Earnings Call: H1 2020

Aug 26, 2020

Good morning, ladies and gentlemen. Welcome to the twenty twenty Interim Results Presentation for Health and Happiness International Holdings Limited. Joining us today is Mr. Lor Fei, Chairman Ms. Leticia Gagne, Chief Executive Officer Mr. Jason Wang, Chief Financial Officer and Ms. Joy Tsai, Investor Relations Director. Kindly note that this webcast is audio only and there is no video. During today's presentation, Mr. Law will first give some opening remarks, after which Ms. Garnier will present the group's business review and outlook for the rest of 2020. Following this, Mr. Wang will present the group's financial review for the interim period. Management will then take questions after the presentation. However, at any time, you may submit a question by text by clicking the question mark symbol on the left side of the webcast panel. Kindly submit all questions in English. Once again, you may submit a question at any time in English only by clicking the question mark symbol on the left side of the webcast panel. I will now pass over to mister Law Fei for his opening remarks. Mister Law, please. Good morning, everyone, and welcome to H and H Group's twenty twenty h one results briefing. 2020 has so far been a very unpredictable year. Meeting each other through the conference call instead of face to face, it's become the new norm. In this environment, our business model has still proven to be adaptable and agile, which has helped us to go through the global COVID nineteen pandemic and proactively respond to changing consumer behaviors, leading us to adapt new ways to market our products and interact with our consumers. In the 2020, we still achieve healthy revenue and adjusted net profit growth. Although this is not a high revenue growth result, we still see a lot of opportunity to grow going forward. I will highlight four points as follows. Number one, during the global pandemic, we see a big opportunity from the increase in demand of our immunity related supplements across both ANC and BNC. We see an accelerating trend of online purchase, which has translated into our robust growth of our online sales across the business in China and globally. Number three, we see further room to growth in offline sales space, which remains a critical part of our business. Despite the presses faced in the first half of this year, we continue to expand our distribution and penetration in China, Asia, and other new markets to make our products now brands more visible and available available to consumer. Number four, at the same time, the market segmentation trend is continue and is creating sales fast growth new categories, including, for example, goat infant formula, infant nutrition supplement, and beauty from within supplements. In the first half of this year, through achieving a profitable growth, we have also been able to maintain a high cash conversion and reduce our net debt leverage. As a result, we have decided to pay an interim dividend 50% of the net profit. Now I will pass it over to our CEO, Alicia Garnier for the detail. Thank you. Thank you, Faye, and good morning or good evening to you all over the phone. Thank you for joining the presentation today. The first half of this year has indeed been very unpredictable on many fronts, but I think you see through our results that the business has responded proactively to all these changes. And our productivity during the initial outbreak at the beginning of the year and what has become a global pandemic throughout the second quarter shows our ability and our ability to respond to the change in consumer needs and of our consumers and our customers. And importantly, we've been able to also enable supply continuity for our business for the first half, which we think is a good performance. As you will appreciate as our part of our ability to embrace change that we have changed the way we report to you and also the way our presentation looks like. So I'm going to refer going forward to the presentation that I hope you have in front of you. We've tried to make information as clear and transparent as possible, also providing you with what we think are the latest consumer trends that we need to embrace to be able to capture growth going forward. So I am now referring to Page four of the presentation, giving you some highlights of our financial performance. We have achieved profitable growth in the first half of this year despite COVID-nineteen challenges. Our first half revenue has been 2.6% year over year like for like with an adjusted net profit up by 8.9% on a like for like basis again, which means that as Fay mentioned, this is not a high growth, but we still have been able to grow in the first half of the year and more importantly to deliver high single digit net profitability growth just by spending more smartly, adapting the way we go to our consumers, the way we trade with our partners and improving our efficiency. So this 8.9% adjusted net profit growth is I think the reflection of us operating more efficiently as a business while still being able to deliver top line growth. I think it's important to highlight the second point that we have seen double digit growth in the China market, which is our core business with 12.8% year on year on a like for like basis, with China now accounting for 82.6% of our total group. Important to highlight that our immunity focus ranges both across B and C, Baby Nutrition and Care and B and C, Adult Nutrition and Care, have grown really fastly over the first half of the year, of course as a result of the pandemic, but also as a result of our ability as a company to have the right proposition for consumers. And as a result, 5.4% increase for immunity related products for BMC and 48.5% for AMC respectively. Our IMF revenue in China has come down at minus 3.5 due to a slower offline traffic, but at the same time our online revenue has grown by 32.8%, which we think is an important performance in light of the digitalization of sales in the China market and globally. So now online sales in China are accounting for 15.5% of our total IMS sales, which is a big uplift versus what was last year, 11.3%. Important also to mention that our Swiss China revenue has grown 27.9%, which demonstrates our ability five years after the China sorry, the Swiss acquisition to be able to move actively into the Chinese market and to activate the brand into China and still five years later to deliver strong double digit growth in the China market for Swiss. From a financial perspective, because of these results and the way we operate as a business model, we have been delivering strong operating cash flow with an increase of 24.5%, which I think is an important performance to highlight because in terms where a lot of things are being disrupted the market, we're still able to keep high cash flow generation and high cash balance, which Jason will highlight later, which puts us in a strong position to continue to invest for the future and have a healthy financial balance sheet. At the same time, we've been able to continue to deleverage our balance sheet with a net leverage ratio down to 1.38 times. And as Faye just mentioned, in order to reward our shareholders and in light of this strong cash performance, we have decided to pay an interim dividend of 50% of our net profit for the first half of this year. On the next page, Page five, we have given you a bit of a snapshot on the largest challenges we have faced from our business perspective in the first half of this year and also the main growth drivers of the business. So the two challenges that we'd like to call out first is the offline traffic down for IMS industry in China, particularly in the second part of this first half, second quarter, which has not fully recovered and as a result has impacted our IMS sales in the China market. The second one is related to our Australian market, which is down in the first half of the year because of the pressure we have faced from the Daigou related channels. So those are the two main challenges. We'll come back to them. At the same time, we have seen positive growth signals and drivers for the business. The first one, a sharp increase in immunity related demand from consumers. Second one, online sales and digitalization of communication with consumers, which is also has translated into an increase of our online sales in China and other markets. The third one is the increasing demand for fast growth new category that we will speak about later. And the last one is an operational data but important that we have been able throughout the first half of the year to ensure continuity in our operations to be able to get products to consumer, to the market and manage also our cost of goods. The next three pages are quick snapshot on consumer trends, emerging consumer trends that we have been foreseeing for some time but have really materialized and accelerated in the first half of this year and that we think are bringing new opportunities for the business. The first one is consumers becoming more health cautious. The next one on page seven is consumers becoming more digital, both from a purchase online channel, but also from a digital communication standpoint. And the next one on page eight is consumers going more green and more natural. So as a result, on page nine, us as a company, we need to capture those trends. And we've been doing a lot of things in the first half of this year to continue to promote preventive health to consumers and give them the right products. So that means launching products with immunity related claims, also enhancing our proposition around protection and immunity for infant formula and our infant probiotic, etcetera. On the online and digital communication standpoint, accelerating our online sales and ensuring that we have a direct consumer and communication with the consumer on digital channels and social media channels has been a key focus for this first half of the year and has translated into more consumer engagement and a driver of our online sales. And from a natural and sustainable perspective, for those of you who follow the company for some time, you would appreciate that we've been for a long time talking about this natural trend of consumer being more natural and also looking at sustainable brands, sustainable products with more sustainable packaging, with more purpose led proposition. And I think we are very well positioned as an organization to answer those trends and accelerate our movement towards a more natural and more sustainable offering. On page 11, you've got a snapshot of our overall performance as a group. So it's obviously a mixed performance. We've gone double digit in China with 12.8%, which is a strong performance. But the main challenge we have faced is obviously in the ANZ region where we have gone down negative revenue 35.8% as a result of the Daigou downtrend. Our Rest of the World market has also negative sales of 4.9%, mostly as a result of the Hong Kong SAR sales drop that I'll come back after a while rest of other markets actually performed on the positive trend. As a result, China remains our number one market with 82.6% of our total revenue and our ability to continue to drive growth in the Chinese market going forward with the resilience that China has shown beyond the COVID-nineteen pandemic will be key for our success going forward. I'm now on Page 13 to give you a snapshot of our BMC performance. So obviously mixed performance again with IMF on the downtrend for the first half of the year, but a very strong performance of our probiotic supplement business as a result of this immunity demand on the upper trend and also our leading position in the infant probiotics, which has helped us to capture most of this demand. Also a strong performance of our other pediatric products, including baby diapers, as well as our Good Groupe products both in France and in China. I'll now dive into our performance by geography. So I'm now on page 16. Now zooming on the China market, which again is our core market. So again, point 8% growth. We can see that the growth is actually mostly contributed by our ANC Nutrition and Care segment, which has grown 27.9%. I'll come back to Swiss China and why China has grown and what we're doing in China to accelerate the brand. But obviously both segments have grown with an even stronger growth on the A and C side of things. I will now spend a bit of time on B and C segment. I'm now on Page 17. So Baby Nutrition and Care segment. On the IMF side, which still represents the largest contributor to our Baby Nutrition and Care segment, the fact that the traffic has not fully recovered on offline post pandemic in China in the first quarter has impacted our revenue and also the timing for our channel expansion. When we were together in March, we explained that we want to continue to penetrate into more baby stores and increase our distribution into the baby store channel in China. But as a result of this low traffic offline, we've been really keen to focus on nurturing the business we have with our existing stores. As a result, we have delayed our further expansion into channel. We have now resumed that towards the end of the first half and we'll carry that distribution going forward in the second half. At the same time, our online sales has grown really strongly, which we think is really important for us to capture the growing demand from Chinese consumers on the online channel. I already spoke about the probiotic supplements and the Dodie diapers segment, which have grown quite nicely with our premium proposition and our super premium proposition in the diaper segments. We now own 11.3% market share of the baby diaper segments in China, which is one of those fast growing categories that we need to accompany. We have also launched an infant nutrition range of supplements on the back of our strong infant probiotic supplement proposition leveraging the BioThyme brand with its immunity and protection brand positioning. We have launched calcium VD and DHA supplements and have also leveraged our network to display those products around our different sales channel. A snapshot now on page 18 on our IMF performance. Our market share has hold pretty stable in the first half of this year. Obviously, a mixed performance in terms of different channels that you can see on the next page are e commerce sales. Market share has grown from 2.2% last year to 2.8% in the first half of the year. But still in e commerce, we're still ranking number 11. So our ability to continue to grow faster to capture this huge e commerce opportunity will be key for the business. At the same time, baby store is still our number one channel and we need to continue again through more store penetration to increase our market share in this region. You also see on Page 18 again that goat's milk infant formula is now accounting for 5.8% of our total IMF sales. There is no like year on year comparison to last year because we actually launched that series in the second part of last year. But our ability to have not more than 5% of our total IMF in the GOAT segment is promising. And we see still some strong growth opportunity to as we go forward into this new emerging category of IMF in China. On page 20, we are now on ANC China, a very strong performance. We are quite happy about this performance because again, years after launching SWISS into China, we're still seeing very strong growth as a result of a growing brand awareness, but also as a result of an online business and the demand from consumers for VHMS on the online channel on the upper trend. And Swiss is still today the number one brand online for VHMS vitamin supplements in the China market and we'll continue to grow that business. We have confidence that there is still a lot of opportunity ahead in light of this immunity demand to grow China Swiss business going forward. Obviously, on CBEC, cross border e commerce, but beyond that also into more channels, including normal trade online and offline. On Page 21, in the Australia and New Zealand market, we have definitely continued to face challenges. We had highlighted that during the the first quarter results announcement, but we're still facing pressure from the Daigou related channels as a result of the COVID pandemic and the lockdown, the fact that the Australian border has been closed, obviously no Chinese tourists in Australia and Daigou stopping trading and therefore this has impacted our China related sales in Australia as a result. That being said, our domestic local consumer demand has remained stable and we see some positive growth in some channels where domestic consumers shop more including the grocery channel which has delivered robust 40% year on year growth and also very fast growth on e commerce just as a part of that global trend that we mentioned. So obviously from a small base, but Australian consumers are equally shifting online to buy more supplements. So we are capturing these additional opportunities to try and enhance our domestic demand. Quick snapshot on the rest of the world's performance, again, 4.9% overall, but mostly as a result of the sales decline we have seen in the Hong Kong SAR, which we report as part of our rest of the world market. Hong Kong was the first market we developed outside of Mainland China a few years ago and obviously very much linked to Chinese Mainlanders traffic and as a result of the COVID pandemic also more Chinese tourists coming to Hong Kong, which has impacted ourselves. But despite that Hong Kong weak performance, the rest of the world, including France, including Europe, and other regions are overall still growing. And so that's promising because that's still part of our global efforts to expand our brands into more territories. I would just highlight two parts because otherwise if we have to talk about each market one by one, it would take more time although we are very passionate about those developments. But Buys Time in the French market has gained the number one position in French pharmacies for organic IMF only three years after its launch. We're very proud about this performance and it has continued to perform quite well throughout the first half of the year. Despite the COVID disruption, we have still continued to carry our plans to launch SWIFT into more territories. And I will call out again the launch into the Indian market, 100% digital and e commerce driven and also entering to the Malaysian market as part of our strategy to move into more markets in Southeast Asia. Quickly on Page 23, again, a lot of investors have been concerned more from a global standpoint on how a company during a global pandemic can maintain a continuity of operations. And I think we have demonstrated during the first half a strong ability to navigate through a lot of supply chain challenges to keep our supply chain on track, control our cost of goods sold, make sure we get products to the market and ensure all the hygiene and health measures that are necessary for our production manufacturing facilities and our supplies to operate normally. So we haven't seen any major disruption to our operations, which we think is an important performance to highlight. I'm now skipping on to page 26, just to make the point here that, you know, beyond the pandemic challenges as a company, we need to keep our long term ambitions. So we need to demonstrate agility on the short term to adjust the way we do business. But at the same time, our long term strategy and our long term commitment to sustainability isn't changed. And without going through the details, would call out as part of our ambition and our goal to become a B Corp certified organization, we spoke about that before, we have just got the certification of our first brand entity, Good Grou, our baby food entity in France, which has just been certified B Corp last week. And we are very proud of this performance. It's also a great encouragement for the rest of the group and our teams across the globe to get to that certification. I'm now on page 27 to provide a quick outlook of how we think the rest of the year will look like as a total business. Obviously, are still aiming at continuing to drive profitable growth at the group level for the full year despite the challenges brought by the pandemic. And we obviously haven't seen the end of this pandemic as we sit now. And we think it will continue for a while. So we need to be ready. But at the same time, we think that we'll still be able to deliver a profitable positive growth for the total year as we stand out now. We will continue to accelerate digitalization of our sales and communication with consumer, but at the same time, as Fay mentioned at the very beginning, our ability to continue to grow off line, which is also an important part of our business, both in China and Australia through penetrating into more stores, capturing more channels is equally important. So we think through these measures, we'll be able to gradually recover from an IMF perspective in China and also with domestic demand in Australia. We'll continue to see pressure from our Daigo business in ANZ region throughout H2. This is obviously going to last for a while as Australian borders are not reopening. And again, we will refocus our efforts in the A And Z Region on the domestic market to make sure we capture growth there with the local consumers. As a total business, again, we are committed to continue to deliver healthy cash flows and continue to work on improving our leverage, which is we think now at quite a healthy level. So we'll continue to be dedicated to improve our balance sheet and demonstrate a strong financial performance and financial health. On Page 28, as part of our strategic initiatives around H2, obviously growing and continuing to deliver growth out of China business will be very important both for B and C through distribution extension, through launching new products both for IMF and other BNC products to help us get into more stores and fuel the growth of our business as part of the initiatives we are working on. And on A and C, beyond growing CBEC, cross border e commerce, we are going to accelerate our normal trade expansion both offline and also in normal trade online through more products including new blue hats upcoming in the next few months. Again, transforming our A and Z business through more focus on the domestic consumer and more focus at the group level both in China and outside China on driving digital channels and engagement with consumer in light of this new norm. I will now pass it on to Jason to present to you our financial performance for the first half of this year. Thank you. Thanks, Alicia. Good morning, everyone. So now let's go to page 30 about additional financial information. So in this page, as you can see, as I just mentioned by, Fahey and Leticia, we managed to achieve the, moderate revenue growth in the first half despite the COVID challenge and also to maintain a stable adjusted EBITDA from last year. Also, I want to highlight here is that our net profit on adjusted basis increased by 8.9%, thanks to the continued efforts to improve our finance cost and tax expenses. The next page, 31. As you can see, the company has managed to maintain a stable gross margin despite the product mix change and also mark mix change in in the first half across the categories. But from the Koto Group portfolio point of view, this is a quite stable gross margin, which can enable to have the sufficient resources for the investment into the marketing channel and new product development with this the profit generated on the gross gross profit. The next page 32, you can see the snapshot of selling and distribution expenses development. So in the first half of this year, our total group selling distribution expenses as a percentage of sales reached 38.7%. Even though it is 1.3 percentage points higher than the the first half of last year, but as you may recall, the overall product mix and market mix are quite different from the the first half of last year. So, therefore, in order to help you to better understand the overall development trend, on the right hand side of the page 32, we listed the full year basis as well because this is we see is more comparable when you look at the overall s and d ratio trend development. And as we indicated during our FY nineteen annual results communication, the 40% of SMD ratio reached last year is really the the peak level for the group. And down the road, we target to gradually bring down this ratio. So now if you look at the the actual development in the the the first half, definitely, this trend continues for this improvement. And if we look at the breakdown between the PNC and ANC, so clearly for the PNC, this improvement continued in a very clear way. While for the a and c, the ratio is higher than the the last year, but this is mainly due to the lower than expected sales of the a and z market. But if we look at the ANZ China market itself, which is the largest market within the overall ANZ portfolio, this SMB ratio got improved by two percentage points in the first half. So therefore, this kind of key focus of the the whole management team to drive for the spending efficiency improvement for both E and C and ANC. Next page 33, you can also see the breakdown of S and P ratio between the new market, new initiatives, and also the investment into the existing markets and existing categories. As you may also recall, the financial control principle we indicated before that the investment into the new market and new categories should not exceed 10% of the total SMD expenses. So from this page, you can see this principle was well maintained both last year, but also in the first half of this year. So therefore, we can strike a right balance that on one hand, we ensure the sufficient investment of the resources into the new market and new categories. But on the other hand, we still maintain a healthy margin level for the group total. Next page, 34. Also, you can see the offer admin expense development in the the first half. So it is the same direction for the overall spending efficiency improvement. As you can see from this page, in terms of both absolute value and also the percentage of the sales, this admin expenses efficiency got improved in the first half of this year. Next page is 35, then let's look at all the balance sheet position. So overall, we have maintained stable working capital turnover. But, of course, as the you may already noticed that offer inventory turnover days then at a quite high level in the first half of this year. So if we look at the the breakdown for the BNC, the inventory turnover days actually got improved from one hundred thirty nine days last year to one hundred thirty two days now. And as we also indicated before, we see based on our overall supply chain model, the normalized range of turnover days for BNC shall be in from one hundred thirty to one hundred forty days. So therefore, the current level is right within this range. As for the turnover days of ANC, it increased from two hundred fifty days to two hundred ninety eight days now. And this is mainly due to two reasons. One is the need to build up the safety stock during the COVID challenge in the first half. And secondly, this is due to the lower than expected revenue growth for the end of market in the first half. So it is the a a key well, the key focus is for the management team right now to further drive down the inventory turnover phase for for the overall product portfolio. But just want to highlight here is that despite this high inventory turnover, the quality of the inventory actually got improved in the first half. So that the overall slow moving provision of inventory as a percentage of the grow overall growth inventory decreased from 8.4% last year to 6.5% now. So definitely, this is a clear sign of the improvement of the overall inventory quality. Now let's move to the next page 36 to look at our cash flow and liquidity position. So as the post and then Tisha mentioned, thanks to the high cash generation of our business model, We managed to achieve 1,200,000,000.0 RMB operating cash flow in the first half, which is 25% increase from last year. So that's our liquidity position at the June reached 3,400,000,000.0 RMB. So this is a significant increase of the overall liquidity resource we have in hand. And this strong liquidity position can enable us to have the sufficient resource to drive the further business growth going forward and ensure also the steady return to offer shareholders. Next page, 37, to look at our overall capital structure. So as you know, we successfully completed the refinancing of our two debt instruments last year. So now we have these two long term debt instruments. The senior notes will mature in October 2024, and term loan will mature in November 2023. So therefore, the company does not have any immediate pressure of short term debt obligation. So this is a quite healthy and long term capital structure we have in place now. Also, thanks to this successful refinancing, we managed to significantly reduce our finance comp in the first half. So versus same period same period of last year, this is a reduction of over 19%. Also, the with the improvement of the overall liquidity position and stable EBITDA, offer net leverage ratio also came down further from 1.65 times last year to 1.38 times. So if you recall, four years ago, shortly after the the Swiss acquisition, the company's net leverage ratio at that time was well above three times. And over the years, with this continuous generation of the the cash flow, we managed to bring down now to this very healthy 1.38 times. So going forward, we will continue to maintain this profitable growth, healthy cash flow, strong liquidity position, as well as a stable capital structure. And, also, we will maintain a continuous dividend payout as a steady return to our shareholders. Thanks. So this is a quick snapshot of our financial position. Thank you, Jason. We are now ready to take questions from the audience. As a reminder, you may submit a question by text by clicking the question mark symbol on the left side of the webcast panel. Kindly submit all questions in English. I will now pass it over to Ms. Joy Tsai, Investor Relations Director to commence the Q and A. Good morning, everyone. I already got some questions from several investors. So the first question is from Lin Wu from Bank of America. Her first question is mass competition. How should we think about competition versus strong local players as we penetrate into lower tier cities with our newly registered domestic MF series? And what measures are we taking to differentiate ourselves and gain shares from the incumbents in these markets? And her second question is on the gross margin side. So for the first half this year, we saw pressure from negative product mix, especially for BNC. So would the pressure continue into 2021? And what is our outlook for group levels GPM in the coming two to three years? And what would be the drivers for the margin expansion? Thank you, Joy. It's Leticia here. I propose to answer the first question and to have Jason answer the second question, if that's okay, which is more of a financial question. On your first question on the IMF competitive landscape and how we can find growth drivers in light of this competitive landscape, indeed, it's a very competitive market. The market has always been very competitive. And definitely, the premium and super premium market is still growing. So that's, I guess, the first element which is important to highlight is there is still growth to capture, particularly in the super premium segment of the IMF market. What we need to do and what we have needed to do first to be able to grow online, which I think we have been able to demonstrate that during the first half and we will continue to put more efforts into driving growth on the online channel, definitely not through price competition because we hope to see some players entering into more heavy price promotions, which is not part of our DNA or way of doing business. So we absolutely have to play on e commerce through driving high quality content, working strategically with the platforms, putting more marketing efforts online, which we have done throughout the first half and we will continue to do so during the second part of this year. The second very important driver for us to gain competition and competitiveness in the offline market is to be able to increase our penetration because compared to our average rate of penetration of distribution versus strong domestic local players, or even very established international players, are still not present in enough baby stores. So we need to gradually increase this distribution. And that is something we were planning to do in the first half of this year gradually, but because of the pandemic and the slow traffic resuming offline, we have put these efforts on hold to try again and maintain our share with existing stores and maintaining their business before expanding further. So we are now resuming those efforts. And that goes along to your next question because channel expansion goes along with product strategy. We need to put together the right offering for this distribution penetration. So when we talk about expanding distribution, we look more into going into tiers four and five cities, expanding to more smaller tier cities where we are less present now. And once we do so, obviously, we do it both with our imported super premium proposition, but also as you just mentioned with some of our local made SKUs that we now have three registered from our local factory in Changsha. We used to have only one. We got two more SKUs in July. So we are now able to carry forward this distribution plan for these new series. And we are expecting to get another important one towards the end of the year if things go smoothly. So along with our enhanced infant nutrition supplement range with these new SKUs and also with new trade and channel incentives, we are putting more efforts into resuming these distribution penetration. What is really key is not just to enter more stores, but also to make sure that we drive sell out of these stores that consumers are coming to buy into these stores. We are also focusing more of our efforts into more activities and education activities with consumers both offline into those new stores with the help of our distributors and also our retailers but also online through live streaming and online education classes for moms as consumers also turn more digital. So we think with all these initiatives we are in a good position know to gradually recover this offline decline that we've seen in the first half to again more penetration with the right product portfolio and the right efforts on consumer education. Yes, you mentioned total baby store store in China and how many store we sell to the store. We have room to go. Exactly. So we definitely we have a plan to expand into 10,000 more baby stores in the second half of the year on top of the more than 30,000 stores that we have by the end of the first half of this year. And to be able to enter into more stores, we also need to have more distributors because our existing distributors have a coverage that might not enable us to go deeper into Tier four or five cities. And therefore, we are now expanding also the number of distributors we work with and we'll be onboarding. We are onboarding more distributors during the second half of the year to help us to move further into into this offline baby store channel. Yep. And then regarding the second question about the the gross margin of P and C, Lin, your observation is correct. So for IMF in the first half of this year, the gross margin slightly declined mainly due to this product exchange. Since now the new IMF categories might be goat milk IMF and organic IMF now accounting for over 10% of the total IMF sales. And this new categories, their gross margin is around 60%, so slightly below offer core series. So going forward, with the improvements of the the supply chain efficiency, thanks to the the buildup of the volume and also the standardization of the promotion practice. So we expect to further improve the gross margin of our new series Plus, also, the, gross margin of, BNC, is supported by the increase of the, the probiotics, gross margin. For the probiotics, the gross margin in first half increased by 2.6 percentage points. Thanks to the improvements of manufacturing capacity utilization. And also since the probiotics is growing at quite high double digit level, so also it has that positive impact on the overall product mix within the BNC portfolio. So going forward, we shall see the continued pressure from this product mix change. But with the efficiency improvement and also the volume buildup, we try to aim to mitigate the certain impact from this product mix change. And on the other hand, regarding the ANC, our gross margin improved slightly in the first half. Thanks to the higher revenue proportion from the, contribution of the China market, which has the higher gross margin level than the, other markets. So it is a positive development gross margin wise. So this why overall for the total group portfolio point of view, then we still target to maintain a stable gross margin going forward. Okay. The next question is from Garth Francis of Ford Asset Management. So his question is outside of goat milk IMF, how much market share in cow milk IMF will was lost and to which competitors? Do you expect these shifts to be permanent? Hi, Joy. Yes, thanks for this question. I just want to clarify that the data we have from Nielsen does not include goat infant formula. So the business we build with our goat IMF is on top of this market share. So the market share for Nielsen is only cow IMF. And again, our market share has been almost stable, right, from 6.2% to 6.1%. And where we have dropped 0.2% is on the baby store channel while we have grown in the online and on the supermarket channel. So I just want to clarify this point. And again, on the IMS side, on the go to IMS side of things, we've seen nice developments with additional growth opportunities for the business. So as mentioned earlier, the way we can regain market share in the baby store channel going forward is obviously through gaining market share with our existing baby stores but also expanding our penetration into more stores. And so to the previous question earlier, again our penetration in baby stores is not even at 50% because there is over 100,000 baby stores in China. And by the June we were at 41,000 stores. If we even extend 10 more thousand in the second half of the year we'll still be at 50% average penetration rate, which still means that we have room to grow to gain market share going forward back into the baby store channel. Again, this needs to be a gradual penetration. We can't do it at once. Otherwise, we compete with ourselves and our existing partners. We'll be keen to do that gradually and to make sure we don't just open more stores, but also drive traffic from these stores through educating the consumers and about our products into the stores and online. Okay. The next question is from Tao Le from Maplefront Abbott. So the first question is, can you please break down the A and Z sales to domestic versus cycle business? What was the decline in the cycle business year on year? And the second question is, is there an obvious reason why a first half SG and A sales to sales ratio is always lower than the full full year? Thank you, Joy. I will reply to the first question and invite Jason to answer the second one. We have in our presentation in the slide related to ANZ, a breakdown of our ANZ sales between corporate daigos and retail sales in ANZ. So we've got 31% of our sales in ANZ, which are selling directly to wholesalers who are then reselling to C2C operators in China or Daigo related channels. So that accounts for 31% of our business in Australia. That's on Page 21 of our presentation. Within the retail components of our A and Z sales, we still have some daigou, we call it retail daigou related cells because you have some Chinese either tourists or Chinese residents in Australia or Daigou that are buying from the shelf in the retail. So within that 68% component of retail, there is also an element of Daigos sales, but it's very hard to quantify it because they're buying in the store products just like domestic consumers would do. So we cannot quantify how much of that percentage is coming from Daigos. But again, in that domestic retail, a large component is domestic, like domestic Australian consumers, and that is the part of the business going forward where we want to focus our efforts to restore growth in the domestic market, while we anticipate the Daigo related business going forward will be mostly driven directly from China. Yeah. And then regarding the the second question about the the how the the company can manage to achieve this s and g and a ratio lower than the the full year level of last year. So here, I can provide you a bit kind of more more insights. So if we look at the the breakdown by BNC and ANC, for PNC in the first half of this year, the the FMD ratio is the 35.8%. And this is a quite significant decrease from both first half last year and the full year of last year. And this is mainly driven by the whole overall efficiency improvement measures implemented by the the company, but also thanks to the faster growing online sales. If you look at the within the BNC, the AM percentage of the sales actually increased by two percentage points from first half last year to first half this year. And this is mainly due to the the fast growing online channels. As we just mentioned, the online IMF sales increased by 30 close to 33% in the first half of this year. But we also at the same time managed to improve the efficiency regarding the channel investment. So for example, after the COVID outbreak, then we managed to reduce the offline promotion activities and move more to the online consumer education activities in the form such as the the live streaming. So that in terms of the expense spending efficiency, that got improved in the first half. But also want to highlight here is that certain offline activities in the first half also now being moved to the second half since those activities could not be carried out in the first half during the the COVID period. So we shall see that the E and C expense ratio to go up a bit in the the second half. And if we look at the the ANC expense ratio profile, as I just mentioned, it increased from the the last year due to this the mix change since there's a lower than expected revenue generation in the end market. But in the the China market itself, we managed to improve the spending efficiency as as well. In the the second half, we have planned some additional spendings because, as you know, in the second half, we will have the important double 11 campaign. Even though in the second half, this ratio will come up a bit, but as we just mentioned, it is a very clear financial control principle of the group that the total SMB ratio should be kept at 40%. So on the full year basis, we shall see this ratio shall stay at around 40% or slightly below. So this is the direction we are aiming for so that then we can still ensure the sufficient resource in the investors in both a and m and also channels to support the growth of the business, but at the same time still maintain a stable overall EBITDA margin for the group. Okay. We have another question from Teresa from. She asked if COVID is positive for immunity products, the negative for offline sales. How does this net out in a post COVID world? Second, how many divisions needs to be certified b corp before the whole company becomes b corp? Thank you, Theresa, for your questions. I just want to clarify the first part of the question again. Am I understanding correctly? We see positive growth in the immunity related category, but negative growth offline. Is that is that talking about the overall business, Joy, or Theresa, directly to clarify? Yeah. I think overall business. Because okay. Our immunity categories are sold both online and offline. Right? And so I guess these are two different dynamics in the business. For immunity related categories growth, I guess that is an overall trend that we see is going to carry forward beyond beyond the COVID pandemic because consumers now are getting more aware that they need to proactively manage their health. So this is a trend that we have foreseen for a long time actually since BioTime was launched fifteen years ago. That was an immunity proposition, an immunity claim. So that's something we have educated the market for a long time. And the fact that we have seen over 45% growth in our probiotics segment in China, I think also demonstrates that consumers are moving much more proactively to this category. So we do foresee that going forward this immunity related category will continue to see strong demand. Obviously, more competition is coming to this game. So we need to be able to launch the right products, but also to talk to the consumer in the right way to explain to them how our products can improve their health and contribute to boosting immunity. So that is something we'll continue to put R and D efforts and also science communication and digital communication on. Your second part of the question relates to the drop we have seen in our offline channel. There's two dynamics. One is in China and one is in Australia for different reasons. So in China, we're talking about the offline traffic, is going on which is not fully resuming. But as said earlier, we need to resume growth in the offline channel and we think we will see a gradual recovery once we are able to further work on our distribution penetration and acceleration into more stores in the IMF segment. In Australia, the element which is dropping off line is Daigo related. But as said also in the domestic part of our business in Australia, there is actually opportunity for off line to grow into more channels, including grocery, also including more community pharmacies. We have launched a new range in the first half of the year called Nutra Plus by Swiss, which is a practitioner recommended range, which will help us also to get into more community pharmacies in Australia to target the domestic consumers. We're buying supplements from the pharmacy shelf through recommendation from the pharmacies. So we still do think there is opportunity for us to continue to grow offline while traffic when traffic resumes after lockdowns in Australia, obviously, and in China again through more distribution. Your second question on B Corp, always very happy to answer your questions on sustainability. I know you're very keen about our progress in this field. Getting certified B Corp at the group level is a complex exercise because we need all of our entities to be certified. And we have a lot of entities in the group. So we are now taking a regional approach. So obviously, Gout Gout is certified now in France because most of our group business now is in France. So they can leverage that claim also as brand in the French market, which actually resonates really well with their proposition around sustainable and organic baby food and children healthy food. So if we want to become B Corp certified as a group, we need to have all of our European entities certified. We need our American entities certified, also our China H and H entity certified and also Australia and New Zealand. So now we have all of our managing directors across all the different regions working really hard through this certification, through the assessment. We are now looking at having our ANZ entity certified by next year, and we'll go step by step. But this is work in progress. We're doing that in parallel, at each regional level. K. The next question is from Chris Lan of. And, actually, his question is very similar to Larry and Larry from Credit Suisse. So I'm going to combine two questions together. So Chris and Larry asked about our inventory. Further to the inventory level for the A and C business, where is the inventory sitting right now? And is this valued at raw material level or finished goods? Does management have a target for ANC inventory for the next twelve twelve months? And what's the definition for the snow grooming inventory? And right now, in terms of the higher than normal inventory level and intention to focus on ANZ domestic market, do you anticipate price competition to be more intense than normal in Australia? And can you provide some colors on the performance on ANC and BNC business in July and August? Jason, would you like to answer this question on on the inventory related part? Sure. So yeah. Maybe I can answer the the first part regarding the the inventory. So, yeah, for the CNC inventory buildup, so it is being built up in both the China and also the Australia. As we just mentioned, it is quite necessary to India to first half for for us to have higher safety stock level during the the COVID. But also the inventory went up in the end that that mainly due to the lower than expected sales. Within the inventory, the super majority is the finished goods. And as you know, the average shelf life of our ANC products is three years. So we still have the sufficient time to gradually dispose to reduce and consume those the inventory. Since the current inventory provisions still at the quite healthy level at 6.5. And regarding the target going forward, what do we see based on the current supply chain arrangement? If we can manage to bring down the inventory of turnover of the ANC from two hundred ninety eight days to two hundred fifty days, This will be quite good level of the improvements in the the coming months. Going forward, we want to bring down the overall group inventory turnover days from currently around one hundred eighty days to around one hundred fifty days, which is the the level of the last year. So this is the direction we are we are working on right now to bring down overall to back to the level of the last year. So now maybe the Patricia can share more color regarding the ANZ domestic market competition. Sure, Jason. I think there was another part of the question in between related to providing color on the performance of both ANZ and VNC business in July and August. I would say that overall, pretty much in line with the trends we have spoken about for the first half of this year. The only difference being that in the IMS space in China, as mentioned earlier, we are resuming our distribution efforts to penetrate into more stores, which we had put on hold in Q2. So we are doing that now as we speak. We have on boarded more distributors and have already started to open more stores. So this is resuming as we speak now. In ANZ, we are facing the same prices from Daigou as mentioned. We think this will continue to be valid for the whole year as Australian borders have not reopened. Domestic consumption is still stable, obviously lockdowns in Melbourne region. So people are buying more online, less offline. But as soon as lockdowns are over, we will be keen to resume also our distribution efforts into more offline channels such as grocery, etcetera, and we are capturing the also online opportunity. But overall, in ANZ, of course, the DIGO pressure is still here. Jason mentioned regarding inventory, obviously, at the beginning of the COVID pandemic, we were very keen to build a safety inventory to make sure we don't run out of stock. And then with a slower than expected performance from Australia, this has resulted in a slightly higher than expected inventory for the first half. As we navigate through the daigou challenges again in the second half, we will very we put a lot of attention on our inventory to make sure we don't overproduce and we deal with the slow moving inventory to try to keep our inventory as a level as healthy as possible. So be sure that we are proactively managing this. Of course, inventory level is high as a result of the ANZ pressure, but we are managing that very proactively. Your last part of the question was related to the as a result, right, the price competition in the Australian market. I guess for us, we tied to our principle that we don't want to in order to get rid of inventory to discount products into the market because that would result into price disruption as Australia and China's Quebec, as you know very well, Chris, are very much interconnected. So if we run heavy promotions in Australia as a result of high inventory, then obviously that will result into price disruption in the Seabeck market in China, which we don't want to see because our Seabeck business in China is running quite healthy. And now it's actually managed by one team together. So our corporate Dagro business in Australia, as this is also China driven consumption is also managed together with our CBEC team in China. So there is price alignment, discount policy alignment, etcetera. So we are managing that very closely in order to avoid a price disruption in the market. And if we have to hold more inventory at the company level in order also to make sure that we keep the market healthy, we will be doing so. So we are managing inventory carefully, managing also stock in the market as carefully as we can to make sure that Australia and China markets altogether keep as healthy as possible from consumer standpoint. Okay. Due to time time constraints, we are taking the very last question from. So he's asking H and H infant formula market share online, lagging behind offline. It's possible due to our high end positioning or maybe it's because of our discounting policy. Management also mentioned several times before to strengthen online channels. Can management share more insights on the reason why we were still behind and how can we catch up with our competitors on the online channels for infant formula? Thanks, Joy. I think the fact that we are still lacking behind, I mean, we are number six as a total brand in China, but we are number 11 online. So in this respect, we are lacking behind, but this is historical reasons because our BioTime business has strictly been quite large offline, particularly in baby stores and also supermarket and pharmacies. So our business historically has been more heavily relying on offline. But actually the total contribution through e commerce to our total sales is now at 15.5%, which is historically high for us. It used to be single digits for many, many years. So actually since the last two years and particularly in the last twelve months, we have gradually increased our market share online. And I think the performance in the first half is actually demonstrated that in a very competitive online channel where everyone is putting more efforts, we are still able to grow market share. Of course, you might think this is a slow growth and it's never enough. But if we go too fast online, then we also disrupt the business that we have offline. So we have to find that right balance and we have to do that without entering the discount game of really heavily promoting our prices. Otherwise, we will also disrupt our business and it will become also a more extensive model. So we are not pushing our market share online through a heavy price promotion. We are trying to build more high quality marketing content, educate the consumer. And so we want this online share gain to be gradual and as healthy as possible for the total business. So yes, we're still lagging behind only ranking 11 online, but that is also an opportunity for us going forward. And so we are putting more marketing efforts online. Going forward, we will have starting from next year a new SKU that will be able to dedicate to our online channel to also have specific efforts on the online channel with dedicated portfolio. And so we'll be gradually hopefully seeing this market share going up, but we need to do that, you know, balancing the total interest of the business. Okay. Thank you everyone for joining us this morning. Please stay healthy and safe. I now announce the end of today's presentation and webcast. Thank you. Goodbye. Thank you. Bye bye. You, everyone. Thank you. Have a good one.