![](\"https:\/\/www.nzherald.co.nz\/resizer\/j3tQaledw-8xk9EC9uO2vKfG8FA=\/16x9\/smart\/filters:quality(70)\/cloudfront-ap-southeast-2.images.arcpublishing.com\/nzme\/YVAJHYECRGMO2KJ7QVE23AOTH4.jpg\")
<\/p>\nA2 Milk’s new chief executive David Bortolussi says the company remains committed to the unofficial infant formula trade into China, despite it being largely responsible for a decline in its earnings over the first half.<\/p>\n
The company’s net profit dropped by 35 per cent to $120 million in the six months to December due to Covid-19 disruption in the unofficial “daigou” trade – mostly out of Australia – into China, and the flow-on impact of that on cross-border e-commerce channels.<\/p>\n
At an operating level, a2 Milk’s ebitda dropped by 32.2 per cent to $178.5m.<\/p>\n
Revenue eased by 16 per cent to $677.4m, slightly better than its December guidance of $670m.<\/p>\n
A2 Milk’s ebitda margin came to 26.4 per cent, a touch down on its guidance of 27 per cent.<\/p>\n
Looking ahead, a2 Milk said it expected its revenue to come in at the bottom of a previously advised $1.4 billion to $1.55b range for the year to June.<\/p>\n
Its ebitda margin forecast for the year was pitched in a range of 24 to 26 per cent, down from its previously advised range of 26 to 29 per cent.<\/p>\n
Infant formula inventory at the end of the six months came to $198.6m, $51.2m higher than at the end of 2020, mostly arising from the uncertainties and complexities of Covid-19 and its impact on supply chains.<\/p>\n
<\/p>\n
Bortolussi, in his first interview with the Herald since taking over the reins from former chief executive Geoff Babidge this month, said daigou was here to stay.<\/p>\n
The trade – which covers individual infant formula resellers to bigger corporate-style operators who ship English-labelled product to the PRC outside the normal export channels – has formed a big part of a2 Milk’s hugely successful infant formula business since the company’s early days.<\/p>\n
Bortolussi said the trade had been slower to recover from the travel restriction lockdowns than the company had anticipated.<\/p>\n
However, a2 Milk’s China label product was performing strongly in the PRC, as was the fresh milk market in Australia and the United States.<\/p>\n
“But the big challenge that we have is our English-label business into the China market,” he said.<\/p>\n
“That’s the product that is in effect exported to China through the daigou reseller channel and also through the e-commerce channel,” he said.<\/p>\n
Bortolussi said a2 Milk remained committed to the channel.<\/p>\n
“It’s always been an important channel for the business and we are very much committed to the channel,” he said.<\/p>\n
“It has evolved over time.<\/p>\n
“We are going to have to work with our corporate daigou partners – to think about how we can adapt and innovate in that channel.”<\/p>\n
Bortolussi said a2 Milk’s inventory was due to Covid-19 volatility and was “higher than we would ideally like”, and that it would be working hard to unwind it over the second half.<\/p>\n
A2 Milk said there had been a strong performance in China label infant nutrition, with revenue growth of 45.2 per cent, an increase in market value share to 2.4 per cent.<\/p>\n
Solid performance in liquid milk in Australia with 16.3 per cent revenue growth driven by higher levels of in-home consumption and a record value share of 11.7 per cent.<\/p>\n
The company has had to revise down its expectations for Southland’s Mataura Valley Milk.
A2 Milk had finalised binding agreements for the proposed acquisition of a 75 per cent interest in Mataura Valley, which would allow the company to diversify away from its current sole supplier, Synlait Milk.<\/p>\n
Dual listed a2 Milk said it had previously announced that during this transitional period (2022-24) the business will operate at about ebitda break even, with the business returning a positive ebitda from 2025.<\/p>\n
“However, due to revised volume assumptions, the Company now expects an ebitda loss of up to $10m per annum during the transition period and still expects ebitda to be positive from 2025,” a2 said.<\/p>\n
In its result, a2 Milk said there continues to be unprecedentedof uncertainty and volatility due to Covid-19.<\/p>\n
![](\"https:\/\/www.nzherald.co.nz\/resizer\/P6pzW74hKDRxerl2c8Y2Rd-rtVk=\/16x11\/smart\/filters:quality(70)\/cloudfront-ap-southeast-2.images.arcpublishing.com\/nzme\/JJ4IEMPMZSHUFHQ7JV7HKKLRRA.jpg\")
<\/p>\n
“The company remains confidentin the underlying fundamentals of the business and will continue to invest behind the brand and in its capability to drive long-term growth.”<\/p>\n
Changes in the approach in the United States, focusing more on affordable premium pricing, resulted in sales there increasing 22.0 per cent, driven by improved in-store sales in established stores as well as an expanded store footprint.<\/p>\n
A2 Milk’s balance sheet remained in a strong position with no debt and a closing cash position of $774.6m.<\/p>\n
The company’s shares fell sharply in response to the result. They last traded at $9.43, down $1.70 or 15.2 per cent, compared with last July’s peak of $21.51.<\/p>\n
Shares in Synlait Milk – 20 per cent owned by a2 Milk – dropped 21c to $4.07.<\/p>\n