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Stock Spirits Group PLC

Preliminary results for the year ended 30 September 2019

A year of good operational and strategic progress, driving strong financial growth

Turnaround of Polish business now complete

4 December 2019: Stock Spirits Group PLC ("Stock Spirits" or the "Company"), a leading owner and producer of premium branded spirits and liqueurs that are principally sold in Central and Eastern Europe and Italy, announces its results for the year ended 30 September 2019 and its proforma unaudited comparative results.

Highlights:

·; Strong underlying volume (+8.0%) and revenue (+10.1% on a proforma constant currency basis) performance reflecting our successful growth strategy; delivered premiumisation target a year ahead of plan

·; Poland: turnaround now complete having delivered 29 consecutive months of year-on-year volume share growth. Revenue from Poland increased 14.0% on a constant currency basis.

·; Today announcing an investment of c. €25m in additional distillation capacity in Poland, to be completed in three years' time

·; Czech Republic: consolidated our market leadership position, taking share in both volume and value. Underlying revenue increased 10.0% on a constant currency basis.

·; Completion of two acquisitions: Distillerie Franciacorta, a leading grappa, spirits and wine business in Italy; and Bartida, a high-end on-trade spirits business in the Czech Republic

·; Exceptional items in the year totalling €11.7m including non-cash impairment loss and a tax credit on historical goodwill and existing brands in Italy (as disclosed at the half year), realisation of an exchange gain following liquidation of a subsidiary and acquisition costs in relation to the two acquisitions made in the second half of the year

·; Profit up 107.8%% to €28.3m (2018 proforma: €13.6m, 2018 9 month reported: €19.3m); basic EPS up 107.9% to 14.26 €cents per share (2018 proforma: 6.86 €cents per share, 2018 9 month reported: 9.71 €cents per share); adjusted basic EPS up 17.7% to 19.68 €cents per share[2], (2018 proforma: 16.72 €cents per share, 2018 9 month reported: 9.71 €cents per share)

·; Total dividend for the year +5.1% at 8.94 €cents per share; proposed final dividend of 6.31 €cents per share[3]

·; Net debt of €42.3 million at 30 September 2019 (September 2018: €31.6 million), resulting in leverage of 0.7x[4] (2018 proforma: 0.5x), after net payments of €31.8m for the two acquisitions

Commenting on the results, Mirek Stachowicz, Chief Executive Officer, said:

"We have delivered a year of good growth as our successful strategy of premiumisation continues to make progress. The turnaround of our Polish business is complete, and we have now delivered 29 consecutive months of year-on-year volume share growth in that market. We have also strengthened our leadership position in the Czech Republic, taking market share in volume and value.

We continue to assess a range of M&A opportunities following our successful acquisitions this year of Distillerie Franciacorta in Italy and Bartida in the Czech Republic, and are committed to pursuing a strategy of both organic and inorganic growth in order to deliver further shareholder value in future.

We are also pleased to announce today an investment in our distillation capabilities in Poland, which will bring future value to our business through cost reduction."

ENDS

Analyst presentation

Management will be hosting a presentation for analysts at 9.00am today at Numis Securities, London Stock Exchange Building, 10 Paternoster Square, London, EC4M 7LT. If you would like to attend, please contact Powerscourt on the details below.

A webcast of the presentation will also be available via www.stockspirits.com and a recording made available shortly afterwards.

For further information:

A copy of this preliminary results announcement ("announcement") has been posted on www.stockspirits.com.

Investors can also address any query to investorqueries@stockspirits.com.

About Stock Spirits Group

Stock Spirits is one of Central and Eastern Europe's leading branded spirits and liqueurs businesses, and offers a portfolio of products that are rooted in local and regional heritage. With core operations in Poland, the Czech Republic, Slovakia, Italy, Croatia and Bosnia & Herzegovina, Stock also exports to more than 50 other countries worldwide. Global sales volumes currently total over 125 million litres per year.

Stock has production facilities in Poland, the Czech Republic, Germany and Italy and its core brands include products made to long-established recipes such as Stock 84 brandy, Fernet Stock bitters and Limoncè, as well as more recent creations like Stock Prestige and Żołᶏdkowa de Luxe vodkas.

Stock is listed on the main market of the London Stock Exchange. For the year ended 30 September 2019 it delivered total revenue of €312.4 million and operating profit before exceptional items of €53.9 million.

For further information, please visit www.stockspirits.com 

Chairman's Statement

As Chairman of Stock Spirits Group PLC, I am pleased to present our results for the year ended 30 September 2019.

The year reflected further delivery of our growth plan, with increased revenue and profits as well as market share in our two largest markets of Poland and Czech Republic. In addition, we were pleased to complete two acquisitions during the year: firstly, the acquisition in June of Distillerie Franciacorta, one of the leading Italian producers of grappa, liqueurs and Franciacorta - a premium Italian sparkling wine that is produced solely in the Franciacorta region; and secondly the acquisition in May of Bartida, a high-end on-trade spirits business in Czech Republic. The integrations of both companies are on track, and we are now focusing our efforts on more meaningful acquisition opportunities to deliver further shareholder value.

Dividend

In line with our progressive dividend policy, our proposed final dividend results in a total dividend for the year up +5.1% on the prior period 'enhanced' dividend, which was paid for the 9 month prior period. The final proposed dividend is 6.31 €cents per share (final dividend for the 9 month to Sept 2018: 6.01 €cents). In total for the year, this results in dividends of 8.94 €cents per share (9 month to Sept 2018: 8.51 €cents per share). The business continues to generate strong cash flows and a healthy cash conversion rate.

Looking ahead

As we look ahead, we are very much on track with our plans. There is good momentum in our core markets, our strategic acquisitions are delivering as planned, and we have a robust pipeline of new products and innovation. Furthermore, we have extensive plans in place to help mitigate the potential excise changes in some of our markets. We are committed to creating value for shareholders and we remain very disciplined as we assess a number of value-creating opportunities that are in front of Stock Spirits today.

Chief Executive Statement

Group financial performance

Following last year's adoption of a 30 September year-end, we present summarised results for the 12 months to 30 September 2019 along with proforma 12 month comparatives. On this basis, we delivered another year of growth in volumes, revenues and profits. We have developed a more premium portfolio and have exceeded our strategic premiumisation target (i.e. 30% of Group revenue coming from premium products) a year earlier than originally planned. Furthermore, we completed two strategic acquisitions, whilst also retaining a strong balance sheet to position the Group well for continued future growth - both organic and inorganic.

Our markets in overview

Total spirits volume in the Group's six direct-presence markets is c.552 million litres, a +1.7% increase on the prior year. Volume grew in each of the last three years and is now at a five-year high.[5] The strength and breadth of our portfolios combined with our market capabilities makes the Group the number one spirits company in the region represented by these six markets, and number three in Europe.

Vodka remains by far the largest category across our markets and accounts for almost half of total volume. This makes it almost four times bigger than the second category (herbal bitters and spirit aperitifs), and over five times bigger than the third category (whisky). Total vodka volumes have grown over the last two years, and the double-digit annual growth rates of premium and ultra-premium vodka over the last five years in this region are significantly higher than any other spirits category.

Herbal bitters and rum, where Stock also has leading brands, are both in volume growth. This is also the case for whisky, where Stock has built share primarily via distribution partnerships with Diageo and Beam Suntory, but is also building a presence using its own brands and those from our Quintessential Brands Ireland whiskey investment.

Spirits performance is influenced by many factors, including demographics, national economic performance, consumer confidence, disposable income, and regulatory environments. Whilst in the short-term consumer demand may fluctuate with economic and regulatory changes, over the long-term we anticipate growth in living standards and disposable income in the regions in which we operate, and therefore a greater demand for higher value spirits in line with our premiumisation strategy. Our sustained growth reflects our ability to leverage these trends by evolving our brand portfolios, supported by marketing investment, innovation, operational excellence, and strong sales capabilities.

Strong momentum in Poland continues

Revenue for Poland was €171.7m for the 12 month period to 30 September 2019 (9 months to 30 September 2018: €105.6m), with adjusted EBITDA of €43.1m (9 months to 30 September 2018: €27.5m).

On a proforma basis, revenue increased 13% from €152.6m in 2018. Adjusted EBITDA increased 7% on a proforma basis from €40.4m in 2018. In 2019, this division represented 55% of Group revenue (2018 proforma: 54%).

Poland is the world's third largest vodka market by value, and the number one European vodka market5. It is the Group's largest market in revenue and profit.

During 2019, the national economy grew, disposable incomes rose, and unemployment fell - all of which increased consumer confidence and purchasing power. These positive macro trends helped drive accelerated growth in spirits. Vodka was the top contributor to category growth, the second being whisky. The total vodka category grew both value and volume. The fastest value growth rate continued to be from the flavoured sub-category, but the far larger clear vodka sub-category returned to value growth, becoming the greatest contributor to absolute growth.

The global trend towards premiumisation in spirits is clearly visible in the Polish market, as total premium vodka achieved double-digit value and volume growth. The mainstream vodka segment continued to outperform the economy segment, with improved value performance. The economy segment continued to decline in value as competitive pricing in the mainstream segment continues to attract up-trading consumers.[6]

Stock is outperforming the total vodka market, with continued share gain. We have now delivered 29 consecutive months of year-on-year volume share growth, which is a clear sign that the Polish business has turned around. Stock's total vodka volume share grew from 26.8% last year to 29.0%, and value share grew from 27.4% to 29.5% (on an MAT basis). For a fourteenth successive month, our volume and value growth outperformed our largest competitor. Our second largest competitor continued to decline heavily in volume and value.

The leading contributor to our clear vodka share growth was the continuing double digit growth of our largest premium brand, Stock Prestige, which is the number one premium brand in the Polish market. Amundsen, another of our premium vodkas, grew volume at a rate almost double that of the top-premium segment in which it competes. Our leading mainstream vodka, Żołądkowa De Luxe, also achieved volume and value growth, outperforming that segment and retaking the number two position within it. In the declining economy segment, Żubr and 1906 both grew in value.6

Stock also grew total volume and value within flavoured vodka, leading growth in the category. Our leading flavoured brand, Lubelska, delivered a higher growth rate than the market-leading flavoured brand. Our Saska flavoured range continued to establish itself amongst emerging spirit drinkers, almost doubling in size. Żołądkowa Gorzka also returned to value growth.6

The continued strengthening of our sales team capabilities created closer cooperation with key customers. In addition, we stepped up the intensity and quality of promotional support, and have engaged in a significant programme of fixture re-layouts in the traditional trade which is yielding improved results.

In our half-year results statement in May, we referred to the possibility of an increase in alcohol excise from 1 January 2020. Draft legislation to implement a 10% increase from 1 January 2020 was introduced in the Polish parliament in November. We are taking the actions necessary to manage the change and its consequences, and are confident of our ability to mitigate any impact.

Strong performance in the Czech Republic

Revenue for the Czech Republic was €81.3m for the 12 month period to 30 September 2019 (9 months to 30 September 2018: €49.2m), with adjusted EBITDA of €24.4m (9 months to 30 September 2018: €13.6m).

On a proforma basis, revenue increased 11% from €73.2m in 2018. Adjusted EBITDA increased 13% on a proforma basis from €21.6m in 2018. In 2019, this division represented 26% of Group revenue (2018 proforma: 26%).

Excluding the impact of the Bartida acquisition in the year, underlying revenue and adjusted EBITDA for 2019 was €79.1m and €24.2m respectively.

The Czech Republic is our second largest market, where Stock has held spirits leadership for over 20 years[7], with brand leadership in the key categories of rum[8], vodka and herbal bitter liqueurs.

The national economy is performing well, with an increase in disposable incomes and a desire for premium products driving value and volume growth in spirits.

The four core categories on which Stock focuses - i.e. rum, vodka, herbal bitters and whisky - together account for c.75% of total spirits volume and are therefore key drivers of overall spirits performance. Value growth was driven primarily by rum, the largest category, and by whisky. These offset a flat performance from vodka, and a decline in herbal bitters.

Stock achieved significantly higher volume and value growth than the total spirits market, as well as superior value growth compared to our main competitors. This was driven by a combination of our premium innovation, benefits from previously-acquired brands, and the addition of new distribution brands. We increased our market leadership, growing value share from 33.0% to 34.3% and volume share from 34.7% to 35.8%.[9]

Within this, Stock grew its market-leading share of the largest category, rum, through the outstanding success of Božkov Republica, which launched in 2018 and significantly grew our value share of imported rum. Its growth was largely incremental as our core Božkov Tuzemsky brand also grew volume and value - as did Captain Morgan Original, which Stock distributes on behalf of Diageo.9

In a flat vodka category, Stock grew both volume and value. Whilst retailer own-label continued to grow, its growth rate and share gains slowed significantly. Stock's brand leader, Božkov vodka, delivered value growth that out-stripped that of retailer own label.

We have the strongest whisky portfolio in the Czech market through our well-established partnership with Diageo, the distribution agreement with Beam Suntory (which commenced in early 2018) and an increasing focus on our own whisky brands. As a result, we achieved strong whisky value share growth despite stiff price competition.

These successes outweighed share decline in the contracting herbal bitters category, where Fernet Stock was affected primarily by changed retailer promotional strategies coupled with aggressive price discounting from international competition. Fernet Stock was relaunched in the summer of 2019 to address this situation, and met with a very positive response from our trade customers and consumers.

We further developed our sales and trade marketing capabilities, with a step-change in category management as well as a continued focus on price management and promotional efficiency. We expanded our contact and service levels with a new dedicated call-centre which increased distribution, revenue and operational efficiency. We also continued to build customer relationships and develop our e-retail customer base.

In our half-year results statement in May, we referred to the possibility of increase in spirits excise. Legislation proposing a 13% increase in excise tax on spirits from 1 January 2020 is progressing in parliament, with final approval expected very shortly. As in Poland, we have implemented actions to manage the proposed change and are confident of our ability to mitigate any impact.

Italy stabilising

Revenue for Italy was €26.9m for the 12 month period to 30 September 2019 (9 months to 30 September 2018: €17.6m), with adjusted EBITDA of €3.6m (9 months to 30 September 2018: €1.7m).

On a proforma basis, revenue increased 4% from €25.8m in 2018. Adjusted EBITDA decreased 19% on a proforma basis from €4.4m in 2018. In 2019, this business represented 9% of Group revenue (2018 proforma: 9%).

Excluding the impact of the Distillerie Franciacorta acquisition in the year, underlying revenue and adjusted EBITDA for 2019 was €25.5m and €3.8m respectively.

The Italian spirits market remains highly fragmented with several mature categories including bitters, vodka, brandy, whisky and liqueurs. Whilst Stock has a relatively small overall share of total spirits, our 6.9% value share (2018: 5.7%)[10] in the modern trade channel gives us leading positions in a number of key categories in the off-trade. This includes number one positions in the clear vodka, vodka-based liqueurs, limoncello and (since the acquisition of Distillerie Franciacorta) grappa categories, and the number two brand in brandy.[11]

There has been an improvement in consumer confidence, underpinned by slight declines in unemployment and inflation and an increase in disposable income.[12] Reflecting this improving macro trend, the total spirits market grew in value and volume for the year as a whole. This was reflected in our own performance, which improved as the year progressed.

Stock grew volume and value share in the brandy category, driven by the continuing success of our Stock 84 range, notably via the premium Stock 84 XO variant. Volume and value MAT shares in our four other key categories - limoncello, vodka, flavoured vodka-based liqueurs, and existing grappa - were flat overall.

The first signs of stabilisation began to emerge during the second half of the year in our Italian business, as we continued to invest in our brands and people, reversing a number of years of cost-cutting. Trade relationships were strengthened through the successful negotiation of annual deals with all buying groups, and planned price increases were achieved. We continued to invest in our core brands of Keglevich and Stock Brandy, and started to see the benefits in the second half of the year.

Nevertheless over the full year, in a highly competitive market, Stock lost volume and value share on our existing brands in our key focus channel of the modern off-trade. As a result and as reported at the half year, there was an after tax €13.3m impact to the income statement of a non-cash impairment against historical goodwill and brands.

A key focus for our Italian team was the acquisition of Distillerie Franciacorta, and its integration is on track. Among its many benefits, the acquisition gives our Italian provenance a significant boost.

We have recently announced the appointment of a dedicated Managing Director for the Italian business, further strengthening the local team by assigning a full-time senior manager to run the business. Marco Alberizzi, an Italian national, has extensive beverages and FMCG experience in Italy and has a track record of business turn-around with Bacardi Italy.

In our half-year results statement in May, we referred to the possibility of an increase in VAT from 1 January 2020. Since then there have been no further developments. Nevertheless, we remain prepared to implement any actions necessary to manage any changes that may be announced.

Other markets

Other markets include Slovakia, Bosnia, Croatia, Bosnia & Herzegovina, our export activities and our Baltic distillery.

Revenue for our other markets was €32.5m for the 12 month period to 30 September 2019 (9 months to 30 September 2018: €21.3m), with adjusted EBITDA of €5.4m (9 months to 30 September 2018: €2.8m).

On a proforma basis, revenue increased 5% from €30.9m in 2018. Adjusted EBITDA decreased 5% on a proforma basis from €5.7m in 2018. In 2019, this division represented 10% of Group revenue (2018 proforma: 11%).

Slovakia: resilient performance in challenging conditions

In a lower growth spirits market than last year, Stock lost marginal volume share but maintained value share. Our biggest growth driver was rum, where Božkov Republica's roll-out achieved a number two ranking in imported rum. In vodka, Amundsen's value growth rate was double that of the vodka category. In whisky, Jim Beam, distributed on behalf of Beam Suntory, grew value well ahead of the total whisky category.

This growth off-set declines in two of our established categories, herbal bitters and fruit spirits. Stock maintained brand leadership in the highly competitive herbal bitters category, but lost share due to highly competitive pricing. The recent Fernet Stock relaunch is aimed at addressing this. Demand for total fruit spirits also contracted, negatively impacting the volume performance of Stock's Golden economy range, despite a stable performance from the premium Golden Ice range and strong growth in fruit distillates.

Overall, it was a challenging year in Slovakia, but one in which expansion into rum and whisky and a strong performance in vodka to remain the second biggest player in the off trade.

Other (i.e. Croatia, Bosnia & Herzegovina, our export operations, and our Baltic distillery)

In Croatia, Stock grew volume and value. This was achieved primarily through on-trade focus, which was supported by the relaunch of Stock 84 and a widened range of distribution brands.

In our export markets, the successful reorganisation of our route-to-market in Germany contributed volume uplift from improved distribution. Our new distribution partnership with The Drinks Company in the UK is now generating high margin incremental sales versus last year.

Irish whiskey joint venture: QBIWL

In March 2019 our Quintessential Brands Ireland Whiskey Ltd joint venture commissioned its Dublin distillery and opened its Visitor Centre. Liquid is now being produced and laid down. The brands of The Dubliner and The Dublin Liberties have recently won several international industry awards and are starting to gain traction in our markets. Poland is now the third largest market for The Dubliner globally.

Value creating acquisition strategy

During the year we completed two strategic acquisitions that in different ways represent the attractive value-creating opportunities that exist for Stock to augment our organic growth momentum. Distillerie Franciacorta provides a premium portfolio that enhances our current brands in Italy. Bartida brings strengthened distribution into the Czech premium on-trade channel. Both acquisitions will enhance our earnings and deliver returns ahead of our conservatively high hurdle rates.

The acquisition of Distillerie Franciacorta, announced in January 2019, was completed in early June and means that Stock is now the No. 1 grappa player in the Italian off-trade. This represents our first step in pursuing consolidation opportunities in the premium segment in Italy, and it has strengthened our position in what remains a fragmented but highly attractive market.

Grappa is Italy's fourth largest spirits category, and the total premium segments in which the Franciacorta brands operate grew by +3.3% in value year-on-year[13]. We see clear synergies with existing operations, both in the on-trade where we can leverage Distillerie Franciacorta's strong presence, and in the off-trade where the acquired brands will benefit from our traditional strengths.

The acquisition gives us a substantial amount of scale in grappa, especially in premium, with minimal additional overheads, and the acquisition is expected to be earnings enhancing in FY2021. More broadly, the acquisition also provides a strong platform from which to enhance the provenance of the Stock Italian brand portfolio and rejuvenate our Italian business. It will enhance our premium on-trade sales capabilities and triple the sales force, bringing growth synergies across the off and on-trade for our entire portfolio. The success of the transaction and integration process provides us with a useful 'template' for potential future acquisitions of this kind.

In May we also completed the acquisition of Bartida, bringing new capabilities and brands to our Czech business. The acquisition builds on our market leadership in Czech and delivers a step-change in our capabilities in the premium on-trade channel. Bartida focuses on premium on-trade outlets, and uses innovative channels such as an e-shop, demonstration bar and on-trade training centre. Bartida also provides a direct route to market to the premium on-trade, and it is a proven model in the Czech Republic which we aim to export to other markets.

The Bartida brand portfolio brings a combination of their own premium brands of fruit spirits and liqueurs, as well as distribution brands, primarily in premium rum. There are no conflicts with our current portfolio, including our distribution brands. Bartida will be earnings enhancing in FY2020.

As we develop our strategic ambitions beyond 2020, we remain committed to increasing shareholder value. Value-creating acquisitions in new categories and / or markets will be a key part of our strategy.

Innovations

We continued to build our core brands via a focused programme of NPD introductions. These aim to "trade-up" consumers to more premium purchases, and to attract millennial drinkers[14]. Collectively, an extremely strong NPD programme across core brands contributed to our value growth.

In Poland, a new premium Żołądkowa Gorzka range was launched under the "Kolonialna" sub-brand, with recipes inspired by 18th century Polish merchant adventurers. Lubelska expanded its appeal to millennial drinkers of flavoured spirits, with the addition of two new Lubelska Soda sparkling fruit flavours designed to widen category and brand usage. Orkisz, our top-premium Polish spelt vodka, was relaunched in a more premium new look, supported by in-store activation and a digital marketing campaign. This resulted in significant value growth in the top premium segment through expanded distribution and increased consumer appeal at point of purchase. Stock Prosecco was also relaunched in more premium packaging to widen its appeal to a millennial audience.

NPD in the Czech Republic also focused on premiumisation of our core brands and increased recruitment of millennial drinkers. The most significant NPD activity was the Fernet Stock relaunch, with new packaging, an expanded flavour range (including lower a.b.v economy and higher a.b.v premium offerings) and a revised pricing architecture, all supported by a heavyweight national marketing campaign.

We launched new labels on our core Božkov Tuzemsky range to improve shelf impact and provide easier range recognition and navigation for consumers. Božkov also expanded its range in the fast growing dark rum and imported rum sub-categories. Božkov Cerny (Black) was the first dark tuzemsky launched in the Czech Republic, and rapidly achieved leadership in that sub-category. Božkov Republica Reserva was launched in late 2019, and is a premium offer which complements our established Republica sub-brand. To celebrate November's thirtieth anniversary of the 1989 Velvet Revolution, Božkov Tuzemsky also launched a commemorative limited edition.

Alongside our successes with our partner whisky brand owners, we are developing our own whisky brands. During 2019 we redeveloped our single malt Czech whisky, Hammerhead, under the relaunched Pradlo brand name with new improved liquids and super premium packaging.

Amundsen vodka accelerated recruitment of millennial consumers. We relaunched its low strength vodka based liqueur range under the sub-brand "Fusion", with new packaging and an enhanced range of contemporary flavours. Building on the learning from our successful limited editions on Stock Prestige in Poland, Amundsen also launched a limited edition for the Czech on-trade, with a premium dark blue glass finish for added on-shelf impact.

Operations, supply chain, and additional distillation capacity in Poland

We continued to develop purchasing capabilities in order to mitigate adverse market conditions in certain categories of inputs. Our plants remain well-invested, with a particular focus on health and safety considerations. Options to create more flexibility to manage our overall cost of goods as well as mix headwinds are being constantly reviewed at all levels of the business.

One such initiative is to increase our own production of alcohol. With this in mind, we are announcing that we intend to substantially expand our distilling capabilities at Lublin in Poland to supplement our existing Baltic distillery. A capital investment of c. €25m is envisaged over a three-year period, with an estimated pay-back period of five years.

Digital and technology

The use of cutting edge technology is a key part of our strategy to deliver enhanced brand experiences. In Poland, Stock started the world's first virtual bartender league, which includes educational activity aimed at creating brand advocacy and increasing consumer engagement in the on-trade.

Our NPD success rate has been strengthened by our investment in a platform to better manage the development process.

We initiated our OneSAP project to develop and implement a common ERP solution across the group, aimed at better leveraging our scale across certain functions. An upgraded standard platform will be designed and implemented by FY2022. Being an existing SAP-user, this capital investment is not expected to materially increase our capital expenditure levels.

Our people

Our second employee engagement survey showed overall improving engagement levels. As with the previous survey, the results are being acted upon.

During the year, we updated our Vision and Mission, articulated our Purpose, and agreed the Values that define and align our organisation and culture.

Our partners

Stock is Europe's third largest spirits by company volume[15]. Given the scale of our positions in the markets in which we operate, we are an attractive partner to other spirits businesses wishing to leverage our route-to-market scale and capabilities.

Poland

We continued to grow whisky share via the Beam Suntory portfolio, where Jim Beam grew value share. Cooperation with Synergy Brands, with which we have partnered since July 2016, generated positive results, with Beluga growing value in the fast growing ultra-premium vodka segment.

Czech Republic

We are about to complete our fifth year as exclusive distributor of the core Diageo brands, and are delighted with the continued value growth of Captain Morgan, Johnnie Walker and Baileys. The addition of the Beam Suntory range materially increased our total whisky share and we began distribution of The Dubliner and The Liberties Irish whiskies from Quintessential Brands.

Integration of distribution brands with Stock's leading local brands across these markets and in Slovakia, Croatia and Italy brought significant benefits to the combined portfolios and further strengthened our overall offering.

Outlook

We are pleased with the momentum in our core markets of Poland and the Czech Republic, and we see significant scope for further growth across all of the markets in which we operate. The year's two acquisitions in Italy and the Czech Republic provide greater scale, a stronger and more premium portfolio, and new distribution capabilities that strengthen our business model.

Our planned investment in our distillation capabilities in Poland will deliver future value to the business and deliver margin enhancement as we grow the business further.

While there are challenges in certain areas of our business, notably in managing any impact that might result from the proposed excise tax increases in the Czech Republic and Poland, we remain confident in the strength of our brands, the quality of our people and the viability of our strategy. As a result, we feel well positioned for future success.

Chief Financial Officer Statement

Proforma results

Following the adoption of 30 September as our accounting year-end last year we have presented certain additional proforma financial statements to cover the 12 months ended 30 September 2018 ("2018 proforma"). We have also set out the basis on which these proforma financial statements have been compiled, and provided reconciliations to the reported financial statements. The proforma financial statements are not audited.

Financial performance

In the 12 months to 30 September 2019, we sold 14.4m 9 litre cases, up 8.5% on a proforma basis from the 13.3m 9 litre cases sold in the 12 months to 30 September 2018 and up 58.2% from the 9.1m 9 litre cases sold in the 9 months to 30 September 2018. On an underlying basis, excluding the impact of acquisitions in the year, we sold 14.3m 9 litres cases in 2019, up 8.0% on proforma 2018 volumes.

Total Group revenue was €312.4m for the 12 month period (2018 proforma: €282.4m), up 10.6% on a proforma basis and up 11.6% on a constant currency proforma basis[16]. Total Group revenue was up 61.2% from €193.8m on a reported basis. Total Group revenue for the 12 month period included €4.0m from the acquisitions. Total underlying Group revenue (reported revenue excluding revenue from acquisitions) was therefore up 9.2% on a proforma basis and up 10.1% on a constant currency proforma basis16. Total underlying Group revenue was up 59.2% on a reported basis.

Revenue per litre[17] in the 12 month period was €2.42 (2018 proforma: €2.37), reflecting the progress in improved sales mix and pricing as our focus on premiumisation gains traction. Revenue per litre17 in the 9 months to 30 September 2018 was €2.36.

Costs of goods per litre17 rose during the 12 month period to €1.27 (2018 proforma: €1.21). This reflects the impact of cost inflation, and as a consequence of premiumisation, a higher proportion of distribution brand volumes and externally sourced liquid in our sales mix. Cost of goods per litre17 in the 9 months to 30 September 2018 was €1.22.

Gross margin therefore reduced to 47.3% (2018 proforma: 48.9%), down 1.6 ppts on a proforma basis and down 1.4 ppts on an underlying basis. Gross margin for the 9 months to September 2018 was 48.2%. Underlying gross margin (reported gross margin excluding gross margin from acquisitions) was 47.5%. Besides cost inflation, the additional distribution brand volumes and externally sourced liquid, this also reflected an adverse mix across our geographies, channels and customers.

Selling expenses were €61.3m for the 12 month period (2018 proforma: €57.7m) as we continued to invest more on our salesforce as well as the development and marketing of our brands and products than in recent years. This included increased advertising and promotion expenditure on Żołądkowa Gorzka and Stock Prestige in Poland. Selling expenses for the 9 months to 30 September 2018 were €42.5m.

Other operating expenses for the 12 month period were €31.6m, up €1.6m (5.2%) on a proforma basis. This largely reflects higher people costs, particularly in Central and Eastern Europe, together with higher variable reward costs as a result of the stronger performance across the business as a whole during the year. Other operating expenses for the 9 months to 30 September 2018 were €22.0m. Underlying corporate costs were up 3.9% on a proforma basis and up 6.3% on a constant currency proforma basis16 principally due to the increase in headcount to support the OneSAP project and to allow us to better focus on supporting our operations. Underlying corporate costs were up 6.5% from €9.3m for the 9 months to 30 September 2018.

Adjusted EBITDA for the 12 month period was €63.2m (2018 proforma: €59.4m), up 6.5% on a proforma basis and up 7.4% on a constant currency proforma basis16. Adjusted EBITDA for the 9 months to 30 September 2018 was €35.8m. Given the timing of this year's acquisitions, there was no material difference between underlying and reported EBITDA for 2019.

As reported previously, the Group does not expect a material impact from the UK's proposed exit from the European Union. As the Group reports in Euros and the main trading currencies are the Polish Złoty and the Czech Koruna, the volatility of pounds sterling is not a material factor. Nevertheless, the implications of Brexit will continue to be monitored as will all the principal risks that the Group faces (see below).

Operating profit for the year (after exceptional expenses) was up 25.0% to €42.2m (2018 proforma: €33.8m, 2018 reported: €28.2m).

Finance costs

Finance costs for the 12 month period were €4.3m (2018 proforma: €3.4m). The increase was primarily due to interest payable on bank loans arising from higher interest rates in the Czech Republic, higher borrowings in Poland to pay historic tax assessments, higher borrowings in Italy to fund the acquisitions of Distillerie Franciacorta and Bartida and further debtor factoring. Finance costs for the 9 months to 30 September 2018 were €1.9m.

Taxation

The total income tax expense for the 12 month period was €9.9m. Included in this figure is an exceptional tax credit of €0.9m that was recognised in conjunction with the non-cash impairment taken against our Italian business, also treated as an exceptional item (further details are set out below). The underlying income tax expense (total income tax expense excluding exceptional items) of €10.9m represents a decrease of €1.5m on a proforma basis and an increase of €3.6m on a reported basis.

As detailed in note 8 of the consolidated financial statements, the underlying income tax expense reflects a number of factors including the tax expense for the current period, changes in provisions for taxation relating to prior years, and movements in deferred tax. The underlying effective tax rate (excluding exceptional items) of the Group for the 12 month period was 21.8% (2018 proforma: 27.1%). The decrease is principally due to the €1.8m tax credit in 2019 relating to provisions for tax in respect of prior years. Were it not for such prior year effects, the effective tax rate would be stable within the 25-26% range.

Group tax provisions totalled €4.3m at 30 September 2019, a decrease of €3.7m from 30 September 2018. The decrease primarily relates to the settlement of open tax issues in Italy. As set out in the principal risks and uncertainties (see below), the Group is exposed to a number of tax risks in the countries in which it operates. There have been a number of developments with respect to the Group's unsettled tax years in several countries. This includes Poland where, in recent years, the Group has noted the Polish authorities increasingly adopting a more aggressive approach towards the interpretation of tax laws and regulations even where they have issued previous tax clearances. As previously reported, our Polish subsidiary, Stock Polska, was issued with an assessment in December 2018 by the Polish tax authorities in respect of its 2013 Corporate Income Tax Return, which was appealed in January 2019. A first hearing of the appeal took place within the tax jurisdiction in August, with a ruling favouring the tax authorities. The Group appealed against this in September. The appeal is currently progressing through the appeals procedure which now goes beyond the tax authorities' jurisdiction and into the administrative courts with a first hearing scheduled for 20 December 2019. Based on advice from our taxation and legal advisors, we continue to consider it likely that our appeal will ultimately be successful and our position upheld. Further details are set out in note 8 of the consolidated financial statements.

Acquisitions

During the 12 months to 30 September 2019, the Group made two acquisitions. On 31 May 2019, the Group acquired 100% of the share capital of on-trade spirits businesses Bartida s.r.o. and Bartida Retail s.r.o. in the Czech Republic. On 3 June 2019, the Group acquired 100% of the share capital of Distillerie Franciacorta S.p.A., a company based in Italy specialising in the production, distribution and sales of alcoholic drinks, including grappa, amaretto and sparkling wines. Further details are set out in note 13 of the consolidated financial statements.

Exceptional items

There were three exceptional items in the 12 month period to 30 September 2019. The first was a non-cash impairment loss of €14.3m against the carrying value of goodwill and brands in our Italian business, together with a corresponding deferred tax credit of €0.9m, the former being included in our interim results in May. The second was the incurring of €1.1m of acquisition costs related to the year's two acquisitions. Further details are set out in note 8 of the consolidated financial statements. The third was the realisation of a €3.8m exchange gain following the liquidation of a subsidiary.

Earnings per share

The basic earnings per share ("EPS") for the 12 month period to 30 September 2019 was 14.26 €cents per share (2018: 9.71 €cents per share). On a proforma basis, the basic EPS for the 12 months to 30 September 2018 was 6.86 €cents. Adjusted basic EPS, removing the impact of exceptional items, was 19.68 €cents per share (2018 proforma: 16.72 €cents). Adjusted basic EPS for the 9 months to 30 September 2018 was 9.71 €cents per share.

Cash flow and working capital

The Group continues to generate strong cash flow from operating activities. Using a measure by which we judge our underlying operational cash flow, the Group generated free cash flow (see note 5) of €57.5m in the 12 months to 30 September 2019 (2018 proforma: €54.3m), up €9.6m from the €47.9m reported for the 9 months to 30 September 2018. This represents a strong conversion rate from Adjusted EBITDA of 91.0% (2018 proforma: 91.5%, 2018 reported: 133.6%), and reflects the continued growth in operating profit and the reduction in working capital (principally trade receivables), offset by an increase in capital expenditure.

Dividend and reserves

The Board has proposed a final dividend to shareholders which represents a continuation in the application of our progressive dividend policy.

The Board proposes a final dividend of 6.31 €cents per share for the 12 months to 30 September 2019 (2018: €6.01 €cents per share), an increase of 5.0%.

When combined with the interim dividend of 2.63 €cents per share paid in June 2019 (2.50 €cents interim dividend paid in September 2018), this totals 8.94 €cents per share for the 12 months to 30 September 2019 (2018: 8.51 €cents per share), and represents an increase of 5.1%.

If, through the combination of continued strong cash generation, limited M&A activity or other significant capital investment, the Group finds itself with an inefficient capital structure, the Board will consider making additional shareholder distributions.

Net debt and maturity profile

The Group's Revolving Credit Facility ("RCF"), which was taken out in 2015, was amended and extended in 2017, and now expires in 2022. Debt can be drawn and repaid at the Group's discretion without penalty or charge. At 30 September 2019, €11.4m of the RCF is used to back excise duty guarantees in Italy and Germany. We also retain a factoring facility capability of €70.0m.

The continued strong cash flow during the 12 month period to 30 September 2019 resulted in Net Debt of €42.3m at 30 September 2019, an increase of €10.7m from 30 September 2018. Leverage rose to 0.67x Adjusted EBITDA from 0.53x (calculated using the proforma Adjusted EBITDA for the 12 months to 30 September 2018). Reported leverage at 30 September 2018 was 0.88x Adjusted EBITDA, calculated using the 9 month reported Adjusted EBITDA.

Our relatively low leverage, combined with the significant headroom in our bank facilities, leaves us well-placed with significant flexibility and financing capacity.

Foreign exchange

The Group remains exposed to the impact of foreign currency exchange movements, with the major trading currencies continuing to be the Polish Złoty and the Czech Koruna. Details of how the Group manages this risk is outlined below in the Principal Risks. At 30 September 2019, there were no formal hedging instruments in place.

A net foreign currency exchange loss of €0.8m was reported within the Adjusted EBITDA over the 12 month period to 30 September 2019. This has arisen on the appreciation of the Euro versus the Polish Złoty and the Czech Koruna.

Changes in accounting policies

The Group anticipates that the adoption of IFRS 16 "Leases" as from 1 October 2019 will retrospectively create right-of-use assets of c. €9.3m (recognised within non-current assets) and lease liabilities of c. €11.0m (recognised within current and non-current liabilities) as at 30 September 2018. The net impact on retained earnings as at 30 September 2018 is anticipated to be a charge of c. €1.7m.

The annual future impact to the income statement is anticipated to be a reduction in operating expenses of c. €3.6m, which will be largely be off-set by an increase in finance costs and depreciation. Hence the overall impact to the profit in future years is not expected to be material. Nevertheless, there will be an improvement in EBITDA and operating profit margins.

Proforma consolidated income statement (unaudited)

for the year ended 30 September 2019

The proforma consolidated income statement has been provided below as additional information for the comparative year 2018. A reconciliation between the 9 month statutory reported consolidated income statement for 2018 and the proforma 12 months to 30 September 2018 is shown further below and is a requirement to illustrate the performance of the business on an annualised basis given the importance of the fourth calendar quarter. This information is unaudited and does not form part of the audited annual financial statements. Selected income statement information has been extracted from the Group's management accounts for the comparative year. Further notes to show the segmental analysis and certain assumptions used to calculate the proforma income statement are outlined further below.

All associated notes for the statutory reported 12 months to September 2019 are outlined at the end of this statement.

2019

2018 - Reconciliation from reported 9 months to proforma 12 months

Notes to the proforma consolidated income statement (unaudited)

for the year ended 30 September 2019

The following notes provide detail on further assumptions applied in deriving the financial information presented in the proforma consolidated income statement for the comparative year 12 months to 30 September 2018:

1. Accounting policies and critical areas of judgement: The accounting policies of the Group, are applied to the statutory period as presented within the financial statements and accompanying notes. The financial information provided for the proforma 12 month period has been derived from this information by extracting selected information from the Group's quarterly consolidated management accounts for the quarters ended December 2017.

Revenue: proforma revenue has been extracted from source accounting records without adjustment. A certain degree of estimation is applied in determining volume rebate deductions from revenue. These estimates are revised each month such that no further adjustment to revenue is necessary for the purposes of the proforma revenue. Revenue rebate adjustments were reviewed, to the extent significant, at the December 2017 year-end and no further adjustment to revenue was necessary for the purposes of proforma revenue figures.

In the context of the Group's critical accounting judgments and key sources of estimation uncertainty, the following considerations were made:

a. Taxation: a thorough review of tax risks and exposures has been carried out in June and December of each reporting period, and again as at September 2018. A review of significant judgments and estimates made in the quarterly period ended December 2017 was undertaken to identify any that would have had a significant impact on September balances. No adjustments were determined to be necessary to the methodology applied as per note 4 below.

b. Impairment of goodwill and indefinite-lived intangible assets: annual impairment reviews were performed as at 31 December of each reporting period prior to 30 September 2018, and then as at 30 September 2018. The impairment charge recorded against goodwill in the quarter ended 31 December 2017 has been included in the proforma financial information as an exceptional expense.

There are a number of other estimates and judgements made on a routine basis that are not considered significant for the financial statements taken as a whole. No adjustments have been made to September 2017 balances to reflect these.

2. Exceptional expenses: in the quarter ended 31 December 2017, two non-cash exceptional items were expensed. The first was an impairment loss of €14.9m against the carrying value of goodwill in our Italian business. The second was a deferred tax charge of €4.7m tax resulting from amortisation on our Polish brands ceasing to be available.

3. Share of loss of equity-accounted investee: on 17 July 2017, Stock invested in a 25% shareholding of Quintessential Brands Ireland Whiskey Limited (QBIWL). Information has been gathered from the management accounts of QBIWL for the year to date September 2018 since acquisition to provide information for the proforma year September 2018. No indicators of impairment were identified during the period since acquisition, and therefore the balances recognised in the proforma period represented only the share of loss for the relevant period. No adjustments were recorded to the fair value of contingent consideration during the period since investment.

4. Taxation: as the effective tax rates for the Group do not materially change year-on-year, for the period of October to December 2017, the effective tax rate (excluding exceptional tax expenses) has been assumed to be the same as for the reported rate for the year to December 2017, 26.7%.

5. Adjusted EBITDA and Free cashflow: The Group defines adjusted EBITDA as operating profit before depreciation and amortisation, exceptional items and the share of results of equity-accounted investees. A reconciliation from profit before tax per the proforma consolidated income statement to adjusted EBITDA is as follows:

The Group defines free cashflow as cash generated from operating activities (excluding income tax paid), plus the proceeds from the sale of property, plant and equipment and proceeds from the disposal of intangible assets less cash used for the acquisition of property, plant or equipment and for the acquisition of intangible assets. Adjusted free cashflow conversion is free cashflow as a percentage of Adjusted EBITDA.

6. Segmental analysis

7. Earnings per share: The proforma earnings per share has been calculated for the basic and diluted measures using the weighted average number of ordinary shares in issue as follows:

a. Proforma year to September 2018: as per the 9 month period ending on the same date and as per note 9 of the financial statements, as there were no material share schemes vesting or purchased into the employee benefit trust in the last quarter of 2017, nor did options outstanding materially differ over that period.

8. Net debt and leverage: Net debt is defined as the net of balances reported as cash and cash equivalents, loans and borrowings and finance leases. Refer to note 30 in the financial statements for a calculation of net debt as at 30 September 2018.

Leverage, being net debt divided by 12 months adjusted EBITDA, is an important measure for the efficient capital structure of the Group at a point in time, to support organic and inorganic growth. This is also an important measure for both our banks and shareholders. Leverage at 30 September 2018 has therefore been calculated using the net debt value (€31,583,000) divided by proforma adjusted EBITDA 2018 (€59,363,000) = 0.53.

Directors' responsibility statement

Each of the Directors, whose names and functions are listed below, confirms that:

To the best of their knowledge, the consolidated financial statements and the Company financial statements, which have been prepared in accordance with IFRS as issued by the IASB and IFRS as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit of the Company on a consolidated and individual basis; and to the best of their knowledge, the announcement includes a fair summary of the development and performance of the business and the position of the Company on a consolidated and individual basis, together with a description of the principal risks and uncertainties that it faces.

Directors

David Maloney, Non-Executive Chairman

Mirek Stachowicz, Chief Executive Officer

Paul Bal, Chief Financial Officer

John Nicolson, Senior Independent Non-Executive Director

Mike Butterworth, Independent Non-Executive Director

Tomasz Blawat, Independent Non-Executive Director

Diego Bevilacqua, Independent Non-Executive Director

Kate Allum, Independent Non-Executive Director

Principal risks

Stock Spirits Group believes the following to be the principal risks facing its business and the steps we take to manage and mitigate these risks. Risks are identified and assessed through a combined bottom-up and top-down approach. If any of these risks occur, Stock Spirits' business, financial condition and performance might suffer and the trading price and liquidity of the shares may decline. Not all of these risks are within our control and this list cannot be considered to be exhaustive, as other risks and uncertainties may emerge in a changing business environment.

References to changes in 2019 mean changes in the 12 month period ended 30 September 2019.

Notes to the Consolidated Financial Statements

at 30 September 2019

1. Corporate information

The consolidated financial statements were approved and authorised for issue by the Board of Directors of Stock Spirits Group PLC (the Company) on 4 December 2019.

Stock Spirits Group PLC is domiciled in England. The Company's registered office is at Solar House, Mercury Park, Wooburn Green, Buckinghamshire, HP10 0HH, United Kingdom.

The Company, together with its subsidiaries (the Group), is involved in the production and distribution of branded spirits in Central and Eastern Europe.

2. Basis of preparation

These financial statements are consistent with the consolidated financial statements of the Group for the year ended 30 September 2019. The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (IFRS), as adopted by the European Union. International Financial Reporting Standards are issued by the International Accounting Standard Board (IASB).

The consolidated financial statements have been prepared on a going concern basis as the Directors believe there are no material uncertainties that lead to significant doubt that the entity can continue as a going concern for a period of at least 12 months from the date of approval of the financial statements.

3. Revenue

An analysis of the Group's revenue is set out below:

4. Segmental analysis

In identifying its operating segments, management follows the Group's geographic split, representing the main products traded by the Group. The Group is considered to have five reportable operating segments: Poland, Czech Republic, Italy, Other Operational and Corporate. The Other Operational segment consists of the results of operations of the Slovakian, International and Baltic distillery entities. The 'Corporate' segment consists of expenses and central costs incurred by non-trading Group entities.

Each of these operating segments is managed separately, as each of these geographic areas requires different marketing approaches. All inter-segment transfers are carried out at arm's length prices. The measure of revenue reported to the chief operating decision-maker to assess performance is based on external revenue for each operating segment and excludes intra-Group revenues. The measure of Adjusted EBITDA reported to the chief operating decision-maker to assess performance is based on operating profit and excludes intra-Group profits, depreciation, amortisation, share of results of equity-accounted investees and exceptional items.

The Group has presented a reconciliation from profit before tax per the Consolidated Income Statement to Adjusted EBITDA below:

Total assets and liabilities are not disclosed as this information is not provided by segment to the chief operating decision-maker on a regular basis.

5. Adjusted EBITDA and Free Cash Flow

The Group defines Adjusted EBITDA as operating profit before depreciation and amortisation, exceptional items and the share of results of equity-accounted investees. Adjusted EBITDA and Adjusted free cash flow conversion are supplemental measures of the Group's performance and liquidity that are not required to be presented in accordance with IFRS.

The directors use the Adjusted EBITDA and Adjusted free cash flow conversion as the performance measures of the business. They remove significant items that would otherwise distort comparability.

The use of these alternative performance measures is consistent with how institutional investors consider the performance of the Group. These measures are not defined in IFRS and thus may not be comparable to similarly titled measures by other companies.

The Group defines free cash flow as cash generated from operating activities (excluding income tax paid), plus the proceeds from the sale of property, plant and equipment and proceeds from the disposal of intangible assets less cash used for the acquisition of property, plant or equipment and for the acquisition of intangible assets. Adjusted free cash flow conversion is free cash flow as a percentage of Adjusted EBITDA.

6. Exceptional items

In 2019, the Group has €15,459,000 (2018: €nil) of exceptional expenses and an exceptional tax credit of €948,000 (2018: €nil).

Of total exceptional expenses, €14,295,000 relates to a non-cash impairment of goodwill and brands in Italy.

Due to Christmas sales being below expectation and a continued decline in the overall Italian spirits market, a revised three-year plan was prepared in March 2019, with the financial projections insufficient to support the carrying value of the CGU. Consequently, an impairment loss of €14,295,000 was recognised in the six month period to 31 March 2019. This impairment reduced the carrying value of goodwill in the Italy Region CGU from €7,732,000 to €nil. Brands in the Italy region CGU were also impaired by €6,563,000, on which there corresponding reduction in deferred tax liabilities of €948,000. Due to the nature and size of the impairment, and consistent with prior periods, this has been disclosed as an exceptional expense.

The impairment analysis completed for year-end purposes shows an improvement in headroom, with this totalling €781,000. The Directors consider that it would be premature at this stage to conclude that the circumstances which gave rise to the recognition of the impairment loss have now decreased or no longer exist. Consequently, €781,000 of the impairment loss which was recognised during the year has not been reversed.

Exceptional items also include:

·; Costs incurred in association with the acquisitions of Distillerie Franciacorta S.p.A., Bartida s.r.o. and Bartida Retail s.r.o. Acquisition costs included in the consolidated income statement, which principally comprise professional fees, total €922,000 for Distillerie Franciacorta and €242,000 for the Bartida entities.

·; Realisation of exchange differences following the liquidation of Stock Spirits Group Services A.G., resulting in a gain of €3,766,000.

7. Finance income and costs

Other interest includes factoring fees in Stock Polska Sp. z.o.o totalling €737,000 (2018: €297,000).

8. Income taxes

(i) Income tax recognised in profit or loss:

There have been no tax charges to other comprehensive income.

Reconciliation of effective tax rate

Exceptional items above represent the impact on the tax charge of the exceptional items.

(ii) Income tax recognised in the balance sheet:

Current tax liability:

The Group is a sizeable international drinks business operating across multiple jurisdictions with intercompany cross border transactions being subject to transfer pricing regulations. As tax, and especially transfer pricing (where regulations and their interpretation may vary considerably), is an area of inherent risk, tax positions adopted by the Group and its cross border intercompany transactions may be subject to challenge by the relevant tax authorities. Although the Group aims to comply with applicable laws and regulations and operates an OECD principles based transfer pricing model, at each balance sheet date the Group undertakes a review of potential tax risks and tax positions and, whilst it is not possible to predict the outcome of any pending enquiries, ensures that adequate provisions are made in the Group accounts to cover any associated cash outflows and estimated future settlements.

As at 30 September 2019, the Group has recognised tax provisions totalling €4.3m (2018: €8.0m) in relation to matters where it is probable that tax positions adopted by the Group may not ultimately be sustained by the relevant authorities. These tax provisions are included in income taxes payable on the balance sheet. The reduction in these tax provisions is mainly due to the payments made and settlements agreed in respect of the enquiries in Italy, Germany and Poland as detailed below.

The Italian business, conducted via Stock S.r.l., significantly reduced its risk exposure related to the inquiries covering the years 2006-2010. The business successfully settled the enquiries related to 2006-2008 using favourable tax amnesty laws to reduce the overall liability below the level provided. This resulted in an overall decrease in tax provisions of €2.2m. The business continues to defend tax positions taken in respect of 2009-2010, for which suitable provisions have been recognised.

Settlement was reached in respect of the enquiry into the 2015 corporate income tax return of the Group's German subsidiary, Baltic Distillery GmbH. A payment of €0.3m, which was fully provided for as at September 2018 and represented tax and interest, was made during the year.

There have been no developments in respect of the ongoing tax appeal in Czech Republic related to the 2011 CIT return of Stock Plzeň-Božkov s.r.o..

In December 2018, following an audit of the 2013 corporate income tax return of the Group's subsidiary in Poland, Stock Polska Sp. z.o.o., the Polish tax authorities issued an assessment totalling PLN 23.8m (€5.4m) in tax and interest by reference to the adopted tax treatment of the pre-IPO intra-group restructuring and management recharges. In accordance with the local tax administration rules, the assessment was paid in full in order to facilitate an appeal. In March 2019, following a review of the late interest calculation by the tax authorities, the assessment was reduced to PLN 20.4m (€4.7m).

In August 2019, upon an administrative appeal by the company, the Director of the Tax Administration Chamber upheld the assessment of the local tax administration related to management recharges and overturned the assessment in part related to the intra-group restructuring, replacing it with an assessment based on different provisions of tax law but similar in its total effect. As a result of this, the assessment was further reduced to PLN 20.3m (€4.6m). The Group appealed against the decision to the administrative court within the prescribed period. The hearing is expected to take place at the end of 2019.

The current assessment of €4.6m comprises €3.8m of tax and interest related to the amortisation of the intellectual property (IP) assets arising from the intra-group restructuring, and €0.8m relating to the deductibility of the intra-group management recharges.

With regards to the amortisation of the IP, the Group obtained advanced tax rulings from the tax authorities prior to implementation, adopted a tax position fully compliant with the tax laws prevailing at the time, and made full disclosures. As the company's tax position had been accepted by the tax authorities for the periods prior to 2013, the Group does not consider there to be any basis for the challenge by the Polish tax authority on this matter. Management, having obtained professional tax and legal advice, considers that ultimately the appeals process will result in a positive outcome for the Group. As such, a corresponding recoverable tax asset has been recorded in current tax assets, and a late interest receivable has been included in trade and other receivables, both equivalent to the amounts paid.

Whilst not subject to inquiries, the tax impact of deductions claimed in respect of the amortisation of the IP in each of the years 2014 to 2017 are in the range between €5.8m and €6.3m. That, together with late interest at the prescribed rate of 8%, determines the Group's maximum possible exposure associated with the issue. Management considers that ultimately it is probable that the adopted tax position will be sustained and therefore no provision has been recognised for this issue. Nevertheless, if assessments were issued, the Group may have to pay over amounts at stake and then seek their recovery using the appeal process.

Although the Group's transfer pricing is performed on an arms' length basis, in management's view there is a risk that tax positions regarding intercompany transactions in certain jurisdictions, including Poland and Czech Republic, may ultimately not be accepted, and thus a provision of €2.4m (2018: €3.6m) is carried against the risk.

Provisions against uncertain tax positions are based on management's assessment of the most likely or expected outcome, however, due to the nature of the underlying items and likelihood of further developments, there is a reasonable possibility of material changes to these estimates over the next 12 months.

Impact of Brexit

On 29 March 2017, the UK government invoked Article 50 of the Treaty of Lisbon, notifying the European Council of its intention to withdraw from the EU. There is an initial two-year timeframe for the UK and EU to reach an agreement on the withdrawal and the future UK and EU relationship. At this stage, there is significant uncertainty about the withdrawal process, its timeframe and the outcome of the negotiations about the future arrangements between the UK and the EU. As a result, there is significant uncertainty over the period for which the existing EU laws for member states will continue to apply to the UK and which laws will apply to the UK after an exit. Following the negotiations between the UK and the EU, the UK's tax status may change which may affect ability of the Group to rely on the EU tax framework, such as EU Parent Subsidiary or Interest and Royalties Directives. At this stage the level of uncertainty is such that it is impossible to determine if, how and when that tax status will change. As it stands, the Group has not identified any critical dependencies or reliances which could materially impact its operations and which could not be managed.

 (iii) Unrecognised tax losses

The Group has tax losses which arose in the UK of €49.5m as at 30 September 2019 (2018: €45.8m) that are available indefinitely for off-set against future taxable profits of the companies in which the losses arose. A deferred tax asset has not been recognised in respect of these losses as it is not sufficiently probable that the losses will be utilised in the relevant entities. 

(iv) Deferred tax balances

Deferred tax assets and liabilities arise as follows:

Deferred tax liability related to brands is based on the difference between the accounting and tax book values of brands, and calculated using the appropriate substantively enacted tax rate. The exceptional deferred tax credit of €948,000 relates to the impairment of Italian brands.

Deferred tax asset in respect of accrued liabilities arises in respect of trade related costs deductible on a paid basis, while other deferred tax assets and liabilities represent all other timing differences between accounting and tax recognition.

 (v) Change in tax rates

Deferred tax assets and liabilities recognised as at 30 September 2019 have been calculated using tax rates enacted or substantively enacted at the balance sheet date and applicable to the periods in which differences between the accounting and tax book values are expected to unwind. In the UK, a reduction in corporate income tax rate from 19% to 17% effective from 1 April 2020 was substantively enacted on 15 September 2016. There is no effect of the change in the applicable UK corporate income tax rate on deferred tax.

9. Earnings per share

Basic earnings per share amounts are calculated by dividing the profit for the period attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the period. Diluted earnings per share amounts are calculated by dividing the profit attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the period plus the weighted average number of ordinary shares that would be issued on conversion of all the dilutive potential ordinary shares into ordinary shares. Adjusted earnings per share amounts exclude the impact of the significant exceptional items that would otherwise distort comparability and distort understanding of the underlying performance of the Group.

There have been no transactions involving the Group's ordinary shares between the reporting date and the date of authorisation of these financial statements.

10. Investment in equity-accounted investee

On 17 July 2017, Stock Spirits entered into an agreement with Quintessential Brands Group for the acquisition of a 25% equity interest in Quintessential Brands Ireland Whiskey Limited for a cash consideration of up to €18,333,000. Consideration comprised an initial cash payment of €15,000,000 for 25% of the equity interest, and a contingent consideration of up to €3,333,000 which is payable over the period November 2020 to May 2022, subject to performance conditions.

The fair value of the contingent cash consideration at the acquisition date was calculated as €2,491,000, and goodwill of €425,000 was recognised. The fair value of the cash consideration at 30 September 2019 is not considered to have changed, with the contingent liability of €2,491,000 being included in non-current financial liabilities.

The Group's share of the loss of Quintessential Brands Ireland Whiskey Limited for the period is €536,000 (2018: loss of €166,000). There has been a corresponding reduction in the carrying value of the investment.

The principal place of business of Quintessential Brands Ireland Whiskey Limited is Dublin, Ireland.

The following table summarises the financial information of Quintessential Brands Ireland Whiskey Limited as included in its own financial statements, adjusted for fair value adjustments at acquisition and differences in accounting policies, as at 30 September 2019. The table also reconciles the summarised financial information to the carrying value of the Group's interest in Quintessential Brands Ireland Whiskey Limited, and the results for the year to 30 September 2019.

11. Risk management

Capital risk management

The primary objective of the Group's capital management is to ensure that it has the capital required to operate and grow the business at a reasonable cost of capital without incurring undue financial risks. The Board periodically reviews its capital structure to ensure it meets changing business needs.

In addition, the Directors consider the management of debt to be an important element in controlling the capital structure of the Group. The Group may carry significant levels of long-term structural and subordinated debt to fund investments and acquisitions and has arranged debt facilities to allow for fluctuations in working capital requirements. There have been no changes to the capital requirements in the current period.

Management manage capital on an ongoing basis to ensure that covenant requirements on the third party debt are met.

The Group regards its total capital as follows:

12. Cash and cash equivalents

For the purposes of the cashflow statement, cash and cash equivalents include cash on hand and in banks, net of outstanding bank overdrafts. Cash and cash equivalents at the end of the financial year as shown in the cashflow statement can be reconciled to the related items in the statement of financial position as follows:

Cash and cash equivalents are denominated in the following currencies:

13. Business combinations

During 2019, the Group made two acquisitions. The acquisitions of the share capital of Distillerie Franciacorta S.p.A. and Bartida (Bartida s.r.o. and Bartida Retail s.r.o.) were accounted for as business combinations as set out below.

Distillerie Franciacorta S.p.A.

On 3 June 2019, the Group acquired 100% of the share capital of Distillerie Franciacorta S.p.A., an unlisted company based in Italy specialising in the production, distribution and sales of alcoholic drinks. The Group acquired Distillerie Franciacorta S.p.A. to enhance its presence in the Italian market as well as to acquire a number of brands including grappa, liqueurs and Franciacorta - a premium Italian sparkling wine that is produced solely in the Franciacorta region.

Consideration transferred

The following table summarises fair values, including measurement period adjustments recognised during the reporting period, of the identifiable assets and liabilities of Distillerie Franciacorta at the date of acquisition:

An advance payment of €3,000,000 was made on 31 January 2019 on signing of the agreement to purchase Distillerie Franciacorta S.p.A. A capitalisation factor was applied to this payment in order to calculate the fair value at acquisition date in June. This increased the deemed cash consideration by €117,000.

An additional €40,000 was paid relating to the reimbursement of equity following the setup of the entity, Distillerie Franciacorta S.p.A.

The purchase price adjustment of €648,000 is based on levels of working capital and inventory being higher at the acquisition date than those on which the contracted consideration was based. This amount is payable within 12 months.

The Group has agreed to pay the selling shareholders additional consideration of €1,000,000 on the second anniversary of the completion of the acquisition, and €900,000 on the fourth anniversary of the completion of the acquisition. The Group initially recognised €1,767,000 as deferred consideration, which represented the fair value at acquisition. At 30 September 2019 the deferred consideration has increased to €1,782,000, representing unwinding of discount from acquisition.

Acquisition-related costs

The Group incurred acquisition-related costs of €922,000 on consulting fees, legal fees and due diligence. These costs have been included as an exceptional expense.

Bartida s.r.o. and Bartida Retail s.r.o.

On 31 May 2019, the Group acquired 100% of the share capital of on-trade spirits business Bartida, an unlisted company based in the Czech Republic specialising in the production, distribution and sales of alcoholic drinks. The deal includes Bartida's online shop as well as their demonstration bar and on-trade training centre in Prague. The Group acquired Bartida to enhance its presence in the Czech on-trade market as well as to acquire a number of brands.

Consideration transferred

The following table summarises fair values, including measurement period adjustments recognised during the reporting period, of the identifiable assets and liabilities of Bartida at the date of acquisition:

The Group has agreed to pay the selling shareholders additional consideration of €1,350,000 on the first anniversary of the completion of the acquisition, €1,550,000 on the second anniversary, and €280,000 on each of the third, fourth and fifth anniversaries should various commitments be met. The Group initially recognised €2,722,000 as contingent consideration, which represented the fair value at acquisition. At 30 September 2019 the contingent consideration has increased to €2,789,000, representing unwinding of discount from acquisition.

Acquisition-related costs

The Group incurred acquisition-related costs of €242,000 on legal and advisory fees. These costs have been included as an exceptional expense. See note 8.

14. Events after the balance sheet date

There were no events after the balance sheet date which require adjustment to or disclosure in these financial statements.

The financial information set out above does not constitute the company's statutory accounts for the year ended 30th September 2019 or period ended 30 September 2018 but is derived from those accounts. Statutory accounts for 2018 have been delivered to the registrar of companies, and those for 2019 will be delivered in due course. The auditor has reported on those accounts; their reports were (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.