Synlait has doubled down on its refusal to acknowledge A2 Milk tearing up its exclusivity agreement with the company, saying the dairy brand’s actions will not dent its 2024 earnings.A2 and Synlait – which produces A2’s Platinum range of infant formula under contract – are set to enter dispute resolution talks that could take more than a year. And if that fails, arbitration will follow, meaning any entanglement could take years.Synlait announced it had sunk to $NZ4.3m ($3.98m) annual loss on Monday – a 111 per cent turnaround on 2022, citing a “challenging year”, which included its feud with biggest customer and shareholder A2.READ NEXTPOLITICSYes23 director branded ‘bitter’ over voice postROSIE LEWIS, PAIGE TAYLORSynlait told investors on Monday that it “disputes that The A2 Milk Company has the right to cancel the exclusivity arrangements”. A2 made the decision in an effort to diversify its manufacturing and shore up the profitably of its loss-making Mataura Valley Milk factory in New Zealand.Synlait chief executive Grant Watson said A2’s “purported cancellation” will not dent its 2024 earnings after A2 agreed to pause its decision until the matter is resolved via dispute resolution.Crucially, it is Synlait which holds regulatory approval from Beijing to sell A2’s infant formula in China – the company’s biggest market – a fact Mr Watson reminded investors on Monday.READ MORE: Microsoft reveals its AI plans for the future of work | The big problem with tiny homes“The A2 Milk Company has confirmed to Synlait that it will in practice maintain exclusivity with Synlait until such time as the matter is resolved, assuming that both parties will seekto progress the dispute process promptly in good faith, and the dispute process is completed by the end of 2024,” Mr Watson said.“The purported cancellation relates only to the exclusivity arrangements. The NPMSA (Nutritional Powders Manufacturing and Supply Agreement) remains in place, but may be terminated by either party on three years’ notice.”After its shares have plummeted 64 per cent since January, Synlait was trading 2.6 per cent higher at $1.20 in midday trade on Monday. It later eased to close 1.3 per cent higher.Its spat with A2 – which began in April – has spooked investors, with A2 shares shedding 1.8 per cent to $4.34 in the past week, giving it a market value of $3.1bn.A2 is attempting to diversify its supply chain, but the failure to turnaround a share price – which has dived from a high of $20 in mid 2020 – is causing a headache within the David Bortolussi-led company.Synlait has created a headache for A2 Milk boss David Bortolussi.It is the only ASX-listed infant formula company to have regulatory approval to sell infant formula across China’s general retail trade – with Mr Watson highlighting that fact to investors.“Synlait continues to hold the Chinese regulatory State Administration for Market Regulation (SAMR) licence, which is attached to Synlait’s Dunsandel manufacturing facilities,” Mr Watson said.“The licence is for The A2 Milk Company’s Chinese labelled Infant Formula (stages one, two and three). The company expects to manufacture those products for The A2 Milk Company for goods destined for the China market for the period of that licence, currently expiring September 2027.”While SAMR regulation has been difficult and expensive to maintain, A2 has been moving to shore-up its relationship with China. Last week, Mr Bortolussi said cancelling the exclusivity with Synlait would allow the company to manufacturer at its loss-making Mataura Valley Milk (MVM) factory, which it owns in a 75/25 per cent partnership with China Animal Husbandry Group.“Having regard to the dispute resolution process, product development cycles and the New Zealand dairy season, any positive impact of the removal of Synlait’s exclusivity on MVM utilisation and profitability is not expected to have a material impact in FY24 or FY25,” he said.“As previously announced, accelerating MVM’s path to profitability by FY26 or earlier is a strategic priority.”Synlait has been forced to revise its earnings several times in the past year, citing falling volumes from A2, which A2 has disputed.In March, Synlait warned that its two-year recovery plan had been pushed out from two to three years, and it expected to deliver net profit of $NZ15m to $NZ25m.This compared with the company saying in December that it expects to enter next financial year with a “similar level of profitability experienced before FY21”. In the year to July 31, 2020, the company generated $NZ75.2m in net profit, a 9 per cent fall on 2019.While demand for A2 infant formula has rebounded from a pandemic-sparked collapse of the Chinese daigou – or reseller – market in 2020, Synlait had been pinning its hopes on a mysterious “customer S”, widely believed to be US nutrition giant Abbott, which was expected to dominate its New Zealand production.But details about a deal with the yet to be named customer have yet to be released.
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