Comvita Limited (CVT) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen and fellow shareholders, and welcome to our Half Year Results Presentation for 2023. Before I talk about our results, I wanted to cover 2 recent major events, Cyclone Gabrielle and the reopening of China. Our thoughts are with everyone across New Zealand impacted by Cyclone Gabrielle and especially our team in the Hawke's Bay region. Earlier this week, I visited our team in Hawke's Bay to assess the impact of Cyclone Gabrielle firsthand. We're really pleased to report that all our team are safe and well, and we've been able to put them in accommodation and support for them and their families. Naturally, our priority is ensuring the ongoing safety of the team and making sure that they have everything that they need after suffering from that significant flooding. The level of devastation that I and destruction that I experienced firsthand can only be described as catastrophic. We recognize it's going to take some time to fully understand the extent of the impact for the area. And we're currently working on plans to support the wider Hawke's Bay community, and we'll update as those plans are finalized. Our own facility has suffered extensive damage. Our working hypothesis is that the site will be written off in its entirety. Naturally, we have full insurance cover in place, and we're working closely with our insurers to get an assessment completed so we can start the process of clearing up our site. From an operational perspective, as previously advised, we've moved extraction to one of our other facilities. And apart from the significant disruption in Hawke's Bay, we did not experience any material impact to our daily operations. As you'll be aware, Mainland China market reopened around the 5th of December 2022 following COVID restrictions. A number of our team members contracted COVID, though experienced mild symptoms and are all well and back at work post Chinese New Year. We've seen strong demand in all channels following reopening. However, $1 million to $2 million of orders were unfulfilled due to courier companies drivers getting COVID. Retail sales were strong in December, growing by 46% year-on-year. A strong sales performance was also experienced in Australia and New Zealand and Hong Kong. In January, we've seen that performance continue despite an earlier Chinese New Year this year versus 1st of February in the PCP. Speaking after LVMH reported their results, Bernard Arnault, Chairman of LVMH. said the signals from China were positive so far. I'm quietly confident that the Chinese leaders being very true they will surely take advantage of this period that is starting to revitalize Chinese growth. If this is the case, and we've seen signs of it in January, then we have every reason to be confident even optimistic about the Chinese market. This sentiment is exactly shared by Comvita. I'm delighted to share today's results with you and report strong and resilient performance across our business despite material foreign exchange headwinds and the COVID impacts that we talked about earlier. We are #1 global brand leader in Manuka Honey and bee products. We're gaining market share in key markets and extending our global leadership. Including today, we've now delivered 6 consecutive reporting periods where we delivered double-digit earnings growth in line or ahead of guidance. Today, we report record revenue of $112 million, which is plus 7% versus PCP, with Greater China plus 9% and North America plus 20%. We also delivered record gross profit of 61.9%, plus 530 basis points versus the prior period. We invested $15.5 million in our brand, an increase of $2.2 million year-on-year and equating to 13.8% of sales. We delivered record operating profit, record EBITDA and record NPAT with our net profit after tax improved by 19.4% versus PCP. Our net debt finished the year at $63.3 million, which is primarily due to investment in inventory. Negative operating cash flow issues that we've reported have now been resolved. The directors were delighted to declare a fully imputed interim dividend of $0.025 per share. Moving to our financial statements. You can see the record revenue of $112 million, as I've already mentioned. In addition, digital share of revenue increased to just under 39% at accretive gross margins. We saw a record gross profit of $69.4 million, which was up 17% versus PCP, record brand investment as we continue to tell the amazing Comvita story to discerning consumers around the world. We continued our investment in transformation activity with $2.2 million invested in this period. And as shared already, delivered a record operating profit of $11.6 million, which is up 61% from the prior comparative period. We also delivered a record EBITDA of $13.4 million, plus 11% versus the prior period, and our normalized EBITDA after ERP costs, plus 16% versus the prior comparative period. I'll come back to that normalization later on. We delivered record NPAT of $4.2 million, plus 19% versus PCP. And this despite the negative FX impact to $3.5 million included in this result and the impact of COVID disruption in China. Next page. We are delighted that momentum continues to build across the business. On this page, you can see our gross profit, operating profit, EBITDA and marketing investment for the last 4 reporting periods. Gross profit has increased by 94% to $69.4 million from $35.8 million in December '19, a compound annual growth rate of 25%. Operating profit has increased by 210% from December '19. EBITDA has increased by 252% from December 2019. All the time, we've continued to invest in our brand, and that marketing investment has increased by 70%, a CAGR of 21% over that period. We're on track to deliver our 2025 plan of $50 million EBITDA by 2025. Our absolute and continued focus underpins our performance and progress. On the page that you've seen before, you can see our purpose and our values, our 3-point plan to stabilize, transform and build long-term resilience and growth at Comvita, how we talk about our unique business model connected from the trees that we create and that we plant right the way through to consumers in market, arotahi or our focus on winning with consumers and having an absolute consumer focus in market. Then the next slide, stages of organizational development. So here, we map out our journey in terms of 3 stages: crawl, stride and run. You can see in the middle period there, which is the stride phase, where we're making progress on our goals in that space before we get to June 24, which is the run period for us. The last box details our business plan, which is 60% gross margin, 15% marketing sales and 20% EBITDA target for 2025. I'll come on to this on the next page in more detail. So as I say, we're aiming to deliver by 2025, 60, 15, 20. So a minimum 60% growth profit, 15% marketing investment sales and 20% EBITDA with a leverage ratio target of 1% to 1.5%. In that gross profit, as you see, we're already at 62% in this period. We are expecting the full year to be around 59% due to the impact of harvest on this year's result and also some growth initiatives that we've got coming into place in the second half. In terms of marketing investment, we've invested 13.8% in this period, and we've delivered a normalized EBITDA after ERP, up 16% versus PCP. On the next page, you can see our 2025 plan on the page, which shares our aim to deliver 50% of our total sales through digital by 2025 and a $50 million EBITDA in that same period. Underneath that, you can see our goals and the key focus in terms of strategic pillars through the business. Looking at ratios in this period, you can see our gross margin was 61.9%, marketing sales was 13.8%, and we delivered 12% EBITDA and adjusted EBITDA of 14%. The directors declared a $0.025 per share dividend. Net debt finished at $63.3 million, up $37 million versus PCP. Our inventory finished the half at $146 million, up $34 million versus PCP, but is still forecast to come back to $135 million by the end of the year, which is in line with our original guidance. We're delighted to report a 10% reduction in total recordable injury frequency rate. We aim to be an organization that delivers both performance in terms of our revenue and profits, but also have a significant environmental and social impact. Our Harmony plan guides us and aligns us with our determination to leave the world in a better place. Our Harmony plan focuses on 4 areas of impact: climate action, bee welfare and advocacy, community impact and native forests and biodiversity. We've made really strong progress against all of these areas. As you can see, in community impact, 91% of our team are now shareholders, and we've invested over $95,000 year-to-date to support our partners and community events. We feel privileged to be able to help communities outside Aotearoa at New Zealand. We're using bees and beekeeping to support people and wildlife in Kenya, training the local Maasai tribe how to keep bees for sustenance and funding education for Maasai women. We believe that all of our team must be safe and return home safe and well at the end of every day. Their safety and well-being is of paramount importance to us, and we're pleased with the progress we're making. Our total recordable injury frequency rate, or TRIFR, reduced by 10% versus FY '22. Our lost time injury frequency rate reduced to 1.5, which is flat on FY '22. We increased near misreporting, which is a sign that we're actively looking for things in the workplace that could harm people, and we're reporting and improving on those. Reportable injuries reduced. We saw a slight increase in motor vehicle in the injury frequency rate, and that's something we're working on. And we carried out a 35% individual well-being checks on our team in New Zealand. We have 552 people in our Comvita global Fano. The average length of service is just over 5 years. 62% of our global team is female, 37% of the leadership team are female. 40% of roles are filled by internal talent, and we're really pleased that the apprentice scheme that we launched a couple of years ago is now seeing 73% of apprentices promoted from our first consort. We aim to be carbon neutral 2025 and net positive 2030. For the first time, we've looked at greenhouse gas emissions, Scope 1 and 2 in this interim period. As you can see in the first box, our emissions actually increased by 19% Scope 1 and 2 in the 6 months to the end of December. This is primarily due to the world opening up again and us traveling more to get to both our apiary teams and to our markets around the world. At the same time, carbon sequestration from our forests increased by 54% to just over 4,700 tonnes of CO2. Carbon stocks since Manuka forest establishment now total nearly 56,000 tonnes of CO2. We generated over 12,000 kilowatt hours from solar panels that we have on our site in Paengaroa. Our packaging recyclable, reusable or compost rate is up to 91%, and we diverted 80 tonnes of waste from landfill. I'll now hand over to Nigel, who will walk through some numbers and also P&L, balance sheet and cash flow. Over to you, Nigel.

Thank you, David. So we've had strong performance in our first half. Many of these numbers have been covered off by David earlier in the presentation, but just to call out the leading numbers, we had operating profit plus $4.4 million or 61% up on last year to $11.6 million, $13.4 million of reported EBITDA, $1.3 million up on first half last year, $4.2 million of reported NPAT, 19% up on last year, $112 million of recorded revenue, gross profit at $69.4 million and our marketing investment of $15.5 million. Gross profit was increased by $10 million over the last year. This was primarily from our focused growth markets, Manuka Honey and our digital channel, combined with continued productivity gains. We had strong performance again in our North American and Greater China maintaining growth despite the COVID lockdown headwinds. We've had strong growth at Monofloral Manuka Honey, and our digital share growth grew to 39% of total sales from 33% last year at accretive margins. And we continue to get productivity gains in our manufacturing processes, leading to lower cost of sales. This year, we're calling out foreign exchange because you will have seen from our profit and loss that we incurred $3.5 million of foreign exchange losses in our first half. These were caused by the lower New Zealand dollar that we experienced. That resulted in a loss of $2.2 million and related to hedging instruments that were delivered during the first half. There was a further $1.2 million of unrealized translation losses incurred in the first half. If we adjusted our EBITDA for those losses, we would have delivered a $16.3 million or 35% increase over PCP. This year, we've also provided an insight into our future hedging cover that we already have in place through to FY '26. We have called out the U.S. dollar and the Chinese Yuan that are major currency exposures. From a balance sheet perspective, we've already noted that our net debt increased by $38 million since 30 June '22. That was as a result of operating negative cash outflows of $20.7 million and investing activities, principally capital expenditure of $11.9 million. We also paid out dividends of $2.2 million. The operating cash outflows of $20.7 million were primarily due to inventory being up $13.7 million, which I'll come back to on the next slide. And debt has also been up $7.5 million, and that was particularly due to high revenues in November and December. As noted, our investing activities included capital expenditure of $11.9 million, and I'll come back to that on a future slide as well. And we are still forecasting our full year inventory to be in line with last year as we provided guidance earlier on. More importantly, as David mentioned earlier, we have resolved our operating cash position, and we will have positive operating cash flows with new supply model, enabling ongoing positive operating cash flows in future reporting periods. Inventory increased by $13.7 million, as mentioned earlier. This was across primarily raw materials, which increased $12.4 million and that was related to prior commitments associated with expired and no longer renewed supplier contracts. David will talk more to that shortly in the presentation. Our finished goods also increased by $2.8 million as we continue to ensure we have sufficient inventory to mitigate supply chain disruptions and meet market demand. I'll hand over to Dave.

We've been optimizing our inventory and supply strategy since 2020. Stage 1 was our harvest breakeven contribution model that we launched in '20 and was proven in both '21 and 2022. To explain our total supply model, it was basically that 30% of our total supply came from our own forests or our own apiary operations and joint ventures. 60% came from our supply partner group and then 10% we would buy from the market as we needed. For the supply partner group, we recognized an inability to price purchases according to consumer demand and volumes were as produced. That created an imbalance in inventory, and it was outside our direct control. With Stage 2, we started exiting, in 2021, we started exiting some long-term supply contracts. Stage 3, by the end of December 2022, all supplier contracts were ended, though an intention to continue working together based on true market demand. For Stage 4, the period that we're in now, our new supply model is now in place. That supply model links supply and price directly to demand. Our new model means our only commitment on volume is through our own supply and joint ventures, which is about 30% of our total needs. With Stage 4 now complete, this means that we're still able to still forecast year-end inventory materially in line with PCP around $135 million. For FY '24, we'll see a material reduction in inventory and associated benefit to cash flow. For FY '25, we'll see a further material reduction in inventory, in line with our 2025 plan of inventory at $85 million and again associated benefits to cash flow. This enables us to have an expectation of positive operating cash flow in half 2 FY '23, FY '24 and FY '25. For our partners, we will continue to partner with our long-term suppliers, but this will be based on demand. We will continue to purchase needed inventory based on the market demand and pricing. We will share more information to give them demand signals ahead of the season to enable us to target crop again in line with that demand. As you'll all have experienced firsthand, this year, we've experienced some extreme weather events. It's too early to give a fulsome update on our harvest performance, but it is safe to say that harvest has been severely impacted by the weather events that I talked to earlier through December, January and February. We saw initial flaring delayed by around 4 weeks. But ultimately, we won't know the quality of the harvest until around April. Our initial expectation is the harvest being between 300 and 350 tonnes, subject to any impact of Cyclone Gabrielle on Hawke's Bay. In our breakeven model, we've based that on 400 tonnes. We've actually delivered a breakeven at 370 tonnes in the past. So we're working hard to deliver that performance again with 0 contribution to group profits from the apiary division in this period. Back to Nigel.

Capital expenditure. Our capital expenditure for the first half is considerably up on the first half last year. That's predominantly due to our investment in the Manuka forest, both from the acquisition of some land for $4 million as well as forest development during the period. The substantive benefits of these investments of forest are expected to be delivered from FY '27 onwards. In addition, we continue to invest in our manufacturing process improvements, which, as I've mentioned earlier, do lead to improved productivity and increased capacity, leading to lower cost of sales. In addition, we are continuing to invest in our digital channel, D2C to drive revenue growth. As referred to earlier, we are upgrading our internal digital transformation program, which is now focused on updating our ERP system, redefining internal and efficient processes and refreshing our master data. This project will run until June 2024 and is designed to give up to date, scalable internal systems and processes and significantly increased reporting capability. Due to changes in accounting guidance, software as a service means that assets aren't owned. These costs will be expensed until June 2024. In line with market practice, these will be normalized in our results and guidance. As David mentioned earlier, again, our Board is very delighted to clear a fully imputed interim dividend of $0.025 per share. The record date will be the 7th of April 2023 and the payment date the 28th of April. This dividend is in line with prior reporting period. Next page, and I'll hand back to David.

We're absolutely committed to understand the science of nature, and we invest more than the rest of the industry combined. Next page. We are delighted to have clinical trials ongoing at the moment to look at Manuka Health for digestive health benefits, and we expect to share the results of that research towards the end of 2023. In 2023, we've had 1 patent granted, 1 patent accepted, and we filed an additional 10 patents that will all help new product development in the future. We have world-leading quality of 14 independent audits and certifications that have been completed. Our industry-leading lab testing standards with 190,000 lab results in half 1 FY '23 increased by 9% versus PCP. In total, we have 45 patents that are granted with many more on the way. In total, other investment into science and research totaled an additional $1.7 million. Turning to market performance. We're pleased to report yet again that we're growing share in our focused markets. Next page. In this interim period, as we've already reported, we delivered record revenue of $112 million, plus 7% versus PCP. Gross profit of 61.9%, plus 530 basis points versus PCP. In Greater China, our revenue increased 9%, and our net contribution increased by 15% to $13.1 million. We achieved very strong performance in Hong Kong, both top and bottom line, though it's estimated NZD1 million to NZD2 million of this came from China consumers shopping in the area. Mainland China sales grew by 3% and net contribution by 2% due to that retail disruption. We saw strong digital sales. Retail sales were highly disrupted. And despite the strength of the performance in December, we're unable to regain the lost ground before that. We increased our market share in Mainland China by 500 basis points, which is greater than numbers 2 to 10 combined. We increased investment in our brand to 15.8% of sales. In North America, revenue grew 20% and net contribution grew 40%. In Australia and New Zealand, the total revenue was flat with a major headwind from Asian Health daigou channel, but our net contribution was improved by 24%. We saw top and bottom line growth in rest of Asia, but the U.K. delivered a performance below expectations, remains subscale, but we have good progress outside the U.K. In Greater China, our revenues increased 9% despite those material COVID headwinds across the region. Mainland China was up 3% despite those COVID measures, but domestic e-commerce was up by 13% to offset cross-border e-commerce and retail disruption. We saw very strong performance in Hong Kong, and the run rate is now above pre-pandemic performance. We increased our market share by 500 basis points to 13%. We increased our brand investment and we see momentum building for a post-COVID takeoff. Net contribution increased to $13 million, plus 15% versus PCP and to 25% of sales, plus 100 basis points versus PCP. In Mainland China, as I've already said, our revenue increased by 3% under the challenging market conditions. Off-line direct retail was down by 5% despite that strong recovery in December, that we did see really strong performance by new key account that we signed at the CIIE show in this first half. We continued investing in our marketing and our brand activity. We delivered higher e-commerce performance marketing to drive additional growth. The brand investment is further reinforcing Comvita brand power to continually gain share as the absolute leader in the market. Net contribution of $10.2 million was improved by 2% versus PCP. In North America, revenue was up 20% in the world's largest monofloral Manuka honey market by volume. Net contribution was up 40%, some of that due to timing. We delivered double-digit growth on comvita.com. We continued growth and market share growth in natural retail channels, nearly doubling year-on-year revenue. We invested in building a foundation for future growth through our brand, through our team, expanding our product range and driving e-commerce and wholesale growth. Net contribution grew by 500 basis points to 34%. In the rest of Asia segment, which comprises of Japan, South Korea, Singapore, Malaysia and Indonesia, we saw total sales up 2%. We saw Japan performance stabilize in both top and bottom line, which is encouraging for us going forward, and we're now starting to build. We saw high single-digit growth in Korea and net contribution increased by 8% versus the PCP and 200 basis points. We're really pleased to share that we signed a new contract with a regional customer with a year 2 revenue target of between NZD5 million and NZD7 million in 2024. In the ANZ segment, revenue was flat versus the PCP. Below that, we saw very strong growth from domestic sales in both Australia and New Zealand, which offset those Asian health headwinds due to China daigou COVID disruption. That strong domestic growth came from all channels and categories. We grew our market share with the biggest segment customer, again, is clear #1 in the Manuka honey category. Net contribution increased by 24% versus PCP and plus 700 basis points to 35% of sales. EMEA or Europe, Middle East and Africa, revenue was down by 13.5% versus PCP. The major issue in the U.K. particularly remains that we are subscale. We're still forecasting double-digit top and bottom line growth for the full year. But primarily, we're still a breakeven business in this region. We have new distribution agreed for half 2, which will be positive for the segment, but recognize a lot of work needs to be done to deliver the true potential that we see. Net contribution was down 96% to $7,000. But as you can see, that 96% was $195,000. We're on track for e-commerce to be 50% of our total sales by 2025. In this period, we reported record revenue of $42.8 million in e-commerce, up 15%. That was delivered with accretive gross margin, improved 230 basis points. Digital share of our total revenue increased to 38.8%, plus 580 basis points versus PCP. We invested more to tell our story through this channel with nearly $7 million of digital marketing investment. We're really pleased that existing consumers continue to purchase more from us, and we saw a 10% growth in direct-to-consumer average order value versus the previous period. And finally, our Net Promoter Score, how consumers judge us, increased to 9.2% over this period. So to summarize, I'll now move to our guidance and the final summary of the whole presentation. But to FY '23, we're forecasting double-digit growth of normalized EBITDA, that normalization will be after ERP investment that will be normalized of circa $3 million. We're assuming a strong growth in China in H2, profitable top and bottom line growth in our focused growth markets, channels and categories, e-commerce share to be greater than 40%, slight softening of GP in H2 support growth activities. Our transformation investment will be $3.5 million, excluding the ERP investment that I mentioned above. Inventory will be flat versus PCP, with an estimate of the full year of around $135 million, and we're forecasting half 2 positive operating cash flows. We're still on track to deliver $50 million EBITDA by 2025. So in summary, for our interim results ending the December 2022, we delivered record revenue, record margin, record investment in our brand for future growth, record operating profit of $11.6 million improved by 61%; record EBITDA, record net profit after tax, up 19%, earnings per share increased by 20% versus PCP, and we declared a fully imputed dividend of $0.025 per share. We're incredibly excited about the future in front of us. We've maintained guidance for FY '23 after normalizing for those ERP upgrade costs that are no longer able to be capitalized. We're on track to deliver our 2025 plan of $50 million EBITDA. We have clinical trials underway to test the medical efficacy of Manuka on gut health. Our new talent backed skin care range will Caravan will be launched in half 1 FY '24 towards November, December. In addition, the total addressable market for honey is forecast to grow by over USD6 billion or 67% by 2031. I'd like to thank you for your continued support. We're delighted with the results that we shared today, and we really believe that our business model and our absolute focus on winning with consumers in market is making the difference. We look forward to taking your questions. Thanks very much.

Now ready for any questions. Online attendees, please click the ask a question box to send in your questions. We do, in fact, already have some questions in the inbox, so I'll read those out and either David or I will respond to those questions as we work through them. The first one is from Margaret Bei. David and Nigel, could you please talk us through what you expect in the apiary division, if breakeven harvest level is 400 tonnes is above your initial harvest expectations of 300 to 350 tonnes...

As you say, our assumption is that the harvest will be between 300 and 350 tonnes. We expect and we are forecasting that to be a breakeven position, which will mean 0 contribution to group profits in this period. We've already delivered a breakeven with 370 tonnes in the past. So we remain confident that we can do that. Obviously, the only part that we've got to work through is impacts on Hawke's Bay of Cyclone Gabrielle and that impact will be an insurance covered. So apart from that, forecasting a breakeven position.

Next question also from Margaret Bei. Can you please talk us through your decision to hold dividends stable instead of increasing it in line with your reported impact?

Yes. So look, we took the decision when we looked at our performance to the end of December that given the high debt that we had, and we felt that it was sensible and pertinent to hold the dividend in line with PCP.

And a follow-up question for Margaret. Can you please talk us through the change in your supply model, which should support inventory normalization?

Yes. So historically, our supply model...

Yes, Nigel here. It seems like we just got a technical glitch with David. So we're talking about the new supply model. And David was referring to that historically, we had commitments in place with a special supplier group that meant that irrespective of volumes that were produced, we were committed to take the inventory. In the presentation, you will see that we indicated that we have terminated those agreements. And therefore, effectively from this season onwards, we are no longer committed to taking that product from those suppliers. As a result, we will have the product coming in from our own apiary business and in addition, just buy on the spot market, that product that we require from time to time. That will enable us to ensure that we manage our required inventory in line with market demand. The next question that's been asked by Christian Bell is the following: You are spending $3 million on ERP in FY '23, how much was spent in FY '22? Your normalized EBITDA treatment only makes sense if ERP cost was 0 in FY '22 or you would need to readjust the FY '22 reported EBITDA down by the ERP expense. The answer to that question is that we, in fact, did spend nothing ERP in FY '22. And so as a consequence, this is the first year that we've initiated that process of implementing a new ERP system or what effect it's updating our existing system. So that answers that question. Next question also from Margaret Bei. Are the raw materials that have increased in the first half '23 from expired nonrenewed contracts still relevant for your existing SKUs? In other words, do you think there would be any wastage? The answer is, the increase in the raw honey inventories that we saw in H1 FY '23 was related to those contracts that I referred to earlier that have been expired and not renewed. And there there's no expectation that there will be any wastage from any of that honey brought in during that period. Next question from Christian Bell. The second half result needs to be strong from a revenue and/or margin perspective. So firstly, what do you expect to drive the uplift, revenue or margin? If revenue, where will that come from? How much visibility of sales do you have over the next 6 months? If it's China, what happens if there is another wave of COVID? Can you divert to other markets? Another angle is that you cut back on a direct OpEx. How much flexibility do you have around that? And would you be willing to do that to ensure guidance?

Sorry about the slight disconnection from my point of view. Hopefully, you can hear me now. Nigel, can I just ask that you repeat those questions, please, so I can answer them for Christian.

David. The question goes as this. The second half result needs to be strong from a revenue and/or margin perspective. So firstly, what do you expect to drive the uplift, revenue or margin? If revenue, where will that come from? How much visibility of sales do you have over the next 6 months? If it's China, what happens if there's another wave of COVID? Can you divert to other markets? Another angle is that you cut back on indirect OpEx. How much flexibility do you have around that? And would you be willing to do that to ensure guidance?

Sorry for the slight technical problem there. Look, we are forecasting strong revenue in the second half of FY '23. In terms of markets, we're expecting a strong performance in China. Actually, we're expecting strong performance across all our segments. We've made a number of account gains through the year, which give us confidence that we'll be able to deliver performance to enable us to deliver to guidance. In terms of COVID impact on China, probably the 2 things I'd say in last year's second half performance, obviously, retail, off-line retail was disrupted from end of February, March right the way until the end of the year. So we have a constrained prior period. On the second part, what we've seen is particularly consumers who've historically used honey as a medicinal or quasi-medicinal product for thousands of years, during those COVID periods, they actually turn to us in greater numbers. So we're proud that actually consumers trust us as part of their own healthcare routines during those times. Naturally, we do have operating costs that will flex at that time. But primarily, we believe that we have a good line of sight after revenue and associated margins over this period. The final question you raised was about earnings momentum and the earnings momentum that we're expecting in the second half, we see it as a continuation of the performance that we delivered in FY '22.

Next question also from Christian Bell. How has January trading been like across your markets, particularly China and the U.S? Is China back to pre-COVID? Are you able to tell if the first half demand is due to the spike in COVID? Have things freed up there?

January, obviously, but January performance was good. It was ahead of forecast, particularly performance in China was good. I wouldn't say it's at pre-COVID levels yet, but all the signs were positive. We have to remember, in this January, we had a full week of Chinese New Year, whereas in prior period, Chinese New Year was 1st of February. So we have good line of sight as to that performance. And we're already planning to make sure we have inventory in place to make sure that we're able to meet elevated demand as and when a second wave starts.

Another question from Christian. If you do hit guidance, it means your second half EBITDA run rate is approximately $20 million. Is there any reason why we couldn't double that for FY '24, given if anything, your market should be better by then?

It's clearly very early to talk about FY '24. What we would say is that we see momentum in our business. We see positive earnings growth and you go back to the information we've shared in this presentation and the last presentation in terms of momentum at that EBITDA level, we really do see that. I think it is fair to say that for 2024, we expect to see market conditions markedly better than 2023. So I think from a revenue and margin perspective, we're expecting a strong performance, but we'll come back to earnings at a later time.

Another question from Christian. Why keep inventory so high for growth given that sales are only expected to be mid-single digit? I'll take that question. We signaled at the end of FY '22, that we anticipated our inventory levels for FY '23 to be in line with where we landed at the end of FY '22, and we maintain that guidance. And this is predominantly due to wanting to ensure that we have enough inventory both in market and in terms of raw materials to continue to meet the unexpected outcomes of supply chain challenges that we're experiencing. The inventory levels at the end of December have peaked. And so we will see those reduce through the second half to meet our guidance range of around $135 million of inventory by the end of FY '23. Next question. This is from Joshua Dale, well done on executing towards your 2025 goals. First question is on guidance. Why was the ERP adjustment not signaled when you issued guidance originally and reiterated back in November that software-as-a-service accounting change has been a new standard for quite some time there, including when you issued guidance originally.

Thanks, Josh. Look, the expectation was that we would still be able to capitalize that ERP investment at the time, and it's only become clear very recently for us probably in the last few months that actually we're not able to capitalize that investment, which is why we've normalized it in the way that you anticipate.

Next question from Josh. When you set guidance, did you assume a normal apiary EBITDA contribution? How do you consider the potential apiary swim factor when setting guidance early in the new year?

But we did anticipate a normal apiary contribution when we set that guidance. And I think it's part of the reason we're so pleased with the performance and the outlook is that we're now effectively maintaining that guidance, but without the benefit of a late apiary contribution, which last year was around $3 million.

Another question from Joshua. For the facility that was damaged in the Hawke's Bay, is it worth your while to reinstate another facility there? Or will you just integrate operations into another site?

Joshua, to be perfectly honest, it's probably too soon for us to make that assessment. Obviously, the team down there are in a state of shock as to what they experienced, to give you that context, the water in the region went over the roof of both the house on site and our facility. So there was significant damage down there. And you can imagine, 3 of the people were actually living in the house on site that were evacuated fortunately. But you can imagine the impact of seeing that devastation and the power of water that actually moved containers, trees, lorries around the site and inside. It clearly looks like it looks horrendous. So we will absolutely come back to that. But right now, we are focused on making sure that we get operations up and running again, and we look after those people who have been affected.

Another question from Josh. Could you please provide an update on the status of the Caravan JV?

Yes, very happy to. So our estimation is that we'll launch late in 2023, probably November, December or very early in 2024 in January. We're making great progress. We finalized formulations. We're hoping to announce talent who will co-found the business with us before the end of this financial year. We believe we've got an incredibly exciting proposition that we're developing. And as soon as we've got talent agreed, then we'll obviously share that. But we'll also share more detail about the lead up to that launch as we get closer to it.

A question asked by Hermane Lowe. How much Manuka forest land is Comvita own at the end of December '22. What is the split between self-owned Manuka forest land and leased land? Was any Manuka forest land damaged by the cyclone?

So I'll take the last question first because that's the easiest. We haven't seen any substantial damage to any of our forests due to the cyclone. Obviously, we have got land that slipped in areas that we extract Manuka that's not owned by us. Currently, we don't actually share the split between managed and owned. That's something that we'll come back to as we go forward. What we have said is we aim to plant between 1 million, 1.5 million trees a year. And we see the long-term opportunity for Manuka forests to deliver the highest quality Manuka honey and us to gain productivity benefits as we deliver from those bigger hive sites.

A question from Joshua again. Your recent provided for elevated inventory in FY '22 was to mitigate supply chain issues, not because you were contracted to take supply from your supply partners. Why was this not communicated previously?

Josh, thanks for that. Look, the primary reason was we did increase inventory to offset the impact of supply. But as you can see from the detail that we shared here back in 2021, we recognized that there was a disconnect between what we received from our supply partner group and what the market demand was. So right back then, we started the process of exiting those long-term supply contracts and where we've got to today with none of them in place, that means that we can really concentrate on making sure supply and demand are balanced and that ultimately, we've only got 30% of our total annual volumes contracted.

Next question, this is for David Oxley by the way. What level of transformation has been is expected to be expensed in FY '24 and then '25, if any?

David, I'll cover 2025. I won't cover 2024 this time. At 2025, there will be no transformation spend. So at that time, all transformation activity will finish.

Next question. Is there a plan to increase the scale of apiary business after the termination of the long-term supply contracts despite positive expectations on operating cash flows? Do you expect the GP to be negatively impacted with more market exposure?

No. So look, our long-term apiary supply forest model is therefore to deliver sustainable supply for the future highest quality, lowest cost and that will continue.

Next question from Christian Bell. Transformation spend of $3.5 million for FY '23 is versus $5.5 million in previous guidance. Why is this lower now?

Christian, look, on the reality that we went through was when we looked at our performance, we saw that we had those significant FX headwinds of $3.5 million, and we recognized that we were going to have a poor harvest performance. So we scaled back the other transformation activity at the time.

Next question from Christian. If there are geopolitical issues that impact access to China, do you have any strategies to get around this? Or will you have to exit?

Look, our long-term commitment to China is really what sets us apart. We're considered to be part of the Chinese business community. We were delighted to be on the front page of the China People's Daily, talking about our commitment to both our team on the ground and the market as a whole. So we have people in market. We've got about 200 people in China, and we have that long-term commitment that's there. So we expect that we would still perform well during that period.

Next question from Mark Topy. Can you expand on the growth momentum in North America and the ability to continue this growth trend?

Yes. Thanks, Mark. So look, we've set out that North America is the world's biggest monofloral Manuka market, and we see significant opportunity to grow both our distribution and our revenue online and offline. Our performance has been strong over the last 3 years, particularly. We see no reason structurally why the U.S. can't be the same size market for us as China. And we've got multiple routes to actually deliver top and bottom line growth in that market.

Next question from Margaret. Did your harvest model help to mitigate the impacts of Cyclone Gabrielle? How much volume traditionally has come through the most impacted region? And how has your bee population held up overall?

Hawke's Bay is probably about 5% of our total apiary supply. So on a macro level, it's not a huge contributor to overall group supply. Naturally, we have lost hives. So that has a direct impact on the bee population in the area. We have been able to move hives into different areas to make sure that we can still generate honey.

And the final question from Hermane Lowe. Was there any cost to exit those long-term supply contracts? And I can answer that and say that, no, there was no cost. They reached their expiry date, and we simply did not renew them. With that being the last question, I think we're at time, so we'll wrap up at this point, and thank everyone for joining the call. And we look forward to meeting some of our investors face to face over the next 2 or 3 days, and we'll conclude at that point. Thank you very much.

Thanks very much, everyone.