Blackmores stumbles on China costs and fish oil shortages

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Blackmores CEO Richard Henfrey is wrestling with supply constraints for some ingredients and a more competitive market in China.

Blackmores is grappling with shortages of ingredients such as whey protein and fish oil, and competition in China is becoming more fierce but chief executive Richard Henfrey says the long-term growth projections for the vitamins maker are robust.

Blackmores shares tumbled more than 15 per cent in early trading on Thursday to $135 as the company said it was working with ingredients suppliers to shorten lead times in its supply chain and that profits from its China business had grown by 4 per cent as it bumped up investment and spent more on expanding its in-country presence in China.

Mr Henfrey said Blackmores still expects solid growth in the second half of 2017-18, after generating a 20 per cent per cent rise in net profit after tax to $34.2 million.

He said on Thursday that Blackmores was a more consistent business now after going through extreme volatility in the past couple of years and it would be some time before it was able to repeat the stellar full-year profit of $100 million notched in 2015-16. “That was the gift year,” he said, when booming demand from China fuelled extraordinary profit growth.

Cost-cutting inside the business and a reduction in discounts to customers enabled Blackmores to generate a 20 per cent rise in bottomline profits, with revenues up 9.3 per cent to $287.4 million. The company lifted its first half dividend by 15 per cent to $1.50 per share, to be paid on March 22.

But the soft Australian retail market is expected to crimp growth in the second half, while Blackmores is also wrestling with some supply constraints. “We’re working with our suppliers to shorten lead times,” Mr Henfrey said. Whey protein and fish oil were two specific areas where there had been constraints.

The China market is becoming a tougher market in which to compete, as different players step up their efforts to gain a bigger share of the market as Chinese consumers flock to “clean and green” products from countries like Australia.

“It’s becoming a more competitive space,” Mr Henfrey said. China sales were up 27 per cent. But Mr Henfrey said profits from China grew 4 per cent as more investment was made in bolstering the in-country presence. Blackmores was also hit by an increase in doubtful debts provisions in China of $2.8 million.

Blackmores has a new distribution centre at Bungarribee in western Sydney which went into full overdrive in December after a staged ramp-up. “We’ve finished building out the technology in there,” he said. But it was at the start of the supply chain where headaches emerged. “It’s at the other end of the chain,” he said.

Mr Henfrey, who took over from long-serving chief executive Christine Holgate in August 2017, said sales revenue in Australian and New Zealand slipped marginally to $121 million as more sales which had previously been emanating in Australia from entrepreneurs buying up in local retail stores and then selling them online in China, shifted across to direct sales online in China by Blackmores itself. But EBIT from Australia and New Zealand was up 19 per cent to $26 million.

Blackmores shares had almost doubled in the past six months from $87 in late August 2017 to $160 on Wednesday before the fall on Thursday.

This was on renewed optimism returned about Mr Henfrey’s strategy of ensuring a more consistent and reliable Blackmores with a focus on lifting investment returns with tighter management.

Lofty gains

Blackmores shares reached the lofty heights of $220 in early January 2016 on the strength of enormous appetite from Chinese buyers for “clean and green” vitamins brands.

It was largely driven by the Chinese entrepreneurs buying up large volumes of vitamins from Australian supermarkets and big box outlets such as Chemist Warehouse, and then selling them online on e-commerce sites in China.

But then regulatory uncertainty resulted in a pull-back. Chinese tourists and exporters changed their buying patterns and the Australian market became much more competitive, with high levels of stock left in warehouses, which blunted the speed of replacement orders.

Rival Swisse was acquired in two tranches for a total of $1.7 billion in 2015 and 2016 by a company now called Health & Happiness, which changed its name from Biostime International.


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