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Edited Transcript of BKL.AX earnings conference call or presentation 14-Aug-19 11:15pm GMT

Full Year 2019 Blackmores Ltd Earnings Call

Warriewood Sep 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Blackmores Ltd earnings conference call or presentation Wednesday, August 14, 2019 at 11:15:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Aaron Boyd Canning

Blackmores Limited - CFO & Joint Company Secretary

* Brent W. Wallace

Blackmores Limited - Chairman of the Board

* Peter Osborne

Blackmores Limited - MD of Asia

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Conference Call Participants

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* Aaron Yeoh

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Christopher Lee;Templeton;Analyst

* Danny Goldberg

Select Equities Pty Ltd. - Director, Senior Advisor and Head of Dealing

* Julian Mulcahy

Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst

* Larry Gandler

Crédit Suisse AG, Research Division - Director

* Richard Barwick

CLSA Limited, Research Division - Research Analyst

* Sam Teeger

Citigroup Inc, Research Division - Analyst

* Shaun Weick

Macquarie Research - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to Blackmores' full year results. (Operator Instructions) I must advise you that this conference is being recorded today.

I would now like to hand the conference over to your speaker today, Mr. Aaron Canning. Thank you, please go ahead.

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Aaron Boyd Canning, Blackmores Limited - CFO & Joint Company Secretary [2]

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Thank you, and good morning, ladies and gentlemen, and welcome to the financial year 2019 investor presentation for the Blackmores Group. As is our practice on these calls, we will take 10 to 15 minutes and I will lead through a presentation of the investor pack that has been issued this morning. We will then spend some time on question and answers.

I would just like to note, on the call today from Blackmores, we have Brent Wallace, the Chairman; Marcus Blackmore, the Interim CEO; myself, Aaron Canning; and members of management, Peter Osborne, our Managing Director for Asia; and Eric Jeanmaire, our Interim Managing Director for Blackmores Australia.

If I move now in terms of looking at the investor pack. Before I go to the details of the first slide, I'd just like to make a couple of comments. The F '19 year was the year that we undertook significant change in this organization, change that will deliver significant value for the future years for this business and change that was focused on making sure the Blackmores business will be a better and more efficient business in the future. The fundamentals of the business remain very strong, and there are significant opportunities in front of us to leverage those fundamentals of the business and continue to invest and grow this business. The financial performance in the year that was FY '19 does not reflect management or the Board's expectations of what this business can deliver nor does it reflect the execution on what is an opportunity-rich environment for the Blackmores group.

So with that preface, I will now go and talk to the investor pack slides. Full year revenue growth was $610 million, up 1% on the prior year. Now we referred to it at Q3 results that we were going to deliver modest full year growth. Management has taken deliberate action through the fourth quarter to enact significant destocking in the channel to China, both in cross-border e-commerce platforms in China and in our export channels, which have impacted our sales on the top line, and I'll cover that up in more detail later. The reported full year profit after tax, or NPAT, was $53.4 million, down 24% on the prior year. As to my opening statements, the organization undertook some restructuring in the fourth quarter, and underlying full year NPAT, excluding restructuring charges, was $55 million, down 19%.

The business is progressing the $60 million business improvement plan over -- the cumulative benefit of $60 million over 3 years to streamline this organization. We remain on track, and we continue to pursue further opportunities to look at benefits beyond that amount.

If we look at the performance of our markets. Sales a -- the sales highlights in particular were driven by our other Asian markets, with sales up 30% and EBIT up over 200%, or 218%, largely a reflection of the continued operating leverage we are seeing across the other Asian markets. Sales in China and Australia obviously impacted the overall group number, and I'll cover that in more detail. The Board have declared a final dividend of $0.70, bringing total dividends for the full year to $2.20, fully franked with a payout ratio of 71% with the maintenance of the dividend reinvestment plan and the 2.5% discount.

So if I turn our attention after Australia and New Zealand business on the following slide. Sales in Australia and New Zealand were $267 million, slightly up on the prior year. Now if I reflect on the performance through the year of the Australia and New Zealand business, sales were up 20% in the first half; Q3 year-to-date, 3%; and finished the full year up broadly about 1%. And those sales were impacted particularly through the second half as the channels to service the China consumer demand were impacted by e-commerce regulatory changes coming into effect in the 1st of January. We see that change as being a permanent shift so we do not see, unless there's further regulatory change, that dynamic returning. Inventory levels in trade remained broadly in line with the prior year, and this is in Australian retailers. Blackmores had maintained the #1 brand in Australia with domestic share just under 16%, 15.9%. And we're very pleased to report that for the 11th year running, we were on the Reader's Digest Most Trusted Brand.

We completed the acquisition of the Impromy weight management program in collaboration with CSIRO, which a CSIRO-endorsed product, in November of last year, and we see further opportunities to continue to grow that product to our distribution domestically and, in time, offshore. And we continue to look for opportunities to innovate off that platform.

In relation to leadership changes in the ANZ business, the recruitment process is nearing conclusion for the Australia and New Zealand managing director role.

If I move on to the following slide, in China. Our sales in the China segment were down 15% at $122 million on the prior year. If I delve into more detail, our in-country sales, so sales made by our business in China to cross-border e-commerce platforms, were up 22% in the year. So the other part for this equation, obviously, is export channel in Australia which was broadly down about 40% and significantly impacted by the regulatory changes taking effect from the 1st of January.

We took deliberate action in the fourth quarter to reduce China e-commerce platforms as well as stock in the channels to China, most notably in the export channel. We finished the year with stock in trade or stock on e-commerce platforms in China normalized. And what I mean by that, we've taken out 4 to 6 weeks of stock through quarter 4 in China and a similar amount in the export channel. And that was a key driver behind the top line sales growth for the group coming down to the lower end of the modest guideline -- guidance.

EBIT for the China business was 40% lower largely driven by the sales dynamics, which I spoke about earlier; increased brand investments in China and expansion in our in-country capabilities, including changes in our senior leadership across sales, HR and key account management. I would also say in relation to country management leadership in China, we have an interim person in that role, one of our very experienced country managers who have been with the group some years. He's currently in an interim capacity, and the recruitment process is underway for a full-term replacement.

If I move onto the other Asian markets, and as I said earlier, this is a highlight of the year. Sales up 30%, reflecting -- and importantly, we are now generating very significant operating leverage in that organization. And as we touched on at the end of the third quarter, we see this dynamic continuing. And largely is a reflection of the investments we've made over the last few years in the region.

If we look across some of the markets in particular, some of the developing markets, Vietnam and Korea, up 157% in terms of net sales, and Korea were up 28%, respectively. Our Indonesian business up 90% and continue to perform ahead of our expectations. And it has turned to profitable in the second half of this financial year.

If I look across some of our other markets, particularly some of the more established markets of Malaysia and Thailand, Malaysia's sales grew 29% and Thailand grew 12%. And we're very encouraged by the growth driven through this group of other Asian markets, and we expect similar growth to continue in the future.

BioCeuticals Group. The BioCeuticals Group includes the brands of BioCeuticals; Fusion Health and Oriental Botanicals, which were part of the Global Therapeutics acquisition; and IsoWhey brands. They drove a combined sales of $113 million, up 4% compared to the prior year.

If we go down into more detail on that, the BioCeuticals business and the BioCeuticals-branded business, including IsoWhey, grew 6%, and the Global Therapeutics-branded business, including Fusion Health, Oriental Botanicals, declined by 3% largely due to structural declines in the health food channel, and we maintained market leadership in the health food channel in Australia.

BioCeuticals continues to maintain its strong leadership in the practitioners space, and we continue to innovate with new product launches in the year and continuing our market-leading ArmaForce range and Ultra Muscleze ease portfolio. And we're very encouraged by the growth we're now seeing towards DNA clinical services business.

Medicinal cannabis, as we spoke about in the past, represents a significant opportunity for the group which we will continue to lead through BioCeuticals, and we continue to progress a clinical trial supported by Dr. Charlie Teo in the year. And off the back of that clinical trial, we've got very encouraging results. And we expect to be able to launch a product off the back of those clinical trials results in FY '2020.

Importantly, if I look at the performance of the BioCeuticals Group at an EBIT level, our EBIT performance for the year was up at 10%, so ahead of sales of 6%. And we expect to generate further operating leverage in that business going forward.

If I turn our attention now to the group performance. As I touched on earlier, revenues were up 1% at $610 million. Now if I reflect on the shape of the year, revenues were up 11% at the first half; at the end of 9 months, up 6%; and now up 1% for the year. And as I said earlier, that was really joined by deliberate action we have taken to take 4- to 6-week stock out of both China e-commerce platforms and the export channel in quarter 4. And we're seeing the benefit of that in the start to FY '20.

As I touched on before, the China business was impacted significantly due to regulatory change, which drove significant changes in consumer buying pattern. And as I've touched on before, we see those changes continuing, particularly impacting the Australian business.

Full year promotional and other rebates investments improved marginally year-on-year by 0.1 percentage points. But importantly, our H2 investment reduced by 1.4% versus the prior corresponding period. We continue to invest in our brands, particularly in China, which drove a full year increase of 16%. Now a number of you may recall, that was up at 29% for the first half and the second half was up 6%. So we aligned our A&P investment in the second half commensurate with the top line sales performance.

Operating expenses grew at 5% for the full year. Importantly, as management took action in the second half largely off the back of the execution of our business improvement plan, expenses for the second half were down 1% on pcp or versus the second half in the prior year. And as I touched on before, reported NPAT of $53.4 million; post-tax impact of restructuring cost, $1.6 million; with underlying NPAT at $55 million.

If I look at the balance sheet on the following slide, the balance sheet remains in strong financial health. Receivables, and particularly now going through working capital, were lower largely due to the phasing of Q4 sales due to actions we took on destocking. There has been no change to the receivables risk profile for the group. In fact, it has improved marginally. Our inventory is higher, and we called this out in Q3, really due to some deliberate actions that we have taken to build safety stock levels and risk -- and largely due to risk mitigation actions we have taken as we head into transitioning into Catalent. And I'll touch on the Catalent transition in more detail in a moment.

Trade and other payables were largely a reflection of timing for purchase orders as we pulled those back through Q4 as we've become more comfortable in our level of stock holding. Intangibles and goodwill reflect the Impromy acquisition in November of last year. Our other net liabilities is largely gross debt, and I'll touch on that in more detail in the following slides. And returns in terms of shareholder equity in assets are largely a reflect of a -- a reflection of timing off the back of the inventory decisions that we've taken transitioning into Catalent. And I would just like to note that performance does not reflect a fundamental change or shift in the returns that shareholders should expect from this business.

If I go into the following page and look at cash flow. Cash flow generating from operations was $52 million, down 43% largely attributable to inventory -- an inventory build, as I have touched on. EBITDA performance marginally improved versus NPAT due to higher interest costs. Cash conversion has -- or is below historical levels. Internally, we set ourselves a guide of 80%, so it's below our internal guide. However, as I said before, we have taken the decision to hold some more inventory through this period. And I'll expect inventory to be coming down in FY '20. Similarly, to the return on assets and shareholder metrics on the balance sheet, the cash flow generation of this business this year does not reflect our expectations going forward. It largely reflects the timing of the decisions we've made around inventory.

Now if I look at net debt in the organization, our cash holding, first, is lower largely due to improved cash repatriation from China, and I'll expect that the dynamic to continue into '20. Net debt has increased in the year largely due to the funding of higher working capital and, to a lesser extent, Impromy acquisition. Gearing at 31% remains modest, although it's up nearly 11 points year-on-year.

We have refinanced our banking facilities in the year. We've added some new banks in the year. We've increased the capacity of our facilities up to $305 million. We have secured improved margins and improved terms, and we have sufficient headroom in place to fund the business for the Catalent acquisition, which will complete on the 25th of October. Our net interest cover remains at conservative levels at a little over 16x.

From a dividend point of view, EPS at $3.092 decreased 24%. As I touched in the opening slide, the Board have approved a $0.70 per share fully franked dividend for the full year, bringing the payout ratio to 71%. We've maintained -- which is marginally down almost 75% on the prior year. That DRP has been maintained with the discount maintained of 2.5%.

If I turn over and just touch on a couple of points that's worthwhile spending a bit more time on, in particular, the business improvement plan. At the end of Q3, we announced a plan to generate $60 million of cumulative efficiencies or savings over 3 years in this business. In Q4, we have enacted a reduction of approximately 40 roles in the organization with associated restructuring cost pretax of $2.2 million or $1.6 million of NPAT. We continue to explore further opportunities to accelerate this plan and opportunities to exceed the $60 million commitment that we made. We will have further one-off costs in FY '20 as we have previously advised and, particularly, as we go through and integrate the Catalent business. I would expect at the end of FY '20, one-off costs would be minimal if not 0.

In relation to the Catalent transaction, that transition remains on track. As I said before, we will debt fund that, and we have been progressively filling that plant up with our product ahead of that transition as they have been exiting business for other third parties.

I would like to note that we have announced price increases to take effect from the beginning of Q2 across our Blackmores Australia and New Zealand business, our China in-country business, the China export channels, the BioCeuticals business and the PAW business, all to take effect from the 1st of October this year. Those are the most significant price increases that the Blackmores Group has enacted, and we are confident about those price increases being able to land in their respective channels.

In terms of new markets, we continue to evaluate market entry into India. And it's important to note that India represents a significant opportunity for Blackmores. And we are continuing to ensure that we take the time to invest into due diligence in India around our operating model and our portfolio and our routes into that market. And as we get closer to the launch, which we'd be hopeful of in the '20 year, we will share more with you on the India opportunity.

Now if I turn our attention to the last slide in terms of outlook, we expect the first half of the FY '20 to remain challenging in terms of the trading outlooks particularly with reference to the shifting consumer purchasing channels to China. So similar dynamics to what we've seen in H2 of the FY '19 year.

Outside of those channels, those China channels, which are impacting the Australian business and the China business, the dynamics in the rest of the organization remain largely similar to what is being delivered through FY '19. We expect, therefore, the group performance in the first half of FY '20 to be below the prior corresponding period of H1 in the prior year, which was not impacted by China regulatory changes. We expect the second half of FY '20 to benefit from some of the operational efficiency benefits that we've enacted through the business improvement plan. So we expect a strong second half.

I think it's important also to touch on a contingent liability that we have disclosed in the announcement today and I want to spend some time on. We have been in discussions with one offshore jurisdiction now for over the past 3 years in relation to our compliance to a free-trade agreement. I would say at the time, currently at this point in time, we do not have a legal liability in relation to these negotiation and discussions. However, assessments have been issued by that regulatory body up to an amount of AUD 10 million relating to periods of 2009 midway -- up until midway through 2014.

From a Blackmores point of view, we believe we have fully complied with all regulatory requirements under that free-trade agreement, and we are continuing to pursue all legal avenues of objection in relation to those assessments. And as such, we do not believe, at the 30th of June or sitting here today, we have a legal liability. And therefore, we have not included our provision in the accounts.

We expect these discussions are going to continue for some time. And as and when we have more clarity, we will then disclose more to the market once we have more certainty.

In relation to the full year, the Board and management remain optimistic about the significant opportunities in front of this organization, and I'll reflect back on my opening statements at the beginning of this presentation. The F '19 year does not reflect our expectations in terms of both management and Board and does not reflect what we believe is the execution on significant opportunities facing this organization, and we are committed to going after those opportunities in the FY '20 year. And it's important that we continue to progress, as we are, the business improvement plan initiatives to help fund investment to drive that future growth.

So that concludes the investor presentation. We'll now open it up to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question comes from the line of Larry Gandler from Crédit Suisse.

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Larry Gandler, Crédit Suisse AG, Research Division - Director [2]

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A question, if I can, maybe for the Chairman. So we had a resignation of 2 Directors quite suddenly. And I was wondering if you can perhaps discuss what the underlying issue was. Was it maybe a strategy issue or some other matter? And that's my first question.

I was unaware that also China management had changed, so maybe you could discuss what was the situation there since I think the person was in the role for a short period of time so maybe all 3 changes were related.

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Brent W. Wallace, Blackmores Limited - Chairman of the Board [3]

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Sorry, I didn't catch your name.

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Larry Gandler, Crédit Suisse AG, Research Division - Director [4]

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Oh, it's Larry Gandler from Crédit Suisse.

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Brent W. Wallace, Blackmores Limited - Chairman of the Board [5]

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Larry, 2 great questions. Let me try and deal with both of them, perhaps in the reverse order. So Sophia joined as a Country Manager and stayed with us for about 3 or 4 months. She ran into some family problems. Her husband was living in Taipei, and her daughter was moving back to Taipei and then back to the U.S. So there were some family issues that she encountered, and that caused her to put her hand up and say that she couldn't any longer be based in Shanghai and work for us. So it was a family situation, completely separated to the 2 nonexec directors, but let me move to that.

Sorry, maybe just to finish on the China piece. So we are in recruitment, which Aaron referred to. We're looking for an MD across the China business, and that's well underway. We probably expect an answer to that in a month or 2. At the moment, we have an interim -- as Aaron also said, we have an Interim Country Manager, [Felicity], who's out of our other Asian business in one of the key markets, and she's up there helping the team execute a lot of the strategies that we have in play. We've also seconded a couple of other folk from around the Asian region to help the China team as we capture the growth.

The 2 non-exec directors who left 2 weeks ago, that was a disappointing loss. And it's fair to say that, in programs which Aaron has outlined for this business, the transformation change we're trying to make creates also some challenging moments sitting around the board table, and both Helen and Jackie chose to resign after some differences of opinion. I'm not really going to get into the details. So it's about as far as I'm going to go.

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Larry Gandler, Crédit Suisse AG, Research Division - Director [6]

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Okay, understood. And I guess more of an operational question for Aaron. In China, Aaron, I'm aware that the new e-commerce is fairly new. Pinduoduo has kind of emerged as a major player. And I'm wondering to what extent is that depressing pricing in the marketplace as they sort of more have a value focus. And that in itself is maybe impacting export trade out of Australia as well as perhaps the -- but really, export trade out of Australia. So just wondering -- and what I was going to ask -- also ask is maybe the ability to take a price increase in that market, which I think you guys announced.

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Aaron Boyd Canning, Blackmores Limited - CFO & Joint Company Secretary [7]

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So Larry, I'll answer it initially. But what I'll do is, given that we have Peter Osborne on the phone, I'll let him talk about that. So look, Pinduoduo, and there are a few others like Pinduoduo, are -- they're causing some disruption in terms of competition amongst China e-commerce platforms. Pinduoduo is very much a value-led proposition. We are also aware with Pinduoduo, there is quite a high level of counterfeit product on that platform, and so we have been reluctant to date to have our brand represented on that platform. But as the continuing competition across e-commerce platforms intensifies, we will expect Pinduoduo to take more direct action in relation to that, and therefore, it creates opportunities for us to engage for them at some point in time in the future.

But why don't I just pass to Peter just to add to anything -- in terms anything I've missed on that. Peter?

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Peter Osborne, Blackmores Limited - MD of Asia [8]

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Thanks, Aaron, and hi, Larry. Look, I think, Aaron, you've covered a good summary of Pinduoduo and the changes we see that platform going through. And Larry, you're right in saying that, particularly, Pinduoduo and others such as Yunji and Onion and other social e-commerce networks -- platforms are driving a lot of competition across the total cross-border space in China. And I think -- but as Aaron said, I think particularly in relation to Pinduoduo, when we believe that platform has taken more actions relating to sales of counterfeit products on the platform, we would -- we already have a relationship with them, but we look to -- we would look to grow that relationship when we believe they're at a position where we could have our brand appropriately represented on Pinduoduo.

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Aaron Boyd Canning, Blackmores Limited - CFO & Joint Company Secretary [9]

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And Larry, the second question of your question was price, so let me address that. So as I've touched on before, we have announced a significant list price increase and first, in fact, for over 3 years. And we've done that in unison with the Australian business, the export channel and all the China in-country channel. Now they're all going up in the same date, and we are very confident about our ability to hang onto those price increases, as I said before. We've taken a very strategic approach to looking at SKU-by-SKU basis to those price increases so some are quite significant, some are more modest. And we'll continue to evaluate that, along with promotional frequency, in depth as we progress through the F '20 year. And I would note as well, BioCeuticals have taken an increase. PAW have also taken increase effective the same date.

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Operator [10]

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And our next question comes from the line of Sam Teeger from Citi.

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Sam Teeger, Citigroup Inc, Research Division - Analyst [11]

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If you can please talk about any disruption you've seen from both a sales perspective but also a logistics perspective from the Hong Kong protests. I guess, what percent of your [C-back] sales are entering China from Hong Kong. Just aware that another listed company has called out some issues here.

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Aaron Boyd Canning, Blackmores Limited - CFO & Joint Company Secretary [12]

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Yes. So look I'll talk about Hong Kong -- both Hong Kong retail, because we have a business there, and I'll talk about the China [C-back] piece. If we look at the changes that have occurred, particularly over the last 6 months, our proportion of sales going through Hong Kong has dropped off dramatically, and that impacted some of the export channels, most notably. And if I look at China sales, most of those are going either direct into China to the customer or into -- or via our warehouse we have in Shanghai. So we don't see in terms of our China segment result any significant disruption from the Hong Kong protests in relation to that part of the business.

However, if I look at our Hong Kong domestic business, and it's a relatively small business, I would note, we are seeing impact there due to retail being down approximately 30%. Obviously, tourism has dropped off significantly, particularly from the mainland. But in the quantum of our overall business, it's quite small.

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Sam Teeger, Citigroup Inc, Research Division - Analyst [13]

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Right. Less than 5%?

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Aaron Boyd Canning, Blackmores Limited - CFO & Joint Company Secretary [14]

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Yes.

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Sam Teeger, Citigroup Inc, Research Division - Analyst [15]

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Great. And second question. In the past, you've disclosed your estimated China sales including daigou. Just wondering if you can provide this for FY '19.

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Aaron Boyd Canning, Blackmores Limited - CFO & Joint Company Secretary [16]

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So just so I understand the question, you're looking for total China sales including implement sales in Australia plus the segment -- the China segment number.

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Sam Teeger, Citigroup Inc, Research Division - Analyst [17]

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Correct.

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Aaron Boyd Canning, Blackmores Limited - CFO & Joint Company Secretary [18]

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I'll give you an estimate, Sam. So you've got the China segment number. So we estimate around $90 million in Australia due to China influence. It's an estimate. That's down about 11%, 12%.

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Sam Teeger, Citigroup Inc, Research Division - Analyst [19]

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Got it. And then just in terms of -- do you expect the efficiencies that you're going to generate in the second half of '20 to offset the guided profit decline in the first half so full year '20 would actually see positive profit growth?

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Aaron Boyd Canning, Blackmores Limited - CFO & Joint Company Secretary [20]

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We haven't been that granular in terms of providing an outlook statement. But I'll answer it this way. Given that we've really only had the fourth quarter to enact that these changes and we are going to continue to accelerate those changes through the first half, you would expect that benefit, as I called out, to start to flow through from H2.

Now I would note, as we've said before, that approximately 2/3 of any efficiencies, we'll reinvest back into the business. And we've given guidance before that 1/3 of that broadly into marketing our brands, 1/3 of that into people and capabilities and 1/3 back to shareholders. So I don't really want to get into the detail of it. But I would say, as I said earlier, we expect those efficiencies to play out through the P&L in the second half. And also, I would say you're going to get the benefit of a full half of price increases as well, Sam, given that we're only going on the 1st of October.

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Operator [21]

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And your next question comes from the line of Aaron Yeoh from Goldman Sachs.

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Aaron Yeoh, Goldman Sachs Group Inc., Research Division - Equity Analyst [22]

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Just following on from Sam's question around the Hong Kong domestic sales. I was just wondering just with regards to your less than 5% estimate, does that include any sale that your China exporters would be doing into Hong Kong?

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Aaron Boyd Canning, Blackmores Limited - CFO & Joint Company Secretary [23]

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Yes. That channel, as I've sort of touched on before with Sam's question, that channel has dropped off quite significantly prior to the Hong Kong protests. So we aren't as yet seeing any further disruption for our export channel because of those protests.

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Aaron Yeoh, Goldman Sachs Group Inc., Research Division - Equity Analyst [24]

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And with regard to that recent drop-off, do you think that's an industry-wide sort of drop-off? Or is that Blackmores specific?

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Aaron Boyd Canning, Blackmores Limited - CFO & Joint Company Secretary [25]

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It's category. So it's in the scan sales that provide evidence to this. And so if you look at the category sales through Q4, the scan sales through retail in Australia is down 25% to 30%. Now that's most notably impacted those customers who were more focused on that export channel, without naming names. And if you look at the participants in that channel, we are faring better than the competition. So it really goes to the strength of the Blackmores brand in relation to the Australian domestic consumer because a number of our competitors were more exposed to the Australian retailer export channel to China model than what we were. Does that make sense, Aaron?

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Aaron Yeoh, Goldman Sachs Group Inc., Research Division - Equity Analyst [26]

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Yes, sure. So I guess in Australia, excluding the China-influenced portion, what do you think the market's growing at, at the moment?

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Aaron Boyd Canning, Blackmores Limited - CFO & Joint Company Secretary [27]

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So if you do the math on our sales in, we estimate our domestic performance in Australia is around, it's an estimate, 5%. The market -- and this, you've got to be clear on this. If you just take the scan sales number, it's going backwards because of that dynamic I just mentioned. But if you look at the domestic number, so stripping out the export business, it's growing at very small single-digit percentages.

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Aaron Yeoh, Goldman Sachs Group Inc., Research Division - Equity Analyst [28]

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Right. Just with regard to the overall Chinese market at the moment, what do you think it's growing at as an industry? And I guess splitting out the sort of comments around, I guess, the changes in the e-commerce law -- that the e-commerce law had brought around purchasing behavior, are there any sort of, I guess, near-term headwinds you could potentially sort of -- you would expect are in the market at the moment, I guess, driven by maybe weaker consumer sentiment in China?

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Aaron Boyd Canning, Blackmores Limited - CFO & Joint Company Secretary [29]

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Look, I think, more broadly, the growth on e-commerce platforms is slowing, and it has been slowing for some time. Now I think you have to put that into context in terms of size and scale of the market. It's a bit like when people talk to GDP growth of China, and they're saying it's growing from 7%. Well, it's still a very, very, very big number. So the overall category is slowing. There are more participants offshore, particularly international brands, coming into the category. However, it's still a very large, large category. So that's the first point.

The second point is, and we've touched on this from one of the earlier questions, you are seeing quite a bit of competition happening across the platforms. So whether it be some of the more established platforms fighting out for market share or some of these new social-sharing platforms, Yunji, Pinduoduo, et cetera, that Peter touched on before, being a disruptor in that space. So it's unclear as to how that will pan out. And that's probably most -- those 2 criteria are probably the most significant external factors that are playing out, Aaron.

That said, we continue to see significant opportunities in the categories that we are in. We see significant opportunities to continue to innovate and extend our portfolio into China, and we are focused on doing that as we head into '20.

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Aaron Yeoh, Goldman Sachs Group Inc., Research Division - Equity Analyst [30]

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Okay, great. One last question for me if I may, just with regard to the price increases that you're looking to put through next year. Can you sort of talk through the strategic rationale as to why you decided to put it now? Is it to hedge sort higher cost increases? Or is it a sort of positioning sort of strategy? And given what you've called out with regards to a more competitive environment in China, particularly with more competitors as well, what gives you the confidence to believe that the price increases will be accepted by the market?

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Aaron Boyd Canning, Blackmores Limited - CFO & Joint Company Secretary [31]

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Yes, look it's an interesting dynamic. And our China team actually wanted us to push prices on some products even higher than what we have actually done. So as I'm sure you can appreciate, Blackmores is a premium brand. We want to make sure it's positioned accordingly in terms of price. So -- but what gives us confidence? There's been some commodity increases particularly on raw ingredients around glucosamine. So glucosamine commodity price increases over the last 12 months are up 30%, globally. So there is really -- we need to move price to obviously protect our margins, and others are doing that as well. So that's a pretty simple example. Fish oil has also increased, nowhere that amount, but again, that's another pretty clear example.

If I look at other particular products and SKUs, there are some unique SKUs in China that we have a strategic opportunity to move the price on. Particularly when there's no competitor, we've got first-mover advantage. And also, we can see some supply constraints coming down the path. So all those factors put together, it makes sense to take a price now. And what we don't want to do, Aaron, is we want to do it all at once. We don't want to subject 3 price increases through the year. So do it once, do it right and do it at the same time across all of the regions. And I would note as well, we are also looking at price increases across our other Asian markets. That's about 4 weeks behind the price increases we are taking for the markets I've just talked about. And we haven't done it for over 3 years so it's timely.

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Operator [32]

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And your next question comes from the line of Julian Mulcahy from Evans & Partners.

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Julian Mulcahy, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [33]

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Just in relation to China, is there anything you can say that will give us confidence that you actually do have a strategy because it's been kind of roller coaster ride? I mean '16 was a sort of a surprise to all, then it's been mainly down, the channels keep shifting, you're taking stock out, you're putting stock in. When do we -- will we actually know that the strategy is in place? And will it work?

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Aaron Boyd Canning, Blackmores Limited - CFO & Joint Company Secretary [34]

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Yes, thanks, Julian. So to my opening statements as we were going through the slides, we are not happy with a performance that we've delivered in '19. If we -- and if I go down a level on that, we're not happy with our China performance. Now we think our strategy in China is sound. I think where we have fallen short is the execution of that strategy. China, as you would very much know, represents the single largest opportunity for us in a geography to invest for the long term and carve out a sustainable position up there. However, to do that, the investment profile in China is very different. The risk profile in China is very different. And I wouldn't want to convey to you to say going forward is going to be a linear journey.

Now the regulatory change that took effect back in 2016, and we had further regulatory change obviously taking effect now, is part of that market evolving and maturing. Now all participants are facing into that, all VDS participants, so this is not unique to us. Now if I look at ours compared to others, I think some have done a better job than us in managing that shift out of the export and Australia channels and done a better job at executing in China. And I think Swisse or H&H is probably a good example of that.

So we're pretty clear in what the strategy is in China. We've talked about reviewing partnerships to our help us extend our capability in China. We continue to look at that. We've invested significantly in China research around the consumer to understand what the Chinese consumers want and where we have a portfolio that can match those needs and wants. And we committed to investing in our brand and our capabilities up there. Now it's disappointing through FY '19, we had some -- our country manager up there had to leave due to personal reasons. But we need to face into that and make sure that we don't have that repeating.

So I don't want you to have the view, Julian, that the strategy is not right. We think the strategy is sound. We think the execution of the strategy is where we're falling short in China.

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Julian Mulcahy, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [35]

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And would you think in within 12 months you'll have a better execution record?

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Aaron Boyd Canning, Blackmores Limited - CFO & Joint Company Secretary [36]

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Very much so. I think if we don't have it within 12 months, then we -- management have failed.

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Julian Mulcahy, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [37]

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Right. And just one other question. Just on the cost savings, the $60 million. I mean 40 heads out of 1,000 people doesn't seem a lot. Where is the rest coming from?

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Aaron Boyd Canning, Blackmores Limited - CFO & Joint Company Secretary [38]

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So it's 40 heads in 3 months. So -- and I would say business improvement is not just about reducing heads, Julian, but let me just answer the head question. We're obviously taking on Catalent organization in October, which will have 260, 270 people coming on board. We obviously got an integration plan with Catalent. We do see further reductions in select functions across the organization as we integrate that business. I'm not going to tell you what the number of those is because, to be respectful to our staff, we need to be working that through with our staff first. But there will be more headcount reductions. I would -- if I were sitting on your side, I'd be focused on the number, not the heads.

And there'll be more efficiencies on things like rationalizing our warehouse footprint from 2 warehouses into 1, which we'll do in the year. We'll get more efficiencies from operating on common technology platforms across Asia and across our Australian businesses. We'll see more efficiencies in how we go to market with some of our key channels and customers. So I'll be looking at that rather than just focusing on it's x number of heads out of the organization by x date.

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Julian Mulcahy, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [39]

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Right. So the $60 million -- the price increase is only part of the $60 million benefit, are they?

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Aaron Boyd Canning, Blackmores Limited - CFO & Joint Company Secretary [40]

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No, no, they're not, no.

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Operator [41]

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And your next question comes from the line of Richard Barwick from CLSA.

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Richard Barwick, CLSA Limited, Research Division - Research Analyst [42]

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Can I just continue on the -- along the similar path. Obviously, you're being very clear that the problems in China you see as being execution related or execution-driven rather than strategy. Can you -- are you able to provide some more explicit examples. Some areas perhaps that you haven't got it right, and where you see that you can Just to try and spell that out in a little bit more detail.

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Aaron Boyd Canning, Blackmores Limited - CFO & Joint Company Secretary [43]

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Sure. So I think if we -- I'll start with the innovation. We've got the largest and most diverse portfolio of anyone in our space. And I think there's an opportunity to leverage that better in China than perhaps we've done in the past. I think there's an opportunity. So we've talked about this, Richard, in the past of being more product led in terms of our marketing campaigns rather than brand led. And what we find and what we have found is when you lead with product, and we also know this from some consumer research, consumers buy the product first, not the brand first, if that makes sense. And so I think there's an opportunity to be more targeted and focused on our marketing campaigns around product first.

I think when it comes to capability up there as well, we did not plan to have our leadership there in terms of country leadership leaving so soon, so that's caused some of the disruption in the year, and so we don't want that going on. And I would also say we've actually included -- we've improved our leadership capability through the year and other functions, such as a sales, key account management and HR, as we build the capability for a bigger organization up there.

The other point when it comes execution, we are going to narrow some of the channels in China which we deal with. And a good example of that is some of the export channels. And we've done quite a bit of research. We called that out in Q3, Richard, around some daigou research. And we see some opportunities through that which we're going to be executing on FY '20 through some joint business plans with certain participants in the channels to China, a bit like a more-for-more plan. So we will invest more with them to grow the business similarly to what we've done with larger platforms in China such as Tmall and Kaola.

Those are sort of the headline views without getting into really detailed specifics up there. What I would like to just reiterate is we're clear on the strategy. Where we have fallen over is the execution of the strategy. And so we know what we need to do. Now we just need to do it.

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Richard Barwick, CLSA Limited, Research Division - Research Analyst [44]

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No, that's helpful. I guess it does beg the question though, in the context of these planned price increases, did you debate the timing of doing it because? I mean it would be an argument to say let's get some of these executional things right first and get it pointing in the right direction before you move on price.

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Aaron Boyd Canning, Blackmores Limited - CFO & Joint Company Secretary [45]

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It's actually happening all at the same time. So the work we've done -- these price increases have been quite some time in the planning. I don't want you to get the impression we've just done them over the last few weeks. They've been going on for a number of months. So -- and we've done collaboration with marketing teams, category teams, the China teams, the export teams all at once. So it's been quite a bit of work, and it's the most significant and detailed work we've done on pricing, at least in the 4.5 years I've been here. And so one actually feeds into the other, Richard. It's all part of it, the overall program, if that makes sense.

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Richard Barwick, CLSA Limited, Research Division - Research Analyst [46]

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And just one last one for me and, again, just on that pricing sort of to round out the discussion. And I fully understand what you're saying terms of the complexity and the work you've done on it. Is it too simple to talk about where this pricing will leave Blackmores' portfolio relative to competitors? Is it -- is there a different answer depending on each specific SKU? Or is there some sort of uniformity that you've been trying to target across the portfolio?

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Aaron Boyd Canning, Blackmores Limited - CFO & Joint Company Secretary [47]

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No, it's -- to give you a little bit more color, we go SKU by SKU. We look at what's happening in the category, we look at the competitor set, we look at promotional price points, we look at the frequency. We look at if we raise price, what's the elasticity of the demand? What does it do to channels? It's very detailed. And so some products -- some SKUs are 0. Some SKUs are significant double-digit increases.

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Richard Barwick, CLSA Limited, Research Division - Research Analyst [48]

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Right. And I guess this goes probably at the heart of your execution point. If you're having to make such dramatic changes and variable changes to your pricing, you wouldn't talk to execution to date hasn't been what it needed to be.

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Aaron Boyd Canning, Blackmores Limited - CFO & Joint Company Secretary [49]

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It's not -- I wouldn't call it execution. So I'll just give an example. So I've touched on it before so let me be more explicit. Glucosamine has gone up 30%. Now we benefited from some contracts we had in place, but to not take a price increase on that product, which is a single-ingredient product, at the same time you're doing everything else, well, that wouldn't make sense. So you've got a great rationale to go to the customer in the environment where competitors are having to do it as well at a similar time to take price increases.

Now whether our unique products we have, and we see opportunities for those products in China, there's a number of ways you can raise prices. You can reduce rebates and discounts, but to a certain extent, you are inhibited in the way you can do that because of contractual arrangements. And so the best way to get at it is sort of list price increase. And the best way to get at it is to -- if you're going to make a change, do it once and put a reasonable price change through.

So it's got nothing to do it execution. It's got to do with the research we've done -- consumer research we've done through Q3 in China; the teams we've had together for the last 3 months assessing what competitors have done, and competitors have taken prices through H2, which we did not; and looking at where we have opportunities to recoup some margin, if I'm honest. And so we've taken that opportunity. It's not execution. The execution is making sure you hold on to the price increases, not the strategy and the thinking around the price increases itself.

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Operator [50]

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And the next question comes from the line of Shaun Weick from Macquarie.

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Shaun Weick, Macquarie Research - Analyst [51]

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I guess a couple of things. I mean just to start with, you're obviously experiencing what appears to be structural change in the go-to-market model with the e-commerce change. You're seeing that -- the say China really starts to consolidate. What are you seeing amongst the Australian-based exporters? Are you seeing consolidation with that channel? What problems are you dealing with there now? And I guess how are you balancing dealing direct into China versus through powerful domestic retailers like Chemist Warehouse and others that have strong resonance and brand conditioning in that market?

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Aaron Boyd Canning, Blackmores Limited - CFO & Joint Company Secretary [52]

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Okay. Now let me try and pick all those answers apart, Shaun. And if I don't answer them all, then let me know. So you're right. There is some structural changes to the channels to China. And I would say to my earlier comment, we see these as permanent, unless there's going to be any further regulatory change we're unaware of. And so how that's playing out is that with direct exporters or corporate daigou that we've been dealing it, we see that continuing to consolidate. And we're working with a smaller number now as we have been, but we can see that even narrowing down even further.

Now the way we manage those players in the channel is we work with our China team in China on mapping the market. So our China team in China's largely focused on servicing of Tier 1 platforms direct. But there are a range of Tier 2 platforms, including some platforms that these exports -- exporters own themselves, that is not being serviced by our China business. So similarly to what we do in China, where we develop what we call joint business plans with the Alibaba Group, for example, we're doing the same here with [exports]. And what we are looking at is they get to certain channels and, to a certain extent, we are looking at giving them sort of semi-exclusivity on certain product portfolios to allow them to invest in those portfolios to grow them and maintain pricing and margin.

Have I answered your -- all your questions there, Shaun?

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Shaun Weick, Macquarie Research - Analyst [53]

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Yes, and that's helpful. l mean I just -- I guess just the other part of it is just, I guess, balancing that -- balancing, I suppose, dealing direct through these exporters versus through the likes of a Chemist Warehouse domestically who is obviously going to want you to pay higher rebates in the market, et cetera, et cetera. Just how you see that kind of dynamic playing out, I guess, over the next 12 months.

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Aaron Boyd Canning, Blackmores Limited - CFO & Joint Company Secretary [54]

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So we've been dealing with that dynamic for the best part of the last 3, 3.5 years. I think it's -- I'll answer it in a slightly different way. Chemist Warehouse, historically and still to the day, has been one of the more active Australian retailers (inaudible) channel. Whether that be Chinese, Australian, tourists, entrepreneurs, students coming off the street buying a handful of products and selling it via WeChat to family and friends or more sophisticated, call them, daigou through Chemist Warehouse, that is still continuing.

But as I said before, that channel is shrinking because, particularly at the smaller end of the daigou market, most notably now because they have to register if they want to sell B2C. And so that's where the market is being impacted a lot. And at the top end of the market, you're seeing some consolidation as I touched on before. So we continue to manage that dynamic with Chemist Warehouse. But we've been doing it now for 3, 3.5 years, and we don't see any new challenges that we haven't already faced [into] coming out of (inaudible) in relation to managing that.

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Shaun Weick, Macquarie Research - Analyst [55]

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Okay. And just maybe leading on from (inaudible), what do you think the implications are for the marketing costs for Blackmores? I mean, historically, you've obviously had the C2C daigou sort of brand and very strong, I guess, portion of the market in terms of building awareness of Australian goods. Like, how do you see that playing out in your marketing costs? Like, do marketing costs have to go higher going forward?

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Aaron Boyd Canning, Blackmores Limited - CFO & Joint Company Secretary [56]

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Look, most of the increases in our marketing investment has come through investments that we've made in China through our in-country team. And to one of the earlier questions where I spoke about execution, where we see our investment in China becoming more effective or efficient, which is not to necessarily representing significant dollar increases, is around changing the mix and focus of that to be more product lead in China. The amount of the dollars spent on daigou marketing or influencing has been relatively small, but I can't really -- and we'll continue to engage that channel appropriately, but from a dollar point of view (inaudible)

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Shaun Weick, Macquarie Research - Analyst [57]

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Okay. And then, I mean, just last final question, can you just talk about, I guess, you have the evolution of the breadth or concentration of demand in China across the SKU range? Are you seeing any evidence that some of those more recently launched products are gaining meaningful traction with Chinese consumers? I guess on -- just trying to get a sense as to whether the product information -- innovation that you've recently completed is actually working?

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Aaron Boyd Canning, Blackmores Limited - CFO & Joint Company Secretary [58]

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Yes. We are seeing some examples of very strong growth, I will say, off a low base in other products in our portfolio. And so a bit back to the pricing conversation, the channel management conversation, we are managing those very differently. And what I mean by that is we're ensuring they're being promoted or discounted heavily in Australian retail as we're managing supply, particularly, we've got supply constraint. But we are seeing, and we are investing in China on a brand-new point of view to continue to accelerate this growth on a number of other new products. We are very cognizant that our current portfolio is very concentrated in China. And as part of our strategy in China, we have a plan to continue to diversify away from those top half a dozen SKUs into a broader range.

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Shaun Weick, Macquarie Research - Analyst [59]

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And so just a follow-on, just the top 6 -- 5 or 6 SKUs, I mean, what are they accounting for, for sales at the moment?

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Aaron Boyd Canning, Blackmores Limited - CFO & Joint Company Secretary [60]

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Look, they have -- I don't have the number off the top of my head, but I'm sure others will be able to talk to, but it's well north of 50%.

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Operator [61]

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And your next question comes from the line of Chris Lee from Templeton.

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Christopher Lee;Templeton;Analyst, [62]

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I just actually have 2 questions. Firstly is on the Australia, New Zealand and as well as the China sales because -- do you have the -- like the sales performance for the fourth quarter fiscal year 2019? Like, how did it do versus in first quarter -- third quarter fiscal year '19? And then can you also briefly comment on the inventory level that you see in the ANZ market as well as in the China domestic market?

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Aaron Boyd Canning, Blackmores Limited - CFO & Joint Company Secretary [63]

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Sure, Chris. I didn't quite hear the first part of the question. But I think what you said was, I'll just confirm, that what was the sales trajectory in the ANZ business for the fourth quarter. Is that the first question?

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Christopher Lee;Templeton;Analyst, [64]

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Yes, yes, yes. Because when I look at the full year numbers for the Australia market, basically, it seems to me the fourth quarter should be slightly better than the third quarter. So that's the reason why I'm asking do you have that number for us.

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Aaron Boyd Canning, Blackmores Limited - CFO & Joint Company Secretary [65]

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Right, okay. So yes, the fourth quarter is -- for the ANZ business, it is better than the third quarter. Do you want me to...

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Christopher Lee;Templeton;Analyst, [66]

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Yes.

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Aaron Boyd Canning, Blackmores Limited - CFO & Joint Company Secretary [67]

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Specifically -- well, I don't -- I guess it was stronger. But that's normal in terms of the cyclical nature of our Australian business. So Q4 is always stronger than Q3, and Q2 is always stronger than Q1. But if I look Q4 on Q4, so on pcp, which I think is a more appropriate way to look at it. It's down single -- mid-single digits, which you can see. As I said earlier when I talked to the slide, the Australia and New Zealand business for 9 months of the year was up 3% and finished the full year up 1%. So if you do the math, you could work it out.

And then your second part of your question was around inventory levels in Australian retail. Is that correct, yes? Is that the question?

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Christopher Lee;Templeton;Analyst, [68]

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Yes, yes, yes.

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Aaron Boyd Canning, Blackmores Limited - CFO & Joint Company Secretary [69]

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Look, it's actually a point in the past that I've touched on, so those of remain broadly in line with last year.

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Operator [70]

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And our last question comes from the line of Danny Goldberg from Select Equities.

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Danny Goldberg, Select Equities Pty Ltd. - Director, Senior Advisor and Head of Dealing [71]

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This is a Danny from Select Equities. It's a great piece of evidence there that your other Asia business is firing. But I suppose focusing on the China market, there's been some rumors in the market that is NetEase Kaola is subject to a potential sale, possibly to Alibaba, which would give those guys approximately 50% to 60% of total cross-border e-commerce. If that sale was to conclude as reported or rumored, how do you think that would impact you guys given that's such an important part to your China business in the cross-border e-commerce section?

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Aaron Boyd Canning, Blackmores Limited - CFO & Joint Company Secretary [72]

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Thanks for the question, Danny. Look, we have strong relationships with both, so NetEase and Tmall, and we have joint business plans with both in China. And we are growing strongly on both portfolios. Now if the rumor is correct and if that was to occur, we don't see -- well, it's difficult to tell, of course, because it's all rumor, and who knows what the future holds? But relationship issues being caused by that because we have strong relationships with both. But I can only really speculate, Danny, beyond that because it is just a rumor. All I can say is we've got great relationships with both, we're growing strongly on both [investments], and we expect to continue to do that, whether a merged entity or remain separate entities.

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Danny Goldberg, Select Equities Pty Ltd. - Director, Senior Advisor and Head of Dealing [73]

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Also in China, there's been obviously some disruption through the Hong Kong channels in recent weeks, and if anything, that looks quite bad. How much is that impacting your first quarter sales at the moment?

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Aaron Boyd Canning, Blackmores Limited - CFO & Joint Company Secretary [74]

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Yes, we had this question on the earlier part of the call, Danny. I'm not sure if you -- maybe you heard it, but I'll just briefly replay it. So the e-commerce regulatory changes impacted that Hong Kong channel significantly the beginning 25th of January this year, but that's been the most significant impact. More recently with the protest activity in Hong Kong, we haven't seen any significant impact to our China business from that because a lot of our shipments now either go from our own warehouse in Shanghai or direct into the relevant free-trade zone from Australia. I would say, however, we've got our Hong Kong retail business which is small but growing strongly, and that has been impacted. And the retail market in China in totality is down 30%, and the tourism from the mainland is down significantly. But it is, as to the earlier caller, it's less than 5% of our sales, significantly less than 5% of our sales, and we're not calling that out as a risk at this point in time.

Okay. Look, I believe that we don't have any more questions. Apologies, the call has run a little longer. We thank you for your time. And for those on the call who we'll see later today and tomorrow, we look forward to meeting you in person.

Thank you very much, and have a good day.

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Operator [75]

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And that does conclude our conference for today. Thank you for participating. You may all now disconnect.