Comvita Limited (CVT) Earnings Call Transcript & Summary

Good morning. Welcome, and thank you for joining us at our presentation today. I'm Bridget Coates, Chair of Comvita, and I'm pleased to introduce my fellow Board member, Mike Sang, who's on the call with us; and also our new CEO, Karl Gradon. Our outgoing CFO, Nigel Greenwood, couldn't be here today due to his illness. So Mike is stepping in as Chair of our Audit and Risk Committee to present the financial results component of this presentation today. Today, we will cover Comvita's current position, the F '25 operating environment and key business updates. Mike will walk through the F '25 financial results. And then we'll hand over to Karl to introduce himself, share his perspective on the industry and on our key markets and to outline Comvita's FY '26 priorities. Our presentation will take about 30 minutes, and then we will open for questions. I should make it clear at the beginning that we will not be giving forward guidance today. There will be an extensive information provided to all shareholders, which will be published in the independent appraiser's report, which will be made available to you all in October. It's important to begin by acknowledging Comvita's current position, both the realities that we face today and the process, which is underway to reshape the business. F '25 exposed the full extent of external market pressures and internal challenges. These issues did not emerge overnight, but they've been building for a number of years. As we outlined at the 2024 Shareholders' Meeting at Mount Maunganui, our revenue had been impacted by weakening demand, changing consumer preferences and oversupply from our competitors in New Zealand, particularly in China. We have not moved fast enough admittedly to respond to these dynamics, and that has resulted in elevated debt and limited financial headroom, which has restricted our ability to move at pace. At the same time, it is important to note that good progress is being made. We have restored free cash flow to a positive position. We have reduced net debt significantly, and we have applied much greater discipline to inventory and cost management. These are all early but important signs that the reset is beginning to take hold. We recognize the impact that the last few years have had on our shareholder base and why -- which is why urgency clarity and a credible path forward are essential for all. Following a comprehensive review of all of our strategic options, the Board signed a scheme implementation agreement with Florenz in August, a New Zealand company based in Christchurch. This agreement provides a potential solution to the structural and financial constraints that the company has faced. It provides an option for our diverse group of shareholders, many of whom will be -- may be seeking greater certainty in the current environment. Before Mike walks through the FY '25 financial results, let me set out the operating context that shape them. The Manuka honey sector remains under sustained pressure with prolonged oversupply, pricing volatility and softer consumer demand all waiting on the industry, as I said before. Against that backdrop, Comvita has carried elevated input costs from honey purchased in prior years. When the market softens, these locked-in costs further compressed our margins and our profitability. At the same time, significant capital was invested to expand our brand and distribution capability, but these investments have not delivered the expected returns in this environment. The turnaround has also carried material costs, reflecting the structural complexity and legacy issues within the business. During FY '25, we implemented a reset program with urgency under Brett Hewlett's leadership. Brett took over in September last year. He has cut costs, streamlined operations, strengthening leadership and positioned the business for improved performance. Importantly, Comvita has also protected its #1 brand position in key markets. It's held direct margins at 57% compared to 59% in FY '24 and achieved important milestones, including a strategic agreement with the world's largest club retailer. We are also reshaping the leadership team, as you are aware, as a deliberate and necessary part of the reset. Our -- we are delighted to welcome Karl Gradon as our new CEO, and Karl will be speaking to you shortly. We have had the recruitment for our new CFO underway as Nigel is stepping down. And FY '26 will see further progress to make sure that the right capability and structures are in place to support improved performance in this coming year. We've reached agreement with our banking syndicate on a revised covenant package. This includes the waiver of 2 covenants that were previously at risk and the introduction of a new EBIT covenant, which will be tested quarterly through to 31st of September 2025. The working capital facility has been reduced to $24 million and extended through to 31st of January 2026, while the core debt facility of $35 million now runs through to 1st of March 2026. These revised terms provide short-term stability, but our lenders have been clear that our long-term recapitalization solution is required. Turning to the going concern issue. Directors have considered -- have carefully considered the matter and believe the group -- is in fact a going concern. Current assets exceed current liabilities, exceed liabilities for $52 million. And our FY '26 forecasts show sufficient cash to meet obligations as they fall due with an expected return to profitability subject of course to execution. However, if the scheme is not implemented, there is a material risk of covenant breach beyond December, which the Board will definitely need to be considering. As to the SIA, while urgent steps have been taken to reduce costs, as I mentioned, and simplify operations, they have not been sufficient on their own to restore strength to our balance sheet. The Board has worked alongside our advisers at Goldman Sachs and at Craigs to assess all strategic options. We've considered trade buyers, financial sponsors, debt and equity solutions. Many alternatives carried high execution risk or -- and involve significant dilution for existing shareholders. None offered the same level of certainty as the offer, which is in front of you today -- or in front of you at the end of the year. On 18th of August, the Board announced a scheme implementation agreement with Florenz at $0.80 a share. The scheme is subject, of course, to shareholder approval, high court approval and independent adviser's report, which will be published for you in October and other -- and satisfying other conditions. The Board unanimously supports the Florenz offer given the premium to recent trading, the greater certainty it provides amid sustained sector, structural and financial challenges, and the liquidity it provides in a thinly traded stock. All shares controlled by the Board will be voted in favor subject to the independent adviser's report and no superior proposal being received by the Board. I would now like to hand over to our Director and Chair of our Audit and Risk Committee, Mike Sang, who will present the financial results to you. Thank you, Mike.

[Foreign Language] Thanks, Bridget. Let me touch on a few key points at the moment. I think the financial summary just sort of shows the type of year we had. The revenue has declined by 4%. I'll talk to that in a moment and as a result of that, an increased pressure on our margins. We've incurred another underlying net profit before tax loss of $21.9 million. The consequence of those 2 losses this year and last year taken in tandem means that we've had to review our value-in-use models and our thinking about how Comvita and the market might move forward in the future. Those resulted in a degree of provisioning and impairment that has reduced that total net profit after tax loss to $104.8 million. We'll touch on the operating expenses. It's been a real focus on managing those. They are down roughly 9% on last year, but that doesn't tell the whole picture. I think that within those operating expenses, a number of the changes we have made, the full year effect will only be felt next year. And then, in addition, we've incurred restructuring and other implementation costs of the changes we've made, which also will not recur next year. There will be some reinvestment back into our OpEx, for example, in marketing for markets where we see opportunity. But nevertheless, we expect to see improvement in our cost structures moving forward. What has been well managed by the team more broadly has been our inventory management. That has enabled us to generate a positive cash flow through reducing inventory. As a result of the free cash flow, we have been able to offset those losses and actually reduce our net debt during the period. And we also think that there is further opportunity for inventory improvement over the next 12 months. Thank you. Flip the page. As you can see, the revenue number is a challenge. That $190-odd million takes us back to the level of revenue we had in financial year 2021. As many of you know, there has been real pressure on cost pressures and inflation through that period. So it does create pressure on the overall performance of the company. It's largely been driven by Greater China, but that just reflects that's where our strength is, and that's where we're heavily exposed. Some of our other markets have also moved, but that China is a critical market for us and a real focus going forward. The gross profit margin of $82.7 million comes out of the 43% but a slightly misleading metric because it includes our provisioning of circa $15 million. Our gross margin percentage without that would be circa 50% compared to 54% last year, and that reflects the challenge on pricing we are facing in the front line. And net profit after tax, I'll reconcile that on the next page actually. So why don't we flip that over now? A major change we have made to try and align a little bit of understanding is in pulling out our impairment, our provisioning for inventory and our fair value in biological assets. So touching on the smaller one. Fair value of our biological assets mainly reflects our bees. Comvita has traditionally valued its bees at export prices. But with the current state of the industry and the surplus hives around and also just the challenges of exporting the scale of bees we have in terms of any [ help ] particularly at this time of year, we felt it was more appropriate in the circumstances to value those bees at domestic prices, which are substantial, yes. There's been a small reduction in our hives. We have consolidated some of our operations, but that primarily just reflects the fact that we're using at domestic bee price rather than international bee price. The provisions for inventory are a significant item. I think the pricing Comvita has paid has been a challenge for us unfortunately. The provisioning is driven by a number of factors that's right across all our business units. But the 2 major items has been a revaluation of part of our raw materials. Some of those materials have started to head towards a point in life where they start to fall a little bit out of spec, which means we tend to use them for specific contractors related to our large retailers and now blending other things. That has enabled us to revalue that down to market prices. Market prices, of course, are a lot lower than what we have been purchasing honey for in the past, and the impairment, which we'll touch on in a moment, is the other major item. And that largely reflects our value-in-use calculations going forward, and in particular, [ if we adjust ] our expected cash flows over future periods. Our balance sheet as a result of the impairment is substantially different than the prior year. Nevertheless, you'll see our major working capital item remains to be inventory, and it still stays at that circa $89 million. The other major item in our balance sheet is our bank debt, down the bottom there, at $71 million, albeit we do have $9 million cash, so the net debt is $63 million. Other current assets just largely reflects our debtors. There has been some changes with just the nature of our revenue down and whatnot. But the key items remain our debt and our inventory balances. Future focus remains on reducing that debt further, and we believe that can be done with our return to kind of a more profitable position next year with ongoing improvements in our inventory, which we expect we can reduce further. Should note that, that reduction isn't just in the volume of inventory we hold. But as we cycle through older higher priced inventory and replace it with lower priced inventory at a lower cash cost, we improve our debt position, and we lowered that inventory balance. These are the items we've sort of touched on already, but you can see the trend over this period. Our net debt was circa $5 million 5 years ago and has risen substantially through that period till the end of the last financial year. We've managed to start to reverse that and correct that and essentially by managing our inventory. But there's no doubt there's been a correlation between our inventory and our debt rising but also with some of our other capital investments and haven't generated the returns we expected. And that kind of operating loss has always been part of that contribution. Nevertheless, it's positive to see the turnaround and the beginning of the progress we've made in the last 12 months. Our operating cash flow is a slightly odd number. You see the sort of '22, '23, '24 numbers were relatively low compared to the profits we've made, and that reflected the fact that we were increasing our inventory and our working capital through this period. The $34.1 million this year reflects the $31.7 million reductions we have made in our underlying inventory numbers. That's our inventory reduction excluding the provisioning we've done. And it's a good number, but the inventory reduction is not a permanent difference. Whilst we expect we can make further changes going forward in the next 12 months, it's not something you can do every year. Our free cash flow down the bottom, you have seen the challenge there. We've had significant capital investments in our prior years, but nevertheless, we've managed to turn that around to a positive result this year through the management of our inventory again. Ongoing cash focus remains the focus. The Board has put a number of practices around it. The team are concentrating on it, and it's a key driver of our performance at the moment. Thank you. I'll hand over to Karl.

Good morning, everyone. Thank you, Mike. Just a quick background on myself. I have had the privilege during my career of working with some of the great local and global brands in the food industry. I've spent most of my career offshore working in some of the most complex markets that Comvita actually operates in today. My roles have included those in innovation and commercial leadership areas, and I look forward to applying those to here at Comvita. I joined Comvita on the 1st of August with a very clear mandate from the Board. My job is to fix what's broken, protect what is strong and improve our performance. In my second week, I visited all of our key Asian markets and spent time with our people, customers and partners. I wanted to see firsthand what's working and of course, what's not. There is no sugarcoating what's going on and the challenges are very real but so is the hard work already underway to reset this business and the opportunities ahead that we execute with focus. This is a global brand with unique strengths, the best value chain in the Manuka sector, strong science, trusted provenance and quality, and a retail and online presence across Asia that no competitor can match. We also have something competitors cannot replicate, our people, whose passion, capability are core to what makes Comvita unique. Our strengths give us a foundation others simply do not have, a global brand with authenticity, the best value chain in the category and a reach across Asia. That foundation is why, even in a tough environment, Comvita is still the leader and why this business is worth backing. At the same time, we must be honest about what has not gone well. We have lost share and margin through slow decisions and poor commercial alignment. Execution of key initiatives has been weak and our cost structures remain uncompetitive. Our systems are fragmented. We have persistent silos and global alignment and prioritization has not been strong enough. The important point on those is it is not a structural floor neither in the category or the brand. These are issues of alignment, prioritization and execution. Those are within our control, and fixing them is exactly what we are doing. Personally, I've always believed in taking uniquely New Zealand products to the world with values-aligned brands at the forefront. I believe that Comvita can be that brand, and I'm here to make sure we get there. As I cast my eye across the market and overall industry, it has been a [ phase ] of survival for much of the sector, and some players have not made it. Oversupply, economic uncertainty and demand fluctuations are reshaping our industry, with the premium positioning, especially under pressure and financial constraints driving consolidation at pace. High stock levels, particularly in the lower UMF grades, are still working through the supply chain, and hive numbers are declining. The category is fragmenting further with very different dynamics across the value and premium segments. At the same time, commoditization is accelerating. Large global entrants with scale and backed by significant capital are moving quickly to capture share and leverage shifts in the market. Honey in a jar is no longer enough. Innovation and consumer insights will be central to all future success. Globally, the category growth remains modest at around 1% to 3% per annum. China continues to be challenging, while other markets are more stable, with growth evident in North America and parts of Asia. For Comvita, these shifts reinforce the need to move beyond commodity honey. Our focus is on premium differentiated offerings and brand-led growth, and that's how we are regaining share in the right parts of the category. When Comvita succeeds, it is largely through China. China, however, remains our most challenging market, with weak consumer sentiment oversupply and aggressive discounting in a value segment, which is weighing heavily on performance. The FY '25 results were disappointing with sales down 10.9% and profit down 24.8% when compared with FY '24. However, we have maintained the #1 brand position with over 50% share, but this has required a reset of our distribution agreements and a refocus on our channels and product offerings to protect margins. These changes are beginning to yield benefits, though I must say recovery will be slow and uneven. Some improvement was seen late in the year, particularly in the premium UMF area and through opportunities at large-scale retail and online channels. Greater controls are now in place and the structure and cultural reset of the China business is well underway. The legacy issues of prior years are behind us, and the team culture much stronger and most importantly, much more accountable. When China performs, Comvita performs. While the turnaround will take time, our fundamentals in this market remain very strong. As I look to the North American market, which is a key growth area for Comvita, it is delivering, with sales up 10% and profits up 15.2% over FY '24. The stronger performance reflects sharper planning and execution alongside progress in both retail and e-commerce channels. We have secured the #1 brand in the natural retail channel, which is a major milestone and our strategic retail distribution partnership is gaining traction. And the reset in our commercial -- sorry, e-commerce business is beginning to show results. Science remains central to our value proposition. We launched our Lepteridine product range with gut health positioning this year in North America as a launch and learn and is providing a platform for new growth. We have encouraging signs across the rest of our world markets, with the rest of Asia outside of China delivering strong growth of 18.5% year-on-year despite it being an excessively competitive environment. My recent trip to Singapore was most encouraging. The brand and early retail investments are gaining traction and momentum is building. However, it's still early days, but these green shoots are emerging after a tough post-acquisition period. Back at home, Australasia has been impacted by a decline in the daigou channel sales driven by weaker Chinese tourism and demand, as we've had pricing pressure and had to manage the clearance of our inventory. Non-honey categories have stabilized and returned to growth, helping balance the mix in this market. In Europe, Middle East and Africa, our sales declined 8.9%. But the move to a distributor model in the U.K. and Europe has returned this region to profitability most importantly. We are seeing promising growth in the Middle East with new pharmacy and wellness retail partnerships coming online. The purpose of this slide is that we operate -- is to show that we operate in a very diverse world. Every market is different. Every region is different. Each has its own context, and each in our portfolio has a very important but different role to play. It requires a tailored strategy. That is critical. There is no single playbook or one-size-fits-all approach. In China, the opportunity is to compete strongly at volume, while in the U.S.A., we are doubling down on premium grocery and online, and regrowth is strongest. Across Asia, it's about optimizing our stores and extending our distribution. While at home, we need to lift our margins through sharper pricing alignment. And in the U.K., Europe and Middle East, it's through pushing profitable distribution network extension. The opportunities are clear, but they will only count if we move decisively. We need to take action now across everything we do, and we are going to attack these markets with everything we have. I mentioned earlier that my Board has been very generous with the mandate they have provided. I have been given the mandate to execute on several priorities. But I'm under no illusions. This is a very difficult environment, and Comvita is facing significant challenges. The need for disciplined execution is urgent. While the scheme process progresses, our focus and management remains firmly on business continuity and performance. FY '25 marked the start of a hard reset. Tough calls were made. We exited noncore operations, restructured and rebuilt the leadership team, which continues today, and we are resharpening our focus on outcomes, not just outputs. There is no silver bullet, and there's a lot of work to do, but there is a path forward with tighter focus, sharper choices and operational discipline. This is not about a new plan. It's about relentless follow-through. Debt is nonnegotiable. In the past, we've been proven to be overly optimistic, investing ahead of traction. That stops here. We must earn the right to grow by getting the basics right. We don't yet have every building block in place, but we know what's missing, and we are able to move quickly to address it. My near-term priorities are very clear. We need to continue to lift our direct margin while holding our prices. We need to grow our share and lower UMF grades with greater commercial acumen. We need to continue our journey of OpEx savings while simplifying leadership and continuing to rightsize our overheads. We must return to profitability. That's a nonnegotiable. And as a result of this, we will reduce our net debt and reset our balance sheet. Looking further ahead, as I cast my eyes to the future, we must defend and grow our #1 position in premium market globally. We must expand distribution through online and retail channels while optimizing our apiary and forest assets for cost-effective but most importantly, secure supply. We must drive innovation and expand the category with sharper commercial filters. But above all else, management must rebuild trust with all of our stakeholders. Comvita has very strong foundations, but that is no longer enough. My job is to align these foundations for competitive advantage and ensure the business moves with urgency, focus and impact. I'm now going to hand back to Bridget to open the call for questions. Thank you.

Karl, thank you very much. That was an excellent assessment, very positive. I'm sure people would have taken a lot of comfort from the firmness with what you spoke and the direction that you've outlined. We are now ready for questions from the audience. [Operator Instructions] We will endeavor to answer as many questions as we can during the time remaining in this meeting. But if we do run out of time, questions -- we will respond to questions in writing. [Operator Instructions] And now I will turn over to [ Kate ] and [ Susan ], who are going to moderate these questions for us.

Thanks, Bridget. The first question today is what assets currently sit outside the current balance sheet, which have been written down to 0 or close to it? What cash flows are associated with these assets?

Thank you. Mike, can we ask you to have a look at -- to respond to that question. It's a long one. Would you like to repeat it in case...

No, that's okay. Unfortunately, there's a range of those assets. The primary ones that we're writing down through the value-in-use and the fair value accounting rules were the Manuka forests and the land use agreements to forests and other related buildings related to our kind of apiary business. The issue we've got in the moment in terms of the apiary part of the market is that the oversupply that Karl has referred to has seen that the wholesale price per honey is low. So when we work out our cash generating unit, there's an accounting term, but basically, our cash flows for our apiary business, we are obliged to use the market rates for wholesale honey. And that means that the cash flow being generated off those Manuka forests is not a lot and doesn't justify the current value of those assets. Now I would say that this reflects the market in the current stage and cycle it is. I think those forests are still maturing in terms of their age and will continue to do so. So in terms of assets outside the balance sheet, I would say they are probably the major ones. The second one is perhaps our brand. And I think that is an intangible rather than tangible asset, but that's probably another asset as well worth noting.

Thank you, Mike. Right. Moving on to the next question, please.

Thanks, Bridget. The next question is did UMF trademark and rating system weakness reflected in marked increases in bulk Manuka honey exports contribute to your sales decline and continuing losses?

I'll start this question and then, Karl, I'll turn to you on the industry. We -- as has been well publicized, the behavior of the industry as a whole has been very unhelpful. Many of our competitors have suffered equivalently. It's made it very difficult. There has been a lot of trading in the marketplace, which is undisciplined and in fact, deceptive. And we have complained about this a number of times over the period as have our competitors. It has made it very difficult to maintain the [ tongue ] of Manuka for our company but also for our country, and it does cause us all a great deal of concern to see that the precious nature of this product and this industry has been deteriorated by behavior that is not appropriate. Karl, I know you've spoken recently on this, so I'll turn it over to you to follow up.

Thank you, Bridget. Look, I think in terms of the UMF association, they play an incredibly important role of creating a benchmark within the sector, and it brings rigor and discipline to the entire sector. What is important is that the UMF acts to enforce the protocols and the standards as they are, and I've had very encouraging conversations with the UMF association over the course of the last few weeks, where they are looking to continue to implement the enforcement protocols around the integrity of product that sits on the shelf. With that in mind, I'm expecting there to be even greater rigor around the performance of the entire sector players that adhere to the UMF logo. And I must say that there is a lot that the other players in the market need to learn from and hopefully therefore, join the UMF Association long term.

Thank you, Karl. [ Susan ], the next one, please.

Sure. You mentioned that China is still slow. What is possible to drive revenue in this key market and does compete to have a fighting brand in the space to compete while maintaining premium product?

Thank you, [ Mike ], for the question. I'll turn over to Karl, who has thought deeply about this issue of maintaining a fighting brand while still maintaining a premium position, which, of course, is a challenging exercise. So Karl, your thoughts, please.

Thank you, Bridget. And great question actually. There are multiple ways that we can approach this either with our own brand or a fighting brand, as you describe it. What we will not sacrifice is the great #1 position of the Comvita brand, especially in the premium market. So I can say that categorically. What we need to be doing now is taking advantage of the current market dynamics and becoming much more aggressive and assertive with what we do in our purchasing and sales behaviors to take on the players, which are currently making inroads in this area. There are multiple channels that we can look at here. We've got some wonderful relationships with the world-leading retailers, which are also looking to grow their own profile in this world. So there is potential for things such as private label or B2B relationships. And who knows what else is out there available to us as we begin to deepen those relationships? So all I'll say is that we have a premium brand that we will continue to grow and accelerate in the markets and the categories that we want to win in, while we will find novel ways to accelerate our market share position and fill our plant [ implying ] that has the capacity today. That is one of our key strengths. We have the capacity to take this opportunity on and take it by the scruff of the neck. So I think that of all of the players in the sector today, we are well placed to take advantage of that.

Excellent. Thank you very much. [ Susan ], the next question, please.

Sure. Is impairment and other assets write-down subjective or objective?

This is one for Mike. Thank you.

It's a good one. It's everyone's best effort to use objective data, which definitely ends up being subjective. The value-in-use methodology simply starts with your view of cash flows in the future periods, remembering that requires an assessment of market conditions and in particular, Chinese consumption for example. Are we going to see continuing pressures there? Or are we going to see a bit of an uplift? How will tariffs and other geopolitical issues impact Chinese demand for our product in terms of the supply side? Are we going to get bumper harvest that's going to continue to see that oversupply and downward pressure on local prices? Or will we see that oversupply work through a system sooner rather than later in order to see a reduction in supply and therefore, less pressure in terms of competition in the market? So all those are subjective decisions where Comvita has made an effort to use data analysis and independent experts its own -- as well as its own product management and leadership to reach a position on. But look, that's a long answer to say that we've done our very best to make what are ultimately subjective analysis.

Thank you, Mike. The next question is from [ Neil Craig ], who would like to state to everybody on the call that he has had no involvement with the company for the past 5 years. So [ Susan ], could you break this question into 2 parts, please, the first section and then the second section. I'll answer the first one.

Sure. First piece is no guidance now is not acceptable to me and other smaller shareholders when Florenz [ has better ] have this, but we don't for the last 2 months in budget for 2026.

Thank you, [ Neil ]. The -- as we have said, the independent appraiser is well advanced and the report will be available in October. It's a very extensive report. It goes through both the history of the company, a lot of detail that shareholders will welcome. As far as guidance is concerned, I can say to you that we are -- that we have a positive free cash flow budget, and we are trading in line with that budget as of, what are we, at the end of August. So we have had 1 month only of this year. We're not able to give guidance, not least because there will be a significant amount of information in the marketplace in very short order, the first quarter results, then the independent appraiser's report, and shareholders will have a huge amount of information available to them before they need to vote. Thank you. The second part of the question, please, which is for Mike.

Second part of the question is I dispute the value-in-use calculation, which is rather meaningless and NTA written down to roughly 50% of breakup value. Please explain. The bid appears to be about 50% of breakup value before value-in-use write-down, which is a bit of a nonsense. Please explain.

Well, first of all, note that's an [ ordinary ] opinion. The value-in-use methodology under the IFRS accounting standards is a well-established process. There has been many companies that have worked through this and how you work through it is an accepted way of doing it. Our value-in-use calculations have been subject to an independent review by a Big 4 company. And in addition to that, Comvita's accounts this year, quite frankly, have been subject to extensive audit. The accounting irregularities, which we've previously reported meant that the audit process this year was very substantive and very thorough and subject to their own internal reviews. So I would say, firstly, that the Board and the accounting team and the professional advisers have made every attempt to conduct the value in use in accordance with an accepted practice. Accepted practice has been viewed by the Big 4 firm and that accepted practice has achieved a [ clean opinion ] from our auditors. The second aspect of it is the view of breakup value of net tangible assets. And if you've got data on that or analysis, we're happy to give you a more detailed analysis. But given the broad comment, let me give you a response, which is that if you take our apiary assets, and you take that value of that honey those Manuka forests are producing and the current market conditions and that those forests only use as those are Manuka forests, and those forests as -- currently have existing contractual requirements and obligations with the landowners, for example, they generate a certain amount of cash. And under the value-in-use rules as per the IFRS accounting standards, then that results in a certain value. So I fully accept that there are different ways to value this company in terms of market value, while people may pay for it and those type of arrangements. But in terms of the IFRS requirements to value in use according to the standards, which are very prescriptive, and we're confident with what has been put in place. Saying that, I fully and utterly acknowledge that there's a large [ subjective ] element to it. You are having to make views around your sales growth for example, and you are having to make views around your procurement price of honey. These things make a material difference. The challenge we have from an accounting perspective, not a business perspective, is that Comvita is a premium product and invests heavily in terms of the quality of their product. And it focuses its procurement and its production of honey to align to the standards and specifications, which we rigorously ensure pass something like 34 tests to ensure that they maintain the standard of our honey on shelf. As a consequence, we are relatively high cost base compared to a lot of our competitors, which is fine because we're a premium product and we're respected. But the consequence of all that in the modeling is that you have a large cost base, a large gross margin. So very small changes in terms of your cost of goods sold or your revenue make material difference to your value-in-use calculations. So in response to your thing, which is a rather long answer, I apologize, I'm very confident in the work a large amount of people have done to ensure the technical integrity of the model. I'm very confident that people have given a lot of thought and effort and consideration to the assumptions that have gone into that model. But I will be the first to acknowledge that they are assumptions. People will have a different view. And because of the large fixed cost base and the premium product and the gross margin percentage, small changes in those views do make a significant difference to your value-in-use calculation.

Mike, thank you for the extensive answer. Could I just reinforce that the Board have really evaluated especially this matter of operating leverage and financial leverage and the impact on the balance sheet. And in our situation with the level of debt that we have, our small changes in assumptions make a very big difference, and as shareholders, consider the accounting information that's been given to you. I think it is important, as Mike has said, to remember that the judgment calls that have been made and behind these numbers, and think about the numbers accordingly. [ Susan ], have next question, please.

The next question, can you please give us some more detail on the inventory value. Specifically, can you please let us know what proportion is at cost? What is at net realizable value for that at cost? What is the net realizable value, especially in the context of a business delivering a gross margin of 43% last year and 54%, last year?

The year before?

Yes, year before.

Yes. Mike, would you like to comment on cost and realizable value? And I think it's a similar...

Yes. Okay. The accounting standards, all our inventory is basically at the lower of cost or net realizable value. The issue into -- the issue we have is actually slightly different than that. Our net realizable value is essentially what we can sell that inventory for on the open market, which is our retail price. So it's very, very rare we get into a situation where cost is higher than net realizable value. It tends to be the exception. So the vast majority of our honey [ vehicle by definition ends up being valued at cost or what we procured at that ]. Our business challenge is that we've often procured that honey at a higher price than what the current market price is. And as a general rule, you are generally not permitted to write that current cost down to market value. You're only allowed to write it down if, for some reason, the retail price, you can sell that honey at is reducing. And so the provisions we've taken this year are related to situations where -- because of change in business circumstances or the nature of the market, as there's been some change at the retail price, which has enabled us to write some stuff down. So the vast majority of our inventory is valued at cost.

Thank you. [ Susan ], could I have the next question, please?

Next question. Could you comment or give a feel on the level of oversupply still there? And will this take 1 year or longer to work through?

Yes. I will start and then turn to Karl to follow up. We have the oversupply situation in the industry has been the subject of a number of analytical reports by external parties. The most credible of these is the Coriolis report, which has indicated on probability of an early recovery at 30% and a probability of a lower and longer recovery at 70%. In that sense, there is still, in their view, an oversupply situation to work through for some months still. I think, Karl, you might have some further comments on that in terms of what you've experienced seeing in the marketplace just in the last period.

I think lower for longest seems to be the trend that a lot of people -- commentators are taking right now. And as Bridget said, it's likely to work through over several months still. However, we see this as an opportunity. And the previous question that I answered was talking about how we might be able to take action to grow market share. And these are certainly the considerations that we will be having. We have a plant here that can take advantage of that surplus supply, and we have a brand and retail relationships that will allow us to push that volume into market should we choose to do that. So I think that it's up to us. We are over 50% of the market, and therefore, we should be taking a lead in ensuring that the market recovers as fast as possible through a set of steps. I'll leave it there, Bridget.

Thank you. [ Susan ]?

Another one for Karl. What does rebuilding trust with all our stakeholders entail? What are the top priorities in regards to this? And where do your bee keeper suppliers sit in this?

Thank you for the question. It's a very good question. There is only one way I see that trust is built. You do what you say you're going to do. So what I laid out on that slide are the priorities. We must continue to hit those numbers. We must continue to execute on the commitments we've made to all of our partners, whether it be banking relationships, whether they be to our retailers and customers and consumers with our brand promise, all the way through to our supplier relationships, of which beekeepers remain absolutely critical. So I am yet to get out into our apiaries. Unfortunately, I've only been in the job for 3 weeks. However, that is an absolute priority for me as we're getting into this important season of the year. And I know that every apiary in the country is beginning to ramp up, so I need to do it quickly.

Thank you, Karl. [ Susan ], any further questions?

Sure. So next question, if the company does not sell to Florenz, is it highly likely that it will need to issue new shares at a discount?

As you -- as I stated before, the Board has considered all the different capital market options that are available to it. Certainly, the issue of shares at a discount to existing shareholders is a possibility. The dilution that would occur is -- would make it very difficult for many of our shareholders to contribute. We will have to see in the fullness of time after the scheme is voted upon by shareholders what options are available to us at that time. As Karl has said, much depends on our trading conditions and the situation at that time. But in essence, the Board has carefully considered every single option available to it in its decisions to date and will continue to do so.

We've got a couple more questions. What do you think China bull stock market will do for Comvita?

Who would like to -- Karl, let's -- yes, thank you.

Look, our stock market is one thing, but most important for our brand is consumer confidence. And if the stock market gains translate to consumer confidence, then we will likely see a positive outcome for our China business. That is not always directly correlated, and we wait with anticipation that, that confidence builds in the China, U.S. and other global markets actually that have not necessarily rallied at the consumer confidence level to the same extent we've seen in the last 6 months of the stock exchange.

Thank you.

We've got one final question. What noncash items apart from depreciation and amortization are included between earnings before financing costs and gross profit in the income statement?

Mike, if you wouldn't mind, thank you.

I think they would be the primary ones. [ Ben ], correct me if I'm wrong. But it's mainly depreciation and amortization are noncash items.

Yes, Mike, the only other one in there is the inventory provisioning [indiscernible].

Sorry, the provisioning and the impairments.

Yes. There being no further questions. I would like to thank you all very much for attending. Thanks to my fellow presenters and the -- I think we gave as much information as we could. And if there are further questions, we would welcome them. So please do send them through, and we will respond. So thank you all for attending and appreciate your support for the business. Thank you very much.