While embattled dairy business a2 Milk will rethink its approach in China, it has no plans to abandon the market – a point it was quick to clarify on Thursday after it was suggested that could be one course of action open to it in a review of its China strategy with 2020-21 weak annual results.
a2, which produces a range of infant formula products along with its namesake milk brand, revealed in Thursday’s ASX release that it had commenced a strategic review of the business focused on finding new avenues for growth moving forward.
CEO David Bortolussi acknowledged the Chinese market, which makes up for nearly half of the business’ revenue, was changing rapidly because of Covid and the rise of Chinese domestic rivals.
A drop in China’s birth rate has shrunk the market for infant formula, and the pandemic has also seen a sharp reduction in ‘daigou’ resellers because of the shutdown of international borders. The daigou channel was one of a2’s biggest supply channels into China.
“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,” he said.
This review will include a2’s approach to driving growth in infant formula across both Chinese and English-labelled products, its infant formula product portfolio and innovation strategy, further growth opportunities, and its overall brand positioning.
But he later made it clear that the company would not abandon China because it was too big a market. Instead a2 wants to refine and rework its current approach – which will be linked to the re-opening of national borders.
a2 has been seriously impacted by the pandemic and downgraded its earnings forecasts four times throughout the financial year as an expected recovery in its Chinese market evaporated and it was forced to write-down $90 million in nearly out-of-date stock.
The company did not provide any specific guidance or sales figures for the start of the new financial year and warned investors conditions would continue to be volatile and challenging, with English label products expected to recover sales slowly and Chinese market growth to be subdued for some time.
a2 saw a slump in earnings for the year to June 30 — revenue down 30.3% to $NZ1.21 billion; earnings before interest tax depreciation and amortisation (EBITDA) down 77.6% to $NZ123 million inclusive of $NZ109 million in stock write-downs and $NZ10 million in Mataura Valley Milk (MVM) acquisition costs.
Net profit after tax plunged 79.1% to $NZ80.7 million (including discontinued operations)
Directors said “Actions taken from 4Q21 to address excess inventory are proving effective with channel inventory levels reducing; product freshness improving and market pricing increasing – rebalancing of channel inventory is expected to continue through 1Q22”
That means the downward pressure on profits from the cost cutting and restructuring have drifted into 2021-22.
It has to be remembered that as hurtful as the fall in revenue, profits and the share price has been for the company and its shareholders, it is nothing compared to the damage done by Covid (and continues to do) to the health of thousands of Australians the sense of loss for families who have lost loved ones.
a2 shares took another big hit on the clouded outlook and confusion about China, falling nearly 12% to $6.05.
