Infant formula company Bubs Australia (ASX: BUB) continues to reap the benefits of a strategic refocus in the US 18 months ago, achieving 26 per cent revenue growth in the December quarter in its largest market, and where a strong US currency has tipped earnings into positive territory. 

Bubs is one of eight companies that was granted special access "enforcement discretion" in the US in 2022 to address an infant formula crisis, on the condition that it complete clinical trials with the Food and Drug Administration (FDA).

The company has recently completed enrolments for these trials with 478 infants taking part, which CEO Reg Weine describes as a "an important milestone for Bubs in its journey to obtain permanent market access for the USA".

"With the USA already our biggest market and one in which we continue to see significant growth, it is pleasing to see that the overall regulatory progress remains firmly on-track," Weine says.

"This remains one of the company's strategic pillars and will underpin future sustainable growth."

Compared to a $6.8 million EBITDA loss in the December half of 2023, Bubs has reported a positive $2.9 million EBITDA for the recent half-year, which is ahead of a breakeven target for FY25 and was aided by a strong US dollar. 

Gross revenue in the US market hit $17.2 million in the December quarter, compared to $7.1 million in China (up 68 per cent) and $6.3 million in Australia (up 32 per cent).

New labelling requirements in the US were also a boon for Bubs. Despite the costs associated with the changeover to a 20oz (567g) tin size, the smaller packs have provided a lower entry point for new consumers while each sale is now at a higher margin.

"The higher sales velocity of the new pack formats, which are higher margin products than the old tin formats, have contributed to the group’s strong gross margin in H1 FY25 of 48 per cent, exceeding our target gross margin for FY25 of 40 per cent," says Weine.

"A stronger US dollar provided additional support for our delivered gross margin in Q2."

He adds that bricks-and-mortar channel sales in the US have "rapidly increased", with the 13-week average for sales sitting at around US$510,000 for the week ending on 5 January, compared to $250,000 for the week ending on 22 September 2024.

"As expected, these significant but positive changes impacted US Q2 ex-factory sales as we transitioned from the old tins to the new tins," Weine explains.

"Sales during the quarter were impacted as both pack formats were still being sold in the marketplace however, in the week ending 5 January 2025, 98 per cent of tins sold in the US were Bubs’ new pack formats. We expect the remainder of the old tins to be fully sold out in the marketplace in the coming weeks.

"Also, during the quarter, Amazon temporarily suppressed some of our products from their online marketplace due to new pack format documentation compliance issues in their system. This issue has now been resolved, and we expect our Amazon sales to improve in Q3."

Chief operating officer (COO) Richard Paine notes that Bubs' trial in the US is one of the largest infant formula studies ever undertaken, as it has been conducted across all three of Bubs’ formulations simultaneously.

"Notably, it also includes a breast-feeding cohort. I expect this study to provide a robust basis for Bubs' future growth, not only in the USA but in other adjacent markets we look to enter," Paine says.

"The commitment from Bubs’ own team, Bubs' USA regulatory specialists, strategic partners and Clinical Trial CRO (clinical research organisation) partners has been outstanding.

"The completion of the enrolment phase is a crucial one and will see submission of the completed clinical trial and supporting documentation to the USFDA in a timely manner."

In other markets, Weine says brand awareness and confidence is building in the cross-border e-commerce (CBEC) channel in China, where Bubs also continues to successfully penetrate the online-to-offline (O2O) Mother & Baby store channel with distribution in 20 provinces and 61 cities across the country.

"With over 480 new O2O stores added in the quarter, this brings the total O2O stores selling Bubs products to over 985, which contributed to a $2.9 million increase in China gross revenue over [the] pcp (prior corresponding period)," he says.

"Our China go-to-market channel strategy focused on CBEC and O2O continues to deliver strong profitable growth with significant scope to grow our distribution footprint and branded sales in the coming years.

"In Australia we continue to be the dominant player in the domestic goat infant milk formula (IMF) market, with 55 per cent market share. Bubs is the fastest growing supplier in Australian major retailers, growing at 13.1 per cent, or 6x faster than the market growth of 2 per cent.

"We are currently developing our optimal market entry strategy for Canada and while we previously envisaged a soft market entry launch in H2 FY25, we now expect to commence selling Bubs products in Canada in FY26."

Bubs Australia has a cash position of $17.2 million and its Deloraine manufacturing facility is now at 84 per cent capacity, compared to a 31 per cent usage in mid-2023 when the group was undergoing leadership turmoil.

Despite favourable currency pushing earnings higher recently, Weine has still affirmed an EBITDA breakeven guidance, as well as $102 million and gross margin above 42 per cent for FY25. 

BUB shares are up 17.35 per cent at $0.115 in morning trading, although this level is still down almost 18 per cent over the last six months.

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