Nestle Nigeria: Under pressure from rising debts

Nestlé Nigeria Plc came under fresh operating pressures in the second quarter of 2020, as sales stagnated under the Covid-19 induced economic lockdown. Costs, however, defied the economic lockdown and grew over the period to the detriment of profit.

Profit accelerated on the downside at the end of half-year operations of the food/beverages company. The profit margin was compressed by the rising cost of finance and cost of sales in the second quarter.

There was a resurgence of finance expenses in the second quarter, as the company went headlong into building balance sheet debts once again. From a moderate net finance expense of less than N83 million in the first quarter, Nestle incurred a net finance cost of N465 million at half-year.

Finance income dropped sharply by 64 percent quarter-on-quarter at the end of June while finance cost grew by 24 percent over the same period. The year-on-year position shows a 47
percent drop in finance income to N472 million and an increase of 5 percent in finance expenses to N937 million at the end of June 2020.

Rising debts explain the rising pressure from finance expenses so far this year. Nestle went aggressive on fresh borrowing in the second quarter, which jerked up total balance sheet debts
from N331 million at the end of the first quarter in March to almost N6 billion at the end of half-year trading in June 2020. It had slashed loans and borrowings by as much as 97 percent in the first quarter.

A drop of 47 percent in net cash generated from operating activities at half-year appears to have warranted the company’s big return to the credit market. Pressure from finance expenses
is now reporting on the company’s bottom line.

Net profit margin has thinned down from 18.5 percent in the same trading period in 2019 to 15.5 percent at the end of June 2020. After-tax profit accelerated downward by 17 percent to N21.8 billion year-on-year at half-year from a drop of 13 percent in the first quarter.

Input expenses grew against a flat revenue position and eroded gross profit. This is a bad turn of events for Nestle from the first quarter position when input cost declined and boosted gross profit. Cost of sales grew by 6 percent to over N80 billion at the end of June 2020 and caused a drop of 8 percent in gross profit to about N61 billion.

Administrative expenses surged upward by about 51 percent year-on-year to N6.6 billion at the end of June 2020 – clearly out of alignment with the flat position of sales. Turnover closed slightly down at N141 billion for Nestle at the end of June 2020. The company is experiencing the worsening of sales performance this year after two years of slowing down.

A 6 percent drop in marketing/distribution expenses to nearly N20 billion helped to moderate the impact of the rising cost lines. Yet operating profit went down at an increased speed of 15
percent to N34 billion against a drop of 8 percent in the first quarter.

Growing costs against constrained sales revenue were the summary of the company’s earnings story for the first half of the 2020 financial year. Increased claims of costs on revenue constricted margins all the way, which undermined the company’s profit capacity.

Nestle is seeing a worsening pressure this year after a sharp slowdown in profit in 2019. The company posted an after-tax profit of N45.7 billion in 2019, which is an increase of 6 percent.

The critical developments to watch on the company in the coming quarters are whether sales revenue would strengthen or weaken the more and whether costs would slow down and stretch out margins. Gaining or losing profit capacity in the second half will also reflect what happens to the rising balance sheet debts.

Nestle Nigeria earned N27.53 per share for its half-year period ended June 2020, dropping from N33.11 per share in the same period last year. The company paid a final cash dividend of N45 per share for the 2019 operations, upon an interim cash dividend of N25 per share.