A2 Milk moves to cancel Synlait's exclusive manufacture, supply rights - Stuff.co.nz

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The a2 Milk Company wants to produce more product at its Mataura Valley Milk factory.

The a2 Milk Company has moved to cancel its exclusive manufacturing and supply agreement with Synlait Milk, paving the way for more production to move to its own factory.

Synlait has the exclusive manufacturing and supply rights over A2 Milk’s Stage 1 to 3 infant milk formula products sold by A2 Milk in China, Australia and New Zealand. The company’s Stage 4 infant milk powder and other a2 Milk products supplied by Synlait are not subject to exclusivity.

The a2 Milk Company said in a statement to the NZX on Monday that it had given Synlait written notice cancelling the exclusive manufacturing and supply rights after market hours on Friday.

Synlait has advised that it is considering the notice of cancellation, it reserves its rights, and it will respond formally in due course. Synlait’s shares and bonds were halted from trading on Monday while it considered the impact of the information.

A2 Milk said the cancellation was due to Synlait’s delivery in full and on time performance during the 2023 financial year falling below the level required for Synlait to maintain such exclusive rights, primarily in relation to English label infant formula product.

A2 Milk said the manufacturing and supply agreement with Synlait will remain and said Synlait remained an important supplier.

The company said the supply agreement with Synlait continued on a rolling term until either party gave three years’ notice of termination and said Synlait was contractually bound to supply up to the same volume of infant formula.

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If Synlait disputed the cancellation notice, the matter would be resolved through good faith negotiations, followed by confidential binding arbitration as provided for under the dispute resolution provisions of the supply agreement, A2 Milk said.

A2 Milk said any such dispute resolution process may take some time to complete.

In the meantime, the company has advised Synlait that it would agree to maintain Synlait’s exclusivity until any dispute was resolved, on the assumption it was resolved by the end of 2024.

Even once the matter was resolved, A2 Milk said it believed it would continue to have the right, but not the obligation, to fully source its current infant formula products from Synlait.

A2 Milk said removal of Synlait’s exclusivity would provide it with the option to produce its a2 Platinum English label product at any facility in the future, including the Mataura Valley Milk factory in Southland that it owns with China Animal Husbandry Group.

Still, the company said given the dispute resolution process, product development cycles and the New Zealand dairy season, any positive impact for the Mataura Valley Milk factory was not expected to have a material impact in its earnings over the coming two years.

A2 Milk has previously said that accelerating the Mataura Valley Milk factory's path to profitability by the 2026 financial year or earlier was a strategic priority.

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