"All about goat": Bubs director lays out plan to cut cost and clutter

Bubs Australia's (ASX: BUB) independent director who led a strategic review of the embattled milk formula company has vowed to cut cost and the clutter of too many products for a brand that has "tried to be all things to all people".

Non-executive director Reg Weine outlined a five-point strategic plan in an investor call today, highlighting Bubs' DNA is in goat's milk-based infant and adult nutrition products, and there would be renewed focus in this category.

"We have a huge global opportunity in front of us in all things goat. The total addressable m arket is estimated to be $4.5 billion, and we can win in this space," Weine said.

"We need to focus in on our hero goat brands, Bubs and Caprilac, and maintain our premium positioning and continue to innovate, and ensure our brand positioning and formulations remain relevant.

"A2 Supreme hasn’t worked in China, it's not performing domestically, and the US consumer doesn't understand A2 protein and why it’s different or important. We need to be very clear on what role each brand plays in our portfolio, the category and in the eyes of consumers," he said, adding the company had too many stock keeping units (SKUs) that weren't adding to the bottom line.

He noted a commitment to delivering a 35 per cent increase in net sales to $80 million in FY24 with the US as the company's "growth engine" - a market where he expects sales to more than double in the current financial year.

"The best news I can share today is that the USA is going better than expected," he said.

"As you know, Bubs were granted a unique opportunity under the US Enforcement Discretion and Project Fly Formula, and the company has made the most of this opportunity with broad distribution across the US.

"What's really critical now is that we deliver for our retail partners across the US and achieve a rate of sale that will ensure our ongoing ranging in these major retailers. We have increased our trade spend to support our US customers and to drive velocity or sell through."

He clarified that the company would invest 15 per cent of net sales in FY24, which is more than leading fast-moving consumer goods (FMCG) brands globally, and the percentage would likely be higher in the US at 18 per cent.

"The single biggest initiative that will create sustainable shareholder value for Bubs is the FDA (US Food and Drug Administration) granting us permanent access into the US," he said, clarifying expectations were that this would be achieved by the end of 2025.

"To illustrate just how big an opportunity the FDA approval and permanent access in the USA is, we have been inundated with inquiries from global brand owners and US retailers wanting to co-pack or partner with them on private label as we move along the FDA pathway," Weine explained.

Apart from making the USA the engine room of growth and portfolio optimisation, another key point is better utilisation of Bubs' manufacturing facility in Deloraine, Victoria, which he claimed was operating at 31 per cent capacity.

"Bubs paid good money ($35 million) for what is a world-class, state-of-the-art manufacturing facility, Deloraine, here in Victoria. We intend to increase the volume through this facility and sweat this asset," Weine said.

"Improvements in working capital are one of the quickest ways we can restore value and improve the returns for Bubs shareholders. You should expect us to be more disciplined have a tighter focus on costs, carry less inventory relative to our sales volume, and deliver improved stock turns from here on in."

He said the company had already reduced its annual operating expense run rate by circa $10 million, and he highlighted plans to significantly reduce cash burn.

"We are confident we can more than halve our monthly cash burn rate from $5 million to approximately $2 million, but please don't expect to see that until Q2 of FY24, as we will have significant legal bills and costs associated with the EGM which is very disappointing," he said.

This is in reference to the extraordinary general meeting (EGM) due to take place on 27 July, where investors will vote on whether to keep new leadership or usher in a new board and executives selected by a group of dissident shareholders comprising the founder Kristy Carr, former chair Dennis Lin, and a Chinese partner, among others.

That Chinese distribution partner, Alpha Group, last week alleged that the previous Bubs management team had made promises that its affiliated entities Willis Trading and Alice Trading could unconditionally return any stock that they could not sell without any liability.

Alpha also claimed these two entities would be seeking a $7.5 million refund on stock that has been paid for and delivered since August last year, and that they would be seeking $12.9 million “due to Bubs’ failure” to provide credit for any near expiry stock.

This bombshell revelation is in contrast to the $5.65 million that Bubs' leadership believes the company is owed by Willis and Alice in accordance with their sales and purchase agreements.

Based on current sales rates in China, Bubs estimates there is five years worth of inventory of the Bubs A2 Supreme product in China that still hasn't been sold.

"Clearly our China's strategy has failed, and we have not had the right go-to-market strategy, the right partners or the right focus. And we need to reset the China's strategy urgently," Weine said, emphasising another key point of the five-point plan.

"Jackie’s (new China manager Jackie Lin) initial observations on our Chinese business were stark. Sell through was weak, only 10 per cent of the distribution points promised by our exclusive reseller have been activated, pricing architecture was wrong, and our daigou business was overly reliant on rebates and discounts."

He emphasised the company's China reset has commenced with a multi-channel go-to-market strategy with new leadership, new trade partners and focused where Bubs has a clear competitive advantage – goat infant milk formula (IMF) and goat adult milk powder.