Nestlé Nigeria Plc Q1’20 – Surge in operating expense drives margin decline

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CardinalStone Research
Nestlé Nigeria Plc (NESTLE) has reported a 12.9% YoY decline in after-tax earnings to N11.2 billion in its unaudited financial statements for Q1’20.
In collating the results, NESTLE considered COVID-19 outbreak as a non-adjusting event because there was a robust business continuity plan in place to ensure uninterrupted supply of essential food and beverages to customers in the quarter.  

Key highlights:

  • NESTLE reported a 67bps increase in gross profit margin to 45.0%, aided by a 2.1% YoY contraction in cost of goods sold in the review quarter. Notably, the company continued to explore the use of local raw materials (i.e. soya bean, maize, cocoa, palm olein, and sorghum) in its production processes. This could slightly limit cost pressures from devaluation in the coming quarters, in our view
  • However, NESTLE reported a 2.0ppts contraction in operating profit margin to 24.9%, after a 6.5% YoY increase in distribution & marketing expense and a 53.1% YoY surge in administrative expense. Operating expense was the main pressure point in NESTLE’s Q1’20 results. This pressure is largely consistent with sustained double-digit inflation, increase in staff strength, and cost of training
  • The company reported a N21.1 billion operating cash flow in Q1’20 (Q1’19: N15.9 billion) despite some indications of working capital pressures in the reported numbers. Specifically, management estimated working capital at negative N10.7 billion in Q1’20 (vs. positive N4.6 billion in Q1’19)
  • NESTLE repaid N5.5 billion and N4.8 billion of intercompany and bank loans (respectively) during the review quarter, driving outstanding debt down to only N330.6 million in Q1’20 (vs. N7.7 billion in Q4’19). If the debt level is maintained, interest expense could be much lower in the coming quarters
  • NESTLE reported a N1.6 billion capital expenditure in Q1’20 (vs. N256.9 million in Q1’19). This increase in capital expenditure did not necessitate fresh inflows from borrowing in Q1’20, suggesting that the business may have leveraged internally generated cash for some projects

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