Mega losses at Nestlé Nigeria: Time to focus

Nestlé Nigeria Plc has announced its nine-month 2024 results, revealing a significant loss before tax of N255.385 billion; This was an increase of 381% year-on-year compared to the loss of N56.65 billion reported in the same period. 2023.

The company reported a pre-tax loss of N104.025 billion for the full year 2023; This is in sharp contrast to the pre-tax profit of N71 billion in 2022.

Despite these losses, Nestlé has demonstrated a consistent growth trend in revenue, gross profit and operating profit in recent years.

From 2019 to 2023, revenue grew at a compound annual growth rate (CAGR) of 18%, while gross and operating profit grew at CAGRs of 14% and 14.5%, respectively.

In 2023, revenue increased by 22% to N547.119 billion and in the nine months of 2024, revenue increased by 22% to N665.290 billion.

This impressive revenue growth supported healthy gross and operating margins that averaged 40% and 23%, respectively.

However, a deeper look at the company’s results shows that these operational gains have been overshadowed by increased financing costs resulting mainly from the devaluation of the Naira.

Interest expenses on financial liabilities for the nine months of 2024 increased by 188% to N83.866 billion. Financial statements reveal that intercompany loan interest accounted for approximately N73.3 billion of this cost; This figure increased significantly from N27.3 billion in 2023 even when foreign exchange impact is excluded.

Additionally, net foreign exchange losses arising from balances in foreign currency increased by 124% year-on-year to N285.292 billion.

Commenting on the results, Mr. Wassim Elhusseini, CEO/MD of Nestlé Nigeria Plc, noted: “Net profit and equity capital are primarily affected by higher finance costs arising from the revaluation of the company’s foreign exchange liabilities; Naira. “Excluding the negative impact of finance costs, the significant improvement in both gross and operating profit positively affects net profit.”

“The steady improvement in gross and operating profit combined with strong sales growth underscores the fact that the company’s fundamentals remain strong,” he added. “It is also encouraging to see that the loss in the third quarter decreased significantly compared to previous quarters.”

Equally encouraging is the company’s commitment to take critical steps such as improving operational efficiency, encouraging innovation and focusing on reducing its dependence on foreign currency by increasing local material sourcing.

Despite these efforts, much remains to be done.

  • Cost of sales continued to rise, outpacing revenue growth, driven by raw materials and direct overhead expenses. Cost of sales in the third quarter increased by 118% to N179 billion, with the nine-month cost rising to N458 billion, 39% higher than 2023 figures.
  • The 188% increase in interest expense on financial liabilities underscores the high debt burden, particularly due to significant intercompany loan interest expense, which increased sharply (from N27.3 billion to N73.3 billion).
  • Interest expenses compounded the net foreign exchange loss of N285.292 billion, which increased due to the devaluation of the Naira.
  • Retained losses increased by 234% to N262.904 billion as of the end of Q3 2024, resulting in shareholder funds turning negative N112.084 billion. If there were no revaluation gain, this negative situation would be even more pronounced. According to the company, in March 2024 it adopted a revaluation model to value its land, buildings, plant and machinery on a historical cost basis. This change resulted in a net revaluation gain of N150 billion, which was reflected in the statement of comprehensive income, financial position and statement of changes in equity.
  • Considering that Nestlé’s share capital is only N396 million and share-based payment reserve is N354 million, the company’s core capital base remains minimal compared to its debt of N685 billion. These low equity components have a limited “owned” Its capital structure reveals that Nestlé has historically relied heavily on debt financing.

Although the company has demonstrated resilience in its core operations, ongoing financial pressure from debt and foreign exchange losses could jeopardize future growth and stability.

To effectively address negative shareholders’ funds, it will take a significant amount of time to wipe out accumulated losses by simply making a profit, especially given the size of current losses.

  • It is therefore vital that Nestlé considers achieving greater equality, among other strategic measures. Shifting the focus to capital restructuring and proactive debt management could be critical steps for Nestlé to regain financial health.
  • The combination of generally negative equity and debt dependence with minimum capital highlights an unsustainable capital structure that presents significant risks for investors and may deter potential new investment.
  • Prior to 2023, the company paid dividends continuously between 2019 and 2022; this was a crucial factor in attracting and retaining shareholders.
  • However, the inability to pay dividends in 2023 contributed to the stagnation of the share price.
  • As of the close of trading on October 31, 2024, the company’s share price was down approximately 20%, further highlighting the negative impact of financial difficulties on investor sentiment.

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