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PZ Cussons Challenged by Continuing Problems in Nigeria

Posted: March 27, 2012

PZ Cussons Plc issued an interim management statement covering January 25 to March 26, 2012, featuring an overview of the company’s financial performance and position for the period. PZ Cussons noted that, with the exception of Nigeria, overall trade in all markets has been in line with company expectations. Profitability in Nigeria has been affected by a continuation of economic and social tensions there, a fact that was highlighted at the time of the company’s interim results in January. However, the company’s balance sheet remains strong despite higher levels of working capital, principally due to higher inventories being carried in Nigeria.

In Europe, the company’s beauty division has continued to perform well, with further new product launches during the period across its portfolio of Sanctuary, St. Tropez and Charles Worthington brands. Additionally, the Fudge hair care brand, acquired in January, has performed well post- acquisition and its integration plans are going according to schedule. Performance in Poland and Greece also has been in line with expectations.

In the Asia-Pacific region, the company saw positive momentum in Indonesia, continued with further growth in revenue and profitability during the period. And while trading conditions in Australia remain challenging, measures to address the underperformance of this business are being successfully implemented with operating results improving on a monthly basis. These plans will be further supported by the supply chain optimization project, detailed below.

For Africa, at the time of the interim results in January, PZ Cussons stated it was closely monitoring the economic and social tensions in its largest market of Nigeria, which could impact the company’s year-end, and the two key issues that were adversely affecting performance have continued to date. Social instability in the north of the country has continued, with sales rates in some northern states being affected by local disruption and uncertainty. At the same time, the removal of the fuel duty subsidy in January has led to lower consumer disposable income, higher transportation costs and port disruption, which all have adversely affected sales and costs during the period.

The company does report that construction of its palm oil refinery with Wilmar in Nigeria is on track, with completion due by the end of the calendar year.

As mentioned above, via this statement, PZ Cussons also announced a new supply chain optimization project. As part of the company’s supply chain strategy, and following a number of years of rising raw material costs together with significant ongoing wage inflation in emerging markets, PZ Cussons has been developing programs to ensure its supply chain cost base remains at a competitive level. As a result, a supply chain optimization project is being implemented over the next 12 months that will aim to significantly reduce the overhead footprint of the company’s manufacturing activities.

There are two components to the project. First, in order to move to a variable cost model for its developed market home care businesses, the company announced an intention to close its manufacturing facilities in Australia with supply being outsourced to third parties, and an intention to review and restructure its manufacturing facilities in Poland. Second, it intends to reduce the supply chain overhead at a number of other manufacturing facilities. This includes an intention to close its manufacturing facilities in Ghana, with supply being moved to third parties as well as to the company’s Nigerian facilities, as well as other optimization projects in Africa and Asia. The total cash cost of these initiatives will be approximately £19 million for redundancy and other associated items, with a payback expected within three years. There will be a further non-cash charge of approximately £20 million for asset writedowns. The benefits of this project will begin to be seen in the new financial year through lower supply chain overheads, the mitigation of the impact of further wage inflation and the avoidance of the high capital maintenance cost that would have been associated with any closed or restructured facilities.

PZ Cussons anticipates that the trading environment for the remainder of the current financial year will remain challenging in most markets given continued pressures on consumer spending power, continued high levels of promotional activity in developed markets and high input costs, and the issues specific to Nigeria. Despite these challenges, the company expects positive revenue growth to be achieved in most markets, supported by a high level of new product development. Performance for the balance of the year in all markets excluding Nigeria is expected to be in line with expectations. However, given the importance of Nigeria to the company, the impact of the continuing tensions in the country will be significant, resulting in overall performance being some way below expectations. Looking ahead to the new financial year commencing June 1, the company is expected to return to profitable growth in all markets including Nigeria, supported by the benefits of the supply chain optimization project.