A2 Milk lowers earnings forecasts for 4th time since September

Infant milk formula maker A2 Milk is quickly crashing back to earth after unveiling its fourth profit warning since September.

A2 Milk CEO David Bortolussi. Picture: Britta Campion

Infant milk formula maker A2 Milk, the former market darling that at its peak was New Zealand’s biggest public company with a market value of almost $10bn, is quickly crashing back to earth after unveiling its fourth profit warning since September.

The company is on a growing casualty list of Australian and New Zealand companies that have ridden the China consumer boom on the way up, along with ­vitamins brand Blackmores and Treasury Wine Estates, only to face a growing profit black hole as trade with China is disrupted.

Chief executive David Bortolussi is facing several challenges as he looks to repair the company’s battered and bruised earnings, as well as its reputation among investors, as the ripples from souring trade with China, COVID-19 and bloated milk inventories erode A2 Milk’s once enviable fat profit margins.

Only taking on the CEO role earlier this year, Mr Bortolussi is acting fast to resuscitate earnings and fix the infant milk group’s bloated inventory problem that will include an estimated $NZ80m-$NZ90m ($74m-$83m) of new provisions against profits for excess inventory that will need to be written down in value.

This will come on top of the $NZ23m in stock provision recognised in the December half.

There will also be management changes, particularly for the crucial China market, with 14-year A2 Milk veteran and CEO of its Asia-Pacific region, Peter Nathan, to ­resign. No reason for his resignation was given on Monday.

The market never likes a profit warning and, with A2 Milk now on its fourth revision of earnings projections, its shares were smacked lower, falling more than 15 per cent on Monday. The stock is down almost 50 per cent since the start of the year and down from just under $20 last year. Shares later closed down 92c, or 13.11 per cent, at $6.10.

The company is now targeting revenue for the 2021 fiscal year in the order of $1.2bn-$1.25bn, and is forecasting an underlying profit margin of 11-12 per cent for its 2021 fiscal year, down from the 24-26 per cent it had forecast at its third earnings downgrade on February 25.

Only three years ago, A2 Milk was crowned New Zealand’s biggest public company, nudging out of the way Auckland International Airport and Fisher & Paykel.

Since then, billions of dollars in shareholder value has been wiped out.

And there is more pain to come, as the company released its trading update, profit warning and plans to address its slipping sales and swollen inventory levels.

A2 Milk said while its third-quarter trading was broadly in line with plans, it was clear that the actions taken to address challenges in the personal shopper “daigou/reseller” and cross-border e-commerce channels would not result in sufficient improvement on third-quarter pricing, sales and inventory levels.

A comprehensive review of ­inventory in the trade has indicated that the level of channel inventory is higher than had been anticipated, with the company to spend more on marketing and book provisions against some stock.

It is increasing efforts to invest behind its China-labelled infant milk formula. Its sales of English-label milk it still has that was sold in China and cross-border channels fell by 77 per cent in the third quarter, to $NZ22.1m.

China-label infant nutrition sales of $NZ98m were recorded for the third quarter, representing 5 per cent growth on the same time last year, and an 18 per cent decline on the second quarter of 2021.

“Despite these short-term setbacks, we are confident in the long-term potential for infant ­nutrition and other opportunities we have in China, and are determined to build on the strong position we have built in the market over the past five years,” Mr Bortolussi said.

“We recognise that the China market and channel structure is changing rapidly and are commencing a comprehensive review of our growth strategy and executional plans to respond to this new environment.”