Nestlé’ Cuts Operating Expenses to Enhance Profit

Kayode Tokede

Nestle Nigeria Plc made progress in the first quarter (Q1) ended March 31, 2022 when it reduced its operating expenses that had eroded profits growth in the 2021 financial year.

The cost-saving plus improving revenue enabled the multinational company to push profit after tax up by 45 per cent up to N18 billion in Q1 2022 from N12.4billion reported in Q1 2021.

The company operations of the food and beverages company ended Q1 2022 show improving earnings prospects compared to 2021 when profit closed at N40.04 billion from N39.21billion in 2020.

Inability to grow profit in the year followed two major cost increases that consumed gains in revenue.

The cost of sales lines are input expenses, which rose ahead of sales revenue at 31.04 per cent to N219billion in 2021 from N167.87 billion in 2020, while revenue grew by 22.55 per cent to N351.8billion in Q1 2022 from N287.98billion in Q1 2021.

Also, net finance income closed Q1 2022 at N1.45billion from a loss of about N1.31billion reported in Q1 2021.

Boasting Revenue by Cutting Cost

Nestlé Nigeria’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. The company’s 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 Q1 2022 from N3.32billion in Q1 2021, 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.

It was nevertheless a moderation in the cost of sales in the Q1 2022 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 revenue in the Q1 2022 at 60.8 per cent compared to 62.5 per cent in 2021 full year performance.

The big news for Nestle in the Q1 2022 is a shift from a net finance cost of N1.3 billion in the same period of 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 Q1 2022. 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 theQ1 2022.

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 Q1 2022.

With the cost of sales still growing ahead of revenue, gross profit grew at a slower pace than sales at 24.5 per cent to N43 billion in Q1 2022 from N34.74billion reported in Q1 2021.

Further pressure on the side of the cost came from marketing and distribution expenses, which also grew ahead of revenue by 28 per cent to over N14 billion in Q1 2022 from N11.11billion in Q1 2021.

 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 Nigeria posted in 2021.

Recovering profit margin

Accelerating 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 Q1 2022 of the current year has seen an improvement in profit margin at 16.3 per cent, the best the company has recorded in over five years.

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 Q1 2022.

Nestle Nigeria, thus ended the Q1 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.

The Food and Beverage Company, had declared a dividend of N25.50k per ordinary share for the financial year which ended on December 31, 2021.

Growth in revenue reflects on assets

As Nestle Nigeria was able to drive its revenue performance, its balance sheet position emerged stronger, closing March 30, 2022 at N39.27billion, representing an increase of 84 per cent from N21.4billion reported in the full year ended December 31, 2021.

As total non-current assets rose by 0.12 per cent to N106.44billion as of March 30, 2022 from N106.3billion reported in 2021, total current assets rose by 6.8 per cent to N217.85billion as of March 30, 2022 from N203.9billion reported in 2021.

In addition, total equity of Nestle Nigeria rose significantly by 83.71 per cent to N39.27billion as of March 30, 2022 from N21.38billion in 2021.

On liabilities, it dropped by 1.3 per cent to N285.02billion as of March 30, 2022 from N288.86billion in 2020 financial year.

Conclusion

Analysts at Cordros securities stated that the Q1 2022 performance was stellar, reflecting on its optimism that the company’s brand equity and product innovation will help it circumvent the stiff competition from unlisted cheaper brands.

The company added that, the margin pressure from higher input costs, which is likely to persist through the 2022 financial year.