Comvita Limited (CVT) Earnings Call Transcript & Summary

Good morning, and welcome, everyone, to Comvita's investor presentation for the half year ended December '21. My name is Nigel Greenwood. I'm the CFO. And also presenting will be David Banfield, the CEO. I know this doesn't always get a lot of attention, but I do draw your attention to the important notice with a number of disclaimers for you to read at your leisure. Also, I want to point out that online attendees can submit questions at any time by clicking the-ask-a-question button on the screen. Home participants will be provided instructions at the appropriate time in the future. I now pass myself across to David to start the presentation.

[Foreign Language] Good morning, ladies and gentlemen, fellow shareholders. Welcome to today's interim results presentation. On Page 3, you can see today's agenda. Today, we will take you through, first off, our focus or arotahi, on the journey to make sure the Comvita is recognized as a premium FMCG brand, and we deliver on the opportunity of our unique business model. We'll also share our 2025 strategic plan. We aim to be a leader in ESG, and we'll share progress that we're making on that journey as well as our goal to be carbon neutral by 2025. We'll then move on to more detail of our half year results for FY '22. I'll then pass to Nigel, who will talk about cash flow, inventory and net debt. We'll then talk about market segments with a particular focus on our focused growth markets of China and North America. We'll then talk about our reinvestment for long-term growth. I'll then move to guidance and summary before we open the call to questions. I'm delighted to share a record Comvita first half earnings performance. As you know, we are #1 global brand leader in Manuka honey and Propolis. This is the fourth consecutive reporting period where I've been able to report earnings growth. We've delivered 6.1% revenue growth despite significant COVID headwinds. Our digital channel stands at 33% of our total revenue, but direct-to-consumer within that growing at 12%. We've continued to invest in brand-building activity with a focus on positioning Comvita as that premium FMCG brand and investment in this period was $13.3 million, which is an increase of 20.9% or $2.3 million versus PCP. Our operating performance was $7.2 million, an increase of 39.4% versus PCP. We also recorded a record EBITDA of $12.1 million, plus 14% versus PCP. Our directors were delighted to declare an interim dividend of $0.025 per share, which is fully imputed. And finally, our net debt stood at $26.3 million, an increase of $21.7 million versus June. That's primarily as a result of increasing inventory to offset global supply chain disruption and as a result of investing in our new joint venture in North America. Before I talk to results, I do want to take a moment to talk about COVID and its impact on the team and our operations. The health and safety of our global team of 500 is our priority, and we're pleased to report that all our people are safe and well. We've taken a risk-based approach to managing our response built around facts and science. The team response has been amazing in all markets with 90% of our team vaccinated globally. We've continued to demonstrate our ability to lead and adapt quickly, including the early adoption of rapid antigen testing for staff in Australia and New Zealand and additional measures for early confirmation and protection. Rapid antigen testing and vaccination was required on site for all our team at Paengaroa. Many markets are still being impacted by ongoing disruption to the supply chain to this pandemic. Recent Ministry of Health advice suggested that in cases of COVID that actually honey or lozenges may help to manage symptoms. The longer-term trend of consumers turning to nature and natural products solutions to their health and wellness needs continued. We're proud to be part of the solution for consumers around the world. Our purpose is working in harmony with bees and nature in New Zealand to heal and protect the world. Our vision is to deliver world-leading standards for our team, our consumers, our shareholders and our planet, contributing to a world where bees and people can thrive in harmony. We aim to reinvest cash to lead industry growth and consolidation, and in process drive increase in standards for consumers around the world. Next page. Here, you can see our 2025 focused strategic plan. As you can see, this plan shares our purpose, our values, our vision. On the top right-hand side, you can see our 60:15:20 business model, the aim to deliver a gross margin of at least 60%, 15% marketing sales and 20% EBITDA margin by the time we get to 2025. Underneath that, you see our 3-part plan to stabilize performance, transform the organization and build long-term resilience and growth. The pillars that support organizational growth are Comvita being recognized as a consumer lifestyle brand, world-class digital engagement and experience, science and quality, organizational simplification and efficiency, and finally becoming a sustainable world-class organization. Underneath that, on the right-hand side, you can see our 2025 strategic goals, with #1 building a China market and business capable of delivering 10 years at 10% compound annual growth rate. Secondly, breakthrough in North America to provide geographical balance to the business. Thirdly, digital channels to deliver 50% of total sales. And finally, all market segments growing with mid-single-digit CAGR and profitable. On the left-hand side of that same box, you can see our KPIs. So carbon neutral 2025 with science-based target for greenhouse gas reduction, a return on capital employed of 500 basis points over our weighted average cost of capital. Our TSR, so total shareholder return at Comvita being above the end at 50% and consumer and employee Net Promoter score above 7. Next page. I'll now take you through our unique business model and particularly, the big change that's happened as we put the consumer at the heart of everything that we do. Here, you can see our business model in its simplest form with the focus of the consumer at the middle, with our aim to deliver the right products to the right markets through the right channels where we can invest in brand, IP and science to explain and evidence the benefits of our products, our vertical integration from hive right the way through to home, means then that we can constantly work on improving quality and delivering a better outcome for our consumers. Our ultimate aim is to be recognized as a premium fast-moving consumer goods brand and deliver that long-term profitable growth. Next page. We have a unique business model. Most people operating in the category either supply or what you can see in front of us here, model 4, where they have supply, and they have some export partners in markets. We have around 350 people globally in market. Those people help us get close to customer, closer to consumer, faster to act, better connected, and we're making significant process (sic) [ progress ] to really accelerate the benefit of that model across the group. Next page. We significantly invest in both science and quality, and this is an additional key differentiator of Comvita. Our strategic goal of higher standards for all New Zealand honey is designed to protect consumers and the industry. We've achieved dual IANZ and MPI accreditation for our in-house honey testing laboratory, the only such certification held by a honey company in New Zealand. We have more patents and publications than any other honey company. We've recently shared the 1.3 million Manuka honey for Digestive Health clinical trial program. As part of a collaboration with the University of Otago, supported by an $875,000 grant from the high-value nutritional science challenge. We also have a global scientific advisory body, and you can see the members of that body from around the world who help us make sure we're at the leading edge of science. Next page. So back to results and results headlines. I'm delighted to share our record performance. Record H1 operating profit of $7.2 million, plus 39.4% versus the PCP. Record EBITDA of $12.1 million, plus 14% or $1.5 million versus the PCP. We delivered double-digit top and bottom line growth in our focused growth markets of China and North America. We delivered double-digit top and bottom line growth in Manuka honey product category. We also delivered double-digit top and bottom line growth in our direct-to-consumer business. Our revenue -- reported revenue increased by 6.1% despite remaining significant COVID headwinds. On a constant currency basis, revenue increased by 6.5%. Our gross profit improved by 760 basis points to 56.6%. We continued long-term brand investment of $13.3 million, a $2.3 million increase or 21% versus the PCP, as we told our story to discerning consumers around the world. Our business transformation plan is on track. We're seeing strong gross profit growth. We're expecting to deliver $14 million in GP improvements since inception by the end of FY '22. We've delivered 35% SKU reduction on top of the 30% that we delivered in FY '21. Net debt increased by $21.7 million since 30th of December -- sorry, 30th of June 2021 to $26.3 million, with $13.2 million of that increase due to increased holding inventory to offset impact of supply chain disruption and $5 million into a new joint venture. We report a 79% reduction in total recordable injury frequency rate, and we're delighted to declare a fully imputed dividend of $0.025 per share. We continue to deliver positive progress on our organizational development plan. A year ago, I shared our plan for crawl, stride, run. The crawl period being from January 2021 for a year, the stride period being the 2 to 3 years from January '21 to June '24, and then our goals in June '24 onwards. Here, you can see the progress that we've made, building on our proud history and moving us towards delivering an exciting future. We aim to be recognized as a global leader in ESG. I'll now share with you a breakout of the aspects that fall under each ESG goal and our progress against each. Next page. On the left-hand side, you can see an image of our Harmony plan that we shared post our full year results in August of this year. And on the right-hand side, our ultimate goal, to strengthen our global hype. Under each of the streams of environmental, social and governance, we've used a simple traffic-light system to show the progress that we're making and our commitment to leadership in this area. Next page. I'm pleased with the progress we're making on diversity, inclusion and equality. 67% of our global team is female. We have 553 equivalent roles in our global team. 50% of the executive team reporting to me are women. 60% of our global roles are customer-facing. 100% of our team are on living wage for New Zealand-based employees. 40% of our Board are women. 63% of vocational development supported women, Maori and Pacifica. Our average service length is 5 years, and we have 100% pay equality globally. Next page. We also aim to be a leader in health and safety, particularly at this time. We report today a 79% reduction in total recordable injury frequency rate, a 33% reduction in reportable injuries, a 77% reduction in motor vehicle incidents and a new measure that we've introduced for this year, we've reported 111 wellness checks, mental health wellness checks across the team. Next page. We've set our goal to be carbon-neutral 2025 and net positive 2030. We're really pleased with the progress that we've achieved over this reporting period. We've invested $145,000 in carbon reduction initiatives. We've invested $151,000 in Harmony partnerships. We've removed 2 tonnes of shrink wrap from our products. We've planted 1.5 million trees, and we're #1 in the Trees That Count leaderboard in New Zealand. Next page. Our Harmony plan launched in August is a progressive policy designed to position Comvita in a leadership position when it comes to environment and action. The 4 areas that we focus on are climate action, bee welfare, community impact and native forests and biodiversity focus. In climate action, we've completed a materiality review. We are in the process of setting targets for greenhouse gas science-based target for greenhouse gas emission reduction. And we're in the process of completing life cycle assessment for Manuka honey in a part to give us an environmental product declaration. When we come to bee welfare, we have formed a partnership with For the Love of Bees. We're a primary partner of Wasp Wipeout program, a major cause of colony loss. We're supporting the Center of Regenerative Learning with For the Love of Bees. We're reducing sugar and varroa treatment. We have appointed the first national bee expert, and we're doing more work to educate the community about the importance and how to support bees. When we look at biodiversity and native forests, as I've already said, we've planted 1.5 million trees. We donated 5,000 seedlings to schools and wildlife centers in the Wairarapa. As I say, we're the primary partner for Wasp Wipeout program. We're also undertaking biodiversity research at our Makino station. And we've also recently supporting Save the Kiwi as a key commitment to New Zealand. Next page. I'm pleased to give you more detail on our performance for FY '22 to December. On the screen, you can see our financial performance for the 6 months ending the 31st of December. Revenue increased by 6.1% or $6 million. We saw strong performance in our focused growth markets and Manuka honey. We've globally relaunched our D2C channel. We report a 760 basis point improvement in gross profit. Our marketing investment has increased to $13.3 million, building long-term recognition of Comvita as the quality brand, up 20.9% and now to 12.7% of revenue. We invested $700,000 in this period in transformation. Other expenses also includes some due diligence costs that I'll come back to. Operating profit increased to a record $7.2 million, up 39.4% and EBITDA to 14%. There is a high effective tax rate of 40.5% in this period due to high nondeductible expenditure. Next page. A key part of our 2025 plan is to deliver a gross profit of at least 60%. We're delighted to report gross profit plus 22% or 760 basis points versus the prior corresponding period. This has been delivered through a combination of delivering in focused growth markets, focused channels and productivity gains. Next page. Our transformation plan is on track. We've made very good progress so far with gross profit improvements of $14 million expected through to the end of 2022 -- sorry, of FY '22. We've delivered strong improvement in dollar and percentage gross profit with that 760-basis point improvement. We've delivered underlying cost reductions of $3 million. We've invested $700,000 in transformation, significant simplification by reducing our SKU count by 35% on top of the 30% we delivered in FY '21. We've reduced legal entities, and we've exited underperforming or nonstrategic joint ventures mainly. Next page. The directors were delighted to declare a fully imputed dividend of $0.025 per share. Record date for dividend is 24th of March 2022 and the payment date being 31st of March 2022. I'd like to thank you for your time. I'm now going to hand over to Nigel, who will talk us through cash flow, inventory and net debt, and then I'll come back to talk about our segments. Thanks very much.

Welcome back, everyone. In this section, I'm going to be talking to cash flow, inventory and net debt. Next page. As you can see from this slide, our net debt has increased since June year-end. You'll see that when you look at the slide that our net debt at the end of December was $26.3 million, up $21.7 million since 30 June '21. That's for a combination of reasons, but predominantly, we generated cash from our financial performance. However, our working capital mostly focused on inventory increases has resulted in a negative operating cash flow. I'll talk more to inventory increase on a subsequent slide, but I do want to reiterate that as a business, we are still focused on reducing inventory in our business to $85 million over the next 2 to 3 years. Next slide. We have reported negative operating cash flow for this half of $4.9 million. For the total year, we still anticipate having positive operating cash flow. As I mentioned just before, the primary reason for our negative operating cash flow in H1 is because of our increased inventory investment. And I'll come to why we've increased inventory investment on the next slide. In addition to that, we also invested $5 million in our joint venture with Caravan, and we've also continued our investment into the Manuka Forest strategy, as well as the digital transformation strategy, which we'll come to on the capital expenditure page. Next slide. Inventory. You can see from this slide that our inventory balance, as I mentioned before, has increased by $10.8 million since June '21. The primary cause of that is our raw material -- investment in raw materials, which have increased from $60 million to $72 million in that time. We expect and we are planning to convert a substantial amount of that raw material inventory into finished goods over the next 6 months. And this is to deal with the supply chain disruption that we're managing throughout the globe. So by year-end, we certainly anticipate total inventory to be lower than where it is today. And we are still targeting to have our inventory at $85 million over the next 2 to 3 years. Next slide. Capital expenditure. You can see from the slide that our capital expenditure half-on-half was relatively lineball with the first 6 months of the prior year. We indicated earlier in our guidance that we anticipated capital expenditure for the full year to be circa around $17 million or $18 million. And right now, even though we've only spent $6 million roughly for the first half, we still anticipate that we will hit that $17 million guidance for our capital expenditure spend in the full year. You can see from the chart that we've invested in our Manuka Forest development, and we continue to do that, our digital transformation as well as other productive capital expenditure and maintenance capital expenditure in the business. At this point, I'll hand back to David, who will talk to market headlines.

Thanks, Nigel. I'll now talk through market segment performance. Just before I do, on the next page, you see that our business performance is unique. With our model, with a team in market around the world, that makes us closer to customer, closer to consumer, faster to act. We empower local teams to act and reflect local requirements. We've significantly enhanced global capability to deliver against that plan. We report strong growth in our focused growth market with Mainland China showing revenue up 13%, net contribution up 40%, an increase to 26% of sales. In North America, we've shown revenue -- we report revenue up 48% and net contribution up 75% with 31% to sales. We're growing market share in both markets. Digital revenue stood at 33% of total in this period. Our direct-to-consumer proportion of digital was up 12% versus PCP. And we've just launched a new tech stack, which is a D2C platform to improve customer retention and data availability. Marketing investment increased by 21% to $13.3 million, which is 12.7% of sales. Finally, all markets are now profitable. I now move to segment performance. As you can see, our Greater China segment in terms of revenue was flat versus the PCP, but Mainland China increased 13% versus PCP. North America increased 48% versus PCP, rest of Asia by 1%. Australia and North America were flat, and EMEA was down by 15%. On an earnings basis, on net contribution, you can see that Greater China improved by 7%, Mainland China improved by 40%, North America by 75%, Rest of Asia reduced by 13%, primarily as a result of COVID-related headwinds in Japan. Australia and New Zealand reduced by 4% as a result of increased investment in those markets and our intent to deliver on our win at home strategy. And finally, EMEA improved from a low base at 71%. I'll now talk about those focused growth markets. So here, our plan is strong structured long-term investment to grow both the total addressable market and to grow market share. We've delivered double-digit top and bottom line growth in both China and North America, and we're growing market share in both markets. Starting with China. Our revenue at Greater China level was flat versus PCP, with significant COVID-related headwinds in both CBEC channels and Hong Kong. We saw strong performance in Mainland China offset those conditions. Our strong net contribution growth delivered in Mainland China, plus 40%, offset the material headwinds in Hong Kong and CBEC. Even at a sector level, our net contribution improved by 7% and improved by 100 basis points to 25% of sales. Looking at Mainland China, which is the focus of our activity, you can see our total revenue increased by 13% to just under $40 million. Our net contribution increased by 40% to just on $10.5 million at 26% to sales. Marketing investment, so investment in long-term brand equity in the biggest honey market in the world, increased by 8% to 15.5% with our aim to build long-term brand loyalty and advocacy. Next page. As we've reported, we've shown strong revenue growth despite massive COVID-related disruptions to retail. We've delivered record results in key festivals at mid-autumn, 11/11 and 12/12. We've agreed new distribution and strategic partnerships in H1 that will be implemented in H2. Our continued focus is positioning Comvita as a premium lifestyle brand. To that end, we increased brand investment by 8%. We have multiple in-market brand partnerships that are driving both premiumization and affinity. We have a new cross-border diagou model to ensure that through those channels, we amplify our in-market brand strength and supply efficiency. Our Asian health model supports local ANZ diagou with targeted brand collateral and value chain benefits. We've enhanced management and visibility of inventories and made good progress to improve availability. In Mainland China, the efficiencies we're achieving support Hong Kong and its profit focus. Next page. The U.S. is the second largest honey market in the world. Comvita's growing share, though remain subscale. Our revenue increased 48% versus the PCP, with strong growth across all channels. Our revenue is inflated by $1.3 million due to early delivery of H2 orders in H1. Revenue includes cross-border sales to the rest of the world as it did in the previous period. Marketing investment was flat versus the PCP due to phasing and earn before we spend philosophy that we have within the business. As a result, our net contribution increased by 75% and 500 basis points to 31% of revenue. Next page. Comvita remains the fastest growing Manuka Honey brand in MULO, which is conventional grocery channel in the U.S., growing at over 250% year-on-year per sellout data. Sell-through in key national grocery retailers launched in 2020 is up 48% in the last 26 weeks. We've gained new placement on key digital partners in late H1, generated momentum into H2. Black Friday featured a sales uplift of 17% over a strong prior period with new e-mail subscribers growing 92% year-on-year, growing our database of loyal brand followers in North America. Looking forward, we've just confirmed new account wins to 3 new account wins with several hundred stores in each. We've partnered with key health and wellness media. We're continuing to work through increased lead times and shipping delays to mitigate supply disruption. As Nigel shared, this is crucial that we make sure that we've got inventory in market to support that market growth. And we're transitioning to a new digital platform and tech stack for a frictionless consumer experience with refreshed look and feel. Next page. I'm now going to hand back to Nigel, who will talk through rest of Asia, EMEA and ANZ. Over to you, Nigel.

Thank you, David. Rest of Asia. Rest of Asia markets predominantly performed very well in the half. However, we had significant headwinds in Japan, which resulted in reducing the overall performance, albeit sales for the half were lineball for the whole market. Our net contribution was down $500,000 for the half or 13%. This is again predominantly related to the COVID headwinds we experienced in Japan. Notwithstanding that, we did increase our investment into marketing across this segment. Next page. ANZ performance. Again, revenue was relatively lineball with the first half of the prior period. Net contribution, however, was slightly down due to, again, our increased market investment because of our commitment to win at home. Notwithstanding that, sellout data is improving month-on-month since July, so we can see continued improvement within this market. Next page, EMEA: U.K., Europe, Middle East and Africa. Revenue has been down 15% year-on-year, and this has been predominantly caused by the COVID closures in the U.K. as well as Europe and online challenges with our partner, Amazon. Notwithstanding that, our net contribution is up $99,000 or 71% year-on-year. We continue to invest in marketing investment, and we anticipate that this market will continue to improve over the foreseeable future. Next page, and I hand back to David.

Our base Comvita plan, 60% gross profit, 15% marketing sales and 20% EBITDA will deliver surplus cash through to FY '25 and beyond. With our transformation program showing positive results and confident of our ability to deliver that base plan, we are looking at opportunities to drive our growth credentials through a combination of M&A, organic activity and high-value partnerships targeting incremental categories with a focus remaining on bee products. We're extremely well positioned. We have a simplified and focused organization. We have good management disciplines. Our physical and digital presence enables demand-side consolidation. We have good team capability, and we have a strong balance sheet. In this reporting period, Comvita entered into an extended period of due diligence on a potential scale acquisition. Value could not be agreed at this time. However, demand side M&A offers incremental value and would enable Comvita to generate operating leverage and drive higher standards for consumers worldwide. Next page. In September, we announced our joint venture with Caravan, an entertainment and sports agency with partnership with creative artists in the U.S. Caravan creates consumer brands and companies cofounded with people of influence to develop transformative direct-to-consumer products, technology and companies for highly engaged pop culture audiences in partnership with CAA. CAA is an American talent and sports agency based in LA. They represent thousands of the world's leading actors, musical artists, Canadians, athlete, chefs and more. Through this unique business model, Caravan have launched a number of successful businesses, such as Fit52 with Carrie Underwood, a community-powered fitness platform, helping people on their personal wellness journey. Next page. Central to our partnership with Caravan is the formation of celebrity-backed lifestyle brand, using the healing properties of Manuka honey and propolis for topical use. In December, we invested $5 million of initial capital into this venture. Details of the product remain commercially sensitive at this point, and we expect to announce further details in the coming months. Next page. Moving to guidance. For FY '22, we maintain our current FY '22 EBITDA guidance of a range of $27 million to $30 million, given the current balance of risk that we see. We expect full year positive operating cash flow. We aim to continue double-digit top and bottom line growth in the focused growth markets in China and North America, Manuka Honey and D2C sales. We expect to see recovery and mid-single-digit revenue growth and associated earnings in ANZ. We also expect to see revenue growth in EMEA. We're targeting a 100 basis point improvement in GP to the full year. And finally, included in our guidance is our full year transformation investment of just on $2.5 million. So in summary, we are building momentum. We're delighted to share record H1 operating profit growth of 39.4%. We delivered double-digit top and bottom line growth in our focused growth markets of China and North America in our digital channel, D2C and in Manuka honey. We've simplified the business. We have increased inventory to manage global supply disruption and ensure we have products in market sell. The directors were delighted to declare a fully imputed interim dividend of $0.025 per share. We're positioning Comvita as a premium FMCG brand, and we've made good progress to deliver our 2025 60:15:20 business model. Thanks very much for your time. We look forward to your questions. And again, I appreciate your support. Thanks very much.

And now time for the Q&A.

[Operator Instructions]

[Operator Instructions] We have one online question, which I'll read out to you. Could you provide some information on the $2.45 million investment in intangibles? Was that digital systems? And the answer is yes, it's predominantly the investment we've been making that we've been talking about into our digital transformation and dot-com platforms that we're planning to roll out globally from now and over the next 6 months. Given that there is only one online question, we will now pass to any phone questions from this time.

And we'll take our first phone question from Christian Bell with Jarden.

First question from me just relates to the M&A opportunity that you just recently looked at. Firstly, can you -- what was it?

Christian, it's David here. No, we're not able to give any details at the moment. As we disclosed in the document, we went through a period of due diligence for a potential scale acquisition and didn't complete at this time.

Okay. Cool. And then just a follow on from there. How much -- what was the M&A cost? What was the cost of the due diligence for that?

We've decided that the costs associated with that would be confidential question.

Okay. Can we assume that those M&A costs were included in the admin expenses, because there was quite an amount of increase from $12 million to $15 million.

Yes. That's correct, Christian.

And so can we assume that admin kind of goes back to more -- levels more typical with the PCP?

Yes, I'd say we have good control of ongoing admin costs within the business and the normalization would be expected.

Okay, cool. Then just following on from that, just on the -- still on the M&A stuff. Are you able to just provide a little bit more color around what kind of things you're looking at? Is it vertical? Is it horizontal? Just keeping in mind, I mean, Comvita hasn't had a happy history with M&A. So if you could just provide color to sort of ease our minds, if you could.

Yes, look, definitely. Probably a few things to say. First off, I think the global Manuka honey market is extremely fragmented. And on the demand side of the equation, so all our focus is how we consolidate the demand side of the market with the aim to utilize our infrastructure to drive up standards for consumers. I think our previous focus has been more on supply side, but we see good control there, but we see a great opportunity to utilize our unique business model. Any M&A activity is focused around bee products. So again, staying true to that core focus that we've talked about for the last couple of years.

Okay. No, that's useful to. Just I mean, given the use of lifestyle brand as well, I mean that kind of brings some of those other old products to mind, but I'm going…

Stuff. No, no, no. 100%, you haven't counted how many times we said focus in the presentation, but that focus still remains.

And then growth to FY '25, just based on previous sort of presentations, it's basically all mix driven, it's not price or volume necessarily beyond that. Is that true?

Well, there's certainly no price planned in our 2025 aspiration. As we generate efficiencies, we aim to keep reinvesting to deliver that growth.

Yes. And the mix is coming from product, market and channel mix, right?

Yes, yes.

And then beyond that point, the plantation model kicks in, which, I guess, starts giving you some more volume growth.

Yes.

If we could just dive into that part of things a little bit more, how many hives will that end up representing? Because you planted about 10 million trees. I guess, what, is that about 10,000 hives?

Yes. Yes, yes. You're right on both. So look, we continue to plant up to a couple of thousand hectares a year. As you say, the benefit of that kicks in post 2025 or the material benefit of that kicks in post 2025. I think last results presentation, we shared what we expect from that, which was the 40:60:20. So 40% improvement in yield, 60% improvement in quality yield and 20% reduction in cost as that comes through.

Yes. Okay. And sorry, will that final hive sort of count from that plantation model, will that be around the 10,000 hive mark?

I wouldn't say final, Christian. Look, I think that what we see with the Manuka Forest is we see a great opportunity to say, improve the quality of our supply going forward. And we see a huge opportunity in that space to deliver high-quality product. So we would intend to keep that going beyond 2025, and we would actively plant more trees to deliver to that future.

And -- I mean, given that you've been planting trees for a little while now, maybe 2 or 3 years, I'm not sure. Have any of the Manuka Forest, have any of the Manuka Forests actually started to provide you with honey? And if so, what have the results been like?

Not at a material level. Our hypothesis that we've shared, the 40:60:20, we do believe that we're seeing that. We looked at a maturity growth of -- we get to 100% utilization at year 6 and about 50% in year 4. So obviously, we're well into that journey now.

Next, we'll move on to Joshua Dale with Craigs Investment Partners.

Just first question from me. On Slide 52, regarding your guidance, you have maintained the $27 million to $30 million EBITDA range, and then sort of right, given the current balance of risks. Just with the wording of that, it sort of feels like there might have been an upgrade there, but you're just being a bit cautious at this stage. Is that a correct interpretation?

Josh, yes, look, I think that we do see a lot of change around the world and we want to get through Q3 and then really assess where we are at the end of Q3. And that's the view that we've taken in line with what you've said.

Okay. That's fair. And just on the topic of M&A. Just one thing I wanted to clarify. Your base FY '25 targets, you do expect to reach those organically, right, without any tailwinds from M&A?

Yes, totally. So yes, so that's what I hope that by sharing that 2025 plan, as you say, organically, you can see -- or I hope you can see why our confidence is there in delivering that at least 60% GP increased investment in marketing and then the returns or the operating leverage and the returns that we get from that. I think as we've talked about historically, that 2025 plan delivers cash back to the business, and we aim to reinvest that in incremental growth activity.

Right. And one comment I noticed in your section on EMEA. You mentioned you had some challenges with Amazon. I was just sort of curious about that and whether you could give some detail around that and whether that may also affect your U.S. operations given that you sell a good chunk of product to Amazon there as well?

Yes, it's -- unfortunately, it's quite easy to explain. So for a period of about 4 months, we haven't -- due to paperwork issues, we haven't been able to trade those. Just about resolved now. It's purely geographically driven. And yes, we're putting that paperwork in place to enable us to continue trading. So one territory only and no knock-on impact into the U.S.

Right. And just last question. Your Hong Kong and CBEC sales did drop quite substantially this half. Is there any more color you can give us there? And sort of, I guess, your view on how temporary or maybe permanent that, that might be?

Yes, certainly. Look, I mean Hong Kong, I was there virtually 2 years ago. And you'll be aware it's been locked down for a considerable period of time. Obviously, our predominant business there was retail, which has been continually impacted by those COVID restrictions. So we hope that Hong Kong opens up, but even the Mainland China border hasn't been opened until recently. So we're just -- we're watching that obviously carefully and making sure that our Mainland China business is the focus of our growth activity. CBEC, I think it's been well documented, the disruption in channels due to COVID. And obviously, Australia has reopened effective now, certainly to tourism, and that will start that process again. But probably, we won't see the benefit of that in our numbers through FY '22. So the guidance that we gave about ANZ growth is really coming from other areas that we're seeing that promising sellout trend that Nigel talked to that's been in place since July.

Next we'll take our question from [ Mark Roberson ].

Just one from me to start. Just looking for some clarity on your margin guidance of 100 bps improvement in gross profit finished for the full year. Is that one, an improvement on the first half?

Yes.

Just looking for some clarity on your margin guidance of 100 bps improvement in gross profit finished for the full year. Is that one, an improvement on 1H '22 and 2H '22, or is that an improvement on the full year -- on the prior full year?

So we're expecting the full year margin to be improved by 100 basis points versus the half year. So full year to be around 57.5%.

Awesome. That's very helpful. And then just one other from me. On the target EBITDA margin of 20% by FY '25.

Yes.

There's still a long way to go. How confident are you of reaching the 20% target? And when can we begin to see the step change towards it? Obviously, if there was an extra cost with the due diligence this month, this half that distorted it?

Look, the big thing in terms of -- again, you see this in our full year guidance that there's $2.5 million of transformation costs in our full year FY '22 guidance. We expect all that transformation costs to have finished by the time we get into FY '25. So that provides a significant proportion of the benefit that we'll get. So you'll see transformation costs in '23, '24, and then we expect that to stop in 25%. So that's a big part of it. And then it's ongoing operating leverage that we're getting by that focus on channels, on SKUs on markets.

And next, we'll move on to Mark Topy with Select Equities.

Question, firstly, just around the China market, whether you can provide us a bit more insight into your growing share there? And also in terms of the mix there, how much -- I think you've talked about the digital side of things. How has that been rolling out in the last half and contributing to margin? And certainly, it seems as though we've got a sense that you picked up market share, some erratic behavior in some of the competitors there. Can you talk us through how you see your market share in China?

Yes. Look, I think we -- look, we're really pleased with the overall performance that we've got -- we've had in China, despite some fairly significant disruption to our retail store presence. So we've continued to perform well through our online channels. And as you say, look, we can see where we are growing share. It is an evolving marketplace, digitally, it's evolving and new channels are creating new opportunity for us. Obviously, there's been some pretty widely reported changes within the KOL landscape in the market itself. And our focus is just on making sure that our core leadership in our core categories continues to perform and that's what we're seeing. And on top of this -- I talk a little bit about it there in the numbers, Mark, but a number of high-profile sort of brand affinity activities taking place, which again put Comvita alongside other leading brands in China.

Great. And just to get a sense of the mix between digital and physical sales in the half?

Yes. So it's around 60% digital, just over.

Right. Okay. Great. And then you alluded to the fact that Australia is opening up. And I suppose students will start coming back here in Australia. So how do you see potential for the diagou market rebound? Or how does that factor into your thinking going into '23 as you talked about?

Yes. Look, we haven't really -- first off, FY '22, we haven't really reflected in FY '22. You see in our guidance that we expect growth to resume in Australia. But that's been something that we've seen some outperformance improved since July. So we feel that we're in a good space there. We're really just trying to test what that return of international travel to Australia means? And we'll come back to that in a later period once we get some more clarity.

Great. And then can you talk about the U.S. growth. With the sales growth being achieved with constrained marketing spend. Can you maybe tell us about the ramp-up and keep that momentum? Or will there be additional investment? Or how are you thinking about additional investment as that sales ramps up?

From the start, U.S. is the second biggest honey market in the world. We see really strong market fundamentals there. We see a good performance in terms of sell-in and most importantly, sell out as we share. And we have an operating model that's working. So I think it's more of the same, but us looking at ways to accelerate that and deliver scale in North America, so we generate that East-West or U.S.-China balance in our portfolio.

Great. And then just in terms of what you're seeing on the COVID side, you mentioned Japan, particularly. Can you give us a sense of what the additional costs and how you're seeing things in the second half now in terms of perhaps Japan coming back on?

Well, obviously, business travel opens up to Japan from the 1st of March without restrictions or with limited restrictions. So again, we're watching closely. In our guidance, we haven't considered a real return to the performance that we saw a year ago. So we've taken a more cautious approach to outlook there in H2. But look, it is one of the world's biggest honey markets, the discerning consumers, it's a place where Comvita should sit very comfortably and be performing very well. So our long-term view of Japan as a market for us is it's attractive. And it is a self-funded, profitable growth in that marketplace, but -- and we still believe in the potential that exists there.

Mark, it's Nigel here. We've gone a bit over time already. I think we're going to have to call the questions to an end. So -- and thank you all very much. We do have some more online questions that we received, which obviously we haven't been able to get to. Assuming we have the contact details of those that provided those online questions, we'll answer those separately. So thank you all very much for attending our presentation. I hope you gained a lot from it. And we look forward to talking to -- no doubt some of you over the next 2 or 3 days as well. So from Nigel and David, thank you very much. Bye-bye.

Sure. Thank you.