Nestle Plc Q3 2019 Results: Weak Quarterly Sales Weighs on Margins

November 4, 2019/InvestmentOne Report

Mixed topline growth: down 2.1% q/q; up 2.4% y/y.

·           Pressured gross profit margin: down 530bps q/q; 150bps y/y.

·           Opex to sales ratio at 19.6%: up 90bps q/q; down 10bps y/y.

·           Contraction in PBT margin: down 680bps q/q; 70bps y/y.

Nestle Nigeria Plc released its Q3 2019 scorecard which showed a 70bps y/y and 680bps q/q contraction in PBT margin to 23.2%. The performance was underpinned by a weaker GPM and OPM performance both y/y and q/q stemming from higher COGS and rise in distribution costs.  

Soft PBT Performance

On a y/y basis, the company recorded a 2.4% increase in revenue. This was mostly driven by an 8.3% rise in the beverage segment as the Food segment was flat y/y. We opine that this increment witnessed in the Beverage space was volume driven as prices remain flat across products. Notably, the underperformance in the food segment may not be unconnected to the stiff competition prevalent in the seasonings space. Despite the increase in topline, a larger increase in COGS (up 5.2% y/y) drove a 1.1% decline in gross profit. As such, GPM printed at 43.5% in Q3 2019. Going down the P&L line, a 1.9% increment in total opex was partly cushioned by the 50% reduction in net finance cost, linked to the 35.5%  reduction in debt pile during the period, led to a flat y/y PBT performance (down by 0.6% to N16.1billion). PBT margin was marginally down by 70bps to 23.2% in the quarter under review.  

Cost Pressures Exacerbate Sales Slowdown

On a sequential basis, the company recorded a 2.1% q/q decline in revenue resulting majorly from an 8.1% q/q drop in beverage sales. Down the P&L statement, PBT margin printed downwards by a 680bps q/q , exacerbated by a 15x surge in net finance cost coupled with 2.7% rise in operating expenses and a 7.9% increase in COGS.  

9M Margin Improvement

In 9M 2019, turnover printed at N211.4billion, a 4% y/y increase compared to 9M 2018. Moving down the P&L, PBT margin rose by 310bps complimented by a 320bps upsurge in GPM, a 50bps dip in opex/sales, driven by a faster growth in topline, coupled with a 61.0% fall in net finance cost. We highlight that the downturn in finance cost could be attributable to a 37.1% drop in total loans plus overdraft. 

Going forward, topline growth may continue to be stifled by intense competition in the consumer space and the inability to enforce cost reflective price increases. However, we expect topline performance in the near term to see support from modest recovery in the economy as well as the implementation of the approved increase in minimum wage. We expect Nestle to sustain its cost management strategies as this may continue to bode well for bottom line performance. This said, our downside risk remains weak consumer spending, delayed passage of the 2020 budget and minimum wage payments as well as increased competition.

YE: DEC (N’ Million)

Q3 2019

Q/Q

Y/Y

9M 2019

Y/Y

Turnover

69,438

-2.1%

2.4%

211,347

4.0%

Cost of Sales

39,206

7.9%

5.2%

-115,035

-1.7%

Gross Profit

30,232

-12.7%

-1.1%

96,312

11.8%

Gross margin

43.5%

-530bps

-150bps

45.6%

320bps

OPEX

13,616

2.7%

1.9%

39,263

6.7%

Opex/sales

19.6%

90bps

-10bps

18.6%

-50bps

Net Finance cost

-499

1447.2%

-49.7%

-496

-61.0%

PBT

16,117

-24.4%

-0.6%

56,554

17.6%

PBT margin

23.2%

-680bps

-70bps

26.8%

310bps

Tax

5,522

-30.2%

21.2%

19,712

31.7%

PAT

10,595

-20.9%

-9.1%

36,841

11.2%

PAT margin

15.3%

-360bps

-190bps

17.4%

110bps

 

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