Thank you for standing by, welcome to The a2 Milk Company Limited HY 2023 results release. All participants are in a listen-only mode. There will be a presentation followed by a Q&A session. If you wish to ask a question, you will need to press the star key followed by one on your telephone keypad. I would now like to hand the conference over to Mr. David Akers, Head of Investor Relations and Sustainability. Please go ahead.
Thank you, Ashley. Starting on slide three. On the call today, we have David Bortolussi, our Managing Director and Chief Executive Officer, and Dave Muscat, our Chief Financial Officer. We also have the leaders from our regions, Li Xiao, Yohan, Kevin, and Blake. The team will present the results and our outlook, and there'll be time for questions at the end. I'll hand over now to David Bortolussi.
Thanks, David. Good morning, everyone. Thanks for joining the call. Before we get into our presentation, I'd like to start by acknowledging the significant impacts from the recent flooding and cyclone in parts of New Zealand and those affected by these events. The loss of life, impacts on livelihoods, damage to homes, infrastructure, and local communities has been devastating. Farming communities, including some farmers supplying our A1-protein free milk and also some of our own team, have been impacted. We're in regular communication with our partners and farmers to provide support where needed. We appreciate all the work the emergency services, Ministry for Primary Industries, and the broader farming community are doing. We've also had many farmers in Victoria and prior to that in New South Wales impacted by flooding events recently.
Farming communities are very much at the backbone of our business, and we'll continue to support our farmers and the communities in which we operate through these difficult times. With that said, I'll move on now to slide four and move on into our interim results presentation. It's been another busy half for The a2 Milk Company, and there's a lot for us to share and cover today. This slide summarizes the key messages in relation to our interim result. Firstly, I'm pleased to announce that our first half result was in line with our expectations with double-digit revenue and earnings growth. In particular, we're pleased to note that we delivered total IMF sales growth of 18% despite a very challenging China IMF market, which was down 12.5%.
Our overall growth was driven by China label IMF sales, and we achieved record market shares in the MBS and DOL channels. We've also just received the results from our brand health tracker, and pleasingly, China brand health reached new highs driven by increased investment and higher impact marketing campaigns. We've also continued focusing on building a strong innovation pipeline with recent new product launches in all categories supporting growth. Finally, as announced on Friday last week, our new China label IMF registration process remains on track. Moving to slide five. The results we're reporting today are in line with our expectations. Revenue for the half was NZD 783 million, which is up 18.6%.Adjusted EBITDA was NZD 107.8 million, up 10.5% and representing a margin of 13.8%.
Our net profit after tax, including the non-controlling interest relating to China Animal Husbandry Group's 25% interest in MVM, was NZD 68.5 million or NZD 73.8 million excluding CAG's proportional MVM loss. Our closing net cash position, sorry, was NZD 707 million. The balance sheet is in a strong position, which is also after completing 60% of our on-market share buyback in the half. This slide also provides a high-level summary of regional and product revenue performance, which the team will cover off in more detail in the presentation. The key messages are that we achieved revenue growth in all major product segments, driven by continued improvement in execution against our refreshed growth strategy, and that this growth, plus our distribution model changes, have led to a significant shift in revenue from our ANZ to China and other Asia segment.
I want to spend some time now discussing what we're seeing in China IMF market and how we're positioning ourselves. Clearly, the market has been impacted by a further decline in the number of births. There was a further 10% decline in the last calendar year, which follows a 12% decline the year before. In the first half of 2023, the overall China IMF market declined 11% in volume and 12.5% in value terms. This reflected the decrease in births and the rolling impact of fewer births in prior years, reducing Stage three IMF sales, which is the largest segment of the market.
We're also seeing a variance in growth rates between key K&A and BCD cities, but the market declines are now nationwide, with K&A market value sales decreasing by 15.4% and BCD market value declining by 10.1%. Looking at the category from a China label and English label perspective, China label market value declined 12.2%, with the MBS channel down 9.8%, but DOL up or domestic online up 4.4%. English label market decline again exceeded the overall market, down 15.7%. The market shift from English label channels to China label channels was less pronounced than in prior periods. Within English label channels, daigou continues to experience strong declines, down almost 40% in the half.
O2O was down 14.5%, conversely, CBEC was up just under 12%, creating a significant mix shift across English label channels. We predicted many of these shifts in developing our strategy, but the extent and speed of change has been very challenging to manage, particularly when COVID-19-related impacts are layered on top. Moving to slide seven. This slide shows that our IMF sales mix has evolved significantly over time and is now almost 50/50 between China and English labels. We also highlight here the positive trends supporting our growth. Within China label channels, we continue to be supported by the mix shift to the ultra premium segment, where our a2 Zhichu brand is positioned.
The rapid growth of the A2 protein segment, which continues to outpace the market and represents over 10% of the category, and increasing brand concentration with the market moving towards the top 10 brands, which have gained 6% share over the past couple of years, with a2 being one of those brands. Turning to slide eight and our outlook for FY 2023. We expect the increasingly challenging China IMF market dynamics to continue due to the following key factors. Fewer births in calendar year 2022 and the rolling impact from fewer births in prior years on later stage IMF products, the evolving English label channel dynamics, and a degree of disruption from the market transitioning from the current new China label GB registered product during this calendar year.
Despite challenges in the China IMF market, we're expecting low double-digit revenue growth in FY 2023, supported by growth in China label IMF, ANZ fresh milk, and our U.S. liquid milk sales. English label IMF revenue is expected to be broadly in line with FY 2022. MVM sales are expected to be down on FY 2022 reported sales due to higher insourcing and lower GDT pricing. It is also important to note that the positive impact of foreign exchange rates on revenue growth is less than what we expected when we provided our last outlook update in November last year. Our outlook for growth margin percentage is slightly higher than in FY 2022.Adjusted EBITDA is expected to grow in FY 2022, while EBITDA margin percent is expected to be similar to FY 2022.
Distribution costs are expected to be higher in the second half of 2023 compared to the first half, due to higher costs associated with China label stock build and transition. Marketing investment along with SG&A expected to be significantly higher than FY 2022 as the company continues to invest in its brand, capability, science, innovation, and sustainability consistent with our growth strategy. As Dave will shortly note, as we called out at the end of the full year result in August last year, our FY 2022 cash conversion was high due to the timing of payments in China, which was impacted by COVID-19. In the second half of 2023, we also need to manage the timing of the working capital build for China label. Overall, we're expecting cash conversion in FY 2023 to be significantly lower than FY 2022, returning to more normalized levels in the future.
Slide nine shows our strategy on a page. We first shared this with you back in October 2021, with incremental changes since then when we updated our purpose and vision. It remains unchanged, and it is how we articulate internally and externally our purpose, vision, goals, and strategic priorities. Moving to Slide 10, we've expanded the presentation on this slide slightly to show you the non-financial measures of success as well as the financial measures and how we are tracking. We've also shown how this ladders up to the overall goals for people, planet, consumers, and shareholders, which also forms the basis of our group performance scorecard and our integrated reporting. Slide 11 is another one we've used regularly.
With our interim result today and FY 2023 outlook, we are on track to achieve our medium-term ambition to grow sales to NZD 2 billion and to improve EBITDA margins over time in the teens. One change here is that we've noted that English label IMF is a work in progress, mainly due to challenging market and channel dynamics. I would also note that China label IMF is ahead of plan. Next, I'd like to highlight how our focus on innovation recently has gained momentum. We launched a number of new products in the past six months, our refreshed a2 Platinum English label IMF range, our Lactose Free milk in Australia, China label a2 Nutrition for mothers, our upgraded a2 Smart Nutrition, and our new full cream milk powder in a tub.
We've also recently commenced a trial in the U.S. for a protein and collagen nutritional powder range on Amazon. We'll be launching a2 Milk® Grassfed in the U.S. in March. I'm especially pleased with how the team has managed the phase in of the refreshed a2 Platinum IMF range and the phase out of the previous range successfully across English label channels within the half without significant market disruption or inventory exposure. Moving to the update on our important China label new GB registration process on slide 13. We were pleased last week to receive confirmation that the NPI audit process on behalf of SAMR will commence this week at Synlait's Dunsandel facility following completion of the dossier review process in December.
We've been working closely with Synlait in relation to the process, including building stock of existing China label product, which has been completed to plan prior to the 21 February manufacturing industry cutoff date tomorrow to assist with our transition program in the second half of 2023 and the first half of 2024. I want to highlight the continued progress we're making in sustainability. In keeping with our purpose and vision, we're determined to pioneer the future of dairy for good. This is especially evident in our goals for people and planet. We're continuing to invest to significantly reduce our Scope one, two, and three greenhouse gas emissions. In the half, we progressed the installation of a new 100% renewable energy-supplied high-pressure electrode boiler at MVM, which is due to be completed in October this year.
The team has already received a number of awards for this project, and it's a really a market-leading implementation in the New Zealand market. We also commenced the preparation for a methane inhibitor feasibility study in Victoria working with Sea Forest and utilizing their SeaFeed product, which is a methane inhibitor from the Asparagopsis seaweed.
We remain committed to making a meaningful contribution to be nature positive and making meaningful change in packaging. We're also proud of our partnerships and continue to support communities in need during the half. I'll now hand over to our new CFO, David Muscat, who joined us in October to take you through our group financials in more detail.
Thanks, David. Good morning, everyone. Moving to slide 16 and a summary of our group income statement. Net sales revenue was NZD 782 million for the half, up 18.7% on the corresponding period. Our China and Other Asia segment grew substantially, up 54%, with strong underlying performances in both China label and English label IMF. This segment now makes up 60% of our total revenue, compared to 46% in the prior period. The U.S.A segment was up 61.8% and MVM up 18.4%. The ANZ segment declined 24.6%, which, as we'll discuss shortly, reflected the challenging China IMF market, along with the actions we've taken to continue refining our English label distribution model, with sales more weighted to the authorized feedback platforms.
As we updated the market in November, it's also important to call out the FX, that FX had a favorable impact on revenue in first half 2023. Due to New Zealand dollar weakness during the half, foreign exchange movements led to an increase in revenue in the order of NZD 35 million and to an offsetting increase in cost of doing business, including our hedge losses, resulting in a minimal impact at the Adjusted EBITDA level. Going down the income statement, gross margin of 47.6% was up 1.3 % points, reflecting the benefits from the a2 Platinum refresh positioning and distribution model changes, price rises, and the cycling of other nutritional stock write-downs in the first half of 2022. This was offset by increases in COGS that included unfavorable FX.
Distribution costs were slightly lower, reflecting the mixed benefit from lower sales to ANZ resellers compared to CBEC and lower U.S. freight rates in the current period. We significantly increased our investment in marketing and SG&A compared to the prior corresponding period, in line with our plans to execute against our refreshed growth strategy. Higher interest rates led to higher interest income. The effective tax rate was in line with FY 2022, impacted by unrecognized tax losses for the U.S. and for MVM. Net profit after tax for the half was NZD 68.5 million or NZD 73.8 million after non-controlling interest in MVM, a loss of NZD 5.3 million for the half. Slide 17 summarizes our segment revenue and EBITDA performance versus first half of 2022.
As mentioned earlier, the China and Other Asia segment is up 54% on the prior period and is now our largest segment in terms of sales and Adjusted EBITDA. Moving to slide 18, which summarizes our first half 2023 performance versus first half 2022 from a product perspective. In all categories, IMF, liquid milk, and other nutrition, we achieved double-digit growth. IMF was an especially strong performance given the 12.5% value decline in the China IMF market overall. Moving to slide 19. Consistent with our growth strategy, our marketing and capability investment has increased significantly. Marketing investment is up 46% compared to the first half of 2022, which reflects our continued focus on China, timings of campaigns, and new product launches. Administrative and other expenses increased 15.8% to NZD 115 million.
This reflected further investment in capability and innovation, normalized LTI expenses, foreign exchange losses, and higher travel following COVID-19 disruptions. On slide 20, the balance sheet remains strong. Cash and term deposits at the end of the period were NZD 777 million, with a consolidated net cash position of NZD 707 million. It's important to note that as we manage our China label IMF transition, we needed to build China label IMF stock during the half. From a balance sheet perspective, this has resulted in our inventory being higher and our other current assets being higher, primarily due to prepayments for China label stock. Another key point to note from a cash perspective is that we utilized NZD 90 million in cash to complete 60% of our on-market share buyback in the half, which we plan to resume.
The final item I'd like to call out with regards to the balance sheet is that trade and other payables are lower. This is mainly due to the timing of annual rebate payments in the first half and also, as David mentioned earlier, due to FY 2022 catch-up payments in China. This related to COVID-19 impacts in FY 2022 and was outside of our control. It was called out previously that this would unwind in the first half of 2023, and we're pleased to have caught up in this important area. Moving to the next slide, which includes our cash flow. The key call-outs for cash flow were the points I made on the balance sheet, where operating cash flow reflects the unwinding of working capital benefits from the second half of 2022 and stock building of China label IMF in the current period.
Both drivers are temporary, and we should see a return to more normalized cash conversion in the future. With that, I'll hand over to Li Xiao to take you through the strong performance of our China label IMF business.
Thank you, Dave. It has been another very busy six months in China, as David mentioned at the start of the presentation, the China IMF market has been very challenging. We are fighting strongly and getting ourselves very fit. When this storm passes, you will see we will be in an excellent position. Today, I want to give you a few of the highlights from first half 2023 for China label. Some of the progress we have made recently includes launching of our new brand proposition, a2 Milk™ Because Milk Matters, coupled with more disruptive PR and greater integration. We have increased activation coverage for regional key accounts. We increased offline distribution in lower tier cities and further refined approach to new user recruitment. We have also increased our level of investment in digital and online, and expanded into emerging online channels.
This is having a very positive impact on the business, which I will take you through now. Turning to slide 24. The overall China IMF market was down 12.2%. MBS was down 9.8%, while DOL was up 4.4%. Our China label sales for the half were up 43.5%, reflecting the strong execution against our strategy. Some benefits from pricing and with a little bit help from foreign exchange. Based on our results, I also want to point out that the first half 2023 revenue includes some increased sales late in the half to mitigate potential COVID-19 related disruptions in China, and also relatively early Chinese New Year. Growth with the prior corresponding period also reflects cycling of actions taken in first half 2022 to rebalance China inventory. Moving to slide 25.
Here you can see we continue to expand it, our distribution footprint. We increased our numerical distribution from 23 - 26, and our weighted distribution from 44 - 47. We are also pleased to have again improved our like-for-like growth in mature stores. On the next slide, you can see our share in MBS has increased to 3.2%. We still over-index in T&A cities with share growing to 7.4%, but we are growing faster in BCD cities with a 32% increase to 2.5% share for the half. We are particularly encouraged by our BCD performance and continue to be focused on capturing our opportunity in these lower tier cities. Turning to slide 27. Our online growth outpaced offline sales growth.
We significantly increased our overall door share to a new high of 3%, and really closed the gap between our MBS and the door share. We also achieved strong growth within the key door platforms of Tmall and JD, while unlocking growth potential in other platforms, Douyin or TikTok in particular. I never thought I would be selling product on TikTok, but here we are. It's lucky I have a very talented team to execute on these online platforms. To put all that in context, slide 28 shows that we are in the top three share gainer among domestic and international brands in both MBS and the door channels. Slide 29 shows that we have again, share in all stages across MBS and the door.
It's important to us that we recruit new users across all stages, given our strong loyalty performance through the brand funnel, early stage new user recruitment is especially important. Slide 30 shows that China label performed strongly in Double Eleven. We increased sales by 76% online compared to last year, improved our ranking from 10th to 8th in Tmall Door flagship store compared to June 18th, maintain our number two position in TikTok from June 18th. On slide 31, we explain the relaunch of our brand proposition. In FY 2022, we have successful campaign highlighting the functional benefits of a2 Zhichu China label and the a2 Platinum English label MF. In second quarter 2023, we relaunched our brand proposition to further emphasize the benefit of a2 protein. This was integrated across channels. The campaign received a Gold Award at the China International Advertising Festival.
Again, I'm very lucky to have such a talented team. Moving to slide 32. With the brand proposition relaunch and all our other activities in the half, we are very pleased to see this hard work translate into new highs in our brand metrics. Total awareness is up to 63, and the trial and the loyalty has also increased. Now I will pass to Yohan.
Thank you, Xiao, and good morning, everyone. We are also pleased with our performance in English label, given the significant challenges in the market in the first half. I will quickly highlight some of the progress we've made in the business. A major focus in the half was the transition to our refreshed a2 Platinum range across all English label channels, which we supported with a digital-focused consumer campaign in China, together with offline events and reseller marketing support in Australia. Another major focus was the refinement we continue to make in our English label distribution model. We also built capability by embedding dedicated teams to focus on O2O coverage growth, leveraging our China offline network and activations. Let's go through the results itself on slide 34. The overall English label market in value declined by 15.7% in first half 2023.
This was driven by a sharp decline of 39.5% in the Daigou channel. O2O channels serviced by ANZ resellers were also impacted. Conversely, the CBEC market benefited from the shift to online channels, achieving double-digit growth. Our net sales revenue was up 1.0% to NZD 285 million, with a major shift within English label channels, reflecting the continued refinement of our English label distribution model and the deliberate shift in sales to CBEC authorized distributors from ANZ resellers. While our ANZ IMF revenue decreased 39.2% to NZD 109.4 million, sales from CBEC and other labels increased by 71.5% to NZD 175.6 million. This also reflected some benefit from pricing from the refreshed a2 Platinum.
Given the evolving market dynamics and challenges, we're pleased that our market share has improved in CBEC and stabilized in Daigou. Slide 35 shows we've increased share in CBEC to 22.1% and marginally increased share in Daigou to 19% after four consecutive periods of market share loss. The CBEC market value share would have been elevated to some extent by sales of both old and new label a2 Platinum during the transition between the two in one half 20 23, and O2O share is stable. Moving to slide 36. As you all know, Double 11 is an important selling event and has the potential to be a difficult event to manage given the product transition and distribution model refinements we were making. We're pleased to have performed well in Double 11.
We increased sales by 4.8%, maintained our number one ranking in CBEC IMF flagship stores, achieved number two SKU in both JD.com and Tmall Global EL top seller list. We also achieved number one ranking in English label IMF stores on TikTok. Slide 37 shows some of the activities we undertook to support the launch of the refreshed a2 Platinum range. The images on the left show the direct engagement and support for the Daigou community in Sydney and Melbourne. The images on the right are China consumer campaign, including video testimonials from key opinion leaders and WeChat content campaign via the Daigou channel. We've built our own in-house capability managing these channels to continue delivering against our strategy. I'll now hand over to Kevin.
Thanks, Yohan. Starting on slide 38, ANZ milk. The key point to make overall is that as we called out at the time in the first half 2022, our sales benefited from COVID-19 lockdowns. This is because the vast majority of our sales are derived from in-home consumption. With COVID-19 restrictions ceasing in second half 2022 and coupled with pressure on household consumption from interest rate rises and inflation in the first half 2023, we experienced challenging market conditions. That said, we're pleased with the progress we've made delivering against our strategy, including the increased distribution of a2 Milk UHT, the successful launch of a2 Milk Lactose Free, bringing new users to the brand, and have commenced preparation work for an on-farm seaweed feasibility study to support methane emissions reduction. Taking a look at our result on slide 39, sales increased 5.6% to NZD 92 million.
In response to higher raw milk prices and other input and logistics costs and net of cost reductions, our prices increased in response to the higher costs. Our sales growth was supported by new products and some favorable foreign exchange movements. That said, the challenges included overall category volume decline, with the prior corresponding period benefiting from lockdowns and, in this period, inflationary pressure leading to consumers trading down. Reflecting this, our market share declined to 11.4%, but I will point out that this is still at a very healthy level and above our share before COVID-19 and the associated lockdowns in Australia. In fact, over that COVID-19 period, while the market volume for liquid milk has decreased 3.7%, our sales were up 2.7%, driving market volume share to increase from 6.6% - 7.1%.
Slide 40 highlights something that we're really excited about, the launch of our new lactose-free milk, which has exceeded our expectations. We launched this product in August 2022 in New South Wales and in Victoria and achieved a 12.3% market share and top status in Australian grocery in 2022 as new product development launch of the year in the dairy milk category. With that, I'll hand over to Blake.
Thanks, Kevin. Slide 41, as you'll see, outlines progress made during the period against our strategic priorities in the U.S.A. In particular, we've been most pleased with the progress in three key areas. Firstly, in demonstrating progress on the path to profitability. Secondly, in building distribution and consumer engagement on both a2 Milk® Half & Half and Hershey's a2 Milk® in both extended shelf life and UHT formats. Thirdly, the robust portfolio of innovation, including a new nutritional powder trial and a new milk line from 3Q 2023. Now, turning to slide 42, you'll see that our revenue has increased by 62% to $52.4 million, and we achieved a significant improvement in our Adjusted EBITDA lossSales growth was driven by modest growth in core liquid milk, increased distribution of new products, and favorable foreign exchange movements.
Our earnings improvement reflected revenue growth, improved distribution rates, and lower marketing spend. Our market value share in the premium milk category for the grocery channel increased to 2.3%. Moving to slide 43, we'll talk a bit about the U.S.A IMF opportunity. During the period, we also received confirmation from the FDA that our application for enforcement discretion to import, sell, and distribute IMF products from New Zealand into the U.S.A had been approved. We continue to assess this opportunity. We intend to pursue longer-term FDA approval of a2 Platinum, while we are also carefully considering market entry options. There are some major challenges given the market structure and development since the initial IMF supply shortages in 2022, as well as the regulatory approval process.
I'm hopeful we'll be able to navigate through this to create a meaningful opportunity for our U.S. business in the future. I'll now hand it back over to David.
Thanks, Blake. Quickly on MVM to round out the first half results. The sales increase versus PTP reflected six months under our ownership versus five months in the first half of 2022. The Adjusted EBITDA loss of NZD 13.4 million reflects the current production mix, with MVM primarily selling lower-value milk powders on the commodity market, compared to a reported loss of NZD 10 million in the first half of 2022 for five months or a loss of NZD 14.4 million on a six month basis. MVM has continued to progress its transition to in-source additional full cream milk powder from Synlait and is prioritizing insourcing skim milk powder and certain existing English label IMF products. MVM will also focus on driving future innovation in nutritional products for a2. Accelerating MVM's path to profitability by FY 2026 or earlier remains a key strategic priority for us.
That takes me to the end of the presentation, and just before we open up the Q&A, I'd like to express my thanks to our team at The a2 Milk Company and our partners for all the efforts and achievements in the half, particularly our China team and our important strategic partner, China State Farm, during the December and January period when COVID was at its most challenging. With that, I'll now pass back to David Akers for Q&A.
Thanks, David. I'll ask that when we take questions, they limit it to two questions and then please rejoin the queue. Ashley, can you please open up for questions?
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. Your first question today comes from Sophie Carran with Goldman Sachs. Please go ahead.
Hi, David and team. Thanks for taking my questions. First, just around the transition to the new China label product, can you just give us a little bit more color around the expected timing of the launch, how much of an inventory buffer you've built up, and then looking at the market, how much you've already seen transition to the new product?
Hi, Sophie. In terms of the timing of the transition and inventory, I mean, it's a long, extensive process which we've been working on for some time now with, really closely with Synlait. We went through the dossier review process in December. The audit is obviously starting this week at Synlait's Dunsandel facility. You know, it's hard to be certain how long that audit process will take. It depends on, you know, the interaction between both parties on that. I mean, I think it would be reasonable at this stage to expect that we would be hopefully through the audit process by the end of the March quarter. Hopefully during the fourth quarter, we would receive approval from SAMR, but there's a, you know, long way to go through that.
That would then enable us to move into production with Synlait, perhaps late in the fourth quarter and into that first quarter of next financial year with a transition to our new product during the first half of 2024. I won't go into the specifics of, you know, the inventory that we've built, but suffice to say that we've built enough inventory which has been completed to plan with Synlait, having regard to our demand forecast for the period and supply from Synlait to cover us through that transition in an orderly way. That's, you know, some of the sort of cash flow impacts that David talked about in terms of how that's impacting our balance sheet and cash flow during the year. From a market transition, you asked about that. I mean, there have been...
I mean, there are, there are hundreds of brands and labels which are subject to the new GB registration process at the moment. There have been both approvals of, you know, more so of China domestic players and manufacturing facilities, but there also have been approvals of multinationals China facilities as well as international facilities. From a New Zealand perspective, to my knowledge, nobody has been approved as yet, although a couple of order processes have also commenced, and ours is commencing shortly. From a market point of view, Xiao, do you just wanna comment quickly on the market? We're just starting to see new GB product transitioning in the market, but I, you know, we expect that to accelerate through the balance of this year, I expect.
Yeah. We probably are seeing, I mean, the local brands is faster. I mean, in taking a long, being closer to the market and get early approval and can produce earlier. For most of the MNC, I think we are on the almost the same page. Yeah. Everybody's building certain amount of inventory before the approval. Yeah. In precaution for the transition period. Probably we are pretty on par with the MNC, while, I mean, local brands enjoy the benefits.
Sophie, we've indicated in our outlook statement, like this is, you know, this is a major event for the whole market, transitioning from ultra new GB product during the course of this calendar year. We think we're well prepared for that in good shape, and our performance in our China label business would suggest that as well. You know, it's gonna be a challenging period for the industry and ourselves to navigate through.
That's helpful, thank you. Just my second question is around the marketing investment. Can you just talk about some of the key areas of investment and then the phasing of that spend first half to second half? Do you still expect that to be slightly first half weighted?
We haven't provided explicit guidance on our marketing investment, you know, first half versus second half. You know, you're probably referring back to at August, we've tried to elevate that up a little bit. We've said that we expect marketing investment to increase significantly YoY. I mean, it'll be broadly similar to our first half, but it really, it just depends on, you know, a variety of factors and, you know, whether we are able to. We've got plans for our marketing for the year and, you know, we may need to tweak those around a bit depending on the situation. You know, for example, you know, we've had COVID impacts impacting timing of marketing and things like that, but it'll be broadly similar, which would represent a significant increase in our marketing investment.
It could be up, down or sideways, but we'll see how that plays out.
Your next question comes from Thomas Kierath with Barrenjoey. Please go ahead.
Morning, guys. Just a question on the revenue guidance, which implies a pretty big slowdown in the second half. The China label business looks like it's going, you know, really strongly. I'm just interested on what you're seeing in Daigou and whether you're expecting that to be quite weak this half. I just would've thought with borders reopening, etc., you actually see a bit of growth there. You know, have you seen that? How are you thinking about that business?
I might, on the Daigou channel and our business, I might just hand over to Yohan to have a quick discussion around that, Tom.
Hi, Tom. Yeah, I guess in terms of Daigou, obviously the last few months have been particularly challenging with all the COVID disruptions for the channel. As you said, I am, you know, quite excited about the prospect of international students arriving to Australia and New Zealand. I guess the only aspect of that is it may take a bit of time for that to show up in, you know, in IMF and Daigou activity. For example, you know, tourism, you know, hopefully will resume. If you look at flight movements, say for Melbourne Airport, while six of the major mainland Chinese airlines have resumed flights to Melbourne, the flight capacity is only still expected to be around 50% in March.
There's still a way to go. Whilst the changes in the international student policies by the Chinese government may result in some flows of international students to Australia, I guess the question is how many will be able to arrive in time for the first semester. Lastly to that is I guess the question of whether, you know, the next generation of Daigou will operate the same as pre-pandemic Daigou. I guess, you know, in a nutshell, Tom, I'm excited by the prospect, but also, I think, you know, we're also mindful of the fact it may take some time for that business to renew itself.
Okay, thanks. Just maybe on that point, you know, you guys have done a lot of work understanding who is actually consuming the product. Do you think that the Daigou customer is, like, incremental and those sales will be incremental, or do you think it'll effectively cannibalize the China label business, you know, when it does come back?
I think that there are some distinctions between the China label consumer and the English label consumer. In some of the past work that we presented, say in the investor day presentation as well, the research showed that, you know, there are distinct consumer sets that go for China label and English label. In fact, you know, when we look at, you know, selling English label and China label products side by side, you know, as an O2O offering in offline stores, we see, you know, overall sales actually growing. I don't necessarily see it as a, as a cannibalistic situation, but rather a different customer segment that we can, you know, approach via the English label products.
Tom, I'd add to that, we, in our ongoing consumer research, our priority stuff, we don't see a lot of switching between the two labels. Also within the English label channel, I mean, you know, on the one hand there's consumer pull and brand marketing that we do, but there's no doubt that the Daigou, from a push point of view, can actually drive our business well, and we've seen that work very well in the past. You know, I think it can very much be incremental. I guess at this stage, you know, we're not clear about the potential impact of that at the moment. If it does reignite, I would assume that a fair chunk of that will be.
Yep. Great. Thanks, guys. Appreciate it.
Your next question comes from David Errington with Bank of America. Please go ahead.
Morning, David. How are you?
Hello.
Can I clarify your comment following on from Tommy's question about the sales? Matt, can you give a bit more detail with regard to how much your sales increased latter part of that second half or the first half, I mean, because of COVID and the relative Chinese New Year? Was that a meaningful number? Also the foreign exchange. Can you give us a bit of, you know, so as we can work out what the underlying growth was in China label?
I'll try and help you with that. On the, at the end of the second quarter, I mean, definitely there was, it was, you know, COVID was obviously, you know, pretty extreme impact after restrictions were lifted. Then we had the early Chinese New Year. You know, we. Again, we performed well during that period. Our sales lifted late in the fourth quarter. Also we wanted to ship a little bit more in just to make sure that we're well covered, because who knows how logistics would've potentially been interrupted. Versus our fourth quarter performance last year, which we spoke about last time we caught up on this, we think that was more material when we look at our share numbers.
Um-
We think that's more substantive. I mean, it's no doubt there was something at the end of the second quarter, but we don't think it's that material. Whereas the fourth quarter, we think that, you know, when we look at our share numbers, it did bump up off trend trajectory during that quarter. We think that part of that would've been pulling forward in effect through pantry loading, 'cause, you know, when the Shanghai lockdowns happened, there was a degree of panic buying at that point. Part of that would've been pulling forward our existing consumers. Other brands in the market were short of inventory at that time, and retailers, so we would've switched some consumers into our brand.
Maybe we retained some of them, I hope, but some of them might've reverted back to that other brand, particularly in stage three, where mothers and parents are generally more willing to, for their, for their infants to switch between brands. We think that was more material. In terms of currency, we quantified in our announcement that the currency impact that happened in the first half versus pcp was in the order of NZD 35 million. If we break that down, around NZD 5 million was associated with MBM, which has kind of different economics associated with it. The other 30 is roughly split 50/50 between transaction and translation. The main transaction exposure we face is in our China label business. Half of that, roughly NZD 15 million, is attributable to the China label business. Yeah.
Yeah.
Does that help?
It does, it does. I suppose my second part question, the part that you and I remember Li Xiao and Yohan talking is, your number one focus in the for the next year or two was your brand health metrics, and that's, you know, sales will come after that. You must be absolutely thrilled with that brand metrics, the way that's going. Maybe a bit of a comment from Li Xiao and Yohan about, you know, the sustainability of that growth in in brand health. The second point to that is, look, where does Daigou fit in with all of this? Is Daigou just... I'm, I'm struggling, David, with the strategy with Daigou. I know that you want it, but can you really have it with a a growth in you know, CBEC, direct CBEC?
I'm just wondering where Daigou fits in with this whole overall strategy, 'cause I'm just a bit confused where it all fits in at the moment?
I just want to make a couple of remarks, then I'll hand over to Zhao and Yohan. On brand health, we are very pleased with the impact that we're having. We're investing a lot more in our brand, as you've seen in the half, in absolute terms and reinvestment rate. I think we're having an impact, as you can see in the metrics that we're sharing. We're really pleased with that, and it appears to be a sustained improvement as well, you know, right through the right through the funnel and also in NPS as well. Delighted about that, and I think that's really driving, you know, the consumer pull for our brand. I'll let Zhao comment in a second on the sustainability of that, and any other comments he'd like to make.
The Daigou channel, it can coexist. Like, I don't think it's a or. It still can be an and for us, as long as we maintain the balance of channel economics between, you know, CBEC and Daigou as well. I'll let Yohan comment on that. Xiao, do you wanna comment on the sustainability of our brand health metrics and perhaps what you're, you know, what maybe some of the drivers of the, you know, in terms of executing or lifting the investment, but also how we've gone about that and why we think that's sustainable?
Yeah. First, I mean, I appreciate, I mean, the support from investor and the global leadership team that we step up the marketing investment. But I mean, that's not only the successful driver. Actually, we are keep on optimizing, I mean, our way of communication to the consumer. So in first half of this year, I mean, we started with a new brand proposition, a2 Milk Because it Matters . That's, I mean, a very, I mean, a more powerful positioning. I mean, combine the A2 category education to grow the pie, as well as, emphasize, I mean, The a [audio distortion]
Also, I mean, this is achieved by a highly integrated campaign for both online, offline, all the touching points we are communicate to consumer in the same message. The message you see are cutting through our, I mean, leading position in those top platform like RED, Bilibili, and, I mean, other, Mamanet, which is where consumers seek, I mean, opinion. These are, I mean, the, we are actually, if you look at our success in the past, you see that we are keep on improving the marketing brand metrics result. It's like, I mean, our total brand awareness jumped in the first half by, from, 57% - 63%.
Under the aware is improved from 21 - 23. The trial, past three months trial improved from 17 - 24. sorry, 17 - 21. Under the brand use most often from 13 - 15. You see that, I mean, it's not only like a total awareness. Total awareness come and goes, I mean, with your budget and investment. I mean, what is encouraging is, I mean, your loyalty rate and also those trial. Plus, I mean, what we call the word-of-mouth recommendation. We also see our Net Promoter Score also updates quite a bit. I would be more optimistic.
I mean, this is going to sustain, not because we are increasing investment, but it's, we are keep on learning, I mean, doing and optimize our approach, I mean, to help generate, I mean, bigger impact with, I mean, less budget. If that answered the question.
Absolutely. It's a great result, Li Xiao.
Yeah.
And-
Thank you.
Yeah. Regarding, I guess the Daigou question that you had, David. To David's earlier point, you know, if we look at the English label market, you know, notwithstanding the challenges that Daigou has faced, particularly in the last few months, it's still a material part of the overall English label market. There's a role for the Daigou channel to play in terms of driving word-of-mouth. Increasingly, yes, you know, the CBEC market and the O2O market is becoming more and more effective in terms of new user recruitment and retaining customers as well. In terms of our approach, of course, we are, you know, improving and increasing our in-house capability in the CBEC and O2O channels.
At the same time, you know, also, setting up our direct engagement with the Daigou channel, which as I said, still has, a role to play and can, exist alongside those other channels as well. You know, I wouldn't say that the, you know, that, you know, that there's no reason to focus on the Daigou channel. It's still quite an important, channel for us in English label.
Thank you, Yohan. Thanks, David. Appreciate the answers.
Your next question comes from Richard Barwick with CLSA. Please go ahead.
Hi, guys. I'm just gonna ask you around your longer term targets for the FY 2026 target. You say that you are on track and the revenue growth would back that up. The composition is shaping up to be a little bit different, at least at this stage, with obviously a lot of success in China label, but less so in the English label. This could have implications as far as margins go because of, you know, Chinese label delivering a lower Adjusted EBITDA margin. Just wanted to hear your thoughts, David, around the composition. As you track towards the NZD 2 billion, is there any reason to change the way you've outlined the, I guess, the growth from the different segments?
That's a good question, Richard. I think. Look, we always expected China label growth to exceed English label. That was factored into our longer term plan at the time. Relative to where we are at the moment, that could change, you know, significantly in the out years. You know, China label has outperformed our initial expectations vis-à-vis that plan. China label is ahead and English label is sort of slightly behind our plan. We've still got a long way to go in that. There's a lot of things that we need to do on product innovation in particular. There's a lot of opportunity for us to innovate in English label to drive growth.
I think Yohan and the team have done a great job reshaping our distribution model and our engagement with all channels and investment in capability as well to execute. From a margin point of view, I think even back then we made it clear that I think it's well understood by the market that English label has greater margin than China label and other parts of our portfolio. That would, you know, all things being equal, would be dilutive to margin. You know, if we can drive growth in China label, the margin differential is not that significant that it would impact our ability to deliver on our ambition that we shared back at the market in October 2021.
Just to [clarify] that last comment you made, you're talking Adjusted EBITDA margin there?
Yeah. Percent EBITDA margin.
Yeah.
Yeah.
Yeah. Okay. And then I guess.
I think-
Just sort of following on from that.
We'll also, I mean, we'll get leverage eventually out of. I mean, we've increased our marketing investment quite significantly. I'm not saying that we necessarily need to increase that dramatically more in terms of a reinvestment rate. We've had a big step up in SG&A investment in a variety of areas, which I called out in my presentation. We'll eventually get leverage out of that as well. Even though we may have some pressure on, you know, growth margins from mix point of view, and, you know, also we've got our, you know, China label transition coming up, which, you know, like the rest of the industry, we're taking the opportunity to upgrade our product, which is higher cost, and we need to manage the implications of that on margin, etc..
I still think there's opportunity for us to get leverage in SG&A, so, and hopefully manage the overall weight and back down to the EBITDA margins.
Right. Well, that was sort of gonna be my next question as well. If, with China label doing, you know, so ahead of schedule, doing better than expected, does the ultimate EBITDA margin for China label, are you more optimistic there? I mean, how should we be thinking about that? I mean, you've yes, you've been very clear that English label margin's greater than Chinese label. As you say, that's well understood, but then it gets pretty vague after that. Yeah. Are you more optimistic on the ultimate Chinese label EBITDA margin, I guess is my question?
Probably, I mean, you're right. Our reporting is, you know, a mix of geographic segments and, then you've got a product overlay to that, and plus we've got big shifts between English label to CBEC and a lso reseller volumes, which are going up there direct as well.
Yeah, it's a bit of noise. I appreciate that's difficult to understand. I think as the China label, we've got a very, you know, we've got a small, relatively small, highly capable, agile team in China, which gets great leverage out of our strategic partnerships and distributors. Again, I think that we will get leverage in cost structures even though gross margins may come under some pressure over time. We've got ways in which we can think about managing that going forward. I think ultimately we'll, we should hopefully be, you know, on track or if not potentially above on China label if we get that kind of growth and leverage.
Okay. Thanks very much.
No problem.
Your next question comes from Adrian Allbon with Jarden. Please go ahead. Apologies, your next question comes from Sam Teeger with Citi. Please go ahead.
Oh, hi, David and team. Thanks for the presentation today. I understand why inventory has increased, but at 31 December, what proportion of the safety stock is on your balance sheet versus what is still sitting with Synlait?
We haven't disclosed that, Sam, but it's, you know, the ramp up in production was sort of from really in that sort of November to February period. There's some on our balance sheet. I don't know if, Dave, you wanna give any more clarity on that, but essentially the, you know, I mean, you're probably familiar with the manufacturing process, but we place a purchase order, Synlait manufactures, it sits in QA for a period of time, and then it sells. It's a sale to us and then becomes on our balance sheet. Dave, do you have anything further you want to add to that?
Yeah, I think probably the bigger impact to Sam, to December, is the increase in prepayments. You'll see our prepayments are up by NZD 40 million. About NZD 10 million of that is insurance, but the rest, NZD 30 million, relates to prepayments related to the ramp. The ramp will continue obviously till tomorrow, but the bigger impact to the December balance sheet is probably coming through prepayments.
Yeah.
With a portion coming through inventory.
The transition stock will have obviously a maximum impact on us in March, April.
Yeah.
Okay, cool. Over the last year, you know we've seen three major foreign brands in Abbott, Reckitt, FrieslandCampina either exit, sell, or scale back their China operations. Appreciate the size and opportunity of the China market, but do you see these examples suggesting it just might be too challenging for foreign brands to make reasonable returns in China over the long term? I guess how much of your recent success in China do you think is a function of these foreign players pulling back? Just kind of clarifying Richard's question from earlier, in the Investor Day, you gave that medium-term margin target in the teens and a low to mid-twenties margin target for the long term.
Apologies if I missed it, in the presentation today, I can only see the mid-teens target reference and nothing about the low to mid-20s over the long term. Just wondering, does that still apply?
If you go back to that particular slide in our 2021 investor presentation in October, we said that it's probably going to be in the teens and possibly in the low twenties, depending on the mix of business and the scale, particularly the scale of recovery in English label, which we talked about at the time. Really the most probable outcome, which we've built our plans on and guided the market to is EBITDA margins in the teens. It would require either a significantly greater growth in the existing shape of our business or a greater mix of English label and overall nutritionals to get into the twenties. I think at the moment it's reasonable to assume that we are, and indeed we're communicating that we're targeting EBITDA margins in the teens.
We want to see that improve over time. The pathway to improvement probably won't be linear, but we're definitely focused on improving our EBITDA margins over time, Sam. In terms of the exits by multinationals and there's, you know, there are other things going on in the market up there, but I think it comes down. There was a period of time obviously where the multinational brands were appealing for certain reasons. I think it's really become a very sophisticated market where both the domestic and international competitors have, you know, in certain circumstances have great brands and capability to execute. Ultimately it depends on how well the brand and the formulation and overall consumer proposition stacks up with consumers and how that performs in the marketplace.
It's become very much like a, you know, a cross between a pharmaceutical and a consumer goods category. I don't think there's necessarily. I mean, there are some advantages that local players have, but generally it's a relatively even playing field. I think the, you know, some of those brands that have exited are probably more, the reason why they've exited is either more specific to their corporate situation or the brand equity and other factors driving their performance in the market. There's no doubt we would've picked up probably some share from that. I mean, we've seen the top 10 brands. We highlighted the increase in share that top 10 brands are gaining in the marketplace over time. It's only natural that we're gonna see further consolidation.
Well, brand concentration increasing at the individual brand level, and then probably corporate consolidation over time, which we're already seeing up in China as well. It is still one of the most fragmented infant milk formula categories or markets in the world, and I think that trend is going to continue. As long as we can, you know, continue to invest in our brand, maintain those really strong and hopefully improve even further, those strong brand health metrics in the market, and hopefully over time, be able to enable more product innovation in the market, certainly in English Label, because that's within our scope at the moment.
As we've talked about before, we're really keen to find a pathway to accelerate our access to additional China Label registration slots to enable us to develop product and take that to market as well. I think as we get through this challenging period that we've got ahead of us, we saw it coming, you know, two or three years ago. You know, our plan was deliberate to double down on China and to invest throughout this cycle and hopefully come out of the back end of this in a very strong position that will enable us to hopefully, you know, get towards being a top five brand in the market, which is our ambition.
If we can achieve that, then that really opens up the opportunity for us to be more meaningful to consumers across their life cycle in different categories as well. That's kinda how we're thinking about it at the moment. No doubt the future will be a bit different to that, but that's our plan.
Great. Thanks, David. Very helpful.
Your next question comes from Matt Montgomerie with Forsyth Barr. Please go ahead.
Hi, David. Thanks for taking my questions. maybe firstly on slide 29, the stage 3 MBS shared data between stage one and stage two, it's, you know, sort of puzzled me for some time. Firstly, you know, why is this the case? Then I guess related to that, on that slide or on a similar slide, you referenced refining your approach for new user acquisition going forward to, you know, improve that early stage share. I guess, what are the learnings from the investment that have been put in place to drive that? What are the specific changes being made to drive that new user recruitment?
I guess similar to what David asked before, but just trying to get into a bit more detail, noting, you know, there are other a2 products around and other brands who are also spending a lot on different marketing initiatives, etc..
Yeah. I might bring Xiao into the conversation. On page 29, Xiao, I think the question from Matt is really looking at the profile of our share in MBS, early stage versus stage three. Why is it that profile? You might actually contrast that to DOL as well. What are we doing to drive new user acquisition really in both channels, but I guess the question mainly relates to MBS.
Yeah. The, I mean, because of our strong, I mean, brand equity that we enjoy the advantage that if we get, I mean, more new user, I mean, most of them are flow through the funnel because of our brand loyalty is well above the industry average. That has obviously our focus, I mean, get new user early stage into the pipeline. Balancing, I mean, the other action is, I mean, a tactical share gain from our competition. That's like a balanced game. If you look at Douyin, I mean, Douyin, I mean, as a online channel used to have the, I mean, the tendency that they harvest, I mean, or cannibalize by discounts over your, I mean, in your ecosystem.
We have a very, I mean, a cautious, I mean, balance, I mean, to make sure that online is growing, driven by the early stage rather than the late stage. For MBS, I think it's a less concern because of most of the new user recruitment activation, like we shared before, Mama Class, Roadshow, PG promotion goal. I mean, all those activation actually is focused on offline new user recruitment. Plus, I mean, some tactical, I mean, promotion to gain share from your stage three competitor. If you see this, I mean, in the recent 6 months, probably that early stage growth is not as strong as, I mean, the past 12 months or 24 months.
It's because, I mean, in China national lockdown, if you notice that, in the, first half, it's a much more serious than the previous, period. I mean, it's like, just, because of, I mean, the annual Congress Party, because of the, I mean, the, I mean, we are very cautious, I mean, to get infection, before a lot of important meeting. There's much more national lockdown and the impact on the offline, which is, I mean, probably not to our best advantage, where our, most of our activation is focused on offline new user recruitment. I'm very confident you are going to see that we are catching up when this, reopen and we stop the zero tolerance policy. Yeah.
I mean, don't worry, this is always number one priority of the company, yeah, to bring more new users to the pipeline. Did that answer your question?
Yeah, no, yeah, that's good. Thank you. Then maybe secondly, on the your share overall, David, of the A.2 market, you know, I appreciate the slide, which I think is the first time you presented it on the category share of the overall market, but would just be curious or interested to hear your thoughts or idea on where that sits today?
Our, our share, I mean, our strategy stepping back from that is to, and consistent with our purpose and vision is to really tell the A2 protein story, exceptionally well to, you know, market more broadly and act as a catalyst for change and really grow the A1-free segment as much as we can. Where, you know, we want to grow the pie so that it's not surprising that we have, you know, led the market and driven exceptional growth in the A2 protein category, and that our share has reduced over time. In the MBS channel, our share has gone, I think most recently at the end of, might be a six-month measure, went from 41%, I think, to 31% share. I can come back and clarify those for you later.
In domestic online it's lower, but it includes slightly different categories in the way that it's measured over time. The reported number's in the 20s, but it's sort of impacted by the goat category and things like that, which are not really specifically A2 protein. You know, our share has declined, but the category is growing rapidly and our business overall is growing ahead, well ahead of category at the moment, and that's consistent with our strategy and how this is likely to play out.
Great. Thank you very much.
The next question comes from Larry Gandler with Credit Suisse. Please go ahead.
Thanks, Dave, for taking my question. David, with regards to the market volume decline of 11%, I think the demographic analysis suggested previously it was running down five or six . Is it fair to say that the other five or six is due to the lockdowns? If you feel that's the case, what sort of signs should we be looking at to see if we're gonna get maybe a sort of over delivery in subsequent periods? Maybe should we be looking at marriage registrations or something? Are you seeing any green shoots there?
Larry, it's well, it's difficult to be precise about the newborns in the category, how it's likely to play out. I mean, again, back in our strategy day, we laid out different scenarios or a range of scenarios that may play out in terms of the evolution of the birth rate over time. What we're seeing at the moment is very consistent with what we'd predicted internally. I know we didn't give you the sort of specific point estimate of that, but it is very consistent with that. That's largely, in our minds, driven by the demographic factors and social factors that we've talked about previously.
We note that, you know, this is a concern for China more broadly, and there are various actions being taken by government and other areas to stimulate the birth rate. In terms of COVID impacts and how that may play out as well, there's a couple of things that we think are kind of important from a timing point of view. I think it's worth going back and having a look at the impact of the vaccination program on early stage growth in the marketplace because at the time there was some, you know, healthcare professionals were advising mothers to be not fall pregnant within a certain timeframe after being vaccinated. So there was a bit of a delayed impact on that.
Actually in the market you can see that, you know, for example, if I look at Kantar, I haven't got volume growth in front of me, but in the first half and second half of 2022 actually saw a positive growth in stage one. I think there was a period of time where the vaccination impacted in the, you know, the birth rate, and then it started to come back and it's come off again recent. I think, and I think then there was, so the initial COVID impact of vaccinations. Then I think, with restrictions lifting in China and many people testing positive, I think equally there's been some advice around being cautious about falling pregnant, you know, soon after having COVID.
I think we're in for just a, I guess summarizing that is I think we're in for a period of some ups and downs. I think hopefully the birth rate will start to stabilize soon and then we may get some improvement in the course of perhaps this calendar of 2024 before it then comes off a little bit more and then hopefully gets back to a more normalized level. It's difficult to predict, but we do follow it very closely, including some of the things that you mentioned around, you know, marriage statistics and, you know, maternity center bookings and all that sort of stuff. Anyway, that's how I think it'll probably play out if that's any help to you.
Yeah, I did manage to follow it. One thing that struck me, as, you know, I think quite interesting is that you think the 11% decline is largely driven by the things you predicted, meaning demographics. Nobody predicted COVID. COVID seems to have been less of an impact on that 11% volume decline. Is what you're concluding?
Well, I think on average over time, I'd have to go back and we're gonna see in China model this intensely. I think COVID is a not a long-term factor. It presents more volatility. I mean, maybe some people for family planning have just changed their decision on timing or what they want to achieve. I think largely you would expect that the vast majority of people it would be more a timing issue rather than a permanent change. I think the overriding impact, the vast majority of this is driven by the demographic and social factors that we talked about previously.
Thanks. Maybe just throw in one other factor there. Economic, you know, China's economy slowed. Is that been a factor you're observing amongst your consumers in your research in their choice to use infant formula?
Yeah, I guess, I mean, when I say social, I probably mean social, demographic, economic. I mean, one of the big concerns that many parents to be in China have is the cost of raising a child. It's well-publicized around that. I think the government is and other parties are taking various initiatives to alleviate that burden over time as well. I think the combination of those costs and then perhaps more challenging economic conditions at the moment would definitely be one of those factors that may be influencing birth rate at the moment and in the years ahead. Hopefully we'll see the China economy recover and get back to strong growth soon.
Thank you.
Your next question comes from Stephen Ridgewell with Craigs Investment Partners. Please go ahead.
Thanks, and congratulations on the results, and particularly the share gains in a tough market you've delivered over the half. My first question is on the revenue guidance. Guidance seems to imply to me around about NZD 50 million of revenue growth from the second half of 2023 versus the first half. Can you give us a rough split, David, of what you're expecting to drive that growth half and half? That's particularly you're not expecting much growth in English Label, but a split between China Label and Fresh would be helpful. Thanks.
Yeah. I mean, we're expecting, you know, well, we've actually guided the English Label as being broadly flat, but we do expect growth in China Label continued sort of. I mean, it's hard to be specific about that. I mean, I've tried to give overall guidance in low double digit. If I just step back, like we previously guided to high single digit, and primarily, I mean, not only, but primarily because of the currency impact that we were seeing last year, sort of prior to our November update at the AGM, we moved that by to low double digit. Currency rates have since kind of almost come back to closer, you know, much closer to prior period for the full year, in effect. We've quantified that.
If it happened to stay around that level, we wouldn't have a material currency variation. We've quantified that currency variation as being NZD 35 million. If you go back to our previous guidance and add that on, then I can see how you kind of get back to, you know, quite, you know, low, low double digit, and that would imply that kind of growth. We're expecting growth in China Label. I think, Li Xiao and the team and everybody that supports our China Label business is doing an excellent job at the moment. You know, we've factored in a reasonably good growth. We've got to be careful how, even if there is really strong demand, you know, we've only got a certain amount of inventory to manage through this transition period.
That's one kind of governing, I guess, constraining factor, and we've allowed for some upside, as you would expect. We won't really necessarily at this point be thinking about pushing that too hard. Our inventory levels in China Label are in good shape. English Label, we're guiding to be broadly in line. The U.S., we still believe we'll get some growth in the U.S., but most of that growth occurred in the second half of last year, if you have a look at it, which, you know, which was mainly the innovation growth that we had that fully impacted the second half. The growth in half on half from first half into second half 2023 would be to a lesser extent.
In ANZ, we're expecting reasonable growth coming particularly from the Lactose Free innovation. We see great potential in that over time, and that's a NZD 140 million category at scan and probably total market's NZD 160 million. It's growing rapidly at the moment. It's unreasonable to think that that'll be a NZD 200 million category over time. We've got a big opportunity to grow share in that over time and to bring consumers back from plant-based alternatives to lactose free A1-free dairy. Reasonable growth there. MVM, you know, that's gonna be impacted partly by the extent of insourcing that we do, which will step up quite a bit in the second half.
You know, that might be, depends on, it's hard to tell with MVM because of commodity pricing as well. In other nutritional products, which we don't spend a lot of time on talking about on these calls, we're expecting growth in that as well, in the second half as well. It'll be a lower growth, much lower growth environment than we've experienced in the first half, and there are reasons why we're so high in the first half, and some of that relates to the prior period actions as well. I hope that gives you some color around that too.
That is helpful. Thanks, David. Maybe just following up, you alluded earlier to, you know, some of the Your competitors have alluded to pantry stocking as boosting some November, December. You did make some comments on the call earlier. I mean, when you think about that second half, has that factored into your thinking, you know, for, you know, the infant formula growth rates in the second half, allowing for a bit of pantry de-stocking? If so, have you seen any evidence of that in the last couple of months?
Look, a little bit. I was saying that I think it was David Errington, who asked a little bit about that as well. I mean, again, we don't... I mean, it's very hard to tell. We think there might have been some. I don't think it will necessarily be that material in terms of the shifting between the halves of that. I think as I mentioned before, the prior period actions taken in the first half of last year when we rebalanced China Label inventory in the channel, and then the fourth quarter, you know, what we kind of characterize as outperformance during that Shanghai lockdown period was probably more material. So I don't think I'd factor too much into it. You might wanna make some allowance for that.
We'll see how our share evolves, post. Definitely when we looked at our share post that fourth quarter, we saw it sort of spike up and then come off and then gradually recovered after that. Not particularly material, but we'll wait and see it play out.
Got it. Thanks, David. Just my second question is on Adjusted EBITDA kind of margin guidance, and I think one of the first questions asked something similar. If you're guiding for revenue growth in the second half, but for that to not translate into, you know, much operating leverage, I mean, can you give us a little bit more color on where you expect the cost pressure to be in the second half? David, you called out sort of distribution costs.
Just wondering, are there any kind of allowances in your thinking for, you know, kind of inventory write-downs and particularly thinking about China Label and the amount of inventory you've got in the channel to allow for that SAMR transition? At a high level, you know, to what extent do you think those costs you're expecting the second half are kind of more one-off and to what extent would you expect them to be recurring? Thank you.
Stephen, I might bring David Muscat into this discussion as well. Dave, do you wanna comment?
Yeah.
The effect on those components on EBITDA evolution?
Yeah, I think, I think for the second half, we talk about COGS pressures. We will still expect to see some inflationary pressures sort of coming through there. The impacts from the China transition shouldn't have much of an impact on our gross margins. For the full year, we have upgraded our gross margin guidance to be slightly up on last year versus flat previously. In terms of marketing, David spoke to that before. In terms of SG&A, we do expect to see increase into the second half again through the capability build and the innovation that will lead to, I suppose, revenue growth and margin improvement into the future. The step change is probably likely be pretty consistent with the first half.
As David said, we are investing into our business at the moment. We are increasing the size of the China team. We're working on future developments with regard to innovation. That is increasing our SG&A. As David said before, we hope to leverage that into the future as we sort of get closer to 2026.
I think in terms of any one-off nature-
Sorry.
Just in terms of any one-off nature, you know, some of the distribution costs that we're gonna incur in the second half relate to the stock build and, you know, additional warehousing, logistics, and handling associated with it. Some of that would be, you could kind of characterize that as one-off. It'll probably still sort of go into the first half of 2024. In terms of stock provisions and write-down risk, you know, we were concerned about that with the English label transition, but, you know, fortunately, that was well managed and we're through all of that now, and we didn't incur much at all in relation to that. We've got a small provision at the moment in relation to our China label transition, but, I think that'll become clearer later as we work through it.
It's a much more complicated process in terms of transition and inventory management and the timing of the registration production, etc.. We've got a small provision at the moment. Obviously, we'll reassess that as we go through the year, but, you know, we're not planning for any major write-downs or transition costs in that regard.
No. No.
Possible, we're not planning.
Yeah, as David said, in terms of the P&L, you'll see it's likely to be in the distribution, which you'll see we've upgraded our guidance around that. Not to a great extent to gross margin.
Yeah.
That's very helpful. Thank you.
That is all the time we have for questions today. I'll now hand back to Mr. Bortolussi for closing remarks.
Well, thanks everybody for joining us today. It's been a good discussion. I hope you got value out of the presentation. I guess in summary, I think our team and our partners, I think we've performed, you know, really well during this period, it's been building for some time now. You know, in essence, I think we're in good shape heading into a particularly challenging period ahead in the next year or two, especially around this English label channel dynamics and also China label transitions that's happening, which is a big market-wide, you know, once in five-year event that's happening in the coming year. I do feel that our team is, you know, really executing well, our brand's in good shape, and we're well placed to emerge stronger out of the back of this.
Anyway, I look forward to catching up with many of you on the call throughout our roadshow and exploring some of these topics that we touched on today and anything else that's of interest to you. Anyway, we'll see you during the next week or two. Talk soon. Bye.
That does conclude our conference for today. Thank you for participating. You may now disconnect.