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

Thank you for standing by, and welcome to the McPherson's Limited 1H FY '26 Results Investor Call. [Operator Instructions] I would now like to hand the conference over to Mr. Brett Charlton, Chief Executive Officer. Please go ahead.

Good morning, everyone. Thank you for joining us for our first half '26 results presentation. I'm Brett Charlton, CEO and Managing Director of McPherson's, and with me today is Mark Sherwin, our CFO. As always, I'll begin by referring you to the disclaimer on Slide 2 and ask that you take the time to read it. Today, I'll cover our first half '26 highlights and an update on our business, and Mark will then step through the financial results in detail and then discuss outlook and our priorities for the second half before we open for questions at the end. So the first half '26 highlights has been a period of stabilization while we have embedded our new operating model, and this is our first result under this new model. As with any transition, there are lessons we've learned through the process of implementing new systems, new processes and new initiatives. But the rationale for our new model remains sound, and the stabilization process is looking very positive. However, there have undoubtedly been a number of areas where our execution has not been what we needed it to be during the transition, and this has impacted on the first half results. For example, we faced transitional issues with stock supply throughout our supply chain, impacting both wholesalers and customers. While some of these issues have been resolved in the half, others remain for us to solve, and this includes the performance of the independent pharmacy channel and the performance of the health food store channel. Overall, though, this is a solid result in the circumstances with both positives and negatives, reflecting the stabilization. Total revenue was down 6.7% on prior corresponding period at $66 million. However, core brand revenue was broadly stable, down 1%. And when you look at this on a like-for-like basis, so excluding the impact of new wholesaler rebates, our core brands overall actually grew 2.2%, which is pleasing. Underlying EBITDA increased 10.6% to $2.2 million, also a pleasing result. Underlying NPAT improved materially to a loss of $0.4 million compared with a $1.3 million loss in the first half of '25. Importantly, we finished the half with net cash of $12.6 million, reflecting strong operational cash generation. We also announced our intention to undertake an on-market share buyback underpinned by confidence in our long-term strategy. While there remains some work to do, this result demonstrates the structural changes we've made are beginning to translate into a more resilient and scalable earnings profile. I thought it would be helpful to share some early observations on our new operating model. And for those of you who are unfamiliar with the changes we've made, a year ago, we announced that we would shift from a legacy direct-to-store distribution, where we operated a warehouse and dispatched approximately 11,000 orders ourselves monthly, to a third-party warehousing and pharmacy wholesaler route to market, matching the market. The structural changes to effect this transition have all been completed. We exited the Kingsgrove warehouse and onboarded a specialist third-party provider -- a third-party logistics provider. And in the second half of '25, we onboarded the majority of pharmacy wholesalers, with only one that we onboarded in the first half of '26. We are deliberately becoming a sales and marketing-led organization focused on brand building, commercial execution and disciplined capital allocation. And I have 4 key observations at this stage of our transformation. First, the strategic rationale remains sound. Our new operating model offers a range of strategic benefits that the previous model could not provide. This structure is asset light, more variable in cost and better aligned with how our customers operate today. Second, we're on track to realize the financial benefits associated with the route-to-market transition. Mark will talk to you more about our progress on that shortly. Thirdly, in terms of wholesaler dynamics, including ordering patterns and service levels, they are stabilizing. We're still working on what our normal operating rhythm looks like under the new model, and this is as expected, given the scale and stage of the changes. And finally, we've strengthened our commercial capabilities to support the model, bringing in new talent over the past 7 months with specific commercial expertise with this model. Operationally, there are several points to highlight from the half year. Firstly, core brands delivered 2.2% growth underlying -- sorry, delivered 2.2% underlying revenue growth on a like-for-like basis. While the overall revenue for our core brands was down 1%, this includes the impact of wholesaler rebates and how these are accounted for as one of the big changes in our new operating model. So by providing a like-for-like figure without the wholesaler rebates, we want to demonstrate that we are seeing growth on an underlying basis, which is pleasing. We successfully embedded and onboarded all pharmacy wholesalers. We increased independent pharmacy channel distribution by 6%. While initial order volumes for this broader range of pharmacies may still be small, the opportunity, though, is very clear. We now have our products in over 4,000 pharmacies across Australia. We deliberately upweighted marketing investment on core brands by 20%, redirecting spend away from lower priority portfolio brands, and we remain on track to deliver $4.5 million to $5 million of incremental route-to-market benefits. And we relaunched -- sorry, and we launched our new e-commerce platform for Dr LeWinn's and Fusion Health, strengthening our direct-to-consumer capability and data visibility, and early signals on those is very positive. Collectively, these actions position us to shift from transformation to disciplined growth execution. So in terms of a simplified and more focused strategy, our vision is to be Australia's leader in premium health and beauty in every household every day. Our strategy remains very simple, consistent and focused on being simplified -- being simplified our execution around 3 pillars: strong brand -- building strong and relevant brands, capturing value together with customers, and releasing the potential of our people. Everything we are doing under the new operating model is designed to sharpen our focus on these 3 priorities. Now looking at some of the brands, Manicare and Swisspers. One of the things I want to say upfront is that we've chosen to have a portfolio of 5 core brands that span different subcategories of the health and beauty industry. This is a deliberate decision, in part, because diversification brings benefits. A blended portfolio performance can offer steadier performance as better performing brands can offset the downside from poorer performing brands in any one reporting period. Manicare had a very encouraging first half with revenue of $25.5 million, up 6.7%. Category growth on beauty tools is modest at 0.3%. And while McPherson's brand scan performance was down 2.9%, this reflected changes -- reflected range changes in private label pressure. Encouragingly, growth in our largest pharmacy customer was steady, supported by new product development and brand investment. Swisspers delivered revenue of $11.8 million, up 11.7%, and the cotton category grew 6.7%. And Swisspers outperformed private label competitors, supported by disciplined promotional mechanics and strong execution of both pharmacy and grocery. Lady Jayne delivered revenue of $9.4 million, down 2.1%. Brand scan data was broadly stable, and we're seeing a robust performance in major pharmacy and grocery channels. However, some delays in our electrical product development and range rationalization in certain wholesale channels was impacting revenue. New hair accessories products are performing really well, including brushes and our fantastic French hairpin. Dr LeWinn's revenue was $8.6 million, down 21%. This reflects out-of-stock positions associated with the packaging refresh and manufacturing transition as well as ongoing softness in the international segment, particularly in China. I spoke about our work to refresh the brand in December -- in our December investor webinar. But in summary, we're pivoting to highlight that this is an Australian brand for Australian skin in unique Australian conditions, focusing on the benefits of each product, all validated by extensive research. The new e-commerce platform launched in October, generating $201,000 in sales during the period compared to approximately $5,000 on the prior corresponding period. It's very early days, but it's an encouraging start in an attractive channel. Stock availability for Dr LeWinn's has now been restored, and we expect improvement in the second half. Fusion Health revenues was down -- was $6.7 million, down 11.8%. However, category growth in VMS was 5%, and our scan data was up 3.7%. The gap between scan and reported revenue reflects underperformance in the health food store and independent pharmacy channels, driven by execution issues and account losses. We have addressed those channel execution gaps and continue to see encouraging performance in major pharmacy. Fusion remains strategically important, and we're excited about the outlook for the brand and about building on the work we've done to date. We did not meet the growth aspirations we set for ourselves in the first half '26. And on that basis, we've moderated the growth outlook, hence the impairment we have announced today. We will be disciplined in monitoring the performance as we rebuild momentum. Now over to Mark for the numbers.

Thank you, Brett, and good morning, everyone. On Slide 14, I'd like to begin with several key messages to summarize the first half results. Firstly, the result reflects a period of stabilization for the business as we begin trading under our new operating model during the half. As Brett has noted, this involves some level of transitional impact as we onboarded pharmacy wholesalers, managed a more rationalized SKU portfolio and navigated a period of out-of-stocks across our core brands. This transitional impact has resulted in a mixed result for our core brands. We've seen positive growth in our category-leading Manicare and Swisspers brands and declines in Dr LeWinn's and Fusion Health. Our ambition as we move forward is clearly to see all core brands in growth. We continue to redirect our A&P investment to our higher-margin core brand range. Our investment overall remains consistent with the prior year. However, we have directed over $1 million in A&P investment to the core brands during the half. And consistent with the first half, the majority of our A&P investment for FY '26 will occur in the first half. Importantly and notwithstanding the transitional impacts we have experienced, our underlying EBITDA for first half '26 is up 10.6% versus first half '25. This is reflective of the financial benefits we are seeing under the new model. Our net cash position at 31 December is strong. Now this reflects our underlying earnings but also reflects the benefit of working capital movements during the half, which will come -- sorry, which I will cover in more detail shortly. And finally, the Board has today announced a market buyback of up to $2 million. Given the balance of retained losses at the half and informed of the loss after tax position for first half '26, the Board determined not to declare an interim dividend. However, this initial form of capital return is expected to enhance shareholder value and demonstrates confidence in the company's long-term strategy. Turning to our underlying financials on Slide 15. Group revenue for the half of $66 million is down 6.7% or $4.8 million. The majority of this decline comes from our portfolio of brands, which are down $4.1 million, reflecting reduced A&P support along with supply challenges, in particular, for our Maseur brand. Our core brands were also down 1% or $0.6 million, reflecting strong growth in our Manicare and Swisspers brands with declines in Dr LeWinn's and Fusion Health. Importantly, as Brett has already pointed out, on a like-for-like basis, excluding the impact of new wholesaler rebates, core brands grew 2.2% on first half '25. I'll come back to this concept of wholesaler rebates shortly as part of the EBITDA bridge on Slide 17. The $2.4 million decline in gross margin is broadly reflective of reduced revenue. However, our gross margin percent was marginally improved on first half '26. This reflects, firstly, an increased weighting of core brand to portfolio brand sales with higher-margin core brands generating a mix benefit along with the unwind of the level of inventory provisioning connected to the recovery of excess stock. These positive benefits were partially offset by the dilutive effect of new wholesaler rebates, which, as we've noted, are now booked as an offset to revenue and unfavorable FX, reflecting an average weakening of Australia to USD. The decline in gross margin has been more than offset by savings in operating costs with several of these linked to annual operating model. Firstly, distribution costs have increased $0.6 million. This reflects new costs associated with our 3PL relationship in the order of $1.6 million, partially offset by savings in freight previously linked to our direct-to-store model of $1 million. As noted, we have maintained our overall investment in advertising and promotions. However, the composition of this investment sees an upweighted allocation to our core brands. The majority of operating cost savings can be seen in employee cost and other expenses, which have reduced by $3.3 million. This reflects approximately $4 million in savings linked to our new operating model from employee costs, which contributed $3.3 million in savings and overheads contributing $0.7 million, with partial offset from inflationary and other employee-related costs. Taken together then, underlying EBITDA of $2.2 million represents 10.6% growth on first half '25. Adjusting for the benefit of reduced depreciation and amortization, which I will cover shortly in a separate slide, underlying EBIT of $0.1 million represents a $1.2 million improvement on the prior period. Now turning to the business segment summary on Slide 16. The ANZ business reported strong underlying EBITDA growth in first half '26, largely reflecting the benefits of the new operating model. The performance of this segment being the majority proportion of our continuing operations largely reflects the drivers already noted for the group. On a like-for-like basis, core brands in the ANZ segment also grew well by plus 3%. The results of the international segment reflects, in large part, the performance of Dr LeWinn's brand in China, which was down $0.6 million. This largely reflects reduced stock availability during the period and the level of disruption, which was incurred in relation to a key distributor in China. Management continues to explore opportunities to grow the international business, including engaging with potential partners to expand digital and e-commerce distribution across existing and new markets. Turning to Slide 17. Here, we provide a breakdown of contributors to underlying EBITDA that are reflective of the underlying drivers of the business performance. This breakdown also highlights how our new operating model is changing the shape of our earnings profile. In this section, we refer to an important measure of performance being contribution after A&P or CAAP. This measure, which reflects gross margin less distribution costs and A&P investment is a key measure of how our brands contribute to overall earnings. Importantly, it also captures the net return after investments in A&P and is, therefore, a measure of how effectively the business is deploying its marketing spend. Turning now to the bridge. Overall, underlying EBITDA of $2.2 million represents 10.6% growth, as we have mentioned. This includes a positive $0.9 million contribution from our core brands, reflecting underlying revenue growth of 2.2% on a like-for-like basis. This has been offset by upweighted A&P investment of $1.1 million on the core brands, which we anticipate will underpin positive returns in future periods. And so taken together, the CAAP for brands was down $0.2 million. We are also reporting a $0.3 million CAAP loss on portfolio brands, which reflects the earnings impact from reduced sales during the period. There are now several large movements related to our change in operating model. Firstly, following the transition to pharmacy wholesalers, the business now incurs service fees in the form of rebates related to the warehousing and distribution of McPherson's products. This cost sits as an offset to revenue, which is why we have provided a like-for-like comparison of sales growth to the prior period, removing the impact of these rebates. As an immediate offset to these wholesaler rebates, the company has unlocked material savings in employee and other costs. The majority of these savings relate to the unwind of in-house fixed costs related to the previous direct-to-store model, including the cost of staff and overheads linked to the Kingsgrove facility. Turning to Slide 18. One aspect of our new operating model, which is demonstrated in the first half '26 result, is a material reduction in depreciation and amortization cost for the business. Overall, the material decline and change in composition reflects the exit from our Kingsgrove warehouse, mainly the associated write-down of leased assets. Our investment in Salesforce CRM has resulted in a modest -- moderate offset to the effects of these changes, but overall, D&A is significantly down. Turning to Slide 19. From a financial perspective, the promise of our new operating model is that it achieves a significant reduction in fixed operating costs. This is the same table that was provided as part of our strategy update in December and is now provided to demonstrate progress against the target of $4.5 million to $5 million in annualized savings. As a reminder, the layout of this table, across the top, we have the key areas of financial changes. On the left-hand side, we have the level of the P&L at which they occur and an indication as to which items are fixed and which are variable. Starting with distribution capability. We anticipate revenue benefits from an expanded distribution footprint in retail and enhanced DIFOT service levels. Both of these come from partnering with our new pharmacy wholesalers in Australia. During the half, the business experienced transitional impacts onboarding several of these, as we've noted, and so this benefit remains in progress at this time. The wholesaler costs, as discussed, there is service costs connected with our pharmacy wholesalers, which totaled $2.1 million during the period. The exit from our in-house distribution activity is where the majority of the financial benefit comes from and during the half is totaled $6.4 million across distribution, employee and other costs as well as reduced D&A. Finally, for the half, the cost of our new 3PL model, cost is $1.6 million. So taken together, this represents savings of $2.7 million during the half, contributing to the overall improvement in underlying EBIT during the period. Turning to Slide 20. The group finished the half with a net cash position of $12.6 million, which was up from $8.8 million at 30 June '25, and this significant improvement is primarily driven by operating cash flows, positive of $5.9 million, reflecting the benefit of earnings but also reduced working capital. In particular, our working capital benefits in relation to the timing of customer receipts and payments, along with reduced inventory holdings more than offset the payment of restructuring costs that occurred in July 2025 connected with the exit of the Kingsgrove warehouse. Due in part to certain trading terms with our customers and the reset of stock levels on key SKUs, we are anticipating some unwind of working capital benefits in second half '26. Outflows in connection with financing activities included lease payments and the repayment of nonbank debt. On Slide 21, as announced on the 28th of November, we have signed a new bilateral 3-year facility with HSBC. This replaces the previous facility, which was due to expire in March this year. The facility has capacity of $16.2 million and reflects the new working capital needs of the business and the facility remained undrawn at 31st December. Finally, on Slide 22, as part of the continuing development of a suitable capital allocation framework, the company has announced today its intention to conduct an on-market share buyback of up to $2 million over the next 12 months commencing in March. Given the balance of retained losses at the half and informed of the loss after tax position in the first half '26, the Board determined not to declare an interim dividend. However, in light of the company's progress through its transformation program and the Board's confidence in McPherson's long-term strategy, the Board considers the buyback an appropriate mechanism to return capital to shareholders while retaining sufficient flexibility to support future growth. The exact amount and timing of the buyback will be dependent on market conditions. I'll now hand back to Brett to cover our outlook and 2026 priorities.

Thank you, Mark. We have delivered on the changes to our operating model and in doing so, address our cost structure and our route to market. And we've done this on time and on budget. However, we need now to ensure we deliver on the core brand growth that will unlock the benefits of our new model and drive shareholder returns. And so our priorities for the second half are very clear. Firstly, we are focused on driving revenue growth through disciplined marketing and commercial execution; and secondly, we want to unlock further efficiencies and benefits within new model. For example, we need to ensure we realize the full benefits of improved distribution and DIFOT under the new model. And finally, we need to maintain disciplined execution across marketing, innovation, e-commerce and our supply chain, and embrace the potential of our people. We are deliberately shifting beyond transformation, and we are shifting towards embedding a high-performance operating rhythm in the second half. In terms of outlook, finally, based on our current trading conditions and continued stability of the new operating model, we anticipate moderate year-on-year growth in underlying FY '26 EBITDA weighted towards the second half. Thank you for your time this morning, and we'll now look forward to kind of fielding some questions.

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

Thank you, everyone, for joining us today. I think you've heard from us that we are very hopeful and optimistic about the business and the changes that we made, and we're looking forward to the second half and seeing you in 6 months' time. So thank you very much for joining us.

That does conclude our conference for today. Thank you for participating. You may now disconnect.