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Comvita announce half year result and $0.8m loss

Comvita’s net profit after tax (NPAT) for the six months to 30 September 2013 is a loss of $0.8m on sales of $43.4.

This compares to an NPAT in the prior half year period of $2.4m on sales of $45.4m. The result is in line with guidance given to the market on 11 October 2013.

Comvita Chairman Neil Craig said, "For the year ended 31 March 2014, we remain confident of exceeding the $103.5m revenue and $7.4m NPAT we achieved in the 2013 financial year. Against this background, we are maintaining our 4 cents per share fully imputed interim dividend in respect of the first half year. This will be paid on 20th December 2013 for those registered on 13th December 2013. The dividend reinvestment plan will not apply."

Second half sales and earnings stronger than first half Comvita CEO Brett Hewlett said, "At the time of giving our guidance on 11 October 2013, we provided a detailed explanation of why revenue and earnings are increasingly biased toward the second half of our financial year."

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"Comvita has historically had a year of two profit halves with the second half year sales and earnings stronger than the first half due to many of our product lines primarily being consumed in the northern hemisphere winter months. This effect is compounded by Asian tourists purchasing our products in New Zealand and Australia during the peak tourism season in our own summer. As we grow our retail infrastructure in Asia and with the Australian market continuing to be quite soft, the effect of this year of two halves is becoming more pronounced."

"While sales are down for the first six months on the prior comparable period by a little over $2m, shareholders should not read too much into this", says Mr. Hewlett. "For this financial year ended 31 March 2014, we expect in excess of 60% of our total sales (56% in 2013) to be in the second half of the year. Furthermore, we necessarily carry an overhead and marketing cost structure in place for the full year, which negatively impacts our first half earnings."

Mr. Hewlett said, "Trading conditions in most markets have been challenging throughout the six month period but in particular in the wholesale markets of Australia and the United Kingdom (where we have limited sales direct to the consumer), price competition was strong."

"Sales in Hong Kong, our second largest market after Australia, have begun to recover from the recent food security issues which heightened consumers’ scrutiny of all imported food products from New Zealand. We were hit particularly hard in the last two months of the six month period with respect to Hong Kong sales. Over the last two months, we ran a marketing campaign based around food safety which has reassured our customers of the quality and integrity of the Comvita brand as we enter the Asian high season of December through to March. We remain confident that sales in this key Asian market and other North Asian markets will be up to our budgeted figures over the second six month period."

Bolstering raw material supply and security "While it is imperative to grow our revenue and profitability for the full year, we also have a strong focus on the key strategic initiative of increased control over our raw material supply and costs."

"The announcement last month of the purchase of Tawari Apiaries in Gisborne provides a strong fifth hub for honey production in the North Island as well as providing a platform to build strategic, long term relationships with landowners in the East Coast region. Other Comvita wholly-owned apiary businesses are located at Kerikeri, Waikato, Whanganui and Wairarapa."

"We are on target this year to have in excess of one third of our honey supplies from our 100% owned apiaries. Our strategic objective is to own 50% of our own supply of honey. The balance of our supply will come from long term contractual arrangements and partnership arrangements, which we value highly. Honey supply partnerships with Comvita involve a long term supply contract as well as access to significant knowledge of Manuka plant propagation. This is in addition to volume and value enhancing apiary production methodologies which we have built up over nearly 40 years."

"Raw Manuka honey costs remain high and have impacted our gross margins over the last 12-18 months. There is mounting market resistance to continually rising prices which impacts sales generally. However, we expect this ‘farm-gate’ price pressure to ease in the coming year. Supply and demand will naturally come into balance with the strong honey harvest of the last and current, season. Anecdotally, honey production from the northern half of New Zealand this current season appears to be significantly larger than last year’s above average volume harvest. After two very poor harvests in 2010/11 and 2011/12, this will enable Comvita to build an inventory of honey as a risk mitigation measure. Comvita’s own ‘in-house’ production will also help our average cost of supply."

Further investments for growth

The investment of $8.9m in Comvita shares by Derma Sciences, our specialist woundcare partner, will be used to support the company’s apiary acquisition and harvest modernisation strategy, to ensure sufficient supply of medical-grade Manuka honey to meet the strongly growing demand for the Medihoney wound care product line.

In support of ensuring full control over quality and safety of any product we produce from Comvita, as announced on 25 September 2013, we invested a further $1m in world leading laboratory equipment. This will provide us with a competitive edge when it comes to consumer confidence and trust in our brand.

The opening of our new Comvita Tourism Centre, ‘Experience Comvita’ will be the focus of branding and sales for the very large numbers of mainly offshore visitors from cruise ships and organised tours. This joint venture with the Department of Discovery is new territory for Comvita with the objective not so much in the profit that will result from this operation, but brand recognition that will result in sales when visitors return to their home country.

Comvita has increased the planting programme of olive trees produced from our in-house nursery operation. More than 250,000 new trees are being planted at our new organic farm just west of Brisbane, Australia. These new trees will be ready for the first harvest of fresh olive leaf in approximately two years’ time.

The Company is also investing in a number of system projects that are important in building our global sales infrastructure. These are a Point-of-Sale till system for retail outlets to better capture sales and customer data; a Demand Planner system to further optimise production planning and inventory management; an Apiary Management System to enable greater control of our expanding apiary business network and a rebuild of our website to provide a more effective, global E-commerce platform. Total capital spend of these projects is approximately $6.6m and will be completed over the next two to three years.

Mr. Craig said, "We remain committed as a Board and Management to deliver both steady and growing income and dividends, and sustainable revenue growth."