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BWX rides the shift to natural beauty products

With demand growing for its natural beauty products, Alex Gluyas speaks with the CEO of BWX, Dave Fenlon, to discuss the company's goal of moving all manufacturing of its brands to Australia, its new manufacturing and distribution centre in Melbourne and how its Sukin brand is driving sales growth.
By · 3 Sep 2020
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3 Sep 2020
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Dave Fenlon is the CEO of BWX, which is a natural beauty company that operates several brands, the main one being, Sukin.

It's been one of those companies that has really found an opportunity during COVID; its share price was initially smashed from around $4.50 at the start of the year, down to $2.50 in March. But since then it's jumped up to above $5 on the back of growing sales. Dave provides an interesting perspective in terms of how BWX is handled its logistics and supply chain throughout COVID, and why consumers are transitioning to natural beauty products.

Here's Dave Fenlon, the CEO of BWX.


Table of contents:
Capital raising and new manufacturing & distribution facility
Growing inventory levels
Increase in margins
Sukin brand success
Sukin growth in US market
Demand for natural products
Andalou Naturals brand performance
Growth outlook
Share price growth & market response


Thanks for joining us, Dave, your most recent financial year 20 report indicated increased revenue across all of your four brands, particularly Sukin. How much of this do you attribute to COVID lockdowns and increased sales over particularly the past six months?

We didn't actually see too much incremental revenue generation due to COVID on skincare, there was a small proportion of revenue, probably around about $3 million from hand sanitiser. But actually, skincare hair and body products have remained pretty resilient throughout COVID. It's underlying a strong performance of the brands that was the main driver.

I've noticed you've recently completed that $40 million placement. What sort of changes are you making to your logistics and supply chain in terms of your inventories and things like that to deal with this growing demand for natural beauty products?

Yeah, so ultimately the capital raising’s main purpose is to allow us to build a new manufacturing and distribution centre here in Melbourne. The current site we have would reach its capacity probably by the end of 2023. What we're trying to do is bring in house, all of our manufacturing, all of our Sukin products are currently manufactured here in Dandenong. But we also have our Andalou products, which are manufactured at third parties, predominantly in the US. What we're trying to do is do all of our manufacturing here in Australia, so most of the cash that we've generated will be in production facilities. And then ultimately, we also want to build our Forever Home, which is aligned with our brand values. A place that's great for our employees to work, the six stars energy rating and is also the epitome of our brand positioning, which is a very light footprint on the environment in which we operate.

And then ultimately, if we can find ways of increasing that production facility, we can bring more of our natural products to consumers. We believe passionately that natural is the only way to think. Consumers are evolving that way, that's a very significant macro trend that has been going now for a number of years. We anticipate over the next three to five years that this new facility will give us the capability of up to producing a hundred million units a year of natural skincare and body products.

Could you expand a little bit more on this facility in terms of its capabilities? I understand there’s automation involved and things like that? How is that going to strengthen your supply chain?

I think importantly, throughout COVID, it's been proven that manufacturing close to your home market has given benefits. If you looked over that key period where lots and lots of retailers were getting essential purchases, we were able to stay in stock. What we also need to do from a business perspective, is improve our stock turn. Automating our factory will allow us to produce products quicker and faster and more efficiently. We do intend to carry more stock because we ultimately need to be sending that off to all of the other global markets in which we operate.

But what we don't want to do is increase the lead time of our facility, so it means that there's a lot of cash tied up in our system. Increased efficiency will allow us to operate in a more lean and effective way, but ultimately, one of our biggest costs is actually our production and manufacturing facility. We do want to automate some of that. That'll allow us to unlock some margin benefits that we will be able to no doubt share with our retail partners, but also use to drive our business in the geographies in which we're evolving into.

Your report mentioned that inventory levels have increased 28 per cent during the financial year. Is this a bit of a plan to stockpile material to mitigate against supply chain disruption?

Look, in all honesty, in March, we had some necessarily speedy decisions to make. We didn't really know what COVID impact was. In March we decided to get some raw materials and packaging around us in case we had challenges. Our underlying stock level, if you take out hand sanitiser and hand wash, was up about 17 per cent. There was obviously a need for us to manufacture significant quantities of hand sanitiser and hand wash. We over manufactured that, we didn't know what the complete demand was, but we didn't want Australian consumers to run out, but we also did make sure we had the right components around us. As you all remember, COVID initially we thought was going to be a supply chain challenge out of you know, Southeast Asia and China, where factories were closing. The reality is that didn't materialise, but we did want to make sure we had the right raw materials around us. So over time that inventory level will come back down. But it was still just in line with our sales growth. We didn't actually stockpile per se, but we didn't find efficiencies in our inventory.

The plan you were mentioning before to manufacture in Melbourne, is that something that you've been planning for a while? Or has it been contributed to, by the idea during COVID that supply chains, there are going to be spot fires, supply chain issues around the globe, so you're really trying to internalise your own?

We initially believed that the model of manufacturing for ourselves was the most efficient and effective model. It also meant that we knew exactly what was in all of our products and it meant that we could bring products to market faster than through a contract manufacturer, and it also meant that we could improve our margins. They were all of the principles that we put in place when we started talking about this about nine months ago, internally. I think COVID clearly also added to that weight of argument by saying that you needed to be able to adapt quickly. I would say it was a secondary thought it's now become probably first amongst equals with the margin and efficiency benefits. But we didn't start out that way, but I suppose by a little bit of luck and a little bit of judgement that's how we've ended up.

You talk about your margins and your report noted that there was a pretty notable improvement in gross margins from, I think it was around 56 per cent to 58 per cent.

Yeah.

Was this due to an increase in pricing or were you more able to get on top of your costs over the past financial year?

Most of it is margin mix. We sold more Sukin product, which is self-manufactured, as I said, which has a higher margin than our other brands. But there was also a three way improvement on (a) better buying from ingredients; (b) less promotions with our customers, making sure that we're effective in our promotions and not over promoting. And then the third one. is there was some slight price increases on the Sukin product on global pricing, but that only came into effect from May, so a very small part of that margin improvement. It's a trifecta of activities. We don’t expect to see that level of margin improvement over the next 12 months, but once we get into the new facility, then we should be able to, again, increase our margin. And again, all of that margin will give us benefits to be able to invest in new markets. We're very much a growth business. We're very much about finding cost efficiencies to reinvest in our business.

Can we just focus on the Sukin brand up for a bit, firstly? It seems to be really driving your sales growth and you're obviously operating in a number of regions. But is there a particular market that you're seeing has picked up recently over the last financial year?

Sukin historically was a skincare business, predominantly domiciled in Australia. We've recently launched in Europe, predominantly in the UK and we’re obviously in the process of rolling out with new distribution gains in the US. But a lot of the growth in Sukin is, we've moved into other natural categories, such as hair, body, and shampoo. The shopping behaviours of both grocery and pharmacy shoppers are quite different. In pharmacy, the majority of the sales are in skincare. In the grocery channel, the majority are shampoo and body wash.

We're able to also increase our distribution of those new products in whichever channel we've been smaller in, in the previous past. If you look, Coles have been a big customer for us. We've launched a small range of skincare products, somewhere between 23 and 32 SKUs, but we've also got significant range benefits with them with our shampoo and body wash products. The other thing we do is we always bring new news to the category. We're a very highly driven, new product development business. Sukin has also in the last 12 months, had a number of significant range improvements. We bought an SPF range of products out. We've also brought a purely ageist range of products out and also a new hydration range. The growth is distribution gains in Australia, distribution gains in Europe and America, as well as new product development in Australia.

And is the plan going forward to target more of those mass market channels, I guess you mentioned stores like Coles, and I guess there's Target. Is that the focus, rather than those premium retailers, that perhaps don't move as much stock?

Look, we know where our position is with our consumers. We're an affordable, natural skin care business. We're not premium, we're affordable. We think that we are very consumer facing. We know where the consumers that we're targeting are shopping and they're shopping both in mass channels and in pharmacy channels and discount pharmacy. They're not so prominent in department stores or high-end retailers. We know where we sit and we have a very clear target to go mass and go mainstream with our Sukin and Andalou brands. It will predominantly be into supermarkets and into mass retailers in all geographies.

We have a playbook that's worked very well in Australia. We went into Coles, it's an exclusive arrangement with Coles, it's proven very successful for both us and them. We'll be doing similar in the European market. The US market is slightly different. There is more skincare product bought in Whole Foods and health food stores where we're already strong. In the US we're predominantly focusing on pharmacy plus what we would call natural supermarkets, so brands such as Whole Foods and Sprouts and Trader Joe's. We've got a very clear channel plan, but it is about going mass and it is about going mainstream and it is about maintaining the affordability of natural skincare with all of our brands.

Sukin, as I understand it, is still quite new in terms of your US market. How have you seen that progress this year?

Yeah, look, strong. We launched in Target just pre-COVID. It was in February, so that launch has been somewhat impacted by the drop in foot traffic in Target. We've just recently launched in Publix, which is a regional supermarket chain and we've also just recently launched in Rite Aid and we also launched on Amazon. We see it as a good opportunity to take our Australian iconic brand to the US. We have a business based in the US that was brought into the family about three years ago. The original founders of Andalou started that business and it's been very successful and has predominantly been in Whole Foods. We're also now in conversations with other retailers to take Sukin to other parts of the US market.

Just in terms of that US market in particular, and I guess globally, are you viewing many similarities between Australia and those other countries you're launching into in terms of the demand for natural products?

Yeah. Overall, the demand for natural products is increasing. It's increasing at different rates of pace, as you would imagine. But what we try and do is always look through the eyes of the consumer. And if there is a macro trend towards natural, which there is in every market that we're going into, then what we then try and do is understand who is shopping our brands, or could potentially be shopping our brands. And then what we will do is take the core DNA of the brand, as you know, Sukin is made in Australia, and take it to those markets, but pivot the marketing story to fit with the consumer in that country.

I'll give you a live example, in the UK market, there are much stricter guidelines about what ingredients can and can't be in natural products than there are in the US. Now we set a high benchmark for our ingredients, but we would talk about our ‘no list’ in Australia, now that no list in Europe is probably not a significant point of difference, but the Australian-ism of the brand is a huge point of difference. The core DNA of the brand stays the same, but we basically shape it and consumerise it for the market in which the brand is about to launch.

Could we move on to the Andalou Naturals brand, it started the first half well, but the report mentioned that it was a little bit more impacted by delays in distribution throughout COVID. What's been the story there?

Yeah. Up until March, we were trending very strongly high teens, low 20s, like for like growth, but as many retailers closed their doors and many supermarkets and pharmacies moved to trying to deliver to consumers with the epidemic high on their agenda, you saw a lot of increase in I would say cupboard filling in distress, purchases of essential groceries. Retailers basically delayed their range pulled back on promotions for a period of time and rightly so. Some of our distribution gains that have been planned for last year had been delayed into the early part of this year. And we also did see some foot traffic drop off in the US particularly around Whole Foods, which is one of our key customers. All, again, driven purely and simply by COVID.

Much of that is recovering at different paces by state, but much of it's recovering. I think all of our distribution gains and planogram changes have now been reset and rediscussed or re-diarised with retailers, just some of them have been delayed. I say very clearly to the team we’ve still got great product. We’ve still got great brand positioning. We just need to be a bit more patient because the retailers have been somewhat focused on solving essential purchases during COVID.

And are those Andalou Naturals, that brand is that going to be rolled out across Australia in pharmacies over the next few months?

Yeah, up until about February time, we had an exclusive agreement with Andalou with Priceline. That exclusivity expired. It was always part of our plan to rollout Andalou into other pharmacy customers. A little bit delayed due to COVID, but that's now I would say about 80 per cent rolled out through Chemist Warehouse, through My Chemist, through Terry White, and through the Sigma store. It is a great brand, it is a great product and we should see the full benefits of that in the second half of this financial year. Andalou, a year ago was the 11th largest natural skincare brand in Australia. It was only in one retailer. At the last read where it had gone in, and as I said, we haven't completely fulfilled all of the rollout yet, it's moved into 7th place. It's a strong brand, and we should get some good growth from it in the years ahead.

And just across the whole company, BWX, you've said ‘at least’ 10 per cent growth in revenue and EBITDA in financial year 21. Does the ‘at least’ imply that this is a conservative estimate? How much growth are you actually expecting?

I think if I could say that the COVID situation still remains unpredictable. We're very clear about what our brands can do when they're in the hands of consumers. But I do think it's too early to say that that's conservative. It's considered. We are only one of a handful of companies who have put guidance into the market. We're confident with that number. It will be somewhat weighted towards the second half. But we've got plenty of opportunities to keep giving the market trading updates. If COVID recovery is better than we anticipate, we'll tell everybody. If there is further lockdowns and further impacts, and of course we'll also update the market. But at this moment in time, knowing what we know and looking forward for the next 12 months, that's why we've come out with that statement.

Yeah, and as you said, it's interesting as not a lot of companies are giving guidance. Obviously, as you said, it's quite a considered estimate. Where are you anticipating that new growth is going to stem from mainly?

I think a lot of it is going to come from new product development across all of our brands. A fair amount of it is going to come from Andalou into Australia, and a fair amount of it is going to come from Sukin in the US. But we also have our Mineral Fusion brand, which has got some distribution gains began in Publix, Rite Aid and a number of other regional supermarket chains in the US. I also think it's important, we probably, like all businesses, this time or March, April, May of next year, we'll be cycling some pretty tough retail conditions. You would hope by then we've come to cope and learn with living with this virus and we'll see some economic return. We will hopefully be getting some benefit of cycling that tough retail environment.

I was just looking at your investor presentation and it actually also mentions BWX is continuing to assess merger and acquisition opportunities. Are you in discussions at the moment with other companies or where's that all at?

There are no live discussions at this moment in time, but I think in these circumstances, you need to be aware of opportunities. There may be start-up businesses that need some support or some cash injection that we may be able to assist. Most importantly, we're very committed to being a natural skincare business. So we would only look at things that are in our wheelhouse and are natural. It is not top of our agenda at this moment in time, we've got great growth opportunities in the regions we're in, we've got a very clear agenda of our new products and our new distribution gains as well as a new factory on our agenda. I'll never say never, but it isn't something that we're hunting down, aggressively.

Right and just onto your cash position. Your net debt was down $43 million to $23 million in the financial year and your cash has doubled since the beginning of the year. Were these two areas of focus in response to COVID uncertainty?

Like everybody, I think importantly, we needed to make sure that we had a strong balance sheet to move forward with. Like you would expect, we focussed very clearly on inventory, stock turns. We were very focused on the relationship we have with retailers, making sure that we get paid on time. We pay our suppliers on time. Really it was again in place pre-COVID. I can't say I was super proud of the results in the previous year around our cash conversion and our cash position. Some of it was already in train and some of it was about making sure like everybody, we were protecting our cash and making sure that whilst we played our part of paying people on time, we were also very focussed on receiving payments on time as well.

It’s been a pretty interesting ride for shareholders. You started the year around, $4.50 and then hit pretty hard in March, I think you dropped to as low as $2.50, but since then it just doubled and it's yeah, it's around $5 at the moment. What do you think has really impressed investors about BWX over the last couple of months?

I think interestingly, it goes back a little bit further than that. If you look back to mid-June of last year, so what 15, 16 months ago, the share price is about $1.89. Then as you said, it moved up to around about $4.50, just after Christmas, that was after we’d announced our half year results. That was driven purely and simply by the fact that we did what we said we were going to do, which was also supporting the share price when we delivered our full year numbers. I think in all honesty everybody knows natural skincare is a good category to be in, affordable is a good category to be in, but it's also about the fact we did what we said we were going to do, which we left guidance in the market and we delivered that guidance.

Now that said, you know, people make their individual choices about the organisations in which they invest in. We believe that we've got a good organisation. We believe we've got good brands and we believe that we've got a long future of growth ahead of us. We don't really focus on a share price, we focus on consumers, we focus on delivering to our retail customer partners and we deliver hopefully a good return and then the shareholders will get their benefit from that.

Just before I let you go, could you give us a bit of an idea of what investors should be looking out for over the next six months, towards the end of the year. What’s in the pipeline?

For us?

Yeah, for BWX.

I think the first I would say signpost is an announcement about the new facilities location and that a contract has been signed so that ultimately, we can hit our deadline of being in there for December 21. In most of the road shows that I had last week, I told everyone not to expect a flat 10 per cent, first half, 10 per cent, second half. We've got a lot of our NPD and our distribution gains planned for the second half of the year. It won't be an equal part.

Looking and continuously assessing our position on new products development, so being online or in stores, if you can get into stores to make sure our new product development is coming on track. Ultimately, we're very transparent. We probably provide more information to our shareholders and to the market than most. We also have our AGM in November, and we'll give everyone an update of how we're performing at that point. And then no doubt in early February, we'll give everyone an update of where we are post our first half.

A lot on the agenda, but a very focussed management team, a very focussed business. And like I said, lots of opportunities or signposts throughout the next six months where people can assess our performance.

Great to chat, Dave, thanks very much for your time.

Thank you. Take care.

That was Dave Fenlon, the CEO of BWX.

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