Britain-based Mr Hearn plans to step down after next year’s annual meeting after nine years on the board and will be replaced by non-executive director Pip Greenwood.

He said while a2 Milk had grown baby formula volume in China amid a declining market facing a lower birth rate, its local partners were key to helping mitigate any risks.

A2 Milk has recently renewed its exclusive import and distribution deal with China State Farm Agribusiness Holding Shanghai Co, which is owned by the same parent company as its equity partner in its Mataura Valley Milk processing plant.

“There are clearly risks, not particularly with China as much as just having a lot of business in one market is inevitably a risk,” he told shareholders at the AGM in New Zealand.

“So we think that we have mitigated the risks, as well as we can.”

A2 Milk shares fell nearly 4 per cent by midday to $5.905 each on the ASX.

A ‘balanced blend’

Mr Hearn said despite some turbulent times recently, next year was the appropriate time to step aside. Ms Greenwood, who has been on the board for more than three years, had the skills and the experience to take over, he added.

“Not only will Pip bring her excellent skills to the role, but this plan also represents a balanced blend of board refreshment together with continuity, which, we believe, is absolutely appropriate after a period of significant change at both board and executive leadership team levels within the business.”

Chief executive David Bortolussi told investors the baby formula and fresh milk company remained on track to achieve his target to grow sales to $NZ2 billion ($1.8 billion) and improve EBITDA margins over time.

A2 Milk has doubled down in China over the past fiscal year. It increased marketing investment significantly to $NZ230 million, with $NZ182 million of that invested in China.

“This was by far our largest single year of investment, reflecting our confidence in the brand and our improved execution and growth potential in China,” Mr Bortolussi said.

Singles’ Day success

A2 Milk’s China label formula product registration was renewed in September, allowing its partner Synlait to manufacture the current registered product until February 21, after which the new national standard applies.

Mr Bortolussi said this process was progressing and, subject to approval from China’s State Administration for Market Supervision, he anticipated the new registration would be obtained in the second half. The company will transition to the new product in market in the first half of the 2024 financial year.

He said a2 Milk had a successful November Singles’ Day sales period in China, where a2 Platinum maintained or improved its rankings, and pricing of the new a2 Platinum was at a premium with older inventory cleared.

China makes up just over half the world’s infant formula market, valued at about $28 billion, and generates most sales and earnings for a2 Milk.

Mr Bortolussi was upbeat about the remainder of the financial year, with the business on track and broadly consistent with the guidance provided in late August, when he also flagged a $NZ150 million buyback.

Mr Hearn said there was no consideration of increasing the buyback, or paying a dividend for now.

The weakness of the New Zealand dollar has inflated revenue and the cost of doing business, but increased interest rates in Australia and New Zealand have improved the company’s interest income on term deposits.

Mr Bortolussi said revenue was likely to increase to low double-digit growth compared to previous guidance of high single-digit growth. A2 milk posted a near 20 per cent jump to $NZ1.446.2 billion in sales over the 2022 fiscal year.

Earnings are expected to remain broadly in line with plan this year. Earlier this month, A2 Milk gained approval to send tins under a relaxation of US import laws to help with a formula shortage across the nation, but it will not have a material impact on this year.

EBITDA margins are expected to be similar to last year’s 13.6 per cent, compared to previous guidance of a modest increase.

Barrenjoey head of consumer research Tom Kierath estimated that, based on a2 Milk’s guidance, this implies 2023 full-year EBITDA of $NZ220 million, which compares with consensus of about $NZ230 million.

“Our earnings forecasts are unchanged,” he said. “The business appears to be being run in a more sustainable way than in the past, in our view.”

Mr Kierath added that given the “ups and downs over the past few years”, Mr Hearn’s board retirement would be welcomed by investors.