Nestle Nigeria: Cost of Sales, OPEX Hampers Profitability

Nestle Nigeria: Cost of Sales, OPEX Hampers Profitability

Kayode Tokede
Mounting cost of sales and operating expenses are the two financial parameters that weaken Nestle Nigeria profitability in nine months ended September 30, 2021 unaudited result and accounts.

Despite reporting significant increase in revenue, the multinational company was faced with double-digit inflation rate and infrastructural challenges that compounded its nine months result robust growth in profitability.

The nine months ended September 30, 2021 results showed a 17.2 per cent growth in the company’s Earnings Per Share (EPS) to N14.95 in nine months of 2021 from N12.76 reported in nine months of 2020, on the back of solid revenue growth of 26 per cent.

On the nine months ended September 30, 2021, the board had proposed an interim dividend of N25.00 per share, translating into N28.14billion shareholders return in the period as against N35.67billion in prior period.

Nestle Nigeria’s revenue grew solidly by 26 per cent in nine months of 2021 to N90.15billion from N71.71billion reported in nine months of 2020 – the highest quarterly growth since Q3-17 (+29.1per cent) – underpinned by substantial growth across the company’s Food (+42.4per cent) and Beverage (+7.6per cent) segments.

Revenue in Nigeria rose by 24 per cent to N258.32billion in nine months of 2021 from N208.73billion reported in nine months of 2020, while revenue from exported goods dropped by 18.2 per cent to N3.27billion in nine months of 2021 from N4.01billion reported in nine months of 2020.

The company’s cost of sales grew by 30 per cent to N55.29billion in nine months of 2021 from N42.52billion reported in nine months of 2020 as it reflected the pass-through impact of elevated inflationary pressures – food inflation averaged 20.3per cent in Q3-21 – on raw material costs. For clarity, company sources 80per cent of its raw materials in Nigeria.

Consequently, gross profit rose by 19.4 per cent to N34.86billion in nine months of 2021 from N29.19billion reported in nine months of 2021 to contract Gross margin by 204basis points to 38.7per cent 40.7 per cent as cost of sales grew faster than revenue.

Declining Margins
Similarly, EBITDA and EBIT margins declined by 43 basis points and 19basis points to 24.4per cent and 22.0per cent, respectively, in nine months of 2021 (nine months of 2020: 24.8per cent and 22.1per cent), following the contraction in gross margin and a 13 per cent expansion in Operating Expenses (OPEX).

OPEX closed nine months at N15.06billion in nine months of 2021 from N13.02billion in nine months of 2020.
The higher OPEX was triggered by an increase in the administrative that gained 22.7 per cent to N2.94billion in nine months of 2021 from N2.4billion reported in nine months of 2020 and selling & distribution that gained 11 per cent to N12.12billion from N10.90billion in nine months of 2020.

Nestle Nigeria’s finance income closed the period under review at N752.9million from N229.25million reported in prior period as finance cost moved from N687.58million in months of 2020 to N2.34billion in nine months of 2021.
The surge in finance cost was underpinned by the rise in interest expense from N1.62 billion in nine months of 2020 to N5.17 billion in nine months of 2021 following increased borrowings during the period.

Thus, the company’s total debt increased to N71.72 billion as of nine months of 2021 from N40.21billion reported in nine months of 2020. In addition, a net foreign exchange loss of N562.84 million contributed to the woes.
Notwithstanding, profit before tax grew by 18.2per cent to N18.21 billion in nine months of 2021 from N15.40 billion reported in nine months of 2020.

Following a tax expense of N6.35 billion, profit after tax closed nine months of 2021 at N11.85 billion from N10.11 billion reported in nine months of 2020.
According to analysts at Cordros Research: “Although Nestle’s Q3-21 revenue growth remains supported by low base effect, it marked the fifth consecutive quarter of top-line expansion.

“Over the medium term, we believe the revenue growth is sustainable given the gradual pickup in the food segment amid stiff competition from unlisted brands. However, concerns remain on the growing finance costs arising from the increase in foreign currency debt amid the weakening naira. Overall, we expect the company to deliver strong earnings growth in 2021.”

2021 Results Indicates Recovery
The company in 2020 full year result and accounts had suffered a N6.5 billion or 14 per cent profit drop, closing the year with an profit after tax of N39 billion from N45.68billion reported in 2019 — lowest in three years.
Nestle Nigeria audited financial report for the 2020 operations shows that inability to grow revenue and cut costs as both were the challenges faced by the management.

The company lost profit all the way from the first to the final quarter in the year. The 2020 financial year saw the worst revenue growth performance for the company in a number of years. At the same time the company faced costs that could not be contained, which consumed revenue and squeezed profit margins in the year.

Two major operating costs escaped management’s control through the financial year. The outcome is that increased proportions of revenue had to be devoted to meet these expenses.

The expense lines include input cost, which grew in defiance of flattened sales revenue, leading to a drop in gross profit. The other is net finance cost — which multiplied four times in the course of the 2020 financial year.
The summary of the operating results of the company in 2020 is that rising cost persisted in the face of revenue growth constraint, which posed considerable pressure on the bottom line.

It was a deceleration in sales revenue for the third year running for Nestle from 2018.
Seasonal sales failed to happen in the final quarter, apparently reflecting the adverse impact of the coronavirus pandemic on consumer spending.

The company closed the 2020 financial year with sales revenue of N287 billion as against N284.03billion reported in 2019. The figure represents an uptick of just one per cent for the year, slowing down from a seven per cent improvement in revenue in the preceding financial year.

In the resulting pressure on cash flow, the company piled up balance sheet debts in the second half of the year. From N13 billion at the end of 2019, the company’s borrowings soared to N40 billion at the end of 2020.
Cost of Sales

Cost of sales grew by 7.7 per cent to almost N168 billion in 2020 from N155.89billion reported in 2019. Cost of sales therefore encroached on revenue significantly and claimed 58 per cent of it. The result is a drop of seven per cent in gross profit to close at N119 billion in 2020 from N128.billion reported in 2019.

The increase in input expenses accounted mostly for the company’s loss of profit margin in the year under review and the profit drop recorded. Some moderation came from a drop of four per cent in marketing/distribution expenses. The effect of the drop was quite insignificant compared to the drop in gross profit.

A further challenge from rising costs came from administrative expenses, which grew by 9.5 per cent in the year to roughly N11 billion. The outcome is a drop of close to 11 per cent in operating profit to N64 billion.
The increased debt load in the year weighed heavily on the income statement by way of huge finance expenses. Finance expenses advanced by 95 per cent in the year to N4.4 billion.

At the same time, finance income fell by 51 per cent to N646 million at the end of the financial year. Net finance expenses therefore raced up by as much as 300 per cent to close at over N3.8 billion for the year.
Rapid increase in major cost elements against the weakness in sales constricted profit margins. Nestle’s net profit margin declined from 16 percent in 2019 to 13.6 per cent at the end of the 2020 financial year.

The company posted an after tax profit of N39 billion at the 2020 full year, which is a drop of N6.5 billion or 14 percent from the 2019 profit figure of N45.7 billion. The profit drop was sustained across the four quarters of the financial year.

Nestle Nigeria earned N49.47 per share at the end of the 2020 financial year compared to N57.63 per share at the end of 2019.
The company had paid shareholders in cash dividend of N25 per share, and announced a final cash dividend of N35 per share.
Impact of COVID-19

The multinational company in a statement had said, “As the COVID-19 pandemic continues to have an impact on a global level, we have three key priorities as a Company: safeguarding the health and wellbeing of our people, ensuring business continuity to meet consumer needs and supporting communities with relief efforts.

“Nestlé Nigeria is working closely with the government, health authorities and other private sector players to respond to the challenge.

“For the Company’s March 31, 2020 financial statements, the Coronavirus outbreak and the related impacts are considered non-adjusting events as the Company has a robust business continuity plan in place to ensure an uninterrupted supply of essential food and beverages.

“Consequently, there is no impact on the recognition and measurement of assets and liabilities.
“Due to the uncertainty of the outcome and duration of the current events, it is too early to quantify the overall impact of the outbreak on the Company’s financial position, results of operations or cash flows in the future.”

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