A2 Milk’s new claims as Synlait dispute boils over

Dairy giant A2 Milk’s salvo comes as the partners continue to spar over contracts and prices in the midst of arbitration proceedings.

Dairy business partners A2 Milk and Synlait’s sparring over contracts and prices continues with the former slapping new claims in the midst of separate arbitration proceedings.

In a long pre-Christmas update on Friday that will hardly cheer investors, Synlait says more issues with its 20 per cent shareholder and customer are now on the table for a third-party arbitrator to work through.

Exclusive discussions have been ongoing for months after A2 Milk’s notice of cancellation of its exclusivity arrangements with Synlait under the Nutritional Powders Manufacturing and Supply Agreement (NPMSA) for a2 Platinum and other products.

The arbitrator will now also look at whether Synlait’s obligation to procure a minimum annual volume of product and if certain priority arrangements for A2 Milk “will cease to apply if the exclusivity provision” is found to have been validly cancelled.

A2 Milk’s intellectual property, if any, under the NPMSA, and related know-how in the products is also subject to the assessment, besides the question of who bears costs for certain one-off airfreighting.

A separate good faith negotiation that was continuing over pricing of products made by Synlait has now expired and is heading for confidential binding arbitration.

“The resolution of this matter is important because it could impact the margin for certain products manufactured under the NPMSA historically and going forward,” Synlait says in its note.

Meanwhile, A2 Milk has sent a notice of further potential claims, including costs associated with product services, surplus or damaged packaging materials costs, new product development, lost profit on delayed deliveries, and alleged failure to share cost savings from the use of third-party ingredients.

“The company has not asserted any monetary loss in its claims at this stage. The parties are underway with good faith negotiations to attempt to resolve these matters.”

Synlait, which has forecast a worse first-half than the previous year, remains of the view that “together both companies stand the best chance of weathering the China market dynamics”.

It has also reiterated its hold on the Chinese State Administration for Market Regulation (SAMR) licence to make A2 Milk’s Chinese labelled infant formula (stages one, two and three) until September 2027.

A2 Milk chief executive David Bortolussi has already said the Chinese market continues to be its biggest single growth opportunity.

Synlait acknowledged “it has been a challenging year, and it is working to re-set” as it negotiates with lenders about a $NZ130m prepayment by March 28 as works to “significantly reduce debt levels which remain elevated”.

A2 Milk is “confident in its position in respect of all of the issues” in dispute with dairy supplier Synlait.

All of these matters are commercial in nature and are not expected to have any operational impact on the group, it said in response to Synlait’s detailed update on separate matters under review with A2 Milk. “The disputed matters do not impact the FY24 guidance,” A2 Milk says.

At the group level, A2M expects low single-digit revenue growth, earnings margins to be similar to FY23 and an improvement in cash flow. Its first-half results are due on February 19.

A2 Milk’s response comes as Synlait expressed its view that “together both companies stand the best chance of weathering the China market dynamics” and reiterated its control of the licence that underpins A2 Milk’s Chinese labelled infant formula plans.

E&P Capital retail analyst Phillip Kimber views A2 Milk’s attempt “to remove Synlait’s exclusivity” as an important part of its move to rebalance and take greater control of its supply chain.

“However, the situation has become fractious,” he says.

“The contractual arrangement, A2M’s 20 per cent stake in Synlait, and that A2M’s products are crucial to the viability of Synlait – are all important factors in the relationship between A2M and Synlait.”

He expects a commercial outcome to eventually be reached, but warns “there is always the risk that such an outcome does not eventuate, which would impact both companies”.

Synlait shares are tracking losses, down to 88cc on the ASX at 2.30pm AEDT; A2M is higher at $4.27.