The A2 Milk Company Ltd (ASX: A2M) share price could come under pressure on Wednesday.

This is because the infant formula company has just released an update, which reveals that trading conditions have not been favourable in the daigou channel.

A2 Milk share price on watch following shock update

This morning, A2 Milk responded to the release of an update from its dairy processing partner, Synlait Milk Ltd (ASX: SM1).

That update revealed that Synlait Milk has downgraded its full-year earnings guidance by NZ$20 million less than a month after releasing it to the market. It now expects its earnings to be in the range of a NZ$5 million loss to a NZ$5 million profit.

Management blamed this largely on “further advanced nutrition demand reductions, mostly from one of Synlait’s customers, which impact consumer-packaged infant formula volumes and base powder production.”

A2 Milk response

In response to this announcement, A2 Milk has revealed that it has lowered its total forecast production volume needs for English label consumer-packaged infant milk formula by ~1,650 metric tonnes for the period March through to June.

There were three reasons for this reduction. These are significant daigou weakness, inventory buildup, and distribution model adjustments. It explained:

This is mainly due to: continued weakness in the ANZ Daigou / reseller market which is down 49% in the most recently reported quarter from Kantar; the impact of significant cumulative delays in English label consumer-packaged IMF deliveries from Synlait to a2MC over an extended period expected to be fulfilled in 4Q234 resulting in a material amount of inventory arriving within a relatively short period which needs to be managed; and ongoing refinement of the Company’s English label distribution model resulting in more customers and distributors being supplied directly out of Hong Kong and China leading to lower future a2MC and channel inventory requirements.

Guidance unchanged

Despite the above, A2 Milk has reaffirmed its previous guidance for FY 2023.

It continues to expect FY 2023 revenue growth in the low-double digits, with softer English label infant formula sales to be partially offset by continued strong double-digit growth in China label revenue. Though, it does concede that its revenue growth is likely to be at the low end of its previous expectations (ie 10% growth).

Finally, A2 Milk’s EBITDA margin as a percentage of sales is still expected to be similar to FY 2022.

The question now, though, is what will demand look like in FY 2024 and is its inventory buildup a sign of tough times and inventory write-offs ahead? Time will tell.

The post A2 Milk share price on watch following worrying update appeared first on The Motley Fool Australia.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended A2 Milk. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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