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.

I've got an atomic tsunami on my hands. He's got a second wave eruption on his hands. I'm getting loads of bacteria off my hands. We've got the whole world on our hands. She's got Mr. E. Magoo on her hand.

We've got a thousand spinning plates on our hand.

We've got the whole amazing wonderful. Wouldn't have it any other way. We've got the whole amazing wonderful.

There you go. So with a change of gears, perhaps let's go from punamis, maybe the first and last time you'll hear that word today, to a look at our beauty business, because our beauty business also merits special attention after a very strong second quarter in the run-up to Christmas. Many of our brands broke records during the quarter and during the festive season. Sanctuary Spa, another of our brands, back on air after years off, increased its market share by five percentage points. where there are a number of our retail partners enjoying record December sales numbers. Saint-Tropez saw continued success on both sides of the Atlantic, growing share in both markets, thanks to retail sales tracking up by more than a third during the last quarter. And Charles Worthington reached record levels of distribution in the UK during the last quarter, helping drive the highest weekly retail sales for over four years. So as you can see, Momentum in beauty and across the must-win brands as a whole that make up the core of our business. Now, moving to slide 26, you'll see that we have also made progress more broadly on our strategic priorities. Our new Chief Sustainability Officer, Joanna Glutzman, has been hard at work scoping out a renewed sustainability strategy for the group and our roadmap through to B Corp certification in the years to come. And there'll be more to come on this in the future. We've also been busy simplifying some of our legacy operations, most notably in Nigeria, including, for example, the completion of the sale of some residential properties that are not core to our future, realising £13 million worth of value with the prospect of more disposals to come. At the same time, we have worked with employees across the organization to develop a new set of values to support the cultural change we are seeking to drive as we raise the bar to create a stronger performance culture, but one that is firmly rooted in our heritage of pioneering entrepreneurs. As part of this effort, we have also sought to transform some of our physical working spaces to make them more contemporary and more suited to the collaborative but flexible ways of working required in our post-pandemic world. This has included moving to new offices in London and renovating our UK and group head office in Manchester. And finally, we have continued to add talent to our leadership team. the appointment of tracy mann to lead our beauty business brings us recent and highly relevant experience of international expansion of premium beauty brands such as charlotte tilbury and perricone md and she's also joined on the team by paul yokum as managing director of our business development unit his deep experience at png beauty and more recently swarovski will help us as we begin to explore moving from fixing our core to growing our core he'll be taking ownership of our existing businesses outside the top priority markets expanding our must-win brands into new geographies and helping us explore inorganic growth opportunities in the future finally then moving to slide 27 i'd like to wrap up with you few reflections on the business We returned to profitable revenue growth in Q2, as we said we would when we updated you on Q1. As we have grown sales, we have also maintained investment in our brands, gaining share and helping us command the price mix improvement needed to offset the significant cost inflation which has buffeted us and many others in the industry. There's no doubt these inflationary pressures have been a huge challenge for us and required enormous agility to get costs that the consumer does not value out and to use all the revenue growth management tools in our toolkit. As a result, we still expect to end the year delivering profit within the range of consensus estimates and revenue growth for the second half. With this in mind, our board has approved the payment of a maintained interim dividend And despite the short-term challenges, we remain focused on delivering against our strategy in the long term, building brands for life today and for future generations. And that's quite enough from us. I'd like to hand over to you. So we'd like to open up to your questions.

Jonathan, Sarah, thank you very much indeed. If you would like to ask a question, then please use the raise hand icon on Zoom and we will come to each of you in turn. Alternatively, you have the option to type in a question to the Q&A box and we will read it out on your behalf. And the first question comes from Nicola Mallard. Nicola, if you would like to unmute and please go ahead.

Thank you. Morning. Can I ask three, if I may? First is, Sarah, you mentioned you're looking to spend a little bit more on CapEx and returning to a sort of a sector norm spend. Can you give us a guide on what that might mean for PZ? Secondly, clearly you've gained a lot of share over the last six months, which is excellent news. How are your competitors reacting? Because presumably before they wouldn't have even sort of worried about PZ Cousins doing something because you weren't terribly reactive. But clearly you're now in the market and you're taking share off other people. So I just wanted to see how they were reacting. And then finally, on cost savings, that's been part of how you've managed the inflation in the first half. Is there more to do on that? Is that still a potential source of balancing out the costs over the next sort of 18 months? Thank you.

Nicola, let me take the CapEx question first. So absolutely, I would expect to see our CapEx number trend up to something closer to two and a half percent of sales. So something like 12 to 15 million on an annualized basis. And that's versus historically about eight. Now, that's not indiscriminate blanket investment across all our brands and across all our geographies. We're focused on our must-win brands. And we, of course, set very different hurdle rates in our different jurisdictions to make sure we generate the return on that spend. But 12 to 15 is a good rule of thumb.

Maybe if I pick up on the share gains and then the outlook on is there more to do on cost savings. So in some respects, I rather hope the competition haven't noticed us and we can continue to fly beneath their radar screen. But as you say, I suspect that may not be the case. And in some cases we have seen it's not the case. and what we have seen is interestingly competition working hard to deal with their own cost inflation and so people are doing it differently there's downsizing there's up pricing there's reduction of promotion to some extent that is taking everyone's eye off the ball whilst we have been able to get out and grow our market share but actually what we continue to see is solid innovation and solid promotional activity from our competition And honestly, we welcome the competition because it is only through healthy competition that we're going to stay sharp and we're going to be able to engage in the battle of who can serve the consumer best. And we're hugely reassured on the progress we have made, but not with any hint of arrogance. Actually, it tells us that we've got to continue to up our game and honestly, we're up for the challenge. In terms of cost as we look forward, Obviously, what we need to do is ensure that we're doing all we can to mitigate costs, to protect margins, to protect future investment in our brands. Where we can take cost out that's cost the value doesn't, sorry, the consumer doesn't value, then we have been hard at work doing that. And there have been some notable examples of where we have been able to. Where we've had to pass on pricing, whether through price increase, mix management, promotion optimization, we have done that. We just want to make sure that we don't get carried away and price ourselves beyond the point of being competitive still. And that's a little bit the tension that we have. So we're doing our best to manage down the ongoing cost and the anticipation of ongoing cost inflation. But what we don't want to do is leave ourselves isolated at high price points. So we're trying to make sure that we get that tightrope walk right and we get the balance right. Perfect.

Thank you very much. The other piece on cost savings beyond product is you've seen us very deliberately investing behind marketing and investing behind commercial capabilities, largely through overheads. So there will come a point where we don't need to keep increasing at a similar level of increase.

OK, thank you. Thank you.

Nicola, thank you very much indeed. And the next question comes from Damian McNeill. Damian, if you'd like to unmute and please go ahead.

Yeah. Hi, morning, Jonathan, Sarah. Just first of all, a quick clarification on Europe margins, if you please. So I think you said that sort of margins were lower because you'd invested behind your brand, which I'm sure you have, but clearly lower Carex revenues would have been impacted on that margin decline. I was just wondering if you could help us sort of separate the decline out and then sort of how perhaps we should think about any recovery from where we are on those European margins. That's the first question I've got, please.

So let me, it's a good question, Damian. Let me try. So in our Europe and America's region, we maintain gross margin flat. Investing behind our brands to see our operating margin some 300 basis points lower than last year. Then that flat gross margin, absolutely. Carex decline in the UK depressed our gross margin. Momentum and conscious price mix improvements in beauty more than offset it. So overall, we were flat gross margin. UK Carex under pressure. Beauty momentum continuing to help us maintain margins.

Yeah, okay, that's clear, thanks. And then just following on from beauty, I mean, clearly it's performing really well, and I think you've touched on Nicola's question that sort of the solid innovation from competition. I was just wondering if we could sort of look at Saint-Tropez in particular and whether the sort of the UK is proving more challenging given the sort of the new launches to market that we've got and whether actually – the international proposition for Santa Fe is where we should be thinking about the growth going forward. And then whilst I'm talking, I might as well ask sort of the cost pressures that we're seeing, clearly they've gone up for H2. Can you give us an indication of how much you are hedged into FY23? Because we're sort of, we're not that far off it, given where your year end is. And I'll just ask one last one. residential properties in Nigeria. How far through that portfolio are we? Are we halfway through it? Just trying to get an understanding of how much is there, please.

Okay, so why don't I take the beauty of maybe the residential properties and Sarah can talk about the cost pressures and what we see the outlook going into FY23. So on Santa Fe specifically, there have been a number of drivers that have benefited us on both sides of the Atlantic. As you know, we have slightly different executions across the two markets, where the U.S. is somewhat more premium, playing by the rules of premium beauty, and the U.K. has been potentially over-distributed and over-discounted in recent years, and we're working hard to try to bring that back up to what we would call more of the premium market that we've seen in the U.S. But in both markets, we've grown market share, and we saw strong retail sales data, the EPOS data that goes through the retailers' tills in both Q2 and the run-up to the festive party season. And that's really part of one of the strategies that we've had, which is to de-seasonalize Saint-Tropez. So actually, it's not just about trying to give yourself the reassurance of having a great-looking skin color when you go out in the summer. It's also when you go out for your parties around Christmas, and we've seen good progress on that. I would also say, a little bit as you're hinting with the international expansion markets, where we've seen progress in the U.S. has also been, as we've seen, very selective distribution expansion across behind the growth of Sephora and Ulta teaming up with Kohl's and Target, which means that we can see more doors added, more points of distribution, but with the premium beauty rules of the game still being adhered to. And so that gives us confidence not only for continued success in the U.S., but potential in other, for example, European markets where we have a less developed business, but we have confidence that we can go after them. Cost pressures, and then I'll come back with properties.

Thanks, Jonathan. So let me split it between commodities and freight and utilities. So for commodities, it very much depends on which raw material, but as a rule of thumb, somewhere between three and six months. For freight and utilities, it's closer to three months. And, Daniel, the reason I answer it that way is we are continuing to look at what is the right level of forward cover for to hedge and guard against volatility but also depending on with where we think we can take price but also wanting to make sure we have the flexibility to consider alternative sources of supply so commodities three to six months freight and utilities closer to three months

If I just pick up on properties. Now, I know you're eagle-eyed, Damien, so you will have noticed on our strategy on a page, what we didn't have was we want to be big in residential properties. So it is clearly non-core for us to have residential properties in our business. And what we were able to identify as part of our overall Nigeria simplification effort was an opportunity to, frankly, reduce the noise in our system of owning residential properties when we're able to realize value for the group, whilst also helping use that to strengthen and create an even more robust balance sheet. So in terms of how far are we the way through, I would say don't work this necessarily in a linear, numeric financial way, but we're somewhere between half and two-thirds of the way through the process. So that's what we meant when we say there may be more to come.

That's great. Thanks very much.

Thank you, Damien. And a reminder that if you would like to ask a question, then please use the raise hand icon on Zoom and we will come to each of you in turn. Alternatively, you have the option to type a question into the Q&A box and we will read it out on your behalf. And the next question comes from Ian Simpson. Ian, if you would like to unmute and please go ahead with the question.

Thank you. Thank you very much. I just wondered if you could talk a little bit more about the commodity pressures that you're seeing and the exact phasing of that. And clearly there are some commodities like palm oil where it's, you know, pressure in parts of your business, but also a windfall in others via the JV. But any more colour you can give in terms of specific commodity movements and how we should expect the cabinets of that both through the second half of this year, but also in your sort of first half 23. Very helpful. Thank you.

Shall I take that? Yep. Thanks, Ian, for the question. So if I think about our commodities, we've talked about palm oil and we've talked about resins. Into the second half of the year, both of those have increased in the second half of this year. On the first half of this year, which was already a significant increase on last year, we expect both of those to the rate of increase to moderate into the first half of FY23. Now, it is true that we have something of a natural hedge in terms of our palm oil JV with Wilmar. Now, we can't use those palm oil products, but we can and have generated successful price increases off that business in Nigeria. If I think about freight, against which we've had some shielding in the second half of this year, having bought forward and given ourselves some cover, we are more exposed to spot prices for freight into the first half of FY23. And as I say, labour, we've successfully kept our factory production costs flat this year. We will see a net increase through our factory network next year in FY23, not a material one. And we are seeing also some of our energy contracts coming up for renewal. So if I were to think about the 10% increase in our COGS base we've seen next year, I think we should be assuming that into FY23, it will be somewhere between half and two thirds of what we've seen this year into next year. Now, our cost saving mitigation and our RGM initiatives this year will carry over into FY23. Plus, I think it's fair to say we've learned how to execute against RGM and cost savings this year that carry us in good stead into next year. So that's how I'd be thinking about it.

Very helpful. Thank you. Ian, thank you very much indeed. And that was the currently final queued question. We'll just wait a second and see if there are any more. You've got about 10 seconds to raise hand, and it looks like Ian's coming back in with a follow-up. Ian, if you'd like to go ahead.

Thanks. I might as well if no one else wants the microphone. So when I think about pricing, I think there's certainly an impression that pricing in Europe tends to be quite seasonal in that you kind of get, you know, your window in January to put your pricing through with some of the retailers. And that's kind of it. You've clearly done a phenomenal job taking pricing across your portfolio. It would be great. Any color you can give on, you know, how that's going in developed markets versus emerging. But also if there are any kind of particular kind of cliff edge months where the pricing rolls over that we should think about and what that might mean for the cabinets again. Thank you.

So let me pick that one up, Ian. So actually, just to answer the specific first, and then I'll give you the broader. So there are no real cliff edge months for us in our business versus, for example, those that are heavily exposed to Western Europe retailers, such as the French retailers or the German retailers. So we don't have that same cliff edge dynamic. What we have done is truly embrace and accelerate our revenue growth management capabilities, which are a continuum of interventions, and I call them tools within our toolkit, that we need to use. And given the magnitude of the cost inflation we've been experiencing, we need to use all of them in some way. Some are better suited to developing markets. Some are better suited to developed markets. And in the past, I would have said that you'd be quite binary. In a developed market, you would go with sophisticated promotion optimization and innovation. And in a developing market, you can be much more upfront just about straight price increases of X percent and multiple through a year. Actually, the magnitude of the challenge has been so great that we've needed to do a bit of both in all markets. And therefore, we've seen much more of a blend of both specific price increases sometimes on a given brand or across the entire portfolio. That's more common in our developing markets, but we have even resorted to it in our more developed UK and Australia markets. But there's also significant price mix wins to be had in making sure that we are shifting our demand activation to the higher gross margin segments within our brand portfolios. That has been true in Indonesia on Customs Baby, also in Africa. Sarah mentioned brands such as Stella and Rob, which are significantly higher gross margins than some of our others. But also, it's through the promotion optimization where, in particular, we've seen some big wins moving away from historical EDLP promotional programs towards high-low, which still is enough to be competitive to secure strong display, give the consumer a sense that they're getting a great deal, but also just nudge up the average price realization over time. And we've seen very good examples, not least in Australia, of where we have done that and where there'll be more to come.

Thank you.

Thank you.

And the next question comes from Fletcher Tully. Fletcher, if you'd like to unmute your microphone and please go ahead.

Hi, both. Yeah, just a quick update. I believe you are hiring someone to assess the returns on your marketing spend. And I was wondering if you could give an update there, how you assess that and the returns on that. And also the CapEx, given that it is going up, could you provide an update on how you assess the returns on that CapEx, whether there's a threshold there? and the difference between the regions in that. Sarah, you mentioned that you look at different returns for different regions, so a bit more colour there would be good. And also the balance sheet. You guys seem to have one of the most unlevered FMCG balance sheets in the industry. Are we gradually heading towards net cash here? With special dividends considered, I think a lot of PLCs out there that have seen their balance sheets improve, they've come out with special dividends over the last month or so. And yeah, if you could give an update on the outlook of the balance sheet, that'd be good. Thank you.

So I'll answer the marketing spend one, Fletcher. Good morning, by the way. And Sarah can then step in on CapEx and Balance Sheet. So you're right. We appointed a chief marketing transformation officer and the emphasis being on the T there four or five months ago. And Andrew Gagan joined us with extensive experience at Diageo, particularly in improving return on investment through managing more effectively the marketing mix and before that at PepsiCo. And Andrew has been getting to grips with essentially what have we got in terms of data and tools? What do we need to develop in terms of data and tools to, A, get a better grip on what is our genuine return on investment? And then what are the tools we need to improve them? And so although it's relatively early days, he is busy doing that. And over time, we'll get more comfortable coming to you with what are actually some numeric indicators of progress on return on investment. But we are very clear that what we won't be doing is continuing to increase marketing investment by the plus 40% that we have delivered over the last two years. And what we'll be shifting to is much more of a focus on increasing return on investment. And just to give you an idea, one of the early hunting grounds that Andrew's already looking at is how do we get the balance better between money spent on development of marketing assets and activity and future innovation versus money that's actually spent in the deployment so that we shift more into deployment. We have less money tied up in actually developing what we're trying to communicate to consumers in whatever form. And we're already making some progress, and we'll give you an update when we know some more. Sarah.

Morning, Fletch. Let me take the CapEx one and then the balance sheet. So it's true to say that within our CapEx spend, much we demand to have a financial return on. Some we don't. So, for example, if I think about our refurbishment of our group HQ, what I haven't done is build a business case to cash up some happy factor to say, you know, we're going to sell more as a result. So that was key in terms of us winning the battle for talent and progressing towards our B Corp ambition. So some capex won't have a financial business case as we would recognize it, but the vast majority will and does. And the teams have to come and demonstrate an internal rate of return versus some cost of capital hurdle rates that go beyond our overall group WACC. And we have put in hurdle rates that are different by region. So you can imagine, given the inherent risk profile of our Nigerian business, essential capex in Nigeria, absolutely, to safeguard the welfare of our teams. But growth capex has to cover a much, much, much higher hurdle rate. And we are constraining the amount of capex we're putting into those higher risk geographies. On balance sheets, Yes, it's fair to say that as things, if I dial the clock forward, we will ultimately at some point, if we do nothing different to today, be in a net funds position. And whilst that gave us real resilience and flexibility and confidence and continues to, given the economic volatility, it's not the most efficient capital structure for a PLC, you're right. So we have no current plans for a special dividend. We have been historically over the last 12, 18 months committed to two things. One is investing behind growth in the business, and the other is a sustainable dividend strategy. And we see no reason and have no intention to come off either of those two statements. What you might have seen, and Paul Yocan's role is a nod to, Once our must-win brands are competitive in their home markets, we see an opportunity increasingly to take them to new markets, and it may be that we can supplement our current must-win brands with new brands. Now, we've got nothing to update on at this stage. We will update if there is something to share, but you should assume we would come at any m a related activity with the same focus and the same discipline as we've applied to our core so disciplined on valuation clear on the strategic fit and clear it represents the best use of our shareholder capital thank you thank you very much indeed and that was the final question so jonathan perhaps i could hand back to you well thanks bob so thanks all for your questions this morning and more broadly actually for your interest in pz customs

and our journey increasingly from turnaround to transformation. We are on the way, but we have plenty more to do, and we're looking forward to getting on with that plenty more. You know, we always said there would be bumps along the way, and, boy, there has been a massive bump called cost inflation this year. We are working really hard to get over that bump and to stay focused on delivering against our strategy for the longer term, and we look forward to updating you on progress against the strategy next time. So thanks a lot for today. Bye-bye.