U.S. Markets open in 7 hrs 42 mins

Edited Transcript of STCK.L earnings conference call or presentation 4-Dec-19 9:00am GMT

Preliminary 2019 Stock Spirits Group PLC Earnings Presentation

London Dec 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Stock Spirits Group PLC earnings conference call or presentation Wednesday, December 4, 2019 at 9:00:00am 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

* Javier Gonzalez-Lastra

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

* Matthew Charles Webb

Panmure Gordon (UK) Limited, Research Division - Analyst

* Sahill Javed Shan

Nplus1 Singer Capital Markets Limited, Research Division - Senior Research Analyst of Consumer

* Ted Nyhan

JP Morgan Chase & Co, Research Division - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Good morning, everyone, and thank you for joining us for our 2019 full year results. We have published today our reported numbers for the 12 months to 30 September 2019 and pro forma unaudited comparatives. As usual, I'm joined here today by Paul Bal, our CFO.

I will start by providing a brief summary of the year, then take you through the business review for the period, including an update on the performance in each region. As well as clear evidence of our strategy in action, before handing over to Paul to take you through the financials. I'll then come back to give you some closing remarks, after which you have the opportunity to ask questions.

I'd like to start by summarizing our performance during the year. We delivered a very good market share performance in our 2 key markets.

In Poland, the turnaround of our business is now complete, and we have now delivered 29 consecutive months of year-on-year volume share growth in both volume and value terms. Revenue -- sorry, we continue to outperform our competitors there in share growth in both value and volume terms. Revenue from Poland increased 14% on a constant currency basis. In the Czech Republic, we have enhanced our market-leading position, which has been further strengthened by the acquisition of Bartida during the year. And underlying revenue from this market increased by 10% on constant currency basis -- excuse me, I need some water.

The group achieved a positive underlying financial performance, growing revenue by a little over 10% on constant currency basis and underlying adjusted EBITDA by 7.3%, also on constant currency basis. Adjusted earnings per share was up over 17 period -- 17% in the period. Our cash generation remains strong with 91% cash conversion during the year.

At the year-end, our leverage stood at 0.7x. The fact that this performance has been driven almost entirely organically, shows that our underlying organic growth strategy is working. However, it has also been an eventful year for M&A. In June, we completed the EUR 26.5 million acquisition of Distillerie Franciacorta in Italy. And in May, we completed the bolt-on acquisition in the Czech Republic of Bartida for up to EUR 11 million. We have already signaled previously, we continue to look at the range of value-enhancing opportunities. In terms of M&A, this will leverage our expertise in vodka and bitters. And what we constantly -- and we are constantly reviewing a number of opportunities across Europe in what we call the vodka and bitters belt.

Today, we are announcing a circa EUR 25 million investment in our Polish distillation capabilities, which will take place over a 3-year period and have a 5-year payback. Lastly, I'm pleased to announce that the total dividend for the year of EUR 8.94 per share, which is up a little over 5% on last year's total dividend. This demonstrates a continued progressive dividend in line with our policy.

We will now go through the performance on market-by-market basis, starting with our core market of Poland on Slide 6.

The overall Polish spirits market is now worth EUR 3.7 billion, up 7.5% in value terms at September 2019 versus September 2018. The clear vodka market grew up 4.6%, with flavored vodka continuing to perform well, up 8.1%. The economic backdrop in Poland remains positive, which in turn means that the higher price trends within vodka continue to have the greatest growth as disposable income rise and unemployment falls. The whiskey category also continues to demonstrate strong value growth, up 15.7% in the year. And the other segment, rum, gin and tequila are now starting to show good growth, albeit from a small base.

In our half year results statement in May, we referred to the possibility of an increase in alcohol excise in Poland. As you might have seen, since then the draft legislation to implement a 10% increase from January 2020 was introduced in the Polish Parliament in November and is on the verge of being passed. Now you would expect me to say that such events are normal in this industry. But I would like to nevertheless say we have prepared very well for this event. Paul will cover this in his -- in more detail in his section. But in the meantime, I want to say that Stock is in a very different position now than it was in 2014 when it was the last increase in Poland. And we have now far stronger brands, we have far stronger operations and teams across the region. And the wider Polish and Czech economies are now much more robust, with rising disposable income, falling unemployment and increasing consumer confidence. All in all, we are confident that we will be able to manage our way through this situation.

Now moving to Slide 7. We continue to outpace both our competitors in Poland and share gains in both volume and value terms. We are also outpacing the market in clear and flavored vodka and across all price segments, including premium, mainstream and economy.

Turning to mainstream pricing on Slide 8, you can see from this chart, which covers the last 18 months, there had been a clear and positive pricing trend over the past year. It is worth noting that our brand Zoladkowa de Luxe is growing faster than its segment, in spite of generally being priced higher than the competitors.

As you can see from Slide #9, we are the only player in the Polish market to have consistently delivered quarterly market share growth throughout the year. In fact, to the end of September 2019, we have now achieved 29 months of consecutive volume share growth year-on-year and 25 months of consecutive value share growth. We think this is a great performance in the context of such a competitive market. And having seen October data, I'm pleased to confirm that this trend has continued.

In terms of evidence of our strategy in action in Poland, I would like to highlight the continued success of Saska in appealing to the millennial audience. This has been achieved by creating a compelling communication campaign around the 3 new flavors that were launched in 2018, supported by point of purchase merchandising and social media campaign, which reached over 2 million views on different platforms. In addition, the recognition of the changing way in which young adults are consuming our products, we recommended pairing the flavors with selected foods.

As a result, Saska flavors achieved 102, moving annual total -- sorry, 102%, moving annual total value growth versus last year in the Polish off-trade.

Turning now to the Czech market on Slide 12. As in Poland, we have seen continued strength in the wider market due to a robust economy and rising disposable income. The total value of spirits market grew 3.2% to EUR 0.5 billion. We continue to see a particularly strong performance in the rum and whiskey segment, which is -- which more than compensated for a contraction in the total demand for herbal bitters, during the period. Vodka, the second largest spirits category, was flat in the year, whilst retailer-owned label vodka continued to grow its growth rate and share gains slowed significantly. In our half year results statement in May, we referred to the possibility of an increase in spirits excise in the Czech Republic. Legislation proposing a 13% increase from January 1, 2020, is progressing through the parliament, with final approval expected very shortly. As in Poland, we have prepared extensively for this situation. And Paul, again, will cover this in more detail in his section.

Moving to Slide #13. Notwithstanding our leadership position, we increased our market-leading value share of total spirits from 33% to 34.3%, driven by growth in rum and whiskey. We grew value share in rum, the biggest spirits category in the Czech Republic, by 4%, from 61.8% to 65.8%. This was driven both organically by the strong performance of Republica rum and via M&A through addition of the Bartida rums. The decline in the herbal bitters category is being addressed by the recent relaunch of Fernet that has increased the average price per liter of the product by 22%.

Moving to Slide 14. In terms of evidence of our strategy in action in the Czech Republic, the use of digital communications, which is another key strategic pillar for us, around the relaunch of Fernet has been particularly successful. From April to September, we ran an online campaign entitled "Be the maker of our own destiny," which incorporated content-on-demand adverts on Facebook and Instagram, high-profile sampling events and music events to generate online social media activity by attendees of our targeted demographic. The result of this activity was improved brand awareness and higher consumption frequency scores. For example, perception by consumers when asked, "Fernet Stock is a brand that I want to be seen with" increased by 50% and "Fernet Stock is better than other brands" increased by 53%. Now for those of you in the audience who are financially minded, these are very important scores.

Moving on to Slide #16 and Italy. Turning to Italy, which, as a reminder, accounts for around 9% of our sales. During the year, there has been an improvement in consumer confidence underpinned by slight declines in unemployment and inflation and an increase in disposable income. Reflecting this improving macro trend, the total spirits market grew in value by 3.8% to EUR 1.6 billion. And just comparing it, it's slightly ahead of the growth rate we saw in the Czech market, but in a market that is 3x the size of the Czech market. The market remains highly fragmented, but attractive, given the potential for consolidation. During the year, we entered the premium Grappa market, courtesy of our acquisition of the Distillerie Franciacorta. While the Grappa market declined very slightly overall, it grew in the standard price and premium segment with the decline coming from the economy segment.

In our half year results statement in May, we referred to the possibility of an increase in VAT from 1st January 2020. Since then, there have been no further developments in this area.

Moving to Slide 17. Against the background of an improving market, our underlying Italian business is showing signs of stabilization. And we achieved positive revenue growth in the second half of the fiscal year. We grew volume and value share in the branded category, driven by continuing success of our Stock 84 range. Notably via the premium Stock 84 XO variant. The relaunch of Keglevich is beginning to deliver results in the flavored vodka category, where our value share is now at 61%. A key focus for our Italian team was the acquisition of Distillerie Franciacorta and the integration process is well on track. We are also delighted to recently announce the appointment of a dedicated managing director for the Italian business. Marco Alberizzi is an Italian national and has extensive beverage and FMCG experience in the region, with a great track record of turnaround at Bacardi Italia.

Moving to Slide 18. In terms of evidence of our strategy in action in Italy, our work with Stock 84 is a great example of our ability to successfully premiumize our products. Last -- sorry, 2 years ago, we launched Stock 84 XO, a barrel aged, 8-year-old brandy with improved packaging and brand positioning. As a result, Stock 84 XO now commands a retail price premium of around 35% versus Stock 84.

As a result, we have achieved moving annual total value growth of 4.5%, which is well ahead of total brandy category growth of 1.4%.

Now looking at other markets division on Slide 20. In the Slovakian market, we saw a marginal decline in volume share but managed to maintain our value share. We maintained brand leadership in the herbal bitters category but lost share due to the highly competitive pricing. The recent Fernet Stock relaunch is addressing this.

In vodka, Amundsen value growth rate was double that of vodka category. Our biggest growth driver was rum, where Božkov Republica's rollout achieved #2 ranking behind Captain Morgan in the imported rum category in the first year of launch.

Turning now to international. We grew both volume and value in Croatia through our on-trade focus, which was supported by the relaunch of Stock 84 and a widened range of distribution brand. We also saw good growth of the Polish vodka brands in Germany and the U.K. on the back of appointment of new distribution partners there.

Now moving to Slide #21. Our strong route to market makes us the partner of choice for global brand owners such as Beam Suntory and Diageo, where we hold multiyear distribution contracts with these global companies. This allows us to generate incremental margins from categories in which we would otherwise not be present. Having premium third-party brands in our portfolio also helps us drive our own premiumization strategy, albeit their growth inevitably dilutes our percentage margin. The strength of our route to market yields benefit for both parties. And you can see on the page here some examples of the value growth we have generated in the year.

Moving on to Page #22, I want to update you on our acquisitions that were undertaken recently. All 3 acquisitions are on track, with integration progressing well. Starting with Distillerie Franciacorta, it provides us real scale in Grappa, especially in the premium segment. It also means that we are now the #1 Grappa player in the branded off-trade. Bartida gives us a unique focus on premium on-trade and provides us with a business model that we will look to deploy in other markets.

Finally, looking at JV with Quintessential Brands in Dublin. Poland is now the third largest market for the Dubliner. We're also very pleased with the numerous awards received by our brands, reflecting the superiority quality of our whiskey -- superior quality of our whiskey.

Moving to Slide #23. Acquisitions are not the only investment that we can make to enhance the shareholder value. Today, we are announcing an investment of circa EUR 25 million in expanding our Polish distillation capabilities. It will have a 3-year -- it will be a 3-year project. And once commissioned, will generate a very attractive 5-year payback. It will enhance our gross profit margin in the future but also increase our current capability to support our strengthening business as well as provides flexibility in our distillation capabilities across the group. This investment represents also a strong vote of confidence in our growing Polish business.

Moving to Slide 24. And finally, before I hand over to Paul, I want to reiterate our criteria for future M&A. This slide will be familiar to those of you who attended our capital markets event in the summer in the Czech Republic. In terms of type of target we are looking at, there will be businesses with which we can leverage our expertise in spirits and especially in clear and flavored vodka and in bitters. We are looking for proven local brands that have positions of scale in their segments and markets and are cash generative and are geographically close to our existing operations in order to facilitate synergies where possible.

We are setting high financial hurdle rates in assessing these acquisitions, in line with the impairment rates for the given market rather than our actual cost of capital. And in terms of the regions we'll consider, it's what we describe as the vodka and bitters belt across Central, Eastern and Northern Europe. And as we've said before, we will not be considering acquisition opportunities in Russia, Belarus and Ukraine.

With that, I will hand over to Paul for the financial review.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay. Thank you, Mirek. Good morning, ladies and gentlemen, and it's my pleasure to announce our result for the year ended 30th September, '19.

I'm going to start with Slide 26. The audited results for the year 30 September '19, were required to be reported against the comparative, which is the audited reported results for the 9 months ended 30 September '18. This is because the group adopted September 30 as the new year-end last year. Therefore, to provide a more comparable picture of our performance, we're also reporting pro forma comparatives. These comprise the results for the 12 months ended 30 September 2018. So my section of today's presentation is based on that pro forma approach to presenting our results.

How these are compiled is summarized in Slide 48 in the appendix to this presentation. Further detail is set out in the results announcement release this morning and in our annual report and accounts, which is available in due course. This is the last time we will take this approach as from this year we will have comparable audited prior year numbers.

For a further twist in the 2019 results is a result of the 2 acquisitions. Both acquisitions were only completed in June, and therefore, have only had a small impact on the group's results for this year. Nevertheless, there are places in our reporting where we refer to underlying results and these are references excluding the impact of those 2 acquisitions. On this pro forma basis, our underlying results show continued improvement in financial performance from the top lines of volume and sales growth to the bottom line. In constant currency terms, underlying revenues were up 10.1% to EUR 308.4 million. Underlying gross profit margin was 47.5%, in line with our expectations. Adjusted EBITDA grew 7.3% to EUR 63.2 million. Underlying adjusted EBITDA margin was 20.5%, and basic adjusted earnings per share grew 17.7% to EUR 0.1968 per share. Beyond the profit and loss account, our cash flow delivery remains robust, and as a consequence, our balance sheet remained strong even after making 2 acquisitions. After I present more details on the financials, I will provide an update on excise in Poland and the Czech Republic. Then I'll end by covering the final dividend that we're proposing in line with our progressive policy.

Finally, IFRS 16 on leases is effective for us on the 1st of October 2019. The anticipated estimated impact on the current year ending 30th September 2020 is not material and is set out in Slide 50 in the appendix of this presentation.

So moving to Slide #27, and the group's consolidated profit and loss account with the pro forma comparatives. I won't go through the entire detail set out here. Suffice to say, the reported 10.6% increase in revenue was impacted by a small unfavorable currency effect. The underlying revenue, excluding acquisitions, was up 9.2% of reported rates or 10.1% in constant currency terms. Clearly, our growth strategy is driving strong top-line growth, and our profits are growing, too, gross profit being up 7%. We invested more behind our brands than in previous years. There has also been more investment in our sales force capabilities. We include our 25% share as a result of our associate Quintessential Brands Ireland Whiskey Limited, and this result is in line with our expectations. Overall, our performance has resulted in another year of double-digit growth in operating profit and a slight improvement in our operating profit margin.

We booked 3 exceptional items before tax this year. First, as reported at the half year, a noncash impairment of EUR 14.3 million against the carrying value of our Italian business. And now, EUR 1.1 million of costs associated with making the year's 2 acquisitions, and a EUR 3.8 million noncash foreign exchange gain on liquidating a dormant subsidiary. Higher net finance costs largely reflect more borrowings to fund acquisitions. The lower tax charge and lower effective tax rate are impacted by payments and settlements in respect to historic tax issues, mainly in Italy, and the underlying effective tax rate is stable. Underlying performance is best reflected in the improved adjusted EBITDA growing 6.4% year-on-year or 7.3% in constant currency terms. It is also visible in the adjusted earnings per share growth of 17.7%.

Turning now to Slide #28. Breaking down the results of each half year shows the cyclicality following the move to a 30th September year-end. The first half of the financial year containing the important fourth calendar quarter, now our Q1, is a little bigger than the second half of the financial year. Across both halves, we see continuing year-on-year upward momentum in our underlying revenues, even before you include the contribution from the year's acquisitions. Adjusted EBITDA has a positive momentum, too, especially in the second half of the year, reflecting the later Easter in 2019 and given that integration costs were being incurred at our acquired businesses.

Looking at the underlying results, excluding the acquisitions impact, margin pressure was less than in the first half.

With Slide #29, 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 strong 8.5%, with some 50 basis points coming from the year's 2 acquisitions. The markets driving this growth were Poland, with its increasing share and growing market and the Czech Republic going from strength to strength.

Stripping out this very positive volume impact, our underlying average prices were slightly up. Foreign exchange impacts were negative this year, and I'll cover that later in my presentation, and mix improved as we premiumized further.

Clearly, our growth strategy is driving strong top-line growth. And the Slide 30 shows profits are growing, too, with gross profit being up 7%. It's driven by positive momentum in our key markets, our organic growth strategy and also acquisitions. We remain very focused on input costs. We leverage our growing scale and smart sourcing and procurement continues to help us manage cost inflation. However, there was margin dilution. And as we proceed with our plans, sales mix can have a different impact in terms of margin mix. And notwithstanding the higher gross profit, mix changes across our markets, channels, customers and brand portfolio resulted in a gross profit margin of 47.3%.

Today, we announced our intention to build additional distillation capacity in Poland. The capital investment will be around EUR 25 million over 3 years, and will deliver a strong return and a fast payback for a plant investment, being about 5 years. Besides the vote of confidence in our Polish business, it will give the group more strategic flexibility as well as more means to manage our margins.

Looking then specifically at Poland in the next slide, Slide #31, We see revenue grew a strong 14% at constant currency, as it benefited from a healthy positive combination of all 3 growth levers: volume growth, positive pricing and improving mix. Of the 3 levers, pricing still lags the others, reflecting the continued strong competition in the market as it shows. EBITDA grew 9% in constant currency terms, showing once again our capability in a very competitive market to grow and yet also deliver a very decent return. The EBITDA margin was outside our 26% to 27% range that we aspire to, simply because we chose to invest more behind our Polish portfolio than before.

Turning to the next slide, Slide #32, to the Czech Republic, our second biggest market after Poland. As in Poland, we delivered very healthy growth in the top line at 13.1% in constant currency terms. Stripping out the sales contribution of the newly acquired Bartida business, it was still a strong 10%. This underlying growth was primarily driven by premiumization and notably, the continued growth of Božkov Republica rum as well as of the Beam Suntory portfolio. Their success is now spread across all 3 growth levers but especially volume and mix.

EBITDA growth was a very strong 12.1%. Even without the small contribution from Bartida, it was up 11.5%. Underlying EBITDA margin, excluding Bartida, would have been up on 2018 at 30.6%, given lower marketing investment this year. The margin dilution from Bartida reflects integration and is not an indicator of the normal margins to come from that business. We expect this business to be earnings enhancing in the current year.

I move now to Slide #33. As Mirek said, in Italy, we see signs of stabilization in the second half of the year, and some progress with pricing was possible. Both volume and revenue were slightly up in the underlying business in the second half. Revenue for the full year rose 4.4%, due completely to the contribution of the newly acquired Distillerie Franciacorta business. Otherwise, underlying revenues were only slightly down for the year. Adjusted EBITDA and the EBITDA margin was down. The costs associated with integrating the Distillerie Franciacorta weighed on the EBITDA and the EBITDA margin also. And it's not an indicator of the margins that the business is capable of delivering once integrated. A bigger, more complex business than Bartida, we expect this business to be earnings enhancing in the next financial year.

Turning now to Slide #34, I now move to rest of our operations. The 5.2% revenue growth helped by contribution from Distillerie Franciacorta export sales. The underlying growth rate was still 4.2% and largely driven by our international business, especially in the Balkans and Germany.

As Mirek mentioned, Slovakia showed resilience in the face of tough market conditions, managing to deliver some revenue growth. EBITDA and EBITDA margin declined. The contributing factor were higher costs in our Baltic distillery. The positive EBITDA contribution from Distillerie Franciacorta exports wasn't enough to offset the underlying business.

If we now move to Slide #35, I've already mentioned that foreign exchange movements provided a small headwind to our top line. This was also the case for our bottom line. This came from the weakening of our 2 main currencies, the Czech crown and the Polish zloty versus the euro. In the appendix to the presentation on Slide 49, we have set out the key exchange rates over recent periods. We have found our key currencies to have been relatively stable. And we can reconfirm that we don't believe the proposed Brexit will have a material impact on our business.

The next slide, Slide #36, sets out our net finance costs. Our financing arrangements run to late 2022, and they have not changed over 2019. The Czech Republic's interest rate has risen over the period, so raising our interest costs a little. Otherwise, we have seen higher financing costs, mainly due to higher borrowings to finance the year's 2 acquisitions and also to pay historic tax.

I now turn to Slide #37, and turning now to the subject of tax. The significant rise in the current tax expense comes from both higher taxable profits but also having exhausted brought-forward tax losses in Poland. However, there is a corresponding offset from a lower deferred tax charge. The picture is distorted by movements related to prior years. This year saw a material benefit from settling historic issues under an Italian tax amnesty. Ignoring exceptional items and the prior year issues, a more stable effective tax rate in the mid-20s over both years is there. The tax environment remains challenging with authorities taking an aggressive approach. As reported before, we have felt this, especially in Poland. Here, as previously reported, during the year, we were assessed in respect of our 2013 corporate tax returns, mainly relating to pre-IPO corporate restructuring between 2009 and 2013. Our first appeal heard by the tax authorities themselves in August was unsuccessful. Our next appeal, which will be held by normal courts with the hearing scheduled to start later this month. Based on the professional advice received, we remain confident that our position will ultimately prevail.

The group has provisions totaling EUR 4.5 million, down from EUR 8 million last year, were based on professional advice. Future settlements are likely or expected with respect to the historic positions. Nevertheless, in some other circumstances, the group may have to pay over 7% as deemed by authorities and then seek their recovery through appeal.

Moving to the next slide, Slide #38, we come to cash flow. Strong cash generation has been a hallmark for this group, and the free cash flow rose 5.9%. The implied conversion rate was a robust 91%. The main reason for the lower conversion rate than last year is an increase in capital expenditure, predominantly in our plants and our car fleet. It masks good progress being made in managing down our working capital.

I'll click now to Slide #39, and staying with this theme on the next slide. Notwithstanding our strong cash flow generation, our net debt increased to EUR 43.3 million, a rise of EUR 10.7 million during the year. Of course, this largely reflects the 2 acquisitions completed this year as well as tax and dividends paid. Our balance sheet leverage has risen to 0.67x. This is within our desired range of 0.5 to 1.5x leverage. The group has significant liquidity available to it and is well-funded in the future to pursue our strategic growth aspirations and to reward our shareholders with progressive dividends.

With Slide #40, I'll now turn to the subject of excise in Poland and Czech Republic. In neither country has any new law actually been enacted yet. But the legislative process is underway, and we are sufficiently confident both will pass shortly to take effect from the 1st of January 2020.

For Poland, a 10% excise rise against most alcohols is expected. The last rise was in early 2014 at 15%. The 10% rise expected now could represent a retail price increase of some 8%. For the Czech Republic, the proposal is for a 13.2% excise rise just for spirits alcohol. The previous rise was in 2010 at 7.5%. And the 13.2% excise rise now could represent a retail price increase of some 10%. Whilst we cannot share our precise plans due to commercial sensitivity, we can explain some of the ways in which we are prepared for such developments, and some of the actions we'll be taking over the coming months to manage the impact. After all, having to manage excise increases from time to time is an inherent characteristic of this industry.

Over the years, our business has become more resilient. Our brand portfolios in both markets have a much larger premium component, where consumers are typically more resilient to higher prices. In the Czech Republic, the proportion of our revenue that is premium has almost quadrupled since 2010 to nearly 40% of our revenue.

In Poland, the proportion has more than doubled since 2014 to 35%. Brands covering all price segments give us flexibility to use them tactically to achieve overall pricing objectives. We are also more adept at managing margins through managing the alcohol content within our products. Overall, we are going into these excise changes better placed than we were last time.

Inventory building is common in situations such as this, and this is now underway. Throughout the value chain, players will hold more inventory at the old prices. This gives flexibility as to how and when price -- new pricing will be introduced once the new excise is effective.

Our strong balance sheet gives us the strength to participate in this as well as to provide support to our customers. The pricing strategy in response to the excise rise is critical and requires good market insight and intelligence as to consumer, customer and competitive positions as well as to their likely actions and reactions. It also requires a capable sales force to execute the strategy and yet be flexible enough to adapt to an evolving competitive situation. Once the new pricing is in place, focus shifts from customers to consumers. Though spirits could be considered a staple in these markets, it still becomes important to reignite consumer interest in the category. And our marketeers are already developing plans for this.

These plans also has to be flexible enough to adapt to changing scenarios and competitive reactions. Consumer communication, including through digital channels, also plays a part. We believe we have all this in hand with both of our teams in Poland and in the Czech Republic. We are also entering into this situation with strong positive momentum in both markets. In these markets, as we saw with previous excise rises and we expect to see again this time, a short-term negative effect on consumption.

But then, there is a clear return to trend in the following year. More premiumized markets, especially those with positive economic prizes in which consumers now enjoy considerably stronger earnings should prove more resilient to higher pricing than before. And given our September year-end, any consumption impact will be spread over the current and next year. Excise and price increases always provide challenges. However, Stock Spirits is in better shape than it's ever been to manage this.

I now turn with my final slide, Slide #41, for the subject of dividends. The board today has proposed a final dividend of EUR 0.0631 per share for the 12 months to September 30, 2019. This is progressive, being a 5% increase on the EUR 0.0601 per share final dividend for the previous 9 months. The total dividend for the year including the interim dividend of EUR 0.0263 is EUR 0.0894 and this is a 5.1% increase over 2018's total dividends.

Going forward, we will continue to focus on providing our shareholders with progressive dividends where cash generation allows. And with that, I thank you, and I'll hand back to Mirek.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Paul. So to conclude, this has been another year of continuing operational and financial progress. Our Polish business now has been turned around, and we are consolidating our leadership position in the Czech Republic, and Italy is stabilizing. Poland -- in Poland, we are announcing a significant investment in additional distillation capacity with a very attractive payback period. The strong finance -- underlying financial results speaks for themselves.

And we are pleased with the M&A that we have undertaken to date. And we are also pleased with the progress we are making against our -- the 4-pillar strategy. In the area of premiumization, our aim was for 30% of Stock's revenue to come from -- to come from premium brands. We have exceeded this target, achieving 31.7%, and doing so a year ahead of schedule. Our aim for millennials was to attract internationally minded consumers to our local brands. And we have now increased our millennial consumers, up 3.4% to 21.1%, an additional 300,000 consumers in the target segment added to our portfolio.

In Digital, we had the objective of regularly communicating with 75% of our target consumers through digital channels. During the year, our combined digital communication achieved a reach of 88.8%. And I covered earlier our track record in M&A. So all in all, we are very happy with the strategic progress that we are making.

And finally, I want to finish up by outlining the opportunities that we see in front of us. Firstly, we feel confident in saying that we have built a strong track record in local brand premiumization and distribution, while also executing and integrating acquisitions. Secondly, we are now the #3 spirits player in Europe in volume terms and the #1 player in Central and Eastern Europe. And as I said before, this volume point is very important as it gives us a strong route to market with all its strategic benefits. And from here, our medium-term strategic plans beyond 2020 are to continue to exploit these advantages of scale and distribution especially through premiumization and to explore and potentially enter attractive new segments and markets. By doing so, we see a clear opportunity to significantly enhance shareholder value using our financial resources to accelerate organic growth and to execute our disciplined acquisitions strategy. That concludes the presentation today. We would like to now open up the floor for questions.

Could you please identify yourself with your name and organization before you ask your question. Thank you.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Ted Nyhan, JPMorgan. Two questions, please. Just on margin dynamics for next year in the context of a potential mix shift towards premium potentially, also how's marketing spend? Some color throughout would be helpful. And then also, in terms of the difference in the impact of the excise duties in Czech and Poland. Do you expect there to be a material difference in either retailer or consumer reaction? Or is it broadly similar?

--------------------------------------------------------------------------------

Miroslaw Boguslaw Stachowicz, Stock Spirits Group PLC - CEO & Executive Director [2]

--------------------------------------------------------------------------------

Maybe you take the first and I take the second.

--------------------------------------------------------------------------------

Paul S. Bal, Stock Spirits Group PLC - CFO & Director [3]

--------------------------------------------------------------------------------

Sure. Okay. So first, on the margin -- on the margin point, Ted, you know me better than that. I'm not going to give any future guidance on margin. I mean suffice to say, the margin impact that we've seen this year, as I said on the slide, was predominantly driven by a combination of mix factors. It's not input costs per se. If we look at the movement that we have seen, about 1/3 of that came from classic cost inflation, right? The rest of it is a combination of these impacts that we see. Now a lot of these impacts are coming from progress on our strategies. They're planned, they're expected. And in a way, they're signifying our success. Our challenge, of course, is to manage those. And obviously, focusing on what we can do, we can bring our input cost down further and the investment that we've outlined today is one step in achieving that. It will create the space that we can manage these kind of shifts further. But to what those shifts will be in the future, we shall have to wait and see.

In terms of the material point?

--------------------------------------------------------------------------------

Miroslaw Boguslaw Stachowicz, Stock Spirits Group PLC - CEO & Executive Director [4]

--------------------------------------------------------------------------------

Yes. The question about the differences between the way that excise will play itself out in Poland and Czech, what do I say the difference is? Well, I think there are 2 key differences. One is the shape of the distribution channel is different in Czech and in Poland. So the traditional trade in Poland is being much more fragmented, allows us having a much better access than our competitors to be more skilled in introducing our pricing strategy. In other words, in Poland, over 60% of sales of spirits are done through the very fragmented traditional trade channel. And there are only 2 companies capable of executing effectively price rises in this channel, that's -- we are one of them. And the second point that differentiates Poland and Czech is the importance of on-trade. Now Poland has a relatively small on-trade, Czech has a relatively large on-trade. So the sales of on-trade into the HoReCa channel and bars is over 30%. And for premium, it's well over 40%. Now we are much stronger in on-trade, especially after the acquisition of Bartida.

On-trade will be much less sensitive to excise increases because consumers are paying the premium in on-trade anyway. Now that gives us -- that very strong position in on-trade in Czech Republic gives us a possibility to shift resources and to get better return from investment in marketing in the more premium end of the market. So it will cushion the potential impact.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

I think Mirek has talked about the differences. I mean, the one important similarity is the dynamic we've seen historically. But in the first 12 months, you've got the dip in consumption, but within 12 to 24 months, it's back up to a normal trend. We've seen this in past for sure.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Javier?

--------------------------------------------------------------------------------

Javier Gonzalez-Lastra, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [7]

--------------------------------------------------------------------------------

Javier Gonzalez-Lastra from Berenberg. A couple of questions. Mirek, I appreciate you can't talk about your pricing strategy too much in detail ahead of the -- or until the excise have increased, but I just wonder whether you could comment from the lessons learned in the situation in 2014, '15. What would it -- looking at that example, what would you have done different back then in terms of the pricing and on-trade -- the trade execution? Second question is the slide -- what is it -- 31, where you guys gave the growth -- volume growth in Poland of 11.1%. I just wonder whether you could give us a -- break that down in terms of what the third-party brands have contributed to that growth. And lastly, I was interested on your comment of utilizing the financial flexibility to facilitate the trade load. Does that mean that you're going to facilitate payment terms to your customers? And we should expect a significant increase in the debtor days?

--------------------------------------------------------------------------------

Miroslaw Boguslaw Stachowicz, Stock Spirits Group PLC - CEO & Executive Director [8]

--------------------------------------------------------------------------------

How about I take the first one?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

I'll take the second.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

So Javier, concerning the pricing in 2014, I wasn't around in 2014, but I joined as a nonexecutive in 2015. So I have learned the lessons very well.

There was -- the problem in 2014 wasn't so much the excise itself. It was broader pricing after the excise. And it was the decision of the Russian competitor to not to pass on the excise and consequently dropped the pricing by roughly 15%. It wasn't the handling of the excise that was the problem, the problem was the perception of the management team at the time that, that position was not sustainable for Russian competitor.

What has changed since then is that we have adjusted our strategy, and we have told ourselves -- the assumption that we have been making since the time when I came on board was that the current pricing in mainstream market in Poland is here to stay forever. And the challenge I put in front of the team was to make it work. So we need to grow regardless of pricing in mainstream in Poland. And I think we have demonstrated the ability to do so. We grow both top line and the bottom line successfully, regardless of what our Russian competitor does with pricing. So it wasn't so much the handling of excise. It was the overall pricing strategy. And rest assured, regardless of what we do with excise, we will cut -- remain competitive in pricing. And I have demonstrated on Page 8 that we are capable of pricing our mainstream products at some premium to the other players and still outgrow the mainstream category. So clearly, we are fully capable of pulling other levers, which are marketing and sales levers, that we were not capable of pulling in 2014. And that's really the -- ultimately, the biggest difference. The biggest difference, the quality of the team.

Now there is a reason why we are investing EUR 25 million in Poland, and it really is the vote of confidence from our Board and to the capability of getting good return on this. And that's down to the team that we have in place in Poland that really knows what they're doing. We have systems in place. We have control of the business. I'm confident we'll manage this.

Paul, to you.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

So Javier, your second question was about the role of the third-party brands in the Polish growth story of -- particularly on the top line of 14%. We obviously, for commercial sensitivities, we don't talk about the sort of precise sort of proportion of our business, which is third party. But suffice to say, in the 14%, the third-party portfolio has played its part. And we've seen that, obviously, as I said, in the mix impact that we saw, for example, third-party sales going through in whiskey in Poland. The third-party portfolio is working alongside our own portfolio, it's growing at similar kind of rates to our own portfolio and the overall sort of indicator of that is if I look at the overall proportion or contribution that third-party makes to our sort of portfolio in Poland, it's relatively stable.

--------------------------------------------------------------------------------

Miroslaw Boguslaw Stachowicz, Stock Spirits Group PLC - CEO & Executive Director [12]

--------------------------------------------------------------------------------

There was one more.

--------------------------------------------------------------------------------

Paul S. Bal, Stock Spirits Group PLC - CFO & Director [13]

--------------------------------------------------------------------------------

Yes. So -- and then in terms of the final question, which was about trade load. Yes, I think it starts with a competitive advantage. Our balance sheet, our strong balance sheet gives us a competitive advantage over both our competitor, Marie Brizard, there obviously issues, but also over our bigger competitor, Roust. Now obviously, we will use that to our competitive advantage. And we have done that in the past as well, if you recall, back at the end of 2017. Now we are at September year-end. So consequently, the trade load that we will be seeing that is now taking place will probably peak towards the end of this quarter, but then we'll unwind over the coming quarter. So consequently, any sort of distortion of working capital should have played itself out within the first half of the year. Now it does, of course, raise concerns about governance and cash management, and I'm confident of the controls that we've got in place in terms of authorization to make sure that we're extending credit where it's safe to do so. And we've also got other mechanisms in place in our markets, including Poland, to give us some protection should things not go as we plan them to go.

So overall, I'm confident that we're able to sort of exploit our balance sheet, and we will do so competitively in this situation.

--------------------------------------------------------------------------------

Christopher Wickham, Equity Development Limited - Analyst [14]

--------------------------------------------------------------------------------

Chris Wickham from Equity Development. Just 3 things. I mean I was wondering, perhaps, if you could put a bit more granularity about the actual investment behind the Polish brands that you talk about on Slide 31. And another thing, when we talk about pricing, I mean, clearly, we're many, many -- we're 5 years on from where we were in that notorious 2014 in terms of your largest markets, but, yes, there is always a combination of how the market is structured and then premiumization. You have that stated target of 30, you obviously beat that. I was just wondering where you might go in terms of premiumization, not simply in the percentage of premium brands, but simply what you're charging for those premium brands, I mean, where you can start to scale up in terms of you've got the scale of pricing.

And then finally, in terms of M&A, obviously, you've given us that heat map, that footprint where you want to be, and you've been very descriptive in terms of the kind of businesses you'd like to acquire. What I'd really be interested to know is, what is it that you would do better with your targets than what they're currently doing. When you look at them, you say, "Ooh, that's not the way you run that business." What is the sort of the magic Stock Spirits effect that's going to turn those businesses around and therefore, add a lot of value for shareholders?

--------------------------------------------------------------------------------

Miroslaw Boguslaw Stachowicz, Stock Spirits Group PLC - CEO & Executive Director [15]

--------------------------------------------------------------------------------

Yes. Let me...

--------------------------------------------------------------------------------

Paul S. Bal, Stock Spirits Group PLC - CFO & Director [16]

--------------------------------------------------------------------------------

I'll take the investment, and you take the pricing? And you can touch on the magic?

--------------------------------------------------------------------------------

Miroslaw Boguslaw Stachowicz, Stock Spirits Group PLC - CEO & Executive Director [17]

--------------------------------------------------------------------------------

Yes, I'll do the last ones.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

So the investment -- so the -- specifically, the investment that was made in Poland, the increase in investment year-on-year were predominantly in the flavored vodka category, as it were. And the brand which benefited the most is the iconic Zoladkowa Gorzka brand. And that, as you know, is an iconic brand. It's the bitter orange bottle that people will sort of remember with a recipe that goes back to 1822.

So besides the mother brand, our money went on these things here, Chris, which are 2 premium extensions of Zoladkowa Gorzka called Kolonialna. And this is now sort of going back to sort of 1822, the spirit of sort of Polish adventure, maritime adventure exploration and spices and botanicals and so forth. Okay? So that's where the bulk of the investment went on that particular brand. There was investment across, obviously, the rest of the portfolio, too, but that's where the big gain was, okay? In terms of your sort of second question...

--------------------------------------------------------------------------------

Miroslaw Boguslaw Stachowicz, Stock Spirits Group PLC - CEO & Executive Director [19]

--------------------------------------------------------------------------------

Yes. It's about the premiumization and how quick would that translate into higher pricing? And I guess, the root of your question is if we premiumize so well, how come we are not getting better pricing, right? Now we are premiumizing in 2 ways, and we are getting better pricing. We are premiumizing through sales of our own brands, and we are also selling more third-party brands. So our successes in whiskey are through mostly global brands of Beam Suntory and Diageo. These brands we sell with different margins because for Diageo and Beam, we are, of course, distributers, and these sales are margin dilutive for us even though in terms of cash margin, they're highly attractive we would not want to do without them. It's very clear. It makes sense for us to be present in segments where we don't have our strong brands, where we don't have other brands at all to use third-party brands. It also has a cross-selling effect. So when we go to a premium on-trade outlet, let's say, in Poland, still 2 years ago, we wouldn't be in a position to sell our vodka portfolio without having Beam Suntory brands because they opened the door. So we -- even though you don't have an immediate financial impact, it opens doors. The fact that you are what is called the full-range supplier is important for our on-trade customers. So that effect is very important.

Further premiumization will be taking place. We are ambitious. And as Paul said, if you look at the business in Poland in 2014, it was about half of the sales than -- I mean, it was much smaller segment of the premium sales, it doubled since then. In Czech Republic, since 2010, it quadrupled. So we are doing the right thing in this respect. And we will continue, but it will not have then the same effect on our margins as it does on margins of, say, companies like Diageo, where they're only selling their own -- their own brands.

Last final point I would make. We had a huge success with this product, which is called Republica. It's a fantastic product. It's also massive margin. But in terms of margin percent, it is dilutive versus other products because we are buying Caribbean rum. We're buying in bulk, we are negotiating the pricing right, but we don't yet own a distillery in the Dominican Republic, nor do we plan to own one in the near future. So consequently, it will have a dilutive effect, even though it makes all the strategic sense in the world to sell this product because it has hugely attractive margins. And finally, the magic of SSG? Well, acquisitions are about being able to make them and being able to make them work. And I do think we can do this. We have -- we are looking at businesses that are about local brands. And I think our track record in the last 3 years shows that we know how to premiumize local brands and how to make them work, how to leverage the strength of route to market. We really know about this. I did not say this on the presentation, but I feel reasonably confident on the basis of the turnaround we have delivered in Poland, so we can take any broken business and fix it. So clearly, we will be looking at businesses that are in a perfect shape. We'll be looking at businesses where we identify an opportunity to apply ourselves to it. We are a team that is used to working internationally. We are an international team, fairly diverse. And I think we can work in any European market and add value there. And our Board is of the same view having to work with -- having worked with us for the last 3 years.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

I think in terms of sort of specifics, Chris, I mean, specific sort of tangibles, if we look at the investments that we've made this year, the 2 acquisitions, when we bring, for example, more route to market, clearly, given our size, there's obviously the cost leverage. I talked about our capabilities in sourcing and in procurement. I have to say, we get stronger and stronger. And of course, the more scale we bring into the machine, the better the result. Our marketeers, particularly on the digital side -- remember these are predominantly sort of private and small companies that we're buying, so we're able to also throw in our competency in that area, including digital, as I said. And also, finally, as Mirek says, it's the ability to premiumize in a way that the current vendors aren't necessarily able to do.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

And finally, what Paul is referring to is what we call the base in our strategy. So you are very well familiar with the strategic 4 pillars. But there is a base there. There was a huge amount of work in our business that went into strengthening the foundation, which means that when we come to an acquisition like Distillerie Franciacorta, right now, we are in a position to have plug-and-play processes. So when we come there, we don't waste time on thinking how to do this. We have a process, and we say, okay, this is how the process works, we plug you in. And we are in a position to do this with any other acquisitions. So we're confident we can integrate well.

--------------------------------------------------------------------------------

Matthew Charles Webb, Panmure Gordon (UK) Limited, Research Division - Analyst [22]

--------------------------------------------------------------------------------

Matthew Webb from Panmure Gordon. Can I start off with a couple of questions on Poland? The first really sort of broadens out Chris' question about investment in the Polish brands. Obviously, you talked about investment to premiumize your portfolio. But I see in the statement, you also talk about stepping up the intensity and quality of promotional support. And I just wondered whether you could give a bit more detail on what was entailed there and which particular categories and brands got that support. And the second question on Poland was just whether you were able to give any guidance on the phasing of that EUR 25 million of investment? I've got a couple of questions on Italy as well, but maybe do those first.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

I'll take the first one. And maybe you could talk about the phasing?

So the quality and the amount of the promotional support. I think the -- without going into specifics by brand, if you turn to the slide on the Polish market, on Page 6 -- it's better the one on 7. You have the brands, and we compare here the segment growth versus our brand growth. And in various segments, we use various tools to propel this growth, which is well ahead of the segment. So going one by one. In the economy segment in Zubr, it was really about pricing because in economy segment, that's what matters. We are, of course, having superior liquid to other economy brands in Zubr. And people who buy economy brands don't buy it for prestige, they buy it because they know about vodka, they appreciate vodka and they know the taste for vodka. And the quality of liquids that we have in economy is superior to anything that competition has, and that's how we win. So it's about price and quality mix.

On Zoladkowa de Luxe, it's about the quality of execution in trade. We have relaunched the bottle in 2018. And because it's a massive brand, it's the largest brand, it is. Only in 2019, we really only had the new bottle on the shelf. So we have directed resources to execute this well on the shelf in the in the traditional trade. It's over 60,000 stores. And you need to go to them and you need to merchandise the product correctly, and you need to also have point of purchase merchandising materials that block the position on the shelf for your products. When there are only 2 companies that can effectively execute this, that has a devastating impact on others. And you can see this in the position of Marie Brizard. And we, of course, have programs to do this. We have what's called the Perfect Store program, where dozen -- over dozen -- over 10,000 stores are now executed according to our merchandising standard within the Polish trade.

Moving on Stock Prestige. This has grown really rapidly, plus 26%, and it's the #1 premium brand in Poland. And we've grown this segment. Segment grew 25%, and we still outgrew the segment being the leader. That is achieved both through the quality of execution and the quality of communications, mostly digital communication. And this digital communications in Stock Prestige -- Stock Prestige is a very young brand. So it is one of our millennial brands. It's also one of our millionaire brands. So we -- the execution, digital execution of Stock Prestige is critical. And that's where our know-how comes in play. We have really creative ideas. And if you met the marketeers there, these guys are different kind. They're really creative people. So we come up with the digital communication that is striking the chord with the millennials. Amundsen is the same. And the quality of execution in Amundsen is so high, our Polish team actually got what's called Effie. And that's the most prized and respected prize for effective marketing execution influenced for the campaign -- digital campaign, where we were running a photo competition for extreme sports for Amundsen, which was Amundsen Expedition competition. It had huge response from amateur photographers and has created big waves.

Beluga, we use the same muscle, it's not our brand, but it's -- we don't have anything in the ultra-premium. And finally, Lubelska, which is a massive brand, and it has outgrown at double the speed of the segment. We invested in new product development there in execution. And it's also about the recipes. So we have upgraded recipes of the products. You can see we are playing different -- we are pulling different levers and it's not one fits all. It's depending on the segment, on the brand, on the target consumer.

Did I answer this one for you?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes, so Matt, in terms of your second question, which was about the phasing of the EUR 25 million investment in the distillation capacity. As you will appreciate, we're still sort of fine-tuning our actual sort of plans. And given the size of this, obviously, that's quite a task. But for obviously, appreciating the need to sort of want to sort of model the impact that this has on cash and so forth, I would say the assumptions that I would suggest sort of for now, would be probably looking at over the next 3 years, so taking year '20, '21 and '22, I would take a profile which is 6, 13 and 6. So the bulk of the investment falls into the financial year 2021, okay? That's realistic given sort of where we are with excise at the moment and where our focus is. So that, I think, reflects where the phasing at this stage is. Obviously, because it's a material project, we will keep you updated on our progress on that. And if that materially changes, I will obviously report that. I think it's also -- I think at this stage, we're sort of saying that this is beyond the traditional guidance that I have given on CapEx. So the traditional guidance I've given on what I call operational CapEx has been EUR 6 million to EUR 10 million per year. A program of this magnitude is sitting outside and beyond that guidance.

--------------------------------------------------------------------------------

Matthew Charles Webb, Panmure Gordon (UK) Limited, Research Division - Analyst [25]

--------------------------------------------------------------------------------

That's very clear. And then just 2 questions on Italy. The first, I think you said that there was no new information on the proposed VAT increase. Are you assuming that goes ahead or not? And then the second question, you said that the DF acquisition integration is proceeding according to plan. But I wonder if you could just sort of update us on where you are in that process, for example, are you starting to get any benefits from cross selling? Or is it too early for that?

--------------------------------------------------------------------------------

Miroslaw Boguslaw Stachowicz, Stock Spirits Group PLC - CEO & Executive Director [26]

--------------------------------------------------------------------------------

You take the second one. And -- sorry, what was the first question?

--------------------------------------------------------------------------------

Paul S. Bal, Stock Spirits Group PLC - CFO & Director [27]

--------------------------------------------------------------------------------

On the VAT...

Right. So on the VAT, with the 2% VAT increase that was being promoted (inaudible).

--------------------------------------------------------------------------------

Miroslaw Boguslaw Stachowicz, Stock Spirits Group PLC - CEO & Executive Director [28]

--------------------------------------------------------------------------------

There was the first stage of putting the 2 business together, which is done. So shipping products together to customers happened essentially on the one of the ownership, which is great. There was no delay. The customers did not see any gap. And it's putting together the 2 sales forces which is critical. And at that stage, we are now in. So large part of the Distillerie Franciacorta sales force is in on-trade, which is fantastic for us. These are agents, and we -- one needs to train these agents in the new products so that they are capable of selling them. We have looked at the entire brand portfolio, and we have split the brand portfolio in such a way, there's no competition between on-trade and off-trade, it's critical in any on-trade sales. We have cross -- started cross-selling some of the premium products of Stock like the XO brandy into the existing channel, whilst we have used our sales force, the old Stock sales force in the on-trade to improve the presence in the modern trade. Now modern trade takes time because terms and conditions need to be renegotiated on a cyclical basis. So we need to wait for the next cycle to see real benefits of this. But in on-trade, the benefits are coming quickly. We have also been able to start selling DF products in Croatia, and they are a big success there. Because of their premium nature, and our Croat business is mostly on-trade. So these premium products of DF are working very well in on-trade. So we're hopeful we'll be able to roll them out elsewhere. Our next target is Germany. We want to put some feet on the ground to get into the Italian -- with Italian products in Germany.

--------------------------------------------------------------------------------

Paul S. Bal, Stock Spirits Group PLC - CFO & Director [29]

--------------------------------------------------------------------------------

And given one of the objectives of this as we've sort of set out will have minimal impact on overhead. It goes without saying that the back-office integration is pretty advanced.

--------------------------------------------------------------------------------

Sahill Javed Shan, Nplus1 Singer Capital Markets Limited, Research Division - Senior Research Analyst of Consumer [30]

--------------------------------------------------------------------------------

It's Sahill from Nplus1 Singer. Most of my questions, in all honesty, have been answered but just a few follow-up questions here. Just again on acquisitions, you've talked about DF in Italy. What about the one in the Czech Republic? I suppose what I'm getting at really is relative to your sort of revenue cost synergy expectations, how are the 2 acquisitions performing? The second question is, again, the nod to the increase in duty increase coming through the next 12 months or so, what's the expectations in terms of a step increase in marketing spend going forward to try to mitigate that in terms of sort of getting the consumers on site and trying to derisk the volume risk from that? And my final question was coming back to the Polish market, could you give us a bit more color in terms of competitive behavior or struggles vis-à-vis Marie Brizard in particular, out in the Polish market since you updated us back at the interim stage?

--------------------------------------------------------------------------------

Miroslaw Boguslaw Stachowicz, Stock Spirits Group PLC - CEO & Executive Director [31]

--------------------------------------------------------------------------------

Should I take the acquisition and the last one, maybe you can talk on...

Okay. So acquisition performance. It's well on track. And I think I repeated this twice, but maybe I'll give you a bit more color on this. So I already talked about the Distillerie Franciacorta. In terms of Bartida, that's an on-trade business that has been extremely successful by developing 2 tools. One is the direct channel to premium on-trade outlets, where they essentially deliver immediately after receiving an order. And the second one is the e-commerce shop. We have aligned the e-commerce activities with the premium range of our products, and that's mostly Republica, we also launched in -- when was it -- in September, the premium version of this one, which is Fernet barrel-aged and that is going strictly in the first stage into on-trade outlets using the channel of Bartida. So it has opened up -- Bartida has opened up a rapid way of deploying premium products from our portfolio in this. The -- we have said that Bartida will be profit enhancing in 2020, and I'm confident it will be because it's -- the integration has gone extremely very seamless. We have actually designed it as a separate entity in our organization. And we have connected the back offices, but we want to keep the sales forces autonomous because of the different nature of distribution channel. So it is almost as if we had another distributor, a specialized distributor because we are geared to dealing with distributors very well, we are actually using the sales force of Bartida as if it was a specialized on-trade distributor, with rapid developments there.

And DF, I will -- I have covered, though, the thing with [Fernet].

Now concerning the competitive behavior in Poland, well, I've shown you the pricing. We are winning in Poland. There's no question. And we've shown you sufficient number of figures to confirm that we are winning in terms of market share. I think the objective of our competitors are different. I think that the objective of Roust is to defend and monetize their market share. It's beginning to be more apparent, defend and monetize. And I think that the objective of Marie Brizard is to get out. The -- that's my suspicion, of course. But I followed their announcement closely and they say in their announcement that they will consider any option. They have already sold their wholesale business. Rumors has it that they are out in the market looking for buyers for the -- for various assets that they have in the market. So the outlook for competition, it's unpredictable always what will happen with -- especially with excise increase. Early signs, you can see that there's an upward trend in pricing since in the last 12 months. Early signs of what companies want to do, we are in December. So price lists usually need a month -- need to be communicated a month in advance to the trade.

So we have seen what our competitors have done in point of pricing. And essentially, the price lists have been increased by an excise, especially important here is Roust is the largest player. Now it doesn't guarantee that there will be no drop in pricing as a result of discounts and allowances late in the game, but the early signs are promising. Marie Brizard is less material in this respect. I think because they are looking for a way out, I think that they will be very aggressive in pricing. But the room for maneuver is limited because over the last 3 to 6 months, they have filled the trade with so much product. You can see the difference in the -- what they are reporting as sales out and sales in, so their stocks are growing. Their ability to respond to the price increase now will be limited. And I think that they have few options.

--------------------------------------------------------------------------------

Paul S. Bal, Stock Spirits Group PLC - CFO & Director [32]

--------------------------------------------------------------------------------

Coming to your question about what does it mean for marketing investment in light of the excise? The short answer is it's not going to make a material impact to our marketing investments. And the reason why is, if we look back over these 2 markets, and I think we've said this from -- when we announced the 2017 results, back in March 2018, we said that we were entering a period where we were going to step up investment behind our brands, and we did that. So in both of these markets, the portfolios have enjoyed sustainable levels of consistent investments. So at this juncture, we don't see the need to all of a sudden to step up an investment in marketing. We're quite happy with where our portfolios are. Now what it does mean, Sahill, if the pricing environment becomes competitive, we're well placed in terms of the equity of our brand. As we saw in the pricing chart for mainstream clear vodka, even with our pricing where it is we're growing share. And that's a testament to the equity that we've built over the last few years behind these brands.

--------------------------------------------------------------------------------

Miroslaw Boguslaw Stachowicz, Stock Spirits Group PLC - CEO & Executive Director [33]

--------------------------------------------------------------------------------

There are no further questions. Thank you very much for joining us. Hope to see you at the half year results.