Freshly minted a2 Milk chief executive David Bortolussi is hopeful investors can see the underlying strength of the milk and infant formula company despite a “disappointing” first-half result after weaker-than-expected sales in China.
Mr Bortolussi, who took up the reins at a2 just two weeks ago, was forced to downgrade the company’s full-year guidance in his first results call on Thursday after a further deterioration of the business’ key daigou reseller channel.
New a2 Milk CEO David Bortolussi has a tough job ahead after the company again cut its outlook for the year.Credit: AFR
“The results are disappointing relative to initial plans [and] to market expectations, but we’re having to navigate through pretty difficult times,” he told The Age and The Sydney Morning Herald.
“So I’m hopeful of starting to recover in the second half and being in a better position going into 2022.”
A2 Milk reported a 16 per cent decline in revenue to $677.4 million for the six months to the end of December and a 35 per cent fall in net profit after tax to $120 million.
These falls were driven by a decline in daigou sales, as a2 Milk’s products are often purchased in New Zealand and Australia by resellers who then ship them into China to sell to customers there.
The pandemic has severely affected this practice, partially due to fewer Chinese people being in Australia owing to border closures and partially due to a preference from Chinese consumers for home-grown products, fuelled by cheaper local prices and concerns over shipping delays.
Earnings in a2’s China segment fell 19.7 per cent, and the company’s cross-border online sales, a channel the company said is highly reliant on cross-promotion by daigou, slumped 35.5 per cent.
The decline prompted a2 to adjust its full-year forecasts down to the lower end of its previously advised guidance, telling investors to expect revenues of $1.4 billion and earnings margins of 24 per cent to 26 per cent.
A2’s shares plummeted more than 16.2 per cent to close at $8.76 on Thursday as investors reacted to the unexpected cut.
Mr Bortolussi said the business was endeavouring to repair its daigou channel, working with resellers to improve its attractiveness to Chinese shoppers.
“We are working with our daigou partners to improve the economics, which mainly is rebalancing stock, which could hopefully improve economics going forward as pricing recovers and margins recover for them,” he said.
The former Bonds executive also pointed to the growth of a2’s Chinese label baby formula products that are sold within the country. Trade is up 45.2 per cent to $213.1 million, with distribution growing to 22,000 stores.
“Growth in China’s domestic business is up 45 per cent, Australian milk up 16 per cent and US milk up 22 per cent,” he said.
“So, even though we had to adjust our guidance, we’ve got one key problem, but there are still a number of really positive aspects of the business and its performance.”
Analysts were unimpressed, however, with Citi’s Sam Teeger questioning if a2 had its “best days behind it” and suggesting the business may have to downgrade its guidance again.
“[Guidance] implies a significant fourth-quarter improvement in the daigou channel, which may be challenging without the return of students and tourists, the ongoing resurgence in Chinese domestic brands, and an outdated formulation,” he said.
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