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

Thank you, everyone, for standing by, and welcome to the McPherson's Limited Half Year 2022 Results Release. [Operator Instructions] I would now like to hand over to Mr. Grant Peck, CEO and Managing Director.

Good morning. Thanks very much. Welcome to the McPherson's first-half results presentation. My name is Grant Peck, I'm the CEO. And with me today is Paul Witheridge, CFO. Today, I will give a brief performance overview and discuss market conditions and trends. Paul will then take you through the financial highlights for the half, and I will return to take you through divisional performance and an operational review update, a quick conversation around the outlook, and we'll then be able to take some questions to the overview. The first-half performance in what continues to be a difficult economic and frankly, social conditions, demonstrated the resilience of the McPherson's brand portfolio and business model in the domestic market. Sales revenue grew to $108.8 million, benefiting from the full 6-months inclusion of the acquired Health business, which was acquired in December of the prior year. And this offsets the year-on-year drag associated with the international business reset. Pleasingly, organic growth from owned brands continues to deliver significantly through very trying conditions, with strong performance from Manicare, Lady Jayne and Swisspers in particular. Cost headwinds in Home Essentials through commodity and freight in particular, have constrained underlying EBIT growth, but we will have -- but we have implemented pricing in this month that will support margin restoration in the second half in this sector. Confidence in this outcome, together with our low gearing, support the continuation of our dividend policy, and we maintain our previous expectations around near-term performance. Finally, we continue to build our momentum against the 2021 operational review outcomes, including resetting the target model for our international business in [ China ]. As we flagged in November, we have now finalized our inventory provision against the free [ trade ] over demand expectations [indiscernible] and have booked this provision accordingly. To the market and our continued choice to focus on health, wellness and beauty, we maintain our confidence in the selection of health, wellness and beauty as our focus areas. Our performance in both the pharmacy sector, represented on the left-hand side of this chart, and the grocery sector on the right-hand side of this chart, is averaging out at better or at market -- the market over time. Let's talk about pharmacy. In pharmacy, we've got some exposure to the challenged skincare sector, which has come under pressure with lockdowns, reduced [ diagou ], reduced travel and student traffic. However, our central beauty sector, where our strong brands in this space are performing well, has meant we have avoided some of the pitfalls in the broader pharmacy sector, a sector that has understandably demonstrated some market volatility over the last 2 years. In grocery, we continue to see potential -- upside potential, I should say, as we expand our brands participation and in our major grocery positions, particularly in Swisspers and Multix, we have established sustainability [ credentials ] that are delivering performance ahead of the market. To the market conditions and the ever-present conversation around pandemic, the market remains difficult and less predictable than we would like, but our breadth of offering provides a natural hedge across the supply chain. Demand patterns impacted, of course, by social shutdowns, have been reasonably predictable. Skincare is challenging, domestically, but the fundamentals will return, and Essential Beauty and homecare fundamentals seem unlikely to falter and continue to grow, as the consumer behavior around [indiscernible] trends positively. In the supply chain, the impacts of the Omicron wave seem to have peaked, and logistics reliability is recovering. Of course, commodity and sea freight is a well-documented cost-push and inflation trigger, which, for us, plays out most immediately in the Home Essentials margins. We addressed this with urgency and completed price rises in the sector in early February. But clearly, from an expense management focus and perspective, we're now pivoting to an inflationary cycle that is very focused on pricing and margin mitigation, and this will need to expand to other categories. In respect to market trends, we do consider we're well placed with our brand sets to leverage relevant market trends at homecare, sustainable and ethical brands, proactive and preventative health management and aging well. I'll now ask Paul Witheridge, our CFO, to present the financials for the half, and I'll return shortly to give you further updates around progress we are making against the strategic agenda. Paul?

Thanks, Grant, and good morning, everyone. Firstly, on Slide 9, a breakdown of McPherson's first-half sales by commercial business unit. As Grant has noted, total company sales grew by 7% to $108.8 million in comparison with the 6 months ended 31 December 2020. The company's largest business unit, ANZ Beauty and Household consumables, recorded very strong 11% growth in sales of owned brands. Following strong growth in fiscal '21, the first half of fiscal '22 again saw a very strong 18% growth in the company's market-leading Beauty Essentials brands, driven by 25% growth in Swisspers, 19% growth in Manicare and 10% growth in sales of Lady Jayne products. New product innovations and a shift toward home beauty solutions continues to result in improved demand for the company's core essential beauty products. Skin, hair and body category grew by 6%, with domestic sales of Dr. LeWinn's and A'kin products growing 3% and 17%, respectively. Despite the recent Covid-19-enforced lockdowns weakening demand in the broader cosmeceutical and natural skincare categories, the household consumables category grew by 5% with strong demand for Multix Alfoil products, Multix garbage bags and Multix baking papers. While sales of agency brands and private label products to decline, these low-margin categories are not the primary focus of the company. The company's new Health business unit recorded sales of $8.4 million. This was below our expectation, with many health stores and pharmacies experiencing reduced foot traffic during COVID-19 lockdowns, particularly in the first quarter. Additionally, some raw material shortages and supply chain inabilities impacted core product inventory positions. The International business unit recorded a 52% decline in sales to $3.7 million. As the skin, hair and body category, which is -- which has recently been dominated by sales of Dr. LeWinn's to China, fell by 70%, with cross-border e-commerce distribution into China constrained by excess inventory and reduced consumer demand. Moving on to a bridge of first-half underlying EBIT to last year. The key points to note are: firstly, strong 18% sales growth in the company's beauty brands generated incremental contribution of $3.3 million in the first half of fiscal '22. Secondly, the full 6-months trading from the company's new Health unit generated incremental EBIT of $1.1 million with contribution in EBIT margins in line with expectations. Thirdly, a stronger Australian-U.S. dollar exchange rate generated a net FX gain of $1.3 million. Offsetting these positive EBIT impacts were significantly-higher commodity costs, particularly aluminum and resin, in comparison with the first half of fiscal '21. The adverse impact on company EBIT, achieved primarily impacting the Multix brand, was $2.6 million. Significantly-higher sea freight costs adversely impacted EBIT by $1.8 million. The previously-noted [ 70% ] decline in Dr. LeWinn's sales to China reduced EBIT by $500,000. And finally, two incremental cost elements, directly related to strong volume growth in the domestic beauty brands, were higher carton freight costs of $600,000 and higher domestic advertising and promotional spend of $0.5 million dollars. Moving on to the company's balance sheet and gearing position at 31 December '21. Net bank debt remains low at $8.8 million, resulting in a low gearing of 7%. This strong balance sheet position has been maintained despite the seasonally-low cash conversion of 48%, recorded in the first half of fiscal '22. Our reduction in working capital is expected to generate seasonally-stronger second-half cash conversion. Consequently, net debt at 30 June '22 is projected to be $1 million to $3 million below 30 June '21, which was $8.4 million. The Board has declared an interim fully-franked dividend of $0.03 per share, payable on the 18th of March. This dividend represents a payout ratio of 87% of first-half underlying profit after tax. Regarding capital management initiatives, the Board considers it prudent to defer any decision to return capital while there remains a high level of uncertainty in the market due to potential supply chain disruptions or adverse economic impacts from COVID-19. I now hand you back to Grant for our divisional performance highlights. Thank you.

Thanks, Paul. Moving to our largest business. As previewed, we've had strong core brand performance in the ANZ business in the first half of FY '22. We've increased sales in all core owned brands versus the prior-year comparative [indiscernible] market share growth of 4 of the 6 owned brand product categories. In fact, centralbeauty sales are up 18% skincare, haircare and bodycare up 6 and household consumables up 5%. We continue to see the importance of new product innovations and the shift towards home-based beauty solutions. We're supporting the shift towards home-based beauty solutions with those innovations. We've also had strong support and collaboration with our customers. So I must say that we're seeing our retailer partnership with Chemist Warehouse year-on-year growth at greater than 20%. We've renewed leadership in this very important part of the business. The transition has been completed, and I'd like to thank both ingoing and outcoming -- ingoing and outgoing personnel in that space for the professionalism and the transition that has been completed. We're also seeing strong integration with the Health team, connectivity, and we're maturing significantly, in terms of collaboration across the new and the old parts of the business. We've got new business performance regimes, driving collaboration and performance understanding in plus. It's been a very resilient performance despite difficulties. The lockdowns and low [ diagou ] environment, weakened demand in cosmeceutic or natural skincare, but we're lapping COVID early waves now. So we are beginning to see growth reappear. And as we've discussed, we are still seeing strong central beauty market dynamics. We've touched on the fact that profit growth is challenged by margin pressures, particularly household consumers, due to increased commodity and sea freight costs. As noted previously, price rises have been implemented in early February. Ranging improvements continue to add growth profile across the portfolio, with adjacencies such as Swisspers [ Bain ] and step-up NPD, such as Manicare, automated tools, driving positive category dynamics and as a result, our performance. On to the Health business. This is the first full year of our operation. So results for the full-half one versus just 1 month in the prior-year comparison. Given it's the first time that we're looking at this on a full-year basis, it is worth noting that this business typically skews towards [ half-through ]. When from a consumer perspective, immunity concerns generally peak. We inherited availability challenges, and these were addressed in FY '21. Albeit, we're still faced with longer lead times, partly [indiscernible] by production and raw materials in FY '22. We're still working through that in a far better position, and we need to drive confidence in availability to really explore the growth potential of our brands in this space. It was a difficult period, from a trading condition perspective, for Health in the first half. Health store channel closures during Delta wave in Q1 on the Eastern seaboard, did impact the performance in the first quarter. Nevertheless, for 4 months, we see, is [ resilient ]. Sales were in line with expectations despite those challenges, and that includes a deliberate structural change in the Western Australian service model, with an expected and planned for one-off sales reduction. [ EBIT ] margins were in line with expectations. They were supported by award-winning marketing awareness campaigns, digital and in-store, known as Wintering Well, in FY '21. And then finally, what I would say is that we've also seen the synergistic potential associated with getting our business [ closure ]. A'kin is now ranging 25% of the health core -- health store account population, demonstrating the potential for us bringing our brands together in new channels that we acquired with this acquisition. So the growth opportunities in health, immunity products are seeing significant demand, not surprisingly, at the moment, against, which we will also deliver, very relevant NPD as soon as March this year. I see that -- we see the NPD and marketing focus against immunity to deliver significant second-half upside. And we are seeing expanded channel ranging and offshore opportunities in the calendar year '22. To the International business. The International strategy is to broaden channel participation and decrease our risk profile. We are well advanced in finalizing target operating models in key markets. The pre-pandemic stage joint venture arrangements with ABM, Access Brands Management, do not have relevance post COVID and have not been completed. Future arrangements and partnership planning is underway. As we've gone through this process, the research for our target model has demonstrated the proposition for Dr. LeWinn's remains extremely attractive in China and export general. Functional anti-aging skincare remains the most desired and fastest-growing skincare sector in China. The functional needs of repair, line smoothing and anti-aging other top -- China consumer needs, and Dr. Lewinn's addresses all of these. The China skincare market is expected to be a $66 billion AU market, second largest in the world, in 2021, with an estimated 48% purchased online by 2024. Undeniably, cross-border e-comm is challenging, but still with long-term potential. The pause in cross-border e-comm channel with lost [ diagou ] in travel, combined with rolling domestic China lockdown, is leading to an increased relevance of domestic brands in China. Nevertheless, growth is expected to moderate, believe it or not, to 24% by 2023. For context, since market in 2016 and 2017 grew at 82% and 74%, respectively. So our narrow channel participation by McPherson's with Dr. LeWinn's has led to over reliance and risk, and we are now changing this. So the results for the first-half sales of Dr. LeWinn's products in China of $1 million due to in-market inventory clearance and moderated demand, clearly well beneath the prior-year comparative. The Asian markets, generally, continue to struggle with the COVID environment and lack of tourism sales into Singapore and surrounding countries of $1.9 million, compared with $2.2 million a year before, on reduced tourism in COVID. Whilst we're going through this reset period, we have taken reductions in advertising and promotion, while we reset that clear legacy stock. And as I flagged in the summary, earlier, we have finalized a one-off $9.4 million provision against those -- that pre-COVID inventory. The progress agianst the key pillars. In May 2020, we expressed these 4 areas we focus on. I would like to just recap on them just quickly. Core owned brands -- these 4 pillars. First of all, core owned brands, where we see significant upside from ranging, adjacencies and organic NPD-driven growth. This is where our results, currently, are clearly the strongest. Health and wellness, the significant potential for immunity, supported by growth in the near term, supported by greater confidence in availability. To the third pillar, reset and selectively expand our international footprint. Our Dr. LeWinn's brand remains uniquely positioned to exploit relevant agents in [ care ] consumer needs. However, CBEC market remains subdued, as pandemic and [indiscernible] constrains lingers. And in cost and margin optimization, where we now recognize the need to pivot to an inflationary environment, where we're not contemplated. Only a short time ago, we were a blended, cost optimization and margin protection in the form of price rises required to keep pace with input cost pressures. To our progress against the strategic plan, we're making concerted progress against the strategy we laid out, and these are the highlights to see in the last 6 months. In [indiscernible] brands, our renewed leadership, peer accountability for performance and pursuit of [indiscernible] a leading NPD growth, is winning. Significant customer relationships, where we partner for growth, are delivering category-leading performance. The Health platform has established category-leading digital and in-store marketing behind the Fusion brand, and this create a reconsideration at customer and consumer level. Increasing confidence in the supply security and what is a difficult time for ingredient supply chain reliability, is key to the future growth of this brand. Significant cross-business leverage, the example I gave in respect to the [ kin ], is also delivering impressive growth for this part of the business. In International, the hiatus in cross-border economic [ pulse ] is giving us timing to construct an appropriate risk- and reward-based operating model for International. Latent potential is being expressed in requests for our major skincare brands across many geographies. However, we will need to be considerate and selective in how we respond. And then finally, to our cost agenda, as I've mentioned, given the pace of input [ plus ] change, we've pivoted to cost and margin protection. We expect revenue optimization to be a future conversation for many updates to come. On to the outlook and a few other important updates. First, I'd like to talk about the Board. As advised on the 20th of December last year, Ms. Helen Thornton has been appointed as an independent Non-Executive Director of the Board. Helen is a well-respected Non-Executive Director with extensive financial, risk management, audit and governance expertise, along with -- aligned with strong strategic capabilities and leadership and relationship management skills, and we believe this complements the existing experience base of the Board. And to Graham. As previously foreshadowed, following a brief transitional period, Mr. Graham Cubbin has retired from the Board, effective the 21st of February 2022. Graham has made a significant contribution to the company over the past 11 years as a director, including 6 years as Chairman of the Board. His leadership and guidance cannot be underestimated. They have been a fundamental driver of the clarification of the company's strategic direction as a health, wellness and beauty brand owner and provider. On behalf of the Board and the management, I'd like to thank Graham for his leadership and wish him all the best for the future. To our outlook, despite continued uncertainty in the economic outlook and all that implies, we have confidence in the resilience of our brands, customer relationships and breadth of offering. And I think, our first half demonstrates that. We reiterate our recent November guidance, including an expectation of some favorable underlying currency positions, which will support the profit evolution in the second half as well as already-implemented price increases in the key commodity impact ranges. This recent guidance is reiterated in the slide here for your information. Finally, by way of conclusion, I'd just like to reemphasize our confidence in the future by talking to the unique capabilities and fundamentals that support it. Again, in this half, the breadth of our market-leading brand offerings in health, wellness and beauty are proven in difficult trading conditions, that they present a robust combination that has performed against a backdrop of demand unpredictability. This is surely a key trait of McPherson's portfolio of offerings. That said, we must also acknowledge the extraordinary challenges faced by our retail partners in the last half, and I must thank them for their continued support and dedication in supporting our shared consumers in such a tough period. Our innovation agenda is a significant feature of our relevance at customer and consumer level, and we will continue to drive this feature of the portfolio. The supply chain team has perhaps completed its most challenging 6 months yet. I thank the team for their extraordinary efforts. We see the resilience, breadth and potential stretching capability in our route to market, has still not completely tapped and intend stretching this further. To our team, our team has been through a period of change, and we are now bidding in new organization structure, processes, and we see further upside in this space from better collaboration, focus and the renewed energy that comes with renovation. Our balance sheet, which is conservatively geared and has enabled the continuation of our dividend policy -- sorry, which is conservatively, it has enabled a continuation of our dividend policy of big [indiscernible], plus at this point in the economic cycle, it represents security against economic uncertainty. Our setting in this respect will remain high on the board agenda, as we assess the environment, going forward. I'd like to thank you for your time, attendance and interest today. And I'd like to open up the forum for questions. John, do we have questions.

Yes, we do. We have an audio question ready from Sarah Mann.

My first question is just around the pricing [indiscernible] that you flagged. Can I just clarify -- is this across the board? Or is it only a specific category like Multix that are particularly impacted? And can you give us a feel for, I guess, the percent increase in how that kind of sits versus [indiscernible]?

Sorry here. I found that really hard to hear.

Can you would you mind repeating the question, that you're getting a little bit closer to the microphone?

I'm happy to repeat the question and then -- just so everyone else gets it. So Sarah's question was price rises, how significant, across which categories? Is it across the board? [indiscernible] So [indiscernible] possible.

In terms of the price increases, Sarah, they were targeted at the Multix product range, particularly Multix Alfoil, due to the increase -- well-documented increase in aluminum. So aluminum is a commodity over the first half relative to the first half of fiscal '21, increased over 40%. So [indiscernible] and Woolworths and our other primary grocery customers did accept meaningful price increases. I won't, for sensitivity reasons, tell you what they were, but that they're meaningful, and they do go a long way to restoring our margins to -- where traditional healthy margins for the Multix brand. We are looking at other increases across the broader portfolio, but they are in progress, and we haven't had the same commodity cost pressure impacting any of the other brands other than Multix and associated private label supply.

And I'd just like to call out as well, Sarah. Traditionally, with grocery counts, price rises take quite a good time to implement and are difficult. And I think, given the environment, the circumstances associated with the global economy at the moment, our credit to the 2 grocery partners that we're talking about in the relative pace that they addressed our concerns around pricing in that category. And [indiscernible] conversation is, inflation, from what I can see is, is going to break out quite quickly on the basis of that category as an example. So did that answer your question?

Yes, it did. So just to clarify then, so the guidance that you've provided only factors in cost increases, essentially for Multix, if anything incremental you can get in your other brands that [ kind of be outside ]?

Well, to be clear, the guidance that we've provided does factor in both the price increases be processed as I -- the ones that I've just discussed, across the Multix portfolio as well as the cost pressures that we see coming through in the second half. So both the price increases and the cost pressures that we're experiencing, are both taken into account in our guidance.

Okay. Sorry. And then the next question for me is just around skincare. So A'kin has been ranged in a bunch of health food stores now and in Woolworths. Can you give us a bit of color around how A'kin performed versus the rest of the category in that period? And is the potential for -- or are you in discussions around [indiscernible] further?

Just -- sorry, Sarah, just repeat the last part of that question.

The last part of the question was just around, are you in discussions around expanding ranging further?

Expanding ranging further. No. Okay. So from a year-on-year perspective, A'kin is in growth. A lot of that growth is coming through from the healthcare -- sorry, the hair part of the A'kin range. We -- so we see hair is definitely the focus for the future. We continue to build our plans around that brand, perhaps with a skew towards here as the relevant -- the most relevant and the most, at this point, successful offering in A'kin. And so I wouldn't suggest that there's -- aside from the Health channel, that the step-up plans immediately in grocery against A'kin. We want to bed down where we're at. So I think, aside from new channels, it's built on what we have, with a focus on hair. And that's what I would see. I see a level of refreshment of that brand has been important in the future. as well.

Great. And then sorry, next question for me is just around Global Therapeutics. So I know you mentioned, there was a one-off step change in the WA strategy that led to [indiscernible] revenue being a little bit softer than expected. Just to clarify though, when you acquired the [indiscernible] the expectation was a run rate of around 20 to 21 and revenue per annum roughly a 20% margin. Well, I mean, are you on track to, kind of, revenue from the run rate in the second half?

Yes. Yes. We would see -- we've had -- we had a difficult first quarter because the biggest channel for the brands, unfortunately, was not a center service, and so they were not open. So we needed to pivot everything to online. So a difficult first quarter of the first half for the healthcare team. But that was also why I was keen to talk to the seasonality immunity, is when it does skew to half 2, this business. So we still see ourselves striving after that run rate of circa 20, from an apples-with-apples perspective, on Health.

Great. And then one of the other areas of growth that potentially we're also going into independent [ pharmacy ] and actually [indiscernible]. Is that still expected or what's the timing of that?

That's what I'm referring to. I'm talking about the opportunities in the second half in calendar '22. From my perspective, just getting that inventory security and the choices that we will make and the sequencing that we'll make around channel opportunity in Australia, New Zealand, they -- we will see those opportunities feed into the outlook yet at this point, we have not forecast them either.

All right. Thanks very much.

No other questions at this stage. .

Right. Well, if that's the case, I'd like to thank everyone for their time and interest today. I know that everyone's schedule is quite busy. I'm also quite conscious of the fact that Paul and I are seeing a number of people in the next week or so. So we look forward to catching up then. In the meantime, stay safe. Thanks very much, everybody.

Thank you.

Thanks, everyone. So that concludes our webcast for the McPherson's Limited Half Year 2020 Results [indiscernible]. Thank you for participating, and have a great day.