EABL boss quits after eight months amid falling profits, stiff competition
- This is the latest in a slate of recent significant changes to EABL’s executive suite that have culminated in the increase in the number of senior managers seconded from Diageo.
- The incoming CEO has his work cut out for him. He will have to come up with ways of boosting dividends to calm nervous shareholders. Secondly, he will have to find ways of growing sales.
- EABL needs to increase consumption of low-cost beers and spirits, which act as an entry level for consumers moving from traditional beers. But this segment is coming under threat from both competitors and regulators.
East African Breweries’ stock rose slightly on Friday at the Nairobi bourse, defying news the regional brewer’s boss had quit, just a week after it announced a 14 per cent drop in net profits.
The firm said Devlin Hainsworth, the group’s managing director, had resigned, barely eight months after he joined the brewer.
In a statement, the region’s largest brewer said Mr Hainsworth will step down at the end of next month, paving the way for Charles Ireland.
“Mr Hainsworth will be leaving the position of group managing director of EABL effective March 31, in order to pursue other interests outside of EABL and Diageo,” said Charles Muchene, the group chairman, in a statement. The share rose to Ksh281 ($3.26) on Friday from the previous day’s Ksh277 ($3.2).
Mr Ireland has been the managing director of Guinness Anchor Berhad, a joint venture between Diageo — EABL’s majority owner — and Asia Pacific Breweries, Malaysia’s third largest consumer goods business, which is listed on the Malaysian Stock Exchange and valued at $1 billion.
Mr Devlin took over the reins at EABL on July 1, 2012, replacing Seni Adetu, who had been at the helm since July 2009.
This is the latest in a slate of recent significant changes to EABL’s executive suite that have culminated in the increase in the number of senior managers seconded from Diageo.
Since EABL did not give reasons for Mr Devlin’s departure, analysts were left second-guessing.
“I think the CEO’s exit is performance-pegged, due to the fact that it is coming a week after the results. EABL has been fairly stable and it has been on a growth path but now the environment has changed and they are feeling it,” said Samuel Wachira, general manager, Francis Drummond and Company, a Kenyan stock brokerage.
On February 15, the brewer announced a 14.45 per cent drop in net income to Ksh3.75 billion ($43 million) for the six months to December 2012, compared with Ksh4.389 billion ($52.92 million) as at December 2011.
Total revenue rose by 10 per cent to Ksh30.63 billion ($350 million) from Ksh27.77 billion ($334 million) but a drop in consumer spending delivered only three per cent in revenue growth in Uganda.
On the other hand, increased taxes in Tanzania did not dampen growth in that market, where Serengeti Breweries saw its revenues jump by 16 per cent.
The drop in profits was attributed to a sharp increase in financing costs, which shot up to Ksh2.06 billion ($23.58 million) for the six months to December 2012 compared with Ksh642 million ($7.74 million) for the six months to December 2011, as well as other operating costs related to subsidiary forex translation losses.
Diageo, EABL’s majority shareholder, provided the loan that was used to buy a 20 per cent minority stake in Kenya Breweries Ltd subsidiaries from SABMiller in 2011.
“EABL has always maintained zero long-term debt, so it’s expected that the new CEO will look at cutting the level of leverage,” said Kuria Kamau, an analyst at Kestrel Capital, a Kenyan brokerage.
“Looking at the level of debt and the fact that the company will use free cash flow to pay it, it’s expected that the dividend payout will remain low,” he said.
The incoming CEO has his work cut out for him. For one, the company slashed its interim dividend for the six months ended December by 40 per cent — the first time in more than five years.
This was as a result of the profits drop even as it also chose to retain funds to boost its cash position and build a war chest in anticipation of the expected competition from SABMiller.
“The alcohol industry is very competitive and I do not think volumes are growing that much,” said Eric Musau, a research analyst with Standard Investment Bank.
Investors, used to handsome dividend pay-offs from the company, have punished the counter, with the stock losing ground.
Mr Ireland will have to come up with ways of boosting dividends to calm nervous shareholders. Secondly, he will have to find ways of growing sales.
Beer sales grew by 11 per cent in 2012, and while growth in the spirits market was also impressive, increased competition in the sector has put pressure on growth figures.
Premium spirits like Johnnie Walker and Smirnoff grew by 38 per cent and 24 per cent respectively, compared with 51 per cent and 57 per cent respectively in 2011, on account of growing competition.
The competition has also affected mass targeted spirits like Kenya Cane, which Diageo said in its latest financial report had gained market share following the banning of plastic packaging in Kenya, but competition from other local spirits in glass bottles has seen their local spirits volumes sales drop by about 30 per cent.
Currently, spirits contribute 15 per cent of the firm’s total revenue, but the segment has been growing much faster relative to the beer market, and seems to offer much more growth promise given the low per capita spirits consumption in the region.
It means EABL needs to increase consumption of low-cost beers and spirits, which act as an entry level for consumers moving from traditional beers. But this segment is coming under threat from both competitors and regulators.
Keroche, Kenya’s second largest brewer, has embarked on a Ksh2.5 billion ($29 million) expansion plan that will increase its production capacity tenfold to 100 million litres per year.
By Peterson Thiong’o and David Mugwe