PZ Cussons plc: Will plans to streamline operations change its fortune
Their products once bestride the consumer market space like a colossus as consumers jostle to have a bite of their personal home care products. Sadly, things have changed for the consumer goods-giant as cash strapped consumers now go for cheaper products thereby putting sales of leading brands under pressure. Also, the country’s tough operating environment; decrepit infrastructures, porous borders, double-digit inflation and sluggish economic recovery, have further compounded sector players’ woes as they struggle to break-even.
The company has in the last 120 years of doing business in the country been able to establish its brands to meet the basic daily need of millions Nigerian consumer market. It has strategically developed product lines that include soaps, detergents, toiletries, feminine hygiene products, pharmaceuticals, cosmetics, packaging materials, refrigerators, freezers, and air conditioners to appeal to the quality and price requirement of households.
Brands such as Venus, Imperial Leather, Joy luxury soaps, Carex, Mamador Oil, Yo, Nunu, Bliss, Coast, Minerva, Zip detergent, Radiant detergent, Morning Fresh wash, , and the range of Haier Thermocool electrical (refrigerators, freezers, air conditioners, fans, air coolers, washing machines, water dispensers, water heaters, gas cookers and microwaves, among others) show a strong market presence of PZ in Nigeria.
Nigeria’s huge population estimated to be around 180 million coupled with its rapid urbanization rate and the rising spate of the youthful population, eager to try new products and brands, provides a compelling reason for consumer-facing companies and retailers to jostle market in the country. According to World Bank data, Nigeria, South Africa and Egypt — contributes above 50percent of Africa’s total consumer spending.
Financial performance mirrors industry woes
In its full year 2018/19 financial result, the company’s revenue tanked 7.7percent year-on-year to N74.3bn.
This was dragged by the decline in revenue from the more dominant Home & Personal Care (HPC) segment which fell by 19.3 percent to N47.2bn while revenue from the lowly weighted Electrical segment increased by 22.6percent year -on-year to N27.1bn.
The decline in the HPC segment was due to lower sales volume which has been exacerbated by low consumer disposable incomes and growing competition from cheaper imported or unlisted brands.
Despite lower volume sales, Cost of Sales rose by 2.0percent to N57.7bn amid inflationary pressures.
Consequently, Gross Profit declined sharply by 30percent to N17.1bn and Gross margin dipped, down 7.4ppts year—onyear to 23percent.
Looking at the Operating Cost numbers, PZ’S operational challenges came to fore as the dominant Selling & Distribution cost grew 11.5percent to N10.7bn while the less dominant Administrative Expenses declined significantly by 37.2percent year-on-year to N4.1bn. Thus, Operating Profit plunged by 72percent year-onyear to N2.3bn.
Finance cost declined significantly by 63.5percent year-onyear to N304.0mn while Finance Income also advanced sharply by 63.3percent year-on-year to N295.0mm. Also, PZ reported a significant reduction in FX loss (down 91percent year-on-year to N444.3mn) amid stability in the FX market.
In its half year result for the period ended 30th November 2019 revenue slumped 3.2 percent to N33.94bn from N35.05bn in same period in 2018. Its cost of sales surged 7.4percent to 28.15bn from N26.22bn, leaving gross profit at a meagre N5.79bn from N8.82bn in 2019.
Selling and distribution cost dropped 9.6percent to N4.62bn from N5.11bn. Administrative expenses increased 34.1percent to N2.66bn from N1.98bn in half year 2019. Leaving the cosmetics and soap maker in a battered state with a loss of N1.58bn as compared with a profit of N1.22bn in same period last year.
According to the parent company of PZ Cussons Nigeria, PZ Cussons in United Kingdom which owns a 73.27percent stake in the group in Nigeria, the fortune of the company was impacted by a weak consumer spending in its major markets.
New appointment new turn around?
The consumer giant announced some new changes to its board. Most recent is the appointment of Zuber Momoniat, a South African as the new chief finance officer with effective from 1st April 2020.
Momoniat is a certified chartered accountant with over 17 years of experience in account reconciliation, budgeting, internal controls, forecasting, and financial planning.
The new appointment follows the resignation of Pedro Barreto, its chief finance officer with effective from 31 March.
Also it announced the appointment of Panagiotis Katsis as its new chief executive officer from July 1st following the retirement of its current helmsman, Christos Giannopoulos.
Contrary to media speculation that the company that has done business in Nigeria for 120years is planning to shut down following declining sales, the management of the company refuted making such plans.
Surprising, last week announced the proposed sale of its Nigerian dairy business, Nutricima, to Frieslandcampina WAMCO Nigeria Plc, an affiliate of Royal Frieslandcampina in the Netherlands.
PZ Nigeria in a statement on Monday said the proposed sale is in line with the group’s focus scale and accelerate strategy in order to streamline its focus on core personal care and beauty products.
Nutricima’s major product portfolio includes milk and yogurt-based drinks such as Nunu, Yo, and Olympic.
With this announcement, it brings to an end PZ Cussons foray into the diary market entered in 2005 through a joint venture with
Glanbia Plc with an immediate goal to supply evaporated milk and milk powder in Nigeria.
This joint venture was however short-lived as PZ Cussons in 3015 bought Glanbia’s 50 percent stake in Nutricima, for £21 million in cash, giving PZ Cussons full ownership and control.
Even though the partnership achieved few results such as the construction of a second facility for the manufacture of UHT products which was opened in 2009, Nutricima has also developed market leading consumer brands including Nunu, Olympic and Yo.
Sadly, this has not impacted positively to bottomline of PZ Cussons. It is however not surprising that the consumer goods company which recently celebrated its 120years in Nigeria decided to spinoff the unprofitable business due to intense competition in the milk industry.
In its profit warning issued in March 2018, the makers of Joy soap and morning fresh detergent noted that significant cost inflation in Nigeria kept discretionary income under pressure subduing milk sales in the country, hitting prices and margins.
“As a result the usual peak season has not occurred to the expected level with inventory levels in the trade remaining very high leading to intense competition, most noticeable in the milk category, which in return is resulting in lower volumes, prices and margins” the company said.
According to analysts, it expects operational challenges to intensify as an upward review of the minimum wage is likely to be counter-balanced by the upward review in VAT. This will be exacerbated if the currently porous borders are not effectively tightened to control the influx of cheaper smuggled HPC products, making it difficult to pass on the effect of the VAT to consumers as it will risk losing more market share.
Also, the likely increase in electricity tariffs by July will further add pressures on PZ’S operational cost while concerns around FX devaluation later this year might hamper the recent recovery in the White Goods segment.
The situation at the Apapa port – a major route for PZ’S raw material import is another source of pressure to be watched. Looking at all the above factors, the only positive that lies ahead for PZ, like all other players in the consumer goods sector, is the implementation of the new minimum wage which may be pressured by the proposed increases in levies on consumers.
“Accordingly there would be further pressure on PZ’S earnings, but we see it as a good stock to buy for dividend seeking investors as it has historically not missed dividend payment and its low/nil debt exposure also supports future dividend payment,” analyst said in a note.