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Annabelle Degroot: Zambrew Finance Director

Africansens is pleased to publish the podcast and full transcript of the recent combined Zambian Breweries plc and National Breweries plc investor conference call below

Audio recording of the Combined Conference Call



Transcript of Combined Conference Call

Operator
Good day ladies and gentlemen and welcome to the Zambian Breweries Plc and National Breweries Plc half year results for the year ended 30th September 2014. All participants are now in listen-only mode and there will be an opportunity for you to ask questions after today’s presentation. If you should need any assistance during the conference then please signal an operator by pressing star and then zero. Please also note that this conference is being recorded. I would now like to hand the conference over to Annabelle Degroot. Please go ahead.

Annabelle Degroot
Hello. A warm welcome to our fourth investor conference call, ladies and gentlemen. The related earnings release of Zambian Breweries and National Breweries and my presentation should have been emailed to you already today. If, however, you have not received these documents they are available on www.zambrew.com together with audio and other files from our previous earnings calls. After my full presentation today we will have the usual Q&A session. If you wish to submit email questions during the call you are most welcome to, and I will make every effort to answer them. There is a link on www.zambrew.com. Any unanswered questions will be addressed in our follow-up email sent to you after the call and published on www.africansens.com.

If we lose connection today, as has happened in the past, please be patient as our service providers will reconnect us. I bring your attention to the usual forward-looking information disclaimer on page two of my presentation. In my last call I highlighted the risk we faced in Zambian Breweries as the result of the 60% increase in excise as a business. And that will be discussed in detail today during my presentation. I would now like to take you through the Zambian Breweries Plc presentation and take you straight to page three which sets out the agenda for today.

I will take you through the trading and business environment followed by a short strategic review and a discussion on our managing sustainable development programme recently launched. I will then take you through the financial highlights, a summary of CAPEX in the past and then some prospects for the future. On the right there is a picture of our malting plant ground breaking ceremony which we are very proud of that happened very close to the half year, and it starts the beginning of the maltings project that will go through to 2017.

Slide four sets out our view of the trading and business environment in this half year period. The regulatory environment stabilised and we did not see a plethora of statutory instruments come through as we have in the past, and that made operating in this environment much easier. In addition we had strong reported GDP growth of Zambia of 6.3%. Despite this, however, this has been a very difficult half year for the business. Generally we saw a reduction in disposable income of our average consumer as a result of a lot of negative sentiment coming through in the mining sector due to tax and legislation, a general slow-down in government infrastructure spending on the roads and other infrastructure programmes, and unfortunately we had significant currency depreciation in the period.

The Kwacha depreciated against all major currencies. The worst performing was against the US dollar where it depreciated by 18.62%. This has obviously made a lot of our input costs much more expensive and then dilutes our earnings when we translate back into dollars. Unfortunately inflation increased to 7.8%, and as a result of tightening monetary policy to control the exchange rates, interest rates rose initially up in the high 20s and then came back down to 19%. Given this was against 12% in the prior period, this was a big increase.

This has generally led to a softening in demand of our consumers as they have come under increasing pressure in the period. In addition to this we experienced a really constrained trading environment under the 50% excise regime. As discussed in our previous calls, the government in the 2014 budget increased our excise tax on clear beer from 40% to 60% which was a 6% increase. This has translated as expected to a 23% decline in our mainstream volumes.

Now, this was modelled and set out with the government having been through this process before, so exactly what we expected to happen has unfortunately happened. As we took the excise into our price and increased the price of beer, our consumer in Zambia is very elastic and under the difficult economic conditions in this period, they are just not able to afford the beer. So a lot of our consumers are either buying less beer or downtrading into other beers, primarily opaque beer and spirits. And this has resulted in a 23% decline in our mainstream volumes. That is obviously a very serious situation for our business, and it has only partially been offset by a focus by our group on affordable offerings to those consumers. By affordable offerings I mean our Eagle beer, which is made from sorghum, and our newly-launched 750ml bulk pack which offers the consumer a discount on mainstream beer.

The good news is that our soft drink performance was strong in the half year and we grew by 13.3%, which indicates the fundamentals in our business are still good. Soft drinks are a very affordable prospect for the consumer in Zambia. Despite the aggressive competition from Pepsi we grew by 13.3%.

Page five sets out the strategic review for the period. What we saw in these six months was the reengineering of the business to manage the lower volume base while not losing focus on the strong-performing soft drinks business. So it is very important that we understand the impact of excise and that we do not constrain the business as a whole, because the soft drinks business is doing so well. We have unfortunately in the period cut 120 positions through redundancies and natural attrition. We have cut back on third-party contracts and held back on fixed costs. And we are continuing to focus on this area as hard as we can.

Importantly we have dialled up the economy offerings in our business to mitigate the risks of consumers trading down. We also focused on pushing products out to the dry areas and more rural areas of Zambia, and our mini distributor model was scaled up to capture new growth. Our affordable offerings, as explained, were primarily the 750ml Mosi pack which was launched in the north of Zambia and our Eagle brand which previously was a very popular brand and we had to constrain it in the past because of capacity issues. Now that we have capacity we are scaling up Eagle in a large way, and that actually attracts an excise duty of 20% as opposed to 60% which makes it much more affordable to the consumer. It is currently priced at just below 70% of mainstream.

The good news is that our Mosi brand has continued to grow relative to the Castle brand. We are very proud of our local Mosi brand, and we continue to invest in it and the quality of it, and that has come through in the numbers. Unfortunately our Castle brand is struggling and it is generally under pressure across the region. There is also very clear evidence of our consumers trading down from Castle into opaque beer as they look for the same alcoholic percentage in the beer that they are consuming.

Fanta outperformed Coke interestingly in the period, reaffirming the preference of the Zambian consumer for flavours. That whole flavour category in Zambia has been reinvigorated by the fact that Pepsi has come in with very strong flavour brands. Both Mirinda and Fanta have both grown significantly under the period.

The good performance of Castle Lite and Miller in the six months, however, underscores the growing affluence we have now at the higher end of our consumers with continuing growth of the middle class. So what we are starting to see is the real polarisation of our consumers, some towards the higher end of Castle and Miller and others down-trading out of mainstream into opaque and cheaper spirits.

The availability of cheaper spirits remains a significant problem for us. These spirits in sachets were banned approximately a year and a half ago. They are now back in 200ml glass bottles and they present the consumer with 200ml of spirits at 43% alcohol at 5 kwacha versus one Mosi at 6.5 kwacha for 4.5%. So there is a significant difference in the alcohol offered by the cheap spirits. We have a lot of evidence to show that excise is not being paid on those spirits and that the alcohol is being imported illegally without tax. So we have a major fight on our hands with competing with those propositions.

Again smuggling remains a problem at the border for us, particularly on Castle Lite, because of the excise duty we have on our local Castle Lite it is much cheaper to smuggle it in without excise at the border. We are aggressively discounting at the border to try and prevent this, and we have engaged the smuggling unit of the ZRA to try and help us with this problem. Despite that however Castle Lite has grown well in this period.

We continued to secure our value chain through local sourcing in this period with the maltings project groundbreaking. That is so important to us and will allow us to malt all of our local barley and to scale up our local barley programme. We anticipate that this maltings programme will be live from January 2017. In terms of market share we held market share in the period under beer, but we remained under pressure in the soft drinks arena from a share perspective. Pepsi does continue to be aggressive in this market.

If I take you to page six, it highlights our new sustainable development priorities under the recently-launched Prosper programme. SAB Miller has now taken out 10 sustainable development priorities and tried to focus them into five shared imperatives which are shown on the right of this slide. I just wanted to set out what Zambian Breweries was doing to address those five priorities because we take them very seriously.

In terms of accelerating growth and social development we have a large women entrepreneur programme that we support, and that is now being rolled out into a retailer development programme in the coming year. In terms of making beer the natural choice and encouraging responsible drinking Zambian Breweries has launched a safe drink and drive campaign in the period and supported the government in rolling that out.

In terms of securing shared water resources for our business we have secured the Itawa natural springs resource up in Ndola. What that does it allow the community free access to clear water and clean water in that community where it was previously getting very polluted, and secured access to that site for our brewery up in Ndola.

In terms of creating value through reducing waste and carbon emissions we are very proud to be involved in the imminent launch of a large recycling project in Zambia. It is something we take very seriously. And support responsible sustainable use of land for growing crops. We are now engaging over 23,000 farmers and acquiring 50,000 metric tonnes of crops from farmers across barley, sorghum and maize in Zambia. Slide seven shows the Prosper logo as recently launched setting out the five priorities for SAB Miller.

I would now like to take you through the financial highlights for the six month period. On page nine we have a summary of the PNL. Lager volume as discussed declined by 16.4% and this was a result of the excise impact. Essentially That was 23% down on mainstream with it being offset by an increase in our Eagle 750ml, Castle Lite and NGB. Soft drinks as earlier discussed grew by 13.3% led by Fanta. This gave us a net 5.2% decline in volumes. Unfortunately that translated to a net producer’s revenue decline of 12% to 11.9% as we saw a mix towards lower-priced soft drinks away from beer.

Our gross profits declined 16.3% reflecting major currency depreciation and extra distribution costs as we move out to the regional areas. Our gross profit decline in constant currency was only 3% but the 16.3% reflects the increased cost of bringing in imported products and translation into dollars. We have in that number got continuing manufacturing efficiencies and we have reallocated some storage costs which were in the gross profit number in prior years down into fixed costs at the operating profit level.

Our operating profit decline of 36.9% in US dollars was a disappointing result for the group. It was 27% down in constant currency. It is important for us to understand the further dilution of the results from the gross profit to the operating profit level. This was primarily driven by one-off costs associated with the redundancy programme that we went through in the period, some extra costs linked to an operational integration project that we are conducting that we believe is for the benefit of the business in the long run, and the significant reallocation of storage costs – that is primarily barley and maize storage costs – out of gross profit into fixed costs.

Taking you to page ten, this then led to an operating margin decline of 530 basis points, primarily reflecting the mix away from mainstream beer towards economy beer and soft drinks. Pleasingly our finance costs were down by 10%. We managed to continue to negotiate good interest rates despite the increase in rates in the economy. We had better working capital management and better cash management generally. This then translated to a profit after tax decline of 37.7% and 28% in constant currency.

In summary, this was a difficult period where we experienced volume decline, currency devaluation, a product mix towards lower margin brands and one-off operating costs which were responsible for the performance of this half year. Resultantly our earnings per share were down and the board did not recommend a dividend for the half year.

Page 11 and 12 set out the results that I’ve just been through. I won’t take you through them in detail but am happy to answer any questions on these slides as we go through.

Taking you to page 13, I wanted to set out the cumulative CAPEX spend for the group as an indication of the significant commitment that SAB Miller has put into Zambia over the past five to six years, with a cumulative spend of $390 million expected by the end of this year. The CAPEX spend of $36 million this year primarily reflects the maltings plant, soft drink line upgrades and a large effluent treatment plant in the Lusaka brewery.

Hence it is even more important for us to fix this excise problem for the business given how much has been invested. We are now expecting to provide returns to the group, and so getting the excise rate reduced or dealing with that excise rate is an absolute priority for the business.

Taking you to slide 14 I wanted to set out the prospects for the rest of the year and going forward. Despite the difficult year we still remain confident in the Zambian economy and the resilience of this business in the long term. We see this as a temporary problem. We will readjust to cope with it and move back into growth going forward. Our key focus areas will include ensuring affordability for our consumers as we now recognise that they cannot afford our beers, and capacity utilisation of our new brewery while supporting the strong performance of soft drinks.

We will continue to restructure and manage costs with the reality of our current volumes and margins. The strategic investments will however still go ahead in the maltings plant and in soft drinks upgrades to set this up for future growth. We will continue to increase our geographical reach to capture rural growth as we believe this presents real opportunity for the group. There will be, however, more focus placed on our reputation as a responsible stakeholder in the investment, tax and employment framework in Zambia. This is something that we need to place much more emphasis on.

We are engaged with the SEC and LUSE to address the 75% shareholding requirement and are very active in that arena. Finally, we face a politically uncertain time at the moment in Zambia, and this will reflect in the second half. With the recent death of our president and new elections coming on the 20th of January the impact on volumes in this period is uncertain at this time. That concludes my presentation for Zambian Breweries.

I would now like to take you into the presentation for National Breweries. Moving to page 18, it sets out the agenda. I will take you through a very similar format to that we’ve just gone through in Zambian Breweries. On page 19 National Breweries obviously experienced a very similar trading environment, but contrary to Zambian Breweries, National Breweries had a stronger half year. In kwacha terms our operating profit was up 23%. Unfortunately again this was diluted when it was translated back into dollars into a muted growth.

The decline in disposable income for our National Brewery consumers was evident as they really came under pressure. As a result we saw significant down-trading into bulk beer. Bulk beer is illegal in fact, it is not being regulated. So we lost many of our consumers into that market in the period. Our new 29.1 million plant is nearing completion in the second half. This will double production to 2.1 million hectolitres from 1 million hectolitres in Lusaka. That has provided some obstacles to current production in Lusaka. So our carton production in Lusaka is not what it should be for prior year because there have been continuous disruptions during this time. Unfortunately in the period we have been hampered by water shortages, power outages and plant break-downs which have resulted in lost opportunity in terms of volume.

Taking you to page 20 for the strategic review, what is very important for National Breweries going forward is that we continue to invest in systems and utilities to enhance our operational efficiencies. It has become clear to us that this business has been under-invested in the past and is now reflecting in these often and constant break-downs of old plants and some of the breweries. What we have done is we are replacing the Lusaka brewery and we have already invested a significant amount of money in sorting out generators, boilers and water supply such that we do not suffer from these break-downs going forward.

In the period we remained focused on Chibuku Super PET, our new product, with the launch of that, and the returnable bottle category expansion while maintaining our core carton business. It is absolutely imperative to us that we maintain that carton business and see that as the bread and butter of the business while we roll out the Super proposition to consumers mostly in the regional areas. Super now accounts for 20% of our sales, but it is clear that affordability remains a constraint for those customers. So it is still a better proposition than cartons, but it has to be correctly priced such that they can access it, especially under the current environment.

The playing field for the opaque beer business remained unlevel with some competitor breweries continuing to trade in draught beers despite the local council banning the packaging and transportation of product in drums. As explained with Zambian Breweries as well, cheap spirits has increased significantly and is a very evident competitor to our Chibuku proposition.

In addition, the market on the copper belt became more competitive at the end of the second quarter after one of the opposition breweries introduced a new brand of beer on the market called Kankoyo. The new product is packaged in one litre HDPE bottles and has a very highly competitive price point of 3 kwacha. And it is competing directly against our Super product which is priced at 4 kwacha, despite the fact that it is not carbonated. But the new packaging is helping it.

Slide 21 sets out the picture of the new brewery which we hope will be commissioned very shortly. And page 22 and 23 take you through the Prosper imperatives which apply to National Breweries as well as Zambian Breweries. If I take you to the financial highlights on page 25, I will take you through these and then I’m happy to take any questions on the PNL in the Q&A section.

Chibuku carton volume growth was 1.4% in the period. As explained earlier, there was some lost opportunity due to plant break-downs. Chibuku Super volume, however, declined by 4.1%. And what we saw was a reaction by the consumer partially to a change in the alcohol percentage while we were fine-tuning this product, and also a reaction by the consumer to the price in terms of not being able to afford it as the economic conditions tightened. We have now addressed both of those issues.

As a result net producer’s revenue declined by 7.3%. However, the gross profit increased by 0.6% reflecting good variable cost savings on the negotiation of carton and maize prices. We managed to achieve very good decreases in both of those main ingredients for this product. Pleasingly, operating profit increased by 5.8% in dollars and 23% in constant currency, reflecting a good performance for this business for the half year.

We saw operating profit margin growth of 180 basis points, reflecting that mix, continued contribution of Super in the business and those variable cost savings. We had profit after growth tax of 4.8%. And unfortunately the growth was muted by the currency devaluation in terms of our dollar results. Once again the board did not recommend a dividend payment for this business on the basis that we really need to reinvest in this business and see how the full year pans out before we declare a dividend.

Page 27 and 28 set out the detailed PNL that I am happy to take question on at a later stage. 29 is an important slide for this business which shows the real decision by SAB Miller to invest in Chibuku going forward. This isn’t a business that we have invested significantly in the past. You can see that real step change from 2013 to the current year reflecting the investment in the Super line in Kitwe and now this large Lusaka brewery.

In terms of prospects on page 30 for Chibuku, as I said before cartons remain the backbone of this business and it is important that we do not lose focus on that. The environment, however, remains highly competitive, so we have to start to distinguish ourselves with good quality beer, rich market penetration and the launch of Super. The continued pressure on disposable income is expected to continue to impact sales with consumers trading down to bulk, as I spoke about before.

But we do see a step change in the business with the introduction of the new Lusaka brewery. We will take advantage of the shelf life of Super to enhance our sales in the more remote areas where Chibuku is not traditionally supplied to from Lusaka because of the shelf life. And as with Zambian Breweries we will be placing more focus on protecting our reputation as a responsible stakeholder in the investment, tax and employment framework in Zambia. Again I must point out that we face an uncertain political environment in the second half and the impact on volumes is uncertain at this stage.

That now concludes my presentation today and I am happy to take questions from the floor.

Operator
Thank you very much. Ladies and gentlemen, we will firstly take questions regarding Zambian Breweries Plc. Should you wish to ask a question please press star and then one now. Should you decide to withdraw your question please press star and then two. I will repeat that. To ask a question on Zambian Breweries please press star and then one now. We have a question from Paul Robinson at Laurium Capital. Please go ahead.

Paul Robinson
Hi Annabelle. Thanks very much for taking the call. Could we have some kind of view on how volumes are looking now post the second half and into the festive season, whether you are seeing a similar decline in volumes run rate right now year on year? And secondly, the SAB Miller Coke deal and ramifications for Zambrew going forward.

Annabelle Degroot
In terms of volumes there has been very little change. The second half there is definitely some uncertainty in the market at the moment. First of all we had a period of mourning. Other businesses that I’ve talked to are suffering from the same. There is fairly low-key activity at the moment from our consumers. It is generally quite quiet unfortunately. In terms of the Coke deal you will see that Zambia and Botswana form Phase two of the Coke deal. That is because the Coke businesses are embedded into the beer businesses in both of those countries. For a transaction to happen for both of those businesses the minority shareholders would need to accrue this and that may present some challenges. So they will probably be looking for a different type of solution for the business going forward and not necessarily splitting it out.

Paul Robinson
And what type of solution do you think that could end up being?

Annabelle Degroot
I’m not able to comment about that at this moment, other than to say it is unlikely that the minority
shareholders would approve that the Coke business gets split out of Zambian Breweries.

Paul Robinson
Okay. Thank you.

Operator
Ladies and gentlemen, a reminder that should you wish to ask a question regarding Zambian Breweries please press star and then one now. We have no further questions on Zambian Breweries. Therefore should you wish to ask a question regarding National Breweries please press star and then one now. Our first question comes from Andrew Schultz of Investec. Please go ahead.

Andrew Schultz
Hi Annabelle. Can you give us any indication on the proposed timing of the potential sell-down to the 75% level? LUSE has been saying that these sell-downs were imminent. That was six to eight months ago. Can you indicate where you are in the transaction?

Annabelle Degroot
No, I’m afraid I can’t, other than to say that we are fully engaged with LUSE and the SEC to find a solution for us to meet that 75% requirement.

Andrew Schultz
Okay. Thanks.

Operator
Our next question comes from Paul Robinson of Laurium Capital. Please go ahead.

Paul Robinson
Hi Annabelle. This is a question for Natbrew and Zambrew. Can you give us an indication of what kind of operating cost growth you see for next year? I know it is pretty hard and there are a couple of moving parts, but what are you guys expecting?

Annabelle Degroot
In terms of operating costs we will either try and keep them flat or they should be in decline. When you strip out the exceptional costs we had in the first half year, other than that our operating costs were actually less than prior years. We pulled that back. So I would expect to see very muted growth of our operating costs. Certainly as a business we cannot afford to allow those to grow.

Paul Robinson
Okay. Thanks.

Operator
Our next question comes from Godfrey Mwanza of Barclays Africa Group Absa Asset Management. Please go ahead.

Godfrey Mwanza
Hi Annabelle. Thank you for the presentation. Sorry, I actually had a question about Zambian Breweries but I got in a bit late there. Regarding the sell-down, could you give a bit more colour as to what the challenges you are facing in particular? There is sufficient interest to take up the amount that needs to be sold down, but it is taking a lot longer. Can you give us an indication of what kind of challenges you are facing, as opposed to giving a timeline on when you expect to be compliant? That’s the first. And then the other one is integration of Zambrew and Natbrew operations, if you can give some colour on that as well. Thanks.

Annabelle Degroot
In terms of the 75% I’m not really able to comment. It is obviously a large sell-down for us to cope with, from 87% to 75%. Obviously SAB Miller is seeking to find an ideal solution to that. I can’t really comment on that any more. We are working with LUSE and SEC on that as quickly as possible. In terms of the integration of National Breweries and Zambian Breweries, we are in the process of integrating those businesses from an operational point of view. It makes perfect sense. A couple of years ago we integrated the back office of these businesses. And it now makes sense that we combine forces on the technical side and the sales and distribution side to drive synergies and use best practises from both businesses to our advantage. So it is sort of a natural process if you like. It seems like the logical next best step for those businesses.

Godfrey Mwanza
Thank you.

Operator
Our next question comes from Tamir Saeed of THS Partners. Please go ahead.

Tamir Saeed
Hi. I’ve got a couple of quick questions, both on the Natbrew business. The first one is obviously the currency decline impacted your costs in the Chibuku business. How have you been thinking about the pricing on that? Have you been passing through the local currency cost increases in price? And then secondly, I had a question on the overall volumes of the Chibuku carton plus the Super business. Given that you had down-trading from your mainstream brands in Zambrew I would have expected maybe to see the overall volume of the Chibuku business growing by more. So could you give us a bit more colour as to was it that you lost market share to the informal business, or how much of it would be the launch of the new competitor product against the Super range? Thank you.

Annabelle Degroot
It wasn’t a great line, but I will try and address the questions and if I don’t answer it completely please let me know. In terms of price we have had increasing import costs for a lot of our products in Zambian Breweries. Unfortunately we are not able to pass that on, and that is why it has hurt our gross margin and operating profit because our consumers cannot afford to cope with any further increases. So we have absorbed those price increases both in Coke and in soft drinks, although we did take a PET price in August for our soft drinks.

In terms of National Breweries we are very much unexposed to exchange rates in that business really. Our main inputs are maize, which is locally priced, and cartons which is foreign currency related, but in the period we have managed to really negotiate a big decrease in those prices with Nampak. So for this period we have not had to pass on any exchange impacts into the price in Chibuku. In terms of our volumes in Chibuku I think it is a mixed bag really. We definitely have clear evidence of Castle consumers down-trading into Super. Like you said, you would expect to see an increase in volumes. However, we also on the lower side have very clear evidence of Chibuku customers down-trading into the cheaper bulk beer and spirits. That business hasn’t really benefitted because the down-trading has happened on both ends. However, it is clear that we lost some opportunity in that business because of these production break-downs, which I hope now are a thing of the past.

Tamir Saeed
Thank you. Just one last question on the bulk beer. I’m sure you are engaged with government all the time to try and crack down on that. Are you getting support from the government? What is the dynamic there?

Annabelle Degroot
No, there is really no appetite to enforce that legislation. We do engage with government but we are not making any progress.

Tamir Saeed
Thank you.

Operator
Ladies and gentlemen, a final reminder that if you would like to ask a question please press star and then one now. Our next question comes from Jonathan Imakando of African Alliance Financial Services. Please go ahead.

Jonathan Imakando
Thank you, Annabelle. I just had a couple of questions for you. My first question actually relates to Zambrew. Could you please give us an indication in terms of contribution margins for the lagers against the soft drink? Then my next question is regarding the Eagle brand. You mentioned that there was increased capacity. What is the current capacity that you have for the Eagle brand? Lastly, regarding the excise duty change I know there was an interaction with the government in terms of having them reduce that. I need to find out how far you have gone, and whether there is any expectation regarding that, or what is the hold-up given that the government actually receives more revenue with the lower excise duty.

Annabelle Degroot
Thank you. On the relative contributions of lager and soft drinks I’m not really able to give you that level of clarity on this call publicly, other than to say we earn higher margins on lager because it is a higher priced product. But it is also our product, and it is important to understand that we are only a Coke bottler, so we share margin on Coke with Coca Cola. So the Coca Cola margins are significantly lower than the beer margins. In terms of Eagle capacity we came into extra capacity as a result of the new Ndola brewery. The Ndola brewery has now got a 1.1 million brewery and used to be just below 400 hectolitres. We have a new packaging line there of 750,000 hectolitres capacity and we have a second older line there that we can use as well. With the decline in mainstream lager volumes we are only using the new line, the 750,000 hectolitre line, and the lines in Lusaka. So there is ample capacity at the moment.

And your last question on excise duty, yes, we have been talking to government all year and actually providing them with a monthly update as to the position of the company. What is actually important is to explain the whole picture to government. What is clear is that our volumes are down. As a result employment is down. We have made people redundant. We are cutting our barley crop as a result, so there is impact on agricultural. You know there is impact all the way through the value chain. And an extra $32 million investment that we were going to do up north was cut. So what we find is the government completely understands the story. They understand it and they hear us.

What is difficult to get past is they are actually earning more excise duty than they were earning last year because the price went up. But the argument that you have to get through to Government is actually they would have been earning even more than that. And particularly as we go out in future years the gap between what they will earn and what they could have been earning will widen. That is a difficult argument to make because while the ministry of finance understand it, the tax authorities are sitting there saying, well, we’ve got more tax than last year so what’s the problem? So it is actually arguing that lost opportunity and the bigger impact on investment and jobs that is so important. The indications are that our arguments are totally understood but the political environment is very difficult in which anybody would make any of those difficult decisions publicly. The current party is under a lot of pressure. So nobody is going to make a decision on this for
the foreseeable future.

Jonathan Imakando
Thank you Annabelle. Just a follow-up question. When I was actually looking at the actual prices on the shelf of the beers and what the impact was before the excise duty and after, it doesn’t seem that much. Are there any other factors besides the excise duty that is causing the 16% drop in volumes in lager that we are seeing?

Annabelle Degroot
On the contrary, Jonathan, our recommended retail price went up from 5 kwacha to 6.5 kwacha in a very short period of time because we took price in October. And then the excise duty came in, so it went up by 1.5 kwacha. So that is a 30% price increase. On the other hand then you have consumers who are now coming under increasing pressure at the moment because of the harder economic conditions. You combine those and it becomes very difficult.

Jonathan Imakando
Thank you.

Operator
Annabelle, it would appear we have no further questions. Do you have any closing comments?

Annabelle Degroot 
I just wanted to say many thanks for your kind attention today. Your time is really appreciated and it is great to be able to share our story with you. Thank you very much.

Operator
On behalf of Zambian Breweries Plc and National Breweries Plc that concludes this conference. Thank you for joining us. You may now disconnect your lines.

END OF TRANSCRIPT

Related Links:
View Zambian annual reports
View Zambian Breweries plc section
View National Breweries plc section
 
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