Seven-Up Bottling Company (7-Up) Plc witnessed improved performance in the year as the company rode on the back of improved cost efficiency and substantial reduction in gearing level to optimise profitability. While sales growth remained in single digit, increased cost efficiency optimised the bottom-line performance with double-digit growth in pre and post tax profits. Audited report and accounts of the soft-drink company for the year ended March 31, 2013 showed that sales increased by 7.1 per cent but higher margins pushed profit before tax up by 27.5 per cent. Profit after tax rose by 70.3 per cent, underlining the increase in basic earnings per share from N2.62 in 2012 to N4.46 in 2013.
The improved bottom-line performance enabled the company to increase cash payout by 10 per cent just as its net assets value rose by 22 per cent. The prospects for future dividend payment was stronger with a dividend cover of 2.0 times in 2013 as against 1.3 times in 2012. Both actual and underlying profit and loss indicators showed appreciable improvement in the profitability of the company.
The company’s profit and loss performance was also congruent with improvement in its balance sheet. With larger equity funds, lower financial leverage and increased liquidity, the balance sheet was stronger in 2013 compared with the previous year.
However, the company’s financing structure and general balance sheet position remained susceptible. While the debt-to-equity ratio improved by 51 percentage points, it remains substantially high at about 118 per cent. The company still wriggles with negative working capital and vulnerable liquidity coverage.
Interim report for the six-month period ended on September 30, showing considerable improvement in actual and underlying profitability. Average pre-tax profit margin improved to 8.23 per cent as against 3.02 per cent recorded in comparable period of 2012. Turnover rose by 22.7 per cent from N27.57 billion to N33.83 billion. Gross profit grew by 25.5 per cent to N12.65 billion as against N10.08 billion in corresponding period of 2012. Profit before tax jumped by 234.6 per cent from N832.30 million to N2.78 billion. After taxes, net profit rose by 200 per cent from N719.4 million to N2.16billion.
Financing structure
Total assets had inched up by 5.9 per cent from N48.49 billion to N51.37 billion. Current assets stood at N15.50 billion, 3.3 per cent above N15.01 billion recorded in 2012. Long-term assets had increased by 7.2 per cent from N33.48 billion to N35.87 billion. Total liabilities closed almost flat at N38.79 billion as against N38.18 billion. Bank loans dropped by about 15 per cent from N17.41 billion to N14.82 billion. While the paid up capital remained unchanged at N320 million, shareholders’ funds rose by 22 per cent from N10.31 billion to N12.58 billion.
Seven-Up’s financing structure improved in 2013. The proportion of equity funds to total assets improved from 21.3 per cent in 2012 to 24.5 per cent in 2013. The company’s debt-to-equity ratio also reduced from 168.9 per cent in 2012 to 117.8 per cent in 2013. Long-term liabilities/total assets ratio improved from 17.5 per cent to 21.3 per cent while the proportion of current liabilities to total assets stood at 54.2 per cent in 2013 as against 61.2 per cent in 2012.
Efficiency
Average number of employees increased to 3,701 persons in 2013 as against 3,643 persons in 2012. Total staff costs meanwhile increased from N7.437 billion to N8.388 billion, implying an average cost per head of N2.27 billion in 2013 as against N2.04 billion in 2012. Average contribution of each employee to pre-tax profit improved from N0.70 million to N0.88 million. The wide disparity between average cost per head and average pre-tax profit per head underlined the top-heavy nature of the staff costs structure, where nearly half of the employees earn around N1 million per annum. The company reined in costs and increased staff productivity, creating modest margin that further improved profitability. Total cost of business, excluding interest expense, improved marginally to 91.3 per cent in 2013 as against 92.1 per cent in 2012.
Profitability
The intrinsic profit-making capacity of the company improved in 2013. While gross profit margin inched up from 35.6 per cent to 35.7 per cent, the improvement was evident in pre-tax profit margin which rose from 4.3 per cent to 5.1 per cent. Underlying returns were also better with return on total assets of 6.4 per cent in 2013 as against 5.3 per cent in 2012. Return on equity also rose from 16.3 per cent to 22.7 per cent.
Group turnover rose by 7.1 per cent from N59.86 billion to N64.09 billion. Cost of sales moderated at N41.12 billion as against N38.54 billion. Gross profit rose by 7.3 per cent from N21.333 billion to N22.89 billion. Total operating expenses stood at N17.41 billion, 5.0 per cent above N16.58 billion recorded in the previous year. While non-core business income rose by about 25 per cent from N57 million to N72 million, interest expense was almost flat at N2.29 billion in 2013 as against N2.25 billion in 2012. With these, profit before tax increased by 27.5 per cent from N2.56 billion to N3.26 billion. With about 54 per cent reduction in tax expenses, profit after tax jumped by 70 per cent from N1.68 billion to N2.86 billion.
Also, basic earnings per share improved from N2.62 to N4.46. The company paid cash dividends of N1.41 billion for the 2013 business year compared with N1.28 billion distributed for the 2012 business year. This implies a dividend per share of N2.20 in 2013 as against N2 in 2012. Notwithstanding the increase in cash payout, dividend cover increased from 1.3 times to 2.0 times. Net assets per share also increased by 22 per cent from N16.09 to N19.63.
Liquidity
Seven-Up’s liquidity position improved during the period, although it generally remained weak and susceptible. Current ratio, which relates current assets to current liabilities, improved from 0.51 times to 0.56 times. While working capital remained negative, the quantum improved during the period. The proportion of working capital to total sales stood at -19.3 per cent in 2013 as against -24.5 per cent in 2012. Debtor/creditor ratio closed 2013 at 8.9 per cent compared with 6.6 per cent in 2012.
Governance and structures
A leading fast moving consumer good (FMCG) company, 7-Up is the manufacturer and Nigerian franchise holder for several global soft drinks including Pepsi and Mirinda. Incorporated in 1959, 7-Up derived its name from its unique flagship brand-7-Up soft drink. Its other popular brands include Teem Lemon, Mountain Dew and aquafina. Its shares were listed on the Nigerian Stock Exchange (NSE) in 1959. It stands alone as the only publicly quoted soft-drink company in Nigeria. Affelka S A is the majority core investor in 7-Up with total equity stake of 72.97 per cent.
The board and management remained unchanged during the year. Faysal El-Khalil still chairs the board while Mr Sunil Sawhney leads the executive management team as managing director and chief executive. The company broadly complies with extant codes of corporate governance and best practices.
Analyst’s opinion
The performance of 7-Up in 2013 is commendable. It has managed its constrained top-line efficiently. The emerging balance sheet restructuring, though still tenuous, supports the overall performance outlook. However, it needs to further enliven the top-line and create wider room for profitability, there is a limit to the extent it can use cost management to manage slow sales without adversely affecting the long-term performance of the company. Besides, 7-Up needs to aggressively improve on its balance sheet restructuring.
The emerging outlook is impressive; 7-Up needs to sustain the momentum; growing the top-line while optimising the midline cost management to deliver better returns to shareholders.
