Bubs Australia Ltd
ASX:BUB
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Bubs Australia Ltd
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Ladies and gentlemen, thank you for standing by, and welcome to the Bubs Australia Third quarter Investor Call. [Operator Instructions] Please be advised that today's conference is being recorded.I'll now hand the conference over to your first speaker today, Founder and CEO, Ms. Kristy Carr. Thank you. Please go ahead.
Welcome, everyone, and thank you for awaiting today's Bubs Australia call to review the Appendix 4C Cash Flow Statement for the third quarter. And I have with me from the Bubs' team on the call, both Iris Ren, our CFO; and Dennis Lin, our Executive Chair, who will be available to answer any questions that you may have.So by now, you will have seen our market release on the ASX, including the results commentary, which hopefully provides you with a good perspective of our progress over the last quarter, especially in light of the challenges that we've all faced with COVID-19 pandemic, first on the China side of the business when the outbreak hit during Chinese New Year and then the direct impact on our domestic operations.So I'd like to start by saying how fortunate we are that all of the Bubs team are healthy and, thankfully, none of our employees have contracted the virus. Obviously, their health and safety and well-being of all team members have really been our highest priority throughout the outbreak. Over the past weeks, the leadership team has been meeting on a daily basis, and our Board has been meeting on a weekly basis to discuss the latest advice from the government and health authorities and ensure that our internal safety protocols are in place as well as various impacts across business operations. So this has meant that all of our staff has been working from home for the last month, but simultaneously, our production team has continued to operate throughout, whilst we've enhanced the safety and social distancing measures in our production line in order to supply essential products to Australian families.So I think before we sort of get into the performance and review some of the results, I'd like to start by saying how sort of proud we are of the Bubs team who have really demonstrated the sheer determination and resilience during what was undoubtedly our most challenging quarter in the company's history. Certainly, they adapted to the new and very dynamic environment. And every challenge that we were confronted with, the team managed to find opportunity whilst remaining positive and showing genuine empathy for the Bubs family internally and also for the global community and our end consumers. And this is really what our values and culture have been built on.So I'll begin by highlighting a few points around our performance and key operational developments and then we can finish with some further comments regarding the impact of COVID-19 as it relates to the Bubs business and our go-forward strategy. We will then open up the call for any questions for those on the line.So the third quarter really demonstrated the strength of our vertical integration model and the agility of our team to continue to meet demands of -- and needs of Bubs family in a challenging operating environment. And it was probably only 3 or 4 years ago that we were procuring a lot of our key ingredients from international markets, such as our goat dairy milk powder from Europe and relying on contract manufacturing, which often requires a 3-month lead time to change production capacity.I think the strategic milestones that we had put in place throughout the previous years and months made the company very well placed to tackle what we were faced with through the quarter. And owning our own goat dairy supply and having such strong partnerships with our Victorian farmers as well as our strategic partnership with Bega Cheese and having full control and ownership over our manufacturing facility enabled us to respond to the changing environment very quickly and with great flexibility, which enabled us to deliver the result that we have done today.So looking at highlights across the performance for the quarter. I am pleased to be able to demonstrate that we've accelerated our sales momentum and delivered on our key strategic objectives that had been put in place for the long term. So we did experience increased demand across all key local retail channels and all key strategic partnerships, and in all instances, we were able to fulfill that demand despite there being various logistical and other challenges that emerged during the quarter. This resulted in us achieving a solid revenue growth trajectory through quarter 3, delivering our record quarterly sales -- gross sales of $19.7 million, which is a 67% uplift on prior corresponding period and also an increase of more than $5 million on quarter 2, the previous quarter, or a 36% uplift quarter-on-quarter.Really, the underlying growth behind that strong growth trajectory was with infant formula, both our goat dairy and our organic grass-fed product lines. So across infant formula portfolio, we saw a 137% growth, increased pcp and about 58% quarter-on-quarter. And we saw goat dairy continue to gain momentum in both the domestic channel as well as the Daigou and cross-border e-commerce channel as the route through to China. But I think also it is worth mentioning the progress that we've made on the organic grass-fed infant formula through the quarter. So we had done a soft launch into Chemist Warehouse for the back half of last calendar year. And we were able to bring forward a rollout into Woolworths during this time of increased demand in infant formula category 2 months ahead of our planned planogram annual date, which is May, in which case we will roll out the cow milk products to 700 stores. But we brought forward and distributed those products to just over 200 stores.In addition, we also saw the organic grass-fed milk sales accelerate in Vietnam. So we had -- after launching our goat product there prior to Christmas, we had started to roll out the organic cow milk product, and we really saw that -- those sales take off through the quarter well ahead of expectations.The other key focus, I guess, in the results that I would like to draw your attention to was around cash. I'm pleased to report that the business generated a positive operational cash flow in the quarter with a surplus of $2.3 million. We also maintained strong cash balances of $36.4 million, which is really providing us with significant financial flexibility to take advantage of the dynamic and evolving market, both through the quarter and moving forward into quarter 4 and beyond.So I think really the foundation work in building that vertically integrated supply chain has really allowed us to act with agility and to satisfy the increased demand that we experienced across all channels here and abroad. And above all else, I think owning our goat dairy supply and our production facility has really been the key strength during this period of uncertainty that was brought on by COVID-19.So domestically, the Bubs portfolio revenue increased 123% pcp and now accounts for 62% of all gross sales in the third quarter. At the same time, our China direct revenues more than doubled pcp and now accounts for 24% of the gross sales as we continued to ship in container loads by sea to our strategic partners in China, being Alibaba and our joint venture with Beingmate.We also put in strategies in place to support our Daigou channels, which have continued throughout the quarter to be a significant source of revenue, and we work very closely with our corporate Daigou lead partner to be able to ensure a continued route to market to our Chinese consumers.I think more than ever, our investment in our canning facility has really been validated this quarter and has given us the flexibility to quickly ramp up production in line with demand, and we had a solid cash equivalent inventory position to fulfill that demand. We've also seen an increase in production from our contract manufacturing partners in that quarter.So considering the current environment, we took a strategic decision to prioritize the Bubs Goat Milk Infant Formula range, which was experiencing such a surge in demand and, as a result, we delayed the refresh of the CapriLac brand, which is now produced in-house for the very first time. So we delayed that launch by approximately 4 weeks to the very end of March, which did impact the Adult Goat Dairy sales for the period, but has now gone into full production with the first containers being shipped to China. So that involves where before we would only run the canning of the infant formula and the packing of the goat dairy pouch line separately, we actually developed throughout the quarter as we changed the way in which we produced on the floor to enable us to manufacture both CapriLac products and the infant formula products simultaneously. So moving forward, we won't have to prioritize one over the other, and that involves doubling production in the Deloraine facility. We hired an entire -- and hired and trained an entire new production line team, and we have increased production considerably there to be able to run the double shift from 7:00 a.m. to 11:00 p.m. daily with 2 complete teams.So before I open the call to questions, I perhaps will just make a few more specific comments around COVID-19 as it relates to our business. I think now more than ever, the Bubs portfolio is an essential service critical to the well-being of Australian families, many of whom rely on infant formula as either the sole or primary source of nutrition for their newborn and infant nutrition needs. So that classification, we have been authorized to continue to operate throughout as have our manufacturing partners, such as Bega and Fonterra and our dairy farmers. So therefore, we've experienced minimal disruption to the business due to the COVID-19 outbreak from a supply and production point of view. Whilst it remains, I think, too early still to quantify the long-term impact of COVID-19 on the business, to date, Bubs Australia has seen no reduction in demand from our retail partners. In fact, as I said, we have experienced an increase in demand across all of our retail channels. We have met and continued to meet all of that domestic demand, and that has come from being able to ramp up the production.So given the company's vertically integrated model and existing partnerships, it was very pleasing to see that our supply chain had not been adversely impacted. We're also now working very closely with our partners to ensure continuous supply of our products, particularly to our international consumers in China and Vietnam where logistics have been made more complex from the outbreak. And while international and those sort of last-mile logistics on the ground remained a challenge through the quarter, we did actually fulfill all orders which we were very pleased about. So none of these would have been made possible without our team, our Australian farmers and our production partners and being classified as an essential service. And we appreciate that we've been very fortunate within the business sector to be able to deliver on these results. We'll certainly continue to closely monitor our position and update the market of any further important developments as they occur.I think looking ahead, we are pleased with the strong sales growth momentum across the core products segments as well as the regions in which we operate. It's a testament really to the operating and capital strength of the company and, importantly, our agility in responding to a rapidly changing situation.So the company anticipates continued benefits from its key competitive advantages, namely exclusive goat milk supply, advanced and secure manufacturing capability, differentiated products across infant, junior and adult nutrition categories as well as the geographic diversification with Australia, our home market, as well as China and the expansion into Vietnam. So management, therefore, expects that segment and regional sales growth to continue into the fourth quarter and beyond. It may also be worth mentioning at this point that the product extensions that utilize our key goat dairy ingredient will also help drive future sales growth, and the launch of our Australian and Chinese label Junior Nutrition product will really lead the way in innovation throughout this quarter. So we had our first tin of Junior Nutrition come off the line today, and we are still on track to be launching both English label products of the Junior Nutrition range in both goat and cow dairy as well as the Chinese label product for Goat Junior Nutrition, which we'll be launching into mother and baby stores in the month of June. That will also be supported by the rollout of the Chinese label cereals for mother and baby stores at the same time period.So management really has continued to focus on the operational and capital management and improving margins and remains dedicated in pursuing our strategic long-term goals, delivering profitable and scalable growth.So with that, I think I'll open up the call to any questions around the quarterly.
[Operator Instructions] Our first question is from Ernest Chung from Wei Capital.
I guess my first question relates to sort of demand and what you're seeing this quarter? And do you expect the strong demand to continue? Or is that just driven mainly by COVID-19?
Sure. Thanks, Ernest. Look, we -- there was a lot of different things that contributed to the increased demand and, certainly, COVID-19 played a role. But having said that, I think it's important to point out that pantry stocking really only played a small role in that overall quarterly revenue result. So -- and we saw different levels of pantry stocking throughout different parts of the ecosystem, both in China at various stages throughout the quarter and also in Australia and Vietnam. I guess infant formula as a product is very -- sorry, infant formula as a product is highly sensitive and very essential to parents. Obviously, this is an item that you cannot be without in your pantry. And we did various -- we put various measures in place to ensure that all Australian parents were able to access our brand of infant formula, whether that be through our domestic retail partners or through our B2C channel where we offered free delivery for anyone who wasn't able to find our products on shelf or perhaps lived remotely. So we were able to cater to that surge. But at the same time, we saw a few changes in both offtake of our brand of products, but also in the way in which consumers shopped for our products. So for instance, we -- not all brands were able to have a continuous and [ undisrupted ] supply of products to shelf. So I think this was a good opportunity for Bubs, particularly in the differentiated premium segments that we play in, being goat dairy and organic cow dairy-based infant formula, that there was, for the first time -- not the first time, but it was unusual to see a level of switching happening in the marketplace in infant formula brand. And I think during this period, we were able to attract many new users to the Bubs brand, which was very pleasing.We also saw an increase in the usage of Stage 3 powdered product in the Australian marketplace, which traditionally infants would move to a fresh product by the time they are 1. So at the same side, we saw -- on the cross-border e-commerce ecosystem in China, we saw a considerable uplift in the infant formula category throughout the quarter, not just for our brand but across the total category. And we've been able to attract new users to the Bubs brand throughout that uplift that have continued on into the following months. So we do feel as though during this period, we have introduced new families to the Bubs brand, and we're not expecting a sudden trough or drop-off in demand moving forward, and we certainly haven't seen that to date. So our forecast is for a continued growth trajectory across the different retail channels.
Okay. And I guess for the second question, in terms of -- you mentioned there were some like issues with logistics. I guess that's sorted now, but was there any increase in costs associated? And does that affect margins in any way?
Yes. So many of our strategic partnerships, we don't cover the logistics costs end-to-end. However, obviously, if there's a significant change in the cost of getting product to markets, then it will have an adverse impact on us. So many of our larger contracts are what we call ex-works. But I guess the biggest impact to the logistics front was the reduction in passenger flights and, therefore, the cargo was -- either had to move through freight, which is now in high demand and very, very expensive, or we were able to quickly transfer to sea freight. So in most instances, we did the latter and restructured our route to market to move through sea freight. I think it's probably also worth mentioning that we -- the change in the currency certainly worked in our favor so that any additional costs that our customers were paying on the logistics front, they were recouping in the saving on the currency exchange.
Okay. Great. And I guess final question is, is there any news on the SAMR application process? Or I guess COVID-19 means it's sort of delayed.
Yes. Dennis, do you want to respond to that one?
Sure. Thanks, Kristy. And Ernest, thanks for that question. It's Dennis Lin here. I think I wouldn't refer to a delay if we didn't have a specific timing in the first place. But certainly, COVID-19 has taken priority and necessarily so with Chinese regulators, particularly SAMR. Certainly, we are actively engaging with them. But at the same time, there's no additional insight in terms of the timing. Naturally, I think for -- observers of this particular industry would be aware that, generally, there is a requirement that SAMR officials would be required to actually visit and inspect the facility physically unless they choose to engage a third party to do so. So I think COVID-19 will certainly have an impact if that requirement were to actually continue. But I am pleased, I guess, that we are actively engaging and working with them through issues, but certainly the last correspondence was that they currently are working on other priorities and that they would actually revisit once COVID-19 is under control within China and absolutely understandably so.
[Operator Instructions] There are no further questions from the telephones. I'd like to hand the call back to the speakers for any closing remarks. Please continue.
Dennis, did you want to make any remarks?
No. Thanks, Kristy. I guess thanks, everyone, for joining the call. Obviously, it's a difficult time. So we will continue with our business because we are supporting, I guess, local employment and Australian farmers in making sure that their milk can go somewhere and, obviously, supporting our Bubs family. So thank you for your support. And in closing, I guess, stay safe and stay well.
Ladies and gentlemen, that does conclude the call for today. Thank you for all participating. You may all disconnect. Goodbye.
Thanks, everyone.
Thanks, everyone.