Article in AFR - interesting exchange on the analyst briefing call it seems (my bolding added).
A2 Milk smashed by shaky daigou, slashes full-year outlook (AFR)
The A2 Milk Company has posted a 35 per cent fall in net profit after tax for the December-half after suffering a 16 per cent decline in sales as its key daigou channel remains shaky in the wake of COVID-19 restrictions.
Shares on the ASX were heavily sold down by 15 per cent to $8.88 each in early trade after the baby formula and fresh milk maker said the pandemic also continues to hurt cross border e-commerce sales into China. It also slashed its full year guidance - again. However, a2 Milk achieved its lowered guidance for revenue of about $NZ670 million ($626 million) in the half year
But A2 Milk said globally there continues to be volatility due to COVID-19 leading it to cut its outlook once again, but said it expects the fourth quarter to be significantly up on the third quarter after supporting its daigou partners and cutting inventory.
On Wednesday, it flagged its earnings before interest, tax, depreciation and amortisation margin was 26.4 per cent, or 27 per cent excluding Mataura Valley Milk acquisition costs. This was affected by lower sales and a $NZ23.3 million stock provision.
Bank of America Merril Lynch analyst David Errington slammed the company over its stock issues, pointing to the provision and increased inventory position by $52 million.“Peter, I’m sorry I don’t accept your explanation on that (inventory),” he said on a call.
“You have been saying now for some time you don’t have an inventory problem, but then your saying you now have one.”Peter Nathan, CEO of Asia Pacific, refuted a2 Milk has a trade inventory issue but noted the potential for baby formula product to get in “the wrong places” and a new traceability system will allow it to identify where product is coming from.
“The inventory will be lower going forward in order to uplift the daigou pricing,” he added.In December, a slower recovery in daigou sales to China forced a second cut to the company’s earnings guidance in three months. Daigou are ‘personal shoppers’ who buy products such as formula, vitamins or luxury goods outside China for customers in China. Any return of international students and tourists may be some time away in later calendar 2021.
A2 Milk’s total revenue reached $NZ676.5 million in the half-year, while earnings before interest, tax, depreciation and amortisation (EBITDA) of $NZ178.5 million was down 32.2 per cent.NPAT of $120 million was about 8 per cent below Citi analyst Sam Teeger’s estimate which appears to be driven by a weaker than expected performance from China.
The dual-listed company is heavily reliant on doing business in China, where sales channels account for 48 per cent of its total infant nutrition sales.Sales of a2 China label infant nutrition remained robust at $NZ213.1 million, up 45.2 per cent in the period.
It expanded its mother and baby store footprint to 22,000 sites, up from 19,100 at the end of the 2020 financial year.But baby formula sales in Australia/New Zealand declined 40.5 per cent to $209.5 million for the half.
Fewer international students and Chinese combined with subdued online pricing and channel inventory destocking have resulted in daigou resellers being slower to re-enter the market to promote the brand, the company said.
While there was some improvement towards the end of the period, the recovery was not as strong as expected, and a2 Milk is now seeking to re-activate the important distribution channel. The company is working to rebalance inventory levels, and provide some support to the daigou as well as working with corporate daigou to drive new ways in distribution.
In cross boarder e-commerce channel a2 Platinum English and other label infant nutrition sales fell 35 .5 per cent to $NZ103.5 million.
“While our performance in the competitive “11/11″ online sales event showed year-on-year growth with higher promotional activity, sales in the period following that event were below expectations with subdued pricing,” the company said.
Further growth in the liquid milk businesses in both Australia and the US was achieved, with Australian sales up 16.3 per cent to $NZ86.9 million.
New CEO David Bortolussi, who took the helm of the one-time market darling on February 8 from Geoff Babidge, faced investors for the first time.He said globally there continues to be unprecedented levels of uncertainty and volatility due to COVID-19.
“The company remains confident in the underlying fundamentals of the business and will continue to invest behind the brand and in its capability to drive long term growth,” he said.“However, the pace of recovery in the daigou channel and in the CBEC channel has been slower than previously anticipated and we now expect revenue to be at the lower end of the previous guidance.
”Group EBITDA margin for the full year is now expected to be in the range of 24 per cent to 26 per cent compared with its prior lowered expectations of 26 per cent to 29 per cent.
Revenue will now be at the lower end of its previous guidance range of $NZ1.4 billion to $NZ1.55 billion.Mr Bortolussi will be driving the company through a difficult patch. A2 Milk’s share price has roughly halved in the past six months, sinking its market cap to $7.8 billion on the ASX.
(20min delay)