Blackmores shares plunge as coronavirus taints outlook

Vitamin supplement company Blackmores (ASX: BKL) has come out of a trading halt to issue a dramatic cut to its profit outlook due to coronavirus disruptions and the costs of manufacturing changes.

The Sydney-based group expects a net profit after tax (NPAT) of between $17-21 million for FY20, compared to a $53 million result the previous year.

As recently as Blackmores' October AGM it was expecting a year-on-year improvement in the second half, but now it could even be in the red in the months ahead given the NPAT of $18.3 million recorded in the first half.

BKL shares were down by almost 17 per cent at $74.435 each at 10:45am AEDT.

"We understand and acknowledge that shareholders will be bitterly disappointed with the financial performance of the business," says Blackmores chairman Brent Wallace.

"We acknowledge that these results are completely unsatisfactory and we have much work to do to restore confidence in Blackmores."

Wallace notes Blackmores has a mostly new leadership team led by CEO Alastair Symington, who joined the business in late 2019.

"This team has quickly made inroads to identify the challenges facing the business and to progress a plan to return the company to an acceptable level of performance," says Wallace.

"There is a lot of work to do to restore the trust of our shareholders and we are resolute in our commitment to doing what it takes to achieve this," adds Symington.

"Our new management team is progressing plans to turn around the business, which involves getting better control and visibility of our fixed costs, improving gross margins and significantly improving quality of our earnings in a more sustainable way."

Blackmores is expecting at least two to three months of sales and supply challenges in China due to the coronavirus, which the World Health Organisation (WHO) has now changed the name of to Covid-19 to avoid confusion as previous outbreaks such as SARS and MERS were also coronaviruses.

"Our thoughts are with the vast and increasing number of people impacted by the outbreak of the Novel Coronavirus. Our primary focus continues to be on the health of our employees and those in the most affected areas," says Symington.

Blackmores explains that while the outbreak has led to increased demand for immunity products in Australia and Asia, the impact of sales has been countered by supply chain disruptions resulting from the contagion.

In China, local guidance for businesses and schools for people to stay at home for at least the remainder of February has led to a series of interruptions. Channels which rely on free flow of
passengers (duty free, small business traders and tourists) have been impacted.

Some e-commerce partners have cancelled or modified February promotions with a slowdown of China inbound and internal freight, which has made it difficult to serve the local market demand with much needed product.

Manufacturing issues

Changes to the company's production processes have contributed significantly to the profit downgrade as well.

After taking control of the Braeside production facility in late October, it became apparent that capacity underutilisation, increased raw material costs and changes to the manufactured product mix were having a negative effect which will likely mean a $9.5 million hit the second half.

"We are confident that the Braeside manufacturing plant will be a key competitive advantage for the Blackmores Group over time, with specific intellectual property and a highly skilled workforce as well as several manufacturing licences and product registrations linked to the site," says Symington.

"This capability also ensures that we remain proudly Australian when manufacturing complementary medicines - an important quality that underpins our brand.

Blackmores forecasts it will take 24 months to address this key change to operations, including a combination of cost savings initiatives and higher volumes.

"We are shifting our product development focus onto fewer, bigger and more premium offerings for consumers, which will lead to longer run sizes, positive mix and contribute to greater manufacturing efficiencies," adds Symington.

Blackmores is also overhauling its labels to ensure full compliance with new rules from Australia's Therapeutic Goods Administration (TGA) around product claims, with a program of work that is set to have a $7 million impact on earnings before interest and tax (EBIT).

The group has used these changes as an opportunity to upgrade label designs for the Blackmores brand in all markets.

"This is an ambitious but necessary piece of work. The outcome will not only meet new regulatory requirements but importantly will make it easier for consumers to better navigate our range, with clearer communication on pack and improved presence on-shelf," says Symington.

"While our market research shows refreshed label design will contribute to volume growth in FY21 and beyond, there are costs and revenue phasing effects which have a one-time impact on EBIT in the second-half.

"We have revised our forecast of costs related to this transition in the face of disruptions linked to the Coronavirus outbreak."

On a more positive note, the business expects a pre-tax gain of approximately $3 million due to the pending sale of a small parcel of land which is non-core to operations.

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