Clover Corporation Limited (CLV) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Clover Corporation Limited FY '26 Results Briefing. [Operator Instructions] I would now like to hand the conference over to Peter Davey, Managing Director and CEO. Please go ahead.

Good morning, and welcome to the FY '26 results presentation for Clover Corporation. I'm Peter Davey, the CEO and MD. And with me today is Andrew Allibon, who is the CFO and Company Secretary. So I go to the results page, a really strong year for the company. In fact, a record year for the company, which I'm really proud of everybody that works here. It's been a wonderful year, a very difficult year to meet the performance. It just really shows that we've been on a path for a long-term growth, and it's delivering, and that's what we've been trying to achieve and we'll continue to do. The year was highlighted by $97.4 million in revenue at a 35.5% average gross margin across the business, a 4% improvement in margin. The revenue growth was slightly ahead of our guidance, which was $92 million to $96 million. It was 13% improvement up on what was very good FY '26 (sic) [ FY '25 ] at $86 million. And the gross margin is really a testament to the innovation that we have in this business where we've further increased the product mix and getting the benefits of our vertical integration strategy, which we'll talk to in more detail. EBITDA at $17 million is up $4.7 million on the prior year, really driven by that sales growth and the gross margin improvement, but also our operating costs have been really held well in line as a percentage of our sales. Net working capital has increased to $49.8 million. It's up $7.5 million on the prior year, and it's really driven by increasing our inventory position by $19.8 million to meet the increased sales that we're getting through, especially across our ARA and fish oil products. We've had to buy in more inventory to meet that forecasted demand. The balance sheet remains very strong. We've got $7.2 million in cash. And pleasingly, we have no more interest-bearing liabilities. NPAT at $10.5 million, up 50% from the prior year of $7 million with the increased drivers of lower expenses and an effective tax rate helping that number. And from that, the Board has declared a final fully franked dividend per share of $0.0125 per share. We move on to the next slide. This operational highlights page, really the middle of it stands out to say exactly what we do. The adherence to our growth strategy with investment in customer diversification and our new product development is what's delivering. It's delivered improved revenue. It's delivered improved profit margins. And what it's really done is position us for long-term growth. We've got customers with unique products that have developed their solutions and they're utilizing our products in those, which is a real partnership in the marketplace that drives future long-term growth. Across the year, we've seen significantly improved demand for our high-quality ARA products from the infant formula market. Melody Dairies has delivered a profit in line with our expectations. But most of all, it's delivered a reduced cost for our business, which is benefiting our margin position. And we've expanded our distribution network globally with 30 distributors now. And we have repaid all of our debt. CholineXcel has moved along. We've gone into registration of the product. We're now looking at commercial packaging options. We've established a dedicated resource to help us enter the U.S. nutraceuticals market, and Ecuador continues to deliver for the business, and we're looking at further increases in its capacity, all of which I'll go into a bit more detail. The product mix slide, which we've shown several times now, really continues to show the success of our innovation strategy, which is diversifying our sales and our customer base. Now when you look at that graph, the second half of FY '26, near 2/3 of our sales are from 18 products and our traditional base products, which are 3, one of which being oil, is now 1/3 of our business. So that's really helped drive the margin position of the business. What it's really doing is helping our customers with solutions that are driving their businesses, which improves our demand overall. Really, the story of the year has been 2 things: Western manufacturers, especially infant formula market, have done very well into the infant formula market of Asia and China and Greater China. And then we've seen significantly increased demand for our ARA powder products. The ARA powder is a required inclusion in infant formula and we have what we think and many of our customers do the best quality product in the world. With that, we'll move on to the financials, and I'll let Andrew take those over for us. Thanks, Andrew.

Thank you, Peter. Peter has certainly highlighted the top line and the results in terms of margin over the course of the year. So I won't labor on restating those numbers. In terms of our revenue position, as highlighted those, 13% increase, predominant increases in the ANZ Western manufacturers with around a $10 million movement year-on-year and through our European, Middle East base of a $6 million increase, which offset some small declines through the Asia and Americas. So in reference to Peter's commentary there, Western manufacturers, that's where we've seen good growth. And as Peter said, back into parts of the China -- the Asia market. Again, Peter has highlighted there the margin, so I won't spend too much time on those, and there may be questions at the end of the presentation. Our operating cost growth, an 8% increase. It really reflects our continued investment in people across the business and across all areas, be it finance, sales and research and development. That's why costs are up there. Our new market development costs increased year-on-year, predominantly with the U.S.A. market expansion that we're undertaking. And again, we'll talk more to that later in the presentation. So really pleasing with the NPAT growth and our EBITDA percentage continuing to increase. For those of you who had the opportunity to look through the Appendix 4E in more detail, you'd certainly see that as part of our result, we endured or had to account for FX translation losses of $1.1 million and I'll talk to that a bit later as well. So a great result in terms of EBIT. Just moving to the next slide, which is cash flow. On the back of, I guess, great performance, we'd like to see more net cash inflows from operating activities. What we've highlighted in this slide is the significant increase in inventory. With inventory, 50% of it is raw materials, 50% of it is finished goods for FY '26. And the requirement for higher levels of raw materials and finished goods really translates to the supply chain, the time and length of our supply chain. So we've got the demand to meet customers' requirements, but we do need to order oil. We need to test the oil. We need to manufacture it into powder. We need to test the powder. So we end up holding larger values of inventory, and that's fundamentally where the operating cash flows have gone over the course of the year. Purchase of plant and equipment, not significant, largely matching depreciation over the course of the year. And with the performance of Melody Dairies, which is the loan to associates, there was a repayment of a short-term loan that had been created some 18 months ago. So pleasingly, they've been able to repay back some of that assistance. And as Peter said, our interest-bearing liabilities for Clover have now been fully repaid. So we're well positioned to move forward on our capital planning program, which again, we'll talk to a little bit later in the presentation. I think in the half year's result, we certainly did the AGM last year, we sought shareholder approval to -- for the company to support an acquisition of shares to satisfy future vesting rights around our long-term incentive scheme. We purchased $700,000 of shares, and that's detailed more fully in the annual accounts and we'll continue to look at that position as we go forward over the course of the year. I will now move to the next slide, which is the balance sheet. I've had references that it's considered a lazy balance sheet with 0 debt. But pleasingly, the cash position, we've been able to maintain trade receivables, good collections over the course of the year and through to the end of the year, the inventories, as I indicated, certainly up to support our customers. Trade payables, a little bit of extension, more timing related as we purchased that inventory having settled debt with our trade payables suppliers. So in terms of the net asset growth, up $5.8 million year-on-year, a great outcome. I will now hand it back to Peter. So rather brief, but I think certainly questions later on.

So I'll take you through the operational highlights of the year, and we'll turn to Ecuador first. So part of our vertical integration strategy has been the purchase and the construction of the Ecuador facility, where we sustainably extract tuna fish oil. So that investment is now representing a contribution to our overall margin position because we source the oil at a cheaper cost. It now is 30% of our total raw material inputs in FY '26. So it's a big part of our business. We are continuing to negotiate for additional supply of tuna heads. So effectively, the factory takes from the canning operations and the loining operations, the head, which obviously doesn't go in the can. So we take the head, which would either be dried as a meal. We extract the oil from it, and that's -- we bring it here to Australia then to clean and then supply through our products. We have invested in additional people during the year as we've grown the business, and we are committed to that site to source from suppliers who demonstrate sustainable fishing practices. It's quite a strict ruling and any of our suppliers have to meet the EU standards, which are quite grueling. The second part of our vertical integration strategy on the next slide is our New Zealand investment. So we have a partnership in a facility there. We are a 44% owner of Melody Dairies where we turn our oils into powders. It's been a great year for that facility. It's well managed. It's well run. It's producing excellent quality product, and it's become much more efficient in its operation. We have customers continuing to qualify the facility. It is now operating at near full capacity, 24/7. And Clover has got other facilities [Audio Gap] 50% of our powders. Weekly, we're utilizing the facility along with our other partners and shareholders, and we will continue to pursue that business for improved productivity and reduce costs across the overall. Both of those are now part of our vertical integration and contributing and helping that market position for the business well for the future. I'll move on to some of our product story. First one being choline, so an update of where we are. So choline is a unique product where we've taken a choline product. We call it CholineXcel. We have encapsulated that, so it's now a free-flowing white powder. Traditionally, choline is a very difficult product to manufacture with, and we've been able to turn it into something that is very easy to manufacture with. It's very new still. We've provided samples to select customers under very strict conditions until we got our PCT stage of intellectual properties. So we've applied for that. Now we've been granted the first step of that, which allows us to be a bit more open in terms of providing samples to customers for more trial work. The full patent protection follows that, but it won't be for 4 to 8 years. So the PCT stage gives us a degree of protection in the marketplace. We've gone through all the manufacturing trials, which has gone really well with a manufacturing partner. We're now looking at how we package that and the formats and the equipment required so we can increase our production rates. We have had customer trials since the first quarter of FY '26 in non-infant applications. Generally, customer trials will go from 12 to 36 months. It depends on the shelf life for their product. So some will be relatively soon and some will be a lot longer. Overall, our current partner, and I expect that partner to be around for a long time, is relatively small to provide with enough product to do some small food and nutraceutical business. We are generally looking for a larger scale manufacturing so we can enter into the infant formula market. And so we've got all different sorts of things we're pursuing, toll manufacturing, joint ventures and acquisitions. So everything is on the table at the moment because choline is going to be a wonderful product for this business going forward, and we need to be able to produce it at scale so we can meet demand as it comes on. Move to the next slide. So our 2 core ingredients that we microencapsulated and turn into powders are DHA, which is an omega-3 and ARA, which is an omega-6. So I'll take those 2 products, and I'll give you a bit more detail about them. We have continued and will continue to invest in our R&D to create different alternatives and different representations of these products. It's a major part of where our portfolio growth has been delivering in terms of revenue and differentiation of our product offering in the marketplace. And we have a whole range of products for the DHA of non-allergenic high fortification and plant-based products that we really provide to a customer as a solution that they can't get from anywhere else. These are unique products. It allows us to have a great relationship with our customers, providing them with a solution to a problem they have and so they can create unique products themselves. And we're expecting that our change in our distribution structure where we've aligned with external distribution businesses around the world will further grow that marketplace as that gives us entree into other customers that we normally couldn't access. In the ARA growth market, we've seen really improved demand. We are known across the infant formula marketplace for having an extremely high-quality product and that has won a significant business over the last year, financial year. And going into FY '27, we're seeing some really good projections and growth and discussions with customers that will continue that growth in the market. Really, overall, we've seen good business last year, and we expect that to continue into FY '27. And then our diversification in that area is growing. We've added new packaging equipment that allow us to present the ARA product in different formats that allow us to enter into markets that we haven't normally been able to access. Move on to something quite new is the U.S. nutraceutical market. The U.S. market for nutraceuticals is enormous and it has changed significantly over the years. The market is now looking for alternatives to the softgels and capsules that has traditionally been using. So powders, gels, liquids, gummies is becoming the new part of that marketplace. Why? Customers are sick of taking pills. I don't know how many pills they can take of the day. There's a much higher emphasis on taste and convenience of our products being delivered. The sports nutrition market is growing. Seniors and children especially have difficulty swallowing pills and tablets. So they're looking at different formats for delivery of their omega-3s generally and the marketplace itself is accepting and also requiring encapsulation technologies like ourselves, ours to deliver on those products. So our technology is really well positioned to deliver into nutraceutical formats. You can't put straight oil into a powder or a gel or a liquid. You need to encapsulate it, so it doesn't have the smell and taste. And our technology can deliver very high doses in very small particles. We have employed a nutraceutical expert that's going to focus on the strategy for that marketplace. And he's looking at supply chain considerations and potential partners for us to acquire or enter that marketplace with. We are using this as an entree to establish market presence in the U.S.A. for other products as well, like our gel-form product. And so we expect this to open the door for other opportunities for the business. We will see additional costs in the business driven by this. Over the next 2 to 3 years, we will gradually increase our expense as we look into this marketplace and start to enact that strategy to grow the market into something new. So it's another leg to the business where we can find new growth for the company going forward. We move on to the next slide. So the strategy and outlook, everybody always looks at the outlook page. The strategic focus across the next year, choline will be a major market focus. We will release choline, although in limited volume until we get more capacity. We will get more customer acceptance. We expect initial customer orders, and we will scale up manufacturing. And a large part of the new product introduction to the marketplace is in certification by customers and the dryers itself. So we find a customer, they have to do their own trial work and then they have to come and certify our manufacturing process. So there is time involved in this process. As I discussed, the U.S. nutraceutical market is a new entry for us, and we're looking for that for growth for the future. And we have established a distribution network across the world. We will look to develop that through a pipeline of new sales and new customer applications. We will continue to invest in our facilities here and in people and potentially in other markets. And we'll continue to focus on the development of our products and diversification. It's a clear strategy, which has delivered growth and good margin position for the business. And we'll look to continue optimizing our supply chain and the cost structure associated with it. So by vertically integrating, we've delivered margin improvement with improved negotiation capabilities around buying products, but also the access directly of now supplying ourselves with a large percentage of our own manufacturing and our own supply chain for raw materials. So the story of the future will be managing our capital for future growth. We will invest in the future to continue growing this business as this year has been out as a good testament to show what we've been able to do. So as we look to the following year and the next slide, so the FY '27 outlook, Clover enters FY '27 with a positive momentum supported by the demand for its products and our vertical integration into our supply chain and the expansion of our distribution network, all of those are contributing to the growth for the future. We do anticipate significant investment in the development and ongoing commercialization of our new products, and choline will take money to deliver to the marketplace. It needs manufacturing capability. Based on the current market and global conditions, the Board expects revenues for the first half of FY '27 to be ahead of the prior corresponding period. Thank you very much, and we will now open it up to questions. Happy to take your questions. Hopefully, we can answer them for you.

[Operator Instructions] Your first question comes from Caleb Weng with PAC Partners.

Just on ARA, you called it out as quite a big contributor for growth this year. Is that mostly in ANZ? And also, how should we think about the quantity and how much contributed to growth this year versus how much we can expect in FY '27 from ARA?

Thanks for the question, Caleb. It was a big contributor across the year. I think we grew sales by $5 million across the entire year. It was about $4 million in the second half, so about 50% of the growth in the second half was driven by the ARA. It was global. So a lot of the sales went into the ANZ market, generally Asia, some China and quite a bit into Europe. So it's not with one customer, it's with many. So -- and look, the way we've entered that is we expect that to continue. So we'll see -- we would expect to see that second half continue into the first half of this year.

Yes. And so that inventory buildup, I think you guys went from about $35 million to $44 million. Is that mostly just ARA building up? And can we see that as a sign, I guess, of your confidence in FY '27 orders?

Yes, you're right. It's a combination of both the DHA oils and the ARA. But significantly, ARA is a significantly higher cost product to buy in the oil and the supply chain for it is significantly longer. So we've had to buy in more inventory. And because we've had more sales into the European market, we've had to position finished inventory into the European market to support that growth. So we're confident as reflected in the outlook comment, we expect to have a great first half.

Yes. And are you still going through sort of the qualifying processes with some customers to sort of establish ARA supply? Or have you sort of already qualified for all the major customers?

Pretty much qualification is done. Most of what it's now, it's about more negotiation. So there are customers that are continuing to come to us for supply. And -- but qualification is done. We're pretty much qualified across the world with our ARA product now.

Yes. And just one final one for me. On Europe and Middle East, that sort of fell a bit backwards in the second half. Is that to do with -- I think you highlighted before, there was a Middle East customer you had that was quite significant. Is it just them getting impacted by the war or...

No, not really.

So it's probably just more general timing. Yes, there's goods in transit issues that we deal with. So some of that could have played out in timing of the sales, Caleb.

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

Just a question, firstly, around your second biggest customer. Can you maybe just talk through the drop in revenue with that customer and what you might be expecting to see in F '27?

So a little bit of a shift in the customer mix over the course of the year. I think we would see an increase in #2 customer over the course of next year.

And in terms of the second biggest customer in particular, might you expect them to sort of return or surpass to their, say, F '25 level?

Yes, we would. Yes.

Okay. Terrific. Just my second question is, I guess, by exclusion, it's not necessarily financially or even commercially relevant. But just there's no mention of Premneo. Can you maybe just give us an update on perhaps why that is the case?