News Column

Unilever Contends With High Financing, Operating Costs

July 2, 2014

High cost of financing, distribution and operations have combined to drive down the profits of Unilever Nigeria, writes Goddy Egene

Unilever Nigeria Plc, listed in the consumer goods sector of the Nigerian Stock Exchange (NSE), is one of the leading and oldest names in the Nigerian economy.

If the popularity of products and name is what determines the financial performance of a company, Unilever would have definitely been a clear leader in the consumer goods sector.

A look at the refrigerator or the bathroom shelf, one is bound to see at least one of the company's brands. Unilever creates, markets and distributes products that people use to feed their families and keep themselves and their homes clean and fresh.

However, looking at the performance of the company in 2013 and first quarter of 2014, the brand equity, popular products and others have not really yielded the expected results as the company battles with high operating costs to remain afloat.

Corporate background Unilever Nigeria Plc was established in 1923 as a soap manufacturing outfit. The company was initially known as Lever Brothers West Africa and was founded by Lord Leverhulme. It got quoted on the NSE in 1973.

After series of mergers/acquisitions, the company diversified into manufacturing and marketing of foods, non-soapy detergents and personal care products. These mergers/acquisitions brought in Lipton Nigeria Limited in 1985 and Cheesebrough Ponds Industries Limited in 1988. The name, Unilever Nigeria Plc, was adopted in 2001 to create global uniformity in the Unilever family.

The shares of the company are held 50.04 per cent by the parent firm, Unilever, while balance of 49.96 per cent is in the hands of Nigerian investors.

The global brands in the kitty of Unilever's Personal Care Unit include: Close-Up toothpaste, Pepsodent toothpaste, LUX beauty soap, Lifebuoy soap and Vaseline Petroleum Jelly.

In the Food Business Unit, brands like Blue Band Margarine, Lipton Yellow Label Tea, and Knorr bouillon cubes are paraded. OMO Multi-active Detergent and Sunlight washing power takes the central stage in the Home Care Unit.

Unilever's board of directors is led by Nnaemeka Achebe (Obi of Onitsha) as chairman. Mr. Alfred Yaw Nsarkoh, who is Ghanaian as managing director/CEO) . Mr. Sudarashan Kasturi and Mr. Ologbaraete Pinnick are executive directors. The non-executive directors include: Mallam Abba Kyari; Mr. Atedo Peterside; Mr. Udoma Udo Udoma and Mr. Thabo Mabe.

Success Factors Although the company is 91 years old, it has remained successful. Unilever explains that the long-term success of its business stemmed from the strong relationship with the consumers, based on the deep roots in the local cultures and markets.

This enables it to create products that help them to 'feel good, look good and get more out of life' and the total commitment to exceptional standards of performance and productivity.

"In order to sustain this success, we endeavour to maintain the highest standards of corporate behaviour towards our employees, consumers, customers, communities and operating environment.

"Our brands are household favourites and this is because we are so deeply committed to meet the everyday needs of people everywhere in Nigeria. What is more, our deep roots here, combined with international experience and support, enable us to consistently develop brands, which raise the quality of life. It is therefore no surprise that one would find that all over Nigeria, people are at home with our brands," Unilever said.

2013 Operating Environment Like other manufacturing companies, Unilever in 2013 operated in an environment that was characterised by lack of adequate infrastructure such power and good road/transport network.

Over the years, these had remained a major concern to manufacturing companies. Power generation continues to affect production negatively as it increase the cost on the part of manufacturers and at the same time putting pressure on consumer's disposable income.

Equally, the challenge is heightened by high cost of distribution of goods and logistical operations due to the poor states of interstate roads. Unfortunately, other source of transportation like waterway and railway remains untapped or abandoned.

Meanwhile, the security situation in certain parts of the country equally affected the performance of companies, Unilever inclusive.

Financial performance The challenges in the operating environment affected the performance of Unilever in 2013. Analysis of the financial performance of Unilever shows a turnover growth constrained by increasing cost of sales, distribution expenses, finance charges.

All these impacted negatively on the bottom-line of the company. Unilever recorded a turnover of N60.004billion in 2013, showing an increase of eight per cent from N55.548billion.

But that growth was neutralised by 11 per cent increase in cost of sales, which grew from N33.9 billion to N37.55 billion in 2013.Distribution and administrative expenses witnessed a higher growth of 14 per cent, rising from N12 billion to N14.5 billion.

Finance charges jumped by 39 per cent from N816 million to N1.1 billion, showing the need for equity capital injection. In 2013, Unilever's loans and borrowing jumped over 1,288 per cent from a mere 23million in 2012 to N3 billion in 2013.

As a result of the high finance charges, profit before tax (PBT) declined by 16 per cent from N8.18 billion to N6.91 billion. The company tried to improve on the bottom-line the reducing tax by 19 per cent from N2.58 billion to N2.104 billion. Despite that, the profit after tax fell by 14 per cent from N5.59 billion to N4.83 billion.

Based on the reduced profitability, earnings per share declined from N1.48 to N1.27. Also, the measure of the gain, which accrues to the owners of the company, known as return on equity dropped by 5.86 basis points in 2013 to 49.87 per cent from 55.73 per cent in the previous year.

Similarly, profit margin, the proportion of sales converted to distributable profit, declined by 2.07 basis points to 8.01 per cent from 10.08 per cent in the previous year. Out of the N1.48 EPS, the directors decided to distribute N1.25 as dividend per share.

While the 2013 financial year is gone, Unilever is recording a similar performance trend in the current year going by the first quarter results ended March 31, 2014.Unlike 2013 full year when revenue increased eight per cent, Unilever's revenue if Q1 fell three per cent to N13.8 billion, compared to N14.2 billion in corresponding period of last year.

Also, unlike 2013 when cost of sale rose, it decline five per cent in Q1 of 2014, to N8.5 billion, from N9.4 billion. However, distribution expenses remained a drain on the income of the company and still showing the poor state of infrastructure in the country. It rose by 32 per cent from N3.8 billion to N3.8 billion.

Similarly, the huge borrowings the company embarked upon in 2013, remains a drag on its bottom-line as finance charges increased by 30 per cent from N294 million to N381 million.

Consequently, PBT fell by 46 per cent from N2.02 billion to N1.08 billion. Again, the company tried to reduce the tax payment by 55 per cent this time, from N757 million to N339 million. That notwithstanding, PAT declined by 41 per cent from N1.26 billion to N750 million.

EPS for Q1 fell by 40 per cent from 33 kobo to 20 kobo. If this trend persists, the company may end up with an EPS of 80 kobo for the whole year.

A big task for management It is the belief of market operators that the management of Unilever, led by Nsarkoh, who was assumed the position of MD at the beginning of the year, needs to work hard to deliver better results in the remaining quarters of 2014 and years ahead.

They are, however, confident that given the background of Nsarkoh, the company's declining fortunes may improve soon. Nsarkoh joined Unilever from Unilever East and Sothern Africa, based in Kenya where he was MD.

He has served as Strategic Assistant to Unilever Executive Member and President of Unilever Asia, Africa, Central and Eastern Europe based in the United Kingdom. He also served at various times as marketing director Unilever Ghana, African Regional Brand Manager Laundry Regional Innovation Centre, Unilever South Africa, Production Manager Unilever Ghana among others.

He was said to have contributed immensely to the growth of Unilever businesses in Ghana, South Africa, Asia, Central and Eastern Europe in his over 20 years career in Unilever.

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Source: AllAfrica

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