Distell reports higher sales in spite of recession

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Even in the face of the protracted global recession, dwindling consumer disposable income and destocking by the trade, Distell was able to lift revenue and sales volumes for the six months to December 31, 2009, compared with the same period 12 months earlier.

South Africa's leading producer of wines, spirits, ciders and ready-to-drinks (RTD) grew sales volumes by 7,7% and revenue by 9,3% to R6,6 bn. Operating profit rose marginally by 1,9% from R931,9 m to R949,2 m but, headline earnings declined 1,9% to R623,2 m and headline earnings per share, by 2,0%.

A dividend of 124c per share has been declared, equal to the previous year's interim payment.

MD Jan Scannell said domestic sales volumes had risen 5,8%, and revenue by 10,2% and that Distell's share of local alcoholic beverage consumer spend had been successfully maintained.

With consumers seeking lower-priced options in an extremely challenging trading environment characterised by rising debt levels and unemployment, cider and ready-to-drink brands had continued their strong performance. However, the spirits portfolio had seen volumes decline in line with worldwide trends. The wine portfolio had experienced a marginal dip in sales volumes.

"The severity of the recession notwithstanding, Distell has maintained its policy of protecting brand equity by not purchasing marketshare at the expense of profitability. Now more than ever, it is critical that we maintain brand reputation so that when the economy recovers, we are well positioned to capitalise on improved consumer spend," said Scannell.

International sales volumes, including Africa, increased by 13,8% but a stronger rand against all major currencies limited international revenue growth to 12,0%. Scannell said spirits volumes exported showed encouraging increases and wines more modestly so, while ciders and RTDs continued their dramatic upward trajectory, although off a smaller base."

Distell exports Amarula worldwide, while wine brands such as Nederburg and Two Oceans continue to defy the downturn in key markets. Cider brand Savanna is steadily building its presence in the UK and Holland as Hunter's strengthens its footprint in Africa.

The increase of 1,9% in operating profit had resulted mainly from continued revenue growth, he said. "Benefits derived from improved throughput and greater efficiencies were largely offset by the impact of the stronger rand on the revenue line and a less profitable sales mix. Moreover, foreign currency conversion losses of R17,9 m, compared with last year's R32,1 m gain for the comparable period, also impacted significantly on the 10,6% increase in operating expenses."

Consequently, the net operating margin had declined to 14,3% from 15,3% a year ago.

Capital expenditure had amounted to R372,1 m, of which R84,5 m was spent on the replacement of assets. A further R287,6 m had gone mainly to the expansion of cider, sparkling wine and whisky production capacity.

Investment in net working capital, including R116,1 m relating to last April's acquisition of heritage cognac brand Bisquit had increased by 12,0% to R3,0 bn.

Cash retained from operations amounted to R380,4 m (2008: R360,2 m). Distell remained in a strong financial position, Scannell said, with net interest-bearing debt of R193,8 m, and a debt/equity ratio of 3,7% as at 31 December 2009.

He stressed that the impact of the global economic crisis was far from over, despite some signs of a recovery. "Persistent uncertainty and continued volatility make it difficult to predict either the timing or the extent of any upturn, particularly given the present, high levels of consumer debt and unemployment. In South Africa, the situation is exacerbated by still deepening job losses, as well as rising energy costs.

"Nevertheless, we are confident our versatile portfolio of strong, appealing and diverse brands and our capacity to trade across a spectrum of markets will keep on bolstering us against adverse trading conditions. Thanks to our reputation for delivering excellent value across a comprehensive range of price points, we should also be able to benefit from any likely change in consumer patterns that persist post-recession, with a more considered, frugal attitude to spending replacing the conspicuous consumption of the past. At the same time, the security of our financial position should give us the opportunity to take early advantage of any improvements in the economic conditions of the markets in which we operate."

He added that, with the 2010 FIFA World Cup just months away, the global focus on South Africa was increasing and would in all likelihood translate into increased tourist traffic. Moreover, Distell's agreement with FIFA, entitling the company to market Amarula and a range of specially produced Nederburg wines for the tournament, suggested there was still reason for some optimism.

"We are confident that Amarula and Nederburg will benefit from the association, not just inside the country but worldwide. There is a strong interest in football, and enthusiasts should respond to the increased visibility of the two brands in these countries. We also look forward to many of our other brands benefitting from the increased international spotlight on our country."

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