Cadbury Nigeria Plc has lost the operating grip from the good first quarter starting and the uncertainty that laced its outlook for the year downed into a loss position in the second quarter. The beverage and confectionaries manufacturing company lost the strength that shielded profit against revenue losses in the first quarter.
An accelerating drop in sales revenue is at the centre of the problem. The company lost over 27 percent of turnover quarter-on-quarter at the end of June 2020. That pushed up the year-on-year drop in sales from 8 percent in the first quarter to 18 percent at half-year.
A 30 percent cut down on selling and distribution expenses within the second quarter was insufficient to compensate for the sales revenue losses. The period, therefore, ended in an operating loss of roughly N168 million for Cadbury Nigeria.
The company still maintains the strength from deleveraging of its balance sheet last year. The mounting pressure on the bottom line in the current year is in spite of a complete absence of finance expenses. A shift from net finance cost to net finance income was the enabling factor for profit improvement at the end of last year.
This year so far any saving graces to defend profit appear to be far-fetched for Cadbury Nigeria at the end of half-year trading. Even the increase in finance income in the first quarter gave way for a drop in the second quarter.
Cost-cutting in the key expense lines of the company continued in the second quarter. However, costs generally aren’t coming down as rapidly as revenue.
Cost-cutting had enabled management to turn a 3.6 percent decline in gross profit into a 24 percent improvement in operating profit in the first quarter. This could not be sustained in the second quarter with accelerated drops in sales revenue and gross profit.
Cadbury Nigeria closed half year operations in June 2020 with sales revenue of N15.9 billion, which is a year-on-year drop of 18 percent. Export sales are still holding up at 25 percent growth at half-year from a decline at the end of 2019. Domestic sales of beverages accounted exclusively for the drop in turnover.
The cost of sales changed direction from declining ahead of sales in the first quarter to a slower drop than the turnover in the second quarter. That put fresh downward pressure on gross profit – from only a 3.6 percent decline in the first quarter to a drop of 20 percent year-on-year to N3.3 billion at half-year.
Management continued to keep costs under control with selling and distribution speeding up to a year-on-year drop of close to 20 percent to N2 billion. Administrative expenses however slowed down from a 24 percent drop in the first quarter to 16.7 percent to N646 million at half-year.
The cost savings were insufficient to make up for the accelerated drop in gross profit during the review period. That turned the table in respect of operating profit from a 24 percent growth in the first quarter to a drop of 19.6 percent to about N715 million at half-year. We had placed a question mark around the company’s ability to sustain the first-quarter performance.
A major favorable factor for the company that has prevented a wider downward swing on profit so far is the absence of finance expenses. The company ended the half-year operations with a finance income of N52 million, which is however a drop from N68 million in the same period last year.
Cadbury Nigeria ended half year operations in June 2020 with an after-tax profit of over N536 million, which is a drop of 20 percent year-on-year. It is also a drop from the closing profit of N639 million for the first quarter. The difference is a loss of N102 million sustained in the second quarter.
The company earned 29 kobo per share at half-year, down from 34 kobo per share in the first quarter, and 36 kobo per share in the same period last year. It earned 57 kobo per share at the end of 2019 and paid out 49 kobo per share in cash dividend.
The outlook for the company continues to point to weakening sales revenue in an environment of rising input cost and low consumer spending capacity. The ability to defend profit against falling sales and rising costs and prices can be expected to wane. Volatile shifts in costs and incomes are likely to keep the company’s bottom line under pressure in the second half.
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