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

The Board of Directors of the Zwack Unicum Plc. has approved the Management’s report about the results of the Company in the 2019–2020 business year.

The data have been audited.

1. Analysis of the Report about the Business Year

Total gross sales of the Company were HUF 26 358 million – practically the same as in the previous business year (+HUF 17 million; +0.1%). Net sales (sales revenues excluding excise tax and public health product tax [NETA]) were HUF 13 960 million, a year-on-year decrease of 11.3% (by HUF 1.8 billion).

There was a year-on-year decrease of nearly HUF 2 billion in the net domestic sales (–13.7%). The net sales of own produced goods decreased in the domestic market by HUF 1 792 million (by 16.2%) (HUF 9 303 million instead of HUF 11 094). Broken down, sales of premium products decreased by 15.8% and those of quality products by 17.4%.

The amendment of the Act on Public Health Product Tax (NETA), effective as of 1 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, palinkas and all bitter liqueurs also), and the tax categories were raised by 20%. The Company shifted the massive tax hike into its gross prices but – just as we had predicted – that has radically reduced the volume sold. As a consequence of those two contrasting processes, the gross domestic sales revenue did not change compared to previous year. As proportionally the combined excise tax and Public Health Product Tax (NETA) levied on the smaller volume was higher than a year before (+HUF 1 796 million; +16.9%), the net sales have considerably decreased.

The net sales revenue of traded products had a year-on-year decrease of 5.2%. Broken down, the revenue of the Diageo portfolio went up by 13.3%, while the revenue of the other traded products decreased by 48.5%. That the Zwack Unicum Plc. has not been the official distributor of the Moët-Hennessy products in Hungary since 1 March 2019 explains the latter decrease. If we correct that factor, the sales revenue of the other traded products increased by 12.3%.

The last quarter of the business year (January–March 2020) saw an over 50% year-on-year sales growth. As the pre-emptive purchase of our products as related to changes in the NETA tax occurred in December 2018, sales in January–March 2019 were very low. By contrast, the sales figure of the last quarter of this business year was, more or less, ordinary. There was another factor that pushed up the sales figure of the last quarter. Because of the COVID pandemic, the logistic systems of the major retail chains became overwhelmed, so their ordering habits substantially changed. Some of our customers bought several times more than the usual amount in the final days of March. That improved the sales figure of March, yet it decreased the turnover of April 2020. 

Market research data for the April 2019–March 2020 period in off-trade indicate that the Hungarian taxed spirits markets had a year-on-year increase in volume by 2.1% and in value by 11.9%.

Export earnings were HUF 1 679 million – a year-on-year increase of 11.8% (+HUF 178 million). The brunt of increase was derived from sales in the Company’s two major export markets: Italy and Germany. In both cases sales went up about 40%. However, revenues from the “duty-free” sector decreased by nearly 20% (the NETA tax has also affected sales in Budapest’s international airport).

The material-type expenses decreased by HUF 436 million (–7.6%). As that figure is lower than the decrease of net sales – the latter being –11.3% – the gross margin ratio has a year-on-year decrease of 1.5 percentage point (62.1% instead of 63.6%). An unfavourable shift in the product mix is the main factor behind that change (the sale of own-produced high-margin goods decreased faster than those of traded products).

Employee benefit expense decreased by HUF 79 million (2.6%). Bearing changes in the labour market in mind, at the beginning of the business year, the Company granted a wage and salary increase of between 5 and 10%, differentiating it for the various payment levels. In lower payment categories the hike was higher while in higher ones it was lower. Employee benefit expense figure showed a year-on-year decrease despite the wage hikes was due to several factors: the social contribution tax was lowered as of July 2019; the year-on-year obligation to pay the bonus for long service and the retirement bonus decreased and, during the previous business year, several one-off expense items were posted.

The depreciation charge showed a year-on-year decrease of HUF 87 million (15.4%). It has been established practice for the Company to monitor the expected useful life of its most important assets in each business year. In agreement with our auditors, in this business year we reviewed a bigger than usual set of assets, and for some of them we defined a longer expected useful life than that indicated in our books before. That is the main cause of the decrease in the depreciation charge. Moreover, in the previous business year we posted HUF 22 million of extraordinary depreciation as related to assets that we do not use anymore. 

The other operating expenses decreased by HUF 224 million (5.9%). The decrease was entirely due to the decision that the Company reduced marketing expenditure by nearly HUF 300 million (about 12%).

The other operating income increased by HUF 43 million (10.3%). That was mainly because brand owners of traded products had increased their year-on-year marketing expenditure reimbursement. The exchange rate gain also increased by HUF 11 million. 

The profit from operation was HUF 2 169 million – a year-on-year decrease of 29.6%.

The taxes levied on the operating income increased by 6.1% (that is to say, by HUF 28 million). The corporate income tax – in line with the change of operating income – decreased by HUF 44 million (-27,9%). The local business tax and innovation contribution went down by HUF 39 million (-12,9%) but the self-revision of the local business tax caused an increase in the Company’s expenses by about HUF 98 million. Moreover, deferred tax expense increased by HUF 13 million.

The Company’s profit after taxation was HUF 1 696 million – a year-on-year decrease of 35.3% (previous: HUF 2 623 million). The profit after taxation exceeded the annual plan by over 20%.

The inventories increased by HUF 275 million (+11.5%). Growth in the stock of own-produced goods accounted for two-third of the increase. In the middle of February 2020, when the COVID pandemic situation was becoming serious, the Management of the Company took various measures. A decision was made to considerably increase the stock of the Unicum finished product. That step was meant to forestall the undesirable situation where the unavailability of raw materials could bring the plant to a halt. By the end of March 2020, a considerable part of that quantity had been produced, which in turn strongly increased the closing inventory of finished products. As for the remainder of the increase in inventories: the weakening of the forint pushed up the prices of imported materials.

Trade and other receivables increased by 42.2% – which is in harmony with the above-mentioned considerable increase in sales in the last quarter. 

Trade and other liabilities showed a year-on-year increase of 14.1% (HUF 504 million) due to the higher tax burden (excise tax, the NETA tax and VAT), which in turn followed from the increased turnover at the end of the year. 

Acting in consensus with the main shareholders, the Management of the Company decided to raise credits. By doing so the Company has generated a sufficient financial position even for the contingency that the COVID epidemic might last for a long period. Our on-trade sales, which account for a half of the Company’s revenues, had practically discontinued by the end of March. That was because the dominant majority of gastronomic units suspended operation for an indefinite period after the opening hours had been officially shortened to flatten the curve of new cases of COVID-19. If those restrictive measures stay in force for several more months, the Company might have to use those credits.   

Thus decision was made to raise credit in the value of twice HUF 1.25 billion. The first credit was drawn at the end of March, the second one at the beginning of April. It is a priority for Zwack Unicum Plc. to be able to stay solvent towards its suppliers and employees and fulfil its tax-paying obligations also during the COVID pandemic. Said credits will assure for the Company’s operation the required financial security practically for the whole of the 2020–2021 business year. The costs of the credits are by far lower than the damage that any harm to the Company’s goodwill could cause.  

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 premium spirits has increased in Hungary in recent years, but in the near future – as caused by the COVID pandemic – it is expected drastically to fall.

1. Objectives and Strategy of the Company

The Company’s primary activity is producing and selling branded premium and quality alcoholic drinks. In Hungary the principal aim of Zwack Unicum Plc. is to maintain its market leading role in spirits. Furthermore, we aim to strengthen the export markets.

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 and Kalinka), 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. Our core export markets are Italy, Germany and Romania.

In the frame of the sustainability strategy laid down in the respective, published report, as from 1 September 2019, the Company has been using 100% green electricity. Other measures are under evaluation.

1. 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. That capital project is to be completed during the 2020–2021 business year, 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

As of 31 March 2020, the Company’s headcount stood at 238 (at the end of the 2018–2019 business year it was 237).

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 predicted fall in consumption (which is referred to at item no. 2 above) can have a significant influence on the Company’s profitability during the 2020–2021 business year. The restrictive measures related to the COVID pandemic – whose duration cannot be seen in advance – might, in the worst-case scenario, endanger a dominant part of the planned annual profit.    

Important risk factor affecting our Company is the possible 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. Having said that, if the exchange rate changes during the business year, that can have a major impact on the Company’s comprehensive income and the Shareholders’ equity.   

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 significant interest risks because the Company also has loans whose interest is linked to the BUBOR. The book value of the loans is, by the order of magnitude, the same as their market value.

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 95% 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 based on the expected cash flow.

This 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 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.

20 May 2020

On behalf of the Board of Directors of the

Zwack Unicum Plc.,

Financial Statements

PK3. Statement of financial position (according to IFRS)

data in HUF million

 PK4. Statement of comprehensive income (according to IFRS)

data in HUF million

 PK4/2. Statement of comprehensive income, IV. quarter (according to IFRS)

data in HUF million

   

PK5. Cash flow statement (according to IFRS)

data in HUF million

PK6. Statement of changes in equity (according to IFRS)

data in HUF million

Data FYI – Group of Products Report

data in HUF million

  
Data Sheets related to the Financial Statements

PK1. General information on financial data

PK2. Companies included in consolidation

PK7. Off Balance Sheet significant items 1

Data sheets related to shares structure and shareholders

RS1. Ownership structure and shareholders’ shares

Name of shareholders	Total registered capital
Ordinary shares	Beginning of business year (on 1 April)			End of period
	%2	%3	pieces	%2	%3	pieces
Domestic institutional/company	2.35%	2.39%	47 876	1.33%	1.35%	27 117
Foreign institutional/company	75.93%	77.25%	1 545 077	75.75%	77.08%	1 541 531
Domestic private individual	13.13%	13.36%	267 242	14.44%	14.70%	293 938
Foreign private individual	6.79%	6.91%	138 249	6.67%	6.78%	135 661
Employees, top managers	0.08%	0.09%	1 556	0.09%	0.09%	1 753
T O T A L	98.28%	100.00%	2 000 000	98.28%	100.00%	2 000 000
Redeemable liquidation preference shares
	%2	%3	pieces	%2	%3	pieces
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