Bubs Australia Limited (BUB) Earnings Call Transcript & Summary

Australia webinar with respect to the announcement that was made at the ASX earlier this week for the FDA authorization. We're going to go through a formal part of the presentation and then move into Q&A and encourage you to add those questions, and we'll hopefully get through most of them in time. This presentation runs for 45 minutes till 11:45, and we're going to be pretty strict on that timing. But without any further ado, let me pass you over to Joe Coote, the CEO of Bubs Australia. Over to you, Joe.

Yes. Thanks, Adrian. Really appreciate that. It's great to be here today to share more on the wonderful news that we recently received from the FDA. My name is Joe Coote. I'm the CEO of Bubs. I'm joined this morning by Chris Rowe, who's our CFO; and also Jasmin Manner, who leads our business up in the U.S., and she's based in Los Angeles. So go those Rams, Jasmin in the NFL this weekend. If we could tab over, please. And if we could tab again. Yes. So look, this is a transformational milestone. We're really thrilled to achieve this milestone. I know it's required some patience from our investors and a number of people. And I know for our team members, it's been a really huge journey of over 4 years. But this permanent authorization really sets us up to really accelerate our strategy. We're pleased to share that we've got our 3 SKUs authorized. It establishes us amongst a very limited group of non-U.S. businesses that operate in this highly regulated environment in the infant formula business in the U.S. And it will now unlock further opportunities, not just to accelerate our business, which Jasmin will take us through, but it will also open up some adjacent segments as well, which we'll talk a little bit about. So if we could tab, please. So I just wanted to recap a little bit about who we are in the world and what our strategy is. So we've probably all seen these slides if you've been to some of our other updates. But the U.S. is now a cornerstone of our global portfolio. But if you look at that picture on the right there, we are a business with a prominent focus on infant formula around our Bubs brand, but we also have our CapriLac brand that's in Australia and China. And -- so that's our portfolio of brands that we'll look to invest in as we move forward. Our products cover infant, toddler and adult currently, but we do have an interest in more broadly the nutrition space. And our dominant market now or our largest market is the U.S. We're very proud of the portfolio of markets that we have as an Australian business. We now have the U.S. business 3x bigger than our Australian business and our China business is also bigger than Australia. But we're really now a true mini-multinational is what we like to say. If you move across to our strategy, a number of things here in our strategic pillars that this news from the FDA will reinforce and allow us to move forward with confidence. Firstly, our brand, it resonates with the U.S. premium natural consumer. Secondly, in terms of building a winning portfolio, our goat SKU is a product that goes exceptionally well in the U.S. We now have coverage in over 50 states and over 10,000 stores. That's a great portfolio that Jasmin will talk more about in a moment. And also our third pillar around our farm-to-formula value chain. We've been under the scrutiny of world-class organization like the FDA have looked at our farm-to-formula value chain. We're proud of the Australian business. We know we've got great farm-to-formula, but that's now being validated by that agency in one of the toughest markets in the world. So we're very proud of that. We believe it sets us up for a great future. And so we're going to share that with you as we step through today. So if we could tab, please. As you're aware, we've been building bench strength in the team. So we have a great Board. We've had Paul, our Chair; and Steve, Paul joined in '23, Steve in 2019. Steve is based in Boston. But recently, we've supplemented the Board with 2 other very experienced and capable non-exec directors based offshore. So we're very pleased we shared previously that Lori and Pascal have joined. They're both proven leaders having worked with them now for a few months. It's been great to benefit from their experience. Their pedigree is from very large businesses where they've worked in branded infant formula and baby. They have a very global perspective, but particularly Lori has very deep experience in the U.S. And they have worked in both large and small companies. So within their career and some of their more recent focus has been in high-growth consumer businesses. And so they're really helping the Board as we navigate the challenges and opportunities that we see ahead of us. And it's been great to welcome them on to the Board. Today, we'll be hearing from Jasmin shortly. She's been with the business just coming up to 12 months. She has extensive experience in the U.S. in branded baby. Likewise, she's supplemented with Annie, who's our CMO based up in L.A., doing great things and also comes with a deep level of experience around U.S. branded consumer. And then Chris Rowe, our new CFO, many years in the dairy industry, but 3 of the last 4 years in the U.S. And we're fortunate to have Richard Paine, joined back in 2019. He's been through us on the journey. He's been a large part of the FDA submissions. And together with Kat, our GM of Corporate Services, that rounds out the team that focuses on the U.S. business. So we've got a great team, and we're ready to really move and accelerate and grow this business in the U.S. So when you look at the U.S. infant formula market, it's a very large and substantial market. It's a high-value market. It's a sophisticated market. It's a competitive market. The total market is AUD 7.2 billion. It's -- the segment that we play in though is not the mass market. So if you come across to the premium natural is the term that they use in the U.S., that's where we have our predominant focus. It's a newer subcategory. It's a higher-value subcategory. It tends to attract consumers that are looking for better. And when you say better, they could be looking for better for the environment, better for the animals, better for their baby, better for themselves, better for their family. But these are high-value consumers. They consume a lot of digital. And that premium natural subsegment in infant is now AUD 842 million. So it's grown over the last 4 years, 53.6%. So it's a really interesting space for us to be. But if you come one step right, that's really our sweet spot. So predominant focus for us is our goat product. There's no goat infant formulas manufactured in the U.S. There's ourselves and 2 other people that import. That's now a AUD 400 million business. It's grown from a standing start, and we now enjoy 24% market share of that high-value category. Now we're very confident of our position in this high-value subsegment, and we look to grow from a very solid base. This brings us to the growth that we've enjoyed. So most people would be aware, we had a rapid start back in 2022 when there was an issue with one of the major infant companies. And we, as an Australian business, responded. We airfreighted product up into the U.S. It was a real rapid start. People like Richard Paine and Chris Lotsaris did a great job to really grow that business 52% CAGR over those ensuing years. And so it gives us a really solid base, and it's been great to see Chris Lotsaris grow that business, but then 12 months ago, passed that over to Jasmin Manner, who joins us this morning. And so at this point in time, I'll hand over to Jasmin to take you through more.

Thank you, Joe. So when you look at this graph, we really built this foundation across 3 areas, and these are also the areas where we will accelerate growth in the future. So first, we built a national distribution network. And what does that mean? Actually, in less than 1 year, we expanded our distribution from around 4,000 doors into almost 12,000 stores. We are currently in all 50 states present and in all the channels that really matter in this lifestyle category. We also strengthened our inventory levels in FY '26. And that was actually really important in gaining that additional distribution without this very stable supply chain, we could have never managed to do that. Secondly, we invested in demand generation. And what is important to say here in these founding years or in the start-up years in the U.S., this demand creation was mostly generated through lower-funnel investments, so retail channels and shopper marketing and then also in focusing on health care professionals and educating consumers through these pediatricians on the benefits of goat milk. The FDA authorization now actually gives us a greater confidence to invest in the long term. And that is what gets me, of course, super excited because we can now not only leverage the established commercial platform that we have built over the last 12 months, it really supports investment in mid- and higher-funnel and therefore, for the long term. We can also look at portfolio expansion and it creates opportunities to evaluate additional supply chain efficiencies. So a lot has been unlocked or at least is supported through this authorization. So let's look at distribution opportunities first. So you show the next slide, Joe. So here's what I just talked about. And when I look at distribution, for me, it's not about just adding more doors. It's really making each distribution point more productive. We are currently in 17 brick-and-mortar retailers. And one -- the biggest opportunity we saw last year was mass. We were in about 15% of all mass retail doors. Today, we are almost in 80% -- we're almost covering 80% of all mass retail. And this is why we can say we are now truly a national brand. We also want to then deepen our presence within those existing accounts. And this is when I say make the distribution we have more productive. It's how can I get additional facings, better shelf positioning and also incremental displays. All of that will then lead to higher velocities, more visibility and at the end of the day, a higher conversion at that same retailer in that same store. Another opportunity is geographical white space. So what we saw is we were underrepresented in certain states. And when you look at the United States, there are some states that are really this saying, it's like fish where the fish is or where the fish are. There are certain states that are really higher covered by lifestyle consumers. So that's California, New York, Florida, Texas, et cetera. And this is where we want to play. And in those states, what is important is that you are represented at local grocery premium retailers. And an example here is we launched at H-E-B in Texas, and that gives them accessibility to those Texans who are really looking for formulas like Bubs makes a huge difference to our business. And last but not least, it's channel expansion. While we were represented in mass to a certain degree and in grocery, there was opportunity to expand in specialty stores in those natural ones. And we launched just at the beginning of this year in Sprouts Farmers Market. And I think a week ago, we were now approved at Whole Foods to be launching there next year. So I'm super excited for that. In May, we launched at Sam's Club and the club business is for bulk buys. And then as we speak, we are now rolling out at CVS, which is a drugstore channel and really helps consumers to find the product. When they are kind of in a panic mode, they just have to run around the corner and get more infant formula. So all these initiatives improve really the quality of revenue, and that's what it is about. It's like, create potential for a better mix and a higher revenue per distribution point. That's what you're focusing on. Next, please. As distribution has expanded, our marketing flywheel now helps turn accessibility into demand. So while we are now accessible, now we have to get that reach, reach those parents, convert them to buy, measure if the investment was the most productive one and then get this flywheel running. So with every turn, we are becoming more effective. The idea here is that we don't have a series of one-off campaigns. It's really one story that keeps us going around. So we first focus on parents that are really likely to value our differentiation in our products. So usually younger parents, let's say, millennials or the younger millennials, and they are really focusing on premium ingredients, goat milk benefits and then trusted Australian quality, and that's what we are honing in. We then want to convert this awareness into purchase. So national availability means they are finding us now. They don't have to look for us really. But that means we have to work on retail activation. We are establishing user-generated content. And then very important on Amazon and Meta is really ratings review and search functions that drive awareness and then conversion at the end of the day. And the third step is measurement. And that is MMM. We presented that recently. That is looking into platform analytics, Numerator for shopper data and then incrementality that is run through our agency's proprietary analytics tool. And with that, we are just improving our investment every time we are putting any post or any activation, CTV, et cetera, out there. So the flywheel in the end, builds momentum, customer acquisition becomes more efficient. That's the whole idea behind it. On the right-hand side, you actually see that this is not just a future plan. I am so excited that in the next 2, 3 weeks, we are actually launching our first 360 campaign, and this campaign focuses on 2 key points of differentiation, the benefits of goat milk and then our Australian provenance and quality credentials. what you also can see, we call it the go gentle from the get-go. In the past, Bubs was very focused on being a solution to a digestive problem. However, our consumers use formula for about 9 months. So you don't want to acquire them in the third month. You want to get them from the get-go. So when the baby is born, and that's also what this campaign is about. So we actually extend the lifetime of the proposition. Next, please. So when we are allocating our investment towards demonstratable incremental returns, FDA authorization allows us to also activate our established presence to really scale the platform in a bigger meaning. And what do I mean by this? On the one hand, we are talking about renovating the core, which is all about refreshing the brand. So we have a brand refresh coming up, which will support our price and mix proposition on shelf. The new design is geared much more towards our millennial consumers. We have a much better highlighting of our benefits. And then as a functional benefit, we are introducing a high-top lid with a scoop inside, which is a lot more hygienic. On the innovation side, this is all again about broadening our portfolio. So believe it or not, because we have our sourcing out of Australia that gives us points of differentiation within the formula that other brands don't have, brands that come out of Europe or the U.S. So we do have the ability to actually look into formula improvements or slightly modified formulas that help us extend the portfolio into the more premium segment. And then also, we want to extend our lifetime value of the brand by looking into adjacencies in the very near future. So all of this, in the end, supports a pathway to stronger profitability. That's what I'm mostly interested in and create potential for better mix and a higher revenue per distribution point. In closing, we have a leading position in one of the fastest-growing parts of the category. We have built a national commercial platform. We have a measurable growth engine and then now we have also the regulatory certainty to invest, optimize and scale for long-term value creation.

Thank you, Jasmin. If we could tab, please. Jasmin did a great job there in talking about our core focus, what we get out of bed for each morning is to grow this amazing brand, take the great story from Australia, connect with those U.S. consumers, do it in a digital way. So it's a highly effective model that drives growth and profit ultimately for our shareholders. And when you look at that, another opportunity though that we've looked at that's definitely a secondary focus, but we have this amazing farm-to-formula supply chain. People tell us they love it. We've recently extended contracts and sourcing with our Victorian-based goat farmers that product runs through that supply chain. We have a world-class facility in Dandenong in Melbourne, where the FDA auditors compliment us on the quality of the service, the culture of the team there. We take that product across the U.S. So we've also had other people say, well, could you make some product for us? And so that's where we are now considering pursuing a contract manufacturing strategy. Now that we have the FDA authorization for our branded products, that's a possibility. It is something that commercially could be interesting. It's a large segment in the U.S. It would open up an opportunity to potentially participate in an additional addressable market of up to USD 350 million. We also, though, need to be very cognizant of the FDA regulations. So we have been planning for this. It's a variant submission process that we would enter into. We did make those submissions yesterday, actually. So we're not sort of wasting any time on that. And so it's an exciting opportunity. We don't have anything that we can share today that's absolutely firm, but we're on that journey, and it's a new strategy that with the milestone that we achieved on Monday, we can now put some effort into. So if we could tab, another area that we have spoken about previously is our farm-to-formula supply chain. And so we've done a lot of work on this in the past 12 months. We now feel that we have mapped the market. We speak about buy, build and rent options. So as our volume grows, as we utilize the capacities that we have. And as we look at some of the journey of distance with supplying the U.S. from Australia, we are looking at some optionality to maybe place some asset or maybe have some partnerships in the U.S. We'd also be interested in reducing working capital, maybe reducing some of our exposure to tariffs. And so we have some models where we assess those different factors. One of the things the retailers tell us is they love us to be more responsive. For those who are around at the start of the year, we did have a very low inventory. We had to air freight product up to the U.S. So we're doing a lot of work on our supply chain to try and strike the right balance between essentially operating efficiency, working capital and then being responsive and nimble for those U.S. retailers. So as I said, we've done a lot of that work. We feel ready now to action those moves when we get to those points in the business. Those decisions will be made based on hitting growth targets, profitability and risk return hurdles. So we'll keep you apprised of any developments in those areas. Just as I'm closing on that, just we do have a key focus on the U.S. where over time, we may look to supplement or extend the Australian capability. But we are very committed to our Australian Origin. It's part of our brand story. And so our important home market, China, Rest of the World, we wouldn't necessarily see that product coming from a U.S. source. So it's really about a solution primarily for the U.S. at this point. And so we've made great progress and the permanency with the FDA gives us more confidence to -- if we need to potentially invest capital up in the U.S. market. So we can -- just sort of as we start to close out now, this is a massive milestone. It's been something that's been imminent for quite a while. It's a little bit like when you go hiking, you reach a peak and then there's another peak that you see that you need to navigate. It's been a little bit like that for some of our investors as well as our team. But we've secured permanency. It's a transformational milestone. We're very proud of that. We're very proud of the team and our partners have helped us achieve that. And really, if you think of us more as a broader proposition, we have this amazing brand that sits in an attractive category. The authorization in the U.S. now that we have, there's definitely a moat around that. So there's higher barriers for other people to achieve what we have achieved. So we've done the hard yards. We've spent the money, and we now have it. We believe that allows us to build more financial momentum in our business. As Jasmin said, our brand resonates with those families in the U.S. So we'll continue to invest in those high-value premium natural families. We have a very efficient model. Jasmin spoke a lot about digital marketing. A lot of our consumers are digital natives, and so it's about being really effective with that flywheel to become known and then to have those people choose us as their partner as they're going on their feeding journey. We have a highly experienced Board and leadership team. We have a very global team now. We have many, many years of infant formula and high growth in particularly the U.S. market and China as another important market for us where we have some great skilled people like Jackie and Steve, our Director, has extensive experience there as well. So we feel like we can navigate a lot of the opportunities, but also some of the uncertainties that are out there in the world that we currently live in. We have a diversified portfolio. The U.S. is, as you can see in the numbers, a large part of our business, but we are diversified. I always say there's a graveyard of Australian businesses that have looked to grow outside of Australia. We have navigated that. Our business in the U.S. is 3x larger than Australia. Our China business is larger than Australia, and we have growth businesses in places like Vietnam. So we're very proud of our global reach. Our Australian Origin resonates with people. And so the final point is we are building a resilient supply chain to service those customers around the world. But for the moment, with a big priority on our U.S. families who trust Bubs to go on their feeding journey. So look, that was what we wanted to cover this morning. Adrian, I might hand back to you. I know we were -- hoping we may receive some questions.

Yes. No, thank you, Joe. And just to remind those that are on the call to ask a question, just put it in your Q&A and we'll kind of work through as many as we possibly can. So Joe, the first one starts with a pat on the back actually. So let me start off with that one. Always good to start that way. Congratulations on securing the FDA approval. This marks a new chapter for Bubs. May I ask what is the estimated time line for an additional FDA variation? Is this a requirement for private labels?

Yes. So we've secured the permanent licenses for the U.S. And the process now is a separate but related process. It's for a variant of those primary licenses that we have. So I'm going to be the last person that's going to make a commitment on a time line given what we know from the past 4 years at Bubs. But suffice to say, it's a different process. It's a process that we've been preparing for. We have a great team that is working on that. We have great advisers, and we've made that application just yesterday. So we knew it was coming, and now we will be working diligently with our colleagues at the U.S. FDA. But it's not possible or appropriate for me to offer any view on time lines. But we will remain very engaged, and we see it as a great commercial opportunity.

Thanks, Joe. Next one is just a really quick one. Have you explored supply out of New Zealand? I think I know what your answer is.

Yes. I mean we absolutely, as a global business, we look at all sources of demand. So we've been looking at different markets. And the world is changing. We've looked at a market like Canada with some of the geopolitics up in North America is potentially more interesting than it was. And then even in a market like the U.K., never say never. Like -- so we are scanning. We are interested in growth, but it's got to be economically rational. It's got to be where there's not huge competitors and where there's not huge sort of geopolitical risks. And then yes, absolutely, on the supply side, we do have friends over in New Zealand. There are a lot of goat farmers in New Zealand. There's some great asset in New Zealand. And so I would say at this point, we have nothing that we have on our immediate radar. But we look at our supply chain with a lens on can we provide quality and service and effective efficiencies to access certain markets. And if you look at a market like China, where there's the SAMR license, there's more SAMR licenses in New Zealand than there is in Australia as an example. Australia has better trade terms with the U.S. We had an FTA in place before the recent tariff regime. So again, I sort of draw that reference that nothing is forever either. But if we saw great commercial opportunities in New Zealand, then the [indiscernible] would be never say never. But at our core, we're very proud Australians. We love our Australian farming system. The FDA have done all the work on our Australian supply chain, and that's our core focus.

Thanks, Joe. Next question. It was mentioned at the top of the call that Bubs is one of the 3 goat formula players in the U.S. market. All players are importers. Can you talk about direct competitors, particularly where their product is imported from and whether they have FDA permit authorization or are working towards that status?

Yes. So we have some competitors who we respect. They do a great job. Their brands stand for things that are a little bit different to us. They don't have the amazing attributes that we have as Australians. But they do a great job. One of them is quite a lot larger than us, and they're out of the U.K. and Europe, and they do exceptionally well in the market. So yes, like we watch what they do as they watch what we do. We don't overfocus on our competitors though either. We run our own game. We're very happy with who we are in the world. Our brand stands for clean label. Our brand stands for the functional benefit primarily at the moment, Gentle Tummies and then this Amazing of Australia. So that's the game we play. It resonates with the U.S. consumers in our target set. We've done a lot of work to really understand who our consumers are. So we've got a very efficient digital marketing model to access those consumers and they're expressing a preference to take our products on. And so yes, but it's a competitive market, and we respect our competitors, absolutely, and we wish everybody well. But yes, we're playing our own game to win.

Thank you, Joe. The next question, I'll just remind the question that this is about the FDA authorization and governance matters are a very different forum, i.e. the AGM. So I kind of will limit the question here for your benefit, Joe. So firstly, do you anticipate the formal FDA approval versus informal approval will change the velocity of growth in the U.S.A.? And secondly, do you anticipate further capital investment is required to fully harness the U.S.A. opportunity? Or will it be accelerated by operational cash flows?

Yes. I mean, I think -- so we have the permanent access now. So that gives us certainty. And I think Jasmin covered a lot of those points. So we now have greater confidence to invest and accelerate our strategies. So as we look at renovating and innovating our products, as we look at activating our brand. But look, we're always responsible with deployment of our capital. We have a plan to run the business from within the cash flows that we generate primarily. But if there's opportunities out there, we're always looking to grow the business. In terms of some of the other things that this FDA permanency grants us, it's the things that I mentioned. It does open up the possibility subject to further FDA approvals to access the contract manufacturing market, as I said, and we are excited about that. But we're also very, very clear that it is another FDA process. And then finally, our supply chain. So there wouldn't have been people that would have supported us to invest in asset in the U.S. without permanency. So we have that now. So that gives us a bit more optionality. But then we've got to look at what that would mean to our operating environment, and I shared some of those variables. So I think we -- as we reach the certain triggers that we would need to see, as we look at our customer metrics around service and responsiveness, as we look at responsible deployment of capital and as we look at our unit economics for profitability, they are the things we look at to make these decisions. And as we have new news, we'll come back to the market and share it. But we don't have anything further that we would be sharing today.

Thanks, Joe. A couple of quick ones. How do you intend to step up sales and marketing now, targeted or broad-based?

I might throw this one to Jasmin because this is her game, particularly up in the U.S. So yes. Maybe, Jasmin, you could talk about the social posts we might do with the NFL game in Melbourne and the fact that the U.S. -- the NFL is a big -- it's a big game in the U.S. It's a big deal. It's something that a lot of consumers are aware of that they're playing down in Australia. So it's a little example of some social posts that we're drawing on that. And it really is these millennials, as Jasmin calls them, they're really -- they move fast. They go between platforms. We weren't doing much on TikTok 12 months ago where we were Jasmin, but we chase them to where they go, and we want to be relevant and then we want them to convert and then have loyalty to our brand. But this is Jasmin's passion. So over to you, Jasmin.

Yes. It's actually both, right? We are going focused nationally. So what that means is, I call it, you go into the metropoles. This is where our consumers are. So while it will be a national campaign, it's really focused on maybe 15 big cities where we know that this is where the majority of those lifestyle consumers live. And that is how we will approach it and where we feel we get the best out of our buck at the end of the day. Yes, that would be the short answer to this.

Okay. Thanks, Jasmin. Joe, the next question, a quick one. And actually might be one that you might throw to Chris because we haven't heard from Chris yet. Comment on the U.S. path to profitability, please.