July 31, (THEWILL) – Unilever Nigeria Plc recorded a profit after tax (PAT) decline of 996.4 percent in its second quarter (April – June) 2022 operations as shown in its interim half-year report submitted to The Exchange and posted on its website. The foremost Fast-Moving Consumer Goods (FMCG) firm recorded a post-tax profit of N110.4 million, year-to-year, from N1.2 billion achieved in the corresponding period (April – June) of 2021.
This reflects the worsening economic headwinds that have created severe pressure on the real sector, especially manufacturing firms, which have continued to bear the brunt of rising inflation occasioned by high cost of diesel and slump in the value of the Naira. Manufacturing firms that rely on the input of the backward integration programme, a policy that promotes local sourcing of raw materials, are also battling with the severe economic challenges notwithstanding the significant increase in the price of their products.
An analysis of Unilever’s Q2 2022 report revealed that the FMCG company operated under financial pressure during the period, as financial costs rose to N507.46 million from N11.09 million in the corresponding period of 2021, reflecting a 4,510 percent jump. Compared to the preceding period (Q1 2022), the increase was also remarkably high. It jumped from N121.13 to N507.46 million suggesting that the firm’s fortune began to experience the downward slope in its 2021 operations.
Environmental effects on its business were equally not friendly. Cost of sales jumped from N11.88 billion in Q2 2021 to N16.21 billion in the review period, showing a rise of 36 percent – a reflection of the rising inflationary trend since the year from 15.60 percent in January to 16.8 percent in June 2022, a rise of 120 basis points. Selling and distribution expenses increased to N1.27 billion from N749 million in the corresponding period, or 70 percent rise, while marketing and administrative expenses followed the same upward trajectory to N4.82 billion from N3.43 billion in Q2 2021, a jump of 41 percent.
The finance costs pressure impacted the gains recorded in revenue which rose by 42.4 percent from N16.33 billion to N23.24 billion – a positive trend that began to show in the year with Q1 2022 revenue jumping 13 percent to N23.24 billion from N20.56 billion in the preceding quarter.
A segregation of the data revealed that revenue for food products rose to N10.43 billion from N7.18 billion in the corresponding period (Q2 2021), while home and personal care items also increased: from N9.15 billion in Q2 2021 to N12.81 billion showing a 40 percent jump. The firm’s sluggish growth reflected in its earnings per share performance which declined from 0.21k (in Q2 2021) to 0.02k in the review period.
Unilever’s Corporate Affairs Department did not respond to the enquiry by this newspaper on the firm’s Q2 2022 performance.
Commenting on the firm’s Q2 2022 performance, Dr Biodun Adedipe, Chief Consultant, B. Adedipe Associates Limited, a management and financial services firm, observed that Unilever is facing challenges of economic headwinds among other unfavourable circumstances.
“No doubt, the company is facing challenges of economic headwinds that have caused escalation of the cost of doing business in Nigeria as well as capital structure that made it to depend more on borrowing, which is an expensive source of fund at the present moment in Nigeria.
“Others include limited space for increase in product prices, which may play out in two ways of buyer resistance and/or competitiveness and inability to effectively manage costs. Proper cost profiling should still leave some scope for cost management – a situation like this warrants reworking the business model, right through the supply chains to internal workings of the firm.
“Perhaps the firm has to intensify local sourcing of inputs and deliberately reduce its vulnerability to exchange rate movements. These are the issues I can immediately raise in this situation of Unilever,” the renowned Economist told THEWILL in a note.
A study by THEWILL earlier in the year showed that the performances of Nigeria’s FMCG firms were severely impacted by a tough operating environment in the first quarter of the year (Q1 2022). Spiral inflation, decline in consumer demand, wrong-headed policies, among the others, combined to create a regime of high operating costs for the companies surveyed.
An analysis of the Q1 2022 interim reports revealed that the companies struggled to lift margins. Their profit and revenue haul showed an average 50 percent growth year-on-year, while the key six cost/expenses indices revealed an average 92 percent increase. The selected key cost areas include Tax Expenses, Cost of Sales, Administrative Cost, Sales/Marketing Distribution, Raw Materials/Inventory and Employee Expenses/Entitlements.
Data from the firms’ interim reports showed a significant increase in their operating costs which could lead to downscaling in the firms’ operations, or outright downsizing to remain in business. Stakeholders and industry experts believe that the firms must take drastic measures to avoid sinking in the miry clay of high operating expenses as raging inflation continues.
The six quoted major FMCG firms surveyed include Nigerian Breweries Plc, Unilever Nigeria Plc, Nestle Nigeria Plc, Guinness Nigeria Plc, Cadbury Nigeria Plc and Dangote Sugar Refinery Plc. They have a combined market capitalisation of N2.3 trillion and constitute over 60 percent of total market capitalisation of the Consumer Goods Sector amounting to N3.36 trillion as of Friday May 13, 2022.
The highest expenses window recorded by the six surveyed firms was in cost of sales (COS) which jumped from N216.3 billion in Q1 2021 to N269.9 billion in Q1 2022, representing a 24.8 percent increase. The COS is the accumulated total of all costs used to create a product or service which has been sold. It represents the direct costs related to the manufacturing of goods and services that are sold.
The companies’ raw/packaging materials inventories showed a total of N161.4 billion during the three months of the year, a 20 percent rise from N134.7 billion spent in the corresponding period in 2021.
Employee expenses/entitlements during the period grew by 23 percent to N63.6 billion from N51.8 billion posted in Q1 2021, with Unilever recording the highest employee/personnel expenses/entitlements of N37.9 billion followed by Nigerian Breweries with N13.6 billion. The other higher number was that of Nestle which recorded N8.4 billion.
Sales/Marketing/Distribution expenses by the six firms totaled N57.9 billion against N40.5 billion in the corresponding period which reflects a 43.3 percent increase.
The challenged performance of the FMCGs firms emanates from the rising cost of goods and services which ate into companies’ profits at levels not seen since 2017. This is despite price adjustments made across board by most of the consumer goods companies.
Specifically, Nigerian companies spent a huge sum on power in the first quarter of 2022 as the cost of energy surged significantly across most countries in the world. Escalating power supply blackouts worsen the situation by forcing businesses and households to buy more diesel and petrol to operate generators. Cost of diesel sold as high as N850 per litre in some parts of the country, while some firms had to cut down on working hours in order to manage costs.
The spiral effects also extended to the cost of transportation on the back of petrol scarcity which lingered for six weeks in a row, caused by the importation of adulterated fuel. Notably, the high cost of operating expenses is rampaging the entire economic landscape hitting hard on the small and medium enterprises (SMEs) which are direct beneficiaries of the recovery phase of the FMCGs after the COVID-19 pandemic. Whilst price increases have helped cushion rising costs for some of the companies, experts anticipate a further dip in profits in the short to medium term if the current inflationary trends persist.
The Manufacturers Association of Nigeria (MAN) had warned that the high costs of diesel used by their members could lead to a high cost of goods and services due to escalating cost of production.
“Knowing that diesel has been deregulated removes the question of a buffer to the cost. The law of demand and supply is at play here and since we have historically lacked local refining capability, we are left at the mercy of the vagaries of international price and the geopolitics of it. As long as the price of crude oil continues to go up, price of AGO will equally skyrocket,” Director-General, Manufacturers Association of Nigeria (MAN), Mr Segun Ajayi-Kadir said.
About the Author
Sam Diala is a Bloomberg Certified Financial Journalist with over a decade of experience in reporting Business and Economy. He is Business Editor at THEWILL Newspaper, and believes that work, not wishes, creates wealth.
