2022
ANNUAL
REPORT
We pioneer the future of Dairy for good
THE a2 MILK COMPANY ANNUAL REPORT 2022 THE a2 MILK COMPANY
HAS MADE SIGNIFICANT
PROGRESS IN
IMPLEMENTING ITS
REFRESHED GROWTH
STRATEGY AND
IMPROVING PERFORMANCE
DURING FY22
GROUP
PERFORMANCE*
$1,446m
Revenue
19.8%
$196m
EBITDA
59.0%
PRODUCT
SEGMENT
REVENUE*
$1,022m
Infant nutrition
11.9%
$265m
$123m
NPAT attributable
to owners of the
Company
52.0%
$817m**
Net cash
16.49c
Earnings per share
Liquid milk
10.4%
51.8%
$204m
Operating cash flow
$159m
Other
202.6%
OPERATING SEGMENT REVENUE
$726m
China and Other
Asia
24.5%
$83m
USA
30.0%
$533m
Australia and
New Zealand
4.8%
$104m
Mataura Valley Milk
* Includes MVM acquired during FY22.
** Including term deposits and borrowings, excluding
subordinated non-current shareholder loans.
CONTENTS
Chair’s letter
CEO’s year in review
2
4
Building a sustainable growth business 14
How we create value
Company overview
Strategy
Risks and opportunities
Goals
Corporate governance
Governance
Directors
Executive Leadership Team
Remuneration
Financial statements
16
18
22
24
32
51
52
56
58
60
65
Other information
118
2
1
THE a2 MILK COMPANY ANNUAL REPORT 2022 CHAIR’S LETTER
CHAIR’S
LETTER
David Hearn
Dear Shareholder
On behalf of your Board, I am pleased to report a positive and
much improved performance for The a2 Milk Company in FY22
with almost all the business fundamentals showing strong
recovery throughout the year. This strong recovery means that we
exit FY22 with the business tracking positively and, as such, gives
us confidence that FY23 will show continued growth.
I concluded my letter in FY21 leaving you with two important
thoughts. The first was that whilst the issues that arose that
year were undoubtedly a challenge, the business remained at its
heart a robust, differentiated branded business with exceptionally
strong financial fundamentals.
The second was that I, and the Board, recognised the serious
challenges created by the market conditions in FY21 for you, our
shareholders and that the Board and the executive leadership
team (ELT) were determined to make back lost ground.
With that context, it is pleasing to provide a significantly more
positive update this year on the progress we have made as a
Company in stabilising the business and returning to growth,
confirming the underlying strength of the business to which I
referred last year.
It was important for us to recognise in FY21, in light of the world
changing as a result of the global pandemic, that we would
need to develop new and appropriate strategies to succeed in
the future, not by discarding the foundations on which we have
built past success, but by building on them and developing them
further to remain fit for purpose in this new environment.
During the year, the Board and the ELT together, completed a
holistic review of our market, brand, product and distribution
opportunities and we announced our refreshed growth strategy.
This refreshed growth strategy was in response to the rapidly
changing infant milk formula (IMF) market dynamics in China.
There is strong evidence at many levels in the FY22 result that
the plans developed from that strategy are already gaining
significant traction and that the significant investments we made
in restructuring our business, especially on the supply-side, have
definitely shown their worth.
This year’s performance proves that our confidence in the
underlying strength of the a2™ brand was well-founded, and
we invested a record amount for the Company in marketing,
continuing to build our brand and strengthen consumer loyalty.
Our refreshed growth strategy, increased brand investment and a
renewed inventory setting have resulted in a strong performance,
improved trajectory, clear market share gains and our strongest
brand health metrics recorded to date.
We have made significant advancements in delivering against
our strategic priorities this year by:
— Investing in people and planet leadership with meaningful
and impactful investments in these areas;
— Increasing our marketing investment in China significantly
towards capturing the full potential in the China IMF market;
— Ramping-up our product innovation efforts with a number of
new products launched and a pipeline developed for the next
few years and beyond;
— Transforming our supply chain, particularly with efforts to
expand our A1 protein free milk pool at Mataura Valley Milk
(MVM) and in accelerating efforts to explore opportunities
relating to China label market access and in-market supply
capability; and
— Putting plans in place to accelerate our path to profitability for
our USA and MVM businesses.
These plans will continue to evolve as we develop and grow and
we are pleased with the progress that has been made during
the year.
Complementing the work on our growth strategy and delivery
against our strategic priorities, we recently also refreshed our
purpose and vision. It is important for all businesses to know why
they exist and where they want to go. Our refreshed purpose, ‘We
pioneer the future of Dairy for good’ reflects the unique strengths
of the business, and our vision of ‘An A1-free world where Dairy
nourishes all people and our planet’ reflects the positive future
we want to help create. The combination of our purpose, vision
and strategy strengthens the foundations on which we will drive
further growth in the future.
2
Given the stabilisation and strength of the business, the
robustness of our balance sheet with net cash of $817 million1 at
year end, an improved growth trajectory and more confidence
in our outlook, the Board intends to implement an on-market
buy-back programme of up to $150 million to effectively utilise
excess capital at this time. While we continue to prioritise growth
initiatives and will ensure we retain balance sheet strength and
flexibility, we have determined that a share buy-back programme
is an effective way to return capital to investors and reflects the
confidence the Board has in the outlook of the business.
On behalf of the Board, I would like to express my sincere
gratitude to David Bortolussi, our Managing Director and Chief
Executive Officer, for his leadership and impactful contribution
which has been immense through a particularly challenging time
for our Company. David has shown tremendous skill and tact
in navigating us through these challenges and setting us up for
further growth. At the ELT level, there have been changes during
the year including a number of new appointments. I extend my
thanks and gratitude to the whole ELT and every member of the
a2MC team in all of our regions for their contributions this year. In
particular, I would like to recognise the extraordinary efforts of our
teams and strategic partners in navigating the many supply chain
challenges which have been experienced globally in recent times.
Being able to maintain continuous supply of our New Zealand IMF
products into China required considerable collaboration, careful
planning and perseverance – a real team effort.
I would also like to thank my fellow Directors for their significant
contribution over the past year. The Board has also undergone
some renewal. In March this year, Sandra Yu was appointed to
the Board. Sandra is a highly regarded company director and has
extensive experience in the IMF market in China as a former head
of Mead Johnson Nutrition’s Greater China business. Furthermore,
David Wang will join the Board as a non-executive director in
September. David’s appointment will add further China and
manufacturing expertise which will be an invaluable asset as we
continue to transform our supply chain in New Zealand and China.
“ This year’s performance proves
that our confidence in the
underlying strength of the a2™
brand was well-founded.”
After nearly nine years of exceptional contribution to the
Board, and consistent with corporate governance best practice,
Julia Hoare, our Deputy Chair, has announced her intention to step
down following the release of our FY23 interim results. The Board
continues to be active in considering renewal and there are plans
in place to undertake additional renewal over the next few years.
Your Board and the ELT is committed to our purpose and vision,
we have a refreshed strategy in place and our execution against
those plans is gaining increased traction as every month passes.
We believe in the science that underpins our products and are
investing behind our brand in a focussed and meaningful way.
Furthermore, having regrouped and stabilised the business,
our performance is stronger and our outlook improved. We did
not find ourselves here by chance, and indeed several difficult
decisions needed to be made in FY21 to get us here. However,
those decisions are proving to have been the right ones and we
are pleased to be back on track.
Finally, I would like to thank you, our shareholders, for your
continued support for our Company and look forward to updating
you at our annual shareholders’ meeting in November.
In the meantime, may I take this opportunity to wish you and your
family the best of health.
Yours faithfully,
David Hearn
Chair
28 August 2022
1. Including term deposits and borrowings, excluding subordinated
non-current shareholder loans
3
THE a2 MILK COMPANY ANNUAL REPORT 2022 WE PIONEER THE
FUTURE
Britta Campion / Newspix
4
DAVID BORTOLUSSI
MANAGING DIRECTOR AND CEO
CEO’S YEAR
IN REVIEW
David Bortolussi
The a2 Milk Company has made
significant progress in implementing
its refreshed growth strategy and
improving performance during FY221.
More specifically, the:
1. Inventory management actions taken last calendar year to
address excess infant milk formula (IMF) inventory have proven
effective with channel inventory at target levels, product
freshness amongst the best in the industry and improved
market pricing
2. Refreshed growth strategy communicated to the market in
October 2021 which focused on capturing the full potential of
the China market opportunity is having an impact achieving
new highs in brand health metrics and record market shares
3. Full year result for FY22 is in line with the Company’s
expectations as outlined on 21 February 2022, delivering
double digit revenue and earnings growth despite challenging
market conditions driven by the refreshed growth strategy
and improved execution
4. Outlook for the business in FY23 is positive with continued
revenue and earnings growth expected, and the Company is
on track to deliver on its medium-term financial and non-
financial ambitions communicated to the market at its Investor
Day in October 2021
As a result of the above, and considering its strong balance
sheet position, the Company intends to execute an on-market
share buyback of up to $150 million. An on-market share
buyback is considered to be the most appropriate form of capital
management at this time.
The Board and Executive Leadership Team would like to express
their appreciation to the Company’s supportive shareholders,
talented team, valued farmers, loyal customers/distributors,
committed suppliers and strategic partners in China, for their
collective support during a challenging period overcoming
COVID-19 related disruption and market headwinds.
1
All references to full year (FY), halves (H) and quarters (Q) relate to the
Company’s financial year, ending 30 June.
5
OF DAIRY
FOR GOOD
“
It was a successful year for
The a2 Milk Company
delivering double digit
revenue and earnings growth
despite challenging market
conditions.
”
THE a2 MILK COMPANY ANNUAL REPORT 2022 CEO’S YEAR IN REVIEW
Financial highlights2
Operational highlights
— Brand health metrics reached new highs across
the business with total a2MC IMF spontaneous
brand awareness in China increasing significantly
from 16% to 21% following a 36.3% increase in
marketing investment
— Record market shares achieved in China label IMF
in mother and baby stores (MBS) and domestic
online (DOL), with English label IMF market share
in cross border e-commerce (CBEC) increasing in
2H22 and offline-to-online (O2O) over the full year.
Record market shares also achieved in Australia and
USA milk
— Deliberate shift in distribution of English label
IMF to more transparent, performance-based
and exclusive partners progressing well with
significantly improved share of voice in the
Daigou channel
— Increased focus on innovation resulted in the
highest number of new product launches in
the Company’s history: a2 Milk® Half & Half,
HERSHEY’S a2 Milk®, a2 Milk® UHT, a2 Milk®
Cream on Top, a2 Milk® Lactose Free and refreshed
a2 Platinum® English label IMF
— Completion of Mataura Valley Milk (MVM)
acquisition with China Animal Husbandry Group
with successful integration and commencement of
a2 Milk® powder manufacturing underway
— Significant increase in sustainability targets,
initiatives and impact in many areas of the business,
including committing to New Zealand’s first
high pressure electrode boiler supplied by 100%
renewable energy at the MVM site
— Revenue growth of 19.8% to $1,446.2 million (11.2% ex-
MVM3) with 2H22 up 18.9% on 1H22 (15.7% ex-MVM)
— China label and English label IMF sales up 12.2% and
11.6% respectively
— ANZ and USA liquid milk sales up 1.8% and 30.2%
respectively
— Earnings before interest, tax, depreciation and amortisation
(EBITDA4) up 59.0% to $196.2 million. EBITDA to sales
margin increased to 13.6% (16.1% ex-MVM) compared to
10.2% in FY21
— Net profit after tax (NPAT) including amounts attributable
to non-controlling interests up 42.3% to $114.7 million with
$122.6 million attributable to owners of the Company5
— Earnings per share up 51.8% to 16.5 cents in FY22
compared to 10.9 cents in FY21
— Strong balance sheet with closing net cash6 of
$816.5 million with operational cash conversion7 of 114%
during the year
— Positive outlook for FY23 with high single digit revenue
growth and EBITDA margin improvement expected (see
Outlook below for further detail, including key industry and
business risks)
2 All figures are in New Zealand Dollars (NZ$), unless otherwise stated.
3 Excluding the impact of consolidating Mataura Valley Milk (MVM) into
4
the Group result, which was acquired in July 2021.
EBITDA is a non-GAAP measure and does not have a standardised
meaning prescribed by GAAP. However, the Company believes that
in combination with GAAP measures, it assists in providing investors
with a comprehensive understanding of the underlying operational
performance of the business. A reconciliation of EBITDA to net profit
after tax is shown in the Company’s FY22 Investor Presentation (slide
55) and Other information in this Annual Report (page 126).
5 The non-controlling interest represents China Animal Husbandry
6
7
Group’s 25% interest in MVM.
Including term deposits and borrowings, excluding subordinated non-
current shareholder loans.
Operational cash conversion defined as net cash flow from operating
activities before interest and tax divided by EBITDA.
Group financial performance8,9
The Company’s revenue for FY22 was up 19.8% driven by
strong growth in the China & Other Asia and USA segments,
along with incremental sales from the first-time inclusion of
MVM. This was partially offset by lower IMF sales in ANZ due to
deliberate changes to the Company’s English label IMF route-to-
market structure, resulting in a shift in sales towards the China &
Other Asia segment. 2H22 revenue growth also reflects actions
taken by the Company in 2H21 and 1H22 to address excess
IMF channel inventory, execution of the Company’s growth
strategy, strong China label IMF consumer demand in part due
to COVID-19 related lockdowns as well as pricing and favourable
foreign exchange.
Gross margin percentage10 of 46.0% was up 3.7ppts and reflects
the cycling of prior year stock write-downs, price increases,
reduced trade spend and favourable foreign exchange; partially
offset by higher raw material and logistics costs which were
impacted by COVID-19 and the inclusion of MVM. Gross margin
percentage excluding MVM was 50.9% compared to 42.3% in
FY21 which was significantly impacted by stock write-downs.
EBITDA increased by 59.0% to $196.2 million primarily reflecting
higher revenue and gross margin. EBITDA growth came
notwithstanding a 36.3% increase in marketing spend and
the anticipated uplift in Administrative and Other Expenses,
which have increased by 15.6% due to capability investment,
increase in employee incentive costs (low base last year), and
higher professional services fees and insurance costs. COVID-19
adversely impacted in-market freight rates and distribution costs,
particularly in the USA business. Together, these factors resulted
in an EBITDA margin of 13.6% (16.1% ex-MVM).
Net profit after tax, including amounts attributable to the non-
controlling interest was $114.7 million, an increase of 42.3%.
Depreciation and amortisation was $18.9 million, net interest
income was similar to prior period and the effective tax rate
of the Group was 36.7%. NPAT attributable to owners of the
Company was $122.6 million.
The balance sheet remains in a strong position with closing
cash and term deposits of $887.3 million. The higher cash
balance reflects the cash generated during the year offset by
$213.7 million of capital invested in the acquisition of MVM
(net of cash acquired). As a result of the ownership structure
of MVM, the Group is now consolidating MVM’s financial debt
which was $70.8 million at period end (excluding $36.2 million
of subordinated non-current shareholder loans), and therefore,
the Company had net cash11 of $816.5 million. Inventory at the
end of the period was $140.0 million, higher than at the end of
FY21, mainly due to the inclusion of MVM. The Company’s IMF
inventory levels were lower than planned at year-end due to
COVID-19 impacts on its China label supply chain.
Operating cash flow was $203.8 million. Excluding interest and
tax, this represented operational cash conversion of 114%12 which
was relatively high during the period. This was mainly due to an
increase in trade and other payables related to the timing of 4Q22
brand investment and inventory orders, combined with delayed
invoicing and payments processing in China due to COVID-19
related lockdown impacts.
China IMF market update13
The number of births in China decreased by 11.5% in 2021 to
10.6 million14 and is expected to decline in 2022. This decline has
been partially offset by an increase in household penetration and
consumption within the IMF market.
In volume terms, the overall IMF market in China decreased
by 4.3% in FY22, as several years of declining newborns had
a cumulative impact on Stages 2 and 3, partially offset by
increasing household penetration particularly in relation to
growth in Stage 4. Market value also decreased by 3.1% in
FY22 as growth in average market prices was not enough to
offset volume declines. Market price growth of 1.3%, driven
both by premiumisation (consumers trading-up and new
product innovation) and channel mix shift to higher-priced China
label channels, was less than in previous years and was also
impacted by increasing promotion frequency, albeit at reduced
discount levels.
“ We are pleased with the
progress that has been
made in stabilising the
business, refreshing our
strategy and improving
our execution.”
8 All figures are in New Zealand Dollars (NZ$), unless otherwise stated.
9 All comparisons are with the 12 months ended 30 June 2021 (FY21),
unless otherwise stated.
12 Operational cash conversion defined as net cash flow from operating
10 Gross margin percentage is calculated as sales less cost of goods sold,
activities before interest and tax divided by EBITDA.
divided by sales.
13 Kantar Worldpanel 0-6 years old Baby & Kids panel: National IMF market
11 Including term deposits and borrowings, excluding subordinated non-
tracking (Key&A + BCD cities), unless otherwise stated
current shareholder loans.
14 Source: China National Bureau of Statistics.
6
7
THE a2 MILK COMPANY ANNUAL REPORT 2022 CEO’S YEAR IN REVIEW
“ The increase in our
marketing investment
has driven further gains
in brand health metrics
and record market
shares delivering
strong growth in our
China infant milk
formula business.”
The market shift towards China label product continued
compared to English label product, although the extent of the
shift this year was less pronounced than last year. In FY22, China
label product accounted for 85% of the market (compared to
84% in FY21) and English label product accounted for 15%
(compared to 16% in FY21). The shift towards China label in the
previous year was more significant (7% pts) due to significant
COVID-19 related disruption and associated demand and
supply volatility.
Growth rates varied significantly between Key&A and BCD cities,
with Key&A value sales decreasing by 7.1% whilst in BCD cities
market value was broadly flat in line with the divergence of birth
rates across city tiers.
Within China label channels, several market dynamics are
supporting a2MC’s growth, including a continued mix shift
to the ultra-premium segment (where the Company’s China
label product competes), more rapid growth of the A2 protein
segment, increasing brand concentration towards market leading
brands (with a2 至初 ® remaining one of the few international
brands continuing to grow market share) and the continued shift
to online channels, where international brands have historically
outperformed local brands.
English label channels are showing signs of stabilisation, with
the rate of decline in overall English label value sales (down
9%) reducing significantly compared to FY21 (down 33%) and
sales growing by 1.6% in BCD cities in 2H22. Within English
label channels, there is a mix shift from Daigou to CBEC and
O2O channels.
Despite challenging market dynamics, a2MC’s growth in FY22
in China label and English label IMF was encouraging, and the
Company has a significant opportunity to grow market value
share from its current levels of 4-5%.
a2MC regional performance
1. China & Other Asia
China & Other Asia revenue of $726.5 million was up 24.5%, with
EBITDA of $145.1 million up 92.0%. Growth was driven by 2H22
performance as the Company ramped-up execution of its growth
strategy supported by strong China label IMF consumer demand
in part due to COVID-19 related lockdowns, as well as favourable
foreign exchange. The increase in EBITDA margin from 13.0% to
20.0% reflected higher gross margin during the period mainly
due to cycling the impact of stock write downs last year and the
operational leverage benefit of higher sales, partially offset by
higher marketing investment.
There were further gains in brand health metrics following the
significant increase in marketing investment in 2H22. Based on
the Company’s most recent tracking (Jul-22 compared to Jan-22),
spontaneous awareness for total a2MC IMF (ie China label and
English label) increased from 16% to 21%, the rate of consumers
who have ever trialled the Company’s IMF products increased
from 19% to 20% and the percentage of consumers who claim to
use the Company’s IMF most often increased from 12% to 13%.
Within this, China label prompted brand awareness improved
from 45% to 50% and English label prompted brand awareness
improved from 27% to 29%.
The 2H22 campaign continued to build on the execution themes
from the 1H22 campaign with more balanced functional and
emotional brand messaging, more precise targeting of consumers,
greater use of health care professional marketing, increased
social seeding and stronger integration across all channels and
of both labels.
China label IMF
Sales for a2 至初 ® China label IMF of $437.6 million were
achieved, representing an increase of 12.2%. As referred to in the
Company’s announcement on 21 February 2022, the Company
restricted sales to distributors in 1H22 (particularly in 4Q21 and
1Q22) to rebalance channel inventory levels and improve channel
dynamics. As a result of this, sales in 1H22 were down, but were
up significantly during 2H22. Consumer demand for a2 至初 ®
over the year was strong and the Company increased share in
store and online, and across all stages.
a2MC increased offline numeric and weighted distribution as
well as same store sales, resulting in Key&A and BCD cities share
increases during the year. Offline distribution increased to 26.5k
stores at the end of June 2022 from 22.8k at the end of June
202115. The Company has expanded its focus from building share
in national key accounts to also pursuing regional key accounts, as
well as targeting greater penetration in BCD cities and developing
new strategies for accelerated growth in certain high-potential
provinces. As measured by Nielsen16, retail sales for the MBS
channel by value were down 2% in FY2217. a2MC’s market value
share in MBS increased to 3.0% at the end of June 2022 versus
2.2% at the end of June 2021, and a2 至初 ® was one of the few
international brands that gained share in the period.
Accelerating the Company’s online growth is a strategic priority
for China label IMF and performance in DOL is a key measure
of success. As measured by Smart Path, retail sales for DOL by
value were up 4% for FY2218. a2MC’s market value share in DOL
increased to 2.5% at the end of June 2022 versus 2.0% at the
end of June 2021.
English label IMF (CBEC)
a2 Platinum® English and other label IMF sales of $255.8 million
were up 53.3%. The result reflected improved channel economics
and demand during the period, price increases, favourable foreign
exchange and reduced discounting during the “6/18” and “11/11”
online sales periods in China.
Strong revenue growth in CBEC also reflects execution of the
Company’s strategy to simplify and delayer its distribution
network to move closer to its consumers, which has reduced
the extent of indirect unauthorised cross-channel sales from
ANZ resellers to CBEC participants. This has resulted in a greater
proportion of those sales now being supplied by authorised CBEC
distribution partners, increasing reported revenue to CBEC (refer
ANZ section below).
15 a2MC internal data tracking of stores with active sales in the past 12
months.
16 Note that during the period, Nielsen expanded its sample store coverage
to enhance channel representativeness, and historical data has been
restated to reflect this enhancement.
17 Nielsen MBS retail measurement service: mother and baby stores only
retail sales (by value). 12-month rolling share. FY22 versus FY21.
a2MC continued to prioritise overall channel economics through
tightly controlled inventory levels and promotional activity in
CBEC. As a result, and as expected, English label sales during
key promotional events in 1H22 were slightly down on last
year but recovered in 2H22 with improved market pricing
across CBEC platforms and reseller channels, enhancing
overall channel economics. Notwithstanding these actions, the
Company’s platform rankings were maintained or improved
during the period.
Similar to DOL, the Company is focused on CBEC online growth
and building digital marketing and e-commerce capability to
improve its execution which is having an impact, particularly on
new user recruitment and late-stage retention. As measured by
Smart Path, retail sales by value for the CBEC channel were down
2% for the period19. a2MC’s market value share in CBEC was
19.5% at the end of June 2022 versus 21.1% at June 2021, with
market share improving in 2H22.
Liquid milk and other nutritional products
Sales of liquid milk in China & Other Asia were up 34.4%
to $11.1 million and revenue from other nutritional products
was also up 19.7% to $22.1 million. This reflected progress
in executing against adjacent category growth opportunities,
including the launch of UHT in China. These results were achieved
notwithstanding significant supply chain disruption in liquid milk
during the period due to COVID-19 impacts on manufacturing
and logistics.
2. Australia and New Zealand (ANZ)
ANZ segment revenue of $532.7 million was down 4.8%, with
EBITDA of $173.2 million up 16.4%. Lower revenue was a direct
consequence of the Company restructuring its English label IMF
routes-to-market and reflected a mix shift in English label IMF
sales from an existing reseller to CBEC distribution partners. The
shift in the English label route-to-market is a constructive change
and an evolution for the Company in the long term to progress
its ambition to have the number one English label product range
in China. Higher EBITDA was driven mainly by cycling prior year
inventory write-downs, pricing and favourable foreign exchange,
partially offset by higher cost of goods sold.
18 Smart Path China IMF online market tracking: domestic online platform
19 Smart Path China IMF online market tracking: for CBEC only retail sales (by
sales (by value). 12-month rolling share. FY22 versus FY21.
value). 12-month rolling share. FY22 versus FY21.
8
9
THE a2 MILK COMPANY ANNUAL REPORT 2022 CEO’S YEAR IN REVIEW
“ We have maintained our
brand leadership position
in liquid milk in Australia
with increased loyalty and
household penetration, and
our USA milk business grew
strongly during the year
driven by innovation.”
IMF resellers and retail
IMF sales in ANZ decreased 7.9% to $328.8 million. In addition to
the channel mix shift from ANZ resellers to CBEC, customer mix
within ANZ resellers also shifted significantly during the period
with some resellers securing additional volume. This managed shift
followed an in-depth review of the Company’s reseller route-to-
market which has resulted in improved visibility and control of
channels to market. The lower reseller sales due to the channel mix
shift were partially offset by pricing adjustments to address pricing
relativities and less promotional activity on CBEC in the interests of
maintaining a healthy ecosystem.
Following this route-to-market review and consistent with the
Company’s growth strategy, management has focused on
developing more transparent, performance-based, exclusive and
channel compliant distribution partnerships during the period.
As a result, significant volume transitioned from the Company’s
previous largest reseller to CBEC distributors (ANZ volumes
ultimately on-sold to CBEC platforms were re-routed through
authorised CBEC distributors) and to other existing ANZ reseller
partners during the period. Supply continues to be allocated
carefully to all reseller partners to ensure appropriate stock levels
are maintained in the channel.
Although market share reduced in the Daigou channel during the
period, the rate of decline improved in 2H22 following the change
in distribution partners. Kantar data20 indicates consumer sales in
the Daigou channel were down 17% for FY2221 and that a2MC’s
Daigou market share declined to 18.7% at the end of June 2022
versus 22.2% at the end of June 2021. However, a2MC’s Daigou
market share decreased by approximately 2% pts in 2H21 and
1H22 but declined by less than 1% in 2H22 following the change.
The ANZ reseller channel is an important channel, particularly
in relation to new user recruitment. In addition to changing
distribution partners, the Company stepped up its support for
the channel through more direct engagement with resellers
and Daigou, production of more digital marketing content and
conducting Daigou sales events resulting in increased share of
voice in the channel which is an important leading indicator
of share growth. To enable this increased level of activity, the
Company invested in developing its reseller and Daigou trade
marketing capability during the period.
An initiative to increase distribution in the O2O channel
commenced during the period with growth experienced during
FY22. A key strategic focus was working with partners to increase
store numbers through the O2O channel and drive new user
recruitment. Kantar data indicates consumer sales in the O2O
market grew 26%22 for FY22 and that a2MC’s O2O market share
increased to 18.6% by the end of June 2022 versus 17.5% at the
end of June 2021.
As part of the Company’s strategic priority to drive growth
through innovation, the Company refreshed its English label
IMF product range and packaging in 1Q23 which has gained
additional distribution in retail.
Liquid milk
Australian liquid milk sales increased marginally by 1.8% to
$172.0 million, reflecting volume growth and price increases
implemented during the year in response to higher raw milk prices
and other input and logistics costs, as well as favourable foreign
exchange. This was partially offset by easing COVID-19 restrictions
in 2H22 which negatively impacted in-home consumption levels.
The Company maintained its brand leadership during the year
with increased loyalty and household penetration. Brand health
metrics improved with awareness and trial increasing. a2MC
achieved a value share of 12.4% at the end of June 202223 versus
12.2% at the end of June 2021 declining marginally in 2H22 as
lockdowns eased. Market share gains were achieved in all states
except Western Australia, with new record value shares in New
South Wales and Victoria. Pleasingly, three a2 Milk® products
achieved rankings in the top ten products in the dairy category
in Grocery.
a2 Milk® UHT was launched during 3Q22 and is now available in
major supermarket chains across Australia. This addition to the
Australian liquid milk portfolio provides loyal consumers with a
shelf-stable pantry backup or camping supply of their favourite
a2 Milk®. a2 Milk® Cream on Top was also launched during 2H22
and is now available in 350 stores across Australia.
20 Kantar data based on a panel of 9,000 consumers covering 0-6 year olds
and only seeks to project ~40% of the population.
22 Kantar Worldpanel 0-6 years old Baby & Kids panel: National IMF market
21 Kantar Worldpanel 0-6 years old Baby & Kids panel: National IMF market
tracking (Key&A + BCD cities)
tracking (Key&A + BCD cities).
23 IRI Australian Grocery Weighted Scan 12-months ending 30 June 2022.
Post year-end, the Company launched a new a2 Milk® Lactose
Free range for consumers that are lactose intolerant enabling
all consumers to enjoy the benefits of a2 Milk® (noting that
individuals can be A1 protein and/or lactose intolerant).
Lactose free milk is a significant category in Australia with
retail sales value greater than $130 million. The Company has
secured arrangements for distribution of the range with major
supermarket retailers in Australia, supported by a targeted
marketing campaign. The a2 Milk® UHT, a2 Milk® Cream on Top
and recent a2 Milk® Lactose Free launches are consistent with the
Company’s strategy of ramping up innovation to drive growth.
Other nutritional products
Revenue in other nutritional products was also impacted by the
channel mix shift to CBEC, and was slightly below prior year,
declining 5.2% to $31.9 million.
3. North America
USA revenue increased 30.0% to $82.7 million while EBITDA
decreased 9.4% resulting in a loss of $36.7 million. The higher
revenue was driven by growth in core liquid milk, the introduction
of new products, reduced trade spend and favourable foreign
exchange. Sales growth in core liquid milk was primarily driven
by growth in the Grocery and Mass channels of trade which
grew 38% during the period, partially offset by reduced Club
channel distribution.
Sales growth was mainly through increased same store sales with
only modest increases in distribution from 26.8k stores at the end
of June 2021 to 27.4k stores at the end of June 202224. Two new
products were launched during 1H22 – HERSHEY’S a2 Milk® and
a2 Milk® Half and Half – achieving higher than expected listings
in trade. A combination of growth in the core and innovation
increased a2MC’s market value share in the premium milk
category for the Grocery channel from 1.8% in June 2021 to
2.1% in June 202225. Key marketing and public relations activities
continued which resulted in improvements in brand awareness
and household penetration.
The increased EBITDA loss was mainly due to a significant increase
in freight costs throughout the year, coupled with fuel surcharges
from higher diesel prices and higher raw milk costs in 2H22, partly
offset by price increases and trade spend reductions. Marketing
and SG&A costs were relatively flat in combination. EBITDA
losses were also higher due to foreign exchange movements.
Accelerating the path to profitability in the USA by FY25/FY26
remains a key strategic focus and the Company expects to make
meaningful progress on this during the year ahead.
Mataura Valley Milk
MVM revenue of $104.4 million26 and an EBITDA loss of
$18.8 million were recorded for the eleven months of a2MC’s
ownership during FY22. The EBITDA loss reflects the current
production mix with MVM primarily selling lower value milk
powders on the commodity market. The result was slightly better
than expected due to favourable foreign exchange and Global
Dairy Trade (GDT) pricing partly offset by higher raw milk costs
during the period.
a2MC’s acquisition of a 75% interest in MVM is strategically
important as it provides the opportunity to participate in
nutritional products manufacturing and the potential to pursue
24 SPINS retail sales data as of 30 June 2022 and internal counts
25 SPINS data for the Grocery channel only for the 52 weeks ending 30 June
2022 and 30 June 2021.
26 Revenue excluding intercompany sales.
additional China label registrations and product innovation
opportunities in the future. It strengthens relationships with key
strategic partners in China, achieves supplier and geographic
diversification, reduces risk across a2MC’s IMF and other
nutritionals businesses, and over time will offer access to insourced
manufacturing margins.
Accelerating MVM’s path to profitability by FY26 or earlier is a key
strategic focus. To improve profitability, the Company commenced
manufacturing a2 Milk® Full cream milk powder at MVM during
1H22, which was previously manufactured by Synlait Milk Limited
(Synlait). The Company is working on in-sourcing a2 Milk® Skim
milk powder and certain existing English label IMF product from
Synlait, developing future product innovation at the facility and
exploring additional third-party customer opportunities. To
complement this and facilitate future China label registration
applications, MVM has commenced planning for the installation of
a laboratory and blending and canning capability at the site.
Growth strategy update
At a2MC’s Investor Day in October 2021, the Company announced
its refreshed growth strategy which was adapted to the rapidly
changing IMF market dynamics in China. At the same time, the
Company also outlined its medium-term indicative sales and
EBITDA margin ambition. In 2H22 the Company focused on
implementing its strategic priorities and related initiatives, including
a material increase in brand investment. Significant early progress
has been made against the Company’s five strategic initiatives.
1. Invest in people and planet leadership
The Company refreshed its purpose ‘We pioneer the future
of Dairy for good’ and vision ‘An A1-free world where Dairy
nourishes all people and our planet’ which highlights the positive
impact the Company wants to have on the world, inspiring its
team and partners. New leadership and culture development
programmes were launched, and team engagement, net
promoter and diversity and inclusion surveys were completed
to benchmark progress. Investment was made in organisational
capability expansion, particularly in China with a focus on digital
marketing and e-commerce targeting DOL, CBEC and O2O
growth opportunities. More ambitious sustainability targets were
set, and related initiatives launched, including commitments in
GHG emissions reduction, farm environmental plans and animal
welfare, and for the transition to more sustainable packaging.
Importantly, a2MC announced a significant investment to reduce
GHG emissions through the MVM boiler electrification, sourced
from 100% renewable power, and to support Synlait’s biomass
boiler conversion.
“ The Company is committed to
investing in tangible climate
and nature related programmes
that will create a positive
impact on the planet.”
10
11
THE a2 MILK COMPANY ANNUAL REPORT 2022 CEO’S YEAR IN REVIEW
2. Capture full potential in China IMF
The Company’s most critical business development focus is to
ensure it delivers its full potential in China IMF. The Company
completed its brand positioning review, significantly increased
China marketing investment, invested in digital content
generation and executed integrated marketing campaigns with
a more targeted mix to increase impact. In terms of offline sales,
the Company commenced China label in-market growth pilots
with a mix of above-the-line and below-the-line brand and sales
activation initiatives, increased MBS distribution (particularly in
lower tier cities) and increased same store sales. Investment was
also made in growing DOL and CBEC sales and developing the
O2O model in key accounts. The English label route-to-market
review was completed and actioned, as well as investing in
Daigou marketing support and engagement.
3. Ramp-up product innovation
Liquid milk and other nutritional products grew significantly in
China & Other Asia demonstrating progress in executing against
adjacent growth opportunities outside of IMF. The Company
supported Synlait to complete and submit a2MC’s China label IMF
new GB registration dossiers for an upgraded formulation. The
Company launched UHT, Cream on Top, Lactose free, Half & Half
and HERSHEY’S a2 Milk® products in liquid milk during the year
and refreshed English label IMF product post year-end.
4. Transform the supply chain
Following completion of the MVM acquisition, the Company
commenced planning for laboratory and blending and canning
capability at MVM with third-party support and accelerated
efforts to explore additional opportunities relating to China
label market access in New Zealand and China. The Company
progressed capacity expansion initiatives at its Smeaton Grange
and Kyabram manufacturing facilities.
5. Accelerate path to profitability for USA and MVM
USA top-line growth was accelerated through new product
launches, reduced trade spend and price increases, which
also improved gross margins. The Company accelerated plans
to insource a2 Milk® branded product manufacturing from
Synlait and develop third-party business at MVM to improve
capacity utilisation.
China label new GB registration update
a2MC and Synlait are working closely together in relation to the
new GB registration process by China’s State Administration for
Market Regulation (SAMR) for a2MC’s China label IMF product,
a2 至初 ®. China label product manufactured after 21 February
2023 needs to comply with the new GB standard.
While the Company’s new GB registration process is progressing,
timing is uncertain and subject to SAMR approval. However, it
is noted that the Ministry for Primary Industries (MPI) has co-
operation arrangements in place with SAMR which, amongst
other things, positions New Zealand well in relation to China
registration processes.
a2MC’s current China label IMF product registration expires in late
September 2022. a2MC and Synlait have applied for the renewal of
this existing registration which the Company anticipates receiving
in September consistent with SAMR’s practice with other brands
in similar situations. Such renewal would in effect allow Synlait
to manufacture a2MC’s current registered product up until the
end of the grace period on 21 February 2023 when transition to
the new GB standard is required. The current registered product
manufactured up until this date is allowed to be sold in market after
that date. This period through to 21 February 2023 is sometimes
referred to as an “extension” of the existing registration.
In all circumstances, a2MC fully respects SAMR’s governance and
timing of this important registration process.
On-market share buyback
The Company announces that it intends to undertake a capital
return of up to $150 million through an on-market share buyback.
The buyback is expected to commence towards the end of
September and could run for up to 12 months.
a2MC regularly assesses its balance sheet position in order to
deliver the optimum structure to enhance shareholder value in line
with the Company’s strategy and capital allocation framework.
This framework prioritises investment in growth initiatives and
maintaining balance sheet flexibility ahead of capital returns to
shareholders. Where there is capital which is surplus to achieving
these priorities a2MC makes a disciplined assessment of the
potential to return funds to shareholders.
The Company’s balance sheet is in a strong position that provides
the capacity to distribute up to $150 million to shareholders, with
the most appropriate method being an on-market share buyback.
With a closing net cash balance27 in FY22 of $816.5 million, there
is sufficient capital reserve to fund investment opportunities,
maintain an appropriate cash buffer as well as return surplus capital
to shareholders.
The buyback is subject to market conditions, a2MC’s prevailing
share price and all other relevant considerations. a2MC reserves the
right to vary, suspend without notice, or terminate the on-market
buyback at any time.
Further details in relation to the share buyback are provided in the
separate Company announcement also released to the market on
29 August 2022.
27 Including term deposits and borrowings, excluding subordinated non-
current shareholder loans.
Key financials
The Company is expecting high single digit revenue growth
in FY23. 1H23 growth (on 1H22) is expected to be significantly
higher than 2H23 growth (on 2H22).
FY23 gross margin percentage is expected to be broadly in
line with FY22, with cost of goods sold headwinds related to
increasing milk, ingredient and packaging costs offset by price
increases, mix benefits and cost mitigation initiatives.
The Company will continue to increase its brand investment in
FY23. Marketing spend will be skewed marginally towards 1H23
with a significant uplift versus 1H22 due to campaign timing.
A further uplift in Administration & Other expenses is expected,
reflecting additional capability build, upweighted investment in
science, innovation and sustainability, and inflation impacts.
Overall, the Company is expecting EBITDA growth in FY23 and
a modest improvement in EBITDA margin (% of sales). With
the marketing plan weighted to 1H23, the Company expects a
slightly higher EBITDA margin in 2H23 versus 1H23.
Operational cash conversion is likely to be significantly lower in
FY23 than FY22 mainly due to the reversal of working capital
timing benefits in FY22 and an increase in inventory levels.
The Company expects that capital expenditure will be
approximately $25 million during FY23 mainly due to
enhancements in existing supply chain capacity and capability.
This amount excludes any more substantive investment to
develop the Company’s New Zealand and China supply
chain capability.
Industry and business risks
In addition to trading upside and downside, other risks include,
but are not limited to, COVID-19 impacts on supply chain, SAMR
registration process timing, volume impact of price increases,
foreign exchange movements, cross border trade, changes in the
regulatory environment, and commodity prices. These risks could
materially impact expected revenue and earnings outcomes.
David Bortolussi
Managing Director and Chief Executive Officer
28 August 2022
Board and Management renewal
The Board is continuing its programme of renewal and is
focused on increasing its levels of China market, IMF category
and manufacturing experience. In March 2022, Sandra Yu was
appointed to the Board. Sandra is a highly regarded company
director and has extensive experience in the IMF market in China
as a former head of Mead Johnson Nutrition’s Greater China
business. The Company also announced today the appointment
of David Wang to the Board as a non-executive director. David’s
appointment adds further China market and manufacturing
expertise which will be an invaluable asset with the recent
acquisition of MVM and the Company’s strategy to develop its
supply chain capability in New Zealand and China.
Consistent with corporate governance best practice, the
Company’s Deputy Chair, Julia Hoare, who joined the Board in
November 2013, has advised of her intention to step down as a
Director after the Company has delivered its FY23 interim results
in February 2023. A process will shortly commence to identify a
suitable replacement director that ensures the Board maintains an
appropriate balance of skills, knowledge and experience.
During the year, the Company announced a number of changes
to its Executive Leadership Team. Yohan Senaratne was appointed
as Executive General Manager – International, Kevin Bush was
appointed as Executive General Manager – ANZ, Bernard May
joined as Chief Executive – MVM, Amanda Hart was appointed
as Chief People & Culture Officer, and Edith Bailey was appointed
as Chief Marketing Officer. Lastly, the Company announced the
resignation of its Chief Financial Officer, Race Strauss, and the
appointment of David Muscat who will join the Company as its
Chief Financial Officer in October 2022. Prior to David joining
a2MC, Mark Sherwin has assumed the position of Interim
Chief Financial Officer.
Outlook
Business and category
China label IMF sales are expected to be up in FY23 with
significant growth in sales in 1H23 versus 1H22. At this stage,
2H23 sales growth is expected to be impacted by transition to
the Company’s pending new GB registration. English label IMF
sales are expected to be up in FY23 with 1H23 sales expected
to be broadly in line with 2H22 due to the impact of managing
transition to the refreshed a2 Platinum® range.
Australian liquid milk sales are expected to remain broadly in line
with FY22, with reduced in-home consumption following the
easing of COVID-19 related lockdowns offset by growth through
innovation. USA liquid milk sales are expected to be up in FY23
driven by continued growth in core liquid milk and innovation,
and a significant improvement in EBITDA losses is expected.
MVM will be included in the Company’s result for 12 months
compared with 11 months in FY22. MVM FY22 revenue
(excluding intercompany revenue) and EBITDA losses for the
12 months were $116.2 million and a loss of $23.2 million
respectively (unaudited). Revenue is expected to be down in
FY23 compared to FY22 (12 months) due to increasing levels of
insourcing and lower GDT pricing, and EBITDA is expected to be
broadly in line with FY22 (12 months).
12
13
THE a2 MILK COMPANY ANNUAL REPORT 2022 BUILDING A SUSTAINABLE GROWTH BUSINESS
BUILDING A
SUSTAINABLE
GROWTH
BUSINESS
OUR
REPORTING
APPROACH
The Company believes a move towards
integrated reporting will benefit stakeholders
by providing a more complete picture of how
it creates and preserves long-term value.
There has been a trend in recent years towards more integrated
reporting, driven by the expectations and needs of various stakeholders,
including shareholders.
At its core, the integrated reporting concept refers to a principles-based,
multi-capital framework in which companies can communicate clearly
and concisely about how their strategies, governance, performance and
prospects create value in the context of their external environments.
The a2 Milk Company notes the recent developments in this space,
and in particular the announcement in November 2021 from the
International Finance Reporting Standards Foundation, in forming the
International Sustainability Standards Board (ISSB). The ISSB’s purpose
is to deliver a comprehensive global baseline of sustainability related
disclosure standards that provide investors and other capital markets
participants with information about companies’ sustainability-related
risks and opportunities, to help them make informed decisions. It is
expected that this will result in a more definitive approach for companies
to follow with regard to integrated reporting. While more work will be
required to align to these expected standards in the future, this
FY22 annual report has been developed with this in mind.
This report outlines how The a2 Milk Company creates value for its
shareholders over the short, medium and long-term. It describes the
Company’s refreshed purpose and vision, its values, strategy and
performance as well as the governance framework and management
oversight in advancing opportunities whilst managing risks.
One of the Company’s goals is to ensure that it creates long-term,
enduring value for shareholders through a trusted, transparent
relationship. A move towards integrated reporting is one of the
ways the Company is seeking to achieve this.
14
15
Mataura Valley Milk
THE a2 MILK COMPANY ANNUAL REPORT 2022 HOW WE CREATE VALUE
INPUTS
COMPANY OVERVIEW
Page 18
GOALS
Page 32
Our people
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. We are committed to the wellbeing and safety
of our people and are continuing to develop systems and processes
to identify, control, report, investigate and monitor health and safety
risks and actions across the business.
Our brand
Our trusted brand, our proprietary know-how and A2 protein
expertise are our most valuable assets. We are committed to
maintaining and growing these assets with appropriate investment.
Through ongoing science and research programmes, we are
deepening our expertise and advancing global understanding
of the potential health benefits of a2 MilkTM.
Our environment
Access to natural resources and a thriving agricultural sector
that supports healthy ecosystems 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 are committed to finding unique and high
impact solutions across our value chain to help address these
challenges. Appropriately meeting this challenge will enable
us to continue providing premium a2 MilkTM based products
to our consumers and long-term value to our shareholders.
Our supply chain
Complementing our own fresh milk and nutritionals
production capability, we work closely with our suppliers and
farming community to maintain a reliable and responsible
sourcing and manufacturing supply chain. We believe this is
critical to our long-term success.
Our communities
We support communities in our key regions of New Zealand,
Australia, China and the USA with a focus on proactive
wellness to nourish the lives of children and families and help
them to thrive.
Our finances
The Company carefully balances investment in its supply
chain and distribution through both strategic partnerships and
direct ownership. Combined with the rapid growth of its premium
products, this approach has enabled the Company to build a
strong and robust balance sheet, which, guided by its capital
management framework, provides financial capital for the
Company to deploy in the pursuit of its strategic objectives.
PURPOSE
We pioneer
the future of
Dairy for good
Page 22
VISION
An A1-free world
where Dairy
nourishes all
people and our
planet
RISKS AND
OPPORTUNITIES
The sale of
nutritional
food products
Page 25
Doing business
in international
markets
Page 26
STRATEGIC
PRIORITIES
– Invest in people and
planet leadership
– Capture full potential
in China IMF
– Ramp-up product
innovation
– Transform our supply
chain
– Accelerate path to
profitability in USA
and MVM
VALUES
– Bold passion
– Pioneering spirit
– Humility
– Respect
– Integrity
Major
international
events
Page 27
Competitive
intensity
Page 28
Climate
and nature
Page 28
Strategic
partnerships
Page 29
Evolving
technology
Page 29
Talent and
culture
Page 30
Social licence
to operate
Page 31
PEOPLE
Create a safe, diverse, inclusive
and engaging place for our
people to thrive, support our
farmers and contribute to
our communities.
Page 32
PLANET
Protect our planet and cows,
rethink packaging, achieve
net zero and become nature
positive.
Page 36
CONSUMERS
Bring the unique benefits of
pure and natural a2 MilkTM to
as many consumers as possible.
Page 40
SHAREHOLDERS
Create long-term, enduring value
for shareholders and a trusted,
transparent relationship.
Page 44
16
17
BUILDING A SUSTAINABLE GROWTH BUSINESSTHE a2 MILK COMPANY ANNUAL REPORT 2022 BUILDING A SUSTAINABLE GROWTH BUSINESS
COMPANY OVERVIEW
R ASIA
Strategic partners
E
H
T
A & O
N
I
H
C
A
U
S
T
R
A
L
I
A
Strategic partners
&
N
E
W
Z
E
A
L
A
N
D
CHINA & OTHER ASIA
Revenue
$726m
EBITDA
$145m
Market size
China IMF market
$47 billion1
Supply chain
– China State Farm importation
agent and master distributor
– 110 distributors
Our people
107 (full time equivalent)
Product Portfolio
AUSTRALIA & NEW ZEALAND
Revenue
$637m
EBITDA
$154m
Market size
Australian liquid milk market
$1.9 billion2 plus cross-border
access to China market
Supply chain
Australia (Liquid Milk)
– Smeaton Grange (a2MC)
– Kyvalley (a2MC)
– 4 third-party processing
relationships
– 25 farmer suppliers
New Zealand (Nutritionals)
– 75% interest in
Mataura Valley Milk
– 19.8% interest in
Synlait Milk
– 209 farmer suppliers
Our people
289 (full time equivalent)
Product Portfolio
Part of The a2 Milk Company
Licensee fresh milk
Canada
Licensee fresh milk
New Zealand
1. FY21 Market size based on a2MC internal estimation approach
2. FY21 Australian supermarket milk retail sales in NZD Source: IRI Australian
Grocery Weighted Scan for the 12-months ending 30 June 2021
3. Source: SPINS US MULO, USA FY21 retail milk sales in the premium
segment in NZD
N
O
R
T
H
A
M
E
R
I
C
A
NORTH AMERICA
Revenue
$83m
EBITDA
($37m)
Market size
USA premium milk market
$4.3 billion3
Supply chain
– Three third party
processing relationships
– 9 farmer suppliers
Our people
31 (full time equivalent)
Product Portfolio
18
18
19
THE a2 MILK COMPANY ANNUAL REPORT 2022
COMPANY OVERVIEW
Who we are
The a2 Milk Company is a dairy nutritionals company, fuelled by
its purpose to pioneer the future of dairy for good. The Company
was founded in 2000 in New Zealand by scientist Dr Corran
(Corrie) McLachlan and his business partner, Howard Paterson,
who recognised that not all milk is the same. Dr Corrie McLachlan
joined Sir Robert (Bob) Elliot – who had earlier discovered that
proteins in milk affect people differently – to pioneer research to
understand these differences better.
Originally all cows’ milk contained only the A2 protein type. The
A1 protein arose through a genetic mutation over many years.
Today, most regular milk contains a mixture of A1 and A2 proteins.
Results of several published peer-reviewed human clinical trials
have shown that A1 protein can cause digestion issues for some
people. A scientific and proprietary way to identify cows that
naturally produce A1 protein free milk was also discovered.
Today, The a2 Milk Company continues to pioneer this science
and research, bringing A1 protein free milk to the world, allowing
more consumers to enjoy its unique digestive and other potential
health benefits.
The Company produces a portfolio of products made with milk
from specially selected cows that naturally produce milk containing
only the A2 beta casein protein type and no A1. These products
include fresh milk, ultra-heat treatment (UHT) milk, extended shelf
life (ESL) milk, infant milk formula (IMF), milk powders (including
instant whole and skim milk powder) and other dairy nutritional
products primarily for the New Zealand, Australia, China and
North American markets.
The Company’s primary business activities are:
— China and Other Asia: Sales of China label and English
label IMF, liquid milk and other nutritional products in offline
stores and domestic and cross-border e-commerce channels.
— ANZ: Sales of English label IMF and other nutritional products
through reseller and retail channels, and sales of liquid milk
across Australian and New Zealand retail channels.
— North America: Sales of liquid milk products across
the United States of America and Canada.
— Mataura Valley Milk: Production of nutritional and
commodity products in New Zealand.
PURPOSE – WHY WE EXIST AND THE IMPACT WE CAN HAVE ON THE WORLD
The a2 Milk Company’s purpose talks to the positive
impact the Company can have. Our Purpose lives at the
intersection of the Company’s unique strengths and
what the world needs.
To be continually at the
forefront of change
WE PIONEER
THE FUTURE
OF DAIRY
FOR GOOD
Using the processes and
products available today
and being open to what
dairy could become
tomorrow
FOR THE GOOD OF
People
— Our consumers
(healthy and tasty nutrition)
— Our team
(motivated and engaged)
— Our farmers
(sustainable partners)
Planet
— Animal welfare
(best practice)
— GHG emissions (net zero)
— Nature positive
(thriving ecosystems)
— Sustainable packaging
VISION – THE KIND OF POSITIVE FUTURE THE COMPANY WANTS TO HELP CREATE
Opportunity for more
consumers to experience
the digestive and other
potential health benefits
of A1 protein free milk
In combination with
other foods, dairy
can help deliver on
people’s complete
nutritional needs
AN A1-FREE WORLD
WHERE DAIRY
NOURISHES ALL
PEOPLE AND
OUR PLANET
Dairy helps nourish
consumers, farmers
and communities
to take advantage
of opportunities to
live their best lives
Dairy has the
potential to be
GHG net zero and
nature positive
VALUES
Pioneering
spirit
Unconventional
open-minded thinking
that re-imagines the
possibilities –
outcome driven.
Bold passion
Driven to realise our
amazing potential as
a company and
as individuals.
Humility
We’re never done
growing, discovering;
and have a willingness
to continually iterate
and learn.
Respect
Seek to
understand and
appreciate difference
in all its forms.
Integrity
We do the
right thing for our
consumers, partners,
people... and
our cows.
20
21
BUILDING A SUSTAINABLE GROWTH BUSINESSTHE a2 MILK COMPANY ANNUAL REPORT 2022 STRATEGY
Adapting our growth strategy
During FY22, The a2 Milk Company undertook a holistic review
of its market, brand, product and distribution opportunities and
announced its refreshed growth strategy in October 2021.
Through this review, the Company has set clear goals for the
business in four primary areas: People, Planet, Consumers
and Shareholders, to ensure that in addition to achieving its
commercial ambitions, it is also actively working to deliver
its sustainability priorities and is executing in a way that
further develops a trusted and transparent relationship with
its shareholders.
The Company’s growth strategy centres on five key
priorities:
— Invest in people and planet leadership: While the
Company’s primary commercial objective is to deliver its full
potential in China IMF, critical to doing so is ensuring it has
thriving, high performing teams to execute its strategy. The
Company has also elevated investment in planet leadership to
sit amongst its top strategic priorities, by taking direct action
to lead the industry, particularly in GHG emissions reduction,
farming practices and sustainable packaging. The Company
has also started the journey to become more focused on
supporting healthy ecosystems through nature positive
initiatives.
— Capture full potential in China IMF: To achieve its
commercial ambitions, at this stage the Company remains
primarily focused on capturing its opportunity in IMF in
the China market. To accomplish this, the Company has
identified that it must increase control over its China label (CL)
and English label (EL) distribution, get closer to consumers,
continue to increase investment in its brand, and further invest
in its digital marketing and e-commerce capability.
— Ramp-up product innovation: While the Company has
historically been focused on a narrow product range, to
continue to drive growth in IMF and beyond, it will be
important to expand its portfolio both in China label and
English label IMF, as well as entering adjacent product
categories in key markets.
— Transform our supply chain: Connected to its IMF and
innovation ambitions, the Company will need to transform its
supply chain. This includes obtaining additional China label
IMF registrations, increasingly leveraging its manufacturing
capability at Mataura Valley Milk Limited (MVM), partnering
with new suppliers to deliver new products and, over time,
developing supply capability in China.
— Accelerate path to profitability for MVM and USA: To
maximise investment in China and to improve Group return on
sales, the Company needs to ensure it accelerates the paths to
profitability for each of the USA and MVM. The Company is
targeting achieving this during FY26 or sooner.
Purpose
Vision
Goals
Strategic
priorities
Create a safe, diverse,
inclusive and engaging
place for our people to
thrive, support our farmers
and contribute to our
communities
Protect our planet and cows,
rethink packaging, achieve
net zero and become nature
positive
Bring the unique benefits
of high quality, pure and
natural a2 Milk™ to as many
consumers as possible
Create long-term, enduring
value for shareholders
and a trusted, transparent
relationship
1
Invest in people and
planet leadership
2
Capture full potential
in China IMF
3
4
5
Ramp-up product
innovation
Transform our
supply chain
Accelerate path
to profitability
– Invest in our people
to enable them to
thrive
– Take direct action
to lead the industry
in GHG emissions
reduction, farming
practices and
sustainable packaging
– Gain more control
over CL and EL
distribution and
get closer to our
consumers
– Increase investment
in our brand, digital
marketing and
e-commerce
– Expand our CL and
EL IMF product
portfolios
– Enter adjacent
product categories in
relevant markets to
drive growth
– Expand CL registered
– Take action to realise
market access
potential in USA
– Utilise MVM and
invest in New
Zealand capability
– Develop China supply
capability over time
– Expedite insourcing
of a2™ products
and third party
nutritional volume to
significantly increase
MVM profitability
Enablers
Brand strength
Science and innovation
Strategic relationships
Capability development
Values
Bold passion
Pioneering spirit
Humility
Respect
Integrity
Financial measures of success
The Company’s medium-term ambition is to grow sales from
$1.2 billion in FY21 to approximately $2 billion in the next five or
more years (FY26+) and to deliver EBITDA margins in the ‘teens’.
The sales ambition is expected to be predominantly driven by
growth in China label and English label IMF as well as other
nutritional products sold in China.
The key drivers for the sales growth are:
— Increasing share of China label infant nutrition
— Supporting English label channel recovery post
COVID-19 and executing strategy to gain share
— Growing other dairy and nutritional products in
China through innovation and distribution growth
— Growing in existing and new emerging markets
— Expanding in milk and adjacent categories in ANZ and the USA
While the Company’s ambition is to improve EBITDA margins over
time, in the medium-term it is anticipated to be in the ‘teens’ due
to a range of factors. This includes China IMF market conditions
and channel dynamics, mix of business (IMF channel mix and
overall product mix), investment levels in brand and capability,
timing and investment required to deliver the Company’s priorities
around its supply chain transformation, and achieving profitability
in the USA and at MVM.
There are also key macro uncertainties that may impact
the future outlook, including:
— How the China birth rate will evolve and the impact policy
changes may have on this
— The extent and pace of recovery in cross-border trade post
COVID-19
— How the competitive landscape will evolve in China including
the outcome of the new GB registration process
— The extent and pace of change in consumer product and
channel preferences
— How the China regulatory framework and international
relations may evolve and impact trade
Because of these uncertainties, it is very difficult to define future
state targets and when they will be achieved – the path is also
unlikely to be linear. Accordingly, future results may be materially
different to the Company’s ambition.
Non-financial measures of success
The Company is also focused on several medium-term non-
financial measures of success over time, as summarised in the
image below.
With regards to its people, the Company is targeting below 10
for its safety TRIFR1, improving its employee engagement score
to above 80%, and maintaining its diversity and inclusion rating,
which scored 4 out of 5 across the organisation in the Company’s
most recent engagement survey.
The Company is committed to minimising its impact on the planet
and improving a variety of areas to become a more sustainable
business. This includes targeting net zero emissions for Scope 1
and 2 by 2030 and Scope 3 by 2040, targeting 100% completion
of Farm Environmental Plans and Certified Animal Welfare
Programmes by the end of calendar year 2023 and targeting 100%
reusable, recyclable or compostable packaging with 50% average
recycled content by 2025.
The Company has also set brand health, market share, and
innovation targets to deliver on its Consumer goals. For
brand health, the Company is targeting greater than 25% for
unprompted awareness in China, loyalty of greater than 40% in
Australian fresh milk, and household penetration above 10% in the
USA in the premium milk segment.
Across market share, the Company is working to become a top
five China label IMF player with greater than 5% market share and
to have the leading English label IMF range with market share for
that range of greater than 25%. For its liquid milk business, the
Company is targeting greater than 15% market share in Australia
and greater than 5% in the premium milk segment in the USA.
For innovation, the Company is looking to secure three or more
China label registrations while also expanding its English label IMF
portfolio to grow its overall China IMF business. Additionally, the
Company is looking to drive $200 million in incremental revenue
from dairy and other nutritionals in China while also driving 25% of
sales from new products in Australia and the USA.
SHAREHOLDERS
Medium-term sales
ambition (≥5 years
from FY21) of ~$2.0b
Targeting EBITDA
margins in the ‘teens’
in the medium-term
PEOPLE
PLANET
CONSUMERS
Safety TRIFR1 <10
with continuous
improvement
GHG emissions
reduction
– Scope 1+2 net zero
Engagement >80%
by 2030
Diversity and
inclusion rated
>4 out of 5
by team
– Scope 3 net zero
by 2040
100% completion of
Farm Environmental
Plans and Certified
Animal Welfare
Programmes
100% reusable,
recyclable or
compostable
packaging with
50% average
recycled content
1 Total Recordable Injury Frequency Rate (TRIFR)
Brand health
Market share
Innovation
China unprompted
awareness >25%
Australian fresh
milk loyalty >40%
USA household
penetration >10%
in premium milk
Access to ≥3 CL
registrations
Expanded EL IMF
portfolio
Incremental $200m
in revenue from dairy
and other nutritionals
to China
>25% of sales from
new products in
Australia and USA
Top-5 IMF player in
China with share
>5%
Leading EL IMF range
in China with share
>25%
Australian fresh
milk share >15%
USA premium
milk share >5%
Incremental $100m
revenue from existing
and new emerging
markets
We pioneer the future of Dairy for good
An A1-free world where Dairy nourishes all people and our planet
PEOPLE
PLANET
CONSUMERS
SHAREHOLDERS
Medium-term measures of success
22
23
BUILDING A SUSTAINABLE GROWTH BUSINESSTHE a2 MILK COMPANY ANNUAL REPORT 2022 RISKS AND OPPORTUNITIES
The Company recognises that the
management of risks and opportunities
is an inherent part of actively growing
and developing the business.
Effective risk management anticipates risk, develops strategies
to manage risk and enables the Company to capitalise on
opportunities, which is critical to sustainable, long-term
value creation.
The a2MC Risk Management Policy outlines the programme
the Company has implemented to deliver appropriate risk
management within its processes, systems, culture and decision
making. A copy of the Risk Management Policy is available at
www.thea2milkcompany.com/corporate-governance.
Approach to risk management
Our approach to risk management is anchored to ISO 31000
principles to ensure that robust foundations support our processes
and procedures and, in doing so, this allows the Board to fulfil its
governance responsibilities by making a balanced assessment of
the risk management process. Risks are identified, assessed and
monitored through regular workshops with senior management
and the Audit and Risk Management Committee on a regular
basis. Mitigating actions and controls are designed to limit the
likelihood of key risks occurring, as well as the associated impact
if these risks do occur.
Our risk management approach evolves continually as we identify,
assess, mitigate, and monitor both financial and non-financial
risks that may affect our ability to achieve our strategic objectives.
Governance of risk
The Board is responsible for the overall system of internal
control and has delegated responsibility for ensuring that the
Company maintains effective risk management and internal
control systems and processes to the Audit and Risk Management
Committee. The Audit and Risk Management Committee reviews
the risk profile including material business risks and provides
regular reports to the Board on the operation of the internal
control system.
The Company’s management is responsible for designing and
implementing risk management and internal control systems
which identify material risks for the Company and aim to provide
the Company with warnings of risks before they escalate.
Management implements the action plans developed to address
material business risks across the Company.
Management regularly monitors and evaluates the effectiveness
of the action plans. In addition, management promotes and
monitors the culture of risk management within the Company
and compliance with the internal risk control systems and
processes. Management reports regularly to the Board regarding
the status and effectiveness of the risk management programme.
The Committee and management may also refer particular risk
management issues to the Board for final consideration
and direction.
KEY SOURCES OF RISK AND OPPORTUNITY
The Company has identified nine sources of risk
and opportunity relevant to its business activities.
The sale of
nutritional
food
products
Doing business
in international
markets
Social licence
to operate
Talent and
culture
STRATEGIC
OBJECTIVES/GOALS
Major
international
events
Evolving
technology
Competitive
intensity
Strategic
partnerships
Climate and
nature
The following summary provides an overview of each key source,
including key economic, environmental and social risks with the
potential to materially impact the Company’s ability to achieve
its objectives. It also summarises how the Company is responding
to those risks, as well as associated opportunities.
The sale of nutritional food products
a2MC supplies food products for human consumption, including complex nutritional products for
consumption by infants and children. As a result, the Company is inherently exposed to potential
product quality, food safety and/or food integrity events.
Key Risks
Key Responses
— Genuine, perceived, or alleged
— Priority focus on food safety and quality management
contamination, or unsafe products
— Food safety and quality systems audited by accredited
third-party verification agencies
— High-quality third-party manufacturing partners
— Rigorous positive release protocols (comprehensive testing of product
quality and integrity prior to the release of finished product)
— Traceability systems
— Product innovation and technology to enhance product security
— Testing of certain distributed products in selected markets
— Dedicated customer careline covering all active markets
Key Opportunities
An increasingly health-conscious society combined with the size and enduring nature of the nutritional food category provides
significant opportunity to:
— Leverage our pioneer status to promote the benefits of products made with a2 Milk™
— Assert the Company’s competitive advantage in beta casein testing and technology (our True a2™ ecosystem – page 43)
— Continually advance an uncompromising, unrivalled and renowned Quality Assurance programme
— Maximise the potential of our existing product portfolio in key markets
— Explore opportunities to expand our existing product portfolio, and enter adjacent product categories to drive growth
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BUILDING A SUSTAINABLE GROWTH BUSINESSTHE a2 MILK COMPANY ANNUAL REPORT 2022 RISKS AND OPPORTUNITIES CONTINUED
Doing business in international markets
With the Company’s expanding geographical footprint, it is exposed to various risks and opportunities
associated with conducting business in international markets.
Key Risks
Key Responses
Failure to renew the SAMR product registration1
for China label infant nutrition:
— Extension of existing GB registered product
from September 2022 to February 2023;
and/or
— Close partnership with infant nutrition manufacturer, Synlait Milk Limited
(Synlait), which holds GACC2 and SAMR registrations allowing canned
formula to be exported to and sold into the China market
— Supported Synlait to complete and submit SAMR China label IMF new
GB registration dossiers for all stages with site audit timing to be confirmed
— Approval of GB registration for new
— Operational plans in place to navigate orderly transition to newly registered
formulation
China label product
Major international events
The COVID-19 pandemic continues to cause unprecedented social, economic and supply chain
disruptions globally. Recent international conflicts have also reshaped the global energy market, and
contributed to major global food shortages and increasing rates of inflation globally. Additionally,
potential outbreaks of animal diseases are a risk for the business.
Key Risks
Key Responses
— Route to market disruption and transport
cost volatility
— Continued close cooperation with Synlait to maintain continuity of infant milk
nutrition supply, and third-party suppliers in Australia and the USA to maintain
continuity of liquid milk supply
— Increased warehousing locations in China to mitigate against disruptions
caused by lockdowns associated with COVID-19
— Enhanced inventory surveillance and reporting to maintain stock control
and availability through the supply chain
— Changing macro trends (including
— Continued strong investment in brand to grow share
— Health and wellbeing of our people
— Adoption of robust infection control protocols in line with all relevant
government requirements, particularly across the Company’s
manufacturing facilities
— Inflationary pressures creating volatility
in operating costs and availability of
ingredients and raw materials
— Use of long-term milk supply agreements in certain markets
— Forward procurement of key ingredients to stabilise price and ensure
availability
— Multiple sources of supply for certain ingredients
— Strong premium brand providing platform for cost recovery to varying extent
through wholesale price adjustments
— Potential animal disease incursions
impacting the ability to supply export
markets
— Assist farmers with farm biosecurity plans and preparedness
— Business Continuity and Crisis Management frameworks and procedures
including simulations to mimic real life events such as animal disease outbreaks
Key Opportunities
Our response to global events provides opportunities to enhance our profile in existing markets, and provide support to disrupted
markets.
— Consumer share gain opportunities through ensuring product availability in a supply-constrained environment
— Our Company structure provides agility to rapidly respond to global events
— New market/product opportunities
demographic, economic and social trends),
which can impact the size of addressable
markets and/or the complexity of operating
in those markets (e.g. decline in birth-rate
in China)
— Agile approach to the execution of sales and marketing programmes,
adjusting where appropriate to reflect shifts in consumer and
channel dynamics
— Leverage multi-label, multi-channel portfolio to broaden distribution
and consumer reach (including into lower-tier cities in China)
— Exploring opportunities to expand our China label and English label
infant nutrition product portfolios; and enter adjacent product categories
to drive growth
— Geopolitical tension and regulatory
— Strong understanding of local standards, regulations and guidelines,
environments influencing channels to
market, market access, product registrations,
trade tariffs, taxes, and quotas
supported by expert in-market advisory
— Strong strategic and collaborative partnerships with Chinese State-owned
enterprises
— A multi-product, multi-channel route to market strategy for the sale of infant
nutrition into China
— Foreign currency exchange rate volatility
— Treasury management activities, providing oversight and monitoring of foreign
currency exposures with some cash flow hedging
— Multilayered, complex, and opaque route
to market channels
— Actions taken to simplify and delayer our English label infant milk formula
distribution network, supported by more transparent partner relationships
Key Opportunities
Doing business in international markets provides the opportunities for us to fulfil our strategic goal to ‘bring the unique benefits of
pure and natural a2 MilkTM to as many consumers as possible’. These include:
— Significant further growth potential of infant nutrition and other products in China, the largest and most attractive market for
infant nutrition globally
— Exposure and potential entry to large and attractive new markets
— Ability to leverage the unique benefits of a2 MilkTM to ‘cut through’ to consumers in international markets
— Operational resilience through developing and leveraging enduring strategic relationships
— ‘Experience sharing’ of consumer and product insights across markets
1 Registration achieved by Synlait and given by China’s State Administration of Market Regulation (SAMR) in September 2017 for the Company’s China label
infant nutrition. 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.
26
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BUILDING A SUSTAINABLE GROWTH BUSINESSTHE a2 MILK COMPANY ANNUAL REPORT 2022 RISKS AND OPPORTUNITIES CONTINUED
Competitive intensity
a2MC has experienced significant growth over recent years, driven predominantly by the success of
its infant nutrition businesses in Australia and China and liquid milk businesses in Australia and the
USA. This success has inspired others to compete with a2MC in the A2 beta casein protein segment.
Key Risks
Key Responses
— Market share erosion in core markets due
to domestic brands’ potential to resonate
and connect more effectively with local
consumers than international brands
— Infringements of our intellectual property
rights resulting from third-party conduct
or claims against such IP rights
— Significant and ongoing investment in brand building activities globally
— Use of consumer and health care professional education to ensure clear
understanding of the unique A2 protein proposition and benefits
— Significant and ongoing investment in science, nutrition and innovation globally
to ensure we deliver unique consumer value propositions in all our markets
underpinned by our proprietary know-how and quality processes
— Regular monitoring of market share data and consumer/shopper insights,
preferences, and expectations
— Continued investment in intellectual property to expand the Company’s
trademark and patent portfolio
— Monitoring infringement of the Company’s IP and taking action to protect it
— Counterfeit products
— Processes and technology to identify and manage potential counterfeit products
including the use of external agencies and in-market authentication testing
— Development of the True a2TM ecosystem, which includes independent product
audits and QR code verification systems to ensure products are of the highest
quality and safety (see True a2TM page 43)
Key Opportunities
While competitive intensity can present market share erosion risks, it also expands consumer awareness and engagement with the
benefits of a2 MilkTM, encourages opportunities in relation to product innovation, and allows a2MC to further leverage its ‘pioneer’
and premium brand status. Opportunities exist to:
— Emphasise our proprietary know-how and quality processes to deliver A2 protein products that are of unrivalled quality
— Invest in science, nutrition and innovation to continue to pioneer the future of dairy and explore new opportunities
— Drive awareness and education of our unique A2 protein proposition and benefits to increase our consumer base
Climate and nature
Being heavily dependent on agricultural inputs, a2MC is exposed to short, medium and long-term
climate and environmental risks including physical risks resulting from acute and chronic changes in
climate, and transition risks resulting from regulatory, or market pressures associated with on-farm
emissions (see Task Force on Climate-related Financial Disclosures page 47).
Key Risks
Key Responses
— Climate change effect on
— Establishing baselines and setting targets across GHG emissions, energy and water
biodiversity, soil, ecosystems,
water access and uncertainty
in carbon pricing, quality and
availability of raw materials and
ingredients
consumption, waste-to-landfill and product packaging (see pages 36 to 39)
— Sourcing milk from diversified milk pools within New Zealand, Australia and the USA and
incorporating climate impacts into future sourcing strategies
— Investing in new technologies and emissions reduction initiatives
— Global framework for farm environmental plans, addressing the most material aspects of
environmental management in the dairy industry
— Farmer grant programmes to support farmer-led sustainable dairy farming projects
Key Opportunities
Acknowledging climate and nature risks provides significant opportunity for the Company to play a leading role in driving industry
change. Building trust with increasingly climate aware consumers and ensuring climate scenarios and modelling are considered in
medium-term and long-term strategic planning to develop operational resilience. Opportunities exist to:
— Develop operational resilience by incorporating climate and nature scenario modelling into long-term strategic planning
— Strengthen brand and social positioning via a leadership position in GHG emissions reduction, recyclable packaging and
farming practices
— Realise increased productivity and efficiency via new technologies and practices that lower emissions and environmental impact
Strategic partnerships
The Company’s success has been underpinned by relationships with key strategic partners, including
critical supply and distribution partners. As a result, the business is inherently exposed to the
operations of key partners changing in a material way, or as the result of one or more partners
reprioritising their support for a2MC.
Key Risks
Key Responses
— Disruption to key partner operations
— A broad range of strategic partner relationships have been developed over time
impacting supply and/or access to critical
markets
— Key partners reprioritising their support for
a2MC or failing to act ethically or in line
with a2MC’s values
— Long-term partnership with dairy nutritionals manufacturer, Synlait,
complemented by the Company’s equity interest in that business (and in which
Bright Dairy, a multinational food and beverage company headquartered in
China has a 39.0% interest)
— Acquisition of MVM providing supplier geographical diversification
— Strong partnership with China State Farm Holding Shanghai Co., Ltd,
a2MC’s exclusive import agent for its China label products
— Strengthened relationship with key partners in China via MVM acquisition,
forming a joint venture with China Animal Husbandry Group
— Multiple milk processors contracted in Australia and the USA, mitigating reliance
on a single processor in these regions
— A controlling 75% interest in MVM acquisition supports growth of the
Company’s nutritionals business and further strengthens our relationship with
China National Agriculture Development Group Corp
— Actions taken to simplify and delayer our English label infant milk formula
distribution network, supported by more transparent partner relationships
— Ability to ensure timely supply of finished
— Ongoing access to milk pools that exceed the Company’s current usage
products to customers
requirements
— Access to manufacturing capacity that exceeds current usage requirements
Key Opportunities
Our key partnerships provide significant opportunities including:
— Access to high quality manufacturing capacity to support growth ambitions
— Access to international markets (including opportunities to expand product registrations)
— Opportunities to diversify supply chain partners over time to build operational resilience
Evolving technology
Technology is used by a2MC to process transactions, manage stock, manage product purchases and
deliveries and manage operational production amongst other functions. Uninterrupted availability of
the technology solutions is a crucial element of the value creation chain.
Key Risks
Key Responses
— Cyber attacks (including ransomware)
— Improved cyber security systems and protections, including restricting
— Unauthorised disclosure of or loss of
confidential data/information
access to sensitive data, conducting regionally-specific cyber security audits,
implementing more sophisticated cyber tracking and monitoring tools
— Reliability/stability of critical applications
— Transitioned to Tier 1 cloud-based enterprise resource planning (ERP) software
and reduced the number of applications in use across the business
Key Opportunities
Advances in technology also present significant opportunities, including:
— Digital platforms that support consumer engagement and marketing initiatives
— Real-time data to drive insights and informed decision making
— The use of product technology including traceability systems
— Enhance our climate risk modelling and Task Force on Climate-related Financial Disclosures (TCFD) reporting and early adoption of
— Increased automation of manufacturing and distribution processes over time
the voluntary Taskforce of Nature-Related Financial Disclosures framework
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BUILDING A SUSTAINABLE GROWTH BUSINESSTHE a2 MILK COMPANY ANNUAL REPORT 2022 RISKS AND OPPORTUNITIES CONTINUED
Talent and culture
The Company relies on the talent and wellbeing of its people and the effectiveness of its culture
for success. The loss of business-critical skills or the inability to identify, attract and retain qualified
people could have a direct impact on managing business operations successfully.
Key Risks
Key Responses
— Physical and psychological
— Invested further in resourcing structures to ensure capacity supports business needs
health, safety and wellbeing
— Implemented an integrated safety management framework, deployed through education,
leadership and establishment of revised safety standards across all sites and operations
— Established a Head of Workplace Health and Safety role
— Established numerous wellbeing initiatives (see People section, from page 32)
— Loss of business-critical skills
and/or corporate knowledge
— Alignment of remuneration to market benchmarks, Company objectives and risk tolerances
— Reduced workforce capacity
and productivity, and people
capability
— Commenced the ‘Thrive’ leadership programme with the Executive Leadership Team and
Senior Leaders as well as ‘Situational Leadership’ training for leaders at all levels
— Investment in training and career development programmes
— Succession planning to ensure continuity of knowledge, skills and experience
Key Opportunities
Providing a safe, diverse, inclusive and engaging working environment is foundational to attracting, developing and retaining talent,
which in turn is critical to sustainable growth. Opportunities exist to:
— Amplify the unique attributes of working at a2MC and aim to be the employer of choice in the sector
— Nurture the inherent energy, passion and enthusiasm that working for a trusted and unique brand attracts
— Promote the employee experience, foster a learning environment, and celebrate diversity and inclusion
— Cultivate our purpose-driven culture
Social licence to operate
Acting and operating in an ethical manner, consistent with the expectations of our shareholders,
customers, consumers, suppliers, regulators, governments, communities and other stakeholders
protects our reputation and economic sustainability. A real or perceived abuse of our social licence to
operate could result in significant brand damage, financial loss, and the loss of strategic partnerships.
Key Risks
Key Responses
— Non-compliant or
— The Company’s animal welfare programme aligns to globally recognised frameworks for
substandard animal welfare
practices
Animal Health and is evolving from the Five Freedoms Model to the Five Domains Framework
of animal welfare (refer to page 37)
— Responsible marketing
— Signatory to the Marketing in Australia of Infant Formula: Manufacturers and Importers
breaches (eg promotion of
breast milk substitutes)
Agreement 1992 (MAIF Agreement) (refer to page 42)
— Cross-functional approval process implemented (including regulatory and legal review) prior
to publication of marketing material
— Modern slavery in the supply
— Modern slavery risk management programme, with annual Modern Slavery Statement
chain (refer to page 34)
submissions
— Corporate values and a suite of corporate codes and polices developed and embedded
(including a Code of Conduct and a responsible sourcing policy)
— Potential bribery and
corruption allegations
— Corporate values and a suite of corporate codes and polices developed and embedded
(including an Anti-bribery and corruption policy and gifts and benefits policy)
— Water usage, waste water
— Establishing baseline and setting targets across water
and water pollution
— Water use monitoring systems in place at MVM and Smeaton Grange milk processing site
— Undertaking water usage reduction projects and utilisation of a waste-water treatment system
on-site at Smeaton Grange, with liquid waste products returned to farms and used as fertiliser
— Farmer grant programmes to support farmer-led sustainable dairy farming projects
Key Opportunities
Our purpose to ‘pioneer the future of dairy for good’ refers to a significant leadership opportunity to do business the ‘right way’ and
exceed stakeholder expectations in doing so. This includes:
— Aspire to lead the market in making a positive contribution to society. For example to set and monitor industry leading standards
for animal welfare on a2MC product supplier farms and to commit to engage and invest in the communities in which the
Company operates through proactive programmes as well as reactive support in times of need
— Take a leadership position in protecting our planet
30
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BUILDING A SUSTAINABLE GROWTH BUSINESSTHE a2 MILK COMPANY ANNUAL REPORT 2022 GOALS
SDG alignment:
PEOPLE
Create a safe, diverse, inclusive and engaging place for our people
to thrive, support our farmers and contribute to our communities.
Passionate and thriving team
The Company is committed to creating a safe and highly diverse and inclusive environment for its people. The Company’s ambition is
to be an employer of choice by creating a fulfilling employee engagement experience that enables employees to thrive personally and
professionally. To facilitate this ambition, the Company focuses on health and safety, invests in leadership, promotes the employee
experience, fosters a learning environment, and celebrates diversity and inclusion.
During FY22, the Company launched various initiatives to deliver on its ambition to achieve engaged and effective teams who create
long-term value for the Company and its shareholders.
FY22 PROGRESS
Health and safety
— Implemented an integrated safety management
framework, deployed through education,
leadership and establishment of revised safety
standards across all sites and operations.
— Established a Head of Workplace Health and Safety role.
— Provided free access to all team members and
their families to resources and tools promoting
mindfulness, meditation and mental wellbeing.
— Offered the Company’s first ever ‘Wellbeing
Day’ across all regions in recognition of
employees’ efforts throughout the year.
— Renewed and updated health and safety
policies across the business.
— Continued to partner with ‘Headspace’, a global
provider of web-based resources to promote
mental health training and support.
Investment in leadership
— Commenced the ‘Thrive’ leadership programme with the
Executive Leadership Team and Senior Leaders, integrating
constructive leadership tools within the business.
— ‘Situational Leadership’ training being undertaken
by all leaders at all levels – the intent of this
programme is to provide an integrated and practical
approach to effective leadership styles.
Reward and recognition
— Launched global reward and recognition platform
‘LegenDairy’, accessible to all team members.
— The platform provides wellbeing and rewards,
celebrates tenure and also provides an opportunity
to celebrate the many examples of individuals and
teams who are going ‘above and beyond’ in a way
that is consistent with the Company’s values.
— Celebrated team members in Global Town Halls
which recognises monthly ‘a2 Legends’.
— Celebrated annual a2 Legend award
at Senior Leaders conference.
Recruitment
— Implemented frameworks to underpin
the employee lifecycle.
— Adopted Recruitment Provider Onsite model to
integrate and align the talent acquisition function
to business values, goals and future success.
Supporting a diverse and inclusive workplace
— Enhanced family leave policy in Australia,
New Zealand, China and the USA.
— Launched the ‘Families @ a2’ platform for team
members to gain access to family support resources.
— Established a membership with
the Diversity Council of Australia.
KEY METRICS DATA
As at 30 June 2022
Directors*
Executive Leadership Team*
People Leaders**
Remaining Team Members
Total
Age as at
30 June 2022
Under 30
30 to 50
Over 50
Total
Number
%
50
12%
291
68%
86
20%
427
Cohort
Male
3
9
64
143
218
6
12
95
315
427
Variance
to LY
1%
4%
(5%)
%
50%
75%
67%
45%
51%
Female
3
3
31
172
209
%
50%
25%
33%
55%
49%
Tenure as at
30 June 2022
0-2 Years
2-5 Years
5+ Years
Total
Number
%
187
44%
190
44%
50
12%
427
Variance to
Last Year %
females
0%
11%
(8%)
(7%)
(7%)
Variance
to LY
(8%)
15%
(6%)
* David Bortolussi has been included in both the Director and ELT calculations.
** The a2 Milk Company defines People Leaders as any Team Member with direct reports.
NEXT STEPS
— Facilitate evolution of individual development plans
— Launch of ‘Udemy’, an online learning platform
— Develop and launch the Company’s
Reconciliation Action Plan
— Facilitate series of education sessions on
unconscious bias and mental wellness
— Continue to rollout constructive leadership
training programme across the organisation
— Launch upgraded website capability for ‘Careers
at a2’, showcasing ‘Working at a2’ insights
and providing future team members with an
understanding of the Company’s purpose, culture
and values, as well as vacancies and benefits
— Embed partnership with an external provider as
an integrated talent function in the ANZ business
that will enable a proactive and strategic approach
to talent acquisition and talent management
— Enhance current benefits to strengthen the
Company’s value proposition for employees
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THE a2 MILK COMPANY ANNUAL REPORT 2022BUILDING A SUSTAINABLE GROWTH BUSINESS
Enriching communities
The Company recognises that it has a responsibility to
support and contribute to the communities in which it
operates. a2MC strives to make a difference by helping
communities thrive and supporting organisations that are
helping to create a brighter future for children and families,
and the Company’s farming communities.
The Company has developed a community support
framework to guide how to engage, invest in, and give back
to the communities in which it operates, act on relevant
social issues, and contribute to other programmes that are
aligned to the Company’s purpose and which employees are
passionate about.
Support takes the form of funds and product donations
to help communities, as well investments of time from
the Company’s people to work directly with partner
organisations. As a business founded on innovation, the
Company believes that science plays an essential role in
enhancing the health and wellbeing of communities over time
and by harnessing science, the Company can deliver superior
outcomes for its consumers.
FY22 PROGRESS
Proactive support
— Foodbank School Breakfast Program (Australia)
— Cure Kids support (New Zealand)
— KidsCan (New Zealand)
— Feed the Children (USA)
— More Good for Rural Schools (China)
— Operation Smile (China)
Event-based (or reactive) support
— GIVIT New South Wales and Queensland Floods
(Australia)
— Save the Children (Ukraine)
— Boulder Fires contribution (USA)
— Shanghai lockdown product donations (China)
Additional farming community specific
programmes and support
GOALS PEOPLE (CONTINUED)
Modern slavery
The Company’s values and principles have an impact well beyond its
own operations. The Company believes in the vital role business plays
in upholding human rights and considers it a basic responsibility to
ensure that individuals, communities and the environment are treated
with respect.
Modern slavery is unacceptable and addressing risks of modern
slavery is an important part of the Company’s approach to business
and human rights. The Company’s approach to human rights and the
management of modern slavery risk is guided by the United Nations
Guiding Principles on Business and Human Rights. The Company
is committed to continuing to develop its approach and focus on
addressing modern slavery risks within its operations and supply chain.
During FY22, the Company delved deeper into its operations and
supply chain by continuing to scale up its due diligence both internally
and externally. The Company undertook a second-tier review of its
modern slavery risks, expanded its due diligence process for higher risk
suppliers, reviewed its indirect modern slavery risks in its operations
and supply chain, and completed its internal due diligence process
to better understand the minimum employment standards across its
global operations. This due diligence process assisted the Company in
determining which countries and industries have higher modern slavery
risks and therefore which to focus on to improve outcomes for workers.
In the identified areas of concern, the Company took a more
focused approach. After its review of the employment standards for
promotional staff used in China, the Company made changes to its
engagement with these companies, creating better oversight and
enforcing stricter and better work practices. The Company has also
developed a pledge from its USA farmers whereby they confirm that
they do not engage in modern slavery practices.
The Company is now developing a Modern Slavery Response Protocol.
The protocol will provide further structure to the Company’s modern
slavery programme and sets out the key pillars of the Company’s
modern slavery risk management (response) programme, with action
items aligned to each pillar.
FY22 PROGRESS
— Updated responsible sourcing policy
— Undertook second-tier review of modern slavery risks
— Commenced review and analysis of modern slavery risks in
relation to MVM
— Reviewed indirect modern slavery risks in operations and
supply chain
— Expanded due diligence process for higher risk new suppliers
— Published the Company’s second Modern Slavery Statement in
December 2021
NEXT STEPS
— Further review of the Company’s Responsible Sourcing Policy
— Complete review and analysis of modern slavery risks in
relation to MVM
— Prepare modern slavery questionnaire to be sent to all suppliers
of the Company
— Prepare modern slavery remediation process
— Expand existing training programme to include training tools
for key employees, on-farm suppliers and the China team
$3.2m
in cash and product donations
KIDSCAN (NEW ZEALAND)
KidsCan is New Zealand’s leading charity dedicated to
helping New Zealand children affected by poverty. The
Child Poverty Monitor in New Zealand shows 11.3% of all
children living in households in material hardship regularly
go without essentials.
The Company has recently become a major partner
of KidsCan to help support low socio-economic early
childhood education centres across New Zealand to
provide children attending those centres with food,
clothing, and health products. a2MC supports KidsCan’s
belief that education is a child’s ticket out of poverty and
that children struggle to learn when they are cold
or hungry.
The Company is proud to partner with KidsCan, providing
children with the essentials, to help them participate in
learning and have the opportunity for a better future.
CURE KIDS (NEW ZEALAND)
Cure Kids is the largest funder of child health research in
New Zealand after the government. The Company was
proud to support Cure Kids Professorial Chair, Andrew
Day, in FY20 and FY21 to research digestive health for
children, with a special focus on coeliac disease and
irritable bowel disease. In FY21 and FY22, the Company
also made a significant donation to Cure Kids’ Elliott-
Caughey Fund, a fund created to recognise the co-
founders of Cure Kids, emeritus Sir Bob Elliott and Dr Ron
Caughey. Sir Bob was passionate about conditions of
inequity and preventable childhood illness, hence those
conditions are a focus for this fund. This is a continuation
of research support from a2MC into children’s health
and nutrition.
FOODBANK (AUSTRALIA)
The Company has supported Foodbank with fresh milk
product donations in New South Wales and Victoria since
2015, scaling up support in times of heightened need.
In FY22, support was increased by providing a cash
donation to support Foodbank School Breakfast
Programs. The Company also donated a2 MilkTM products
to Foodbank through the National Donor Partnership.
The School Breakfast Program provides a healthy
breakfast for school children who would otherwise go
without, and delivers important benefits for the students
across a broad range of physical and mental health
outcomes, including energy levels and concentration.
Through this donation, the Company was able to support
Foodbank to provide 47 schools in some of Australia’s
most remote Indigenous communities with access to the
School Breakfast Program.
OPERATION SMILE (CHINA)
About 25,000 babies born in China each year suffer from
cleft lip palate. Corrective surgery can help to transform
those children’s lives – but they cannot undergo surgery
until they achieve the requisite ‘health standard’, which
includes weight targets.
The Company partnered with Operation Smile during the
year to provide corrective surgery expenses and nutrition
products to 300 children suffering from cleft lip palate,
before and after their operations.
With more than 6,000 medical volunteers from around
the world, Operation Smile is one of the world’s largest
volunteer-based not-for-profit organisations.
FEED THE CHILDREN (USA)
The Company partnered with Feed the Children in the
USA to help give struggling families the supplies they need
to send their children back to school with confidence.
With the increased hardship children and families have
faced since the outbreak of COVID-19, it is estimated that
1 in 6 children in the USA suffer from food insecurity.
In August and September 2021, the Company donated
cash to provide food and supplies to school children,
giving children what they need to do and be their best.
34
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THE a2 MILK COMPANY ANNUAL REPORT 2022BUILDING A SUSTAINABLE GROWTH BUSINESS GOALS
PLANET
Protect our planet and cows, rethink packaging, achieve net zero
and become nature positive.
SDG alignment:
The relationships the Company has with
farmers and the natural systems in which
it operates are pivotal to its success and
long-term value creation.
The Company continues to work with farmers to promote strong
animal welfare practices, and put in place farm environmental
plans, which are key initiatives that support the natural resources
utilised by the business. Additionally, the impact of climate change
has the potential to drive significant structural transformation
across the dairy sector and the Company is actively looking at
ways to reduce its impact on climate and the environment more
broadly. The Company has a number of initiatives addressing key
areas as they relate to the resources and the downstream impacts
as a result of using these resources.
Thriving farms
Farmers play a vital role in the Company’s supply chain, not
only as suppliers of the precious milk source for the Company’s
products but also as stewards of the environment and as vital
contributors to local communities. In addition, the humane
treatment of cows is of the utmost importance. The Company
is committed to working with and supporting farmers to enable
them to improve the impact on the environment.
Farm environmental plans
The Company has developed a global framework for farm
environmental plans. The principles of the framework address
the most material aspects of environmental management in
the dairy industry:
— Lowering GHG emissions
— Managing water quality and efficiency
— Managing soil quality
— Boosting on-farm biodiversity
— Improving nutrient (effluent) management
TARGETS AND COMMITMENTS
Climate impact
— Net zero GHG emissions for Scope 1 and 2 by 2030
— Net zero GHG emissions for Scope 3 by 2040
Farm environmental plans
— 100% of farms supplying raw A1 protein
free milk to have a farm environmental
plan in place by the end of 2023
Animal welfare
— 100% of farms to be certified under an
upgraded programme by the end of 2023
Other natural resources
— Reviewing water, waste and biodiversity targets as
part of work commenced on nature risk assessment
FY22 PROGRESS
— Continued to roll out farm environmental plans
— Continued to evolve and refine farm
environmental plan roadmap
— Secured in-region partners to execute roadmap
— 83% of farms supplying raw A1 protein free milk
had a farm environmental plan in place, up from
81% in FY21 and approximately 65% in FY20
NEXT STEPS
— Progress towards farm environmental
plan target for end CY23
— Review farm ambassador programme
— Establish farm environmental plan
programme with Mataura Valley Milk
Animal welfare programme
Best practice standards for animal welfare on farms are central
to the responsible sourcing of raw A1 protein free milk.
The Company’s animal welfare programme meets
globally recognised frameworks for Animal Health
and is evolving from the Five Freedoms Model to the
Five Domains Framework of animal welfare.
a2MC’s approach to animal welfare is to drive improvement,
reduce risk and ensure farmers are welfare centric. This is
achieved through the combination of increased audits, wider
audit scope, milk monitoring, on-farm technology and training.
A number of extensions to the animal welfare programme
were developed in FY22, supporting farmers to establish
systems for continuous improvement in animal welfare and to
further improve programmes beyond the industry standard.
FY22 PROGRESS
— Commenced roll-out of auditor and a2MC
farm services team training modules
— Staged launch of upgraded animal welfare
programme and farmer online portal
— Commenced implementation of robust audit scope
and frequency to increase visibility and reduce risk
— Launched redefined animal welfare programme
with Synlait
NEXT STEPS
— Progress towards animal welfare certification
target for end CY23
— Launch a2MC redefined animal welfare
programme with MVM
— Undertake pilot technology trial on farm
to validate animal welfare auditing data
— Progress towards global certification of the
redefined programme
Climate impact
Climate change and the reliance on natural resources is driving
significant structural transformation across the dairy sector.
The sector will need to take concerted action to manage the risks
and opportunities associated with a move towards a lower carbon
footprint. The risks include regulatory initiatives, such as carbon
pricing, market risks and changes in consumer preferences.
The sector’s reliance on natural systems and vulnerability
to changes in temperature and rainfall will also drive
mounting physical risks across agriculture.
There will also be extraordinary opportunity for the sector
to realise increased productivity and efficiency through
new technologies and practices that lower emissions and
environmental impact throughout the supply chain.
During the year the Company undertook a detailed
assessment of the GHG emissions footprint related to
MVM, to incorporate it into its reporting framework.
GHG EMISSIONS PROFILE1
FY22
490,153
22,972
3,221
Scope 1
Scope 2
Scope 3
FY21
459,749
30,144
3,426
Scope 1
Scope 2
Scope 3
GHG footprint
ON-FARM
PROCESSING
DISTRIBUTION AND OTHER
78%
TOTAL GHG EMISSIONS
405,547 t CO2-e
16%
TOTAL GHG EMISSIONS
83,826 t CO2-e
6%
TOTAL GHG EMISSIONS
28,475 t CO2-e
1. Greenhouse gas emissions, calculated as tonnes of carbon dioxide equivalent (tCO2-e), refer calculation at the bottom of page 38.
36
37
THE a2 MILK COMPANY ANNUAL REPORT 2022BUILDING A SUSTAINABLE GROWTH BUSINESS
GOALS PLANET (CONTINUED)
GHG emissions reduction programme
For FY19 and FY20, a2MC purchased carbon credits to offset its GHG
emissions. In FY21, the Company decided to redeploy the financial
contribution that would have funded carbon credits offsets, into
environmental programs that were more tangible in actively reducing
its emissions over time. This more direct approach to GHG emissions
reduction continues to be a strong focus for the business. The Company’s
GHG emission reduction programme covers Scope 1, 2 and 3 emissions.
While much of the Scope 1 and 2 emissions, primarily from processing
activities, are within the Company’s control to reduce, they account for
approximately 5% of total emissions. The Company is progressing the
installation of a new high pressure electric boiler at MVM which will
substantially reduce its Scope 1 emissions once commissioned (scheduled
for FY24).
By contrast, Scope 3 emissions account for approximately 95% of
emissions. The largest contributors to Scope 3 emissions are on-
farm emissions (including methane), third party processing emissions
(including use of coal) and emissions from transport and logistics
(including sea freight and ocean freight). The Company is working
to progress projects in methane reduction from inhibitors such as
asparagopsis. Other scientific breakthroughs may allow alternative
solutions to be considered and adopted in the future. Importantly,
the Company is also seeking to partner with research organisations
to address GHG emissions via a holistic approach to sustainable and
regenerative agriculture.
FY22 PROGRESS
Scope 1: GHG emissions from direct operations
— Committed to, and progressing, the installation of a new
high pressure electric boiler at MVM which received
co-investment from the New Zealand Government
Investment in Decarbonising Industry (GIDI) Fund
— Commissioned and completed a study for the
Company’s primary Australian milk processing facility
at Smeaton Grange, New South Wales, with key
projects progressed to a detailed feasibility study
for GHG emission reduction opportunities
Scope 2: Electricity utilised in direct operations
— ‘Green energy’ or equivalent electricity supply contracts
established at all sites where available, which included
converting electricity supply contracts for offices in
Sydney and Melbourne and at the Smeaton Grange
processing site in New South Wales, while continuing
contracts already in place for the Auckland office
and USA office (partial green energy supply)
Scope 3: Indirect GHG emissions
— Following contribution by a2MC to Synlait
boiler conversion, progress made by
Synlait towards that installation
— Further exploration of on-farm commercial trial
utilising Sea Forest’s SeaFeed™ product – a
methane inhibitor from asparagopsis seaweed
1 Greenhouse gas emissions, calculated as tonnes of carbon dioxide equivalent
(tCO2 e), have been estimated using considerations from The GHG Protocol
guidelines. Emissions and conversion 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. We expect
data quality to improve over time as we continue to work with our partners.
KEY METRICS DATA1
a2 GHG emissions
(TCO2-e)1
Total GHG emissions
Scope 12
Scope 23
Scope 34
Direct operations5
Third-party processing
and freight
On-farm6
Metric
Smeaton Grange
Total water usage
(‘000 litres)
Water efficiency
(litres/litre of milk)
Waste water diverted
to beneficial land
application (litres)
Waste produced (tonnes)
Waste diversion
Energy consumption
(kWh)
Metric
Mataura Valley Milk
Total water usage
(‘000 litres)
Water efficiency
(litres/litre of milk)
Waste water diverted
to beneficial land
application (litres)
Waste produced
(tonnes)
Waste diversion
Energy consumption
(kWh)
FY22
516,345
22,972
3,221
490,153
2,669
110,247
FY217
493,319
30,144
3,426
459,749
2,737
113,651
FY207
516,552
228
1,613
514,711
3,854
127,177
403,429
376,930
385,521
FY22
FY21
FY20
24,692
28,361
27,662
0.7
0.6
0.7
627,200
813,600
919,900
26.5
96.6%
1.7m
28.0
96.9%
1.8m
28.9
97.1%
1.7m
FY22
306,596
2.6
2,275,750
85.3
96.4%
15.1m
2 Includes natural gas estimates and/or extrapolations for some
information not yet available. These figures include lignite used for
MVM boiler (FY21 and FY22); plan in place to install a new high
pressure boiler at MVM, scheduled to be commissioned in FY24.
3 Includes electricity estimates and/or extrapolations
for some information not yet available.
4 Due to the nature of Scope 3 emissions occurring outside of areas
under 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 or where data was
not yet released. 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.
5 Includes our own fresh milk processing
facility and corporate operations.
6 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
estimated based on our proportion of total output.
7 GHG emissions have been restated to incorporate new available
data from our partners. (For FY21 and FY20). For FY21 the GHG
emissions have been updated to include MVM which was acquired
on 1 July 2021. The inclusion of the MVM emissions for FY21 have
been included to provide an adequate comparison to FY22.
Sustainable packaging
Sustainable packaging is an important element in the Company’s
ambition to protect the planet. It is also an increasingly
important area for many stakeholders, including consumers.
The Company has a vision for as much of its packaging
as possible to be reusable, recyclable or compostable.
Achieving this will require a region-by-region and product-
by-product approach over time. In the latest year there was
a focus on products sold in Australia and New Zealand.
Australia first introduced the ‘2025 National Packaging Targets’ in
2018 and updated them in 2020. The targets require a complete
and systemic change to the way Australia creates, collects and
recovers product packaging, and are an important step on the
country’s journey towards a circular economy for packaging.
The targets are overseen by the Australian Packaging
Covenant Organisation (APCO). In 2021, a2MC became a
signatory to the Covenant, strengthening the Company’s
long-term commitment to sustainable packaging.
As a signatory to the Covenant, a2MC is required to
report on its progress on an annual basis and to publish
an action plan. This covers all Australian sales which
captures a significant proportion of the Company’s product
portfolio including IMF. During the year, the Company
extended and aligned its sustainable packaging targets
to APCO targets for products sold in all markets.
TARGETS
Sustainable packaging
— 100% reusable, recyclable, or compostable packaging
— 70% plastic packaging being recycled or composted
— 50% average recycled content included in packaging
— Phase out of problematic and unnecessary
single-use plastics packaging
FY22 PROGRESS
Fully recyclable packaging reduced from 97.3% in
FY21 to 90.2% in FY22. The introduction of UHT to
the Company’s product portfolio in FY22 accounts
for this change. However, alternative packaging
solutions are being investigated through the long-
term sustainable packaging roadmap project to
meet the ‘2025 National Packaging Targets’.
— Extended and aligned the Company’s sustainable
packaging targets to APCO targets for products sold
in all markets
— Continued to investigate innovative packaging
design for sustainable solutions
— Improved the Company’s APCO rating to ‘Leading’
— Updated the Company’s APCO action plan
— Commenced a project to develop a long-
term sustainable packaging roadmap
NEXT STEPS
— Complete the development of the long-
term sustainable packaging roadmap
— Continue to execute against the APCO
action plan and make progress against
sustainable packaging targets
FARMER GRANTS PROGRAMMES
The Company has partnered with Landcare Australia since
2017 and provided more than $850,000 of funding for
sustainability initiatives with positive environmental and
business outcomes. In 2022, the Company commenced
a partnership with Lincoln University, New Zealand’s only
specialist land-based university, to launch a new initiative
to support sustainable dairy farming projects – The New
Zealand Farm Sustainability Fund™.
The Company committed up to $500,000 in the first year
to enable fund grants for farm projects that demonstrate
an integrated approach to a sustainable future and enable a
positive and meaningful impact across the community and
environment.
The Fund was open to New Zealand farms that supply
milk under contract with MVM or Synlait for use in the
manufacture of products for the Company.
Awards will be made on the basis of assessment criteria
that include alignment with a2MC’s sustainability objectives
and one or more of the following key environmental
improvement themes:
— Lowering GHG emissions
— Increasing on-farm carbon sequestration
— Improving farm system resilience
— Improving water quality and efficiency
— Enhancing on-farm biodiversity
— Enhancing animal wellbeing/health
— Managing and improving soil health
It is expected that successful applications will be
announced in September 2022.
BUILDING A MORE SUSTAINABLE
BUSINESS AT MATAURA
VALLEY MILK
The Company acquired a 75% interest in MVM, a dairy
nutritionals facility located in Southland, New Zealand
during the year.
A significant amount of work was undertaken to integrate
MVM into the business including several activities
to build upon MVM’s sustainability credentials:
— Completed detailed assessment of
MVM’s GHG emissions impact
— Updating the Company’s climate
scenario analysis to include MVM
— Included MVM in a2MC’s GHG emissions reduction
targets for Scope 1, 2 and 3 emissions
— Committed to replacing the boiler at MVM from
a lignite boiler to a high-pressure electrode boiler
through the full electrification of the site and received
co-investment from the New Zealand GIDI Fund
— Enabled MVM’s participation in the Farm
Sustainability Fund, with grants available to eligible
suppliers of raw A1 protein free milk to MVM
— Exploration of a commercial trial using
methane inhibitor asparagopsis seaweed
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THE a2 MILK COMPANY ANNUAL REPORT 2022BUILDING A SUSTAINABLE GROWTH BUSINESS GOALS
CONSUMERS
Bring the unique benefits of pure and natural a2 MilkTM
to as many consumers as possible.
SDG alignment:
The Company’s trusted brand, its
proprietary know-how and A2 protein
expertise are valuable assets. The
Company is committed to maintaining
and sustainably growing these assets
with ongoing investment.
The Company’s premium brand is strengthening in awareness,
consumption and loyalty to varying levels across its key markets.
The Company has increased its investment to grow and protect its
brand and its trademarks in all product categories and regions.
Through ongoing science and research and development
programmes, the Company is deepening its expertise and
advancing global understanding of the potential health benefits
of a2 MilkTM. In addition, the Company believes in the potential
of science and will continue to invest in research programmes to
drive innovation for the betterment of consumers at large.
There are three key focus areas to ensure the Company
can continue to deliver a targeted and differentiated brand
proposition and distinctive product portfolio: build and
strengthen brand love, create a distinctive product portfolio and
invest in science, nutrition and beta casein science. In addition,
the Company is focused on delivering products that are safe and
of high quality as well as responsibly marketing to consumers.
Build and strengthen brand love with
the Company’s targeted consumers
The Company is committed to increasing investment
levels to improve brand equity in its key markets of China,
Australia and the USA. The Company targets consumers
who experience perceived discomfort consuming products
that contain A1 beta casein protein as well as progressive
and health-conscious consumers who are drawn to the
differentiated, and quality proposition that a2MC delivers.
When targeting consumers who would otherwise limit their
consumption of dairy products or avoid them altogether, the
Company’s marketing approach emphasises the potential
health and well-being benefits of its branded products. a2MC
aims to ‘welcome these consumers back to milk’ and allow
them to enjoy the nutritional wonder of dairy products.
Many consumers and healthcare professionals report that some
people who experience digestive issues drinking regular cows’
milk may experience benefits when they switch to a2 MilkTM.
Distinctive product portfolio
The Company has a distinctive product portfolio which is
based around the benefits of products made from milk that
contains only the A2 protein type and no A1. The product
portfolio can be divided into three core categories: liquid
milk, infant milk formula and macro milk. Each is positioned
in the premium segment of their respective categories.
The Company’s approach to growing its products varies
within each market in which it operates – adapting to local
consumer preferences, category nuances, channel dynamics,
regulatory requirements and overall category maturity.
FY22 PROGRESS AND NEXT STEPS
The Company increased marketing investment by 36.3%
primarily reflecting a significant step-up in China above the
line brand investment as well as below the line activation in
line with its refreshed growth strategy.
Marketing Investment1
ANZ
— Continued to invest in brand and in ensuring strong in-
market presence
— Brand health metrics improved during the period
— Brand leadership maintained with increased loyalty
and household penetration
— Largest brand advertiser in the fresh milk category
in Australia
Australian milk market value share3
China
— Successfully launched two marketing campaigns which
emphasised functional benefits
— Achieved the highest brand health metrics in the
Company’s history following the campaigns
Total Brand Awareness China2
— Launch of a2 Milk® Cream on Top and a2 Milk® UHT
products during the period
— a2 Milk® Lactose Free launched in 1Q23 with distribution
across all major supermarket chains in Australia to be
supported by a targeted marketing campaign
International
— Delivered material improvements in brand engagement,
following increased brand support to resellers, and direct
engagement with daigou
USA
— New marketing campaign launched to drive increased
— Upward momentum in English label brand awareness
awareness and new consumers to brand
following two marketing campaigns in FY22
— Launched a2 Milk® Half and Half which has now
— Completed preparations for 1H23 relaunch of
been accepted in over 6,000 stores
a2 Platinum®
Total a2MC EL Prompted Brand Awareness2
— Launched a2 Milk® HERSHEY’S which has now been
accepted in over 6,000 stores including Walmart and
Sam’s Club
40
41
1. Marketing investment by region in NZD$ million.
2. Source: IPSOS China brand health quarterly tracker (n= 9750 respondents)
3. IRI Australian Grocery Weighted Scan 12-months ending.
THE a2 MILK COMPANY ANNUAL REPORT 20222317612781619141516174574477470112841H202H201H212H211H22USAANZChina2H221106710193137NZ$ millionMarketing InvestmentJan-19Apr-19Oct-19Apr-20Sep-20Dec-20May-21Oct-21Jan-22Jul-22Total Brand Awareness China – spontaneous & total prompted25253343454749475454Jan-19Apr-19Oct-19Apr-20Sep-20Dec-20May-21Oct-21Jan-22Jul-22Total a2MC EL Brand Awareness18%16%21%32%27%25%29%24%27%29%Jun-19Dec-19Jun-20Dec-20Jun-21Dec-21Jun-22Australian Milk Value Share11.2%11.3%11.3%11.7%12.2%12.4%12.4%BUILDING A SUSTAINABLE GROWTH BUSINESS
GOALS CONSUMERS (CONTINUED)
Invest in science, nutrition and
A2 protein science education
As the pioneer of the A2 protein science, the
Company is also the custodian of the category.
The Company’s science priorities have always aligned with its
business strategy, and most importantly, its consumer needs.
Science, and the newly created nutrition function, are
enablers to support growth and delivery of key strategic
priorities, and decrease risk to the business.
The Company will increase its investment in
strengthening its global leadership in A1/A2 beta-
casein research. Key strategic priorities include:
— Continue to strengthen the evidence supporting
digestive benefits of a2 Milk™
— Expand research to explore the immune
and cognitive benefits of a2 Milk™
— Expand on research across different life-stages
Product quality and food safety
The Company is committed to the highest standards of product
quality and food safety, especially given a large proportion of its
products are consumed by infants, young children and pregnant
women. The Company has significant proprietary knowledge and
quality processes to deliver A2 protein products that achieve these
standards, as well as compliance with other market regulations
and requirements.
This commitment is supported by:
— A comprehensive and unique focus on A2 beta casein protein
segregation and testing from farm to finished product
— A priority focus on food and safety and quality management
audited by accredited third party verification agencies for
both self-owned and third party manufacturing sites
— Long-term partnerships with high quality third-
party manufacturers who share the Company’s
focus and ambition on social responsibility
Overall, with research being undertaken in China, ANZ and
USA, and with the integration of the science and nutrition
functions, a2MC will expand its scientific credibility, knowledge
and understanding of the A1/A2 protein science, enabling it to
communicate the functional story in an innovative manner.
a2 Centre of Research Excellence™
— Relevant industry certifications including ISO 9001 (IMF), and
SQF (certification of the Company’s Sydney processing facility)
— Ongoing monitoring and compliance with relevant regulatory
requirements in the markets in which the Company operates
— Investment in people and training to ensure capability
to meet product quality and food safety standards
To strengthen its category leadership the Company is investing
in the a2 Centre of Research Excellence™ (a2 Core™).
— True a2™ system for our powdered
products for those most vulnerable
The objective of a2 CoreTM is to centralise research
expertise and education that will:
— Build credibility for A1/A2 protein science
— Promote academic partnerships and industry collaboration
— Enable the Company to participate with regulatory
authorities to define and protect the A2 protein category
— House research summaries, scientific references and
education materials for health care professionals
Responsible marketing
The Company’s approach to marketing infant nutrition aligns
to the core principle of supporting breastfeeding as the primary
form of infant nutrition. The Company has developed a premium,
high quality range of infant nutrition products to provide
parents an alternative when breastfeeding is not an option.
The Company complies with local best practice in each of its
active markets with respect to marketing of IMF products.
Marketing in Australia of Infant Formula
(MAIF) and Infant Nutrition Council
The Company is a signatory to the MAIF Agreement and a
member of the Infant Nutrition Council, which represents
the major manufacturers and marketers of infant nutrition
in Australia and New Zealand. All members abide by a
Code of Conduct including the MAIF Agreement and
The Infant Nutrition Council Code of Practice for the
Marketing of Infant Nutrition in New Zealand.
TRUE a2™
The Company takes great care in leveraging its significant
proprietary know-how and quality processes to deliver
products that are made with A1 protein free milk, are of
the highest quality and are safe and compliant with market
regulations and requirements.
The four pillars of the True a2™ ecosystem cover the
complete product lifecycle. While the ‘Made with a2 Milk™’
and ‘Testing’ pillars are fundamental to the composition and
safety of our products, the ‘Independent product audits’
and ‘QR – verification system’ pillars demonstrate a2MC’s
commitment to reducing risks around food fraud.
The True a2™ ecosystem captures the Company’s proprietary
know how and processes to deliver superior quality and
authentic traceable products. This ensures that a parent in
China or a parent in Australia has the same, highest quality
powdered products from The a2 Milk Company.
Underlying the four pillars is the Company’s scientific heritage,
clinical research and understanding, the quality of its raw
materials, its knowledge of beta casein protein testing from
farm to shelf, and its production and supply chain.
Made with
a2 MilkTM
True a2TM
Independent
product audits
Testing
QR – verification system
Made with a2 MilkTM
At The a2 Milk Company, we go to great lengths to ensure
that our a2 MilkTM is from cows that naturally produce milk
with only the A2 protein type and no A1.
Our farmers hand select cows that naturally produce only
the A2 protein type by using a simple and non-invasive
genetic test that analyses a hair or tissue sample from each
cow. These cows are then milked separately and the milk is
segregated throughout the supply chain.
Testing
Testing is an integral part of the product development
process. At multiple stages along the a2 Platinum® and
Zhi Chu® product journeys, each individual ingredient
and packaging component is appropriately tested, as
well as the final product.
This ensures all our a2 Platinum® and Zhi Chu® products
meet the highest quality and safety standards.
QR code – verification system
Each and every can of a2 Platinum® and Zhi Chu®
products have a unique QR code, allowing consumers
to obtain further information about the product.
Independent product audits
The a2 Milk Company employs an independent third party
to verify its a2 Platinum® and Zhi Chu® products. Oritain is a
food-traceability expert and tests samples of a2 Platinum®
and Zhi Chu® products it obtains straight from retail shelves
to confirm that these products are True a2TM. This testing is
scientific, ongoing and completely independent.
42
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THE a2 MILK COMPANY ANNUAL REPORT 2022BUILDING A SUSTAINABLE GROWTH BUSINESS GOALS
SDG alignment:
SHAREHOLDERS
Create long-term, enduring value for shareholders and
a trusted, transparent relationship.
One of the Company’s principal objectives
is to create long-term enduring value for
its shareholders.
Delivering on this objective requires strong financial performance
underpinned by long-term strategic decision making and
supported by a robust capital management framework. Close
management of business risks and opportunities is also critical
to delivering successful outcomes. The Company’s strong
balance sheet provides it with the flexibility to respond to
risks and opportunities in pursuit of long-term value creation
and in line with the Company’s strategic objectives.
The Company continues to strengthen its strategic partnerships
to support its next phase of growth. Its strategic partners
provide a range of benefits including manufacturing
expertise, market access support, distribution and logistics
services, and consumer and regulatory insights.
Maintaining transparency with the Company’s shareholders
ensures they are informed, and updated with the Company’s
strategic priorities and decision-making processes. The
Company continues to provide more information through
a variety of reporting frameworks including the Task Force
for Climate-related Financial Disclosures and the Carbon
Disclosure Project. The Company hosted an Investor Day
during the year to engage with the investment community
and communicate its refreshed growth strategy.
In FY22 the Company made meaningful progress against its
medium-term financial ambitions, with strong growth in revenue
and earnings, and is well positioned for further growth.
KEY METRICS DATA (FY22)
$1,446m
Revenue
+19.8%
Revenue growth
13.6%
EBITDA margin
+51.8%
Earnings per share
(EPS) growth
45.6%
Return on capital
employed (ROCE)1
114%
Operating cash
flow conversion
The Company continues to target medium-term sales of
approximately $2 billion in FY26+ and is targeting EBITDA
margins in the ‘teens’ in the medium-term.
1. ROCE is defined as EBIT / Capital Employed. Capital Employed is
calculated as total assets less current liabilities and cash & term
deposits
Capital management
On 27 August 2022, the Board of Directors resolved that
the Company intends to undertake a capital return to
shareholders of up to $150 million through an on-market share
buyback. The buyback is expected to commence towards
the end of September and could run for up to 12 months.
The Company’s balance sheet is in a strong position that
provides the capacity to distribute up to $150 million to
shareholders, with the most effective method being an
on-market share buyback. With a closing cash balance
exceeding $800 million, there is sufficient capital reserve to
fund investment opportunities, maintain an appropriate cash
buffer as well as return surplus capital to shareholders. The
buyback is subject to market conditions, a2MC’s prevailing
share price and all other relevant considerations.
Capital allocation to drive growth
The Company’s capital allocation framework prioritises investment
in growth initiatives ahead of returning capital to shareholders.
There are several critical elements to be considered as part
of the capital framework. Firstly, the Company will invest to
grow the core business in existing markets, which includes
investment to build its business in China, participation in IMF
manufacturing, and other infrastructure to support growth.
The second element is investment to expand the
boundaries of its business. This includes:
— Expanding its presence in an existing market with a new
product, or entering a new market with an existing product
— Assessing complementary mergers and acquisitions
to drive further growth in core markets
Thirdly, the Company needs to ensure it maintains a
level of balance sheet strength and flexibility to support
business growth and risk management activities, and
to manage in uncertain operating environments.
Finally, the Company will make decisions to return excess
capital to shareholders where it is in shareholders’ long-
term interest to do so. The Company’s capital allocation
framework is continually reviewed by management and
the Board and is summarised in the image below.
CAPITAL ALLOCATION FRAMEWORK
Operating cash flow generation
Capital funding
Grow the core business in existing markets
Expand the boundaries
Balance sheet strength and flexibility
— Invest in building core business
— Adjacent new product categories in
— Capacity to support business growth
— Participate in infant nutrition manufacturing
— Enable investment in systems, infrastructure,
quality, safety and expertise
— Organic growth – existing and new products/
new retail channels
— Assess M&A opportunities to support
core business growth and supply
chain evolution
existing markets
— Geographic expansion of existing products
into new markets
— Assess M&A opportunities to
expand boundaries
and risk management initiatives
— Maintain a conservative cash reserve to
manage in an uncertain environment
Excess cash flow
Shareholder returns
44
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THE a2 MILK COMPANY ANNUAL REPORT 2022BUILDING A SUSTAINABLE GROWTH BUSINESS GOALS SHAREHOLDERS (CONTINUED)
Strategic partnerships
The Company has built its foundations with a
number of key strategic partnerships.
Each partner brings different strengths that enable the
Company to execute against its strategic objectives. In
particular, its partnerships with CNADC, CAHG, CSF and Synlait
provide invaluable insights and assistance in understanding
the consumer and regulatory environment in China.
China National Agriculture
Development Group Co., Ltd.
China National Agriculture Development Group Co.,
Ltd. (CNADC) offers comprehensive agricultural services
in mainland China and is the parent company of China
State Farm and China Animal Husbandry Group.
CNADC is a leading State Owned Enterprise, meeting China’s
agricultural needs and holding seventeen wholly-owned or
share-controlled subsidiaries, and three publicly listed companies.
CNADC’s knowledge of the Chinese market and its ownership
of China State Farm and China Animal Husbandry Group
positions it as a strong partner for a2MC for the long-term.
China State Farm
China State Farm Holding Shanghai Co., Ltd (CSF) became
the Company’s exclusive logistics and distribution partner
for IMF products in China in 2013. CSF is the exclusive
import agent for the Company’s China label IMF products
with 120 active IMF distributors and approximately 110 UHT
and milk powder distributors throughout the country.
The Company renewed its agreement with CSF in
December 2018. This is due for renewal again in 2022.
The expertise of CSF especially during lockdowns in
China assisted a2MC in navigating city closures and
fulfilling product deliveries despite the challenges.
China Animal Husbandry Group
China Animal Husbandry Group (CAHG) became
a strategic partner when the Company purchased
75% of MVM in 2021. CAHG holds 25% of Mataura
Valley Milk and is also owned by CNADC.
The partnership with CAHG provides the opportunity
to build and enhance the Company’s relationships with
key partners in China.
Synlait
Synlait Milk Limited (Synlait) has been instrumental in producing
a2MC’s IMF products since 2012. a2MC and Synlait renewed
their agreement in 2019. The agreement outlined a two-year
extension to the original agreement providing for a rolling
three-year term from 1 August 2022 (or effectively a new
minimum term to 31 July 2025, at the earliest), an increase
in the volume of nutritional products over which Synlait has
exclusive supply rights, increased committed production
capacity from Synlait, and an update to the pricing terms that
reflect the commitment on the part of both companies.
In addition to its operating agreements, a2MC holds a 19.8%
equity interest in Synlait, making it the second largest shareholder.
Synlait’s largest shareholder is Bright Dairy, a multinational
food and beverages manufacturing company headquartered
in China. Bright has a 39.0% interest in Synlait.
Fonterra
In 2018, the Company announced a strategic relationship with
Fonterra Co-operative Group Limited. The arrangements include
an exclusive licensing agreement for the production, distribution,
sale, and marketing of a2 MilkTM branded fresh milk in the
New Zealand market.
Investment in Mataura Valley Milk (MVM)
On 30 July 2021, a2MC completed its acquisition of a 75%
interest in MVM, a dairy nutritionals business, located in
Southland, New Zealand. The benefits of the acquisition include:
— Opportunity to build and enhance the Company’s
relationships with key partners in China including CAHG
which retained a 25% interest in MVM alongside a2MC
— A unique opportunity to acquire a new world
class nutritional manufacturing capability
— Existing supply agreements with local farmers engaged to
supply the highest quality milk and significantly transition to
being A1 protein free milk suppliers as quickly as possible
— Supplier and geographic diversification within New
Zealand to complement existing supply from Synlait
— Innovation and new product capability to deliver
on the Company’s growth strategy
— Opportunity to capture manufacturing margins in the future
— Ability to further enhance and protect the
Company’s intellectual property
— Greater control over the Company’s future with
respect to its China label IMF registrations
While the short-term outlook is challenging, utilisation will
increase over time with plans to reach profitability during
FY26. The Company has commenced manufacturing its a2
Milk™ powder from MVM, with plans to transition more
product from Synlait to MVM, and to prioritise development
of new products over the short-to-medium term.
Reporting transparency
Nature-related financial disclosures
Broader nature related risk and opportunity disclosure is an
emerging area of focus for stakeholders. There is new awareness
globally that nature underpins the global economy. A series of
recent reports led to the launch of the Taskforce of Nature-Related
Financial Disclosures which aims to introduce a framework for
companies to voluntarily report and act on evolving nature related
risks. It is expected that this framework will be published in 2023.
Recently, the New Zealand External Reporting Board, announced
it is developing new standards for climate-related financial
disclosure. It is expected that these standards will closely
follow the recommendations of the Taskforce for Climate-
Related Financial Disclosures. Based on the work undertaken
by a2MC over the past number of years, the Company believes
it will be well placed to report to the requirements of the
External Reporting Board when the standards are published.
Given the importance of nature to its business model and
activities, the Company has commenced reviewing this
voluntary framework in the context of its business. This year,
the Company commenced an initial pilot analysis of nature-
related risks and intends to build on this work in future years.
Investor Day
The Company hosted an Investor Day in October 2021 to
release its refreshed growth strategy. The Investor Day outlined
the findings of its holistic review of its growth opportunities,
insights on key markets, categories and channels, as well
as its financial ambition and key initiatives to deliver on this
ambition. The event also provided an opportunity for the
Company to introduce its renewed Executive Leadership Team.
The objective of the Investor Day was to provide the market
with a greater understanding of the Company’s business, and
extensive information was provided to the market to facilitate this.
Carbon Disclosure Project (CDP)
Climate Change Questionnaire
The Company completed the FY21 Climate Change questionnaire
to receive a rating for the first time during the period and
this was the Company’s third submission since FY20. The
questionnaire measures and outlines the risks and opportunities
the business faces with regards to climate change. This
questionnaire is scored by CDP and then released for public
review following the rating. This comprehensive questionnaire
provides transparency to shareholders on climate change impacts
and how the Company is navigating these challenges. The
rating also provides shareholders with a comparison to other
corporates as it relates to its approach to climate change.
Task Force on Climate-related Financial Disclosures
In 2019, the Company indicated that in response to the increasing
demand for transparency on the identification and management
of climate-related risks, it would move towards aligning with the
recommendations of the Taskforce on Climate-Related Financial
Disclosures (TCFD). In subsequent years, the Company increased
its disclosures on climate-related financial disclosure reflecting the
additional work being undertaken internally to understand these
dimensions and potential impacts to the business. This report
includes disclosures to fully align to the original voluntary TCFD
framework in line with the Company’s commitment to do so for
FY22. The framework will be mandatory for a2MC from FY24.
Overview of climate scenarios methodology and approach
As part of the ongoing management and integration of climate
risk and to better understand its exposure to climate risks
and opportunities, the Company has conducted a detailed
scenario analysis across both transition and physical risks and
opportunities in line with the TCFD recommendations.
The Company first undertook this analysis in 2020, and
again in 2022 based on material changes to its business
operations including in particular the Company’s acquisition
of a 75% interest in Mataura Valley Milk, along with
the latest available climate data. The analysis involved
modelling the potential financial impacts of climate change
on the business, taking a long-term view out to 2050,
to inform future strategic and financial planning.
The Company has undertaken two climate
risk and opportunities analyses:
— Transition risk analysis: two transition risk scenarios
representing a high transition risk future aligned with
1.5-degree trajectory and a low transition risk future
aligned with a greater than 3-degree trajectory
— Physical risk analysis: two physical risk scenarios
representing a high physical risk future aligned with a
greater than 3-degree trajectory and a low physical risk
future aligned with a less than 2-degree trajectory
Whilst these scenarios are hypothetical constructs and not
designed to deliver precise outcomes or forecasts, the analysis
will assist the Company with strategic planning and in responding
to trends and external events which may change over time.
Transition risk analysis
Physical risk analysis
Risk
profile
Underlying
scenario
Risk
profile
Underlying
scenario
LOW
IEA STEPS
HIGH
RCP8.5
HIGH
IEA NZE
LOW
RCP2.6
High
temperature
scenario
>3°C
Low
temperature
scenario
<2°C
46
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THE a2 MILK COMPANY ANNUAL REPORT 2022BUILDING A SUSTAINABLE GROWTH BUSINESS GOALS SHAREHOLDERS (CONTINUED)
Transition risk analysis
The above transition scenarios were used to assess how the
Company would perform and operate under a low carbon
transition scenario where the economy decarbonises in line
with 1.5-degrees relative to a business-as-usual trajectory. This
allowed for an assessment of the impact of climate action, policy,
technology deployment and market shifts on the Company.
To model these impacts, the Company used data provided by
the International Energy Agency’s (IEA’s) Net Zero emissions
by 2050 scenario to assess high transition risks and data from
the IEA Stated Policies Scenario to assess low transition risks.
The analysis focused on two key impacts which were
deemed to be most material to the Company:
— Regulatory impacts associated with future implementation
of plausible emissions pricing regimes in Australia,
New Zealand and the United States; and
— Market impacts focusing on changing consumer
preferences associated with the shift from traditional
dairy products to plant-based milk products.
Physical risk analysis
The above physical scenarios were used to assess how the
Company would perform and operate under a ‘hot house
world’ scenario in which there is limited climate action and
as such the economy fails to decarbonise resulting in global
temperature rise of above 3-degrees relative to a low physical
risk trajectory. This allowed for an assessment of the impact
of acute and chronic physical risks on the Company.
To model these impacts, the Company used data provided in the
Intergovernmental Panel on Climate Change (IPCC) Representative
Concentration Pathway (RCP) 8.5 to assess high physical risks
and the RCP2.6 to assess low physical risks. The analysis included
bottom-up farm level analysis of exposure to acute and chronic
physical risks across the Company’s supply chain, with deep
dives on the most material risks, being drought and flood.
Analysis on an unmitigated basis
Aligned to the TCFD recommendations, the Company’s analysis
under each scenario combined the internal and external data
referred to above to identify financial material impacts on the
Company, with the impacts being assessed on an unmitigated
basis. This was done to inform future strategic decision making
around how the Company can better build resilience and
capitalise on future opportunities. The Company plans to update
the scenario analysis as material changes to the business arise
and will continue to deepen and evolve the methodology.
Key insights: Transition risks and opportunities
The following key insights have been taken from the
Company’s transition risk scenario analysis.
1. If the Company meets its emissions reduction
targets, it will significantly reduce exposure
to carbon pricing across the business
Carbon pricing would increase costs for the Company’s
products in the absence of emissions reduction activities
scenario relative to a scenario in which the Company
delivers on its emissions reduction targets.
The plan to meet these targets is based on several
initiatives including methane inhibitors, electrification
of coal boilers, renewable energy supply and
decarbonisation of transport over time.
Investments in these initiatives will make the business more
resilient to carbon pricing in the medium to long-term.
2. The Company’s liquid milk products could
be exposed to demand erosion associated
with plant-based milk alternatives
The demand and market share of plant-based milk alternatives
is growing and poses a risk to dairy milk products. Perceived
health benefits are the biggest driver of ‘switching’ from
dairy to plant-based alternatives with environment and
animal welfare concerns being secondary drivers.
Carbon pricing has the potential to amplify these trends
by affecting dairy milk supply chains substantially more
than plant-based supply chains – resulting in a smaller
price differential between the two product categories.
Given the Company’s premium brand – which is driven by health
benefits – it is possible that a2MC is protected from ‘switching’.
Underpinning the ‘premium’ brand position with both health
and sustainability attributes, coupled with demonstrating
environmental credentials, may offer further protection.
3. Product exposure to emissions pricing is
dependent on price elasticity of demand as
well as product emissions intensity
IMF is relatively more protected from emissions pricing than
liquid milk products due to lower emissions intensity per dollar
of revenue. However, these impacts could be more pronounced
in a more disorderly transition scenario in which carbon pricing is
rolled out sharply and heterogeneously across different markets.
Key insights: Physical risks and opportunities
The following key insights have been taken from
the Company’s physical risk scenario analysis.
1. Reliance of the Company’s liquid milk products on
local supply chains in Australia and the USA exposes
them to supply chain disruption from drought
The Company’s liquid milk supply chains in Australia and the
USA are highly exposed to drought risks. Drought has the
potential to significantly impact on-farm dairy productivity,
creating supply constraints in highly exposed regions.
The Company’s analysis indicates that if unmitigated, drought
risk could impact profitability under both the below 2-degrees
scenario and the above 3-degrees scenario referred to above.
2. The Company’s New Zealand IMF supply chains
are relatively protected from drought risk but are
exposed to regulatory risks relating to water
The New Zealand IMF supply chain is relatively protected
from drought risk under climate scenarios with some regions
forecast to experience increased intensification of rainfall.
While some farms are at risk across the New Zealand supplier
base, surplus milk available in the milk pool could provide some
protection against impacts on supply and profitability. Despite
this, some parts of the supply chain – including the Canterbury
region – are exposed to water quality and usage issues.
Transition and physical risks and opportunities summary
The following table summarises the key risks and opportunities, the potential financial impact, magnitude and time horizon.
Transition
risks and
opportunities
Risk /
opportunity
Overview
Regulation
Risk
Market
Risk /
opportunity
Carbon pricing
The Company’s direct operational emissions (Scope 1
and 2) are predominantly from the lignite used for the
boiler at MVM. With a plan in place for a high-pressure
electrode boiler to be commissioned in 2023, a2MC’s
direct operational emissions will be modest, making
direct carbon pricing liabilities immaterial to the business.
However, emissions pricing (across all GHG emissions) in
the supply chain could increase the cost of milk inputs.
On farm emissions represent a large proportion of the
Company’s lifecycle emissions footprint and these costs
are likely to be passed on by farmers under current
market conditions. This is particularly relevant in the
New Zealand context where proposed regulatory
changes regarding a price on agricultural emissions are
being developed. The materiality of these regulatory
risks will depend on market price elasticity of demand
for the Company’s products and the extent to which
these costs are passed on by suppliers. Under current
market conditions the price elasticity of demand for the
Company’s IMF and liquid milk products is low, reducing
the materiality of this risk. It will also be impacted by the
extent to which the Company can reduce its emissions
and decarbonise its supply chain.
Changing consumer behaviour
Consumer preference shifts away from traditional dairy
products towards plant-based products have been
observed in recent years, driven by various factors
including climate and environmental considerations.
Carbon pricing has the potential to amplify switching,
by affecting dairy milk supply chains more than
plant-based supply chains resulting in a smaller price
differential between the two product categories. The
Company views this as both a risk and opportunity
and is responding with strategies to maintain and
grow its premium brand positioning, and through the
development of a low-carbon transition strategy to
reduce potential carbon liabilities.
Physical
risks and
opportunities
Risk /
opportunity
Overview
Chronic
Risk
Acute
Risk
Drought
Drought can impact dairy farms in several ways, including
limited supply and high cost of feed, limited water supply,
and impacts to the health and output of cattle due to
change in feed nutrition mix. Drought has the potential to
impact availability of supply and increase operating costs.
Flooding
Flooding can result in the loss of livestock, occupational
health and safety risks for employees and other
stakeholders, damage to property including paddocks
and pastures, critical equipment and facilities, temporary
loss of farm access, and loss of inventory.
Potential
magnitude
Time
horizon
Low
Medium-
term
Potential
financial
impact
Increased
indirect
operating
costs
Low
Short-
term
Potential
magnitude
Time
horizon
Medium
Long-
term
Medium
Long-
term
Decreased
/ increased
revenues
due to
reduced
demand
for
products
Potential
financial
impact
Increased
indirect
operating
costs
Increased
indirect
operating
costs
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THE a2 MILK COMPANY ANNUAL REPORT 2022BUILDING A SUSTAINABLE GROWTH BUSINESS GOALS SHAREHOLDERS (CONTINUED)
Strategic response and next steps
The Company is implementing and will continue
to evolve a mitigation and adaptation strategy
to address the impact of climate change.
Importantly, it has commenced the development of low
carbon transition strategy out to 2040 with targets for Scope
1, 2 and 3 greenhouse gas emissions reduction to net zero
by 2030 (for Scope 1 and 2) and by 2040 (for Scope 3).
Furthermore, the Company views changing consumer preferences
as both a risk and opportunity and is responding with strategies
to maintain and grow its premium brand positioning, and
through the development of a low-carbon transition strategy
to reduce potential carbon liabilities. It is likely that over time
there will be a shift in consumer preference towards climate
and environmentally friendly dairy products. This creates
an opportunity to strengthen the visibility and transparency
around these attributes in the Company’s products.
The Company’s mitigation approach to the impact of
climate change includes decarbonisation initiatives already
underway in our direct operations, for example:
— Converting the MVM coal-fired boiler to a high-
pressure electrode boiler and utilising renewable
energy for the electrification of the site.
— Undertaking a study for the Company’s primary milk
processing facility in Australia, Smeaton Grange, with key
projects progressed to a detailed feasibility study, following
the installation of solar power at Smeaton Grange last year.
— ‘Green Energy’ or equivalent contracts established at
all sites where available which included converting
contracts for offices in Sydney and Melbourne,
operations in Sydney, while continuing contracts
already in place for Auckland and the USA.
Given the materiality of the Company’s Scope 3
GHG emissions, it is also investing in mitigation
initiatives in its supply chain. These include:
— Contribution to the conversion of Synlait’s
coal-fired boiler to biomass
— Working with methane mitigating asparagopsis
based feed supplement provider
— Establishing / continuing farmer grants programmes,
which in 2022 were extended beyond Australia to
New Zealand (see page 39 for further details)
The Company’s adaptation approach includes
investing in resilience throughout its direct
operations and supply chain, for example:
— Establishing a global framework for ‘farm environmental plans’
which is currently being rolled-out across supplier farms
— Farmer grants programmes, which in 2022 was
extended beyond Australia to New Zealand
(see page 39 for further details)
In August 2022, New Zealand released its first national adaptation
plan which contains strategies, policies and actions that will help
the country adapt to the changing climate and its effects. a2MC is
reviewing this plan to help inform the next steps on adaptation.
50
BUILDING A SUSTAINABLE GROWTH BUSINESS CORPORATE
GOVERNANCE
Governance
Directors
Our Executive Leadership Team
Remuneration
52
56
58
60
51
THE a2 MILK COMPANY ANNUAL REPORT 2022 CORPORATE GOVERNANCE
GOVERNANCE
The a2 Milk Company is committed to
maintaining the highest standards of
corporate governance. The Company’s
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.
Good corporate governance adds to the
performance of the Company, creates
shareholder value and engenders the
confidence of the investment market.
The Company’s 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,
4th Edition (ASX Principles).
For FY22 the Company’s corporate
governance framework complied with the
recommendations in the NZX Corporate
Governance Code and the ASX Principles,
except as noted below.
Corporate Governance Statement
The Company’s Corporate Governance
Statement, which is current as at 30 June
2022 and approved by the Board, can be
found at https://www.thea2milkcompany.
com/corporate-governance.
The 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/corporate-
governance. These include matters
relating to the Company’s strategic
direction, financial performance, executive
management, audit and risk management,
business planning, corporate governance
and disclosure, performance evaluation,
workplace health and safety, ethical
conduct, and determining the Company’s
sustainability strategy, including to
respond to the Company's environmental
and social sustainability risks and
opportunities.
The Board delegates certain functions
to its three Committees (Audit and
Risk Management Committee, People
and Remuneration Committee, and
Nomination Committee). The diagram
opposite illustrates the Company’s
corporate governance framework:
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 NZX Listing
Rules, the NZX Corporate Governance
Code and the ASX Principles. 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, her or their capacity
to bring an independent view to decisions
in relation to the Company, or act in the
best interests of the Company as a whole
rather than in the interests of an individual
security holder or other party.
Based on these measures, and the
considerations discussed in this Annual
Report, the Board considers there is an
appropriate level of independent view
and judgement exercised by all directors
and that David Hearn (as of February
2022), Julia Hoare, Pip Greenwood,
Warwick Every-Burns, and Sandra Yu are
independent directors as at 30 June 2022,
and that up to her resignation on
28 February 2022, Bessie Lee was
also an independent director.
Audit and Risk Management
Committee (ARMC)
People and Remuneration
Committee (PRC)
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.
This committee assists the Board in
overseeing the design and implementation
of appropriate people and remuneration
policies and practices for the Company,
to ensure the Company can deliver on
its business objectives, remuneration is
fair and current, and the Company is
compliant with relevant laws, regulations
and applicable listing rules.
Nomination Committee (NOM)
This committee assists the Board by
considering nominations to the Board to
provide an appropriate mix of expertise,
diversity, skills and experience on
the Board.
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/corporate-governance.
INDEPENDENT
ASSURANCE(i)
COMPANY
SECRETARY(ii)
GOVERNANCE FRAMEWORK
BOARD OF
DIRECTORS
Accountability
and reporting
Delegation and
oversight
BOARD
COMMITTEES
(ARMC, PRC,
NOM)
Delegation and
oversight (iii)
Accountability
and reporting
CEO(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 operations; leads the
(v)
Executive Leadership Team.
Implements strategy and business plans; directs
performance and behaviour of team.
52
53
THE a2 MILK COMPANY ANNUAL REPORT 2022
CORPORATE GOVERNANCE
GOVERNANCE (CONTINUED)
Board size, skills and structure
During the reporting period, the Board comprised between four and five independent non-executive directors (with Sandra Yu replacing
Bessie Lee following her retirement on 28 February 2022 and David Hearn considered to be independent from February 2022) and
one executive director, the Managing Director and CEO, David Bortolussi. The Company’s constitution provides for a minimum of
four directors and a maximum of eight, of which at least two must be ordinarily resident in New Zealand to comply with the NZX
Listing Rules.
The Board comprises directors with a diverse range of skills, experience and backgrounds to support the effective governance and
robust decision-making of the Group. A summary of the key skills and experience of the current directors against those identified
in the skills matrix is set out below:
Capability
Governance – experience in and commitment to the highest standards of corporate governance, including
as a non-executive director of a listed company, large or complex organisation or government body
Sustainability – understanding and experience in sustainable practices to manage the impact of business
operations on the environment and community and the impact of climate change on business operations
Strategy – development of corporate and business unit strategy and/or mergers, acquisitions and alliance
structuring and execution
Risk management – experience in identification, monitoring and management of material financial and
non-financial risks and understanding, implementation and oversight of risk management frameworks and
controls
Financial – understanding of financial statements and reporting, key drivers of financial performance,
corporate finance and internal financial controls
Leadership – experience in a senior management position in a listed company, large or complex
organisation or government body, including experience in leading strategy execution and operational
performance improvement
People and culture – experience in overseeing workplace culture, people management, development and
succession planning, setting remuneration frameworks and promoting diversity and inclusion
Consumer products – experience as a senior executive in, or as a professional advisor to, consumer
products (including dairy and/or nutritional) businesses, including sales and marketing and supply chain
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
Digital, data and technology – experience and expertise identifying, assessing, implementing and
leveraging digital technologies and other innovations, including in digital marketing and commerce,
understanding the use of data and analytics and responding to digital disruption
International markets – experience as a senior executive in, or as a professional advisor to, international
businesses and exposure to global markets and a range of different political, regulatory and business
environments
No. of Directors (total of 6)
Level of capability
High
Medium
2
1
4
2
2
4
1
4
1
1
2
2
2
2
3
2
2
4
1
1
1
4
The Board skills matrix identifies the predominant skills of each Director. The Board has specifically limited each Director to having a
maximum of four areas identified as 'high capability' and four areas identified as 'medium capability'.
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 2022 was as follows:
Committee
Members
Independent
Non-executive
Audit and Risk Management Committee
Julia Hoare (Chair)
Warwick Every-Burns
Sandra Yu (appointed 1 March 2022)
Bessie Lee (retired 28 February 2022)
People and Remuneration Committee
Warwick Every-Burns (Chair)
Pip Greenwood
Sandra Yu (appointed 1 March 2022)
Bessie Lee (retired 28 February 2022)
Nomination Committee
Pip Greenwood (Chair)
Julia Hoare
David Hearn
Attendance at Board and Committee meetings
Director attendance at Board and Committee meetings during FY22 is set out below.
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
David Hearn1 (Chair)
Julia Hoare (Deputy Chair)
David Bortolussi
(Managing Director and
CEO)
Pip Greenwood
Warwick Every-Burns
Sandra Yu2
Bessie Lee3
Meetings
of the Board
Audit and Risk
Management Committee4
Remuneration
Committee
Nomination
Committee
Held
Attended
Held
Attended
Held Attended
Held Attended
12
12
12
12
12
2
10
12
12
12
12
12
2
10
–
6
–
–
6
1
5
–
6
–
–
6
1
5
–
–
–
2
2
1
1
–
–
–
2
2
1
1
6
6
–
6
–
–
–
6
6
–
6
–
–
–
Held: meetings held during the period for which the person was a director or Committee member
1 David Hearn: independent director from 21 February 2022.
2 Sandra Yu: appointed 1 March 2022
3 Bessie Lee: retired 28 February 2022
4
In addition to the formal Audit and Risk Management Committee meetings, the Committee also had 3 workshops to prepare for formal meetings and discuss
any issues as they arose
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/corporate-governance:
— Securities Trading Policy;
— Shareholder Communications Policy;
— Global Whistleblower Policy;
— Global Anti-Bribery and Anti-Corruption Policy; and
— Responsible Sourcing Policy.
— Code of Ethics;
— Continuous Disclosure Policy;
— Diversity Policy;
— Risk Management Policy. Refer to the discussion of this policy
commencing on page 24;
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.
54
55
THE a2 MILK COMPANY ANNUAL REPORT 2022
CORPORATE GOVERNANCE
DIRECTORS
David Hearn
Julia Hoare
David Bortolussi
Warwick Every-Burns
Pip Greenwood
Sandra Yu
Chair and Independent,
Non-Executive Director
Master of Arts
Deputy Chair and Independent,
Non-Executive Director
Bachelor of Commerce, FCA, Chartered
Member of the Institute
of Directors (NZ)
Managing Director and CEO
Bachelor of Commerce
(University of Melbourne), FCA, F FIN,
Member of the Australian Institute of
Company Directors (MAICD)
Independent,
Non-Executive Director
Advanced Management Program (Harvard)
Independent,
Non-Executive Director
Bachelor of Laws
(LL.B.), University of Canterbury (NZ)
Independent,
Non-Executive Director
Master – Marketing, International Business
Management (National Taiwan University)
Advanced Management Program
(Harvard Business School)
Director since February 2014
Director since November 2013
Director since February 2021
Director since August 2016
Director since July 2019
Director since March 2022
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 SafeStore
Holdings PLC, Lovat Partners Limited
and Committed Capital Limited.
David resides in the United Kingdom.
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.
In addition to her Company directorship,
Julia is the chair of Port of Tauranga
Limited, and a director of Auckland
International Airport Limited and Meridian
Energy Limited. She is also the President
and chair of the New Zealand Institute of
Directors and a member of the Chapter
Zero New Zealand Steering 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 was
a member of the New Zealand External
Reporting Advisory Panel from 2013
to 2021.
Julia resides in New Zealand.
David joined the Company in February
2021 from his most recent role as Group
President – International Innerwear,
HanesBrands. He joined Pacific Brands
in 2009 initially as Chief Financial and
Operating Officer taking over as CEO
of the public company in 2014. In 2016,
HanesBrands acquired Pacific Brands and
expanded David’s role to cover Australasia
and subsequently its international
innerwear operations outside of the
Americas.
Prior to this David spent five years at
Foster’s Group, where he held the role
of Chief Strategy Officer responsible
for corporate strategy, M&A, business
development and performance
improvement. Prior to Foster’s Group,
David held senior consulting roles at
McKinsey & Company and PwC.
David’s career has largely been focused
on the Consumer and Retail sector in
Australia and New Zealand complemented
by significant international experience in
various markets and categories in China,
SE Asia, EU and the USA.
David resides in Australia.
Warwick has been a director of the
Company since 23 August 2016. He is also
Chair of the People and 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 resides in Australia.
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 People and Remuneration
Committee.
Sandra Yu has been a Director of the
Company since 1 March 2022. Sandra sits
on both the Audit and Risk Management
and the People and Remuneration
committees.
Currently Pip is also a director on the
boards of Westpac New Zealand,
Spark New Zealand, Fisher & Paykel
Healthcare and Vulcan Steel. 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, 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.
Sandra is an experienced global executive
in consumer goods industries, and
importantly in the infant milk formula
(IMF) market in China, with a proven
track record of driving business and brand
transformation, leveraging opportunities
for growth, and building organisational
capabilities across China as well as the USA
and other parts of Asia.
As the former head of Mead Johnson
Nutrition’s Greater China business,
Sandra was a member of the Mead
Johnson Nutrition’s Global leadership
team. Prior to that, Sandra held various
other senior executive roles at Mead
Johnson Nutrition, including as the Global
Marketing Vice President, responsible
for transition to new digital media and
e-commerce channels globally.
Sandra was also appointed as the non-
executive chairwoman to lead RB China's
advisory board after the merger between
Reckitt Benckiser and Mead Johnson
Nutrition in 2017.
Prior to joining Mead Johnson, Sandra
held executive positions at Unilever,
where she worked across Asia for
thirteen years.
Sandra resides in Greater China.
56
57
THE a2 MILK COMPANY ANNUAL REPORT 2022 CORPORATE GOVERNANCE
OUR EXECUTIVE
LEADERSHIP TEAM
David Bortolussi
Managing Director and CEO
Bachelor of Commerce (University
of Melbourne), FCA, F FIN, MAICD
Refer to page 56 for biography
Mark Sherwin
Chief Financial Officer (Interim)
Bachelor of Business – Finance and
Accounting (University of Technology,
Sydney), CA, DipInvRel
Mark Sherwin assumed the position of
Interim Chief Financial Officer in May 2022.
He is responsible for finance, investor
relations, risk and IT across the Group.
Mark has been with the Company since
2015 in a range of Group Finance roles
and brings 17 years’ experience across
finance, tax, investor relations, FP&A
and risk management. During this time,
Mark also spent 3 years leading the
Group's Investor Relations function.
Prior to joining a2MC, Mark
gained experience with Deloitte,
Shell plc and UGL Limited.
Jaron McVicar
Chief Legal and Sustainability
Officer and Company Secretary
Bachelor of Laws (University of Otago)
Jaron joined the Group in November
2016, having already provided legal
advice to the Group over a number
of years in his previous role with a
leading New Zealand law firm.
Jaron is responsible for the Group’s
legal function and in his role as
Company Secretary works closely
with the Board on governance.
Jaron’s role also includes leading our
important sustainability programme.
Prior to joining the Group, Jaron
worked in private practice for 15 years
as a corporate and commercial lawyer,
including seven years working in London.
Jaron is a qualified solicitor in New
Zealand and England and Wales.
Shareef Khan
Chief Operations Officer
Bachelor of Science, CSCP, APICS
Shareef joined the Group in June 2012
and is responsible for all operations
including farm services, planning,
supply chain, quality and regulatory
and product development across the
Group in each of our geographies.
This spans from farmers through to
distribution to our customers and includes
management of key strategic partnerships.
Shareef has over 18 years’ senior
management experience in the dairy
and infant nutrition category. He is a
qualified supply chain professional and has
experience across a number of industries.
Edith Bailey
Chief Marketing Officer
Bachelor of Business, Marketing and
Management – University of Technology
Sydney.
Edith joined the Company in December
2021 and is responsible for managing
the strategic and creative direction of
the a2™ brand, overseeing science
and nutrition functions, developing
integrated marketing programmes
and leading product innovation.
Edith was previously Consumer Marketing
Director, ANZ, with Danone Nutricia’s
Specialised Nutrition division, having spent
the past 14 years with the organisation
in several senior marketing, channel and
category development positions. Edith
has significant experience in the infant
nutrition category across China, New
Zealand, Australia and South East Asia.
Before her time at Danone, Edith held
senior marketing roles with Pepsico,
Campbell Arnotts and S.C. Johnson & Son.
Eleanor Khor
Chief Strategy Officer
Bachelor of Commerce / Bachelor of
Laws (Hons), University of Melbourne
Eleanor joined the Company in
August 2018, bringing a diverse
range of experience, including her
time as a corporate and M&A lawyer
at Allen Linklaters, a management
consultant at Bain & Co, and working
in private equity with a focus on
consumer goods businesses.
As Chief Strategy Officer, Eleanor is
responsible for developing corporate
and business strategy and the
execution of key growth, performance
improvement and potential M&A,
joint venture and alliance initiatives.
Since joining a2MC, Eleanor has
spent significant time working across
China and the Asia Pacific regions.
Amanda Hart
Chief People and Culture Officer
Bachelor of Business Administration –
University of South Australia
Amanda joined the Company in September
2021 and is responsible for driving the
people strategy and executing integrated
programmes focused on continuing
to improve the Company’s capability
building, leadership development,
employee engagement, diversity and
inclusion, and pioneering culture.
Amanda was previously Head of Human
Resources (Australia and New Zealand),
with Dyson Appliances, having spent
the past four years with the organisation
as a senior human resources leader
across several Asia Pacific markets with
a focus on leadership development
and organisational change.
Prior to her time at Dyson Appliances,
Amanda held senior human resources
roles with Cotton On Clothing Group and
Global Radio whilst based in England.
Yohan brings capability in strategy,
marketing, sales and e-commerce, and
experience in infant milk nutrition and
adjacent categories in China. Yohan joined
the Company from his most recent role as
Sales and Marketing Director at Bellamy’s
Organic. Yohan has also held multiple
positions at Mondelez International,
including Head of e-commerce for
Australia, New Zealand and Japan. Prior to
this, Yohan worked at ANZ Bank, focusing
on retail banking digital transformation
and with strategy consultancy LEK.
Bernard May
CEO – Mataura Valley Milk
Certificate in Company Direction
(NZ Institute of Directors), Certificate in
Food Technology (Auckland Institute of
Technology), Certificate of Quality
Assurance (New Zealand Quality
Assurance Authority)
Bernard joined The a2 Milk Company
when it acquired 75% share of
Mataura Valley Milk in July 2021.
Bernard is responsible for leading
Mataura Valley Milk, one of the
most technically advanced nutritional
manufacturing sites globally. Mataura
Valley Milk produces nutritional products
for international brands that value
quality, reliability and expertise.
As a skilled leader with 35 years of
experience in the food and beverage
industry, Bernard has a comprehensive
knowledge of operations management,
commercial leadership, product
development and people development
including in his management roles for
both Lion and Westland Milk Products.
Xiao Li
Chief Executive – Greater China
Kevin Bush
Executive General Manager – ANZ
Bachelor of Arts in Business Admin,
English (Heilongjiang University), Master,
EMBA (China Europe International
Business School)
Member of the Australian Institute of
Company Directors (MAICD), B. Comm
Marketing (Monash University), Graduate
Cert Data Analytics (UNSW)
Xiao Li joined the Group in April 2019
and is responsible for maximising the
significant opportunities that the Greater
China market presents for the Company,
executing against our strategy and putting
the right capabilities in place to deliver
to these future growth opportunities.
Xiao Li has substantial experience building
successful businesses in China across a
diverse range of multinational and local
fast growth consumer driven companies
including Shell Company, Mars, Unilever,
Nike, GM of Pousheng (HK listed sport
retail), Burger King China (CEO) and in his
previous position as President of Wanda
Kids Group and SVP of Wanda Group.
Blake Waltrip
Chief Executive – USA
BA Economics (University of California at
San Diego), Masters of Business
Administration (Anderson Graduate
School of Management, UCLA)
Blake joined the Group in May 2016,
assuming the role of Chief Executive
of the USA region. Blake is responsible
for leading our Northern American
liquid milk business as well as managing
our supply chain partnerships and
performance for this region.
Blake has a strong marketing, sales and
general management skill set. Blake
was previously the CEO of Quinoa
Corporation Inc, (The Ancient Harvest
Brand) based in Boulder, Colorado.
His previous roles have included VP
and CMO of the beverage division of
the Hain Celestial Group, Managing
Partner of a marketing services and
strategy group, Growth Ventures,
President Americas of Lowe Alpine, and
an earlier extensive marketing career
with Nestlé USA beverage brands.
Kevin was appointed to the role of
Executive General Manager – ANZ
in July 2021. Kevin is responsible
for leading the Company’s business
in Australia and New Zealand.
Kevin previously held the role of Sales
Director – ANZ from July 2016 and was
pivotal in growing the a2 Milk™ liquid milk
brand and driving increased market share.
He has also overseen the successful
establishment of the a2 Platinum®
brand in the South Korean market and
various other business development
initiatives across the Group.
Kevin is a highly experienced sales and
marketing professional with extensive
FMCG experience across Australian and
UK markets and has held senior positions
with leading consumer goods companies
including Mars, Nestlé and McCain Foods.
Yohan Senaratne
Executive General Manager
– International
Master (Business Administration) –
Kellogg School of Management,
Northwestern University, Bachelor
Commerce, Bachelor Business Systems –
Monash University, Member of the
Australian Institute of Company Directors
(MAICD)
Yohan is responsible for leading the
Company’s cross-border export business,
primarily focused on English label IMF
products manufactured in New Zealand
and sold into China, including liquid
milk and other nutritional products.
Yohan is responsible for managing
products sold through all channels,
principally via the daigou/reseller/O2O
and cross-border e-commerce (CBEC)
channels. The International team is also
responsible for developing the Company’s
business in emerging markets.
58
59
THE a2 MILK COMPANY ANNUAL REPORT 2022 CORPORATE GOVERNANCE
REMUNERATION
The Company’s success depends on the quality and contribution of
its people, with their talents enabling us to realise our enduring
purpose and vision, and achieve our short and long-term ambition
and strategic objectives. The Company’s remuneration philosophy
for all employees and executives aims to:
Remuneration packages for senior leaders are structured so that a
significant portion of remuneration is at risk but can be earned by
the achievement of superior performance. The LTI plan is designed
to drive sustained performance over time and to both attract and
retain the best possible talent.
— link rewards to the creation of sustainable value for
shareholders, whilst avoiding inappropriate risk;
— attract, motivate and retain talented employees and executives;
— initiate and execute the Company’s strategy and
business plans as endorsed by the Board;
— incentivise, recognise and reward the delivery
of outstanding 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 and fair in a broad market.
REMUNERATION POLICIES
AND PRACTICES
The People and Remuneration Committee advises the Board on
the policies and practices of the Company regarding the
remuneration of directors, the executive leadership team
(reporting directly to the CEO) (ELT) and other senior leaders of the
Group and reviews all components of the Group’s remuneration
practices relevant to its employees. The People and Remuneration
Committee Charter sets out the objectives, responsibilities and
authority of the People and 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, ELT and other senior
leaders 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 People and Remuneration
Committee reviews the remuneration packages of the CEO, ELT
and other senior leaders at least annually and as an aggregate, all
other employees at least annually.
All employees have a fixed remuneration package. Selected
employees also have variable remuneration in the form of a
short-term incentive (STI) as part of their remuneration package.
Certain selected senior executives may also have long-term
incentives (LTI) as part of their remuneration package.
In FY22, eligible employees, not participating in the LTI plan, were
entitled to participate in the Company’s Gift Plan, under which
they receive shares in the Company worth up to A$1,000, at no
cost to the employee. This plan is designed to give participating
employees an ownership interest in the Company.
An appropriate remuneration mix is determined for each
position, taking into consideration the employee’s role
and level of responsibility.
MANAGING EXECUTIVE
PERFORMANCE
Robust processes are in place for supporting and evaluating the
performance of the CEO, ELT and other senior leaders.
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 budgeting
and forecasting process. The CEO is accountable to the Board for
the delivery of the agreed targets and objectives.
The objectives agreed between the Board and the CEO are
discussed and cascaded to each member of the ELT and captured
in individual performance plans. The CEO uses the performance
plans to facilitate individual conversations with each member of
the ELT. The performance discussions are documented and form
the basis of the annual performance review that each executive
undertakes with the CEO at the end of the performance period.
The outcome of the executive’s performance over the course of
the year is one factor taken into account when any changes to
fixed remuneration or any award of variable remuneration and
incentives are considered.
During FY22, each member of the ELT who was an employee for
the duration of the reporting period had at least one performance
discussion documented.
REMUNERATION FRAMEWORK
The remuneration framework is designed to deliver high
performance with substantial components at-risk, with the aim
of more closely aligning remuneration with the Company’s
values, objectives and risk tolerances as set out below.
FIXED REMUNERATION
Employees’ fixed remuneration is based on a matrix of an
individual’s skills and experience relevant to the role, their
individual performance and their current level of remuneration
relative to market remuneration benchmarks. 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 benchmarks.
VARIABLE REMUNERATION
The STI and LTI programmes provide the potential for participating employees to receive payment over and above fixed remuneration.
These programmes are discretionary, appropriate to the results delivered by the Group and employee performance and based on the
principle of reward for performance. A significant portion of senior executive remuneration is at risk.
The following table illustrates the relative percentages of fixed remuneration and at risk STI and LTI for FY22.
CEO
Fixed
27%
STI (at target)
LTI (face value)
32%
41%
Executive Leadership Team (not including the CEO)
30%-45%
24%-29%
27%-45%
Short-Term Incentive (STI) plan
The purpose of the STI plan is to build a results-focused culture, incentivising delivery of the Group’s short-term targets and objectives
and rewarding team and individual performance. STI values and performance targets are approved by the People and Remuneration
Committee and Board each financial year.
Payments are made under the STI plan in the form of a cash bonus.
The FY22 STI plan provides that the amount of any cash bonus payable to a participating employee will be determined by reference to:
— the amount of the employee’s target incentive, as referenced against their fixed annual remuneration;
— the Group’s performance against the FY22 Group Performance Scorecard (comprising both financial and non-financial targets)
including implementation of the Group’s refreshed growth strategy, as set out below; and
— the employee’s performance against personal objectives for the performance period reflected in an individual performance multiplier.
The FY22 Group Performance Scorecard includes financial measures with a weighting of 60% and non-financial measures with a
weighting of 40%, as set out in the table below.
For each objective there are threshold, target (as shown in the table below) and maximum metrics to assess the Group’s performance
against and the outcomes as determined independently by the Board (excluding the CEO).
FY22 Group Performance Scorecard
FY22 Group Objectives
Financial Measures
Non-Financial Measures
People
Sustainability
Market access
Brand health
Market share
Inventory
Total at target
Metric
Net sales revenue
EBITDA
Safety performance, awareness and leadership;
employee engagement; and constructive leadership
programme implementation
Development of sustainability targets across six capitals
framework and implementation progress
China label new GB formulation registration progress
Brand health targets across Australian milk trial; China unprompted
brand awareness; and USA household penetration (with most
weight placed on China outcomes)
Market share targets across China label IMF (offline and online);
English label IMF; Australian fresh milk and USA liquid milk
Inventory months cover for Group and across multiple channels to
market and at relevant points of distribution
Weighting
at target
60%
40%
5%
5%
10%
5%
5%
10%
100%
The FY22 STI plan provided threshold to maximum potential metrics for the Group Performance Scorecard with outcomes ranging from
0% to 130%, with target at 100%. The outcome of the FY22 Group Performance Scorecard determined by the Board for all Executive
Leadership Team members (including the CEO) was 95% reflecting that an outcome of 55% (of 60%) was achieved against financial
measures (with FY22 net sales revenue being above target, and with FY22 EBITDA being marginally below target) and an outcome of
40% (of 40%) was achieved against non-financial measures with the various components overall being at target.
60
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THE a2 MILK COMPANY ANNUAL REPORT 2022 CORPORATE GOVERNANCE
REMUNERATION (CONTINUED)
Long-Term Incentive (LTI) plan
Participation in the LTI plan is by invitation only, at the sole and absolute discretion of the Board. The LTI plan is designed to reward
performance in support of the achievement of the Company’s refreshed growth strategy: targeting profitable, long-term revenue growth,
which requires appropriate investment.
The Company grants performance rights (Awards) to eligible participants under the plan, governed by specific terms and conditions. Each
Award granted represents a right to receive one fully paid share in the Company (or cash equivalent, at the election of 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, with the number of Awards to an eligible participant set by reference to a fixed percentage of
that participant’s fixed annual remuneration. No dividends are paid on performance rights. The Board may forfeit performance rights for
fraud, dishonesty or wilful breach of duties.
Performance rights granted in FY22
During the year the Board authorised the issue of 4,355,314 performance rights to the CEO, ELT and senior leaders under the LTI plan in
respect of FY21 (the issue of which was temporarily deferred) and FY22.
The deferral of the issue of performance rights under the LTI programme in FY21 meant that performance rights were issued in the period
in two tranches, with differing performance periods and performance hurdles as set out below.
The performance rights vest subject to:
— Continuing employment; and
— Achieving certain EPS CAGR (compound annual growth in diluted earnings per share) and minimum Revenue
CAGR (compound annual growth in sales) performance hurdles over the performance periods:
Performance rights grants:
Performance period
EPS CAGR hurdle
Revenue CAGR hurdles
Tranche 1 (FY21 plan)
1,955,113 rights
2 years to 30 June 2023
Tranche 2 (FY22 plan)
2,400,201 rights
3 years to 30 June 2024
20%
20%
7.5%
10%
12.5%
6%
8%
10%
50% vest
85% vest
100% vest
Both the minimum EPS CAGR and minimum Revenue CAGR must be achieved for any vesting of performance rights. The minimum
vesting proportion is 50%; thereafter, vesting is on a straight-line basis between each vesting hurdle.
EPS CAGR and Revenue CAGR are derived from the annual report of the Company for the relevant financial years and are subject to
adjustment to remove the impact of material items as the Board may determine, including, without limitation, adjustments made to
exclude the impact of unusual or one-off items, discontinued operations, acquisitions and disposals and capital management.
It is currently intended that, subject to compliance with relevant laws, the Company will satisfy its obligation to allocate ordinary shares
upon the vesting of performance rights by instructing the trustee of the a2MC Group Employee Share Trust to purchase shares on market.
Further details on the current LTI plan and previous plans can be found at Note F2 to the financial statements.
Minimum Shareholding Requirement
Executive Leadership Team
A Minimum Shareholding Requirement (MSR) Policy applies to all members of the ELT. From time-to-time additional employees may
be identified to whom the MSR Policy will apply.
The purpose of the MSR Policy is to strengthen the alignment between the interests of the ELT and the interests of shareholders and
encourage a focus on building long-term shareholder value.
Each member of the ELT is required to acquire and hold a minimum shareholding equivalent to 100% of their fixed annual
remuneration comprising base salary and compulsory employer superannuation contributions (or equivalent) before any tax or
social security deductions.
ELT members are expected to achieve the MSR by the end of five annual vesting periods for LTI grants. All executives are currently
expected to achieve the MSR within the timeframe required by the policy.
Directors’ remuneration
Non-executive directors’ remuneration is paid in the form of director’s fees and is structured to reflect the respective responsibilities and
workloads of their Board and Committee positions.
The annual aggregate non-executive directors’ remuneration pool, approved by shareholders at the Company’s Annual Meeting of
Shareholders held on 20 November 2018, is capped at $1,365,000.
Directors’ fees structure
Base board fees:
Chair of the Board (refer below)
Deputy Chair
Non-executive director
Audit and Risk Management Committee:
Chair
Committee member
People and Remuneration Committee:
Chair
Committee member
Nomination Committee:
Chair
Committee member
$ annual
265,000*
210,000
165,000
35,000
16,500
35,000
16,500
22,000
11,000
*
The Chair's annual base fee was increased to $265,000 with effect from 21 February 2022, being the date on which it was confirmed that the Board had
determined that David Hearn was an independent director of the Company.
Remuneration and the value of other benefits paid to non-executive directors of the Company for the year ended 30 June 2022 was as
follows:
David Hearn (Chair)
Julia Hoare (Deputy Chair)
Pip Greenwood
Warwick Every-Burns
Bessie Lee1
Sandra Yu2
Total
Board fees
Committee fees
Audit and Risk
Management
$
–
35,000
–
16,500
11,000
5,500
68,000
People and
Remuneration
$
–
–
16,500
35,000
11,000
5,500
68,000
$
200,0003
210,000
165,000
165,000
110,000
55,000
905,000
Total
remuneration
$
200,000
256,000
203,500
216,500
132,000
66,000
1,074,000
Nomination
$
–
11,000
22,000
–
–
–
33,000
1 Bessie Lee: retired on 28 February 2022
2 Sandra Yu: appointed 1 March 2022
3 Reflects that the Chair's base fee increased from $165,000 to $265,000 effective 21 February 2022
No director of a subsidiary company was remunerated in their capacity as a director.
62
63
THE a2 MILK COMPANY ANNUAL REPORT 2022 CORPORATE GOVERNANCE
REMUNERATION (CONTINUED)
Remuneration of CEO – David Bortolussi
David commenced his appointment as Managing Director and CEO
on 8 February 2021. Details of his remuneration arrangements are
set out below:
Remuneration paid in FY22
The remuneration paid to David Bortolussi in the financial year was
as follows:
Term
There is no fixed term, David’s employment is ongoing
until terminated by either David or the Company.
Total Fixed Remuneration
A$1,795,082 per annum (inclusive of superannuation),
to be reviewed annually.
Fixed remuneration
STI paid
Transition benefits1
Allowance
2022
A$
1,795,082
630,000
2021*
A$
693,160
–
–
1,270,000
226,416
94,340
STI
On an annual basis, David participates in the Company’s STI plan.
For FY22, his STI incentive at target is 120% of his Total Fixed
Remuneration subject to the achievement of the Group
Performance Scorecard and individual performance objectives
both determined by the Board (excluding David). In FY22, the
Group Performance Scorecard outcome range is from 0% to
130% and David’s individual performance multiplier range is from
0% to 130% which is consistent with the prior year. Accordingly,
David’s STI payment in FY22 is determined by multiplying his Total
Fixed Remuneration by 120% multiplied by the Group
Performance Scorecard outcome multiplied by the individual
performance multiplier.
Total remuneration received
2,651,498
2,057,500
* From 8 February 2021 to 30 June 2021
1
Refer to FY21 Annual Report for details of transition benefits received by
David on a one-off basis in FY21.
As noted above, for FY22, David is entitled to receive an STI
payment at target of 120% of his Total Fixed Remuneration
modified for group and individual performance. The Board has
determined that the Group Performance Scorecard outcome is
95% and David’s individual performance multiplier is 110%. As a
result, a payment in the amount of A$2,251,031 is to be made to
David under the FY22 STI plan representing 105% of his
entitlement at target.
LTI
On an annual basis David will be invited to take up performance
rights under the Company’s LTI plan. To date, performance rights
issued to David have been issued on the basis that they may only
be satisfied on exercise with shares purchased on market.
LTI – granted in FY22
In October 2021, the following performance rights, totalling
969,483 rights, were granted to David under the Company’s
LTI Plan:
— Tranche 1 (FY21 plan) 478,577 performance rights vesting
Relocation allowance
An allowance of A$10,000 per month (net of tax) was paid
to assist David during FY22 to assist with the cost of David’s
accommodation in Sydney and travel between Melbourne
and Sydney.
Notice period
Generally, resignation by David requires six months’ notice and
termination (other than for cause) by the Company requires twelve
months’ notice.
Leave
Five weeks per annum paid annual leave.
Other terms
The agreement also includes standard terms covering
expense reimbursement, conflicts of interest, confidentiality,
intellectual property and moral rights, clawbacks and restraints
upon termination (which address non-competition, as well as
non-solicitation of employees, customers and suppliers).
August 2023; and
— Tranche 2 (FY22 plan) 490,906 performance rights vesting
August 2024.
Time-based rights – transition benefits
In FY21, David was granted 311,283 time-based rights as a
transition benefit, being partial compensation for vested and
unvested entitlements that he forfeited on resigning from his
previous employment.
Of these time-based rights, 155,642 vested on 21 February 2022,
when the share price was NZ$6.31; and the remaining 155,641
rights are scheduled to vest in February 2023.
Other than to meet any tax obligations, no shares held by David
can be sold until he holds sufficient shares to meet the Company’s
minimum shareholding requirement under the MSR Policy.
64
FINANCIAL
STATEMENTS
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
66
67
72
73
75
76
77
65
DIRECTORS’ APPROVAL OF THE
FINANCIAL STATEMENTS FOR
THE YEAR ENDED 30 JUNE 2022
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 2022.
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 2022 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 E1 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.
David Hearn
Chair
28 August 2022
David Bortolussi
Managing Director and CEO
INDEPENDENT AUDITOR’S REPORT
FOR THE YEAR ENDED 30 JUNE 2022
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
Report on the audit of the financial statements
Opinion
We have audited the financial statements of The a2 Milk Company Limited (the “Company”) and its
subsidiaries (together “the Group”) on pages 72 to 117, which comprise the consolidated statement
of financial position of the Group as at 30 June 2022, 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 72 to 117 present fairly, in all material
respects, the consolidated financial position of the Group as at 30 June 2022 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 International
Code of Ethics for Assurance Practitioners (including International Independence Standards) (New
Zealand) 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.
A member firm of Ernst & Young Global Limited
Liability limited by a scheme approved under Professional Standards Legislation
66
67
THE a2 MILK COMPANY ANNUAL REPORT 2022 FINANCIAL STATEMENTS
INDEPENDENT AUDITOR’S REPORT
FOR THE YEAR ENDED 30 JUNE 2022
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.
Customer rebates and promotional allowances
Why significant
Revenue and associated trade receivables are
recognised net of 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
variable rebates and the expected level of rebate
claims by the customers.
This was considered a key audit matter given the
value of 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 and promotional allowances are included in
note B2 to the financial statements.
How our audit addressed the key audit matter
Our audit procedures included the following:
Considered the appropriateness of the
Group’s revenue recognition accounting
policies as they relate to rebates and
promotional allowances.
Understood the Group’s processes and
controls over the recording of rebates and
promotional allowances.
Selected a sample of customer contracts,
determined whether variable 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 variable 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
rebates and promotional allowances and
inquired as to the likelihood of aged balances
being settled.
Considered the adequacy of the associated
disclosures in the financial statements.
Valuation of inventory
Why significant
How our audit addressed the key audit matter
As at 30 June 2022 , the Group held $140.0 m (FY21:
$112.2m) of inventories.
Our audit procedures assessed the valuation of
inventories and the related financial statement
disclosures. These procedures included the following:
As detailed in note C2 of the financial report,
inventories are valued at the lower of cost and net
realisable value. Significant judgement is involved in
estimating the net realisable value of inventory across
a range of product types with limited shelf life sold
through a number of sales channels.
In addition, complexities associated with COVID-19
and the geopolitical environment continue to impact
international trade, supply chain efficiency, consumer
preferences and inflation, leading to increased
uncertainly in forming these estimates.
We considered this a key audit matter due to the size
of the inventory balance and the complexity in
estimating the valuation of inventory.
Assessed the application of inventory costing
methodologies and tested the recorded cost
of a sample of inventory items to supplier
invoice or other relevant documentation.
Assessed the effectiveness of relevant
controls to identify inventory that is no
longer considered saleable.
Attended stocktakes at a selection of
locations to validate the existence and expiry
dates of inventory on a sample basis.
Attended the destruction of stock at a
sample of locations to validate the accuracy
of prior year inventory written off and
associated costs of disposal.
Tested the year-end inventory ageing
forecast model prepared by the Group which
is used in calculating the net realisable value
of inventory. Our procedures included
validating model inputs, including expiry
dates, and assessing the sales volume and
pricing used based on historical evidence,
seasonal trends and enquiry with
management.
Considered the adequacy of the associated
disclosures in the financial statements.
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
68
69
THE a2 MILK COMPANY ANNUAL REPORT 2022 FINANCIAL STATEMENTS
INDEPENDENT AUDITOR’S REPORT
FOR THE YEAR ENDED 30 JUNE 2022
Acquisition of Mataura Valley Milk Limited
Why significant
On 30 July 2021, the Group completed the
acquisition of 75% of Mataura Valley Milk Limited
(“MVM”) for $161.8m and concurrently entered into
a shareholder loan with MVM for $106.7m, resulting
in a cash outflow of $268.5m.
As detailed in note E2 of the financial statements, the
Group’s share of identifiable net assets acquired was
assessed as $67.7m. Goodwill on acquisition
amounted to $94.1m. This goodwill was allocated to
existing cash generating units of the Group.
Acquisition accounting, including determining the
value of purchase consideration, identifying and
estimating the fair value of identifiable net assets and
the allocation of goodwill on acquisition to cash
generating units (“CGUs”) requires significant
judgement and estimation. The Group engaged
specialists to determine the fair value of property,
plant and equipment.
We considered this a key audit matter due to the size
and complexity of the acquisition and its resulting
impact on the Group’s financial position.
How our audit addressed the key audit matter
Our audit procedures included the following:
Inspected the acquisition contracts and
settlement support to assess the nature and
timing of the business acquisition in
accordance with NZ IFRS 3.
Evaluated the fair value of purchase
consideration based on the contract terms,
settlement adjustments and disbursements.
Assessed the reasonableness of the Group’s
assessment of the identifiable assets and
liabilities included in the acquisition and the
fair value of those assets and liabilities.
Involved our in-house valuation specialists in
evaluating the fair value of property, plant
and equipment.
Assessed the competence, qualifications and
objectivity of the Group’s valuation
specialists.
Recalculated the goodwill on acquisition and
assessed the Group’s allocation of goodwill
to its identified CGUs.
Assessed the adequacy of the associated
disclosures in the financial statements.
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.
Directors’ responsibilities for the financial statements
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/ . We also provide the directors with a statement
that we have complied with relevant ethical requirements regarding independence, and to
communicate with them all relationships and other matters that may reasonably be thought to bear on
our independence, and where applicable, actions taken to eliminate threats or safeguards applied.
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
28 August 2022
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
70
71
THE a2 MILK COMPANY ANNUAL REPORT 2022 FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30 JUNE 2022
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 30 JUNE 2022
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 for the year
Profit for the year attributable to:
Owners of the Company
Non-controlling interests
Other comprehensive income
Items that may be reclassified to profit or loss:
Foreign currency translation profit
Cash flow hedges
Items not to be reclassified to profit or loss:
Listed investment fair value loss
Total other comprehensive loss
Total other comprehensive loss attributable to:
Owners of the Company
Non-controlling interests
Total comprehensive income/(loss)
Total comprehensive income/(loss) attributable to:
Owners of the Company
Non-controlling interests
Earnings per share
Basic and Diluted (cents per share)
The accompanying notes form part of these financial statements.
Notes
B1
B1
B4
B6
C7
2022
$’000
2021
$’000
1,443,740
1,205,034
(780,222)
663,518
2,489
(48,854)
(105,200)
(230,019)
(104,525)
177,409
6,569
(2,591)
3,978
181,387
(66,646)
114,741
122,624
(7,883)
114,741
11,073
(14,113)
(22,543)
(25,583)
(24,471)
(1,112)
(25,583)
(695,321)
509,713
1,700
(45,175)
(87,020)
(168,710)
(94,462)
116,046
3,989
(770)
3,219
119,265
(38,607)
80,658
80,658
–
80,658
1,073
–
(134,618)
(133,545)
(133,545)
–
(133,545)
89,158
(52,887)
98,153
(8,995)
89,158
(52,887)
–
(52,887)
B5
16.49
10.86
Attributable to owners of the Company
e
v
r
e
s
e
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S
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0
0
0
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$
Year ended
30 June 2022
g
n
i
l
l
o
r
t
n
o
c
–
n
o
N
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t
s
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0
0
0
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$
y
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i
u
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a
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T
0
0
0
’
$
Balance 1 July 2021
(11,405) (130,978) 36,058
(3,773)
–
(110,098) 1,044,937 149,121 1,083,960
– 1,083,960
–
–
–
–
–
– 122,624
–
122,624
(7,883) 114,741
Profit after tax for
the period
Foreign currency
translation differences
– foreign operations
Changes in cash flow
hedges taken to equity
Cash flow hedges
reclassified to profit
or loss
Listed investment –
fair value movement
Total comprehensive
income for the period
Transactions with
owners in their
capacity as owners:
Issue of ordinary shares
Share issue costs
Employee withholding
tax payments
Treasury shares
purchased
Treasury shares
transferred
Share-based payments
Acquisition of subsidiary
Income tax
Total transactions
with owners
10,454
–
–
–
–
–
–
(22,543)
11,073
(22,543)
–
–
–
–
–
–
–
–
(250)
–
–
–
–
–
–
–
–
–
–
(13,306)
(1,189)
1,281
11,609
–
83
–
–
–
–
–
–
–
–
–
–
–
–
10,253
(12,025)
–
10,454
(21,632)
(21,632)
4,872
4,872
–
(22,543)
3,759
4,378
–
–
–
–
–
(13,001)
(24,471) 122,624
–
–
–
–
–
–
10,454
–
10,454
(21,632)
(1,727)
(23,359)
4,872
615
5,487
(22,543)
4,378
–
–
(22,543)
4,378
98,153
(8,995)
89,158
–
–
–
–
–
–
–
–
–
–
–
(250)
(13,306)
92
11,609
–
83
(1,772)
–
–
–
–
–
–
–
–
–
45
(9)
45
(9)
–
(250)
–
(13,306)
–
–
–
–
92
11,609
–
83
–
–
–
–
–
–
45
(9)
(250)
(13,306)
92
11,609
22,578
22,578
–
83
36
(1,736)
22,578
20,842
–
–
–
–
–
–
–
–
–
Income tax
619
–
Balance 30 June 2022
(332)
(153,521)
46,311
(15,798)
(13,001)
(136,341) 1,167,561
149,157 1,180,377
13,583 1,193,960
The accompanying notes form part of these financial statements.
72
73
THE a2 MILK COMPANY ANNUAL REPORT 2022
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 30 JUNE 2022
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 30 JUNE 2022
Foreign
currency
translation
reserve
$’000
Fair value
revaluation
reserve
$’000
Employee
equity
settled
payments
reserve
$’000
Treasury
shares
reserve
$’000
Total
reserves
$’000
Retained
earnings
$’000
Share
capital
$’000
Total
equity
$’000
Year ended 30 June 2021
Balance 1 July 2020
(12,478)
3,640
41,719
(10,031)
22,850
964,279
146,933 1,134,062
Profit after tax for the period
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
Treasury shares retained for
employee withholding tax
payments
Treasury shares transferred
Share-based payments
Income tax
Total transactions with owners
–
1,117
–
–
–
(134,618)
(44)
–
1,073
(134,618)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(6,574)
1,835
(922)
–
–
–
–
–
–
–
(316)
6,574
–
–
(5,661)
6,258
–
80,658
1,117
(134,618)
(44)
–
–
–
(133,545)
80,658
–
–
–
–
–
80,658
1,117
(134,618)
(44)
(52,887)
–
–
(316)
–
1,835
(922)
597
–
–
–
–
–
–
–
2,207
2,207
(19)
(19)
–
–
–
–
2,188
(316)
–
1,835
(922)
2,785
Balance 30 June 2021
(11,405)
(130,978)
36,058
(3,773)
(110,098) 1,044,937
149,121 1,083,960
The accompanying notes form part of these financial statements.
Assets
Current assets
Cash and term deposits
Trade and other receivables
Prepayments
Inventories
Income tax receivable
Total current assets
Non-current assets
Property, plant and equipment
Right-of-use assets
Investment property
Intangible assets
Other financial assets
Prepayments
Deferred tax assets
Total non-current assets
Total assets
Liabilities
Current liabilities
Trade and other payables
Customer contract liabilities
Lease liabilities
Loans and borrowings
Other financial liabilities
Total current liabilities
Non-current liabilities
Trade and other payables
Lease liabilities
Loans and borrowings
Other financial liabilities
Total non-current liabilities
Total liabilities
Net assets
Equity
Share capital
Retained earnings
Reserves
Total equity attributable to owners of the Company
Non-controlling interests
Total equity
The accompanying notes form part of these financial statements.
Notes
2022
$’000
2021
$’000
D3
C1
C2
C4
D7
C5
C6
C7
B6
C3
B2
D7
D8
C8
C3
D7
D8
C8
D5
D6
887,308
83,510
54,537
140,044
5,841
875,150
65,284
27,819
112,204
16,435
1,171,240
1,096,892
240,547
16,030
15,663
109,322
135,260
2,059
25,731
544,612
1,715,852
17,162
15,302
16,614
15,137
157,803
–
53,101
275,119
1,372,011
376,082
266,296
3,171
3,128
40,794
16,999
440,174
416
14,224
66,206
872
81,718
521,892
4,746
3,648
–
–
274,690
511
12,850
–
–
13,361
288,051
1,193,960
1,083,960
149,157
149,121
1,167,561
1,044,937
(136,341)
(110,098)
1,180,377
1,083,960
13,583
–
1,193,960
1,083,960
74
75
THE a2 MILK COMPANY ANNUAL REPORT 2022 FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 30 JUNE 2022
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2022
Cash flows from operating activities
Receipts from customers
Payments to suppliers and employees
Interest received
Interest paid
Taxes paid
Net cash inflow from operating activities
Cash flows from investing activities
Payments for property, plant and equipment
Payments for investment property
Payments for intangible assets
Acquisition of subsidiary
Payment for listed investment
Payments for term deposits
Net cash outflow from investing activities
Cash flows from financing activities
Payments of lease principal
Purchase of treasury shares
Proceeds from issue of equity shares
Proceeds from borrowings
Net cash inflow/(outflow) from financing activities
Net (decrease)/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.
Notes
2022
$’000
2021
$’000
1,431,254
1,251,909
(1,207,386)
(1,067,977)
4,341
(1,383)
(23,026)
203,800
(4,939)
(1,071)
(229)
(213,746)
3,989
(699)
(97,807)
89,415
(5,673)
(17,216)
(1,638)
–
–
(39,841)
(450,000)
(669,985)
(4,089)
(13,306)
36
27,000
9,641
(456,544)
875,150
18,702
437,308
–
(64,368)
(3,230)
–
2,188
–
(1,042)
24,005
854,178
(3,033)
875,150
D4
C4
C5
C6
E2
C7
D3
D7
D6
D5
D2
D3
Contents
A
B
B1
B2
B3
B4
B5
B6
C
C1
C2
C3
C4
C5
C6
C7
C8
D
D1
D2
D3
D4
D5
D6
D7
D8
D9
Basis of preparation
Group performance
Operating segments
Revenue
Expenses
Finance costs
Earnings per share (EPS)
Income taxes
Operating assets and liabilities
Trade and other receivables
Inventories
Trade and other payables
Property, plant and equipment
Investment property
Intangible assets
Other financial assets
Other financial liabilities
Capital and financial risk management
Capital management
Financial risk management
Cash and term deposits
Cash flow information
Share capital
Nature and purpose of reserves
Leases
Loans and borrowings
Capital expenditure commitments
D10 Contingent liabilities
E
E1
E2
E3
F
F1
F2
F3
F4
Group structure
Consolidated entities
Acquisition of subsidiary
Deed of cross guarantee
Other disclosures
Related party transactions
Share-based payments
Auditor’s remuneration
Subsequent events
Page
78
79
79
82
83
83
84
84
87
87
87
88
89
90
92
95
95
96
96
96
103
103
104
104
105
107
108
108
109
109
110
111
113
113
114
117
117
76
77
THE a2 MILK COMPANY ANNUAL REPORT 2022 FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2022
BASIS OF PREPARATION
A. BASIS OF PREPARATION
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 2022 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 New Zealand’s 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 naturally containing
the A2 protein type.
The consolidated financial statements were authorised for issue by
the directors on 28 August 2022.
The consolidated financial statements:
— have been prepared in accordance with Generally Accepted
Accounting Practice in New Zealand;
— comply with the New Zealand Equivalents to International
Financial Reporting Standards (NZ IFRS);
— comply with International Financial Reporting Standards
adopted by the International Accounting Standards Board;
— are 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
— have been prepared in accordance with the historical cost
convention and, except for listed investments and foreign
currency forward contracts, do not take into account changing
money values or fair values of assets.
Certain comparative amounts have been reclassified to conform
with the current period’s presentation.
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
— consistently applied to all periods presented in these
consolidated financial statements.
Accounting policy: Foreign currency
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 B6: Income taxes – Deferred tax balances
— Note C2: Inventories – Estimation of net realisable value
— Note C5: Investment property
— Note C6: Intangible assets – Impairment review of goodwill
and intangibles
— Note C6: Intangible assets – Allocation of goodwill
— Note C8: Other financial liabilities – Fair value measurement
of foreign currency forward contracts
— Note D7: Leases – Determination of lease term
Changes in significant accounting policies
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 2022.
New standards and interpretations not yet adopted
There are no new standards and interpretations that are issued,
but not yet effective as at 30 June 2022, that are expected to
have a material impact on the Group in current or future
reporting periods.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2022
GROUP PERFORMANCE
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 the 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 in the current financial
year it has four reportable operating segments as follows:
— The Australia and New Zealand segment receives external
revenue from milk, infant milk formula and other nutritional
products along with rent, royalty and licence fee income.
— The China and Other Asia segment receives external revenue
from infant milk formula, other nutritional products and milk.
— The USA segment receives external revenue from milk sales and
licence fees.
— The Mataura Valley Milk segment (from acquisition on 30 July
2021) receives external revenue from the manufacturing and
sale of nutritional and commodity products.
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.
78
79
THE a2 MILK COMPANY ANNUAL REPORT 2022 FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2022
GROUP PERFORMANCE
B1. Operating segments (continued)
2022
Consolidated sales
Other revenue
Total external revenue
Inter-segment revenue
Australia and
New Zealand
$’000
China and
Other Asia
$’000
USA
$’000
Mataura
Valley Milk
$’000
Eliminations
$’000
530,508
726,498
82,384
104,350
2,218
–
271
–
532,726
726,498
82,655
104,350
–
–
–
Total
$’000
1,443,740
2,489
1,446,229
–
–
–
4,543
(4,543)
–
Reportable segment revenue
532,726
726,498
82,655
108,893
(4,543)
1,446,229
173,210
145,078
(36,677)
(18,795)
–
Reportable segment results
(Segment EBITDA)
Corporate EBITDA
Group EBITDA
Interest income
Interest expense
Depreciation and amortisation
Income tax expense
Consolidated profit after tax
2021
Consolidated sales
Other revenue
Australia and
New Zealand
$’000
China and
Other Asia
$’000
558,331
583,421
1,389
–
USA
$’000
63,282
311
63,593
Reportable segment revenue
559,720
583,421
Reportable segment results
(Segment EBITDA)
148,849
75,569
(33,540)
Corporate EBITDA
Group EBITDA
Interest income
Interest expense
Depreciation and amortisation
Income tax expense
Consolidated profit after tax
262,816
(66,602)
196,214
6,569
(2,467)
(18,929)
(66,646)
114,741
Total
$’000
1,205,034
1,700
1,206,734
190,878
(67,450)
123,428
3,989
(699)
(7,453)
(38,607)
80,658
B1. Operating segments (continued)
Other segment information
2022
Additions to non-current assets
Depreciation and amortisation
2021
Additions to non-current assets
Depreciation and amortisation
Geographical information
Australia and
New Zealand
$’000
China and
Other Asia
$’000
3,595
5,098
20,364
3,087
88
2,223
47
2,176
USA
$’000
44
505
3,051
489
Mataura
Valley Milk
$’000
2,220
8,420
–
–
Corporate
$’000
3,913
2,683
4,105
1,701
Total
$’000
9,860
18,929
27,567
7,453
Revenue from external customers based on the location of the customer
New Zealand
Australia
China
Other
Non-current assets based on the geographical location of assets
New Zealand
Australia
China
Other
2022
$’000
2021
$’000
138,874
498,203
714,133
95,019
28,813
530,907
574,119
72,895
1,446,229
1,206,734
233,553
42,779
1,935
2,886
281,153
5,978
43,219
3,858
2,988
56,043
Non-current assets exclude financial instruments and deferred tax assets.
In FY22, New Zealand revenue and non-current assets include Mataura Valley Milk Limited, acquired on 30 July 2021. Refer Note E2.
One customer within the Australia and New Zealand segment contributed revenue in excess of 10% of Group revenue of $175,391,000
(2021: $200,514,000).
Mataura Valley Milk results are for the 11 months from the acquisition on 30 July 2021.
80
81
THE a2 MILK COMPANY ANNUAL REPORT 2022 FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2022
GROUP PERFORMANCE
B2. Revenue
Disaggregation of revenue
In the following table, revenue is disaggregated by geographical location (reportable segments) and major product types.
2022
Infant milk formula:
China label
English and other labels1
Liquid milk
Other
2021
Infant milk formula:
China label
English and other labels1
Liquid milk
Other
Mataura
Valley Milk
$’000
–
–
–
104,350
104,350
Australia and
New Zealand
$’000
China and
Other Asia
$’000
–
328,819
171,964
31,943
532,726
437,591
255,761
11,092
22,054
726,498
Australia and
New Zealand
$’000
China and
Other Asia
$’000
–
357,037
168,986
33,697
559,720
389,882
166,870
8,252
18,417
583,421
USA
$’000
–
–
82,384
271
82,655
USA
$’000
–
–
63,282
311
63,593
Total
$’000
437,591
584,580
265,440
158,618
1,446,229
Total
$’000
389,882
523,907
240,520
52,425
1,206,734
B2. Revenue (continued)
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 the
A2 protein type, to wholesale customers; and manufactures nutritional and commodity products for sale 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 offsetting 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 customers, 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.
B3. Expenses
1
Revenue is allocated based on management responsibility and usually reflects the geographical location of the Group’s wholesale customers. It is understood
that the majority of the infant milk formula sales to customers in the Australia and New Zealand segment are ultimately consumed in China.
Contract balances
The following table provides information about receivables and contract liabilities from contracts with customers.
Profit before income tax includes the following significant items:
Salary and wage costs
Equity-settled share-based payments (refer Note F2)
Receivables
Customer contract liabilities
Note
C1
2022
$’000
67,411
(3,171)
2021
$’000
47,838
(4,746)
Customer contract liabilities are payments received in advance from customers. The amount of $4,746,000 recognised in customer
contract liabilities at 30 June 2021 was recognised as revenue in the year ended 30 June 2022.
Remaining performance obligations at 30 June 2022 have an original expected duration of one year or less.
Directors’ fees and expenses
Audit fees (refer Note F3)
Bad and doubtful debts
Insurance
Professional service fees
ERP project costs1
Depreciation and amortisation
Net foreign exchange losses
Cash flow hedge losses
Mataura Valley Milk Limited acquisition costs (refer Note E2)
1 ERP project costs included costs of configuring and customising software in a Cloud Computing Service Agreement.
B4. Finance costs
Interest expense – lease liabilities
Interest expense
Finance costs
2022
$’000
76,990
11,609
1,074
1,695
30
22,069
16,848
–
18,929
6,436
5,487
–
2022
$’000
592
1,875
124
2,591
2021
$’000
62,860
1,835
1,040
1,410
17
20,371
13,138
9,695
7,453
8,956
–
10,376
2021
$’000
699
–
71
770
82
83
THE a2 MILK COMPANY ANNUAL REPORT 2022 Deferred tax balances
Deferred tax assets are only recognised in the financial statements to the extent that it is probable that sufficient taxable profits will be
available, against which the tax asset can be utilised.
FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2022
GROUP PERFORMANCE
B5. Earnings per share (EPS)
B6. Income taxes (continued)
Profit attributable to members of the Company used in calculating basic and diluted EPS ($’000)
Weighted average number of ordinary shares (‘000) for basic EPS
Effect of dilution due to time-based and performance rights (‘000)
Weighted average number of ordinary shares (‘000) for diluted EPS
Earnings per share
Basic EPS (cents)
Diluted EPS (cents)
2022
122,624
743,618
176
743,794
2021
80,658
742,456
293
742,749
16.49
16.49
10.86
10.86
Recognition and measurement
Basic EPS is calculated as net profit attributable to members of the Company, 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.
2022
Gross deferred tax assets
Patents
Provisions and accrued expenses
Tax losses
Property, plant and equipment
Employee share scheme
Diluted EPS adjusts basic EPS for the dilutive effect of employee share rights that may be converted into ordinary shares in the Company.
Other
B6. Income taxes
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:
Accounting profit before income tax
Income tax expense calculated at 28% (2021: 28%)
Difference in income tax rates: Australia 30% (2021: 30%), USA 24% (2021: 24%),
and China 25% (2021: 25%)
Non-deductible expenses and non-assessable income
Prior period adjustment to tax expense
Unutilised foreign tax credits
Income tax recognised in equity
Deferred tax asset not recognised
Total tax expense
Income tax recognised directly in equity
Current tax
Deferred tax
Tax (benefit)/expense in equity
2022
$’000
45,482
28,072
(6,908)
66,646
181,387
50,788
923
2,377
1,292
1,325
–
9,941
66,646
(3,759)
(702)
(4,461)
2021
$’000
65,820
(25,647)
(1,566)
38,607
119,265
33,394
2,566
3,191
(5,243)
726
(219)
4,192
38,607
219
747
966
Gross deferred tax liabilities
Property, plant and equipment
Net deferred tax
Charge to profit or loss
Charge to other comprehensive income
2021
Gross deferred tax assets
Patents
Provisions and accrued expenses
Tax losses
Employee share scheme
Other
Gross deferred tax liabilities
Property, plant and equipment
Net deferred tax
Charge to profit or loss
Charge to other comprehensive income
Net deferred tax balances recognised in the financial statements
Net deferred tax assets
Net deferred tax liabilities
Net deferred tax
Opening
balance
$’000
Charge to
comprehensive
income
$’000
Charge to
equity
$’000
Closing
balance
$’000
515
49,809
254
–
323
3,131
54,032
(931)
53,101
(404)
(27,574)
(61)
29
706
(1,080)
(28,384)
931
(27,453)
(28,072)
619
(27,453)
–
–
–
–
83
–
83
–
83
111
22,235
193
29
1,112
2,051
25,731
–
25,731
Opening
balance
$’000
Charge to
comprehensive
income
$’000
Charge to
equity
$’000
Closing
balance
$’000
71
16,609
305
10,104
1,487
28,576
(375)
28,201
444
33,200
(51)
(8,969)
1,644
26,268
(556)
25,712
25,647
65
25,712
–
–
–
(812)
–
(812)
–
(812)
2022
$’000
25,731
–
25,731
515
49,809
254
323
3,131
54,032
(931)
53,101
2021
$’000
53,101
–
53,101
84
85
THE a2 MILK COMPANY ANNUAL REPORT 2022 FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2022
GROUP PERFORMANCE
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2022
OPERATING ASSETS AND LIABILITIES
B6. Income taxes (continued)
Tax losses
The Group entities have the following estimated gross tax losses at balance date not recognised:
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.
United States of America
New Zealand
Australia
Total
2022
$’000
85,918
190,624
–
2021
$’000
57,567
–
844
276,542
58,411
Imputation and franking credits
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 AUD.
Imputation and franking credits available within the Group, and ultimately available to the shareholders of the Company as at year end:
Imputation credits
Franking credits
2022
$’000
49,939
457,715
2021
$’000
52,731
422,760
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 or equity, in which case that tax is recognised in other comprehensive income or equity respectively; 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 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.
Key estimates and judgements
Recovery of deferred tax assets
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.
C1. Trade and other receivables
Trade receivables from contracts with customers
Allowance for expected credit losses
Goods and services tax
Other receivables
2022
$’000
67,411
(125)
9,711
6,513
83,510
2021
$’000
47,838
(107)
11,390
6,163
65,284
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
2022
$’000
17,974
119,505
2,565
140,044
2021
$’000
16,309
89,579
6,316
112,204
At year end $12,227,000 (2021: $108,578,000) was recognised as an expense in cost of sales for inventories written down or written off,
with $4,838,000 (2021: $Nil) relating to MVM inventory.
The inventory balance at 30 June 2022 includes $36,863,000 of inventory held by MVM (30 June 2021: $Nil).
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 may impact these estimations in future periods.
86
87
THE a2 MILK COMPANY ANNUAL REPORT 2022 FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2022
OPERATING ASSETS AND LIABILITIES
C3. Trade and other payables
Trade and other payables – current
Trade payables
Rebates and promotional allowances
Accrued charges
Employee entitlements
Trade and other payables – non-current
Employee entitlements
2022
$’000
83,107
99,771
164,797
28,407
376,082
2022
$’000
416
2021
$’000
40,986
70,127
137,257
17,926
266,296
2021
$’000
511
Recognition and measurement
Trade 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.
Accrued charges represent amounts payable for supplies and services received but not invoiced at the reporting date.
Employee entitlements
Provision is made for benefits accruing to employees in respect of wages and salaries, bonuses, 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.
Office and
computer
$’000
Furniture
and fittings
$’000
Leasehold
improvements
$’000
Plant and
equipment
$’000
C4. Property, plant and equipment
2022
Carrying amount 1 July 2021
Acquisition of subsidiary
(Note E2)
Additions
Depreciation
Net foreign currency
exchange differences
Land
$’000
–
Buildings
$’000
–
8,763
51,162
197
(1,176)
–
–
–
936
2,247
327
(1,202)
–
52
Carrying amount 30 June 2022
8,763
50,183
2,360
Cost
Accumulated depreciation
Carrying amount 30 June 2022
8,763
–
8,763
51,359
(1,176)
50,183
4,698
(2,338)
2,360
814
–
51
(176)
44
733
1,281
(548)
733
Office and
computer
$’000
Furniture
and fittings
$’000
Leasehold
improvements
$’000
Plant and
equipment
$’000
2021
Carrying amount 1 July 2020
Additions
Disposals
Depreciation
Net foreign currency exchange
differences
Carrying amount 30 June 2021
Cost
Accumulated depreciation
Carrying amount 30 June 2021
1,004
389
–
(741)
284
936
2,072
(1,136)
936
313
666
–
(140)
(25)
814
1,186
(372)
814
Total
$’000
17,162
4,010
11,402
–
166,741
228,913
394
(1,028)
3,970
(7,505)
4,939
(11,087)
165
359
620
3,541
174,967
240,547
6,023
(2,482)
3,541
191,313
263,437
(16,346)
(22,890)
174,967
240,547
Total
$’000
14,206
5,673
(7)
9,382
3,062
–
(1,050)
(2,761)
8
51
3,507
1,556
(7)
(830)
(216)
4,010
11,402
17,162
5,464
(1,454)
4,010
20,244
(8,842)
11,402
28,966
(11,804)
17,162
Recognition and measurement
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. Land is not depreciated. The following estimated useful lives are used in the
calculation of depreciation:
Buildings
20-90 years
Office and computer equipment
2-25 years
Furniture and fittings
Leasehold improvements
Plant and equipment
5-10 years
2-10 years
2-50 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.
88
89
THE a2 MILK COMPANY ANNUAL REPORT 2022 FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2022
OPERATING ASSETS AND LIABILITIES
C5. Investment property
In FY21 the Group acquired the manufacturing facilities of the Kyvalley Dairy Group (Kyvalley), the Group’s long-term fresh milk supplier
in Victoria. Kyvalley continues to operate the facility under a long-term operating lease and a long-term supply agreement. Under the
agreement the Group will also undertake a future expansion and upgrade of the facility, subsidised by increased rent.
The purchase and upgrade of the Kyabram site is a strategic investment to ensure quality of products and processing capacity. The related
long-term product supply agreement entered into alongside the investment provides ongoing supply from Kyvalley’s contracted
A1 protein free milk pool.
2022
Carrying amount 1 July 2021
Additions
Transfers
Depreciation
Net foreign currency exchange differences
Carrying amount 30 June 2022
Cost
Accumulated depreciation
Carrying amount 30 June 2022
2021
Acquisition
Additions
Depreciation
Net foreign currency exchange differences
Carrying amount 30 June 2021
Cost
Accumulated depreciation
Carrying amount 30 June 2021
Land
$’000
293
–
192
–
13
498
498
–
498
Land
$’000
290
–
–
3
293
293
–
293
Buildings
$’000
5,166
Plant and
equipment
$’000
10,291
–
(192)
(528)
122
4,568
5,246
(678)
4,568
Buildings
$’000
5,267
–
(150)
49
5,166
5,316
(150)
5,166
553
–
(1,912)
245
9,177
11,688
(2,511)
9,177
Plant and
equipment
$’000
10,795
–
(599)
95
10,291
10,890
(599)
10,291
Work in
progress
$’000
864
518
–
–
38
1,420
1,420
–
1,420
Work in
progress
$’000
–
864
–
–
864
864
–
864
Total
$’000
16,614
1,071
–
(2,440)
418
15,663
18,852
(3,189)
15,663
Total
$’000
16,352
864
(749)
147
16,614
17,363
(749)
16,614
C5. Investment property (continued)
Profit arising from investment property
Rental income
Future minimum rentals receivable under operating lease
Not longer than 1 year
Longer than 1 year and not longer than 5 years
Longer than 5 years
Total undiscounted lease payments to be received
2022
$’000
1,088
2022
$’000
1,132
4,529
16,797
22,458
2021
$’000
804
2021
$’000
1,075
4,301
16,043
21,419
Measurement of fair value
The investment property was purchased in September 2020. The Group has not engaged an independent valuer for the current period
and a fair value of $15,800,000 at reporting date has been determined by the Directors based on a capitalisation of rent valuation
approach based on a 7% rate of return. Directors consider that this calculation represents a reasonable approximation of fair value as
at 30 June 2022.
Recognition and measurement
Investment property
Investment property is held primarily to earn rental income and capital appreciation. It is measured initially at cost, including transaction
costs such as transfer taxes and professional fees for legal services. Subsequent to initial recognition, the Group elected to measure
investment property using the cost model (carried at historical cost less accumulated depreciation and impairment).
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. Land is not depreciated. The following estimated useful lives are used in the
calculation of depreciation:
Buildings
Plant and equipment
4-40 years
3-25 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.
Work in progress expenditure is capitalised only when the Group can demonstrate 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. Depreciation
commences when the asset is available for use.
Rental income
Rental income arising from operating leases on investment property is accounted for on a straight-line basis over the lease term, and is
included in Other revenue in the Statement of comprehensive income.
90
91
THE a2 MILK COMPANY ANNUAL REPORT 2022 FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2022
OPERATING ASSETS AND LIABILITIES
C6. Intangible assets
2022
Carrying amount 1 July 2021
Acquisition of subsidiary (Note E2)
Additions
Amortisation
Net foreign currency exchange differences
Carrying amount 30 June 2022
Cost
Accumulated amortisation and impairment
Carrying amount 30 June 2022
2021
Carrying amount 1 July 2020
Additions
Disposals
Transfers
Amortisation
Net foreign currency exchange differences
Carrying amount 30 June 2021
Cost
Accumulated amortisation and impairment
Carrying amount 30 June 2021
Patents
$’000
Trademarks
$’000
Software
$’000
Project
development
$’000
806
–
118
(40)
(1)
883
1,527
(644)
883
3,812
–
93
–
–
3,905
3,905
–
3,905
2,347
943
18
(1,237)
(5)
2,066
4,954
(2,888)
2,066
Patents
$’000
Trademarks
$’000
Software
$’000
815
64
–
–
(73)
–
806
1,409
(603)
806
3,432
380
–
–
–
–
3,812
3,812
–
3,812
311
1,194
(77)
973
(68)
14
2,347
3,998
(1,651)
2,347
Goodwill
$’000
8,172
94,078
–
–
218
Total
$’000
15,137
95,021
229
(1,277)
212
102,468
109,322
102,468
112,854
–
(3,532)
102,468
109,322
–
–
–
–
–
–
–
–
–
Project
development
$’000
Goodwill
$’000
957
8,125
–
–
(973)
–
16
–
–
–
–
–
–
–
47
8,172
8,172
–
8,172
Total
$’000
13,640
1,638
(77)
–
(141)
77
15,137
17,391
(2,254)
15,137
Trademarks are allocated to the following cash generating units (CGUs) for the purpose of impairment testing: Australia and New Zealand
$304,000 (2021: $283,000); China and Other Asia $3,436,000 (2021: $3,376,000); USA $165,000 (2021: $153,000).
During the year the total value of research and development costs expensed was $4,389,000 (2021: $2,506,000).
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 2 to 3 years.
The costs of configuring or customising a supplier’s application software in a Cloud Computing Software as a Service agreement are
expensed as incurred.
Project development costs
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 5 years.
C6. Intangible assets (continued)
Recognition and measurement (continued)
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 for internal management purposes as follows:
Australia and New Zealand
China
2022
$’000
50,738
51,730
102,468
2021
$’000
8,172
–
8,172
The movement in goodwill is attributable to the acquisition of Mataura Valley Milk Limited. Refer Note E2.
Recognition and measurement
Impairment testing of non-financial assets
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
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.
92
93
THE a2 MILK COMPANY ANNUAL REPORT 2022 FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2022
OPERATING ASSETS AND LIABILITIES
C6. Intangible assets (continued)
Annual impairment testing as at 30 June 2022
The recoverable amount of CGUs containing 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 4-year forward plans supplied by
management.
As at 30 June 2022, the recoverable amount of the Group’s CGUs 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, no impairment write downs are considered necessary.
Key assumptions
Gross margins
Gross margins are based on budgeted margins for FY23, 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 (pre-tax): 9.7% (2021: 7.6%)
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.
Revenue growth
Revenue projections have been constructed with reference to the FY23 budget and 4-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% (2021: 2.0%) has been used for future cash flow growth beyond the 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.
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)
C7. Other financial assets
Listed investment at fair value
2022
$’000
2021
$’000
135,260
157,803
The listed investment is a 19.8% holding in shares in Synlait Milk Limited (Synlait). Synlait is a dairy processing company (listed on NZX and
the ASX) with which the Group has an ongoing Nutritional Powders Manufacturing and Supply Agreement. No dividends were received
from this investment during the year (2021: $nil).
Shareholding in Synlait Milk Limited
Movements in the period
Balance 30 Jun 2020
Placement
Balance 30 Jun 2021
Balance 30 Jun 2022
Fair value loss in period
Shares
’000
35,575
7,778
43,353
43,353
Cost
$’000
248,940
39,841
288,781
288,781
Share
price at
report date
$7.10
$3.64
$3.12
Market
Value
$’000
252,580
157,803
135,260
(22,543)
Mark to
market
$’000
3,640
(130,978)
(153,521)
A fair value loss of $22,543,000 (2021: loss $134,618,000) was recognised in other comprehensive income 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.
C8. Other financial liabilities
Current
Foreign currency forward contracts
Non-current
Foreign currency forward contracts
2022
$’000
16,999
872
2021
$’000
–
–
Recognition and measurement
Foreign currency forward contracts are stated at fair value, calculated by reference to current forward exchange rates for contracts with
similar profiles, adjusted to reflect the credit risk of the various counterparties.
Key estimates and judgements
Fair value measurement of foreign currency forward contracts
The fair value of foreign currency forward contracts is measured using valuation techniques. The inputs to these models are taken from
observable markets where possible, but where this is not feasible, a degree of judgement is required in establishing fair values.
Judgements include considerations of inputs such as liquidity risk, credit risk and volatility. Changes in assumptions relating to these
factors could affect the reported fair value of these financial instruments.
94
95
THE a2 MILK COMPANY ANNUAL REPORT 2022
FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2022
CAPITAL AND FINANCIAL RISK MANAGEMENT
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.
D1. Capital management
The Group’s objective when managing its capital is to safeguard the Group’s ability to continue as a going concern and to continue to
generate value for stakeholders. The Group is not subject to externally imposed capital requirements, and currently has no debt, other
than loans and borrowings specific to Mataura Valley Milk Limited (Refer Note D8).
The Group’s capital structure may be modified by payment of dividends to shareholders, returning capital to shareholders, or issuing new
shares. The Board regularly assesses its capital position in order to deliver the optimum structure to drive shareholder returns in line with
the Company’s strategy and capital allocation framework.
The Board regularly assesses the Group’s balance sheet position when considering how to deliver the optimum structure to enhance
shareholder value in line with the Company’s strategy and capital allocation framework. This framework prioritises investment in growth
initiatives and maintaining balance sheet flexibility ahead of capital returns to shareholders. Where there is capital which is surplus to
achieving these priorities the Board makes a disciplined assessment of the potential to return funds to shareholders.
D2. Financial risk management
Financial risk management objectives
Exposure to credit risk, market risk (including currency risk, commodity price risk, interest rate 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 centralised treasury department (Group Treasury) provides treasury services to the business, co-ordinates access to domestic
and international financial markets, and monitors and manages liquidity. The Group’s corporate function monitors financial risks relating
to the operations of the Group through internal risk reports which analyse exposures by degree and magnitude of these risks.
Policies and procedures are reviewed periodically to reflect both changes in market conditions and changes in the nature and volume of
Group activities.
The Group does not enter into or trade financial instruments, including derivative financial instruments, for speculative 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 risks 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.
D2. Financial risk management (continued)
Credit risk management (continued)
Counterparty 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, ANZ Bank, Westpac, ASB Bank, Bank of New Zealand, HSBC Bank, and JP Morgan Chase Bank.
Counterparties to derivative financial instruments are large banks with which the Group has existing banking relationships, with
acceptable credit ratings determined by recognised credit agencies.
The Group does not have any other concentrations of counterparty credit 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
on credit 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 2022, 23% of sales with credit terms were to three customers
(2021: 22% of sales to three customers). There is no history of default for these customers.
The allowance for expected credit losses is recognised based on an assessment of lifetime expected credit losses.
Ageing of trade receivables at reporting date
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
Allowance for expected credit losses
2022
$’000
48,009
16,612
2,339
449
2
67,411
(125)
67,286
2021
$’000
40,420
6,082
442
600
294
47,838
(107)
47,731
2021
$’000
99
17
(9)
107
Maximum exposures to credit risk at balance date:
Cash and term deposits (counterparty risk)
Trade receivables (customer credit risk)
2022
$’000
2021
$’000
887,308
67,411
954,719
875,150
47,838
922,988
The average credit period on sales is 15 days (2021: 17 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
Balance at end of year
2022
$’000
107
30
(12)
125
96
97
THE a2 MILK COMPANY ANNUAL REPORT 2022
FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2022
CAPITAL AND FINANCIAL RISK MANAGEMENT
D2. Financial risk management (continued)
D2. Financial risk management (continued)
Market risk management
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 change in foreign currency exchange rates to the NZ dollar, and to
interest rate risk. Prices charged by manufacturers (including pricing of whole and skim milk powders) are subject to movements in
commodity milk pricing. The Group’s holding of a listed investment also exposes it to equity price risk.
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 other than the adoption of foreign currency hedging in the period.
Interest risk management
The Group’s main interest rate risk arises from long-term borrowings. Borrowings issued at variable rates expose the Group to cash flow
interest rate risk. Borrowings at fixed rates expose the Group to fair value interest rate risk. These risks are not hedged.
Bank borrowings are primarily from New Zealand banks, in New Zealand dollars, at New Zealand market rates.
Fixed and variable rate exposure
Fixed rate instruments
Financial assets
Financial liabilities
Variable rate instruments
Financial assets
Financial liabilities
2022
$’000
2021
$’000
525,663
(63,206)
462,457
30,000
(30,000)
–
300,000
–
300,000
30,000
–
30,000
Fair value sensitivity analysis for fixed rate instruments
The Group does not account for any fixed rate financial assets and liabilities at fair value through profit or loss and does not employ
derivatives (interest rate swaps) as hedging instruments under a fair value hedge accounting model. A change in interest rates at the
reporting date would not affect profit or loss for the Group.
Cash flow sensitivity analysis for variable rate instruments
A reasonably possible change of 100 basis points in interest rate at the reporting date would have increased (decreased) equity and profit
or loss by $325,000/($325,000). This analysis assumes all other variables remain the same.
Foreign currency risk management
The Group’s exposure to foreign currency risk arises principally from its operations in Australia, the USA, and China; and the resultant
movements in the currencies of those countries against the NZ dollar. The Group did not hedge this risk in prior periods.
The Group commenced hedging a portion of this risk in the period using derivative financial instruments such as foreign currency forward
contracts, designated as cash flow hedges, to hedge certain highly probable foreign currency transactions. These contracts are executed
by Group Treasury in accordance with the Group’s treasury risk policy.
The Group may also transfer cash balances from time-to-time between currencies to reduce exposure or to match underlying liabilities.
Hedging currency risk
On entering into a hedging relationship, the Group formally designates and documents the hedge relationship and the risk management
objective and strategy for undertaking the hedge. The documentation includes identification of the hedging instrument, the hedged item
or transaction, the nature of the risk being hedged and how the entity will assess the hedging instrument’s effectiveness in offsetting the
exposure to changes in the hedged item’s fair value or cash flows attributable to the hedged risk. Such hedges are expected to be highly
effective in achieving offsetting changes in fair value or cash flows and are assessed on an ongoing basis to determine that they were
actually highly effective throughout the financial reporting periods for which they are designated.
Changes in the fair value of derivatives that are designated and qualify as cash flow hedges which hedge exposure to variability in cash
flows of a highly probable forecasted transaction are recognised directly in other comprehensive income and accumulated in the hedging
reserve. The ineffective portion is recognised in profit or loss within other expenses. Hedge accounting is discontinued when the hedging
instrument expires or is sold, terminated or exercised. At that point in time, any cumulative gain or loss on the hedging instrument
recognised in equity is kept in equity until the forecasted transaction occurs or until cash flows arising from the transaction are received.
The amount recognised in other comprehensive income is transferred to profit or loss in the same period that the hedged item affects
profit or loss. If the forecast transaction is no longer going to occur the item is transferred to profit or loss when hedging is discontinued.
The gross value to be received or paid and the weighted average contracted exchange rates for foreign currency forward contracts
outstanding at year end are as follows:
Carrying
amount
2022
$’000
AU Dollar
Buy NZ dollar/sell AU dollar
(110)
US Dollar
Buy NZ dollar/sell US dollar
17,109
Buy NZ dollar/sell US dollar
872
Term
One year
or less
One year
or less
More than one
year, less than
two years
Notional amount NZ dollars Weighted average exchange rate
2022
$’000
2021
$’000
2022
2021
66,632
266,570
40,950
–
–
–
0.9005
0.6640
0.6349
–
–
–
The carrying amount of foreign currency forward contracts is recognised in Other financial liabilities (Refer Note C8).
The foreign currency forward contracts are considered to be highly effective hedges. There was no significant cash flow hedge
ineffectiveness in the current year.
98
99
THE a2 MILK COMPANY ANNUAL REPORT 2022 FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2022
CAPITAL AND FINANCIAL RISK MANAGEMENT
D2. Financial risk management (continued)
D2. Financial risk management (continued)
Foreign currency risk management (continued)
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 unhedged 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.
2022
Movement on exchange rate
AU Dollar
US Dollar
Chinese Yuan Renminbi
2021
Movement on exchange rate
AU Dollar
US Dollar
Chinese Yuan Renminbi
Net exposure on
reporting date
$’000
–
(2,169)
65,188
(142,135)
Net exposure on
reporting date
$’000
–
2,416
68,576
(97,602)
Impact on pre-tax profit or (loss)
$’000
+10%
(241)
7,243
(15,793)
$’000
-10%
197
(5,926)
12,921
Impact on pre-tax profit or (loss)
$’000
+10%
268
7,621
(10,845)
$’000
-10%
(220)
(6,233)
8,873
As the unhedged 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:
AU Dollar
US Dollar
Chinese Yuan Renminbi
Average rate
Reporting date spot rate
2022
0.9379
0.6813
4.3958
2021
0.9308
0.6965
4.6079
2022
0.9058
0.6248
4.1860
2021
0.9301
0.7034
4.5426
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 S&P/NZX 50 index over the same period.
As at 30 June 2022, the exposure to the listed investment at FVOCI was $135,260,000 (2021: $157,803,000). A 10% increase or decrease
in the share price of this listed investment would result in an increase or decrease of $13,526,000 (2021: $15,780,000) 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.
Loans and borrowings within the Group are specific to the operations of Mataura Valley Milk Limited (Refer Note D8). No other entities
within the Group have borrowings (2021: Nil).
Contractual maturities of financial liabilities
The contractual maturities of financial liabilities, including estimated interest payments and excluding the impact of netting arrangements
are set out below. No interest is payable on trade and other payables.
2022
Non-derivative financial liabilities
Secured bank loans
Unsecured loan from MVM’s
non-controlling shareholder
Lease liabilities
Trade and other payables –
excluding employee entitlements
Derivative financial liabilities
FX hedging contracts
Outflow
Inflow
2021
Contractual cash flows
Carrying
amounts
$’000
Total
$’000
6 months
or less
$’000
6 to 12
months
$’000
1 to 2
years
$’000
2 to 5
years
$’000
More than
5 years
$’000
57,000
59,377
27,662
538
1,088
30,089
–
50,000
55,834
–
13,794
–
–
42,040
17,352
19,249
2,075
1,603
2,578
7,116
5,877
347,675
347,675
347,675
–
–
–
–
–
–
–
–
Carrying amount at fair value
17,871
392,023
159,206
190,996
41,821
(374,152)
(148,752)
(184,450)
(40,950)
489,898
500,006
387,866
22,481
4,537
37,205
47,917
Non-derivative financial liabilities
Lease liabilities
16,498
19,129
2,185
1,989
3,010
5,217
6,728
Trade and other payables –
excluding employee entitlements
248,370
248,370
248,370
–
–
–
–
264,868
267,499
250,555
1,989
3,010
5,217
6,728
Change in liabilities arising from financing activities
Secured bank loans
Unsecured loan from MVM’s
non-controlling shareholder
30 June 2021
$'000
Acquisition
of subsidiary
$'000
–
–
–
30,000
50,000
80,000
Cash flow
$'000
30 June 2022
$'000
27,000
–
57,000
50,000
27,000
107,000
100
101
THE a2 MILK COMPANY ANNUAL REPORT 2022
FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2022
CAPITAL AND FINANCIAL RISK MANAGEMENT
D2. Financial risk management (continued)
D3. Cash and term deposits
Carrying amounts versus fair value
The fair values of financial assets and liabilities, together with the carrying amounts shown in the statement of financial position, are as
follows:
Cash and term deposits
Trade and other receivables
Foreign currency forward contracts
Listed investment
Secured bank loans
Unsecured loan from MVM’s
non-controlling shareholder
Trade and other payables – excluding
employee entitlements
Hierarchy
level
2
1
2
2
2022
2021
Carrying
amount
$’000
887,308
83,510
(17,871)
135,260
(57,000)
Fair Value
$’000
887,308
83,510
(17,871)
135,260
(57,000)
(50,000)
(50,000)
Carrying
amount
$’000
875,150
65,284
–
Fair Value
$’000
875,150
65,284
–
157,803
157,803
–
–
–
–
(347,675)
(347,675)
(248,370)
(248,370)
633,532
633,532
849,867
849,867
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).
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.
Estimation of fair value
The following methods and assumptions are used in estimating the fair values of financial instruments:
— Listed investment – closing share price on NZX
— Foreign currency forward contracts – calculated by reference to current forward exchange rates for contracts with similar maturity
profiles, adjusted to reflect the credit risk of the various counterparties
— Loans and borrowings – present value of future principal and interest cash flow, discounted at the market rate of interest at the
reporting date; and
— Cash and term deposits, trade and other receivables and payables – carrying amount approximates fair value.
Cash at banks and on hand
Short-term deposits
Cash and short-term deposits
Other current term deposits
Cash and term deposits
2022
$’000
331,646
105,662
437,308
450,000
887,308
2021
$’000
531,469
343,681
875,150
–
875,150
Cash at banks and on hand includes AUD 84,460,000 (2021: AUD 80,404,000), USD 52,495,000 (2021: USD 67,743,000), and RMB
229,639,000 (2021: RMB 278,312,000).
Bank balances and cash comprise cash held by the Group. Cash and short-term deposits earn interest at fixed and floating rates based on
daily bank deposit rates. The carrying value of cash assets and term deposits approximates their fair value.
Other current term deposits comprise term deposits with a maturity greater than three months and less than twelve months, having an
average maturity of nine months and a weighted average interest rate of 3.22% per annum.
Term deposits are presented as cash equivalents in the statement of cash flows if they have a maturity of three months or less and are
readily convertible to known amounts of cash with no significant risk of changes in value.
For the purposes of the statement of cash flows, cash and cash equivalents comprise the following:
Cash at banks and on hand
Short-term deposits
Cash and short-term deposits
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
Loss on disposal
Gain on termination of lease
Gift shares satisfied by issue of Treasury shares
Share-based payments
Net foreign exchange (gain)/loss
Income tax on hedges
Deferred tax
Changes in working capital:
Trade and other receivables
Prepayments
Inventories
Trade and other payables
Customer contract liabilities
Income tax receivable
Income tax payable
Net cash inflow from operating activities
2022
$’000
331,646
105,662
437,308
2021
$’000
531,469
343,681
875,150
2022
$’000
114,741
2021
$’000
80,658
18,929
7,453
–
–
92
11,609
(8,787)
3,759
27,453
(3,562)
(20,852)
(19,679)
94,993
(25,489)
10,593
–
203,800
84
(9)
–
1,835
3,766
–
(25,824)
5,416
28,517
35,128
(15,819)
973
(16,435)
(16,328)
89,415
102
103
THE a2 MILK COMPANY ANNUAL REPORT 2022
FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2022
CAPITAL AND FINANCIAL RISK MANAGEMENT
D5. Share capital
D7. Leases
2022
2021
Number
of shares
Share capital
$’000
Number
of shares
Share capital
$’000
743,410,790
149,121
739,830,151
146,933
Group as lessee
The Group has entered into leases for office and industrial premises, motor vehicles and equipment. 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 with options to renew contain market review clauses in the event that an option to renew is exercised.
Right-of-use assets
Carrying amounts of right-of-use assets recognised and movements during the period:
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
Gift shares
Share match programme
Vesting of matching share rights
Share issue costs
–
–
201,636
29,778
6,038
8,286
–
245,738
–
–
–
–
45
–
(9)
36
3,200,000
320,000
38,820
7,144
14,675
–
–
3,580,639
2,016
–
–
–
191
–
(19)
2,188
149,121
Balance at end of year
743,656,528
149,157
743,410,790
Vesting of time-based rights: Shares issued to participating employees continuing in employment to a vesting date in the period.
Gift shares: Shares issued to employees not participating in the Company’s Long-term Incentive plans. Each participating employee
received Company shares to the value of approximately A$1,000.
Share match programme: Shares purchased by employees in the period from their after-tax pay. The Company will match the number
of shares acquired and retained; subject to continuing employment to September 2022.
Vesting of matching shares: Shares vesting in September 2021 for employees participating in the FY20 share match programme
who continued in employment to September 2021.
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. Nature and purpose of reserves
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.
Treasury shares reserve
The treasury shares reserve comprises the cost, net of any tax effects, of the Company’s shares purchased and held by the trustee of
the a2MC Group Employee Share Trust to be available solely for participants in Group employee share plans. When treasury shares
subsequently vest to employees under employee share plans, the carrying value of the vested shares is transferred to the employee
equity settled payments reserve. During the year 2,200,000 Company shares were acquired by the Trust at an average price of $6.05
(2021: Nil shares acquired). As at 30 June 2022, the Trust held 2,372,842 of the Company’s shares (2021: 362,823 shares).
Hedging reserve
The hedging reserve comprises the effective portion of the cumulative net change in the fair value of hedging instruments used in cash
flow hedges pending subsequent recognition in profit or loss when the associated hedged transactions are recognised in profit or loss.
Movements on these reserve accounts are set out in the Consolidated statement of changes in equity.
2022
Carrying amount 1 July 2021
Acquisition of subsidiary (Note E2)
Additions
Depreciation
Net foreign currency exchange differences
Carrying amount 30 June 2022
Cost
Accumulated depreciation
Carrying amount 30 June 2022
2021
Carrying amount 1 July 2020
Additions
Depreciation
Net foreign currency exchange differences
Carrying amount 30 June 2021
Cost
Accumulated depreciation
Carrying amount 30 June 2021
Lease liabilities
Carrying amounts of lease liabilities and movements during the period:
Balance at beginning of the year
Acquisition of subsidiary (Note E2)
Additions
Gain on termination of lease
Accretion of interest
Payments
Net foreign currency exchange differences
Balance at end of the year
Current
Non-current
Leased
property
$’000
Office and
computer
$’000
Plant and
equipment
$’000
15,039
88
3,308
(3,688)
587
15,334
23,684
(8,350)
15,334
101
17
24
(41)
1
102
188
(86)
102
162
537
289
(396)
2
594
1,297
(703)
594
Leased
property
$’000
Office and
computer
$’000
Plant and
equipment
$’000
15,764
2,952
(3,596)
(81)
15,039
19,701
(4,662)
15,039
115
13
(27)
–
101
146
(45)
101
265
75
(179)
1
162
469
(307)
162
2022
$’000
16,498
642
3,621
–
592
(4,681)
680
17,352
3,128
14,224
17,352
Total
$’000
15,302
642
3,621
(4,125)
590
16,030
25,169
(9,139)
16,030
Total
$’000
16,144
3,040
(3,802)
(80)
15,302
20,316
(5,014)
15,302
2021
$’000
16,843
–
3,040
(9)
699
(3,929)
(146)
16,498
3,648
12,850
16,498
104
105
THE a2 MILK COMPANY ANNUAL REPORT 2022 FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2022
CAPITAL AND FINANCIAL RISK MANAGEMENT
D7. Leases (continued)
Amounts recognised in profit or loss
Depreciation expense – right-of-use assets
Interest expense – lease liabilities
Expenses relating to short-term leases (included in Other expenses)
Expenses relating to low-value assets (included in Other expenses)
Total amount recognised in profit or loss
Cash flows for leases
Total cash outflows:
Lease interest
Payment of lease principal
Non-cash additions to right-of-use assets and lease liabilities
2022
$’000
4,125
592
461
5
5,183
2022
$’000
592
4,089
4,681
3,621
2021
$’000
3,802
699
567
5
5,073
2021
$’000
699
3,230
3,929
3,040
Recognition and measurement
A right-of-use asset and a lease liability are recognised at the lease commencement date.
The right-of-use asset is initially measured at cost, and subsequently at cost, less accumulated depreciation as the asset is written off over
the term of the lease, impairment losses, and any adjustments for remeasurements of the lease liability.
The lease liability is initially measured at the present value of the lease payments payable from the commencement date, discounted using
the interest rate implicit in the lease or, if that rate cannot be readily determined, the Group’s incremental borrowing rate. Generally, the
Group uses its incremental borrowing rate as the discount rate.
The lease liability is subsequently increased by the interest cost on the lease liability and decreased by lease payments made. It is remeasured
when there is a change in future lease payments arising from a change in an index or rate, a change in the estimate of the amount expected
to be payable, or changes in the assessment of whether a purchase or extension option is reasonably certain to be exercised.
Key estimates and judgements
Determination of the lease term
Judgement is applied to determine the lease term for those lease contracts that include renewal or termination options. This
assessment impacts the lease term, which may significantly affect the amount of lease liabilities and right-of-use assets recognised.
In determining the lease term consideration is given to all facts and circumstances that create an economic incentive to exercise an
extension option, or not to exercise a termination option.
Group as lessor
Refer Note C5: Investment property.
D8. Loans and borrowings
Current
Secured:
Bank loans
Unsecured:
Loan from MVM’s non-controlling shareholder
Non-current
Secured:
Bank loan
Unsecured:
Loan from MVM’s non-controlling shareholder
2022
$’000
2021
$’000
27,000
13,794
40,794
30,000
36,206
66,206
–
–
–
–
–
All of the loans and borrowings are specific to Mataura Valley Milk Limited (MVM) and are interest bearing.
The bank loans are secured against MVM’s property at Pease Street, Gore, New Zealand, and are subject to compliance with financial
covenants requiring the maintenance of specified financial ratios, related solely to MVM. All borrowing covenant ratios and limits have
been complied with during the financial year.
The non-current bank loan matures in July 2024. The interest rate applicable as at 30 June 2022 was 3.62%.
The average interest rate applicable at 30 June 2022 for the current bank loans was 3.08%.
Finance facilities available to MVM:
— Total bank debt facilities of $75 million, of which $57 million was drawn as at 30 June 2022.
— A performance guarantee facility of $10 million, of which $6.2 million was drawn as at 30 June 2022.
The unsecured subordinated loans are provided by MVM’s non-controlling shareholder. The non-current loan has an initial term through
to FY27, to be repaid thereafter at a time to be agreed by the shareholder lenders. The interest rate applicable as at 30 June 2022 was
2.56% and is deferred and capitalised into the loan balance.
Other Group entities have access to bank guarantee facilities totalling $1,656,000 of which $870,000 was drawn as at 30 June 2022.
Recognition and measurement
Interest bearing loans and borrowings are initially recognised at fair value at transaction date, less directly attributable transaction costs,
and subsequently measured at amortised cost using the effective interest rate method.
106
107
THE a2 MILK COMPANY ANNUAL REPORT 2022
FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2022
CAPITAL AND FINANCIAL RISK MANAGEMENT
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2022
GROUP STRUCTURE
D9. Capital expenditure commitments
E. GROUP STRUCTURE
Contracted but not yet provided for and payable
Property plant and equipment
2022
$’000
5,575
2021
$’000
–
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 2022 are as follows:
D10. Contingent liabilities
On 6 October 2021, The a2 Milk Company Limited (‘the Company’) announced that group proceedings had been filed in the Supreme
Court of Victoria by Slater & Gordon Lawyers, which named the Company as the defendant. The proceeding relates to the period from
19 August 2020 to 9 May 2021 (Relevant Period) and makes allegations that the Company engaged in misleading and deceptive conduct
and breached its disclosure obligations by failing to disclose certain information to the market. The claim filed by Slater & Gordon Lawyers
is said to be brought on behalf of shareholders who acquired an interest in fully paid ordinary shares in the Company on the Australian
Securities Exchange (ASX) or NZX Main Board (NZSX) between 19 August 2020 and 9 May 2021 (inclusive).
On 24 November 2021, the Company was served with a representative proceeding filed in the Supreme Court of Victoria by Shine
Lawyers, which names the Company as the defendant. The proceeding makes allegations which are broadly similar to those advanced
by the class action proceeding filed by Slater & Gordon Lawyers on 5 October 2021. The claim filed by Shine Lawyers is said to be
brought on behalf of group members who acquired an interest in ordinary shares in the Company on the ASX or the NZSX: (1) prior
to 19 August 2020, and retained those shares until a date after 28 September 2020; or (2) during the Relevant Period.
On 14 June 2022, the Supreme Court of Victoria approved the proposal to consolidate the proceedings filed by Slater & Gordon Lawyers
and Shine Lawyers (the Australian Proceedings). The consolidated claim is brought on behalf of shareholders who acquired an interest in
fully paid ordinary shares in the Company on the ASX or the NZSX: (1) during the Relevant Period; and (2) prior to 19 August 2020 and
retained those shares until a date after 28 September 2020. The claim makes allegations under both Australian and New Zealand law.
On 18 May 2022, the Company announced that a representative proceeding had been filed in the High Court of New Zealand which
names the Company as the defendant (the New Zealand Proceedings). The New Zealand Proceeding, filed by Thorn Law and funded
by CHC Investment Fund III Pty Limited relates to the same period (19 August 2020 to 9 May 2021) and makes allegations under New
Zealand law only which are substantially the same as those advanced in the Australian Proceedings. The claim is commenced on behalf of
group members who acquired an interest in ordinary shares in the Company on the ASX or the NZSX: (1) during the Relevant Period; and
(2) prior to the Relevant Period and continued to hold some or all of those shares for part or all of the Relevant Period. The Company filed
an interlocutory application for a stay of the New Zealand Proceedings under the Trans-Tasman Proceedings Act 2010 (NZ) on
23 June 2022.
The Company considers that it has at all times complied with its disclosure obligations, denies any liability and will vigorously defend the
proceedings. The Company is required to file its defence in the Australian Proceedings on 25 October 2022. The Company has not filed a
defence in the New Zealand Proceeding and no orders will be made until after the determination of the stay application.
The claims of group members have not yet been and are not required to be quantified. Based on the current status of the Australian
Proceedings and the New Zealand Proceedings, it is not practicable to provide: (a) an estimate of the financial effect; (b) an indication of
the uncertainties relating to the amount or timing of any outflow; or (c) the possibility of any reimbursement.
On 24 August 2022, there was a hearing in the Supreme Court of Victoria in relation to whether that Court has jurisdiction to determine
the claims advanced by New Zealand acquirers under New Zealand law. Judgment in the matter has been reserved. The New Zealand
Proceedings are next listed in the High Court of New Zealand for hearing of the stay application on 28 November 2022 and
29 November 2022.
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
Mataura Valley Milk 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 Ltd
a2MC Group Employee Share Trust
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
Parties to
Deed of Cross
Guarantee
(note E3)*
✓
–
–
✓#
–
–
✓
–
✓
✓
✓
✓
–
–
–
–
–
–
–
Principal place
of business
Proportion of ownership interest
2022
2021
New Zealand
–
–
New Zealand
New Zealand
New Zealand
New Zealand
New Zealand
Australia
Australia
Australia
Australia
Australia
Australia
Australia
UK
USA
USA
Canada
China
Singapore
100%
100%
100%
100%
75%
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%
* 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.
#
a2 Infant Nutrition Limited is the subject of an ASIC declaration under section 601 CK(7) of the Corporations Act 2001 (Cth, Australia), providing relief from
the requirement to prepare and lodge an audited financial report in Australia.
Other than the acquisition of Mataura Valley Milk Limited on 30 July 2021 (Refer Note E2), there were no 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 Limited (UK), 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
All intragroup assets and liabilities, equity, income, expenses, and cash flows relating to transactions between members of the Group are
eliminated in preparing the consolidated financial statements.
108
109
THE a2 MILK COMPANY ANNUAL REPORT 2022
FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2022
GROUP STRUCTURE
E2. Acquisition of subsidiary
Mataura Valley Milk Limited acquisition
On 30 July 2021, The a2 Milk Company Limited (a2MC) acquired a 75% controlling interest in Mataura Valley Milk Limited (MVM), a dairy
nutrition business, located in Southland, New Zealand.
The acquisition will enable the Group to participate in nutritional products manufacturing, provide supplier and geographical
diversification, and strengthen relationships with key strategic partners in China.
Fair value of identifiable assets and (liabilities) acquired
Cash and cash equivalents
Trade and other receivables
Inventories
Property, plant and equipment
Right-of-use assets
Intangible assets
Trade and other payables
Borrowings – external
Borrowings – shareholder loans
Lease liabilities
Net identifiable assets acquired
Less: non-controlling interests
a2MC’s share of net identifiable assets
Fair Value recognition
on acquisition
$’000
54,760
22,590
8,161
228,913
642
943
(38,361)
(30,000)
(156,694)
(642)
90,312
(22,578)
67,734
Accounting policy for non-controlling interests
The Group recognises non-controlling interests in an acquired entity either at fair value or at the non-controlling interest’s proportionate
share of the acquired entity’s net identifiable assets. For the non-controlling interests in MVM the Group has elected to recognise the
non-controlling interests at its proportionate share of the acquired net identifiable assets.
Total cash outflow and goodwill on consolidation
Net identifiable assets acquired
Loan payable to a2MC in net assets acquired
Goodwill
Total cash outflow
$’000
67,734
106,694
174,428
94,078
268,506
Goodwill comprises the value of expected strategic synergies arising from the acquisition including access to manufacturing margins and
the ability to provide capability for product development and supply, based on this recently constructed world-class nutritional products
manufacturing facility with an established workforce, and access to a growing A1 protein free milk pool. It is not deductible for tax
purposes.
Goodwill is allocated to the cash generating units (CGUs) that are expected to benefit from the synergies of the business combination,
irrespective of whether other assets or liabilities of the acquiree are assigned to those units or groups of units.
Total goodwill of $94,078,000 has been allocated to the following CGUs: Australia and New Zealand: $42,348,000; China $51,730,000.
For the eleven months ended 30 June 2022 MVM contributed revenue of $104,350,000 and an after-tax loss of $31,530,000 to the
Group’s results. If the acquisition had occurred on 1 July 2021 management estimate that, for FY22, consolidated revenue would have
been greater by $11,866,000 and consolidated profit would have been less by $5,610,000. In determining these amounts management
has assumed that the financing arrangements applicable from 30 July 2021 applied as if the acquisition had occurred on 1 July 2021.
The net outflow of cash on acquisition of $213,746,000 consisted of the total cash outflow of $268,506,000, less cash balances acquired
of $54,760,000.
E2. Acquisition of subsidiary (continued)
Mataura Valley Milk Limited acquisition (continued)
Acquisition-related costs
No acquisition related costs were paid in the period. Total acquisition-related costs of $10,376,000 were incurred in the year ended
30 June 2021 and included in Other expenses in the consolidated statement of comprehensive income and in operating cash flows in
the consolidated statement of cash flows.
Recognition and measurement
Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of
the consideration transferred, which is measured at acquisition date fair value, and the amount of any non-controlling interests in
the acquiree.
Goodwill is initially measured at cost, being the excess of the aggregate of the consideration transferred and the amount recognised for
non-controlling interests, over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed.
Acquisition-related costs are expensed as incurred and included in profit or loss as Other expenses.
When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation
in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date.
E3. Deed of cross guarantee
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 eligible for relief from the Corporations Act 2001 (Cth, Australia)
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 (Cth, Australia). 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 as listed in Note E1), after eliminating
all transactions between parties to the Deed of Cross Guarantee, at 30 June 2022 are set out as follows:
Consolidated statement of comprehensive income and retained earnings for the year ended 30 June 2022
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 end of year
2022
$’000
2021
$’000
1,273,571
1,147,020
(1,058,365)
(1,036,347)
8,140
223,346
(59,291)
164,055
(654)
163,401
1,048,914
654
3,554
114,227
(33,598)
80,629
1,254
81,883
968,285
(1,254)
1,212,969
1,048,914
110
111
THE a2 MILK COMPANY ANNUAL REPORT 2022 FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2022
GROUP STRUCTURE
E3. Deed of cross guarantee (continued)
Consolidated statement of financial position as at 30 June 2022
Assets
Current assets
Cash and short-term deposits
Trade and other receivables
Prepayments
Inventories
Income tax receivable
Total current assets
Non-current assets
Property, plant and equipment
Right-of-use assets
Investment property
Intangible assets
Other financial assets
Deferred tax assets
Total non-current assets
Total assets
Liabilities
Current liabilities
Trade and other payables
Customer contract liabilities
Lease liabilities
Other financial liabilities
Total current liabilities
Non-current liabilities
Trade and other payables
Other financial liabilities
Lease liabilities
Total non-current liabilities
Total liabilities
Net assets
Equity
Share capital
Retained earnings
Reserves
Total equity
2022
$’000
2021
$’000
797,296
153,906
49,229
95,678
12,648
801,412
124,918
26,531
109,156
22,419
1,108,757
1,084,436
15,802
12,460
15,663
14,441
565,047
18,424
641,837
15,279
10,902
16,614
14,961
291,901
46,422
396,079
1,750,594
1,480,515
336,473
240,988
2,514
832
12,553
352,372
416
872
12,517
13,805
366,177
4,746
1,910
–
247,644
511
–
9,611
10,122
257,766
1,384,417
1,222,749
149,157
149,121
1,212,969
1,048,914
22,291
24,714
1,384,417
1,222,749
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2022
OTHER DISCLOSURES
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
2022
$’000
6,802
1
–
6,358
13,161
2021
$’000
8,438
40
926
1,210
10,614
Other than non-executive directors, key management personnel in FY22 include the following senior executives:
Managing Director and CEO
Chief Financial Officer (to 17 May 2022)
Interim Chief Financial Officer (from 17 May 2022)
Chief Executive, Greater China
Transactions with key management personnel and their related parties
During the year there were no related party transactions with key management personnel or their related parties (2021: $nil).
Loans to key management personnel and their related parties
No loans were outstanding or made to key management personnel and their related parties at any time during the 2022 and 2021
financial years.
112
113
THE a2 MILK COMPANY ANNUAL REPORT 2022
FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2022
OTHER DISCLOSURES
F2. Share-based payments
F2. Share-based payments (continued)
Long-term incentives (LTI)
The LTI plan is designed to retain and motivate senior management to achieve the Group’s long-term strategic goals by providing rewards
that align the interests of management with shareholders.
During the year the Board authorised the issue of 4,355,314 performance rights to senior management under the LTI plan.
The issue of performance rights under the LTI plan was temporarily deferred in FY21. To accommodate the deferral of the LTI programme
in FY21, the performance rights issued in the period are in two tranches, with differing performance periods and performance hurdles as
set out below.
The performance rights vest subject to:
— Continuing employment; and
— Achieving the following performance hurdles over the performance periods:
Performance rights grants:
Performance period
EPS CAGR
50% vest
85% vest
100% vest
Tranche 1 (FY21 plan)
1,955,113 rights
2 years to 30 June 2023
Tranche 2 (FY22 plan)
2,400,201 rights
3 years to 30 June 2024
20%
20%
7.5%
10%
12.5%
6%
8%
10%
Revenue CAGR hurdles
Both the minimum EPS CAGR (compound annual growth in diluted earnings per share) and minimum Revenue CAGR (compound annual
growth in normalised sales) must be achieved for any vesting of performance rights. The minimum vesting proportion is 50%; thereafter,
vesting is on a straight-line basis.
EPS CAGR and Revenue CAGR are derived from the annual report of the Company for the relevant financial years and subject to
adjustment to remove the impact of such items as the Board may determine, including, without limitation, adjustments made to exclude
the impact of unusual or one-off items, discontinued operations, and acquisitions and disposals.
No amount is payable upon vesting of the performance rights and conversion to shares. Each exercised right is an entitlement to one fully
paid ordinary share in the Company.
Fair value of performance rights
The fair value of services received in return for performance rights granted to employees is measured by reference to the fair value of the
rights 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 simplified Black-Scholes option pricing model.
Fair value of performance rights granted during the period and assumptions
Performance rights
Grant date
Fair value at measurement date
Share price at grant date
Performance rights life
Tranche 1
22 Oct 21
$7.18
$7.18
1.8 yrs
Tranche 2
22 Oct 21
$7.18
$7.18
2.8 yrs
Performance rights granted in previous years
In FY20 performance rights were issued in two tranches, with differing performance periods and performance hurdles as set out below.
Performance rights granted to employees in China in FY21 are subject to the Tranche 2 performance hurdles.
The performance rights vest subject to:
— Continuing employment.
— Minimum performance hurdles of both:
— A minimum diluted earnings per share (EPS) compound annual growth rate (CAGR) increase of 15% over the performance period
(EPS CAGR); and
— A minimum normalised sales CAGR increase of 15% over the performance period (Revenue CAGR).
— Tranche 1 grants had two-year performance hurdles to 30 June 2021, and Tranche 2 grants have three-year performance hurdles to
30 June 2022.
— No awards will vest if EPS CAGR or Revenue CAGR is less than 15% over the respective performance periods.
— 50% of the awards will vest if EPS CAGR and Revenue CAGR of 15% is achieved, up to a maximum of 100% of the award vesting
if Revenue CAGR of either 22% or more for the two-year performance hurdle, or 25% or more for the three-year performance
hurdle is achieved.
The Tranche 1 awards did not vest.
The average fair value of the Tranche 2 awards at grant date was $13.69.
EPS CAGR and Revenue CAGR are derived from the annual report of the Company for the relevant financial years and subject to
adjustment to remove the impact of such items as the Board may determine, including, without limitation, adjustments made to exclude
the impact of unusual or one-off items, discontinued operations, and acquisitions and disposals.
Time-based rights granted in previous years
Vesting of the time-based rights is subject to continuing employment, with no performance conditions, vesting as follows:
Number of time-based
rights granted
103,409
2,455
155,641
261,505
Grant dates
19-Nov-19
10-Mar-21
5-Feb-21
Vesting dates
22-Aug-22
15-Dec-22
8-Feb-23
Fair value
$14.00
$9.70
$11.00
LTI outstanding as at 30 June 2022
Performance rights – FY20 grants Tranche 2
466,539
Various
21-Aug-22
21-Aug-22
Number
Grant Dates
Vesting Dates
Expiry Dates
Performance rights – FY22 grants
21-Aug-23 &
21-Aug-23 &
22-Oct-21
21-Aug-24
21-Aug-24
4,223,525
4,690,064
Time-based rights – FY20 grants
103,409
19-Nov-19
23-Aug-22
23-Aug-22
Time-based rights – FY21 grants
Matching share rights – FY21 plan
158,096
261,505
14,704
5-Feb-21 &
15-Dec-22 &
15-Dec-22 &
10-Mar-21
8-Feb-23
8-Feb-23
n/a
30-Sep-22
30-Sep-22
114
115
THE a2 MILK COMPANY ANNUAL REPORT 2022 FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2022
OTHER DISCLOSURES
F2. Share-based payments (continued)
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 1.5 years (2021: 0.8 years)
Time-based 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
Number
2022
Number
2021
881,060
(546,310)
4,355,314
–
4,690,064
1,483,874
(125,080)
139,566
(617,300)
881,060
Number
2022
Number
2021
685,336
(3,080)
–
(420,751)
261,505
300,768
–
537,696
(153,128)
685,336
The weighted average remaining contractual life of time-based rights is 0.4 years (2021: 0.8 years)
Other employee equity schemes
In the period, employees not participating in the LTI plan participated in the following schemes:
— Gift offer: employees received Company shares to the value of approximately A$1,000 each.
— FY21 Share Match Programme: employees who undertook to purchase Company shares for a minimum value of A$200 to a maximum
value of A$2,000 up to 30 September 2021 from their after-tax pay will receive matching shares from the Company equal to the
number of shares acquired and retained under the scheme, subject to continuing employment up to September 2022. There was no
Share Match Programme offered in FY22.
Amounts recognised in the consolidated statement of comprehensive income
During the year ended 30 June 2022, a $11,609,000 expense was recognised in the consolidated statement of comprehensive income for
equity settled share-based payment awards (2021: $1,835,000).
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 settled payments 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:
Fees to Ernst & Young (Australia):
Fees for auditing the statutory financial statements of the parent covering the Group and auditing
the statutory financial statements of any controlled entities
Fees for other assurance and agreed-upon-procedures services
Fees for other services:
Market research1
Total fees to Ernst & Young (Australia)
Fees to other overseas member firms of Ernst & Young:
Total fees to other overseas member firms of Ernst & Young for local statutory audits
2022
$’000
1,586
118
240
1,944
109
2,053
2021
$’000
1,285
75
220
1,580
125
1,705
1 The research reports prepared are solely for the Group’s internal use and contents of these reports are not subject to Ernst & Young audit.
F4. Subsequent events
On 27 August 2022, the Board of Directors resolved that the Company intends to undertake a capital return to shareholders of up to
$150 million through an on-market share buyback. 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.
116
117
THE a2 MILK COMPANY ANNUAL REPORT 2022 OTHER
INFORMATION
COMPANY
DISCLOSURES
1. SUBSTANTIAL PRODUCT HOLDERS
The shares of the Company are quoted on NZX, the ASX and Chi-X Australia.
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 2022 (such disclosure being required by the Financial Markets Conduct Act 2013 (NZ))
and as at 1 August 2022 (such disclosure being required by the ASX Listing Rules):
As at 30 June 2022
As at 1 August 2022
Number of
ordinary shares
in the Company
in which a
Relevant
Interest is held
Number of
ordinary shares
in the Company
in which a
Relevant
Interest is held
% of ordinary
shares held
% of ordinary
shares held
45,389,774
6.10
45,389,774
6.10
Name
PERPETUAL LIMITED
and subsidiaries
The total number of voting shares on issue as at 30 June 2022 was 743,656,528 and the total
number of voting shares on issue as at 1 August 2022 was 743,656,528.
2. VOTING RIGHTS
During the period 1 July 2021 to 30 June 2022, 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. All votes cast at shareholder meetings are by way of poll.
118
119
THE a2 MILK COMPANY ANNUAL REPORT 2022 COMPANY DISCLOSURES
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 2022 are listed below:
4. SPREAD OF SECURITY HOLDERS AS AT 1 AUGUST 2022 AND NUMBER OF HOLDERS
a) Fully paid ordinary shareholders
Rank
Investor name
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
HSBC Custody Nominees (Australia) Limited
J P Morgan Nominees Australia Pty Limited
Citicorp Nominees Pty Limited
HSBC Nominees (New Zealand) Limited*
Tea Custodians Limited*
Citibank Nominees (Nz) Ltd*
JPMorgan Chase Bank*
HSBC Nominees (New Zealand) Limited*
Bnp Paribas Nominees NZ Limited Bpss40*
Accident Compensation Corporation*
New Zealand Depository Nominee
New Zealand Superannuation Fund Nominees Limited*
Bnp Paribas Noms Pty Ltd
National Nominees Limited
Premier Nominees Limited*
Custodial Services Limited
JBWERE (Nz) Nominees Limited
Public Trust*
National Nominees New Zealand Limited*
Cogent Nominees Limited*
Total
Number
of shares
95,352,557
42,606,730
37,586,912
27,839,798
24,379,403
23,240,973
21,431,535
20,651,873
19,868,096
19,629,611
15,844,934
14,050,721
13,063,286
11,033,224
9,395,719
7,637,117
6,855,810
5,811,578
5,645,682
5,374,499
% Issued
capital
12.82
5.73
5.05
3.74
3.28
3.13
2.88
2.78
2.67
2.64
2.13
1.89
1.76
1.48
1.26
1.03
0.92
0.78
0.76
0.72
427,300,058
57.45
* These shares are held through New Zealand Central Securities Depository Limited (NZCSD), a depository system which allows electronic trading of securities
to members.
Size of Shareholding
1 – 1,000
1,001 – 5,000
5,001 – 10,000
10,001 – 100,000
100,001 shares or more
Number
of holders
Number
of shares
62,279
25,683
5,026
3,562
22,567,119
62,646,799
37,459,232
84,265,498
210
536,717,880
%
3.04
8.42
5.04
11.33
72.17
96,760
743,656,528
100.00
As at 1 August 2022, and based on the closing market price on that date, the number of holders with 220 or less ordinary shares (being
less than a minimum holding of NZ$1,000 under the NZX Listing Rules) was 27,863 and the number of holders with 110 or less ordinary
shares (being less than a marketable parcel of A$500 under the ASX Listing Rules) was 16,872.
b) Performance rights (unlisted securities not quoted by the ASX or NZX)
Size of Shareholding
1 – 5,000
5,001 – 10,000
10,001 – 100,000
100,001 performance rights or more
c) Time-based rights (unlisted securities not quoted by the ASX or NZX)
Size of Shareholding
1 – 5,000
5,001 – 10,000
10,001 – 100,000
100,001 performance rights or more
d) Matching rights (unlisted securities not quoted by the ASX or NZX)
Size of Shareholding
0 – 1,000
Number
of holders
–
7
36
9
52
Number
of holders
1
–
–
2
3
Number
of holders
104
104
Number
of rights
–
54,237
1,648,794
2,987,033
4,690,064
Number
of rights
2,455
–
–
259,050
261,505
Number
of rights
14,704
14,704
%
–
1.16
35.15
63.69
100.00
%
0.94
–
–
99.06
100.00
%
100.00
100.00
120
121
THE a2 MILK COMPANY ANNUAL REPORT 2022 COMPANY DISCLOSURES
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 2021 to 30 June 2022:
Registered holder
David Bortolussi
DMZSK Pty Ltd
DMZSK Pty Ltd
DMZSK Pty Ltd1
Beneficial/
Non-beneficial
Acquired/
(Disposed)
Class of
financial
product
Consideration
paid/(received)
NZD
Date
Beneficial
Beneficial
Beneficial
969,483
Performance rights
22 October 2021
(155,642)
Time-based rights
21 February 2022
155,642
Ordinary shares
21 February 2022
N/A
N/A
N/A
Directors of the Company as at 30 June 2022 held the following relevant interests in the financial products of the Company as at that date:
Registered holder
David Hearn
David Lovat Gordon Hearn
David Bortolussi
Beneficial/
Non-beneficial
Balance held
No.
Class of financial
product
Beneficial
1,055,000
Ordinary shares
DMZSK Pty Ltd as trustee of D&M Bortolussi Family Trust
DMZSK Pty Ltd as trustee of D&M Bortolussi Family Trust
DMZSK Pty Ltd as trustee of D&M Bortolussi Family Trust
Beneficial
Beneficial
Beneficial
155,642
969,483
155,641
Ordinary shares
Performance rights
Time-based rights
Julia Hoare
Julia Cecile Hoare
Warwick Every-Burns
Beneficial
50,000
Ordinary shares
Warwick Every-Burns as trustee of Wake Super Fund
Kathryn Every-Burns
Beneficial
Beneficial
75,000
25,000
Ordinary shares
Ordinary shares
1 Reflects the issue of ordinary shares to David Bortolussi following the vesting and automatic exercise of time-based rights.
6. CREDIT RATING STATUS
Not applicable.
7. NZX WAIVERS
There were no 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 2022.
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 2022 as follows:
— The Company has arranged and paid for policies for directors’ liability insurance which ensure that the directors 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.
— Pip Greenwood’s spouse owns an adviser entity which provides financial and transaction consulting services to a range of
organisations, including from time to time participants in the dairy sector (other than the Company). While Ms Greenwood has no
involvement in the entity, or its clients, she has disclosed that interest as the entity may from time to time consult to entities with which
the Company may transact. The Company and Ms Greenwood have agreed a protocol whereby Ms Greenwood abstains from all
Board discussions and decisions including the entity or its clients, and does not receive relevant Board papers, where this occurs.
— Julia Hoare is a director of Meridian Energy Limited, which is expected to supply electricity to MVM under a new power purchase
agreement following completion of the project to convert MVM’s current coal fired boiler to a high-pressure electric boiler. While
Ms Hoare has no involvement in the matters which are the subject of discussion between Meridian and MVM, the Company and Ms
Hoare have agreed a protocol whereby Ms Hoare abstains from all Board discussions and decisions involving the supply of electricity
to MVM in connection with the boiler conversion project, and does not receive relevant Board papers or parts of any Board papers,
where this occurs.
During the reporting period ended 30 June 2022, directors advised the Company of the following changes or additional entries in the
Company’s interests register:
Name of Director
Entity
Position
Julia Hoare
Julia Hoare
Chapter Zero New Zealand Steering Committee Member
Sustainable Finance Forum, Leaders’ Group
Ceased to be a member
No other entries were made in the interests registers of the Company’s subsidiaries during the reporting period.
122
123
THE a2 MILK COMPANY ANNUAL REPORT 2022 COMPANY DISCLOSURES
8.2 Directors of subsidiary companies
The following persons held office as directors of subsidiary companies during the year ended 30 June 2022.
Subsidiary
The a2 Milk Company (Export) Limited
Jurisdiction
New Zealand
a2 Infant Nutrition Limited
a2 Holdings UK Limited
New Zealand
New Zealand
The a2 Milk Company (New Zealand) Limited
New Zealand
Mataura Valley Milk Limited
New Zealand
a2 Australian Investments Pty. Limited.
Australia
a2 Botany Pty Ltd
Australia
The a2 Milk Company (Australia) Pty Ltd
Australia
a2 Infant Nutrition Australia Pty Ltd
a2 Exports Australia Pty Limited
Australia
Australia
The a2 Milk Company (Nutrition) Pty Limited
Australia
The a2 Milk Company Limited
British Columbia, Canada
The a2 Milk Company Limited
The a2 Milk Company
Scotland, UK
Delaware, USA
The a2 Milk Company LLC
Delaware, USA
a2 Infant Nutrition (Shanghai) Co., Ltd.
The a2 Milk Company (Singapore) Pte. Ltd.
China
Singapore
Directors (or equivalent)
David Bortolussi
Mark Sherwin (appointed 6 June 2022)
Race Strauss (resigned 16 May 2022)
David Bortolussi
David Bortolussi
Mark Sherwin (appointed 6 June 2022)
Race Strauss (resigned 16 May 2022)
David Bortolussi
Julia Hoare
David Bortolussi
Shareef Khan
Deyong Zhang
Race Strauss (resigned 17 May 2022)
Xue Tingwu (resigned 23 June 2022)
Mark Sherwin (appointed 22 July 2022)
Cao Siyuan (appointed 22 July 2022)
David Bortolussi
Mark Sherwin (appointed 6 June 2022)
Race Strauss (resigned 16 May 2022)
David Bortolussi
Mark Sherwin (appointed 6 June 2022)
Race Strauss (resigned 16 May 2022)
David Bortolussi
Mark Sherwin (appointed 6 June 2022)
Race Strauss (resigned 16 May 2022)
David Bortolussi
David Bortolussi
Mark Sherwin (appointed 6 June 2022)
Race Strauss (resigned 16 May 2022)
David Bortolussi
Mark Sherwin (appointed 6 June 2022)
Race Strauss (resigned 16 May 2022)
David Bortolussi
Mark Sherwin (appointed 6 June 2022)
Race Strauss (resigned 16 May 2022)
David Hearn
David Hearn
David Bortolussi
David Bortolussi
Mark Sherwin (appointed 6 June 2022)
Race Strauss (resigned 16 May 2022)
Xiao Li
David Bortolussi
Mark Sherwin (appointed 6 June 2022)
Race Strauss (resigned 16 May 2022)
Shaun Singh
No employee of the Company appointed as a director of the Company or its subsidiaries receives remuneration or other benefits in their
role as a director. 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 14.
8.3 Use of company information
The Board received no notices during the reporting period ended 30 June 2022 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
On 27 August 2022, the Board of Directors resolved that the Company intends to undertake a capital return to shareholders of up to
$150 million through an on-market share buyback.
11. ON-MARKET PURCHASES
During the reporting period ended 30 June 2022, 2,200,000 shares of the Company were purchased on market and held by the trustee
of the a2MC Group Employee Share Trust to be available solely for participants in Group employee share plans.
12. DONATIONS
The Company and its subsidiaries have made donations of cash and products totalling $3,159,176 during the year ended 30 June 2022
(2021: $2,309,729).
13. 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 2022 and 30 June 2021 is as follows:
Directors
Females
Males
Gender diverse
Officers
Females
Males
Gender diverse
At 30 June 2022 At 30 June 2021
6
3
3
–
12
3
9
–
6
3
3
–
8
1
7
–
124
125
THE a2 MILK COMPANY ANNUAL REPORT 2022 COMPANY DISCLOSURES
14. 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 2022.
The remuneration bands are expressed in New Zealand Dollars.
Number of
employees in
the year ended
30 June 2022
(Based on
actual payments)
Value of
exercised options
and rights
included in
remuneration
range $
31
35
18
14
8
13
10
8
5
6
8
6
9
7
7
1
3
3
1
3
1
4
1
2
1
2
1
1
2
2
1
1
1
1
1
1
2
1
1
–
–
–
–
–
–
–
–
–
196,682
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
92,132
–
32,345
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
$250,000 – $259,999
$260,000 – $269,999
$270,000 – $279,999
$280,000 – $289,999
$300,000 – $309,999
$310,000 – $319,999
$320,000 – $329,999
$340,000 – $349,999
$350,000 – $359,999
$360,000 – $369,999
$370,000 – $379,999
$390,000 – $399,999
$400,000 – $409,999
$420,000 – $429,999
$430,000 – $439,999
$440,000 – $449,999
$450,000 – $459,999
$460,000 – $469,999
$510,000 – $519,999
$530,000 – $539,999
$550,000 – $559,999
$560,000 – $569,999
$590,000 – $599,999
$600,000 – $609,999
Number of
employees in
the year ended
30 June 2022
(Based on
actual payments)
Value of
exercised options
and rights
included in
remuneration
range $
1
1
1
1
1
1
1
1
17,104
–
36,337
–
–
44,853
673,666
650,443
231
1,743,562
Remuneration Range
$ (Gross)
$610,000 – $619,999
$620,000 – $629,999
$690,000 – $699,999
$770,000 – $779,999
$1,100,000 – $1,109,999
$1,190,000 – $1,199,999
$1,270,000 – $1,279,999
$1,710,000 – $1,719,999
Total
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
and rights. The table does not include amounts paid after 30 June
2022 relating to FY22, and long-term incentives that have been
granted and have not yet vested or been exercised (as applicable).
15. PRINCIPAL ACTIVITIES
Other than the acquisition of Mataura Valley Milk Limited in
July 2021, there were no significant changes to the nature of
the business of the Company (or its subsidiaries) or to the classes
of business in the which the Company (or its subsidiaries) had
an interest during the year ended 30 June 2022.
16. 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.
Group EBITDA
Depreciation and
amortisation
EBIT
Interest income
Interest expense
Income tax expense
Net profit after tax
Attributable to:
Owners of the Company
Non-controlling interests
2022
$’000
2021
$’000
196,214
123,428
(18,929)
177,285
6,569
(2,467)
(66,646)
114,741
122,624
(7,883)
114,741
(7,453)
115,975
3,989
(699)
(38,607)
80,658
80,658
–
80,658
CORPORATE
DIRECTORY
Company
The a2 Milk Company Limited
New Zealand share registry
Australian share registry
Registered offices
Auditor
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
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THE a2 MILK COMPANY ANNUAL REPORT 2022 thea2milkcompany.com
The a2 Milk Company Limited (Australian Registered Body Number 158 331 965 – Incorporated in New Zealand)
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