Stock Spirits takes heart from turnaround strategy as Ebitda rises 66%

Stock Spirits takes heart from turnaround strategy as Ebitda rises 66%
By bne IntelliNews August 10, 2016

Central and Eastern European drinks producer and distributor Stock Spirits Group announced on August 10 that its first-half core profits before exceptionals rose 66%. The distiller also appointed Miroslaw Stachowicz, who has worked as interim CEO since the departure of Chris Heath in April, as new chief executive.

The improving results are arguably a vindication of the new management team’s strategy to turn around the business, which was hurt by problems in its key Polish market. The difficulties led to conflict with Portuguese businessman Luis Amaral, whose Western Gate Private Investments became the largest shareholder with the purchase of a 9.7% stake in November and who has since installed two of his directors on the board. Heath’s early retirement came as a result of that fight.

It was the former CEO's struggle to deal with the problems in Poland - where Amaral leads major wholesaler Eurocash - that was at the crux of the battle. A 15% hike in Polish excise taxes at the start of 2014 sparked a prolonged price war. Stock Spirits has a 38% share by value of the Polish spirits market, and draws around 60% of its revenue in Central Europe's biggest market.

The first half results suggest Stock Spirits is now making headway. Ebitda before exceptionals rose to €17.9mn for the six months to June 30, compared with €10.8mn a year earlier. Revenue was €116.0mn in the first-half versus €108.0mn a year earlier, while operating profit was €12.5mn compared with €5.2mn and profit after tax €8.4mn versus €0.2mn.

“Today we have reported Ebitda growth across all our markets for the first half of this year, after a difficult 2015, showing that the many initiatives we have put in place in Poland are starting to show positive results,” Stachowicz said. “Although the recovery is in its early days, I am confident that, along with our strengthened management team in Poland, we will be able to build on this encouraging start over the coming months.”

The company's London- and Prague-listed shares have risen 37% over the past six months, and following the results were trading up around 1% at CZK52.55 in Prague.

Stachowicz said as CEO he will continue to implement the strategy that came out of a “root and branch review” announced by the company last year, in response to pressure from Amaral. Eleven actions covering the entire spectrum of operations were recommended, including the elimination of waste, price repositioning of key brands, changing the way in which the Polish sales force operates, and reallocating advertising and promotional spending across the group to focus more on Poland.

“We are showing progress on the vast majority of these actions as they are implemented… and we are well on track as the results are beginning to show,” Stachowicz adds. He cites a recent distribution contract with the the premium Beluga brand of vodka, as one that fits “perfectly with out product portfolio and does not cannibalise our premium offerings of Amundsen Expedition and Stock Prestige”.

The company announced an interim dividend of €0.0227 per share, which follows the July payment of a special dividend of €0.119 per share. “This, together with the normal dividend payout, will result in the payment of 100% of net free cash flow to shareholders for 2016,” the company said.

This is a strategy the company is using to keep shareholders on management’s side in the fight with Amaral, who the company claims wants Stock Spirits to chase market share without any reference to profitability. Amaral has a conflict of interest, the company says, because he is also the CEO and largest shareholder in Eurocash, Stock Spirit’s largest customer.

“This is a commitment to all the shareholders that if we do not identify any sizeable M&A in the near term, which we said in March, then we would find ways to return cash to shareholders,” said Stachowicz.

Lesley Jackson, chief financial officer, said: “Other shareholders have asked when we would return surplus cash if we didn’t do material M&A, but it certainly hasn’t come from Western Gate.”

Some analysts, however, were less impressed with the results. J&T Bank said that overall, the results for the first half confirm earnings rebounded and the situation on the Polish market has calmed. However, the analysts also note that in the first quarter the company reported revenue growth of 29% y/y to a total of €55.3m, which means that in the second quarter revenues actually declined 7%. 

“This is probably connected with earlier disputes of the management with the largest shareholder and an effort to ‘inflate’ the 1Q result," they write. "Nevertheless, without further details, the development in 2Q was either unfavourable or the results published for 1Q did not really correspond to reality. Either option does not put the management in a very good light."

Stock Spirits Group was established in 2008 from the merger of Eckes & Stock and Polmos Lublin. The group has a portfolio of more than 40 brands across a broad range of spirits products including vodka, liqueurs, rum and brandy, and operates in the markets of Bosnia-Herzegovina, Croatia, Czech Republic, Italy, Poland and Slovakia.