Earnings Report 2013 H1: Dangote Flourmills Struggles As Hight Cost Of Wheat Wipes Out Profits.

DANGOTE FLOUR MILLS PLC

Commentary: Financial performance for the six months ending June 2013

Overview

The group’s performance for the six-month period ended June 2013 continues to reflect the significant challenges being faced by the business in the short term. Sales volumes continue to be impacted by intense competition arising from over-capacity of supply in the flour milling sector, as well as unresolved debt issues, which have resulted in the moderation of credit extension to customers. Profitability has been further impacted by pricing pressures resulting from significant input cost inflation in the raw material cost of wheat, which has increased by 17% relative to the corresponding prior period and has been exacerbated by the 15% wheat levy imposed with effect from 1 July 2012. The results also reflect once off costs of N796million resulting from the new management team’s focus on the right-sizing of the business and the optimisation of supply chain efficiencies and product quality. Management continues to focus on improving service levels and driving demand in order to improve capacity utilization and sales volumes, whilst managing margin pressures to ensure an improved profit performance. Progress is being achieved in improving the group’s internal controls and business systems.

Financial performance

Group turnover of N29.4billion was 1.7% ahead of corresponding prior year period. Group profitability was negatively affected by ongoing volume pressures, as well as significant input cost inflation, which could not be fully recovered through price increases. Operating loss before interest and tax of N1.68billion included non-recurring abnormal costs of N796 million relating to retrenchment costs as well as the write off of obsolete stock and fixed assets. Net financing costs of N2,1billion is reflective of the compounding effect of the group’s increased debt and high cost of borrowing, which is currently being reviewed.

Dangote Flour

Turnover for the six-month period ended 30 June 2013 increased by 6.6% to N15.6billion. However, above inflationary cost increases in the raw material cost of wheat resulted in an operating loss of N1.9billion for the period. The business has embarked on a turnaround strategy to ensure adherence to world-class manufacturing standards and operating disciplines and whilst this has resulted in significant once off costs in the period, satisfactory progress is being achieved in improving product quality and service levels.

Dangote Pasta

The Pasta business experienced significant challenges during the period that arose from product quality and supply chain issues. The manufacturing facility was shut down for a three-week period in order to address production inefficiencies and to ensure consistent product quality and service levels. Consequently, sales volumes were negatively affected during the period and turnover declined by 39.2% to N2.9billion, relative to the corresponding prior period.

Dangote Noodles

The Noodles business achieved a 28% increase in turnover to N2.9billion for the six-month period ended 30 June 2013. This was underpinned by strong volume growth, which resulted from an improvement in service levels. During the period under review, the Noodles manufacturing facility in Calabar, which had previously been moth-balled, was reactivated in order to supplement market demand.

Dangote Agrosacks
Turnover for the Agrosacks business increased by 15% to N9.2billion and operating income after abnormal items grew by 47% to N1,46billion.

Outlook

The group continues to implement its turnaround strategy in a challenging trading environment and it is envisaged that the “back to basics focus” will continue for the balance of the current financial