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PZ Cussons: Harsh milieu hurts profit



PZ Cussons: Harsh milieu hurts profit

Nigeria’s unfavourable operating environment has resulted in a sharp decline in PZ Cussons’ profits. Chris Ugwu writes


While Nigeria’s infrastructure deficit, particularly electricity supply and bad road networks, continue to hurt manufacturers, at times forcing some of them to fold up, the prevailing macro-economic indicators also point to a sector, which is headed for collapse if adequate measures are not taken to arrest the situation.
The cumulative effect of the scarcity of forex, falling oil prices, security challenges in Northern part of the country with the attendance consequences of loss of lives and properties, the resurgence of restiveness in the Niger Delta and the continued depletion of foreign reserves have continued to pose serious threats to businesses and social activities in the country.
One of such companies adversely affected is PZ Cussons Nigeria Plc, which has seen continuous decline in profits.
Despite that the group had finished 2017 financial year with impressive results, recording 73.13 per cent growth in profit after tax, the soap manufacturer continued to witness fluctuations in financials during the 2018.
PZ Cussons had predicted that its full year pre-tax profit is expected to be at the lower end, as conditions in Nigeria had worsened.
The company said while higher oil prices in Nigeria have contributed to increased foreign exchange reserves and a relatively stable exchange rate, liquidity has not flowed down into the economy.
Consequently, the company did not see a pickup in sales during the peak selling season in the country, and volumes, prices and margins are being hurt across most areas of the Nigerian product portfolio.
True to the company’s prediction, the profit came in lower with a record of 48 per cent decline in profit after tax for the full year ended May 31, 2018.
A market sentiment for the shares of PZ Cussons had also dwindled relatively due to challenging environment.
The share price, which closed at N23.00 per share in October, 2017 has recorded a dip in growth. At the close of business last Friday, the company’s share price stood at N13.50, a decline of N9.5 or 41.3 per cent year to date.

Hopes by market watchers that the company will sustain good profit margin during the first quarter of 2017 following the impressive full year result was dashed, as the tough macroeconomic conditions took toll on the operations, prompting the company to slip into loss position to finish with a loss after tax of N123.083 million for the first quarter ended August 2017.
According to a filing with the NSE, the firm posted a loss after profit after tax of N123.083 million in contrast to a loss of N1.585 billion posted a year earlier, representing a percentage change of 92.24 per cent.
Loss before profit before tax stood at N181.005 million during the period under review from loss before tax of N2.431 billion during the corresponding year of 2016, accounting for percentage change of 92.55 per cent.
The revenue of the soap manufacturer showed a drop of 12.81 per cent from N16.752 billion in 2016 to N18.898 billion in 2017.
PZ Cussons Nigeria bounced back to profitability, reporting a profit after tax of N589.655 million for the half year ended November 2017.
The group in a filing with the Exchange posted profit after tax of N589.655 million in contrast to a loss of N288.950 billion posted a year earlier, representing a percentage change of 304.03 per cent.
Profit before tax stood at N868.683 million during the period under review from loss before tax of N425.127 billion during the corresponding year of 2016, accounting for percentage change of 304.90 per cent.
The revenue of the soap manufacturer showed a growth of 23.48 per cent from N33.302 billion in 2016 to N41.123 billion in 2017.
For the Q3 ended February, 2018, while sales of N22.1 billion fell by -7 per cent y/y, the decline in PBT and PAT was more significant. PBT and PAT declined by -61 per cent y/y and -64 per cent y/y respectively. Positives coming through from relatively lower net finance charges and forex-related losses were completely offset by the topline decline and a -583bps y/y contraction in gross margin to 26.7 per cent. PZ Cussons UK (the parent company) issued a profit warning for its Q3 2018 (end-Feb) results.
PZ Cussons recorded 48 per cent decline in profit after tax for the full year ended May 31, 2018.
The group posted a profit after tax of N1.927 billion during the financial year as against N3.686 billion reported in 2017, representing a decline of 48 per cent.
Profit before tax stood at N2.313 billion from N4.811 billion posted in 2017, accounting for a drop of 52 per cent.
However, the group raked in revenue of N80.552 billion during the year under review from N78.215 billion posted in 2017, amounting to a growth of 3 per cent.
Given the relatively weak FY’18 performance, PZ proposed a final dividend of N0.15/share (vs.N0.50 in FY’17).

Profit deflators
Commenting, Caroline Silver, the global Chairperson said: “Whilst the Group has delivered good profit growth in Asia and a creditable result in Europe, macro-conditions in Nigeria have resulted in a sharp decline in Africa profits for the year and hence a disappointing result for the Group as a whole.
“Within Africa, and in particular Nigeria, it is important to note that there has been no structural change in the landscape of the categories in which we operate. We remain proud of our brand portfolios across Personal Care, Home Care, Electricals and Food & Nutrition and of our extensive manufacturing and logistics capability and many of our brands have strengthened their No.1 or No.2 positions during the last year.”
However, she said a sustained lack of liquidity at both consumer and trade level has resulted in a significant contraction in the size of the market, resulting in lower volumes, prices and margins.
“In the absence of an indication as to when liquidity in Nigeria may improve ahead of the February 2019 general elections, we are taking steps to optimise further our overall product portfolio and to reduce our cost base, “ she added.
“Within Asia, our businesses in Australia and Indonesia have made sound progress in the year, setting good foundations for growth in the years to come.
“In Europe, good growth in the Group’s Beauty division has helped to partially offset the more challenging trading conditions faced in the UK Washing and Bathing division”.

Looking ahead
Besides, the chairperson, said: “For all markets, we remain focused on innovation but with a sharpened lens on fewer, bigger, higher margin product launches, which will differentiate further our brands, as well as a reduction in overheads through optimising our operating model.
“The Group’s balance sheet remains strong and we will continue to evaluate growth opportunities utilising the Group’s brand portfolio and distribution capability.
“Whilst we expect another challenging year ahead, the business is well placed to return to growth and consequently the Board has maintained the full year dividend.”
Looking ahead, PZ Cussons said its ongoing initiatives including a review of product costs across all categories, will strengthen its brand portfolio.
“It is expected that macro conditions will remain challenging with general elections in Nigeria and Indonesia falling in the second half of the new financial year,” the company said, adding that it was seeing pressure from volatile exchange rates and commodity costs.

Analysts’ perception
Commenting on the full year result, analysts at CardinalStone said despite the growth recorded in top line on a year-on-year basis, Q4’18 performance came in weaker.
“PZ recorded a decline of 17.9 per cent YoY and 21.9 per cent QoQ respectively to N17.3 billion. The performance is particularly worrisome given that Q4, which is usually the firm’s second strongest quarter, turned out weakest in FY’18.
In Q4’18, production costs declined at a slower pace, by 10.3 per cent YoY. As a result, gross margin weakened by 5.4 ppts to 36.0 per cent in Q4’18 (Q4’17 41.4 per cent).
“FX losses on the company’s foreign currency payables declined by 21.5 per cent YoY to N2.1 billion,” the company added.
“However, on a QoQ basis, FX losses surged by 199.6 per cent QoQ. In contrast to the net finance income of c. N45.0 million recorded in Q4’17, PZ posted a net finance cost of N84.8 million in Q4’18. In the light of the aforementioned, bottom-line growth was pressured in the period under review, declining by 71.7 per cent YoY to N589.7.
“We highlight the pressing need for the company to optimize its product portfolio across the Home and Personal Care segment and the Nutricima (Milk) business to drive top-line growth in the coming financial year, given weak performance in FY’18.
“Also, we note the pressure on production costs (+11.6 per cent YoY), growing at a faster pace than the meagre revenue growth of 3.0 per cent YoY, hence, margins were depressed. An intentional review of product costs with specific focus on packaging is necessary in order to restore gross margin to healthy levels. For FY’19, we expect FX losses to continue to moderate, given our outlook of sustained FX stability.”

Last line
Though high cost of operations have adversely affected the real sector, it is important for the company to continue to manage its cost base tightly to deliver moderate operating margins for growth and profitability.

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