26 January 2021

INTERIM ANNOUNCEMENT OF RESULTS

FOR THE HALF YEAR TO 30 NOVEMBER 2020

Revenue and profit growth in all Regions; balance sheet strong

PZ Cussons PLC, a leading consumer products group, announces its interim results for the six months ended 30 November 2020.

¹ Exceptional items before tax (2020: expense £11.4m - continuing operations £1.4m income, discontinued operations £12.8m expense; 2019: income £6.7m - all continuing operations) are detailed in note 4.

² Constant currency comparison. See page 3 for a definition of constant currency.

³ Net debt, above and hereafter, is defined as cash, short-term deposits and current asset investments, less bank overdrafts and borrowings. It does not include IFRS 16 lease liabilities of £12.1m (2019: £9.9m) (refer to note 11).

* The results for the half year to 30 November 2019 have been restated to reflect discontinued operations and prior year adjustments. Further details are set out in note 16 and 2.

Group Highlights

·      Revenue growth of 14.6% with growth in all Regions.

·      Focus Brands revenue grew 21.9% driven by Carex, Morning Fresh, Cussons Baby and St Tropez.

·      Adjusted operating profit of £36.4m, increased 14.8%, driven by improved performance in all Regions partially offset by increased Central investment in capabilities.

·      Growth in adjusted operating margin despite increased investment in marketing and organisational capabilities.

·      Adjusted profit before tax of £34.9m, an increase of 18.7% reflecting the increase in adjusted operating profit and a lower interest charge.

·      Reported profit before tax of £36.3m, slightly below last year due to the profit on disposal of our Greece business last year, and in this year exceptional costs primarily related to Nigeria.

·      Balance sheet continues to strengthen with net debt of £18.2m versus £137.7m last year, with undrawn financing facilities at 30^th November 2020 of £217m.

·      Interim dividend maintained in line with last year at 2.67p per share.

·      Capital markets day scheduled for 25 March.

Europe & the Americas Highlights

·      Unprecedented growth in hand wash and hand sanitiser categories but demand remains volatile and increased competition from new market entrants especially in hand sanitiser.

·      Revenue growth of 32.6% driven by Carex, the #1 choice of consumers in both the hand wash and hand sanitiser categories.

·      Imperial Leather adversely impacted by the prioritisation of Carex production with re-listing of products late in Q2. Original Source saw growth in its core proposition but declined due to a reduction in promotional activity and the simplification of its portfolio.

·      Beauty revenue showed a modest reduction with on-line performance of St Tropez and Sanctuary almost offsetting the decline in the UK high street.

·     Adjusted operating profit of £27.3m, 33.2% ahead of last year with growth in both the UK and Beauty. Reported operating profit was £27.2m.

Asia Pacific Highlights

·      Revenue increased by 4.2% with growth in key markets of Australia and Indonesia.

·      Market share continued to grow in Australia Home Care and in key categories for Cussons Baby in Indonesia.

·      Morning Fresh and Cussons Baby delivered improved revenue results and Rafferty's Garden returned to growth.

·    Adjusted operating profit of £11.7m grew by 48.1% with both Australia and Indonesia increasing due to higher revenue and improved margins. Reported operating profit was £11.1m.

Africa Highlights

·      Revenue grew in Africa by 5.9% driven by growth in all categories across our Nigerian business.

·     Electricals, Morning Fresh, Cussons Baby and Premier all increased revenue together along with growth in some of our smaller brands.

·     Adjusted operating profit of £2.3m reflected both increased revenue and margin improvement in Nigeria offsetting transactional foreign exchange losses. Reported operating profit was £4.6m.

·      Improved operating profit performance in Kenya, Ghana and our joint venture, PZ Wilmar.

·      Completion of the disposal of Nutricima, our Nigerian milk business on 28 September.

·     Simplification project for Nigeria commenced, with a planned review of portfolio, route to market, organisational design, structure capabilities and assets. First stage completed.

Central

·      Higher costs in first half reflects the increased investment in capabilities including digital, marketing and strategy.

Outlook
 

We saw renewed momentum in our business in the first half of our financial year, with delivery of top and bottom line growth allowing for increased investment in both marketing and organisational capabilities. Initial steps have been taken to turn around the business but these are only the start of a multi-year programme to return to sustainable profit growth.

In the second half we expect continued economic uncertainty associated with COVID-19, the risk of weaker consumer confidence combined with already evident upward cost pressure. Despite these external headwinds we plan to continue to increase investment in our brands.

Assuming no material change to anticipated COVID restrictions or resulting consumer behaviour, we expect to perform in line with the current range of market expectations for this financial year.

Commenting today, Caroline Silver (Chair) said:

"The organisation has been stabilised in the last twelve months with the arrival of Jonathan Myers as CEO and his new management team.

Our fast start to this financial year was maintained with the Group delivering strong growth in revenue and adjusted profit across all Regions, notwithstanding increased investment in marketing and organisational capabilities. 

In the second half of this year, with our recent strategy review moving into execution, we expect further progression in brand building, the continued turnaround of key brands and the implementation of our simplification project in Nigeria. 

The external environment continues to remain very challenging and volatile but we remain focused on developing our strategic plans that will benefit all stakeholders in the longer term.

The Board has declared an interim dividend of 2.67p in line with our last financial year 2020. We are pleased with progress to date and confident in our future plans but remain cautious given the external environment".

Also commenting today, on the strategy update, Jonathan Myers (CEO) said:

"Our focus in the first half of this year has been to deliver a fast start for the business, with emphasis on profitable revenue growth as well as maintaining our strong balance sheet discipline. We saw this as essential to reset both in terms of organisational pace and agility to adapt to changing consumer and shopper habits.

In parallel, we completed our review of the strategy to become a brand-led and consumer-focused organisation, delivering sustainable profitable growth with hygiene, baby and beauty at our core. We look forward to sharing our plans with you in more detail at a capital markets day on 25 March".

Press Enquiries

Investor and Analyst conference call

Management will be hosting a conference call for investors and analysts at 9:30am (UK Time) today. Please call Guy Scarborough at Instinctif Partners for dial-in details on 07917 178 920 or email Guy.Scarborough@instinctif.com 

The presentation slides to accompany the conference call are available to download from the Company's website at www.pzcussons.com.

Basis of Preparation

The accounting policies applied in our interim financial statements are consistent with those of the annual financial statements for the year ended 31 May 2020. The Directors continue to adopt the going concern basis in preparing the accounts on the basis that the Group's strong liquidity position is sufficient to meet the Group's forecast funding needs, including those modelled in a downside case.

The discontinued operations presented include Nutricima Ltd as the assets of this business were disposed of on 28 September 2020, with proceeds of £17.1m. The exceptional costs associated with this disposal relate largely to the unwinding of the accounting for historic foreign exchange reserves. As noted in our year-end report for 31st May 2020 we expect this to amount to an exceptional charge in total of £34.2m once all inter-company loans are extinguished. These inter-company loans have been impaired to their recoverable value in prior periods. This exceptional charge will not impact cash.

In our Financial Statements we use alternative performance measures such as adjusted operating profit and constant currency measures that are not recognised under IFRS. These metrics are used to allow the readers of the Financial Statements to obtain a more consistent comparison of the underlying performance of the Group by adjusting for certain items which, if included, could distort the understanding of the Group's performance and comparability between periods. The same measures are used by management for planning, budgeting and reporting purposes and for the internal assessment of operating performance across the Group. The adjusted presentation is adopted on a consistent basis for the purposes of the half year and full year reporting. Where relevant, comparative IFRS measures have also been presented.

Adjusted results are presented on a continued basis and before exceptional items. In the current period exceptional items include the profit on the sale of land by PZ Cussons Nigeria as a result of the Nutricima disposal, offset by costs associated with the expansion of our Group Strategy project to include the first stage of our Nigeria simplification. This first stage has involved incurring redundancy costs and the write-down of assets due to the closure of our Coolworld retail electrical stores in Nigeria.

The adjusted and reported results for the current period are presented with variances to prior period results and also as variances between the current and prior period on a constant currency basis. The constant currency impact has been derived by retranslating the 2019 result using 2020 foreign currency exchange rates. The translational impact was a £10.9 million loss on revenue, a £0.5 million loss on adjusting operating profit, and a £0.5 million loss on adjusted profit before tax.

In terms of segmentation our three operating Regions are represented and in addition our Central revenue and costs. Central refers to the activities in terms of revenue and costs of our fragrance house and in terms of cost the expenditure associated with the Global HQ, our non-market facing functions and global costs net of recharges to our Regions.

The following Group and Regional performance commentary is presented on a continuing operations basis. All growth percentages are stated in constant currency and operating profit is stated and discussed on an adjusted basis unless otherwise noted.

Business Review: Group Performance

Revenue at £312.9m increased by 14.6% versus last year with growth in all three Regions. Europe & Americas was our star performer with outstanding growth related to the performance of Carex as a result of the demand for hand wash and hand sanitiser associated with the COVID-19 pandemic, allied to a strong performance in Asia Pacific and an improved performance in Africa.

Adjusted operating profit at £36.4m was 14.8% higher than last year with growth in all three Regions. There was excellent profit growth in the UK with Beauty also growing profit despite a modest reduction in revenue driven by the decline in the UK high street. Indonesia and Australia delivered an increase in operating profit with improvements in revenue and margin. Nigeria grew profit with increased revenue and improved margin offsetting transactional foreign exchange losses. In the first half of the year there was also increased investment in marketing and organisational capabilities.

On an IFRS basis, reported operating profit was £37.8m (2019: £39.0m), with the decline driven by the profit on disposal of our Greek business last year and exceptional costs related to the extension of our Group Strategy project to include Nigeria simplification, offset by the profit on the sale of land by PZ Cussons Nigeria as a result of the Nutricima disposal.

Business Performance: Regional Performance

Continuing operations

¹ Constant currency comparison.

² Exceptional items before tax (2020: income £1.4m; 2019: income £6.7m) are detailed in note 4.

³ The prior year balances have been restated for change in the segementation of the business as described in note 3.

Europe & the Americas

Revenue at £117.1m (2019: £88.3m) grew by 32.6% versus last year with growth in adjusted operating profit to £27.3m (2019: £20.5m).

As a result of the COVID-19 pandemic, there has been unprecedented growth in the hand wash and especially the hand sanitiser categories in the UK. However demand continues to remain volatile and difficult to predict. We also see an increase in competition with new market entrants especially in hand sanitiser.

Despite this in the first half of this financial year we have continued to see high demand for our Carex brand. The COVID-19 pandemic has seen consumers, especially in the hygiene category, favour tried and trusted brands such as Carex. This has resulted in Carex maintaining the #1 position in the significantly enlarged UK market for hand wash and also hand sanitiser. Carex accounts for over 37% of the hand wash market and over 27% of the hand sanitiser market (Kantar, value share, for 52 weeks to December 1^st 2020).

Carex has driven an improvement in UK revenue compared to last year. Imperial Leather was adversely impacted by the prioritisation of Carex but we expect the full listing to be in place during the second half of the year. Shower and bath products were also impacted by increased competition. Original Source delivered growth in its core proposition but overall revenue declined due to a reduction in promotional activity and simplification of the portfolio.

Beauty revenue was modestly down on last year, mainly due to UK high street performance adversely impacting our Sanctuary and hair brands; Charles Worthington and Fudge.

The increased focus on on-line together with our hero products led Sanctuary to offset some of the adverse impact of the UK high street. St Tropez delivered good revenue growth in the first half with an improved performance on-line in the US and UK leading to an increase in self-tan sales allied to continued success of the innovations launched. On-line continues to be a key platform for our Beauty brands and an area of investment. Our on-line sales increased year-on-year to around 38% of our total Beauty revenue as we continue to grow our digital route to market.

Adjusted operating profit for the region grew due to the revenue performance in the UK and increased profit in Beauty driven by the improvement in margin. This was partially reduced by higher marketing investment specifically on the Carex brand with increased trade marketing costs at point of sale.

On an IFRS basis, reported operating profit was £27.2m (2019: £18.3m), in line with adjusted operating profit.

Asia Pacific

Revenue at £95.9m (2019: £92.0m) grew by 4.2%, with adjusted operating profit at £11.7m (2019: £7.9m), an increase of 48.1%.

Cussons Baby market share in Indonesia continued to grow in key categories such as bath, cologne, hair lotion and wipes (Nielsen, Scantrack November 2020). In Australia, Morning Fresh together with our detergent brand Radiant grew market share (Nielsen, Grocery Scan, December, 2020).

In Indonesia, revenue grew with growth from Cussons Baby especially in the higher margin categories of baby cologne, baby wash and baby hair lotion. Carex was launched with limited distribution in the first half of the year and contributed to the overall revenue growth.

Australia revenue was higher than last year driven by the performance of our Home Care brands and Rafferty's Garden. Morning Fresh continued to grow revenue driven by the impact of COVID-19 and the consumer preference for reliable, known brands. Radiant, our detergent brand, also grew and we saw a return to growth for Rafferty's Garden following the brand's restage in the second half of last year. This offset the COVID-19 related decline in the beauty category in Australia.

Adjusted operating profit at £11.7m (2019: £7.9m) grew by 48.1%, driven by growth in Indonesia with improved mix leading to higher margins, and also Australia where revenue grew and promotional costs were lower than last year. Profit was further supported by some one-off costs incurred in the prior year by the export business.

On an IFRS basis, reported operating profit was £11.1m (2019: £8.0m), in line with adjusted results albeit including a charge for re-organisation included as part of the Group structure and systems project.

Africa
 

Revenue at £94.9m (2019: £89.6m) grew by 5.9% versus last year, with an adjusted operating profit of £2.3m (2019: £1.6m).
 

Revenue in Nigeria grew with our Personal Care, Home Care and Electricals all ahead. Morning Fresh continued to deliver both volume and price increases, with Cussons Baby returning to growth. Premier core grew supported by a product re-stage in the second half of last year but there was a decline for the Premier Cool variant which was adversely impacted by a recent price increase.

Electricals revenue was higher with price increases specifically across our core ranges of washing machines and fridges offsetting volume decline.

Overall adjusted profit increased as a result of the higher revenue with all operating units delivering a profit. This improvement was partially offset by transactional foreign exchange losses in Nigeria arising from the scarcity of hard currency in the market leading to an adverse financial impact in the conversion of naira to US dollars.

On an IFRS basis, the reported operating profit was £4.6m (2019: £1.7m) and includes the profit on the sale of land by PZ Cussons Nigeria as part of the disposal of our Nutricima business.

Central

Revenue at £5.0m (2019: £3.2m) grew versus last year with an adjusted operating loss of £4.9m (2019: profit £1.7m).

Revenue refers to sales from our fragrance house and grew in the first half as a result of the sale of low margin semi-finished products to third parties as part of the enlarged Carex supply chain.

Costs associated with Central reflect the expenditure for our Global HQ and non-market facing functions net of recharges to our regions and our fragrance house. The higher costs in first half reflects the increased investment in capabilities including digital, marketing and strategy and the inclusion in the prior year of the income from the sale of a small brand.

On an IFRS basis, the reported operating loss was £5.1m (2019: reported operating profit of £11.0m) with the movement largely driven by the inclusion of profit from the sale of our business in Greece last year.

Financial Review

Group adjusted operating margin was 11.6% (2019:11.3%) on adjusted operating profit of £36.4m (2019: £32.2m) from revenue of £312.9m (2019: £284.0m). The increase in adjusted operating margin was driven by improved pricing and mix, partially offset by a step up in marketing investment and capabilities as well as partially offset by transactional foreign exchange losses in Nigeria arising from the scarcity of hard currency in the market leading to an adverse financial impact in the conversion of naira to US dollars.

In Europe & the Americas adjusted operating margin was 23.3% (2019: 23.2%), with the Region delivering margins growth due to a reduction in promotional costs for hand wash and the positive impact on mix of sanitizer sales. In addition, Beauty margins improved due to the increase in St Tropez sales and higher sales of Sanctuary hero products compared to gift sets and the reduction in the overall contribution of the lower margin hair brands. This growth in margin was largely offset by our decision to increase marketing investment together with higher trade marketing costs in the UK to improve execution in the market.

In Asia Pacific, adjusted operating margin increased to 12.2% (2019: 8.7%), with the growth driven by improved price and mix in Indonesia and a reduction in the mix from lower contribution categories. Australia also saw a strong increase in margin due to a reduction in promotion spend partially offset by the lower contribution from the high margin beauty business.

In Africa, adjusted operating margin grew to 2.4% (2019: 1.7%) driven by increased pricing in Electricals and a stronger price and mix performance on the Personal and Home Care brands. This offset foreign exchange losses due to scarcity in foreign currency.

Net finance costs of £1.5m (2019: £2.2m) were lower than last year reflecting higher cash balances and lower borrowings as a result of the proceeds from the disposals, improved working capital management and payment of the final dividend later in the year. We continue to reduce the draw down on our £325m credit facility which had headroom at 30 November of £217m (2019: £147m). 

Adjusted profit before tax at £34.9m (2019: £30.0m) reflected the increased revenue across all three Regions partially offset by higher investment in marketing and organisational capabilities, and foreign exchange losses in Nigeria.

The effective tax rate on adjusted profit was 24.6% (2019: 24.3%) which is largely in line with last year and is a result of the profit mix between regions.

Adjusted earnings per share of 6.67p (2019: 5.76p) increased by 15.8% as a result of the higher group profit.

Net exceptional income on a continuing basis was £1.4m. This includes the profit on the sale of land by PZ Cussons Nigeria as a result of the Nutricima disposal, offset by costs associated with expansion of our Group Strategy project to include the first stage of our Nigeria simplification and related to redundancy costs and the write-down of assets due to the closure of our retail electrical stores in Nigeria, Coolworld.

In the discontinued operations, the exceptional costs of £12.8m relate mainly to the unwinding of the accounting for historic foreign exchange reserves in relation to the disposal of Nutricima. As noted in our year-end report for 31st May 2020 we expect this recycling of foreign exchange reserves associated with Nutricima to amount to an exceptional charge in total of £34.2m once all intercompany loans associated with Nutricima have been extinguished. This will not impact cash. See note 4 for further details on exceptional items.

On an IFRS basis, reported profit before tax, including discontinuing operations, was £36.3m (2019: £36.8m) a decline of 1.4% largely driven by the profit on the disposal of our Greek business last year and exceptional costs associated with the expansion of our Group Strategy project to incorporate Nigerian simplification offsetting the increase in profits this year. Earnings per share from continuing operations was 6.81p (2019: 7.55p), a decline of 9.8%.  From continuing and discontinued operations, earning per share was 3.42p (2019: 7.10p)

Net debt, defined as cash, short-term deposits and current asset investments, less bank overdrafts and borrowings and excluding IFRS 16 lease liabilities, at £18.2m (2019: £137.7m) reduced due to proceeds from the disposals, payment of the final dividend for FY20 later in the year and increased focus across the business on managing working capital and capital expenditure.

Total free cash flow, defined as cash generated from operating activities less capital expenditure, was £33.0m (2019: £21.6m) demonstrating the strong cash management in the year. The result clearly shows the focus of the business amid volatility to reduce stock, enforce trade terms and restrict investment. These results also include the early payment of £8m in VAT as part of the UK COVID-19 relief programme. PZ Cussons did not partake in the furlough or COVID-19 Commercial paper programmes.

Our balance sheet remains strong with a net debt to adjusted EBITDA ratio of 0.2 as at 30 November 2020 (2019: 1.5) and net assets of £409.9m as at 30 November 2020 (2019: £436.1m). The Group is funded by a £325 million Revolving Credit Facility committed until 28 November 2023, with £217m in headroom as at 30 November 2020. 

The Group's three UK pension schemes have an aggregate pension accounting surplus under IAS 19 of £35.8m, after the restriction due to asset ceiling (2019: £33.8m). The overseas schemes reported a deficit of £7.6m (2019: £7.0m).

Brexit

As part of our risk management process we have been planning for Brexit over a number of years. In summary, the initial impact of Brexit on our business has been managed with only a small adverse impact. The impact of tariffs remains small given our sourcing, our EU customers continue to receive our products and across our key lines we have the required raw materials. We are seeing some delays in material supply and of course the wider economic impact will be known later.

Related parties

Related party disclosures are given in note 14.

Principal risks and uncertainties facing the Group

Our principal risks and uncertainties are explained in more detail in note 18 and remain as stated on pages 50 to 58 of our 2020 Annual Report and Accounts which is available on our website at www.pzcussons.com.