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

Thank you for standing by, and welcome to the McPherson's Limited 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 FY '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 FY '26 highlights, the progress we've made through the year and provide an update on our business. Mark will take you through the financial results in more detail before I return to discuss outlook and priorities. We'll then open the call for questions. FY '26 was undoubtedly a disappointing financial year for us. While we completed the transition to our new route-to-market model and delivered the structural benefits we expected, the business experienced greater disruption than anticipated through the transition and a number of execution challenges that impacted sales performance. Revenue declined 14.9% to $118.3 million and underlying EBITDA declined to $4.3 million. Core brand revenue was down 11.3% and statutory NPAT was a loss of $20.3 million. Our balance sheet remains sound with $5.4 million of net cash at June 30, 2026. The result is below what we wanted it to be, but we finished the year with a stronger operating platform and a clear plan for FY '27. I think it's important to be clear about what drove the result. The first factor was disruption associated with the route-to-market transition, particularly in parts of the pharmacy channel, notably independent pharmacy. It has taken longer than expected to transition customers to our preferred ranging and bestsellers list. Second, Dr. LeWinn's experienced out-of-stock issues associated with its packaging refresh and supplier consolidation activities, while reduced product availability and limited participation in key promotional programs. Third, promotional activity did not generate the level of demand we targeted in a number of categories and brands. And finally, Fusion Health delivered a weaker-than-expected result, reflecting innovation performance, lower rates of sale in health food channels and disruption in the independent pharmacy channel. Importantly, though, we view these as execution and transition issues rather than structural issues with either our categories, our brands or the operating model itself. We've taken definitive steps to address these challenges, and we have made significant investment in inventory to restore supply. We have reshaped our marketing model, and we have significantly increased the size of our innovation funnel. We've also continued to invest in the capabilities and people to support our sales and marketing functions. We now have a clear FY '27 plan to convert a stronger platform into improved financial performance. While FY '26 was challenging financially, there were a number of important achievements during the year. Firstly, the route-to-market transition is now complete. We have transitioned to the pharmacy wholesaler and third-party logistics model, significantly expanding our pharmacy reach and now have access to more than 5,000 -- sorry, 4,500 pharmacies across Australia. Second, the structural benefits from the new model have been delivered. We realized approximately $2.8 million of EBITDA savings and approximately $5.6 million of EBIT savings during FY '26, and that's in line with our expectations. Thirdly, our experience with our largest pharmacy wholesaler has been particularly encouraging and gives us a sense of what the model looks like when it is working. Sales and volumes with our largest pharmacy wholesaler increased during FY '26. SKU ranging was broadly maintained through the transition, and that gives us confidence the model can support growth when executed effectively. Fourth, we launched new direct-to-consumer platforms on both Dr. LeWinn's and Fusion Health and continued to strengthen our e-commerce capabilities overall. We also developed enhanced social and creator-led marketing capabilities, refreshed our innovation pipeline and refinanced our debt facilities to better align with our new operating model. Our strategy remains pretty straightforward. At the same time, we've refined it to be about concentrating investment behind fewer and bigger opportunities. We believe that we can create value by focusing on strong brands in attractive health and beauty categories, build demand through effective marketing and innovation, partner closely with customers and increasingly engage consumers directly through e-commerce and digital channels. During FY '26, category growth remained positive across beauty tools, cotton, hair accessories, facial skin care and vitamins, minerals and supplements. Our categories remain attractive, but our own performance was below expectations. The challenge was the disruption associated with the transition activities, product availability issues in Dr. LeWinn's and the weaker-than-expected performance in Fusion Health. Our objective in FY '27 is to close the gap between category growth and our own performance. Our 3 largest brands continue to hold leadership positions in their respective categories. Manicare experienced disruption associated with ranging changes and competitive dynamics in parts of pharmacy, although this was partially offset by growth in grocery and our major pharmacy customer. Swisspers was the standout performer during FY '26, supported by strong grocery execution and improved performance in key pharmacy accounts. Lady Jayne was impacted by route-to-market disruption as well, reduced promotional participation and delays in the rollout of the electrical range. Across all 3 brands, we continued investing in innovation, packaging and brand development initiatives that will support future growth. Dr. LeWinn's and Fusion Health were the 2 brands which contributed most significantly to the revenue shortfall in FY '26. These are the 2 of the brands where we see the biggest opportunity for growth as they are in particularly large and growing categories. For Dr. LeWinn's, the primary issue was product availability. Out-of-stock issues associated with the packaging refresh and supplier consolidation activities reduced availability and constrained participation in key promotional programs. While those issues have now been resolved, the impact on customer momentum persisted throughout much of FY '26 and constrained our ability to participate in promotional activity. For Fusion Health, performance was impacted by weaker-than-expected innovation outcomes, lower rates of sale in the health food channel and disruption in the independent pharmacy channel. Despite the FY '26 result, we remain confident in the long-term opportunities for both of these brands. They operate in very attractive categories. We have strengthened their digital capabilities, and we see significant opportunity to improve execution and build momentum. Thank you. I'll hand now to Mark to take you through the financial results.

Thank you, Brett, and good morning, everyone. Starting on Slide 14, I want to frame the FY '26 result with 6 key messages before stepping through the detail. Firstly, FY '26 was a period of transition. It was our first full year operating under the new model following the transition we substantially completed by 30 June '25. The disruption from that transition was greater than we anticipated and combined with executional challenges had a significant impact on revenue through the period. That said, the structural savings from the new operating model were delivered. We said we expected to unlock $4.5 million to $5 million of recurring EBIT benefit. And in FY '26, we realized $5.6 million. However, those benefits were more than offset by trading performance with underlying EBITDA of $4.3 million, well below plan. In the second half, we invested in inventory to restore product availability, in particular, for the Dr. LeWinn's brand, and that investment in working capital is the primary driver of the downward movement in our net cash. And finally, our debt facilities have been refinanced and rightsized in line with our new operating model, providing access to capital to support our strategic agenda. Turning now to Slide 15. Group revenue of $118.3 million was down 14.9%, or $20.7 million. Core brands account for $14.1 million of that decline, down 11.3%. Adjusting for new wholesaler rebates and net transitional pipe-fill, that is selling to onboard our pharmacy wholesalers, the underlying decline was 6.1%, and I'll come back to this on the revenue bridge shortly. Portfolio brands were down $6.6 million, or 45.9%, reflecting reduced A&P support and to a lesser extent, supply disruption. Reduced A&P on these brands reflects a deliberate reallocation of investment towards our core brands. Our gross margin improved 0.9 percentage points to 58.8%. This reflects a favorable mix benefit from core brands, which represented a greater proportion of revenue in FY '26 versus FY '25 and which carry higher margins. This was partially offset by the dilutive impact of new wholesale rebates. Moving below gross margin. Distribution costs increased $2.2 million to $7.5 million. This reflects the cost of the new 3PL relationship, partially offset by savings in direct-to-store delivery costs. Our A&P spend of $20.5 million was down $1.9 million. And notwithstanding the decline on prior year, our investment rate was up in part due to the establishment of our new e-commerce platforms and with support reallocated from portfolio brands to core brands. Our contribution after A&P or CAAP, which largely represents the business' variable contribution to its fixed cost base was $41.6 million, down $11.2 million with CAAP margin down 2.8 percentage points to 35.2%. Below CAAP, we delivered significant savings. Employee costs reduced by -- sorry, by $6.8 million, or 21.5% to $24.9 million and other expenses reduced by $1.4 million to $12.4 million. That is $8.2 million of combined savings driven principally by the Kingsgrove warehouse exit and the new operating model, supported by disciplined overhead management. Taking this together, we delivered underlying EBITDA of $4.3 million, down 41.4% on FY '25 and underlying EBIT of $0.2 million. Underlying NPAT was a loss of $0.5 million. On Slide 16, we present our segment summary. Australia and New Zealand delivered revenue of $115.8 million, down 14.8% and underlying EBITDA of $9.7 million, down 25%. Contribution after A&P was $41.4 million. The drivers of those already noted for the group, including disruption from the route-to-market transition, particularly in independent pharmacy, out-of-stock issues affecting Dr. LeWinn's and weaker-than-expected performance in Fusion Health. Our Swisspers brand posted modest growth. Trading conditions in the independent pharmacy channel remained challenging across health and beauty, grocery and one major pharmacy customer did perform more positively. For our International segment, revenue of $2.6 million was down $0.7 million or 16%, driven primarily by Dr. LeWinn's in China, reflecting ongoing weakness in demand and a slower-than-anticipated recovery in market activity. The International business delivered a positive contribution margin and improved its EBITDA loss position to $1.1 million from $1.6 million, largely through cost management. Looking ahead, management has identified a distributor-led operating model as the preferred approach for international with implementation commencing during FY '27. Slide 17 sets out the revenue bridge, and this is the slide that best explains the headline decline. We start with FY '25 net sales of $139 million. The first movement, $7.1 million, captures 2 route-to-market impacts. The first is the new wholesaler rebate for warehousing and logistics, which under the new operating model is recognized as an offset to sales rather than as a cost. The second is approximately $4 million of net transitional pipe-fill revenue weighted to FY '25 related to the onboarding of pharmacy wholesalers. Neither item reflects underlying consumer demand. Adjusting for both gives a comparable FY '25 base of $131.9 million against which FY '26 revenue declined just over 10%. Core brands account for $7.4 million of that, a like-for-like decline of 6.1%. The drivers of customer ranging changes associated with the transition, brand performance and competitor intensity across parts of the pharmacy channel, out-of-stock challenges primarily affecting Dr. LeWinn's and weaker-than-expected innovation performance. This was partially offset by growth in our largest pharmacy wholesaler, growth in the grocery channel and growth from our new e-commerce platforms. Portfolio brands account for the remaining $6.2 million, down 44% on a like-for-like basis, reflecting reduced A&P support and some supply disruption. Slide 18 now sets out the key movements in underlying EBITDA from $7.3 million in FY '25 to $4.3 million in FY '26. This includes $4.5 million relating to the wholesaler rebates and transitional pipe-fill that I've just described. Core brand contribution after A&P was down $6.4 million. This reflects the like-for-like sales reduction of 6.1%, upweighted distribution costs under the new 3PL model and an upweighted A&P investment rate. The core brand CAAP is the primary driver of the below expectation EBITDA performance during the year. The impact from portfolio brands was modest at $0.7 million as the sales decline was largely offset by reduced A&P support. FX was favorable at $0.4 million, reflecting a comparatively stronger Aussie against the USD, net of our hedge cover. Employee costs and other expenses contributed $6.8 million and $1.4 million, respectively. And in summary, contribution after A&P was down $11.2 million and $8.2 million of cost savings brought us back to $4.3 million. Turning to Slide 19. This sets out the structural benefits that the new operating model delivered in its first full year. In February '25, we said we expected to unlock incremental EBIT -- sorry, incremental underlying EBIT of $4 million to $5 million from FY '26. In February '26, we then guided towards the upper end of that range. And in FY '26, we delivered $5.6 million. Taking the components in turn, distribution gains have been made in the pharmacy channel. However, as noted, transitional ranging issues in parts of the pharmacy sector have offset these gains. Progress is being made in this area, but I will let Brett cover this in his outline of FY '27 priorities shortly. Next, there is a $3.2 million offset to revenue and gross margin being the wholesaler service charge for warehousing and logistics. Accounting standards require this to be presented as an offset to revenue, but in practice, it replaces costs we no longer incur further down the P&L. Distribution is a net $1.7 million cost, comprising $1.7 million of reduced delivery costs from exiting in-house distribution against $3.4 million for the new 3PL services model. Employee and other expenses delivered savings of $7.7 million from the exit of warehouse employees and overheads. And D&A delivered $2.8 million from the Kingsgrove warehouse exit. Just 2 points to close on this slide. First, the fixed cost savings are now permanently in the base. Employee costs, other warehouse costs and D&A are all done. Second, we now operate a more variable cost model than we did under the legacy structure, where sales distribution does not convert, there is flex in the wholesaler cost line. That is a significant change from the disproportionately high fixed cost base we carried previously. Slide 20 sets out the material items for the year on a pre-tax basis. During FY '26, we recognized total material items of $25.6 million before tax. The majority of these items are noncash with $2.1 million representing cash costs in FY '26. The largest component is the $20.7 million impairment of intangible assets. This comprises a $15 million goodwill impairment in the ANZ segment and $5.7 million of brand impairments, principally Manicare, Fusion Health and several smaller brands. These impairments reflect a recalibration of growth assumptions based on current trading performance. The second category is $1.6 million of restructuring and transformation costs associated with implementing the new operating model, including IT and project management costs and employee-related transition costs. The final category is $3.3 million of other items. This includes $2.3 million of regulatory and legal costs associated with the ASIC proceedings together with an onerous lease charge on relocation of the corporate office and ERP-related expenditures. These have been partially offset by a small interest benefit associated with an ATO refund. Taken together, these material items resulted in a statutory loss after tax of $20.3 million compared with an underlying NPAT loss of $0.5 million. Turning to cash on Slide 21. The group finished the year with net cash of $4.5 million, down from $8.8 million at 30 June '25. Operating cash flow of $0.7 million compared to $2.2 million in FY '25. NPAT adjusted for noncash items contributed $6.2 million, but this was offset by a $5.5 million working capital outflow, the largest element of which is $6.4 million of inventory investment in the second half to restore product availability and support service levels. Working capital also reflects the payment of restructuring costs in July '25, partially offset by a timing benefit on customer receipts and payments. Payments for PP&E and intangibles of $1.3 million related to point-of-sale assets and capitalized IT product development costs. Lease payments were $2.9 million, and we spent $0.8 million on the on-market buyback. We were undrawn on our facilities at 30 June 2026. Finally, Slide 22 summarizes our actions taken with regard to capital management, and there are 4 key points. Firstly, we refinanced our debt facilities during the year, rightsizing them to support the new operating model. Secondly, we invested in inventory to restore product availability and support service levels. Thirdly, the Board has determined not to pay a final dividend, reflecting the retained loss balance at 30 June '26 and the FY '26 loss after tax. And finally, we initiated our on-market buyback, reflecting the Board's continued confidence in the long-term strategy. I will now hand it back to Brett to take us through the FY '27 priorities and outlook.

Thanks, Mark. As we enter FY '27, our focus is very straightforward. Our task is to convert the stronger platform we've built into improved commercial outcomes, and we have 5 very clear priorities. First, strengthen customer engagement through deeper joint business development planning with our key customers. Second, optimize ranging and increased wholesaler SKU availability and rebuilding distribution around our bestsellers list. Third, accelerating growth through impactful consumer marketing, leveraging the social and creator-led capabilities developed during the latter part of FY '26. Fourth, increasing the launch frequency and effectiveness of our innovation pipeline, supported by sustained brand investment. And finally, increased investment in e-commerce across both owned platforms and marketplace channels. While FY '26 was disappointing, we now have a lower cost operating model, improved product availability, expanded pharmacy reach and much stronger digital and marketing capabilities. Naturally, commercial recovery lags the operational recovery, and this is the gap we are looking to close quickly. Our focus in FY '27 is execution and growth, and we believe the actions taken over the past 12 months have strengthened the foundations of the business and position us to capture the benefits of our expanded distribution footprint over time. Finally, while the subdued sales in FY -- sorry, in the fourth quarter of '26 continued into July, with the benefit of the new operating model, management's priorities for FY '27 and a disciplined approach to cost management, company is focused on delivering underlying EBITDA growth for the full year. Thank you. And now we'll open the line up for questions. We've actually got some questions that have already come in, which we might cover.

[Operator Instructions] Your first question comes from Josephine Lang from University of Melbourne, who asks, has MCP considered divesting one of their lower-performing brands to focus on the core ones where they see greater growth instead?

Yes, it's a great question. And that was -- I'd probably point to the transformation that we've been through over the last kind of 2 years or so. When we started this journey, we had about 16 brands under the portfolio, and we've really rationalized them back to the ones that we believe in. And strategically, we believe these 5 brands are the brands that we should really focus on. I think it's easy to kind of think about should we divest them, but these brands have significant consumer franchise in the marketplace. They have good distribution and they're well presented in our customers. And our job despite last year's performance, which is transitory, we still very much believe in the 5 brands we've got at the core of our strategy.

Your next question comes from David Wille from JPMorgan, who asks, with net cash at end FY '26 being $4.5 million and the provision of $2 million in place for the upcoming orders by the court and a soft July 2026, what is the actual net cash today? When is the court orders to be made from the ASIC fine?

Yes. Great. Thanks for the question. It's Mark here. I think I'll answer the first one, and I'll let Brett answer the second. So net cash, $4.5 million at the end of FY '26 is correct. The $2 million provision. What I'll say is that, that's noncash in nature. It's a provision. So that -- I can say that, that is not impacting cash at this point in time. We're not going to guide or sort of give updates on cash on a monthly basis. But just given that you've mentioned the soft July 2026 flow would be comfortable saying is that at the end of July, we did remain in a net cash position, but I don't think I can give too much more than that.

And in terms of the timing of when we believe ASIC will be fining the penalty, that's really up to the court, and we're still working through our options and considering the judgment would be the position.

Another question from David Wille, who asks, with international revenue at $2.6 million for FY '26, what is the inflection point where this actually isn't costing shareholders' money and contributing to NPAT?

Yes. Thanks. It's Mark again. I'll start here, too. I think one thing to note on the international business, which we've provided a little bit more information on in the presentation is the contribution of the international business. So it's actually got a positive contribution to the fixed cost base overall for the business today. It's small, about $200,000, but it is providing some contribution. If we were to exit those fixed cost base, which sit below that would still sit in the business. So the inflection point is about here where we are today, but that doesn't mean that that's -- that we're necessarily satisfied with that. And I might pass over to Brett to answer the rest of it.

Yes. I think the international business is a focus for us in FY '27 to really start to move into the distributor model that we've outlined. We feel as though that our brands do have opportunities in marketplaces such as China and Europe with some of our customers that are expanding in those areas. And we feel as though with a model that is focused on keeping the OpEx low and kind of distributing it from Australia, we feel as though that's a much more sustainable model that will start to turn profitable quickly.

Another question from Josephine who asks, reported revenue was down 14.9% versus a 10.1% like-for-like decline after adjusting for wholesaler rebates and pipe-fill. Should we now consider those RTM transition impacts fully reflected in the FY '26 base? Or would there be further distortion in FY '27?

Yes, look, I think it's a good question. What I'd say is that the vast majority of those route-to-market impacts are reflected in FY '26. It's been one of the key reasons for the challenging year that we've had. But some of the impacts that we've called out as well are transitional. So one example would be the ranging changes, the ranging impacts. It will take some time for us to fully resolve that. We're making improvements and gains have been made even in recent months with respect to that. So we won't say that, that's been fully completed, but progress -- good progress is being made on that. The second example would be the marketing model. So a lot of effort has gone into revising and adjusting our approach to driving marketing in the market. And again, that will take a little bit of time to come through and be reflected in financial performance.

Andrew Gracey from Deep River Funds asks, have you taken cost from the business for 2027, given the sales revenue base is now lower? If so, what is the cost reduction quantum?

Andy, well, FY '27 has really only just started. I mean, look, we're always looking at our cost base. I mean, there's a number of initiatives that we're looking at, particularly around the ERP as an example, which will help us to reduce our cost base. But generally, we're always assessing what we're doing with cost. I mean, we're still fairly early in this year, and we are looking for sales to recover pretty quickly. But I don't think we're in a position where we're wholesale slashing the cost base. I think we've done a fair bit of that over the last year, and we're trying to get the model to settle. That said, the big next cost piece that we look at is the ERP, which we spent a significant amount keeping our current ERP alive with consultants and a whole bunch of other costs. And we've started to identify exactly where we're headed in that territory, and there will be -- there is cost reductions, both from the cost of the tech as well as potentially OpEx around that as well.

Your next question is from John Burgess from RaaS Research, who asks, is the current working capital/revenue indicative of the likely medium-term ratio?