and expenses arising from intragroup transactions, are eliminated
in preparing the consolidated financial statements.
88 The a2 Milk Company
2019 Annual Report
Financial statements
Stepping it up 89
Notes to the financial statements – Group structure
for the year ended 30 June 2019
Notes to the financial statements – Other disclosures
for the year ended 30 June 2019
E2. Deed of cross guarantee (continued)
Consolidated statement of financial position
as at 30 June 2019
Assets
Current assets
Cash and short-term deposits
Trade and other receivables
Prepayments
Inventories
Total current assets
Non-current assets
Property, plant and equipment
Intangible assets
Other financial assets
Deferred tax asset
Total non-current assets
Total assets
Liabilities
Current liabilities
Trade and other payables
Customer contract liabilities
Income tax payable
Total current liabilities
Non-current liabilities
Trade and other payables
Total non-current liabilities
Total liabilities
Net assets
Equity
Share capital
Retained earnings
Reserves
Total equity
F. Other disclosures
F1. Related party transactions
Ultimate Parent
The a2 Milk Company Limited is the parent of the Group. The Group consists of The a2 Milk Company Limited and its subsidiaries as listed
in Note E1.
Key management personnel
Key management personnel are defined as those persons having significant authority and responsibility for planning, directing and controlling
the activities of the Group, and includes the directors, and a number of senior executives.
Key management personnel compensation:
Short-term employee benefits
Other long-term benefits
Termination payments
Share-based payments
Key management personnel include the following senior executives:
Chief Financial Officer
Chief Executive, Asia Pacific
Chief Executive, USA
2019
$’000
6,576
36
916
5,693
13,221
2018
$’000
4,717
155
–
1,110
5,982
Transactions with key management personnel and their related parties
The following table provides details of transactions that were entered into for the relevant financial year.
Related parties
Sales
Other transactions
Outstanding
receivables/
(payables)
a2 Holdings UK Limited – consultancy fees payable to Lovat Partners
Limited, an entity controlled by David Hearn, Chairman of
the Company. The fees were charged at commercial rates.
This consulting arrangement ceased on 18 December 2018.
No amounts were receivable from related parties at year end.
Loans to key management personnel and their related parties
2019
$’000
2018
$’000
2019
$’000
2018
$’000
2019
$’000
2018
$’000
–
–
44
85
–
(85)
No loans were outstanding or made to key management personnel and their related parties at any time during the 2019 and 2018
financial years.
2019
$’000
2018
$’000
414,177
56,283
49,018
106,396
625,874
9,942
12,901
304,252
5,059
332,154
958,028
145,331
1,431
42,942
189,704
228
228
189,932
768,096
144,495
614,385
9,216
768,096
311,346
63,677
35,431
62,520
472,974
9,254
13,028
141,295
3,762
167,339
640,313
117,031
898
50,530
168,459
1,247
1,247
169,706
470,607
141,566
323,797
5,244
470,607
90 The a2 Milk Company
2019 Annual Report
Financial statements
Stepping it up 91
Notes to the financial statements – Other disclosures
for the year ended 30 June 2019
F2. Share-based payments
Long-term incentives (LTI)
The LTI plan is designed to retain and motivate senior executives and management to achieve the Group’s long-term strategic goals by
providing rewards that align the interests of the executives and management with shareholders. Performance rights and time-based rights
are currently issued under the LTI plan; and options were previously issued in FY15 and FY16.
Performance rights were issued under the Group’s long-term incentive plan in FY17 and FY18. During the year, 245,787 performance
rights and 599,254 time-based rights were granted to the Managing Director and CEO; and 93,809 time-based rights were granted to the
Company's Chief Scientific Advisor.
The performance rights, granted on 13 July 2018, vest subject to an earnings per share (EPS) performance hurdle, and continuing
employment. The absolute EPS hurdle is a minimum diluted EPS compound annual growth rate (CAGR) increase of 15% over a three-year
performance period, with no retesting. 50% of the award will vest if diluted EPS CAGR of 15% is achieved, up to a maximum of 100% of
the award vesting if diluted EPS CAGR of 25% or more is achieved.
Vesting of the time-based rights issued in the year is subject to continuing employment, with no other performance conditions, vesting
as follows:
Number of time-based rights granted:
Grant dates
Vesting dates
237,090
120,142
151,108
90,914
31,270
31,270
31,269
693,063
13 Jul 18
13 Jul 18
13 Jul 18
13 Jul 18
1 Aug 18
1 Aug 18
1 Aug 18
28 Aug 18
3 Sep 18
30 Jun 19
24 Aug 19
1 Aug 19
1 Aug 20
1 Aug 21
The time-based rights granted on 13 July 2018 were issued to the Managing Director and CEO as compensation for forfeiture of STI and LTI
entitlements with a former employer as a result of resignation to take up employment with the Company, with vesting dates matching the
vesting dates of the forfeited entitlements.
No amount is payable upon vesting of the performance and time-based rights and conversion to shares. Each exercised right is an entitlement
to one fully paid ordinary share in the Company.
The FY19, FY18 and FY17 performance rights awards vest subject to an earnings per share (EPS) performance hurdle, and continuing
employment. The absolute EPS hurdle is a minimum diluted EPS compound annual growth rate (CAGR) increase of 15% over the
performance period, with no retesting. 50% of the awards will vest if diluted EPS CAGR of 15% is achieved, and up to a maximum
of 100% of the award will vest if diluted EPS CAGR of either 20% or more, or 25% or more, is achieved, as follows:
Grants outstanding 30 June 2019:
Performance period
Performance hurdles
50%
100%
F2. Share-based payments (continued)
The options granted in FY15 and FY16 vest in five equal tranches over five years, commencing on the first anniversary of the date
of the grant.
The FY16 awards of options vest subject to share price growth performance hurdles over a five-year performance period, and continuing
employment. The absolute share price growth hurdle is a minimum share price CAGR of 10% over the performance period, subject to annual
retesting until the performance condition is met, or the performance period ends.
On vesting, options are exercised on payment of the exercise price. No amount is payable upon vesting of the rights and conversion to shares.
Each exercised option or right is an entitlement to one fully paid share in the Company.
No dividends are paid on options and rights, and they do not entitle their holder to attend or vote at Company meetings.
LTI outstanding as at 30 June 2019
Number
Grant Dates
Vesting Dates
Expiry Dates
Performance rights – FY17 grants
875,000 8 Feb 17 and 10 Mar 17
8 Feb 20 and 10 Mar 20
8 Feb 20 and 10 Mar 20
Performance rights – FY18 grants
617,300 28 Sep 17 and 6 Mar 18
1 Sep 20 and 6 Mar 21
28 Jun 21 and 6 Dec 21
Performance rights – FY19 grant
245,787
13 Jul 18
30 Jun 21
30 Sep 21
1,738,087
Time-based rights – FY19 grants
184,723
13 Jul 18 and 1 Aug 18
28 Aug 19 to 1 Aug 21
28 Aug 19 to 1 Aug 21
Options – FY15 grants
Options – FY16 grants
3,200,000
30 Mar 15
30 Mar 16 to 30 Mar 20
30 Jun 20
3,800,000
12 Aug 15
12 Aug 16 to 12 Aug 20
12 May 21
7,000,000
Performance rights movements:
Outstanding at the beginning of the year
Forfeited during the period
Granted during the period
Vested during the period
Outstanding at the end of the year
The weighted average remaining contractual life of performance rights is 1.1 years (2018: 1.9 years).
Number
2018
2,262,000
(1,040,000)
710,200
(320,000)
1,612,200
Number
2019
1,612,200
(119,900)
245,787
–
1,738,087
Number
2019
693,063
(508,340)
184,723
FY2017
875,000 rights
FY2018
320,000 rights
297,300 rights
FY2019
245,787 rights
3 years
EPS CAGR 15%
EPS CAGR 25%
Time-based rights movements:
Granted during the period
Vested during the period
Outstanding at the end of the year
3 years
2 years
EPS CAGR 15%
EPS CAGR 15%
EPS CAGR 20%
EPS CAGR 25%
The weighted average remaining contractual life of time-based rights is 0.6 years.
3 years
EPS CAGR 15%
EPS CAGR 25%
92 The a2 Milk Company
2019 Annual Report
Financial statements
Stepping it up 93
Notes to the financial statements – Other disclosures
for the year ended 30 June 2019
F2. Share-based payments (continued)
Options movements:
Outstanding at the beginning of the year
Forfeited during the period
Granted during the period
Exercised during the period
Outstanding at the end of the year
Exercisable at the end of the year
Weighted average
exercise price
2019
$0.63
–
$0.63
$0.63
Number
2019
12,400,998
(2,400,000)
–
(3,000,998)
7,000,000
2,400,000
Weighted
average
exercise price
2018
Number
2018
$0.63
16,631,998
–
–
$0.63
$0.63
–
–
(4,231,000)
12,400,998
1,400,998
The weighted average remaining contractual life of options is 0.7 years (2018: 2.6 years).
The weighted average share price on exercise of the options in the period was $12.03.
The fair value of services received in return for performance and share-based rights or options granted to employees is measured by reference
to the fair value of the rights or options granted. The estimate of the fair value of the services received is measured by reference to the vesting
conditions specific to the grant based on a MonteCarlo simulation option pricing model.
Fair value of performance and time-based rights granted during
the year and assumptions
2019
2018
F2. Share-based payments (continued)
Amounts recognised in the consolidated statement of comprehensive income
During the year ended 30 June 2019, a $8,184,000 expense was recognised in the consolidated statement of comprehensive income for
equity settled share-based payment awards (2018: $2,612,000).
Recognition and measurement
The grant date fair value of share-based payment awards made to employees is recognised as an employee expense with a corresponding
increase in the employee equity benefit reserve, over the period that the employees become unconditionally entitled to the awards. The
amount recognised as an expense is adjusted over the period to reflect the number of awards for which the related service and non-market
vesting conditions are expected to be met, but is not adjusted when market performance conditions are not met.
F3. Auditor’s remuneration
The auditor of the Company is Ernst & Young Australia.
Amounts received or due and receivable by Ernst & Young for:
An audit or review of the financial report of the Group
Other services:
Market research
Sustainability reporting advisory
2019
$’000
701
79
40
820
2018
$’000
609
119
65
793
Fair value at measurement date
Share price at grant date
Performance rights life
Expected dividend yield
Risk-free interest rate
Historical volatility
Jul 2018
Aug 2018
Sept 2017
Mar 2018
F4. Subsequent events
$7.77
$10.33
2.98yrs
–
2.09%
30%
$12.75
$11.39
–
–
2.06%
30%
$5.75
$6.54
2.18yrs
–
2.10%
30%
$12.65
$12.75
2.68yrs
–
1.89%
30%
On 20 August 2019, the Board decided to exit from liquid milk operations in the UK to focus instead on strengthening the Group’s position in
core regions, which offer more significant scale potential and a platform for further new product development.
The details of the exit plan are yet to be finalised, but the financial impact of the planned exit is not expected to be material to the Group.
The Group does not have any material long term commitments in the UK.
UK infant nutrition customers have been transferred to the Group’s China and other Asia segment.
No other matters or circumstances have arisen since the end of the financial year which have significantly affected or may significantly affect
the operations, the results of these operations or state of affairs of the Group in subsequent financial years.
Partly paid shares (PPS) – legacy scheme
Partly paid ordinary shares were issued in financial years prior to 30 June 2014. No further grants will be awarded under this scheme.
All remaining PPS were exercised during the year.
Partly paid shares movements:
Outstanding at the beginning of the year
Forfeited during the period
Exercised during the period
Outstanding at the end of the year
Exercisable at the end of the year
Number
2019
1,500,000
–
(1,500,000)
–
–
Number
2018
8,750,000
–
(7,250,000)
1,500,000
–
94 The a2 Milk Company
2019 Annual Report
Financial statements
Stepping it up 95
O T H E R I N F O R M AT I O N
Contents
Company disclosures
Corporate directory
98
106
96 The a2 Milk Company
2019 Annual Report
Other information
Stepping it up 97
Company
disclosures
1. Substantial product holders
The shares of the Company are quoted on NZX, the ASX and Chi-X.
According to substantial product holder notices and the Company’s records, the following persons were substantial product holders in respect
of the ordinary shares of the Company as at 30 June 2019 (such disclosure being required by the Financial Markets Conduct Act 2013 (NZ))
and as at 1 August 2019 (such disclosure being required by the ASX Listing Rules):
Name
Commonwealth Bank of Australia
The Vanguard Group, Inc.
Pendal Group Limited
BlackRock, Inc. and related bodies corporate
As at 30 June and 1 August 2019
Number of ordinary shares in the Company
in which a Relevant Interest is held
% of ordinary shares held
53,591,057
51,494,591
38,544,523
38,298,101
7.29%
7.01%
5.24%
5.21%
The total number of voting shares on issue as at 30 June 2019 was 735,048,405 and the total number of voting shares on issue as at
1 August 2019 was 735,079,675.
2. Voting rights
During the period 1 July 2018 to 30 June 2019, each fully paid ordinary share of the Company gave the holder the right to cast one vote
per shareholder on a show of hands and one vote per share on a poll on any resolution. Following the Company’s transition to the new
NZX Listing Rules on 30 June 2019, all votes cast at shareholder meetings will take place by way of poll.
3. Twenty largest fully paid equity security holders
The names of the 20 largest holders of ordinary shares in the Company as at 1 August 2019 are listed below:
HSBC Custody Nominees (Australia) Limited
HSBC Nominees (New Zealand) Limited
JP Morgan Chase Bank
HSBC Nominees (New Zealand) Limited
Citibank Nominees (NZ) Ltd
J P Morgan Nominees Australia Pty Limited
Citicorp Nominees Pty Limited
Tea Custodians Limited
National Nominees Limited
Accident Compensation Corporation
Citicorp Nominees Pty Limited
Cogent Nominees Limited
New Zealand Superannuation Fund Nominees Limited
National Nominees New Zealand Limited
BNP Paribas Nominees NZ Limited
Premier Nominees Limited
BNP Paribas Nominees Pty Ltd
Cogent Nominees (NZ) Limited
FNZ Custodians Limited
Forsyth Barr Custodians Limited
Total
Number of shares
142,853,602
50,909,598
46,551,850
38,592,191
37,459,637
35,958,600
30,788,330
23,254,567
21,418,032
18,975,721
17,049,761
15,257,915
11,276,605
11,152,056
9,426,691
8,303,719
6,005,807
4,599,198
4,363,108
3,864,534
%
19.43
6.93
6.33
5.25
5.10
4.89
4.19
3.16
2.91
2.58
2.32
2.08
1.53
1.52
1.28
1.13
0.82
0.63
0.59
0.53
538,061,522
73.20
4. Spread of security holders as at 1 August 2019 and number of holders
a) Fully paid ordinary shareholders
Size of shareholding
Number of holders
Number of shares
1 to 1,000
1,001 to 5,000
5,001 to 10,000
10,001 to 100,000
100,001 shares or more
23,804
12,520
2,688
2,178
191
41,381
9,582,331
30,909,282
20,247,136
56,002,254
618,338,672
735,079,675
%
1.30
4.20
2.75
7.62
84.13
100.00
As at 1 August 2019, the number of holders with between one and 57 ordinary shares (being less than a minimum holding under the
NZX Listing Rules based on the closing market price) was 257 and the number of holders with less than a marketable share parcel of the
Company’s fully paid ordinary shares of AU$500 (under the ASX Listing Rules), based on the closing market price, was 399.
98 The a2 Milk Company
2019 Annual Report
Other information
Stepping it up 99
Company disclosures
b) Options to acquire ordinary shares (unlisted securities not quoted by the ASX or NZX)
Directors of the Company as at 30 June 2019 held the following relevant interests in the financial products of the Company as at that date:
Size of holding
100,001 options or more
Number of holders
Number of options
5
5
7,000,000
7,000,000
c) Performance rights (unlisted securities not quoted by the ASX or NZX)
Size of holding
5,001 to 10,000
10,001 to 100,000
100,001 performance rights or more
Number of holders
Number of rights
2
16
4
22
13,300
866,800
857,987
1,738,087
d) Time-based rights (unlisted securities not quoted by the ASX or NZX)
Size of holding
10,001 to 100,000
Number of holders
Number of rights
2
2
153,453
153,453
%
100.00
100.00
%
0.77
49.87
49.36
100.00
%
100.00
100.00
5. Directors’ relevant interests and share dealings
Directors of the Company reported the following acquisitions and disposals of relevant interests in financial products of the Company during
the period 1 July 2018 to 30 June 2019:
Beneficial/
Non-beneficial
Acquired/
(Disposed)
Class of
financial product
Registered holder
Jayne Hrdlicka
Carla Jayne Hrdlicka
Carla Jayne Hrdlicka
Carla Jayne Hrdlicka
Carla Jayne Hrdlicka
Carla Jayne Hrdlicka
Carla Jayne Hrdlicka
Carla Jayne Hrdlicka
Carla Jayne Hrdlicka
Carla Jayne Hrdlicka
Carla Jayne Hrdlicka
Geoffrey Babidge2
GCAA Investments Pty Ltd
GCAA Investments Pty Ltd
GCAA Investments Pty Ltd
GCAA Investments Pty Ltd
GCAA Investments Pty Ltd
Peter Hinton
Peter Bruce Hinton
Peter Bruce Hinton
David Hearn
Lovat Partners Limited
David Hearn
David Hearn
Beneficial
Beneficial
Beneficial
Beneficial
Beneficial
Beneficial
Beneficial
Beneficial
Beneficial
Beneficial
Beneficial
Beneficial
Beneficial
Beneficial
Beneficial
Beneficial
Beneficial
Beneficial
Beneficial
Beneficial
245,787
599,254
(237,090)
237,090
(120,142)
120,142
(178,616)
(178,616)
(151,108)
151,108
(250,000)
(250,000)
(53,858)
(196,142)
(250,000)
(25,000)
(325,000)
(100,000)
100,000
(100,000)
Date
13 Jul 18
13 Jul 18
28 Aug 18
28 Aug 18
03 Sep 18
03 Sep 18
18 Sep 18
20 Sep 18
30 Jun 19
30 Jun 19
Consideration
paid/(received)
NZD
N/A
N/A
N/A
N/A
N/A
N/A
($2,157,336.94)
($2,202,781.09)
N/A
N/A
Performance rights
Time-based rights
Time-based rights1
Ordinary shares1
Time-based rights1
Ordinary shares1
Ordinary shares
Ordinary shares
Time-based rights1
Ordinary shares1
Ordinary shares
23 Aug 18
($2,913,204.50)
Ordinary shares
23 Aug 18
($2,938,950.00)
Ordinary shares
27 Aug 18
($659,110.54)
Ordinary shares
28 Aug 18
($2,412,448.53)
Ordinary shares
29 Nov 18
($2,751,077.00)
Ordinary shares
Ordinary shares3
26 Sep 18
21 Feb 19
($297,856.28)
($4,550,000)
Options4
Ordinary shares4
Ordinary shares4
25 Feb 19
25 Feb 19
25 Feb 19
N/A
$63,000
($1,454,657.50)
1 Reflects the issue of ordinary shares to Jayne Hrdlicka following the vesting and automatic exercise of time-based rights.
2 Transactions are for the six-month period after Geoffrey Babidge retired as Managing Director and CEO on 16 July 2018.
3 Sale by Peter Hinton of 325,000 ordinary shares off-market to his spouse.
4 Reflects (i) issue of ordinary shares following exercise of options held by Lovat Partners Limited; (ii) subsequent transfer of those ordinary shares from
Lovat Partners Limited to David Hearn; and (iii) subsequent sale by David Hearn of those ordinary shares on-market.
Registered holder
David Hearn
Lovat Partners Limited
David Lovat Gordon Hearn
Julia Hoare
Julia Cecile Hoare
Jayne Hrdlicka
Carla Jayne Hrdlicka
Carla Jayne Hrdlicka
Carla Jayne Hrdlicka
Peter Hinton
Peter Bruce Hinton
Warwick Every-Burns
Warwick Every-Burns
as trustee of Wake Super Fund
Kathryn Every-Burns
Jesse Wu
Jesse Jen-Wei Wu
Beneficial/
Non-beneficial
Balance held
No’s
Class of financial product
Beneficial
Beneficial
3,200,000
Unlisted options to acquire ordinary shares
100,000
Ordinary shares
Beneficial
50,000
Ordinary shares
Beneficial
Beneficial
Beneficial
151,1081
245,787
90,9142
Ordinary shares
Unlisted performance rights
Unlisted time-based rights
Beneficial
300,000
Ordinary shares
Beneficial
Beneficial
Beneficial
75,000
25,000
27,000
Ordinary shares
Ordinary shares
Ordinary shares
1 Reflects the number of ordinary shares issued to Jayne Hrdlicka following the vesting and automatic exercise of 151,108 time-based rights on 30 June 2019.
2 Reflects the remaining time-based rights held by Jayne Hrdlicka following the vesting and automatic exercise of time-based rights described in this section.
6. Credit rating status
Not applicable.
7. NZX Waivers
A summary of all waivers granted and published by NZX following an application by the Company or relied upon by the Company during
the reporting period ended 30 June 2019 is as follows:
• On 5 July 2019, NZX granted the Company a waiver from NZX Listing Rule 9.1.1. The waiver allowed a wholly owned subsidiary of
the company to enter into a variation to an existing supply contract with a subsidiary of Synlait Milk Limited without obtaining shareholder
approval.
• On 12 September 2018, NZX granted the Company a waiver from NZX Listing Rule 5.5.1(b). The waiver allowed the Company to hold
its Annual Meeting physically in Melbourne, Australia.
• The Company transitioned to the new NZX Listing Rules on 30 June 2019 and has relied on the class waiver granted by NZX on
19 November 2018 in relation to the transition.
8. Particulars of notices or statements given to or approved by the Board
8.1 Interests register
The Company is required to maintain an interests register in which the particulars of certain transactions and matters involving the directors
must be recorded. The interests register for the Company is available for inspection on request by shareholders.
Directors have declared interests during the reporting period ended 30 June 2019 as follows:
• The Company has arranged and paid for policies for directors’ liability insurance which ensure that directors of the Company and its
subsidiaries are protected against liabilities and costs for acts or omissions by them in their capacity as directors of the Company and
its subsidiaries.
• The Company has provided Deeds of Indemnity to all directors for potential liabilities and costs they may incur for acts or omissions
in their capacity as directors of the Company and its subsidiaries.
• Directors’ relevant interests and share dealings as outlined in Section 5, above.
Refer to Note F1 to the financial statements for consultancy transactions entered into with David Hearn.
No other entries were made in the interests registers of the Company's subsidiaries during the reporting period.
8.2 Other positions held
No directors advised the Company of changes to interests during the reporting period ended 30 June 2019.
100 The a2 Milk Company
2019 Annual Report
Other information
Stepping it up 101
Company disclosures
8.3 Directors of subsidiary companies
The following persons held office as directors of subsidiary companies during the year ended 30 June 2019.
Subsidiary
The a2 Milk Company (Export) Limited
Jurisdiction
New Zealand
a2 Infant Nutrition Limited
New Zealand
a2 Holdings UK Limited
New Zealand
a2 Australian Investments Pty. Limited.
Australia
a2 Botany Pty Ltd
Australia
The a2 Milk Company (Australia) Pty Ltd
Australia
The a2 Milk Company (New Zealand) Limited New Zealand
a2 Infant Nutrition Australia Pty Ltd
Australia
a2 Exports Australia Pty Limited
Australia
The a2 Milk Company (Nutrition) Pty Limited
Australia
The a2 Milk Company Limited
British Columbia, Canada
The a2 Milk Company Limited
Scotland, UK
The a2 Milk Company
Delaware, USA
The a2 Milk Company LLC
Delaware, USA
a2 Infant Nutrition (Shanghai) Co., Ltd.
China
The a2 Milk Company (Singapore) Pte. Ltd.
Singapore
Directors (or equivalent)
Jayne Hrdlicka (Appointed: 16 July 2018)
Craig Louttit
Geoffrey Babidge (Resigned: 16 July 2018)
Jayne Hrdlicka (Appointed: 16 July 2018)
Peter Nathan
Geoffrey Babidge (Resigned: 16 July 2018)
Simon Hennessy (Resigned: 3 December 2018)
Jayne Hrdlicka (Appointed: 16 July 2018)
Craig Louttit
Geoffrey Babidge (Resigned: 16 July 2018)
Jayne Hrdlicka (Appointed: 16 July 2018)
Craig Louttit
Geoffrey Babidge (Resigned: 16 July 2018)
Jayne Hrdlicka (Appointed: 16 July 2018)
Craig Louttit
Geoffrey Babidge (Resigned: 16 July 2018)
Jayne Hrdlicka (Appointed: 16 July 2018)
Peter Nathan
Geoffrey Babidge (Resigned: 16 July 2018)
Jayne Hrdlicka (Appointed: 16 July 2018)
Julia Hoare
Geoffrey Babidge (Resigned: 16 July 2018)
Jayne Hrdlicka (Appointed: 16 July 2018)
Peter Nathan
Geoffrey Babidge (Resigned: 16 July 2018)
Simon Hennessy (Resigned: 3 December 2018)
Jayne Hrdlicka (Appointed: 16 July 2018)
Craig Louttit
Geoffrey Babidge (Resigned: 16 July 2018)
Jayne Hrdlicka (Appointed: 24 September 2018)
Craig Louttit (Appointed: 24 September 2018)
Jayne Hrdlicka (Appointed: 16 July 2018)
Craig Louttit
Geoffrey Babidge (Resigned: 16 July 2018)
David Hearn
William Keane
Jayne Hrdlicka (Appointed: 16 July 2018,
Resigned: 1 June 2019)
Geoffrey Babidge (Resigned: 16 July 2018)
John Scott Wotherspoon (Resigned: 9 August 2018)
Simon Charles Hennessy (Appointed: 9 August 2018,
Resigned: 24 August 2018)
Jayne Hrdlicka (Appointed: 16 July 2018)
David Hearn
Geoffrey Babidge (Resigned: 16 July 2018)
Jayne Hrdlicka (Appointed: 16 July 2018)
Craig Louttit
Geoffrey Babidge (Resigned: 16 July 2018)
Michael Bracka (Resigned: 19 December 2018)
Peter Nathan (Appointed: 19 December 2018,
Resigned: 30 May 2019)
Xiao Li (Appointed: 30 May 2019)
Jayne Hrdlicka (Appointed: 16 July 2018)
Craig Louttit
Shaun Singh
Geoffrey Babidge (Resigned: 16 July 2018)
No employee of the Company appointed as a director of the Company or its subsidiaries receives remuneration or other benefits in their role
as director, other than described in the Remuneration section on page 47 of this Annual Report. The remuneration and other benefits of such
employees, received as employees, are included in the relevant bandings for remuneration disclosed under Employee remuneration range in
Section 13, below.
8.4 Use of Company information
The Board received no notices during the period from directors requesting to use Company information received in their capacity as directors
which would not have been otherwise available to them.
9. Limitations on the acquisition of securities
The Company is not subject to chapters 6, 6A, 6B and 6C of the Corporations Act 2001 (Cth, Australia) dealing with the acquisition
of its shares (including substantial holdings and takeovers).
Limitations on the acquisition of the securities imposed by New Zealand law are as follows:
(i)
In general, fully paid ordinary shares in the Company are freely transferable, and the only significant restrictions or limitations in relation
to the acquisition of fully paid ordinary shares in the Company are those imposed by New Zealand laws relating to takeovers, overseas
investment and competition.
(ii) The New Zealand Takeovers Code creates a general rule under which the acquisition of more than 20% of the voting rights in
the Company, or the increase of an existing holding of 20% or more of the voting rights in the Company, can only occur in certain
permitted ways. These include a full takeover offer, a partial takeover offer, an acquisition approved by an ordinary resolution, an
allotment approved by an ordinary resolution, a creeping acquisition (in certain circumstances) or compulsory acquisition if a shareholder
holds 90% or more shares in the Company, in each case in accordance with the New Zealand Takeovers Code.
(iii) The New Zealand Overseas Investment Act 2005 regulates certain investments in New Zealand by overseas persons. In general terms, the
consent of the New Zealand Overseas Investment Office will likely be required where an “overseas person” acquires shares or an interest
in shares in the Company that amount to more than 25% of the shares issued by the Company or, if the overseas person already holds
25% or more, the acquisition increases that holding.
(iv) The New Zealand Commerce Act 1986 is likely to prevent a person from acquiring shares in the Company if the acquisition would have,
or would be likely to have, the effect of substantially lessening competition in a market.
The Company has complied with, and continues to comply with, the requirements of the NZX Listing Rules with respect to the issue
of new securities.
10. On-market buy-back
There is no current on-market buy-back of the Company’s securities.
11. Donations
The Company and its subsidiaries have made donations of cash and inventories totalling NZD 944,057 during the year ended 30 June 2019
(2018: NZD 50,852), primarily related to NZD 861,460 for drought relief and various other donations including donations of inventory to
not-for-profit and charitable organisations.
12. Directors and officers
For the purposes of NZX Listing Rule 3.8.1(c), the quantitative breakdown as to the gender composition of the Company’s Directors and
Officers as at 30 June 2019 and 30 June 2018 is as follows:
At 30 June 2019
At 30 June 2018
Directors
Females
Males
Officers
Females
Males
6
2
4
9
4
5
6
1
5
9
1
8
102 The a2 Milk Company
2019 Annual Report
Other information
Stepping it up 103
Company disclosures
13. Employee remuneration range
The following table shows the number of employees and former
employees of the Company and its subsidiaries (not being directors
or former directors of the Company) who, in their capacity as
employees, received remuneration and other benefits valued
at or in excess of $100,000 during the year to 30 June 2019.
The remuneration bands are expressed in New Zealand Dollars.
The table includes base salaries, short-term incentives, contributions
paid to an individual’s superannuation fund, or, if an individual is a
KiwiSaver member, contributions of 3% of gross earnings towards
that individual’s KiwiSaver scheme, and exercised options. The table
does not include amounts paid after 30 June 2019 relating to FY19,
and long-term incentives that have been granted and have not yet
vested or been exercised (as applicable).
Number of
employees in
the year ended
30 June 2019
(based on actual
payments)
Value of
exercised
options
included in
remuneration
range
14. Principal activities
There were no significant changes to the nature of the business
of the Company (or its subsidiaries) or to the classes of business in
which the Company (or its subsidiaries) had an interest during the
year ended 30 June 2019.
15. Reconciliation of EBITDA to net profit
after tax
Earnings before interest, tax, depreciation and amortisation (EBITDA)
is a non-GAAP measure. However, the Company believes that it
provides investors with a comprehensive understanding of the
underlying performance of the business.
EBITDA
Depreciation and
amortisation
EBIT
Interest income
Income tax expense
Net profit after tax
2019
$’000
413,610
(2,176)
411,434
4,277
(127,970)
287,741
2018
$’000
283,037
(2,174)
280,863
2,369
(87,548)
195,684
4
6
9
6
3
5
2
4
2
4
3
1
1
1
2
2
3
1
2
2
1
2
1
1
1
1
1
1
1
1
1
1
1
1
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2,310,000
3,354,000
4,480,000
4,480,000
9,251,527
8,944,000
Remuneration range
$ (gross)
$100,000 – $109,999
$110,000 – $119,999
$120,000 – $129,999
$130,000 – $139,999
$140,000 – $149,999
$150,000 – $159,999
$160,000 – $169,999
$170,000 – $179,999
$180,000 – $189,999
$190,000 – $199,999
$200,000 – $209,999
$210,000 – $219,999
$220,000 – $229,999
$230,000 – $239,999
$240,000 – $249,999
$270,000 – $279,999
$280,000 – $289,999
$290,000 – $299,999
$310,000 – $319,999
$340,000 – $349,999
$360,000 – $369,999
$370,000 – $379,999
$390,000 – $399,999
$410,000 – $419,999
$430,000 – $439,999
$490,000 – $499,999
$590,000 – $599,999
$790,000 – $799,999
$2,830,000 – $2,839,999
$4,040,000 – $4,049,999
$5,030,000 – $5,039,999
$5,230,000 – $5,239,999
$9,600,000 – $9,609,999
$10,200,000 – $10,209,999
Total
78
32,819,527
104 The a2 Milk Company
2019 Annual Report
Other information
Stepping it up 105
Corporate
directory
Company
New Zealand share registry
Australian share registry
Registered offices
Auditor
The a2 Milk Company Limited
Level 10
51 Shortland Street
Auckland 1010
New Zealand
Link Market Services Limited
PO Box 91976
Victoria Street West
Auckland 1142
New Zealand
Telephone: +64 9 375 5998
Link Market Services Limited
Locked Bag A14
Sydney South NSW 1235
Australia
Telephone: +61 1300 554 474
Level 10
51 Shortland Street
Auckland 1010
New Zealand
Level 4
182 Blues Point Road
McMahons Point NSW 2060
Australia
Telephone: +61 2 9697 7000
Ernst & Young
200 George Street
Sydney NSW 2000
Australia
Company Secretary
Jaron McVicar
Corporate website
www.thea2milkcompany.com
The
A2 protein
difference
Originally all cows
produced milk
containing only the
A2 protein type
Genetic variation has resulted in mixed
herds over time
Conventional cows’ milk
contains two main types
of beta casein protein,
A2 protein and A1 protein
– our branded milk is
different from conventional
cows’ milk because it comes
from cows selected to
naturally produce only the
A2 protein type and no A1.
Our milk is comparable to
conventional cows’ milk in
other respects.
Our branded milk is naturally
occurring and not a product
of genetic engineering or
technological processes.
Many consumers and healthcare
professionals report that certain
people who experience challenges
drinking conventional cows’ milk
may experience benefits when they
switch to a2 MilkTM.
Typical cow herds
produce conventional
milk containing a mix of
A1 and A2 protein types
Our branded milk is sourced
from herds producing milk
naturally containing only the
A2 protein type and no A1
106 The a2 Milk Company
2019 Annual Report
The A2 protein difference
Stepping it up 107
t h e a 2 m i l k c o m p a n y . c o m
The a2 Milk Company Limited
(Australian Registered Body Number 158 331 965 – Incorporated in New Zealand)