Conflict has erupted between New Zealand-based A2 Milk and Synlait, major players in the milk and infant-formula industry, following A2 Milk’s decision to terminate a longstanding exclusive supply contract.

Synlait serves as a provider of dairy, infant-formula products, and ingredients to A2 Milk. However, on Sunday, September 17th, A2 Milk made an announcement through a statement on the New Zealand stock exchange (NZX) that it had issued a written notice to Synlait, terminating the exclusive manufacturing and supply privileges that Synlait had previously held. These privileges encompassed the production of stages 1 to 3 of A2’s infant-formula products intended for sale in China, Australia, and New Zealand.

A2 Milk, holding the second-largest stake in Synlait at 19.8%, stated that it terminated the exclusive agreement because Synlait’s performance in delivering products in full and on time during FY23 fell below the threshold necessary for maintaining such exclusive rights.

However, it said “Synlait remains an important supplier”.

Yesterday, Synlait responded. In a stock-exchange filing, it said, “Synlait disputes that The A2 Milk Company has the right to cancel the exclusivity arrangements.”

A2 Milk has confirmed that, in practice, Synlait will continue to enjoy exclusivity until the matter is resolved. The contract includes a 20-day dispute resolution process, and if the issue remains unresolved after this period, arbitration proceedings will be initiated.

Synlait additionally highlighted its possession of the Chinese regulatory State Administration for Market Regulation (SAMR) license, which pertains to its Dunsandel manufacturing facility and encompasses A2 Milk products. Synlait anticipates continuing the production of these products for the Chinese market until the license’s expiration in September 2027.

Local media reports have proposed that by discontinuing Synlait’s exclusive agreement, A2 Milk could potentially make use of the specialized dairy nutritionals facility, Mataura Valley Milk. This facility is jointly owned with China Animal Husbandry and has been operating at a loss.

The Nutritional Powders Manufacturing and Supply Agreement (NPMSA) between A2 Milk and Synlait will continue under a rolling term, as it can only be terminated by either party with a three-year notice period.

In its statement to the NZX, Synlait also informed the market about the successful completion of its bank refinancing, welcoming new members to its banking syndicate, including ANZ, Bank of China, China Construction Bank, HSBC, and Rabobank. As a result, the company has secured a working capital facility amounting to NZ$240 million (approximately $142.5 million) and revolving credit facilities of NZ$230 million.

Furthermore, it reaffirmed its net profit guidance for the full year of 2023, which spans from a net loss of NZ$5 million to a net profit of NZ$5 million. The company emphasized that A2 Milk’s announcement would not affect its performance for the fiscal year 2023.

The group is scheduled to unveil its full-year 2023 results on Monday, September 25th.

Back in April, A2 Milk expressed surprise at Synlait’s profit warning, where Synlait cautioned investors about a potential net loss of NZ$5 million, contrasting sharply with its earlier projection of an annual net profit after tax ranging from NZ$15 million to NZ$25 million.