Analysis of the Report
Total gross sales of the Company were HUF 10 724 million – a year-on-year decrease of 12.3% (-HUF 1 499 million). Net sales (sales revenues excluding excise tax and public health product tax [NETA]) were HUF 5 724 million, a year-on-year decrease of 11.5% (-HUF 743 million).
There was a year-on-year decrease of HUF 615 million in the net domestic sales (‑10.9%). The net sales of own produced goods decreased in the domestic market by HUF 466 million (by 10.7%; it was HUF 3 875 million instead of HUF 4 340 million). Broken down, sales of premium products decreased by 15.1% while those of quality products increased by 6.8%.
The net sales revenue of traded products had a year-on-year decrease of 11.7%. Broken down, the revenue of the Diageo portfolio decreased by 2.8%, while the revenue of the other traded products shrank by 46.2%.
During the second quarter of the business year domestic sales strongly improved. In the first quarter domestic sales had a year-on-year decrease of 24.1% mostly due to COVID–19 pandemic-related government measures to close, for two months, on-trade units (which account for about a half of the Company’s domestic revenues). As in the July–September period there were no such restrictions, sales recovered. In fact, in the second quarter of the business year the Company posted a year-on-year increase of 0.9%. While the two summer months brought tangible increase, in September the second wave of the pandemic caused another major setback.
Market research data for the April–September period indicate that the Hungarian taxed retail of spirits grew in volume by 3.1% and in value by 7.9%. In the same period Zwack’s sales decreased by 12.4%, because the Company’s portfolio was hit with the earlier mentioned extremely high taxation.
Export earnings were HUF 715 million – a year-on-year decrease of 15.1% (-HUF 128 million). While in the first quarter sales showed a year-on-year decrease of 26.8%, the second quarter the decrease was only 4%.
Among the key markets, sales in Italy decreased by a third, but those in Germany showed a 15% year-on-year increase. Our exports to Romania practically stagnated (-6%), but as tourism had shrunk, sales in duty-free shops continued to plunge (-82%).
The material-type expenses decreased by HUF 128 million (-5.6%). As that figure is lower than the decrease in net sales – the latter being -11.5% – the gross margin ratio has a year-on-year decrease of 2.3 percentage points (62.2% instead of 64.5%). The weakening of the Hungarian Forint mainly accounted for the rise in per-unit material cost.
Employee benefits expense decreased by HUF 86 million (-6%). 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. The average pay hike was 6.5%. In lower payment categories the rise was relative higher while in higher ones it was lower. That the employee benefit expense figure showed a year-on-year decrease despite the wage hike was due to several factors. First, the social contribution tax was lowered (HUF-40 million). Second, under the IFRS, the dividends paid after liquidation preference shares have to be posted as a personnel type of cost. In contrast to the previous business year, when a dividend of HUF 1 300 was paid per share, this year the Annual General Meeting resolved that only HUF 300 may be paid by share. That decision reduced employee benefit expenses by HUF 35 million, and the lower dividend figure decreased the Company’s long-term liabilities related to the liquidation preference shares by a further HUF 20 million. In addition, a further HUF 34 million could be saved in other employee benefits expense (for instance, training courses, entertainment allowance and so on).
The other operating expenses showed a year-on-year decrease of HUF 556 million (-29.5%). The cost reduction was due mainly to the reduction of the marketing expense. Many of the marketing events planned for the first six months could not be held (for instance, summer music festivals were cancelled) and, as for other such events (for instance, consumer promotion events in gastronomy), we suspended them for the period of the pandemic, bearing preventive considerations in mind. Having said that, the saving of a sum of HUF 140 million is only temporary for the following reason: in the previous business year the Company’s marketing campaign in Italy took place in August and September but in this business year it will occur in October and November. Thus its costs will be posted in the third quarter.
The other operating income decreased by HUF 69 million (-28.2%). That was because the brand owners of traded products decreased their marketing expenditure reimbursement by HUF 100 million as our marketing expenditure for the products concerned was lower. By contrast, the exchange rate gain showed a year-on-year increase of HUF 28 million.
The operating income was HUF 830 million – a year-on-year decrease of only 2.2%.
During the period under review the Company had to pay HUF 10 million in interest on its loan of HUF 2.5 billion. During the epidemic the loan gave enhanced financial security for the Company. (See our previous Annual Report about details of the loan.)
The income tax expense decreased by 11.6% (HUF 22 million).
All in all, the Company’s profit after taxation was HUF 653 million, roughly the same as that in the first half of the previous business year (-HUF 7 million; -1.1%).
Trade and other receivables showed a year-on-year decrease of HUF 462 million due to September’s slack turnover.
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.
The consumption of premium alcoholic drinks has grown in Hungary over the past few years but the COVID–19 pandemic will most likely upset that that trend for 2020 (in total consumption of retail and gastronomy).
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.
As from 1 September 2019, the Company has been using 100% green electricity. Other sustainability measures are under evaluation – for the implemented sustainability measures, please, visit our sustainability report on our homepage.
(https://zwackunicum.hu/en/cegunk/fenntarthatosag-napjainkban/)
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.
The Hungarian Ministry of Foreign Affairs and Trade (KKM) awarded the Company a non-repayable subvention to increase competitiveness to the tune of HUF 106 million on 9 June 2020. The award follows from the Ministry’s invitation to proposals, which was entitled “Invigorating the Economy amidst the Current COVID-19 Epidemic”. The invitation to proposals was promulgated in Decree 7/2020 (16 April) of the Ministry of Foreign Affairs and Trade.
The Decree provides that the subvention to increase competitiveness must be spent on fixed assets. Our Company is going to use it as a co-financing instrument to purchase a packaging and palletizing machine to be installed in our plant at Dunaharaszti. The subvention covers 50% of that capital investment. The investment project is to be completed during the first quarter of 2021 but by 30 June 2021 at the latest.
- 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
During the first half year the Company’s average statistical headcount was 246 (in first quarter of the previous business year it was 244).
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 decrease in consumption that was seen during the first wave of the pandemic and which can be forecast for the second wave is set to have a major impact on the Company’s profitability in the 2020–2021 business year. The Management predicts a significant year-on-year decrease in profits depending on the size of the second pandemic wave (it might exceed 50-80%).
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 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 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 half of the 2020–2021 business year there was no change in the organization of the Company.
- The Company does not possess shares of its own, just as before.
The full report can be downloaded by clicking the following link:
