A2 Milk has cancelled the exclusivity clause in a manufacturing deal with Synlait

A2 Milk has cancelled the exclusivity rights in a manufacturing deal with Synlait Milk, sending the latter’s shares sharply lower, but Synlait says it has no right to do so.

A2 Milk executive David Bortolussi.

Synlait Milk shares tumbled on Monday after A2 Milk said it had cancelled the exclusive manufacturing and supply rights covering three types of milk formula, however Synlait says A2 has no power to spike the agreement, and it will be business as usual for the time being.

A2 told the ASX on Monday morning it had informed Synlait after the market close on Friday that it was cancelling exclusive manufacturing and supply rights under which Synlait was producing stage one to three of A2’s infant milk formula products sold in China, Australia and New Zealand.

“A2 Milk has given notice of cancellation of Synlait’s exclusive manufacturing and supply rights due to Synlait’s delivery in full and on time performance during FY23 falling below the level required for Synlait to maintain such exclusive rights, including as referenced in A2 Milk's market announcement on April 26, 2023 and primarily in relation to English label infant milk formula product,’' A2 said.

While the exclusivity under the contract has been cancelled according to A2, the company said the manufacturing and supply agreement itself would continue, and “Synlait remains an important supplier of A2 Milk’’.

Synlait is 19.8 per cent owned by A2 Milk.

Synlait said that it “disputes that The A2 Milk Company has the right to cancel the exclusivity arrangements’’.

“The A2 Milk Company has confirmed to Synlait that it will in practice maintain exclusivity with Synlait until such time as the matter is resolved (assuming that both parties will seek to

progress the dispute process promptly in good faith, and the dispute process is completed by

the end of 2024),’’ the company told the ASX.

Synlait said the announcement was not expected to impact its full year results in FY24.

Cancelling Synlait’s exclusivity would allow A2 Milk to make A2 Platinum, the brand of the company’s English label product, at Mataura Valley Milk (MVM), a processing facility in New Zealand it owns a 75 per cent stake in.

While A2 aims to bring that facility back to profitability, it flagged on Monday this would be a medium term proposition.

“Having regard to the dispute resolution process, product development cycles and the New

Zealand dairy season, any positive impact of the removal of Synlait’s exclusivity on MVM utilisation and profitability is not expected to have a material impact in FY24 or FY25,’’ A2 said.

“As previously announced, accelerating MVM’s path to profitability by FY26 or earlier is a strategic priority.’’

Synlait is due to report its 2023 results on September 25, with the company having given guidance that this result will be in the range of $5m either side of break-even.

E&P Capital retail analyst Phillip Kimber said the announcement was a positive step for A2 Milk.

“We view the removal of Synlait’s exclusivity to produce A2 Milk’s infant milk formula products as an important part of A2 Milk’s move to rebalance and take greater control of its supply chain,’’ Mr Kimber said.

However Mr Kimber highlighted the interrelationships between the two companies which meant there was some way to go in terms of a manufacturing reset for A2.

“This supply chain initiative commenced in August 2021 with the acquisition of 75 per cent of MVM, with the other investor being China State Farm (A2’s exclusive distributor of China label product).

“We would expect MVM to begin to manufacture English label product at some point in the future (as this product does not require GB (Chinese standards) registration).

“We would also expect at some stage MVM will apply for GB registration to enable it to manufacture China label infant milk formula product.

“In the meantime, A2 will need to manage relations with Synlait given it holds the GB registration to produce A2’s China label product (which accounts for about 50 per cent of A2’s total infant milk formula sales).

“The contractual arrangement, A2’s 20 per cent stake in Synlait, and that A2’s products are crucial to the viability of Synlait – are all important factors in the relationship between A2 and Synlait.’’

A2 shares were 1 per cent lower at $4.43 by early afternoon on Monday while Synlait stock was 7.6 per cent lower at $1.09 after trading as low as $1.04.