Last November, Unilever Nigeria announced the resignation of its CEO, Yaw Nsarkoh. Prior to his resignation, Mr Nsarkoh was placed on a leave of absence. Nsarkoh, a Ghanaian citizen, has had a long career within the Unilever Group.
Before assuming the role as CEO of Unilever Nigeria, he had headed several regional headquarters of the global manufacturing company, especially in Africa. He also served as a Strategic Assistant to Unilever’s President for Asia, Africa, Central, and Eastern Europe.
His exit surprised a few analysts considering how he was able to grow revenues over the years and overseeing the massive deleveraging of the company’s balance sheet. It’s latest results perhaps explain why he had to leave.
Unilever Nigeria Plc reported a pre-tax loss of N8.3 billion in the full year ended December 2019, sending shock waves around the equities market. For a company that has over the last 5 years reported astronomical revenue growth, the loss reported was a rude awakening.
Just last year, the company reported record revenue of N92.9 billion and pre-tax profits of N12.6 billion for the year ended December 2018. Just 5 years before in 2014, Unilever reported a revenue N55.7 billion and a pre-tax profit of N2.8 billion.
So what happened in 2019?
A cursory look at the result shows the company’s reported losses stem from a massive 34.6% drop in revenues to N60.7 billion, it’s lowest revenues since 2015 when it reported revenues of N59.2 billion. Unilever’s reported revenues from 2 major segments, Food Products, and Home & Personal Care. Each division experienced declines.
Revenues from its Food Products Division went from N44.3 billion in 2018 to N31.9 billion in 2019. Home & Personal Care also saw revenues go from N47.7 billion in 2018 to N28.8 billion a year later. Despite the drop in revenues, the cost of sales and operating expenses remained high, resulting in much lower margins.
To understand why revenues declined this badly, one will have to flashback to a series of events that occurred in 2019 and perhaps the year before.
Nairametrics first observed a disconnect between Unilever’s rising revenue and its cash in an article published on the site in 2016. Then we observed that the company was finding it difficult translating some of its income to cash. Out of the revenue of about N32 billion in the first 6 months of 2016, the company only collected N8.6 billion in cash.
The situation continued in subsequent years. As the company’s revenue grew, so did its receivables. For example, between 2015 and 2016, as revenues grew by N10.5 billion, receivables also grew by N8.8 billion. In fact, between 2014 and 2018, revenues had grown by as much as N37 billion just as receivables grew by N21.6 billion. Trade receivables were N8.5 billion in 2014 compared to N30.1 billion in 2018.
In other words, most of the sales the company booked were backed by cash as most of its distributors either had unsold inventories or had challenges paying. For years, it appears Unilever had been booking revenues without backing it up with cash. When this happens and auditors believe the chances of recovering the receivables are slip, they request that the company write down the debts.
In 2019, Unilever wrote down about N721 million in impaired receivables. Investors will be concerned that the company still has about N24.45 billion in receivables down from N30.1 billion a year earlier. The company reported that trade receivables declined by N5.7 billion in 2018 as its distributors paid up.
Why the high receivables?
Unilever’s aggressive revenue drive commenced right after 2015 when the company raised over N50 billion in right issues. It used most of the money to pay down its loans. As then-new, CEO Yaw Nsarkoh assumed the position, the company embarked on an aggressive sales push. However, as sales personnel grew revenues, they did so by offering their distributors healthy credit lines in exchange for pushing their products.
Most Nigerian sales distributors lacking bank credit rely heavily on lines of credit from manufacturers to stock up inventory in the hope that they can sell, keep a margin and repay their supplier. It’s designed to be a win-win situation provided that the inventory does end up in the hands of the final consumer. Unfortunately, the influx of cheaper and often more reliable products from smaller competitors may have negatively impacted sales.
Unilever stops credit Policy
In a research note read by Nairametrics, Unilever informed analysts that it was tightening its credit policy to its distributors to enable the company to manage its huge receivables. The implication of this decision started to impact sales in the third quarter of 2019. The company’s revenues fell from N23.4 billion in Q2 2019 to N8.9 billion and N9 billion in the third and 4th quarters of the year. This is essentially why Unilever reported a loss in 2019.
Results like these often throw up casualties, so it was no surprise that erudite CEO Yaw Nsarkoh was asked to resign and shipped out of Nigeria. prior to his resignation, Mr. Nsarkoh was placed on a leave of absence. In his place, Mrs. Adesola Sobande-Peters (who was poached from Guinness some years back) was delegated to act as an interim Managing Director of the company.
Just last week, the company announced Carl Raymond Cruz as the Company’s new Managing Director. Cruz, a Filipino, is currently the Chairman of Unilever Sri Lanka. He is credited for turning around the Sri Lanka entity and establishing Unilever Sri Lanka as a market leader across key categories.
Perhaps more heads will roll or continue to roll as the company rolls back on its aggressive sales strategy amidst mounting losses.
Unilever’s new CEO will first need to face investor scrutiny over the state of the current receivables. Investors will want to know how much of the N30.1 billion in receivables can be recovered and how much further write-downs the company might need to take.
They will also want to know how it intends to compete now following its new stiff credit policies. A 34.6% drop in revenues without a marginal drop in the cost of sales and operating expenses is unsustainable. It’s either it finds ways to grow topline or it will need to cut down severely on operating expenses. There are bound to be tough decisions in the coming months, if not years for this company.
Unilever’s share price fell 9.7% on Friday and is down 49% in the last one year.
Fidelity Bank Plc must cover the chink in its curtains to keep rising
Fidelity Bank Plc follows the narrative of top tier-2 banks, which have had better or easier years.
The Nigerian banking sector has consistently been one of the most profitable sectors in the Nigeria Stock Exchange market. However, in 2020, Deposit Money Banks (DMBs) have faced a flurry of impediments, which may have affected their solidity.
With reduced income from fee and commission implemented at the start of the year by the Central Bank of Nigeria, the paucity of foreign currency for international transactions, the resulting economic contraction from dire effects of the coronavirus pandemic, and the consequent operational constraints of keeping employees safe, 2020 is obviously fraught with numerous disorders for banking institutions.
For most, it hasn’t exactly been a year for growth at all, more like a walk in the woods, where improvements to bottom-line is almost unexpected. This period, many banks seem content with simply surviving and fundamentally matching their previous feats.
Fidelity Bank Plc follows the narrative of top tier-2 banks, which have had better or easier years. The bank generated a 2020 9M PAT of N20.4billion, rising 7.08% from the corresponding figures last year, but drilling solely into its results in Q3’2020 and its exact comparative period in 2019, the bank suffered reduced interest revenue, reduced fees and commission, reduced profit before tax, and reduced after-tax profit.
Fidelity Bank Plc concluded Q3 with a profit position of N9.1billion, 13.7% decline compared to its position in 2019 y/y. PBT reduced by 12.9% from N10.8billion in 2019 to N9.4billion this year. Gross earning in Q3 was only N49billion as against N57billion in 2019 – plummeting 14%.
The Group Chief Executive Officer of the bank, Mr. Nnamdi Okonkwo, commenting on the result said: “Our 9 months results reflect our resilient business model, particularly in a very challenging operating environment. We worked closely with our customers to gradually recover from the economic impact of the pandemic and the attendant effect of the lockdown. The drop in gross earnings was due to the decline in interest and similar income, caused by lower yields and drop in fee income.”
True cause of the reduction in earnings
DMBs generate gross earnings under three primary subheads: Interests earned, Fees and commission, and Other operating income. Fidelity Bank Plc generated a combined total of N150.8billion for the period ended September 2020 from these three categories, compared to the N158.5billion in the corresponding period last year.
Deeper analysis reveals that this rising tier-2 bank has seen more deficit in revenue from fee and commission compared to the other aforementioned gross-earnings’ generating-sources within this period. Interest earned dropped by a difference of N4.3billion, while revenue from fee and commission saw a decline of N4.8billion from N14.5billion in 2019 to N19.3billion YoY.
Fee and commission as a component of gross earnings
Card maintenance fees, account maintenance fees, commission on remittances, collect fees, telex fees, electronic transfer fees, amongst others, represent the plethora of channels that makes up income from fee and commission.
The real insight this particular component of gross earnings provides is that a spike in revenue generated indicates increasing/increased customer account activity. The more a customer maximizes the usage of an account’s product and facilities, the more the revenue earned from this segment. Thus, earnings from fees and commissions are so overriding due to their apparent controllability.
For example, a bank could make the decision to purely pursue and aggressively drive the usage of its ATM debit card and promptly see the revenue from commission rise. Furthermore, an increased rate of card production and collection necessitates usage and consequently means more money is earned as card maintenance fees.
The fact that gross earnings reduced mostly from fees and commissions should be a telling concern for the Management of Fidelity Bank Plc. Post covid-19 would birth the dawn of a new era for business processes. The management must guarantee the usability of its electronic banking channels, promotion of its cards, and with urgency, implement improved service delivery mechanisms to ensure that it is the first port of call to customers for general payments and remittances.
These measures are of grave significance in the bid to bridge its widened fee and commission income gap.
Holistically, in the 9 months ended September, it is worthy of note that the bank made certain advancements. Customer Deposits, Net Loans and Total Assets all grew in double digits. Customer Deposits grew by 22.3% from N1.2billion to N1.5billion, Total Assets also rose by 21% from N2.1billion in 2019 to N2.5billion, and Net Loans rose by 12.9% to N1.3billion from N1.1billion.
Airtel is paying up its debts
Airtel’s annual report revealed that the company has a repayment of $890 million due in May, as well as, an installment of $505 million due in March 2023.
Airtel’s presence in 14 countries from East Africa to Central and West Africa would have been impossible without relevant financial investments. But, while the funds have been key to its growth in the past few years, many of its financial obligations are starting to mature quickly.
The Covid-19 pandemic has had negative economic effects on different sectors of the economy; however, the resilience of the telecom sector is evident in an increase in Airtel’s income. The overall performance of Airtel increased with a revenue growth in constant currency of 19.6% in Q2 compared to 16.4% recorded in Q1, while revenue on reported basis increased by 10.7% to $1.82 billion, with Q2 revenue growth of 14.3%.
Unilever Nigeria Plc: Change in management has had mixed impact
9 months into the change of management, Unilever Nigeria Plc’s performance in Nigeria has been largely underwhelming.
Change in the management of a company is never a walk in the park. Transitions usually take time to yield the desired results. Organizations can look to past successful managerial transitions for inspiration, but not for instruction because there is no defined playbook. The decision to replace Mr Yaw Nsarkoh, who served as the Managing Director of Unilever Nigeria Plc until the end of 2019 was plausible, but adjustments were never going to be an easy task.
Mr Nsarkoh had served as Managing Director of the company for 5 years and steered the course of its proceedings with remarkable skill up until the financial performance disaster which culminated in his resignation on November 28th, 2019.