Business
Choking industry costs: Nestle’s unyielding burden
By OKEY ONYENWEAKU
The challenge of managing administration and distribution costs in addition to expanding rates of competition from nimbler entrants, and of course the other bogeyman, forex, have been at the base of the challenges that Nigeria’s conglomerates operating in the Fast Moving Consumer Goods, FMGC arena have been facing for a while now. From UACN to Cadbury and on to Nestle, it has been a stiff run for some time now as management grapples with watching the numbers and adjusting the plugs.
In a recent notification to the Nigeria Stock Exchange, Nestle Nigeria indicated that it’s Q1 2020 Accounts, namely the unaudited financial statements for the period ended 31 March 2020 would be reviewed and approved by the Board by 8 May 2020.
Accordingly then, and in line with the Listing Rules of the Nigerian Stock Exchange, it said that it was writing to statutorily inform the managers of the exchange ‘that the closed period during which no Director, person discharging managerial responsibility and Adviser of our Company and their connected persons shall deal in the securities of the company is effective from 23 April 2020 to 11 May 2020.’
When the company eventually released the Q1 2020 results, it emerged that while revenues generally held steady in the N70billion mark year on year, cost of sales for the first quarter of 2020 also only marginally shifted to now hold at N38.67 billion, compared with the N39.50 billion recorded in the corresponding period in the preceding year.
Another accounting head that was also largely even had to do with the conglomerate’s Gross profit posting for the period ended March 31, 2020. It came to N31.66 billion, a figure that represented a 0.6 per cent increase over the N31.47 billion recorded in the corresponding period in 2019.
From this point, however, the figures tend to tilt more southwardly.
Profit before tax for Q1 2020 came to N17.45 billion. This is an almost nine per cent decline when contrasted with the N19.12 billion that was posted for the corresponding period in 2019.
Similarly, at N11.20billion, the Profit after tax figure for Nestle Nigeria in Q1 2020 represents almost a 13 per cent decline from its corresponding Q1 2019 performance where it had posted a more upbeat N12.85 billion in that accounting segment.
Flowing from the above, Earnings per share came to a lower N14.21 contrasted with N16.21 in 2019.
Poring through the books, one finds that the points to watch going forward would be administrative expenses and distribution, as well as sales and marketing expenses.
Indeed, while the management would generally need to keep its hands on all of its levers, one critical point that it may have to give extra attention at the moment is the question of expanding its local content offering. Though it has done some work in this area over the years, the fact of the spike in forex rates in the current period as well as the evidence from its Q1 posting that a considerable chunk of its sluggish growth is traceable to what some describe as ‘its increased losses from its overseas activities.’
Here they point to the fact that with the company operating a commercial procurement policy where it gets about all of its raw materials from local and foreign suppliers; developments like the recent spike in forex rates are almost now foreshadowing a likely negative impact on its books in Q2 2020.
Indeed, in its Q1 2020 financials, its profitability was hampered by a 720.6 per cent foreign exchange loss of ₦154.7 million.
Sturdy player
To be sure Nestle Nigeria has demonstrated over the years that it is indeed a sturdy player in the Nigerian business arena. With strong household brand leaders like the Milo beverage and the Maggi seasoning, the company has through the years found and occupied regular spots in many a Nigerian household.
This acceptance has also been demonstrated at the Nigerian Stock Exchange where it recently hit the N1,000 per share mark.
Add to this the strength of its global parent brand which continues to provide the Nigerian operation with strong shoulders upon which to rest, then you have a business operation that would require more than the casual occurrence to flinch.
But then these are unusual times in the Nigerian and global business firmament and
What the analysts say
Asked to periscope Nestle’s 2020 Q1 report and anticipate the Q2 own within the current climate of increased and emergency expenses and where costs seem to continue to be a huge challenge for them like other manufacturers in the Nigerian environment now, the analyst, Peter Eluka says:
‘It is quite a tough call. Costs are rising for manufacturers and will likely rise a whole lot more as the Naira depreciates and inventories stack up as demand falls. What can be done about it? Not much, this is the new reality of business for at least one year. The year 2021 might prove to be better as demand returns and the international oil price stabilises at US$30 per barrel.’
So you want some quick advice, CEO: fasten your seat belts!
Bigger picture
Indeed, fears are that the Q2 performance of firms like Nestle may even be less salutary than the ones being posted for Q1 no thanks to the yet ravaging effects of the COVID-19 pandemic.
Already analysts are cutting back on hitherto healthier and more optimistic forecasts for businesses all across the Nigerian space. And as they are putting it, this is being done without any emotions even as it does not indicate any grave signs of danger or distress at the moment.
For example, following its review of the UAC of Nigeria’s Q4 2019 and Q1 2020 Results review last week, FBN Quest Research posted a Downgrade to Neutral for the equities of the firm despite what it called a Strong Upside
‘We downgrade our rating for UACN to Neutral and cut our price target by -27% to N10.0. Our earnings outlook over the near-to-medium term has deteriorated sharply given that the company’s PBT driving segments – Paints (c.38% of PBT) and Packaged foods (c.30% of PBT) are likely to be hardest hit by the ongoing COVID-19 crisis.’
Specifically, we highlight that i) products from these segments are more discretionary, making them more vulnerable to the ensuing slump in demand; and ii) import requirements for paints are as high as 80% of CoGS while the packaged foods business has an indirect fx exposure of around 50%. We, therefore, see weaker exchange rates eroding profits.’
‘The other weak spot for the overall group is the tough operating environment faced by the Animal Feeds & Other Edibles business. Indeed, Q1 2020 results show that PBT for the segment plunged by -91% y/y to N11m and missed our forecast by -63%. Although management has made clear that, going forward, it will pass on fx inflation to animal feed prices, we see this move being constrained by strong competitive headwinds in this space. Taking all these into consideration, our EPS forecast for 2020E has been adjusted lower by -33%, driven by -27% and -12% cuts in paints and packaged foods. This implies an average cut of around -26% over the 2020-22E period.’
For firms like Nestle that are still equally exposed to the vagaries of imports and exchange rate fluctuations, it is a similar set of tough calls that its management is expected to make in the days ahead. And this is not being helped by the fact that as at last Friday, the naira was already exchanging at N455 to the dollar.
Underscoring the related effects that the nation’s macro-economic headwinds would be contributing to the ability of firms like Nestle to weather the tempestuous storms that lie ahead of it is the statement last weekend from the Federal Ministry of Finance announcing that the federation accounts allocation committee (FAAC) had shared N606.196 billion to the three tiers of government for April.
While on the surface of things, this is just in line with the monthly practice in the country, the core import here for our purpose is that the sum shared is down N174 billion from the N780.926 billion disbursed in April based on revenue generated in March and N581.566 billion in March that is also based on revenue generated in February.
Among other sectors that have presently begun to show signs of bucking down under the weight of COVID-19 is VAT revenues in which “the gross revenue available from the VAT for April 2020 was N94.495 billion as against the N120.268 billion distributed in the preceding month of March, resulting in a decrease of N25.772 billion.’ As a consumption tax that is chargeable on goods and services in the country, this decline points to the reality that businesses are not selling as much as they used to do.
Other revenue segments that recorded decreases within the month according to Dodo, included petroleum profit tax (PPT), companies income tax (CIT) and import duties.
