A2M Cancels Synlaits Exclusive Supply Rights

In a significant move, The a2 Milk Company Limited (ASX: A2M) has issued a written notice to Synlait Milk Limited (Synlait) to cancel the exclusive manufacturing and supply rights previously granted to Synlait. This cancellation affects stages 1 to 3 of a2MC's current infant milk formula (IMF) products, including a2 Platinum® and a2 至初®, for sale in China, Australia, and New Zealand.

Reason for Cancellation

The decision to cancel Synlait's exclusive rights stems from Synlait's failure to meet the delivery in full and on time performance (DIFOT) during the fiscal year 2023. This performance fell below the threshold required for Synlait to retain exclusivity, particularly concerning English label IMF products.

Supply Agreement Remains in Place

Despite the removal of exclusivity, the manufacturing and supply agreement between Synlait and a2MC (Supply Agreement) will remain valid. Synlait continues to be a crucial supplier to a2MC, and pricing terms and key conditions from the Supply Agreement will persist. Key points to note:

• The Supply Agreement remains active on a rolling term, with either party needing to give three years' notice for termination.
• Synlait remains contractually bound to supply the same prescribed IMF volume per annum, covering all stages of a2MC's current English label product, a2 Platinum®, and the new China label GB product, a2 至初®.

Dispute Resolution

Synlait is currently reviewing a2MC's cancellation notice. If Synlait disputes the cancellation, the matter will be resolved through good faith negotiations. If necessary, confidential binding arbitration will follow, as outlined in the dispute resolution provisions of the Supply Agreement. a2MC anticipates that this dispute resolution process may take some time.

Continued Exclusivity (Temporarily)

While the dispute resolution process is ongoing, a2MC has agreed to maintain Synlait's exclusivity, assuming the dispute reaches resolution by the end of 2024. Even after the matter is resolved, a2MC retains the right (though not the obligation) to source its current IMF products exclusively from Synlait.

Implications for Production

The removal of Synlait's exclusivity provides a2MC with the option to produce a2 Platinum® at any facility, including Mataura Valley Milk (MVM). MVM is a dairy nutritionals facility in New Zealand's South Island, in which a2MC holds a 75% stake in partnership with China Animal Husbandry Group (which owns the remaining 25%). It's important to note that due to the dispute resolution process, product development timelines, and the New Zealand dairy season, any positive impact on MVM utilization and profitability is not expected to significantly affect FY24 or FY25. However, it remains a strategic priority to accelerate MVM's path to profitability by FY26 or earlier.

This development in the partnership between a2MC and Synlait is expected to have far-reaching implications in the dairy and infant formula markets, and all eyes will be on the outcome of the dispute resolution process.

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