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Distell H2 revenue grows to R11bn despite challenging global environment

17th February 2015

By: Tracy Hancock

Creamer Media Contributing Editor

  

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The global environment continues to be challenging, notes JSE-listed Distell, which for the six months ended December 31 reports sales volumes of 369-million litres, a 3.7% increase, growing revenue by 10.5% to about R11-billion.

In the group’s unaudited results for the period, diverging growth and monetary policy expectations in developed economies alongside a more notable moderation in emerging market growth were tagged as the root of the tough trading conditions, which Distell expected to persist.

Nevertheless, the alcoholic beverages producer and marketer, which aspires to double its revenue and profit by 2020, continued to pursue and invest in its long-term strategy to deliver shareholder value.

In a conference call on Tuesday, Distell MD Richard Rushton attributed the group’s performance, which exceeded expectations, to the pace of its investments picking up in a set of core brands domestically, in Africa and in certain global markets; investment increasing in "people capability" and building routes to the market in Africa, as well as investing heavily in capability building in its Southern Africa operation. To this end, Distell had appointed a number of senior leaders, for example in human resources and marketing, with experience at global level or global experience in a related industry.

Rushton noted that part of the company’s strategic aspirations was to “scale up excellence”. 

“We acknowledge being, to a large extent, a Western Cape, initially wine, producer… and have quite a lot of work to do to raise our bar to an international level in many parts of our business,” he said.

Rushton explained that Distell was focused on strategic investments, highlighting supply chain reliability service as a major priority.

“Our portfolio complexity has not made us the most cost-effective or nimble supply chain organisation. A lot of investment is going into our Springs facility capacity expansion to reduce our dependence on producing and packaging ciders [solely] at Distell’s Paarl and Green Park facilities. [This will spread] our risk and add flexibility and service reliability in the process,” he stated.

Distell was also on track with increasing the level of efficiency at its freeze plant, by up to 60% to 80%. The facility is very important to grow Distell’s cider business beyond the domestic platform, added Rushton, who noted that the company aspired to be the leading cider player globally and was currently number two.

REVENUE AND SALES VOLUMES
According to the group’s unaudited results for the period, domestic revenue and sales volumes increased by 12.9% to R7.8-billion and 6%, respectively. South Africa accounted for 72.3% of Distell’s revenue for the period under review.

Rushton noted that the company had reason to be cautiously optimistic regarding consumer spend and a lower inflation outlook in the year ahead in South Africa, which was currently dealing with a disrupted power supply. But, generally, he believed the consumer environment could be a bit better in the foreseeable future.

Distell’s wine portfolio recorded sales volumes that reflected strong growth in South Africa, while Distell’s cider and ready-to-drink brands indicated satisfactory growth, “albeit at a slower pace than in previous years”. The spirits portfolio showed a marginal volume increase. 

In international markets, outside Africa, revenue generated from the sale of the company’s brands grew 9.3% to R3-million on a volume decline of 1%. However, Distell’s international business did benefit from a weaker rand.

The spirits portfolio delivered volume and revenue growth of 6.3% and 12.3%, respectively, while the wine category grew its revenue by 6.2% and volumes contracted by 2.4%. 

Africa accounted for 15.4% of Distell’s total revenue, which was up 4.1%; however, without Angola, which was impacted by the timing of shipments, revenue would have been 7.2%. Angola experienced a 4.5% drop in revenue.

In sub-Saharan African markets, outside South Africa, revenue growth was 4.1%, while volumes dropped by 2.7%, mainly owing to the timing of export shipments to Angola. The region contributed 55.3% to Distell’s foreign revenue. 

“The financial results for the period, supported by satisfactory overall revenue growth, were positively influenced by a weaker rand,” Distell advised, adding that steep increases in excise duties and investments that were made to support corporate strategy were partially offset by lower increases in raw material input costs.

Meanwhile, operating expenses increased by 11.1% on the back of increased investments made in “key strategic initiatives”.

The operating profit margin declined slightly from 13.8% to 13.4% on the company’s 10.5% revenue increase, while net finance costs increased from R110.2-million to R126.7-million. 

The effective tax rate increased from 26.5% to 28.6%, mainly owing to nontaxable gains, relating to the previous year’s remeasurement of the contingent purchase consideration for Burn Stewart Distillers (BSD), which Distell acquired in April 2013.  

Normalised headline earnings and operating profit, which excluded the adjustments in respect of the BSD purchase consideration, increased by 9.5% and 7%, respectively.

The remeasurement of the contingent purchase consideration for the BSD acquisition amounted to a gain of R159-million and was included in the comparative period’s earnings. In the current period, an expense of R8.9-million, relating to the finalisation of the transaction, was also included in earnings. 

Reported headline earnings decreased by 7.6% to R987.4-million, while headline earnings a share and operating profit decreased by 13.4% to 455.7c and 4.6% to R1.5-billion, respectively.  

INVESTMENT AND FUNDING 
Distell’s total assets increased by 10.6% to R17.9-billion during the period under review, with investment in net working capital remaining at R5.5-billion and inventory increasing by 6.8% to R6.6-billion.

Of this, bulk spirits in maturation, which were planned in accordance with the group’s longer-term demand projections, grew 15.5%.  However, bottled stock and packaging materials reflected a decrease of 1.6% on the previous year’s comparable period. 

Capital expenditure for the six months amounted to R305.7-million, of which R165.8-million was spent on the replacement of assets. A further R139.9-million was directed to the expansion of capacity, mainly in relation to the group’s cider and whisky manufacturing facilities. 

During December, the group acquired a 26% equity stake in KWA Holdings, Kenya's leading spirits manufacturer, bottler and distributor, for a cash consideration of R111.3-million, with Rushton adding that Distell was bullish about investment in Kenya and East Africa in general.

“This transaction will enable Distell to expand its production and distribution footprint in the important East African market,” noted the company.

Cash retained for the six months amounted to R1.1-billion compared with R143.7-million in the 2013 comparable reporting period.

Distell remained in a strong financial position, as shown by a debt to debt-plus-equity ratio of 21.1% and a debt-equity ratio of 26.8% at the end of the period under review. 

CASH DIVIDEND DECLARATION 
Distell declared, from income reserves, a gross cash dividend of 158c a share for the interim period ended December 31, compared with 154c a share declared for the year-ago period. 

The company pointed out that there were no secondary tax company credits available for use and that the dividends tax rate was 15%, while dividends tax would amount to 23.7c an ordinary share.

“As a result, ordinary shareholders who are liable to pay dividends tax will receive a net dividend amount of 134.3c a share. Shareholders exempt from paying dividends tax will receive 158c a share,” Distell advised, noting that the issued ordinary share capital as at February 16 was 221 737 356 ordinary shares compared with 221 435 026 ordinary shares in 2014.

Edited by Creamer Media Reporter

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