International Breweries Plc has received a big relief from close to 60 percent slashing of balance sheet debts but operating challenges aren’t yet letting in the light of profit in a tunnel of losses. Half-year report for the brewing company at the end of June 2020 shows that huge cash outflow for finance expenses have dropped considerably and that has permitted the rebuilding of finance income.
The outcome of these developments is that finance expenses fell by over 67 percent year-on-year to N2.2 billion at mid-year in June 2020. Over the same period, finance income sprang up from insignificance to N1.3 billion. Consequently, a net finance cost of N7 billion that accounted for 70 percent of the company’s N10 billion pre-tax loss in the same period last year, shrank to N948 million at the end of June 2020.
Debt reduction however is one part of the challenges facing the brewing company. International Breweries is yet to free itself from a cost-income structure that is unable to deliver profit. Three times multiplication of operating loss to N11 billion at half-year spells the challenges facing the company on fundamentals.
Costs aren’t coming down at an equal pace with sales revenue and input cost is leading an encroachment of costs into earnings. That led to a loss of over N5 billion in gross profit year-on-year at the end of half-year trading in June 2020.
Gross profit was insufficient to meet administrative cost and marketing and other expenses had no revenue backing at all. That sets the company on the way to building another huge operating loss this year after posting an operating loss of N21 billion at the end of 2019.
The company is also on the path of building a net loss for the third straight year after closing last year with a loss of close to N28 billion. The difference this year is the cut down in net finance cost that was as large as N15 billion in 2019. The income tax credit is again helping to dress down the net loss position as happened in the preceding year though the figure is going down this year.
The reduction in net finance cost is however a backward step from the net finance income of N346 million at the end of the first quarter. Finance expenses grew while finance income dried up across the quarters. If the pace is maintained in the second half, the margin of drop-in net finance cost can be expected to be much lower than recorded at half-year.
The company’s half-year interim shows sales revenue of N60.6 billion, which is a drop of 11.7 percent year-on-year. This is worse than a flat position in the first quarter and an increase of roughly 10 percent in turnover at the end of last year.
At over N51 billion, input cost went down by 5 percent – less than one-half of the drop in sales revenue. The cost of sales continues to claim increasing proportions of sales revenue from 78.6 percent in the same period last year to 82.5 percent in the first quarter and further to over 84 percent in June 2020.
That caused a 35 percent drop in gross profit to N9.5 billion – which was insufficient to meet administrative expenses alone. Other operating losses soared from only N186 million to N4.6 billion over the review period.
The result is an operating loss of over N11 billion at half-year, more than three times the corresponding figure of less than N3.5 billion last year. Despite the disappearance of net finance income, a drop of 86.5 percent in net finance expenses at half-year is a big boost in the company’s income statement.
The huge drop in net finance cost is the reward of the company’s debt reduction move in the first quarter. The development has taken off pressure from finance expenses on the bottom line so far this year.
A tax credit of N2.6 billion at half-year helped to reduce a pre-tax loss of nearly N12 billion, still leaving the bottom line in the red at N9.3 billion. This is an increase of roughly 37 percent over the loss figure the company posted at half-year in 2019.
The brewing company lost 35 kobo per share at the end of half-year, down from 80 kobo loss per share in the same period in 2019. The drop reflects the increased volume of shares this year arising from the rights issue in the first quarter.
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