a2 Milk Company Ltd (ASX: A2M), the leading dairy and infant formula products company, announced Monday that it has agreed to a supply contract extension with Synlait Milk Ltd (ASX: SM1).
Synlait is a supplier to the a2 Milk Company for its Platinum infant formula and other nutritional products in select markets. a2 Milk Company is known for its a2-only protein cows milk products, which are believed to relieve stomach discomfort for some consumers.
Under a deal announced to investors in 2016, Synlait would supply a2 Milk Company for a minimum of five years with rolling three-year terms from August 1, 2018.
In a public filing today, a2 Milk Company announced a two-year extension to that term, providing a new minimum term of five years to July 2023. Synlait will remain the exclusive supplier of product lines in select markets.
Therefore, Synlait also stands to benefit from an increase in volumes of infant formula products and will commit to increasing production capacity.
“This new agreement has been carefully developed to provide the Company with security for nutritionals supply to our key markets consistent with our overall strategic objective of maintaining high quality supply with ongoing cost-competitiveness,” a2 Milk Company’s CEO Geoffrey Babidge said.
Fonterra (ASX: FSF) is another a2 Milk Company supplier, with rights over supply into some of its key markets. However, it is Synlait that provides the a2 Milk Company with its Chinese infant formula sales.
“This contract extension reflects a2MC’s commitment to continue to build on the excellent relationship that both companies have enjoyed over recent years,” a2 Milk Company chairman David Heard said.
Like Bellamy’s Australia Ltd (ASX: BAL) and Blackmores Limited (ASX: BKL), a2 Milk Company has sought to tap into growing demand from Asian consumers, particularly in China.
Based on Kantar Infant Formula tracking data, a2 Milk Company believes it has around 5.4% infant formula consumption market share in China, according to a recent ASX filing.
Despite concerns that Nestle will enter the market for infant formula, a2 Milk Company said there has been, “no noticeable impact” on infant formula sales and recently forecast $NZ900m in sales revenue for its 2018 financial year.
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