7-Up: profit down to three-year low

Seven Up Bottling Company has ended its 2015/16 financial year with the lowest profit figure in three years, as we had forecast at the end of the company’s third quarter trading last December. The soft drinks company lost 53% of its profit in the preceding year following inability to grow sales revenue in the face of two major rising costs.

The company’s high growth momentum and consistent gains in market share weakened in the preceding financial year when both revenue and profit slowed down. Further slowdown in sales revenue happened in the just concluded financial year, resulting in a sharp drop in profit.

The company closed the financial year with sales revenue of N85.63 billion, a slowdown in the growth rate from 5.9% in the preceding year to 3.9%. This is just 4% ahead of our full year revenue projection of N82.2 billion for the company. The company’s critical selling period is its final quarter – January to March but the seasonal sales failed to happen for the company this year. This is in spite of the extended hot weather condition, which is a reflection of the depleted consumer spending power in the present economic situation.

Two major cost elements – cost of sales and finance charges grew well ahead of sales revenue and therefore claimed increased proportions of earnings. The result is a significant loss of profit margin during the year. The company maintained a trend of growing profit since 2011/12 financial year but the last financial year marks the end of the good trend. Also, the stable growth in sales volume seen for many years has weakened considerably in the last two years.

The company has succeeded in putting all other costs under control except cost of sales and finance expenses. Cost of sales rose by 16.6% at the end of the year – more than four times the growth rate in sales revenue during the same period. It therefore claimed an increased share of turnover from 63% in the preceding year to 70.8% at the end of the 2016 financial year.

The rise in input cost resulted in a drop of about 18% in gross profit to a little over N25 billion at the end of the financial year. Gross profit margin went down from about 37% to 29% over the review period. This is a sustained decline for the second year.

The second cost element that has undermined the company’s profit capacity is finance cost, which rose by about 32% to N3.24 billion at the end of the financial year. This is however a sustained slowdown from 92% growth in the second quarter and 42% rise in the third quarter. At over N19 billion, the company’s balance sheet debts are only slightly reduced compared with the closing figures for the prior financial year.

The company reported a net profit of about N3.35 billion at the end of the 2016 financial year in March, which is a drop of 53% from the profit figure of roughly N7.13 billion in the preceding year. This is virtually at par with our after tax profit projection of N3.1 billion for Seven Up Bottling Company for the year. The company had improved after tax profit by 11% in the 2014/15 financial year.

In addition to the constraint in growing earnings, the ability to convert revenue into profit has weakened further for Seven Up on account of rising costs. Net profit margin is down from 8.6% at the end of the prior financial year to 3.9% at the end of the 2016 financial year.

The company shows a significantly improved cash flow position with an increase of  46% in net cash generated from operating activities to about N17 billion, a drop of over one-half in net cash utilised for investing activities and a reduction also in net cash utilized for financing activities. The company ended the year with a net cash increase of N7.58 billion, a turnaround from a net cash decrease of N5.58 billion in the preceding year.

Management demonstrated effective cost controls in the other cost lines to counter the effects of rising input cost and finance charges. Selling/distribution expenses declined by 8.6% to N11.80 billion and administrative cost was flat at N6.57 billion during the period.

Earnings per share amounted to N5.23 for Seven Up at the end of the year, a drop from N11.12 in the preceding year. The company has proposed a cash dividend of N2.75 per share, improving from N2.50 per share for the prior financial year.