Edited Transcript of API.AX earnings conference call or presentation 23-Apr-20 12:00am GMT

At the same time, we are working on 3 other strategies that will see us through the COVID-19 pandemic and set us up for the future. We could see an extended period of low growth, as I mentioned before, and preempted that by focusing on 3 other key strategies: lowering our cost of doing business, strengthening our balance sheet and accelerating our investment in our growth assets. Pleased to say that we’re making good progress on all of these, and there’ll be more to come.

So moving to the first of the 4 strategies on Slide 6. All our Priceline research and customer insights point to consumers taking more control of their wellness, both physical and mental. They expect retailers have a deeper connection with them, they want to matter and they feel better when they do matter. For Priceline, there’s a real opportunity for us to also become more emotionally relevant for our customers in this uncertain world. So when we break this down, we will play a stronger role by strengthening our health offers in our stores and by creating new levels of care and service at every touch point with our customers.

Our customer insights tell us that our customers want to own their health care and continue to seek affordable beauty. And we’ve increased our focus on our health programs and ranges, introducing new ways for our customers to feel in control and, as I said, own their health care. We’ve rolled out machine-driven in-store health checks across the Priceline Pharmacy network. We have developed medicine management apps, dose administration aid programs and a broader health product offer. And we’re focused on how we deliver more new and exclusive brands in-store and online.

A major shift in this COVID-19 period has been the digital engagement that our customers have sought with Priceline and with other retailers. We launched Click & Collect in the first half, and we have rapidly deployed Click & Deliver recently, both of which leverage our store network to efficiently distribute to our customers.

So turning to our focus on operating costs. The first half, we closed 2 distribution centers, Newcastle and Canberra. These centers have served us well over the years. However, with improved automation through our supply chain, we’re now able to seamlessly service those customers through our Sydney DC. We have commenced a restructure of our support office functions and our overall operating model, which has increased efficiency and taken costs out of the business. We’ve invested in technology over the half with further capability added to our Sister Club platform. We invested in our inventory optimization program to drive down working capital, and we’ve added capability to our promotions management system. Our cost of doing business is now 10.8%, and this is an improvement of 6% over the prior corresponding period, and that’s a net 6% after all rent increases, wage increases and other CPI adjustments. There are further savings to come.

So turning to Slide 8, the balance sheet. Our actions to strengthen the balance sheet and focus on returns to shareholders are starting to flow through to our results. Adjusted net debt reduced by 50%, and cash conversion days reduced by 7.3 days on the prior corresponding period. That comes on the back of a successful program to focus on inventory productivity, including the inventory optimization investment that I’ve just mentioned. We sold our Sigma shares at an opportune time, and we continue to manage our cash and debt well, which is backed by strong relationships with our banks.

And to our last — or our fourth strategy on Slide 9, investment in our growth assets. Clear Skincare and Consumer Brands will be areas of significant growth in the medium term. We’ve escalated the rollout of Clear Skincare clinics. We’re up 25% over the space of the year, which will allow us to connect with more consumers when the clinics do reopen. We’ve enhanced and relaunched our online store for Clear Skincare, which is performing well particularly at a time when the clinics are closed, and this is helping to replace product sales that we enjoyed prior to COVID-19. Importantly, this is allowing us to stay connected with our Clear Skincare customers.

For Consumer Brands, we’ve invested in our Consumer Brands product development with an associated increase in the products that we produce. As the largest supplier of cold and flu medications in Australian pharmacy, we have broadened our health care range in the first half and more recently. Consumer Brands has also quickly adapted to produce hand sanitizer to scale in response to the COVID-19 pandemic.

Our investment in these businesses will continue, albeit prudently as we preserve cash. So as we move forward, I hope it’s clear that these 4 areas of our strategic focus makes sense given the current environment.

So now let’s have a quick look at the headlines for the 2020 year. So I’m on Slide 11. As I indicated at the AGM, due to the challenging retail conditions and the effect the bushfires in the eastern states have had on consumer confidence, we experienced some softness in our EBIT and NPAT. The results we are reporting today are in line with the commentary at our AGM. Our revenue was $2 billion, 2.8% up on the prior corresponding period. Underlying EBIT was $41.7 million, down 6.1%. Underlying NPAT was $26.3 million, slightly down by 1.9% on the prior corresponding period. Peter will outline the adjustments made to underlying results in more detail, but at a headline, they include some one-off costs for the half and the impact of the new leasing accounting standard, AASB 16.

Underlying earnings per share was $0.053, down 1.9% on the prior period. One of the highlights of the half is adjusted net debt, which was $129.7 million, down from $262 million at the same time last year. In a moment, Peter will explain why this figure has been adjusted. Overall, this is a very solid result in a very challenging retail environment, and we’re well placed with a strengthened balance sheet as we move forward. As it relates to dividends, API’s Board has resolved not to pay an interim dividend. After much consideration, it was deemed a prudent decision to preserve cash in the current environment.

I’ll go into the operational details shortly, but for now, I’ll hand over to Peter to talk you through the financials in more detail. Peter?

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Peter Mendo, Australian Pharmaceutical Industries Limited – CFO [3]

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Thank you, Richard, and good morning. I would like to echo Richard’s thanks for joining us today, and welcome you from cloudy Adelaide where I’m located at the moment.

Looking at the financial overview on Slide 13. To recap on the key financials, our results are in line with the comments provided at our AGM in January, with challenging retail conditions and lower consumer confidence, seeing underlying EBIT fall $2.7 million, a decline of 6.1%; and underlying NPAT down $0.5 million, a fall of 1.9% on the prior corresponding period. Like many retailers, we experienced a flow-on effect of low consumer confidence in January and February. As such, I would like to highlight our expense management for the half, which reflects efficiency gains and provides a lower expense baseline for the future. Once underlying adjustments and the impact of AASB 16 is removed, our cost of doing business has improved to 10.8% of revenue, an improvement of 70 basis points on the prior year of 11.5%. I’d just like to point out in the 4D income statement, administration costs and general expenses includes the $4.2 million restructuring costs for the period.

From my perspective as the CFO, the focus in the business towards a leaner operating model is sound and is proving to be even more important since COVID-19. In relation to our underlying adjustments, we have removed the one-off costs during the half in relation to closing 2 distribution centers and the restructuring of our support offices. The other underlying adjustment relates to the impact of implementing the new leases accounting standard, AASB 16. As some of you know, we lease our premises including our head office, distribution centers, company stores and clinics. The impact of this change was a net negative $0.8 million in the reported NPAT. The later disclosures are included in Note 12 of the 4D.

I would like to now take some time to outline a couple of items in our results. While neither of these items fall into the definition of underlying adjustments, I want to be transparent. Consistent with last year’s full year, other income includes $6.9 million relating to the release of the remaining provision for contingent consideration. This provision reflected potential cash earn-out payments to Clear Skin (sic) [Clear Skincare] founders based on the future stretched performance targets for the original 44 clinics. And to be very clear, it does not relate to the performance of the 15 clinics we have subsequently opened. We, along with our auditors, are of the view that this part of the provision will not be paid but will be continued to be reviewed each half until we own 100% of Clear Skincare. In addition, being in the position to be able to, we prudently increased our debtor’s provisioning by an additional $9.3 million than we normally would as a consequence of the current environment we find ourselves in.

Moving to debt management on Slide 14. It is evident from the slide, our significant focus on cash and debt management over the past 12 months has resulted in a decrease in our debt level, the timing of which could not be better given the COVID-19 pandemic. Adjusted net debt at the end of the half was $129.7 million, down from $262 million at the end of February 2019. I need to refer to adjusted net debt because net debt in our 4D is $75.9 million. However, one of our transactional banks did not process, despite much effort, $53.8 million in payments on the 29th of February, our half year-end. While reported net debt is technically correct, it would have been higher, if not for this error. Therefore, we have adjusted net debt up by $53.8 million to $129.7 million to allow fair comparison to prior periods. The reduction in adjusted net debt over the 12-month period is due to a number of items, but 2 call-outs are: working capital improvements, reflecting the success of our inventory optimization program which, combined with strong cash collections, totaled $54.4 million and was used to repay debt; and we sold our Sigma shareholding, the proceeds of $82.2 million were also used to reduce debt.

To Slide 15, working capital. Pleasingly, cash conversion days is now at an optimal level, which will hold us in good stead as we move through COVID-19. Cash conversion at 22 days, a reduction of 7.3 days on the prior corresponding period, reflects the working capital improvements just outlined. Given the current environment, it is worthwhile noting that our debt facilities have staggered termination dates and are with a number of domestic Australian banks, which spreads refinancing risks significantly. All our facilities had in excess of 12 months duration as at the end of February. And as a prudent measure, we are in discussion with banks to further extend these facilities. We are well placed from the cash and debt position with strong relationships with our banks. Net financing costs for the half were $10.3 million. This total included $3 million relating to the introduction of AASB 16 and $0.7 million relating to our Sigma shareholding.

Moving on to Slide 16, capital management outlook. We are no different to virtually every other company around the globe. Cash is king, and our focus on debt reduction in the first half has been a very sound decision based on current business conditions. We will preserve cash to ensure against future shocks and to allow us to fund any appropriate growth opportunities. We have reassessed our capital expenditure program, and we’ll continue to do so with a focus on growth initiatives. We will continue to assess our options for the Sydney DC. As you’d expect, we have been managing credit risk carefully, and my credit team and I will continue to focus on this very closely. And as we have advised previously, we have Clear Skincare clinic’s second and third acquisition payments due September 2020 and September 2021.

I am pleased to say that returns to shareholders have been consistently strong. The growth in underlying return on equity reflects the effect on equity of the Clear Skin transaction and importantly, growth in pharmacy distribution and Clear Skin contribution. The slight reduction in underlying return on capital employed reflects lower EBIT for the half. As Richard has said, the API Board resolved not to pay a dividend for the half. From my perspective as the CFO, this is a prudent decision to preserve cash in the current environment.

I’ll now hand back to Richard to provide more detail on our operational results.

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Richard C. Vincent, Australian Pharmaceutical Industries Limited – MD, CEO & Executive Director [4]

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Thank you, Peter. So we’ll move to Slide 19 and we’ll work our way through the 4 business units, and I’ll start with Pharmacy Distribution. Revenue, excluding hepatitis C was $1.43 billion, so we’re up 7.1% on the prior corresponding period. Gross profit was up $3 million from $109 million to $112 million. And clearly, we were helped by the return of some of the major pharmaceutical manufacturers to the CSO system throughout the half. In addition, this improvement was due to the work done by our team to retain and win individual pharmacy and pharmacy group business.

Pharmacy Distribution remains a highly competitive marketplace. So I’m pleased to say that we grew revenue and increased our overall number of stores in our banner groups. We now have over 1,500 members in our combined retail pharmacy programs compared to 1,400 in the prior period. As I mentioned earlier, as part of our ongoing drive for efficiencies, we closed our Newcastle and Canberra distribution centers, consolidated that volume into Camellia, and all of that is going well. Bearing in mind — bearing all of this in mind, I think the result for Pharmacy Distribution for the half was a very solid performance.

Let’s have a look at the Priceline Pharmacy. Total registered revenue, which excludes dispensary, was $589 million, down 1.8% on last year. Total network like-for-like retail front-of-shop sales were 1.3% down on the first half of last year, reflecting that challenging retail environment that I mentioned before. If we include dispensary in this number, like-for-likes would be positive 0.9%. Typically, we haven’t done that, but I’m calling this out because we are quite rightly very focused on the health category and as I mentioned earlier in my operational update, our strategy is to provide customers with a comprehensive health offering, both products and services. Total Priceline store network stood at 488 at the end of February, up by a net 9 stores on last year. At the close of half 1, our pipeline of new stores remains strong. But we will have to assess what happens as a result of COVID-19.

Pleasingly, the combination of exclusive and targeted offers via our Sister Club has seen basket sizes increase as well as major product launches and category development initiatives meant we were able to hold our market share. Importantly, this was the case across all 3 segments in Priceline: health, personal care and the beauty segment despite intense competition and increased discounting. Take-up for Click & Collect was strong in the first half. And as you’d expect in the current environment, demand for Click & Collect and Click & Deliver options have accelerated since then. Our promise to customers is that Click & Collect orders will be fulfilled in 2 hours, and Click & Deliver turnaround is same day or next day at the customer’s choice. Priceline was able to hold overall market share in what’s been a pretty challenging retail landscape.

Looking at Clear Skincare. Clear Skincare’s revenue increased to $24.6 million, up 12.8% on the prior corresponding period. Gross profit was $20.9 million, up 14.5%, reflecting strong margin management, combined with the benefit of additional revenue from high-margin cosmetic injecting. And in that category, we’re growing strongly. Total clinics stood at 59 compared to 47 at the end of the prior half year. And like Priceline Pharmacy, we’ve identified locations to accelerate network growth. As you can see, Clear Skincare’s momentum was building steadily, so we’re well positioned to reignite growth once we are able to reopen the clinics safely.

As it relates to Consumer Brands, signaled at the AGM, Consumer Brands recorded declines in both revenue and gross profit over the prior corresponding period from $34.1 million and $16.7 million to $28.3 million and $10.8 million, respectively. These sales and GP figures in our Consumer Brands business partly reflect timing issues relative to orders that came through in the first half of last year, plus the business experienced supplier delays relating to importing raw materials and completed product for both the Personal Care and the pharma plant. In addition, the impact of the lumpy nature of our export business, along with delays in new product launches, has pushed revenue from the first half into the second half. So with all that said, provided we have no further supply interruptions to raw materials and other key inputs, we expect to see significant and sustained improvements in the second half especially as we enter the winter season where our range comes into its own. Looking to the future and the potential of this business, we continue to invest in new products and expand the categories in which this division operates. And in the half, we saw 74 new products added to the portfolio to bring that total to 444.

So let’s now talk about COVID-19 at a high level, and then we’ll have a look at what impact it’s had on the business units across API. API is a critical component of the national health infrastructure and the safety and wellbeing of our staff, our customers, our franchise partners and our suppliers is paramount to us as is continuing to operate during this pandemic. We’ve introduced throughout API, and particularly in our distribution centers and stores, separate teams to facilitate continuity of service with an A team and a B team as the typical structure. Where we’ve had instances of COVID-19 infection, we’ve been able to work successfully with the state health departments to quarantine those who require it, deep clean the affected areas, get replacement staff in place and reopen 24 hours later. We remain confident that we’ll cope well with any future outbreaks.

Our continuity plan extends through the supply chain from manufacturers to community pharmacies. And if I stand back from all of that and see how we’re performing, I’ve never seen our supply chain stretch the way it has been in the last 7 weeks, and I’m proud to say that’s absolutely shown its resilience through that period.

So moving to Slide 28, let’s consider the impact of COVID on the business units. On Wednesday, the 25th of March, our Chair and I wrote to our shareholders. We noted that there was no certainty as to future demand given the fluidity of the situation. We also outlined the Pharmacy Distribution and Priceline Pharmacy had experienced significant revenue growth since the half year-end. And that continues to be the case for Pharmacy Distribution, with demand to date well ahead of the same time last year. Priceline Pharmacy like-for-like sales remained elevated during March.

However, the community stay-at-home message from the Prime Minister and the government has impacted more recently on parts of this business. If and when our customers go out to shop, they’re generally engaging in targeted shopping rather than browsing. For example, volumes for scripts remain up, hair color products are up dramatically, and skin care and vitamins are also seeing growth. While our overall basket size is significantly up, particularly those baskets of our Priceline Sister Club members, foot traffic is clearly down on the same period last year. Store results varied considerably across the Priceline network, as you might expect. Those with dispensary and street frontages are seeing much higher traffic than those without dispensaries and those stores that are buried deep in major shopping centers.

Priceline stores in the major CBDs have also seen foot traffic drop off markedly, while others continue to trade well. Our increased focus at Priceline Pharmacy on our health offering and other high-demand products is expected to protect the network from the full extent of the downturn, and we continue to assess the performance of each store.

For Clear Skincare, API closed all Clear Skincare clinics in New Zealand on Monday, the 23rd of March, and all the Australian clinics on Wednesday, the 25th of March, and they remain closed. And there’s no certainty as to when they can reopen. We have engaged in discussion with our landlords, not only across Clear Skincare but also across our Priceline network, across our distribution centers and across our support offices. I want to be clear on this that, in most instances, those discussions are proving fruitful. Where they aren’t fruitful, as per the approach we’ve adopted in recent years, we’re not afraid to permanently close stores and/or clinics.

We are maintaining appropriate engagement with Clear Skincare’s clients throughout COVID-19. The aim is to ensure that we can hit the ground running post the pandemic. We saw a good take-up of Clear Skincare’s product range through our Priceline Pharmacy network during the half year, and we’ll continue to sell products during the enforced shutdown. I’m pleased to say that Clear Skincare product range is selling well via the Clear Skincare online site.

Consumer Brands production, as you might expect, is running well above usual loads in both March and in April to date to meet the extra demands in Australia and New Zealand caused by COVID-19. The key areas of focus is sourcing and manufacturing high-demand products such as cold and flu medicines, analgesics, and we’ve recently commenced manufacturing hand sanitizer, as I mentioned before. So for this business, COVID-19 is presenting some new opportunities.

Well, let’s just have a look at Slide 29 now and our role in the community at the moment. I’d like to take a moment to reflect on the bushfires and the COVID-19 pandemic. As I mentioned, I’m very proud of the response to the bushfires from all of our staff, franchisees, pharmacist partners and, in fact, the whole CSO system. Our response has been exceptional. Our Pharmacy Distribution business coordinated deliveries of life-saving medicines with the RAAF and other authorities, and our Priceline Pharmacy franchisees and stores rallied to raise over $220,000 in-store and distributed $30,000 worth of very carefully selected care packs for free to those in need and those displaced from their homes. Now we find ourselves in another crisis, and we’ve again responded well. Supporting that increase in volume is a significant amount of work in our distribution centers and throughout our Priceline Pharmacy network to ensure medicines are equitably distributed to those most in need. We’ve worked very closely with our suppliers to manage the unprecedented demand, and we’ve ensured stock has been available for rural and individual pharmacies.

I remain proud of the important work that we do in the community, and I’d like to once again thank all of those involved, not just our own staff but everyone across our networks and our supply chain. The bushfire disaster and the COVID-19 pandemic have reinforced what — the PBS medicines delivery system, which is underpinned by the CSO funding, is classified as critical national infrastructure for all Australians.

So finally, to our outlook. In relation to the seventh CPA, API reported previously that the government had signaled its intention to maintain the funding of the CSO to continue to ensure equity of access to PBS medicines for all Australians. In March last year, government confirmed that the funding will remain in place until June — the end of June 2020 for distributors like API that deliver the full range of PBS medicines to pharmacies within 24 hours. Given everything that’s going on, as you’d expect, there’s not a final agreement in place with the government. But we have every reason to think that the current system will continue to be well supported, and I’m confident around that space.

API’s strong balance sheet will provide us with flexibility in managing through the current crisis despite the recent revenue impacts of declining retail sales in some Priceline stores and the temporary closure of all of our Clear Skincare clinics. From a capital management perspective, as Peter mentioned, we’ll focus on preserving cash in the short term, prioritize our CapEx, et cetera, et cetera. Having said all of this, we cannot offer guidance for the second half. It’s simply because of the volatility the ongoing COVID-19 pandemic is causing.

So that completes our operational overview, our review of the first half performance, the COVID impact and our outlook. So I’m now going to ask that the line is opened up so that Peter and I can take some 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 today comes from the line of Philip Pepe from Blue Ocean Equities.

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Philip Pepe, Blue Ocean Equities Pty Ltd, Research Division – Senior Industrials Analyst [2]

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I appreciate that sales will be quite volatile given what’s happening in the world. We’ve seen some ABS data suggested March was quite strong in some categories. And some of it was actually pull-forward of demand. Can you put some numbers around your trading in March and then April so we understand what good means and what a slowdown means?

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Richard C. Vincent, Australian Pharmaceutical Industries Limited – MD, CEO & Executive Director [3]

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Okay. So just to give you some context, Phil, we did mention that we were up about 50% in our letter to shareholders across our distribution business, and our distribution business represents primarily PBS drugs plus some over-the-counter medicines and front-of-shop products. Without getting into specific numbers, what I’ll say to you is that, that was a similar level through our Priceline business for those types of categories. When it comes to front-of-shop products, directionally, it was not as strong as that but it was clearly well up on the prior year and prior periods.

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Philip Pepe, Blue Ocean Equities Pty Ltd, Research Division – Senior Industrials Analyst [4]

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And in terms of the subsequent slowdown, I’m guessing in front of shop, has that more than offset the growth? Or are you still net positive for the 6 weeks?

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Richard C. Vincent, Australian Pharmaceutical Industries Limited – MD, CEO & Executive Director [5]

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So to be absolutely transparent, it’s jumping around quite a lot. So we’re having strong days and then we’re having softer days. And when you look at the mix — as I mentioned before, when you look at the mix of our network, those stores in the CBD or those that are buried inside of shopping centers are the ones that are seeing the softness. Most strip pharmacies or in general locations with at least the street frontage are going okay. And our scripts are still remaining very solid in Priceline Pharmacy. Just to be clear, Phil, when I said, we’re not giving guidance, I know that people will try and get a read on what does all of this mean, but I’m deliberately staying away from it because it is fluid, and it is jumping all over the place.

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Operator [6]

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Our next question comes from the line of Megan Kirby-Lewis from Morgan Stanley.

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Megan J. Kirby-Lewis, Morgan Stanley, Research Division – Research Associate [7]

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Just similar sort of idea on the sales just in the Priceline business. If you could just, I guess, give us a little bit more detail on the sort of number of stores that remained open and what proportion has moved to online sales. And then just my second question is around the flu vaccine and just sort of what sort of benefit we could expect to see from the additional uptake there.

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Richard C. Vincent, Australian Pharmaceutical Industries Limited – MD, CEO & Executive Director [8]

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Okay. Thanks, Megan. So in terms of the stores open, all of our Priceline Pharmacies as well as our company-owned stores are all open. We — as a retailer, we want to make sure that our stores are open for our customers. And the sooner we can go back to normal shopping, that would be great. But at this point, they’re all open. And in terms of our online business, our online business is up about 300% on what it typically is. So it’s definitely stronger. That stay-at-home message is meaning that people are at home, they’re still wanting to shop and they’ve shifted their shopping habits in some cases to the online channel. And we — as I mentioned before, we’re seeing a combination of pure online sales plus Click & Collect increase. And we’ve recently launched Click & Deliver, and that’s starting to take off as well. Balance though is that our online sales are relatively small to our store network — relative to our store network. So keep that in perspective.

Flu vaccines, we’ve already supplied 310,000 flu vaccines across our whole network, not just Priceline but independent pharmacies as well. By this time last year, we supplied about 150,000. So clearly, the communities and our customers are looking to make sure they’re in a good position coming into the winter season. You will have seen a note from Seqirus saying that they’re about to produce another 2 million flu vaccines. Look, at a high level, and I can’t speak for all the other wholesalers, but essentially, the supply chain doesn’t have a lot of stock of flu vaccine left until the next wave comes through, which will be the Seqirus stock. A lot of that will go into primary care environments like hospitals and the immunization programs that are set up across Australia and some will be allocated to the community pharmacy area.

From a Priceline perspective, and this is something we don’t often talk about, there’s no money in that — in flu vaccines for us and it’s very — there’s a limit for pharmacists. Pharmacists do it as a service and they do it as a convenience for patients because it is a relatively cheap cost to consumers. So from your perspective and your questioning, the upside from flu vaccines is virtually nothing.

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Operator [9]

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Your next question comes from the line of Mathieu Chevrier from Citi.

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Mathieu Chevrier, Citigroup Inc, Research Division – Assistant VP & Senior Associate [10]

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My first question, just to stay on the topic of Priceline, what’s your mix of front-of-shop OTC drugs in dispensary roughly in the Priceline network?

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Richard C. Vincent, Australian Pharmaceutical Industries Limited – MD, CEO & Executive Director [11]

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Our front of shop and our health category is 50-50.

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Mathieu Chevrier, Citigroup Inc, Research Division – Assistant VP & Senior Associate [12]

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All right. And then in terms of the front of shop, how much of that is beauty oriented rather than health oriented?

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Richard C. Vincent, Australian Pharmaceutical Industries Limited – MD, CEO & Executive Director [13]

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Probably 3/4 of it.

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Mathieu Chevrier, Citigroup Inc, Research Division – Assistant VP & Senior Associate [14]

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Right. Okay. So you’re looking to increase that health care segment, like you were saying, relative to the beauty segment, is that correct?

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Richard C. Vincent, Australian Pharmaceutical Industries Limited – MD, CEO & Executive Director [15]

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Yes, we are. And maybe let me recap on that piece for everyone on the call. We do have a strong product offering in our stores today in the health category. What we’re doing is we’re looking at how do we provide an end-to-end health and wellness solution for our customers, how do we connect the various departments, how do we add relevant products and how do we help our customers who have told us they want to control their health and manage their health, how do we do that better. So that will come through our health stations that are in all of our Priceline Pharmacy stores and then are now being rolled out in our company stores. It will come through online doctoring in due course.

It will come through adapting what we have in place with our Sister Club and our app that connects our consumers around the beauty categories. We’ll do the same thing across the health categories and then a range of other health-related services so that we become more of a one-stop shop for our customers to help manage their health. And as we’ve rightfully said, we know that customers want to take control of their health, and we know that they feel better when they feel like they matter. And that’s what we’re building our whole health strategy around. And that will play out over a period of time in a range of different ways in those health categories.

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Mathieu Chevrier, Citigroup Inc, Research Division – Assistant VP & Senior Associate [16]

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Understood. And if I can just follow up on your statement about an extended period of low growth. When do you see the business returning to normal? And what would that mean for the Priceline business?

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Richard C. Vincent, Australian Pharmaceutical Industries Limited – MD, CEO & Executive Director [17]

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That’s the million-dollar question, Matt. So look, we will always be guided by the Chief Medical Officer and the government. We’ve taken that approach all the way through because safety comes first for our staff. And we need to know that we’re putting them in a safe environment, and we’re managing the protocols around safety and hygiene, et cetera. It’s still unclear. The situation’s very fluid. We’ve kept all of our Priceline stores open because we are part of the essential health chain, getting drugs to patients. When things will bounce back, I’m not clear, it’s hard to say. Well, we hope that we will have our Clear Skincare clinics open relatively soon. And you’ll note the New Zealand government’s change around its Level 4 restrictions moving back to Level 3 progressively, so that’s a step in the right direction as well.

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Operator [18]

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(Operator Instructions) Your next question comes from Gretel Janu from Crédit Suisse.

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Gretel Janu, Crédit Suisse AG, Research Division – Research Analyst [19]

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So just firstly, on the rent, what proportion of stores have you received rental concessions?

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Richard C. Vincent, Australian Pharmaceutical Industries Limited – MD, CEO & Executive Director [20]

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We don’t have a percentage. But because, Gretel, as you understand, there’s similar landlords across quite a lot of the network, so when you’re having a discussion, a lot of it is a new principal discussion with those major landlords. But I did want to make the point that I made earlier because I know there’s been some reporting around disputes with landlords. We’re having productive discussions, and we’re taking a balanced approach with landlords based on where each store is at, the merits and the situation of each store. And most of our landlords are taking that same approach.

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Gretel Janu, Crédit Suisse AG, Research Division – Research Analyst [21]

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Okay. So are you able just to give us any color in terms of what we could expect in terms — on those rental concessions and how much do you think as — on a group basis, you potentially could receive?

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Richard C. Vincent, Australian Pharmaceutical Industries Limited – MD, CEO & Executive Director [22]

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I think as a principle, you’d expect that based on store turnover being down, you’d expect a proportionate level of reduction in rent. And you know the code applies to small businesses, but we’re taking the principles of the code and having our discussions with landlords on those — using those same principles.

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Gretel Janu, Crédit Suisse AG, Research Division – Research Analyst [23]

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Okay. No, that’s very helpful. And then are you able to give us an update on your cash performance through March and into April just given the volatility in trading?

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Richard C. Vincent, Australian Pharmaceutical Industries Limited – MD, CEO & Executive Director [24]

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Yes. So March was strong cash performance — and maybe I’ll let Peter cover this off. But at a high level, March is strong. And April is obviously an end-of-month collection from our pharmacists, and I think we’re in reasonable shape, but I’ll hand over to Peter to talk about that.

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Peter Mendo, Australian Pharmaceutical Industries Limited – CFO [25]

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Yes, that’s correct, Richard. Obviously, as you said, March was a massive month, month-on-month that I, probably in my 5 years at API, have seen the volume come through. And as you said, when you’re pointing out that the pharmacy sales were up by 50%, that’s coming off a bit in April. So the key to us is that our — obviously, our payments for those — volumes that came through for the March results will be coming due at the end of April. We’re in good shape to do that. And the other thing we’re making sure that we concentrate on is obviously that all our receivables are pharmacists and the like. So they’re all SMEs. So we’re working closely with everyone, API people in each state, to ensure that our collections are maintained at a level that they’ve been over the last few months. So yes, we’re in good shape as we move through. And like we said in the speeches, we’ve got the good relationships with the banks as well, and they have indicated that they’d be quite supportive through this period as well.

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Operator [26]

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Your next question comes from the line of John Hester from Bell Potter.

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John Hester, Bell Potter Securities Limited, Research Division – Senior Healthcare Equities Analyst [27]

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Just want to turn to the financials from Page 8 of the interim financial report and for Peter or Richard to either comment on some of the movements in these expense lines. So marketing and sales expense, for example, I think was $107.4 million down to $99 million. So I just wanted to ask what is the major driver of that decrease? And is it sort of a permanent thing? Or can you provide some more color?

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Peter Mendo, Australian Pharmaceutical Industries Limited – CFO [28]

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I don’t know, I think that — yes, look, I think as we’ve gone through this period in the 6 months, as we’ve gone through our restructuring, we’ve looked at all the level of expenses, whether direct or indirect, and ensured that what we’re spending is basically what is required. In the — so it’s looking at some cost containment, not cost cutting. So I think when the market and when the retail, particularly the segment and the consumer confidence rises again, you’ll probably see that go back to the normal levels that you’ve seen over the — over your time of covering API. And like I said, the administration expense is going up because basically if you knocked off the restructuring costs that went through there, they’d be back around the normal levels as well.

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John Hester, Bell Potter Securities Limited, Research Division – Senior Healthcare Equities Analyst [29]

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So what was the gross amount of that restructuring cost?

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Peter Mendo, Australian Pharmaceutical Industries Limited – CFO [30]

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$4 million, $4.2 million.

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John Hester, Bell Potter Securities Limited, Research Division – Senior Healthcare Equities Analyst [31]

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Okay. And that has pretty much to do with the closure of Canberra and Newcastle, right?

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Peter Mendo, Australian Pharmaceutical Industries Limited – CFO [32]

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Well, the closure costs of that, plus any expenses that came with restructuring the DCs from a people point of view and the support offices as well. There would have been some one-off costs through that.

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John Hester, Bell Potter Securities Limited, Research Division – Senior Healthcare Equities Analyst [33]

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Okay. And Peter, I just wanted to go back through some of your early points. So you’ve — in Note 3 on Page 15, you put through just basically $7 million in nonrecurring revenue. Nonrecurring, as a change in financial liability, really, it’s not — it’s a noncash item. You’ve once again included it in your underlying result.

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Peter Mendo, Australian Pharmaceutical Industries Limited – CFO [34]

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No. Look, I think we’ve been pretty clear on our underlying results and the guidance. As I’ve said I’m happy to — I think we’ve got to call a bit later on. So we can go through from the point of view of working out what a trading result would be like when we chat probably one-on-one. But API has been historically, I think, called out anything that’s underlying that we consider to be one-off. And that comes out of the ASIC regulatory code of 230, we’ve got to do that. And as we said, this is not a one-off. This is a review and it does reflect a reduction in cash payments that we would have had to pay out under the acquisition of CSC, if those stretch targets for the 44 clinics that we took onboard before — after that restructuring at — sorry, the transaction date was going to do that. So — and like I said, as a result of having some ability, even though we looked at — those provisioning on its own, I did take up, like I said, through the P&L an extra $9 million on top of what I’d normally do for the half in regards provisioning, which I think is a prudent thing to do. That’s in the outlook.

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Operator [35]

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Next question comes from the line of Nicolette Quinn from Morningstar.

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Nicolette Quinn, Morningstar Inc., Research Division – Equity Analyst [36]

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I’m interested about that date of provisioning. And if you could just make a comment on the health of the franchisees and maybe your thinking around that provisioning. So are you seeing a deterioration in their underlying businesses?

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Richard C. Vincent, Australian Pharmaceutical Industries Limited – MD, CEO & Executive Director [37]

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So maybe I’ll take this up first. Look, like everyone in this COVID-19 scenario, we’ll need to wait and see how things play out. For the run-of-the-mill community pharmacists, we haven’t built that extra $9 million into our provisions based on any particular pharmacies. It’s based on a view that it’s prudent to do it. And because, as Peter said, we have the ability to do it because we have the reversing entry around the contingent consideration. The 2 effectively offset each other at an NPAT level, back to John’s question previously. So it’s really a — it’s just a prudent general provision that we’ve taken up. When — what we need to continue to watch closely, and Peter did talk about it, is collectibility of our debts, and we’re watching that very closely because March was a very big month for retail pharmacies, which means that pharmacists need to pay us at the end of this month, and that’ll give us a guide as to how they’re all traveling. But equally, that makes some good sales through this period. So we’re just going to have to let that play out, Nicolette.

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Operator [38]

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(Operator Instructions) So we have a follow-up question from the line of John from Bell Potter.

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John Hester, Bell Potter Securities Limited, Research Division – Senior Healthcare Equities Analyst [39]

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Richard, just once again, on the dividend, you’ve suspended the dividend temporarily. When do you expect to be in a position to make — or give us some guidance on whether you will pay a final dividend or some sort of indication as to whether this is going to be an ongoing situation.

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Richard C. Vincent, Australian Pharmaceutical Industries Limited – MD, CEO & Executive Director [40]

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Yes. So John, that’s a good question. So I would think as things move backwards in terms of the controls that the government put around retailing and business goes back to normal, which we hope is going to happen sooner rather than later, then you would think through the second half, our second half will be clear around the shape of our P&Ls and cash flow and as we move towards the end of our financial year, which is August, we should be in a better position to talk about dividends. The reality is we could have done something. We chose not to because of just the Board’s decision to be — take a prudent and conservative approach at this point in time. I don’t think that will last, and I hope it won’t last. So we’ll — so through the second half, I would think, John, as we typically, in this sort of scenario, at some point, we will have to provide an update to the market on how we’re trading, and that will give you a steer as to what’s likely to happen.

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Operator [41]

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There are no further questions at this time. I’ll hand the call back to Richard for any closing remarks.

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Richard C. Vincent, Australian Pharmaceutical Industries Limited – MD, CEO & Executive Director [42]

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Thank you. So look, I just wanted to reinforce again, if I could, back to the strategy over the next 6 months, which is covered on Page 5 or Page 6 — Page 5, which is the 4 key areas of our strategy is obviously driving Priceline Pharmacy to a stronger position around its health offer; lowering our cost of doing business, we have more plans in that space; continuing with our inventory optimization tools to focus on driving down our working capital but, at the same time, where it makes sense, to invest and take advantage of our growth assets. Now that’s — if you like, in a nutshell, that’s our driver over the next 6 months and beyond. And all of the business is very focused around those elements. And we’ve obviously made some progress towards that in the first half. So that’s where we’re at.

Thank you for taking the time to join us this morning. And as we typically do, we’ll catch up individually off-line. Stay safe, everyone. Thank you.

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Peter Mendo, Australian Pharmaceutical Industries Limited – CFO [43]

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Thank you.

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Operator [44]

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Ladies and gentlemen, that does conclude today’s conference call. Thank you for all participating today. You may now all disconnect.