Comvita Limited (CVT) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Comvita FY '21 Full Year Results Conference Call. This call is being recorded. At this time, I would like to turn the conference over to Nigel Greenwood. Please go ahead, sir.

Good morning, everyone, and welcome to Comvita's Investor Presentation for the Full Year Results FY '21. I'm Nigel Greenwood, the CFO of Comvita, and with me is David Banfield, the CEO of Comvita. I will now hand over to David to start the presentation.

[Foreign Language] Good morning, everyone. And as Nigel says, welcome to the FY '21 Full Year Comvita Results. I start on Page 3 of the investor presentation. Over the next 35 minutes or so, Nigel will take -- Nigel and I will take you over the key highlights of FY '21 with the agenda that's highlighted in the presentation on Page 3. Next page. The results that we share today show we're making good progress to build a more resilient Comvita. I want to start by giving you a brief overview before we go into more detail. As you're aware, we are #1 global brand leader in Manuka honey and Propolis. We have 552 members of the Comvita Whanau. We have a unique model with 7 subsidiaries over the world, meaning that we're closer to consumers. In FY '21, digital revenue accounted for 34% of our total revenue. we invested $24.2 million, an increase of 56% in the Comvita brand to tell our story. Our results in FY '21, we delivered an EBITDA of $25.5 million, an increase of 511%. We had -- we showed strong management of cash and working capital. Net debt finished the year at $4.6 million. And in the financial year ending 30th of June, our total shareholder return was 35.3%. Next page. Our cause guides our action and our beliefs. Our cause is working in harmony with bees and nature in New Zealand to hear and protect the world. and I'm particularly excited later on today to share with you some aspects of our environmental beliefs that are reflected in our performance. Next page. I now move to our focus, our model and how that shapes everything at Comvita on Page 7. Our model or Arotahi is designed to deliver long-term profitable growth. We put the consumer at the heart of our thinking. We start with the right products at the top of the graph through the right markets, to the right route to market. We invest in brand, we invest in IP and we invest in science. That enables us to further improve quality of the products we provide that in turn feeds back to the right products that consumes want. We believe this model is intrinsic to our long-term success. Next page. We have a unique business model with a truly connected end-to-end model from our land ownership, our Manuka forests right the way through to our team in market. We believe that this model gives us an even greater chance of long-term success as we're better connected, we're more agile to changing consumer demands, and we become a better partner for customers in market as well. Next page. Before I share the actual results or more detail of the actual results, I just wanted to pause on COVID-19. Our primary focus remains on the health and wellness of our team around the globe. The team are all safe and well, though some family members have been affected, especially, in India and South America. The team response has been amazing in all markets. Many markets, obviously, at the moment, including [ MCFO ] in New Zealand are still being impacted by ongoing disruption. We are proud to be part of the solution for consumers around the world, and we do believe that the longer-term trend of consumers turning to nature and natural products for solutions to their health and wellness have continued and actually has become more evident. We're obviously looking carefully at our policy to protect the team going forward. Initial part of that is ensuring that anyone traveling when we can internationally for business work has to be fully vaccinated. Next page. We support and lead calls for higher standards for all New Zealand honey, both domestically and internationally. We have one of the most advanced in-house honey laboratories in the world that was established in 2012. We are regularly independently audited. We've achieved the highest standard AA rating from the BRC, British Retail Consortium. We are New Zealand's only dual IANZ and MPI accredited in-house honey testing laboratory. In 2011, we invested $6.2 million, an increase of 11% in R&D. We filed and had granted new patents for proprietary products relating to inflammation of the gastrointestinal tract and skin. And in addition, we're a core partner supporting the pursuit of certification trademarks in key markets. Next page. Moving on to our headline results. In FY '21, we delivered a reported net profit after tax of $9.5 million versus a loss of $9.7 million in the PCP. Our reported EBITDA, $25.5 million is an increase of $21.3 million versus June 2020 or 511%. We delivered double-digit top and bottom line growth in focused growth markets of China and U.S.A. in our Manuka product category and in our digital channels. Our gross profit improved by 730 basis points to 53.9%. As already shared, our investment in our brand and telling our unique Comvita story increased by $8.7 million or 56%. The transformation program that I've shared over recent investor calls is on track. We have a new leadership team in place. As reported, we have strong GP growth. And in 18 months since initiating the transformation program, we've delivered about 12 -- just over $12 million of value. In FY '21, we reduced our SKU count by 30% as we looked to simplify the business further. Net debt was reduced by $10.9 million to $4.6 million with inventory reduction of $11.7 million. Operating cash inflow was $24.8 million. The health and safety of our team is of paramount importance. And we're delighted to show a 9% reduction in our total recordable injury frequency rate. And finally, the directors were pleased to record a fully imputed dividend of $0.04 per share. I'll now hand over to Nigel. Thank you.

Good morning, everyone, again. I'm going to present the full year results, financial information and a little more detail and no doubt we'll take questions later in the session. So our key financial results are on Page 13. Whilst New Zealand dollar revenue showed a slight decline year-on-year, it's important to note that on a constant currency basis, our revenue was $2.9 million or 1.5% improved year-on-year. We've also established a measure of our underlying revenue growth which is 5.4%, and we have explained that lower down on the page. We've had a significant improvement in our gross profit percentage, rising to 730 -- rising up by 730 basis points in the year. Gross profit improvement has enabled a 56% increase in our marketing investment and now represents 12.6% of revenue, which is working towards our target of 15% of revenue by 2025. And as David said earlier, our EBITDA at 511% up on last year, now represents 13.3% of sales. Next page. On a balance sheet perspective, our net debt has reduced by $10.9 million to be $4.6 million at year-end. Our operating cash flow of $24.8 million reflects EBITDA performance, with net working capital movements being relatively flat year-on-year. We have seen further reductions in our inventory by $11.7 million as we continue to optimize inventory holdings, and we still remain on target to achieve our $85 million inventory target over the next 2 to 3 years. And we have had strong EPS performance at $0.14 per share. Gross profit. Gross profit -- this is Page 15. Gross profit improved by $12.1 million, and that is on the back of our growth in focus markets, Rest of Asia and the digital channel and as well as productivity gains. We've had strong performance in China and North America as well as the Rest of Asia segment. The digital channel increased 17% year-on-year and now represents 34% of our total sales at accretive margins. Effectively, every 10% increase in our digital share improves our gross profit by 100 basis points. And this is -- this growth revenue and gross profit in our growth markets has more than offset the gross profit headwinds we've had in the Australian and New Zealand market. We've also achieved productivity gains in our manufacturing processes, leading to a lower cost of sales base. And our apiary business this year broke even, which was a reflection of our new harvest model and reflects that even in a low performance and poor harvest year, we can still break even in our apiary business. Next page. Our transformation program is on track. We've had very good progress so far with $12 million in value gain growth through improved GP as well as reduced fixed costs over the last 18 months. We've had strong improvement in both gross profit dollars and gross profit percentage and as demonstrated by the 730 basis point improvement over the last year. We have identified underlying cost reductions of $5.7 million to date, and that is reflected in both cost of sales as well as other operating expenditure. To achieve this, we have invested $1.2 million over the last 12 months in transformational expenditure. Our SKU reduction delivered another 30% in SKUs year-on-year. We've continued to look to consolidate our legal entities around the world, removing those that are no longer required. And we've exited underperforming or nonstrategic joint ventures and that's primarily been completed. So we are on track to complete our first phase of our transformational program by FY '23 latest. And now we return our focus to deliver further incremental $10 million of value, with the second transformational program that is underway. Within our earnings guidance for FY '22, we do include an additional $2.5 million or total $2.5 million of transformational spend. Next page. Moving on to cash flow, inventory and net debt. Next page, cash flow. I mentioned earlier that our operating cash flow for the year was $24.8 million. And this is relatively in line with EBITDA as our working capital movements have remained relatively neutral year-on-year. We've achieved significant reduction in inventory during the year, and it's largely offset by increases in receivables and reductions and payables. And we've continued investments in Manuka forests, manufacturing process and improvements in the wellness lab. Next page, inventory and net debt. As noted earlier, inventory down $11.7 million, and that's predominantly been a reduction in our non-Manuka honey inventory holding through bulk sales. The increase in trade receivables year-on-year reflects the very strong sales month we had in China, resulting in slightly higher revenue [ earnings ] at the end of the year. And the net debt increase was $10.9 million, as previously mentioned. Next page, inventory. I previously commented on the reduction of inventory and that has been predominantly resulted as a result -- is reduced by -- reduced raw materials inventory of $16.6 million, whilst we had an increased our finished goods inventory end market, and that's been to mitigate against risks of port and shipping delays that can be outside our control. Next page, capital expenditure and leased assets. We've continued our strategy to invest in Manuka forests, and that's demonstrated by the Manuka forest development costs of $3.8 million. Full potential will be delivered in the years to come. We've increased our investment and manufacturing process improvements, and they have delivered significant positive impact and productivity gains, reducing our standard cost and improving our gross profit. We invested in our first wellness lab in Auckland. And this has been a significant development and will be something that we continue to do, as we referred to as our building Toronto's in the China market over FY '22. And we've also entered into 2 long-term lease agreements. And of course, as many of you will know, under the leasing standard, these have to be capitalized and as part of our overall capital expenditure for the year. Next page. Lastly, from me, for the month, our investments. As noted earlier, we've been focused on removing noncore, nonstrategic, joint venture investments. In that regard, we have wound up our joint venture relationship with Putake and substantially also with Gan Supplies (sic) [ Gan Supply ] during the course of this financial year. We retain our investment in Apiter, which is facing some short-term COVID impacts, but they remain on strategy for the long term, and our investment in Apiter remains sound. Lastly, Makino investment is performing well and is on track to receive our first harvest in FY '22. I will now hand back to David.

Thanks, Nigel. I'll jump straight to Page 24. So our new harvest model worked in FY '21, which is a really important asset outcome for us. Despite the year's harvest being below average caused by unsettled weather, the quality of the harvest and great cross -- cost control has meant the harvest delivered a small contribution to group profits in the financial year. The total harvest was 370 tonnes versus the previous year harvest of net of over 700 tonnes. We still have good availability to meet future demands. But this is an important step to de-risk Comvita going forward. When we look at the harvest, again, as I've shared before, there are 3 criteria that we look at: that's yield, quality of yield and cost to extract. A while ago, I shared, when we talk about Manuka forests, that we had a hypothesis that we're looking to prove. And that hypothesis has been directionally proved in FY '21 that would show that we could deliver 40% improvement in yields in our forests, 60% improvement in quality of yields and a 20% reduction in cost. This is an important part for our future supply. Next page. I now move on to market segments and performance. So on Page 26. As I shared earlier, our business model is unique, with our global in-market subsidiary teams close to customer, close to consumer, which makes us faster to act. We've enhanced team capability in the markets around the world. We delivered strong growth in our focused growth markets with Mainland China revenue growth of 31% and net contribution growth of [ 25% ]. In North America, we showed 23% revenue growth and 18% net contribution growth. Our balanced distribution model markets show the operating leverage that -- potential that exists with revenue up 11% in contribution to 26.5%. Marketing investment, as I say, has increased by 56% to 12.6% of sales, enabling us to refine and tell our unique Comvita story. Next page. When we look at performance of our markets in reported currency, you can see that China was $93 million -- Greater China, $93 million, up 7%; North America at $24.7 million, up 12%; Rest of Asia, up 23%; significant headwinds in Australia and New Zealand, down 27%; and Brexit and COVID headwinds in EMEA, again, down 26%. We think -- we believe it's more important or appropriate to look at our performance in constant currency. On Page 28, you can see that constant currency performance. As we're going into the segments, we'll break that out. So it'll be more relevant. So we now turn to Page 29. You can see our net contribution segment performance with Greater China, up 9%; North America, up 7%; Rest of Asia, up 52%; EMEA, up 100% to a breakeven position, which is really important strategically for us; and Australia and New Zealand showing the impact of COVID headwinds and particularly the Asian health/Daigou impact. Next page. As we previously shared, China -- China and U.S. are our #1 -- are the #1 and #2 markets for honey in the world. Our focus there is on long-term investment to grow total addressable market and market share. On Page 31, you see our performance in Greater China on a reported currency basis with revenue up 7% and net contribution improved by 9% to 21% of total sales. Next page. In local currency, when looking at Mainland China, we see the strength of our performance where we delivered a record result and really strong results turn around. Our total revenue has improved by 31%. Our net contribution was improved by 25%. As I've shared, China is the world's biggest honey market. Our marketing investment is needed to make sure that we target increase in total addressable market and our share. And the net contribution, the leverage we would be seeing is an important aspect for us. On Page 33, you can see Mainland China on a reported currency basis, again with the same stats. As I've shared, we've delivered strong results on Page 34. As I've said, we've delivered strong results in Mainland China. We have a new leadership team in place who are performing strongly. We delivered record results in key festivals of 11/11 and 6/18. We were #6 and the only international brand in the healthy food category in Alibaba. Our digital channel grew 41% to 57% of total. The retail sector has now recovered and is up 28% versus PCP. Strong performance in Manuka honey up 38%. We've also implemented a new CBEC/Daigou model to make sure that the emphasis is actually an amplification of the Comvita reason why to enable that channel to be truly incremental. We have enhanced management and visibility of inventories. Our success in Mainland China is generating efficiencies that also support our Hong Kong profit focus. We're also delighted to see multiple brand partnerships that help us drive affinity and brand recognition in market. Next page. An example of partnerships driving affinity is represented on this page. So as you can see, this is an afternoon tea celebration of the Park Hyatt in Shanghai. So it's an iconic event, and we became the partner of that event over 5 million views of this highly influenced [indiscernible] The alignment of ourselves with such iconic institutions further supports premiumization of Comvita. Next page. Moving on to North America on a local currency basis. Revenues increased 23% versus PCP, with strong growth across all channels. Revenue does include some cross-border sales that go to Middle East of $2.1 million versus $0.8 million in PCP. Net contribution increased 18%. Marketing investment increased 80% and our digital sales have grown by 37% to 36% of total. Next page, you see the same numbers, but on a reported currency basis. Next page. Our highlights in North America include that we are the fastest growing Manuka honey brand in the U.S. We have increasing rate sale per point of distribution with key retail customers, strong growth in key product categories, including UMF Honey and Propolis. Retail distribution has increased by approximately 2,000 stores, doubling our presence. In comvita.com, we're seeing a 30% increase in users, a 33% increase in transactions, e-mail marketing up 29%, and social up 117%. We've earned media impressions of $1.25 billion, up from $722 million in PCP. We committed to save 5 million bees working with bee keepers across the U.S., which led to a feature in Forbes. We're also partnering with major health publications, health media publications to expand our thought leadership within the category. I'll now hand back to Nigel, who'd talk the other segments.

Thank you, David. First, focusing on rest of Asia. So turning to Page 40. See, for the rest of Asia, net sales had a significant growth of 23% and net contribution was up 52% year-on-year. And it's evidencing the benefit of leveraging the low cost base whilst growing revenue. We had key strategic focus on Manuka and Propolis. And we refer to Rest of Asia as part of our balanced distribution model between off-line and online, and this is key to our sustainable success in that market. Next page. Moving to our performance in Australia and New Zealand. Moving to Page 42. As we've talked about earlier in the presentation, we have experienced some challenging headwinds in the ANZ market. And this has been a reflection of a combination of COVID, in particular, impacting on the Daigou channel in that market. As a consequence, our sales year-on-year were 26% down, and our net contribution was 27% down. We were named -- our marketing investment increased a little to $200,000 to 6.5% of sales. The New Zealand market mix contribution, however, was flat versus last year, despite an increase in marketing of 6.5%. The digital channel that we own was down 13% year-on-year, but at an immaterial level. We did focus on reducing our trade stocks in this market by $2 million, and that's in line with the lower sales. On a positive note, the quarter 4, in that market, was up 17% on the same time last year and 33% on quarter 3, reflecting our view that the underlying revenue challenges have flattened out, and that, we believe, will grow to the future. Next page, our U.K., Europe, Middle East and African markets. Next page. Again, these markets have been affected by a combination of COVID, and more recently, the Brexit impact. As a consequence, our sales year-on-year were down 25%. But on a very positive note, our net contribution was at breakeven reflecting a focus on cost control to ensure that even with this lower sales, we actually had a breakeven contribution. European sales to -- in H2 were significantly affected because of Brexit, effectively no sales into that market. We have addressed that going forward, and we now have established a new European entity that would enable us to now export products into Europe, and we should expect to see sales returning in FY '22. Online sales was up 85% from a very low base, however, as the market moves towards a more balanced distribution model. And online has a 47% share of our total sales in FY '21 versus 14%, last year. I will now hand back to David to continue the presentation.

Thanks again, Nigel. So I now share progress on our 3-point plan. So moving to Page 46. As you may be aware, our plan is to -- our 3-point plan is to stabilize the organization, transform the business and build long-term resilience and growth. We've endeavored to show red, amber, green assessment of where we are across each of those elements in this page. We believe we're making good progress and are in line with where we believe we would be at this stage. When I come to the Level 3, building a long-term resilience and growth, the top point there, this is an important year for us of getting to that terminal model of gross margin of over 60% marketing sales of 15% and an EBITDA ratio of 20%. I'll come back to that a bit later. Next page. I've previously shared this page, which looks at the stages of organizational completed development over this 5-year period. The first column there, you see what I call the crawl period where we were looking to achieve up until June 2020. The next period really took us from Jan 1 to June 24. And again, you can see that same red, amber, green assessment of where we actually are. And then from June 24 onwards, where we really hit our straps and our organizational goals that you can see, including that 60:15:20 model. Our performance and our stage of development really are built on an incredible history and an incredible founding story, but really do point to the exciting future that we believe that exists for Comvita. Next page. Part of that exciting future is our long-term sustainable model. As I already shared on the left-hand part side of the page, you can see that 60:15:20, so where we believe that we'll get to in terms of gross profit of at least 60% marketing, sales of 15% and an EBITDA ratio of 20%. But we believe we will underpin that by being recognized as a premium FMCG/CPG brand. We aim to be carbon neutral by 2025. We aim to be B Corp certified, and we will retain our focus on strong working capital control and cash management through the business. Next page. We aim to be carbon neutral by 2025 and carbon positive by 2030. Delighted to share our first assessment of our carbon impact. So on the top part of the graph, you can see our carbon impacts of our Scope 1 and Scope 2 emissions, and on the bottom left-hand side of the page, you can see Scope 1, Scope 2 and limited, not yet fully audited Scope 3 emissions. What this shows you is in Scope 1, Scope 2, our carbon emissions are 1,000 tonnes of CO2. At the same time, our forests removed 4,000 tonnes of CO2, which means that our net position is a positive 3,000 tonnes of CO2 on Scope 1, Scope 2, and the opposite side, a net positive of 1.9 tonnes -- 1,900 tonnes of CO2. This is really important for us to get fully validated audited data that will point to and prove our long-term commitment to carbon positivity. Next page. Looking forward to FY '22, we are forecasting FY '22 EBITDA guidance range of $27 million to $30 million. We're forecasting continued double-digit top and bottom line growth in focused growth markets, digital share to at least -- to be at least 38% of revenue, mid-single-digit revenue growth in ANZ pointing to the fact that Nigel just raised about us believing that we've reached the bottom in that market or in that segment, our focus on further increasing in our GP percentage that skewed to H2. Our transformation program continues with a total of $2.5 million investment that's included within our guidance. We're targeting further inventory reduction from $100 million to $90 million, and we'll invest about $18 million in CapEx over the year. Final page. So in summary, our focused strategy is starting to deliver results. We see the strong transformation in performance in that FY '21 result that we shared today. Double-digit top and bottom line growth in our focused growth markets through our digital channels and in Manuka, we significantly simplified the business in terms of the range, in terms of the operating business and roles of responsibilities throughout the business. We've reduced inventory. We're generating cash, we're paying down debt. and our broad transformation agenda is on track. We believe we're putting in place foundations for long-term profitable growth at Comvita and making good progress to deliver our 60:15:20 business model by 2025. I'd like to finish there, and thank you for your time. And now I hand back to -- for any questions. Thanks very much.

[Operator Instructions] We take our first question from Joshua Dale at Craigs Investment Partners.

Dave and Nigel, well done on the progress you've made this year. Just a few questions from me. First of all, looking at your accounts a little deeper, Am I right in looking at your $25.5 million of EBITDA and thinking that the underlying figure would be closer to $21 million and that you've got a $2.2 million fixed kind of in there. Other income is boosted by $2.2 million of government grants and subsidies. And your equity Canada investments have gone from a loss last year to now $1 million profit. I suppose what I'm trying to do is separate the one-offs from the operating performance, and I'm keen to understand whether we can expect the same level of government grants and subsidies going forward. And also what has turned the equity accounted investees from a loss into $1 million profit this year. And is that sustainable?

David, do you want me to address those questions?

Yes, please, Nigel.

Right. Okay, Josh. Right now I'll start with the foreign exchange gain. That it's not -- you should not think of that as a one-off sort of underlying EBITDA adjustment because the other side of that gain is setting -- if you like, the downside associated with that is setting our revenue and gross profit percentage for the most part. In other words, or -- within the revenue, we've had to translate our overseas cash flows at spot rate and that's what reflected in the revenue number, whereas our hedging instruments have enabled us to offset some of that loss in -- by way of a foreign exchange gain. It's just part of our overall hedging policy. It is ongoing and in place. And in any 1-year, it could either be a positive or negative, but the other side of it will always be reflected in our actual performance on the top line and in gross profit. So in my opinion, that is not what I would consider to be an EBITDA adjustment item. With respect to the government grants, the majority of that number actually is related to the Callaghan R&D grants that we received. You will note that David earlier mentioned that we spent about $6.7 million on R&D in the year, and we get a grant income associated with that. So again, that is something that we would expect to get every year. So it's, again, not an underlying adjustment because it's a sustainable performing return. The other part of that particular number was associated with some COVID grants that we received in our Hong Kong market. Now arguably, they were there deliberately to offset the impact of that market of COVID. So from our point of view, yes, we did experience -- a significant underperformance in that market has been reported that was somewhat offset by those COVID grants. Of course, as COVID unwind and that market returns performance, you might see and expect to see that effectively, they are netted out. So again, I could put a very good argument that, that should also not be treated as a one-off underlying adjustment. The last one we referred to was the returns from our -- under our investment from parties. They have improved. And that's the consequence of us doing a couple of things. One is divesting ourselves from underperforming joint venture investments historically. So that's the performance in FY '20 versus FY '21 is the main reason for our year-on-year improvement, including Apiter, where there was a small return from that as well. So is it sustainable? We think so. So you should expect that you'll continue to see performance from our joint venture partners that we remain invested in to give us a return going forward. So I know that's a very long answer, but you also have a very long question. And -- but I did think it was important to give our perspective as to why we haven't shown those as underlying adjustments. It's really important that you understand that we don't think that they should be underlying adjustments and that our EBITDA performance is sustainable and will grow. I hope that's helpful.

No, that is very helpful. And I'm guessing that then means your $27 million to $30 million EBITDA guidance does sort of account for those adjustments as well then?

Correct.

Yes. That's right, Josh.

Okay. And the second to last question. Do you bake in a recovery in Australia and New Zealand into that forward guidance?

Yes. So in our FY '22 numbers, we are predicting mid-single-digit revenue growth and associated earnings in ANZ, which we believe, as we've shared earlier, is reflected in our Q4 performance of plus 17% and that Q4 being up 33% on Q3 as well.

Okay. Great. And last question from me, more as a reminder for myself. When you discuss your geographic segments and your slide pack, are your marketing costs for each segment included as part of the cost to get to your net contribution? Or do your marketing costs sit outside of that below the net contribution line, so to speak?

No, they're in our net contribution costs. Did you get that, Josh. Sorry, I didn't hear.

I did, yes.

We'll take our next question from Guy Hooper from Forsyth Barr.

I guess, just quickly, you haven't bridged the gap, a gross profit margin between what you achieved this year and the target at another 600 basis points expansion to 2025. Is there COGS improvement to come? Or is most of that being driven by just improved market that's -- and I guess secondly, could you maybe touch on what you're seeing what prices and your expectations around those?

Yes, I'll talk to that. Look, in terms of -- we do see further COGS improvement opportunity and some of our capital programs are designed to specifically achieve better overhead recovery. And some of that is -- that comes from that absolute focus on SKU level performance. So -- That would be in the improvement in GP we're expecting into FY '22. In terms of core expectations for FY '22, no COGS increase, no input cost increase and no price passed on to market in our guidance.

I guess the other -- actually the guidance to further inventory reductions, is that just doing the bulk sales on Manuka? And how much of inventory is currently on Manuka?

No, it's not just that, it's more about -- Guy, it's more about getting to a level that we believe, let's say, protect us from the vagaries of supply -- of harvest movements year-on-year. But just a good input and throughput of total of total inventory. And as Nigel shared, look, we believe that we should be at an inventory level longer term of between $80 million and $85 million. And we believe that's a sustainable level for us. I'll come back to your question later, Josh (sic) [ Guy ], on the mix, but primarily, we'll keep good levels of Manuka inventory.

We'll take our next question from Mark Topy from Select Equities.

Dave and Nigel, just if we get some further expansion on that gross profit increase in terms of that product mix that you mentioned, is that -- because you're driving higher value products. Can you talk us through the sort of sales lineup and the consolidation and rationalization away from lower-margin brands?

Yes. So you're right, I should say that. Look, it's a combination of things. So it's obviously about channel, where we see improvements through -- that the growth in digital channel is that accretive margins and Nigel shared every 10% increase in that channel has about 100 basis point impact on -- positive impact on the group. It's about segment where our performance is good in higher-margin areas, and that includes Asia, clearly, as a whole. It's about exiting from underperforming SKUs, which means we get better recoveries on everything else. And it's those production efficiencies that then flow as a result, which is why we believe that we have a pretty good line of sight towards our 60:15:20 model.

Great. And if you might just talk us through any observations on how you see the China market overall. And I guess you've obviously moved to the online events, the major online events. Do you feel that you're picking up market share? Or can you talk us through just how the market is positioned at this point in time? And also the growth opportunities in that China market from an organic point of view in terms of the market growing there.

Yes. Look, our performance in China, as you can see, Mainland China is really strong at $337 million in local currency, up 30%. One of the big changes that we've made through FY '21 is really to make sure that we've got a hugely capable in-market team, and we've been able to fund that through efficiencies. We've seen growth across the board, but we've also seen premiumization as well, which plays to our sort of core brand strength, so I think the underlying dynamics are good. Obviously, there's some short-term disruption with COVID around. But what you see in these numbers retail up 28% and total up to 31%. And as I say, that gives us reason to believe we've got good momentum. In terms of share, I think we are doing well. And we are improving share and we think there's room to grow the market and our share within the market.

Great. And strategically, just looking at that China presence and the Daigou market here in Australia, which sitting on the ground here in Australia, I don't see rapidly rebounding, but it seems to have really lessened your remaining presence on the Daigou channel going forward. How do you think of that business strategically in terms of distribution. And that China strength that you've now developed, does it really lessen your reliance on the Australian channel to that extent?