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Cost had most impact on businesses — Guinness CEO

The Managing Director, Guinness Nigeria Plc, Mr. Peter Ndegwa, in this interview with Financial Vanguard, spoke on issues that challenge manufacturing companies in Nigeria , brewery sector, Guinness brands, proposed capital raising, future prospects, among others. Excerpt:

By Peter Egwuatu

WHAT are the challenges  facing the manufacturing industry in the country?

The economic environment has been challenging for all businesses and we are no exception. Within the context of the economy, there are things to be mindful of. Firstly, consumers are under pressure given that we are in a recession and for businesses like ours who sell consumer goods, it is an important consideration. We have also seen a lot of down-trading by consumers as well as a reduction in the frequency of purchase thus forcing them to prefer lower priced brands.

Secondly, the cost side has had the most fundamental impact on many businesses. As evidenced by many of the financial results being announced, one would see clearly that the cost side of the business has posed a very great challenge for many firms. This is primarily caused by the currency, in terms of where the naira is versus the dollar and also inflation. On the   Foreign Exchange issue, we have seen a move from a fixed rate to a kind of managed float which has led to depreciation of our currency by about 50 percent.

Impact on industry

When you then compare that with the parallel market rate, which is the proxy that is being used for pricing goods, the impact on industry becomes very significant directly from when you import inputs and also on our local suppliers who also depend on imported inputs.

What are you doing in terms of sourcing your raw materials locally?

We have since commenced downward integration strategy. So, while we have increased our local sourcing from about 40 per cent to 70 per cent in the past two years, we have had it easier with raw materials like sorghum because they come from farms. Even with sourcing local raw materials, we have had some challenges partly in terms of crop failure, and partly because of increase in trading around the borders which is driven by currency which means that the price we’ve had to pay for sorghum, for example, is twice or two and a half times increased.

Beside the problem of souring raw materials, what other factors affect the brewery sector?

One important factor that affects the brewery industry is energy. We have seen less availability of gas during the year. Our energy supply in many of our factories is dependent on gas plants especially in Lagos. As such, when gas is not available, we are forced to use diesel which is less efficient and more costly.

So when you translate this big element into performance, your topline and costs are under serious pressure. And then in terms of funding, interest rates have gone up, and because you have less cash flow, you have to take a little bit more debt, including foreign currency debt so that you are able to fund the business given the lack of liquidity.

What kind of innovation has Guinness introduced in recent time to overcome some of its challenges?

Our business in our industry is considered and referenced as the innovation powerhouse. Innovation continues to be a critical part of our DNA as a business. For example, in the last three years, Orijin has come alive. From there, we have launched Orijin Bitters, a spirits drink and Orijin Zero, a non alcoholic version. So Orijin is a very strong and innovative brand that we have leveraged to launch exciting extensions across a number of customer categories.

It is important to note that we have also launched innovation on the basis of our big brands.   So for Guinness, we launched Guinness Africa Special which appeals to more contemporary consumers, slightly smoother and lower alcohol. In the malt segment, we have launched Malta Herb Lite for consumers who still want to enjoy the goodness of the Malta Guinness brand but with less calories. Even though, it is still early days, initial consumer reaction to Malta Guinness Herb Lite has been very great. We have been known primarily for our premium beer brands but with our Satzenbrau brand, we have begun to expand access to enable us participate in the accessible categories.

Guinness recently announced a Rights Issue and concluded an Extra Ordinary Meeting, EGM where shareholders ratified the proposal to raise additional capital. Can you explain further the reason behind the proposed Rights Issue given the economic context?

January this year, we held an Extra Ordinary General Meeting where shareholders approved for Guinness Nigeria to go out there and raise N40 billion using a Rights Issue. The reasons why we are going for a Right Issue are very straight forward. I have earlier provided a context to the harsh realities of the operating business environment so business is under pressure from the currency challenges and that has impacted our performance – reducing earnings. Also because of the liquidity in the market, we have had to get dollar based loans to enable us fund our imports so that we can continue to produce brands for consumers. It is pertinent to say that as a business, we have been committed to Nigeria and we will continue to be in this market for decades to come. This is reflected in the quality of investments we have made over time including the new production line we launched last year. So, it is very important that we go into the capital market to give shareholders an opportunity to participate in the business.

What are your expectations from the Rights Issue, and do you think it will be fully subscribed?

Our expectation is that the Rights Issue will help mitigate the impact of increasing finance costs, optimise balance sheet and improve the company’s financial flexibility. We expect that it will eliminate our increasing finance costs and return the company to profitability. The last time we did a Right Issue was about 25 years ago. We believe that given the current economic climate it’s time we go back into the market to ensure that the business can navigate through the next few years which are going to be tough, however, we continue to invest to grow our business. So it’s about investment,   enabling us retire debt that we have on our balance sheet including dollar based debts and therefore remove the foreign currency risk that we are carrying on our balance sheet which is healthy for investors so that in the future, we have less volatility in our Profit and Loss statement. Also, we believe that the Rights Issue would be fully subscribed since the shareholders have given their approval and support.

What would you say to those who feel that the rights issue is an indirect means for Diageo to acquire a majority stake in Guinness Nigeria Plc, seeing that their prior plan to increase its stake to 70 percent was unsuccessful

Indeed, I recall that during the EGM a question in this regard was asked. Everyone needs to understand what a Rights Issue is. It allows every single shareholder to subscribe for rights based on their current shareholding. So if every shareholder in Guinness Nigeria Plc subscribes for their rights, everyone would keep their current shareholding. So, it is not that we are raising new capital by other means. There is no way if everyone subscribes to the Issue that we can increase the shareholding value of Diageo. However, we have said to shareholders that they are also entitled to apply for more rights than their shares entitle them. So at the end of the process, if there are some rights that are not subscribed to, the board would then allocate the unsubscribed rights remaining to anyone who has applied for additional rights which would be based on their shareholding.

The Rights Issue is meant to support the company to grow, it is   about bringing cash into the business therefore shareholders should feel that this is an opportunity to grow a business that has been very strong and has paid dividends for many years.

What’s your perception in terms of outlook for the brewery and manufacturing industry in 2017?

Consumer goods respond to growth or no growth in the economy.

Mainstream brands

Consumers have to continue to spend – they just prioritize their spending in different ways. So what we have seen in our industry is that consumption had reduced but the industry is still in growth and consumers are probably consuming more lower priced brands.

Therefore, we would see accessible brands whether they are in beer, spirits or soft-drinks growing faster than the mainstream brands. The premium end of the industry is also still experiencing growth because those consumers are less immune to what’s happening in the economy. But that’s a very small segment as our business is mostly a mass market and our brands are consumed by everyone especially the average guy down the road.   So on a topline basis, the industry will continue to experience growth but the biggest issue that the industry is currently bogged down by is on the cost side as everyone is declaring results that show a significant reduction in margins. This is partly because consumers are consuming lower priced brands but largely on account of the cost of doing business, which means that profitability in the near term is going to be affected but on the long term, our expectation is that costs will stabilize and the market would grow in leaps and bounds. What we can’t say is how long it’ll take to get there.

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