The a2 Milk Company’s full-year profit slumped 79 per cent and the niche milk marketer warned the coming year would be challenging and volatile as it grapples with disruption in its key Chinese market.
Profit fell to $80.7 million in the year to the end of June, from $385.8m the previous year, the company said in a statement to the NZX on Thursday. Revenue fell 30 per cent to $1.21 billion, at the bottom end of its May forecast for $1.2b to $1.25b.
The former market darling was once the biggest company on the NZX as its shares soared above $20. However the shares have tumbled 68 per cent over the past year following a string of downgrades as its sales to China slowed. The stock was the biggest decliner on the index on Thursday, down 9.7 per cent to $6.46 in mid-afternoon trading.
“The result was disappointing,” said Fisher Funds senior portfolio manager Sam Dickie. “The outlook is very cloudy and from an investor’s perspective, taking a wait and see approach is prudent.”
A2 Milk has suffered a setback during Covid-19 as border closures and trade disruptions meant fewer tourists and international students shipped its products to China, known as the daigou trade.
The company wrote down $108.6m of stock to reduce the amount of older inventory in the market, and it said that’s proving effective, with product freshness improving and market pricing increasing.
However it noted the Chinese market dynamic is changing rapidly as a lower birth rate dents demand for infant formula, and competition heats up with local players gaining market share against the traditional multinational brands.
“It was a challenging year for The a2 Milk Company but we remain confident in the long-term opportunity that the infant nutrition market in China represents,” said managing director David Bortolussi.
“We recognise that the China market and channel structure is changing rapidly and we are undertaking a comprehensive process to review our growth strategy and executional plans to respond to this new environment.”
Lydia Pu was among an estimated 40,000-plus daigous selling New Zealand products such as honey and milk powder to customers in China.
In the company’s China and other Asia market, earnings before interest, tax, depreciation and amortisation (EBITDA) fell 66 per cent to $75.6m. Sales of A2’s China label infant formula increased 15 percent to $389.9m, while sales of its English and other label formula fell 51 per cent to $166.9m.
In its Australian and New Zealand market, EBITDA fell 68 per cent to $148.8m as an increase in fresh milk sales in Australia failed to offset a slump in daigou sales.
The company said its move to restrict sales, swap out older inventory for fresh stock and increase wholesale prices has been encouraging, with product freshness and market pricing starting to improve. Some English label inventory was still in the market and depressing prices but it expected this would be largely cleared by its key Singles’ Day peak trading period on November 11.
Still, the company estimates it has lost market share in the daigou channel during the year, with Kantar data suggesting daigou consumer sales were down 42 per cent over the year, and A2’s daigou share having slipped to 22 per cent from 24 per cent.
A2 expects its revenue in the first half of this year to be marginally lower than last year as weaker English label infant formula sales are offset by the addition of revenue from its Mataura Valley Milk dairy manufacturing joint venture. However revenue in the second half of the year should be significantly higher.
The gross margin this year is expected to be broadly similar to last year, excluding the stock writedowns in 2021 and the addition of the Mataura plant.
While A2 believes the business will continue to make significant progress on many fronts, this year is expected to continue to be a challenging and volatile, it said.
A2 noted its balance sheet remains strong, with net cash of $875.2m.
Source: stuff.co.nz
