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Double-digit topline growth accompanied with the highest earnings loss in its listed history. That, in short, is the summary of Friesland Campina’s (previously: Engro Foods Limited) full year financial performance for CY19.

While twenty percent topline jump is the only positive in the scorecard announced on the bourse, other achievements remain concealed from the PSX notice. Stellar revenue growth, for example, appears to have come thanks to volume growth across both business segments and all major product categories, including Olpers, Tarang, and Omore.

Management commentary in the interim financials suggests that products in the dairy segment expanded market share thanks to increased communication spend. Recall that volume leader in the tea whitener category - Tarang – saw a relaunch last year; since then, significant brand investment has helped restore volumes, even as category growth has remained stagnant.

Similarly, volume offtake in the ice cream segment was helped by induction of trade assets, coupled with product innovation. Launch of two new products in the dessert category made it stand out from competition.

However, mounting inflationary pressure – particularly rupee devaluation – appears to have pushed production cost in the fifth gear, which resulted in flat-lined gross profitability. Cautious consumer spending also meant that the company was unable to take product price increases, which put a dint in the efforts made on gaining market share.

Frieslandcampina Engro Pakistan Limited
Rs (mn) CY19 CY18 YoY
Revenue from contracts with customers - net 38,857 32,439 20%
Cost of Sales (33,687) (27,285) 23%
Gross Profit 5,170 5,154 0%
Distribution & marketing expenses (3,969) (4,206) -6%
Administrative expenses (1,246) (957) 30%
Loss from core operations (45) (9) 411%
Other operating expenses (247) (108) 128%
Other income 413 622 -34%
Earning before interest & taxes 121 505 -76%
Finance cost (1,222) (675) 81%
Loss before taxes (1,100) (170) 546%
Taxation 145 234
Net profit/(loss) for the period (955) 64
Earnings per share (Rs) (1.25) 0.08
GP margin 13.3% 15.9% ? 258 bps
EBIT margin 0.3% 1.6% ? 124 bps
PBT margin -2.8% -0.5%  ? 231 bps
Interest cover (x) 0.10 0.75 ? 65 bps
Source: PSX notice

Recall that loose milk prices in the open market increased by close to 10 percent in CY19, which is indicative of the rising raw material cost. Raw milk and packaging material constitute over 75 percent of total cost of sales, which during the year appear to have grown by north of 20 percent.

According to quarterly disclosures, the company finally took price increases in third quarter to maintain a semblance of profitability, which appears to have had the opposite effect. In order to maintain full year volume targets, the company had to increase spend on consumer promotions – which in effect ensured that company posted loss from core operations.

Stunted EBIT earnings – that in the past two years stemmed from non-cash gain on biological assets – did little to keep bottomline in the green, as interest expense crossed billion rupees barrier for the first time, no thanks to ongoing monetary tightening.

Together, the triple-whammy from rising raw material cost, devaluation impact on cost of imported raw material and equipment, and high borrowing rates were more than sufficient to result in the highest pre-tax loss since at least 2009.