Bubs Australia Limited (BUB) Earnings Call Transcript & Summary

Good day, and welcome to the Bubs Australia Limited FY '25 Results. [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 Joe Coote, CEO, to begin the conference. Joe, over to you.

Thank you very much. Welcome, everybody, this morning to the Bubs Australia FY '25 Results Presentation. My name is Joe Coote. I'm the CEO of Bubs, and I'm joined this morning by Naomi Verloop. So we appreciate you taking time to join us. If we could tab, please. Just as we get started, we wanted to do an acknowledgment of country. So as Bubs, we acknowledge the traditional custodians of the lands on which we operate, and we pay our respects to elders past and present. If we could tab, please. So just as we get started, I just wanted to acknowledge that I'm the new CEO of Bubs. I've been in my role for 5 weeks. It's been a busy time. I do have over 30 years of experience in and around consumer products, dairy industry and infant formula actually. So I've admired the Bubs business as an outsider looking in. And after 5 weeks, it's great to be on the inside. I've spent a lot of time getting out meeting our people. I have traveled to our 3 major markets being based here in Melbourne. Obviously, I've been to the Australian retail partners that we have. But I've also taken time and traveled with our Chair across to the U.S. and also up into China. So I'll share more on that as we go through the presentation this morning. But I'm really focused on our people, get to understand our people all through the business, our partners, primarily our retail partners, but we have a lot of supply partners as well. We obviously have important partners in the U.S. like the FDA. And then I'm also very focused on understanding how the business is performing and what our results are today that I'll share. I'm very proud to share those results. For me, the category we play in is it's a precious category in a lot of respects. It's a category in the grocery sector that requires the highest trust of any item that you'd see in a grocery store. It's a very special thing for a mother to choose our product and give the sole source of nutrition from our product for her new baby, and we sort of take that very seriously. It's also a category that has attractive returns. And so for me, that duality of the trust we have in the category and being an attractive returning category as well make it very appealing. So I'm going to hand over now to -- if we could tab across to Naomi, our CFO.

Thanks, Joe. Really pleased to be here today for the second time to be presenting our full year results for FY '25. I've been on deck now for about 6 months. And in that time, I've been really strongly focused on building capability and process, not only within my team, but also across the wider business. This has included having the strong focus on our S&OP processes as well as our IBP or integrated business planning processes to really making sure that we've got our forecasting, our budgeting processes and all of our standard monthly reporting operating as smoothly as possible. The key focus for me over the last 6 months has really been all about building operational resilience and making sure that we put together the right strategic objectives going forward that are going to build long-term profitability and working capital benefits for the group. So happy to be here today and take you through the results with Joe.

Thanks, Naomi. If we could tab. Yes. So this morning, what we will take you through is, firstly, the FY '25 financial results. I will then offer some commentary on the key markets that we operate in. And then finally, we'll close out with some discussion on strategy update. So if we could tab to kick things off, I'm really proud to share that Bubs as a business in F '25 has delivered the commitments that we made to the market. We're very proud of these results, and we've shared that with our teams that operate and represent us around the world. There's really 4 key areas that I would call out. And these are commitments that were made by our business through the FY '25 year. So very happy to report that our total revenue exceeded the commitment to exceed $100 million, and we landed at $102.5 million, which was a great result. Our gross profit percentage, we committed to the market that we'd exceed 40%, and we actually came in at 48%, so some overdelivery there that we're proud of. Moving through to underlying EBITDA. We committed to deliver a positive underlying EBITDA, and we did that. We've delivered $0.6 million. And then finally, on positive operating cash flow, we delivered $6.1 million. So together, that's a great result for F '25 that we're proud to share more on this morning, and we'll get to that as we tab through. Just the other part that we'll cover and just offer some early comments on our forward focus. What I'm focused on at the moment as the new CEO, given I'm 5 weeks in, is really assessing the business performance, as I said, getting to know our people, our partners, drilling into some of the performance and also keeping an eye on the dynamic global environment that we are all operating in currently. I think we're all aware there's a fair amount of macroeconomic challenge. If we, as an example, look at the cost of living crisis that we experienced here in Australia, that's impacting consumers. If we look a little bit offshore, some of the geopolitical challenges, we are keeping a close eye on the U.S. environment and particularly the tariffs. So it's a dynamic environment that we operate in and more than 80% of our business is now outside of Australia. So we do really watch the global environment. Moving forward, we're looking to step up our ambition. We're really a business that's seeking to realize our full potential. And so over the next few months, I'll be working with the team to look at a strategy update to look at how we can map out what full potential would be for Bubs and then set out a pathway to look at how we can align our resources to execute against that plan. And so that's something that I'm working on with the team. It's a top priority apart from delivering the day in, day out business. And our plan is to bring that back and share it with the market in late November. So that's the forward focus that we have currently. If we could tab, I'm just going to hand over to Naomi now to take us through some of the FY '25 numbers.

Thanks, Joe. So looking to the P&L, we've obviously got headline results, as Joe just mentioned, of revenues up to $102.5 million. And our underlying EBITDA at $0.6 million with baseline EBITDA coming in at $5.5 million. So revenues were up overall about 29%. U.S.A. was the biggest driver of this. Overall, we've seen a $22.8 million increase in group revenue since FY '24 and approximately $18 million of this is growth coming from the U.S.A. products, especially our goat SKUs are performing very well over there, and we're still #1 in terms of our infant formula goat SKU on Amazon. Looking at gross profit, we are up in terms of gross profit dollars, 27%. As we continue to deliver in the U.S.A. market, volume mix and margin focus shifts to international markets and especially in the U.S., we see that market being highly profitable with a much better contribution margin compared to the other markets we operate in. Looking to operating expenses, you can see that they're down about 23%. There's been a large focus this year on cost reduction activities, really optimizing our spend and looking at where we need to spend and being really strategic about that. Included in the numbers as well is credit recoveries of $3.1 million. That mainly relates to a provision release for the Alice & Willis legal settlement. We were allowed to set off certain assets and liabilities as part of the judgment that came through on that legal settlement, and that allowed us to book in a gain of $3 million. Overall EBITDA, therefore, came in at $5.5 million versus the $20.3 million loss in FY '24, which was a significant uplift. And looking down to the underlying EBITDA number, that is $0.6 million. Now basically, that $0.6 million number is derived by adding back $3 million for the Alice & Willis provision, another $0.6 million relating to Alice & Willis, which was booked through to other income as a gain. And we also had $1.3 million of insurance claim that came through in the current financial year. So backing out those one-off items, the underlying EBITDA result came in at $0.6 million. Just clicking now to the balance sheet.

If we could tab, please.

I think you can see that it's a fairly capital-light balance sheet that we have here at Bubs. Most of the assets and liabilities that we have are current in nature and form part of the working capital cycle. You can see that trade and other receivables, we've managed to contain that to $10.6 million from $9.3 million in FY '24. That was despite the significant uplift in revenues over the year. So there's been a really, really strong focus on cash collections and following up on overdues, which has allowed us to ensure that we've maintained that balance fairly similar to prior period. Inventories, you can see, are significantly lower. We've reached a low point in our inventory cycle. As we look ahead into FY '26, we'll be looking to build up inventories again. and that will put some pressure on our operating cash flow over the first half of the year. Looking at trade and other payables, they've also decreased by $7.4 million. That's partly driven by this decrease in inventories that you see. There's also been a little bit of timing differences on our go-forward purchases, which instead of coming in at the end of June, they're now going to be coming in over the course of the first quarter. You can also see that borrowings have been eliminated during the year. So we did repay in Q4 approximately $5 million that we had drawn on the $10 million facility we have with NAB. As at the end of 30 June '25, we now have that full $10 million facility available to us.

If we could tab, please.

Looking now at our cash flows. It's been a strong year on cash for Bubs and our continued focus on working capital management has helped us achieve this. Cash from operating activities was positive for the year at $6.1 million versus the net cash used in prior period of $26.3 million, so an improvement of over $20 million. That was largely driven by higher revenues, which consequently then led to higher receipts from customers. You can see there that receipts have increased about $26 million year-on-year and a lot of that growth obviously being driven by the U.S.A. market, which is our core market at the moment. Payments to suppliers also decreased $6.6 million. Again, that's due to the tight focus on working capital and also diligent supply-demand planning. But I will point out to the fact that we are at a low point again on our inventory cycle, and we will be looking to build up inventories over the coming months. Overall cash position has improved really significantly. You can see total cash and cash equivalents at the end of the period, $17.4 million, just $0.1 million down from where we landed at FY '24, which was $17.5 million. And that is a great result given that we've repaid the borrowings. And obviously, there was no share issue completed this year. So a solid result for the business.

Tab, please.

Looking ahead to the next slide, we're focusing here on our group revenues and the trajectory over the last 3 years. You can see that 81% of our sales are now driven by overseas markets, and we've achieved a CAGR over the 3-year period of approximately 30.6%. Again, as I've said, the U.S.A. business has gone from 40% of our group revenues up to 52%, and that's all driven by our strong footprint in retail outlets as well as online via Amazon. Within the U.S. market itself, we've seen a CAGR growth over the 3-year period of approximately 49.1%. If we look next at China, it's holding steady at around 21% of group revenues. China has achieved a CAGR over the 3-year period of 24.4%, and that's mainly been achieved by focusing on our cross-border e-commerce channel as well as our online to off-line expansion into a number of new stores over the course of FY '25. If we look ahead to Australia, we can see Australia declining a little bit to 19% of group revenues, and that makes sense in line with our strategy to not only focus on our home market, but to diversify the business and grow our revenues overseas also. Australia continues to do well in the infant formula space, and our underlying revenues for infant formula were up 10% year-on-year. Over the 3-year period, we achieved a CAGR of 6.8% in Australia. Rest of the world tracking nicely as well, still holding fairly consistent at about 8% of the total group revenues. We're seeing Vietnam and -- Vietnam and Japan, sorry, as our main markets over there. They make up about 75% to 80% of the revenues in rest of the world. And that -- those markets, we have seen go up over the 3-year period by a CAGR of approximately 27.5%.

Tab please.

This next slide here actually gives us an overview of underlying gross profit. You can see on the face of the P&L, we actually talked baseline gross profit numbers. But if we look at the underlying position, you can see the trajectory over the 3-year period, moving from 30% on an underlying basis in FY '23, up to 41% in FY '24 and FY '25 landing at 48%, which our baseline is pretty much the same as the underlying for the period. We've continued to have a strong focus on margin mix and market. Obviously, the U.S. being -- having a very high contribution margin as we lift revenues in that space, we have consequently seen an uplift in the gross margin percentage. You can see that prior year gross profit percentages there have been normalized for releases made against inventory positions and loss-making product and ingredient sales we've had to do in prior periods. Looking ahead, we sort of expect margins to normalize around that 40% to 45% range as we absorb tariffs and look to meet customer demand as quickly as possible in the U.S.A., which has the potential for us to potentially be looking at air freight as we go into Q1 of FY '26.

Tab, please.

Now looking across at cash flow, it's been a good story. Operating cash flows have been positive for the last 3 quarters. We've ended the year at about $6.1 million of positive operating cash flow. Obviously, that's all being led by the higher receipts for the year as well as that discipline on working capital management. We will be building up inventories over the course of the first half, in particular, the first quarter in order to meet the U.S.A. demand and growth. We can also see that net working capital as a percentage of sales has sort of reached a low point at 22.6%, significantly lower than prior year. And that, again, is due to that low point in the inventory cycle whilst trying to meet the growing demand in sales volumes, in particular, from the U.S.A. As I said previously, we do expect OCF to be impacted in the coming months as we rebuild for FY '26.

Tab, please. Yes. Thanks, Naomi. Appreciate that. So if we move through now to update on the market and if we tab again, kick off with our largest market now, as Naomi shared, over 52% of the Bubs business, the U.S. market, and it's a market that I personally know very well, having spent the last 8 years living up there before returning to Australia with my family. And very happy to say, if you look at that picture on the top right, we've got a very extensive coverage across what is a geographically large country, and we also have the online presence as well through Amazon. So over 5,700 stores across the major banners, which is a really great achievement by the team. I was up there recently. You can see on the bottom right, in one of the Target stores with Katrina, our Chair. And Target is a really key driver of infant formula in the U.S., but in particular, this premium natural subsegment that is growing significantly at the moment. So Target is really a destination for moms. Infant formula and other baby items are really one of the key categories. So they're one of our key partners. And really, if you take that into the numbers, we're #1 on Amazon with goat infant formula. And we're really positive about this market. As Naomi said, it's high value. We believe we can continue to grow that premium segment, which at $770 million is about 10% of the total category. But then within that premium natural segment is Goat, where we're a large player. So $189 million of the $770 million, and we're 26% of that goat subcategory. As we all would be aware with the U.S., we are monitoring closely. There's quite a lot of activity around tariffs and trade. And so we're just really keeping a watch on that. And if we can tab over, I'll talk more about some of the exciting work that we've done with the recent submittal of our new infant formula, looking for permanent access to the U.S. market through the FDA. Most people would be aware that this started back in May '22. When I walked into my office actually here at Bubs, I saw a picture of the tweet that President Biden sent in May of '22, which really was the key start point where we flew infant formula into the U.S. to help with their supply issues. And really, if you look at those milestones on the right-hand side of the slide, you can track our progress in participating in the market and then now moving to having a lodged a submission for permanent access to the market through the FDA. It's been quite an involved process, but the team has done a great job to work that through. And over the course of the last 2 years, we've done some great work. And I did just want to share one of the highlights for me is around the infant growth monitoring study that we completed in December '24. Now this is a very expansive study. The study that we did is the largest of its kind ever conducted in the U.S. And these studies look at positive results around healthy growth, which is length, weight and circumference of head actually, looked at the tolerance for the baby in terms of gentle tummy is what we all like to have a good night sleep and then overall satisfaction. And just sharing there in that picture, the 3 formulations that we have submitted. The B100 on the left is our grass product, bovine or cow. The B200 is goat, which is in the middle and the blue. And on the right is our essential product, which is also a cow or a bovine product. And you can see there that very, very strong feedback in terms of satisfaction. And with particularly along that bottom line, the responses to, I would likely or very likely recommend this formula very, very high marks there. So we feel confident we've got something to go to market and share. We've made our final submission. It's with the FDA, and we expect to receive notification on that before the end of this calendar year. So if we could tab. China is another great market for Bubs. We've been there for a number of years. It's one of our core markets, and I visited there recently as well. It's a very dynamic and competitive market. There is a lot of players, lot of the business is done on e-commerce. There's over 1,200 infant formula brands. With that said, there is still a lot of general trade as well, and that picture there of the general trade store was a store that I visited with the team, store based in a city called Hefei, which is 147 kilometers west of Shanghai. It's a city of 10 million people. It's the 18th largest city in China, but it's got one of the top 5 cities for birth rate in China. So it's a city that's particularly of interest to us. And it was amazing to see the -- again, the duality of the channels there. A lot of folks are transacting on the e-commerce, but in these communities, these mother and baby stores as well are really a popular channel to go and source your product. Now also, if you look down on the bottom left, we also have an adult product in China, which is our CapriLac product. It also sells well. It takes us into another segment of the market, which is healthy aging in the adult space. And it's another area that we're quite proud of what the team has achieved. The thing -- the 2 channels we operate in primarily is the cross-border e-commerce. We've had a great result there where the team has seen our business grow against the category that's declined. And we've got a great team that manages that business very effectively. If you go to the general trade, we operate in the O2O element of general trade, which is offline to online. We've ranged into 1,315 stores across 99 cities. So we're very happy and confident of the progress that we're making in China, and we've got great brand equity and sustainable growth and margins. Tab, please. Moving through into the Australian market. Obviously, our home market. It's a market that has been reducing as a relative percentage, but it's still our core home market. So I'm very pleased to report that as I've been out to 3 major retail channel partners, and that's a photograph there on the top right from one of our channel partners, our product on shelf looks great. We've done some enhancements to our range this year. We have launched our essential product, which is in some other markets, but we've released that here in Australia as well. It's really taken us into a different segment of the infant formula market, which is the mainstream. It's really resonating with the consumers. It's at a keen price point. and it has a Clean Label Purity Award, which is also resonating with consumers. So we feel really positive about where we're at in the Australian market. We're holding our #1 position with over 50% of the goat infant formula, and we feel really confident in those partnerships we have with the 3 large retailers in our space. Tab, please. Slide 19. So our other segment is Rest of World, and this covers a number of countries, but we are predominantly currently 78% of our revenues coming from Japan and Vietnam. But there's a lot of other countries that we have aspiration to grow within. A lot of these countries are within Asia and Middle East, typically with large populations, growing GDP per capita. They tend to have fairly high birth rates. And there is quite a growing subsegment in the premium infant formula space for imported product. And Australia as an origin is highly desirable and our products do resonate. We're very proud of the partnership that we have with our Japanese partner. We sell, as you can see there on the top right, on the Rakuten channel, which is an e-commerce channel. We have a number of very loyal consumers up in Japan, and we're hoping to grow with those consumers and have a larger presence in the Japan market over time. Vietnam as well, a country of over 100 million people, a very young population, relatively high birth rate. So we're really excited about the growth of our Vietnamese business. I met this week actually with our Vietnamese distributor, and we're working on planning out the next 12 months. extending our reach in the general trade, looking to grow our business in Vietnam. It's a competitive market, but it's a market that we have been in for a while, and we do have some good brand equity. We're looking forward to continue to partner and grow in Vietnam as well. Other priority markets are Malaysia, which again is a high-value market, strong GDP per capita and birth rates and formula participation rates. And then the other one that I'd mention is Canada, obviously, an adjacency to the U.S. And again, a high-value market, large population, not a lot of locally produced formula up in Canada. There's a desire to look at our goat products, and we are working with some of the retailers up there to launch our products late in the second half of FY '26. So if we could tab down to Slide 20, give some updates on our strategy. If we tab again to Slide 21. So just linking into an update on our 5-point strategy, which we've been tracking since August '23, so coming into 2 years. And happy to report that we're tracking well against those 5 areas. There's been some significant progress and some milestones that have been achieved that we're very proud of. I'll share some of those now. So if we just start on the left-hand side with U.S. as our growth engine. So it's been an amazing journey there. As Naomi headlined, a year-on-year revenue growth, 52%. It's also not just a market that's growing with volume and price, but there is some nice margin there. And so we feel really positive about our prospects in the U.S. market. As I shared, we have issued our application to the FDA for permanent market access. Moving across to China, we did undertake a reset. I think we're well and truly, we've cycled through those dynamics from the reset. We do have a great team up there led by a gentleman called Jackie, spent some time with him and his team in Shanghai. They achieved a 22% year-on-year revenue growth last year, as I shared, and we've really grown our position from cross-border e-commerce into the O2O channel, as I mentioned. And we've got some great plans that we will continue to progress and execute in that China market. Moving to portfolio optimization. We've really sharpened up our portfolio over the last 2 years. We're quite focused. We have our Goat product. We have some different offers around the bovine products. And as I mentioned as well, I did show that photograph in the China market with the adult product, which is a goat powder for adult, which we -- the brand is CapriLac, and that's also a significant business for us. In the past 12 months, we've refreshed our artwork and packaging. And you can see there quite a sharp portfolio of products that really stands out as a brand block when you see us on shelf, and it's something that the consumers -- it's appealing to the consumers, and we feel really good about that refresh. If you move forward to sweating our assets, we have a great facility where I'm located here today with Naomi down in Deloraine in Dandenong in Southwest -- sorry, Southeast of Melbourne. It's a great facility built to very high standards. It has some capacity that we can grow into. It generates efficient unit cost and it produces really high-quality products. So we now will continue to drive that asset to high utilization and efficiency, and it gives us a great platform from which to take our high-quality Australian products to the markets around the world. Finally, working capital, and Naomi did talk a lot about this. Some really significant milestones have been achieved in the last 12 months, as I headlined and Naomi shared a little more on. We're very proud of achieving positive cash flow, positive EBITDA, significant milestones. Naomi did also flag that with our growth aspirations and with inventory being at a low point in the cycle, we are keeping a very close eye on that, and we're really looking to deliver highest possible service to our customers around the world. And from an Australian base, we've got a long thin supply chain that we operate, and we'll continue to invest in service to those customers around the world. So that's where we've been, and it's been a great achievement by the team. So if we tab over to Slide 22, which will be the last slide for today before we break and take some questions. So this is a focus for me over the coming weeks and months. We do have a plan to come back to the market late November to share a strategy update. And as I said at the start of the call, we'll be looking to plot a path to take Bubs to its full potential. In doing that, we would recognize or we'll be elevating our ambition. We'll be aligning our capabilities to execute that ambition and really deliver value for our shareholders, which ultimately, if I start at the bottom of the page is why we're all here. So we really are focused on generating shareholder value, and we believe this strategy update will show a clear path on where we see the opportunities and where we'll plot out some milestones to realize those opportunities and execute against that plan. If I just go to the top there for me, and it all starts with having a clear purpose, having a really clear vision for the future and then really being clear on the values that we live to. We've got a great brand. A lot of our values are derived from our brand. We've got a great founder story. We're a brand that's for moms. We've got a great DNA. We stand for gentle tummies and natural clean label products. So we really want to make sure that we all anchor into that as a platform around our purpose, vision and values. And from there, we go and we do a great job connecting with our customers and consumers. Typically, our customers are moms, our consumers are bubs, sometimes dads by formula as well. And so it's for the whole family, obviously, but it's really about that trust. As I said at the start of the call, the infant formula category calls for the highest levels of trust in any grocery store. And so that's what we hold core. And so we'll be looking at mapping the markets, understanding how we continue to grow our brand equity. We do have a great brand. We're really proud to take that brand out to the world. And then it's about understanding the customer journey. So when people are aware of our brand, how do we take them through the customer journey through awareness to using our products and ultimately deciding to feed their baby our products through that first year of life for the child, and that's essentially through that customer journey. We're also very focused on innovation. We've got some great things in the pipeline. We'll share more on that as we move forward. So that will be a core focus, and it really starts with the consumer and the brand, how they connect. And then from there, we look to work out how we go to market. So moving to the right, which is really about how we activate our marketing, primarily digital activation, some physical activation in store, but a lot of the connections that we build with our prospective consumers and our current consumers is around digital. So we have some really great team members who really focus on that. We're very active at monitoring that spend and looking at the attribution of that spend and where we can get the greatest return. We'll be very targeted in where we invest. We'll look at certain geographies. But even countries like the U.S. and China, you have to look geographically beyond the country. And in some cases, we're getting down to a city level. We're looking at demographics and psychographics, and we're really looking at where is the Bubs consumer, how can we reach out to them and how can we bring them into become consumers where we have cost to acquire them and then for the period of time they're with us, typically up to a year when that baby is in those early stages, what's the lifetime value that we derive from that consumer. And so we'll look at our product range, the channels that we reach. There's a mix of online and physical retail stores. And we'll also look at who we partner with. So an example, in the U.S., the Target store is really a massive destination for mothers, not just for infant formula, but for other baby items like clothing and wipes and diapers as they call them in the U.S. or nappies here in Australia. So that's a really important part of our strategy. From there, we look at our supply chain, which is really how we source right back at farm, really high-quality milk here in Australia, where we have great partners on farm. Look at our manufacturing assets and our manufacturing partners. As I said, we have a great asset here in Deloraine. Then we've got that long thin supply chain as we take products up to the U.S. and China. We do a lot of shipping containers. Occasionally, we do some airfreight. We obviously try and minimize that. But we really want to continue those really high standards of quality and service. We want to be reliable for our customers and our consumers. And ultimately, for our shareholders, we want to be really efficient. So we want to do that with our percentage of costs in different elements of the supply chain that benchmark against close to best practices. If we move one step forward, it's really important, particularly in the infant formula space that we work across our industry peers, particularly health care professionals and regulators. A lot of moms turn to the health care providers for advice when they're making decisions. It's really important that health care professionals are aware of who we are. They're able to set choices out for the moms, and we hope that the moms make decisions to come and try our products. And when we do a great job, they stay with us. We also have to work with the regulators. FDA in the U.S. is a great example of that, and we've been doing a lot of work with the FDA. But really, also at the end of the day, nothing happens without a great team. There is a great team within Bubs. We have a great culture. We aspire to be an even higher performing team, and that's something that we'll work on as well. And then obviously, we work with our trading partners, primarily downstream from us, the retailers. We've got some great partners like here in Australia, Coles, Woolies and Chemist Warehouse. I've mentioned Target a few times, Walmart in the U.S. We have a number of channel partners up in China. And so we'll continue to invest in those relationships and ensure that we're a great partner for them as well and that together, we can service the needs of our customers and consumers. So we'll be mapping that out as we look at the strategy. And then just closing with a really razor sharp focus on shareholder value. We're doing this to service moms, but ultimately to provide an economic return to our shareholders as well, and we'll be very clear on where we see the value and where we're investing to look at economic return and ultimately to deliver total shareholder return. So I will stop there. I think we're coming in quite aligned with the 1 hour that we have, which will give us about 15 minutes for some questions. So I'll close there and say thank you and hand back to the moderator to switch us across to some questions. Thank you.

[Operator Instructions] And your first question comes from the line of Jonathan Snape from Bell Potter.

Can you hear me okay?

Yes, Jonathan, we can hear you.

Great. Look, can I just ask a question because I've heard you talk a couple of times about this long supply chain in terms of inventory and stuff like that. And I'm looking at the inventory numbers here today, and I'm seeing finished down by 26% year-on-year if I'm looking at today's covet. Your ingredients down 56% year-on-year and the prepayments in the balance sheet down more than 80% year-on-year. And I'm trying to reconcile 20% type growth that I think consensus has in there for next year and this rapid downdraft in your, I guess, stock levels, both finished and the stuff that has to come through and how that ties up with it. Is there any color you can give on how fast that downdraft is, how quick you can get it back up and how it kind of aligns with your expectations for how things should phase like first half, second half next year?

Yes. So you're right on that. And you can see that inventories are down and overall, we've gone from $28 million to $20 million. And you could easily say that, that is low. And basically, the reason for that is that sharp uplift in demand we saw in the last quarter of Q4 FY '25, where we had out of stock with one of our key competitors, Kendamil. That switched over a lot of their customers over to us. And we actually ran down a lot of our safety stocks over that period. So by the time we ended 30 June '24, we had a sharp decline in our inventories. At the moment, it's our first priority to rebuild those back up. We think that's going to take about 3 to 5 months to fully execute. I did mention in the call that there is a position that we might need to air freight to get product to customers on time. We have done analysis on that, and it's still a positive variable contribution margin for us. So we're fully committed to meeting that demand and ensuring that we don't lose those consumers as we go through the inventory build process.

Okay. Do you have an idea on what that Kendamil kick was to you in the fourth quarter?

I would say that we've actually managed to convert around 20% of those sales. We've actually seen an uplift in our revenues that has continued since that period, and we've been able to maintain a broad baseline. So there was a kickup from Q3, and we've been able to maintain about 20% to 25% of those consumers.

Yes. It's a tough category in that respect where if a mom typically can't buy the formula and she switches, it's not uncommon to stay with where she switched to. So I think we've benefited from some of that pain that Kendamil has felt, and that's a dynamic in the category that we're all very familiar with. So...

All right. And look, can I just ask around margins? Gross margin in the first half was 50%. I think the full year is 48%. So it's probably what, 45%, 46% in the second half. Marketing came down quite a lot as well in terms of spending from that kind of 15% to 16% level down to 9% in the second half. When you're looking forward, is the 45% the starting point and then you have to think about how tariffs impact that because that looks like it could be a 500 basis point move if there's no price increase on the other side of it. But then how do you think about marketing and where that investment should be as well?

Yes, I'll start first and maybe Naomi can color with some numbers. But the way we think about marketing and particularly the U.S., we have an opportunity to keep really expanding and building our brand equity. There's premium natural subcategory is growing. And while it's growing and it's a new subsegment, we need to be there. We want to be there. So we are very committed to investing in that position. And so we are investing more going forward than we have in the past few quarters on that basis. And we're very confident there's a strong ROI for that investment. In terms of any other color on the numbers, Naomi, would you add anything else?

Yes. I think just in terms of the marketing, we're trying to be very strategic on it. So we're looking at our key markets and our core markets. Obviously, with the U.S.A., we've been in that market for around 2 or 3 years. We know that the market that we're focusing on, they're only in the game for max 1 year. So you really only have that consumer for 9 to 12 months. And that means that we still do need to have a focus on brand building and marketing and promotional spend. And we will be focusing on that in FY '26 and beyond to make sure that we keep on growing our customer base.

So sorry, what does that kind of mean for margins? Is the GM is 40%, 45%. Marketing sounds like it's going up from the 9% level that it was in the second half and distribution, depending on whether you air freight about flat to plus 100 bps or that kind of...

Some of those components that you're talking about actually sit within the gross profit level rather than down below the line. When I look at trade spend, there is going to be uplift in certain markets as we look to be strategically focused in the U.S.A. Overall, I would say that gross profits are going to be in the range of 40% to 45% as we absorb tariffs and air freight -- potential air freight that we need to do in the first couple of quarters of the year.

[Operator Instructions] And there are no further questions. So I'd like to hand back.

Well, thank you, everybody. We appreciate you taking time. We're very proud of the results that the team has delivered. We're excited about the future. We will hope to reengage in late November. I know we do have a series of meetings lined up over the next few weeks, and we look forward to meeting some of you folks, and we appreciate your support for our business. And thank you. Have a great rest of the day.

That does conclude our conference for today. Thank you for participating. You may now all disconnect.