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Edited Transcript of AHY.AX earnings conference call or presentation 24-Aug-17 10:59am GMT

Half Year 2017 Asaleo Care Ltd Earnings Call

Box Hill, Victoria Mar 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Asaleo Care Ltd earnings conference call or presentation Thursday, August 24, 2017 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Paul Townsend

Asaleo Care Limited - Former CFO & Company Secretary

* Peter Diplaris

Asaleo Care Limited - Former CEO, MD, President & 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

* David Errington

BofA Merrill Lynch, Research Division - Head of Consumer Research for Australia and Asia

* 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's Half Year 2017 Results Announcement. Today's briefing will be delivered by our CEO, Peter Diplaris, and CFO, Paul Townsend. (Operator Instructions) Peter, please go ahead.

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Peter Diplaris, Asaleo Care Limited - Former CEO, MD, President & Director [2]

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Thank you, and good morning, and thank you for joining the Asaleo Care First Half 2017 Results Presentation. Paul Townsend, our CFO, and I will be presenting, and we will take questions at the completion of the presentation.

I will start with the first half highlights. Our first half results were solid. Our Tissue segment performed strongly with a record first half result. We are investing to support future growth in Personal Care, and we delivered on our capital optimization program.

Let's briefly cover the results. Our underlying NPAT grew 4.1% on the prior corresponding period with statutory NPAT growing at 11%. Underlying EBITDA grew 4% to $60.9 million with the Tissue segment EBITDA growing 18.3% compared to the same half last year.

Personal Care EBITDA declined 8.8% as a result of higher advertising and promotion investment to support our new product innovation and also some FX impacts.

Our interim dividend of $0.04 per share will be maintained. This will be 50% franked.

Our statutory earnings per share was $0.051 per share compared to $0.044 per share for the corresponding period. The share buyback program was completed in the first half. Net debt is now $272.2 million with our leverage ratio of 2.05x EBITDA approaching the midpoint of our target range.

We are executing the strategy outlined in our 2016 full year results presentation. Feminine Care and Baby Care product innovations are in the market and are being supported by advertising and promotion. Our capital optimization projects, including the sale and leaseback of our Springvale Personal Care side, and our finished goods inventory reduction initiatives were executed successfully, which led to the delivery of incremental free cash of $38.4 million.

We estimate full year free cash flow of between $85 million to $95 million inclusive of capital wealth optimization initiatives and growth CapEx.

Three segments performed extremely well, Professional Hygiene, Incontinence Healthcare and Baby, which I will cover later. We are expecting year-on-year growth in fiscal year '17. However, there are a number of challenges. Our company faces cost headwinds in the second half, predominantly in electricity, which will be $3.5 million higher than the prior corresponding period, and pulp, which will be $3 million higher.

The retail landscape remains very competitive, and we do not see this changing.

We do have plans in place to mitigate these impacts and competitive pressures, and delivery of our guidance will require these to be successful. Our capital management program remains the same.

Let's now look at our segment performance. With Personal Care, EBITDA was down 8.8% whilst revenue was slightly higher, up 0.2%. We had growth in Incontinence Healthcare and Baby Care, however, Feminine Care sales were down. The bar chart at the bottom of this slide summarizes the major movements between the 2 halves.

In summary, last year, we had a one-off cost of $1 million to establish everyday pricing with key accounts, which did not reoccur this year. An adverse FX impact of $2 million on our raw materials and finished goods as well as increased cost in advertising and promotion of $1.7 million contributed to the decline.

Our Feminine business continued to hold its price per piece, however, volumes were adversely impacted by competitive promotional activity.

Our Roll.Press.Go innovation was launched in May, and benefit realization is expected in the midterm.

Incontinence Healthcare business grew strongly at 6% with new contracts and organic growth fueling this percentage.

Baby revenue was driven by better Treasures sales, which is our brand in New Zealand, where sales were 17.4% higher than the prior year. Additional price promotions and marketing support for the brand for the first half were undertaken compared to the prior year.

We also relocated and upgraded our Nappy assets in June with our new product rolling out into the market at that time.

Our Tissue first half performance was strong with EBITDA growing 18.3%. Our revenue was slightly higher, up 0.7% versus last year, with strong sales growth in our B2B segment, which was up 7%, and the Consumer New Zealand, which was up 2%.

In Consumer New Zealand, we had improved sales mix

(technical difficulty)

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Operator [3]

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Ladies and gentlemen, your speaker is currently experiencing some technical difficulties with their line. Please standby while we access this presentation. (Operator Instructions)

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Peter Diplaris, Asaleo Care Limited - Former CEO, MD, President & Director [4]

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Okay, sorry, we seem to have had a technical glitch, where we dropped out, so I'm just going to cover the Tissue segment performance again for those that might not have heard it.

Just to reiterate, our Tissue first half performance was strong with our EBITDA growing 18.3%. Our revenue was slightly higher at 0.7% versus last year, and we had strong sales in our B2B segment, which were up 7%. And also our Consumer New Zealand, which had -- which was up 2%, and we had a particularly strong sales mix with our brands, specifically Purex and Handee Ultra towel having experiencing double-digit growth.

Consumer Tissue Australia and Pacific Islands' revenues were down.

The EBITDA improvement includes favorable lower pulp and raw materials pricing of $6 million, offset by adverse FX movement of $6 million.

Additionally, we had increased energy costs of $1 million. There was significant logistics savings from exiting outside storage derived from our finished goods reduction initiatives. We also had lower freight rate and other savings coming through. A&P remains consistent with the first half of '16.

Specifically looking at our 2 segments, our B2B or Professional Hygiene business had strong growth in both Australia and New Zealand. This business is achieving good growth by contract wins, selling a value proposition that resonates with key customers and targeting key end-user accounts with the right product mix.

Consumer Tissue had strong branded sales in New Zealand, as I mentioned earlier, of 10%. Obviously, this provided favorable product mix. Lower-margin private-label sales in New Zealand declined.

Consumer Tissue sales in Australia declined 5% due to reduced promotional activity in key categories. The Australian channel remains highly competitive.

Turning to our outlook. Our '17 guidance remains unchanged, however, as I outlined earlier, we are facing headwinds in pulp and energy compared to the second half last year. We're also participating in a highly competitive retail environment. We have plans in place to mitigate these headwinds, and now, we'll need to be successful in order to meet guidance.

To reconfirm our guidance, we are forecasting low single-digit growth in underlying EBITDA or NPAT and underlying EPS at low to mid-single-digits. Our free cash flow between $85 million to $95 million remains unchanged. Our capital management principles also remain unchanged.

Just want to spend a bit of time covering strategy and providing you with an update. Just to recap, we have covered a lot of this in the past, but I just wanted to recap that we are focused on an organic growth strategy. We believe that this approach provides our company with the best possible growth pathway and utilization of our resources.

The reason for this is quite simple. If you look at the bar chart to the left of the page, you will see there are significant market opportunities for Tissue. Asaleo Care has approximately 20% market share of the available $3.6 billion market in which we operate. Asaleo Care sales are reflected in the blue part of the horizontal bar. To succeed, we require the right organic strategy and the appropriate execution. Our strategy comprises 4 parts: product innovation and differentiation; range and coverage; distribution innovation; cost reduction and efficiency.

I'll now provide you with an update. We've had a number of product innovations in our market this year, and I'll cover this in a moment. In relation to range and coverage, we are focused on diversifying our channels and customer base. We are growing in B2B and has expanded geographically in the Pacific Islands. Our top 2 customers now represent 29% of our sales, which is down from 35% when the company listed in 2014.

We spoke about Roll. Press. Go innovation in February. This product has been in market since May, and whilst it is still early days, sales volume growth compared from May to July this year versus the same period last year in Australia was up 7%.

The launch has been supported by advertising and promotional programs, social media and samples. A new package design was also a part of the launch.

Our Treasures Baby Care innovation, following CapEx investment, was launched in June, and the full range is now in market. Whilst scan sales are encouraging, customer feedback and acceptance of the new range is being monitored.

As I mentioned earlier, our B2B business is focused on executing growth by innovative product solutions that improve our sales mix.

Tork proprietary systems are the key to this strategy and now represent 32% of our sales. We will continue to invest in Consumer Tissue brands as well.

Reducing costs and efficiency improvements continue to be a major focus. Some initiatives undertaken in this first half were exiting outside our storage facilities and reducing associated costs, reducing energy usage of paper machines at Box Hill, logistics and procurement cost savings as well.

Let's now review our safety performance. I'm pleased to say we had a substantial decrease in the first half injury frequency rate. This is evidence that our focus and actions on safety are gaining traction. We will continue striving to aim for a zero injury workplace.

I will now hand over to Paul.

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Paul Townsend, Asaleo Care Limited - Former CFO & Company Secretary [5]

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Thanks, Peter, and good morning, ladies and gentlemen. I'll spend some time going through more of the details on the financial performance for the half year.

Firstly, revenue. Solid growth in both B2B categories of Professional Hygiene and Healthcare, together with the Baby segment, exceeded declines of the Consumer Tissue Australia and Pacific Islands segment.

Peter provided the details earlier, so I'm not going to cover it again.

Turning to cost of goods sold. Whilst probably flat half-on-half, favorable U.S. dollar pulp prices and U.S. dollar-euro product pricing were offset by increasing costs relating to adverse foreign exchange movement half-on-half, in particular AUD-USD and NZD-USD, and [on product while managing] costs.

The key dollar impacts on cost of goods sold, the unfavorable pulp of $6 million, as Peter covered earlier, and unfavorable FX of $8 million.

Distribution costs were down half-on-half due to reduced external storage costs, facilitated by the inventory reduction initiative, reduced transport rates and other efficiencies and lower sales volumes.

Sales, marketing and administrative costs were higher half-on-half by virtue of increased, at the time, promotional expenditure of circa $1.7 million related to the Feminine Care and Baby Care new product innovation launches. This was offset, to some extent, by savings through lower headcount and price controls around other overhead discretionary spend.

As previously noted, the EBITDA of $60.9 million was up $2.3 million from $58.6 million or 4% compared to the prior corresponding period.

Net financing costs increased half-on-half due to higher gross debt levels, $340 million compared to $311 million and higher effective interest rates half-on-half, 3.6% compared to 3.4%.

The higher debt level was principally attributable to the share buyback program.

Underlying NPAT of $28.2 million is up $1.1 million or 4.1% on the prior corresponding period. Statutory impact of $27.7 million is $0.5 million lower than the underlying result after adjusting for the non-recurring items relating to costs associated with the finished goods reduction initiative, abnormal storage costs and the gain recognized on the sale of the Springvale property.

A reconciliation between underlying statutory impact is set out on Slide 33 in the appendix.

Capital optimization. In the 2016 full year presentation, we identified projects to optimize the company's balance sheet through the generation of incremental free cash of the business. These were: a sale and leaseback of the Springvale manufacturing facility and an initiative to reduce finished goods inventory in manufactured Tissue and Baby to more optimal levels.

We're estimating around $35 million to $40 million of incremental free cash from those projects, and they have delivered $38.4 million.

The reduction in manufactured finished goods, net of an increase in imported finished goods, yielded $16.3 million, and the Springvale sales transaction, $22.1 million.

To recap, the sale of the Springvale site was initiated as it was considered too large for our current needs. And given there was no strategic reason to own the site, it was deemed appropriate to recycle the capital into higher returning investments.

The finished goods reduction initiative involved reducing inventory to more optimal levels, thereby, generating a working capital benefit together with reduced third-party storage costs associated with the reduction in inventory.

The cash flow generated by the impacted lease has contributed to reducing the company's leverage ratio to just over 2x as at 30 June 2017 and has improved the company's return on invested capital by 1 percentage point.

I will now talk to operating cash flow. With the reduction in finished goods, operating cash flow conversion is over 100% for the half. This is after maintenance CapEx in the first half in 2017 of $9.2 million and growth CapEx of $6.8 million.

The positive working capital movement of $16.8 million is primarily made up of a net inventory reduction of $8.5 million and improved accounts receivable and trade payables positions of $2.8 million and $6.4 million, respectively.

As mentioned previously, the key driver of the improved working capital position is essentially initiatives to reduce the finished goods inventory. This has included lower manufactured Tissue finished goods holdings as a result of the half 1 '17 capacity shuts and lower Baby finished goods holdings following the machine shut and relocation.

These initiatives have been offset by an increase of around $3 million in imported finished goods associated with our growth in the Professional Hygiene and Incontinence Healthcare categories.

In terms of free cash flow. The company delivered a strong free cash result for the first half of $67.3 million or $60.5 million after growth CapEx.

As is illustrated on the left-hand side of the slide, we've shown the breakdown of free cash, which stands $67.3 million. We then highlight how the free cash is applied to capital allocation items consistent with the capital management principles we have previously communicated.

For your reference, the capital management principles are set out on Slide 32 of the appendix. The $67.3 million free cash in the first half '17 has been allocated as follows: $6.8 million has been allocated to growth CapEx, meaning CapEx which has been identified as meeting or exceeding our internal rate of returns criteria; $32.8 million being the payment of the March dividend; and $4.5 million being the remainder of expenditure on the company's share buyback program. The remaining $23.3 million has been applied to debt reduction.

The maintenance CapEx of $9.2 million has been incurred in the first half '17. This CapEx has been largely spent on initiatives at the Box Hill and Kawerau plant, together with the investment in digital platforms and increased investment in expenses aligned to growth in Professional Hygiene's proprietary product sales.

We are forecasting maintenance CapEx to be around $20 million for the full year.

The growth CapEx of $6.8 million is mostly associated with the relocation/upgrade of the Baby machine in New Zealand and also includes Box Hill paper machine upgrade and pre-engineering work associated with a proposed Professional Hygiene investment.

Depreciation has remained fairly consistent over the past few years and is expected to remain so.

The company's net debt position has reduced from $295.5 million as at 31 December 2016 to $232.2 million as at 30 June 2017.

Net debt-to-EBITDA leverage has reduced to 2.05x as at 30 June 2017 and is at the midpoint of the company's optimal gearing range of 1.5- to 2.5x.

This reduced leverage has been aided by capital optimization initiatives we delivered in the first half and is after the impact of $99.5 million that incurred in the share buyback program.

In terms of debt facilities, the company has total facilities of $350 million with $298.5 million being drawn as at 30 June 2017.

The weighted average maturity of the company's debt is 3.1 years following the refinancing in December '16 of Facility A and C after September 2021 and September 2020, respectively.

In terms of capital management, the first half '17 interim dividend has been maintained at $0.04 per share, which is in line with the company's capital management framework of paying 70% to 80% of statutory NPAT as dividends and represents a payout ratio of 78.5%.

This slide also provides a summary of the outcomes delivered by the share buyback program. In summary, 10% or approximately 60.3 million of the company's shares were bought back at an average price of $1.65 per share, which represents total cost of around $99.5 million.

From a shareholder's return perspective, all key measures, being earnings per share, return on invested capital and return on equity, have improved on an underlying basis half-on-half due to improved product performance, execution of the capital optimization program and completion of the share buyback program. In particular, underlying earnings per share of $0.052 per share is an increase of 7.7% half-on-half and has been achieved by improved underlying profit performance and the share buyback program.

I will now hand back to Peter.

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Peter Diplaris, Asaleo Care Limited - Former CEO, MD, President & Director [6]

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Thanks, Paul. To summarize today's results presentation, we are executing our strategy with both our Baby Care and Feminine innovations in the market. Our business-to-business channel is growing, and this trend is helping to diversify our customer base. We are delivering on our capital management principles with the $0.04 per share dividend being maintained, the share buyback completed and our optimization projects delivering incremental free cash.

Our financial returns are strong with growth in our underlying earnings per share and ROE measures.

We also reiterate our full year '17 guidance of low single-digit growth in underlying EBITDA or NPAT and low to mid-single-digit EPS growth.

That concludes our first half presentation. But before I turn to questions, I just like to close by thanking Paul for his outstanding contribution to our organization over the past 5 years.

We will now take questions. Thank you.

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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 David Errington from Merrill Lynch.

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David Errington, BofA Merrill Lynch, Research Division - Head of Consumer Research for Australia and Asia [2]

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Again, congratulations, Paul, on a great career at Asaleo and all the best for the future. Peter, can I open the betting with these cost increases that you're going to experience in the second half and the measures that you're looking to mitigate? Are they -- first of all, electricity, $3.5 million in the second half. What's your annual electricity cost running at in terms of increase? Is it a doubling of that? Or is it going to actually increase even further than that? It went like $3.5 million, is that an annualized -- is that sort of like a 6 monthly number that we just annualized it? Or is that a number that we need to even consider even higher than that?

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Peter Diplaris, Asaleo Care Limited - Former CEO, MD, President & Director [3]

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What it is, it's our 6 monthly number, David, for this half compared to the same half last year. So it's an increase of $3.5 million on the same half last year.

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David Errington, BofA Merrill Lynch, Research Division - Head of Consumer Research for Australia and Asia [4]

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When did it kick in, Pete? When did it kick in? Did it kick in, in the first half?

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Peter Diplaris, Asaleo Care Limited - Former CEO, MD, President & Director [5]

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It kicked in, in the first half. In the first half, we had an impact of $1 million that we have to -- Paul?

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Paul Townsend, Asaleo Care Limited - Former CFO & Company Secretary [6]

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[What it means] in the first half is that we'd actually locked in the first quarter's rate. And then because you're selling out a stock, you've got a lag before it should pan out. So the second half represents, if you like, a more, if you like, annualized run-rate. So you'd effectively annualized that second half position.

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David Errington, BofA Merrill Lynch, Research Division - Head of Consumer Research for Australia and Asia [7]

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And the measures to mitigate, I mean, is it -- what are you looking to do there? Are you looking to improve productivity? Or are you just looking to put prices up, increase price, go to the retailers and say, look, guys, this is a legitimate cost increase, we just need to put pricing out. What's your thoughts there, Peter?

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Peter Diplaris, Asaleo Care Limited - Former CEO, MD, President & Director [8]

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There's a number of mitigating actions, David. Obviously, you can't just have one plan initiative. We've got pricing in some channels, where there are some channels where pricing is easier to take than others, so we have got pricing levels...

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David Errington, BofA Merrill Lynch, Research Division - Head of Consumer Research for Australia and Asia [9]

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That's your B2B, I suppose, yes.

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Peter Diplaris, Asaleo Care Limited - Former CEO, MD, President & Director [10]

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Without being specific on country, channel, customers, et cetera, pricing is going to be part of the mitigation. We also got some cost initiatives running toward the business, which we've had for quite some time. So we're always looking at ways of taking costs out of our manufacturing as well as some of our procurement and logistics costs. And finally, it is also an opportunity for us to drive more volume and get better machine recoveries in certain growth areas that we have, and selling a better mix also helps. So when we saw the, if you like, these impacts, we had a meeting with our team, and we basically worked on a number of, if you like, mitigating options or solutions for this half. And some we've already implemented, and we're comfortable that we've put enough initiatives in place to try to mitigate that impact.

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David Errington, BofA Merrill Lynch, Research Division - Head of Consumer Research for Australia and Asia [11]

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You really specifically called out the competitiveness in the retail segment. Has that stepped up? Or what's your thinking behind making that statement? I mean, you've -- you specifically called it out, retail. Is that a word -- in other words for us, it's going to be pretty hard to get these cost increases through higher pricing in retail channels. Is that code for that? Because I know that the bottlers, for example, I have got this container deposit scheme coming in, and they're confident that they can get that through and all the rest. But what's your thinking? Is -- when you called out that retail is getting tougher, is that code word for, well, it's really tough putting any form of cost increases through?

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Peter Diplaris, Asaleo Care Limited - Former CEO, MD, President & Director [12]

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David, what I've actually said is retail is competitive and challenging, which, I suspect, is consistent with where it's been in Australia for the last 2 to 3 years. So I said, what I'm saying is I don't see that landscape changing. I see it as being as competitive and as tough as it was over the last 2 to 3 years. And our people have gotten used to dealing with those competitive pressures. And what I'm saying is I don't see it getting easier. And when you look at our retail, our business, we have -- as you're well aware, we've got a B2B business, which is sort of not part of the retail landscape. We also still -- we have a certain amount of volume in New Zealand, which is very different, we believe, in terms of the retail landscape compared to Australia. So specifically, the Australian retail landscape is where what I'm referring to. So in terms of pricing, you asked about pricing, I don't want to comment on price initiatives. But obviously, there are some products that are more priced inelastic than others. Some you have to watch what your competitors are doing. So we evaluate all of those aspects and determine what ours is.

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David Errington, BofA Merrill Lynch, Research Division - Head of Consumer Research for Australia and Asia [13]

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Okay, and that leads into Personal Care, particularly Feminine, which clearly is the one area of -- the result looks to be pretty strong other than that one area which -- now how much of this shortfall, if you like to call it, is basically timing, in that it's upfront investment for the new product? And how much of it is actually competitors basically being very price aggressive in that category? Because it looks like that is the one area, the feminine hygiene area, that really it seems to have fallen away in the last 6 or 12 months. I don't know if that's a fair comment. But can you give us a bit of granularity as to what's happening within that market, and what we can expect from Feminine Hygiene in the next 6 months and then probably in the next 12 to 18 months?

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Peter Diplaris, Asaleo Care Limited - Former CEO, MD, President & Director [14]

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Okay, sure, David. Look, first of all, I just want to say that our objective with Feminine it was to get behind the launch of Roll. Press. Go, which we articulated in the previous presentations. So we've obviously got to hire new advertising, a new digital program. We upgraded our website. We had a lot of sampling. So we -- our decision was we've got to get behind our innovation, changed our packaging, and we also held our price at the same time. So we're saying if we're investing in the brands, we're going to hold out price, so our price per piece held pretty well. And we did had -- during the period of our launch, the competitive intensity in terms of promotional pricing increased, and that build out our volume. So that means that our pricing strategy has to be reevaluated going forward. Do we have an everyday low price? Do we go back to high, low? So for some customers, we had some adjustments on our pricing strategy. So for example, in one retailer, for example, we decided to do more high, low as opposed to do everyday low pricing, just to give ourselves that flexibility, David. So to answer your question, with Feminine, I still feel that our program, in terms of long-term growth and making sure that this is successful in the long term, the right investment in advertising, marketing, getting things right in terms of brand health is absolutely critical, and when our research is coming back, it's telling us that the initiatives that we're undertaking is leading to good brand health measures. So we're always going to evaluate the price, the volume, advertising. But to answer your question, is it -- do I believe in what we're doing is the right thing for the brand longer-term and will lead to growth? Yes, I do. I'm pretty passionate about that, and I think we've also got more flexibility in the brand by changing, if you like, some of the pricing strategies in certain accounts as well. So that's the right mix between price, volume, advertising, and -- but ultimately, we've got to support the brand.

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David Errington, BofA Merrill Lynch, Research Division - Head of Consumer Research for Australia and Asia [15]

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Okay. And just I'll finish off on just the cash flow. The working capital performance looked to be pretty strong, and Paul outlined your savings there, which were pretty tidy, 8.5 inventory in payables and receivables. Is that sustainable going forward? Or is that likely to be reversed? Or can you keep that level of working capital improvement ahead of the system?

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Paul Townsend, Asaleo Care Limited - Former CFO & Company Secretary [16]

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Yes, there should be no reason why that we can't hold that working capital position. The only caveat on that is that as our Incontinence Healthcare and Professional Hygiene sales increase in the proprietary systems, we will -- because it's -- they're imported products essentially, that we would get some growth in working capital associated with that. But net-net, that will be a good thing for our business because we'll have increased profit improvement, but we will have an increase in working capital associated with the growth in those businesses.

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Peter Diplaris, Asaleo Care Limited - Former CEO, MD, President & Director [17]

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But with finished goods, David, to answer your question, I feel that it is sustainable because there's a number of factors. We're now 3 years into a stable, if you like, manufacturing environment, post, if you like, the investment we had 3 years ago in Tissue. So we have a lot of predictability out of what our machines can do. We also have a fairly consistent demand signal coming from our customer base. So it's a good time to actually say, "You know what, we can run to lower inventory levels and still maintain our service level." So I feel that it is sustainable for sure.

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Operator [18]

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Your next 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 [19]

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Can I start off, the Professional Hygiene business had a great result. You had revenue growth of 6% in Australia and 9% in New Zealand. Just interested in a feel for was that about winning extra customer accounts or more price through existing accounts? Or just give us a bit of color as to the drivers of growth in that part of your business.

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Peter Diplaris, Asaleo Care Limited - Former CEO, MD, President & Director [20]

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There are a couple of things, Craig. I think if you look through the previous results presentations as well, we've had -- we've consistently had some growth in Professional Hygiene, and we also I mentioned that would be a focused area in Tissue for us because it's one of those channels, which has a higher barrier to entry than a lot of other segments, other Tissue segments. So it's performing well because I think we've got the right product and service offer. We keep talking about selling proprietary systems, and proprietary systems are unique to us. So when we install them into a customer, it means that the replenishment comes with our products only, so that helps our mix and also it helps our customer with a product that reduces their costs. Having said that, we've also invested in that theme over the last 3 to 4 years. We've got some high-quality people that worked for us over a long period of time, growing our business through more people on the ground, servicing the end-user customers a lot more than what we did 6 or 7 years ago. So we've got -- our reach is far better than what it was. And it is important we grow in this area because we manufacture in the order of 120,000 tonnes of tissue, and B2B is an area that -- within that 120,000, the more we get out of B2B, the better it is for our business the way I feel.

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Craig John Woolford, Citigroup Inc, Research Division - MD and Head of Australian Consumer Research Team [21]

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Okay. So it sounds like an area where you can sustain your growth. Second the -- obviously, an excellent margin result in Tissue. And it looks like there's 2 major drivers, being the mix shift towards the professional business as well as the benefits from the inventory reduction or lower warehouse and storage cost. Is that a [nice] summary.

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Peter Diplaris, Asaleo Care Limited - Former CEO, MD, President & Director [22]

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And Craig, and New Zealand as well. I've called out New Zealand. New Zealand Consumer Tissue had a good result, specifically our brands.

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Craig John Woolford, Citigroup Inc, Research Division - MD and Head of Australian Consumer Research Team [23]

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Yes. Okay. We see this -- the other segment or product category that did well was Baby. Should we see a further step-up in revenue growth given you've now got the new machinery in place? Or will that take a little bit of time? Or how should we think about it? It's been quite volatile, that part of your business.

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Peter Diplaris, Asaleo Care Limited - Former CEO, MD, President & Director [24]

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Look, I think we've got to give any product launch a bit of time, Craig. I mean, I think when you invest in new machinery and support the brands, that investment takes time, and our view is that we've got a great brand, a brand that's got -- have strong loyalty for a number of years. I think the initiatives that we've got in place and the product that we want to take to market will get better, and I think that longer term, I'm looking at this business as a way of growing our sales. So in terms of short term, I think 17% was a good result in the first half. I don't think we're going to keep growing at 17%, that's a pretty big growth number.

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Craig John Woolford, Citigroup Inc, Research Division - MD and Head of Australian Consumer Research Team [25]

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Okay, understood. And just on FX, Paul, you called out the raw materials impact on Personal Care. I just wanted to clarify or double check, it's the same sort of profile, hedging profile, in that part of your business as it is on the pulp.

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Paul Townsend, Asaleo Care Limited - Former CFO & Company Secretary [26]

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Yes, it is it. There might be a month difference in the lag, in terms of that 2 to 3 months lag there for imported Personal Care products compared to 3 to 4 months lag for the pulp.

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Operator [27]

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

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Larry Gandler, Crédit Suisse AG, Research Division - Director [28]

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It's true that there was some very good elements to these results, guys, with working capital and professional care. But there is a bit of an elephant in the room with regards to that $8.5 million inventory wind down charge. I guess, Peter, the question is, how do you kind of persuade us that that's not going to recur again? So maybe describe sort of how we got there, the adjustments you made and why you don't think it's going to occur in next 2 years, let's say?

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Peter Diplaris, Asaleo Care Limited - Former CEO, MD, President & Director [29]

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The inventory reduction? The reason I don't feel it will reoccur is because we've got a focus on inventory reduction in terms of making sure that we don't get into outside storage going forward because outside storage is a cost that by not having the excess inventory, we're not paying for that additional storage. So there was a resultant savings. So if we increase our inventory beyond our existing network, Larry, it means that we're also going to get a cost in relation to our outside storage. There's a penalty for us if we have too much stock. Secondly, as I mentioned earlier, we're in a better position now to assess our demand signal and also supply. We had -- in 2014, '15, we had new kits, and it was running well for a couple of months, and it was not running as well right now. The predictability out of our assets is very solid. So we know what we can make. We understand our demand signals, and we've got a fairly good handle on them, on what is required to service our customers at the same service levels we've done historically. So it's probably overcompensated a little bit on the inventory in the past whilst we were commissioning the asset. And also, Larry, the last thing is we did build up Baby inventory last year because we were changing from: one, we're moving from one facility to another, and we were shutting down our Baby machine. So that won't reoccur because we're not going to be relocating our Baby machine in the next 2 to 3 years.

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Paul Townsend, Asaleo Care Limited - Former CFO & Company Secretary [30]

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Yes, and there was about $4 million of the total circa $20 million in net inventory.

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

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So of that $8.5 million charge, which was in the reconciliation of underlying, some of that's relating to Baby? Or is all that Tissue?

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Paul Townsend, Asaleo Care Limited - Former CFO & Company Secretary [32]

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No, that $8.5 million is Tissue only. So the way to think about it is that there was about a $15 million reduction in Tissue, and that's what the $8.5 million charge relates to. Baby was $4 million. So your net finished goods, if you like, the math is $3 million in (inaudible) -- sorry, $3.5 million to $4 million in Baby, then you had $10 million in Tissue. And that was offset by $3 million increase in the imported goods. So that should net to $16 million, if you like, up in finished goods -- down in finished goods.

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

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Okay. It's just that the Tissue inventory may have been sold either below cost or below normal margins, so you took a charge...

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Paul Townsend, Asaleo Care Limited - Former CFO & Company Secretary [34]

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No, that was the shut -- that was the cost incurred in the under recovery. So the under recovery is fixed costs, not producing inventory for that period, and we highlighted that when we actually talked to the full year results.

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

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Yes, I remember. Okay. So that's the -- that was the under recoveries. And you had to shut, I recall, shut capacity, and Peter, what you're indicating is the need to shut capacity occurred over time because from '14, '15 and even '16, your equipment wasn't operating, say, consistently. So over those 3 years, you built this inventory. It wasn't as if you planned for a level of sales in '16 and did not achieve those level of sales?

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Peter Diplaris, Asaleo Care Limited - Former CEO, MD, President & Director [36]

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We never -- if you look at level of sales, to use as an example, this inventory reduction program was across Australia and New Zealand. And New Zealand represents about 1/3 of our inventory reduction. And if you look at the sales results in New Zealand, we had double-digit growth of Purex, which is our major growth product, which grew about 15%. We had Handee Ultra, which grew about 15% New Zealand. So it's not sales-related in New Zealand. In Australia, our volumes out of Australia has been circa between 4% to 5% variation in volumes over the last 2 years, give or take. I mean, that's a rough guess, but ultimately, Larry, we had been in outside storage for a long period of time, and -- but it makes sense. If you're going to be efficient and if we're going to be talk about generating free cash, it's important that these sort of initiatives come to fruition and they stay there.

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

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Okay, good. I am getting the picture now. I just have 2 other questions on this. I believe you guys, on converting capacity, went from 7 to 5 days, which -- that should help, I guess, in matching supply and demand. And the other one is mills need to still run 24/7. Does your mill overproduce? How do you ensure your mills produce to your current demand level?

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Peter Diplaris, Asaleo Care Limited - Former CEO, MD, President & Director [38]

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We always get the balance -- we tend to get the balance. While there are times where we're sometimes short on our paper grade or there are times when we have low papers. So what we do is we make sure that we have obviously a little bit of insurance, and we sometimes have some buffer stock of reels. So we don't short the converting line, but I think -- Larry, I think it's been managed efficiently, 3 years down the track, a lot better than what it was. So our reels probably -- the right answer to the question is we just basically manage the reels to what our demand is, which is demand -- which is based on the converting line, and we can do a number of things with paper machines. We can slow them down if we have to. We can take shuts and take maintenance early. So there are a number of ways that we can manage paper and converting, it's something that this business has been doing for some time.

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

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Okay, so unlikely to see an excessive inventory build, that's good. Just one last question from me, Peter, on Feminine Care. So my own channel check suggests that Roll. Press. Go, it's out in the marketplace, that in itself is achievement, but maybe kind of hasn't come out of the gates at the way it could have. Do you need to make any adjustments? Or is it, as you say, it's delivering encouraging metrics at the moment?

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Peter Diplaris, Asaleo Care Limited - Former CEO, MD, President & Director [40]

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Yes, it's early days, Larry. I mean, at the moment, we've got about a 15% awareness level of that concept. But remember, it's 3 months, and our goal is to get the awareness up, get people to -- get more and more consumers to understand it. So I think over time, the awareness levels will build. It'd be great to get a jump, if you like, and prove to work in month 1. But these things always take a bit of time is my experience with brands. But sort of measures where it's getting -- our brand is looking a lot healthier, measures of leader, being the expert, being trusted and quality, all those measures are hitting in the right direction when we do research. So -- but I think we're on the right path, and we'll make some adjustments along the way, but the sampling program was fairly intensive. We supported it with TV advertising, which you probably may or may not have seen, I don't know. Our website has been upgraded. So we've got behind it, and we've just got to -- we've got to just 3 months in or 4 months in there, we've just got to stay with it.

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Operator [41]

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There are no further questions at this time. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may now disconnect.