Nestle Nigeria hopeful for better 2nd half despite rising costs

Nestlé Nigeria Plc recorded substantial progress in earnings performance in the third quarter that has rekindled hopes for a better second half for the company than the first. The company’s third quarter operations saw a rebound from a 12 percent profit drop in the second quarter to a 17 percent increase quarter-on-quarter.

The profit improvement in the third quarter is read as an indicator for an improved second half for the food & beverages company. The prospects for sustaining the profit improvement in the final quarter are considered good for the company. The full year earnings outlook points to a turnaround from a profit drop in the preceding year.

The company’s year-to-date earnings numbers at the end of the third quarter in September 2021 show a gain in momentum in sales revenue growth from 21 percent year-on-year at half year to a 23 percent rise.

Nestle raised turnover by 23 percent or nearly N49 billion year-on-year at the end of the third quarter to over N261 billion. A renewed strength in building sales revenue is a major positive development for the company this year and the high point of its operations over the nine months of trading.

There is a stable growth in sales revenue across quarters at 24 percent in the first quarter, 23 percent in the second and roughly 26 percent quarter-on-quarter in the third quarter.

The improvement represents the best the company has recorded in turnover growth over the past three years. It is a rebound from flat growth in sales revenue in 2020 and an increase of 7 percent in 2019.

Growing sales revenue has helped the company moderate rising costs and prop up the bottom line. It houses the strength for possible recovery and growth from a 14 percent drop in the company’s after tax profit to N39 billion at the end of last year.

The company still faces the challenges of rising costs, which consumed most of the gains in sales revenue at the end of the third quarter, squeezing margins and undermining profit capacity on year-on-year reading.

Two major expenditure lines are the culprit – cost of sales and finance expenses, which consumed much of the increase in sales revenue.

At N160 billion, input cost overtook the increase in sales revenue at 31 percent year-on-year compared to the 23 percent. This means over 61 percent of group turnover was devoted to cost of sales at the end of the third quarter, up from about 57 percent in the same period last year.

Interest expenses swelled three and half folds to N5.7 billion over the same period. At N4.5 billion, net finance cost multiplied five times year-on-year at the end of the third quarter. It grew in proportion from less than 2 percent of operating profit in the same period in 2020 to 8 percent at the end of September 2021.

Mounting balance sheet borrowings explain jumping finance expenses. The company’s interest bearing debts keep rising from N40 billion at the end of 2020 to N45 billion at the end of the first quarter and from N52 billion at half year to over N71 billion at the end of the third quarter.

Costs grew generally ahead of revenue at third quarter close, resulting in a loss of profit margin – from 15 percent in the same period last year to below 13 percent.

Yet the company’s cost and income balance represent some progress from the second quarter records when the two major expense lines consumed more than all the increase in sales revenue in the quarter.

There was a slowdown in marketing and distribution expenses, which provided some cost savings that enabled the profit improvement in the third quarter.

Further progress is indicated by a 25 percent growth in operating profit quarter-on-quarter in the third quarter compared to a decline in operating profit in the second quarter.

The company closed the third quarter operations with an after tax profit of N33.6 billion, which is an increase of 5 percent year-on-year. With further upturn in both revenue and profit in the final quarter, the company can be expected to make up fully for the profit drop it suffered last year.