SA sales whittled down

Shareholders in recently listed “sin sector” investment company Niveus will cheer news that its 52%-owned liquor subsidiary KWV posted a small interim profit.

Niveus owns specialised gaming interests outside the casino sector, most notably cash-generative interests in the limited payout machine industry. An initial worry was that losses from KWV could drag the whole company down.

KWV’s interim results to December showed R10,4m at bottom line, a most encouraging turnaround from the nearly R50m loss at the June year-end.

KWV’s profit from core wine and spirits offerings (stripping out interest earned) was R9m. A breakdown of the profit line, though, indicates a huge disparity between local (mainly brandy and ready-to-drink products) and offshore initiatives.

SA sales in the interim period touched R232m, but were whittled down into a loss of almost R3m. European and UK sales of R136m translated into a fuller-bodied R25m at operating profit level (last year R15m). A R10m gain in sales in the rest of the world to R75m did not fall through to operating level, which was static at R11m.

The international profit growth could easily be dismissed as currency gains. But KWV CE Andre van der Veen says the currency effect in KWV’s international profit doesn’t make a big difference to revenue. “We hedge a portion of our sales. Our international profit was assisted by a reduction of sales in unprofitable markets and bulk sales of products.”

There is still work to be done, though. Van der Veen notes the quality of KWV’s earnings remains low and sales of branded products must improve.

The poor performance of local brands (which kicked in close to R14m in profits in the previous interim period) must be viewed in the context of new initiatives in the ready-to-drink (RTD) category.

Van der Veen says local operations incurred costs with the launch of RTD brands as well as the expansion of the local market sales force following a decision to establish an in-house sales infrastructure. “The benefits of this decision have yet to [materialise] and remain a business priority.” Promotion marketing and distribution expenses were up 7% to R114m, but this was offset by a 28% cut in operational and administrative expenses to under R36m.

Optimism needs to be tempered, though. Van der Veen says establishing new brands in a very competitive market is expensive and difficult. “It is, however, important to have products in our portfolio that have a short working capital cycle if we wish to improve our return on assets.”

He warns that many new products fail. “We would be naive to think that we will not form part of this statistic over time.”

On a more cheerful note, he does point out that KWV & Cola and jimmijagga, both relatively new products, have loyal followings. One might then reasonably expect further gains at KWV’s top line (over and above the 4% interim gain), but it may take years for the RTD push to enhance margins.

Source: Financial Mail – Marc Hasenfuss