Tough consumer environment takes toll on Nestle’s June performance

Nestle Lanka PLC reported relatively subdued financial performance during first half of 2017 (1H17) as the weak consumer spending hit the local unit of the Switzerland-based world’s biggest food and beverage company.

According to the interim financial accounts filed with the Colombo Stock Exchange, the company reported revenue of Rs.8.6 billion for the April - June quarter (2Q17) compared with the Rs.9.2 billion revenue recorded in the same period in 2016.  

This is a decline of Rs.677 million or 7.3 percent year-on-year (YoY) and also the second consecutive quarter of weak sales by the producer and marketer of popular dairy products Nespray and Milo and instant noodle brand Maggi. 

The weak sales have largely been due to the hike in the value added tax (VAT) which led to weak consumer spending, said Bartleet Religare Securities (BRS), a Colombo-based stockbroking firm, analyzing the interim results. 

“We expect volumes of dairy (mainly Nespray Everyday milk powder) to have affected significantly due to: (1) fresh imposition of VAT on locally manufactured milk powder with effect from January 1, 2017 (2) reduction of custom duty on imported milk powder by Rs. 35 (3) government not changing the maximum retail price on full cream milk powder (FCMP)”, said BRS’s Equity Analyst, Imali Amunugama. 

The reduction of duty on imported milk powder puts Nestle at a disadvantage as the company sources almost 100 percent of dairy requirement from domestic farmers. 

However, BRS expects contribution from coconut milk powder under ‘Maggi’ brand to the revenue to have increased during the period as many people shifted to the product when the coconut prices reached close to Rs.100 a nut due to prolonged drought and irresponsible clearing of coconut cultivated lands for housing.   

Maggi is the only coconut milk powder produced by a Nestle factory internationally and is exported to over 60 countries, hence price increases would have been possible on exports, BRS believes.  
Meanwhile, the company’s 2Q17 net profit fell sharply by 35 percent YoY to Rs.779.3 million as the woes in the dairy sector and the higher coconut prices pinched the margins.  

The gross profit margin declined down by 290 basis points to 35.1 percent YoY while the operating profit margin dropped by a steeper 440 basis points to 12.4 percent YoY, BRS’s measurements showed. 

The earnings per share fell to Rs.14.51 from Rs.22.15 a share a year ago. 

The Nestle share closed Rs.3.70 to close at Rs.1,898.10 at last week’s trading.

Meanwhile, during the six months ended in June 30, 2017, Nestle Sri Lanka reported a revenue of Rs.18 billion, compared to Rs.19 billion during the same period in 2016 while the earnings fell by about 33 percent YoY to Rs.1.6 billion or Rs.30.55 a share. 

Nestle Sri Lanka’s performance largely reflected its global performance, which also has faced some lacklustre growth amid tough consumer environment and also pressure from activist investors.
By June 30, 2017, Nestle S.A held 90.82 percent stake in the company while there was 9.18 percent stake under public holding.