Interim Management Report on the results of the Zwack Unicum Plc. in the first three quarters of the 2018–2019 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 three quarters of the 2018-2019 business year. The data have not been audited.

1. Analysis of the Interim Management Report

Total gross sales of the Company were HUF 23 882 million, a year-on-year increase of 19.1%. Net sales (sales revenues excluding excise tax and public health product tax) were HUF 14 358 million – a year-on-year increase of 18.2% (by HUF 2 212 million).

There was a considerable increase in the net domestic sales (HUF 2 176 million; 19.9%). The net sales of self-manufactured goods increased in the domestic market by HUF 2 026 million (24.3%) (HUF 10 377 million instead of HUF 8 352). Broken down, the sales of premium products increased by 20.4% and of quality products by 37.2%. The amendment of the Act on Public Health Product Tax (NETA), effective as of January 2019, was the main cause of the spike in net sales in the third quarter. In fact, every type of alcoholic drinks has been taxed and the tax categories have been raised by 20%. As a consequence, in December 2018 as much pálinka and bitter liqueurs were sold as in about four average months at other times. Additional smaller factors in the expansion of the net domestic sales were an overall rise in the consumption of alcoholic drinks and that the market responded favourably to the introduction of new products (Unicum Riserva and Kalumba).

The net sales revenue of traded products had a year-on-year increase of 5.8%. Broken down, the revenue of the Diageo portfolio went up by 5.1%, and the revenue of the other traded products grew by 7.6%.

The favourable sales figures were a consequence of the increase in the volume sold and a rise in average sales prices.

Market research data for the April–December period in the off-trade indicate that the Hungarian market of spirits had a year-on-year increase in volume by 3.5% and a year-on-year increase in value by 7.4%. In terms of value, consumption rose in every segment: premium by 6.2%, quality by 8.7% and non-branded by 7.8%.

Export earnings were HUF 1 238 million – a year-on-year increase of 3%. Unicum Riserva accounted for a considerable part of the increase in earnings. Export of pálinkas increased above the average growth rate. The export revenue of Unicum levelled off (+0.7%).

The material cost of goods sold increased by HUF 1 433 million (15.3%). As that figure is lower than the growth of net sales, which was 18.2%, the gross margin ratio has a year-on-year increase of 1.1 percentage point (59.2% instead of 58.1%). A favourable change in the product mix is the main factor behind that change (the sales of own-produced goods - which have higher margin - increased faster than that of traded products).

Employee benefit expense increased by HUF 197 million (9.5%). At the beginning of the business year the Company granted a wage and salary increase of 8%. The effects were dampened by the fact that the social contribution tax was reduced by 2.5 percentage points. Furthermore, the employee benefit expense increased by about 2.5% because a higher provision has been built to cover long-term incentives (bonus for long-serving staff members, pensions, management stock option plan).

Depreciation charge went up by HUF 31 million (8.6%). That was the consequence of major technological projects of the previous year (see the Management Report of the fourth quarter of the 2017/18 business year).

The other operating expenses increased by HUF 365 million (16.4%). It was mainly due to the higher marketing expenses. The Fütyülős brand has been advertised by a new television commercial. The introduction of Kalumba in the on-trade has been supported by tasting promotions, and commercial on television and on the Internet. The marketing costs of Unicum have also gone up within Hungary and abroad. In Italy Unicum has been supported by a new television commercial.

The other operating income increased by HUF 59 million (10.4%). That was mainly because brand owners of traded products had increased their year-on-year marketing expenditure reimbursement (+HUF 54 million). In the period under review the exchange rate gain was HUF 5 million vis-à-vis an exchange-rate loss of HUF 22 million last year (it is posted in the line of Other operating expenses).

The Company’s profit after taxation is HUF 3 340 million – a year-on-year increase of 32.8% (previous: HUF 2 516 million). As a consequence of the massive pre-emptive purchase in December 2018 and the consumer shock forecast for January 2019 in the wake of the massive retail price increase, the fourth quarter of the 2018/2019 business year is expected to produce an all-time low result. That said, for the entire business year we predict a year-on-year increase of about 10% in the profit after taxation.

The considerable increase in the accounts receivable and the trade accounts payable (29.5% and 33.7%, respectively) is due to the spike in the December 2018 sales figures.

The increase of nearly HUF 1 billion in cash in banks and on hand (38.5%) is a consequence of the higher profit figure.

2. 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 performance. Domestic consumption of branded spirits has increased in Hungary in recent years and the tendency is expected to continue in the near future. See above (first chapter of this report for concrete market figures).

3. Objectives and Strategy of the Company

The Company’s primary activity is producing and marketing branded spirits. 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 exclusive distributor of the products of Diageo Plc.; and in this business year distributor of Moet-Hennessy. Distribution contract with MHCS and Hennessy will terminate at the end of  February 2019. 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, 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.

4. 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 2017–2018 business year it was 237 and in the corresponding period of the previous business year it was 232).

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 profit and loss statement, nor on shareholders’ equity.

The Company is not exposed to significant commodity market and other price risks either, not to interest risks because the amount of liquid investments on 31 December 2018 was HUF 16 million, and 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 credit risk is low since Zwack Unicum Plc. placed its funds with reliable financial institutions.

Liquidity management of the Company covers the necessary amount 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.

The increase in the above-mentioned public health product tax will have a tangible negative impact on the forthcoming business year. As a consequence of the tax hike of 20%, the shelf price of products that had been subject to NETA tax before is to rise by 6 to 7%. The retail price of products that will become subject to NETA tax for the first time (pálinkas and bitter liqueurs) is to rise by 20% in the premium category and as steeply as 25% in the quality segment. In the past volume shortfalls were nearly as big as the price hikes in the first year. That is why we expect that in the next business year the net sales figure is to decrease by more than 10%.

Note that this Company has major brands in the two product categories that are the most heavily affected. Considering the Company’s sales mix, those very brands include top profit-generating products.  In addition packaging materials (bottles, bottle caps, cartons and labels) will have higher prices in the world market. In order to compensate increased costs we plan to reduce expenses in marketing and costs of operation. All in all, we forecast for the forthcoming business year decrease of over 40% in profit after taxation.

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 UK. Zwack export activities to the UK are immaterial 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:

  • There was no change in the ownership structure of the Company.
  • During the first three quarters of the 2018–2019 business year there was no change in the organization of the Company.
  • The Company does not possess shares of its own, just as before.

5 February 2019

       On behalf of the Board of Directors of the

                                                                 Zwack Unicum Plc.,

                                            Sándor Zwack             Frank Odzuck

                                            Chairman         Chief Executive Officer

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