More pressure on Blackmores (BKL) and Bega Cheese (BGA) yesterday, continuing the pain triggered by Tuesday’s revelation by Bega of problems in the new joint venture with the vitamins group and weak trading forecast for the full financial year.
Bega’s shares fell by over 20% on Tuesday and Wednesday in the wake of the news of the provision of $5 to $7 million against Bega’s share of the JV.
And while they fell another 1.9% to $5.14, touching a year low of $5.035 yesterday, it was Blackmores that took centre stage in the bad news department.
Blackmores shares have hit new lows yesterday after the annual meeting heard a weak profit update, and fell under the $100-level for the first time since August 2015.
Investors saw through the positive spin on poor September quarter earnings, and focused on the fact that full year sales will fall short of last year’s record.
While confirming weak September quarter earnings, Blackmores said it enjoyed "improved sales and profitability momentum" at the end of the quarter. Even so, full year sales will fall short of last year’s record, it warned ahead of the meeting in a statement to the ASX.
The shares by well over 7% to a day’s low of $97.91, before edging higher and regaining the $100 mark where they ended, up 1.3% at $105.74 as the believers crowded back to push the shares higher amid the wider sell off.
After a gangbuster year in 2015-16 as group net profit more than doubled to $100 million on revenue up 52% at $717 million, the new financial year has started more slowly.
The September quarter saw revenues down 8.1% at $149 million as the net profit slump a nasty 44.6% to just $12 million.
In August, the group warned that first quarter earnings would be down, and now it has confirmed that full year revenues will fall short of last year, saying only that it "remains confident in the group’s strategic focus and long-term growth prospects".
"We entered the second quarter with an improving sales and profit trajectory, there are positive sales trends that indicate overstocking is easing, consumer demand remains robust and we have been able to capture significant new sales in China," chief executive Christine Holgate said.
“Importantly, consumer demand remains high, though our profit result for the first quarter was impacted by softer sales in Australia primarily as a result of changes in the export market which previously was largely serviced through Australian retailers.”
“The lower Australian sales impacted our ability to recover the cost of our operational infrastructure which is reflected in our lower earnings before interest and tax,” she said. “It is important we continue to focus on adapting our business and continuing to invest for longer-term growth.”
“Our China business, comprising in-country sales and sales from our new export division to service the Chinese market, delivered $31 million, up 220% compared to the prior corresponding period,” said Christine Holgate. “The rapid growth of sales through these channels is encouraging as it validates continuing demand for our products in China.”
Blackmores said its Australia sales of $68 million were down 40% compared to the prior corresponding period as Chinese exporters transitioned to new channels and Australian retailers worked through excess stock. We estimate the impact of reducing excess stock to be $17 million with a further $28 million resulting from changes to the way exporters buy through Australian retailers.
Around 20% of Australian sales in the first quarter are estimated to be to consumers in China,” Ms Holgate said. “Pleasingly, underlying sales to Australian consumers for the first quarter were growing ahead of the category and Blackmores remains the clear market leader.”
“We have had nearly three years of rapid growth over which time our expenses have increased to meet demand. We are in the process of realigning our cost structure to ensure it is appropriate to the size of our business, that it enables us to best serve our customers and that it still allows for investment in new platforms for growth.”
She said that in-country Asia sales were up 37%, contributing $35 million. Direct sales to Asia were $52 million for the quarter including almost $17 million from Blackmores’ new Chinese export division.
And on the Bega joint venture, Ms Holgate said "Sales of nutritional foods in partnership with Bega have been sluggish in the first quarter as the Australian market adapts to overstocking. The team is focused on launching into the China retail market later in the second quarter following the recent approval of labels that meet China’s strict regulations.”
But unlike Bega, no sign of a provision against the JV. So either Bega has been to hasty to strike a provision against a possible fall in value in the JV, or Blackmores has another view that is more confident. At the moment both can be right – but the interim results next February will hopefully see clarification.
