The A2 Milk Company Ltd (ASX: A2M) share price will be one to watch on Thursday.
This follows the release of the fresh milk and infant formula company's half year results this morning.
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How did a2 Milk perform in the first half?
The good news for shareholders and the a2 Milk share price is that the company delivered a result in line with its downgraded guidance.
For the six months ended 31 December, the company reported a 16% decline in revenue to NZ$677.4 million. This compares to its guidance of ~NZ$670 million for the half.
In respect to earnings, a2 Milk posted a 32.2% decline in earnings before interest, tax, depreciation and amortisation (EBITDA) to NZ$178.5 million.
While this means that its EBITDA margin came in below its guidance of ~27%, this was due to Mataura Valley Milk acquisition costs. Excluding these costs, a2 Milk's EBITDA margin would have been in line at 27%.
And on the bottom line, the company's net profit after tax fell 35% over the prior corresponding period to NZ$120 million.
Finally, a2 Milk reported a NZ$9.2 million operating cash outflow for the period. This was due to an increase in inventory and a decrease in accounts payable. Nevertheless, the company finished the period with a massive NZ$774.6 million cash balance and no debt.
Why did sales and earnings decline?
There have been a number of factors weighing on the company's performance and ultimately the a2 Milk share price.
The main one is of course weakness in the daigou and cross-border e-commerce (CBEC) channels. They have been significantly impacted due to disruption resulting primarily from COVID-19 related issues.
And although the company's China label infant nutrition products grew sales by 45.2% to NZ$213.1 million and its Australian and US liquid milk businesses continue to growth, it wasn't enough to offset this.
Also weighing on its performance was weaker gross margins. This was primarily due to recognising a stock provision of NZ$23.3 million, higher cost of goods sold for China label infant nutrition, pricing pressures, and an adverse product mix shift. The latter has seen a higher proportion of liquid milk to infant nutrition sales.
Guidance downgraded again
Although a2 Milk delivered a first half result in line with its guidance, it looks likely to fall short of its full year guidance. This could be bad news for the a2 Milk share price on Thursday.
Management commented:
"The pace of recovery in the daigou/reseller channel and in the CBEC channel has been slower than previously anticipated and the Company now expects revenue to be at the lower end of the previous guidance range."
"A lower EBITDA margin range is now expected due to lower revenue, higher brand investment, longer daigou/reseller support, movements in foreign currency and adverse channel mix relative to what was anticipated in December."
In light of this, it is forecasting FY 2021 revenue of ~NZ$1.4 billion. This compares to its previous guidance range of NZ$1.4 billion to NZ$1.55 billion.
As for its earnings, management now expects an EBITDA margin of 24% to 26% (excluding acquisition costs). This compares to its previously downgraded guidance for an EBITDA margin of 26% to 29%.
It is also worth noting that this guidance assumes that actions it is taking to reactivate the daigou/reseller channel deliver a significant improvement in quarter-on-quarter growth in the fourth quarter.
The a2 Milk share price is down 31% over the last 12 months.
