Nestlé’ Nigeria Trims Costs To Stretch Out Profit To N18b In Q1

Nestle Nigeria made some headway in the first quarter in trimming critical cost lines that hindered profit improvement in 2021. The cost-saving plus improving sales revenue enabled the company to push after-tax profit a clear 45 per cent up to roughly N18 billion in the first quarter.

First-quarter operations of the food and beverages company ended March 2022 show improving earnings prospects compared to last year when profit closed flat at N40 billion. Inability to grow profit in the year followed two major cost increases that consumed gains in revenue.

The cost lines are input expenses, which rose ahead of sales revenue at 31 per cent at the end of the year compared to 22.6 per cent. Also, net finance expenses jumped by 173 per cent to over N12 billion last year to claim a significantly increased share of operating profit.

Nestlé’s management is showing a lot of caution on the side of cost this year in order to avoid a repeat of last year’s pattern where virtually all the gains in revenue were consumed by cost increases. Administrative expenses, which are under full management’s control, are getting hit more than the others.

The administrative cost was slashed by 21 per cent to N2.6 billion in the first quarter, which compensated for the company’s inability to cut other costs outside its full control. The big challenges remain in input and marketing/distribution expenses, which keep growing ahead of sales revenue.

Input expenses amounted to N67 billion for the first quarter, which is an increase of 27.6 per cent year-on-year and slightly ahead of a 26 per cent increase in turnover to N110 billion over the same period. Marketing and distribution costs equally grew ahead of sales by 28 per cent to over N14 billion in the first quarter.

It was nevertheless a moderation in the cost of sales in the first quarter compared to last year when the margin of increase ahead of sales was much wider at 31 per cent compared to 22.6 per cent. Cost of sales claimed a reduced proportion of turnover in the first quarter at 60.8 per cent compared to 62.5 per cent at the end of last year.

The big news for Nestle in the first quarter is a shift from a net finance cost of N1.3 billion in the same period last year to a net finance income of N1.4 billion. This was achieved with a windfall of N3.8 billion in finance income, rising from an insignificant figure of N123 million in the same period last year.

The robust finance income however obscured the persisting rapid growth in the cost of finance, which rose by 65 per cent to N2.4 billion in the first quarter. Net finance cost claimed 8 per cent of operating profit at the end of the year but the position changed to a contribution to build operating profit in the first quarter.

Rising finance expenses continue to reflect huge debt build-up in 2021 from N40 billion at the end of 2020 to N77 billion and further to about N84 billion at the end of the first quarter.

With the cost of sales still growing ahead of turnover, gross profit grew at a slower pace than sales at 24.5 per cent to N43 billion compared to 26 per cent. Further pressure on the side of the cost came from marketing and distribution expenses, which also grew ahead of turnover by 28 per cent to over N14 billion.

The moderating factor is cost-saving realised from the drop in administrative expenses, which raised operating profit by 30 per cent to N26.4 billion at the end of the period. This is a strong acceleration from an increase of less than 12 per cent in operating profit in 2021.

The upturn in net finance income extended the growth in the bottom line to 45 per cent with an after-tax profit of slightly below N18 billion for the first quarter. This is already 45 per cent of the full-year profit of N40 billion that Nestle posted in 2021.

Accelerating sales revenue with recovering profit margin is the combination that is working for Nestle on the earnings track this financial year. Last year, the profit margin went down from 13.7 per cent in the prior financial year to 11.4 per cent. The first quarter of the current year has seen an improvement in profit margin at 16.3 per cent, the best the company has recorded in six years at least.

Nestle is seeing the first reasonable profit improvement in three years after a profit drop in 2020 and a slight improvement in 2021. The company is still on its way to recovery from a 14 per cent profit drop in 2020.

The strength of the turnaround lies mainly in strengthening sales revenue for the second year after three straight years of slowdown ended in flat growth in 2020. The strongest growth in sales looks quite likely for Nestle this year based on the accelerated growth record in the first quarter.

Nestle ended the first quarter trading in 2022 with earnings per share of N22.68, rising from N15.64 per share in the same period in 2021. The company paid a total cash dividend of N50.50 per share for its 2021 trading.

Comments are closed.