Half Year 2016 Stock Spirits Group PLC Earnings Presentation August 10, 2016

Transcription

1 Half Year 2016 Stock Spirits Group PLC Earnings Presentation August 10, 2016 C: David Maloney; Stock Spirits Group; Chairman C: Miroslaw Stachowicz; Stock Spirits Group; CEO C: Lesley Jackson; Stock Spirits Group; CFO P: Wyn Ellis; Numis; Analyst P: Komal Dhillon; JP Morgan; Analyst Presentation David Maloney: Good morning, everyone. Welcome to Stock Spirits Group Interim results presentation for the six months the 30 June, I'm David Maloney, the Chairman of the Group, and I'm joined to by Miroslaw Stachowicz, our Chief Executive Officer, and Lesley Jackson, our Chief Financial Officer. We have a brief presentation for you, after which we will open the floor for questions. I will cover an overview of the last six months, followed by more detailed commentary from Mirek and Lesley on the Group's performance. We're pleased to report a positive trading performance in the last six months with sales growth of 7% and EBITDA growth in all of our markets. Adjusted EBITDA, EUR17.9 million, which is 65.9% higher than prior year. Now, which in fairness was a weak comparative. The Board's and executive team's primary focus remains on the return of our Polish business to sustainable revenue and profit growth. While early days, I am encouraged by signs of stabilization and our operations performance with positive momentum in both volume and value market share in Q2. This is particularly evident in the largest sector in the vodka market, the traditional trade, which is where most of our current initiatives are targeted. Net sales in Poland are up 15.7% and EBITDA is up 64.8%. Cash generation continues to be strong. Our adjusted cash conversion rate was 88.9% in the half year. In March, the Board committed to return cash to shareholders in the event that we did not execute any material M&A by the end of the year. Given our continuing focus in Poland, we decided to announce a special dividend in June of GBP0.10 per share, the equivalent to EUR Together with the interim dividend announced today of EUR per share and the final dividend for 2015 paid earlier in the year of EUR0.4.55, this means that total dividends paid in the 2016 calendar year will be EUR per share. Our leverage remains lower on the one times at 30 of June. The Board has carefully considered the potential impact of Brexit, and while early days, believes that it will have minimal impact on the business. On the people front, we finally have full management teams in place in all markets, and I'm delighted that Mirek has today been announced as the Group's new CEO. As you know, he has been a non-

2 executive director since November, 2015, and has been interim CEO since April. The Board are confident based on his good work in the last few months that he will deliver the change that the Board and the shareholders expect to see. In March this year, the Board announced the results of its strategy review and highlighted four key areas of focus. Our number one priority was to return the Polish business to sustainable growth. We stressed at the time and subsequently that this was something that we would strive to achieve not in a matter of weeks, but months. Our new managing director arrived in June; after all, however, while I don't wish to steal Mirek's thunder, early signs of our pricing initiatives are encouraging with June showing market share gains, particularly in the traditional trade. The Board also stated as saying to optimize returns on all assets. We've been reviewing the cost across all business areas and also considering the optimum structures for managing the Group. We've identified the number of initiatives which we are implementing and will continue to do this. Today, we announced that our Swiss office would close and we will no longer have the position of Chief Operating Officer. As I said earlier, we do not intend to conduct any material M&A in the near future while we focused on the Polish turnaround. However, we continue to review smaller bolt-on acquisitions, which can generate incremental shareholder value through extending our portfolio offer to our customers. In this vein, we are also working hard to identify distribution partners and we are very pleased to recently announced agreements with Distell and Synergy. Finally, our strong cash generation allows us to generate an income for our shareholders. I talked earlier about specific dividends in 2016, but would also reiterate our guidance that we intend to target ongoing annual dividends of 35% of Group net free cash flow. I'll now hand over to Mirek, who will talk in more detail about the first half of Miroslaw Stachowicz: Thank you, David. It gives me great pleasure to speak to you today as the new Chief Executive Officer. I'm very excited about the future opportunities here at Stock Spirits. I will now walk you through the developments in the Polish market. The actions that we have taken in Poland since the full year announcement in March, and the results that these actions have produced so far. Turning to Slide 8. In the last 12 months, the overall Polish vodka market has been showing consistent growth in volume terms. As you can see, this has been driven as a consequence of reducing prices and loss of value. However, this is now starting to reverse and we see both value and volume trends improving since January, Turning to the next slide, I have shown the movements in the trade channels. The traditional trade channel continues to remain the most important trade channel and its share of the total market has grown this year. This has always been an important trade channel for us, and our initiatives this year have focused up on it.

3 Turning now to Slide 10. Based on the recommendations of the Root and Branch review, we have reduced prices on a number of our core products in order to narrow down the gap between our branch and our competitive branch without damaging our brand equity. On this slide, I have shown how the price gap has narrowed on our core clear mainstream brand, Zolądkowa de Luxe, versus our two key competitor brands. This has taken time for the pricing changes to work through to the consumer, but it is clear that the price gap is narrowing and our pricing strategy is being implemented. Now turning to Slide 11. As David has stated, we now have a permanent management in Poland who will take the business forward. Marek Sypek, who is in the audience today over here, the new MD, has many years' experience in private equity and FMCG. Piotr Dziarski, the new Sales Director, has spent part of his career with Zywiec Heineken in Poland and other drinks companies. Both are key to ensuring the continued success of Poland and have hit the ground running since their appointment in June. They join Brad Holder, who joined the business earlier this year as Financial Director, and who is with us also today. Our relationships with customers are improving and our focus has been the traditional trade, which has grown by 4.5% this year. And now I want to take you through the recap of the Root and Branch review. Now turning to Slide 12. In March we show the key areas of focus coming out of the Root and Branch review we undertook earlier this year. We identified 11 key actions and said some would bear fruit faster than others, and I want to share with you where we have been concentrating in the first half of this year. Some of these actions were prioritized and their implementation is more advanced; all actions will be implemented this year and will cover pretty much the entire scope of our root to market. No turning to more detailed actions undertaken this year on Slide 13. We reduced prices on a number of our core brands to allow our products to be more competitive. I have already shown you we have made good progress on this from my earlier slides. To support the pricing initiatives in Poland, we have reallocated funds from other markets within the Group to support price to our wholesalers. We are working with a number of priority trade customers who are helping us to support our new brand strategy in the traditional trade channel. We have changed the priorities from the sales teams in order to improve our merchandising presence and increase coverage of stores. Now turning to Slide 14. The structure of the sales team is being redesigned to shorten the travel time and allow more time to actually be with our customers. Also, we are recruiting to bring some key competencies, which have been previously outsourced, back in-house. Additionally, we wanted to expand the product portfolio. We have recently announced our agreement with Synergy to distribute their ultra-premium vodka, Beluga, in the market. This product's price positioning will allow us to deliver vodka at all price points; from ultra-premium to economy. We have also released some selected MPD in the year in order to maintain attractiveness of our brands. I will discuss these later. We have also initiated action to eliminate waste with a particular review of spend of external services and consultancies. Additionally, we will be implementing a sales force

4 automation system. The other Root and Branch priorities are being worked on, but we wish to be focused and effective in all we do. These will take longer to implement and deliver results. I look forward to updating you again at the yearend presentation. On the next slide, I have shown the results that our actions have produced in the market share trends. We have lost considerable share both volume and value over the course of the last two years, and this had been reported previously. We have taken action in the first half of this year to address this, and in quarter one, began a series of price reductions on a number of core products with the majority of reductions implemented in May. The price reductions take times to move through the supply chain to reach consumers, so we have only begun to see the results in the last few months. The data presented on this chart is from [Musent] to the end of June, and already reflect a stabilization in our volume and value market share. In particular in June, we have actually managed to show small improvements in share at the expense of our key competitors. We have always stated that we won't chase market share at any cost, and we won't. You can see our value share remains higher than our volume share, unlike our two main competitors. Turning now to Slide 16. I have included this slide with data sourced from CMR data rather than Nielsen. CMR reports data from a population of stores in the traditional trade and provides weekly tracking, rather than monthly, as for Nielsen. This helps us monitor the trends more dynamically. This data supports the trend that we are already seeing from Nielsen and indicates that our share in the traditional trade has grown in the last few months. On the next slide, I have shown how our main brands have performed in the last few months in the traditional trade using the CMR data. All have shown some share growth at the expense of competitor brands. I would like to turn now to the other markets of the Group. Turning now to Slide 19. In our second largest market, the Czech Republic, we have also made some good progress this year. Building up on the increased investment in the herbal bitters category over the last few years from the launch of new flavor variance of the successful Fernet brand and increased spend on advertising, we have continued to record market share growth so far this year. This year we have launched a new variant under our biggest spirit brand in the Czech Republic, Bozkov, to provide consumers with more choice. This has assisted us in growing our value share in the rum category. Overall, we have recorded a small amount of growth in our market share, which at the end of June reached 34% of the total Czech market. Turning to Slide 20. In Slovakia, our focus on Golden Ice and Fernet through the introduction of new variance last year has yielded some share growth in both volume and value of the spirits market. To further expand our portfolio, in June we announced the

5 distribution agreement with Distell in this market to distribute their range of spirit brands. This adds strength and depth to the portfolio, particularly in the whisky category. Turning now to Italy. Italy remains a challenging market. In the last few years, our branded performance has suffered from increased raw material prices compounded by a number of excise butane increases. We have a large presence in this category; we are being particularly affected. Last year we initiated a number of changes to our pricing and promotional strategy, and I'm very pleased that this has now started to yield results and we have seen some growth in our share in this category. Whilst we moved forward in the branded category, we are now seeing significant decline in the flavored vodka category. We hold a 60.2% of this category, so this is very important for us. We have already initiated a number of actions to address this decline and we will monitor progress closely. Similarly to Slovakia, in June we announced the distribution agreement with Distell in Italy. I just want to touch on our distribution brands strategy on the next slide. Distribution to third-party brands assists stock in complementing our own product portfolio and ensuring that we can target critical growth categories such as whisky in each market in which we operate. With the recent announcements to distribute brands from Synergy and Distell, we now have relationships with third-party brand holders in all our wholly-owned key markets. Distribution partners are key relationships to foster, and we will continue to review other opportunities to ensure that all important consumer-driven categories in markets are served by our combined portfolio. Turning now to Slide 23. MPD remains very important to ensure we excite consumers and increase demand for our brands, particularly in the dark market of Poland where advertising is prohibited for spirits. In 2015, we had a significant number of new launches, primarily in the second half of last year. To ensure that we can embed the launches from last year and focus on the new products where we are seeing the greatest potential, we are limiting the number of new product launches this year. Additionally, we will review our range and discontinue underperforming products to ensure we retain focus. In Poland, we will focus in 2016 on Saska and Amundsen Expedition. In Czech, Fernet and Bozkov remain our key brands and we will focus on the new variance we launched last year, and the new Bozkov variant launched this year. A number of launches are planned for the second half of this year. A key milestone has also been reached in the first half of this year, and we are now selling Amundsen Expedition in all of our whollyowned markets. Turning now to Slide 24. This year we have reviewed our organization and corporate structure, implemented cost savings, and are retendering key professional services. We now have fewer people working at our head office in Wooburn Green than we did at the end of last year. We have today announced the closure of our Swiss office. Related to disclosure, we also announced the departure of Ian Croxford, Chief Operating Officer;

6 effective immediately. I would like to thank Ian for the contribution he has made to Stock Spirits over the last nine years. We have also implemented initiatives in our markets, as detailed on this slide, which will generate savings from the start of There is, inevitably, some short-term costs for undertaking these actions. But the longer term savings will deliver real shareholder value, and Lesley will comment on this in her section. Now I will hand over to Lesley Jackson, the Chief Financial Officer. Lesley Jackson: Thank you, Mirek. Good morning, everyone. I will now take you through the half year financial performance. Firstly, we are reporting a significant improvement versus a very weak first half last year. Volumes have grown, and whilst overall revenue has grown, the revenue per case has dropped marginally due to our investments in our core brands in Poland. Cost of goods per case remain broadly the same as last year and, therefore, the pricing changes have only had a marginal impact upon gross margin in the first half. We would expect there to be a more marked impact on gross margin in the second half of the year. To reduce the impacts of the price reductions on EBITDA margin, we have reallocated internal budgets on advertising and promotional spend, thereby reducing selling expenses. This reduction has not come at the expense of supporting our brands, and it's possible due to the limited number of new products we have launched as discussed earlier. Decisive actions in the first half have resulted in an improved operating profit and EBITDA margin. Our refinancing, which took place in quarter four last year, has delivered a reduction in net finance costs to the Group, and I will cover this in more detail later. Earnings per share is calculated at EUR0.04 per share against EUR0.00 for last year. Turning to the next slide. Following very weak trading in quarter one last year volumes have increased year-on-year. Net revenue per case has reduced by 1.5%, reflecting the investment we have made in our core brands in Poland. Moving on to Slide 28. Net sales revenue has grown due to growth in volumes as we have overcome the trading issues in quarter one of 2015, whilst reducing price in order to narrow the gap between some of our products and our competitor products. As the data has demonstrated, this investment is now starting to deliver some signs of market share stabilization. Given the time delay in the supply chain for the price reductions to reach the consumer on shelf, this investment should yield more in the second half of Improved trading, the reduction in selling expenses, together with tight control over overheads, has resulted in improved EBITDA of EUR15.1 million for Poland at half year, and a healthy margin for 24.8%.

7 On the next slide, I have shown the performance of our Czech business. Whilst revenue has been pretty flat, we have recorded market share gains, as we saw earlier. With more limited launches of new products in the first half versus last year, we have been able to reallocate marketing investment from Czech to support the pricing initiatives in Poland without damaging the support of our brands. The Czech market has delivered EBITDA improvement and margin growth. Turning now to Slide 30. As Mirek has already said, the Italian market remains challenging. We have started to make progress on our portfolio brandy products and have implemented some actions to address significant decline in flavored vodka, and we'll monitor the position. In spite of these challenges, we have recorded an improvement in EBITDA margin and a fairly flat year year-on-year EBITDA performance. On the next slide, our other segments continue to show strong growth with growth in net sales, revenue, EBITDA, and margins. The new products launched last year in Slovakia continue to perform well and have greatly assisted our growth there. The distribution brands in Croatian and Bosnia have assisted growth in our own portfolio, particularly in the premium segment, providing a strong platform for its launch, Amundsen Expedition Vodka. EBITDA in this segment has increased by 71.1% to EUR1.5 million for the half year. On the next slide, I have set out our free cash flow. Stocks cash conversion continues to be a strength and a competitive advantage. Improved trading in Poland and continued focus on working capital has yielded a significant improvement in cash conversion with a conversion of 88.9% in the half year. Moving now onto the slide on net debt. In the first half we have continued to generate strong cash flow. Our capital spend is slightly higher than the same period last year as we have invested in new packaging technology in Poland to support our future MPD program. For the full-year, we expect capital spend to be similar to prior years. Our net debt at the end of the half year is similar to the yearend and our leverage has reduced below one-times. It should be noted that the special dividend was paid out after the half year closing and is not included in this bridge. On the next slide, I have detailed our net finance costs. Our refinancing last year is delivering significant benefit with a reduction in finance cost for the half year of EUR2.8 million, and enhancing earnings per share by a little over EUR0.01 per share. Our new facility has provided us with fully flexible debt, combined with margins which are materially lower. We are therefore able to adjust our debt levels in line with seasonal changes to cash flow and take advantage of lower costs. We have recorded EUR1.5 million of foreign exchange gains in the half year. These have been generated on intercompany loans, which have now been fully settled and will therefore not recur.

8 And now moving to our tax charge for the half year. Our current tax expense has increased due to the increase of EBITDA in the period. We continue to amortize our deferred tax asset, which impacts our operating profit, but not our cash flow. This will continue for a few more years until the asset is fully amortized. Our effective tax rate for the half year has reduced versus last year to 34.2%. Turning now to Slide 36. Mirek has already commented on the actions we have taken across the Group to tighten control of overheads. On this slide, I have provided detail behind the corporate costs we report in the segmental analysis, Note Five, for the half year accounts. Our underlying corporate costs have reduced year-on-year. We have incurred additional costs this year from the recruitment process of a new CEO and nonexecutive directors, additional costs for the AGM process, and the Root and Branch review of the Polish business. These costs have amounted to an additional EUR1 million. After consolidation adjustments and the impacts of foreign exchange, corporate costs for the half year are EUR9.4 million. We have today announced the closure of the Swiss office. Together with other costsaving initiatives, we expect to incur restructuring costs in the region of EUR800,000 to EUR1.3 million in the second half of this year. Currently, we expect these initiatives to later corporate costs savings of EUR1.5 million in On my final slide, foreign exchange has not had a material impact upon our financial profit performance in the half year, even though we have seen some marginal devaluation of the Polish zloty. It has, however, had a more pronounced impact upon the balance sheets. Exchange rate differences relating to the translation from the functional currencies of the Group s foreign subsidiaries into euros are accounted for by entries made directly to the foreign currency translation reserve in the balance sheet. We have recorded an EUR8.1 million movement in the foreign currency translation reserve in the half year accounts. I will now hand back to Mirek to conclude. Miroslaw Stachowicz: Thank you, Lesley. So in conclusion, I just want to recap on the progress in the first half of the year. A positive overall trading performance compared to a weak prior year. We have stabilized the Polish business and implemented a number of actions, which are beginning to yield results. With the new local team in place, we see there is much more to do and are progressing with a turnaround of the Polish business. Cash generation continues to be strong and we retain significant headroom in our financing facilities to support the ongoing needs and future strategy of the business. We have returned capital to shareholders through the payment of the special dividend, and today announced their interim dividend. I believe that we are well-positioned to meet our expectations for the full year and look forward to updating yearend progress in March next year. Thank you.