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Jan Scannell

Distell defies tough market to post some solid results


Headline earnings rose 12,0% to R1,1bn, while operating profit increased 26,6% to R1,8bn. Normalised headline earnings and operating profit, excluding the impact of an additional excise duty provision of the previous year, as well as the interest provision and the full impact of the Burn Stewart Distillers Limited acquisition in the current year, increased by 14,0% and 8,3% respectively.

Distell had provided R297,8m for additional excise duty on wine aperitifs stemming from tariff reclassifications the previous year. This year, a further R171,7m was allocated for interest payable on the duty. The company acquired Burn Stewart Distillers Limited in April for £160m.

The strategic purchase of a range of scotch whisky brands, several distilleries and stocks in maturation to service over 60 markets globally, was made to strengthen its product portfolio, extend its global reach and advance its Southern African leadership of the spirits industry.

Commenting on the results, Group MD Jan Scannell said the results had been favourably impacted both by good sales and the weaker rand. “Steep increases in excise duties and marketing expenses were partially offset by foreign currency conversion gains. However, we also saw the benefits of improved efficiencies in the business and the normalisation of certain raw material input costs. “

He said operating expenses had increased by 10,3%. Excluding the previous year’s provision for additional excise duty, operating expenses had risen 13,1%, compared to revenue growth of 11,9%. Consequently, net operating margin contracted to 11,2% from 12,1%.

RTDs and cider shine

RTDs and ciders in particular had once again delivered excellent growth, not only domestically, but across a number of African markets. He added that new distribution partners for Savanna had been appointed in the UK, enhancing its route to market. “We have also recently outsourced Savanna production off-shore to Belgium to better service the UK, an important market for us.”

The ongoing appetite for whiskies; the growth of Bisquit cognacs, acquired by Distell in 2009; and Amarula Cream’s continued good performance had all helped to offset the decline of the brandy segment. As a result, Distell’s global spirits business had been able to show reasonable value growth. The wine portfolio had also delivered solid value growth.

Stressing that while bulk wine exports accounted for 64,8% of South Africa’s wine export for the period under review, which was broadly in line with global trends, Distell’s focus had remained on packaged wines.

“Despite the more competitive environment, we increased our share of South Africa’s packaged wine exports to 27,3%. This is a most encouraging development, as not only do packaged wines offer bigger and more stable margins, they are also critical in protecting brand equity. We have maintained pricing across all our drive brands, despite the fact that some competitor producers have used the declining value of the rand to lower prices.”

Sales outside South Africa rose by 10,2% with revenue rising 23,1%. Sub-Saharan African markets, excluding South Africa, driven primarily by strong cider growth, had contributed 55,6% to foreign revenue.

He said the company was building a well-resourced business unit in Africa to further unlock opportunities on the continent. “We also continue to partner in joint ventures with local players in appropriate markets as far as possible to enhance our price-competitiveness, at the same time countering high import costs and government tariffs. To this end, we have made good progress in the key markets of Angola, Ghana and Kenya.”

Domestic revenue increased by 8,6% and sales volumes by 6,1% with ciders recording the strongest increases. While volumes for wine sales were largely flat, good profit gains had been achieved, all the more noteworthy, he said, given the highly contested nature of the local market, characterised by aggressive discounting.

The performance of the spirits portfolio had been hampered by the disappointing sales of brandy that had been most vulnerable to excise duty hikes but investment in the category to reverse the decline was beginning to show encouraging results.

“As the market leader, we continue our long-term commitment to revive the entire category. We are doing so by developing leading offers that are continually rewarded with accolades for excellence on international competitive platforms. We support the Brandy Fusion showcases in Johannesburg and Cape Town and we continue to access new consumers through celebrity endorsements and sports sponsorships.”

At the super-premium level, brandy, cognac and whisky brands had grown by almost 50% in volume, helped by a growing awareness of quality credentials, as well as by successful consumer engagement initiatives and innovative gifting solutions, he confirmed.

A dividend of 183 cents (2012: 152 cents) per share has been declared. This represents a total dividend of 335 cents (2012: 295 cents) for the year and a dividend cover of 1,6 times (2012: 1,6 times) by headline earnings.

Capital expenditure amounted to R742,1m, of which R277,5m was spent on the replacement of assets. An additional R464,6m was dedicated to the expansion of mainly whisky and cider capacity.

Tough trading continues

Scannell said challenging trading conditions were expected to persist. “There have been some tentative signs of economic recovery in the US, but the countries in the eurozone remain in recession. Emerging and developing countries, hit by the sluggish economies of their developed trading partners and lower commodity prices, are also growing at a slower rate than in the past. Domestically, high unemployment and limited disposable income continue to curtail consumer spending.

“Nevertheless, we have a strong and diverse portfolio of appealing brands. We continue to enhance our route to market across a spectrum of markets and, with a debt to debt plus equity ratio of 28,4% and a debt equity ratio of 39,7%, we are in a secure financial position to continue the pursuit of our strategic course.”

Scannell, who has been at the helm of the Distell Group since its inception in 2001 following the merger of Distillers Corporation with Stellenbosch Farmers’ Winery, retires at the end of this year. Richard Rushton, currently president of SABMiller’s Colombian operations, has been appointed to the board from November and is expected to succeed him. He comes with extensive experience in Latin America and India.