Earnings Call: H1 2021

Feb 25, 2021

Hi, everyone. Thanks for joining the call today. On the call today, we have our Managing Director and Chief Executive Officer, David Bordelucci our Chief Financial Officer, Raees Strauss Peter Nathan, our Chief Executive for Asia Pacific. David, Raees and Peter will present our half results and there will be time for questions at the end. And with that, let me hand over to David. Thanks, David. Good morning, everyone. I'm very pleased to have finally joined the Aytu Milk Company after a long transition period. It really is a remarkable business. Notwithstanding some of the challenges that we will cover today, I'm confident in the fundamental to the business and I'm excited about the future. It's been a big couple of weeks settling in, relocating to Sydney, meeting as many of our team as possible around the world in person and virtually, being introduced to our strategic partners and developing a better understanding of the business. I've only been in the business a short time. So for the intro, I just wanted to make a few comments on the half and cover why I think the fundamentals remain strong. First half was challenging for Aytu. Like most businesses, it's been impacted by various dynamics related to COVID-nineteen, which has caused a lot of demand and supply volatility that has impacted the business significantly. We won't gloss over the fact that Performance for the half was challenging and disappointing relative to the company's initial plans and market expectations. Revenue and earnings were down significantly, mainly due to disruption in our ingus label business, which Peter will cover later. But there were some real positives in our results too in the China label business, Australian Liquid Milk and a material improvement in the profitability of our U. S. Business. Notwithstanding these challenges and results, the fundamentals of the business give me confidence that we have plenty of opportunities to grow the business over time. I've reviewed our brand health metrics across our categories and markets, and they're strong, which we'll continue to have to invest in. We have a compelling consumer product with 1st mover advantage and loss of innovation potential over time. We have significant further growth potential in our core markets, particularly in the China label IMS market. We have a strong balance sheet with the flexibility to invest in growth opportunities. And lastly, the team has been investing heavily in improving our execution capability. Lastly, I want to acknowledge the efforts put in by Aytu team and all of our strategic partners. It's clear they've been working hard to address the challenges head on and get the business back into growth. I'll now hand over to Rice to take you through the financials and then Peter and Rice to take you through the regional performance. I'll come back at the end to cover our plan and outlook for the second half. Thanks, David. Hi, everybody, and I hope everybody is safe and well. There are a number of highlights in our results despite the challenges. We are especially pleased with the strong growth in our China label business. We are achieving a growing share in the largest IMF channel with strong brand health metrics. However, the shape of the results has been impacted by our performance in our English label channel. Here on Slide 7, We presented a summary income statement for the half year. Group revenue was down 16% And EBITDA was down 32%. I'll explain some of the key movements on the next few slides. On Slide 8, we show our segment revenue. China and Other Asia segment was flat half on half, where the growth in China label was offset by the decline in CBEC. In Australia and New Zealand, as we flagged previously, We were impacted by challenges in the Daigo and reseller channel. And in the USA, the changes we make to our execution approach have had a positive impact. Moving to Slide 9. A few things to call out here. Our lower gross margin percentage reflects the impact of a number of temporary factors. Most relevant is the stock provision that we recognized in the half and the adverse product mix shift with a high proportion of liquid milk to infant nutrition sales. Another important point here is that historically, the gross margins we have achieved for infant nutrition sales between channels has been broadly similar. However, some variance in gross margin percentages between the channels has now emerged. This is due to the different channel pricing pressures, cost of goods sold differences, particular things like ingredients and packaging innovation and foreign exchange movements. China label infant nutrition has a lower gross margin percentage then our English label, but has a higher absolute gross margin per unit in a higher cost to serve channel. Moving to Slide 10. Our balance sheet remained in a strong position with closing cash position of $775,000,000 Cash was $80,000,000 lower than June, And this was due to negative operating cash flow, primarily due to an increase in working capital, reflecting higher inventory and a decrease in accounts payable, our participation in the recent Synlait Capital Raising and our acquisition of the Kaia Valley processing facility. With that, I'll hand over to Peter to go through the Asia Pacific performance. Thank you, Rice. So looking at Slide 12, and look, this is a So we have presented a number of times before. And what it does is summarizes our infant nutrition revenue across both ANZ and China. And you can see that the proportion of our revenue has evolved over time and we're growing very well in our China label business, which is the largest by a long stretch of the infant nutritional channel within China. Looking at Slide 13, we show that In China label, we grew revenue by 45% on the prior this is the prior cross funding period. We also grew share and furthermore expanded our footprint. We've invested very heavily in our brand via insta activation With greater engagement with consumers through increased Mama classes and also promotional people as one of the key activation points. We do believe that there continues to be an opportunity for us to gain market share given our very strong brand resonance with our consumers. We're very pleased with our performance here given the incredible strong strategic importance and size of the MBS channel. Looking at Slide number 14. What this slide does is highlight some of the key activities during the half terms of our social media campaigns as well as investments in roadshows, in Mama classes, in promotional people and other various activities, which we use to engage our consumers with. If we look at Slide 15, What this shows is that the very strong growth we delivered in distribution and also growth in our MBS Market value share, which was up to 2.4% from 2% at the end of the December half. In Slide 16, our performance in English label was impacted by Australian retailers and diverse reseller channels as well as in cross border e commerce. In our INZ business, we have previously explained the challenges initially resulting from the disruptions of COVID-nineteen. The pantry stocking in 3Q 2020 and then the unwind in Q4 and into this fiscal year was also compounded by the challenges in the Daigo reseller channel, which we did begin to observe from September. These events combined with subdued online pricing and channel inventory unwind have resulted in So I got resellers means slower to fully rear end of the market to promote our brand than we initially expected. In CBEC, our sales were down 35%. Having said that, our market share was 22.2% to 3% on MAT basis, which was up from the previous a share number that we took to the market of 21.5%. The revenue decline this period, therefore, was due to A lower level of sales to informal social e commerce channels and traders, which are not bettered by SmartPath. And also on top of that, there was some inventory further inventory around wine in these channels. And in addition, we have temporarily ceased sales of our Hong Kong label. While our performance in the competitive 11.11 online sales event showed strong year on year growth with higher gross and activity, Sales in the month preceding that or just after that were a little bit below our expectation with There's some pricing issues compounding back there. Looking at Slide 17. We do have a solid plan in place to reactivate the English label channels. We are focusing on reactivating the Diageo resale channels and are confident So it does still remain a very attractive and strategically important channel for distribution penetration and also for new user recruitment. We are aiming to continue to reactivate the channel by further rebalancing inventory levels and improving, very importantly, traceability through the channel. Furthermore, we will continue to provide temporary support to corporate Diago. And lastly, we will be continuing to look at some innovative opportunities within corporate Diago to further grow distribution. In CBEC, we'll continue to rebalance inventory in the channel and also continue to refine and optimize our promotional approach. Turning to Slide 18. Liquid mill, it's fair to say, does continue to be an absolute critical pillar of our business. And we're pleased to announce that we have achieved double digit growth as we've increased our market share again, and we now have a market share of 11.7% in value in Australian grocery. Assuming the COVID-nineteen situation improves in Australia, however, we would expect out of home consumption to increase Or to decrease a little bit, which could impact us slightly in the second half. And New Zealand licensing fees increased by 33% during the period, Along with China revenue, which increased in liquid milk 107 percent to $3,700,000 On Slide 19, it demonstrates that the other nutritional product segment, mainly our whole milk and skim milk powders, And we've seen additional products here such as Smart Nutrition, Nutrition from Others and also Manuka Honey Howdy. Unfortunately, all of these product categories were impacted by the disruption we've experienced in the dilutive reseller channel, But we are confident in our plan to reactivate the channel, and we do definitely see further opportunity in all of these other nutritional products moving forward. And now I'd like to hand back to Rice. Thanks, Peter. In the USA, I'm now talking on Slide 20, We delivered 22.3 percent revenue growth. During 2020, we did observe that consumers were becoming more value conscious given the economic uncertainties and retailers were prioritizing conventional and private label brands. Consequently, we have redirected a significant portion of our marketing investment towards account specific activity to position our pricing at a more affordable premium level. The aim was to increase shelf presence as well as investing in additional in store activation to further build velocity. Our average velocities have grown within our key accounts and distribution grew to 22,300 stores, and we have strong brand health metrics. For the second half, as we further increase our trade spend, we are expecting net revenue to be lower than the first half. On Slide 21, we show some images of the in store activities and Slide 22 has the growth in our store footprint. So turning to Slide 24 to talk about some group updates. The proposed Matara Valley Acquisition will provide the opportunity for us to participate in nutritional product manufacturing. It provides supplier and geographic diversification and strengthens our relationship with key strategic partners in China. Over time, it will also offer access to manufacturing margins and the ability to provide more flexibility for product supply, including the potential to pursue an additional China label registration and additional innovation opportunities. During a transitional period, MVM will operate as a manufacturer of commodity powders and some base powders for nutritional products prior to manufacturing predominantly consumer packaged nutritional products for the AT Mill Company. We previously announced that during this transitional period from FY 2022 to 2024, The business will operate at approximately EBITDA breakeven, with the business returning a positive EBITDA from FY 2025. However, due to the revised volume assumptions, we now expect an EBITDA loss of up to $10,000,000 per annum during the transition period. We still expect EBITDA to be positive from FY 2025. Prior to any further investment in a blending and canning facility and the associated infrastructure with that, It is expected that depreciation and amortization during the transitional period will be approximately $15,000,000 We are continuing to explore business development opportunities to improve the financial performance during this transition period. On sustainability, we made progress in a number of areas in the first half. In particular, We established the A2 Impact Fund as a vehicle to fund and manage our investments in pursuit of our sustainability and decarbonization goals. The team is making progress in several areas, including on farm activities, such as Farm Environmental Plans and Animal Welfare, as well as across various people and community initiatives. We are also working through the process of target setting and we'll look to update you later in the year. And with that, I'll hand back to David. Thanks, Rice and Peter. Turning to Slide 27. I thought it would be useful to summarize on the slide here the key actions we are taking in the second half, which we've already covered in the presentation. Just to reiterate, we're pleased with our performance in China label and liquid milk in Australia and the U. S, and we'll keep executing against those plans. And we have a good plan for reactivating the Daigo channel and optimizing our growth in CPEC. As you would expect, I will also be reviewing our growth strategy and execution plans with our leadership team and Board to consider what adjustments we may need to make to maximize the long term growth potential of the business. Turning to the outlook on the next slide. Globally, there continues to be unprecedented levels of uncertainty and volatility due to COVID-nineteen. The company remains confident in the underlying fundamentals of the business, and we will continue to invest behind the brand and in its capability to drive long term growth. However, the pace of recovery in the Daigo channel and in the CBIC channel has been slower than previously anticipated, and the company now expects revenue to be at the lower end of the A lower EBITDA margin range is now expected due to lower revenue, higher brand investment, longer Diogo support, movements in foreign currency and adverse channel mix relative to what was anticipated in December. Accordingly, the company's FY 'twenty one outlook is now as follows: group revenue for FY 'twenty one in the order of 1,400,000,000 Group EBITDA margin for FY 2021 of 24% to 26%, excluding MVM acquisition costs. The outlook for F21 assumes the actions being taken to reactivate the Daigo channel, deliver a significant improvement in quarter on quarter growth from the Q3 to the Q4. And with that, we'll open up the call for Q and A. Back to you, David. Thanks, David. Operator, if you can please help us facilitate the Q and A session. Thank The first Question comes from Sean Cousins of JPMorgan. Please go ahead. Thanks. Good morning, all. I just want to Ask a little question about inventory. The company is now discussing rebalancing inventory in the Diogo and Seabed channel. Is this the company confirming there is excess inventory the Diogo channel. And if so, when did this start? As we've been asking a bit about this issue for some time and A2 has been indicating there hasn't been an inventory issue Sure. It's David. From my point of view, it seems to be rebalancing, but I think Peter is probably best placed to answer this. Yes. And what we're not talking about inventory, which we are aware of. So the key point being is that the inventory within Customers that we ship to, we've been confident for some time. It's more about Inventory, which is very hard to trace, which falls into 3rd parties, which typically fall into the In terms of the trader type definition, that is inventory which is more difficult get a handle on that. And that's what we're still trying to make sure that we bottom out. But again, that is and that's where the traceability system that we're putting in place is so critical in ensuring that, that is achieved going forward. Okay. I mean, we've sort of been concerned about trader distributor inventory being an issue as well. Is this something where You just can't get a hold of it and that's the It's not distributor, no, it's very different definitions. Distributor inventory, we have got a good handle on All of the customers we ship to, we have a very good handle on inventory. It's the non customers which get leakage, which is more difficult to trace. And we want to absolutely make sure that that's bottomed out. And on top of that, as I said, the traceability system is a key in that. But yes, that we want to make sure that distinction is clearly understood. Okay. And does the company reiterate the 30% EBITDA margin target in the medium term. I couldn't it may be in your release, I might have missed it. But could you confirm if that's still being reiterated or has that been removed, please? John, I've taken that out for the time being. It's we're in a very different context. It's not that that is Really inappropriate. It's just that I haven't had time to think about our plans going forward with the team and we may give some more color around that in the future. That makes a lot of sense. Thanks, David. Thanks, Peter. The next question comes from David Arrington of Bank of America. Please go ahead. Good morning, all. Good morning, David. It's been a long time. It's been a while. So welcome aboard and good luck. First question I've got is on the inventory. And Peter, I'm sorry, I just don't accept your explanation on that. You've been saying now you haven't got an inventory problem, but now you're saying you may have an inventory problem with Customers that you don't know who they are. And then the company takes a $23,000,000 inventory provision out of the blue. And the inventory this half has increased by $50,000,000 on your balance sheet. So can you explain What is going on in your inventory? Because I know the question has been asked last 12 months and you have steadfast denied that there's an inventory issue, But clearly, there is. Your inventory has increased by $50,000,000 You've taken an inventory provision by $23,000,000 And now you're saying that there's inventory with Customers that you don't even know who they are. And you have to do a tracing system to try to track it down. If that's not an inventory problem, I don't know what is. So can you give a bit more clarity so that we can have a bit more comfort that you are in control of your inventory? So David, it's Ray. Let me start on our inventory and then Peter can comment on the trade inventory. We had previously said that, that when COVID started, we did take contingency steps working with our strategic partner in Synlay to build up our inventory. Because when COVID first started, there was issues of supply. There was risks of not being able to get materials. And you'd appreciate there was risks globally about the global supply chain. So we took a deliberate step, which we did talk previously about building up our inventory. Unfortunately, post that, as the Daigo and English label channels started to contract, The demand off take our demand off take of that started to decline. Hence, we have to go through a downgrade process. And that inventory that we had built up was not being reduced as quickly as we wanted. We as part of our December downgrade, which we delivered to the numbers that we did communicate back in December, incorporated that we would take a provision, which we now have done of $20,000,000 or $23,000,000 into our results for the half. So that is, as I said, deliberate contingency we took for COVID. The demand fell off. We were left with a lot of inventory. And what's really important, as you'd appreciate, is we need to ensure that, that inventory does not end up in the trade that could potentially be discounted and we protect the quality to ensure as it gets older, We ensure that it doesn't get to the trade and we will potentially destroy it, hence the provision. That's our inventory. But I'll throw it to Peter to talk about the inventory through an Office of Supply Chain. Sure. Look, let me be clear that I'm not saying that we have a trade inventory issue at all. That's not what we're saying. What we are saying is There is always a potential for product to get into their own phases and that will always be the case. And therefore, the traceability system enables us to identify precisely where that Product originally came from and therefore deal with it. So that will help us going forward. So that is a clear point to make. The other point to make is that The extent to which pricing is uplifted is a consequence of reduced inventory. And therefore, What we're saying is that the inventory that we need going forward will be lower than what it has been in the past in order to uplift the diode pricing. So we're not saying just to be very clear, we are not saying that we do have a trade inventory problem at this point in time. Okay. I'll leave that one there. If I could go on to my second question, which is on the recovery of the corporate DAIGU. The first part of it is, well, how are you going to actively manage this? Because your statement that you're expecting the 4th quarter To be a significant improvement on the Q3. That really concerns me because that means that there's Potentially further risk to the downside here if what you're actually doing doesn't work or is delayed further. So can I ask a question either to you, Peter, or it's too early for you, David, because I'm not you've just come on board, but probably, Peter, you're the best? What are you actively doing with the corporate DAIGU to actually deliver 4th Quite a significant improvement on the Q3. What are you actually doing to ensure that? So is this because that's a big statement to make to the market. You have to be held to account on that because when it comes again that you come for another downgrade, I mean we've had 3 strikes now. How many more downgrades do you want to come to the market with? And you've got that big statement out there that Q4 is going to be significant on Q3. So what are you going to do to ensure that you don't come to the market again with another significant downgrade? What are you doing to ensure that? Sure. No, it's an excellent question. Yes, so we're doing 3 things. Firstly, there is a positive trend for corporate divest, so let's be clear about that. So the trend is up. So the other bottom has been behind us and we've seen positive trend upwards. That's on the basis of Two initiatives. 1 is the corporate dialogue and support program, which is rebuilding conference in the channel. In addition to that, We have some innovation activity, which has been effective. And thirdly, which is in front of us, there's some innovation within the corporate doigot channel itself, which is building momentum, particularly in the O2O space in China. And also the O2O channel, let me say, David, is He's shown some very significant growth for us in China. That gives us confidence that we're going to end the quarter. We're in the half fresh from it. Okay. Well, thanks, Peter. I'll let someone else have a go. But thank you for your answer. It was very good. Thank you. The next question comes from Chelsea Ledbetter of Forsyth Bar. Please go ahead. Thanks. Good morning, Tim. I just maybe extending a couple of those questions a little further. So you talk about the inventory traceability, Peter. Can you give us The time line of when that will actually be in place? Yes, yes, Chelsea, we're looking to get that implemented by the end of the month. So the reason and I think it might have mentioned this in previous calls, there's been a significant delay on the basis of COVID in terms of technicians being able to implement. But given the now kind of spring up, we're very confident that the process has already started, but we're very confident by the end of this month very, very soon That will be up and running. Okay. Thank you. And I guess coming back to the questions For around the statement on significant improvement quarter on quarter. Can you kind of cycle back and sort of I don't know if you can, but give us some sort of quantification around what that Q3 last year looks like This is the Q4 last year. You talked a lot about pantry stocking in the Q3 of 2020 and some of that unwinding in the Q4. I'm just trying to understand, I guess, what Comps alike that you are cycling for that Daigou channel in particular, but also, I guess, how the 3rd quarter has Started versus the 2nd quarter. And ultimately, what gives you the confidence for that statement around significant improvement? And Maybe if you can provide some quantification around what significant improvement actually means? Sure. Look, I mean, We're not going to give the absolute specifics of that, but you could probably do the math on that in terms of looking at Yes, the guidance number relative to the results. But what we would say is, again, we have seen some very strong Momentum and off take within the corporate dialogue channel. We've seen very strong momentum in the O2O channel. So that gives us confidence on top of What we did indicate and going back to David Arrington's question around further tightening, so it's not about the fact that we've got inventory to further tightening, which is implicit in the numbers to further up with pricing on top of the innovation, on top of the margin support, which hopefully will fall away once the pricing starts to move upwards. And then you couple that with the momentum that we've already seen that gives us confidence in that Okay. And any context on the pantry stocking In terms of how to think about that from for what you're cycling in the prior period? Yes. Look, the pantry stocking, yes, look, the numbers would indicate Clearly, that's behind us. But clearly, that upset or unsettled some of the flow of numbers in terms of ex factory. But we're confident that That's no longer an issue, which is implicit in the obviously in the numbers that we've delivered, which then we should get in terms of the HVAC through being as we indicated in previous announcements, not as high as we thought, going back to 6 months. Okay. I'll leave it there for now, but I might take a few more offline with you. Thank you. Sure. The next question comes from Richard Barwick of CLSA. Please go ahead. Thank you. Good morning all. I was going to just try and get a bit more clarity, if I can. When you talk about the pace of recovery in the daigou and reseller channel, Basically recovering more slowly than previously anticipated. Why is that? Do you understand why or what's caused that now? And then sort of married up with that is how does your new diago channel reactivation plans compare to the plans you had in place Back at the last downgrade just before Christmas? Yes. Look, that's an excellent question. Look, the key issue process has really been about market pricing. So market pricing, we expect it to recover more quickly than it has. Now outside of market pricing, we've still seen growth. Had we had market pricing where we thought it would be On top of what we've run with initiatives, we would have been at the numbers that we thought in previous announcements. So it's really those the combination of those two factors. So do you think that means, Peter, if the market pricing has been weaker, I. E. Hasn't recovered to the extent that you thought, Is that a sign that there is more inventory washing around? So this sort of stuff that you don't have the visibility on There's actively more there than you had appreciated. Well, there was a bit of disruption from Pinduoduo, which we're confident now that there is less access. As I said, they tried to build the Gives the capacity to really deal with that with more management. That is certainly the case. Okay. And I'm pleased you raised PDD because that's my next question. So back in August September, The sort of the color we got from you guys then you're pretty dismissive of that as a channel and saying that it wasn't compatible For the Aytu brand, is it a place you didn't want to be? Has your views towards PDD changed at all? I mean, My observations would be it's seemingly like a more credible channel today than what it was even 6 months ago. So just wanted to know If it's going to play a bigger role or going forward for Aytu? Or are you still intent on sort of getting your product out of there? No. Look, our view has not changed. So we believe that they're not the sort of customer that we want Want to be encouraging. We're doing business with so another customer, but a platform. So in that regard, no, our view has not changed. It remains consistent. All right. Thank you. I'll leave it to the next question. The next question comes from Sam Tigger of Citi. Please go ahead. Hi there. Good morning. Maybe one for Peter. Peter, just in terms of the comments around the recovery in market pricing, It's been a lot of talk around supply on this call. But what about the demand side? It just seems to me that the formula Not as advanced as a few of your competitors in terms of the ingredients and the resurgence of Chinese brands continues. Sorry, I'm not sure about so you said about the formula. Sorry, what was your can you just repeat that or rephrase that question, please? Yes. So just in terms of the market pricing recovery comments you made earlier, feels that a lot of the comments is around Hi. But can you talk maybe a bit more around the demand side? I mean, from my perspective, it seems that your formula is not as advanced as a few of your competitors We've launched into this space in recent times. And also we've got this resurgence of Chinese brands, which continues. Yes. With the I think you talked with the formula, are you referring to competitive product? Or is that your question? When you say the formula, what do you think is right now? I mean, all the ingredients, a lot of your competitors that look at the formulas. Yes. Look, I think on that point, the reality is, Sam, it's always been a brand play. So we've been pleased with the success we've had relative to new entrants. Yes, you could argue some new entrants may or may not have Relatively strong ingredients panels, but that hasn't meant that they've had consumer traction. So it's been at this point in time, there's been no I want free product, which is our consumer traction. It doesn't mean that they want, but clearly it's been, as FirstMerit Advantage has served us particularly well. In terms of the supply side, what I would reiterate is that, Again, we're getting traction in terms of uptake with the Argo channel, post the COVID Disruption, so we're seeing our way clear of that as I indicated or reemphasizing the point that upside beyond What we've indicated would be dependent on pricing, which would therefore we are determined to try to leverage or to try to encourage into comments around inventory. So that really probably answers that question that there is some Yes, the pricing dependency will provide further variation. Got it. And then the lower China label margins that you're talking about, In your view, is this something temporary that's going to pass or is this the new normal? This is Ham, it's Rafe. I'm going to just take that one. The China label margins, the innovation we put in the lid, the additional lactoferrin does make that a more expensive product. That, of course, will continue. The impact that It comes through because that is transacted for us through RMB into U. S. Dollars back to New Zealand dollars. I think that part will be particularly temporary. And we have, of course, well, that's more from the seabed side taking part of the obsolete stock. So for China label, I would say that the FX is potentially temporary, but the actual ingredient cost and the lid is a permanent fixture. And the channel pricing pressures that the release alluded to. So the channel pricing pressures For joint label pricing, we don't see a lot of pressure. So we've maintained our pricing Through the period. Got it. And then in terms of the reduction in corporate costs, what proportion of these reductions Do you feel you can bank permanently? We will be able to bank A significant amount of the consulting costs because we've now built a lot of capability. So one of our biggest cost exposures as we previously talked about, was consulting. That has come down significantly. That will remain. Of course, we have being able to secure travel savings, but yes, they will go back up a little bit. And there has been a reduction in employee incentives, which of course will come up. So the lion's share of the cost, which is in fact these consulting costs and other discretionary costs will maintain. However, I will say just so we're clear is we've always talked about building capability. The lion's share of that is done, but we will continue to invest in systems, in the right capability and in building, for example, the right sales team across China and the U. S. Great. Thank you. The next question comes from Marcus Curley of UBS. Please go ahead. Good morning. 2 from me. I just wonder, Peter, if you could provide a little bit more color on the reduction in the Seabex sales. In particular, Yes. What style of customers you've seen reduced sales into. And also by reading it, it also suggests potentially that There's been a material impact from the Hong Kong border crossing markets. Could you talk a little bit to that? Yes. I think one thing to appreciate is the Yes, market share did indeed grow with Seabic. It's a very important point to reiterate. So that's the prior period. So that's encouraging. We're still getting consumer traction. So I think the key point is that, yes, implicit in our number was the fact that there was some Probably some leakage from distributors through to customers such as Pinedale, which we Fine. Have found hard to trace, which is no longer the case. So that probably is one of the key drivers. And as I said, furthermore, The further reduction or the reduction in inventory not beyond what we've had in the past, but reducing beyond that in order to push pricing up, which will impact positively impact the Igo channel as many other key factor. And so we should interpret the sort of step back as, I suppose partly permanent, yes, given that some of these distributors you're selling into, yes, you're not going to be supplying, yes, given the platforms they were selling onto? No, no, no. We'll continue to supply those distributors, but the point we're making is threefold. Firstly, offtake has still Been solid. So consumer uptake has been strong across in general terms. Point 2 is that We had to reduce inventory in order to push pricing up beyond what we normally would. Therefore, it's not to say we've held too much in between the past, but we had to take further steps. Thirdly, as I said, there's been some leakage, which we needed to deal with around Pinnabula and some of those social ecommerce platforms, which are not authorized platforms, And the suspension of the Hong Kong label product, Yes. What's the impact of that, yes, on the CPIC revenue? Yes. Well, that is That impacted around that's a Diogo impact. So most of that product flowed through to the southern provinces, Von Dominguez. And obviously with the border closure, which is separate issue that the border closure due to the geopolitics with Hong Kong and China I meant that that dried up at the time when pre COVID, but impacted through the period. I think the numbers are in there In terms of volume, we reported in the prior point, Sorry, 10,700,000 10,700,000, yes, the Hong Kong label impact. And a full year? And secondly, I just wondered if you could talk to I'm giving us some color on what you're planning on doing with marketing spend. It was low in the first half. What level are you doing in the second half? And Yes. How does that influence your store rollout program in China? Yes. So marketing activity Half on half will continue to be significantly stronger in the second half in China than the first half sorry, than the period last year and also the first half. But if you look at, a lot of that activity will be both in store. So it will be continued to be very strongly weighted towards Push People or in store promoters, roadshows, Mama classes, in store activity in MBS in addition to broadcast media. But yes, as Rice indicated, we'll continue to invest behind our brand and the second half investment will be very strong, which is also one of the key drivers of momentum, particularly in the last quarter. Sorry, just to be clear, the second half marketing spend will be above the comparative period last year. Yes. And significantly and more importantly, very importantly, it will be stronger than the first half. So it will be a lot stronger than the first half, Ben. And but within the guidance, by the sounds of things, you haven't incorporated Yes. Any significant growth in the MBS offline channel in terms of sales Would be my interpretation. Is that the wrong interpretation? No, that's not correct. We are expecting some growth in sales within NBS. So NBS, we are expecting it to continue to grow I was meaning sequential. Yes, half on half. No, it's MBS half on half will be growing. Okay. Thank you. Mark, just to come back on that question that you asked on Hong Kong, just for clarity, The first half Hong Kong label revenue was $10,700,000 On a full year basis, last year was 16,200,000 The next question comes from Nick Marr of Macquarie. Please go ahead. Good morning, guys. Could you just on the China label talk through the half on half growth that you saw in 'twenty one versus 2nd half twenty twenty seems to have slowed quite materially despite the footprint increase. We're talking about roughly a 40% growth half on half for the same period last year. Sorry, more sequentially, so first half versus second half twenty twenty? First half versus second half Yes, look, I suppose what we are what we're not doing is giving the 2nd half on first half, but what we're saying is the half on half growth continues to be in the order of 30 yes, 40%. Okay. What I'm trying to focus on is that the first half was up kind of around 12% on the second half twenty twenty. So The growth there was slower than the build in a number of stores. So what's happening to velocities and everything else If you look at our velocities, they continue to grow in terms of our both our Distribution and also our same store sales growth. So the expectation of our ex factory is in line with our offtake expectation. Okay. And then just kind of at a higher level, you've talked about reducing kind of sell into some of the channels. What would your best guess Of what actual consumption levels are versus what you guys are selling over Slide 21. So some indication of how demand is versus what you're selling in? Yes. Look, what we can say is that if you look at our if you look at the market share, the data points that we provide, we've provided you with our Market share for MBS, where you've seen an uplift, which therefore reflects the world consumption uplift. If you look at our CBEC Sure. You can also see that that has uplifted half on half, which again shows some sort of consumption. What we don't have, of course, is a He's hard data on Diogo. So we're not going to provide you with a number on that given the fact that Yes. There's some lack of certainty around that. The next question comes from Phil Kimber of Evans and Partners. Please go ahead. Hi, guys. I just had a question around pricing and I'm new to the stock, so apologies if it's Simple question. But when I look at it, the different channels in China seem to have very different Retail pricing from $400 a tin to $300 a tin. And I'm just wondering, I know that Some of those higher priced, just the China label product have different ingredients and so forth. But What are the risks that pricing actually has to converge over time? And usually when prices converge, they Converts to the lower level, because there seems to be quite a big contrast between even Australian retail prices If you put them into renminbi, there seems to be a lot of differentials in pricing depending on which Channel you're in and I'm just wondering what are the risks that that has to converge? That's a really good question. But I think the pleasing thing is that we've had that Variation since the get go and we've maintained that pricing variation across channels. So it's something that consumers are So consumers in the MBS channels are prepared to pay a price premium based on the experience They received in store the recommendation plus the fact that they're buying a China label product, which they see as being slightly high spec relative to the diago pricing, Which is mine. So we've maintained that variation, I think, very importantly, for a long period of time. There's nothing to suggest that, that won't continue. So therefore, is it so when you're talking about pricing, it's more the seabed versus the Daigou Pricing, that's the issue where the daigos aren't getting enough profit. There wasn't enough profit in them or Lower profit, so that they moved away. Is that I mean has that sorted itself out now? Or is there still a way to go on that Pricing between CEBEC and Daigou. Yes. So firstly, you're correct in saying that that pricing Dynamic does not exist in MBS. So that's point 1. The second point you raised about the pricing Right. So therefore, the extent to which Diago pushes is largely dependent on margin their own margin, which is a reflection on price. So therefore, in order for us to fully or still to reactivate the diva channel, we need to push margin up, hence the fact that we put through Margins support within corporate. But furthermore, we're trying to uplift pricing, but that hasn't happened as quickly in the last few months as we thought. Having said that, we still experienced, as we indicated, off the offtake improvement or I should just say So our momentum, particularly with Ozawa. But clearly, clearly, the pricing dynamic between Diago is very, very different to MBS. And then my other question was just in relation just to what's happening in the market and maybe your share is small, so it doesn't affect you. But I see yesterday or the day before a big U. K. Player talking about a strategic review, really tough Numbers in China and they're talking about the domestic players are starting to really take share. Are there any things that You're also seeing in that marketplace? Well, there's 2 points to make. You're absolutely spot on. The domestic buyers doing well. And that's very clear, particularly if I hear. Having said that, the very pleasing thing is that as an international brand, we are still gaining share within the MBS channel despite the domestic some of the strong domestic players. So relative to other internationals Within MBS, we still continue to do very well. And so therefore, our brand is still resonating particularly well with Chinese consumers and also with For our brand, AlkerMetrix, we were very pleased with awareness, purchasing in Chongqing, loyalty scores, all of those continue to play very well, which is So while we invest continue investing to invest heavily behind our brand, we're in the MBS channel because we are getting uplift as a result of the investment. Okay. That's great. Thank you. The next Question comes from Adam Fleck of Morningstar. Please go ahead. Hi, good morning. Thanks very much. Peter, just following up on Your comments around 4th quarter significantly improving partly due to the price increase that comes on the back of the inventory Management in Daigo. Can you talk a little bit about the glide path to make sure that the incentives and the support that you're providing are in fact temporary beyond that price. Is that a conversation you're having with the Daigo partners, just cognizant of the risk that some of that Level of support sticks around and is no longer temporary. Sure. Clearly, that's the conversation we're having. So we're measuring very carefully the sell out with our corporate diago partners and then Yes, the margin required to get additional momentum in the channel or additional arms and legs in the channel. So yes, you're absolutely spot on. We're working very closely with our key partners to measure that. Okay. That's good to hear. Thanks. And then maybe just a question On the U. S, obviously a significant improvement in the EBITDA loss, but trying to pair that against your comments around Pricing movements to reset more affordable premium level. How are you thinking about that business generating breakeven or even positive Profitability in the future. Sure. So we've been clear that we haven't stated exactly when break That's deliberate because we intend to continue to invest behind the brand, but we are clearly on the pathway to bring it to breakeven. It's obviously a significant leap forward, which you will see in these results. The whole focus of this pivot that we talked about is to really improve the activation in store. So it's about ensuring that where the main purchase Decision is made on the shelf that we in fact have clear facings. We are getting additional facings. We are doing additional in store execution and we are therefore pivoting our marketing spend from the below the line type spends to ensure that we've got first the affordable pricing, which resonates better with the consumer and better availability in store. So this pathway will continue to generate volume, And importantly, it will get us closer to the breakeven. As you can see, we are much closer, but we have not stated exactly when that breakeven will be because we want the flexibility to continue to invest in the brand as we need to. Got it. That makes sense. That's helpful. Thanks very much. The next question comes from Andrew McLennan of Goldman Sachs. Please go ahead. Thank you. Good morning, everyone, and welcome, David. Great to Catch up since the PAC Brands days. Welcome aboard. Mike, I've got just One quick question around provisions for Rice and then a question around new customer recruitment. Just that provision incurred in the first half, was that fully expensed in the first half? Or is it still rolling through into the second half? No, it's still expensed into the first half. Okay. Sure. And then in terms of early stage Sales, you did mention in that December downgrade that new customer recruitment was an area where you really need to lift At the same time, the early stage sales from what we can see on the Tmall activity have been materially underperforming versus The later stages. And obviously, there's some argument to suggest that they may provide a leading indicator. Can you talk about How those the relative performance on stage sales has gone and whether or not you've seen any improvement since your comments in December. Yes. Look, great question. I think for us, it's sort of a The title of 2 cities, so to speak, in a sense the MBS environment is very different where we're supporting a lot of the investment on new user recruitment within MBS hence the uplift in investment in Mama Class and in store promoters. So that's one of our key drivers in key ambitions within MBS. Within CEBEC and Diogo, There is a relationship clearly between Diago Push and therefore new user recruitment. So the expense which we had some downward pressure on Diogo push, then yes, you would expect some Some drop in years of equipment in the early stage. Having said that, the later stage, Stage 3 in particular, there always tends to be a lot of brand entry at that point. So It's fair to say they are 2 very different segments and you still can be very successful in Stage 3 in particular and getting the users based on the back to branch which in that segment without necessarily wanting to having Stage 1 uplift in the usual recruitment. Having said that, We are still very intent on making sure we do up the Stage 1, hence the ambition to uplift Daigo in order to achieve it. Okay. So overall, when you aggregate the relative sales growth in MBS and CBEC, How are the stages performing? Is Stage 1, Stage 2 underperforming Stage 3 sales growth? But we're not giving out specific numbers. We haven't clearly ever done that. But yes, broadly, the trends around in mine having on aggregate wise, we're probably a little lower in stage 1. But as I said, we're not going to be precise about that. Okay. Thank you. This concludes our question and answer session. I'll now hand the call back to David for closing remarks. Thanks, everybody, for joining the call today. I'm really looking forward to making a contribution to the business going forward And engaging with our investors and analyst community over the roadshow over the next this week and next week. So look forward to catching up with you all. Thanks for joining us today. Cheers. That does conclude our conference for today. Thank you for participating and you may now disconnect.