PZ Cussons plc (PZC) Earnings Call Transcript & Summary

Hello, and welcome to today's PZ Cussons trading update. My name is Bailey, and I'll be your moderator for today's call. [Operator Instructions] I would now like to pass the conference over to our host, Jonathan Myers, CEO. Jonathan, please go ahead.

Thank you, Bailey, and good morning, everyone. Thanks for joining the call. Following the release of our Q4 trading statement earlier this morning, Sarah and I will provide some highlights on recent trading at PZ Cussons and an update on the significant recent movements in the Nigeria foreign exchange regime before we then hand over to you for any questions you may have. We've had a good end to the year with 6.7% like-for-like revenue growth in Q4. While there have been movements within the business segments throughout the year at an overall group level, trading has been very consistent at around 6% growth. We've seen revenue growth across each of our 3 regions in our fourth quarter with Europe and the Americas region, not only sustaining its Q3 return to revenue growth, but doing so with what we expect to be an improved operating margin versus the first half and back in line with last year. As such, while we're still closing out the year-end process, we expect to deliver adjusted PBT of at least GBP 70 million, a little ahead of consensus. So sustained momentum on the top line and anticipated delivery in line with expectations on the bottom line. We've also continued to make good strategic progress too. We're pleased with the performance of Childs Farm, which we acquired just over a year ago. Brands delivered 12% revenue growth in FY '23 driven by distribution and share gains in the U.K. and momentum in other international markets. I know Sarah and the team are looking forward to providing many of you with a more in-depth update on progress of the Childs Farm brand at our capital markets event next week. We've also continued to deliver on our promise of driving growth in and beyond the core by expanding into new category adjacencies and geographies. Building on the launch of Morning Fresh into the Australian auto-dish category that we announced at our Q3 trading update, we are currently launching Original Source into the Spanish market. In fact, I had the chance to see the launch in person last week on a visit to stores in Barcelona, including the initial launch activity, ranging from posters around the city and online influencer engagement to unsuspecting metro commuters being confronted with [ bathrobe ] [indiscernible] Original Source ambassadors, sampling the highly distinctive product in busy stations. And we'll have more to say on this and our broader performance at our prelims in September. With that, I'll hand over to Sarah to walk you through some of the impacts of the recent movements in Nigerian FX rates.

Thanks, Jonathan, and good morning, everyone. I'd like to do 3 things. Firstly, remind everyone of the Nigeria FX regime; secondly, give a sense of the impact of these changes; and thirdly, to underline the fact that we see these once-in-a-generation changes as positive for Nigeria and positive for PZ Cussons. While these policy changes came earlier than we and others had expected, the move brings clarity to a situation where change was seen as inevitable and should, in the long run, lead to greater economic and trading stability in Nigeria that we're well placed to capitalize on. By way of context, access to foreign exchange through official channels in Nigeria has historically been challenging, with scarcity of foreign currency fueling demand in the informal market. This has resulted in a wide dislocation between the official and the unofficial rates. As you'll be aware, a new government was sworn in at the end of May, following the elections in February. And as part of President Tinubu's inauguration speech, he indicated his intention to implement fiscal reforms, focusing first on the removal of the fuel subsidy, which was duly removed on the 1st of June, and then the liberalization of the ForEx market and correspondingly the potential alignment between formal and informal market pricing. On Wednesday, the 14th of June, the Central Bank of Nigeria announced to ForEx market participants that they were now allowed to make a market at a free floating rate between buyers and sellers. Previously, the restriction had been that banks were permitted to offer a price but only at the official CBN rate. As of today, the ForEx market is naturally in a price discovery phase with low levels of trading and more liquidity will be required to bring stability to the underlying exchange rate. The NAFEX rate, the official rate and so the accounting basis upon which we translate our Nigerian income statement, has ranged between around [ 630 to 750 ] since the CBN announcement compared to around [ 460 to 470 ] before the announcement. And the midpoint of this new range represents a devaluation of approximately 1/3. We see the financial impact of PZ Cussons as falling into 3 parts. And we've provided some sensitivities in the RNS this morning to help with your modeling. Given the significant volatility that we're still seeing, it's impossible to predict precisely where the rate will settle. The first impact is the more mechanical translational impact, which is essentially the reporting of our local naira earnings into sterling. A 10% change in the U.S. dollar to naira rate equates to around 0.5p adverse impact on EPS or around 5%. The impact to EPS is relatively lower than operating profit given our minority interest in Nigeria and the relatively higher tax charge. There is similarly an impact on the translation of our cash balance. Given the historic challenges in repatriating cash, we have a cash balance in Nigeria equivalent to around GBP 200 million. And so each 10% movement in the naira versus the balance sheet rate as of the 31st of May reduces this balance as reported in sterling by some GBP 20 million. We welcome the recent reforms, which many believe could herald better future U.S. dollar liquidity in Nigeria, which should, in turn, ease the repatriation of cash by multinationals. Secondly, the transactional impact that our teams on the ground will experience. This relates to the higher costs associated with buying certain raw materials whose price is typically denominated in U.S. dollars. Now the impact here is all nuanced as the rate at which we have been sourcing U.S. dollars has been higher than the official NAFEX rate. It's been a blend of U.S. dollar exports to our market in Ghana, some local commercial bank liquidity and shareholder loans. Clearly, we will be looking to offset this to the fullest extent possible through pricing. And we have a strong track record here, having successfully done so for the last couple of years. We will be mindful of both competitive dynamics at play and the fact that Nigerian consumers have for some time now been facing double-digit inflation. And finally, the devaluation of the naira will also impact the translation of U.S. dollar-denominated liabilities of our Nigeria business, which will be recorded within statutory profit or reserves in the group's financial statements. That summarizes the near-term financial impacts. Now I should stress that although we have made reference to FY '23 numbers to demonstrate the sensitivities, we fully expect this to be treated as a post-balance sheet event and do not expect FY '23 numbers to be impacted. We'll give further guidance as appropriate at our prelims and Q1 results announcement in September and we'll report the impact formally for the first time in our FY '24 interim results in February of next year. As I've said earlier, we absolutely see these reforms as positive for the country and therefore also for PZ Cussons. It's very early days, and we are in the hygiene, baby and beauty business, not in the business of ForEx forecasting. But we might infer by the strength of the local Nigerian stock market currently at a 15-year high, but the reforms have been well received. The return of ForEx liquidity would mean we would be better able to repatriate cash from Nigeria, and that's highly positive, freeing us to reduce gross debt at a group level and use the surplus cash to invest in M&A. You'll appreciate that there is only so much we can share regarding the outlook for ForEx rates in Nigeria, but we'd be happy to take questions. We request that you keep questions focused primarily on Nigeria and ForEx as we will only be ready to present all the details behind our full year performance with our formal results presentation in September. And operator, over to you.

[Operator Instructions] Our first question today comes from the line of Damian McNeela from Numis.

Just to be clear, the sensitivity that you've provided is explicitly the mechanical impact of an FX move, and I guess the question is, should we be taking further consideration for an impact on the Nigerian consumer? Because obviously, as you mentioned, they're already seeing double-digit inflation, they're going to be enduring the removal of the fuel subsidy, which will be clearly putting pressure on disposable incomes. And then we're going to be seeing further price increases coming through from the likes of yourselves. I mean, should we be expecting a deterioration in the consumer environment as on top of the sort of the explicit FX impact that you've highlighted?

So Damian, it's a good question. And you'll appreciate it's very early days. Let me point you to a couple of things. First of all, absolutely, the devaluation relates only to the mathematical mechanics of the translation of our local results. The Nigerian consumer has for many decades, and I'm sure for many decades to come, proven themselves to be highly resilient, and we have built strong brands locally. So we considered, if you like, the best hedge and the best way to protect our business going forward in Nigeria was to strengthen our local team to build our brands and to streamline our operations. So we've been seeing over the course of the last 12 to 18 months, a steadier depreciation in the naira. Necessitating a number of actions over the past 18 months, be that straight pricing, be that product mix optimization, all of which underpinned by an investment behind our brand so that our consumers are still getting good value and also a streamlining of our cost base in our local business, and you should consider us to continue with all of those actions, we remain healthily paranoid. The removal of the fuel subsidy, for example, saw some queues at petrol and diesel stations for probably only 24 to 48 hours, by which point, things then returned to a new normal. So the Nigerian consumer is very resilient and very agile, and we will be doing our best to make sure our brands keep serving their needs.

Actually, Damian, If I just step in, almost conversely, whilst working through whatever cost opportunities we have to remove things that the consumer doesn't value or notice, what to continue the strong track record of pricing execution, we see it as a competitive opportunity, right? Because there may be a chance for us to really get out there and serve consumers better with much loved brands whilst others may be timid. So we really want to make sure that actually we see this is a way of winning in the Nigerian market. And exactly as Sarah said, the sticker shock of week 1 of the fuel subsidy by week 3, it's not that it's completely gone away, but the queues at the petrol station certainly have.

Okay. That's very clear. And perhaps maybe just 1 more on price increases or how much stock you have in country and how many weeks can you last before those stocks have run down and price increases become inevitable?

So actually, we have relatively low stocks on the grounds in Nigeria. One of the reasons for that being we can typically source some of our raw materials only 1 to 3 months out. So actually, we're pretty agile in terms of stock on hand. I would say that one of the things we're also exploring is whether we can source more raw materials locally as well as importing. Price increases, we're continuing to monitor it on a weekly and monthly basis. Actually, if you run the math, as we've done, the level of price increase assumed to maintain our margins in local currency terms over the next 3 to 6 months, you shouldn't assume needs to be any higher than it's been over the past 12 to 18. So the team are working hard as I say, we're mindful of the consumer, confident in the strength of our brands, and we think we've got good operational and commercial agility on the ground with our new teams who are fully committed to the cause.

Okay. And just to be clear, that margin that you're talking about is the cash margin, not the percentage margin.

A little bit of both. So we've seen that we reported in the release this morning, an improvement in our margins from actually a loss-making position 3 years ago to an operating margin north of 10%. So we're confident in our ability to keep taking pricing to protect margins in Nigeria.

The next question today comes from the line of Matthew Webb from Investec.

A couple of questions, please. Firstly, just on the surplus cash that you have in Nigeria. I mean you've talked about now being able to access that and potentially use it to pay down gross debt, elsewhere use for M&A, et cetera. I mean how quickly can that process start? I mean presumably, the whole situation is still rather in flux for now. I mean is this something that you're actively looking at already? Or is this something more for the medium term? That's the first question. And then the second question, and obviously, this devaluation was -- we've all been up saying this coming for a long time, it's not a huge surprise. But nonetheless, obviously, is a bit of a setback to your overall group financial performance. Are there other things you can do elsewhere in the group to try and offset this? I'm guessing from your previous record, you're probably looking pretty hard at that. Is there anything you'd point to in terms of sort of possible mitigation in the broader group?

Thanks, Matthew. Let me take both of those, and maybe then Jonathan can complement a little bit on the second question as well. So how quickly could we be repatriated in cash? The answer is right now. So there is a market, liquidity is low and pricing is high. So we have our treasury teams engaging daily with local banks. We're waiting for the market to settle a little bit. So we are asking our teams on the ground to slightly moderate their level of volume growth because we don't want to build up more U.S. dollar liabilities before we can settle those, if you like. So the team are focused on moderating volume and driving price. We could be in the market today to the tune of USD 2 million, USD 3 million, USD 5 million of purchases on a daily basis, but we are waiting over the coming days and weeks for it to settle a little bit and our local banking partners on the ground, whilst unable to predict when it will settle are looking at Q3, at this time calendar year as being the point at which that market would have settled to the degree it would be sensible for us to be buying U.S. dollars in a more considerable quantum, if that gives a little bit of color that we were looking -- We're looking, but we're not panicking and we're not making any immediate reaction to buy dollars at an economic rate that is higher than we will ultimately need. In terms of number 2 -- it ultimately wasn't a surprise. The speed of the reforms were a surprise. We talk -- let me talk about 2 things a little bit is as we were scenario planning for just this eventuality being maybe 3, 6, 9 months away, we explored some options to hedge our position. Now it's not typical to hedge translational exposures even in developed markets because typically, the cost of those instruments is prohibitive. And of course, hedging is just delaying an inevitable cost impact not eliminating it, it's even more difficult in a restricted ForEx regime where those instruments aren't available. Our best hedge to protect ourselves and our consumers in the event now of this devaluation was the building of our brands, the taking price, the strengthening of the team and the streamlining of the operations, if you like, the self-help that we've been engaging in, in Nigeria for the past 2 years. We are 3 weeks into our FY '24 financial year. So there are still various uncertainties in terms of the Nigerian outlook but also more broadly. So Matthew, you wouldn't expect us to be guiding for FY '24 until our prelims in September, and we will do so then. There are probably a few things to think about in terms of the macro outlook coming off of trade costs and commodities more broadly. So for the first time in 3 years, we see a slight easing in terms of our cost inflation headwinds. Now that is set against particularly in the U.K., a consumer still feeling the squeeze from the cost of living crisis. So we are making sure our brands and our pricing is agile for consumers with varying levels of disposable income. So we see a tailwind potentially from commodity and freight inflation. U.K. cost of living remains a slight concern, and we are determined to keep investing in our brands and in our strategic capabilities for the long-term good of the business. So you can imagine that we will be pulling every possible lever to deliver an optimal profit performance in FY '24 without starving the business of the investment that it's so richly needs and deserves.

Yes, perhaps if I just add to that. Beyond the cost dynamics that Sarah referred to there is we're seeing some easing and is still a chance for us to go again on identifying opportunities in our cost base that we can translate into fuel for growth. Actually, it's about being really committed to some of the big strategic choices that we have made and continuing to deliver on those in FY '24. So the first is really making sure that we are strengthening our core that we're sufficient to win in our core, particularly our higher-margin regions, and that's most notably Europe and Americas. So we're determined to get Europe and Americas back to sustainable, profitable revenue growth in FY '24 after some of the ups and downs that we saw in FY '23, particularly we went from H1 into H2. And I'd probably throw in there as well a determination to be competitive in our other more profitable region of Asia Pacific, in particular, Indonesia, where Cussons Baby has done a good job of protecting its position, but we think we can get even more competitive and have an opportunity to do so. So all of that would fall into that remit and making sure we're strengthening our core, and then actually, it's also accelerating going beyond our core. So it's not just the Original Source in Spain that we mentioned. It's not just being in it for the long term in the launch of auto in Australia on the market-leading Morning Fresh manual washing up liquid brand. It's also pushing out some of our other higher-margin brands so that at the gross margin level, they become more accretive for us. And most notably there, that will be Childs Farm on both sides of the Atlantic and we'll give you more progress on that when we talk in September.

[Operator Instructions] There are no additional questions waiting at this time. So I'd like to pass the conference back over to Jonathan Myers for any closing remarks.

Thanks, Bailey. So in summary, we've had a strong end to the year, and we expect to make further strategic progress next year, just as I've outlined, continuing to transform the business and building brands for the long term. As Sarah has explained, the naira devaluation is likely to have a one-off impact to our near-term reported financial performance, but we believe these reforms are positive for the medium to long-term prospects for our Nigerian business. We hope the call has been helpful, but please do get in touch with Simon, who will be happy to help on any further questions you might have. Otherwise, we're looking forward to seeing some of you at next week's Childs Farm investor event and then to update all of you on our results and further progress at our prelims in September. Thank you very much, and have a good day.

This concludes today's conference call. Thank you all for your participation. You may now disconnect your lines.