PZ Cussons Plc

So good morning all and thanks for joining today's call where Sarah and I will update you on the latest results from PZ Cussons. And moving to slide three, you'll see that our agenda is to update on first half results for our financial year 2022, as well as an outlook for the balance of the year. We'll finish up with the latest progress against our strategy before opening up for your questions. And moving to slide five, let me start, though, with some key messages to help frame what we're reporting today. I'm pleased to say that we returned to revenue growth in our second quarter, delivering plus 5% growth on the same quarter in the previous year, as we said we would at our September prelims and Q1 trading update. We saw strong growth, often double-digit, across many of our Muslim brands and most of our markets. helping more than offset the underlying drag of the peak of the pandemic demand and high levels of Carex sales in the base period. We see these results as evidence that we continue to make good progress against our strategy, still only about one year old, of building brands for life today and for future generations. One indication of this progress is that we've been able to continue to increase investment levels behind our brands, driving market share growth, with seven out of eight of our must-win brands growing value share in the first half. And this world-based momentum has enabled us to improve price mix, which in turn has helped us navigate very significant cost pressures, both in commodities and logistics. We have worked hard on cost and price to offset high levels of unexpected inflation. probably driving more pricing and revenue growth management actions in the last year than we have in the last decade, and we will need to continue to do so. While we anticipate sustained inflationary pressures this year and next, we expect to deliver our full-year profit in line with the current range of consensus estimates. I can also confirm that our Board has approved the payment of a maintained interim dividend Another sign of confidence in our long-term performance potential and strong balance sheet position. Now, over to Sarah for a closer look at the results.

Thanks, Jonathan. Turning first to slide seven. Let me start with the key financial headlines for the first half. Our revenue and profit performance, our net debt position and our interim dividend. All revenue growth figures are quoted on a like-for-like basis, unless otherwise stated, which adjusts for constant currency and the impact of the 5am disposal. All profit measures cover our continuing operations on an adjusted basis. Revenue was £284 million, 2% lower than in the first half of FY21 on a like-for-like basis. driven by a decline in hygiene demand in our Europe region impacting our must-win brand Carex. Our Asia-Pac and Africa regions and our core categories of baby and beauty were all in growth. We maintained operating margin despite significant cost inflation with continued price mix initiatives improving our gross margin by 40 basis points and funding further increases in marketing investment behind our must-win brands, in line with our strategy to drive sustainable, profitable revenue growth. Reported revenue with the 5am yoghurt business included in the prior year was a decline of 9%, and this led to adjusted profit before tax of 32 million, 8% lower. Adjusted basic earnings per share were down 15%, as the increase in profit from Africa results in more earnings being attributable to our minority interests there. Our statutory profit before tax of £35 million increased 8% due to net income from adjusting items in this period compared to a net charge in the prior period. Continued balance sheet disciplines saw net debt close at £10.5 million, £20 million lower than at the end of our last financial year in May. And I'll take you through the detail later, including the drivers of our free cash flow conversion. As Jonathan mentioned, the board is pleased to approve an interim dividend maintained in line with FY21 at 2.67 pence. So now let's look at the first half revenue performance in a little more detail on the next two slides. On a two-year basis, comparing against the first half of FY20, revenue for our total business is 13% higher and is up across each of our core categories of hygiene, baby and beauty and in all geographic regions. Our must-win brands also show very strong momentum on this two-year basis, up 20% and with Carex up over 40%. The overall one-year decline in must-win brand revenue in half one of 11% was driven by Carex being up against the peak of the pandemic. The UK hand hygiene category is normalising at higher levels than pre-pandemic and Carex has gained share, extending its market leadership position by four percentage points. Excluding Carex, must-win brands grew 10% versus the prior year. Our portfolio brands also grew, up 11% in the first half, with the electricals business and other portfolio brands in Nigeria performing strongly, some at very attractive margins. We returned to mid-single-digit revenue growth in Q2, as we anticipated, but this was not quite enough to offset the Q1 impact, resulting in the 2% like-for-like decline for the first half. Whilst we continue to navigate market volatility, we currently expect to be in growth for the second half thanks to continued brand activations and revenue growth management initiatives enabled by our investments in marketing and behind commercial capabilities. Moving now to overall business performance by category on slide nine and the split between volume and price mix. Half 1 revenue was up in both our core categories of beauty, up 21%, and baby, up 1%. Hygiene revenue was down 12%, but excluding Carex grew 6%. In the first half, we saw price mix improvement in two out of three of our core categories, namely baby and beauty. Hygiene declined both volume and price mix as a result of the normalised demand for Carex I described earlier. Excluding Carex, hygiene grew volume by 1%, with price mix driving a further 5 percentage points of revenue growth. Price mix was a key enabler for us being able to maintain margins in the face of significant cost inflation in the first half. And I'll come on and say more about that later. We continue to invest in the revenue growth management capabilities we need to allow our strengthened brand equities to translate into higher price points in the market. And we will be welcoming a new RGM director to the business in the coming months. Now let's take a look at our regional performance, starting with Europe and the Americas on slide 10. The revenue decline of 19% was driven by Carex. partly offset by strong growth in our beauty business from increased brand investment, successful marketing activations, price promotional efficiency and distribution gains. Sanctuary Spa revenue growth and share gain was the result of a new consumer insight led TV campaign and through the line activation. Saint-Tropez continued its growth momentum in both the US and the UK and gained share. Original source returned to growth in the first half and also gained market share. Imperial Leather declined in the face of strong grocery competition in shower, but saw share gains in the overall UK washing and bathing category in both bar soap and hand wash. And work is progressing on a major repositioning of the Imperial Leather brand with a launch plan for FY23. We maintained gross margin with operating margin down as we continue to invest behind our must-win brands. Turning now to slide 11 and our Asia-Pacific region, where revenue was broadly flat. Cussons Baby held flat, despite pandemic restrictions severely impacting retail channels in Indonesia. It maintained a market leading position and also saw significant price mix improvements, both from a focus on driving the growth of the more profitable segments within the baby category and multiple price increases. Revenue in Australia and New Zealand was held back by Q1 supply issues on Rafferty's Garden, which are now resolved. Rafferty's Garden, one of our portfolio brands, retained its number one market position in baby food with a 30% share. Morning fresh revenue grew despite being up against high consumption at the peak of the COVID-19 pandemic in the prior year and gained significant share of the Australia manual dishwash category, up to 47%. Gross margin improved strongly and operating margin also moved up. Now moving to slide 12 and Africa, where revenue was up 22%, reflecting growth across all of Nigeria, Kenya and Ghana. Our must-win brands of Morning Fresh, Premier, Joy and Cussin's Baby all grew revenue double-digit. Premier and Joy both increased their market share positions, and Morning Fresh maintained its market-leading position with a share of 58%. We also saw revenue growth across our portfolio brands, with Electricals, Stella, a skincare cream, Rob, a medicated ointment, and Canoe, a multi-purpose soap, also all in strong double-digit growth. much of it at attractive margins. Price increases across all product categories offset significant input cost inflation arising from commodities, freight and forex. The devaluation of the Naira held back the 22% revenue growth in constant currency to plus eight on a reported basis. Our palm oil joint venture, PZ Wilmar, improved profitability compared to the prior year through expanded distribution and successful pricing activity. Having returned the African business to profit in FY21, we've continued this momentum into the first half of FY22, with an increase in half one operating margin of nearly six percentage points to over 8%. This is a result of multiple rounds of price increases, focus behind our more profitable product categories and discipline on overheads. Next slide, please. Our overall operating margin held flat at 11.6%, despite significant cost inflation and a further increase in marketing investment. I've already mentioned the price mix improvements, which saw our gross margins nudge up. Underlying overheads were down half a percentage point, offset by foreign exchange impacts. Our palm oil joint venture with Wilmar in Nigeria, although not a core category, has seen increased profitability versus the prior year. Let's turn now to our cash flow and our resulting net debt on slide 14. Continued balance sheet discipline provides us with the flexibility for future investment. Net debt reduced from 31 million in May of last year to 10.5 million in November, driven by strong operating cash flow and proceeds from further portfolio optimisation, specifically the sale of 5AM and subsequently some of our Nigerian residential properties. Working capital in the half was a cash outflow of 15 million. Inventory levels increased due to higher commodities, where in some cases we forward bought to avoid supply disruption ahead of cost increases. And we also worked hard to secure supply availability in beauty in the face of some disruption. And this gave us some clear competitive advantage in the form of incremental sales. and we expect free cash flow conversion to trend back up to more normal levels. CapEx in the half was 5 million. We plan to increase our future investment levels to be more in line with consumer goods sector norms as we invest to unlock future growth capacity, drive manufacturing productivity savings, and support our sustainability strategy, as well as, of course, performing essential maintenance. We paid out six million in cash taxes in the first half, and we expect our effective tax rate to be broadly flat to slightly down this year and next, before then increasing in FY24 as a result of the UK corporation tax rate change. Net financing costs are down year on year on reduced borrowings. Summing up then, on the next slide, and looking at our first half financial performance versus our strategic financial framework. The chart on the left shows revenue growth versus the prior year on a quarterly basis and us returning to growth in Q2 of this year. This was our first quarter of growth on a quarter of growth in the previous year under our new strategy and an important step towards our strategic goal of sustainable, profitable revenue growth. Looking now to our strategic financial framework on the right, price mix improvements and product cost-saving initiatives allowed gross margins to expand. And coupled with restraint in overheads, this enabled increased marketing investment behind our brands to fuel future revenue growth and share gains. Next slide, please. So let's turn now to look in more detail at the outlook for the balance of FY22 and beyond, starting with our input costs on slide 17. Like many others in our sector, we are continuing to face into significant commodity, freight and increasingly labour and utility cost headwinds. We now estimate an in excess of 10% increase in our FY22 cost of goods versus the prior year. And as a reminder of what we outlined in September, materials and product costs make up the majority of our cost of goods, some three quarters or so. Palm oil, which is both a raw material in itself and also the feedstock for oleochemicals, the main source of surfactants used in our soap products and resins for our bottles, have both experienced double digit cost increases. As context, in base currency, current palm oil prices are more than 50% higher than the previously witnessed highs of 2012. We expect continued inflationary pressures on commodities in half too, but then anticipate the rates of increase to moderate somewhat in FY23. The cost of shipping from our manufacturing base and finished goods supplies in Asia is also up, as global supply chains slowly recover from the disruption caused by the pandemic. Costs have continued to increase in half too, and we anticipate further inflationary pressure into FY23, as some of our existing freight contracts come up for renewal. We expect to hold our factory conversion costs flat in half too, offsetting salary inflation through cost-saving initiatives, followed by a small increase in FY23. what specific initiatives then are we implementing to protect our margins whilst continuing to offer an attractive value proposition to our retailers distributors and consumers one of the building blocks of our pz customs growth wheel you might recall let's take a look on slide 18. we're continuing continuing our coordinated efforts to protect our margins by accelerating or turbo boosting both our revenue growth management and cost saving programs. In particular, reducing product, manufacturing and logistics costs that the consumer doesn't see or doesn't value. We've priced and implemented other revenue growth management initiatives in all of our markets. In our developed markets, we've continued to invest in strengthening brand equity to encourage our consumers to move up the value curve in exchange for additional benefits. We've also improved the efficiency of our promotional programmes to reduce the overall level of price discounting whilst remaining competitive. And at the same time, we've executed targeted price increases to offset inflation. Our beauty brands, Saint-Tropez and Sanctuary Spa, also delivered mix improvements by focusing on higher margin products and reducing our reliance on gifting and gift sets. In Indonesia, we've innovated on custom baby in higher margin segments, executed successive price increases, and also realized cost savings. For example, reducing the outer packaging in our wipes products. In Africa, we have deliberately driven demand for the higher margin products in our portfolio, executed multiple rounds of price increases and realised cost savings to deliver a strong top and bottom line performance despite significant inflationary pressure. Turning now to the outlook on the next slide. We're expecting the return to revenue growth seen in Q2 to continue into the second half. building on that momentum now that we've moved through the base impact from the peak of the pandemic and with the rate of decline of Carex moderating significantly. But we're continuing to face into volatility in the markets in which we operate. We're navigating the inflationary pressures on commodities, freight, labour and utility markets by reducing our internal cost base and driving price mix improvements. And we will need to keep working to combat those cost headwinds into FY23. We're determined to invest in marketing, which coupled with new commercial capabilities will build stronger brands and in parallel, a greater return on every dollar of that marketing investment. FY22 will be another year of progress under our new strategy to drive sustainable, profitable revenue growth. Despite the backdrop of a volatile inflationary environment, with cost pressures showing no sign of abating, assuming no further unforeseen disruptions, we expect to deliver adjusted profit before tax for FY22 within the current range of consensus estimates. And with that, I'll hand back to Jonathan.

Thanks, Sarah. So moving to slide 20, let's take a look at the progress being made against our strategy. One year on, we have started to turn the business around, but we still have plenty to do to deliver the full transformation that will unlock our potential. Hopefully, many of you will recall the key elements of the new strategy that we rolled out at our Capital Markets Day last March. We set out our ambition to get back to sustainable, profitable revenue growth and to do so by building stronger brands in our core categories of hygiene, baby and beauty. with a focus on our top must-win brands and our priority markets of the UK, Australia, Indonesia and Nigeria, which together account for 90% of our net sales, plus the US for our beauty business. We knew it would take investment in capability and culture, dramatic simplification of our operations, as well as raising the bar for talent and leadership. All of it underpinned by a commitment to sustainability and working for the interests of all stakeholders on our journey to certification as a B Corp by 2026. So how are we doing against our strategy? Well, let's move to slide 22, and you'll see that a year on, we have continued to deliver renewed or sustained momentum across all of our must-win brands, except one. Carex is obviously up against a sizable base of unpromoted, full-price sales, which is dragging down the overall performance of our must-win brands to 11% decline versus last year. Although Carex was not our fastest-growing brand last year, it was our biggest. So take Carex out, and the balance are up 10% this year, all of them flat or growing, and seven of them growing double-digit, with Beauty and Africa Business Units leading the way. And when we look on a two-year basis, even including Carex, then our must-win brands are up 20% in the first half. Performance has been driven by our renewed focus on building our core brands, including a return to integrated online and TV campaigns for the first time in years on some of our biggest brands. These have included a new Force of Nature campaign and on plant-based premium innovation on Original Source in the UK. now back in growth after last year's decline. And in Australia, strengthened in-store fundamentals in our core grocery retailers and the impact of our first new marketing campaign in recent years have helped Morning Fresh grow revenue ahead of strong pandemic demand levels in the prior year and strengthen its clear market leadership position, breaking through the 50% share threshold twice in the last six months. In Indonesia, sales of Cussin's Baby were held flat due to pandemic-related lockdowns, but the team did a good job of driving demands to the higher gross margin segments of our business, growing gross profit on flat sales, ahead of returning to growth later in the year as restrictions start to be relaxed. Meanwhile, our brand equity remains strong, as demonstrated by leading top-of-mind awareness scores for Cussin's Baby. Africa saw some of the strongest sales growth performances in the group, helping them achieve market share highs versus recent years. Sarah and I were lucky enough to visit Lagos in November during a narrow window in travel restrictions to see the operations and meet the people. We saw the brand building activity, ranging from hospital programs to reach new mums with cousins baby, to wash-a-thons to demonstrate superior product performance on morning fresh, Combined effectively with a renewed route to market focus to drive distribution of the right SKUs into the right regions and store types. All of this on top of multiple rounds of pricing and mixed management interventions to help offset significant inflation. So obviously the outlier here is Carex. So let me provide some reassurance on current performance and let's move to slide 23. We have already seen the rate of decline reduce as we move from Q1 to Q2 and expect to see sequential improvement and a return to revenue growth as we move through calendar 2022. Carex was the market leader of both hand wash and hand gel pre-pandemic. And now, with the market sizes of both categories settling post-pandemic at significantly higher levels, Carex has actually extended its market leadership position of both categories, growing overall value share by four percentage points in calendar 2021, according to IRI. And we're continuing to act as a market leader should. investing in the brand and generating competitive new claims rooted in powerful consumer insights to build on our heritage of washing and caring for hands over the past 25 years, with one purchase of Carex every second in the UK last year. Our latest campaign is bringing all of this to life right now, online and on TV, seeking to serve those consumers looking for the freedom to thrive as we emerge from the pandemic. So let's take a look on the next slide.