A2 Milk's new chief executive David Bortolussi has defended the timing of the company's fourth consecutive earnings downgrade.
The company's sole infant formula supplier, the closely-aligned Synlait Milk, in March reported a 76 per cent slump in first-half earnings to $6.4 million, driven by Covid-19 disruption.
And with Melbourne - a key city for the unofficial daigou trade to China - locked down for several weeks due to Covid-19 - analysts had grown doubtful about A2 Milk's earnings prospects.
Today A2 Milk said it expects earnings before interest, depreciation and amortisation (Ebitda) to sales margin for 2021 in the order of 11 per cent to 12 per cent, more than half the guidance given in February was for Ebitda margins of 24 to 26 per cent.
Based on analyst forecasts that could translate to a drop of around $200m in earnings.
Bortolussi, who has been in the job since January, said that when the board met over the weekend it had become clear that a downgrade was necessary.
"When we updated the market at the half-year, we said then that our plan was to do several things, so while the third quarter would be quite modest the actions that we were taking would lead to a significant improvement in the fourth quarter on the third quarter.
"It really only became apparent to us that the actions that we had taken were not going to be sufficient to deliver that fourth-quarter uplift what we were looking for," he said.
Latest sales and inventory data had been disappointing.
"Together these two pieces of information led us to update the market today."
What's the current state of play with daigou?
Bortolussi said the retail component of the daigou trade had reduced substantially, although it was better than it had been.
"The corporate daigou channel - which involves multiple routes to markets - is still operating, albeit at a reduced scale - but it is still operating in a healthy way.
"The cross border English label business will continue to be an important part of our business going forward."
Have other parts of the business taken up the slack?
"Our China label business - the domestic business in China - is performing in line with expectations.
"It's broken down a little bit there at the moment for various reasons but that's a real focus for us in the future - growing our business in China domestically.
"The business in Australia and the US is performing in line as well."
"The real problem again - the same as it was at the half - was the English label cross border business, which is both through the daigou reselling channel and through our e-commerce channel as well.
Could the diminished daigou trade be a positive in the long run?
"I think so. From what I can gather, the board and management have always appreciated the benefit of the daigou channel - which has assisted in growing the brand over many years - but have always recognised that over time that it would be a challenging route to market, and that the channel would also need to evolve.
"Daigou has evolved over the years from the very start of it - the suitcase trade - to more sophisticated e-commerce routes to market.
"Last year accelerated a trend that the board had already recognised and it may put us in a stronger position in the longer term."
How will a2 Milk navigate structural changes in the market from here?
"It's definitely been a volatile period over the last 12 months for our business and many other businesses."
A2 Milk needed to rebalance its inventory position.
"We need to invest more in our brand going forward to drive consumer demand and we need to think more carefully about the medium to long-term growth opportunities, which we will do as part of our strategic review.
"The New Zealand infant formula business to China is a key part of our growth going forward, but we are also mindful of other categories that we may have."
How do you explain this being the 4th downgrade so far?
"I empathise with our shareholders. They have had it particularly tough over the last 12 months with four downgrades now.
"The volatility in the business has been pretty extreme.
"I know it's been painful for our investors but it's been a business that has delivered $1.3 billion in revenue and 20 per cent Ebitda margin.
"We have a very strong balance sheet and a very strong brand.
"We are not in a crisis. It's just that the company's performance is not in line with expectations."
A2 Milk has about $850m in the bank - with about $400m yet to be spent on its Mataura Valley Milk acquisition.
The company has already signalled that it is looking at its capital management options.
"We have plenty of cash and capital available to us. There is nothing wrong with our financial position."
On that score, a2 Milk will report back to shareholders at its annual result in August.
Among the options is a share buyback.