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Q3 ’21: Nestle’s Finance-Costs Pains

December 25 (THEWILL) – Nestle Nigeria Plc had a good report on the third quarter (Q3) 2021 (July – September). However, the sore spot of high financial costs has lingered since the year. This would have an inexorable impact on the bottom line and further lower the dividend chart that nearly hit the bottom of the trough in 2020.

At a glance, the top food manufacturing and marketing company’s revenue jumped 25.7 percent from N71.73 billion in Q3 ’20 to N90.15 billion in the reporting period. At the nine-month level (January – September), the trend was the same: from N212.73 billion in the corresponding period (from the previous year) to N261.59 billion in the reporting period, an increase of 23 percent.

This dragged down the bottom line as after-tax profits (PAT) rose 17.5 percent from N10.11 billion to N11.85 billion in Q3 ’20 and Q3 ’21, respectively. For nine months to September 2021, the PAT rose to N33.58 billion in Q3 ’21 from Q3 ’20 of N31.97 billion. Basic earnings per share (EPS) also fell to 14.95 kobo in the reporting period from 12.76 kobo in Q3 ’20, up 17.2 percent.

But unlike the top and bottom, which moderated upwards over the period, providing soothing relief from the combined effects of the COVID-19 restrictions and the 15-month closure of the land border, the consumer goods company is in serious pain. due to the significant upward jump in the financial sector. cost. Borrowing cost (FC), also known as the borrowing cost (COF), is the cost, interest, and other costs involved in borrowing money to build or buy assets over a period of time. This increases operating costs, decreases profits and reduces the dividend to be paid.

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In Q3 ’21, Nestle’s borrowing costs increased from N687.58 million in Q3 ’20 to a staggering N2.34 billion over the period considered – an increase of 246.6 percent. This reflects the trend at the nine-month level to September 30, which shows a massive 253.7 percent spike, from N1.62 billion to N5.73 billion in 2020 and 2021 respectively.

Net financing costs, which are financial costs less financial income (such as interest on deposits or currency gains), were N1.58 billion in Q3 ’21, a 245 percent jump from N458.32 billion in the corresponding period (from the previous year). years). From nine months to September 30, the picture is no less worrying. Nestle’s net financing costs increased from N923.65 million in 2020 to N4.53 billion in 2021, representing 391 percent.

“The company has a huge problem on its hands. It is short of cash or expanding beyond the treasury. Regardless of the source of the borrowed money – parent or sister companies or financial institutions, it will impact earnings and ultimately lead to a meager return on investment, through dividends to investors,” said Abiodun Abioye, a chartered accountant and tax expert. “It shows that the company is not generating the amount of revenue or that operating costs are increasing due to various factors,” he added.

This can be seen from the disturbing increases in the company’s cost of sales (COS), marketing and distribution and administrative costs.

At close of business on September 30, 2021, the company recorded a 30 percent increase in cost of sales from N42.52 billion in Q3 ’20 to N55.29 billion in Q3 ’21. In nine months ended September 30, cost of sales increased to N160.3 billion in 2021 from N122.7 billion in the corresponding period, an increase of 60.3 percent.

Marketing and distribution expenses as derived from the Q3 ’21 report showed an increase in their costs, from N10.93 billion in the corresponding period to N12.12 billion in the assessment quarter (July – September), or 10.8 percent. The administrative burden shows the same trend. It rose from N2.39 billion in Q3 ’20 to N2.94 billion in the quarter under review. That is an increase of 23 percent. At the nine-month level, the 60-year-old consumer goods company in Nigeria recorded N9.55 billion and N8.97 billion in 2021 and 2020 respectively, showing an increase of 6.4 percent.

Dividend declared in the reporting period decreased by 21 percent to N28.13 billion from N35.66 billion achieved in Q3 ’20.

When contacted, a member of Nestle Nigeria Plc’s Corporate Communications and Public Affairs Department, who did not want the name published, declined to comment.

Nestle is one of the major Fast-Moving Consumer Goods (FMCG) companies in Nigeria listed on The Exchange, which posted significantly impressive performance in their half-year (H1 2021) operations – exceeding industry expectations.

Businesses in the FMCG sector were hit hard at the peak of the COVID-19 outbreak in 2020. The 15-month closure of the land border also took its toll on these businesses, as many were unable to distribute or export their products. The purchasing of raw materials was also put to the test.

Nestle Nigeria and PZ Cussons reportedly spent weeks at sea exporting their products to West and Central African markets following the closure of the land border. The result of these bold but “suicidal” steps was loss of forex earnings, diminishing earnings, downsizing of operations and in some cases employee retirements. Their misfortune also extended to the small businesses engaged in the active supply chain under the backward integration policy.

The rapid recovery of the FMCG companies after the twin tragedy of the COVID-19-induced recession of 2020 and the 15-month closure of land borders is a ray of hope for the small businesses involved in backward integration policies. Backward integration is a practice in which companies are encouraged to grow their own raw materials by purchasing their suppliers or establishing farms to grow products for their factories.

SME space operators belonging to various sectors, especially agriculture and transportation, have benefited from the policy as the FMCG companies are making great strides in supporting and implementing the policy. Governments at the three levels have also benefited from the measure through tax revenues, skills acquisition, infrastructure and technology.

Nestlé Nigeria, for example, plans to employ 5,000 smallholder farmers to supply raw materials for its agro-business. The initiative, ‘Developing Inclusive Grain Value Chains Project’, is a collaboration with IDH, a sustainable trade initiative, and TechoServe. According to Nestle, the initiative is a seven-month project that will facilitate the supply of corn, soybeans, millet and sorghum. It added that the scheme will increase farmers’ incomes and create a steady supply of locally grown crops as the COVID-19 pandemic disrupted global imports of these materials.

Nestlé revealed that the objectives of the project are: to work with six small and medium-sized enterprises (SMEs) that collect and deliver crops to Nestlé factories; aggregators and sub-aggregators will receive training on proper grain handling, storage and testing, as well as entrepreneurial and financial skills; while logistics partners receive training on the proper handling and storage of grain during transportation.

“You can be sure that Nestle’s high borrowing costs, which negatively impact the top and bottom lines, will have an adverse effect on backward integration. Many of the SME operators will experience a turning point in their fortunes, especially as a lack of a favorable environment and a hostile business environment is killing Nigerian companies in their herds,” said Adedoyin.

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