Pernod Ricard S A

Good morning, ladies and gentlemen, and welcome to our first quarter sales call. As said, we'll go through a brief presentation and then give you a chance for some questions. We're hosted this morning by Hélène de Tissot, our Finance, IT and Operations Director. Hélène, over to you.

Thank you, Julia. Good morning, everyone. So let's start with this Q1 sales performance. The organic sales growth is plus 1.3% for this quarter, plus 4% reported sales. So this is a moderate growth, which is in line with our expectations on a very high basis of comparison. As a reminder, last year the growth was plus 10.4% for the first quarter. So if I may, I will go through the key markets first, and then we move to the brands. So we start with our number one market, the U.S. So this is a good start in the U.S., plus 6%, thanks in particular to innovation and there's as well some advance shipments in that quarter performance. Moving to China and India, a good growth, plus 6% for China, plus 3% for India on a very high basis of comparison. Global travel retail is in decline by 6%, following a very strong Q1 last year with double-digit growth in Q1 fiscal year 2019. And we have a good growth in Europe, plus 3%, thanks to strong sales in Eastern Europe and return to growth in Western Europe. So moving to the brands, our strategic international brands are growing by 3% for this first quarter, with growth moderation, which is due to the high basis of comparison we had, especially on Martel and Scotch last year. but an acceleration of Jemison in this first quarter, but as well Befitter, Malibu, and Havana Club. So strategic local brands plus 2%, with a softer growth due to a very high Q1 last year for Seagram's Indian whiskeys. Specialty brands, which is the new category in our house of brands that we started to communicate about in the H1 last year. is performing well, plus 15%, a very dynamic performance, particularly for Lillet, Monkey 47, but as well our Agave portfolio with Delmage and Altos. Strategic grinds, minus 2%, which is a modest decline linked to the continued implementation of our value strategy on Jacobs Creek, mainly in the UK. Pricing is positive, plus 2%, on strategic brands. So let me now deep dive into the key markets. So USA plus 6%, as I mentioned, this is a good start. Jameson, which is our sub-brand, is in strong growth with the dynamic development of Black Barrel. We have as well the continued dynamism on our growth relays, in particular the Glenlivet, which is driven by Funders Reserve and the launch of the Glenlivet 14 years old. Talking about our bastion now, solid growth for Malibu and Kahlua, but Absolute is still in decline despite a promising launch of Absolute Juice. I take the opportunity of talking about the U.S. to mention the add of a new American whiskey to our new American whiskey portfolio with the completion of the Castle Brown acquisition and of the Jefferson acquisition as far as American whiskey are concerned. since the 9th of October. Trade tariffs are going to be applied as soon as tomorrow to the single malt Scotch and Spanish wine. Global travel retail, I mentioned it, minus 6%, and this is mainly due to a high basis of comparison, but as well some promotional phasing in Europe, and we have a very strong price mix in global travel retail in this period. Moving to China, so good growth, plus 6%. versus a very high comparable basis, plus 27% last year. So overall good growth, despite some softer on-trade environment. Martel, strong pricing, impact in this performance. As I'm sure you remember, we increased our price by 5% last February, so we have the effect, the full impact of that in the Q1 performance, with softer volumes, which is... perfectly in line with our mid-term strategy in terms of sustainable inventory management. Chivas is in decline due to the challenging on-trade environments. We continue as well to have a very dynamic development of growth relays, in particular with double-digit growth of Absolute and Valentine's Finest. Moving to India now, so good growth, plus 3% versus a very high, plus 34% last year. There is some softening macroeconomic environment happening in India, and we had as well some impacts of very severe flooding in the Q1. Seagram Indian whiskeys are driven by a dynamic growth of Imperial Blue, and we have as well continued strong double-digit growth for our strategic international brand and for Jacobs Creek. So moving now to the other key markets, Europe. So France is growing by 3%. This is due to promotional phasing in a market which stays difficult. You have Nielsen volume indication in our presentation of minus 3%. Having said that, Absolute is again in a double-digit growth in France. Spain is stable with a gene portfolio, mainly B-fitter and C-gram genes that are now gaining share. UK minus 1%, with a very strong dynamism in Jean, offset by the value strategy of Jakob Strick, as was mentioned before. So we are continuing to gain share in that market. Germany, strong growth, thanks mainly to Lille, Havana Club and Absolutes, with strong pricing as well. Russia, we mentioned Eastern Europe a bit before, so Russia is in the as well as strong continued double-digit growth driven by strategic international brands, in particular whiskeys and Martel. Moving to America, so Canada is in decline. It's mainly linked to phasing, despite double-digit growth of Jameson. Latin America, modest growth overall with a strong dynamism in Brazil. Asia, rest of the world, so Japan, a continued strong growth in Japan, led by Chivas. and a good price mix. Korea, significant decline with improving performance on strategic international brands, offset by the transfer of imperial distribution to third party. And Africa Middle East, plus 9%, driven mainly by a strong growth in Turkey, Nigeria, West Africa, and as well, Angola. So maybe let me now move to the outlook for the full year. So in a particularly uncertain environment, Panorica expects to obviously continue the execution of our Transform and Accelerate strategic plan that we presented to you a few months ago, focusing on embedding dynamic growth and delivering approaching leverage, obviously in line with our objective to maximize long-term value creation. We are as well going to be focusing on the implementation of the Reconquere project in France that we announced a few days ago with the main objective to return to growth in medium term in that country. We expect dynamic sales growth to continue, albeit growth rates will moderate versus fiscal year 2019 in India and China, which is fully consistent with our strategic plan assumptions. We expect, as well, a dynamism in the U.S., following the inventory optimization we implemented last year, and with, as well, the integration of the new American risky portfolio I was mentioning before. As mentioned, as well, in our full-year communication, we're going to keep, invest, and increase our investments behind strategic investments, meaning key capex and strategic inventory priorities. We are starting our share-buy-back program from tomorrow, and you have some more details on the execution of that first tranche in the presentation. And we expect a significantly positive effects impact on our profit from recurring operation. So, we are confirming our guidance for the year, which is an organic growth in profit from recurring operation between plus five and plus 7%.

Thank you very much. We'll turn to your questions now, please.

Thank you. And ladies and gentlemen, we will now begin the question and answer session. As a reminder, if you wish to ask a question, please press that one on your telephone and wait for your name to be announced. Please stand by while we compile the Q&A queue. This will only take a few moments. If you wish to cancel your request, please press the hash key. Once again, please press that one if you wish to ask a question and the hash key to cancel your request. And the first question comes from the line of Simon Hales from Citi. Please go ahead. Please go ahead. Salmon Hales, please go ahead. And the next question comes from the line from Edward Monday. Please go ahead.

Morning, Hélène. Morning, Julia. Three questions, please. Hi, can you hear me?

Yes, absolutely.

Great. Morning. So the first question is on slide five on your outlook, which is unchanged, that third bullet, dynamic sales, growth to continue in line with sort of medium term. Does that imply that for the year you're still comfortable with your medium term expectations for China and India of high single digits to low double digits for China and I think low double to mid team for India given that the first quarter was always going to be very, very tough given the very tough basis of comparison in those two markets, my first question. The second question is on global travel retail. I was wondering whether you're able to provide a bit more color around the minus six by region. And then the third question is on FX guidance, where you're being a slightly more, I think, optimistic, you know, guiding now for a significant positive impact. I was wondering whether you're able to quantify what that might mean.

Okay, thank you very much. So I will start with your first question. So as you rightly mentioned, we are obviously citing a very high comparable basis of the this first Q1, and especially in China and India, which obviously was fully expected. So that's why this was as well mentioned in the full year communication in terms of what should be the outlook for fiscal year 2020. So I would say absolutely no surprise in that. Yes, we are comfortable that the mid-term ambition we are having for those markets, by the way, not only for those markets, but for China and India, are still very valid. This is obviously the whole focus of the Transform and Accelerate strategic plan, and we've been investing consistently in the past to deliver a type of ambition. So Q1, very high for those both markets, China and India. By the way, H1 as well is quite high in terms of comparable basis for those markets as well. And the soft Q1 was fully expected, so no change in terms of our ambition in those markets. And that's exactly what you mentioned. If I may move now to global travel retail, so we don't give the figures by... By sub-region, I would say, because as you know, it's very volatile for our travel return, and especially on a quarterly basis, I don't think it will be very meaningful. So this is mainly linked to the very high comparable basis that we had globally last year, and as well some phasing in Europe. FX guidance, well, I think obviously we have three months more than last time we talked about it. And there's already some positive impact in this first quarter, as you can see. We don't want to quantify it precisely right now. It's obviously early in the year, and there's lots of sensitivity linked to what could be the US dollar rate for the full year. But I'm sure you have all the information you need to make your own computation. If you refer to the sensitivity analysis that we did, We gave at the time of the three-year communication knowing that the average rate last year was 114 for Euro-US dollar. So that should help. But it's fair to say that we assume currently, looking at the current Euro-US dollar rate, that the impact could be significantly positive for us.

Great. Thank you.

Thank you. And the next question comes from the line of Trevor Sterling. from Ben Staines. Please go ahead.

Good morning, Hélène. Three questions from my side, please, Hélène. So in Asia, you talk about the China on trade being slightly weak. And I wonder if you just give us a little bit more color. Is that related to clampdown and corruption or is it underlying consumer trends? In the Americas, U.S. was very strong at 6%, but the region was only 2%. And I wonder if you tell us what was the big drag on growth in the Americas? And finally on currency, you've given guidance based on the spot rates of the 1st of October. Over the last couple of weeks, Sterling has rallied strongly, which presumably will put some offset to that in terms of transactional FX on Scotch COGS. And I was wondering if you could just make any comment on how significant that could be.

Okay, so maybe I'll just start by the final one on the FX and the impact on the On the sterling, I think we're not commenting, especially on such a short period, what could be the impact. So that's the only thing I can tell you. I'm sorry. At this time of the year. Maybe I'll start now with your question on China. So it's fair to say that we mentioned in the communication that we have a softer on-trade environment in this first quarter. few months of the year, and this is mainly due to the recent closures that happen in the on-trade environments, mainly in the night outlets, to be more specific. And this started late spring, to be fair, and it's leading in some cases to temporary closures of KTVs, and as well as some modern clubs have to close a bit earlier than they should, let's say. So this is the reason why we mentioned this softer untraded environment. And this is as well impacting especially Shibas in this first quarter. Moving to your question on America. So yes, it's plus 6% for the U.S. and America is plus 2%. There is, as we mentioned as well, some phasing impacting Canada in this first quarter, which is in decline due to that phasing. There is as well travel retail Americas, some phasing as well there. And LATAM is in modest growth. So that's how you get to the 2%. Thank you very much, Hélène.

You're welcome.

Thank you. And the next question comes from the line of Ewan Mitchell from Barclays. Please go ahead.

Morning, both. I wonder if you could just talk through some kind of the depletion trends that you've seen in China in a bit more detail. I know you said the on-trade has been tough, but is that broadly in line with what we've been seeing? And then secondly...

Hong Kong has that affected travel retail I know you said it's volatile but is there something that we should be continuing to be aware of there thank you yeah thank you so back to China so the performance again of plus 6% is a good one due to this very high comparable basis of plus 27% so We were expecting this growth to moderate. And by the way, as we mentioned, not only for the first quarter, but for the full year. And we believe the growth will moderate to be in line with our mid-term ambition, which is high single digits, low double digits for China. So, talking about depletion, I'm afraid that I cannot tell you much more than what I just said about on-trade, because we don't have the... Mid-Autumn Festival and Golden Week depletion so far. It's too early in the year. So I cannot comment those depletion trends. Hong Kong, so Hong Kong, well, we have obviously a market distribution company there, sorry. So we have some decline in the Hong Kong domestic markets. and as well some impact in travel retail, as you mentioned. I would say both are quite limited for us because it's a small business for us, Hong Kong, from a domestic point of view, and travel retail is impacted, especially because of the reduction of Chinese travelers, but it has a limited impact globally.

Okay, thank you very much. If I may, one more on Absolute in the U.S. Is this in line with what you were expecting post the launch of Juice, or are you expecting an upturn from here? Could you just give a bit more color on how you're seeing that go?

Yeah, thank you. So, I mean, there are two things important to remember as far as Absolute in the U.S. is concerned. is first the launch of the new campaign, Planet Earth Fervid Vodka, that has been launched end of April last year, so only six months ago, but which is strongly activated in the US. And as well, as you mentioned, the launch of Absolute Juice, which this one happened in July, so it's even more recent. So the distribution is expanding. I would say the early signs of the launch are quite positive. and we're obviously monitoring the development of that launch. Maybe just to give you some more details, the distribution gains we are having in Absolute Juice are faster than Lime in the same period post-launch, and as you know, probably Absolute Lime was a good success in the U.S. So it's still early days, and we are carefully monitoring the development of that launch.

Thank you.

Thank you. And our next question comes from the line of Marion Mulcheron from Main First. Please go ahead.

Hi. Good morning, everyone. Just a question for me, please. The first is on the several phasings you've seen. There were some positive, some negative. So what would be, in your view, a good underlying growth assumption for Q1? I mean, did you see major changes? changes in sell-out trends also in some key markets.

And the second question is on... Marie, sorry to interrupt you. We didn't hear the beginning of the question. Would you mind repeating? The line was blurred. We couldn't hear you. Sorry about that.

Yeah, sure. Sorry. It's about, I mean, there have been several phasing impact in Q1 and some technicals. I was just trying to get a better understanding of the Underlying trends you've seen in some markets and notably on travel retail. I think last year you were up 6% So if we strip out some effects, I mean are the is it still similar what you're seeing this year? I guess some if there was some phase changes in sellout trends and some markets could be a good Good proxy and then the second question is on France as so there was obviously some help in q1 and Now, what's the underlying – is the minus 3% from Nielsen? You mentioned a good read of the underlying trends, because I think Q4 last year was probably much worse due to the EGALIM low. So just trying to see what we should expect for the upcoming quarters there.

Okay, thank you. So, I mean, in terms of underlying trends, I think we already covered – the key markets, talking about China and India, and maybe just to remind as well that in the U.S., our expectation for the full year is fully consistent with our mid-term ambition, which is mid-single-digit growth. So nothing I can add to that. So if we talk about then the other geographies, it's fair to say that the... The Western Europe is now back to growth, and this is mainly due to Germany's strong growth. So it's difficult, obviously, to talk about an underlying trend by only referring to one quarter, because as you rightly mentioned, there are many things that can happen in terms of phasing or technicalities. Germany is exiting a commercial dispute, so that's part of the reason of the dynamism, but the underlying trends are good, especially on the brands that I mentioned before. Moving to France, because that's your next question, but I think it's as well probably the right market to flag in terms of underlying trends, unfortunately being less favorable than this first quarter sales performance. The market is still in decline, and we are obviously still facing the same difficulties in terms of environment, which is deflationary environment, and as well some categories that we are very exposed that are in decline. What you mentioned about EGalim Law is obviously still very relevant because the law is in force, and has been in force since February or March last year, so we're going to have the impact of EGalim Law in the coming months. I don't think we should expect short-term any improvement in that market. What is obviously very relevant to mention is that we have an ambitious plan to be back to market share gain in France with a significant organization to put agility and more efficiency in France to recover in that market, which is obviously quite relevant for us. But it's a mid-term plan. The teams are going to be focused in the implementation of that plan this year. And this return to growth is the mid-term ambition.

Okay, thank you.

Yeah, I think you mentioned as well something on travel retail. So there was a high-comp basis, double-digit growth last year in the quarter.

Thank you so much. And as a reminder, please, if you wish to ask a question, please press that one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the hash key. And the next question comes from the line of Chris Pitcher from Redbird. Please go ahead.

Thank you very much. Good morning. A couple of questions. Firstly, on the wine value strategy, how long until that stops being a drag on on sales. And can you give us some indication of how the value strategy is impacting profitability for wine? Can you just give us a bit more colour on the US shipment phasing? You've just spent two quarters reducing inventories, and now there's been some advanced shipments. Can we just understand what's going on there? And then finally, just on India, some other companies are talking about a slowing environment in India, particularly in the rural region. Can you give us any indication whether you're seeing something similar and what you're split would be, say, rural versus urban, if you have that figure. Thank you.

Thank you. So I start with the wine. So the value strategy is impacting us as well in this quarter, as you rightly pointed out. This is mainly a Jacobs Creek in the UK, so we don't exactly quantify how long this is going to last but I mean it is a strategy so we're going to keep implementing it. What I think is very important to point is that we have as well other brand and brand market combination on which the dynamism is much stronger. For instance, talking about Jacobs Creek, this is a very dynamic brand in key markets such as China and India and with a very strong double-digit growth. And this is as well a brand which is very dynamic in Eastern Europe. And we have as well a strong growth relay in our wine portfolio, such as Compo Viejo in the U.S. So I would like to reduce the conversation on wine on the situation of Jacob Street in the U.K. with much more dynamism in some other geographies and with as well some other brands. So then the US, so you were talking about the phasing of the shipment. So maybe let me use that question to clarify that we did implement this optimization of wholesaler's inventory in the second half last year. Mainly I would say in the last quarter to be fair. So this has been done by June 2019. Talking about the first quarter phasing, so the shipments are plus 6%, and we mentioned that the underlying trend is a circa plus 4, which is very consistent with what it was last fiscal year. So there is some difference in those numbers. There is some advance shipments that have been done by wholesalers, let's say, anticipating the risk of U.S. tariffs, for which, as you know, there was a lot of uncertainty in the list of products, the quantum as well as the tariffs, until I would say probably the last minute. So that's one of the explanations. The other one, which is a very usual one, is that obviously this is a quarter just before a very festive season of October, November, and December in the U.S., so as we are accelerating to ensure that our products are at the right location in terms of point of sale and consumption for this very busy quarter in the U.S. So talking about India, your last question, so it's fair to say that there is a softening of the macroeconomic environment. As an illustration, as you know, there is some The GDP of the second quarter was only plus 5%, which was quite low compared to what it used to be previously. So this is, let's say, softening. As obviously you know, India is a key market for us. We have a very strong ambition in India. Our mid-term ambition is low double digits, and we believe this is the right underlying trend to expect for this fiscal year. So I would say no change at all in the fundamentals for us in India. The softening of the environment for the first quarter has probably led to some, let's say, softer demand and some trading down. That's why we have some stronger performance of Imperial Blue compared to the other seagram whiskeys in this first quarter. But there is no change in the strategy and no change for us in terms of the ambition for the year. Please remind as well that in the Q1, we had severe flooding, heavy rain and flooding in some key states in the eastern and western parts of India, especially Haryana and Maharashtra, which impacted our performance in this first quarter. And again, there was a very high comparable basis because last year was recycling the first quarter of the previous year with the highway van and JST implementation.

Thank you very much.

You're welcome. Thank you. And the next question comes from the line of Sajid Aul. Please, from Credit Suisse, please go ahead.

Yeah, thanks for the question. Just going back to global travel retail, I think you said Q1 last year was up double digit. Can you just give us a sense of what global travel retail was up last year on a full year basis so we can get a sense of the phasing of the comparatives there? And then my second question is on the US. Your underlying performance still seems to be around 4%, which is pretty in line with last year. Are you seeing any benefits yet from the stepped-up investments from your wholesalers following the inventory optimization across the portfolio?

Okay, thank you. So on global travel retail, again, I would say, first, a quarter is a quarter. And second, global travel retail can be very volatile. So that's, I would say, two very good reasons not to spend too much focus on what is the expectation from one quarter to the other. But to answer your question, global travel retail last year was growing by 6% for the full year, and it was double digits in the first quarter. So moving to the U.S., so this plus 4%, as you mentioned, is very consistent with our performance last year, and it's probably in line with the market. Obviously, we have strong ambition in the U.S. As I mentioned, mid-term ambition is mid-single digit. This is our number one market. We have significantly increased our investment two years ago to support that ambition. And we are obviously keeping a strong focus and investment in that key geography for us. So no change, obviously, in our ambition. This is, again, only a quarter. Everything which is put in place is there to give us the right outcome for the full year and the following years. As far as the wholesaler's support are concerned, as you rightly mentioned, we did negotiate with them stronger activation in the context of the inventory optimization. and this is going to be happening in the full year. So let's say no need to focus on one quarter versus the other in terms of activation. What matters is a continued investment strategy and focus on our teams and our customers to deliver that ambition.

Got it. And just a quick technical one on tax. Since you last updated, I think the – there's been a reduction in the corporate tax rate in India. Are you able to give us some sensitivity on that to your business here?

Well, we don't quantify this, and obviously this is a sales school. But I think what I can say is that this recent tax reform obviously appears to be good news. This should as well... help the dynamism of the economy in that key market for us. So we'll probably be able to give you more flavor than that in our next communication.

Thank you. We'll take our two last callers now, please.

Thank you so much. And the next question comes from the line of Simon Hales from Citi. Please go ahead. Hi, Simon. Can you check if your line is on mute? Can you press star six? Simon, can you check if your line is on mute? Can you press star six on your telephone keypad? Since we have technical difficulties with this line. Simon?

It's the telephone.

So we will pass to the next question that comes from Andrea Pistacci from Deutsche Bank. Please go ahead.

Yes, good morning, Helen and Julia. Three questions, please. The first one, could you talk a bit about the stock levels in China, how you feel about these stock levels going into Chinese New Year and whether we should expect a bit of a replenishment of stocks, as you said, go into New Year and given the timing of the Chinese New Year a bit earlier this year, whether this will have an impact, a positive impact on Q2. The second question on your guidance, you've confirmed 5% to 7% EBIT guidance organic. At the full year, you were saying that this guidance was factoring in some of the obviously risks in the environment. Now, the biggest one of these risks was tariff risk, presumably, which for now seems to have gone away. Now, of course, this may change, but for now it's gone away. Does this mean, I don't quite know how to say this, but does this mean that you are, if anything, even more confident about this guidance? I'm saying this in the context of consensus being close to 8% still above your guidance range. And then, if I may, the final question is on the U.S., on Jameson. which you're saying is performing strongly. Can you just give an update on Jameson, in particular on those SKUs of Jameson-like castmates which were underperforming that you were working on to improve?

Yes, thank you very much. So I'll start with your first question about China stock levels and Chinese New Year phasing. So maybe just to... Remind you that we are monitoring very closely the stock evolution. We have a very good visibility on a monthly basis. So we did have a very healthy trade inventory stock at the end of last fiscal year, and then we are following that all along the year. Obviously, there is some increase just before some significant festive season. And that's obviously quite usual. So talking about the phasing of Chinese New Year, it's going to be 25th of Jan. Last year it was the 5th of February, so it's a bit earlier. So it could have some impact in terms of a stronger Q2 for us. Having said that, the... The intake periods can really change year on year on Chinese New Year. So I wouldn't elaborate too much on that. It's too early to give as well the trend of what could be the phasing of the replenishment of stocks. And I would like to highlight that we have a high comp last year for the full H1, even if the Chinese New Year was a bit later than it's going to be this year, because China was at plus 28% for the year. So we're going to have a high comp there. For the guidance, so I think, as you rightly mentioned, the guidance that we are confirming today has been built and focused in a context that we qualify as particularly uncertain and that we still qualify as particularly uncertain. Unfortunately, I just need to amend what you said. The tariffs have not gone away. They are implemented as of tomorrow. So... The risk and the uncertainty around the risk have been clarified, let's say, but it has been as well. It is materialized and it's going to happen tomorrow and obviously it's not good news. So I just wanted to clarify that. So the guidance right now is confirmed as well because the environment remains particularly uncertain, as I mentioned earlier. the U.S. risk was and is one of the factors. By the way, there is still uncertainty of this U.S. tariff impact for the full year because, as you might have seen, there is what is called a carouseling process, which means that there will be a review of the list subject to this 25% tariff in 120 days. and then again in 180 days. So the risk is still there. That was not the only one. The environment, as obviously you know, is as well especially, let's say, impacted by the trade war, and I should say trade wars, that could escalate between the U.S. and China, but as well between the U.S. and the European Union. And these as well other risks but as well the global GDP forecast, which is reducing, and this is usually impacting the consumption. So we are very early in the year. The environment is particularly uncertain, and this is why we are confirming the guidance. Your last question was on Jemison. So Jemison, obviously the all-star brand in the US. The dynamism was good. It's a strong growth for Jemison in the first quarter. Outlook for the brand is high single-digit, low double-digit value growth. Original is in high single-digit growth. And to be more specific about your question on Castmate, it's performing better. but it's still cycling the IPA launch. And we should, as Will mentioned, Black Barrel. There's a strong momentum on Black Barrel, which is enjoying a double-digit growth.

Thank you. Very clear.

You're welcome.

So, ladies and gentlemen, I think that brings our call to a close. Thank you very much, Hélène, and thank you very much, ladies and gentlemen, for your time. Have a good day. Thank you very much.