Guinness Nigeria: Q3 loss eats up profit

Guinness Nigeria’s profit slump in the second quarter extended into a loss in the third, erasing part of the second quarter profit close. The brewing company had suffered a 65.5% profit fall in the second quarter ended December 2015 and a heavier year-on-year drop in the third quarter has left the company at the edge of profit and loss. The chance is high for swinging into a loss at full year after a sustained drop in profit for the past three years running.

The company’s troubles reflect the total industry strain. The breweries sector is moving from stagnation since 2013 to a decline, which is hurting sales volume and squeezing margins for all the operators. Low consumer spending is to blame for inability of even consumer facing industries to sell. Rising consumer prices and growing volumes of unpaid workers’ salaries in public and private sectors appear to hurt brewing companies more than the others.

Competition has intensified in the sector and companies are incurring greater costs to generate a naira of sales revenue than previously. Guinness lost 18% of sales revenue on year-on-year basis at the end of the third quarter in March 2016 and closed the period with a turnover of N69.62 billion.

An improvement in sales revenue at the end of the last financial year raised some hopes that growth might resume after two years of revenue losses. The results so far indicate to the contrary – the strongest drop in sales revenue in recent years looks very likely for Guinness Nigeria at the end of the current financial year in June. Sales revenue is projected at N92 billion for Guinness Nigeria for the 2015/16 operations. This will be a drop of 22.4% from the peak sales revenue of N118.5 billion the company posted last year. It will also be the lowest revenue figure for the company in many years.

Falling revenue has hurt profit performance badly and this is the picture for brewing companies generally. The operators here cannot easily cut costs to defend margins. The business runs on considerable short- and long-term borrowings and high finance charges and other expenses have undermined the bottom line.

The company closed the third quarter trading with a net profit of N864 million, a sharp fall of 83.4% from the corresponding figure of N5.22 billion in the same period last year. It is also a drop of 26.3% from the closing net profit figure of N1.17 billion in the second quarter. This means the third quarter operations ended in a loss.

The full year profit outlook for the company is uncertain with a good chance of a further loss in the final quarter. A further loss in the final quarter will mean little or nothing at all to show in the bottom line. Even with a profitable operation in the final quarter, a reasonable profit cannot be expected unless a windfall happens for the company.

The summary of the cost-income relationship of the company in the current financial year is that sales revenue is dropping but costs aren’t coming down as fast as revenue. Cost of sales, for instance, went down by 12.6% year-on-year compared with a drop of 18% in sales revenue during the same period. This means a naira of sales cost more to produce this year than in the preceding year. Gross profit margin therefore declined from 47% in 2015 to 43.5% over the review period.

Marketing and distribution expenses declined even less rapidly than sales revenue at 9.4% year-on-year, indicating an increased share of sales revenue was dedicated to marketing and distribution expenses during the period. The same applies to administrative expenses, which declined less rapidly still at 8.2%.

The only cost saving in the year came from net finance charges, which dropped ahead of revenue at 30.8% at the end of the third quarter. This reflects an increase of 40% in finance income during the period.

The company’s balance sheet borrowings have increased with short-term debts rising by over 81% to N12.62 billion and bank overdraft jumped four times over to N5.84 billion. Long-term borrowings also grew by 24.3% to N15.22 billion.

Guinness has lost profit margin from 6.1% at the end of the third quarter last year to 1.2% this year. Earnings per share has fallen from N3.46 billion to 57 kobo over the period. The outlook for the full year earnings per share position is uncertain. The company earned N5.17 per share at the end of the last financial year and gave out N3.20 per share in cash dividend.