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A2 Milk cuts guidance again

The a2 Milk Company continued its hefty slide after the infant formula company provided a trading update and a revised outlook for FY21, which saw guidance cut for the fourth time. Globally there continues to be unprecedented levels of uncertainty and volatility due to COVID-19 which has significantly impacted markets in which a2 Milk trades and consequently the performance of A2M.


While the company’s third-quarter sales performance was broadly in line with its revised plan at $295.0 million, it is emerging that actions to address the challenges have not resulted in sufficient improvement in pricing, sales and inventory levels in the daigou/reseller and CBEC channels required to deliver the forecast significant uplift in fourth-quarter sales.


In February, A2M outlined the actions it was taking to address the challenges it was facing, particularly in the daigou/reseller and cross border e-commerce channels. To re-activate the daigou/reseller channel it was aiming to rebalance inventory levels, implement a new traceability system, provide temporary support to key daigou/reseller customers and work with corporate daigou to drive distribution innovation. In the CBEC channel, it was aiming to rebalance inventory levels, refine its promotional approach and invest in building enhanced digital and e-commerce capability.


The second-half plan also included continuing to invest behind the brand to drive growth in the China label infant nutrition business. The outlook assumed these actions would deliver a significant improvement in quarter-on-quarter growth.


The Board tasked management to undertake a comprehensive review of inventory, which indicated that the levels were much higher than had been anticipated and that the challenges in the daigou/reseller and CBEC channels have been exacerbated by this excess inventory and difficulties with visibility. As a result, more aggressive actions would be taken to address excess inventory which will impact FY21 revenue and EBITDA, and potentially the first quarter of FY22.


The company will also increase marketing investment in 4Q21 and into FY22 to drive consumer demand.


FY21 revenue


A2M is now targeting revenue for FY21 in the order of $1.20 billion to $1.25 billion. The significant decline from the outlook provided in February reflects the impact of the lower than expected sales in 4Q21 versus the prior plan and the further actions being taken to rebalance the channels by actively reducing sales in May/June.


It will take some time to rebalance inventory levels and restore channel health. An immediate recovery is not expected and a further update for FY22 will be provided at the company’s results in August.


FY21 EBITDA


A2M is expecting an EBITDA to sales margin for FY21 in the order of 11% to 12%.


The significantly lower EBITDA margin outlook from that provided in February reflects:

- The lower than expected sales in 4Q21 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, which is in addition to a $23 million stock provision recognised in 1H21.

- One-off costs of approximately $8 million associated with the implementation of the Company’s new cloud-based enterprise resource planning system