Lion Brewery 3Q profit hit by factory closure, higher taxes

Lion Brewery Ceylon PLC saw its performance for the December (3Q17) quarter as well as for the nine months being hit by a series of factors— both natural and manmade, but the management forecasted for better days ahead for Sri Lanka’s largest brewer. 
Releasing the results for the October-December quarter, the company reported earnings of Rs.4.00 or Rs.320. 1 million against Rs.5.66 a share, down 29 percent from a year ago but much better than Rs.5.97 loss per share reported during its earlier quarter. 

The beer sales dropped by 35 percent to Rs. 5.34 billion as the resumed factory operations did not reach its capacity until end of December while the people shifted to both hard and illicit liquor due to higher taxes slapped on the beverage at multiple instances.  Lion Brewery’s Biyagama factory became completely dysfunctional after floods in May, last year destroyed the facility before it resumed operations in November.
The company received a billion rupee claim from the insurers and another billion rupees is expected to be received before the end of June, this year. 
Meanwhile, for the nine months ended December 31, 2016, the brewer reported a loss of Rs.7.93 a share or Rs.634.1 million loss as opposed to a profit of Rs.21.59 a share or Rs.1.73 billion recorded during the corresponding period last year. 
The revenue too fell sharply to Rs.15.4 billion from Rs.27.2 billion earned a year ago. 
The imported beer brought in from its partner, Carlsberg breweries in the Asian region, did little to provide a buffer to the top line because such beer mostly came in canned form and also did not substitute all preferred flavours brewed at the destroyed facility. 
Although the company was thankful to the government in assisting it to import such beer at taxes limited to the value of the local excise duty, it did not comprehend the government’s tax policy which put the industry at a disadvantage over the hard liquor industry and toddy.  “The taxes on beer are killing its demand. Since the 70 percent increase in its tax in October and November 2015, beer volumes have declined by 40 percent. In the meanwhile, arrack – the tax of which was increased by a more palatable 25 percent has seen a 14 percent growth in its volumes. 
Whilst beer with an alcohol content of 5 percent or above is taxed at Rs .315 per litre, the tax on toddy – which has similar alcohol content – is just Rs.50 per litre. 
As a result, consumers are shifting in large numbers to toddy. In revenue terms too, the government is losing out since available data clearly indicates that this industry is a habitual tax evader,” the company said in an earnings release. 
In November 2016, the value added tax on alcohol products was also re-introduced at the rate of 15 percent making the matters worse for the industry as it pushed up the beer prices further. 
The company said as a result of the combined effect of all these polices, the beer industry volumes have fallen by as much as 40 percent while the price of a beer bottle has risen by a staggering 75 percent during the last 15 months. 
As of December 31, 2016, Ceylon Beverage Holdings PLC held 52.25 percent stake in Lion Brewery while Carlsberg Brewery Malaysia Berhad held 25 percent stake. 
Carson Cumberbatch PLC held another 5.13 percent stake being the third largest shareholder.