Nestle Nigeria Is Growing Profit From Slowing Sales
MICHAEL MOSES
Nestlé Nigeria isn’t quite finding its feet in pushing sales so far this year, as sales keeps decelerating for the second year. But the company’s strategists seem to be perfecting a formula for growing profit from slowing sales. That was the course the food and beverages company followed last year to lift profit a clear 28 percent from 9 percent improvement in turnover.
Expectedly, the company is following the same path that worked for it the year before. Sales revenue has decelerated further to just 5 percent at the end of half year trading in June 2019 but management pushed profit up by more than 22 percent. The pattern is expected to follow the company to full year.
The ability to keep profit growing well in a bad selling season draws essentially from a swift move to deleverage the balance sheet over the past two years. A major swelling of finance expenses had caused a big plunge in profit in 2016. The company’s management took decisive steps to cut down its huge interest bearing debts.
The favourable earnings report for the third year running is the impact of sharp reductions in balance sheet borrowings. The direct effect of that is huge cost saving from rapidly declining finance expenses. Finance expenses fell by 83 percent in 2018 and are further down by 20.5 percent at the end of June 2019. This is against increasing finance income, which has seen a shift to a net finance income position this year.
Apart from cost saving from creditors, Nestle is equally saving cost on input and administrative expenses, which is raising its capacity to build wealth for shareholders. Improving profit margin is a confirmation of the success of the company’s new financial strategy. It is simply cutting resources from other stakeholders to shield shareholders from operating difficulties.
Nestle Nigeria posted sales revenue of about N142 billion at the end of half year operations in June, which is an increase of 5 percent year-on-year. Sales grew evenly across the first two quarters of the year and have continued to slow down for the second year from 34 percent in 2017 to 9 percent in 2018.
Sales revenue is projected to be in the region of N285 billion for Nestle Nigeria at full year. This indicates that growth in sales revenue is expected to step up from 5 percent at half year to 7 percent at the end of the year. The company closed last year’s operations with a turnover of N266 billion.
Cost of sales maintained the 5 percent margin of decline recorded in the first quarter and provided another major cost saving point for the company during the review period. This has permitted more than all the increase in sales revenue to boost gross profit.
The result is that gross profit grew close to four times as fast as sales revenue at 19 percent to N66 billion at the end of June. Gross profit margin has therefore stretched out further from 44 percent in the first quarter to 46.6 percent at half year against 41 percent in the same period last year.
Administrative cost was flat at half year, as it shifted from a 9 percent drop in the first quarter to an 8 percent increase in the second quarter. It remains a cost saving centre for the company so far. Marketing/distribution expenses however continue to move in the opposite direction despite moderating from 15 percent growth in the first quarter to 12 percent at half year.
As happened in the first quarter, savings from input cost and administrative expenses countered the increase in marketing/distribution expenses. Consequently, the increase in sales revenue was boosted by the cost savings to build operating profit. At over N40 billion, operating profit grew by 26 percent at the end of half year operations.
Finance cost continues to drop for the third year running while finance income continues to improve. Finance expenses dropped by 20.6 percent at half year to N888.7 million while finance income improved by 6 percent to N891 million over the same period. That remains a net finance income position though the figure has declined from the first quarter mark, as finance cost grew in the second quarter.
Further growth in finance expenses may be expected in the third quarter, as new borrowings in the second quarter have raised total debts from less than N7 billion at the end of the first quarter to over N15 billion at half year.
There remains so far a major change in the company’s cost structure to its advantage, having brought under control finance expenses that proved to be out of control two years ago. This has provided a major reinforcement of the company’s profit capacity with pre-tax profit growing by 27 percent to over N40 billion at half year. This shows a gain in profit margin at each stage of the income-expenditure flow.
Nestle Nigeria posted an after tax profit of over N26 billion at the end of June 2019, a year-on-year growth of 22 percent. Full year profit is projected to be in the region of N53 billion for Nestle Nigeria in 2019 – an expected growth of 23 percent for the year. It raised profit by over 27 percent to N43 billion in 2018.
There is a further gain in net profit margin from 18 percent in the first quarter to 18.5 percent at half year – the highest mark in many years. The company earned N33.11 per share at half year, up from N27.07 per share in the same period in 2018. The full year earnings per share expectation is in the region of N67 for Nestle Nigeria in 2019. An interim cash dividend is expected at the end of the third quarter.
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