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Slide 3: Welcome

Welcome

Good morning, ladies and gentlemen.

My name is David Hearn.

As Chair of your Board I have the privilege of chairing this Annual Meeting.

Who would have thought last year, when we had our first ever virtual meeting that it would not be our one and only. But sadly, due to the tenacity of the COVID-19 pandemic, we are forced to have a virtual meeting again this year. I'm sure we all hope that, next year, our lives will be freer again and as a result we will be able to schedule this meeting in person.

As always, today you can vote and ask questions online.

I would encourage you to send through your questions as soon as you can so that we can make the process as efficient as possible.

So, on behalf of the Board of The a2 Milk Company Limited, I would like to welcome you formally to The a2 Milk Company's Annual Meeting.

In accordance with the constitution of the Company I am satisfied that a quorum is present - and I declare the meeting open.

Introduction of Directors, Management, Advisors and Auditor

Let me introduce the Company's Directors who are joining us today. We have:

  • Julia Hoare, the Company's Deputy Chair, joining us from New Zealand,
  • Warwick Every-Burns, joining us from Sydney,
  • Pip Greenwood, joining us from New Zealand,
  • Bessie Lee, joining us from China, and
  • David Bortolussi, our Managing Director and CEO, joining us from Melbourne.

Let me also introduce:

  • the Company's Chief Financial Officer, Race Strauss, and

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  • the Company's Chief Legal & Sustainability Officer and Company Secretary, Jaron McVicar.

Also joining us today are representatives from the Company's legal advisors, and our Auditor, Ernst & Young.

Apologies

We have received no apologies in advance of this meeting.

Slide 4: Agenda

Agenda & Notice of Meeting

The agenda for the meeting is shown on the slide here.

I will make a short introductory speech, after which I shall ask David Bortolussi, our CEO, to address the meeting.

We will then proceed to the formal business of the meeting and any general business as outlined in the notice of meeting, which has been circulated to all shareholders.

Unless there are any objections, I will proceed on the basis that the Notice of Meeting is taken as read. The Notice of Meeting and the Annual Report are available on our website.

Proxies

I have been advised that 1,401 valid proxies have been received representing more than 348 million shares (or roughly 47%) of the total number of votes able to be cast at the meeting.

Minutes of the previous Annual Meeting

The minutes of the last Annual Meeting, held on 18 November 2020, have been signed by me as the

Chair of that meeting, as a correct record of those proceedings.

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Slide 5: Chair Speech

Chair's Speech

Given that the last 18 months have been tumultuous for the Company and our shareholders, I would now like to make some remarks to put these events in perspective.

As I noted in my letter to shareholders a few months ago, there is no hiding from the fact that the 2021 fiscal year was very challenging for the Company.

I don't need to explain to you that we as a Company, along with all of us individually, have experienced an extended period of great uncertainty and volatility, caused by several different factors including of course the COVID-19 pandemic.

But if it was a challenging year for the company and its management, I recognise that it was a very disappointing year for you, our shareholders, in many ways.

While we were disappointed with our financial performance and the pressure this put on our share price, we were pleased to deliver many significant achievements against our strategic objectives, despite the challenging market conditions.

Today, I would like to take the opportunity to cover a number of topics that we believe are of importance to you.

  • Firstly, I would like to step you through some of the challenges we faced during the course of the 2021 fiscal year and the actions the Company has taken to address these issues.
  • Secondly, I would like to provide the Board's perspective of the Company's revised growth strategy that has been undertaken in recent months. David Bortolussi will provide more detail on this in his address as well, but it is important that shareholders also understand this from the Board's perspective.
  • Thirdly, and related to this, I will discuss how the Board is thinking about capital allocation and capital management.
  • I will then cover the board renewal and management changes that have occurred during the year.
  • And finally, I will address some additional topics that we know are on shareholders' minds.

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First, stepping through FY21 - the challenges and actions taken.

As we all know, in FY21, the Company experienced great uncertainty and volatility.

During this period of volatility, the normal behaviours of both our consumers and our trade customers changed, in some cases radically, as a result of their reaction to the covid crisis, and this had a profound and very challenging effect on many aspects of our business.

Across the early phase of the pandemic, and particularly in our infant nutrition business, there were highly unusual swings in demand as consumers tended to panic buy and pantry load, creating a large spike in sales, followed several months later by a gradual unwinding of these pantry stocks as things settled down.

These dramatic swings in consumer behaviour subsequently drove equally significant changes in the behaviour of many of our trade customers as they tried to meet these volatile demand patterns whilst trying to balance off their own challenges at the same time.

The other point to make, is that these swings in consumer demand were exacerbated by real concerns over the future availability of certain key infant nutrition ingredients, which are sourced from all over the world.

In order to make sure that we were able to meet any further spikes in demand, in the early period of COVID-19 we chose to build our own inventory levels to ensure we were able to meet potential demand patterns without facing supply chain disruption.

Whilst this was a rational decision to make at the time given the prevailing uncertainty, especially bearing in mind that we commit to production three months in advance, the anticipated demand for these increased orders didn't materialise and as a result this led to increases in our own inventory.

As a result of these challenges, excess inventories built up right across our business both internally and externally throughout our distribution channels. This excess inventory build-up was also exacerbated by a marked general slow down on the overall infant formula market within China for the first time in over 15 years. To address the excess inventory levels, the board and management put in aggressive measures in the fourth quarter of the fiscal year to address the situation.

These challenges impacted our English label infant nutrition business in particular. In the first quarter of the fiscal year, we were impacted by the flow-on effect of pantry destocking following the strong sales uplift in 3Q20. Furthermore, there were lower than anticipated sales to retail Daigous in Australia, due to multiple reasons including reduced tourism from China and international student numbers.

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By the end of the first quarter, our major reseller customers started to feel increased disruption within their businesses, impacting our trading with them. With the effect of the disruption in the reseller channel, we shifted our focus to activating the CBEC channel in a manner which complemented our reseller business.

By the end of the second quarter, it became clear that the disruption we were experiencing in the reseller channel was also impacting our CBEC business. Following a Board-initiated comprehensive inventory review undertaken by management in the second half, it became clear that the challenges in the reseller and CBEC channels were being exacerbated by the overall high level of channel inventory, as a result of the highly complex and multi-layered distribution and channel systems in which we operate.

In the third quarter of the fiscal year, we announced a number of initiatives, particularly in those heavily affected channels, to address the issues.

Specifically, we deliberately slowed down our own sales into the CBEC channel to reduce the inventory levels; we reduced our forward orders from our infant nutrition supplier Synlait to reduce our own internal stock levels; and we embarked on a series of promotional programmes designed to move product through these channels more quickly. Whilst these initiatives had some positive effect, the board and management took the decision that we ultimately needed to take more aggressive action to address these issues fully and allow the business to return to growth as quickly as possible.

As we disclosed in our update on May 10, the Board made the difficult decision to address the inventory issues head-on and aggressively deal with the situation in a substantive way. This decision required significant inventory write-downs and external distributor inventory swaps which was costly but effective in helping to restore balance and appropriate pricing in the market. Ultimately, we believe that these decisions were in the Company's, best medium and long term interests by creating a platform for a return to growth in the future.

I, along with the Board and the executive management team, am confident that the approach we have taken, while painful in the short-term, will place the Company in a much better position to begin to return to a growth trajectory, primarily by continuing to build our strong brand from the solid base that we have created over the past several years.

Pleasingly, as David and the management team updated the market a few weeks ago, we are starting to see positive signs from the actions we took earlier in the year.

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A2 Milk Company Ltd. published this content on 16 November 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 16 November 2021 22:06:16 UTC.