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Edited Transcript of AHY.AX earnings conference call or presentation 20-Aug-19 12:01am GMT

Half Year 2019 Asaleo Care Ltd Earnings Call

Box Hill, Victoria Aug 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Asaleo Care Ltd earnings conference call or presentation Tuesday, August 20, 2019 at 12:01:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Campbell R. Richards

Asaleo Care Limited - CFO

* Sid Takla

Asaleo Care Limited - CEO, MD & Director

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Conference Call Participants

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* Craig John Woolford

Citigroup Inc, Research Division - MD and Head of Australian Consumer Research Team

* Larry Gandler

Crédit Suisse AG, Research Division - Director

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Presentation

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Operator [1]

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Good morning, and welcome to Asaleo Care Half Year 2019 Results Announcement. Today's briefing will be delivered by CEO, Sid Takla; and CFO, Campbell Richards. (Operator Instructions)

Sid, please go ahead.

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

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Thank you. Good morning, ladies and gentlemen and welcome to the half year 2019 results announcement for Asaleo Care. I would firstly like to take the opportunity to introduce and welcome Campbell Richards, our new CFO, who will be joining me on the results announcement today.

Can you please turn to Slide 3 to commence with an overview of our performance. Asaleo Care's business performance is on track with the company's financial results for the half year being in line with expectations. The outlook for the full year 2019 remains unchanged. In March, we successfully completed the sale of the Consumer Tissue Australia business with proceeds largely used to pay down debt. This has significantly strengthened our balance sheet and reduced our leverage ratio from 3.25x to 2.1x EBITDA at the half year.

Our strategy to drive growth is now clearly focused on becoming the leader in personal care and hygiene in Australasia while investing in our brands and putting the needs of our customers and consumers first. I'm pleased to report that we are investing in our brands and that this renewed focus on customer and consumer is starting to deliver growth. Revenue from our continuing operations grew by 2.2% to $202 million. Pleasingly, our retail position was the key driver of this growth, which I'll elaborate on in coming slides.

We have increased investment in our brands with advertising and promotional spend up 19%, with plans to extend this further in the second half. We have also invested in incremental sales and marketing resources to help facilitate this growth. In addition to these investments, our $25 million capital investment in B2B tissue-converting equipment in New Zealand is on track to deliver substantial operating efficiency. This machine is currently being commissioned with production scheduled to commence in quarter 4 of this year.

Earnings before interest, tax, depreciation and amortization was down 8%, mainly due to higher pulp costs, costs associated with shuts taken for the installation of the new asset and in brand investments I previously mentioned.

Another important milestone was achieved in the first half with Essity reaffirming its long-term commitment to the company, with new commercial terms finalized for the license agreement which has been extended out to 2027.

With regard to capital management, as previously guided, full year free cash flow is expected to be minimal after the investment in strategic CapEx and unwinding in its first half some of the technical working capital initiatives put in place in 2018. As a result, no interim dividend is being declared.

If we now turn to Slide 4 to have a quick recap on the new business structure post divestment. With the divestment of the Australian Consumer Tissue business, we have realigned our reporting segments to better reflect how we manage the ongoing business. Historically, we have reported our segments of Tissue and Personal Care, but we have now moved to reporting the segments as Retail and Business to Business. This is better aligned to the way we engage with our customers and consumers and creates greater focus for our teams internally.

The Retail segment includes Feminine Hygiene, Incontinence Care, Baby Care, Consumer Tissue in New Zealand and our Pacific Islands business. This segment represents approximately 40% of the revenue and EBITDA for continuing operations. The Business to Business segment includes our Professional Hygiene and our Incontinence Healthcare businesses. This segment represents approximately 53% of both revenue and EBITDA for continuing operations.

Please turn to Slide 5 titled Essity Reaffirms Long-term Commitment. A new Trade Mark and Technology License Agreement with our global partner Essity has been finalized, reaffirming their long-term commitment to Asaleo Care. In addition to the 5-year extension, now through to 2027, new commercial terms have been agreed that better reflect the scope and scale of our future business. This agreement provides continued access to technology, marketing materials and a pipeline to world-leading R&D and innovation for the Tork, TENA and Libra brands.

In addition, Robert Sjöström has resigned as a director of the company following an internal promotion. Essity's Marie-Laure Mahé, Commercial Director of France and Belgium Consumer Goods, has been appointed a director of the company.

We'll now move to the specific review of the B2B and Retail segment performance. So can you please turn to Slide 6. With the Asaleo Care B2B segment now representing more than 50% of total business and to maintain the solid growth that it has achieved over the last 5 years, we continue to invest in this division. Investment includes the launch of new, innovative, technology-based customer solutions, incremental field sales resources and a major CapEx investment in new manufacturing equipment at our New Zealand facility that I mentioned earlier.

TENA Healthcare achieved a strong sales result, up 5.1% through growth in both the residential and home care markets. TENA, as the leading brand and well known for its high quality of product and service, is well aligned with a greater focus on quality of care in the aged care sector, highlighted by the current Royal Commission into aged care. The sales activity pipeline for this business remained strong in the second half, which has been supported by the launch of the new continence assessment tool, known as TENA Identifi, which I'll talk to you on the coming slide.

Tork Professional Hygiene sales were marginally down by 1% following the exit of 2 unprofitable contracts. These contracts were commodity-based products not issued through dispensing systems. This highlights the importance of our strategic direction to continue focusing on higher-margin proprietary dispensing solutions, which offer greater value to our customers. These proprietary systems continue to grow and now represent over 36% of all Professional Hygiene sales.

The pipeline for Professional Hygiene is strong, and we anticipate with new innovation coming to market a stronger performance in the second half. Margins in the Professional Hygiene division were impacted by higher pulp costs and production shuts taken to install the new asset at our Kawerau site in New Zealand. B2B sales overheads were also higher as we invested in additional resources to bring the new innovation to market. Campbell will talk to pulp shortly, but with the recent easing in pulp prices, we will see a modest benefit for the B2B business in the later part of this year.

If we now turn to Slide 7. I would like to share with you 2 of the world-leading innovations that we have recently brought to the B2B market both already generating incremental revenue. The strength of the B2B business is our competitive advantage generated from innovative products and systems that have been built on customer and consumer insights. TENA Identifi and Tork EasyCube are 2 of the latest innovations brought to market that leverage the Internet of Things to improve quality of care and the standards of hygiene.

Firstly, TENA Identifi's revolutionary sensor technology tracks a resident's voiding during a 72-hour period, generating a report with urinary patterns and volumes. And information in the report helps determine the most appropriate incontinence products, recommended toileting times and adjustment of care routines, which ultimately leads to a higher quality of care. In quarter 2, we converted our first large aged care group in Queensland onto TENA Identifi, and we're currently running several trials with other large aged care groups. This is a game-changing technology focused on improving the quality of care.

Secondly, Tork EasyCube, which is the world's leading facility management software, brings a whole new level of efficiency and effectiveness to cleaning operations. Real-time data from connected devices and dispenser systems are displayed in an easy-to-use web application, directing cleaning teams to where they are needed the most. We officially launched the EasyCube in New Zealand last year, and after initial trials, we now have 3 paying customers. What's important to note is this is generating incremental revenue for our service separate to the product refills itself. Tork EasyCube is now being launched in Australia with trials also in progress.

TENA Identifi and Tork EasyCube are 2 examples of a strong pipeline of innovation coming through in the B2B business, and as mentioned previously, we've invested in incremental sales resources to bring these innovations to market.

Can you please turn to Slide 8 to discuss the Retail segment performance. The Retail segment has had a strong start to the year, achieving top line growth of 4.5%. Volume and value growth was achieved across all categories, except Baby. With a renewed focus on customer and consumer, we have achieved incremental ranging in our key categories and supported this through increased investment in shopper-based activity, brand advertising and incremental sales and marketing resources.

TENA Incontinence Retail revenue was up 4% with the ranging of new products, including new TENA Discreet Ultra Thin Pads and new TENA his and hers colored pants. Libra sales volumes increased 6%, assisted by the launch of the new Libra Girl product range. Libra sales value increased by 1% due to higher investment in shopper promotional activity.

Baby revenue was down due to continued strong price competition from imports. However, we have launched a new Treasures Care product in New Zealand earlier this month, which is made locally in New Zealand and builds on Asaleo Care's strong environmental credentials with the use of FSC pulp in the diaper core, a natural fiber top sheet and packaging that is made from 51% sugarcane.

Consumer Tissue revenue in New Zealand was up 16% in the first half with the launch of new products and a renewed focus driven by the new leadership and a new team in New Zealand.

The strong sales performance by all the key retail categories has helped offset the impact of the higher pulp costs and the increased investment in brands, resulting in an overall EBITDA for the Retail segment only being down 1.4% on last year. With pulp prices easing, we will see a benefit for our Retail business in the later part of this year.

Please turn to Slide 9 to discuss the growth initiatives for the Retail segment. With our focus on driving growth, there has been a significant increase in the level of activity in the first half of the year with plans to increase this further in the second half. We launched 3 new SKUs for TENA: Ultra Long Liners, Discreet Ultra Thin Pads and female and male colored pants. For Libra, we launched the unique Libra Girl tampon, which has been designed for smaller bodies. The Libra brand has been supported with strong in-store activation promoting Australian-made and the collaboration with Share the Dignity, which I'll elaborate on shortly.

We are excited to have launched the new advertising campaign for Libra on Sunday called Blood Normal. If you watch programs such as The Project, The Bachelor or Survivor, you might have seen the ad already. The aim of the campaign is to break down periods averse, encourage conversation around menstruation and reduce stigma and shame around periods. As the only Australian manufacturer of feminine care products, Libra has played a leading role in helping to normalize menstruation for over 40 years.

With regard to our Consumer Tissue business in New Zealand, the strong sales performance in the first half has been driven by the launch of new products such as the Sorbent premium range generating growth of over 10% and the Handee Max 3-ply product being the most absorbent towel now in the New Zealand market. This product was given a gold rating by Black Box members. Again, across all our categories, we will continue to increase investment in our brands to drive long-term growth.

Please turn to Slide 10 for a review of our safety performance. Safety of our employees and contractors is paramount. And hence, we continue to invest and focus on initiatives that create a safer working environment. Over the last 2 years, we have spent over 15% of maintenance CapEx on specific safety-related initiatives. In addition to investments such as the new converting machine in New Zealand, these modern-day assets are equipped with technology that takes safety to a much higher level.

We've also continued to roll out our random drug and alcohol testing program across all sites. This testing is for all Asaleo Care employees. With the strong safety culture, we continue to work with our employees to find solutions to identify and eliminate any safety hazards. This year, Asaleo Care was a finalist in the Endeavour Awards for Safety Solution of the Year, recognizing an operator-led, manual-handling solution at our Springvale site. Please note that the lost time injuries and the lost time injury frequency rate provided on this slide for 2018 and 2019 are for continuing operations only.

Please turn to Slide 11 for an update on Asaleo Care's corporate social responsibility initiatives. Asaleo Care and its employees take great pride in delivering on our purpose of care, comfort and confidence every day for all our stakeholders. Whether it is through our long-standing partnerships with charities such as Ronald McDonald House, who aim to provide a home away from home for seriously ill children and their families; or supporting great new initiatives such as Share the Dignity, who aim to provide feminine care products for women in need, Asaleo Care helps to make a difference.

As a proud local manufacturer known for its high sustainability credentials, as recognized by the Dow Jones Sustainability Index for 4 years in a row, we continue to invest in initiatives that lessen our footprint on the environment. Recent examples include the investment in the New Zealand converting asset, with new technology that reduces our energy consumption and waste; and our new Treasures Care product that I mentioned earlier, that now uses a natural fiber top sheet, FSC pulp in its core and a more sustainable packaging produced from 51% sugarcane.

Finally, as the market leader in continence care in the residential aged care sector, TENA has an important role to play as an educator on best practices for continence management. Therefore, we will be contributing to the Royal Commission into aged care quality and safety.

I will now hand over to Campbell Richards for a more detailed review of our financials.

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Campbell R. Richards, Asaleo Care Limited - CFO [3]

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Thanks, Sid, and good morning, ladies and gentlemen. Can I please ask that you turn to Slide 13, where I'll explain the financial performance for the half year. The table in this slide represents the financial performance for the continuing operations. That is the remaining business after the sale of Consumer Tissue Australia. My commentary will focus on the underlying result of the continuing operations, but I'll also discuss the nonrecurring items and discontinued operations to complete the full statutory view.

Firstly, to revenue. The business experienced top line growth of 2.2% driven by growth in the Retail business of 4.5%. Excluding the loss of export tampon sales to Essity that was included in the first half '18 result, the Retail business actually grew 6%. B2B business managed to hold revenue flat versus the prior corresponding period, notwithstanding the exit of a couple of unprofitable contracts in the Professional Hygiene business. Sid has already discussed this in detail, so I won't cover it again.

Gross margins declined from 42% in the first half of 2018 to 38% in the first half of 2019, which resulted from a number of factors that I will now explain. Firstly, we made a decision to increase trade investment, particularly in Feminine and Incontinence Care products, to drive trial of new products range and to ensure our targeted price indexes were maintained. Secondly, the business has experienced a number of increased input costs, most notably pulp and imported finished goods, partially currency-related that drive approximately $5 million in increased costs. I'll discuss pulp pricing further in Slide 15.

Sales, marketing and administration expenses were 3% higher than prior corresponding period, largely due to a 19% increase in advertising and promotion as well as an increase in our sales and marketing resources to drive sales growth.

There's a 50% increase in depreciation compared to the prior corresponding period due to the first time adoption of the new lease accounting standard, that in the first half '18 has not been restated to reflect the new standard. That is the depreciation increase is largely due to the lease amortization.

Similarly, the increase in net finance costs is largely due to the inclusion of [lease interests] in this line. Notwithstanding the repayment of debt in the first half of 2019, net financing costs were still higher due to the high leverage ratio at December 2018 driving interest rates on our debt higher. I'll discuss the nonrecurring expenses on the next slide.

Next, I would like to discuss the discontinued operations result, including the gain on sale of the Australian Consumer Tissue business. In relation to the gain on sale, it should be noted that the amount disclosed will be further adjusted in the second half of 2019 as a result of 2 outstanding items. Firstly, the working capital adjustment to the net proceeds is yet to be finalized and will be finalized before year-end. This will be a favorable adjustment of up to $6.2 million.

Secondly, the sale agreement provided for an environmental indemnity granted by Asaleo Care in favor of the purchaser and is subject to a cap of $9 million. We're currently undertaking environmental assessment and this should be concluded before year-end. The indemnity will be in the form of cash held in escrow for a period of 10 years.

Excluding these yet-to-determined amounts, the total gain on sale including costs incurred in FY '18 is $5.9 million. The loss from discontinued operations represents the trading loss of the Australian Consumer Tissue business from the 1st of January through the 29th of March 2019.

I'll now ask you to turn to Slide 14, which reconciled the underlying NPAT to the statutory NPAT, and this is where I'll discuss the nonrecurring items in more detail. The items disclosed as nonrecurring in the first half results relate to the strategic initiatives undertaken in our New Zealand manufacturing operations consistent with the guidance provided back in February.

The first item relates to expenses, principally asset write-offs in relation to the installation of the new converting equipment at our Kawerau site. The write-off relates to 4 converting machines that had to be replaced with a new, larger converting machine that will improve efficiency and reduce waste. The second item relates to redundancy costs associated with the capacity reduction at our nappy manufacturing facility in Te Rapa.

I now ask you to move to Slide 15. As can be seen from the graph in the slide, we've experienced significant increases in pulp prices during 2018 and 2019, and this impacted our margins. We're starting to see a softening in pulp prices as we head into the second half of the year due to underlying global demand and supply dynamics. Due to the supply chain lag between purchasing pulp and seeing it flow through into our cost of goods sold, we will only start to see this benefit our results in quarter 4.

I'll now ask you to move to Slide 16, where I'll discuss cash flow. This slide represents cash flow for the group including the discontinued operations for the first quarter of 2019. The left-hand side of the graph shows the breakdown of free cash flow, and the right side explains how the free cash flow was sourced and applied to capital allocation.

The company had a free cash flow deficiency of $61.2 million during the first half, and there are 3 main drivers of this. Firstly, the Australian Consumer Tissue business incurred a trading loss during the first quarter of 2019 whilst under our ownership.

Secondly, as you'll be aware, Asaleo Care undertook a number of working capital initiatives in 2018 to generate cash flow. As Sid and Lyndal explained in the 2018 full year results, these initiatives were short term in nature and hence were unwound in the first quarter in 2019, resulting in a significant cash outflow. Please note that these initiatives do not include the significant reduction in inventory achieved last year, which has been maintained.

Lastly, as a part of the sale of the Australian Consumer Tissue business, Asaleo Care retained responsibility for collecting trade receivables and paying trade payables as at completion on the 29th of March 2019. There was a net payable position of $22.7 million that was funded by Asaleo Care in the first half. Maintenance CapEx of $5.3 million was paid during the period. And financing costs and tax payments made up the remaining draw on free cash flow.

The right side of the graph depicts how the free cash flow was sourced. On an overall level, net debt reduced by $110.5 million, as can be seen on the far right side of the graph. This was funded by the proceeds on the sale of the Australian Consumer Tissue business of $180 million, which was reduced by transaction costs of $7 million. As a part of the sale, Asaleo Care was required to put $7.5 million into escrow until the sale is finalized. This escrow amount was released back to us. The net proceeds were then applied to lease payments of $6.1 million and growth CapEx of $11.1 million relating to the new Zealand converting machine.

I now ask you to turn to Slide 17 to discuss our debt facility. As previously disclosed, the net proceeds of the sale of the Australian Consumer Tissue business were used to pay down debt. We reduced our total debt facility from $400 million to $250 million and reduced the number of lenders in the syndicated facility from 5 to 3. But we also have the senior note program in place.

Pleasingly, our leverage ratio has decreased from 3.25 in December 2018 to 2.1 at June 2019, providing headroom in our facility and strengthening our balance sheet. We expect the leverage ratio to continue to decrease in the second half.

I now ask you to move to Slide 18. Our maintenance CapEx for the first half was broadly in line with the prior year and is currently running behind depreciation. As previously discussed, the strategic CapEx principally relate to the purchase and installation of the new tissue converting machine in Kawerau. The equipment is being commissioned and will commence production in quarter 4 of this year. This new equipment will reduce waste and create significant operating efficiencies. As outlined in the slide, depreciation now includes lease amortization under the new accounting standard, and we've shown this separately.

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, Campbell. So I'm on Slide 19. So in summary, our performance is on track. We have successfully completed the sale of the Consumer Tissue Australia business, with the proceeds largely used to pay down debt, which has significantly strengthened our balance sheet. We have finalized the license agreement with Essity, which reaffirms their long-term commitment to Asaleo Care. The new commercial terms now better reflect the scope and scale of future business. And I've shared with you many examples of our increased investment in brands with a renewed focus on customer and consumer that is starting to deliver growth.

If you now turn to Slide 20, we'll review our full year outlook. Focusing on strategy execution. Throughout the presentation this morning, you have heard me talk about the elements of our strategy that you see on this slide. Our strategy to drive growth is now clearly focused on Asaleo Care becoming the leader in personal care and hygiene in Australasia while investing in our brands and putting the needs of our customers and consumers first.

It started with the in-depth strategic review 12 months ago, and we are now heavily into execution mode of these strategic plans. Whether it's the large structural changes, such as the sale of Consumer Tissue Australia business, or the execution of each individual brand strategy, each of these initiatives has the aim of delivering value to all of our stakeholders.

Please turn to Slide 21. Our 2019 full year outlook remains unchanged. EBITDA forecast to be in the range of $80 million to $85 million. The U.S. dollar pulp price is easing, but with a 6-month lag before this hits our P&L, we will only see a modest benefit this year. We do expect to see more of this benefit in the first half of 2020, although this will be partially offset by the weaker Australian dollar.

Returning to longer-term trends, we expect the second half 2019 financial performance to be stronger than the first. As previously guided, we expect our full year free cash flow to be minimal. First half cash flow was impacted by the unwinding of tactical working capital initiatives put in place in 2018 and the large strategic CapEx investment. Pleasingly, however, we expect our second free cash flow to be positive.

As committed, 2019 was to be a year to reset and renew Asaleo Care. We have stabilized and strengthened our financial position, and we are investing in our brands for sustainable, long-term growth.

I thank you for your interest in our company, and both Campbell and I are willing to take any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Craig Woolford from Citigroup.

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Craig John Woolford, Citigroup Inc, Research Division - MD and Head of Australian Consumer Research Team [2]

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I just wanted to understand. So in your commentary, A&P spend is up 19%. Does all of that fall into the sales, marketing and admin line, because that was 3.3% EBITDA? I'm interested in what other costs might have fallen to offset that.

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Sid Takla, Asaleo Care Limited - CEO, MD & Director [3]

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Well, we do have a large sales and marketing cost because we now have that portfolio mix of B2B, so we have a large field force investment grade. So there were some vacancies in the first half that we have now since filled. I've mentioned that, that we've put in actually incremental sales and marketing resources. And keeping in mind that the A&P spend is essentially for the Retail business, which now represents a smaller portion overall.

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Craig John Woolford, Citigroup Inc, Research Division - MD and Head of Australian Consumer Research Team [4]

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So the A&P up 19% is for the Retail business?

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Sid Takla, Asaleo Care Limited - CEO, MD & Director [5]

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Right.

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Craig John Woolford, Citigroup Inc, Research Division - MD and Head of Australian Consumer Research Team [6]

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For the first half. But yes, there would be additional of just cost growth or A&P growth in the second half given field force vacancies have been filled.

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Sid Takla, Asaleo Care Limited - CEO, MD & Director [7]

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Correct. Yes, we've allowed for that in our forecast -- full year forecast for both, for increased resources and increased A&P spend.

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Craig John Woolford, Citigroup Inc, Research Division - MD and Head of Australian Consumer Research Team [8]

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Yes. I mean yes, the broader, high-level question is because you flagged it and it is important that you invest in your brand, what is the threshold? How do you think about how much needs to be spent? It's hard for me to judge because the 19% is a big number. It looks impressive but it might be coming from a low baseline. How do we get a better handle on what that increase should be?

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Sid Takla, Asaleo Care Limited - CEO, MD & Director [9]

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Yes, I think I sort of referred to this at the full year guidance. And that was around -- if you recall, Craig, last year's profit was $90.6 million adjusted for lease accounting, and this year's range of $80 million to $85 million for 2019. And I essentially explained that the difference between the $80 million to $85 million and the $90.6 million last year, that difference is essentially investment in the brands. Now there've been swings and roundabouts, there's price movements, et cetera, but that level in that guidance of changing [mix] is essentially the investment we're looking at. And you'll see that increase in the second half.

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Craig John Woolford, Citigroup Inc, Research Division - MD and Head of Australian Consumer Research Team [10]

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Got it. Campbell, maybe a question for you around lease accounting. I just want to be 100% clear that the EBITDA from first half '18 of $42.9 million essentially had a rental charge in it because you didn't restate comparables. $4.7 million, I think, was the change on the lease accounting.

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Campbell R. Richards, Asaleo Care Limited - CFO [11]

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Yes, that's correct. So there's probably about $4.5 million, Craig, of lease adjustments effectively that are above the line in first half '18.

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Craig John Woolford, Citigroup Inc, Research Division - MD and Head of Australian Consumer Research Team [12]

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Yes. Okay.

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Campbell R. Richards, Asaleo Care Limited - CFO [13]

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In combination with the amortization of the [leases].

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Craig John Woolford, Citigroup Inc, Research Division - MD and Head of Australian Consumer Research Team [14]

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And in first half '18, a fair bit of that would have been part of cost of sales?

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Campbell R. Richards, Asaleo Care Limited - CFO [15]

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That is -- yes, a fair component of that is in cost of sales [in the chart will show you], yes.

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Craig John Woolford, Citigroup Inc, Research Division - MD and Head of Australian Consumer Research Team [16]

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Okay. All right. And then my last one is I just wanted to understand working capital. Explain that $22.7 million payment for the net payables you're paying. Can I get a bit more understanding on that item?

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Campbell R. Richards, Asaleo Care Limited - CFO [17]

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Yes, sure. So as part of the agreement for the sale of the Consumer Tissue business, given the business was effectively run as a single business with similar supplies and customers, trying to separate that between the 2 parts of the business, so the business to be sold and the retained business, was difficult to accurately pull apart. And as part of the commercial deal, it was agreed that we would retain all of the payables and the receivables and pay those out. And the net payable position was $22.7 million.

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Craig John Woolford, Citigroup Inc, Research Division - MD and Head of Australian Consumer Research Team [18]

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Wouldn't it be fair for us as analysts or investors to see that as a net reduction in the proceeds that you received?

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Sid Takla, Asaleo Care Limited - CEO, MD & Director [19]

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I think it's also about timing, Craig, because as part of the base data that was used to calculate that valuation, we also ran down inventory by $32 million, which we took the benefit of last year versus AP and AR that was taken this year. So I think it's partly also the timing of when these working capital adjustments hit.

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Craig John Woolford, Citigroup Inc, Research Division - MD and Head of Australian Consumer Research Team [20]

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Okay. So I mean just to round it out, what's the approach to the dividend payments moving forward, in the second half? You said that overall cash flow will be quite minimal for the full year. How does that impact the prospect of dividend payment?

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Campbell R. Richards, Asaleo Care Limited - CFO [21]

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Look, I think, Craig, it will depend on how we do land the full year from a free cash flow point of view. Again, depending on how we land, if we do generate sufficient free cash, then obviously it's the decision of the Board. But we'll consider the dividend paying capacity at that time.

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Operator [22]

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(Operator Instructions) Your next question comes from the line of Larry Gandler from Crédit Suisse.

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Larry Gandler, Crédit Suisse AG, Research Division - Director [23]

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A few questions from me. On the cash flow, I'd also like to understand with regards to a couple of pieces of the outlook. The remediation, I guess, cash flow you're indicating, $6.2 million, can you just walk us through that, Campbell? Will that be an actual cash item? Or is that just sort of an accounting adjustment?

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Campbell R. Richards, Asaleo Care Limited - CFO [24]

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No, no, it will be a cash item, Larry.

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Larry Gandler, Crédit Suisse AG, Research Division - Director [25]

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Okay. So what you're saying is if -- what's that contingent upon, that $6.2 million?

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Campbell R. Richards, Asaleo Care Limited - CFO [26]

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There are a number of working capital adjustments that are to be agreed with the purchaser in terms of how that's to be calculated. And that's why we're saying it will be an amount up to $6.2 million. So a number of those items is still being discussed with the purchaser, but it will represent cash.

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Larry Gandler, Crédit Suisse AG, Research Division - Director [27]

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Okay. Great. And the gain of $9 million, is that only $1.5 million above the $7.4 million? Is that really an immaterial thing here? Or is there an incremental $9 million?

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Sid Takla, Asaleo Care Limited - CEO, MD & Director [28]

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It's the other way around, Larry. The net $9 million refers to environmental indemnity. It's capped at $9 million. There is currently an environmental assessment being conducted at the site between 2 parties, a party nominated by Asaleo Care and a party nominated by the purchaser. And whatever amount is agreed between the 2 parties, and these are independent third parties, that will be the amount that we put into escrow. That's anything between 0 and $9 million, and that is what we'll be putting to escrow. So at this stage, we haven't allowed for that item. But it will be completed before the end of the year.

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Larry Gandler, Crédit Suisse AG, Research Division - Director [29]

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Okay. But that's not -- yes, go ahead.

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Sid Takla, Asaleo Care Limited - CEO, MD & Director [30]

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So that's the potential draw on cash. The other -- the working capital adjustment is a cash benefit.

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Larry Gandler, Crédit Suisse AG, Research Division - Director [31]

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Oh, I see. Okay. I got it. So you might have to put -- and how does that -- what's the -- the other thing in cash flow is the $7 million escrow. What was that in relation to in the period?

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Sid Takla, Asaleo Care Limited - CEO, MD & Director [32]

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It was regarding to a break fee, Larry. So both parties put in $7.5 million as a break fee during the negotiation. And obviously, the transaction was completed successfully so that amount that was put in escrow was released into this financial year.

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Larry Gandler, Crédit Suisse AG, Research Division - Director [33]

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Okay. And continuing on the cash flow. With regards to your guidance for minimal free cash flow in FY '19, I have to imagine that is excluding the proceeds that you received from the sales of the Tissue business.

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Sid Takla, Asaleo Care Limited - CEO, MD & Director [34]

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Yes, yes. Absolutely, yes.

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Larry Gandler, Crédit Suisse AG, Research Division - Director [35]

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Okay. Great, yes. All right. If I can now leave cash flow and just ask a couple other questions. In Fem Care, Sid, how do you feel your pricing is relative to the competition? I believe it's a bit on the high side but -- and you brought it down, but I'm just wondering where you think it is -- where you think it sits today.

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Sid Takla, Asaleo Care Limited - CEO, MD & Director [36]

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We definitely plan to be competitive, Larry. We're investing a lot in the brands in terms of innovation, advertising, et cetera. And one of the levers we have to pull is a price lever. And we've started doing that particularly in quarter 2, and we plan to continue to do that in quarter 3 and 4. So we will defend our share and we want to grow this business. So we will continue to invest heavily in that brand.

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Larry Gandler, Crédit Suisse AG, Research Division - Director [37]

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Yes. Okay. I think it might be the right thing to do, I'm just -- because technically, you guys are the local producers. Obviously, raw materials are a major -- imported raw materials nullify large parts of the cost advantage, but you still should have some sort of perhaps cost advantage locally or perhaps not. How do you feel about your manufacturing advantage being local?

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Sid Takla, Asaleo Care Limited - CEO, MD & Director [38]

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Yes, we believe we do have an advantage, Larry. As part of our in-depth strategic review, we had a good look at whether we continue to manufacture locally or whether we import. And through that analysis, we've definitely determined that we definitely have a competitive advantage being a local manufacturer. And particularly, as the U.S. dollar starts to -- or continues to drop, also the Aussie dollar against the U.S., we continue to see that as a potential upside for us in that category being a local manufacturer.

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Larry Gandler, Crédit Suisse AG, Research Division - Director [39]

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Is there an objective then to become price leader in this market? Actually, be seen as best value. Or is that -- the premium position is something you have to be cognizant of?

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Sid Takla, Asaleo Care Limited - CEO, MD & Director [40]

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Well, I think our focus is to be competitive, Larry. We have fantastic quality products. We're bringing new innovation to market in this area. Examples like Libra Girl, it's a uniquely designed product for smaller bodies. So all that comes with value. The same with the TENA category as well. We're introducing product that adds a unique proposition to our consumers. But we will make sure that we are competitive. So it is about the overall value that we bring to our consumers. So it will include all those elements.

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Larry Gandler, Crédit Suisse AG, Research Division - Director [41]

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Okay. And jumping over to B2B. Sales were sort of flattish but TENA was up 5%. And I know the other business was down 1%. But even with TENA up 5%, I would have thought the overall division had better -- would have had better sales growth. Is there other things dragging on that sales line?

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Sid Takla, Asaleo Care Limited - CEO, MD & Director [42]

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No, the Professional Hygiene business is a large part of that B2B portfolio, Larry.

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Larry Gandler, Crédit Suisse AG, Research Division - Director [43]

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Okay. So is that much bigger?

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Sid Takla, Asaleo Care Limited - CEO, MD & Director [44]

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Yes. That 1% is sort of reflective of its portion of that portfolio.

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Larry Gandler, Crédit Suisse AG, Research Division - Director [45]

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Okay. Got it. And last question from me is -- would you guys be prepared to give us a Baby update, not necessarily in terms of the operating performance but in terms of, I know you're conducting a strategic review, where you guys landed in terms of that business?

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Sid Takla, Asaleo Care Limited - CEO, MD & Director [46]

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At this point of time, what we have done, Larry, is we've launched a new product called Treasures Care. And it's really built around an environmental proposition, something that Asaleo Care just pride itself on. So it's a new product launched in August, for the first time using FSC pulp in the core. We are using a natural fiber top sheet and we're using a packaging that uses 51% sugarcane. So it's quite a unique proposition building on the New Zealand-made also.

So what we'd like to see, our first step at least in the short term is to see how that performs. We think with all the research that we've done, we think it's a compelling proposition. But we will monitor that over the next 6 months. We've got obviously several options with that business, but we just want to give this proposition a really good go and then we'll consider other options down the track.

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Operator [47]

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There are no further questions at this time. I would now like to hand the conference back to today's presenters. Please continue.

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Sid Takla, Asaleo Care Limited - CEO, MD & Director [48]

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Okay. If there are no further questions, again, I thank you for your interest in our company and I am sure I will talk to many of you over the course of the next few days. Thank you.

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Operator [49]

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Ladies and gentlemen, this does conclude our conference for today. Thank you for participating. You may now all disconnect.