GlaxoSmithKline may post lowest profit in four years

GlaxoSmithKline Consumer Nigeria has grown profit every year over the past three years but the pharmaceutical company appears to have lost the growth momentum in 2014. The company experienced a slowdown in sales revenue growth in the course of last year’s operations and costs grew ahead of income. That lowered profit margin to the lowest level in many years. Interim reports showed a sustained drop in profit, which is likely to lead to the lowest profit since 2011.

Mr. Dayanand Sriram, the new managing director of the company, ended third quarter operations with a step up in profit growth from the second quarter performance. If he sustains the improvement in the final quarter, profit may be better than estimated. In any event, last year seems to be one of the company’s most challenging operating periods. Innovative approaches are needed to grow sales volume ahead of operating costs and therefore reinforce profit growth.

The company ended third quarter operations with a turnover of N23.21 billion, which is an increase of 8.8% over the corresponding figure in 2013. Based on the third quarter growth rate, sales revenue is estimated at N32.2 billion for GlaxoSmithKline Consumer Nigeria in 2014. This will be an increase of 10.3% over the closing revenue figure in the preceding year, which will be a slowdown from the annual growth of 15% in 2013. The company has maintained stable growth in sales revenue over the past five years, as new product launches have led to revenue base diversification and some gains in market share.

The company continued to lose significant profit as per the interim reports against the improvement in revenue. After tax profit dropped by 39.5% year-on-year in the second quarter and at N1.48 billion in the third quarter, it was a drop of 23.3% year-on-year. As much as N619 million of the profit was earned in the third quarter, raising hopes for further accelerated growth in the final quarter.

After tax profit is estimated at N2.14 billion for GlaxoSmithKline Consumer Nigeria at the end of 2014. This will be a drop of 26.7% from the peak profit figure of N2.92 billion the company reported in 2013. In the event of a further step up in the last quarter, profit may be reasonably better than estimated.

The overall performance picture of the company in 2014 is growing revenue and declining profit. Rising cost is to blame for this but decelerating revenue growth also plays a role. The company is generating the naira of sales at a higher cost than previously. Cost of sales grew by 18.6% to N15.33 billion year-on-year in the third quarter, more than twice as fast as sales revenue. That raised the proportion of sales revenue devoted to cost of sales from 60.6% in September last year and from 60.2% at the end of 2013 to 66% at the end of the third quarter. Gross profit margin has therefore declined from 39.4% to 34% over the review period.

Selling and distribution expenses also grew ahead of sales revenue at 11.6% compared to the 8.8% growth in sales. It therefore claimed an increased share of sales revenue. A drop of 14.7% in administrative expenses failed to counter the increases in cost of sales and selling/distribution expenses. Operating profit therefore dropped by 27.9% to N1.95 billion during the period. The company has a major operating advantage in having insignificant interest expenses and is therefore operating at a net interest income position. Its balance sheet shows no interest bearing debts.

The cost-income structure of the company in 2014 tilted to the detriment of profit margin. Net profit margin dropped from 9% in September 2013 to 6.4% in 2014, the lowest figure in many years. Inability to defend profit margin was the major operating weakness of GlaxoSmithKline Consumer Nigeria in 2014.

Major developments in the balance sheet as at the end of the third quarter include a rise of 78.5% in trade and other receivables to N7.24 billion, an increase of 18% in inventories to N6.63 billion, and a drop of 58.3% in cash and bank balances. Trade and other payables also grew by 26% to N13.59 billion at the end of September. These changes led to adverse cash flow with a net cash decrease of over N2.28 billion during the period.

The company earned 155 kobo per share at the end of the third quarter, a drop from 202 kobo in the same period in 2013. Earnings per share is estimated at 224 kobo for the company in 2014. That will be a drop from N3.05 it earned at the end of 2013 – the lowest earnings per share since 2011. Dividend per share has been maintained at N1.30 in the past two years.