A2 froths over Synlait’s profit downgrade, dismissing softer demand as a beat up

The maker of A2 Milk’s Platinum range of infant formula expects its profit to dive as much as $18.53m on softer demand – but A2 says it’s not to blame.

The manufacturer of A2 Milk’s Platinum range of infant formula, Synlait, expects its earnings to crumble as much as $NZ20m ($18.53m), blaming A2 for softer demand as the company repositions its China business.

Synlait, which is listed on the New Zealand Stock Exchange, emerged from a trading halt on Wednesday, indirectly naming A2 Milk as the cause of its financial woes.

The news sent the dual-listed Synlait crashing with its Australian shares plunging 27 per cent to $1.44– a record low, taking losses so far this year to 56.8 per cent. Synlait’s comments also attracted a strong rebuke from its largest customer and second-biggest shareholder, A2 Milk.

A2 said it does not expect any material change in its sales volumes and earnings guidance. But it could not avoid the fallout of Synlait’s earnings downgrade, with A2’s shares sliding 5.1 per cent to $5.42.

In a statement to the NZX, Synlait said it expected to deliver a full year net loss of $NZ5m or at best a splender net profit of $NZ5m. This compares with previous guidance of a net profit of $NZ15m to $NZ25m.

“Further Advanced Nutrition demand reductions, mostly from one of Synlait’s customers, which impact consumer-packaged infant formula volumes and base powder production, are expected to have an NPAT impact of approximately $NZ16.5m in FY23,” Synlait said.

“The remainder of the NPAT impact (approximately $NZ3.5m) is attributable to less material factors, including higher financing and supply chain costs.”

But A2 Milk chief executive David Bortolussi disputed Synlait’s comments.

“In response to Synlait’s announcement, which indirectly refers to A2 Milk Company, the company is surprised at the extent of the reduction in Synlait’s guidance range,” Mr Bortolussi said in a statement to the ASX.

Synlait milk factory in Raikaia Near Christchurch. It is expects earnings to crumble as much a $NZ20m.

Mr Bortolussi said while A2 had lowered forecast production guidance for English label infant formula, it was offset by strong growth in China label products.

“A2 Milk Company confirms that there is no material change to its FY23 outlook as confirmed at the time of the announcement of its 1H23 results on February 20, 2023.

“The company maintains its FY23 revenue guidance of low-double digit percentage growth on FY22, but notes that English label IMF revenue is now expected to be down mid-single digits, partially offset by continued strong double-digit growth in China label IMF revenue.

“As a result, the company expects revenue growth to be at the low end of its previous expectations (i.e. approximately 10 per cent). The company continues to expect an EBITDA margin (percentage of sales) similar to FY22.”

It comes as Synlait has joined companies including Sigma Healthcare and the now defunct Scott’s Refrigerated Logistics in implementing a disastrous software upgrade, which has also hit earnings.

Synlait has been pinning its hopes on a mysterious “customer S”, widely believed to be US nutrition giant Abbott, which was expected to dominate its New Zealand production.

But details about a deal with the yet to be named customer have yet to be released. But on Wednesday, Synlait continued to talk up the deal, saying it expected stronger demand from a “new multinational customer”.

“Once commercial production commences, (the new customer) will assist in delivering strong double-digit growth in advanced nutrition sales volumes in FY24,” Synlait said.

It also said that it was on track to receive its renewed Chinese export registration from Beijing.

“The State Administration for Market Regulation (SAMR) re-registration process remains on track. The on-site audit process is complete and Synlait still expects to receive re-registration and commence production in Q4 FY23, subject to SAMR approval.”

Synlait said it was continuing to “actively engage with its banking syndicate, which remains strongly supportive”.

“Amendments to certain banking covenants for the remainder of FY23 have been approved. The amended key financial covenants that will apply until test dates up to and including July 31, 2023.”

E&P analyst Phillip Kimber expected consensus earnings estimated for A2 to fall 1-2 per cent.

“English Label sales in the reseller/diagou channel remain weak and are below A2M’s expectations. China Label sales remain strong and are above A2M’s expectations,” Mr Kimber wrote in a note to investors.

“As a result, A2M has reconfirmed its FY23 guidance comments, albeit lowered its FY23 revenue guidance from “low double-digit” to “approximately 10 per cent”. Given A2M’s English Label volume was indirectly referred to in Synlait’s profit warning, A2M is clearly surprised at the magnitude – and we expect frustrated – by Synlait’s announcement.”