Flour Mills of Nigeria Plc faced a significant foreign exchange (FX) loss of N22.5 billion during its first quarter (Q1) operations, largely attributed to the naira’s devaluation.
This FX loss drastically altered the company’s earnings trajectory, causing a net loss of N9.3 billion, whereas it could have seen a potential 52 percent increase in operating profit to approximately N23 billion without the FX devaluation.
Profit drop by 53.4%
The Q1 interim financial report, covering the period ending June 2023, disclosed a substantial 53.4 percent decline in operating profit to N7.1 billion.
The FX loss played a central role in the multiplication of net operating losses, consuming more than half of the gross profit.
The company’s management remains optimistic that naira exchange rates will stabilize, coupled with improving sales and cost-saving strategies, paving the way for more favorable earnings in the future.
Flour Mills reported robust revenue growth in the topline, generating N456.4 billion in the first three months of operations, representing a year-on-year increase of 34.4 percent.
This marks the fourth consecutive year of strong sales revenue growth.
Despite the impressive sales growth, rising costs have hindered the conversion of increasing sales into profit, a trend observed in the previous financial year when a 32 percent rise in sales resulted in only a 5.4 percent improvement in annual profit, amounting to N29.5 billion.
Aside from the FX loss, pressure also came from three other major expense categories, exacerbating the FX loss’s impact on the bottom line:
- Cost of Finance: This expense more than doubled, increasing by 104 percent to N16.6 billion by the end of Q1, exceeding the N7.1 billion operating profit and resulting in a pre-tax loss of N9.3 billion. Finance expenses for the last financial year amounted to around N56 billion.
- Selling and Distribution Expenses: These grew by 29.5 percent, nearly reaching N6 billion, limiting cost savings during the period.
- Production Costs: Despite some moderation relative to sales, production costs expanded by 32.6 percent, reaching N406 billion, still accounting for 89 percent of sales revenue.
Gross profit, however, exhibited strong growth, rising by 51.3 percent to close at N50.3 billion for the quarter.
While some cost savings were realized in administrative expenses, which increased by 12.3 percent to N11.3 billion, and net impairment loss on trade receivables, which dropped by 82.5 percent over the review period, the primary factors contributing to the company’s Q1 loss were the FX loss and the substantial finance expenses incurred during the quarter.
Flour Mills’ substantial borrowing, totaling over N383 billion at the end of Q1, with a slight increase from N382.5 billion at the end of the previous financial year, excludes lease liabilities of over N23 billion.