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KWV TO STICK TO STRATEGY DESPITE OPERATING LOSS

27 Nov KWV Holdings

UNLISTED liquor group KWV will stick to its strategy of volume growth and product diversification despite racking up an operating loss of nearly R20m in the six months to end-September.

The interim loss follows a R3.5m operating profit generated in the preceding nine-month period to end-March 2013.

KWV CEO Andre van der Veen said this week that the company’s focus — which now includes Ready-to-Drink (RTD) brands along with the traditional wine and brandy offering — remained on volume growth rather than cost reduction.

The company, though, still managed to keep its gross margin steady at 35%.

He said the volume growth and brand diversification strategy was critical to balancing KWV’s revenue-cost equation.

In the interim period, revenue decreased 3% to R430m compared with the six months to December 2012. But Mr van der Veen pointed out that a “like-for-like” comparison against sales for the six months ended September 2012 actually showed a volume increase of 5% and revenue increase of 25%.

The different periods for comparison follow a decision to change KWV’s financial year to March to bring it into line with its controlling shareholder, Niveus Investments.

While turnover grew and total costs were well contained at R152m, KWV’s chance at staying in the black was ruined by a nonoperating “other” loss of R23m — which included hefty exchange rate losses of R38m. The exchange control losses included a R9.3m charge relating to increased mark-to-market losses attributable to future periods.

Mr van der Veen said the net realised loss of R27m represented additional income that the group might have earned it did not hedge its export sales book.

He said a substantial portion of KWV’s budgeted sales was hedged when pricing agreements with customers were concluded.

This was to ensure planned (trading) margins were achieved.

Mr van der Veen said the hedging policy was appropriate considering the low aggregate profitability that impeded KWV’s ability to absorb foreign exchange risk.

Despite the losses, controlling shareholder Niveus — itself controlled by investment giant Hosken Consolidated Investments (HCI) — was happy to further fortify its position in KWV.

Niveus recently reported pushing up its stake in KWV from 52% to 54% after buying 2-million additional shares on the open market.

Niveus would have been aware that KWV depleted its cash holdings in the interim period, shifting from a positive balance of R107.5m at the end of March this year to an overdraft of R2m.

Mr van der Veen said the negative cash position was mainly due to the normal business cycle that saw increased trade receivables and lower trade creditors.

“The negative cash flow in the six months under review is significant if compared with December 2012, but if compared with September 2012 this is in line with the normal business cycle and strategic plan,” Mr van der Veen said.

Source: BDLive – Marc Hasenfuss