Flour Mills: Input costs claim 90% revenue as wheat prices sting

In the last ten years, rising input costs have remained a thorn in the flesh of Flour Mills as cost of sales consistently claimed 80 to 90 percent of the firm’s total revenues.

In its first quarter (Q1) 2023 financial statement published on the Nigerian Exchange Group (NGX) for the three months period ended 30th June 2022, the manufacturing company’s cost of sales claimed 90 percent of its total revenue in the period.

Flour Mills reported a 47.28 percent increase in revenue to N306 billion in the first quarter of 2023 from N208 billion in the first quarter of 2022.

An analysis of the group’s revenue by reportable segments shows that food generated the most revenue for the company.

Revenue generated by foods amounted to N213.17 billion, agro-allied amounted to N65.65 billion, sugar amounted to N55.02 billion, and support services N5.76 billion.

“We believe the revenue growth was driven by a combination of volume growth and upward price reviews, though we are yet to confirm price increases,” analysts at CSL Stockbrokers Limited said.

With material costs playing a significant role in the growth, its cost of sales increased by 47 percent to N306.35 billion in the first quarter of 2023 from N208 billion reported in the first quarter of 2022.

Material costs reported by the company grew by 48.79 percent to N276.77 billion in the first quarter of 2023 as against N186.02 billion in the first quarter of 2022.

Analysts at CSL Stockbrokers Limited attributed the increase in the cost of sales to the prevailing global price hike and local FX pressures.

Percentage of revenue

Ayodeji Ajilore, an investment research analyst with ARM Securities, explained that it is an external economic environment issue to Flour Mills of Nigeria, adding that “the rising cost to sales margin is not something within their control except they would settle for commensurate price adjustments on the affected product lines.”

“For instance, wheat price per ounce has been soaring. As of June wheat price was $379.89 per ounce, which has now slowed to $316.69 in August. Meanwhile in March after the Russia-Ukraine war started we saw it at around $446 per ounce from $325.16 in January. For Flour Mills of Nigeria things will improve over time but what affected them is that during the last six months, the external condition has been daunting,” he explained.

The manufacturing company was also impacted by increased energy costs, which contributed to a rise in their cost of sales. As compared to Q1 2022, when electricity expenses were N5.38 billion, Flour Mills reported a 77.3 percent increase to N9.34 billion in Q1 2023.

Material cost

Ajilore also mentioned that the cost of energy has also increased significantly, adding an extra layer of concern — Not because of improved production volume.

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“Therefore, implying that the elevated global energy cost brings with it a spiked cost of energy per unit for the firm output,” he said.

In a similar vein, Flour Mills Nigeria reported an increase in inventory costs that totalled N82.57 billion in the first quarter of 2023, which reduced the company’s working capital.

The increase in the cost of inventory reported by the manufacturing firm was a significant driver for the negative cash flow from operating activities reported by the company, which amounted to N22.52 billion in Q1 2023.

The manufacturing company’s inventory cost grew by 96.86 percent to N367 billion in the period under review compared to N186.44 billion in the first quarter of 2022.

Further breakdown of inventory shows that the total value of raw and packaging materials reported by Flour Mills accounted for 76.96 percent of the total inventory reported by the company.

Raw and packaging materials which contributed to the bulk amounted to N282.46 billion, the value of work-in-progress products amounted to N15.35 billion, and the value of finished goods in-store amounted to N22.2 billion.

The overall result of increased input costs taking a significant portion of Flour Mill’s sales is that the company’s profit will only slightly increase, and the profit and EBITDA margin will be lowered.

Flour Mills’ profit in the first quarter of 2023 increased by 3.5 percent to N5.49 billion from N5.45 billion in the corresponding period of 2022.

BusinessDay’s analysis of the manufacturing company’s profit margin, which measures how much sales revenue exceeds costs in a business, found that it was 1.6 percent, down from 2.33 percent in the first quarter of 2022.

EBITDA increased by 18.7 percent year-on-year to N24.38 billion in the first quarter of 2023 from N20.53 billion in the first quarter of 2022.

However, EBITDA Margin shrank, down 1.7ppts to 7.2 percent in the first quarter of 2023 from 8.8 percent in the first quarter of 2022.

The decline in EBITDA Margin according to analysts at CSL Stockbrokers Limited was largely driven by the increase in the cost of sales and operating expenses.

Flour Mills of Nigeria Plc has been driven to adjust to the rising costs of wheat and other raw materials as Nigeria continues to be largely dependent on imports.

In the recently released second quarter (Q2) foreign trade in goods statistics by the National Bureau of Statistics (NBS), Durum wheat (Not in seeds) maintains its position as the third most imported product in the country, accounting for 4.46 percent of the total value of goods imported into Nigeria.

Durum wheat (Not in seeds) imported into the country amounted to N242.66 billion in the second quarter of 2022.