Nestlé Lanka’s earnings hit record high in 1Q

Driven by record high sales volumes and the low tax regime, Nestlé Lanka PLC, the local unit of the Swiss food giant, reported the highest earnings in the firm’s recent history for the March quarter (1Q21), despite the higher sales costs and marketing expenses.

The company recorded Rs.11.45 billion for the quarter under review, up nearly 25 percent year-on-year (YoY) and 15.2 percent quarter-on-quarter (QoQ), while the cost of sales grew at a slower pace of 18.9 percent YoY and 8.8 percent QoQ to Rs.7.3 billion, resulting in a gross profit of Rs.4.1 billion, up by 37.6 percent YoY and 29 percent QoQ. 

The company saw its marketing, selling and distribution expenses and other operating expenses rising by 19.2 percent YoY to Rs.1.6 billion and 1304 percent YoY to Rs.142.3 million. In the company’s annual report for the year ended on December 31, 2020, Nestle Lanka noted that it had stepped up efforts in the communication drive to promote its key brands, including locally manufactured Maggi as well as Milo and Nestomalt, focusing on improved health aspects.

The firm was able to reduce its administrative expenses by 6.5 percent YoY to Rs.617.8 million in the quarter, which resulted in an operating profit of Rs.1.72 billion, up by a record 80.6 percent YoY.

Summing up, the company’s earnings for the period under review rose to a recent high of Rs.32.42 per share or Rs.1.74 billion, indicating an increase of 170.3 percent YoY and 152.2 percent QoQ.

The previous highest earnings were recorded in a first quarter in 2016, when the firm reported Rs.23.74 earnings per share or Rs.1.27 profits on Rs.9.7 billion revenue, according to the firm’s financials filed with the Colombo Stock Exchange (CSE).  The company’s income tax expense also fell by 71.2 percent YoY to a historical low of Rs.74.8 million in the period, as the firm adopted the new tax rates included in the Inland Revenue amendment bill, dated March 18, 2021. The new tax rates are expected to have a retrospective effect starting from January 1, 2020, based on the guidelines issued by the Institute of Chartered Accountants of Sri Lanka on April 23, 2021.
Accordingly, the tax rates applicable are: 18 percent for manufacturing business profits, 14 percent for export profits and 24 percent for other income, as against the previous standard rate of 28 percent. 

The export segment contributed to around 17 percent of the company’s revenue in 2019.  Nestlé Lanka PLC Chairman Suresh Narayanan in the 2020 annual report cautioned that a steep increase in coconut prices could impact its export competitiveness.

The firm’s performance is in line with its parent Swiss-based Nestlé S.A’s regional performance. Nestlé S.A in its first quarter earnings report highlighted that South Asia recorded a double-digit growth, with positive contributions from key brands, which include Maggi, Nescafé and KitKat as well as  infant nutrition products. 

“By product category, sales in culinary, dairy and coffee all grew at double-digit rates. Infant nutrition posted slightly negative growth but gained market share in South Asia and Africa,” it said.

For the Swiss-based food giant, Asia, Oceania and Sub-Saharan Africa was the fastest growing market during the quarter under review, recording an organic growth of 9.1 percent YoY and recording the only positive growth in reported sales compared to the other regions. 

However, in the absence of details of sales in the quarter, it remains difficult to forecast on the sustainability of revenue growth.

As Sri Lanka entered into the third COVID-19 wave in the second quarter of the year along with the other South Asian markets, concerns remain about the sustainability of sales recorded in the first quarter of the year.

According to Narayanan, currency volatilities, milk availability and affordability are key challenges for the company’s operating environment during this year. In mid last year, the company expected the depreciation of the rupee and volatility in the foreign exchange market to impact the costs of imported raw and packing material. So far during the year, the rupee has depreciated by over 6 percent against the US dollar. In milk products and ice cream segment, Nestlé S.A reported a price growth of 15.7 percent YoY in the quarter. However, it’s not clear how the pricing changes impacted Nestlé’s revenue in Sri Lanka.

Amidst the first wave of COVID-19, Nestlé’s local unit noted that it was exploring new ways of working, new business models and alternative routes to market to continue its positive momentum.

“Nevertheless, we will continue our balanced pursuit of top line growth, bottom line performance and improved capital efficiency, to deliver sustainable results with a purpose-driven approach,” Narayanan stated. 

Nestlé Lanka this month launched a high-tech cold storage temperature solution for its cold storage of raw materials. The firm is also moving ahead to lunch Sri Lanka’s first UHT milk carton recycling facility together with other industry stakeholders to meet its target of making their packaging 100 percent recyclable or reusable by 2025. (NF)