The A2 Milk Company Ltd (ASX: A2M) share price will be one to watch on Thursday.
That's because this morning the infant formula company made a very positive announcement relating to its US operations.
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Why is the A2 Milk share price on watch?
The A2 Milk share price could defy the market selloff today after the company announced that it will soon be selling its infant formula in the massive US market.
According to the release, the United States Food and Drug Administration (FDA) has exercised its discretion to allow A2 Milk to import infant milk formula products into the United States.
A2 Milk applied to the FDA on 26 May but had its application deferred in August. Since then, the company continued to engage with the FDA to meet its requirements and to reconsider A2 Milk's application.
It has now done enough to convince the FDA to approve its application and has been given the thumbs up to import, sell, and distribute a2 Platinum infant formula products (Stages 1 and 2) from New Zealand into the US through to 6 January 2023. The company is also able to supply Stage 3 toddler products, which does not require enforcement discretion.
What's different?
The release notes that the product that will be supplied to the United States has the same formulation as a2 Platinum but has different scoops, mixing instructions, and labelling requirements to meet the FDA requirements. This product is not currently available in inventory and needs to be manufactured as soon as possible.
A2 Milk previously indicated to the FDA that if approval was obtained by 30 September 2022, it had the capacity through Synlait Milk Limited (ASX: SM1) to manufacture 9 million cans of a2 Platinum (equivalent to 211 million 8oz bottles) by 30 June 2023 if required during the supply shortage period, subject to customer demand.
However, management highlights that while the United States is a significant opportunity, it is difficult to predict the infant formula sales potential as it is a highly competitive market to enter.
Accordingly, the company believes sales will be significantly below indicated manufacturing capacity and is provisionally forecasting sales of 1 million cans to the United States during the second half of FY 2023.
Furthermore, management expects gross margins to be lower than average, distribution costs to be higher due to potential air freight and rework costs, and incremental marketing and trade investment to enter the category. This makes its earnings impact unclear at this stage.
Management commentary
A2 Milk Company's managing director and CEO, David Bortolussi, said:
We are pleased to be able to assist parents and caregivers in the US by providing access to significant volumes of high quality, a2 Platinum infant and toddler milk formula manufactured in New Zealand during this challenging period. Our a2 Platinum product meets the FDA's food safety and nutritional requirements and is made with a2 Milk, which has digestive and other potential health benefits that have underpinned the success of our brand in other markets.
a2MC is well positioned to support this initiative being one of the leading premium international infant milk formula brands with annual sales exceeding 30 million cans. We have scalable production capacity in New Zealand with Synlait plus existing a2MC US sales, marketing and supply chain capability that can be leveraged.
We are increasing our supply to respond to this situation, while importantly ensuring that we continue to meet the needs of our other IMF consumers and trade partners in China and other markets. If the US requires further support over an extended period, we have the proven ability to scale up significantly.
