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Edited Transcript of AHY.AX earnings conference call or presentation 19-Feb-19 11:00pm GMT

Full Year 2018 Asaleo Care Ltd Earnings Call

Box Hill, Victoria Mar 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Asaleo Care Ltd earnings conference call or presentation Tuesday, February 19, 2019 at 11:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Lyndal York

Asaleo Care Limited - CFO

* Sid Takla

Asaleo Care Limited - CEO, MD & Director

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Presentation

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Operator [1]

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Good morning, and welcome to the Asaleo Care Full Year 2018 Results Announcement. Today's briefing will be delivered by CEO, Sid Takla; and CFO, Lyndal York. Questions will be taken at the end of the presentation.

Sid, please go ahead.

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Sid Takla, Asaleo Care Limited - CEO, MD & Director [2]

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Thank you, Tara. Good morning, ladies and gentlemen, and welcome to the full year 2018 results announcement for Asaleo Care. As Tara mentioned, Lyndal York, our CFO, and I will be presenting to you today.

Can you please turn to Slide 3, titled, Actions taken for long-term success?

For the full year 2018, Asaleo Care achieved an underlying EBITDA result of $80.6 million, which is within the guidance previously provided. From a continuing operations perspective, the underlying EBITDA was $81.5 million. Since becoming CEO, I have continuously reiterated that for Asaleo Care to achieve sustainable, profitable growth, we must become a more customer- and consumer-focused organization. Over the last 6 months, we have developed extensive strategic plans and importantly, taken decisive action to build the foundations required to deliver on this objective in 2019 and beyond.

Examples you'll hear today include the sale of our Consumer Tissue Australia business, which will allow us to focus on our more profitable and higher-growth categories in Personal Care and B2B. Through our agile inventory program, we have realigned inventory holdings to customer demand rather than being a manufacturing-level organization. This initiative has reduced inventory by $32.5 million since June 2018. And a third example of setting this business up for long-term success is the in-principle agreement with our global partner, Essity, to extend the trademark and technology license for a further 5 years through to 2027. This gives us exclusive access to a strong pipeline of innovation, allowing us to differentiate our offer.

The first 2 examples above have also significantly strengthened our balance sheet through the reduction of debt and working capital. The change in mix of our business portfolio towards Personal Care and B2B will also reduce the volatility in our future earnings.

In 2018, we also placed great emphasis on building stronger relationships with our customers. We demonstrated commitment to our brands to investment in quality and marketing spend. The relaunch of Sorbent is a great example of this. We achieved growth on this brand for the first time in many years, resulting in increased ranging, new private label opportunities and incremental promotional activity, all of which help solidify our customer relationships. We plan to increase our investment significantly across all our brands moving forward and continue to work closely with our customers to bring joint value to our end consumers. As a result of the in-depth strategic review, a new direction has been set and we are well progressed in the execution phase. I'll share more details on the strategic review direction -- on this -- new strategic direction later on in the presentation.

Can you please turn to Slide 4, titled, Successful outcome from our strategic review?

On the 6th of December last year, we announced the sale of the Consumer Tissue Australia business to Solaris Paper for $180 million at a multiple of over 10x pro forma EBITDA. As mentioned above, the sale enables us to focus on the less capital-intensive, higher-margin division of Personal Care and the B2B channel. Both offer higher-growth opportunities and a greater propensity to differentiate ourselves. The sale completion process is on schedule and we expect settlement to occur by the end of quarter 1, 2019.

The net proceeds from the sale will be used to pay down debt, and we expect that this will bring our debt leverage ratio down to the lower end of our internal target range of 1.5x to 2.5x EBITDA by the end of 2019. The Consumer Tissue Australia business will now be classified as discontinued operations and will be disclosed separately in line with the accounting standards.

If you now move to Slide 5, I'll provide further details on the performance of the discontinued operations.

In order to provide a clear comparative base for the continuing operations, we have reallocated overhead costs previously absorbed by Consumer Tissue Australia, which we'll now refer to as the discontinued operation, back to the remaining divisions of Asaleo Care. We have also reinstated the 2017 result between discontinued and continuing operations to provide comparative benchmark data. You'll note that after the reallocation of overheads, the discontinued operations made a loss of $0.9 million compared to a profit of $26.7 million in 2017. The key drivers of this decline in profitability have been extensively communicated over the last 12 months and include the increase in major input costs of pulp and energy to all-time highs, lower retail sales volumes during protracted negotiations and the increased investment to support the relaunch of the Sorbent product.

From a net sales perspective, discontinued operations was down 12%, whilst continuing operations was down 2%. I'll provide further details of the sales performance of the continuing operations in coming slides. So please note, all financial analysis moving forward will be on a continuing operations basis only.

Can you now please move to Slide 6 to discuss the change in reporting segments?

With the sale of the Australian Consumer Tissue business, we have realigned our reporting segments to better reflect how we manage the remaining business. Historically, we have reported our segments as Tissue and Personal Care, but we'll now move to reporting the segments as Business-to-Business and Retail. Again, it reflects the way we manage the business internally and is better aligned to our strategic plans.

The Business-to-Business segment includes our Tork Professional Hygiene and our TENA Incontinence Healthcare businesses. This segment represents approximately 55% of both EBITDA and revenue for continuing operations. The Retail segment includes Feminine Care, Baby Care, Incontinence Retail, Consumer Tissue New Zealand and our Pacific Islands business. This segment represents approximately 45% of the EBITDA and revenue for continuing operations.

Can you please turn to Page 7 to review the continuing operations performance for full year 2018?

The underlying full year 2018 EBITDA result for Asaleo Care continuing operations was $81.5 million, representing a 16.5% decline on 2017. Retail EBITDA was down 21% year-on-year, mainly driven by the significantly higher pulp costs impacting our Consumer Tissue New Zealand business. Again, please keep in mind, we're talking continuous operations only here.

The decline in volumes expressed in our Baby business post the quality issues in May 2017 continued to impact the business in 2018, and even though these quality issues have been resolved, the very competitive open market has been difficult to regain share. Feminine Care half -- first half sales were down as we transitioned off EDP pricing, but had positive trends in the second half. Pleasingly, our Incontinence Care business continues to perform strongly. B2B EBITDA was down 12.4%, again, mainly driven by the significant increase in pulp costs for our Professional Hygiene business. Branded business-to-business sales grew by 2.3%, but were partially offset by a lower private label sales in Professional Hygiene.

Our underlying net profit after tax was $37 million and statutory NPAT was $0.8 million. The statutory NPAT included noncash inventory write-down impairment charges of $30.5 million, which were booked back in June 2018. In assessing the business's financial performance, it has been determined that no final dividend will be paid.

On the next 3 slides, I'll now discuss the segment performance in more detail. Can you please turn to Slide 8?

Overall revenue for the Retail segment declined 5.2%, with Baby and Feminine Care the key drivers. Offsetting some of that decline was growth in Incontinence Care, Consumer Tissue New Zealand and the Pacific Islands business. Retail EBITDA was impacted by higher pulp costs, full year rent on the Springvale site and partly offset by lower A&P spend, with advertising on Roll. Press. Go not continuing in 2018. Specifically for our Incontinence business, sales grew by 4.8%, driven by the launch and ranging of new products, Night Pants and Lights by TENA in the major grocery channel. Other sales channels such as pharmacy and direct online also performed strongly for this category.

Our Baby diaper business, as previously mentioned, has been heavily impacted by the quality issues experienced in late 2017 and the loss of a private label contract. Even though the quality issues have been addressed and the new and improved product has been in market for 8 months, that market remains very competitive and share growth has been difficult to achieve. This category (inaudible) in-depth as part of our strategic review, and various options are being considered to address this category's performance.

If you can turn to Slide 9.

Consumer Tissue New Zealand sales were up year-over-year, despite volumes being impacted during protracted price negotiations in the first half. All our key tissue brands in New Zealand -- Purex, Handee and Sorbent -- performed strongly in the second half once price negotiations were finalized. With our renewed focus on customer and consumer, the quality improvements being made across all our tissue categories continue to underpin growth. Further investment in 2019 will focus on product improvement and customer and consumer engagement.

For Feminine Care, our focus in 2018 was to transition off the EDV pricing mechanism and reinvest in increased trade spend to support market share and protect our volumes against heavy competitor discount. As demonstrated by the graph in the bottom left-hand corner of the slide, we achieved 3 consecutive quarters of volume growth. Our second half 2018 volumes were higher than our second half 2017 volumes, and the trend in value share growth has also been positive. It is also important to note that this growth has come from the higher-margin pad and liner categories. Our tampon volumes were impacted by the loss of an export contract, although this had minimal EBITDA impact. The Feminine Care category will remain a primary focus for us in 2019.

Can you please turn to Slide 10 to discuss the B2B segment performance?

Branded revenue growth for our B2B segment was 2.3%. The loss of a tissue private label contract reduced the overall growth to 1.2, but again, this had minimal EBITDA impact. As mentioned previously, the significant increase in pulp and the rate at which it occurred made it very difficult for the B2B business to offset the full cost impost of $12 million. Price increases, positive product mix and product cost control helped mitigate a large portion of the cost increases, but overall EBITDA finished 12.4% down on last year.

Incontinence Healthcare delivered top line growth of 5.2% in Australia and 7.6% in New Zealand. Our modern incontinence products continued strong growth and drove a favorable margin mix. We had a full year benefit from contracts won partway through 2017, and we were successful in renewing several of our large contracts in 2018.

Professional Hygiene had modest growth with branded sales up 1.3%. We continue to focus on our proprietary branded systems, which continue to grow and now represent over 34% of our total sales. This continues to underpin our margin development. There was opportunistic activity by competitors to target our commodity-based volumes whilst we engage the market in price negotiations. Our experience over the last 5 to 6 years in this category shows that a quality product and service offering with demonstration of true value to our customers and consumers will result in longer-term growth and ultimately negate the short-term opportunistic behavior. With a strong innovation pipeline, we remain optimistic about our growth in the B2B channel.

Can you please turn to Slide 11 to review our safety performance for 2018?

After a significant improvement in our safety performance in 2017, we have sustained that position in 2018 whilst we continue to focus on the underlying actions required for further improvements. These directive measures included, the rollout of drug and alcohol testing across both manufacturing and office-based staff; targeted injury prevention activities, which resulted in teams collaboratively engineering our manual-handling and plant safety hazards; and the focus in high-risk management and controls across all sites. This included procedural and physical changes being implemented in areas such as energy isolation, fire prevention and traffic management.

We also continue to invest in injury prevention and risk mitigation initiatives. Examples of this ongoing investment include the full replacement of the roof at our Fiji manufacturing facility and with the installation of a new converting asset in Kawerau New Zealand in 2019. This asset comes with a much higher safety rating than the assets it replaces.

I'll now hand over to Lyndal to take you through the financials in greater detail.

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Lyndal York, Asaleo Care Limited - CFO [3]

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Thanks, Sid, and good morning, ladies and gentlemen. Firstly, if you could turn to Slide 13, I'll spend some time going through more of the detail on the financial performance for the full year.

Table shows the detailed line item results for continuing operations only, with discontinued operations all in 1 line second from the bottom. My commentary on this slide is for continuing operations only.

Firstly, revenue. There was a decline in revenue, driven by the challenges in Feminine and the Baby Care segments. Partially offsetting this was solid sales growth in our Incontinence segments. Sid provided the detail earlier so I won't cover it again. Cost of goods sold margin increased compared to last year. There have been significant cost increases in pulp, which accounts for approximately $19 million of the increase in costs. Favorable foreign exchange was able to offset less than 1/3 of the higher pulp costs. Historically, the U.S. dollar exchange rate has moved in line with pulp prices, providing a natural offset. Pulp has increased at a much steeper rate than the U.S. dollar has weakened this year, minimizing that natural offset.

Sales, marketing and administrative costs were down due to the lower advertising and promotional expenditure of approximately $3 million. Last year, we supported the Roll. Press. Go and the Treasures Nappy new product innovation launches. We kept strict cost control this year to help mitigate the impact of the decline in revenue.

Our EBITDA of $81.5 million was down 17% compared to the prior year. Net financing costs were higher, primarily due to higher average interest rates and higher average net debt. The key drivers for the higher average interest rate were fees related to the refinancing and additional facilities as well as increase in the BBSY rate used for our debt. The average net debt was higher due to the weaker trading performance. Underlying NPAT of $37.0 million is down 26% on the prior year. This year, we've recorded a statutory net profit after tax for continuing operations of $800,000, down from $55.1 million last year. This year's statutory result includes $46.6 million before tax and $36.2 million after tax of nonrecurring items. I will talk through these nonrecurring items shortly.

Our discontinued operations produced a loss of $109.5 million this year against a profit last year of $2.1 million. The statutory net loss after tax on a total group basis was $108.7 million compared to a profit of $57.2 million last year.

I'll discuss the nonrecurring items now on Slide 14. Our continuing operations have incurred $46.6 million of nonrecurring costs before tax. The first 2 items on this slide relate to our agile inventory program. Inventory levels have grown over the last 18 months as our business focused on manufacturing performance. We manufactured at preset levels to support the anticipated rebound in sales. The higher sales were expected from coming out of the everyday pricing agreements in Feminine Care and the resolution of quality issues with our nappies as well as the expectation that our competitors would increase prices in response to the increase in pulp and electricity in the tissue categories.

Subsequent increase in work-in-progress and finished goods also required the hiring of additional external storage. One of the outcomes from the strategic review this year was to realign our inventory holdings to customer demand. We have set strict inventory holding practices and set optimal target levels for our SKU based on weeks of coverage at current run rates. This allows us to ensure we have adequate supply for our customers but are also agile enough to be able to implement product and packaging improvements in a timely basis. To achieve these targets, we had to close down certain lines for an extended period and run some machines a lot slower than optimal. This resulted in abnormal manufacturing costs. The amount of $6 million that we classified as nonrecurring is only the portion of manufacturing costs that related to reducing inventory levels from those held at the 1st of January 2018 to the target levels. All manufacturing costs that reflected the lower sales volume achieved during 2018 remain within underlying EBITDA.

We had exited all additional outside storage by the end of December 2018 and thus, have treated those costs of $700,000 as nonrecurring.

$3.2 million has been incurred on operational and corporate restructuring. This has resulted in annual cost savings of approximately $1 million to $2 million, primarily through reduced headcount in our operations. We're undertaking a capital investment into our B2B Professional Hygiene business. This involves a significant upgrade to our Kawerau site. There are $5.7 million of costs recorded this year related to that upgrade program. This covers accelerated depreciation for machines that will be decommissioned and the spares related to those machines as well as the provision for the future restructuring costs.

We've incurred $0.5 million related to the strategic review we undertook this year. This excludes the costs involved related to the sale of our Australian Consumer Tissue business. Those costs are included in discontinued operations. There are impairment and inventory write-down costs of $30.5 million related to the Personal Care New Zealand business. There is a tax benefit of $10.4 million related to the -- all of these nonrecurring items.

In the discontinued operations, we incurred $130.1 million of nonrecurring costs before tax. This relates to the impairment and asset write-down in June of $116.3 million, operational restructuring of $2.7 million, abnormal manufacturing and third-party warehouse costs related to the agile inventory program of $5.4 million and costs related to the sale of the business of $5.7 million.

Now on Slide 15. We had an impairment and write-down of assets of $146.8 million in total this year. This was split $30.5 million from continuing operations and $116.3 million from discontinued operations. These charges are noncash and do not impact our debt levels or debt covenants. The Tissue Australia and Personal Care New Zealand segments were tested and determined to be impaired at June. In Tissue Australia, the key drivers of the impairment were sustained historic high input costs, particularly pulp, ongoing intensity of competition in the retail business and the decision to invest to support our market share. In Personal Care New Zealand, the key drivers of the impairment were the ongoing intensity of competition, including a new entrant and new brands and continued decline in market share in the Baby Care business.

The allocation of the impairment charge for the continuing operations is $13.1 million against goodwill and other intangible assets, primarily brands, $13.8 million against property, plant and equipment and $0.4 million for spares related to plant and equipment, which is classified within inventory. We also wrote down $3.2 million of inventory that is from previous generations and not our latest product or is not currently ranged with our customers.

The impairment charges were determined in line with accounting standards. The recoverable amount at June was determined using a value-in-use methodology. This method is conservative and it did not allow us to take into account any future benefits that were likely to arise from the implementation of initiatives developed through our strategic review which was in progress at that time. There were no additional impairment charges in the second half of the year.

Turning to cash flow on Slide 16. This slide represents the cash flow for the entire group, continuing and discontinued operations. The company delivered free cash flow of $64.8 million this year. The left-hand side of the slide shows the breakdown of that free cash flow generation. The second half of 2018 generated $63 million of this free cash flow. Because of the decline in profitability that we advised the market of in July, we had a strong focus on reducing our net debt in the second half of 2018 to ensure we remained compliant with all of our debt agreements. This necessitated us executing some initiatives to generate cash in the second half of 2018 that will naturally reverse in 2019. Pleasingly, we were compliant with all of our debt requirements at the 31st of December 2018.

The decrease in working capital of $27.3 million is primarily due to inventory and payables. From our agile inventory program that I discussed earlier, our total inventory reduced by $32.5 million in the second half. Higher input costs, particularly pulp and electricity, have increased the value of all of our inventory, offsetting some of the decrease in volume.

There was an increase in payables of $29 million this year. To drive cash generation, we negotiated the suppliers the favorable payment terms for an interim period through the transition of the sale of the Australian Consumer Tissue business. This will only last through 2019 as we finalize the sale of the business and return to our usual terms. An additional accounts receivable securitization facility was also entered into during the year to broaden the receivables that are able to be securitized and generating a onetime cash increase.

We invested $17.2 million in maintenance CapEx during the half and financing costs were $12.7 million. We paid $1.2 million in taxes during the year. This is lower-than-usual as we were able to defer the payment of some of our installments to 2019. Therefore, we expect next year to be higher-than-usual as this timing balances out.

Other nonrecurring payments of $12 million represent the cash portion of the nonrecurring items I discussed earlier.

On the right-hand side of the waterfall, we then outline our capital allocation. A minimal amount of $4.2 million was spent on growth CapEx, then CapEx which had been identified as meeting or exceeding our internal rate of return criteria. The final dividend for full year 2017 of $32.6 million was paid in March. We've paid $8.5 million related to the sale of the Australian Consumer Tissue business. $1 million of this were for costs related to the sale. We have also paid $7.5 million into an escrow account that will be refunded once the sale is complete. Our net debt decreased this year by $16.7 million to $262.4 million.

Moving to Slide 17. We were very disciplined with our CapEx spend this year pending the outcome from our strategic review. The chart on the left shows total CapEx, split between continuing and discontinued operations. Following the sale, we expect regular CapEx spend to reduce by approximately 1/3. There will be an increase in CapEx spend in 2019 as we complete the Kawerau site upgrade. Depreciation from continuing operations has remained consistent over the past few years. That will increase after the Kawerau site upgrade is complete late in 2019. Depreciation and discontinued operations is lower this year following the impairment of property, plant and equipment that was booked in June.

Slide 18 shows the company's net debt position with $262.4 million at 31st of December 2018. This is down from $279.2 million at 31st of December 2017 and down $47.3 million from 30th of June 2018. In June, our debt was refinanced. Facility B was scheduled to mature in June 2019. As such, we wanted to refinance this prior to 30th of June 2018 for it to continue to be classified as noncurrent debt.

Pricing had increased from 2014 and we were expecting margins on the refinanced facility B to increase by 40 to 50 basis points. To help offset this increase, we took the opportunity to refinance at the same time facilities A and C, which previously had maturities in 2020 and 2021. We achieved a reduction in margin pricing for these 2 facilities and extended the maturity of facility C. We also issued senior notes into the U.S. market with a bilateral note purchase agreement for $110 million with tenor of 7 and 10 years. This debt is in Australian dollars at fixed interest rates. Overall, our average margin on all debt increased approximately 20 basis points as a result of the increased tenor. The weighted average maturity of our debt is 4.3 years.

Coming out of the refinancings, our total debt facilities increased from $350 million to $400 million to allow management of timing of cash flow including strategic CapEx. Following completion of the sale of the Australian Consumer Tissue business, we will reduce our facilities to an appropriate level to reflect the size and needs of the business moving forward. Our leverage ratio has increased to 3.25x at the 31st of December 2018, up from 2.25x as at 31st of December 2017. Again, we were compliant with all requirements under our debt facilities at 31st of December 2018.

The company has historically targeted a leverage range of between 1.5x and 2.5x. When we complete the sale scheduled for the first quarter of 2019, we will receive the proceeds of $180 million less costs related to the sale and adjusted for movements in working capital from June 2018 to the completion date. As we have executed our agile inventory program in the second half of 2018, there will be a working capital adjustment to reduce the proceeds on sale accordingly. We anticipate that there will not be a material profit on sale recognized. Following completion of the sale, our leverage ratio will return to within our target range, and we anticipate being at the lower end of our targeted range by the end of 2019.

The company has a strong history of solid cash conversion from our profit. The chart on the bottom right shows the free cash flow generated and the conversion rate for each of the last 4 years. Over the 3 years prior to this one, that is 2015, '16 and '17, we generated $225 million in free cash flow and averaged 56% conversion from underlying EBITDA into free cash flow. This has then been used for capital management purposes, on strategic CapEx, dividends and returns to shareholders and the repayment of debt. The company has paid out $300 million to shareholders since we've listed in 2014. $100 million has been on share buyback program and $200 million in dividends.

This year, we have generated $65 million of free cash flow, with a record high 80% conversion. This abnormally high conversion is due to the focus on generating cash to ensure compliance with our debt agreements. The negotiated payment terms with suppliers was to cover us through the sale period, and they will revert to our standard terms following the sale. Likewise, the deferred tax installments this year will be caught up in 2019.

We see 2018 and '19 as transition years from a cash flow perspective and expect minimal free cash flow to be generated in 2019. We will receive proceeds from the sale, less cost of sale and adjustment for lower working capital. We also have a higher-than-normal strategic CapEx to pay for in 2019 as we complete the Kawerau site upgrade.

The Board will reassess our dividend policy following the completion of the sale and the Kawerau site upgrade. We will ensure all key factors of investment in the business, repayment of debt such that we have a stable leverage ratio at the lower end of our target range and shareholder returns are balanced. We expect to return to a sustainable, free cash flow conversion of around 60% to 65% from 2020 onwards. This is approximately 5 percentage points higher than our historic conversion rates.

Moving to Slide 19, we have calculated these key shareholder return metrics on a total group basis, that is including discontinued operations. Underlying earnings per share was down 50% on prior year, reflecting the decline in profit. The underlying return on invested capital and return on equity were also down on last year. Whilst these returns have reduced, it is important to note that our return on invested capital exceeded our after-tax weighted average cost of capital and a strict discipline is maintained for evaluating all investment decisions. Following the completion of the sale of the Australian Consumer Tissue business, these metrics are all expected to improve.

On Slide 20, I want to discuss a change that you will see in our accounts for 2019 onwards. There is a new lease accounting standard that is effective for us commencing on the 1st of January 2019. This standard requires lessees to record their operating leases on the balance sheet. Up to and including 2018, operating leases were not on the balance sheet and the rental payments were recorded as expenses and included as a reduction to EBITDA. On 1st of January 2019, we have to include, as an asset, for the right-of-use on our balance sheet as well as the corresponding lease liability for the net present value of future lease payments. This increases our total assets and total liabilities but has a minimal change to net assets.

When the rental payments are made, the payment reduces some lease liability rather than being expensed to EBITDA. During the term of the lease, the right-to-use asset is depreciated and net expense is included as depreciation in the income statement. There will also be a small interest expense as the net present value of the lease liability is recalculated each reporting period end. The net effect is that rental payments will no longer be included in EBITDA but will be reflected as higher depreciation and interest expense.

The table on Slide 20 shows the impact to the 2018 account if the new lease accounting standard was in effect for the year. We have shown these for continuing operations only. Total assets would have been $23 million higher and total liabilities would have been $26 million higher as at the 31st of December 2018, reducing net assets by $3 million. EBITDA would have been $9.1 million higher, being a total of $90.6 million from continuing operations, instead of the $81.5 million that we have reported today. There is no change to NPAT as depreciation and interest have increased largely offsetting the increase in EBITDA. The outlook that Sid will take you through shortly is under the new lease accounting standards and will be comparable to the $90.6 million continuing operations EBITDA for 2018 shown on this slide.

I'll now hand back to Sid.

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Sid Takla, Asaleo Care Limited - CEO, MD & Director [4]

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Thanks, Lyndal. Can we please turn to Slide 22 to discuss our new strategic direction?

As part of the in-depth strategic review that we commenced mid last year, we took the opportunity to revisit the company's purpose and vision. One of the unique prepositions of our organization is that we touch human lives at all stages of their life cycle, whether it's a newborn baby through our diaper business or Incontinence Products at the later stages in life. Through this personal interaction with consumers, our purpose is to provide care, comfort and confidence in everyday life. Our vision is to be the #1 Personal Care and hygiene company in Australasia.

We are building a sustainable business, capable of achieving long-term growth. We are doing this by becoming fanatical about being a customer- and consumer-focused business. We have established 4 strategic pillars to provide discipline and structure in the way we execute our strategic objectives. These pillars are: targeted sales growth, with particular focus on Personal Care and B2B; a differentiated offer, using innovation and our corporate social responsibility credentials as a key point of difference; supply chain excellence, leveraging both our local manufacturing footprint, but also the global Essity network; and our fourth pillar of exceptional people, where we identified that having strong leadership and an aligned and accountable workforce is the key success factor in strategy execution.

As with some of the initiatives previously discussed in this presentation, we are well into the execution phase of this new strategy. We will continue to share with you key developments on our new strategic direction over the course of 2019.

Can you please turn to Slide 23 for our 2019 outlook?

The company expects its continuing operations to deliver an underlying EBITDA in the range of $80 million to $85 million for the full year 2019. As Lyndal explained, this includes the new lease accounting treatment and is comparable to the $90.6 million for 2018 if the standard had been in place for that year. Some key assumptions to note in our forecast are that we will significantly increase the level of investment to support the long-term growth of our brands. This investment will include research and development, quality improvements, advertising and promotional spend, people and capital projects.

In regards to major cost assumptions, we anticipate that U.S. dollar pulp pricing will continue to impact our first half performance at similar levels to that experienced in the second half of 2018. We are seeing some potential easing in pulp towards the end of 2019 and into 2020. We have specified underlying EBITDA in the range above as this will exclude approximately $6 million of nonrecurring costs primarily to complete the Kawerau site converting upgrade for our B2B business. Approximately $4 million of this nonrecurring cost will be cash.

We are also projecting that our free cash flow will be negligible in 2019. As Lyndal explained earlier, with a strong focus on reducing our net debt in 2018, we had to execute some initiatives to generate cash, which will now naturally reverse in 2019 as we transition back to a normal trading environment post the sale of the Australian Consumer Tissue business. Our strategic CapEx will also be higher-than-average as we fund the forementioned investment at our New Zealand facility. As previously noted, there'll be no final full year 2018 dividend paid.

Please now turn to Slide 24 for our final summary.

2018 represented a watershed year for Asaleo Care. We have reset the business for long-term success via the execution of strategic initiatives, such as the sale of the Australian Consumer Tissue business, the significant reduction of our inventory through the agile inventory program and the extension of our exclusive licensing arrangement with Essity through to 2027. This partnership with Essity provides access to world-leading innovation. And with our stated commitment to significantly increase investment in our brands, we are confident in our ability to achieve sustainable long-term growth.

We have strengthened our balance sheet and better balanced our portfolio, which will reduce future earnings volatility and allow us to focus on our higher-margin, higher-growth and less capital intensive categories of Personal Care and B2B. We have taken tangible actions to become a more customer- and consumer-focused business. This was evidenced through our investment in product quality and in-store activity across many of our brands in 2018, resulting in incremental ranging, new private label and promotional opportunities.

We have set a new strategic direction after an in-depth review of the whole business and we have demonstrated an ability to execute these plans with great efficiency. Strategy process is not static. We continue to develop other initiatives that will reduce cost, drive growth and add long-term value for our shareholders.

Thank you for joining Lyndal and I on the call today. And I appreciate your interest in our company. We will now move to take any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) There are no questions in queue at this time. (Operator Instructions) Sid, Lyndal, there are no questions so I'll pass back to you if you have any closing comments.

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Sid Takla, Asaleo Care Limited - CEO, MD & Director [2]

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Obviously, we've done a really good job of communicating the results. So now if there are no further questions, I know we've got scheduled calls throughout the next couple of days and face-to-face meetings, so I'm sure we'll pick up questions along the way. So again, thanks, everybody, for joining the call. And as I said, appreciate your interest in our organization. Thank you.

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Operator [3]

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Thank you so much. Ladies and gentlemen, that does conclude the call for today. Thank you so much for attendance. You may now disconnect.