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

Good morning, everyone. Thank you for joining us today for McPherson's FY '24 results. I'm Brett Charlton. I'm the CEO of McPherson's, and I'm joined today by our CFO, Mark Sherwin, who started with us in May of this year. Please note the disclaimer at the start of this presentation. And I'll now take you through the presentation itself. Starting with the results. This has been a year of good progress on our transformation. We've taken the logical steps to reset the business with the goal of returning to sustainable profits and increased shareholder returns. Before I go through the result though, I want to discuss where we started less than 12 months ago and why there was so much of an imperative to transform at McPherson's. When I came to McPherson's, one of the most important things we identified as a new management team was that the business had become dependent on variables beyond its control. Whether that be commodity price cycles, foreign exchange rates or fluctuating freight rates, our exposure to these, especially through the Multix brand, meant in the years of high input costs we would have to pull promotional investment from our health, wellness and beauty brands to sustain profits. The consequence of this was reduced investment to grow our core brands across a whole spectrum of things that are very important to grow brands, advertising and promotions, research and development, innovation, customer insights, investments with our suppliers and customers. As a result, our brands began to falter as the lack of investment compounded with intermittent support and a declining performance leading to regular and material impairments. It was an unfortunate slow and steady decline. Put simply, this had to stop, and we needed to regain control. The status quo was no longer an option. We had to create a different business, a leaner, more nimble model that was less exposed to these variables, and we needed a team of leaders who passionately believed if we can focus our energies on our people, our customers and our brands, then we will have an amazing business, all in the service of shareholder returns and increased and sustainable profitability. To do this, we've had to make a series of hard choices to reorient the business to set it on a new and more focused path. The consequences of those deliberate decisions are the results we are presenting today, the difficult decisions needed to create a sustainable, growing and profitable business. Another consequence of these tough decisions is that the business will not be paying a dividend for the second half of FY '24. While the sale of Multix has strengthened in McPherson's balance sheet, the company does not have the retained earnings balance given the loss this year and previous years, therefore, cannot pay a dividend under the Corporations Act and general law. The Board's view is that by using the company's balance sheet to fund continued investment, the company can derisk and accelerate the substantial transformation of the business that is underway. At the same time, the Board recognizes the company's strong history of dividend returns and why we're announcing that we will review our capital allocation framework. The dividend will be a key consideration in this as we will make sure we have all the right capital allocation in place for McPherson's of the future, a new business with new opportunities ahead. I appreciate that's a lengthy introduction to this presentation, but it's important context for why we have taken the decisions we have and why the results are the way they are. Let's turn to the results, shall we? Our numbers for this year are complex. As you may know, at the end of June, we announced that we had divested the Multix bags, wraps and foils business. So on our FY '24 accounts, Multix has been reported as a discontinued operation. For today's discussion, we're going to focus on our continuing operations, excluding Multix. However, at the same time to make interpreting the results easier for investors, we've also included total group results, including Multix. Let's go through the continuing operations first. This year, we reported sales of $144.6 million and underlying EBITDA of $7.7 million from our continuing operations. Our underlying EBITDA was negatively impacted largely by foreign exchange and portfolio brand performance. In addition, our material nonrecurring items incurred as a part of our strategy reset led to a significant statutory loss. While disappointing, this does reflect a year of material progress in the business to a more simplified and efficient business model. It was very encouraging to see that core brand sales outperformed our other brands throughout the year and notably improved in the second half '24 when compared with second half '23. The total business saw revenue down 6% on last year, reflecting decisions to exit nonstrategic agency and private label brands. And I also want to note 2 strengths of the result: the first one, we drove strong operating cash flows over the year, supported by improved inventory management; and secondly, we ended the year with a strengthened balance sheet and $14.1 million in net cash. Slide 6, transformation. At the start of this presentation, I shared with you the context of our transformation. It's been the first year. And as I've said, we've taken a series of deliberate steps to become a more focused and streamlined organization. And this slide really sets out what we've done this year on that front. Divesting Multix was a major milestone in our transformation. However, we've also done a lot of work on our brands, rationalizing our SKUs, repairing and resetting important processes and on productivity initiatives. These included the first phase of Salesforce.com implementation designed to unlock world-class sales execution, tenders for our logistics and formulated products manufacturers and a detailed planning to reduce our working capital. This year has been the foundation year for our transformation, and we're excited to be now a pure-play health wellness and beauty company ready for the next stage of our transformation reset. Talk about Multix. We announced the review of Multix in November of last year. It was an important exercise that identified a few key reasons why Multix wasn't going to be a long-term part of our future. Firstly, it's a fundamentally different business. Bags, wraps and foils have different drivers and challenges to health, wellness and beauty. Secondly, it's a category that's faced a number of headwinds, including changing consumer preferences, increased regulatory focus and pressure on household budgets, leading consumers to routinely trade down to private label products. And against this backdrop, it's hard to have a point of difference and a competitive edge. And as I've stated, it's a very cyclical business with exposures to the fluctuations of currency, commodity and freight prices and a more volatile earning result. The review concluded we should divest the Multix brand, and we were delighted to announce the sale to ICBG in June this year for $19 million. Moving to the operational transformation update. The divestment of Multix has a number of implications for our business and our transformation plan. The main one is that a large portion of the shared fixed cost base has been retained, creating residual cost. Addressing this is now our key priority. Part of the challenge is that the cost of this group infrastructure are significant. The warehouse and office size are built for an era long ago, and we have a legacy management warehouse system that reached the end-of-life status and would likely require a complete replacement in the next 2 to 3 years at significant cost. So the way that we propose to deal with this is through a potential new route to market, effectively changing our business model to one that is more fit for purpose for our strategy. This route-to-market review is looking at a range of options but with the clear intention of releasing the residual cost and expanding our ability to service more customers in a more cost-effective manner. We are now in the depths of this review, and we'll update our investors as we conclude the best way forward. Let's talk about strategy now. These 5 core brands are the heart of our new strategy. These are our 5 most recognizable and strongest brands, and we see huge potential for their growth with the right business model around them and increased investment in brand building activities. They are in resilient attractive categories, beauty tools, hair accessories, skin care, cotton and vita-minerals and supplements. Similar to our broader transformation strategy, our near-term priorities are focused on getting the basics and fundamentals right, increasing our knowledge base through research, leading to clearly differentiated brand positionings, platform-based innovations and expanding our distribution and channel presence. All of this will be done in unison with our customers as we partner with them through their promotional assets as well. In terms of the core brand performance, we've seen some encouraging signs from our core brands in FY '24. Manicare, we've seen increased activity from lower price competition, which has impacted us this year as the cost of living pressures continue to bite. But in addition, the result was impacted by an unfavorable first half range review where a major customer reduced a lot of the Manicare products they were carrying. However, we saw an improved performance in the second half when the same customer that had destocked us restocked us. Also pleasingly, we've seen a positive performance in the grocery channel, which is very good news. Lady Jayne had performed strongly. New ranging in major customer and the success of our brushes and rechargeable ranges has proven popular with consumers, an example of our team's platform-based innovation capabilities. Dr. LeWinn's was impacted by supply issues and challenges that continued from FY '23 into the first half of FY '24. Resolving these supply issues was a key priority for us, and constraints have been largely resolved across the SKUs for Dr. LeWinn's. Replenishment orders started to come through in the second half, and that resulted in a stronger performance overall. Swisspers has performed well in a number of channels but especially in grocery. And finally, Fusion's performance has been the weakest of our core brands as a result of supply challenges. It's been a tough year for Fusion as it did lap the initial stocking by a major account, but we have seen significant improvement in DIFOT in the second half as a new manufacturer was appointed, which should ensure consistent supply into FY '25. Across our brands, the best indicator we've seen is that we have a stronger second half '24 compared to a second half '23. So we're starting to see the results of our early work on our supply chain, working with customers and the strength of our brands, responding to focused investment. I'll now hand over to Mark to handle the financials.

Well, thank you, Brett, and good morning, everyone. As Brett noted, our results for the year are more complex than usual due to divestment of Multix, which, due to its significance, has been disclosed as a discontinued operation. As such, I'd like to start by highlighting some key messages. Firstly, with regard to our continuing operations. Revenue declined 6.8% to $144.6 million, largely reflecting our decision to exit nonstrategic and agency brands. Sales of our core brands outperformed portfolio and other group brands, resulting in a higher margin product mix for the group. Our underlying EBITDA is down $4.5 million to $7.7 million. There are several items contributing to this, which we will cover in the following slides. However, the primary contributors to this are an unfavorable currency impact from a weaker AUD versus USD and a decline in contribution from our portfolio brands. We finished the year, as Brett said, in a net cash position of $14.1 million, up from a net debt position of $6.5 million in FY '23. This, of course, includes sales proceeds from the Multix divestment, but it is also a reflection of improved operating cash flows during the year. Regarding our discontinued operations, sales from Multix declined 3.8% to $53 million during the year as we continue to see consumers trade down to private label alternatives. Notwithstanding this decline in sales, we saw an improved underlying EBITDA due to more favorable commodity and freight prices, and this reflects the cyclical nature of the business. Importantly, following the Multix divestment, our continuing operations retain a residual shared cost base, including warehouse capacity and fixed overhead costs. Turning to our summary of financials for the continuing operations. Our 5 core brands continue to outperform the rest of the group. This results in a higher-margin product mix and an improved gross margin percentage overall, up 0.9 percentage points on the prior year. Core brand sales were broadly in line with FY '23 at $122.4 million but had a stronger relative second half performance with sales up 1.8% versus the prior corresponding period. By comparison, at the half, our core brand sales were down 2.9% on the prior corresponding period. As noted by Brett and our brand performance overview, Lady James, Swisspers and Manicare all had improved growth performances in the second half, which is encouraging. Unfortunately, sales of our portfolio brands declined $2.7 million during the year. And this largely reflects supply challenges on our Maseur and A'kin brands and the transition of focus from our Oriental Botanicals brand to Fusion. Our exit of nonstrategic and agency brands saw a $6.9 million decline in revenue, and this is the largest contributor to the decline in overall revenue, and it reflects the exit of lower margin SKUs from the business. I'll speak in more detail to the decline in underlying EBITDA shortly. Before that, on Slide 13, I'd like to take a moment to cover our material items from continuing operations. These items do not form part of the underlying EBITDA result due to their nature. However, they are reflective of our trading performance and overall reset of the business in FY '24. Unfortunately, due to current performance, accounting standards have determined that we write down the carrying value of the inventory prepayment associated with the exclusive distribution agreement with Chemist Warehouse. This write-down totals $3.7 million and is distinct from the $1.2 million amortization listed further below. Notwithstanding this position, management are highly motivated to realize value from this agreement and are exploring opportunities to do so. We've also booked $2.8 million in brand impairments from Maseur, Oriental Botanicals and Revitanail. This reflects the trading performance of these brands, but it's also the impact of the Multix residual cost base, which is now shared across other brands in the portfolio. Inventory write-downs totaling $2.3 million have been booked in relation to our SKU rationalization program, which is focused on removing the long tail of low-profit, low-volume SKUs from our portfolio. Restructuring costs of $1.7 million have been incurred to right size our employee base and $1 million has been incurred in leadership transition costs, which includes recruitment and professional fees associated with the ASIC matter. Slide 14. And turning to our business unit overview. The performance of the ANZ business, being the majority proportion of our continuing operations, largely reflects the drivers already discussed or to be discussed in further detail on upcoming slides. So I won't spend further time on this here. The international business has seen a large decline in sales during the year, which primarily reflects a change in distribution model in Singapore and the associated exit of agency brands. The Dr. LeWinn's brand performed in line with prior year despite being hampered by supply challenges. A new social e-commerce partner has recently been appointed to leverage the strong brand awareness in China. Notwithstanding the decline in sales, EBITDA has improved, reflecting a positive skew mix on the Dr. LeWinn's portfolio and supported by employee savings from restructuring activities. Slide 15 shows the underlying EBITDA from our continuing operations, which has declined $4.5 million during the year. And this reflects several key drivers, which I'll briefly step through starting with the largest contributor, currency. A weaker Aussie dollar versus the U.S. dollar has resulted in a $2 million impact to margins during the year. This impact is inclusive of hedge cover and relates to products procured internationally. Due to the source of certain core brands, the continuing operations, excluding Multix, will remain exposed to currency moving forward. The contribution after A&P or CAAP decline of $1.8 million from portfolio brands reflects their performance during the year, which, as noted, was below expectations. The group's exit from nonstrategic and agency brands also contributed to a CAAP decline. However, this partially -- this is partially mitigated by savings in employee costs associated with the new distribution model in Singapore. An additional $0.7 million in stock provisions has been booked for stock with shelf life issues. More positively, the contribution on our core brands has been favorable and is reflective of mix benefit across the 5 brands. This is also net of up-weighted A&P investment versus the prior year. We have also booked savings on employee costs related to restructuring activities during the year. Slide 16 gives an overview of the Multix divestment with a little bit more detail. So turning from the continuing operations. We saw a continued decline in sales during the year, down 3.8% to $53 million, and this is reflective of both our performance in the category impacted by a shift of consumers to private label but also the full year impact of range reductions by a key grocery customer in FY '23. However, reflective of the cyclical nature of the business, gross margins improved significantly as a result of commodity and sea freight pricing with some partial offset from FX. This result emphasizes the potential volatility in earnings of the brand but also presented an opportune time to divest the business. In terms of the financial impact of the continuing operations, it is important to note that due to the nature of the sale, that is the sale of brand and inventory assets only, the continuing business retains a residual cost base following divestment. The business no longer carries the direct costs associated with the brand, including direct variable and some direct fixed costs, but it does carry the indirect costs, which in FY '24 amounted to approximately $6.5 million. The nature of these costs includes warehouse lease and occupancy costs, indirect employee costs, IT and technology, insurance, and corporate overheads. Management are now targeting the removal of these residual costs primarily supported by a potential new route-to-market strategy. The group had a net cash position of $14.1 million at 30 June, and this significant improvement is reflective of the strong operating cash flows of $12.3 million, which is $5.8 million up on the prior year and reflective of underlying NPAT after adjusting for noncash impairments. It also reflects improved working capital, which mostly reflects reduced inventory holdings. The net cash position also benefited from proceeds from the divestment of Multix, excluding GST and payments of PP&E and intangibles includes investments related to the group's new CRM tool. Turning to capital management. Unfortunately, due to the balance of retained losses, including the group's current year statutory loss, the company is not in a position to pay a final dividend for FY '24. We recognize this will be a disappointment to many shareholders given the strong history of capital returns from the company. As part of the next stage of its transformation, the company will conduct a review of its capital allocation framework and dividend policy to better align with the group's refreshed strategy. The total dividend for FY '24 will therefore be the $0.02 per share paid on 22nd of March 2024.

Okay. Thank you, Mark. I'm going to turn now to the first half priorities and general summary before we move to questions. Earlier in this presentation, I shared with you our transformation update. And what we have achieved in FY '24. I want to turn now to -- ahead to our priorities for this year. F '25 is going to be a key year for our transformation. The plus is that if we can deliver on our transformation this year, then our aim is to have a new simplified operating model fully functional by FY '26. Overall, we're continuing to become a more streamlined and focused organization. Our priorities are rolling out changes to our operating model and releasing residual costs into more promotions for our core brands, leading to more profitability. We also want to align our brands to the right channels and customers by ensuring our distribution is strong across all customers from our must-stock list. As mentioned, we're very focused on resetting our knowledge base and finally, as Mark mentioned, will be undertaking a review of our capital management and capital allocation framework. I'd like to now talk about the outlook before I open up the session for questions. I wanted to say, firstly, we are 100% focused on executing on our transformation while growing our core brands. Both of these things have to happen this year. This requires focused commercial execution in a challenging economic environment. And at the same time, we will continue to work to remove the residual cost base we've inherited. McPherson's remains encouraged by the growth potential in its core brands and early indications of their momentum. Year-to-date, we've seen some growth in core brands revenue compared to the same period last year. And so that concludes our presentation today, and I'd like to throw it back and call for questions.

[Operator Instructions] First question today comes from Sarah Mann from Moelis Australia.

My first question for you is just around the core brand. So it's a little bit tricky to interpret how costs have moved from a half-to-half basis just given the risk statement to continuing operations. But from memory, there was a plan to kind of increase A&P spend for some of the core brands in the second half. So obviously, it's nice that you saw, I guess, a lift in revenue in the second half from some of those brands. But are you happy with the return on investment associated with the increased A&P spend that you applied to those brands? Or is the improvement in the second half, actually more a function of just some of the supply issues that impacted the first half being resolved?

Yes. Great question. I mean it is a complex picture in that regard because it is a combination of both. I think it's fair to say our increased investment in the brands was welcomed by customers, and that allowed us to kind of promote more effectively. So that definitely did contribute. But on brands like Dr. LeWinn's, definitely, we saw the replenishment from the supply chain failures in the first half coming out of '23 that helped -- that definitely helped the second half picture. But I would say, definitely, the A&P that we're putting on our brands has given us comfort that if we continue to invest and increase our investment and make our return on in those -- like the effectiveness of that A&P, if that increases, we're very confident that we're going to see a return and a result from that.

Okay. Great. And I guess the other way to ask the question is just around, I guess, market share in the second half. So obviously, looking at a retail scan level rather than, I guess, replenishment orders from some of those supply issues. Do you have any data around how market share for some of those core brands moved in the second half off the back of the increased kind of A&P spend?

Yes. I mean, look, the -- again, tricky to answer because it depends on the category. I would say that we're not comfortable at the moment or happy with, number one, our investment rates around A&P and that our categories are growing faster than us. Now the problem with that is that we're largely -- in Manicare, Swisspers and Lady Jane, we're the #1 player. So we largely drive the category. And so the category is -- responds to A&P. So that's why we're so focused on it, is the more that we can invest in our brands, the more that we grow the category. So I think it's kind of -- our share is probably stable to slightly behind where we'd like it to be, and we've lost some share to private label. But that's more of a function of we're not operating in the category as the leader we should be. We should be investing more, and that should be on really effective promotions.

And then the last question for me and apologies if it's kind of oversimplifying things. But you've got a net cash position post the divestment of Multix, which is good. But at the same time, like the continuing business is currently not making any money, and I know there were kind of some one-offs that you called out there. Presumably, when you move to this new distribution model and you address kind of the residual cost base associated with the divestment of Multix, presumably, there's going to be some one-off costs there as well. And on top of that, you've clearly flagged that a lot of investment's required in this business just on the ERP front and the CRM stock as well. Just wondering, given where we're sitting now, like with the $14 million of cash, like, what kind of time line does that give you for getting a new distribution model in place when you look at the cash position of the business?

Yes, kind of. The fair question, I mean, I'll probably answer it a slightly different way. The target has to be removing the residual cost, and the way that we do that is to change our route to market. That means that we've got to move from where we are into a different model, and that can be a hybrid of a number of different things. That could be wholesalers. That could be another smaller warehouse of our own. That could be a third-party logistics and warehouse provider. And so all of those things are in the middle of that review right now. Also in that review is what's it going to cost us to move to that model. And so the reason that the Board has moved at this point to kind of really kind of hold that cash there is as it becomes clear about what it will cost us, we want to make sure that we've got enough cash to do that transformations can be expensive as evidenced by this year. And so we want to -- in answering your question, we're targeting this year. We would love to be able to get ourselves into a new model this year and have a really clean set of heels for FY '26. And if we can do that, we feel as though that's going to be a great result for investors because we'll have released that cost back on to the P&L back on the balance sheet, depending on where it lands, and that will really help us to then start to invest in the brands in the way that we really think they deserve. Does that answer your question?

Yes. Yes. No, that's very helpful. And then just on that though, like the ERP investment, I mean, is it fair to say that some of that stuff might have to wait a little bit and while we just kind of figure out the route to market?

That's absolutely fair, although we are working -- to that end, we are working very hard on data cleaning and ensuring we've got all of the layers right so that when we do press the button, we've got it nice and clean and ready to go. I'm encouraged by the simplicity of the ERP that the -- Nathan, our CIO, is proposing. It's a very simple model. It's not super expensive. It's going to cost us some, but largely, the reason we're doing ERP is to derisk the business. Similar to our WMS, our warehouse management system, our ERP is also end of life. And so changing to something at the right time is the endeavor that we're engaging in now. But it's definitely [indiscernible]. There is a lot of transformation going on, as you can see, and we've got another year of it. Throwing an ERP into it this year is not going to happen. It will not be this year. It will be '26 or '27 definitely.

[Operator Instructions] As there are no further questions at this time, I'll now hand back to Mr. Charlton for any closing remarks.

Yes, I'd like to thank everybody for joining us today. I think you've seen that we're a motivated team with a plan. We're taking some very deliberate steps to change this wonderful business into something that is going to be quite special in, hopefully, 12 months from now. And we're grateful for the support, for our investors as we go through this transformation, and we look forward to speaking to you in our one on ones.