With deft cash management experience and strong brands as its weapons ,Cadbury maintains positive net income outlook despite the cost conundrum
As humanity battles daunting intricacies of life, even the best corporate organizations could get caught up in the reality of changing business life-cycles or become a victim of a deleterious environment . In the last financial year as it was the one before and indeed many more years back in time, the competitive space of the Foods and Beverages industry was paved with heavy challenges . But when the going gets tough, the tough get going
Cadbury Nigeria Plc, a corporate giant providing premium quality beverages across the nation and a big player in this industry , no doubt ,has continued to raise its head even in the stormy sea , battling those challenges in the last few years . Naturally , both the old and new generation competition are giving it a run for its market share . But Cadbury is proving unassailable with strong brands as its weapons . With the three elements for a successful competitive strategy at its disposal , the battle is half won ; its products are known to be unique and not easily be replicated. This is the difficult element in a competitive market. Its products are still relevant to the customer, indicating the company maintains the customer focus required for success in today’s business environment
However , asides the heat of competition, deleterious financial environment leading to increase in the prices of raw materials ,disruptions in logistics ,skyrocketing interest rates following increased charges paid on bank loans as well as significant increase in overall debt are the other obstacles that set the entire industry for failure .
But Cadbury is still standing tall , turning adversity to success as it maintained a steady growth; no doubt ,it is battling the vicissitudes of time and doing so with strong commitment. Behind this is Mrs Oyeyimika Adeboye, its current CEO whose actions and initiatives signal the end of its battle of survival and return of impressive returns .
The above optimism is predicated on her strong pedigree for the job . Before being appointed as MD, in April 2019 ,she had spent a total of 10 years and seven months with Cadbury . Moreover , she had consciously built a career in finance, strategy and business administration, both in Nigeria and the United Kingdom for over two decades, one can almost say that Oyeyimika had spent all the years preparing for the top. These are the credentials working for her currently as she is strategically tackling those challenges upfront .
She is not oblivious of the fact that the only way to survive the cost conundrum is to gain cost leadership or achieve competitive cost advantage to become the lowest cost producer in the industry. Indeed the company is improving its facilities as it committed N726.32b in 2021 as net cash used in investing activities to investment. This was earmarked for acquisition of property, plant and equipment . This initiative will allow it to produce n large scale and enable it to attain economies of scale. No doubt , any company that finds itself in this situation is expected to possess high capacity utilization, good bargaining power, high technology implementation among others factors that are necessary to achieve cost leadership. The Cadbury’s initiative in this direction seems a move that investors should be interested in because investment signals improvement and better results on the floor of the Nigerian Stock Exchange. The move itself indicates that the company’s management is a subscriber to the never ending improvement principle.
Consequently , at the end of 2021 financial year , with deft cash management experience and strong brands at its disposal it maintains good growth in revenue and positive net income outlook despite the cost conundrum, its liquidity position is also impressive in spite of the increase in its leverage position. To achieve this is not that easy ,it was a tug of war against the sprawling costs
REVENUE
Under her leadership Cadbury has continued to display resilience and stand tall with the group results revealing increase in revenues year on year . However, the gains from this feat are no doubt being curtailed by higher than par increase in the cost of sales currently hitting the roof top as well as interest rates going way up
She could not be blamed for this , it was an inherited conundrum . Before her assumption of office in April 2019 ,specifically in 2016 ,the company recorded a loss of N296.40b. Although a new Managing Director in February ,2017 Mr Muhammad Amir Shamsi, a Pakistani national returned Cadbury to profitability before he left in 2019 , this feat was achieved under high cost of sales and high interest rates
Despite this , Cadbury Nigeria Plc under her leadership is fighting hard to turn adversity to success as it maintained a steady growth profile. In the last financial year, the foods and beverages giant helped more Nigerians to gain more nutrients as they imbibed more of the branded fast moving consumer goods in Nigeria.
Financially speaking , it translated to an 19.7 percent rise in the amount of products consumed in the period. That is, its total revenue swelled to N42.37billion in 2021 from N35.41billion in 2020
This may not be farfetched . Cadbury brands are high profile any time,any day built over years through strong consumer perceptions, expectations, and experiences with all products or services under its umbrella. It operates through three segments: Refreshment Beverages, Confectionery, and Intermediate Cocoa Products. The Refreshment Beverages segment manufactures and sells refreshment beverages under the Cadbury Bournvita and Cadbury 3-in-1 Hot Chocolate brands.
Moreover , much of the success can be pinned to the excellent promotions the company embarked upon in the period ; its advertising and sales promotion cost inched up by 10% to N2.87b from N2.61b ; this is 56.7 % of the total selling distribution cost
All of these had a significant impact on sale even if it hiked the cost of doing business. To sell these products is not always easy as is the case for all manufacturers. The trend is that the cost for that as represented by the cost of sales on the profit and loss account never goes down. The only direction it travels is northwards. Cadbury could not able to contain that polar movement as such as it trekked 21.6 percent to N35.89b from N29.51b.The dilemma is that it is difficult to continue to jerk up prices in a highly competitive environment that many customers could not afford
Despite the high cost of sales the gross return of the Manufacturer of Bournvita hit 9.8% to N6.48b from N5.90b though this at variance with the stronger momentum displayed at the revenue level
Furthermore, a 77.7 percent slump in other income to N24.08m from N108.04m did not help the matter
OPERATING EXPENSES
Doing business in this environment requires a hulk of expenditure whose destructive impact shatter an operator’s profits. Though, the company’s operations cost hiked marginally by 4.7% to N6.01b from N5.74b,it was very destructive to the operating income and ultimately to the bottom line in an absolute term . Though its trading profit percent increased from N281.82 billion to N401.47billion. ,the operating expenses or costs of doing business, which was already heavy the previous year was damaging to the bottom line .This ,however , is an industry wide phenomenon
This is evident in its cost to income metric of 92% in 2021 a little better than it was in 2020 at 95.5% indicating a 92k expense from every one Naira operating income ; this is an improvement from approximately 96k from every one naira from its operating income . it cost the company almost 99k to get one naira revenue when its total cost at N41.90b is compared to N42.37b revenue in 2021 while in the year 2020 99.6% of the total revenue when finance incomes are excluded
CASH MANAGEMENT
But the company saved the day by its deft experience in cash management. .Between 2020 and 2021 , its cash and cash equivalents increased by 60.4% from N11.12b to N17.82b .The adept skill displayed delivered a huge net finance income that consequently saved the day for the company as it could have recorded a loss in 2021 as its net income .
This was helped by interest received from the company’s prudent investments in the financial market. Though its finance cost skyrocketed above 20 000% from N1.20m to N249.58m its finance income that increased by 57 % toN856.03b from N127.44b boosted its chances of better profitability in 2021 at a net finance income of N606.45B from the previous year amount of N126.24b as its profit before tax hit N1.10b ,a 169% increase from N408.07Bin the year 2020
However, because the company did not enjoy a tax credit as in the previous year , paying N648.21b ,its net income backtracked and fell by 52% to N449.71b from N931.83b in 2020 ; in the previous year ,the company enjoyed a tax credit of N523.76b that boosted its profitability then
The high and heavy cost of sales ,operating expenses and heavy tax paid as against the tax credit enjoyed in 2020 joined hands as spoilers to the potentials for better profitability created by its revenue growth in 2021 .Consequently , there was an 52 percent decline to bottom line . Net profit fell to N449.71billion from N931.83 billion.
The slow-moving pretax profit and net profit were contagious ; they clobbered and pinned down both the pre-tax and net profit margins
Its pretax margins improved to 2.6 % from 1.2 % in 2020 while at the net profit margins level the reverse is the case as it declined from 2.6% to 1.1% .Analysts say though the margin is stagnant and negligible it could be situated on the stifling cost of sales and hostile interest rates. However, the company is expected to be turned around for better returns since this margin represents a loss in a year that inflation remained at double digits.
LIQUIDITY
Though its debt profile in the process took an upswing direction as the total loans rose sharply by 203% to N10.48b from N3.45b, with the company’s improved cash management ability, its liquidity status is still healthy in the period under review
The improved cash cycle helped the company to maintained positive liquidity though its current ratio sank. This, ostensibly, is because of the increase in its debt profile . Cadbury liquidity ratio is flat at 1.4 between 2020 and 2021 which means that it has 1.4 times its liabilities in assets and can currently meet its financial obligations Any current ratio over 2 is considered ‘good’ by most accounts. While the current ratio is 1.4 ,its quick ratio is also flat at 1.0 . This is still considered to be a good ratio but tight . This, no , could be linked to increase in its debt profile in 2021 . Any quick ratio over 1 means that the company holds enough in its accounts to pay off all liabilities within 90 days. If the quick ratio is under 1, this would instead indicate that the company would have difficulty paying its debts.
LEVERAGE
However, the overall financial leverage is higher than last year because the company took additional term loans. Its debt to assets ratio now stands at 25% compared 10.4% in the previous year while its debt to equity is 0.77x compared to 0.25% in 2020. This is below 1 ; a ratio greater than 1 implies that the majority of the assets are funded through debt. A ratio less than 1 implies that the assets are financed mainly through equity. A lower debt to equity ratio means the company primarily relies on wholly-owned funds to leverage its finances.9 Dec 2020
.
