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Why the a2 Milk Company share price sank 7% lower today

James Mickleboro
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The A2 Milk Company Ltd (ASX: A2M) share price has been amongst the worst performers on the ASX 200 on Monday.

At the time of writing the infant formula and fresh milk company’s shares are down 3.5% to $14.05.

However, at one stage they were down a sizeable 7% to $13.55.

Why is the a2 Milk Company share price sinking lower?

Investors have been heading to the exits today after a2 Milk Company announced the surprise exit of its CEO, Jayne Hrdlicka.

According to the release, Hrdlicka has agreed to step down from her role and will be replaced by the company’s former chief executive officer, Geoffrey Babidge.

Mr Babidge will not be taking on the role permanently, though. The release explains that a global search for a new chief executive officer will commence immediately.

Why is Jayne Hrdlicka stepping down?

The outgoing CEO revealed that the increasing demands from the role were behind her decision to step down.

She said: “Board and management have worked closely together to chart the future and it is no doubt bright and we are well advanced in executing it [….] The reality however is that the next 3-5 years will continue to require the CEO being present in our core markets of China and the US and that combined with running a New Zealand company based in Australia required more travel than I had anticipated when I joined the company.”

In addition to this, an accompanying release adds to speculation that there were disagreements between the board and the former CEO over its margins.

Although it “fully endorses the strategy which Jayne and the senior leadership team have developed” it advised that it believes the company can invest in its future growth and preserve its margins.”

The release states that the a2 Milk board “considers it is appropriate for the Company to target an EBITDA margin of at least 30% in the medium term” and that this “can be achieved without detriment to the opportunity to capture our desired long term market position in China and USA.”

This compares to Hrdlicka’s original plan to reduce its EBITDA margin to 28% in 2020.

What now?

Interim chief executive Geoffrey Babidge revealed that he is recharged and ready to get to work.

He said: “The organisation has strong momentum and is positioned to capitalize on the huge opportunity in front of it. Since my retirement in July 2018, I have closely monitored the Company and its progress. I have also had some time off to recharge and I’m excited to be back and working with the team.”

The company’s chairman, David Hearn, took this opportunity to reiterate its guidance for FY 2020.

He advised that a2 Milk Company continues to expect a full year EBITDA margin in the range of 29% to 30% and first half revenue in the range of NZ$780 million to MZ$800 million.

The post Why the a2 Milk Company share price sank 7% lower today appeared first on Motley Fool Australia.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of A2 Milk. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019