A2 shares slump after big earnings downgrade, resignation

Shares in a2 Milk tumbled after the alternative dairy company slashed its revenue and earnings forecasts for the 2021 financial year.

It was the company’s fourth consecutive earnings downgrade.

In the first few minutes of trade, a2 Milk shares were at $6.30, down more than 16 per cent from $7.59 at Friday’s close.

A2 Milk said an immediate recovery in the business was not expected.

The company also announced the resignation of one of its key executives – chief executive Asia Pacific, Peter Nathan.

Nathan has been a key figure in a2 Milk’s success in recent years due to his expertise in the unofficial daigou trade into China.

Daigoiu, until the onset of Covid-19 restrictions, has played a major role in a2 Milk’s success – making it at one point New Zealand’s biggest company by market cap.

In today’s statement, A2 Milk said it had been severely impacted by the near collapse of the important daigou unofficial sales channel of infant formula into China.

The alternative milk company is now targeting revenue for 2021 of $1.20 billion to $1.25b, down from an earlier forecast of $1.4b.

“The significant decline from the outlook provided in February reflects the impact of the lower-than-expected sales in the fourth quarter versus prior plan and the further actions being taken to rebalance the channels by actively reducing sales in May/June,” the company said.

“It will take some time to rebalance inventory levels and restore channel health,” it said.
“An immediate recovery is not expected and a further update for 2022 will be provided at the company’s results in August.”

The company is expecting an earnings before interest, depreciation and amortisation (EBITDA) to sales margin for 2021 in the order of 11 per cent to 12 per cent (excluding Mataura Valley Milk transaction costs). The guidance in February was for EBITDA margins of 24 to 26 per cent.

The downgrade represents a drop in EBITDA of around $22m.

The significantly lower EBITDA margin outlook reflected the lower than expected sales in the fourth quarter versus the prior plan and the further actions being taken to rebalance the channels by actively reducing sales in May/June.

A stock provision of approximately $80 million to $90 million in addition to the $23m stock provision recognised in 1H21.

Separately, a2 Milk said its chief executive Asia Pacific, Peter Nathan had resigned but would remain with the business for some time to ensure a smooth and orderly transition.

A2 Milk said the revised outlook did not reflect the underlying performance or strength of the business.

“The board and management have determined that it is appropriate to address the inventory imbalances aggressively in order to allow the business to return to growth as quickly as possible and to deliver acceptable margins,” the company said.

“Most of the actions that we are taking are non-cash in nature with the result that company’s balance sheet will remain strong,and we would expect to see improved performance during 2022,” it said.

Specifically, a2 Milk estimated that if the one-off charges and sales reductions to reduce inventory in the trade were backed out for this year, the business would record annual revenues in the order of $1.3b with an EBITDA margin percent in the low to mid-twenties.

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