Nestle Nigeria Plc achieved strong financial income of almost N4 billion in the first quarter, which helped boost the company’s profit by 45% to around N18 billion. The profit figure represents 45% of the N40 billion annual profit the company recorded at the end of the 2021 financial year.
The company’s first quarter interim report at the end of March 2022 shows a combination of growing revenues and slowing costs that define a promising year for the food and beverage company. The developments appear to have set the stage for a recovery in the business this year from last year, when earnings closed flat.
Nestlé is experiencing the first reasonable profit improvement in three years and is still on track to recover from a 14% profit decline in 2020. This year’s recovery is driven by accelerating revenue. business and profit margin recovery.
With an accelerated 26% increase in sales to more than 110 billion naira in the first quarter, Nestlé can look forward to the strongest sales growth in recent years this year. Revenue is accelerating from the 22.6% improvement in 2021 to N352 billion.
The profit margin climbed to 16.3% in the first quarter, the company’s best performance in six years. Last year, its profit margin fell from nearly 14% in the previous fiscal year to around 11%.
A robust financial income of 3.8 billion naira in the first quarter came as a windfall compared to an insignificant figure of 123 million naira in the same period in 2021. This caused a big change in the cost-income balance of the business from a net finance cost of N1.3 billion to a net finance income of N1.4 billion over the reporting period.
Despite robust financial revenues, the challenge of rapidly growing financial expenditures remains. The cost of funding increased by 65% to N2.4 billion in the first quarter.
The increase in debts on the balance sheet explains the increase in the company’s financial charges. Nestlé’s borrowing increased from 40 billion naira at the end of 2020 to 77 billion naira at the end of 2021, reaching around 84 billion naira at the end of the first quarter.
Cost savings on expense lines that hampered earnings improvement in 2021 are also supporting the profit margin gain and earnings improvement in the first quarter. The change in position from net financial expense to revenue is the biggest positive move in cost savings. In the previous year, net finance charges jumped 173% to over N12 billion and consumed a significantly increased share of operating profit.
Additionally, administrative expenses provided one of the largest cost savings for Nestlé in the first quarter. Administrative costs fell 21% to N2.6 billion in the first quarter.
Similarly, input costs, which were a major constraining factor last year, moderated in the first quarter. At N67 billion for the first quarter, cost of sales rose 27.6% year-on-year, slightly ahead of the 26% increase in revenue over the same period.
This compares to the prior year when input costs rose before revenue to 31% at year end from 22.6%. Compared to the previous year, cost of sales claimed a reduced proportion of revenue in the first quarter at 60.8% compared to 62.5% at the end of last year.
However, marketing/distribution spending shows no signs of slowing down. The expense line continues to grow ahead of revenue by 28% to over N14 billion in the first quarter against a 26% increase in sales.
Despite the impacts of cost of sales and marketing/distribution expenses increasing more than revenue, gross profit still improved by 24.5% to N43 billion in the first quarter.
A boost came from cost savings from lower administrative expenses, which increased operating profit by 30% to N26.4 billion at the end of the period. This is a strong acceleration from a less than 12% increase in operating profit in 2021.
The influx of net financial income provided the most important growth feature which boosted net income growth to 45% for the first quarter.