Morning, everyone, and thank you for joining us today. My name is David Bortolussi. I am the Managing Director and CEO of The a2 Milk Company. Today, I am joined on the call by our CFO, Dave Muscat, and our business unit leaders, Li Xiao, Yohan Senaratne, Jaron McVicar, and Kevin Bush. The team and I will present the results and outlook, and there will be time at the end for questions. During the presentation, we will focus on continuing operations excluding MVM, which we divested in the first half, and occasionally refer to underlying results, which excludes both MVM and a2 Pokeno.
We have excluded a2 Pokeno from the underlying results, given that the site is currently underutilized and incurring manufacturing losses and transformation costs, which are short-term in nature. Starting on slide four, we delivered FY 2026 results in line with or slightly ahead of our updated April guidance, with double-digit revenue growth.
Infant milk formula, or IMF, grew 5% in a flat China market, supported by strong English label growth, with China label sales significantly impacted by temporary supply chain disruption in the fourth quarter. Supply chain disruption had a material impact on China IMF product availability, performance, and supply chain costs, which impacted our second half group sales and earnings. As you would expect, we have a comprehensive recovery plan in place and we commenced execution, which I will come back to later in the presentation. Other nutritionals grew significantly by 42% through innovation in kids, seniors, UHT, and supplements. In liquid milk, growth was well above market at 22% in Australia and the U.S. Our commitment to innovation has resulted in the launch of a series of new products over recent years, which are making meaningful contributions to our growth.
These new products accounted for more than 50% of our sales growth in FY 2026, with further launches planned in the first half of 2027. We also advanced our supply chain transformation through the divestment of MVM and the acquisition of a2 Pokeno, with the transformation program on track or ahead of plan. Finally, following regulatory approval of our two new China label registrations, we declared a NZD 300 million special dividend and today announced an increase in our full-year ordinary dividends with improved payout ratio. In combination, we have declared a total of NZD 453 million of ordinary and special dividends in FY 2026. Turning to our financial summary on slide five. Revenue was up 12.4% to NZD 1.95 billion. Reported EBITDA was down 2.5% to NZD 284 million, which was impacted by supply chain disruption and a2 Pokeno losses.
On an underlying basis, excluding a2 Pokeno, the EBITDA was up 5.4% and underlying EBITDA margin was 15.6%. From earnings perspective, underlying net profit after tax and underlying EPS were up approximately 7%. Slide six shows that our growth was broad-based across all of our geographic markets and product categories. China and other Asia grew 11%, ANZ 10%, and the U.S. over 28%. By product category, IMF was up around 5%, liquid milk up 22%, and other nutritionals up 42%, excluding a2 Pokeno sales. Moving to slide seven. The China IMF market was relatively flat, with premiumization offsetting a low single-digit volume decline. The China label IMF market stabilized and English label growth slowed significantly in the second half due to the impacts of industry recalls. Pleasingly, the a2 type protein and ultra-premium segments continued to grow ahead of the category, which plays to our strengths.
Slide eight addresses the supply chain disruption experienced in the fourth quarter. As outlined in our market announcements in April and July, product availability was materially impacted by a number of factors, including strong demand in the preceding quarter, freight challenges, a production backlog at Synlait, extended product release time frames, and additional customs and testing requirements. These factors have been resolved and availability has significantly improved. However, the in-market product availability issues necessitated a large proportion of our existing users to switch to alternative brands, which, as you can see, significantly impacted our China label market share during the fourth quarter. The rate of recovery will depend on our ability to regain past users, new user recruitment momentum, and the performance of our new China label IMF products.
Slide nine sets out our recovery plan, built around rebuilding trust, driving past and new user recruitment, supporting our distributor and retailer ecosystem, and launching new products. There has been positive early progress against our plan. A new traceability tool has been very well received by consumers. Brand sentiment is recovering, and new user recruitment conversion rates are back to or above historical levels. Moving to slide 10. The first wave of marketing behind our China IMF recovery is focused on reassuring consumers that a2 products are of the highest quality. This includes a market-leading traceability tool with batch-by-batch testing, an endorsement campaign from China State Media, Xinhua News, with a leading food safety expert, and independent validation by a leading quality assurance influencer, Daddy Lab . Together, these initiatives are rebuilding confidence in quality and supply and driving positive sentiment.
The next slide measures how our social media and PR activity is helping rebuild confidence in the a2 brand. Brand sentiment has recovered quickly towards prior levels, with the ratio of positive to negative sentiment improving significantly in July. Search interest in the a2 brand, a2 Zhichu, and a2 Platinum on the major e-commerce platforms has been recovering each week, reaching around 80% of December to January peak levels by the end of July. From mid-August, our new user education and recruitment programs will ramp- up, followed by a broader a2 brand superiority campaign in October. Turning to our outlook statement on slide 12. We expect revenue and EBITDA to grow in FY 2027, supported by innovation and new markets, continued momentum in other nutritionals and liquid milk, and improved profitability at a2 Pokeno.
IMF sales are expected to be impacted by the flow-on effects of supply chain disruption in the fourth quarter, with a gradual recovery over the course of the year, supported by an increase in marketing investment, particularly in the first half. As a result, group revenue and EBITDA are expected to be materially weighted to the second half. Overall, we currently expect mid-single digit revenue growth in FY 2027, with first half revenue broadly in line with last year. EBITDA margin is expected to be approximately 15%, with the first half materially down on PCP before improving in the second half. Our full outlook statement, including key risks, is set out in our results commentary released today. Slide 13 outlines our strategy, which is unchanged and enduring.
We remain focused on capturing the full potential in China IMF, ramping up product innovation, entering new markets, and transforming our supply chain, all underpinned by our brand strength and science and innovation capability. As slide 14 shows, we continue to track well against our medium-term financial and non-financial goals and remain on track to deliver the majority of our targets, despite the temporary supply chain disruption during the fourth quarter. Turning to the next slide, we just fell short of achieving our medium-term revenue ambition of NZD 2 billion this year, but will do so in FY 2027. Our market and category growth drivers remain on track, except for China label IMF, which has been impacted by supply chain disruption and is a key focus and work in progress currently.
Moving to the next page and beyond our FY 2027 goals, we have significant growth opportunities to capture in our core business, adjacent categories, and new markets over the years ahead. We've been addressing these opportunities over time and thought it would be helpful to lay out the markets and categories we are focused on, the estimated size of these markets at retail, the addressable component, our current share, and how our portfolio through innovation and new markets has evolved from FY 2021 to where we expect to be by the end of FY 2027.
Interestingly, our portfolio of products and markets has expanded from eight in FY 2021 to a planned 36 by the end of this year, which is an indication of the focus on innovation and market expansion. In summary, we have a low share of a large TAM with plenty of growth opportunities to pursue over the long- term.
Over recent years, we have focused on expanding our product portfolio supported by investment in innovation and product development capability, a2 Pokeno, and building a network of strategic manufacturing partners. Slide 17 highlights the many new innovations coming to market in FY 2027 and beyond. In the first half of 2027, we'll launch two new China Label products that will expand our China Label portfolio from one to three, significant updates to a2 Platinum and a2 Genesis, alongside continued expansion in other nutritionals, which Xiao and Yohan will cover later. Moving to slide 18, which speaks to the science that underpins our a2 brand proposition and innovation. We have continued to invest in research for more than 25 years, building scientific evidence around milk that is A1 protein-free. A highlight this year was our U.S. growth monitoring study, a key clinical requirement for the FDA infant formula approval process.
The study showed that infants consuming formula made with a2 Milk demonstrated appropriate growth and had a comparable safety profile to infants consuming conventional formula, which is the primary purpose of the study. However, secondary analysis of the data showed a 6% greater length and weight gain versus conventional infant formula. These findings were presented at the American Society for Nutrition Annual Meeting in July and attracted significant interest. Slides 19 and 20 cover our supply chain transformation. During the year, we completed the acquisition of a2 Pokeno, a world-class nutritional facility, and the divestment of MVM. Since acquisition, we've more than doubled our Pokeno team, delivered the first phase of our multi-year capital investment program on time and on budget, and secured registration amendments for the two new China label products.
The site is on track for an EBITDA breakeven result in FY 2027 as we insource a2 Platinum and capture vertical margin benefits. As for slide 20, all of our key milestones with respect to English label transition, China label registrations, and facility upgrades through FY 2026 are all complete with our FY 2027 metrics on track, with production and financials in line with plan. Finally, on slide 21, we continue to make good progress on sustainability, including commencing work to convert the a2 Pokeno gas-fired boiler to an electro boiler to progress towards our Scope 1 and 2 net zero target by 2030. We also established real on-farm data collection approaches to increase the accuracy of our Scope 3 emissions reporting and awarded 27 new projects through our Farm Sustainability Fund. I will now hand over to Dave to take you through the financials in more detail.
Thanks, David, and good morning, everyone. Starting on slide 23 with our group P&L. Net sales revenue was up 12.4% to NZD 1.972 billion, with growth across all product categories and segments. Gross margin was 47.7%, down 3.4 percentage points, reflecting a2 Pokeno losses, which were in line with expectations, a lower share of China label sales, one-time costs related to the previously mentioned supply chain disruption, and higher COGS due to higher milk and other ingredients prices, particularly in the second half. Distribution costs were marginally higher as a percentage of net sales revenue at 3.5% due to higher freight rates, primarily related to the liquid milk businesses. Marketing investment of NZD 325 million was higher in support of the China growth strategy, innovation, and new user recruitment.
SG&A was also higher this year, mainly reflecting investment in capability to support China growth and supply chain transformation, including planned a2 Pokeno operating and transformation costs. However, if you exclude FX losses caused by the New Zealand dollar devaluation, SG&A as a percentage of sales was lower than last year. Reported EBITDA was NZD 284.4 million, with margin in line with our previous guidance. On an underlying basis, excluding a2 Pokeno losses and transformation costs, EBITDA increased to NZD 307.6 million, reflecting growth in the underlying business. Our effective tax rate improved to 30%, supported by improved profitability in New Zealand and partial utilization of our group tax losses. NPAT from continuing operations was NZD 208 million or NZD 235.8 million on an underlying basis. We also declared a final dividend of NZD 0.095 per share, representing a payout ratio of around 74%.
The dividend will be fully franked and unimputed and will be paid on the 2nd of October. Slides 24 and 25 set out our segment and product performance. On slide 24, China and other Asia revenue grew by 11.2%, with segment revenue and EBITDA impacted by a2 Pokeno losses and the fourth quarter supply chain disruption. ANZ and USA both achieved double-digit revenue growth, with USA EBITDA improving materially. Slide 25 shows revenue growth across all product categories and group level, with liquid milk and other nutritionals growth partially offsetting China label IMF decline. Moving on to slide 26. Operating cash flow was NZD 133.1 million, with cash conversion of 68%, in line with our updated guidance. This reflects the planned inventory build associated with the a2 Pokeno ramp-up and normalization of China label IMF inventory, plus some timing impacts related to the fourth quarter supply chain disruption.
Investing cash flows included net supply chain transaction outflows of around NZD 165 million, associated with the a2 Pokeno acquisition and MVM divestment, with other investing activities, including a reduction in our term deposits and CapEx additions relating to our a2 Pokeno capital upgrades. Our closing cash balance at the end of the period was NZD 784.5 million, down NZD 276.7 million, reflecting the previously mentioned supply chain transactions, a2 Pokeno capital investment program, and dividends paid throughout the period. Turning to slide 27, our balance sheet remains strong, with cash and term deposits of NZD 784.5 million and no external debt. Inventory, as previously mentioned, increased, and intangibles rose with the goodwill from the a2 Pokeno acquisition. The balance sheet gives us capacity to support our growth strategy while balancing risk and maintaining flexibility for future investment. That concludes the financial overview.
I will now hand over to Xiao to take you through the performance of our China label business.
Thank you, Dave. Starting on slide 29, China label IMF revenue declined 14% to NZD 544 million for the year. This was very much a story of two halves, with revenue up 6.5% in the first half and down 33% in the second half as a result of the fourth quarter supply chain disruption. As previously mentioned, the contributing factors are now resolved. IMF availability has improved significantly. While it is too early to be conclusive, we are encouraged by some of the early data reads, with brand sentiment significantly improved since June, and the conversion rate of new user recruitment activities is back to historical level. However, to be clear, the recovery is expected to be gradual in FY 2027. Turning to the next slide and looking at market share. On the MAT basis, China label share increased to March before declining to 5.2% by year-end.
However, on a quarterly basis, MBS and the Daigou both declined significantly impacted by the fourth quarter supply chain disruption. As stock levels has now significantly improved, we are focusing on our China IMF recovery and regaining past users and accelerating new user recruitment. Moving to slide 31, which previews our two new China label products that are due to launch in the first half of FY 2027, both of which will be manufactured at a2 Pokeno. The first, a2 Zhichu Qi Run, targets the off-premium segment and share gains in low-tier cities. The second, a2 Zhichu Zhichun, is a new certificate organic product that is expected to build our brand in higher-tier cities. Both products has innovative packaging, including scooping lid, and provide consumer with confidence in the safety and quality of their purchase via our recent launched traceability APP.
Together, these new IMF products expand our China label range and support our growth strategy in the China IMF market. Our retailers, distributors, and brand ambassadors are excited to welcome our new a2 IMF babies to the market very soon. I will now hand over to Yohan to take you through the English label and other nutritionals.
Thanks, Xiao, and good morning, everyone. Starting on slide 32, our English label IMF revenue grew 23% to NZD 788 million, driven by our strong growth in our CBEC and O2O channels, with a growing contribution from a2 Genesis, which now represents 6% of the total English-label sales and rapid expansion in new markets, particularly Vietnam. Third quarter a2 Platinum sales were strong following industry recalls. However, offtake momentum slowed in the fourth quarter, indirectly impacted by the USA label IMF recall announced in May 2026, net of some modest switching benefits from China label. In ANZ, our English label IMF sales declined due to lower Daigou channel sales, while a2 Gentle Gold continues to drive growth in Australian retail channels. Moving to slide 33, when looking at market share. From a market perspective, English label now represents 20% of the total China IMF market.
However, market growth slowed significantly in the second half following industry recalls. a2 MC was the leading share gainer on CBEC, driven by a2 Platinum and a2 Genesis performance. a2 Genesis has now achieved a 1.8% share on CBEC, with over 60% of offtake coming from early-stage products. More recently, following the USA label IMF recall, offtake momentum has been indirectly impacted. However, we are focused on rebuilding momentum in the first half. Slide 34 previews updates to our a2 Platinum and a2 Genesis formulations. a2 Platinum will receive its first major update since 2022, with an enhanced advanced nutrition formulation, premium packaging, and traceability. a2 Genesis will be upgraded with additional HMOs and a change to the probiotics to strengthen its super premium positioning.
Both of these products will be manufactured at our a2 Pokeno facility, with the insourcing of a2 Platinum significantly increasing production volumes and bringing vertical margin capture benefits to the group. Continuing to the next slide. Our new market strategy continues to advance with Vietnam starting to scale. Distribution has expanded to more than 3,500 stores and English label sales grew strongly during the year. We are also continuing to assess and progress further opportunities across Southeast Asia and the Middle East. Turning now to other nutritionals on slide 36. Sales grew nearly 60% to NZD 216 million, led by our kids and seniors fortified milk powders. Our kids range continues to grow strongly, with the product also responding as a substitute for Stage 3 and Stage 4 China label IMF users during the fourth quarter supply chain disruption.
Our seniors and adult ranges hold leading category positions. Our new height support Kids UHT has resonated well with consumers since launch. We saw strong growth in emerging markets for our macro milk products. Turning to slide 37, taking a look at some of our individual products more closely. As previously mentioned, our China label kids milk powder is growing rapidly, with half-on-half sales up around 80% and retaining the number one ranking amongst international brands in MBS stores. We continue to build brand awareness and new user recruitment for our broader kids portfolio through our Octonauts 2.0 campaign, including a customized episode featuring The a2 brand, character integration on pack, and a full suite of co-branded gift boxes across the a2 Kids portfolio. Looking ahead, we will continue to innovate our kids milk powder range with new functional formulations to address areas of strong consumer interest.
Continuing on to the next slide, we entered a new category through the launch of our China label pediatric supplements range during the second half. The range is focused on immunity, gut health, brain and eye health, and anti-allergy. Early consumer response has been encouraging, supported by professional endorsement. We see significant potential to expand the platform over time, including expanding into English label. Turning now to slide 39, which previews our English label pediatric supplements range due to launch in the first half of FY 2027. Our English label supplements range is manufactured in Australia to TGA standards and will be available for sale in Australia, New Zealand, and China CBEC. We will be first to market with Australian-made liquid calcium sachets, one of the largest and fastest-growing categories. We intend to launch the range into Vietnam, subject to achieving registration.
With that, I will now hand over to Jaron to take you through ANZ.
Thank you, Yohan, and good morning, everyone. For those I have not met, I am Jaron McVicar. While I have been with a2 for some time, this is my first results presentation since stepping into the ANZ leadership role in April. It is my pleasure to take you through the ANZ results today. Turning to slide 40. Our Australian liquid milk business delivered another strong year, with net sales revenue up 17% to NZD 245 million, driven by growth in both our a2 Milk Core and a2 Milk Lactose Free ranges. We outperformed the category, growing overall share to 11.7%. Lactose free reached a record share of 22.6%. We are also proud to be the first national lactose-free brand with the launch of a2 Milk Lactose Free in Coles WA.
We delivered premium brand exposure across our priority markets through our exclusive Australian Open partnership as the first dairy milk partner of the Australian Open in its 120-year history. With our bespoke co-branded frappes becoming viral sensations on social media, driving exceptional visibility and brand engagement, including through mass sampling. Moving to slide 41. Slide 41 highlights the lactose-free opportunity, which has been a major driver of category growth. a2 Milk Lactose Free is the only product in the Australian market that is both A1 protein-free and lactose-free. Lactose-free retail sales value has grown over 6% in the last year and is approaching 10% of the total dairy milk category. The a2 Milk Company continues to gain share in this fast-growing category and is the number two brand in the segment.
This gives us confidence in the broader opportunity for A1 protein-free and lactose-free milk, including in markets such as the U.S. On that note, I will hand over to Kevin to take you through the USA results.
Thanks, Jaron. Turning now to slide 42. The USA had an excellent year with net sales revenue up 29% to NZD 179 million and importantly, achieved EBITDA breakeven in the second half for the first time. Growth was underpinned by double-digit gains across our core and grass-fed ranges, increased household penetration and distribution, and a2 Milk is now a top 10 U.S. liquid milk brand and is the fastest-growing. From an IMF perspective, we managed a small voluntary recall of discontinued USA label IMF batches as announced in May this year. This recall was isolated to the USA market and is completed and closed with immaterial impacts on USA financials. Our long-term FDA approval for IMF continues to progress with a final factory inspection completed recently. Moving to slide 43.
We continue to strengthen the brand in the USA with awareness and Net Promoter Score both improving and a new food service partnership with Steak 'n Shake. Looking ahead and building on the strong momentum we have seen in lactose-free in Australia, we see an opportunity to bring the same differentiated proposition to the USA. In the first half of FY 2027, we will launch a 2% lactose-free product with selected retail partners. In addition, we are also considering opportunities to enter the high-growth protein segments of the market with products currently under development. I will now hand back to David.
Thanks, Kev. That concludes today's presentation. I will now hand back to the operator for the Q&A.
Thank you. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. If you wish to cancel your request, please press star two. If you are on a speakerphone, please pick up the handset to ask your question. Your first question comes from Peter Marks from Goldman Sachs. Please go ahead.
Morning, guys. Thanks for taking my question. I am just wondering if we can break down the EBITDA margin guidance a bit further. Is there anything in there that we should be thinking about gross margins and what are you thinking in terms of marketing and then the other cost line as well? I think that would be really helpful. Thanks.
Yeah. No problem. I will ask Dave to give you some color on that.
Yeah, sure.
Yeah.
Hey, Peter. There is a lot of noise in the FY 2026 results. Probably the best way to think about it is to start with the FY 2025 EBITDA margin, the 16.6%, which does not have any Pokeno in it, which is, I suppose, in line with the breakeven result we are expecting in FY 2027. So it is probably the best, cleanest starting point. If you think about that 16.6, we are guiding in FY 2027 to approximately 15%. So you are talking 1.6 percentage points. One thing that is very important to factor in is that most of the vast majority of that decline will actually be gross margin. I will come back to marketing in a second. It will mostly be gross margin and driven by probably two factors mainly. One is mix.
If you think about the fact that we have called IMF to be broadly flat for next year and strong growth in the other nutritionals and liquid milk, it is quite a reasonable amount of mix dilution coming through. It will improve through the year. But on average, through the year, there will be mix dilution. Also, there are some COGS pressures coming through milk, through lactose, a little bit still through whey as well. So they will be the two sort of headwinds. Against that, we will have some probably some FX tailwinds, and we are cycling a little bit of air freight, but most of that 1.6, call it gross margin.
Marketing will be up, but in terms of reinvestment rate, it is probably more of a phasing story, in terms of the first half being up by quite a lot, and probably from a full-year perspective, it probably normalized, but it will be up as probably more slightly than gross margin. Sorry. Or COGS, sorry. Then we will get a little bit of leverage on SG&A. So that is probably the way to think about the shape of the EBITDA, for next year. Then probably I may as well cut it off now because I am sure I will get the question later, is around the phasing for next year. We have talked about, obviously, I mentioned before the 15% approximate EBITDA percentage for next year, with second half weighting.
Probably the two call-outs, if I am thinking about where you get to from an average for the full year, our marketing will probably be around probably two percentage points reinvestment rate higher than you will get for the average for the full year. Our gross margin is probably going to be a percent worse than we would get to from a full year perspective. Hopefully those building blocks give you enough to be able to build your numbers for next year.
That is very helpful, thanks. Can I just follow- up? With the COGS pressures and everything that is going on with the business at the moment, how are you thinking about pricing? Do you think you can offset some of those with price increases, or is there just too much going on? Do the new products and the formulation refreshes and the packaging refreshes actually allow you to take a bit of price? Interested in how you think about that.
Sure, David. We are taking price effectively in some of the categories in markets, but overall it is not necessarily mitigating margin. For example, in our China label product, we have increased price a little bit, but a lot of that is going back to the trade to support margins and activation. In our a2 Platinum product, as we transition, in effect, pricing will be similar, but there will be slightly smaller pack size, so price per kilogram, if you like, will go up a little bit. Then in milk, we have taken a bit of price as well, but reflecting the increases in farm gate milk prices as well. So we are taking price, but it is not necessarily being accretive to margin overall.
Very helpful. Thanks.
Thank you. Your next question comes from Sam Teeger from Citi. Please go ahead.
Good morning, guys. Thank you. What was your China label market share in July for the month across all stages? When do you think you will get back to where you were pre the supply shortages?
Sam, we are not providing the China label share data for July. We necessarily have that all at the moment. Suffice to say it is down quite a bit. We would probably estimate that our off take at the moment sort of in the order of probably about 40% of what it might have been if you take the last reported results through to December. So it has come off quite a lot. But it is rebuilding back now. We are not providing guidance specifically again for the AGM. We expect a gradual recovery over the course of the year. Probably get back to roughly the same run rate by the end of the year that it was sort of pre the supply chain disruption. If that helps you. So progressively from where we are now back to sort of 100% of that run rate.
From a reported sales point of view, that would then mean that it wouldn't be until the first half of FY 2028 that we'd be at the same level of total sales that we were pre-crisis.
Makes sense. That's helpful.
It could be better and worse for that, but that's just sort of our expectations, what we're planning for at the moment.
Okay. No, that's great. Thanks. Which of the user reacquisition initiatives that you have in place now in China have you found to be most impactful? Are you planning any tweaks to them going forward?
Xiao, do you want to talk about our past and new user reactivation or recruitment initiatives we have at the moment?
So we have a pretty good track record to recruit new user, like what happened in the past year, first quarter. Then we quickly turned around the new user recruitment in the second quarter. The most effective activation mix for new user recruitment starts with what we call the mom class, targeting at a pregnant woman, which we are executing in thousands of activation per year, as the number one priority. Then the second one, if you look at we have several thousand of key promotion group, brand ambassador in the store. They are also the key driver to get a new user in the MBS store. Thirdly, we also have other activation like road show, also partially contribute to the new user recruitment, across all the early stage and the late stage.
Plus, last but not the least, we have a medical marketing team who are targeting at special channel, like maternity center or the hospital, for the early stage new user recruitment.
Right.
I think you and other of the market picked up that we've also sort of got gift with purchase, benefits of returning to the brand, and also enhanced loyalty program. So overall, at the moment, our user recruitment conversion rates and the activities we've got in place at the moment are at or above historic levels in terms of the conversion of the activity. Not necessarily in aggregate, but at the conversion rates are really encouraging at the moment.
Excellent. Last question. What are the biggest learnings from the supply chain challenges? Appreciate that quite a number of the factors were outside your control, but what tweaks might we make to the operating model going forward to avoid this happening again? Thank you.
Sam, you're right. A lot of this was outside our control in terms of the industry factors that led to recalls, new standards, testing methodologies, and all that at both in the New Zealand side as well as the China side. But the underlying thing that we need to address is having more consistent level of inventory throughout the supply chain at the right stages of the supply chain. We've struggled with that mainly due to some challenges we've had with Synlait's supply over time. However, having said that, Synlait has recovered well in recent months, and we have no real concerns about supply going forward. But we must work together with Synlait to ensure that we have more consistent supply going forward.
Indeed, from our Pokeno facility going forward, as our English label product and our new China label products hopefully become more material over time, we need to do the same ourselves. So we're not saying we're perfect, but we've got to ensure that we have more consistency in our production and inventory management throughout the system.
Great. Thank you.
Thank you. Your next question comes from Tom Kierath from Barrenjoey. Please go ahead.
Morning, guys. Just to follow on from Pete's question then, just on marketing. You are saying it will be a lot higher in the first half, that 2 percentage points. Can you maybe just give us some color on how much of that relates to the Pokeno products? Just how should we think about, I guess, the marketing spend in relation to that launch that you are doing this half?
Tom, the support for new products coming to market, not only the China label products, is appropriate, but relatively modest compared to the total investment that we have in brand and new user acquisition overall for both the a2 Zhichu China label product and a2 Platinum. Obviously, a2 Platinum is a combination of both. We are phasing out a2 Platinum and bringing in a new upgrade. We have a baseline level of investment in Always On digital and everything else. We have significant investment in early-stage new user recruitment, and then we cycle in and out of new innovation coming to market, of which we have a fair amount coming to market in the next quarter, which we wanted to highlight to our investors.
There's an appropriate amount, but don't think that it is by any means the sort of majority of our investment on the new products and ignoring the base business.
Can you maybe just talk through the incrementality of the Pokeno products? How should we think about maybe market share when we're talking about share in 12 months' time? Where should we be in share then maybe versus now if the plans play out?
Back a year ago, we sort of mapped out, in connection with the acquisition, what we expected the new China label products to contribute in sales and also gave some earnings sort of margin perspective as well. It was over NZD 100 million of incremental sales over the next few years, at close to our average China segment EBITDA margins. Where we are at the moment is, our thinking is that with the launch, which is slightly ahead of plan, being able to launch these products in October, having just commenced the manufacturing and that, which is great to be in market earlier. We're hoping that they might contribute. If you look at the phasing there, I think there's a phasing chart in the earlier presentation 12 months ago. I think hopefully they'll make a stronger contribution earlier. I won't be specific about that.
One of the reasons I say that, Tom, is that through the supply chain disruption that we've experienced in our recovery program, we've deliberately constrained the distribution or the weighted distribution of our Zhichu product. We're at about 2/3 of what we were pre-supply chain disruption, which actually opens up a bit more sort of available distribution for one of those products which will play a more discrete or incremental role. If you put that all together, I think earlier launch, perhaps a little bit more white space in distribution. I think we are hopeful that we'll get a greater contribution earlier, but we won't provide any specific guidance on that at the moment.
Okay, great. Thanks, David.
Thank you. Your next question comes from Craig Woolford from MST Marquee. Please go ahead.
Morning team. Firstly, just want to clarify what your guidance infers about the second half and if that is an indication of more normal margins. If I have interpreted your commentary right, it is more like a 12% EBITDA margin in the first half and I guess by inference closer to 18% in the second half of 2027. Is that second half relatively clean? Is that a guide of how margins look once all the supply chain noise settles down?
Craig, yeah, I will not comment on the percentages you called out, but what I will say is just be wary of the marketing because we are basically saying that the first half will be reasonably up in terms of percentage points, sort of implies second half will be probably down relative to the normal run rate. There is probably a little bit to come back on that margin from a marketing perspective. But I think the second half should be a better indication of what we will see in the future.
Directionally.
Directionally.
Directionally, right.
Yeah. Can I, with the English label performance in FY 2026, is there any way to tease out, it must be very difficult, any way to tease out underlying performance versus some of the customers that might have shifted to that channel, the CBEC channel, because of the shortages?
From China label, Craig, going across to English label? Is that what you are saying?
Yeah. You have gone from, I think it was 19.1%.
Yeah.
A year ago to 19.5. Is that organic or switch?
Yohan might want to add to this, but just in terms of the switching. We did mention in our update to the market there was some switching from Zhichu to Platinum. There was some, but I think perhaps that has been amplified by the market. I think there has been probably expectation that is greater than what it was. In essence, it was relatively small, the switching from China label to Platinum. Most of the users unfortunately have gone to other brands, which some have retained with us, and our job is to get them back. I do not know if that helps.
Well, I guess the natural follow-on, it is quite a good result on English label because it was fairly static over the last 18 months at 19.1, and it is up to 19.5. What would you attribute that to?
Yeah. Market share growth is, I guess two factors. One is, of course, continued investment in a2 Platinum and in particular new user recruitment. We have seen particularly, over the last 12 months, an improvement in our Stage 1, Stage 2 share. The second thing is the introduction of a2 Genesis as well. That adds a greater addressable market for us because it gives us exposure to the faster-growing HMO segment within English Label. We have been able to capture, on an MAT basis in CBEC, now a 1.8% share. Those two together then, if you look at it over an 18-month period, have contributed to the EL share gains.
Right. Thank you.
Thank you. Your next question comes from Richard Barwick from CLSA. Please go ahead.
Good morning, all. David, I just want to talk specifically about winning back some of the lost China label share. How much can you target or can you identify those a2 customers that have switched away? I was also curious to think through, is there a point when it is too late to get them to switch back? The other dimension to that question is, does the transition from Stage 1 to 2 and 2 to 3, does that present opportunities to win those customers back? I would just like to talk through those points, if you could, please.
Yeah, sure, Richard. In terms of targeting those users that may have lapsed. We can do that in certain areas, but by no means do we have a comprehensive CRM tool that tracks everything across all channels. It is just because of the nature of the China market as consumers buy offline and online through different platforms and things, and it is hard to capture a lot of that information. We say, for example, in offline in the national key accounts and some of the regional key accounts, we have our promotional ambassadors in store who keep quite close contact with our consumers that regularly purchase from those stores and through WeChat channels and everything else. We have good line of sight over that through our loyalty program overall. There is a portion of consumers that do subscribe to our total loyalty program.
Then within the e-commerce platforms, there are loyalty programs there as well. So we have some line of sight over our users that we can target and retarget. Your second part of that was, is it too late? For some of our-
From what point is it too late then?
Yeah. So just in terms of the timing. So for early-stage users, if they have switched to another brand, most mothers with a young infant would be generally not inclined to switch back unless they've had problems with the new product that they are using. Some will. Some may wait till the next stage of transition, which is the second part of your question, which is when you transition from 1 to 2 to 2 to 3, that provides another opportunity to regain those consumers. And of course, as those consumers did change to other brands, the competition couldn't help but offer them attractive deals on full case or one or two cases, which means that some of them have significant pantry inventory to consume as well before they would contemplate switching back to us.
So there's several of the reasons why it's going to take some time for those consumers to come back to us, and we're also refocused on ramping up the momentum of our new user recruitment. And then for later-stage users, I'd just highlight that Stage 3 users, the infant or toddler is obviously more robust and consumers that have got greater flexibility in modifying feeding patterns or potentially using alternative nutrition or other products and then switching back is much more convenient for the consumer. And on Stage 4 in particular, whilst we're out of stock in Stage 4 for a long period of time due to Synlait supply, we did have our Kids Nutrition, Kids Advanced product that we refer to, which has been incredibly successful and also supported some of those consumers or users that were using Stage 3 and 4 product as a substitute product.
It is complicated. We do not have full line of sight over everything at the moment. The plan that Xiao and the team have put in place is being executed well, and there are some encouraging signs, but it is too early to be quite definitive. We will give updates to the market as we go next at the AGM and again at the half year or in between if we need to.
Just timing-wise, though, David, to win these back, presumably the sooner the better, and so therefore the AGM update, that will give you the best insight. I mean, that seems like it is unlikely to be a second half weighted winning Chinese label customers back. That is going to be a first half story?
Yeah. Well, we are hoping that there will be a significant proportion that will come back. Some have already come back because we were largely out of stock, Richard, and so a great proportion had left, and so to even be at 40% off take at the moment or thereabout, that is already a significant return in the brand and that is improving every week. So we will see where we are at the AGM.
We will certainly provide an update then. If it is materially different, up or down, we will obviously let the market know if that is critical. But overall, at the moment, we are expecting, as I said earlier, if we are around 40% now to be back to 100% or thereabout run rate by the end of the financial year, so progressive recovery throughout the year. So we are very careful about how we are going about this.
The number one priority for us is to ensure that we maintain our really strong brand health that we have for the a2 brand. The last thing we want to do is to rush into this and not preserve that, the distribution and the great sort of trade support that we have in the market as well as looking after our consumers. That is why we have constrained our distribution at the moment, and we are progressively going to expand that over time. We are not discounting product and pushing it into consumers or expanding our distribution rapidly, which could run the risk of ending up with a lot of slow-moving inventory in the trade and create freshness issues and pricing and impact the whole ecosystem, which is really important to the a2 business model.
In essence, we are going about this in a really measured, careful way, mindful of what our consumers need and the health of the a2 brand for the interest of the long- term.
Yep. Okay. It all makes sense. Thanks, David.
Thank you. Your next question comes from Adrian Allbon from Jarden. Please go ahead.
Good morning, team. David, just keen to understand, when you talk about constraining, if you like, the distribution for a2 Zhichu in particular, when you provided your sort of July update and you were sort of there about that target inventory, is that against the constrained construct? I am just trying to sort of reconcile where we might have been forecasting to where you are sort of at now with a new view on the distribution in terms of releasing it slowly as you got confidence.
Yeah. That is correct, Adrian. It is against a constrained distribution that we are at target. We factor in a certain number of weeks cover, and that is a forward-looking, months cover or weeks cover measure that we have. The offtake was uncertain at that point. Generally, you are correct that we were referring to us being at roughly a target inventory on a constrained basis for the offline channels. That is not relevant for online.
Okay. Then, I think as you talked about 40% offtake to 100, would you expect that that distribution would go back to where it is? I know you talked about possibly seeding some of the constrained people with the new products initially, but is that a reasonable assumption as well?
Yeah, I think that we will head back towards in the order of 25,000 to 30,000 doors that we had previously. I cannot be specific on exactly when that is going to happen, but I think we will head towards that by the end of the year. If you factor in that, there will be a little bit of trade inventory level expansion as we move from weighted distribution of around 2/3 now to closer to 100% over time, if that is where you are coming from.
Yep. Okay. No, that is fine. Just in terms of the English label seemed to slow quite a bit in the second half as you talked about the market commentary, and I guess your market share dipped a little bit in that fourth quarter relative to the Kantar stuff if you indicatively look at the Smart Path. Can you talk a little bit more about what is happening right now relative to that exit rate?
Yeah. I might hand over to Yo, but we did definitely see a decline in offtake following the U.S. recall announcement. Again, that product is a different product. There's no physical issue with the product. It was just obviously the unfortunate, the similar name, et cetera, and being picked up in China. I will hand over to Yo.
Yeah. As David said, if you look at the second half, the third quarter was growing strongly. It was a continuation of the trend in the first half. The biggest challenge was in May and June when the U.S. label recall came out, there was an indirect impact. Yes, you can see in the fourth quarter, Smart Path is probably the best indicator of the impact, where you can see it's effectively up 10% down for May and June. What we expect is, of course, that to rebuild in the first half. But you can see it on the data on slide 33. Fourth quarter 2026 is 17.9 versus the MAT of 19.6.
Okay. The expectation is that that dent would be sorted over the first half. That's what you're saying. You're already seeing progress.
Yeah.
That's coming.
Yeah, correct.
Okay.
Yeah.
Just a final question from me. Just in terms of obviously the whole sterilize and testing was a big priority for the c ompany over, particularly over the period since you reported the February result. Can you just update us on where you are at with that? Is it back to normal now against the new testing regimes that are required, or are there any outstandings required on that work program?
Adrian, I think the testing methodologies and levels have been reasonably well established internationally. However, I do note that New Zealand is really the only country that has introduced very definitive standards and requirements at some of the tightest levels, which is great. We have no problem with that at all. It is just that it did evolve a lot quickly over time for both regulators and company participants. We have gone through testing of all of our product. We have made adjustments to our supply chain. There is no concern around the safety of our product in relation to Salmonella. I cannot, as an infant company, you cannot promise there is never going to be any quality or safety issues. But we have really solid certificates of analysis from suppliers. We do testing on Salmonella throughout the supply chain as part of our release processes.
We make those test results available to our consumers. I mentioned earlier in the call about the batch-by-batch testing results. You can see nil detect on all of our products, every batch. It is a very thorough process that we have in place now. So no concerns whatsoever. And most of the industry has adapted rapidly as well. But we are being very transparent about that.
Okay. Thank you. That is great.
Thank you. Your next question comes from Marcus Curley from UBS. Please go ahead.
Good morning, team. I just wondered if we could revert back to the high level of the guidance. Is it right in assuming that, in terms of the infant formula guide, that you are talking about growth in English label and a decline in China label at a high level?
We haven't been explicit about that, Marcus, but certainly in the first half, that would be the case. Over the full year, it remains to be seen. It's probably closer than you may expect. We'll just have to wait to see how that plays out. We haven't provided specific guidance for that. But yeah, certainly in the first half, English label will outperform China label on a reported sales basis. Yeah.
Okay. I suppose then just on English label, are you anticipating growth in English label for the year?
Yeah, at this stage we would expect that if anything, English label is likely to be ahead of China label. But it depends. It depends on how the new products perform and everything. It's early in the year, but yes, that would be our sort of expectation at the moment. But the difference between the two, if you're expecting English label to way outperform China label, given what's happened to China label, that's not necessarily going to be the case. It's probably a bit more nuanced than that.
Yes. I suppose when you think about English label, I appreciate the comments around your market share in the fourth quarter. You don't necessarily see that in the second half revenue performance. You've obviously got Vietnam going well, you've got new products coming. You're getting back into stock on new products. Just sort of trying to gauge what I'm missing in terms of the English label performance potentially in the next 12 months.
Well, maybe not in the next 12 months, but when you're looking at it, there's a little bit of movement in trade inventory as well that you might want to factor in as well in the second half, because we finished the December half slightly low in English label trade inventory, and then at the end of the year slightly higher because of the late fourth quarter drop-off in offtake. So that explains a little bit of the higher. If you're trying to understand the relativity of the reported sales growth versus the market share numbers, that explains a little bit of that.
Right. Okay. So that drop-off-
You've got underlying growth, you've got new emerging markets, and then you've got a little bit of trade inventory level movement as well.
Okay. Thank you. It looks like the two new China label products are both in the ultra-premium category. Is that different to what you were initially thinking? Maybe you can just give us a little bit more color in terms of maybe the price points of those two products and how you plan to roll them out from a store perspective.
Xiao, d o you want to talk to the-
Yeah. Both of the product is positioned as an ultra-premium product. Because the a2, the heritage is both perceived by the consumer and the retailer as the ultra-premium product. We also represent the ultra-premium segment. For the digestion, it is going to be a lower tier city expansion because this patent MLCT and plus OPO, plus full nutrition benefit really appeal to the lower tier mom who wants basically everything. Also, if you can see from the market, even in the lower tier city, there are still 40% above ultra-premium contribution in the lower tier city with mom inspired to buy the best product for their Maybe, yeah. This product going to the lower tier city with ultra-premium positioning, digestion, full nutrition benefit, and plus a higher trade margin, which is also very effective in the lower tier city.
Because typically in the lower tier city, we rely more on the retailer's recommendation. Yeah. The a2 Zhichun, which is a2 organic, are serving as an ultra-premium product. Typically, organic is a very unique segment in China market, only appealing to certain consumer in the higher tier city. This product has to be a higher price and also represent the best source of milk, a2 New Zealand. Probably that is the best, most valuable, precious source of milk to make this product. So it is going to dispute around Zhichu in the higher tier city. It pops off tier accounts. Hopefully generate incremental volume appealing to this segment.
You are right, Marc, a year ago, as we were developing our plans, we thought this would either play in the super premium to ultra-premium space, and we have leaned towards the ultra-premium as we have done more work on our go-to-market strategy, taking into account distributor and trade feedback on it as well. So we think this is the right positioning in the full nutrition formulation that the Qi Run product has, we think supports that as well. If it does not-
If it priced against-
If it doesn't purpose hold that price point, we can always wind that back a little bit. But it's very difficult, as you know, to take a product up after you've launched at a certain price point.
Are both products priced at a premium to the existing product?
The organic product will be at a premium to Zhichu, but we're not being specific about the Qi Run product pricing relative to Zhichu at this stage.
Okay.
It will be close. I am not saying it is going to be above or below, but it will be close, but in the ultra-premium segment.
Thank you. Your next question comes from Phil Kimber, from E&P Capital. Please go ahead.
Hey, guys. I just had a question on the market growth you expect. I think you have given the total China infant formula market grew at 0.7%, but that was over the whole year, and at the half it grew 3.6% for just the first 25 or 26 weeks. So it looks like it has gone backwards about 3% now and China label, and English label looks like maybe flat and China label down. What is your expectation for the market to grow or decline in FY 2027? When you look at the various stages, should we anticipate that that momentum increases, as in it declines faster? Am I missing something in that?
No, it is always hard to be definitive about the China infant market. At the moment, our thinking is that, the number of newborns will probably be up this, supported by the marriage rate, which increased last year. So you have got the impact of the Dragon Year still working its way through the system in the later stages. Then you have got birth rate obviously declined a lot last year, but will probably be up marginally this year. So overall, we would expect, Phil, we would expect the market to be down low single digits, only down slightly next year. Low single digits, probably early stage, reasonably robust, flat to marginally up. Later stage should be down because of the tail end of the Dragon Year working its way through the system, if that makes sense.
Yeah. When you say are you talking FY 2027 there or calendar 2027?
Yeah, FY 2027. Yeah.
Yeah.
The birth newborn numbers, I am referring to calendar year because that is the closest which they reported.
Yeah. My second question, just around Synlait, you mentioned, you are having to work with them to improve supply. In terms of, there has been rumors on the wires around ownership changes there. I do not know if there is anything you can talk to on that or where you think that might end up, that business.
I think there's been
From your point of view.
Every six months there seems to be rumors about us doing something in relation to Synlait. I will not comment on speculation. All I will say is that we have had a long and strong relationship with Bright and Synlait, despite some of the supply challenges that we have had. We work day-to-day really closely with Synlait. The a2 Zhichu China label registration is very strategically important to us, and we intend to partner with them in the long- term. The only other thing I would say is that the acquisition of Pokeno and the hundreds of millions of dollars that we have invested in that and the upgrade is probably indicative of our supply chain strategy. I have got nothing more to say on that, Phil.
Cool. Thank you.
Thank you. Your next question comes from Stephen Ridgewell from Craigs Investment Partners. Please go ahead.
Yeah, good afternoon. David, first question from me is just on the new China label products. Just wondering if you could please give us a broad indication as to the revenue contribution that's baked into the guidance for flat overall infant formula sales from those new products. Then just related to that, would you be expecting these new products to have a positive contribution at the EBITDA level in FY 2027? Or given launch cost, is that perhaps more of an expectation for FY 2028, please?
I'll go back to the comments I made earlier in the call, Stephen, in the Q&A session. I forget who it was to, but last year, if you have a look, when we announced the acquisition, we said that the two labels would contribute incremental over NZD 100 million of sales, and there's a chart in there which shows the sort of expected ramp-up of that. For the reasons I said before, I'd expect that to be great earlier than what that chart would indicate. The chart would indicate we probably expect NZD 10 million or less this year, which is not quite right. So it'll be more than that, but it's certainly not going to be the majority. So it'll be a reasonable number, but we're not providing specific guidance on that.
In terms of the contribution, probably diluted in the second quarter when they are launched, but accretive in the second half.
Cool. Thank you. Just going back to the broad brush sort of recovery plan for China label sales. I guess at a high level, just given we are seeing social media sentiment improve per the data you have provided, search rates are improving, and stock is broadly available for China label, I guess at a high level, why are we not seeing a stronger pickup in sales already? I think down 60% does seem pretty steep. There is quite a big mountain to climb to get back to the 100% of pre-crisis levels. When you look at the recovery plan, in the detail you will be looking at it, do you sort of assume a large number of those customers are gone for good and that you are really relying on over-indexing market share gains for new mothers to get back to that pre-crisis level of sales?
If that is the case, I am just wondering if you are able to share more data points with us to perhaps provide comfort on that recovery plan. Thank you.
Well, I think, so being out of stock for most of the fourth quarter, as I said, has had a pretty significant impact on our user base, particularly early stage. So now at about 40% offtake run rate, we have lost the majority of our early-stage customers through forced product switching to other brands. We have probably maintained the majority of our later stage users. As I said before, it is challenging to get those early-stage users back quickly. But there will be opportunities as they consume the pantry stock that they have and as they change stage going forward into Stage 2 and Stage 3. There will be other opportunities to acquire them. Overall, I guess by definition, given what we are saying, we are assuming that we will over-index in terms of our new user acquisition going forward.
In terms of data point, the best thing I can offer you is that the conversion rates on the activity that we have in place at the moment by the different channels and mechanisms that we go about are either at or above where we were pre-supply chain disruption. We are investing more in marketing this year. In absolute terms, if you run the math on it is a significant increase in marketing weighted to the first half as well. We have the full support of our retailers as well, and distributors. For example, in these types of things, one of the most critical things in the trade is to hang on to the shelf space that you have. Overall, we have the same, if not greater shelf space, despite being without product for a considerable period of time.
Some of our retailers have actually given us an extra bay as well, which is incredible support. Anyway, Xiao and the team are doing a terrific job in China to, one, to manage the fourth quarter, but now in executing our recovery program and so far so good. It is early days.
Cool. Thank you.
Thank you. Your next question comes from Julia de Sterke from Morgan Stanley. Please go ahead.
Hi, everyone. Just wanted to come back to your comments around the outlook for the English label category into FY 2027. You noted in the release around competitor recall impacts in the second half. Given they seem to be normalizing now, could you just speak to maybe in more detail, your outlook for the next 12 months on both the competition side and therefore prospects for customer acquisition as well?
Yohan. Do you want to do that?
Yeah.
Like category and-
Yeah. I think obviously if we look at the English label market overall and you look at the first half, it was growing strongly. Obviously, the second half was impacted by the competitor recalls. So although English label now makes up 20% of the total China IMF market, obviously the second half has been impacted by all of that. So of course, the major brands within the EL segment have had challenges in this space. For ourselves, of course, May, June, we had our own challenges. What we observe from competitors is that it does take a few months for that to rebuild, and so we would expect the same from ourselves. So I guess if we look at the English label market, the underlying demand for the product coming from overseas is still there, notwithstanding the challenges that the sector's had with those recalls.
We would expect that Horizon and a2 Genesis, or our a2 Platinum and a2 Genesis, will support our growth and rebuild into FY 2027.
Got it. Just on the reformulation of the a2 Genesis product, I think you mentioned earlier that it was to kind of reinforce the premium positioning of the product, maybe not in those specific words. Could you just speak to why the upgrade of that product now and what you are seeing in the market that might potentially be a catalyst for improving that kind of premium positioning?
Yeah. So if we look at a2 Platinum, the product has been in market for a number of years, but we have not really upgraded the formulation meaningfully since 2022. Of course, consumer expectations along ingredient profiles such as HMOs have changed in that period. So what we want to do is make sure that we improve the formulation of the product, plus also improve the usability of the product. So a good example of that is the new a2 Platinum product has the scoop in the lid.
But historically, we have had the scoop in the powder, which we know can be a bit annoying for consumers. So we have improved both the formulation and the usability to keep in line with consumer expectations. Also on the a2 Genesis product, we have upgraded the formulation to have six HMOs. We know consumers are looking for a variety of HMOs within that formulation.
Of course, once we launched, we had three HMOs, and we have upgraded to six HMOs, plus upgraded the probiotic itself to a human resident bacteria. So, that also improves the positioning of the product. So, both the upgrades for the English label products are to keep in line with the consumer expectations.
Thanks.
Thank you. Your next question comes from Will Twiss from Forsyth Barr. Please go ahead.
Morning, guys. If you look at kind of the initial recovery campaign that is underway, a lot of it is quite heavily focused on product quality and testing. Is that actually in response to anything you are seeing from consumers in terms of being concerned about the quality of the product and not just the product availability over the fourth quarter?
Well, no, not specifically for our product, but there has been a lot of concern amongst Chinese consumers in the infant and toddler category, given what has happened in the market in the first quarter of this year, and also in other categories like nappies or diapers have had issues as well. There has been another recent sort of infant formula with another brand. I will not comment on it specifically, but another concern recently as well. I think generally, Chinese consumers, mothers are very conscious about the importance of quality in our category, and they are very sensitive to it. We are just doubling down on that and making sure they have got 100% confidence in our brand in the category.
The other part of the confidence is not the quality, it is the supply, which is what the main issue that we had, which is we did not have product in market. We are giving them confidence around the availability of product and the distribution of retail and being back in all the national key accounts with, in some accounts with additional shelf spaces are really positive. We will be refreshing our point of sale and everything going forward. There is a lot of work around that, just providing our consumers with trust on quality and supply, which is the most important thing in our category.
Okay. That's helpful. Thank you. If we think about supply chain costs, we know there were some additional costs kind of embedded in the cost base for FY 2026. Can you just talk to or provide some more color around how much cost is in there relative to a normal baseline and then what the outlook is for some of those items into FY 2027?
Hi, Will. It's Dave. We're not going to be getting into the ins and outs of the second half supply chain costs, gross margin. There's significant additional costs. There's some mitigating factors and some going the other way. I think the best way to think about it, like I said before, is start with your FY-- start with a clean year, which is FY 2025, and build it from there. I sort of gave you the building blocks a little bit earlier.
Thank you. There are no further questions at this time. I'll now hand back to David Bortolussi for closing remarks.
Thanks, everyone, for joining the call. Before I finish, I'd like to thank our a2 team for their incredible effort and impact during the year. It's been a challenging end to the year. I think our teams, particularly our China team and supply chain team, have done a wonderful job mitigating that impact and are now focused on our recovery plan going forward and all the other growth opportunities we have in the business. So thank you to our team and to our investors and analysts. Look forward to catching up with you shortly over the next week or two. Thanks for joining the call. Cheers.
That does conclude our conference for today. Thank you for participating. You may now disconnect.