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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

ANNUAL RESULTS

Operator
Good day ladies and gentlemen and welcome to the combined Zambian Breweries Plc and National Breweries Plc results for the year ended 31 March 2015. All participants are now in listen-only mode and there will be an opportunity to ask questions after the 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 turn the conference over to Herman Lubbe. Please go ahead, sir.

Herman Lubbe
Good morning ladies and gentlemen and welcome to our third investors’ conference. My name is Herman Lubbe, as already stated, and I’m the newly-appointed Finance Director for Zambian Breweries. Before we get going I just want to make sure everybody is aware that there is a link that one can submit email questions on. It is at www.zambrew.com. We will go through the normal presentation and at the end of the presentation we will allow for a question and answer session. So please use the www.zambrew.com site for that purpose. If we lose connection at any point in time please be patient. Our service provider will try and reconnect us. It has happened in the past that the link to Zambia goes down, and we will try to re-establish that as soon as possible.

I also want to bring to your attention the usual forward-looking disclaimer on page two of the presentation. You will also note that in the half year Anabelle dealt with a couple of issues. You will see that we broadly kept the same agenda and structure of the presentation just from a consistency point of view. Many thanks again for your attention. We really appreciate that we’re able to tell our story and share our story with yourselves. I just want to start by saying that this year has been quite a challenging and quite a difficult year for Zambian Breweries, but I think towards the end of the year you will see that we are again on track.

So if we go into the presentation, as I mentioned the forward-looking statement is on slide two. If we turn the page to slide three you will see the agenda and also a picture of our new investment, a 250 million Kwacha maltings plant in Lusaka south Multi Facility Economic Zone, MFEZ. The capacity of this maltings site will be 15,000 tonnes initial capacity and it has obviously got the ability to be expanded.

So let’s move to slide four, trading and business environment. If we look at the regulatory environment in Zambia the GDP growth for the period was 5.5% and inflation eased towards the end of the year lower and lower, ending at 7.27%. And in general terms that is actually quite a good state to be in. Unfortunately despite these two numbers I’ve just mentioned we saw a reduction in disposable income for the average consumer. There has been a huge negative sentiment on the mining sector. The government introduced an increase on the mining royalties from 6% to 8% on the underground operations and from 6% to 20% on the open pits. Now, that created quite a stir and quite a problem for the mining sector similar to what happened to us with excise. And the mines started facing some difficulties, retrenching people and downscaling mining operations.

And towards the last quarter of the year – this is where this played out – the Kwacha also depreciated significantly from 6.2 Kwacha to the dollar and I think the worst was 8 Kwacha to the dollar in the last quarter. And this is on the back of the mining and government tax. We are pleased to say that the mining tax has since been resolved. Unfortunately the damage to the Kwacha has been done. It has recovered quite a bit from the 8 Kwacha to the dollar level to kind of 7.3 Kwacha or 7.2 Kwacha. That is where it is currently trading against the US dollar.

Another thing that hit the copper industry is that the copper prices reduced quite significantly. It was $6,500 on average for the copper price in this financial year, and if you compare that to $7,100 the previous financial year then it is a significant reduction. The reason why we all talk about the cost on the mines, I mean the mining industry is the biggest industry in Zambia by far. There are quite a number of people employed and it is by far the biggest industry, so if the mines suffer the country suffers from an income point of view and from a disposable income as well.

Another thing that happened in Zambia was the credit availability. To try and curb the depreciation of the Kwacha the Bank of Zambia has also increased the statutory reserve from 14% to 18% which meant that there was less money available for the banks in the market, and we see the impact as well. And then the major problem that we faced in the year was the 50% increase on excise. That was a decision by the government in January 2014 and this whole financial year that excise increase of 50% could be felt to the extent that mainstream clear beer was 23% down on volume between quarter one and quarter three, which is a significant decrease in volume.

It again confirms the sensitivity of the consumer, because when the prices went up we could dramatically and almost immediately see the price elasticity and the sensitivity. Another consequence of the excise increase was the significant increase in smuggled Castle Lite because the excise increase created an opportunity for smugglers that can get Castle Lite into the country. And we saw a significant increase in the smuggling of Castle Lite to the extent that there is now more Castle Lite sold in Zambia by smugglers than sold by Zambian Breweries Plc. We estimate that it is about 25 million Kwacha that we lose in net profit because of the smuggling of Castle Lite.

If you turn the page to slide five, strategic overview, I have just sketched the scenario of what we found ourselves in during the year. I think what is important is what we did  about it. So the strategic review slide is going to talk a bit about that. You see that the first one is readjusting the business to manage lower volumes. We as a Board and as a company needed to take a couple of bold actions to rejuvenate sales. Part of the things that we did is we said we need to rejuvenate and kick-start the business from a sales point of view again. One bold decision was to roll back the price on our 375ml product. It is about 65% of our total beer portfolio. Our biggest pack. We rolled that price back from 6.5 to 6 Kwacha. That was in the last quarter, quarter four.

Another thing we did in quarter four was we introduced a 750ml Castle Lager pack as well. We used to have a 750ml Mosi only in the north of the country. We introduced that country-wide. So since the last quarter of this financial year we actually had a 750ml Mosi and Castle Lager, and that was favourably priced at 10 Kwacha. So those were two big, bold actions to rejuvenate sales and we are pleased to say it actually had an amazing effect. In the last quarter the beer sales grew by 21% due to these measures so that we only end up 8% overall on clear beer volumes down for the year. As I said, it comes at a lower margin than before, but it was something that we needed to do and we are quite comfortable with the effect it had.

We also had a look at fixed costs, reduced fixed costs to quite an extent to try and recover, as well as we retrenched 122 employees in Zambian Breweries through the year.

Going to the next point, we also dialled up the engagement with government on excise. We had discussions with the Zambia Revenue Authority, the Ministry of Commerce, Finance, Labour and Sport. We also assess the smuggling with the ZRA, the Zambian Revenue Authority, with the Ministry of Finance, Commerce. The Zambian Revenue Authority definitely wants to help, since they are also losing quite a lot of revenue through smuggling. We had a meeting just the other day, and they are very keen to see where they can assist.

We also continue focusing on the dry areas of the country with our MDC model. We also have introduced credit as a lever to drive sales. Obviously quite responsible, making sure that the governance etc. is in place. But we definitely want to use credit as far as possible as a lever and not as a hamper when it comes to driving sales. We have introduced Cassava which is a nice fairy tale story. Cassava is a potato like plant, for those who don’t know and it grows in the north of the country. We now have  100% local sourcing on our Eagle product either through cassava or sorghum. There are a lot of very small-scale farmers in the north of the country. The Eagle with cassava has given us an excise break because of the cassava introduction.

The interesting thing about Zambia is even though we see it is a country where affordability is key there is definitely an affluent high-end consumer and a middle class that has been growing. And we have seen Castle Lite and MGD doing well. It is important for us to keep focus on those brands whilst we look at the economy sector.

Through the year we held market share on beer, but we remained under pressure on soft drinks through the year. We however saw soft drinks grew 10% in the year versus prior year. We had in the past significant stock out issues which we resolve, specifically over peak, and we saw a major improvement from a soft drink sales point of view.

If we turn the page to page six, you will see the market share graphs we’ve been talking about. Zambian Breweries have 90% market share on clear beer and 58% on soft drinks. The 58% on soft drinks is definitely a focus area for us and a concern. We definitely want to increase the 58%, and have a couple of plans in place also involving the Coca Cola Company. I’m unfortunately not at liberty to say at this stage the detail of those plans, but what I can assure you is that we do have a couple of plans in place to see how we can increase our soft drink market share.

Turning the page to managing sustainable development. Sustainable development is at the heart of what we do. Social responsibility is something that SAB Miller is very proud of and take very seriously. You will see if you look at page seven that we had ten priorities that moved into the five, as you can see on the right. Accelerate growth and social development, endeavour to make beer the natural choice, secure shared water, reduce waste and sustainable use of land.

If we just turn the page to page eight that is now what we call Prosper and those are the five key pillars or strategic imperatives. We obviously have initiatives under each of these pillars. The two I want to highlight is the middle ones, which is Resilient World and the Clean World Recycling Project. We are doing quite a lot on water. Water is, in Africa, and in general quite a scarce resource. We have a project at Itawa Water Springs which is in Ndola. Ourselves and the community use the spring for water consumption. There is bathing in the spring etc. We have now engaged with the project to build swimming pools, to build places where the local communities can wash their clothes etc. So we are working with the communities to safeguard the natural resource and the water resources that we have available to us.

And then the next one is the clean world recycling project. We are busy with a recycling project in Zambia. It is quite far down the track. And we also want to uplift the local communities, especially the women, to make sure that they actually can earn money, create an industry. Currently there is no industry that really recycles when it comes to paper, glass and PET in Zambia. And we are busy working with government as well as with NGOs as well as with a couple of companies to see how we can do that. We have already started this month in May selling quite a bit of our PET to a company which is going to recycle it and use it to make new PET bottles and various other things. We are quite excited with the recycling project that we have engaged with. The last pillar is the Productive World. Then there is also the whole farming and local sourcing of barley etc. that falls under there.

Right, turning the page to page nine, the financial highlights. Page ten and 11 are financial highlights. It might be better to look at pages 12 and 13 which is just a summary of the income statement. I will quickly talk you through that. As mentioned before the lager volume was 8% down on the prior year. If you take into consideration the 23% decline in quarters one to three, the impact of those changes to the 375ml prices and the 750ml introduction across the country had a major impact on the larger volumes to only end up at 8%. Soft drinks volumes were up 10%. Because the beer margin is higher the net production revenues were down 11%, and that is also because of the impact of beer as well as the price roll that we had.

Gross profit declined by 14%, and that is also mainly because very few raw materials are actually sourced currently in Zambia. All your major machine spares are brought in. And the devaluation of the Kwacha had a major effect on our raw materials pricing specifically, as well as the combination of inflation and  amortisation that we had to take due to the 750ml bottles that we launched. We had about $2 million extraordinary cost in our income statement. $1 million was for exchange losses due to the devaluation of the Kwacha. We do take forward contracts but it does come at a price. And another $1 million is for the retrenchments of the 122 heads referred to earlier, which won’t reoccur.

If you go further you will see that the Board has also decided not to declare a final dividend  due to the financials and also because we wanted to make sure that we reduce our debt – we had a couple of big years of CAPEX spend behind us

If I turn the page if you look at slide 13 you will see that we’ve mentioned most of the income statement. The one thing I want to highlight is that the changes we’ve made and the reduction even though there is $1 million in there in net operating expenses for the retrenchment you will see it is actually 3.3% down on operating expenses even though there was 7% inflation. So it is not the same levels that NPR has decreased, but the reality is that I think we made quite a big saving on some of the fixed costs. And we have a couple of other plans still in place to reduce fixed costs going forward.

If you turn the page to slide 14 if you look at fixed costs, which is the one we just spoke about, the third one from the top – fixed cost per hectolitre, which is a measure we use – you will see our fixed cost per hectolitre is very similar to FY13 levels and a little bit better than FY14 even with the drop in volume. So that shows that we did some good work there. You will see the effective tax rate, we have ZDA licenses which give us the ability to claim certain tax breaks. And those have come into effect between FY14 and FY15, and that in future should reduce our tax rate further.

Then if we move over to slide 15, CAPEX, you will see that this is a cumulative CAPEX slide in dollars. We have spent quite a bit of money in Zambia over the last five years. So it is important to note that we have enough capacity now to carry us into the future. The reduction in volume does create a bit of extra capacity specifically at our Ndola plant. We are still committed to the Zambia government and employment etc. That is why we are going ahead with the maltings as well. That is why the maltings project is mainly in the FY15 year. I think going forward we will see a reduction in CAPEX spend when it comes to Zambian Breweries.

Turning the page to page 16, prospects, I think despite it being a difficult year quarter four was encouraging and we have confidence in the resilience of our business and the future of Zambia. We believe that with the government we can partner and really get Zambian Breweries back to not only one of the biggest companies in Zambia but also to the profitability levels that we used to see in the past. Key focus areas will include soft drinks. I mentioned we definitely have a couple of plans on soft drinks market share specifically. And those plans are busy being rolled out as we speak.

We will continue to restructure and manage costs. Cost is always a big focus. And we are focusing specifically on two big issues, total cost of manufacturing and total cost of distribution. And I’m pleased to say that total cost of manufacturing we’ve seen a year on year, month on month reduction in total cost of manufacturing. Total cost of distribution is a newer concept, something that we are going to really focus on this year. We are going to measure distribution costs over all the three businesses. And we also have a couple of plans in place to reduce distribution cost specifically.

I mentioned before investments will only go ahead on the premise of future growth. We need to return the company to growth, which means CAPEX investment will definitely slow down in the future. We will continue to increase our reach to rural areas and increase availability. We are committed, like I said earlier, to the long-term prospects of the Zambian economy. And that is demonstrated by the maltings plant that will be commissioned towards the last quarter of the FY16 financial year. We continue to engage with LUSE to address the 75% shareholding requirement. We submitted the options to LUSE with the help of our head office in London and submitted options of how we can get to the 75% shareholding.

We have come to the end of the Zambia Breweries presentation. We will only look at questions towards the end. The question session will be first for Zambian Breweries and then for National Breweries. As mentioned earlier, you can use the www.zambrew.com link to submit questions.

I will now move onto National Breweries.

So if you look at slide 19 it is just the disclaimer again. If you turn the page we will look at slide 20, exactly the same agenda. Chibuku Super is the picture there. Chibuku Super is the new kid on the block when it comes to opaque beer. It is a PET offering. That gives you a longer shelf life and feedback from traders is that it tastes a lot better than the normal Chibuku. It also gives us the ability to get into the trade further away from the production side because of the extra shelf life that we have on Chibuku Super.

If we turn the page to page 21, trading and business environment, the top section is exactly the same or similar to Zambian Breweries. So I will just focus on the bottom part of the page. We have mentioned the disposable income, and specifically in this section of the business National Breweries consumers are very sensitive to price. We have seen it in the past when we take price on the carton variant, it is very, very price sensitive.

If you look at the last bullet point, we had significant commissioning and design problems at our new Lusaka brewery. It is an absolutely state-of-the-art brewery and packaging line, but the reality is that as SAB Miller this is the first opaque brewery that we have ever built. Usually we buy companies with these breweries and run them. This was the first time that we had to from scratch build an opaque brewery. There was a lot of learning through the process, but the reality is there were significant commissioning problems for the last quarter from about November into December when we started producing the commercial product.

And that created quite a big drop in volume. We simply couldn’t supply the market. What we then did was to make sure that we actually still produced beer in other areas of the country and physically transported it to Lusaka. That created huge costs in distribution, and then the plant in Lusaka itself was manned appropriately to make sure that the new equipment can be run. So not a great story for quarter four for National Breweries. If you only look at quarter four we will see a loss in profitability of 20 million Kwacha which is a significant drop in profitability due to the costs we incurred.

Turning the page to page 22, investments, we will continue investments in systems and utilities. We had integrated from a sales and technical point of view the National Breweries into Zambian Breweries. The same board of directors, the same ExCom looks after both businesses, the same distribution manager, the same technical and manufacturing etc. And we believe there is definitely value in doing this. That kicked off on 1st April. We will continue to focus on Chibuku Super, as I mentioned earlier, but we will always have to remember that the carton business is core and we can never let that out of our sights. So carton is definitely where the volume sits, but the Super is definitely a proposition that we will be pushing quite hard into this new financial year.

The playing field however hasn’t remained level. There has been a significant increase in the bulk opaque, which is actually illegal. There is actually an SI72 2012 law which is in place which states that you can’t distribute, package and sell bulk opaque. The reality is, it is happening all over Zambia, and it is creating quite a problem for us. It is taking quite a bit of market share. And we have engaged with the Zambian Revenue Authorities so that they can help us to reduce this. The enforcement of this SI72 is unfortunately local government, and we have engaged with a couple of local governments already where there are huge problems when it comes to bulk opaque.

We also saw quite a lot of cheap spirits in the market, and those cheap spirits in all senses are quite dangerous but the country has certainly become more competitive. There are a lot of opaque breweries that have seen the light, and we have got our work cut out from a marketing and sales point of view to counter that. The reality is we believe that our product is still far superior to anything else in the market. And the good news is that we’ve managed to sort out all the production related problems at National Breweries. Our production line is now running and we can in this financial year definitely give everybody else a bit of a run for their money when it comes to competition. In the short term we’ve rolled back the price in the north on our Chibuku Super and we’ve seen great uptake from the Chibuku drinkers there.

If you turn the page, the sustainability, I’m not going to go through page 23. I will jump to slide 24. The one I want to focus on is again the Clean World. I mentioned earlier the recycling project. We’ve also got 28 collectors that have been collecting the opaque cartons. In the last five months of the last financial year we have managed to physically collect 30 tonnes of cartons that will be destined for recycling. As I mentioned we are busy working with local government and with companies that will use these cartons to make toilet tissue amongst other things.

Looking at the financials, if we turn to page 28 the Chibuku volumes for the year were 2.3% down. That was because supply was interrupted in the last quarter and Chibuku Super declined by 7% due to the non-supply in the last quarter. Net revenue was 13% down, but as mentioned before due to the increase in distribution, the fixed costs, the overtime of manning the Lusaka plant as well as manning all the other plants to help supply Lusaka we saw a significant reduction on Net profit of 41%.

But as mentioned earlier this is something that we are confident has been resolved now. The supply issues have been resolved and we can actually now able to compete again with our competitors.

If we turn the page you will see that we have not declared any dividends. There are obvious reasons why we haven’t done that. Due to the significant decrease in volumes if we go to page 30 you will see the key financial ratios. The volume has considerably decreased from FY14 to FY15. Year FY14 was a very good year for this business and it was the year that we had the biggest profitability from a physical dollar point of view ever. If you turn to page 31 you will see the huge jump in between FY14 and FY15 on CAPEX. That is due to the new brewery that was built. CAPEX will reduce significantly going into FY16.

To turn the page, page 32, I mentioned earlier that the new Lusaka brewery did cost $30 million. It is absolutely state-of-the-art. These are just a couple of pictures of the brewery. An investment that sets us up to really compete and to really manufacture product that hasn’t got any equal at this stage in Zambia, even abroad.

If we go to page 33, prospects, as mentioned cartons remain the backbone of our business but definitely our higher margins are with Super. So while we still have the focus on cartons we definitely want to grow the Super range. And there are a couple of plans in place on how we want to do it, but we believe that there are untapped areas in the country and even export opportunities. The environment like I mentioned is highly competitive. We still have the problem with bulk and illicit alcohol which is something which we are busy addressing. That is definitely putting pressure on us. Bulk is a truck with a 5,000 litre tanks of opaque beer driving around in the street, so you can imagine the kind of quality issues and sanitation issues you have with that kind of operation. It is something we are addressing with government.

We have got capacity and we have resolved all our supply issues, so therefore we have set ourselves up for the future. And our focus will still be placed in strengthening our reputation and being a responsible stakeholder in the Zambia government when it comes to sustainability, development, employment, recycling etc. So even though National Breweries had a bit of a terrible last quarter we believe we have set ourselves up to have a fairly good FY16. There are one or two things to sort out, but we definitely have our ducks in the row when it comes to that.  So that is the end of the presentation.

Operator
Thank you very much, sir. Ladies and gentlemen, we are now taking first the questions for Zambian Breweries results, and after that we will take questions for National Breweries. If you would like to ask a question regarding the Zambian Breweries results please press star and then one on your touchtone phones. If you decide to withdraw your question please press star and then two. Again if you would like to ask a question please press star and then one. Our first question is from Sibusiso Hlatshwayo from Anibok Investment Research Chambers. Please go ahead.

Sibusiso Hlatshwayo
Thank you very much for the call. Two questions for you. The first is what is your capacity at National Breweries and what is your capacity at Zambrew in terms of hectolitres?

Herman Lubbe
In Zambian Breweries 2.8million hectolitres
In National Breweries 3.6million hectolitres

Operator
Thank you very much. Our next question is from Joshua Tembo from African Alliance Securities Zambia. Please go ahead.

Joshua Tembo
I’ve got two questions for you. The first one is in the event that the government does not adjust the excise tax downwards what is your volume forecast for the next two years? And the second one is when do you plan to release the shares for the 25% free float on the Lusaka Stock Exchange? Thank you.

Herman Lubbe
If you look at our current financial year performance on Zambian Breweries it was just over 2 million hectolitres in totality, which includes the CSD and lager component. We already took the impact of the excise increase in this financial year. We will therefore start growing from here. So it is a bit difficult to say exactly what numbers we’re going to get to. But we strongly believe we’ve got a very good case with the government on excise and we strongly believe that there is definitely a chance of an excise reduction. We have already been heard by government and we’ve at least got a chance that they’re going to reduce excise. Volumes are just one indication. Currently our volumes is projected to be 2.4 million hectolitres for this financial year, but the problem with that is it’s at a lower margin. We need to get the balance right between having the volume but also the profitability. Even if the excise rate remains as it is we believe that between soft drinks and beer 2.2 million hectolitres is what we will grow from. The question is more the profitability, and that is the key for us. It is one thing to grow volume, but it is another thing to ensure that you grow it at a profitable margin.

Unfortunately I’m not at liberty to say what specific provisions we’ve made this year about the free floating shares. There are a couple of suggestions we made to LUSE and we are awaiting their reply on our proposals. Since we haven’t had any feedback from them I think it would be a bit reckless to commit to what our options are when it comes to the free float. What I can assure you is that we definitely want to adhere to the requirements from a government point of view, but we have to be sensible about it. We can’t just take those shares and release them onto the market because it will dilute the share value quite significantly. Those are the kinds of discussions we had with LUSE.

Operator
Does that answer your question, Joshua?

Joshua Tembo
Sure. Just are you able to give us a timeframe?

Herman Lubbe
I wish I could give you an answer. We are waiting for LUSE to come back to us, to be honest with you. When they do we will communicate the timeframe through the normal channels, the AGM, the press etc. At this stage we don’t have a timeframe. It is in the foreseeable future though, and we have had a couple of engagements already. Unfortunately I don’t have a timeframe to tell you it is going to be a year or two, but it is definitely going to be the foreseeable future.

Joshua Tembo
Okay. Thank you.

Operator
Thank you very much. Our next question is from Jonathan Imakando from African Life Financial Services. Please go ahead.

Jonathan Imakando
Hello. Thank you for taking my question. I actually have two on Zambrew. The first is what has been the impact of the price reduction? I realise that in terms of wholesale the price was reduced from 6.50 Kwacha to 6 Kwacha. Are we seeing any positives for the first three months of this calendar year? And then another question would be regarding the exchange losses. Is there anything being done to mitigate those losses going forward, especially knowing that there is a lot of importation that Zambrew has been doing. So what can we do to mitigate this to bring down those costs?

Herman Lubbe
Let me answer your second question first you mentioned what we are going to do about exchange rate. We have a treasury department at our Plc head office. We’ve got another one at the hub. We have requirements to hedge at specific levels, so we’ve got quite a professional team looking at this daily, hourly for us. So one of the things we do is forward hedging, forward contracts. The concern with forward contracts I suppose is if you look at the forward points it is quite expensive, because it is about the differential on the interest rates on the dollar side and the interest rates on the Kwacha. We know that the Zambian interest rate is significantly higher than the USD one. So the forward point is definitely something that is costly, but the reality is we do hedge and we’ve got the guardrails so if it is within three months we’ve got certain percentages that we need to hedge. We hedge 95% plus of all our forward exposure at any given point in time.

Jonathan Imakando
Thanks. I also asked about the impact of the price reduction at the beginning of the year. Are we starting to see volumes come up as a result of that, or is it more or less flat? Are you able to comment on that?

Herman Lubbe
Sure, no problem. What I mentioned earlier is if you look at the clear beer volumes for quarters one to three it is 23% down. If you look at the last quarter it was 21% up. That 21% is the combination of the 750ml that we’ve introduced and the reduction of the price on the 375ml. So a significant increase in quarter four. We have brought that into our budget. We had a good month in April when it comes to beer volumes, a little bit softer in May. But we can definitely see a significant increase and we are getting back to the prior year levels.

Jonathan Imakando
Thank you. Just one last thing. Is there any traction that is actually being made with the government? I know the discussions have been ongoing since they introduced the higher excise duty, but in your discussions with them do you feel there is any hope of this actually coming down, or is it what we can expect to see for the next year?

Herman Lubbe
That’s a good question. We haven’t had a heck of a lot of discussions with the government during the middle of last year. We have intensified our discussions towards the end of the financial year. The reality is we have a new government. We’ve got a new president, there is a new cabinet. So since January we really intensified the discussion we had with all different sectors in government. It depends on who you talk to, to be honest. Everybody is listening though. Even the Minister of Labour was very interested in the discussion. So it is a difficult question. I think the problem is whether the government can afford to drop excise, because excise is a short-term gain for them but it’s a long-term loss. We are able to prove to them that the fact that they put excise up, yes they get more excise in the short term, but over the long-term they lose and so do we. And then there is the knock-on effect in the economy on farmers and other sectors. We used to use about 16,000 tonnes of barley or malt and now we are down to about 10,000. So it is a huge knock-on effect in the farming communities etc. And obviously you can’t just look at excise. You have to look at corporate tax, VAT, employee tax, all those. The case is a good case. The question is whether the government can at this stage afford it. And I think if we are honest with ourselves there is a chance, but to put a percentage to it I think is a bit difficult. We should know in two months’ time, because we are at a very sensitive stage in the discussion related to excise. We are at the highest level that we can be when it comes to that and within the next two or three months I think we will have a clear answer for you.

Jonathan Imakando
Thank you.

Operator
Thank you very much. Ladies and gentlemen, that’s all we have time for from the conference call. We do have some webcast submissions if you would like to address those, sir.

Herman Lubbe
The one question is, is it viable to cut prices in a weakening currency given a significant portion of costs are hard currency denominated? That question came from Bevin. So I think the reality is that one needs to look at what options are available to one when you make these decisions. Obviously we don’t take reducing prices very lightly. It is something that doesn’t happen in a lot of markets. The reality is we look at everything we had, all the tools and all the levers we could produce. And we saw that we had to stop the 23% decline in beer volumes. Strategically I think it is the right thing to do. We also at the start of our excise communication cut the prices in anticipation of an excise reduction. So if you cut prices it immediately falls through to the bottom line, but with what we have seen the volume does help quite a bit when it comes to the physical running of the breweries etc. One case that you get 70% margin on is better than a case that you don’t sell at all. So we definitely think it is the strategically right move to cut the prices.

Then there is the next question. Would it be possible to quantify the once-off operating costs in Zambrew’s numbers for the year? The once-off cost depends on what you mean with once-off cost. If we look at the exchange rate losses – I don’t know whether you would classify those as a once-off cost – if you exclude that it is about $2 million sitting in Zambrew’s cost which is once-off. And the biggest portion of that relates to retrenchment specifically which will not reoccur into this financial year.

There is another one that was raised by Bevan. How was your ESG activities contributing to the overall profitability of the business. The water and recycling projects. Some numbers. I wonder if Bevin is on the line. Just explain what he means for ESG.

Bevin Ngara
Sustainability and governance issues like your corporate social responsibilities.

Herman Lubbe
Okay. It’s an interesting question, actually a very good question now that I’m thinking of it. The reality is that as a company of our profile and our footprint corporate social investment is quite important to us and it becomes a license to trade issue. It is a license to trade issue. The reality is if we look at what government is doing and the laws they are thinking of proposing, there is a law that might come into effect that will to an extent force companies to clean up and be corporate responsible when it comes to littering the Zambia that we all love. So we already then decided that from a corporate social responsibility point we need to start a recycling project. Corporate social responsibilities cost you money, but if you gain the hearts and the minds of the consumer out there, and you’re part of them, you’re part of their upliftment, they are going to be the people that are loyal to you and your brand. So to quantify that is a bit difficult I would think. But the reality is we also want to be ahead of the curve. So when the legislation comes in, which we believe might still come in the near future, we want to be ahead of the curve and have all our systems in place to recycle. When you look at the work we are doing on Itawa Springs, it is something we have to do. If those springs are polluted to the extent that we can’t use that water then we have a problem in Ndola brewery. So the financial impact could be devastating if you actually don’t get involved. So it is a bit difficult to quantify how much bottom line profit has been made because of our social responsibility. But I think most of these things are done with a risk mind set to an extent as well to make sure that when you do this you actually have a specific goal in mind.

Bevin
Thank you.

Herman Lubbe
Those were all the questions that were submitted online to us. So far that looks like all the questions that we received on this side. Are there any other questions that anybody wants to ask?

Operator
We do have a follow-up question from Sibusiso from Anibok.

Sibusiso Hlatshwayo
Hi. Is it possible for you to give us a breakdown of your operating margins and your CSD versus the prior year in terms of percentages?

Herman Lubbe
Sibusiso, we are not at liberty to share value chains and those kinds of things. Those are quite sensitive information. So I don’t think from our side we want to get into specific value chains or how much money we make out of each product.

Sibusiso Hlatshwayo
Okay, that’s fine.

Operator
Thank you very much. Sir, we have no further questions. Do you have any closing comments?

Herman Lubbe
From our side if we look at both entities we had different problems during the year on the Zambian Breweries side on excise and on National Breweries with the rollout of our new investment. I think from our side like we said earlier we are quite confident in the businesses. We are confident in our people. We are confident in the government. We are confident in Zambia. From our side we have a whole new management team. All the Excom is new except for our HR Director and our Technical Director. So management definitely have a new zest for life. I think we are all keen and ready to make a real difference to these businesses. The last thing from my side, thanks very much for everybody’s participation and the questions. It was a pleasure for us to host you.

Operator
Thank you very much, sir. Ladies and gentlemen, on behalf of Zambian Breweries and National Breweries that concludes today’s conference. Thank you for joining us and 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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