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EXCLUSIVE: Interview with Comvita (NZE: CVT) Management (Part 1)

We were lucky to have the chance to interview the top management team of one of the hottest NZ listed companies: Comvita. As reported on Comvita website, they “are an international natural health products company backed by a strong New Zealand heritage. [They] are committed to the development of innovative natural health and well being products, backed by credible scientific research. Among their main products there is the famous Manuka Honey.

We report our exclusive conversation with the top management team. We will have two episodes in which we will discuss both the strategy as well as the financials.

Comvita Strategy

Can you tell us about the Comvita strategy going forward?

Our new strategy has three core platforms:

  1. “Grow superior supply” – this is about securing more, high UMF honey through our breeding and plantation strategy, and securing high quality propolis.
  2.  “Win where it counts” this is about building profitable distribution to ensure our product is available in the key outlets where our customers prefer to shop
  3.  “Invest in our brand” So more people get to know and love our brand. We have seen very clearly that when consumers are aware of our brand, Comvita has quite a high chance of converting this awareness to a sale.

The Company has decided to focus our strategy on continuing to build on our early leadership position in Manuka honey and Propolis over other ingredient platforms such as Fresh Olive Leaf. This means we will run a leaner, more focused business model with a lower overhead cost and we are concentrating efforts on working capital in the year ahead to ensure we reduce debt levels.

This more focused direction should lead to a sharper focus on profits generation rather than revenue growth from a more diversified product strategy.

Although this is a focused product strategy, it is also about getting closer to the consumer. Tightening our focus will result in increased in-market spend to share our brand story more directly with the consumer.

 To achieve this,we will be increasing our marketing spend in support of the Comvita brand in all key markets. Our consumers have been telling us our packaging could better communicate our brand’s heritage, and more clearly demonstrate our high-quality and premium position.

As such, we are rolling out a new visual identity for all Comvita Manuka honey packs from April 2019. Having new embossed pots and lids, cartons and brand booklets will allow us to tell a deeper source to shelf story, while improving functionality and navigation. This investment in our brand will be supported by above-the-line advertising, social media marketing,and new point-of-sale assets to support our retail partners.

 We are focused on growing our resource and capability in digital and social marketing, and will be increasing our investment in public relations, marketing communications, and advertising in our two focus markets; China and North America.

Where do you expect growth to come from?

Propolis is the key supporting ingredient to Manuka, accounting for circa $18m of revenue pa, and potential to grow strongly. There is a high level of consumer awareness in Asian countries (particularly China) of the health and well being properties of Propolis, but our sales have been constrained by raw material supply from New Zealand.

On 2nd July 2018, Comvita completed the investment of 20% in Apiter (Uruguay Propolis supplier), securing exclusive supply.  We expect to increase our range from products already developed by Apiter, now that we are not supply constrained for high quality source material.

The company is focused on NZ/Australia with a good presence in Asia. Recently you have been successful in the US market. Do you have plans to expand geographically?

We have significant market opportunities ahead of us, particularly in China and North America.  Our strategic focus is to build distribution into the natural and specialty channels in North America and to continue to grow our relationships with key Chinese e-commerce, and cross-border e-commerce platforms. We intend on expanding our retail distribution inside China and Hong Kong.

Where do you plan to invest more heavily? If so, what the risks and opportunities in expanding abroad?

In the short-term we are investing $12m to upgrade our warehousing capability at Paengaroa. This will provide us the ability to store virtually all our raw materials at Paengaroa in a purpose-built state of the art, climate-controlled warehouse that will enable consolidation of warehousing activities across the group.

The upgrade includes a 270kw photo voltaic solar system, generating 370,000 kWh of power per annum (the same consumption as 53 houses) which will provide a good proportion of our sites power requirements. The building design also allows for rain water from the roof to be stored to supply a significant portion of the sites water requirements, in line with our companies’ sustainability values.

In the medium term, our investment will reflect a shift from being a supply-led business to a consumer-led business, investing in direct to consumer channel opportunities in China and some bricks-and-mortar in North America to support our brand story.

In the past Comvita has had some issues with your supply chain in China, have you resolved these? Do you see any risk going forward?

Both Australia and New Zealand grew 43% and 12% respectively compared with the prior period as we have seen a rebound in our Grey Channel sales to China.

 A significant portion of our products end up in China and these sales have traditionally been through e-commerce and daigou (grey) channels.  Securing a Joint Venture (Comvita Food (China) Ltd) with our long-term distributor, Shenzhen Comvita Natural Food Co Ltd, in July 2017 has mitigated a lot of the risk around informal sales channels into China and has enabled us to strengthen our local sales and marketing capability.

We have made good progress in managing the expansion of our e-commerce business inside China and have also moved to increase our presence in cross border e-commerce. E-commerce sales are now greater than 50% of our total sales inside China.

Comvita seems to have had a few weather/production related problems (Supply co). Strategically, does it make sense to focus on production rather than leveraging the marketing and branding(Brand co) capabilities of Comvita? Do you have any plan to restructure your business?

Comvita has been hampered by weather events in recent years.  This has streamlined our thinking and highlighted the importance of strengthening our supply chain to mitigate events and secure honey through our plantation strategy.

For the first time we have and will continue to provide the market with more detail on our harvest performance with separate reporting of our “supply” business alongside our core Comvita “brand”business.  This will enable investors to assess the underlying performance of the core, and better understand the long-term investments we are making in strategic supply such as our Manuka breeding programme and plantations that will underpin the company’s future growth.

Our branded business continues to grow, and we see the focus continuing to shift to brand.  It doesn’t take away from the importance of our supply side, but it does show that supply is simply an enabler to run a consumer-focused business.

We have no plans to restructure our business, but we do see the value in providing investors with more clarity around Supply co and the impact on our brand business.

Do you invest in new technologies, eventually to improve your production?

To increase both the volume and the quality of manuka honey, Comvita have been investing in a Manuka Breeding and Plantation programme.  Over the last 10 years, Comvita has established 12 seed nurseries in different geographic/climatic locations that contain much of Manuka’s genetic potential.  We have been actively testing the agronomics of growing Manuka in large scale plantations and have completed significant field testing.  We are starting to see some excellent outcomes from this breeding programme to the point where we are confident in our ability to secure our future increased supply requirements through plantations. 

The focus of our breeding programme has been to:

  • Improve DHA quality in Nectar across different varieties while extending and managing flowering periods to mitigate weather risk
  • Provide geographic and climatic tolerances 
  • Improve plant vigour and pest & disease tolerance

Over the last two winters, we have already planted(using improved ‘crosses’) circa 2000 ha of land jointly or owned by Comvita or land over which we have long term leases. This genetic improvement programme and large-scale plantations will bean ongoing feature of our business.

Our Board now has increasing confidence in securing our Manuka honey supply through plantations on otherwise poorly producing North Island hill country.  This plantation strategy will require significant capital funding to fully capitalise on IP that has been developed over the last 10 years of ‘in house’ genetic improvement. 

We have planted 2,100,000 Manuka seedlings throughout New Zealand since 2016 and we are working towards planting 13,400 hectares of Manuka nationally by 2023.

To capture the value from our expanding plantation initiatives, Comvita have invested in a state-of-the-art Apiary Management System (AMS).  All hives are continuously tracked and monitored to provides trace ability and transparency of our hives through to honey extraction.  This investment in technology has resulted in increased hive yield, efficiencies across our six bee-keeping operations and improved compliance reporting.

The innovative and efficient tool links primary apiary practices with today’s commercial reality, allowing beekeepers to record and monitor hive development to ensure all hives are placed where they can take best advantage of nectar flows.

Another new investment aimed at increasing production is the recent acquisition of Queen Breeding business, Daykel.  It is the only company in NZ producing Carniolan honey bees, a strain with both varroa resistance and good honey production. Good beekeepers attribute 90% of the success of the hive down to the queen. A poor queen equals a weak hive,which equates to less honey. To achieve high yields and varroa resistance,queens must also be reared from breeder queens that have been selected for these traits. Daykel is recognised by a number of experienced beekeepers as the number one source of breeding queens in New Zealand and one of the best in the world.

The acquisition of this Queen Breeding business allows the selection of queens best suited to the geographical location of our hives. This will be complimentary to our manuka breeding and plantation programme, which is also focused on producing plants matched to geographical location.

Ultimately, gaining access to Daykel Apiaries’ queen breeding unit and the associated improved queen breeding stock will enable 100% Comvita owned, Kiwi Bee Apiaries, to produce better quality hives which in turn will lead to more consistent and higher yields of honey.

Investing in honey authenticity research and technology to ensure a well-prepared laboratory, has enabled Comvita to adapt quickly to the MPI Manuka definition,ensuring we are in a good inventory position.

Do you see any risks arising from potential trade wars?

Country-of-origin labeling and free trade agreements can play a valuable role during trade wars,enabling consumers to be aware of which country they are purchasing products from, and providing firm frameworks for governments when they consider tariffs.

Comvita has worked with the Ministry for Primary Industries on the recent Manuka Honey definition, and industry bodies such as the Manuka Honey Appellation Society and UMF Honey Association to progress efforts to protect the term ‘Manuka Honey’as a country of origin mark.T

  • May contain projections or forward-looking statements about Comvita. Such forward-looking statements are based on current expectations and involve risks and uncertainties.  Comvita’s actual results or performance may differ materially from these statements;
  • Includes statements relating to past performance, which should not be regarded as a reliable indicator of future performance;
  • Is for general information purposes only, and does not constitute investment advice; 
  • Is current at the date of providing these answers, unless otherwise stated.



Categories: Australian Stocks, Featured, New Zealand Stocks

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2 replies

  1. Great interview, keep it up guys!

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