Hello, and welcome to today's PZ Cussons trading update. My name is Bailey, and I'll be your moderator for today's call. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. If you would like to ask a question, please press Star, followed by one on your telephone keypad. I would now like to pass the conference over to our host, Jonathan Myers, CEO. Jonathan, please go ahead.
Thank you, Bailey. Good morning, everyone. Thanks for joining the call. Following the release of our Q4 trading statement earlier this morning, Sarah and I will provide some highlights on recent trading at PZ Cussons and an update on the significant recent movements in the Nigeria foreign exchange regime, before we then hand over to you for any questions you may have. We've had a good end to the year, with 6.7% like-for-like revenue growth in Q4. While there have been movements within the business segments throughout the year, at an overall group level, trading has been very consistent at around 6% growth.
We've seen revenue growth across each of our three regions in our fourth quarter, with Europe and the Americas region not only sustaining its Q3 return to revenue growth, but doing so with what we expect to be an improved operating margin versus the first half and back in line with last year. As such, while we're still closing out the year-end process, we expect to deliver adjusted PBT of at least GBP 70 million, a little ahead of consensus. Sustained momentum on the top line and anticipated delivery in line with expectations on the bottom line. We've also continued to make good strategic progress, too. We're pleased with the performance of Childs Farm, which we acquired just over a year ago. The brand delivers 12% revenue growth in FY 2023, driven by distribution and share gains in the U.K. and momentum in other international markets.
I know Sarah and the team are looking forward to providing many of you with a more in-depth update on progress of the Childs Farm brand at our capital markets event next week. We've also continued to deliver on our promise of driving growth in and beyond the core by expanding into new category adjacencies and geographies. Building on the launch of Morning Fresh into the Australian auto dishwash category that we announced at our Q3 trading update, we are currently launching Original Source into the Spanish market. In fact, I had the chance to see the launch in person last week on a visit to stores in Barcelona, including the initial launch activity, ranging from posters around the city and online influencer engagement, to unsuspecting metro commuters being confronted with bathrobe-clad Original Source ambassadors sampling the highly distinctive product in busy stations.
I will have more to say on this and our broader performance at our prelims in September. I'll hand over to Sarah to walk you through some of the impacts of the recent movements in Nigerian FX rates.
Thanks, Jonathan. Good morning, everyone. I'd like to do three things. Firstly, remind everyone of the Nigeria FX regime. Secondly, give a sense of the impact of these changes. Thirdly, to underline the fact that we see these once-in-a-generation changes as positive for Nigeria and positive for PZ Cussons. These policy changes came earlier than we and others had expected, the move brings clarity to a situation where change was seen as inevitable and should, in the long run, lead to greater economic and trading stability in Nigeria that we're well-placed to capitalize on. By way of context, access to foreign exchange through official channels in Nigeria has historically been challenging, with scarcity of foreign currency fueling demand in the informal markets. This has resulted in a wide dislocation between the official and the unofficial rates.
As you'll be aware, a new government was sworn in at the end of May, following the elections in February. As part of President Tinubu's inauguration speech, he indicated his intention to implement fiscal reforms, focusing first on the removal of the fuel subsidy, which was duly removed on the 1st of June, and then the liberalization of the FX market, and correspondingly, the potential alignment between formal and informal market pricing. On Wednesday, the 14th of June, the Central Bank of Nigeria announced to FX market participants that they were now allowed to make a market at a free floating rate between buyers and sellers. Previously, the restriction had been that banks were permitted to offer a price, but only at the official CBN rate.
As of today, the FX market is naturally in a price discovery phase with low levels of trading, and more liquidity will be required to bring stability to the underlying exchange rate. The NAFEX rate, the official rate, and so the accounting basis upon which we translate our Nigerian income statement, has ranged between around NGN 630- NGN 750 since the CBN announcement, compared to around NGN 460- NGN 470 before the announcement. The midpoint of this new range represents a devaluation of approximately one-third. We see the financial impact of PZ Cussons as falling into three parts, and we've provided some sensitivities in the RNS this morning to help with your modeling. Given the significant volatility that we're still seeing, it's impossible to predict precisely where the rate will settle.
The first impact is the more mechanical translational impact, which is essentially the reporting of our local Naira earnings into sterling. A 10% change in the U.S. dollar to Naira rate equates to around a GBP 0.005 adverse impact on EPS, or around 5%. The impact to EPS is relatively lower than operating profit, given our minority interest in Nigeria and the relatively higher tax charge. There is similarly an impact on the translation of our cash balance. Given the historic challenges in repatriating cash, we have a cash balance in Nigeria equivalent to around GBP 200 million. Each 10% movement in the Naira versus the balance sheet rate as at the 31st of May, reduces this balance, as reported in sterling, by some GBP 20 million.
We welcome the recent reforms, which many believe could herald better future U.S. dollar liquidity in Nigeria, which should in turn ease the repatriation of cash by multinationals. Secondly, the transactional impact that our teams on the ground will experience. This relates to the higher cost associated with buying certain raw materials whose price is typically denominated in U.S. dollars. Now, the impact here is more nuanced, as the rate at which we have been sourcing U.S. dollars has been higher than the official NAFEX rate. It's been a blend of U.S. dollar exports to our market in Ghana, some local commercial bank liquidity and shareholder loans. Clearly, we will be looking to offset this to the fullest extent possible through pricing, and we have a strong track record here, having successfully done so for the last couple of years.
We will be mindful of both competitive dynamics at play and the fact that Nigerian consumers have for some time now been facing double-digit inflation. Finally, the devaluation of the Naira will also impact the translation of U.S. dollar-denominated liabilities of our Nigeria business, which will be recorded within statutory profit or reserves in the group's financial statements. That summarizes the near-term financial impacts. I should stress that although we have made reference to FY 2023 numbers to demonstrate the sensitivities, we fully expect this to be treated as a post-balance sheet event and do not expect FY 2023 numbers to be impacted. We'll give further guidance as appropriate at our prelims and Q1 results announcement in September. We'll report the impact formally for the first time in our FY 2024 interim results in February of next year.
As I said earlier, we absolutely see these reforms as positive for the country and therefore also for PZ Cussons. It's very early days and we're in the hygiene, baby, and beauty business, not in the business of FX forecasting. We might infer by the strength of the local Nigerian stock market, currently at a 15-year high, that the reforms have been well received. The return of FX liquidity would mean we would be better able to repatriate cash from Nigeria, and that's highly positive, freeing us to reduce gross debt at a group level and use the surplus cash to invest in M&A. You'll appreciate that there is only so much we can share regarding the outlook for FX rates in Nigeria, but we'd be happy to take questions.
We'd request that you keep questions focused primarily on Nigeria and FX, as we will only be ready to present all the details behind our full year performance with our formal results presentation in September. Operator, over to you.
Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, please press star followed by one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. Please do ensure that you are unmuted locally. Our first question today comes from the line of Damian McNeela from Numis. Please go ahead, Damian. Your line is now open.
Hi, morning, everybody. Thanks for taking the question.
Morning.
Morning, Sarah. Just to be clear, the sensitivity that you've provided is explicitly the mechanical impact of an FX move. I guess the question is: Should we be taking further consideration for an impact on the Nigerian consumer? 'Cause obviously, as you mentioned, they're already seeing double-digit inflation. They're going to be enduring the removal of the fuel subsidy, which will be clearly putting pressure on disposable incomes, and then we're gonna be seeing further price increases coming through from the likes of yourselves. I mean, should we be expecting a deterioration in the consumer environment as on top of the sort of the explicit FX impact that you've highlighted?
Damian, it's a good question, and you'll appreciate it's very early days. Let me point you to a couple of things. First of all, absolutely, the devaluation relates only to the mathematical mechanics of the translation of our local results. The Nigerian consumer has for many decades, and I'm sure for many decades to come, proven themselves to be highly resilient, and we have built strong brands locally. We considered, if you like, the best hedge and the best way to protect our business going forward in Nigeria, was to strengthen our local team, to build our brands, and to streamline our operations.
We've been seeing over the course of the last 12-18 months, a steadier depreciation in the Naira, necessitating a number of actions over the past 18 months, be that straight pricing, be that product mix optimization. All of which underpinned by an investment behind our brand, so that our consumers are still getting good value, and also a streamlining of our cost base in our local business. You should consider us to continue with all of those actions. We remain healthily paranoid. The removal of the fuel subsidy, for example, you know, saw some queues at petrol and diesel stations for probably only 24-48 hours, by which point things then returned to a new normal.
The Nigerian consumer is very resilient and very agile, and we will be doing our best to make sure our brands keep serving their needs.
Yeah. Actually, Damian, if I just step in. Almost conversely, while working through whatever cost opportunities we have to remove things that the consumer doesn't value or notice, or to continue the strong track record of pricing executions, we see it as a competitive opportunity, right? There may be a chance for us to really get out there and serve consumers better with much-loved brands, while others may be timid. We really want to make sure that actually we see this as a way of winning in the Nigerian market. Exactly as Sarah said, the sticker shock of week one of the fuel subsidy, by week three, it's not that it's completely gone away, but the queues at the petrol station certainly have.
Okay, that's very clear. Perhaps maybe just one more on price increases, or how much stock you have in country, and how many weeks can you last before those stocks have run down and price increases become inevitable?
Actually, we have relatively low stocks on the ground in Nigeria.
Okay.
One of the reasons for that being, we can typically source some of our raw materials only one to three months out. Actually, we're pretty agile in terms of stock on hand. I would say that one of the things we're also exploring is whether we can source more raw materials locally as well as importing. Price increases, we're continuing to monitor it on a weekly and monthly basis. Actually, if you run the math as we've done, the level of price increase assumed to maintain our margins in local currency terms over the next three to six months, you shouldn't assume needs to be any higher than it's been over the past 12 - 18. You know, the team are working hard.
As I say, we're mindful of the consumer, confident in the strength of our brands, and we think we've got good operational and commercial agility on the ground with our new teams, who are fully committed to the cause.
Okay, thank you. Just to be clear, that margin that you're talking about is the cash margin, not the percentage margin?
A little bit of both.
Bit of both, right.
We've seen, as we reported in the release this morning, an improvement in our margins from actually a loss-making position three years ago, to an operating margin north of 10%. We're confident in our ability to keep taking pricing to protect margins in Nigeria.
Okay. Thank you, Sarah. I will hand the mic over.
Thank you. The next question today comes from the line of Matthew Webb from Investec. Please go ahead, Matthew, your line is now open.
Thanks very much. Morning, everyone. A couple of questions, please. Firstly, just on the surplus cash that you have in Nigeria, I mean, you've talked about now being able to access that and potentially use it to pay down gross debt elsewhere, use for M&A, et cetera. I mean, how quickly can that process start? I mean, presumably the whole situation is still rather in flux for now. I mean, is this something that, you know, that you're actively looking at already, or is this something more for the medium term? That's the first question. Then the second question. Obviously, this devaluation was, we've all been able to see this coming for a long time, so it's not a huge surprise.
You know, nonetheless, obviously it is a bit of a setback to your overall group financial performance. Are there other things you can do elsewhere in the group, you know, to try and offset this? I'm guessing from, you know, your previous record, you're probably looking pretty hard at that. Is there anything you'd point to in terms of sort of possible mitigation in the broader group? Thank you.
Thanks, Matthew. Let me take both of those, and maybe then Jonathan can complement a little bit on the second question as well. How quickly could we be repatriating cash? The answer is right now. There is a market, liquidity is low, and pricing is high. We have our treasury teams engaging daily with local banks. We're waiting for the market to settle a little bit, so we are asking our teams on the ground to slightly moderate their level of volume growth, because we don't want to build up more U.S. dollar liabilities before we can settle those, if you like. The team are focused on moderating volume and driving price. We could be in the market today to the tune of, you know, $2 million, $3 million, $5 million of U.S. dollar purchases on a daily basis.
We are waiting over the coming days and weeks for it to settle a little bit. Our local banking partners on the ground, whilst unable to predict when it will settle, are looking at Q3 of this current calendar year as being the point at which that market will have settled to the degree it would be sensible for us to be buying USD in a more considerable quantum. If that gives a little bit of color, Matthew. We're looking, but we're not panicking, and we're not making any knee-jerk reaction to buy USD at an economic rate that is higher than we will ultimately need. In terms of number two, it ultimately wasn't a surprise. The speed of the reforms were a surprise. We talk.
Let me talk about two things a little bit, is, as we were scenario planning for the, just this eventuality being maybe three, six, nine months away, we explored some options to hedge our position. Now, it's not typical to hedge translational exposures, even in developed markets, because typically the cost of those instruments is prohibitive, and of course, hedging is just delaying an inevitable cost impact, not eliminating it. It's even more difficult in a restricted FX regime where those instruments aren't available. Our best hedge to protect ourselves and our consumers in the event now of this devaluation, was the building of our brands, the taking price, the strengthening of the team, and the streamlining of the operations. If you like, the self-help that we've been engaging in Nigeria for the past two years.
We are three weeks into our FY 2024 financial year, there are still various uncertainties in terms of the Nigerian outlook, but also more broadly. Matthew, you wouldn't expect us to be guiding for FY 2024 until our prelims in September, and we will do so then. There are probably a few things to think about in terms of the macro outlook. A coming off of freight costs and commodities more broadly. For the first time in three years, we see a slight easing in terms of our cost inflation headwinds. Now, that is set against, particularly in the U.K., a consumer still feeling the squeeze from the cost of living crisis. We are making sure our brands and our pricing is agile for consumers with varying levels of disposable income.
We see a tailwind potentially from commodity and freight inflation. U.K. cost of living remains a slight concern, and we are determined to keep investing in our brands and in our strategic capabilities for the long term good of the business. You can imagine that we will be pulling every possible lever to deliver an optimal profit performance in FY 2024, without starving the business of the investment that it so richly needs and deserves.
If I just add to that, beyond the cost dynamics that Sarah referred to there, as we're seeing some easing and there's still a chance for us to go again on identifying opportunities in our cost base that we can translate into fuel for growth. It's about being really committed to some of the big strategic choices that we have made and continuing to deliver on those in FY 2024. The first is really making sure that we are strengthening our core, that we're sufficient to win in our core, particularly our higher margin regions, and that's most notably Europe and Americas. We're determined to get Europe and Americas back to sustainable, profitable revenue growth in FY 2024, after some of the ups and downs that we saw in FY 2023, particularly as we went from H1 into H2.
I'd probably throw in there as well, a determination to be competitive in our other, more profitable region of Asia Pacific, in particular Indonesia, where Cussons Baby has done a good job of protecting its position, but we think we can get even more competitive and have an opportunity to do so. All of that would fall into that remit of making sure we're strengthening our core. Actually, it's also accelerating, going beyond our core. It's not just the Original Source in Spain that we mentioned. It's not just being in it for the long term in the launch of Auto in Australia on the market-leading Morning Fresh manual washing up liquid brand. It's also pushing out some of our other higher margin brands so that at a gross margin level, they become more accretive for us.
Most notably there, that will be Childs Farm on both sides of the Atlantic, and we'll give you more progress on that when we talk in September.
Terrific. Thank you both very much.
Thank you. As a reminder, if you would like to ask a question, please press star followed by one on your telephone keypad. There are no additional questions waiting at this time, I'd like to pass the conference back over to Jonathan Myers for any closing remarks.
Thanks, Bailey. In summary, we've had a strong end to the year, and we expect to make further strategic progress next year, just as I've outlined, continuing to transform the business and building brands for the long term. As Sarah has explained, the Naira devaluation is likely to have a one-off impact to our near-term reported financial performance, we believe these reforms are positive for the medium to long-term prospects for our Nigerian business. We hope the call has been helpful, please do get in touch with Simon, who will be happy to help on any further questions you might have. We're looking forward to seeing some of you at next week's Childs Farm Investor event, up to updating all of you on our results and further progress at our prelims in September. Thank you very much, have a good day.
This concludes today's conference call. Thank you all for your participation. You may now disconnect your line.