Comvita 2018 Annual Shareholder Meeting – presentation

ANNUAL SHAREHOLDERS’
MEETING
18 October 2018

This presentation is given on behalf of Comvita Limited. Information in this presentation:
•Shouldbe read in conjunction with, and is subject to, Comvita’sAnnual Reports, Interim Reports and market
releases on NZX;
•Is from audited reports for theyear ended 30 June 2018;
•May contain projections or forward-looking statements about Comvita. Such forward-looking statements are
based on current expectations and involve risks and uncertainties. Comvita’sactual results or performance may
differ materially from these statements;
•Includesstatements 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 investmentadvice;
•Is current atthedate of this presentation, unless otherwise stated.
While all reasonable care has been taken in compiling this presentation, Comvita accepts no responsibility for any
errors or omissions.
All currency amounts are in NZ dollars unless otherwise stated.
2
IMPORTANT NOTICE

NEIL CRAIG
CHAIRMAN'S ADDRESS
3

AGENDA
4
1.Welcome / Apologies – Neil Craig
2.Chairman’s Address – Neil Craig
3.Chief Executive Officer’s Review – Scott Coulter
4.Reports and Financial Statements
5.Resolution 1: Appointment and Remuneration
of Auditors
6.Resolutions2, 3 & 4: Directors’ Elections
7.General Business
8.Afternoon Tea

SarahKennedy
Independent
Director
MurrayDenyer
Independent
Director
Paul Reid
Independent
Director
BrettHewlett
Independent
Director
NeilCraig
Non-Executive
Chairman
Luke Bunt
Independent
Director
Xin Wang
Non-Independent Director,
upfor election at
2018 ASM
BOARD OF DIRECTORS
5

•FY18 Financial Results
- Year in Review
- Key Financial Numbers
- Separate Supply & Brand business reporting
•Other Notifiable Events
- Plantation Strategy
- Manuka honey definition
- Purchase of 20% of Apiter
- Potential Acquirer of Comvita
- Strategic Direction Reappraisal
CHAIR ADDRESS
6

FY18 FINANCIAL
R ES U LT S
7

YEAR IN REVIEW
•After tax operating earnings of
$9.3m was a $14.8m rebound in
profitability on net sales
•Revenue growth was up 19% on
FY17
•Result well short of our earlier
forecast of beating our record
NPAT of $17.1m, as a result of
second consecutive poor honey
season
TOTAL SALES
$186m*
OPERATING PROFIT AFTER TAX
$9.3m
Figures are based on audited results to 30 June 2018.
$
$
$
* China JV sales elimination of $9.3m is deducted from this
NET DEBT
$92m
8

*Revenue includes other revenue from our apiaries and deferred revenue and royalties from Derma Sciences during FY17
**EBITDA: earnings before interest, tax, depreciation andamortisation
KEYFINANCIALRESULTS
•Sales increased 19% from FY17
•After tax operating earnings of $9.3m
•China JV
•Equity earnings – China contributing
$3.3m for 51% share of JV
•Intercompany elimination of sales at
$9.3m
•Fully imputed dividends of 6 cents
represents policy change (from payout
ratio of 40-45% to 25-30% of NPAT)
•Net borrowings of $92m mainly to build
inventory of Manuka honey
Financial results for
theyearended
30 June
2018
Audited
30 June
2017
Audited
Gross sales $186m$149m
China JV elimination of sales$(9.3)m-
Net sales$177m$149m
Total revenue*$178m$156m
EBITDA**$20.5m$19.8m
After tax operating earnings$9.3m$(5.5)m
Dividend per share (NZ Cents)6.002.00
Net borrowings$92.0m$62.0m
9

SUPPLY BUSINESS VS BRAND BUSINESS
•Supplybusiness caused a
$10.7m negative fall
against budget at an NPAT
level, i.e. instead of $4.5m
expected profit, we
recorded a $6.2m loss after
tax in the Supply business
•Underlying Brandbusiness
performed well in FY18.
NPAT improved from $1.1m
to $15.5m
2018 Guidance updated 30 January & 23 February 2018
SUPPLY & BRAND OPERATING NPAT SPLIT
5
-
(5)
(10)
OPERATING NPAT ($m)
20
15
10
2017 Actual2018 Guidance2018 Actual
Supply
(6.6)
Brand
1.1
Total
(5.5)
Supply
4.5
Brand
13.5
Brand
15.5
Total
18.0
Total
9.3
Supply
(6.2)
10

OTHER NOTABLE EVENTS
•Manuka plantation strategy
•Ministry of Primary Industries’ new
Manuka honey certification standard for
exports introduced
•Purchase of 20% of Apiterin Uruguay on
1 July 2018
•Potential acquirer of Comvita and due
diligence process
•Review of strategic direction resulting in
more targeted focus on Manuka honey
and Propolis
11

PLANTATION STRATEGY
•Significant investment made already by Comvita over
more than a decade in a Manuka breeding programme
and the agronomics of Manuka plantations
•Following a large number of commercial trials and field
testing, we now have 14 seed nurseries in different
geographic/climatic locations
•2,000 ha of hill country already planted in land owned, or
controlled by Comvita on a long-term basis
•We are now increasingly confident on the economics of
growing Manuka provided the correct location and the
Manuka strain bred for that location, is chosen for
planting
•Plantation will require significantly more capital which
may come directly into the Supply business, if the Board
chooses to do so
•The Board is currently exploring different capital
structures to fund our plantation strategy
12

MPI MANUKAHONEY DEFINITION
THERE IS NOW A LEGALLY ENFORCEABLE DEFINITION FOR
NEW ZEALAND MANUKA HONEY EXPORTS
•Clear, legally enforceable standards for Monofloral
Manuka honey will eliminate fringe operators
•Independent testing required by law for export
certification
•Additional complexity in both manufacturing and
procurement has increased costs particularly in the
area of laboratory testing of honey
•Comvita has been able to adjust quickly to new
standard
•Provides additional confidence to invest and grow
Manuka honey supply via plantations using Comvita’s
in house breeding programme of the last 12 years
•Loophole for domestic sales of Manuka honey needs
to be closed
13

INVESTMENT - APITER
•Propolis is the key supporting ingredient to Manuka, accounting
for circa $18m of revenue pa.
•There is a high level of consumer awareness in Asian countries
(particularly China) of the health and wellbeing properties of
Propolis, but our sales have been constrained by limited raw
material supply from New Zealand.
•Propolis is made by bees from plant resin of certain tree species –
with latitude and climate very similar to New Zealand. Apiter
produces high quality Propolis from Uruguay and has phenolic and
flavonoid levels similar to New Zealand produced Propolis.
•On 2 July 2018, Comvita completed the investment of 20% in
Apiter(Uruguay Propolis supplier), securing exclusive supply.
Purchase price USD$6.25m including USD $600k CVT shares.
•We expect to increase our range (from products already developed
by Apiter), now that we are not supply constrained for high quality
source material.
14
SUBSEQUENT EVENT – 20% INVESTMENT

POTENTIAL ACQUISITION OF COMVITA
15
•On the basis of prospective buyers’ credentials, stated
intentions for the business and non-binding, incomplete
proposal on price per share, we allowed a third party
(not currently on our share register) to undertake due
diligence on Comvita
•In negotiations that followed our profit downgrade on
16 April 2018, we could not agree on price and the
Board decided it would not recommend a sale of the
business
•A unanimous decision of Directors not to support a bid
at a lower price was made after confidential
consultation with the two largest Comvita shareholders
plus founder Alan Bougen.Without their support, any
bid would not have been successful
•All aspects of the proposal including the potential
bidder and proposal on price, remain confidential

•The Board and Management undertook a full
strategic review of the business post the potential bid
for Comvita not proceeding
•Result
•A much tighter focus on products from Manuka
honey and Propolis
•A lower overhead cost structure will result from
the tighter focus with increased in-market spend
in support of Comvita Brand and Manuka honey
and Propolis product ranges
•This more focused direction will lead to a sharper
focus on profit generation rather than revenue
growth from a more diversified product strategy
STRATEGIC DIRECTION

SCOTT COULTER
CEO REVIEW
17

•Leadership team
•Markets and operations
•Agricultural risk and mitigation
•Strategy
•FY19 Outlook
OVERVIEW
18

Ben Shaw
ChiefMarketing
Officer
SimonPothecary
Chief Sales
Officer
Colin Baskin
Chief SupplyChain
Officer
LEADERSHIPTEAM
JulianneKeast
ChiefFinancial
Officer - Acting
Kate Selway
Chief People& Culture
Officer- Acting
ScottCoulter
Chief ExecutiveOfficer
MarkSadd
Chief CommercialOfficer
19

FY18 REVIEW
MARKETS AND OPERATIONS
20

BUSINESS HAS RETURNED TO GROWTH
•Grey channel sales have
recovered strongly, year on year
by 58%
•Strategic goal – East/West
balance
•North American
breakthrough sales driven
by COSTCO and Amazon
•Same store sales growth in
Hong Kong 5% and Korea 10%
21
MOVING ANNUAL TOTAL SALES
(12 Month rolling)
$ MILLIONS
0
50
100
150
200
250

Figures are based on the year end audited results to 30 June 2018.
Other sales of $11.5m (2017: $18.7m).
* $21.4m represents the sales from Comvita to the China JV before elimination of $9.3m.
** $46m represents in market sales of the China JV which are not included in Comvita group revenue, as equity accounted.
GLOBAL SALES FY18 VS FY17
22
NORTH AMERICA
(Slide 23)
$26.8m
(2017 : $3.8m)
EUROPE
$8.7m
(2017 : $7.4m)
+17%
ASIA
$36.8m
(2017 : $32.4m)
+14%
CHINA
(Slide 24)
$21.4m
*
(2017 : $28.6m)
$46m
**
(Slide 11)
AUSTRALIA
$45.5m
(2017 : $31.8m)
+43%
NEW ZEALAND
$37.1m
(2017 : $33.1m)
+12%

NORTH AMERICA
R ES U LT S
•Sales grew to $26.8m
•Strong sell-through from newly established
relationship with COSTCO. Distribution in 100
stores in Canada and 200 of 500 COSTCO stores
in US
•COSTCO US in a high stock position of another
brand with impact in first half FY19
•Will be extending distribution into natural health
channels in both North America and Canada
•Hired new Sales Manager to drive growth in
this sector
•E-commerce sales in Amazon increased 53%
further strengthening our position in the US
market
23

CHINAJOINTVENTURE
R ES U LT S
•Sales inside China meeting expectations and
profit ahead of internal targets
- Sales $46m
- Share of earnings $3.3m
•Good expansion in e-commerce business
- growth from 38% to >50% of sales
•Strategy to grow bee products and leveraging
our brand strength in Manuka honey
•Consistent pricing between channel is
challenging. Retail, e-commerce, wholesale
and the ANZ ‘Grey Channel’
24

$132m
$
5m
$
7m
( 2017:$43m)
( 2017: $90m)
PERSONAL CARE
MEDICAL
$42m
PRODUCT SEGMENTS OF TOTAL REVENUE
( 2017:$4m)
HEALTHCARE
( 2017:$11m
including
royalties)
FUNCTIONAL
FOODS
71
%
23
%
2
%
4
%
25

•Invested for growth
•Strong inventory position
- 30 June 2018, $116m
- 30 June 2017, $88m
•Finishedgoods
- Consistent at $26m whilst sales grew by 19%
- Service level delivery remains stable at 96%
•Raw Materials
- $89m of raw material stock
- Second poor honey season has led to more
aggressive purchasing to ensure we have honey
to deliver FY19
•MPI changes to Manuka definition provides
new market opportunities
INVENTORY
60
40
20
0
140
NET DEBT INVENTORY
INVENTORY
NET DEBT
2017
2018
120
100
80
26
Millions

27
NEW WAREHOUSE
•Enables consolidation of warehouse operations across the business
•Storage ofhoney to optimisequality
•Solar power in line with companysustainability values

AGRICULTURAL RISK
AND MITIGATION
28

MANUKA HONEY
•Red dots on the graph are
where the harvest is more
than two standard
deviations from the mean
•2002 crop impacted by
Varroa
•2017/18 season only
marginally better than
2016/17
•Over the last 42 years the
trend line has been positive
on crop yield
29
Source MPI
25.0
15.0
0.0
45.0
40.0
35.0
30.0
NZ HONEY PRODUCTION KG/HIVE
20.0
10.0
5.0
42 YEAR AVERAGE: 29.3kg/hive
STANDARD DEVIATION: ±6.1KG(± 20.6%)
TREND LINE (DOTTED): 2016=31.9KG/HIVE
EXTERNAL FACTORS

Improved Product Mix
•Improved site selection post MPI changes
•Increased pollination revenue – stable
income stream
Cost structure moving from fixed to more variable
•Reduction in fixed term employees
(ongoing since 2017/18)
•Changes to temporary labourcontracts
•Less hives, but similar number of supers to
deploy if seasonal conditions allow
RESHAPING OUR APIARY BUSINESS TO MINIMISE
AGRICULTURAL RISK
30
FY18 ActualFY18 Adjusted
for reshaped
business
Reshaped
business
model
Kg per hive16.5*16.524**
NOPAT***($6.2m)($6.2m)$2.0m
Improved Product
Mix
$2.0m
Coststructure($2.0m)
Result($6.2m)($2.2m)$2.0m
*16.5kg harvest volume in FY18
**MPI Source –42 year average harvest 29.3kg/hive –24kg c.
1 standard deviation from the mean
*** NOPAT Net Operating Profit after Tax for Supplybusiness

31
•Additional honey supers can be added on top of the hive to
collect more honey when conditions are optimal
RESHAPING OUR APIARY BUSINESS
HONEY
SUPERS

STRATEGY
32

CHANGE IN STRATEGY:
33
Comvita’slong-term vision hasn't changed from
that of the founders, to look after the health
of the community by creating natural products
that work.
But right now we need to focus.
We believe focusing on a narrower product
range for the nextfive years will help us grow
ourprofitability faster.
"Our vision was to care for the
health of our community with
natural products that work."

•Comvita embraced diversification principally due to concerns
over long-term Manuka honey supply
•2016 strategy had a sales target of $400m made of:
•$280m core (Manuka honey and Propolis based)
products
•$120m of diversified products
•Core products still on track
•Ourdiversificationstrategyto deliver$120m of non-honey
products has not met our expectations
•We have resetour current strategy to focus on core products
and have adjusted the overhead structure of our business to
reflect this change
•Over the next five years we have modelled a lower sales,
lower cost business model that deliversgreater profitability
•Execution risklower dueto the focus on core products
•Manuka Plantations will deliver on foreseeable UMF Manuka
honey demand from our customers
CHANGE IN STRATEGY:
34

COMVITA STRATEGY: #1 IN MANUKA HONEY GLOBALLY
1. GROW SUPERIOR SUPPLY
•To secure more high
UMF honey
2. WIN WHERE IT COUNTS
•To be available where
our customers prefer
to shop
3. INVESTING IN OUR BRAND
•So more people know and
love our brand
35

36
STRATEGY
GROW SUPERIOR SUPPLY
•Plantations will provide
us the high UMF honey
we need to growour
business
•Balance of supply inthe
5+ UMF grade will
come from additional
hive growthin NZ
REGIONAL GROWTH IN BEEHIVE NUMBERS
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
800,000
900,000
198819891990199119921993199419951996199719981999200020012002200320042005200620072008200920102011201220132014201520162017
Total
Growth

GROW SUPERIOR SUPPLY
MANUKA PLANT BREEDING
•Plantations will provide us with the
ability to grow
•Focus on the breeding programmehas
been;
•To improve DHA quality in nectar
across different varieties while
extending and managing flowering
periods to mitigateagricultural risk
•Provide geographic and climatic
tolerances
•Improve plant vigour and pest and
disease tolerance
•Capabilityto eco-source seed
37

38
•We have 14seed nurseriesacross the country
with most ofManuka's genetic materialin
them to provide a broad base for cross
breeding
•Over 2,000 ha of Commercial plantationswith
overtwo million trees planted
•Plan to grow to 19,400 ha by 2027
•Scale upof nurserycapability underway
GROW SUPERIOR SUPPLY
PLANTING& PROPOGATIO
N

39
GROW SUPERIOR SUPPLY
PLANTATION SITE LAKE TUTIRA HAWKES BAY

40
GROW SUPERIOR SUPPLY
WILD MANUKA VS PLANTATION
•Small amount of canopy
•Minimal flower growth
•Short flowering season
•Extensive flowers
•Bush habit
•Longer flowering period
•Higher UMF

COMVITA STRATEGY: #2 WIN WHERE IT COUNTS
41
•To be available where our customers
prefer to shop
•Optimise channel profitability
•Global price harmonisation

•Increase our market investment
so more people are aware of
and love our brand
•Use our core ingredients for
innovation
•Build our digital and marketing
capability
COMVITA STRATEGY: #3 INVEST IN OUR BRAND
42

•We are investing in digital advertising and
social media to drive category awareness
and cement our premium position.
INVEST IN OUR BRAND
43

INVEST IN OUR BRAND
INNOVATION FROM THE CORE
44
•Investment in product development will
be with our core ingredients of Manuka
honey and Propolis

OUTLOOK
45

OUTLOOK
46
•Redefining the strategic direction has been a
strong focus of the Board and Management,
post the potential bid for the Company
•With our revised strategy, we are confident of
both sales and profit growth for the full year
•First half grey channel sales into China up on
2018, but negatively impacted by protracted
price negotiations
•North American sales slow due to inventory
overhang from another New Zealand honey
brand, hence we won’t see the ‘pipeline fill’ into
COSTCO that we saw last year
•Lowering of the fixed overhead in our Supply
business and in the Brand business provides us
with a lot of confidence for this financial year
and beyond

RESOLUTIONS
47

RESOLUTIONS
48
FORMALITIES
Reports and Financial Statements
RESOLUTIONS
•Appointment and Remuneration of Auditors
•Directors’ Elections:
•Re-elect Mr. Lucas Nicholas Elias Bunt
•Re-elect Mr. Murray John Denyer
•ElectMs. Xin Wang

GENERAL BUSINESS
49