McPherson's Limited (MCP) Earnings Call Transcript

Thank you for standing by and welcome to the McPherson's Limited Full Year 2022 Results Release. [Operator Instructions] I would now like to hand over to Mr. Grant Peck, CEO & Managing Director.

Thanks very much, Josh. Good morning, and welcome everyone to the McPherson's FY '22 Results Presentation. Joining with me today are Paul Witheridge, our CFO; Supriya Singh, Commercial Director for ANZ; and Jade Peak, Commercial Director for our International Business. Today, I will be running through introduction and thereafter, Supriya will take you through the ANZ performance highlights in health and beauty. Jade will take you through the work we're doing in resetting our International business and Paul will address the numbers. Following this, I will return for a brief summary and outlook and then we'll open for questions. So I'm sure, it's a very busy time of year for everyone. So I'm going to get straight into our presentation, to the FY '22 overview. We previewed these results in our announcement in late July. So we'll move through today's overview quite quickly. In spite of a reasonably tough consumer and global economic environment, I'm encouraged by our FY '22 performance. We grew sales by 7% to $214 million and underlying EBIT by 11% to $10.7 million. These numbers were all part of our July preview. To the dividend, however, given our strong cash flow and resulting balance sheet strength, I'm pleased to advise the Board has approved a final $0.02 per share dividend, which will be fully-franked. This takes the full dividend return to $0.05 per share for the year, same as FY '21. 2, our market environment. We spent a lot of time talking about market environment in prior updates. The markets we operate in are large. Health, wellness and beauty category value now sits at [ $16.5 billion ], up 8.4% on March, April 2022. The increase in value since the last update due to pandemic-related factors as well as the continued evolution of the underlying aging demographic. This is a robust market that continues to demonstrate resilience. The dynamics impacting the sector remains strong trends that are supporting many categories but are especially prevalent in health, wellness and beauty. Consumers are increasingly demanding sustainable solutions. With the pandemic as a recent driver of consumer behaviors, a proactive beauty and beauty at home trends are well attended by many of our care motivated brands. And as we look to be more self-sufficient as consumers and aware of our own health, we are increasingly looking at clean, efficacious solutions to our health needs. But like all businesses, we are facing a difficult consumer environment, where global and local costs are shifting us into an inflationary environment quite different to the last decade. Naturally enough, the consumer is worried and will prioritize what they spend on. International market norms are not returning at the rate we'd all like to see as international travel, students and markets pause to see a geopolitics and pandemics evolve. Like many, we need to change our expectations in this space. Finally, sea freight and typical commodity and currency relationships have broken, and this is creating new challenges and increasing uncertainty. What we can say, however, is at this time, the health and beauty consumer is demonstrating resilience and is prioritizing their health and beauty needs. This chart is new, so need some pause for understanding. On the left is 4 categories. On the right, health and beauty. The charts are sales and units, so no accounting for price. What we can see is the unit sales in all categories falling off 3% for the quarter, but the health and beauty consumer transactions are growing at 3% in the same quarter. For all categories unit sales revenue is up 6.6%, and that's not all that different to the headline inflation rate the Reserve Bank is calling out at the moment. For the health and wellness categories, price increases feeding in from COGS inflation is driving a 4.6% revenue per unit increase and the category growth sits at 9%. It would be dangerous to draw a line through the health and wellness categories and suggest are recession-proof. I don't do that. But I think it's fair to say that consumer is prioritizing their needs in the categories we participate in. On to our F '22 achievements. In F '22, we believe we've created a platform for growth and confidence in our future. We have new, simplified and a clear structure aligned against our growth opportunities. We've removed complex and unrewarding joint venture arrangements. We've simplified and enhanced our senior leadership team structure and are revising business processes to support alignment and engagement. Our brands are continuing to grow categories they've participated and accordingly, they are getting better range. And Supriya will elaborate with specific examples shortly. Our service model is extensive in the pharmacy space, and our reach and service is key to leveraging partnerships across the breadth of the health and wellness landscape. We have pivoted to the inflationary cycle, and our core brands have taken responsible pricing actions to mitigate cost inflation. With growth in supply confidence, particularly in respect of the Fusion range, we are now accessing distribution opportunities available to this brand. As we continue to integrate the health and beauty sales force, we will drive efficiency and optimize our investment return in this key component of our model. Finally, and importantly, in the second half of this year, we announced our strategic alliance with Chemist Warehouse. Officially, this kicked off on July 1. But in practical terms, we simply stepped up our relationship that was well established. Our unique 2-way and long-term relationship created by our strategic alliance is progressing well in its first quarter. As most would be aware, the arrangements included exclusive distribution of key desirable Chemist Warehouse brands, which are complementary to our existing portfolio. I look forward to seeing Chemist Warehouse brands complementing our health offering, in particular, in the next fiscal. The McPherson's strategy is well complemented by our arrangement, and I look forward to many years of shared growth with what is currently our largest shareholder. Finally, to our most important consideration, our people and our team. The last few years have been a challenge on so many fronts. However, I do take the view that the alignment of our team, a selective introduction of new talent, introduction of a refined purpose and associated reset of our values will be the most important achievement of the financial year '22. With our new purpose to provide care solutions, to nurture confident, healthy and sustainable lifestyles, I believe we have captured the essence of what McPherson's wants to be at this rather interesting point in history. With that, I'd now like to ask Supriya to review ANZ beauty and health performance, and I'll return to summarize later.

Thanks, Grant. I am Supriya Singh, the Commercial Director for the Australia and New Zealand business unit. I have more than 20 years' experience working in health and beauty consumer groups within Australia and globally. And I joined the McPherson's team last September. As Grant mentioned, the health and beauty category is performing strongly in Australia and New Zealand. And within this context, McPherson's is outperforming both the pharmacy and grocery channels across our core categories during FY '22. Dr. LeWinn's is the #1 Australian Cosmeceutical pharmacy brand. A'kin is a leading hair care brand in pharmacy. Manicare is the #1 beauty tools and accessories brand. Lady Jayne is the #1 hair tools and accessories brand. Multix is #1 in foil, bake, garbage and freezer bags and Swisspers is the #1 lotion brand. The Australian-New Zealand beauty business unit achieved a 5% increase in sales, driven by an 11% increase in sales of owned brands. This strong growth was a result of growth in -- on 5 out of our 6 core brands. The growth in owned brand sales was offset by pressures in commodities and sea freight, resulting in contribution margin being slightly down at 39%. We executed price increases for a range of multi products in the second half of FY '22 and have plans for further price increases across our core brands in FY '23. Price increases for our essential beauty brands, that is Manicare, Lady Jayne and Glam were affected this month. Our essential beauty brands all achieved strong double-digit growth in sales and Multix grew by 10%. Skin care sales grew by 6% with Dr. LeWinn's at 8% and A'kin holding steady. We invested in additional advertising and promotional spend to build awareness, trial and support our innovation. This was supported by a focus in upskilling on e-commerce across all our channels from pure player to e-retailers and direct-to-consumer, which led to a 42% growth in e-commerce sales. This reflects the shift in shopper behavior towards online, which accelerated during COVID-19 but has continued to grow strongly in the second half of FY '22. We achieved significant growth in ranging, in particular within the pharmacy channel with an additional 28,000 points of distribution. Manicare and Lady Jayne built on the move to beauty at home with the launch of premium beauty accessories and tools, increasing the average wait of purchase and leading innovation across the category. Dr. LeWinn's continued to tap into the trend of consumers looking for skin care solutions inside and out with the expansion of the successful Inner Beauty range. This range now comprises more than 10% of total brand sales. And Swisspers and Multix led the drive for sustainability within bags, wraps and foils and cotton, with the launch of paper stems across our cotton tips and more Multix Greener innovation. The health business unit sales grew 90%, reflecting McPherson's first full year of ownership of the Fusion and Oriental Botanicals brands. Despite a difficult first half for the health business, with many health stores closed for extended periods due to COVID-19, impressive like-for-like growth of 19% was achieved in the second half of FY '22, driven by 26% growth in Fusion Health sales. The Fusion brand continued its dominance as one of the leading vitamins, minerals and supplements brands in the health feed channel, with an estimated 95% distribution. It is now poised for significant growth as we integrate health and beauty field sales, expand into pharmacy and execute the strategic alliance with Chemist Warehouse. Underlying EBIT grew faster than sales, reflecting the integration efficiencies with more to be delivered in FY '23. New product launches for Fusion with Immunity & Stress and Quercetin Advanced, capitalized on key categories and trending ingredients. Fusion's Wintering Well campaign, promoting immune health was recognized by -- with 2 prestigious industry awards, the complementary health care products Self-care Excellence Award and the Complementary Medicines Australia Highly Commended Outstanding Marketing Campaign Award. We invested strongly behind this campaign, increasing digital reach by 47%. And importantly, education has always been a key pillar for Fusion Health and we continue to use multiple approaches to deliver this. With the launch of the new online learning management system, the McPherson's Academy and reaching 3,000 store staff across e-learning face-to-face and online events. McPherson's continues to grow its trusted market-leading owned brands by investing in 4 key areas. Firstly, an innovation program that leverages macro trends and drive category growth by premiumization. Secondly, distribution expansion to make these brands more accessible to more consumers. Thirdly, integrated marketing campaigns with a strong focus on owned, earned and paid digital. And fourthly, continued alignment of the health and beauty service products. I'll move to a few highlights for our brands. Manicare gained 1.2 points of market share and passed the $60 million retail sales milestone driven by premium on-trend power accessories like the Magnifying Pore Vacuum. The brand also won 3 awards in the annual beautyheaven Glosscar Awards. Lady Jayne gained 2.1 points of market share and launched into the adjacent category of premium power tools with the Lady Jayne hair straightening brush. This launch accelerated total brand growth to 21% following its launch in the last quarter of FY '22. Swisspers gained 2.7 points of market share, driven by premium sustainable innovation. In particular, we partnered with key retailers, those with plastic reduction initiatives in place to phase out plastic stem cotton tip. The transition from plastic stems to cotton tips with paper stems was the #1 new product launch across all the categories we compete in, delivering $5.6 million in sales during FY '22. And Multix grew sales by 10%, maintaining the #1 position in the key segments of foil, garbage bags, freezer bags and bake paper. We partnered with key retailers on sustainable initiatives. And in October 2021, Multix Greener was awarded the coveted Nielsen IQ BASES Breakthrough Innovation title. Dr. LeWinn's grew both sales and share in FY '22, driven by the inner beauty range, which is now 10% of total brand sales and growing by 145%. We launched 2 new ingestible beauty products, Marine Collagen Peptide Inner Beauty berry flavored powder and Marine Collagen Peptide Inner Beauty Orange and Mango Liquid Shots, further establishing our position as the skincare authority within the vitamins, minerals and supplement category. Fusion capitalized on key categories and trending ingredients with the launch of Fusion Immunity & Stress and Fusion Quercetin Advanced, both particularly relevant in times of heightened concern for immune health and stress support. And we supported these launches with award-winning integrated marketing campaigns like Wintering Well. I'll now pass on to Jade to discuss the international business.

Thank you, Supriya. Good morning, everyone. My name is Jade Peak, and I am the Commercial Director of the International business unit. Including my time at McPherson's, I have been working in export markets in health and beauty for the last 15 years. The International business unit at McPherson's is responsible for all markets outside Australia and New Zealand. FY '22 was a reset year for our international business, and we look to continue to broaden our risk base. Sales declined by 6%, largely due to the challenges in our China business and changes in the global landscape. International markets have not reopened in the time frame that we expected, and this has compromised access and opportunity for market entry. Inbound tourism did impact our Singapore business and the surrounding market and with consumers in Asia showing high levels of caution, new opportunities were impacted. Sales into China for Dr. LeWinn's were challenged, with increased channel competition in the e-commerce space and growth from Chinese domestic brands. We moved beyond the previous heavy stock weight of Dr. LeWinn's in China and now look to reignite the demand by our broader channels. Cross-border e-commerce conditions in China continued to be challenging. And with the zero-COVID approach in that market, operating was difficult. McPherson's has undertaken strategic reviews of all our partnerships to define the right target operating models across the regional scope of our business as part of planning for the future. The business continues to evolve our diversification strategy for our international business, both in China and beyond. In FY '23, we continue to focus on diversification in our planning for expansion. And McPherson's will be selective in pursuing international opportunities, and we look to leverage existing omni-channel presence in markets like Singapore. A key driver of our growth will be new market entries with a prudent approach. E-commerce will be a lead channel for expansion targets across all our regions with capabilities in this space are priority. E-commerce penetration in focused markets is high, and this channel will further increase an importance for McPherson's. The growth we are seeing in the beauty and personal care categories globally present strong opportunities for McPherson's brands. Our partnership selection will be critical for the realization of our expansion goals. And we look to engage value-enhancing expertise to help us service into natural markets and deliver growth. We expect cross-border accessibility in China to continue to strengthen and that the regulations will favorably support this. Growth does continue in cosmeceutical and anti-aging skin care in China. And Dr. LeWinn's as a brand is well positioned to leverage this trend. McPherson's is evolving the portfolio in China and expanding on open platforms. The competition in cross-border platforms is heightened, leading us to a more diversified approach. With this and a growing partnership base, China remains both relevant and strategically important. Close followers will be across the Dr. LeWinn's brand presence on the social e-commerce platform operated by ABM. Aligned to our expansion aspirations, we are expanding alongside this ongoing relationship with ABM and the opportunity that their platform and private traffic presence for the brand. I'd like now to hand over to Paul Witheridge.

Thanks, Jade, and good morning, everyone. The financial results for fiscal '22 that the company has released today are consistent with the company's preliminary results release on the 28th of July. This presentation includes an appendix with a detailed profit and loss statement and should be read in conjunction with the Appendix 4E to gain a complete understanding of McPherson's financial performance in fiscal '22 and its financial position at June '22. By way of a summary and recap of what Supriya and Jade have presented, total group sales grew by 7% to $214 million in fiscal '22. Our ANZ beauty and household consumables business unit achieved 11% growth in own brand sales. Breaking that strong result down by category. Firstly, the skin, hair and body category grew by 6%, with Dr. LeWinn's achieving 8% growth and A'kin delivering a steady outcome. Secondly, the essential beauty category grew by 15% as all 3 core brands achieved double-digit growth. New product innovations and a shift toward home-based beauty solutions resulted in 20% growth in Swisspers, 14% growth in Manicare and 12% growth in Lady Jayne. Finally, the household consumables category grew by 9%, driven by strong demand for the broad range of multi products. Sales of agency and private label products declined by 16% and 26%, respectively, as the company's primary focus has been on growing sales of its own brands. Our health sales increased by 89% as the company recorded a full year of sales in fiscal '22 in comparison with 7 months of sales in fiscal '21. Pleasingly, second half '22 sales grew by 19%. This outcome was driven by 26% growth in Fusion. International sales declined by 36%, largely due to the $4.2 million decline in sales of Dr. LeWinn's products into the Chinese market as the cross-border e-commerce channel continued to be challenging in FY '22 and the company transitions to a more diversified channel strategy. Sales in the Singapore market and surrounding regions declined by $300,000 from $4.1 million in fiscal '21 to $3.8 million in fiscal '22 as COVID-19 had a significant impact on inbound tourism. Now to a bridge of the company's 9% growth in underlying EBIT from $10.8 million in fiscal '21 to $11.8 million in 2022. The first 2 favorable elements relate to the profit impact of strong growth and contribution from the company's essential beauty brands and Multix being $4.7 million and $2.7 million, respectively. These figures exclude the adverse impact of commodity costs and sea freight costs, which are outlined separately. The positive incremental EBIT contribution from the first full year of trading for the health brands was $1.9 million. The net favorable impact from foreign currency movements was $2.6 million, noting that the company hedges its U.S. dollar currency exposures 12 months in advance. The favorable contribution from strong growth in own brand sales was offset by material cost increases in commodities [Audio Gap] and sea freight, which increased [Audio Gap] by $4.4 million and $3.6 million respective escalations in the price of oil, natural gas and electricity. The adverse contribution impact of the 26% decline in COVID-related sales was $1.2 million, the adverse impact of the $4.2 million decline in Dr. LeWinn's sales into China and the impact of cost inflation on direct-to-store freight was $800,000 in both instances. Now moving on to net debt and gearing. The company's financial position remains very strong with net debt of $1.7 million and gearing of 1% at 30 June '22. This outcome was a consequence of the company's strong underlying cash conversion of 129% in Q2, largely due to a $7.9 million reduction in trade receivables. In terms of dividend and capital management, the Board has declared a final ordinary dividend of $0.02 per share fully-franked, payable on the 23rd of September, taking the company's full year dividend to $0.05 per share, representing an underlying payout ratio of 97%. This is consistent with the company's policy to pay a minimum of 60% of underlying profit after tax, subject to cash requirements. Given the company's low level of net debt, the Board will consider capital management initiatives in conjunction with the upcoming debt facility review in the first half of fiscal '23, remaining cognizant of evolving macroeconomic conditions and business requirements. I'll now hand you back to Grant for a summary and outlook. Thank you.

All right. Thanks very much, Paul. To the outlook. In conclusion, we're of the opinion that the category we have chosen will continue to serve us well. We have category-leading brands across a generous breadth of the health, wellness and beauty landscape. We have innovation driving growth and the right partnerships to facilitate and complement our strategy. Our balance sheet and demonstrated cash flow capability gives confidence we can support the business requirements going forward. We also understand we need to approach the new international market opportunities with a revised strategy, that broadens our risk base and invest commensurate with the demonstrated opportunity. Of course, the last 15 months since our May '21 operating review, the environment has changed materially. With commodity sea freight and inflationary pressures now quite different to what was observed, frankly, in the last decade, the consumer is facing some similar challenges. Given this uncertainty, we don't believe it appropriate to continue to provide guidance. However, we are confident in our ability to drive continued growth through our unique consumer, customer, channel and category expansion, enabled by our targeted investment in innovation and an enhanced and very capable leadership team. I'd like to thank you for your time, your support and interest today. I'd now like to open the floor for questions.

We currently have no questions in the queue. [Operator Instructions]

Sorry, Josh, there was one question in the queue. For some reason, isn't appearing on your screen. But the question is, can you give us some light on how trading conditions have been for the start of fiscal '23? So Grant, would you like to provide some brief light on that?

Yes. I think it's fair to say that we're comfortable that we're continuing to see growth on the same period. Beyond that, it's early. So -- but we're quite comfortable with the outlook at the moment in Q1.

And Paul, I can see we have someone just joining the audio question system.

There's a question here from [ Vishal ]. Hopefully, I've pronounced that name right, [ Vishal ]. And [ Vishal's ] question is, can you please provide your thoughts on the impact of Chemist Warehouse still being secured? And what it means for the growth profile of the business over the next few years? How does it impact your confidence and outlook for the business? [ Vishal ], I would perhaps refer you back to the original announcement around Chemist Warehouse. We think it's very, very much aligned to our strategy. We see opportunity for closer collaboration in 2 respects. One is our brands in their environment. And also, we're really excited about being able to add some of the quite significant Chemist Warehouse brands into our portfolio, particularly in the health space. We think we -- we think it rounds our health portfolio in a very strong manner. And so in short, that arrangement certainly gives us real confidence in growth opportunities going forward.

We have an audio question on the line from Sarah Mann.

Okay. So I just wanted to ask a question firstly on the strong sales result in essential beauty. You guys have been pretty good doing [indiscernible] branding. Can you give me a bit of a feel for what percent of the growth came from kind of [ past inflation that you went from the higher dollar volume products versus fixed ranging ]?

You dropped out just -- You're after the split, I think, Sarah. While Supriya thinks about her answer here, can I just clarify the question? You're after the split between incremental ranging innovation -- and pricing?

Yes. So let me take that question. In FY '22, we didn't execute price increases across our essential beauty range. So that started this year in August. However, what we did do is launch more premium innovation. So things like the power tools of the Pore Vacuum as well as the Lady Jayne hair straightening brush. Now they are still a relatively small percent of sales at less than 5% across both of those brands, but growing at more than 100%. So we expect that to have a much bigger contribution moving forward. The majority of that double-digit growth across both Manicare and Lady Jayne is really driven by range expansion and the core and demand for our core range growing as people are doing more beauty at home.

Okay. And the next question is just around the NPD pipeline. So you guys have done a good job in kind of the beauty tool space. Can you give us a bit of an outlook around, I guess, what the NPD pipeline looks like for the next 12 to 24 months? And do you expect that to drive growth?