PZ Cussons Plc

Hello and welcome to the PSED Cousins 2023 Interim Results presentation. My name is Lauren and I will be coordinating your call today. There will be an opportunity for questions at the end of the presentation. If you would like to ask a question, then please dial into the conference call and press star followed by one on your telephone keypad. I will now hand you over to your host, Jonathan Myers, CEO to begin. Jonathan, please go ahead.

Thank you very much. Good morning, everyone. And thanks for joining the call. Today, Sarah and I will update you on our results for the first half of the year and progress against our strategy. In terms of agenda, I'll start by providing some overall perspectives on the first half and then hand over to Sarah to take you through the group financials and regional performance. After that, I will cover off some of the operational and strategic developments in more detail. And then it will be over to you when we'll be delighted to take your questions. I'm pleased to say that we have continued to make good progress against our strategy in the first half of the year as we continue the move from turnaround to transformation. Starting with our financial performance, we have delivered another half, in fact, our fifth consecutive quarter of profitable like-for-like revenue growth, with the majority of our must-win brands up versus a year ago. While there has undoubtedly been some impact of the volatile and inflationary external conditions across our markets, the strength of our brands and the work we have done over the past few years to make PZ Cussons a stronger and more resilient business mean that we have largely been able to offset the impact through pricing and productivity initiatives. We have been working hard to use the full range of revenue growth management tools so we can avoid simply pushing price increases onto our customers and consumers wherever possible, including using our portfolio to ensure that we are meeting the needs of our consumers through innovation, through the reframing of value, and with the right packed formats and sizes. We said we would continue to invest in our brands, and that is what we have been doing. We have doubled investment behind our must-win brands in the first half of our financial year, compared to levels prior to the launch of our strategy. We have invested in new and improved advertising campaigns, a full restage of Sanctuary Spa, and the relaunch of portfolio brands, with Imperial Leather and Customs Creations helping to broaden our appeal to a wider range of UK consumers. And Child's Farm continues to make good progress, leveraging the strength of the group for new international listings, and we're excited about the imminent launch of the first new product development since we acquired the brand. We are far from finished in addressing our legacy issues, but we have made good progress so far, especially in Nigeria, to drive significant and sustained improvement in financial and operational performance. Despite the challenging external environment, we reiterate our outlook for the full year. We are building a higher growth, higher margin, simpler and more sustainable business, and are confident in our long-term ambition of delivering mid-single-digit revenue growth with a mid-teens margin. I'll be back to talk in more detail about some of these highlights shortly, but first, Sarah will take you through our financial performance in the first half.

Thanks, Jonathan, and good morning, everyone. I'm going to provide a summary of the half one financials, walk you through the key movements year on year at a group level and then by segment and finish with the outlook for the year. We've delivered a robust performance in the first half of this year against the backdrop of continued macroeconomic challenges with inflationary pressures and softer consumer confidence in a number of our markets. With another period of like-for-like revenue growth, profit in line with expectations, and a strong balance sheet, we see a more resilient business emerging, capable of delivering more consistent financial outperformance. So let's take a look at the summary financials. Total revenue is up nearly 19%, reflecting improved underlying performance, a strong contribution from the acquired child's farm business, favourable Forex movements, and an additional six reporting days in the period, contributing around three percentage points to overall revenue growth. Within the 6% like-for-like growth, our must-win brands in aggregate were back into revenue growth, up 2%, and up 7% excluding Carex, ahead of the overall group growth. Operating profit margin was lower, at 9.9%, consistent with the guidance we provided at our full year results in September. Earnings per share was 8.5% lower, as the 8% growth in profit before tax was more than offset by an increased tax charge and an increase in minorities, both due to the continued profitable growth of our Africa business. Net debt remains very low, albeit up a little year on year, and the board has approved a dividend of 2.67 pence, unchanged from last year and the two years prior. Now let's take a look at the revenue performance in more detail. Looking left to right on the chart, you can see that like-for-like revenue growth of 6% was driven by the performances in Asia-Pac and Africa. Both regions are delivering ahead of the expectations we had for them at the start of this financial year. Carex and Saint-Tropez were the main contributors to the decline in Europe and Americas, and Jonathan and I will come on to describe both the drivers and our plans in some detail. Like-for-like volumes were down 5%. Around three percentage points is explained by Carex and our Nigerian electricals business. The decline in Carex reflects the ongoing hand hygiene category normalization post-COVID. In electricals, which clearly sits outside our core categories of hygiene, baby and beauty, we continue to intentionally and successfully take price to drive margin, willing to forego some volume. We therefore see the underlying volume performance somewhat better than the 5% headline decline, And these trends have remained fairly consistent throughout the period. That said, we continue to remain vigilant on evolving price elasticity trends, particularly in our developed markets. Charles Farm added just over £6 million to revenue, while the combination of Forex and the benefit of the additional six reporting days added another £28 million. The Forex benefit represents the general depreciation of Sterling, and in particular versus the Naira, accounting for half the benefit. The Naira was on average around 10% stronger during the first half, although this gain has reversed in recent months as we head into the uncertainty of the political elections. And to help you with your Forex modelling, we've shown in the appendix the split of our revenue by currency along with the prevailing rates in recent reporting periods. The additional six days, which is not dissimilar to a retailer's 53rd week, have not been included in the like-for-like revenue growth number of 6%. And this phasing unwinds in Q4, and so there will be no overall impact for the year as a whole. Turning to margin. As I mentioned, our operating margin declined as we guided it would. 170 basis points lower than the prior year period, down to 9.9%. Gross margin was down 270 basis points. The vast majority of this is explained by adverse geographic mix as our lower margin business in Africa and to a lesser extent, our home care brands in Australia grew faster than our Europe and America's region, which contains our highest margin brands. While we remain encouraged with our overall ability to offset cost inflation through a combination of pricing, revenue growth management and productivity interventions, the phasing of the pricing versus the inflation in a challenging UK market has contributed to the half one margin erosion. The improved second half performance in Europe and Americas, which I will come on to explain, will significantly improve both the geographic mix and the overall group margin performance in half too. Lower overheads contributed 50 basis points to margin, and brand investment, up in absolute terms year on year, grew by less than the rate of revenue growth, leading to further margin progression. Our palm oil joint venture saw its margin decline slightly, lapping a strong prior year performance. Finally, we saw a small forex benefit related to fair value gains on hedges. I'll now give a little more detail on each of our three regional segments. Firstly, Europe and Americas. Although total revenue was up, like-for-like revenue declined 6%, broadly in line with Q1. The first half performance is explained by Carex and Santropay. and we saw good growth across other brands. Overall, margins were down 11 percentage points compared to the comparable period last year. Clearly, this is not where the margin for the business needs to be, but we're confident in the plans we have in place to address this. So let me give a little more colour on what is behind the margin movement and how we think these factors will evolve over the next six to 12 months. There were three drivers of the margin decline. Firstly, the external environment has been more challenging than we anticipated. UK washing and bathing, which is by far the most important category for our Europe and America's region, was down 8% in the period, as consumers have sought to make savings in their personal care routines in the face cost of living challenges. And on top of the inflation the consumer is seeing, we continue to see our own input costs higher year on year. This inflation is in part attributable to the stronger US dollar, which represents a significantly greater proportion of our costs than it does our revenue. And we estimate the impact of the stronger dollar on our Europe and America's cost base to be approximately two percentage points. This will ultimately be covered through pricing, but there's a lag. with price increases implemented partway through the period. Secondly, the revenue of two of our highest margin brands declined. The decline in Carex continues to be a result of the ongoing normalization of consumer behavior post-COVID. We've seen extremely strong share gains in hand sanitizers, but overall the hand hygiene category is down significantly. Taking a step back, however, Carex remains some 20% above pre-pandemic levels, and our market-leading share position will stand us in good stead when the category momentum returns. Santra Pay declined as we lacked the double-digit growth we posted this time last year on the back of the successful Ashley Graham activations and the distribution gains in the US with both Ulta and Sephora. Finally, we make no apology for investing for growth. We're seeing strong returns from investing behind our must-win brands. And although it is easy to cut spend to meet short-term profit expectations, maintaining investment is the right thing to do. And Jonathan will talk a little more about recent successes. We're also making targeted investments behind growth into white spaces, particularly in our beauty business. The margin decline also incorporates the consolidation of Charles Farm, which represents around 100 basis points of the total. Compared with the first half, we expect the second half revenue and margin performance in the Europe and Americas region to be markedly better. Although the consumer outlook does remain uncertain, and as noted, we will continue to invest behind long-term growth and our strategic transformation, The other down elevators in our margin bridge should reverse in half two. We expect Carex and Saint-Tropez trends to improve significantly. Even if there is further normalization of the hand hygiene category in half two, we expect the impact to lessen. And for Saint-Tropez, we're encouraged by some extremely strong EPOS data in the US over the past couple of months, consistently up double digits. And tomorrow, our beauty team will be announcing the first of our new products for the 2023 season. And these will be heavily supported by our global brand ambassador, Ashley Graham, giving us further confidence that the half two performance will be better than the first. We also expect several percentage points of margin improvement related to input cost trends in the second half as inflation moderates and and mitigating actions increase. For example, the full annualized benefit of accelerated UK price increases and other RGM activities, which took place during the first half. Overall, therefore, we expect the 6% like-for-like revenue decline we reported for half one to reverse in half two, which combined with a more favorable cost outlook should lead to a significant improvement in the margin in the second half of the year. Moving on to Asia-Pac, where we have continued to see strong growth, with revenue up 7.5% on a like-for-like basis. Our Australia business And so we can now contemplate new growth opportunities. In Indonesia, we've seen a softer customs baby performance, low single-digit revenue decline, as the more recent increase in inflation has put pressure on disposable household incomes and in turn led to a decline in the baby toiletries category. We continue to focus on evolving our portfolio towards the higher margin subcategories within Bailey, such as oils and lotions. Finally, Africa revenue increased by 30%, of which half was like-for-like growth. With high inflation, this growth has unsurprisingly been mainly price-mix led, but that said, volumes declined only low single digits, reflecting the quality of our brands, both must-win and portfolio. And this performance has seen us achieve an operating margin of nearly 12%, the highest since 2015. And Jonathan will talk a little later about the actions we've taken to deliver this. Turning now to cash flow and the balance sheet, our balance sheet remains strong, with net debt to EBITDA of around 0.4 times on a last 12 months basis. We generated 4 million pounds of free cashflow during the period with our typical seasonal working capital outflow and some additional early buying of raw materials ahead of future price increases, translating to higher stock levels in Nigeria. We also expect a strong sellout performance in beauty in half two to further reduce stock levels. We realized another 13.5 million pounds from the sale of residential properties in Nigeria, bringing the cumulative total to over 30 million. The other big movements in net debt were the payments of the final FY22 dividend, the extension of a loan to our Wilmar JV as we elected to make our surplus Naira cash balance work well for us and limit the need for more expensive external operational funding locally and for it. Turning finally to the outlook. We remain mindful of the challenging macroeconomic environment, but we still expect to deliver full year profit before tax in line with current consensus estimates. We've slightly updated our outlook on affected tax rates and the interest charge for the year, although these broadly net each other off. All in all, a robust performance set against a difficult external backdrop. We continue to see a picture of improving consistency of delivery, and are building a higher growth, higher margin, simpler and more sustainable business. And we remain confident in our long-term ambition of delivering mid- and single-digit revenue growth with a mid-teens margin. And with that, I'll hand back to Jonathan.