Sechaba Brewery Holdings Limited 2018 Annual Report

We have extracted below the Chairman’s Statement from the 2018 annual report of Sechaba Brewery Holdings Limited (SECHAB.bw), listed on Botswana Stock Exchange:

A win-win situation

The successful turnaround of Sechaba Breweries Holdings Limited (SBHL) is reflected in our financial performance for the year ended December 2018. This was driven by our strong commercial plans, diversified portfolio of brands, boosted by efforts by the Government of Botswana to review the highly regulated environment surrounding the industry.

The separation of the non-alcoholic beverages bottling operations into a separate entity, Coca Cola Beverages Botswana (Pty) Limited (CCBB) – formerly known as Beverage Manufacturers Botswana (Pty) Ltd, from the alcoholic operations under Kgalagadi Breweries (Pty) Limited (KBL), took place during the year under review. This follows the announcement to SBHL shareholders that Anheuser-Busch InBev (AB InBev) and The Coca Cola Company (TCCC) reached an agreement in principle for TCCC to acquire the non-alcoholic business segment of KBL after receiving requisite regulatory and material consents.

As a result, on 26 November 2018, SBHL was part of a capital restructure. However, throughout this restructure, the effective holding by SBHL in KBL remained the same. Following the separation SBHL is represented by investment in 2 associates, KBL and CCBB, with separate commercial focus leading to strong financial performance going forward. Before the restructure, SBHL’s interest in the beverage business was represented by a sole investment in KBL.

Reflecting on our performance

The company delivered very impressive financial performance in 2018 as profit grew significantly by 97% compared to the prior year. This was due to the once-off refund of the Alcohol Levy that was charged on excise for part of the years 2017 and 2018. On a normalized basis, profit after tax excluding the refund was approximately 39% above prior year.

During the year under review, total company managed to grow volume, increase revenue and gain market share. Total volume grew by 5% compared to prior period spurred by the increase in clear beer volumes, which grew overall by 13%, which benefited from a very solid trade execution and introduction of the high end company. As a result, final dividend of 88 thebe per share was declared by the Directors of Sechaba Breweries Holdings as at 31 December 2018.

This is another step forward in our company’s transformational journey. As indicated above, SBHL has had a successful year which was not without its challenges. Our focus this year is to continue to drive the organic growth of our business while deleveraging towards our optimal capital structure. As we look forward, we are excited about the growth opportunities. While there is still more work to be done, we are confident in our strategy and plans to grow our business by creating value and delivering sustainable top and bottom line growth in the coming year and beyond.

Economic overview

Botswana GDP at current prices stood at P189, 868.5 million in 2018 compared to P180, 102.1 million in 2017, recording an increase of 5.4 percent almost the same as Ministry of Finance and Economic Development’s 2018 forecast growth rate of 5.3% and slightly higher than the International Monetary Fund ‘s projection of 4.6 percent.

Real GDP increased by 4.5 percent in 2018 compared to a 2.9 percent increase in 2017. The rise in real GDP was mainly attributed to Water &Electricity, Mining and Transport & Communications industries, which recorded an increase in value, added of 21.0, 7.4, and 6.4 percent respectively.

Efforts by the government to diversify the economy and reduce dependence on the mining sector continue to yield positive outcomes as evidenced by decline in the share of the mining sector value addition in the Gross Domestic Product from 25 percent to 18 percent in the period from 2008 to 2018 and an increase in the contribution of non-mining sectors from 75 percent to 82 percent over the same period.

The average inflation rate increased from 3.79 percent for 2018 when compared to 3.3 percent in 2017. However subsequent to the estimated improved real GDP growth rate of 2.9 percent in 2017 and 4.5 percent in 2018, there is a positive outlook of the domestic economy. The Ministry of Finance and Economic development’s forecast for 2019 is a growth rate of 4.5% for the domestic economy. The economy is expected to strengthen in both the Mining and Non- Mining sectors, dependent on global diamond market, stability of water and power supplies, the Government’s continued support and development of initiatives meant to further improve the business environment.

Botswana Stock Exchange performance

Market activity on the exchange declined significantly by 28.01 percent y-o-y to 527.4m shares transacted versus 732.6m shares in the financial year 2017. 8 counters on the domestic bourse closed the year in the green, 4 were flat and 15 were in the red. Domestic Company Index (DCI) declined by 11.4 percent when compared to the decline of 5.8 percent in the previous year.

Sechaba was one of the notable gainers in the year 2018, by 2.72 percent and -5.49 percent in Pula terms and USD terms respectively from BWP 19.47 at 29 December 2017 to BWP 20.00 at 29 December 2018.

Sechaba’s value traded generated the most mainly on the company’srepurchase of 22.4 million shares worth BWP 425.6 m from AB InBev representing 16.839 percent of Sechaba shares on 15 November 2018.

Profit after tax grew significantly by 97 percent compared to prior year as a result of the once-off refund of alcohol levy that was charged on excise for the years 2017 and 2018. On a normalized basis profit after tax excluding the refund was approximately 39 percent above prior year. Board of Directors of Sechaba Brewery Holdings declared final dividend of 88 thebe for the year ended 2018.

Contributing to a sustainable future

In March 2018, our ambitious 2025 Sustainability Goals were launched, which will help us brew great beers for the next 100 years and beyond. For centuries, the experience of sharing a beer has brought people and cultures together. Even in our hyper-connected, always-on world, this simple act is as powerful today as it was generations ago. To brew the highest-quality beers, we need a sustainable environment and thriving communities. As a result, sustainability is not just related to our business, it is our business.

Fostering a culture of Smart Drinking

As a group we are committed to responsible drinking and road safety. This means that we continue to address issues that are most material to our business and where we can make the most impact on the community. Our programs include The “Ikgalemele” campaign (“It’s your responsibility”) continued in various areas around the country, promoting the message of responsible drinking. Both radio and print media continue to be an effective and valuable channel through which stakeholders are informed and educated about our moderation initiatives to reduce the harmful use of alcohol.

SBHL’s associates also have at its disposal an internal self- regulatory policy called the Responsible Marketing and Commercial Communications Code (RMCC). Compliance with this Code is mandatory for all sales, trade marketing, brand communications, promotions and campaigns for all our products that contain alcohol or use an alcohol-trading name.

Additionally, as part of our global commitment to reach 20% of our volumes from No- and Lower-Alcohol options (NABLAB) by 2025, we launched Castle Free – a beer with no alcohol. Here the aim is to empower our consumers with choice and robust health information about the products, through offering them the option of still enjoying all the sociability of beer without alcohol. Furthermore, we continued to offer our consumers brand St Louis Lager, following the brand refresh on pack and claim reposition. This is a proudly Batswana product.

Regulatory Environment

During the year under review, the Government of Botswana amended Alcohol Levy rate effective from end September 2018. The levy rate on alcoholic beverages, albeit in the interim, was reduced by 20%, that is, from 55%/50% to 35%. This was a commendable decision that showed government’s commitment towards making the regulatory environment more conducive for doing business in the country.

However, the calculation for levy on locally produced alcoholic beverages is still based on the total cost of production and excise duty payable in terms of Customs and Excise Duty Act, which means KBL continues to pay a tax on top of another tax. This anomaly continues to have a sizable impact to the company financial performance.

Achieving great results together

Although the non-alcoholic ready to drink segment has been separated from KBL – for SBHL, this has created an additional diversified and focused non-alcoholic beverage company. The two companies – KBL and CCBB, are set to benefit from the insights and experience with regard to management, technical, brand building and distribution expertise of their global companies – Ab InBev and Coca Cola Beverages Africa.

We would like to thank our shareholders for their continued support. Our commitment remains focused on delivering solid organic growth.

As we look forward, we are excited about the growth opportunities as a result of our commercial strategy, robust portfolio of brands, geographic footprint, and unmatched efficiency and, most importantly, our committed and talented people. This makes us confident that we can deliver on these objectives now and in the future.

Acknowledgements

I would like to thank my co-directors for supporting me as the Chairman of the board and for their continuous guidance and advice. My sincere appreciation goes to the Management Teams of the associate companies.

I wish to extend my most sincere gratitude to the Government of Botswana, shareholders, wholesalers, retailers and all other strategic partners for their support and backing our efforts towards this industry. We want to thank our employees for their commitment and dedication, which is reflected in the positive results in the past year.

Thabo Matthews
Chairman of the Board