Nestlé Nigeria Plc has released its nine-month 2024 results, revealing a substantial pre-tax loss of N255.385 billion, a 381% year-over-year (YoY) increase from the N56.65 billion loss reported during the same period in 2023.
In full-year 2023, the company reported a pre-tax loss of N104.025 billion, contrasting sharply with a pre-tax profit of N71 billion in 2022.
Despite these losses, Nestlé has demonstrated a consistent growth trajectory in revenue, gross profit, and operating profit over recent years.
From 2019 to 2023, revenue grew at a compound annual growth rate (CAGR) of 18%, while gross and operating profits rose at CAGRs of 14% and 14.5%, respectively.
In 2023, revenue increased by 22% to N547.119 billion, and by the nine months of 2024, revenue had surged by another 22% to reach N665.290 billion.
This impressive revenue growth has bolstered healthy gross and operating profit margins, which have averaged 40% and 23%, respectively.
However, a deeper look into the company’s results shows that these operational gains are overshadowed by soaring finance costs, driven primarily by the devaluation of the Naira.
For the nine months of 2024, interest expenses on financial liabilities surged by 188% to N83.866 billion. The financial statements reveal that interest on an intercompany loan accounted for approximately N73.3 billion of this cost, up significantly from N27.3 billion in 2023, even excluding the impact of foreign exchange.
Additionally, net exchange losses from foreign currency-denominated balances reached N285.292 billion, marking a 124% YoY increase.
Commenting on the results, Mr. Wassim Elhusseini, CEO/MD of Nestlé Nigeria Plc, noted, “The net profit and equity are primarily impacted by high finance costs due to the revaluation of the company’s foreign currency obligations, triggered by the unprecedented devaluation of the Naira. Excluding the adverse impact of finance costs, the net profit is positively impacted by significant improvement in both gross and operating profit.”
“The steady improvement in gross and operating profit, along with strong top-line growth, underscores the fact that the underlying fundamentals of the company remain strong,” he added. “It is also encouraging to see that the loss in the third quarter has dropped considerably compared to previous quarters.”
Equally encouraging is the company’s commitment to taking critical steps, such as improving operational efficiency, fostering innovation, and focusing on reducing its reliance on foreign exchange by increasing local sourcing of materials.
Despite these efforts, much remains to be done.
- The cost of sales, driven by raw material and direct overheads has continued to soar, outpacing revenue growth. In Q3, the cost of sales grew by 118% to N179 billion pushing the nine-month cost to N458 billion, 39% higher than the 2023 figures.
- The 188% increase in interest expenses on financial liabilities highlights the burden of high debt, particularly due to the significant intercompany loan interest expense, which has grown sharply (from N27.3 billion to N73.3 billion.
- Interest expenses are compounded by net exchange losses of N285.292 billion, which escalated 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 negative shareholders’ funds of N112.084 billion. Without the revaluation gain, this negative position would have been even more pronounced. According to the company, in March 2024, it adopted a revaluation model for valuing its land, buildings, plant, and machinery, from the historical cost basis. This change resulted in a net revaluation gain of N150 billion, which has been reflected in the statement of comprehensive income, financial position, and statement of changes in equity.
- Given that Nestlé’s share capital stands at just N396 million and its share-based payment reserve at N354 million, the company’s core equity base is minimal relative to its debt of N685 billion. These low equity components indicate a limited “owned” capital structure, revealing that Nestlé has historically relied heavily on debt financing.
While the company has demonstrated resilience in its core operations, the ongoing financial strain from debt and foreign exchange losses could jeopardize future growth and stability.
To effectively address the negative shareholders’ funds, it would take a substantial amount of time to wipe out retained losses solely through profit generation, especially given the scale of the existing losses.
- Therefore, it is crucial for Nestlé to consider injecting more equity alongside other strategic measures. Shifting the focus toward capital restructuring and proactive debt management could be critical steps for Nestlé to regain financial health.
- The combination of overall negative equity and reliance on debt, coupled with minimal share capital, highlights an unsustainable capital structure that presents significant risks for investors and may deter potential new investments.
- Prior to 2023, the company consistently paid dividends between 2019 and 2022, a crucial factor for attracting and retaining shareholders.
- However, in 2023, the inability to pay dividends contributed to stagnation in the share price.
- As of the close of trading on October 31, 2024, the company’s share price has decreased by approximately 20%, further highlighting the negative impact of its financial challenges on investor sentiment.