BUSINESS UPDATE for the period 1 July 2016 to 30 September 2016 Quarter 2, FY2017

Transcription

1 BUSINESS UPDATE for the period 1 July 2016 to 30 September 2016 Quarter 2, FY2017 Commentary: AUCKLAND, New Zealand, 31 Oct The Board of Oceania Natural (NXT: ONL) is pleased to announce the quarterly performance of the business to 30 September 2016 compared to the company s Key Operating Milestone (KOM) targets for the year ending March 31, Total revenues Sales for the quarter were $1,007,000. The quarter was marked by laying further groundwork in China, which includes preparing for growth to accommodate larger sales volume through channels now controlled by the business. These channels to market are aligned with new Chinese regulations that favour businesses building physical establishments in China. The establishment of these channels was pursued in lieu of chasing short term immediate volume sales, which would have led to more total revenues for this quarter, as compared to long term sustainable revenues. The company has continued to build its presence in China, this includes: 1. Opening ONL Wuxi - a new physical presence in Wuxi City This new physical presence in Wuxi City began trading in September and generated revenues of $544,514 for the 22 days it was operating during the reporting period. ONL Wuxi serves as ONL s Asia headquarters and now employs five staff. 2. Activating new distribution networks These are controlled by partners who are shareholders in ONL Asia, the incorporated joint venture established with Chinese investors in Hong Kong in July. The Wuxi-based sales team are working with the new partners in establishing a strong promotional programme to introduce ONL products to their existing client bases. 3. Developing new technology to protect consumers from counterfeits The management team has also spent considerable time this quarter developing a new mobile scanning authentication application, TrustONL, that runs on WeChat s platform and protects consumers from the growing number of counterfeit food products being sold in China. 4. Negotiating an agreement with Property and Casualty Company Limited In tandem to developing TrustONL, ONL entered an agreement with China s largest insurer Property and Casualty Company Limited (PICC), which, from November 2016,

2 will control and produce all the labelling of ONL products sold in China. These labels include a protected QR code that can be verified when scanned through WeChat, therefore, guaranteeing the authenticity of ONL products to the consumer. ONL believes it may be the first Manuka honey supplier to offer this type of assurance system globally and will be using TrustONL for all products exported to China. Direct and distributor sales Increased ownership and control of distribution networks is the key sales strategy being pursued by ONL. This allows ONL to remain in control of its brands and ensure promotional activities are focused on driving overall awareness of the ONL product range in China. Direct sales are $880k for the quarter. This includes the $545k revenue from ONL Wuxi City. ONL Wuxi is working with local partners to assist with the direct sales channels and this may see smaller inventories held by distribution partners in future. Distributor sales through ONL s existing distributors were $127k. There have been no large volume sales orders for this quarter to our three independent distributors, resulting in their sales falling below the target range. However, sales through our NZ channels, ONL Wuxi and other direct channels (e.g. online) represent the pattern of sales made in Q1. As the ONL product range expands, it will also be made available to current independent distributors, as they focus on geographic areas that are not covered by the ONL Wuxi base. Online sales Online sales channels continue to be strong. Gross margin Second quarter gross margin was 43% and above the KOM target. However, current pricing expectations have been lowered given the current discounting of honey products in China by ONL s competitors (discussed further below). This will adversely impact gross margins if retail pricing remains at current levels. Investors pour $533K into Manuka Bonds The Board is pleased with the uptake of Manuka Bonds, a debt security issued in August to fund an increase in ONL s bulk Manuka honey inventory. Manuka Bonds issued as at 25 October total $533k. Wholesale investors have invested $326k during this reporting period, secured by a first ranking specific security interest over the specific barrels of Manuka honey purchased with the investor s subscription for a period of months (at an interest rate of 8%).

3 The Manuka Bonds offer is perpetual, continuing as long as there is investor interest and a need for honey supply. Manuka honey may increase its Manuka Factor under controlled conditions during the months it s in storage and potentially appreciate in value. This offers Manuka Bond holders the potential to share in the uplift in value if the honey moves into a higher Manuka Factor band. Outlook Changing regulations in China mean that businesses building a strong physical presence with direct-to-consumer relationships stand to benefit over those relying on third party distributors, pure online sales or informal trade channels. The Board has noted that some competitor products are being sold at heavily discounted prices for extended periods. This could be due to an attempt to reduce surplus stock levels, a market correction to selling prices, or a rise in the availability of counterfeit products, which are often sold at much lower prices than genuine premium Manuka honey products. The Board believes discount pricing will be unsustainable for competitors. While there is an increase in lead times for new orders, the Board expects sales of ONL premium honey products to rise in the following two quarters, in line with the KOM targets. New ONL distribution channels are expected to generate large orders for the busy gifting season starting in the next quarter. The upcoming third quarter includes the busy Christmas and New Year period, as well as a large Chinese festival called Singles Day on 11 November, which has become the largest single online shopping day in the world, surpassing Black Friday and Cyber Monday in the US. For example, online retailing giant Alibaba reported $US14.3 billion of sales last year on that one day. While revenue for the quarter has increased, the Board currently believes that its annual KOM targets are still reasonable and that no adjustment of the targets is required at this time. The first two quarters have focussed on scaling the business for future growth, including expanding our physical footprint, direct distribution channels, ensuring the company is well positioned to navigate new Chinese regulations for online retailers, and to protect consumers against the rise of counterfeit honey products. Beyond China During the quarter, trial shipments to Taiwan and Japan were completed and further distribution opportunities in these markets are being evaluated. ONL is expecting to ship the

4 initial products to the South Korean distributor during November and the Board remains excited by the growth prospects of the Noni Juice and Noni product range within this market. Performance against Key Operating Milestones: Key Operating Milestones ( KOM ) Q1 FY17 Q2 FY17 YTD FY17 Full Year FY17 Targets 1 - Total Revenue ($ 000) $51 $1,007 $1,058 $5,380 2 Direct Sales ($ 000) $25 $880 $905 $1,380 3 Distributor Sales ($ 000) $26 $127 $153 $4,000 4 Gross Margin Percentage 56.0% 43.0% 43.6% 40.0% KOM Calculations: Total Revenue ($000) ONL is a relatively new entrant into the market selling honey products, Noni juice and natural product supplements and total revenue is a lead indicator of the success of the business. ONL has key relationships and distribution agreements in place that will drive revenue growth and is working on various initiatives to increase New Zealand and other international market revenues. Together with other products on offer, the demand for its products is growing strongly and the investment in building the Rich Garden brand in China will see further strong revenue growth in that region. The revenue projections made in the KOMs are in New Zealand dollars and will fluctuate depending on currency movements of the New Zealand dollar exchange rate against the currencies where the products are sold. Additionally, ONL s sales revenue increase in the second half of the financial year due to Singles Day, Christmas, Gregorian New Year, Chinese New Year and Valentine s Day falling within this period. These events generate higher than normal sales in ONL s key market of China. Direct Sales ($000)

5 Direct sales channels include local sales to New Zealand consumers through business-to-business sales agreements and online channels both domestically and internationally. Channels for direct sales include: Online sales through various websites offering the products; and Rich Garden instore display areas within retail stores and through its own stores (including ONL Wuxi) ONL s strategy is to increase its direct sales through online channels and company-owned retail stores. This will provide ONL with more control over brand and distribution, as it develops additional products. Distributor Sales ($000) Distributor Sales are generated by third party distribution channels. Various sales channels and selling platforms are used with the majority of the marketing being done in China through selected distributors. ONL continues to work with various distributors in order to increase revenues in foreign and domestic markets. Sales channels through distributors include: Distributors that have entered into agreements with ONL to market its product range through their marketing and sales channels; and New distribution partnerships established through ONL Wuxi, which serves as the central location from which ONL manages and grows its distribution network in new provinces within China. Distributors provide both a physical presence and expertise in their home markets enabling initial growth of ONL s branded products. However, over time the proportion of total sales through distributors will decrease as the company builds its direct and online sales channels. Gross Margin Expressed as a percentage. Expressed as a percentage, the gross margin represents the percentage of total revenue that the combined ONL group retains across its various products after incurring the direct costs associated with producing the goods and products sold (COGS). Maintaining and growing Gross Margin allows ONL to spend a higher percent of revenues on other business operations, such as marketing, expanding into new markets and investing in its own beehives. It is calculated as follows: Gross Margin % = [Total Group Revenue (less) COGS] / Total Group Revenue Future Events:

6 Event Date Half Year Preliminary Result Due 30 November 2016 Interim Report Due 31 December rd Quarter business Update Due 31 January 2017 ENDS Authority for this announcement Name of senior manager or director authorised to make this announcement: Malcolm Lindeque Contact phone number: Contact address: Malcolm@onlgroup.co.nz Date of release: 31 October 2016 Oceania Natural Limited s shares can be traded on the NXT Market. Oceania Natural Limited is required to disclose information under the NXT Market Rules. Information about the NXT Market and Oceania Natural is available here or from the company s website at For media enquiries please contact: Julie Landry, Connect PR, julie@connectpr.co.nz or About Oceania Natural Ltd Oceania Natural (ONL) produces and distributes healthy, high quality products derived from natural food ingredients, including New Zealand Manuka honey as well as Noni fruit sourced from the Cook Islands. More than 80% of the company s FY2016 sales were generated from China, where ONL has an established network of distributors marketing its products under its Rich Garden brand. The company also sells direct from its websites and through a number of popular online trading platforms in China including Tmall, WeChat and Alibaba. See