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Thursday 21 October 2021

How Comvita’s ‘unique’ model helped drive its $19m turnaround

16th September 2021 By Staff Reporter | | @foodtickernz

Comvita has released its annual report and its full of insight about how the company sees its operations and markets, including an extensive Q&A with board chair Brett Hewlett and chief executive David Banfield. We’ve reproduced some of that content below to share some of that detail.

Comvita is forecasting an EBITDA range of $27m–$30m for FY22.

In August, the honey producer reported a net profit after tax of $9.5m for the year to June 2021, reversing a loss of $9.7m for the previous 12 months in a $19.2m turnaround.

Note, the questions asked below are Comvita’s own.

Your business model is also quite different from others. Why have you chosen to shift from sell-in to sell-through? 

DAVID BANFIELD: Our business model is absolutely unique. We truly operate from end to end. We own and operate Mānuka forests planted with our unique Mānuka cultivars, with hives cared for by our own beekeeping team and honey extracted at our own facilities. We have a high-quality production facility powered by photovoltaic cells with our own independently verified laboratory on site – the only one in the industry. We also have our own teams on the ground around the world, whereas most of our competitors rely on third parties to execute their plans on the ground, in market. All of that means we’re better connected to consumers’ changing needs. 

Our focus on sell-out is designed to ensure that we understand drivers of performance at an individual customer level and tailor our activity accordingly. This also ensures that we have a clear line of sight of trade stocks with the intention of ensuring we understand any one-off impacts on our performance (positive or negative) and avoid peaks and troughs related to one-off stocking events.

We aim to be their best partner by helping our customers manage supply, demand and, ultimately, cash. Our focus is on delivering long- term, profitable growth rather than just to ‘get orders’, and in the medium term, we believe this will be reflected in our customers designating Comvita as their brand of choice. 

You had what could be considered a very ‘poor’ harvest this year at only 370 metric tonnes yet achieved a breakeven performance on your apiary business. Historically, a poor harvest would have carried through to a poor result. What’s changed? 

DAVID: When I first joined Comvita, shareholders highlighted the impact that poor weather conditions could have on harvest and consequently on Group performance. This also directly impacted how the investment community valued Comvita (due to perceived agri-risk). We implemented a new plan in 2020 to ensure that, in poor weather years, we achieved a breakeven in our apiary division (i.e. no profit contribution to Group profits from apiary) and a contribution of around $2m–$3m in good weather years – this was based on an average ‘poor’ harvest being around 410 tonnes. This year’s breakeven was achieved despite being 10% below our base case.

The apiary team did a great job to manage costs and quality of yields. We expect that, in time, this reduced risk and recognition of Comvita as a premium FMCG brand will enable Comvita to be re-rated. We retain strong relationships and supply from our Supply Partner Group (long-standing, high-quality, independent, exclusive suppliers) to allow us to mitigate seasonal variability in harvest yields and maintain service levels to our markets and customers. 

David Banfield

What’s going on with your various joint ventures? How do they fit into your plans? 

DAVID: We have exited from any non-performing or non-strategic joint ventures. There are now three remaining: Makino, Apiter and Medibee Australia. Makino is a long-standing, high-quality Mānuka forest partnership and is performing very well, and we see long-term alignment and opportunity here. Apiter supplies us with high- quality Propolis from Uruguay. Apiter and Propolis are very much part of our long-term plans. We’re actually the global leader in Propolis, and our view is that there is significant untapped potential in the category. We do have too much inventory but we’re reviewing that, and this will be reflected in our long-term category plans. 

Medibee Australia is different. We no longer have a long-term strategic need for this JV. The only reason it’s retained is because of a bank facility guarantee that’s in place of A$4.5m. The business, while recovering from the damage of devastating fires in 2019, generates cash, so we’ll focus on that and reducing the bank facility to zero and then we’ll plan to exit. 

You announced a second transformation aspiration to achieve a further 400–500 bps improvement in gross profit, targeting a gross profit percentage of 60% by 2025. Can you talk through that in a little more detail please? 

DAVID: This will be delivered by a combination of factors: increasing Mānuka and Propolis share of the total revenue; increasing digital share to 50%; increased share of revenue and earnings from higher margin country segment (Asia); improving production efficiencies; improving overhead recovery in production; and finally, an additional benefit of our new apiary strategy is limiting collection and extraction of non-Mānuka honey that is margin dilutive. 

You’ve invested $3.8m in your Mānuka forest strategy and $2.6m in projects to improve productivity this year. Why is this important and how do you measure productivity/return on investment? What are the anticipated benefits and returns of your reforestation strategy? 

BRETT HEWLETT: The Board keeps a very sharp eye on the IRR on all investments. The $6.4m invested this past year has mostly been targeted at projects optimising operational efficiencies and productivity at our Paengaroa and apiary manufacturing facilities. In some cases, the payback has been less than 12 months, so benefits are already partly reflected in this year’s results – with more to come over the next one to two years. At the Group level, we have targeted an overall ROCE of >12.5% or 500 bps over WACC within the 2025 plan. 

We believe that this long-run minimum rate of return on invested capital is both sustainable and appropriate for a company like Comvita. 

DAVID: In order to get product of the highest possible standards, we need to ensure that we can manage the environment around our hives. Having large-scale Mānuka forests in remote areas allows us to create a perfect environment for bees and for Mānuka to flourish and an environment where we manage the impact of pesticides and other non-desirable substances near or on our land. We are delighted that we’ve seen the return of kiwi and whio (blue duck) to our restored land in one forest. Additionally, this strategy has a strong correlation with our kaitiakitanga values and our broader commitment to become carbon neutral by 2025 and carbon positive by 2030. 

What we’re seeing from this year’s results is that our core forest business model is working, and this will give us higher yields, higher quality of yield and also lower costs due to proximity and scale. Our hypothesis is that we will be able to increase yield by 40% in our forests, increase quality of yield by 60% and decrease costs by 20%. For me, the question is when we accelerate this reforestation strategy rather than if. 

In terms of productivity, we aim to be the highest- quality, lowest-cost producer of Mānuka and Propolis. We can only achieve this goal if we have an absolute focus on automation, continuous improvement through our production facilities and also the returns that we get from all SKUs that we manufacture. This financial year, we reduced our SKU count by 30% as we deleted SKUs that didn’t meet our expected returns. In the year ahead, we will reduce our SKU count by a further 20%. 

This year, China and the United States have done very well, but other markets – notably New Zealand and Australia – have languished. Why has there been such disparity? 

DAVID: During the interim results presentation in February, I categorised the performance and segmentation of our markets as either narrow or balanced distribution countries. In all cases where we have a balanced distribution model, we have performed strongly, whereas when our distribution, digital capability/focus and sales and marketing activity have had a narrow focus, we have struggled.

In the case of Australia and New Zealand, this was the case due to us focusing on Asian health/daigou and travel retail. Naturally, with these channels not operating effectively, neither has the market. I do want to highlight though that, in Q4, our ANZ sales grew by 17% year on year, potentially highlighting we’ve reached the bottom here and now have a base to build from. 

In China itself, many companies exporting there have been devastated by the Covid-affected daigou channel. How have you managed to come through comparatively unscathed? 

DAVID: The reality is that we don’t see ourselves as an exporter. It comes back to the difference between our business model and other companies that rely on daigou/Asian health/CBEC for performance. In China, we have nearly 200 people on the ground who helped us deliver 31% revenue growth and 25% net contribution growth while investing an extra $6.6m in our brand. This team is there to ensure that we understand customer and consumer needs and are highly responsive to changing needs in the most dynamic market in the world. 

Andy Chen (Comvita’s regional CEO in Asia) has put together a very talented in-market leadership team, funded by some of the efficiencies we have delivered across the Group. In the last year, we’ve appointed in-market GM Sales, CMO, CFO, People and Transformation Lead and also a new head of Hong Kong SAR/Macau and Southeast Asia. This team have all come from bigger FMCG or global businesses. They believe in our huge potential in China and across Asia and want to be part of the exciting chapter ahead of us. 

You have just released your carbon footprint for the first time – how do these actions benefit all Comvita stakeholders? 

DAVID: Last year, we set out our plan to be carbon neutral by 2025 and carbon positive by 2030. I believe the movement to reduce and/or offset greenhouse gas emissions is one that is going to rise in importance over the next five years, and we aim to make sure that we are a leader in this field. We’re making great progress here. We’ve planted another 2 million trees this year, and our 2030 Harmony plan sets out our broader organisational goals. We will also start our B Corp registration process in FY22. B Corp is the leading global standard for organisations setting the highest standards. In the process of doing the right thing by registering for B Corp, we will also be able to attract new investment from organisations looking to invest in sustainable enterprises. 

Comvita shareholders will be pleased to see a resumption of dividend payments. What is the company’s dividend policy going forward? 

BRETT: This year’s dividend of four cents per share represents 30% of net operating earnings. This was set by the Board after assessing the cash needs of the business for the next 12 months and taking into consideration a residual level of uncertainty in the markets. 

We are currently in the process of building long-term resilience and growth, which is why we believe the best use of cash at present is to prioritise value-accretive growth-based initiatives. However, my clear message to shareholders is it’s not our policy to accumulate large reserves of cash, and within the bounds of good capital management and fiscal responsibility, we aim to maintain an annual dividend payment. 

In terms of guidance, you are forecasting an EBITDA range of $27m–$30m for FY22, double-digit earnings growth next year, but very strong EPS growth. 

DAVID: FY22 is going to be another important year as we continue to invest in our brand and our team in order to deliver sustainable returns for all stakeholders. We know that we have to deliver again in FY22 in order to build real trust and belief and are absolutely focused on delivering our plan. We also continue to put in place foundations that will enable us to deliver our 2025 plan and, most importantly, deliver long-term profitable growth at Comvita. We are on a journey to extend our global leadership, invest in telling our incredible brand story and have a business model capable of delivering 20% EBITDA by 2025. 

Read Comvita’s 2021 annual report here.



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