Clover Corporation Limited (CLV) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Clover Corporation Limited 1H 2025 Results Call. [Operator Instructions] I would now like to hand the conference over to Mr. Peter Davey, Managing Director and CEO. Please go ahead.

Good morning. Thank you, Harmony. Welcome to the Clover Corporation First Half FY '25 Results Presentation. My name is Peter Davey, the CEO of the company. And with me is Andrew Allibon, the CFO and Company Secretary. Andrew will take you through the financial components. If we go to this next slide. This is an addition for people that haven't known much about us in the past, a bit about the corporation. We develop and produce encapsulated bioactive ingredients, specializing in high-value nutritional oils for infant formula, for medical foods and for functional foods. Effectively, what we have is encapsulation technology. We take highly valued bioactives and we turn them into powders, emulsions and oils. And then those products enable our customers to turn them into a finished product. So we really support our customers in creating a finished product and developing a solution for them. And I think as I walk through this presentation, you'll see that, that's what stood us in very good stead in the marketplace over the last 6 months. In the first half of '25, we had 60 employees in the company. We have 7 offices around the world. We have 21 products that we sold in that first half, so different products. We have 4 manufacturing sites. We sold to 165 different customers across 40 different countries. That may vary in the second half, and we might sell more products to more customers in different countries. It's just a bit of a snapshot to give you an overview of really it's pretty tight in terms of cost base and employees, but we have a really broad marketplace of different products in different markets and customers that we sell to, helps us weather the storms at times. If I move through on to the half year financial highlights of the business. It's been a very good first half, certainly a turnaround for the business on what was previous. So $37.6 million, effectively up $10 million on the same period last year. Revenue was in line with guidance. Overall, up 38% against the $27.3 million and a 200 basis points improvement in our gross margins overall. Our EBITDA position, up $4 million, $4.3 million overall. EBITDA's growth driven by just improvement in sales, improvement in margin, we've got a better customer mix and product mix into those customers. And the driver of that, the performance has helped in our manufacturing. So more volume helps our manufacturing base, and that's really improved. In terms of our working capital position, it's been reduced by a further $4.9 million. We've been driving our inventory down another 12.9%, 13% on the quarter before. And so that leaves us with a really strong balance sheet. We've converted debt and inventory into more cash in the business, and that's sitting at the moment at $15.4 million. NPAT was up $3 million on a very poor first quarter last year to $2.4 million. So a real turnaround and improvement in terms of delivering some profitability for the business, and that allows our directors to declare a dividend of $0.75. So an interim fully franked dividend per share of $0.75 that will be paid to shareholders. It's nice to be able to deliver back to the people that own the company, and that's what we exist for. I'll move on to the half year operational highlights. We've seen a recovery in both the infant formula sales in our business and our other business as well. So overall, the market -- our market has improved, whilst the market still is in a bit of decline. Europe and ANZ has really been the highlights of that. The new product sales, which I'll talk to a bit more, has continued to diversify and allowed us to help customers with solutions and grow the business. And we've really focused on engaging with our customers to diversify the business. So we're selling still into infant formula and the infant formula base is quite strong, but we've certainly seen growth in other segments of the business, into the food and other parts of the market. And our operational performance is aligned to that, and I'll talk to some of those areas in a bit more detail. Across the quarter, I think we talked last year about adding to our distribution network. We've traditionally gone to marketplace in our own right. Over the quarter -- over the half, we've added a number of distributors across North America, Asia and Europe. Some of them are in their infancy, but some have actually delivered in terms of sales already, and I'll discuss that a bit further. Ecuador has been a good improvement. So we launched Ecuador last year, and we received our first crude delivery in November 2024 and we're continuing them on a monthly basis. And we've seen a real good turnaround in the Melody Dairies business, which was a bit of a drain on us previously, but it's certainly turned around and improved, and we'll talk to that. I think the next slide will tell a fairly good story for you, and we started doing this last year to give you an indication of what's happened with the business. It certainly shows, if you look at that graph, a return to the business of growth and that's why we exist. If you go back to FY '23 at the start, there was an enormous stock build, especially by the infant formula customers in the world that didn't understand what was going to happen with the new Chinese JV licensing situation. So they built inventory to that. That build was too high at the start, and therefore, we then saw a significant decline. And into FY '24, the first half, we had very poor birth rates globally. It wasn't just China. It was across the entire world, low birth rates. In China, our Chinese customers moved away from us because of fears around tuna oil, which I've gone through in the past. But then it started to improve. In the second half of '24, we saw customers exiting a lot of the inventory build and we started to see the market return for us. And then that's gone into FY '25. So the first half of FY '25 is a good story. We've divided this graph into 2 parts. One is our base infant formula business. We've traditionally sold 2 major products into that business and that shows that, that's continued and achieved growth. And when you consider that the entire infant formula market in the world is absolutely in decline, we've been able to hold and grow our position. And a big part of that is the secondary part. The other products that we've introduced, and I've talked to many of you about over the last 4 to 5 years, we're starting to see some real traction with those products. And that's going both into infant formula, but also into the other markets. So food, nutraceuticals, sports drinks, a whole range of different products that we are now servicing and that whole range of customers that we've been supplying. So now 50% of our business is in other products. Those products are very unique to our business. They're unique in that we have patents around them. No one else has got them. They provide solutions to customers that no one else can do. So we allow customers, we solve their problems with unique products that has allowed us to get now 50% of their business. And that's a lot of the margin story as well. They're differentiated products that allow us to earn a bit more. So that's a good slide, and it shows a positive continued growth and that's an expectation that we have for the future as well. I'm going to hand it over to Andrew now to take you through the financial results. Thank you, Andrew.

Thank you, Peter. Peter certainly commented on the top line and the improvement in revenue. I'll probably make a couple of call-outs in relation to second half FY '24, which was [ 34.9 ]. So we continued that momentum as previously stated. So a really good first half on the top line, which Peter has indicated has flowed through the business into gross margin and then through to NPAT. A couple of items, the gross margin. We've certainly talked about the basis points improvements there. Yes, it's underpinned by a change in customer and product mix throughout the course of the period, good operational performance where we've been running our refining facility in Altona and also through Melody Dairies. So those 2 manufacturing sites have contributed. Peter did mention Ecuador and oil. We really haven't seen the benefits of that in the first half of FY '25. So we will see those benefits flow through in the second half of this financial year once we've got that oil into powder products and sold to our customers. A couple of items, again, that's not on this sheet that I thought might be worth mentioning and for those who have had an opportunity to look at the actual accounts, a couple of normalized items that is worth identifying. So currency movements certainly over the 6 months have benefited the business, partly in gross margin, but also in relation to our euro and USD cash positions where we've seen a reported FX gain of $0.7 million, and you'll pick that up in the notes to the accounts. Offsetting that is good performance, which is resulting in a requirement to make sure we're appropriately provisioned for possible bonuses to staff as we go through the rest of the year, and that's about $0.4 million variance from the same time last year. So those 2 items are worth recognizing. So overall net profit result of $2.4 million, fantastic position. No doubt questions will be answered at the end of the presentation. Moving to the cash flow statement. Really good position in terms of our operating activities, which, as highlighted, has come through good practice around our management of inventory, which we've driven down. A couple of call-outs there around Ecuador. The $445 million as reported is fundamentally the residual CapEx spend in getting the plant operational in first half 2025. And as noted, Ecuador was -- originally was debt funded where we took down that loan drawn facility. And over the course of the period, we have been paying that back, which is reflected in the lower interest costs as shown on the statement. One other point that's probably worth noting there is the income tax paid, quite a large differential on a low result last year with high income tax expenditure. That was the result of the business prepaying its taxes in 2024, which was rebalanced in the second half of 2024. So we're more aligned to where we should be in first half 2025. But last year, we had embarked on a payment program and the results that were flowing through resulted in a correction in the second half of the year. And finally, turning to the balance sheet. Again, as mentioned, really strong position, cash, which Peter mentioned, inventory down, receivables. We've had good collections throughout the course of the year, a lot more focus and follow-up with our customers, ensuring they're adhering to terms. And over the course of the year, we've continued to pay down debt. So a strong balance sheet, which puts us in good stead as we roll forward into the second half of the financial year. Just in terms of inventory positions and management of stocks there, that's really around our management of both algal and our tuna stocks of oils. We've got good positions, but it's also making sure that we're timing deliveries aligned to customer forecast so that we've got product not sitting in the warehouse for extended periods of time, but getting it in so that we can process it on a timely basis. So on a financial basis, really good first half. I'll now hand it back to Peter who'll take you through a bit more of an operational understanding -- or rather view. Thank you, Peter.

Thanks, Andrew. So if we turn to Melody Dairies, probably just to expand on what Andrew was saying. Melody helps us with velocity of inventory through the business. Being an owned site, we can manufacture much more hand to mouth. We have a significant amount of business that's in New Zealand itself. So we can effectively manufacture in a week and then send it to a customer the following week, which has certainly improved the inventory position and allowed it to move through the business quicker. But really, the story about Melody is a real turnaround in its performance. You would be aware, if you've listened to me previously, that we put a new management team in last year. We took an increased share in the business, bought out one of the other shareholders. And with the new management team, we're getting much better quality and high utilization of the facility. Of course, that's very helped by our demand that's going through the business and also the other major shareholder in Spring Sheep that's putting through significant volumes through the company and allowing us to meet the take-or-pay obligations that are in the factory to make sure it operates. The cost of production continues to decrease as we improve our volumes through the site and the site and we understand how to manufacture at the site. And we did recognize a loss in the first quarter, which was we closed the factory for a month around maintenance activities. So the rest of it has been a breakeven, and that's where we're targeting that facility. We run the facility for the lowest of cost, and that's the way it's been established. I'll move on to Ecuador. Many of you may recall that last year, we announced that we were putting in a facility. We built a facility in Ecuador, which is the third largest tuna fishing port in the world. There are many tuna canning operations and filleting operations. And there was nobody taking the excess parts of the fish and extracting oil from them. That facility was built. We are now extracting tuna oil from the heads of the fish. So we buy the heads of the filleting operations and the tuna canners. We take them through a crushing operation. We then send the crude oil to Australia. So we are achieving about 1 container a month into Australia. And we then sell the dried meal into the feed and protein industry. We're getting excellent yields. We've completed the resourcing of the facility with staff and operations. And it's been a really cost-effective business that will show in our results in the second half of the year. So it hasn't hit the cost of goods at the moment. We've been bringing product in and refining it, and it will then go into our products in the second half of the year. But excellent quality product, really high levels of omega-3. The 2 elements that we look for in omega-3 are DHA and EPA, and we are getting higher levels in those products that allow us to supply the market. The Ecuador facility has the capacity to supply about 50% of our oil. We continue to buy off other partners, and we will always do that. In fact, with the current level of demand, we have quite dramatically increased our level of purchasing from our traditional suppliers. It just gives us a lower cost base. It gives us the ability to buy oils out of a different marketplace. It gives us control over quality, and obviously, some control over price as well and availability. So it's certainly helping the business and we'll see it in the financial results come through in the second half. A bit -- we move on to some of our product categories. So DHA growth. So DHA is an element of omega-3, and that's one of the elements that a lot of our customers require to fortify their products with. We have diversified our product formulations into nonallergenic products or higher fortified powders and plant-based solutions, which many of them are on trend, you might say. And those products have allowed us to deliver solutions to customers in the marketplace, which has derived more business for us and more profitability. The entire infant formula market has been subdued because of the low birth rates. We have seen a really good rebound with our customers though. So the customers that we service have shown some good growth, especially across Europe and Australia and New Zealand. So we're starting to get more sales. Most people would be aware that around 65% of all production in the world ends up in Mainland China. So whilst China did have a small increase in the birth rate last year, quite small because of the year of the Dragon, we've seen our customers winning more share, and therefore, we grow with them and that's been very good. A lot of those customers also now are supplying into the seniors market and teenage market. So a lot of the sales that we are currently doing, especially for these newer products, aren't going into infant formula, they're going into these new products that they're targeting into the seniors market. And certainly, if you go into Mainland China and into a supermarket, about 50% of the shelf space is now seniors and the other 50% is infant formula. So it's been a real change in the blend of products that goes in the marketplace. And we're doing these sort of products across the world where people are recognizing as we all age and the marketplace is aging that they need to change and evolve their product offering, and we've done that with them. So we've been able to diversify our product base. Now interestingly, we've seen real growth in pet food. I think that's a hangover from COVID. So we're seeing customers buying our product going to pet food, into nutraceuticals, into sports nutrition. And as I've just spoken about, adult nutrition has been a major growth path for us and will continue to be in the future. As I move to other products, we've got these high fortified levels of omega-3 going into our powders and our emulsions that's allowed us to get into the pet food, nutraceutical and food for special medical purposes. And I just thought I'd give you one example. One of those products we've introduced in the marketplace is a high -- it's called EPA product. EPA, or eicosapentaenoic acid, is used -- is well known to reduce inflammation. We're providing that product into a Chinese pharmaceutical company that's producing a special -- food for special medical purposes and they're giving it to cancer patients for recovery after chemotherapy. Our Gelphorm product, which is a double emulsion -- so it's not a powder, it's an emulsion product, a liquid product, it allows omega-3s to be incorporated into UHT products, which is -- really shouldn't be possible. We've created this. So you can have a drink with omega-3 in it with no taste or smell issues and 12-month shelf life. We have been in a major brand in the U.S. and that has expanded considerably in the U.S. It's grown really well and they've expanded the range and they are now incorporating it across their entire range of products. So we'll see that grow more. We've still got the product on trial with other customers in the U.S., in Asia and in Europe. Being -- going into UHT takes a long time. Products have to be formulated, and then the shelf life testing of UHT has to be done in real time. So sometimes that's 24 months before the shelf life occurs. So I think we'll see a good future for this product and it will continue to grow. I've just come back from my travel through Asia, and we've got a lot of trials going on at the moment. Asia does like UHT, especially in that it can be distributed in a nonrefrigerated way. And we've also now just developed a more concentrated version of the product, which customers were really happy with. So it gives them a solution where they can fortify a UHT by using less product to get a higher fortification level. So it offers them a solution that they were looking for as we introduced this product to even move it further. I'll move on to bit of the stories about some of the products we've talked about in the past and still in the pipeline. We introduced last year CholineXcel. Choline, by its nature, is a product that is legislated to be incorporated into infant formula, both in Europe and in China. It has inherent manufacturing problems. So it is hydroscopic, so it attracts water, so it's very difficult to manufacture with. We developed a flowable powder and we've registered it for intellectual property globally. We did production trials in December and produced quantities to show customers. We will do further production trials with it to get it up to scale. We're going to present it at a major food show in Europe in May, where we'll show a lot of customers. And we will do some selective introduction to customers so they can see it and use it and trial it, which we would expect to start in the first quarter of FY '26. We're still working on getting it up to scale in terms of production and then the packaging of the product. So just to give you an understanding, this product is used in equal quantities or greater to the level of DHA in every can of infant formula. And at the moment, every infant formula manufacturer has a problem with it. So we have a unique solution for it. Probiotics is a project we've had running in the business for quite a while. Effectively, a probiotic is a live organism. Traditionally, it is delivered in a frozen format to a customer. So it's sort of a dry powder, icy powder. Once it starts defrost, those organisms start to die. And so we have had a long-term project really requested by customers to how can we turn that into a powder that's not frozen, much easier to deal with. You could imagine trying to take a frozen powder and put it into a dry blending operation doesn't really work very well. One, it starts to melt really quickly and sticks to everything so it's very difficult to deal with. We've had some success with this. We are trying to work out how we can make it broader across a variety of different organisms. You may know that probiotics come in millions of different formats. So we've had some success with it, and we're continuing to work on how we can increase the shelf life of a whole range of different organisms. And once we do that, we will start to deal with customers. We've spoken to some of the large probiotics businesses. They're very keen on it because no one effectively has ever been able to achieve this. A lot of people say they have, but no one's really been able to get a result. So we'll look to that for the future of growth of the business. I'll move on to Premneo. Most of you would be aware that we have developed a unique DHA emulsion. It's a concentrated emulsion that was fed into a clinical trial with preterm infants. And the outcome of that was that it proved we could improve the IQ of preterm infants by 30%. Significant result. We went out and spoke to many pharmaceutical companies who effectively said that good luck getting it approved, and we've learned that being it's quite difficult to get regulatory approval. Effectively, this product is fed to a preterm infant less than 32 weeks in a neonatal unit through a nasal gastric tube. And therefore, no one's questioned the efficacy that the product will actually achieve the result. The question has always been around the safety of it. Can you prove that it's absolutely safe? We presented results that we've had to wait for an independent review by scientists that aren't associated with our company so they can prove that it is safe. Those results are just in. Then to get regulatory approval, a panel of experts have to review all that data, and that's now in process. We're confident that we will get there. It's a challenging process to get regulatory approval, though. So the expectation is that we will get regulatory approval in Europe, which is really the first part of the world looks at for scientific or pharmaceutical approvals. And once that's approved, then most other marketplaces will follow. We have had discussions with potential partners in this product, and we have them ongoing. And we have had discussions with manufacturers. This product will be a pharmaceutical, so it has to be manufactured under pharmaceutical GMP standards and packaged that way. And really cost effectively, India is the only marketplace where you can do this. Most pharmaceutical companies in the world manufacture and package their products in India. They have very impressive facilities. So Premneo has still got some way to go. But again, it's an exciting product once it actually gets into the marketplace. One, it will generate some profitability for the business, but really, it's going to be a fantastic solution for babies, which is a wonderful outcome ethically. As I turn to the strategy and outlook for the business, I'm sure many of you will be interested in this part. Look, the strategic focus for the business operationally and supply chain is very much around Ecuador and Melody. Getting Ecuador's supply chain aligned into our business, increasing the volume of oil through that will help the gross margin of the business. And then Melody, getting it up to speed, it's running really quite well at the moment. And if we can continue to build on that volume and have more product come through there, it allows us to manufacture a lot of these sort of more unique products that we're selling into the marketplace. It now represents 50% of the business. It gives us a lower cost base that, again, will allow us to support customers in terms of pricing position, but also improve our margin position as well. And then into the innovation and growth of the business. We've just appointed distributors, they'll take time to come on board. Partly at the moment, they're learning and understanding the market. But that will really help the reach of our sales. We've been very good with large accounts. These distributors have access to hundreds of smaller accounts that we traditionally just cannot service with our team of 10 salespeople. So this allows us to access hundreds of salespeople that are selling multiple products and are really genuinely quite knowledgeable in the entire marketplace of bioactives, and that will help us get some more growth in the market. The Choline product will move into further trial work and production work to build the scale of the product and then we will allow customers to take the product for trials. We'll be quite selective in the way we do that, and that should lead to commercial sales after those trials take place generally 12 to 24 months. Getting regulatory approval for Premneo, we would expect ANZ and Europe to come fairly quickly once this comes through. And I'll be heading up to India again to talk to the distributors and the packaging businesses in the next couple of months to try and move that along. And diversification remains the key. We've shown that diversification of product allows us to improve sales and maintain sales and margin in the infant formula market, but also in the food and nutraceuticals and other markets as well. So that will allow us to grow along with products like Gelphorm and Premneo. It gives us exposure outside of the infant formula market. We will never ignore the infant formula market. It's a great market for our products. It supplies volume, and we get a lot of revenue and profitability from that market. And then Choline. The CholineXcel is a unique product that no one else has a solution. It solves our customers' problems. We've been talking to them about it, many of them are quite excited about it as we are. So once we've got that up to scale, that should help us in future years. So there is an outlook for growth for the business. We've shown that we're back in line to growth in our more traditional products and more -- the products we've released over the last 4 to 5 years, and these will just continue to add on to that. So as I move to the outlook for FY '25, so for the remainder of the year, the Board expects the momentum in the first half of FY '25 to continue with a stronger second half, assuming current forecast demand and the global conditions prevail. So it looks like it's going to be a good second half, I'm happy to report. And I'm happy to take your questions as well. So thank you very much for listening. Thank you, Andrew. And I'm looking forward to hearing your questions today. Thanks.

[Operator Instructions] Your first question comes from Apoorv Sehgal from UBS.

A few questions from me, please. First one, based on what you're seeing through February and March so far, can we talk about like what kind of second half skew you're expecting? I mean, I guess if we go back to FY '24, it was a 56% sales skew in the second half. It feels like momentum is pretty good so far. So is that kind of skew roughly what you might expect to land in this year?

We're not going to -- AP, thanks for the question. We're not going to provide you with guidance other than what the Board has approved us to give. What we can say is that it's going to be an improvement on the first half. Traditionally, the business generally does have a second better half than the first. But we're continuing at the moment to see strong forecasts in the business, which gives us a really good view of the entire half, and that's looking really promising. Assuming customers place orders to that and take the product and we can manufacture it, which is another problem, then it's going to be a good second half.

Okay. And just sticking with the top line, if I look at Europe specifically, it was very strong. From memory, there was a customer you lost there last year and then they started reordering again. Is that kind of the driver behind that big sort of rebound in the sales? And I'm just wondering, is there anything kind of one-off or abnormal in nature in that $10.5 million that we should be thinking about in the second half? Or do you think that $10.5 million is kind of the normal run rate?

I don't recall a customer that we lost. Other than China, we lost some customers, is there one, Andrew?

So just for clarification, AP, Europe is Europe and Middle East. So I think we had reported previously the Middle East had stopped ordering. So we've seen some of those orders come back in the second -- in the first half of this year.

Yes. I think we had a Middle Eastern customer that ordered way too much inventory and it's taken them a long time to wash that inventory through, but they have returned and we're seeing it. A short answer to the question is we would expect that to be a normal run rate. And we're certainly seeing broadly our customers, the big ones and the smaller ones, all starting to recover their positions. I think some of them just lost their way relative to the changes in their licensing and positions supplying into China and a lot of them have now been able to navigate their way through the marketplace and find their positions again.

Okay. That's encouraging. Let's move to gross margins then. That was a pretty good result, 29.6%, good recovery there. Can we talk about your expectations for the second half, particularly given your comments on Ecuador? It sounds like that hasn't really given you a gross margin benefit just yet and that should be coming in the second half. So just how should we think of second half gross margins versus first half?

So you are correct there, AP, in terms of Ecuador and as we talked in the presentation, whilst we're manufacturing, that oil hasn't actually been sold in finished product in the first half. So as we bring that through the system, it is cheaper than our current sourced products from other suppliers, which is what we're looking for. The customer mix, we also see as being consistent moving into the second half, which has helped us. So when you're asking for guidance on what the second half gross margin, I can't really see it going backwards. So holding or slight improvement.

Got it. And so the mix is...

Sorry, can I just add on top of that without wanting to say too much. The benefit of a weaker AUD has helped the business. We source in USD, but we also sell in USD and euro. So those currency positions have assisted some of the GM percentage point improvement. What happens in the second half, I don't have that crystal ball view.

Got it. Okay. So if we just assume FX sort of holds where it is and the Ecuador facility is giving a bit of a tailwind, customer mix is normal, really should be gross margins should tick up slightly in the second half?

Yes.

Yes. Okay. That's cool. I'll ask one more question and then I'll kind of maybe go back in the queue. On operating costs, so first half OpEx, pretty well controlled, $7.5 million. How should we think about the second half, please?

So second half, in line with where we're trying to take the business. We have increased heads late in the first half. So we will see some employment costs tick up in the second half. And also within our R&D cost base, we test every product. So the more product that we're selling, we've got to test more products. So some of those costs will come through as well. And then the other point that I mentioned earlier was the provisioning for short-term incentive bonuses. If we continue in line with how we're performing, there will be an uptick in the provisioning for what we call merit or STI. So it won't go backwards in the second half, it will go up a couple of percent.

So the OpEx will be a couple of percent higher in the second half versus first half?

Correct.

Okay. So not too much change. That new market development cost line, normally, it's a little bit higher, but this time it is like $100,000. Is there meant to be an uptick coming there? Or is that just you're sort of done with that stuff?

No. So what I had tried to do and communicate with yourselves and the rest of the market is the new market development costs were related to our development in the likes of Premneo in Ecuador when we're establishing the facility. Ecuador is now part of the base business. So it's no longer hitting that disclosure line. So what you're seeing there is ongoing regulatory costs associated with Premneo, and we'll expect to see some costs related to Choline as we move into that phase of spending money but getting no return.

Sorry. Can I just double check? You said before OpEx in the second half only maybe a couple of percent higher versus first half. Is that -- just based on some of the comments, it sounds like maybe it should be a bit more -- higher because every cost line could be a bit higher. I'm just wondering if I interpreted that correctly.

Yes. So each of those 3 major departmental cost lines for OpEx will go up 4% or 5%.

Okay. So 4% or 5% should be the total OpEx growth in the second half versus the first half, really?

Correct.

Your next question comes from Mark Southwell-Keely from Select Equities.

Just firstly, in terms of the U.S., the overall revenue in the first half despite some continued great progress is still relatively small. During the presentation, you mentioned that the U.S. customer is extending the application of Gelphorm across the whole range when I think of its products. Can you maybe give us a sense of the scope of what that might translate to? Is that like an extra 25% on the U.S. revenue or is it like an extra 3 or 4x?

I don't know, Mark. We've certainly now -- that customer is now representing virtually all of those U.S. sales. So a lot of the other smaller things we were doing have fallen away. So that one business represents nearly every cent of it, so without them, the U.S. is very disappointing. I'm not sure it's going to get much better in the short term. So I can't give you a number, because I don't know the number. We've certainly seen significant uptake in their product. I know they've just bought more product only in the last week. So they're continuing to grow. Their brand is doing well in the marketplace. We expect them to grow, but I don't have a number for you. But overall, the U.S. has been a real disappointment in terms of our traction to get sales, and we need to do more to make it a bit better in that marketplace. We have just appointed a major distributor for the entire U.S. market, which we would hope can bring more sales in that marketplace and better access to the market.

In terms of the commentary around the application of the product in relation to different, I guess, milk powder products, say, for seniors, can you give us a sense for what you think the growth rates for those underlying products are?

I think they're going to grow a fair bit. We've got -- we've been successful in our powders into a range of seniors products. And your business especially would be aware that a lot of the Chinese manufacturers are now moving towards the seniors marketplace. With their capacity reduced from infant formula, they're now trying to focus on other markets. But we're seeing it throughout all the Western manufacturers as well. So it may be a bit of a transition of volume. We could see a 10% uplift in the business because of businesses going through new inventions of products. They all recognize that they need to be in this segment. Some have moved quickly and some are very slow. So yes, it could be a 5% to 10% improvement in the business overall over the next couple of years.

Just finally, in terms of Melody Dairies, first, the maintenance of the facility, which you quantify as 1 month, can you maybe just translate that in terms of what the costs were for that period where there was no revenue? And also, is this an annual maintenance commitment? Or how often does this occur?

So Mark, Andrew. Yes, it's an annual program that we go through. So it's happened over the last 4 or 5 years that we've been associated with the facility. The 3-week period, generally, is what it is. Fundamentally, what it does is it probably takes out close to 80% of our production days available. So the facility charges a rate per production day for that revenue. It loses 80% of its expected monthly revenue, but then it's got to cover its operating costs, et cetera, wages, et cetera, et cetera.

Because we run the business at breakeven, it's effectively not covering its costs during that period of time. So that's why it represents a loss to the business.

What's the dollar amount?

So we said the business has been targeted and running close to breakeven post that period. So in terms of what we've recognized to date sort of indicates a little bit about what that operating cost was in that first month.

Your next question comes from Stella Wang from CTHD Investment.

Can you hear me all right?

Yes, Stella. We can hear you.

One question regarding U.S. Firstly, do you see if they do impose tariffs on agriculture and pharmaceutical products, do you guys fall into that category? And also from memory, previously, around year 2020, you have products going into U.S. UHT milk product. If I remember right, with Enfamil was under Mead Johnson, but that line has fell off as well. So I wonder if this round with currently looking good UHT milk product in place and growing, is there any risk that they are like Enfamil product previously, they go well for a while and then sell through again?

There's a lot of questions in this, Stella, so I'll try and answer them. Our customer base in the U.S., I would call quite depressed relative to the rest of the marketplace. We've seen good recoveries through Europe, Australia and New Zealand and really there's been movement of product into New Zealand out of Asia, but that's been good growth whereas the U.S. has actually been in decline. As for what Mr. Trump is going to do with tariffs, I don't know. At the moment, we have a free trade agreement with the U.S. and we enjoy that in being able to supply the product. It's the emulsion product that we supply to them. He may apply a tariff to it, I don't know. The one thing with the products that we supply in there, the tariff codes that we supply under are fairly protected because they're going into production. They're not a finished product, if I can put it that way. So if I was supplying a finished product, I might be subjected to a tariff. We might be protected, and might is the word, in that we are supplying ingredient to an American manufacturer that then is producing a finished product. And there is no alternative. So the product we supply to the UHT manufacturer, there's no equivalent in the world. So they don't have a choice. They can't go to somebody else. I don't know if that answers your question well, but as I said to Mark, Americas have been very disappointing because, yes, we have a major infant formula customer there, but they've been terrible, to put it basically. They're terrible.

That does answer. Can I have 2 more questions, if it's okay, just very quickly?

Go ahead. Sure.

Yes, the first one is in terms of Choline. It sounds like the first time we see any commercial sales at the earliest will be H1 FY '27 considering 12 to 24 months shelf life testing. Is that about right?

Yes. I'd say that's the conservative approach. We may see customers -- we'll see customers doing trials in the first half of '26, which really isn't that far off. And some of them will -- I think it will give them such a good experience that some of them may accelerate it. They have a significant problem, and we can solve it for them. So we may get it in the second half of '26. But yes, conservatively, I'd say FY '27 first half is where we'll see the volume come through.

Great. And then lastly from me. Melody Dairies' covenant breach has been in there for a while. Now it's breakeven. When can we see that kind of hammer hanged there lifted?

Yes. We keep communicating with the bank. They're very happy. Well, they're happy because we're paying them money. We haven't missed a payment effectively. So they're just not going to withdraw it. I think it's maybe more of a reflection of the New Zealand market than just ourselves. It's BNZ, the bank. We talk to them quite regularly. And I think the New Zealand market, in general, is going through some problems economically. There's been a lot of defaults within the New Zealand marketplace and customers have been going to liquidation for them. They have not acted upon that note at all in the last 3 years, but it stays in place. They haven't -- they just leave it in place. They are not willing to remove it until we've moved through the loan. I think we have about -- the business loan is about NZD 19 million. So it's a fairly large sum, but that's of Melody. So we own, in Australian terms, about $8 million of that loan.

[Operator Instructions] Your next question is a follow-up from Apoorv Sehgal from UBS.

I thought Slide 7 was interesting where you showed the base infant formula versus the new products' contribution to sales. Just to clarify, that 50% for the new products, can you divide that between what's infant formula-related new products versus non-infant formula? I'm just trying to get a sense of like how much of your total group sales are now outside of infant formula?

Look, the short answer is no, we can't. And why is because we sell these products to infant formula company, XYZ, without giving you the company's names. And they then put them into teenage milk drinks. They put them into sports nutrition drinks and they're putting them into, as I've alluded to, seniors drinks. So it's certainly broadened the application of these products into a whole range of new products, but they don't tell us. They just buy. We do applications work with them to show them how to do it. But then once it gets down to the tin tacks of what they're ordering of us, they're very secretive about what they do with it. And we supply to 60% of the world's infant formula manufacturers and they are very secretive. So that's why we can only depict it this way. 50% of our products are now not the traditional base infant formula products. They are more unique products that we have created and patented over the last 8 years. And it shows diversification of the business. We've always said that our target is to try and get 50-50 infant formula and non-infant formula. I'd suggest today that is more at about an 80-20. So 80% of the business is infant formula and about 20% is other products. But it's really hard to give you a definitive number. And you know what, we would love to know. Out of everybody, we would absolutely love to know, but they are too secretive to tell us.

Okay. No, that's 80-20 is helpful enough. A question for Andrew. Just on the inventory, the $24 million at the first half, could you give us a sense of what you're expecting come 31 July?

Yes. Peter made a reference there that -- around our ability to supply. So we've got pretty tight at this level. So -- and it will all come down to timing, AP, around when deliveries are made. But I'd expect it, at this point, to tick up a couple of million. I originally targeted to get it to [ $10 million to $30 million ] when it was at $36 million if you might remember back then. The fact that it's continued to track down has been pleasant. But it's probably, yes, a couple of million would give us a little more comfort around our ability to respond to unforecasted demand.

Okay. And one last one for me. Just on the -- just a follow-up question on the tax. So the tax rate was 30% in the first half. Historically, it's obviously been a bit lower than that and you've kind of explained earlier why it is a bit higher. Just going forward, Andrew, what kind of tax rate should we assume in the second half and sort of beyond that as well?

Well, conservatively, I'd be sort of that 29% is where we would expect it to finish, which is in that range.

29% for the full year?

Yes.

And that's kind of the go forward. Because I just thought with the Middle East and all that, maybe it would actually drag the tax rate maybe closer to 26%, 27% like longer term.

Yes. Look, in terms of the jurisdictions that we sell into and in accordance with the way in which we manage our transfer pricing across all of those regions, yes, it can be influenced by just the volume of sales in regions, but I'd expect it to come back a little bit where it is at the half.

There are no further questions at this time. I'll now hand back to Mr. Davey for closing remarks.

Thanks very much for your attention. I'm sure I'll see most of you over the next few days, and happy to take any further questions outside of this forum. So thanks very much. Nice to be delivering a better result and showing that we're back on growth, and that's the expectations of what we bring in this business every day. I look forward to delivering a better result again for the end of the year. Thank you, Andrew. I appreciate your time as well. Thank you.

Thank you.

And that does conclude our conference for today. Thank you for participating. You may now disconnect.