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.

Revenue drop

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, its 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.

Flashback

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.

Consequences

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.

What next?

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.