McPherson's Limited (MCP.AX) Earnings Call Transcript & Summary

Welcome to the McPherson's FY '25 Results Presentation. Following the formal presentation there will be a Q&A session for investors and analysts. [Operator Instructions] I will now hand you over to Brett Charlton.

Good morning, everyone. Thank you for joining us today for our full year results. I'm Brett Charlton, I'm the CEO and Managing Director of McPherson's and with me is Mark Sherwin, our CFO. We have our usual disclaimer at the start of the presentation, which I'd ask you to kindly note. I'd like to say a few words upfront about today's announcement. This has been a major year for McPherson's, the most significant one of our transformation to date. During the year, we transitioned our operating model from a direct-to-store distribution one to a new wholesaler and third-party warehousing model. This is the culmination of the transformation we started with our strategy reset in November of 2023. At that point, we announced 2 key components that would drive the transformation of McPherson's. Firstly, we announced we would become a pure-play health, wellness and beauty company with a focus on 5 core brands: Manicare, Lady Jayne, Dr LeWinn's, Swisspers and Fusion Health. Secondly, we announced that we would become a more streamlined and focused group, and that will transform our operating model, both our route-to-market and our cost structure. A major milestone in the transformation was the strategic review and subsequent divestment of the Multix brand in June of 2024. This released proceeds to fund the changes we needed to make while streamlining the business significantly. However, it also amplified the challenges with our high fixed cost model that needed to be addressed. Our key focus of FY '25 was the transformation of our operating model, changing, as I said, from a direct-to-store distribution one to a new wholesaler and third-party warehousing model and in doing so, addressing our cost base. This was a prerequisite for driving growth and realizing the full potential of our brands. Put simply, a legacy model and the infrastructure that supported it was rapidly becoming obsolete and was going to require costly replacement. In addition, the cost structure of the business with a high fixed cost base and exposure to too many factors outside of our control severely limited our ability to invest in and grow our brands. Our new model uses the expertise of specialist wholesalers and a third-party warehousing partner. It is asset-light and scalable. It is a more compelling proposition for our customers and consumers, and it allows us to focus on our core strengths in sales and marketing. There is much to say about this new model, the opportunities it creates for McPherson's and our ambition to capitalize on these opportunities. As such, we will host a strategy webinar and investor meetings later in the first half of financial year '26 to present more detail on our strategy and what's next for McPherson's. But for today, I'm going to focus on our FY '25 results. Our FY '25 results were achieved under the legacy operating model, but reflect this transition underway in the business. This includes the significant work required to transform the operating model. It also includes foundational investment in our core health, wellness and beauty brands, essential to positioning our brands for FY '26 and beyond. The results of much of this work are not yet fully reflected in the FY '25 result, but we look forward to updating you on these results as they unfold this year. But turning to the results. You can see from our results that the underlying financials for the business are broadly in line with FY '24 and reflect our legacy direct-to-store operating model. Some of these were foreshadowed in our July '25 announcement, revenue of $139 million, core brand revenues of $124 million and underlying EBITDA of $7.3 million. In addition, our underlying net loss was $0.1 million, while our net statutory loss after tax was $15 million. Both of these figures reflect the transformation underway and the statutory loss reflects the one-off costs incurred as a part of this. Our balance sheet does remain strong with a net cash position of $8.8 million. Our balance sheet flexibility has been a real asset in funding our transformation. If we look at our core 5 health, wellness and beauty brands, there are 2 overarching things I want to call out. Firstly, 4 out of our 5 core brands achieved growth in FY '25. And if we look at Australia and New Zealand only, all 5 core brands grew during the year. But secondly, we are honest that these brands are not yet performing in line with our aspirations. Prior to our strategy reset, these brands did not have the benefit of sustained disciplined investment to build them for a prolonged period. The direct-to-store fixed cost model of the business was a handbrake on our ability to invest properly to unlock their full potential as consistent investment was hampered by variable cost swings, particularly from the Multix supply chain. So the fact that they are performing as they are in part demonstrates the resilience of these brands now poised to benefit from ambitious plans and a clear strategy to invest in them. The strongest performance, as you'll see, is for Fusion Health, and I'll share some further information about the work we've done in a case study shortly. At the other end of the spectrum, Dr LeWinn's has been challenging this year. Sales actually grew 1.5% in Australia and New Zealand, which is pleasing. However, this was offset by a decline in sales in the international business. In light of this, we've decided to impair the value of the Dr LeWinn's brand by $3.7 million, and Mark will talk about it shortly in the financial section. In August of 2024, we presented this slide for the first time to show the road map for the transformation that we were working through. We made strong progress in the first half of FY '25, and I'm delighted to report that we have again completed our objectives for the second half in '25. The FY '24 year was the foundational year of our transformation, a new strategy focused on 5 core brands, brand and SKU rationalization, pharmacy channel focus, technology stack reset and route-to-market review. We characterize FY '25 as a year of heavy lifting to bring it to life, and it's been exactly that. Our key focus has been on the implementation of our new route-to-market model through a third-party warehousing and wholesale model. This has been critical and a prerequisite if we are to unlock the potential of our leading brands. The benefits of our new model are extensive. We've refocused the business on its core competencies. We've unlocked recurring EBIT in part from the stranded fixed cost base following the divestment of Multix to be reinvested in sustainable growth, and we've created a more variable and scalable model to support future growth. We've also invested in comprehensive foundational consumer research to inform our expanding marketing and sales activities. This has meant a deliberate investment now to support the effectiveness of FY '26 and future years brands and innovation campaigns. We intend to hold a strategy webinar later in first half FY '26. In the meantime, however, I wanted to share a case study for the brand we have done the most work on, which is Fusion Health. If you're not familiar with Fusion Health, it's a range of vitamins and supplements that brings together the very best of ancient wisdom and combines it with modern science. When we reset our group strategy in November of '23, it was clear that the Fusion Health brand had the potential to deliver strong, sustainable growth and profitable returns. Early consumer research we conducted supported the case, consumers were excited by the combination of traditional herbal expertise meeting modern scientific validation. With the benefits of this research, we could refine Fusion's brand positioning to better differentiate it within the vitamins, minerals and supplements category. The next step was a comprehensive review of the Fusion range, rationalizing on unprofitable SKUs and ensuring we had a compelling product range to offer to our customers. Another focus area was ensuring we had the right route to market that we were getting to our customers and consumers through the right channels at the right time. Our new operating model is a big part of this. In addition, for Fusion, in particular, there was a real opportunity in the health food store category. We made the decision to appoint a specialist wholesaler for Fusion specifically in this channel, Clifford Hallam Healthcare or CH2 for short. Like other specialist wholesalers we've appointed, their expertise is best-in-class logistics so they can get Fusion orders to quickly -- to customers quickly, reliably and nationwide. Other initiatives we've completed with Fusion include the innovation pipeline. This needed a wholesale refresh, and we now have a 2- to 3-year pipeline of exciting products heading to our consumers. Our research has meant we can keep refining our brand presentation to consumers with a new campaign launching in September, and there will be a packaging refresh to reflect all of that, which will be rolled out over the course of FY '26. This is clearly the brand where we have done the most work and it's delivering promising results for us and is a signal of the work to do. In FY '25, Fusion had the strongest growth rate of our core brands at 10.4% for the year. And based on year-on-year [ scan ] sales data, early indicators for July continued -- show continued momentum for Fusion in FY '26. And over to Mark.

Thank you, Brett. Good morning, everyone. On Slide 10, I'd like to begin by giving some context to the FY '25 results. It's been a major year as we transform the business and understand the implications for our route-to-market and cost structure provides some important context. Firstly, the result overall is a steady one in the circumstances. It was delivered under our legacy model with a residual cost base in place following the divestment of Multix. Secondly, in second half '25, we started to affect the transition to our new operating model and had substantially completed this by 30 June. This addresses the residual cost base from the Multix divestment and has a significant number of strategic and financial benefits for the business. The benefits of this will start to flow in FY '26 and will be realized over time from that point onwards. As a result of the change in model, there is approximately $5 million in revenue benefit from transitional pipe-fill included in the FY '25 result. This establishes a base level of working capital to support retailer demand in FY '26. In line with our pharmacy wholesaler update on the 15th of August, further transitional pipe-fill will occur in FY '26 to support the onboarding of API, however, not to the same extent as was recognized in FY '25. Turning to the consumer environment. We operate in attractive higher growth categories of health, wellness and beauty. Notwithstanding this, the trading environment in FY '25 has been challenging with lower consumer confidence. As a result, during the year, the categories within which we participate grew at lower rates overall than in FY '24. Notwithstanding this and point 5 covers this, our core brand sales in Australia and New Zealand were up with all 5 core brands in growth. Finally, a key theme for this result and of our strategy is understanding our approach to advertising and promotional investment. This year, we deliberately redirected A&P spend towards investment in our core brands, including on foundational consumer research. The benefits of this are not fully reflected in the FY '25 result, but create an important foundation that we can build from. Turning to Slide 11. I'd like to highlight several key messages in relation to our underlying financials. Firstly, our group revenue of $139 million for FY '25 is down 3.9% or $5.7 million. This primarily reflects the decision taken as part of the company's strategy reset to exit nonstrategic, lower-margin brands, which we commenced doing in first half '24. This accounts for $4.1 million of the $5.7 million movement during the year. We achieved growth across our core brands, which were up 1.9% or $2.3 million during the year. These brands, which on average generate higher margins than our portfolio brands and are in our attractive core categories of health, wellness and beauty benefited from upweighted A&P and transitional pipe-fill to our new pharmacy wholesalers, which I'll come back to shortly. As noted on Slide 6, 4 out of 5 core brands achieved growth in FY '25. However, the overall result was impacted by the performance of Dr LeWinn’'s in our International segment. Adjusting for this, sales of our remaining 4 core brands were up 4.1% or $4.1 million during FY '25. Our portfolio brand sales were down, which in part reflects a redirection of A&P investment to our core brands. Notwithstanding this sales decline, the impact on earnings is moderated by reduced A&P spending on these particular brands. As noted in our release, our core brands have benefited from transitional pipe-fill to new wholesalers during May and June, equivalent to approximately $5 million of sales or 3.6% of FY '25 revenue. This pipe-fill establishes a base level of working capital to support retailer demand in FY '26, including from increased distribution and service capability. We note that a level of transitional pipe-fill will also occur in FY '26 to support the onboarding of API, which we announced to the market on 15th of August. Our gross margin was maintained at 57.9% and reflects the benefit of a higher weighting of core brand revenue to total group revenue, which is favorable to our margin mix. And this was offset by the impact of negative brand and channel mix, primarily linked to the lower relative sales of the Dr LeWinn’'s brand versus other core brands and to a lesser extent, lower volumes through independent pharmacy. We also experienced a level of unfavorable FX from a relatively weaker Australian dollar. Our overall investment in advertising and promotions was broadly in line with FY '24. However, as noted by Brett, in FY '25, we have taken deliberate steps to invest in foundational activities to support the effectiveness of brand campaigns in FY '26 and beyond. This includes, for example, investments in consumer research, which will inform our expanding marketing and sales activities. During the year, we significantly reduced our spend on employee costs and other expenses, saving $2.7 million. This reflects actions taken through FY '24 and '25 to rationalize our employee base. Savings from the absence of short- and long-term incentives for senior management, noting while strong progress was made on operational execution and strategic priorities, performance targets were not met during the year and a disciplined approach to overhead management. Taking all this together, we achieved underlying EBITDA of $7.3 million for FY '25, approximately 5% behind FY '24. Finally, our net cost -- sorry, our net interest costs have reduced substantially as a consequence of the repayment of borrowings during first half '25 and the reduction of our debt facility capacity from $45 million to $25 million second half '25. Turning to the summary of financials by segment on Slide 12. The ANZ business reported modest underlying EBITDA growth in FY '25. The performance of this business being the majority proportion of our continuing operations largely reflects the drivers already noted for the group. However, of note is the performance of our core brands, which grew 3.6% or $4.2 million during the year with all 5 brands achieving growth, including Dr LeWinn’'s, which was up 1.5%. The results of the International business reflect in large part the performance of the Dr LeWinn’'s brand in China, which was down 62% or [ $2.1 ] million. The current scale of the brand made it difficult to compete with deep discounting by other major skin care brands in the market during the year. Management continues to assess the opportunity for Dr LeWinn’'s and other brands in China and the Asia Pacific region in the context of its strategy. Turning to Slide 13. Our underlying EBITDA of $7.3 million was marginally below FY '24. This is reflective of several key drivers, which I'll briefly step through. The contribution from our core brands is positive, reflecting overall sales growth, although modest, up 1.9%, but with moderation from brand and channel mix, most notably the relative performance of Dr LeWinn’'s. We have upweighted our investment in core brand advertising and promotions to drive sustained long-term growth. The current year reflects an investment in working media, out-of-home and in-store promotions and the level of foundational consumer research for our core brands to support more informed spending in FY '26 and beyond. Taken together, the contribution after A&P or CAAP for our core brands was down $1.9 million for the year. Importantly, though, this includes the impact of the international business, which accounts for $1.7 million of this CAAP reduction. The combined impact from portfolio brand performance and the exit of nonstrategic brands is modest with redirected A&P invested driving an improvement in portfolio brand contribution. A comparatively weaker Australian dollar, net of our hedge cover has resulted in a higher average cost of sales for the group during the year. This $900,000 impact follows the $300,000 impact reported at the half. As noted earlier, actions taken to rationalize our employee base, combined with disciplined management of overheads has resulted in $2.7 million of combined savings during the year. Slide 14, summarizes key material items recognized during the period consistent with guidance provided in our 18 July results update. The majority of these items relate to, firstly, noncash intangible asset write-downs; and secondly, costs associated with our change of operating model. In total, $19.7 million in pretax material items have been booked. And this includes $10.2 million in noncash impairments to intangible assets. This includes write-downs of brand names, goodwill and customer relationship assets and reflects current trading performance relative to plan, particularly Dr LeWinn’'s in the international business and upweighted A&P to support core brand growth. $7.4 million in redundancy and implementation costs related to the new operating model and $3.2 million in non-cash write-downs of right-of-use lease and other warehouse assets as well as onerous contract provisions associated with our [ sublease ] of Kingsgrove facility. There was some partial offset by other items, which were favorable of $1.1 million. Of the $19.7 million of material items, approximately $12.1 million are non-cash and $7.6 million are cash. We're conscious that as a result of the strategy refresh and transformation activities, a significant level of material items have been recognized through FY '24 and FY '25. With the shift to a new operating model now substantially complete, we anticipate a reduction to material costs for future reporting periods. Turning to Slide 15. The group finished the year with a net cash position of $8.8 million. The movement since June is largely reflective of $3.6 million in payments for PPE and intangibles, namely for Salesforce software and in-store activation assets. Operating cash flows of $2.2 million, although positive, were impacted by the timing of customer receipts, including from transitional pipe-fill orders, collected in July, and this has moderated our cash position as at 30 June. Our net cash position, along with the positive unwind of working capital post 30 June has funded redundancy payments connected with the timing of staff exits in July. Finally, turning to Slide 16. I want to provide an update on the transformation of our operating model and the impact on our cost base. You will recall that in February this year, we -- when announcing the transition to our new operating model, we said that we expected to unlock incremental annual underlying EBIT in the order of $4 million to $5 million from FY '26 onwards. More recently, as part of our FY '25 results update in July, we said we expected to unlock an EBIT benefit towards the upper end of that range and that this benefit would allow for further investment in our customers and brands in line with strategy. As such, we have provided an update to the slide we presented in our February half year results. The first thing to note is that there are both revenue and cost base benefits associated with the new operating model. The first 2 blocks of our [indiscernible] chart show you the revenue base benefits and offsets. We expect a revenue benefit in the range of $2 million to $2.5 million worth of EBITDA. This is the benefit from approximately $4 million to $5 million of incremental revenue, which we anticipate will come from increased distribution and service capability. What this means in practice is we achieved greater reach, notably to more independent pharmacies nationwide and enhanced [indiscernible] levels that will enable better availability of products on shelves, thanks to timely delivery and restocking. There is a $4 million to $4.5 million revenue offset, which is the service cost charged by wholesalers for warehousing and logistics. Accounting standards require this to sit as an offset to revenue. However, in practice, it is a replacement cost for the cost savings that I'll discuss further down the P&L. Next, we move on to cost base benefits, and this you will see is where we have really been able to address a substantial portion of the residual cost base that was left following the divestment of Multix. Firstly, there was $6 million to $6.5 million of employee savings from exiting our warehouse and distribution capabilities. In practice, this reflects not having to resource a warehouse and direct-to-store distribution model. Secondly, we anticipated $1.5 million to $2 million savings from cartage and freight and other warehouse costs. These were all costs associated with the direct store model. Offsetting these 2 benefits, we have $2 million to $2.5 million of costs associated with the new 3PL services model. Taking all that together, gives $3 million to $3.5 million EBITDA benefit. There is a further $1.5 million D&A relief associated with the derecognition of our right-of-use lease and warehouse assets, which arose in connection with the sub-lease of the Kingsgrove warehouse. Together, this results in $4.5 million to $5 million of recurring benefit in EBIT. There will be an opportunity to ask questions on this at the end. However, in closing, I'd like to highlight 2 key points. Firstly, we now operate in a more variable model. This is a really important change from our legacy operating model with its disproportionately high fixed cost base. Secondly, of the 4 key benefits to unlock, 3 are now done. Those are employee costs, the exit of other warehouse costs and reduced D&A. This leaves distribution and improved service level benefits being the one we aim to achieve in FY '26 and beyond. I'll now hand back to Brett to take us through our first half priorities and FY '26 outlook.

Thanks, Mark. Our strategy is about achieving sustainable, ambitious growth in our core categories of health, wellness and beauty. We want to grow market share and volume for our core brands through disciplined reinvestment and rigorous evaluation of organic and inorganic growth opportunities, and we do have big ambitions. However, those ambitions have to be underpinned by a stable scalable business model. This is why we have taken a disciplined approach to our transformation, working through the steps methodically and carefully and prioritizing doing the right things well to build a strong base. This approach to execution absolutely continues. The 4 pillars of our strategy are our brands, our customers, our people and the digital transformation of our company. Turning to our key priorities for the first half of FY '26. Firstly, we need to embed our new operating model by inspiring the talent we have on our journey, mature the growth processes for sales and marketing while we create new data capabilities to surface meaningful insights to support it. Secondly, we want to keep capitalizing on the improved distribution and service delivery capabilities of our new model, as Mark just outlined. There are multiple strategic and financial benefits that our new operating model provides and that we will be able to unlock over time. Thirdly, we'll build our foundational brand development work -- we'll build on our foundational brand development work from FY '25, and we should start to see early results in FY '26. And finally, we'll continue disciplined investment in brand-building activities. This is designed to generate sustainable growth for our core brands. Turning to outlook. We've been clear that changing our operating model has been about ensuring we have a model in place that allows investment in our core brands to drive sustainable growth. As such, we intend to reinvest a significant portion of the incremental EBIT from new operating model into growth initiatives for our core brands, customers and capabilities. This is in line with our strategy. And in the first year, we expect moderate returns from this investment. This year, we had the impact of approximately $5 million of transitional pipe-fill. Next year, that will be partially but not fully offset by transitional pipe-fill from onboarding API. Taking into account these factors, we're anticipating moderate growth in underlying EBITDA for FY '26. And as in FY '25, we expect the result for the FY '26 financial year to be weighted to the second half. Thank you all for your time today, and I look forward to taking your questions.

[Operator Instructions] We have a question from Robert [ Algeari from Malloc Pty Ltd ]. Robert asks, can you please provide an update on the status of the ASIC proceedings?

Sure. Well, we don't comment on anything that's in front of the courts as we currently are. What we can say is that the proceedings have completed in terms of the court showing -- but at this point in time, there's no further updates.

Seeing no further questions in the queue. So I'll hand back to you, Brett, for some closing remarks.

Okay. Thank you, everybody. I mean I think you're seeing a team highly motivated to deliver on the potential of this magnificent business. It has been a year of incredible change and the transformation has really met its Zenith at June 30. But we'd like our investors to know that we're highly committed to really starting to generate the growth that the opportunities provide for us. And we thank you all for your ongoing support. There is 2 parts to the Chemist Warehouse deal that we have. The first one is a preferred brands agreement, which is a 20-year agreement, 5-year -- 4-, 5-year agreements, and we're 3 years into the first phase of that. That agreement gives us preferred brand status for the promotional assets inside Chemist Warehouse and is -- and ensures that we get a seat at the table with our brands and our innovations. It ensures that our brands are not just promoted heavily inside Chemist Warehouse, they're also promoted. They're also positioned on shelves, and we get to use their assets in ways that we probably wouldn't be able to without that preferred brands agreement. As we've expressed before and foreshadowed the exclusive distribution agreement of the Chemist Warehouse brands has been difficult. That struggled through some supply chain issues and some other distribution issues. But largely, the benefits that we've received from that agreement have been from the preferred brands agreement.

The next question is from Shuo Yang from Microequities. Shuo asks, can you comment on the more recent scan sales data for the various core brands?

The scan sales data that we've got shown in the pack is indicative of where the brands are headed. And as we've reflected in this, scan sales are telling us that we're headed in the right direction. Categories are looking stronger as a general, probably an overview. I think that's reflective of the retail environment in total. You'll see -- we feel that we're certainly in the right channel with -- in pharmacy channel. Pharmacy channel is showing strong, steady mid-single-digit growth across all of the categories, and we're hoping to match all of that going forward. But what you've got in this pack is pretty much the latest data. So it shows pretty much where it's at, Shuo.

Our next question is an audio question from [indiscernible] private investor.

Yes, I got several questions. The first one is, well, you didn't pay any dividends. You have spent around $22 million on advertising. If you would have paid, say, $0.01 dividend, that would have costed you around $1.4 million. Okay. The next one was, I would like to know what the staff is now, the staff count. How many has the company made redundant?

Yes. Thanks for the question. Hopefully, you can hear us okay.

Sorry, can I still speak or...

If there are any more questions, yes.

Yes. The next thing is also you said the staff cost was $31.7 million and other expenses $13.8 million. What is the $13.8 million?

So [ Harsit ] before Mark talks on dividend and staff costs, let me just talk about staff numbers. At the end of FY '23, we had about 334 people in the business. We're now at about...

I can hardly hear you. Can you speak louder? Or is it somebody call me back because I would really like to hear it.

Okay. Can you hear me now?

I can hear you as a some -- a small background. Sorry?

Can you hear me now?

Yes, I can hear you slightly better.

Okay. Let me speak up for you then. So let me cover the staff...

Can you now tell me what is the staff before you made them redundancy the staff count? And how many staff do you have now after the redundancy?

Okay. So in FY '23, we started with 334 people, and now we're down to about 145. So it's been a significant reduction. And that's reflective of both looking at our cost base relative to the revenues that we've got post the Multix divestment, but then also the removal of approximately 75 to 80 roles in the warehouse that happened on June 30. Mark will talk about the dividend now.

And what sort of staff costs would you have now in '26 financial year '26? What you're looking roughly?

Well, I think the best way to think about that is in the transition benefit slide, which I think is Slide 16, you can see there's $6 million to $6.5 million of employee savings, which we look to unlock as we move forward. So that's the saving that comes through in FY '26.

Dividend?

It is so bad. I hardly can hear you. I can only hear you talking something like is the staff -- that it doesn't make sense to me. I can hear every third word. I can hear. So is there something you can speak louder, so I can hear it? I mean, it would be very nice. I'm an investor, and I would have liked a couple of answers, which I really haven't got yet, right? When you say staff cost for '25 was $31.7 million and then below it says other expenses, $13.8 million, right? Now what I would like to know is what the staff cost roughly would be in the coming year? Are we talking the staff costs will be down to around $20 million and other extra maybe $4 million? That's my really question is I would like to see as an investor, I would like to see what sort of outlays we have on staff cost. And I haven't got the answer from you till yet.

Okay. [ Harsit ] I think we've got a problem with the line. So we'll take this offline, and we'll get your details after the call. And Mark and I will give you a call separately, if that's okay, just to make it easier. Are there any other questions?

Thank you. There are no further questions in the queue.

Okay. Thank you, everybody. That's a wrap for the FY '25 outlook. Again, thank you all for your time today.