In 2019 Vinda continued to deliver on its financial and business objective namely driving double-digit growth and improving our business fundamentals to improve gross margins to achieve a sustainable double-digit operating margin in the mid-term.
STRONG TOP LINE GROWTH
We achieved top line organic growth of 11.6% driven by our excellent performance in tissue, good growth in Southeast Asia and North Asia and an increasingly promising personal care performance in mainland China with the launch of incontinence pants and the relaunch of Feminine Hygiene business.
Outstanding performance of premium portfolio1
Our strong tissue performance was driven by strong growth of the premium segment of our portfolio fueled by strong innovation and continuous support by customers. Tempo grew more than 40% in mainland China at a constant exchange rate. Vinda Deluxe now represents more than 10% of the Vinda tissue portfolio. Tork had a significant growth performance through dispenser placement and the launch of comprehensive washroom hygiene solution. Compared to two years ago, our premium portfolio has grown from 13.1% to 24.5% of our tissue sales and is much more robust to the competitive environment and the challenging market condition. These premium brands tend to be less price sensitive than the lower margin segment and offer superior product quality to consumers.
Successful launch of new feminine and incontinence care products in mainland China
During the year we relaunched our Feminine Hygiene products in mainland China and initial consumer response was very positive. Creating awareness is our key priority for the years to come and initial repeat purchases are looking encouraging. We want to establish Libresse as a purposeful brand in creating a world where women can live the life they want, by breaking V Zone taboos. We are confident that a meaningful scale of Feminine Hygiene business will translate into a strong profitability driver in the medium term.
For incontinence care, we launched the incontinence pants in mainland China, a series of products that we believe will be the key growth and margin driver in this category. The overall incontinence care opportunity remains very strong with aging population in mainland China but also in North and Southeast Asia. Incontinence pants will play a major role to allow people to remain mobile and able to enjoy daily life in full.
Solid business in Southeast Asia & North Asia2
In Southeast Asia we saw a very good progress after a challenging start in the first quarter. We had overcome the challenges by the second quarter and since then the business has grown well. We grew market shares and maintained our leading positions in incontinence care in Malaysia and Singapore, we also maintained our leading positions in baby and feminine care categories in Malaysia. Innovation also played a major role in Southeast Asia markets across different categories. With the relaunch of Drypantz, the diapers’ sizes can be adjusted to fit the baby at every stage of its growth. We also collaborated with the popular Pink Fong character in launching a limited edition of a range of products under the Drypers brand. The entire relaunch of Feminine Hygiene products with new packaging and product selection criteria were to help women to choose their right product.
North Asia also performed well despite the challenging business environment in the Hong Kong market with export to Japan and other Asian markets counterbalanced its slowdown. Despite the difficult retail environment in Hong Kong in the last few months, the new launches of Vinda toilet-roll and boxed facial tissue together with the Tempo prestige toilet-roll and Sakura series performed well.
The continuous shift in the retail environment towards e-commerce and new retail are reinforcing Vinda’s competitive advantage. As the leading player in most e-commerce platforms, we continued the strong growth momentum of the past. We also start to see an increasing momentum of the e-commerce sales in Southeast Asia and are very well set-up to gain advantage of the channel shifting trend.
PROFITABILITY AND CASHFLOW
We continued to focus on the business fundamentals to improve profitability and cash flow.
Gross margin improved significantly this year not only helped by declining pulp prices but more specifically by a more premium brand portfolio in tissue (as discussed before) and the continuous cost savings in supply chain.
These efforts resulted in a significant margin expansion in operating profit and net profit from 6.9% to 9.8% and 4.4% to 7.1% respectively or in absolute terms a growth of respectively 53.9% and 75.3%. Improved profitability, together with well-planned CAPEX and working capital, helped to deliver a positive free cashflow (the cash generated from operations after deducting CAPEX required for operations and income tax paid) of HK$1,453 million during the year. This cash flow allowed us to further strengthen our balance sheet, with our net gearing level and net debt/EBITDA ratio reduced to 41% and 1.4% at the end of the year, respectively.
CAPACITY EXPANSION AND EFFICIENCY IMPROVEMENT PROJECTS
Our strong growth in tissue requires us to continue to expand our production capacity. While we are changing our strategy to invest mainly in premium tissue manufacturing and outsource some of the standard grades, the need for capacity expansion remains high. 2019 we added some capacities in Hubei while we also stopped an old paper machine in Guangdong. Currently, we are continuing to build further capabilities in Longyou and Yangjiang.
During the year we kicked start the construction for our new facilities in Malaysia. This project will allow us to consolidate our existing Southeast Asia factories and warehouses under one roof. This will significantly improve our operating efficiencies with all functions working at the same location.
In 2019 we also continued to work to reduce our environmental footprint. Over 99% of our pulp sourcing was certified or came from responsible sources. We have further reduced the water and energy consumption per ton of paper produced.
In addition, Vinda became the first FMCG company to obtain the “Green Finance Pre-Issuance Stage Certificate” issued by the Hong Kong Quality Assurance Agency (HKQAA) and raised a green loan of HK$300 million in Hong Kong. This breakthrough showed that Vinda had strong commitment to environmental protection and perseverance with sustainable development.
The business outlook remains good despite a number of uncertainties such as pulp prices, Sino US trade relationship and exchange rate fluctuation. Competition remains tough but we believe that our improved brand portfolio is well equipped to compete.
While we are expecting pulp prices on the low level, we think it has reached the bottom of the cycle and it is probably not bouncing back in 2020. Price competition remains intense, in particular in mainland China, but our enhanced product and brand mix should be an effective margin protection.
2019 has taught us that the uncertainty of Sino US trade relationship had a strong impact on RMB and USD exchange rate. As the majority of our pulp purchases are in USD, this could have an impact on the year to come.
Finally, the economic outlook for mainland China remains uncertain. Lower consumer confidence during slowing-down growth economic cycle may have an impact on the premiumization of the market.
Despite these challenges and uncertainties, we are confident that we can continue to deliver strong profitability in 2020. Growth will be more of a challenge in particular with declining average market prices in tissue. We believe that our innovation program and our focus on strong brands will counterbalance most of these impacts.
Vinda remains committed to become a leading Asian Hygiene player. Our stable management, the capability of our people and the support from our key shareholder Essity in brands and research and development gives us all the means to continue to be successful in 2020 and beyond.
Remarks1：Premium portfolio (Tempo, Vinda Deluxe, Tork and wet wipes)
2：North Asia includes HKSAR, Taiwan China and South Korea