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Dabur India Limited Investors Conference Call for Acquisition of Namaste Laboratories, LLC Dabur India Ltd. s Participation MR. SUNIL DUGGAL - CHIEF EXECUTIVE OFFICER MR. S. RAGHUNATHAN - CHIEF FINANCIAL
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Dabur India Limited Investors Conference Call for Acquisition of Namaste Laboratories, LLC Dabur India Ltd. s Participation MR. SUNIL DUGGAL - CHIEF EXECUTIVE OFFICER MR. S. RAGHUNATHAN - CHIEF FINANCIAL OFFICER MR. ASHOK JAIN - GM-FINANCE & COMPANY SECRETARY MRS. GAGAN AHLUWALIA - GENERAL MANAGER - CORPORATE AFFAIRS Page 1 of 17 Thank you Melissa. Good evening ladies and gentlemen, on behalf of management of Dabur India Ltd., I welcome you all to this conference call relating to our recently announced acquisition of Namaste Laboratories LLC. Present with me are Mr. Sunil Duggal, Chief Executive Officer, Mr. Raghunathan, Chief Financial Officer, and Mr. Ashok Jain, General Manager Finance & Company Secretary. We will now have a brief overview by Mr. Duggal post which we will start the Q&A. We would request all the participants to restrict the questions to Namaste as far as possible in order to make the best use of time. I hand over now to Mr. Duggal. Good afternoon ladies and gentlemen. I welcome you all to the Dabur India Conference call regarding the recent acquisition. We are pleased to announce that we have entered into an agreement to acquire Namaste Laboratories LLC, a leading ethnic hair care products company based out of Chicago and having operations in North America, Europe, Middle East, and Africa. The company markets a wide portfolio of hair care products under the name Organic Root Stimulator, catering to the specific hair care needs of people of African descent. The company has revenue of $93 million for the calendar year 2010 with EBITDA of about $12 million. The company was established in 1996 and has shown a strong trajectory of growth particularly during the last five years when it recorded a CAGR in sales of over 20%. The company has demonstrated a remarkable resilience even during the recessionary phase in the US and continued to grow its business defying the prevailing economic environment. This acquisition enables us entry into the ethnic hair care products market valued at more than US$1.4 billion in the US and more importantly tapped into the significant market opportunity in the fast growing and hugely populated yet under-penetrated consumer markets of Africa. It is estimated that 14.2% of the world s population is of African descent, which translates into a total of about a billion people, a majority of these live in the African continent followed by the US, Europe and Latin America. We believe that with this acquisition along with the recently acquired Hobi Kozmetik, we will have a portfolio of products which will enable us to cater to this large and under-penetrated consumer base. Namaste s product complements our existing product portfolio in the Middle East and African markets extremely well and will give us the necessary scale and capability to effectively service that market. Namaste has a well established distribution network in the US which can also serve as a gateway to the US market for Dabur s portfolio. They have a management team led by the founder and CEO Gary Gardner, who will continue with the company along with other members of the management. The Namaste team has vast and deep knowledge of their consumers, their preferences and requirements spanning over 20 years and bring to the table strong management capabilities and acumen in the ethnic hair care space. The entire equity stake of Namaste has been acquired at a cost of US$100 million. This translates into valuation of 1.1x sales and 8.3x EBITDA. In addition to the acquisition cost of $100 million, there may be further milestone payments of up to a maximum of US$40 million pursuant to an earn out agreement subject to stringent operational targets which aim at doubling of revenues and more than Page 2 of 17 doubling of EBITDA over the next four years. The acquisition is likely to be completed within the calendar year 2010 subject to regulatory approvals. With this, I now open the Q&A and will be happy to answer your questions. Percy Panthaki from HSBC. Hi Sunil, congrats on the acquisition. Thank you. My question is basically relating to the geography in which Namaste is present, it is mainly in the US, and most FMCGs are wary of entering the US market for some probably valid reasons. It's a more mature market, growth rates are slower, very large established brands exist there, etc. and my concern was just on this aspect, So if you could throw some light on what was the rationale for going into something which is predominantly in the US given that industry growth rates as per your presentation itself is at about 5% CAGR over the last or rather expected over the next 5 years? And if you are to grow faster than this, you probably will have to gain market share, so what gives you the confidence that you will certainly be able to gain market share in the US? Well the two reasons here why we have pursued this opportunity despite the fact that 72% of revenues come from US, one is that the current management of this company has demonstrated a great ability to be well ahead of the pack and therefore to gain share in the otherwise not very fast growing market of the US. For example, last year they were the only company to actually grow this category and everybody else declined and they have from zero base in 1996 come to a 12.6% share which is I think very creditable. So we believe that the US growth while not spectacular will be steady and will not be a drag on the business as a whole, however the greater opportunity comes from outside the US where we believe that the headroom for growth particularly in the African continent is enormous and in addition, there are interesting markets like Brazil which we have not even begun to scan. So the true opportunity lies outside the US. We believe we will get a good strong profitable baseline growth in the US market and really the topping up will come from outside. And that is one of the reasons why the current management actually sold out because they also appreciated the fact that US can only grow at a certain pace and they did not feel that they had the requisite capabilities financial or otherwise or infrastructural to really seed the markets outside the US and that s why they started talking to us, because we do have a reasonably high level of capability and infrastructure in Africa which we can leverage. Can you give an idea of let's say 5 years down the line, the 72% of contribution from US, how much it could be? I suspect it will be in the region of 50%. We still have to now craft a precise plan, but the firstcut indicators are that around 5 years from now, not more than 50% of revenues would come Page 3 of 17 from the US. In fact, it could be considered to be lower than that. These are conservative estimates in terms of growth outside the US, it could be higher, but I think at the very least, it will be 50% contribution outside the US. Fair enough. And I just wanted to understand basically the EBIT margin profile of this product, somewhere around 12%-13%. 13% yes. That seems a little low given that this is a specialized personal care product, most specialized personal care products have EBIT margin profiles of 20% plus, so what's your take on that? I think we can ramp it up to a reasonable extent, some of the upside is already visible in terms of cost of manufacturing, in terms of cost of distribution. There are upsides which, like I said, we can capture reasonably soon, but I think the real margin upside would come if we are able to localize manufacturing outside the US, not for the US market, but for the non-us areas. And then you come to a much lower cost environment. Today, much of their overseas margins are very compressed due to very high cost of shipping duties and distribution costs, so that acts as a drag, the overseas market acts a drag. The moment we shift manufacturing for the African market in particular to our plants whether in the UAE or Nigeria or Egypt, we suspect that the overall margins would expand, now how much they will, it is a tough call at this point in time, but they certainly would be ahead of what we see at present. Would you have an idea what is the margin for US business alone? Well the US business is ahead of the African business, it will probably be in the region of around 15% and the overseas business would be more in the region of around 8 to 10%. It's widely varying depending upon where overseas, you are selling. A lot of Africa is very low margins, because the duty structure in countries like, say Nigeria is extremely high. So there is no pattern here, but overall it is much lower than what the US margins are. So US at 15%, I mean is that something normal because for a specialized product like this, I would have thought that margins at 20%-25% is possible, so do you think that the margins are lower because there is a problem with the selling price not being high enough or you think there is something in the cost base in US it self which is a problem? We have to go a little bit deeper into this, but I suspect that there is a lot of value which we can capture from the COGS part and we are already sending a team of our commercial people to look at the cost structure, they basically do it on a conversion basis and perhaps purchasing is probably not their core area of capability. It's more in terms of consumer understanding and marketing. So we believe we can pull out some cost in that area. And also I think it's a question of scale, the sales and distribution costs are high which we have already agreed to bring down to some extent. And there will be other costs, I think that is what we bring on to the table, our Page 4 of 17 ability to manage costs and therefore raise the margins. The gross margins are around 50% which is not bad, so there has been nothing wrong with the selling price; it's really at the top end of the market. What are the A&P spends like as a percentage of sales? It's around 12%-13%. It's mostly below the line; there is not too much media which they use. So we really have to look at the whole architecture of the way they run their business and we may choose to do it a little bit differently Right. And do you think these acquisitions can actually open doors for the US market for some of your other products and if so which are the products you think are amenable for the US market? Quite frankly, we haven t built any sale of Dabur products into the whole valuation matrix so far, but obviously a distribution infrastructure and entry into key accounts like Wal-Mart, 30% of the business comes from Wal-Mart, would open some doors. I don t think a huge number of Dabur products would gain entry but perhaps there will be some products which the chains would welcome and so we would have to look into that, perhaps you know psyllium or things like that. But it's still to be mapped out and also today we don t have entry into the big chains like Wal-Mart but there are Wal-Marts which are in Indian dominated enclaves, so any entry into those stores which may be a small fraction of the total universe of Wal-Mart etc., would definitely prove to be an upside even with existing consumer base. But at this point in time, we have not put any numbers worthwhile there, but that s really one of the side benefits which we will get out of this deal. Okay, that's all from me, sir, thank you very much. Manoj Menon from Kotak Manoj Menon: Hi, Sunil, congratulations on the deal, one of my question has been answered, just two more quick ones. One, if you could just help us understand a bit on the overall ethnic specific hair care market, who are the players, what the dynamics are, not necessarily in US, at a global level? See the global numbers are very hard to get, because the market is so fragmented outside the US and particularly in Africa, it's very hard to piece together the numbers and get to kind of aggregate level in terms of shares. But let's take the US market to begin with; you have L'Oreal with its brand SoftSheen-Carson, at 18% share. Then you have Pro-Line which was spun off by Procter and is now I think independently managed is 13.2%, Namaste is 12.6% and Gary is pretty confident that this year they would overtake Pro-Line so it will become the number two Page 5 of 17 brand. And the rest is fairly fragmented, there is Cheatham, Bronner, Dr. Miracle s, but those are all in the region of 3%-5%. Manoj Menon: Okay, so basically there is no major MNC except for L Oreal being present there, and is there any reason for that? There is L Oreal and there is that company in Chicago itself which was recently bought over by Unilever, Alberto-Culver, and Alberto-Culver is also a player. So these are the two companies which are large in size, which are in this space. Now in Africa interestingly, the only major player which is Pan-African in terms of its reach is L Oreal with SoftSheen- Carson. Also interestingly, Gary Gardner who runs this company and who has sold it to us, was also one of the co-founders of SoftSheen, which was an independent company in Chicago and then his father sold it to L Oreal. Then Loreal took another company called Carson to form SoftSheen-Carson. So these people have a very long heritage in terms of building and managing brands in this domain. Manoj Menon: Sure. Now actually my question was coming from the context that considering the emerging market focus of most of the multinational companies particularly in personal care, which I would presume would include Africa as well in terms of emerging market. So is there a much bigger opportunity for everyone to participate, how do the dynamics which you see not necessarily in the near term more like 5-10 years to pan out in this? See the only multinational of very large scale in this space is L Oreal and they do have manufacturing in South Africa but beyond that while they do distribute in other parts of Africa there is not much else activity going on. I think we need to look at the Africa market not from the point of view of just South Africa or West, but we will have to look at it in blocks like South East, West Central and North. And that s exactly how we are planning to run the rest of our business, by putting manufacturing plants in each one of the free trade or tariff free zones, which exist. And that s how we will be able to really bring down cost because the way the costing today is it is actually pretty unaffordable by a vast majority of African people, but the moment we bring down cost and these are products of very high quality and if we are to maintain that quality that opens up a potentially enormous market. Well I think now the other aspect of this deal is that the combined aggregation of Dabur, Hobi and Namaste gives us a suite of products which is a very compelling one to really crack open the African market. Just with Dabur, quite frankly, we were pretty hobbled outside North Africa in terms of the product suite which we had. Now Hobi gives us a low price entry into hair and skin care which is more main stream stuff and this is ethnic specific hair care. So I think we are now ready to make a big leap in Africa. Manoj Menon: Sure, understood, sounds good. Sir, just one question on terms of a little bit more from an HR kind of an angle because for all practical purposes now Dabur is actually now a multinational company, let's say from a branding point of view, from a marketing point of view or even from Page 6 of 17 an HR or technical point of view, how are you looking at the whole HR configuration in terms of, I mean because the point what I am trying to get is at in terms of the cultural requirements to run a merged company is going to be different from, what we would have done till now, so some thoughts on that. Yeah I think we will continue to have a board management structure for example, Namaste will continue to have a board which will include the CEO and also have people from Dabur inducted onto the board and the CEO will report to the board and the governance structure will be crafted accordingly. In the case of Namaste, we would obviously give the incumbent management a lot of rope to run the US business, because they understand that in a far more profound manner than we would be able to do. And the Africa piece would be collaborative between the Namaste management and the Dabur International management. So we still have to work out the nitty-gritty of the governance mechanism for Namaste, but broadly the structure would be like I described. And in the case of Turkey, again a similar range when we have a CEO who is from the erstwhile management and he would report to the Hobi board and largely run the Turkey business himself with us playing the role of board members. And the business outside Turkey at least most of the business outside Turkey would be done collaboratively between the Turkish team and the Dabur international team and if those products come to India, the India team. Manoj Menon: Sure, just one last question regarding the out-performance of the Namaste products particularly in the last year or so, in the US market which you just alluded to, is it wholly attributable to the better consumer understanding or in terms of in any market developments, in terms of what is the core competence of this group?is it just the understanding being a niche player, is it just kind of being ahead of the curve, because I am just trying to get in terms of what has taken them so successfully to let's say beat someone like L Oreal? There are two or three aspects here, one is that they genuinely have a great deal of empathy and understanding of the African-American consumer in a way that no other company has because for the other companies it's probably a small add-on to a very large business, so they would not have that same passion to develop this particular category, these people have done it all their lives, so they have a very profound understanding. Secondly, they are very entrenched in Wal-Mart and around 30% of their business comes from Wal-Mart and last year, of course the only retail chain which grew was Wal-Mart, so they were in the sweet spot. And I think that strength in terms of the relationship with Wal-Mart is a very important aspect of the US business which will continue to hold them in good stead. But the truly important thing that there is an understanding of the consumer and ability to craft products which match consumer needs. Manoj Menon: Thanks, I will come back if I have more. Okay, thanks. Page 7 of 17 Varun Lohchab from Religare Capital Markets. Varun Lohchab: Hi Sunil congratulations. Most of my questions have been answered, just a couple of them, one in terms of within the US market, is it that Namaste products are strong at one end of the price pyramid versus the competitors that you mentioned and like do they straddle the price pyramid and do they compete head on with likes L Oreal and all in terms of the exact? They are actually at the top end of the pricing spectrum; they are ahead of L Oreal in terms of pricing. Despite that they have created a huge level of consumer preference. Now for Africa, the challenge before us would be to bring down cost in as short as time as possible without compromising on quality. And I am not saying that that is going to happen you know day after tomorrow, because there are lots of hurdles in terms of product registration etc., and also putting in the requisite manufacturing capacities. But I think within the next one year or so, we would be reasonably ahead of the curve in this area. But their products are not cheap, they are at the top end and they have resisted temptation of getting into the mass market which perhaps is not so much required in the US, but Africa, we will have to look at the whole pricing issue a little bit more deeply. Varun Lohchab: Okay. And just on the funding for the deal if you can just throw some light on that? Raghunathan: Yeah we will be borrowing externally to fund these acquisitions whi
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