PZ Cussons Nigeria (PZ) is the largest subsidiary of the global PZ Cussons group, accounting for around 40% of international sales. The company has enjoyed tremendous success in Nigeria and is among the largest firms in the fast-moving consumer goods sector. PZ operates in four segments: personal care, home care, food and nutrition, and electrical goods. Additionally, it is a significant player in West Africa, supported by a supply chain and distribution network that enables PZ to launch new products at affordable prices.
PZ has had challenging times recently. In addition to macro headwinds and increased competition, the company has been affected by tight local foreign exchange (FX) rules. Crude palm oil (CPO), which is a major raw material for PZ products, is among a few of the items that the central bank excluded from accessing FX via the official window. PZ Cussons UK, its parent company, has recently acknowledged significant difficulties arising from FX pressures on its biggest market.
In the third quarter of 2016 – PZ’s calendar year ends in May – sales totalled N20bn ($63.1m), a 5.6% year-on-year (y-o-y) decline, while profits before tax (PBT) and after-tax profits declined more significantly, by 51.8% and 41% y-o-y, respectively, to N987m ($3.1m) and N795m ($2.5m). The PBT decline was due to a combination of a gross margin contraction of 281 basis points to 24.3%, a 5.1% y-o-y rise in operating expenses (opex) and a 24.2% y-o-y increase in net interest expense. These more than offset the impact of a 62.7% y-o-y rise in other operating income. Below the PBT line, tax expenses were 83.1% lower than the prior year. However, the y-o-y decline in after-tax profit was exacerbated by a N74m ($234,000) minority interest charge. Management attributed the poor profitability to the increased cost of inputs and settlement terms as a result of FX scarcity. The company stated in November 2015 that it was adopting several strategies to reduce the impact of headwinds, including downsizing products, price increases and entering into supplier agreements with local palm oil producers. These efforts had a visible impact in the third quarter, as sales grew by 27.9% quarter-on-quarter (q-o-q), helped by a seasonal boost from the holiday period in December. PBT rose by 63% q-o-q, while after-tax profit grew faster, up by 165.1% q-o-q due to a 53.1% q-o-q decrease in tax expense.
PZ Cussons UK expects to book a £7m exceptional charge in the last quarter of 2016 due to the FX impact in Nigeria. A further £10m exceptional charge related to the same issue is expected in 2017.
According to PZ Cussons UK, PZ’s home and personal care business continues to perform well despite tough competition. The reverse is the case in electrical goods due to a squeeze on consumers’ discretionary income. The electrical goods segment accounted for 36% of sales in FY 2015/16. To address waning sales in this segment, PZ plans to overhaul its supply chain by providing the market with much cheaper alternatives.
PZ has stated that it was paying as much as 70% more than the official FX rate for US dollars. As such, the company entered into agreements with local palm oil suppliers to serve as buffers. In the long term the firm, through a joint venture with Wilmar International, plans to set up a fully integrated project at an estimated cost of $650m to grow oil palm, and mill and then transport CPO to its refinery. The joint venture has acquired 26,500 ha of land for oil palm plantation in several estates in Cross River State and another 12,800 ha from Obasanjo Farms. The firm is aiming for a total area of 50,000 ha. It has invested $165m in a 1000-tonne refinery in Lagos from which it refines, fractionates and packages CPO into Mamador and Devon King’s Cooking Oil for its food and nutrition business. It will take three to five years for any meaningful impact to be seen on its earnings.
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