PZ Cussons plc (LON:PZC) has announced its 2024 interim results for the six months ended 2 December 2023.
Jonathan Myers, Chief Executive Officer, said: “PZ Cussons is a stronger business than when we launched our new strategy, as demonstrated by our ninth consecutive quarter of like for like revenue growth and, on a constant currency basis, double-digit operating profit growth in the first half of the financial year. We have clearly had our challenges but have also delivered a turnaround in our UK Personal Care business and put in place measures to address the underperformance in our Beauty business.
The most significant challenge we have faced by far has been the devaluation of the Nigerian Naira, which is today around 70% weaker than a year ago, representing the biggest drop in the currency’s history. As we set out in September 2023, macroeconomic developments in Nigeria would be the key determinant of the FY24 results. Whilst we continue to make good progress in managing this volatility, the further devaluation in recent weeks will inevitably impact our FY24 results. As a Board, we have taken the prudent step to reduce the interim dividend in light of the devaluation.
As we look ahead we remain confident about the long-term potential for PZ Cussons as we build a higher growth, higher margin, simpler and more sustainable business.”
| £m unless otherwise stated | Adjusted | Statutory | ||||
| H1 FY24 | H1 FY23 | Change | H1 FY24 | H1 FY23 | Change | |
| Revenue | 277.1 | 336.9 | (17.8)% | 277.1 | 336.9 | (17.8)% |
| LFL revenue growth [1] | 2.2% | 6.1% | – | n/a | n/a | n/a |
| Operating profit/(loss) | 30.6 | 33.2 | (7.8)% | (89.7) | 39.2 | n.m. |
| Operating margin | 11.0% | 9.9% | 110bps | (32.4)% | 11.6% | n.m. |
| Profit/(loss) before tax | 26.1 | 34.5 | (24.3)% | (94.2) | 40.5 | n.m. |
| Basic earnings per share | 4.32p | 5.16p | (16.3)% | (10.84)p | 5.90p | n.m. |
| Dividend per share | n/a | n/a | n/a | 1.50p | 2.67p | (43.8)% |
See page 12 for definitions of key terms and page 13 for the reconciliation between Alternative Performance Measures and Statutory results.
‘n.m.‘ represents non-meaningful growth rates.
Numbers are shown based on continuing operations. With the exception of LFL revenue growth, % changes are shown at actual FX rates.
H1 FY24 refers to the 6 months ended 2 December 2023 and H1 FY23 refers to the 6 months ended 3 December 2022.
[1] Like for like revenue growth definition has been updated in H1 FY24 to exclude revenue related to unbranded sales which represented approximately 1% of FY23 revenue. H1 FY23 LFL revenue growth has not been re-presented but would have been 6.6% under the revised definition.
Summary
Naira devaluation
· As indicated in previous announcements, the devaluation of the Nigerian Naira has had a significant impact on our financial results and comparisons to the prior year. The foreign exchange loss in the period was £88.2 million and was wholly the result of the devaluation of the Naira which fell by 51% between 31 May 2023 and 2 December 2023[2]:
o Statutory results show an operating loss of £89.7 million having been materially impacted by these foreign exchange losses.
o Revenue declined by 17.8% (£59.8 million) to £277.1 million of which £52.9 million was attributable to the Naira devaluation.
o Given the material financial impact of the Naira devaluation, the Board has determined it is prudent to reduce the interim dividend by 44% to 1.50p.
[2] From NGN/GBP of 577 as at 31 May 2023 to NGN/GBP of 1,176 as at 2 December 2023. Historic NGN/GBP rates are summarised on page 11.
Performance and strategic progress
· Like for like (LFL) revenue growth was 2.2% driven by price/mix improvements of 7.0% and a 4.8% decline in volume.
· Adjusted operating profit margin increased 110 basis points (bps) with an improvement in each of our three regions driven primarily by an increased gross profit margin.
· Profit before tax declined by 24.3% reflecting an increased interest charge, but the reduction in both the effective tax rate and non-controlling interest as a result of the Naira devaluation resulted in a lower decline in adjusted EPS of 16.3%.
· On a constant currency basis, the financial performance has been more robust with adjusted operating profit growth of 17.2% and EPS growth of 9.0%.
· Strong cash generation with free cash flow of £20.0 million (H1 FY23: £4.2 million) with headroom on banking facilities of £105.0 million (31 May 2023: £73.0 million) and further improvements since the period end.
· Delivery against our FY24 priorities including:
o Improved USD sourcing in Nigeria allowing for cash repatriation and a reduction in the Group’s gross borrowings.
o Turnaround in UK Personal Care performance benefitting from a focus on executional capabilities.
o Strong growth of Childs Farm continuing to deliver on the significant international opportunity with distribution gains in the US and Europe.
o Organisational changes under way to simplify our UK structure and strengthen Group-wide brand-building and growth capabilities, addressing underperformance in Beauty.
Dividend
The Board has reviewed the dividend carefully given the material devaluation of the Naira, particularly as it is difficult to foresee a significant rebound in the value of the currency in current circumstances. Had the exchange rate as at 31 January 2024 been the rate used to translate the FY23 results, FY23 EPS would have been over 30% lower. As a result, the Board has determined that it would not be prudent to pay an unchanged dividend. It has therefore elected to pay an interim dividend of 1.50p with the objective of achieving a cover of approximately two times for FY24.
The dividend will be paid on 4 April 2024 to shareholders on the register at the close of business on 8 March 2024.
FY24 outlook
At our FY23 full year results in September, we noted that the Nigerian macroeconomic environment, and the currency particularly, would be the key determinant of FY24 results. Since then, we have experienced further depreciation of the Naira, with the official rate falling more than 30% since our balance sheet date of 2 December. As a result, we now expect FY24 adjusted operating profit, at reported rates of exchange, to be in the range of £55-60 million[3].
[3] Compares to prevailing consensus operating profit range of £61.5-68.2m as at 21 September 2023
Introduction from our Chief Executive Officer
It was nearly three years ago that we launched our new strategy and we are, overall, making good progress as we build brands to better serve consumers. In doing so, we will ultimately transform the Group creating value for all stakeholders. The business has now delivered nine consecutive quarters of LFL revenue growth and adjusted operating profit for the first half of the year is up 17% on a constant currency basis.
Particularly encouraging in the first six months of the year has been the turnaround of the UK Personal Care business which has delivered growth in market share, revenue and profitability. This follows an extended period of volatility driven by Covid, cost inflation and cost of living pressures. Carex exited the first half of the year in growth and each of our UK Personal Care brands grew volumes in the second quarter.
Offsetting this in the first half of the year has been the devaluation of the Nigerian Naira. Given the scale of Nigeria within our business – representing 35% of revenue and 22% of net assets in FY23 – this has had a material impact on our earnings and our balance sheet. In addition, it has created trading challenges in the market itself given its inflationary impacts with inflation now at a 30-year high of 29% [4].
We are continuing to navigate these challenges effectively with both operational and corporate interventions. However, given the size of our business in Nigeria and the ongoing macroeconomic uncertainty, we believe the prudent course of action is to reduce our interim dividend by 44%. Longer-term, we will continue to simplify and strengthen our business in Nigeria in order to capture the longer-term opportunities that the market offers.
Elsewhere, we also know we have much more to do. The performance of our Beauty brands, even after allowing for some intentional volume reductions to protect margin, has fallen short of our expectations in recent months and we have already taken action to address this. Trading in Indonesia has been soft in the half largely due to pressures on the consumer, however we remain confident in the long-term prospects for the market and are confident that our innovation plans will support a return to growth over the coming months. Meanwhile, we see good progress in the UK as noted above and continued solid growth from Australia as Morning Fresh continues its expansion ‘beyond the sink’.
[4] Source: 28.9% based on Central Bank of Nigeria, December 2023.
Our strategic progress: Building brands for life. Today and for future generations.
In the first half of the year, we have made good progress against our strategy which is centred around five choices: Build Brands, Serve Consumers, Reduce Complexity, Develop People and Grow Sustainably. For FY24 specifically, we have established four clear priorities for the business focusing on the most urgent activity whilst investing resources into longer-term opportunities.
#1: Further simplifying and strengthening Nigeria
We have continued to improve our sourcing of US Dollars and, as previously noted, our local business expects to be able to continue to meet its needs for the foreign currency required for day-to-day operations thereby eliminating further lending from the Group’s holding companies. Furthermore, we repatriated £13 million by the end of November and are working to repatriate further cash by the end of the financial year.
Our transaction to de-list and buy out minority shareholders in Nigeria will, once complete, further simplify and strengthen our business in Nigeria. We continue to target completion by the end of the financial year although this is subject to a number of local approvals.
#2: Returning the UK to sustainable, profitable growth
Our UK Personal Care business, comprising primarily Carex, Imperial Leather, Cussons Creations and Original Source, has seen a turnaround in performance in H1 FY24, with increased market share, revenue and profitability. This is the result of a strengthened leadership team and a more determined focus on building back several core executional capabilities. Looking ahead, there remains significant opportunity to regain previous levels of profitability in UK Personal Care and, as described below, we see opportunity to improve performance of our other UK brands which have previously been managed as part of our Beauty organisation.
#3: Driving further expansion from the core
Childs Farm continues to grow strongly and we have recently gained further distribution in key German retailers. Our US launch is on track with Amazon sales increasing rapidly. We expect to secure new listings in premium regional retailers before the end of this financial year.
Our recent launch of Imperial Leather in Thailand continues to go well benefitting from significant local influencer coverage and broader social media activity.
The launch of Morning Fresh into the Australian auto dishwash market has contributed positively to our revenue in the period, as part of the brand’s longer-term ambition of growing ‘beyond the sink’. The auto dishwash market is broadly double the size of the hand dishwash market and is growing at approximately twice the rate.
Following its launch in July 2023, Original Source in Spain continues to build momentum in a highly competitive market. The launch campaign has been strong, achieving good social media coverage and consumer engagement. We expect to reach over 1,500 listing points over the coming months and have secured listings with Carrefour amongst others. The sector in Spain is worth around £300m [5] and is Europe’s third largest bath and shower gel market, signalling the strength and ambition of the brand to continue to grow.
[5] Euromonitor
#4: Continuing to transform capabilities
As part of our continued efforts to transform the capabilities of the Group, we have made a fundamental change to our organisational structure as we reorganise and simplify our UK business while strengthening our overall Group brand-building and innovation capabilities. These measures are designed to address the recent under-performance of our Beauty business and to accelerate growth more widely around the Group.
Firstly, we have appointed one leader across the combined UK business compared to the previously-separate Personal Care and Beauty approach. These business units have historically had two leadership, two commercial and two support teams, resulting in significant duplication of effort. The change will drive significantly greater scale and faster decision-making, with one team and one ‘face to the customer’ as we share best practice and pool our understanding of customers, consumers and the categories.’
Secondly, we are strengthening further our brand-building capabilities, particularly behind our brands with the most growth potential. We have created a dedicated team under Paul Yocum, previously Managing Director of Business Development, in the new role of Chief Growth and Marketing Officer. Over the coming months, we will increase our resourcing of brand strategy and planning, consumer insights, innovation and marketing capability. In doing so, we will continue to look to drive the leverage benefits from centralising certain activities while retaining the local insights our multi-local portfolio footprint can provide. The team will also be responsible for overseeing our growth markets including the US business.
Separately, we continue to invest behind the tools employed by our teams. During the period we have brought much of our Revenue Growth Management (RGM) activity in-house, using latest Microsoft cloud applications to drive analytics and generate insights. Currently live in the UK, this will ultimately be extended internationally and is expected to result in a more cost-effective, faster and more effective RGM capability.
Summary
I would like to thank my PZ Cussons colleagues across the world for their hard work in recent months. We are focused on creating further value from our portfolio of brands and continuing to execute our FY24 priorities. We remain optimistic about the longer-term potential for PZ Cussons as we build a higher growth, higher margin, simpler and more sustainable business.
