Transcript of Zambian breweries and National Breweries conference call

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1. Transcriptofthecombined ZambianBreweriesplcandNationalBreweriesplc conferencecall heldonFriday12July2013 Presentation&Audio 2. Zambian…
  • 1. Transcriptofthecombined ZambianBreweriesplcandNationalBreweriesplc conferencecall heldonFriday12July2013 Presentation&Audio
  • 2. Zambian Breweries and National Breweries Conference Call July 12, 2013 Operator: Good morning and welcome to the Zambian Breweries and National Breweries Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key, followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to Annabelle Degroot, the FD of both companies. Please go ahead. Annabelle Degroot: Good afternoon, everyone. This is Annabelle Degroot, the FD of Zambian Breweries Plc and National Breweries Plc. Welcome to our call. I will be discussing our view of the future of our industry and the Zambian economy and then we'll separately discuss Zambian Breweries Plc and National Breweries Plc results. This should last around 30 minutes. Thereafter, I'll open the floor to questions-and-answers dealing with Zambian Breweries first and then National Breweries. We have set aside 45 minutes for this. This is our first attempt at a call of this nature and we will try and manage it as best as possible but please bear with me. If I don't manage to address all of your questions, please email them directly to my address at, which will be sent out to you. Announcements will be sent subsequently by email to you and other call participants. Thank you to those who had sent questions in advance. I will now go through the presentation and just give the page number of the presentation when I turn the slide to help you follow it. Page 1 - Welcome to the Investor Conference Call. Page 2 - I would like to just give an overview of the Zambian economy at the moment. We're very pleased with the GDP growth in Zambia since 2000. Robust growth. We've had four peaceful democratic presidential transitions since 2000, strong credit rating and the recent over- subscription on the euro bond on the €750 million bond was a good sign of positive investor confidence in the country. Page 3 - we have attractive economic fundamentals at the moment. Zambian's sitting ahead of the rest of Africa in real population growth rates on the average rates. We've got robust growth, again, sitting ahead of the average of Africa, LatAm and the world and we're sitting with a population
  • 3. of 14 million at the moment, with relatively low per capita consumption of beer, and I'll go through that on a separate slide. Page 4 - I won't go through this table in detail. I mean, if there's any questions afterwards, but as you can see the GDP growth muted inflation growth which has been very positive for us. A relatively stable exchange rate last year although it has depreciated this year, and good population growth. Slide 5 - this slide is important just for you to understand where we're sitting on the per capita rate for sparkling beverages and for beers. So, as you can Zambia is sitting right at the bottom of the trend at 21 per capita on sparkling and 8 on beer count, and this obviously presents us with a good opportunity to build a full beer and soft drink portfolio to access these (inaudible). Slide 6 was really the final slide on the economy, and while it's quite a busy slide, the take-away from this slide is that the majority of our population and the growth is sitting in a very young population in Zambia, and so this group of people will gradually migrate into being our consumers and it's a significant wave of young people coming through. If I just move on to Page 7 and then Page 8, just to talk about the operating highlights of Zambian Breweries Plc, our beer and soft drink business in Zambia. The highlights really have been the good trading environment, strong GDP growth and a stable inflation, and in fact, inflation coming down in some instances, and this growth achieved despite a real increase in new regulations in the country. So, I will go through those in a bit more detail but it has been a little bit volatile in the last year. A number of regulations from the government; none of which we particularly disagree with. It was just the way some of them were implemented very rapidly was—it made things difficult for the business in some instances. We have good beer growth of 12%, really, and strong market growth underpinned by improved execution and brand health, so particularly we saw our local brand Mosi really gaining momentum, something we're very proud of. And also in the premium category, Castle Lite have grown in triple-digit's been a very, very strong (audio interference) last year. Our soft drinks growth of 30% really came on the back of affordability, availability and market development. We had a very specific soft drink recovery plan. We had been losing market share, so a lot of effort was put into market execution, extra coolers, sales reps, and more importantly, we rolled back the price of all soft drinks in anticipation of an excise break from the government. So, we made the decision to take the price back before the government made the decision to take excise back which did eventually come
  • 4. through in the first of January this year. So, good soft drinks growth for the business. Most importantly, we were in a capacity constrained environment on the beer side for most of the year. We had reached capacity, we were not able to (inaudible) the brewery until the new brewery came in online in November, but with increased focus on manufacturing efficiencies and distribution efficiencies, we were able to grow beer 12% despite having no extra capacity. The good news there is that the new Ndola Brewery, so our $86 million brewery investment in Ndola came online in November towards the end of the financial year. The brewery came online, the new packaging line associated with that brewery has come online in this financial year. So, while we were able to brew more beer, we were still restricted in the year unfortunately with the old packaging line. That brewery came online in record time and it's going to significantly contribute to the growth of the beer volumes in the north of the country where copper is so prevalent at the moment. Something we're also proud of is our successful local sourcing initiatives which have now resulted in the approval of a malting plant in Zambia. We've been focusing strongly on our Bali local sourcing and local Bali- growing program in the last few years. That crop has been very successful. It has, however, had to go to Zimbabwe to be malted. Now, just the company in Zimbabwe is now running out of malting capacity, and hence we were faced with a very difficult decision of—to—and we would have to build a malting plant or we would have to stop the local Bali program. So, I'm very pleased to announce that we have now got approval to build that malting plant which will allow significant savings on our Bali and malt practice going forward. Other local sourcing initiatives have included the set up of a local preform manufacturer in Zambia, and so we will no longer have to bring those in to South Africa. So, that helped the security of supply and also cost savings. Important in the business is we've had a complete revised HR structure put in place with improved processes and employee engagement, and something we've really seen from performance management is improved performance from all of our key staff in the year. And importantly, for our license to trade issues and our relationships with government, our total tax contribution has increased from $95.7 million to $107.7 million, which is important to (audio interference). Moving on to Slide 9, it's just a picture for you of the old Ndola Brewery that we've been operating, built in 1952, and then on Slide 10 is now the new improved brewery. It's been a great success.
  • 5. I'll move on to Slide 11, and then onto Slide 12. I won't dwell on these slides, I think you can see through them, but just to give you a sense of who our competitors are in the market. We are obviously the dominant party in the beer industry. We have over 80% of market share. Our main competitors are Kazuma who really imports, they do not manufacture, they import Heineken and Windhoek, primarily, and Amstel. And then, we have seen increasing amounts of imports coming in over from the Congo border, Primus and Simba, generally coming over legally, and that's primarily because we were unable to supply the market in the north because of our constraints with capacity. Now that we're able to supply the market in full, we're seeing a roll-back of those imports quite quickly. On the AFB, which is our—where we compete with our Redds product, again we compete against Kazuma. They are fairly strong on the Hunters' (ph) side of things, and there is a small amount of Savanna Light in from (inaudible). On Slide 14, moving onto Slide 14, our soft drink competitors. Soft drinks is a far more competitive business here. We have a plethora of B brands in the market that was (inaudible) heavily against in (audio interference) low cost, low class (ph) products. We can see those come through from California Beverages and acacia beverages, and then importantly, our main competitor at the moment now is Pepsi; they're in with the business called Varun Beverages here and they compete against us with both the soft—with the bottles and the (inaudible). I mean, if anything, the introduction of Pepsi into the environment has driven a far stronger performance from our soft drinks business here in Zambia with that competition. So, I'll move on to Slide 15, and then onto Slide 16. If I just give you a summary of the financial performance of Zambian Breweries, good GDP growth and inflation. I just wanted to go through some of the regulatory changes from the government. SI 33 moved all local transactions into our local currency kwacha, which makes sense. The unfortunate issue was that there was no warning of the changed legislation and we had significant forward contracts in dollars taken out against the Ndola Brewery. That had two impacts on us the first four weeks. (Inaudible) then we had to pay those contracts in kwacha we sat on excess foreign currency for a lot of the year, and unfortunately the kwacha appreciated strongly after that regulation, which resulted in us actually making $3.3 million of exchange losses in the year which you will see in our finance costs. SI 23 was an alcohol packaging restriction that actually had more impact on Zuku (ph), which I will go through in the next presentation, but what it did do was ban alcohol sachets, which are spirit sachets, which had a major social impact in Zambia, and so we were pleased with that regulation. Again, SI 64 came in and restricted trading out heavily which
  • 6. impacted both the beer and the Chibuku business. That legislation was changed back so it was only a short-term issue for us. And then finally on SI 47, we had minimum wages acts brought in. This did not impact our business because obviously as you can all see here, we pay well above minimum wages. Then lastly, most recently, there's been a bold amendment act in this current year which have put forex monitoring in place for the business. Again, we don't expect that to have a major impact on the business other than it's increasing our administrative burden in the environment. We did have the rebasing of the kwacha on the first of January. Basically, they took three zeros off the kwacha. We—that was managed internally without any issues. And then, I guess just the other important thing too with the business environment was just to understand that we were in a very cap ex intensive year. The Ndola project was a big project; took up a significant amount of time but has been managed in line with budget with no issues. The next slide, Slide 17 is just to give you a feel for the exchange environment. The South African rand has depreciated significantly against the kwacha in the year. That is—that has a good impact for us. We've made good positive price variances on our imports from South Africa. And then also to point out, while there was some concern about the kwacha in the year, actually when you look at the chart over the financial year, the kwacha only depreciated approximately (audio interference) percent in the period, so nothing drastic. The only problem was is that sharp appreciation you can see as a result of the SI 33 which is unfortunately the period following that where we made our exchange losses of (audio interference). Moving on Slide 18 - Financial Highlights. This is the beer growth of 12% and soft drinks of 30%. We took a beer price increase of 7% at the beginning, right at the end of the prior financial year, so the beginning of this financial year. That was effectively a negative price increase because we had not taken prices two years, so this is obviously with inflation taking into account our beer prices have not been very inflationary. And then, soft drinks on the 300 ml, the glass bottle, we actually took a 23% price roll-back in anticipation of the government removing excise, and we took that price back in March 2012. Then on soft drinks, 500 ml PET, we then reduced the price by 7% on the first of January as a result of the government agreeing to take back excise back to 0% on soft drinks. The primary drive behind this lobbying with the government was that actually soft drinks in Zambia are relatively expensive compared to other countries in Africa, and the government was very keen to make soft drinks accessible to most people and so they agreed to take the excise back. Whenever we've negotiate excise rates with the government, we have always shown that we will be able to generate (audio interference)
  • 7. revenue from that because of the growth of volume, and that has come through and backed up our case. So we had, as a result of that strong volume growth, we had revenue growth of 20%. The very strong fixed cost controls in the business this year very much increased both the format; that along with those distribution savings and manufacturing efficiencies trickled down to operating profit growth of 29%, and most importantly, an operating profit margin growth of 140 basis points. So, a strong year overall for Zambian Breweries. As a result of our good cash flow generation, on Page 19, you can see that we achieved a 15% reduction in interest burden. Unfortunately, our finance cost were driven up by the exchange losses that I explained on forward contracts. And, we managed to reduce our debt burden to 57 million from our $75 million syndicated facility. Refinanced that in February 2013. We had many, many banks involved in that syndication beforehand, but because of the increased ability of the banks in Zambia to lend, we have now refinanced that directly with four banks (audio interference) country. Importantly, we've dropped our effective tax rate from 41% to 33%. We had provided for a liability that we were concerned with in the prior year that we've managed to resolve, and so that provision has been released and along with accessing some of our tax incentives from some of our big investment programs, like Ndola, we've managed the tax rate down to 33%. And then, just to mention that our cap ex spend of $50 million, roughly, was in line with budget with no major overspend. Moving onto Slide 20. I won't go through this in detail. I think the important thing is to see the volume growth feeding through to the operating profit growth and the margin growth. If I move onto Page 21, again, nothing significant to point out. Unfortunately that growth in finance cost doesn't reflect the reduction in interest as a result of those exchange losses. So, without good operating profit growth, reduction in finance cost and interest cost and the interest—the income tax savings in the year, we actually delivered a profit for the year up 42% on prior year up to $20 million. Moving on Page 22 on the balance sheet. The significant movement is on the borrowings, on the drop on the borrowings and nothing else major to report in the balance sheet other than the increase in property, plant and equipment as a result of the Ndola Brewery. Again on the cash flow, on Slide 23, just to again point out that we had good cash flow generation in the year, which helped to reduce our debt burden.
  • 8. Moving on to Slide 24. Debt in the business has been a concern for SABMiller and has been the primary reason why we have not been paying dividend, and again, why we will not be declaring dividends this year. There is an increased focus on reducing that debt burden, getting our interest cost down before we start paying dividends. The main thing about this slide is to show you that we still remain relatively cap ex intensive next year. Zambian Breweries have got the maltings approved and so there will be a significant investment next year in our malting plant. But, the important thing is that cap ex as a percent of EBITDA has started to reduce, which is positive for the business. Moving on to Slide 26. This was a slide to explain to our Board as to why we would not be declaring dividends. Again, you know, the same story - we need to get our interest burden down and our debt burden down. The next slide, Page 27, is just a story that we provide to the government in terms of our VAT and excise contributions going forward. The important thing for us is to demonstrate to the government that their decisions to reduce excise in Zambia have actually driven volumes up and driven revenue collection up. The numbers here are our straight progression It's just a straight progression of where we are right now. That does not actually reflect detailed internal numbers, which we don't provide to government, but this is a slide to show the government that their decisions to roll-back in excise and to reduce excise have definitely got a positive revenue impact for the government, and we like to try and maintain that relationship because we feel those excise rates are sitting at the right level at the moment. Moving on to Slide 28. Just sort of the general outlook for Zambian Breweries. Because of our robust macroeconomic outlook for Zambia and our continued strategy of doubling the price, halving the price, accessing affordable cash (inaudible) and going farming in terms of our local Bali sourcing program, we're expecting, you know, good, strong volume and revenue growth and good EBITDA growth going forward. In the next year, we do expect our raw material input cost to rise. Unfortunately, we will have to go back to importing malt on quite a large scale while we straddle that year while the malting was being built, so we're in a tough situation where Zimbabwe does not have enough capacity for us and therefore our capacity will not be up towards—until the end of F'15 and so unfortunately this year we are importing quite a big proportion of our malt, so that will impact on our P&L. The good news is this will be offset by the efficiencies coming through from our new brewery and local preform manufacturer. And, it's important to note that as we try and grow our volumes and access these (audio interference), we are going to have to go wide. So at the moment we're very focused in Lusaka and Ndola, and as we move further out into the country accessing remote areas, we will obviously sacrifice
  • 9. some margins to get the product out there. Our full year cap ex is expected to be ar
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