Nigerian Breweries Plc has employed massive spending on products marketing and promotion to lead consumers back to brewed products. The company spent over N97 billion in marketing and distribution expenses in 2021 with N39.5 billion of it devoted to advertising and sales promotion, as contained in the audited accounts for the year.
The strategy paid off with accelerated growth in sales revenue that raised the brewing company’s turnover to a new peak at over N437 billion at the end of 2021. This represents a major acceleration in sales from a 4 per cent improvement in the preceding year to roughly 30 per cent growth in 2021.
The growth margin represents an increase of more than N100 billion in sales revenue for the company in the year, good enough to jerk up turnover to a new peak at the end of 2021 after trading below the 2017 high of about N345 billion for three years.
The company’s management combined the marked recovery in sales revenue with cost moderation to stage a turnaround in the bottom line. Net profit rebounded from N7.4 billion in 2020 to N12.7 billion at the end of the 2021 financial year.
The performance provided a wage to the company’s three years of a downward run in profit and marks the turning point for a long journey to rebuilding profit. Group profit figures for Nigerian Breweries had shrunk from the 2013 high of over N43 billion to the N7.4 billion posted in 2020.
The profit plunge started in 2018 when the company suffered a 41 per cent drop in profit to close the year at N19.4 billion. Group profit went down again by 17 per cent in 2019 to N16 billion and then sank by 54 per cent to N7.4 billion in 2020, the lowest profit record in 15 years.
The biggest cost saving in the year was extracted from input expenses, which had posed a major challenge to management in recent years in terms of balancing growth in sales and the cost of generating the same.
Faster growth in input cost than sales revenue has been the key undermining factor that led to the sustained profit drop for the company for the preceding three years to 2020. While sales revenue grew by 4 per cent in 2020, the cost of sales grew three and half times faster at 14 per cent to over N218 billion. The increase in the cost of sales exceeded the increase in sales revenue, which caused a drop in gross profit to N118.7 billion in 2020.
The company succeeded in addressing the imbalance between sales revenue and the cost of the naira of sales in 2021. It reversed the position, which set input costs to grow at a slower pace than sales revenue. Cost of sales grew by less than 27 per cent to N277 billion in 2021 compared to the almost 30 per cent growth in sales revenue.
The reversed growth pattern in input cost and sales revenue changed the company’s position from a drop of 10 per cent in gross profit in 2020 to an increase of 35 per cent to N160.4 billion in 2021. Also, operating profit reversed from a 16 per cent drop in 2020 to a 40 per cent advance to N41.5 billion over the review period.
Another favourable development for the company in the 2021 financial year is a turnaround from a drop in other income in the preceding year to high growth of more than five and a half folds to N4.6 billion in the full year.
A further strength was added by a slight decline in net finance expenses to N17.8 billion. This is a change of direction from a big jump of 51 per cent in finance cost to N18 billion in 2020, which consumed 61 per cent of operating profit in the year.
The effect of a decline in finance expenses in 2021 is a 40 per cent increase in operating profit to N41.5 billion. Net finance cost, therefore, claimed a reduced share of operating profit at close to 43 per cent at the end of the year.
The company’s management appears to have noted the significant negative impact of finance expenses on the company’s profit performance in the preceding year and therefore took steps to reduce dependence on debt financing.
It slashed balance sheet borrowings from N91.5 billion in 2020 to N31.4 billion at the end of 2021.
The improved profit performance of the company in 2021 is therefore a function of revenue gains and cost moderation. Net profit margin improved from 2.2 per cent in 2020 but remains quite low at 2.9 per cent in 2021.
Despite the upturn seen in the 2021 financial year from a 54 per cent profit drop in the preceding year to a 72 per cent rebound, some challenges remain for the brewing company.
These include the rapid growth in marketing/distribution expenses well ahead of sales revenue at about 38 per cent to over N97 billion against the 30 per cent growth in turnover. Likewise, administrative costs grew ahead of sales revenue at about 37 per cent to over N26 billion.
The implication is that significant cost savings elsewhere must happen to prevent these cost elements from encroaching on profit capacity. The cost-saving room was provided by the cost of sales in 2021 but should it fail in the current financial year, the ability to sustain profit recovery would be impaired.
Another area of concern is that export sales remained constrained in 2021 with revenue from the line dropping from N144 million in 2020 to N128 million. The company’s ability to sustain profit recovery in the current financial year depends on how far it can keep revenue growing and key costs slowing down.
Nigerian Breweries has announced a final cash dividend of N1.20 per share with an option to convert into new shares. It paid an interim cash dividend of 40 kobo per share in the course of the 2021 financial year.