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Edited Transcript of 1112.HK earnings conference call or presentation 21-Aug-19 2:00am GMT

Half Year 2019 Health and Happiness (H&H) International Holdings Ltd Earnings Call

Sep 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Health and Happiness (H&H) International Holdings Ltd earnings conference call or presentation Wednesday, August 21, 2019 at 2:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Fei Luo

Health and Happiness (H&H) International Holdings Limited - Chairman

* Laetitia Marie Edmee Jehanne E. P. Garnier

Health and Happiness (H&H) International Holdings Limited - CEO & Executive Director

* Yidong Wang

Health and Happiness (H&H) International Holdings Limited - CFO & Executive Director

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Conference Call Participants

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* Lincoln Kong

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Tiffany Feng

Citigroup Inc, Research Division - VP and Research Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Welcome to the 2019 Interim Results Presentation for Health and Happiness International Holdings Limited.

Before we start, let me introduce the management representatives who are with us today. With us today are Mr. Luo Fei, Chairman; Ms. Laetitia Garnier, Chief Executive Officer; Mr. Jason Wang, Chief Financial Officer; Ms. Joy Tsai, Investor Relations Director.

Mr. Luo will first give us an opening remarks, then Ms. Garnier will review the group's financial highlights and walk us through the group's business review, outlook and strategy. After this, Mr. Wang will walk us through the additional financial information. Lastly, we will open the floor to questions. I will now pass the stage to Mr. Luo. Thank you.

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Fei Luo, Health and Happiness (H&H) International Holdings Limited - Chairman [2]

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Dear investors, good morning. I'm very glad to be here with you in the 2019 interim results announcement. In this age, we are faced with a lot of different fluctuations and uncertainties. And in the first half, we've experienced a lot of different changes in the market. And against this backdrop, the management has tried very hard to achieve double-digit growth in terms of our revenue, and we have maintained very good profit, net profit margin, and we have done a lot to achieve this. And we also would like to thank our team who didn't make it here.

Overall speaking, we have 2 big segments, including BNC and ANC. BNC reached our targets basically at the beginning of this year. And in the major categories, we have surpassed the industry average. And there are some quick-growing categories, for example, the organic categories of the IMF products, we have also seen good results. For example, you can see that Healthy Times has performed very well in the first half. And also, there are some other pediatric categories, which also achieved quite good growth. And we have basically deployed our products for the BNC part in the first half, and this has laid a very good foundation for our future growth. So we are confident about our BNC.

As for ANC, you can see that it hasn't achieved our goal that was set in the beginning of the year. The main reason, you must know, is because of the e-commerce law in China. In Q1, ANC in China dropped by around 20% -- over 20%. This was not expected. But in Q2, we have narrowed down the decline in ANC sales in Australia. So we have made adjustments in the company. And ANC in China has performed quite well despite a lot of different challenges in the Chinese market in the first half. But still, Swisse China was growing very well in the first half. We are glad to see that the normal trade products in ANC are more and more. We have a lot of products, which are approved for normal trade in China. In ANC, we have more blue hat products, more SKUs on the market. So we expect that ANC will continue to grow a lot in the second half.

And we can see that with the introduction of normal trade in China, with a larger proportion of normal trade in China and less daigou agents, it is easier to manage for the company. And we can see that the daigou businesses are very much affected by the new e-commerce law. Daigou means the purchasing agent will try to help the daigou business to help them operate better while abiding by the law. And in the meantime, we'll also try to grow our active sales in China. Although both ANC and BNC faced some challenges the first half, we still see a growing trend.

And in the process, we also managed to reduce our financial costs. You can see that the return to shareholders numbers are better this year. Looking to the future, we are positive about both BNC and ANC in the long term, especially. But at the current moment, the macro economic environment, the market conditions for IMF and ANC, there are new channels, new markets, so there are a lot of different challenges, but we have to do a lot more work to sustain the long-term growth. We are very positive about the long-term growth of both segments, and we will adjust our structure in-house to give better returns to the shareholders.

And in the next part, Laetitia and Jason will walk you through some of our performance figures and the financial highlights.

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Laetitia Marie Edmee Jehanne E. P. Garnier, Health and Happiness (H&H) International Holdings Limited - CEO & Executive Director [3]

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Thank you, Fei. Morning, investors and friends. I insist on speaking in Mandarin.

In the first half, Fei just told you that we face a lot of external challenges in both segments, ANC and BNC. Despite all these challenges, we successfully got a double-digit growth. We see this as a good performance for the company, but especially, we see a lot of difficulties in ANC. It hasn't reached our expectation, but BNC was roughly meeting our expectation.

And let's look at the adjusted EBITDA figure. We see a negative 4.4% change in adjusted EBITDA in the first half comparing to last -- that of last year. This is because in the beginning of the year, we mentioned that in the first half, we will work on the core markets and the 2 core segments. In the meantime, we are working on new categories and new segments. So we are investing a lot into the future growth points. And if you look at the difference between the EBITDA and adjusted EBITDA, the difference was narrowing comparing to that of the previous years. We will talk more about the nonrecurring items later to explain about the smaller difference between EBITDA and adjusted EBITDA because we have done a lot of consolidation so that we reduced the nonrecurring items, so we see a smaller difference between the 2.

And for the reported EBITDA, it reflects a double-digit growth, 34.5% increase. And you can also check the adjusted net profit figure. It reflects our optimization in our reduction on financial costs and operating costs. In the future, we will continue to improve our efficiency to continue to improve our net profit and net profit margin. In the first half, the net profit grew by 85.5%, and the net profit margin was 14% in the first half. And as Mr. Luo just said, it was a very difficult number to -- for us to have achieved. We think it is quite a good performance, taking into consideration of the environment. But it hasn't met our expectation.

You can also see that the operating cash flows dropped by 16.5% in the first half. This was also affected by the environment. In the next half, we will optimize our inventory to try to increase our operating cash flow. As for the cash conversion, you can see that from adjusted EBITDA to operating cash flow, the conversion was not as high as last year. Last year, it was around 90%. But this year, it's still -- the conversion is still more than 80%. This still means that we are an asset-light company with very high cash conversion ratio.

And let's look at the 2 segments in more details. In the first half, there are a lot of confusions in the IMF market, and we continue to work on the premium and the super-premium segments. As for -- you can see that ANC revenue grew only by 4.8% in the first half, and the adjusted EBITDA also was reduced by 19.3% in the first half. This was because of the difficult market in the first half.

And about the revenue mix, you can see that BNC has a lot of proportion now because BNC grew faster than ANC, but we'll continue to invest in both segments. This will remain our 2 major segments in the future. We still see growth potential for both segments.

So BNC first. In the first half, we had a growth of 17 point -- 14.7% in the first half in infant formula, 6.3% growth in probiotic supplement and also some growth in the new pediatric products. We have a lot of new categories, for example, baby food, diapers. This kind of other pediatric products grew by 107.4%. As we just said, the new categories will become the new growth drivers in the future for the company, and we will still continue to grow this part. We can see it is very fast-growing and has reached our expectation.

In addition to the category breakdown, we can look at the different markets in the world. China, Mainland China, remain our largest market, but we are still working on the other markets. For example, we'll launch our milk formula products in Australia in the first half. And also, we launched new VHMS products in Hong Kong SAR. And although China continues to be our largest market, we are trying to work on the other markets to drive the overall growth of the company. This is also part of our international strategy to launch products in different markets and devote a lot in different markets.

As for ANC, we see a lot of challenges, especially in the ANZ, Australia and New Zealand markets. And the first -- in the first half, ANZ market declined by 11.7%. In the meantime, Mainland China grew by 21.9% in H1. And the rest of the world, they are now starting to have significant contribution to the overall ANC revenue. It is now contributing 8.3% to total revenue. And we have a lot of newly growing market, including Hong Kong, Singapore, Italy, the Netherlands and also the U.S. All those other markets are growing very quickly at the moment.

And we would like to especially mention that in China, we have a lot of active sales, and the active sales proportion has growing over the years. This is also part of our strategy, introduced when we acquired Swisse. With that, we want to move from passive sales to active sales. We want to communicate with them -- with consumers more directly and work with the sales platform in China directly instead of using passive sales through the daigou agents.

So on the group level, Mainland China is always the largest revenue contributor. The proportion in the first half was 74.9%, about 2% growth compared to that of last year. In the meantime, you can see that the rest of the world part grew by around 2% in the first half. This is also in line with our international strategy. Here, you can see a lot of the brands under the group. You can see that we have adopted a multi -- multi-brand and multi-category strategy. When we talk to our clients, we don't only talk to them about Biostime or Healthy Times, we talk about a lot of different brands and different categories under the group. And we have always adopted the PPAE model, we want to remain Premium, Proven, Aspirational and Engaging. And we will invest more in the engagement part to gain more love from the consumers.

This year, we add an innovation part to our -- to us. And we also want to stress the engaging -- the engaging word. We want to make people to be engaged with us, to interact with us because without interaction, a brand will fail. You won't get any returns from your investment if you can't get consumers to love your brand. We need to conversion -- we need to convert the love from the consumers to actual sales. In the first half, we have done a lot of digital promotion work. For example, we have conducted staff training and some online interaction with our consumers to ensure that we can hear the voice from the consumers more directly.

So more about our businesses. BNC achieved a double-digit growth in the first half, and we continue to use the multi-brand and multi-category strategy. Especially, we've done 3 things. Firstly, in terms of branding, we've invested a lot in consumer education about our brand knowledge. And also, we work on innovation and channel development. In China, we have multiple channels, and we have new deployments over the first half. We have a lot of different channels including the baby specialty stores. In baby specialty stores, we work very closely with key national and regional accounts. In order to launch our loyalty program to attract new consumers and retain our loyal customers. For example, our MAMA100 loyalty program. We are promoting that very heavily in the first half.

Looking at the IMF industry, it has always featured a fierce competition. Especially in China, the birth rate is dropping. Still in the first half, the market achieved a 11% growth in sales, according to a Nielsen report. But we outperformed the market, and we also maintained a 5.9% market share in the IMF market. We are currently ranking #7. There are many other brands, which are -- especially foreign brands, which have grown very fast in China, in IMF. Still, we maintained our seventh place on the list. This reflects our market positioning in the premium league. And also our capacity to develop our channels and retain our customers. And we will show you more figures about our premium series. We have seen very good -- very pleasant growth from Healthy Times. And Healthy Times is currently contributing around 5.1% to total sales of -- under the group.

And about the channels, it is relatively stable comparing to that of last year. In the baby specialty stores, the proportion dropped by around 2% because there are a lot of competition. As for supermarkets and e-commerce, you can see that we have increased our market share in both channels. This can also be seen from our big promotion on the June 18 shopping festival in China. We have participated in that shopping festival very actively. We have launched a lot of digital content to achieve better sales during that period.

As for probiotics, we have outperformed our expectation. We have underperformed our expectation in the beginning of the year because we had a relatively high base last year. And when we launched our Q1 report, we've explained about the high base. And also, we see a lot of new participants in the probiotics market. We have the -- we have some blue hat marks, which have helped us in probiotic sales, but we still see a lot of new competitors in the market. We can see that currently, the entrance -- the entrance barriers have been smaller, so there are a lot of new competitors. Still, we have maintained a very good reputation because we claim to be the top 1 probiotic brand in the world. And we claim to be the #1 brand of pediatric probiotic supplement in the world. We are promoting this statement, not only in China, but also the rest of the world. And we think that in the second half, probiotics categories -- in this category, we will have more innovative products, which will help ourselves in the second half.

As for the other markets, in March, we shared with you that we launched our IMF and probiotics products in Australia, and it has performed relatively well. In Australia, currently, we have over 1,000 stores selling our IMF and probiotics products. Those channels were from the Swisse brand, including Chemist Warehouse, et cetera. And we also appointed Miranda Kerr as our Biostime brand ambassador. She helps us establish our global image. And in France, 2 years ago, we launched our organic IMF series. Although you might think that France is relatively a small market, but it is one of the biggest market in Europe in terms of IMF.

We launched our products 2 years ago in organic stores, and we acquired the Dodie brands afterwards. Dodie has a very good -- very good channels. It has thousands of pharmacies. Last year, in September, we launched our organic IMF series, and we can see that we are already -- we have already ranked #2 among organic IMF brands in the pharmacy channel. This means that we have very good quality in terms of our brand, and we also have very good selling points. We are very well accepted by the local French consumers. And in Hong Kong, in June this year, we launched our goat milk products. In China, we see a big trend for goat milk.

For normal trade in China, we need to see updates for the regulations, but we already launched the goat milk product in Hong Kong first as a trial for Healthy Times. The organic IMF market grew by 25.9% in first half, but we grew by 42.7%, which is much higher than that of the industry average. We are currently a very big brand in terms of organic IMF products in China. This was because we leveraged our channels very well. Last -- in the first half, we project the same growth. In the second half, we think we are on track. And the growth, we are very positive about the future growth for the Dodie brand.

A lot of the investors are curious about our diaper performance. We didn't really differentiate diapers from the other pediatric products, and we only have the number for the overall revenue growth of the brand. Only France and China are our 2 major markets. They account for around half of total sales. We see more opportunities for diaper products in China, and we think first half has been quite good for the brand for Good Goût. This was a newly -- this is a newly-acquired brand of the company, Good Goût is one of the largest growing baby food brand in France. Good Goût launched a healthy snack concept for baby food. We think this segment -- this category is very promising.

And if you -- currently, a lot of the baby food are -- for baby under the 18 -- under 18 months -- but if you have children, your kids are over 3 years -- is 3 years old, some of the babies still fancy the very sugary products. So Dodie target those kids and provide very healthy snacks for the children over 3 years old. We think this is very promising. We want to be a pioneer in this segment for babies over 3 years old. And we also appointed Mbappé, one of the one of the best celebrities in France to promote our Good Goût brand in France. We think it will take time for this brand to take off in China, but we still think it will be become a market leader in terms of the new categories.

In May this year, we already launched some products for Good Goût in China through CBEC platforms. And later in July, we launched in normal trade. We want to sell a lot more and see a lot more growth in the Double 11 shopping festival in China in the second half.

We think the competition will remain very fierce in terms of both ANC and BNC in the second half. We need to find new growth points. We do have very good strength in terms of our core categories. Still, we need to do more, including market management, team mobilization, and also innovative consumer education programs to achieve new growth. And meanwhile, we need to launch new categories to deliver good growth. We have 3 key points of growth in the second half. The first one is the goat milk. In March this year, we shared with you that last year, we acquired a factory, Australian goat milk factory in Australia, and we have spent some time to register and change the brand registration so that we can put our Biostime trademark on the product. We have completed that change, and we plan to launch the goat milk product in normal trade in Q4 this year under the Biostime trademark.

In terms of probiotics, in addition to the previous probiotics products by Biostime, this year, we launched a new probiotic drop this year. This is a new product. We launched this in Shanghai, and customers have given very nice, very positive feedback about the probiotic drops. And we think this will become a new leader in the market. In China, we will -- we will try to promote 2 new price range diapers in China. Currently, we are premium and super premium. The current price range is around RMB 80 to RMB 100. In the future, we think we can launch new A product, which is about RMB 150 to cover different customers. So we can cover more channels, more stores and target different customer groups.

In addition to Mainland China, in Hong Kong, we will promote the HMO probiotic products. And also, in Australia, we also launched the goat milk product, and we will also use the local factories to produce the Australian products. In the second half, most of the growth will be seen in Q4 and around the end of this year.

As for ANC, in the first half, due to the negative influence from the e-commerce law, we were influenced a lot but this, we are not alone. There are many other brands, which were affected by the new e-commerce law. You can see the same trend in the market.

Swisse was a widely loved brand in Australia among the daigou agents. So in Q1, we were heavily affected, but in Q4, the influence [mitigated]. And now we still are not very clear about second half, but we don't think this is a problem of our brand. This is because the overall market was stirred by the new law. We are still the market leader in VHMS and also in the multivitamin products. We have maintained our retail position very well. And in the Chinese market, we rank first in terms of CBEC and normal trade. And we think that in the second half, we can have a very good sellout situation in the second half. The Chinese consumers love the Swisse brand, and they have a big demand for our products.

In the second half, in Australia, we will still face the daigou challenge. The individual daigou agents and their business will affect our overall sales. We think because last year, there were no such law, so comparing to that of -- compared to the second half last year, we will still see some negative influence from the new e-commerce law.

There are some -- although there are some daigou people leaving the industry, there are still many other daigous remaining in the market. So we still need to help them to give them introductions about our new products to help them increase their sales so that we can still maintain our passive sales from them. In the second half and also in 2020, we'll continue to work on the domestic market in Australia to serve the local residents, to launch new products related to the natural -- related to the natural supplements.

In the second half, we have -- we will launch a lot of kids supplements. We have upgraded series. You can see that the design of the packaging is very cute. We just launched the products, and we promoted this together with the daigou people. And very soon, we will launch this in the CBEC platforms and also in normal trade. We will continue to market our products together in the future. We also have some new beauty products, including masks. We have very good innovation in masks and have received very good feedback from the market.

Hope that in the future, we can maintain a leading position in the Swisse brand in China. In the second half, you might be worried about the slowdown in our sales growth. And in China, consumers' confidence was affected for the supplements. So now we need to work on the image of our products and try to promote to the customers, telling them that our products are natural and our products are good for the body.

And in the Double 11 shopping festival, we still think that we can secure good growth in the second half. Some people might be worried that the Chinese consumers will suddenly do not like the Swisse brand, although we see a slowing down trend in the VHMS market, we still think the Swisse brand is one of the favorite brands of the customers. And we hope to outperform the market in the second half in terms of VHMS through our marketing and brand education.

We think more opportunities lies in the new channels, including social media, social media e-commerce. And for example, Pinduoduo and the new kinds of social media, e-commerce, other than the major e-commerce platforms such as Taobao and JD.com. We are already working on some new social media e-commerce platforms, and we think that in the second half, we have already made good preparations.

And for normal trade, it is not only offline, but also online. In JD.com and Tmall, we'll continue to try to launch new products, while abiding by the rules. There is a big possibility because we've made preparations, our teams are trying to register more products for us.

Recently, we've got a blue hat mark for the vitamin C Effervescent and we also have a blue hat for the kids vitamin D product. So we will promote these 2 products on different channels. So all of these channels have been worked. We have worked with this -- all these channels closely, including baby specialty stores and VIP pharmacies.

In the first half, we got a blue hat for the vitamin D plus calcium, and so the product sales were very well in terms of pharmacy channel. In the second half, we hope that Swisse can grow very well as well in the second half because it grew by around 70% in first half, accounting for around 11% of total sales. In the second half, we have made good preparations with the channels, the other offline channels, and also the online new e-commerce channels, so we are confident about the growth of Swisse in the second half.

Globally speaking, we've mentioned that Swisse Australia and Swisse China and the other new progress have all demonstrated good progress, especially in Italy and Hong Kong. In Hong Kong, we -- our products have been performing very well over the last 2 years. And although we are competing with the very big brands, our products are selling very well in the past 2 years. So this means that our product -- our model, our business model is very effective in Hong Kong. This year is the 50th anniversary of Swisse. A lot of different marketing events will further help our sales in the second half.

I need to speed up because I think you must be very curious about our financial figures. So the last part is about Aurelia. It's a new brand we acquired from the U.K. In the first half, we completed the acquisition in January. And then in April, we've already launched the products on the CBEC platforms. This was because of our teams, our existing teams in Swisse. We have existing connections with Red, Xiaohongshu, and also (inaudible) and also many other beauty channels. We launched Aurelia products with those platforms, and we also invited KOLs to France and the U.K. to get more product information about Aurelia.

In the second half, we have a new business model, which is the DTC, direct-to-customer channel, Direct-to-customer platform last year, we had launched our new range, Swisse Me. It's a brand under Swisse. It's a new range. It's a lifestyle brand. We launched it in the U.K. If you look at Instagram or search for Swisse Me, you can place the order directly on our official website to get a product. The products are more of food and some nutrition-related drinks. There are new bottles, new packaging. It is especially for the new generation. It was a single development in the beginning. We've done a lot. We value sustainability and we'll continue to devote as to sustainability.

And in June this year, we launched our 2018 sustainability report. If you have time, you can have a look in the report to see some of the recent moves of the company in terms of sustainability.

In addition to our core businesses, we are also working on innovations. In the first half, actually last year, we established the new H2 fund. It's an innovation fund, incubator fund. With this fund, we were working with early-stage startups. We had a minority stakeholding in those small, early-stage companies to help them get a fund to develop their businesses. Because it's a minority stake, we won't affect the management of those companies. Still, we can help them to do their innovation.

Last year, I mentioned Genclis, it's an innovation about allergy prevention for the babies. And so the research was undergoing. And if we succeed, we will have a disruptive new technology for baby IMF. And there are a lot of other innovations. For example, Lumen is a really -- company. They have very good innovation in diagnosis. We have already gained minority stake in that company, and we will try to see what can we work out for our corporation.

Lumen provides very good -- very, very customized solution to customers. Especially, they use AI technology. They have won a lot of awards in the U.S. and the other countries for their innovation. This can help us with innovative beauty solutions and beauty products.

Bod, on the last bottom, is innovative brand in Australia. They have very good technology. And we just got a minority stake in their company, and we signed a strategic agreement with them. In the future, we will work with them to launch some new health supplement.

Overall speaking, we see that market was not optimal. But in the second half, we still see that these kind of challenges will remain. But in both ANC and BNC, we see that there is a growth opportunity. More importantly, against all those uncertainties, the team needs innovation and quick response to succeed to secure our growth because innovation is the key to secure the growth. We need to make quick adjustments when there are uncertainties in the market. We need to adjust our strategies quickly to respond to those new challenges. So hope you -- hope that you can be assured that the company has a very quick response to market changes. This is DNA of the company.

So now I would hand over to Jason, and he's very eager to share with you our financial statistics in the first half. Thank you.

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Yidong Wang, Health and Happiness (H&H) International Holdings Limited - CFO & Executive Director [4]

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Thank you, Laetitia. Investors and friends, good morning. I would like to walk you through some of our financial figures in the first half.

Laetitia just shared with you that -- I would share with you our top line growth in the first half. And I also would like to share with you about our overall gross margin in the first half. Our gross margin was quite stable at 67.2% overall. It was within our expectation. Especially in the ANC part, the gross profit margin continued to grow.

Through continuing to -- through continuous innovation of our products, we add more high-margin new products. So this drive our -- this has driven the growth in the ANC gross margin as well IMF, the gross margin maintained at a stable level in the first half. In the beginning of the year, we projected that we would see some cost increase problem in IMF. We will see higher packaging costs. But in the meantime, we have some help from the exchange rate part because the euro was quite weak in the first half, so this has offset some of the increasing cost in the packaging.

As for probiotics supplements, the gross margin was still quite high. It was the largest amount -- or categories, although it was slightly lower than that of last year. It was still very high because we have -- we have improved our formula this year. That's why there are more costs associated with the new formula. Although the -- for the other pediatric products, the gross margin was reduced in the first half. Laetitia just mentioned that in the first half, the Dodie contribution to overall sales grew. And also, we have a new product from Good Goût.

So with the change in the mix, you can see that the gross margin might change because there are a lot of new products. But still, you can see from all this that we adopt a multi-category and multi-brand strategy. With all those uncertainties in the market, we maintained very healthy gross profit margin in all categories. Only with this high gross margin can we have the resources to devote to our channels and products in the future. Therefore, the management are very glad to see this kind of high gross margin.

Secondly, in terms of the S&D expenses, it was the largest among our operating expenses. So we want to provide more transparency to you, investors. Before, when we reported annually and interimly, we only give you S&D expenses on a group level. This is the first time that we give you the detailed numbers, the detailed S&D expenses by BNC, ANC and group level so that you can be clearer about our fees and expenditures at the moment. You can see that on the chart from the value and the proportion in the first half 2019, the S&D expenses were more than that of last year. This was mainly because of the new investment in new markets, new categories. In the meantime, ANC -- and in the original core markets of ANC and BNC, i.e., Australia and China, we have optimized our expenses to hope to reduce the S&D expenses or maintain those expenses at a stable level in key markets, China and Australia.

Comparing to that of the second half of 2018, we -- our costs was quite flat. We didn't compare it to the first half of 2018 because in the first half of last year, we didn't have brands such as Good Goût and also other brands. That's why we -- it is only comparable to look at the second half of 2018. So comparing the 2 halves, our S&D expenses was flat. And we can say that the S&D expenses was actually much lower than that was reported, and that was submitted for approval to the Board before. This means that we have controlled our expenses very well. We have made timely adjustments to make sure that with the growth in top line products, we can give more expenses in the future. We just said that in the first half, although ANC growth was lower than our expectation, because of the new S&D expenses, the adjusted EBITDA was still better than our expectation. It was because we have it, the money, to spend when we need it. In the future, we will continue to control our fees more stringently. And in the meantime, we will make sure that we can support our new strategies with investment.

Last -- just now, we mentioned that in the second half, we will launch new goat milk formulas in ANC. We will launch the probiotic drops, and we all try to promote the Good Goût products in Asia. So we do have a lot of things to do in the second half. And also, we have the B2C products under the Swisse Me brand. So all this means that we will have a lot of investments in the second year.

So there are 2 parts. For the new markets and new products, we will invest more. But for the existing markets and stable, relatively mature markets, we will try to control the fees more stringently.

As for the administrative expenses, it's the same thinking. In the first half of 2019, we have adopted a lot of ways to improve the efficiency of fund usage. And the administrative expenses ratio of sales was reduced from 6.5% to 5.9% in 2019.

Here are some detailed figures about adjusted EBITDA and net profit. And if you have followed us in the past 2 years, you will know that the company has consolidated a lot of items. For example, we have refinanced some of the debt. We got the -- we buy back some distribution rights for Swisse. So there are a lot of changes. In order to help you better understand the dynamics and operations in the company in the past few years, we have a lot of adjustment items so that you can make the adjustment and see the adjusted EBITDA for the real operation results of the company in the past 2 years. We shared with you in the beginning of the year that in the end of 2018, we successfully consolidated a lot of things. So from 2019, we project that we will have less adjustment items not only from the number of items but also from the total amount of all this adjustment items. They will be reduced, and we will see a smaller and smaller difference between the EBITDA and adjusted EBITDA.

You can see from this chart that everything is going very well. In the first half 2019, we only adjusted 2 items. Adding up those 2, it's around RMB 100 million. But in the same period last year, the total adjustment was around RMB 300 million. And in first half, which are the 2 adjustments. The first one is related to our noncash FX gains. It is an intra-group borrowing. Last year, there were a lot of borrowings because of many transactions. So last year, we had a loss -- FX loss of RMB 218 million. But this year in the first half, we have a noncash gain -- FX gain of RMB 58.1 million.

And the second adjustment item is the net fair value gain on financial instruments. This was about our bonds. This is the fair value of the redemption for our bonds. In the first half, we -- the fair value of the financial instruments improved. That's why we had a gain on that part.

Adding these 2 adjustments up, we will have around RMB 1 million. So when you want to compare the operating results, you need to take [out] those 2 adjustment items. The reported EBITDA is around RMB 1.298 billion, but it was much higher than that of last year. And for the reported net profit, its growth in the first half was around 85% in the first half. The growth was because of a lot of adjustment items last year. And also, our tax cost was optimized.

Last year, many adjustment items cannot have tax rebates. That's why the effective tax rate in the first half last year was around 41%. But this year, with the reduction of adjustment items and also the reduced interest costs after buying back of some debt, we have a much lower tax effective rate. On a normalized basis, the tax rate was reduced to 31%. Last year, it was 41%. And in the first half, the financial fees was also reduced by around 23%. So adding all those together, the reported net profit recorded a 85% growth in the first half to RMB 713 million.

And now moving on to the working capital. In the first half, for the operating cash flow part, the trade and bills receivables were -- turnover days were quite stable. And then the trade payable turnover days increased a bit because there was a cutover thing. And actually, the actual turnover days was around 80%, which was flat with that of last year.

In the middle, you can see the biggest difference between this year and last year, which is in the inventory turnover days part. The inventory turnover days for BNC was stable at 139 days. The major increase was in ANC. The inventory turnover days increased from 140 to 254 days. This was because in the first half, affected by the new e-commerce law, the ANC growth was lower than our expectation. While we need to prepare the products, we need to make the inventory 3 or 6 months as before. That's why our inventory turnover days for ANC grew heavily from 140 to 254.

So if we look at the quality of our inventory, we are satisfied with it. We have a note underneath saying that the slow-moving impairment was reduced by 36%. And currently, it's only around RMB 30 million. Although the inventory turnover days and the inventory volume of ANC both grew a lot, but the slow-moving inventory was reduced both in terms of the total amount or the stock number. This means that we are managing our inventory and stock well. We [can] manage our inventory, neglecting the high turnover days.

In terms of cash balance and operating cash flows, we see a reduction in the operating cash flows in the first half 2019 compared to that of last year. It was around RMB 1 billion in the first half and accounted for around 80% of EBITDA. So the conversion rate was still healthy. The main reason in the reduction was because of the inventory.

If you look at the cash balance on the right part, we are satisfied with our cash balance. By the end of first half 2019, we have over RMB 2 billion cash balance. We think that cash is the key in this very volatile age. Therefore, with this very good capital base, this can help us develop our future business and make necessary deployments. And in July this year, we completed our RMB 300 million cash dividend payout this year, and we also redeemed our debt earlier, as promised in the beginning of the year. And we also made new Australian dollar investments this year. All of these new deployments are because of our ample cash reserve.

The last part is about our current capital structure. In the first half, you can see our debt details on the left. We have optimized our debt. The absolute value was reduced from $900 million to 88 -- $886 million. And also, in August, we redeemed another debt earlier. This means that we have a even smaller outstanding debt instrument. In addition to the reduction in total scale, the proportion was also better adjusted. Currently, the proportion of terms loans and the senior notes are both around 50% This means that our debt instrument structure was optimized, and it can reduce our financial costs. You can see in the middle chart that our financial cost was reduced in the first half. So we repaid the 2 debts earlier this year. This helped a lot with our financial cost improvement.

I want to clarify that recently on the capital markets, people are worried about the foreign exchange rate of RMB. RMB is quite weak at the moment against the U.S. dollar, and Australian dollar is also quite weak against the U.S. dollar. So people are worried, and some people are worried whether -- because we have around RMB 800 million debt outstanding. They are worried whether we are -- we will be affected by the exchange rate. I'm glad to tell you that we have made deployments a few years ago. Currently, all syndicated -- all of our syndicated loans have been hedged, and the Australian -- the U.S. dollar debts have all been hedged to Australian dollars. So the change in the exchange rate will not affect our debt payments. And especially for the high-yield debts, we have around 300 -- among the $425 million outstanding debt [of us], we have hedged around $300 million of them to RMB. So in terms of risk management, we think we have done very well. In this kind of very volatile age, we think it is very important for the company to manage the risks so that we won't experience a lot of different obstacles in the financial cost part.

The last chart is about our net leverage ratio. You can see that it's very healthy. Around 4 years ago, when we completed the Swisse acquisition, the net leverage ratio was around 3.8x, around 4x. So in the past 4 years, we have reduced our net leverage ratio year by year. And now it is 1.65x, which is very healthy. And recently, the rating agencies also completed the annual review of our company. If you check the rating agency report, they maintain very positive outlook for the company, and the credit -- the -- our credit profile have -- has also improved.

Overall speaking, we need to grow our business better in the future. And in the meantime, we need to control our financial costs, ensure that we have enough operating cash flow. And at the year-end, we want to give a good dividend payout to our shareholders. Thank you.

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Questions and Answers

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Operator [1]

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We will now open the floor for questions. If you have any question, please raise your hand, and we will pass the microphone to you. Please also introduce yourself.

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Unidentified Analyst, [2]

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Terrance from [COS]. I have 3 questions. The first one is about your outlook for the nutrition market. You mentioned in the announcement that the nutrition market, the VHMS market, in China was slowing down, and I would like to know some other factors causing the problem. We do know about the daigou problem. You mentioned before that daigou is -- the daigou business is kind of free advertisement to the company. Will this affect our active sales in China? Will daigou affect the active sales in China? And without the daigou, without the free advertisement from them, will we have more budget in China for the advertisements of active sales in China? We see that you have appointed new celebrities to speak for the brand. You hired Wu Chun, which is a renowned celebrity. He is not so young. He is not so chased after by the young consumers. So we really would like to know what kind of new marketing efforts have you taken on the active sales in China?

And secondly, because in China, the market has been -- the company -- I want to know that what is the discrepancy between the performance and your expectation? Just now you spoke about your performance in July. We know that July cannot represent the performance in the second half. Still, we want you to comment on the July performance as well as the outlook for the remaining 5 months.

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Unidentified Company Representative, [3]

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Thank you, Terrance. I'll your first question, and then we will answer your second question together. For active sales in -- for VHMS in China in the second half, it was because of the 100-day campaign influence. There were some scandals about VHMS sales in China. It has affected some of the consumer confidence. So this is more of an industry factor. You mentioned whether there are other factors affecting our active sales in China. We do think that overall sluggish economic growth in China was affecting our VHMS industry, and the new e-commerce law hasn't affected our active sales in China. But on Taobao, there are some distributors or some daigou people on Taobao, which are affected by -- which were affected by the new commerce laws. So I still think the new commerce law was the major influencing factor about the free advertisement from the daigou people, about whether we need to step up more on the advertisement of active sales in China.

We think that we have done active marketing over the past few years. Our active marketing have been very positive in China. We didn't wait for or rely on the daigou people to help us promote our brands. We have a lot of marketing efforts on the major platforms, and the marketing fees ratio of total sales was controllable. Although the new e-commerce law was introduced this year, we didn't have a larger proportion of marketing expenses of total sales. This was very stable last year.

We want to continue to invest on the branding and the penetration of the Swisse brand, especially when we enter the normal trade age. We still need to work on the penetration of Swisse because the current market share of Swisse was not too big in the offline channels.

About the celebrity endorsement, we invited Mr. Wu Chun this year. He is a dad and he has 2 babies. He can help us promote the -- our products, our baby products in the baby specialty stores. We currently have probiotic products. And in the future, we also have calcium DHA products for mothers and babies. So for this kind of consideration, we have appointed Mr. Wu Chun as our endorsement. We also have another professional KOL this year. We worked with him last month. Especially, this KOL went to Australia to help us promote our maternal series. In the second half, we are talking with a new female celebrity. We haven't disclosed her name. So in the second half, we will have 2 celebrities to endorse for the Swisse brand in China. We haven't changed our overall speaking -- our overall strategy of celebrity endorsement. We don't have a lot of pressure in terms of marketing. It is still controllable, and we are working on that.

For the overall performance in the first half, BNC was within our expectation. ANC underperformed because of the few factors that we mentioned. Overall speaking, the management maintain a positive revenue growth outlook, and we think that we can maintain a healthy profit level and cash conversion and a very stable annual dividend payout. And we are trying to improve our corporate governance and transparency. We have -- we had a very good practice because we give you key indicators, key operating indicators per quarter to give you a very clear guidance. Not all of the listed companies can give you those figures. We give you the quarterly numbers for you to understand our business development and the new trends. And it was based on the same reasons that in the interim report in the MDA, we mentioned something about our July performance so that we can be more transparent with you. In the MDA, we made it very clear: the performance in July was affected by the high base in June because of the big shopping event in China. The June 18 shopping festival has become a nationwide shopping festival, both online and offline. That's why in June, we had a very high base in June. And in July, the Australian market still faced some inventory problem in Australia. That's why in the MDA of the interim report, we disclosed some of our comments on the July performance to be more transparent with you.

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Unidentified Company Representative, [4]

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I want to add a few points about the daigou purchasing agent business. By the end of 2015, when we did the acquisition, we had been very clear that at that time, the main business was in Australia, was for the domestic Australian market and the daigou people. At that time, many investors were worried. You said that individual daigou people are not manageable, and you thought that we had to adopt a different model to control the risks. That's why after the acquisition, we have made a very clear strategy that we need to speed up the active sales deployment in China. That's why in 2016, we established Swisse China to work on the active sales in China for Swisse. And currently, the ratio of active sales in China is growing day by day, and this is conducive for our long-term growth in Swisse.

It doesn't mean that we will give up the daigou business. Actually, currently, there are some big purchasing agents in Australia. They are still doing the daigou business, but they are converting to the cross-border e-commerce channels gradually because that is the only legal way to do it. We are still doing it, so we have to continue to help them. This -- the change -- the only change is that the smaller agents were eliminated from the market because of the constraints from the e-commerce regulation, the tax influence and the registration influence all made those small agents going out of the market.

If you have followed us for some time, you will know that every year, we will give you a number of the active sales of Swisse in China. Three years ago, we said that -- we hope that active sales in China would be 55% 3 years ago. But currently speaking, we think the proportion will be even higher in the future. And we -- previously, they didn't work on the Chinese active sales. But now as we are working on that, we think that the change in the mix will help us to make the structure more reasonable, to make it more commercially viable. In the long term, we are very positive about a Swisse business in China because we have a lot of young consumers. We -- because Swisse -- most of the Swisse products were targeted at the older customers, it's more of a traditional VHMS brand. That's why we launched the Swisse Me brand to target the younger generation, targeted at those young millennials, which -- who really focus on nutrition and care. They do yoga. They want some natural supplements, and they value lifestyle changes. So Swisse Me will be the new brand that is targeting at the new generation. And if you want more details, you can -- please feel free to check the Swisse Me website.

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Tiffany Feng, Citigroup Inc, Research Division - VP and Research Analyst [5]

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I'm Tiffany from Citigroup. I have 3 follow-up questions. The first one is about your performance in July. Could you please talk about it in more details? And in BNC, ANC and in the sales in Australia and in China, is that the growth in July was around 5%. But in the first half, the growth was around 11%. So this means that the decline was very apparent in July. You mentioned 2 reasons. The first reason was the high base in June. But actually, in the second half, the Swisse China was selling worse comparing to the first half. Even if we consider the high base in June, the growth in July was still -- it still seems not to be enough. So can you talk more about the Swisse active sales in China?

The second question is about the deleveraging -- the inventory of daigou people in Australia because they had a lot of inventory in the first half. We think that in the second half -- we think in the second half, although the inventory level are lower and lower still in July, we see that the daigou people are still trying to get rid of the stock. Can you explain more about the stock thing in July for the daigou people?

My third question is about the inventory of ANC in the first half because the inventory was quite high for ANC in the first half. Will you -- what measures will you take to lower the inventory level in the second half? And also, I remember that in the first half, we increased the price for some of the ANC products. In the beginning of the year, you -- when you see that some of the stocks are already slow moving, did you increase the price because you -- despiting the fact that some of the stock are moving very slowly? Or at that time, you didn't see the trend in the moving of the stock? You said that you project -- still project a growth for ANC. Can you give us a guidance for the growth of both segments in the whole year?

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Unidentified Company Representative, [6]

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For the July performance, it is actually difficult to look at a single month performance in isolation. That's why there are some changes in the -- when we look at the July performance, it was different from the first half. We think it is actually more reasonable to look at different months together, for example, adding June and July together. In IMF last year, in the June 18 shopping festival, it wasn't participating in the festival so much. So last year, we didn't really gain a lot of sales growth from that day. But this year, the shopping festival was -- has a larger scale with more platforms participating. That's why we had more promotional events for that day. So June marks a very high sales growth in IMF. This would definitely have affected our sales in IMF in July. And currently speaking, in Q3, there are competition in the IMF market. We won't change our main strategy. But still, we see that the industry dynamics are not changing, and the high base was the key.

As for ANC, you asked about the Australian daigou people in July. In Q2, the slowing trend was contained. But still, we see some negative growth in the Australian market because last year, we didn't have the new e-commerce law. So comparing to that of last year, we would see the negative growth. I would like to suggest that -- not to look at the performance on a monthly basis.

For the inventory, I can understand that by June, the inventory level was high. When we are stocking up, we base the stock -- the inventory level based on our previous sales statistics. That's why our inventory level was quite high at the end of June. But later, we were adjusting our orders. We don't think there will be a lot of write-offs in the second half. We are actively managing our position in inventory, and we're adjusting our orders. We think the inventory, although it's quite high, it's controllable in the second half.

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Unidentified Company Representative, [7]

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Adding more to the price increase in the beginning of the year, when we increased our price at the beginning of the year, we only increased the price for a few SKUs, a small number of SKUs. And we increased the price because we compared them to similar products on the market, and we think that it is reasonable to adjust the price. It is not -- we didn't really check the correlation between the price and the stock moving trend. And the major influence comes from the new e-commerce law as well as the campaign, tackling some illegal distributors on social platform, which has damaged consumer confidence in VHMS market. In the interim report, we highlighted the July performance just to be more transparent. We are not saying that the overall trend has been changed. If we look at the group as a whole, we think we can have a positive sales growth on a yearly basis.

About the inventory, it is quite natural because in the beginning, we made a inventory plan. We didn't know that the sales will drop by around 20% in the first half in Australia. That's why the inventory level went high at the end of June. Although the inventory was high, the products that we have stock up are among the best sellers. Some people might be worried when we introduce new products, the old stock will be -- will not be selling so well. You don't need to worry about that because those are the best-selling categories. We think that we can manage our inventory well in the second half.

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Lincoln Kong, Goldman Sachs Group Inc., Research Division - Equity Analyst [8]

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Lincoln from Goldman Sachs. The first question is about your costs in the first half because we see the ratio of costs increase in the first half. Looking into the second half, you have given a quite conservative projection for the growth of Swisse. For the fees, for the S&D expenditure for the Swisse brand, will you try to control that because of the slow growth in Swisse China? And do you have more guidance for the annual EBITDA margin? Have you adjusted your guidance for EBITDA margin?

And my second question is about the daigou people in Australia for Swisse. After the 100-day campaign, there were a lot of influence over the daigou. So do you see that now it is not only the smaller purchasing agents that were affected that are also -- do you see that there are some bigger daigou people which are affected? And also the -- some of the bigger distributors, for example, the pharmacies in Australia, are they affected by the 100-day campaign? We don't think that the e-commerce law will have a big influence over the bigger sales agents. My last question is about the BNC part. In the second quarter, ANC -- BNC grew much faster than Q1, and you mentioned about the de-inventory in July. Looking at the BNC part, can you provide more comments on the market competition because there are some other brands, some other international brands which are actively working on the market in China for the IMF products? Do you think that will have some influence on our brand?

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Unidentified Company Representative, [9]

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For the cost management, it is in line with our plans. In the first half, in terms of the ratio, it was flat with the -- with that of H2 last year. And actually, we can see that on the group level, the ratio has reduced. So this means that we have already optimized our fees in the core markets. In the second half, we will continue to adjust the expenses based on the changes in the sales of ANC products. And we'll have key strategies for ANC, for example, continuing to expand normal trade using our blue hat marks. And also, we launched our Swisse Me brand on the DTC platform. And also, Aurelia will start to be sold in Asia. All of these developments, we need to invest in them. And in the meantime, we need to work on our core markets to ensure that every year -- every month, we can make timely adjustments depending on the active -- the actual sales of the different brands. Overall speaking, we think the profit margin will be healthy. Currently speaking, we are satisfied with the current profit margin. In the future, we hope that we can maintain that good margin and maintain our cash conversion rate. I want to further strengthen that for the shareholders, we hope that we can pay out dividends timely and steadily as a return for their shares.

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Unidentified Company Representative, [10]

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Adding up to the financial results page, we are actively managing our fees in the first half. We -- under order pressure, we are still able -- we were still able to manage the costs in ANC. And in the meantime, we were investing on the future growth points. These are all in line with our principles, including working on the existing markets and also developing the new growth points. We think that the dynamics will not change as much in the second half.

In the beginning of this year, we just started to see the influence on the daigou people. Actually, the daigou word means a lot. There are a lot of different agents. Currently, the retail or individual daigou people, they buy the products from our stores and then resell them in China. They were affected because they had a relatively small scale. And also, there are new requirements and new costs associated for them because of the new e-commerce law, because they have to apply for business license, they need to pay tax, et cetera. So if they don't have a capacity to absorb all those new differences, this will heavily affect their margin, making them have to leave the industry. But the bigger agents, although they are smaller in number but they are bigger in scale, some of them might decide to work in the other -- on the other businesses, for example, social media, social media sales, et cetera. We still have a significance in Australia to work with the big daigou people and the wholesalers. The e-commerce law affected our price because we have some -- because the bigger daigou, they have a lot of inventory. So this has a price pressure on them. We will still work with the bigger daigou people, but the key to work with those people is to engage them, to have product training for them to help them market their products.

As for BNC, I understand your question. BNC was growing quite small in Q1. When we look at individual quarters, the fluctuations will be higher. And your question is about the competition in the second half because our performance in July was not optimal. We mentioned that the July was mainly affected by the high base in June. Overall speaking, we think the second half won't see less fierce competition. And we see that there are a lot of price competition on the market, both from the domestic brands and the international brands. We will remain in the premium and super premium range. We will educate our consumers. And in the digital age, we need to have a lot of transformations. For example, we need to educate the community. For example, we can have online mother classes. We can have mother groups, mother community so that we can spread the information in all those channels and also in the stores. We can educate and train the staff better to help promote our brands. This kind of digital education will be a key job promotion in the second half.

And in Q3, we'll see very fierce competition, and there are new measures taking place. But we think in Q4, there will be less influence. And as we are launching new products, for example, the goat milk and the new probiotic drops, we can see more growth in Q4, I think.

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Operator [11]

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Thank you, everyone. This brings today's presentation to an end. Have a great day, everyone. Thanks.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]