GREEN shoots are appearing in the Bellamy's Organic (ASX: BAL) business in the early days of its turnaround.

The baby food company has met first half guidance for sales, earnings and net profit after tax, but missed its statutory EBIT target by around $2 million because of a write down on ingredients associated with reduced production.

Full year guidance on reported EBIT has been revised from $22-$26 million to $19-$23 million because of restructuring costs and ingredients.

Net profit after tax for the first half of FY17 was down 47 per cent to $7.2 million, while revenue increased 13 per cent to $118.3 million. Full year revenue is expected to be between $220-$240 million.

Acting chief executive officer of Bellamy's, Andrew Cohen, says, "Bellamy's is currently facing a number of challenges; however, we are implementing a turnaround program aimed at improving returns for all stakeholders.

"As outlined on 11 January 2017, we have amended our manufacturing contract with Fonterra to extend the contract and apportion minimum volume commitments over a longer period."

"We are making strong progress with our business plan and have already undertaken several structural improvements aimed at a material reduction in our operating costs and staff numbers have been reduced to a sustainable level."

The company has launched a focused marketing campaign to win back the Daigou sellers which abandoned the company last year (it increased first half marketing spend 316 per cent on the pcp), and has agreed a plan with its China offline distributor to expand store coverage.

It is also consolidating its inventory with a single strategic reseller in China.

"We have reassessed our marketing strategy and targeted a marketing drive in Daigou channels in China and stabilized sales in Australia," says Cohen.

"We are reviewing our supply chain to reduce ingredient costs, consolidating our Australian and Chinese reseller partners and plan to increase the number of stores selling our products in China by 1,600."

The brand saw growth in its China e-commerce market share, which grew to 4.9 per cent on Alibaba, compared to 3.8 per cent in the second half of 2016.

In its results presentation, the company explained how an inventory build up of Australian label product by China and Hong Kong resellers hurt the company in the 2016 calendar year.

This led to widespread discounting on Chinese e-commerce platforms, especially for Singles Day, and impacted the competitiveness of the Daigou channel and Australian sales.

Bellamy's was locked into a manufacturing contract with Fonterra that stipulated minimum production levels, and inventory stock built up as demand for the product reduced.

The company says it will take several months to reduce production due to supply chain lead times, but anticipates a return to positive free cash flow by midway through the second half.

The company is facing up to three class actions, and Slater and Gordon became the first to officially file an action with the Federal Court of Australia last week.

Bellamy's is trading down around 1 per cent at $4.26 per share at 2:12pm AEDT today.

Business News Australia

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