East African Breweries Limited re-strategizes operations to weather COVID-19 storm

KENYA – The East African Breweries Limited (EABL) has taken conservative approaches to new investments and cash use as it seeks to weather the COVID-19 storm.

According to reports by Citizen Digital, the company has suspended environmental investments which include solar energy, biomass and water recovery as a means to manage costs and liquidity.

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Spending into advertising and promotions (A&P) was the first to take a cut in light of business risks posed by the pandemic.

“Our market teams re-organized their plans to help us emerge stronger from the crisis and continued to execute with discipline and invest prudently to ensure we are strongly positioned for a recovery in consumer demand,” EABL noted.

Subsequently the company has made available majority of its drinks in cans and cartons to mirror the shift in consumption patterns away from on-trade markets to take aways.

The company is presently reliant on e-commerce and non-traditional channels such as cash and carry, Wines & Spirits and supermarkets to keep sales going.

In addition, the brewer has said that it will reduce its purchase of raw material from farmers in the upcoming season by 71 per cent in response to a weak demand for its products.

Its purchases of sorghum and barley from contracted farmers will decline to 10,000 and 12,000 tons respectively from a combined 77,000 tons last year.

“The government’s COVID-19 containment measures have included the closure of on-trade outlets (bars, pubs and restaurants) where most of KBL’s beers made from barley and sorghum are consumed.

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“This has in turn reduced our demand for barley and sorghum in this planting season, and our field extension team contacted our registered farmers to notify them on this development,” the brewer noted.

Lower orders for the essential raw materials are expected to impact the livelihoods of farmers in the EABL value chain which the firm estimates at 60,000 in its 2020 annual report.

EABL Group Corporate Relations Director Eric Kiniti however says the firm will endeavour to retain its supplies from small-holder farmers as it currently holds discussions with the players.

“Small-holder farmers are the most impacted by the decision unlike the large commercial farmers who can easily switch to the production of a different commodity,” he said.

EABL’s bond terms compliance extended

To further ensure continuity of its operations, EABL has received a three-year extension to meet terms of its Sh6bn (US$55.4m) bond, that required its current assets including cash to match short-term liabilities like supplier debt.

EABL had last year received a one-year waiver to end of 2020 but this has now been extended to end of 2023, shielding it from the risk of the bond being classified as current liability.

The brewer was required to maintain a current ratio, a measure of a company’s ability to meet its short-term obligations, of at least 1 but this has proved elusive since last year, with Coivd-19 complicating the situation.

This has prompted EABL to make a fresh Capital Markets Authority (CMA) application to exempt it from keeping its current assets including cash balances at same level with short term liabilities such as bank overdrafts and supplier debt, reports Business Daily.

“For the medium-term note, the CMA has exempted the group from maintaining a current assets ratio of 1 until June 2023,” says EABL in its latest annual report.

EABL says this ratio fell short at 0.63 partly due to the receipt of new bank loans in the period.

EABL had Sh44.94 billion (US$415.5m) debt as at end of June with Sh8.03 billion (US$74.2m) classified as current liabilities, meaning repayable within 12 months. The current assets were valued at Sh5.076 billion (US$46.9m) during the review period, putting the current assets ratio at 0.63.

“The directors believe that this is transient in nature as the Group continues to align its capital expenditure with long term funding,” says EABL.

EABL issued a fixed medium term note of Sh5 billion (US$46.2m) in March 2015, followed by another one worth Sh6 billion (US$55.4m) in April 2017. The first one matured last March while the second tranche will mature in March 2022.

The Sh6 billion outstanding bond is unsecured and has an annual interest rate of 14.17 percent.

This means that the CMA exemption covers the entire remaining period of the bond and takes pressure off EABL whose business has suffered on state closure of bars to contain Covid-19 spread.

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