Cadbury Nigeria has moved out of a net loss of N250.7 million in the second quarter into a profit level that keeps it on the edge of slipping off again. The beverage manufacturing company suffered a big profit slash last year and this year another major profit drop is keeping it swinging between profit and loss. The company returned to profit in 2010 after many years of sustained losses. It seems to have run out of the operating steam again that empowered its turnaround five years ago.

Management is keeping costs in check but the problem is stagnating sales revenue. It has not been able to grow turnover reasonably since 2012 and it closed 2014 operations with the lowest turnover in four years. A further drop happened at the end of the third quarter in September, indicating that the sales revenue could fall to the 2010 level at the end of 2015.

A robust finance income used to be a major strength on the income statement but that fell by 81% in 2014 and has fallen by another 63% as at the end of the third quarter. The robust cash flow and huge cash balances that used to produce huge interest income have thinned down considerably. The company hasn’t yet returned to the injurious bank borrowings that hurt it badly in the past but it may not be that far from it going forward. The ability to smell profit at all at this time rests on the absence of any finance charges.

Inability to grow sales revenue warrants a strategic look at the company’s products. Sales revenue closed 10% down year-on-year at N21.07 billion for the company at the end of the third quarter. The full year expectation is N29.2 billion – the same revenue figure it generated in 2010. It will be a decline of 3.3% from the sales revenue of N30.52 billion the company posted at the end of 2014. Sales revenue dropped by 15% in 2014 to stand at the lowest figure since 2011.

Cadbury Nigeria closed the third quarter operations with a net profit of N28.5 million, which is a drop of 98% from the net profit figure of N1.65 million in the same period last year. It is however a big recovery from loss of N250.7 million in the second quarter. The likely full year position is dicey, as it could swing to either side of profit or loss. After tax profit fell by 75% in 2014 from a peak figure of N6.02 billion in 2013 to N1.51 billion, the lowest profit in four years.

The ability to convert revenue into profit weakened considerably in 2014. Net profit margin sank from 16.8% in 2013 to 5% in the year. Profit margin has virtually thinned out at 0.1% at the end of the third quarter of the current year.

Apart from the decline in sales revenue, other incomes have also continued to drop. Finance income, which boosted the bottom line in 2013, dropped by 81% to N331 million in 2014. It dropped further by 63% to N114 million at the end of the third quarter. Also, other income, which dropped by 35% in 2014 is further down by 63% to N93 million at the end of September.

The large profit drop against a 10% drop in sales revenue is explained by sticky cost behaviour. Costs failed to go down with sales revenue and this is true of all the main cost lines of the company. Cost of sales was flat year-on-year at the end of the third quarter, caused nearly a drop of 26.5% in gross profit to N6.40 billion at the end of the third quarter.

Marketing and administrative cost was also flat at N6.38 billion over the same period, claiming 30.3% of revenue against 27.3% in the same period last year. The summary of the company’s operating story is that income lines are down and costs are sticky.

The company’s balance sheet was still free of interest bearing debts as at the end of September and this is a major operating advantage for the company. Since the company exited its balance sheet debts with fresh capital injection it has operated with an entirely debt free balance sheet.

Changes in the balance sheet have helped the company’s cash flow position significantly. Trade and other receivables have dropped by 19% to N4.96 billion from the closing figure last December and inventories are down by 4% to N2.30 billion during the same period.

Trade and other payables increased by 2% to N13.76 billion and cash and bank balances grew by 23% to N4.54 billion. These developments explain a drastic change from a net cash of only N37.8 million generated in operating activities in the prior year to a net cash generation of N1.94 billion at the end of the third quarter.