Business / Economy

Drop in infant formula sales hits A2 Milk's bottom line

16:34 pm on 21 February 2022

Specialty dairy company A2 Milk's bottom line has been halved, as it continues to face significant disruption to its infant formula sales in China.

The company's six-month results for the first time included earnings from milk processor Mataura Valley Milk (MVM), which added $38.6m in revenue but ran at a loss of $10m due to lower volumes. Photo: RNZ / Nate McKinnon

KEY NUMBERS:

(for the six months ended 31 December 2021 vs year ago)

  • Net profit: $59.6 million vs $120m
  • Revenue: $660.5m vs $677m
  • Underlying earnings: $97.5m vs $178.5m
  • Dividend: no dividend vs 12 cps

A2 Milk chief executive David Bortolussi said despite challenging market conditions in China and volatility caused by the pandemic, it was making good progress to stabilise the business.

"Our first half result is in line with expectations, placing the company in a strong position to continue executing our strategy and deliver revenue growth in FY22."

The past six months was the first time earnings from milk processor Mataura Valley Milk (MVM) had been included in A2's financial reporting. MVM added $38.6m in revenue but ran at a loss of $10m due to lower volumes.

The major hit to the company's finances over the past 18 months have come from a drop in sales of infant formula to Chinese students, tourists and unofficial buyers through the "daigou channel", and e-commerce sales through third parties to China, because of pandemic related disruptions.

Market conditions over the past six months have also come under pressure as the birthrate in China fell by 5 percent. Similarly, the value of China's infant formula market had fallen 3.3 percent.

"The actions we took to address excess infant milk formula inventory last year are proving effective, and we are seeing improvements in English label channel inventory levels, market price and product freshness," Bortolussi said.

He said this had resulted in an improved outlook for the rest of the financial year, but the higher revenue was unlikely to translate into better earnings as the company continues to invest in its brand and growth strategy.

It would also be offset by higher cost of milk, ingredients and packaging costs.

Forsyth Barr investment analyst Matt Montgomerie said A2's underlying profit of $89m was ahead of its forecast of $80.1m and market expectations of $79.1m.

Contrary to A2's commentary, Montgomerie thought earnings upgrades were likely.