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 2021–2022 business year.

The data have not been audited.

Analysis of the interim management report

Total gross sales of the Company were HUF 6 345 million – a year-on-year increase of 44.8% (HUF 1 964 million). Net sales (sales revenues excluding excise tax and public health product tax [NETA]) were HUF 3 586 million, a year-on-year increase of 54.6% (HUF 1 267 million).

There was a year-on-year increase of HUF 1 131 million in the net domestic sales (56.0%). The net sales of own produced goods increased in the domestic market by HUF 911 million (by 56.8%) (it was HUF 2 513 million instead of HUF 1 602 million). Broken down, sales of premium products increased by almost 80% while those of quality products increased by 9.2%. That the introduction into the off-trade market of Unicum Barista – the youngest member of the Unicum line of products – went even better than we expected was instrumental in the outstanding performance of the premium category.

The net sales revenue of traded products had a year-on-year increase of nearly 53%. Broken down, the revenue of the Diageo portfolio increased by 46.3%, while the revenue of the other traded products grew by 107.9%. As for the latter category, wines and mineral waters contributed to the growth in an almost equal share.

Due to the Hungarian government’s pandemic-related measures, the Company’s net domestic sales decreased by nearly 25% during the first quarter of the previous business year. On-trade – which accounts for about half of the Company’s gross sales – accounted for the major part of that decrease. As during the current business year the pandemic-related restrictive measures have been steadily eased, on-trade could generate a considerable year-on-year increase, especially during the second part of the quarter. The Company’s off-trade sales – which were not affected seriously by the restrictive measures in Q1 of the previous business year either – also showed a marked year-on-year increase thanks to our determined efforts to renew our product assortment. The Company’s total domestic sales could even exceed (by 18.4%) the corresponding figure of two business years before, when there was no pandemic yet.

Market research data about the retail turnover for the April–June period indicate that the Hungarian taxed retail trade of spirits grew by 14.8% in volume and by 21.4% in value. In the same period the sales of the Zwack Unicum Plc. increased by 56% thanks to the combined effects of introducing Unicum Barista into the off-trade and the nationwide recovery of on-trade units.

Export earnings were HUF 438 million – a year-on-year increase of 45.2% (HUF 136 million).

As far as the key export destinations were concerned, sales to Italy decreased by 7%, however those to Germany showed a considerable year-on-year increase (+39%) and, at variance with the previous business year, those to Romania also soared. Sales in duty-free shops continued to fall short of the pre-pandemic period. But – as tourism showed early signs of a revival – sales were higher than a year before.

The material-type expenses increased by HUF 310 million (35.3%). As that figure is lower than the increase in net sales – the latter being 54.6% – the gross margin ratio has a year-on-year increase of 4.8 percentage points (66.9% instead of 62.1%). The decrease in the per-unit material cost was due to the following factors: a favourable change in the setup of products (the sale of own produced high-margin goods grew steeper than that of the traded products) and the Hungarian forint strengthened.

Employee benefits expense increased by HUF 52 million (7.4%). At the beginning of the business year, the Company granted an average wage and salary increase of 4%. The Annual General Meeting of 30 June 2021 resolved that a dividend of HUF 700 should be paid as compared to HUF 300 a year before. Under the IFRS, the dividends paid after liquidation preference shares have to be posted as employee benefits expense. Consequently, the higher dividend payment raised the personnel type of cost by HUF 14 million. In additional, as our plants upped production to satisfy increased consumer demand, wage supplements had to be paid, which in turned increased costs.

The depreciation showed a year-on-year increase of HUF 21 million (18.3%). Broken down, the depreciation figure for property, plant and equipment went up by HUF 14 million (12.5%). The depreciation charge of the packaging and palletizing machine installed in our plant at Dunaharaszti at the beginning of the business year accounted for the major part of it. Another factor that increased costs was that the Company now categorizes pallets in its books as “tangible assets of minor value” and posts for them immediate depreciation as opposed to three-year deprecation method applied until a year ago.

The other operating expenses showed a year-on-year increase of HUF 304 million (46.8%). A marked rise in marketing expenditure accounted for the bulk of the rise. Unlike during the previous business year, many of the domestic marketing events could be held at the end of the third wave of the pandemic. The export marketing expenses also went up steeply (by HUF 110 million) as our media campaign scheduled for autumn 2020 in Italy was transferred to the UEFA Euro 2020 football championship. Other areas where there was higher year-on-year spending were maintenance and transport (the latter caused by increase in volumes to be transported).

The other operating income increased by HUF 49 million (94.2%). Our revenues from marketing expenditure reimbursement shot up (owners of brands that we trade upped their payments) but the exchange rate gain showed a year-on-year decrease.

The operating income was HUF 651 million, which exceeded that a year before by an impressive HUF 629 million.

During the period under review the Company gained a net direct income of HUF 45 million. In April 2021 the Company sold Morello Kft.– its investment in associate. The income was higher than the book value of that entity. In March 2021, at the end of the previous business year, the Company repaid half of the loan of HUF 2.5 billion it had raised earlier in that business year to cushion its operation. The Company repaid the other half of the loan in April 2021, at the opening of the present business year. Then owners of the Company decided to raise another loan of HUF 1.5 billion to ensure a stable financial standing for the Company in a volatile market environment. The balance of the interest payable on that loan and the interests due to the Company on its fixed bank deposits is close to zero.

The Company’s income tax expense increased by HUF 78 million. While in Q1 of the previous business year the Company did not have to pay corporate tax because that quarter was loss-making, in this quarter that tax payable is HUF 55 million. The remaining part of tax increase is accounted by growth in both the local business tax and innovation contribution payable on gross margin.

All in all, the Company’s profit after taxation was HUF 571 million. That shows a considerable year-on-year increase of HUF 603 million, and it also exceeds our plan target.

Trade and other receivables went up by HUF 300 million (10.5%) due entirely to the increase in sales.

Accounts payable went up by HUF 1 833 million (42.9%). That was partly due to our said dividend payment obligation rising by HUF 800 million. Also, the higher sales volumes pushed up accounts payable and the Company’s tax burden.

Apart from the changes described above, there were no other major new developments in the balance sheet.

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 had grown in Hungary in the past few years, but that tendency was drastically broken by the pandemic in 2020. For over half a year during the 2020-2021 business year in Hungary the on-trade sector was under lockdown, which sharply reduced consumption. But in the foreseeable future our Company expects consumption of alcoholic drinks to bounce back in Hungary.

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 constantly under evaluation and under execution – 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

1.  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.

The Company started ambitiously revamping its bottling technology in its Dunaharaszti plant in 2015. Old machines in two bottling lines have been replaced by new ones. The scheme was completed during the 2020/21 business year. In forthcoming years we plan to invest in fixed assets nearly as much as the sum of the annual depreciation.

• 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.

2. Human Resources

The Company’s average statistical headcount figure in Q1 was 241 (239 a year before).

The health of our employees is a priority for us, especially during a pandemic. Thanks to several measures (face masks, gloves, regular tests, granting the opportunity to work from home and so on), it can be safely declared that the Company has handled well even the third wave of the pandemic. Some of the health-related measures are partly kept in force so as to minimize the effects potential further waves of the pandemic.

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.

3. Risk factors

We hope that the toughest period of the pandemic is behind us. However, the pandemic might have numerous longer-term consequences (further waves of the pandemic, additional temporary lockdowns; loss of clients in the on-trade; consumer cautiousness amid volatility; rising unemployment; relative weakening of purchasing power; faster shrinking population) that can reduce both the domestic demand for spirits and the Company’s prospects for growth.

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 prices of raw materials and packaging materials have steeply risen in the wake of the pandemic – which poses certain risks for the Company in the goods market. Those risks can affect as much as 3% of the value of the raw materials and packaging materials that we regularly purchase.

The Company is not exposed to significant interest risks because the interests of its loans are tied to BUBOR. The book value of our loans is more or less 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 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 Report gives a reliable picture also of the Zwack Unicum Plc.’s situation, development and performance.

Additional information:

• On 30 June 2021, acting in compliance with relevant legislation, the Board of Directors of the Company met in session acting with the authority of the General Meeting. The resolutions made there were made public on the same day, and they can be read on the Company’s website.
• There was no change in the ownership structure of the Company.
• During the first quarter of the 2021–2022 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 Q1 report can be accessed by clicking the following link: Zwack Q1 Interim Report