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A2 Milk says rising environmental costs not a 'big risk'

Thursday 22nd August 2019

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A2 Milk says the cost of meeting more stringent water, animal welfare and emissions standards is not a "big risk" to the company and it will work with partners to help the industry meet the new requirements.

Chief executive Jayne Hrdlicka says the dairy marketing firm, the third-largest New Zealand company by market value on the NZX, is very focused on ensuring its activities are sustainable over time across its supply chain.

“We are working closely with our farming community to make sure that we can do everything we can together to ensure sustainable farming practices, great animal welfare and focus on clean waterways for the future.

"Helping all of our partners be able to achieve that is an important part of our story," she told BusinessDesk. 

Asked if the changes would increase the firm's raw material costs, Hrdlicka said “we don’t actually see that in particular as a big risk."

A2 Milk's main suppliers are Synlait Milk and increasingly Fonterra Cooperative Group.

A2 has an exclusive infant formula supply arrangement with Synlait and holds a 17.4 percent stake in the company. It also has a strategic relationship with Fonterra, which in February began signing up farms to supply A2 Milk. 

The dairy sector is already warning of increased costs on farmers as environmental requirements become most stringent and as the Reserve Bank looks to require higher capital buffers for licensed lenders.

Short-term costs will also increase for both Synlait and Fonterra, along with other processors, if a recommendation from the Interim Climate Change Committee is implemented. The committee recommended agricultural emissions be priced through the emissions trading scheme at processor-level as soon as feasible, ideally from 2020.

Initially, the impact will be minimal as it will only involve 5 percent of total emissions. However, analysts have warned that the 5 percent is a starting point and carbon prices will likely increase.

“We are a company built on partnerships," Hrdlicka said. "We will work collaboratively with all of our partners when there are issues that challenge the industry to make sure we solve them together.”

A2 supports the global ambition of the Paris Agreement and a 2050 net zero emissions target, the company says in its annual report. "We are already taking steps to limit our environmental footprint where we can, set targets for our supply chain impacts and will be offsetting the greenhouse gas emissions from our direct, third-party processing and on-farm operations from FY19.”

According to the report, direct and indirect emissions will be offset with carbon credits sourced from projects in the firm's key local markets - Australia, New Zealand, the US and China.

The firm's total GHG emissions were the equivalent of 519,068 tonnes of carbon dioxide, up 26.8 percent from a year earlier. A2's direct operations were responsible for about 5 percent of that. On-farm emissions totalled almost 391,000 tonnes.

A2 shares last traded down 2 percent at $14.52 after closing down 12 percent yesterday despite reporting 40 percent-plus gains in earnings and revenue. 

Markets were surprised when the company said full-year ebitda as a percentage of sales is expected to be broadly consistent with the 28.2 percent it recorded in the second half of the 2019 financial year. Analysts had been expecting it to be around 32 percent.

The decline will come as it lifts its full-year marketing investment to around 12 percent of sales and on continued investment in organisational capability to support future growth.


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