Comvita Limited (CVT) Earnings Call Transcript & Summary

Good morning, and welcome to the Comvita Limited Half Year Results Conference Call. Today's call is being recorded. [Operator Instructions] Thank you all for your attention. I will now turn the call over to Chairman, Mr. Brett Hewlett.

Yes, good morning. Thank you, Nick, and welcome to everybody. My name is Brett Hewlett. I'm recently appointed Chair of the Board. And with me today, I've got David Banfield, our new CEO. He's, I think, 25 days in the role. So he will certainly bring some fresh perspectives in the discussions. We've also got in the room, Julianne Keast, who's the acting CFO. And actually, this is Julianne's last meeting. So thank you very much, Julianne, for your very much valued service, and wish you all the best in the future. I thought we'd first of all start with something that's really top of mind for us all, really. And it's, of course, coronavirus. We're obviously monitoring the situation very closely as everybody is. Our first thoughts, however, go to our extended Comvita team and staff around the world that are all being impacted by this. We have approximately 200 people in the Greater China region. And of course, the region has also been impacted by the social unrest that unfolded in Hong Kong very recently. So people are really being under a great deal of pressure there. So I want to thank them all for their resilience and commitment to the cause. But we will reflect on the commercial impact of coronavirus in the report as we go through, but I just thought it would be important to acknowledge the human pain and suffering that's going on at -- to such a degree. Probably to start, I'll hand over to David shortly, I'm sure it's he you want to hear from. But just to sort of provide some headlines. We have -- we will report a net loss for the first half of this year of $12.97 million. And I'll get David to explain that. A very disappointing result. But under the circumstances, not a surprise to us. This includes about $5.8 million of nonoperating items, and David will take you through what that looks like. At the ASM in August (sic) [ October ] this year -- or last year, we said this was going to be a year where we would stabilize, reset and refocus. We are aiming to be back in the black this financial year and on a modest growth in revenue, and that trend, where underlying EBITDA earnings is positive. So we are trending the way we have intended. We are seeing revenue growth across the board, primarily due to the China market integration. But on a like-for-like basis in China, we've seen about a 15% growth in revenue. And probably, more importantly, underlying earnings in China has grown by about 30% on a like-for-like basis. The organization overall is generating positive cash flows, and we are paying down debt as we go along. We are in the process of a business transformation, and David will take you through some of those findings here and thoughts on how that's going to go and what he hopes to achieve. I'd probably just also like to take the opportunity to thank the staff and my fellow directors on the Board for their resilience as we go through this change because it's been a fairly traumatic change for everybody, really. We also announced today that we are going to raise capital. We -- as I said, we're paying down debt. We were operating positive cash flows. And we expect that to continue. But we would like -- given the reset that we're undertaking and given the current events in front of us, we feel that it's appropriate to build some resilience into the business. So we have engaged Craigs Investment Partners and Forsyth Barr and retained them as joint lead managers, and we'll be providing some details to the market shortly around the details of that capital raise. But we just thought it was appropriate at this time to move on that. Probably enough for me, David, I'll hand over to you to take us through the detailed results.

[Foreign Language], everyone. My name is David Banfield. Look, before I take you through the key numbers. What I thought I would do is just share the sort of high-level focus for the business and that we've been going through. So at a really high level, 3 things that we're aiming to achieve. The first one is about systematically fixing the issues that have held us back, creating a flexible, agile organization that's able to react appropriately to positive and negative opportunities that we see. The second aspect of the area of focus is really about transformation and simplification of our overall operating model and us as a business. And again, as I talk you through the nonoperating impacts, you can see some of that complexity that we have within the current organization. And the last area really is about focus for us. Focus on what we consider to be the long-term growth market and the markets where we're able to really get a breakthrough in scale and profitability in China and North America. Overall, the position is we need to come back to a position where we are in a position to manage those external factors that have harmed us. And with various strategic initiatives we have underway, whether it's at a harvest level, whether it's a daigou level, we now have a better ability to manage any of those impacts on the downside and still benefit on the upside. The final bit is just making sure that we have a real link to what's actually going on in the market. And this is really crucial for our long-term success. So back to the interim results just in review. So as Brett shared, a hugely disappointing net profit after-tax loss of $12.97 million. Nonoperating items at EBITDA level $6.7 million, and I'll take you through a waterfall of that in a second. One-off EBITDA, OpEx, again, I'll take you through that in a second, which would give us an underlying number of about -- an EBITDA -- underlying EBITDA of $1.3 million. Group revenue increased during the period by 20.7% as a result of China integration, and China did show the positive signs that we anticipated with revenue up 15%, earnings up 30%. And within that earnings increase of 30%, there's actually an extra $1 million investment in activity in-market, which is designed to grow brand equity and long-term opportunities. So again, I'll come back to that. We've seen inventory reductions. As we said, we would -- a net debt reduction versus the PCP and a positive operating cash flow. So slide -- slide -- sorry, I lost the page number, 9, gives you that waterfall of the EBITDA reconciliation. So all those nonoperating items, I'll just quickly walk you through those. So if I focus on column 2, the EBITDA numbers. So you can see the further financial statements, EBITDA of $8.8 million. The first aspect there is a fair value of inventory on acquisition of the China subsidiary. So definitely one-off in nature. So you see $3.5 million one-off in nature and obviously, profitability of flow-through from here on. The second is the impairment of our investment in our Medibee Australia business. This is a direct result of the bushfires in Australia that wiped out the grounds, but our hives we're able to be moved. But obviously, the flora and fauna was destroyed in the process. The next point is about the wind up of our Kaimanawa investment, and other than that, the SeaDragon movement in fair value. So as you can see, these are all things that are outside ongoing business. Those total adjustments would be $6.7 million. The second half of the page looks at one-off costs incurred versus the PCP. There are specific inventory write-downs relating to the U.K. and table honey, which were one-off in nature and to flow-through; divestment of our Nelson site; restructuring-related costs and savings from the restructure that we'll see flowing through the business into next year, which brings us down to that underlying result of plus $1.3 million versus $1 million in the prior period. Obviously, the numbers themselves are small, but it does show an underlying basis and reason for us to come back to how we win. When we look at cash flow, inventory and net debt, we see -- so Slide 11, from a cash flow perspective, cash inflow of $887,000. That cash flow is consistent with operating loss for the 6 months, less working capital improvements, including that inventory reduction of $16 million. Next page, inventory and debt. 2 main points that I would draw your attention to is the inventory reduction. So minus $2.9 million versus 31 December, '18, minus $16 million versus 30th of June '19. We've reduced finished goods across all major markets. And versus December last year, we've seen a net debt decrease of $10.6 million, though an increase of $4.2 million due to cash outflows from investing activities. Next page. In terms of the honey harvest, one of the parts of transformation of the business as a whole, in feedback from analysts and feedback from our customers, one of the things that we recognized was we've become associated with, if the honey crop was good, Comvita was good; if the honey crop was bad, Comvita was bad. So what we've actually done is redefine that whole business model to be flexible to what actually happens. So it protects us on the downside, but still enables us to positively participate on the upside, and again, I think, builds resilience back to the organization as a whole. When we talk about the honey crop itself for 2020, the national crop indicators are positive. Clearly, we benefited from a strong settled summer. The -- there's been good flowering and nectar flow reported across the country. When we look at our crop, we're about 50% of the way through harvesting and about 25% of the way through testing quality, so the Manuka level. We expect the 2020 crop to exceed 2019 actuals and our budgeted plans for 2020. All of our extraction plants are operating at capacity, and we've also gone through and re-queened the hives with improved genetics. Next page, so I'll now move on to the market segment performance. This is one of the key areas for us. And I will come back to this a bit later when I talk about my findings during my initial period -- initial 25 days, as Brett said at the start. And this is the absolute -- it being absolutely vital that we are at the cutting edge of customer-consumer in-market know-how, and we need to make sure that we connect everything that we're doing in Paengaroa back to what's actually happening in the market. On to Page 16, you can see sales up in North America; sales up in Europe, Middle East and Africa; sales up in Greater China, and again, I'll go into these -- all of these in a bit more detail at the moment; down in rest of Asia; and down in Australia and New Zealand. So I head into these in a little bit more detail. For the purposes of the segments, for China, we report China and Hong Kong combined. But as our segment levels don't have comparative figures in for China for last year, we've broken China around this time so that we can show you a comparative like-for-like performance. So on Page 17, you can see that like-for-like performance that I mentioned earlier. So revenue improved by 15%, net contribution increased by 30%, net contribution percentage up by nearly 1.5 percentage points. And as I said earlier, within these numbers, there is the extra $1 million that we've spent in marketing, which is about long-term brand building in the crucial market of China. At segment level, the percentages really don't make too much difference or don't really show us too much because we're not comparing like-for-like, but you can see revenue up 115% as a result of China coming through and contribution up 160%. Within it, there is a negative contribution from Hong Kong which is down 30%, which is a direct result of reduced footfall in Hong Kong as a result of the upheaval in the city itself that everyone would have seen. And before I go on, we felt it was important that we shared the impact of coronavirus on our performance. Naturally, I start with that and echo Brett's comments at the very start that our thoughts and our plans are with the teams in-market who are still operating there. But when we look at the performance itself, so propolis and Manuka honey make up over 90% of our total revenue. Both of these product categories have known antiviral, antimicrobial and immunity benefits, and we're pleased to be part of the solution to help our consumers build general immunity. Where we've seen footfall unaffected by coronavirus, so shopper footfall, we've seen revenue increased by 35% versus the prior comparative period. In China, footfall is significantly reduced in offline bricks-and-mortar outlets. Once footfall recovers, people shopping recovers, sales growth is expected to perform at that -- around that 30% increase level. Where online providers are operating normally, sales have increased by 38%. And just so I can give you a bit of context of that. So the supply chain side of online retailers, where people have a fully integrated and fully owned supply chain, they're operating normally, and that's where we're getting those numbers. A number of the online platforms outsourced supply and have had challenges in actually fulfilling demand. We're currently forecasting a 10% revenue impact on our second half performance in China. If we look at Australia and New Zealand, footfall through key tourist dominant partners is materially reduced along with daigou channels, so people in Australia and New Zealand, who supply outside, who are unable to supply their end market customers. We're forecasting, therefore, a second half revenue impact of up to 20% in Australia and New Zealand. We have good inventory levels in-market, and we're in the process of boosting local inventory to meet anticipated inflated demand. We do believe that any impacts are short term. And as soon as shopper numbers returns, our performance will show material improvement. As everyone else who has released results, as announced, it is an evolving situation, and we will update the market as new information emerges. On to Page 20. When we look at the rest of Asia, top line revenue is down 4%. Actually -- totally as a result of timing of activity in Japan and that will correct itself in the second half. We've seen strong double-digit growth in Korea, and we've opened our first flagship store in Malaysia. Contribution level. Contributions improved by 15% due to our emphasis on profitable growth through these markets. In Australia and New Zealand, revenues down by $5.5 million and contribution falling at $1.3 million. There were 2 one-off impacts that have caused this change year-on-year. The first one is about change to MPI export requirements, which hit us in the first quarter, which was $2.7 million. The second is, one particular customer in Australia ordered significant quantities, 10 months stock, which equates to an overstock effectively at $4.3 million in the prior period. Again, both of those are nonrecurring, and we'll move towards stabilizing low single-digit top line growth and profitable bottom line performance. Next page. In the North America, we feel that momentum is building. Our overall revenue has improved by 4.5%, with good performance across our major customers. Whilst our contribution margin is down by $220,000, that's purely as a result of setup costs for new customers that will come online. Our Black Friday activity in America does show us the potential of the market, with sales up 51% year-on-year, of which over half came from new customers to our category. We've launched new Comvita Kids lines in Whole Foods nationally and supported by a hugely successful PR campaign, gaining awareness within natural foods focused parents. We've got new listings in several hundred new independent and regional health accounts. Next page, Europe, Middle East and Africa. So top line revenue, up by 10% versus the prior comparative period. The bottom line impact there is 600 -- is all about legacy issues that we've actually sorted. As I mentioned earlier, on inventory, $630,000 of that was a legacy issue for a customer that we've now cleared. Coming on to Page 24, I wanted to take a few minutes to share the key findings and in my first 25 days, and our plans to turn around performance in the business as a whole. The reception, the openness I've received from the team has been really fantastic. I really do believe that the team are change-ready. They know that to win we have to change and are absolutely committed to be part of that. They also appreciate for us to win going forward, those 3 elements are vital: fix the underlying issues that have caused our underperformance and give ourselves a flexible capability to respond; transform and simplify our core operating model; and generate that breakthrough in new markets in North America and China. Key findings, the first page, so Slide 25, won't be a surprise. But I do think it's really important that we recognize the good position that we're in, in terms of our position in-market, clearly not our numbers. We are a market leader in Manuka and key bee product categories. We are a technical leader. We are the quality leader in both honey and propolis. We act as a category guardian and really put efficacy and know-how at the heart of that. The product categories are hugely relevant to current macroeconomic and mega trends around healthy products around personal well-being and that we have a highly capable and committed team members. On to the next page. However, what I found is we have lost focus. The business has become too complicated. The organization at some level has become disconnected from market needs and being slow to react to both positive and negative issues and opportunities. We have unsustainable costs in COGS and OpEx. And we sit today with elevated gearing. And whilst we're comfortable that it's covered by salable inventory, it is still higher than we would want. And some of our internal processes are inefficient and don't support us to get to where we want to be. The key part for us is about focus. So arotahi in Maori. So our focus on key growth markets of China and North America, which give us a total addressable market of USD 1.5 billion; focus on profitable growth through ANZ and all other regions; focus on delivering the benefits of the $15 million business transformation plan with a simplified and integrated operational structure underneath; and the focus of delivering a capital structure that builds resilience, as Brett said, and supports our long-term growth. I'll take each of those in some detail in a second. Next page, Slide 28. So on Page 28. So if you look at the total addressable market, China honey market is worth about USD 1.2 billion, about RMB 8.5 billion. Imported honey accounts for about 12.5% of the total. The market, as a whole, is forecasting double-digit compound annual growth over the next 5 years. Manuka and imported honey is forecast to over index versus that market growth. And the key attributes that are going to support that over indexing of market growth is about trust and heritage, something where Comvita performed strongly. When we look at our business in China, we are the market leader. We have significant brand equity. We have an experienced team in market, and our focus has moved to delivering what we call our model city performance. And just to explain that. So in a former life, we used to call it -- in North America, we used to call it [ building Toronto's ]. And -- so if we take a current city, and we look at that city on a turnover per capita basis. And we -- so we use that as our base hypothesis for the potential of the market. If you extrapolate that performance to China, we would be delivering revenue through China of about $0.5 billion. So the role for us will be to take that 1 city, which is a real city today. We'll replicate that in another city to prove that the model is robust. And then once we've proven -- that the hypothesis proven, we moved to rolling out through Tier 1, Tier 2, Tier 3 cities. We are in the process of still completing integration of our former JV. And as I said, continuing to invest in both brand and team capability in market to win in China. When we look at North America. So next page, Slide 29. Total addressable market is around $340 million. Imported honey accounts for about 1/3 of that or 30% of that, which would be about $100 million. We're expecting high figure -- high single-figure CAGR over the next 5 years, with strong adoption by millennials and rapidly expanding availability through both online and offline retail. We're seeing encouraging performance. Black Friday shows us the opportunity when we align product communication and activity. We have new distribution agreements. It will come into force in the second half, already signed, that will come into force in the second half of this year. We're exploring disruptive market-leading direct to consumer as we really try and deliver that breakthrough in North America. And what we're aiming for is a balance between our performance in Asia and our performance in North America as we go through. Final part there is about Comvita in Australia, New Zealand. Look, our home market is where we need to protect our leadership, stabilize revenue and associated earnings, invest in brand equity, and we'll do that by simplifying our organization. We'll look to deliver low single-digit top line growth, but all of the benefits of that flowing through to the bottom line. Next page, the $15 million transformation plan. So the goals of the plan are a 500 basis points, 5 percentage point improvement in gross margin per annum; $5 million reduction in fixed costs per annum; automation, integration of all of our key internal processes to make sure that we have efficient, scalable, accurate organization; and then simplification of operating companies and investment on both supply and brand side to be focused on the areas where we have significant, competitive advantage, and we know we can win with the right focus. Final part, as Brett shared right at the start, in the next few weeks, we will announce details of the capital raise. This is to build resilience for the company during this time of reset and transformation. We -- that will include a renounceable rights issue to existing shareholders. Craigs Investment Partners and Forsyth Barr have been appointed as joint lead managers through this process. So that's virtually it for me, but I just wanted to come back to -- we understand that our performance is not in line with our capability. We've identified those areas that we need to fix and the need for us to be flexible to meet changing market and consumer needs. We have a plan that's there to transform and simplify our overall operations. And we have a clear focus in delivering breakthrough in both China and North America. To emphasize that we only win if we're connected to markets and consumers, as part of this process, we'll rename the head office to the Market Support Centre to ensure that everyone understands that if we don't win in market, we don't win at all. And I think we're well set up over this next period of time to deliver the plans and get the Comvita business back into profitable growth. Thanks very much.

Thank you, David. It's Brett Hewlett here. Maybe we can hand it back to you, Nick, and you could facilitate questions from everybody on the call.

[Operator Instructions] And we will now go to our first question.

Yes. [indiscernible]

We can hear you. I didn't pick up who is on the call or who is asking.

It's Christian Bell here from Jarden. Sorry, he didn't tell me that I was online, but anyway.