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A2 Milk (ASX:A2M) share price on watch after 79% profit decline and weak outlook

This infant formula company’s shares will be on watch after its FY 2021 results…
The post A2 Milk (ASX:A2M) share price on watch after 79% profit decline and weak outlook appeared first on The Motley Fool Australia. –

The A2 Milk Company Ltd (ASX: A2M) share price will be one to watch closely on Thursday.

This follows the release of the infant formula company’s full year results this morning.

A2 Milk share price on watch after achieving downgraded guidance

Revenue down 30.3% to NZ$1.21 billion
Earnings before interest, tax, depreciation and amortisation (EBITDA) fell 77.6% to NZ$123 million
Stock write-downs of NZ$109 million
Net profit after tax down 79.1% to NZ$80.7 million
Cash balance of NZ$875.2 million
Board decides against capital return
Outlook: Tough year ahead in FY 2022

What happened in FY 2021 for A2 Milk?

All eyes will be on the a2 Milk share price today after it delivered a result in line with the guidance it downgraded four times during FY 2021. For the 12 months ended 30 June, the company reported a 30.3% reduction in revenue to NZ$1.21 million. This compares to its most recent guidance of NZ$1.2 billion to NZ$1.25 billion.

This reflects a 16.6% decline in China & Other Asia revenue to NZ$583.4 million, a 42% decline in ANZ revenue to NZ$559.7 million, and a 3% decline in North America revenue to NZ$63.6 million.

The company notes that its performance was impacted by sustained weakness in the daigou channel because of COVID-19, a contraction in the Chinese infant nutrition market, and heightened competitive intensity in China. Management highlights that local players in China continue to gain share against the traditional multinational brands. This is being driven both by the strength of local brands in domestic channels, as well as an overall mix shift from cross-border to domestic channels.

Things were much worse for its EBITDA, which fell 77.6% year on year to NZ$123 million. This includes the impact of a whopping NZ$109 million write-down of its inventory and NZ$10 million of acquisition costs. It also just meets the lowest end of its final guidance of NZ$132 million to NZ$150 million (before acquisition costs).

The NZ$109 million write-down reduced its inventory to NZ$112.2 million at the end of the financial year. Management notes that channel inventory in CBEC and daigou/reseller channels are now at target levels. Whereas China label inventory is expected to reach target levels by the end of first quarter. Positively, these actions are proving to be effective, with early signs of price stabilisation in the CBEC channel and some recovery in the daigou/reseller channel.

One thing that could weigh on the a2 Milk share price today is news that the board has decided against returning funds to shareholders. Despite sitting on a cash balance of NZ$875.2 million and having a depressed share price, the board stated that it plans to preserve balance sheet strength, having regard to market volatility and potential opportunities to reinvest in growth and supply chain.

What did management say?

A2 Milk’s Managing Director and CEO, David Bortolussi, acknowledges that FY 2021 was a difficult year but remains positive on the future.

He commented: “It was a challenging year for The a2 Milk Company but we remain confident in the long-term opportunity that the infant nutrition market in China represents.”

“The actions taken from the fourth quarter to address excess inventory are proving effective with channel inventory levels reducing, product freshness improving and pricing increasing. Our brand health metrics remain strong overall with some improvements in our most recent tracking research following a significant marketing campaign in China in the fourth quarter.”

Mr Bortolussi also revealed that the company is reviewing its growth strategy in response to a rapidly changing China infant formula market and structural factors in the daigou channel.

“We recognise that the China market and channel structure is changing rapidly and we are undertaking a comprehensive process to review our growth strategy and executional plans to respond to this new environment.”

This review includes the company’s approach to driving infant nutrition growth in both China label and English label channels, its infant nutrition product portfolio and innovation strategy, adjacent growth opportunities, and its brand positioning to ensure continued resonance and distinctiveness amongst an evolving consumer base.

What’s next for A2 Milk in FY 2022?

Unsurprisingly after being heavily criticised for downgrading its guidance four times in FY 2021, management has decided against offering guidance for FY 2022.

Instead, it is providing current observations on key drivers and important issues that may impact its FY 2022 results.

This includes China’s infant nutrition market being materially impacted by a lower birth rate, especially recently due to COVID-19 and related vaccination programmes causing many people to delay pregnancy. Market share gains by domestic brands are expected to continue.

It also notes that the English label infant nutrition segment is targeting sales stabilisation in FY 2022 but a wide range of outcomes is possible. This is due largely to COVID-19 impacts on the daigou/reseller channel and associated impact on CBEC for English label products which are expected to be prolonged.

Overall, the company is expecting first half revenue to be marginally lower than the prior corresponding period. Though, this includes revenue from the recently acquired Matura Valley business.

Furthermore, gross margins are expected to be similar for the full year, excluding FY 2021 inventory write downs.

It concluded: “Overall, although a2MC believes the business will continue to make significant progress on many fronts, FY22 is expected to continue to be a challenging and volatile year. Due to the actions taken in 4Q21 to address channel inventory and improve product freshness, coupled with strong brand health, the business is well-placed to adapt its strategy and execution to drive growth in the longer term. However, recovery in English label channels is expected to be slow and market growth in China will be subdued for some time.”

A2 Milk share price performance

Given the company’s abject performance over the last 12 months, it will come as no surprise to learn that the A2 Milk share price is underperforming the market significantly.

The A2 Milk share price is down 62% over the last 12 months. Shareholders will no doubt be hoping for better over the next 12 months.

The post A2 Milk (ASX:A2M) share price on watch after 79% profit decline and weak outlook appeared first on The Motley Fool Australia.

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More reading

5 things to watch on the ASX 200 on Thursday

The A2 Milk (ASX:A2M) share price crashed 16% last time it reported
Here’s why the A2 Milk (ASX:A2M) share price is down 42% so far in 2021
Here’s what has been moving the A2 Milk (ASX:A2M) share price in August 2021
Here’s why the A2 Milk (ASX:A2M) share price is up 11% this week

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended A2 Milk. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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