Cadbury out of the red on cost slashing in Q3

Cadbury Nigeria has contained rising cost of sales, which was the main challenge that caused a net loss of N861 million in the second quarter. Cost of sales slowed all the way down from 40.5 percent rise in the second quarter to a marginal increase of 2 percent quarter-on-quarter in the third quarter.

The development has changed the company’s earnings story all the way to the bottom line to deliver an after tax profit of over N2 billion for the third quarter. That is a high jump from the profit figure of N318 million the company posted in the same quarter last year and from the loss position in the second quarter.

With the jerk down in input cost, the beverage and confectionaries manufacturing company has altered its cost-income structure to create room for profit. Cost of sales had grown well ahead of sales revenue in the second quarter at 40.5 percent compared to 30 percent quarter-on-quarter.

This has changed to a marginal increase of 2 percent in input cost against 16.6 percent growth in turnover quarter-on-quarter in the third quarter. The result is a big upturn of about 75 percent in gross profit to N3.4 billion for the third quarter from a drop of 32.5 percent quarter-on-quarter in the second quarter.

There is also a change of direction from rising selling and distribution cost in the second quarter to a drop of over 12 percent quarter-on-quarter in the third quarter. The company’s management also slashed administrative expenses from N290 million in the same quarter last year to N95 million in the third quarter.

The cost slashing moves have turned around the company’s position from an operating loss of N932 million in the second quarter to an operating profit of N2.4 billion in the third quarter. This represents close to six times increase from N420 million operating profit in the same quarter in 2020.

More than seven times increase in net finance income added to the robust growth in operating profit to push pre-tax profit to N2.7 billion for the third quarter – which is a six times jump quarter-on-quarter.

Cadbury’s third quarter result is its star performance so far this year compared to a drop of 62 percent in after tax profit in the first quarter and a loss position in the second quarter.
The company’s after tax profit of N241 million in the first quarter was absorbed by a loss of N861 million in the second quarter, closing the half year with a net loss of N516 million. It has overwritten the half year loss with the N2 billion profit in the third quarter, ending the nine months of trading with a bottom line of N1.5 billion.

Cadbury appears to be back on course for a rebound from profit drop last year. Despite a rise and fall pattern the company has remained profitable since it returned to profit in 2017 from a N563 million loss in 2016.

The company’s nine months of operations shows that sales revenue grew by 16.5 percent year-on-year to close at N30 billion. This is a slight improvement from the 16 percent revenue growth at half year. Revenue from export sales continues to face down, dropping by 53 percent year-on-year to N1.3 billion at the end of the third quarter.

Domestic sales keep sustaining recovery so far this year at an increase of 25 percent to N28.7 billion from a drop of 10 percent at the end of last year.

The move to contain cost of input in the third quarter moderated the year-to-date figure from a 30 percent rise at half year to 19 percent increase year-on-year, closing at N24.4 billion at the end of September 2021.

Limiting cost of sales from growing ahead of sales revenue to growing below it is the game changing development that Cadbury effected in operations in the third quarter. It is also the critical factor for returning to profit at the end of the third quarter.

Cost of sales claimed a reduced share of sales revenue at 81 percent at the end of the third quarter, down from 88 percent at half year but slightly above the 79 percent margin in the same period last year.

With moderated input cost, gross profit rebounded at the end of September from a 34 percent drop at half year to over 6 percent improvement year-on-year to N5.6 billion. This is also a change of direction from a drop of 29 percent in gross profit recorded at the end of 2020.

Cadbury’s management has therefore addressed a fundamental imbalance in the company’s cost-income structure at half year when gross profit was insufficient to meet selling and distribution expenses. This time, gross profit covered operating expenses and produced an operating profit of N1.8 billion at the end of the third quarter.

Cadbury continues to benefit from its significantly deleveraged balance sheet, closing the third quarter operations with a net finance income of N333 million – four times the N85 million it earned in the same period last year.

However, inter-company borrowings of N6.3 billion this year have raised balance sheet debts to N9.5 billion.