May 10, 2021

New Zealand's a2 Milk cuts annual sales forecast on lower sales to China

New Zealand's a2 Milk has cut its annual sales forecast for the third time due to continued disruptions and inventory oversupply in its key sales channel to China, as the company's shares dropped to its lowest in 3-1/2 years, Reuters reported.

a2 Milk said it will review its growth strategy in China, affected by COVID-19 pandemic. The "daigou" channel, where consumers in China can purchase products outside of China imported informally, has been affected by COVID-19 as the channel is supplied by tourists and international students.

David Bortolussi, a2 Milk chief executive, said there will not be sufficient improvement in pricing, sales and inventory levels even if actions were taken to address issues related to "daigou" and other cross-border e-commerce channels.

The company also said its growth in China is also affected by lower birth rates in the country, resulting in a branding and channel strategy review as well as increased marketing expenditure into fiscal 2022.

a2 Milk has changed its 2021 revenue projections to between NZ$1.20 billion and NZ$1.25 billion (~US$873.5 million to US$909.9 million; NZD 1 = US$0.73), lower than the previous NZ$1.40 billion (~US$1.01 billion).

The company's shares dropped 16.3% to NZ$6.05 (~US$4.04), the lowest since September 25, 2017 and one of the worst performers on Australia's benchmark index in 2021.

About NZ$80 million to NZ$90 million (~US$58.2 million to US$65.4 million) in provisions will be set aside by the company as cover for writing off inventory, but it said cutting excess inventory could affect its financial performance for the first quarter of fiscal 2022.

Bortolussi said the company is confident in its long-term potential for infant nutrition and other opportunities in China despite the short-term setbacks.

The company said it is reviewing options to manage its capital, including a potential share buyback even though its balance sheet is strong.

- Reuters