Higher Finance Cost Erode Nestle’s Profit

Kayode Tokede

Nestle Nigeria Plc reported 16.1 per cent increase in revenue to N127.97 billion in first quarter (Q1) ended March 31, 2023 from N110.23billion in first quarter ended March 31, 2022 but significant increase in finance cost down its profits.

The multinational Fast-moving Consumer Goods (FMCG) growth in revenue was driven by Nestle’s Food that grew by 22.7 per cent and contributed 63.4per cent of revenue and Beverages rose by 6.1per cent and contributed 36.6 per cent of revenue segments, reflecting consumer’s resilient demand for Nestle’s products.

Nestle Nigeria’s exports in the quarter declined significantly by 87.3per cent to N256.61 million in Q12023 from N2.03 billion in Q1 2022.

Nevertheless, its domestic revenue still accounted for the bulk of its top-line, maintaining its c. 99.8per cent contribution to revenue.

 Remarkably, the gross profit margin expanded by 113basis points to 40.4per cent in Q1 2023, as revenue gained 16.1 per cent, faster than the cost of sales that rose by 13.9 per cent, reflective of the inflationary pressures on the cost of domestic food prices.

The company recorded a net finance cost of N3.75 billion in Q1 2023 as against N1.45billion in Q1 2022, owing to a huge increase in its finance cost, that closed Q1 2023 at N5.34billion from N2.37billion in Q1 2022 and a 58.2 per cent decline in finance income.

Higher interest expense on financial liabilities of N5.89 billion in Q1 2023 from N2.37billion in Q1 2022   underpinned the increase in finance cost, amid a net foreign exchange gain of N545.05 million.

While the lower finance income can be attributed to the decline in short-term investments (-11.5per cent to N89.18 billion in Q1 2023.

Amid hike in finance cost, profit before tax declined by 10.6per cent to N24.90 billion in Q1 2023 from N27.85 billion reported in Q1 2022. 

A lower income tax expense of N8.69 billion in Q1 2023 led to a profit after tax of N16.21 billion in Q1 2023, a 9.8 per cent decline from N17.98 billion reported in Q1 2022.

However, in 2022 financial year, the company recorded highest trade and other receivables in over five years and its impact reflected in its revenue growth.

The company in 2022 reported N82.24billion trade and other receivables as against N43.3billion reported in 2021.

Major contributing factor to trade and other receivables was N55.54billion advance payment to suppliers in 2022 from N19.92billion in 2021.

The company closed the year under review at N446.82billion, representing an increase of 27icnrease from N351.82billion reported in 2021 financial year.

Nigeria remains revenue drive for Nestle Nigeria, followed by Ghana.

In 2022, revenue from Nigeria increased to N443.41billion from N346.54billion in 2021, while revenue from Ghana dropped to N2.74billion in 2022 from N2.75billion in 2021.

The cost of sales lines are input expenses, which rose ahead of sales revenue at 32.3per cent to N291.05billion in 2022 from N219.99 billion in 2021.

The company closed 2022 with N155.76billion gross earnings, an increase of 18.15 per cent from N131.84billion reported in 2021.

Nestlé Nigeria’s management is showing a lot of caution on the side of operating expenses  in order to avoid a repeat of 2021 pattern where virtually all the gains in revenue were consumed by cost increases.

The company’s administrative expenses and Marketing and distribution expenses  were under full management’s control.

In 2022, the company reported N68.87billion total operating expenses, an increase of 15.6 per cent from N59.59billion reported in 2021.

The administrative cost was at N11.54billion in 2022 from N11.49 billion in the 2021, while marketing and distribution expenses increased to N57.33billion in 2022 from N48.1billion in 2021.

It reported N20.53billion finance cost in 2022 from N12.08billion reported in 2021. Finance income closed 2022 at N1.99billion in 2022 from N646.55million in 2021

The big news for Nestle Nigeria in 2022 was a significant in finance cost, driven by N12.68billion interest expense on financial liabilities and N7.85 billion net foreign exchange loss. 

The company declared N71.11billion profit before tax, an increase of 15 per cent from N61.88billion reported in 2021.

With 1.4 per cent increase in tax expenses to N22.14billion, Nestle Nigeria closed 2022 with N48.96billion profit after tax in 2022 from N40.04billion in 2021.

The directors recommend the payment of a final dividend of N 36.50kobo (2021: N25.50 kobo) per share having earlier declared an interim dividend of N25.00 (2021: N25:00) from the profit of 2022 on the issued share capital of 792,656,252 (2021:792,656,252) ordinary shares of 50kobo each.

The proposed final dividend of N 36.50kobo is from the after tax profit for the year ended 2022. If the proposed final dividend of N 36.50kobo is approved by the shareholders, it will be subject to deduction of withholding tax at the applicable rate and the total dividend paid for the year will be N61.50kobo.

Growth in revenue reflects on assets

As Nestle Nigeria was able to drive its revenue performance, its balance sheet position emerged stronger, closing 2022 at N415.04billion, representing an increase of 34 per cent from N310.24billion reported in the full year ended 2021.

As total non-current assets rose by 17 per cent to N124.53billion 2022 from N106.3billion reported in 2021, as total current assets hits N290.5billion in 2022 from N203.9billion reported in 2021.

In addition, total equity of Nestle Nigeria rose significantly by 42 per cent to N30.29billion in 2022 from N21.38billion in 2021.

On liabilities, it increased by 23 per cent to N384.75billion in 2022 from N288.86billion in 2021 financial year.

Conclusion

The Managing Director and CEO of Nestlé Nigeria, Mr. Wassim Elhusseini, in a statement said, “I congratulate and thank everyone, especially our staff and managers whose unwavering commitment, dedication and ingenuity drove the excellent results achieved in 2022.

“I am extremely proud of the team’s ability to continue to achieve so much even under the current challenging business environment, enabling us keep our commitment to deliver value for our shareholders, our consumers and the communities in which we operate. This is proof that success is built into the DNA of our organization and that working together, we can thrive and even excel in the most trying environments.”

“In 2023, we will continue to work to ensure the availability of affordable nutrition for the individuals and families who depend on us to nourish their families daily. We know that it will be a challenging year, with the general elections and the associated charged political environment as well as the disruptions in economic activities experienced with the change of some denominations of the Naira.

“We are also faced with the increasing cost of doing business – especially the high cost of inputs, and therefore, remain flexible and resilient in our operations”.

“Our priority will remain the wellbeing of our people, our consumers, our communities and our planet as we unlock the power of food to enhance quality of life for everyone today and for generations to come”.