By Jenny Ruth
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Tuesday 23rd May 2006 |
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Sharechat: You're aiming to more than triple sales in the next five years. Isn't that a very ambitious target, especially since sales haven't quite doubled in the last five years?
Comvita chief executive Brett Hewlett: CEOs sometimes make these bold statements. I'm very confident we can achieve that sort of growth. We're talking about $30% growth per annum to get to $100 million in 2010. About half of our growth will be organic and the other half will be from acquisitions. Acquisitions can be acquiring new technology or new product concepts or it could be acquiring an additional channel to market. It could also be more around securing a supply chain. It could be a variety of things. Also, looking back over the last five years, we've been developing quite a big pipeline. If you consider that 12 months ago we didn't own our UK distributor so we had limited opportunities to expand. We hadn't yet started in China. We were having teething problems getting our Japanese operation up and running. Japan's a very interesting market in itself. Most companies that enter there end up having problems. Japan's got a bit of a track record of killing a lot of cash. We started there four years ago and the last two years we've been making money. Japan contributed $250,000 to our bottom line last year. It's a very profitable market.
SC: And you decided to bypass the traditional Japanese distribution system?
BH: We had listened and learnt from other companies and learnt that trying to do it through a distributor was going to be too difficult. We've developed it ourselves and it's certainly paid off. Twelve months ago we didn't have that strength of distribution. We hadn't yet opened in China, which has opened up massive distribution opportunities. We're very confident we can grow. We will need to find good acquisitions.
SC: What good is a 10% stake in Derma Sciences?
BH: What it really does is put us in a partnership relationship with Derma as opposed to just a supply and distribution agreement. They do need cash. They were looking to do things. We could've made a bigger call on them but we felt that wasn't really necessary. I think New Zealand business people seem to have somewhat of a paranoia about minority stakes and partnership agreements. If you're interested in developing a relationship where you can have a more open relationship and shared plans and have an aligned thinking about development, 10% is as good as 50%. You don't have to control the company to get the outcome you want. We've got observer status on the board. We have a fairly high degree of influence or at least information on what the company's doing. The more I work with them the more I realised they're a very good company.
SC:How did you find Derma Sciences? Why not a bigger company?
BH: To some extent, that's (Derma's small size - it had a market capitalisation of $US9.2 million in mid-May) one of the appeals of it. We've had some discussions with some of the bigger companies. The reality is, they've very slow. They're not willing to try new things. They're very entrenched in the products they've already got. With something new, they want to see it works before they will try it. Derma is focused on the wound care business and they're at the top end of that market. They're very well placed to help us. Strategically, Derma needs us as much as or arguably even more than we do them. They're going to put a lot of effort to grow this business. They have a very good future. They're ambitious and they want to grow like we do. The CEO of Derma Sciences, Ed Quilty, joined the company about five years ago. He openly admits he came in with the ambition to clean the company up and sell it. When he came in, he realised there were very good opportunities for growth so he changed his strategy. He's an extremely competent and well-connected CEO. He's brought in a new management team and cleaned out the less profitable parts of the business. He's opened a production facility in China so they now produce the cheaper, low end products there and he's focused their Toronto manufacturing plant on the advanced higher end stuff.
SC: Why did Comvita pay so much for its initial stake in Derma Sciences?
BH: Our initial investment of $US500,000 was really an investment in our brand. That money is pegged to the marketing and the launch of the new product. There's a constraint on how Derma Sciences can use that money. It's a very good deal. The money is to be spent on promoting our product and in return we get a block of shares. We also get an opportunity to buy another $500,000 worth of shares next year. I think the share price is on the move with the latest acquisition they've made when they've bedded that acquisition down and showed they can make money out of it. I think we will see some good share price growth. (Comvita paid 75 US cents a share and its option also allows it to pay 75 cents a share, the level the stock was trading at in mid-May). The second investment we made there was really an opportunity that Derma brought to our attention. They were looking to raise capital and make the acquisition of Western Medical. They needed to raise $US6.5 million and that was a significant amount for an over-the-counter company. It's typical that they would offer it at a discount (60 US cents a share)
SC: How long do you expect it will take to get (US) Food and Drug Administration (FDA) approval for the manuka wound care products?
BH: We've had some feedback from the FDA already. We're very confident it will be going through. They've just asked for additional information. We're aiming to launch the products in the US in September. We would certainly hope and expect to have FDA approval before then. We would expect to have it by August. It's probably worth making the comment that the products are already CE certification (Conformité Européene, the European Union equivalent of FDA approval). It's more of a routine process. Rather than will it ever pass or not, I don't think we have any doubt it will pass, it's just how long will it take.
SC: How are you going to secure appropriate supplies of manuka honey to cater for the planned growth? (The annual report notes that New Zealand's current crop of the right quality manuka honey is enough to produce $160 million worth of wound dressings at wholesale prices.)
BH: What makes us different is we're really looking to secure value. We're not just buying pots of honey to put on the shelf. It's more about quality than quantity of honey. We're working very closely with beekeepers. The beekeeper community has seen us as credible. If you were a betting man or woman, you would back Comvita. We work very closely with them to get greater quality from their hives and the honey we're receiving. The value aspect: the people competing with us to purchase the honey can't add the value we can. Take the direction we're taking in wound care, for example. A 25-gram dollop of honey goes into a typical wound dressing. As a result, we can get more than double the value of that honey compared to putting it in a pot, even if we were selling it at a premium. It is all about creating value and that's to the benefit of the entire industry. In the company's history, in 2002 we had a terrible season and the whole industry was grappling for stock. We typically carry about a year's worth of stock. That's a cost of doing business in natural products, I guess.
SC: Why did you purchase your UK distributor?
BH: We had a distributor we had been working with for something like 20 years. They had done a fabulous job getting the name established in the market, but they were a very small organisation and under-resourced. They had no ambitions to change that. They had no real ambitions to step outside of the UK. We wanted to grow much bigger and faster than they did. It was a very amicable agreement we came to. We could've waited until the distribution agreement expired in another two or three years but we thought it was prudent to get in there and make it happen. A distributor coming to the end of their agreement and knowing they weren't going to be renewed isn't much use to you. It's also about capturing value. There are margins being made in the UK that I think would be much better in the pockets of Comvita's shareholders.
SC: Why was the second half of 2005 so much stronger than the first half and than the second half of 2004?
BH:Probably a combination of things. We're growing fairly rapidly and there's always going to be a lumpier growth curve. You're not going to get a 50/50 split. It's more like 40/60. You get new projects started at the beginning of a fresh year and they don't get going until towards the end of the year. It's worth noting that 2006 will be a similar year. We've already signalled to the market that the first six months is probably going to be fairly flat in earnings compared to 2005. We're growing but we're investing. The benefits of those investments don't really start to kick off until the year unfolds. The other impact is the foreign exchange rate.
SC: Why were New Zealand sales down in 2005?
BH:Predominately, it was hugely impacted by tourism numbers here in New Zealand. About 50% of our total sales in New Zealand are to the Asian community. A large proportion of that is stimulated by Asian tourists coming here or people buying gifts to send to people back home. It's hugely impacted by the type of Asian tourists coming to New Zealand. The Japanese and Koreans have dropped off significantly in numbers. Predominantly, the Asians who do come are on packaged tours and they just don't have the income. One of our biggest clients is Regency Duty Free and they have also felt it. As a result, they closed their Christchurch store which was one of our biggest outlets. If you took those out of the equation, all other sectors of our New Zealand business actually grew last year.
SC: Why did profitability decline in Asian and Australia in 2005?
BH: It's mostly around investment. We've put quite a lot of people into Taiwan, for example. We've beefed up to support China and Australia. We've put a lot more people in and marketing. There are foreign exchange impacts there as well, both in Asia and Australia, US dollar impacts. The underlying profitability of those two markets is still very, very good.
SC: Why was sales and profit growth in the UK and Europe so strong in 2005?
BH: They (the distributors) certainly put in some additional effort once they thought they could sell the business. There was quite an impetus. We have two distribution channels in the UK. We have the Medibee brand - we acquired that brand when we bought the company Bee & Herbal. That's distributed by Optima in the UK and they had a fantastic year. They've grown very rapidly, mostly in grocery and health care chains. That's the underlying factor in the UK and why we're so excited to have it back under our control. We also did have one month of sales from the ownership of our distributor.
SC: Can you quantify the impact the high New Zealand dollar has had on the company and how its recent fall will benefit the company?
BH: The past three or four years have been pretty tough really. We've been working against the flow. The fact that Comvita has been able to grow in a very tough foreign exchange market is really testament to the brand and to the people out there pushing it. To quantify the impact is tricky to do because there are so many ways of looking at it. In 2005, you could say it was about $200,000 off the bottom line. Had we not had a very good hedging policy, it would've been much worse. This year we still maintain a fairly robust hedging policy. We're something between 50% and 100% hedged 12 months forward. We don't like to go much further than that. The first half of this year we still have hedging contracts in place. We won't get the full benefit of the fall in the New Zealand dollar in the first half of this year. As the year unfolds, we will start to realise more. We're buying forward now at some very good rates.
SC: What percentage of 2005 sales was from non-bee products?
BH: Less than 5%. We do have a number of products which are combination ones like propolis and black currant. We tend to put our bee products in with just about everything we put on the market. By and large, it's less than 50%. As we've stated, we would like to try and grow that to 25% within five years.
SC: Why is the company wishing to diversify away from bee products?
BH: A very important point to make is we're not diversifying away from bee products, it's as well as. Bee products are still very key to what we do. We have enormous growth potential with the range of bee products we have today. We have a technical team that focuses on that alone. It's about spreading our interests. We're focusing on where we source our products. We're focused on four key health solutions. Anti-inflamatories are where we're focusing on. We will source our raw materials wherever it's appropriate to give us that functionality. We're at a very interesting turning point. Our thinking, our focus is back on health solutions. We're on a discovery path. We're talking to a lot of universities and crown institutes to tap into a wealth of research ground available in New Zealand, working on natural sources, bio-ingredients and looking at a unique position for ourselves.
SC: What sort of products will they be?
BH: New Zealand has a wealth of strengths in the dairy industry. We would like to tap into that wealth of experience. We have some products on the market like colostum and probiotic, a living bacteria. There are bio actives in the marine world and we're in talks with NIWA to discover some of those. There's the horticultural areas, fruits and vegetables, there's a wealth of ability there in the New Zealand research world.
SC: Why was the company able to increase its prices in 2005?
BH: I think it's brand basically, the Comvita brand attracts a huge premium offshore when stacked up against other products and we don't seem to have any problem selling it. I think there are some economies of scale coming in. We're able to realise some efficiencies in our factories. We can start to things cheaper and better. Overall our margins are increasing - it's not just about increasing prices.
SC: Will the company's wound care sales continue growing at the same rate as in 2005?
BH: It's from a small base. We're still foundation building. We're getting good traction in the UK and Asia for our products and soon, we hope, from the US. 2007 and 2008 is really going to be the big growth period for us. We're introducing new products now that will be rolling out next year as well as getting the ones we've got onto the market.
SC: What attracted you to your job?
BH: The opportunity. I had come home. I wanted to come home to New Zealand and re-settle here and I spent a year and a half doing consulting work. What attracted me to Comvita was the opportunity. The skills and values of this company are fantastic. When I met the board and some of the key team members, I fell in love with the place. It wasn't a very difficult decision.
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