PZ Cussons: Rebuilding profit on new strength in sales   

PZ Cussons Plc has renewed the strength of its sales force that could see the biggest improvement in turnover in years after two years of drop. The first half of the company’s current financial year ended November 2020 saw the first sales revenue improvement in three years.

With the upturn in turnover in the second quarter, the consumer goods manufacturing and marketing company has rebounded from a loss of N212 million in the first quarter and posted a profit of N821 million at the end of November 2020. This had raised hopes for the current financial year running up to May 2021 after the company ended the preceding financial year with a loss of almost N7 billion.

There is however a major hurdle to contend with on the path of profitability this financial year. It is a foreign exchange loss of N2.8 billion that consumed the entire operating profit at the end of the second quarter. This is a high jump from just N50 million in the same period in the preceding financial year.

Rising exchange loss is happening for the third year running and is therefore a major factor with the potential of changing the course of the profitable operations recorded so far.

An exceptional growth in other income in the year accounted for the profit figure the company posted at the end of November. The good news is that the company has shifted from an operating loss of N1.9 billion to operating profit of almost N2 billion over the review period.

Two positive developments that produced the outcome are first, the change of direction from a two-year drop in sales to a year-on-year improvement. The second is cost saving from input cost, which declined in the second quarter. At N27 billion at the end of the second quarter, cost of sales declined by 3.3 percent.

Pushing up sales revenue and pushing down cost of sales were the key strategy that PZ Cussons engaged to drive a turnaround in the second quarter. With these changes, the company’s management is showing some progress in addressing the constraints that affected profit capacity over the preceding three years.

Rising cost of sales is the main cause of the loss the company incurred in the preceding financial year. Increase in input cost had caused a drop of as much as one-half in gross profit.

Management has succeeded in reversing the move in the 2021 financial year with a decline in input cost and a resulting leap of 75 percent in gross profit at the end of the company’s half year trading last November.

The proportion of turnover claimed by cost of sales has declined from 87 percent at the end of the preceding financial year to less than 73 percent at the end of the second quarter. The resulting strong improvement in gross profit margin is one of the major favourable developments in the company’s earnings story so far in its current financial year.

Another challenge on the side of costs is rapidly increasing administrative expenses. Administrative cost grew by 34 percent year-on-year to N3.6 billion at the end of the second quarter. This was however moderated by a slight decrease in selling and distribution cost.

The gain in gross profit saw the company through to the reversing of operating loss to operating profit. From an operating loss of N1.5 billion in the same period in the last financial year, PZ Cussons built an operating profit of roughly N2 billion at the end of the second quarter in November 2020.

The apparent windfall from other income reinforced the upturn in operating profit. Other income multiplied from less than N88 million to N1.8 billion over the review period. Also, finance cost dropped by 80 percent over the period, which enabled the company to shift from a net finance cost to a net finance income status at the end of the period.

The combination of improvement in earnings and cost savings helped the company to contain the huge foreign exchange loss and yet delivered a reasonable profit at the end of the second quarter. The favourable outcome reflects progress towards rebalancing of the company’s cost-income structure that had lacked adequate room for profit over the past three years.

Costs are moderating generally for PZ Cussons as sales revenue is improving. The cost of generating a naira of sales revenue has declined. Prospects are good for boosting profit performance in the company’s second half.

PZ Cussons closed the second quarter operations in November 2020 with sales revenue of N37.4 billion, which is an increase of 10 percent year-on-year. The company lost sales revenue in the preceding two years and is therefore seeing the first improvement in turnover in three years in the current financial year.

PZ Cussons produces and sells a wide range of consumer products and home appliances. These include detergent, soap, cosmetics, refrigerators, air conditioners among others.

The company closed the second quarter operations with an after tax profit of N821 million, which is a pull back from a loss of N1.6 billion in the same period in the 2020 financial year.