PZ Cussons plc (PZC) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the PZ Cussons Interim Results Conference call. [Operator Instructions] I must advise you that this conference is being recorded today, Tuesday, 28th of January 2020. And I would now like to hand the conference over to your first speaker today, Tim Linacre. Thank you. Please go ahead.

Thank you. Good morning. Welcome, everybody. Welcome to the PZ Cussons Investor and Analyst Conference Call for the interim announcement of results for the half year to 30th of November 2019. The presentation will be started by Caroline Silver, Chair of PZ Cussons, I'll now hand over to Caroline.

Thanks. Good morning, everybody, and thank you for joining us for the presentation of our results, as Tim said, for the half year ended 30th of November 2019, and welcome. As you all know, we announced in December that our long-standing CEO, Alex Kanellis, will be retiring from the company at the end of the month. I know that many of you know him well, and I'm sure we all wish him and his family well for the future. As previously indicated, whilst Alex's successor is being appointed, I will take the role of Executive Chair from the date of his retirement. And so I'm delighted to be here today with an Alan Bergin, our interim CFO. And I'm also very pleased to add that the process for appointing Alex's successor is well advanced. And I can't say more than that at this point. But it is well advanced. And as soon as we have more to tell you, we will be back to you. Before I hand over to Alan to discuss our results in detail, let me just say a few words about where we are on strategy, which, as you know, we announced last year. And I'm looking at Page 2 of our short slide deck here. So we're pleased to report that progress on our Focus Brands was stable compared to prior year despite the challenging market conditions across all our key geographies. As we said, we're targeting our support and investment behind these Focus Brands specifically, and that will continue in the second half of the year, where we have some important campaigns and initiatives, including those which further our work to support the environment and reduce use of plastics, which we know is important to all our stakeholders. We also took steps to streamline and focus our activities with the disposals of both our food business in Greece and our Polish activities announced, and there will be more to come on that front, too. Further reshaping of the portfolio is underway. Initiatives to improve our operating efficiencies are now being implemented at pace. As Alan will discuss, our balance sheet has been further strengthened, and we continue to focus on strong management of our working capital and cash. And our interim dividend has been maintained at 2.67p per share. We will, as we usually do, take questions at the end of the presentation. And so now I propose I hand to Alan, who will take us through the results for the first half of the year. Alan?

Thanks very much, Caroline. Good morning, everyone. Please, can you turn to Slide 3 in the results presentation? For context, the commentary and financials refer to adjusted results of continuing operations on a constant currency basis unless otherwise noted. Group revenue of GBP 293.3 million declined by 4.3% mainly due to challenging market conditions in our key geographies in the U.K., Australia and Nigeria. As Caroline said, the revenue from our Focus Brands was more robust, and encouragingly, results were in line with last year. Group adjusted profit of GBP 30.3 million declined by 13%, reflecting the lower revenue in the U.K. and Australia and reduced operating margin in Asia Pacific and Africa, offsetting a growing margin performance in Europe and the Americas. Adjusted profit before tax declined by 13% compared to last year driven by those results, offsetting a lower interest charge. Our adjusted EPS fell moderately by 6% to 5.33p, reflecting the operating results but partially offset by a lower effective tax rate and reduced minority interest. Net debt further declined to GBP 136.2 million from GBP 177.2 million this time last year, further strengthening our balance sheet. Reported profit before tax at GBP 34.7 million, increased by 34.5%, reflecting the profit on the sale of our business in Greece and a reduction in exceptional costs. This led to a 55.4% increase in the reported earnings per share at 7.10p. Please now, can you turn to Slide 4, to the Europe and Americas region? We saw good share growth in the U.K. for both Imperial Leather and Original Source despite a very competitive environment and became the volume share leader in Washing and Bathing. U.K. consumer confidence is clearly affected by Brexit and the general economic and political environment, and this led to continuing consumer uncertainty and some down-trading to private label and hard discounters. As a result, revenue declined by 4.7% to GBP 91.6 million. The down-trading to product label impacted us in Carex despite strong marketing campaigns. We continue to lead in this category. And in the second half, we will see increased emphasis around our environmentally friendly range as well as trade-level marketing plans to improve results in this category. Margins in the U.K. Personal Care remained reassuredly robust, and we saw only minimal reduction for our brands. In Beauty, we remained constant, especially in the U.S., where in the first half, we saw a continued increase in sellout at retail, and this is reflected in the share growth for St. Tropez in the mass and premium category. Beauty revenue declined against last year, driven by the already-mentioned consumer environment in the U.K. and lower shipments in the U.S. due to the trade stock policy in the first half of the year. As you know, the majority of our sales arise in the second half of the year in the U.S. due to seasonality. The adjusted operating profit of GBP 227 million (sic) [ GBP 22.7 million ], a decline of 4.3%, is primarily due to the performance in U.K. Personal Care, with Beauty largely in line with last year and the region benefiting from the disposal of a noncore brand. Regional operating margin of 24.8% is ahead of last year, reflecting good growth of our margins in Beauty and the overall strength of our Personal Care brands in the U.K. market. Please now, can you turn to Slide 5, to our Asia Pacific region? Indonesia continued to deliver strong revenue growth, driven by Cussons Baby with market share also increasing. As you know, Indonesia saw severe flooding in December, and our manufacturing site in Jakarta was severely impacted by this. A magnificent response by our employees led to full operational status within 1 week, and initial indications are that costs associated with this disruption will not be material. Revenue declined by 3.8% to GBP 94.2 million and was due to a weakened performance across Food and Personal Care in Australia. Increased promotional activity and pressure on pricing has led to revenue being impacted. Morning Fresh performed better, holding on to its category leadership and growing revenue. Operating profit was GBP 8.2 million, declining by 17.5% due to performance in Australia, increased marketing investments, and higher product costs in the region. This offset a strong performance in Indonesia. For these reasons, operating margin also declined for the first half. Please now, can you turn to Slide 6, to our final region, Africa? For the first half of the year, we saw revenue down by 4.4%, an improved rate of decline on last year. This result reflected continued pressure on our Home and Personal Care business in Nigeria. We continue to be impacted by contraction in those categories with reduced pricing, heavier promotion costs impacting our mix. Despite a good revenue performance in the Electricals business, this resulted in a loss at regional level of GBP 0.6 million. Outside of Nigeria, we saw year-on-year operation profit growth in Kenya, Ghana, and higher income from our joint food business, PZ Wilmar. Please now, can you turn to Slide 7 to see the continued progress on cash flow and net debt? These interim results continue to see an improvement on cash management. Net debt at 160 -- at GBP 136.2 million improved from the same position last year of GBP 177 million, reflecting our ability to generate strong cash flows, the positive proceeds from the disposals and our efficient approach to CapEx and working capital investment. We continue to have a strong balance sheet with debt at 1.5x EBITDA, and this continues to be our focus for the business. We expect this ratio to further improve by year-end. Finally, for today, please, can you now turn to Slide 8 for our closing comments and outlook? We expect an improved performance in the second half of the year, assuming no further worsening in the macro conditions. In H2, we expect to return to stability in the U.K., primarily due to performance in the hand wash category, supported by a more environmentally friendly range and increased trade support across all our brands. Beauty revenue in the U.S. is forecast to grow, supported by significant marketing investments. We will also see more stability in our results from Australia and Africa largely driven by improved performance by our focus brands and overhead efficiencies. Assuming these initiatives are successful, we expect full year revenue and adjusted profit before tax to be modestly below the prior year on a like-for-like basis. We have started to make progress on our new strategy and look to accelerate this in H2, through the performance of -- on Focus Brands, increased marketing investment, additional overhead initiatives and further refinement of our activities and portfolio. This is the end of the formal presentation. We will now take questions from those on the call.

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your question comes from the line of Damian McNeela.

A couple for me, please. Firstly, just could you give us a little bit more color on the performance of the Focus Brands? You sort of stated that they were broadly stable, but I was wondering if you could sort of give us any more indication on whether any particular brands were quite strong or where you thought brands needed to improve. Then in Australia, could you just be slightly more specific on where the issue lies? Is there a particular brand and particular customer that's causing the headache for you there? And then the last one for now would be on palm oil. I think we've seen a very strong increase in the price of palm oil over recent months. So I was just wondering whether we should be thinking about that as a headwind to input costs in the U.K. or whether the opportunity is greater for the business in Nigeria and what you could do there.

Thanks very much, Damian. So I'll have a go with all 3 questions. So the first question, just to repeat for the audience, was around the performance of Focus Brands. Second is a bit more detail on Australia. And then the last question is the impact of palm oil in the U.K. and also Nigeria. So listen, in dealing with the performance of the Focus Brands. So overall, you're right. We -- a stable performance. Some areas that we were sort of very confident over and glad to see was our premium brands in Nigeria. So we saw good growth in Cussons Baby. We saw Morning Fresh and the Electricals continue with the premium level to grow. So that was good news. We're also reassured by the results of Sanctuary in the U.K. That was robust. So that was a good performance given the environment. I talked about Original Source. The share growth has helped the number there as well. So they're all mainly the positive areas. In terms of St. Tropez, it is seasonality. So we expect to have a greater idea in the second half of the year. If we look at where areas to improve, definitely, Carex, and we've highlighted that and the loss to private label. And also in our Nigeria business, we've got a relaunch of Premier in the second half of the year to help reduce the reduction in our Home and Personal Care business. So that's really around the performance of the Focus Brands. Also, to help the improvement in the second year on the Focus Brands, we will increase our marketing investments as we said in presentations. In Australia, there is a general competition around pricing, high promotions, and it is affecting all categories. As we stated in the answer, we did lose share on Rafferty’s Garden, primarily before the relaunch. We've put in a relaunch at the end of the half, so it will have no impact in these numbers. But the areas where we were losing share, we've put in some new products and restaged our current products. So very much a wait and see in Rafferty’s Garden. And then also in the Personal Care, which includes Beauty in Australia. We saw a reduction in our hair brands. So we are evaluating that at the moment. But again, that was largely driven by discounting and price competition. Morning Fresh, as I said, did remain strong and grew. So that was good news. In terms of the headwinds from palm oil, in Nigeria, I wouldn't see a significant impact in the short term because PZ Wilmar, which is our -- which sells edible oil. They do import theirs, so there will be a slight impact on pricing for those rather than the advantage. In the U.K., we're roughly hedged this year. So not an issue this year, and we are working on a plan next year to minimize some of the apparent downside. But we usually buy roughly 3 months to 6 months in advance. There are no issues at the moment in either of those markets.

And it might just be actually worth saying that the border closures in Nigeria, if anything, helped PZ Wilmar because they stabilized the supply of oil through official channels. And therefore, that's not unhelpful despite the overall price dynamics.

Your next question comes from the line of Nicola Mallard.

Just staying on the Focus Brands. I just wonder whether you could give us an idea as to what percentage of total revenue they account for. And do we assume that anything that you don't count as a focus brand is potentially on the list? Caroline, you said there's more to come in terms of focusing the portfolio. Do we assume that anything that's not counted as focus is perhaps on that list of pending disposals? And also, on marketing investment, you said you've been looking to increase marketing expenditure in the second half. Where is the funding coming from that? Because clearly, that's an expenditure in terms of P&L. And I just wondered where the balance is. Is it coming from operational savings that are starting to come through?

So let me take the second of Nicola's questions. Thank you, Nicola -- whilst think about 1 and 3. I think it's not right to think that anything which isn't in focus is automatically disposals. I mean we always keep everything, as any good management team will tell you [ under reveal ] in terms of value to us, value to others, of course. But I think what we do with the Focus Brands is we're looking at where we have a right to win and then a chance to achieve above-average growth and, therefore, where we want to prioritize investments. There's been a series of what one might could -- tail brand is a little bit harsh, but brands which actually contribute to the overall significantly in which we would wish to also keep within the portfolio. So there's -- and within focus, we split them into brands that we're driving, brands for transformation and brands for growth as well, so we can distinguish there. But I think it's fair to say there is more to come, as I said, but not necessarily everything which isn't on the focus page is up for disposal because it's about creating the right portfolio to have scale and engagement with the customers. Alan, do you want to talk a little about 1 and -- question 1 and 3?

Sure. So just to recap, what percentage is the Focus Brands for our total revenue? And how do we support the increased market expenditure in the second half? So thanks very much, Nicola. So Focus Brands account for around 2/3 of our revenue. So just understand in terms of that. In terms of the increase for the second half, probably really from 3 areas. So we do have a little bit of a better mix in the second half for the whole group. So some -- we're expecting some more premium growth largely in America and some other areas of the business in the second half. But underpinning this also is our overhead initiatives that we've been working on and then some product cost initiatives that will bear fruit in the second half.

Your next question comes from the line of Matthew Webb.

Three questions, please. Firstly, will the step-up in marketing investment that you're planning for the second half of this year roll into H1 of next year, resulting in another step-up? And if so, are you comfortable with consensus expectations for PBT for that year, which I think is sort of up from expectations of around GBP 63 million this year to around GBP 67 million next year? That's the first question. The second, in U.S. Beauty. Do you expect the negative shipment phasing that you suffered from in H1 to reverse in the second half and provide you with a benefit? Or was that just a one-off adjustment to stock levels? And then the third question. In U.K. Washing and Bathing, just to make sure I understand this correctly. So there was increased promotional activity in the branded segment. Is that right? And yet consumers, despite the presumably better value on offer there, were still trading down to private label? And if so, is that surprising?

Alan, do you want to take that?

So just for the call, Matt, thanks very much for dialing in, Matthew. So 3 questions. The step-up in marketing investment, will we see that coming into the following year? Comment on U.S. Beauty and the stock and then the U.K. Washing and Bathing and the increase in private label. So first, the step-up in marketing investment. Yes, we do see an increase into the following year. We've got some internal targets. We're looking at increasing our marketing spend as a percentage of net-net sales. We see that increasing in the second half of this year, and we see that increasing next year as well. So yes, we continue to see that. In terms of U.S. Beauty, Matthew, first of all, it's the base. So this year, more than ever, because of our marketing campaigns in the second half of the year, the first half is around 20% of what we expect in revenue with 80% in second half of the year. So really, it is all about the second half of the year. And we see the stock adjustment in the first half as not impacting the story of how we'll do in Beauty this year. It really is about the second half of the year. And then finally, in the U.K. Washing and Bathing category. What we're seeing is it is mainly a trade issue where people are going to stores like Aldi and Lidl ahead of some of the malls, where we're very strong. So it's less about brands. It's more of where shoppers are going. What we do know in the second half of the year is we've got much more support from the trade for some of our brands to achieve our numbers.

Just to follow-up on the first of those. I noticed you didn't offer any comment on consensus expectations for next year. Is that -- would you just prefer not to at this early stage? I'd understand if that's the case.

It's early stages at this point.