Guinness Nigeria’s profit down to lowest in eight years -THE CITIZEN

Guinness Nigeria closed its 2014 operations in June with a lower profit figure than recorded any time since 2007. The brewing company lost both sales volume and profit for the second year with turnover falling below the level four years ago in 2010. There is operating pressure from both sides of converting assets into revenue and in converting revenue into profit. Balance sheet debts have expanded and interest cost is consuming an increased proportion of revenue.
Mr. Seni Adetu, the company’s managing director/chief executive officer, has a big battle to fight in the competitive arena to recover market share in order to reverse the dwindling fortunes of his company. The weak consumer spending in the economy isn’t a sufficient explanation for the sustaining loss of sales volume. Key competitors are able to achieve new peaks in sales revenue in recent years and current interims indicate sustaining growth.  Adetu apparently needs to take another look at his company’s products, pricing and distribution network.
Guinness Nigeria closed its 2013/14 financial year at the end of June with after tax profit of N9.57 billion. This is a drop of 19.3% year-on-year and a further fall from the company’s peak profit figure of N14.93 billion reported in 2012. It is the lowest profit the company has posted since 2007. The company lost its profit growth momentum in 2010, as revenue growth forces began to weaken.
Its main competitor, Nigerian Breweries, grew after tax profit by 13.2% in 2013 and is looking forward to an accelerated growth this year. International Breweries recorded a decline of less than 10% in after tax profit in its 2013/14 financial year, which was after an outstanding growth in the preceding year.
Declining profit capacity is a factor of both dropping sales revenue and relatively rising operating cost. Turnover went down by 10.8% to N109.20 billion at the end of the 2014 financial year. This is a further drop from the peak sales revenue of N123.7 billion the company generated in 2012. The company’s 2014 turnover is slightly lower than its revenue figure four years ago in 2010. Both Nigerian Breweries and International Breweries grew sales revenue every year over the past five years. This is an indication of a continuing loss of market share by Guinness Nigeria.
The loss of turnover in 2014 is against an increase of 9.3% in asset base to N132.33 billion in the year. Asset turnover has therefore declined from 1.0 to 0.8 over the review period, indicating a fundamental weakness in the productivity of the naira of assets employed in the business. There are concerns as well that the growth in assets is driven by the most liquid assets rather than the capacity building plants and equipment. This is an indication that the structural changes needs for a turnaround aren’t happening yet.
The drop in profit is also a factor of relatively rising cost, which is led by interest expenses. Interest cost rose by 13% to N4.44 billion during the year to claim 4.1% of sales revenue against 3.2% in the preceding year. Rising interest expenses follows rising balance sheet debts. A drop of 29% in short-term borrowings to N11.94 billion is more than countered by a rise of 212% in long-term debts to N27.43 billion.
Further incursion on revenue came from distribution/administrative expenses, which was flat at N35.94 billion against the decline in turnover. Its share of sales revenue therefore grew from 29.4% to 32.9% over the period. Earnings pressure was further extended by a drop of 10% in other income at N734 million. Costs are not that excessive but appear to be high relative to the declining sales revenue situation.
A favourable cost behaviour came from cost of sales, which declined ahead of sales revenue at 13% to N57.87 billion. This improved gross profit margin from 45.8% in 2013 to 47% in 2014. The revenue saved was however claimed by the cost increases, leading to a drop of 31% in pre-tax profit. A drop of 59% in tax expense prevented a more rapid drop in after tax profit than recorded in the year.
Other major developments in the balance sheet include an increase of 27% in trade debtors and other receivables to N21.08 billion, a near doubling of cash and bank balances at N6.29 billion and a drop of 61% in current tax liabilities to N1.58 billion.
Earnings per share dropped from N7.93 in 2013 to N6.36 in the 2014 financial year. This is a continuing fall from N9.91 in 2012. The company has proposed a dividend of N3.20 per share for shareholders in the company’s books by 13th October while payment will be made on 16th November 2014. It had paid a dividend of N8.25 in the preceding year.
The current financial year places a question mark on Guinness Nigeria as to whether the downward trend in earnings will sustain or whether there would be a turnaround. The company’s management needs to end the declining trend in sales volume, which will prevent further encroachment of costs into revenue. Costs are not that high except in the context of the falling revenue situation. The effort to control costs isn’t going to be felt on the bottom line until revenue begins to grow once again.