Delta navigates complexities, delivers solid underlying performance

Delta Corporation Limited (Delta) painted a picture of contrasting realities in its recent financial results for the period ended March 31, 2024. While headline figures reported strong growth, management commentary revealed the significant challenges the Zimbabwean beverage giant has been grappling with.

According to Delta’s leadership, the operating environment in Zimbabwe remains intricate. The company is contending with currency instability, inflation, and a stringent fiscal policies. These factors are further compounded by the impact of the 2024 budget’s tax measures, particularly the sugar tax and limitations on distribution channels, which have disproportionately affected the beverage sector.

Speaking at the company’s analysts’ briefing, CEO Matts Valela, said the announcement of the 2024 National Budget, which introduced various tax measures, resulted in the emergence of grey imports of common brands and other competitive brands from neighbouring countries with lower taxes.

This could potentially lead to lost revenue for the Government and harm local businesses.

Adding to the uncertainty is the recent introduction of the Zimbabwe Gold (ZiG) currency.

Valela said the currency change “is a challenge that we all have to face”.

“But we remain hopeful that this time we will get it right and it shall not result in any further destruction of balance sheets.”

“We prefer stability wherever we land,” said Valela.

Finance director, Alex Makamure, said the swings in currencies (exchange rates) had a significant impact on the business.

The lack of clarity surrounding supporting fiscal policies and persistent macroeconomic rigidities, make it difficult to predict the future economic landscape.

Valela said the new measures had resulted in the company facing counter-party risk, even from reputable customers.

“You find that some fairly reputable customers became a high credit risk because of the environment and that disrupted the supply chain into the market,” said Valela.

Delta acknowledges that achieving a stable currency will require addressing these underlying issues.

Despite these headwinds, there are reasons for cautious optimism. The anticipated decrease in mineral prices and reduced agricultural output due to the 2024 El Niño-induced drought, might be mitigated by a potential rise in mining activity, the continued resilience of diaspora remittances and Delta’s own efforts to improve product supply through its recently commissioned additional production capacity.

Additionally, the company is focusing on operational efficiencies to further strengthen its position.

Delta recorded record levels in its lager beer volumes while sparkling beverages and sorghum beer were also near all time highs.

Lager beer volumes reached a record high of 2,46 million hectolitres from 2,17 million hectolitres prior year comparative. Lager beer contributed 41,45 percent of the total revenue for the group.

Valela attributed this to market execution and improved brand and pack availability of its products.

In sorghum beer, volumes reached 4,19 million litres slightly lower than the record high of 4,58 million achieved in 1998. Sorghum beer contributed 32,67 percent of the total revenue for the group.

“We are driving hard, balancing scud and super,” Valela said.

Sparkling beverages of 2, 053 million hectolitres were just shy of the record high of 2,098 million hectolitres achieved in 1999, but significantly above 1,59 million hectolitres achieved in FY2023.

Sparkling beverages contributed 19,11 percent of the total revenue for the group.

This business was, however, affected by the introduction of sugar tax which resulted in high price increases, Valela said.

Estimates are that the company, including Schweppes and Afdis, will pay US$46 million in sugar tax in the 2024 fiscal year.

This is over and above the more than US$142 million Delta pays in various taxes.

Delta’s reported financial performance reflects a 43 percent year-over-year increase in revenue to US$768 million and a 53 percent growth in operating income to US$152 million. Both growth rates were above the growth in volumes.

Management acknowledges that these figures are susceptible to distortions caused by fluctuations in inflation and exchange rates, as well as the complexities of transitioning to International Financial Reporting Standards (IFRS).

“As we go forward, hopefully ZiG will be more stable and hopefully we will be able to give you reliable numbers,” Makamure said.

He, however, said the business had still realised some underlying growth during the period despite the distortions.

Delta paid a total dividend of US$3 cents with management adopting a cautious approach due to environmental factors as well as the need to capacitate the business.

To provide a more accurate picture of the company’s health, Delta’s management relies on internal data that tracks business performance on a month-on-month basis.

This data reveals a 10 percent revenue growth, which aligns with reported volume growth. This suggests that the reported figures based on IFRS accounting might understate Delta’s actual performance.

Overall, the key takeaway is that Delta’s underlying business appears to be robust despite the challenging environment.

The company is prioritising measures to safeguard its financial health, optimise resource allocation, and generate positive cash flow to fund ongoing capital projects and potentially turn around its regional operations.

Management expresses cautious optimism about future growth opportunities, focusing on strategies to capitalise on consumer demand and further enhance operational efficiencies.

It is important to note that the shift to US dollar reporting, while mandated by IFRS, might introduce inconsistencies when making historical comparisons.

Additionally, Delta is currently contesting tax assessments levied by the Zimbabwe Revenue Authority, which could have a material impact on the company’s financial standing if not resolved favourably.

The dispute is on the formula used for splitting taxes into currency payment.

A total US$54,7 million in income tax, penalties and interest is under tax dispute with ZIMRA and Delta has not yet provided for it. The matter is before the courts.

Despite these uncertainties, Delta remains committed to its sustainability agenda. The company has intensified its efforts in areas like responsible alcohol consumption, waste reduction, and community involvement, while also optimising resource utilisation.-ebusinessweekly