Bubs’ strong Australia, US growth countered by pull back in China

Last year’s massive order from the US and personal endorsement from President Biden has helped drive sales for Bubs but China has remained a tough market.

Bubs co-founder and chief executive Kristy Carr believes China will return to sales growth in the second half. Picture: Jane Dempster

Infant milk formula maker Bubs, which in 2022 snared a blockbuster deal to resupply the depleted US market that came with a personal endorsement from President Biden, has posted strong sales growth in Australia and US offset by pullbacks in China due to its now abandoned Covid-zero policy.

The disappointing China results - with the nation once considered the key growth engine for Bubs - saw shares in Bubs slide almost 10 per cent in early trade to 32c.

In a trading update to the market on Tuesday the infant nutrition and dairy specialist said first-half group revenue for fiscal 2023 was down 1 per cent to $37.9m with first-half sales for its branded milk products (which excludes bulk powder sales) up 16 per cent to $36.5m.

Australia and the US proved the company’s key drivers of sales growth for the December half.

Australian second quarter revenue was up 28 per cent with the first half up 23 per cent. In the period its Bubs infant formula sales grew at nearly seven times the market growth rate. International second quarter gross revenue was up 26 per cent and first-half revenue up 93 per cent as the Australian-based Bubs continued to make inroads into the $US5.6bn ($A7.85bn) US infant formula market.

In mid 2022 Bubs grabbed global attention when it was invited to supply the highly depleted US market by Washington that was accompanied by a personal endorsement from US President Joe Biden.

As part of that deal the Biden administration asked Bubs to provide at least 1.25m tins in the coming weeks and months, equivalent to at least 27.5m bottles. Bubs became the first international infant milk supplier to be signed up to the US government’s frantic efforts to replenish its dangerously low supplies of infant milk formula, with many parents in the US driving hours to secure a single tin as stocks run low.

A series of problems plaguing the sector in the US such as supply chain issues rising from Covid-19 and the recent closure of a major supplier’s manufacturing site in the US due to a bacterial outbreak had forced the US government to reach out to overseas producers such as the ASX-listed Bubs.

On Tuesday Bubs said it was on track to meet regulatory milestones for permanent access to the US market and was working closely with key US regulatory agency the FDA and other stakeholders to help diversify America’s infant formula supply chain and secure ongoing availability in the American market.

As a result, Bubs has rapidly scaled its retail footprint during the first half, the company said, which now stands at over 6,500 stores across 42 states, including the four largest retailers of infant formula; Walmart, Target, Kroger and AlbertsonsSafeway, as well as health food chains like Whole Foods, baby chains, drug stores, and e-commerce marketplaces like Amazon.

However, this upbeat growth trajectory was countered by slowing sales in China caused by the impact of Covid-19 and government policies to rein in the spread of the virus.

Bubs said gross revenue in China was down 66 per cent for the second quarter as prolonged Covid lockdowns caused significant disruption. However the company said following the change of China’s Covid policy and border reopening it expected the growth rate in China to accelerate in the second half.

“As foreshadowed at the company’s annual general meeting in November, group gross revenues for the first two quarters are largely consistent with the first half of last year, arising from strong year-on-year growth in Australia and the United States being offset by the impacts of China’s now abandoned Covid-zero policy on channel dynamics and consumer purchasing activity,” said Bubs founder and chief executive Kristy Carr.

“Bubs’ domestic growth momentum continued with quarterly gross revenue up 28 per cent compared to the same period last year. Bubs has consolidated its leadership position in the goat infant formula segment, now representing 58 per cent of the total goat formula market in Australia.”

At the end of the December half Bubs held $51.4m in cash reserves.