A2 Milk's net profit drops by 79 per cent, decides against buyback

Business Reporter·NZ Herald·

25 Aug, 2021 08:58 PM3 mins to read

A2 Milk chief executive David Bortolussi. Photo / Supplied

A2 Milk's net profit dropped by 79.1 per cent to $80.7 million in the June year, driven by Covid-19 disruption and a rapidly changing infant nutrition market, particularly in China.

The alternative milk and infant formula marketer's 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 $123 million, inclusive of $109m in stock write-downs and $10m in Mataura Valley Milk (MVM) acquisition costs.

A2 Milk's share price fell hard on the result, initially dropping 66c, or 9.23 per cent, to $6.49..

The company said its EBITDA to sales margin came to 10.2 per cent, or 11.1 per cent excluding Mataura Valley.

The company appeared to go cold on the prospect of returning capital to investors, saying investment in the business was the most likely course of action.

The "daigou" unofficial trade in infant formula from Australia to China - formerly key plank in a2 Milk's strong growth story - has been severely disrupted by Covid-19 lockdown, and a2 Milk said the current year would remain challenging.

A2 had earlier guided investors to revenue in the 2021 June year of $1.20b to $1.25b.

The mid-point of its forecast ebitda range was $141 million.

Analysts had expected a2 Milk's net profit to come in at around $96m.

The company said it had experienced a "very challenging" year, impacted by unprecedented levels of uncertainty and volatility due to the prolonged impact of Covid-19 and a rapidly changing Chinese infant nutrition market.

"Over the past year China market growth has reduced significantly from globally high rates to be flat, and cross-border trade has been disrupted significantly which has had a profound impact on the Company's results," chief executive David Bortolussi said.

"While certain areas of the business performed well, with market share gains in China label infant nutrition and Australian fresh milk, the company was impacted by a significant decline in cross-border English label infant nutrition and other nutritional sales through daigou/reseller and e-commerce channels," Bortolussi said.

This created substantial demand and supply volatility, which caused material excess inventory issues that exacerbated the impact, he said.

The company had addressed its excess inventory issues, rebuild the management team, increased brand investment to drive demand, started a review of its growth strategy and reviewed options to deploy available capital.

The board had carefully considered capital management initiatives and has decided not to return capital to shareholders, preferring instead to preserve balance sheet strength with having regard to market volatility and potential opportunities to reinvest.

A2 Milk said its board and management are confident in the underlying fundamentals of the business and that the growth opportunity in core markets remains strong.