Nestlé Nigeria post first quarter earnings decline, as intercompany loans drags margins 

Article summary

• Nestle Nigeria has recorded a 9.85% quarter-on-quarter decline in profit after tax, amounting to N1.771 billion, driven by a 200% increase in interest expense on intercompany loans.
• The company witnessed a 125.80% surge in finance cost and according to notes to the financials, included in the finance cost is the interest expense on intercompany loans amounting to approximately N5.52 billion in Q1 2023 (2022:N1.84billion).
• The FMCG giant having witnessed a strong 2022 FY for the year ended December 31, 2023, with double-digit growth in both PAT and revenue supported by healthy domestic sales is set to pay a final dividend of N36.50 on May 18, 2023.

Nestle Nigeria Plc has released its unaudited financial statements for the first quarter that ended on March 31, 2023, recording a 9.86% quarter-on-quarter decline in profit after tax, amounting to N1.771 billion.

The decline in the bottom line is attributed to high finance costs, especially interest expenses on intercompany and bank loans.

The company received about N8 billion in intercompany loans and added about N9.8 billion in bank loans pushing the loan book up by about N17.8 billion to N152.58 billion.

Shares

Nestle S.A. Switzerland owns about 66.18% or 524,559,457 shares of Nestle Nigeria.  Nestle Nigeria conducts business with its related parties. The Company procures all its raw materials on a commercial basis from overseas and local suppliers.  Amongst the overseas suppliers are companies in the Nestle Group.

Interest expense on intercompany loans has continued to cut into the company’s bottom line. In the 2022 FY, the company paid N11.402 billion in interest expenses on intercompany loans.  But the good thing is that the company has been able to generate enough operating profit to cover its interest expense and thus record impressive returns on shareholders (161%; 2022 FY).

Equally, the company is a dividend-paying company. The company intends to pay an N36.50 per share dividend on May 18, 2023, for the 2022 FY.  This is in addition to the interim dividend of N25 per share paid on December 5, 2022.

Profit

The company’s operating profit was boosted by a 16% increase in its top-line revenues of N127.970 billion, the highest over the past five quarters. The revenues were boosted by a rise in sales from its Food Strategic Business, which includes the production and sale of Maggi, Cerelac, Nan, Lactogen and Golden Morn.

Revenues from this segment went from N66.135 billion to N81.176 billion as a combination of better distribution, price adjustments, and improved product positioning helped boost sales.

The company also reported improved sales from its beverages SBU, which includes the production and sale of Milo, Chocomilo, Nescafe, Milo ready-to-drink (RTD) and Nestlé Pure Life.  The SBU saw revenues jump to N46.794 billion from N44.090 billion same period in 2022.

What you should know

Despite the revenue growth, the company faced a rise in operating expenses as rising inflation, exchange rate and the new naira note swap policy exacerbated costs.

Cost of sales took 59.64% of revenues much improved from 60.77% same period in 2022.  But due to the elevated overhead costs, the operating margin was reduced to 22.39% from 23.95% the prior year.

The impact of the rising operating expenses and interest expense is reflected in the company’s net operating cash flow, which printed at –N24.869 billion in Q1 2023, much higher than the –N4.433 billion recorded in 2022 FY and the highest since 2018.

The import of this is an indication that Nestle Nigeria in recent years has not been to generate enough revenues to cover its operating/overhead costs.

This may have reflected in its share price. Nestlé’s share price has continued to be bearish.  Last year, it lost about 1.79% of its value.  This year, it has lost 5.11% of its price valuation, ranking it 136th on the NGX in year-to-date performance.

The bottom line

This performance reflects our concerns about the weakening margins, driven by higher expenses, given the current inflationary pressure.

Expectations

For the rest of the year, we expect Nestle to re-engineer its SBUs to shore up revenue generation driven by brand equity and production processes innovation, so as to be able to revert to positive net cash flow from operating activities.

The company’s successful introduction of the use of local raw materials such as soya bean, maize, cocoa, palm olein and sorghum, in its production processes, if sustained, would help reduce the high cost of imported raw materials and consequently improve earnings.