Bubs Australia Limited (BUB) Earnings Call Transcript & Summary

Good day, and welcome to the Bubs Australia Full Year 2022 Results Call. [Operator Instructions] And finally, I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome Executive Chair, Dennis Lin, to begin the call. Thanks, Dennis.

Thank you, operator. Good morning, everyone. Thank you for joining the Bubs Australia results conference call. I'm joined by Founder MD and CEO, Kristy Carr; and CFO, Iris Ren. The call will be for up to 90 minutes. We will firstly highlight key drivers for the FY '22 results, our priorities for FY '23 and beyond and allocate majority of the time for questions. Please have the investor presentation handy as we will refer to it throughout this call. FY '22 is a year we're celebrating in many respects against continual headwinds, but approached the year with its trade volatility to finding profitable growth and in the process unlocking a significant new market in USA and sustainable growth possibilities through multiple products and regions. Our growth profile continues to outstrip the overall category trend including our shareholder return over the last 12 months. We attribute much of the underlying success to the entrepreneurial spirit of the entire Bubs family including our strategic partners that are accompanying us along this exciting journey. I will now hand over to Kristy.

Thank you, Dennis. Good morning, everyone. After what can only be described as an extraordinary year, I am, first of all, delighted to be reporting a maiden underlying EBITDA profit of $4.8 million. To top off the year, our many months of hard work in the United States ensured we were in pole position to help American families, whilst entering a market that remains the home of mass consumption and is notoriously competitive for a new brand to establish itself. We will never forget our roots here in the Australian business and together with our many opportunities in China and Asia generally, our business has many exciting new chapters ahead. There's many achievements naturally needed a little bit of right place, right people and right time along the way or what some people might refer to as luck. However, more importantly for me, I strongly believe it came down to our overall strategic foundations in ensuring that we are prepared for weathering the risks as well as being prepared to capitalize on the opportunities when they come knocking. As you can see on the investor presentation, if you turn to Page 6, that we have identified 5 key drivers of the Bubs winning formula. Firstly, Bubs is a brand families can trust to nourish their child with clean nutrition throughout the first 1,000 days of life. The Clean Label Purity Award requires a product to go through an independent test for 400 chemical residues before receiving the award. This is, we believe, the next level of infant nutrition in establishing consumer trust in both China and the USA as well as here in our home market, Australia. You can also see that we now have a comprehensive high-margin Infant Formula portfolio that extends to all 3 of the fastest-growing segments with our most recent launch of the A2 Protein formula range, that now sits alongside Bubs Organic Grass-Fed Formula and our regional Easy-Digest Goat Milk Infant Formula portfolio. This diversification sets our key product assortments that we intend to utilize to tackle our key global markets through our vertically integrated operational knowledge with scale now increasing operational efficiencies and, of course, Bubs innovative and agile team. The winning formula has led to, on Page 7, 3 important key financial milestones being achieved in FY '22: record revenue, record EBITDA profit and record gross margin. Our major A2 Protein innovation project throughout the year has significantly contributed to the strong performance in Australian retail, with record sales and market share in all leading supermarket and pharmacy chains as well as our China business, which now exceeds pre-pandemic levels, underpinned by our strategic partnership with A Z Global, Australia's largest corporate Daigou exporter of infant formula. You can also see that in the space of just 2 or 3 months, we are now ranked in over 6,000 retail stores across the United States. This is 3x bigger than our current store footprint in Australia. We still believe we have a long way to go in the U.S. and many more milestones to be achieved in FY '23. Naturally, we read the same news headlines, and we appreciate the market volatilities, as outlined on Page 8. It is important to remember that infant formula is a branded staple that is essential and often the sole source of nutrition for a baby. As a result, we have been able to work through the input costs to date through a mix of cost improvements and price increases. Through our various levers, we will continue to juggle on balance these variables and respond to market dynamics. Before handing over to Iris to go through the financials in more detail, I wanted to share some of the key highlights with you outlined on Page 10. You can see here the incredible year the company has had, achieving critical scale with over $100 million in gross revenue, an uplift of 123% on the prior year. The underlying EBITDA profit of $4.8 million is ahead of guidance, driven by a mix of optimization and significant improvement to the group gross margin now sitting at 32%. We are particularly pleased with our most profitable portfolio segment, Infant Formula revenue increasing 177% year-on-year. And China is our lead export market has also returned to high growth with a 166% increase in revenue on the prior corresponding period. Domestic revenue is not just a throwaway metric for Daigou cells recognized in Australia. A retail scan data across all 3 major retailers shows Bubs is clearly the fastest-growing manufacturer of infant formula with circa 39% value growth across the moving annual totals. Importantly, following the successful capital raising of $63 million, in July, Bubs has sufficient capital strength to fund our future high-growth trajectory. Thanks. Iris?

Thanks, Kristy. And Slide 11 sets of a key overview of our financial year '22 results. Gross revenue increased 123% to $104 million, which is driven by strong growth in China and USA market. Revenue increased 127% to $89 million, which is a reflection of more efficient trade spend management. Group gross margin increased to 32%, excluding the Corporate Daigou equity-linked transaction, group gross margin is at 35%. This is due to the optimized product and channel mix, efficient trade spend management, improved supply chain efficiency and inventory management. Moving on to OpEx. Overall OpEx over revenue ratio has improved from 57% to 32%, which demonstrates the efficiency in operating expenses and cost control. All the above factors have contributed to our first underlying EBITDA profit of $4.8 million. Slide 12 sets out the growth journey of our top line, demonstrates how Bubs was impacted by COVID and how we bounced back post COVID. Now we have delivered more than $100 million gross revenue, we have established the scale. Our next phase will focus on improving underlying EBITDA, while maintaining a high growth rate. In financial year '22, we delivered significant improvement in gross margin. Slide 13 provides further insights at assortment level. We have removed inventory provisions and equity-linked transaction in the calculation of product margin to demonstrate a normalized trend. Group branded product margin improved from 24% to 36% over the 3-year period. Infant Formula margin has improved from 35% to 38%. Bubs Goat Infant Formula, the margin has improved from 35% to 42%. Next slide outlines the key reasons behind this gross margin improvement. We have always focused on the growth of our key product, Infant Formula. Our Infant Formula portfolio has increased circa 200% compared to 12 months ago and is now contributing 60% of the group revenue. Channel mix is also heading in the correct direction. China being the most profitable channel has contributed 55% of group revenue with revenue up 166% compared to financial year '21. Margin accretive USA markets contributed 9% of group revenue in financial year '22. Supply chain efficiency, efficient trade spend management and inventory management also contributed to the gross margin improvement. Based on these factors, we have delivered a gross margin improvement of $40 million, which is the key driver of turning underlying EBITDA to the profitable position. Although OpEx expenses increased in dollar value, we have delivered the efficiency of operating model, which is supported by the reduced cost of doing business ratio from 57% to 32%. Looking at the strength of our balance sheet on Slide 16. Cash position down from $28 million to $16 million, with cash outflow in operating activities improved from $23 million to $9 million. Inventory position has returned to the target position at 30 June '22 to support the continued growth in China and USA markets. Increase in trade and other receivables reflects a stronger May and June sales compared to the prior year period. Increase in trade and other payables driven by timing of operating expenses and inventory procurement activities in quarter 2 -- quarter 4 financial year '22. Subsequent to year-end, the group successfully completed capital raise of $63 million. The group has a strong balance sheet with sufficient headroom to fund future high-growth trajectory. I'm now handing over to Dennis to talk about strategic road map.

Thank you, Iris. Earlier, we went through the strategic pillars and our winning formula. Before we look at each key market in a little bit more detail, I think it is telling to look at Slide 19. On this page, you can see 3 of our core markets in their respective market life cycles. As small and mature as the Australian market may be, we believe the home market provides us with the best genuine authenticity to projecting ourselves as true blue Australian as well as getting feedback from consumers so that our marketing and product development are based on what consumers need and want. China is a significant market, as you can see. It is also, at the same time, very competitive. As we have shown over the last several years, we plan to continue with reimagining pathways to market so that we can grow without needing to commit the same level of marketing as our peers. As we often say in Bubs, we find different ways to jump the queue to get the front of the line and top of mind for consumers. In contrast, USA is a very concentrated market. I cannot overstate the importance of having been the first mover and the brand awareness we were able to create through earned media during the Infant Formula shortage crisis as well as our ability to be arranged in as many stores as we have without the traditional entry costs such as margin fees. These are no sugar hits. Instead, these catalysts break down fundamental barriers to entry for a foreign infant nutrition brand for the first time in many decades in the USA, and the opportunity is very unlikely to be repeated. At the same time, having been through the rigors of the initial FDA process, we believe the enforcement discretion places Bubs in an enviable position of attaining permanent status in the USA. On Slide 20, you can see the diversification we have been able to achieve this year on top of record metrics. Kristy will now explain the market in more detail.

Thanks, Dennis. Turning to Slide 23. You can see Bubs is growing significantly in both scan sales value and market share over the year. We are incredibly proud of becoming the #1 Goat Infant Formula brand in Australia across all 3 major retailers. This has been achieved in a mature market where significant multinational corporation has been a long-standing market leader, and we did so without compromising on price or value chain. A record market share of 4.7% demonstrates Bubs is punching above its weight, ranks in the #6 position behind the 3 multinational and category leaders in A2 Protein and Organic category segments. This gives us the underlying confidence of consumer engagement on our home court as well as our team's ability to grow against macro or in a competitive environment. To conclude that we are gaining ground on our Organic Formula as we become the #2 Organic Formula brand in Australia and that we have now launched our most premium A2 Protein formulation [indiscernible] with symbiotic blend of pre and probiotics, high levels of Omega 3 plant-based DHA and nutrients. We have included some detail on China on Slide 25 and 26. Given it represented 55% of group revenue in FY '22, the market is a clear priority for us, and we are delighted with the progress to date, with revenues surpassing pre-pandemic levels in FY '22. The ongoing plan for China and priorities will be based around visibility, sustainable value chain and proximity to consumer, notwithstanding the route to market. During the year, we experienced 29% growth in cross-border e-commerce platforms revenue and fivefold growth in what is traditionally referred to as Corporate Daigou and is now perhaps best referred to as the recruitment channel. We have worked closely with our strategic partners throughout the year on developing new ways of ensuring a new level of visibility and new user recruitment from brand through to consumers. It reminds us of 2016 when the term Daigou first appeared, and we look forward to sharing that in more detail as the proprietary distribution partnership with A Z Global evolves over the next few months. Our team has also significantly overdelivered within our marketing budget allocations. China marketing was circa 12% of the overall China revenue in FY '22 and of particular note is the endorsement from Will Liu, and our social media campaign, which generated 390 million views in close to 64,500 Bubs video uploads. Our China team will continue to optimize our resources and ensure that we are able to build brand awareness through the relevant channels in China. During the last quarter of FY '22, the USA clearly played an important role in significantly accelerating our expectations for market access. Given the recent and overwhelming developments ahead of schedule, we have dedicated several slides to explain and provide more context. As Dennis mentioned earlier, we have never set out to enter the USA on a temporary basis. And it is pleasing for the FDA Commissioner, Califf, to confirm the regulators' intent for the 8 brands worldwide that have received the enforcement discretion to apply for a permanent regulatory status. We do not expect any disruption of being able to continue to supply our products to American families in the long term. It is worth noting that prior to the Infant Formula crisis, there had already been a sizable grade channel market where American parents sourced Infant Formula from overseas that have not been received FDA approval. This is particularly [indiscernible] to European Infant Formula brand. And by design, Bubs chose to respect the FDA processes and ensured that it did not supply to American parents in this manner. However, the patent certainly indicated there's an appetite and desire for innovative Infant Formula brand from outside the United States. Since the first of 6 Operation Fly Formula plan funded by the U.S. government touched down, we have delivered over 800,000 tins of Infant Formula and secured -- to the United States and secured ranging in over 6,000 stores, including the top 4 Infant Formula retailers being Walmart, Albertson Safeway, Kroger and Target. And more recently, we entered into a supply agreement with Whole Foods Market to range Bubs Infant Formula in their 550 stores. Our market entry was significantly aided by the earned media from being one of the very first to be approved and appear on U.S. shelves and collective efforts with the U.S. government agencies and co-promoting Bubs Australia as a name to know the U.S. retailers, health care professionals, influencers and of course, parents. Without these kick starts, the USA Infant Formula market would have been a much longer-term prospect for Bubs. We will now ensure that we continue to stay ahead of the curve and market dynamics give us confidence that the U.S. will be as significant as China is for Bubs in the short to medium term. Overall, this would place Bubs Australia as the only global challenger with a comprehensive clean Infant Formula portfolio and we aim to be in a meaningful industry participants in both China and the USA, two of the most important and largest markets for Infant Formula in the world while continuing to grow our home market of Australia.

Thanks very much for that, Kristy. We have been through a substantial part of the presentation, including a summary of our FY '23 priorities. As you can see on Slide 36, we have clear priorities to execute, many of which will move Bubs into yet the next league again. Last, but not least, it's a collage of select memories from the last 12 months that I have had the pleasure of choosing. A business cannot function without the entire team, and we are grateful to our Bubs family from around the world. We are on a mission to growing the next generation of happy and healthy families and babies through clean nutrition, and we thank everyone for their commitment and dedication and wonderful memories we have created together along the way. Thank you. Kristy and Iris. We will now take questions in order. Operator?

[Operator Instructions] Your first question comes from the line of Sam Teeger from Citi.

On Kristy's earlier reference to luck, I think you make your luck, so congratulations on what the team has accomplished. A couple of questions for me. Based on the current manufacturing performance of Deloraine, are you feeling about 1.5 million tins by mid-November, how much upside could there be in the enforcement discretion period?

Sure. No, Sam, thanks very much for that. I think you heard just before that prior to, I guess, the financial year-end last year or FY '22, we had sent through 540,000 tins under Operation Fly Formula and over the last 4 to 5 weeks, you can [indiscernible] where we're tied to provide this update to the FDA and the U.S. regulators, we are in constant communication. we have sent through another 260,000 tins. We are currently working on a momentum of anywhere between 100,000 to [ 150,000 ] tins a week. The top retailer that Kristy had mentioned are [indiscernible] and I think we may have actually included in the slides that we're very excited, that we're about to launch into the Whole Foods. And the initial customer feedback has been incredible. The -- I must say anecdotally, the entire teams are being quite [indiscernible] by the testimonials of some of the American parents. And certainly, we're starting to obtain the Scan Data from [indiscernible]. And given that we sort of started from very much [indiscernible] we're being quite happy and -- with how [indiscernible] started, and we're certainly looking forward to, I guess, turbocharging that with Kristy and I [indiscernible] in the next couple of weeks to work together with the retailers as well as the regulators.

Sure. And then just in terms of the U.S. Operation Fly Formula, so do you think the 800,000 tins didn't go as part of the program from here, how much will be part of the Operation Fly Formula program versus -- or you have to freight it yourself? And what's the different kind EBITDA margins if you freight it yourself or for those as part of Operation Fly Formula?

So Sam, the Operation Fly Formula has now come to an end for all manufacturers. So within that period, we obtained 6 fully chartered 747 flights funded by the U.S. government, which equates to the 540,000 tins. So the next 260,000 are what we have flown over to the U.S. via regular commercial air freight. And we continue to now supply to a combination of commercial air freight and sea freight. So we have now moved from, I guess, what was a supply-driven model into a space where we have healthy levels for much of our range in the U.S. that can continue to supply the ongoing demand. Now we don't want to miss this window of opportunity, so we are going to continue to commercially air freight product, whilst the shelves are still understocked, and there is a very strong demand for new business and new retail as well as end consumer demand, while the competitive players aren't supplying to meet that demand. So we are -- we do envisage doing some commercial air freight all the way through to December, but we're simultaneously shifting to sea freight so that we can continue to supply exclusively by sea freight by the end of this calendar year. So obviously, there are margins sort of advantages of, a, having the U.S. government fund the first sort of half -- over 0.5 million tins and we're sort of, I guess, offsetting some of that margin win between now and December as we use a combination of air and sea.

Got it. So just to confirm, that freight is in the gross margin and then if so, how do we think about gross margins in '23 compared to '22? If you will be -- yes, if you'll be freighting more by yourself?

I think the gross margin sort of percentage for FY '23, we no longer have the sort of the assistance from the U.S. government for freight, but gross margin in dollar value definitely [indiscernible] due to the increased contributions on USA market and sort of all the other points [indiscernible].

Sam, perhaps I can sort of just give you a little bit more guide on that. The -- if we were to include freight on a commercial basis, the -- we're still looking at USA as our most profitable market in FY '23.

Your next question comes from the line of Paul Jensz from PAC Partners.

First question is on the -- what we expect through September from the U.S. and the FDA? What sort of announcements and I suppose, time frame through the September? Maybe Dennis, if you could go through what we can expect?

Paul, for sure. And Kristy, will also be -- she is more [indiscernible] with President Biden. So she can probably answer to that question a little bit more. But from a regulatory perspective, we are expecting FDA to issue very specific framework and guidelines that only apply to the 8 brands that have received enforcement discretion. The -- and depending on how the brands have assisted the American families, specifically, what is referred to as post-marketing activities, that will then really start to drive how the permanent transition would actually occur. So we are expecting regulatory framework to be released in late September and it is the FDA. So I think by late September, I would budget for the last day of September for that particular guidance. But we are still in weekly communication in terms of sort of working through as much as we can on that. And we'll have something more to discuss, I guess, closer to the date. The key point, however, is there is no interruption intended by the FDA or the U.S. government as we transition from temporary to permanent. Kristy, do you want to add to that?

Yes. No, I think that last point is key and why management can certainly, through our weekly conversations with the FDA, including irregular discussions with Commissioner, Califf, himself, why management can speak with such conviction on the long-term viability of market access is because they have made it very clear and publicly announced that pathway so that we can continue to supply Infant Formula beyond the November initial discretionary date whilst we move through that more permanent regulatory pathway. That was important, obviously, for us, as a business as we're making commercial decisions that will impact beyond that date, but it was also very important and said back to the FDA by many industry bodies at a retail level and at a consumer level.

And Paul, I think it's perhaps also relevant to sort of think through, Abbott has, in total, record about 70 million tins of Infant Formula during the Infant Formula shortage crisis. And by being the first-mover, Bubs has now, I guess, become the preferred Infant Formula for many thousands of American families. And so it is challenging for the FDA because it no longer makes sense for them to be disrupting the families, again, from needing to actually change from 1 brand to the next and then the next. And that's why Commissioner, Califf, who has a background not just as a public servant, so he was a practicing cardiologist, so he has a real and genuine intimate knowledge of, I guess, family's needs. And that really came through when Kristy and I met with him on a couple of occasions.