The latest on BWX Limited

Myles Anceschi is the CEO of BWX Limited. BWX has been a shocking story during 2018. It started the year at $7.50, got a non-binding indicative conditional cut of offer from the former CEO, John Humble, at $6.60 which didn’t actually turn up to anything. We didn’t end up finding out whether the bidders, Humble, CFO Aaron Finlay and Bain Capital where were the supporters of the offer; we didn’t really end up finding out whether they withdrew or the board knocked them back but maybe one day we’ll find out in Court. 

It’s certainly been a terribly costly experience for shareholders and they’re probably wondering who to blame, the board or the bidders, because it was really disruptive and we don’t know to what extent the decline of the share price, which has since occurred, because the share price fell to a low of $1.50 and now just a bit of $2 dollars. Whether that’s occurred because of the offer or despite the offer and we would have been better off selling it at $6.60 to Humble, Finlay and Bain if that was possible. 

Anyway, it’s been a terrible experience for shareholders, they’ve lost a lot of money and they question is, what happens now? The results the other day for the half-year, resulted in a pretty big increase in the share price from about $1.50 to $2 which was great. The question I suppose for those either in there or thinking of buying BWX is, is that going to keep going? Because the stock was definitely oversold, no doubt about it, and Myles needs to explain what he’s going to do. 

Here's Myles Anceschi, the CEO of BWX Limited.

Listen to the podcast or read the full transcript below:

Myles, it’s been a pretty messy 2018.  I mean, particularly for shareholders – had a shocking time, the shares went from $7.50 to $1.50 over the course of the year and the place was upended by a MBO attempt from the former CEO, John Humble.  Can you take us through what it was like in there during 2018 and how disruptive it was?

Obviously, Alan, a very distracted period and one that’s reflected in the numbers.  I think that the MBO was certainly a major distraction, but the issue was more where that came in the progression of the business.  I think if you take into context that around 4-4.5 months earlier, we just completed our third acquisition in three months with 2 of those being in the US, there was probably the timing as much of the activity that created such a big impact.  Then underlying that you had internally operating improvement projects like our Enterprise Resource Planning Upgrade, which was already well-planned but when those things are executed without the appropriate level of focus that also has an impact. 

Really busy here.  One that really doesn’t change the potential in the platform.  We have great brands and a good geographical presence now, but certainly I don’t think we’ve realised that potential because of the distraction.

I’ve got to say, I’m wondering whether shareholders of BWX have a case for a class action against John Humble and Bain, or at least John Humble.  I think it’s disgraceful what happened there, that these guys launched an MBO, completely distracted the company, the shares collapsed, revenue and profits went down and it came to nothing.  They ended up not getting a bid at all, I think it’s incredible!  What’s your comment on that? 

Yeah, I think it’s a fair comment but one that I really try not to focus on, Alan.  I think that past and what happened will be for others to assess and I think for us in the business, whilst it was a distraction, what we really want to focus on is the future for BWX.  I think that’s very topical and what we discussed in due course, but in reality the underlying potential of the business I think is what drove that action.  It was an attempt to buy, probably not to sell, and I think that potential is what we focus on, so I understand that it would be interesting for many people to discuss but I think it kind of distracts from our future story.

And that’s what you should be focusing on as CEO, I get that, but what about the board, is there any sense that the board has a case against the former CEO?

Yeah, look, I’m not sure about that and I couldn’t comment to it, Alan.  But certainly, one where the question could be asked…

[Laughs] Fair enough.  In the process of knocking back the offer, there was an independent board committee that did a thorough evaluation of the company’s options, did a strategic review, and then came up with the idea that in the end it’s going to remain independent.  Can you take us through what the strategic review found and cited?  And just give us a sense of what that was about?

I think the strategic review was obviously trying to understand the potential of the component parts of the business and then how each of those component parts when stacked together would create long-term shareholder value.  In a sense it was designed to assess and take relative point versus the indicative offer that had been produced, but it was also designed to understand where the strategic pillars, as we set in place the correct ones.  I think after a lot of work obviously with external advisers sort of trawling through the business, the pleasing thing from my point of view was that pretty much every one of the strategic pillars was validated and what we had already initiated change on was how we execute underneath some of these pillars. 

We’ve got a very strong brand platform.  We have quite unusually for a brand and manufacturing business a very good exposure to e-commerce and I think the geographical coverage that we have at the moment places us in a good position to access really scaled markets internationally.  And so the whole process, when it washed out, I think allowed us to say we’re focusing on the right things.  We need to a lot of things differently, and as I said, we were already initiating change in those areas, and it proved up the longer term potential for the business and where we potentially could sit on a world scale, should we execute properly.

Obviously the proposal from John Humble, Aaron Finlay who was the Finance Director, and Bain Capital was for $6.60 cash per share with a scrip alternative.  Obviously it was non-binding, indicative, conditional, preliminary… all those weasel words.  But nevertheless, Humble put a price of $6.60 on the business and it’s now much less than that, it’s like $2.10 or something.  I suppose the question is, and shareholders and investors will be thinking, well what is the business worth?  Is it worth $6.60 fundamentally?  And the shares have fallen to where they are now, $2 bucks or so, because of what’s been going on, because of disruption, or is there something more fundamental that’s occurred that’s resulted in that decline in value.

I think the long-term dollar price will be dictated by the market, obviously.  I think the reason for the fall, to be frank, is that there was a lot of inconsistency and a lack of transparency.  Then you had essentially a little bit of a loss of faith in that growth pathway.  Our focus has been to rebuild both an operating and a people base platform that can leverage the clear opportunity in natural personal care products globally.  This is a sector that is really well supported by that growing preference for natural and wellness.  Obviously these trends started in foods 10-15 years ago and they’re progressing very quickly through personal care.  In that sense, we have really leading brands in a space that is enjoying macro growth support.  I think once we have a couple of halves of consistent performance where we’re focused on leveraging the platforms, you’ll see that true potential of the business come back online, and I think that will reflect in the price but we still have to execute and that’s what we’re focusing on at the moment.

Is Sukin becoming and is it a global brand now?

I wouldn’t say it’s a global brand now.  It is certainly a dominant domestic brand.  It’s becoming a scaled regional brand and I think that underneath the new international strategy, we’re focusing on the right scaled global markets that will ultimately mean it does become a global brand.  

That’s the plan, the plan is to make it a global brand?

Absolutely.  It’s a unique brand in that it’s very accessible in price, it’s high performance, and that sets it apart from lots of the global competitors set out there.  The success it’s had in Australia, we can replicate in other markets and by doing that we think we’ll achieve global scale.

What’s the brand characteristic then, you’re saying that it’s a low price characteristic, is it?

Yeah, the pricing is accessible and generally for natural globally what you’ve had is either products that don’t have the right performance or they’re very premium priced.  The problem that Sukin solves for consumers is that it gives them the right level of performance at an accessible price.  And so we very much see Sukin as the natural competitor to those mass and mainstream brands like a Dove or a Nivea and it’s an alternative to those sorts of brands.  

What do you mean by performance?  In this business, what is performance?

I think the way the product is formulated and there’s an ultimate consumer point of truth.  When you put that product on your face, does it moisturise or does it cleanse?  And if it doesn’t work then it doesn’t matter what the packaging looks like or the brand story’s like, it’s got to be affective, and Sukin is.  The reason it’s growing so strongly domestically is because it’s a very highly efficacious product.  It’s just that it is at a price point that allows kind of a gateway into natural.  We see that as being the primary role of that brand in many categories and we’re pursuing those opportunities.  

Are you getting momentum in the US, UK and – are you in Europe or just the UK and US?

Just UK and Canada are the two primary international markets, growing really healthily in those markets.  We are gaining new users and we understand that brand proposition is compelling to draw consumers into the brand in multiple international geographies.  We’ve entered into the US beginning in the natural channel and we see that as being a platform for future potential growth in other channels in that big market.  Then obviously we have China and our exposure to China where we already have a good presence via cross-border e-commerce, which will continue to expand over time.  

It is a brand that has universal appeal.  I think that ultimately with branded businesses, execution and the marketing efforts are extremely important and that’s a competitive landscape.  But we know that the brand will stand on its own two feet if we educate consumers on why it’s such an attractive proposition.

Just talking of China, you mentioned China – one of the challenges you’ve listed in your recent presentation deck was soft export sales to China.  Can you tell us what’s going on there?

That was really I think based on our go to market model in China.  I don’t think we had appropriate levels of pricing and control throughout that margin chain that goes up into China, and it is obviously a marketplace that changes rapidly.  I think the traditional pathway that many businesses have enjoyed into China via the Daigou networks is evolving rapidly and ultimately if you don’t have good pricing control, so the participants in that market, whether it be a Daigou or Tmall, everyone needs to make money and pricing control is the foundation of that.  Therefore, moving to a single distributor we think gives us that appropriate level of pricing control and will ultimately allow more people to actively sell the brand in China and therefore the brand will grow. 

Do you think you can get onto the powdered milk baby formula bandwagon?  Blackmores are on it too with their vitamins, so that’s surely a big win for you if you can jump on that little train?

I think it’s a different category, and the interest in Chinese consumers is driven very much by how near to self they are.  These are categories that are being ingested and therefore the Australian quality and control story is very powerful in China.  It will flow into skin care and personal care and there already is a very healthy appetite for natural skin care in China and Australia is a very attractive source of that type of product, given our clean/green image that we enjoy with Chinese consumers. 

Certainly, there is a runway for growth and we do view China as a significant opportunity.  But much as is the case with some of the brands that you mentioned, it can be very lumpy and so our focus is building really sustainable regional revenues that will allow us probably to have a bigger play at China at some point in the future, rather than strictly make ourselves a China story.

You had a pretty solid earnings before interest tax depreciation and amortisation (EBITDA), but the operating cash flow went backwards because of working capital movements.  Can you tell us what’s going on there and whether that’s temporary. 

Yeah, look, it is temporary, we’ll be unwound in the 2H, basically driven by inventories and pre-payments and we have specific programs in place that will rectify that in the 2H. 

What is it, a stock problem is it?  You didn’t have enough stock or something?

Oh, no, obviously we manufacture so we’ve never had an issue with the volume of stock available.  There is an element of prepayments and blanket orders that are placed in advance and so they come into the system.  Then in terms of pure finished goods in inventories, you’re constantly seeking to match that to the forward sales cycle and have appropriate levels in the supply chain.  As I said, we’re really comfortable that those issues will be rectified in the second half.

Is it all about Sukin for you?  I think it’s roughly a third of your total sales, but have you got other brands that you think have potential?

I think I referenced earlier the strength of the combined brand platform.  If you think of Sukin as that accessible entry point into natural, we have the Andalou Naturals brand that we acquired out of the US.  That is very much a masstige price point.  And then you have Mineral Fusion as the third major branded platform, which is natural colour cosmetics.  That category has enormous potential long-term because of the synthetic nature of most of the traditional offerings and that growing appetite for natural solutions.  If you then couple that to the nourished life platform which I mentioned earlier in terms of exposure to business consumer sales via e-commerce, we have there a platform that both helps us learn in real time about consumer preference in this space, but also exposure to a retail channel of the future. 

And so I think when you bind all those together, you’ve got a series of price points that can be attractive to many different consumers in terms of natural.  You’ve got category differentiation in terms of skin care and colour cosmetics, and then you’ve got good exposure to e-commerce.  So, it’s a pretty compelling offer for both retailers, but also one where we believe we can make it more and more compelling for consumers.

A bit about yourself Myles, you were acting CEO during the takeover role for last year.  How long had you been with BWX and what was your background before that?

I started in January 2017 and essentially my background is branded consumer goods.  The longest period I served was with Reckitt Benckiser globally, but most recently before BWX I was with SodaStream in Australia for a couple of years and prior to that, with a business called Independent Distillers which was owned by PEP and sold to Asahi.

All right, so you’ve moved from booze to face care, excellent!

Yeah, it’s an interesting journey but one where that appetite’s for wellness and better for you.  We could see that on the alcohol side five or six years ago, and certainly you saw that with SodaStream which is obviously very much a wellness based and environmentally friendly kind of system.  They’re both experiences instructive in terms of that broader long-term trend towards a solution for the better for you.

Great to talk to you, Myles, thanks.

Thanks, Alan.

That was Myles Anceschi, the CEO of BWX.