Bubs Australia Limited (BUB) Earnings Call Transcript & Summary

Thank you for standing by and welcome to the Bubs Australia Limited 2026 Full Year Results. [Operator Instructions] I would now like to hand the conference over to Mr. Joe Coote, CEO. Please go ahead.

Thank you very much and welcome, everybody, to the Bubs FY '26 Results Presentation. My name is Joe Coote. I'm joined here this morning by Chris Rowe, our CFO, and we will take you through our results. If we could tab, please. If we could tab again, please. So Bubs acknowledges the traditional custodians of the lands on which we operate. We pay our respects to elders past, present and emerging. Tab, please. So as I mentioned, my name is Joe Coote. I'm the CEO at Buds. I've been in the role for 11 of the 12 months of the FY '26 financial year. So it gives me pleasure to be here today to present our results. I am joined by our newly appointed CFO, Chris Rowe. Chris Rowe joins the business with extensive experience across the markets that we operate in, particularly most recently in the U.S. He has many years' experience in dairy and particularly in the infant formula subsector so he's made a very strong start. It's been a very busy few months for Chris as we've been working on closing FY '26. So great to have Chris on the team and you'll hear from him in a moment. In terms of the agenda today, I'll start with a summary of the results. I'll then hand over to Chris, he'll take us through the financial overview. Chris will then hand back to me and I'll go through some regional performance summaries, a bit of an update on our strategy, outlook for the future and then we will take Q&A to round things out. So thank you. If we could tab, please. Really wanted to start with our purpose this morning. It's a very simple purpose. Everybody can read it. But what I wanted to reflect on is it's something that really resonates deeply with our consumers, particularly our mums. Our mums put trust in our brand to, in some cases, provide sole source of nutrition for their new infants. So it's a very critical time for those mums and we at Bubs do a great job of that. So this purpose drives our team. It rallies us each day to do what we need to do to work with our farmers and get product right through on to shelf. So when mums need that product for their babies, they have it. It's understood and appreciated by our retail partners not just in Australia, but around the world; particularly our U.S. retailers understand this and they are very passionate about supporting us in delivering this purpose. It's also respected by the regulators, particularly in the last period as we've been engaging with the FDA, it's something that they often reflect on. But I think for this audience this morning in terms of our FY '26 results, it is of particular relevance. As we look at the year, a lot of the numbers that we've presented come back to this purpose and I'll draw 2 references. Firstly, our revenue. Delivering this purpose has allowed us to grow a business from Australia that now has delivered $112 million of revenue. We have businesses outside of Australia. In the U.S. more than 3x as big as the business in Australia. And then finally, with FY '26, it has been a year where there's been some external headwinds. And so as we've looked at how we've spent our money, we've been very careful to go back to purpose; to think about our consumers and ensure that in the first half we maintained our presence on shelf. So we did incur some additional costs to service those customers and ensure we were there for those mums. And then in the second half, additionally, across our industry globally, there's been a regulatory reset. So again we did invest additional money to live this purpose and we believe it serves us moving forward. It grows brand equity because people trust our brand. So if we could turn. Okay. We get into the numbers now. I know everyone is waiting for the numbers so let me start on the top left there. As I mentioned, very proud to confirm that we've delivered just shy of $112 million of revenue. That's up 9% across the group, but very pleasingly up 24% in the U.S. I'm just going to move around and move across to the right. As I mentioned and I'll talk more in a moment about some of the reasons we had to put some additional money into our COGS, very disciplined execution of some challenges, but the net of that meant that our gross margin was 39.8% in the year. That then pretty much dropped through to the bottom line so our reported EBITDA is minus $1.8 million, which is within the guided range. But pleasingly if we move across to the bottom left, that calculates to an underlying EBITDA of $5.3 million, which does show very encouraging growth year-over-year. And while we acknowledge and recognize the minus $1.8 million, it is significant that we do see that underlying strength in the business. So if we move across just to the bullets, there's really 2 areas where we've needed to deploy very disciplined execution. The first one is around external disruptions. So we've had a lot of volatility in the U.S. with tariffs. It's been widely publicized and most things you hear in the media are true. So we've spent $2.6 million on those tariffs in FY '26. Secondarily, we've navigated a regulatory reset. Now this has been a global reset and that started on the 5th of January. I can remember the day. And so we have been working with the regulators, with our customers to ensure that we stay on shelf for our mums, for our consumers and for our babies and in the second half, that's cost us just under $4 million. In terms of building for growth, we started FY '25 with a very low inventory level of just over $20 million. Now with an aspiration to sell $120 million of sales and a 4- to 6-month lead time in our supply chain, we really understood very quickly that we needed to restock our supply chain. We prioritized the U.S.; it's our key growth market, it's our highest margin market. So as Chris will talk about shortly, we exit the year at $36.3 million of inventory. That's healthy inventory. That's the targeted inventory that we have planned for and, as I said, we've had disciplined execution in taking that inventory up to that number. To do that and to protect service aligned with our purpose, as I mentioned, in the U.S. we had to airfreight some product. That cost us $3 million predominantly in the first half. That allowed us to protect service, that allowed us to be there for our mums and their babies and that allows us to grow our brand equity and our reputation. Additionally, as we've grown and become a little bit more sophisticated as a business, we've taken on some additional capability. We have some new folks that have joined the business. We've moved some key roles up to the U.S. We have a CMO based up in the U.S. We have a Chief Commercial Officer based up in the U.S. for that region., Very experienced ladies who come into the business with very relevant experience and relationships into the trade and doing a great job. And then finally, our marketing. In the year, we increased our marketing 21%, higher than our revenue growth and that's to show confidence in our brand. And as we invest in marketing and we're delivering better content, we're very happy that that will set us up for future growth as we move forward. Just to round out, we also came to the market on the 26th of March with a growth strategy. Pleased to report, and I'll talk later some more tangible examples of how we're progressing that strategy, particularly some of the value that it's delivering. It gives us clarity and allows us to be really clear on how we execute our purpose. And then finally, I know something that everybody is eagerly awaiting is the status with our FDA approval. We've progressed significantly. We are in the final review stage and we are very confident that we will receive the FDA notification. With that said, I'll hand over to Chris to take us through the numbers.

Thanks, Joe. Good morning, everyone. It's a pleasure to be here. Turning first to our income statement. Key highlight is our revenue growth, up 9.2% year-on-year to just under $112 million and that was driven, as Joe mentioned, by increase in sales in the U.S. of 24% year-on-year. We've prioritized supply to the U.S. throughout the year. That also resulted in us incurring airfreight in a program that is now finished, but it really did enable us to achieve that level of growth in our critical growth market. When you turn to our gross profit. While revenue was up, our gross profit was down 9.4% to $44.5 million and that really reflected the impact of the airfreight program that we talked about, regulatory challenges and changes that occurred throughout the year and a combination of U.S. specific and non-AU tariffs that impacted our cost of goods as well. Our operating expenses were up 5% to $48.8 million and that reflected an increase in our marketing spend that we incurred in order to activate our brand and drive our sales program. Overall, our OpEx to revenue ratio saw a small improvement to 44% compared to 45% prior year. When we look at our underlying EBITDA, we were at $5.3 million demonstrating strong underlying earnings improvement and operating leverage to a degree. That was despite incurring airfreight, tariffs, regulatory-related changes throughout the course of the year. And the bridge on the bottom left shows the transition from our reported $1.8 million EBITDA loss to the $5.3 million underlying EBITDA. We move forward. Touching next on our balance sheet. We had a clear plan throughout the year to reinvest in inventory to support the growth of our business. We have a long physical supply chain and that requires working capital support and that saw our inventory increase $16.2 million throughout the year to $36.3 million. That inventory increase was funded by a combination of cash and debt and our operating cash flow mostly reflects and matches that change in inventory level. So very much a plan that we've executed to a level that we're very happy with and have now got to a position that is about right to support our business as we go forward. We could move forward one. As I said, the inventory rebuild in our mind is largely complete and levels of inventory relative to sales are back to around about where they were 2 years prior. We are comfortable with that level of inventory. We think it's the right level to support our growth ambitions given the length of our supply chain and we really only see inventory moving upwards in line with sales as we progress forwards. So with that, I'll hand back to Joe.

Thank you, Chris. If we could tab, please. I'll now take us through a summary of our 4 regions. I'll start with the U.S.A. where we delivered $65.8 million of net revenue. That now represents 59% of our total revenue line. So it's been a great growth story for us. We're very proud of the team. Jasmin, who leads the team up there, does a great job. The picture there on the left shows the coverage that we have now across the U.S. So we're in all 50 states. Pleasingly, we're in the 6 retail formats that we choose to be in. So with Amazon, we have a direct-to-consumer capability where anybody in the U.S. can source our product. We're also in the mass format. We're in grocery. We've recently joined the club format where we're now ranged at Sam's Club and we have a particular unique SKU for that format. We've recently come into the drug format, which is targeting convenience. And for those mums who may run out of formula out of hours, that's a great channel for them to ensure that we can keep in supply with our purpose. And then finally, we're doing very well on the specialty channel. And so we're very happy with our ranging now. We've met our targets of over 10,000 stores and now it's all about driving velocities in each of those stores. In terms of the macro market conditions. The area that we play in is premium natural so it's a subsegment of the total category. So within the total category we're 1%, which in such a big market is actually significant. But in the premium natural high margin better-for-you subsector, we're actually 8% and that's something we're very proud of. Additionally in the goat subsegment, which is a subsegment to premium natural, we are 20%. There is no goat infant formula produced in the U.S. and so our goat product does particularly well and we're very proud of the growth that we've experienced there. So in terms of turning the ranging of over 10,000 stores now into velocities and more revenue, it comes down to marketing. So we've done some great work on repositioning our brand. We really are proudly of Australia. We talk about being gentle functionality for the baby and we're a clean label product. And all these attributes are very on trend for our targeted consumers and their babies. We've been shifting our spend, looking for where we can track these mothers down and have them know who we are and then come into the store and try our product and become users of our product. So some of the more contemporary platforms we use are Reddit and TikTok. So we're very interested in TikTok and we're very pleased with how that platform is driving our brand. Our click-through rate on Amazon is up 20%. We have been with Amazon for a number of years, but we're very pleased with our business there as well. And so overall in the U.S., we're very happy. We've navigated the tariffs, we're on shelf and we're really set for what should be a great future. If we tab forward. Our second biggest market is China and so in China, we delivered $21.4 million of revenue, about 19.1% of our total. So a very important market. And important to note that both these markets are outside of our home market, Australia. There's a graveyard of Australian brands that have had the ambition to take themselves offshore. Our U.S. market is 3x bigger than Australia and our China market is bigger than our Australian market as well. So we're really a business that is globalizing and our brand and our product being proudly Australian is resonating with those mums in those different geographies. Now in China there has been a lower birth rate, but the premiumization within the total category is positive and particularly for the English label. So we're happy with the progress our brand is making. We have a great team in China led by a gentleman called Jackie. And within China, the regulatory reset has been something that we've navigated with a lot of other industry players. And the product flows now are normalizing and we've reset. And we are, as we get through H1, feeling good about the momentum in China. In terms of our portfolio, China is a market where our core offer is infant and we sell through the offline to online channel where in the year we've grown to over 1,800 stores and our sell-out has increased by 30%. So some really stellar numbers there. We've historically been in the CBEC channel, which is the cross-border e-commerce, and our sell-out in that channel was up 34%. So you might note that both those sell-out numbers are over 30% and that was digesting what was a little bit of an inventory imbalance that we came into the year with. But the team has navigated that and our inventory now is balanced in F '27 and we're moving forward positively. Additionally, TikTok; our profile of consumers tend to be those types of mums that are consuming a lot of digital and TikTok is a preferred platform. So we're investing not just in the U.S. but also in China with TikTok. And the other thing I'll mention in China is we're very proud of the progress we've made in the adult category. So we have a separate brand called CapriLac. Watch this space. We are very positive about the expansion into adult. The lifetime value that we can accrue from an individual consumer in adult is significantly longer. Typically, an infant is in our system for 1 to 2 years. And so the team in China have done great work to expand into bricks and mortar. We're in 100 premium retail outlets. We do really well on the Tmall platform and we've launched a China label CapriLac product. So it's an area that we have strong strategic focus moving forward. We tab. Our home market. Critically important market for us, Australia 16.3%. Disappointed with our result in Australia. Wonderful shot of a farm there. I love showing that shot to our retailers. That's one of our farming partners in Victoria. Beautiful, beautiful set up there with the green grass, very different particularly to what people expect in the U.S. and China. So that of Australia attribute is something that we really accentuate and we're very proud of. Maybe we take it for granted in Australia, but that's a snapshot of one of our farms. In terms of the market condition, Australia is a market again where the global macro is true in that the birth rates are down, the mass market is challenged. There is some pockets of value. There's some premiumization opportunities. That's where we play. If we come back to the year though, it's been a little bit of a journey. So we've navigated through 4 steps as I would see it. We entered '26 with a little bit of negative momentum. We weren't spending the money that we would have hoped to spend on advertising promotion. Some of the content we had to sharpen up and so we spent the first half really looking at recalibrating our brand creative. We've really gone for our purple of Australia, gentle on the tummy and our clean label attributes and it's resonating with our consumers. So once we had the enhanced creative, we upped our advertising promotion spend in the second half to 16%. And then what we're seeing now coming out of the year and into FY '27 in H1 is that we're regaining market share and our brand awareness has increased a total of 10 points, which is very significant. So while we're not happy with Australia, we feel positive about the momentum as we come through H1 and we'll share more on that in due course. If we can tab, please, to our final geographic segment, which is our Rest of World. The Rest of World was $6.4 million of revenue to $5.7 million. It was down 25%. This is where we really had some very significant impacts from the regulatory reset particularly in the second half. We did have some challenges in the first half with product availability. One of our large markets, Vietnam had some changes to their nutritional panels around carbohydrates. So we navigated that with that market. In the second half, we did pause in Vietnam. We just really wanted to be sure that we understood the regulatory environment. We took the time to make sure that we protected our consumers in Vietnam and we'll very shortly be relaunching in Vietnam and we feel positive about that as a market that has huge opportunity. We've got a great distribution partner up in Vietnam as well. Japan, little bit similar. suffered a little bit from stock rationing. We were prioritizing markets and so a little bit softer, but they're our 2 big markets. We also have presence in some other markets and we do have an ambition to continue to grow our Rest of World business. So if we could tab, please. Just some words on the strategy. As I mentioned, we shared our strategy with the market on the 26th of March. It's now 5 months subsequent. What I can say confidently is we're bringing the strategy to life. There's a lot of activity. There's a lot of inputs, but we're driving to outputs. There's an ROI, there's tangible outputs and there's a contribution to the growth of the business and to a stronger bottom line. We're doing that through our 3 strategic pillars. Our first pillar is owned by Annie, our Chief Marketing Officer, and it's really about activating our brand for our consumers. Our second pillar is around building winning portfolios. It's led by our 3 commercial leaders; Chris in Australia and Rest of World, Jasmin up in the U.S. and Jackie in China. It's really about having the products that are on trend with our targeted consumers. It's about working with the right retailers in the right formats and channels. And it's about differentiating ourselves from our competition through price and promotion. So it all comes together commercially. And then finally, a large part of what we do, this pillar is led by Richard Paine, our COO, is connecting our farms to our families with our formula. And so we've done a lot of work in this area and I'll share some of those examples at the moment. But it is great as someone who's worked for non-Australian businesses for most of my career to be representing Australia and sharing the amazing goodness that we bring in our products from our Australian farming partners and our high quality manufacturing and supply chain systems. A couple of the enablers I'll talk to is innovation. In technology, we're doing some work in AI. We do work very hard on our performance culture and ultimately that's about living our values. So if we tab over. A couple of examples here in terms of what we're doing in the strategy that will create value for our shareholders in the future. If we start on the left with activate brand and consumer. As I mentioned, we've reweighted our digital presence. We're finding there's some great results from TikTok as an example and that's an ongoing process. And our CMO, Annie, has built a process to look at that objectively with some technology that looks at the math and we chase the ROI and we go to where our consumers are and we engage with those consumers so they're aware of who we are, they trial us and then they stay with us. We've also got some exciting news coming down the pipe with a brand refresh. Later in the year, we'll share more on that. I'd love to share more today, but it's very exciting and will be something that we'll share in due course. If I move across to building a winning portfolio, it's really about expanding our presence. As I mentioned, Jasmin and the team up in the U.S. have got to over 10,000 stores in all the retail formats that we're targeting. We do have an innovation pipeline. There's a big focus on adult, I mentioned that in the China update and we do have an aspiration to launch into Canada. We move one tab further. A lot of activity in this area with Richard Paine, our COO. We have streamlined and optimized our farm and production network. So we are working more deeply with less partners and we are feeling really good about bringing the goodness of the Australian farms to our markets around the world. In the logistics and manufacturing space, we have delivered hard cash reductions of $1.15 million. That relates to how we're packing containers for export. It also relates to how we're reducing the number of steps in our manufacturing process and that's money that's being banked to the bottom line. We've also made commitments to extend our goat herd through our partners in Australia by 70%. We're very confident that we're working with great people there on farm and it's a key part of our value proposition. We did talk at the strategy about the future network for growth. We have done a lot of work to understand the options and scenarios between buy, build and rent. I think we've mapped the options. We've got some preferred scenarios. There's nothing that I will share today on that, but we have a very clear view of where we will go and when we will go as the triggers in the business call for those additional capacities. Finally, on the enablers. Important that we have strong enablers in terms of living our values at the core, but also some of our operating platforms. We've done a lot of work in the safety and quality. Our quality systems have held up very, very well. I'm very proud of our quality team. All the work we do with the regulators, particularly the FDA, and our quality capability is always something they give us credit on. The audits that we've had have all been successfully navigated and I really put that down to the strong focus and the capability we have in our quality team. Additionally, in our finance and planning area; our operational planning, financial planning; some of the work that Chris Rowe did before he stepped into the CFO was in that space and we've strengthened our capability there. The other one I'll mention before I close is just AI. It's everywhere. I'm sure everybody is using it. We have some targeted functional use cases, not surprisingly we're going to where value is. For us it's procurement. We spend a lot of money on dairy solids and other ingredients. So we've got some activity around procurement. And then additionally, in trade spend and marketing where also we spend a lot of money, they're our 2 biggest areas. So we're targeting where the value is and at this point in time we've got targeted use cases and we're a test and learn cycle and we hope through '27 to do more in that space. With that, I will ask that we could tab across and start to look at the outlook. So it's clear that FY '26 had some challenges, as Chris and I have highlighted. H1 largely restocking from that very low inventory position. We stayed in stock. We did that for our consumers. H2, we navigated the global regulatory reset. Some of the momentum coming into the year is still building. We hope to see that build through H1 and as we have something to share, we will. But the environment has normalized and the product flows are coming back to normal. In terms of revenue outlook, we are a growth business. We're very confident in growth. The U.S., as we said, we've got our 10,000 stores. We've got our marketing stepped up. We now need to have the flywheel spin and turn those stores into dollars and that's something where we do have strong momentum. China, we've got expanded distribution. We have the adult focus and we've sharpened our marketing and we feel good about growth in China. Australia, we're continuing to invest. We want to accelerate our recovery. We've got some green shoots of recovery, but we need to see more and we're very confident that we've got the right strategy in place to see that recovery. And then finally in Rest of World, does remain mixed. We will be relaunching in some markets. Product flows are improving, but they do tend to be the markets that when we're rationing, we tend to go to the other markets above Rest of World, but they are critical markets. There's growth, there's good margin and so we'll remain focused on those. Our gross margin is expected to improve and normalize. Chris spoke about that. We have the working capital in place. We have the targeted weeks of inventory in the U.S. in our warehouse. We're in good shape. We can be there for those consumers and we can fulfill those orders for those retailers. And then finally, we will continue to invest in our brand. We have stepped up our percentage of net revenue investment in marketing. We're proudly doing that. We're watching that mindfully. We're ensuring there's an ROI and more from that as we move forward. And then finally, it's hard to manage a regulator like the U.S. FDA. So we don't make commitments on their behalf, but we are in the very final steps and we're very confident that we will come to the market with some news from the FDA in due course. With that said, I'll pause and answer questions.

[Operator Instructions] Today's first question comes from Jonathan Snape at Bell Potter.

First, I'll ask around the one-off costs. It looks a little bit bigger than where you were thinking. The big one is probably that $3.9 million. How do I think about that? I guess a, what is it? What was the $3.9 million spent on? And b, how do I kind of think about that into '27? Are there still some residual costs in these resets around the U.S. or does it largely kind of flow out next year?

I'll take that one. We see those very much as one-off costs and we don't expect to have those sorts of costs flowing into our result in any material form in F '27. The type of -- the nature of the costs are essentially around inventory provisioning. We had a level of inventory write-off in some specific cases as we made sure that all of our product was really what we wanted it to be to meet the needs of our consumers.

So we protected our consumers. We've taken those write-downs and the flows are returning to normal now with the resets that we've seen from the regulators in the different markets around the world. So we feel good about the future, Jon, and it's rapidly normalizing.

Okay. So that includes -- I think when I looked in the segment notes, there was about kind of $1.5 million in provisioning and inventory write-downs in the inventory note, that's included in that $3.9 million, is it?

Yes.

Okay. And if I look at freight, I can see the landed costs, the difference between freight charging has come down a long way in the stuff that's landing at the moment in the U.S. So that's largely through the system or is there still some legacy kind of in-built COGS that flows through in '27 in some of the early parts of the year or is it kind of all washed through now the P&L?

Mostly washed through, but a little bit of legacy. We have enough stock, particularly of the key goat infant formula in the U.S., that takes a little while to wash through the system. We finished air freighting in about towards the back end of half 2. So there will be a little bit left of that cost sitting in inventory, but it's not going to last long.

And basically all product is now back on the water and if something happened in market like a competitor went out of stock and we had a surge, we've built the muscle to surge and we still have positive gross margin. But clearly as you can see from the data you look at, Jon, that ocean freight is far, far more lower cost per unit than the airfreight. So we would only do that if we had to and we don't plan to.

Yes, definitely. And look, the marketing investment, I did notice a drop down in this result kind of that 13.5%, 14% kind of level or 13.5% I think it was. I think you put a number in there for Australia with the relaunch was a bit higher than that. If we're looking at the U.S. and the relaunch in Vietnam, where should sales to marketing kind of sit? It used to be up much closer to 20%. I think there used to be a target floating around of closer to 15%. Is the 15% kind of the right number for a business like this or is there a little bit more in that first period?

Yes. Jon, I'd say mid-teens like the [ MBA ] classes will tell you 10 to 12. I think we're in a category where we've got a shorter customer life cycle. So we move those mums through pretty much on an annual basis. So I would say mid-teens and we are very committed to investing that A&P and it varies by market. The big quantum of spend is in the U.S. And so I would say mid-teens is where we will be moving forward.

There are no further questions from the teleconference currently. I'll now hand back to the room to address presubmitted questions.

There were a number of investors that had presubmitted questions and of that, some of them were governance related and we passed them on to the Chair, Paul Jensen, to take them into consideration with the AGM itself. But sticking to the operational questions. First one, and you kind of addressed this, Joe, but when will you receive permanent FDA approval and what is the reason for the delay?

So as we said, we've been working with the FDA in the U.S. now for over 4 years. So it's a long process, but it's a very worthwhile achievement when it's finally granted and we are in the final stages. So we have been through the infant growth study, which is a very expensive and time-consuming part of the process. We've had people doing desktop reviews of auditing operational processes and we've also had FDA inspectors out in Australia auditing physical facilities. So that's now wrapping up. We are in regular contact. We're in good standing with the FDA. I have been in the U.S. attended personal meetings. I've attended an industry roundtable with 12 CEOs. So we are included in that network now. So though it's difficult to make a commitment on behalf of a U.S. regulatory agency and all I can say is that we are wrapping up the final stages and as a team, we feel very confident that that will be forthcoming.

Next one, AI. Not surprising to see this. So does Bubs intend to use AI to reduce freight and logistics costs?