Clover Corporation Limited

Thank you for standing by and welcome to the COVID Corporation Limited HY26 results briefing. All participants are in a listen only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Mr. Peter Davey, Managing Director and CEO. Please go ahead.

Good morning all. Welcome to the first half FY26 investor presentation. I'm delighted to be with you and present some good results. I'm Peter Davy and he is Andrew Elegon. Andrew is the Company Secretary and CFO. He will take us through the financial part of the results and following the presentation we're happy to take questions from you. So if I move to the highlights of the first half financial year, revenue was up $6.5 million to $44.1 million. That's a record result for the company, so an outstanding revenue result, which has driven our gross margins up to 35.6% as well. The revenue has really been generated with new customers and some of our other customers really improving their results as well. So a mixture of the two, which is driving an improved revenue result. EBITDA, $6.9 million up $2.6 million on the prior period by half has been outstanding. That's really underpinned by... The new product mix of products that we've got, so that's delivering better margins, delivering with new customers, and an improved manufacturing performance across the entire business. Cash on the balance sheet is sitting at $10.3 million. That's offset a little bit by we've had to increase our inventory position by $10.2 million, and that's really just in response to the improved customer demand. We've tried to flex our inventory position relative to the demand that we've forecast in the business, and so you can see we've had to increase that volume in response to the increased demand we're seeing. NPAT for the period up $1.8 million to $4.2 million, so it's nice to see it washing through to the bottom line as well MPAT is really a reflection of that mixture of growth and the new customers that we've added into the business. The more new products that we get to sell to customers, the improved gross margin and ultimate MPAT position. And of course, the increased sales of each month helps wash through to a higher profit in the business. And I'm really pleased to say that the board has approved a one cent per share interim fully franked dividend per share. So that's wonderful to see that we're giving a continued return to our shareholders and investors. And thank you to them for sticking with us through some tougher periods before. As I move to some of the highlights, the operational highlights of the business, it's really a story of we're starting to see the benefits of long-term collaboration with our customers. We have developed a portfolio of products over a period of time that gives customers solutions they can't get somewhere else. And so it takes time for those customers to go through qualification and shelf life testing those products, but it's really now starting to deliver a more diversified mix of customers, of product applications, and that gives us a better mix that delivers an improved margin position as well. We're providing a solution that nobody else can. We've seen some really good opportunities come through the seniors nutrition market and powdered nutrition. Powdered drinks is really growing in the marketplace for growing up toddlers and adults into things like sports nutrition, and that's really diversifying our product base. You would all be aware that for a long time we've been extremely strong in the infant formula market. We're now seeing much more diverse customer base for the business. And we've added a lot of distributors. So we started to talk about this at the end of last year, that we were moving away from our sold service in the marketplace to a distribution model. And so over the six months, we've appointed many distributors country by country that is helping us access customers that we've never had opportunities with before in segments that we haven't been able to service. We've seen some benefit to that, and we expect that will continue in the future. More operational side of the business, Ecuador has provided us with consistent supply of our crude oil which is helping deliver improved profitability. Melody Dairies is a business in its own right that we are an owner of and that it's delivering real operational benefits and they've resolved their non-compliance issues over their banking covenants on their loan. Colleen Excel's product we spoke about last year. It's still in its development stages. We are working on different packaging formats for the product. So customers will want it in different sizes to what they buy our traditional products. So we're looking at implementing new equipment to be able to do that. Customers are doing trials of the product and going through shelf life trials. And that'll take some time to get through where customers understand the product and will use it. I've got some more detail I'll cover later. And pleasingly, we've paid all bank debt as well in the half. So the balance sheet's looking quite clean with no bank debt, opening some opportunities for further investment in the future. This slide we talked about last year, and I think it's a really strong slide, and it shows the continued improvement with new products that is driving both the growth of the business, but also improving and growing the margin of the business. And if I just talk to the graph part, You can see over the period that the base products of the business, which have been with the business some 20 years, they're the ones that we make less margin of. They're not differentiated from a lot of the competitors' offers, and so they represent a couple of products in the business. We now have a portfolio of about 22 products in the business. So that 20 other products is what's representing a diversified product base where we're giving solutions that other people don't have. We're not a one-size-fits-all business. We try to provide a solution to a customer's problem so they can get an answer and therefore use our products. And that's really opened up opportunities you can see in terms of, one, revenue growth, but also really driving our margin positioning. And we are selling that into human nutrition, into food, into nutraceuticals and into new infant formula applications as well. And it's really where the story of the business is driving now and we expect that will continue in the future. I'll now turn to the financials and ask Andrew to take you through the post.

Thank you, Peter. And given the financial highlights, Peter has made commentary around revenue and gross margins Just in terms of on this slide, I think it's worthwhile. Previously, we haven't called out the gross profit as an individual line item. And just for clarity for those on the call, the number effectively represents what's displayed on the appendix 4D from the profit and loss statement, which is revenue less the raw materials and consumables. And we've been consistent in how that's been determined. So as Peter said, gross profit at 35.6, a pleasing increase which is aligned with the customer and product mix that's happened through the first half. And again, for those on the call that would have listened to our full year results, we finished last year and our published accounts show our gross margin at 30.4%. So again, the message around continuing to diversify our product range, meeting our customers' needs and expectations for their own their own purposes that has delivered the higher gross margin, which is very pleasing. Across our operating costs, they have increased. We continue to support growth through headcount, fundamentally looking to source up in our R&D department quality and through our sales teams. In terms of the bottom line, NPAT at 4.2, return on sales at 9.6, so we're getting back to where the business was some four years ago. which is really pleasing as well. So it's coming through. The hard work that's been undertaken over the last few years is really starting to pay off. I just might make a call out there and someone has highlighted that the ROI is not annualised. It's actually a period number. So the 5.8% is for the half year. So in rough terms, the annualised position would be 11.6%. I'll turn to the next page. Before I do that, I have called out the unfavourable impact there of 1.7. This is around the restatement of our consolidated accounts and equity positions, which again you'll note on the Appendix 4D for those that have had an opportunity to look at it. Multitasking, turning to the next page, in terms of cash flow. Our operating cash flows have been solid but in comparison to the prior year, it is down. That's fundamentally that we've now got cash tied up in the inventory position. That has grown for the first half of this year and certainly from the first half of FY25 and I'll talk to that on the next page when I get to it. The rest of the information is presented. Plant and expenditure, minimal through the period. It's residual capex relating to Ecuador and we've now invested in a packaging line for oil pouches again to meet our customers' growing needs. And with the Ecuador investment complete and as Peter said earlier, those borrow funds now have been fully repaid so Ecuador is starting to perform to the levels we want it to and we'll touch on that a little bit later as well. In terms of the Next page on the balance sheet, we continue to hold a strong cash position, sort of an average of around $10 million historically and that's really to address any fluctuations in our working capital which has come through in this reporting period. The higher level of inventory fundamentally is all in raw materials. The current year's raw is 24 million of that 35 million as displayed in first half 26, so it's close to 70% of our inventory is based in raw materials, which is oils, both refined and crude. And then as a comparative in the prior period, raw materials were at 12.7 million, so around 50%. So you can see that the growth from half on half is principally all in raw materials in readiness to meet future needs of our customers as we move forward. The Ecuador investment is complete. Bank debt fully repaid, as Peter said earlier. And we just called out there that whilst we don't have debt on our books, our ownership interest in Melody Dairies at 43.9%. We do have associated debt related to that investment. I'm sure you'll have questions at the end of the call, so I will hand back to Peter now to take you through the operational highlights.

Thanks very much, Andrew. I'll talk to some of the facilities and how they're delivering and some of our new product programs. Ecuador, just to background some people on Ecuador, about 50% of our raw material is tuna oil that we use in our products. So therefore we're very reliant on different sources. We strategically invested in a company-owned facility. So Clover owns 100% of the facility that we built three years ago in Ecuador. Ecuador is the third largest tuna fishing port in the world. Essentially what we do is we buy the heads of the tuna fish that are used for filleting or for canning. Neither of those operations utilise the heads, so we take the parts that aren't utilised. We then debone those heads and we extract the oil from the meal. The meal and the bones are all crushed and resold, so we sell that product, and then we take the oil as a crude oil and bring it to Australia where it is refined. It is outstanding oil. Really, for the business, we need to ensure that we have supply chain surety of quality supplied product, which we get out of the equitable business. We still buy 70% of our oil off other businesses. It gives us another country, another domain that we buy oil from. So we buy it out of different facilities around the world. So it gives us another territory to buy from, removing supply chain risk. It is extremely high quality. It's the best quality oil that we get from the world coming from our own facility. The waters of South America provide a different profile of oil, so it allows us to blend oils with other oils we buy from different oceans to achieve a customer result, so we need that variance. And of course, it gives us control over the price position. So understanding the costs of sourcing and extraction allows us to be better placed to deal with our other suppliers in terms of our price position. So over the half, the volume of the crude tuna oil that we're getting from the business represents 30% of the volume of oil that we bought in the period. We expect that will continue and hopefully improve in the future. We are negotiating for additional head suppliers, so some businesses want to retain them themselves. We're proving economically that it's a benefit to them that they should supply to us because we buy them often. And we've added some resources to the business, so we've put more employees into the business so it's capable of meeting increased demand in the future. really good story that's contributing to the revenue of the business but also the profitability of the business for a competitively sourced oil. If I move to New Zealand, Clover owns 43.9% of a spray-drying facility that we built in 2020. It's called Melody Dairies. It's gone through some challenges over time but going really well now and it's delivering a very high quality product and we're getting good efficiency, good efficient use of the plant in alignment with the other shareholders and other users of the facility. The facility now operates profitably, so it's meeting the original parameters that were established when we did the investment some six years ago. Clover now uses that facility every single week, so we are in there most of the time manufacturing on the site. and we are continuing to pursue other opportunities to improve efficiency so over the period we've been able to improve the off-take so the productivity of that facility and we will continue to do other things that will help us from an investment and a process management perspective to get higher productivity out of the site one of the things that this plant really does is it allows us to manufacture a lot of these niche products that we've developed so If we were manufacturing the two products we were 10 years ago, we wouldn't need it. What we do now is we manufacture a much broader range of products and this facility is really designed to be able to produce the niche products that we supply to marketplace. The other side of it is it offers us absolute supply chain security to us and our customers. When they buy off us, they know that if the facility in Australia has an issue, we've always got another facility that's in New Zealand that helps us and helps our customers with buying from us. I'll move on to one of the new products that we talked about late last year. It's called Choline XL. Choline by nature is a similar product to a salt. It is legislated to be used in infant formula. It's a product that is required by the human body for brain and nervous system development. But most important of all, it is the carrier of lipids through the human body. So the lipids that we supply are the DHA and the omega-6 and omega-3 products that we sell. It has a unique problem. Being a type of salt product, it attracts water from the atmosphere. So it's very difficult to use in any sort of dry blending operations So what Clover has done is developed a powdered form of this product that's very flowable and can be used in a dry application. Where we're up to, we've given samples to some customers. We've been cautious about who we've given it to in that we can't over promise and under deliver. We've applied for intellectual property. We expect that to be granted in July of this year. We're working through different packaging formats for the product. So being a very hydroscopic product, it needs a specialised packaging format and different sizes to what our customers would traditionally buy. We have not given it to infant formula customers because we just don't have the capacity at this stage to be able to supply the infant formula market. even though some have already found out about it and want it. And we're looking at securing a manufacturing footprint for the product. We have one site that we're using on a contract basis, and we're looking to purchase a site to extend that manufacturing that will take us into the infant formula market in the future. I thought the next slide covers a bit more about DHA and ARA to really underpin the story of the results that we're presenting today. These two are the core products that we actually sell. DHA is an element of omega-3. It is essential for the development of your brain, your eye and neural signalling through the body. It is legislated to be included in infant formula basically across the entire world and it's now being used in a whole range of other products that go into human nutrition, especially into the seniors market and sports nutrition. There's been a lot of research in recent times that's helped us expand our market. And so what we've done is taken base products and delivered it in different formats to suit different applications for customers. So that 20 additional products that we've grown over the last 10 years is now going into a whole range of different applications that other people just don't have. So we've been able to develop with customers solutions that's now delivering in terms of revenue and our margin position. And it's not an overnight success. When you present a product like this to a customer, they'll often take three to five years to develop the product, do the testing of it, and bring those products to market. And so now we're dealing with hundreds of customers in this sort of product range, not the 20 or 30 customers we were dealing with 10 years ago. So we've also added distributors in the marketplace. It's fairly new to us but those customers, those distributors are now opening up new customers that we've never had access to. We have a fairly limited team in the marketplace and so by adding distributors by country, they're taking our products to customers that we've never been able to see before. So that'll continue to grow the business and offer us new opportunities to further diversify the base. The ARA product. ARA is called aridonic acid. It is an omega-6 product. It is included in infant formula. In Europe and in China, it's legislated to be included in infant formula. And it's a key component in regulating inflammation, immunity, and brain function. So the human body needs it. It's looking pretty positive for us. So we've got a strong customer forecast for it for the second half of FY26, following a recall of our competitors' products. So it's opened up an opportunity for us to be able to supply a lot more of this product into the marketplace. We've also, as Andrew alluded to, we've just put a new packaging machine Customers want this product in different sorts of size packaging and so we've only in the last few weeks taken delivery of new packaging equipment that will allow us to meet customer expectations about the way the product is delivered to them in different formats. Next slide talks a bit about the Premneo product. Most of you will be aware of this product that we did clinical trials on it. It's proven to increase the IQ of preterm infants. We've now planned a clinical trial in the Indian market for registration in India. It's the largest market in the world. We're seeking regulatory assistance to help us progress regulatory approvals into Singapore and Canada. They're a bit of precursors to other markets. Generally, the world will follow what Singapore and Canada does, so we're focusing on them. And we're going through a second round of clinical experts that are reviewing the product for the EU market. And their opinion will come after they've done verification work with the people that actually did the science, the scientists that did the original trial. And so their opinion will come from those discussions. Obviously, we don't know the result of that at this stage. I'll return to a bit of the strategy and outlook for the business. The priorities for the second half of the year, when you look at our growth, it's all been underpinned by our R&D investment. We will continue to support our R&D business to further our applications, our uses of our existing products, the development of new products that we can go out to marketplace and further diversify the base of the business and grow and improve the profitability. It's a proven formula for us and it's starting to deliver, which is just We will continue to invest in our vertical integration strategy where we've got Ecuador on board and we've got Melody Dairies that delivers us supply chain quality, cost efficiency and make sure that we have available ingredients for our production and production facilities. We're pursuing alternative applications with our products, so it gives us continued diversification of other markets. We're continuing to expand that distribution network that will help that diversification. So I've spent time in cars with people in different marketplaces and visited customers that we've never seen before. Only last week I was in China and managed to see businesses that are in the nutraceuticals and food market, which provides a great opportunity And then the last one is that we are doing more trials with the chlorine powder. Customers are doing their own testing and shelf life testing. And at the moment, the focus is around food, beverage, and the seniors, toddlers market. As we add capacity, we will then look to the infant formula market, which is by far the greatest opportunity for the product in the future. You need capacity before you go and approach that market, though. And then... what everyone wants to know, what's the outlook for the rest of the year and it's a really pleasing outlook. The Board anticipates that the positive momentum from the first half of FY26 will carry forward, resulting in a stronger second half based on the current demand forecast. So we're seeing strong demand through the business. This outlook does assume that geographical tensions will not worsen and supply chains will remain stable. ensuring both inbound material supplies and outbound shipments are not disrupted throughout the rest of the financial year. And I'm sure we're all well aware of some of the tensions that are occurring in the world at the moment, so we're hoping that doesn't impact us. It hasn't so far. So our revenue guidance for the full year FY26 is in a range of 92 to 96 million, which would certainly make it a record year for the entire business and very pleasing to be able to deliver for our shareholders. So with that, I thank you very much for your interest and your time and I look forward to your positive questions. Thanks very much.

Thank you. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star 2. If you're on the phone, please pick up the handset to ask your question. Your first question today comes from Mark Southall-Keeley with Select Equities. Please go ahead.

Good morning, guys. Good morning, guys. Thanks for taking my questions. Could we settle for some constructive questions rather than necessarily positive questions?

I even said that just for you, Mark, so there you go.

Good stuff. Just the first question just on the guidance. There seems to be potentially a little bit of inconsistency in terms of the language in the update in the sense that the working capital update and the reference to demand been so strong so you're building up your inventories to service that really strong demand. which sounds fantastic. But then if we look at the guidance and just look at the second half, what it implies in terms of the second half, it doesn't look like there's a huge growth factored into the second half vis-à-vis second half last year. I'm just wondering if there's a little bit of inconsistency there in terms of how you're talking to the inventory versus the revenue guidance.

In the inventory position, we had reduced our inventory to around the $30 million mark or a bit lower. So we pushed it just down too much. We needed to get it back up to a position where we could respond to changes in the marketplace. So we've probably added more inventory to the marketplace. and in relation to the ARA position in the marketplace, it's not a stock we would have held a large volume of, so we've had to buy significantly more of that to be able to meet the opportunity. There is a bit of a surge in the marketplace to try and get some of that oil, so we've probably bought more than needed at this stage. The guidance is genuinely a reflection of what we're seeing in the forecasts that we've got, so they're pretty much, they're in the forecast. It's just even the variance there is just will customers all take it in the last couple of months? Sometimes we'll see it pushed over into the next year. It's just purely a reflection of what we genuinely know, that's all.

The performance in Europe during the half looked extremely strong and must be very pleasing for you guys. Conversely, the US territory does seem to be underperforming. Just wondering... Any specific feedback you can provide in terms of the US?

US has been disappointing. We haven't been particularly strong there. In the half, we've added two new staff into the US. We've also appointed a distributor to try and address that. We have traditionally serviced one of the largest infant formula companies in the market. so that's reflected in our results. So we're doing things to address it, to try and grow it, but, yes, it's disappointing. And hopefully the new people and the new distributor can help address that. Europe's been really positive. We've added new customers there. You may recall that about two years ago we put a new team into Europe, so we put three people in there, and that's certainly starting to deliver. They're very impressive. They're doing a very good job for us. Europe is a reflection of Europe and the Middle East, so the Middle East is doing very well. A little bit of the benefit of the current tension is that it's been helping our business because we can get product across into there where other people can't. So Europe's a reflection of good growth with new customers, long-term work with customers to get those new product applications going, so it's not just driven by one segment.

Understood, thank you and also just finally from me, in terms of I guess transportation costs, have you guys completed any sort of sensitivity analysis that you might be able to share in terms of movements in transportation costs?

So, Mark, in terms of sensitivity analysis, we're looking at it. We're responding to customers' needs both in shipping and in air freight. So we are seeing shipping lines putting surcharges on their bills. I'm in the middle of analysing that in a bit more detail. So it's probably one of the qualifications that in terms of our full year guidance around gross margin, which we're not giving you, would be where are we today, how will that impact. They're all the things I'm currently looking at as we go forward.

You guys have the ability to mitigate any of the, assuming some increases in these costs.

Are you able to mitigate that with... Yeah, there's certainly an opportunity to pass those costs on to customers, but there's often a lag in that process. So that would be something that would be a bit of a drag on potentially the second half of this year in terms of getting those increases through and how long they persist will be another issue in the decision-making.

Understood. Thank you.

Thanks, Mark.

Once again, if you wish to ask a question, please press star 1 on your telephone. Your next question comes from Stella Wang with CTHD Investment. Please go ahead.

Hi, good morning, guys. Can you hear me all right? Yes, fine. Great, great. Firstly, congratulations on great results. My first question is regarding the different performance across the three regions. Now, the sales from AMZ plus Asia is slightly more flat, up about 2% to 3%. Was any of this due to the negative impact on some of your customers after recall? And on the other side, Europe is absolutely shooting the star out. Is any of the new ARA demand after recall contributing at all so far to the H1?

No. So the short answer is no, and I'll explain it a bit more. Really, we didn't see anything of the recall in the marketplace until December. It really didn't wash through with any of our customers until January. So our first half ended at the end of January. What we saw in January was a lot of inquiries from people. So what we've done is we bought product as quickly as we could. Hence, we put a lot of inventory in in January, as much as we could possibly find. None of our customers' demand would have been impacted during that period and what we expect is a positive result out of it as we're seeing customers that would traditionally buy the DHA product but not the ARA office, they will now start to buy the ARA office. So that's reflected in some of the improvement in the second half. Customers are still coming to terms with it as well. Some of them are looking at how it affects them, what they do to respond to it, and you're talking about an element that often will take people years to make a change to the sourcing of because they have to go through shelf life testing and different things. So some we already were approved with. They're the ones we will get some business out of, but others are now going through qualifications with us. So does that answer your question, Stella?

Absolutely, it does answer the question. So, any impact, negative or more possibly positive, will be coming through gradually in H2. Now, longer term, just trying to understand, once they change from using oil to your powder product of ARA, would they just continue on or would it be easy for them to switch back in the unlikely event of your competitors coming back into the group book?

The customers that we're dealing with were buying a powdered version of an ARA product originally, not the oil ones. And so it's a like-for-like sort of change. Will they go back? If I was them, no, I wouldn't. They are... They were buying a product that was considerably cheaper than our product, and that's why we didn't have a large amount of that business. But buying a cheaper product has proven quite detrimental to a lot of brands in the marketplace and some of the biggest brands in the world. So I think they're all going to rethink their sourcing strategies, and I doubt we'll see them going back to that competitor's product ever again.

Great, great. Now my second question, regarding the choline development now on trial with the customers, congratulations, what's the typical timeline for those non-infant products?

Probably into the next financial year, we should start to see some revenue from the choline products. So we'll go through the remainder of this year doing production trials and packaging trials and shelf-life testing. And we would expect to see sales into the first half of the next financial year.

Great. Now, the third one, if I may just squeeze one in, there are some positive impacts on your growth margin from AUD being strong against New Zealand, as you said. commented in your announcement. Was that much or can we expect such strong gross margin to continue despite of the potentially temporary strong Aussie dollar against New Zealand?

No, the gross margin impact is really the operational benefits out of Ecuador, our Altona facility operating at good capacity. Melody Dairy is operating at good capacities, giving us a lower cost per kilo, and fundamentally the product mix that we're selling. It's not really given on the back of currency. That's improved our gross margin there.

We did talk to the currency headwinds, so maybe you explain that.

So, yeah, so in the results, In terms of in the P&L, the notes to the P&Ls, in the prior period, we had profitable FX gains, and in the current year, which I'd highlighted at the end of last year, that I expect that would turn around, and it has in line with the AUD strengthening against the US and to the euro through the course of the year. So that's where we're copying... negative impacts in our result for this path. So it's the restatement of US cash holdings, US investment, Ecuador, investment in New Zealand, that restatement is of those assets, movements in currencies while we're reporting these losses.

Great. Thank you both, all from me. Okay.

Thank you. There are no further questions at this time. I'll now hand back to Mr Davey for closing remarks.

Thank you all. Thanks for your interest. Nice delivering some improved results and giving you an outlook that's quite positive. So the business is getting in the right direction. And I look forward to seeing many of you over the next few days. Thank you, Andrew.

That does conclude our conference for today. Thank you for participating. You may now disconnect.