Dairy marketer A2 Milk and milk processor Synlait Milk have agreed to extend their infant formula supply deal and increase the volume of formula Synlait will supply as the two continue to focus on sales in the lucrative Chinese market.
A2 and Synlait first signed a supply agreement in 2012 to support the milk marketing firm's plans to launch infant formula sales into China, and inked a new deal in August 2016 providing for increased scale if market demand warranted it.
The companies' arrangements were for a minimum of five years from 2016, with a rolling three-year term from August this year, but have been extended by two years so will last until at least July 2023. Synlait will increase the volume of infant formula products it is A2's exclusive supplier for and increase its committed production capacity.
They have also agreed on pricing terms "that reflect the commitment on the part of both companies to an ongoing market-competitive pricing regime", each company's statement to the NZX said. However, the companies either need shareholder approval for the changes or a waiver from NZX from needing to get shareholder approval.
A2 said the extension was consistent with the global strategic supply strategy it has been developing, while Synlait said the agreement reinforces the close working relationship between the two "as they work to develop A2 Platinum for the ANZ and China markets on an exclusive basis to a specified product volume."
"This step is about bringing Synlait and the A2 Milk Co closer together in anticipation of continued growth,” Synlait managing director John Penno said. "It also puts both companies in a great position to further leverage the Chinese Food and Drug Agency (CFDA) registration of A2’s infant formula products, which was achieved in September 2017."
A2's managing director Geoffrey Babidge said the deal "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's shares last traded at $11.43, up 42 percent this year, while Synlait's were last at $11.39, up 58 percent.