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Edited Transcript of MCP.AX earnings conference call or presentation 15-Aug-19 1:01am GMT

Full Year 2019 McPherson's Ltd Earnings Call

MULGRAVE , VICTORIA Aug 23, 2019 (Thomson StreetEvents) -- Edited Transcript of McPherson's Ltd earnings conference call or presentation Thursday, August 15, 2019 at 1:01:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Brett Jason Owers

McPherson's Consumer Products (NZ) Limited - Director

* David Fielding

* Donna Chan

* Laurence McAllister

McPherson's Limited - MD & Director

* Lori Pirozzi

McPherson's Limited - International Sales Director

* Paul Witheridge

McPherson's Limited - CFO & Joint Company Secretary

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Conference Call Participants

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* Brendon Agius

* Ian Munro

CCZ Equities Pty Limited, Research Division - Senior Analyst

* Jonathon Higgins

Shaw and Partners Limited, Research Division - Analyst

* Sarah Mann

Moelis Australia Securities Pty Ltd, Research Division - Analyst

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Presentation

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Operator [1]

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Mr. McAllister, your line is now open. You can start the conference now.

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Laurence McAllister, McPherson's Limited - MD & Director [2]

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Thank you. This is Laurie McAllister, Managing Director of McPherson’s. Good morning, and welcome to the McPherson’s 2019 Full Year Results.

Today, I'm joined by 5 of the senior leadership team. As many of you know, you've heard from me talk about the business ongoing, and we feel it's important that you continue to gain access to some of our extremely strong talent, having them present across their specific disciplines and functions.

No surprise, very consistent strategy that we are extremely focused on: one, focus on our core 6 brands; explore new product platforms; move across strategic partnerships; and drive geographic footprint.

These are our 10 strategic business imperatives to offer you more granularity. So let's look at how we're doing.

As much as there is much to do, we do feel we are tracking relatively well. So let's look at the top 10.

Why health, wellness and beauty? Well, it's big. It's got strong growth rates, strong margins and health, wellness and beauty's sustainable set of categories and industries.

Two, revitalize our own McPherson’s brands. As you will see, Donna, our Marketing Director, will talk about how we've revamped and renovated our core 6 brands with new visual identity, packaging, ingredients, claims and double-digit growth.

Three, ensure a healthy balance sheet. Paul will talk to the fact that it wasn't so long ago we had quite a bit of debt. Now we got very low debt and very strong cash flow.

Four, moving from a transactional to strategic partnerships for our top six customers. This has been delivering very, very well. We've renegotiated our trading terms across our top six customers, working on joint business plans together and talk to tops to grow our pie collectively.

Five, integrate and grow acquired skincare brands, Dr. LeWinn’s and A’kin. We feel that we owe the community that before we go out and buy more businesses that we demonstrate that what we have acquired in the last 4 to 5 years that we can grow. And that's what's happening. Both these brands are growing very strongly.

Six, create a China-facing business. Working with our ABM partners exclusively in China, we have taken the business in Dr. LeWinn’s China from $400,000 in FY '17 to $3 million in FY '18 to now just completing $16 million in FY '19. So this is, again, a very, very strong delivery, working with ABM.

Seven, ensure we have a team fit for the future. What we are is lucky to inherit a very strong team as well as bring great people into the business, and it really has been about the expertise, the capabilities, the values and behaviors, and the team is performing extremely well as a team.

Eight, stop the bleeding in New Zealand and Singapore and expand into Asia. We're glad to see that the New Zealand business is out of the red and into the black and the turnaround is well under play with our Singapore office and our reach across broader Asia, excluding China.

Nine, gain efficiencies across supply chain. We've realized these efficiencies and put them to bottom line, and we now have a very efficient business, and we'll talk about a little bit later, with significant excess capacity to look at other new incremental business, which then gives us a lead to #10.

We feel we've done a really good job in these new ventures. They're innovative, with great people: Kotia, Sugarbaby and Soulful. But we're yet to crack the big one. So watch this space.

Okay. Now let's talk about the team. So as you can see, my Sales Director to the left, obviously, international role, senior management roles in FMCG across Coca-Cola and Sanofi Healthcare.

Paul, our Financial -- Chief Financial Officer, who has about 10 years' experience within McPherson’s,and also had background in PE and KPMG as well as working with listed companies and senior financials with OPSM and Angus & Coote.

Donna, our Marketing Director, has great experience in J&J, FMCG, Campbell's and Arnott's and is managing a big team of marketing talent to drive our core brands.

David Fielding, ex Coca-Cola Company. David and myself worked for each other on-and-off and have crossed paths over 20-plus years at the Coca-Cola system. And David's got vast knowledge in marketing, innovation and strategy as well as working with the Visa company.

Lori Pirozzi, we brought in from Sanofi. Great experience in export key accounts, national sales and great exposure to pharmacy and grocery senior management.

Brett Owers has been with the company for 8 years also a Chartered Accountant like Paul, also -- and previously KPMG, and is heading up a new business in connection with David Fielding to try and find new targets in M&A and ventures.

Mary Pearce, Dr. Mary Pearce is ex BWX, has taken our R&D team from a headcount of 2 to 12, with a structure of chemists, formulators, packaging people and regulatory experts to support Donna's marketing plans and new ventures.

Mark Brady, great experience in pharma through Pfizer, he's a Six Sigma Black Belt in supply chain and very, very much structured, detailed and impressive as far as our supply chain capabilities are set up.

And last but definitely not least, Sarah Tully, who's our HR Director, great disciplines in HR, who has an entrepreneurial background with a blend of soft and hard skills to develop people and build a team of individuals and teams and help us drive great culture through our values and behaviors.

From a Board perspective, I'm happy, to say that our Board's capabilities now reflect our strategies in health, wellness and beauty. Graham's now been with the business for almost 10 years. And as you probably know, Graham was ex-Kerry Packer, CFO from Consolidated Press Limited as well as backgrounds in Ford and other companies.

Jane McKellar, great experience in FMCG and Beauty. Ex-Unilever, ex-Stella, ex-Managing Director of Elizabeth Arden for Australia as well as 9SMS and Microsoft. Grant Peck, who -- and Jane heads up our RemCo chair for the company -- the Board.

Grant Peck's the Chair of Audit Committee, is the ex-CFO and Supply Chain Director of CUB and great international experience of FMCG across CUB and McCormick's.

Geoff Pearce, 40 years of building and manufacturing brands across pharma and cosmetics, health, wellness and beauty, FMCG and extremely connected and very generous with his time and business opportunities and introductions.

Alison Mew, more of a scientific background in biopharma as well as production QA/QC in operations. Alison is really demonstrating a keenness to work with us in our process as an operating model as we move into new categories, such as digestibles.

So let me now pass over to Paul.

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Paul Witheridge, McPherson's Limited - CFO & Joint Company Secretary [3]

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Thanks, Laurie, and good morning, everyone. Firstly and importantly, [today, I'd like to say] our audited results are totally consistent with what we released in late July as a preliminary set of numbers. So no variance there.

Moving over to our breakdown of our FY '19 sales by product category. Firstly, the headline there is that our sales revenue from continuing operations did increase by 7% when we exclude our Coty Fine Fragrances sales in FY '18. Remind you that we exited that agreement with Coty back in February 2018.

Going through the individual owned brand segments that we have. Very strong growth, as we've reported in our skin, hair and body category, 72% growth for the year and importantly, 86% growth in the second half of FY '19 versus the second half of FY '18. And that was in both the export and domestic channels. Also pretty good growth for A’kin in the domestic channel.

Our essential beauty category was relatively flat. We had good growth in Manicare, 2%, particularly given the strong growth we had last year in that brand. So it was good to consolidate that this year. And that was offset by a 2% decline in sales of Lady Jayne products and a 7% decline in sales of Swisspers product due to increasing competition from private labels we have active plans to address.

With regard to our household essentials category, which is primarily our Multix brand, again, we consolidated really strong double-digit growth in Multix that we had coming into this fiscal period with moderate growth, 1% growth in the Multix brand. So we were pleased with that outcome, given the strong growth we had last year, and that was driven by our important innovation in the growing [arrays] that Donna will take you through in more detail.

So overall, our own brands were up 11%, which is very strong outcome for us, from $145 million to $160 million. Our agency brands becoming less significant for us, which is a pretty good thing. And we did have a decline there in sales of 11%, and that was driven by a 20% reduction in Trilogy sales and we're exiting the Trilogy agreement, effective May 2019.

Private label sales were up marginally. It's not the main game for us. It's -- we provide that as a service to our retailers, but up 6%. So overall, our total sales, as I said, excluding fine fragrances from last year, it was up 7%.

So going over to a bridge of our underlying profit before tax from last year through to this year, you can see that while the figure was consistent, i.e., $19 million, there were some important moving parts to point out. Firstly, the impact of the loss of fine fragrances on our PBT was $3.1 million. We more than offset that with growth in our own brands contribution from our own brands of $4 million. We had 2 areas of decline that I've mentioned. Firstly, the impact of a decrease in contribution from our agency brands, excluding fine fragrances. That impacted us negatively to the tune of $0.5 million, and we did have a decrease in contribution from private label of around $900,000 which is primarily currency-related.

We made an important investment in our advertising during the period, which obviously drove part of that increase in contribution from owned brands of $4 million. So the investment we made there was a net investment of $1.1 million. We had an increase in our Multix spend. That was a key area of investment for us. We had some areas that have decreased to come up with that net result of $1.1 million investment in advertising.

Laurie has mentioned our balance sheet strength, and you'll see that on the slide I'm about to show you, the impact of that on our PBT was to reduce our interest expense by $1.6 million. So there's a bridge of our FY '18 to FY '19 PBT.

Going over to the next slide, which is our balance sheet. The summary there is that we did reduce our net debt from $9.8 million to $7.5 million over the 12 months and that was despite making some really important investments for the business going forward. So we invested $3 million in display fixtures, very important to secure that real estate within the key retailers we deal with. We made a $2.9 million investment in the Kotia venture. And we made a $3 million investment in the Aware business, which has been part of facilitating strong and sustainable supply through to our export and local customers with Dr. LeWinn’s.

So we've got a modest gearing at 7%. It's come down from where it was back in 2015, 44%. And we've done that -- we've been able to achieve that modest gearing despite those significant investments. And you can see on the right-hand side there, as Laurie mentioned, significant movement in debt, down from $77 million in June 2015 to just about 0 when you exclude those investments we made at the end of 2019.

So cash flow, no surprise, we had really strong cash conversion, 117%. We continue to focus on working capital management. Key reasons for that really strong cash flow was sales mix-related, very, very good debtor's profile in relation to our sales mix leading into the end of the year, and we're also able to reduce our investment in inventory. So very strong outcome there.

And you can see -- if you cast your eye over our cash conversion over the last 5 years, we come pretty close to averaging around 100% which indicates that we're good at managing our working capital.

Going on to the dividend. As we signaled back in late July, we're paying a $0.06 final dividend, fully franked. That compares with $0.025 last year, so a nice increase there. We're paying it a bit sooner than we did last year. So that's going to be paid on the 26th of September, taking total ordinary dividend to $0.10 per share compared with [$0.085] last year. We remind you, we paid a special of $0.02 per share, fully franked, back in March. So overall, a $0.12 dividend this year, and we're still coming with a very low debt number. So clearly, we have capacity to pay a high payout ratio. And we do have the objective of reducing our franking credits. This year, our franking credits have come down from $22.7 million to $20.7 million, and we would like to see that come down further given the value they have in the hands of our shareholders.

So we have retained the DRP, despite our low debt profile, and we've retained it at a 2.5% discount because you do want to encourage reinvestment. We do have plans to grow our business through investment in M&A. And we do want to continue to pay out those dividends. So that's why we've left that DRP in place with a discount.

So summary of outcomes. Look, I think the key point I'd like to make is that there are earnings and there are earnings and I think those are very high-quality earnings this year for us and that's indicated by some key elements I'll point out to you.

The growth in our owned brand sales from 69% to 76% is the sign of the quality of those earnings. A reduced proportion of sales to grocery, an increasing pharmacy is another sign of health for us. The absence of significant items is good. That's the first time for many years that we've reported a result without any significant items. Very strong cash conversion despite significant, important investments in the future, Kotia, Aware and real estate. A high dividend payout of 77%, and that's the ordinary dividend payout and a low gearing at $0.07. So I think you can see there that we ticked quite a few boxes in terms of quality of earnings.

So I will now pass you over to our Marketing Director, Donna Chan, who will take you through some marketing slides.

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Donna Chan, [4]

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Thanks, Paul. As Laurie has already shared with you, we've had quite an exciting year revitalizing and growing our brands. Throughout the year, we focused on 4 key macro trends. China export has absolutely been turned on with the Dr. LeWinn’s brand. Natural continues to resonate with consumers, and our A’kin brand is perfectly positioned to capitalize on this long-term trend.

Our new product success in Multix Greener and Swisspers Cotton Tips Paper Stems is a testament of consumers increasing interest in sustainable solutions. And our [face-first] strategy is going from strength to strength, with expanded ranging in both Dr. LeWinn’s and A’kin.

Our strong growth in our brands can be attributed to 4 full key pillars: increased investments in innovation (inaudible) delivering over $13 million of retail sales through new products; huge focus on in-store execution, combined with increased consumer advertising and promotion investment; strong strategic customer partnerships, working hand-in-hand with them to build our categories and brands; and expansion plans into new markets, new segments and new categories.

This chart shows the quarter-on-quarter value growth in the pharmacy channel. The blue line represents the pharmacy channel growth, which you can see, is fairly flat, particularly in the latest quarter. The red line shows McPherson’s growth across the same period and at 10% growth in the latest quarter, we're significantly outperforming the channel. The same chart has been replicated for unit growth and the results reflect the same positive trend for our brand.

The grocery channel, represented by the blue line, is showing slight growth between 1% to 2% quarter-on-quarter. McPherson’s is in the red line and has been able to outpace channel growth with the launch of sustainable offerings at Multix and Swisspers, accelerating growth in the latest quarter to nearly 10%. We've replicated the style also for unit growth in the grocery channel and in the latest quarter, McPherson’s is growing 14% in this highly promoted and competitive market.

Moving on to our brands. Dr. LeWinn’s has had an absolutely phenomenal year as the #1 Australian cosmeceutical brand within the facial skincare pharmacy channel. Dr. LeWinn’s has grown an impressive 125% in sales revenue in fiscal year 2019.

In the Australian domestic market, our sales have accelerated 26%, outpacing category growth by 4x. Rejuvenation of our Reversaderm range now sells 7x more compared to prior to relaunch. The launch of our clinically-proven Ultra R4 Collagen Surge product has attracted strong consumer demand. Within Australian pharmacy, Collagen Surge is the #1 new product launch within facial skincare in the last 6 months. In fact, in China recently, we sold 5,000 units within 58 seconds. And our masks are selling at a rate of 6 masks every minute since launch.

The virtuous cycle of the China export and domestic market is well and truly propelling Dr. LeWinn’s growth. The lilac bar represents domestic growth and the dark purple bar represents export sales. Export is growing exponentially with so much more potential to come.

A’kin haircare, skincare and personal care is grounded in a strong natural philosophy and has grown plus 15% in the domestic market. Increasingly, we have invested in clinical and consumer trials to not only provide consumers pure, natural products with a beautiful experience, but natural products that are highly efficacious. Our Age Defy relaunch with clinicals have grown 182% versus a year ago. Our new clinically-proven natural deodorant has delivered plus 241% growth. And we've entered the mask category with efficacious Australian ingredients.

Our market-leading beauty and hair accessories brands continue to drive category growth and market share gains. Highlights for this year included the launch of Manicare Sonic Mini, a smart, affordable cleansing innovation. Our first-to-market launch of the world's most innovative lash tech, Glam for Magnetic Lash Technology and new Lady Jayne detangling brushes to connect with the youth consumer.

The transformation of the bags, wraps and foil category within Multix has really spearheaded the charge towards sustainable materials. This has been a massive game changer for the category and the brand. In fiscal '19, the bags, wraps and foil category grew by 5%. With the launch of Multix Greener and Multix Reuse Me, Multix grew by plus 12% and scans out an increased market share by more than 2 percentage points.

During fiscal '19, we also invested $2.5 million in the "Choose Wisely, Choose Multix" campaign. We successfully grew the brand not only in sales, awareness and purchasing but also cemented Multix in consumer's mind as the smart choice with better quality product.

During the year, we continued to innovate with more first to market, sustainable products and Multix and Swisspers. The sustainable macro trend is only going to continue gaining more momentum as consumers make the switch to better environmental options. We have an innovation pipeline that will continue fueling increasing consumer demand for real sustainable products.

We continue to increase our engagement with consumers by digital media, reaching 18 million consumers by our social media platforms, 3 million consumers by influencer activity and delivering 45 million ad impressions. Additionally, we support our customers with a comprehensive listing of our product range on SKULibrary.

Understanding consumer needs and partnering with our customers is at the heart of our success. I'll now hand you over to Lori, who will take you through our customer achievements.

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Lori Pirozzi, McPherson's Limited - International Sales Director [5]

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Thank you, Donna. Well, from a customer point of view, the strength of our relationships that we have established at the top-to-top, key accounts and category level continue to drive positive results.

As Laurie mentioned, we have resized and optimized our trading terms with key customers. This is supported by a clear investment strategy and a collaborative approach to joint business planning has delivered mutual growth year-on-year for us and our partners. As a result, in FY '19, our participation in customer assets and advertising vehicles increased by 65%. And in a time where retailers are actively rationalizing ranges over 48,000 implemented distribution points were secured for our brands. And the availability of penetration of our own brand expanded into an additional 92 doors across the last calendar year.

If we move on to the next slide and look at the key contributors to our success in building these relationships, driving engagement and growing share. Put very simply responding in alignment with our customer strategy, understanding the importance of creating retailer differentiation into our environment and working hand-in-hand with our customers to drive performance.

We successfully [entered] a number of different avenues, including first-to-market opportunities, exclusive offers, unique in-store experiences and more operationally, building fully integrated sales and marketing campaigns.

On the next slide, we can see the elements that make up our approach or campaign or integrated campaigns, as we call it, which particularly increased selling periods for new product launches has been a clearer approach to driving growth and gaining share. Investment in customer vehicles right through from catalogs to sampling and executing a number of these at the same time has very much amplified our success.

We take that change for us has come from our increased investment in online activation this year. Our continued focus on excellence in execution and our upgraded investment in in-store presence, as Paul mentioned earlier.

I might just move to the next slide and just quickly recap on the results that Donna spoke about regarding Collagen Surge. It's a key hero for us and its launch. We launched across a number of different retailers needing a number of different vehicles from catalog, TVC, in-store theater, training and online [and TV] vehicles and it hit #1 especially since our new product launches in the last 6 months, selling 1 unit every 4 minutes from launch. And as Donna mentioned, the momentum keeps building for this product, not just domestically, but also in China.

So I'm going to touch on the key success story of the Manicare Sonic Mini, launched -- which launched in the Top 5 NPD and gained 2.5 share points during the spring beauty festival. Glam Magnetic Lashes, top 3 NPD launches in Priceline in the last 6 months. And actually, in pharmacy also, we have just seen in recent data. And interestingly, that Glam has grown share at 1.2 percentage points since launch.

We've used the same approach in key selling periods, as you see with the Multix Christmas promotion, which gained 3% share points across the use of catalog, magazine, online and off-locations display in-store, which really has been a key enabler to accelerating growth. And I'll talk to this investment on the next slide, where we actively increased investment by 45% in FY '19 in real estate in-store.

[We did go through] a number of different key areas, new products and off location [spend] to disrupt the path of purchase in high traffic areas; permanent category solutions to improve shopability, such as the rollout of the beauty accessories solutions in Chemist Warehouse, which we rolled out across 281 stores and is delivering 16% growth.

Other solutions include the implementation of a mass destination, improving shopability of a subcategory in absolute exponential growth. This investment, in conjunction with having the right ranges in-store, inch-wide, multi-promotional activations, strong alignment to customer strategies, have really been key to building our position in market and securing stronger, long-term strategic partnerships with our customers.

I'll now hand over to Brett and David, who will talk about the new business.

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Brett Jason Owers, McPherson's Consumer Products (NZ) Limited - Director [6]

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Great. Thanks, Lori. As mentioned previously, McPherson’s is firmly focused on the health, wellness and beauty market. This market is a significant place to play, not only in Australia but globally. In Australia alone, it's a $17 billion-plus market. The market has strong margins; a growing consumer base, both domestically and internationally, particularly with the expansion of China, all of which is having a positive influence on the demand for Australian and New Zealand-based products.

Our company, McPherson’s, is well positioned to win within this market as we are already a key participant within Australia, New Zealand and Singapore and we cover all major channels, in particularly, the large pharmacy and grocery channel.

In terms of M&A. M&A growth remains a key strategic priority of the business. Our focus is health, wellness and beauty. And as such, that's where our acquisitions will lie. We have a strong balance sheet which provides us good capacity to fund a solid acquisition. We have been actively identifying, analyzing and approaching targets and we continue to do so. We have a dedicated new business team that is working on this as a priority. It's not if but when we will get this acquisition across the line.

We have a strong process for analyzing targets as we want to ensure that we make the right moves. We have entered into 3 new ventures in the past 9 months, being Kotia, Sugarbaby and Soulful. These ventures provide the business with a de-risked entry into some new, exciting, branded opportunities.

In terms of M&A approach. It consists of 4 main models for us which are used depending on the circumstances and the outcome desired.

Firstly, noncontrolling strategic investments. These are investments that enhance McPherson’s capacity and capabilities without requiring a controlling stake investment. A good example of this is our recent investment in the Aware manufacturing group, which has already delivered McPherson’s with additional manufacturing capacity and continuity of supply around some of our key Dr. LeWinn’s SKUs.

Then we have joint ventures. These provide McPherson’s a de-risked entry into some early-stage brand and/or technology opportunities, while still providing us with a pathway to full ownership. One of the keys here is the founders remain engaged in the venture to help continue to grow the business while still enabling the venture to leverage our scale and capability.

We also have smaller bolt-on acquisitions. These are the less complicated, smaller deals, things that get involved straight into our existing infrastructure and leverage our scale and capabilities with McPherson’s then able to expand distribution within our major markets, as well as internationally.

And finally, a significant M&A deal. This is where our focus lies. The business is well placed to complete a significant M&A deal. We're actively looking for it. These deals will provide McPherson’s with additional scale, earnings and synergies as well as access to new markets, categories and channels.

In relation to the 3 ventures that were signed in the last 9-or-so months, the first one, Kotia, is a New Zealand-based anti-aging skin care brand. The brand is centered around the hero ingredient of New Zealand, deer milk. This is the first product of its kind to market. The product is now in market in both Australia and New Zealand and we believe the product will have good potential for China and Europe markets as well.

Sugarbaby is an Australia-based tanning and skin care brand. This brand is focused on targeting the younger, higher-spending millennial consumers. We see this brand as complementing our existing portfolio as it will help recruit younger consumers into McPherson’s products. We also see this brand as having good potential for the growing e-commerce market.

And the newest venture, Soulful. This one is centered around health and wellness and it's McPherson’s first real move into these areas. The brand's focus is on the fast-growing gut health market as well as having student and pregnancy milk formulas. We also see this brand as having good China potential.

I will now hand over to David Fielding, who will take us through export.

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David Fielding, [7]

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Thanks, Brett. China and New Zealand really experienced some strong growth in FY '19 with core brands being a significant driver of that.

We continue to see healthy contribution across our export markets and we believe that this will continue as we go forward into FY '20.

We are establishing a strong foothold in Southeast Asia, and we see it as key to our success in FY '20 with plans for expansion as well across Continental Europe and the Middle East to deliver further growth, more in the midterm.

Distribution for the Kotia brands in key markets across Asia really does remain our focus. Given the unique characteristics of each market, strong engagement with our partners through joint business planning has really been critical to the performance in FY '19. Nurturing these key relationships will enable McPherson’s to broaden the scope of brands that we can put through the region as well as to build our networks into the future. So why do we see Asia expansion as such an important priority? 2/3 of the world's middle class will reside in Asia by 2030. They have a growing penetration in spend in beauty categories, where we have strong expertise. As we invest in these markets, gathering rich local insights, it really allows McPherson’s to tailor our brands and products to local needs, making our brands ever more relevant.

We don't take for granted the importance of the providence of our brands. Born in Australia and New Zealand, it brings with it a strong expectation around quality and authenticity. As we accelerate our innovation pipeline, we continue to excite consumers, building stronger engagement.

So for China, strong growth really was achieved in FY '19 and we have aggressive plans in FY '20. ABM, our exclusive partner on Dr. LeWinn’s, has more than 1 million resellers in the network and it continues to grow. We're expanding our capabilities in the export team to really cope with the ever-changing and adapting market there.

As we've said to Southeast Asia, we continue to accelerate our distribution points beyond 2,500 driven by these strong partnerships with key distributors. We're building a strong presence in-store as we see it as a key priority to engage shoppers.

For the U.K. and Continental Europe, we currently have a tight range on 2 brands. The approach is to expand the range and enter into new markets.

And for the Middle East, it really is a new market entry strategy. Focused on our core range, we want to establish distribution and build demand in these new markets.

So now, I'll hand back to Laurie to cover supply chain.

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Laurence McAllister, McPherson's Limited - MD & Director [8]

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Thanks, David and Brett. Okay. So supply chain. This is crucial that we are fit for the future with this capability and enabler.

So as you can see from a capacity perspective, the team have done a great job in freeing up capacity that allows us to take existing growth and new growth as well as M&A to fulfill our capabilities and capacity. To put that in dollar terms, if we can fill up that capacity, it gives us somewhere in the range of $12 million to $14 million of incremental EBIT, which is very, very significant.

On delivery front, we deliver to more than 5,300 postcodes in Australia every day across pharmacy and grocery. This is also supported by a great team of people, with the average tenure of being greater than 18 years. On the efficiency side of things, we've managed to continually reduce our supply chain costs by 56% over the last 5 years with hard savings of up to $7.5 million. Again, working capital coming down 40% in the last 2 years.

As far as how we look at future-proofing the business, it's important that we have the right capabilities and I'll talk a little bit more on the next slide about Aware, but it's also being sure that we are adapting and adaptable to take businesses in the business and out of the business and still maintain continuity of operations. And as well as that, you'd actually need to keep investing in the business to make sure you have all the key ongoing capabilities and systems in place.

So if we now look at the Aware Group. The Aware Group, as you know, we took a $3 million investment in not so long ago. Why? Because this is a very, very impressive manufacturing capability that will end up being one of the largest in Australia with a 22,000 square meter site in Dandenong, in Victoria.

Additionally, why do we take the investment? It gives us priority. It gives us confidence in supplying DIFOT. It gives us shorter lead times, higher quality, dedicated technical and operational staff, a 22-bench R&D facility and a relationship that means we can move harder and faster in supporting our skincare business. In particular, we've actually seen this come into play 3 months ahead of plan on Dr. LeWinn’s for China that has really helped us support our great partner in ABM with Dr. LeWinn’s China export product. So a great partnership there that's really enabling the business to grow.

So in summary, on the top 10 business imperatives, we are stealth-like focused on health, wellness and beauty. We have profitably grown our own brands again and revitalized them. We have a great balance sheet position that's going to help us for the future M&A. Our key accounts have never been in a better position with joint business planning and revised trading terms. Our skincare brands are growing massively and gives us more confidence for the future. The China business is in great shape with our virtuous cycle of a strong domestic business supporting a strong China business and vice-versa.

As you can see, our team, our structure now reflects our strategy in health, wellness and beauty. And in New Zealand and Singapore, where we're having some issues over the last few years, we're really seeing that return to a very strong growth again. Supply chain is our enabler for growth and is very, very well-managed. And as you know, these new exciting ventures of Kotia, Sugarbaby and Soulful will deliver some nice incremental volume and profit as well as great innovation and partnerships.

So now let's get to the big deal. So in summary of highlights of financial outcomes, as Paul mentioned, it really has been high-quality earnings, supported by increased proportion of own-brand sales, from 69% in FY '18 to 76% in FY '19. A reduction in our proportion of grocery business, which has led to, obviously, an increase in our pharmacy business, which carries better margins. Again, it's great to see this year an absence of significant items in FY '19, supported by very strong operating cash conversion of plus 117%.

Again, these key strategic investments in Kotia, Sugarbaby, Soulful and Aware, as well as our display investment in CapEx with Chemist Warehouse and pharmacy in general is driving a great growth opportunity.

We've got a high dividend payout of 77%, low gearing at 7%. And for the first time that anyone can remember, we're offering FY 2020 guidance of plus 10% year-on-year PBT.

So I'll finish up there. And before I move to Q&A, I'd like to thank you, but also the team. But please, if you get the chance, do go online and look at the 2 to 3 videos that give you updates on our skincare business. You can see the growth, the innovation and the future of Dr. LeWinn’s, A’kin and soon to be, Kotia. Thank you. Q&A?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Jonathon Higgins from Shaw and Partners.

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Jonathon Higgins, Shaw and Partners Limited, Research Division - Analyst [2]

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Cracking set of results, guys. I have a few, if that's okay.

Firstly, just around -- just -- are you able to just -- maybe just take us into the Swisspers' performance? And you sort of said at some point that you've got -- you've had some competition from private label. Just take us through that business unit.

And in the past with businesses like Multix and products that probably have had a little bit more of a challenging overall macro environment, how do you sort of envisage that working out in the next 12 months?

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Donna Chan, [3]

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Jonathon, it's Donna here.

With regards to Swisspers, it has been a pretty tough year, a lot of private-label competition. We also had quite a bit of stock that went in the last financial year, which had an impact on this year's revenue results.

However, moving forward, what we are doing is we're really, I suppose, repositioning the brand from an eco perspective. So we've done our first move in that, which was the cotton tips paper stems, which is growing really nicely and the accounts is broadening the distribution. And obviously, with all the press that is around on sustainability, I mean that's going to be a macro trend. It's probably going to be something that retailers are demanding. We're actually future-proofing the whole cotton category with a lot of NPD pipeline that we're developing right now.

In addition to that, we're going to be expanding the brand into new categories and that's well underway, behind the scenes. So we're really excited, I'd say, about the future that we have in Swisspers in carving out a new future along sustainability in existing categories as well as entering new categories.

So I'm looking forward to a really good, I'd say, sustainable future. But I'm expecting also a better result at this financial year that we're coming into as well.

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Jonathon Higgins, Shaw and Partners Limited, Research Division - Analyst [4]

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Can we expect the essential beauty category to return to growth?

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Donna Chan, [5]

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Look, I do. Actually, we've had some really good news coming through.

We've actually got some strong distribution gains in Manicare and Lady Jayne that's going to go through in the next couple of months which is going to add quite significantly to our business. And we've also, start of the year, kicked off the year in Swisspers quite well as well. With the plans that we have in place and also the customer commitments that we have already achieved for the upcoming quarter, I think we're going to see -- I mean, probably not the growth that we're seeing like in skincare with export, but I think we're going to see a modest growth coming through.

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Laurence McAllister, McPherson's Limited - MD & Director [6]

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Yes, Jon. I think also we're actually quite excited about the future of Swisspers. It's a really big, trusted brand by Australian moms and what Donna's team is doing, as we speak, is just presenting plans to us and to future customers around innovation, sustainability and new categories and because the brand is big, it can actually stretch into new areas and that's all incremental for us.

So I think we've got a good future ahead of us with Swisspers. We are always going to be up against the tough private label. A situation is not going to go away. But I think it's almost like where Multix was a few years ago. But also kind of where Swisspers is now coming out with meaningful innovation.

So I think watch that space. We feel good about it.

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Jonathon Higgins, Shaw and Partners Limited, Research Division - Analyst [7]

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Just the next one for me, just about -- around the margins in the business. Like in the second half, you put on -- you had a pretty massive sort of gross margin performance. I think it's probably a gross profit margin record for the company in the second half.

I'm guessing that's obviously coming from that China-facing business and the growth in those own branded products there. And yes, I would sort of talk -- and this is probably a question for Paul as well.

Yes, I would just want to talk through the swing factors around margins into next year. We're not -- we're currently seeing the Aussie sort of printing 67-ish type thing. I know you've got a pretty extensive hedging program. You've also got Aware manufacturing that's going to be full run rating at some point in the year, expect to see a gross margin benefit out of that.

Can you maybe just provide us a little bit of color around the various parts that make up the margin towards next year?

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Paul Witheridge, McPherson's Limited - CFO & Joint Company Secretary [8]

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Yes. Thanks, Jon. You're right. The currency will be a significant swing factor in FY '20 and we've anticipated that as part of our budget for next year. So you're right, we do hedge 12 months forward. But when you take into account our hedging profile, the impact in isolation of currency falling, as it has, from low 70s through to high 60s, is around $4 million in isolation for us and we've anticipated that.

We do get the benefit -- the other big swing factor, as you're probably aware, is commodity costs, particularly in our Multix brand. We do get the benefit of reduced commodity costs coming through next year, if you were to apply current commodity costs to our profile for -- our business is around a $1.5 million benefit that we get. So the net move is about $2.5 million negative but that's fundamentally eclipsed by growth in skincare that we are anticipating for next year. It more than covers that $2.5 million negative impact of currency, net of commodity movement.

Now in terms of what happens to us if the currency were to slide further. We're pretty much at the -- in terms of FY '20, we're pretty much at the bottom point of our option hedging position. That means that, really, there's no material impact even if the currency were to slide significantly. We'd be protected by our current hedging profile and there wouldn't be a material decline in our currency. There might actually be a net benefit for us, given that we're hedged on currency and we leave our commodities opened because commodity prices will typically fall if the continuing position around global growth stays in place, which is obviously quite negative.

So hopefully, that answers your question, Jon. In summary, yes, significant currency impact we've already taken into account. We're aware of it. We're confident that growth in skincare will more than cover that.

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Jonathon Higgins, Shaw and Partners Limited, Research Division - Analyst [9]

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Okay. Yes. I mean, so conceptually, it means that the guidance is sort of $21 million of PBT for next year on a constant currency commodity type basis without having to cycle something like the CODI contract, you probably had a number sort of closer to 23, 24 without those headwinds. So obviously, there's some pretty strong core business growth.

Just one last one from me, just around -- just the seasonality in the business. We're seeing large volumes coming through from that China business. Do we -- what sort of seasonality do we expect into next year? And do we expect it to be lumpy as a result of that sort of exponential China volumes coming on across the business?

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Paul Witheridge, McPherson's Limited - CFO & Joint Company Secretary [10]

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Yes. Well, you probably know that a lot of that -- a lot of that China-based growth comes through events that are quite specific. So it is relatively lumpy and timed around events. And Jon, the key events, correct me if I'm wrong, but we look at kind of 11/11?

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David Fielding, [11]

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11/11, Chinese New Year. But what we've seen also, Jon, this is David here, is that with ABM, they actually sort of flattened that curve a little bit because the beauty of their reseller model means that they are able to execute, basically every month, within that reseller model. So that -- you obviously have the large ones, which are the bigger, well-known ones. Some of them led by Tmall, et cetera. But then 3/3, 4/4, 5/5, 6/6, 7/7, they're actually able to build up their own specific promotional events, which does help to flatten that sort of event seasonality a little bit better.

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Operator [12]

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Your next question comes from the line of Brendon Agius of Curran & Co.

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Brendon Agius, [13]

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Just a question with regards to your Hong Kong office here. I understand it's a small office focused on supply chain. I'm just wondering if there's contingency plans in place if there is a deterioration in the situation there.

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Laurence McAllister, McPherson's Limited - MD & Director [14]

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Yes. Actually, I've got a few calls about that last night, actually.

So fundamentally, that Hong Kong office, which we've got about 22 people in, is procuring with Mainland China. That's basically when they travel to China to negotiate things on Multix, Swisspers and the essential beauty range, being Manicare and Lady Jayne and whatnot.

So it's more of a discussion, negotiation with Mainland China. We do not -- our products come from Mainland China directly into Australia and we export directly in the skincare brands from Australia into Mainland China into bonded warehouses and free trade zones.

So from a continuity perspective, we've got no issues for us because we're not actually having product flowing through Hong Kong itself. We just have an office there to basically liaise with the Chinese manufacturers.

So no issues for continuity for us, Brendon.

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Operator [15]

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Your next question comes from the line of Ian Munro of CCZ Equities.

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Laurence McAllister, McPherson's Limited - MD & Director [16]

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I think we might have lost Ian.

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Ian Munro, CCZ Equities Pty Limited, Research Division - Senior Analyst [17]

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Sorry about that. Congrats on the numbers.

Just following up on Jon's question on the China export channels and particularly you referenced to them being lumpy at the moment.

As the distribution points grow, does that lumpiness start to absorb? And can you perhaps give us an indication of how the pipeline is looking in the short and medium term?

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Laurence McAllister, McPherson's Limited - MD & Director [18]

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Yes, I think it's a lot less lumpy than what it was when we first started this, Ian. That's primarily because for now, we've got an export team in place with Mandarin speakers, both in the sales partnership side of the business as well as the marketing side of the business.

So really is -- we've now got a 12-month forecast with ABM on Dr. LeWinn’s China. We now recognize that we've got 4 hero SKUs and our manufacturing is being put in place with their pharma, cosmetics, and now, the Aware group which is delivering a lot of great continuity of high-quality supply.

So it's a shadow of what it used to be, Ian, as far as the lumpiness. And it's really now about really just getting the -- delivering the supply to the demand.

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Ian Munro, CCZ Equities Pty Limited, Research Division - Senior Analyst [19]

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And just on that point, Laurie, can you sort of -- just the responsiveness of the new supply agreement with Aware and how that potentially has more benefits not just for the China relationship but also for the inventory that you're carrying and the working capital of the business?

I note that there was some working capital unwind in FY '19. It's probably -- the second part of that question is probably more for Paul...

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Laurence McAllister, McPherson's Limited - MD & Director [20]

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I'll take the first, then I'll pass the second to Paul. So fundamentally -- obviously, this is a very close relationship we have with Aware, given the fact that from a disclosure perspective, obviously, Geoff Pearce is on our Board, who's also a major shareholder in the Aware business. The opportunities is, is that Geoff has been able to talk to around different ways to procure different componentry, which is great.

We're obviously gearing up significantly in volume. So that means more automation that Geoff can provide versus the manual manufacturer in Western Sydney. And then -- that's a healthy business. It's got access to capital and CapEx. So good future for us. They are very, very responsive. They've put on their own account manager, who is basically part of our team -- is part of the Aware team and an R&D person, and that allows us to kind of get really close on -- we have a weekly 4-hour meeting on forecasts to make sure that we can deliver as much as we can to our great partners at ABM.

So on the -- so we also may consider, down the track, actually even doing more with them because we're finding, from an ABM China perspective, that integration through the line, where we look at 250 ABM-ers coming down in a few months to go through the facility and they're putting a large marquee and a big event on. They like to see people on the working bench and the R&D bench labs, seeing the products being produced, seeing how the beads come out, et cetera, and then obviously, trying the product.

So it's a little bit of theater we've got that we can work in with Aware because we've got a very strong relationship with them, and we're prepared to grow together. And we'll also look at other brands going through that facility also.

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Paul Witheridge, McPherson's Limited - CFO & Joint Company Secretary [21]

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And your question around year-end EBITDA and cash flow and inventory impact, Ian.

The 2 inventory impacts we had were a reduction in Trilogy stock. Was a pretty significant for us, given that we're exiting that agreement. That was positive for us to the tune of a couple of hundred million dollars. And we're also -- sorry, a couple of million dollars, about $2 million. Correct myself there. And also, a reduction in skincare stock as a result of strong Q4 sales.

So I mentioned that we're able to get the cash in from a lot of those sales. We benefited from also the straight inventory reduction due to the strength of those skincare sales.

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Ian Munro, CCZ Equities Pty Limited, Research Division - Senior Analyst [22]

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Just one final one. Just with the online sales across the various brands going direct-to-consumer. You might have said that, I might have missed it, but what is the share of revenues coming from that channel?

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Laurence McAllister, McPherson's Limited - MD & Director [23]

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Absolutely very, very, very tiny. Basically, I think I might have mentioned before, the day that we start undercutting our key customers online is the day that we get removed from their shelves.

So our online is basically around engagement. We've got a beautiful online site on our key brands. It's about engagement. It's about showing the advertising. It's talking about how we procure more sustainable products. It's about clinical trials. It's about really engaging with our consumers and giving them much more involvement and understanding and knowledge of our brands today and how we're looking to take them forward. So that's a key piece.

We do sell online. We sell on average about 10% to 15% more expense than our key customers, very much on purpose because we don't want to undercut our key customers. We probably do about 160 grams worth of sales, Ian. That's really tiny and that's on purpose.

We do more convenience. So basically, if you spend $90 with us, which is not difficult to do, especially in skincare, we'll deliver for free. We do have a store allocated where we've loaded in about 7,000 outlets. So if you go online, you'll be able to see the nearest pharmacy or grocery outlets to your house and you can then -- we can direct you to our key customers that are supporting our brands.

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Operator [24]

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Your next question comes from the line of Sarah Mann of Moelis Australia.

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Sarah Mann, Moelis Australia Securities Pty Ltd, Research Division - Analyst [25]

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So just a question on the JVs. Can you give us an indication for Kotia, like how the sales are going versus expectations?

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Laurence McAllister, McPherson's Limited - MD & Director [26]

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Yes, Brett and I can jump into that, if you want.

I think there's 2 parts to look at it. One of them is obviously the physical sales themselves against the forecast or budget. And as you know, when you're launching these new things, it is the ups and downs of the market.

So look, as we look at it, we're pleasantly, humbly surprised about the performance. But then the other thing we do within, say, the Australian context is you look at Priceline and we're part of a suite of new exclusive brands that Priceline has taken on in this whole skincare space. So I think, Sarah, you're probably aware of Priceline's strategy about how they use these exclusive brands. And we certainly benchmark ourselves against those launches. And again, humbly surprised that we're doing one of the top hits in terms of performance against those new brand launches.

So the Australian market, I think we want to continue to obviously work with Priceline. We've activated real assets -- their assets, 360s and goodie bags and so forth.

We're entering into a new campaign, which is a campaign across social media, digital, print and TV. Speaking of now for the next 3 to 4 months, and we're really hoping that, that drives a lot more engagement and awareness around the brand. New Zealand, I guess, is more of a shouldering out the distribution. So Green Cross Health and pharmas is where we started. With [Brendan] our country manager there. We're also looking at travel retail, inbound Chinese tourism stores, gift stores, et cetera.

So again, we're feeling pretty confident about what's the performance of the brand in New Zealand as well.

And that leaves the big question around exports. So we really believe from the beginning that the IP and the idea and the whole package around this brand was very geared towards export opportunities. And so we've started off leveraging our current partners in exports, the likes of Healthmore, as well as working with some new partners to drive that forward as well.

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Sarah Mann, Moelis Australia Securities Pty Ltd, Research Division - Analyst [27]

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Okay. So in terms of building the brand, it sounds like you're primarily working with the -- like your customers' assets rather than doing, I guess, I don't know, ad campaigns or anything like that?

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Laurence McAllister, McPherson's Limited - MD & Director [28]

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So our campaign kicks off now. So that's a significant investment out of the A&P budget over the next 4 months. That will take us from October through to November. So that's our own paid media as well as owned media that we'll get from it.

So we've leveraged the customer assets because I think there was a strong belief that the likes of Priceline, when they're building these exclusivities, if you can get onto those tailwinds, you can drive engagement into the store and then obviously, the likes of off-location displays on [dollar ends]. Activity within the store as well comes as part of that package. So that's partly why we've really leveraged their assets.

:p id="379815782" name="Sarah Mann" type="A" />

Okay. And then just with regards to more broadly, like, you've got new launches over FY '20. I know in Dr. LeWinn’s, you guys have kind of called out the mass category. But are there any big launches that we should be looking out for across the next 12 months? And how do you, I guess, kind of think about their contribution to earnings?

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Donna Chan, [29]

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I suppose in terms of upcoming new launches, we are looking at expanding into new categories. That's going to be across the number of our brands. So that's very exciting.

So I suppose there's a number of launches which are about continuing the momentum that we already have. We've got some new products coming out in September in skincare. We've got some new categories, would probably come out in the second half of next year. So yes, there are some sustainability we'll continue to feature across the Multix and Swisspers brands.

Then I thought I wanted to tell you something but I don't want to give away (inaudible) anyone that's listening into the conference call like the competitors go, "Oh, that's what they got up their sleeve."

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Laurence McAllister, McPherson's Limited - MD & Director [30]

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[The markets know it] is pretty important.

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Paul Witheridge, McPherson's Limited - CFO & Joint Company Secretary [31]

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Don't give too much away, Donna.

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Donna Chan, [32]

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But it will be -- innovation is really the hot blood of the health, wellness and beauty category. We know that. We're really fixed on innovation. We've increased our resources from an R&D resource perspective. We've increased the amount we spent on clinical and consumer trials. We've increased our investment on consumer research and really understanding new categories and how we want to get into these new categories.

It's fair to say that innovation will continue to be a major part of our program, generating growth. And -- but we don't want us to get also the rejuvenation of ranges. We've seen huge success rejuvenating some of our core ranges and just selling exponentially.

So there's a big program coming in place. And it -- And as we break throughout the year, I'll be showing more and more.

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Operator [33]

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(Operator Instructions) There are no further questions at this time. Please continue.

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Laurence McAllister, McPherson's Limited - MD & Director [34]

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Okay. Well, thank you for that. I think we'll just finish up there. Thank you for your engagement and for supporting the journey and we look forward to seeing many of you on the roadshow across Sydney and Melbourne.

So thank you from the McPherson’s team. Goodbye.

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Operator [35]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.