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Edited Transcript of CVT.NZ earnings conference call or presentation 24-Feb-21 8:30pm GMT

·40 min read

Half Year 2021 Comvita Ltd Earnings Call Feb 25, 2021 (Thomson StreetEvents) -- Edited Transcript of Comvita Ltd earnings conference call or presentation Wednesday, February 24, 2021 at 8:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * David Banfield Comvita Limited - CEO * Nigel Greenwood Comvita Limited - CFO ================================================================================ Conference Call Participants ================================================================================ * Christian Bell Jarden Limited, Research Division - Research Analyst * David Oxley * Joshua Dale Craigs Investment Partners Limited, Research Division - Research Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Welcome to the Comvita Fiscal Year '21 Half Year Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Nigel Greenwood, Chief Financial Officer. Please go ahead, sir. -------------------------------------------------------------------------------- Nigel Greenwood, Comvita Limited - CFO [2] -------------------------------------------------------------------------------- Good morning, everyone, and welcome to the Comvita Half Year Results Presentation for FY '21. With me, I have Mr. David Banfield, the CEO, and I will hand over to him to start the presentation. I'll be back a little later and probably some guests as well. -------------------------------------------------------------------------------- David Banfield, Comvita Limited - CEO [3] -------------------------------------------------------------------------------- (foreign language) Good morning, and welcome to the interim results presentation from Comvita. As you can see on Page 1, the focus of today's presentation is focused on arotahi, and it's a continuation of the theme that you've certainly heard from me and from the team since this time last year when I started. I'll now move on to Page 3, the agenda. Over the course of the next sort of half an hour or so, we will run through our focus, we'll run through our results, and then we'll come back to our 3-point plan of to stabilize, transform and build long-term resilience and growth at Comvita. Next page, Page 4. In October, we shared our redefined course. This redefined course drives and frames our action as an overall organization. And as you can see, working in harmony with bees and nature in New Zealand to heal and protect the world. Next page, we also reiterated our absolute focus on the consumer, and our model there or our focus model really revolves around the consumer at the center of everything that we do with the right products, in the right market through the right channels, allowing us to ensure we can invest in brand, IP and science, reduce risk along the way. As we invest in science, we get improved quality and our vertical integration, then means that, that feeds back into the right products and round we go again. On to next page. As I've previously shared, Comvita has a unique business model in the category. The slides here really tries to capture supply side and demand side and an evidence Comvita's unique end-to-end business model. The real difference is that by having our own people and our own subsidiaries around the world, we should be closer to customer, closer to consumer and, in that more intimate relationship, make sure that we're able to respond at speed as we meet those emerging market needs. And I'll share some examples as we go through today of when and how we've done that. Next page. Just before I move on to results, I did want to start from talking about impact of COVID, first off, from the team. Clearly, the world has fundamentally changed as a result of COVID, and so have we. Our primary focus has been on the health and wellness of our team around the globe and particularly pertinent for us when we are in somewhat of a bubble in New Zealand, but our operating teams have been affected and are currently still affected by lockdown. Pleased to say that all our teams are safe and well, though clearly some family members have been affected. Around the world, the team response has been amazing. Particularly, as we've moved into the COVID period, we were also starting our transformation journey at Comvita. We are proud to be part of the solution for consumers around the world, and we do believe the longer-term trends with consumers turning to nature and natural products as solutions to their health and wellness needs have continued. When we then change that and we look at segmentation of performance, what we really see is 2 different types of market segmentation: balanced distribution -- those markets with a balanced distribution model and those markets with a narrow distribution model, and I will turn to each of those separately. So next page. When we look at the balanced distribution model, this is with a good balance of off-line and online sales. This represents about 2/3 of our total revenue. All of those markets have performed well. It has -- the balanced distribution has enabled us to fulfill consumer needs or when there's been any disruption to pivot to actually leave that. We've got good brand affinity and growing. There's a recognition of our quality. We're growing share, and our differentiated model does enable us to connect and act at speed to meet those needs. On the flip side, in our narrow distribution markets, which represent about 1/3 of our revenue, those -- all those markets have struggled with top line performance and reliance on a particular group of customers. They all have similar characteristics, though the actual route to market does vary. There have been some own goals in that with a lack of -- with previous distribution focus and a lack of digital capability. From a supply point of view, we have good inventory levels in market to meet demand. And again, our model has meant that any increased lead times, particularly, and cost to fulfill highlight the benefit of having our own teams on the ground in market. Next page. There has been a fair amount of press recently about standards and global regulatory framework. Comvita supports the goal of the highest possible standards for all New Zealand honey, and we have one of the most advanced in-house honey laboratories in the world, which was established in 2012. We're independently audited by a number of external authorities such as Medsafe, MPI. We've achieved AA rating with BRC, British Retail Consortium, who act for a number of companies around the world. And the AA rating is the highest you can achieve. We -- all our products are tested for and meet the glyphosate standard. It's not detectable. I think it's also important to say whilst our business is founded on science, we -- over this next chapter, we want to make sure that science remains central to our long-term opportunity. Our Chief Science Officer, Dr. Jackie Evans, is part of the leadership team. And as part of our 5-year plan, we are committed to invest 1% of our earnings in science until 2025. Next page. So I'll now move on to the headline results that we share today. I am encouraged to report that for the 6 months ending 30th of December, we have a reported net profit after tax of $3.5 million versus $13 million loss in the PCP. At an EBITDA level, EBITDA reported at $10.6 million versus an $8.8 million loss in the PCP, which is an improvement of $19.4 million. Revenue increased by 5.4% and 6.7% in constant currency. We delivered double-digit top and bottom line growth in our focus growth markets, gross profit improvement of 1,080 basis points. We've increased marketing investment by 25% as we look to tell our stories to consumers around the world. The $15 million transformation plan that we shared last year is on track to deliver. In addition, we've reduced debt. We've reduced the inventory, and we've seen a cash inflow of $9.4 million. Our focus on health and safety has also seen a 37% reduction in our total recordable injury frequency rate. We have maintained our guidance, and dividends are expected to resume at our full year. I'll now hand over to Nigel. -------------------------------------------------------------------------------- Nigel Greenwood, Comvita Limited - CFO [4] -------------------------------------------------------------------------------- Good morning, everyone, again. We're on the key financial results page, which I actually don't intend to work through with you again because really the majority of the numbers on here and the key matters on here were addressed by David on the headlines page. So I'll move on to the next page, the $15 million transformation update. David had mentioned that we've made very good progress on that. And this has been evidenced through strong improvement in both our dollar and percentage gross profit achievements in H1. We're on track to deliver an underlying cost reduction of circa $5 million for the full year, which is also an excellent outcome and reflects the focus and resilience we have in the business as we look to transform and improve and simplify the way we do things. We are investing $1.5 million per year to ensure that we can deliver on this transformation program. It doesn't happen by chance. It takes focus and it takes investment to get there. We're on track to reduce our SKUs by 30%. We have initiated the process to tidy up our legal entities around the world and reduce those and have a much simpler corporate structure. And we have exited SeaDragon during the course of the first half. We are on track for completion of the $15 million transformation program by January '23 latest. During the first half, we've also committed to a further $10 million transformation program. We believe we have the necessary capability and processes to enable that, over the next 3 years, targeting completion by June '24, and that will be through a focus of increasing our gross profit percentage even further by 400 to 450 basis points along with further cost reductions, and these are in addition to the $15 million transformation program I previously talked to. Next page. Cash flow, inventory and net debt. Moving on to cash flow. Very positive cash flow in the first half. You can see, we delivered $9.4 million of operating cash flow in the first 6 months compared to only just short of $1 million in the first 6 months last year. Our investing activities of $5.7 million really continue primarily to reflect our investment and our plantation strategy as we continue to grow the number of plantations we've invested in throughout the North Island. Financing activities, they reflect the fact that we're paying down both debt and our lease liabilities, which has already been indicated in respect of our reduction in net debt. Next page, inventory and net debt. It's very pleasing to see that our focus on reducing our inventory in the business is continuing at $98 million at the half. It's considerably down on both same time last year as well as 30 June 2020, seeing an $18 million reduction over the last 12 months. Trade receivables remaining relatively in line with the same time last year, a little bit better. Working capital, significantly better than the same time last year. Net debt, down to $13 million. We're on track to continue to reduce our net debt by the end of the financial year. Overall, a very strong and healthy balance sheet. We continue to reflect what we refer to as our underlying earnings reconciliation. We presented this at the both the half year and full year for FY '20. It's pleasing to note that we don't have any nonoperating items to add back this year. You can see we had quite a complex underlying earnings reconciliation this time last year. However, there were some one-off costs that we just feel that we should highlight that occurred during the first 6 months. The first one is the apiary cost reduction. I'll let you come back to that in a minute, to explain what we've done there. The R&D grant income of $700,000 that we've treated that as a one-off upside because, in fact, that particular R&D grant related to FY '20 and not FY '21. That is a very positive number in any event. Inventory write-downs we incurred was treated as one-off because they relate to non-Manuka raw honey as well as some Propolis inventory that are legacy items, so not in the normal course of business, but we've written those down in order to move them quickly. We continue to invest in our transformation, $450,000 there. And overall, you can see the impact of our underlying results of $12.6 million. Impact on harvest -- on the harvest. So this is where I'll quickly address the apiary cost change in accounting treatment, but we continue to focus on high quality and lower cost in our apiary business. We're reducing downside risk, and we have mentioned earlier in previous presentations the way we've changed our business model in the apiary business means that in a poor harvest year, we are confident that we will breakeven rather than incur significant losses, as has been the case in the past. In a good year, we expect to generate between $2 million to $3 million of profit from that business. You'll note that we've taken a more balanced approach to the way we treat some of our apiary costs. And as a consequence, we've taken up $1.1 million in apiary costs in the first half. This is a change in accounting treatment, and it's really to balance out across the whole season the risks that we see that's evident in every year that we have a harvest. This will be an ongoing accounting treatment process, so you can expect to see it year-on-year. It does unwind in the second half. So where are we with our honey supply to '21? Well, there has been some weather condition impacts that have occurred during the year, but we're still at a point of the season where it's too early to tell exactly how our honey harvest will work out. We do focus on 3 key criteria, being yield, quality of yield and the cost to extract the honey. We will provide the market with an update of our full season performance in terms of our honey harvest either in late April or early May. I'll pass back to David to deal with market segments. -------------------------------------------------------------------------------- David Banfield, Comvita Limited - CEO [5] -------------------------------------------------------------------------------- Thank you, Nigel. I just want to clarify one thing very quickly on the apiary business. And that is in a good year, the apiary contributes about $2 million to $3 million, that Nigel just said, to group profits. And in a poor harvest, what happens is the contribution to group profits becomes 0, so just to be clear with that. So moving on to market segments. I'll now share with you our segment performance. Yes, headlines here. Look, our business model is unique, as I've already shared, but our global mark in global subsidiary team, closer to customer, closer to consumer, faster to act, primacy of market, making sure we've got talent in market. Really pleased with some of the enhanced capability we've brought into our international teams, particularly in China through the course of this year. We delivered strong growth in our focused growth markets. Mainland China, revenue up just under 20%, net contribution up 28%; North America, revenue up 38% and net contribution up nearly 200 -- or 220% (sic) [222%]. When we come back to that segmentation that you see, all the markets with balanced distribution model are performing well and those markets with a narrow distribution market are underperforming, but clearly, we've got plans in place to change that model. The balanced model does also show the operating leverage potential that we see going forward, which is an important part. In the course of this year, we've increased marketing investment by 25%, and that really allows us to refine and tell our unique why Comvita story, and again, I'll come back to that a little bit later. The next page breaks down the performance through the balanced distribution markets, the limited distribution markets and other. I'll cover those as we come to the actual markets themselves. But you can see the characteristics in terms of the revenue we've achieved, the performance we've achieved and the typical share of digital within them. Our focus is really to build momentum in those markets and deliver profitable growth in other markets. The biggest issue, and again, Nigel will talk to this in a minute, in terms of dollar issue to resolve is the Australian market, where revenue was down $5.5 million versus the PCP due to the points that you see there. Next page. So -- and then move on to the world map in terms of revenue. Encouraging to see North American growth, Greater China growth, rest of Asia growth. U.K. is flat. But again, I'll come back to U.K. when we talk about -- more about profitability. And you see the issue that I just shared in terms of ANZ. We have been impacted by FX. So we included a constant currency performance so that you can get a like-for-like performance. So as you can see there, on a constant currency basis, group performance up by 6.7%. Net contribution segment, so next page, you can see positive movement in China, rest of Asia and North America. And encouragingly for us, the U.K. business has moved from -- or EMEA business has moved from a loss of nearly $1 million in the PCP to a breakeven business. And then you see where we've been able to mitigate some of the impact in Australia and New Zealand through careful management. Next page. So I'll now talk to our focus growth markets, and then I'll hand over to Nigel to talk the other markets. So focus growth markets, China and North America. Both of those markets, China and North America, our model is about structured long-term investments to grow both market and market share. Our current business model there is the balanced distribution model, and I believe that's what's reflected in the performance that we've got. In Greater China, which includes Hong Kong, we -- you see our total revenue increase by 8.6% and our net contribution by 42%. We have been impacted in the Hong Kong market at top line, but actually, we've delivered profitable performance at bottom line. Next page, I'll move on to Mainland China. And on a reported basis, encouraging to see that top line growth just under 20%, over 20% on a constant currency basis. China is the world's biggest honey market. So it's encouraging to see that we're delivering that with our people on the ground. We also increased our brand investment by maybe 1/3 or to 1/3 to build that long-term brand loyalty and advocacy. But also, we're able to see that net contribution fall through. In North America, on a constant currency basis, revenue up by just under 43% and net contribution up by 200%. Marketing investment, again, increased by 1/3. Digital sales accounted for 41% of half 1 sales and were up 87% year-on-year, which also includes comvita.com. The significant contribution percentage increase is due to operating leverage but also some timing of marketing activity, which is moved into H2. About $850,000 of this is due to new business. Next page. Next page, you have the reported currency figures for North America, same commentary primarily applies. And finally, just the headlines for North America. We are the fastest-growing Manuka honey brand in the U.S. in both conventional and in natural channels based on sell-out. We're increasing our rate of sales per point of distribution, and we have good orders through the balance of FY '21. We've achieved a 170%, 1-7-0 percent, increase in our retail distribution in this 6-month period, and we continue to build that distribution and marketing, particularly where we're trying to build that model city. We've earned media impressions over this period of 560 million, which is up 24% versus PCP. So I'll now hand back to Nigel, who will talk to the rest of the segments. -------------------------------------------------------------------------------- Nigel Greenwood, Comvita Limited - CFO [6] -------------------------------------------------------------------------------- Thank you. Welcome back again. I'll start out with talking through the rest of Asia, which -- and this is on a reported currency basis. You can see that sales are up 48% on last year, which is a significant improvement. Net contribution also well up 151% and now reflects almost 30% on a net contribution percentage basis. We continued our strategic focus on Manuka and Propolis. We are now also focusing on a more balanced distribution model in these markets to keep sustainable success. Moving to the ANZ performance, the markets where we have had some challenges over the last 6 months. Starting with the combined, on a constant basis -- combined results for Australia and New Zealand on a constant currency basis. You can see that our revenue is down 21% year-on-year. Noting, at the same time, however, that our net contribution is only down 5%, which does reflect that we are continuing to focus on managing our costs and our investment in that market so that notwithstanding the lower revenue, we are still generating, I think, a reasonable net contribution in that market. Specifically talking to New Zealand and then Australia. New Zealand revenues, in fact, did improve on the prior year at 10.5%. COVID has impacted on the New Zealand market, just not as great as it has in the Australian market. We do continue to invest in our brand, but we are forecasting a decline in H2 due to ongoing impacts of COVID. In the Australian market, this is a market that's been most affected, revenue has reduced by $5.5 million versus last year, and it's partly and mainly caused by the narrow distribution model that David talked to earlier in the presentation. We do continue, however, to invest in the brand, and it's a major customer destocking occurring over the 6-month period. So we do expect revenue impacts through to the full year. Moving to the next page, it's just on a reported currency basis. Moving to the EMEA performance for the first 6 months. Revenue has obviously been flat year-on-year. That reflects, I guess, the market where we still need to do more work and invest in growth in that market. Having said that, we have, again, looked at our business model and the way we operate in that market. So the positive news is that we have achieved a sort of a breakeven net contribution versus last year, and that we see as a positive signal. Looking at it on a reported currency basis, you can see that it's also relatively flat year-on-year. I'll now pass back to David to take us through the final part of the presentation. -------------------------------------------------------------------------------- David Banfield, Comvita Limited - CEO [7] -------------------------------------------------------------------------------- So I'll now come back to our 3-point plan. So a year ago, we shared our plan to stabilize performance, transform the organization and build long-term resilience and growth. It's -- we've made good progress, but we recognize equally, there's a lot to do to deliver the true long-term potential of Comvita, and that's what this plan is designed to do. So next page. And here, I'm trying to capture the stages of development. So starting on the left-hand side, our incredibly proud history, our market-leading history and then how we look to progress to that exciting future on the right-hand side. In the period between January '20, you see I call the 3 periods crawl, stride, run, the things that we've done to actually set ourselves up for this next stage, this 2- to 3-year period when we learn to stride into that next bit to enable us to get to that June '24 position and then be able to really deliver that long-term sustainable growth. Next page. I just wanted to share an update on the progress we've made. So simple traffic light system. So again, stabilize, transform and build long-term resilience and growth. You can see the one red traffic light for us at the moment is that winning in Australia and New Zealand, and again, we've already talked to some of that. And a key part of our plan in Australia and New Zealand is to build domestic consumption of world-leading Manuka and Propolis. But across the rest of the areas, we've made good progress, but still space to go. Moving on to stabilizing performance. So our goal is grow domestic consumption and relevance in ANZ, so that build brand awareness and loyalty; share our unique story; launch a unique experiential store, again, I'll come back to that in a minute; build authority and leadership with industry, education and like-minded organizations. We want in that stabilized world, all existing markets on track to deliver that balanced distribution model with an organization that delivers against those fundamentals that you can see there. We believe the real strength of the organization is our connection to market, and reflected in that is our view of the primacy of market and making sure that we connect to our purpose and our values. Next page, transformed performance. This really -- again, in the last year, we've talked a lot about, when we think about consumer, we think about activity that drives household penetration, activity that drives frequency of use and activity that builds brand affinity and loyalty. So that intimate relationship is really crucial for us to actually show that. We believe that there are more efficiencies to gain, which will enable us to tell our story to those consumers around the world and are a vital part of that future. All markets will transition to our balanced distribution model. We will have integrated, automated, scalable, internal processes that, again, allow us to grow. Data insights at hand, driving decisions and continued radical simplification in terms of structure, in terms of SKU count and entities that Nigel mentioned earlier on. Next page. So finally, in terms of that long-term resilience and growth, we are looking to deliver mid-single-digit 5-year CAGR. We're looking to grow the total addressable market and the market share in our key markets. We have a 0 long-term debt and 20% EBITDA model. We're looking to deliver double-digit EPS growth on a 5-year CAGR. Brand to be recognized as a super brand, and we will launch new categories that will help us drive longer-term earnings growth. We will partner with other global leaders to leverage our mutual expertise. We aim to be the best employer in New Zealand, and that, that will enable us to attract, develop and retain our high-quality team. We believe the best interest of all shareholders is served by our team being shareholders as well. And we've set out on our journey to become carbon-positive by FY '30. And the final point, we are measuring as a KPI for the business total shareholder returns versus the NZX50. This slide just I shared at the Annual Shareholder Meeting, and it's just really, if you look at, China is the biggest honey market in the world -- of the world. If you look at the total market and the share of imported honey today, the opportunity that it creates as we drive relevance to keep target audience to grow the imported honey share of total, and it is important that we tell that story and why Manuka honey, particularly from Comvita, is central to that growth. Next page. So in terms of building long-term resilience and growth. In the top left, you can see an image of our new experience center, which will open in [Keith Street] in early March, which will be an experiential, immersive experience where we really tell the story of Comvita and the story of the hive in a really unique and compelling way and probably unlike anything that we've done before. On the top right, you see our brand positioning in terms of only nature knows more. We do believe that consumers will choose products that have limited or minimal impact or balanced impact on the planet. Our core value of (foreign language) is reflected, and you see our goal to be carbon-positive by 2030 and carbon-neutral by 2025. And finally, on the bottom right-hand side there, you see a new digital development which will be coming again in early March, which will enable us to differentiate and tell our story to consumers around the world. Finally, moving back to full year guidance. Our full year guidance is a range of $20 million to $23 million. In line with our previous disclosures and obviously subject to delivering our guidance, the Board has reconfirmed its commitment to resume dividend payments at the end of this financial year. So just in summary, our focus strategy is starting to deliver results, a strong H1 result, double-digit growth in focus growth markets, good performance in focus categories. We've simplified the business. We're launching a second transformation program, and our first transformation program is on track. We're reducing inventory. We're generating cash. We're paying down debt, and we're in the process of putting in place foundations for long-term profitable growth at Comvita. Thanks very much for your time. We'll now hand back to the moderator for any questions that you may have. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) And we'll take our first question today from Joshua Dale with Craigs Investment Partners. -------------------------------------------------------------------------------- Joshua Dale, Craigs Investment Partners Limited, Research Division - Research Analyst [2] -------------------------------------------------------------------------------- Just a few questions from me. First of all, reconciling a couple of points you make in your commentary, the first being, you're targeting mid-single-digit revenue growth. And second, you expect digital sales to lift from 32% currently to 50% by 2025. If you do the math on the implications that retail sales will decline or perhaps be cannibalized by digital, is that sort of what you're trying to communicate? Can you talk to that a bit more? -------------------------------------------------------------------------------- David Banfield, Comvita Limited - CEO [3] -------------------------------------------------------------------------------- Yes. No, that's exactly the point. I think that one of the things that we saw through the first half of FY '20 is if you look at the digital shift that took place in the U.S., we saw 10 years' worth of growth to that channel in 2 months or 3 months. And when we think about digital, we're sort of really trying to have a 10x mindset, and we believe that is a permanent shift and that then it's really important that, again, we have that capability to support that permanent shift. -------------------------------------------------------------------------------- Joshua Dale, Craigs Investment Partners Limited, Research Division - Research Analyst [4] -------------------------------------------------------------------------------- Okay. Great. And just next question. On Slide 12 in your presentation, you talk about improving gross profit by sort of 600 to 700 basis points, excluding the impact of the harvest. Is that improvement independent of the performance of the apiary business? What's driving that improvement? Was it sort of either increasing prices or has the cost you purchased honey from market declined? Or what's your thinking there? -------------------------------------------------------------------------------- David Banfield, Comvita Limited - CEO [5] -------------------------------------------------------------------------------- Three things: Market mix, so more profitable markets growing faster; channel mix, so digital channel being accretive; and finally, the benefits of focus on our core products of Manuka and Propolis. -------------------------------------------------------------------------------- Joshua Dale, Craigs Investment Partners Limited, Research Division - Research Analyst [6] -------------------------------------------------------------------------------- Okay. Great. And just on your segment split. There's obviously a cost component to each. Do you spread the cost of the apiary business across each geographic segment? Or do they all fall into ANZ or all fall into corporate costs? -------------------------------------------------------------------------------- Nigel Greenwood, Comvita Limited - CFO [7] -------------------------------------------------------------------------------- The impact of the apiary business performance do not impact on the markets at all. They fall into the sort of not the ANZ market, but the sort of the corporate part of our segment reporting. So that's where you will see the impact of that apiary business performance or share. -------------------------------------------------------------------------------- Joshua Dale, Craigs Investment Partners Limited, Research Division - Research Analyst [8] -------------------------------------------------------------------------------- Right. Okay. So the contribution margin for each is -- in each market is completely independent of apiary business performance? -------------------------------------------------------------------------------- Nigel Greenwood, Comvita Limited - CFO [9] -------------------------------------------------------------------------------- It could be. Yes, that's right. -------------------------------------------------------------------------------- Joshua Dale, Craigs Investment Partners Limited, Research Division - Research Analyst [10] -------------------------------------------------------------------------------- And just last question from me. On dividends, do you have an indication around any potential payout ratio you'd be looking to target at the full year? -------------------------------------------------------------------------------- David Banfield, Comvita Limited - CEO [11] -------------------------------------------------------------------------------- No. The -- obviously, we have a stated dividend policy that we shared actually during the capital raise. But the Board will review the appropriate level as we track through H2. -------------------------------------------------------------------------------- Operator [12] -------------------------------------------------------------------------------- Next, we'll hear from Christian Bell with Jarden. -------------------------------------------------------------------------------- Christian Bell, Jarden Limited, Research Division - Research Analyst [13] -------------------------------------------------------------------------------- Just firstly, could I please just clarify a couple of ones? The -- just for the $15 million strategy transformation, in simple terms, is that split $10 million gross margin or gross profit and $5 million cost out at the OpEx line? -------------------------------------------------------------------------------- David Banfield, Comvita Limited - CEO [14] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Nigel Greenwood, Comvita Limited - CFO [15] -------------------------------------------------------------------------------- Yes. It's the progress we're making against those to pursue the story. So we're committing to achieving that $15 million by no later than January '23, and we're making that progress on both improvement in gross profit percentage as well as cost reduction. -------------------------------------------------------------------------------- Christian Bell, Jarden Limited, Research Division - Research Analyst [16] -------------------------------------------------------------------------------- And I think I slightly missed the questions before, which I think you might have answered. But the gross -- from a gross margin contribution that's coming from -- just trying to understand what's actually driving it. And so can you just simplify what that is? -------------------------------------------------------------------------------- David Banfield, Comvita Limited - CEO [17] -------------------------------------------------------------------------------- Yes. So Christian, 3 things: market, so obviously, shares -- markets where we deliver a higher contribution, growing share; channel, so digital channel being accretive; and category and the benefits of our focus on Manuka and Propolis. -------------------------------------------------------------------------------- Christian Bell, Jarden Limited, Research Division - Research Analyst [18] -------------------------------------------------------------------------------- Okay. And the $5 million is just a bit of corporate structure. -------------------------------------------------------------------------------- David Banfield, Comvita Limited - CEO [19] -------------------------------------------------------------------------------- Yes, we -- I mean, we've made some fairly significant organizational changes, and we continue to do that, to enable us to better connect to consumers in market. And part of that is just being clear on the role of the markets and being clear on the role of the Market Support Centre in Paengaroa. -------------------------------------------------------------------------------- Christian Bell, Jarden Limited, Research Division - Research Analyst [20] -------------------------------------------------------------------------------- On the gross margin -- from a gross margin perspective, how far through are you -- how are you tracking against that $10 million at the moment? Like was that -- can you speak to that a bit? -------------------------------------------------------------------------------- David Banfield, Comvita Limited - CEO [21] -------------------------------------------------------------------------------- Look, well, you can see the improvement that we've reported in these numbers. So I think we have a good line of sight. So when we say that, we're on track, we're a fairway through that process, which is encouraging. -------------------------------------------------------------------------------- Christian Bell, Jarden Limited, Research Division - Research Analyst [22] -------------------------------------------------------------------------------- Was up -- was any of the gross margin uplift for this period due to a better quality honey? -------------------------------------------------------------------------------- David Banfield, Comvita Limited - CEO [23] -------------------------------------------------------------------------------- Not as much. No, it's more due to those -- so those -- the points that I just raised, the last point, and I should just clarify this. When we talk about focus on Manuka and Propolis, that's about the production efficiency we generate as we go through. So again, because we've stopped doing a number of things, it means we get better overhead recovery, better efficiencies through the plants. So that's sort of a double-edged benefit. -------------------------------------------------------------------------------- Christian Bell, Jarden Limited, Research Division - Research Analyst [24] -------------------------------------------------------------------------------- Okay. Good. And as part of the new apiary model, I guess, is that between years and between better crops of honey and whatnot, are you aiming to smooth -- a degree of smoothing by holding high-quality honey for some years and then selling (inaudible). -------------------------------------------------------------------------------- David Banfield, Comvita Limited - CEO [25] -------------------------------------------------------------------------------- No, what we've done today, actually just -- I mean, it does move earnings, but yes, we have our own business that obviously gets different quality or different, yes, quality of honey during different times. But the apiary model is more about making sure that, as I say, in a bad harvest or poor harvest, there's just zero contribution to group profit from that. And in a good harvest period, we get the level of sort of $2 million to $3 million that we talked about there. So -- and that will help us actually deliver. Yes, that will help us deliver more balanced returns half to half. -------------------------------------------------------------------------------- Christian Bell, Jarden Limited, Research Division - Research Analyst [26] -------------------------------------------------------------------------------- Cool. Yes, understood. And then just sort of simple, we finished additional $10 million, where the gross margin [improvement] is coming from there and also from the underlying cost reduction, but how is that different from [this?] -------------------------------------------------------------------------------- David Banfield, Comvita Limited - CEO [27] -------------------------------------------------------------------------------- This is incremental, too. So the program of work that underpins the first transformation program, obviously, we had specific tasks or specific elements to it. And these are additional things that we believe we can achieve by further investment on top of what was originally planned. -------------------------------------------------------------------------------- Nigel Greenwood, Comvita Limited - CFO [28] -------------------------------------------------------------------------------- Christian, we do have a number of initiatives, both at the gross margin or improving our gross profit percentage as well as our reduction in costs, that we are going to be focused on and putting into place to achieve that incremental $10 million. It's just not a number we're plugged out of the year and said, oh, let's just go for it. We do have some insights as to how we're going to get there. -------------------------------------------------------------------------------- Christian Bell, Jarden Limited, Research Division - Research Analyst [29] -------------------------------------------------------------------------------- No, I'm not getting there. Just trying to understand if you're just making the same drivers better or you're actually hitting new initiatives than what you've already done? -------------------------------------------------------------------------------- Nigel Greenwood, Comvita Limited - CFO [30] -------------------------------------------------------------------------------- Okay. -------------------------------------------------------------------------------- Christian Bell, Jarden Limited, Research Division - Research Analyst [31] -------------------------------------------------------------------------------- And sorry, just to clarify, it is just making the ones you're already doing better as opposed to adding a whole bunch of new ones? -------------------------------------------------------------------------------- David Banfield, Comvita Limited - CEO [32] -------------------------------------------------------------------------------- No, there's new stuff -- new things as well. It's based with our core focus areas. But look, we do think that there are those opportunities to drive further -- or create further efficiencies. And we think, look, they're critical in terms of our longer-term business model, which needs us to be telling that why Comvita story. So we need to deliver extra efficiencies there so that we can invest in our brand and tell our story better around the world. -------------------------------------------------------------------------------- Christian Bell, Jarden Limited, Research Division - Research Analyst [33] -------------------------------------------------------------------------------- Are you able to give an example of one of those efficiencies? -------------------------------------------------------------------------------- David Banfield, Comvita Limited - CEO [34] -------------------------------------------------------------------------------- Not at this stage, but we will during the course of the second half. -------------------------------------------------------------------------------- Christian Bell, Jarden Limited, Research Division - Research Analyst [35] -------------------------------------------------------------------------------- Okay. Cool. And sorry, just finally, your underlying EBITDA of -- in full year guidance of $20 million to $23 million, why is there no sequential growth in the second half? -------------------------------------------------------------------------------- David Banfield, Comvita Limited - CEO [36] -------------------------------------------------------------------------------- Probably a combination of things. So look, we did have a strong H2 last year, and we've still got that ANZ uncertainty that exists, as Nigel highlighted, when he went through that segment performance. And it is about, as I say, putting in place those foundations for years 2, 3, 4, 5 as well, which we'll continue to do. -------------------------------------------------------------------------------- Christian Bell, Jarden Limited, Research Division - Research Analyst [37] -------------------------------------------------------------------------------- Sorry, I wasn't comparing it to second half last year. I was comparing it to the first half of this year. So you're going from $12 million. And then if you're at the top end of guidance for the full year, that you're going from $12 million in the first half to $11 million in the second. -------------------------------------------------------------------------------- David Banfield, Comvita Limited - CEO [38] -------------------------------------------------------------------------------- Yes. The same reasons still apply, but -- yes. -------------------------------------------------------------------------------- Operator [39] -------------------------------------------------------------------------------- (Operator Instructions) We'll hear from David Oxley with ACC. -------------------------------------------------------------------------------- David Oxley, [40] -------------------------------------------------------------------------------- Could I just ask one quick question? Can you tell me what the apiary contribution was in the first half '20 and what it's gone to in the first half '21? You obviously alluded to a $1.5 million improvement due to the accounting change that's come through. What were the actual numbers? -------------------------------------------------------------------------------- Nigel Greenwood, Comvita Limited - CFO [41] -------------------------------------------------------------------------------- You're asking about the apiary contribution in the first half? -------------------------------------------------------------------------------- David Oxley, [42] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Nigel Greenwood, Comvita Limited - CFO [43] -------------------------------------------------------------------------------- Versus second half? -------------------------------------------------------------------------------- David Oxley, [44] -------------------------------------------------------------------------------- Yes. The first half this year versus the first half last year. -------------------------------------------------------------------------------- Nigel Greenwood, Comvita Limited - CFO [45] -------------------------------------------------------------------------------- The apiary business itself, the contribution that, that business makes was all recognized in the second half. So if it's a good harvest year, the contribution we talked about between $2 million to $3 million would be recognized in the second half. In a poor harvest year, if there was no contribution at all, in other words, at breakeven, that would also be a second half impact. What we've done, however, is to acknowledge the fact that there are risks associated with that business and that, in our view, it's prudent to sort of spread that risk across the full year rather than have that risk be entirely addressed in the second half. So under accounting standards, effectively, we've got what we call an early recognition of some costs in the first half. That's $1.1 million that we've effectively been able to take up in the first half. It will obviously get unwound in the second half and then the performance of the apiary business is either a positive contribution or a neutral contribution or somewhere in between will be a second half impact. -------------------------------------------------------------------------------- Operator [46] -------------------------------------------------------------------------------- We have a question from [Richard Blackhurst]. -------------------------------------------------------------------------------- Unidentified Analyst, [47] -------------------------------------------------------------------------------- Last year, you mentioned that... (technical difficulty) -------------------------------------------------------------------------------- Nigel Greenwood, Comvita Limited - CFO [48] -------------------------------------------------------------------------------- Richard, sorry, we're really struggling to hear you at this end. -------------------------------------------------------------------------------- Unidentified Analyst, [49] -------------------------------------------------------------------------------- Okay. I don't think I can do anything about that. -------------------------------------------------------------------------------- Nigel Greenwood, Comvita Limited - CFO [50] -------------------------------------------------------------------------------- No, we've got you now. -------------------------------------------------------------------------------- Unidentified Analyst, [51] -------------------------------------------------------------------------------- Can you hear me now? -------------------------------------------------------------------------------- David Banfield, Comvita Limited - CEO [52] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Nigel Greenwood, Comvita Limited - CFO [53] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Unidentified Analyst, [54] -------------------------------------------------------------------------------- Yes. Okay. You mentioned that you were -- once you return to profitability, you'll be paying back wage subsidies for the COVID effect? -------------------------------------------------------------------------------- Nigel Greenwood, Comvita Limited - CFO [55] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Unidentified Analyst, [56] -------------------------------------------------------------------------------- It's still on track? -------------------------------------------------------------------------------- Nigel Greenwood, Comvita Limited - CFO [57] -------------------------------------------------------------------------------- Well, we did that, yes. So we did that in half 1. -------------------------------------------------------------------------------- Unidentified Analyst, [58] -------------------------------------------------------------------------------- Okay. Next question. It seems to me that the weather is more settled after December. Is there anything in your research and development to try and have Manuka flowering at a more settled time of the year, which is after Christmas? -------------------------------------------------------------------------------- David Banfield, Comvita Limited - CEO [59] -------------------------------------------------------------------------------- I think we've talked about, when we're choosing sites, we try and choose sites where it does become later. But look, as you know, the -- yes, it's impossible to control what the weather throws at us, but yes, some of our sites are later. -------------------------------------------------------------------------------- Operator [60] -------------------------------------------------------------------------------- (Operator Instructions) Actually, we do have a follow-up question from Joshua Dale with Craigs Investment Partners. -------------------------------------------------------------------------------- Joshua Dale, Craigs Investment Partners Limited, Research Division - Research Analyst [61] -------------------------------------------------------------------------------- Hello, can you hear me? -------------------------------------------------------------------------------- Nigel Greenwood, Comvita Limited - CFO [62] -------------------------------------------------------------------------------- Yes, Joshua... -------------------------------------------------------------------------------- Joshua Dale, Craigs Investment Partners Limited, Research Division - Research Analyst [63] -------------------------------------------------------------------------------- Can you hear me, David and Nigel? -------------------------------------------------------------------------------- Nigel Greenwood, Comvita Limited - CFO [64] -------------------------------------------------------------------------------- Yes. We've got you. -------------------------------------------------------------------------------- Joshua Dale, Craigs Investment Partners Limited, Research Division - Research Analyst [65] -------------------------------------------------------------------------------- Excellent. Just one last one from me. And the segment contributions in the -- most of your accounts, can you talk to what you've restated or reallocated in China, ANZ and the other segments? And then there's also been a reallocation in corporate expenses, too. They don't align with what was in your previous interim result. -------------------------------------------------------------------------------- Nigel Greenwood, Comvita Limited - CFO [66] -------------------------------------------------------------------------------- Regarding interim results from last year? -------------------------------------------------------------------------------- Joshua Dale, Craigs Investment Partners Limited, Research Division - Research Analyst [67] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Nigel Greenwood, Comvita Limited - CFO [68] -------------------------------------------------------------------------------- Yes. There is a reason for that. First off, what we have -- we've done a couple of things. And one of the things we've done is that we -- how we treat freight costs. So freight costs are now between (inaudible). Well, then as far as the other thing we've done is that we have reviewed the impact of integrating data, probably China and Greater China market into our systems here at Paengaroa that were previously done manually. And what we've discovered during that process is the way that the allocation of how intercompany profit and inventory has changed. And so it has resulted in a change to the numbers that we had presented in the last half year results to the numbers that we're presenting this year results. We can affirm that the numbers that you're seeing in the current results are the correct numbers. These relate to cross-border sales between ANZ and China. -------------------------------------------------------------------------------- David Banfield, Comvita Limited - CEO [69] -------------------------------------------------------------------------------- Josh, we can probably go through it when... -------------------------------------------------------------------------------- Nigel Greenwood, Comvita Limited - CFO [70] -------------------------------------------------------------------------------- We want to call on that. There's a little bit of complexity to it, Josh. But you're right, that had changed. -------------------------------------------------------------------------------- David Banfield, Comvita Limited - CEO [71] -------------------------------------------------------------------------------- We can take you through it. And look, we recognize, obviously, we reflected the position in last year's result as well as the change in last year's result that it actually decreases the percentage increase. -------------------------------------------------------------------------------- Operator [72] -------------------------------------------------------------------------------- Thank you. That will conclude today's question-and-answer session. I will now turn the conference over to Mr. Greenwood to close. -------------------------------------------------------------------------------- Nigel Greenwood, Comvita Limited - CFO [73] -------------------------------------------------------------------------------- Great. Well, look, thank you very much, everyone, for attending our investor presentation this morning. I hope you are satisfied with the information that we're able to provide to you. And the analysts on the call, we'll be talking with you this afternoon. And with -- David and I will be on the road Friday and Monday visiting a number of institutions over those 2 days. So thank you very much again, and have a good day. -------------------------------------------------------------------------------- Operator [74] -------------------------------------------------------------------------------- That will conclude today's conference. Thank you for your participation. You may now disconnect.