TheCable

Guinness Nigeria is still headed downward in terms of profit performance in the current financial year ending June. The brewing company closed its last financial year with the lowest profit figure in eight years and further drop looks quite likely this financial year.

Based on the second quarter growth rate, the company is likely to post the lowest profit in nine years. It is operating in a market besieged by competitive battle, which is hurting sales revenue and constricting margins.

John O’Keefe, the company’s managing director/chief executive officer, needs to employ new strategies to recover and defend market share in the highly competitive market. The slow growth in sales volume has resulted in increased costs per unit of sales.  O’Keefe’s main challenges are how to grow sales revenue ahead of cost of sales and reduce marketing and distribution expenses relative to sales.

Guinness Nigeria closed its second quarter operations at the end of December 2014 with after tax profit of about N3.40 billion. This is a drop of 32% from the corresponding figure in the prior year and a sustaining drop from the company’s peak profit figure of N14.93 billion in 2012. It had suffered a drop of 19.3% in after tax profit to N9.57 billion in the 2013/14 financial year.

Based on the growth rate in the second quarter, after tax profit is projected at N7.1 billion for Guinness Nigeria in 2015.  This will be a drop of almost 26% following a drop of about 25% in the preceding year.

The weakening profit capacity is explained by weakness in sales revenue and relatively rising operating cost. Turnover went down by 10.8% to N109.20 billion in 2014, a further drop from the peak sales revenue of N123.7 billion the company generated in 2012. The company’s revenue growth momentum has been weak since 2010 and costs are rising continuously in proportion of turnover.

Based on the second quarter growth rate, sales revenue is projected at N112.54 billion for Guinness Nigeria in 2015. This will be a marginal increase over the revenue figure in 2014 after it suffered declines in the past two years.

Weakness in revenue performance is confirmed by declining productivity of assets employed in the business. Asset turnover has continued to decline from 1.0 at the end of 2013 financial year to 0.8 in 2014 and further to 0.41 at the end of the second quarter.

Rising costs, led by interest expenses, compounded the problem of revenue weakness. Net interest expenses rose by 28.5% to N2.32 billion during the review period, claiming an increased proportion of sales revenue. Rising interest expenses is despite a reduction in the company’s balance sheet debts from the closing figure at the end of the last financial year. The company’s total loans and borrowings have declined by 10% to about N27.3 billion.

Further incursion on revenue came from administrative expenses, which grew by 22.5% to N6.02 billion. Its share of sales revenue increased from 9.3% to almost 11% over the period. Earnings pressure was further extended by a higher growth of 7.4% in cost of sales than sales revenue.

Other major developments in the balance sheet apart from the decline in loans and borrowings include an increase of over 30% in trade debtors and other receivables and a moderate decline in cash and bank balances. The company remains under cash flow pressure though an improvement in cash generated from operations and declines in cash used for investing and financing activities reduced the pressure considerably.

Earnings per share dropped from N3.32 in the second quarter of last year to N2.26 at the end of December. This is a continuing drop from N7.93 at the end of 2013 financial year, N6.36 in 2014 and N9.91 in 2012. It paid a dividend of N3.20 per share in 2014, down from N8.25 in 2013.

The critical action required by management is to arrest the declining trend in sales volume and rebuild the company’s revenue capacity. This is all that is needed to prevent further encroachment of costs into revenue. Costs do not appear excessive except in the context of the revenue weakness. Management needs less effort in controlling costs than in propping up sales revenue.