A2 Milk looks to New Zealand as China tensions flare

Despite being listed in Australia, the infant formula maker is seeking cover under the long white cloud as Scott Morrison steps up his fighting words on China.

A2 Milk CEO David Bortolussi says A2 is a New Zealand company with all its products coming from across the Tasman. Picture: Britta Campion

A2 Milk is seeking cover under the Land of the Long White Cloud, playing up its New Zealand origins and Chinese partners as relations with Beijing firm as a key election battleground.

The trans-Tasman dairy company upgraded its revenue guidance on Monday, sending its shares up 11.1 per cent to $5.89.

While A2 chief executive David Bortolussi said it would take some time for the daigou market to recover to pre-pandemic levels, the company’s English-label infant formula sales were stabilising and positioned for growth in a rapidly “changing market”.

“In the mother and baby store channel, the ultra premium segment was 7 per cent,” he said.

“And the A2 protein category within that was up a greater amount and the domestic online market was up 5 per cent as well.”

The company is embarking on a $NZ220m ($204m) marketing campaign focused on China.

Citi equities analysts said the better than expected result, outlook and net cash position had “translated into us having great conviction around … the new management team’s ability to turn around the business”.

Similarly, Macquarie analysts said A2 appeared “to have stabilised the business with recovery commencing and improving revenue outlook a positive sign”.

The result comes amid heightened political brawling between Scott Morrison and Anthony Albanese, with the Prime Minister accusing the Labor leader of being “soft” on China.

There has also been an increase in geopolitical hostilities, with a Chinese navy ship targeting an Australian defence aircraft with a military-grade laser in the Arafura Sea.

Asked how much the hostilities were of concern to A2 after two years of pandemic woes, Mr Bortolussi cast his eyes further east – to New Zealand.

“It‘s always a concern for us, but I would highlight that we are a New Zealand company and all our product comes from New Zealand including significant investment there with the (Mataura Valley Milk infant formula plant) acquisition,” he said.

“It has significant Chinese partners that are associated with that business … China State Farm and China Animal Husbandry Group are our distribution and manufacturing partners … infant formula is a very sensitive category and we have one of the leading brands in the marketplace.

“I would hope that with our category and brand position, we won‘t be disrupted by that, and we’ll concentrate on things inside our control.”

It comes as A2’s net profit tumbled more than 53 per cent to $NZ56.1m in the six months to December 31 due to Covid-19 travel restrictions and excess inventory. Revenue, meanwhile, slid 2.5 per cent to $NZ660.5m.

Revenue from China and other Asian markets dropped 6 per cent to $NZ306.3m, with earnings before interest, tax, depreciation and amortisation plunging 37.1 per cent to $NZ59.4m. In Australia and New Zealand, sales also fell, down 10.7 per cent to $NZ283.3m, with EBITDA falling 18.1 per cent to $96.2m as the company “rebalanced” its inventory and the collapse of the daigou market.

“(Australia and New Zealand) reseller channel sales trajectory has improved,” Mr Bortolussi said. “The actions taken to rebalance excess inventory throughout the supply chain and improve freshness have resulted in an increase in reseller market pricing of between 20-50 per cent since July 2021, varying by product stage and channel.”

The company said it lost market share in the daigou channel during the period.

“Kantar data indicates daigou consumer sales in the market were down 13 per cent … and that (A2)’s 12-month rolling daigou market share declined to 20.2 per cent at the end of December 2021, compared to 22.5 per cent at the end of June 2021.”

US revenue eased 5.2 per cent to $NZ32.4m but it decreased its loss by 41.5 per cent to $NZ16.4m.

A2 has upgraded its overall revenue outlook for the second half of the year as international borders reopen and it gains traction in China. “Despite challenging market conditions in China and Covid-19 volatility, we are making good progress stabilising the business,” Mr Bortolussi said.