Comvita Limited (CVT) Earnings Call Transcript & Summary

Welcome, everyone, to the Comvita HY '25 Interim Results Presentation. My name is Nigel Greenwood, CFO. Online attendees can submit a written question at any time by clicking the Ask a Question button on your screen during the presentation. Your questions will be answered at the end of the presentation. I will now hand over to [Audio Gap].

Thank you, Nigel [indiscernible], and welcome, everybody. Brett Hewlett. I'm the CEO, assumed the role in September last year. Yes, we'll have a pretty comprehensive presentation to you today. If I could just go to the next slide around our summary position. We'll be talking a lot around the impacts of the market, industry, challenging environment, the very significant seismic changes that are taking place in our trading environment. We'll also be talking around a very much back-to-basics approach to how we're dealing with the business, repositioning the business for our current realities. We'll also talk around cultural reset. We acknowledge the erosion of trust that's taken place as we've had to present a number of bad news results, and that's weighed heavily on our image with our key stakeholders. We'll talk about trust and transparency and how we're working to restore that, and, of course, talk about how we're reinstating tighter controls of our business. We'll talk about what we're doing to stabilize the business and with an absolute laser focus on net contribution from our subsidiaries and a free cash flow -- concentration of our focus all around that. We'll talk around how we're improving operational efficiencies and how we're getting costs out of the business. And then we'll also just give you a bit of an outlook to the market as we see it. Next slide. If I just start with a summary headline results. Our first half year result, our revenue is around $100 million for the first year. It's down 5% on prior year, although we have seen in the last quarter and into January building momentum and a stabilizing of revenue through the peak seasonal festive season period. Gross profit sitting around 50%. That's down considerably on where we were in the prior comparable period of around 60%. That's a reflection of the deep discounting that's going on and the trading promotions that we're having to undertake and also a reflection of some of the market mix and product mix, and we'll talk a little bit more about that. But again, we're seeing indications that, that's stabilized, and we're starting to see a gradual and steady return as we evolve our channel mix. Operating expenses overall are down around 8.5% as our cost-out initiatives do start to bite, although the lion's share of that will start to impact in the second half and running into FY '26. NPAT for the first half is a reported net loss of $6.5 million. Inventory movement, we're down $23 million. So a considerable drop in inventory compared to the comparable period. Our net debt is also down on prior comparable period to $81.6 million, although it is slightly up and where we ended our position in June '24. However, net positive cash flow has been coming through for the success of 5 months. So we're seeing quite a steady restoration of stable free cash flows coming through, and you will hear a bit about that in a minute. Operating -- net operating cash flow of $9.8 million. So the company is capable of generating cash, and we're seeing an overall net cash free cash flow for the full half year of $2 million. Next slide, please. I wanted to deal with a couple of smelly fish, so let's deal with this one around accounting irregularities. Clearly, we deeply regret having to have to report this. As part of our restructure and review process, we've identified a number of transactions that took place in FY '23 and FY '24. And it was through that review, a number of sales and accounts receivable balances were seen to be incorrect and needed to be adjusted. We undertook a more comprehensive review. We had a large independent accounting firm carry out a review, both on the ground here in New Zealand, but also in China and Singapore, and additional irregularities were identified and adjustments have been made to the accounts to reflect those. All of those adjustments are in this slide here. I won't take you through those now. I'll leave readers to go through that in their own due course. But that gives some materiality, if you like, or some context to the adjustments that have been made in prior periods. Most importantly, I can reassure readers or listeners that we have taken measures to correct -- tighten controls, restructured the organization. We've changed reporting lines. We've refreshed and revamped our procedures and policies to make sure that they're fully compliant with what you would expect from Comvita. Accountability measures have been put in place and are ongoing. So we can talk a little bit more about some of those changes to the organization as we go on. Next slide, please. Update on bank discussions. It's apparent that we're still in negotiations and discussions with our bank syndicates. We continue to get support in those discussions and ongoing, but it's clear that our current financial performance doesn't enable us to achieve our current bank syndicate covenants. We did agree to an alteration to those covenants to the 31st of December, and we remained within those, we met those revised covenants. As it currently stands, the covenants, as they're written in our agreements, we wouldn't be able to meet the requirements in Q3 and Q4. So we're having discussions with our banks to try and reset those. And we'll be able to update the -- our shareholders before the next covenant test date, which will be the 31st of March. Next slide. So let me talk about what's going on in the market and our trading environment right now. Next slide, please. This has been well reported, the seismic change that we've seen evolving in the industry -- in the honey industry and bee production. This is a very busy slide, I apologize. Basically, it's showing a very long-term trend of honey production in New Zealand with a very recent spike that started around 2011, 2012 and saw what was a traditional trend of around 1% growth in volume of production coming out of New Zealand escalate to more than 7% growth in production, followed by an absolute collapse starting in 2020, down by almost 24% to bring it back to a more stable position. So this surplus of production that was recognized has been -- hasn't been absorbed by the steady growth in demand in market and has created a surplus and a glut, as it's been referred to in the industry. Next slide, please. The industry is going through a lot of changes there's no doubt. The macro position on the industry is that we are seeing this unsustainable price dumping is taking place to kind of move that glut and try and reduce that industry-wide surpluses. And we're seeing surpluses not just of raw honey on the ground here in New Zealand, but also finished goods in market, which is completely being pumped out into the market. So we're having to respond to that and all brands are having to respond to that. Industry regulation is in place or changes to industry regulation, pulling together the 3 industry bodies to try and restore some sort of controls and better regulation of how the industry is dealt with. But in many cases, that's coming a little bit too late for many operators. A large number of apiarists and beekeepers have become distressed in their business and they're looking to offload any surplus stocks that may have. We are seeing a rightsizing of supplies. You'll see from that previous slide that production has come down very significantly. Hive numbers have more than halved since 2020, since the peak. And we think that will -- we think we know that, that will eventually work its way through. Demand, on the other side, has actually gone back into growth mode. So both in volume and value terms, we're seeing a reported increase in export value of around 10% year-on-year as reported by MPI export data. So that's encouraging. We are going to see a continued growth as a category and a continued reduction of that surpluses. What has become really apparent is that in order to really compete in the industry, it's absolutely important you have security of supply, that you've got good quality control assurances you're able to offer to customers. And also customers more and more are looking for absolutely credible sort of ESG and sustainability credentials in order to offer and looking for participants to supply them. Security of supply from quality land and forest resources remains the economic sustainability key success factor for the sector. Next slide, please. Market, what's going on in the market. Clearly, we are seeing a consumer sentiment very soft, and that's certainly felt most strongly in the China market. It continues to be soft, and our outlook is for a continuation of that. But it does seem to have stabilized and settled down. The heavy price discounting by new entrant Manuka brand does continue and does continue to cause problems. However, there are some benefits to all of this, the discounting and the new entrant. It is stimulating a lot of interest in the category. The category is growing globally, and there is segmentation of the industry taking -- of the sector taking place as well. So movements into everyday offerings. Super premium is also growing and expanding, healthy snacking, things like lozenges, blister packs, other formats are being introduced and pushing us into other categories, health care and personal care products, which are not always recognized in the data that is available. So the category is expanding, evolving in a good way. Large global warehouse clubs and super discounters do see big opportunities in the Manuka honey category, and they're reaching out and expanding their interest in this category as they see the opportunities. Large digital platforms, of course, have enabled in recent times very rapid growth in the category. And with low barriers to entry, that does mean that a lot of brands and suppliers have been able to grow very quickly in this category. The question remains as to whether or not the digital platforms will be profitable as everybody has struggled to sort of make money out of this category. In the meantime, offline retailers and especially the premium ones are rapidly evolving their business models, looking for digital platforms and digital delivery, but also looking at upgrading their brand experience and their retail experience offerings. And we're seeing that play out very strongly in very sophisticated ways across all of our key Asian markets. Next slide, please. I'll just take you through the segment performance, what's happening market by market and territory by territory, starting with Greater China. Next slide, please. We've talked about the depressed or soft consumer sentiment towards spending. We are seeing frugality of willingness to spend by Chinese consumers taking place, and that seems to continue. But as I said, it seems to have also plateaued and leveled out. The economic outlook for China does remain soft, but we still remain very positive on the long-term prospects, I think, as everybody has been reporting. Our gross margin in that market remains stable, and we have the ability to actually leverage our omnichannel capability. We're not only a wholesaler or a digital channel distributor there. We're also a retailer. And we have other facilities with key accounts, for example, Ole, one of the biggest premium retailers in China. We remain the #1 premium health and wellness brand. Our market share is still just above 50%, and we're looking to regain some territory there. We are very active in our new product development and innovation, adopting some regional approaches to make sure that we stay relevant to local consumers in China and across Asia as we sort of look to expand the category reach and penetration and stay relevant to consumers. We are simplifying and streamlining our organizational structure across Asia, in particular in the China market. We're reinstating much tighter controls, with our Finance in Greater China reporting directly to our group CFO. Next slide, please. North America, we've seen some revenue growing by about 12% in the prior comparable period after a dip that took place last year. We are continuing to see growth in both the offline and online channels. We're regaining market share and we're doing very well in the -- some of the retail sectors we're operating in, for example, in naturals consumer goods. And I'm very pleased to confirm that we've regained some lost territory with the largest club retailer. That was just confirmed in January '25. We continue to differentiate our brand and value proposition in the North American market, ensuring that we're positioning to suit the North American consumers and differentiating from what we do in Asia. Again, we've simplified our organizational structure and brought greater focus to our distribution model in that market. Next slide, please. Covering some of the other -- rest of the world. Rest of Asia, we are getting some good wins there, particularly in Hong Kong and in Singapore and in Korea. It remains a challenging environment. There is still heavy competitor discounting. We do gain great strength from our omnichannel presence, especially in retail, digital, pharmacy. And some of the other channels, we're pushing more into. And we are still maintaining a premium brand image and remaining fairly stable around our gross margins. ANZ has been a bit of a mixed bag. We are seeing in some of the -- some channels, especially those servicing cross-border and daigou channels, has continued to also decline in line with the soft position in China. In other areas, we're actually getting some nice gains, particularly in tourism and also in pharmacy channels. Underlying the -- our domestic sales in Australia and New Zealand has stabilized nicely and also we're starting to see returning to growth. Europe, Middle East markets and the U.K., we have changed our business model there. We've actually closed our entity in Europe and in the U.K. and we've reverted to a distribution model. Again, we'll see a decline or we're anticipating a decline in sales, but we should see a safe return to net positive contribution. Next slide, please. I mentioned before that we're having a back-to-basics approach to how we're repositioning the business and setting ourselves up for the current reality. Next slide, please. First of all, the culture reset. As talked about, we are conscious of the fact that there has been an erosion of trust, and we're working very hard to try and restore that. We believe that greater collaboration across the organization and a willingness to confront the truth and bad news as well as the good news is ultimately important. We talk a lot less about what we're going to do, and we talk a lot about what we have done and what we've delivered on. And also, of course, we want to provide greater transparency in all of our operations. And our restructuring efforts, we've looked to ensure to change reporting lines so that we can have markets focused on what markets should be focusing on, which is sales and marketing and also, of course, collecting cash. And our central operations are here to support our operational capability around the world in the most efficient and capable way. We've brought absolute focus and a change in culture to say absolutely drilled on driving net contribution in market, looking at our channel mix, product mix and operational capability and costs in market to maximize the net contribution. And we are very focused on generating net positive cash flow every month, and we monitor that very closely. We've radically simplified the organization. We've scaled back the senior leadership team by at least 4 roles. Two Regional CEOs, a Business Development role and Chief Technology Officer have come out of the organizational structure and design. We've closed our U.K. and our European subsidiaries and we've changed those to distributor model. We've overall reduced overall head count across the group by 67 people, which has resulted in a $4.5 million cost saving for the group during FY '25. We've also reduced the Board from a team of 8 to 6 Directors. We're doing a lot of work around improving operational efficiencies and much -- improving our -- a sharper procurement and also drawing focus to overall cost per kilogram. Already, we've confirmed cost of goods savings of $6 million for FY '25, and we're still working hard to find more. We are competing in both the premium and the everyday sectors. We're making sure that we are reaching and seizing opportunities wherever we may see them, and that's helping to move inventory. We are reaffirming our #1 position in all of our key target markets. We're setting ourselves up for a strong rebound in FY '26 under new leadership. Next slide, please. We take great confidence from recognizing that we've got good underlying core attributes to the business, that those do set us apart from our competition. For example, we've got a very strong brand. We're #1 in China. We're #1 in Hong Kong. We're #1 in Singapore and South Korea. And we're on track to being #1 in North America. Our omnichannel capability and diversity of the way we go about doing business also sets us up to really leverage our premium brand performance in Asian markets in particular. We have channel diversity covering digital, retail Comvita -- the stores that are owned by us -- and then also retail partners, with key strategic partners across the world. We also have wholesale and distributor markets. We also have diversity of product offering, everything covering functional foods, snacks, healthy snacks all the way through to health care products and personal care products. We have a real commitment to science and innovation, and that provides customer assurance as to our ability to deliver and security of supply through our forest and apiary capability. And of course, we also have more than 50 years of experience of doing what we're doing. Next slide, please. This slide just summarizes really the trend over the last 20 years. We've been a listed company for a little over 20 years. We've been in Asia and China for a little over 20 years. But we've actually been operating as an organization for more than 50. It's never been a straight line to growth and success. We have been through a roller coaster of events. But if you look at the long-term trend, you can see it still remains positive. There is clearly a slowing down of our growth trajectory, and that just alerts us to the need to keep innovating, keep thinking forward and keep thinking how can we adapt the category. As the category leader, we have to keep finding ways to innovate and make sure that we're evolving the category in a good way. So we're very pursuant on doing that. But look, we've shown resilience over this period and we're definitely digging down and making sure that we're resilient through this current crisis. Next slide, please. I can now hand you over to our CFO, Nigel Greenwood, who will take you through the financial results for the first half.

Next slide, please. Total revenue, as Brett has already mentioned, was circa $100 million for the half. And I think the key point that we're recognizing and seeing right now is that revenue is actually stabilizing year-on-year, so showing signs of recovering and hopefully into the future as well. Our gross profit declined as a percentage of sales by about 900 basis points. Whilst direct margin reduction was part of the reason, we also have seen lower manufacturing overhead recoveries, a weaker apiary season and higher inventory provisions all impacting on our gross profit. We've made a significant reduction in our marketing investment spend half-on-half, and we are primarily focusing our marketing spend on those channels that are delivering the most net contribution to get the best return possible for our marketing investment. Sales expenses have increased as a percentage of sales, and that's partly due to the channel shifts, where some channels have higher sales expenses than others. We are carefully managing our ERP costs. And as a consequence, they have dropped $1.8 million half-on-half. We have incurred higher restructuring costs of $2.1 million for the half. And that's a reflection, of course, of the number of roles that have come out of the business that Brett previously referred to and the initial cost of undertaking that process. Other operating expenses have decreased $1.5 million compared to PCP. Now we are seeing those cost reductions play out, and we will get a better impact of those in the second half and flowing through into FY '26 as well. Next slide, please. Cash flow is our primary focus. We know we need to get our net debt down. So we are ensuring that we have very tight controls over all cash outflow as well as ensuring that we're collecting our cash inflows from our customers as fast as we can. We have had an operating -- positive operating cash flow for the half of $9.8 million, which is an improvement of $16 million over the prior period. And that's primarily been driven by a $15 million reduction in inventories since the year-end. Investing activities are also down almost $13 million on half-on-half. In this half, the only investment that we've been -- that we've had was a deferred HoneyWorld settlement payment of $3.1 million. And in terms of capital expenditure, that's been tightly controlled at $2 million, which is $3.6 million lower than the prior half. We did deliver a positive operating free cash flow of $2 million, which is a $28 million improvement on the prior period. Interest expense costs are roughly in line with last year, and we would expect to see those come down as both a combination of having -- getting our net debt down as well as the lower OCR. Next slide, please. From a balance sheet perspective, our net debt at $81.6 million was a decrease of about $2 million on FY '24, and that's due to initial losses incurred in the first quarter of this half. Then in addition to that, we had the deferred HoneyWorld settlement payment. Also in July each year, we have our annual site payments paid to landowners, which was around $4 million in the first quarter as well. And so they created headwinds in terms of getting our net debt down. However, since then, in the quarter 2, we have seen our net debt decrease by $16.5 million. Debtors at $31 million is reflecting a $2.4 million increase on FY '24, and that's predominantly because we had a very strong December sales month. And of course, most of that went to debtors as at the half year-end. Creditors stand at $23.3 million. That's a significant decrease of $12.6 million on the June '24 balance. And the reason for that decrease in creditors is, one, we are decreasing our honey purchases. So the level of honey purchase creditors is lower than it has historically been. We had the accrual for the site payments at year-end, which were then subsequently paid out in Q1. As well as also the provision for that deferred HoneyWorld settlement we already talked about. So they are the key reasons why we've seen our creditor balance reduce by almost $13 million. On a positive focus, though, our inventory has reduced materially down to $121 million, which is $15 million down on FY '24. And I'll talk a little bit more about inventory on the next slide. Next slide, please. A focus on inventory. So total inventory down $15 million, as I just mentioned to you. You can see from the breakdown of inventory on the chart on the right that the finished goods was the primary driver of reduction in inventory, down $13 million on the prior period. And there's a connectivity around some of these impacts that we're having and seeing on our P&L. So for example, I mentioned earlier that we had lower manufacturing overhead recoveries in the half, and that's because we're converting less raw honey into finished goods that we -- because we already have sufficient enough finished goods in market and in country to meet our demand requirements or substantially so. So the consequence of not converting results in raw honey being roughly in line with last year, but it has enabled us to sell through a significant amount of our finished goods inventory. Honey work-in-progress is just managed on an ongoing basis. And with respect to raw materials, as I mentioned earlier, they have remained relatively flat. So whilst we are converting raw honey into finished goods, at the same time, through our apiary business, we effectively take to the balance sheet our monthly apiary costs so that by the end of December the accrual, if you like, for apiary costs sitting in raw materials is roughly around circa $10 million. So that effectively means building up into raw materials and ultimately converts into inventory when we complete the harvest and take that honey -- actual raw honey into raw materials. Next slide, please. I'll now hand back to Brett to complete the summary, and then we'll move to Q&A.

Thank you, Nigel. It's been good. Yes, if I could -- I guess you've heard us talk about -- I think just to recap really the presentation. So we are approaching -- we are applying a back-to-basics approach, repositioning the business for our current reality. We are undertaking quite a considerable culture reset and reorganizing the structure of the organization to respond to the challenges that we've seen. We're ensuring that tighter controls have been put in place to ensure that we can't see a reoccurrence of the unfortunate events that we had to report in recent times. The market and the industry does remain challenging, and we are going to continue to see an evolution of the trends. But we do see a steady unwind and a stabilizing of category growth over the next 1 to 2 years. We are restoring focus to absolutely delivering on net contribution and cash flow. We're improving operational efficiencies, and that's starting to deliver benefits -- tangible benefits to the business through to second half and into FY '26. And we are setting ourselves up for an improved position into the FY '26 calendar year. Next slide, please. The outlook that we're seeing is that -- we see an outlook for flat sales overall through the end of FY '26. The China market is expected to remain soft for the balance of '25, and we do see a steady improving situation in the rest of Asia and North America. Margins have stabilized. So we do see that there are some -- small headwinds continue as we work through our current inventory position, and a steadily improving position as we start to see the lower cost of honey and the lower cost of goods starting to impact the business. We are seeing a steadily improving cash flow position, and the full benefit of the restructure falls into FY '26. In 2024 and 2025, the industry honey harvest is viewed at this stage to be below average, not necessarily a bad thing. But Comvita is very well placed given its forest and apiary capability to provide security of high-quality supply looking forward. Next slide, please. Actually, I think we can move straight into questions now. I think that concludes our presentation, yes. So I'll hand you back to Nigel Greenwood for -- to field those questions.

Thank you, everyone. We are now ready for any questions. Online attendees, please click the Ask a Question box to send your questions through to us to answer. We already obviously have some questions. And just excuse me whilst I'll read these out. And either Brett or I will respond to each one. The first question from Christian Bell. Given the significant discrepancies in earnings for '23 and '24 and considering these involve basic accounting principles, there's heightened concern that this may have an intentional act to manipulate the market. Firstly, can the Board clarify if there was any deliberate action behind these simple yet impactful discrepancies? What are the consequences for those involved? And how did this basic accounting issue evade detection?

Yes. I was expecting this question. Look, there's no doubt that this is a very unfortunate series of events. Invoices were raised and accounts receivable balances were recognized that were inappropriate and weren't anticipated that they could be recovered. There were invoices that were raised in one prior period and then credited back in the next period. Accounts receivables then were reported here as being not due, and that was a misreporting and a misrepresentation of the accurate -- of the real situation. All of those discrepancies have been identified. All of the changes that have been made representing the accounts now have been recognized. Those adjustments have been made. And we have reestablished ourselves, and our focus remains on ensuring that controls are in place and that our processes are tightened up to ensure this sort of thing cannot happen again. As I said, we are looking to hold to account those individuals that might be involved, but that's a process that is ongoing in the business right now and we're not really able to be more specific around that at this stage.

Next question is also from Christian. It's a follow-up question. Will higher authorities be required for an unbiased external investigation given the nature of the discrepancies?

Look, that's a difficult one for us. Again, our focus is on making sure that these sort of things can't happen again now internal controls are in place. We're working with the existing team and the team that we've got on the ground to looking forward. I'm actually very grateful for the assistance we've got from the wider organization around providing information when asked. The investigations that were carried out by an independent large accounting firm has been very productive, very revealing. We've learned a lot from it. And I don't think there's any doubt that we've uncovered all of the issues to date. So our focus remains on doing that. Any follow-up actions that are going to be required will be a matter for future review, but I can't really comment on it just now.

Next question from [ Oel Scholars ]. With the share price near all-time lows, do you see a need to raise more capital with debt facility coming up for renewal and pressure on debt covenants?

Yes. Look, it's certainly not our intention to rush out and raise capital. That wouldn't be a very wise thing right now in this environment. We are working very closely with our banks. Obviously, we'd like to provide them with the reassurances that we're able to meet covenant requirements and also continue to fund the business. As I mentioned before, we've had a run now of 5 months. Every month, we've been able to produce net positive free cash flow. And that remains our focus to continue that trend. If we continue with that, we have the ability to pay down debt, the ability to stabilize the business. And that's what we're currently focused on.

Next question from Guy Hooper. On sales, can you expand on the moving parts within the sales guidance for flat growth year-on-year? You mentioned a soft but stabilizing market in China. Can you talk about sales run rates in the market?

Look, through the peak period, October, November and December, of course, that covers most of the big promotional periods, 11/11, the Christmas peak and 12/12 and all the other seasonal events that happened right into the Chinese New Year, which takes place early February. And we've seen a steady stabilizing really in the China market of revenue through that period on PCP. And also, we're seeing some nice growth actually in some of the other markets where we've got a strong retail presence, for example, Hong Kong, Singapore and Korea. We've also seen some nice sales uptick through our retail stores, for example, the one behind me, which is in Auckland Airport duty-free area. So we're seeing some nice healthy trends in those areas. So long may that continue. As far as consumer sentiment goes in the Mainland China market, which, of course, has a very material impact on our performance, we are seeing a stabilizing and a settling down, if you like, of consumer sentiment. The economy is strong there. It still continues to grow. It's still got the highest GDP growth of any of the major markets around the world. Consumers are not impacted by the levels of inflation and high interest rates that we're getting in the Western world. That's telling us that consumers, especially middle-class consumers, continue to save and have been a lot more discretionary around where they spend their money. But there is a pent-up capacity there to spend again should they get confident and comfortable about the general economic environment. So I think that continues to give us confidence in that market. North American market, we're seeing things pretty stable, going well. There are certain premium sectors in the natural products sector, in particular, where we're seeing some steady growth and a return to confidence, if you like, by consumers in the North American market. And very good relations and good discussions with key retailers there.

Next question. You've managed to sell down -- this is a question from [ Christopher Burn ]. You've managed to sell down inventory to reduce debt. What level do you think you can get inventory down to without risking future sales?

Yes, it's always a popular question. We work very much on stock turn on days, stock on hands more than necessarily the inventory value. But look, we still would like to reduce inventory. We've got it down considerably already. I think the original target when I was talking to most of the shareholders 6 months ago was around that $120 million mark. We still think we've still got some capacity to reduce. Our focus needs to be on finished goods to make sure that we are maintaining reasonable safety stock levels in market, but that we manage that in the most efficient way. Our raw materials are always going to be rather cyclical in nature. It depends on the harvest. And as I said, this will be quite low this year. So that should help us to some extent to bring down the overall volume of raw materials. But there's still sufficient, we believe, out there in the market still, obviously, with that glut to still meet our needs going forward.

I have 2 questions here from Guy related to gross margin. Looking into FY '26, you've indicated $6 million of cost out related to COGS. For forecasting, is it fair to say that the main driver of any expected margin lift will come from that?

Yes, I think that is a fair assumption. It certainly underpins our gross margin position. We know that there is a constantly improving situation with our cost of goods as we work through honey that was literally accumulated or purchased when the market price for wholesale honey was higher than it currently exists. But we also know that if you look a year or 2 forward, that there is going to be a return to sort of -- some sort of more stable or a reset, if you like, of that wholesale price of honey. So we're going through a cycle here. But as we are able to accumulate and acquire and procure cheaper honey, that does help our lower cost of average. And that's going to be beneficial. We are also making a lot of gains around the way we operate, the way we blend honey, the way we make up our batches of honey to ensure that we're also getting optimum use out of what we have got. We are also making sure that we evolve our product offering as well so that we can change -- we can evolve margin that way. We over-index quite considerably at the premium end of the market. And just as one example, we launched a UMF 29+ product in Asia recently. Hong Kong and Singapore were sold out in less than a month, and we continue to trend very strongly there. And these products are selling for NZD 1,788 for a pot of honey. So very experienced, super-premium product, and we still can do really well there. Our UMFs and other premium offerings using Manuka honey under the Comvita brand continue to trend well.

Second question from Guy. How long will these last? And to what extent has it reset consumer expectations around the value of the product?

Just to clarify the question, these last as in trends or...

Yes, the cost of sales of -- the honey pricing trends and pricing associated with that.

Yes. Look, I wish I had a crystal ball on this. We are -- our analysis based on the available volumes, we believe, looking at supply-demand, sort of overlaying trends in recent -- in the last 5 years and trying to project that forward would indicate that probably in the next 1 to 2 years we'll start to see a steady unwind of that volume. It's a little bit of a confused message because when we look at export data, we can monitor very clearly how much volume and value of honey is exported from shores, but it's not always clear to us how much of that is sold through in market. And we do observe when we look at product on the shelf from our competitors that sometimes that inventory is old, is dated stock. And of course -- then the other question is around the quality of what is available here in the raw materials market. Can it be market accessible? Is it -- does it meet quality standards required by our trading partners? So not all of the honey that's sitting in warehouses around New Zealand can necessarily be traded into market. So trying to unravel and understand all of that trend is somewhat challenging. But that's the time frame, that we believe it will take around 1 to 2 years to completely unwind from the glut. And we should be well back into a more stable pricing position in that time frame.

Next question from [ Christopher Burn ]. It's a worry that the industry can't absorb a 7% CAGR of honey supply as it did during the 2008 to '20 period. Is the industry -- is this an indication of slower growth? And has the China consumer lost interest of Manuka Honey?

Yes. Look, it's a very good question, and I'm very interested in the perceptions there around the category. I think globally the category is growing. We have seen a decline in the category in the China market, along with a general decline around premium and luxury products and general consumer goods. So I think that is a reflection of the consumer sentiment. When we look at the -- the most transparent data we can get in China, for example, is around the digital space, digital platforms, which provide reasonable transparency. Of course, you have to pay for it, but you can get that data. And the decline in value, we believe, is mostly driven by the discounting that's going on. So prices of competitive honey is literally 50% or more cheaper than the Comvita standard offering. And if you think that -- Comvita came from a position of around 60% market share on those digital platforms and it's declined to about 50% market share. Most of that has been through deep discounting by competitors. So the value of the category has diminished. The volume of the category is probably relatively stable right now. It has been in decline, but we believe it's starting to plateau. Our market share is starting to claw back if I look at the trend over the last couple of months as well. So our decline in market share of the existing category has also restored a few incremental points over the last 1 to 2 months.

Next question from Christian Bell. Does the inventory book value fully take into account the significant price discounting you have spoken about today? Actually, I'll answer that question. Actually, Christian, I'm pretty confident you've asked this question before. And so the answer is that we hold our inventory at the lower of cost or net realizable value, which is a reflection of appropriate accounting standards. It means that if we can convert our raw honey into a finished product and sell it at a gross profit, then that is at the lower of cost or net realizable value. We acknowledge that some of our raw honey may be held at a value that's higher than current market pricing, but that does not mean that we are in a position to write that honey down. So that's effectively the answer that I've provided historically to that question. Next question is from Mark Topy. Can you make any comment on how long the honey surplus to work through, even approximately? Is it 12 months or longer? What other balance sheet options are there for asset sales or others to be considered? There's some more questions here. I'll leave it at that for now, and I'll let you answer those ones, Brett.

Yes. As you can imagine, Mark, we're thinking about all those options for freeing up cash, releasing capital where it's not been productive. As far as inventory, I think I answered that. But I would also probably talk to other growth opportunities we're seeing. We've always been very good at as a business around innovating product offerings, making sure that we can get the highest possible value for every kilogram of honey that we produce. So it's either through improved quality, improved performance around UMF ratings, but also around other qualities of honey that we believe can be done, pushing the category into premium offerings and high-margin offerings, for example, blister packs and sachets and other food offerings and healthy snacks and health care products. So we'll keep driving that agenda. But the category overall is also growing very much in the value and volume end of the sector. We're seeing that certainly happen in North America. And there will be some considerable opportunities also to move some volume, and that's going to help clear current inventories way faster than we probably would have seen in the past.

Next question from Mark is, how is trading for the Chinese New Year period? And do you perceive any brand impact on Comvita in China from the level of discounting occurring there?

Look, as I said, the consumer perception of the category is still one of premium. This is a large category in China, and Chinese consumers whether they're in China or around the world immediately see value for this. This is a health product more than a food. And so there's a very high value placed on it. The Comvita brand is very strongly sought after by Chinese consumers no matter where we see them. And so I think the premium nature of the category is well preserved and well understood. The discounting doesn't help with that perception. But I think in many ways, it's actually opening up the category to more consumers, consumers that maybe weren't able or weren't interested necessarily in purchasing at these high prices. So I think that can be a good thing. And we've just got to make sure that we keep innovating and keep adapting our product offering to make sure that we stay relevant to consumer needs. But clearly, the consumer sees this category as premium and they see the Comvita brand within that category as being the most premium brand to have.

And the last question from Mark was, can you provide any expectations around cash flow for the second half and where net debt might land by year-end?

I can answer this one, but I can also ask Nigel to chime in as he likes. Look, I think given the restructuring, the cost-out initiatives that we've initiated -- and I've already reported on what we've actually delivered so far in the first half, and we still have some restructuring plans underway that we haven't yet completed on. Also, the full benefits given the fact that when -- especially when it's people related, there is a period when you still have to cover some costs around that restructuring as it takes time to work through notice periods and restructuring costs, et cetera. So certainly, towards the end of second half, in the fourth quarter, we'll start to see some benefit there. But the reality is a lot of those cost savings on the OpEx side anyway will really fall into FY '26. From the cost of goods and improvements, we certainly see some steady improvement through the second half, and that will have a bearing on our cash flow position. We're not having to -- or not required to purchase large volumes of raw honey, for example. We have our own apiary harvest to -- that is funded over the course of the year. And so there's not going to be additional funds required to have to go and buy large volumes of additional honey. So I think this -- you can -- should give some confidence around a steady improvement around cash flow position over the next 6 to 12 months.

Next question is from [ Page Hennessy ], and I can take this question, Brett. Page has asked that you produce positive cash flow. Can you disclose the profile of free cash flow dollars each month? And how should we think about a steady state free cash flow generation for the year? Look, Page, I don't think we would provide the monthly free cash flow numbers because, clearly, they can fluctuate a little bit as working capital can move around or the timing of when CapEx spend might occur. But I think it is -- following on from Brett's response just now to the prior question, I think you can expect that we will -- we are forecasting to generate a positive free cash flow in H2 and continue reducing debt during the second half. And I think we're coming up close to our -- we've got 3 minutes to run. So we'll be finishing up in about 3 or 4 minutes. So the next question is from [ Yu Bing Lee ]. Do you think high inventory is the problem or the loan and borrowings is the problem?

Look, there's no doubt that the latter is of most concern to us and to our shareholders. We don't want to have that level of debt position, and we're doing everything we can to try and reduce it. And we're having good conversations with the banks to ensure that we can still manage our business as we work through this change. Inventory, of course, is -- a lot of our cash and a lot of that debt was accumulated as we built up working capital over the last couple of years. And if we can unwind that, that can only be a good thing. But we also need to have supply security, right? So if we're dealing with large customers, we need to be able to provide them with the security of knowledge that we can deliver, we can supply consistently and at scale. And that's also equally important.

Next question is from [ Stephen Walker ]. The new high 29 UMF product, is it -- was that generated through your plantations? And what capacity is there to expand that premium end?

Yes. A lot of the team within -- a lot of our marketing people, of course, asked me that question all along. Yes, it was -- it was produced by our -- the lion share of it anyway was produced by our own forests, our own facility. And we know we over-index. Those forests were planted 6,000 hectares with the intention that they would be able to deliver a higher quality product. And by and large, they are in most cases. We also use our own cultivars. We've had a breeding program going more than 15 years now, and that's produced some really nice quality of cultivars or trees, plant varieties that are planted in these various locations. So that is providing benefit. We don't see this necessarily as being a high-volume market, and we wouldn't want to flood the market with a premium product like this. Exclusivity and having some premium and selected nature to this is really important to the formula for creating value here, certainly in the eyes of the consumers. But yes, we believe we can build some volumes of that and the higher UMFs steadily over time.

A question from [ Alan Bargen ]. A non-financial question. Could Brett give any update on Comvita's recent discovery of Lepteridine and the related clinical trials specifically around gut health?

Nice to see you on the call. Yes, Lepteridine was a discovery actually made a long time ago by Comvita, but has been developed through the benefit of clinical trials that were recently undertaken by Comvita, and clinical trials which showed absolute tangible benefit around the standard product made with a standardized content of Lepteridine, which is a patented product -- or a chemical, sorry, that is found in Manuka honey from certain locations and specific locations that Comvita has a proprietary position around doing the scientific research and doing the analysis to identify that compound. This compound is linked with improvements to gut health and associated anti-inflammatory properties of Manuka honey. We've known for many, many decades that consumers around the world, especially Asian consumers, consume Manuka honey because it's very beneficial to the gut and to -- yes, dealing with irritable syndromes around gut health. Now UMF by itself does not explain that. UMF is actually an antibacterial claim, which is widely known and widely associated with the wound care properties that Comvita has also been able to leverage in historic times and develop a following, if you like, for Manuka honey based on its antibacterial properties. Lepteridine steers directly towards its anti-inflammatory and its gut health properties. So this is a pretty exciting development. We will launch a product very soon in North America, and we'll be also looking to roll out other products using Lepteridine in other markets in this next calendar year -- or in this current calendar year, I should say.

Thank you. Look, we only have one more question. So I think whilst the time is up, we should just take that question. And that's from [ Mark Sadd ]. We have seen a reduced GP margin of 900 basis points, and that's been referenced to discounting and higher provisions being incurred outside of the cost of the $6 million in this area. Should we expect similar margins for the next 6 months as we continue to see discounting and increased provision -- and continue to see discounting and increased provisionings being made? And are you concerned if this has any impact on the carrying value of inventory?

Look, the discounting, Mark -- I guess we've reached a level where we feel -- we've been obviously playing around with discounting, pricing positioning and price elasticity experiments, if you like, for quite a lot of time. And I guess we've found a landing where we feel that we don't need to discount more. We don't need to move our prices anymore as far as consumer is concerned, and we could hold a position there. We don't believe that the discounting by competitors is sustainable, albeit it could intensify from time to time. But our consumer base, by and large, especially in our premium Asian locations has proven very sticky, excuse the pun. And as I said, we've sort of stabilized market share loss, and that's in the face of continuing discounting by competitors. So I think we've sort of stabilized the price position, so we're comfortable with that. The next opportunity is, of course, to continue to work on our cost position. There's no doubt that the honey that was accumulated by Comvita over the last few years in anticipation of a continuation of revenue growth that had been joined for at least a 3- or 4-year stretch didn't continue. And so we do have honey that was acquired at a higher price that has to be worked through and unwound steadily over time, which is happening. And so increasingly, we're underpinning that margin with a steadily improving situation on costs.

Thank you, everyone, and that brings the investor presentation session to an end. There are no more questions. So thank you all for your attendance. And some of you will see over the next few days.

Thank you very much.