Cadbury: Severe Competition, Cost of Sales Threatens Profit

Kayode Tokede
With hike in cost of sales and severe competition in the consumer goods sector, Cadbury Nigeria Plc’s profit and dividend payout to shareholders seems threatened in 2021 financial year result and accounts.

The company in its nine months ended September 30, 2021 unaudited result and accounts was unable to managed its rising cost of sales, which was the main challenge that caused a net loss of N516 million in the half year ended June 30, 2021
The multinational company had reported cost of sales of about 30 per cent to N16.3billion in H1 2021 from N12.61billion reported in H1 2020.

Cost of sales in nine months ended September 30, 2021 grew by 19.04 per cent to N24.4billion from N20.52billion in nine months of 2020, to drive proportion of cost of sales/revenue to 81.28 per cent in nine months of 2021 from 79.53 per cent in nine months of 2020.

The company in the nine months under review reported 16.5 per cent increase in revenue to N30.05billion from N25.8billion reported in prior nine months of 2020.
Revenue generated in Nigeria rose by 25.04 per cent to N28.7billion from N22.96billion in nine months of 2020,while export sales dropped by 52.9 per cent to N1.33billion from N2.83billion reported in nine months of 2020.

Analysts explained that further rise in cost of sales and hike in finance cost in fourth quarter of 2021 might weaken the company’s profit in full year ended December 31, 2021 results.
Companies operating in Nigeria had faced hike in cost of sales in the four quarter of 2021 amid growing revenue, mixed financial parameters that stand to play critical role in profit.
However, decline in total operating expenses and growth in net finance income boost profits in the nine months under review.

Cadbury Nigeria’s total operating expenses dropped by 10 per cent to N3.82billion in nine months of 2021 from N4.24billion reported in nine months of 2020.

The breakdown revealed that selling and disturbing expense gained 2.5 per cent to N3.38billion in nine months of 2021 from N3.3billion in nine months of 2020, while administrative expenses dropped by 53.3 per cent to N436million from N935.99million prior nine months of 2020.
Net finance cost dropped by 290 per cent to N333.25million from N85.45million reported in nine months of 2020.

The company’s profit of N241 million in the first quarter was absorbed by a loss of N861 million in the second quarter, closing the half year with a net loss of N516 million. It has overwritten the half year loss with the N2 billion profit in the third quarter, ending the nine months with a bottom line of N1.51billion.
The company to be back on course for a rebound from profit drop last year but cost of sales pose a threat.

Despite a rise and fall pattern the company has remained profitable since it returned to profit in 2017 from a N563 million loss in 2016.
With moderated input cost, Cadbury Nigeria’s gross profit rebounded at the end of September from a 34 per cent drop at half year to over six per cent improvement year-on-year to N5.6 billion. This is also a change of direction from a drop of 29 per cent in gross profit recorded at the end of 2020.
Cadbury Nigeria’s management needed to address fundamental imbalance in the company’s cost-income structure at half year when gross profit was insufficient to meet selling and distribution expenses.

This time, gross profit covered operating expenses and produced an operating profit of N5.6 billion at the end of the nine months of 2021 as against N5.28billion reported in nine months of 2020.
Cadbury continues to benefit from its significantly deleveraged balance sheet, closing the third quarter operations with a net finance income of N333 million – four times the N85 million it earned in the same period last year.

However, inter-company borrowings of N6.33 billion this year have raised balance sheet debts to N9.5 billion as at September 30, 2021.
Total assets closed September 30, 2021 at N42.28billion, 27 per cent increase from N33.21billion reported in full year ended December 31, 2020.

Weak Revenue, Profits
Hitherto, the company in 2020 financial year had reported weak revenue that eroded profits.
Cadbury Nigeria had reported 9.97 per cent decline in revenue to N35.41billion in 2020 financial year as against N35.41 billion reported in 2019.

In line with the information contained in the report, the 9.97per cent decrease in the revenue of Cadbury Nigeria in 2020 was occasioned by the decrease in domestic and export sales of the company, this decline went on to impact the profits of the Company in 2020.

This is logical as Fast Moving Consumer Goods (FMCG) profit margins are usually rather slim, hence Cadbury, like every other player operating in the FMCG sector mostly employs a strategy focused on driving top-line sales (revenue) and by extension increasing market share.
Consequently, the impact of the COVID-19 on the Company’s sales pressured revenue in 2020, and this impacted profits significantly.

It is important to understand that Cadbury’s profitability thrives on high volume and high revenue. However, the decrease in revenue without a more than proportionate decrease in Cost of Sales by 4.82 per cent to N29.51billion in 2020 from N31billion in 2019, to pressured the company’s prospects of posting an impressive profit last year, as gross profit declined by 30.73 per cent to N5.77billion.

Other income increased to N108.04 million, up by 24 per cent in 2020 from N87.13million in 2020.
The company reported 12.12 per cent increase in Selling and distribution expenses decreased to N4.58billion from N5.2billion, while administrative expenses decreased to N1.18 billion, down by 35.25 per cent from N1.82billion reported in 2019.

With about 31.21 per cent decline in Net finance income to N127.44 million in 2020 from N184.1million in 2019, Profit for the year decreased to N931.93million in 2020 from N1.07billion in 2019.
Financial position in 2020

Despite all these, the company’s liquidity position improved in 2020 driven by an 86.1 per cent increase in net cash generated from operating activities, which rose sharply to N4.25 billion from N2.29 billion.

However, total assets grew by 15.31 per cent to N33.21billion in 2020 from N28.8billion in 2019, driven by 34.3 per cent growth in total current assets that moved from N15.17billion in 2019 to N20.38billion in 2020.

The company reported about six per cent decline in total non-current assets to N12.83billion in 2020 from N13.6billion reported in 2019.
Total equity closed 2020 at N14.7billion, an increase of nine per cent from N13.5billion reported in 2019.

The operation of Cadbury Nigeria Plc dates back to the 1950s when the business was founded to source cocoa beans from Nigeria.
Since then, the company has grown to become one of the leading players in the industry, providing consumers with many well-known and patronised brands.

The Company is a subsidiary of Cadbury Schweppes Overseas Limited which held 74.97per cent of the issued and fully paid share capital of the Company as at 31 December 2020 (2019: 74.97per cent ). The ultimate parent of the Company is Mondelēz International incorporated in the United States of America. Amount due to Cadbury Schweppes Overseas Ltd at the end of the year was N632.6 million for 2019 dividend (2019: Nil).

The remaining 25.03per cent equity-ownership is held by a diverse group of Nigerian individuals and institutional shareholders. Cadbury’s market capitalization closed 2021 at N16.53 billion when it share price closed at N8.80.