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

Good morning, everyone. Thank you for joining the McPherson's Limited Results Presentation for 2023. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Slide 3 outlines the agenda for today's presentations and the speakers from the McPherson's team. Our first speaker today is Ari Mervis, the Chairman of McPherson's. Thank you, Ari.

Good morning, everyone, and thank you for joining us here today. Before we commence, I would like to acknowledge the [indiscernible] people, who are the traditional custodians of the land from where we are presenting today. I would like to pay my respect to the elders past, present and emerging. The reason that I'm attending and introducing this morning's results presentation is that as you may be aware, we have recently transitioned the Managing Director and CEO, and this provides me with an opportunity to introduce you to Brett Charlton, who are delighted has joined McPherson's a few weeks ago and who's very well credentialed to drive the required turnaround that we're looking for at the company. After the management team take you through the fiscal '23 results, Brett will say a few words about himself and his initial findings at McPherson's and will also be available to answer questions and answers during our question session. While you will note that the results that will shortly be presented fall short of our collective expectations due to a combination of macro and operational issues, the Board remains confident around the prospects and future of McPherson's. The company has a terrific portfolio of leading brands, a talented team of employees and a robust customer and consumer base. Coupled with the strong balance sheet and renewed leadership, the Board -- the business is very well positioned to deliver growth into the future. I would now like to hand over to Paul Witheridge, our CFO, who will lead the presentation.

Thanks, Ari, and good morning, everyone. Firstly, a snapshot of the fiscal '23 financial outcomes. The total sales revenue outcome of $210.3 million for fiscal '23 was 2% below the previous year. Supriya and Jade will provide a category breakdown shortly. In summary, the company's sales revenue from owned brands increased by $3.2 million or 2%. Underlying EBIT of $9.1 million for fiscal '23 was $2.7 million or 23% below last year with profitable growth from the Essential Beauty category more than offset by declines in Multix and A'kin volumes and margins with sales in the skincare category impacted by supply constraints in the June quarter. I'll provide more detail regarding expense movements when I go through the bridge of fiscal '22 to fiscal '23 EBIT. The company's balance sheet remains strong with closing net debt of $6.5 million and low gearing of 5.5%. This strong financial position has enabled the directors to declare a final dividend of $0.01 per share fully franked, taking the full year dividend to $0.03 per share fully franked. The first year of our strategic alliance with the Chemist Warehouse Group has been steady with good sales growth from our own brands in the Chemist Warehouse retail network and more work to be done on the distribution of the Chemist Warehouse brands in McPherson's customer network. To recap, the alliance involves a unique 2-way relationship whereby McPherson's has been appointed exclusive distributor of Chemist Warehouse brands, which are complementary to McPherson's existing portfolio. Chemist Warehouse is arranging new McPherson's brands, including Fusion, and McPherson's is benefiting from enhanced support for its existing Essential Beauty brands in the Chemist Warehouse network. The strategic alliance has supported McPherson's growth in the pharmacy channel in fiscal '23. The company has recorded various material items totaling $12 million before tax in fiscal '23, but then excluded from our underlying results. The primary items are an $8.3 million impairment of our Multix brand and a $2.9 million impairment of our Maseur brand, both due to a revision of future revenue assumptions impacting the valuation of these brands. Other material items include brand impairment and asset write-downs totaling $0.5 million and professional fees in relation to asset matters of $400,000. Regarding the status of asset litigation, as announced to the ASX on December 9, 2022, asset commenced several proceedings in the Federal Court of Australia against McPherson's Limited and its former Managing Director, Chief Executive Officer, in relation to events during the period October 30, 2020 to December 1, 2020. The company is defending these proceedings and has not recognized the provision matter in the financial statements because there is no liability or present obligation. Now introducing our ANZ commercial director, Supriya Singh, who will now provide an overview of the ANZ business unit performance in fiscal '23.

The Australian New Zealand business unit sales declined 2.5%, with strong growth on Central Beauty Brands and Health, offset by declines on Bags, Wraps & Foils, skincare and haircare. The 3 Essential Beauty brands, Manicare, Lady Jayne and Swisspers, all recorded strong top line growth ahead of market and growing share. This was driven by a combination of successful new product launches, higher brand awareness and increased distribution. Dr. LeWinn's was growing strongly in half 1, but was adversely affected by supply constraints. The supply chain is recovering, but we were not able to fully recover the business we lost. A'kin sales declined sharply as we cut back investment and cleared stock ahead of the brand relaunch in fiscal '24. We believe A'kin has a strong right to win with a relevant consumer proposition that leverages macro trends towards sustainable Australian beauty brands. Fusion Health grew sales 10% in its first full year of distribution in both the pharmacy and health food stores channel. The brand has grown awareness, consideration and market share. Multix sales and market share declined, driven by the continued strength of our market-leading Essential Beauty brands and significant distribution growth with an incremental 33,000 distribution points added. Growth was broad-based across customers lead by [indiscernible] costs, specifically commodities and freight, negatively impacted our fiscal '23 gross margins, as what we shared previously, and we are committed to growing our trusted market-leading owned brands by investing in distribution expansion to make our brands accessible to more consumers, integrated marketing campaigns with a strong focus on digital and a continued focus on aligning our health and beauty go-to-market model and program that brings on-trend beauty tools into the high. Current cost of living pressures have made the brand's proposition of high-quality tools at affordable prices even more relevant. An example of this is the Manicare Crystal Hair Remover, which was the #1 new product launch for the category. Lady Jayne grew at 25% and drove category growth as the brand continued to elevate the performance of at-home beauty accessories available through pharmacy and grocery with premium rechargeable devices at great value for money. Swisspers gained market share and grew category value with innovation and sustainability and the infusion of skincare ingredients into cotton products to provide consumers with even better value for money. Dr. LeWinn's led innovation in the Inner Beauty segment with the launch of Australia's first vegan collagen as more Australians choose a plant-based diet. Fusion continued to expand distribution in pharmacy and launched Mood Support, responding to an increasing focus on mental health and awareness of how supplements can help. I will now pass on to Jade Peak, our International Business Unit Director.

Thank you, Supriya. The International division grew the top line in FY '23 with more normalized trading with China. Underlying EBIT was significantly improved, driven by the profitability of Dr. LeWinn's in China and some cost optimization initiatives. Despite supply constraints, Dr. LeWinn's delivered 13% growth on last year, driven by [indiscernible] and relaunch of the A'kin brand slowed sales internationally. Southeast Asian markets are in growth for our Essential Beauty brands. And during FY '23, plans were in place for a new business model in Asia with staged cost efficiency. Dr. LeWinn's continued focus on cross-border e-commerce channels in China remains strategically important with growth potential from expansion in both the public and private platforms. Internationally, McPherson's is focusing resources on strategic opportunities for our owned skincare brands in markets where category opportunity is strong. Leveraging the growth trends in skincare globally remains relevant for Dr. LeWinn's and A'kin. Structural changes and business model improvements in our Southeast Asian business delivered cost efficiencies with immediate impact. Closure of our permanent establishment in Singapore will introduce resource efficiency and cost optimization from the appointment of a local distributor. Localized expertise and careful selection of market expansion opportunities enable sustainable growth internationally. The A'kin relaunch will be introduced into existing markets across FY '24. I will now hand back to Paul Witheridge.

Thanks, Jade. Firstly, a bridge of the key elements impacting the company's decrease in underlying EBIT from $11.8 million in fiscal '22 to $9.1 million in fiscal '23. The first favorable element relates to the profit impact of the previously noted strong growth in the company's Essential Beauty brand with a favorable contribution impact of $93.9 million. The second element relates to the contribution improvement from sales of Dr. LeWinn's products of $1.2 million as the mix of sales in fiscal '23 resulted in a higher margin than fiscal '22. These 2 favorable contribution impacts were offset by volume-driven declines in contribution from sales of Multix, A'kin and private label products at $2.9 million, $0.6 million and $0.3 million, respectively. The 2023 outcome was also impacted by an increase of $1.5 million in advertising and promotion expenses to drive growth in Essential Beauty and Fusion sales. Increases in warehousing and freight expenses of $800,000 and increased travel expenses of $400,000 and a foreign currency loss of $1 million, which was mitigated by a $2.9 million gain from the company's U.S. dollar hedging policy. I've already outlined the strength of the company's financial position in my introduction. The company had an operating cash inflow before interest and tax payments of $6.8 million in fiscal '23, representing an underlying cash conversion of 51% for the year. I've already outlined the company's fiscal '23 dividend position in the introduction. The high dividend payout ratio reflects the company's strong balance sheet and significant franking credit balance and is consistent with the company's policy to pay a minimum of 60% of underlying profit after tax, subject to cash requirements. Brett will now take us through a summary and outlook. Thanks, Brett.

Thank you, Paul, and thank you, Ari, for the introduction today. I'm sincerely grateful for the opportunity to lead a company with 163 years of history, a company that spans 3 distinct centuries. The Board have asked me to lead a journey of change, a change journey that can capitalize on the heart of our business strengths, our world-class brands, our tenured customer relationships and our deeply committed people. Ms. Jade, within the next few months, look to review our strategic priorities and focus our energies on an efficient and focused business model. My focus initially will be on reducing complexity and simplifying what we do, creating operational excellence in our processes and creating a culture of continuous improvement. Externally, we serve our consumers well with strong brands and leading customers, so my focus will be to grow these relationships even further by focusing on the things that matter. While only here just over 3 weeks, I've found a supportive group of professionals who are committed to seeing the business succeed. I've been in listening mode, meeting as many people as I can to gather a feel for the culture and sense of opportunities in front of us, and I'm encouraged and excited by the opportunities I've seen so far. I recognize we may not have met the expectations of shareholders this last year, and we have no time to lose on stepping up to a new level of performance. But I believe we have the right mix of brands, customers and people to do it, and I'm energized and excited by the challenge ahead of us. Thank you, and we'll be taking questions from here.

[Operator Instructions] Our first question comes from the line of Sarah Mann.

Right. First question for me is just on Dr. LeWinn's. You called out clearly there were some impacts in the period from supply issues. Just wondering, firstly, how you're going in terms of resolving those issues and the timeline around that? And then secondly, in the period when supply has kind of been disrupted, I guess, has there been any market share impacts who've taken share and your outlook around being able to call that back when supply was renewed?

Thanks, Sarah. It's Jade. In terms of the supply recovery, obviously, you saw that there was an impact towards the end of F '23. We are in a recovery stage across all of the markets that have been impacted for Dr. LeWinn's, and we're definitely already seeing improvements in that across quarter 1 in FY '24. I will let Supriya just make a comment around the share and the end market dynamics.

Thanks, Jade. I think it's quite difficult for us to quantify an impact on share, but it is clear that we didn't have the levels of supply that we would have wanted and hence, this impacted our sales and would have had some impact on share, but it is hard to quantify exactly what that would be at this stage. That said, we are recovering, and we have really strong plans over the next quarter to recover anything that we have bought.

Okay. Great. And then another question on the Essential Beauty NPD pipeline. I mean, clearly, that business has continued to deliver strong growth. Just wondering if you can give any color around the outlook for NPD and how that's going to flow through to, I guess, growth in F 24?

Absolutely. I can answer that question as well. So we are really excited about the potential for Essential Beauty. I'll talk Manicare first because we are seeing a real trend with more at-home beauty. And so while we continue to drive our core, which is the majority of our business, the growth or the exponential growth is actually coming from our extra tools and also our premium salon tools. So we do have a very strong NPD pipeline coming through over the next 6 and 12 months on Manicare. On Lady Jayne, very similarly, we had huge success behind our straightening brush getting into the power accessories categories. We had a follow-up at the end of fiscal '23 with the volumizing brush, and we will continue to have a really strong pipeline expanding into that Electrical segment, which is adjacent and completely incremental. It does not cannibalize on any of our current business. In fact, we've just expanded distribution of our hair straightening brush into grocery, which is a huge win for us. And then switching the directions, we continue to try to merge that beauty with cotton with skincare-infused ingredients in cotton, which we can also provide really some value for money as consumers don't need to buy 2 products to get that same benefit.

Right. And then just a question on, I guess, your margin outlook, particularly for Multix, that's been headwind for a while. But input costs, I presume stabilized. And I think you're forecasting increases there as well. Can you just give us any color around your outlook for margins for that business?

Yes. Thanks, Sarah. The margin outlook for Multix in particular is good in the sense that some of the key cost drivers that impacted our margins adversely in fiscal '23, like sea freight and commodity costs, are reducing. So broadly, we expect and are seeing margin improvement coming through positively for Multix in the current environment, given that cost dynamic improvement. In terms of price increase, probably not scheduling any price increases for the next 12 months, given the consumer environment and strong cost dynamic.

Got it. Okay. And then last question for me. And sorry, I apologize, I missed the beginning of the press. Sorry, Brett, if you've already kind of touched on this. But I guess just interested from your perspective, like what do you see kind of the easy wins are for the business and like the key opportunities, I guess, how you've come in?

Thanks, Sarah. The business has got a fantastic core range of brands presented very well in customers. I think the early stages of what I want to do is to simplify the operations and certainly, capitalize on the strategic alliances we have with our customers. I think it's no secret to what we have with Chemist Warehouse. That's an advantage for us. And I think in general, so far, the people that I've met in the business has been hugely supportive of a simplified and streamlined set of actions that can be really passed in the marketplace. It's got a great culture, it's got good people. It's got great brands, and it's got a great route to market. So I don't see any reason why we shouldn't be optimistic about our future. And I think the environment, looking forward market-wise, is positive. There are headwinds from consumer spending, but I think the categories that we're in position us well and the strength of our brand's position as well. So I'm hugely optimistic about the future of the company.

[Operator Instructions] There are no further questions at this time. This concludes today's call. You may now disconnect.