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Stock Spirits Group PLC
Preliminary results for the year ended 31 December 2016
Good operational progress in a year of significant change
8 March 2017: Stock Spirits Group PLC (“Stock Spirits” or the “Company”), a leading owner and producer of premium branded spirits and liqueurs that are principally sold in Central and Eastern Europe, announces its results for the year ended 31 December 2016.
* Subject to shareholder approval at the AGM on 23 May, the final dividend will be paid on 26 May based on a record date of 5 May 2017.
** Stock Spirits 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, Adjusted EBITDA margin and adjusted free cash flow can be found in Note 5.
“2016 has been a year of significant change for Stock Spirits, and we have emerged from it in a much stronger position than we were in this time last year. Trading has remained challenging in our core Polish market, where there have been several significant changes in the competitive landscape. Against that backdrop, we are pleased to have made tangible progress across a range of strategic initiatives that are aimed at improving the long-term performance of the Group. Furthermore, we are now starting to see signs of stabilisation in our Polish business, as reflected by the market share gains that we achieved in both value and volume terms during the second half of 2016 versus the first half.
We have a strong portfolio of award-winning brands, an exceptional distribution network, well-invested production facilities, and an outstanding and committed team at all levels of the organisation. These factors, as well as our ongoing restructuring activities and cost control measures, leave us well positioned to achieve sustainable long-term growth and as a result we look to the future with confidence.”
Management will be hosting a presentation for analysts at 9.00am today at etc.venue St Paul’s, 200 Aldersgate, St. Paul’s, London, EC1A 4HD. If you would like to attend, please contact Powerscourt on the details below.
A webcast of the presentation will also be available via www.stockspirits.com and a recording made available shortly afterwards.
For further information:
Stock Spirits Group: +44 (0) 1628 648 500
Powerscourt: +44 (0) 207 250 1446
Rob Greening email@example.com
A copy of this preliminary results announcement ("announcement") has been posted on www.stockspirits.com.
Investors can also address any query to firstname.lastname@example.org.
Stock Spirits is one of Central and Eastern Europe’s leading branded spirits and liqueurs businesses, and offers a portfolio of products that are rooted in local and regional heritage. With core operations in Poland, the Czech Republic, Slovakia, Italy, Croatia and Bosnia & Herzegovina, Stock also exports to more than 40 other countries worldwide. Global sales volumes currently total over 100 million litres per year.
Stock has state of the art production facilities in Poland and the Czech Republic, and its core brands include products made to long-established recipes such as Stock 84 brandy, Fernet Stock bitters and Limonce, as well as more recent creations like Stock Prestige and Zoladkowa de Luxe vodkas.
Stock is listed on the main market of the London Stock Exchange. For the year ended 31 December 2016 it delivered total revenue of €261.0m and operating profit of €40.1m.
For further information, please visit www.stockspirits.com
As Chairman of Stock Spirits Group PLC, I am pleased to present our Annual Report and Accounts for the year ended 31 December 2016.
2016 was a year of great change at Stock Spirits, especially at Board and Senior Management level. Whilst our major market of Poland remains a challenging trading environment and highly competitive, management have been focussed on the stabilisation of our performance in this market. While there is much work to do, the initial signs are positive and I am pleased with our financial performance and strong cash flow.
During the year, there were a number of changes to the Board, not least the appointment of a new Chief Executive Officer (CEO) after the retirement of Chris Heath in April 2016. I will discuss the full Board changes in the Governance section later in my statement, but I was personally delighted that the Board approved the appointment of Mirek Stachowicz in August 2016. Mirek had stepped in as Interim CEO, upon Chris’ retirement, from his position as a Non–Executive Director (NED) on the Board.
As I referenced in my statement last year, I initiated a review of Group Strategy, as well as a full ‘root and branch’ review of the Polish market and our business in that country, at the end of 2015. Mirek will provide a detailed update on Poland in his statement, and I have provided an update on the conclusions of the Group Strategic Review below:
During the year, we saw the completion of the recruitment of all senior management positions in local markets, including the important role of Managing Director of our major market, Poland. This means that we now have Managing Directors appointed in all markets in the Group. Our people are key assets of the business and I would like to recognise the commitment of all our employees and thank them for their ongoing contribution and support.
In line with the Corporate Governance Code, the Directors’ remuneration policy will be put to shareholder vote at the forthcoming AGM, and a number of changes have been proposed. Executive Directors’ and Senior Managers’ interests remain fully aligned with shareholders.
Turning now to the Board changes, I would like to personally wish Chris Heath well in his retirement and thank him for his service to the Company. Chris served as Chief Financial Officer (CFO) from 2007 and as CEO from 2009 until his retirement in April 2016. Following a detailed assessment of both internal candidates and external candidates identified by an international search firm, I was delighted that the Board unanimously decided in August that our colleague, Mirek Stachowicz, should be appointed as CEO. Mirek had been working as Interim CEO since April.
There were a number of other Board changes during the year:
I believe that the Group enters the new year with a significantly strengthened and experienced Board and I welcome all my new colleagues as we face our challenges together.
All Board Committee compositions are fully compliant with the Corporate Governance Code. The Board and its Committees have met regularly throughout the year and an independent, external Board evaluation has been undertaken.
During the year, following implementation in Poland at the end of 2015, the review of our internal controls around key business processes was successfully rolled out to the remaining countries across the Group, providing comfort to the Board with regard to the control environment in these markets.
I thank the Executive Directors and NEDs with whom I serve for their support and insight in helping to run the Group as effectively as possible.
Externally, one matter which is front of mind for all businesses based in the UK is the implications of the UK exit from the European Union (Brexit). The Group operates predominantly in Poland and the Czech Republic. The implications of Brexit on the Group, are not considered to be material at this stage. However, we continue to monitor progress on the exit of the UK from the EU and what that might entail for the Group and we will seek to mitigate against these risks as they arise.
Just over a year ago, I said that the Board and I were fully committed to turning around the fortunes of the Group and returning it to sustainable long term growth. With a stronger Board and key local management now in place, I believe we have begun to make progress and are in a position to deliver sustainable levels of growth and profit and to develop in the future. There are still opportunities and risks to manage, particularly in Poland where we are at the beginning of a journey, but I believe with our talented people and our award-winning brands, we are in a position to deliver on this objective.
Having been appointed to the role of CEO for the Group during 2016, I am pleased to be presenting my first CEO statement.
We have, I believe, successfully navigated a challenging year for the Group. The key priorities during the year have been the turnaround of the Polish business and putting the Group back on track to deliver the strategy agreed at the time of the IPO. We have made tangible progress on both of these key priorities.
Since my appointment as Interim CEO in April, I have committed the majority of my attention to the turnaround of our Polish business. Additionally, I implemented a number of initiatives, in order to accelerate change across the entire Group. These included development of people capability, organisation structure review and strengthening of management processes; review of the UK Head Office; detailed review of the Group cost base; revision of the new product development (NPD) processes; product range reduction across all the markets (SKU rationalisation); reduction of waste through operations efficiency; and revenue growth in key profit pools through distribution agreements. All of these projects have yielded positive results during 2016, with further benefits to accrue in 2017.
We have recorded full year volume of 12.3 million cases. We have recorded growth in both volume and net sales revenue. Full year volume of 12.3 million cases is 0.5 million cases, 4.2%, ahead of 2015, whilst net sales revenue has recorded a 1.2% increase to €261.0m (on a constant currency basis).
Adjusted Group EBITDA is €51.5m in 2016. Whilst this is below the result of last year, removing the net impact of one-off items (CEO pay in lieu of notice, CEO recruitment, NED recruitment, additional AGM costs, closure of Swiss office and PSP adjustments) would result in a reported adjusted EBITDA of €53.0m.
The profit for the year is €28.4m, a significant increase versus 2015 of €19.4m.
Our cash flow generation is a key focus area for the business and remains strong. Against our commitment to return 100% of net free cash flow to shareholders for 2016, this will result in dividends totalling €39.2m being paid to shareholders in respect of 2016.
Taking into consideration our small acquisition in the Czech Republic of €5m as described below, our year end net debt was €59.7m, versus €57.2m at the end of 2015.
The Group retains very strong liquidity, significant headroom in our borrowings and a robust balance sheet, providing us with the financial strength to take the business forwards.
To reiterate elements I presented at the half year and the progress we have made in the second half of the year, here is a summary of the actions taken in 2016 against the outputs of the root and branch review:
Work continues to fully implement all of the initiatives from the root and branch review. The actions taken so far have only been in place for part of a year, and I am confident that with the changes in place for a full 12 month period the benefits will be considerable in 2017.
In the Czech Republic, we completed the recruitment of the Senior Management Team (MD, FD and Sales Director) and the team have been in place since the early part of the year. Our Božkov brand is the single largest spirits brand in the Czech Republic commanding 54%1 market share in its category. As a major brand leader, it was facing increased price competition and the entire category risked commoditisation. We took the decision to launch a new variant called Božkov Tradicini, and reposition the old product under the name Božkov Original. This has increased our consumer offering and, in turn, has supported the premiumisation of Božkov Original. Although this has resulted in a decline in overall market share, this has been more than offset by an increase in overall value and profitability of the brand. Also, to capture further share of the rum category, we launched a new white rum variant under the Božkov brand.
The expansion of our Božkov portfolio places the business on a firm footing going into 2017 and we were delighted to receive the accolade of “most trusted alcohol brand” for Božkov in a massive independent consumer survey.
Our financial results for Czech support the actions we have taken with a growth in EBITDA of 6.0% to €19.6m.
Our Italian business has made progress and grown share in both limoncello and brandy2 categories through targeted promotional activity. Although we have also grown our share in the important flavoured vodka category, this is against the backdrop of significant decline in this category2. A review is underway to consider all the opportunities to arrest this decline. We re-tendered our logistics services in Italy and implemented a successful change of provider at the year end, which will deliver cost savings in 2017. The decline in flavoured vodka has impacted the results of this market and we have recorded a reduction in EBITDA during 2016.
The team in Slovakia continue to make good progress and record growth in profit and market share. The business has overseen another successful year for the Golden brand, supported by the new products launched in the last two years. Furthermore, new variants added to the Fernet range during 2015, have continued to grow the brand equity of this leading bitters brand.
Our international markets and export operation has also recorded good profit growth during the year, and continues to benefit from the Beam Distribution contracts in Croatia and Bosnia, which have facilitated the launch of Amundsen Expedition vodka in these markets during 2016.
As set out in the Chairman's statement, we continue our focus on the tenets of the strategic review undertaken in 2015 as shown below.
The strategy for growth that we are pursuing has six key, interlocking aspects:
It is worth emphasising that expansion within Central and Eastern Europe outside our existing geographies remains part of our strategy, but is not a priority at this stage.
In line with this strategy, in October we announced the acquisition of the spirits business comprising Nordic Ice vodka, Prazska vodka and Dynybyl gin from Bohemia Sekt s.r.o. This was our first acquisition since we listed on the London Stock Exchange and is a positive step forward for Stock Spirits. The brands and production, are being integrated into our existing portfolio in the Czech Republic, and strengthen our positions in the vodka and gin categories. The rationale for the acquisition was to gain further access to the growing vodka category in Czech with established brands. All the synergies, generated primarily from production and procurement efficiencies, will be reinvested behind the brands, and therefore the contribution from these brands is not expected to be material in the short term.
Whilst David has mentioned the changes at Board level in his statement, during 2016 we have completed the appointment of the full Senior Management Team in Poland. We now have on board, Marek Sypek as Managing Director, who has a great track record in FMCG and Private Equity and Piotr Dziarski as Sales Director, who has specific alcoholic beverage industry experience in Poland. Both were appointed in June 2016. Earlier in the year saw Bradley Holder appointed as Finance Director, with experience in Poland at both Coke and Pepsi, and later in the year we appointed Jagoda Palider as HR Director, who joined us from TJX Europe in the UK.
With the appointment of new Managing Directors in Czech (Jan Havlis), in early 2016, Italy and International (Michael Kennedy in 2015) we have completed the task to appoint very capable Managing Directors to all markets.
Shortly after taking the role of Interim CEO, I undertook a review of the organisation structure and concluded that the current size of the Group, and immediate priorities, did not warrant the role of COO. The role was therefore made redundant, and Ian Croxford who had undertaken the role for the past nine years, left the Group. I would like to thank Ian Croxford for his service and wish him well for the future.
We have made further changes to the organisation in 2017, to simplify the business, transfer activities from our Head Office to the markets and deliver savings. Logistics and Customer Service are now integrated within local market teams (previously part of Group operations), and we have restructured the commercial operations in Italy and the UK.
Restructuring opportunities to simplify, de-layer the business and empower the key employees will remain my ongoing focus as I see this as a key competitive advantage in the future.
I have made a number of changes that have allowed executives to make more, and faster, decisions in their specific areas of responsibility. In a break from past practices, I ensured that the personal bonus objectives became transparent to all senior team members, shared among them and aligned towards the strategic goals. I radically increased the amount of interaction between the senior team members by changing the way we work. I believe these changes have improved the level of motivation and sense of ownership among the senior team.
One of the key reasons for unsatisfactory performance of the Group since the IPO was the senior management turnover. To ensure that senior management are motivated to deliver against the many challenges we face at a time of significant internal change, the Board has implemented new retention plans and reward mechanisms. These are based on restricted stock awards, in addition to the normal long term remuneration mechanisms, and aim to retain the key senior management and align their interests with shareholders.
Following my appointment, I had conversations with all our major investors in excess of 30 meetings. I would like to take this opportunity to thank our shareholders for committing their valuable time to these sessions. Whilst I took careful note of all the feedback received during these meetings, it is my responsibility to strike the right balance among the diverse views and recommendations, putting them to the best use for the benefit of all the shareholders.
I instigated a thorough review of our Group Head Office, covering all aspects of its size, role, functions, location and tax implications associated with any relocation. The conclusion was that whilst the complete move of the Head Office to Warsaw would result in annual operating cost savings, the return was not compelling, as only half of the savings would produce an attractive return within the next three years. This is due to the existing contractual arrangements, the regulatory environment in the UK and Poland, and the considerable tax risk, further exacerbated by uncertainty around Brexit.
Furthermore, the resulting business disruption and diversion of management focus that would arise from a relocation, given the loss of expertise with the need to recruit the entire Head Office and a large part of the Senior Management Team in Poland, would seriously compromise our ability to deliver our strategy, including the turnaround of the Polish business.
The outcome of the review was presented to the full Board in November and it was unanimously resolved to retain the existing Head Office in the UK, and continue to seek opportunities to deliver cost savings with attractive returns, but without compromising the ability of the Group to deliver its strategy.
I initiated a number of initiatives to review the cost base across the Group.
In August, we announced the closure of our Swiss operation. At the time, we expected the savings from this closure to be €1.5m in a full year and we fully expect this saving to be delivered.
Across all markets there has been a focus on reducing our underlying cost base, with every opportunity taken to action cost savings. From a logistics re-tender in Italy, termination of consultants in Poland and a commercial reorganisation in Czech during the year, the cost base has been placed under intense scrutiny.
We have re-tendered all Group professional services, seeking opportunities to retain access to high quality professional advisors at a lower cost. For corporate tax, employment tax and internal audit we have retained the services of internationally renowned professional advisors with engagement now delivered via their offices in Warsaw, thereby reducing the blended hourly rates on these services going forwards. We have changed our providers for public relations, corporate website and professional advisors to the Remuneration Committee. We have renegotiated our service agreements for corporate law and company secretarial requirements. We also changed the provider for travel services and, coupled with a change to the travel policy for the Board and senior executive management, have already realised savings from this activity. As mentioned earlier, we have implemented further cost saving initiatives in early 2017, as this remains a key focus area.
Working towards our commitment to strengthen our premium portfolio, in July we announced two new distribution partnerships, with the Synergy Group in Poland for the ultra-premium Beluga vodka collection and with Distell International in Italy and Slovakia for a number of their premium brands, including Amarula, Black Bottle and Scottish Leader. This objective was further endorsed later in the year with the extension of the Beam Suntory agreement in Poland, which sees an expanded portfolio of premium spirits including some of the world’s most sought after Japanese whiskies.
We continue working on other distribution opportunities in the market segments and geographies that are of high interest to us strategically.
Given the very high number of new product launches in 2015, and the need to focus upon implementation of the root and branch initiatives in Poland, we slowed down the pipeline of new products being launched in 2016. This allowed us to embed the successful brand launches from 2015, and focus the 2016 new product activity around core brands and premiumisation opportunities. Marketing funds specifically planned for other new product launches were reallocated to provide support for the core brand pricing initiatives in Poland.
NPD was an area where we suffered a setback in the last year, when we had a dispute over the Saska brand's intellectual property rights, due to mistakes made in the product launch in 2015. This prevented us from utilising the full portfolio of our flavoured vodka and vodka-based liqueurs brands including Lubelska, Żołądkowa Gorzka and Saska to deliver their full potential in Q4. Nevertheless, we managed to keep the leadership of the flavoured vodka category and, by early February 2017 the situation with Saska was resolved. With Saska now firmly back on the market, we can now focus upon the development of our flavoured vodka portfolio.
Partly to prevent such mistakes from happening again, we carried out a complete review of the NPD process. The primary objective was to ensure there is a good balance between satisfying changing consumer needs, sales force priorities, as well as internal supply chain and inventory efficiencies. Historically, this balance hasn’t always been delivered. I believe that the process going forwards will produce more targeted innovations and reduce our obsolete inventory provisions, which in the past three years significantly impacted our financial results.
I have implemented a review of the processes for demand planning and inventory management in order to focus on eliminating waste. This included the roll-out of an improved sales and operations planning (S&OP) process across the Group and a comprehensive stock keeping unit (SKU) rationalisation project. As a result of the latter, we have ceased production of a significant number of under-performing SKUs. This initiative is expected to have a negligible effect on our future contribution margin but, importantly will improve supply chain planning and inventory efficiency. Positive results have already been generated, with a reduction in year-end inventory compared to the prior year of €6m, despite growing sales volumes. I expect this review to deliver more benefit in 2017.
2016 saw more focus on IT projects, including the implementation of a Group-wide single network and a strengthening in our cyber security environment, achieving the UK Government Cyber Essentials Scheme certification.
Other IT investments included the automation of our Customs registers and a new warehouse management system in Poland and in Italy, a new integrated electronic data interface (EDI) to our new logistics provider and a sales force customer relationship management (CRM) solution.
For the future, I see IT as an important element within our businesses and we will invest more in this area than historically.
During the year, we completed our investment in production flexibility capability at our plant in Lublin as well as investment in our infrastructure specifically targeting health and safety initiatives. Our manufacturing base is well invested, and I expect that we will only continue to invest in maintenance and health and safety initiatives.
Since taking over as CEO I have pursued an intensive agenda of change. My focus on Poland continues unabated, and will remain so until I am happy that the business is able to deliver sustainable top line and profit growth. The focus in 2017 will continue to be on the turnaround of the Polish business and making sure that the Group delivers on its strategic objectives. To facilitate this, we will remain focused on delivering cost savings, driving profit and cash and developing our people to build a highly motivated team.
I believe the business is in a much stronger position than it was 12 months ago. Whilst I don’t underestimate the size of the task we face, we have already implemented some very difficult decisions and delivered positive results from the actions we have taken, so I am confident in the future of the Group.
My confidence is further reinforced by the fact that the bulk of the work we have completed so far was put in place during the second half of the year, with some of the key initiatives only coming on stream in Q4 2016 and Q1 2017. More importantly, the new management teams in Czech, and especially Poland, are only now emerging from their inevitable team-building processes and will show their full potential in 2017. I look forward to working with them, and the entire team, to meet expectations of the stakeholders of the Stock Spirits Group.
1. Nielsen, total Czech Republic, total off-trade, total spirits, MAT volume December 2016
2. IRI retail sales data, total Italy, total modern trade and discounters, total spirits, MAT volume December 2016
2016 has been a challenging year for the Group with highly competitive trading conditions continuing in Poland, management changes and an array of commercial initiatives and restructuring activities. The financial results show profit for the year of €28.4m and reflect continuing strong cash flow delivery.
Following the root and branch review in Poland, we recognised the need to initiate a number of activities; pricing on core brands was a key activity. At the interim results we stated that we had implemented changes across a number of core brands to bring pricing closer in line with major competitors, and that this had limited impact in the first half but would impact the second half financial performance.
To help offset the negative impact of the pricing changes, and given the significant number of new product launches in 2015, new product activity was reduced in 2016 versus our original plans, with greater focus around core brand activity. Funds that had been planned for some of the 2016 new product launches were reallocated to support the Polish pricing activity.
Following the change of CEO, the Group undertook a major review of its cost base and implemented a number of cost savings, which further helped to offset the pricing impact in Poland. This included the closure of the Swiss office, and the termination of the COO role, in addition to an array of other cost saving initiatives as outlined in the CEO statement.
The business delivered higher volumes in 2016, against the backdrop of a very poor Q1 in 2015, and following the pricing initiatives implemented in Poland in 2016, volumes grew 4.9% in 2016. Net sales revenue of €261.0m has declined by €1.6m versus 2015 in spite of higher volumes sold. This is due to the investment in pricing in Poland, particularly impacting the second half of the year and translation effect of foreign exchange (primarily devaluation of the Polish Złoty) which alone reduced net sales revenue by €4.8m, versus 2015. On a constant currency basis net sales revenue has grown by 1.2%.
In the second half of the year the business undertook a full product range review and took the decision to cease production of our under-performing products. During 2017, the eliminated products will have less than 1% impact on gross margin but will significantly improve forecasting, planning and inventory management. This has contributed to additional inventory provisions at the year end, which have been recorded within cost of goods sold. Further, changes were made to production and planning processes with a greater focus on inventory efficiency. After accounting for the inventory provisions, cost of goods per case was broadly in line with 2015.
Selling costs show a decrease versus 2015 due to the reallocation of funds in respect of new product launches with reinvestment in pricing in Poland, as explained earlier.
Likewise, other operating expenses reflect a decrease versus the prior year, whilst at the same time including a number of costs that have been incurred to undertake restructuring measures and change of management. These costs relate to items which we expect to be of a non-recurring or exceptional nature, and have not been shown as either exceptional or non-recurring:
The Group re-tendered a number of professional services, resulting in change, aimed at either reducing cost or improving the quality of service (or both). This activity has delivered tangible savings in 2016 and we expect further benefits to be delivered during 2017.
The Group did not make any performance share plan awards in 2016. Furthermore, the Group wrote back a provision relating to share options vesting at the time of the IPO and the full cost of the EPS element of the 2015 performance share plan awards, has the effect of €1.6m. The latter adjustment was made in line with the provisions of IFRS 2 and certainty that the performance conditions, set at the time of the award, will not be achieved.
Operating profit has decreased to €40.1m from €41.7m in 2015. If the net impact of the one-off costs (€1.5m net cost) are taken into consideration then operating profit was largely unchanged from last year. Reported profit, for the year has increased from €19.4m to €28.4m.
For internal purposes the Group uses EBITDA to measure the performance of the business. The adjusted EBITDA for the Group for the full year 2016 is €51.5m (2015: €53.7m) after taking into consideration €0.5m of positive foreign exchange impact versus 2015. The devaluation of GB Pound more than offsets the negative impact of the devaluation of the Polish Złoty on the Group results. Details of these adjustments are contained within note 7 to the accounts, shown below
The Group's primary trading markets are in Central and Eastern Europe, with the Head Office in the UK and a small percentage of trading within the UK. Currently, the Group does not expect any material impact on the outcome of the exit of the UK from the European Union. This will continue to be monitored in line with all primary risks that the Group faces.
In 2016 there have been no exceptional costs, and non-recurring costs of €0.2m are associated with the impairment of fixed assets. Non-recurring expenses in 2015 were also incurred on the impairment of fixed assets.
The reported EBITDA has been adjusted to remove the impact of these costs and a reconciliation is shown in note 7 to the accounts.
Finance income of €1.7m (2015: €2.4m) shows a decrease from last year due to a lower gain on foreign exchange of €1.5m (2015: €2.0m) which has arisen on intercompany loans and the impact from the devaluation of the currencies these loans are denominated in. These loans have now been fully discharged.
As commented in last year's report, the Group refinanced its bank facilities in November 2015 and negotiated a new facility. This has resulted in significantly lower finance costs to the Group of €1.0m (2015: €10.3m). In 2015 unamortised bank charges relating to the previous facility accounted for €4.3m of the prior year finance expense, and by its nature this cost has not recurred in 2016.
Our tax charge, reflects a number of factors: the current year tax expense, provisions for prior year tax expense and the amortisation of a deferred tax asset (created following corporate restructuring at the time of the IPO in 2013).
The current year tax expense of €7.0m, shows an increase from 2015 (€5.9m) primarily due to higher taxable profits. In reaching the calculation of current year tax expense the Group includes an amount of Group expenses which are not tax deductible, and based upon the belief that these expenses will never be considered tax deductible, do not recognise any deferred tax asset on this tax loss. This treatment is consistent with 2015 for these expense type items.
In 2016 there has been no further increase in the provisions that the Group carries in respect of outstanding and potential tax risks arising from open tax audits and investigations. We believe that the level of provision already held for tax investigations and assessments is adequate, given the level of risk we face. The most significant risks continue to relate to our Italian business and further information is provided in note 11 below. Resolution of the outstanding tax investigations and assessments in Italy is taking considerable time, where our tax affairs have not been closed since 2005. The process is proving to be both lengthy and costly, and we expect will take further time to complete.
In the Czech Republic we have received a tax assessment for €1m in respect of the tax year 2011, and are defending the company’s position as we do not believe the grounds for the assessment are valid. No provision has been made in respect of this assessment. In line with normal process, we have received a notification in Poland by the tax authorities of a standard enquiry relating to the tax year 2013. This enquiry remains open and no assessment has been received.
The deferred tax asset will continue to be amortised through the profit and loss account, however it should be noted that we do not expect to benefit from any continuing deduction for tax payments beyond 2017 for the restructuring undertaken in Poland at the time of the IPO in respect of intellectual property amortisation.
We have again reported very strong cash flow during the year. The changes to the production process, and termination of a number of products, as discussed earlier, have resulted in improving the efficiency of our inventory and reduced working capital. Together with reduced finance expenses, we have generated adjusted net free cash flow of €48.3m (2015: €46.9m) and a free cash flow conversion of 93.8% (2015: 87.2%).
The Group made a small acquisition in the second half of the year,acquiring the spirits business of Bohemia Sekt in the Czech Republic. The acquisition cost was €5m plus costs, and was financed from existing cash.
The Group has not undertaken any material M&A activity in 2016 and as committed to shareholders in June 2016, will return 100% of adjusted net free cash flow generated in 2016 as dividends. Accordingly the Group announced and paid a special dividend of 11.9 € cents per share, followed by the normal interim dividend. As a consequence the Group paid out dividends during the year of 4.55 € cents per share as a final dividend in respect of financial year 2015, the special dividend of 11.9 € cents per share and an interim dividend of 2.27 € cents per share in respect of the financial year 2016. Total dividends paid in 2016 were 18.72 € cents.
The Group is subject to material movements in working capital through seasonal trends and the timing of sales during the month of December. The key influence is the payment of excise duty in Poland which is remitted to the tax authorities 25 days after despatch. As a consequence, the excise duty on sales made in the first week of December will be paid by the year end, whereas the receivable balance will continue to reflect the duty and VAT collectible from the customer. This can cause significant movements in the closing year end working capital. For the year end December 2016, trading in the first week of December was consistent with the prior year and the movement in working capital was not impacted by the timing of sales.
As already stated, activity has been undertaken to improve the efficiency of inventory, with a reduction in the product range and changes to production and planning processes. This has delivered a significant improvement to the level of inventory the Group held at the year end, with inventory recording a €6m reduction versus 2015.
The Group’s focus upon cash generation will continue to review opportunities to improve the efficiency of working capital across the Group.
In November 2015 the Group concluded the arrangement of a new bank facility comprising of a multi-currency, unsecured, €200m revolving credit facility (RCF). The former facility was repaid in full. The RCF provides the Group with increased flexibility allowing us to amend our levels of debt according to the seasonality of cash flow. The RCF carries lower margins which has significantly benefited our financial performance in 2016 and will continue to do so in future years. If the net debt were to remain unchanged from the year end throughout 2017, the interest charge would be €1.9m. The Group has retained the factoring facility and in line with last year, is permitted to draw up to €50m.
Net debt has been impacted by €1.5m of temporary additional excise duty guarantees to support the transfer of duty bonded goods to a new logistics provider in Italy. The change of provider follows a tender process and secures cost savings in 2017. The transfer of goods has now been fully completed and documentation has been submitted to the tax authorities for the repayment of the additional excise duty guarantee deposit.
The strong cash flow during the year resulted in net debt of €59.7m at the end of December 2016, a slight increase (after taking into consideration the small brand acquisition and the additional temporary excise duty guarantee deposit) from €57.2m in 2015, and leverage of 1.16x from 1.07x in 2015.
There remains sufficient headroom within the current bank facilities to support our strategy going forwards, as we retain headroom within the new RCF and in addition to the factoring facility of €50m.
All debt continues to be drawn in local currency to provide flexibility in facilities and a natural hedge for cash flow and balance sheet protection.
No changes were made to the Group's bank facilities during 2016 following the refinancing in November 2015. The revolving credit facility (RCF) has a term of five years from November 2015 and is not subject to any amortisation profile. Debt can be drawn and repaid at the Group’s discretion without penalty or charge.
At the end of December 2016, €14.7m of the RCF is utilised to back excise duty guarantees in Italy and Germany. This utilisation reduces the available balance of the RCF but does not constitute drawings against the facility, and as such this utilisation is not disclosed as a liability in the balance sheet.
The year end utilisation includes €1.5m of temporary excise duty guarantees drawn in cash to cover the transfer of inventory from the former logistics operator in Italy to the new logistics operator and will be cancelled.
The Group remains exposed to the impact of foreign currency exchange with the major trading currencies being the Polish Złoty and the Czech Koruna. The Group where possible aims to match currency cash flows, liabilities and assets through normal commercial business arrangements. An example of this is all external third party debt is drawn in local currency. There are no hedging instruments in place to manage transaction exposure, where this arises.
The other currency that the Group is exposed to from non- trading activity is GB Pound. Our exposure to fluctuations in the Swiss Franc have now been removed following the closure of the Swiss office. Exposures to GB Pound are as a result of operations and bank balances arising in our UK based Head Office. We are limited on the natural hedging that is available to manage this exposure, given the non-trading activity within the Head Office operation.
The majority of exposure during 2016 reported within operating profit, has arisen on the devaluation of the Polish Złoty largely offset by the devaluation of GB Pound which has reduced the costs of the Head Office operation and translation impacts upon working capital reported in these entities.
The Group will continue to monitor its foreign currency exposures and where necessary to appropriately manage risk and will implement hedging arrangements.
The Polish Złoty has recorded further devaluation during 2016. The Czech National Bank have stated that the stability mechanism that has been in place for a period of time will continue during 2017, and at this point in time we do not see an significant foreign exchange risk arising from the Czech Koruna. The table below shows the stated currency versus the Euro.
There has been no change to the equity structure of the business in 2016 and it remains 200 million issued shares with a nominal value of £0.10 each.
On a fully diluted basis the earnings per share at the end of December 2016 was €0.14 per share versus €0.09 per share in 2015.
In 2015, EPS was impacted by the accelerated amortisation of bank fees, reported in finance expenses, of €4.3m (a non-cash item). If this item is excluded the adjusted earnings per share in 2015 would have been €0.11 per share.
Given that a significant percentage of the Group’s sales, 31% in 2016 (34% in 2015), occur during Q4, due to the strength of the Christmas and New Year holidays, this has made forecasting full year profit very difficult, and can have a significant impact upon full year cash flow according to the timing of sales in the final month. In line with many other companies faced with this seasonal trading peak, the Board have taken the decision to move the year end away from this critical trading period, to the end of September in 2018. Accordingly, we will report a full 12 month period for 2017, a nine month period for 2018 (from January to end of September), followed by a normal 12 month period from October 2018.
Further information will be provided in the coming 18 months to assist with the comparative periods' financial performance.
Each of the Directors, whose names and functions are listed below, confirms that:
to the best of their knowledge, the consolidated financial statements and the Company financial statements, which have been prepared in accordance with IFRS as issued by the IASB and IFRS as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit of the Company on a consolidated and individual basis; and to the best of their knowledge, the announcement includes a fair summary of the development and performance of the business and the position of the Company on a consolidated and individual basis, together with a description of the principal risks and uncertainties that it faces.
David Maloney, Chairman
Mirek Stachowicz, Chief Executive Officer
Lesley Jackson, Chief Financial Officer
John Nicolson, Senior Independent Non-Executive Director
Mike Butterworth, Independent Non-Executive Director
Tomasz Blawat, Independent Non-Executive Director
Diego Bevilacqua, Independent Non-Executive Director
Randy Pankevicz, Non-Independent Non-Executive Director
8 March 2017
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