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

Welcome to the McPherson's First Half 2023 Results Presentation. [Operator Instructions] I will now hand over to Grant Peck, Managing Director and CEO.

Thanks, Juan. Good morning, and welcome, everyone, to the McPherson's FY '23 First Half Results Presentation. My name is Grant Peck, the CEO and Managing Director. Joining me here today are Paul Witheridge, CFO; Supriya Singh, Commercial Director for ANZ and Jade Peak, Commercial Director for our International Business. Today, I'll provide a short introduction. And thereafter, Supriya will take you through the ANZ business performance highlights in health and beauty. Jade will take you through the work we are doing in resetting our international business, and Paul will address the financials. Following this, I will return for a brief summary and outlook, then we will open for questions. So we'll get straight into our presentation. My first obligation is to apologize for being late and respective results, and we will elaborate on reasons behind this in today's discussion. However, before that, I'd like to take you through our first half performance. We previewed the underlying results in our announcement in January and outcomes have not changed. I'd like to take the opportunity to elaborate on how we're performing and what we're seeing in the market. In an increasingly tough consumer environment, we observed a clear divergence in results across our portfolio. Our sales growth of 3% was influenced by the decision to reduce unprofitable and nonstrategic business. In particular, in private label participation in the bags, wraps, and foils category with an impact of a $4.7 million reduction in top line sales versus the prior year. These exits account for 5 points of sales growth. So the underlying continuing business is growing at 8% to 9%. The Multix performance in the half has been challenging. The key cost drivers in the last 18 months moved significantly against the underlying brand and category profitability, sea freight, commodity and currency. Pricing to mitigate margin deterioration has been taken, and the category volume performance has fallen in the face of price increases. As a relatively premium position in the category, this has disadvantaged Multix as much as any. As many would be aware, the cost drivers have improved over the last few months. Once the more expensive inventory is worked through the system, we expect to see margin recovery versus the position in the first half. Whilst this is encouraging, we also recognized the fundamental category is changing quickly, and we need to focus on the more resilient components of the category, increase the pace of innovation and change with it. I'll further address the Multix brand position shortly. In contrast, our performance in health, wellness and beauty has continued to deliver significant growth. Brand growth in Manicare and Lady Jayne is double digit. And the increased ranging of Fusion is driving a 30% increment in this brand in the half. Our performance in this space is driven by our aligned health and beauty sales force, a clear direct-to-market distribution model, strategic partnerships and class-leading innovation. As a result of this performance level, our growth in the pharmacy channel is in the mid-teens. In fact, 16% growth. To support this brand momentum and additional ranging, we did step up our A&P investment against key growth brands post the pandemic hiatus. This represented an additional $1.7 million investment in the 6 months versus half 1 in the prior year. We anticipate returning to F'22 investment levels in the second half. In respect to the balance sheet, in the last few weeks, we have advanced our refinancing program and are now in the process of finalizing legals and documentation accordingly. Given our strong cash flow, underlying business results and resulting balance sheet strength, I am pleased to advise the Board has approved a final $0.02 per share dividend, which will be fully franked. I'd now like to address the market environment. The overarching comment in respect of the market is the consumer is becoming more cost conscious and this is clearly not an unexpected revelation. The dynamics impacting the sector remains strong trends, however, that are supporting many categories that are especially prevalent in health, wellness and beauty. Consumers are increasingly demanding sustainable solutions, albeit the propensity towards value is consistent. So premiums for sustainability are becoming less common. With the pandemic as a recent driver of consumer behaviors, the proactive beauty and beauty at home trends are well attended by many of our care motivated brands. And as we look to be more self-sufficient and aware of our health, we are increasingly looking at a clean and efficacious solution to our health needs. I would note, however, the natural skincare sector has struggled to see value growth post [ dorgov ] restrictions due to competitive price pressures in the market. All consumers are increasingly cost conscious and norms adopted out of necessity in the pandemic are proving relevant to a thrift-conscious beauty consumer. I believe it is better to say the experience in our portfolio over the last 6 months seems to demonstrate that even the budget-anxious consumer, will prioritize their health and beauty over more commoditized products. The challenges, we are still facing a difficult cost environment where global and local costs are leaning towards an inflationary setting, albeit with some commodity and sea freight swings moving in our favor most recently. As many would be aware, sea freight and the more difficult commodity and currency relationship seems to be normalizing. So we hope to see a more predictable environment evolving, hopefully supported by some greater levels of geopolitical stability. The international markets appear to be waking cautiously, and this might become a power wind in the future, but we are not betting the farm on a return to previous [ dorgov ] intensity levels. To an update on our strategic alliance. Clearly, one of the big changes in the period was the commencement of our Chemist Warehouse strategic alliance. Officially, this kicked off on the 1st of July 2022. But in practical terms, we simply stepped up a relationship that was well established. This unique 2-way and long-term relationship is progressing well in its first half. As most would be aware, the arrangements include exclusive distribution of key desirable Chemist Warehouse brands, which are complementary to our existing portfolio. We know and understand that these are long-term arrangements and will take time to gain momentum. In addition, the arrangement provides mutual support for increased ranging of McPherson's brands in Chemist Warehouse and enhanced support behind existing brands. I'm pleased to say this arrangement, which is a number of subsets is on track to delivering overall on the year 1 business case and the returns been anticipated at its inception. I'd also like to point out that there are considerable advantages from working so closely with our partners that continue to accrue. Pace to market on new product development and buying synergies and advertising expenditure are 2 such examples. I'd now like to move on to update on a few corporate items. I apologize for the line accounts. With such a considerable change in consumer behavior over the last period, we needed to assess future expectations and brands' performance expectations accordingly. We have done this. And together with managing the changing and complex rules for intangible brand and other asset valuations, this has taken way too long and lead to the late lodgment of our accounts. I'd like to think the detailed work we have done at this period close will help us in good stead for future processes in respect to balance sheet items, including intangible and other disclosure considerations. The outcomes -- the company has taken impairments against the Multix and Maseur brand valuations. Moderated future growth expectations on these 2 brands has resulted in these 2 noncash write-offs against the brands' values. In respect to the Multix brand valuation, the company has impaired the brand and taken a noncash charge in half line of $3.9 million. This brand is at a low point in cash and margin return due to cost driver factors we have discussed and we recognize these are going to improve. However, we also recognize the category faces challenges in respect to post-pandemic demand and changing consumer preferences within the category. Whilst we will move the brand to address the changing category dynamics, the charge to take value out of the balance sheet in respect of this brand we see as appropriate. The Maseur brand enjoyed a growth in the early stages of the pandemic, but following price increases at the start of the year, revenue results in the last 6 months were below expectations and have given rise to a reduced growth expectation going forward, driving a reduced valuation. In addition, the process of inventory clearance of previously written down Dr. LeWinn's product. [indiscernible] international markets has yielded a surplus in provision versus our original expectation, which we are appropriately writing back. To refinancing. As I mentioned earlier, the group is renewing its facilities, which will -- which expire at the end of this fiscal and the date of this report has received credit approved term sheets from its syndicate lenders and is well advanced in completion of legal documentation. Finally, I'd now like to make what comment I can in respect to the ASIC investigation. As announced to the ASX on the 9th of December 2022, ASIC commenced civil proceedings in the Federal Court against McPherson's and its former CEO in relation to certain events during the period 30 October 2020 to the 1st of December 2020. In short, we are defending our position. It's too early to assess the outcomes or to make any liability assessment if indeed there is one. This has been disclosed as appropriate in the 4D statement release. I'd like now to hand over to Supriya Singh to take you through the domestic business performance. I'll return later to summarize and take questions.

Thanks, Grant. I'm Supriya Singh, the Commercial Director for the Australia and New Zealand business unit. The health and beauty category continues to grow in Australia and New Zealand, showing resilience in an environment of cost of living pressures and declining consumer confidence. Within this strong growth, McPherson's is outperforming the pharmacy channel across our core categories in half 1, 2023. However, we've been challenged in grocery due to Multix, as Grant has referenced. Multix has grown slower than the overall bags, wraps and foils category as the brand has a stronger position in wraps and foils, which have declined faster than other segments. Our portfolio of market-leading brands continues to be a key strength. Dr. LeWinn's is the #1 Australian at cosmeceutical pharmacy brand. Fusion is one of the fastest-growing vitamins, minerals and supplements brands in pharmacy. Manicare is the #1 beauty tools and accessories brands. Lady Jayne is the #1 hair tools and accessories brand. Swisspers is the #1 cotton brand. And despite challenges, Multix has maintained its #1 position in foil, bake, garbage and freezer bags. A critical organization change we shared 6 months ago was the plan to integrate the Australia and New Zealand health and beauty commercial business units with 2 key objectives: firstly, to provide an improved service promise to our customers. This integration has allowed McPherson's to provide a single point of contact for customers across our entire portfolio of brands, a single order, single invoice and single delivery. Secondly, it has delivered cost efficiencies by combining selling, distribution and administration operations across these previously separate business units. The Australia and New Zealand Commercial Business Unit now comprises McPherson's beauty, health and consumable brands sold in the Australia and New Zealand markets. The Australia and New Zealand Commercial Business Unit, including both health and beauty, achieved a 2% increase in sales in half 1 2023, driven by a 7% increase in sales of our owned brands. Five of our 7 core brands are growing with or ahead of market. The 3 essential beauty brands: Manicare, Lady Jayne and Swisspers all recorded strong double-digit growth in sales, well ahead of market and growing share. This was driven by a combination of: one, higher brand awareness due to investment in marketing; two, increased distribution; and three, new product launches. Dr. LeWinn's grew sales behind innovation in serums and increased ranging. However, this was offset by reduced sales on A'Kin. A'Kin has been impacted by aggressive discounting in the natural skin and hair segment, which we have chosen not to participate in. However, we have plans to grow category value with a renewed proposition and lineup in 2024. Fusion Health grew sales 30% due to new ranging in the pharmacy channel and increased investment in brand awareness and marketing activity. The pharmacy channel grew 16% with all key customers improving sales versus half 1 2022. The growth was led by Chemist Warehouse and enabled by our strategic alliance. Currency, commodity and freight negatively impacted the contribution from Multix. These cost drivers are recovering, but it will take time to impact margins due to current inventory holdings. Pricing was taken in half 1 2023, but the category has remained challenging as consumers reduced consumption and trade down due to cost of living pressures. In addition, the strategic decision to reduce the unprofitable private label business in bags, wraps and foils has reduced total sales. McPherson's growth tactics are consistent with what we've shared previously, and we are committed to growing our trusted market-leading owned brands by investing in an innovation program that leverages macro trends and drives category growth by premiumization, distribution expansion to make our brands accessible to more consumers, with over 30,000 additional distribution points just in half 1 2023. Integrated marketing campaigns with a strong focus on owned, earned and paid digital media and a continued focus on aligning our health and beauty go-to-market model. Manicare's double-digit growth has been driven by premium on-trend power accessories like the firming body sculptor. This builds on the beauty at home trend and appeals to the value-conscious consumer who is hesitant to spend on salon beauty treatments. Lady Jayne gained 4.4 points market share as momentum continued to grow in the adjacent category of premium power tools with the Lady Jayne hair straightening brush. This accelerated brand growth to 39%. And Swisspers continues to gain market share, driven by premium sustainable innovation and appealing to new consumer segments. In particular, we launched reusable eco cleansing pads, which has won several awards and entered into the baby cotton segment. Dr. LeWinn's performance was driven by the launch of the new serum series and continued momentum on the award winning in a beauty range. The serum series consists of 3 products each targeting a top consumer need and can be used with any of the existing Dr. LeWinn's regimens enhancing their results. Fusion won the Self Care Excellence award for the second year in a row for the integrated marketing campaign, immune fitness. The brand recognized as a stress that a challenging economic environment has caused and focused on the stress and anxiety product as a hero for the total brand marketing campaign. I will now pass on to Jade to review the international business.

I'm Jade Peak, the Commercial Director of the International business unit at McPherson's. During the first half of FY '23, we continued our patient and cautious approach for our international business. Sales versus the first half in FY '22 increased by 32%, largely driven by the improvement in Dr. LeWinn's sales to China, up by $1 million on the prior year. The underlying EBIT increase versus first half FY '22 is reflective of the growth in sales alongside the reset of our channel strategy in China. The international business unit has reset capabilities to support our expansion aspirations and deliver service excellence. We are taking cost out from low-growth areas and shifting overhead to align with strategic growth opportunities. Our partnerships are also key to the capability mix aligned to the revised international strategy. We are creating a platform from which to continue our diversification across channel, market and portfolio and to ensure selective expansion with a sustainable investment model as well as building our digital path to purchase. Global markets continue to open, improving access and opportunity for market entry. Cross-border conditions in China are improving following the removal of restrictions, travel resuming and consumer confidence. We are committed to the strategic outcomes underpinned by key initiatives. Expansion will continue to be selective and driven by diligence around relevance and size of prize, but coupled with an investment model that applies caution to reduce risk in new markets. Partnerships are critical to delivering excellence in market, and I am pleased to confirm 2 examples of value-enhancing partners in China. We have appointed [ Golden River ], an open platform distributor in China for the Dr. LeWinn's brand. They will exist alongside our relationships with existing partners and enable the broadened base of presence in this market. A new partnership has also been formalized for the A'Kin brand in China. eCargo will facilitate the acceleration of growth via our full-service distribution model in the CBEC space, with scope for expanded distribution across Greater China in the future. Skin care remained relevant globally, and our focus mirrors this trend. Our entry into new markets via the skin care category will be curated to meet the localized needs of the consumer and their purchase journey. Cosmeceuticals and the cross-border channel in China continue to present ongoing growth opportunities. The Dr. LeWinn's offering delivers skin care solutions to meet the needs of the Chinese consumer. Diversification remains important across our brand base, our channels, markets and partnerships. We have refreshed partnerships in China to diversify, as I mentioned, and we will continue to apply a derisking approach to all regions. Our channel approach will be market and region specific. However, e-commerce remains a focus within the opportunity for omnichannel presence. Our partnerships, along with a curated portfolio and a consumer-first approach will drive future growth in the e-commerce space. I will now hand over to Paul to take us through the financial results.

Thanks, Jade, and hello, everyone. The financial results for the first half of fiscal '23 that the company has released today are consistent with the company's trading update released on 17 January 2023. This presentation includes an appendix with a detailed profit and loss statement and should be read in conjunction with the Appendix 4D to gain a complete understanding of McPherson's financial performance for the 6 months ended 31 December '22 and its financial position as at 31 December '22. By way of summary, total group sales grew 3% to $112 million over the reporting period. The company's ANZ business unit, which now includes the integrated health business into the larger beauty and household consumables business achieved 7% growth in owned brand sales from $93 million in first half '22 to $99 million in first half '23. Breaking this outcome down by category. Firstly, the essential beauty category grew by 17% as all 3 core brands achieved double-digit growth. New product innovations and a shift toward home-based beauty solutions resulted in 39% growth in Lady Jayne, 17% growth in Swisspers and 11% growth in Manicare. Secondly, the skin, hair and body category declined by 7%, with Dr. LeWinn's achieving slight growth, while A'Kin declined by 32% due in part to range deletions in the grocery channel. Thirdly, the health category grew by 17% with strong growth of 30% achieved by Fusion Health driven by the company's recently established strategic alliance with the Chemist Warehouse Group. Finally, the household consumables and other brands category declined by 2%, largely due to a 5% decline in Multix, as it has been impacted by a deterioration in consumer sentiment and the post-COVID decline in at-home consumption. Sales of agency brands increased by 8% while the private label products declined by 59% as the company has reduced its participation in low-margin bags, wraps and foils private label categories and focused on growing sales of its own brands. Finally, international sales increased by 32%, largely due to a $1 million increase in sales of Dr. LeWinn's products into China. Sales into the Singapore market and surrounding regions increased from $1.9 million in first half '22 to $2 million in first half '23. Now to a bridge of the key elements impacting the company's decrease in underlying EBIT from $7.2 million in first half '22 to $5.8 million in first half '23. The first 2 favorable elements relate to the profit impact of the previously noted strong growth in the company's essential beauty and health brands with the favorable contribution impacts being $3.6 million and $400,000, respectively. These favorable contribution impacts were offset by material increases in commodity costs and sea freight costs, which increased by $800,000 and $900,000, respectively, as well as a $900,000 adverse impact from the decline in Multix volumes. An increase of $1.7 million in advertising and promotion expenses to drive growth in Essential Beauty and Fusion Health sales and increases in employee expenses of $400,000 and travel expenses of $500,000 also impacted the first half '23 outcome. The company's financial position remains strong with gearing of 10% and net bank debt of $13.9 million at 31 December '22. The company had an operating cash outflow before interest and tax payments of $6 million for the first half of fiscal '23, largely due to increases in working capital. A seasonal reduction in working capital over the 6 months to 30 June '23 is forecast to result in strong cash conversion over the second half. The Board has declared an interim ordinary dividend of $0.02 per share fully franked payable on 6 April '23, representing an underlying payout ratio of 89%. This is consistent with policy to pay a minimum of 60% underlying profit after tax, subject to cash requirements. I'll now hand back to Grant for a summary and outlook.

Thanks very much, Paul. Perhaps first step what I'd like to do is to talk about the platform that we're creating to enable growth. We are creating -- we believe we're creating a unique platform to enable growth in the health, wellness and beauty space. We have a motivated team driving towards a revised vision supported by clear values and simplified and clear processes. Our much stocked brands are driven by innovation. These brands are delivering growth to customers and relevance to consumers. This relevance is delivering increased ranging opportunities and has enabled us to take pricing in today's inflationary environment. We are growing with the most relevant customers in the channel delivering relevance in difficult economic times. We have strategically aligned with the key movers in the category, and we'll continue to look to provide value to all retail partners in the category. Supply stability is returning and we can leverage our domestic logistics route to market and global buying capabilities. And finally, we have a unique direct-to-market approach in selling resources and -- and finally, we have a unique direct-to-market approach in selling resources and delivery, and this will be scalable for future growth. The outlook. Despite the challenging broader economic environment, our focus is not changing. We are of the opinion that the category that we have chosen will continue to serve us well. We have category-leading brands across a generous breadth of the health, wellness and beauty landscape. We are creating a platform of capability in health, wellness and beauty that will support growth well beyond our current level. Our team is revised, simplifying our lives by process, vision and values. Our brands are driving growth and the right partnerships to facilitate and complement our strategy. Our balance sheet has demonstrated cash flow capability and gives us confidence we can support the business requirements. Of course, we recognize we'll need to pivot our Multix brand towards more resilient subsets of the category, and we do continue to engineer the brand for cost efficiency and innovation. And we understand we need to approach the new international market opportunities with a revised strategy that broadens our risk base and invests with demonstrated opportunity. These changes and revised partnerships are underway. We'll now open up to question-and-answer session.

Well, thank you all. Thank you for joining us today. And there's no questions, that concludes the webcast. So look forward to catching up. It does not appear like there is any questions so that being the case, thank you for joining us today. That concludes the webcast.