Bubs Australia Limited (BUB) Earnings Call Transcript & Summary

Good afternoon, everyone, and thank you for joining today's FY '24 Full Year Results Presentation. My name is Reg Weine and I am the CEO and Managing Director, and I have been in the role for just on 12 months leading the Bubs turnaround. Today, we will be sharing our full-year results following the release earlier today of our 4E Preliminary Final Report. Before we get into the slide presentation, I would like to draw your attention to the disclaimer on Page 2 of the presentation and now on the screen. Joining me on the results presentation today are members of the Bubs executive leadership team, including Robin Johnston, Chief Financial Officer; Richard Paine, Chief Operating Officer; Chris Lotsaris, General Manager, USA; and Jackie Lin, Bubs' General Manager, China. Today's presentation will cover the Bubs' investment proposition or as I like to call our investment thesis, the FY '24 highlights, and how we are executing on our strategy. We will then step through the FY '24 financial overview. And then we'll bring it all together with our very positive outlook for FY '25. These are the 6 ingredients that I feel make Bubs a strong investment proposition and that contribute towards our competitive moat. We have a very large and growing addressable market worth more than USD 100 billion globally. We remain a capital-light business with significant operating leverage. Australian provenance and access to high-quality dairy ingredients remains a core strength. Our Bubs portfolio is differentiated and distinctive. And Bubs revenue is growing 46% year-on-year in the U.S.A., where penetration of Goat infant milk formula is very low at just 1.4% of the category, providing a long runway for sustained growth. And we are the only Australian FDA-approved infant formula manufacturing facility with permanent access to the U.S. expected in 2025. Moving on to the FY '24 highlights and the significant progress we've made in the first year of our turnaround. Firstly, we achieved net revenue of $80 million, in line with guidance and 33% up on prior corresponding period. We exceeded our gross margin target of greater than 40%, in line with guidance, and we believe we can build this out in the coming years. Our U.S. growth engine is delivering, which will provide a sustainable runway for growth for many years to come. We continue to make meaningful progress on the U.S. FDA clinical trial, and we remain on track for permanent FDA approval in October 2025, with more than 95% of the target patients now enrolled in our growth monitoring study. Richard will share more on that later. Our China reset is gaining traction with year-on-year revenue growth of 27%, and we exited the year strongly with half 2 growing 38% over half 1. Our normalized cash burn of $1.2 million per month was in line with guidance and despite the lumpiness of our cash flows, we are confident in our cash flow forecast, the FY '25. Newer high-margin teams, new variants, and new contemporary packaging was successfully launched in the U.S.A. and China market with early sales data and retailer and consumer feedback being very positive. Our state-of-the-art Deloraine canning asset is currently running at 85% utilization on a 5-day double-shift basis and has done so since January this year. This global rebranding, reformulation, and repackaging project has been a very significant upgrade to our portfolio and a huge undertaking. I'm very pleased to say that it has been incredibly well executed by our teams in Australia, China, and the U.S. Our new brand portfolio is margin accretive. It's more distinctive and different. It will encourage greater trial and will help our sales team gain and win more distribution points in their markets. Over time, these necessary important upgrades we think will lead to greater share of the U.S., China, domestic, and rest of world markets. There is always an inherent risk with any major brand and packaging change. But as I said earlier, the early scan sales data and retail and consumer feedback is very positive. And on that very positive note, I'll now hand over to our Bubs' General Manager, USA, Chris Lotsaris. Over to you, Chris.

Thank you, Reg. Good afternoon, everyone. I'll now take you through the U.S. business. And some exciting news, our newest infantile Bubs Essential was last week awarded the 2024 Good Housekeeping Parenting Award. Founded in 1985, Good Housekeeping is one of the most iconic and long-standing publications in the United States, and it is renowned for its rigorous product testing and ethical stands. The magazine is known for featuring expert advice from various fields, including nutritionists and other health care professionals. The Good Housekeeping seal first introduced in 1909 has become a mark of quality and reliability, giving consumers confidence in the products they purchase. And now Bubs Essential is the proud recipient of this prestigious badge. On to our performance. Our strong momentum continued in FY '24 with the U.S. gross revenue seeing an impressive 48% growth, reaching $47.3 million. We achieved a record Q4 scan revenue of USD 11.2 million with over 280,000 tins sold. In June of '24, we also set new records with over USD 1 million in weekly scan sales and more than 27,000 tins sold in a single week. This significant sales growth has been fueled by strong consumer demand, endorsements from health care professionals, social media advocacy, and robust trial and repeat purchases. To continue meeting the rising consumer demand in the U.S., we're investing in working capital in the second half of the year, which will prevent future stock shortages. Our Goat Stage 1 product is now the #1 selling IMF product on Amazon. And additionally, Bubs is closely following the FDA's guidelines to secure permanent access to the U.S. infant formula market with over 95% patient enrollment in the growth monitoring study as of August 23, 2024. Bubs is now available in over 5,800 stores across 42 U.S. states, reaching all major channels, including grocery, mass, pharmacy, and e-commerce. Our strong presence in the top 4 retailers, Walmart, Target, Kroger, and Albertson Safeway, has been instrumental in ensuring our products are widely accessible to our consumers. The U.S. has a total addressable market of $8.1 billion with a compound annual growth rate of 3.9%. There are significant regulatory barriers to new entrants with most innovation coming from existing brands, and adjacent markets such as Canada and Mexico present attractive opportunities as we look to grow our business. Bubs is the first to introduce Goat infant milk formula to the U.S. and now holds a 48% market share. Although Goat form penetration is currently at 1.44%, it is growing rapidly, offering a long runway for sustained growth in the years ahead. We have made great strides in e-commerce and are now expanding our physical store presence and distribution with existing partners like Walmart and Target. We're also entering new retailers such as Weis Market and [ key drugs ] and exploring new channels to sustain our growth momentum. FY '25 forecast gross margin at over 40% and a growing trend towards specialty formulas. I will now hand over to Bubs' Chief Operating Officer, Richard Paine to provide the regulatory update.

Thank you, Chris. The clinical trial has continued with a consistent pace of enrollment. Bubs has continued to closely monitor actions and activities aimed at boosting enrollment and maintaining this momentum. This active oversight has seen the number of recruitment sites increased significantly throughout the duration of the trial. The study has now enrolled some 384 patients out of a study particle target of 400. Bubs has continued to fully inform the U.S. FDA regularly around its meaningful progress on the clinical trial. Additionally, we have lodged the grass or are generally regarded as safe application for Goat full cream milk powder, which is currently under evaluation with the U.S. FDA also. This is important given it's a key ingredient in our formulation. As part of the formal transition guidance, Bubs is on track to provide the U.S. FDA clinical trial update due on September 6. We anticipate launching the fully completed clinical trial in the first half of 2025. To this end, Bubs' technical consultants in the U.S. are proactively undertaking as much pre-work and data review as is possible now. This preparatory work is made possible by the efficient digital data capture model methodology that the Bubs clinical trial has utilized. Given the meaningful progress Bubs has demonstrated throughout the regulatory process, we remain on track to obtain permanent access into this strategically important market. Pleasingly, Bubs has now obtained authorization to sell Bubs Goat and Bubs Essential infant formulas in Canada under Health Canada's interim policy for infant formula. Accordingly, on August 16 Bubs was added to the enforcement discretion official listing as published by Health Canada. The interim policy process remains in place until December 31, 2025, with a permanent access regulatory process running in parallel. Bubs is fully utilizing the USA-based clinical trial in this full Canadian application and participation in the permanent pathway process. In the meantime, Bubs still invest with Health Canada directly around developing a dual language label specifically for the Canadian market, which is now also approved. It is planned for a soft market entry during the early part of 2025, which will leverage learnings from the U.S.A. market success. I'll now hand over to Bubs General Manager for China, Jackie Lin to share the great progress we are making in China.

Thank you, Richard. Good afternoon. Now, I run through China business in FY '24. Bubs China business demonstrated a strong performance across key financial metrics and growing momentum of LC business growth, showing accomplishment of our China business reset. The distribution restructuring and product upgrades support our sales growth by 27% year-on-year to $17 million in FY '24. We are also able to restore premium price architecture and healthy value chain in the market through Bubs' core Goat range. The second half sales grew 38% over the first half in FY '24, driven by business restructuring and restore of confidence from both customer and distribution network and seeing an impressive GMV growth over 90% from overall Seabank business in the second half compared to our first half of FY '24. Also, profitability was improved dramatically in FY '24 through optimization of product portfolio and our focused marketing strategy along with cautious management to ensure sustainable sales performance. Marketing expense was improved from 41% to 14% of revenue, leading Bubs to a clean pathway of profitability in China market. After resolving aging inventory issue led by previous distributor, our new upgraded Goats Infant Formula range as Supreme Provo Premium Formula are very welcomed by both customers and distribution network during our recent launch. Release developments will continue to accelerate our growth trend in both sales and profitability. We anticipate 50% revenue growth in China in FY '25. We designed a strong foundation of portfolios to field customer demands on high-quality specialty products in both Goat and Provo categories. In addition, to capture the growing trend of ad & Nutrition, our Catlett brand developed will also allow us to grow further in Chinese customers' journey by introducing new products and entering new channels. Over 15% improvement of Bubs average retail price was also achieved in China, driven by distribution and portfolio reset, while attractive gross margin of over 39% was stabilized with our upgraded portfolio. This will provide solid base for Bubs to grow to stay in premium and profitability, is a way to grow sustainably in China. We continue to invest in Seabank channel, such as Alibaba, JD.com as a whole. Strategically, we also enter all throughout channel. This will fill Bubs new growth and boost awareness in China, especially in exciting and vibrating lower-tier cities. Also, as referred to an online to offline model, it's a channel and also a business model and the cross-border e-commerce to provide customer in-store experience and also convenience. Bubs is now available in over 300 stores across major cities and strategically collaborating with Monty, which is one of the largest auto store chains in China. We expect to expand to over 1,000 stores across 30 cities in the coming financial year. The growth of auto will be supported by focused trade and marketing activities to ensure customer equities acquisition and sales growth. After all, China JD dissolution with Hainan young partner has been offset. Now, it's our time to 100% focus on investment in growth and penetration. That's all for me on China. I will now hand back to Bubs' CEO and Managing Director, Reg Weine.

Thanks, Jackie. As we've heard today, we are growing really, really strongly in our 2 strategic markets being U.S.A. and China. But I'm really pleased to say that domestically, we're also doing incredibly well. As you can see, our full year Australian revenue of $21.6 million was up 24% on prior corresponding period. We're the #1 goat formula brand in the Australian market with 52% share. And we're growing 6x faster than the category. Our Hero Goat brand is growing by 78% on an MAT basis. And for context, overall, Bubs remains a bigger brand than Bellamy's in the Australian infant milk formula market. I'll now move on to Bubs Rest of World performance and update. I'll start this segment update with our ambition and Bubs' goal is to be the market leader in goat infant milk formula in 7 of the world's 10 largest IMF markets by 2030. We are currently in 3 of those markets today, and we aim to enter 1 or 2 strategic new markets each year. The 7 of the top 10 IMF markets that we are not present in represent an addressable market of approximately $9.3 billion, and we feel we can enter and win in most of those markets in a low-investment and low-risk way. Looking at our Rest of World performance. Our revenue has grown 20% CAGR over the last 5 years and the growth in Bubs Rest of World operating segment has been driven by our growth in Japan and Vietnam. As Richard said earlier, Bubs is now exploring strategic opportunities in North America, and we plan to enter Canada in half 2, and we will have further news on other markets in due course. Our 5-year revenue CAGR in Japan is 78%, and we are achieving in a better than 40% gross margin in that market. We don't often go into market-specific performance within our Rest of World segment, however, I wanted to include our Japan performance to demonstrate how Bubs new market entry model and success can be replicated in other markets. We feel we have developed a core competency in entering new markets and feel we can continue our international expansion and success in a very considered and deliberate way that doesn't require us to bet the farm in a way that builds the brand's global footprint and generates a positive return on investment within 3 years of entering a new market. On that note, I'll now hand over to Robin, our CFO, to speak to our FY '24 financial overview. Robin?

Thanks, Reg. Good afternoon, all. Pleasing to have the opportunity really to present a set of financial results, which I think, demonstrably show that Bubs' turnaround is well underway. Just talking through the FY '24 P&L lines. As you've heard, we have revenue of $80 million gross margin, $39 million, and that's at 49%. But within that, there's an underlying gross margin of 41%, and I'll come back to that in a couple of slides' time. Pleasingly, with the 34% increase in revenue, when we look at our distribution, marketing and employee costs, they've been maintained within the previous year. So, we're showing that we have the scale to be able to support additional growth on that pathway to profitability. We have a statutory EBITDA loss for the year of $20 million and a net loss after tax of $21 million. But noting those results of $21 million also include $11 million in nonrecurring costs. Growth across all the regions, this is a gross revenue slide, which sales effectively before the trade spend and the life of retailer allowances. The bridge shows that the dollar growth in each market has contributed to the $25 million growth revenue increase on the prior year. And in every market, we're seeing double-digit growth. It's pleasing to say and as time goes by, it's becoming more challenging for many businesses. So, pleasing to see about this well underway. This slide not only shows that every market provides a meaningful contribution to the group, but at 73% or 58% of the group's $80 million revenue is now earned internationally. This shows the importance with $80 million and a 33% growth. This shows the importance of the U.S.A. revenue now at 44% of the group's revenue. The China reset, as Jackie touched on before, is well underway and second half revenue was up 38% over the first half. Domestic growth is at 6x faster than the average in the category, and Japan is another key focus with sales increasing at 50% over last year. The gross margin bridge that has been prepared is to show the underlying margin. As you can see, the financial reports reported gross margin was at 49%. However, this doesn't tell the complete story. Last year, in June '23, Bubs set aside $25 million to address inventory concerns resulting from a failed strategy. During the year, these concerns were addressed and a much-reduced provision was required at the end of June '24. This reduction was released into the June '24 results, resulting in the rate of 49%. But once this is excluded and look at the underlying performance of the key categories, the rate is 41% going forward. Balance sheet. The cash and cash equivalent in June '24 of $18 million, we had trade receivables of 9 million inventories of 28, so current assets totaling $60 million. In liabilities, we had trade and other payables of '18, borrowings of 5. So, current liabilities of $30 million and net assets effectively of $36 million. The increase in trade receivables really reflects the revenue increases, and it's important to note that our debtors book consists of high-quality major retailers. The revenue growth also required increase in the inventory from $21 million to $28 million to increase demand in the changing can sizes and someone that Chris talked about earlier. It's important to note that these amounts are net of inventory provisions. And once these are considered there's, in fact, a 28% reduction in inventory from June last year to June this year, reflecting the improvement in the operational management of inventory and the focus that, that has on releasing cash. On to cash flow. Bubs finished with $18 million in cash for the end of the period and operating cash flow we 45% reduction on the previous year. If we go through the thing, we have a $26 million use of operating activity well down on the previous year of $47 million. And within that $26 million, we have $12 million of nonrecurring costs. So, normalized, that brings taking that down to $14 million for the year. So, again, we've talked about it before, and we're well on our way to getting that cash burn back to breakeven. Thank you. I'll now hand back to Reg for the outlook and the path to profitability.

Thanks, Robin. Okay. So, what to expect in FY '25? Well, firstly, I'm pleased to say we delivered on what we said we would do in FY '24 and in the first year of our turnaround as we track towards a positive EBITDA result in FY '25 before share-based payments. In FY '25, we are forecasting net sales revenue of $102 million or $130 million in gross sales. That's a 28% uplift over FY '24. And reminding the audience that our strategic markets, the U.S.A. and China are expected to grow by 50% year-on-year. We expect gross margin, as Robin said, to remain above 40% and hopefully a little higher. You heard from Richard around our meaningful progress on the FDA regulatory pathway, and we remain on track for permanent access to the U.S. market from October 2025, and you can anticipate Bubs launching into the Canadian market early in half 2 of this financial year. Our delivered gross margin and strong top line momentum do help us solve for a positive EBITDA result in FY '25. But it will require us to be very disciplined, as Robin said, around costs. To illustrate that point, this bridge highlights the key drivers of the expected improved profit delivery from FY '24 to FY '25. As you can see, the additional $22 million of revenue forecast in FY '25 will provide $9 million of gross profit at a 40-plus percent gross margin. I mentioned cost discipline and the team, we feel we've got a very good fix on our costs, our operating expenses and non-costs. So, please don't take prior year expenses and extrapolate them as there are far too many one-offs, including $7 million of FDA regulatory costs that we incurred in FY '24 to obtain permanent access to the U.S. market, along with $5 million of FY '24 litigation costs, which are nonrecurring. The way we are modeling our internal forecast EBITDA in FY '25 is that we are assuming some product margin improvements. We do have some further cost-out initiatives. We expect continued revenue growth. And when you consider those things in combination with the above one-off nonrecurring costs, it does provide a clear pathway to a positive EBITDA number before share-based payments in FY '25. Moving to the next slide. This slide is intended to give shareholders a short, medium and longer-term view of Bubs path to profitability and what we're focused on. Short term is really what we've already baked into our FY '25 plans and most of which we've covered today. Medium term are the things we are working on now. For example, we're working with our bank on a larger, more flexible trade finance facility to support our working capital requirements and support our future growth. Our marketing investment needs to be at least 15% of net sales. Last year, we invested heavily in brand building activity and spent approximately 15.5% of net sales. So, we'll closely monitor and manage our marketing investment and return on investment. Longer term are the things we are working on or considering in a 2- to 5-year horizon, including capacity planning for Deloraine, SMR registration for China. And, of course, we want to be self-funding within the next 2 years, if not sooner. So, that completes the FY '24 results presentation. I'd like to thank our shareholders who have joined the call today, and we'll now move to the Q&A.

We did get a couple of questions that came in overnight in this morning. I've got those questions in front of me. So, I might read them out for the audience, and then I'll ask the team or I'll respond to each one in course. The first question was just wondering if dividends are a goal of your company, if they are, how long before they arrive as an estimate? I'll answer this one. There are currently no plans to pay dividends. We are very focused on getting to positive EBITDA this year in FY '25 and to be self-funding as soon as possible, as I mentioned. Certainly, down the track wind Bubs is profitable and generating free cash flow, I'm sure the Board will consider dividends as part of the company's capital management plan. The second question, can you please advise whether Bubs will be cash flow positive in FY '25? Great question. Again, I'll do this one, Robin. As we discussed in today's presentation, our FY '25 guidance is the above to be EBITDA positive before share-based payments. So, this year, operationally, we'll cover our cost from a cash flow perspective. If we do need to invest in inventory in half 2 of FY '25 to support growth into next year, we would look to use our trade financial debt facility to fund that. A couple of more questions that came in and received from John. Does the rest of the world include India? With this increase in middle class population, the fact that drink goat milk should be included in a trial period. India, Richard, I might throw that to you.

Thanks, Reg. Great question. So, thanks for that question. India, certainly a unique market and it does represent some challenges. There's certainly been some significant commercial and trade barriers, although that's progressively coming down. It's a market that we've had a good look at. But I think at the moment, it would be fair to say that with some of the unique purchasing patterns and methods of purchasing, we're seeing that it's not a market that we've got a lot of sight on success in the short term. So, we're just keeping that one under a watching brief at this stage, would be my comment. Reg?

Thank you, Richard. A question here from John in relation to the U.S. Food and Drug Administration costs in FY '24 and managing the expenses to obtain it. Are there any other more material amounts of expense anticipated in FY '25? No, John. Most of the costs related to the FDA are behind us. And as we said in Robin's section of the presentation, all of those one-offs are really nonrecurring. So, it's very much business as usual. We know what the costs are. We've got a good handle on those things. So, not expecting any material one-offs in FY '25. Next question, what is the price comparison between the old style tins and the new style tins? What is the expected difference in product being sold? Will smaller tins mean the same level of production cost or will production costs stay the same? Well, there's about 3 questions in that, and I might throw that one to you, Richard, if I could.

Yes, sure, Reg. I guess the move from the larger 800 gram-tin to the smaller approaching 600, just less than 600-gram tin really means that it's going to retain a premium positioning, but at a more affordable price point. So, we think that, that really brings it in line to the standard U.S. tin size, if I can put it that way. The price has come down relatively proportionately, I'd suggest. But to answer one of the other elements of that question, the product itself is largely the same, and that reason for that is that, it's a highly regulated market, and we're undergoing the clinical trial and so forth. So, that means that the formulation can't change too much. And in line with that, we see some improvement in ingredients purchasing, which will probably offset a little bit of the line efficiency loss in moving to that smaller tin. So, hope that answers the question.

It answer the question very well. Thank you, Richard. And the last question relates to the preliminary final report, Page 15, short-term incentives, or STI performance rights. 2.5 million share rights will be issued if the group achieves the budget trading and EBITDA. The question from the shareholder is, was it necessary to give out performance rights when making a loss? The answer to that question for that shareholder is, if you look at Page 15 of the preliminary final report, there is a note there that says due to the trading EBITDA hurdles not being met. No, STI performance rights were vested in 2024. Hopefully, that answers that question. That's all the questions that we received. However, we do encourage our shareholders to always reach out and interact with the company and management. Just a reminder, the e-mail address for investors is [email protected], now displayed on the screen, and we always endeavor to get back to shareholders within sort of 48 hours. So, we would encourage any questions that come out of today's presentation to be sent through and best endeavors to get back to you as quickly as we can. Thank you to the presenters today. I appreciate being on the call with me and thank you again to all of our wonderful shareholders, and we look forward to further updates. Thank you.