Distell has warned that the direct cost of load-shedding for SA’s largest alcohol producer might quadruple as there appears to be no light at the end of the tunnel for SA’s power crisis and the troubles plaguing state-owned power utility Eskom.
The direct costs of the power cuts was R12.5m and is “anticipated to nearly quadruple should the current stage of load-shedding in SA continue”, the company said.
Distell is in the process of completing its merger with Europe’s largest brewer, Heineken, in a deal that will bring R40.1bn in much-needed investment into SA. It was announced in November 2021 and is still waiting Competition Tribunal approval.
Distell CEO Richard Rushton acknowledged in a press statement that the “regulatory process has taken longer than anticipated” but said the tie-up would create a “formidable” firm better able to serve consumers.
Despite the delay, Distell noted in its half-year results to end-December that “at present, all indications are that the implementation of the transaction will still occur in the coming months”.
The high cost of doing business in SA, Distell’s biggest market, was highlighted by the interim results in which revenue growth far exceeded profit.
Group revenue rose 15.9% to R20.6bn on 10.3% higher sales volumes with earnings before interest, tax, depreciation and amortisation (ebitda) only rising 5.4% after foreign currency movements.
Operating expenses, including the cost of producing more product due to higher demand, grew 17.6%.
The company was forced to import extra glass at higher prices than in the local market and spent more on apple concentrate as local demand spiked.
In SA, sales of Savanna, Hunter’s and Bernini grew as did those of wines, including the Durbanville Hills, Drostdy-Hof and the JC Le Roux sparkling varieties. Sedgwick’s Old Brown Sherry was also popular.
About a third of the inventory build-up was to mitigate the likelihood of production delays due to load-shedding, Distell told Business Day. However, holding extra stock increases working capital costs and taxes.
In 2022, SA experienced 207 days of load-shedding, particularly in the second half of the year, while there have been blackouts every day so far in 2023, according to data from the load-shedding notification app EskomSePush.
Profit for the period shrank 0.5% to R1.62bn. Cash generated from operations more than halved to R1.38bn and net cash generated from operating activity dropped more than two-thirds to R763m.
Lower cash on hand was due to “a significant investment in working capital” due to the extra inventory, which also resulted in higher excise taxes. Sin taxes are only recouped when the product is sold but are paid during the production stages.
The company decided against declaring an interim dividend, citing the buyout offer.
Heineken, which makes Strongbow cider, told the tribunal last month if it cannot buy both Hunter’s and Savanna ciders, the deal is not “economically feasible” and will not go ahead. This was in response to brewer SAB’s demand at the tribunal that Hunter’s be excluded from the deal.
The deal must be finalised by May 13 or the Heineken and Distell boards will both have to agree to an extension or start again with a new offer and a shareholder vote.
Distell is looking at growing its Sub-Saharan Africa business to offset numerous headwinds which include load-shedding, rising interest rates and elevated consumer debt levels in its largest market, SA.
“Sub-Saharan growth of about 3.6% is expected for 2023 and the group continues to focus its expansion strategy on various markets in Africa with much higher growth prospects than the domestic market,” the company said.
“The development of the new production facility in the Tatu City special economic zone in Kenya is progressing according to plan and is expected to be completed in 2023, with double the current production capacity.”
The group said its capital expenditure for the current period increased 16.2% to R751.2m. Of this, R491.7m was set aside for the expansion of capacity, particularly in cider and international Scotch whisky at Tatu City.
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