August 14, 2019 / 11:46 PM / 4 days ago

UPDATE 3-Australia's Blackmores changes tack in China as profit falls

* FY profit falls 23.6% to A$53.5 mln vs A$59.9 mln analysts view

* Warns of challenging trading conditions in China

* Daigou channel will not go back to what it was - deputy CEO

* Shares tumble 12% to a 4-year low (Adds management quote, portfolio manager comment)

By Paulina Duran and Shriya Ramakrishnan

SYDNEY/BENGALURU, Aug 15 (Reuters) - Australian vitamin maker Blackmores Ltd warned first-half profit would decline due to tougher conditions in China, as it disappointed investors on Thursday with weaker-than-expected earnings and a dividend cut, sending its shares down 12%.

Blackmores, once an investors’ darling as China’s appetite for health products drove double-digit annual sales growth, is now struggling with tougher import rules and a slowdown in consumer spending in its biggest overseas market.

Deputy Chief Executive Office Aaron Canning said rule changes in China had led to 40% lower sales through the company’s “daigou” network of informal exporters, once the lynchpin of its success in China.

“The daigou channel has been impacted by regulatory change, so that channel will not go back to what it was unless there’s further regulatory change,” Canning told Reuters in a phone interview.

“So the strategy is to invest in China directly.”

Blackmores was seeing double-digit growth from “in-country” sales driven by investments in its brand in China and partnership agreements with Chinese online platforms such as Alibaba Group Holding Ltd, he said.

The company also planned to raise prices on its products from Oct. 1 to protect its margins and to reflect its “premium” brand.

Overall sales to China, which include direct exports and in-country sales, fell 15% in the year, prompting a bigger-than-expected 23.6% drop in full-year profit. Blackmores shares fell 12% to A$73 after the result, their lowest level since July 2015.

“What’s alarming is that ... the trend - both in revenue and EBIT - is deteriorating meaningfully, and of course the outlook seems very weak,” said Jun Bei Liu, a portfolio manager at Tribeca Investment Partners.

“The issue with China is also that Blackmores never really had a sustainable take-up of products to get consumers really excited.”

Net profit fell to A$53.5 million ($36.1 million) in the year ended June 30, down 21% from 2018 and below the A$59.9 million average forecast by nine analysts, according to IBES data from Refinitiv.

It declared a final dividend of 70 Australian cents per share - down from 155 cents last year - and said it would undertake a A$60 million savings programme over three years.

On top of its declining sales and profitability, analysts expressed concern about the unexpected departures of two company non-executive directors and its country head in China.

In a call with analysts, Canning said the directors had resigned after “some differences in opinion”, without elaborating.

The company was recruiting a managing director to head its Chinese business after the previous head left for family reasons, he added.

Blackmores last month hired Alastair Symington as its chief executive, hoping his experience in China would help revive sales growth in the country. Symington will join the company on Oct. 1.

$1 = 1.4813 Australian dollars Reporting by Paulina Duran in Sydney, and Shriya Ramakrishnan and Niyati Shetty in Bengaluru; Editing by Stephen Coates

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