TheCable

A high rise in foreign exchange losses ate up all of GlaxoSmithKline Consumer Nigeria’s [GSK] gross profit at the end of the second quarter in June and threw the company’s bottom line into a deep red. The foreign exchange losses swelled virtually uncontrollably from only N175 million in the same period last year to N4.52 billion at the end of June 2016.

That caused over 699% upsurge in other losses, which amounted to N4.62 billion at the end of the second quarter.  That was well above the company’s gross profit figure at the end of the period. Declining sales revenue and rising input cost have further extended the operating challenges for the pharmaceuticals company this year.

Sales revenue went down by 9.6% at the end of the second quarter to N13.97 billion. Based on that growth rate, GSK is expected to close the current financial year with a turnover of N29.6 billion. That will be a decline of 3.4% from the sales revenue of N30.64 billion the company posted in 2015.

Sales revenue only edged up in 2015 and the company managed to maintain a slowing trend of continuing improvement over the past five years. Revenue growth has been weak in recent years and the prospects for moving from flat growth to a decline are high for GSK in the 2016 financial year.

Over the past three years, turnover has hovered between N29 -30 billion and a decline this year will most likely send it back to the 2013 level.

Cost of sales failed to go down as fast as revenue and that compressed gross profit margin. At N9.92 billion, cost of sales went down by 3.5% compared to the drop of 9.6% in sales revenue. That resulted in a rapid drop of 21.7% in gross profit to N4.04 billion at the end of June 2016. Gross profit margin declined from 33.4% to 28.9% over the period as cost of sales claimed an increased share of sales revenue.

The entire gross profit was insufficient to meet other losses of N4.62 billion – which was an upsurge of nearly 700% from unrealized foreign exchange losses of N4.52 billion at the end of the second quarter. This is an unexpected swelling from only N20.6 million in foreign exchange losses in the entire 2015 financial year.

Management kept selling and distribution expenses flat at N3.02 billion at the end of June but administrative expenses could not be prevented from almost 9% increase. A recovery of N1.2 billion of excess accruals for lincence fee came like a highly needed windfall. It therefore went to some extent to reduce the full effect of the foreign exchange losses on the bottom line.

Yet, GSK ended up with an after tax loss of over N3.7 billion at the end of the second quarter. This is against a net profit of N297 million in the same period last year and the closing net profit figure of N965 million for 2015.

GSK suffered a drop in profit for the second year in 2015 from its peak profit figure of N2.92 billion in 2013. Inability to grow sales revenue has been constraining profit margin in the past three to four years. This year, declining revenue and unanticipated exchange losses have thrown the company off target. The prospects for returning to profit in the second half of the year appear quite slim for GSK.

Earnings per share has dropped from 32 kobo at the end of the second quarter of last year  and 96 kobo at full year to negative N3.10 at the end of June 2016. The company paid a cash dividend of 30 kobo for its last year’s operations.