Unilever H1 2020 Shows Third Loss in Four Quarters

ISMAIL MUSA

Unilever Nigeria’s second quarter (Q2) 2020 unaudited result recently released, showed three straight losses posted in four quarters.

UNILEVER second-quarter results published Monday, July 20 revealed that the company’s Earnings Per Share (EPS)  declined by 181.9 percent y/y, and implying a post-tax loss of N1.63 billion, which according to Cordros Research, accounts for the company’s third loss in the last four quarters.

The result also showed that the year on year (y/y) EPS decline was due to lower revenue and compression in gross margin.

According to data released by the company, revenue plunged by 40.1 percent y/y (H1-20: -35.9% y/y) in Q2-20, following significant declines in revenue from the HPC which dipped by 45.6 percent and Food Products by 35.1 percent segments, marking the seventh consecutive quarter of year-on-year revenue decline.

Despite weak macros and the tighter consumer wallet, the result continues to reflect the Company’s decision, in Q3-18, to tighten credit terms among its distributors to address significant exposures from high trade receivables.

Sequentially, revenue remained somewhat resilient, amidst the impact of the COVID-19 pandemic, growing 5.1% q/q, and marking a second consecutive quarterly growth. Food and HPC revenue grew by 6.0% q/q and 4.0% q/q respectively, with demand for essential food and hygiene-related brands, which tend to be non-cyclical, remaining resilient in the period.

Gross profit margin (-12.4 ppts y/y) shrank to 19.5% in Q2-20, as CoGs (-29.3 % y/y) remained sticky, declining much lower than revenue. We highlight the recent devaluation in the naira, restrictions in access to foreign exchange, and the inflationary impacts on production inputs as factors affecting the preceding.  Management, in its Q1-20 conference call, highlighted that the current FX situation is similar to the 2015-2017 crisis and currently faces challenges sourcing foreign exchange from the apex bank’s official windows.

Despite the 6.5% decline in OPEX, EBIT (-173.5% y/y), and EBIT margin (-24.1 ppts y/y) both declined as the top line plunge outpaced the decline in OPEX. Noteworthy is the NGN597.19 million in impairment losses on trade receivables recorded in the period, the highest on record.

Also, UNILEVER recorded net finance income growth of 158.5% y/y in Q2-20 as finance costs fell faster than finance income. Consequently, the company recorded a net loss of NGN1.63 billion (vs. net income of NGN2.00 billion in Q2-19).

 Compared to Q1-20, EPS was down -246.6% q/q, driven by gross margin compression (-6.2ppts), higher OPEX (+54.3% q/q), lower net finance income (-29.5% q/q) and tax expense of NGN118.27million (vs. tax credit of NGN165.96 million)

For H1-20, operating cash flow turned positive, growing to NGN9.25 billion (vs -NGN11.80 billion in H1-19) following management recent initiatives to shrink its working capital funding gap.

Comment: Unilever’s Q2 performance continues to reflect the challenging operating conditions as pressured consumer wallet continues to impact sales, while weaker exchange rate, poor FX liquidity, and rising inflation continue to impact input and fixed costs.

Cordros Securities stated “We also note the high marketing and admin expenses, which in our view are not sustainable and will continue to weigh on topline, though management has stated they will continue to invest behind their brands in order to boost volumes. We expect the reaction to the results to be negative. Our estimates are under review”