should be good opportunity for AHF and his JV partner
WHY AHF has more than 1 potential JV partner
"It is also moving to insist only dairy companies that produce their own milk, process it, blend it into an infant formula mix and put it in tins all in one location, none of which Bellamy’s does, will be granted import licences from 2018."
High-flying Australian infant formula company Bellamy’s appears to have fallen foul of Chinese authorities as changing regulations make it unlikely it will be able to continue to sell its popular organic infant formula and toddler milk powders into China beyond next year.
Chinese regulators are cracking down on the hundreds of foreign companies that have taken advantage of the seemingly insatiable demand by Chinese mums for imported infant formula, since its 2008 melamine substitution scandal destroyed trust in local products.
It is also moving to insist only dairy companies that produce their own milk, process it, blend it into an infant formula mix and put it in tins all in one location, none of which Bellamy’s does, will be granted import licences from 2018.
Bellamy’s, a small Tasmanian organic food business that rose to become a $1.5 billion China export success story after its $1 shares soared to be worth $16 each, is in a trading halt on the stockmarket after an unexpected profit downgrade early this month halved its value.
Bellamy’s chairman Rob Woolley blamed rival companies fearful of losing their import licences flooding Chinese markets with infant formula at deeply discounted prices, crashing its own hopes of selling 10 million tins of infant formula in 2016-17 for about $35 each. Just how bad the impact on Bellamy’s bottom line has been, and if it will affect the future of Mr Woolley and Bellamy’s chief executive, Laura McBain, will become clearer when the company ends its 10-day trading suspension tomorrow and updates investors on its financial position.
But some of Bellamy’s woes also appear to be of its own making, at least in the eyes of Chinese regulators.
Despite its well-known Australian-made label and high-profile branding, which has helped it capture 3 per cent of China’s massive infant formula market, none of its organic milk is produced locally.
Bellamy’s does not own a single cow or organic dairy farm in Australia, nor does it have any local dairy farmers supplying it with organic milk.
Its milk powder, which makes up about 55 per cent of the ingredient content of infant and toddler milk drink powders, comes from organic farmers in Europe, mainly from Austria.
Neither does Bellamy’s mix its own infant formula blends, nor put the powder into cans, or even own its own certification for the critical Chinese import licences.
Instead, it contracts out all of these processes to two other Australian dairy processing companies, Bega-Tatura Milk and Fonterra, while also piggybacking on little-known Melbourne tinning factory, Blend and Pack, for some of its import accreditation.
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The future of Bellamy’s chairman Rob Woolley and, potentially, chief executive Laura McBain looks increasingly in doubt as the trading suspension of the Tasmanian organic infant formula company prepares to be lifted tomorrow.
Plummeting Chinese sales and expensive locked-in take-or-pay supply deals with the two local dairy processors supplying its infant formula and toddler powder milk mixes have thrown the finances of the former $1.5 billion stockmarket darling into chaos. After 10 days of a voluntary trading halt, the wipeout of $600 million of its market value and two pending class actions from disgruntled investors, the market is anxiously awaiting an update on how far the finances of Bellamy’s have crashed.
Rumours suggest the recent plunge in its infant formula sales, discounting by rivals that has slashed wholesale returns for each 900gm tin from an average $30 to below $25, and the need to continue to buy bulk infant formula under expensive contracts with Bega Cheese and Fonterra despite sagging demand, may have so destroyed the company’s cashflow that it could be perilously close to trading insolvent.
Bellamy’s had hoped to sell up to 10 million cans of infant formula in 2016-17 — more than half to China — based on its previous year’s phenomenal sales growth rate of 95 per cent, and rocketing China sales of 331 per cent.
But on December 1, Mr Woolley announced in a trading update that its likely full-year revenues could come in below 2015-16’s $244.6m, well below market expectations of $368m.
The warning of likely sales of only 6-7 million tins at lower margins — which Bellamy’s blamed on regulatory changes, forthcoming restrictions on the number of baby nutritional products allowed to be sold in China, and price discounting by rivals — followed by the 10-day trading halt, has dashed investor confidence in the company.
It has also deepened fears about just how bad the news from the company tomorrow will be.
Dean Fergie, an investment manager with Cyan Investments, dumped about $500,000 of Bellamy’s stock as the share price started to free fall early this month.
He fears the company’s two years of stratospheric growth may have led to a rose-tinted outlook by Bellamy’s executives and board about how long the China success story would last, and a fixation with locking in enough supplies of organic milk powder and infant formula mixes to meet expected stellar growth.
“There seems to be a serious disconnect between the amount of [raw materials] Bellamy’s has contracted to buy and what it is actually now selling,” says Mr Fergie.
“They now have a [sales] volume problem, a pricing problem and a margin problem. I wouldn’t have thought that would have tipped them into insolvency, but it could be that their cash situation is dire and they are having problems making their payments [to Fonterra and Bega Cheese] because they have locked in such financially demanding take-or-pay supply contracts.
“Just how bad and how quickly their finances have deteriorated won’t be apparent until they come back on [to the ASX], but investors are nervous and the long delay does suggest there is a lot of soul searching going on.”
There are also questions being asked about Bellamy’s obligations as a public company to continuous disclosure in a timely manner of any changes material to its share price.
They centre on why Bellamy’s did not inform the ASX about its sales slump around October 25, when Bega executive chairman Barry Irvin went public at his company’s annual meeting about the falling Chinese demand for contract-made infant formula being experienced by another of its marketing partners, Blackmores.
Bega is Bellamy’s long-term supplier of infant formula blend, selling into the same markets as Blackmores. Bega’s own shares crashed 20 per cent as Irvin said conditions had changed dramatically since the Blackmores’ joint venture was announced a year earlier, at a time when prices for Australian-made infant formula were sky high, there was not enough product to meet demand and Chinese residents in Australia were stripping the shelves of Coles, Woolworths and local pharmacists of every tin of local infant formula to send to China.
“The combination of a regulation change in China, a supply response to the demand signals and the evolution of (new) supply channels to market now sees significant discounting in the marketplace and signs of short-term oversupply,” Mr Irvin warned then.
“This change in market circumstances has seen our expected sales not materialise at levels that were initially forecast and some strong headwinds for the partnership, particularly in the Australian market.
“From my perspective, the nutritionals’ joint venture situation was something we needed to recognise and announce because we thought it was material; people can make their own assessment.”
Mr Fergie fears hubris by Bellamy’s management may have played a part in its downfall.
“I’ve seen it so many times with businesses that are growing quickly, have a product with tailwinds, and it all seems really easy. They start to think the good times will go on for ever and nothing can go wrong and they lock in overly rosy supply contracts,” Mr Fergie said.
He expects close scrutiny of dates in the company’s sales figures, and a possible bloodbath in the share price.
“It’s going to be all about points in time; for example, nothing was said about being under pressure at the AGM in early October or that [sales] had got significantly worse — that’s where the market will have an issue with continuous disclosure obligations of the company. “It’s nervous times for shareholders. If it’s as bad as everyone is fearing, you would have to expect some big heads will have to be put on stakes, and that means Rob [Woolley] and Laura [McBain].”
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