Hike in finance cost, operating expense erode Nestle Nigeria’s profit

Nestle Nigeria for third quarter (Q3) ended September 2016 recorded significant increase in finance cost and operating expenses that affected negatively on its profitability.

In the third quarter of 2016, Nestle Nigeria’s revenue was up by 20 per cent to N129.48 billion from N107.99 billion recorded in the same period of 2015, while profit after tax was down by 97.2 per cent from N17 billion to N484.69 million.

The company’s increase in revenue was driven by both price and volume driven, but the increase over second quarter of 2016 was largely as a result of price increase actions.

The key features of the third quarter result are hike in finance charges and operating expense.

The multinational company finance charges significantly rose by 418 per cent to N21.98 billion from N4.2 billion in third quarter of 2015 while total operating expenses closed the period at N26.56 billion, nearly 14 per cent above N23 billion recorded in Q3 2015.

Nestle Nigeria, like other Fast Moving Consumer Goods Companies (FMCG) have taken profit and loss actions lately to minimize the impact of rising costs on margins.

Gross margin fell by 682 basis points, but compared to second quarter of 2016, gross margin actually increased by 542 basis points following recent price increases.

Feedback from our routine check is that unlike most FMCG companies whose margins were also affected by negative energy substitution, higher raw material input prices — both local and foreign sourced — constituted the most pressure on Nestle Nigeria’s margins.

While interest expense component of finance costs fell by 21 per cent, the core driver of the surge was the depreciation of the naira which resulted in a net foreign exchange loss (on Nestle Nigeria’s short-term borrowings) of N41.7 billion as against N17.1 billion.

However, the company’s total assets rose by 34 per cent to N160 billion from N119 billion in 2015.