In 2023, global birth rates dipped by 1.15% per 1000 people, with significant declines noted in the EU (5.9%) and China (2.3%), extending a five-year trend. Consequently, all stages of infant formula production, from birth to growing milk, have declined.

As a result, Clover Corporation (ASX: CLV), an Aussie tech company specialising in infant formula ingredients, has faced hurdles.

These challenges stem from multiple factors, including declining global birth rates, a preference shift in Chinese manufacturing towards Algae DHA over fish DHA, and intensified competition within a contracting market. Despite efforts to diversify revenue streams by venturing into non-infant formula products and supplying certain infant formula manufacturers who have restored their volumes in mainland China, the downturn in the infant formula market remains prevalent across diverse regions.

The net sales revenue for the half year ending January 31, 2024 (H1 FY24), was $27.3 million, a 39% decrease from the previous year. Reduced volumes and increased investment in new products and markets led to an operating loss of $0.6 million, after a profit of $3.6 million in the previous corresponding period. Clover’s EBITDA fell from $5.7 million in H1 FY23 to a mere $300k.

China’s changing regulations proved particularly challenging. The country now requires a license to sell infant formula, which means fewer manufacturers and tougher competition for ingredient suppliers like Clover. This has squeezed Clover’s profits.

Moreover, after the Fukushima nuclear incident—and the subsequent release of waters, China urged formula makers to avoid tuna oil. As a result, orders for Clover’s tuna DHA powders from China dropped in the last six months. Now, Clover requires approval for its Algae DHA products. Manufacturers are eager to speed up this process to keep the supply flowing.

Clover’s microencapsulation technology enables nutritional oils, such as tuna, fish, algal and fungal oils, to be added to infant formula, foods and beverages.

In response to the decrease in demand, management has taken steps to cut costs, conserve cash, and decrease inventory levels of crude oils and powder stocks to match the lower demand. At the same time, Clover is trying to broaden its customer base and explore new markets and products. Efforts include developing encapsulated Choline for dry mix applications, expanding microencapsulated probiotics for better usability, advancing regulatory approvals for Premneo—an emulsion aimed at enhancing the IQ of preterm infants—and investing in facilities for fish oil sourcing to tackle the shortage of Anchovy oil. It has also extended its distribution channels into Mexico and South America.

In light of its performance, the Board is not declaring an interim dividend. It will be using the cash to support the new product commercialisation, which is set to add greater shareholder value over time.

Clover predicts a better performance in the latter half of FY24, assuming demand and global conditions stay steady. Based on existing customer forecasts, it anticipates FY24 revenue to range between $60m to $70m.