Trading update and revised FY21 outlook

Growth strategy and capital management review commenced

The a2 Milk Company (“the Company”, “a2MC”) today provides a trading update and a revised outlook for FY21. Key points

• The trading dynamics in the China infant nutrition market have been and continue to be challenging for a2MC and many international competitors

• While a2MC’s 3Q21 trading was broadly in line with plan, it is clear that the actions taken to address challenges in the daigou/reseller and CBEC channels will not result in sufficient improvement on 3Q21 in pricing, sales and inventory levels to meet our previous guidance based on April sales being well below plan

• The Board tasked management to undertake a comprehensive review of inventory in the trade and this work has indicated that the level of channel inventory is higher than had been anticipated

• As a result of the inventory review, it is clear that the challenges in the daigou/reseller and CBEC channels have been exacerbated by excess inventory and difficulties with visibility

• In the interest of the long-term health of the a2 brand and the medium-term trading outlook of the business, more aggressive actions to address excess inventory will be taken which will impact FY21 revenue and EBITDA, and potentially 1Q22

• The inventory management actions being taken will provide Chinese mothers with the freshest infant milk formula and benefit the Company’s customers, distributors and partners

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

• Despite these short-term setbacks, the Company remains confident in the long-term opportunity that the infant nutrition market in China represents, and is determined to build on the strong position which the Company has built within this market over the past five years

• However, the Company recognises that the China market and channel structure is changing rapidly and has therefore commenced a comprehensive process to review its growth strategy and executional plans to respond to this new environment

• In addition, the Board is actively considering capital management initiatives, including a potential share buy-back and an update will be provided at the full year results in August

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My thoughts: A2M is stuffed. Structually challenged, with a lot of issues and headwinds going forward. With rise of Chinese local brands, non exisitance of diagou channels for the foreseeable future, and massive inventory stockpile issues, dont see a turnaround any time soon. Shame, as I loved its business model being a capital light marketing business like Coke.

Getting out of it from my RL portfolio today. Tough lesson learnt - Cut losses early and dont hang on in the hopes of a recovery in face of multiple downgrades, even though the business was once a highflyer blue chip market darling...