Nestlé Nigeria: cost of sales and OPEX hamper profitability


Kayode Tokede
The increase in cost of sales and operating expenses are the two financial parameters that weaken the profitability of Nestlé Nigeria during the nine months ended September 30, 2021, earnings and unaudited accounts.

Despite the news of a significant increase in revenues, the multinational company faced double-digit inflation and infrastructure challenges that worsened its nine-month result in terms of robust growth in the economy. profitability.

Results for the nine months ended September 30, 2021 showed a 17.2% growth in the company’s earnings per share (EPS) to N 14.95 in nine months of 2021 compared to N 12.76 in nine months of 2020, thanks to strong revenue growth of 26 percent.

During the nine months ended September 30, 2021, the board of directors proposed an interim dividend of N 25.00 per share, resulting in a return to shareholders of N 28.14 billion during the period compared to N35. , 67 billion N during the previous period.

Nestlé Nigeria’s revenue increased sharply by 26% in nine months of 2021 to reach N90.15 billion from N71.71 billion in nine months of 2020 – the highest quarterly growth since the third quarter 2017 (+ 29.1%) – supported by substantial growth across the Food (+ 42.4%) and Beverages (+ 7.6%) segments of the company.

Revenue in Nigeria increased 24% to N258.32 billion in nine months of 2021, from N208.73 billion reported in nine months of 2020, while income from exported goods fell by 18.2 % to 3.27 billion naira in nine months of 2021 from N4. 01billion reported in nine months of 2020.

The company’s cost of sales rose 30% to N55.29 billion in nine months of 2021, from N42.52 billion in nine months of 2020, as this reflected the impact of high inflationary pressures. – food inflation averaged 20.3 percent in the third quarter. -21 – on the costs of raw materials. For clarity, the company sources 80% of its raw materials from Nigeria.

As a result, gross profit rose 19.4% to N34.86 billion in the nine months of 2021, compared to N29.19 billion reported in the nine months of 2021 to contract. .

Lower margins
Likewise, EBITDA and EBIT margins declined 43 basis points and 19 basis points to 24.4% and 22.0%, respectively, in the nine months of 2021 (nine months of 2020: 24.8 % and 22.1%), following the contraction of gross margin and a 13 percent increase in operating expenses (OPEX).

OPEX closed nine months at N15.06 billion in nine months of 2021 against N13.02 billion in nine months of 2020.
The higher OPEX was triggered by an increase in administration which gained 22.7% to N2.94 billion in nine months of 2021 from N2.4 billion reported in nine months of 2020 and sales and distribution which gained 11% to N12.12 billion from N10.90 billion in nine months of 2020.

Nestlé Nigeria’s financial income closed the period under review at N752.9 million, compared to N229.25 million in the previous period, with financial costs falling from N687.58 million in the months of 2020 to 2.34 billion naira in the nine months of 2021.
The surge in financial costs was supported by rising interest charges from 1.62 billion naira in nine months of 2020 to 5.17 billion naira in nine months of 2021 following an increase in borrowing from the during the period.

Thus, the company’s total debt rose to 71.72 billion naira in nine months of 2021, compared to 40.21 billion nair reported in nine months of 2020. In addition, a net foreign exchange loss of 562.84 million of nairas contributed to the woes.
Nonetheless, pre-tax profit rose 18.2% to N18.21 billion in nine months of 2021, from N15.40 billion reported in nine months of 2020.

After a tax burden of 6.35 billion naira, profit after tax closed nine months of 2021 at 11.85 billion naira compared to 10.11 billion naira reported in the nine months of 2020.
According to analysts at Cordros Research: “Although Nestlé’s Q3-21 revenue growth remains supported by a weak base effect, this is the fifth consecutive quarter of revenue expansion.

“In the medium term, we believe that revenue growth is sustainable given the gradual recovery of the food segment in a context of strong competition from unlisted brands. However, concerns remain about the rising financial costs resulting from the increase in foreign currency debt amid a weakening naira. Overall, we expect the company to post strong earnings growth in 2021. ”

2021 results point to a recovery
The company’s results and accounts in 2020 suffered a decline of 6.5 billion naira or 14% in profits, ending the year with an after-tax profit of 39 billion naira, compared to 45.68 billion naira. reported in 2019, the lowest in three years.
Nestlé Nigeria’s audited financial report for operations 2020 shows the inability to increase revenues and reduce costs, as both were the challenges facing management.

The company lost profits from the first to the last quarter of the year. Fiscal 2020 saw the company’s worst revenue growth performance in several years. At the same time, the company had to contend with uncontrollable costs, which consumed revenue and reduced its profit margins during the year.

Two significant operating expenses escaped management’s control during the year. The result is that increased proportions of income had to be spent on these expenses.

The expense lines include the cost of inputs, which increased in defiance of the flattened revenue, resulting in lower gross margin. The other is the net finance cost – which has quadrupled in fiscal year 2020.
The summary of the company’s operating results in 2020 is that rising costs have persisted in the face of the constraint of revenue growth, which has put considerable pressure on the bottom line.

This is a deceleration in turnover for the third consecutive year for Nestlé from 2018.
Seasonal sales did not take place in the last quarter, apparently reflecting the negative impact of the coronavirus pandemic on consumer spending.

The company closed fiscal 2020 with revenue of 287 billion naira compared to 284.03 billion naira reported in 2019. The figure represents an increase of only 1% for the year, slowing from an improvement 7% of revenues during the previous fiscal year. year.

In the resulting pressure on cash flow, the company accumulated balance sheet debt during the second half of the year. From 13 billion naira at the end of 2019, the company’s borrowing soared to 40 billion naira by the end of 2020.
Cost of sales

Cost of sales increased 7.7% to almost 168 billion naira in 2020, compared to 155.89 billion naira reported in 2019. Cost of sales thus encroached considerably on revenue and claimed 58% of it. . The result is a seven percent drop in gross profit to close at 119 billion Naira in 2020 from 128 billion Naira reported in 2019.

The increase in input costs mainly explains the loss of profit margin of the company during the year under review and the decline in profits recorded. Some moderation came from a four percent drop in marketing / distribution spending. The effect of the decrease was quite insignificant compared to the decrease in gross margin.

Another challenge related to rising costs came from administrative expenses, which rose 9.5% during the year to around 11 billion naira. The result is an almost 11 percent drop in operating profit to N64 billion.
The increase in indebtedness during the year weighed heavily on the income statement through enormous financial charges. Financial spending rose 95 percent during the year to reach N 4.4 billion.

At the same time, financial income fell 51 percent to 646 million naira at the end of the fiscal year. Net financial expenditure therefore rose 300% to close at over 3.8 billion naira for the year.
The rapid increase in major cost items in the face of weak sales reduced profit margins. Nestlé’s net profit margin increased from 16% in 2019 to 13.6% at the end of fiscal 2020.

The company posted an after-tax profit of 39 billion naira for fiscal 2020, which is a decrease of 6.5 billion naira or 14% from 2019 profit of 45.7 billion naira. The decline in profits was sustained over the four quarters of the year.

Nestlé Nigeria earned N 49.47 per share at the end of fiscal 2020, compared to N 57.63 per share at the end of 2019.
The company had paid shareholders a cash dividend of N 25 per share and announced a final cash dividend of N 35 per share.
Impact of COVID-19

The multinational company said in a statement: “As the COVID-19 pandemic continues to impact globally, we have three key priorities as a business: protecting the health and well-being of our employees. , ensure business continuity to meet consumer needs. needs and support communities in relief efforts.

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

“For the company’s financial statements as at March 31, 2020, the coronavirus outbreak and related impacts are considered non-regulatory events, as the company has a solid business continuity plan in place to ensure an uninterrupted supply of essential food and drink.

“Therefore, there is no impact on the recognition and measurement of assets and liabilities.
“Due to the uncertainty of the outcome and duration of current events, it is too early to quantify the overall impact of the epidemic on the financial condition, results of operations or future cash flows of the society.”


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