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Cut in Cadbury's profit disappointing- THE CITIZEN

By The Citizen


Cadbury Nigeria Plc closed its 2012 financial year with lower profit and sales revenue figures than achieved in the preceding year. This seems to add fresh uncertainty to the rising hopes for a final turnaround for the company.

It is the third year that the company has sustained profitable operations since the end of its running losses in 2009. It is again the first time that Cadbury is unable to grow revenue in the past five years. Is this a normal once in a while earnings slip or a signal for sustaining slow down are the questions that the company's 2013 operations are likely to answer.

The company's net profit figure declined by 6.0% from N3.68 billion in 2011 to N3.46 billion in 2012, after more than tripling at 211.9% in 2011. The decline reflects both a marginal reduction in sales revenue and a weakness in converting revenues into profit. Compared to an increase of 16.8% in 2011, sales revenue slipped by 1.6% to N33.5 billion in 2012.

The strength to sustain the company's turnaround process rests on its ability to drive a new force of growth in sales revenue. Inability to grow sales revenue was the main factor in the company's past losses.

Growth in sales revenue needs to step up reasonably and consistently for the company to prevent further profit fall and perhaps a relapse into losses. Competition is quite fierce in the food/beverages market where the company operates and this is affecting even well established brands.

Low dispensable incomes of consumers is hurting sales volumes, as people switch to cheaper products and local alternatives. A good part of the market is presently lost due to out right avoidance of what are otherwise considered to be basic consumer goods.

The market conditions could pose further challenges for Cadbury in growing sales revenue and profit in 2013. The company seems to require both products diversification and a new strategic selling design. With its many years of operations in Nigeria, the company ought to have become more or less a conglomerate with arms and extensions of operations in key markets.

The company's selling effort may need a reconsideration to ensure it follows a clear cut strategy in identified markets. Otherwise aggressive marketing effort could mean spending money without making the sales. That is exactly what happened to the company last year.

In 2012, selling and marketing expenses were the only major expenditure line that grew significantly at 28% to N5.03 billion. There was however nothing to show for the extra spending in terms of the expected growth in sales revenue.

Neither did the increase of 19.3% in total assets by the company yield increased revenue in the year. Asset turnover declined from 1.0 in 2011 to 0.8 in 2012, indicating that the naira of assets employed earned less sales revenue than in the preceding year.

Getting sales revenue to grow appreciably is a target that Cadbury cannot afford to miss in 2013. This is because further constraint in selling is bound to depress profit margin further. This can be expected because further cost cutting may not be possible after the squeeze of last year.

The company had to cut administrative expenses by as much as 30.9% to N2.17 billion in 2012. The cut down enabled it to prevent a sharp drop in profit in the year. Despite that, profit margin still slipped from 10.8% in 2011 to 10.3% in 2012. This is however an improvement from 8.6% net profit margin recorded in the third quarter. This shows that profit growth stepped up in the final quarter.

Another important area of consideration is cost of sales, which stood at about 67% of sales revenue at the end of 2012. This shows that Cadbury is a higher cost operator than Nestle Nigeria, which recorded cost of sales equal to 57% of sales revenue in 2012.

With a lower cost per unit of sales revenue, Nestle is able to achieve a higher gross profit margin at 43% than Cadbury's 33% in 2012. Nestle is therefore able to transfer more sales revenue into profit with its net profit margin of 18.1% compared to Cadbury's 10.3% at the end of 2012.

Despite the challenges of selling constraint and higher operating cost structure, Cadbury has overcome a great challenge. It has wiped off the huge indebtedness that used to eat up revenues and leave big losses for shareholders. The company's balance sheet is now entirely free of debts and the earnings that creditors could have collected by way of interest charges are now retained for shareholders.

The profits the company made in the preceding two years were used to fill up negative reserves arising from past losses. At the end of 2011, the entire net profit of N3.7 billion was applied to finally clean up the reserve account. For the first time in many years, the company's retained earnings account has returned to a significantly positive figure big enough for dividend pay-out.

Cadbury has declared a cash dividend of 50 kobo per share from its earnings per share of N110, the first dividend payment in six years. This is a dividend yield of 1.4% and a pay-out ratio of 45.5%. The company's register is scheduled to close on 15th April 2013 while payment date will be 9th May 2013. The company paid the last dividend of N1.30 in 2006 out of its earnings per share of N2.45.

Cadbury is a company to watch in 2013, whether it will reinforce sales revenue and rebuild profit margin or begin a new trend of decline. If sales revenue fails to grow in the year, it is not likely that it can again rely on cost cutting to defend profit. The company is currently in a year in which it cannot afford to show earning weakness.