Ndegwa:  Guinness' Rights Issue will Mitigate Rising Finance Costs

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INTERVIEW

The Managing Director/Chief Executive Officer, Guinness Nigeria Plc, Peter Ndegwa is a qualified accountant and alumnus of the London Business School, University of IESE and Strathmore University. Since he became the CEO of the company in July 2015, the business has run into many headwinds. He spoke to Goddy Egene on some of the challenges and efforts being made to return the company to profitability

You assumed office as the Chief Executive Officer of Guinness Nigeria in 2015, what has been your greatest challenge?

The economic environment has been challenging for all businesses and we are no exception. In fact every CEO in Nigeria at the moment is confronted by lots of challenges with the economy being the biggest one. Within the context of the economy, there are three 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’s 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 Forex issue, we have seen a move from a fixed rate to a kind of managed float which has led to depreciation of our currency of about 50 percent. When you then compare that with the parallel rate, which is the proxy that is being used for pricing goods, the impact on industry becomes very significant directly through from when you import inputs and also on our local suppliers who also depend on imported inputs.

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. But what we have seen when we locally source, especially for packaging materials, where large components are imported is the inability to source for foreign currency from the official market has forced them to go into the parallel market which they in turn now use to price our goods. As such, we have seen producer input costs go up by about 50 per cent. 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 have had to pay for sorghum for example is twice or two and a half times increased.

The third factor which is also very important is related to 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 these big elements into performance, your top-line 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.

The company for the first time in 30 years recorded a loss last year, how do you plan to reverse the losses incurred on your balance sheet?

We are very confident about our strategy and want to solidify our status and operations as the first and only Total Beverage Alcohol business in Nigeria offering the widest range of drinks – from adult premium non-alcoholic drinks (APNADS) to lager, stout, mainstream spirits, premium and super premium spirits which puts us in a great position to continue to offer consumers quality brands and allows us to grow the business. We had announced a 20 per cent growth in the first half of last year, July to December 2016, which means that our business from a top-line perspective is growing. We also announced that we had not only grown local demand but exports as well. The area where we can’t tell what will happen is on the cost side. Like I had touched on, we have had significant inflation on our producer inputs; – whether they are linked to inputs that are imported such as packaging materials or raw materials like sorghum which increased by more than a 100 per cent. Also we cannot tell what will happen to the foreign exchange market, the level of liquidity in the market means that we will continue to come under pressure and foreign currency losses would continue to affect our business. We are confident that this business has a lot of growth avenues but the cost side affects all of industry. Because we are here for the long haul, our intention is to navigate through the next few quarters so that we come through as a very strong business.

There have been calls for equity injection into your operations, which I believe informed the recent decision for a Rights Issue, which the shareholders have gladly approved. Can you throw more light on Rights Issue?

Yes, in 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 rights 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.

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 is will eliminate our increasing finance costs and return the company to profitability. The last time we did a rights issue was about 25 years ago. We believe that given the current economic climate it is high time we went 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 is 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.

Will the N40 billion be sufficient to help the business find some stability in view of the inflation in the economy as well as the instability in oil prices?

I must tell you that the first thing that we are going to be doing is to take out a lot of the debt that we have – we will pay off both local and foreign currency debts  which we have held as a lack of our inability to access dollars in the market.  We got a facility from our parent company, Diageo to ensure that we could access liquidity. Also, given the business conditions we have increased our borrowing from banks and so at the end of the rights issue, we would be able to pay back which in turn would free our business and enable us invest in the future. We have also carried out an assessment of the funding that we will need over the next five years and we feel that the size of our issue will help address our funding needs over this period even as we navigate the challenges within the dynamic Nigerian economy.

But there are insinuations is some quarters 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 per cent was stalled?

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 a business that has been very strong and has paid dividends for many years.

You sound very confident about the success of the Rights Issue but do you think that the timing is auspicious considering the current economic recession?

This is very good question. But I want to tell you that the timing of a rights issue is a very tricky subject because you do a rights issue for the most part when you want to retire debt or when you want to fund a business. As management and a board, you must be confident that shareholders are investing in a business that will grow in the future. As such, the intention is for shareholders to determine if they want to subscribe to the rights issue process. We have gone round, had meetings and presentations with shareholders and we believe that shareholders want to support this business because we have a great future and Nigeria would overcome its present challenges that the economy faces because it is still the largest economy in Africa and most attractive from a consumer goods point of view. As a business, we are venturing into new and exciting categories like the spirits business where we haven’t played in before now, our innovation pipeline is fantastic and we are pretty confident about our strategy. But we need to go out into the market and raise money to enable us deal with the debt, and the current cost of doing business that has arisen as a result of factors like the foreign currency issue, inflationary impact and so on. We have received lots of support from the shareholders including the majority shareholder, Diageo to ensure that we can get cash into our business to support our growth and I believe that the shareholders will make their own judgement and decisions on the rights issue.

What is 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.  Consumers have to continue to spend – they just prioritise 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 much 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 is happening in the economy. But that is 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 top-line 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 stabilise and the market would grow in leaps and bounds. What we can’t say is how long it’ll take to get there.

How is Guinness responding to the changing needs of multiple stakeholders outside the investment community in terms of social investments?

Guinness is a well-loved brand and a house hold name in Nigeria. We have been involved with lots of socially responsible projects. Our flagship initiative, the Water of Life has impacted a significant number of people positively across the nation with over 26 project sites. The other area where our impact is being felt is in the area of local sourcing of raw materials. Five years ago, we were probably sourcing about 25 per cent of our raw materials locally but today our local content input is at about 70 per cent which is very significant for our business. Through these vehicles, our investors see a business that is thinking about the community, the future, and consumers respond in the way that they choose our brands.

Has the decision to locally manufacture some of your spirit brands begun to yield any dividends?

Yes, we have begun to see to dividends. It is important to recognise that one of the reasons we decided to locally manufacture our spirits brands is premised on our intentions to increase our local sourcing to about 80 per cent on the input side and to as much as it’s possible localise the production of all our brands other than those that need to be imported such as scotch which has to be imported from Scotland for example. One of the benefits of going this route is that the raw materials are available locally, most of the associated costs are denominated in Naira terms, as such there is less volatility on the cost side and finally it allows you to price right. The brands we produce locally are of great quality and are priced at an accessible price point that allows consumers to enjoy their favourite drinks and this where our confidence about our ability to grow this business stems from going forward.

Considering the dynamism in the industry, is Guinness looking to introduce new products that would cater to those at the lower end of the market in view of depressed wallets and changing consumption patterns?

Brands that are placed at price points that consumers can afford but are of high quality are defined as accessible brands. Some of our products like the Smirnoff X1 is at a price point that consumers can afford.  So we have launched some other products like that on the spirits side. Satzenbrau, one of our beer brands is doing very well as it is one of the fastest growing brands in its category. On the malt side, we have Dubic which is also doing very well. So we have got a number of brands that are doing so well in the market and we have priced them taking into cognisance the pressures faced by many consumers. These are not cheap brands even though they are affordable, there is a distinct difference between those two terms – cheap brand and brands that are affordable. Our brands are international brands that are sold at price points that consumers especially given the economic circumstances can afford and they are from the house of quality, therefore, the consumer confidence is very strong.   You will also find that we are putting in a lot of money into advertising to allow for consumer understanding, engagement and bonding.

Are there particular kind of innovations you  are most proud of?

I am proud of all our brands in Guinness Nigeria. 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, whether it is the Orijin ready to drink, a very strong brand that has excited customers. 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. So we are very proud of Orijin.

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.

We have also begun to innovate in the area of Spirits, which is a big part of our strategy going forward. In January 2016, Guinness Nigeria acquired the rights to distribute Diageo’s International Premium Sprits (IPS) like Johnnie Walker, Baileys, Smirnoff, among others  in Nigeria, making us the only truly total beverage alcohol (TBA) company in Nigeria offering the widest range of drinks – from adult premium non-alcoholic drinks (APNADS) to lager, stout and IPS. We also acquired the rights to distribute brands from India’s largest spirits business, United Spirits Ltd (USL) for brands like McDowell’s Whisky. Also last year we inaugurated  a production line for the local manufacturing of spirits at our Benin plant. We have just launched some exciting innovations from there using global brands like Smirnoff, Gordons to locally produce variants such us Smirnoff X1, Smirnoff X1 Chocolate and Gordons Moringa. This is an exciting time for us as a business because I was in trade visiting some of our outlets and saw the brands selling. Innovation is a competitive advantage for us in this market and we have a strong innovation pipeline to drive the products which would leave our consumers spoilt for choice.

The economic environment has been challenging since the time you came as CEO and now but what has been your most difficult moment?

At this point, I think that any CEO in this country would say that they have moved from producing and marketing whatever it is that they produce to dealing with the risks arising from the economy. The amount of time that we spend as CEOs determining how to mitigate the risk of currency fluctuations is significant – where do you get dollars for raw materials, at what price among others. So for me, the business has gone through a difficult moment but if there is one that I can call out, it is our ability to keep the business going given the liquidity in the market.

How would you describe your leadership style?

I have a very simple leadership philosophy – keep it simple. You must be very clear on the two or three things that the organisation is going after. Communicate it to the staff, external stakeholders and investors and just keep repeating the message regardless of what is happening in the environment. It is also important that you focus on the area that you want to influence. For us as a business, we are committed to expanding our portfolios so that we are rich in more consumers across three areas – beer, spirits and soft drinks. We also want to take out costs so that we can become a more agile business and one that can price brands in a more affordable way for the consumers. Also as a leader, it is imperative to be obsessed with the front line, for us this means getting our brands as close to the consumers as possible.  Also keep the strategy very simple and ensure that the internal guys don’t worry about what’s going on in the environment, whether it’s the currency or other external factors.  And then, make decisions quickly. The problem when you are facing many challenges is to be very risk averse and not want to make decisions quickly. It is the time to be a lot more agile so that you can navigate through the challenges that you are faced with.

How do you relax and unwind?

Outside of work, I have some of activities that help me to relax and unwind. I go to the gym three or four times a week.  I also love martial arts and so I have a trainer who comes to teach me taekwondo.  I love to watch football and enjoying watching the games with my family apart from taking my son to play football. Finally, I also find time to play golf and these activities really help to keep me relaxed.

 If you are stranded on an Island and you had just one drink with you, what would it be?

It has to be Johnnie Walker. I love water but Johnnie Walker would do in this scenario.

What message do you have for your intending and existing shareholders as well as the consumers?

Our consumers have been with us for a very long time. As Guinness Nigeria, we offer an array of high quality brands and are an innovation hub. We are able to offer a wider variety of products to our consumers at a more affordable price points with our innovations in the spirits, beer and soft drinks categories. Some of these brands include Smirnoff X1 intense chocolate vodka, Smirnoff Extra Smooth Vodka, Gordon’s Dry Gin, Moringa Citrus Blend, McDowell’s No. 1 Reserved Whisky, McDowell’s VSOP and Royal Challenge Finest Premium Whisky for the spirits segment; Orijin Zero and Malta Herb Lite in the adult premium non-alcoholic drinks and in the beer segment, our brands like Satzenbrau provide touch points at which our consumers can continue to interact with us. We will continue to provide our consumers with brands that are of high quality and choices in spite of the prevailing economic circumstances.

To our investors, we have been a stable company for a long time. We have invested in this country and will continue to invest in it for the future. As management and a board, we are confident about our strategy. I can’t tell investors whether or not to buy shares as they have to make their judgement based on the information available. All I can say is that our intention is to continue to invest in the country and make investors happy that they invested in our company.