Bubs launches $63m capital raising to triple production and expand deeper into the US

A chronic infant formula shortage in America has fast-tracked Bubs expansion by 18 months and steered it to its first year of profitability.

Bubs will triple production of its infant formula this financial year after it launched a capital raising worth $63m to fund its US expansion. Picture: Kevin Dietsch/Getty Images/AFP

Bubs will triple production of its infant formula this financial year after it launched a capital raising worth $63m – or about 20 per cent of its issued capital — to fund its US expansion and next wave of growth.

Bubs expects to deliver its first profit this year, forecasting more than $2.4m in underlying earnings before interest, tax, depreciation and amortisation as its US sales gather more traction than initially expected.

The company — which entered a trading halt on Tuesday — initially planned a targeted launch in the US, given its marketing budget could not compete against the likes of Abbott, Mead Johnson and Nestle, which have dominated the American infant nutrition market for decades.

But a shutdown of Abbott’s Michigan factory, which supplied about 20 per cent of the US infant formula market, on contamination concerns and then flooding, created an unexpected opportunity for Bubs and other foreign infant formula manufacturers.

Bubs executive chairman Dennis Lin after the US Food and Drug Administration granted the company discretionary approval to import its infant formula to ease a chronic shortage, it had achieved invaluable brand awareness.

“When I went through immigration in the US and the immigration officer asked me what I was there for, I mentioned Bubs. A year ago when I was in the US, they didn’t know how to pronounce Bubs,” Mr Lin said.

“But in LAX, the immigration officer … said ‘look, I love Bub’s Australia. I love what you guys do and the people of America thank you’. No amount of advertising can you get you that level of brand awareness.”

Bubs co-founder and chief executive Kristy Carr said the FDA discretionary approval had fast-tracked its US expansion by about 18 months.

“This is now expected to be a significant revenue and profit driver for the business. The company is working in collaboration with the US government to facilitate a regulatory pathway to continue to supply safe infant formula products to American families for the long-term,” Ms Carr said.

Bubs this week pre-sold its fourth planeload of infant formula – about $3m worth of product – that has arrived in the US. It has also gained approval to be distributed on the US government’s Special Supplement Nutrition Program for Women, Infants and Children, which supplies about half the US market — and has received a concession on the 17 per cent tariff on foreign infant formula.

In total, it expects this year’s revenue to exceed $100m.

The capital raising will be priced at 52c a share. It will comprise an institutional placement of $32.4m worth of new shares and one for 10.42 pro-rata accelerated non-renounceable entitlement offer to raise $30.6m.

The raising will fund a second high-speed canning line at its infant formula factory in Melbourne, as well as US operating expenses and other costs.

Mr Lin said once installed — which could take up to 12 months — Bubs will go from producing 10 million to 30 million tins of formula a year.

The turnaround comes after Bubs, like other infant formula producers with deep exposure to China, battled a collapse of the daigou or reseller market at the start of the pandemic, following international border closures.

As international travel restrictions ease further — with Covid-19 vaccine declarations no longer a requirement on arrival – the traditional daigou market, i.e. students and tourists buying products in Australia and sending them back to China, is expected to steadily return.

This will create more demand for Bubs products domestically. If demand surges more quickly than expected before Bubs’ installs its new canning line, Mr Lin said as a bridging measure the company could outsource some manufacturing to other Australian infant formula makers.

“If we look around the industry there is actually spare capacity in other canning facilities similar to ours. We will always be Australian made until we have a particular scale (in an overseas market) then we may look at doing something in-country, so it’s good that we have some existing spare capacity that we can tap into.”

Rival infant nutrition company Bellamy’s, which China’s Mengniu Dairy took over for $1.5bn on 2019, has also gained temporary FDA approval to import infant formula to the US, A2 Milk — which has an established fresh milk business in the US — is yet to get the green light.