In the days after Bellamy's Australia admitted in a vaguely worded statement to problems in China, the infant formula maker hurriedly established a war room in the Melbourne offices of law firm Herbert Smith Freehills.
The company's "business update" delivered on December 2 last year had wiped $500 million from its sharemarket value and as its problems grew, so too did those around the war room table on level 43 of 101 Collins Street.
What started out as a temporary office for out-of-town Bellamy's directors Patria Mann and Michael Wadley soon became a critical command post with just one mission to save the company.
"Nobody really knows how close it went to going under," says one person involved.
The abrupt decline was all the more striking given how high Bellamy's had soared.
In less than a decade, it had gone from a Tasmanian family-run business to the poster child for Australian success in China as it took advantage of surging demand for foreign infant formula which became known as "white gold".
In a series of interviews with the key players,The Australian Financial Review pieced together how that disappointing sales update on December 2 eventually contributed to the departure of the chief executive, company secretary, head of sales, the demotion of the chief financial officer and, in the months ahead, will likely see the chairman step down.
And it all happened in just five weeks, while at the same time two class actions were launched against Bellamy's and a group of disgruntled shareholders, led by Tasmanian investor Jan Cameron, agitated to overthrow the board and take control of the company.
In those early days of December, before class actions and management purges were even contemplated, it was simply practical for the Bellamy's directors to congregate at Freehills, partly because the company's own Melbourne office was being renovated.
But as the days went on, the choice of location became highly symbolic for how the crisis would be handled.
This would be one for the lawyers.
Rather than being the sober voice of caution in the corner, the lawyers were hosting the party and that would eventually lead to chief executive Laura McBain and chairman Rob Woolley being sidelined, as the independent directors took control of the company.
It meant legal precedent trumped the assurances of management.
And in those pre-Christmas days at the Paris end of Collins St, it eventually led to the mention of James Hardie.
For any company director, that would be an alarming comparison.
At Bellamy's, it was made in the context of a 2012 High Court ruling which found the directors of James Hardie had breached their duties by not seeking a second opinion on financial statements that claimed the company's asbestos victims' compensation scheme was "fully funded".
"The High Court could not have been more clear that best practice was to get a second opinion," said one person involved.
For the board of Bellamy's, that precedent meant obtaining an additional insurance policy by hiring PPB Advisory, a firm which specialises in "corporate advisory, restructuring and insolvency".
They are not the people you call when business is good, but a firm directors seek out when they need comfort around assumptions which might one day be tested in court.
"They [the directors] had to be sure the company was solvent," said the person involved.
By that point it had become about limiting the risks, a strategy that demanded at least two other delicate phone calls in those days before Christmas.
One of these was to the company's bankers at HSBC to see if they continued to have a "degree of confidence" in the business, given its changed circumstances.
It later emerged slowing demand in China and a failure to quickly halt the production of excess infant formula had left the company with just $1 million in cash and reliant on the grace of its bankers to fund working capital.
"In that situation, you want to call the bank, not the other way around," said the source.
"If they didn't reach an understanding with the bank, then they would have had to seek a cash injection."
The other delicate call at that time was made to the firm providing Bellamy's with director's liability insurance to make doubly sure everyone at the top table was adequately covered if the worst were to happen.
The road taken was the cautious one, by a group of professional directors who all had more to lose than $92,000 a year in board fees.
Such caution was not overly surprising, given their backgrounds.
Launa Inman, an independent Bellamy's director and veteran retail executive who now sits on the Commonwealth Bank of Australia board, had seen this movie before.
She was hired to clean up the mess at surfwear maker Billabong International in May 2012 after a similar profit downgrade had wiped out half the company's value, allowing the class action lawyers to swoop.
Hardened from that experience, Inman was always going to be sceptical of the assurances given by management.
As was Patria Mann, another independent director and forensic accountant, who had spent much of her professional life as a partner at KPMG.
Then there was Michael Wadley, the longest-standing independent director, who previously ran the China practice for London "Silver Circle" law firm Ashurst, while the other director, Charles Sitch, had spent a lifetime at McKinsey.
"Under every rock they [the directors] looked, there was another problem," says one source.
But before unleashing the "turnaround" specialists at PPB on the accounts, management was asked to take another look at the new data coming out of China.
While McBain was still involved in this process, the main work was done by the former Bain consultant, Andrew Cohen, who since July had been Bellamy's chief operating officer.
For the year prior to this, he had been consulting to the company.
As a result of the post-December shakeout which led to McBain's departure, Cohen is now acting CEO.
"The board wanted another perspective on the business in China, a hard number crunch," says the source.
That would eventually result in Bellamy's shares being suspended from trading on the ASX on December 12. They would remain in a trading halt for a month.
During this period it would emerge the company had a year's worth of inventory or around $110 million of stock sitting in factories and warehouses, a crucial fact not mentioned during the December 2 "business update".
It was this revelation that pushed the company right to the brink.
There was too much stock in the system, while at the same time Bellamy's was obliged to continue paying New Zealand dairy giant Fonterra to produce more infant formula whether it was required or not.
This was part of the now-infamous "take or pay contract".
If it had not been renegotiated, then Bellamy's was liable for another $8 million to $10 million a year in "shortfall payments" to Fonterra, a commitment the company would have struggled to meet.
At that point the "war room" at Freehills in Melbourne expanded into two rooms.
There was the "Bellamy's room" and the "Fonterra room" as the company and its advisers scrambled to renegotiate the contracts and rescue the company.
Even with the changed contract terms, Bellamy's expects to pay at least $22 million over the next two years in shortfall payments and has given Fonterra "second ranking" security over its assets.
In return, the dairy giant pushed out the minimum production requirement under the contracts from five to eight years.
As is often the case, the crisis at Bellamy's unfolded in slow motion. When the board assembled for a scheduled meeting via phone at 8am on December 2, there was no sense of what was to come.
"At that point we were not thinking there is something seriously wrong," says one source.
"There was nothing dramatic about the call. We were just saying sales were not as good as expected."
When the meeting concluded at 9:09am, the Australian Securities Exchange (ASX) was informed that Bellamy's sales would be flat at $110 million in the second half of 2017.
For a company which had consistently posted annual revenue growth above 60 per cent, it was a big comedown and the market was not forgiving.
Just after the opening bell, the stock dropped 42 per cent and continued falling all day, finishing the session down $5.28 at $6.85.
On a call with analysts shortly after the market opened, McBain attempted to spin the slowing growth as a "transition year".
Under pressure, she stumbled, handballed tough questions to her CFO, Shona Ollington, and generally failed to provide any clarity.
Most pointedly, however, she refused to give figures on Bellamy's market share in China, saying only that the company was "happy" with the numbers and it was difficult to get a "lens" on China.
That reeked of obfuscation.
In a follow-up question, CLSA analyst Shaun Weick pointed out rival infant formula maker A2 provided such figures and he wanted to know if Bellamy's market share was falling.
But the question was shut down by both McBain and Ollington.
"We haven't disclosed market share, Shaun, so I think I probably need to leave the questioning at that."
In a phone interview last week, Weick said: "They were clearly sidestepping the question."
Either they didn't know, he said, or they deliberately didn't answer.
No sooner had McBain ended the analyst call, phone lines across the Melbourne and Sydney CBDs lit up.
"That was one of the top five worst investor calls I have been on," one fund manager told an analyst.
"What is going on at Bellamy's?"
The directors also started getting calls.
Along with the usual offers of help, came warnings to be careful and to ensure the problems at Bellamy's didn't spill over to the other boards on which they sat.
A year earlier, McBain, rather than dodging questions, would have happily bragged about the company's market share.
Under her stewardship, Bellamy's had grown from a small family company in Launceston selling baby cereals and snack foods into the biggest infant formula player in the country, commanding nearly 25 per cent market share at the start of 2016.
After being appointed general manager in 2006, McBain focused Bellamy's efforts on infant formula and the China market.
It was a strategy that paid off, but a large part of the success was due to an army of personal shoppers, known as "daigou", who bought up tins of the organic formula in Australia and sold them to clients in China.
They were, and still are, a trusted distribution source for Chinese mothers fearful of buying tainted products demand from daigou resulted in Australian infant formula sales tripling in just three years.
But it was always a "grey channel" and exposed to any tightening of import regulations in China, while also making it hard for companies to assess real demand.
As one source close to Bellamy's confessed, three years ago the company thought 20 per cent of their domestic sales were going to China, when it was actually 80 per cent.
That's why when McBain made a crucial, and ultimately ill-timed, decision to reduce Bellamy's reliance on this powerful distribution channel, it backfired.
The new strategy was about going direct to consumers in China via e-commerce sites T-Mall, JD.com, Kaola, NetEase and VIP.
But when these sites began discounting, as they were holding too much stock, the daigou came under pressure.
Suddenly they couldn't compete with the online platforms in China and so switched to other products such as A2 Platinum.
That led to Bellamy's market share dropping from 22.3 per cent in the quarter ended April 16 last year, to 13.9 per cent in the three months to October 16, according to data from Aztec, which looks at the number of tins scanned in supermarkets and pharmacies across Australia.
At the start of the year, this figure had stabilised, down slightly at 13.8 per cent for the three months ended January 15, according to figures obtained by the Financial Review.
About the same time as Bellamy's market share was falling in Australia, hedge funds sensed the company might also be facing an inventory glut in China.
At an investor conference, it was suggested they should fund an informal stocktake at baby stores, supermarkets and other retailers across China.
The plan was to look at the expiry dates on Bellamy's tins and therefore work out how much stock was in the system.
It's unclear whether the survey ever went ahead, but by mid-year Bellamy's was a heavily shorted stock as many bet on looming problems in China.
For the Bellamy's board, the issue was not so much the shorts as why the company itself didn't have the information the hedge funds were chasing.
"They hadn't done the work on their supply chain and distribution channels," says CLSA's Weick.
"They had lost control over inventory levels and pricing."
The issue facing the Bellamy's board is why these inventory problems were not mentioned earlier, most notably in the December 2 "business update".
The contrast between this statement and the company's second announcement on January 11 is telling.
The earlier update appeared to dismiss the problems as a "temporary volume dislocation," and talked about the number of followers Bellamy's had on Facebook, while hardly even mentioning inventory.
The January 11 update focused on the need to "reduce production and better manage inventory levels" while revealing the company's thin cash position and that it was sitting on the equivalent of a year's worth of stock.
As many in the market had suspected, Bellamy's problems were not so much regulatory but operational.
It was these type of growing pains that chairman Rob Woolley had in mind when he strengthened the board after Bellamy's August 2014 listing.
He ticked all the right corporate governance boxes.
Between February 2015 and March last year, three independent non-executive directors Inman, Mann and Sitch joined the board, in addition to Wadley, who had been there since the float.
They were professional directors, which inevitably led to tension with Woolley and McBain, who were close personally and saw themselves like the creators of Bellamy's success.
It made for a sometimes uncomfortable board dynamic, but up until the December 2 "business update", these strains were normal for a company that had gone from a micro cap to be worth $1.4 billion in just two years.
But those tensions would spill into the open as ever greater problems emerged.
The close relationship between the chairman and chief executive became a problem.
While Woolley was seemingly the dominant party in the relationship, having hired McBain and also appointed her husband Roger to the board of his other company, TasFoods, in reality it was the other way around.
"He [Woolley] didn't realise it, but Laura was the boss," says one insider.
"Under pressure that really showed."
One issue concerning the board was McBain travelling at least two weeks each month, either seeing suppliers in Europe, the sales force in China or speaking at investor conferences.
"The board wanted her to be at home running the business," says the source.
But when this was communicated through Woolley, the message was not received and McBain kept travelling.
"On the one hand, she [McBain] loved being at the centre of the dealings, which was a good thing, but she was a micro manager and delegated nothing."
McBain declined to be interviewed by The Australian Financial Review, saying only she wanted the best for Bellamy's.
"I am proud of what I achieved over 10 years," she said via phone.
The former CEO was not so shy on November 14 when she and CFO Ollington sat down for an interview with the Financial Review's BOSS magazine.
The comments she gave in the interview, initiated by Bellamy's public relations firm, read like a victory lap.
There was no hint of caution in the interview, which was done three days after the annual Singles Day shopping festival had concluded in China.
Disappointing sales during that 24-hour event, which actually runs for three weeks, was the trigger for Bellamy's to issue its now infamous December 2 "business update".
Insiders insist the full numbers from Singles Day took a few weeks to calibrate, but going ahead with the BOSS interview when so much was riding on that one event, demonstrated a lack of judgment.
"There were a lot of raised eyebrows in the company when that appeared.
She should never have done it," says one source.
Questioned during the interview on why Bellamy's would not experience the same slowing growth that had hit vitamin maker Blackmores, McBain insisted changes in China were not so hard to pick for those who could "read the tea leaves" and had their "ear to the ground".
Key players in the Bellamy’s Australia drama
THE INDEPENDENT DIRECTORS
Launa Inman Had seen the inside of a corporate crisis before as the CEO brought in to clean up Billabong International in May 2012 after a profit downgrade and as investor class actions loomed. The former Target managing director is now a director of the Commonwealth Bank and Super Retail Group.
Patria Mann Is a forensic accountant and former partner at accounting firm KPMG. She is a director of Event Hospitality and Entertainment (previously Amalgamated Holdings), Ridley Corp and Allianz Australia.
Michael Wadley Provided the board with its China experience and had advised Bellamys on its mainland strategy and compliance before the listing. He previously ran the China practice at law firm Ashurst and is now an independent consultant.
Charles Sitch A former director of McKinsey & Co and current director of Spark Ltd (previously Telecom NZ) and Apiam Animal Health.
Jan Cameron The founder of adventure clothing group Kathmandu is a Tasmanian resident and one of the original backers of Bellamys. She is leading a bid to topple the board and potentially reinstate McBain as chief executive. But there is uncertainty around her intentions after she appeared to try and hide her link to Bellamys largest shareholder Black Prince.
THE CHIEF EXECUTIVE OFFICER
Laura McBain Appointed general manager of Bellamys in 2006, when it was still a private company and grew it, as CEO, into a $1.4 billion market darling and member of the S&P/ASX 200. But her botched China strategy nearly brought the company down, as management struggled to get a handle on inventory, and she resigned in January.
Rob Woolley Founding chairman and major investor in Bellamys, who was very close to McBain, is expected to resign later this year. He was previously the managing director of Webster Ltd, outback cotton and grain producer, Tandou, and a partner at Deloitte.
- This article first appeared in The Australian Financial Review