Shares in Bega Cheese have plunged to a three-month low after the dairy producer revealed that its partnership with Blackmores to sell infant formula and nutritional powders in China and Australia had missed sales forecasts.
Consequently, Bega's earnings in fiscal 2017 were likely to be flat
Bega's shares were 93 cents, or 14.3 per cent, lower at $5.56 at 1456 AEDT, while Blackmores was nine cents lower at $112.63.
Bega executive chairman Barry Irvin on Tuesday said that this time last year, supermarket shelves were empty of infant formula amid growing domestic and international customer demand.
But regulatory change in China, new suppliers, and new channels to market had resulted in significant price discounting and signs of oversupply.
"This change in our market circumstances has seen our expected sales not materialise at levels that were initially forecast and some strong headwinds for the partnership, particularly in the Australian market," Mr Irvin told shareholders at Bega's annual general meeting.
Consequently, Bega will take a $5 million to $7 million provision on inventory, representing its share of the Bemore partnership.
Bega Cheese and Blackmores set up their joint venture - called Bemore - in January 2016 to supply infant formula and other nutritional foods to consumers in Australia and Asia.
Morgans agribusiness analyst Belinda Moore said the Bemore joint-venture clearly had not gone as well as initially hoped.
"If you've been to the supermarkets of late, you would have seen the heavy discounting of the Blackmores infant formula brand in probably what was already a somewhat overcrowded category," Ms Moore said.
"We could tell with the level of discounting that the brand was initially struggling."
Ms Moore said the infant formula brands that were doing well were those with a point of differentiation, such as the Bellamy's organic product and A2 Milk's product containing a different protein.
Mr Moore said it was still early days for the Bemore joint-venture: it had only started in January and it can take years to build a new brand.
Bega chief executive Aidan Coleman said on Tuesday that ongoing growth in the dairy foods sector and an improved outlook for dairy commodity prices were expected to improve the company's financial performance in fiscal 2017.
But that improvement would be offset by the very challenging business environment for dairy nutritional products, especially infant formula and "growing up" milk powders.
Mr Coleman said Bega expects its earnings before interest, tax, depreciation and amortisation (EBITDA) in 2017 to be broadly in line with that of 2016, before the impact of any provisions associated with the Bemore partnership.
