PZ Cussons warns over profit as inflation erodes consumer confidence

Tough competition for its bestselling milk segment has undermined sales, according to manufacturer PZ Cussons Plc, which issued a profit warning after succumbing to the volatile and unpredictable macroeconomic headwinds.

The company behind the imperial leather soap blamed the situation on inflation of the local currency, intense competition from its bestselling powered milk segment as consumer discretionary income remained under pressure.

PZ Cussons and other consumer goods firms in Africa’s most populous nation are grappling with low patronage from consumers as many are living below the poverty line while unemployment rates are rising.

Many are being pushed down the income ladder while over 3 million people lost their jobs in Nigeria last year. This means many Nigerians cannot afford what they used to.

Unemployment rates increased to 18.80 percent in the third quarter of 2017 from 6.40 percent in the last quarter of 2015, according to data from the National Bureau of Statistics (NBS).

While inflation dropped for a 12 consecutive months to tough down at 14.33 percent for the month of February, the figure is behind the central bank’s 6 percent and 9 percent target range.

Indigenous firms like beverage producers and flour millers were able to pass on higher costs to consumers as they increased price of their products.

PZ Cussons has foreign exchange losses of N2.57 billion as at half year ended November 2017 as the company was hard hit by the currency devaluation.

While the Nigerian consumer goods giant posted a profit after tax of N589.55 million from a loss of N288.95 billion the previous year, its margins are squeezed.

Earnings before interest and tax margins (EBITA) margins declined to 30 percent in the period under review from 34.44 percent the previous year. Gross profit margins fell to 9.42 percent in the period under review from 13.30 percent the previous year.

The parent company mentioned that intense competition is resulting in lower prices and margins, but “noticeably in the milk category, according to analysts at Cordros Research.

“Overall, for us, we should mention that PZN’s gross (24%) and EBIT (3%) margins are currently below their 2013-2016 averages (c.27% and 8% respectively), and, while we see little downside pressure from current levels, we also do not expect them to return to historical levels soon,” said analysts at Cordros Capital.

There could be light at the end of the tunnel for PZ Cussons as the parent company has imitated remedial actions to reassessment of the structure of its operating model in Nigeria in order to reduce overheads, review of product costs with a focus on areas such as packaging reduction.

The company’s share price has gained 11.43 since the start of the year, valuing it at N91.32 billion.

BALA AUGIE