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quoteThe Group's Profit Before Taxation contracted by 11.2% despite the Group having recorded a 7% increase in revenue year on year. quote

Lee See Jin, Managing Director
of NTPM Holdings Berhad.

The Managing Director's Outlook

31 July 2012

Our marketplace continues to undergo a fundamental shift. In the financial year ended 30 April 2012, the inflationary pressures, high volatility of commodity prices and tough economy put considerable pressure on consumers, customers and manufacturers. We too were not spared. Against this backdrop, the Group's Profit Before Taxation contracted by 11.2% despite the Group having recorded a 7% increase in revenue year on year.

Paper Segment

The paper division remains as the main pillar and core contributor to the Group's results with revenue of RM358.4 million and Profit Before Taxation of RM52.8 million. This represents an increase in revenue of RM9.2 million over the previous financial year. In terms of profit, the Group reported a 11.9% decrease in Profit Before Taxation over the same reporting period a year ago.

Despite decent volume growth, the overall margins and earnings of tissue paper continued to come under pressure due to relatively flattish average tissue selling price, higher staff costs, high raw material costs, and hikes in electricity and natural gas tariffs. Profit was also affected by the absorption of initial start-up pre-operation cost of the newly acquired paper mill in Bentong, Pahang. Thankfully, the weakening of the pulp and recycled prices in the second half of the financial year under review slightly softened the effect of the overall increase in total cost on the Group's margins of tissue paper products.

Over the last two years, the paper division focused on streamlining its operational efficiencies by engaging in various cost savings projects, and has undertaken a massive infrastructure expansion to cater for the Group's future tissue paper expansion. In 2010, a tissue converting "Plant B" was set up with the aim of segregating the "roll" and "sheet" form of End-Of-Line manufacturing process. Subsequently, additional processing capacity in the form of two converting lines of Toilet Roll with Kitchen Towel Interchangeable Rewinder machines and one unit of JRT machine were brought in to provide better and more consistent quality products, alleviate some of the current capacity constraints and contribute to the Group's earnings growth in the coming years. In doing so, we have also built an additional waste paper warehouse and constructed a brand new sales office cum warehouse in Melaka. We have also ordered one 30 tonne/day paper making machine which is scheduled for commissioning early next year.

The recent acquisition of the paper mill in Bentong will provide us with a lower-cost access to our customers in Singapore and the southerncentral region of Malaysia. The Bentong mill has 2 units of paper making machines with an installed capacity of 30 tonne/day. The strategic location of the Bentong tissue plant will enable us to benefit from the significant freight advantages relative to our competitors. Our strategic location will also allow us to provide better customer service in terms of prompt delivery and replacement of goods.

Personal Care Segment

For the financial year ended 30 April 2012, the personal care segment recorded revenue of RM91.4 million and Profit Before Taxation of RM6.7 million as compared to its preceding year's revenue of RM71.1 million and Profit Before Taxation of RM7.2 million. Despite of recording higher revenue, Profit Before Taxation has declined slightly mainly due to the increase in raw material prices as well as higher interest charges resulting from the drawdown of term loans during the financial year under review.

The double digit growth in revenue was buoyed by the impressive performance of the baby diapers products. Revenue for baby diapers recorded a 60.0% growth year on year. The success of the personal care segment that comprises sanitary napkins, baby diapers, facial cotton and adult diapers was mainly attributable to the Group's ability in expanding its market share and enhancing its brand image. We managed to achieve this success by providing a concerted marketing support across all key brands through our well planned promotional activities in the retail trade. Also, we continued to maintain close customer contact by listening to them and making comprehensive product improvements in return. For example, last year through the successful innovations and renovations, we improved the absorbent polymers used as the water-absorbing ingredients in manufacturing baby diapers. We have also introduced 'hook-and-loop' closure that results in a much stronger holding power, and rolled out new product features that satisfy more customers.

Drawing on this success, we have ordered one unit of high-end pull-on baby diapers machine costing RM11.0 million. The machine is expected to arrive early next year. More importantly, with this new pull-on baby diapers machine, we would be able to entice more customers to buy them by providing an exciting comprehensive range of baby diapers that would enable us to meet their distinctive needs. As a relatively new player in this product line, we are committed to continuously provide a safe and hygienic environment for child care by constantly offering better quality products.

Future Challenges & Strategy

Over the last two financial years, we experienced unprecedented challenges as a result of volatile and rising commodity prices. Due to rising demand and tight industry capacity, pulp and recyclable paper prices rose from the middle of 2009 through the first half of 2011. However, pulp prices eroded sharply in the fourth quarter of 2011 on weaker demand stemming from economic uncertainty in Europe and credit tightening in China. Furthermore, the volatility of other important commodities such as oil and wheat over the years has been embeddedin the supply chain where this in turn has a direct impact on the Group's profitability. As we approach the second half of year 2012, we remain cautious that it is possible in the near term for the markets to anticipate a rebound of pulp prices and move quicker than we expect.

The recent announcement by the government in respect of the minimum wage policy in Malaysia is expected to come in force within the next couple of months. We expect to face higher costs and lower earnings once the minimum wage of RM900 is implemented. We hope that the implementation of the minimum wages would be marginally cushioned by higher top-line volume growth across all product segments although we are not discounting the fact that it may be necessary to pass on the additional cost (which is likely to be embedded across our entire supply chain) to our customers.

On the other hand, we have also taken certain measures such as automation to improve our competitiveness and productivity. We had enjoyed small scale success in our automation projects this year such as the automatic loading of slithered jumbo roll to packed serviette at Serviette Machine No. 12, auto inject printing of batch coding at Echo 1 Machine and multiplying the speed of automated single roll wrapping process at Toilet Roll MQ3 machine. We are currently drawing a pipeline of more automation projects and we will continue to develop strategies to lower our costs. Also, we plan to leverage on the RM110 million fixed assets investments that we have invested over the last three financial years. With the numerous measures we have put in, we strongly believe we have the capacity and capability to implement numerous productivity and efficiency improvements to develop a strong, competitive business with sustainable operating performance in the demanding market.