Comvita Limited (CVT) Earnings Call Transcript & Summary

Good morning, and thank you all for joining us today. I'm Karl Gradon, Chief Executive Officer of Comvita. I would like to warmly welcome you to this online meeting, where we will provide an update on Comvita's full year results for the year ended 30th of June 2026. Today's presentation will be led by myself and our Chief Financial Officer, Mandy Tomkins-Dancey. We represent a new team. And before all else, I want to thank the entire global Comvita team for their efforts during this milestone year. I would also like to acknowledge our directors in attendance, Bridget Coates, Comvita's Board Chair; Mike Sang, Chair of the Audit and Risk Committee; Bob Major, Chair of the Safety and Performance Committee; Greg Barclay, Michael Chai, Julia Xu and Peter Nathan making up the rest of the directors. I will start the session today with a high-level performance review for 2026 and talk through our strategic and commercial performance. I will then hand over to Mandy to provide more detail on our financial performance. I will, at the end of the presentation, provide our 2027 outlook before we move to a question-and-answer session. The simple message for 2026 is that Comvita delivered the priorities we set at the start of the year, returning to profitability with NPAT of $7.7 million and finishing the year in a materially stronger position than we started. We returned to profitability, materially reduced debt, normalized inventory and restored positive cash generation. This helped enable us to complete the recapitalization and financing process, which gives the business a much stronger financial platform to move forward from. As part of the capital raise, Fraser and Neave joined our register as a strategic investor. Several strategic initiatives are now underway that have the potential to accelerate growth across Southeast Asia and support long-term value creation. During the year, we also completed a significant refresh of the leadership team, ensuring the business has the capability, experience and accountability required for the next phase of Comvita's growth and development. The outcomes this year were a hard one. They reflect stronger discipline across the business and the benefit of decisions taken throughout the reset process. At the same time, I want to be clear that this is not the end of the work. FY '26 stabilized the business, strengthened the foundations and restored our financial flexibility. FY '27 is about converting that stronger platform into consistent commercial performance and long-term value creation. I'll now turn to the financial highlights for FY '26. The year reflects a significant improvement in Comvita's financial position. Revenue increased to $213 million and the business returned to profitability with reported NPAT of $7.7 million. Operating cash flow strengthened materially and free cash flow was positive, supported by improved earnings, inventory normalization and disciplined working capital management. The balance sheet also improved substantially. Net debt reduced from $62.4 million to a net cash position of $0.5 million, reflecting stronger operating cash flows, inventory normalization and a successful recapitalization. Inventory reduced to around $80 million, which is within a more sustainable operating range for our business. Importantly, these outcomes were delivered while completing the recapitalization and refinancing. The financial base of the business is now materially stronger than it was a year ago. This slide sets out the priorities we gave to market and the progress delivered against each of them. We returned the business to profitability ahead of guidance, strengthened the balance sheet and brought inventory back into the more normal operating range. We maintained our premium brand positioning, sharpened our innovation pipeline and delivered significant volume growth through strategic channel partnerships, particularly in North America. We also substantially strengthened the leadership team during FY '26. This team is now fully established, bringing the strategic commercial capability, experience and accountability needed for the next phase of growth, operational improvements and value creation. The key point is that FY '26 was a year of delivery against the reset priorities. We now have a more stable platform, but we still have work to do in our systems, our cost base, supply optimization, brand investment and channel execution. Before moving into our market performance, it's worth stepping back and looking at what is happening in the broader Manuka honey category. Global demand is becoming more diversified. North America is now the largest Manuka honey market globally and category demand continues to broaden beyond Greater China. We are leading this growth. At the same time, category growth is increasingly volume-led, which reinforces the need for brand differentiation, premiumization and disciplined value creation. Supply dynamics are also changing. Industry inventories have reduced, raw honey pricing has stabilized and quality supply is becoming more important. For Comvita, our vertically integrated model is a great advantage. in this environment. The 2026 Manuka season was a great example of that. While some in the industry were cautious ahead of the season, our own supply position was very well managed by the team, supported by our forests, apiaries and procurement discipline. Ending the year with our inventory in balance was a significant achievement and both our operations and apiary teams should be rightly proud of their strong performance. The implication is clear. Market and channel diversification, innovation, brand strength and supply security matter more than ever. Our overall market performance in 2026 was mixed, but the direction of travel has improved. Intentional diversification of channels and geographies is a key part of our strategy. Growth in North America and the rest of Asia helped offset continued headwinds in China and softer trading conditions in ANZ. We saw strong club retail performance in North America, continued leadership in China, expanded distribution in selected markets and encouraging momentum from innovation and premiumization. At the same time, we are not underplaying the challenges. China consumer demand remains softer, parallel imports and lower price competition continue to place pressure on the entire category and some markets remain uneven. What has changed is the business is now better positioned to manage through those conditions. We have a broader market base, clear channel priorities and stronger execution discipline. Greater China remains our toughest market, but it also remains a market where Comvita has significant brand strength. In FY '26, we maintained our #1 brand position with more than 50% market share and retained leadership in online sales. Locally led innovation helps strengthen our consumer engagement and create new consumption occasions, which is important in a category facing more value-conscious consumers. The challenges are clear. Consumer demand is still softer. The category continues to see commoditization and the pricing pressure from parallel imports and lower price competition remains a headwind. However, our focus is, therefore, disciplined and targeted. We will continue to capture volume growth in large-scale retail and online channels, expand our premium human footprint, our new innovation and formats and optimize our store retail network. The objective is to protect leadership and rebuild quality growth rather than chase volume at any price. Under new leadership, North America was a key driver of our FY '26 performance and is now our most significant growth market. Strong club retail performance supported volume growth, sell-through and inventory normalization while also introducing Manuka Honey to U.S. consumers at scale. We also maintained our leadership position in natural retail and extended our distribution across priority channels. Importantly, North America is no longer simply a volume growth story. It is creating broader consumer awareness of the Manuka honey category, increasing category participation and is helping establish a platform for growth across multiple markets. We are grateful for the scale and momentum our club retail partner provided, but we are also managing concentration risk and profitability carefully. The focus is on building a durable and diversified North American business across retail partners, natural grocery, e-commerce and emerging digital platforms. The opportunity is significant, but the market is competitive. Our priorities are to grow brand awareness, increase household penetration, expand distribution in the right channels and formats and continue to build digital commerce capability. Across our other markets, the focus has been on improving profitability, sharpening channel execution and expanding reach in priority areas. The rest of Asia continued to build momentum with strong performance in markets such as Singapore and South Korea, supported by retail optimization, digital growth and key distribution partnerships. In Japan, the focus has been more on resetting the platform for improved profitability. We are particularly encouraged by the engagement of our new strategic shareholder, F&N. As mentioned earlier, several strategic initiatives are now underway across channels, innovation and supply chain that have the potential to create and accelerate growth across Southeast Asia for long-term value creation. ANZ does remain challenging, particularly given weaker consumer conditions and ongoing pressure in the Asian health channel, but margins improved in parts of the portfolio, and we continue to see opportunities through pharmacy, tourism and owned brand experiences. In Europe and the Middle East, the move to a distributor-led model is improving efficiency and profitability with new growth opportunities emerging through strategic partnerships. The common theme across these markets is disciplined channel focus and growth where we can get an appropriate return. Innovation is not only about launching new products and leveraging our proprietary science, it is about strengthening our brand relevance, premium positioning and future growth opportunities. In FY '26, we continue to build innovation platforms around products and formats that expand how Comvita is used. This included new Manuka honey Lozenge variants, locally led eye health innovation in Asia focused on the growing need to address eye problems that come as a result of prolonged screen time and the elevation of our super premium UMF 29 Manawaimai first harvest product, which tells a stronger single source story from our own Manuka forests. Our science program is also central to differentiation in a category where many competitors can make similar broad claims, proprietary science and clinical evidence are what allow Comvita to stand apart. Our Lepteridine work and upcoming gut health clinical trials are important examples of how we are building a science-based platform that can support future premium innovation. The focus is disciplined innovation, fewer, better opportunities that strengthen the brand, create new usage occasions and support long-term category leadership. A more efficient operating model was also a major contributor to our FY '26 success. We reduced inventory, strengthened procurement discipline and forecasting tools, improved manufacturing utilization and continue to sharpen our sales and operations planning. These actions supported margin recovery, working capital improvements and stronger cash generation. The reset has also reinforced the importance of making better use of our existing assets and infrastructure. In-sourcing selected production, improving planning tools and reducing avoidable waste all helped to improve returns from the operating base we already have. There is still more to do. We will continue to optimize our cost base, our operating model and capability to support a more globally integrated and scalable business. I will now hand over to Mandy to provide additional detail around our financial performance. Thanks, Mandy.

Good afternoon, everyone. I'll now take you through the financial performance in more detail, including key earnings drivers, cash generation, balance sheet position and our approach to capital allocation. As Karl has outlined, FY '26 was a year of significant financial reset and commercial rigor. The focus from a financial perspective was to restore profitability, improve cash conversion, reduce debt, complete the refinancing and ensure the business entered FY '27 with materially stronger financial foundation. Importantly, as we look at the quality of earnings improvement, this result reflects a combination of underlying operational improvement and some legacy issues that affected FY '25. I'll talk specifically this underlying performance improvement, including the gross margin shift and contribution from North America. FY '26 marked a return to operating profitability with operating profit before financing costs improving by $43 million compared with FY '25. Revenue increased to $213 million, supported by strong North American growth and improved market diversification. Importantly, revenue growth translated into improved profitability through stronger manufacturing utilization, improved overhead absorption and continued cost discipline. Gross margin recovered materially during the year. Part of this year-on-year movement reflects the impact of significant inventory-related provisions recorded in FY '25. Normalizing for those provisions, FY '25 gross margin would have been 50.8% compared to 53.9% in FY '26. This generates a genuine underlying improvement driven by manufacturing efficiencies, improved inventory utilization and procurement outcomes. Our medium-term expectation is that gross margin will stabilize in line with honey cost stabilization. The significance of this result is not simply that profitability has returned. It demonstrates that the business is now generating earnings from its core operations, supported by disciplined execution and stronger operating model. This slide shows how profitability was restored during FY '26. There were 3 important drivers. These were revenue growth, particularly in North America, stronger margins through manufacturing and supply chain efficiencies and ongoing cost management across the business. The increase in volume improved our factory utilization and overhead recovery, while inventory optimization initiatives, disciplined procurement, stronger apiary performance and improved raw honey utilization all contributed to margin improvement. The year-on-year comparison also benefited from lower depreciation of around $3 million following asset write-offs in FY '25 and from the use of lower cost honey procured in the prior year. Even allowing for these benefits and despite higher freight costs and broader macroeconomic pressure, the result demonstrates that the business has made real progress in improving the quality and resilience of our gross margin. Importantly, profitability was not driven by a single action. It reflects multiple improvements across the business working together, including commercial performance, operational execution and a more efficient operating cost base. Operating expenses reduced by $8 million year-on-year, reflecting the cost-out actions that were taken. We will continue to assess business performance to ensure our cost base is appropriately sized and focused on initiatives that add value. While market conditions remain challenging in several regions, the business demonstrated that it can improve earnings through disciplined execution and strong operational performance. Earnings were above guidance with normalized EBIT of $16.4 million versus guidance of $15.5 million. Normalizations were also in line with guidance. One of the most important strategic shifts during FY '26 was the continued diversification of Comvita's revenue base. While Greater China remains a key market, stronger growth in North America, Southeast Asia and EMEA have reduced our reliance on any single geography and created a more balanced business. The diversification is deliberate. It improves resilience, broadens our growth opportunities and reduces our exposure to economic or competitive challenges in any one market, creating a stronger and more sustainable platform for long-term growth and shareholder value creation. Our focus now is on converting that momentum to broad diversified channel and customer base while maintaining our commercial rigor around margin and working capital. One of the most significant achievements of FY '26 was restoring cash generation through disciplined inventory management and improved operating performance. Our inventory reduced from $89 million to $79.9 million and is now back within our target operating range. This reflects increased sell-through, better inventory utilization and stronger planning processes across the business. Our operating cash flow increased to $40.3 million, and our earnings to cash conversion improved materially. Our cash generation was not simply the result of selling down inventory. Inventory normalization was a significant contributor, but we also saw benefit of improved earnings and better alignment between production, inventory and customer demand. The working capital reset is now substantially complete. Going forward, our focus is maintaining this discipline while continuing to support growth opportunities and [Technical Difficulty] supply resilience to increasingly drive cash generation. This represents a significant change in the company's financial position in a relatively short period. Refinancing was completed during the year, providing appropriate liquidity, covenant headroom and flexibility through to September 2028. This gives the business the capacity to execute against its strategy. Focus now is to preserve that flexibility while selectively investing in growth opportunities that support long-term value creation. With the balance sheet reset, the discussion shifts from repairing the business to how capital will be allocated going forward. Our first priority remains financial discipline, maintaining appropriate liquidity and preserving flexibility remain important, particularly given the volatility that can exist within agricultural supply chains and global consumer markets. Our second priority is targeted investment in the areas that strengthen competitive advantage, including honey supply, brand, science, innovation and digital capability. Finally, we remain focused on improving returns from existing assets and driving greater operating efficiency throughout the business. Over time, as earnings, cash generation and balance sheet metrics continue to strengthen, we remain committed to returning capital to shareholders through a sustainable dividend while ensuring that capital allocation remains appropriate to the opportunities and risks facing the business. Today, our priority remains balancing financial resilience, growth investment and long-term shareholder returns. I'll now hand back to Karl to provide comments on our FY '27 outlook.

Thanks, Mandy. As we look to FY '27, our stance remains confident and pragmatic. The business is materially stronger than it was a year ago, but disciplined execution remains the priority. We have made good progress. The business has been stabilized, the balance sheet has been repaired and the leadership team is in place. We are clear about the issues, clear about our priorities and better positioned to execute, but there is still significant work ahead. FY '27 will be another demanding year with its own challenges across consumer demand, competitive intensity and geopolitical uncertainty. The honey harvest variability will continue, and we will need to keep improving our operating model. The opportunity remains significant, but our focus is on continuing to improve operational performance and returns while pursuing targeted growth opportunities with discipline. FY '27 presents both opportunities and challenges. The opportunities are clear. Further expansion in strategic markets and channels, a stronger innovation pipeline and the ability to invest more deliberately in brand, science, digital and supply capability are important. This must happen at the same time as we tightly control our controllables, which are primarily our costs. The risks are also clear. Geopolitical disruption could affect freight, fuel and supply chains. Consumer sentiment remains uncertain, particularly in China. The honey harvest outcomes can vary and competitive intensity remains high across the category. Our approach is to manage these risks closely while continuing to move the business forward. We are not assuming that the environment will get easier. We are building a business that can perform with more resilience and discipline through that environment. We will focus on the U.S. and other strategic markets and channels where we see the strongest opportunity for growth. Our priorities are clear and deliberately few and focused. We will strengthen the brand because brand relevance and differentiation are critical in a more competitive category. We will drive category growth through product innovation and science with a focus on fewer, higher-quality opportunities. As the category supply and demand continues to rebalance, we believe trusted brands, which we are with strong supply access, which we have and genuine differentiation and disciplined execution will be the best position to succeed. We will remain disciplined in our approach to capital allocation, sharpening in optimization of our footprint while continuing to improve our operating model capability and cost base. Some of that focus will take investment and the benefits will take time to flow through. Our focus is now disciplined execution and creating long-term shareholder value. Comvita has a trusted global brand, deep science capability, high-quality supply and increasingly diversified market footprint with a strengthened leadership team. We are the industry leader. With the foundations now substantially rebuilt, our focus turns to disciplined growth, targeted investment and creating sustainable long-term shareholder value. We will now pause and take any questions, which can be submitted through the portal provided. Please click Ask A Question to send in your questions. As we wait for these to be received, I'd like to again thank our Board members, leadership team and the wider Comvita global team for their ongoing efforts in helping position Comvita for a far more successful future. If we do run out of time, we'll provide a response to you after the presentation.

Thanks, Karl. First question is normalized EBIT stated to be $16.4 million and operating profit of $14.0 million. Could you please outline normalizations applied to EBIT and EBITDA...

The normalizations are in line with our previous guidance, and those include transaction costs associated with the failed SIA of approximately $1.4 million in addition to transaction costs of approximately $1.9 million. And these are also outlined for you in the investor presentation at Slide 18.

Thanks, Mandy. The next question, gross margins are high, but net returns low. What plans do you have to reduce overheads?

We have a continued focus on our entire cost structure from our apiaries right the way through to the way that our product ends up in market. We have continued to focus our attention to all parts of that value chain. And over the coming months, we will continue to hone and prioritize our resource allocation. As we look for the reduction of overhead costs, we will continue to look at every possible attribute out there. We have recently undertaken some structural reviews and changes to the business, which have resulted in a reduction in headcount, and we expect that over time, we will continue to optimize our channel strategy going forward.

Thanks, Karl. Next question. North America sales increased from $28.7 million to $58.7 million. However, contribution margins declined from 14.1% to 6.6%, potentially due to product mix change. Should we expect North American contribution margins to improve from current levels?

Over time, we certainly should be expecting to see that. We have a great partnership in place with our retail partners in North America. And as we have optimized our procurement and inventory levels, we expect this to normalize. What has been a good outcome this year is that the operational efficiencies gained through those volumes have benefited the wider business, not just the North American business. So we've seen several advantages in that particular sales channel well beyond that channel itself as well as the fact that we've actually seen a significant uplift in the penetration of Manuka and the understanding of the benefits of Manuka at the consumer level that have come as a result of this channel growth. So we see it as a very strategic and important part to our portfolio today.

Thanks, Karl. The next question, congratulations to you all. That is an impressive improvement in the business. Question, revenues in North America were strong, although margins weak. To what extent were you discounting or selling lower quality honey to reduce your company inventories to target levels? Was the North America average quality of honey sold significantly lower in North America? Should we expect reduced sales in 2027 given this?

Thank you, firstly, for the congratulations. The team has worked extremely hard, and we're all very proud of the outcome. So the North American volumes were strong, and it's something which has permeated the entire business. The inventories have been reset, as you noted, and we're now down to our target levels, which means that we're now able to replenish our stocks at the ongoing prevailing market prices, which gives us a competitive advantage compared to where we were this time last year. The quality of the honey is not low grade. It is a very good quality product, which we supply to a very good quality consumer base. And as a result of that, we would expect that the volume will continue to prevail into the 2027 year, and we've already received strong purchase orders for that.

Thanks, Karl. Next question, what was the cost of the capital raise?

Issue expenses associated with the capital raise were $3.42 million. You'll see those recognized against equity for the capital raise within our financial statements. In addition to that, failed SIA costs of $1.4 million were recorded in operating expenses and separately disclosed.

Thanks, Mandy. Next question. When do you hope to provide a dividend, i.e., do you pay a dividend in 2027?

Dividends will be returned when earnings, cash generation and balance sheet metrics support a sustainable dividend. The emphasis there is being on sustainable, and our Board will continue to review its dividend policy as that evolves.

Thanks, Karl. Next question. The outlook section is all motherhood and apple pie. Do you have an actual guidance?

We have a very early stage of the year, which is traditionally -- we're currently in a very early stages of the year. These are the lowest 2 sales months. As a result, we are not giving guidance today. We'll look to provide further guidance as the apiary crop and the sales channels evolve in the important months of both November and onwards. So once we have that certainty, we'll be providing guidance to the marketplace.

Thanks, Karl. Many in the industry have fallen by the wayside. Do you have strategies to take advantage?

I think that the industry today has really suffered some challenging times and points to the strength of having a good brand and a great distribution channel and supported by a great team. We also now have a great balance sheet. So we have the resources and the capability now to take advantage of that situation should the opportunity prevail. But right now, our business needs to continue to get focused on exactly what we need to deliver that's within our control. If there is something that we could play a part of that greater industry outcome, then we will do that. But right now, we've got a business that we're focused on making world-class.