International Breweries: Interest and taxes eat up profit

Lenders and tax authorities have claimed all profit before interest and taxes of International Breweries at the end of the third quarter and left a loss of N437 million for shareholders. Everything else in operations has gone reasonably well for the brewing company in the current financial year ending next March. There is an outstanding growth of 55% in operating profit and a top growth record of 56% in pre-tax profit at the end of the third quarter in December 2016. 

Finance charges, led by exchange losses, however multiplied more than four times and claimed 90% of the pre-interest profit. The balance was insufficient to meet tax expenses, resulting in the first loss record the company has seen in several years. The company’s borrowings have expanded over the nine months of trading but management has restructured its debt profile to cut down on bank overdrafts and increase long-term borrowings.

The company achieved a top growth record of 38% in sales revenue year-on-year at the end of the third quarter, which indicates a strong gain in market share in a tough breweries industry. While the giants in the business are losing business in a hostile competitive clash, the medium operators have seized the opportunity to advance market share.

Sales revenue amounted to N22.74 billion for International Breweries at the end of the third quarter. This is already quite close to the full year turnover of N23.27 billion it reported at the end of the 2016 financial year. The full year outlook indicates sales revenue in the region of N30 billion for the company at full year. That will be an increase of 29% – the strongest revenue growth for the company in four years. There has been an upward creep in sales revenue over the past three years.

The company encountered a sharp increase of 45% in cost of sales during the review period, well ahead of the growth in sales revenue. That reduced the gross profit margin slightly but still permitted an impressive growth of 31% in gross profit to N10.88 billion at the end of December.

Marketing expenses and administrative cost moderated significantly relative to revenue during the period, which enabled the company to grow operating profit well ahead of revenue. At N5.36 billion, operating profit rose by 55% year-on-year at the end of the third quarter.

An upsurge in finance expenses, driven by exchange losses, disrupted the flow of revenue into the bottom line. Finance expenses roses by 317% to N4.62 billion during the period and claimed 90% of profit before interest and taxes. That caused a drop of over 78% in pre-tax profit to N520 million, which was insufficient to cover tax expenses of N957 million. That resulted in a net loss of N437 million for International Breweries at the end of the third quarter. The company has remained profitable since it restructured operations in 2011.

The company has cut down bank overdraft, which was the main interest bearing debt in the preceding financial year, by 70% to N2.57 billion at the end of the third quarter. It has increased long-term borrowing to about N8 billion. The changes are expected to reduce its finance expenses.

Seasonal sales in the third quarter improved the overall performance considerably, having contributed a net profit of N1.44 billion that cut down the cumulative loss position. The renewed strength in the third quarter is expected to extend to the final quarter, leaving a fair change of returning to profit at full year.

The company closed the third quarter with a loss of 13 kobo per share compared to earnings per share of 52 kobo in the same period in the preceding year. It earned 59 kobo per share at the end of the last financial year and paid a cash dividend of 32 kobo per share.