Manufacturers walk tightrope as rising costs narrow profit margins   

Operators urge govt to tackle structural constraints

Nigerian listed companies continued to battle for corporate survival with high inflation, currency depreciation and high energy costs driving up the costs of sale of many entities across sectors by a staggering over 100 per cent last year, data from a full-year report suggested.

This sharp rise in operational expenses severely squeezed profit margins, forcing many businesses to adopt aggressive cost-cutting measures to stay afloat.

Data from the Nigerian Exchange Limited (NGX) revealed that manufacturing firms were the hardest hit, grappling with escalating raw material prices, increased transportation costs and elevated finance costs.

Five companies with audited reports, for instance, had their combined cost of sales soar by 91 per cent last year as they struggled with elevated energy and finance costs.

The companies’ combined cost of sales rose from N899.2 billion in 2023 to N1.718 trillion last year. The sharp increase in cost of operation has impacted negatively on profit margins even where revenue increased significantly.

Operating margins, for many listed companies, shrank or even dipped into negative territory despite the rise in revenue. For instance, BUA Cement grew its revenue by 90.5 per cent to N876.47 billion in its full-year result only to post a 6.4 per cent rise in profit after tax (PAT). The PAT moved from N69.47 billion in 2023 to N73.9 billion.

Nestle, on its part, posted a loss after tax of N164.6 billion despite significant growth in its top line, which was up by 75.3 per cent to N958.8 billion.

Fourth-quarter reports of companies awaiting their audited reports may follow a similar path. Some have already had their incurred cost soared by over 100 per cent last year, a situation that may have eaten deep into their operating margin.

The 2023 unification of exchange rates led to a sharp depreciation of the naira, making imported inputs more expensive. The crisis was worsened by the removal of fuel subsidies, which pushed up energy costs in several folds, forcing many companies to review salaries and increased significantly personnel costs.

Key players such as BUA Foods, Nigerian Breweries (NB), Cadbury and UACN saw their cost of sales more than doubled, with some posting losses despite revenue growth.
To maintain profitability, companies have had to adjust prices and pricing strategies, restructure supply chains and/or explore alternative financing options.

A look at the full-year 2024 performance of NB, UACN, Beta Glass, Presco and Nestlé showed a staggering increase in costs.

Their combined cost of sales rose from N899.2 billion in 2023 to N1.718 trillion in 2024, amounting to a 91.06 per cent increase.

Similarly, in the fourth quarter (Q4) 2024, Fidson Healthcare, Livestock Feeds, BUA Cement, Cadbury and Vitafoam reported an aggregate cost of sales of N1.194 trillion, about 102 per increase from N591.5 billion posted in Q4 of 2023.

Across the board, Nigerian businesses faced relentless cost pressures last year, with inflation, FX challenges and energy costs eroding disrupting projected expenditure and eating into profit forecast.

In its full-year operations, NB saw its cost of sales jump 97.5 per cent, from N387 billion to N764.5 billion, largely driven by skyrocketing raw material costs. The depreciation of the naira also made essential imported ingredients like barley, hops and packaging materials significantly more expensive.

UACN’s cost of sales rose by 52.5 per cent from N94.6 billion to N151.3 billion, as the company struggled with rising raw material costs, FX volatility and higher energy expenses.

Similarly, Beta Glass saw N87.2 billion cost surge, a 72.6 per cent increase from N50.5 billion in 2023. The increase was similarly fuelled by escalating raw material and energy expenses.

Presco also felt the impact, with its cost of sales climbing 68.7 per cent from N37.3 billion to N63 billion, largely due to higher input costs of crude palm oil production, rising energy expenses and currency devaluation, which inflated the cost of imported equipment and materials.

Nestle Nigeria reported one of the steepest increases, with its cost of sales soaring by 97.8 per cent year-on-year to N652.46 billion as against the N329.94 billion it incurred in 2023. This was attributed to inflation and the FX crisis, which drove up the cost of imported raw materials.

Its production re-scoping activities might have contributed to the sharp rise.
Also in the fourth quarter of 2024, Nigerian companies continued to grapple with soaring production costs.

Fidson Healthcare Plc’s cost of operations surged by 54 per cent, up from N31 billion in 2023 to N49.2 billion in 2024. The sharp increase was propelled by higher raw material costs, the FX crisis that made imports more expensive, escalating energy costs and rising logistics expenses.

Similarly, Livestock Feeds recorded an 84 per cent jump, with costs increasing from N19.2 billion to N35.2 billion.

BUA Foods faced even more significant cost pressure, with its cost of sales rising by 110 per cent from N468.9 billion to N984.9 billion.

Cadbury and Vitafoam also recorded significant spikes, with their costs increasing from N6.3 billion to N11.6 billion (77 per cent rise) and N15 billion to N23.6 billion (57 per cent rise) respectively.

Companies have been battling a persistent foreign exchange crisis that has severely weakened shareholders’ funds and disrupted financial performance since 2023.
The continuous depreciation of the naira and forex volatility have not only driven up operating costs but also resulted in FX losses, straining corporate balance sheets.
What makes the situation even more challenging is the recurring nature of FX exposure witnessed; it made recovery increasingly difficult.

As businesses grapple with rising costs of imported raw materials, debt servicing, and dollar-denominated obligations, profit margins continue to erode.

Despite efforts to hedge against currency risks and implement cost-cutting strategies, uncertainty remains high, with no clear indication of when financial stability will be restored.

For instance, Nestle Nigeria’s full-year results revealed that soaring finance costs played a critical role in the company’s financial downturn. Its finance cost surged by 68.2 per cent to N392.8 billion, far exceeding operating profit and becoming the primary driver of its full-year loss.

The company’s loss after tax widened to N164.6 billion, representing a 107.1 per cent increase from the 2023 figure.

The company’s liquidity position also deteriorated significantly, with cash and cash equivalents plunging by 86.5 per cent year-on-year to N22.642 billion. The sharp decline raised concerns about Nestlé’s ability to manage short-term obligations, particularly in an environment of rising borrowing costs.

NB was able to pick its first profit in two years, thanks to its cost-citing initiatives that have started paying off. Yet, the Company Secretary/Legal Director, Uaboi Agbebaku, highlighted that net finance costs still increased by 34 per cent, contributing to a 36 per cent rise in net loss.

Amid these mounting financial pressures, industry stakeholders are calling for urgent policy interventions to support struggling businesses. They stressed the need for measures to stabilise the naira and ease import costs, which have been exacerbated by foreign exchange volatility.

They canvassed for energy subsidies or relief programs to cushion the impact of soaring fuel and electricity prices.

Also, the stakeholders called for regulatory flexibility to reduce compliance burdens on listed firms.

Without these interventions, many manufacturers risk prolonged financial strain, potential layoffs, and even delisting from the NGX as operating conditions remain volatile and unpredictable.

Managing Director of Arthur Steven Asset Management Limited, Tunde Amolegbe, attributed the rising cost of sales to cost-push inflation driven by limited local supply and the high cost of imports due to naira depreciation.

He explained that the sharp increase in raw material costs significantly contributed to overall production expenses, directly fueling the surge in the cost of sales. The economic impact of this trend is reflected in rising product prices at a time when consumer purchasing power is weakening. Lower consumption leads to reduced economic activity, ultimately affecting GDP growth.

To mitigate these challenges, Amolegbe, who is also a former president of the Chartered Institute of Stockbrokers emphasized the need for increased import substitution in raw material sourcing.

He admitted that many companies have already adopted backward integration strategies but added that the need for urgency in accelerating these efforts. Additionally, he called on the government to address structural issues in the agricultural sector to enhance local raw material production and reduce dependence on imports.

He also highlighted the surge in finance costs, linking it to naira depreciation and rising interest rates.

“With the cost of bank borrowing becoming prohibitively high, many firms have turned to alternative financing sources. Companies with foreign partners have resorted to internal borrowing, while others have tapped into the fixed-income capital market, issuing bonds and commercial papers to meet funding needs.”

Amolegbe noted that the increase in turnover for many firms has been driven primarily by higher product prices rather than an expansion in sales volume. However, when rising operating, administrative, finance, and production costs are factored in, it is unsurprising that many companies are reporting net losses.

He suggested that companies must also find innovative ways to cut costs and remain competitive in the challenging economic environment, even as the government continues to take decisive action to lower the cost of doing business in Nigeria.

President of the New Dimension Shareholders Association of Nigeria, Patrick Ajudua attributed the rising cost of sales to escalating raw material and input costs, which have significantly impacted manufacturers.