Headwinds blow froth off the beer

ORGANISED religion got the better of SABMiller in the 12 months to March.

The absence of an Easter period during SABMiller’s financial 2014 was one of the factors that restrained profit performance by the world’s number two beer group.

CE Alan Clark calls them “headwinds”, and notes that despite them the group could report a 1% rise in operating profit before exceptional items and amortisation (ebita).

The Easter impact was particularly noticeable in South Africa, where South African Breweries (SAB) was forced to report a zero increase in lager volumes and in soft-drink volumes for the 12 months.

SAB’s outgoing executive chairman, Norman Adami, says that, in addition to the absence of Easter, SAB’s softdrink results were hit by bad weather in March, the unrest in Rustenburg and intensified competition from economy soft-drink brands.

But the first two months of financial 2015, which have included Easter and several public holidays, are showing a significant improvement with volume increases in double digits.

For the overall group, the strongest headwind came in the form of the US dollar, which appreciated significantly against all currencies of the emerging markets that dominate SABMiller’s operations.

The strength of the dollar has a twofold negative impact on SABMiller’s reported profit. It increases the cost of raw materials such as wheat, maize and malt, which are priced in dollars on the world market, and it reduces the

Soft-drink volumes were up 5% on an organic basis

dollar value of profits earned in the weaker emerging-market currencies.

Adami notes that some 95% of SAB’s purchases are sourced in South Africa, but that much of this is priced in dollars.

The reported results look significantly stronger if the currency headwind is excluded.

On a constant currency basis, ebita rose 7% on a 1% increase in larger volume. “Lager volumes grew by 1% on both reported and organic basis, reflecting robust growth in Latin Amer- ica, Africa and China, partially offset by declines in Europe and North America,” says Clark.

Soft-drink volumes were up 5% on an organic basis driven by Latin America, Europe and Asia.

Jean Pierre Verster of 36ONE Asset Management describes the results as “not great but reasonable given the circumstances”.

Verster says investors welcomed the savings expected from the centralistion of the group’s procurement systems and back-office functions.

“This sort of centralisation is typical of multinationals, especially those that have been built on the back of M&A activity. Once the group’s focus is on consolidation rather than acquisition, it is possible to lift margins by squeezing efficiencies in this manner,” says Verster.

Significant and better-than-expected cost savings already achieved on this front indicate that talk of a ‘‘business capability programme” was not just ‘‘MBA-speak”, he says.

The African market continues to be the group’s stellar performer.

Verster says that a major issue in Africa’s growth related to affordability, which SABMiller had worked hard to address.