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

Good morning, everyone. I'm Brett Charlton, and I am the CEO and Managing Director of McPherson's. And with me today is Paul Witheridge, our CFO, and I am delighted to be presenting our results for the first half of FY '24. We are in a time of transformation for the business following my appointment in August 2023, and the strategic reset we announced in November 2023 is well underway. During the half year, the business has set a solid foundation for future growth, while maintaining a steady performance. While revenues have been lower for reasons we will go through, earnings improvements have more than offset the impact of this. In addition, the results of early transformation initiatives within the business, together with a reduction in input costs, have started to deliver benefits, notably in improved growth and EBIT margins and in stronger cash generation. On November 15, we announced our new strategy. The new McPherson's strategy aims to provide -- to drive productivity and growth in higher-margin and high-growth categories, where McPherson's has a competitive advantage and allows for disciplined reinvestment into core brands and portfolio expansion opportunities. The new strategy separates our brands into 2 categories: core brands and supporting portfolio brands. Our core brands are Manicare, Lady Jayne, Dr. LeWinn's, Swisspers, and Fusion Health. These brands have been identified as McPherson's most successful recognizable brands in high-margin categories, where McPherson's can invest to achieve sustainable growth and increase market share. Our supporting portfolio brands are A'kin, Maseur, Wagner, Bondi Fragrance, Foster Grant, INC, Oriental Botanicals, and Revitanail. These brands will provide group profit and scale by offering an attractive range of in-demand consumer health, wellness and beauty products, primarily to the pharmacy and e-commerce channels. The first half results demonstrated the resilience of our core brand range. In a challenging environment, these have performed strongly within our portfolio, notably, Dr. LeWinn's, with revenues up 7% on the first half of fiscal '23 as the highlight. During this first half of the year, we've been busy implementing our new strategy. Firstly, we've streamlined our brand portfolio by announcing our exit from nonstrategic agency brand relationships. We're also stopping lower-margin private label contracts. Secondly, we've redesigned our operating model, so it is now a functionally based model that is set up to capitalize on the strength of our core brands. We reduced headcount as a part of this through the removal of about 40 roles, while adding new roles to create opportunities for our existing staff to develop and grow while we execute our new strategy. Thirdly, we completed a review of our inventory position and movement, which identified opportunities to increase supply chain efficiency, decrease the amount of inventory, and reduce the number of active SKUs from over 900 to under 500 SKUs. This simplifies our operations. Finally, we announced a strategic review of the Multix brand, which is currently underway. We've also made some exciting new appointments. Hanli Pretorius has joined us as Chief People Officer; Stuart MacAulay as Supply Chain Director; Nathan Alexander as Chief Information Officer; and Craig Durham as General Counsel and Company Secretary. These are talented and experienced executives who are joining a renewed executive leadership team responsible for driving transformation within the business. Looking ahead, our immediate priorities include continuing to implement the systems, processes and culture to execute on our new strategy to drive productivity and growth. We're also implementing technology solutions to streamline sales and people management processes, including sales forces, trade promotions, management and retail execution modules, which are anticipated to be live in the final quarter of fiscal '24. These modules are specifically designed to drive revenue growth through enabling a more accurate assessment of trade promotions and effectively implementing sales driving activities in the pharmacy channel, such as must-stop list distribution, pricing implementation, and dynamic sales call routing. We're also reducing the level and complexity of inventory holdings in line with the findings of our review. I'll now hand over to Paul Witheridge to present the financial results.

Thanks, Brett, and good morning, everyone. On Slide 11, you can see a summary of our results for the first half of fiscal '24. We recorded total sales revenue of $103.4 million for the first half of fiscal '24, 8% below last year. While revenue declined in the first half and expansion in gross margin offset most of the revenue decline, sales of the company's 5 core brands overall reduced by 3% to $63.8 million. Of note, Dr. LeWinn's performed strongly with sales growth of 7% versus the first half of fiscal '23. Sales of the company's supporting portfolio of brands were down 20% to $9.4 million, chiefly as a result of the rundown of stock in A'kin prior to brand relaunch and the deletion of the Moosehead brand. Multix revenues were down 11% as consumers switched to private label and less premium products in this category. The decision to exit low-margin agency and private label sales in the domestic and Singapore markets accounted for $1.7 million of reduction in revenues. While revenue declined in the first half, McPherson's gross margin before material items increased to 51.1% from 47.5% in the first half of fiscal '23, which offset most of the revenue decline. This improvement was the result of reduced input costs, particularly sea freight and commodity costs, and the increased weight of higher-margin Dr. LeWinn's sales. Gross margin gains were reduced by depreciation in the AUD/USD exchange rate, increasing cost of goods sold by $2.1 million. Corporate expenses in the first half of fiscal '24 of $2.5 million were marginally below last year, noting that the full impact of the headcount reduction announced in November of 2023 is to come in the second half of this fiscal year. Statutory profit before tax, inclusive of material items, for the first half of the year was $2.7 million. The primary material item in the first half of fiscal '24 was $1.8 million in relation to one-off restructuring costs. Warmer Christmas typically has seasonally lower cash flow over the first half of the financial year. Cash generation was strong during the first half of fiscal '24 as a result of transformation initiatives within the business. This was a pleasing sign of some of the early results of steps taken as part of our new strategy. Operating cash flow was $9.1 million before interest and tax for the 6 months ended 31 December '23. This represented first half '24 cash conversion of 110% before material items. Net working capital also reduced by 21% to $38.8 million over the 12 months to 31 December '23. McPherson's balance sheet remains strong with net debt excluding lease liabilities of $4 million, a reduction of $9.9 million compared with 31 December '22. The company's gearing ratio was 4% at 31 December '23. With both cash generation and balance sheet strong, we are in a good position for disciplined investment in transformation and growth. Given the company's strong balance sheet and tracking credit balance, the Board has determined to pay an interim dividend of $0.02 per share fully franked. The interim dividend represents a payout ratio of 81% of profit after tax before material items and is in line with the company's dividend policy to pay a minimum of 60% of profit after tax before material items. Thank you. I'll now hand you back to Brett.

Thank you, Paul. McPherson's products are in resilient categories. That is essential products that people need for their everyday lives. While consumer spending and confidence is a driver of McPherson's business, at this stage, we cannot see evidence of any material softening in demand from our customers for stock on our core brand portfolio. Our priority is to focus on implementing our organizational transformation and strategic reset. McPherson has a strong set of category-leading brands. Our aim is for these brands to lead activity in the categories in which they operate. Our new strategy is about unlocking the potential of our core brands: Manicare, Lady Jayne, Dr. LeWinn's, Swisspers, and Fusion, and our supporting portfolio brands. We have already taken steps to drive revenue growth in the second half of '24 through elevated promotional and advertising activity, and I believe the early results of our transformation initiatives are coming through, and there is positive momentum in the business for the second half. I thank you for joining us today, and I look forward to taking any questions you may have.

Thank you, Brett. We currently have no questions in the queue. [Operator Instructions] Our first question comes from Sarah Mann.

So the first question is on GP margin. So it's really nice to see that, that's moved in your favor, partly because of the inflationary pressures unwinding, but also because of the mix. Looking into the second half, I was just wondering if you've seen any of those kind of, I guess, benefits thought to unwind the other way, not so much for a new perspective, but I'm thinking more about, I guess, reversion from potential front disruptions from the issues in the Red Sea at the moment.

No, at this stage, Sarah, we're not seeing any of that. As we said a little earlier, we're pretty confident in the way that things are panning out. We're not seeing any deterioration in COGS. It's pretty steady at this point, I'd say.

Great. And then the next question is just on essential beauty. So you called out that Swisspers and Lady Jayne are kind of broadly flat on last year, Manicare being down. Just wondering if you could give us a feel for what like category growth for the industry has been, just to get a feel for how you're tracking versus the industry?

Pretty steady on Lady Jayne and Swisspers. They're pretty flat. Our share is pretty solid in those categories. But I would say that we're looking forward to the second half because we've got a lot more promotional and advertising activity in them to try and drive the categories forward. Manicare has been down largely because of the change in the sub-brand of Manicare Glam, which is the eyelash category. That saw a huge push post COVID, which has kind of come back to normalized levels. So we've seen that come off. But largely, they're pretty steady, and we're confident, in the second half, our promotional advertising plans will be pushing them along.

Okay. So you haven't seen any, I guess, competitive pressures from other new entrants or people trying to move into your adjacencies to get your market share?

Well, I mean, there's always competitive pressure. I mean, that's the nature of FMCG. I mean, for large part, I'm more interested in resetting a lot of the promotional advertising plans, so that we can really hand on heart say that we're investing at the levels we should on these brands, because I would say in the past we haven't been. But in the categories themselves, they're always competitive. Swisspers not so much. It's more of a stable category versus private label. Manicare, obviously, there's a number of competitors in the beauty essentials category, which are pushing really hard, but we're confident in our shares and that we're headed in the right direction with a bigger plan this half.

Great. And then you spoke about Dr. LeWinn's, so the first quarter and the second half of last year, you had some issues with supply. Clearly, that result, obviously, has helped deliver the strong result in this half. But would it be possible to give us any color around, I guess, kind of the first quarter and second quarter switch, just to get a feel for that delta? And then also, obviously, COGS [indiscernible] in the results. Like any data you can provide at kind of the retail [indiscernible] in terms of performance of that brand, please?

Dr. LeWinn's is definitely kind of biased towards second half. Its first half -- sorry, its first quarter did have a fairly large degree of out of stocks, which we have resolved, which has been some great work from the supply chain team. We're very confident in this half as well. So the second quarter was where most of that growth has come from, and that's largely from the strength of the brand being back in full stock and a renewed kind of AMP push. [indiscernible], I mean, that category is powering forward. I think last -- I don't have the numbers directly at hand, but it's certainly in the high teens in terms of the category pushing forward. We're looking to kind of -- the benchmark we're setting inside our organization is that we really want to start kind of competing at the category growth rates. So it's a great category, has a lot of activity in it, and a lot of macro headwinds for us. So very keen for Dr. LeWinn's to start to get up to that level.

And then in terms of the fact that you've now got stock up, what's your strategy around potentially starting to push harder in the offshore market as well given that you've historically had some success offshore a bit? Or is the focus in the short term all really just around the opportunity in Australia?

Yes. Our focus is very much ANZ at the moment. Huge opportunities in Australia and New Zealand, although there are obviously large opportunities overseas. Our international business is a small part of our overall operation, but it's an important part, and we do see it growing certainly faster than the other parts of the company, but it still remains a relatively small part of the overall operation, and most of our efforts are in Australia and New Zealand.

Yes, makes sense. And then for Fusion, so you are cycling path still, and I think you called out 4% like-for-like growth if you took that out. Given what -- I mean, I guess, just interested in how the VMS category is performing overall. And yes, it just feels like perhaps Fusion is not growing as strongly as you might have liked?

Yes. I think that's a fair assessment. Again, it kind of does fall into a renewed push in the second half around that brand. It did have a lot of stock problems as well in the first quarter of last year. We've now resolved those. There's always kind of support issues with various different ingredients from time to time in VMS in my experience. But largely, those issues have been resolved. And we do have, again, another big push in this half to lift the performance around Fusion. But that's an accurate assessment. It's probably not growing as fast as we would like.

Our next question is a text question from Carlos Gill. Carlos asks, can you just confirm what the net headcount reduction during the first half '24 was? And in what areas did you increase headcount?

The net headcount drop, Carlos, thank you for the question, was 40. And the comment that we have in the current statement is that we've moved a lot of headcount around inside the business. We've kind of shifted the different types of roles that we have inside the organization, but net head count was down 40 roles.

Carlos has asked another question. Also, can you give us the exit first half '24 annualized wage cost run rate?

I guess the best way to answer that question, Carlos, and thank you for the question, is that our annualized exit run rate is around $3 million below where it was prior to the restructuring change. So if we were to compare the full year impact of those restructuring changes we've made, the overall salaries and wages, it gets $3 million below where it was on an annualized basis.

Thank you. There are no further questions. So that concludes today's call. Thank you for joining us today. You may now log out.