Unilever Nigeria: Sales Drop Below Cost, Consume Profit
Unilever Nigeria’s operating pressure took a new turn in the third quarter when input cost exceeded sales revenue. That produced a gross loss of N1.7 billion from which the company built a net loss of over N3 billion for the three months of the third quarter. The full-year outlook for the conglomerate has overturned from profit into a likely loss.
The three months of the company’s trading in the third quarter have turned out to be one of the worst operating periods in its history. Turnover fell by 63 per cent against the corresponding quarter last year, creating a loss position all the way from the top line. The quarter saw a sharp swing from the blue into the red – big enough to consume most of the N3.5 billion profit the company posted a half-year.
The company’s operating story in the third quarter presents a dismal picture of the full-year position to be expected. Another major loss in the final quarter looks quite likely and a deep plunge from a closing profit of N10.55 billion in 2018 into a loss may be the summary of Unilever’s earnings story for the 2019 financial year.
The company’s challenges are presently beyond the limits of management’s control. Its figures simply tell the bad story – the cost-income structure is out of alignment. Consumers aren’t buying and products are being sold at below input cost. Somebody else will, therefore, have to pay for marketing, administrative and finance expenses. That person is the shareholder, who gets a loss in place of a profit.
The severity of the operating difficulties the company faced in the third quarter is still largely obscured by the year-to-date numbers. The closing figures at the end of the third quarter aren’t displaying the sudden jerk down of sales below input cost, the appearance of a gross loss – a signal for corporate demise and a bottom-line deep in the red.
Unilever’s year-to-date numbers show a turnover of N51.63 billion at the end of the third quarter in September 2019. This is an accelerated drop of close to 29 per cent year-on-year from 11 per cent drop at half-year.
The third quarter operations contributed less than N9 billion or 17 per cent to sales revenue compared to N24 billion or over 33 per cent in the same period last year. A further loss of sales may be expected in the final quarter. The company is headed for the first revenue drop in several years at the end of 2019.
The company’s sales are generated from two broad market segments – food products and home/personal care products. It is losing sales at both fronts but home/personal care products are leading the drop so far.
It is a sudden change in fortune for Unilever that maintained an unbroken record of three years of rapid growth to 2018. The good trend is set to be broken badly this year. Records of accelerating revenue with moderating cost in the past three years have turned to rapidly falling sales revenue and a rising loss.
Input cost isn’t going down at an equal pace with sales revenue and the situation worsened in the third quarter. While sales revenue dropped by 28.6 per cent at the end of the third quarter, cost of sales went down by 15 per cent to almost N42 billion. That caused a sharp fall of 58 per cent in gross profit to N9.63 billion over the review period.
Selling/distribution expenses also maintained sticky behaviour and claimed yet an increased share of revenue during the review period. Only a moderate cost saving was made from marketing/administrative expenses, which dropped ahead of sales at 34 per cent.
Operating profit proceeded from a sharp drop of 38 percent to N3.8 billion at the end of June to a loss of N758 million at the end of September. This follows an operating loss of N4.64 billion incurred in the third quarter.
Further pressure on the bottom line came from a drop of 25 percent in finance income against an increase of 62 percent in finance expenses to N443 million. The company still maintained a net finance income position at N1.4 billion. That covered the operating loss and still left a pre-tax profit of N647 million.
Unilever Nigeria closed the period with an after-tax profit of N541 million, a sharp drop from N3.5 billion at half year and N9.56 billion in the same period last year. This follows a net loss of N3 billion in the third quarter. A profit projection of N6.8 billion for Unilever made in the previous analysis is no longer realisable in the light of the disappointing third-quarter performance.
The company’s operating figures could have been worse still had management not moved ahead of time on a deleveraging programme that has produced a virtually debt-free balance sheet. Interest-bearing debts have been maintained at less than N4 million, having been mowed down from N21 billion in 2016. Finance cost recorded during the review period consists of exchange losses and interest on third party bank loans, according to the company’s report.
Net profit margin fell from 13 percent in the same period last year and from 8 percent in June to 1 percent in September. Earnings per share dropped from N1.66 in the same period last year to 9 kobo at the end of the third quarter. The company earned N1.84 per share at the end of 2018 and paid a cash dividend of N1.50 per share.
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