Uninspiring topline performance: down 3.2% q/q, 0.9% y/y.

·         Improved gross profit margin: up 120bps q/q; 70bps y/y.

·         Mixed Opex to sales ratio at 20.1%: down 310bps q/q; up 260bps y/y.

·         Mixed PBT margin: up 480bps q/q; down 210bps y/y.

Nestle Nigeria Plc released its Q1 2020 scorecard earlier this week which showed an uninspiring topline performance driven majorly by an 8.7% y/y dip in the Food Segment, even as the Beverages Segment continued on its growth trajectory.  The performance was underpinned by a strong GPM and a deterioration in Opex/sales ratio by 260bps y/y. PBT margin printed at 24.8%, down by 210bps y/y. More notably, we highlight that the company deleveraged its balance sheet during the quarter, paying off its bank loan and FCY loan, leaving just a N159million overdraft. 

PBT Unaided by Weak Earnings and Rising Opex

On a y/y basis, the company recorded flat turnover (-0.9%) on the back of an 8.7% fall in food revenues, which may partly be due to the lockdown measures and consequent effects on demand for seasoning products following restaurant closures, mass cancellation and postponement of events. More notably, we highlight that the company may have faced significant transport and logistics challenges as goods in transit printed 173% higher y/y, impeding revenue recognition as they remain yet to be delivered to wholesalers. These create concern for the segment in Q2, when the lockdown was even more accentuated. We highlight that the beverages segment surged by about 13%; this may not be unconnected to stockpiling by consumers and COVID-19 motivated closures of schools inciting higher in-home consumption patterns. Moving down the P&L, Opex/sales worsened by 260bps driven by 6.5% increase in distribution costs and an unprecedented 53.1% in administrative expenses. The company recorded a net finance cost of 83milion (vs a net finance income position in Q1 2019) driven by a 64.2% drop in finance income. We opine that this is a direct reflection of a lower cash balance after its deleveraging exercise earlier in the quarter and the prevailing lower interest rate environment. The company paid off bank loans and its existing FCY loan from its parent company, Nestle S. A, leaving just a N159million overdraft; effectively eliminating FX losses in the foreseeable future, which should bode positively for bottom-line performance. We may see the company take advantage of cheaper local currency borrowing in the near future for its financing needs. We highlight that during the quarter, the company recorded a net FX gain of N155million, implying that Nestle must have sourced for FX before the depreciation trend commenced and the FCY liability must have been paid earlier in the year. PBT margin was impacted by the aforementioned factors, leading to a 210bps decline y/y. 

Cost Management Key to Profitability

On a q/q basis, topline fell by 3.2% on the back of a 6.3% drop in revenues from the Food segment, unsupported by a flat performance in the beverage segment. Moving down the P&L line, PBT margin (up 480bps q/q) was supported by a 120bps improvement in GPM, a 310bps downtrend in Opex/sales driven by a 19.8% chop in distribution costs and an improved net finance cost position of N83million (vs N442million in Q4 2019) on the back of lower interest payments and a net FX gain of N155million during the quarter.  

Outlook

Going forward, topline growth may continue to be stifled by intense competition in the consumer space, particularly as the economic effects of the COVID-19 spread hamper consumer demand. We are particularly concerned about performance in Q2 2020, where bans on social gatherings and social distancing measures take center stage and pose downside risks for seasoning sales. However, we expect company performance to see support from the recent deleveraging exercise, its superiority ability to price cost reflectively and brand loyalty. Additionally, strong market share in other regions of the country besides Lagos as well as being placed in a favorable position relating to local sourcing (80:20 domestic to foreign sourcing of raw materials) places the company in pole position compared to competitors. Nestlé’s inclusion in the list of companies allowed to import milk should also bode well for company operations. Our concern, however, lies in the prospect of dollar illiquidity particularly in the context of a devaluation, as its supply chain is still subject to fx risks relating to pricing. With that being said, we expect Nestle to sustain its cost management strategies and this should be supportive for bottom line performance in the near term.