Guinness Nigeria: Increase in finance cost, cost of sales erode profit
By Philemon Adedeji
Guinness Nigeria Plc, in its third ended March 31, 2023 reported a decline in profit before tax (PBT) and profit after tax (PAT) amid a significant increase in finance cost and cost of sales (CoS).
One of the top brewers in Nigeria and a subsidiary of Diageo Plc reported N9.94 billion profit before tax in Q3 2023, a decline of 55.7 per cent from N22.47 billion reported in Q3 2022, while profit after tax dipped by 61.6 per cent to N5.877 billion in Q3 2023 from N15.28 billion reported in Q3 2022.
Despite the decline in profits, Guinness Nigeria declared N172.48 billion revenue in Q3 2023, an increase of 8.17per cent from N159.44 billion in Q3 2022.
Revenue generated in Nigeria increased to N170.8 billion in Q1 2023 from N157.97 billion in Q 2022, while export closed Q3 2023 at N1.67 billion from N1.48 billion reported in Q1 2022.
The cost of sales reported by Guinness Nigeria, however, grew by 9.61 per cent to N112.1 billion in the period that ended March 2021 from N102.26 billion in the same period of 2022, thereby accounting for 65 per cent of the total revenue reported during the period.
This brings its gross earning to N60.39 billion in Q3 2023, a growth of 5.6 per cent from N57.18 billion in Q3 2022.
The steep contraction in gross profit margin (-759 basis points to 33.5 per cent) in Q3 2023 from 41.1 per cent in Q3 2022, reflecting the faster increase in cost off goods consumed (+21.2per cent) relative to revenue growth (+7.4per cent).
Non-core income increased to N1.48 billion in Q3 2023 from N1.34 billion in Q3 2022, driven by Gain on disposal of property, plant and equipment that closed Q3 2023 at N1.13 billion from N483.45 million in Q3 2022.
Furthermore, the company’s operating expenses increased to N44.4 billion in the period under review from N35.64 billion recorded in the same period of 2022, with marketing expenses accounting for the larger chunk of the amount reported.
The beer maker saw its finance income and finance expenses surge by 67.4 per cent and 523.4 per cent respectively in the month period that ended March 2023 on the back of Interest expense on loans and borrowings and loss on remeasurement of foreign currency balances.
Further down, a net finance cost of N2.17 billion was recorded in Q3 2023 against a net finance income of N202.82 million in Q3 2022, comprising a 984.4 per cent surge in finance costs and a 9.7 per cent decline in finance income.
Analysts at Cordros research indicated that the exchange difference on the letter of credits (+608.8 per cent to N2.12 billion) and a higher loss on remeasurement of foreign currency balances (+716.3 per cent to N3.19 billion) drove the elevated finance costs. Meanwhile, on finance income, there was a 13.4 per cent reduction in short-term deposits in the period.
Guinness’s total assets increased to N217.61 billion in Q3 2023 from N215.7 billion recorded in the same period of 2022.
Cash generated from its core business activities increased by 15 per cent in Q3 2023 to N23.6 billion from N20.53 billion recorded in the corresponding period of 2021.
Furthermore, the financial data shows that the beer makers’ net cash used in investing activities for the period was negative, amounting to N3.91 billion in the period under review largely due to the acquisition of property, plant and equipment during the period.
Net cash flow from financing activities was also negative, totaling N11.64 billion during the period due to the payments and finance expenses paid during the period.
Consequently, cash and cash equivalents for the period ended March 2023 amounted to N58.03 billion from N52.68 billion in the same period of 2022.
Conclusion
Analysts at Cordros added that, “Guinness’ Nigeria performance in the quarter was grim in our view, as the brewer continues to ride on a tough terrain characterised by dwindling consumer disposable income and a fragile FX market.
“The major downside risk as seen in the preceding quarters remains elevated cost pressures, particularly pressures from foreign exchange losses, with that moderated, we expect growth in Q4 2023.
“Looking ahead, we expect further price increases to mitigate rising costs and improve margins. Over the medium term, we remain optimistic about the resilience of Guinness’s Total Beverage Alcohol portfolio strategy as a key driver of sustainable growth. Our estimates are under review.”
The Managing Director/CEO, Guinness Nigeria, Mr. John Musunga, said in a statement said, “In the first nine months of fiscal 2023, Guinness Nigeria has delivered growth in the face of the challenging operating environment characterised by rising inflation, deteriorating foreign exchange situation, temporary cash scarcity, and election related anxiety and disruptions.
“Total net revenue grew by eight per cent, driven by category mix optimization, pricing and organic volume growth in mainstream spirits, supported by excellent execution of our route to consumer strategy.”
Musunga added: “Revenue growth was particularly strong for the strategic focus categories: Premium Stout, Ready-to-Serve, and Spirits. We continued to invest behind our strategic growth priorities to remain top of mind and command a premium to consumers who chose our brands for the value they bring to their occasions.”
The released statement stated that the company’s Gross Profit grew six per cent, and its distribution expenses increased by 24 per cent, driven by a nearly three times spike in the price of diesel and other haulage inputs.
“The costs of goods grew faster than net sales revenue due to inflationary pressures and the impact of foreign exchange depreciation; and increased administrative expenses in the period are driven by payroll inflation (mainly performance-related) and one-off tax provisions,” Musunga further explained.
“Coming from an exceptional 2022 performance, operating profit softened by 24 per cent versus same period last fiscal, whilst it remains very strong at N17.4 billion considering the prevailing macroeconomic environment.
“The implicit 18 per cent devaluation of Naira caused the financing costs to spike by 1,696 per cent vs same period last year. We mitigated this, to some extent, by generating 67 per cent interest income growth from our investment of free cash.
“The Management at Guinness Nigeria remains resolute in its business strategy, as well as its engagement of stakeholders across its value chain. As we enter our 73nd year of existence in Nigeria, we remain fiercely committed to Nigeria and to having a positive impact on those around us and our consumers,” Musunga added.
Chair of the Board of Guinness Nigeria Plc, Dr. Omobola Johnson, who also commended the impressive result, said: “The Board remains confident that our strategy is sound and will continue to support the Management to build a business that will consistently deliver sustainable growth for all our stakeholders.”
