Over a 10-year period Distell has delivered a total shareholder return of 30,9% per annum, performing ahead of other major international competitors in the alcoholic beverage market.- Merwe Botha, Chief Financial Officer
Creating valueOur ultimate governing objective is to create value for all stakeholders and for shareholders in particular.
The value a company generates for its shareholders is best measured by total shareholder return (TSR), a combination of share price appreciation and dividends over the medium to long term. Internally we assess our progress in this regard by measuring the key components of value: growth in earnings before interest, tax, depreciation and amortisation (EBITDA); investment; and free cash flow.
Over a 10-year period Distell has delivered a TSR of 30,9% per annum, performing ahead of other major international competitors in the alcoholic beverage market. This compares favourably to the JSE’s Top 40 10-year compound annual growth rate (CAGR) of 17,5%.
Sharing valueThe value Distell creates and how it is shared and distributed amongst stakeholders is reflected in the cash value added statement.
Over a 10-year period we have contributed R46,1 billion to the country’s economy. A total of R43,0 billion was distributed in cash to stakeholders, the main beneficiaries being the government, who received 63,6% or R27,4 billion by way of taxes, and our employees, who were allocated 25,5% of the distribution by way of emoluments. Shareholders received R4,7 billion.
Key performance indicatorsWe measure our ability to maximise value within a comprehensive ‘value-based management’ framework that comprises four pillars, applied both at a corporate and business unit level.
These include: revenue growth; profitability through operating margin improvement; asset efficiency, and sustainability and corporate responsibility.
This report aims to provide a balanced view of our performance in the context of these four criteria.
Over a 10-year period we have contributed R46,1 billion to South Africa’s economy.
Strategic financial goalsTo comprehensively plan and monitor our performance in line with our strategic objectives we use a range of financial and non-financial key performance indicators to monitor progress and to adapt to changes in the external environment. A selection of key performance indicators are included in employee performance and incentive contracts to ensure alignment of interests of shareholders and employees.
Distell’s strategy is to deliver consistent value creation for stakeholders over the longer term by:
- driving top-line growth and margin expansion in a sustainable and responsible way; and
- growing the business organically and through acquisitions. More specifically, we aim to:
- deliver a return to shareholders that exceeds the Top 40 Index of the JSE over the longer term;
- achieve annual returns that exceed the weighted average cost of capital (WACC) by at least 5%;
- deliver at least double-digit top-line growth;
- enhance EBITDA margin to at least 17,0%; and
- achieve an annual free cash flow conversion of at least 6,5% on an organic basis.
The strategic priorities identified enable us to achieve these financial goals appear in the report of the managing director.
Our current performance
Operating profit, as reported, increased 22,9% to R2,2 billion.
In April 2013 the Group acquired Burn Stewart Distillers Limited (BSD). The purchase consideration for this acquisition included a contingent consideration of £10 million, payable within 12 months of the closing of the transaction, provided the business was able to deliver a specified EBITDA target for its financial year, ended 31 December 2013. The contingent consideration has now been remeasured and reversed and an amount of R159,0 million is reflected in “other gains” in this regard.
Normalised operating profit, which excludes the remeasurement of the contingent purchase consideration, as well as the full impact of new business acquisition expenses in the previous year, increased by 8,1%.
The financial results for the period, supported by satisfactory overall revenue growth, were positively influenced by a weaker rand. Steep increases in excise duties and marketing expenses were partially off-set by foreign currency gains, the benefits of improved efficiencies in the business and the normalisation of certain raw material input costs.
We also report EBITDA (earnings before interest, taxation, depreciation and amortisation) as this is a key performance metric used internally to manage and evaluate operating performance. EBITDA, on a normalised basis, grew 11,4% to R2,4 billion, while EBITDA margin was maintained at 13,5%.
The 12,8% increase in revenue was achieved through a combination of:
- overall volume growth of 3,1%;
- selective price increases; and
- a change in sales and brand mix.
The rand, on a weighted average basis, deteriorated by 18,8% against the currencies of the countries in which we trade and thus positively impacted revenue derived from international operations. Overall volume growth was driven by volume increases from our operations in South Africa and other developing markets in the rest of Africa. In overseas markets value contraction in Europe and Asia Pacific was partly off-set by growth in North and Latin America.
Revenue derived from operations outside of South Africa, on a non-duty paid basis, now comprises 36,6% of Group revenue.
Revenue delivered by the newly-acquired Burn Stewart Distillers grew to R1,1 billion, and contributed 6,3% to Group revenue.
Our strategic priorities include:
- sustaining our strong position in the domestic market, increasing the revenue and profit contribution from our international operations;
- increasing investment in customer and consumer-facing activities and route-to-market capabilities; and
- improving operating margin.
To support these priorities and achieve our financial goals demand that we enhance operational effectiveness and efficiency across the business. This is done through continued business process improvement, already a well-established capability in the business. Total operating costs grew 12,7% to R15,7 billion compared to revenue growth of 12,8%. Operating costs, excluding sales and marketing expenses, grew 11,4% to R13,2 billion.
The benefits flowing from increased throughput and improved efficiencies in transport and logistics, procurement and working capital management delivered savings of R222,3 million, allowing us to reinvest in strategic areas of the business, particularly in support of brands, stepping up marketing initiatives and extending marketing and sales capabilities in key markets.
Gross margin improved from 34,2% to 34,6%. Favourable results flowing from business process improvement projects and the beneficial impact of the weaker rand on international revenue and earnings were partially off-set by the steep increases in excise duties, trade incentives and certain raw material costs.
Costs of goods sold increased 12,2% compared to volume growth of 3,1%, resulting in an 8,9% increase per unit sold. This compares favourably with a revenue per litre increase of 9,4%. Overheads in distribution rose 7,5% compared to an increase in domestic sales volumes of 2,6%, resulting in a 1,0% increase in cost per unit. This is substantially below inflation and average sales price increases.
Other overheads, excluding sales and marketing expenses, increased to R569,0 million. Sales and marketing expenses, including advertising, increased 20,0% to R2,5 billion and comprise 14,1% of total revenue (2013: 13,3%).
Share of equity-accounted earnings
The Group’s share of equity-accounted earnings comprises its share of the after-tax profits of associated companies and joint ventures.
Our investment in associated companies includes a 35% share in Tanzania Distillers Limited and a 26% interest in the Mauritian company Grays Inc. Limited. Tanzania Distillers continued its growth path, delivering earnings growth of 15,2%. Grays produced excellent results, achieving earnings growth of 169,4%. Our share of profits from associates increased 27,0%. Investment in joint ventures comprises the Group’s 50% share in each of African Distillers Holdings Private Limited, which is a Zimbabwean company; and LUSAN Holdings, which is a wine-producing operation. Our share of profits from joint ventures increased from R7,5 million to R13,0 million.
Finance costs and cash flow
Total interest-bearing borrowings, net of cash and cash equivalents, increased R545,9 million to R3,4 billion.
Net cash generated from operations, before working capital movements, declined 2,2% to R2,3 billion. Working capital increased by 22,9% resulting in a cash outflow of R755,7 million. As a result, cash generated from operations amounted to R1,6 billion (2013: R1,0 billion). Taxation paid increased from R374,2 million to R459,1 million. Prepaid taxation at year-end was R53,8 million (2013: R29,3 million).
Fixed capital investment spent to maintain and expand operations amounted to R691,8 million compared to R745,6 million last year.
Cash inflow before financing activities was R202,8 million. Dividends paid to shareholders amounted to R708,0 million (2013: R616,3 million). The R546,7 million deficit was funded through an increase in interest- bearing borrowings.
Finance costs decreased from R233,4 million last year to R211,5 million.
The effective tax rate decreased from 32,1% last year to 25,4%. This is as a result of the benefit of the remeasurement of the BSD contingent consideration which is not taxable in the current year, as well as the interest provision on excise duty in the previous year which was not tax deductible.
Headline earnings, as reported, increased 40,4% to R1,5 billion. Normalised headline earnings, namely reported headline earnings excluding adjustments made in the previous year for additional interest on outstanding excise duty and the full impact of new business acquisitions, as well as the reversal of the contingent purchase consideration for BSD this year, grew 1,7% to R1,4 billion, to achieve a CAGR of 8,3% over a seven-year period.
Investment and funding
Total assets grew by R1,6 billion to R15,9 billion, an 11,5% increase on the previous year. At the same time net operating assets (i.e. fixed assets, intangible assets, inventory and receivables less payables) increased 19,3% to R11,7 billion.
Capital expenditure amounted to R691,8 million of which R276,3 million was spent on the replacement of assets, while a further R415,5 million was directed to capacity expansion.
Net working capital increased by R1,1 billion to R5,9 billion, an increase of 22,9% on the previous year. Inventory, the main component, rose 9,8% to R6,9 billion. Bulk spirits in maturation, planned in accordance with the Group’s longer-term view of consumer demand for our brands in this category, increased 21,2% to R3,7 billion.
Investment in bottled stock and packaging material declined by 16,1% and 6,2% respectively. We finance our operations through cash generated by the business and a combination of short- and medium-term bank credit facilities, and seek to mitigate the potentially adverse impact of currency exposures by borrowing in rand when deemed cost-effective.
The Group’s previous syndicated debt facility matured in June 2014. A new debt facility of R2,5 billion was arranged through syndication, with two financial institutions participating, to cater for the Group’s longer- term funding requirements. The structure of the new facility is as follows:
Economic profit is determined to assess the Group’s returns from its asset base, compared to a standard cost of capital charge. It is calculated as the difference between the standard capital charge on the average total invested assets and the actual returns achieved by the Group on these assets. The standard capital charge applied to the average total invested capital is currently 10,7%.
Calculations for return on average total invested capital and economic profit for the years ended 30 June 2014, 2013 and 2012 were as follows:
The profit used in assessing the return on total invested capital reflects the operating performance of the business, stated before exceptional items and finance charges, and after applying the tax rate before exceptional items for the year. Average total invested capital is calculated using the average derived from the consolidated statements of financial position at the beginning, middle and end of the year. Average capital employed/average total invested capital comprises average net assets for the year (excluding post-retirement employment net liabilities/assets) and average net borrowings. Return on average total invested capital 16,5%
- R1,2 billion bullet loan repayable in five years (June 2019);
- R0,9 billion bullet loan repayable in three years (June 2017); and
- R0,4 billion revolving facility repayable in three years (June 2017).
Working capital needs are met by the availability of R2,0 billion of general banking facilities, of which R1,6 billion remains unutilised.
The Group remains in a strong financial position with interest-bearing debt, net of cash and cash equivalents, at R3,4 billion, and a debt-to- debt plus equity ratio of 28,5%. With a total debt capacity in excess of R4,8 billion the Group is well placed to take advantage of investment opportunities as they arise.
Return on invested capital and economic profit Return on invested capital and economic profit are measures applied by management to assess the return obtained from the Group’s asset base and is determined to evaluate the overall performance of the business and underlying business units.
Return on invested capital
As disclosed in a circular to shareholders on 17 December 2013 Distell’s original BEE transaction was restructured on 17 January 2014. In terms of the transaction 17,7 million shares were issued to members of the BEE consortium. The transaction impacts the weighted number of shares in issue and, therefore, earnings and headline earnings per share.
The restructuring of the transaction had no material effect on the results and performance of the Group.
The transaction will, to the extent possible, ensure that Distell’s BEE ownership credentials are maintained, subject to future BEE code changes, and will enable the Distell Development Trust (previously the CSI Trust) to effectively fund its corporate social investment programme.
The directors have resolved to declare a final gross cash dividend number 52 of 183,0 cents per share, bringing the total dividend for the year ended 30 June 2014 to 337,0 cents per share (2013: 335,0 cents per share). The total dividend represents a dividend cover of 2,1 times (2013: 1,6 times) by headline earnings.
Our guideline is to achieve a dividend cover of between 2,0 and 2,5 times headline earnings.
Chief Financial Officer
25 August 2014