N22.5bn FX loss overturns Flour Mills’ profit in Q1

Flour Mills of Nigeria Plc incurred a foreign exchange (FX) loss of N22.5 billion in its first quarter (Q1) operations following the devaluation of the naira — which overturned the company’s earnings story from a possible 52 percent leap in operating profit to a net loss of N9.3 billion.

The company’s management stresses that without the FX devaluation, operating profit would have advanced by 52 percent — which points to the region of N23 billion in Q1.

Instead, the Q1 interim financial report of the food and agro-allied company at the end of June 2023, shows a deep plunge of 53.4 percent in operating profit to N7.1 billion.

Net operating losses, fueled by the FX loss, multiplied close to 10 times and consumed more than one-half of gross profit.

The company’s management is hoping that the exchange rate of the naira will stabilise and the improving sales combined with cost savings strategies, will see it through to better earnings stories ahead.

The company is coming on quite strong in the topline reading with N456.4 billion raked in within the three months of operations. That represents an increase of 34.4 percent year-on-year, showing a sustaining strong growth in sales revenue for the fourth year running.

Flour Mills had closed the 2022/23 operations last March with 32 percent advance in turnover to stand in excess of N1.5 trillion. The company looks quite confident to drive sales to the region of N2 trillion in its current financial year ending March 2024.

The challenge is that rising costs are not letting management convert increasing sales into profit. That was equally the case last financial year when the 32 percent rise in sales produced only 5.4 percent improvement in profit for the year, amounting to N29.5 billion.

Apart from the foreign exchange loss, pressure came from three other key expense lines, which extended the impact of the exchange loss on the bottom line.

Cost of finance more than doubled at 104 percent to stand at N16.6 billion at the end of the Q1. That swallowed up the operating profit of N7.1 billion and created a pre-tax loss of N9.3 billion. Finance expenses were in the region of N56 billion for the last financial year.

Selling and distribution expenses grew by 29.5 percent to almost N6 billion, which did not permit a reasonable cost saving during the period.

Despite some moderation relative to sales, production cost grew by 32.6 percent to N406 billion, which remained quite large at 89 percent of sales revenue.

Notwithstanding the low margin, gross profit grew strong enough at 51.3 percent to close at N50.3 billion for the quarter.

Some cost savings were achieved from administrative expenses, which grew by 12.3 percent to N11.3 billion as well as net impairment loss on trade receivables — that dropped by 82.5 percent over the review period.

Two main factors responsible for the company’s loss in Q1 are, therefore, the foreign exchange loss and the huge finance cost incurred during the quarter.

The company’s borrowing remains large at over N383 billion at the end of Q1, slightly up from N382.5 billion at the end of last financial year. This excludes lease liabilities of over N23 billion.

The earnings outlook for Flour Mills for the coming interim hinges on the two critical factors of FX loss and mounting finance expenses.