Cadbury Nigeria: Losing the turnaround gains

Cadbury Nigeria appears to be witnessing the reversal of the critical gains and changes in its operating structure that led to its return to profit in 2010. Revenue growth, which picked up in 2010 has slowed down and a drop in turnover looks likely from the 2014 operations. Profit margin dropped to the lowest mark in four years as per the third quarter report last September.

The favorable impact of a large finance income on the income statement has faded with a drop of 76% in the third quarter. The robust cash flow and huge cash balances that used to produce huge interest income have thinned down considerably to the point that a return to the injurious bank borrowings appears quite compelling for the company going forward.

Inability to grow sales revenue and its effects on the bottom line are likely to register clearly in the 2014 result now awaited. Full year estimates indicate that both revenue and profit numbers are likely to be lower than any time in the past four years for Cadbury Nigeria in 2014.

Sales revenue closed 12% down year-on-year at N23.31 billion for the company at the end of the third quarter. The full year expectation is slightly below N32 billion, which will be a drop of about 11% from the revenue peak of N35.76 billion the company posted at the end of 2013. Despite the turnaround of the company in 2010, inability to grow sales revenue has remained a problem. After four years of returning to profit, revenue isn’t expected to be reasonably above the N29.2 billion it reported in 2010.

The company closed the third quarter operations with an after tax profit of N1.65 billion, which is a drop of more than 57% year-on-year. The full year after tax profit is estimated at N2.54 billion for Cadbury Nigeria in 2014. That will be a drop of 55% from the peak profit figure of N5.5 billion the company earned in the preceding year. This will be the lowest profit for the company since 2011 and the second profit decline in the past four years.

The ability to convert revenue into profit was weaker in 2014 than any time in the past four years. Net profit margin dropped in the third quarter from 14.6% in the same period in the prior year to 7.1%. An asset turnover of 1.1 as at the third quarter was achieved with a drop of 32.7% in total assets as at the end of September.

The company experienced operating pressures from both cost and revenue lines in 2014. Apart from the drop in sales revenue, other incomes dropped by 734% into a negative figure. Finance income, which boosted the bottom line in the preceding year, dropped by 76% to N308.5 million. Cost of sales failed to drop as rapidly as sales revenue and marketing and operating cost went up during the period, claiming increased proportions of revenue. The summary of the operating story of the company in 2014 is likely to be that income lines declined and costs increased.

That position is very likely to be compounded by changes in the balance sheet that constrained cash flow adversely. Inventories rose by 57% to N2.95 billion as at the end of the third quarter over the closing figure in the preceding year while trade and other receivables also grew by 17% to about N7.5 billion during the same period. There was virtually no increase in the payables. These explain a drastic fall of 86% in cash and bank balances to N2.5 billion.

The virtual dry up of the huge cash balances at the beginning of the year seems to have left the company with no option but a return to bank borrowings that had hurt the company’s business badly before. Net cash generated from operating activities dropped by 99% to N37.8 million as at September while net cash used for financing soared by 385% to N14.65 billion. The effect of these changes is a net decrease of 1076% in cash and cash equivalents, which has almost claimed all the cash resources at the beginning of the period.

Since the company exited its balance sheet debts with fresh capital injection it has operated with an entirely debt free balance sheet. With the depletion of its cash resources presently, a resort to fresh borrowings appears inevitable for Cadbury Nigeria. Unless sales volume picks up radically, the borrowing that the company will require to keep the business running will be quite big. If that happens, a slip back into a new era of losses may be expected.