October 28, 2021

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Edited Transcript of BKL.AX earnings conference call or presentation 24-Feb-20 10:15pm GMT

Warriewood Mar 23, 2020 (Thomson StreetEvents) — Edited Transcript of Blackmores Ltd earnings conference call or presentation Monday, February 24, 2020 at 10:15:00pm GMT

* Gunther G. Burghardt

* Russell J. Gill

JP Morgan Chase & Co, Research Division – Head of Emerging Companies for Australia and New Zealand

Citigroup Inc, Research Division – Head of the Australian Small Caps Team & Director

Ladies and gentlemen, thank you for standing by, and welcome to the Blackmores half year results and strategic review investor call. (Operator Instructions) Joining us on today’s conference, we have Alastair Symington, Chief Executive Officer; and Gunther Burghardt, Chief Financial Officer. (Operator Instructions) Please be advised that this conference is being recorded.

I would now like to hand the conference over to your first speaker, Alastair Symington. Thank you. Please go ahead.

Thank you. Good morning, everyone. This is Alastair Symington, and welcome to the Blackmores Group half year results and strategic review call. I’m here with Gunther Burghardt, our Chief Financial Officer. We’re really looking forward today to share with you, firstly, the results of the first half year. We will spend most of our time on this call stepping through the outcomes of our strategic review which we spent the last 3 months involved in, and we will lay those strategic priorities out for this group over the next 60 minutes.

Firstly, I just did want to comment on the fact that Gunther will take us through the results in a minute. Our results are broadly in line with what we shared on our February 12 call. And we will take you through those in a minute. But beforehand, I just would like to just comment a little bit on what you’re going to see over the next hour or so.

Really, in terms of our strategic priorities, it reflects a shift in choices over here at the Blackmores Group. We have a wonderful collection of products and services that we offer, natural health solutions to consumers in many markets. One thing that we are more focused on as we go forward is the fact that there is a changing consumer demand and needs, preferences in the marketplace. So you will see our shift moving from product-led innovation more to consumer-led innovation. And we’ll talk a little bit about China and some of the Asian markets, in particular, and what we’re looking to do to support those consumers.

What you will also see is we are moving away from more of what has been in the past as short-term sales focus to something around more sustainable, profitable growth, and we’ll explain how we’re going to do that as well.

In the past, we’ve also had mostly an Australian-driven-Asia-followed approach where we develop products for Australia and then we export and trade in Asian markets. We will migrate over to what we’re calling a lead market approach where products will be developed in local markets and then exploit it into other markets outside of those lead markets.

We are focusing more on the fact that as a premium brand and the #1 most trusted brand in Australia and in some of our lead markets that we need to continue to offer a premium experience for our consumers, and that’s through packaging design and in the store, and we’ll take you through some of that.

We have obviously taken hold of a great new manufacturing facility in Braeside in Victoria. We’ll step you through how we see best utilization of that facility. And in particular, some of the innovations that sit within that facility. And then ultimately, in order for all of this to have come together, it’s about communicating clear choices, focusing more on outcomes and having a single purpose.

With that, I’m going to hand to Gunther Burghardt, who’s going to step you through some of our financials, and then we’ll come back on the strategic priorities. Gunther?

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Gunther G. Burghardt, Blackmores Limited – Group CFO [3]

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Great. Thank you very much, Al. And as Al mentioned earlier, we haven’t had a lot of changes since we talked to you on the 12th of February. We did finish the application of our AASB 16 leasing standards in our results. But our underlying profitability, in particular, is little changed.

And to hit a couple of the highlights on this first slide, we had revenue of $303 million in this first half of F ’20. And that was down about 5%. And the declines we had was largely China, was down about 6% in revenue; and ANZ was down about 20%. Very strong performance in other Asia which grew by 29%. And I do want to sort of talk to the fact that there was about $5 million of currency benefits in other Asia. And my preferred measure as we talk about the business is really to look at almost constant currency revenue gains. So for other Asia, that’s about a 20% growth, but very strong. In markets like Indonesia, in particular, you’re going to hear about the focus from Al later in the strategic presentation, that market’s really been on fire. And it’s grown 45% in local currency in that first half. Also strong growth being posted in Malaysia and a number of other markets. So very excited about that business.

As I said, ANZ was down a little bit. But within the ANZ business unit, BioC grew by 6%. But the BioC group in total, the increases in the BioC brand were partly offset by GT and IsoWhey and some of the other franchises within that group, so an overall flat result. But BioC remains very strong. As it shows here, it’s the #1 brand in Australia with practitioner-only products. So a very good result there.

We started to show in these statements for the first time a total cost of goods sold view at the bottom of this chart and also began to report on gross profit. And I think as we become a manufacturing business, that sort of transparency about gross profit margins is very important. We did post a 54% result in underlying margins in that first half. When we gave our outlook a couple of weeks ago, we mentioned that the second half will see us have adverse variances in Braeside of about $13 million pretax. So for those of you doing the math, we’ve given guidance that second half revenue will be broadly flat, and Braeside will impact us by about $13 million in the second half. So that’s about a 4 margin point impact we’ll see in that second half of the year. And part of the focus of the strategy is very much on how we leverage that facility with innovation and how we’re going to drive cost savings programs to optimize that margin over time. And as we said, that will be a 2- to 3-year job to get to where we want to be on that one.

I think I’ll finish off this slide by saying we did agree and told you on the 12th that we’re not going to pay a dividend in the second half. And that’s really reflecting our commitment to a solid balance sheet. We have $136 million of undrawn facilities at the end of the first half. So we’re in a good position from that perspective, but we’ll be very focused on cash, looking at noncore assets, and I think the dividend is a demonstration of our commitment to a solid balance sheet.

The next slide really just gives a further breakdown of that revenue. We’ve covered a lot of that in the first slide. I think we continue to monitor the coronavirus situation. I mean obviously, overnight, we’ve seen that spread to some other countries. So we’re monitoring that closely. But we don’t have any changes in our revenue outlook to report to you at this time. I think on this slide, we are, for the first time, calling out our Pure Animal Wellbeing franchise. And Al’s going to talk a lot more about that in the coming strategy session. While it’s a small franchise, it’s already got revenue growth in the upper single digits without a lot of support. And so we think it’s very exciting. And Al is going to outline that opportunity.

On the next slide, we sort of delayer China and other Asia. And I think a couple of things. Well, total China was down, and that’s the in-country sales and exports, by 6%. The in-country sales in China were up by 2% in the first half of the year. So we have seen that impact primarily on exporters. In the second half, though, you should expect that the combination of coronavirus and the label transition will cause in-country sales in China to be down somewhat.

We talked a little bit about the exciting opportunities in other Asia. And I think finally, we’re mentioning that over the coming months, you’re going to see us, particularly in F ’21, looking at an entry into India. And so I think it highlights that not only do we have some great results that we’re posting in other Asia, but our geographic white spaces are not yet filled. And there’s a lot of opportunity for Blackmores in the future as we look at some of those geographic opportunities as well. I think you’ll see our approach to India being cautious, and it’s going to be about test markets and those sorts of things.

I’m going to finish off with balance sheet and cash flow slides. The next slide, we talk a bit about our balance sheet. And while the inventory number is up by $4 million, that includes $19 million that we purchased in the first half as part of the Braeside acquisition. I think the good news is that the underlying inventory fell by $15 million, and that’s starting to show that our integrated business planning processes are starting to contribute to the business. And they’re starting to allow us to decrease our inventories and freight costs through better planning, which is a good news story in that first half.

Within the balance sheet, you’ll see a lot of movements of both the inventory, working capital and asset acquisitions as part of Braeside. And of course, you’ll see the step-up in interest-bearing liabilities to $153 million as we funded that acquisition. We do have a payment of a little over $22 million left in the second half of the year to finish off our obligations in relation to that facility. I think the other thing is within these statements, we have finished the application of the leasing standards, and so you’ll see a footnote there that sort of outlines the impact on our asset and liability accounts as we finish the application of AASB 16.

The next slide outlines our cash flow. And while we show cash generated from operations of $47 million, I think it’s important to be transparent and remove the $23 million that’s included from that result as part of our RPA or receivables purchase agreement. So we sold $23 million in receivables in December. So the real numbers, that were down about 30% in terms of our cash generated from operations. And clearly, that’s going to be an important focus for us. How do we get the right payable terms with our customers, how do we focus on receivables and, as I mentioned, the start of the good story on inventories, those will be the kind of levers we pull to make sure that our working capital starts to move in the direction we want it to. So that’s going to be key for the business going forward.

Also adjusting out the RPA receivables sale, our underlying cash conversion ratio was really about 64% in that first half. And that compares to 60% in the prior year comparative period. Now over time, we’re going to want to see that getting up into the sort of 70%, 80% plus kind of neighborhood. But of course, in the second half, we do have those remaining payments for Braeside, which impact cash overall. But in future years, you’ll want to see us get up into that 70%, 80% or higher kind of cash conversion area. And that’s the kind of ratios that we think a good business should be delivering.

Finally, our gearing rose to about 35.6%. And as I mentioned, made sure that we didn’t pay a dividend in that second half of the year, and we’re looking through the noncore asset sales. You’ll hear more about that. We called out a minor piece of property adjacent to our head office in the first half. And that whole transaction is moving ahead, but it’s not yet finalized.

Finally, I’m going to finish before I hand back to Al to talk about the strategy on our business improvement slides, so on the next slide. The business called out a number of months ago that in calendar year 2019, it would deliver $16 million from efficiencies. Now the reality is that it did deliver about 40 or 50 roles reduced predominantly in its Australian operations, but there has been a reinvestment, particularly in our IT infrastructure. So we’ve gone live on ERP platforms in a number of countries inside Asia, and we’re nearly done a job of aligning our BioC businesses with our ERP systems here in ANZ. So there are some infrastructure investments we’ve had to make, and they are impacting costs. I think while that savings was definitely there, we’ve also seen some increases in things like insurance. About $1 million of that comes from Braeside in the first half, and there’s probably about $1 million in other insurance costs we’ve seen in the first half. So really between IT and insurance, we’ve seen an offset to some of those savings that we did deliver. I think more importantly is what are we going to deliver over the 3 years of the strategic plan.

And what we’re calling here is we want to, first of all, change the language that we use to describe our savings. You might have previously heard a number from previous management of $60 million. Now what they were talking about was how you add in your savings over the next 3 years together to get a cumulative number of $60 million. We prefer to align with the typical way savings and benefits are described to the market, which is what will the annualized EBITDA benefit be by 2023? And we’re calling out a benefit of $50 million annualized per year by 2023. The assumption in Braeside is that it is simply getting back to the point in that 3 years where it is offsetting its variances. And it’s doing that through superior mix, through volume growth and through savings programs. So that $50 million is not really coming from Braeside. We see that as being a combination of cost-out programs in our products, simplification of our OpEx and our structure and the growth platforms that Al is about to talk to you about. So $50 million is the marker we’re putting in the ground, and we intend to reinvest half of that predominantly in Asia, both in China and other Asia, in order to drive our growth there and the growth platforms. So that gives you a sense of where we intend to get in over that 3-year time frame, and Al is now going to take it away and describe the strategies that are going to get us there.

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Alastair Symington, Blackmores Limited – CEO, MD & Director [4]

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Great. Thanks, Gunther. So just in terms of the last couple of months, as I mentioned up front, we’ve spent quite a bit of time reviewing our strategies, where we see some of the opportunities going forward and then, as important, seeing where some of those challenges might lie and how do we overcome some of those challenges.

If we just take a look at the previous 4 or 5 years, it’s a pretty sobering picture here. You see revenue flat over the last 5 years. There was some step-up in 2016 as China — as our China business took off. But if you have a look at most of the other markets, aside from other Asia, which we’ve seen very good growth over the last 2 or 3 years, the business has been relatively flat. And so we need to really find ways to start to drive growth across a number of different markets. I think more alarming is the fact that as growth is still, margins have eroded. We have not done a good job of taking pricing to offset rising costs. And there has not been very good control of our fixed costs. And so that has seen net profit down year-over-year starting in 2016. And even in the 2016 year, I mean, there was a lot that was coming through from the China business. We know that there’s around $20 million of impact that came through on vitamin E cream in that year. So there’s quite a lot of onetime positives that are coming into the P&L. And so we, as a management team, are looking at ways of driving more sustainable long-term profitable growth. So we need to see profit growing year-over-year and return to shareholders being more consistent.

Some of the other challenges we’re looking at. We called out, over time, the need to invest in China. As we look at rest of — if we look at Asia in total, roughly 45% to 50% of our revenue now comes out of Asia. There’s only around 15% of our operating costs linked to that business unit. So if you think about investments, in investing ahead of growth, the growth curve in some of these markets, that’s not something that I’ve been used to and the teams have been used to. So we need to relook and reshape how we invest into Asia.

The second point here is clarity around choices and focus, and we’ll spend a little bit of time taking you through what we mean in terms of being more focused and choiceful in a couple of areas, and that’s around our product assortment, our brands and markets and some of the channels that we look to serve.

I think we’ve mentioned this a few times, but increasing levels of trade spend is an unprecedented level of promotional activity, in particular in the Australian market. So the challenge here is to find ways of creating value for consumers and shoppers that’s beyond just price activity. And that’s a challenge as the leader in Australia that we own. And that’s something that we want to work with our retailers on in terms of creating a much more shopper-friendly and heightened consumer experience within the store, online and just in terms of the interactions with our brands in general.

We talked at the AGM around uncompetitive gross margins. You’ll hear us, Gunther and I, talk a lot about mix, and we want to be really clear about the importance of mix in terms of driving not only pricing but also more importantly gross margin, which allows us to invest more in our brands and our people.

And then in terms of the way we work, really getting clearer about more simplified structure and making sure that people are clear within our organization in terms of the roles and the value that they bring in our business growth.

One last point I’d like to make before we move on is just the Braeside, we called out 3 things on February 12 that’s really impacting us in the here and now, in the first half results or at least in our outlook going forward. And that was how we modify our operating model to take into account the fact that we’re now fully vertically integrated as a manufacturer and the strategies address some of that, most of that.

The second point is the label transition. We’ve just made these label changes. And so that’s something that we are monitoring on a constant, daily basis, in particular, around the China and coronavirus situation. And then coronavirus, Gunther mentioned it briefly. We are seeing, even overnight, an increasing, alarming rise in cases outside of China. So how do we now consider that in the context of running a global business? So that’s — they’re the challenges that we’ve got in front of us right now.

Shifting to good news. The good news around our brands is that we continue to be a very, very strong brand. Our brand health is — and I’m talking Blackmores, BioCeuticals and Pure Animal Wellbeing, our 3 key brands here. For Blackmores, we’re in 20% of households. So 1 in 5 households has a Blackmores product. We have an 82% prompted recognition of our brand in the market, which is extremely high. We’re still #1 in Australia, Thailand, Malaysia and Singapore. And we, for many years, I think the 11th year in a row, we’re now the #1 — still the #1 most trusted brand in Australia.

If we have a look at BioCeuticals, Gunther mentioned it previously. We’re the #1 practitioner brand in Australia. It’s growing at 18%. And we — in the critical cold and flu segment or the immunity segment, we have a 22.8 — 22.6% share of that total VDS. So that’s vitamins and dietary supplements. Because of our distribution and pharmacy, we reach more consumers with that brand than we’ve ever done before.

And I think the last point here is on Pure Animal Wellbeing. You’ll hear a lot about pet in the strategy. This is a really exciting, fast-growing category. We have the highest brand awareness here in Australia, and we see a lot of opportunity with this brand, not only in Australia, but in some of our close neighbors as well.

Just in terms of the portfolio and strategic review we’ve been doing and we’ve completed over the last 3 months. We’re now wanting to lay out how we’re thinking about the range of brands in the markets and channels in which we serve. So really, what we’ve done here is we wanted to lay out kind of 3 priority choices around our portfolio. Really, I mentioned earlier, Blackmores, BioCeuticals and Pure Animal Wellbeing will be our invested brands. So they’re the 3 brands that we really feel like we have the right levels of advertising and promotional spend, trade spend. We’re thinking about investing in these brands and expanding these brands beyond Australia. These are the 3 brands that we’ll focus on.

The second area is around partnerships, and we’ll talk more about our key strengths and what we want to do in terms of building our capabilities going forward. But certainly, partnerships is a key enabler for us in terms of growth. And really, it’s focusing, when we think about partnerships, and identifying the right partners in 3 areas, and this is really as we think about expanding our business. The first is around access to distribution. So it’s a number of retail points, whether that’s shoppers online or shoppers off-line, in traditional retail and brick-and-mortar. So the partners that we would assess would have to have good access to distribution. Good regulatory understanding of the local market. And the third area is an ability to access consumers directly. And this is either through consumer databases, loyalty programs or distribution directly through e-commerce.

The third area in terms of thinking about our brand is we are seeking to divest what we’re calling noncore brands, where we believe that potential acquirers would do a much, much better job of supporting these brands and really realizing the full potential of these brands. This is — if we were able to find the right partnerships here and exit a number of brands, we also feel like that would allow us here to focus even more on the invest and partnership areas of our business. And so when we have more information on this process, we’ll be sharing it with the market.

Now there’s going to be a lot of detail over the next 15, 20 minutes or so, but if there’s sort of 6 key areas I’d like everybody sort of walk away with and understand, it’s really these 6 key focus areas. And the key messages here are: the first one is we will be stepping up our investments in Asia, and Gunther’s sort of alluded to that, and I’ve mentioned that a bit. We will be more intentional about our investments in Asia, and we’ll talk you through what that looks like.

In terms of rejuvenating and strengthening Australia, there’s a number of different areas. One area in particular that we’ll spend a bit of time talking about is access to practitioners and really providing a wider access for our products and availability of our products to a wider practitioner base, and we’ll talk about allied health care professionals and the needs of those professionals in our strategies.

We just talked — I just talked briefly before about simplifying our business and brand offer. Recognition of pet as an important part of the family health outcomes. Not only is this an important category in terms of the size and potential, but if you have to think about the home, it is widely known that the home is much happier, healthier and more in tuned with mental health if you have a pet in the home. So — and in Australia, there’s a very high incidence of pet ownership. And so when we think about serving consumers and their families, the pet is really an important part of that family going forward. We need to spend more time understanding what are some of the opportunities we can to better serve the pet families.

Partnerships, I mentioned just previously. I won’t talk about that anymore. I think the last point here is around education. Today, we have the Blackmores Institute, which is widely regarded as one of the most influential institutes and education sources in natural health. We will be increasing our investments, not just in the institute, but in education in general, and there are sort of 2 key areas here. One is around improving health literacy, more in communities. So we’ll talk not only in Australia, but about emerging markets and how we improve health literacy, in particular around natural health. And the second area is how do we better leverage these education resources for stronger commercial outcomes and linking that more to our business.

So just in terms of the key strength I mentioned briefly. These are the key strengths that we see either today at Blackmores. So as we think about our strategy, it’s also about retaining what we know is good about this business and then leveraging strength, new strengths going forward. So really, here, we’ve laid out 5 key strengths centered around consumer and practitioner understanding and serving this consumer and practitioner base. The one that is, in terms of the 5 points, the first one is innovation and manufacturing. Manufacturing is a new capability for us. So we’ve obviously spending time working through what some of the intellectual property that exists within that plan that we can best leverage the talent that we have in that plan and the ability to uniquely claim Australian made. We are one of very few companies now in the sector which are 100% Australian owned. And so we feel like that it continues to be — that level of providence is a really important key differentiator for us. And that links back to our innovation, manufacturing capability.

Our culture, we — you’ll hear us talk a lot about being purpose-led and performance-driven from here. There’s a good tension point that exists between being a company which has a very strong sense of purpose and passion for natural health and one that needs to deliver stronger business outcomes. And so that speaks to developing our culture in a new and different way.

The third area, being a partner of choice. And partnerships not only exist in terms of our brands and our products, but also in terms of our retail partnerships, making sure that we’re an ethical partner, that we are doing the right thing when we’re talking about our suppliers and some of the other partners that we have in terms of sourcing products as well. So there’s — in a number of different areas, taking this idea of being a partner of choice very seriously.

And the fourth area is around education and thought leadership. I mentioned the institute. This is something that we see as a key competitive advantage for us over here at the Blackmores Group. We have a huge library of information that’s been built over 87 years. It’s housed in our institute. It covers all of our brands. And as we think about the idea of pet as a key important part of the family’s health outcomes, we also have a lot of information around the role that pets play and what products and holistic health solutions we can provide to the family that have a pet and also, more importantly, on the human side as well as we think about vitamins and dietary supplements and complementary medicine in general.

Always to be underpinned by an obsession with margin. We haven’t — we’ve mentioned a few times, I think you’ll hear this a lot from Gunther and I over time, but certainly being obsessed about gross margin. It’s the fuel for growth. It’s important that we continue to build our gross margin. That allows us to invest in our people and our brands. And when we’re in the business of building brands, then it’s important that we have programs which are consistent and deliver ongoing levels of gross margin that allow us to invest.

In terms of our 3-year goals, we’re really highlighting our 3-year goals around 6 key areas: consumers, growth, people, value, education and sustainability. I — just in the interest of time, I won’t go through each of these 3-year goals. But what I would say is it does come back on to the point that I made earlier around having the consumer and practitioner at the heart. You’ll hear us talk more about the consumer than ever before. We have great products over here at the Blackmores Group. But really, it starts with having the right consumer understanding, the right consumer insights and meeting those consumer needs. So really having brands that are the most loved, trusted and chosen brands in the categories in which we play are critically important.

Sustainability is also — you’ll hear more and more from us around delivery of our sustainability goals. These are 3-year goals. So one of our main goals. There are 17 strategic development sustainability goals that we have — that our strategy is linked to, but one in particular is around the ability to head towards being carbon neutral by 2023. We’ve already made great progress with some of our renewable energy contracts we’ve just signed in the last 3 or 4 months. And we do have targets on our headquarters and some of our administration sites, but we’re looking at our total supply chain as well. So these are areas that we continue to focus in on.

And last but by no means the least is in making sure that we deliver shareholder return ahead of the market, and that’s really having a keen focus on earnings per share and return on invested capital.

So just diving to the strategies. We have 4 key priorities that we’re looking out over the next 3 years. I’m going to step through each of these 4 priorities now. The first one is rejuvenate Australia. You heard me talked about this in October at our AGM. We’ve really got — spent a lot of time since then getting more meat on the bone as it were in terms of understanding what are some of the key strategies and actions that allow us to rejuvenate Australia. And really, when we talk about rejuvenating Australia, it’s built around 4 key areas. One is delivering a superior consumer experience at every touch point. We’ll talk — you’ll hear us talk a lot more about how do we free up consumers’ and shoppers’ time in store through easier navigation, way-finding ability to find the right products at the right place at the right time. A lot of that is going to be done through renovation and innovation around our packaging, around claims. There’s a lot of work that’s going on around that at the moment.

The second area is around targeted channel strategies. Today, we had — we see mostly a fairly standard approach. And when you think about our customer interactions and promotions, we really think that consumers enter into different channels in a different way. They have a different psychology. So having the ability to have an offer in unique channels in a unique way is really, really important. So that’s something that we’re focusing with Ayumi and her team on in Australia.

And looking at areas where we see them, maybe vitamins and supplements are still relatively underpenetrated, and you’ll hear us talk more about this expanded practitioner base. That’s one area that we see has the potential to be — to have a much stronger offer.

And the last point there is around building capabilities in areas such as strategic revenue management. This is an area, again, you’ll hear Gunther and I talk a lot about. It’s making sure that we have programs in place where we are able to flex assortment, pricing and innovation in a way which will allow us to improve our gross margins. And that’s really a core capability of any consumer goods company. It’s one that is quite underdeveloped over here at the Blackmores Group, but it’s one which we’re quickly making up ground on in terms of acquiring and building capability and strategic revenue management.

In terms of the practitioner market, these practitioners — and as I said, the broader term of practitioners than you would have heard from us before, but the interesting point here is that 70% of vitamins and dietary supplement a pharmacy sells are dependent on a practitioner referral. Today, we call on roughly 4,500, 5,000 practitioners. What we call active practitioners is roughly 2,000 to 2,500, and they’re practitioners that are purchasing our products on a regular basis. What we see out in the marketplace is there is a much, much greater audience and level of practitioners that are interested in natural health solutions. Our ability to access those practitioners are really important. So the use of digital tools to allow us to get to a much broader practitioner base is something that we’re spending a lot of time developing right now. If we can create a customer experience using digital, we believe that there’s an opportunity here for us to access more practitioners than ever before. And if we can access more practitioners, provide education and products which will allow them to better serve their patients in their clinics, not only will it allow for a better experience for patients generally, it will improve health literacy. And then convert — as I said, that could convert to pharmacy sales as well. So we see that as a big driver.

We’ll go to the next slide, pet. You’ve heard me talk a bit about pet already. So to give some numbers here, the pet category in Australia is worth just under AUD 4 billion. It’s a big and fast-growing category. We have one of the highest household penetration rates of pet ownership in the world. We have the — one of the highest levels of involvement with our pet. So supplements and vitamins and dietary and nutritional aids is something that is really high on the agenda for pet parents.

The second area that we look at, if we look outside of Australia, is just in pet supplements in China alone, it’s currently a $116 million category, and it’s forecasted to more than double by 2024. Just an interesting fact, in Double 11 in November last year, there was more money spent on pets on Double 11 in China than there was on children. So this really is a phenomenon that is really taking off in a number of different markets, in China in particular.

We see there to be high synergies between our know-how in serving practitioners, in vitamins and supplements, in the allied health channel. And it aligns very well with the way that we can serve vets in their clinics and provide information around the benefits of supplements.

The next strategy I wanted to talk about is delivering new growth. When we talk about the opportunities outside of Australia, there are many, many choices that we have here. In order to be more choiceful, one of the things that we are — have decided on is we do want to invest more in Indonesia. If we look at Indonesia, it’s going to be the fourth largest economy in the world by 2050. There’s more than 260 million Indonesians, of which the majority of those Indonesians are of Muslim descent.

If we have a look at our capabilities in Braeside, we, today, have halal certification in the Braeside facility. And we are working with our Kalbe Farma partner in Indonesia around opportunities to look at developing products for different cultural needs in Indonesia. And so we see this as having a huge potential.

I think the other thing to register here is in some of these markets in Indonesia, Malaysia and in India, they have some of the youngest and most influential consumers in the world, in particular, around health and nutrition. So being able to access those consumers at the point of market entry and offer them Australian-made products of the highest quality standard, we believe, allows us to have a long and prosperous sustainable innovation program for some of these markets. And being fully integrated now means we have more opportunity to do that within our Braeside facility.

The next strategy is — or the next strategic priority is built around the modern career woman. If you just allow me just a minute, I just wanted to introduce the modern career woman. This is highly discerning consumer in China. They — we know through our studies with the Tsinghua University, in the green paper around career women that Lesley Braun and the institute have done recently that 85% of these women are highly stressed, feel pressure and tension balancing work and the home. I don’t think it’s anything probably new to the working career women that we have on the phone here today. But I think in the China context, the difference here is the social pressure that is felt by these women and the responsibility that they have for the broader family needs. So not only their immediate family, their husband and their children, but their grand — but their parents, their husband’s parents and the extended family. They are the gatekeeper for the family decisions on health-related choices. And if we were able to better serve this modern career women, there’s an opportunity for us here to develop much higher value consumer propositions that we can then export to other parts of the world.

So the idea here is, if we go to the next slide, that we will be — we have already made the move to initiate the China innovation center around modern career women. We are in the process of setting that innovation center up. That will allow us to properly invest in people and capabilities and superior consumer understanding and looking at different ways of bringing product, packaging and formulations to market for China. It is our focused strategy around premiumization. These women, if we are able to develop products that they see as high-value and superior, they are willing to pay more, and we’ve seen that in a number of other categories. And so we think that this is an area that has great potential.

The other thing to note here is by focusing on these women and around their family needs, there is distribution opportunities that exist within different — new and different channels. One of which is, what, the term mom-and-baby stores. If you go to a hospital — if you go to hospitals in China, every hospital has — within the precinct, has 2 or 3 mom-and-baby stores around the hospital. And these are an integrated part of the health system in China and one of the fastest-growing channels in China today. So looking at ways of accessing that mom-and-baby channel is another opportunity for us as we think about the modern career women.

The last priority but one of the, I guess, most important is building a world-class organization. In order for these strategies to come to life, it requires us to step up our investments and our focus on building a world-class organization. There’s really 3 areas when we think about world-class organization at the Blackmores Group that we’re going to focus on going forward. So the idea of being purpose-led and performance-driven, as you’ve heard me talk about it earlier, there are programs in place with — that are building off an 87-year history around being one of the most purpose-led companies in the country. Having the ability to manage that in conjunction with more of a performance-based culture is something that myself and my executive — my new executive team are really focusing on resolving that tension. And that’s something that is exciting for the group over here. We’ve gotten great feedback already from our — from the organization on being able to manage that.

The second area is around education. I think here, we’ve mentioned it earlier, but not only is it a strength in our sector for improving health literacy, but I think more importantly, it’s how do we find ways to deliver education as a key driver of consumer and category value. And what I mean by that is we know that in countries like Malaysia and Thailand, where we have product advisers who are in the stores talking to consumers directly, an ability to drive a better education programs, something that’s easy for them to transfer in terms of communication to the shopper, we know that, that improves closure rates in those stores. So leveraging some of those capabilities in some of our emerging markets is one example. There are other examples. If we can better show up at our retailers with information around the category that will allow them to move away from just price activity to looking at more value-added promotions, then that’s something that we believe education has a big role to play.

I think the third area is really around how do we further democratize this idea of understanding natural health and lifting health literacy. So there’s a role that we play in the community, but also there’s potentially a way of monetizing that longer term. So that requires different business models and different thinking, and that’s something that we’re spending time working on right now.

In terms of driving greater value across the business, which is the third area of building a world-class organization, I do want to spend just a minute or 2 just talking about what we mean by driving that greater value. There’s really 5 key areas around leading value position, and Gunther mentioned one of them earlier, which was integrated business planning. This is a process which underpins everything that we do over here at Blackmores when we’re running our business. It’s an end-to-end process that becomes really much more important as we think about being a vertically integrated manufacturer. It helps us to ensure that we have right levels of inventory. It helps us to — it allows us to better manage capital. It also allows us to ensure that we have high service levels to our customers.

This is a program that was initiated about 6 months ago. It takes some time to bed down, but the good news is that we’re making a lot of progress. We see that in some of the indicators within our business, one of which is, in particular, is around inventory. We see that coming under control over the last 3 to 6 months. So more of that to come, but the integrated business planning is an important driver of value.

The second is manufacturing, and we talk about make versus buy. A large proportion of our manufacturing will come from Braeside going forward, but we do still see there to be opportunities to partner with contract manufacturers. Our new pack formats, new ingredients, areas of manufacturing and consumer-led product offerings that we may not necessarily be able to do in Braeside. So we don’t — we’re not sitting here suggesting that we’re going to do 100% of our manufacturing from Braeside. A large proportion of that will be in Braeside, but certainly having the flexibility to be able to access other manufacturers is another important part of our strategy.

And the third area is around value engineering. And this really speaks to the design of our products. This is having premium products with great packaging, ones that is really desirable in the hand. So how do we think about some of the visual cues, some things around tactility and engagement with consumers, that requires a lot of different thinking. We need to do that at the best possible cost as well. And I think one of the big benefits of having Braeside is the fact that we have a lot of capabilities not only in product development, but also in packaging and in things like soft-gel formats, so how do we think about best utilizing those capabilities in a more premium but also more cost-efficient way.

The other 2 areas, procurement and handling, this is built really around warehousing, freight and strategic sourcing. If we think about strategic sourcing, this is an area linked back to our sustainability goals as well as we think about traceability along the supply chain, making sure that we continue to source the highest quality ingredients for our products. So this is an area of real focus for us.

Next slide. So really, I mean, that’s — they’re the key priorities for our company as we go forward. The message that I wanted to leave you with it, maybe I could go to the next slide, is really these — focusing on these 6 key areas. We’ve got a new management team in place. I’ve taken the opportunity with that theme coming in to do our strategic review. That is completed, so we don’t need to waste any time on reflecting on strategic priorities. We presented this to our organization yesterday and we are already in motion in terms of getting after these strategic priorities. Certainly, the most important thing is going to be the execution of these strategic goals and priorities. And that’s something that, within our team here, we’re very focused on ensuring that we have the right indicators in place that we’re measuring and tracking progress, and if need be, we need to adjust as we go along. But certainly, this is the foundation for the next 3 years.

We’re very excited about the possibilities. And when I spoke to the Board just yesterday as well, I mean, we reconfirmed the fact that we are — we feel that it’s a very bright and exciting future over the Blackmores Group. And I think as we get through coronavirus, we’ve obviously got a short-term challenge on our hands. Everybody has, not just our company, but I think the entire world. I am confident that as we come out of that, that there will be a high level of health consciousness globally, and I think Blackmore is best positioned to help solve some of those problems. So it’s a very exciting future.

So just with that, I’m going to stop and thank everybody for their attention today. And I know it was a lot of information, a lot of detail, but I’d like to open up to questions now.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Russell Gill from JPMorgan.

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Russell J. Gill, JP Morgan Chase & Co, Research Division – Head of Emerging Companies for Australia and New Zealand [2]

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A handful of questions. I just want to firstly talk about your comments about being obsessed with gross margins in the business. The margins you’re generating are certainly relative to what I would compare or deem comparable companies actually seem quite healthier gross margin level. It’s actually the — I guess, the EBITDA margin level where you fall down a lot. You also talked about the Blackmores Institute, which effectively funds the entire industry in terms of education and how you make that more commercial going forward. As we roll forward 3 to 5 years, what sort of EBITDA margins should this business actually be generating? And can you just maybe give a bit more detail about how that — you can commercialize that Blackmores Institute?

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Alastair Symington, Blackmores Limited – CEO, MD & Director [3]

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Okay. Russell, thank you. This is Alastair. Thanks for the question. Some good questions. I’ll just — I’ll try to step through. I think there’s 4 questions there. So I’ll do my best to answer those questions.

So just on Blackmores Institute, I mean, in terms of the commercialization of BI, that is something that Lesley and I have spent quite a bit of time looking at over the last couple of months. We see there to be — there’s a couple — there’s kind of 4 areas, I would say, around the institute where we see there to be able to add value. The first one is around digital tools and education that’s customer-facing. And I mentioned through the presentation our ability to be able to better provide more information to a practitioner as they’re serving a client in their clinic. We believe that they are better equipped to talk about natural solutions because they are getting consumers asking questions in this area. It’s really consumer-led demand. What we find now is if they ask about magnesium or turmeric or any of the ingredients that are sort of top-of-mind magnesium, we find that the general level of practitioners, whether it’s a physio, an osteo, a dietitian, they’re not confident to be able to recommend. So if we are able to provide them with better information and give them more confidence in the recommendation, not only will it help improve the revenue within their clinic if they’re able to sell those products, but they can also then go and recommend to a pharma system. We have a 92% average weighted distribution of our products in pharmacies in Australia. So there’s really an ecosystem that we can access with the help of BI around better education. That’s one example. I mean, there’s many, many others in terms of commercialization of BI that we’re looking at.

In terms of gross margin, you comment around the fact that we seem pretty competitive at a gross margin level. Gross margins are moving fast. So over time, we could be seen to be competitive today, but everybody needs to move up the sort of price scale in order to generate high gross margins. We — I mean, at the AGM, I shared something where we’ve done benchmarking. And we said we’re about 5 points below the competition in terms of gross margin. But certainly, from my point of view, having been in consumer goods for 25 years, I think, certainly having the ability to be in the range of somewhere between 55% to 60% gross margin in our sector, in our category, is the range that I want our products to be in in order to best fuel the investments that we need for the products and people.

EBITDA margins. I mean, maybe I’ll ask Gunther to answer on the EBITDA margin. I don’t know that we give guidance on EBITDA margins, but maybe, Gunther, do you want to…

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Gunther G. Burghardt, Blackmores Limited – Group CFO [4]

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And we’re sort of looking at an EBIT margin rather than EBITDA. And what we would like to see our strategy deliver over 3 years is to get north of 15% in EBIT margins. We want to do even better than that, but we’ll put a marker in the sand at around 15% by 2023.

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Russell J. Gill, JP Morgan Chase & Co, Research Division – Head of Emerging Companies for Australia and New Zealand [5]

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Great. Second question, through the accounts, it looked like you dropped $20-odd million worth of sales through Chemist Warehouse. You’re down almost 23%. Can you just give us a feeling whether that’s what you deem representative of the market? Or do you think you under or over-indexed in Chemist Warehouse over those last 6 months?

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Gunther G. Burghardt, Blackmores Limited – Group CFO [6]

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Chemist Warehouse, and I think what you are seeing there is just part of the export story into Asia. There’s no question that there’s a proportion of our business in Chemist Warehouse that’s been impacted in the first half. And as we said when we came out on the 12th of February, we do expect that impact to increase a little bit in the second half as coronavirus affects the extent to which consumers are purchasing here in Australia and going overseas. So it’s a brand more than others coveted by Asian consumers. Well, I think each brand, each major brand has some relationship to Asia, and ours is certainly well known over there.

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Russell J. Gill, JP Morgan Chase & Co, Research Division – Head of Emerging Companies for Australia and New Zealand [7]

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I mean, in the accounts this time, it doesn’t — I mean, correct me if I’m wrong, I can’t see any detailing of rebates this time around. Could you just talk through around rebates? And then, I guess, how that moved in the last 6 months and whether there is an impact to that — to the Chemist Warehouse?

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Gunther G. Burghardt, Blackmores Limited – Group CFO [8]

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Yes, we’re not disclosing anything beyond the net revenue side, and that’s where we want to get people focused. And internally, as Al talked about our obsession in margin, that focus on unit net revenue is where we’re at. I think the one important thing to understand is the business had a history in previous financial years of doing large case deals at the end of the periods, and we did not do that in December. So part of our result is about trying to pull off some of those extreme case deals. Clearly, that is an impact to revenue. But as we get ready to bring price stability to the business and have a platform on which our revenue management can grow our margins, getting out of some of those in the right way, which also works for our customers, is going to be an important balance to strike.

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Russell J. Gill, JP Morgan Chase & Co, Research Division – Head of Emerging Companies for Australia and New Zealand [9]

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And just 2 final things. Just — Al, you made comments about, originally, the very first comment was the strategy previously been Australia developed and then Asia-follow approach and you really want to shift to a China developed model for a lot of the product. You mentioned partnership. Is that something that you will look to do organically in terms of — obviously, you’ve got the Institute over there, but put more money in investment into that? Or is that something where you see — ideally that it would be involvement with a partnership approach?

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Alastair Symington, Blackmores Limited – CEO, MD & Director [10]

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Yes. It’s a good question, Russ. I mean, I think this question has come up over a long period of time. When — I think I said it a couple of times since I’ve been here. My experience, having worked and lived in Asia for 15 years, around partnerships is we’re more of a network model than a sort of a one-size-fits-all approach. So certainly, where we look at opportunities within countries like China — I mean, you asked me about China. So specifically on China, where we can look at opportunities around distribution, regulatory support and then direct to consumers, that’s where we would look at opportunities to partner.

We are in discussions with a couple of different partners around some of those areas. That’s a combination of partnerships rather than sort of one partnership that would solve everything, if I could say it that way. So that’s — and those discussions are well advanced. So when we — if we have a situation where we want to announce a new partner, then obviously we’ll bring that to the market as soon as that’s there.

But in the meantime, we’ve appointed Kitty Liu, who is our Managing Director for China. She started at the beginning of December. Our focus at the moment is to make sure we’ve got the right leadership in China because no matter what partner you choose, if you don’t have the right leadership on the ground focused on the company, on what’s important for our company, it makes any partnership situation very challenging. So we need to have stability at leadership. We need to have people that we’re confident on. And that’s one of the reasons why I appointed Kitty and had her report directly to myself as part of the executive team so we can manage that more intentionally going forward.

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Russell J. Gill, JP Morgan Chase & Co, Research Division – Head of Emerging Companies for Australia and New Zealand [11]

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Just a very final question. I know we did chat a couple of weeks ago, but given your ownership now of Braeside, you probably get a bit more insights, I guess, into the raw ingredient marketplace. We’re hearing increasing, I guess, supply chain issues on certain raw ingredients, particularly in the quality, say, for instance, in vitamin C. Can you talk through whether you’re seeing any challenges in that ingredient marketplace? And specifically, what ingredients you’re seeing either quality issues or pricing or large price inflation?

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Alastair Symington, Blackmores Limited – CEO, MD & Director [12]

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Yes. Look, I’m not sure around the quality question. I mean, we’re not seeing huge deviations in standards and qualities of ingredients at this stage. I can’t really comment on that. What I can comment on is the fact that, in particular, just most recently, over the last 2 or 3 months, we’ve seen challenges starting to crop up with certain raw ingredients and raw materials. And we mentioned these ingredients — you just mentioned vitamin C. We don’t necessarily see a big challenge on that. We did have a situation where one of our suppliers in — on glucosamine, their factory — we get some products coming from China. We did see some of those factories start to close obviously over the last couple of months since Chinese New Year. So there were some challenges, but since in the last week, we’ve seen those factories start to open up again. So we’ve now taken that kind of off our red list and — but we’re still monitoring glucosamine. So supply is patchy, I would say, based off just global supply constraints built around the issues that we see on coronavirus. For quality, I don’t — I’m really — I don’t have anything that I can comment on with regards to quality.

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Operator [13]

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Your next question comes from the line of Sam Teeger from Citibank.

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Sam Teeger, Citigroup Inc, Research Division – Head of the Australian Small Caps Team & Director [14]

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Thanks for the very comprehensive presentation. Just wanted to make sure we get the message correct around the $50 million cost-out. Is another way to think about it is whatever EBITDA you’re going to report in FY ’20, your FY ’23 EBITDA will be at least $25 million higher, given you’ll be reinvesting half of the $50 million?

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Gunther G. Burghardt, Blackmores Limited – Group CFO [15]

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Yes, absolutely. I think that I want to just caution to say it’s not the cost savings. So the $50 million is a combination of leading value proposition. And what Al talked about there was how do we design our products appropriately, how do we drive savings in our Braeside facility and how do we simplify our OpEx. So cost is certainly a big portion of that, but there’s also growth platforms in that $50 million. So I think the right way to look at it is, yes, the $50 million on an annualized basis will appear in F ’23, a combination of costs and growth, and then we’ll reinvest 50% of that predominantly in Asia in capabilities, geographies and strategic priorities.

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Sam Teeger, Citigroup Inc, Research Division – Head of the Australian Small Caps Team & Director [16]

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Got it. And then just in terms of India, just a couple of questions on this market. Firstly, the balancing going into a new complicated market when there’s still so much untapped opportunity in China and Indonesia, how much cost do you expect to spend in the testing phase of the market? Will you need a local partner? Will the testing start in the 6 months of December or the 6 months to June ’21? And what’s your initial expectations of how long you’d be in a test phase for?

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Alastair Symington, Blackmores Limited – CEO, MD & Director [17]

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Okay. Great. It’s Al here. I’ll — yes, I’ll try to tackle all those questions. So certainly, when we look at India, as you mentioned, I mean, it’s very complicated and sometimes a difficult market to enter. I mean, I’ve had a lot of experience with the Indian market at my time on Procter & Gamble. And even P&G, they’ve — this was difficult for them at times.

In terms of our test market, the thing with this category is, if you break it down, the total category value in India is roughly USD 3 billion. So if you have a look at the size of the Australian market versus the India market, it’s pretty much the same if you look at it sort of at a macro level. When you drill down into that, the kind of what we call the addressable market, which is the kind of premium end of the market in vitamin, it’s quite a bit more than that. So — and we see it focused around what they call 9 metros, so 9 capital cities or 9 cities in India. Our test market will be focused on a small number of those cities with a sort of a hand-selected number of retailers. Because you can imagine in — I don’t know if you’ve been to India, but there’s thousands and thousands of kind of little independent stores. The retail environment to shop vitamins and complementary medicine is quite varied and quite diverse. We would only put our products into the stores where we feel confident around having the right level of education and store presence to create the right consumer experience around our brands. So that’s really a very kind of small number of stores, I would say.

And we also want to work with a retail partner that allows us to test and learn as we go along. So if we put products in a certain location, it may not necessarily work or maybe there’s an assortment that we thought, based off our consumer testing, we felt could deliver. But it’s not until you get into those retail environments that you start seeing EPOS sales. We know with confidence that it’s going to work. So it’s — we want to make sure that we test it out before we start over and start putting down a lot of money for infrastructure and setting up a large amount of infrastructure in a country like India.

We’re looking to do that in the first half of fiscal ’21. So as I said, it’s sort of a small test market approach as we enter into that market, but really — and then we’ve had some discussions with some local partners. And again, there’s big distributors there. There’s companies that are interested in Blackmores as part of an assortment as they think about cost to serve in a very fragmented retail environment. But for us, it’s really, as I mentioned, a small number of retailers, small number of cities, sort of test and learn as we go.

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Sam Teeger, Citigroup Inc, Research Division – Head of the Australian Small Caps Team & Director [18]

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And how much are you willing to invest in that trial?

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Alastair Symington, Blackmores Limited – CEO, MD & Director [19]

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We’re not — can’t really put a number — I mean, I’m not going to really put a number on that because we’re talking — as I said, it’s something we’re working with the retailer. So there’s going to be a combination of retailer’s investments and then our investment. So we don’t — can’t really share a number here, Sam, on that one.

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Sam Teeger, Citigroup Inc, Research Division – Head of the Australian Small Caps Team & Director [20]

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Right. And last question just on Indonesia. These customized products are going to be making for the market there. When will they be ready? When will we start seeing first sales? And can you maybe just give 1 or 2 examples of products?

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Alastair Symington, Blackmores Limited – CEO, MD & Director [21]

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Yes. So we’ve got — I mean, we’ve got a pretty good range of products already for Indonesia with Kalbe Farma. Because it’s a joint venture in Indonesia, we actually have a separate lineup already with different packaging just because of that labeling that we need for Indonesia. There’s separate regulations for Indonesia as well that we need to adhere to. So we already have, I would say, a pretty decent assortment.

When we develop new products, there’s — we need to work with the local authorities on what we can communicate around the products which are halal-friendly. So — and that can come through in claims on pack, that can come through in terms of the communication that we provide to the consumers. Today, we see that market — there’s a small number of international manufacturers that enter into the market. We have a lot of local competitors. So we are looking at what the local competitors are doing and where we see we can make an offer that’s different and unique as an international retailer that we can also — that also speaks to, I would call, being more halal-friendly and just — then we will go after that.

The good news is we have capabilities in Braeside around vegan and vegetarian capsules. So even outside of halal, we also have a big capability in vegetarian and vegan-friendly products, which also serves well for markets like India. If you think about the number of vegetarians in India and you think about the products that they’re looking for, they’re not looking for gel capsules which are manufactured with porcine or bovine, they’re looking for vegetarian alternatives. And we have those capabilities in Braeside, and we can further develop those capabilities and meet those market needs.

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Operator [22]

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Your next question comes from the line of Mark Southwell-Keely from Select Equities.

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Mark Richard Southwell-Keely, Select Equities Pty Ltd. – Director, Senior Advisor, Dealer and Head of Research [23]

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Just a couple of quick questions. In relation to the strategy that you have launched for modern career women in China, can you just maybe talk through some of your current SKUs that might be applicable to this particular strategy or whether or not you think you might need to develop new SKUs? And also any regulatory requirements in terms of registering those SKUs of products?

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Alastair Symington, Blackmores Limited – CEO, MD & Director [24]

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Yes. Mark, good to hear your voice. I — and great question. We — in terms of modern career women, I mean, we see there to be huge opportunities to develop a number of SKUs. So I think when we think about the career women through a life stage, and just sort of humor me here for a minute as I take you on the journey of the modern career woman, but certainly if you think about entering into the category, she’s thinking about — not only is she working, but she’s also thinking about having a family. What are some of the products that we can get — allow her to not only perform in her daily work with her — and with her family, but also then allows her the right entry point into thinking about preconception. So there’s products in that area. She then moves into pregnancy. There’s a whole range of products we get off of during pregnancy. Then through breastfeeding and then afterwards in terms of her — the health of her family and the health of her infant.

So if you think about it along a life stage and along a journey, there’s definitely a lot of — there’s so many products and alternatives within natural health we can provide to her today. We offer some of — we offer, let’s call them, sort of one-stop shop almost for natural health today. We have Pregnancy & Breast-Feeding Gold, which is one of our top sellers, but that’s really the tip of the iceberg. There’s so many other offers that we can make in that marketplace. And when we go onto Tmall international, we have a look at some of the other products that are on offer in this marketplace now. There’s a whole range of new offers and alternatives entering the market. We think that as an Australia-based company that has heritage in this area, that we can offer solutions that are very unique to her along that life stage.

So definitely, there are products we can develop. And that’s part of the reason why we need to have this innovation center in China because we need to be closer to that consumer and understand her needs. And that’s certainly something Kitty has great — a great amount of experience in developing, having coming — having come from Reckitt Benckiser and Mead Johnson.

On the regulatory front, Mark, this is — a lot of those products will be designed initially for cross-border e-commerce for the free trade zone platforms and — but — and then over time, we’ll make sure that we’re registering the right products through our wholly-owned foreign entity structure for mainland consumers. But as we — we are exploring some partnerships, I would say, in terms of access to mom-and-baby stores. So how do we have an online-to-offline or an omni-channel experience for the modern career women where she can visit and she can access products and talk to a product adviser in a mom-and-baby store and then maybe order online. So there’s an auxiliary-type environment that we can set up for her as well. So that’s more of a kind of a 2- or 3-phased approach as we think about entering the market with cross-border e-commerce and then in terms of the offline environment in domestic.

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Mark Richard Southwell-Keely, Select Equities Pty Ltd. – Director, Senior Advisor, Dealer and Head of Research [25]

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And just in terms of the pet supplement strategy in China, can you just talk us through any particular registration requirements that might be applicable to that strategy?

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Alastair Symington, Blackmores Limited – CEO, MD & Director [26]

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Yes. Look, we’re actually very early days on exploring the regulatory requirements. There is some restrictions around export of kangaroo made into China that we’ve — and some of our products do contain kangaroo mix, so that’s one area that — but that’s easily substitutable with other alternatives. So we’re looking at what some of those regulatory challenges would be.

We don’t see them to be as onerous as, let’s call it, the human vitamins and the regulatory controls around product safety for people as there is for pets, but it’s still very early days in terms of our assessment on that one. But certainly, we do see there to be — cross-border e-commerce is a thriving and fast-growing segment for pet products. And that’s something that, typically, you don’t see a lot of regulatory controls around or at least to the extent to which you would think about importing products into China.

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Operator [27]

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Your next question comes from the line of Larry Gandler from Crédit Suisse.

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

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I want to continue the conversation on China if I can. You’ve got a slide in your chart actually around Australia where you talk about 80% unprompted awareness or prompted awareness. I’m just wondering with regards to the investment you need to make up there in marketing, what sort of awareness levels is there broadly of the Blackmores brand in China?

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Alastair Symington, Blackmores Limited – CEO, MD & Director [29]

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Yes. It’s a good question, Larry. This is Al. We — I mean, we monitor through platforms because most of our sales go through platforms today. When we look at awareness and intent, we measure that through the data sources we have with — with Tmall international.

Now I’d say the market in China is highly fragmented. I mean, we have a 20 — sorry, we have a 15% share in — of domestic sales in Australia. The market leader — and we’re the market leader here in Australia. The market leader in China is less than 7%. So you’ve got a lot of individual small players.

I think the awareness levels of Blackmores generally is pretty good if you talk to people on the street, but when you look at the number of products that move through the platform and the way that they measure awareness on Tmall international, it’s relatively low. So in order to invest in building awareness of our brands on the platforms, it requires us to have different and unique products. We need to have a far more active innovation program than we do today. Typically, as we’ve said in the deck, it’s more being China follows, Australia leads, and what we’re finding is in that — with that situation, you’re really leaving it up to chance for those products to really make it up the search criteria on Tmall international. You really have to be very intentional about the programs built with Alibaba and making sure that those products are unique and different enough to resonate with Chinese consumers. Chinese consumers these days, brand is — brand awareness is pretty much linked to the newest product that you have in the market, let’s put it that way. So certainly, innovation is really critically important when we think about building awareness in China and that’s really the focus we want to have as we go forward.

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Larry Gandler, Crédit Suisse AG, Research Division – Director [30]

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That’s interesting. So just with the reinvestment, did you guys contemplate maybe all of the $50 million should be reinvested? Is there a — was there a revenue price there that you felt wasn’t attainable? How did you arrive at half would be delivered to the P&L?

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Gunther G. Burghardt, Blackmores Limited – Group CFO [31]

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Yes. And I think that we did it based on how much investment do we need to be successful in addressing our strategic priorities. And we wanted to make sure, when we looked at half, that covered some of the geographic priorities that we had like Indonesia and then Al started to talk about India, but then it also talked about the 4 strategic priorities we articulated, modern parenting in China, et cetera. So how much consumer investment do you need to address those and grow and then what do you need in terms of feet on the street in the geographies in Asia in particular? And actually, we found that with that $25 million on an annualized basis, that would be enough to make sure those priorities grew well.

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Larry Gandler, Crédit Suisse AG, Research Division – Director [32]

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So the $70 million that was in F ’19, selling and marketing, is that something that lifts by $25 million over the next 3 years?

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Gunther G. Burghardt, Blackmores Limited – Group CFO [33]

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Part of that will be — and part of the $25 million will go to OpEx and part of it will go to selling and marketing. So the combined OpEx and A&P, we’d call it, will rise by $25 million. Partly offset by savings, of course, from the $50 million.

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Larry Gandler, Crédit Suisse AG, Research Division – Director [34]

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Yes. Okay. And last question for me. With the mom-and-baby channel, I had this vague notion that the requirements for blue hat was not as stringent as in the pharmacy channel and you guys might actually be able to sell on shelf there. Is that incorrect? Or can you just fill me in on sort of the lay of the land in that channel?

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Alastair Symington, Blackmores Limited – CEO, MD & Director [35]

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Yes. Larry, the blue cap criteria is not really channel-specific or retail-specific. It’s a requirement of the market. So we’re not — to my best of my knowledge, that there’s not a different — there’s not an exception for mom and baby on registration. I think what you do find in register — what you do find in the mom-and-baby stores is that in some of those stores, they will have products which are not blue cap-registered, but they don’t have product in them. So they’ll essentially be empty bottles, so it would be packaging, and though you’ll have a product adviser in those stores. They’ll talk to you about the product. If the individual or shopper wants to buy the product, they then have to go onto the website and order it from cross-border e-commerce. So they can’t take the product away. They can’t take it out of the store. They have to then have it shipped to their home off cross-border e-commerce. So that’s one way around kind of the regulatory because you’re not actually offering product in the store.

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Operator [36]

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Our final question comes from the line of Richard Barwick from CLSA.

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Richard Barwick, CLSA Limited, Research Division – Research Analyst [37]

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I want to ask you about the — you made the comment about the level of promotional activity in Australia being unprecedented. Just to understand the drivers there and where you think they might go because obviously as the market leader, I would assume that some of that, perhaps Blackmores might have been guilty in driving some of that level of promotional activity in the past and leading us to the situation where it is now. Is that a fair comment? Or are we seeing that being led by competitors or, in fact, the retailers themselves? And ultimately, if you’re trying to sort of wean yourself away from this being such — or so promotionally-led, how long and how sort of painful would that process be?

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Alastair Symington, Blackmores Limited – CEO, MD & Director [38]

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Yes, Richard, great question. I think it’s all of the above. Honestly, I think I can’t say that Blackmores has not contributed to this level of promotional spending. I think, certainly, the challenge in a market like Australia where you have very highly concentrated retail environment, that pricing activities do get mimicked quite quickly. And certainly, the retail offer in the market is not that dissimilar with moving from discount pharmacies or grocery to traditional pharmacy.

I think, certainly, for us, we talked about prioritizing certain channels. And certainly, there’s — that’s part of the game now is to ensure that you remain competitive versus your competition with regards to promotions, but what we’d like to do at a time is either find different ways of accessing channels where pricing is not as much of a differentiator. So for example, there are products — if you’re buying vitamin C, that’s a fairly — I think most people would understand the benefits of vitamin C and they don’t need a lot of education and they can probably — a lot of that choice is made based off a combination of access and price, but then if you’re talking about products like Insolar, which is a product which we have which caters to a very different area of the market, they’re not as price-sensitive. So you would like to see that more in a traditional pharmacy where you’ve got a pharmacy assistant being able to take you through the benefits, educate the shopper, gives them an opportunity, the shopper, to ask questions. They’re not necessarily going to be that sensitive to price. So there are more products that we can bring to market that will allow us to have that type of experience with our shoppers rather than just this level of commoditization that we’re seeing just generally.

And I think the second point I would make is these category-wide promotions, which is something that we have invested and at the moment we’re involved in, again, how do we find ways of looking at our assortment in a different way. So rather than just one blanket price off across the entire Blackmores range, there’s sections within the range that we exclude from those types of promotions because they don’t necessarily fit a price sensitivity, you can sell those products without a discount, and how do we offer value to the consumers in a different way. So it’s not something that we, I’d say, we’re ambitious enough and silly enough to think we’re going to change overnight, but certainly, there are some things that we’ve seen work in markets like the U.K. and the U.S., where Gunther and I have had some experience, and some other markets where if you work at retail and provide them with different solutions, we partner on those types of ideas, it’s good for the retailer, it’s good for the consumers and it’s good for Blackmores. And that’s really the win-win we’re looking for.

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Richard Barwick, CLSA Limited, Research Division – Research Analyst [39]

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Yes. I mean, it does seem crazy when you’ve got different price sensitivities across the category to offer a blanket percentage off. Are retailers alert to that and they’re open to a more refined approach to discounting or promotions within the major retailers?

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Alastair Symington, Blackmores Limited – CEO, MD & Director [40]

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I’ve had a number of conversations with a number of retailers since I started. And I mean, yes, the answer is they are open to it. They also see this as something which is a bit of a slippery slope. And again, there’s going to be certain parts of the range, and vitamins in general today are seen as a traffic driver for some of — in particular, around health and beauty. So is there enough — there’s certain offers within vitamins that will continue to drive traffic, but then there’s other areas of our range, which, as I mentioned, are more valuable and we can create more — a differentiator in the market for the category, and that’s something that the retailers are very interested in.

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Gunther G. Burghardt, Blackmores Limited – Group CFO [41]

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And I think often, one of the strategies is bring them a test. If we’ve got some predictive modeling that suggests the retailer can have a good outcome and we can, too, to the extent we can test with some of our retail partners, it helps to drive these programs through.

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

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Okay. And just a really quick one on Braeside. You mentioned not necessarily 100% of your manufacturing would be moving to — would be coming out of Braeside. What sort of percentage is likely — and part and parcel of that, can Braeside actually — is it capable of producing everything you need in terms of its capabilities? Or is there a capacity limitation here?

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Gunther G. Burghardt, Blackmores Limited – Group CFO [43]

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Yes. Listen, we’re not going to give percentages that we’re targeting out of Braeside, but what I will say is that there’s going to be a few technologies that we’re not going to make in Braeside. If I look at things like our kids gummies range — I mean, Al talked about the modern career woman in China. There are some formats like gummies where it doesn’t make sense for us in the short-term to invest in building a lot of capacity in Braeside. So Braeside has some great technologies in soft-gels of all sorts and hard tablets. Those will remain the focus. We’ll get into different packaging formats for those and different sizes of doses, but a few things like gummies, as an example, we won’t bring there, not for short-term.

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Alastair Symington, Blackmores Limited – CEO, MD & Director [44]

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I think we’ve got time for one more. Maybe we might take one more actually.

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Operator [45]

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Your final question comes from the line of Anna Guan from Wilsons.

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Anna Guan, Wilsons Advisory and Stockbroking Limited, Research Division – Equity Analyst [46]

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Just a quick one, following on one of the previous questions on China, particularly around, I guess, the modern career women category that you guys called out. Is it fair to assume, I guess, majority of the investments you guys have allocated to China were primarily focused on this particular consumer group?

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Alastair Symington, Blackmores Limited – CEO, MD & Director [47]

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Short question, short answer, yes. Yes, sorry, I mean, just, Anna, there is — we see many facets to the modern career women. So I think Mark from Select asked a question earlier around what’s the type of range and lineup on SKU. So we call it modern career women, but it can be built around things like immunity, so how do you protect or at least build immunity around your family? They could be mental health and well-being. Could be a part of that modern career woman offer. Digestive health, I mean, there’s kind of a number of different areas you can enter into with the modern career woman. But certainly, that target group we see as being the main target group for China.

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Anna Guan, Wilsons Advisory and Stockbroking Limited, Research Division – Equity Analyst [48]

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Yes, sure. And in terms of, I guess, time-wise, when should we start thinking about first sales from, I guess, some new products launched in China?

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Alastair Symington, Blackmores Limited – CEO, MD & Director [49]

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That’s a great question. We have a big sales event coming up in November, which is called Double Eleven. It’s the biggest sales event in the world. We would like to think that we could have some products available for sale at Double Eleven. That’s the big — if we want to be more customer and consumer-centric, we have to make sure that we’re available at the big key consumption periods. And in China, the single biggest one is Double Eleven.

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Anna Guan, Wilsons Advisory and Stockbroking Limited, Research Division – Equity Analyst [50]

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Okay. Sure. And one last question. You talked about potentially divesting some noncore brands. How should we think about the, I guess, the current contribution — earnings contribution from them? I guess, you probably won’t put a number around it, but should we think about a modest contribution at the moment in terms of — in the context of group earnings or?

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Gunther G. Burghardt, Blackmores Limited – Group CFO [51]

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Yes. I would think about it as pretty modest. It’s not going to be something that’s hugely material. And it’s really about focus rather than transformation.

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Alastair Symington, Blackmores Limited – CEO, MD & Director [52]

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Excellent. Good. Well, thanks, everyone. We — great questions. Thanks for your engagement. It’s really been our honor to share with you the strategies for Blackmores going forward. And we look forward to interacting with each one of you in the not-too-distant future. So thanks for your time this morning.

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Operator [53]

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Ladies and gentlemen, that does conclude our conference for today. Thank you for your attendance. You may now disconnect.

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