Interim Management Report on the results of the Zwack Unicum Plc. in the first quarter of the 2019–2020 business year

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Zwack Unicum NyRt.
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The Board of Directors of the Zwack Unicum Plc. has approved the Management's report about the results of the Company in the first quarter of the 2019-2020 business year. The data have not been audited

1. Analysis of the Report

Total gross sales of the Company were HUF 5 724 million, a year-on-year decrease of 4.2%. Net sales (sales revenues excluding excise tax and public health product tax [NETA]) were HUF 3 070 million, a year-on-year decrease of 15.1% (by HUF 544 million).

There was a considerable decrease in the net domestic sales (–HUF 593 million; –18.2%). The net sales of own produced goods decreased in the domestic market by HUF 551 million (by 22%) (HUF 1 952 million instead of HUF 2 503). Broken down, sales of premium products decreased by 20.6% and those of quality products by 26.0%.

The amendment of the Act on Public Health Product Tax (NETA), effective as of January 2019, was the cause of the considerable difference between the gross and net sales. In the wake of the amendment each and every type of alcoholic drinks has been taxed (as from 2019, pálinkas and bitter liqueurs also), and the tax categories have been raised by 20%. The Company has shifted the massive tax hike into its gross prices but that has radically reduced to volume sold. As a consequence of those contrasting processes, the gross sales have slightly decreased. As proportionally the combined excise tax and Public Health Product Tax levied on the smaller volume was higher than a year before (+HUF 291 million; +HUF 12.3%), the net sales took a steeper dive. 

The net sales revenue of traded products had a year-on-year decrease of 8.9%. Broken down, the revenue of the Diageo portfolio went up by 7.0%, while the revenue of the other traded products decreased by 44.8%. That the Zwack Unicum Plc. has not been the official distributor of the Moët-Hennessy products since 1 March 2019 explains the latter decrease.    

Market research data for the April–June period in off-trade indicate that the tax-paying domain of the Hungarian market of spirits had a year-on-year increase in volume by 2.5% and in value by 12.7%.

Export earnings were HUF 412 million – a considerable year-on-year increase of 13.4%. The brunt of increase was derived from sales in Italy, where sales had a year-on-year jump of 23%. 

The material-type expenses decreased by HUF 149 million (–11.9%). As that figure is lower than the decrease of net sales – the latter being –15.1% – the gross margin ratio has a year-on-year decrease of 1.2 percentage point (64.2% instead of 65.4%). An unfavourable change in the product mix is the main factor behind that change (the sales of own-produced high-margin goods decreased faster than those of traded products).

Employee benefits expense increased by HUF 17 million (2.4%). Bearing changes in the labour market in mind, the Company granted a wage and salary increase of between 5 and 10% by differentiating it for the various payment levels. In lower payment categories the hike was higher while in higher ones it was lower. That the employee benefit expense increase was lower than the wage and salary increase was due two factors: the headcount was lower than in the previous business year and, during the previous business year, several one-off expense items were posted.

The other operating expenses decreased by HUF 97 million (10.1%). The decrease was thanks to lower marketing expenses (–6.5%) and the fact that less fees were paid for consultants.

The profit from operations was HUF 312 million – a year-on-year decrease of 49.1%. The taxes levied on the operating income decreased by 31.9% (HUF 38 million). The income tax expense includes also the local business tax and the innovation contribution – whose basis is the gross profit. Due to the different bases of taxation, the income tax expense only decreased by 31.9% while the profit before tax decreased by 49.1%.

The Company’s profit after taxation was HUF 231 million – a year-on-year decrease of 53.2% (previous: HUF 494 million).

The Company has experience of half a year about the effects of the modification of the above-mentioned the Public Health Product Tax (NETA). Overall, it can be stated that the changes in the market have been more or less as we predicted. After the shelf prices jumped, consumption plummeted in the affected product categories – as expected. We predict that in the rest of the year the volume sold will somewhat climb back. The Management still believes that it is possible to realize the 2019–20 business plan (which foresees over 10% decrease in net sales; and profit after taxation at HUF 1.4 billion – which is by 46% lower than in the previous business year.)

1. Business Environment of the Company

The Zwack Unicum Plc. is the biggest player in Hungary’s spirits market. As nearly 90% of its revenues are domestically generated, trends in domestic consumption are crucial for its wellbeing. Domestic consumption of branded spirits has increased in Hungary in recent years and the tendency is expected to continue in the near future. See the first chapter of this report for concrete market figures.

 2. Objectives and Strategy of the Company

The Company’s primary activity is producing and selling alcoholic drinks. The principal aim of Zwack Unicum Plc. is to maintain its market leading role in Hungary’s market of spirits and further strengthen its export markets and its strong presence in the premium and quality products segments.

In Hungary the Company is the official distributor of several brands like Diageo portfolio. Thus, in addition to the self-manufactured premium brands of outstanding importance in the Hungarian market (Unicum, Fütyülős, Vilmos, St. Hubertus), Zwack Unicum Plc.’s portfolio is enriched by world brands such as Johnnie Walker, Baileys and Captain Morgan. With such a portfolio our Company offers an impressively rich assortment of branded products for consumers.

Product innovation and successful product launch are crucial means of keeping and strengthening the market leader position. The Company has the objective of deriving at least 12 % of its gross sales from exports and has the ambition to increase it.

 3. Main Resources and Risks of the Company’s Activities

  •  Material Resources
  • Production and Plant

The Company has three production plants. Unicum production and part of early maturation are done in the Unicum plant in Soroksári út. The Dunaharaszti plant takes care of additional maturation and bottling of the Unicum liquor, and also the bottling of the majority of the other products produced by the Company. The fruit palinka distillery operates in Kecskemét, and this is where the small series products are bottled.

The Company intends to maintain those three production plants in the long run. The output capacities of the plants concerned are appropriate for bulk production and bottling.

At the plant in Dunaharaszti a major modernization project for bottling began in 2015. Machinery of two bottling lines is being replaced by new machine units. The project is expected to run until 2020, and in that period capital expenditures will exceed annual depreciation figures.

  •  Financial Position

The Company's financial position is stable and it always fulfils its financial obligations on time. Financial transactions were made by UniCredit, Erste and K&H Bank from among the largest commercial banks.

  • Human Resources

The Company’s headcount stands at 233 (at the end of the 2018–2019 business year it was 237 and in the corresponding period of the previous business year it was 242).

In the Hungarian spirits market the Zwack Unicum Plc. has the biggest human resources for sales and marketing. Indeed, the related competitive edge in distribution and innovation are among the Company’s most important strengths.

  • Risk factors

 The most important risk factor affecting our Company is the change of the regulatory environment that may have a negative effect on domestic consumption and caused by this also on the sales volume.

Company activities are exposed to various financial risks: market risks, credit risks and liquidity risks. Seen the high volatility and uncertainty of the current financial market, the Company seeks keeping the possible negative implications affecting Company finances at the minimum. In line with the accounting policy, the Company also applies derivative financial tools to counter certain financial risks.

Regarding its market risks, to reduce the foreign exchange risks arising from the export and import activities and from the Euro deposits, the Finance Department monitors, in line with the hedging policy, the foreign exchange liabilities, and keeps the necessary amount of forex on its bank accounts. Furthermore, the Company completes derivative transactions to reduce the same risks. Therefore the changes in exchange rate within the financial year have no significant implications on the statement of comprehensive income, nor on shareholders’ equity.

The Company is not exposed to significant commodity market and other price risks either, nor to interest risks because the Company also has fixed interest assets whose book value is, by the order of magnitude, the same as their market value; the Company has no interest-bearing loans either.

The Company has no significant credit risks, nor related to accounts receivables, due to the diversity of its customers. Also a significant portion of the accounts receivable is insured by financial institution up to 90% of single liabilities. The Company applies no other credit rating methods since this credit guarantee method is deemed to be effective enough to manage credit risks.

Company financial assets and fixed deposits are mostly in Hungarian forints. The counterparty risk is low since Zwack Unicum Plc. placed its funds with reliable financial institutions.

Liquidity management of the Company covers the necessary number of financial tools and also the necessary credit lines. The Management continuously monitors the necessary liquidity provisions (consisting of the undrawn credit line and the financial assets) based on the expected cash flow.

As an additional market risk we are going to monitor and evaluate the possible impact of Brexit process. Zwack has a limited risk in case of a “hard Brexit” as only a small number of products are sourced from the United Kingdom. Zwack export activities to the United Kingdom are insignificant to the whole business. Zwack is prepared to manage the occasional risk of a “hard Brexit”.

This Interim Management Report has been made according to the relevant accounting regulations and the financial statements made on the basis of our best knowledge. It gives a truthful and reliable account of the assets, liabilities, financial standing and profits of Zwack Unicum Plc. This business report gives a reliable picture also of the Zwack Unicum Plc.’s situation, development and performance.

Additional information:

– The Company held its Annual General Meeting on 26 June 2019. The resolutions of the AGM were made public on the same day and are available on the Company’s website.

- There was no change in the ownership structure of the Company.

- There was no change in the ownership structure of the Company.


- During the first quarter of the 2019–2020 business year there was no change in the organization of the Company.


- The Company does not possess shares of its own, just as before.

6 August 2019

On behalf of the Board of Directors of the

Zwack Unicum Plc.,

 

 

 

Frank Odzuck

Chief Executive Officer

Tibor Dörnyei

Chief Financial Officer

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