Market sours on a2 as forecasts fall

Shares in The a2 Milk Company plunged to their lowest level in more than three years after the specialty milk marketer cut its forecasts for a fourth time as its sales to China were disrupted by the Covid-19 pandemic.

A2 expects revenue of between

$1.2 billion and $1.25b in the year to the end of June, down from its

$1.4b forecast in February, and

$1.73b last year, it said in a statement to the NZX yesterday. It slashed its forecast profit margin to between 11 and 12 per cent, from its February forecast of between 24 and 26 per cent.

Covid-19 border closures and trade disruptions meant there were fewer tourists and international students to ship its products to China, known as the daigou trade. The company said its sales in April fell short of expectations and it had too much inventory in the market.

‘‘The trading dynamics in the China infant nutrition market have been and continue to be challenging,’’ said managing director David Bortolussi, who only took on the role in February.

‘‘In the interests of the longterm health of the a2 brand and the medium-term trading outlook of the business, more aggressive actions to address excess inventory will be taken.’’

A2 plans to rebalance its inventory by reducing the amount sold through the daigou and reseller sales channels for the remainder of this financial year, and potentially into the first quarter of next year.

‘‘While this is necessary to restore the overall health of these channels, it will result in significantly reduced sales’’ for the 2021 financial year, Bortolussi said.

David Bortolussi A2 managing director

A2’s infant formula has a twoyear shelf life from manufacture, and slower sales mean it has older stock in the market, some of which is dated July last year. To refresh its stock, a2 has undertaken to swap out older stock for newer product for its customers and distributors, and destroy the old stock.

It expects to write down about $80m to $90m of its stock, equivalent to 8 million to 9 million tins. That follows a $23m writedown in the six months to December.

The inventory rebalancing would allow the business to return to growth as quickly as possible and deliver acceptable profit margins, he said. The balance sheet would remain strong.

The company will release its annual results in August.

‘‘More aggressive actions to address excess inventory will be taken.’’