JSE-listed Distell is collaborating with government, retailers, suppliers, customers and staff to address the potential long- and short-term effects Covid-19 on its business.
Distell is following the guidelines of the World Health Organisation (WHO), the National Institute of Communicable Diseases and advice announced by the local governments in the markets in which it operates to ensure required actions are taken in relation to the effect of Covid-19 on its customers, employees, suppliers and operations.
A special task team convenes daily to give guidance on existing operational policies affecting employee wellbeing, the company’s supply chain and customer supply.
Comprehensive response plans have been in place since the outbreak and are implemented to cover contingencies including supply chain disruption, product sourcing, logistics, hygiene and cleansing procedures and education on prevention.
In light of the imminent 21-day lockdown in South Africa, which includes a ban on all alcohol sales during this period, Distell is incorporating this into its contingency planning.
The group says that while the situation is extremely challenging and dynamic, and some effects are difficult to quantify at this stage, as at March 26, no cases of Covid-19 have been reported at any of its operations.
Moreover, voluntary changes have been implemented to its marketing code of conduct to promote moderate and responsible in-home consumption of alcoholic beverages.
Given the large volumes of alcohol production, Distell has committed to the production of 100 000 ℓ of alcohol for sanitisers for both commercial and societal purposes. This comes at a time when panic buying by consumers has left South Africa's shelves bare of the product.
It will work with government to make available its distribution platforms to support the need for responsible self-isolation and good hygiene practices in vulnerable communities, the group says.
Distell also says that it is committed to finding ways to support its small and more vulnerable customers, as well as its long-term suppliers in the wine farming industry as the largest procurer of grapes for wine.
“We will continue to work with government and financial institutions to ensure as best we can, the financial health of our long-term partners during this challenging time, and ensure the long-term sustainability of the industry.”
Distell has seen an expected early negative effect on its revenue and volumes across most geographies.
Export activity will also be affected by the lockdown.
About 70% of Africa revenue (excluding Botswana, Lesotho, Namibia and Eswatini, or BLNS) is exported from South Africa to local operations. BLNE operations are fully reliant on the products produced and transported from South Africa.
The group’s largest Africa revenue contributor, Kenya Wine Agencies Limited (KWAL) is, however, only reliant on imports for 30% of its revenue.
Distell says the full effect on revenues and profitability will be more accurately quantified after the lockdown is completed.
Distell will be closing the majority of its production facilities not involved in alcohol production for sanitiser purposes in line with lockdown guidelines and classification of essential items.
Current inventory levels are at about 41 days cover.
The group says it has sufficient supply of raw materials to comfortably meet customer demand beyond the end of the current financial year once the lockdown has been completed.
POTENTIAL FINANCIAL IMPACT
Distell anticipates that its cash generation will be affected, but says its balance sheet remains strong, as demonstrated by a debt to debt-plus-equity ratio of 26.9% at the December 2019 reporting period.
Its borrowings are secured by mortgages over immovable property, general notarial bonds over movable assets and a cession over trade and other receivables of specific group subsidiaries.
The group’s foreign debt amounting to £65-million is ring-fenced to Distell International and secured against in-country stock. Angolan and Nigerian foreign exchange exposure is at a minimum as a result of appropriate planning given recent currency volatility.
Distell has not breached any debt covenants and currently has sufficient headroom, also dependent on crucial cash preservation actions, to navigate the uncertainty over the next few months.
Moreover, it is also actively engaged with its lenders to create an additional margin of safety to operate out of this period should it be prolonged.
Distell’s focus is to conserve cash resources by limiting all unnecessary operational expenses, reprioritising initiatives and deferring noncritical capital projects.
It is also continuing its process to unlock value and lighten its balance sheet as consistent with previous actions.
The premium wine unit of Libertas Vineyards & Estates will be reintegrated back into the business.
The board has decided that, in line with Distell’s strategy to enhance returns and reduce complexity in the organisation, the Alto and Plaisir de Merle estates along with its brands, trademarks and stock will be put on the market to be sold.
Distell said that it is positioned to support its customers and demand post lockdown.
This entails working with key retail customers to ensure online deliveries can be fulfilled by allocating a significant sales effort and logistical support for its stock to be moved to their distribution centres to safeguard supply when allowed.
Moreover, consistent with its digital transformation capability shift, the decentralised business units have stepped up its e-commerce efforts to have product representation across all key online platforms of the market once sales are permitted.
There is also the successful launch of a business-to-business online storefront pilot for customers and scaling it up throughout the remainder of the year.