New BAT boss optimistic on Zimbabwe prospects

British American Tobacco (BAT) Zimbabwe’s new managing director, South African Kimesh Naidoo

ZIMBABWE’S largest cigarette manufacturer, British American Tobacco (BAT)’s new managing director, South African Kimesh Naidoo, says there is light at the end of the tunnel for Zimbabwean businesses. Zimpapers Television Network’s Ndaka Majaka (NM) caught up with Mr Naidoo (KN) to discuss the former AB Inbev boss’ prospects for the cigarette manufacturer in Zimbabwe. Below are some excerpts of the interview:

NM: Congratulations on your appointment, what is your reading of the operating environment you are coming into?

KN: Thank you very much, I am also equally excited about this appointment. From my preliminary reading of the operating environment, it is a challenging one with many moving paths. There seems to be critical shortages of foreign currency and electricity amongst other issues, which are issues I believe are compromising the efficiency and production capacity of various businesses. On the issue of foreign currency, the regulations introduced in 2018 affected the company’s premium and innovative brand Dunhill, which is imported from South Africa and sold on the local market in RTGS$.

Excise duty being a consumption tax, charged on the consumer and collected on behalf of Government by the company, should ideally be paid for in the medium of exchange used with respect to the company’s own sales in relation to its products. The levying of excise duty on imported cigarettes in foreign currency will affect the company’s ability to continue servicing the premium segment, translating to revenue loss for both Government and the company — in true sense, since we have not had the Dunhill product in the market since April 2019, Government has lost revenues amounting to ZWL$4 million. Accordingly, the company continues to engage Government on this matter.

NM:  Zim is battling vast macroeconomic challenges, which have affected sales volumes (which were down 20 percent H1 19) and disposable incomes, what are your plans as the new BAT boss to ensure the company remains afloat?

KN: My immediate focus will be to review the brand portfolio to ensure that it remains consumer relevant. My second area of focus will be to align BAT Zimbabwe’s cost structures to the current realities in the market so that the business remains competitive.

NM:  BAT is struggling to adjust to Zimbabwe’s recently introduced ad valorem taxation on cigarettes, the company says its engaging Government. What will BAT do if Minister Mthuli Ncube maintains the regime in his upcoming budget?

KN: As you are aware, excise is a key factor that affects the success and sustainability of the cigarette industry globally. In this respect, an appropriate cigarette excise regime should be certain, achieve equity, promote investment and grow revenues for Government. We thank the Ministry of Finance for opportunities to engage with them on this important subject matter. We have offered our views regarding the existing excise regime and its impact to Government, and other proposals for their consideration. If the Honourable Minister of Finance maintains the mixed excise system, we will have to adjust to the excise regime and find other cost reduction mechanisms because compliance to the law as a business is our starting point. Just to give you a bit of more perspective, we propose that Government reviews the specific excise component on cigarettes only whilst maintaining the 20 percent ad valorem on ex-factory. The justification to this proposal is that cost base of tobacco products is largely exposed to FX changes, and if the FX movements for this year are anything go by, it essentially means that ad valorem above 20 percent will be a huge strain on the business.

In simpler terms, we believe that our proposal will protect Government revenues against the vagaries of the inflationary economy. It is important to note that the 2020 excise structure should be determined in the context of tight consumer affordability, reduced industry volumes and therefore, reduced revenues, higher total taxes and depreciation of the local currency.

NM:  How much does BAT expect to lose through the new tax regime?

KN: It is difficult to predicate this accurately, but its suffices to say that excise is the biggest determinant of pricing in our industry. It is, therefore, important to make sure that its appropriately shaped to the realities of the market.

NM: In its H1 19 results, BAT said it had parked US$22 million legacy debt with the Reserve Bank of Zimbabwe (RBZ), as it moves to honour international obligations in the wake of foreign exchange shortages in Zimbabwe. Has there been any movement in this direction? How much is owed to suppliers? How much is owed to the shareholder?

KN: The company has applied for registration of its legacy liabilities made up of foreign dividends and other foreign payments with the Reserve Bank of Zimbabwe (“RBZ”) in terms of the RBZ Directive — this has been followed by continuous robust engagements with RBZ. The legacy liabilities amount to US$ 22 million and we await direction from the RBZ. US$15 million amounts to unpaid shareholder dividends and the rest is attributed to suppliers of goods and services.

NM: The issue of illicit cigarette trade remains a sore one for BAT, how has the company positioned itself to remain competitive in light of cheaper imports?

KN: We have noted a growth in locally manufactured cigarettes being sold at prices below the minimum payable tax (excise and VAT) particularly in Beitbridge town and certain high-density suburbs of Harare. Such products are obviously as a result of duty not paid and represent revenue leakages for Government. Lessons from markets such as Zambia and South Africa, with illicit markets in excess of 30 percent of the total market, show that the domestic duty not cigarette market is a serious vice which spreads rapidly and is quite difficult to detect. We are engaging with the relevant authorities and industry bodies to facilitate and install a much tighter control framework on illicit trade. We have already seen positive results through the Honourable Minister of Finance’s Mid-Term Budget Statement wherein he proposed for the destruction of cigarettes impounded by law enforcement agencies and this will go a long way in reducing illicit cigarettes. We are also engaging ZIMRA among others to introduce stricter controls around the export facility (which allows exporters of cigarettes to export cigarettes free of excise) so as to prevent any opportunities for unscrupulous traders to round trip the products and or sell them on the local market. Such controls may include all the following; provision of monetary guarantees by exporters with respect to the acquittal of all export documentation; limitation of benefits of this facility to licensed manufacturers only; stricter accounting and record keeping with respect to export movements; and verification and audits of export sales by ZIMRA.

NM: At group level, BAT Plc is restructuring, will this affect the Zimbabwe unit?

KN: Not at all — BAT Zimbabwe is not affected by the restructuring of the group.

NM: What are your growth plans for the company going forward?

KN: Our business will also continue to focus on its key Strategic Leadership pillars to grow volumes and deliver shareholder value for the remainder of 2019. These are: Portfolio — we will continue to aggressively invest in our brands to ensure we remain relevant to our consumers; Route to Market — we will ensure that our products get to their destination on time and in full and fully maximise on technology to improve efficiencies and gain customer and consumer insights; Effective Cost Management — we will continue to challenge our cost base. We want to achieve the “what”, but always challenge the “how”; and Control Environment — given the volatility of the economic environment, the control environment is key to safeguard our company assets and shareholder value.