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Distell Group Holdings Limited
(Incorporated in the Republic of South Africa)
(Registration number: 2016/394974/06)
Share code: DGH
ISIN: ZAE000248811
("Distell" or "the Company" or "the Group")
FIRST QUARTER TRADING UPDATE (1 JULY 2020 TO 30 SEPTEMBER 2020)
AND AMENDMENTS TO THE COMPANY'S REMUNERATION POLICY
Covid-19 Government Regulations and their impact on the Distell
business
As Distell began trading in its new financial year ending 30 June
2021 (FY 2021), a second ban on alcohol sales was reinstated by
the South African Government without warning, from 13 July 2020,
making South Africa the only country to re-introduce a complete
prohibition on alcohol sales. On 17 August 2020, the ban was lifted
subject to certain trading restrictions which currently remain in
place.
During the first three months of FY 2021, Distell recorded a low
single-digit Group revenue decline and a low double-digit volume
decline, as compared to the corresponding period in the previous
financial year. The short-term trends in Group volume and revenue
have been encouraging and are tracking ahead of our expectations.
In South Africa, as anticipated, the effects of the ban on alcohol
sales on the Group's performance during the period are more
pronounced, with volume and revenue declines in the mid-teens,
although these declines should be seen in the context of a 38%
loss in trading days in the quarter due to the ban on alcohol
sales. Overall performance and cash generation are, however, ahead
of expectations and show a positive trajectory into the first half
of FY 2021 as the business recovers demand and adjusts to the
revised trading conditions.
Category performance continues to reflect changing consumer
trends, with a preference towards spirits and mainstream wine
driven by in-home consumption. Select premium ready-to-drink (RTD)
brands also continue to perform well. The on-premise market is
starting to gradually open up and recover, with projected trends
in small business closures being better than anticipated. This
bodes well for a better than expected industry recovery.
In its commitment to establishing a social compact with Government
and to reducing harm associated with alcohol abuse, the Company is
investing in various initiatives focussed on reducing binge
drinking, drinking and driving and underage consumption, while
also supporting initiatives aimed at eliminating the scourge of
gender based violence. These partnerships include the South
African Police Service (SAPS), The Department of Social
Development, The Department of Transport, The National Liquor
Authority and local Governments in the Western Cape, Gauteng and
Kwazulu-Natal. Distell continues to play an important role in
support of its SME and tavern customers, both in supplying
essential PPE to ensure safe trading, as well as only supplying
COVID-19 compliant outlets to ensure the safety and well-being of
all consumers.
Rest of Africa
In the rest of Africa, excluding BLNE countries (Botswana, Lesotho,
Namibia and Eswatini), the Group recorded an impressive
performance with strong double-digit revenue and volume growth, as
compared to the corresponding period. This was largely driven by
Kenya (double'digit revenue and volume growth) alongside all
priority countries recording positive revenue and volume growth.
Africa performance, including BLNE countries, was more muted with
mid-teen double-digit improvement in both revenue and volume
growth, driven by the lockdown measures imposed in Namibia and
Botswana.
International
Following the early, negative effect of COVID-19 on Global Travel
Retail (GTR) and exports, the Group's international business
recovered strongly across all markets, with double-digit revenue
and volume growth led by the exceptional growth of premium whisky
brands and Amarula. The Group anticipates further pressure on GTR
performance, as global travel restrictions remain in place. This
is balanced with the renewed focus and efficiencies in the overall
whisky business to leverage category trends and to capitalise on
historical investments in stock, and upgrades to our manufacturing
footprint and Brand Homes in the United Kingdom.
The Group's net debt position has improved to R4.2 billion (as
compared to R5.9 billion at 30 June 2020).
Outlook
Whilst overall performance is tracking ahead of expectations, we
remain cautious and realistic with regard to the impact of COVID-
19 in the markets in which we trade. The outlook for economic
growth in South Africa, our biggest market, remains challenging
with varying levels of economic risks negatively affecting
consumers' disposable income. Many of these risks relate to markets
outside of South Africa, with varying levels of impact and risk.
The Group is making strong progress on driving the digitisation of
its business across the value chain, while effecting change to its
cost base. Since our last update to the market, the Company has
completed the sale of the Alto Wine Estate and is at an advanced
stage of concluding the sale of Plaisir de Merle. These two sales
processes will ensure that the Company can improve Group returns
and drive the strategic focus of its wine business.
The Group has a resilient balance sheet, with strong cash
generation ability, underpinned by the recent consolidation and
investments into making its production network more efficient.
The changing trading environment as a consequence of COVID-19 has
tested the Group's culture, agility and response to consumer
behaviour and trends. Our teams are responding strongly to the
challenges and opportunities and a number of innovations have
already been launched since trading has recommenced. The Group's
diverse portfolio of brands, which service a wide range of consumer
needs spanning key consumer occasions and price points, channels
and geographies, is a key strength that we are actively leveraging
alongside our robust and growing manufacturing and distribution
footprint in Southern Africa and other key African markets.
Aligning performance with shareholders' interests
In its effort to improve management alignment with shareholders'
interests, the Group's remuneration committee has proposed several
key changes in its long- (LTI) and short-term (STI) incentive
schemes following market feedback among various stakeholders,
including current and potential investors, governance rating
agencies and advisors. Details of this feedback can be found on
pages 70 ' 71 of Distell's 2020 integrated report, available on
the Company's website at https://www.distell.co.za/investor-
centre/annual-report/ .
1. Allocation of shares
In terms of Distell's current top-up LTI allocation methodology,
LTI awards are made to participants on an annual basis, according
to set multiples of a Total Guaranteed Package (TGP), with tranches
vesting in years 3 to 5. After an initial allocation, subsequent
allocations take into account the previously awarded instruments,
historical vesting and salary changes, in order to determine future
top-up values.
Following a recent extensive independent review and benchmarking
exercise performed on our LTI scheme, Distell hereby announces
that the LTI scheme will change from a Top-Up Allocation
methodology to a simplified Annual Award methodology, effective
October 2020, in line with market practice and also following
extensive shareholder engagement. Vesting will remain unchanged,
with each tranche vesting in years 3 to 5. This significantly
simplifies the awarding of shares based on a consistent factor,
compared to a continuous rolling top-up allocation used in the
previous allocation methodology.
2. Measurements/Key Performance Indicators (KPI's)
STI's (Annual)
As a result of the COVID-19 pandemic and the immense impact it has
had, and continues to have, on our business, a single scorecard
has been approved to drive focused and aligned performance across
all functions for FY 2021. This comprises of:
- Financial KPI's: Net revenue growth and free cash generation,
each weighted 40% to the overall STI scorecard.
- Non-financial KPI's: Measures linked to specific programmes
based on the Group's four primary Sustainable Development
Goals (SDG) (SDG 3, 6, 8 and 12) and one foundational SDG
(SDG 5). These contribute 20% to the overall STI scorecard.
LTI's (3-5 years)
Significant amendments have been made to the Group's LTI
measurements. These amendments include:
- Replacement of Earnings Before Interest, Taxation,
Depreciation and Amortisation (EBITDA) growth with Headline
Earnings (HLE) growth - weighted at 30% to the overall LTI
scorecard.
- Revenue growth - (maintained), weighted at 30% to the
overall LTI scorecard.
- Return on invested capital (ROIC) improvement above
Distell's weighted average cost of capital - previous
weighting doubled to 40% to the overall LTI scorecard.
These amendments relate to Ordinary Resolution 6: 'Non-binding
advisory vote to endorse the remuneration policy' and Ordinary
Resolution 7: 'Non-binding advisory vote to endorse the
implementation report on the Company's remuneration policy' to be
tabled at Distell's virtual annual general meeting to be held
tomorrow, 21 October 2020 at 11:00 am. Participation at the virtual
annual general meeting is facilitated via www.smartagm.co.za.
The information contained herein does not constitute an earnings
forecast or estimate and has not been reviewed or reported on by
the Company's external auditors.
Stellenbosch
20 October 2020
Sponsor and Corporate Broker
RAND MERCHANT BANK (A division of FirstRand Bank Limited)
Date: 20-10-2020 05:00:00
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