Australian Pharmaceutical Industries Limited
API REPORT FOR YEAR ENDED 31 AUGUST 2011
SOLID OPERATING PERFORMANCE IN CHALLENGING CONDITIONS
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Net loss after tax of $23.3 million following non-recurring items (includes $50m
impairment for financial guarantee program reported in 1st half)
Underlying net profit after tax of $20.8 million, compared to $22.6 million in the
previous year
Recovery of the balance of $9.1 million in insurance claim following
Queensland floods now anticipated in FY12
Board has declared a final dividend of 1.5¢ per share, unfranked due to recent
ATO statements
Priceline continues to show credible retail sales, total sales up 2.3% with
comparative store growth of 1.4%
Strong consumer response to Priceline ‘browse online’ trial, roll-out of full online
shopping experience on track for FY12
Pharmacy sales revenue down 10.3% following Pfizer decision and Queensland
floods
Brisbane distribution centre recommissioned with full supply by early November
2011
Extension of Bank facilities for a further two years
In announcing API’s full year result, Managing Director and CEO, Stephen Roche said
the strength of our team helped weather a highly adverse combination of events.
“The financial year just ended saw us endure a difficult period with the confluence of
the Queensland floods closing our Brisbane distribution centre, the toughest retail and
financing environment in a generation, the impact of on-going PBS reforms and major
structural changes to the pharmacy wholesale industry.
“Despite these adverse conditions, we’ve seen yet another highly credible retail sales
performance by our Priceline division and, with our Brisbane distribution centre now
recommissioned, we can look forward to gaining the benefits from our supply chain
transformation program,” said Mr Roche.
As announced in the first half, API incurred a pre-tax impairment charge of $50 million
following a review of its Financial Guarantee program with pharmacists’ banks.
Following the Queensland floods, the company also reported a $3.6 million
accounting loss for the full year along with recognising an expected $5.5 million of loss
of profit recovery as a contingent asset. These losses are expected to be recovered in
FY12.
Other non-recurring operating costs during the full year included tax adjustments of
$2.4 million following settlement of a New Zealand Inland Revenue audit and a recent
tax ruling regarding make good provisions. There was no contribution through sales of
Priceline-owned stores in this financial year compared to $3.6 million in FY10.
Australian Pharmaceutical Industries Limited
Cash management within the business remains strong with working capital reducing
5% and a $33 million reduction in average net debt for the year. Cashflow was
negatively impacted by the timing of insurance proceeds expected to be recovered
in FY 2012.
The company confirmed it had successfully negotiated all banking covenants
following the decision to take a pre-tax impairment charge of $50 million during the
financial year and the earnings impact of the delay in insurance payments associated
with the Queensland floods. The company’s bank facilities, due to expire in May 2012,
were extended for a further two years.
Priceline grows in difficult conditions
Total sales for Priceline, Australia’s favourite destination for health and beauty
products(1), saw growth of 2.3% on the prior period with comparable sales growth of
1.4%. Priceline is one of only a few retailers to post positive comparable store growth
over the previous year.
“We remain confident in our investment in Priceline and the opportunities for Priceline
Pharmacies. The Priceline Clubcard program continues to attract new members. It
now has 3.6 million members whose spend per visit is more than 50% higher than nonClubcard customers. In total, sales to Clubcard members now accounts for over 40%
of total non-pharmacy sales, it is without doubt one of the strongest retail loyalty
programs in the country.
“We’ve successfully introduced Priceline Protects, a suite of life insurance and income
protection products targeted specifically at women.
“The Priceline Sisterhood, a major community initiative supporting those charities
which help address Australian women’s major health concerns, has been warmly
embraced by Priceline customers and our market research shows that this community
based initiative is creating a stronger bond between Priceline and Australian women,”
said Mr Roche.
Following the trial of free heart check consultations last year, Priceline has introduced
a series of targeted free consultation programs in Priceline Pharmacies. This year
Priceline ran separate programs covering pain management, contraception,
menopause, asthma and another heart health program. In total, 16,100 free
consultations were provided during the year.
“Our themed free consultation programs are proving extremely popular and are
strengthening the bond between the pharmacies and the community,” said Mr
Roche.
Priceline’s store expansion program has slowed in the face of the tough retail and
financing environment facing all pharmacists. Whilst the company opened 18 new
franchise stores (including three conversions) and six new company-owned stores,
including one in the new Westfield centre in Sydney’s CBD, the total network of 328
stores was essentially flat against last year.
1 – Source: Galileo Kaleidoscope Brand Health Tracker as at September 2011
Australian Pharmaceutical Industries Limited
“Interest remains strong with ongoing discussions with approximately 100 pharmacists,
but conversions will remain subdued until such time as banking sentiment towards the
retail sector changes,” said Mr Roche.
For the last year, Priceline has been trialling customers’ appetite for online shopping
through a ‘browse online’ capability. The results show that this section of the Priceline
website is the most viewed and visited, and contributes approximately one-third of the
total page views per month. These findings lead Priceline to believe that consumers’
desire for the full online service is greater than previously estimated.
We’ve invested approximately $3 million in our online program to date and believe
that we’re significantly more advanced than any of our competitors in launching this
offer,” said Mr Roche.
Pharmacy distribution shows stability
The pharmacy division remained stable during the 2nd half of the year, following the
impact in the first half of Pfizer’s decision to end its wholesaling arrangements in
Australia and the impact of the latest round of PBS reforms. API successfully
introduced new reduced trading terms for pharmacists on 1 February 2011 and these
terms remain in place.
“We do not anticipate a repetition in FY12 of the conditions which saw a total
estimated loss of 15% of revenue from the wholesale sector. However, if such
circumstances were to recur, we have demonstrated that we can move swiftly and
effectively to recover loss of income,” said Mr Roche.
API re-affirmed its earlier guidance that market speculation of the impact of the
termination of its trading relationship with Pharmacy Alliance and Independent
Pharmacists of Australia Groups (IPAG) were significantly overstated. API has retained
approximately 50% of its former PAL and IPAG members.
API’s NZ manufacturing business rebounded strongly following the plant flood in 2010
to report a 70% increase in earnings before interest and tax.
Dividend
The Directors have declared an unfranked final dividend of 1.5¢ cents per share.
The company has sufficient franking credits available to fully frank the final dividend.
However, as a consequence of amendments in 2010 to the Corporations Act 2001,
regarding the ability of a company to pay a dividend, the Commissioner of Taxation
has informally expressed a preliminary view in an ATO draft fact sheet dated 21 June
2011 that where a company’s net assets are less than its share capital and company
debits a dividend to an account such as accumulated losses, a dividend will be
sourced indirectly from share capital and will be un-frankable. The company is
reporting net assets less than its share capital due to the non-cash impairment charge.
Australian Pharmaceutical Industries Limited
The company expects under normal economic conditions to return to a fully franked
final dividend position during the forthcoming financial year.
The Commissioner of Taxation’s position set out in the ATO Draft Fact Sheet is yet to be
finalised. Given the uncertainty of the ATO’s position, but to give shareholders
certainty of receiving a dividend, the company decided to declare an unfranked
dividend.
Outlook
We expect FY12 to deliver an improvement in underlying net profit after tax now that
its Brisbane distribution centre is fully operational again and the expansion of the
Priceline store network continues.
“We’re cautiously optimistic. Priceline is in a better position than most retailers to
prosper in what appears to be enduring conditions of reduced consumer spending
and increased competition from online offerings.
“We’ve invested significantly in re-engineering our supply chain and shown that we
can effectively manage on-going changes to the wholesale sector as well as handle
major unforseen impacts like the enforced closure of our Brisbane distribution centre. I
don’t think we’ll experience another series of events like we did inFY11,” said Mr
Roche.
A further update will be provided at our AGM in January.
This guidance is subject to no further adverse material change in consumer or
customer demand, a stable economic outlook and no unforseen adjustments to the
regulatory environment or PBS reforms.
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About API
Australian Pharmaceutical Industries Limited (API) is one of Australia’s leading health
and beauty companies. API’s pharmacy business provides wholesale distribution,
business and marketing services to community pharmacies across Australia. The retail
business is one of Australia’s leading health and beauty retailers through its brand
Priceline. The consumer business is a niche player in over-the-counter (OTC)
pharmaceuticals and consumer products based in New Zealand.
For further information:
Media
Investors
Gabriel McDowell
Tel: (02) 8297 1500
Mob: 0417 260 918
[email protected]
Graeme Fallet
Tel: (02) 8844 2101
Mob: 0417 573 463
[email protected]