Asaleo Care waves goodbye to its tissue business
Alan Kohler here with today’s CEO is Sid Takla, the CEO of Asaelo Care. Earlier this month their share priced popped up quite a lot from about 62 cents to above 90 cents following the sale of its tissue business which is basically the Sorbent tissues, they sold that to Solaris Paper for $180 million. It didn’t come anywhere near recovering the drop in their share price from $1.30 down to 70 cents, so their share price halved in July following a trading update which revealed terrible problems with that tissue business. Now they’ve sold it to a global business for quite a decent price, $180 million for a business that’s losing money, that’s not bad.
Asaleo Care goes back to the old Bowater-Scott which was eventually sold to Carter Holt Harvey. It’s had a checkered history, this business, but now it’s had a strategic review, they’ve sold that tissue business and now they’ve refocussed on some B2B businesses as well as Libra feminine hygiene and some incontinent businesses. It’s an interesting transformation that’s occurred, the share price has popped up a bit, the question is are they going to keep going and what sort of future have they got. Here is Sid Takla, the CEO of Asaleo Care.
Listen to the podcast or read the full transcript below:
Just before we get into the actual sale of your tissue business I just wanted to go back to the trading update you gave back in July which I guess previewed it in a way. It seemed to me what you were saying then was that you were getting squeezed between a higher pulp and electricity price, and the supermarkets who I don’t know what they were doing, that’s what I’d be interested to know exactly what was happening. You were sort of caught in a squeeze between those two things, werenn’t you?
Yeah, I think you’re right there, Alan. If you take a step back around what the key drivers were pulp has gone up over the last 12 months by 35% and our energy bill over the last two years has doubled. In paper making, being one of the largest paper makers in Australia, a major component of your cost structure is energy and when that’s doubled, and obviously pulp is the largest component, so to have such a significant increase in pulp – and I think the key this time around, it is a commodity cycle and we experience these rise and falls quite regularly.
I think the difference this time was just the speed of which that pulp price in particular increased within a six month period. It had gone up, as I said, 30%-35% and your ability to recover that in the trade is very difficult when it’s that sort of increase. Inevitably over a period of time you can but when pulp represents 30% of your cost and it’s gone up by 35% you’re talking about a double digit price increase. In an environment where obviously the retail market is tough and they’re both focussing on down pricing obviously that’s a key focus for them.
From my perspective one of the key challenges of the tissue market in this region is excess capacity and that’s why most of the competitors in that market become a slave to the demand in the market because you’re really focussed on filling your tissue machines. Yes, there is pressure from the trade and that pressure, from my perspective, has always been there. A big part of the decision behind this transaction is that there is excess capacity in the market and that always makes it difficult to take price when you have excess capacity in the market.
What you said in that July update was that during protracted negotiations with customers promotions were reduced and in some cases cancelled and significant volume was lost. Explain that, what actually happened?
I think it’s a normal negotiating tactic that it’s an option to cut out some promotions, and particularly the tissue category, Alan, over 80% of all our sales in tissues were sold on promotion. To lose that promotional activity for a three month period has quite an impact on our volumes. To be fair, as we went through those negotiations and came out the other end I feel that we were in a much better relationship with our retail partners and in fact since then we’ve actually gained additional skew opportunities, additional ranging in the categories.
It was a tough period and for a three month period we did lose a fair bit of volume but have come out of it the other end quite positive.
Given all this I don’t really understand how Solaris Paper is going to be able to make money out of this business when you couldn’t, having paid $180 million for it.
They are a global organisation, Alan, with a lot of vertical integration synergies, particularly being a pulp manufacturer themselves. They own both forests, manufactured pulp, manufactured paper throughout Asia and they are a producer of high quality finished goods. Their first benefit is the fact that they have got the vertical integration. The second element is the bit that I touched on a bit earlier around obviously taking out a major player in the market takes out a bit of capacity and then obviously just gives them then a bit of scope.just around decisions they make around pricing going forward.
I think just again having the scale of a global organisation they can leverage a regional footprint to really maximise their profit going forward.
You’re 36% owned by SCA or Essity, the Swedish pulp and paper business, you couldn’t get any synergies with them?
I think just regionally being one is the distance from a city. I think also when we look at some of the key strategic aspects that we wanted to introduce into the business going forward one of those, Alan, was to reduce the our dependence on the tissue business. Tissue prior to the transaction represented 70% of our overall portfolio, that from our perspective is just way too high in terms of trying to reduce the volatility in our business when all of that is really liked to commodity and I think globally ESSITY has a similar view around lessening its dependence on the tissue category.
Strategically for both of us we didn’t feel that longer term that having that sort of ratio in tissue was the right solution for us going forward.
Just talking about Solaris Paper you mentioned something about taking a player our of the market, is that what’s happening here, your business is getting taken out of the market?
No, that’s now what I’m saying. There are four major players in the market, by consolidating that it just creates synergies in its own. It was a conscious decision we made going through the strategic review of how we wanted to set up our business going forward. As I said, Alan, it was really around lessening their dependence on tissue. The other key component is the tissue category is very capital intensive both from a maintenance and strategic capex but also from working capital.
As I said, when you have 80% to 90% of your tissue category sold on promotion the amount of inventory you need to hold to support that type of activity is quite significant. In the presentation we shared with the ASX announcement we’ve disclosed that 30% of the capex that we used to spend in our organisation was directly linked to this Australian consumer tissue business that we’ve sold and almost 40% of our working capital was linked to that business.
You can start to get a feel, Alan, of the cash that we’ve freed up through that transaction and just how much of a less capital intensive business we have going forward. The categories that do remain, particularly around our feminine category of Libra, our incontinence category of TENA and our B2B business is which is supplied out of our New Zealand manufacturing facility. It’s a much lower capital footprint than what we’ve had in the past.
Yes, I can see what you’re seeing that with that kind of capital expenditure and working capital requirement if you get a loss of volume it kills you.
Yeah, it’s such a fixed cost structure, Alan, because paper machines effectively you can’t turn them off you could become a slave to that capacity and when a lot of that capacity had been going offshore demand had been going to offshore capacity and the local players were effectively fighting over a smaller piece of the pie. Obviously that puts pressure on pricing and so hence again that’s why we wanted to remove that volatility out of our business and just focus more on those core categories that were less capital intensive such as the personal care and professional hygiene categories.
I’m just looking, before we move onto exactly what the company looks like now and future I’m looking at a chart from Citi Research showing marketing expended by you and Kimberly Clark Australia and they’re quoting a marketing to sales ratio for you of 6.2% and Kimberly Clark Australia of 20.2% so is that part of the reason you were losing in that game, is because you couldn’t and weren’t spending anywhere near as much as your competitor on marketing?
I think Libra and TENA are still market leaders, Alan, but I think it’s a fair comment and I have read that report from Citi. To grow premium brands you need to invest in them, whether it’s R&D, innovation technology or marketing spend you need to invest in them and again this goes back to the core of the decision that we made that by having such volatility in our tissue business it was compromising what we were spending on our core brands of Libra and TENA and those categories that you mentioned. Absolutely that was a key focus and what we wanted to achieve as an outcome through this strategy is to put ourselves into a position where we can reinvest back into those core categories, back to what we feel is best practice levels going forward which is definitely more than what we’re spending now.
We will see and we have flagged to the market in our announcement and in the roadshows that we’ve done recently that we will be investing significantly more in those remaining categories.
Yeah, I suppose it also goes back in a way to the shift because your band, the Sorbent brand and the other ones that you’ve sold, were originally part of Bowater-Scott, a huge company. They were competing on an equal footing with Kimberly Clark. It was really after you were kind of sold into private equity here and then listed so that the business became a much smaller local business that it wasn’t going to really work I suppose. Now it’s going to Solaris Paper which as you say is a global business and much more able to compete.
Alan, I’ve been with the business for 12 years and the tissue business, particularly the consumer tissue business, has always been a challenging category for us. I’m not sure if that’s probably fair that the private equity piece was a key driver of that, it’s always been a tough market, it’s always been commodity based, you’ve always had these cyclical turns. I mean if you look back to the last four or five years the consumer tissue performance was actually very solid and we actually used that as our basis to determine the pro forma P&L to determine the valuation for the sales.
I don’t think it was so much the private equity piece or being localised, just the fact that we’re so far away. Even when we were part of ESSITY it’s that tyranny of distance, we’ve always essentially been the standalone organisation. The current pulp contracts that we procure off we still procure of the ESSITY global contracts, so we still leverage their scale. Locally we have to manage with energy increases, labour increases, etcetera, and then the dynamic where demand was going essentially to offshore capacity as opposed to local capacity.
Paint us a picture of the new Asaleo Care.
Alan, I touched on something before where I said 70% of the business was tissue and 30% was personal care. Again, when I refer to personal care it’s our feminine care category, our incontinence category and also our baby diapers, that represented about 30%. Post this transaction that split becomes 60/40, 60% tissue and 40% personal care. What’s really important about that tissue business that remains, it’s our manufacturing facility in New Zealand which is a low cost footprint where we manufacture all our B2B tissue products and our Tork brand is produced and always has been produced out of our New Zealand facility.
We’ve also retained our consumer tissue business in New Zealand business where we’ve got very strong brands such as Purex and Handee in New Zealand, both hold the number one position in those markets. Again, we’re the only paper manufacturer in New Zealand, Alan, and really what’s unique about our manufacturing facility in New Zealand is we use geothermal steam in the paper making process and in fact we’re the only ones globally that use geothermal steam in the actual paper making process. We see that as a real competitive advantage not just from a cost perspective but also from an environmental footprint relative to using electricity and natural gas.
That’s from tissue and personal care but the other key objective that we had through this transaction, Alan, was just our split between retail and B2B. Historically we had 60% of our business going through the retail channel and 40% through B2B. That split now goes to 55% B2B, 45% retail so again a much stronger channel mix both in the categories that we play in but also the channels in which we sell to.
On the B2B side of things who are your customers there and how much of that B2B business relies on the licensing agreements you’ve got with ESSITY?
I’ll answer the second part first. A big part definitely relies on ESSITY because the two brands that we sell in there, the Tork and TENA brands, are brands that are owned by ESSITY. Part of the announcement that we made a week ago was the extension of that licensing agreement by another 5 years. It was meant to expire in 2022, this now takes us out to 2027 so almost ten years out now on that license and it gives us exclusive sales and marketing rights in this region but also access to all their innovation and R&D centres that we use directly. That’s the big focus for us.
You said in that announcement that it was in principle agreement for a five year extension, what does that mean?
Yeah, we’ve agreed that obviously for the five years but the terms and conditions of that agreement we’re still working through so we’re making sure that we get the most out of that agreement, just the way we engage going forward, what other brands that we can get access to so there’s other specific details that we felt it was important that we announce to the market that the extension had been reached, an agreement in principle had been reached around that extension. If you think about the brands that are left post the transaction 80% of our sales fall under the Libra, TENA and Tork brands. We own the Libra brand, that’s ours, but we do leverage a lot of the R&D from ESSITY for that.
80% of the sales that remain we really leverage the ESSITY global arrangement that we have in place. That’s why we felt it was important that we announced that when we announced the sales transaction, and subsequently now we are working through the details around it.
Just tell us about the customers in B2B, who do you sell to and how stable is that?
It’s quite a stable business and that’s because the majority of that business is contract based, Alan. When we refer to B2B it’s essentially two businesses, it’s the professional hygiene tissue business and it’s our TENA healthcare. Professional hygiene tissue is all the sort of tissue products you use when you’re away from home, the hospitals, schools, prisons, government agencies, etcetera. Our healthcare business is predominantly the aged care sector. We also sell into the hospitals but the biggest part of the market is really into aged care.
What’s really attractive about that category for us, Alan, is just the growth that we’re seeing in that, relative market growth, predominantly driven by the aging population but just also a lot of what we refer to as cause related illnesses, things like obesity, things like diabetes, things like prostate cancer which unfortunately all those illnesses are growing but it does drive this category that we’re playing around incontinence.
In terms of the customers that we sell to obviously for healthcare it’s all the aged care facilities, big contracts such as Bupa for example. The B2B tissue we go to market in a couple of channels, predominantly through distributors, all the major distributors in the market but also we do direct with some customers, major customers like McDonalds for example, Alan, where we do all their napkins, all their wash room products. Back of house for a lot of the major retailers, we also supply product into them.
The beauty, I suppose, of B2B is just that diversity of the customer portfolio. You have very large distributors to smaller large direct customers to smaller mum and dad type businesses so a real diversified portfolio and an ability to sell a value solution. That’s the absolute key with the B2B market for us and that is why we are the number one player in both of those categories, is that it’s the solution that we sell. It’s not just about selling a commodity based refill, it’s about selling an incontinence solution for an aged care facility or it’s about selling a professional hygeiene solution for somebody like a McDonalds or for somebody like in a 50 story building and how you service that, or an airport, or a shopping centre.
Your ability to sell is much greater and the skillset that’s required in your field force becomes a competitive advantage for you and that’s where we’ve made a lot of investment in our people to really promote that solution sell for us.
It sounds like you really like the B2B business. Would you have liked to sell all of your retail business instead of just part of it?
Definitely not. My view on this, Alan, is I always apply a lens of do I have a competitive advantage in the categories that I play in. When I look at the feminine and incontinence categories where we still heavily play in the retail sector absolutely we feel we have a competitive advantage and will continue to focus on developing those points of difference. You look at our tissue business that we’ve retained in New Zealand, the consumer tissue business we’ve retained, we have a low cost footprint in New Zealand. Again we feel that we have a competitive advantage.
It’s not so much whether it’s B2B or retail, yes I want to have a balanced portfolio, but the key lens is do we have a long term competitive advantage and what we’re left with we definitely feel we satisfy that criteria.
I’m interested in the relationship with Essity because obviously they at one stage when they were called SCA the Swedish business owned 100%, they bought it off Carter Holt Harvey in 2004 and then sold half of it to Pacific Equity Partners. Now they’re down to 36%. Should investors think about them as being on the way out of your business or do they have some sort of residual right of first refusal if they decide to go back into the Australasian market more fully at some point in the future?
Alan, I definitely don’t have a view that they’re backing off in this business. That 36% you referenced is actually still the same 50% that they owned when we listed, it’s just the fact that the valuation was higher. They didn’t sell any of their 50% share during that listing process. The valuation was higher and it diluted down to 36%, in fact it diluted down to around 32% and then we had a $100 million share buyback 12 months ago. Essity didn’t participate in that share buyback so again I think that just supports that view that they’re not backing off their investment. That’s why their share has grown from 32% to 36%.
I think coming out now with this announcement and saying they’re also willing to extend the licensing agreement for another five years, we didn’t have to negotiate that until 2020, so two years before it expired but they were more than willing and they absolutely see it in their interest to be engaging with us and grow in these brands.
When you look at the part of our business that has been growing over the last five or six years it is the B2B part of the business which is essentially their brand, is the Tork and TENA brand, so again it’s absolutely in their interest. They see themselves as a global organisation and where they’ve got a region that’s growing above their global regional rates then obviously that’s attractive for them.
Are there any other of their brands you could license for this market?
There are other parts of the business that they’ve been acquiring recently, that is something that down the track we will talk to them about and obviously as part of the upcoming licensing agreement negotiations we would look at other opportunities with them. Our immediate focus though, Alan, is obviously to get through this transaction, we’ve got that to complete, we’ve got to transition the two businesses apart. We really want to focxus on those brands that do remain around Libra, Tork and TENA in particular and our consumer tissue business in New Zealand. A big part of the transaction was to reinvest back into them.
Part of the strategic review that we undertook was to go back and really understand how we can win in those categories and that will be my focus and the focus of the executive team, is to really grow those brands that remain. Then what comes beyond that we will continue to look at whether it’s other brands we can license or other parts that we can bolt on to the business that make sense and add value, then they’re things that we would always look at.
What sort of margins do you get in the B2B business?
We don’t disclose that, Alan, and I don’t mean to be defensive around this it’s just that being the only publicly listed entity in this space we always feel that we’re quite exposed in this area. What we do say is that the margins in B2B are better than in retail but we don’t disclose what sort of margins we make.
Citi says that your overall margin will increase following the sale from 10% back to the 17% or 18% that it used to be before you got smashed earlier this year and last year, does that sound right to you?
That’s correct. Obviously that’s their assessment but in terms of them improving it’s correct and that’s because we have disclosed that the sale of the Australian consumer tissue business is actually profit accretive which obviously implies, Alan, that it was a loss making business with the current environment around pulp and energy. Naturally that will bring up our margins and it’s always been that the lower margin category that we’ve played in, so just naturally pulling that out and being left with feminine care, incontinence and the professional hygiene business, that naturally will bring our margins up.
What will happen to your return on equity? Because you’re saying that you think you’re going to have to have less capital in the business now, so will that improve your ROE?
Definitely, because as I said 30% of our capex spend was based on this consumer tissue Australia category and working capital really importantly was 40% of that so definitely we expect that to improve going forward.
Can you get it above 20%?
Again, I’m not sharing specifics. As part of our full year announcement come February we will be disclosing more details. The consumer tissue business will be reported as a discontinued business, so I think there will be a fair bit of transparency around that and what the future business looks like.
Right, great to talk to you, Sid, thanks very much.
Thanks, Alan.
I look forward to staying in touch and keeping up with what you’re doing.
Please do, I appreciate your interest in Asaleo Care.
Thank you. That was Sid Takla, the CEO of Asaleo Care.