Strong brands carry Distell

Cape Town - Stellenbosch-based liquor giant Distell endured a challenging second half with trading margins squeezed by "abnormal" packaging materials cost increases in the year to end-June 2009.

On Wednesday Distell reported a slender 0.3% increase in bottom line profits to R954m, after showing an 18% increase in profits to R651m at the half-year mark.

The performance is not surprising, since Distell warned shareholders at the interim stage to expect lower growth in revenue and earnings for the full financial year.

The trading margin for Distell - which produces well-known liquor brands like Klipdrift, Fleur du Cap, Nederburg, Graça, Savanna, Hunters, Amarula and Mainstay - was squeezed from 14.3% last year to under 13%.

CEO Jan Scannel said a spike in costs squeezed margins, particularly in the prices of packaging material and spirit components. "The spike in costs was abnormal, and since we have seen a reversal in prices."

Scannel noted that Distell's cider and ready-to-drink (RTD) brands performed stoutly again - accounting for some 23% of domestic revenue. But he said spirits sales volumes dropped as consumers sought lower-priced alternatives.

However, Distell scored from its international endeavours. Scannel said international sales volumes, including those of Africa, increased by 27% with spirits volumes also achieving good growth.

In total, international revenue grew by 37%, with African markets accounting for over 50% of foreign revenue.

Distell's profit from associates - relating to joint ventures in Tanzania and Mauritius - jumped from R25m to over R30m.

Big capacity expenditure

Distell directors remained prudent in pegging the final dividend at 132 cents per share, which meant the full-year payout was up 8.5% to 256c/share.

This meant the dividend cover dropped to below two times. Distell directors, however, stressed that it was the intention to restore the full-year dividend cover back to two times by headline earnings over time.

Any worries about Distell over-extending itself in paying dividends should be erased by the company's gross operational cash flow of over R1bn for the period. Net operational cash flow - after the payment of tax and dividends - was R56m.

Most market watchers canvassed by Fin24.com felt Distell had performed admirably in tough trading conditions, with one noting that "the performance reinforced the management team's reputation for being able to successfully build on its brands without letting costs run away".

Distell, though, did spend big on extending capacity during the period.

Capital expenditure topped R380m - including R282m spent to increase capacity at the company' cider and RTD facilities, whisky production plants and the sparkling wine cellars.

Earlier this year Distell also spent almost R400m to acquire the international cognac brand, Bisquit.

Looking ahead, Scannel said the persistent uncertainty in world markets made it difficult to predict "either the timing or the extent of the upturn".

But Scannel believed Distell's strong portfolio of brands would stand the company in good stead. He added that the company's capacity to trade across a spectrum of markets, and its secure financial position, would ensure Distell remained well positioned to continue its strategic course.

- Fin24.com