Auditors' Report on the Financial Statements Of
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AUDITORS’ REPORT ON THE FINANCIAL STATEMENTS OFOF ZWACKZWACK UNICUMUNICUM CO.CO. LTD.LTD. 24 REPORT ON THE BUSINESS ACTIVITY OF 2001 The year 2001 was successful, and the plans of the Zwack Unicum Group were fulfilled. We focused our attention on strengthening the position of our brands in markets at home and abroad, on customer relations and further improving the cost efficiency of our operation. The gross sales of the Group amounted to HUF 26.2 billion, 16% higher than in the previous year. Profit before taxation stood at HUF 2.44 billion, 2% above the plan target. (It was behind that of the previous year by 10.4%.) For the main financial figures of the Group, see the table below. Main financial figures of the Zwack Unicum Group (in HUF million) 1998 1999 2000 2001 2002 Plan Gross sales HUF mill 17 865 20 972 22 556 26 172 29 488 Net sales HUF mill 11 499 14 190 15 224 17 593 20 012 Gross margin HUF mill 6 088 7 129 7 433 8 552 9 231 Trading profit HUF mill 2 514 2 698 2 643 2 348 2 734 Profit before taxation HUF mill 2 543 2 864 2 719 2 435 2 711 Profit after taxation HUF mill 2 103 2 315 2 231 2 028 2 223 Dividend HUF mill 1 200 1 500 1 500 1 500 Gross margin % 52.94% 50.24% 48.82% 48.61% 46.13% Operating margin % 21.86% 19.01% 17.36% 13.35% 13.66% Net profit margin % 18.29% 16.31% 14.65% 11.53% 11.11% MARKET SITUATION The quantity of spirits sold in the legal market in Hungary slightly increased, which means a tenden- cy of over ten years changed direction. It was due mainly to the higher sale of low-priced com- modities, and that also contradicted to previous trend. The market of higher-priced premium products also expanded yet to a smaller degree than in former years. The fact that black market activities fell back – which in part caused the growth of sales of com- modities – had a favourable impact on the spirits industry. But the black market still controlled about a quarter of the entire spirits market. Favourable changes in the overall economic environment, as the increase in real incomes, did not bring about a tangible increase in demand for spirits. Concentration continued among companies that sell spirits. The supermarkets dynamically increased their market share, and concentration continued among Hungarian-owned wholesaler groups of alcoholic drinks. During 2001 the own-label products of multiple stores gained an even greater share in the sale of commodities. The number of legal rivals has practically remained unchanged: there continues to be about a hun- dred enterprises that produce spirits. Domestic companies that sell imported brands and those dis- tributing their own products continued their media and point-of-sale activities with unchanged intensity. The dominant majority of our rivals sought to retain their market position in the premium 25 brand and the commodity categories by resorting to discounts and granting retrospective reimbursements for retailers. In addition, some of our legal competitors applied a technique that can hardly be considered legal: they attempted to increase their market share by appearing in the market with replica products that copy major international and domestic products. We consider such conduct as misleading the consumer. Price competition among the distributive firms and the growing market share of own-label products of supermarkets, which are sold at cut-rate prices, have considerably reduced the profitability of the commodity segment. The market position of the Zwack Unicum Co. Ltd. further strengthened. Our Company retained its position among pre- mium brands, realized a slight increase among quality products, and considerable expanded its market share in the commodity segment. Unicum, which is Hungary’s best known and highest rated brand of spirits, has a firm hold as market leader in the market of both the digestives and premium brands. Throughout the year Unicum received a marketing support that was worthy of its weight in the market. During 2001, as in previous years, it was the most forcefully supported brand in the Hungarian spirits market. The year 2001 was outstanding for Unicum in terms of promotional events. Consumer response was excellent to value-added activities, such as Bonbonicum, timed for the Easter season, the pocket flask that appeared during summer, the new member of the gift box line and the olden-looking bottle, both being introduced before Christmas. As for the other own-produced branded products, promotional activities continued to focus on Vilmos, St. Hubertus and Kalinka. Vilmos managed considerably to overfulfil our ambitious yearly plan, while Kalinka and St. Hubertus performed as planned. During the year new commercials came out both for Vilmos and Kalinka. Both commercials did better than their earlier counterparts, as borne out by a consumer research survey carried out in the target group in terms of advertisement awareness and approval ratings. In the course of 2001 St. Hubertus either relied on its highly popular television commercial or used its shorter version, which encouraged consumers to drink it with ice. As a result of that commercial, a larger number of young people than ever before tasted St. Hubertus on ice. By successfully sponsoring college and university events, St. Hubertus managed to consolidate its position among young people, who form the future basis of its consumers. Just as in former years, during 2001 our Company fulfilled its obligations assumed towards our minority co-owner, Guinness UDV. The leading brands of the import portfolio, Johnnie Walker whisky, Baileys cream liqueur, Smirnoff vodka, Hennessy cognac and Gordon’s gin retained their market share. During the final days of the year we began the sale of Guinness UDV’s new brands: Captain Morgan rum, Crown Royal and 7 Crown whisky. In 2001, as before, the search for new market opportunities continued to be central components of our marketing activity. Accordingly, we were active in refining existing and introducing new products. Mention should be made here of the Smash line of products that has brought the cooler type of drinks to Hungary, the whisky and capuccino members of the Sissi cream liqueur range, the herbal liqueur Pannonhalmi Szt. Márton (St. Martin of Pannonhalma), and Szt. György (St. George) digestive. Our other new products include Dessert Amaretto and Éva Bianco. In the field of product development, there were to outstanding events: the outer appearance of Lánchíd, which has a very strong brand awareness, has been refined and complemented with a De Luxe version, and the Óbester line has been renewed both in form and content. The sales of our wine division by far exceeded those of the previous year. The Company’s assortment has been augmented with wines of the Malatinszky Mansion, Montevino and Vylyan Wineries, the Eger wines of Tibor Gál, kosher wines and several imported wines. OUTSTANDING EVENTS IN THE LIFE OF THE COMPANY The year 2001 was full of noteworthy events. Our Company was the first in the spirits industry to issue an Environmental Report, which was well received by trade observers. In April we could announce to the participants in the Annual General Meeting that the Company’s shares had been replaced to the category “A”. In spring 2001 an agreement was signed in Italy under which the production of Unicum terminated in Italy and the Italian market will be supplied with that drink with Unicum produced in Hungary. 26 Our Company and the three other members of the Hungaricum Club – Herend Porcelain Manufactory Ltd., Pick Co. Ltd. and Tokaj Trading House – organized a conference in Szeged. (Hungaricum Club was formed in 2000.) The conference discussed various aspects of the value of branded products and the preservation of national identity at a time when Hungary is on the threshold of acceding to the European Union. We were organizers of, or participants in, numerous events whose traditions and prestige are worthy of our Company’s reputation. Our Unicum concerts with the Budapest Festival Orchestra were highly successful. The Opera Ball was held for the sixth time. Our Company was one of its sponsors and its exclusive supplier of drinks. By now the Opera Ball has become the most prestigious event of the ball season in Hungary. In 2001 a Unicum Gala tournament was held instead of the Unicum Cup tournament. The Hungarian national team played with the team of the Rest of the World, and the rare event attracted a capacity crowd to the bleachers of the Alfréd Hajós swimming pool. The photo exhibition that we organized about the world of Unicum was well received among the visitors. In 2001 the Family Sports Day was held in the Csillebérc youth camp in the Buda Hills. Our staff members and their family members could do sports and other leisure pursuits under ideal conditions. CAPITAL EXPENDITURE AND OPERATION Cost control was careful and efficient throughout 2001 as in previous years. Distribution and marketing continued to be in the focus of the Company’s operation. During the year we reorganized our team of sales executives. As from autumn, the sales represen- tatives who work in the various sales channels have a higher degree of autonomy in making local decisions and have received joint territorial responsibility. The favourable effects of the new regime could already be felt during the Christmas season. The financial position of the Company is firm. No credit was raised during most of the year even though dividend of HUF 1.5 billion was distributed to shareholders. Capital expenditure amounted to HUF 671 million.