10 May 2021

A2 Milk launches review of approach to Chinese infant formula market

2:08 pm on 10 May 2021

A2 Milk has launched a strategic review of its business after it was forced to slash its earnings forecast and write down the value of its assets.

Spoon with infant formula

The company has been wrestling with the effects of closed borders, declining infant births in China and excess supply of its premium infant formula brand (File image). Photo: 123rf

The specialty dairy company's third-quarter sales were in line with expectations at $295 million, but it said steps taken to improve profitability through the daigou and e-commerce channels had been ineffective.

The daigou channel is an unofficial trades route whereby Chinese students and tourists snap up large amounts of A2's products to then onsell them in China.

The company was battered by the Covid-19 pandemic as it wrestled with the effects of closed borders, declining infant births in China and excess supply of its premium infant formula brand, all of which combined to curb demand for its products throughout the pandemic and led to multiple earnings downgrades.

"We have conducted a comprehensive review of inventory in the trade and this work has indicated that channel inventory levels are higher than had been anticipated," A2 chief executive David Bortolussi said.

As a result, the company trimmed its full-year earnings guidance 20 percent to be between $1.2 billion and $1.25bn, and it expected its underlying profit margin would fall from between 24 and 26 percent, to between 11 and 12 percent.

A2 said it would also write down the value of between $80m and $90m worth of stock.

The measures were part of an aggressive approach to rebalance its high inventory levels but would affect the company's revenue and profitability into the first quarter of the next financial year, Bortolussi said.

A2 announced that it would undertake a review of its approach to the Chinese infant formula market, which would focus on its brands, products, marketing and look at other possible opportunities.

The company was also reviewing its capital management.

"The board is actively considering capital management initiatives, including a potential share buy-back and we will provide an update at the full-year results in August," Bortolussi said.

The company announced separately that its Asia Pacific region chief executive Peter Nathan had resigned after 14 years with the company.

Nathan would stay on with A2 for some time to ensure there was a smooth transition, it said.

Get the RNZ app

for ad-free news and current affairs