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BEVERAGES: Disappointing Results For KWV


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Business results at KWV for the year that ended on 30 June 2011 were disappointing on most fronts. The operational performance of the group was under pressure in the first 6 months and deteriorated further towards the end of the financial year. The group recorded an operating loss of R53 million (after adjusting for non-recurring, other gains and losses) in its core business - compared to a R32 million profit in the previous year - which is significantly worse than was expected at the time of the interim results. Revenue declined by 7% compared to the previous year, mainly due to a drop in sales volumes as well as a deteriorating mix of products sold.

When assessing the loss, the effect of challenging markets and the fact that the board and management’s attention was diverted by corporate action must be considered. A bid by the Pioneer group to acquire all KWV’s shares was ultimately rejected by the shareholders but still cost the company R6 million in advisory and related costs and distracted management focus from the core business in trying times.

While there has been an improvement in global wine markets in the past year, KWV’s 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 programs.

Certain wine markets, such as the United Kingdom, have been characterised by 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 3 million litres in the UK. 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 While the local brandy market continues to shrink, KWV has managed to increase its market share: sales of KWV’s 3, 5, 10 and 15 Year Old brandies increased by 10% compared to the previous financial year.

Lower sales volumes for the year impacted significantly on throughput in the cellar and maturation facilities, negatively affecting unit costs and capacity variances. This played a significant part in the decline of KWV’s gross profit margin from 38% in the prior year to 33% in the current year.

Although costs were managed well against budget within the existing structure, it is evident that overhead costs are too high considering the company’s business model and performance. A significant cost cutting and business improvement programme has commenced in an effort to restore profitability. To improve asset utilisation the company entered into several contract bottling

agreements that resulted in other sales more than doubling to R37.6m. Further bottling agreements have been concluded in the new financial year.

KWV’s efforts to restore profitability going forward depend on increased sales in the local market, accessing exports markets that grow at above average rates and managing the cost structure of the business. KWV recently launched a sales expansion plan that included a restructuring of its global sales team and the review of all routes to market.

KWV is fortunate to have a significant cash reserve and an ungeared balance sheet to enable it to endure the current loss making period, to invest in new products and to make acquisitions where appropriate.

The board is in discussion regarding the CEO position and will make an announcement in this regard in due course.

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