At The Market with Tetrad – Art authors a gloomy historical tale

By Brian K Mugabe

APRIL saw the rate of inflation continue to decline for the third month in a row to 505%, having been 622,8% in January, 602,5% in February and 583,7% in March.



NT face=”Verdana, Arial, Helvetica, sans-serif”>Month-on-month inflation has, respectively, gone from 13,7%, to 6%, 5,9% and 4,8%. What these numbers effectively mean is that prices, as measured by the Central Statistical Office, have been increasing but at a lower rate than they did over the same periods of 2003.


Various factors have been touted for encouraging the fall in the rate of inflation such as the stabilisation of the exchange rate due to the auction system and the disbursement of productive sector finance so as “to encourage production”.


The ongoing release of results for the March/April reporting season suggests that the most significant factor impacting on the slowdown in price increases is probably overstocking. As is now common knowledge the December 2003 “peak” retail period witnessed a crash in consumer demand rarely seen in this country as unprecedented high November inflation, and then interest rates impacted negatively on the ability of individuals and businesses in general to buy goods or assets, whether for use or speculative purposes, as had been the case over the past two to three years.


The clampdown on those caught dealing on the parallel forex market also played a role as diaspora money flows became more circumspect. The result was that businesses were left sitting on huge stocks which they could not offload, certainly not at the then prevailing prices. This stockpile is what has been slowly unwound over the past three months at lower prices and promotions to try and stimulate demand. As this effect begins to dissipate so prices will again start to come under pressure to reflect the current cost of inputs and labour. How well these costs are held at bay, going forward, as well as the success or otherwise of efforts to tame money supply growth will have a telling impact on whether the RBZ’s 200% inflation target by year-end can be achieved.


Of the results released this week none have quite managed to capture the difficulties for industry of the late November 2003 to February 2004 period than those of beverages giant Delta, and Art. Looking at them alphabetically we begin with the “shock therapy” performance from Art.


Challenges posed by the changes in the business landscape which began in November with the aforementioned collapse of local demand, surge in interest rates in December and the choking blend rate that came via the foreign currency auction system the following month, manifested themselves in the group’s financials. Although the market had been forewarned through a cautionary statement published by Art’s board in April, the results still left many dumbfounded.


Turnover for the group increased by 429% to $103 billion as the group was forced to withdraw from some non-profitable export markets, which resulted in the decline of export revenue’s contribution to turnover to 27%, from 36%, while local volumes were severely depressed in most of the divisions.


In contrast to the low revenue growth operating and energy costs, respectively, increased in line with, and ahead of, inflation. Against this background operating margins came off significantly, from 31% to 12%, resulting in operating profits growth of just 99% to $12,3 billion.


Net finance costs of $4,5 billion were incurred, a seven-fold increase as the group was caught in the interest rate hike that occurred in December. The revaluation of the local currency resulted in import parity stock write-downs of $3,6 billion and the fire that damaged the Kadoma Fine Paper Mill cotton lint warehouse saw a loss of $1,1 billion being expensed together with an equipment impairment loss of $397 million.


Attributable earnings of $1,9 billion were recorded, a 51% decline when compared with the $3,8 billion achieved in the comparative half- year. The bottom line adequately summed up the sad story for Art.


Delta, demand for whose products was hitherto viewed as largely inelastic, produced a sub-inflation performance for the year to March 31, though these proved far more pleasant reading than those of Art.


Net turnover for the period was up 460% to $580 billion as overall beverage volumes experienced an 18% decline. Lager beer volumes were down 23%, sorghum traditional beer down 14% and carbonated soft drinks down 30% for the year. The December period, traditionally the peak period for Delta, saw lager and sorghum beer volumes fall a staggering 45% and 22%, respectively, when compared with the same period in 2003. Positively, however, Megapak saw volume increases of 14% though these were mainly driven by exports.


Operating income, courtesy of a two percentage point growth in margins to 38%, was up 499% to $189 billion. Finance costs played a major role in stifling bottom line growth as they ballooned to $29 billion, against $300 million recorded in the 2003 financial year. The spike in interest rates in December, a time the company was not able to convert stock into cash anywhere near fast enough, while experiencing a massive influx of deposit returns, (meaning a cash outflow for Delta), were blamed for these finance costs.


After accounting for equity earnings of $6,5 billion and taxation attributable earnings growth was diluted to 394%, giving a figure of $111 billion.


Both companies point to experiencing somewhat of a recovery in the ensuing post half, and year-end, periods respectively. It remains to be seen how well these, and indeed other companies, will be able to change their business models once again so as to adapt to the changing spending patterns of consumers as well as the changed economic environment. It’s definitely not business as usual in Zimbabwe!