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Why the Asaleo Care Ltd (ASX:AHY) share price has been crushed today

In morning trade the Asaleo Care Ltd (ASX: AHY) share price has plunged lower following the release of its preliminary half-year results and full-year guidance.

In early trade the personal care products company’s shares are down a sizeable 34.5% to 85.5 cents.

What was in the update?

In the first-half of FY 2018 Asaleo Care expects to generate revenue of $267.2 million and underlying earnings before interest, tax, depreciation, and amortisation (EBITDA) of $46.3 million. This will be a decline of 9% and 24%, respectively, on the prior corresponding period.

A 39% decline in EBITDA from its Tissue segment has largely been behind the decline, though a 7% decline in Personal Care segment EBITDA also weighed on its results.

Management has blamed the poor result on higher pulp and electricity costs. In addition to this, the company experienced lower sales in its Tissue business because of price increases put in place to cover the cost increases. This led to reduced promotional activities with some customers and a significant loss of volume.

Compounding things further was an increased trade spend to support market share as heavy discounting from competitors weighed on its sales.

As a result of this weak first-half and the failure of initiatives put in place to improve its performance, management doesn’t expect the company to achieve its prior guidance of underlying EBITDA in the range of $113 million and $119 million.

Management now expects underlying EBITDA in the range of $80 million to $85 million in FY 2018, a reduction of 29% from top to bottom.

Will things improve in FY 2019?

The company has undertaken a strategic review in response to the ongoing increases in input costs and challenging consumer market trading conditions.

The objective of this review is to design and implement the most efficient structure and business model to position Asaleo Care for sustainable long-term growth and to maximise its return on invested capital over the medium and long term.

While this could bring about an improvement in FY 2019, it certainly won’t be an easy fix.

Asaleo Care has been on my avoid list for some time now and this remains the case today even after today’s sizeable decline.

I would suggest investors look to other shares in the consumer space such as Blackmores Limited (ASX: BKL) or A2 Milk Company Ltd (ASX: A2M) instead.

Alternatively, these buy-rated shares could be even better picks and are many times better than Asaleo Care, in my opinion.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Blackmores Limited. The Motley Fool Australia owns shares of A2 Milk. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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