Despite high operating expenses, resilient companies record higher revenues in Q2 2022

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The manufacturing sector of the Nigerian economy operated under very stringent conditions in the second quarter financial period ended June 30, 2022 as operating expenses soared significantly. All the companies captured in this report also suffered huge losses due to instability in the exchange rate market. Ironically, the resilient companies still managed to squeeze out water from stone as most of them declared profit as consumers soak the pressure of price increase. BAMIDELE FAMOOFO writes.

Uba Group

On the average, operating expenses in Nigeria’s manufacturing sector increased at about 30 percent in the second quarter of the financial year 2022. Breakdown of items which contributed largely to costs of production as disclosed by some companies whose financial reports were analysed by The Point, showed that increase in the price of diesel, foreign exchange differentials, rising cost of borrowing and logistics accounted for a huge chunk of operating expenses in the review period.

Meanwhile the selected companies which cut across key sectors of the economy were able to declare profit in the second quarter period with consumers being at the receiving end. The companies considered in this report were able to grow their revenue as a result of increase in prices of their products- a brunt which consumers had to bear as they are forced to pay more for the commodities they consume.

According to the National Bureau of Statistics, Nigeria’s inflation figure rose to 18.6 percent in June from 17.76 percent in May. The key drivers of inflation are exchange rate depreciation, high energy cost, increasing financing of deficit by the Central Bank of Nigeria, problem of insecurity which is affecting agricultural production and high cost of logistics.

Muda Yusuf, Founder/CEO, Centre for the Promotion of Private Enterprise, noted that “high inflation continues to take a toll on businesses, production costs have been increasing, operating costs across sectors have become elevated, profit margins are declining, there is a slump in turnover and sales and business sustainability is at risk in many segments of the Nigerian economy.”

Yusuf is worried that investors across sectors in the economy are concerned about the high and increasing energy costs especially the cost of diesel which has gone up by over 300 percent, the cost of aviation fuel which has gone up by another 300 percent, the cost of gas which has increased by over 100 percent in the second half of the year 2022.

“The frequent collapse of the National Grid makes it even more difficult for many businesses to continue to sustain their operations, creating serious business sustainability concerns among investors. Costs have become elevated, profit margins are being eroded, purchasing power is weakened and business sustainability is at risk. The cost of transportation has reached unprecedented levels especially the cost of haulage because of the escalating cost of diesel,” he added.

“High inflation continues to take a toll on businesses, production costs have been increasing, operating costs across sectors have become elevated, profit margins are declining, there is a slump in turnover and sales and business sustainability is at risk in many segments of the Nigerian economy”

Performance at a glance

Flour Mills Nigeria Plc
Multinational food and agro-allied conglomerate, Flour Mills Nigeria Plc, grew its revenue by 45.3 percent year on year (y/y) driven by substantial growth across its food business which recorded a 45.1 percent growth y/y while Agro-Allied grew 37.7 percent, Sugar (+64.1% y/y), and Support services (+3.6% y/y) business segments.

Management in its press release attributed the top-line increase to volume growth and a favourable mix. “We believe the higher volumes were driven by the (1) increased penetration into new and rural markets, (2) continuous investments in its route-to-market strategies with the establishment of 8,000 new outlets, and (3) launch of new SKUs in the starch and fertilizer segments. On a quarter-on-quarter basis, revenue grew marginally by 0.2%,” it said.

But the company’s operating expenses recorded a phenomenal growth to the tune of 52 percent y/y in the review period. Management explained that pressure came from increase in international wheat prices (average price: USD1,077.58/BU in Q1-23 vs USD 680.60/BU in Q1-22) as the company’s primary raw material propelled a faster growth in the cost of sales (+47.3% y/y) relative to revenue (+45.3% y/y).

“We also highlight further cost pressures from the pass-through impact of currency depreciation and the highly inflationary environment. Consequently, EBITDA (-104bps) and EBIT (-43bps) margins came in lower at 6.4 percent and 4.9 percent, respectively, amid a 52.0 percent y/y increase in operating expenses,” the company explained.
In addition, cost of servicing bank loans increased as net finance costs increased significantly by 87.1 percent y/y, following a 79.1 percent y/y increase in finance costs and a 35.1 percent y/y decline in finance income.

“We believe the higher finance costs were driven by the increased debt profile (Q1-23: N322.50 billion vs FY-22: N158.80 billion). The addition of Honeywell’s debt (NGN88.20 billion) to the books accounted for the significant growth in debt,” management explained.

Despite all odds, Flour Mills Nigeria Plc recorded a profit after tax of N5.5billion in Q2, 2022 as against N5.45billion in Q1, 2022.

Meanwhile, analysts have said the company’s elevated costs which continue to inhibit margin expansion remains a cause of concern.

“With global wheat prices expected to temper following the Russia/Ukraine grain export deal, we believe there might be a respite in terms of the cost of sourcing the product, though FX illiquidity and the highly inflationary environment remain key pressure points,” analysts said.

International Breweries Plc
International Breweries Plc, one of the leading brewers in the country, also grew revenue by 25.3 percent y/y (H1-22: +35.9% y/y) in Q2-22, at a slower pace than NB’s topline growth (+31.6% y/y).

Analysts at Cordros Research said the company’s revenue growth could be attributed to resilient consumer demand and single-digit price increases implemented across product categories to cover the excise duty hikes on non-alcoholic beverages by N10 and alcoholic beverages (beer & stout: N40.00/cl) in the period, and rising costs of raw materials.

“CBN"

“Net finance cost surged (+1218.0% y/y), as higher finance costs (+803.1% y/y) offset the upsurge in finance income (+403.8% y/y) in Q2-22. We highlight that higher interest expense on its lease (+743.6% y/y) and financial liabilities (+830.9% y/y) influenced the higher finance costs. On the latter, we suspect that the company recorded some FX losses due to exposure from its foreign currency-denominated payables. Consequently, the company’s pre-tax loss declined by 99.8 percent y/y to N32.07 million in Q2-22. Following a tax charge of N352.90 million, the company recorded a loss after tax of N384.97 million in Q2-22 (vs loss after tax of N11.31 billion in Q1-21)”, Nigerian Breweries explained.

Nestle Nigeria Plc
Q2-22 revenue of Nestle Nigeria Plc grew by 33.3 percent y/y, driven by substantial growth across the Food (+35.9% y/y | 59.1% of revenue) and Beverages (+29.7% y/y | 40.9% of revenue) business segments.

It is believed that price increases implemented across the company’s product portfolio drove strong growth in these segments.

Sequentially, revenue grew marginally by 1.8% q/q, underpinned by the slower pace of growth from the Food (+0.3% q/q) and Beverages (+4.1% q/q) segments relative to Q1-22. Gross profit margin shrank by 471bps y/y to 32.9% in Q2-22, following faster growth in the cost of sales (+43.4% y/y) relative to revenue (33.3% y/y).

The higher cost is reflective of the effects of inflationary pressures. Consequently, EBITDA (-178bps) and EBIT (-140bps) margins both declined to 19.7 percent and 17.6 percent respectively, with further pressures emanating from operating expenses (+9.6% y/y) – marketing and distribution expenses (+20.7% y/y).

NESTLE’s net finance cost grew by 137.5 percent y/y in the quarter, owing to a 134.6 percent y/y increase in finance cost amid a 119.5 percent y/y increase in finance income.

Overall, pre-tax profit grew by 10.5 percent y/y to N15.89 billion in Q2-22. However, a higher effective tax of 38.5 percent in the quarter compared to 35.1 percent in Q2-21 led to slower growth in profit after tax to N9.77 billion (+4.7% y/y).

Dangote Sugar Plc
Dangote Sugar’s revenue increased markedly by 41.0 percent y/y in Q2-22, supported by stellar increases across all its business segments – 50kg Sugar (+39.4% y/y | 96.1% of revenue), Retail sugar (+63.4% y/y | 2.0% of revenue), Molasses (+44.3% y/y | 0.7% of revenue) and Freight income (+268.4% y/y | 1.2% of revenue).

Net finance costs (+164.1% y/y) remained elevated, driven by a 174.2 percent y/y increase in finance costs, with finance income also growing significantly by 201.1 percent y/y in the period.

Overall, pre-tax profit grew by 137.0 percent y/y to N16.13 billion in Q2-22. Following a tax expense of N4.76 billion, profit after tax (+164.3% y/y) printed N11.37 billion in Q1-22.

“In addition, cost of servicing bank loans increased as net finance costs increased significantly by 87.1 percent y/y, following a 79.1 percent y/y increase in finance costs and a 35.1 percent y/y decline in finance income”

Guinness Nigeria Plc
Revenue increased by 28.9 percent y/y in 2022FY (2021FY: +53.7% y/y), buoyed by strong double-digit growth in its strategic focus brands (Malta Guinness and Guinness), local and imported spirits, and the ready-to-drink category. The growth across product categories benefitted from price increases, in spirits and beer categories. Similarly, on a quarter-on-quarter basis, revenue grew by 4.2 percent; the impact of a favorable brand mix.

Operating expenses grew by 40.3 percent y/y to N51.06 billion in 2022FY (2021FY: N36.38 billion), driven by increased spending on advertisement and promotional activities as marketing and distribution expenses rose by 50.2 percent y/y and 35.8 percent y/y, respectively.

Consequently, the growth in other income (+166.1% y/y to N2.74 billion) combined with the growth in gross profit (+59.0% y/y to N72.66 billion in 2022FY) proved sufficient in offsetting the impact of the rise in operating expenses.

Pre-tax profit grew by 310.3 percent y/y to N23.67 billion in 2022FY (2021FY: N5.77 billion). A tax expense of N8.02 billion resulted in a PAT of N15.65 billion (2021FY: N1.26 billion), representing a 1,146.8 percent y/y increase.

Nigerian Breweries PLC
Revenue grew by 31.6 percent y/y (H1-22: +31.0% y/y) in Q2-22.

It is believed that headline price increases instituted across NB’s product categories, particularly in the premium segment supported the topline growth. In addition, it is also believed that revenue would have benefitted from an increased volume outturn following the expansion activities at its Ama brewery and resilient demand from on-trade channels (hotels, bars, restaurants, clubs, etc.), which account for c.64.0% of beer industry sales. However, on a q/q basis, revenue declined by 1.1 percent.

Operating expenses increased by 42.0 percent y/y in Q2-22, resulting in an operating expense ratio of 33.1% (Q2-21: 30.8%). The growth in OPEX was due to a 52.1 percent y/y increase in marketing and distribution expenses (84.9% of total OPEX), reflecting the brewer’s continuous focus on increasing brand visibility.

Dangote Cement
The group’s revenue grew by 10.3 percent y/y in Q2 22, driven mainly by growth in its Nigeria operations (+18.3% y/y); growth from its Pan African operations (-6.8% y/y) faltered. The achieved revenue, when annualised, is above forecasts for FY 22 by 2.9 percent, owing to larger-than-expected price increases. The group recorded net finance cost of N26.83bn in Q2 22 from Net finance income of N700.00m in Q2 21, as it incurred a significant N22.44bn foreign exchange loss. Consequently, Profits before tax declined by 28.2 percent y/y. Despite the decline in tax expense in Q2 22 (-14.2% y/y), Net Income fell by 34.2 percent y/y.