Blackmores shares slump to four-year low as CFO says it “fell short” on China

Blackmores’ CFO has sheeted its profit fall back to the company’s failure to execute its China strategy.

Blackmores chief financial officer Aaron Canning has sheeted the company’s profit fall home to its failure to execute on its China strategy.

Blackmores chief financial officer Aaron Canning says the company’s fall in profit is disappointing, blaming a failure to execute on its China strategy.

The Australian-listed vitamin maker (BKL) reported today that its full-year profit fell 23.6 per cent to $53.5 million, driven by a drop in sales to China.

Shares in the company are down 11.5 per cent at $73.68 following the release of the results.

Mr Canning, who reported the results today following former CEO Richard Henfrey’s shock departure in March, said sales in the China segment were down 15 per cent as regulatory changes meant Chinese consumers shifted from Australian retailers to local sellers.

He said the changes to Chinese e-commerce laws, which came into effect from January 1, saw Blackmores’ export channel via daigous shrink by about 40 per cent.

The Blackmores’ executive said that in 2020 the company had to execute on its China plan. He added that he was asked in the investor briefing today if the strategy was right.

“The strategy is right but we have fallen short on execution,” he said.

“We know what we need to do and we need to execute on that plan with greater pace and scale in 2020.

“We have a new chief executive coming on-board and he needs to be inducted and get his feet under the desk and I’m sure he’ll have thoughts and ideas as well.”

The company’s new chief executive, Alastair Symington — formerly of Nestle, Gillette and Procter & Gamble — will take on the role on October 1.

Mr Canning said the company’s plan was well understood and that both the board and management were aligned to grow the business.

“We are disappointed this year in the result,” he said.

“This is not a reflection of the performance this company can and should deliver and we are committed to doing a better job of that and executing better in 2020.”

Mr Canning added that the opportunity in China had not disappeared, it was just that it was no longer “really easy” like it had been when the daigou opportunity took off.

“It is now down to fundamentals of building your brand, building infrastructure, building capability and that is what is going to ensure this is a sustainable business,” he said.

The Blackmores CFO said the company had not been impacted by the ongoing US-China trade tensions but he said there could be unintended risks to Australian businesses if it continued.

“The unintended consequence is what happens between Sino-US relations and does Australia get caught up in that,” he said.

“We have seen a little bit of it in the past — not us — when Australia has got caught up where shipments into a port get held up for strange reasons. That has not yet been witnessed but that is a risk.”

The annual results showed that Blackmores’ in-country sales in China grew 22 per cent.

Mr Canning said while that was “OK”, the company was disappointed it had not been able to grow stronger than that to offset the channel disruptions that occurred in the export channel.

Blackmores outlined in its results that its “other Asia” business was trending up, which includes Vietnam, Korea and Indonesia. Sales to Indonesia were up 90 per cent, which fuelled that segment to turn profitable for the first time.

Mr Canning said India was on the horizon and he was hopeful Blackmores would enter that market next year, adding that it would be a “very significant” segment for the company.

He said the “other Asia” category was a risk mitigation play given that further regulatory changes were possible in China.

“As the channels in China evolves and matures there will be further regulatory evolution … you can imagine there will be disruption in the future,” Mr Canning said.

“But China represents the single largest offshore market and for us it is a $US50 billion category and growing at double digits, so we have to be there and we are committed to being there and investing there.

“But the journey is not without risk and we have to manage that and having another Asian businesses, including India, helps balance that.”

Mr Canning also outlined that the impact of the Chinese regulatory changes was greater than anticipated as when the new rules were announced it was uncertain how significant it would be.

“From April 1 the checking on parcels coming into the country was ramped up, so it had the consequence of putting further pressure on those that weren’t abiding by those regulations, so you saw that bite in the fourth quarter,” he said.

The CFO said that looking to the first six months of the next financial year, the pain from the China regulatory changes would still be visible as the prior corresponding period did not suffer from that impact.

But he said the second half of fiscal 2020 should benefit from operational efficiencies and he forecast an improved outlook for the second half.

The company cut its final dividend to 70c from $1.55 last year, a drop of 55 per cent.