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Edited Transcript of DGHJ.J earnings conference call or presentation 28-Aug-19 11:00pm GMT

Q4 2019 Distell Group Holdings Ltd Earnings Call

Aug 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Distell Group Holdings Ltd earnings conference call or presentation Wednesday, August 28, 2019 at 11:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Frank Ford

Distell Group Holdings Limited - Group Manager of IR

* Kate S. Rycroft

Distell Ltd. - Executive Director

* Len Volschenk

Distell Group Holdings Limited - MD of Africa

* Lucas C. Verwey

Distell Group Holdings Limited - Group CFO, Group Director of Finance & Executive Director

* Richard M. Rushton

Distell Group Holdings Limited - Group CEO, MD & Executive Director

* Wim Bührmann

Distell Group Holdings Limited - MD of Southern Africa

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Presentation

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Frank Ford, Distell Group Holdings Limited - Group Manager of IR [1]

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Good morning and good afternoon to everybody. Thank you. Welcome to Distell's full year 2019 results as of end of June. We welcome those who have joined us today at [Fond Rands], and we also send out a special welcome to our investors from overseas that are dialing in. And particularly, welcome to all my teammates that are listening to this -- watching this call, actually, via webcast.

Today we're going to run through our full year results. Group CEO, Richard Rushton, will run through the salient features, the strategy, the regions and the categories. Group CFO, Lucas Verwey, will then go through some of the numbers. And we'll land on an outlook with Richard and open the floor as well as the call to Q&A, as always.

Those on the call and the webcast, I do have my eye on the questions coming through. I will open up to the floor first, and then we'll go to the webcast and the callers, please. We welcome questions, and we will answer those as they come in.

So without further ado, Richard, up to you, and then we'll land on the Q&A afterwards. Thank you.

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Richard M. Rushton, Distell Group Holdings Limited - Group CEO, MD & Executive Director [2]

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Good afternoon, everybody. Ladies and gents, investors, analysts, watchers of Distell, thank you for joining us. And also in particular, as Frank mentioned, this is a first-time webcast for all of our employees, those that can join us. They're also watching this live on webcast. I am feeling the pressure somewhat, but anyway.

Yes, so thank you very much for attending this today. I kind of feel, on the one hand, extremely proud of these results; but on the other hand, you got to also see through some of the noise. And we're in this world of incredible noise. We don't know where the Brexit is going to be hard or soft or in or out and whether Trump is making up with China or not. And I guess in a way, there's some kind of ones-offs in our numbers, which might create an element of confusion as painful as they are. We nonetheless have done really well, and I actually want to just commend our teams around the world in South Africa, Africa and internationally, for the resilient performance that we demonstrated in this year's set of results. So thanks again for joining us.

Just starting with the salient features of our performance. So yes, I think if you think about Distell and the fact that 73-odd-percent of our revenue is still dependent on the domestic economy, this performance is a strong one, with volumes flat and revenue up strongly. Without dealing with currency, revenues up just under 9%. That's net revenue excluding excise. And that's a pretty good performance if you think about the context that we find ourselves in. In fact, in the second half of the year, in relation to the first, we actually did a little better in spite of the conditions arguably getting a little worse.

Obviously, revenue growth, we've seen it across all 3 of our geographies. A little smaller in international, but that was a deliberate strategy to focus our portfolio, and I'll deal with that in a moment. But certainly, strong growth in Africa. That's been a standout performance for us. And then a very stellar performance here at home in South Africa.

And then as we indicated in prior meetings, I think the last time in Springs, we indicated at our last results presentation that we were going to be focusing heavily on perhaps more aggressive price management. And you'll recall that I did remark that we were approaching those price decisions with some trepidation given the context, both competitively and economically. But nonetheless, we took more aggressive pricing in this period than we've taken historically. We did that to offset some of the excise increases that we've been partially absorbing over time and also to pass on some of the cost pressures that we've been facing. And I think the fact that we've been able to hold on to strong volume growth across our 3 categories, the fact that we've also posted underlying strong revenue growth just points to the resilience, the power and the breadth of our brand portfolio. So I would just make those opening remarks.

Obviously, margin being critical for us. And if you take out the impairment in Angola and our credit loss provision in Zimbabwe, which Lucas will touch on, our underlying margin, which we have reported is a critical measure for us, went up just under 60 basis points in the period.

For us, as well, as you know, post the acquisitions of Burn Stewart and Bisquit, we had, probably, I reckon, a RONA, or a return on invested capital, of probably 16% to 17% [are dropped] with those acquisitions. And the result of that was clearly the long-term investment in stock. Our RONA levels, as you all know, dropped to 12 and we did -- 12.5. And we did say that getting our return on invested capital metric up was a critical priority for us as a team. And so this last period, again, we're pretty pleased with the 34 basis point improvement in that.

Cash, Lucas will touch on. It's a one-off. Essentially, we've been busy bees, particularly in South Africa with our manufacturing footprint. We've shut down one manufacturing operation. We've moved a lot of our manufacturing capability to [Haoting]. And with that, we had to build up stock in order to service our customers. So there's a stock buildup, and there are some onetime retrenchments in this that we also incurred, but our underlying cash generation as a company is extremely healthy.

So overall, big headlines is momentum in Africa and strong resilient performance in South Africa and now much more pursuit of our strategy in international markets as a company.

Just dealing a little bit with our strategy. I do like to just repeat this for everybody's information. Obviously, we've -- we're a growth business, still focused, given the fact that we still are so heavily dependent on our South African business and there's such a good runway for growth potential in Africa, in particular, we're still very much focused on kind of getting this business double the size and having a more balanced contribution of revenue and profit out of Africa, South Africa and our international business than the one we have today.

Winning in South Africa is critical, expansion into Africa, as I mentioned at the beginning and of course, doing that through our brands and our people. And lastly, obviously as I mentioned, and I'll touch on it in a moment, a refocused prioritization of what we want to achieve through premiumization in our international businesses.

So what's happened in the last year? Well, in a nutshell, the efforts to focus our portfolio are yielding results, both in the margin, but I think also in the tailored effort of our teams to win with core brands in the priority countries that we're choosing to expand in. We also have posted a resilient South African performance with share going up -- market share going up, and I'll touch on that, and further capability being built in the South African business and in our manufacturing and supply chain footprints in South Africa. And lastly, as I said, a strong performance out of Africa with a growing East African presence and platforms now established in Nigeria and significantly advanced in Angola.

Yes. Just -- we had 3 must-win battles. This is just our own internal report card, but just to give you more flavor for the business. For us, delivering category and geographic breakout is critical. We -- our cider -- premium cider business, ready-to-drink portfolio is very critical to that. And we've had good -- actually, volume and revenue growth in South Africa and strong growth in Africa with our RTD portfolio.

As you know, we are constantly on the lookout for merger and acquisition, inorganic opportunities. We're disciplined in that respect, I might add. The 2 acquisitions that we would call out that have been highly -- continue to be very successful for us are our Kenyan acquisition, KWAL, and our premium vodka acquisition here in South Africa, Cruz.

And then I'll touch on Best. The underlying performance of the Best operation has been spectacular. There's just under 32 million liters of mainstream spirits that are being sold on the continent, and that's growing strong double digits. So I'll touch on that. So yes, a busy year of consolidating acquisitions, but not necessarily buying anything further. It's not that we haven't had a good look for whatever reasons, price and discipline, we haven't pursued any acquisitions in this last period.

On the margin, Lucas will touch on this, but I think there's been a combination of price, mix and cost management that have actually helped us improve our margin, our underlying margin. And then through this period, we've also taken those tough decisions, as I know we have reported to you before, are pruning the tail brands. And this has been particularly the case in our wine portfolio and most applicable to our ventures business or our [old] international business.

And there, in our international business, we've cut just under 30% of the low margin, more tactical elements of our export wine business outside of Africa. And you'll see that in the performance of the business, a deliberate choice that we've made.

And then supply chain, I'll show you just a little bit more about that, give you some flavor on that. But both the modernization, the upgrade and the efficiencies -- associated efficiencies and productivity are starting to come out of those investments.

Yes. This year, I mean I know a lot of you watch food prices, maize, energy, fuel, avidly. I don't think many of you will know the kind of pressure that this business faced, which are probably extraneous factors outside of what you'd see in a beer company or a spirits company.

So 2 factors. One would be the ensuing drought in South Africa and impact on wine prices. So just to give you a flavor for that. We think -- we've had 2 years of double-digit cost pressure from wine and grape prices. We think that on an annualized basis, about ZAR 200 million of additional cost was borne in these results that are kind of ones-off as a result of the drought impact.

Just to give you a sense of it, prices went up about between 11% and 12%, and we passed most of that on to the consumer. And we think that perhaps with a better supply-demand balance of grapes and wine, those prices should settle more at 5% to 6%. So we, in fact, pay double. And the prior year, we paid 13% in higher prices per ton for wine. So we've had a tough time of dealing with the particular climatic event that is important in our business. As you know, about 1/3 of our volume is wine. So it's a big contributor. We buy about ZAR 2.2 billion worth of wine and grape a year. We're about 1/3 of the total offtake of the wine industry. So we're a material buyer and obviously impacted by these kind of events. And when you see these results, you should just bear in mind that there's probably, as I said, about ZAR 200 million worth of onetime drought impact in there.

And then believe it or not, climate is a factor, notwithstanding what our leader of the so-called free world says, but yes, I think apple juice concentrate also had a [prost] impact in China. Now China is the largest export of apple juice concentrate, and the U.S. is the biggest importer and the biggest consumer. So we had a prost event there, and then the Trump wars with China and tariffs -- countervailing tariffs imposed. And then we had -- so we had a shortage of apple juice concentrate, and then all the other buyers looking to buy apple juice from other sources.

So we had about a 24% increase or ZAR 100 million of additional cost this last year that went through our income statement. So all told, outside of energy and fuel and the other things that you know about the South African economy, just those 2 commodity price pressures are through our income statement through our results and kind of, nonetheless, the business showed margin increases. So I must give credit to our team, our supply chain organization -- but actually to all of our teams for not wilting. And in this period, we grew share. We -- our top line was strong, and we kind of made that margin move forward. And that's why I kind of feel pretty proud of what we've been able to do under the circumstances.

Then on the transformation front. So yes, I mean there's been a very quiet revolution of stealth happening at Distell. I think if you go into our supply chain operations, I'll show you some photographs, you'll see a very different business from perhaps 3 years ago even. You'll find a modern, diverse, young -- some ladies running big plants, passionate proud team of individuals shooting for the stars and shooting for best-in-class in whatever parameter they're looking to achieve in our manufacturing operations.

And if you go into the marketplace in South Africa and if you do the same in Nairobi, you're going to find the same young diverse, passionate people winning with market execution each and every day in South Africa to 43,000 customers. And I think those efforts in transforming our business, engaging our customers, modernizing our asset base, lifting our standards, benchmarking ourselves against others in the industry are starting to pay off in the performance of the business and actually in the confidence in many parts of our business. So it's been a busy period. And again, I'll touch on that. And to say, notwithstanding it being busy, I think our teams have kept the eye on the ball and delivered a reasonable set of results.

Moving on to South Africa. So I'm going to touch on each business unit. As you know, our business units -- essentially our businesses run geographically. And Wim runs South Africa. He is here. So I'm in trouble later. There he is. He'll certainly answer the difficult questions. Kate is running our ventures business. She's next to Wim. She'll also help me manage the more intricacies of our international business, and Len at the back runs Africa.

So just to begin with South Africa. So here, we just give you a sense of our business in a snapshot. Flattish volume. You all know that at H1 or at the half, we reported about 2.2% volume decline. So we actually picked up a little bit of momentum in the second half, which is pleasing to see. Revenues up strongly, again, as a result of price and mix. Cider's up 11.5%. And I'm going to just also note that we don't talk to volume here, but our volumes are up 2.2% in South Africa in a difficult economy. And as I've always said to you, our cider portfolio operates at between ZAR 125 to ZAR 135 price premium index to mainstream beer. So this is a pretty good performance given the economic conditions we find ourselves in.

Our spirit business was up strongly. And then wine more muted and not -- our mainstream wine business, which is essentially the bulk of our offering, saw double-digit price increases, and we saw volume drop off. And yes, I think in those circumstances to hold on to wine share as the dominant player is a pretty good, solid achievement.

We've had value share gains in spirits and in ready-to-drinks. And the power of our portfolio is manifested in this performance, where the combination of the growth in Savanna and in Bernini has offset some softness in Hunter's, which we have spoken to before, and still grown share. And it's competitive out there, as I think you'll all know.

What's driven a lot of this? Well, obviously as I mentioned earlier, a lot of focus on the basics: getting stuff done each and every day in front of each one of our 43,000 customers that we call on in South Africa; and then measuring it and driving performance through solid incentive practices and outputs. And the graph on the top in the middle block just shows you the core pillars of our market execution levers that each and every sales team is measured around in South Africa.

And those are pretty [asset] measures. To give you an idea, accessibility or affordability really talks to all our brands and packs priced at the right recommended selling price in those cross-section of 43,000 customers. And we're not happy with a 72% price compliance score, but 72% given the size of our portfolio and the number of customers that we call on, is a pretty solid achievement. We'd like to see that in the 80s and 90s, and that's what we aspire to. But if you think where we came from, these are the kind of things that we believe make a difference each and every day in building a resilient, strong business that's well equipped and well poised for growth when the South African economy does come out of the doldrums, which it will.

In premium, again, just to say, we recognize that in South Africa, there are premium opportunities, notwithstanding the tough economy, and that South Africa is at the point of inflection for premiumization as an emerging middle-income country. And so we do focus on premiumization for our wine portfolio, on the one hand, and also for our spirits portfolio. And there, we've seen strong revenue growth as a result of our efforts to pick up some speed in the on-premise environment, which has historically not been a Distell strength. So some good outcomes there.

Then moving to Africa. Certainly a business that for us has been really, really gratifying. And I mean as I said a little bit earlier, I think as the leader of the company, it's painful when you have to deal with an impairment of an asset and also take a provision on the Zimbabwe situation. But it's also prudent. And I think we've done the conservative writing in accepting that perhaps, the fact that the Kwanzaa's halved in the last year and that margins as a result are half what they were when we acquired a minority share in Best, we must actually pay cognizance of that. Nonetheless, the underlying hypothesis, the thesis behind acquiring a minority stake in this business remains intact. We've got a 19% growth in volume, a ZAR 32 million lead to mainstream spirits business in 2 massively important countries on the continent. And in fact, we've got momentum that's picking up.

To give you an idea, in the last 4 months, that business has grown closer to 24.5%. So I think we've got to ride out as Distell prudently places its investment bets on the African continent. We've got to breathe a little; as management team, be responsible in our investments, but see through a little bit of the noise and make sure that we build these platforms and these brands in a strong and compelling and sustainable fashion. We're in that uncomfortable phase where we're still heavily dependent on strong export-led growth for our African business while we build East Africa out and while we start to establish these platforms in Nigeria, Angola and perhaps 1 or 2 other countries. And what I will say to you is, reading beyond that, those 2 events, a performance of just under 41% in revenue growth outside of the traditional customs union countries and just under 30% in volume, I think, is a pretty good performance.

The story for us is, of course, growing confidence in being able to acquire and then building out capability, practices and performance in acquisitions. And the middle graph just shows you our performance in Kenya. Since acquisition, the business has doubled in revenue and tripled in profit. Now of course, we were off a low base. So I wouldn't argue -- I wouldn't suggest that 12.4% EBITDA margin is an exciting one. We're not happy. We're not there yet, but the pace of progress and the kind of build-out of this business is something that we're pleased with.

And we're at that kind of point now where we're going to have to invest, we're going to have to expand because we're going to run out of capacity, we think, in the next 18 months to 2 years given our growth. So we've acquired some property outside Nairobi in order that we can start to expand the business.

And then other critical markets like Mozambique, Zambia all performed very, very well. And even closer to home, our Botswana business did well. Namibia tough. Namibia also experiencing not dissimilar conditions economically to the South African situation.

Yes. Then moving on to our international business. Now I just want to stop for one moment because I am conscious that maybe some of you aren't aware of what we've done with our international business. So we did guide last year that we were going to try and get some focus to this business and participate in premiumization where we felt we had the opportunity to compete and an endgame for growth with a portfolio and a route to market that could support that growth. So as a result of that, we've divided up essentially our old international business into 3 divisions. The first in international spirits business, where we believe the biggest opportunity for growth led by single malt exists and the premiumization potential in spirits. If you watch what's happening with our competitors globally, this is by far the most attractive long-term growth segment for us as a company given our assets that we own and the presence that we have in Taiwan and the U.K. And so therefore, it's our primary focus.

Then on the right-hand side, we did announce through the course of the year, that we're effectively -- after having sold off our share of Lusan, that we'd effectively put Durbanville Hills, Nederburg, Ultra, and our other state brands into the Libertas Vineyards and Estates business. It is its own statutory business. It is set up on [top on] nearly an independent, but it is part of the broader ventures business. And again, we're doing this in order that Kate and her teams can create a much more entrepreneurial, at small, nimble, fleet-footed, responsive to market conditions, in order that we don't necessarily cloud it with the kind of big mainstream Distell machine in South Africa and in Africa.

And then we've got a much more focused effort in international exports, which is really comprised of wine and Amarula. Now Amarula is a really strong brand with just under half of our revenue in international markets outside of the African continent. So it's incredibly important for us, but we have focused our wine portfolio on much more profitable pockets of opportunities, brands and SKUs. And that has resulted in a drop-off in the volume, which is shown in the next slide. And -- but nonetheless, a strong increase in revenue and in margin, in for example, the Libertas business. So the Libertas business sells on an arm's length basis its portfolio into South Africa, into Africa, and into select international markets.

Our international premium spirits business, again, is a story of margin improvement. Here, we've actually -- the volume number is a little bit misleading. Part of our international spirits business has bulk sales of spirits in it. And so you should rather look at our single-malt portfolio, and that portfolio grew by about 20% in revenue and volume. Again, both businesses are focused actively on margin expansion and a much more tailored portfolio focus and much more tailored market expansion initiatives.

Moving on to the segments or the categories. I'll start with our premium side and ready-to-drink portfolio. Their revenue up 12.3%. Volume's at 3.2%. And there, you'll see the benefits of price and mix and portfolio strength across our brands coming through. Yes. And we're pleased with our value share gain in South Africa, in spite of the competitive conditions of -- against our large multinationals, we've held up well. So yes, good strong performance from our ready-to-drink portfolio in spite of those factors. And then wine, I've already alluded to it, between a double-digit price increase passed on to the consumer. Mainstream beer is our biggest direct competitor. Volume drop-off -- resultant volume drop-off, as you'll see here.

Some revenue growth, you can see the delta is effectively the price increase effect, so the delta between revenue and volume. We've seen a lot of competition at the lower end. And it's difficult for us to be all things to all people, so we try our best to stay out of the real low-priced cheap price fighting end of the wine market, but there's a lot of competition as the consumer looks for value opportunities and trades down. But conversely, we're also seeing in our sort of accessible portfolio, nice growth from brands like Drostdy-Hof in South Africa and in some parts of our international business.

Then on to spirits, a strong performance, with volumes up 4.3% and revenue up 11.2%. And as you know, we focused this time last year on our whiskey portfolio, in particular. This gives you a sense of how whiskey's grown, and we're pleased with both our blended whiskey or blended scotch growth as well as our single malts and our single-grain whiskey growth, and you see that performance on the right-hand side.

Had really good growth out of Cruz in white spirits, which has been historically, arguably, a weak part of our portfolio. And we've innovated with Count Pushkin with lower alcohol flavor vodka variants, and those are actually -- the consumers responded very well to those innovations in South Africa.

Brandy has been tough. We've had to pass some pricing on. It's a price-sensitive category. It's a Viceroy story. We've had lots of growth out of Viceroy. We're investing behind the category. We're investing, as we speak, in both Viceroy and Klipdrift. We've seen these before with brandy, so we'll have to hang on. We are focused a little more on margin than just on top line growth. And we did guide that, you will recall, at Springs those that were there. But all in all, our broad portfolio of spirit brands has performed really well in the period.

Then just moving on to our organization. So yes, for those that haven't seen some of our operations, I just thought I'd show you the kind of things that if you walked around an operation at Distell today, this is what you're likely to see: modern, diverse, I'd like to think, a company progressing towards excellence on -- in supply chain. And the Angolan, Kenyan and Nigerian stories about -- are about creating small multipurpose manufacturing capabilities that can do a blend of be it a spirit at low speed or a high-speed accessible wine brand, or alternatively, ciders. So we've actually, in the process, also cultivated a unique kind of manufacturing capability to build a single plant and be able to convert a variety of wines, spirits and ready-to-drink offerings and tailor those offerings for the consumer needs of the country. So I can tell you, our portfolio offering is different in Nigeria from one in Kenya, and that's different from the one in Angola. And all of our operations are being tailored to give us maximum flexibility with our portfolio offering as we expand on the African continent.

And then you will have seen Springs. And we will invite a team, I'm speaking on Frank's behalf to Wadeville, where you'll be able to see our spirits' manufacturing capability, which again, has received significant investment to modernize it.

In this period, over the last 4 years, we've invested about ZAR 1.6 billion in these initiatives. We've put more capacity because the business has grown, but we've put more capacity also in Gauteng, deliberately so because that's the largest consuming market. Lots of our capacity was fragmented and resided here in the Western Cape, which is one of the reasons why we've kind of shut down and converted Green Park from a manufacturing operation into what will become a distribution center for the Western Cape.

So we've invested in capacity. We've reorganized the network. We've modernized it. And we've shifted a lot of the production that we require closer to the biggest consuming marketplace in Gauteng.

With that and with a further investment in distribution capability, we'll now start to turn around goods or products, brands in 24-hour lead times, which we weren't doing before. We'll be able to service our customers a lot quicker. We'll lower our working capital levels.

These projects also aren't just investment projects, each one of them carries a business case, each one of them is measured on all the typical financial parameters that Lucas and his team love, including WACC and return and how quickly we are going to get the returns. We believe that these projects are going to deliver about ZAR 330 million worth of annualized repeatable cost reductions as the footprint is consolidated because as we're doing this job, our capacity utilization of our asset base is going up because we're doing more throughput through fewer lines and fewer facilities. Our overhead per liter is also going to come down, and I'll show that to you in a moment.

We're also doing a similar task as we speak, in East Kilbride in Scotland, where we are also investing to modernize, reorganize and lift our manufacturing and packaging capability with our whiskey business there.

At the same time, in this past year, we did report that we were going to reorganize our corporate service functions. Regrettably, we had to rightsize some of those. We've completed that exercise. And in the process, we've also created a growth and innovation function, which is led by Donovan, sitting next to Len. And that team is focused on 2 critical initiatives: one, much more focused on breakthrough rather than incremental innovation for the company; and secondly, on a multiyear digital transformation of Distell. And I'll touch on that in a moment.

And then Kershen -- and I'll have [Tutsi], there's Kershen Pillay. Kershen is running our corporate service function, and that function essentially takes all of our corporate transactional services, plus our customer call center and puts that on a single platform with digital enablement in place and a new enterprise architecture that will allow us just to be more agile, lower cost and more consumer-centric and customer-centric as we go forward.

So in, on the one hand, investing, rightsizing, reorganizing, modernizing. On the other, I want you to get a strong message of also investing in future capability, which a company such as ours needs in the digital world and to innovate with breakthrough ideas.

What are some of the things that we've seen, as a result of the investments in manufacturing? Well, I -- these are all kind of very detailed charts, and Johan can explain it much better. But they're all indexed. It just gives you a sense of various parameters that, I mean I think he measures more than 200, but these are the more important ones.

Firstly, manufacturing reliability. So you need to run big, high-speed operations with a rhythm, and that rhythm almost needs to be like that of an athlete, where you know when you're going to build up, when you need to pace yourself for the final sprints, and that needs to be repeatedly redone so you can improve your times. It's no different in a manufacturing operation. And manufacturing reliability simply talks to what did we plan? What did we execute? Did we do it? And at -- historically at Distell, we're a little bit laissez-faire, and I'm using that word in the nicest possible way. We were a 2,500 make-to-order SKU, make-to-order operation. And you simply cannot run a 2,500 SKU make-to-order operation efficiently, reliably with high-quality standards each and every day. So we have to get kind of more reliability to plans and plan adherence.

With that, we're then able to create much better cost efficiency, as I said, rhythm to that race. And then factor productivity is an elegant way of saying do we get more throughput through each of our operations with fewer people? And you can see we measure that by way of liters of throughputs by a full-time employee, and those numbers are starting to move up quite strongly.

And then our conversion cost. As I point out in this graph, if you just look at the last 5-year periods, against, I don't know, PPI of probably 6% to 8% over that period, our increase had been 2%. So I think some of the productivity, reliability, efficiency and quality metrics are starting to come through.

Our stock days have come down, but I also want to say to you that they went up over June. So while we were actually reorganizing our manufacturing base, I expect these figures to come down considerably as we've got much more capability closer to markets in the coming year.

Then just on digital. So yes, I just want to just make the point to all investors and watchers of Distell. It's difficult when you're in Stellenbosch or in South Africa staying as -- ahead of the curve as you should against global multinational competitors with fully, globally, just first fully integrated practices and competencies. So I mean we recognized about 18 months ago that we were -- we had to catch up strongly with a digital kind of edge. So we've divided up a multiyear program into essentially 2 buckets and 3 horizons. But our core priority is to actually create digital experiences for customers and consumers that are emotionally engaging, relevant, agile, that speaks them in the language that they want to speak in.

And of course, part of that job is to make sure our marketing teams are equipped with digital fluency skills and our agency partners reflect the same skill. So we're investing there quite aggressively. So that our brands emotionally connect in a new digital world.

Likewise, we're also taking the entire value chain of Distell. We've got about 12 initiatives that we recognize that could be either digitally enabled or digitally disrupted. So it could be everything from demand forecasting to machine learning on solving some problems with accounts receivable. So taking these 12 initiatives, prioritizing them, so that we can start to accelerate the speed, the pillars, the agility of the company, the insightfulness of our company, the decision-making through using digital platforms. And this is a multiyear program. And just to emphasize to everybody again, we're pretty disciplined with financial measures. This is a ZAR 325 million, 3- to 5-year program, sizable money, all with ROIs, hard and soft metrics that we'll monitor and measure as we digitally, I guess build capability in Distell.

Then on sustainability. Yes. I mean South Africa, we know our issues. We're one of the most socially divided, discriminatory countries on the planet. None of us can be particularly proud of it. It's why we sit with the problems we sit with. We can say a lot about the current situation in South Africa. We just take an approach at Distell. We'd rather get on and do stuff and make a difference. And this slide just kind of gives you a sense of investments in skills development and enterprise and supply development and in socioeconomic development that we are committed to because we simply have to make a difference, to job creation and to the social fabric of South Africa if we're going to be a sustainable partner and a growing business in this country, particularly with the consumer base that we serve.

Just on that, just to give you a sense on apples and grapes. So 2 years ago, I can tell you, most of us in this company thought it wouldn't be possible to figure out how you can empower wine farming or grapes. The truth is, we've got a team of people right now working, having figured out how you can do it. And that all these paradigms around low returns and no one will be able to get it done, we're simply getting on and doing it. We found 68 farmers. They're there. They want to be in this business. They don't have access to land. We need water rights. If we get the water rights, we get the yields up. We get some white farmers in to help and partner and twin with our black farming colleagues. We'll start getting some impoundments moving. So yes, it's only 100, 200 hectares of transformed land in South Africa, it's nothing. For a wine industry that's still sitting with 98% of the land in essentially white hands, that's nothing, but it's a start.

And that's the way we tackle this challenge, is we've got an ambition to get 10,000 hectares in part. Where? How are we going to do it? One step at a time, with ZAR 26 million and 181 hectares. If we can prove those work and we can get more jobs created through that, why can't we get 5,000 hectares done? So that's kind of the approach that we're taking, and I'm really proud of the work that Wim, and Bridgitte, who's ill today, and our Corridor team are doing. They've pitched together to win kind of, to think about the social issues that we need to address, but also the economic ones because they're both intertwined. And we're going to get some momentum on this off a small base. Then also just to mention, we've got a major responsibility to ensure that alcohol is consumed socially in a socially responsible way. We're investing heavily in that.

And in particular, we have an obligation to make sure that pregnant women aren't put in harm's way through the consumption of alcohol in that important phase of the development of the young infant. So we focused on those programs. And we're confident as a result of just doing the right thing that we're going to end up with a level 3 BBB accreditation this year, which again requires efforts and investment, but it's the way we see our license to thrive and operate in South Africa. It's just nonnegotiable.

Yes. On environmental, these are the numbers, some pretty good ones, not going to dwell too much on them because I've overstayed my welcome already, stealing your precious time, but we've made some progress here, still got work to do. But nonetheless, good progress.

So with that, I'm going to hand over to Lucas. Thank you.

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Lucas C. Verwey, Distell Group Holdings Limited - Group CFO, Group Director of Finance & Executive Director [3]

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Okay. Thank you, Richard. Afternoon, everyone. Also afternoon to everyone on the webcast, all our colleagues in [Paraga], Stellenbosch, East Kilbride and Africa. Welcome for the first time.

I'm just going to run you through some of the numbers. I think Richard touched on most of it.

If you -- like always, we show you all the numbers, did it last year and the year before, where we show you the reported numbers. They're normalized in South African rand and also normalized on a constant currency basis.

So if I start with the numbers in green. The middle column is more or less, the South African rand normalized performance. So you can see the -- exactly what Richard said, that we have almost flat volume growth with a gross revenue of 9.4%, a phenomenal performance on the top line, post excise that goes to 8.8%. And then the EBITDA on a normalized ZAR, the basis of 12.4%, so double digits on that and then translating to 13.5% headline earnings growth.

So at the start of the year, if you told me that will be the numbers on a normalized basis, I think we would be very happy to take them. So it's a credible and a very solid performance.

And then very importantly, the margin. So the normalized EBITDA margin of 60 basis points. I think if you recall H1, we did mention that we, at that point in time, had 60 basis points margin expansion. And obviously, our business, we make most of our profit in the first half. So to keep the margin expansion on that 60 basis points to the end of the year is a very pretty promising performance in my view.

Also then linking that one number, the return on invested capital, very important for us as a business. We have it in all our SDIs and helped long-term performance measures as linking this income statement to the balance sheet. And obviously, in the year where you expand, and obviously, we're expanding the business. We're improving our sites. We're expanding in Angola, Nigeria, Africa. You have lots of CapEx going into the business. So it's an investment on the -- in the balance sheet. So to immediately get a performance or a return on that is difficult in an expansion phase. But this year, it's the first year -- last year we were flat. This year we got 34 basis points improvement on that number going to 13.6%. So that is in my view, the outstanding measure on the scorecard. So I think to get that moving forward is what we want to go for. And I think a target for that number is we want to have a real economic value add of about 4.5% going in the future. We're not there yet, but we're moving in the right direction.

And then finally, also on cash. Our total dividend, up 7.1% for total, but the final dividend, we did increase by 8.3% as you saw in the SENS this morning. So that's again a credible performance, underscoring our cash generation ability. And that total dividend payout for the year will be ZAR 929 million. So hopefully soon, hopefully next year, we can get over that ZAR 1 billion threshold.

Then just talking a bit about the reported numbers. You can see that the EBITDA, there's 3 things that did impact our EBITDA performance on a reported basis. So the first one is the, let's call it the credit provision against the Zim-denominated bond or Zim-dollar denominated bond in Zim. We took a view to impair or provide against that about to take off 80%. So we took a credit loss provision of ZAR 266 million. That impacts both EBITDA and headline earnings.

Then the second one is we did impair the investment in BGB in Angola. I think Richard spoke to the underlying performance and the volumes of that business, still growing. So it's all about the contract devaluation and the profitability of the business being a bit lower. We took that view, and we did our impairment tests with, obviously the auditors and everyone involved, and we write off ZAR 524 million of that investment. That also impacted EBITDA, did not impact headline earnings. It's capital in nature. So that's why the headline earnings is only 1.7% down.

Then the third theme in the results is we're going through, like we mentioned, a project where we're optimizing our supply chain network. So we did close a significant site in the Western Cape. Obviously, if you want to close a site, there's lots of onetime costs associated with closing that site. We also bulked up our bottle stock. So that we have continuity. Obviously, that's a cash outflow in that specific -- specifically the last quarter. And then on top of that, we did also reorganize our operating model, and therefore, we have a new org structure for supporting that. And then there's also onetime retrenchment and restructuring costs of about ZAR 223 million, if you take those 2 projects combined. So those all are in the reported numbers.

And obviously, cash. On a reported basis, because of those 2 factors, we had lots of expenses in the last quarter due to this restructuring and we also bulked up our stock. So that's -- that absorbed a bit of our cash in the last quarter, reducing our cash by 11.3%. If you normalize, if you just take that one source out, we're comfortable with cash in it. It was flat for the year. And also call out that over the last 5 years, our CAGR for cash is about 18.1% growth. And obviously, on the right, you can see a full recon of how we got to all those numbers.

Yes. And same as, I think you saw this already, very solid performance, tough economic conditions, consumer being under pressure and successful Africa. You saw the Africa performance, like Richard mentioned, excluding [Beyond] is 40% revenue growth, we've got some one-off headwinds. But overall, I think we're on track, tracking Africa margin, third bullet there, margin, margin, margin. I think throughout the business, the focus on margin is significant. So you can see it in the results that's coming through. And obviously, all the optimization, bearing fruit. I think we underestimate, like we mentioned earlier, the cost pressures that we face. And even to have margin moving forward, combining all of that is a credible performance.

And in the international space, we touched on that, we actually -- that we actually, we're reducing the tail quite a bit and having a more profitable business in that space. And yes, this is basically the income statement on one page with margins. So it gives you the full story right from the left to right. You can see the revenue right to the normalized EBITDA and also the margins based on a duty paid and nonduty paid basis. And right at the end, you can see there's a 60 basis points normalized EBIT margin going from 17.3% to 17.9%.

COGS, like we spoke just now, COGS, 9.3%, up lots of cost pressures in that space, but at least managing that to not go beyond. That is quite a performance. Expenses growing by 13.7%. That includes all these one-off costs, which we talked about. They -- that's mainly the restructuring and the credit loss provision or, let's call it, the bad debt provision against that bond that totals ZAR 489 million, excluding that expense bucket grows by 5.2%, which is well contained in the current environment. And then you can -- then it all flows down to normalized EBITDA. That's up by 12.4%. And after FX, if we take the FX windfall because obviously, the rand did weaken, which is good for us. But after that, on a constant currency basis, EBITDA increased by 7.5%.

Yes, margin throughout the business, like we said, lots -- all the line items right to the income statement, we tackle right from revenue, how we price. We did take price this year. The second big line that you'll see in the income statement on the previous page, it -- excise of ZAR 7.1 billion, just to refresh your mind there. Our corporate tax is only ZAR 700 million. So ZAR 7.1 billion in excise is quite a significant line item. So we tackle that, these figures. Initiatives on the go. Do you see how we can reduce and minimize excise? And then obviously, all the input cost drivers from COGS and OpEx, how we can minimize that to improve margin is sort of the theme that we had this year.

Drivers of revenue growth versus gross revenue. So our gross revenue before excise, 9.4% increase, not a lot of volume growth because of all the factors that Richard just already mentioned. Some positive sales mix, a bit of currency and then 6.4% average price increase during the year. So you can see that we did take up our price during the year to give us a 9.4% revenue growth.

Regional performance, we touched on this, still dominated by South Africa, 73% of our revenue coming from South Africa. That's up 9.5%. Very nice to see that Africa and that we need to diversify the spine. And so that is a focus and nice to see that the Africa revenue did decrease by 20%. We talked about the international being flat. While we agree optimizing that portfolio, the profitability of the international business, that grew about 300 basis points. So that's translating to bottom line.

Then on a segmental basis, we're not only a cider business, you can see big portion of the business, still spirits and wines. So very important to us. All of those categories still growing on a revenue basis. And obviously, like we said, the cider category and the spirits category growing by double-digit growth for this last year.

Yes, we always show this, the excise, the drivers of that ZAR 7.1 billion, mainly -- and you can see on the previous slide, we did take 9 point -- 6.4% price increase. That real price of excise is 8.2. So we're actually not passing on all of it. We're trying to, but it's still growing slightly faster than we -- than I think the consumer can afford at this stage.

Then just our total cost bucket, which includes our marketing spend and OpEx of ZAR 5.7 billion, grew by 13.7%. And like we said, just taking out the restructuring costs and the Zim provision, that growth, we're comfortable with, as 5.2%.

That slide comes -- then just exchange rates, we show you the full basket. Obviously, that's still driven by pound and euro, mostly. But as we grow into Africa, we start to show the African exchange rate as well. You see the Kwanzaa day is the main one that did affect our business. So it -- we have a weakening rand, it's the green numbers, it's good for us. We saw a big portion of our business is export. So that's a positive. And then the negative is the Kwanzaa this year.

Moving on to the balance sheet. Very important for that return on invested capital measures and EBA. Net operating assets growing by 3.2%. However, that's taking into account the impairment of our investments in Best. I think just to call out the last bullet there, if we exclude those 2, the order impairment, the net assets did grow by 10.9%. You take it from the top, you can see the investment in fixed assets coming throughout Angola and Nigeria, all those projects gaining traction. So fixed assets up by 11.8% to ZAR 7 billion. Inventory, like I said, a bit higher because of the fact that we closed the site. So you can see on the -- I'll touch on that on the next slide, where we increased our bottle stock. So that's growing by 9.7%.

Accounts receivable. We're happy with that in line, so our debtors days and everything intact, about ZAR 3.7 billion. If you look at that number in July, we did collect about ZAR 900 million. So that number is, in July as we stand here, about ZAR 2.8 billion.

Accounts payable, we did change our terms. So we -- we're on 30 days. We did move it up to 60 days for our biggest suppliers. We didn't do that for the wine industry and our enterprise supply development suppliers. So they're still on 30 days. But the bigger portion of our supply base, we did move to 60 days. I think the industry norm is 90 days. So we're still pretty conservative in that space, and that grew by 9 -- That's the main reason for the 19.5% increase.

And then intangibles, I've got a slide just breaking the ZAR 2.6 billion up between all the different parts. But obviously, the ZAR 525 million reduction in that one investment that decreased that number by 14%.

So intangibles still for a business -- a brand business like us, we don't carry a fair -- a big number of intangibles and investments on our balance sheet. It's about 16% of the total net operating assets, let's call it ZAR 2.6 billion; the goodwill and trademarks, mainly sits with KWA, about ZAR 200 million; the Cruz acquisition that we made of ZAR 100 million; and then obviously, Distell International, which was the old Burn Stewart business that we bought. That's the bulk of the goodwill and trademarks.

And then the investments in our associates, the TDLs, the Grays. Best you can see there is ZAR 278 million. It was ZAR 800 million. And we took that ZAR 524 million knock. And then obviously, a small number for Afdis and the rest, still on the balance sheet.

Then ending off with obviously the most important piece is the cash generation ability of the business. This is our net debt position. We started off with borrowings, net borrowings of ZAR 3.4 billion so -- that we absorb some cash. We did utilize some cash this year of about ZAR 400 million. There's various reasons for that. But we're still generating significant cash from operations of ZAR 3.4 billion. Our working capital, normally we want to keep flat. We did utilize some cash to increase our bottle stock so that we have continuity. So that's one piece of it. And obviously, we did expense quite a number of restructuring costs like we said in the last quarter also coming through the numbers.

And then lastly, you can see the CapEx number, ZAR 1.5 billion. Last year, that number was ZAR 1.1 billion. So there's a significant increase in us expanding into the African continent. And therefore, we end up with a net borrowing of ZAR 3.8 billion. So there's a ZAR 400 million of cash absorption or utilization of cash that we used this year.

During this year, we also refinanced all our debt. So we did change our -- or pushed out our maturity profile of debt, so that the majority is now between 3 and 5 years. And also we load our borrowing cost at the same time. So it was a net-net great outcome for us and a great benefit. Most of that debt is with RMB and Standard Bank. And you can see the rates on the right there. We also did fix some of our interest rate exposure at the same time. So that gives you a view of -- then obviously, same picture, just in a different format. Last year, we produced a cash of 280 -- net cash of ZAR 285 million. This year, we absorbed a bit of cash because of the reasons mentioned. You can see mainly -- it's mainly the working capital and stock as well as the investments in expanding us into Africa.

So that -- and then this is the famous bottle. If you look at this bottle has been retweeted all over. This is basically all the cash that we generate as a business. So we've generated, over the last 9 years, about ZAR 81 billion in cash. So it's quite a significant cash number, growing by 11.9%. So again, you can see the ability of Distell generating double-digit cash growth over a long period of time. So it's a great call out.

And then you can see where it's going over the last 9 years. So 58.3% going to government. And so they're actually the biggest stakeholder in this business; employees, 24%; shareholders via dividends, 8.6%.; and then what's left at the top of the cap, 8.7% that we can invest in growth initiatives. So that's basically in a nutshell where all our cash goes to.

Yes, that's it for me. I look forward to any questions later, but I'll hand over to Richard for the outlook.

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Richard M. Rushton, Distell Group Holdings Limited - Group CEO, MD & Executive Director [4]

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Do you want to stay? So just quickly, just to wrap up. Yes. I think in a nutshell going forward, obviously we're going to defend and exploit the opportunities that are available to us in South Africa being our core business. And we anticipate a tougher environment. We don't think it's going to get easier in the short term. We will place defensively and operationally and executionally, to defend our share position, our brand portfolio, the repertoire of occasions that we appeal to, our increasing reach of our customer universe, our market effectiveness leaders that we are pulling and those supported by brand investment and market execution and people capability investments, I think give us a good kind of dose of feet on the ground, but confidence that we can work through this period of pretty difficult challenging times in South Africa and be well-poised for what will be medium-term growth unquestionably in the South African economy.

We are shifting our innovation priorities away from incremental to breakthrough, and we're investing in digital capability, as I mentioned earlier, and we're going to work hard at improving customer service. We don't believe we're there yet. We measure on time in full as a critical measure. We've still got some work to do on those metrics. We are going to invest in making sure that our operational efficiencies out of our distribution platform are optimized, particularly in the northern part of the country in Gauteng.

Then in Africa, we've got an unwavering commitment to continue with our expansion in the priority markets that we've identified. To do so prudently, not to place disproportionate bits in any one country or one currency or one market. We'd like to see a balance of geographies and kind of diversified economies, and obviously, large consumer bases where our business, our brands will resonate strongly. And we committed to our growth on the continent. We know that it's not easy. We know that with high-growth prospects in Africa comes considerable risk in currencies. And all I'll tell you is that you've got a team of managers who committed to managing that environment as best they can and winning and growing at the same time. We will continue to support Best, given the size of the business and its potential on the African continent.

With our venture business, it's all about tapping those premiumization opportunities and to do that with focus. And we are going to allow those teams to operate with entrepreneurial independence and flair because that's -- it kind of -- those are smaller businesses which require that sort of entrepreneurial ability.

And we're also positioning those businesses to build partnerships. We recognize that we're small. Wine is -- South African wine is, as much as we don't like to admit it, we are a small player internationally.

And in spirits, yes, we're a relative newcomer to premium spirits. And there are lots of opportunities for us to think about alliance-ing, accessing new geographies and routes-to-market differently. And we certainly -- Kate and her team are very much occupied with those activities as well.

Just on the capability of the business and our transformation agenda, I do think we're going to start to see increasing benefits coming out of what we've invested in so far in our supply chain, but also in our capability, our marketing programs, our market effectiveness. We're doing -- to give you an idea, we've got an ambitious program in Africa to do some of the things that -- the South African team with kind of customer intimacy and market execution programs on the continent.

We've obviously -- we've come through change, and it's the first time that we've had to deal with a change -- organization change the size of Distell. So it's been tough. It's been disruptive for what has been a largely well-managed, conservative, familiar, old culture. So I think we're coming out of that. It feels like there's energy and kind of hope and anticipation for the future. Actually, I hadn't signaled out André. He's sitting next to Donovan. He's leading that effort. And we're optimistic that the things that we've done are the right things for the long-term growth and sustainability of our business and our people.

We continue to invest in all of our BBB and transformation initiatives, and we're relevant. M&A is not far from my desktop and from a dedicated team of M&A people who are scanning the African continent and other markets for relevant inorganic opportunities. We'll always do them with discipline, as you know.

So that's it from us. Thank you very much for joining us. I'm sure there are going to be questions. So I'll leave it over to Frank to help us coordinate that.

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Questions and Answers

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Frank Ford, Distell Group Holdings Limited - Group Manager of IR [1]

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Thanks. Thanks, Richard. As I said before, we'll have some questions, open up to the floor first. So there's 1 or 2 individuals I'm really hoping there'll be questions from, Mr. Chris Logan. And we'll open up to the participants. I haven't seen anything come through to the webcast, but we'll confirm that in a second. (Operator Instructions)

So first of all, can I just open to the floor for anyone who've got a question or 2 for Richard and Lucas. Can we just get a mic to (inaudible) Thanks. [Kim], yes, just get a mic to (inaudible).

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Unidentified Analyst, [2]

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Can you just explain to us the nature of the credit loss provision, just slowly how that came about and its implication?

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Lucas C. Verwey, Distell Group Holdings Limited - Group CFO, Group Director of Finance & Executive Director [3]

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Yes, I can. I guess we've got a business in Zimbabwe that we own 31% of, Afdis. Delta is the other shareholder into that business. So that's the start. That's got a production facility just outside of Harare. We -- as Zimbabwe sort of experienced liquidity issues and not getting currency out of the country, most of what they do is they import from Distell. And what that business did owe Distell was basically this, let's call it, 300 million rand-denominated debt. So the company, first, did owe us that money.

The ability of the company obviously to get money out of the country is impossible. So what Delta and us did is, we invested -- we use that Zim dollars to invest in a government-bond, a dollar -- a U.S. dollar-denominated bond that they issued. So the government issued this denominated dollar bond that runs at a coupon of 7% payable in 2 years. So we took the normal trading debt and invested it in country because it's got a higher credit rating than the company. So it's a bit more secured than the company.

Off the back of that, the Afdis business still stands in for that debt. So when we get to that point where the government does not pay, we still can go back to the company. And if they can't pay, we probably can convert that to equity into that business.

Hopefully, we don't get to that point because it means then that the economy is in a bad shape. So we've got this denominated dollar bond. Hopefully, the government will still honor that in 2 years. If they don't, we'll get to that point in 2 years. What we did in the meantime, there's sort of a formula that you follow. And we provided -- against that ZAR 300 million that the government owes us, we provided 266 million of that. So 80% of what they owe us, we provided for you in the financial statement. So that's sort of the story -- or the history around all of that. Hope that clarifies that question. I don't know if you want to add something to that.

And we still support Afdis. We still support the management. It's a great business. Obviously, [the mob] is going through their problems. And they have a big market share. So coming through this cycle, actually, we still have a solid business there. And we'll see if that money can be repaid at that point in time.

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Richard M. Rushton, Distell Group Holdings Limited - Group CEO, MD & Executive Director [4]

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Obviously, we're drip-feeding them. We don't want to also run that business into liquidation. So there is trickles of money coming out. And as that money comes up, we help them just to keep the working capital cycle moving forward and their ability to supply their consumer. I mean it's a quality business. And it's a quality management team in a country with massive short-term challenges but long-term potential. So yes, I think it's a prudent provision. Not nice, but it's prudent. And it's not a signal that we're not going to get paid or we're not going to go and look for our money.

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Frank Ford, Distell Group Holdings Limited - Group Manager of IR [5]

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Thanks. I'll give it to [Shaw].

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Unidentified Analyst, [6]

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Richard, a quick one on a similar vein. On Angola, are they self-funding? Or do you, at some point, also have to kind of put more capital in to support growth?

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Richard M. Rushton, Distell Group Holdings Limited - Group CEO, MD & Executive Director [7]

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Sure. That's a good question. I mean look, as you know, we -- 26% shareholders in the business. So our share of any call up for funding is small. But I mean they haven't had a requirement yet to call for additional funding. That, in fact, use some of the trapped cash to invest in infrastructure, the manufacturing and distribution plants in -- to finance the growth in Luanda has been expanded.

And then I mean the big issue is just they're selling probably on -- today about $19-odd million in much more secure, if we can call it, debt bonds in Angola. That number was at $38 million a year ago. So actually, they've done quite a neat job of paring down the kind of trapped cash in dollars, if you call it that. So the answer is if they had to call for cash, we would have to stamp up our share of it, but I don't see an immediate material need for -- they're able to finance it through the local businesses as we speak. Any...

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Lucas C. Verwey, Distell Group Holdings Limited - Group CFO, Group Director of Finance & Executive Director [8]

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And I think they're managing their growth based on the cash availability. If they get cash out, so they can pay within capital, they manage their growth -- I think they can grow much faster if there was no restriction on cash.

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Richard M. Rushton, Distell Group Holdings Limited - Group CEO, MD & Executive Director [9]

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And I mean we're active in that respect. And I can tell you, they are more concerned than we are being the 76% -- 74% shareholder.

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Frank Ford, Distell Group Holdings Limited - Group Manager of IR [10]

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Richard, I want to remind you, these guys here are dying to answer some questions as well.

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Richard M. Rushton, Distell Group Holdings Limited - Group CEO, MD & Executive Director [11]

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Sorry. Len, did that help or was it fully...

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Len Volschenk, Distell Group Holdings Limited - MD of Africa [12]

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Spot on, Richard.

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Frank Ford, Distell Group Holdings Limited - Group Manager of IR [13]

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I'll just take one through the webcast, [San Dile] from [Motomba]. Thanks, I'll get your question. Maybe one for Lucas. CapEx guidance in Africa, particularly. And then just a sort of general A&P spend going forward, that sort of guidance.

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Lucas C. Verwey, Distell Group Holdings Limited - Group CFO, Group Director of Finance & Executive Director [14]

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Okay. CapEx, you saw the CapEx number. The net of that ZAR 1.1 billion -- of that ZAR 1.6 billion is purely CapEx. It's the first time we went over ZAR 1 billion in this company. The guidance for next year will probably be a similar number. As we expand, we still need to finish production in Angola, and there's still some CapEx to be spent in South Africa. So -- but the strategy is most of our production and that sort of CapEx will be going into Africa going forward. So the bulk of it will be Africa.

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Richard M. Rushton, Distell Group Holdings Limited - Group CEO, MD & Executive Director [15]

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On A&P, yes. I mean I think our ratio, I don't want to declare the number. It's competitive information. It's in line with our peer groups, whether it's a spirits company or an RTD company or a wine. Wine spend a lot less on A&P, spirits, than premium ciders do.

I'd like us -- if the truth be told, I'd like us to be investing a bit harder. And so there's probably going to be a little bit of pressure on certainly, the Africa and then the South African team. I think we need to shore up and protect our consumer franchises in spite of the tough time. So we've got above-inflation budget for A&P, and I'd like us not to -- I'd like us to invest. But we always do it prudently, but those consumer franchises are our lifeblood.

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Frank Ford, Distell Group Holdings Limited - Group Manager of IR [16]

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[Ente]?

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Unidentified Analyst, [17]

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Richard and Lucas, perhaps if you could just clarify, is there any intention to do any more restructuring in the next year? Should we expect more restructuring, retrenchment-type costs? And could you perhaps quantify the benefit of the investment that you've made in restructuring the business in terms of margin enhancement this year? What are the savings going to be, in other words?

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Richard M. Rushton, Distell Group Holdings Limited - Group CEO, MD & Executive Director [18]

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Yes. So I mean we've done quite a lot of the heavy lifting on restructuring. So maybe André, JP, I can't see us -- I think what we've had to bear, we've taken through the income statement this year. And we've been prudent in that respect, is the answer to the question.

For truth be told, I can't ever say no to anything. We -- I think change is just a constant. We, as leaders, are dealing with it all the time. I think we've got some further work still to do. There are opportunities, but they're relatively small. To give you an idea, our network optimization projects, which are largely supply chain ones plus the reorganization and restructuring, we think there's about ZAR 200 million of annualized benefits. So we've taken the onetime costs and we've seen the capital investment, as you saw in the presentation. We think in total of the 2 project, there's about ZAR 200 million of recurring savings that come out of those projects. And then there's obviously a working capital benefit on the supply chain, which we still want to work through a little harder because we've had a onetime impact at year-end by moving stock while we're obviously reorganizing and finalizing the move of production lines and what have you.

But I think -- I don't want to put it out there because you would hold me to the guidance. But we're going to be pretty tough on net working capital going forward because we'll have a much more settled, closer-to-market production and distribution base. And with 24-hour turnaround times or lead times of moving product to customers, which we haven't had in the past, our lead times have been much longer, we've got to push for some ambitious net working capital targets. Would I be right in saying that, Johan? I mean intuitively, the way I think about it is we should be striving for 0. So kind of net no working capital in days, just a balance. So I don't know. I'm talking -- Lucas is (inaudible). And I'm not informed -- but I think there's more to come out of working capital is the short answer. And I mean I'm giving you a number that I think we can deliver. We'd like to do better, is the answer.

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Frank Ford, Distell Group Holdings Limited - Group Manager of IR [19]

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Just for the record, that's not official guidance.

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Richard M. Rushton, Distell Group Holdings Limited - Group CEO, MD & Executive Director [20]

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That's not official guidance.

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Frank Ford, Distell Group Holdings Limited - Group Manager of IR [21]

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The IR guy would say that. [Ente], any more? Sure. [Chris]? If we could just get the microphone to Chris, if you don't mind.

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Richard M. Rushton, Distell Group Holdings Limited - Group CEO, MD & Executive Director [22]

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Is the number right? I don't know. Did I, André? Or did I play the wrong hand?

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Frank Ford, Distell Group Holdings Limited - Group Manager of IR [23]

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[Chris]?

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Unidentified Analyst, [24]

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I think it was a great presentation. They seem to get better each time. I guess it's correlated to Frank's influence becoming bigger and bigger.

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Richard M. Rushton, Distell Group Holdings Limited - Group CEO, MD & Executive Director [25]

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He even gave me a jacket for the...

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Unidentified Analyst, [26]

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Sure. You have to give me one, too. But perhaps the question, if you can just give us some insight into how you assess acquisition opportunities in difficult geographies like, say, Angola, where there's a higher risk profile. So perhaps just take us through how you frame decision-making.

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Lucas C. Verwey, Distell Group Holdings Limited - Group CFO, Group Director of Finance & Executive Director [27]

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Do you want to start...

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Richard M. Rushton, Distell Group Holdings Limited - Group CEO, MD & Executive Director [28]

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You start...

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Lucas C. Verwey, Distell Group Holdings Limited - Group CFO, Group Director of Finance & Executive Director [29]

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Look, I can give you a -- so we -- normally, the normal fundamentals in that market, do we want to be in that market? Let's take Angola as an example. We were in that market a long time ago. So we had a sizable business. I think we had about close to ZAR 150 million, ZAR 200 million EBIT business in Angola before we did BGB. We go through the normal process. And in terms of the financials, we collect all the data. We do a proper due diligence. And what we did with BGB, for example, is we did all the normal discounted cash flows used a work of -- which includes some of the risks associated with that economy. I think we used about 20%.

We overlaid that to look at the working capital requirements. Obviously, given that the fact at that point that you know there's constraint on cash coming out of the country. And you overlay that to understand the effect on Distell for one.

And when we did that, specifically on the working capital, we saw buying 100% of this business might be too risky. And therefore, we decided to buy only 26% of the business. So based on all those factors and work we've done, we came to a conclusion to buy a smaller piece, so not to overburden Distell with any -- or not cash coming out of that country. Obviously, all the other macros that you take into account when evaluating a business, a new business or a new territory or market, we do.

But -- and then obviously, what we also took into account or what we wanted to take into account is to diversify -- diversifying that business into the rest of the continent. So at that point in time, I think it was probably a 90% volume -- Angola volume business. I think currently, it's about 80%. So there's about 20% coming from the rest of Africa. And that's how you mitigate against the -- probably the noncash or the cash risk in that country or the liquidity risk in that country. Is there anything...

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Richard M. Rushton, Distell Group Holdings Limited - Group CEO, MD & Executive Director [30]

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Just on that, I mean so part of that analysis outside of just the commercial and the strategic logic of doing it is obviously all the financial modeling, largely DCF-driven but all sensitivity-driven as well. So the 4, 5 conditions, are -- you will recall, we -- about 2 years ago, when we did the deal, we have -- we reported in our annual financial statements the 5 conditions around which we'd be a willing buyer of the remaining share of the business. And those conditions are actually driven by things like the margin, such as -- all those risks, both commercial and financial, that we saw in the business we required a partner to deliver again. So in a way, the challenge now is for our best partners to deal with the margin. And I mean that is the fundamental issue right now is that we've got a currency that's halved the inputs -- almost all of their inputs. They can't price it all up in one go. Now they need to substitute with local inputs, which they're busy doing. And they're going to have to work hard in the marketplace to start to build brand strength and margins and packs back up to the original levels they were.

I'll say to you that as tough as and as painful as this event has been, also a little bit philosophical about it in one respect only, and that is if you take a look at the Tanzania TDL business, we had a tough time with a sachet ban in that country. Three years later, all credit to the TDL team, they've got the margin slightly higher than pre the ban and the profitability is up on what it was before. So I think sometimes in Africa, you've got to be alive to the inherent volatility of currency, country risk. And we do that as best we can.

What would we have done differently and obviously, we -- I, personally as the CEO, reflect deeply. Zim, I think it's a tough issue and it's a provision. What could we have done differently in Angola, hand on heart, the only thing was not transact and I think that for the long term of Distell would have been the wrong decision. So we're going to back ourselves to walk through this with Len and with the Best team and win in the rest of Africa and win in Angola.

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Frank Ford, Distell Group Holdings Limited - Group Manager of IR [31]

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Anything else, [Chris]? Sure. I'd like to just see if there's anyone on the line. If -- Denee, if you have anyone on the line for us?

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Operator [32]

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Yes. So we have a question from [Ed Pina] from [Tantallon].

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Unidentified Analyst, [33]

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Can you hear me?

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Richard M. Rushton, Distell Group Holdings Limited - Group CEO, MD & Executive Director [34]

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Yes. Yes. We can hear you.

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Unidentified Analyst, [35]

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Apologies I can't be there. Just a quick one on your operating model efficiencies slide. You showed us ZAR 178 million savings from the head count and a ZAR 330 million annual cost savings coming from the CapEx. That ZAR 330 million, has that been realized over the 2015 to 2019 period? Or is some of that still going to realize in 2020? And is it right to assume that ZAR 178 million head count reduction is what we should be seeing in 2020?

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Richard M. Rushton, Distell Group Holdings Limited - Group CEO, MD & Executive Director [36]

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Okay. So the ZAR 300 million refers to annualized savings, a portion of that over the life of the project. A portion of that, this year, net about ZAR 40 million, am I right, Johan, is reflected? We think it's about ZAR 122 million annualized associated with the capital investment in, and so there's more to come out on an annualized basis. Obviously, you've now moved to production. You now need to settle that all down and produce and get all your inputs. And then we'll see the actual number. So it's an estimate based on all of our modeling.

And then on the head count, yes, I mean I'm open to correction, but the numbers you quote are right. Just remember that our business is a composition of permanent employees and then full-time equivalent employees that are made up of contracts, casual and fixed-term employment. Now in that slide, I showed you in the 1 year, you will have seen, there was a jump in the cost of the conversion cost, and that was as a result of the government's decision to equalize pay, which I think, again, was probably for -- less for Distell who were paying above the minimum wage, but for many companies that weren't. There was exploitation taking place there. So all those rates were equalized to effectively treat full-time equivalents as permanent employees. So you'll remember, there was a onetime jump. So in total, our full-time equivalent head count has come down by probably about 320 to 350 people in total. That includes the voluntary early retirement, which we went through as part of this process of permanent employees. That also includes some retrenchments regrettably, and it includes the optimization of fixed-term and temporary employment contracts, all of which were effectively permanent employee cost to us. And that total bucket is just over 300 employees or 8% of our employee cadre.

I must just also point out that I think -- just to let you know, I mean we don't do this lightly. From 2 years ago, our team started quietly planning just using natural attrition to make sure that the pain on South African families and people leaving our business was minimized. So we started a process of natural attrition a while ago. So -- and we've done quite a neat job of, I think, just getting more efficient with managing full-time equivalent employees, particularly the fixed-term contract and the temporary employment cadre. And as you do it -- as you get your capacity utilization up, the rhythm in your production plants right, your dependence on sudden requirements for short-term temporary labor actually comes down. And so that's going to be a benefit, I think, we're still going to see. Long answer.

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Unidentified Analyst, [37]

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So then just maybe to recap. It's not unfair to assume RAZ 180 million from labor; RAZ 40 million from sort of initial cost savings from the CapEx; and then over the next 18 months, RAZ 122 million, as you start realizing plant efficiencies?

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Richard M. Rushton, Distell Group Holdings Limited - Group CEO, MD & Executive Director [38]

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You've hit the nail on the head.

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Frank Ford, Distell Group Holdings Limited - Group Manager of IR [39]

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Denee, anyone else?

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Operator [40]

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That was the only question we had.

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Frank Ford, Distell Group Holdings Limited - Group Manager of IR [41]

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Thanks. Thanks a lot. I think there's a couple on the floor now. [David], you've got the mic.

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Unidentified Analyst, [42]

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Richard, yes. I mean we're obviously quite deep into a sort of consumer recession and I think everyone understands that well. With your kind of broad portfolio, are there any green shoots that you're seeing sort of popping up at this point? And then secondly, if you don't mind, you also mentioned the on-premise, there seemed to be some winnings there. Can you maybe just give us some more color on that as well, please?

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Richard M. Rushton, Distell Group Holdings Limited - Group CEO, MD & Executive Director [43]

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Gee, green shoots. I think it's heads down and wait for green shoots to emerge, quite frankly. I wish I could -- I wish I could give you -- is that fair? I think this premiumization opportunities, there are South Africans out there that obviously still have disposable income, like socializing. Hopefully, we can do a bit better at soccer and we can kind of do well in Japan, we might celebrate a little more. So -- but in all seriousness, I mean premiumization, there are pockets of opportunity. And then for us, I think if you just look at the resilience and the depth of our -- and the reach of our portfolio, both in occasions and obviously in outlets and channels, I think we're just well placed that if they are -- Western Cape, the economic growth is still pretty good. We've had some good gains in KwaZulu-Natal and in the Eastern Cape. We'd probably be under-indexed in wine/spirits there. But also just generally, ciders are a little smaller there, so there are opportunities there. I don't think we should -- we're not -- I mean are -- we just had feet on the ground at the moment because we're not expecting the consumer environment to help us anytime soon. Wim, I mean do you have a different view?

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Wim Bührmann, Distell Group Holdings Limited - MD of Southern Africa [44]

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(inaudible)

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Richard M. Rushton, Distell Group Holdings Limited - Group CEO, MD & Executive Director [45]

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Yes. In fact, that's a better eloquent way. You had a plan, Johan. But I also think, obviously, the environment politically isn't helping us. But we also all just got to chip in now in South Africa and get on with it and fix the place. And part of that is us. And was there another part to your question...

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Unidentified Analyst, [46]

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Yes. Yes. And maybe just on -- just the on-premise, the...

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Richard M. Rushton, Distell Group Holdings Limited - Group CEO, MD & Executive Director [47]

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Yes. So on-premise, I don't know, Wim, you might want to talk to that. We under-indexed there.

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Wim Bührmann, Distell Group Holdings Limited - MD of Southern Africa [48]

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I think you're right. There are 2 channels that -- which we were under-indexed, mainstream and on-premise. In both of them, we've developed tailored offerings for our customers, so on seller program, the mainstream and another one in on-trade. The gist of that is using our portfolio much better, which we've naturally got a portfolio. We're actually the only guys having a portfolio that offer everything to an on-premise outlet from RTDs to wine, et cetera. So we'll just use that to our strength. And it's the same 4As that you've seen in that graph. So it's making it available, accessible to customers and incentivize our consumers along the way. So it's just the offering and it's working quite well.

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Richard M. Rushton, Distell Group Holdings Limited - Group CEO, MD & Executive Director [49]

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The one green shoot I'm hopefully hoping for is just we've had our share of commodity cycle one off. So hopefully, this year, we won't -- I think energy and fuel and the rand are always going to be factors. About ZAR 2.7 billion of our spend is rand-influenced. With a weaker rand, we do get impacted. But I think the big hits we've had to absorb, hopefully, we won't see a repeat. If we have a -- it looks like we're going to have a decent harvest, we hope. It's still early days, but rain has certainly helped. So maybe some of those onetime factors for juice concentrate and the wine cost push won't be nearly as acute as they've been.

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Frank Ford, Distell Group Holdings Limited - Group Manager of IR [50]

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I think we'll take one last one. This is via email from (inaudible) at RenCap. Three quick ones. One, I'll give to you, Lucas, and the other 2 to Richard. The first one is how we derive our revenues in Africa. Is it local currency or -- and/or USD? And which is which? Lucas, you take that one. These last 2 is more around strategy. Are we more mainstream versus premium? What is our thinking around there? And the third one is our -- basically our SKU rationalization and does that include any brands we want to offload, like we did with whiskey and the businesses around that. So Lucas, do you want to take the first one?

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Lucas C. Verwey, Distell Group Holdings Limited - Group CFO, Group Director of Finance & Executive Director [51]

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Okay. First one, basically, the majority of what we do in Africa comes from the SA platform. So we export FOB in South African rand. So we get that -- so it's a rand-denominated export business, except where we have local production. The biggest one obviously is in Kenya, so that's in Kenya shillings. So there, we do have a bit of exposure in that currency. And obviously Zim, small, local production; and then Angola. So those 3 currencies do play a part, but the majority will be rand-denominated at this stage. But that's actually the reason why we want to expand into Africa is to have local production footprint in those markets.

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Frank Ford, Distell Group Holdings Limited - Group Manager of IR [52]

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Okay. Richard, do you want to take the 2 around mainstream versus premium and then SKU rationalization?

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Richard M. Rushton, Distell Group Holdings Limited - Group CEO, MD & Executive Director [53]

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Yes. So on mainstream and premium, unquestionably, in Africa and South Africa, we're primarily a mainstream wine and spirits business and a premium ready-to-drink cider business. So we actually have to be suitably equipped with both the premium brand-building skills on the one hand and the mainstream skills on the other. In Africa, outside of South Africa, largely, we see the opportunity in the mainstream with seeding and growth of our ready-to-drink premium cider brands. Internationally, it's really -- it's a premiumization. It's a premiumization, yes. I don't know if you want to talk to the -- Kate, the SKUs of the -- or any of the premiumization.

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Kate S. Rycroft, Distell Ltd. - Executive Director [54]

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I mean I won't say much more than Richard just said about premiumization. I mean that is the focus internationally, just that is where the growth is in alcohol generally in most categories. The growth is going to come from the premium segments. And the assets we have in international are well positioned, particularly now that we focus them to go after their growth.

Just in terms of the SKU rationalization. Across the group, we cut about 29% of the SKUs. That does not mean we've cut brands necessarily per se, so going into brand's certain packs, formats. And a big driver of that is to obviously simplify your supply chain environment. So we're making fewer things and more of it at a time. And then also just in terms of the front-end focusing on what they're selling. There have been some smaller brands that have come out of there, none of which we've shelved completely. And actually, we are having a bit of a discussion between the Best business and the SA region as to how we can possibly utilize some of those trademarks in some of the smaller businesses that we have where they will just naturally get a bit more time and attention. And also they are more material relevant to that -- I mean relative to that business. So I don't know if that answers that.

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Richard M. Rushton, Distell Group Holdings Limited - Group CEO, MD & Executive Director [55]

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And just to stay on brand disposals, I mean as a going-in position, we're not in the business of disposing -- I mean we do that -- if we do that, it's because, gee, there's a real compelling strategic reason to do so. So I mean it's not like we've got an active disposal program.

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Frank Ford, Distell Group Holdings Limited - Group Manager of IR [56]

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I think we'll end it there. I just want to thank everyone's time for coming out today and also those people who have listened in to the webcast and watched the webcast. Thank you to my South African teammates, the guys in England and Scotland. We look -- we do love you, but we look forward to coming up against you in the World Cup in a few weeks' time. And we've got a busy schedule, so we'll be at the RMB off piste investor conference. So we're happy to engage you there. Next week, we're actually hosting a group of investors in Nairobi. If you don't know about that, please get in touch with me. My contacts are at the end of the presentation. And we will be in London in November, seeing international buy and sell side as well as, probably, I'll drag Lucas and Richard to the East Coast sometime in December. So there's plenty of opportunity to see us.

Thank you once again. It is a bit chilly. But the best answer to that, is a 20-year old [Fond Rand]. And you can find at the back, there'll be some lunch available. Please stick around for a little bit. We're happy to have you here. Have a safe trip back home, and thank you very much for coming and listening. Appreciate it.

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Richard M. Rushton, Distell Group Holdings Limited - Group CEO, MD & Executive Director [57]

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Thank you very much. Thank you.