Nervousness about the Chinese infant formula market has prompted financially stretched dairy co-operative Murray Goulburn (MG) to assure farmers and shareholders 90 per cent of its nutritional sales are destined for markets outside China.
The reference to the Chinese market came as the big co-op confirmed it had scrapped talks with global nutritional formula company Mead Johnson Nutrition (MJN) about an alliance for the supply of nutritional products.
Those discussions began in March and involved supply arrangements to China.
They also provided the foundations for a planned upgrade at MG’s Koroit factory in northern Victoria, now unlikely to go ahead.
On Friday star Tasmanian infant formula player Bellamy’s Australia blamed Chinese regulatory changes for a stock build up in China which had contributed to a 40pc revenue slide.
The news sent the organic dairy formula business’ share price sliding.
It followed Bega Cheese’s share backlash in October after it also reported its new infant formula venture with Blackmores was not as revenue-strong in China as planned.
Bellamy’s said the regulatory changes were affecting premium formula players as the government moved to limit the number of baby formula brands sold.
MG said it was still committed to a nutritionals strategy and was continuing to explore new ways to work together with Mead Johnson.
However, interim chief executive officer, David Mallinson, said the co-op was reviewing its nutritional investment strategy to ensure MG was maximising value for its suppliers and owners, while exercising discipline with MG’s capital.
“This is consistent with our announced approach to our beverages investment,” he said.
Power and effluent infrastructure costs totalling about $50m meant the Koroit plant expansion could not be funded by MG and was now unlikely to go ahead without financial assistance from both state and federal governments, Mr Mallinson said.
However, a nutritional supply agreement with Indonesia’s Kalbe Nutritionals also negotiated early this year, remains in place.
“Approximately 90pc of MG’s existing nutritional sales are destined for markets outside of China,” Mr Mallinson said.
He said US-based MJN, one of the world’s leading baby formula suppliers, still viewed MG as a valued business partner and the co-op continued to have “an excellent relationship with them”.
Bega recently told its shareholders it planned to provision up to $7m for inventory, representing the company’s share of the Bemore partnership which was not getting the sales it expected in China.
Bellamy's Australia chairman, Rob Woolley said chief executive Laura McBain's job was safe, despite that company’s share price plunge.
“I think Laura is one of the most outstanding executives in the country,” he said.
“We are an incredibly strong business.
“We are in the game for the long haul.”
Tasmanian-based Bellamy’s, which produces organic baby foods and formula, said unaudited revenue was up 24pc to $93m between July 1 and November 20.
However, it said the stock build up in China meant earnings margins will contract to below 20pc in the first half of fiscal 2017.
It is now also tipping revenue to be about $240m for the full year, roughly 40pc below estimates.
The stock tumbled 43.5pc to $6.85 on Friday, after earlier touching a low of $6.80.
Bellamy's shares hit a high of $16.50 earlier this this year.
One fund manager expressed concern about the company's visibility, given one month ago Bellamy's told investors that there was no stock issue.
“Now they have issued a 40pc profit warning."
Mr Woolley said Bellamy's had to wait to see sales from Singles Day, which is the biggest online shopping event in the world.
"This was a hard call," he said.
"We didn't know the extent of it until late last week.
“I don't like this blip, but this is a long-term play. We are absolutely behind our team."
The fund manager added he was surprised China's regulatory changes were affecting premium formula players such as Bellamy's and rival A2 Milk Company.
China's regulatory changes aim to reduce the number of baby formula brands sold in the $US20 billion market.
Bellamy's exports its certified organic food to customers in China, Hong Kong, Taiwan, Singapore, Malaysia, Vietnam, and New Zealand, as well as supplying to grocery stores in Australia.
Bellamy's generated $62m in direct China sales in the 2016 financial year, and Citi estimates that will rise to $371m over the next three years.
Ms McBain said the long-term outlook was positive and Bellamy's continued to build a sustainable long-term business, focused on increasing distribution across Australia and Asia.
However, momentum had slowed due to "temporary volume dislocation" on the back of regulatory changes and effects of restructuring the route-to-market in China impacting from late first quarter.
