Annual Report (ESEF) • Sep 29, 2023
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BUILDING BRANDS FOR LIFE. TODAY AND FOR FUTURE GENERATIONS. PZ Cussons plc / Annual Report and Accounts 2023 FOR EVERYONE, FOR LIFE, FOR GOOD. Performance Highlights Revenue £656.3m LFL revenue growth 1 6.1% 2 11.2% 9.1% 1 £5.7m 6.40p 11.23p 8.70p See Key Performance Indicators / Page 49 2023 2022 2021 2023 2022 2021 9.1% 2023 2022 2021 11.23p 2023 2022 2021 6.1% 2023 2022 2021 2023 2022 2021 8.70p 2023 2022 2021 11.2% 2023 2022 2021 6.40p Overview Contents Our strategy in action How we report Build Brands 19 Serve Consumers 20 Reduce Complexity 21 Develop People 22 Grow Sustainably 23 Governance 01 Strategic Report Governance Financial Statements DEAR SHAREHOLDER, A Word from our Chair 02 Overvi ew PZ Cussons and what attracted you to the role? of the business? Q: What do you want to achieve over in your role? A: A: A: A: A: 03 Strategic Report Governance Financial Statements FY23 REVENUE SPLIT WE ARE A BRANDED CONSUMER GOODS BUSINESS. PZ Cussons at a Glance MUST WIN BRANDS (48% OF FY23 REVENUE) 1 • • • • • PORTFOLIO BRANDS (52% OF FY23 REVENUE) 1 • • • • £656.3m nearly 140 yrs 6.1% 3 2,600+ 4 By Category 17% 1% 51% 31% 19% 29% 13% 39% 04 Overvi ew PZ CUSSONS ALLOWS INVESTORS TO CAPITALISE ON ATTRACTIVE MARKET TRENDS IN THE CONSUMER GOODS SECTOR, PARTICULARLY IN THE EMERGING MARKETS OF ASIA AND AFRICA. Our Investment Story the business management team 400m 12m annually Sources: 12% 1 05 Strategic Report Governance Financial Statements The Year in Review New award-winning campaigns for iconic brands Entering new markets Responding to cost-of-living pressures New product development Executive Leadership Team JUN 2022 APR–JUL 2023 JUN 2022 APR 2023 JUN 2023 page 19 page 22 page 19 page 53 page 20 06 Overvi ew People transformation Better for all credit facility Childs Farm SlumberTime PZ Cussons Board of the Board of Directors Future ready OCT 2022 NOV 2022 FEB 2023 FY23 NOV 2022 page 25 page 19 page 24 page 187 Serve Consumers page 03 07 Strategic Report Governance Financial Statements STRATEGIC REPORT 08 OUR VALUES. BOLD STRIVING ENERGETIC TOGETHER 09 +12% +47% 96% Chief Executive’s Review RETURNING THE GROUP TO SUSTAINABLE GROWTH. We are now approaching three years into our strategy and we have continued to make good progress. We have sought to regain our focus on the consumer while re-investing in our brands and building capabilities.” Jonathan Myers 10 Overvi ew 1 in and loyalty £300m 2 Longer term, we continue to build towards a higher growth, higher margin, simpler and more sustainable business.” Jonathan Myers 11 Strategic Report Governance Financial Statements • • • • 3 Chief Executive’s Review continued 12 Overview Jonathan Myers On behalf of the Board, I would like to thank the PZ Cussons teams worldwide for their continued energy and tenacity in these challenging conditions and our suppliers and customers for their valued partnership.” Jonathan Myers 13 Strategic Report Governance Financial Statements Business Model WE BUILD BRANDS WHICH ENABLES US TO CREATE VALUE FOR ALL OUR STAKEHOLDERS. OUR COMPETITIVE ADVANTAGE Our people WHAT WE DO Advertising and marketing distribution 14 Overview THE VALUE WE CREATE innovation 15 Strategic Report Governance Financial Statements Our Markets WE ARE WELL-POSITIONED TO DRIVE GROWTH THROUGH OUR MULTI-LOCAL APPROACH, WITH OUR LOCALLY-LOVED BRANDS. LOCALLY-LOVED BRANDS OUR PRIORITY MARKETS ARE: Indonesia • • • • • • • KEY SUB-CATEGORIESCATEGORIES MUST WIN BRANDS Hygiene Baby Beauty 16 Overview MACRO TRENDS AFFECTING OUR BUSINESS DYNAMIC MARKET SIZE FOCUS ON BABY PERSONAL CARE DEVELOPING MARKETS DRIVEN BY VOLUME GROWTH • • DEVELOPED MARKETS DRIVEN BY PREMIUMISATION • • Macro-economic environment Our response 1 2 Channel disruption Technology Sustainability Developing markets GLOBAL CONSUMER TRENDS ‘PLAY AND EXPLORATION’ ‘PROTECT AND NURTURE’ ‘SUSTAINABLE’ £3.5bn 17m 17 Strategic Report Governance Financial Statements Our Strategy WE BUILD BRANDS TO SERVE CONSUMERS BETTER, WITH HYGIENE, BABY AND BEAUTY AT OUR CORE. OUR STRATEGY CAN THEREFORE BE SUMMARISED ACROSS FIVE FOCUS AREAS: STRATEGY OVERVIEW Focus on Must Win Brands WHERE TO PLAY HOW TO WIN BUILD BRANDS SERVE CONSUMERS REDUCE COMPLEXITY DEVELOP PEOPLE GROW SUSTAINABLY 4 PRIORITY MARKETS 18 Overview BUILD BRANDS INVESTING IN OUR BRANDS TO DRIVE AWARENESS AND CONSUMER LOYALTY 19 Strategic Report Governance Financial Statements Our Strategy continued SERVE CONSUMERS Winning in traditional trade in Nigeria and online • • Dachshund Through the Snow WINNING WHERE THE SHOPPER SHOPS 20 Overview to Manchester REDUCE COMPLEXITY • • • 1,008 2 17 SIMPLIFYING OUR OPERATIONS AND PORTFOLIO TO IMPROVE RETURNS AND REDUCE RISK £2–3million 21 Strategic Report Governance Financial Statements Our Strategy continued DEVELOP PEOPLE the Africa Consumer Business and is How would you sum up your role? NINGCY: OGHALE: 100 days in the role? NINGCY: OGHALE: What excites you most about your new role? NINGCY: OGHALE: INVESTING IN OUR TEAMS TO STRENGTHEN CAPABILITIES businesses. 22 Overview NEW BOTTLE REFILLS LAUNCH Format uses PACK MIX MORNING FRESH PLASTIC GRAMS PER KG Auto Launch New Cap 1 2 GROW SUSTAINABLY Our Group Sustainability Goals. 33% virgin plastic reduction by 2030 100% recyclable, reusable or compostable packaging by 2030 100% paper by 2025 ACTING IN THE RIGHT WAY FOR LONG-TERM GROWTH 23 Strategic Report Governance Financial Statements People and Culture PRIORITISING PEOPLE AT PZ CUSSONS. Early careers: Leaders at all levels: We have a powerful PZ Cussons purpose, ‘For everyone, for life, for good’, championing the wellbeing of our consumers: people, families and communities everywhere.” 24 Overvi ew Events: Global Engagement Survey 2023 PZ Cussons 88% PZ Cussons as a great 85% 25 Strategic Report Governance Financial Statements Sustainability IT’S IN THE DNA OF PZ CUSSONS TO BE A FORCE FOR POSITIVE CHANGE. Board ( Decision, collaboration Delivery page 28 page 30 page 40 26 Overview OUR BETTER FOR ALL FRAMEWORK. We continue to use our Environmental and Social Impact framework Better For All to steer our progress. Our governance system forms an important part of Cussons to work collectively towards our ESG targets.” 27 Strategic Report Governance Financial Statements Sustainability continued FOR EVERYONE. 2022–23 0 0 0 0 0 0 0 1 13 3 2 1 2 0.02 3 1.15 28 Aligning to the SDGs 29 Sustainability continued FOR LIFE. 88.4% 96% 30 1 2 3 2 2 22% of our emissions Scope 3 calculated NA 31 4 UK Total Scope 1 4 2 642 Scope 2 4 2 676 2 0 0 0 Total Scopes 1 & 2 4 2 2 642 2 0.31 5.50 4.52 2 5 0 0 0 Scope 3 6 205 NA NA NA 2 Sustainability continued For Life continued 32 UK Total Scope 1 2 642 Scope 2 2 676 2 0 0 0 Total Scopes 1 & 2 2 2 642 2 0.31 8.61 5.96 2 0 0 0 Scope 3 205 NA NA NA Cat 15 Investments 1 33 Sustainability continued For Life continued 3 34 TASKFORCE ON CLIMATE-RELATED FINANCIAL DISCLOSURES (TCFD). 35 Sustainability continued For Life continued Taskforce on Climate-related Financial Disclosures (TCFD) continued Strategy • • • 2 36 PHYSICAL RISKS MT LT and decreased revenue as a L L LT L L L L L ST MT LT 37 Sustainability continued For Life continued TRANSITION RISKS ST MT L L M L L L ST MT See scope 1 above. See scope 1 above. L See scope 1 above. L L M ST MT L L L L Cost of energy ST MT Net Zero L L L To minimise the risk of increased cost L L L 38 OPPORTUNITY ST MT LT L L L L L L L M 39 Sustainability continued FOR GOOD • • • • CODE OF ETHICAL CONDUCT 40 Animal testing MODERN SLAVERY ACT AND SUPPLIER CODE OF CONDUCT 41 Non-Financial and Sustainability Information Statement A1 Society as appropriate. 42 Overview Section 172(1) Statement CREATING A DIALOGUE WITH OUR STAKEHOLDERS. OUR APPROACH TO DOING BUSINESS IS FOUNDED ON THE PRINCIPLE OF CREATING SUSTAINABLE VALUE FOR ALL OUR STAKEHOLDERS. Section 172(1) factor (a) to (f) Relevant disclosures Page number or website (a) Consequence of any decision in the long-term • • • • • • • • (c) the need to foster the company’s business relationships with suppliers, customers and others • • • (d) the impact of the company’s operations • • • • (e) the desirability of the company maintaining a reputation for high standards of business conduct • • (f) the need to act fairly as between members of the company • • AGM • • 43 Strategic Report Governance Financial Statements Section 172(1) Statement continued WHY WE ENGAGE KEY PRIORITIES HOW THE GROUP ENGAGES BOARD ACTIVITY/ HOW THE BOARD ENGAGES STRATEGIC OBJECTIVE PRIORITIES FOR THE YEAR AHEAD • • • • • • Customer service • • • • Market research • • • • site visits • • • • • • • • • • • • • • • • • • • • • • Customers and Consumers Employees 44 Overview • • • • Not to increase costs • • • • • • • • society • • • • • • • • • Distributors and Suppliers Communities • To understand their investment • • • • • • • • • • • • • • • • • Ad hoc investor events • • • • • • Investors Serve Consumers 45 Strategic Report Governance Financial Statements Section 172(1) Statement continued Investors 46 Overview Investors 47 Strategic Report Governance Financial Statements Investors Section 172(1) Statement continued 48 Overview Key Performance Indicators HOW WE MEASURE OUR PERFORMANCE. PERFORMANCE HIGHLIGHTS Revenue 1 £656.3m 11.23p 2023 2022 2021 LFL revenue growth 2 9.1% 6.1% 2023 2022 2021 2023 2022 2021 2023 2022 2021 LFL revenue growth 6.1% 49 Key Performance Indicators continued PERFORMANCE HIGHLIGHTS CONTINUED 1 2 Indicator of the return on £5.7m 11.2% 8.70p 6.40p 2023 2022 2021 11.2% 2023 2022 2021 2023 2022 2021 2023 2022 2021 50 SUSTAINABILITY HIGHLIGHTS 81% 7.8% £69.9m >90% code of conduct page 24 page 30 page 41 51 Strategic Report Financial and Operating Review GROUP PERFORMANCE OVERVIEW OF GROUP FINANCIAL PERFORMANCE 52 Overview PERFORMANCE BY GEOGRAPHY 205.8 n/a 29.3 14.2% 0.4 0.2% 2 in 190.7 4.4% n/a 27.5 14.4% 29.6 15.5% 3 53 Strategic Report Governance Financial Statements Financial and Operating Review continued 256.3 13.4% n/a 37.2 14.5% 48.3 18.8% 54 Overview Naira 5 Average FX rates revenue GBP 27% 1.00 NGN 35% 536 14% 1.78 11% 7% 1.20 Other 6% – Total 6 100% – – 15.7 Africa revenue • • 55 Strategic Report Governance Financial Statements Financial and Operating Review continued 2023 £m Group 59.7 13.6 73.3 656.3 9.1% 11.2% 0.4 28.9 29.3 205.8 0.2% 14.2% 29.6 27.5 190.7 15.5% 14.4% 48.3 37.2 256.3 18.8% 14.5% 56 Overview 2023 £m 61.8 12.3 74.1 2023 £m 61.8 12.1 7.0 12.3 91.1 1.3 92.4 2023 pence 8.70 2.53 11.23 8.67 2.52 11.19 8.70 2.53 11.23 8.67 2.52 11.19 As at 31 May 2023 £m 127.4 129.0 – 256.4 Current asset investments 0.5 5.7 2023 £m 76.6 69.9 57 Strategic Report Governance Financial Statements Risk Management and Principal Risks HOW WE MANAGE RISK. Board of Directors Oversees the consistent 58 Overview • • • • • reported These risks are then assessed then planned 59 Strategic Report Governance Financial Statements Risk Management and Principal Risks continued 60 Overview 61 Strategic Report Governance Financial Statements Risk Management and Principal Risks continued RISK 1: IT AND INFORMATION SECURITY Trend: • • • • • • • • • • TREND LINK TO STRATEGY 62 Overview RISK 2: TALENT DEVELOPMENT AND RETENTION Trend: • • • • • • • • • 63 Strategic Report Governance Financial Statements Risk Management and Principal Risks continued RISK 3: FINANCIAL CONTROLS (FOREIGN EXCHANGE, TREASURY AND TAX) Trend: • • • • • • TREND LINK TO STRATEGY 64 Overview RISK 4: CONSUMER AND CUSTOMER TRENDS Trend: • • • • • • RISK 5: LEGAL AND REGULATORY COMPLIANCE Trend: • • • • • • • 65 Strategic Report Governance Financial Statements Risk Management and Principal Risks continued RISK 6: BUSINESS TRANSFORMATION Trend: • • focus on our Must Win Brands • the consumer • • • • • • RISK 7: MARKET AND ECONOMIC DISRUPTION, INCLUDING EMERGING MARKETS Trend: • • • • • • TREND LINK TO STRATEGY 66 Overview RISK 8: HEALTH AND SAFETY Trend: • • • • • RISK 9: SUSTAINABILITY AND THE ENVIRONMENT Trend: • • • • • • • • 67 Strategic Report Governance Financial Statements Risk Management and Principal Risks continued RISK 10: SUPPLY CHAIN AND LOGISTICS Trend: • • • • • TREND LINK TO STRATEGY 68 Overview Viability and Going Concern • • • • 69 Strategic Report Governance Financial Statements M&C spend – trends 2. TALENT DEVELOPMENT increase security the environment Risk Management and Principal Risks continued 70 Overview 71 Strategic Report Governance Financial Statements GOVERNANCE 72 OUR ENERGETIC VALUE IN ACTION. OUR BOLD VALUE IN ACTION. WE ARE UP FOR EVERY CHALLENGE • • • WE ENGAGE WITH COURAGE AND AUTHENTICITY • • • 73 Governance A DIVERSE AND EXPERIENCED BOARD. N Other R D E N Chair E A N A N R A N E N R Our Board 74 Overvi ew 2022 the • • 2019 • 2020 2020 • • 2021 • 2021 2016 2021 Directors’ core areas of expertise 5 75 Governance Financial StatementsStrategic Report Our Executive Leadership Team A STRENGTHENED EXECUTIVE LEADERSHIP TEAM. 76 Overvi ew Secretary 77 Governance Financial StatementsStrategic Report Chair’s Introduction to Governance DEAR SHAREHOLDER • • • • 78 Overvi ew 2023 FOCUS AREAS. Chair succession Board evaluation Strategy delivery Audit tender Remuneration policy Nigeria Pages 96 to 101 Pages 104 to 109 Pages 102 to 103 Pages 90 to 95 79 Governance Financial StatementsStrategic Report Board Activity at a Glance Serve Consumers 2022 Strategy day • • • • • • • • Customers/Consumers • Investors • • • Investors • • • Investors • • Investors • Customers • • Investors • • • • 80 Overvi ew • Investors • • Investors • • Investors • Investors • • Community Budget approval • • Investors • Investors • Investors • • Investors • Investors • • Community • Customers/Consumers • Investors • • • Investors Page 18 Page 43 81 Governance Financial StatementsStrategic Report Annual Report and Accounts Reference A • B • C and Board resources • D • E • • Corporate Governance Statement 2023 82 Overvi ew • • • • • • • • • • • 83 Governance Financial StatementsStrategic Report Annual Report and Accounts Reference F • Our Board G • Our Board • • Our Board I • Board roles Role • • • • • • • • • • • • • • • • • • • • • • Corporate Governance Statement 2023 continued 84 Overvi ew Role • • • • • • • • 85 Governance Financial StatementsStrategic Report Corporate Governance Statement 2023 continued and meet current and THE BOARD THE EXECUTIVE LEADERSHIP TEAM (ELT) THE BOARD DELEGATES RESPONSIBILITY FOR CERTAIN MATTERS TO ITS PRINCIPAL COMMITTEES 86 Overvi ew 1 2022 2 6/6 2020 2021 2016 Kirsty Bashforth 2019 3 2020 2021 2021 • • • • • • • 87 Governance Financial StatementsStrategic Report Corporate Governance Statement 2023 continued Annual Report and Accounts See page J • Our Board • K • • • Our Board • • • L • • Tenure 88 Overvi ew Annual Report and Accounts See page M • • N • • • • O • • • • Annual Report and Accounts See page P • • • • Q • • R • • 89 Governance Financial StatementsStrategic Report Nomination Committee Report THIS YEAR THE COMMITTEE HAS LED THE PROCESS FOR CHAIR SUCCESSION AND REVIEWING THE EFFECTIVENESS OF THE BOARD. Committee membership and attendance 1 2022 1/1 2 3/3 2016 3/3 Kirsty Bashforth 2019 3/3 3 3/3 * 2023 2023 * 2023 • • • • DEAR SHAREHOLDERS, 90 Overview Committee role • • • Board vacancies • • • Priorities for 2024 • • • • 91 Governance Financial StatementsStrategic Report Nomination Committee Report continued * 92 Overview • • • • • • 93 Governance Financial StatementsStrategic Report Nomination Committee Report continued Process • • • • • succession • Performance Indicators for the Board • YEAR 1 YEAR 2 YEAR 3 94 Overview Percentage of the Board Percentage Men 5 62.5% 3 10 66.7% Women 3 37. 5% 1 5 33.3% 0 – 0 0 – 0 – 0 0 – Percentage of the Board Percentage 7 87.5% 4 12 80% 0 – 0 0 – 1 12.5% 0 2 13.3% 0 – 0 1 6.7% 0 – 0 0 – 0 – 0 0 – 95 Governance Financial StatementsStrategic Report Audit and Risk Committee Report THE COMMITTEE HAS CONTINUED TO FOCUS ON EMBEDDING PROCESSES AND CONTROLS. DEAR SHAREHOLDERS, • • Committee membership and attendance 2020 2016 1 2021 96 Overview Committee role • • • • • • Priorities for 2024 • • • • • • • • • • resource • • 97 Governance Financial StatementsStrategic Report Audit and Risk Committee Report continued CONTINUED • • • • • • • • • • 98 Overview Controls TCFD Internal control structure • • • • • • • 99 Governance Financial StatementsStrategic Report Audit and Risk Committee Report continued CONTINUED 100 Overview • statutory audit • • • • • • • • • • • • • • • 101 Governance Financial StatementsStrategic Report Environmental and Social Impact Committee Report THE COMMITTEE MADE SIGNIFICANT PROGRESS IN STRENGTHENING THE COMPANY’S ENVIRONMENTAL AND SOCIAL IMPACT ACTIVITY. DEAR SHAREHOLDERS, Committee membership and attendance 1 2022 3/3 2 2022 2/2 3 2022 3/3 2022 3/3 2022 3/3 2022 3/3 Kirsty Bashforth 2022 3/3 2022 3/3 2022 3/3 2022 3/3 102 Overview ES strategy Committee role • • • • Priorities for 2024 • • • • 103 Governance Financial StatementsStrategic Report Remuneration Committee Report IN LINE WITH ITS DELEGATION FROM THE BOARD, THE COMMITTEE SETS THE COMPANY’S REMUNERATION POLICY FOR APPROVAL BY SHAREHOLDERS AND IS RESPONSIBLE FOR THE TERMS AND CONDITIONS OF THE REMUNERATION OF MEMBERS OF THE BOARD AND THE EXECUTIVE LEADERSHIP TEAM (ELT). DEAR SHAREHOLDERS, • • • • Committee membership and attendance Kirsty Bashforth 2019 5/5 1 2020 2021 2021 5/5 104 Overview • • • • • • Committee role • • • 105 Governance Financial StatementsStrategic Report • • • • Remuneration Committee Report continued 106 Overview • • • • • • • • • 107 Governance Financial StatementsStrategic Report Salary • • • • Directors receive market • • • • • • • • • • Remuneration Committee Report continued 108 Overview • • • • • • • • • • vested shares from current PSP 109 Governance Financial StatementsStrategic Report Our Base salary • • • • • • • • Remuneration Policy 110 Overview Our Base salary • • • • • • • • 111 Governance Financial StatementsStrategic Report Remuneration Policy continued deferred annual • • • • Other aspects 112 Overview deferred annual • • • • Other aspects 113 Governance Financial StatementsStrategic Report Remuneration Policy continued Legacy awards • • Other aspects Jonathan Myers Minimum 114 Overview Other aspects Sarah Pollard Minimum 115 Governance Financial StatementsStrategic Report Remuneration Policy continued 0% 0% 100% of award 100% award 1 May 2020 • • • • • 116 Overview Death Any other reason Death Any other reason Any other reason 117 Governance Financial StatementsStrategic Report Remuneration Policy continued 1 2 31 March 2023 Kirsty Bashforth 3 31 March 2026 118 Overview Report on the Directors’ Remuneration 1 2023 2022 2 2023 2022 Pension 3 2023 2022 2023 2022 Bonus 2023 2022 PSP 5 2023 2022 Other 2023 2022 2023 2022 Total 2023 2022 8 1 2023 2022 2 2023 2022 Other 2023 2022 Total 2023 2022 119 Governance Financial StatementsStrategic Report Chair 1 2 Report on the Directors’ Remuneration continued 120 Overview • • • • • • 121 Governance Financial StatementsStrategic Report 1 DBSP 2021 DBSP 2021 • • • Report on the Directors’ Remuneration continued 122 Overview plan 1 123 Governance Financial StatementsStrategic Report Report on the Directors’ Remuneration continued Threshold target Threshold target • • • 124 Overview • • • • held at 31 May 2023 at 31 May 2023 at 31 May 2023 1 Value of shares held at 31 May 2023 as a 56.35% 28.28% 1 125 Governance Financial StatementsStrategic Report Report on the Directors’ Remuneration continued 1 2013 2015 2016 20212019 20222020 2023 50 100 150 200 250 300 126 Overview 2022–23 80.1% 20% n/a n/a 1 660 n/a n/a 2023 £m % 84.7 26.8 1 74.1 127 Governance Financial StatementsStrategic Report Report on the Directors’ Remuneration continued 3.5% 3.4% 8.7% 9.1% 44.4% 0.0% 0.2% 0.3% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Bonus 41.6% 52.4% 62.7% Bonus n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a Bonus n/a n/a n/a n/a n/a n/a n/a 2022–23 A 18 29 44 A 15 23 30 A 19 29 A 660 9 13 19 128 Overview 2023 Salary Total pay • • • • 129 Governance Financial StatementsStrategic Report Report on the Directors’ Remuneration continued July 2022 • • • • • • • • • • August 2022 • • • • • • January 2023 • • • • • • • • March 2023 • • • • • May 2023 • • • • • • • • 130 Overview % % % % By order of the Board of Directors 131 Governance Financial StatementsStrategic Report The principal activities of the Group are the manufacture and distribution of soaps, detergents, toiletries, beauty products, pharmaceuticals, electrical goods, edible oils, fats and spreads and nutritional products. The subsidiary undertakings and joint ventures principally affecting the profits, liabilities and assets of the Group are listed in note 1 of the Consolidated Financial Statements. 1 2 3 5 6 9 10 11 12 13 Kirsty Bashforth 1 Report of the Directors 132 Overview 2023 Kirsty Bashforth 3 – 5 Notes: % % 14.70% 11.50% 7.27% 4.92% 4.94% 4.65% 4.36% 3.57% 133 Governance Financial StatementsStrategic Report • • • Research and Greenhouse Report of the Directors continued 134 Overview 2023 No. % % % % % 726 27 73 74 40 61 36 51 32 35 109 60 109 110 125 65 150 66 Board Directors 3 33 3 50 3 Board Directors 6 67 5 56 50 5 62 the Group 135 Governance Financial StatementsStrategic Report Report of the Directors continued Purchase of own shares • • • • • • 136 Overview • • • • • • • • • 137 Governance Financial StatementsStrategic Report FINANCIAL STATEMENTS 138 OUR TOGETHER VALUE IN ACTION. OUR STRIVING VALUE IN ACTION. WE ARE TOGETHER AND IT GIVES US STRENGTH • • • WE WORK WITH RESILIENCE AND DETERMINATION • • • 139 Independent Auditor’s Report To the Members of PZ Cussons plc • • • • • • • • • • • • 140 Overview • • • • • • • 141 Strategic Report Governance Financial Statements continued • • • • • • Independent Auditor’s Report continued To the Members of PZ Cussons plc 142 Overview • • • • • • • • 143 Strategic Report Governance Financial Statements Independent Auditor’s Report continued To the Members of PZ Cussons plc 144 Overview Full audit scope Revenue Adjusted PBT Total assets 67% 72% 74% 6% 21% 11% 20% 12% 17% • • • • 145 Strategic Report Governance Financial Statements • • • Independent Auditor’s Report continued To the Members of PZ Cussons plc 146 Overview • • • • • 147 Strategic Report Governance Financial Statements continued • • • • • • • • Independent Auditor’s Report continued To the Members of PZ Cussons plc 148 Overview • • • • • • • • • • • 149 Strategic Report Governance Financial Statements 16. Use of our report Statutory Auditor Independent Auditor’s Report continued To the Members of PZ Cussons plc 150 Overview Notes 2023 2022 (restated) Business performance excluding adjusting items £m Adjusting items (note 3) £m Statutory results £m Business performance excluding adjusting items £m Adjusting items (note 3) £m Statutory results £m Continuing operations Revenue 2 656.3 – 656.3 592. 8 – 592. 8 Costofsales (39 9. 0) – (39 9. 0) (3 6 5. 3) – (3 6 5. 3) Gross profit 2 57. 3 – 2 5 7. 3 2 2 7. 5 – 2 2 7. 5 Sellinganddistributioncosts (10 5 . 3) – (1 0 5 . 3) (9 0 . 3) – (9 0 . 3) Administrativeexpenses (8 6 . 2) (13.6) (99. 8) (76. 7) (1 . 3) (78.0) Shareofresultsofjointventures 12 7. 5 – 7. 5 6.6 – 6.6 Operating profit 2 73.3 (13.6) 59.7 6 7. 1 (1 . 3) 65. 8 Finance income 14.1 1.3 15.4 2 .7 – 2 .7 Finance costs (13.3) – (13.3) (4.0) – (4. 0) Net finance income/(costs) 6 0.8 1.3 2.1 (1 . 3) – (1 . 3) Profit before taxation 74 . 1 (12.3) 61. 8 65. 8 (1. 3) 6 4.5 Taxation 7 (2 0. 1) 4.7 (1 5 . 4) (1 2 . 8) (0 . 3) (1 3 . 1) Profit for the year from continuing operations 4 54.0 (7. 6) 4 6.4 53.0 (1 . 6) 51 . 4 Discontinued operations Lossfromdiscontinuedoperations – – – (1 . 8) – (1 . 8) Profit for the year 54.0 (7. 6) 4 6.4 51 . 2 (1 . 6) 49.6 Attributable to: OwnersoftheParent 4 7. 0 (10.6) 36.4 50.8 (2.9) 4 7. 9 Non-controllinginterests 7. 0 3.0 10.0 0.4 1.3 1.7 54.0 (7. 6) 4 6.4 51 . 2 (1 . 6) 49.6 pence pence pence pence pence pence Earnings per share for continuing and discontinued operations Basicearningspershare 9 11. 2 3 (2 . 5 3) 8 .7 0 1 2. 14 (0 . 69) 11.45 Dilutedearningspershare 9 11. 19 (2 . 5 2) 8. 67 12.07 (0. 6 9) 11.38 Earnings per share for continuing operations Basicearningspershare 9 11. 2 3 (2 . 5 3) 8 .7 0 12.57 (0. 69) 11. 8 8 Dilutedearningspershare 9 11. 19 (2 . 5 2) 8. 67 12. 50 (0 . 69) 11. 81 Refertonote1(c)fordetailsoftheprioryearrestatements. Consolidated Income Statement For the year ended 31 May 2023 151 Strategic Report Governance Financial Statements Notes 2023 £m 2022 (restated) £m Profit for the year 46.4 49. 6 Other comprehensive (expense)/income Items that will not be reclassified subsequently to profit or loss Remeasurementofretirementandotherlong-termemployeebenefitobligations 21 (3 2 . 8) 3 7. 4 Deferredtaxchargeonremeasurementofretirementandotherlong-termbenefitobligations 19 7. 4 (8 . 4) Total items that will not be reclassified to profit or loss (25 . 4) 29.0 Items that may be reclassified subsequently to profit or loss Exchangedifferencesontranslationofforeignoperations (21 .7) 21 .7 Cashflowhedges–fairvaluemovementsnetofamountsreclassified 17 0.4 0.2 Reclassificationofexchangedifferencesonrepaymentofpermanentasequityloans(netoftaxation) – (2 .7) Reclassificationofreservesondisposals – 0.1 Total items that may be reclassified subsequently to profit or loss (21 . 3) 19.3 Other comprehensive (expense)/income for the year net of taxation (4 6 .7) 48.3 Total comprehensive (expense)/income for the year (0 . 3) 9 7. 9 Attributable to: OwnersoftheParent (6. 9) 9 4.3 Non-controllinginterests 6.6 3.6 (0 . 3) 9 7. 9 Refertonote1(c)fordetailsoftheprioryearrestatements. Consolidated Statement of Comprehensive Income For the year ended 31 May 2023 152 PZ Cussons plc / AnnualReportandAccounts2023 Overview Notes 2023 £m 2022 (restated) £m 2021 (restated) £m Assets Non-current assets Goodwillandotherintangibleassets 10 31 2 .7 333.9 293.6 Property,plantandequipment 11 74 . 3 82.9 91.5 Right-of-useassets 25 12.5 16 .9 11.7 Netinvestmentsinjointventures 12 52. 0 45.4 34.2 Deferredtaxassets 19 7. 5 4. 5 5.9 Currenttaxreceivable – 1.2 1 .7 Retirementbenefitsurplus 21 38.5 69. 3 33.6 4 9 7. 5 55 4.1 47 2 . 2 Current assets Inventories 14 11 2 .9 111. 8 91 .1 Tradeandotherreceivables 15 119. 1 105.0 11 0 .7 Derivativefinancialassets 17 1.0 0 .7 1.0 Currenttaxreceivable 1.0 2.6 1 5.3 Current asset investments 0.5 0.5 0.3 Cashandcashequivalents 16 256.4 163. 8 8 7. 0 490. 9 3 8 4.4 305.4 Assetsheldforsale 13 – 3.4 7. 6 490. 9 3 8 7. 8 31 3 . 0 Total assets 988.4 941.9 78 5.2 Equity Sharecapital 22 4.3 4. 3 4.3 Ownshares 22 (3 6 . 9) (4 0. 0) (4 0. 0) Capitalredemptionreserve 0.7 0 .7 0 .7 Hedgingreserve 0.2 (0 . 2) (0 .4) Currencytranslationreserve (89. 0) (69 . 2) (8 7. 4) Retainedearnings 511 .7 528 . 5 478.1 Other reserves 4.6 2.9 0.9 Attributable to owners of the Parent 395.6 4 2 7. 0 356.2 Non-controllinginterests 26.5 21.9 18 .8 Total equity 422.1 4 4 8 .9 375.0 Consolidated Balance Sheet As at 31 May 2023 153 Strategic Report Governance Financial Statements Notes 2023 £m 2022 (restated) £m 2021 (restated) £m Liabilities Non-current liabilities Borrowings 16,17 2 51 . 2 174 . 0 118 .0 Otherpayables 18 4.1 4.5 0. 3 Leaseliabilities 25 11. 3 14. 0 8 .7 Deferredtaxliabilities 19 76. 9 91 .7 74 . 2 Retirementandotherlong-termemployeebenefitobligations 21 12.4 13 .1 12.9 355.9 2 9 7. 3 214 .1 Current liabilities Borrowings 16 – 0 .1 – Tradeandotherpayables 18 182.2 163.9 150.9 Leaseliabilities 25 1.7 2.9 3.1 Derivativefinancialliabilities 17 0. 5 1.6 0.8 Currenttaxationpayable 25.6 21.6 35.2 Provisions 20 0.4 5.6 5.6 210.4 19 5 .7 195.6 Liabilitiesdirectlyassociatedwithassetsheldforsale – – 0.5 210.4 19 5 .7 1 9 6.1 Total liabilities 566.3 493. 0 41 0 . 2 Total equity and liabilities 988.4 941.9 78 5.2 Refertonote1(c)fordetailsoftheprioryearrestatements. Theconsolidatedfinancialstatementsfrompages151to219wereapprovedbytheBoardofDirectorsandauthorisedforissueon 26September2023. Theyweresignedonitsbehalfby: J Myers S Pollard 26September2023 PZCussonsplc Registerednumber00019457 Consolidated Balance Sheet continued As at 31 May 2023 154 PZ Cussons plc / AnnualReportandAccounts2023 Overview Notes Attributable to owners of the Parent Non- controlling interests £m Total £m Share capital £m Own shares £m Capital redemption reserve £m Hedging reserve £m Currency translation reserve £m Retained earnings £m Other reserves £m As at 1 June 2021 – as previously reported 4.3 (4 0 .0) 0.7 (0 .4) (8 7. 4) 474 . 6 0.9 18. 8 371. 5 Effectofprioryearadjustments 1(c) – – – – – 3.5 – – 3.5 Asat1June2021–asrestated 4.3 (4 0 .0) 0.7 (0 .4) (8 7. 4) 478 .1 0.9 18. 8 375.0 Profitfortheyear–asrestated – – – – – 4 7. 9 – 1 .7 49.6 Othercomprehensiveincome – – – 0.2 18.2 28.0 – 1.9 48.3 Total comprehensive income for the year – – – 0.2 18.2 7 5.9 – 3.6 9 7. 9 Transactions with owners: Ordinary dividends 8 – – – – – (2 5 . 5) – – (2 5 . 5) Share-basedpaymentexpense – – – – – – 2.0 – 2.0 Dividendsrelatingto non-controllinginterests – – – – – – – (0 . 5) (0. 5) Total transactions with owners recognised directly in equity – – – – – (2 5. 5) 2.0 (0 . 5) (24.0) As at 31 May 2022 4.3 (4 0 .0) 0.7 (0. 2) (6 9. 2) 528 . 5 2.9 21.9 4 4 8.9 As at 1 June 2022 4.3 (4 0 .0) 0.7 (0 . 2) (69 . 2) 528 .5 2.9 21. 9 448.9 Profitfortheyear – – – – – 36.4 – 10. 0 46.4 Transferbetweenreserves 1(c) – – – – (1 . 5) 1.5 – – – Othercomprehensive (expense)/income – – – 0.4 (1 8 . 3) (25 . 4) – (3. 4) (46 .7) Total comprehensive (expense)/ income for the year – – – 0.4 (1 9 . 8) 12 .5 – 6.6 (0. 3) Transactions with owners: Ordinary dividends 8 – – – – – (2 6. 8) – – (2 6. 8) Share-basedpaymentexpense – – – – – – 1 .7 – 1.7 SharesissuedfromESOT 22 – 3.1 – – – (2 . 5) – – 0.6 Dividendsrelatingto non-controllinginterests, net of forfeitures – – – – – – – (2. 0) (2. 0) Total transactions with owners recognised directly in equity – 3.1 – – – (2 9. 3) 1.7 (2 . 0) (2 6 . 5) As at 31 May 2023 4.3 (36 . 9) 0.7 0.2 (89. 0) 511. 7 4.6 26. 5 422 .1 Refertonote1(c)fordetailsoftheprioryearrestatements. Consolidated Statement of Changes in Equity For the year ended 31 May 2023 155 Strategic Report Governance Financial Statements Notes 2023 £m 2022 £m Cash flows from operating activities Cashgeneratedfromoperations 24 76. 6 66.2 Interestpaid (11 . 8) (3. 5) Taxationpaid (15.6) (12 . 3) Net cash generated from operating activities 49. 2 5 0.4 Cash flows from investing activities Interest received 11. 8 2.6 Investment income received – 0 .1 Purchaseofproperty,plantandequipmentandsoftware 10,11 (6.7) (8 . 2) Proceedsfromdisposalofplant,propertyandequipment 14.4 18 .6 Proceedsfromdisposalofbusinesses – 6.4 Acquisitionofsubsidiary 28 – (33. 6) Loansadvancedtojointventure (11 . 2) (1 2 . 6) Loanrepaymentsfromjointventure 11. 2 21. 0 Net cash generated from/(used in) investing activities 19. 5 (5.7) Cash flows from financing activities DividendspaidtoCompanyshareholders 8 (26 . 8) (2 5. 5) Dividendspaidtonon-controllinginterests (2. 6) (0 . 5) Proceedsfromloansbyjointventure – 0.6 Repaymentofleaseliabilities 25 (2. 5) (4 . 0) Repaymentofloansandborrowingsfacility 16 (205.0) – Proceedsfromloanandborrowingsfacility 16 28 3.0 56.0 Financingfeespaidoncommittedcreditfacility (2 . 8) – Net cash generated from financing activities 43.3 26 .6 Net increase in cash and cash equivalents 112 .0 71. 3 Effectofforeignexchangerates 16 (1 9 . 3) 5.4 Cashandcashequivalentsatthebeginningoftheyear 16 16 3.7 8 7. 0 Cash and cash equivalents at the end of the year 16 256.4 16 3 .7 Consolidated Cash Flow Statement For the year ended 31 May 2023 156 PZ Cussons plc / AnnualReportandAccounts2023 Overview GENERAL INFORMATION PZ Cussons plc public limited company registered in England and Wales ock Exchange and is domiciled and incorpor UK ess of the regist PZ Cussons plc the parent company and ultimate parent of the Group. The principal activities of the Group are the manufacturing and distribution of soaps, detergents, toiletries, beauty products, pharmaceuticals, electrical goods, edible oils, fats and spreads and nutritional products. These consolidated financial statements are presented in Pounds Sterling (GBP) and, unless otherwise indicated, have been presented in £million to one decimal place. Foreign operations are included in accordance with the policies set out in note 1. For the year ended 31 May 2023 the following subsidiaries of the Company were entitled to exemption from audit under s479A of the Companies Act 2006 relating to subsidiary companies: Subsidiary name Companies House Registration Number Bronson Holdings Limited 09771991 PZ Cussons Acquisition Co Limited 13977759 PZ Cussons (International Finance) Limited 08589433 St. Tropez Holdings Limited 05706646 Tadley Holdings Limited 10438262 Thermocool Engineering Company Limited 09266188 1. ACCOUNTING POLICIES The consolidated financial statements have been prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006. The preparation of financial statements, in conformity with IFRSs, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting year. Although these estimates are based on management’s best knowledge of the amount, event or actions, actual results ultimately may differ from those estimates. Key sources of estimation uncertainty are described on pages 168 to 169. The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Business Review section of the Strategic Report. The financial position of the Group and liquidity position are described within the Financial Review section of the Strategic Report. In addition, note 17 to these consolidated financial statements includes the Group’s objectives and policies for managing its capital; its financial risk management objectives; its exposures to market risk, credit risk and liquidity risk; and details of its financial instruments and hedging activities. After making enquiries, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for a period of at least 12 months from the date of approving these consolidated financial statements and that, therefore, it is appropriate to adopt the going concern basis in preparing the consolidated financial statements for the year ended 31 May 2023. The scenarios considered as part of the going concern assessment are consistent with those used in the longer-term viability statement set out on pages 69 to 71. The consolidated financial statements have been prepared using consistent accounting policies except as stated below. (a) New and amended accounting standards adopted by the Group The following amendments to existing standards have been applied for the first time in the year ended 31 May 2023: • Amendments to IAS 16 ‘Plant, Property & Equipment’ – Proceeds before Intended Use • Amendments to IFRS 3 ‘Business Combinations’ – Reference to the Conceptual Framework • Amendments to IAS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’ – Onerous Contracts – Costs of Fulfilling a Contract • Annual Improvements to IFRS Standards 2018-2020. • Amendments to IAS 1 ‘Presentation of Financial Statements’ – Non-Current Liabilities with Covenants. The adoption of the new accounting standards and interpretations listed above has not led to any changes to the Group’s accounting policies or had any other material impact on the financial position or performance of the Group. Notes to the Consolidated Financial Statements 157 Strategic Report Governance Financial Statements Notes to the Consolidated Financial Statements continued CONTINUED (b) New accounting standards and interpretations in issue but not yet effective Certain amendments to existing standards, as listed below, have been published that are not mandatory for the 31 May 2023 reporting year and have not been early adopted by the Group. Effective date 1 January 2023: • Amendments to IAS 1 ‘Presentation of Financial Statements’ – Classification of Liabilities as Current or Non-Current. • Amendments to IAS 8 ‘Accounting Policies, Changes in Accounting Estimates and Errors’ – Definition of Accounting Estimates. • Amendments to IAS 1 ‘Presentation of Financial Statements’ and IFRS Practice Statement 2 – Disclosure of Accounting Policies. • Amendments to IAS 12 ‘Income Taxes’ – Deferred Tax related to Assets and Liabilities arising from a Single Transactions. Effective date 1 January 2024: • Amendments to IFRS 16 ‘Leases’ – Lease Liability in a Sale and Leaseback. Effective date to be confirmed: • Amendments to IFRS 10 ‘Consolidated Financial Statements’ and IAS 28 ‘Investment in Associates’ – Sale or Contribution of Assets between an Investor and its Associate or Joint Venture. The adoption of the new accounting standards and interpretations listed above is not expected to lead to any significant changes to the Group’s accounting policies or have any other material impact on the financial position or performance of the Group. (c) Corrections of errors In preparing these consolidated financial statements management identified errors relating to transactions reported in prior periods. In accordance with IAS 8 ‘Accounting Policies, Changes in Accounting Estimates and Errors’ these errors have been corrected either by restatement of previously reported figures or within the current year as described below. Restatements The following items were considered as material errors requiring restatement of previously reported figures. Intangible asset impairment – in the year ended 31 May 2020 a number of businesses were disposed of by the Group, resulting in the recognition of a £6.3 million impairment charge in relation to capitalised software. The accounting treatment of these impairments has subsequently been reviewed and determined to be not in accordance with IAS 36 ‘Impairment of Assets’. The effects of correcting for this error are to increase the previously reported carrying value of intangible assets on the consolidated balance sheet by £4.7 million as at 1 June 2021 with a corresponding increase in the deferred tax liability of £1.2 million, and to recognise a £0.8 million amortisation charge within previously reported administrative expenses in the consolidated income statement for the year ended 31 May 2022, with a corresponding £0.2 million decrease in the taxation charge. Childs Farm business combination – in March 2022, the Group acquired Childs Farm. The non-controlling interest of £3.3 million recognised on the business combination has subsequently been reviewed and determined to be not in accordance with IFRS 3 ‘Business Combinations’. The effect of correcting for this error is to reduce each of the previously reported carrying values of goodwill and non-controlling interests on the consolidated balance sheet by £3.3 million as at 31 May 2022. There is no impact on the previously reported consolidated income statement. The impact on the consolidated balance sheets and consolidated income statement of restating previously reported figures for the items described is set out in the tables below: As at 31 May 2021 As previously reported £m Intangible asset impairment £m As restated £m Consolidated balance sheet Goodwill and other intangible assets 288.9 4.7 293.6 Total assets 780.5 4.7 785.2 Retained earnings (474.6) (3.5) (478.1) Deferred taxation liabilities (73.0) (1.2) (74.2) Total equity and liabilities (780.5) (4.7) (785.2) 158 Overview As at, and for the year ended, 31 May 2022 As previously reported £m Intangible asset impairment £m Childs Farm business combination £m As restated £m Consolidated income statement Administrative expenses (77.2) (0.8) – (78.0) Profit before taxation 65.3 (0.8) – 64.5 Taxation (13.3) 0.2 – (13.1) Profit for the year from continuing operations 52.0 (0.6) – 51.4 Profit for the year 50.2 (0.6) – 49.6 Consolidated balance sheet Goodwill and other intangible assets 333.3 3.9 (3.3) 333.9 Total assets 941.3 3.9 (3.3) 941.9 Retained earnings (525.6) (2.9) – (528.5) Non-controlling interests (25.2) – 3.3 (21.9) Deferred taxation liabilities (90.7) (1.0) – (91.7) Total equity and liabilities (941.3) (3.9) 3.3 (941.9) Corrections in current year The following items were not considered as material errors, and therefore have been corrected in the current year. Reclassification of exchange differences on repayments of permanent as equity loans – in the prior year, £1.5 million of accumulated foreign exchange losses were reclassified to the consolidated income statement following a decision to repay the intercompany loan between PZ Cussons Ghana Limited and a fellow subsidiary. This treatment has subsequently been reviewed and having considered the divergence in practice in the interpretation of IAS 21 ‘The Effects of Changes in Foreign Exchange Rates’ the Group’s policy is to reclassify foreign exchange differences on such items only on the disposal or partial disposal of an equity interest. This has been corrected in the current year through a transfer from retained earnings to the currency translation reserve. There is no impact on previously reported total equity. Transactions of the Company-sponsored Employee Share Option Trust (ESOT) – as stated in the accounting policies of the Company, transactions of the ESOT are treated as being those of the Company and are therefore reflected in the Group’s consolidated financial statements. Purchases by the ESOT have been reflected, however certain issuances and sales of shares from the ESOT in previous years had not been. This has been corrected in the current year through a £2.7 million reduction in the own shares reserve for the cost of shares issued and sold, the recognition of cash proceeds of £0.6 million with a corresponding decrease in retained earnings. Impairment of net investment in joint ventures – in the year ended 31 May 2021, Wilmar PZ International Pte. Limited, a 50% joint venture interest of the Group, ceased operations and a £2.2 million impairment was recognised against the carrying value of the Group’s net investment. The joint venture was formally dissolved in May 2023 and a subsequent review of the previous impairment charge has identified that the impairment was made in error, and a correction has been made in the current year. In addition, certain comparative disclosures have been corrected as disclosed in notes 5, 17(b) and 26. (d) Accounting policies Basis of consolidation The consolidated financial statements incorporate the financial statements of PZ Cussons plc and entities controlled by PZ Cussons plc (its subsidiaries) made up to 31 May each year. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases. The total profits or losses of subsidiaries are included in the consolidated income statement and the interest of non-controlling interests is stated as the non-controlling interest’s proportion of the fair values of the assets and liabilities recognised. Comprehensive income attributable to the non-controlling interests is attributed to the non-controlling interests even if this results in the non-controlling interests recognising a deficit balance. The interest of non-controlling interests in the acquiree is initially measured at the non-controlling interest’s proportion of the net fair value of the assets, liabilities and contingent liabilities recognised. Where non-controlling interests are acquired, the excess of cost over the value of the non-controlling interest acquired is recorded in equity. Where necessary, the accounts of subsidiaries are adjusted to conform to the Group’s accounting policies. All intra-Group transactions, balances, income and expenses are eliminated on consolidation. 159 Strategic Report Governance Financial Statements CONTINUED Business combinations and goodwill The Group accounts for business combinations by applying the acquisition method. The fair value of consideration of the acquisition is measured at the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquiree. The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3 ‘Business Combinations’ are recognised at their fair values at the acquisition date, except for non-current assets (or disposal groups) that are classified as held for sale in accordance with IFRS 5 ‘Non-current assets held for sale and discontinued operations’, which are recognised and measured at the lower of the assets’ previous carrying value and fair value less costs to sell. All acquisition costs are expensed as incurred, and presented as adjusting items. Where acquisitions are achieved in stages, commonly referred to as ‘stepped acquisitions’, and result in control being obtained by the Group as part of a transaction, the Group re-assesses the fair value of any existing investment as part of determining the fair value of consideration. In determining the fair value of the Group’s existing interest, reference is given to the fair value of consideration paid to increase the Group’s interest in the existing investment as well as considering the specific fair values of assets and liabilities transferred to gain control. Any increase or impairment of the Group’s existing investment is credited/charged to the consolidated income statement, and presented as an adjusting item. Tax benefits acquired as part of a business combination, but not satisfying the criteria for separate recognition at that date, are recognised subsequently if new information about facts and circumstances change. The adjustment is either treated as a reduction in goodwill (as long as it does not exceed goodwill) if it was incurred during the measurement period, otherwise it is recognised in profit or loss. Goodwill arising on a business combination represents the excess of the cost of acquisition over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the subsidiary or equity method investment recognised at the date of acquisition. Goodwill arising on the acquisition of a subsidiary is separately presented on the Group’s balance sheet, and goodwill arising on the acquisition of an equity method investment is included within the carrying value of the investment. If, after re-assessment, the Group’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities exceeds the cost of the business combination, the excess is recognised immediately in the consolidated income statement. Goodwill also includes amounts to reflect deferred tax liabilities established in relation to acquisitions in accordance with IFRS 3 ‘Business Combinations’. Goodwill is initially recognised as an asset and is subsequently measured at cost less any accumulated impairment losses. Goodwill is tested for impairment annually, or more frequently if there are indicators of impairment. The method used for impairment testing is to allocate goodwill to appropriate cash-generating units (CGUs) based on the smallest identifiable group of assets that generate independent cash inflows, and to estimate the recoverable amounts of the CGUs as the higher of the asset’s fair values less costs of disposal and the value in use. An impairment arises if the recoverable amount of the CGU is less than the carrying amount, in which case the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the CGU and then to the other assets of the CGU pro-rata on the basis of the carrying amount of each asset in the CGU. Impairment losses recognised for goodwill cannot be reversed in a subsequent period. On disposal of a subsidiary or an equity method investment, the attributable amount of goodwill is included in the determination of the profit or loss on disposal. Investments in joint ventures Under IFRS 11 ‘Joint Arrangements’, investments in joint arrangements are classified as either joint operations or joint ventures depending on the contractual rights and obligations of each investor. PZ Cussons plc has assessed the nature of its joint arrangements and determined them to be joint ventures. Joint ventures are accounted for using the equity method. Under the equity method of accounting, interests in joint ventures are initially recognised at cost and adjusted thereafter to recognise the Group’s share of the post-acquisition profits or losses and movements in other comprehensive income. When the Group’s share of losses in a joint venture equals or exceeds its interests in the joint ventures (which includes any long-term interests that, in substance, form part of the Group’s net investment in the joint ventures), the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the joint ventures. After application of the equity method, the Group determines whether it is necessary to recognise an impairment loss on its investment in its joint ventures. At each reporting date, the Group determines whether there is objective evidence that the investment in joint ventures is impaired. If there is such evidence, the Group calculates the amount of impairment as the difference between the recoverable amount of the joint venture and its carrying value, and then recognises the loss within ‘Share of results of a joint venture’ in the consolidated income statement. Notes to the Consolidated Financial Statements continued 160 Overview Revenue Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods provided in the normal course of business, net of discounts, trade spend, rebates and sales-related taxes but including interest receivable on sales on extended credit. Sales of goods are recognised when control of goods has been transferred which is generally on receipt or collection by customers. Should management consider that the criteria for recognition are not met, revenue is deferred until such time as the consideration has been fully earned. Trade promotions, which consist primarily of customer pricing allowances, placement/listing fees and promotional allowances, are governed by agreements with our trade customers (retailers and distributors). Accruals are recognised under the terms of these agreements, to reflect the expected promotional activity and our historical experience. These accruals are reported within trade and other payables. Trade promotions The Group provides for amounts payable to trade customers for promotional activity. Where a promotional activity spans across the year- end, an accrual is reflected in the Group accounts based on our expectation of customer and consumer uptake during the promotional period and the extent to which temporary promotional activity has occurred. Where promotions, rebates or discounts give rise to variable consideration, the Group accounts for this by using the most likely amount method and this is generally estimated using known facts with a high degree of accuracy. Revenue is constrained to the extent that variable consideration has been taken into account for the period and that no reversal in consideration is expected. Research and development Research and development expenditure is charged against profits in the year in which it is incurred, unless it meets the criteria for capitalisation set out in IAS 38 ‘Intangible Assets’. Operating profit Operating profit is the profit of the Group (including share of joint venture profit) before finance income, finance costs and taxation from continuing operations. Foreign currencies The financial statements of each Group entity are prepared in the currency of the primary economic environment in which the entity operates (its functional currency). For the purpose of the consolidated financial statements, the results and financial position of each entity are presented in Pounds Sterling, which is the functional currency of the Company, and the presentational currency for the consolidated financial statements. In preparing the financial statements of the individual entities, transactions in currencies other than the entity’s functional currency are recorded at the actual rate of exchange prevailing on the dates of the transactions, or at average rates of exchange if they represent a suitable approximation to the actual rate. At each balance sheet date, monetary assets and liabilities denominated in currencies other than the functional currency of the local entity are translated at the appropriate rates prevailing on the balance sheet date. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing balance sheet rate. Exchange differences are recognised in other comprehensive income. Foreign exchange gains and losses arising from the settlement of foreign currency transactions and from the translation of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement. On consolidation, the assets and liabilities of the Group’s overseas operations are translated at exchange rates prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for the year. Cumulative foreign currency translation differences arising on the translation and consolidation of foreign operations’ income statements and balance sheets denominated in foreign currencies are recorded as a separate component of equity. On disposal of a foreign operation the cumulative translation differences will be transferred to the income statement in the period of the disposal as part of the gain or loss on disposal. Finance income Finance income includes interest receivable on short-term deposits, interest receivable on loans to joint ventures, net finance income in relation to defined benefit pension schemes and the change in the fair value of deferred consideration on business combinations. Finance costs Finance costs include interest expense in relation to financial liabilities (which includes the unwind of the discount rate applied to lease liabilities), finance expense on defined benefit pension schemes, amortisation of fees incurred in arranging financing and the change in the fair value of deferred purchase consideration on business combinations. 161 Strategic Report Governance Financial Statements CONTINUED Adjusting items The Group adopts a columnar format in presenting the consolidated income statement to highlight significant items within the Group’s results for the year. Such items are classified and presented as adjusting items. These items are those that are material in value or related to significant one-off changes in the structure or value of the business. Certain adjusting items may be recognised across multiple years if they are deemed to be part of a significant transformation project which would not be expected to recur. Such projects are required to be agreed up front with a clear scope, timeline and budget. The Directors apply judgement in assessing the presentation of such items as adjusting items. The Directors believe that the separate disclosure of these items is relevant to an understanding of the Group’s financial performance by providing an alternative and meaningful basis upon which to analyse underlying business performance and make year-on-year comparisons. The same measures are used by management for planning, budgeting and reporting purposes and for the internal assessment of operating performance across the Group. These alternative performance measures should be viewed as supplemental to, but not as a substitute for, measures presented in the consolidated financial information relating to the Group, which are prepared in accordance with IFRS. Further, they may not be comparable with similarly-titled measures reported by other companies due to differences in the way they are calculated. Taxation Tax on the profit or loss for the year comprises current and deferred tax. Tax is recognised in the consolidated income statement except to the extent that it relates to items recognised in other comprehensive income, in which case it is recognised within that statement. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the financial year-end date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided on temporary differences between the carrying amounts of assets and liabilities recognised for financial reporting purposes and the amounts used for taxation purposes, on an undiscounted basis. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amounts of assets and liabilities, using tax rates enacted or substantively enacted at the financial year-end date. Deferred taxation is not provided on the initial recognition of an asset or liability in a transaction, other than in a business combination, if at the time of the transaction there is no effect on either accounting or taxable profit or loss. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax liabilities on a net basis. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. The Group maintains adequate provisions for potential liabilities that may arise from periods that remain open and not yet agreed by tax authorities. The ultimate liability for such matters may vary from the amounts provided and is dependent upon the outcome of agreements with relevant tax authorities. In assessing uncertain tax treatments, management is required to make judgements in determination of the facts and circumstances in respect of the tax position taken, together with estimates of amounts that may be required to be paid in ultimate settlement with the tax authorities. As the Group operates in a multinational tax environment, the nature of the uncertain tax positions is often complex and subject to change. Original estimates are always refined as additional information becomes known. Property, plant and equipment Property, plant and equipment is stated at historical cost less accumulated depreciation and accumulated impairment losses. Land and buildings held from before the date of transition to IFRS for use in the production or supply of goods or services, or for administration purposes, are stated in the consolidated balance sheet at deemed cost at the date of transition to IFRS less accumulated depreciation and any accumulated impairment losses. Depreciation is charged so as to write off the cost or valuation of assets, other than land, over their estimated useful lives, using the straight-line method, on the following basis: Freehold buildings at rates not less than 2% per annum Plant and machinery not less than 8% per annum Fixtures, fittings and vehicles not less than 20% per annum In the case of major projects, depreciation is provided from the date the project is brought into use. Land and assets in the course of construction are not depreciated. Notes to the Consolidated Financial Statements continued 162 Overview An asset is de-recognised from the consolidated balance sheet when it is sold or retired and no future economic benefits are expected from that asset. The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the consolidated income statement when the asset is de-recognised. The assets’ residual values and useful lives are reviewed and adjusted if appropriate at each balance sheet date. Property, plant and equipment is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. Property, plant and equipment that has been impaired is reviewed for possible reversal of the impairment at each subsequent balance sheet date. Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, to the extent that the increased carrying amount does not exceed the value that would have been determined had an impairment loss not been recognised in prior years. A reversal of an impairment loss is recognised immediately in the consolidated income statement. Investment property On acquisition, investment property is initially recognised at cost, or deemed cost where no monetary consideration is exchanged. Investment property is subsequently recognised in the accounts at cost less any impairment loss and recorded as a separate item within property, plant and equipment. Gains or losses on disposal are recognised within administrative expenses in profit or loss. No depreciation is charged on the basis that it is not considered to be material in any year or cumulatively. Other intangible assets Other intangible assets comprise brands and software. Brands An acquired brand is only recognised on the consolidated balance sheet where it is supported by a registered trademark, where brand earnings are separately identifiable or the brand could be sold separately from the rest of the business. Brands acquired as part of a business combination are recorded in the consolidated balance sheet at fair value at the date of acquisition. Trademarks, patents and purchased brands are recorded at purchase cost. The Directors believe that acquired brands have indefinite lives because, having considered all relevant factors, there is no foreseeable limit to the period over which the brands are expected to generate net cash inflows for the Group. Further, the Directors have the intention and the ability to maintain the brands. In forming this conclusion the Directors have not taken into consideration planned future expenditure in excess of that required to maintain the asset at that standard of performance. In accordance with IAS 36 ‘Impairment of Assets’, as the brands have indefinite lives they are tested for impairment annually, and more frequently where there is an indication that the asset may be impaired. The method used for impairment testing is similar to that used for goodwill whereby the brand is allocated to a CGU based on the smallest identifiable group of assets that generate independent cash inflows. The recoverable amount of the CGU is determined as the higher of the asset’s fair value less costs of disposal and the value in use. An impairment arises if the recoverable amount of the CGU is less than the carrying amount. Any impairment is recognised immediately in the consolidated income statement. Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is recognised immediately in the consolidated income statement. Software Expenditure on research activities is recognised in the consolidated income statement as an expense as incurred. Expenditure on development activities directly attributable to the design and testing of identifiable software products and systems are capitalised if the product or systems meet the following criteria: • The completion of the development is technically and commercially feasible to complete • Adequate technical resources are sufficiently available to complete development • It can be demonstrated that future economic benefits are probable and • The expenditure attributable to the development can be measured reliably. Development activities involve a plan or design for the production of new or substantially improved products or systems. Directly attributable costs that are capitalised as part of the software product or system include employee costs. Other development expenditures that do not meet these criteria as well as ongoing maintenance are recognised as an expense as incurred. Development costs for software are carried at cost less accumulated amortisation and are amortised on a straight-line basis over their useful lives (not exceeding ten years) at the point at which they come into use. 163 Strategic Report Governance Financial Statements CONTINUED Leases The Group assesses whether a contract is or contains a lease at inception of the contract. The Group recognises a right-of-use asset and a corresponding lease liability with respect to all lease arrangements in which it is the lessee, except for short-term leases (defined as leases with a lease term of 12 months or less) and leases of low-value assets (defined as those less than £5,000) where the Group recognises the lease payments as an operating expense on a straight-line basis over the term of the lease. While the Group does lease certain equipment and vehicles, its leasing activities mainly relate to properties. Leasing contracts are typically made for fixed periods of up to 12 years, but certain property leases across the Group have extension and termination options which are used to maximise operational flexibility in terms of managing contracts. The majority of extension and termination options held are exercisable only by the Group and not by the respective lessor. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. The lease liability is initially measured at the present value of the lease payments, excluding those paid at the commencement date, discounted at the rate implicit in the lease, or if that cannot be readily determined, at the Group’s incremental borrowing rate specific to the term, country, currency and start date of the lease. Lease payments included in the measurement of the lease liability comprise: • Fixed lease payments (including in substance fixed payments), less any lease incentives • Variable lease payments that depend on an index or rate, initially measured using the index or rate at the commencement date and • Payments of penalties for terminating the lease, if the lease term reflects the exercise of an option to terminate the lease. The lease liability is presented as a separate line in the consolidated balance sheet, and is subsequently measured by increasing the carrying amount to reflect interest on the lease liability (using the effective interest method) and by reducing the carrying amount to reflect the lease payments made. The Group remeasures the lease liability (and makes a corresponding adjustment to the related right-of-use asset) whenever: • The lease term has changed or there is a change in the assessment of exercise of a purchase option, in which case the lease liability is measured by discounting the revised lease payments using a revised discount rate or • The lease payments change due to changes in an index or rate or a change in expected payment under a guaranteed residual value, in which cases the lease liability is measured by discounting the revised lease payments using the initial discount rate (unless the lease payments change is due to a change in a floating interest rate, in which case a revised discount rate is used) or • A lease contract is modified and the lease modification is not accounted for as a separate lease, in which case the lease liability is measured by discounting the revised lease payments using a revised discount rate. The right-of-use assets comprise the initial measurement of the corresponding lease liability, lease payments made at or before the commencement day and any initial direct costs. They are subsequently measured at cost less accumulated depreciation and impairment losses. Whenever the Group incurs an obligation for costs to dismantle and remove a leased asset, restore the site on which it is located or restore the underlying asset to the condition required by the terms and conditions of the lease, a provision is recognised and measured under IAS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’. The costs are included in the related right-of-use asset, unless those costs are incurred to produce inventories. Right-of-use assets are depreciated over the shorter period of lease term and useful life of the underlying asset. If a lease transfers the ownership of the underlying asset or the cost of the right-of-use asset reflects that the Group expects to exercise a purchase option, the related right-of-use asset is depreciated over the useful life of the underlying asset. The depreciation starts at the commencement date of the lease. The Group does not have any leases that include purchase options or that transfer ownership of the underlying asset. Variable rents that do not depend on an index or rate are not included in the measurement of the lease liability and the right-of- use asset. The related payments are recognised as an expense in the period in which the event or condition that triggers those payments occurs. As a practical expedient, IFRS 16 ‘Leases’ permits a lessee not to separate non-lease components, and instead account for any lease and associated non-lease components as a single arrangement. The Group has not used this practical expedient. Inventories Inventories are stated at the lower of cost and estimated net realisable value. Cost comprises direct materials and, where applicable, direct labour costs and those overheads that have been incurred in bringing the inventories to their present location and condition. Cost is calculated based on standard costs based on normal operating conditions with price and usage variances apportioned using the periodic unit pricing method. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution. Where net realisable value is lower than cost, provision for impairment is made which is charged to cost of sales in the consolidated income statement. Notes to the Consolidated Financial Statements continued 164 Overview Assets held for sale Non-current assets and groups of assets and liabilities which comprise disposal groups are classified as ‘held for sale’ when their carrying amount will be recoverable principally through a sale transaction rather than through continuing use. To be classified as a ‘held for sale’ asset or disposal group, the sale must be highly probable and the assets must be available for sale immediately in their present condition. In addition, all of the following criteria must also be met: • Management is committed to the plan to sell • The assets are being actively marketed • Actions required to complete the plan should indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn and • A sale has been agreed or is expected to be concluded within 12 months of the balance sheet date. Immediately prior to classification as held for sale, the value of the assets or groups of assets is remeasured in accordance with the requirements of IFRS 5 ‘Non-current Assets Held for Sale and Discontinued Items’. Subsequently, assets and disposal groups classified as held for sale are measured at the lower of book value or fair value less disposal costs. Assets held for sale are neither depreciated nor amortised. Discontinued operations To be classified as a discontinued operation, any disposal group or asset held for sale must have clearly distinguishable operations or cash flows, as well as meeting any one of the following three criteria: • The component must be a separate major line of business or geographical area of operations; or • Part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations; or • Is a subsidiary acquired exclusively with a view to resale. If none of these three criteria are met, the disposal group or asset held for sale will be classified within continuing operations. Cash, cash equivalents and bank overdrafts Cash and cash equivalents include cash at bank and in hand, call and short-term deposits and other highly liquid investments with original maturities of three months or less which are readily convertible onto known amounts of cash and insignificant risk of changes in value. Bank overdrafts are repayable on demand and form an integral part of the Group’s cash management. Financial instruments Financial assets and financial liabilities are recognised on the consolidated balance sheet when the Group becomes a party to the contractual provisions of the instrument. Derivative financial instruments The Group’s activities expose it to the financial risk resulting from changes in underlying market rates including foreign exchange and interest rates. The Group uses derivative financial instruments such as forward foreign exchange contracts and interest rate caps to hedge its risks associated with foreign currency and interest rate fluctuations. For those derivatives designated as hedges and for which hedge accounting is appropriate, the Group documents at the inception of the transaction, the hedging relationship between hedging instruments and hedged items. The documentation identifies the hedging instrument, the hedged item or transaction, the nature of the risk being hedged as well as its risk management objectives and how effectiveness will be measured throughout its duration. Such hedges are expected at inception to be highly effective. The Group also performs periodic assessment of whether the derivatives that are used in hedging transactions remain highly effective. The Group designates gross positions and hedge documentation is prepared in accordance with IFRS 9 ‘Financial Instruments’. All derivative financial instruments are initially recognised and subsequently remeasured at each reporting date at fair value. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative. Changes in the fair value of derivative financial instruments that are designated and effective as hedges of future cash flows are recognised directly in other comprehensive income. Any gains or losses arising from changes in the fair value of derivatives that do not qualify for hedge accounting, or in relation to any ineffective portion of derivatives that are otherwise in a hedging relationship are recognised immediately in the consolidated income statement. Financial assets The Group’s financial assets are initially and subsequently measured at either amortised cost or fair value through profit or loss, depending on the financial asset’s contractual cash flow characteristics and the Group’s business model for managing them. The Group de-recognises a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. 165 Strategic Report Governance Financial Statements CONTINUED (a) Trade receivables Trade and other receivables are initially measured at transaction price, and subsequently at amortised cost. The amortised cost for trade and other receivables is generally equivalent to the invoiced amount less allowance for expected credit losses (ECL). The ECL is based on the difference between the contractual cash flows due in accordance with the contract and the present value of all the cash flows that the Group expects to receive. The Group has elected to use the simplified approach in calculating ECL and recognises a loss allowance based on lifetime ECLs at each reporting date (i.e. the expected credit losses that will result from all possible default events over the expected life of the financial instrument). The Group has applied the practical expedient to calculate ECLs using a provision matrix based on the Group’s historical credit loss experience, adjusted for factors that are specific to the debtors, general economic conditions and an assessment of both the current as well as the forecast direction of conditions at the reporting date. Trade receivables are fully impaired and subsequently written off when all possible routes through which amounts can be recovered have been exhausted. The Group recognises any impairment gain or loss in the consolidated income statement with a corresponding adjustment to the financial asset’s carrying amount through a loss allowance account. (b) Loans to joint ventures The Group’s loans to the joint venture (presented in the consolidated balance sheet as part of the ‘net investment in joint ventures’) are measured initially at fair value and is subsequently held at amortised cost less an ECL allowance. The loans are assessed for an ECL allowance as follows: • Where there has been a significant increase in credit risk since initial recognition – the Group measures ECL based on lifetime ECLs i.e. all credit losses expected from possible default events over the remaining life of the loan, irrespective of the timing of the default • Where there has not been a significant increase in credit risk since initial recognition – the Group measures the loss allowance at an amount equal to 12-month ECL i.e. the portion of lifetime ECL that is expected to result from default events on the loan that are possible within 12 months after the reporting date. In assessing whether the credit risk has increased significantly on the loan to the joint venture since initial recognition, the Group compares the risk of a default occurring on the loan at the reporting date with the risk of a default occurring on the loan at the date of initial recognition. In making this assessment, the Group considers, in particular, the financial and operational performance of the joint venture, changes to the financial forecasts or increases in credit risk on other receivables. Any associated loss allowance related to loans to joint ventures is recorded in the consolidated income statement. Financial liabilities and equity Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. (a) Interest bearing loans and borrowings Interest-bearing bank loans, borrowings and overdrafts are initially recorded at fair value, net of directly related fees, and are subsequently measured at amortised cost using the effective interest rate method. Gains and losses arising on the repurchase, settlement or other cancellation of interest-bearing loans and borrowings are recognised in finance income and finance costs, respectively. (b) Trade payables Trade payables are initially recognised at fair value, normally being the invoiced amounts, and subsequently measured amortised cost, using the effective interest rate method. The carrying amount of trade payables generally equals the originally invoiced amounts. (c) Trade payables under vendor financing arrangements The Group may from time to time enter into arrangements with a bank or banking partners under which the bank offers vendors the option to receive early settlement of its trade receivables. Vendors using the financing arrangement pay a fee to the bank. The Group does not pay any fees and does not provide any additional collateral or guarantee to the bank. Based on the Group’s assessment the liabilities under the vendor financing arrangement are closely related to operating purchase activities and the financing arrangement does not lead to any significant change in the nature or function of the liabilities. These liabilities are therefore classified as trade payables with separate disclosures in the notes to the consolidated financial statements. The credit period does not exceed 12 months and are not discounted. As at the reporting date, trade payables under vendor financing arrangements were £nil (2022: £5.9 million), see note 18. (d) Share capital and own shares An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. Ordinary shares are classified as an equity instrument. Incremental costs directly attributable to the issue of new ordinary shares or options are shown in equity as a deduction, net of tax, from the proceeds. Notes to the Consolidated Financial Statements continued 166 Overview Where any member of the Group purchases the Company’s equity share capital, the consideration paid, including any directly attributable incremental costs (net of tax), is deducted from equity attributable to the Company’s equity holders until the shares are cancelled or reissued. Where such ordinary shares are subsequently reissued, any consideration received, net of any directly attributable incremental transaction costs and the related tax, are included in equity attributable to the Company’s equity holders. Reserves (a) Capital redemption reserve Amounts in respect of the redemption of certain of the Company’s ordinary shares are recognised in the capital redemption reserve. (b) Hedging reserve Changes in the fair value of derivative financial instruments that are designated and effective as hedges of future cash flows are recognised in the hedging reserve through other comprehensive income. If the firm commitment or forecast transaction that is the subject of a cash flow hedge results in the recognition of a non-financial asset or liability, then, at the time the asset or liability is recognised, the associated gains or losses on the derivative that had previously been recognised in other comprehensive income and accumulated in the hedging reserve are removed directly from equity and included in the initial measurement of the asset or liability. If the hedged item is transaction-related the foreign currency basis spread is reclassified to profit or loss when the hedged item affects profit or loss. Those reclassified amounts are recognised in the consolidated income statement in the same line as the hedged item. (c) Currency translation reserve The currency translation reserve recognises the cumulative effect of foreign exchange differences arising on translation of the Group’s overseas operations from their local functional currency to the Group’s presentational currency. Provisions Provisions are recognised when the Group has a present legal or constructive obligation for a future liability as a result of a past event, where the amount of the obligation can be estimated reliably and it is probable that the Group will be required to settle that obligation. The amount recognised as a provision is the Group’s best estimate at the balance sheet date of the likely future economic outflows required to settle the obligation. Warranties are provided within the Africa Electricals Division. Warranties are provided from the date of sale and are typically 12 months in length. A warranty provision is included in the consolidated balance sheet, which is calculated on the basis of historical returns as well as past experiences and industry averages for defective products. Retirement benefit and similar obligations The Group operates retirement benefit schemes in the UK and for certain overseas operations. In the UK, these comprise defined benefit schemes, each of which was closed to future accrual on 31 May 2008, and defined contribution schemes. Overseas schemes are predominantly defined contribution schemes, with the exception of PZ Cussons Indonesia, which operates a defined benefit scheme. The Group accounts for its defined benefit schemes under IAS 19 ‘Employee Benefits’. The deficit/surplus of the defined benefit pension schemes is recognised in the consolidated balance sheet (with surpluses only recognised to the extent that the Group has an unconditional right to a refund) and represents the difference between the fair value of the plan assets and the present value of the defined benefit obligation at the balance sheet date. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related pension obligation. Pension charges/income recognised in the consolidated income statement consists of administration charges for the scheme, past service costs and a cost/income based on the net interest expense/income on net pension scheme liabilities/surpluses. Net interest is calculated by applying a discount rate to the net defined benefit liability or asset. Past service cost is recognised in profit or loss when the plan amendment or curtailment occurs, or when the Group recognises related restructuring costs or termination benefits, if earlier. Remeasurements comprising actuarial gains and losses, the effect of the asset ceiling and the return on plan assets (excluding interest) are included directly in other comprehensive income. Payments to defined contribution retirement benefit schemes are charged as an expense when employees have rendered service entitling them to the contributions. Share-based payments The Group operates a number of long-term incentive schemes which provide share awards to Executive Directors and certain senior employees. These schemes are designed to align the interests of the participants with those of the Group’s shareholders. The Group also operates a Share Incentive Plan (SIP) scheme which is open to UK employees. The awards under these plans are measured at the fair value at the date of grant and are expensed over the vesting period based on the expected outcome of the performance, where they apply, and service conditions. At each balance sheet date, the estimate of the number of awards that are expected to vest is assessed, and the impact of the revision, if any, is recognised in the consolidated income statement, with a corresponding adjustment to equity. 167 Strategic Report Governance Financial Statements CONTINUED Dividend distributions Dividend distributions which are subject to shareholder approval are recognised as a liability in the period in which the approval is given. Interim dividends, which do not require shareholder approval, are recognised when paid . Consideration of climate change In preparing the consolidated financial statements, management have considered the impact of climate change, particularly in the context of the risks identified in the TCFD disclosures on pages 35 to 39. There has been no material impact identified on the financial reporting judgements and estimates. In particular, management considered the impact of climate change in respect of the following areas: • Assessment of impairment of goodwill, other intangibles and tangible assets • Assessment of impairment of financial assets • Going concern and viability disclosures • Impact on useful economic lives of assets • Preparation of budgets and cash flow forecasts. Given the low value of short to medium term risk to these areas assessed in the TCFD report, no climate change related impact was identified. The viability assessment on pages 69 to 71 includes an assessment of severe but plausible scenarios, including climate change risks, with the potential to impact future performance but none of these are considered likely to give rise to a trading deterioration of the magnitude indicated by the stress testing or to threaten the viability of the business over the four year assessment period. Management are, however, aware of the changing nature of risks associated with climate change and will regularly assess these risks against judgements and estimates made in preparation of the Group’s financial statements. Accounting estimates and judgements The Group’s significant accounting policies under IFRS have been set by management with the approval of the Audit & Risk Committee. The application of these policies requires management to make assumptions and estimates about future events. The resulting accounting estimates will, by definition, differ from the actual results. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Key sources of estimation uncertainty Pensions The cost of defined benefit pension schemes and the present value of the pension obligation are determined using actuarial assumptions in those valuations. These include the determination of the discount rate, future salary increases, mortality rates and future pension increases. Due to the complexity of the valuation, the underlying assumptions and its long-term nature, a defined benefit obligation is highly sensitive to changes in these assumptions. All assumptions are reviewed at each reporting date. Significant differences in actual experience or significant changes in key assumptions could affect the retirement benefit surplus/obligations and the net interest expense. In determining the discount rate, management considers the interest rates of corporate bonds with at least an ‘AA’ rating or above and having terms to maturity approximating to the terms of the related pension obligation to be appropriate. The mortality rate is based on publicly available mortality tables for the specific countries. Those mortality tables tend to change only at intervals in response to demographic changes. Future salary increases and pension increases are based on expected future inflation rates for the respective countries. See note 21 for details of key estimates and assumptions applied in valuing the pension schemes. Current tax Current tax liabilities/assets relate to the expected amount of tax to be paid/received as a result of the operating performance of the Group’s entities. In calculating the appropriate tax charge, assumptions and judgements are made regarding application and interpretation of local laws. In situations where tax impacts are subject to uncertain treatment, interpretation of local rule or regulation, or otherwise remain to be agreed with relevant tax authorities, an estimate of any resulting financial impact may be recorded in the consolidated financial statements. Any such management estimates are made in accordance with IFRS requirements, including IAS 12 ‘Income Taxes’ and IFRIC 23 ‘Uncertainty over Income Tax Treatments’ when considering income tax and IAS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’ in relation to non-income taxes. Due to the uncertainty associated with such tax items, there is a possibility that on conclusion of open tax matters at a future date, the final outcome may differ significantly from the original amounts recorded. Where the eventual tax paid or reclaimed is different to the amounts originally estimated, the difference will be charged or credited to the income statement in the period in which it is determined. Included within the current tax liability of the Group are current tax estimates with carrying values as at 31 May 2023 of £25.2 million (2022: £29.5 million), of which £20.1 million (2022: £18.8 million) relates to a single estimate arising due to a difference in technical standpoint between PZ Cussons plc and a tax authority on a subjective and complex piece of legislation. Due to the known difference in technical standpoint, this potential tax liability has been provided for in full as the range of possible outcomes could be a liability up to the full value of the provided amount, however the potential future settlement remains a cash risk. Notes to the Consolidated Financial Statements continued 168 Overview Of the remaining £5.1 million (2022: £10.7 million), £2.8 million (2022: £5.1 million) relates to the perceived risk that due to the subjective nature of transfer pricing in certain jurisdictions, tax authorities may challenge the arm’s length nature of certain intercompany transactions. In addition to the provision items listed above, as at 31 May 2023 the Group had further contingent tax liabilities of £7.8 million (2022: £8.9 million) and contingent assets of £2.2 million (2022: £nil). Although having a lower probability of a material financial, such positions have been disclosed as contingent liabilities in accordance with IAS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’. Assessment of impairment of goodwill and other indefinite life assets Goodwill and brands have all arisen from business combinations and all have indefinite useful lives and, in accordance with IAS 36 ‘Impairment of Assets’, are subject to annual impairment testing (which the Group carries out at the year-end date), or more frequently if there are indicators of impairment. The method used for impairment testing is to allocate assets (including goodwill and brands) to appropriate CGUs based on the smallest identifiable group of assets that generate independent cash inflows, and to estimate the recoverable amounts of the CGUs as the higher of the asset’s fair values less costs of disposal and the value in use. Value in use is determined using cash flow projections from approved budgets and plans which are then extrapolated based on estimated long-term growth rates applicable to the markets and geographies in which the CGUs operate. The cash flow projections are discounted based on a pre-tax weighted average cost of capital for comparable companies operating in similar markets and geographies as the Group adjusted for risks specific to the particular CGU. The assumptions used in the cash flow projections, and associated sensitivities, are described and set out in note 10. Assessment of useful lives of acquired brands The Directors are required to assess whether the useful lives of acquired brands are finite or indefinite. Under IAS 38 ‘Intangible Assets’, an intangible asset should be regarded as having an indefinite useful life when, based on all of the relevant factors, there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the entity. In determining that the acquired brands have indefinite lives, the Directors give consideration to such factors as their expected usage of the brands, typical product life cycles, the stability of the markets in which the brands are sold, the competitive positioning of the brands, and the level of marketing and other expenditure required to maintain the brands. The carrying value of brands within intangible assets as at 31 May 2023 was £230.8 million, and if, for example, the useful lives of brands were estimated to be 50 years based on their strength and durability, this would give rise to an annual impairment charge of £4.6 million. Critical areas of judgement Permanent as equity balances Common with many groups, subsidiaries within the Group enter into transactions with fellow subsidiaries. These transactions give rise to intragroup receivable/payable balances which, given the different functional currencies of subsidiaries, can mean certain of these receivable/payable balances will be denominated in foreign currency for one of the counterparties or, in some instances, both counterparties. The retranslation of these intragroup foreign currency balances gives rise to foreign currency exchange differences, and IAS 21 ‘The Effects of Changes in Foreign Exchange Rates’ provides guidance on the classification of these differences. More specifically, in relation to consolidated financial statements, IAS 21 provides guidance when settlement of these balances is neither planned nor likely to occur in the foreseeable future in which case such balances can be considered permanent as equity. Under these circumstances, which also extends to amounts lent to equity method investments, exchange differences are classified as other comprehensive income within the currency translation reserve. Judgement is required when assessing when the permanent as equity criteria are met. The Group’s loan to its joint venture, PZ Wilmar Limited, is considered a permanent as equity loan (note 12). 2. SEGMENTAL ANALYSIS The segmental information presented in this note is consistent with management reporting provided to the Executive Leadership Team (ELT), which is the Chief Operating Decision-Maker (CODM). The CODM reviews the Group’s internal reporting in order to assess performance and allocate resources and has determined the operating segments based on these reports which include an allocation of central revenue and costs as appropriate. The CODM considers the business from a geographic perspective, with Europe & the Americas, Asia Pacific, Africa and Central being the operating segments. In accordance with IFRS 8 ‘Opera , the ELT has identified these reportable segments which aggregate the Group’s trading entities by geographic location as these entities are considered to have similar economic characteristics. The number of countries that the Group operates in within these segments is limited to no more than five countries per segment, which share similar customer bases and encounter comparable micro-environmental challenges. The CODM assesses the performance based on operating profit before adjusting items. Revenues and operating profit of the Europe & the Americas and Asia Pacific segments arise from the sale of Hygiene, Beauty and Baby products. Revenue and operating profit from the Africa segment also arise from the sale of Hygiene, Beauty and Baby products as well as Electrical products. The Central segment comprises the activities of our in-house Fragrance business and of the costs associated with the Global headquarters and above market functions, net of recharges to our regions. Intra-Group sales of materials and manufactured goods, and charges for franchise fees and royalties are carried out on an arm’s length basis. Reporting used by the CODM to assess performance does contain information about brand-specific performance but global segmentation between the portfolio of brands is not part of the regular internally reported financial information. 169 Strategic Report Governance Financial Statements CONTINUED (a) Reportable segments Continuing operations 2023 Europe & the Americas £m Asia Pacific £m Africa £m Central £m Eliminations £m Total £m Gross segment revenue 210.2 197.8 256.3 74.0 (82.0) 656.3 Inter-segment revenue (4.4) (7.1) – (70.5) 82.0 – Revenue 205.8 190.7 256.3 3.5 – 656.3 Segmental operating profit/(loss) before adjusting items and share of results of joint ventures 29.3 27. 5 29.7 (20.7) – 65.8 Share of results of joint ventures – – 7.5 – – 7.5 Segmental operating profit/(loss) before adjusting items 29.3 27.5 37. 2 (20.7) – 73.3 Adjusting items (28.9) 2.1 11.1 2.1 – (13.6) Segmental operating profit/(loss) 0.4 29.6 48.3 (18.6) – 59.7 Finance income 15.4 Finance costs (13.3) Profit before taxation 61.8 2022 (restated) Europe & the Americas £m Asia Pacific £m Africa £m Central £m Eliminations £m Total £m Gross segment revenue 196.3 179.2 222.0 77. 3 (82.0) 592.8 Inter-segment revenue (3.3) (5.4) – (73.3) 82.0 – Revenue 193.0 173.8 222.0 4.0 – 592.8 Segmental operating profit/(loss) before adjusting items and share of results of joint ventures 35.0 20.9 15.7 (11.1) – 60.5 Share of results of joint ventures – – 6.6 – – 6.6 Segmental operating profit/(loss) before adjusting items 35.0 20.9 22.3 (11.1) – 67.1 Adjusting items (12.1) 16.1 6.3 (11.6) – (1.3) Segmental operating profit/(loss) 22.9 37.0 28.6 (22.7) – 65.8 Finance income 2.7 Finance costs (4.0) Profit before taxation 64.5 Refer to note 1(c) for details of the prior year restatements. Segment assets and liabilities are not disclosed because they are not reported to or reviewed by the CODM. (b) Geographical and category analysis The Group’s parent company is domiciled in the UK. The split of revenue from external customers and non-current assets between the UK, Nigeria and the rest of the world (Other) is: 2023 UK £m Nigeria £m Other £m Total £m Revenue 177.9 227.9 250.5 656.3 Goodwill and other intangible assets 274.9 2.8 35.0 312.7 Property, plant and equipment 23.7 29.8 20.8 74.3 Right-of-use assets 9.2 1.2 2.1 12.5 Net investment in joint ventures – 52.0 – 52.0 Notes to the Consolidated Financial Statements continued 170 Overview 2022 (restated) UK £m Nigeria £m Other £m Total £m Revenue 172.5 192.3 228.0 592.8 Goodwill and other intangible assets 296.6 3.0 34.3 333.9 Property, plant and equipment 24.1 34.8 24.0 82.9 Right-of-use assets 12.0 1.4 3.5 16.9 Net investment in joint ventures – 47.0 (1.6) 45.4 Refer to note 1(c) for details of the prior year restatements. The Group analyses its revenue by the following categories: 2023 £m 2022 £m Hygiene 334.8 305.9 Baby 123.1 103.4 Beauty 85.3 80.9 Electricals 105.4 91.5 Other 7.7 11.1 656.3 592.8 3. ADJUSTING ITEMS Adjusting items income/(expense), all of which related to continuing operations, comprised: 2023 £m 2022 £m Nigeria Simplification 6.8 7.8 HR Transformation (0.6) (2.9) Finance Transformation (5.1) (0.7) Supply Chain Transformation (4.0) (0.7) (2.9) 3.5 Transaction-related income/(costs) 0.7 (1.4) Intangible asset impairment net of impairment reversal (12.3) (3.1) Impairment reversal of net investment in joint ventures 2.2 – Reclassification of exchange differences on repayment of permanent as equity loans – (1.5) Compensation from Australian Competition & Consumer Commission – 1.5 Profit on disposal of five:am – 0.7 Derecognition of capitalised costs related to cloud computing arrangements – (1.0) Adjusting items before taxation (12.3) (1.3) Taxation 4.7 (0.3) Adjusting items after taxation (7.6) (1.6) Adjusting items before taxation are classified within: 2023 £m 2022 £m Operating profit (13.6) (1.3) Finance income 1.3 – (12.3) (1.3) 171 Strategic Report Governance Financial Statements CONTINUED A description of the principal adjusting items is provided below: Nigeria Simplification – comprises £11.1 million from the profit on disposal of a number of residential properties (2022: £15.9 million profit), and other costs of £4.3 million (2022: £8.1 million) which, in the current year, relate to consultancy costs and other advisory costs related to the simplification programme, and in the prior year related to the impairment of factory assets and associated engineering spares within inventory. HR Transformation – the programme centres around investment in a new people system designed to enhance ways of working, build organisational capability and underpin the Group’s new culture, reduce organisational risk and embed better controls and drive process efficiency. This two-year programme of change is split into two phases across the Group’s financial years 2022-24. Finance Transformation – this project which started in 2022 is a three-year programme of change covering investment in a future finance operating model and improving capability, processes and controls. As well as ensuring the Group are ready for compliance deadlines with future corporate reform in Nigeria and the UK (ICFR or ‘UK Sox’ as part of the proposed BEIS corporate reform), it will also improve the overall Group control environment, with the right set of processes and systems and a strengthened financial control team. It will deliver an optimal Finance Shared Service Centre footprint and address the legacy finance process and systems issues associated with our SAP ERP system. The programme is expected to incur up to a further £5.3 million of costs in 2024. Supply Chain Transformation – this multi-year programme which started in 2022 is designed to respond to the longer-term business strategy of the organisation, its objectives being to align and improve supply chain capabilities and drive activities that will dramatically reduce business complexity. It focuses on leading brands for priority markets and outsourcing manufacturing that is no longer economically viable. It enhances capabilities where there is scale and strategic advantage in terms of formulation or manufacturing or where there are geographical benefits. Total programme spend is estimated at approximately £16 million, of which approximately £3 million relates to capital expenditure, over the 5 year programme lifecycle. Transaction-related income/costs – in March 2022, the Group acquired Childs Farm, and in the current year recognised a £1.3 million reduction in the deferred consideration liability for the acquisition (note 18) and incurred £0.6 million of costs related to the integration of the business. In the prior year, £1.4 million of costs directly attributable to the acquisition of Childs Farm were incurred including legal and other advisory fees. Intangible asset impairment net of impairment reversal – comprises a £16.5 million impairment of the Sanctuary Spa brand (note 10) and a £4.2 million reversal of a prior period impairment of the Rafferty’s Garden brand (note 10). In the prior year, an £11.6 million impairment of the Charles Worthington brand was recognised along with an £8.5 million reversal of a prior period impairment of the Rafferty’s Garden brand, the latter resulting from a review of future growth assumptions used in the annual impairment test. Impairment reversal of net investment in joint ventures – relates to the reversal of a £2.2 million impairment made in a previous period by the Group in its 50% interest in Wilmar PZ International Pte. Limited, which ceased trading in October 2020 and was dissolved in May 2023 (note 12). The following items relate solely to the prior year: Compensation from Australian Competition & Consumer Commission – being a receipt from the Australian Competition & Consumer Commission as compensation towards legal costs incurred by the Group in a successful defence of a legal case related to competition in the laundry market in Australia dating from 2008–2009. Profit on disposal of five:am – on 4 June 2021, the Group completed the sale of the assets associated with five:am, which was the Group’s yoghurt business in Australia, for £7.2 million. The £0.8 million pre-tax profit recognised on disposal was net of £0.4 million of accumulated foreign exchange losses reclassified from equity. On a post-tax basis the profit was £2.5 million which included the release of a £1.2 million deferred tax liability in relation to the disposed brand. Derecognition of capitalised costs related to cloud computing arrangements – following the April 2021 IFRIC agenda decision in relation to this matter, the Group reviewed its costs capitalised in respect of cloud computing arrangements and determined that they did not meet the criteria for capitalisation, and accordingly derecognised and expensed these. Notes to the Consolidated Financial Statements continued 172 Overview 4. PROFIT FOR THE YEAR Profit for the year has been arrived at after charging/(crediting): 2023 £m 2022 (restated) £m Net foreign exchange losses 5.1 7.1 Research and development costs 0.5 2.0 Depreciation of property, plant and equipment 8.2 9.3 Impairment of property, plant and equipment – 5.9 Amortisation of intangible assets 7.0 7.4 Impairment of intangible assets 16.5 11.6 Impairment reversal of intangible assets (4.2) (8.5) Depreciation of right-of-use assets 3.9 3.5 Profit on disposal of property, plant and equipment (11.1) (15.9) Raw and packaging materials and goods purchased for resale 377.5 342.4 Inventory provisions 2.0 6.9 Net trade receivable provision reversal (0.8) – Short-term or low-value lease rentals (0.2) – Employee costs (note 5) 84.7 72.8 Refer to note 1(c) for details of the prior year restatements. Auditor’s remuneration An analysis of Auditor’s remuneration is provided below: 2023 £m 2022 £m Fees payable to the Company’s Auditor for the audit of the Company’s annual financial statements and consolidation 2.2 1.3 Fees payable to the Company’s Auditor and their associates for other services to the Group: – audit of the Company’s subsidiaries 0.8 0.8 Total audit fees 3.0 2.1 Fees payable to the Company’s Auditor and its associates for other services: – audit-related assurance services – – Total fees 3.0 2.1 Fees for permitted non-audit services paid to the Company’s Auditor included £40,000 (2022: £40,000) for the review of the Group’s interim statement released in February 2023 and in the prior year £700 in respect of services rendered to witness and report on the destruction of inventory in Thailand. 173 Strategic Report Governance Financial Statements 5. EMPLOYEES The average monthly number of employees (including Executive Directors) was as follows: 2023 number 2022 number Production 1,647 1,783 Selling and distribution 613 668 Administration 412 401 2,672 2,852 Costs incurred in respect of the above were as follows (comparative amounts have been corrected from previously reported): 2023 £m 2022 £m Wages and salaries 74.7 63.3 Social security costs 4.2 3.5 Pension costs 4.1 4.5 Share-based payments expense 1.7 1.5 84.7 72.8 The pension costs (note 21) consist of: 2023 £m 2022 £m Defined benefit schemes 1.5 1.7 Defined contribution schemes 2.4 2.2 Nigerian gratuity scheme 0.6 0.5 Other post-employment benefits (0.4) 0.1 4.1 4.5 6. NET FINANCE INCOME/(COSTS) 2023 £m 2022 £m Interest receivable on short-term deposits 11.1 1.7 Interest receivable on loans to joint ventures 0.7 0.4 Finance income on defined benefit pension schemes 2.3 0.6 Change in fair value of deferred consideration 1.3 – Finance income 15.4 2.7 Interest payable on borrowings (11.3) (2.5) Finance expense on defined benefit pension schemes (0.6) (0.6) Interest expense on lease liabilities (0.5) (0.5) Amortisation of financing fees (0.9) (0.4) Finance costs (13.3) (4.0) Net finance income/(costs) 2.1 (1.3) Notes to the Consolidated Financial Statements continued 174 Overview 7. TAXATION 2023 £m 2022 (restated) £m Current tax UK corporation tax – current year (2.2) 2.5 – adjustments in respect of prior years (0.3) (0.5) – double tax relief (0.5) (1.1) (3.0) 0.9 Overseas corporation tax – current year 26.3 12.2 – adjustments in respect of prior years 0.8 (0.5) 27.1 11.7 Total current tax charge 24.1 12.6 Deferred tax Origination and reversal of temporary timing differences (6.2) (2.7) Adjustments in respect of prior years (2.3) 3.0 Effect of rate change adjustments (0.2) 0.1 Total deferred tax charge (8.7) 0.4 Total tax charge 15.4 13.0 Analysed as: Tax on profit before adjusting items 20.1 12.7 Tax on adjusting items (4.7) 0.3 15.4 13.0 Refer to note 1(c) for details of the prior year restatements. The effective tax rate in relation to continuing operations for the year was 24.9% (2022: 20.2% as restated). Before adjusting items, the effective tax rate was 27.1% (2022: 19.5%). 175 Strategic Report Governance Financial Statements CONTINUED UK corporation tax is calculated at 20.0% (2022: 19.0%) of the estimated assessable profit for the year. Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions. The Group has chosen to use the UK corporation tax rate for the reconciliation of the tax charge for the year to the profit before taxation as this is the seat for the central management and control of the Group. 2023 £m 2022 (restated) £m Profit before tax from continuing operations 61.8 64.5 Loss before tax from discontinued operations – (1.7) Profit before tax 61.8 62.8 Tax at the UK corporation tax rate of 20.0% (2022: 19.0%) 12.4 11.9 Adjusted for: Effect of non-deductible expenses 2.2 6.6 Effect of non-taxable income (4.9) (10.0) Effect of rate changes on deferred taxation (all territories) (0.5) – Tax effect of share of results of joint ventures (2.2) (2.0) Other taxes suffered outside of the UK 3.2 2.2 Net adjustment to amount carried in respect of uncertain tax positions (0.8) 0.2 Movements in deferred tax assets not recognised (0.6) – Adjustments in respect of prior years (1.5) (1.2) Differences in foreign tax rates (non-UK residents) 8.1 5.3 Tax charge for the year 15.4 13.0 Tax charge attributable to continuing operations 15.4 13.1 Tax credit attributable to discontinued operations – (0.1) Tax charge for the year 15.4 13.0 Refer to note 1(c) for details of the prior year restatements. Primary reconciling differences between tax at UK corporation tax rate and the actual tax charge for the year include the following: • Effect of non-deductible expenses of £2.2 million (2022: £6.6 million) include items considered non-deductible across the Group’s various operating entities, including disallowances in respect of related party transactions • Effect of non-taxable income of £4.9 million (2022: £10.0 million) predominately related to the non-taxable gain in Nigeria on property disposals. The prior year amount included a large non-taxable gain in Nigeria of £3.2 million relating to land disposal and non-taxable proceeds of £4.0 million on disposal of the five:am brand and related items • Other taxes suffered outside the UK increased the annual tax charge by £3.2 million (2022: £2.2 million) and included unrelievable withholding taxes incurred on dividends received in the UK • Differences in foreign tax rates during the year of £8.1 million (2022: £5.3 million) reflect changes in the Group profitability profile. Taxation on items taken directly to equity and other comprehensive income was a credit of £8.9 million (2022: £9.3 million charge) and related to deferred tax on the remeasurement of retirement and other long-term benefit obligations, on share-based payments expense and on exchange differences on intercompany balances determined to be permanent as equity. The Group operates in a multinational tax environment where the nature of uncertain tax positions is often complex and subject to change, and necessarily involves a degree of estimation and judgement in respect of certain items whose tax treatment cannot be finally determined until resolution. The Group believes that it has made adequate provision for all open tax positions including those in current discussion with local tax authorities, and which totalled £25.2 million as at 31 May 2023 (2022: £31.0 million). Further information on uncertain tax positions can be found in note 1(d) under ‘Key sources of estimation uncertainty’. Notes to the Consolidated Financial Statements continued 176 Overview 8. DIVIDENDS 2023 £m 2022 £m Amounts recognised as distributions to ordinary shareholders in the year comprise: Final dividend for the year ended 31 May 2022 of 3.73p (2022: 3.42p) per ordinary share 15.6 14.3 Interim dividend for the year ended 31 May 2023 of 2.67p (2022: 2.67p) per ordinary share 11.2 11.2 26.8 25.5 After the balance sheet date, a final dividend for the year ended 31 May 2023 was proposed by the Directors of 3.73p per ordinary share. This results in a total final proposed dividend of £15.6 million (2022: £15.6 million). Subject to approval by shareholders at the Annual General Meeting, the dividend will be paid on 30 November 2023 to the shareholders on the register on 3 November 2023. The proposed dividend has not been included as a liability in the consolidated financial statements as at 31 May 2023. 9. EARNINGS PER SHARE Earnings per share (EPS) represents the amount of earnings attributable to each ordinary share in issue. Basic EPS is calculated by dividing the earnings (profit after tax attributable to owners of the Parent) by the weighted average number of ordinary shares in issue during the year, excluding own shares owned by employee trusts. For diluted EPS, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares. The Group’s dilutive potential ordinary shares relate to awards granted under the Group’s share incentive schemes which are described in the share-based payments note (note 23). The average number of shares is reconciled to the basic weighted average and diluted weighted average number of shares as set out below: 2023 number 000 2022 number 000 Average number of ordinary shares in issue during the year 428,725 428,725 Less: weighted average number of shares held by employee trusts (10,180) (10,249) Basic weighted average shares in issue during the year 418,545 418,476 Dilutive effect of share incentive schemes 1,530 2,365 Diluted weighted average shares in issue during the year 420,075 420,841 An adjusted EPS measure is provided which calculates EPS excluding adjusting items from profits attributable to owners of the Parent. As described in the accounting policies, the Directors believe that the separate disclosure of adjusting items is relevant to an understanding of the Group’s financial performance, and excluding such items provides a more meaningful basis upon which to analyse underlying business performance and make year-on-year comparisons. 177 Strategic Report Governance Financial Statements CONTINUED Earnings per share from continuing and discontinued operations 2023 £m 2022 (restated) £m Profit after tax attributable to owners of the Parent 36.4 47.9 Exclude: adjusting items (net of taxation effect) 10.6 2.9 Adjusted profit after tax 47.0 50.8 2023 pence 2022 (restated) pence Basic earnings per share 8.70 11.45 Exclude: adjusting items 2.53 0.69 Adjusted basic earnings per share 11.23 12.14 Diluted earnings per share 8.67 11.38 Exclude: adjusting items 2.52 0.69 Adjusted diluted earnings per share 11.19 12.07 Refer to note 1(c) for details of the prior year restatements. Earnings per share from continuing operations 2023 £m 2022 (restated) £m Profit attributable to owners of the Parent from continuing operations 36.4 49.7 Exclude: adjusting items (net of taxation effect) 10.6 2.9 Adjusted profit after tax 47.0 52.6 2023 pence 2022 (restated) pence Basic earnings per share 8.70 11.88 Exclude: adjusting items 2.53 0.69 Adjusted basic earnings per share 11.23 12.57 Diluted earnings per share 8.67 11.81 Exclude: adjusting items 2.52 0.69 Adjusted diluted earnings per share 11.19 12.50 Refer to note 1(c) for details of the prior year restatements. Earnings per share from discontinued operations 2023 £m 2022 £m Loss after tax attributable to owners of the Parent from discontinued operations – (1.8) 2023 pence 2022 pence Basic losses per share – (0.43) Diluted losses per share – (0.43) Notes to the Consolidated Financial Statements continued 178 Overview 10. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill £m Software £m Brands £m Total £m Cost As at 1 June 2021 53.9 66.0 233.2 353.1 Additions (restated) 13.5 1.4 35.5 50.4 Derecognition of capitalised costs related to cloud computing – (2.2) – (2.2) Exchange differences 0.8 0.4 1.6 2.8 As at 31 May 2022 68.2 65.6 270.3 404.1 Additions – 2.0 – 2.0 Disposals – (0.5) – (0.5) Transfer to property, plant and equipment – (0.4) – (0.4) Exchange differences (1.6) (0.1) (3.1) (4.8) As at 31 May 2023 66.6 66.6 267. 2 400.4 Accumulated amortisation and impairment As at 1 June 2021 – as reported 10.6 32.8 20.8 64.2 Effect of prior year adjustment – (4.7) – (4.7) As at 1 June 2021 – as restated 10.6 28.1 20.8 59.5 Amortisation charge (restated) – 7.4 – 7.4 Impairment charge – – 11.6 11.6 Impairment reversal – – (8.5) (8.5) Derecognition of amortisation related to cloud computing – (1.2) – (1.2) Exchange differences 0.5 0.3 0.6 1.4 As at 31 May 2022 11.1 34.6 24.5 70.2 Amortisation charge – 7.0 – 7.0 Disposals – (0.5) – (0.5) Impairment charge – – 16.5 16.5 Impairment reversal – – (4.2) (4.2) Exchange differences (0.9) – (0.4) (1.3) As at 31 May 2023 10.2 41.1 36.4 87.7 Net book value As at 31 May 2023 56.4 25.5 230.8 312.7 As at 31 May 2022 (restated) 57.1 31.0 245.8 333.9 Refer to note 1(c) for details of the prior year restatements. Capitalised costs and accumulated amortisation relating to cloud computing were derecognised in 2021 following the IFRIC agenda decision in April 2021 regarding the treatment of such costs. Amortisation is charged to administrative expenses in the consolidated income statement. Cumulative impairment of goodwill as at 31 May 2023 was £10.2 million (2022: £11.1 million) and cumulative impairment of brands as at 31 May 2023 was £36.4 million (2022: £24.5 million). Software includes the Group’s enterprise resource planning system (SAP), and the carrying value of this asset as at 31 May 2023 is £20.6 million (2022: £25.3 million as restated), with four years of amortisation remaining. 179 Strategic Report Governance Financial Statements CONTINUED Other than software, intangible assets comprise goodwill and brands. Goodwill and brands have all arisen from previous business combinations and all have indefinite useful lives and, in accordance with IAS 36 ‘Impairment of Assets’, are subject to annual impairment testing (which the Group carries out at the year-end date), or more frequently if there are indicators of impairment. The method used for impairment testing is to allocate assets (including goodwill and brands) to appropriate cash-generating units (CGUs) based on the smallest identifiable group of assets that generate independent cash inflows, and to estimate the recoverable amounts of the CGUs as the higher of the assets’ fair values less costs of disposal and the value in use. Value in use is determined using cash flow projections from approved budgets and plans which are then extrapolated based on estimated long-term growth rates applicable to the markets and geographies in which the CGUs operate. The cash flow projections are discounted based on a pre-tax weighted average cost of capital for comparable companies operating in similar markets and geographies as the Group adjusted for risks specific to the particular CGU. Goodwill of £56.4 million (2022: £57.1 million as restated) comprises £40.4 million (2022: £40.4 million) in relation to the acquisitions of the Group’s Beauty brands (Charles Worthington, Fudge, Sanctuary Spa and St. Tropez), £13.5 million (2022: £13.5 million as restated) on the March 2022 acquisition of Childs Farm and £2.5 million (2022: £3.2 million) in relation to other acquisitions. Goodwill for the Beauty brands is assessed at the group of CGUs comprising these brands (see table below) as this represents the lowest level at which goodwill is monitored by management. The carrying value of goodwill and each brand is set out in the table below. For the impairment testing of brands, each brand is allocated to a single CGU. For the impairment testing of goodwill, Childs Farm goodwill is allocated to the same CGU as the brand and, as noted above, Beauty goodwill is allocated to the group of CGUs comprising the Beauty brands: Goodwill 2023 £m Brands 2023 £m Goodwill (restated) 2022 £m Brands 2022 £m Charles Worthington 9.6 9.6 Fudge 24.6 24.6 Sanctuary Spa 58.9 75.4 St. Tropez 58.4 58.4 Beauty 40.4 151.5 40.4 168.0 Original Source – 9.8 – 9.8 Rafferty’s Garden – 34.0 – 32.5 Childs Farm 13.5 35.5 13.5 35.5 Other 2.5 – 3.2 – 56.4 230.8 57.1 245.8 In performing the impairment testing, the Group has used the budget and plan covering the four years ending 31 May 2027 as described in the Long Term Viability Statement on page 69 and the Board approved CGU specific plans for a fifth year before applying the long term growth rate. Assumptions in the budgets and plans used for the value in use cash flow projections (for all brands excluding Childs Farm) include future revenue volume and price growth rates, associated future levels of marketing support, the cost base of manufacture and supply and directly associated overheads. These assumptions are based on historical trends and future market expectations specific to each CGU and the markets and geographies in which each CGU operates. Childs Farm was acquired in March 2022, and on the business combination a fair value for the brand of £35.5 million was recognised, with goodwill arising of £13.5 million. Management’s stated plan is to expand the brand into international markets, and so specific assumptions on revenue growth along with associated higher gross margins have been applied. Revenue for Childs Farm is expected to triple over the five years ending 31 May 2028 reflecting the growth potential in international markets. The margin growth in international markets compared to the UK is driven by premium product pricing perception and lower expected promotional activity in these markets. Management forecasts cash conversion rates (being the ratio of operating cash flow to operating profit) based on historical experience. Notes to the Consolidated Financial Statements continued 180 Overview The other key assumptions applied in determining value in use are the long-term growth rate beyond the period of the approved budget and plan, and the discount rate to apply to the cash flow projections, both of which are determined with reference to the markets and geographies in which the CGU (or group of CGUs) operates. The long-term growth rates and discount rates applied in the value in use calculations used in impairment tests were: Long-term growth rate 2023 Long-term growth rate 2022 Pre-tax discount rate 2023 Pre-tax discount rate 2022 Charles Worthington 2.0% 1.5% 10.1% 10.1% Fudge 2.0% 1.5% 10.7% 10.1% Sanctuary Spa 2.0% 1.5% 10.2% 8.0% St. Tropez 2.0% 1.5% 10.4% 8.0% Beauty group of CGUs (goodwill assessment) 2.0% 1.5% 10.4% 8.2% Original Source 2.0% 1.5% 10.5% 8.0% Rafferty’s Garden 2.5% 2.5% 10.6% 10.0% Childs Farm (brand and goodwill assessment) 2.0% n/a 12.2% n/a The results of the impairment tests as at 31 May 2023 were as follows: Sanctuary Spa For the Sanctuary Spa brand, the recoverable amount of the applicable CGU was determined to be £63.0 million based on a value in use calculation which, when compared to a carrying value of £79.5 million (of which the brand represented £75.4 million), resulted in an impairment charge of £16.5 million. The recoverable amount reflected the challenging UK consumer and self-care category backdrop as cost-of-living pressures mean consumers are sensitive to price increases. Management has determined gross margin to be the key assumption in the forecasts for Sanctuary Spa given the factors noted above regarding consumer price sensitivity. Sensitivity analysis has been carried out and a reasonably possible change where gross margin was to decline by 2.5% within the five year forecast period would increase the impairment charge by £8.5 million to £25.0 million. Conversely should gross margins improve by 2.5% the impairment charge would reverse by £8.5 million to £8.0 million. Charles Worthington For the Charles Worthington brand, the recoverable amount of the applicable CGU which was based on a value in use calculation was determined to be £11.5 million, marginally in excess of the carrying value of £10.6 million (of which the brand represented £9.6 million). The recoverable amount reflected slower growth on a strong sales performance in the year ended 31 May 2023 coupled with a recovery in margins after previous inflationary cost increases were absorbed without passing on to consumers given price sensitivity during the cost of living crisis. Management have determined gross margin to be the key assumption in the forecasts for Charles Worthington given the factors noted above regarding consumer price sensitivity. Sensitivity analysis has been carried out and a reasonably possible change where gross margin was to decline by 3.0% within the five year forecast period would result in an impairment charge of £1.2 million. Conversely should gross margins improve by 3.0% an impairment reversal of £3.0 million would be recorded. Management determined, therefore, that due to the marginal headroom in the base case and a potential reasonably possible downside leading to an impairment charge, that it was not appropriate to reverse any of the £19.9 million cumulative impairment recorded in prior years. Management do not consider a further decline in volumes to be reasonably possible scenario based on historic experience. However, an increase of 20% in forecast sales within the five year forecast period would result in a reversal of £5.4 million being recorded. Rafferty’s Garden For the Rafferty’s Garden brand, the recoverable amount of the applicable CGU was determined to be £44.6 million based on a value in use calculation which, when compared to a carrying value of £32.0 million (reflecting brand value of £29.8 million), resulted in the reversal of a previously recognised impairment charge of £4.2 million. The increase in the recoverable amount reflected a change in the current year estimates reflecting the upturn in the brand’s performance. The reversal of the impairment loss has not exceeded the carrying amount that would have been determined had no impairment loss been recognised in prior years. Other CGUs For the remaining CGUs, the recoverable amounts of the respective applicable CGUs, which were determined based on value in use calculations, exceeded the carrying values. Sensitivity analysis on the value in use calculations did not identify potential impairment in relation to a reasonably possible downside in the assumptions used for the projections. 181 Strategic Report Governance Financial Statements 11. PROPERTY, PLANT AND EQUIPMENT Land and buildings £m Investment property £m Plant and machinery £m Fixtures, fittings and vehicles £m Assets in the course of construction £m Total £m Cost As at 1 June 2021 83.9 8.4 112.3 49.3 7.0 260.9 Additions – 0.2 – – 6.6 6.8 Disposals (0.6) (2.4) 0.5 (1.5) (0.1) (4.1) Reclassified as held for sale (2.0) (1.7) – – – (3.7) Reclassification to investment property (4.7) 4.7 – – – – Other reclassifications 0.7 – 4.5 3.1 (8.3) – Exchange differences 4.0 (0.7) 7.3 1.2 0.3 12.1 As at 31 May 2022 81.3 8.5 124.6 52.1 5.5 272.0 Additions – – – 0.1 4.6 4.7 Disposals (3.6) – (5.3) (1.5) (0.1) (10.5) Reclassifications and transfer from intangible assets 0.9 – 4.8 1.2 (6.6) 0.3 Exchange differences (3.1) (1.3) (4.4) (0.9) (0.1) (9.8) As at 31 May 2023 75.5 7.2 119.7 51.0 3.3 256.7 Accumulated depreciation and impairment As at 1 June 2021 32.6 0.8 89.1 46.9 – 169.4 Depreciation charge 1.8 – 5.8 1.7 – 9.3 Disposals (0.4) (0.7) 0.4 (1.5) – (2.2) Reclassified as held for sale (0.4) (0.6) – – – (1.0) Reclassification to investment property (1.6) 1.6 – – – – Impairment charge 3.8 – 2.1 – – 5.9 Exchange differences 1.1 – 5.6 1.0 – 7.7 As at 31 May 2022 36.9 1.1 103.0 48.1 – 189.1 Depreciation charge 0.8 0.1 5.7 1.6 – 8.2 Disposals (2.7) – (5.3) (1.5) – (9.5) Reclassifications 0.4 (0.4) – – – – Exchange differences (1.0) – (3.6) (0.8) – (5.4) As at 31 May 2023 34.4 0.8 99.8 47.4 – 182.4 Net book value As at 31 May 2023 41.1 6.4 19.9 3.6 3.3 74.3 As at 31 May 2022 44.4 7.4 21.6 4.0 5.5 82.9 Depreciation is charged to administrative expenses except for plant and machinery which is charged to cost of sales in the consolidated income statement. As at 31 May 2023, the Group had entered into commitments for the purchase of property, plant and equipment amounting to £1.1 million (2022: £0.3 million). As at 31 May 2023, the Group’s share in the capital commitments of its joint venture was £nil (2022: £nil). Disposals in each year mainly related to the sale of residential properties in Nigeria as part of the ongoing simplification programme and which realised a £11.7 million (2022: £15.9 million) profit on disposal which was included within adjusting items (note 3). The impairment charge of £5.9 million for land and buildings and plant and machinery in the prior year related to the impairment of factory assets in Nigeria as part of the ongoing simplification programme, and this charge was included within adjusting items (note 3). The fair value of the investment properties as at 31 May 2023 is £42.2 million (2022: £43.7 million). Notes to the Consolidated Financial Statements continued 182 Overview 12. NET INVESTMENTS IN JOINT VENTURES Joint ventures are contractual arrangements over which the Group exercises joint control with partners and where the parties have rights to the net assets of the arrangement, irrespective of the Group’s shareholding in the entity. The Group’s principal joint venture relates to a 50% interest in PZ Wilmar Limited, a manufacturing business based in Nigeria. In the Group’s consolidated financial statements, the interest in PZ Wilmar Limited is accounted for using the equity method, and the Group includes loans advanced to the joint venture within its net investment. The movement in the year in the carrying value of the net investments in joint ventures is set out below: PZ Wilmar Limited Other joint venture £m Total £m Long-term loans £m Equity method accounted £m As at 1 June 2021 35.2 0.7 (1.7) 34.2 Share of profit – 6.6 – 6.6 Exchange differences 4.4 0.1 0.1 4.6 As at 31 May 2022 39.6 7.4 (1.6) 45.4 Share of profit – 7. 5 – 7.5 Impairment reversal – – 2.2 2.2 Loan waived on dissolution – – (0.6) (0.6) Exchange differences 0.7 (3.2) – (2.5) As at 31 May 2023 40.3 11.7 – 52.0 The long-term loans are denominated in US Dollars, interest free and repayable in part or in full on demand, subject to a 12 month notice period. Exchange differences on the long-term loans are recorded within other comprehensive income as the loans are determined to be permanent as equity (applies to the exchange differences on the loans receivable and the corresponding loan payable in PZ Wilmar Limited’s results). Set out below is the summarised financial information for PZ Wilmar Limited: 2023 £m 2022 £m Assets Non-current assets 46.4 51.1 Current assets Cash and cash equivalents 25.4 43.4 Other current assets 83.8 6 7.5 109.2 110.9 Total assets 155.6 162.0 Liabilities Non-current liabilities (82.2) (80.5) Current liabilities (50.0) (66.8) Total liabilities (132.2) (147. 3) Net assets 23.4 14.7 Proportion of Group’s ownership interest in the joint venture 50% 50% Equity method accounted carrying amount of the Group’s interest in the joint venture 11.7 7.4 183 Strategic Report Governance Financial Statements CONTINUED 2023 £m 2022 £m Revenue 380.1 295.6 Profit before tax 20.2 18.8 Profit after tax 14.9 12.6 Proportion of Group’s ownership interest in the joint venture 50% 50% Share of result of joint venture 7.5 6.6 The long-term loans issued to PZ Wilmar Limited have been assessed for impairment in accordance with IFRS 9 ‘Financial Instruments’. These loans are considered to be in stage 2 as the credit risk has increased significantly since initial recognition. The loss allowance has been measured using lifetime expected credit loss by assessing the value in use of PZ Wilmar Limited, and on this basis, management has concluded that no impairment of these loans is required. The Group’s other joint venture related to a 50% interest in Wilmar PZ International Pte. Limited which ceased trading in October 2020 and was dissolved in May 2023 resulting in the reversal of a £2.2 million impairment recorded in a previous period. On dissolution, the loan advanced by the joint venture was waived. 13. ASSETS HELD FOR SALE Assets held for sale as at 31 May 2023 were £nil (2022: £3.4 million). Assets held for sale at 31 May 2022 related to residential properties in Nigeria which are being disposed of as part of the ongoing simplification programme. 14. INVENTORIES 2023 £m 2022 £m Raw materials and consumables 21.1 27.9 Work in progress 9.9 10.0 Finished goods and goods for resale 81.9 73.9 112.9 111.8 During the year, the cost of inventories recognised as an expense, and included in cost of sales, amounted to £377.5 million (2022: £342.4 million) which included £2.0 million (2022: £6.9 million) for the write-down to net realisable value for slow-moving and obsolete inventories. Inventories are stated after provision to write-down to net realisable value of £6.0 million (2022: £8.8 million). 15. TRADE AND OTHER RECEIVABLES 2023 £m 2022 £m Trade receivables 92.6 90.9 Less: loss allowance (4.4) (3.9) Net trade receivables 88.2 87.0 Amounts owed by joint ventures 2.2 1.7 Other receivables 22.1 11.0 Prepayments 6.6 5.3 119.1 105.0 The Directors consider the carrying amount of trade and other receivables approximates to their fair value due to their short-term nature. Notes to the Consolidated Financial Statements continued 184 Overview Movement in the trade receivables loss allowance was: 2023 £m 2022 £m As at 1 June (3.9) (4.1) Increase in loss allowance (2.0) (0.9) Allowance utilised during the year 0.1 0.3 Allowance released during the year 1.2 0.9 Exchange differences 0.2 (0.1) As at 31 May (4.4) (3.9) See note 17 for an analysis of the ageing and credit risk profile of trade receivables. Net trade receivables are denominated in the following currencies: 2023 £m 2022 £m Sterling 31.9 36.3 US Dollar 11.2 12.5 Nigerian Naira 10.1 11.0 Euro 0.7 0.8 Australian Dollar 17.3 9.5 Indonesian Rupiah 13.2 12.1 Ghana Cedi 0.8 1.4 Other currencies 3.0 3.4 88.2 87.0 The increase in other receivables during the year is primarily attributable to the retail auctions operated by the Central Bank of Nigeria, whereby the bank required advance Naira deposits prior to the bi-weekly allocation of foreign currency. Following the auction, the bank returned all cash either in Naira or if successful in the auction, foreign currency. These auctions ceased after year end following the policy announcement made by the Central Bank of Nigeria to liberalise the foreign exchange regime (note 30). 16. CASH AND CASH EQUIVALENTS AND NET DEBT Cash and cash equivalents include cash at bank and in hand, short-term deposits and other highly liquid investments with original maturities of three months or less which are readily convertible into known amounts of cash and insignificant risk of changes in value. Borrowings comprise bank overdrafts and amounts drawn under the Group’s committed credit facility. Bank overdrafts are repayable on demand and form an integral part of the Group’s cash management. Further details on the Group’s committed credit facility are provided in note 17. The Group defines its adjusted net debt as cash and cash equivalents net of borrowings, and net debt as cash and cash equivalents net of borrowings and lease liabilities. Movements in cash and cash equivalents, adjusted net debt and net debt were: 1 June 2022 £m Net cash flow £m Foreign exchange movements £m Other £m 31 May 2023 £m Cash at bank and in hand 105.8 31.0 (9.4) – 127.4 Short-term deposits 58.0 80.9 (9.9) – 129.0 Cash and cash equivalents reported in the consolidated balance sheet 163.8 111.9 (19.3) – 256.4 Current borrowings – bank overdrafts (0.1) 0.1 – – – Cash and cash equivalents reported in the consolidated cash flow statement 163.7 112.0 (19.3) – 256.4 Non-current borrowings (174.0) (77.2) – – (251.2) Current asset investments 0.5 – – – 0.5 Adjusted net cash/(debt) (9.8) 34.8 (19.3) – 5.7 Lease liabilities (16.9) 3.0 – 0.9 (13.0) Net debt (26.7) 37.8 (19.3) 0.9 (7. 3) 185 Strategic Report Governance Financial Statements CONTINUED 1 June 2021 £m Net cash flow £m Foreign exchange movements £m Other £m 31 May 2022 £m Cash at bank and in hand 79.4 24.1 2.3 – 105.8 Short-term deposits 7.6 46.9 3.5 – 58.0 Cash and cash equivalents reported in the consolidated balance sheet 87.0 71.0 5.8 – 163.8 Current borrowings – bank overdrafts – (0.1) – – (0.1) Cash and cash equivalents reported in the consolidated cash flow statement 87.0 70.9 5.8 – 163.7 Non-current borrowings (118.0) (56.0) – – (174.0) Current asset investments 0.3 – – 0.2 0.5 Adjusted net debt (30.7) 14.9 5.8 0.2 (9.8) Lease liabilities (11.8) 4.0 (0.5) (8.6) (16.9) Net debt (42.5) 18.9 5.3 (8.4) (26.7) Other includes lease additions and an increase in the lease liability arising from the unwinding of interest element. As at 31 May 2023, £204.1 million (2022: £113.0 million) of the cash and cash equivalents was held by the Group’s Nigerian subsidiaries. The increase of this amount during the year was mainly due to the effect of the country’s foreign exchange regime where exchange rate controls impact the ability of those subsidiaries to access foreign currency in order to settle foreign currency liabilities. Subsequent to the year end, a policy announcement was made by the Central Bank of Nigeria to liberalise the foreign exchange regime, and following this announcement, the Naira exchange rate weakened against Sterling and USD (see note 30). 17. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (a) Financial instruments The carrying amounts of each class of financial instruments were: Financial assets 2023 £m 2022 £m Derivatives designated as hedging instruments Forward foreign exchange contracts 0.8 0.4 Derivatives not designated as hedging instruments Forward foreign exchange contracts 0.2 0.3 Equity instruments at fair value through profit or loss Current asset investments 0.5 0.5 Debt instruments at amortised cost Cash and cash equivalents 256.4 163.8 Net trade receivables and other receivables 110.3 98.0 Amounts owed by joint ventures 2.2 1.7 Long-term loans owed by joint venture 40.3 39.6 410.7 304.3 Classified within: Current assets 370.4 264.7 Non-current assets 40.3 39.6 410.7 304.3 Notes to the Consolidated Financial Statements continued 186 Overview Financial liabilities 2023 £m 2022 £m Current interest-bearing borrowings Bank overdrafts – 0.1 Non-current interest-bearing loans and borrowings at amortised cost Bank loans and borrowings 251.2 174.0 Derivatives designated as hedging instruments Forward foreign exchange contracts 0.1 0.5 Derivatives not designated as hedging instruments Forward foreign exchange contracts 0.4 1.1 Other financial liabilities at fair value through profit or loss Other payables 1 5.9 7.2 Other financial liabilities at amortised cost Trade and other payables 2 175.5 159.1 Lease liabilities 13.0 16.9 446.1 358.9 Classified within: Current liabilities 179.5 166.4 Non-current liabilities 266.6 192.5 446.1 358.9 1 Relates to deferred consideration on the acquisition of Childs Farm (note 18). 2 Excludes other taxation and social security. Bank loans and borrowings are amounts drawn under committed facilities. During the year, the Group agreed a new £325 million committed credit facility which is available for general corporate purposes. The credit facility incorporates both a term loan, of up to £125 million, with the balance as a revolving credit facility (RCF) structure with maturity dates of up to November 2028. Drawings under the term loan are permitted in GBP, and under the RCF in GBP, Euros or US Dollar (USD) at interest rates at a margin above SONIA, EURIBOR or SOFR, as applicable, of 1.30–2.10% dependent on leverage and the attainment of specified sustainability performance targets. Bank loans and borrowings as at 31 May 2023, which are presented net of £0.8 million of unamortised financing fees, comprise £125.0 million of term loans which are denominated in GBP at an interest rate, including margin, of 5.73%, and £127.0 million of borrowings under the RCF which are denominated in GBP at interest rates, including margin, at between 5.66–5.78%. This facility described above replaced the previous £325 million revolving credit facility which was due to expire in November 2023, and the bank loans and borrowings as at 31 May 2022 of £174.0 million at an interest rate of 0.80% above SONIA relate to this previous facility. In addition, the Group retains other unsecured and uncommitted facilities that are primarily used for trade-related activities. As at 31 May 2023, these amounted to £199.8 million (2022: £252.3 million) of which £93.3 million, or 47% were utilised (2022: £53.8 million or 21%). As at the reporting date, there were no bank overdrafts (2022: £0.1 million). 187 Strategic Report Governance Financial Statements CONTINUED Changes in liabilities arising from financing activities were as follows: 1 June 2022 £m Net cash flow £m Foreign exchange movements £m Other £m 31 May 2023 £m Current borrowings – bank overdrafts (0.1) 0.1 – – – Non-current borrowings – bank loans and borrowings (174.0) (78.0) – 0.8 (251.2) Lease liabilities (16.9) 3.0 – 0.9 (13.0) 1 June 2021 £m Net cash flow £m Foreign exchange movements £m Other £m 31 May 2022 £m Current borrowings – bank overdrafts – (0.1) – – (0.1) Non-current borrowings – bank loans and borrowings (118.0) (56.0) – – (174.0) Lease liabilities (11.8) 4.0 (0.5) (8.6) (16.9) (b) Risk management The Group’s activities expose it to a variety of financial risks, including market risk (arising from movements in foreign currency rates, commodity prices and interest rate risk), credit risk and liquidity risk. Overall risk management is led by senior management and executed according to Group policy with the intention to minimise adverse impacts on the Group’s financial performance through the execution of agreed risk management strategies. Management of these risks, along with the day-to-day management of treasury activities is performed by the Group Treasury function as defined within the Board- approved policy framework. Where appropriate, the Group uses derivative financial instruments to hedge certain risk exposures. The use of financial derivatives and the management of all financial risks is governed by the Group Treasury policy as approved by the Board of Directors. The Group does not enter into any financial derivative contract for trading or speculative purposes. All hedging activity is carried out by a central treasury department that hedges financial risks according to forecasts provided by the Group’s operating units. The Group also enters into contracts with suppliers for its principal raw material requirements and associated input costs. Commodity and associated input and manufacturing costs such as energy are part of the Group’s normal purchasing activities. A. Market risk The Group’s principal market risks are in relation to foreign currency exchange rates, the prices of certain commodities and interest rates. In managing market risks, the Group aims to minimise the impact of short-term fluctuations on the Group’s financial performance. However over the longer term, permanent changes in market rates will have an impact on consolidated earnings. (i) Foreign currency risk Foreign currency risk is the risk that the fair value of Group assets, liabilities or future cash flows will fluctuate due to changes in foreign currency exchange rates. The Group is exposed to foreign currency exchange translation and transaction risks as follows: • Foreign currency exchange translation risks arise due to the translation of assets and liabilities denominated in currencies other than the functional currency of the subsidiary into functional currency, which is recorded in the income statement. Further translation differences arise on the translation of assets and liabilities of non-GBP functional currency operating entities into GBP being the Group’s presentation currency, which are recorded in other comprehensive income • Foreign currency exchange transaction risk occurs due to changes in the value of cash flows in a currency other than the functional currency of the operating entity. The most significant foreign exchange transaction risk exposures for the Group are the purchase of inventories (predominantly raw materials) and services purchased in USD and Euros. Group policy is to reduce this risk, mainly in relation to its GBP and AUD functional currency subsidiaries, by using forward foreign exchange derivative contracts as hedging instruments which are typically designated as cash flow hedges. In these cases, the Group negotiates the terms of the derivative to match the terms of the hedged item exposure normally including covering the period from initial forecasting of the hedged item purchase commitment to the point of settlement. Notes to the Consolidated Financial Statements continued 188 Overview Hedge accounting is typically applied in order to remove any timing mismatch between the hedging instrument and hedged item, with the effective portion of the change in fair value of the hedging instrument initially accounted for in the hedging reserve through other comprehensive income. If the firm commitment or forecast transaction that is the subject of a cash flow hedge results in the recognition of a non-financial asset or liability, then, at the time the asset or liability is recognised, the associated gains or losses on the derivative that had previously been recognised in other comprehensive income and accumulated in the hedge reserve are removed directly from equity and included in the initial measurement of the asset or liability. If the hedged item is transaction-related the foreign currency ‘basis spread’ is reclassified to profit or loss when the hedged item affects profit or loss. Those reclassified amounts are recognised in the consolidated income statement in the same line as the hedged item. Hedge ineffectiveness may arise from items including changes in forecast transactions, misalignment in critical terms, or if credit dominates the relationship between hedged item and hedging instrument. Where there is ineffectiveness and hedge accounting criteria are not met, the change in the fair value of the derivative is accounted for through profit or loss. There was no ineffectiveness during the reporting period in relation to the use of forward foreign exchange contracts. The notional amounts of forward foreign exchange contracts outstanding as at the reporting date, along with the weighted average hedge rates of these contracts and average spot rates for the reporting period are as follows: Notional Fair value 2023 Currency million Currency pair Weighted average hedge rate GBP equivalent £m Average spot rate Asset £m Liability £m sell USD 73.5 GBP:USD 1.24 59.0 1.20 0.1 (0.3) buy EUR 5.5 GBP:EUR 1.13 4.9 1.15 – (0.2) sell AUD 8.2 GBP:AUD 1.86 4.4 1.78 0.1 – buy USD 19.9 AUD:USD 0.68 15.2 0.68 0.8 – buy GBP 0.6 AUD:GBP 0.56 0.6 0.65 – – buy SGD 0.5 USD:SGD 1.34 0.3 1.37 – – 1.0 (0.5) Notional Fair value 2022 Currency million Currency pair Weighted average hedge rate GBP equivalent £m Average spot rate Asset £m Liability £m sell USD 55.7 GBP:USD 1.29 43.1 1.34 0.3 (1.3) buy EUR 9.8 GBP:EUR 1.17 8.3 1.18 0.1 (0.1) sell AUD 4.8 GBP:AUD 1.82 2.6 1.84 – (0.1) buy USD 29.4 AUD:USD 0.73 23.1 0.73 0.3 (0.1) buy GBP 1.0 AUD:GBP 0.57 1.0 0.54 – – buy SGD 3.4 USD:SGD 1.37 2.0 1.36 – – 0.7 (1.6) As at 31 May 2023, the aggregate net amount of fair value movements of forward foreign exchange contracts currently deferred in the cash flow hedge reserve was a gain of £0.2 million (2022: £0.2 million loss). It is anticipated that the purchases of the hedged items that these forward exchange contracts were entered into for, will take place during the next financial year and these will be sold within 12 months of purchase. The movement in the hedging reserve during the year was as follows: 2023 £m 2022 £m As at 1 June (0.2) (0.4) Fair value net gains of hedging instruments, net of amounts reclassified 0.4 0.2 As at 31 May 0.2 (0.2) The aggregate amount under forward foreign exchange contracts taken directly to profit or loss was a gain of £2.2 million (2022: £0.8 million loss). 189 Strategic Report Governance Financial Statements CONTINUED The majority of the Group’s assets and liabilities are denominated in the functional currency of the relevant subsidiary. The following sensitivity analysis illustrates the impact of a 10% strengthening of the Group’s transactional currencies against local functional currencies, with all other variables held constant. The impact on the Group’s profit before tax is due to changes in the value of monetary assets and liabilities. The impact on the Group’s pre-tax equity is due to changes in the fair value of forward exchange contracts designated as cash flow hedges and the long-term loan to a joint venture (note 12). The Group’s exposure to foreign currency changes for all other currencies is not material. A similar but opposite impact would be felt on both profit and equity if the Group’s main transactional currencies weakened against local functional currencies by a similar amount. £m 2023 2022 Impact on profit before tax Impact on pre-tax equity Impact on profit before tax Impact on pre-tax equity US Dollar (6.2) 5.4 (1.8) 5.5 Nigerian Naira 3.1 – 2.4 – Chinese Renminbi (2.4) – (0.5) – The table above shows the foreign currency risk in relation to non-functional currency financial instruments in subsidiaries’ financial statements at the balance sheet date. In addition, the Group is also exposed to foreign currency risk on the translation of overseas subsidiaries’ results into Sterling for the Group consolidated financial statements through the use of the average rate for the income statement and the closing rate for net assets. The impact on the Group’s profit before tax and total equity if the applicable rate used to translate the results of the Group’s principal foreign operations into Sterling were adjusted to show a 10% strengthening of Sterling is shown below. A similar but opposite impact would be felt if Sterling weakened against the other currencies by a similar percentage. Impact on adjusted operating profit Impact on operating profit Impact on total equity£m Nigerian Naira (3.3) (4.3) (27.0) Indonesian Rupiah (1.7) (1.7) (0.9) Australian Dollar (0.8) (1.3) (5.3) Other (0.9) (0.7) (3.0) In the table above, the most significant balance sheet item impacting total equity for the Nigerian Naira is the cash and cash equivalents held by the Nigerian subsidiaries (note 16). (ii) Commodity pricing risk Commodity risk is the risk that changes in underlying raw material prices have an adverse impact on the Group’s financial performance. The Group’s policy is to minimise the pricing volatility accompanied by unfavourable changes in commodity prices by entering into fixed price supplier contracts in line with its commercial strategy. The Group does not enter into any commodity derivatives. (iii) Interest rate risk Interest rate risk is the risk that a change in interest rates will have an adverse impact on the Group’s financial performance. The Group is exposed to interest rate risk to the extent it has cash at bank and on short-term deposit, enters into floating rate borrowing arrangements, and/or related interest rate hedging derivatives. The Group’s policy permits entering into interest rate caps to minimise interest rate risk, and the Group previously entered into an interest rate cap on a notional principal amount of £75 million, in which it agreed to exchange at specified intervals, the difference between fixed and floating rate interest amounts, with a floating strike price of 1.25%. This was accounted for as a cash flow hedge with the option time value accounted for a cost of hedging. The interest rate cap expired in December 2021, and no interest rate caps have been taken out by the Group since. Notes to the Consolidated Financial Statements continued 190 Overview The following table sets out the sensitivity to a reasonably possible change in the Nigerian Fixed Deposit interest rates on the cash at bank and short-term deposits held by the Group’s Nigerian operations as at 31 May 2023 (note 16). With all other variables held constant, the Group’s profit before tax is affected as follows: Increase/ decrease in basis points Effect on profit before tax 2023 £m 2022 £m Nigeria rates +50 0.6 – -50 (0.6) – The following table sets out the sensitivity to a reasonably possible change in SONIA interest rates on that portion of loans and borrowings affected as at 31 May 2023. With all other variables held constant, the Group’s profit before tax is affected as follows: Increase/ decrease in basis points Effect on profit before tax 2023 £m 2022 £m GBP rates +50 (1.3) (0.9) -50 1.3 0.9 B. Credit risk The Group is exposed to counterparty credit risk from its financing and investing activities with banks and financial institutions, including cash deposits, and the use of derivatives and other financial instruments, from its operating activities (primarily trade receivables) and its loans to its joint venture (note 12). The maximum exposure to credit risk at the end of the reporting period is the carrying amount of each class of financial assets. Financing and investing activities The Group maintains a policy on financial counterparty credit risk exposures that limits the maximum exposure on the investment of surplus cash and use of derivative instruments with reference to a minimum credit rating as maintained by Standard & Poor’s (S&P) or Fitch, with further limits established for levels of exposure at various ratings levels. The level of exposure and the credit worthiness of the Group’s banking counterparties are regularly reviewed to ensure compliance with this policy. Higher cash held with lower rated banks reflects the impact of perceived sovereign ceilings operating within those countries. Cash and cash equivalents and net forward foreign exchange contracts by counterparty credit rating at the end of the reporting period is as follows (ratings per S&P unless unavailable, in which case the Fitch rating is used). The 2022 classification has been corrected to report £114.3 million cash and cash equivalents as B+ to B- counterparty credit rating (previously reported as BB+ to BB-): 2023 2022 Cash and cash equivalents £m Financial derivatives £m Cash and cash equivalents £m Financial derivatives £m AA- 8.8 0.8 11.1 0.2 A+ to A- 38.6 (0.3) 27.6 (1.0) BBB+ to BBB- 2.3 – 8.4 (0.1) BB+ to BB- 2.3 – 1.8 – B+ to B- 204.3 – 114.3 – not rated 0.1 – 0.6 – 256.4 0.5 163.8 (0.9) The amounts classified B+ to B- counterparty credit rating relate to cash and cash equivalents held predominantly in Nigeria where the sovereign credit rating is B- thereby limiting the rating of banks incorporated within the country. There are no significant concentrations of credit risk within the Group arising from the use of derivatives or other financial instruments. 191 Strategic Report Governance Financial Statements CONTINUED Trade receivables The Group trades only with creditworthy third parties. Under the Group policy, customers are subject to credit verification procedures in order to establish appropriate credit terms and trade receivable balances are monitored on an ongoing basis. An allowance for loss is estimated by management based on the expected credit loss model approach. The creation and release of provisions for receivables is charged/credited to administrative expenses in the consolidated income statement. Receivables are written off when all possible routes through which amounts can be recovered have been exhausted. Trade receivables consist of a broad cross section of the international customer base for which there is no significant history of default. The credit risk of customers is assessed taking into account the local market environment, customers’ financial positions, past experiences and other relevant factors. Individual customer credit limits are imposed based on these factors, and payment terms are generally 30 days, with a range from 14 to 90 days (2022: 14 to 90 days) which reflects the differing nature of trading in the Group’s geographical segments. No other receivables are deemed to be impaired. The ageing and credit risk profile of trade receivables based on the Group’s provision matrix at the end of the reporting period was: As at 31 May 2023 Expected credit loss rate % Gross trade receivables £m Lifetime expected credit loss £m Net trade receivables £m Not past due 0.1% 76.2 (0.1) 76.1 Past due 0–30 days 0.2% 10.0 – 10.0 Past due 31–60 days 3.8% 0.3 – 0.3 Past due 61–90 days 3.8% 0.5 – 0.5 Past due 90–180 days 2.9% 2.2 (0.1) 2.1 Past due >180 days 52.8% 3.4 (1.8) 1.6 92.6 (2.0) 90.6 Specific provision (2.4) Net trade receivables 88.2 As at 31 May 2022 Expected credit loss rate % Gross trade receivables £m Lifetime expected credit loss £m Net trade receivables £m Not past due 0.4% 74.4 (0.3) 74.1 Past due 0–30 days 1.1% 8.9 (0.1) 8.8 Past due 31–60 days 12.5% 1.6 (0.2) 1.4 Past due 61–90 days 11.1% 0.9 (0.1) 0.8 Past due 90–180 days 15.4% 1.3 (0.2) 1.1 Past due >180 days 38.2% 3.8 (1.3) 2.5 90.9 (2.2) 88.7 Specific provision (1.7) Net trade receivables 87.0 C. Liquidity risk The Group is exposed to the risk that it is unable to meet its financial commitments as they fall due. Under the terms of the £325 million committed credit facility agreed during the year, the Group must meet certain financial covenants for the facility to remain in place and, therefore, for the Group to continue to borrow under it. The previous revolving credit facility, which was replaced by the currency facility, contained similar financial covenants. The covenants are described in the Capital risk management section. Notes to the Consolidated Financial Statements continued 192 Overview The Group manages liquidity risk through the Group Treasury function, with cash flow forecasts prepared and reviewed on a monthly basis. In addition, longer-term cash flow forecasts of up to 12 months are prepared as part of the Group’s monthly forecasting and periodic budget cycles, with performance against free cash flow and net working capital targets monitored each month and providing longer-term cash flow and net debt visibility. The Group’s net debt level can vary from month to month depending on seasonal trading patterns including the holding of inventory, timing of receipts from customers and payments to suppliers, and the timing of any capital and restructuring projects. Set out below is the maturity profile of the Group’s financial liabilities which is based on the contractual undiscounted cash flows prepared using forward interest rates where applicable, showing items at the earliest date on which the liability could be required to be paid (for borrowings under committed facilities, the maturity is based on the maturity of the facility). The table includes both interest and principal cash flows. To the extent that interest flows are floating rate, the undiscounted amount is derived from interest rates at the reporting date. Derivatives are presented on a notional basis in Sterling. As at 31 May 2023 < 3 months £m 3–12 months £m 1–2 years £m 2–5 years £m > 5 years £m Total £m Trade and other payables 177.3 – 1.3 2.8 – 181.4 Forward foreign exchange contracts 71.8 12.8 – – – 84.6 Borrowings 1.7 – 125.0 127.0 – 253.7 Lease liabilities 0.6 2.0 2.2 4.0 6.3 15.1 As at 31 May 2022 < 3 months £m 3–12 months £m 1–2 years £m 2–5 years £m > 5 years £m Total £m Trade and other payables 161.8 – – 4.5 – 166.3 Forward foreign exchange contracts 79.5 42.2 – – – 121.7 Borrowings 0.1 – 174.0 – – 174.1 Lease liabilities 0.7 2.6 2.9 5.3 8.0 19.5 The forward foreign exchange contracts disclosed in the tables above are the gross undiscounted cash outflows. Those amounts may be settled gross or net. The following table shows the corresponding reconciliation of those amounts to their carrying values: As at 31 May 2023 < 3 months £m 3–12 months £m 1–2 years £m 2–5 years £m > 5 years £m Total £m Inflows 71.9 13.2 – – – 85.1 Outflows (71.8) (12.8) – – – (84.6) Net 0.1 0.4 – – – 0.5 Carrying amounts: Asset 0.5 0.5 – – – 1.0 Liability (0.4) (0.1) – – – (0.5) 0.1 0.4 – – – 0.5 As at 31 May 2022 < 3 months £m 3–12 months £m 1–2 years £m 2–5 years £m > 5 years £m Total £m Inflows 78.8 42.0 – – – 120.8 Outflows (79.5) (42.2) – – – (121.7) Net (0.7) (0.2) – – – (0.9) Carrying amounts: Asset 0.5 0.2 – – – 0.7 Liability (1.2) (0.4) – – – (1.6) (0.7) (0.2) – – – (0.9) 193 Strategic Report Governance Financial Statements CONTINUED Capital risk management The objective of the Group when considering total capital is to protect the value of capital investments and to generate returns on shareholder funds. Total capital is defined as including bank loans, bank borrowings and equity, including, when applicable, derivatives used for the purposes of hedging currency and interest exposure on the loans and borrowings, but excluding the cash flow hedging reserve. In support of its objectives, the Group may undertake actions to adjust its capital structure. Actions may include, but are not limited to, raising or prepaying of borrowings together with related derivative instruments, issuance of additional share capital, payment of dividends or share repurchase programmes. The Group considers net debt (excluding lease liabilities) to be an important performance measure, on the basis that this measure forms the basis of one of the covenants in relation to the Group’s £325 million committed credit facility, being the Leverage ratio of Total Net Debt to EBITDA as defined in the facility agreement. As at 31 May 2023, the Group’s net debt position was £7.3 million. This amount was net of £256.4 million cash and cash equivalents and, as described in note 16, the majority of this was held by the Group’s Nigerian subsidiaries where the effect of the country’s exchange rate controls impact the ability of those subsidiaries to access foreign currency in order to settle foreign currency liabilities. As described in the foreign currency risk section of this note, this Naira denominated cash and cash equivalents amount represents a balance sheet exposure for the Group. The other covenant in relation to the £325 million credit facility is Interest Cover, being the ratio of Adjusted EBITDA to Net Finance Charges. The committed credit facility also includes other customary provisions relating to events of default, including non-payment of principal, interest or fees, misrepresentations, breach of covenants, creditor process, cross default to other indebtedness of the borrowers and its subsidiaries. During the year, and as at the reporting date, the Group was in compliance with all financial and other covenants. After the November 2022 refinancing, the Group and their lending banks made some amendments to clarify and confirm the basis of the covenant calculations. Fair values Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Group uses various methods including market, income and cost approaches. Based on these approaches, the Group utilises certain assumptions that market participations would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs may be readily observable, market corroborated, or generally unobservable inputs. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following categories: Level 1: Derived from quoted prices in active markets for identical assets or liabilities; Level 2: Derived from observable inputs other than level 1, including quoted prices for similar assets or liabilities, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data; and Level 3: Derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs). This may include pricing models, discounted cash flow or similar methodologies as well as instruments for which the determination of fair value requires significant management judgement or estimation. There were no transfers between Level 1, 2 and 3 during the current or prior year. At the end of the reporting period, the Group held the following financial assets and liabilities at fair value: As at 31 May 2023 Level 1 £m Level 2 £m Level 3 £m Total £m Assets held at fair value Current asset investments – – 0.5 0.5 Derivative financial assets – 1.0 – 1.0 Liabilities held at fair value Derivative financial liabilities – 0.5 – 0.5 Other payables – – 5.9 5.9 Notes to the Consolidated Financial Statements continued 194 Overview As at 31 May 2022 Level 1 £m Level 2 £m Level 3 £m Total £m Assets held at fair value Current asset investments – – 0.5 0.5 Derivative financial assets – 0.7 – 0.7 Liabilities held at fair value Derivative financial liabilities – 1.6 – 1.6 Other payables – – 7.2 7.2 The following is a description of the valuation methodologies and assumptions used for estimating the fair values. Current asset investments – Current asset investments comprise non-listed equity investments. A discounted cash flow methodology is used to estimate the present value of the expected future economic benefits to be derived from the ownership of these investments. Derivative financial instruments – Derivative financial instruments comprise forward foreign exchange contracts. Fair value is calculated using observable market data where it is available and include spot rate and observable market forward points as discounted to reflect the time value of money. Counterparty credit is monitored. No adjustment to the fair value for credit risk is made due to materiality. Other payables – Other payables held at fair value relate to deferred purchase consideration on the acquisition of Childs Farm (note 18), which was estimated by applying an appropriate discount rate to the expected future payments. The key assumptions take into consideration the probability of meeting each performance target and the discount factor. Should the target not be met, no consideration would be payable, and should the discount rate applied be changed, the fair value of the deferred purchase consideration would change, but the amount of consideration that would ultimately be paid would not necessarily change. For the financial assets and liabilities not held at fair value, there was no material difference between their carrying values and their fair values, except for non-current borrowings which are presented net of unamortised issuance costs of £0.8 million. 18. TRADE AND OTHER PAYABLES 2023 £m 2022 £m Current Trade payables 75.9 78.4 Trade obligations with banks 8.6 – Amounts owed to joint ventures – 0.6 Other taxation and social security 4.9 2.1 Other payables 10.8 10.8 Accruals 82.0 72.0 182.2 163.9 Non-current Other payables 4.1 4.5 4.1 4.5 Refer to note 17 for further information on financial instruments classified by category/fair value hierarchy level and management of liquidity risk. The Group has an arrangement with a bank under which the bank offers vendors the option to receive earlier payment of the Group’s trade payables. Vendors utilising the financing arrangement pay a credit fee to the bank. The Group does not pay any credit fees and does not provide any additional collateral or guarantee to the bank. Current trade payables include £nil (2022: £5.9 million) under these vendor financing arrangements. Trade obligations with banks relate to common practice in Nigeria where the bank undertakes to settle certain trade creditors on the Group’s behalf and receives subsequent settlement from the Group trading entities. The Group does not benefit from payment terms with the bank that are contractually extended beyond those agreed with the supplier, and neither does the supplier benefit from early payment terms. Accordingly, such liabilities continue to be recognised within trade payables and cash flows are presented as operating. Deferred consideration for the acquisition of Childs Farm in 2022 (note 28) is included within other payables of which £3.1 million (2022: £3.2 million) is classified as current and £2.8 million (2022: £4.0 million) as non-current. The liability was reassessed during the year and a £1.3 million reduction was recognised in finance income. 195 Strategic Report Governance Financial Statements 19. DEFERRED TAX Deferred tax is provided under the balance sheet liability method using the applicable jurisdiction tax rate at which the balances are expected to unwind. Movements in deferred tax assets and liabilities during the year were: Property, plant and equipment £m Retirement benefit obligations £m Revaluation of property, plant and equipment £m Unremitted earnings £m Business combinations £m Accruals and provisions £m Tax losses £m Other timing differences £m Total £m As at 1 June 2021 – as previously reported (9.4) (5.7) (5.9) (1.9) (42.0) 3.8 1.3 (7.3) (67.1) Effect of prior year adjustment (1.2) – – – – – – – (1.2) As at 1 June 2021 – as restated (10.6) (5.7) (5.9) (1.9) (42.0) 3.8 1.3 (7. 3) (68.3) Credit/(charge) to income statement (restated) 0.7 0.5 0.1 0.5 2.5 (0.2) (1.5) (3.0) (0.4) Charge to other comprehensive income – (8.4) – – – – – (0.9) (9.3) Arising on a business combination – – – – (8.9) – – – (8.9) Exchange differences (0.5) 0.2 (0.1) – (0.2) 0.2 1.0 (0.9) (0.3) As at 31 May 2022 (10.4) (13.4) (5.9) (1.4) (48.6) 3.8 0.8 (12.1) (87. 2) Credit/(charge) to income statement 0.1 (0.4) 0.7 (0.4) 2.7 0.3 3.3 2.4 8.7 Credit to other comprehensive income – 7.4 – – – – – 0.9 8.3 Exchange differences 0.4 (0.2) 0.4 – 0.7 (0.3) (0.5) 0.3 0.8 As at 31 May 2023 (9.9) (6.6) (4.8) (1.8) (45.2) 3.8 3.6 (8.5) (69.4) Refer to note 1(c) for details of the prior year restatements. Unremitted earnings may be liable to overseas withholding taxes if anticipated to be distributed as dividends. A deferred tax liability has been recognised in respect of unremitted earnings in Indonesia of £1.8 million (2022: £1.4 million). No deferred tax liability has been provided for unremitted earnings of any other Group companies overseas as these are considered indefinitely reinvested outside the UK. As at 31 May 2023, the aggregate amount of temporary differences associated with investments in subsidiaries and joint ventures for which deferred tax liabilities have not been recognised totals approximately £15.9 million (2022: £14.3 million). Deferred income tax assets are recognised for tax loss carry forwards to the extent that the realisation of the related tax benefit through future taxable profits is probable. At 31 May 2023 the Group recorded a deferred tax asset of £3.6 million (2022: £1.3 million) on recognised but unused tax losses. A further £2.7 million (2022: £5.1 million) of unrecognised tax losses are not expected to expire or be disposed of, together with £13.9 million (2022: £14.0 million) of unrecognised capital losses relating to the disposal of the five:am business. There is also an additional unrecognised deferred tax asset of £13.8 million relating to timing differences other than unrecognised tax losses. This amount relates to fixed asset differences, unused temporary differences, and accruals and provisions, and it is not probable that these timing differences will reverse in the foreseeable future. Other timing differences include a liability for brands and goodwill of £7.1 million (2022: £6.8 million), an asset for share-based payments of £0.5 million (2022: £0.6 million), and a liability for unrealised foreign exchange movements of £1.6 million (2022: £2.1 million). After offsetting deferred tax assets and liabilities where appropriate within jurisdictions (as permitted by IAS 12 ‘Income Taxes’), the net deferred tax liability comprises: 2023 £m 2022 (restated) £m Deferred tax assets 7.5 4.5 Deferred tax liabilities (76.9) (91.7) (69.4) (87.2) Notes to the Consolidated Financial Statements continued 196 Overview 20. PROVISIONS Warranty provisions £m VAT provision £m Total £m As at 1 June 2021 0.7 4.9 5.6 Provided 0.1 – 0.1 Utilised (0.2) – (0.2) Exchange differences 0.1 – 0.1 As at 31 May 2022 0.7 4.9 5.6 Released (0.4) – (0.4) Utilised – (4.9) (4.9) Exchange differences 0.1 – 0.1 As at 31 May 2023 0.4 – 0.4 Warranty provisions relate to the Group’s electricals business in Africa. The VAT provision related to one of the Group’s subsidiaries which had initially incorrectly assessed VAT on sales of certain goods and purchases of certain raw materials over the period 2016–2019. Following a determination on the VAT treatment of these sales and purchases, a liability was provided for which included an estimate of applicable fines and interest, and this was settled during the year. 21. RETIREMENT BENEFITS AND OTHER LONG-TERM EMPLOYEE OBLIGATIONS The Group operates retirement benefit schemes in the UK and overseas as described below. UK retirement benefit schemes The Group operates four defined benefit pension schemes in the UK, each of which were closed to future accrual on 31 May 2008. The schemes are as follows: • PZ Cussons Retirement Benefits Plan (Main plan) – for UK-based employees excluding PZ Cussons plc Executive Directors • PZ Cussons Directors’ Retirement Benefits Plan (Directors’ plan) – for PZ Cussons plc Executive Directors • PZ Cussons Pension Fund and Life Assurance Scheme for Staff Employed Outside the UK (Expatriate plan) – for all eligible expatriate employees based outside the UK • PZ Cussons Employer Financial Retirement Benefits Scheme (Unfunded plan) – an unfunded, unapproved retirement scheme for certain former PZ Cussons plc Directors. Current and deferred members of these schemes are provided with defined benefits based on service and final salary. The Main plan, Directors’ plan and Expatriate plan are funded schemes and the assets of the schemes are administered by trustees and are held in trust funds independent of the Group. The most recent triennial actuarial valuations of these schemes was as at 31 May 2021, and were performed by an independent professional actuary. Each scheme was determined to be in surplus and therefore there are no company contributions required to be paid before the next valuation. 197 Strategic Report Governance Financial Statements CONTINUED The UK’s main schemes expose the Group to actuarial risks such as investment risk, interest rate risk and longevity risk as described below: Risk Description Mitigation Investment risk The present value of the defined benefit pension schemes’ liabilities is calculated using a discount rate (investment return) determined by direct reference to high- quality corporate bond yields (for IAS 19 ‘Employee Benefits’ purposes) and gilt yields (for statutory funding and long-term funding purposes). If the return on scheme assets is less than these discount rates, the funding position of the schemes will fall. As part of the financing of the funded schemes, they invest in assets with higher return expectations than lower risk bonds that are the best match for the schemes’ liabilities. To control the resulting investment risk, the funded schemes invest in diversified portfolios of growth assets with the balances invested in liability-matching bond assets designed to control interest rate risk (see below). The split between growth assets and liability-matching bond assets for each funded scheme is regularly monitored to ensure investment risk is not excessive given the statutory funding assumptions and the schemes’ long-term funding objectives. Interest risk A decrease in the corporate bond yield and/or gilt yield will increase the present value of the schemes’ liabilities under the IAS 19 ‘Employee Benefits’ and statutory/ long-term funding bases respectively. The funded schemes make use of liability-driven investment techniques to protect them against the majority of the interest rate risk inherent in their liabilities. This is achieved by investing in gilts and investment grade corporate bonds such that changes in the schemes’ liabilities due to falling gilt and/or corporate bond yields are offset by similar movements in the value of the schemes’ overall assets. Reflecting the funded schemes’ focus on controlling interest risk relative to their statutory and long-term funding bases, the schemes’ liability- matching bond portfolios are predominantly invested in gilts, with the balance invested in investment grade corporate bonds to increase the expected return on the plans’ assets in a risk-controlled way. In doing so, the exposures to investment grade corporate bonds also help mitigate the interest rate risk inherent in the schemes’ IAS 19 ‘Employee Benefits’ liabilities. Inflation risk An increase in inflation results in higher benefit increases for members, which results in higher scheme liabilities. The schemes’ liability-matching bond assets are also designed to hedge the majority of the inflation rate risk inherent in the schemes’ liabilities. This is achieved by investing in index-linked gilts. Longevity risk The value of the schemes’ liabilities is calculated by reference to the best estimate of the life expectancy of each scheme’s participants. An increase in life expectancy of the schemes’ participants will increase the schemes’ liabilities. To help control longevity risk all the schemes are closed to future benefit accrual. The schemes consider additional approaches to mitigating longevity risk, for example by buying annuities with an insurance company to cover the schemes’ liabilities. Notes to the Consolidated Financial Statements continued 198 Overview A summary of the amounts recognised in the consolidated balance sheet for the UK schemes described above is as follows: 2023 2022 Assets £m Obligations £m Total £m Assets £m Obligations £m Total £m Main plan 154.0 (127. 3) 26.7 217.3 (157.9) 59.4 Directors’ plan 29.2 (17.4) 11.8 36.9 (27.0) 9.9 Expatriate plan 89.2 (44.7) 44.5 113.8 (55.0) 58.8 Unfunded plan – (3.1) (3.1) – (3.5) (3.5) 272.4 (192.5) 79.9 368.0 (243.4) 124.6 Restriction due to asset ceiling (44.5) (58.8) Net asset 35.4 65.8 Classified as/within: Retirement benefit surplus 38.5 69.3 Retirement benefit and other long-term employee obligations (3.1) (3.5) 35.4 65.8 The trust deeds for the Main plan and Directors’ plan provide the Group with an unconditional right to a refund of surplus assets assuming the full settlement of plan liabilities in the event of a plan wind-up. Furthermore, in the ordinary course of business the trustee has no rights to unilaterally wind up, or otherwise augment the benefits due to members of the scheme. Based on these rights, any net surpluses in these two UK schemes are recognised in full. The trust deed for the Expatriate plan provides the trustees with an unconditional right to wind up the scheme and distribute the surplus to members. Therefore, the surplus on the Expatriate plan has not been recognised in the consolidated balance sheet (shown as a restriction due to asset ceiling in the table above). Movements in the fair value of plan assets were as follows: 2023 £m 2022 £m As at 1 June 368.0 416.8 Recognised in consolidated income statement: – administrative expenses (0.4) (0.9) – finance income 10.5 7.0 Recognised in consolidated other comprehensive income: – return on plan assets (excluding finance income) (77.9) (45.9) Not recognised within comprehensive income due to asset ceiling: – finance income 2.1 1.0 – return on plan assets (excluding finance income) (16.3) 4.2 Employer contributions to the Unfunded plan 0.2 0.2 Benefits paid (13.8) (14.4) As at 31 May 272.4 368.0 Employer contributions to the Unfunded plan related to payments during the year to former Directors amounting to £201,089 (2022: £190,888). 199 Strategic Report Governance Financial Statements CONTINUED The assets in the schemes are as follows: 2023 £m 2022 £m Equities 5.2 19.0 Bonds 259.7 329.3 Property – 4.2 Cash and cash equivalents 7. 5 15.5 272.4 368.0 Equities and bonds are quoted in active markets with all other assets being unquoted. The UK schemes’ investment strategy is set by the respective trustees after taking appropriate advice from their investment consultant. The trustee’s primary objective is to invest the scheme’s assets in the best interest of the members and beneficiaries. Within this framework the trustee has agreed a number of objectives to help guide them in their strategic management of the assets and control of the various investment risks to which the scheme is exposed. Movements in the present value of the plan defined benefit obligations were as follows: 2023 £m 2022 £m As at 1 June (243.4) (334.1) Recognised in the consolidated income statement: – finance income (8.3) (6.4) Recognised in consolidated other comprehensive income: – remeasurement gain due to changes in demographic assumptions 5.4 2.9 – remeasurement gain due to changes in financial assumptions 49.3 78.9 – remeasurement (loss)/gain due to experience adjustments (9.3) 0.9 Benefits paid 13.8 14.4 As at 31 May (192.5) (243.4) Amounts recognised in the consolidated income statement comprised: 2023 £m 2022 £m Administrative expenses (0.4) (0.9) Finance income 2.2 0.6 1.8 (0.3) Amounts recognised within consolidated other comprehensive income comprised: 2023 £m 2022 £m Relating to plan assets: – return on plan assets (excluding finance income) (77.9) (45.9) Relating to plan defined benefit obligations: – remeasurement gain due to changes in demographic assumptions 5.4 2.9 – remeasurement gain due to changes in financial assumptions 49.3 78.9 – remeasurement (loss)/gain due to experience adjustments (9.3) 0.9 (32.5) 36.8 Notes to the Consolidated Financial Statements continued 200 Overview The key financial assumptions used by the actuary to value the scheme obligations were as follows: 2023 2022 Rate of increase in retirement benefits in payment – pensions in payment 2.90% 2.75% – deferred pensions 2.40% 2.35% Discount rate 5.40% 3.50% Inflation (RPI) 3.10% 3.15% The mortality assumptions used were as follows: 2023 years 2022 years Weighted average life expectancy on post-retirement mortality table used to determine benefit obligations – Member age 65 (current life expectancy) 22.9 22.9 – Member age 45 (life expectancy at age 65) 24.4 24.4 The ages shown above are weighted average across the schemes based on the scheme’s defined benefit obligation as at 31 May 2023, and the prior year ages are presented on the same basis. The graph below sets out the undiscounted benefit payments that are expected to be paid from the funded schemes based on the data used for the triennial actuarial valuations as at 31 May 2021: Deferred Pensioner Undiscounted future benefit payments (funded plans) 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 2052 2054 2056 2058 2060 2062 2064 2066 2068 2070 2072 2074 2076 2078 2080 2082 2084 2086 2088 0 2 4 6 8 10 12 14 16 18 Undiscounted benefit payments (£m) The sensitivities on the key actuarial assumptions as at the end of the year in relation to the schemes were: Change in assumption Change in obligation Discount rate Decrease of 0.25% Increase of 3.0% Inflation (RPI) Increase of 0.25% Increase of 2.6% Mortality Increase in life expectancy of 1 year Increase of 3.4% The sensitivities shown above are approximate. Each sensitivity considers each change in isolation and is calculated using the same methodology as used for the calculation of the defined benefit obligation at the end of the year. The inflation sensitivity includes the impact of changes to the assumptions for the revaluation and pension increases. In practice it is unlikely that the changes would occur in isolation. During the year ending 31 May 2024 the Group expects to make cash contributions of £nil (2022: £nil) to funded defined benefit schemes, and £215,000 (2022: £197,000) to unfunded schemes. 201 Strategic Report Governance Financial Statements CONTINUED Overseas retirement benefit schemes Outside of the UK, the Group operates a number of defined benefit pension schemes, all of which are unfunded, and the movement in the liability positions of these schemes during the year was as follows: 2023 £m 2022 £m As at 1 June (9.6) (8.4) Recognised in consolidated income statement: – administrative expenses 0.2 (0.9) – finance expense (0.6) (0.6) Recognised in consolidated other comprehensive income: – remeasurement (losses)/gains (0.3) 0.6 Benefits paid 0.8 0.6 Exchange differences 0.2 (0.9) As at 31 May (9.3) (9.6) The most significant overseas defined benefit scheme is operated by the Group’s Indonesian subsidiary, and its obligations have been valued using a discount rate of 6.75% (2022: 7.75%) and a salary inflation rate of 8.0% (2022: 8.0%). The scheme’s obligation included in the above table is £8.7 million (2022: £8.6 million). The sensitivities on the key actuarial assumptions as at the end of the year in relation to the overseas schemes were: Change in assumption Change in obligation Discount rate Decrease of 1.0% Increase of 9.3% Salary rate Increase of 1.0% Increase of 8.9% Defined contribution pension schemes and other long-term employee obligations The Group operates a defined contribution pension scheme for current employees in the UK and at a number of overseas subsidiaries. The amount recognised as an expense in the consolidated income statement in relation to these schemes was £2.4 million (2022: £2.2 million). The most significant other long-term employee obligation relates to the gratuity scheme operated by the Group’s Nigerian subsidiary. This scheme operates under an agreement established in 2006 between PZ Cussons Nigeria plc and its employees, and is only eligible for employees who joined the company before 1 January 2007. The scheme is funded directly by the company, and the amount recognised as an expense in the consolidated income statement in relation to this scheme is £0.6 million (2022: £0.5 million). 22. SHARE CAPITAL AND INVESTMENT IN OWN SHARES (a) Share capital 2023 2022 Number 000 £m Number 000 £m Allotted, issued and fully paid: Ordinary shares of 1p each 428,725 4.3 428,725 4.3 Total called up share capital 428,725 4.3 428,725 4.3 The Company has one class of ordinary shares which carry no right to fixed income. (b) Investment in own shares Investment in own shares held by the Group represent the shares in the Company held by the employee share trusts which comprise the Employee Share Option Trust (ESOT) and the Share Incentive Plan (SIP) trust. The ESOT was established to purchase shares to satisfy awards under the Group’s incentive schemes and the SIP trust was established to purchase and hold shares on behalf of employees participating in the SIP. Further details of these schemes are provided in note 23. Notes to the Consolidated Financial Statements continued 202 Overview Movements in the investment in own shares were: ESOT number SIP trust number As at 1 June 2021 10,291,149 – Issued to satisfy options (63,099) – Transfers (34,269) 34,269 As at 31 May 2022 10,193,781 34,269 Issued to satisfy options (132,634) – Transfers (64,651) 64,651 As at 31 May 2023 9,996,496 98,920 The transfer of shares between the trusts relate to matching awards provided by the Group under the SIP (see note 23) which are sourced from the ESOT. The cost of shares held in the ESOT and SIP trust as at 31 May 2023 was £36.9 million, and the market value was £18.6 million (2022: £20.6 million). 23. SHARE-BASED PAYMENTS The Group operates a number of long-term incentive schemes which provide share awards to Executive Directors and certain senior employees. These schemes are designed to align the interests of the participants with those of the Group’s shareholders. The Group also operates a Share Incentive Plan (SIP) scheme which is open to UK employees. The incentive schemes are described below. Performance Share Plan (PSP) The current version of the PSP, the PZ Cussons Long-Term Incentive Plan 2020 (LTIP 2020 plan), was approved by shareholders and adopted at the 2020 Annual General Meeting. Under the LTIP 2020 plan, Executive Directors and certain senior employees are generally eligible to participate in the PSP, which provides for the grant of conditional rights to receive nil-cost shares (performance shares) subject to continued employment over a three-year vesting period and the satisfaction of certain performance criteria established by the Remuneration Committee. The fair value of the awards is determined to be the market price of the underlying shares on the date of the grant. There are no cash settlement alternatives. The Group accounts for the performance share awards as equity-settled awards. In the current year, 1,616,361 performance share awards (2022: 1,348,831 awards) were granted equating to a total fair value of £3.3 million (2022: £3.3 million) which will be recognised over the vesting period. The LTIP 2020 plan also permits a portion of the awards for the senior employees, but not Executive Directors, to function like restricted stock. These share awards (restricted share awards) vest in full subject only to continued employment, with no performance conditions. There are no cash settlement alternatives. The Group accounts for the restricted share awards as equity-settled awards. In the current year, 948,158 restricted share awards (2022: 612,378 awards) were granted equating to a total fair value of £1.9 million (2022: £1.4 million) which will be recognised over the vesting period. The total expense recognised in the consolidated income statement in the year in respect of both the performance share awards and the restricted share awards was £1.3 million (2022: £1.2 million). Deferred Bonus Share Plan This plan is limited to the Executive Directors and requires a minimum of 25% of any annual bonus earned to be deferred into shares (deferred bonus shares). The deferral period is three years (unless the Remuneration Committee determines otherwise) and the shares vest in full subject only to continued employment, with no performance conditions. The fair value of the deferred bonus share awards is determined to be the market price of the underlying shares on the date of the grant. The Group accounts for the deferred bonus share awards as equity-settled awards. In the current year, 89,222 deferred bonus share awards (2022: 116,730 awards) were granted equating to a total fair value of £0.2 million (2022: £0.3 million) which will be recognised over the vesting period. The amount recognised in the consolidated income statement in the year in respect of deferred bonus share awards was £0.1 million income (2022: £0.3 million expense). 203 Strategic Report Governance Financial Statements CONTINUED SIP The Group launched the SIP in October 2021. Available to UK employees, this plan aligns employees with the business strategy and investors by encouraging equity participation through the wider employee population. Under the plan, employees can opt to make a salary deduction on a monthly basis to subscribe for shares which the Group matches up to a maximum of £100 per employee per month. These matched share awards vest subject to continued employment over a three-year vesting period and a number of conditions associated with withdrawal. The fair value of the matched share awards is determined to be the market price of the shares on the date of matching. There are no cash settlement alternatives. The Group accounts for the matched share awards as equity-settled awards. In the current year, 71,160 matched share awards (2022: 35,389 awards) were granted equating to a total fair value of £0.1 million (2022: £0.1 million) which will be recognised over the vesting period. The expense recognised in the consolidated income statement in the year in respect of matched share awards was £45,000 (2022: £71,000). Set out below are the movements in the options and awards under each of the schemes: Performance shares number Restricted shares number Deferred bonus shares number SIP number Total number Options/awards outstanding as at 1 June 2021 3,315,616 370,947 – – 3,686,563 Options/awards issued 1,348,831 612,378 116,730 35,389 2,113,328 Options/awards exercised – (28,311) – – (28,311) Options/awards lapsed/forfeited (1,411,534) (104,060) – (1,209) (1,516,803) Options/awards outstanding as at 31 May 2022 3,252,913 850,954 116,730 34,180 4,254,777 Options/awards issued 1,616,361 948,158 89,222 71,160 2,724,901 Options/awards exercised – (50,325) – – (50,325) Options/awards lapsed/forfeited 1 (1,249,311) (160,840) – (8,880) (1,419,031) Options/awards outstanding as at 31 May 2023 3,619,963 1,587,947 205,952 96,460 5,510,322 1 Of the options/awards which lapsed/forfeited in the year ended 31 May 2023 for the performance shares and restricted shares, 1,290,407 related to the previous scheme approved in 2014. The vesting dates of the outstanding options/awards as at 31 May 2023 is: Performance shares number Restricted shares number Deferred bonus shares number SIP number Total number 31 May 2024 958,755 423,434 – – 1,382,189 31 May 2025 1,124,677 513,282 116,730 29,102 1,783,791 31 May 2026 1,536,531 651,231 89,222 67,358 2,344,342 Notes to the Consolidated Financial Statements continued 204 Overview 24. RECONCILIATION OF PROFIT BEFORE TAX TO CASH GENERATED FROM OPERATIONS 2023 £m 2022 (restated) £m Profit before tax from continuing operations 61.8 64.5 Loss before tax from discontinued operations – (1.7) Profit before tax 61.8 62.8 Net finance (income)/costs (2.1) 1.3 Operating profit 59.7 64.1 Depreciation (notes 11 and 25) 12.1 12.8 Amortisation (note 10) 7.0 7.4 Impairment of intangible assets and property, plant and equipment (notes 10 and 11) 16.5 17. 5 Impairment reversal of intangible assets (note 10) (4.2) (8.5) Profit on disposal of property, plant and equipment (11.1) (14.0) Impairment reversal of net investments in joint ventures (2.2) – Derecognition of capitalised costs related to cloud computing arrangements – 1.0 Reclassification of exchange differences on repayment of permanent as equity loans – 1.4 Difference between pension charge and cash contributions 0.5 1.1 Profit on disposal of businesses – (1.7) Share-based payment expense 1.7 1.9 Share of results of joint ventures (7.5) (6.6) Operating cash flows before movements in working capital 72.5 76.4 Movements in working capital: Inventories (8.4) (14.5) Trade and other receivables (13.4) 4.0 Trade and other payables 30.3 0.4 Provisions (4.4) (0.1) Cash generated from operations 76.6 66.2 Refer to note 1(c) for details of the prior year restatements. 205 Strategic Report Governance Financial Statements 25. LEASES The Group has lease contracts for various items of property, motor vehicles and other equipment used in its operations. Leases of property generally have lease terms between three and 12 years, while motor vehicles and other equipment generally have lease terms between one and four years. The Group also has certain leases of vehicles with lease terms of 12 months or less and leases of equipment with low value. The Group applies the ‘short-term lease’ and ‘lease of low-value assets’ recognition exemptions for these leases. Movements in the carrying amounts of right-of-use assets during the year were: Land and buildings £m Motor vehicles £m Other equipment £m Total £m As at 1 June 2021 10.3 1.2 0.2 11.7 Additions 5.9 1.0 1.2 8.1 Depreciation (2.9) (0.2) (0.4) (3.5) Exchange differences 0.3 0.3 – 0.6 As at 31 May 2022 13.6 2.3 1.0 16.9 Additions 0.7 0.9 0.1 1.7 Depreciation (2.5) (1.2) (0.2) (3.9) Derecognition of right-of-use assets (1.6) (0.1) (0.3) (2.0) Exchange differences – (0.3) 0.1 (0.2) As at 31 May 2023 10.2 1.6 0.7 12.5 Movements in the carrying amounts of lease liabilities during the year were: £m As at 1 June 2021 11.8 Additions 8.1 Accretion of interest 0.5 Payments (4.0) Exchange differences 0.5 As at 31 May 2022 16.9 Additions 0.8 Accretion of interest 0.5 Payments (3.0) Derecognition of lease liability (2.2) As at 31 May 2023 13.0 Notes to the Consolidated Financial Statements continued 206 Overview The classification of lease liabilities is: 2023 £m 2022 £m Current liabilities 1.7 2.9 Non-current liabilities 11.3 14.0 13.0 16.9 Amounts recognised in profit or loss were: 2023 £m 2022 £m Depreciation expense of right-of-use assets 3.9 3.5 Interest expense on lease liabilities 0.5 0.5 Expense relating to short-term or low-value assets 0.2 – 4.6 4.0 The maturity analysis of future lease payments is provided in note 17. 26. RELATED PARTY TRANSACTIONS Key management personnel The key management personnel of the Group comprise the members of the PZ Cussons plc Board of Directors. The key management personnel compensation was as follows (comparative amounts have been corrected from previously reported): 2023 £m 2022 £m Short-term employee benefits 2.5 2.1 Post-employment benefits 0.1 0.1 Share-based payments expense 0.5 0.3 3.1 2.5 Transactions with joint ventures Certain Group subsidiary companies enter into related party transactions with PZ Wilmar Limited, a joint venture interest which was set up under the terms of a joint venture agreement with Wilmar International Limited. Set out below are details of related party transactions during the year with PZ Wilmar Limited as well as balances as at 31 May 2023: • At 31 May 2023, outstanding long-term loans receivable from PZ Wilmar Limited amounted to £40.3 million (2022: £39.6 million). These long-term loans are presented as part of the Group’s net investment in the joint venture, and are denominated in US Dollars, interest free and repayable in part or in full on demand, subject to a 12-month notice period. The loan is matched by another loan of the same amount and terms from the Group’s fellow joint venture partner • Short-term loans are advanced to PZ Wilmar Limited from time to time. These loans are interest bearing, repayable on demand and not secured. During the year, loans advanced amounted to £11.2 million (2022: £12.6 million) and were repaid in full during the year, and the amount due as at 31 May 2023 was £nil (2022: £nil). In addition, in the prior year the loan receivable as at 31 May 2021 of £8.5 million was repaid. Interest received in the year amounted to £0.7 million (2022: £0.4 million) • At 31 May 2023, the outstanding trade receivable balance due from PZ Wilmar Limited was £2.2 million (2022: £1.7 million). All trading balances are settled in cash, and there were no provisions for doubtful related party receivables at 31 May 2023 (2022: £nil). PZ Foundation The PZ Foundation is not a related party within the definition of IAS 24 ‘Related Party Disclosures’ or the UK Listing Rules. Neither PZ Cussons plc nor its subsidiaries have effective control or day-to-day management responsibilities for the PZ Foundation and the Group’s support is limited to annual donations to support the Foundation’s charitable works. Disclosure is made in this section on a voluntary basis in the interests of transparency. During the year contributions from the UK business to the PZ Foundation were £0.2 million (2022: £nil). As at 31 May 2023 there were no outstanding balances with the PZ Foundation (2022: £nil). 207 Strategic Report Governance Financial Statements 27. DISCONTINUED OPERATIONS In 2022, net costs of £1.8 million were recognised in relation to other operations discontinued in prior periods, and cash used in operating activities amounted to £0.7 million. 28. BUSINESS COMBINATIONS There were no acquisitions in the year. Acquisition in year ended 31 May 2022 On 21 March 2022, PZ Cussons Acquisition Co Limited, a subsidiary of the Group, acquired the entire issued share capital of Tadley Holdings Limited, the parent company of Childs Farm. Childs Farm is a leading brand in UK baby and child personal care. Under the terms of the transaction, the founder of Childs Farm made a £3.25 million investment in PZ Cussons Acquisition Co Limited which gave her a 8.125% equity interest in the company, with a mechanism for the Group to purchase this equity interest in two equal tranches following each of the years ending 31 May 2024 and 31 May 2025 at a price based on a 6.62x multiple of the lower of Childs Farm’s actual gross profit and forecast gross profit in those years, subject to a cap of £32.5 million. The terms also allowed for purchase of this equity interest prior to these dates under certain conditions. As the mechanism to purchase the former owner’s equity interest in PZ Cussons Acquisition Co Limited is contractual, the Group has accounted for this obligation as deferred consideration in relation to the acquisition of Tadley Holdings Limited. The deferred consideration liability determined at acquisition amounted to £7.2 million and as at 31 May 2022 this was classified within other payables, with £3.2 million within current liabilities and £4.0 million within non-current liabilities. The liability was reassessed during the year and a £1.3 million reduction was recognised in finance income (note 18). The amounts recognised in respect of the identifiable assets acquired and liabilities assumed are as set out in the table below: 2022 £m Intangible assets – brand 35.5 Inventories 2.2 Trade and other receivables 2.7 Trade and other payables (4.4) Deferred tax liabilities (8.9) Total identifiable net assets acquired 27.1 Goodwill (restated) 13.5 Purchase consideration 40.6 Refer to note 1(c) for details of the prior year restatements. Purchase consideration comprised: 2022 £m Cash consideration paid 36.7 Cash received from former owner (3.3) Deferred consideration 7.2 Total consideration 40.6 The net cash outflow on acquisition comprised: 2022 £m Cash consideration paid 36.7 Cash received from former owner (3.3) 33.4 The goodwill arising on the acquisition of £13.5 million comprised the expected synergies between the acquired business and the Group. Childs Farm contributed £2.9 million of revenue and £0.4 million loss to the Group’s operating profit for the period between the date of acquisition and 31 May 2022. In the year ending 31 May 2022, costs related to the acquisition amounted to £1.4 million which were recognised in the consolidated income statement within administrative expenses. The Group has presented these costs as adjusting items (note 3). Notes to the Consolidated Financial Statements continued 208 Overview 29. SUBSIDIARIES AND JOINT VENTURES Details of the Company’s subsidiaries as at 31 May 2023 are as follows (PZ Cussons (Holdings) Limited and PZ Cussons (International) Limited are directly owned by PZ Cussons plc; all other subsidiaries are indirectly held): Company Operation Country of incorporation Parent Company’s interest Proportion of voting interest Registered Office address PZ Cussons (Holdings) Pty Limited Holding company Australia 100% 100% Level 3, 510 Church Street Cremorne Victoria 3121 PZ Cussons Australia Pty Limited Manufacturing Australia 100% 100% Level 3, 510 Church Street Cremorne Victoria 3121 PZ Cussons Beauty Australia (Holdings) Pty Limited Holding company Australia 100% 100% Level 3, 510 Church Street Cremorne Victoria 3121 Rafferty’s Garden Pty Limited Dormant Australia 100% 100% Level 3, 510 Church Street Cremorne Victoria 3121 United Laboratories Limited Dormant Australia 100% 100% Level 3, 510 Church Street Cremorne Victoria 3121 PZ Cussons (New Zealand) Limited Distribution Australia 100% 100% Level 3, 510 Church Street Cremorne Victoria 3121 Paterson Services (Shanghai) Limited Active China 100% 100% Suite 635, 6th Floor, No.2000 Pudong Ave. China (Shanghai) Pilot Free Trade Zone Bronson Holdings Limited Holding company England 100% 100% Manchester Business Park, 3500 Aviator Way, Manchester, M22 5TG Milk Ventures (UK) Limited Holding company England 100% 100% Manchester Business Park, 3500 Aviator Way, Manchester, M22 5TG PZ Cussons (Holdings) Limited Holding company England 100% 100% Manchester Business Park, 3500 Aviator Way, Manchester, M22 5TG PZ Cussons (International Finance) Limited Provision of services to Group companies England 100% 100% Manchester Business Park, 3500 Aviator Way, Manchester, M22 5TG PZ Cussons (International) Limited Provision of services to Group companies England 100% 100% Manchester Business Park, 3500 Aviator Way, Manchester, M22 5TG PZ Cussons (UK) Limited Manufacturing England 100% 100% Manchester Business Park, 3500 Aviator Way, Manchester, M22 5TG PZ Cussons Beauty LLP Distribution & holding partnership England 100% 100% 19-20 Berners Street, London, United Kingdom, W1T 3NW Seven Scent Limited Manufacturing England 100% 100% Agecroft Commerce Park, Lamplight Way, Swinton, Manchester, M27 8UJ St. Tropez Acquisition Co. Limited Holding company England 100% 100% Manchester Business Park, 3500 Aviator Way, Manchester, M22 5TG St. Tropez Holdings Limited Holding company England 100% 100% Manchester Business Park, 3500 Aviator Way, Manchester, M22 5TG Thermocool Engineering Company Limited Dormant England 100% 100% Manchester Business Park, 3500 Aviator Way, Manchester, M22 5TG PZ Cussons Acquisition Co Limited Holding company England 91.87% 91.87% Manchester Business Park, 3500 Aviator Way, Manchester, M22 5TG Tadley Holdings Limited Holding company England 100% 100% Manchester Business Park, 3500 Aviator Way, Manchester, M22 5TG Childs Farm Limited Distribution England 100% 100% Manchester Business Park, 3500 Aviator Way, Manchester, M22 5TG PZ Cussons Ghana PLC Distribution Ghana 95.68% 95.68% Plot 27/3-27/7, Sanyo Road, Tema, PO Box 628 Community 1, Tema Parnon (Hong Kong) Limited Provision of services to Group companies Hong Kong 100% 100% 1/F., Hing Lung Comm. Bldg., 68-74 Bonham Strand, Sheung Wan PZ Cussons (Hong Kong) Limited Dormant Hong Kong 100% 100% Level 54, Hopewell Centre, 183 Queen’s Road East PZ Cussons India PVT Limited Provision of services to Group companies India 100% 100% 604, ‘C’ Wing Raylon Arcade Ram Mandir Road – Kondvita Road, Bhim Nagar, Andheri East, Mumbai 400093 PT PZ Cussons Indonesia Manufacturing Indonesia 100% 100% Jalan Halim Perdana Kusuma No. 144, Kebon Besar, Batuceper, Tangerang, Banten, Indonesia 209 Strategic Report Governance Financial Statements Company Operation Country of incorporation Parent Company’s interest Proportion of voting interest Registered Office address PZ Cussons (Europe) Limited Dormant Ireland 100% 100% The Greenway, Ardilaun Court, 112-114 St Stephen’s Green, Dublin, D02 TD28, Ireland Childs Farm Europe Limited Dormant Ireland 100% 100% 4th Floor, 103/104 O’Connell Street, Limerick V94 AT85, Co. Limerick, Ireland PZ Cussons (East Africa) Limited Manufacturing Kenya 99.99% 99.99% P.O. Box 3085 G.P.O Nairobi, Standard Street, Building: Lornho House Food For Life Nigeria Limited Dormant Nigeria 99.99% 99.99% 45/47 Town Planning Way, Ilupeju, Lagos Harefield Industrial Limited Distribution Nigeria 99.99% 99.99% 45/47 Town Planning Way, Ilupeju, Lagos HPZ Limited 1 Manufacturing Nigeria 74.99% 74.99% 45/47 Town Planning Way, Ilupeju, Lagos Nutricima Limited Dormant Nigeria 99.99% 99.99% 45/47 Town Planning Way, Ilupeju, Lagos PZ Cussons Nigeria PLC Manufacturing Nigeria 73.27% 73.27% 45/47 Town Planning Way, Ilupeju, Lagos Roberts Pharmaceuticals Limited Dormant Nigeria 100% 100% 45/47 Town Planning Way, Ilupeju, Lagos PZ Cussons Polska SA Distribution Poland 100% 100% Ul. Chocimska 17, 00-791 Warszawa PZ Cussons Singapore Private Limited Provision of services to Group companies Singapore 100% 100% 5 Shenton Way, UIC Building #10-01, Singapore 068808 Guardian Holdings Company Limited Provision of services to Group companies Thailand 49% 49% 35 Moo 4, Tessamphan Road, Ban Chang Sub-District, Mueang Pathum Thani District, Pathum Thani Province PZ Cussons (Thailand) Limited Manufacturing Thailand 99.99% 99.99% 35 Moo 4, Tessamphan Road, Ban Chang Sub-District, Mueang Pathum Thani District, Pathum Thani Province PZ Cussons Middle East and South Asia FZE Dormant UAE 100% 100% PO Box 17233, Jebel Ali, Dubai St. Tropez Inc. Distribution USA 100% 100% 140 Broadway, Suite 2240, New York NY 10005 Childs Farm, Inc. Dormant USA 100% 100% 251 Little Falls Drive Wilmington, DE 19808 1 The equity interest in HPZ Limited is owned by PZ Cussons Nigeria PLC. In addition, Paterson Zochonis Employee Trust (registered in Jersey) is also a subsidiary. The trust was established in 2001 and holds shares in the Company predominantly for the Group’s Long-Term Incentive Plans (note 23). Joint venture company Operation Country of incorporation Parent company’s interest Registered Office address PZ Wilmar Limited Manufacturing Nigeria 50% 45/47 Town Planning Way, Ilupeju, Lagos With the exception of PZ Cussons Acquisition Co Limited which has an accounting reference date of 31 March and Paterson Services (Shanghai) Ltd with an accounting reference date of 31 December, all subsidiary entities have an accounting reference date of 31 May. 30. EVENTS AFTER THE REPORTING PERIOD Central Bank of Nigeria announcement In June 2023, a policy announcement was made by the Central Bank of Nigeria to liberalise the foreign exchange regime which, as part of a broader suite of fiscal reforms under the new government, is designed to improve the longer-term economic prospects for the country and remove some of the challenges faced by multi-national companies in repatriating funds from Nigeria. Following this announcement, the Naira exchange rate weakened against sterling and USD. The Group’s exposure to foreign currency risk is described in note 17, and sensitivity tables are provided which set out the impact of movements in the principal foreign currency exchange rates affecting the Group’s results. Offer to acquire minority-held shares in PZ Cussons Nigeria Plc On 5 September 2023, the Group announced that it had made an offer to acquire the 26.73% of issued share capital of PZ Cussons Nigeria Plc held by minority-held shareholders at a value of ₦21 per share, subject to prevailing market conditions, equivalent to a total cash consideration payable of £22.8 million (based on a Naira to GBP rate of 977). Funding for the transaction is expected to come from existing Naira cash balances. The offer is subject to the approval of the PZ Cussons Nigeria Plc board, regulatory approvals and vote of the minority shareholders. CONTINUED Notes to the Consolidated Financial Statements continued 210 Overview Company Balance Sheet As at 31 May 2023 2023 £m 63.2 5 – 63.2 Current assets 5 7.4 Investments 0.5 1.2 9.1 6 56.4 – Net assets 56.4 4.3 0.7 – Other reserve 3.7 84.6 56.4 J Myers S Pollard 211 Strategic Report Governance Financial Statements £m £m £m £m £m £m £m As at 1 June 2021 – as reported as restated net movement Shares issued from Ordinary dividends 3 As at 31 May 2022 – as restated 4.3 0.7 – 2.0 127.9 97.6 – – – – – Ordinary dividends 3 – – – – – – – – – 1.7 – 1.7 Shares issued from – 0.4 – – – – As at 31 May 2023 4.3 0.7 – 3.7 84.6 56.4 Company Statement of Changes in Equity For the year ended 31 May 2023 212 Overview • • • • • • • • • • • • • Notes to the Company Financial Statements 213 Strategic Report Governance Financial Statements CONTINUED • • • • • • • £m £m £m £m Investments Net assets Other reserve Notes to the Company Financial Statements continued 214 Overview 215 Strategic Report Governance Financial Statements CONTINUED 2023 £m 3.1 1.6 2023 £m 15.6 11.2 26.8 Notes to the Company Financial Statements continued 216 Overview Cost As at 31 May 2022 – as restated 90.7 1.7 As at 31 May 2023 92.4 – As at 31 May 2023 As at 31 May 2023 63.2 As at 31 May 2022 Country of England 100% 100% England 100% 100% 217 Strategic Report Governance Financial Statements 2023 £m – Current – – 2.3 5.1 7.4 2023 £m 15.8 0.1 15.9 2023 000 £m 4.3 4.3 Notes to the Company Financial Statements continued 218 Overview As at 1 June 2021 Transfers As at 31 May 2022 – Transfers As at 31 May 2023 219 Strategic Report Governance Financial Statements ADDITIONAL INFORMATION 220 221 B Corp BEST values ELT EPS PZ Cussons Growth Wheel SKUs Glossary 222 Overview Further Statutory and Other Information M22 5TG PZ Cussons plc Manchester Business Park 3500 Aviator Way Manchester M22 5TG Kevin Massie 223 Notes 224 FSC LOGO WLT LOGO PZ Cussons plc Manchester Business Park 3500 Aviator Way Manchester M22 5TG
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