Cadbury Nigeria: Good Q1, Uncertainty Ahead
Cadbury Nigeria built in an internal strength that shielded profit against loss of sales revenue in the first quarter but the prospects for staying the course going forward is uncertain. Weak growth in sales revenue has characterised the company’s operating climate in recent years but management succeeded in holding profit up for the third straight year in 2019.
The strength of the beverage and confectioneries manufacturing company to defend profit stems from cost saving resulting from deleveraging the balance sheet. A complete cleanup of the balance sheet of all interest-bearing debts in 2018 created room for profit improvement in 2019.
Finance expenses dropped from N592 million in 2018 to zero at the end of 2019. A net finance cost of N475 million shifted to a net finance income of N185 million over the period. That provided the strength to turn a drop of 20 percent in operating profit into an increase of 26 percent in pre-tax profit at the end of 2019.
The company still retains the advantage of the complete disappearance of finance expenses in the current year, resulting in an increase in net finance income in the first quarter. This has been supported by cost-cutting in all the key expense lines of the company. This enabled management to turn a 3.6 percent decline in gross profit into a 24 percent improvement in operating profit.
Two major cost elements caused a drop in operating profit at the end of 2019 – selling/distribution expenses and administrative cost. They are the focus of the company’s cost-saving strategy in 2020 with significant reductions achieved at the end of the first quarter.
The rein on costs followed loss of sales revenue during the first quarter after an improvement of 9 percent at the end of 2019. Despite a tight hold on cost of sales in the first quarter, the company still suffered a drop in gross profit.
Cadbury Nigeria closed the first quarter operations in March 2020 with sales revenue of N8.55 billion, which is a year-on-year drop of a little below 8 percent. Export sales picked up from a decline at the end of last year to a record growth of 28 percent in the first quarter. The drop in turnover was therefore accounted for exclusively by domestic sales of beverages that generate 86 percent of turnover.
Cost of sales dropped a little faster than sales at over 9 percent year-on-year to N6.3 billion. That reduced the decline in gross profit to 3.6 percent to N2.3 billion at the end of March.
Two major developments overturned the decline in gross profit into an improvement in operating profit. These include a drop of 9 percent in selling and distribution cost to N1.1 billion and a 24 percent drop in administrative expenses to less than N340 million.
At N882 million, operating profit grew by 24 percent year-on-year – a relatively outstanding performance compared to the full-year operating profit figure of N1.3 billion in 2019. A question mark however hangs around the ability to sustain the first-quarter growth rate to full year.
The performance was uneven last year as the company generated more than one-half of the closing operating profit figure in the first quarter. A major drop in the second quarter worsened to an operating loss in the third.
The smoothening factor that has shielded profit from the operating volatility is the absence of finance expenses. The company ended the first quarter with a net finance income of N30 million, increasing from N10 million in the same period last year.
The company’s management paid off all interest-bearing debts in 2018, which enabled a shift from a relatively large net finance cost in that year to a net finance income of over N185 million at the end of the 2019 financial year.
The revenue improvement in 2019 was the first time that Cadbury Nigeria would beat its sales revenue figure of N36 billion attained as far back as 2013. The strength for a further climb in sales revenue was missing for the company in the first quarter.
The company ended first-quarter operations in March 2020 with an after-tax profit of N639 million, a year-on-year growth of 26 percent. Profit performance last year was equally uneven across quarters. Half of the full-year profit figure was earned in the first quarter, dropping considerably in the second quarter and sinking into the red in the third quarter.
The company earned 34 kobo per share in the first quarter, improving from 27 kobo per share in the same period last year. It closed the 2019 operations with earnings per share of 57 kobo and is paying 49 kobo per share in cash dividend. The qualification date is 22 May 2020 while the payment date was yet to be announced at press time.
The outlook for the company indicates the loss in sales revenue is likely to sustain in the light of the coronavirus-induced economic lockdown. The ability to defend profit will therefore depend on how management is able to keep the key operating expenses from rising. Volatile shifts in costs and incomes with the unpredictable bottom line are expected to mark the company’s operations in the 2020 financial year.
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