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

Thank you for standing by, and welcome to the McPherson's Limited Full Year 2021 Results Release. [Operator Instructions] I would now like to hand over to Mr. Grant Peck, CEO and Managing Director. Please go ahead.

Thanks very much, [ David ], and good morning all. I hope you're all surviving and looking after your own health and wellness in lockdown. I'm here today with Paul Witheridge, the CFO of McPherson's. So throughout the last 9 months, there's been a number of occasions where we've had the benefit of being able to sit down and talk to investors, also often, unfortunately, via some kind of Internet-based facility. But nevertheless, there's been one resounding message amongst many, where the investors have expressed the view that our results presentation in the past has gone on a little. With this in mind today, we've got a short 25-page presentation and an aspiration for leaving significant time for Q&A at the end of the suggestion -- at the end of the session today. So I intend to provide a brief F '21 overview and introduction and then hand over to Paul, who will talk about the detailed financial highlights, following which I'll come back and update our progress versus the strategic and operational review that we completed in May this year and talk about our progress towards our ambitions in that space. Finally, we'll have a summary and a discussion around the outlook and then open up for questions. Now in terms of [ vision ] that you're going to be supplied by today, I don't really think you need to dwell terribly much on my COVID study. So I'm going to allow the presentation to take center stage, so you get a better view of exactly what's being presented on the screen. So thanks, [ David ]. Let's move on to the F '21 results on a page. Despite the obvious challenges of a lockdown market in the last quarter of this year, our April guidance, which was $200 million in sales and between $10 million to $13 million in underlying EBIT, was met. We're fortunate to have an extremely resilient domestic performance and brands. And yes, these were offset by lower international sales of Dr. LeWinn's and some one-off items, which we'll take you through. We also have a very strong balance sheet with low debt and gearing, which is an important factor as we look to weather these unique economic environments that we're currently enjoying. Most importantly, through the year, as most of you would be aware, we put in place a very clear strategy to progressively achieve targets and aspirations towards our F '26 goals. Our health acquisition, Fusion Health and Oriental Botanicals being the 2 key brands in that space, is progressing very pleasingly. We've begun the reset to simplify the business, drive efficiencies and focus on growth. And in so doing, we have created 3 commercial business units, which we're going to focus around those 3 growth areas we identified in May. We're in process of exiting complex joint ventures, which weren't delivering what we need, and we're moving our way towards a leaner business and identifying significant cost opportunities. I'd like to talk briefly about our May investor review outcomes on Page 5. The last 12 months has driven the need for a recalibration and a reassessment of capability and focus. The COVID-19 pandemic significantly disrupted our international business. This forced a deep and introspective assessment of what's been created at McPherson's in the last 5 years. We do have strong brands and consumer propositions in the domestic market and a beachhead brand in skincare in China with Dr. LeWinn's. However, as a team, from the Board down, we recognize we need to improve, how we play in these focus and better return from our existing brands and existing capabilities. We need to drive fewer, bigger, better initiatives with a more mature approach to balancing our risk and growth opportunities. Our approach in the international space requires a better risk/reward balance, and our costs need to be addressed to suit our current business reality. I will review our progress against these focus areas following Paul's financial summary. Before I do, however, I'd like to address the market and COVID and the conditions we're dealing with at the moment. People, health and safety, as always, is our first priority. And it's very pleasing to be able to stand here or sit here [ as best may be ] and say to you that we continue to be working in a COVID-free environment from an employee perspective. We're getting all too good at working in remote locations, and all of our Eastern Seaboard offices are working in this kind of environment and I'm talking to you in at the moment. Our Kingsgrove warehouse has had a very limited lost time and at this point, 0 cases, which is pretty incredible position considering the situation that Delta is providing in Sydney. We're constantly monitoring the health and safety of our staff. And in particular, I like to call out those people in the warehouse and the work that they're going through and the effort they're going through just to get to work every day. From a supply perspective, we're weathering the challenges. Yes, there are increased shipping times and at times, a difficult environment. Despite our impairment of the Aware investment, we remain confident that our local formulated supply capability is in good shape. And our imported product service levels have held well over the last 12 months, and people would understand we rely on our relationships in Asia to support a number of our brands. Of course, from a demand perspective, the daigou trade is a phenomenon that is being curtailed by COVID. That's impacting beauty, in particular, in the domestic market and quite clearly, the international market. We're fortunate, however, we have a balanced portfolio in the health, wellness and beauty space; and the trend towards care at home does lean into brands in the beauty and the household essential space. And then finally, we are aware that we need to continue to pivot as shopper behavior continues to change dramatically in the face of lockdown, lockout, lock-in. And so we're agile when it comes to channel management in this space. With that, I look forward to coming back and talking to you shortly, and I'll hand over to Paul to talk about financials.

Thanks, Grant, and good morning, everyone. Today, we have released our [ explanatory ] financial statements to the Australian Stock Exchange, and I encourage you to review that document to gain a complete understanding of McPherson's financial performance in fiscal '21 and our current financial position by category. The significant sales decline in export of Dr. LeWinn's product has resulted in a 51% reduction in skin, hair and body sales to $30.9 million. Importantly, the Dr. LeWinn's brand continues to have strong recognition in China as evidenced by in-market sales data. The brand has grown from a 0 base in 2016 to underlying sales of approximately $20 million. The fact that this growth has been achieved by accessing one relatively narrow channel to date indicates the significant potential for Dr. LeWinn's in China as it expands into other channels. Sales of A'kin products increased by 11%, largely due to a new partnership with a key retailer in Australia to range of focused selection of haircare products from November 2020. Incremental ranging of a further 5 A'kin skincare products will commence before the end of August 2021. During fiscal '21, McPherson's generated substantial growth in its essential beauty category where sales grew 15% to $67 million driven by a 40% growth in sales of Lady Jayne products, 13% growth in Manicare and 4% growth in Swisspers. The COVID-19 pandemic has led to a shift away from beauty salons to home-based beauty solutions, which in combination with successful new product innovation has resulted in improved demand for all of the company's core essential beauty products. The household essentials and other brands category is dominated by Multix, where sales declined by 8% in fiscal '21 to $50 million, largely due to ranging losses in the Kitchen Tidy bag category in 1 major retailer. Multix is responding to recent ranging losses by further strengthening its sustainability range of products across all segments. The Fusion Health and Oriental Botanicals brands contributed $9.5 million sales in fiscal '21. When acquired, the in-market performance of these brands was being adversely impacted by stock shortages due to a known pre-acquisition fire at one of its major suppliers. Alternative sources of supply have been progressively secured over the last 8 months with the out-of-stock position almost eliminated. In summary, total owned brand sales declined by 9% to $168 million. However, excluding Dr. LeWinn's export sales, our owned brand sales increased by 9% to $162 million. While our owned brands are our primary focus, McPherson's also supplies a range of agency and private label brands to our customers. Agency sales declined by 11% in fiscal '21, largely due to a $1.3 million decline in Ozguard hand sanitizer sales due to significant oversupply of that product in the market. Low-margin private label sales declined by 13% due to increased competition from direct manufacturers. Today, Grant has announced a new commercial business unit structure comprising 3 CBUs, each with individual responsibility for marketing, sales and profit outcomes. These CBUs are: ANZ Beauty and Household, International, and Health. Future reporting will be aligned with the new CBU structure. Today, I've included 2 pie charts on Slide 6 illustrating the relative sales of each of these 3 CBUs in fiscal '21 and fiscal '20. No surprise that the ANZ beauty and Health unit dominates our sales profile in both years. Now moving through to a slide that has a bridge of our FY '20 to FY '21 underlying EBIT. You can see there that we've moved from an EBIT of -- or an underlying EBIT of $25 million in fiscal 2020 through to this year's reported underlying EBIT of $11.3 million. And we did experience, as noted, key -- strong growth, sorry, in key brands, which are represented by the first 3 bars on that chart. So we had increase $2.5 million in Manicare contribution, a $1.6 million increase in Lady Jayne contribution and a $1.4 million contribution from our newly acquired Health division. We also had a $1.2 million decrease in our JV losses with tighter expense control and a $700,000 improvement in our New Zealand EBIT outcome. The significant negative impact on our result for the year was the decrease in Dr. LeWinn's export contribution, which is a function of both sales and margins through to the China market. That impacted our earnings by $15.7 million. We also had a $3.9 million decrease in Dr. LeWinn's domestic contribution due to the significant absence of daigou trade. We had a $1.1 million FX loss. As you know, we do hedge our current 12 months forward, and that reflected a decline in the nature of our hedge book. And we had a $0.5 million decrease in private label contribution. I should point out that this is a representation of our underlying EBIT, and I have attached to the presentation an appendix that illustrates the significant items explaining the statutory loss before interest and tax that the group incurred in FY '21. Now moving through to some key metrics on our balance sheet quickly. So the next slide. Thank you. We did have very healthy underlying cash conversion in fiscal '21. You can see that on the first graph, 108% underlying cash conversion. And you can see on that graph that we just have a history of a strong cash conversion. Our net debt and our gearing both remain very low net debt of $8.4 million and gearing at a record low for the last 7 years of 7%. Moving through finally to an explanation of our dividend payment and cash -- sorry, and capital management considerations. So by way of dividend, the Board has declared a final ordinary dividend of $0.015 per share fully franked taking the full year dividend to $0.05 per share fully franked. That represents a payout ratio of 99% of our fiscal '21 underlying profit after tax due to the strength of our balance sheet. That final dividend will be paid on the 23rd of September. Given the strength of our balance sheet, we have considered various capital management initiatives. However, at this point, we do consider it prudent to defer any decision to implement these while there is a high level of uncertainty regarding the COVID-19 pandemic. Thank you. I shall now pass you back to Grant.

Thanks very much, Paul. Firstly, quick, a recap, and I'd like to go back to our May investor presentation. Next slide. Thank you. I won't spend too long on this slide, but in May, we reemphasized our comfort in the choice around our center of gravity being health, wellness and beauty. We are operating in a $15.2 billion market. All the macro indicators support the strength of this choice for decades to come. Not only that, but some of the trends that underlie this choice continue to be just as relevant today and into the future: proactive beauty, or what I call preventative maintenance; brand Australia; beauty at home, more prevalent, naturally enough in a COVID situation, in fact, almost mandated; and sustainability, which is a trend of our age and is clearly [ not ] going away. Don't take my word for it. I guess the other perspective is we continue to see increased corporate interest in participation in the category and not just in respect of McPherson's. And I think about the recent activity in respect of Wesfarmers and API. In May, we laid out a platform of 4 separate areas of focus. Next slide, please. Our aspirations are laid out clearly. We intend to grow to $300 million in sales and $50 million in EBIT in FY '26. We'll focus on the 6 core owned brands, the health and wellness platform, selectively expanding and maturing our international footprint, and we'll address costs. What I'd like to do for you now is briefly address each 1 of those 4 areas and how we're progressing towards our ambition. Next slide, please. The largest part of our business and our focus is the most robust, and that's in the 6 core owned brands in the domestic market. Paul started to touch on the significant brand performance that we're seeing. 4 out of our 6 core brands are in significant growth. Manicare, Swisspers, Lady Jayne and A'kin is represented on the right of this slide. Our pharmacy and core pharmacy business has outperformed the category significantly during FY '21 and growing at a fair clip versus a relatively flat market. To be fair, we also recognize there are headwinds against some of our core brands. The 2 I'd call out, in particular, is the impact that we continue to see from a reduced daigou phenomenon on beauty. And clearly, COVID is not helping that. And so Dr. LeWinn's, both from a domestic perspective and also the well-understood international perspective, has faced significant headwinds. And then in bags, wraps and foils with Multix, we led the market into the greener category, and our competitors are catching up with fast innovation, which will now move on to a second wave of delivering against that innovation. So they're the 2 brands that sit outside our 4 of 6 that are growing well. We'll continue to focus on sustainability. Swisspers and Multix, in particular, are leading the way and led the way in terms of category innovation against sustainability in the space they operate in, particularly excited about the cotton tips and paper stem replacement program that's going on in Swisspers, and we've got more exciting news to come in respect of that range in the next few years. We continue to invest behind expanding our capability whether it be training and product knowledge or moving into more online investment around digital capability, increasing our penetration in that area of the market that continues to grow. Next slide. In May, we suggested there was upside from our core business in ranging customer expansion and channel expansion. We're already seeing traction against that aspiration. We set some distribution targets, recognizing that we, in some areas, were underrepresented versus our brands' potential. We've already confirmed over 25% of the annual distribution target that we set for ourselves in distribution with 26,000 additional distribution points confirmed for the first half of 2022. Lady Jayne, Manicare and A'kin have also demonstrated that we -- where we believe there was opportunity to move our success from a far channel perspective into grocery and we're seeing additional listings in grocery in that space. We continue to collaborate with our key partners in a retail sense, and we'll see activity against our key brands in television in partnering on programs with our key retailers. In customer expansion, we will continue to ensure we're fronting up into the new online opportunity and space. And we've noted some of them that we have already seen arrangements in place for in the first half of '22. And then to innovation. Innovation is always a highlight of the McPherson's go-to-market strategy. And I'd like to talk about that in a little bit more detail on the next slide. We talked about moving categories into adjacencies, top left of this slide. Swisspers, we see, is a very powerful brand in the cotton space. The adjacency is baby, and we're moving into that category in the first half of this year. Moosehead is being relaunched and that together with Stratton are addressing the men's grooming category. The momentum and driving beauty at home, we're seeing extraordinary growth for Manicare, Glam and Lady Jayne in this space. With more sophisticated beauty tools, we're moving up the value ladder and consumers are leveraging the at-home beauty treatment with some now very sophisticated solutions from our brands in that space. Bottom left corner, we continue to innovate in skincare; and then finally, earning sustainability for those 2 key brands, where sustainability means so much, continues to be an absolute priority. On to Health. Next slide, please. Paul talked about the fact that we've acquired the GT business, now the Health business and the key brands, Fusion Health and Oriental Botanicals. We are delighted, truly happy with the progress of stabilizing this business. We will discuss the background and the fact that we inherited the business that had real holes in availability through the fire, which was pre-acquisition. We've recorded $9.5 million worth of sales in the F '21 year against this business. In April 2021, it was the highest sales month since September 2019, our best -- the best month from a sales perspective for this business with the exception of the March '20 panic buying sessions. Our stock availability levels have been at the highest that they've been in 2 years. And we've had a close look at our quarter, quarter 4 in FY '21, and like-for-like sales growth after -- sales growth after accounting for nonprofitable SKUs that were deleted in the run-up to the sale period would indicate that we're growing at a rate of 16% year-on-year in the quarter. In addition, the team in the Health business engaged the customer base with the Fusion Health Wintering Well campaign, which really leveraged the renewed availability and put our brands at the forefront of the channels that they operate in. Into the future, next slide. We continue to identify considerable upside in this business. As an example, ranging in the pharmacy space, which we do so well in with other brands, is still under 40%. So there's significant upside for our brands in this space. Not only that, we've got complementary McPherson's products that are now accessing the skills and the talents of the team, and we're getting additional ranging for A'kin and Happy Flora in health stores. We're assessing the China market opportunity and expect to have a plan ready to go in the next half for a launch into a bigger and broader environment for Fusion and Oriental Botanicals internationally, including and probably leveraging most likely e-commerce platforms in that process. From an NPD space, in the Health business, the brand effectively competed within its own broader portfolio in the past, and we'll selectively address this by opening up new opportunities and [ you need states ] that Fusion and Oriental Botanicals can address. Onto China. What I'd like to do, I guess, is in the first instance, just refresh some of the fact base. Sales following a significant distribution in the demand profile in the calendar year last year reduced significantly our sales to our partner, down from $37 million to $7 million in F '21. As Paul has already indicated, end market sell-through by ABM is estimated to be in the $19 million to $20 million range, down some 21% on FY '20. Our understanding of brand performance of beauty brands generically or across the e-com channel is that they're down by 20% to 25%. The brand in itself is probably slightly -- is outperforming the market. We know we've got significant inventory weight being worked through, and we're working with our partner against that. In respect of the work we did, we looked carefully and looked in depth at the brand and what's been created. We have an established anti-aging position, which is a key platform internationally. The awareness, reputation and efficacy are strong. However, we know we need a better, broader and tailored -- better, broader and tailored marketing assets and better availability. As a result, we are now working to address our arrangement with ABM and its relevance to the new market relativities and the brand and how we manage it in the future. There's much work to come in this space, but we've created a significant asset. And that's got great long-term potential, and we continue to -- intend to exploit it. In fact, we're now progressing entry into non-China markets in a very measured, careful and thoughtful way. We've contracted in the U.S.A. to start in this half against the e-commerce opportunity on a purely self-funding basis. We're looking, as we've discussed earlier, at Fusion Health's entry into the international space. And we know that we've got strong IP positions against Dr. LeWinn's globally ready to go. Finally, onto cost and efficiency. We've restructured our business, and Paul's discussed some of this. We've restructured our business, clarified and simplified expectations for the senior leadership team. We're building the business around the 3 core growth principles: core range in ANZ, Health and International. We're focusing the international business on skincare, and skincare management and marketing will come out of the International business. So we can focus on the discrete needs of each of those international markets, including the domestic market. We're reviewing our joint venture agreements and exiting complexity that is generated by those agreements. Doesn't necessarily mention [ name ] they're exiting the brands, but we're certainly taking complexity out of our ranges in that space. In the warehouse and distribution space, we're in the process of re-contracting in Kingsgrove lease, and that will open up opportunities to continue to explore and exploit warehouse and distribution efficiencies. So we're on track with our May investor presentation across our commitments and are moving quickly to implement those. Onto a trading update. Well, with 15 million people in lockdown, it does restate some of the demand profiles on a quite regular basis. Fortunately, we've got a core range and brand profile offerings that are complementary no matter what the outcome from a consumer perspective. So despite the external environment, we're optimistic that '22 will deliver improved revenue and EBIT on '21. Having said that, the market uncertainty support, as Paul has indicated, maintenance of a less geared balance sheet. In the international space, we require some patience. We need to be broader with a more predictable base to call on from a geographic and a brand perspective. This will take some time, but there's a really great opportunity in the export space that we tend to continue to exploit. I'd like to move to summary, and then we can open it up for questions. So in short, what would I like to leave you with? We have a resilient performance from our core business. We've got a clear strategy in place and rapid execution of those initiatives. We're prioritizing simplification in our business and cost efficiencies that will come with that. Our Health business platform has been established -- the performance base has been reestablished and a call out to the people in the Health team who have joined McPherson's and in the space of 7 months, really reestablished the platform for that business to grow from. Our International restage has commenced, and we're seeing real opportunity in other markets that we're starting to move towards. And we continue to see ourselves as on target for our aspirational targets we set in May around F '26. A few quick points on the larger environment. As most of you would be aware, we've moved to start a commensurate process around refreshing the Board, and we are now driving to and are moving towards a leaner senior leadership team as we've discussed. We've constantly got an eye out on acquisitions, but I would impress upon you the following: that we don't have anything currently being considered; that all we would do would be acquisitions of meaningful scale and they must be aligned to health, wellness and beauty. And frankly, right now, our focus is on reestablishing the business in Australia and seeding our International business. I'd like to thank everyone for their time today. I know it's a difficult time. And it's not just a difficult time, but everyone's doing it from home. So I appreciate you putting yourself out to listen to us today. And with that, I'd like to open up for Q&A.

Our first question comes from Lachlan Moffet Gray at The Australian. Lachlan asks, could you please elaborate on why the written down hand sanitizer was unsalable?

Short answer Lachlan is that dates back to middle of the COVID or, what I call it, peak COVID. Although I'd like to say it was peak COVID, but right -- with what we're going through right now, I'm not so sure. The world moved to make an enormous amount of sanitizer, and that created a glut. And I think there was -- and I'm not just suggesting this was us and us alone, but there's an enormous supply of hand sanitizer in the market worldwide, and that's what led to an inability to sell that product.

Our next questions come from Philip Pepe. Philip's first question is have you made any progress in derisking the reliance on one brand, one channel, one international geography.

Thanks, Philip. My view is we have -- not only have we had a deep look at the China market and the China market alone, where we recognize and we understand we need to move out -- we need to broaden our offering, and we're in that conversation with our partner in that market at the moment, but also we've commenced a progress of moving into other markets. And as I talked about earlier, first one of those markets will be the very large U.S.A. e-com market. We're taking some graduated steps towards that, and we'll do that before the end of this half. So we've appointed a distributor. And we've designed the portfolio, the Dr. LeWinn's portfolio that we think is appropriate, and we're going to begin a graduated and, I would say, self-liquidating approach to that market in the next 6 months. So yes, we need time. We need time. We certainly got -- we certainly are aware and conscious that we need to work through some inventory positions in the China market. We know that we need to broaden our approach in that market. But most importantly, we need to have other markets. And that is part of the announcement today around our intent around the U.S. And it's not to suggest we're just relying on the U.S. We'll also use those IP positions that we've confirmed to look at other markets. In the first instance, from an e-com perspective because, particularly at the moment, cosmeceuticals, I think the stat globally is something in the range of between 40% and 50% of all cosmetics purchased online. So we think we can -- we think we're going to have a cost-effective market entry trial test and grow on that basis, Philip. Thanks for your question.

Philip's second question is can you provide any financial guidance for FY '22?