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Edited Transcript of STCK.L earnings conference call or presentation 14-May-19 8:00am GMT

Interim 2019 Stock Spirits Group PLC Earnings Presentation

London May 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Stock Spirits Group PLC earnings conference call or presentation Tuesday, May 14, 2019 at 8:00:00am GMT

TEXT version of Transcript


Corporate Participants


* Miroslaw Boguslaw Stachowicz

Stock Spirits Group PLC - CEO & Executive Director

* Paul S. Bal

Stock Spirits Group PLC - CFO & Director


Conference Call Participants


* Christopher Wickham

Equity Development Limited - Analyst

* Damian Paul McNeela

Numis Securities Limited, Research Division - Analyst

* Doriana Russo

HSBC, Research Division - Analyst

* Matthew Reid

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Matthew Charles Webb

Panmure Gordon (UK) Limited, Research Division - Analyst

* Ted Nyhan

JP Morgan Chase & Co, Research Division - Analyst




Miroslaw Boguslaw Stachowicz, Stock Spirits Group PLC - CEO & Executive Director [1]


Good morning, everyone, and thank you for joining us for our 2019 half year results. We have published today our reported numbers for the 6 months to 31st of March 2019 and pro forma unaudited 6 months comparatives. As usual, I'm joined here by Paul Bal, our CFO.

I will start by providing a brief summary of the first half of the year, then take you through the business review for the period, including an update on the performance in each region, before handing over to Paul to talk through the financials. I'll then come back to give you some closing remarks. After which, you'll have opportunity to ask questions.

I'd like to start by summarizing our performance during the first half of 2019 financial year. We delivered good market share gains in our key markets during the period. In Poland, we outperformed all of our competitors in share growth in both volume and value terms. In the Czech Republic, we achieved a record value share despite already being the market leader.

We also achieved a positive financial performance, growing revenue by almost 10% on a constant currency basis and adjusted EBITDA by almost 6% also on a constant currency basis. Adjusted EPS was up just over 11% for the period. Our cash generation remains strong with 93.2% cash conversion during the 6 month period. At the end of the period, our leverage stood at 0.42x.

During the first half, we announced plans to acquire Distillerie Franciacorta, a premium grappa business in Italy, for EUR 26.5 million. We expect to complete the transaction in June 2019. While post the period end, I thought it was worth drawing your attention to the fact that we announced another bolt-on acquisition this morning. We have agreed to acquire Bartida and its sister company Bartida Retail, a premium spirits drink business focused on the premium on-trade market in the Czech Republic, for up to EUR 11 million. This provides a step change in our capabilities in the premium on-trade, and I'll talk about this in more detail later in the presentation.

Lastly, I'm pleased to announce an interim dividend of EUR 0.0263 per share, which is up 5.2% on last year's interim dividend and demonstrates a continued progressive dividend in line with our policy.

We will now go through the performance on a market by market basis, starting with our core market of Poland on Slide #6. The overall Polish spirits market is now worth EUR 3.5 billion, up 1.8% at March 2019 versus March 2018, despite the fact that Easter fell in the second half of the financial year compared to the first half last year. The overall clear vodka market was up 0.8%, with flavored vodka continuing to perform well, up 4.4% on the year.

Stock's volume and value growth rates were ahead of the category in both the clear and flavored segments and across all price segments, including total premium, mainstream and economy. We are particularly pleased with our flavored range results, which have grown in value almost twice as fast as the total flavored segment over the last year. We continued to see higher growth in the premium, top premium and ultra premium segments, reflecting growing consumer affluence and a positive economic environment in Poland. The whiskey category continues to demonstrate strong value growth, up 10.6%.

On 16th of April 2019, the Polish government published its long-term financial plan for 2019 through 2022, which included a proposed 3% increase in excise duty on spirits, beer and wine from January 2020. We are currently assessing the risk, but remain confident in our ability to manage the impact of an increase.

Turning now to mainstream pricing on Slide #7. As you can see from this chart, which covers the last 18 months, Zoladkowa de Luxe has generally commanded higher retail price. At only 3 points during the period shown, we have been at parity with our key competitors and each time only for a month. At the same time, over the last 12 months, Zoladkowa de Luxe has shown greater market share growth than its competitor brands due to the successful relaunch in early 2018 involving a new bottle and improved liquid. We believe this all demonstrates that despite Roust continuing its strategy of reducing prices, this is not translating into market share gains.

While we are seeing early signs of stabilization in pricing in the last few months, it is still too early to tell if this signifies any fundamental change in Roust's long-term pricing strategy and we believe they will remain opportunistic. However, we are no longer as reliant on this category for profitability, having built strong positions in the flavored and premium categories, which drove our organic growth in the period.

Now moving to Slide #8. As you can see from this slide, we continued to outpace our competitors in Poland in share gains in both volume and value terms. During the period, we achieved the greatest absolute growth in both volume and value and the fastest growth rates among the major players in the market. We are also outpacing the market in clear and flavored vodka and across all price segments, including premium, mainstream and economy.

In clear vodka, the success of our premiumization initiatives are demonstrated by continued share gains by Stock Prestige, which grew almost 23% in value, and Amundsen Expedition, which grew over 14% in value. This category-leading growth has been achieved through our increased focus on our flavored range and in particular Lubelska and Saska. Over the last 6 months, Lubelska grew value share 16% and Saska grew value share over 77%. Just over 3 years after launching the Saska brand, it is now larger than Marie Brizard's long established Krupnik flavors range.

Moving to Slide #9. As you can see from this slide, we have consistently delivered quarterly market share growth throughout the year and continue to take share from both our major competitors. In fact, till the end of 2019, we have achieved 23 months of consecutive volume share growth year-on-year. From the graph, you can see that while Marie Brizard's share decline has slowed in the last 2 quarters, it is yet to stabilize and remains in overall decline. We believe in the past Roust has been the main beneficiary of Marie Brizard's decline, gaining share in mainstream clear vodka. However, more recently, we have gained share from both Marie Brizard and Roust in premium and in flavored vodka.

Moving to Slide #10. I'd like to talk you now through the 2 areas of successful new product development in the period. Firstly, we launched Orkisz, an ultra-premium vodka made from spelt wheat -- we relaunched Orkisz forgive me. This product aligns to our strategy of premiumizing our offering to consumers who are prepared to pay a premium for higher quality taste and premium packaging, of which our Orkisz relaunch is a great example.

We have also had a lot of success with the expansion of our Saska range, with more sophisticated multiple flavors targeted at millennials' taste profile. Our coffee with a hint of brandy flavor has proved particularly popular, is now our bestselling flavor, accounting for 41% of the brand sales.

Turning now to the Czech market. As in Poland, we have seen continued strength in the wider market due to a robust economy and rising disposable incomes. The total value of the spirits market grew by 4% to EUR 0.5 billion. We sold 3 out of 4 biggest spirit categories in the market, rum, vodka and whiskey, achieved moving annual total volume and value growth, which more than compensated for a contraction in total demand for herbal bitters during the period.

We continued to see a particularly strong performance in the rum segment, which was up 11.4% in the period. During the course of last year, we encountered certain headwinds relating to change in dynamics in trade promotions in private label ranges in the Czech Republic, which we addressed during the summer. The changes made by the retailers in promotions are now back to normal levels and we have returned to positive momentum. We continue to address changes in the vodka category, where the expansion of private label offerings has stolen share from the longer established vodka brands.

On 5th of April 2019, the Ministry of Finance in Czech announced a proposed circa 13% increase in duty on spirits with effect from January 2020. Similar to in Poland, we are currently assessing the risk, but remain confident we can manage the impact of any increase.

Moving to Slide #13. Notwithstanding our leadership position, we increased our market-leading value share of total spirits from 33.6% to a 5-year record of 34.7%, driven by growth in rum and whiskey. We grew value share in rum, the biggest spirits category in the Czech Republic, by 3.7% from 61.4% to 65.1%, driven by the success of Republica, where we now have 45% of the premium rum segment. The growth achieved in rum and whiskey more than compensated for the contraction of our total vodka share in Czech and offset the decline of the herbal bitters category. I'll talk on the next slide about our actions to relaunch Fernet to address this contraction.

Black Fox, a new brand launched last year, also continues to grow share of the premium herbal bitters segment. Stock grew value share of the whiskey category by 3.9 percentage points, strengthened by Stock's expanded distribution portfolio with the addition of Beam Suntory brands. Today, we announced the acquisition of Bartida in the Czech Republic, and I will talk more about this later.

Moving to Slide #14. To address these 2 remaining headwinds in the Czech Republic, allowing us to maintain the strong momentum we are seeing in the overall market, we have revisited our vodka promotional activity. We have been working to improve our category management with retailers to manage the growth of private label. We have optimized the assortments, revisited shelf plans, rebuilt fixtures with key customers with increased -- which increased our share of shelf space at the expense of underperforming competitors.

In herbal bitters, we relaunched the Fernet Stock range with new improved premium packaging -- you can see an example here -- and flavor innovation, supported by traditional and digital advertising campaign as well as store activation. We are seeing positive early signs from both initiatives, with an improving performance for the full year-to-date for Stock's key brands in both categories.

Turning now to Italy, which, as a reminder, accounts for around 8% of our sales and just over 3% of our EBITDA. As you know -- as you all know, the overall economic environment in Italy continues to be challenging, with a higher level of unemployment and low growth impacting consumer consumption.

During the period, the total off-trade market declined slightly in volume by 0.9% and remained flat in value terms, but with growth in certain categories and price segments, for example, the premium grappa segment. The government in Italy has also announced a proposed increase in VAT from 22% to 25% and/or an increase in excise tax from 1st of January 2020. Similar to Poland and Czech, we will continue to monitor this, but remain confident we can manage any impact of this increase.

Moving to Slide 17. We are pleased with the success of our premiumization in brandy, where the relaunch of Stock 84 range last year with improved liquids and packaging has delivered share gains and volume and value growth ahead of the category. Against the backdrop of continued tough trading conditions in Italy, our value share of clear vodka fell 0.3% and we gained marginal share in brandy. However, as a result of the softening market and strong growth of private label, we saw losses in flavored vodka, basically (inaudible) limoncello. Keglevich clear vodka has responded well to our multiyear investment and maintained its position as market leader despite pressures from private label.

However, in flavored vodka, it is now apparent that our focused investment isn't delivering the desired rebound as quickly, as forcefully as we had hoped for. We are therefore now reevaluating alternative tactics such as investing behind a broader range of our brands. We believe there is a significant opportunity in consolidation in Italy, which will allow us to build scale in the market. This opportunity is demonstrated by our planned acquisition of Distillerie Franciacorta, which I will talk about later.

Looking now at other markets division on Slide 19. In the Slovakian market, we maintain value share of total spirits at 12%. Stock maintained leadership in herbal bitters, but lost share due to the aggressive price promotional activity by a major competitor. In tandem with the Czech Republic, we relaunched the Fernet Stock range in April 2019 to support a return to share growth in this category.

We continued to focus on premiumization as part of our new product development in the market. Stock's fastest value growth in Slovakia was in whiskey. Having begun distribution of Beam Suntory's range in May 2017, Jim Beam's value share increased to 7.7% from 5.9% moving annual total.

We delivered a positive performance in Croatia with the relaunch of Stock 84 brandy last year, reinforcing our market-leading position of imported brandy and driving share gains in this category. In our export markets, our new distributor in Germany has -- was appointed in January 2019 and since then has gained listings in the retail segment for Polish brands.

Moving now to Slide 20. Having now demonstrated how our organic strategy is delivering results, I would like to move on to our fourth strategic pillar M&A and talk through our recent acquisitions. Firstly, I'd like to update you on the investment we made in Quintessential Brands Irish whiskey. In February 2019, our joint venture partners commissioned the Dublin distillery and this along with the Visitor Center opened in Dublin with a very positive response from the national media, as you can see from the slide, and we've been very pleased with the response from visitors so far.

Moving to Slide #21. And now to our acquisition of Distillerie Franciacorta, which we announced in January this year. The deal will enable us to become the #1 player in branded grappa in the off-trade. It will also provide scale and will be earnings enhancing in the financial year 2021 due to integration costs in the first year of ownership.

We will triple our salesforce, enabling us to leverage growth in both the off and on-trade, and it will enhance the provenance of our Italian brands portfolio. This deal is a template of the kind of bolt-on acquisitions we would like to look at in Italy in the future. It is an example of how we can generate growth and consolidate the market through acquiring family-run businesses operating in this fragmented market.

Moving to Slide 22. I'd like now to give you some more detail on the announcement this morning that we have signed contracts for the acquisition of Bartida, a premium spirits drink business in the Czech Republic. This acquisition will strengthen our position as the leading player in the premium on-trade within the Czech market.

Bartida's brand portfolio includes both owned premium brands of fruits, spirits and liqueurs and third-party distribution brands primarily focused on premium rum. This deal is entirely complementary with our existing brand portfolio, including our existing distribution brands, with no conflicts and provides both revenue synergies as well as complementary operational capabilities. The business is focused on premium on-trade, utilizing an e-shop, a demonstration bar, an on-trade trading -- training center in the center of Prague.

Whilst we are ready -- we are already in the -- excuse me. Whilst we are already the overall market leader in the Czech Republic, this acquisition will provide a step change in our capabilities in the premium on-trade, as well as delivering against the group's premiumization strategic objective. The deal will also provide us a direct route to market in the premium on-trade, a proven model we can then look to roll into other markets.

Due to the unique concept and on-trade capabilities of Bartida, we plan to keep the unit operationally independent whilst also including our own premium brands within its portfolio. We signed the deal yesterday and expect to complete on 31st of May.

Looking now at the deal financials. We are acquiring the business for up to EUR 11 million, including a 5-year earn-out, allowing us to retain the 2 current shareholders over the period. This is a split between EUR 7.3 million payable on completion and EUR 3.7 million earn-out based on certain conditions for the existing shareholders. We expect the acquisition to be earnings neutral in the first complete year of ownership and earnings enhancing thereafter.

Moving now to Slide #23. Moving now to M&A and the future. We have carried out 4 acquisitions since the end of 2016: 3 of which have been in our existing markets. However, we do see some limits to potential opportunities given our market-leading positions in our existing markets and the need to ensure we integrate recent acquisitions successfully in the relevant markets before embarking on future deals.

As a result of this, we will also start to look for opportunities in new geographic markets, but only where we can leverage our competitive strengths. Firstly, where we can leverage our strong expertise in specific spirit categories, in particular in clear and flavored vodka and herbal bitters. Secondly, we have proven expertise in local brand development with an important placed on the provenance of our brands. We will look at adjacent geographies where we can acquire a leadership position in at least a growing segment, or ideally, the overall market in order to facilitate synergies.

Lastly, we benefit from the ability to leverage the strong cash generative nature of our business. And of course, we always apply strict disciplines for evaluation of any deal, be it financial or commercial.

And now I will hand over to Paul to talk through the financial results.


Paul S. Bal, Stock Spirits Group PLC - CFO & Director [2]


Sorry. Just before I start the presentation on my part, just to clear up one thing that may just have been one misunderstanding on the reference that Mirek made to the Bartida deal. It is earnings enhancing in the first full financial year as we've said in the statement just to be absolutely clear, and the same on the slide deck.

Okay, thank you, Mirek. Good morning, ladies and gentlemen. It's my great pleasure to present the financial results for the first 6 months ended 31 March 2019. I start with Slide 25. Last year, Stock Spirits moved to a 30 September year-end, therefore, the financial results for the 6 months period to 31 March 2019 are reported against the comparative, which is the pro forma unaudited results for the 6 months ended 31 March 2018. This provides a more meaningful and comparable picture of our performance for the first 6 months of this financial year.

Our results announcement released this morning sets out the detail of the basis on which the pro forma results are prepared. This includes the adoption of IFRS 15 revenue from contracts with customers, which was adopted since January 2018, but which has been also applied throughout the reported comparative period since the 1st of October 2017.

Now on this basis, our results reveal continued improvement in our overall financial performance, from the top line of volume and sales growth to the bottom line. The revenues were up 8.2% to EUR 156.9 million. Reported adjusted EBITDA grew 4.2% to EUR 33.5 million. On a constant currency basis, the increase was higher at a pleasing 5.8%.

The gross profit margin and adjusted EBITDA margin did soften a little as a result of sales and channel mix, as well as more investment in our products. And basic adjusted earnings per share grew a strong 11.3% to EUR 0.1015 per share.

As a result of the challenging conditions affecting our operations initially, we have recognized a further impairment against the carrying value of that business. This EUR 14.3 million impairment has been treated as an exceptional non-cash item. The comparative period includes a previous impairment of EUR 14.9 million recognized in December 2017.

Beyond the profit and loss account, our cash flow delivery remains robust, with 93.2% cash conversion. And as a consequence, our balance sheet has got stronger and net debt leverage is now at 0.42x. Finally, in line with our progressive dividend policy, we are announcing a 5.2% increase in our interim dividend compared to the 2018 interim. This is a payment of EUR 0.0263 per share.

So starting with the group's consolidated profit and loss account on Slide 26. The 8.2% increase in revenue was driven by volume and mix but hit by pricing and unfavorable currency effects. Otherwise, revenue was up a strong 9.7% in constant currency terms, with both volume and mix reflecting our strategic focus on premiumization.

Per liter cost of goods increased beyond general inflation levels, so the gross profit margin decreased to 47%. This reflects the greater volume of higher cost premium products sold both in our own portfolio and from our stable of third-party distribution brands, especially whiskey. This increase was exacerbated by channel mix, with increased sales through discounted channels, where pricing is not as high as in other channels in which we operate.

We have also continued to invest in our product offerings, keeping them attractive propositions for our consumers. In similar vein, the increase in selling expenses also reflects more consumer promotions during the period. This investment was partly compensated by a small decline in other operating expenses. We maintain our focus on our overhead cost base, both in the center and in our operating units.

We include our 25% share of the results of our associate Quintessential Brands Ireland Whiskey Limited, and this result is in line with our expectations. At the time of making the investment in 2017, we said that the payback would not start until year 4, which is our year ending 2022. The Dublin distillery and Visitor Centre opened in February this year, liquid is now being laid down to deliver its own whiskey 3 years from now.

Overall, our performance resulted in almost double-digit growth in operating profit before exceptional items and a 30 basis point improvement in our operating profit margin to 18.5%.

Net finance cost was slightly up, reflecting more drawing down against our facilities to fund dividends, M&A and the tax payments, as well as some working capital in the period. On an underlying basis, there is a small improvement in the effective tax rate.

Underlying performance is best reflected in the improved adjusted EBITDA growing 4.2% or 5.8% in constant currency terms. The adjusted EBITDA margin slipping 80 basis points to 21.4% reflects the softer gross profit margin. Nevertheless, the adjusted EPS growth of 11.3% rounds off a pleasing set of results for the period.

With Slide 27, let's now look into the components of our results in a little more detail, starting with the top line. Our overall volume grew a very robust 6.8%. The market particularly driving this growth was Poland with its increasing share. The Czech business also did very well, reaching a 5-year share record. Revenues up at over 8% would have been up almost at 10% were it not for the foreign exchange effects of 1.5% being a drag on the results. Our underlying average prices were down nearly 2%, driven in the main by Poland and the Czech Republic. Mix continues to show healthy improvement as we premiumized further and leveraged our portfolios to deliver value.

Looking specifically at Poland in the next side, Slide #28. We see revenues benefited from a healthy positive combination of 2 growth levers: solid volume growth, especially in premium and flavored vodkas; and significantly improving mix. Overall, pricing was negative, reflecting channel mix as more sales went through the discounted channel, especially in whiskey, as well as the continued strong price competition in parts of the vodka market. EBITDA grew a solid 7.4% in constant currency terms, showing our capability in a very competitive market to grow and yet also deliver a decent return.

The EBITDA margin slipped 90 basis points to 23.5% due mainly to the margin impact of sales mix, increased product investment and as well as some higher marketing spend. For these conscious reasons, it is below the 26% to 27% EBITDA margin range that we aspire to be within. Though we're outside that target range, we still consider that to be the goal in current market conditions as we seek to regain market share and deliver value growth simultaneously.

Turning to the next slide, Slide #29, the Czech Republic, our second biggest contributor after Poland. Very healthy growth in the top line was primarily driven by the continued strong success of Republica, launched in early 2018. Some of this comes through the high volume, but it mainly comes through the significant mix improvement and also has the benefit from growing the Beam Suntory brands. The pricing hit comes predominantly from promotional activity in the vodka category.

EBITDA growth was significant at over 28% and the EBITDA margin up 380 basis points. However, this reflects lower marketing investment in this period compared to last year when we invested behind the 2 major launches of Black Fox and Republica. Stripping out that effect, there is a slight softening in underlying EBITDA margin due to margin mix and local cost inflation.

I now move to Slide #30, and I would just like to reiterate what Mirek has previously mentioned that Italy is only 8% of our group revenue and just over 3% of the EBITDA. The market has faced another challenging period with the economic environment remaining testing for our consumers, and this was most evident around the Christmas period. This has put pressure on all of the growth levers, and therefore, sales volume and revenues are lower.

The adjusted EBITDA and EBITDA margin were down primarily given the lack of sales growth. There was also higher marketing spend as we invested in turning around the fortunes of our key vodka brand in Italy, Keglevich. The continued disappointing performance in Italy has resulted in us recognizing a further impairment against the value of our existing business. The write-down of EUR 14.3 million has been recognized in this period as a non-cash exceptional item. In late 2017, we had already recognized an impairment of EUR 14.9 million.

Turning now to slide #31. I move to the rest of our operations. Overall, they have delivered slightly higher revenues, primarily in our international exports business. Our Slovakian business encountered some aggressive price competition in the herbal bitters category. Consequently, EBITDA fell as did the EBITDA margin, with Slovakia's pressures offsetting the growth in international.

Moving to Slide #32 and some words on central low corporate costs. These represent the costs not only of our U.K. corporate office, but also the costs of central functional heads such as for operations, procurement and internal audit, who are located outside of the U.K. in other group locations. Despite inflationary pressures, we have kept the core cost base flat and remain vigilant for further opportunities to make our model more efficient.

I guess no results presentation is complete these days unless there's some reference to Brexit. Ours is on Slide #33. As stated here, due to our setup, Brexit is not a principal risk for us. We have minimal exposure to its potential impacts beyond some foreign currency volatility.

On the subject of foreign exchange, I now move to Slide #34. I've already mentioned that foreign exchange movements created some headwind to our top line. This was also the case for the bottom line. And this came predominantly from the weakening of the Czech koruna and the Polish zloty versus the euro over the period. Given the macroeconomic uncertainties in Europe, in the appendix to this presentation we set out the key exchange rates over recent periods as well as where they stand at present. There are no formal hedging instruments in place till the 31st of March 2019. We consider ourselves reasonably well naturally hedged. However, we monitor the situation, and should foreign exchange volatility increase, it will become more prevalent.

The next slide, Slide #35, sets out our net finance costs. As our financing arrangements have not changed over the period, I would not expect much underlying movement. However, currency movements did have some impact. Higher bank financing costs reflect more and deeper drawing of our facilities to fund the tax payments, working capital, dividends and M&A. Our financing facilities run till late 2022, and combined with a strong balance sheet, these financing facilities provide us with a good base from which to pursue our strategic aspirations.

I now move to Slide #36, turning now to the subject of taxation. The increase in the current tax expense results from higher profits, but also from having fully utilized brought forward tax losses in Poland. This is partly offset by lower deferred tax charges as timing differences in Poland also reduced, partly because of the exceptional write-down of deferred tax balances taken in the prior period. Therefore, the effective tax rate has reduced 110 basis points to 25.1%. The tax environment remains challenging, especially in Poland. The group holds provisions totaling EUR 7.2 million, where, based on professional advice, future settlements are likely or expected in respective historic positions.

We have previously stated that in some other circumstances the group may also have to pay over some assessed dues by the authorities and then seek their recovery as the appeal processes run their course. That was the case at the end of December 2018 when we received an assessment in respect of our 2013 filing in Poland. One element of that assessment covered the pre-IPO intellectual property restructuring, in respect of which an assessment of EUR 4.5 million was levied.

This has since been reduced to EUR 3.9 million by the authorities. We paid the assessment and launched an appeal for the now EUR 3.9 million as we believe our 2013 position will prevail. This position is supported by our professional advisors. Our results announcement released this morning sets out further details on the extent of such potential exposures, as does our 2018 report on accounts.

Moving to the next slide, Slide #37, and we come to cash flow. Strong cash generation has been the hallmark of the group and free cash flow rose significantly. The implied conversion rate moved up from 79% to a very robust 93.2%. This is all the more impressive given the increasing quantum of our third-party distribution agreements as these typically represent a higher value than our own product inventory.

While free cash flow was up, net free cash flow was down as we paid over the 2013 Polish tax assessment, which we consider is recoverable in time, as well as the advance payment for the Distillerie Franciacorta acquisition.

I click now to Slide #38. Staying with this theme on the next slide, our strong cash generation has enabled us to reduce the net debt to EUR 25.2 million, a reduction of EUR 6.4 million during the 6 month period, notwithstanding these material payments that I've just referred to. Consequently, our already low balance sheet leverage has reduced further to 0.42x.

Now whilst this is below the 0.5 to 1.5 range I have targeted, we fully expect to soon be paying further acquisition costs as we complete the Distillerie Franciacorta acquisition and we proceed with the Bartida deal that was announced today.

The group has significant liquidity available to it and it is well funded for the future to pursue our strategic aspirations and reward our shareholders with progressive dividends. And should there be opportunity, we are also well placed to consider further distributions.

With Slide #39, I will now conclude and cover off 2 matters. First, is the subject of dividends. The Board today has approved an interim dividend of EUR 0.0263 per share for the 6 months period. This is a 5.2% increase on the EUR 0.0250 per share interim dividend paid last year. The dividend will be paid on the 21st of June and it will be based on the record date of the 31st of May and further details are set out in our results announcement released this morning. We plan to continue to focus on providing our shareholders with progressive dividends. If through the combination of our continued strong cash generation and little executed M&A the group finds itself with an efficient capital structure, the Board will consider making additional shareholder distributions.

And finally, Mirek and I look forward to hosting a number of you who have confirmed their attendance at our Capital Markets visit to our Czech facilities next month. Beyond that, we'll provide our usual update immediately after we close our year-end on 30th September. And the full release of our annual results will follow on in early December.

And with that, I thank you and I hand back to Mirek.


Miroslaw Boguslaw Stachowicz, Stock Spirits Group PLC - CEO & Executive Director [3]


So to conclude, I want to provide a quick summary of our performance during the first half of the year and some comments on the outlook. Firstly, during the period we continued to deliver against our strategy. In our largest markets, Poland and Czech Republic, we delivered continued and accelerated organic growth.

In Poland, we achieved 23 months of consistent year-on-year volume share growth, outperforming our competitors. We delivered organic growth in premium and flavored vodka segments and having built a strong position in the flavored and premium categories, we are now less dependent on the highly competitive mainstream clear vodka segment for profitability.

In the Czech Republic, we now have record levels of value share due to the success of our premiumization strategy. We have seen significant success with our Republica as well as the original Božkov Tuzemský range and focus new product development on the relaunch of Fernet to address the decline in the herbal business category.

Italy remains a challenge, but we remain focused on turning around the performance of the business and continue to assess potential acquisition opportunities that can provide us with additional scale in the market.

In terms of our financials, we achieved a positive organic performance with -- our market share performance is reflected in our financial results for the period.

Moving to M&A. We successfully executed 2 acquisitions in our existing markets, which align to our strategy and the clear criteria we have laid out. Our immediate priority remains to successfully integrate these recent investments.

Looking forward, we continue to assess opportunities in our existing markets for bolt-on acquisitions against our criteria and with rigorous discipline. In addition to this, we will assess the potential to enter new markets where we believe we can leverage our competitive strengths and expertise.

That concludes the presentation today. We would like now to open the floor for questions. Please, can I ask you to give your name and the organization you represent before asking your question? Thank you.


Questions and Answers


Ted Nyhan, JP Morgan Chase & Co, Research Division - Analyst [1]


Ted Nyhan, JPMorgan. Just a couple on the Czech Republic. Can you give us any color on your outlook for the Czech -- well, Czech margins specifically, but also on the top line in terms of volume and mix in the second half given annualization of Božkov Republica launch and the private label promotional activity in Q1 '18? And on private label, is -- have we seen the worst of that in the Czech Republic? Do you expect any further I suppose disruption from increased penetration?


Paul S. Bal, Stock Spirits Group PLC - CFO & Director [2]


So Ted, you'll know we're not going to make forward-looking statements. But as we highlighted on Slide 29, there's a number of things going on in the Czech Republic EBITDA. And probably the principal one is the fact that we had a high amount of marketing investments last year supporting the 2 big launches of Black Fox and Republica.

So clearly, we don't have those coming in. So therefore, you're seeing the slight benefit of that in the current results. Going forward, we expect the continued momentum to be positive in the Czech Republic. And of course, we've just launched Fernet. It's too early to make the call on it, but initial signs are positive.

So if you strip out the underlying -- if you strip out the increased investment issue, you should get a more stable run rate on the margins going forward. And certainly, there is still an underlying improvement period-to-period and year-on-year.


Miroslaw Boguslaw Stachowicz, Stock Spirits Group PLC - CEO & Executive Director [3]


On the private label, I have mentioned in the presentation that we see the period of instability in the relationship with customers standing. We saw this at the beginning of last year, where customers started changing their promotional schedules, and that was combined with the introduction of wide ranges of private labels.

What we have been able to do since then -- and you could see the spillover effect still in the results of the whiskey category -- was to essentially work closer with customers. Once they realized that some of the activities they decided to implement last year were not working according to their expectations, we were able to work with them on category management to improve the performance of the entire categories for them.

Now that doesn't mean that we are able to roll back the private label because most of the introductions will stay. But being then the clear market leader -- and just let me remind you we are 3x bigger in terms of market share than our nearest competitor in Czech Republic. So that gives us leverage to be a credible partner for our distribution partners to work on category profitability. And that allows us, as I said, to gain disproportional share for brands also in Vodka versus the underperforming other brands. And that is the nature of the activity that we have undertaken.

This has taken some effort and investment, but we are optimistic it's going to work. And let me repeat: there has been a period of adjustment in our customers relationships, where the customers were looking at changing things. But they now are working hand-in-hand with us. So I'm optimistic about our ability to manage this in the Czech business.


Matthew Charles Webb, Panmure Gordon (UK) Limited, Research Division - Analyst [4]


Matthew Webb from Panmure. Three questions, please. The first just on -- your dividend also increased by 5% in the period, well below the growth in the adjusted EPS of around 11% despite the debt being very low and below your targeted range. I just wonder why that was. I know the dividend growth is more in line with your EBITDA growth. I don't know whether that's coincidence or whether that's more how you think about how you should be growing your dividend?

Second question possibly related. I see the depreciation charge was quite sharply lower. I just wondered why that was. And then the third question on the acquisition in the Czech Republic. I just wondered what sort of proportion of your portfolio is going to be transferring across to Bartida. You talk about your premium brands. What would that account for roughly as a percentage of your portfolio?


Paul S. Bal, Stock Spirits Group PLC - CFO & Director [5]


So on the dividend, Matthew, as we've said in the past, we are following a progressive dividend policy. So over the last several cycles, we've been increasing the dividend broadly around -- sort of around the 5% mark. Yes. Yes, based on the results of this period, it obviously looks out of kilter given the increases that you're seeing, as you say, in the earnings per share. But it is in line with sort of where we are with the EBITDA.

Recognize what you're saying about the leverage in the balance sheet, but equally, as I've said, we've got a number of sort of cash payments that will be imminent over the coming weeks. And we shouldn't also forget that there are still some potential exposures that we face on the fiscal side, which, whilst we believe we will prevail, there's a risk that we may be making payments. So in that and particularly as this is an interim stage, I think the Board feels comfortable to keep with the progressive approach and keeping that progressive interpretation as being around 5% for now.


Miroslaw Boguslaw Stachowicz, Stock Spirits Group PLC - CEO & Executive Director [6]


Now regarding the Bartida question, what percentage of our portfolio will transfer to Bartida. Well, we don't split the reporting by brands, but let me just give you an idea how it works. The acquisition of Bartida gives us what we call the leading position in the -- on Czech on-trade.

And that's a deliberate choice of words because there is a funny interpretation of IWSR, who's the main reporting source. Some of the brands that we consider premium, such as Captain Morgan or Jägermeister, which we don't distribute, are not considered premium by IWSR, which doesn't seem logical. But because we want to keep reporting consistent with external sources, therefore we don't -- we didn't report that we are #1 in distribution.

In reality, we are. When you consider brands like Captain Morgan or our Republica, we are #1 distributor of premium brands through -- because of this acquisition, we've become #1 distributor of premium on-trade.

Now premium on-trade is by far the fastest growing part of Czech on-trade. That change has been accelerated as a result of taxation changes in Czech Republic and the smoking ban, where you see a number of traditional pubs closing down as a result of the need to have cash registers. And the booming part of the on-trade is the premium on-trade.

So we are very pleased with this acquisition because it gives us an existing unique channel. And what is interesting about it, it is a new area of competence because it's direct delivery to this channel by our own logistics system.

Now what will transfer? Clearly, our third-party brands. Bartida has no access to either the Diageo or Beam portfolio. But we also have our own premium brands such as Republica, which is a very hot product in Czech Republic with 45% of premium rum. Clearly, everybody wants to be distributing this. And we of course have Black Fox.

Now we are looking at various other areas where we are going to premiumize. And you can see that the relaunch of Fernet is in full swing and we are hoping that we are going to follow this one up with some interesting further premium propositions in this premium -- in the bitters area.

So I think the combined portfolio of Bartida and ours is second to none. We were very pleased with having the ability to distribute Beam Suntory alongside with the portfolio of Diageo. With this acquisition, we have full possibility to generate growth synergies in the fastest growing part of the Czech on-trade. So we are very excited about this.


Paul S. Bal, Stock Spirits Group PLC - CFO & Director [7]


Coming back to your question on depreciation, yes. Obviously, it's a little bit tricky to navigate with the restatement of the year and so forth. So one's got to obviously be careful that one's not comparing the statutories because you're comparing the 9 month period with the 6 month period in these results. However, if you look on Note 5, you will see a more comparable number. And yes, there is a reduction in the depreciation, but not as markedly obviously if you were comparing 6 months versus 9 months. And that's largely a question of timing, Matthew, more than anything else especially sort of when assets become capitalizable to become depreciated more than anything else.


Damian Paul McNeela, Numis Securities Limited, Research Division - Analyst [8]


Damian McNeela from Numis. A couple of questions on excise. You mentioned that we're seeing excise increases come through in Czech Republic and Poland and possibly even Italy and that you were confident of managing those. Could you give us a sense of what the sort of the historic excise increases have been over recent years and what sort of price elasticity of demand looks like for major categories and sort of support your confidence around that?

And then secondly, pull on margins. You are below where you sort of [guided]. I think, again, you sort of said you are comfortable that you'll get back to sort of the range. Can you sort of give us a bit more color on why you think that's the case, please?


Paul S. Bal, Stock Spirits Group PLC - CFO & Director [9]


So firstly, in terms of excise, the last increase in excise in Poland was in 2014 and I doubt if some of you will recall it was quite a significant increase of 15%. So what we're looking at the moment here -- at around 3% is obviously a different proposition. And an excise increase of that size would have quite a considerable sort of impact on consumption patterns at least in the short term. And then sort of the real effect will even out over the longer term. But in the short term, an excise increase of that would have been disruptive, and I believe it was.

In terms of the evolution of excise in the other markets, the Czech market has been relatively stable since at least 2010. And in Italy, there have been fiscal increases, but they haven't been anywhere near as marked. And so during the period of 2013 and '14 there were some changes there, but those were more possibly VAT related rather than excise related. So yes, we're expecting obviously some change. The precise details haven't been confirmed fully. There are some public announcements out there. But we're sensing that the position is still moving and likely to move if governments complete their own budgeting.


Miroslaw Boguslaw Stachowicz, Stock Spirits Group PLC - CEO & Executive Director [10]


The pricing elasticity, just one more thought. Paul is absolutely right that the impact on the sales will be significant of any excise increase, but the bigger the excise increase, the bigger the impact. But it varies according to the segment. So when you look at the pricing elasticity in the mainstream and economy segments, this is by far the biggest impact there. Where you see the dynamic of the market is moving towards premium, the impact of excise increase there will be much more limited, so the consumer propensity to buy will be much less impacted by this.

And I think that we -- as we said, we are much less dependent on profitability from the mainstream and economy segments. We are less likely to experience an impact of excise increase, specifically in Poland, but anywhere where we are premiumizing, than our competitors, who are sitting mostly in the mainstream and economy.


Paul S. Bal, Stock Spirits Group PLC - CFO & Director [11]


I think that addresses the excise question, Damian. Yes. In terms of your other question in terms of sort of the margin in respect to Poland. The main driver on the margin in Poland in this period was the sales mix, as we refer to, with whiskey in the discounted channel. There is a seasonality to whiskey. So we should not see that as being as big an impact as we go forward into the second half of the fiscal year because of the seasonality. So that's probably the single driver.

But in terms of sort of compensation, obviously the more we continue to grow in flavored, we'll have a beneficial effect offsetting that margin. So whilst we were outside of our sort of stated goal of 26% to 27%, as I said, that's still where we feel we should be and that is where we will continue to sort of aspire to in that way.


Doriana Russo, HSBC, Research Division - Analyst [12]


Doriana Russo, HSBC. Another follow on question on Poland. Obviously, you had exceptional growth in the first half and way ahead of the underlying market. What are your expectations for the full year? If you can share some thoughts. And whether we should probably -- if there is any one-off action that we need to take into account, not to extrapolate the total growth?

And secondly, you mentioned a change in strategy in Italy. I know it's just a small part of your portfolio. But can you elaborate a little bit on what are the opportunities that you see, or as a second trial to reinvigorate your presence there?


Miroslaw Boguslaw Stachowicz, Stock Spirits Group PLC - CEO & Executive Director [13]


So regarding Poland, Doriana, as you know, we don't make the forward-looking statements. But I said that I remain confident in our ability to continue the positive momentum. And the reason why I'm confident about this is because there isn't any particular one-off item that has driven the performance of Poland. The performance is coming across the board.

And I tried to emphasize this in the narrative. The performance comes from a variety of categories, a variety of segments. We seem to be growing across the board and we are outgrowing the fast-growing segments. So I remain optimistic that we will continue to do so.

I don't see any significant reason why we should see a sudden contraction or stabilization of growth in the segments where we have been growing in the first half. So whiskey seems to be performing very well. Flavored vodka, which is particularly important for us, continues to grow. Premium clear segment continues to grow. And our brands have momentum. So I remain optimistic that this will continue in Poland.

As far as Italy is concerned, we -- as you recall, I said we are serious about Italy and we will behind invest -- I said many times we will invest behind the business in Italy. And we invest in 2 ways. We are looking to grow our critical mass because there's a certain amount of fixed costs that we need to carry in the country. And by putting more business through the fixed costs base, we will get better efficiency and operational leverage. So we do this by investing behind brands and looking for acquisitions that would bring in a minimal overhead. And I think that the acquisition of Franciacorta is a good example of an acquisition that brings in minimal overhead and brings in additional volume through the business.

Now we invested behind Keglevich and Keglevich is the key brand for us in Italy. Keglevich plays in 2 categories: in clear vodka, and that's a -- it's a segment that is growing; and in flavored vodka, that's a segment that is contracting. We have put significant investment behind Keglevich brand and the clear part of our brand has responded very well to this.

So the growth of clear vodka comes from 2 parts of this segment: from private label and from premium end. Keglevich sits in the middle. And it was able to keep its position we believe through the investment because we started communicating with consumers, there is a buzz around the brand, it's very positive. So we are pleased with this part. And it's absolutely -- this was the right thing to do.

Now we also saw response from the flavored part, but the response is not sufficient to justify the investments. So we can continue to invest behind flavored brand -- part of the brand, but it will not be as efficient an investment as behind other parts of our portfolio.

And don't forget our portfolio has just grown by an acquisition of a premium grappa brand, is this product here. And this premium grappa brand represents an opportunity because it operates in a growing part of the market. So we need to reassess considering these 2 factors where the money invested behind the brands will bring better benefit and what is the response to the brand support from the flavored vodka. It doesn't mean that we are going to stop supporting flavored altogether, but we are going to play with the available funds for investments in such a way that we generate best possible return.


Doriana Russo, HSBC, Research Division - Analyst [14]


Shall we then assume that Italy will -- the profitability of Italy will structurally stay low for the immediate future until you figure out what strategy is going to come next?


Paul S. Bal, Stock Spirits Group PLC - CFO & Director [15]


I think the answer to that is: what's the space? It's clear that we have some work to do in Italy and we never said it's going to be quick. When we first started on this journey 12 months ago, we said this was going to be a multiyear program. And I think we're responding to a decent period of time to have got some first experience of it, but I think the journey will still continue. It will still be something of that order that we said before. So yes, I would manage the expectation in that regard, but we are on it.


Miroslaw Boguslaw Stachowicz, Stock Spirits Group PLC - CEO & Executive Director [16]


Italy is a business that needs to turnaround and I think we are doing the right things to deliver this turnaround. We need time to do this.


Christopher Wickham, Equity Development Limited - Analyst [17]


Chris Wickham from Equity Development. Just 3 things. Number one, just to reconfirm because you say you don't make forward-looking statements, that that EBITDA of 0.42 that struck off the 59.4 you did last year adjusted, yes?

And then the second one is really just on sustainable organic EPS growth. I mean, you have got that quite classic looking distilled spirits, where you take a revenue number and then you add close to 200 basis points to the growth from margin enhancement and then you got another couple of hundred from sort of finance and tax. Should we like assume that that's the sustainable growth rate, but with due regard for maybe having a slower rate of growth of sales?

And then the third point. I mean, you've talked quite a lot about the discipline process of M&A. I mean, it's very much a grind out really, isn't it, in Western Europe to try and find those opportunities? How long do you think it could take -- and this goes back to a conversation we're having before the meeting -- how long would it take really for your perception to change from being a single market company with some exciting add-ons to being an international spirits company?


Paul S. Bal, Stock Spirits Group PLC - CFO & Director [18]


So on the first one regarding EBITDA. I think, Chris, the consensus that's out there is around sort of in the mid sort of 62 level according to Bloomberg, and we're comfortable with that overall sort of number as an aspiration for this financial year. And then, sorry, you'll just need to give me some help with the second question.


Christopher Wickham, Equity Development Limited - Analyst [19]


The second one really refers to the -- just the buildup of EPS growth. I mean obviously, you printed 11.3% there. And that comes off 8 point -- roughly about 8% from sales. And then you got the 2 equally divided add-ons really, which is sort of margin enhancement. And then the financial effects of sort of interest and tax. I was just really wondering whether we should just leave the latter 2 in place and then sort of maybe strike a lower sales growth when we're looking forward 2 to 3 years to just to have that sort of mental buildup of what your earnings per share growth model is.


Paul S. Bal, Stock Spirits Group PLC - CFO & Director [20]


Which is probably traditionally what has been the case, yes. So I would say I would probably stick to that. Yes.


Miroslaw Boguslaw Stachowicz, Stock Spirits Group PLC - CEO & Executive Director [21]


On the final question regarding the acquisition and how long this is going to change the perception of us as being single -- focused on single geographic markets. Well, I think that the perception as far as our company is concerned regarding the M&A is changing. We had a lot to prove. It was a stated part -- it has been the stated part of our strategy that we will consolidate the markets. And we had first to prove we are capable of doing this because there was no M&A since the IPO until 2016.

Now we have 4 M&As, 4 bolt-on acquisitions behind our belt, 3 in the existing geographies. So we have been able to change the perception that we are unable to do acquisitions. Now we can prove we can. There was a lot of questions at that time whether there are targets available. And I was saying, "Yes, there are targets available. They are attractive with good financial return." Despite the general perception that assets are overvalued, we are able to buy them at the right price.

So I think that that's another significant change. We can prove that we have assets. We are identifying assets that are available at the right price. And as I signal here, we will continue to do so. We see still scope in some of the existing geographies to continue to do bolt-ons. But we will need to absorb some of the bolt-on acquisitions that we have already done. So we are looking at new geographies. And we cannot clearly comment about what acquisitions we have in mind, but I'm signaling that we are looking at new geographies as we see the potential to extend into new geographies.

I think it will benefit our business provided that we meet the criteria that we have set out. So we need to operate in the adjacent geographies, we need to use our competencies, and we need to be very clear about what kind of acquisitions we make in order to give them immediately the critical mass in the markets that we will be operating.


Matthew Reid, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [22]


Matt Reid from Berenberg. Just a couple on Czech. Have you seen any impact so far in the kind of I guess competitive maybe promotions or whatever behind Jägermeister following them taking back distribution in the market from Rémy Cointreau I believe?

And then just kind of going back to looking at margin for the second half of the year, what should we kind of anticipate in terms of the impact from the Fernet relaunch? Is that going to be another kind of chunk margin dilutive like we saw previously from the launches behind Black Fox and Republica?


Miroslaw Boguslaw Stachowicz, Stock Spirits Group PLC - CEO & Executive Director [23]


Well, let me take the Jägermeister question and then Paul will respond to the Fernet question. The quick answer to your question is we have not seen much of an impact of Jägermeister acquiring the distribution from Rémy Cointreau in Czech and in Slovakia. Do we expect to see any significant change? We don't.

You have seen from our announcements that we've seen a lot of price aggression in this segment with the Jägermeister's pricing coming down significantly. We are addressing this issue with the relaunch of Fernet. We needed time to -- we needed to sequence events correctly in the Czech and Slovak, especially in the Czech market in order to take advantage of all the opportunities that we had available to us. And I think that the results of the Czech business indicate we were right because the performance has been nothing short of stellar.

So what we need to do is we need to address this issue of competitive situation in the Fernet market, in the bitters market. And we have -- we are confident we can do this. I don't expect a worst situation coming from Jägermeister because the price position of Jägermeister has been aggressive over the last 2 years. The amount of investment going into distribution building and ATL communication has been heavy. So I think we don't anticipate any significant change there. The -- our activities will respond to this challenge appropriately.


Paul S. Bal, Stock Spirits Group PLC - CFO & Director [24]


On the question about margins, Mat, I mean, clearly our strategy is not to be margin dilutive, right? Let's be assured. But in terms of being able to provide a definitive, it's far too early. There's too many moving pieces and also obviously it's commercially sensitive. But certainly our intention is not to be margin dilutive.

There's a number of things that are in play. Obviously, it's too early at the moment to be able to definitively comment on the performance. We only launched it a few weeks ago. So it's still sort of finding its way into the market.

Also, we have obviously the excise exchange on the horizon. And the other variable that comes into play in the case of this category of course is alcohol content, ABV. So that also has a bearing. So there's a number of sort of moving parts here. But certainly, the intention is not to be margin dilutive.


Miroslaw Boguslaw Stachowicz, Stock Spirits Group PLC - CEO & Executive Director [25]


Are there any more questions? No. Thank you very much for your time. A pleasure to meet you.