Jeremy Hutton: Milford Asset Management expert on A2 Milk cutting their earnings forecast

Shares in A2 Milk dropped this week after the company downgraded their earnings forecast - after the business was hoping to increase their net profit for the June year.

A2 Milk has cited supply chain issues, partly relating to the conflict in the Middle East.

Milford Asset Management's Jeremy Hutton explained further.

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Episode Transcript

Speaker 1 (00:00):
Jeremy Hutton, Wilford Acid Management is with us alo.

Speaker 2 (00:02):
Jeremy, Oh, Heather, how you doing very well? Thank you.

Speaker 1 (00:05):
Now, A Too Milk had a downgrade in the forecast
earnings this week, of course, did you find that surprising
for a business that had been going so well?

Speaker 2 (00:13):
Yeah, it was. It was slightly disappointing for the market
and for a two particularly that they're just excuse me,
upgraded their earnings only only six weeks ago. And a
reminder for listeners A to Milk they are a large
supply of infant formula product into the very important Chinese market,
and you're right, they have been doing really really well

(00:33):
of late and they are now in fact the second
largest international brand in the huge Chinese market. And you know,
that's an outstanding outcome for a relatively relatively new company.
But I mean, this week, unfortunately, they're downgraded their earnings
by around thirteen or forteen percent, and the share price
is off roughly roughly the same amount. But I would
just comment that, you know, over the past two years,

(00:57):
the share price is still up over fifty percent taking
into account this this downgrade, so you know, still a
very very strong performer.

Speaker 1 (01:05):
Now it didn't seem like it was all bad news, though,
was it.

Speaker 2 (01:09):
Yeah, I mean that was interesting reading from some of
the comments from management, and I would agree. I mean,
usually profit warning warnings of bad news, but not all
of us was bad news. Because on one hand, part
of the issue is that they they're having very very
strong demand and they're struggling to be able to supply
that demand. And unfortunately they haven't had enough inventory in

(01:29):
market and they're having some problem with stockouts on the shelves,
and part of this is its outsource manufacturing. It's just
been struggling to keep up keep up with this demand
and hasn't been able to flex up enough. So unfortunately
A two has been missing out on a few more
sales than they otherwise thought they would have got.

Speaker 1 (01:47):
Yeah, some delays at the Chinese border as well.

Speaker 2 (01:49):
A Yeah, I mean this is the second factor that
they had, and again outside of their control, somewhats and
unfortunately some of their key competitors have had issues with
with product recalls, which is obviously very very sensitive and
infant formula products. So the Chinese authorities have understandable understandably
put in a few more additional checks. Uh, and A

(02:10):
two has been been caught up in this too, and
of course they're not caught up on these recalls, but
they are getting these extra checks and unfortunately they're having
to the products getting held up at the border and
they're having to try and air rate and product in
and this is this is causing some additional costs for them.
So they are getting a squeezed a little bit from
both sides, slightly lower revenue than their respecting and then

(02:33):
and then higher costs from from from these delays and
more air rate going in.

Speaker 1 (02:37):
Do you think this is a temporary blippy too.

Speaker 2 (02:41):
Yeah. I mean, I'd just like to stress again that
they haven't had any products issues with their products in
terms of the in terms of the recalls, so as
I mentioned earlier, they are going going really really well.
So you know, I think they will sort these issues out.
I mean, they're they're insourcing this manufacturing to try and
get a bit more control of the process. They've got
some new product coming out which have been performing really well,

(03:02):
and then they're entering some new geographies too in Southeast Asia,
so they will sort these products out. And especially given
how well the business is done in recent years and
the size of the prize in this massive Chinese market
is huge, so there is a lot of upside here
for a two if they can continue to execute brilliant Hi.

Speaker 1 (03:22):
Thank you for running us for it as always, Jeremy,
That's Jeremy Hutton, Milford Acid Management. For more from Hither
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