Nestle Nigeria unable to grow profit as costs rise at half year

Nestle Nigeria is facing cost increases so far this year that won’t let it convert growing sales revenue into profit. Rising costs claimed more than the N24.4 billion increase in turnover at the end of half-year operations in June and no part of the increase reached the bottom line.

Profit performance has reversed from an 11 percent increase in the first quarter to a 12 percent drop quarter-on-quarter in the second quarter ended June 2021. At N9.3 billion for the second quarter, after-tax profit went down from N10.6 billion in the same period last year. It is also unable to match the over N12 billion profit figure the company generated in the first quarter.

The food and beverages company had raised hopes for a profit rebound this year with its first-quarter earnings report. The profit drop in the second quarter has made this expectation far-fetched with the half-year trading ending in a slight profit decline.

A possible drop in profit for the second year has taken the place of turnaround hopes for the current financial year. The company posted an after-tax profit of N21.7 billion at the end of half-year operations, which is a marginal decline year-on-year.

The problem lies in costs, which are growing well ahead on revenue and therefore squeezing margins. This position intensified in the second quarter when profit margin fell from 15 percent to 11 percent on quarter-on-quarter reading.

The main culprit is cost of sales, which rose ahead of sales revenue in the second quarter at 26.4 percent compared to 19 percent to claim almost all the increase in sales revenue during the quarter. Marketing and distribution expenses also posed a major pressure on earnings with an increase of 39 percent quarter-on-quarter.

The two expense lines consumed more than all the net gains in sales revenue in the second quarter, leaving operating profit slightly down. Yet the biggest cost increase came from net finance expenses, which jumped more than four times quarter-on-quarter to N1.6 billion.

A positive development for the company is in respect of improvement in sales revenue this year compared to three preceding years of decelerating sales that ended in a flat position in 2020. Sales revenue rose by 24 percent in the first quarter and further by 23 percent quarter-on-quarter in the second quarter.

The closing earnings figures for Nestle Nigeria for the six months of the 2021 financial year show a turnover of over N171 billion. This represents an increase of 21 percent in sales revenue over the period, which is a good report for this year compared to a flat growth in turnover recorded in 2020.

The strong improvement in revenue is the saving grace for the company in the face of rapidly growing costs. It provided room to absorb the cost increases with only a moderated effect on the bottom line. The sales revenue growth rate so far is the best record the company has seen since 2018.

However the constraining factor is that the company is spending a lot more than before to generate the naira of sales. At the end of half-year operations, input cost grew by 31 percent to N105 billion compared to the 21 percent growth in sales.

The effect of that is that cost of sales consumed more than 61 percent of sales revenue compared to less than 57 percent in the same period in 2020. Only a small part of the gains in turnover could get down to gross profit due to rising cost of sales.

Gross profit improved by 9 percent to N66 billion at the end of June compared to the 21 percent growth in sales revenue.

A rapid growth in marketing/distribution expenses in the second quarter pushed up the half-year position to an 18 percent increase to N23.5 billion. Administrative expenses however moderated, closing flat at N6.6 billion at the end of June 2021. Operating profit grew by less than 6 percent to close at N36 billion at the end of half-year trading.

A further cost encroachment came from net finance expenses, as finance income dropped and finance expenses grew rapidly. Net finance cost jumped more than six folds year-on-year to close at N2.9 billion for the half year period.

The pressure from cost of finance is reflecting rising balance sheet borrowings – which have grown from N40 billion at the end of 2020 to N52 billion at half year.

The pace at which costs grew ahead of revenue for Nestle increased in the second quarter, which eroded margins further. Net profit margin went down from 15.5 percent in the same period last year and from 14 percent in the first quarter to 12.7 percent at the end of June 2021.