Its results are likely to bring on a more severe babbelas than its fine ten-year old Brandys. CAPE TOWN – Wine and spirits company KWV has released annual results that are likely to bring on a more severe babbelas than that brought on by the worst of excesses with its fine ten-year old.

In its second full year as a stand-alone entity (following the unbundling of its interest in Distell), the group’s earnings went into freefall as the company battled to make sales in stagnant markets and management’s attention was diverted by Pioneer’s bid for the company earlier in the year.

KWV recorded an operating loss of R53m (after adjusting for non-recurring, other gains and losses) in its core business, 134% lower than the R32m profit earned in the previous year. This is significantly worse than was expected at the time of the interim results.

This loss came off revenue of R677m, down just 7% from last year and gross profit that was down 19.3% thanks to an increase in the cost of sales. While operational expenses have been slashed, the marketing and distribution budget has been increased by 20%, reflecting the keener interest the group is taking in promotional activity.

This is paying off in some areas, but not in others. Despite the uptick in whisky drinking in SA – which is taking place at the expense of brandy – KWV has managed to increase its market share. Sales of its three, five, ten and 15 Year Old brandies increased by 10% compared to the previous financial year.

But the company struggled in the export arena – a shame considering the export game was its original raison d’etre. Traditional export markets in Europe and the USA have continued to suffer from reduced consumer spending in the wake of global growth concerns and austerity programmes, said acting CEO André van der Veen in a statement. Certain wine markets, such as the United Kingdom, continue to see significant retailer pressure on margins, and continued consumer price sensitivity. “KWV reduced loss making business in this market, resulting in sales volumes declining by almost 3m litres in the UK,” he said. The rest of Europe remains an important destination for KWV despite volumes also reducing by 7% on the previous year and with trading margins under continued pressure.

KWV has followed an organic growth strategy with a focus on premiumisation, profitability and volume increases. The aim, according to the 2010 annual report, was to triple the company’s market value by 2014 (measured from R6.23 at the unbundling of the company in August 2009). Although the share (traded over the counter) is ticking along at R9.50, something has gone badly awry.

For a start staff have lost morale after four or five years of rolling retrenchments and sales of part of the business. Shoddy treatment has seen the company losing the goodwill and trust of their most important assets – the wine farmers supplying the grapes and wine.

The company has also managed to lose control of its international distribution channels – another critical asset in the wine industry. Four years ago KWV owned all of these routes to market. It is belatedly trying to rebuild these. It has also lost market share to other SA players, in particular Distell.

KWV is now on the back foot in its efforts to restore profitability to the business. The search for a new CEO is still underway after the previous incumbent, the charming but clearly ineffective Thuys Loubser, was summarily removed by HCI. To his credit, Loubser did surround himself with a strong management team, but disillusioned, several of those executives have also departed over the past 15 months.

To turn things around the group is depending on increasing its sales in the local market, accessing export markets that grow at above average rates and managing the cost structure of the business. To this effect it launched a sales expansion plan last year that included a restructuring of its global sales team and the review of all routes to market.

Whether this will be enough is doubtful. But it seems likely that HCI (JSE:KWV) will not stop simply at marketing. But they are keeping their cards close to their chests – neither André van der Veen nor Chairman Marcel Golding were prepared to comment on the results.

No dividend was declared.

Source: Moneyweb – Sasha Planting