BY BAMIDELE FAMOOFO
In the first quarter of the year, Nestle Nigeria Plc was put under increased pressure due to mounting interest expenses. Despite the growth in revenue, currency depreciation and stubbornly high inflation increased the company’s operating costs and margins.
Over the years, the company has shown its dedication to creating value and improving margins for the benefit of its shareholders in spite of macroeconomic challenges.
Revenue growth bolstered by improved performance in the food business segment
Nestle Nigeria Plc turnover rose by 16.09 percent to N127 billion in Q1’23 from N110 billion in Q1’22.
This uptick was largely supported by the food business segment, which grew by 22.7 percent (year-on-year) to N81.17 billion, compared to the 6.13 percent growth in the beverage product business segment to N46.79 billion. During the review period, the company’s domestic sales increased by 18 percent, offsetting the 87 percent decline in export sales.
The company’s food business segment was largely supported by increased sales of brands like Maggi, Cerelac, Nan, Lactogen, and Golden Morn as similar price increases by competitors limited the down trading impact.
Nonetheless, the beverage segment also remains competitive, especially with its Milo and Nescafe products, as the company’s brands remain largely popular among consumers.
Uptick in cost of sales and operating expenses dampens margins
Nestlé Nigeria Plc’s cost of sales increased by 13.9 percent to 76.32 billion in the first quarter ended March 31st, 2023. Meanwhile, gross profit was up 19.44 percent to 51.65 billion compared to 43.24 billion in Q1’22 due to strong revenue growth.
The marketing and distribution expenses grew more than twice ahead of sales revenue at 35.9 percent to N19.3 billion at the end of the quarter.
This, coupled with the 40 percent increase in administrative expenses to N3.66 billion, resulted in a 36.5 percent uptick in operating costs to N23 billion. This exerted downward pressure on the company’s operating margin, declining to 22.39 percent from 23.95 percent in Q1’22.
Nevertheless, operating profit remained strong at N28.65 billion, 8.52 percent higher compared to the corresponding period in 2022.
High interest expense depressed bottom line performance
In the first quarter ended March 20, 2023, Nestle Nigeria Plc, recorded a profit after tax of N16.2 billion, a 9.8 percent decline compared to N17.9 billion in the corresponding period in 2022. The decrease in the company’s profit was largely driven by higher finance costs, which were up 125 percent due to the increase in interest expense on financial liabilities.
Included in interest expense on financial liabilities is interest expense on intercompany loans, which amounted to N5.52 billion, 200 percent higher than 1.84 billion in 2022.
Despite the 70.5 percent increase in interest on bank deposits, the zero net foreign exchange gain led to a reduction in finance income, which resulted in a net finance cost of N3.7 billion compared to a N1.45 billion net finance income in Q1’22.
“In the first quarter ended March 20, 2023, Nestle Nigeria Plc, recorded a profit after tax of N16.2 billion, a 9.8 percent decline compared to N17.9 billion in the corresponding period in 2022. The decrease in the company’s profit was largely driven by higher finance costs, which were up 125 percent due to the increase in interest expense on financial liabilities”
Company Overview
Nestlé Nigeria Plc, is a household name in fast-moving consumer goods in Nigeria, especially in the food and beverage industry. Just like its parent company, Nestlé S.A., a Switzerland-based consumer goods company, it is known for delivering high-quality, nutritious food.
Since inception, the FMCG giant has retained its market share through extensive innovations, a varied product line, product rebranding, and the adoption of a local substitution strategy in sourcing some of its raw materials (including soy beans, cocoa, palm oil, and sorghum, among others).
Nestle Nigeria Plc, seeks to promote local sourcing of raw materials as it leverages the use of local raw materials in manufacturing its goods to hedge against the foreign exchange issues plaguing the Nigerian economy.
In partnership with the International Fertilizer Development Centre (IFDC), the company started a Sorghum and Millet in the Sahel (SMS) project to strengthen the resilience of sorghum and millet farming systems in north-western Nigeria.
There was also the launch of the “feed the future Nestlé Maize Quality Improvement Program (MQIP)” in collaboration with USAID and VEGA as well as the promotion of small-scale agricultural businesses in Kaduna state. All of which are aimed at increasing the quality and quantity of maize and soybean by at least 17,000 metric tonnes annually.
Nestle Nigeria manufactures, markets, and distributes food products, including purified bottled water, and exports consumer goods to markets within and outside Africa. The brand’s distinctive-tasting cereal, Golden Morn, is made from locally sourced grains and fortified with other vitamins. It has been providing delicious nourishment to families for over 35 years. Its milo product continues to promote sports development at the grass-root level through competitions like basketball championships.
The company has made impressive strides over the years as seen in increases in its assets and revenue.
Outlook
Nestle Nigeria Plc has played a significant role in the Nigerian FMCG industry buoyed by investment in backward integration and a well-diversified brand portfolio. The company has continued to invest in strategies for manufacturing products that match consumers’ expectations and benefitted from several government opportunities related to local content production and trade deals.
This indicates that the company is well positioned to capitalize on a window of opportunities within the industry and immune from potential headwinds that could impair future business operations.
While major economic headwinds persist and weigh on profit margins through increased finance costs, Nestle Nigeria Plc faces the risk of currency devaluation due to its significant exposure to foreign debt as well as risk of inflated interest expense particularly as interest rates have been on the rise. We expect a moderation in the company’s capital structure in a bid to reduce exposure to debt and interest expense on intercompany loans.
Notwithstanding, Nestle Nigeria’s operations will continue to leverage on its strong business model, brand recognition, and good product quality.
Green Flags:
.Strong brand name
.Notable parent company
.Diversified product mix
.Backward integration strategy
.Efficient distribution network
Red Flags:
.Stiff competition from other players
.Weak consumers’ purchasing power
.Harsh operating environment
.Heightened insecurity
.Inflationary pressures
