Flat revenue, rising cost explain Nestlé’s N6.5bn profit drop in 2020

Nestlé Nigeria Plc suffered a N6.5 billion or 14 percent profit drop in 2020, closing the year with an after tax profit of N39 billion — lowest in three years. The company’s audited financial report for the 2020 operations shows that inability to grow revenue or cut costs was the management’s challenge in the year.

The food and beverages company’s results fit clearly into our earnings projections in our review of its third quarter operations. We had anticipated that “this year, profit is headed for a drop — which is explained by rising costs against flat sales revenue and the resulting loss of profit margin. The company has sustained profit drop over the three quarters of the current financial year.”

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. The figure represents an uptick of just 1 percent for the year, slowing down from a 7 percent improvement in turnover 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 grew by 7.7 percent to almost N168 billion in the year against the 1 percent gain in turnover. It therefore encroached on revenue significantly and claimed 58 percent of it. The result is a drop of 7 percent in gross profit to close at N119 billion for the year.

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 4 percent 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 percent in the year to roughly N11 billion. The outcome is a drop of close to 11 percent 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 percent in the year to N4.4 billion. At the same time, finance income fell by 51 percent to N646 million at the end of the financial year. Net finance expenses therefore raced up by as much as 300 percent 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 percent 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. It is paying well over that to shareholders in cash dividend. Up on the interim cash dividend of N25 per share, it has announced a final cash dividend of N35 per share.