Johannesburg - South African Breweries (SAB) suffers a double whammy from the ongoing weakness of the rand against the US dollar. About 77 percent of its raw materials are priced in dollars, which means it is facing constant increases in the price of its inputs. In addition, it reports its results in dollars.
Thus the squeezed “rand profits” it makes have to be converted back into dollars at ever-stronger exchange rates.
Despite the cost pressure from the weak rand, for the six months to September SAB was able to achieve a 7 percent increase in revenue in rand terms. However, once this was converted into dollars it became a 9 percent decline on the revenue reported in the previous interim.
It was a similar picture for SAB’s earnings before interest, tax and amortisation (Ebita), where in rand terms it was up 8 percent to R3.8 billion in the six months, but down 9 percent once converted into dollars. SAB’s Ebita margin increased 30 basis points to 21 percent.
“We have lived with the weakening rand for many years,” said Norman Adami, the executive chairman, which includes the South African beer and beverage operations of SABMiller, the second-largest beer group in the world. He said although 88 percent of its raw materials and inputs were sourced locally, most were priced in dollars or on the basis of import-parity pricing.
“Aluminium, resin, barley, maize, hops… these are all priced in dollars,” said Adami, adding: “You can imagine what our performance would have been like if we didn’t have that pressure.”
Lager volumes increased by 3 percent during the review period helped by “topping up” ahead of the mid-September price increase and ahead of the strike action, which began in the last week of September. Adami said that although beer prices were increased in mid-September, following an increase in March, annual increases over the past three years had not only been below inflation, but also below the average 9 percent per annum excise increase.
The star performer in the six months was again Castle Lite, which has recorded a 20 percent increase in volume sales for the fourth year in succession. It now accounts for over 10 percent of total beer volumes and Adami says it is expected to double volumes again in the next four years.
Carling Black Label, which is SAB’s biggest brand accounting for 30 percent-plus of total volume, has returned to growth after five years of stagnant sales performance.
He said that the strong performance during the review period reflected the benefits of the continued investment in “market-facing operations” aimed at enhancing customer service, improved retail execution and brand development. Funding for the “market-facing operations” was partly provided by savings in primary distribution and by “making sure every aspect of waste is eliminated”, said Adami, adding that over the last five years about R3.5 billion of costs had been removed.
Beverages, which include Coca-Cola bottler ABI and Appletiser, reported a comparatively muted 1 percent increase in volumes. Adami explained that this reflected the exceptionally strong performance of beverages in the first half of 2013.
He would not comment on speculation about closer ties being developed between SABMiller and its 29 percent-held associate Distell. Analysts are speculating that given Distell’s stated ambition of becoming the leading cider producer in the world, with a focus on emerging markets, closer ties with SABMiller would be extremely useful.
“The fact that there is huge scope for synergies doesn’t mean there’s automatically an opportunity to capitalise on it,” he said.
SAB shares increased 0.25 percent yesterday to close at a high of R529.30 on the JSE. - Business Report