Cape Town - KWV Holdings, the Paarl-based wine and brandy producer, managed to increase interim operating profits by more than 50% to R35m, even though trading margins were squeezed.

Figures released on Tuesday evening showed KWV hiking turnover 10% to R395m in the half-year to end December. While gross profits decreased 3% to R149m after a more than 20% increase in cost of sales, operating profits jumped 56% thanks to KWV keeping a handle on marketing, promotional and operating expenses.

Operating profits were also bolstered by dividends received, "other income" and "other gains" - which collectively added R14m to the operating profit line.

After taking into account interest income of nearly R5m (thanks mainly to KWV's recent R150m rights) as well as R1.7m in profits from associates, KWV's after-tax income touched R40m.

If KWV's discontinued operations - including profit made on the sale of these assets - are factored in, bottom line profits topped R44m.

The sturdy operational performance will be a relief for shareholders after KWV (then KWV Limited) unbundled its profitable shareholding in Stellenbosch liquor group Distell. In previous years, KWV relied heavily on Distell's profit contribution to top up bottom line.

KWV CEO Thys Loubser said sales volumes from continued operations increased 12%.

He said revenue growth in the South African market was encouraging at 14%, while business in Europe and the United Kingdom grew by over 8%.

Cautious note on prospects

Loubser, however, noted that the strengthening of the rand impacted negatively on wine exports, which account for about 90% of KWV's total wine sales.

He explained that with revenue (up 10%) growing at a slower pace than volumes - combined with continued cost pressure - the gross profit margin declined from 43% to 38%.

Loubser said the company's flagship wine brand Roodeberg was once again KWV's best-performing brand, with volumes up 15%.

"It [Roodeberg] performed well in the local market, together with Café Culture, of which consumers here consumed 50% more than the previous period."

He said the Golden Kaan brand, which KWV bought in August last year, also performed beyond expectations globally.

Looking ahead, Loubser sounded a cautious note on prospects. "Focused efforts to mitigate the impact of the global recession are driving KWV's short-term strategy. South African consumers in particular are facing increasing inflationary pressures, which will affect their expenditure on alcoholic beverages."

He said KWV was maintaining and growing its position in a declining brandy category in the local market. "But we can clearly see that consumers are still trading down."

Loubser said KWV was also concerned about the health of its foreign markets - especially in Western and Northern Europe.

- Fin24.com