a2 Drop in milk revenue following pandemic disruption, drop in birth rate in China – Update

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By Stephen Wright

WELLINGTON, New Zealand – Infant formula company a2 Milk Ltd. said its first-half profits had halved as pandemic disruptions and China’s declining birth rate upended its growth plans.

The company said on Monday it could not give an accurate forecast for full-year revenue and profit, but warned that the expected improvement in revenue would not translate into higher profits as it would spend heavily more to strengthen its brand.

It had a cash position of NZ$747 million ($500 million) at the end of December, down from NZ$875 million in mid-2021, as directors pursue a strategy of trying to resurrect the company’s growth fortunes rather than returning money to shareholders.

A2 Milk’s July-December net profit of NZ$59.6 million was down 50.3% from a year earlier and revenue of NZ$660.5 million -Zealanders was 2.5% lower.

He said China’s infant formula market fell 3.3 percent in value in the first half due to the country’s declining birth rate.

A2 Milk in October had reported a prolonged period of reduced profitability after its business was affected by the Covid-19 pandemic and changes in its crucial market in China.

On Monday, the company said it would spend NZ$220 million in its current financial year on marketing and other brand investments “to drive execution of the company’s growth strategy.”

Shares of a2 Milk have fallen more than 70% since August 2020 following a series of downward earnings revisions as the pandemic caused a slump in formula sales via surrogate Chinese buyers. Its growth prospects in China have also become less certain due to a declining birth rate and the loss of appeal of foreign brands.

The company buys much of its powdered milk from New Zealand producer Synlait Milk Ltd., but last year bought a 75% stake in Mataura Valley Milk for NZ$268.5 million to to have its own production capacity.

Write to Stephen Wright at stephen.wright@wsj.com

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