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

Thank you for standing by, and welcome to the McPherson's Consumer Products Limited HY '21 Results Release. [Operator Instructions] I would now like to hand the conference over to Mr. Grant Peck, CEO and Managing Director. Please go ahead.

Good morning, and welcome. My name -- as Ashley said, my name is Grant Peck, and I am the CEO and Managing Director of McPherson's. With me today, virtually at least, is Paul Witheridge, the Chief Financial Officer; and Donna Chan, the Marketing Director. On behalf of the Board, management and staff of McPherson's, I welcome you here today, and thank you for your interest. I would like to open with some introductory comments, following which Paul will talk through results, and Donna will walk you through our exciting brand performance and opportunities. Let me start with health, wellness and beauty definition of where we want to play. This remains as relevant today as any time in the last 4 years. We continue to see this as the cornerstone of McPherson's strategy. The global environment in the last 12 months has only underlined the wisdom of this choice. As we live in an age of increased mortality, living longer; and increased morbidity, becoming ill sooner, largely through life choices, the health, wellness and beauty definition is not likely to lose relevance. Of course, all companies in the last year have been working in an extraordinary market environment, where the predictability of outcomes has fallen. Our choice to focus on health, wellness and beauty has meant McPherson's, via a robust domestic business, combined with strong investor support, managed to acquire a health business with future growth potential as well as maintained our well-established dividend policy. Our commitment around health, wellness and beauty is only increasing. We are currently working to get a granular understanding within our health, wellness and beauty definition of the growth opportunities for our brands and adjacencies in the domestic market. It is a $15 billion market after all, so scope clearly exists. And for relevant brands, we are looking to a broader export agenda beyond China and Southeast Asia. To strategic business imperatives. Those keen followers of this business will recognize these 10 strategic business imperatives from prior presentations. As a first-time presenter of this information, I want to be clear that evolution of these imperatives is both mine and the Board's intent. I would like to comment quickly on some of these imperatives and performance as I see them. Sustainability is increasingly a focus. Many of our brands hero sustainability, natural and better for you. A few examples. Our greener proposition in Multix took the category into this space, and the competitive sets have been scrambling to catch up. The very essence of A'kin remains the natural approach to skincare and haircare. Swisspers is leading the sustainability agenda in its category. And Sugarbaby, our recent acquisition, is aligned to Gen Z values around clean, kind and vegan in tanning and skincare. Of course, not all brand renovation works to the extent aspired. However, we now have a track record of creating brand renovation that delivers growth and opportunity to our customers and our consumers. We do this through a sales infrastructure and a logistics network uniquely tailored to a dynamic and exciting pharmacy and grocery channel. On to key messages. The Australian domestic business represents $88.5 million of the group's $101.7 million turnover in the first half. The engineering of our business grew at 6%, well in excess of the category and the peer group. I don't intend to steal the thunder of the marketing and sales team represented by Donna Chan here today, but I would like to point out that 4 of our 6 core owned brands are in growth. And we are the third largest ASX-listed supplier to the pharmacy category, growing at 9.4%, a better rate than any of the top 5 in the channel. This performance, together with investor support in terms of the capital raised in the first half, means we present a balance sheet with significant capacity. We will provide a continued, mature dividend profile. Our annualized yield at 8% is well in excess of our competitive set, and, for that matter, in the current low-interest environment, strong by any relative measure. There's no doubt, this yield is flattened somewhat by our current low valuation. Our capital raise anticipated 3 acquisitions and 2 did not make the grade. I will talk more on the Global Therapeutics Health acquisition shortly, together with future criteria for acquisition consideration. Of course, we need to discuss export. As noted in December, the runway growth of the Dr. LeWinn's brand, created in partnership with Access Brands Management, or ABM, slowed significantly in the last quarter of 2020. This moderation was consistent with cross-border economic slowdown noticed as the Chinese consumer came out of version 1 of lockdown. I'd remind all that this is a brand we launched 3 years ago with ABM that was delivering stat sales in hundreds of thousands and is now in the multiple millions, stellar growth by any measure. It's also fair to say there has been more than a little consumer disruption in the last 12 months in China, just like the rest of the world. So consumer behavior in this key export market will be difficult to gauge in the short term following the slowdown in the market through the last quarter. This is the key driver of our decision to remove guidance, and the impact is likely to mean that underlying profit before tax and earnings per share for FY '21 will be materially below F '20. Together with our partner, we are working hard at maturing our relationship and collaborating in our understanding of the market and the supply chain complexity, which is now of a scale that deserves significant support. McPherson's is committed to seeing the Dr. LeWinn's brand as a global participant in skincare, and we see our partnership with ABM as a key strategic relationship to deliver this aspiration. Moving on from China, however, we are also keen to ensure the market understands we are seeing a breadth of growth opportunities evolving for the business. I'd like to talk about these in 3 distinct buckets. Firstly, health. The health acquisition is exciting, Global Therapeutics brands, our Fusion Health and Oriental Botanicals. The Fusion Health and Oriental Botanicals proposition is on trend on so many levels, including products supporting immunity, which couldn't be more relevant just at the moment. It's based on ancient wisdom and modern medicine that addresses many of the byproducts of aging. Preventative and reactionary, natural health management of typical ailments that are efficacious based, in some cases, on centuries of application. We are at day 70 of this acquisition, one that will benefit from our platform of competencies with our consumer and our customer set and our logistics capability. We see opportunity domestically and internationally and expect it to be a growth driver for years to come. To the domestic business. As I alluded earlier, we are seeing growth in our engine room. It's based on a dynamically changing pharmacy and grocery channel. We continue to see ranging, adjacency and innovation opportunities. We will become more focused on competing in all relevant adjacencies and channels. As an example, one of our most exciting new brand propositions is Sugarbaby. This is an exciting tanning and skin care brand pitched at the millennial consumer that we think out positions some of the existing players in the market. Innovation is a key to brand relevance, and our innovation track record and future plans in the space will be a driver of growth. Donna will talk more on our innovation pipeline shortly. Export. Whilst export is fraught with its own challenges, we have demonstrated -- we have a demonstrated brand with international appeal, and we don't see this as the only offering in our stable with this potential. In fact, beyond China, Australian, natural and better-for-you is a triumvirate that we know will have traction once the global markets settle. The Sugarbaby brand, amongst others has, for instance, has a traction beyond the domestic market. We will use this time to build out our approach to the rest of the world. And to acquisition. Our remit in this space is clear, and we won't be hurried. It must be in our warehouse, so unambiguously, health, wellness and beauty. It must be of scale to make a difference and be a better entry point than an existing brand in our portfolio and it preferably should have relevance and opportunity outside Australia. As I've indicated, we have capacity if the right opportunity comes along, but as we have demonstrated, if it doesn't meet the criteria, then we are quite happy that we have plenty of growth opportunity at our disposal. Thank you for your time and attention today. With that, let me introduce Paul Witheridge to address the financial performance. Thank you.

Yes. Thanks, Grant, and good morning, everyone. Just I'm on Slide 7, and firstly, I'll take you through a summary of our first half sales relative to last year by product category, and the headlines are that our sales revenue from owned brands decreased by 4%, while our domestic sales from owned brands actually increased by 7%. That's -- firstly, our skin, hair and body category did decline by 36% from $17.6 million to $27.6 million (sic) [ from $27.6 million to $17.6 million ], and as foreshadowed back in December, that was due to a 67% decline in sales to ABM. Following new ranging in Woolworths of our A'kin brand, sales of A'kin increased by 5% in the domestic market. With the essential beauty category, we saw a 13% increase in sales from $29.1 million last year to $32.9 million this year, and that's predominantly due to the market-leading beauty accessories brand, Manicare and the hair accessories brand, Lady Jayne, growing by 13% and 30%, respectively, very strong growth. We also had 2% growth from our Swisspers brand. As you know, and as Grant has mentioned, we've got a newly formed McPherson's Health division with the acquisition of Fusion Health and Oriental Botanicals brands from the 1st of December. That contributed $1.1 million to our first half sales outcome. Household essentials increased by 7% from $31 million to $32.4 million. And of course, that was driven by our largest brand, Multix, which grew by 6% due to the strong trend towards home-based food preparation, food preservation and household waste disposal. So there's a breakdown of our overall owned brand sales movement, as I said, a 4% decrease, largely driven by the decline in the export market. Also, our Agency brands, due to COVID-19 weakness, predominantly in the Singapore market, where we have a lot of representation from Agency brands, did decline by 10% from $7.2 million to $6.5 million. And also our private label sales, which is not the main game for us, we do it to have relevance with our customers and to provide a [ pool ] category solution for them, did increase by 1%, predominantly due to increased sales to Aldi. So moving on to Slide 8. I've just provided for you today a geographical split because we do have sales offices in different parts of the world. So firstly, the Australian domestic market, as I mentioned, did grow strongly, up 6%. And in fact, our owned brands in the domestic market grew by 7%. In the export market, you can see there on the second line that we did have a decline in owned brands from $14.2 million to $5.6 million, and obviously, that's predominantly due to a reduction in sales through to China of the Dr. LeWinn's brand. New Zealand had a good half, up 8%. That business is certainly getting back on track and is returning to profitability, just good news for the business. Singapore and Southeast Asia, where we have a sales office, which, as you can see there, predominantly sales Agency product, did decline by 37%, and that's predominantly due to the impact of COVID-19 on that region, which is pretty severe. So going over now to Slide 9, which is really just a different visual representation of what I've already taken you through, so no surprises here. It's a bridge of the movement in our sales. And you can see that the 2 detractors were the decrease in Dr. LeWinn's export and domestic sales, $9.1 million and $1 million declines, respectively, there with good increases from our core Australian-facing brands, Manicare, up $2.2 million; Multix, up $1.4 million; Lady Jayne, up $1.4 million; and obviously, the $1.1 million from the new Health division. So there's a visual representation of the sales movement. Going over to Slide 10, which is a bridge of our underlying profit before tax, starting at $8.5 million and moving through to $7.1 million for the half. You can see that, again, no surprise, the 2 detractors were the decrease in contribution from Dr. LeWinn's export and domestic. Just a point there, you'll see that those numbers are actually disproportionately high relative to the sales decrease. And the primary reason for that is that we did take up some additional inventory provisioning against the Dr. LeWinn's brand, and that is reflected in those contribution outcomes. And then you see a series of favorable movements in contribution from Multix, Manicare, Lady Jayne. Again, they're actually disproportionately high because we did have a benefit of some favorable sales mix in terms of the sales of those products into our customers. We did have reduced customer discounts half-on-half. And also, in the case of Multix, we did have a reduction in our inventory provision because we've had some success clearing excess stock. As I mentioned, we had an increase in profitability from Singapore and New Zealand, in combination, a PBT impact of $0.5 million favorable. We actually, for the half, did have a favorable impact from commodity prices, predominantly impacting Multix, and that was a $1 million favorable impact, and we had roughly a $1 million unfavorable impact from currency. And that may seem a little bit odd, given what you've observed in the spot markets, i.e., currency going up and commodities going up. The reason for that is because we do have around a 4-month lag in the impact of those things coming through our COGS and being sold through. And that lag has resulted in that particular outcome. I'd expect, in the second half, that, that situation will be reversed as we do see the benefit of currency appreciation and the dis-benefit of commodity cost increase coming through in our numbers. And just moving now on to Slide 11, a bit of a snapshot of our balance sheet. As Grant mentioned, our balance sheet is very, very strong. Our net debt, excluding lease liabilities, so that net bank debt, reduced from $19.6 million a year ago to $3.8 million. Of course, we've raised equity, as Grant has mentioned, $45.9 million, and we've applied part of that to fund the Global Therapeutics acquisition. And we intend to apply the balance of that equity capital raise for future acquisitions. So our gearing at the moment is really low at 3%, excluding lease liabilities, and obviously, that places us in a good position to fund accretive acquisitions in the health, wellness and beauty space in the medium to long term. You can see there the graphic on gearing, which has come down well over the last 5 years and also our net bank debt, $3.8 million. So moving now on to Slide 12, which is cash flow. Our cash conversion for the first half was 68%. I point out -- as I pointed out in the past, it's seasonally light for 2 key reasons. We do have relatively high sales in December. And also, we do build stock ahead of Chinese New Year shutdowns, which we're in the middle of at the moment. So that's why the cash conversion is relatively low in the first half, and we do expect it to improve over the second half. And again, I've graphed those on that slide for you to see. Finally, just to comment on our interim ordinary dividend. The Board has declared an interim ordinary dividend of $0.035 per share fully franked. That will be paid on the 18th of March, represents a very high payout. It's 98% of our first half earnings per share. And we decided to suspend the dividend reinvestment plan due to our strong balance sheet. So that's it for me. I will now hand you over to our fabulous Marketing Director, Donna Chan.

Thanks, Paul. Good morning, everyone. Today, I'd like to share with you our sales and marketing plan for our core brands. The strength of our brands and innovation program has delivered strong results. Within health, wellness and beauty, we've increased our share by 0.9 points to 16.8%. In pharmacy, we continue to outpace the channel growing twice as fast with Manicare and Lady Jayne spearheading this result. In grocery, expansion and sustainability for our Swisspers and Multix brands has been key to resonating with consumers and driving growth momentum. Zooming in on our performance within the pharmacy channel. The chart on the left shows McPherson's growth in orange versus pharmacy growth in the blue line. You can see that McPherson's outperforming across all months except when COVID first hit. And in this period, you can see that the health products soared to an all-time high. The second chart shows McPherson's growth month-on-month. The orange line represents growth last year, and the blue line represents growth this year. Across all periods, McPherson's growth has strengthened this year. This chart shows suppliers grouped by size. The top 50 manufacturers represent 72% share of the pharmacy channel. McPherson's, ranked at #15, is growing at plus 9.4%, delivering well ahead of many of our peers within this group. Looking at the performance of our brands within the domestic market. We're pleased to report strong results of our brands, with 4 out of 6 gaining market share with significant increases across Manicare, Lady Jayne, Swisspers and A'kin. Multix grew through increased at-home baking and cooking. And whilst the skin care category has been impacted by the loss of the Daigou trade, the strength of our Dr. LeWinn's brand with local consumers has enabled us to hold market share. Innovation continues to play a key role in driving sustainable growth for our brands. In the first half of this year '21, new products represented 33% of our sales. Key themes on new products include premium innovation, sustainable expansion and entry into adjacent categories. Our innovation funnel continues to be fueled with R&D investment, partnerships and exciting projects. Our portfolio of leading brands are well positioned to leverage the latest macro trends. Complementary medicine is in high demand and is perfectly aligned with our recent acquisition of Fusion Health and Oriental Botanicals. We are increasingly investing in science and clinical claim to deliver efficacious products that satisfy the pro-active beauty trend. Our portfolio of trusted Australian natural brands holds appeal to both domestic and international consumers. COVID has driven the rise of beauty at home, which we expect to continue as consumers' behavior has evolved in this new world. And sustainable solutions remain high on our agenda as we champion first-to-market innovation to drive category growth. We're extremely excited about the acquisition of our new health brands, Fusion Health and Oriental Botanicals. The culture and synergy of our teams are well aligned to make way for smooth transition and integration. The complementary distribution network will also allow greater reach and new distribution opportunities across both portfolios. Innovation remains a key driver of growth for Dr. LeWinn's. Clinically proven beauty nutrition was launched at the end last year. Distribution expansion in Chemist Warehouse happening right as we speak. We've just launched our most potent formulation ever for the China market, an intensive action caviar eye serum and eternal youth has been bridged with strong clinical plan. A'kin is well positioned to appeal to a millennial consumer. New products as well as further range expansion in grocery will continue accessibility, awareness and growth momentum for this brand. Sugarbaby has been a fan favorite for tanning solutions. Under McPherson's leadership, the brand has been rejuvenated to connect and appeal with the Gen Z consumer with modern new brand identity, new formulation for sensitive skin and Australian products thoughtfully designed with sustainability in mind. Manicare, Lady Jayne and Glam are leading the category. With innovation, premiumization has turned relatively flat categories to 4% to 7% growth, fashion collaborations with Australian designers, online education, inspiration and connection and continued investment in in-store merchandising. Multix leads the sustainable segment with 53% value share and 79% of sustainable buyers buying into Multix Greener. Swisspers, a trusted Australian brand, leads the cotton category with over 60% share and is leading the charge of reducing single-use plastics within this category. Our continued focus on expanding our sustainable offerings as well company-wide commitment to reduce environmental impact will deliver positive results for our brands and the planet. Adoption of digital has accelerated during COVID. Australians spent $42.2 billion on online retail. Almost 9 million households shopped online in 2020. Increased investment in digital has been a major priority for McPherson's, and the results speak for themselves. Significant increases in engagement, consumer connection and online sales have been key highlights of our plan. In addition, we're investing in a new e-learning platform, which will enhance our retailer education program across our entire portfolio. Moving on to our channel and customer plan. Our strong position in market is a testament to our agility and execution of the strategy. We've seen some macro trends and a shift in retail, which ultimately shaped our sales strategy to ensure alignment to the retail landscape. 4 key macro trends have been large consideration in our plans, and these include: one, channel shift to grocery online and shop local; global expansion; retailer brand focus with over 120 exclusive pseudo-brands within the categories we compete in; and shopper engagement in-store. Key drivers of our end market results have been the transition -- translation of these macro retail trends into strategic sales pillars. In response to the channel shift, we've reshaped our approach and increased ranging online for 223 lines, gained incremental ranging for A'kin and grocery and Big W and added 15,000 incremental distribution points across Australia and New Zealand. Strategic partnerships enabled us to stay close to retailers. In market partnering through customer differentiation, this was a clear driver of share gain. We delivered 10 exclusive Glam products in Chemist Warehouse, 7 first-to-market launches in Priceline and 2 exclusive lines in independent grocery. And with shoppers being influenced at shelf, not only have we continued to execute category and navigation solutions in-market but redeployed funds into off-location display. Whilst we continuously pivot and consider macro retail trends to make decisions, our strategic sales growth pillars remain unchanged. We continue our focus on range and investment optimization and execution to drive the core to provide a platform for innovation, success and profitability, albeit in a different environment. The most exciting and largest growth driver is expansion, with a number of outcomes secured and already in motion. We've achieved over 14,000 incremental distribution points already secured in our second half. I'll now hand back to Grant.

Thanks very much, Donna. I'd just like to, in closing, reiterate the key messages. Firstly, the engine room of our business in the domestic market is growing at 6%. And I think as Donna has just presented, the future continues to look very healthy in that space. The cash flow that, that business drives and the support from investors means we have a healthy balance sheet with meaningful capacity. Our export businesses, whilst going through the pain of COVID and significant demand unpredictability, remain a driver of growth in the medium term. And then finally, we see breadth to our options and growth in the domestic market and in other export markets and, should the right opportunity present, in acquisition. Most importantly, overall, we remain strong advocates for the strategic choice to focus on health, wellness and beauty. Thanks for your attention today, and now I'd like to open up the floor for questions. Ashley?

[Operator Instructions] Your first question comes from Philip Pepe with Blue Ocean Equities.

Just first one on Dr. LeWinn's China, if I may. Obviously, the slowdown coincided with the number of events happening at the same time. There was the successful completion of the 3-year earn-out for ABM, there was COVID and there was Australia-China arm wrestling. Do you have any feel for any excess inventory that might be in the channel that might take roles to work out? Just trying to match up comments today with what you put in your December trading update, where you're expecting 40% to 50% growth in Dr. LeWinn's Asia this year. Is that perhaps a bit high now, are [ you expecting that ]?

Yes. Thanks, Philip. Thanks for your question. I think it's fair to say that it's clear that the last quarter of last year surprised on the downside. The China consumer went from participating aggressively in skincare, and between our partners and ourselves, we're looking at growth that was double-digit and then some. And October, November, December disappointed. That does leave us with a reasonable stock [ right ] in the system. But more importantly, it also leaves us with a bit of a pause for consideration on how that consumer is going to come back now aggressively. Hypothetically, there was a lot more things that they could, all of a sudden, spend their money on in the last quarter. And so all of a sudden, their basket of goods were far broader, and perhaps that's what played out. Right now, we're working closely on getting as good demand plan as we can. We need to -- there's no doubt we need to work out -- work through some of the inventory that was set in place for that October, November, December period. And that's what we're working through at the moment with our partner very closely. Ultimately, it's going to depend on what the consumer offtake looks like. It's still double-digit. Is it 40 or 20? I wish I could tell you with confidence. That's why we removed guidance because it would be a bit of a stab at the moment. But certainly, I think 20 to 40 is our best guess at the moment.

No. Fair enough. And secondly, just quickly, well done on launching A'kin into Woolies. Looks like there's a handful of SKUs on the website. Is the plan to expand ranging on the shelving and a greater presence in co-branding and that kind of thing? How do you see that playing out in the next 12 months?

Donna?

Yes. Absolutely. So we've established ourselves within the shampoo and conditioner. We've already secured additional ranging in new categories within personal care and what is coming out, I think, over the next couple of months. And we're continuing to, I suppose, collaborate with Woolworths on building the brands. Obviously, we're both very keen in this venture and excited in terms of prospects of really building up, I suppose, a larger brand presence within the Woolworths customer.

Your next question comes from Ian Munro with Ord.

Just with regards to Dr. LeWinn's into the ABM channel. It looks like there was between $3 million to $5 million of revenue in the first half. Can you maybe just confirm if that's around the mark? And perhaps just elaborate on how we should think about whether that's the new base going forward. And also interested in your comments as to how that channel has been trading around Chinese New Year. And just perhaps expand a little bit as to how much inventory is in the system over there. And perhaps, should we be thinking about that inventory as being, perhaps, a driver behind the lower guidance for FY '21? And just any general comments about that channel and, perhaps, whether anything sort of you can structurally change to, perhaps, turn that performance around and whether there's any sort of considerations within the ownership structure that needs to be examined to get a better result out of that?

Thanks, Ian. The $3 million and $5 million number is the number recorded in the half. It's definitely a function of the fact that there's quite a lead time in respect to the product. So we do -- we would carry significant amount of inventory in anticipation of the growth that we were seeing. We've had a quarter where that growth stalled somewhat. So we're definitely working through inventory that was set up for the quarter that we now no longer see -- we now need to work through. Paul noted that we've taken an increased position around some inventory from a provisioning perspective. Ultimately, the issue of inventory does depend -- all road leads to Rome, and the demand forecast and the confidence in the demand forecast, which both ourselves and our partner would still see, is in the 20% to 40% growth range year-on-year, becomes issue in terms of working our way through that inventory. And so, yes, we've -- there's more inventory than we'd like to see at the moment, but it's completely -- when you kind of think through the length of the supply chain, when you think through the results in the last quarter, particularly following the spectacular growth in the 3 quarters beforehand, you are going to end up with a workout on a lump of inventory that we need to move through. So that's playing out on our forecast. It's certainly playing out in terms of the work that we're doing with ABM. And I think I would like to point out that we're collaborating extremely well, I think, with our partner in that market to work through that. So $3 million to $5 million. But in answer to your first part of your question, $3 million to $5 million is a function of there was plenty of inventory in the market, and we didn't -- did not need to replenish. So I wouldn't call that out as a typical run rate. And in fact, I probably wouldn't call out whatever our number ends up being for this fiscal as a typical run rate because we've got to work through that quarter's inventory. I hope that helps, Ian.

Just perhaps elaborating on the conditions in the last, say, 6 weeks post balance date that maybe gives -- is there any sort of evidence that you can provide that gives you confidence in that 20% to 40% growth forecast? I mean just relative to where we sort of stand today, it seems a bit aggressive.

Well, Ian, as you can imagine, there's about 4 different promo periods that dominate the Chinese market, and we haven't tripped over the first one yet. So even if I was to call out a number, it probably is too soon to say because we haven't passed the first one, which would be Mother's Day next month. So it's very soon to say.

Just on the inventory balance, this might be a question for Paul, can you give us a sense of how much of it is locked up in Dr. LeWinn's products destined for ABM, please?

Sorry, Ian. Can you just repeat that question?

Just of the inventory balance that we're seeing in the accounts, how much of that is -- at balance date is destined for the ABM JV?

Are uniquely different. Well, if your question is, tell me how much of the inventory just has a market for ABM, it's really none of it because we don't have any product within our portfolio in the Dr. LeWinn's brand that is just sold into ABM. So I can answer the question in the sense of total Dr. LeWinn's inventory would represent, gee, around -- probably around 20% of our overall inventory in that order. But there's no unique stock that goes into the export channel, Ian.

Your next question comes from Elijah Mayr with CLSA.

I just want to quickly touch on if there's any update on the CEO search or if, perhaps, Grant, you would like to stay in the role a bit longer.

So there is an update. There's a process underway. And I'm -- I would anticipate that within the next 2 months, there'll be an answer in the space.