Interim Results 2020
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Stock Spirits Group PLC
Results for the six months ended 31 March 2020
Excise increases were successfully managed, delivering another period of strong financial and operational progress
Current trading resilient, with minimal impact from the COVID-19 pandemic to date
13 May 2020: Stock Spirits Group PLC (“Stock Spirits”, the “Group”, or the “Company”), a leading owner and producer of premium branded spirits and liqueurs in Europe, announces its results for the six months ended 31 March 2020.
Financial and Operational Highlights
|All values in € millions
unless otherwise stated
|Reported 6 months to
|Underlying 6 months to
March 2020 excluding 2019 acquisitions
|Reported 6 months to March 2019 restated for IFRS16
||% Underlying Growth
|Volume (millions 9 litre cases)
|Revenue growth at constant currency1
|Adjusted EBITDA growth at constant currency
|Operating profit before exceptional items
|Profit for the period
|Earnings per share - basic (€ cents per share)
|Adjusted EPS - basic3 (€ cents per share)
All comparative figures for the 6 months to March 2019 have been restated to align with the new IFRS16 requirements, which were adopted by the Group on 1 October 2019.
- Successfully managed January 2020 excise duty increases in both Poland and Czech Republic (which together represent 83.9% of Group revenue), with both businesses continuing to grow in total spirits volume and value
- Poland revenue up 25.4% and Czech Republic underlying revenue up 9.1% (both at constant currency), in both cases reflecting growth in volume, pricing and mix
1 Constant currency is calculated by converting the prior period results at current period FX rates
2 The Company and its subsidiaries, Stock Spirits Group (the “Group”) uses alternative performance measures as key financial indicators to assess underlying performance of the Group. Details of the basis of calculation for Adjusted EBITDA can be found in note 5 to the Unaudited Interim Condensed Consolidated Financial Statements
3 Adjusted basic EPS excludes the impact from exceptional items
- Decisive response to COVID-19 pandemic: proactive contingency actions focused on people and safety, continuity of production and supply, and support of local communities (e.g. through large-scale manufacturing and donations of hand sanitiser)
- Strong balance sheet with unused bank facilities. Net debt4 of €55.4 million at 31 March 2020 (30 September 2019: €55.4 million), resulting in leverage of 0.71x (30 September 2019 restated for IFRS16: 0.83x)
- Interim dividend of 2.77 € cents per share, an increase of 5.3% (2019 interim: 2.63 € cents per share)
- COVID-19 driven exceptional items: impairment of minority investment in Quintessential Brands Ireland Whiskey Limited with a charge of €14.2 million; net release of provisions for contingent consideration of €1.6 million; and €1.3 million of costs from postponed M&A work
Commenting on the results, Mirek Stachowicz, Chief Executive Officer, said:
“These strong results are a testament to the quality of our brand portfolio, the strength of our customer relationships, and the resilience of our business model. It is also these attributes that have enabled us to successfully manage the excise changes that were implemented earlier in the year in our key markets of Poland and the Czech Republic. The COVID-19 pandemic reached our markets towards the end of the period and, as a result of our long-standing focus on the off-trade, our broad portfolio of local brands, and our strategy of sourcing and manufacturing our products locally, it has had a minimal impact on our operations to date. There remains robust demand for our products, but we are monitoring developments closely and are able to respond quickly if required. Our first priority continues to be the health and well-being of our employees, and I would like to thank them all for their extraordinary resilience, loyalty and hard work during this period.”
In line with government guidance on social distancing, the Company has decided not to proceed with a physical results presentation. Instead, an audio webcast and conference call will be hosted by CEO Miroslaw Stachowicz and CFO Paul Bal at 9:00am (BST) on Wednesday 13 May 2020. Dial-in details are below. Please dial in at least 15 minutes prior in order to ensure a timely start to the briefing.
Audio webcast: https://edge.media-server.com/mmc/p/ij23w69i
||+44 (0) 2071 928338
||0800 279 6619
Please note that questions will only be taken over the conference call and not the audio webcast.
A replay of the audio webcast will be available shortly afterwards on the same link as above.
For further information:
Stock Spirits Group +44 (0) 1628 648 500
Powerscourt +44 (0) 207 250 1446
Rob Greening firstname.lastname@example.org
4 Leverage at 30 September 2019 is net debt including IFRS16 liabilities as at 30 September 2019 divided by the Adjusted EBITDA for full year 2019. Leverage at 31 March 2020 is the net debt including IFRS16 liabilities as at 31 March 2020 divided by the unaudited 12 months Adjusted EBITDA to 31 March 2020
About Stock Spirits Group
Stock Spirits is one of Europe’s leading branded spirits and liqueurs businesses, and offers a portfolio of products that are rooted in local and regional heritage. With businesses in Poland, the Czech Republic, Slovakia, Italy, Croatia and Bosnia & Herzegovina, Stock also exports to more than 50 other countries worldwide. Global sales volumes currently total over 125 million litres per year. Stock has production facilities in Poland, the Czech Republic, Germany and Italy and its core brands include products made to long-established recipes such as Stock 84 brandy, Fernet Stock bitters and Limoncè, as well as more recent creations like Stock Prestige and Żołᶏdkowa de Luxe vodkas. Stock is listed on the main market of the London Stock Exchange. For the year ended 30 September 2019 it delivered total revenue of €312.4 million and operating profit before exceptional items of €53.9 million.
For further information, please visit www.stockspirits.com
This announcement may contain statements which are not based on current or historical fact and which are forward looking in nature. These forward looking statements may reflect knowledge and information available at the date of preparation of this announcement and the Company undertakes no obligation to update these forward looking statements. Such forward looking statements are subject to known and unknown risks and uncertainties facing the Group including, without limitation, those risks described in this announcement, and other unknown future events and circumstances which can cause results and developments to differ materially from those anticipated. Nothing in this announcement should be construed as a profit forecast.
Basis of Preparation
The financial information contained in these interim results does not constitute statutory accounts of Stock Spirits Group PLC within the meaning of Section 434 of the Companies Act 2006. Statutory accounts for Stock Spirits Group PLC for the 12 months ended 30 September 2019 were delivered to the Registrar of Companies. The auditors have reported on the accounts, their report was:(i) unqualified; (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report; and (iii) did not constitute a statement under Section 498(2) or (3) of the Companies Act 2006.
COVID-19 IMPACT AND RESPONSE
To-date, the COVID-19 pandemic has had minimal impact both on our performance in our core markets and on the Group’s overall financial position. However, we are monitoring the situation extremely closely given the uncertainty as to how long the crisis will last. However, we do note that most of our core markets have started to relax their lock-downs in recent days.
Our first priority is the health and well-being of our employees, and we quickly implemented an extensive range of measures to provide them with a working environment that is as safe as possible. These include organising revised shift patterns at our facilities to minimise risks, and taking measures to minimise person-to-person contact. Office-based employees are working from home. We have redeployed staff who usually work in the on-trade to new roles, including supporting offtrade sales activities, online training, assisting on-trade customers navigate government support packages, and digital marketing. We have not laid off or furloughed any employees, and have not sought government assistance of any kind in any market.
We continue to see robust levels of consumer demand for our products in our two core markets of Poland and the Czech Republic (which together represent 83.9% of the Group’s revenue). We are fortunate to have had a long-standing focus on the off-trade in both countries, and any impact from the widespread closure of the on-trade (bars, clubs, restaurants and hotels) has been mitigated by the shift to off-trade channels as our products are enjoyed at home rather than in bars or restaurants. Overall, some 85% of the Group’s revenues come through the off-trade channel. We are also underrepresented in duty-free channels, and so have avoided any material impact there.
Furthermore, our broad portfolio of local brands covering all price segments stands us in good stead, as consumers have tended to prioritise more familiar brands and products that they trust. In terms of production, nearly all of our products that we sell within Poland and Czech Republic are sourced and manufactured locally. There has been no disruption to our supply chain, nor to production at any of our facilities, and no impact on our ability to service demand – even in Italy. We are in the fortunate position of being able to offer real help to governments and businesses in their efforts to limit the spread of the virus. Our facilities in Poland, the Czech Republic and Germany have been manufacturing large quantities of hand sanitiser which has been donated for use by medical personnel, the emergency services, and employees in the food and drink sectors. We are committed to continuing to do everything that we can to help during this hugely challenging period for all our stakeholders. Our balance sheet remains strong, with financing secure to November 2022. We are prudently leveraged, being well inside our financing covenants, and have significant unused bank facilities. We have used our consistently strong cash generation to raise inventory levels, further ensuring availability of our products during these uncertain times.
Interim Management Report
Until the COVID-19 pandemic, the main challenge in the period was managing excise tax increases in our two largest markets of Poland and the Czech Republic. Overall performance in the run-up to the excise increases, effective 1 January, was ahead of our expectations. In the following months it further exceeded our expectations, reflecting continued strong consumer demand for our products.
The fact that we have managed the excise increases successfully, and also traded through the COVID-19 crisis without material interruption in our core markets so far, is clear illustration of the resilience and adaptability of our strategy and business model.
This is reflected in our financial results. Overall, the Group grew volumes by +10.1%, revenue by +20.8% and adjusted EBITDA by +29.4%. Both our Polish and Czech businesses grew revenue and profits, notwithstanding the excise increases. Cash has taken on even greater importance in these testing times, and the Group continued to deliver on this front too. As a result, our financial position remains very strong, enabling the announcement of an increased interim dividend.
In Poland, total spirits volume and value growth continued despite the 10% increase in excise duty. Our Polish business delivered a strong performance. It is the fastest growing major player in vodka by both volume and value, and also achieved the greatest absolute growth in both volume and value. Revenue was up by 25.4% (at constant currency) reflecting the growth in volume, pricing and mix. After the excise increase, pricing developed as we expected. Adjusted EBITDA was up 43.8% (constant currency) with improved margins, notwithstanding higher marketing investment. The anticipated small-formats-tax has not materialised due to opposition in parliament. We are committed to fighting this initiative should it be re-introduced, including challenge at the EU level.
There was also continued growth in total spirits volume and value in the Czech Republic following the 13% increase in excise duty. This remains a highly competitive market due to a combination of the excise increase and competitor price-discounting, particularly in the herbal bitters and whisky sub-categories. Against this backdrop, Stock Spirits consolidated its overall leadership in spirits, partly by leveraging the Bartida business acquired last year, partly by continuing to invest in brand equity. The excise increase allowed some progress in pricing, with the exception of the whisky subcategory. Our rum growth was supported by the premium agency distribution brand, Legendario, coming with Bartida, which itself performed ahead of expectations prior to the closure of the on-trade following the COVID-19 outbreak in March 2020. Underlying revenue was up 9.1% (at constant currency) reflecting growth in volume, pricing and mix. Underlying adjusted EBITDA was up 25.6% (constant currency), with margin improvement.
Market conditions in Italy (which represents 7.8% of the Group’s revenue) had been improving prior to the COVID-19 outbreak, which has had a profound impact in recent months. Under the earlier trends, the total market grew in volume (+3.3%) and value (+4.2%). Stock Spirits still has a relatively small overall share of the total spirits market, with 6.6% value share in the modern off-trade channel on which we focus. Nevertheless we hold leading positions in several sub-categories: clear vodka, vodka-based liqueurs, limoncello, and (following last year’s acquisition of Distillerie Franciacorta) grappa. Decline in several of these sub-categories, coupled with private label competition, impacted the performance. While revenue, assisted by last year’s acquisition, was up 21.0%, underlying EBITDA was down significantly, with margins under pressure. Integration of Distillerie Franciacorta, with its outstanding heritage and brands, progresses as planned. Synergies came from distribution expansion of both portfolios prior to the crisis, and this allowed us to gain Beam-Suntory as a distribution partner. Distribution of Beam products commenced in April 2020, despite the lockdown. Plans remain on track for the construction of a new production facility over the coming years.
Our other markets include Slovakia, Croatia, Bosnia and export activities. Overall revenue and profits in this area were lower, driven mainly by a more challenging environment in Slovakia with aggressive price competition and tougher market regulations.
One of the Group’s strategic aims is to grow through acquisition. Our M&A efforts were interrupted by market disruption resulting from COVID-19, and so this work has been postponed. This resulted in the write-off of €1.3 million invested - disclosed as an exceptional item. Our Quintessential Brands Irish Whiskey Ltd (QBIWL) joint venture doubled volumes over its prior financial year albeit from a small base. However, COVID-19 significantly impacted demand for its relatively less established and higher-priced products. In March, it closed its Visitor Centre in Dublin as lock-down measures hit tourism. The distillery continues to operate, and new-make malt liquid is being laid down. Uncertainty over the speed of recovery in sales triggered an impairment of the investment. This had an impact of €14.2 million disclosed as an exceptional item. Also included in exceptional items is a net release of provisions for contingent consideration of €1.6 million (a release of €1.8 million for QBIWL, net of an increase of €0.2 million for Bartida).
We are today announcing an interim dividend of 2.77 € cents per share, representing an increase of 5.3% versus last year’s interim dividend of 2.63 € cents. Given our robust balance sheet, strong cash generation and resilient performance despite exceptionally challenging circumstances, we are pleased to continue with our progressive dividend policy for shareholders.
Poland delivered a strong performance across all of the key spirits categories and price segments, which is a clear illustration of the underlying momentum in this part of our business.
Revenue has increased on a reported basis by +25.2% to €104.9 million, and on a constant currency basis revenue is up €21.2 million versus €83.7 million H1 2019, growth of +25.4%. Reported adjusted EBITDA in H1 was €28.5 million (H1 2019: €19.8 million). On a constant currency basis adjusted EBITDA has increased by €8.7 million, with an increase in margin from 23.7% to 27.2% as excise increases were passed through to customers and subsequently onto consumers.
In the market, total spirits volume and value growth continued despite January 2020’s increase in excise duty. We also delivered growth in the three biggest spirits categories – i.e. vodka, whisky and brandy. Vodka, the largest spirits category in Poland, continued to perform positively, delivering volume growth (+3.8%) and value growth (+7.3%). This is due to two main drivers: firstly, high growth from the total flavoured segment’s value (+10.2%), which commands higher average selling prices per litre than total clear vodka and is a segment that appeals strongly to young adults and female drinkers; secondly, double-digit growth from total premium vodka (+18.7%) as consumers traded up to higher quality at higher average price points.
Stock Spirits is the fastest growing major player by volume (+8.3%) and value (+11.8%) in the Polish vodka market, achieving the greatest absolute growth in both volume and value and the fastest growth rates. This has increased Stock Spirits’ value share from 28.5% to 29.7%. Our volume and value growth rates are ahead of the category in both the clear and flavoured segments. Our categoryleading growth has been achieved through increased focus on our flavoured range (Żołądkowa, Lubelska and Saska) coupled with the success of our premiumisation initiatives in clear vodka, where Stock Prestige, Amundsen Expedition and Orkisz are all in double digit growth ahead of the premium
Whisky, the second largest and fastest growing spirits category in Poland, achieved volume growth (+15.9%) and value growth (+18.4%). At this stage of the whisky category’s evolution, the majority of growth is being delivered via the discounter channel, where the major multinational whisky players and private label are driving trial and consumption using aggressive pricing to grow penetration rapidly, particularly after the duty increase in January. Jim Beam, Stock Spirits’ leading agency distribution brand in Poland, has been put under pressure by this development combined with the significant tariff increases on U.S. spirits and the excise increase. These have increased Jim Beam average price per litre +6.1% over the last year versus a total whisky category average price per litre increase in the same period of +2.2%. Despite this extremely challenging environment, Stock Spirits continued to grow Jim Beam value by (+7.1%). In brandy, the third largest spirits category in Poland, Stock Spirits grew value on its relaunched Stock 84 packaging and liquid range (+10.3%) well ahead of the category at (+8.8%). On-trade is estimated to be some 10% of the market. Our business is under-represented in this channel, with some 3% of revenue for the market coming from on-trade. Work on a new distillery at our Lublin facility has commenced and is proceeding in line with planned timing and costs.
The environment in the Czech Republic remains highly competitive due to a combination of the impact from the excise increase, as well as competitor price discounting. However, Stock continues to lead the spirits market whilst investing in brand equity growth and margin enhancement for the long term.
Revenue has grown on a reported basis by +20.8% to €54.2 million, and on an underlying constant currency basis revenue is up €4.1 million (H1 2019: €45.2 million), or growth of +9.1%. The Bartida acquisition delivered €4.9 million of additional revenue during the period. Reported EBITDA in H1 was €19.8 million versus €15.4 million H1 2019. On an underlying constant currency basis EBITDA has increased by €3.5 million, at a margin of 38.6%.
There was continued growth in total spirits volume and value in the Czech Republic despite the +13% increase in excise duty in January of this year.
At a total market level, spirits remain in volume (+4.0%) and value (+6.4%) growth, as consumers traded up to higher quality and higher price-point products during the period.
Three of the four biggest spirits categories - rum, vodka and whisky - are in MAT volume and value growth, which more than compensated for a contraction in total demand for herbal bitters.
Over the last year, several multinational competitors have continued to deploy very aggressive pricing activity in the herbal bitters and whisky categories in order to accelerate volume growth. As category leader, Stock Spirits chose to invest and has achieved continued growth in total spirits value (+2.6%), and slight volume growth (+0.8%) driving a decline in overall value share for our Czech market from 34.6% to 33.3%.
In the largest of the Czech spirits categories, rum, Stock grew volume and value well ahead of the category.
Our restructured Božkov portfolio, which now covers a wider range of price segments, drove growth in rum from both our core established products and our premium Božkov Republica Reserva and Božkov Czerny (Black) new product development (“NPD”). Our rum growth was also supported by the addition of premium agency distribution brand, Legendario, from the Bartida acquisition.
In the second largest category vodka, our revised category management and promotional activity drove volume growth ahead of the category, comprehensively addressing the headwinds of last year. In the third and fourth largest categories, whisky and herbal bitters, Stock came under intense pressure from multi-nationals which reduced their prices in their quest for rapid volume growth. In both categories, Stock continued to invest in brand equity building, passing on the excise increase in higher pricing post the excise increase and enhancing margin.
The Fernet Stock range relaunch continued its phased roll out, with new improved premium packaging and flavour innovation, supported by a comprehensive consumer communications campaign. The full benefits of the relaunch will take time to materialise as they did on our earlier successful restructuring of the Božkov portfolio, but early indications are positive.
On-trade is estimated to be some 32% of the market. Our participation in this channel has developed especially with the acquisition of Bartida, with some 30% of revenue for the market now coming from the on-trade.
Italy accounts for 7.8% of the Group's revenue. Underlying revenue was down by -6.2%, with the Distillerie Franciacorta (DF) delivering an additional €3.3 million in revenue to get to a reported €14.8 million (H1 2019: €12.2 million). Underlying adjusted EBITDA in H1 was €0.5 million (H1 2019: €1.3
million) and DF was €0.3 million.
Whilst Stock Spirits has a relatively small overall share of total spirits, with 6.6% value share in the modern off-trade channel on which we focus, we hold leading positions in several key categories.
These include number one brands in the clear vodka, vodka-based liqueurs and limoncello categories, and the number two brand in brandy. In addition, following the acquisition of Distillerie Franciacorta, Stock is number one in off-trade grappa.
Trading conditions had improved slightly until the COVID-19 pandemic impacted the country, with lower levels of unemployment and slowing inflation positively impacting consumer consumption over the last year. As a result of these trends, the total market grew in volume (+3.3%) and value grew (+4.2%).
Against this backdrop, Stock Spirits’ total volume share in the modern trade channel, whilst larger than before the Franciacorta acquisition, was slightly down to (6.8%), with value share slightly down to (6.6%).
Following the increased investment in Keglevich last year, Stock Spirits grew overall share in clear and flavoured vodka. In addition, it gained share in limoncello and in brandy post the award winning Stock 84 range relaunch. However, as a result of the softening market and tactical execution issues at Christmas, there were losses in the grappa category.
The integration of the Distillerie Franciacorta acquisition, with its outstanding heritage and brands, is progressing as planned. Sales force synergies in both the on and off-trade have supported distribution expansion of both portfolios prior to the crisis. Plans still remain on track for the construction of a new production facility to expand the existing site over the coming years.
Italy has a significant on-trade channel, estimated to be some 53% of the market. Our business is under-represented in this channel, with some 40% of revenue coming from on-trade.
Other markets includes Slovakia; and Bosnia, Croatia and other export activities together known as International. Revenue was €15.8 million (H1 2019: €16.1 million) and adjusted EBITDA was €2.0 million (H1 2019: €3.0 million).
In Slovakia, total spirits market volume declined (-2.0%) whilst value was flat (-0.1%). Stock Spirits continues to premiumise its range to grow value in the highly competitive Slovakian market and has maintained value share of total spirits (12.1%) this year versus last year (12.1%).
Brand building investment on the Amundsen vodka range drove value growth (+19.0%), off-setting declines for Stock in the fruit spirits category.
Stock Spirits maintained volume leadership in herbal bitters, despite aggressive price promotional activity by major competitors. The relaunch of the Fernet Stock range, launched in Slovakia in tandem with the Czech Republic, aimed to rejuvenate the brand equity, enhance brand perceptions and profitability.
NPD also drove premiumisation. Božkov Republica was rolled out, helping to grow Stock’s share of rum from (7.6%) to (12.0%), whilst our new player in the Borovička (Juniper) category, the premium Golden Ladova (Ice) brand, helped drive a (+146.2%) value growth for Stock in a declining category.
The success of these NPDs off-set declines in our agency brand whisky business with Beam Suntory where, as in the Czech Republic, Stock Spirits came under intense pressure from the combination of aggressive competitor price discounting and U.S. tariff imposition. However, we took the decision to work with Beam Suntory to build investment in brand equity and margin enhancement for the long term, rather than joining a “race to the bottom”.
These initiatives contributed to stable overall volume and value share for Stock Slovenska, maintaining our position as the second biggest spirits company in the off-trade. In April, we announced that the management team of our Slovakian business would be combined with our Czech operations to better leverage the combined scale of the broadly similar brand portfolios in both countries.
In Croatia we have had pleasing results from Stock 84 brandy, post its relaunch, reinforcing our market leading position of imported brandy and growing value share from 11.3% to 13.1%.
All distribution brands have been performing well, including the Beam brands, Beluga, The Dubliner Irish whiskey and the more recent addition of the Fentimans tonics range.
Our new distributor in Germany has delivered tangible results by gaining increased listings in the retail segment for our Polish brands. A new brand ambassador for our Italian portfolio has been appointed in Germany to help drive similar growth on that element of our portfolio. The new distributor for the UK market appointed in January 2019 has driven significant increases for our Polish brands in the UK, notably on Lubelska and Stock Prestige.
Sources for all market data as referenced above: All data quoted is MAT to end March 2020, from Nielsen for Poland, Czech Republic, Croatia and from IRI and IWSR for Italy. Data for Slovakia is MAT to the end of February 2020.
Following implementation of IFRS 16 ‘Leases’ from 1 October 2019, all comparatives have been restated to comply with the new accounting standard to report on a like-for-like basis. Full details of the changes are outlined in note 25 of the unaudited interim condensed consolidated financial statements. One consequence of this is improvement in EBITDA and EBITDA margin, as certain operating costs associated with leases are now considered financing costs.
Also, in the second half of the last financial year, two acquisitions were completed - Distillerie Franciacorta in Italy, and Bartida in the Czech Republic. For key metrics, when comparing our half year results to the prior period, we also report underlying growth rates that exclude the impact of these acquisitions in the current period, again to provide a like-for-like comparison.
Volumes for the period were up 8.3% on an underlying basis, primarily as a result of continued strong performance in Poland and Czech. On a reported basis volumes rose 10.1%.
Reported revenue was up +20.8% to €189.6 million (H1 2019: €156.9 million). Underlying revenue at constant currency increased +15.0% driven by the increase in volume (+8.3%) and pricing (+5.9%), where both Poland and Czech successfully managed the January 2020 excise increases. The excise increase was fully passed on in Poland, with a small margin. In Czech, the excise increase was passed on where competition considerations allowed. Impact to revenue from foreign currency was minimal (+0.1%), as slight weakening in the Polish Zloty was off-set by the strengthening in the Czech Koruna during the period.
Revenue per litre rose 9.8% to €2.59 (H1 2019: €2.36) mainly reflecting the mix impact of last year’s acquisitions, as well as increased pricing in Poland and Czech.
Cost of goods sold per litre increased +10.7% to €1.39 (H1 2019: €1.25), mainly due to last year’s acquisitions and an increase in third party brand costs. This mix reduced gross profit margin by 40bps.
Selling expenses increased +12.6% from a combination of the acquisitions, and increased investment behind our brands. Overheads increased by 11.8% mainly due to higher people costs, plus the increase from the acquisitions.
Exceptional items include an impairment of investment in our Irish whiskey venture, QBIWL. The impact of COVID-19 on the forecasts for this venture results in a €14.2 million impairment. Another consequence of these lower forecasts is the release in the provision for contingent consideration as most of the metrics for payment are unlikely to be met. The resulting impact is a release of €1.8 million. Partly off-setting this, the potential for payment of contingent consideration for Bartida has increased, which has resulted in a €0.2 million increase in the provision.
A further exceptional item is the write-off of €1.3 million of M&A costs incurred, where work has been postponed as a result of the impact of the COVID-19 pandemic.
Operating profit for the period was €25.0 million, an increase of +66.8% versus H1 2019 (€15.0 million). Adjusted EBITDA also increased by +29.4% to €45.6 million (H1 2019: €35.3 million) with underlying adjusted EBITDA increase at +25.6% to €44.2 million and an underlying EBITDA margin
Net debt (now including IFRS 16 adjustments) remains at €55.4 million (September 2019: €55.4 million). Working capital increased at the period-end due to strong sales in late-March, and the building of “safety buffer” inventory to ensure continued supply to our customers. This increase in working capital temporarily reduced our free cashflow conversion level from 93.5% in H1 2019 to 58.9% in the current period. Conversion rates are expected to recover to traditionally higher levels as conditions stabilise over coming months. Leverage has, however, reduced from 0.83x (as at September 2019) to 0.71x reflecting the significantly increased adjusted EBITDA.
Our financing facility covenants are: net debt/EBITDA 3.5x maximum and interest cover 4.0x minimum. We currently operate, and expect to remain, comfortably within these levels, and retain significant unused bank facilities.
Net finance costs declined slightly to €2.2 million (H1 2019 €2.3 million) as the impact of increased facility-drawings to fund last year’s acquisitions was off-set by a reduction in interest rates.
As set out in the principal risks and uncertainties and in note 9 of the interim condensed consolidated financial statements, we continued with the appeal process against the €4.5 million assessment issued by the Polish tax authorities in respect of our 2013 Corporate Income Tax return and historical tax positions. In February 2020 the administrative court of first instance upheld the assessment, and we are currently preparing to lodge a final appeal, to the Supreme Administrative Court. In respect of intellectual property restructuring, representing €3.7 million of the total assessment, our view remains unchanged and, on the basis of all the available evidence and professional opinions, we consider that the position adopted by the Group will ultimately prevail. Therefore, we continue to recognise a receivable against the assessed taxes which, in accordance with the local requirements, have been paid in full to the tax authorities to facilitate the appeal. The remaining €0.8 million remains fully provided for.
Adjusted basic earnings per share were reported as 14.38 € cents for the period, growth of +41.1% versus an adjusted value in H1 2019 of 10.19 € cents per share.
The Board of Directors has approved an interim dividend payment of 2.77 € cents per share, an increase of 5.3% on the prior year interim dividend. The dividend will be paid on 19 June 2020, with a record date of 29 May 2020 (shareholders on the register at the close of business on 29 May 2020). The Euro:Sterling exchange rate will be fixed on the record date.
Given the global nature of the COVID-19 pandemic and the uncertainty around the severity and duration of its impact across our markets, we are not in a position to offer guidance on Group revenue and profitability for the year ending 30 September 2020.
We believe that spirits are – and will remain – a staple product in our key markets, so we expect consumer demand to remain robust. Under the impact of the pandemic, consumer demand has remained resilient in the off-trade channel where we may have also benefited from consumer stock piling.
All aspects of our business continue to be fully operational with the exception of selling into the ontrade channel. Our performance in the second half of the year will, therefore, depend significantly on the speed of recovery of the on-trade channel in our markets. The scope of impact of any possible scenarios here could be limited to the historical 15% share of the on-trade channel in the overall Group revenue.
We have put significant contingency plans in place in order to ensure that we continue to deliver as strong a performance as possible if circumstances change. Our financial position is strong, with relatively low levels of leverage and significant unutilised bank facilities.
Overall, we continue to believe that the resilience demonstrated by our businesses, both during the recent excise increases and through the COVID-19 pandemic to date, means that we are wellpositioned for further success once trading conditions normalise.
After making enquiries, the Directors have a reasonable expectation that the Company and its subsidiaries have adequate resources to continue in operational existence for at least the next twelve months. For this reason, they continue to adopt the going concern basis in preparing the consolidated financial information of the Group.
Principal risks and uncertainties
Clearly the impact of COVID-19 is a major uncertainty facing almost every business. As outlined above, the impact on our trading operations has not been material to date, however, it is almost impossible to predict the future impact, given the uncertain duration of the pandemic and the resulting longer-term macro-economic impact. At this point in time, we are assuming that when the outbreak is contained, and restrictions are lifted, our markets will return largely to normal. However, the overall impact on the economies and consumer spending in our markets and the duration of that impact remains highly uncertain. There may be some longer lasting changes within the trade channels e.g. some bars, restaurants and other outlets may decide not to re-open when the pandemic ends. International travel is likely to continue to be subdued, impacting economies that depend on a high level of tourism such as Italy, even after allowing for a compensating increase in domestic tourism. Online purchasing could become more significant for all categories, including alcohol. There may also be other longer lasting changes in consumer behaviours, but it is not yet clear whether that might entail a reduction in in social gatherings, or an increase. Taking all these uncertain factors into account, we are currently assuming that underlying consumer demand and trends will not be significantly altered post COVID-19 in a way which would materially impact our Group as a whole. Based on that, the Board considers the principal risks and uncertainties for the Group are:
- Economic & political change - Results are affected by overall economic conditions and consumer confidence in key geographic markets in Central and Eastern Europe markets where economic and regulatory uncertainty is considered to be higher than other European countries. Brexit is not considered to be a principal risk or uncertainty for the Group, for the reasons set out on page 19 of the Stock Spirits Group Annual Report 2019.
- Taxes - Increases in taxes, particularly excise duty rates and VAT, could adversely affect thedemand for the Group's products. Tax increases are likely to be considered by many governments to help pay the costs incurred in handling the COVID-19 outbreak. Demand for the Group’s products is particularly sensitive to fluctuations in excise taxes, since excise taxes generally constitute the largest component of the sales price of spirits. The Group may also be exposed to tax liabilities resulting from tax audits. Changes in tax laws and related interpretations and increased enforcement actions and penalties may increase the cost of doing business. In addition, certain tax positions taken by the Group are based on industry practice and external tax advice and/or involve a significant degree of judgement.
- Laws & regulations – The Group is subject to extensive laws and regulations limiting advertising, promotions and access to its products, as well as laws and regulations relating to its operations, such as anti-trust, anti-bribery, data protection, health and safety and environmental laws. These regulations and any changes to them could limit the Group’s business activities or increase costs.
- Marketplace & Competition - The Group operates in highly competitive markets that may result in pressure on prices and loss of market share. This has been particularly evident in Poland historically.
- Strategic transactions - Key objectives of the Group are: (i) the development of new products and variants; (ii) expansion through the acquisition of additional businesses; and (iii) distribution agreements with world-class brand partners. Unsuccessful launches, or failure by the Group to fulfil its expansion plans or integrate completed acquisitions, or to maintain and develop its third party brand relationships could have a material adverse effect on the Group's growth potential and performance.
Further detail on the principal risks and uncertainties affecting the business activities of the Group are set out on pages 14 to 19 in the Stock Spirits Group Annual Report 2019, a copy of which is available on the Company's website at www.stockspirits.com. Subject as stated above regarding COVID-19 uncertainty, in the view of the Board there is no material change in these risks in respect of the remaining six months of the year.
Responsibility statement of the Directors in respect of the half-yearly financial report
We confirm to the best of our knowledge:
The condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU
The interim management report includes a fair review of the information required by:
a) DTR 4.2 7R of the Disclosure Guidance and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and
b) DTR 4.2 8R of the Disclosure Guidance and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so.
Board of Directors
The Board of Directors as at 13 May 2020 is as follows:
David Maloney, Non-Executive Chairman
Mirek Stachowicz, Chief Executive Officer
Paul Bal, Chief Financial Officer
John Nicolson, Senior Independent Non-Executive Director
Kate Allum, Independent Non-Executive Director
Diego Bevilacqua, Independent Non-Executive Director
Tomasz Blawat, Independent Non-Executive Director
Mike Butterworth, Independent Non-Executive Director
For and on behalf of the Board of Directors
Mirek Stachowicz, Chief Executive Officer
David Maloney, Chairman
13 May 2020
Download the full Interim Results statement (PDF 1.30MB)