Dividend dips from 85% to 18%, heavy losses in powdered milk
Nestle profits plunge with margins under heavy pressure

Nestle Lanka Limited had seen profits plunging in the year ended December 31, 2001 to Rs. 77.5 million from Rs. 464.6 million a year earlier despite a 40% growth in turnover.

The company’s Chairman/MD, Mr. G. Tarnero, said that country conditions including negative growth in GDP had an adverse impact on Nestle’s performance.

"Our problems were compounded by the oil crisis, which led to higher raw and packaging materials prices and therefore to generally higher production costs. Additionally, the severe drought during the year crippled agricultural production and precipitated an acute power shortage,’’ he said.

On top of this, there had been a sharp depreciation of the rupee against the US dollar and other major currencies resulting in high interest rates and inflation.

"At the same time, both government and consumers showed a strong reluctance to accept higher retail prices. In addition, prices for milk solids rose as Europe was dropped from the list of suppliers after the outbreaks of foot and mouth disease and BSE,’’ Tarnero said.

"The combination of these political, macro-economic and sectoral factors essentially accounts for the erosion of our profit margins, during the year under review. Despite these setbacks, the profit available to your company for appropriation amounted to Rs. 99 million.’’

However, Nestle’s return to shareholders for the year under review was down to 18% from the massive 85% dividend the previous year.

A 10-year summary of the company’s performance published as part of the annual report indicates that the profit after-tax during the year under review was the lowest for a decade.

Tarnero said that the sale of Nespray full cream milk powder had recorded 32% growth compared to 17% the previous year. Nido, a premium quality full cream milk powder, had also registered an impressive 84% growth in sales.

"In spite of the good growth, the steep rise in milk solid prices and the strong resistance to retail price increases on the part of government and consumers, resulted in a downward pressure of our margins and contributed to a significant loss in our milk business,’’ the chairman said.

In the non-milk business, Nestomalt, the malted food drink which is a major money spinner on the Nestle portfolio, had sustained sales volumes despite stiff competition both from full cream milk powder manufacturers and competitors.

Nescafe had faced a difficult year due to the decline of the tourist industry but the coffee pre-mixed vending business had seen a remarkable increase in distribution in the rural market.

Tarnero said that although Maggi noodles and Maggi soup cubes had started the year with high growth, sales had slowed by mid-year due to tight economic conditions. Local sales of Maggi coconut milk powder had increased 28%.

The confectionery business had grown 50% during the year under review with widening distribution and improved visibility of the products with Kit Kat and Polo recording very good sales growth.

Tarnero said that the export business had registered 12.3% growth over the previous year with coconut milk powder doing well despite high prices of fresh coconuts and competition from Malaysia and the Philippines.

Rs. 50 million of the dividend payout of Rs. 96.5 mn. had been received from Eastern Food Specialties (Pvt) Limited, a BOI-approved wholly owned subsidiary of Nestle, manufacturing coconut milk powder at its Kurunegala factory for export.

Nestle SA is the major shareholder of Nestle Lanka owning 90.8% of the company’s equity. All other shareholders individually hold less than 1% with the second biggest shareholder, the Bank of Ceylon, owning 0.51% of the company’s equity.

The directors of the company are: Messrs. G. Tarnero (Chairman/MD), C. M. V. Donati, L. C. R. de C. Wijetunge, J. E. S. Constantine, R. D. P. Deraniyagala (Resigned 31.01.2002), S. Wickramasinghe (w.e.f. 01.02.2002) and A. R. Rasiah (Alternate to C. M. V. Donati).