Seven Up’s quarter of multiple loses

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The Bottling Company
Seven up Bottling Company’s loss figure in the second quarter multiplied more than three times at the end of the third quarter last December.

The soft drinks manufacturer ended the period with a loss of close to N5 billion, more than three times the loss of N1.56 billion it showed at the end of the second quarter.

The company has addressed one of the two operating challenges hurting its profit capacity while the other has intensified. It has stepped up slowing sales revenue, which grew by a top record of 26% in the third quarter. However rapidly rising cost of sales eroded profit margins further during the period and exclusively accounted for the company’s rising loss.

7-UP
7-UP

Fortunes have turned for 7up from rapid profit advances that hit a peak of N7.13 billion at the end of the 2014/15 trading year. The company experienced a profit crash that saw the lowest profit figure in three years in the 2016 financial year. This has extended into a deep plunge into a loss in the current financial year.

Sales
Sales revenue growth accelerated in the third quarter during which the company earned 38% of the sales revenue for the three quarters. Sales revenue grew by 26% year-on-year to N75.90 billion at the end of the third quarter, accelerating from 18.7% growth in the second quarter.

Based on the current growth rate, sales revenue projection is revised upward from N94 billion to N107 billion for 7up Bottling Company for the 2016/17 financial year. That will be a top growth record of 25% from the sales revenue of N85.63 billion the company posted at the end of the 2016 financial year – the strongest growth rate in three years. Only a moderate improvement of 3.8% in turnover was recorded in the preceding year – the lowest growth rate in many years.

The company continues to devote increasing proportions of sales revenue to cost of sales. Cost of sales grew twice as fast as sales revenue at 52% year-on-year to N64.08 billion. This claimed over 84% of turnover in the third quarter, rising further from 80% in the second quarter. That cut down gross profit by 35% to N11.81 billion during the period.
Other major cost lines of the company have moderated with the accelerated growth in sales revenue. Selling/distribution expenses, which grew ahead of sales revenue in the second quarter, moderated at an increase of 14.5% at the end of the third quarter.

Cost
Administrative cost went down by 10% but finance expenses rose by 24% over the review period to N3.16 billion, reflecting increased borrowings in the balance sheet. Long-term loans grew from N1.52 billion at the end of the last financial year to N10 billion at the end of the third quarter. Bank overdraft facilities rose from a little over N1 billion to N2.7 billion and short-term loans and borrowings have also expanded by 70% to N28.44 billion over the same period.

Pepsi
Pepsi

Earnings & Profitability
The company’s gross profit of N11.81 billion at the end of the third quarter was insufficient to cover selling/distribution and administrative expenses, which raised its operating loss from N76 million in the second quarter to N1.68 billion in the third. Interest expenses had to be met with new borrowings.

The company’s net loss figure grew from N1.56 billion in the second quarter to N4.84 billion in the third compared to a net profit of N2.88 billion in the same period in the preceding year.

The final quarter ending March 2017 is 7up’s best selling season but that isn’t expected to be strong enough to turn around the table. The problem isn’t in selling but in the high cost of products sold.

Price hike?
Raising prices to improve margins is ruled out in a highly competitive market facing the resistance of cash trapped consumers. The Company is primarily involved in the business of bottling and marketing of a wide range of soft drinks and table water.

The company’s cash flow position remains in a bad shape. There is a sharp swing from a net cash flow generated from operating activities of close to N17 billion at the end of last financial year to a net cash utilisation of over N10 billion at the end of the third quarter. Despite a cut down in investing activities, the company had to resort to new borrowings in order to finance its operations.

7up suffered a drop of over 53% in after tax profit in the 2016 financial year and closed with a profit of about N3.35 billion. It had attained a peak profit of N7.13 billion in the 2015 financial year.

The high prospects for ending the current financial year in a loss shows a reversal of fortunes for a company that has recorded one of the biggest profit advances just three years before. 7up had multiplied net profit more than three times to N6.43 billion in its 2014 financial year.

It closed the third quarter operations with loss per share of N7.55 kobo compared to earnings per share of N3.48 in the same period in the preceding financial year. The company closed the last financial year with earnings per share of N5.23.

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