A2 Milk's net profit fell by 79 per cent to $80.7m in June year. Photo / File
A2 Milk's net profit fell by 79 per cent to $80.7m in June year. Photo / File
A2 Milk's chief executive David Bortolussi says a return to double-digit growth for the former high flier was possible, but that it may take time as the company grapples with the impact of Covid-19, increased competition and a declining birth rate in China.
The dual-listed a2 Milk's net profit droppedby 79.1 per cent to $80.7 million in the June year, driven by Covid-19 disruption and a rapidly changing infant nutrition market in China.
The company, which specialises in using milk containing only the a2 beta protein, said its revenue fell by 30.3 per cent to $1.21 billion.
Its earnings before interest, tax, depreciation and amortisation (ebitda) fell by 77.6 per cent to $123m, inclusive of $109m in stock write-downs and $10m in Mataura Valley Milk (MVM) acquisition costs.
The company said its ebitda-to-sales margin came to 10.2 per cent, or 11.1 per cent excluding Mataura Valley Milk, steeply lower than last year's margin of 33.8 per cent.
Bortolussi said an inventory buildup in its cross-border e-commerce and daigou "grey" channels meant the company had to destroy 9 million cans of infant formula that was approaching its use-by date.
He said it had been an "incredibly difficult" financial year.
First there had been disruption to the company's cross-border e-commerce arising from Covid-19 and second, there had been big changes in China - a2 Milk's core market.
Recent census data showed that around 12 million babies were born in China last year - a significant decrease from the 18 million in 2016, and the lowest number of births recorded since the 1960s.
A2's infant formula business is made up of two parts.
Its English label product arrives in China via the e-commerce channel or through the unofficial daigou channel out of Australia, which has been hit hard by Covid-19 restrictions and travel bans.
A2 Milk's Chinese label product will find its way into Chinese households via the more conventional, bricks and mortar, mother and baby stores.
"Our results have been pretty heavily impacted by the cross-border trade and, to be frank, the volatility has caused a lot of alterations to our inventory," Bortolussi told the Herald.
A2 Milk had worked hard, particularly over the final quarter of its financial year, to manage its inventory more aggressively.
After a string of retirements, the management team had been rebuilt, and there had been an increased investment in the a2 brand.
Bortolussi said the company is starting to see the impact of some of those actions - particularly inventory - with a better balance between supply and demand.
The company, which despite its setbacks remains very well cashed up, decided against a share buyback in favour of investing more in its core business.
David Bortolussi, a2 Milk chief executive. Photo / Supplied
Bortolussi said the company was starting to see signs of life in the daigou channel but that the current year would be challenging.
"At the moment, coming off that 2021 year and with Covid-related challenges and with the market still soft at the moment with a declining birth rate, next year is still going to be a pretty uncertain and volatile year, so it's going to take some time to recover."
True to reports out of China, the competition from local players there had increased, manifesting itself in increased promotional activity in the market and all its segments, Bortolussi said.
At the macro level, the mix of China-label domestic business versus the international imported business was leaning towards the China-label domestic business.
Will daigou ever recover?
"It's difficult to tell with certainty. At the moment we expect a long, slow recovery," he said.
"I don't think that it will recover to the same level that it was in the past and it will take a bit of time to recover; until we have the impact of Covid fully out of the system, which may take a number of years."
Can a2 Milk repeat the same double-digit growth rates of the past?
"I think it's possible, but the context has changed quite significantly," he said.
"I don't think the market fully appreciates the potential impact of the significant reduction in the Chinese birth rate," he said.
Jarden analyst Adrian Allbon said that, as usual, there were a lot of moving parts in the result, mainly in infant formula.
But he said the weaker-than-expected performance over the fourth quarter and challenges inherent in delivering an improved performance in 2022 would likely weigh on the stock.
The result was worse than market expectations and the share price suffered accordingly, being down by more than 10 per cent at one point. The stock peaked last year at $21.51.
Looking ahead, more will be revealed when a2 Milk releases the result of a strategic review in October.
