Transcript of Zambian breweries and National Breweries conference call

Transcript of the combined Zambian Breweries plc and National Breweries plc

conference call held on Friday 12 July 2013

Presentation & Audiohttp://slidesha.re/18o8WTu

Zambian Breweries and National BreweriesConference Call July 12, 2013

Operator: Good morning and welcome to the Zambian Breweries and National Breweries Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key, followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded.

I would now like to turn the conference over to Annabelle Degroot, the FD of both companies. Please go ahead.

Annabelle Degroot: Good afternoon, everyone. This is Annabelle Degroot, the FD of Zambian Breweries Plc and National Breweries Plc. Welcome to our call. I will be discussing our view of the future of our industry and the Zambian economy and then we'll separately discuss Zambian Breweries Plc and National Breweries Plc results. This should last around 30 minutes. Thereafter, I'll open the floor to questions-and-answers dealing with Zambian Breweries first and then National Breweries. We have set aside 45 minutes for this. This is our first attempt at a call of this nature and we will try and manage it as best as possible but please bear with me. If I don't manage to address all of your quest ions , p lease emai l them d i rec t ly to my address a t [email protected], which will be sent out to you. Announcements will be sent subsequently by email to you and other call participants.

Thank you to those who had sent questions in advance. I will now go through the presentation and just give the page number of the presentation when I turn the slide to help you follow it.

Page 1 - Welcome to the Investor Conference Call.

Page 2 - I would like to just give an overview of the Zambian economy at the moment. We're very pleased with the GDP growth in Zambia since 2000. Robust growth. We've had four peaceful democratic presidential transitions since 2000, strong credit rating and the recent over-subscription on the euro bond on the €750 million bond was a good sign of positive investor confidence in the country.

Page 3 - we have attractive economic fundamentals at the moment. Zambian's sitting ahead of the rest of Africa in real population growth rates on the average rates. We've got robust growth, again, sitting ahead of the average of Africa, LatAm and the world and we're sitting with a population

of 14 million at the moment, with relatively low per capita consumption of beer, and I'll go through that on a separate slide.

Page 4 - I won't go through this table in detail. I mean, if there's any questions afterwards, but as you can see the GDP growth muted inflation growth which has been very positive for us. A relatively stable exchange rate last year although it has depreciated this year, and good population growth.

Slide 5 - this slide is important just for you to understand where we're sitting on the per capita rate for sparkling beverages and for beers. So, as you can Zambia is sitting right at the bottom of the trend at 21 per capita on sparkling and 8 on beer count, and this obviously presents us with a good opportunity to build a full beer and soft drink portfolio to access these (inaudible).

Slide 6 was really the final slide on the economy, and while it's quite a busy slide, the take-away from this slide is that the majority of our population and the growth is sitting in a very young population in Zambia, and so this group of people will gradually migrate into being our consumers and it's a significant wave of young people coming through.

If I just move on to Page 7 and then Page 8, just to talk about the operating highlights of Zambian Breweries Plc, our beer and soft drink business in Zambia. The highlights really have been the good trading environment, strong GDP growth and a stable inflation, and in fact, inflation coming down in some instances, and this growth achieved despite a real increase in new regulations in the country. So, I will go through those in a bit more detail but it has been a little bit volatile in the last year. A number of regulations from the government; none of which we particularly disagree with. It was just the way some of them were implemented very rapidly was—it made things difficult for the business in some instances. We have good beer growth of 12%, really, and strong market growth underpinned by improved execution and brand health, so particularly we saw our local brand Mosi really gaining momentum, something we're very proud of. And also in the premium category, Castle Lite have grown in triple-digit's been a very, very strong (audio interference) last year.

Our soft drinks growth of 30% really came on the back of affordability, availability and market development. We had a very specific soft drink recovery plan. We had been losing market share, so a lot of effort was put into market execution, extra coolers, sales reps, and more importantly, we rolled back the price of all soft drinks in anticipation of an excise break from the government. So, we made the decision to take the price back before the government made the decision to take excise back which did eventually come

through in the first of January this year. So, good soft drinks growth for the business.

Most importantly, we were in a capacity constrained environment on the beer side for most of the year. We had reached capacity, we were not able to (inaudible) the brewery until the new brewery came in online in November, but with increased focus on manufacturing efficiencies and distribution efficiencies, we were able to grow beer 12% despite having no extra capacity. The good news there is that the new Ndola Brewery, so our $86 million brewery investment in Ndola came online in November towards the end of the financial year. The brewery came online, the new packaging line associated with that brewery has come online in this financial year. So, while we were able to brew more beer, we were still restricted in the year unfortunately with the old packaging line. That brewery came online in record time and it's going to significantly contribute to the growth of the beer volumes in the north of the country where copper is so prevalent at the moment.

Something we're also proud of is our successful local sourcing initiatives which have now resulted in the approval of a malting plant in Zambia. We've been focusing strongly on our Bali local sourcing and local Bali-growing program in the last few years. That crop has been very successful. It has, however, had to go to Zimbabwe to be malted. Now, just the company in Zimbabwe is now running out of malting capacity, and hence we were faced with a very difficult decision of—to—and we would have to build a malting plant or we would have to stop the local Bali program. So, I'm very pleased to announce that we have now got approval to build that malting plant which will allow significant savings on our Bali and malt practice going forward.

Other local sourcing initiatives have included the set up of a local preform manufacturer in Zambia, and so we will no longer have to bring those in to South Africa. So, that helped the security of supply and also cost savings.

Important in the business is we've had a complete revised HR structure put in place with improved processes and employee engagement, and something we've really seen from performance management is improved performance from all of our key staff in the year. And importantly, for our license to trade issues and our relationships with government, our total tax contribution has increased from $95.7 million to $107.7 million, which is important to (audio interference).

Moving on to Slide 9, it's just a picture for you of the old Ndola Brewery that we've been operating, built in 1952, and then on Slide 10 is now the new improved brewery. It's been a great success.

I'll move on to Slide 11, and then onto Slide 12. I won't dwell on these slides, I think you can see through them, but just to give you a sense of who our competitors are in the market. We are obviously the dominant party in the beer industry. We have over 80% of market share. Our main competitors are Kazuma who really imports, they do not manufacture, they import Heineken and Windhoek, primarily, and Amstel. And then, we have seen increasing amounts of imports coming in over from the Congo border, Primus and Simba, generally coming over legally, and that's primarily because we were unable to supply the market in the north because of our constraints with capacity. Now that we're able to supply the market in full, we're seeing a roll-back of those imports quite quickly.

On the AFB, which is our—where we compete with our Redds product, again we compete against Kazuma. They are fairly strong on the Hunters' (ph) side of things, and there is a small amount of Savanna Light in from (inaudible).

On Slide 14, moving onto Slide 14, our soft drink competitors. Soft drinks is a far more competitive business here. We have a plethora of B brands in the market that was (inaudible) heavily against in (audio interference) low cost, low class (ph) products. We can see those come through from California Beverages and acacia beverages, and then importantly, our main competitor at the moment now is Pepsi; they're in with the business called Varun Beverages here and they compete against us with both the soft—with the bottles and the (inaudible). I mean, if anything, the introduction of Pepsi into the environment has driven a far stronger performance from our soft drinks business here in Zambia with that competition.

So, I'll move on to Slide 15, and then onto Slide 16. If I just give you a summary of the financial performance of Zambian Breweries, good GDP growth and inflation. I just wanted to go through some of the regulatory changes from the government. SI 33 moved all local transactions into our local currency kwacha, which makes sense. The unfortunate issue was that there was no warning of the changed legislation and we had significant forward contracts in dollars taken out against the Ndola Brewery. That had two impacts on us the first four weeks. (Inaudible) then we had to pay those contracts in kwacha we sat on excess foreign currency for a lot of the year, and unfortunately the kwacha appreciated strongly after that regulation, which resulted in us actually making $3.3 million of exchange losses in the year which you will see in our finance costs.

SI 23 was an alcohol packaging restriction that actually had more impact on Zuku (ph), which I will go through in the next presentation, but what it did do was ban alcohol sachets, which are spirit sachets, which had a major social impact in Zambia, and so we were pleased with that regulation. Again, SI 64 came in and restricted trading out heavily which

impacted both the beer and the Chibuku business. That legislation was changed back so it was only a short-term issue for us.

And then finally on SI 47, we had minimum wages acts brought in. This did not impact our business because obviously as you can all see here, we pay well above minimum wages.

Then lastly, most recently, there's been a bold amendment act in this current year which have put forex monitoring in place for the business. Again, we don't expect that to have a major impact on the business other than it's increasing our administrative burden in the environment. We did have the rebasing of the kwacha on the first of January. Basically, they took three zeros off the kwacha. We—that was managed internally without any issues. And then, I guess just the other important thing too with the business environment was just to understand that we were in a very cap ex intensive year. The Ndola project was a big project; took up a significant amount of time but has been managed in line with budget with no issues.

The next slide, Slide 17 is just to give you a feel for the exchange environment. The South African rand has depreciated significantly against the kwacha in the year. That is—that has a good impact for us. We've made good positive price variances on our imports from South Africa. And then also to point out, while there was some concern about the kwacha in the year, actually when you look at the chart over the financial year, the kwacha only depreciated approximately (audio interference) percent in the period, so nothing drastic. The only problem was is that sharp appreciation you can see as a result of the SI 33 which is unfortunately the period following that where we made our exchange losses of (audio interference).

Moving on Slide 18 - Financial Highlights. This is the beer growth of 12% and soft drinks of 30%. We took a beer price increase of 7% at the beginning, right at the end of the prior financial year, so the beginning of this financial year. That was effectively a negative price increase because we had not taken prices two years, so this is obviously with inflation taking into account our beer prices have not been very inflationary. And then, soft drinks on the 300 ml, the glass bottle, we actually took a 23% price roll-back in anticipation of the government removing excise, and we took that price back in March 2012.

Then on soft drinks, 500 ml PET, we then reduced the price by 7% on the first of January as a result of the government agreeing to take back excise back to 0% on soft drinks. The primary drive behind this lobbying with the government was that actually soft drinks in Zambia are relatively expensive compared to other countries in Africa, and the government was very keen to make soft drinks accessible to most people and so they agreed to take the excise back. Whenever we've negotiate excise rates with the government, we have always shown that we will be able to generate (audio interference)

revenue from that because of the growth of volume, and that has come through and backed up our case.

So we had, as a result of that strong volume growth, we had revenue growth of 20%. The very strong fixed cost controls in the business this year very much increased both the format; that along with those distribution savings and manufacturing efficiencies trickled down to operating profit growth of 29%, and most importantly, an operating profit margin growth of 140 basis points. So, a strong year overall for Zambian Breweries.

As a result of our good cash flow generation, on Page 19, you can see that we achieved a 15% reduction in interest burden. Unfortunately, our finance cost were driven up by the exchange losses that I explained on forward contracts. And, we managed to reduce our debt burden to 57 million from our $75 million syndicated facility. Refinanced that in February 2013. We had many, many banks involved in that syndication beforehand, but because of the increased ability of the banks in Zambia to lend, we have now refinanced that directly with four banks (audio interference) country.

Importantly, we've dropped our effective tax rate from 41% to 33%. We had provided for a liability that we were concerned with in the prior year that we've managed to resolve, and so that provision has been released and along with accessing some of our tax incentives from some of our big investment programs, like Ndola, we've managed the tax rate down to 33%. And then, just to mention that our cap ex spend of $50 million, roughly, was in line with budget with no major overspend.

Moving onto Slide 20. I won't go through this in detail. I think the important thing is to see the volume growth feeding through to the operating profit growth and the margin growth.

If I move onto Page 21, again, nothing significant to point out. Unfortunately that growth in finance cost doesn't reflect the reduction in interest as a result of those exchange losses. So, without good operating profit growth, reduction in finance cost and interest cost and the interest—the income tax savings in the year, we actually delivered a profit for the year up 42% on prior year up to $20 million.

Moving on Page 22 on the balance sheet. The significant movement is on the borrowings, on the drop on the borrowings and nothing else major to report in the balance sheet other than the increase in property, plant and equipment as a result of the Ndola Brewery.

Again on the cash flow, on Slide 23, just to again point out that we had good cash flow generation in the year, which helped to reduce our debt burden.

Moving on to Slide 24. Debt in the business has been a concern for SABMiller and has been the primary reason why we have not been paying dividend, and again, why we will not be declaring dividends this year. There is an increased focus on reducing that debt burden, getting our interest cost down before we start paying dividends.

The main thing about this slide is to show you that we still remain relatively cap ex intensive next year. Zambian Breweries have got the maltings approved and so there will be a significant investment next year in our malting plant. But, the important thing is that cap ex as a percent of EBITDA has started to reduce, which is positive for the business.

Moving on to Slide 26. This was a slide to explain to our Board as to why we would not be declaring dividends. Again, you know, the same story - we need to get our interest burden down and our debt burden down.

The next slide, Page 27, is just a story that we provide to the government in terms of our VAT and excise contributions going forward. The important thing for us is to demonstrate to the government that their decisions to reduce excise in Zambia have actually driven volumes up and driven revenue collection up. The numbers here are our straight progression It's just a straight progression of where we are right now. That does not actually reflect detailed internal numbers, which we don't provide to government, but this is a slide to show the government that their decisions to roll-back in excise and to reduce excise have definitely got a positive revenue impact for the government, and we like to try and maintain that relationship because we feel those excise rates are sitting at the right level at the moment.

Moving on to Slide 28. Just sort of the general outlook for Zambian Breweries. Because of our robust macroeconomic outlook for Zambia and our continued strategy of doubling the price, halving the price, accessing affordable cash (inaudible) and going farming in terms of our local Bali sourcing program, we're expecting, you know, good, strong volume and revenue growth and good EBITDA growth going forward. In the next year, we do expect our raw material input cost to rise. Unfortunately, we will have to go back to importing malt on quite a large scale while we straddle that year while the malting was being built, so we're in a tough situation where Zimbabwe does not have enough capacity for us and therefore our capacity will not be up towards—until the end of F'15 and so unfortunately this year we are importing quite a big proportion of our malt, so that will impact on our P&L. The good news is this will be offset by the efficiencies coming through from our new brewery and local preform manufacturer. And, it's important to note that as we try and grow our volumes and access these (audio interference), we are going to have to go wide. So at the moment we're very focused in Lusaka and Ndola, and as we move further out into the country accessing remote areas, we will obviously sacrifice

some margins to get the product out there. Our full year cap ex is expected to be around 40 million, which includes malting projects and we expect to pay interest in the region of 7.5 million for the year.

If I move on to Slide 30 now, I will just take you briefly through the financial results of National Breweries and then open it up for questions. National Breweries is a slightly different picture than Zambian Breweries. If I take Slide 31, again, a good trading environment in the country but the plethora of regulations did really impact National Breweries, so the packaging restriction regulation actually was there to restrict alcohol sachets. What the legislation did inadvertently is ban most of our Chibuku products in the packaging that we use, and that wasn't the government's intention but it did besides, you know, move our strategy away from where it needed to be for a while while we lobbied government and got Chibuku allowed back in plastic and carton packaging. It did ban bulk Chibuku and it banned alcohol sachets; both of those had a positive impact on the business because those drinkers moved back into Chibuku away from spirits and bulk (ph).

It remains a highly competitive environment. In Chibuku we have maybe 40 competitors. The bulk industry is still there despite it being banned and it's very, very price sensitive at the moment. We did make the decision in March 2012 to actually roll back the price of our Chibuku by 18%. We had previously, two years ago, increased the price and we took a huge volume drop as a result and lost lots of market share. So, we tried to take the price up towards 3,000. In fact, the market wasn't ready to accept that and as a result we lost business to major competitors. So, we made the decision to roll back the price, regain our market share and consolidate our position in the business, which is really what this year was about. So, while we had strong volume growth of 34%, this did not trickle down to the bottom line, but that is pretty much what we had expected and we were focusing this year on regaining market share and maintaining our current financial performance.

The good news is that we launched Chibuku Super, our new product, which is a slightly carbonated Chibuku with a 21-day shelf life, and that is in a plastic format and has proved to be very popular at the moment. The business did come under margin pressure as a result of this price roll-back. Big maize price increases of 14%, and as our plant gets older and older, the maintenance burden on these plants has become insignificant. So, while we're driving volume our infrastructure is very old, and particularly in Lusaka, and so we saw an increase in maintenance cost. As a result of this, we have now got approval to build a new Lusaka facility, so a complete new Chibuku rebuild in Lusaka of the brewery and a new Chibuku Super packaging line in Lusaka. This is an investment of $25 million and is the biggest Chibuku investment SAB has made in Africa for quite some years. It's something we're very excited about and it's long overdue. Our plant is really starting to peak in Lusaka and is in desperate need of being renovated.

Again, in Chibuku we focus heavily on improved—on an improved HR function and processes with performance management as the anchor. This is new to National Breweries. Zambian Breweries have helped them along the way and that is really starting to show some good results. And again, good news for the government as we increased our total tax contribution from 15 million to 20 million, as National Breweries' excise or Chibuku excise is based on the liter, on volume, and so that's good volume growth fed through to tax collections for the government.

Slide 32 shows our new product, the Chibuku Super which it has been very popular. We installed a new line in Kitwe for $5.5 million and it came online in October of the year, and we're generally finding that, you know, demand is heavily there for this product. Everything that we make we can (audio interference).

Again, if I move on to the competitor landscape on Slide 33 and Slide 34, that is just to—while we have, you know, approximately 40 main competitors, these are our key competitors: Lusaka Beer (inaudible) and Chat, and we compete mostly with them on the carton beer and that is why the Chibuku Super in the new packaging is so important to us because it really differentiates us from the competitor.

If I go on now to the financial performance of National Breweries on Slide 35 and Slide 36, again, just to highlight showing that volume growth of 34% and revenue growth of 31%. Unfortunately, a gross margin decline of 720 basis points as a result of that price roll-back and 14% increase in maize prices. We did have fixed cost growth but it was relatively muted in the business. Again, there was heavy focus on fixed cost in the business but some of that was driven by the maintenance burden, and so because of that declining gross margin and the fixed cost growth, operating profit did decline by 8%, but it wasn't unexpected, it is something that we had, you know, we had seen coming and we felt that it was important to grow our market share in the business and in the country again.

As I said, the Chibuku PET line was commissioned in Kitwe in October 2013, has been a great success, and our effective tax rate has increased slightly from 36 to 38%, primarily as a result of some corrections from last year.

If I move on to Slide 37, that gives you an overview of our—unfortunately, the decline in operating margin as a result of that price roll-back and the maize price increases and the good sales volume growth.

I won't go through Slide 38. I could take any questions if anybody has anything in particular. The one point to note is

distribution costs looked like they went up significantly by 65%. That is primarily a change in the way that we are disclosing distribution cost. We're now disclosing them in line with Zambian Breweries, and in the prior year that some of that number have been (inaudible) within revenues. So, there wasn't anything particularly unusual about our distribution cost. They increased with sales but the disclosure has changed slightly.

Moving onto Page 39. I guess the most significant thing is that it was a cap ex intensive year for Chibuku. You know, they had cap ex of over $8 million, which is unusual for Chibuku. Primarily they normally deal with cap ex numbers around $2 million, and of course that will grow our depreciation number going forward.

On Slide 40, I won't go into that slide, and I'll take questions if there's anything unusual.

And then Slide 41, again, goes to show you the F'14 budget, and again, I do apologize those EBITDA numbers are incorrect. I would ask you not to rely on them. The important thing is, as you can see, our cap ex number shooting up to $25 million, and that is the Lusaka investment in both the new brewery and the PET line. And so, that's something really, you know, very new for National Breweries. The good news is that we will translate a lot of our experience that we've had in Zambian Breweries to help National Breweries with the management of that project.

Again, dividend recommendation, a difficult year for National Breweries. They typically have paid 100% dividends in the past. We did reduce that to 50% last year because of the PET line, and that's National Breweries is now moving into a net debt situation for the first time in a long time. We are actually not recommending a dividend.

Again, VAT and excise contribution is a sort of a progression of where we are with the government, on Slide 43, and it's just important to understand that the excise in Zambian Breweries is calculated on beer, on an (inaudible) basis, and excise on Chibuku is calculated on a per liter basis. So, if we just demonstrate to the government that if we're able to (audio interference) growing volumes in line with GDP growth, that their tax revenue contributions will increase.

And then moving onto Slide 44, Financial Outlook for the current financial year. Our Super line of Kitwe is fully commissioned now and we have added some extra capacity to that plant that is coming online at the moment, and obviously with the Lusaka rebuild and the new Chibuku line in Lusaka, you will see a mix in our products moving away from the carton products slightly towards the PET line which is—PET product, which is very important to us; it differentiates ourselves in this highly competitive market. Again, we are

expecting significant raw material input cost to rise. You probably know that Zambia has just removed maize subsidies in the market that the—and the FRA is not buying the maize directly anymore at the subsidized price, and so we are seeing currently quite a significant increase in the maize price (audio interference).

We hope despite this to still continue our good EBITDA growth going forward, and as mentioned, we will have cap ex spend of $25 million.

So, thank you. That is the end of my presentation and I will now move on to questions. We have an order for asking questions and I will try and answer as much as I can. If I'm not able to answer, I will commit to get back to you on email. We will take questions...

Operator: Thank you.

Annabelle Degroot: On...

Operator: Sorry. We will now begin the question-and-answer session. To ask a question, you may press star, then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. We will first take questions for the Zambian Breweries. At this time, we will pause momentarily to assemble our roster.

Our first question comes from John Niepold with SQM Frontier Management. Please go ahead.

John Niepold: Hi, Annabelle. Thanks very much for having this call; it's really helpful. Just a couple of quick questions. You talked about building the malting plant, which I think when we met the cost of the malting plant sounds pretty close to what the cap ex is going to be for this year. So, does that then—is your expectation then, you know, in 2015 that the cap ex will then fall pretty dramatically? Is that the idea? That's one question. And the second question is, do you foresee that that FX loss was purely a one-off just from last year from that big movement in the currency and that won't be really an issue this year?

Hello?

Operator: Please hold. It looks like we have a—speakers have temporarily disconnected. Please stay on the line; I'll rejoin them.

We thank you for your patience. We will resume shortly. Please hold.

Annabelle Degroot: Hello?

Operator: We've rejoined our speakers.

Annabelle Degroot: Thank you. John, are you there?

John Niepold: Yes, I'm here. Did you hear the question or...

Annabelle Degroot: (Cross talking)

John Niepold: Did it zap out before that?

Annabelle Degroot: No, I'm sorry; we lost you. Could you repeat your question?

John Niepold: Oh yes. So, there were two questions. One was, you know, you were talking about the malting plant and your cap ex being about 40 million. As I recall, the malting plant is, you know, cost pretty close to that 40 million. So, does that imply that for 2015 that the cap ex would come way off?

Annabelle Degroot: Yes.

John Niepold: That's one question.

Annabelle Degroot: Yes, the...

John Niepold: And the second thing was, with the FX, the big FX loss, is that purely just a one-off thing and is not going to happen this year?

Annabelle Degroot: Yes, so I've answered the first question. I mean, the important thing to understand is that the malting plant is straddling two years, so we do have some cap ex spend in F'15, and then this year F'14 have some additional big container investment in bottles and distribution because of our reach out into the remote areas. So, there is some maltings cap ex in F'15. But primarily, yes, I mean we have some major cap ex that has just happened in certainly we view as a group that we should be less cap ex intensive going forward.

John Niepold: Mm-hmm.

Annabelle Degroot: On the second point, yes. I mean, the foreign exchange is where unfortunately I think a one-off, and actually it helps us much more now that we have many of our contracts are actually denominated in kwacha, and so it helps us manage that exchange rate. Unfortunately, this legislation came in when we have particularly high forwards in place before the Ndola project, so it was unfortunate timing.

John Niepold: Right. One other question. With all the cap ex spending and everything, you were talking about the tax rate moving around. What's your expectation for kind of a normalized tax rate?

Annabelle Degroot: I would say a normalized tax rate will be in the region of 35% and possibly a little bit lower because we have tax incentives break from the Zambian government for all the cap ex investment that we're just starting to access now. But typically, our tax rate is around 38% but we would expect to be able to manage it down with those tax incentives.

John Niepold: Okay. And, margins improved pretty dramatically; will that continue on this year?

Annabelle Degroot: Certainly...

John Niepold: Or, with this extra cost of the malting kind of overcome things?

Annabelle Degroot: Well, the margin, we do expect to benefit from the local maltings; not in this current year but going forward because it will reduce the cost of our malt significantly. So certainly, yes, I mean the group expects us to drive margin and that's something that we're always looking (audio interference)

John Niepold: I seem to also recall that with the malting plant, one of the issues was that Zambian Breweries alone was not necessarily big enough to warrant building a separate malting plant. What's the plan with the malting plant? Have you downsized it somehow? Or, will you produce some to essentially sell to somebody else?

Annabelle Degroot: We're putting in a 25,000 ton malting plant and that will give us some extra capacity for the next couple of years. And yes, we will plan to sell some of that into the region, possibly into (inaudible). So, it doesn’t actually give us, you know, too much excess. By F'15, we'll probably be using around 16 to 19,000 tons of that capacity.

John Niepold: Okay. Thank you very much.

Annabelle Degroot: Thank you.

Operator: Our next question comes from Tundai Oho (ph) with Harding Loevner. Please go ahead.

Tundai Oho: Hi, thank you very much for your presentation. Two questions for me. First is on your capacity on the beer and soft drinks. I couldn't

find that one in the presentation and I'm wondering if that's information that you're willing to share. And secondly is on the margins, which you touched a bit on just now. I want to know, given the expected raw material price inflation, are you looking to increase prices if your assumption is that you're planning to add or maintain or increase margins going forward?

Annabelle Degroot: So, if I just talk to the capacity question first of all, we have 1.8 million hectoliters of capacity on beer now in Zambia as a result of the new Ndola Brewery coming online...

Tundai Oho: Mm-hmm.

Annabelle Degroot: And, soft drinks we have in the region of 1.4 million hectoliters of capacity...

Tundai Oho: Okay.

Annabelle Degroot: Soft drinks. In terms of margin and pricing, look, you know, pricing is obviously always something that we could consider, but our view is that we like to maintain that our beer is affordable to the consumer, and so it's not something I can comment on specifically, but...

Tundai Oho: Mm-hmm.

Annabelle Degroot: Where possible, we would prefer to keep our pricing at an affordable level.

Tundai Oho: All right, thanks.

Operator: Our next question comes from Batnai Masiki (ph) with API (ph). Please go ahead.

Batnai Masiki: Okay. Thank you, Annabelle. Just related to your capacity numbers, can you just remind us what capacity utilization there was; (inaudible) Lusaka and also at Ndola that you’re seeing at the moment? And also, I just wanted to have a picture in terms of the stage at which you are in terms of (inaudible) your back office functions between Natgru (ph) and Zangru (ph)? Thanks.

Annabelle Degroot: Capacity, Batnai, is a difficult one. Obviously, we have put capacity in hopefully so that we can not get into a constraint situation again for the foreseeable future. In terms of what's happening right now is that we are trying to understand how far we under-supplied the market. So, last year we were definitely under-supplying the market, and right now we're watching sales, we're trying to ascertain, you know, where that sits and then when we get that, we will have an understanding of whether we have sufficient capacity. But

certainly, on beer, we now have capacity to take us through to good several years.

In terms of the back office integration, we're pleased that it's pretty much complete. Actually, you know, we have a combined (inaudible), a combined finance, IT, HR supply chain and corporate affairs structure. That really has settled down this year and it's functioning quite well. We work off the same operating platform and we have good agreements in place and shared service transactions between the three companies. So, we're quite comfortable that that has settled down nicely for the business.

Batnai Masiki: Okay. And lastly, on Natgru, given that you now have Chibuku Shake Shake, what's sort of the (inaudible) contribution between Chibuku Super and Chibuku Shake Shake given that the uptake on Chibuku Super has been quite encouraging? Can you just give us some picture what you expect going forward?

Annabelle Degroot: Yes. I mean, I think it's important to, while we're relying heavily on this product, you know, it's important to understand that cartons our bread and butter of the business, and so they will always remain a dominant part of this business for the foreseeable future. So, our carton contribution is over 90% of the business, and so we would like Super to be contributing, you know, reducing that by at least 10% and more if possible, but it's important to understand that we cannot replace carton completely with Super. It's definitely about providing a differentiated product from the competitor.

Batnai Masiki: Okay, thank you.

Operator: Our next question comes from Craig Vanderson (ph) with Gooda (ph) Capital. Please go ahead.

Craig Vanderson: Hi, Annabelle. Thanks very much for the call. My questions have actually been asked, but just perhaps to ask kind of a different question. When do you think you'll get past the cap ex hump? And, when do you think you will start paying a dividend? Thank you.

Annabelle Degroot: Look, I mean I think very much, as you can see from our numbers, you know, the cap ex investment have happened in Zambia, we're out of that capacity constraint area now and certainly the view from our group is that we now we need to sweat those assets and pay our way. So, you know, our hope going forward that we will be back into a dividend paying situation, not able to say directly yes or no, but certainly there's a recognition that we've been invested heavily in and now is the time to start paying going forward.

Craig Vanderson: Thank you.

Operator: We will now begin the Q&A session for National Breweries. If you would like to ask a question, please press star, then one. Again, to ask a question, please press star, then one.

We have another question from Tundai Oho with Harding Loevner. Please go ahead.

Tundai Oho: All right, thank you very much. Regarding your Chibuku products at National Breweries, I didn't get a very good clarity on what your market share is in that market and how competitive it is actually in terms of pricing. From your competitors today, price aggressively lower than you and how do you expect to respond to that? Just wanted to get a little bit more color on the competitive side of the business because you said you have about 40 competitors in that and I just wanted to get a good clarity on the dynamics and the aspects. Thank you.

Annabelle Degroot: Yes. So, it's important to understand that the Chibuku industry that a large percentage of the business is in bulk Chibuku, which is the big vat (ph) of bulk Chibuku that are sold throughout the country. That is very difficult to measure, and so what we do know is that we have in excess, I believe, of 70% of the cartons business. So, Chibuku is traditionally sold in cartons or in bulk, and so when we're looking at our market share, we generally look at the carton business because the bulk business is so hard to measure. A lot of it is illicit. Many people do not pay taxes. It's a very difficult industry to measure. And so, when I say we have 40 competitors, I am including all of those bulk competitors, but if you narrow it down to the carton industry where we play, we believe we have in excess of 70% of the business. Again, it's not a very well measured business and so that is our first take at that market share.

So, we compete against in quality and Midlands and Chat Breweries in the cartons, and yes, they price very, very aggressively. And, they generally are smaller family-run businesses and so their margin requirements and shareholder requirements are less than ours, and so they are able to run on a much lower margin than us and remain successful. And, that is something that we suffered with a couple of years ago when we made a decision to take the price up, that the market was not ready for it; our competitors were able to hold their price and we took a significant hit there on market share.

Tundai Oho: Mm-hmm.

Annabelle Degroot: So, it's a highly price sensitive market with low margins.

Tundai Oho: Okay. All right, that's good. So, in terms of like the volume fleet between the carton business and the bulk business, do you have a rough indication of where it is in terms of the industry size?

Annabelle Degroot: I may need to doub le-check th is but my understanding is is that the bulk business is almost double that of the carton business.

Tundai Oho: Okay. All right, thanks. And lastly, do you think in this segment of the market, do you think brand makes any difference in terms of looking at it on the competitive side now? So you said, you know, increased prices or a lot of switching and to your competitors' product. Do you think that the Chibuku brand from SAB, does that make any difference in this segment or not?

Annabelle Degroot: Yes. It's a well admired brand...

Tundai Oho: Mm-hmm.

Annabelle Degroot: And consumers would prefer to drink it. It's good quality, it's more hygienic...

Tundai Oho: Okay.

Annabelle Degroot: And it has a good reputation in Zambia. However, it's important to understand that those consumers, you know, do not have an awful lot of money...

Tundai Oho: Okay.

Annabelle Degroot: And so, when price moves, they will switch very easily to the competitor.

Tundai Oho: Okay. All right, thank you very much.

Operator: Our next question comes from James Chota (ph) with Primera (ph). Please go ahead.

James Chota: Yes. Thank you, Annabelle. Just wanted to find out, in Zambia, I'm pretty sure, just like in the rest of Africa, there's a huge urbanization drive. Will that in any way affect your sales to the Chibuku brand? And if so, what's your long-term plan to stay viable? Will you choose at least to merge with Zambian Breweries? Or, will you try and reinvent the business more than one or the other?

Annabelle Degroot: Sorry, I didn't get the first part of your question. Did you say a large urbanization?

James Chota: I'd say pretty much just like the rest of Africa, Zambia's obviously urbanizing right now, so what impact do you think that will have on your market?

Annabelle Degroot: That will have a good impact on the Chibuku market. I mean, the thing about Chibuku is that it's a—you know, it has no shelf life, really. It has a couple of days shelf life, so we cannot, like Zambian Breweries, it's much harder for—Zambian Breweries can go out to remote areas, to depots in remote areas; Chibuku is much harder to do that because you have to deliver that product fresh. So, the more people that move into towns where our breweries are there, actually that's positive for our growth.

James Chota: But how about in terms of just...

Annabelle Degroot: The one benefit of Chibuku Super is that it does have some shelf life so we are able to access some of the more remote areas with that product.

James Chota: Okay. But, I understand you were saying something about how your general market is in the rural areas, so wouldn't that really affect the perception towards the beer itself, towards the beverage itself?

Annabelle Degroot: No, I mean our market is actually in the urban areas, around the main centers of Lusaka and Ndola in the Copperbelt, so at the moment our primary business is in the urbanized areas.

James Chota: Okay, that's perfect. Okay, and another question was, you're saying that you're probably going to save about 2 million each year from centralizing the back office and admin functions. Have you managed to work out how much will be saved by Zambian Breweries and how much would be saved by National Breweries? Is there like a different split or is it (inaudible)?

Annabelle Degroot: I can't give that specific breakdown. I mean, that savings that we realize really came in the year that we integrated the back office because we were able to save on heads and have one operating platform. So, that cost saving's really embedded in both of those businesses right now. I couldn't give you that specific breakdown.

James Chota: Okay. All right. No, thank you.

Operator: Our next question comes from Craig Vanderson with Gooda Capital. Please go ahead.

Craig Vanderson: Hi. Can you perhaps give us a bit more color on the impact of the maize subsidy removal on your GP margin, your gross profit margin?

Annabelle Degroot: Not specifically. I mean, maize accounts for approximately 35, 40% of the cost of our product and I'm not able to tell you yet where the maize price is going because we have just entered into the major buying season right now. So, I mean just to give you a guide, we entered the maize season last year at around 1.1 quatro (ph) per kg. We're looking at a maize price of around 1.4 at the moment, 1.5, but you know, this is the most expensive time. The major crop is about to come in, and as the crop comes in, we would hope to see the price come down. So there's no doubt we are going to have an inflationary maize price increase this year.

Craig Vanderson: Okay, thanks. So, you said that's about a 30% increase in the maize price, is that correct?

Annabelle Degroot: Yes. I mean, yes, year-on-year.

Craig Vanderson: Okay, thank you.

Operator: This concludes our question-and-answer session. I would now like to turn the conference back over to Annabelle Degroot for any closing remarks.

Annabelle Degroot: Thank you. I just wanted to say thank you all for participating in the conference call. I believe it's been very fruitful and your input is much appreciated. Going forward, we hope to adopt these conference calls more regularly and it's something that we will develop, and I would very much welcome your feedback if you have any concerns in terms of the way we've conducted it. For those attending our AGM on Monday at the (inaudible) in Lusaka, we look forward to seeing you there. And then, just to point out that the information disclosed today will be widely disseminated online by our investor relations provider. Thank you very much and have a good weekend.

Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.