Unilever Nigeria: A Plunge From The Peak
Unilever Nigeria plunged from its peak profit record of N10.5 billion in 2018 into a loss of over N4 billion in 2019. This was our expectation for the company at the end of the third quarter that “the full-year outlook for the conglomerate has overturned from profit into a likely loss”.
Our analysis of the company’s earnings prospects at the end of September 2019 had presented a dismal picture of the full-year position to be expected. “Another major loss in the final quarter looks quite likely and a deep plunge from a closing profit of N10.55 billion in 2018 into a loss may be the summary of Unilever’s earnings story for the 2019 financial year”, the report said.
Just as projected, the above is the summary of the company’s earnings report for 2019. It was a bad turn in fortunes for Unilever Nigeria that saw one of the most impressive earnings improvements over the preceding three years. In three years to 2018, Unilever grew after-tax profit by an average of 114 percent from stable growth in sales revenue.
The company lost turnover and profit capacity in 2019, as operating pressure that took a new turn in the third quarter held on to a full year. Input cost exceeded sales revenue in the third quarter and consumed most of the N3.5 billion profit the company posted at half-year.
The pressure intensified in the final quarter when a gross loss of N1.7 billion in the third quarter grew to nearly N3 billion. A loss of over N3 billion for the three months of the third quarter multiplied three times to almost N9 billion within the final quarter. A tax credit of N4.2 billion reduced the net loss in the fourth quarter to N4.7 billion.
The second half of the company’s trading in 2019 turned out to be one of the worst operating periods in its history. Turnover fell by 63 percent in the third quarter and again by 58 percent in the final quarter, creating loss positions all the way from the top to the bottom lines. There was a sharp swing from the blue into the red in the third quarter and yet into deeper red in the final quarter.
The company’s challenges are big enough to warrant taking the business back to the drawing board. Its figures simply tell a bad story – the cost-income structure has faltered. Consumers aren’t buying enough and products are being sold at below input cost. Management has to look elsewhere to be able to pay for marketing, administrative and finance expenses. Shareholders are getting the heat with retained earnings drained more than halfway and equity base down to a three-year low.
The severity of the operating difficulties the company faced in 2019 is partly obscured by the profitable records of the first half. A profit of N3.5 billion at the end of half-year trading moderated the closing figures for the year. The sudden jerk down of sales below input cost in the second half and the sustained gross loss position for two quarters are bad signals going forward.
Unilever’s unaudited report for 2019 shows a turnover of N60.76 billion, which is a drop of 34 percent from the company’s peak sales revenue of N92 billion in 2018. It is the first revenue drop for Unilever Nigeria in several years, as forecast. Turnover kept on accelerating downward through the year from 11 percent at half year to 29 percent at the end of the third quarter and further to 34 percent at full year.
The second half of the year contributed about N18 billion or less than 30 percent to the full-year sales revenue. The company’s sales are generated from two broad market segments – food products and home/personal care products. It lost sales on both fronts but home/personal care products led the drop at close to 40 percent.
It was a sudden change in fortune for Unilever Nigeria from accelerating revenue with moderating cost and soaring profit to a rapid drop in turnover and a loss. This has come after three years of an unbroken record of stable improvements in sales revenue and rapid growth in profit. The good trend has been broken badly as was anticipated.
Input cost went down but not as rapidly as sales revenue. Compared to the 34 percent drop in sales revenue at the end of the year, the cost of sales went down by 16 percent to N54. Input cost, therefore, consumed 89 percent of turnover in the year compared to 70 percent in 2018. The result is a sharp fall of 76 percent in gross profit to N6.7 billion at the end of 2019.
Selling/distribution expenses also failed to drop as rapidly as sales revenue and therefore claimed an increased share of revenue in the year. The same is true of marketing/administrative expenses, which at over N13 billion, was close to twice the gross profit figure.
The result is a roundabout turn from an operating profit of N10.4 billion at the end of 2018 to an operating loss of N10.3 billion in 2019. Other disappointments came from a drop of 20 percent in finance income to N2.8 billion and a drop of other income from N2.3 billion to just N65 million over the review period.
At the same time, finance expenses rose by 82 percent to N824 million. The company still maintained a net finance income position at over N2 billion. That only scratched the operating loss and still left a pre-tax loss of N8.32 billion. This is against a pre-tax profit of N13.6 billion in 2018. A tax credit of N4 billion came quite handy for Unilever, which lowered the net loss for the year to N4.2 billion.
The company closed the 2019 operations with a balance sheet completely free of interest-bearing debts. Its management had implemented a deleveraging program that mowed down borrowings from N21 billion in 2016 to zero at the end of 2019. Finance cost recorded during the year consists of exchange losses and interest on third party bank loans, according to the company’s report.
Earnings per share dropped from N1.77 at the end of 2018 to a loss of 74 kobo at the end of 2019. The company paid a cash dividend of N1.50 per share for the 2018 operations. Dividend hopes are dashed for 2019 by the loss in the year and rapid depletion of retained earning – which fell from over N23 billion in 2018 to N10.3 billion at the end of 2019.
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