A2 Milk's new chief executive David Bortolussi says the company remains committed to the unofficial infant formula trade into China, despite it being largely responsible for a decline in its earnings over the first half.
The company's net profit dropped by 35 per cent to $120 million in the six months to December due to Covid-19 disruption in the unofficial "daigou" trade - mostly out of Australia - into China, and the flow-on impact of that on cross-border e-commerce channels.
At an operating level, a2 Milk's ebitda dropped by 32.2 per cent to $178.5m.
Revenue eased by 16 per cent to $677.4m, slightly better than its December guidance of $670m.
A2 Milk's ebitda margin came to 26.4 per cent, a touch down on its guidance of 27 per cent.
Looking ahead, a2 Milk said it expected its revenue to come in at the bottom of a previously advised $1.4 billion to $1.55b range for the year to June.
Its ebitda margin forecast for the year was pitched in a range of 24 to 26 per cent, down from its previously advised range of 26 to 29 per cent.
Infant formula inventory at the end of the six months came to $198.6m, $51.2m higher than at the end of 2020, mostly arising from the uncertainties and complexities of Covid-19 and its impact on supply chains.
Bortolussi, in his first interview with the Herald since taking over the reins from former chief executive Geoff Babidge this month, said daigou was here to stay.
The trade - which covers individual infant formula resellers to bigger corporate-style operators who ship English-labelled product to the PRC outside the normal export channels - has formed a big part of a2 Milk's hugely successful infant formula business since the company's early days.
Bortolussi said the trade had been slower to recover from the travel restriction lockdowns than the company had anticipated.
However, a2 Milk's China label product was performing strongly in the PRC, as was the fresh milk market in Australia and the United States.
"But the big challenge that we have is our English-label business into the China market," he said.
"That's the product that is in effect exported to China through the daigou reseller channel and also through the e-commerce channel," he said.
Bortolussi said a2 Milk remained committed to the channel.
"It's always been an important channel for the business and we are very much committed to the channel," he said.
"It has evolved over time.
"We are going to have to work with our corporate daigou partners - to think about how we can adapt and innovate in that channel."
Bortolussi said a2 Milk's inventory was due to Covid-19 volatility and was "higher than we would ideally like", and that it would be working hard to unwind it over the second half.
A2 Milk said there had been a strong performance in China label infant nutrition, with revenue growth of 45.2 per cent, an increase in market value share to 2.4 per cent.
Solid performance in liquid milk in Australia with 16.3 per cent revenue growth driven by higher levels of in-home consumption and a record value share of 11.7 per cent.
The company has had to revise down its expectations for Southland's Mataura Valley Milk.
A2 Milk had finalised binding agreements for the proposed acquisition of a 75 per cent interest in Mataura Valley, which would allow the company to diversify away from its current sole supplier, Synlait Milk.
Dual listed a2 Milk said it had previously announced that during this transitional period (2022-24) the business will operate at about ebitda break even, with the business returning a positive ebitda from 2025.
"However, due to revised volume assumptions, the Company now expects an ebitda loss of up to $10m per annum during the transition period and still expects ebitda to be positive from 2025," a2 said.
In its result, a2 Milk said there continues to be unprecedented 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."
Changes in the approach in the United States, focusing more on affordable premium pricing, resulted in sales there increasing 22.0 per cent, driven by improved in-store sales in established stores as well as an expanded store footprint.
A2 Milk's balance sheet remained in a strong position with no debt and a closing cash position of $774.6m.
The company's shares fell sharply in response to the result. They last traded at $9.43, down $1.70 or 15.2 per cent, compared with last July's peak of $21.51.
Shares in Synlait Milk - 20 per cent owned by a2 Milk - dropped 21c to $4.07.