Pernod Ricard S A

The conference will begin shortly. To raise your hand. Good day and thank you for standing by. Welcome to the EMEA LATAM conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be the question and answer session. To ask a question during the session, you will need to press star 11 on your telephone keypad. You will then hear an automatic message advising your hand is raised. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Charlie Monte. Please go ahead.

Good morning. Good afternoon, everyone. We are very pleased to welcome you to our EMEA LATAM conference call. We are today hosted by Gilles Bogart, Chairman and CEO of Pernod Ricard EMEA LATAM. I guess most of you would have seen the video we posted on our website this morning. So in the interest of time, I suggest we go straight into the Q&A session. Operator, could you please open the line to the first caller?

Thank you very much. Dear participants, as a reminder, if you wish to ask a question, please press star 1 1 on your telephone keypad. Now we're going to take our first question. Please stand by. And the first question comes from the line of Olivier Nicolai from Goldman Sachs. Your line is open. Please ask a question.

Hi, good afternoon, Jill and Charlie. I've got three questions, please. First of all, on Europe, you mentioned a good recovery in the untraded many markets. Do you currently see any sign of the untraded channel becoming weaker? And do you see any sign of downtrading across your portfolio? Certainly, looking at your costs and the cost outlook, We've seen gas prices coming down quite a lot. Do you expect a relief on glass cost in the region? And is it fair to say that glass cost is much more of an issue for Europe than it is for LATAM in Africa? And lastly, a question on Brazil. I mean, you've had amazing growth, 50%. Do you expect this very strong growth momentum to continue? And when can we expect LATAM profitability to get closer to the group average? or maybe closer to even your main competitors in the region? Is it just a scale issue? Thank you very much.

Thank you, Olivier. Good afternoon. I think your first question is on Europe, on the recovery of the on-trade. fair to say that we still benefited in the Q1 of the current fiscal year of a strong long-trade recovery in some markets, in particular in Southern Europe, Italy, Greece, and in Liberia, in particular, Spain. So this is probably the last, you know, tale of rebound post-COVID that we have in both markets. So it helps performance in the first quarter. That said, the on-trade demand across most geographies remains quite good. And so we have not seen any signs of deceleration in the on-trade. We just normalize in the quarters to come because we still have favorable comp in the Q1. On down-trading, we... We have not seen any evidence to today. Our business is up. Premium spirits are more resilient than the other FMCG categories. Our portfolio is skewed towards premium products. We have a broad portfolio addressing different consumer locations. It's an affordable luxury with a lower frequency purchase. And so we have not seen any evidence of down trading so far. I think the first question was about energy cost and glass. I think you know that glass is among the drivers which are under pressure from an inflation standpoint, with also some capacity limits from some glass suppliers. I think we've been managing well that situation, limiting any particular issue, limiting out of stock. Let's say we believe we'll keep living with that and tough environments from a glass supply standpoint and still with high inflation in the months to come. No major difference between markets. We tend very often to bottle in the country of origin, and so there is no particular difference on that aspect between markets. let's say, European markets or Latin American markets. I think your last question was on the growth in Brazil. I think that Brazil has been quite dynamic in the last year. It's still dynamic in the first quarter. I think LATAM together with the SSA are two continents which have been taking off in the last 12 months, thanks to the very good work we've been doing there. I think the off-trade consumption has been quite strong in Brazil with the development of the cocktail culture, and it remained resilient after the on-trade was back. We've been also able to pass on significant price increases, which has drive value even at higher levels. And as a consequence, you know, in LATAM, it's about gaining share, growing value ahead of volumes, and getting the scale. And that's what is happening at the time being in Brazil and in the other countries of the region. And obviously, mechanically, it drives margins, operating margins up also. So this is the current dynamic that we have in Latin America and in particular in Brazil. Thank you very much, Jane.

Thank you. Dear participants, as a reminder, if you wish to ask a question, please press star 1 1 on your telephone keypad. Now we're going to take our next question. The next question comes from the line of Edward Mundy from Jefferies. Your line is open. Please ask a question.

Good afternoon, Julie. Good afternoon, Charlie. Two questions, please. I'd love to get an update on the condo reality platform. Which markets in your territories are currently live, and what does the roadmap for rollout look like? Second question, sticking with the digital transformation, where you have rolled out some of the KDPs, such as Matrix, RevArt, and VStar, could you perhaps provide some examples of how this is aligned for stronger competition, for instance, through leveraging data or through better sales focus? And then third question is, I'm going to come back to the question around cocktail culture. Clearly during COVID, there was quite a bit of home mixology and cocktail making in Europe. Do you think this will help to accelerate development of cocktail culture in Europe where there still is a gap versus markets such as the US?

Sorry, the line was very, very bad. So your first question was on KGP and the deployment of the platform. Can you just repeat your second question, please?

Sure. First question is which market and how does the rollout look like? Second question, where you have rolled it out, how the tools align for stronger execution. And then the third question is around cocktail culture in Europe, to what extent you can close the gap to the U.S.,

Yes, thank you for your questions. I think on the journey to the Candidity Platform, I think we are well on track in EME Latam. We have an ambitious transformation roadmap with, I would say, more than 10 markets involved so far. Maine is the largest one. For instance, we have DSTAR in Germany, in UK, Spain. and being deployed in South Africa and Turkey. And as you know, this is about sales, and it drives incremental value with greater outlets targeting, assortments, optimize the team visit planning, new touchpoints, and at the end of the day, the objective to increase our top-line growth, improve our distribution. We also have the deployment of Vista RevUp, which is our price optimization platform IA Base 2 in the UK and in Mexico with having some very good results so far that we can leverage obviously to help us in our pricing journey which is obviously as you know one of our top priorities and Matrix which is about ANP allocation, helping us to properly allocate ANP by touchpoints, by brands. We have deployed it in Spain, in Germany, in the UK in particular. It's being deployed in Brazil, soon in Mexico. And it has also delivered some tangible results, helping in particular to optimize the number of touchpoints and to refocus behind the touchpoints with the best return, which has then proven some stronger overall performance. So good progress so far on the COVID platform. We have other markets that will deploy some of those KDPs in the next 18 months. Cocktail culture is definitely something that has accelerated during COVID. And the good news is that It has stayed since then. So it explains the resilience of the off-trade, the home consumption. And we've been very active with our brands. with our marketing initiatives to help sustain that cocktail culture. We did it in Europe, we did it in Brazil, where we launched Bar Aberto, which is a kind of master chef of cocktails, and which has been a great opportunity to engage with people when they're at home to help them to prepare cocktails. And this trend is still very strong, and it's cute towards premium brands, so it's very branded, easy recipes, and we keep leveraging that in many markets in the UK, in Germany, even in Spain, in Italy, and in most Latin countries. So this trend was reinforced during COVID. and has remained quite strong since. And it's very good for our brands considering the exposure to premium brands for Panoramica.

Very good. Thank you, Gilles. Thanks, Charlie.

Thank you. Dear participants, as a reminder, if you wish to ask a question, please press star 11 on your telephone keypad. Yes, speakers, there are no further questions at this time. I would now like to hand the conference over to our speaker, Charlie Monte, for closing remarks.

Hi, operator. Can you please just ask if there's any further questions?

Dear participants, once again, if you wish to ask a question, please press star 11 on your telephone keypad. We will proceed with the next question. And the next question comes from the line of Edward Mundy from Jefferies. Your line is open. Please ask your question.

Operator, I think Ed is trying to ask a question. Can you please try to connect him?

Charlie, can you hear me?

Yes, Ed, we can. Please go ahead.

Okay, very good. Sorry, I've got bad reception. So the question was around Malsi, where I think you've increased sales by seven times since you've bought it. Can you talk about how you've been successful with that model, and does that give you more appetite for further bold forms of interesting brands that are similar to Malsi? And then the second question is really the role of wine within the portfolio within Europe. Could you perhaps just remind us what role does it play and which markets is it particularly meaningful to?

Thank you for your questions. First one, I think it's a great addition to the portfolio. Super premium, flavored gin, Italian origin. great brand, great look and feel, great marketing assets, and we've been growing very, very fast, well ahead of our initial forecast and reaching in the region 250,000 cases at the end of last fiscal year, growing very strong double digits. And it happens in many, many markets. In Italy, in particular, the whole market, the brand has had fantastic starts. It's strong in the UK. It's strong in Germany. It's strong in South Africa. LATAM is interested by the brand also. So it's a very, very good start. Again, leveraging on the brand, which is today largely skewed towards off-trade and that we are gradually building also through the on-trade, but it was launched during COVID. So let's say the focus was mainly put on off-trade at the beginning. And we are quite confident on the growth potential of that brand going forward, which, again, is at a very high price level, super premium brand. So it's quite good also for not only the growth of the region, but also the margins. Your second question is on wine. As you know, our exposure to wine in the region is relatively limited. It's... 6 or 7% of the whole net sales in the region, mainly in two geographies, in the UK and in the Scandinavian region. And let's say the start of the year has been more challenging for wine, first because we have tough comps, and there were some phasing elements here also, and also because our strategy is really to focus on higher end. It's not a volume game. It's a value game. And so we prefer to focus on the brands which are at the right price points. And wine is largely exposed to the UK, as you know. And the UK as a whole is probably today in a more complicated macroeconomic environment. And as a consequence, wine has been suffering there a bit more.

Thanks, Gilles. And just one final, if I may, if there are no other questions from others. It's really around the health of inventories, the level of inventories that you're seeing at wholesale and retail within your region. Any comments you have to make on that?

Our trade inventories are quite healthy, normal levels, well-monitored, well-equipped with data to be able to to monitor our trade inventories and properly manage selling and sell-out. So healthy situation.

Very good. Thank you, Gilles.

Thank you. Now we'll proceed to the next question. Please stand by. And the next question is coming from Andrea Bistacci from Bank of America. Your line is open. Please ask your question.

Yes. Hi, Gilles. Hi, Charlie. Two questions, please. You were talking about Malfi and some of the additions to the portfolio in Europe. You've done also a lot of bolt-on deals in the U.S. over the past few years, Jeffersons and, importantly, the recent one with Sovereign Brands. which has, for example, Bumbu, which is growing strongly in the U.S. What potential do you see? What brands, what are these brands you think have the most interesting potential in Europe? And then the second question, a bit more general on the consumer environment, you're flagging that you haven't seen any significant change yet. Should the environment, let's say, deteriorate going forward, what what shape do you think, how do you expect the weaker consumer environment to manifest itself primarily in spirits and in your business? Is the main issue, in your view, channel shift or trade down, and how are you positioning yourself? How are you preparing for channel shift? Thank you.

Thank you, Andrei. The first question is on the various, let's say, US-led acquisitions. So we bought different US whiskeys. We bought recently Codigo, Tequila, which is largely at the US market, and we increased our participation in sovereign brands. We announced the deal recently. Even if those acquisitions are mainly done to sustain the growth potential of the U.S. markets, definitely there is an opportunity also outside the U.S., in particular in Europe. I think on the U.S. basically it's fair to say that we are growing our supply so that we can deliver strong growth in the U.S. and then also start to seed the brands in Europe. So it will happen gradually over the years to come, but let's say it will take some time before we can have a significant size of business coming from that, but we have a plan clearly to grow our American whiskey portfolio outside the U.S. in the 10 years to come. Sovereign Brand is, we're very happy with that acquisition, because we believe a lot in the potential of Bel Air on the one hand, on Boom Boom also. These are, you know, culturally-led, you know, super premium brands which are very trendy, that's a model that works very well, and we'll be very happy to distribute some of those brands in many markets of Pernod Ricard and Yemin Atam with the objective to co-develop and see the potential of those brands together with Bud Berish and sovereign brands. because those brands already have some early presence in many, many markets, and we believe that with his specific know-how in this type of culturally-led brands, his knowledge of all the influencers, and the strength of our virtual markets, We can definitely see a great opportunity in particular in the prestige portfolio, sparkling wine, champagne, and rum. So Southern Brand is a good investment for Pernod Ricard for the U.S., but also worldwide. Your second question is on the consumer environment. As I said, and as you properly noted, so far so good, and consumer demand remains strong, and we don't see any sign of down trading. I think we remain confident because the momentum is there. We have strong brands. The consumer dynamic is positive. If the environment is getting more difficult, to say that some macroeconomic indicators show that, you know, the environment could get more difficult. We believe we are well equipped. You know, we have a broad-based, you know, portfolio. We are present in many major geographies. Premium brands have shown their resilience through crisis. And, you know, I remember in the past, including with my previous half, some discussion on, you know, will premiumization go on when times were tougher? And history shows us that premiumization is a long-term trend that went through also during slower consumer demand periods. So with this depth of the portfolio, the ability potentially to leverage more some brands than others when the environment is tougher, Our channel exposure also, which, you know, we can also allocate resources between channels when needed, as we did, for instance, during the COVID when the entree was closed, I think makes me confident that we'll have the agility to be able to adjust to the situation. We can be very reactive also to adjust investment when needed. And we start to be, you know, very, very well equipped on data including predicted data, to help us, to guide us with agility and speed when there are some changes of environment. So I think that if a slowdown happens, we would be well prepared and well equipped to well adapt to that situation. Thank you.

Thank you. Now we're going to take our next question. Please give us a moment. The next question comes to the line of Jeremy Fialco from HSBC. Your line is open. Please ask a question.

Hi there. A couple of questions from me. Firstly, if you could talk about the performance of the aperitif brand, I guess mainly Lille. You talked about that being plus 7%. That also being one of the main priorities for the region. Now, I guess when we look at that versus the major aperitif pair, they've certainly grown somewhat quicker. So perhaps you could talk about what your strategy for the brand is and what you think is actually kind of achievable for that brand on a longer-term view. And the second question is if you could talk about the volumes within the region. I think you talked about being plus nine in Q1. but with double-digit price mix, which would therefore imply that volumes are a little bit negative at the moment. So could you talk about if that is indeed correct and which parts of the business have got negative volumes and which parts have got positive? Thanks.

Thank you for your question. You're right to speak about operatives. This is definitely true. one of the growing moments of consumption. And it happened during COVID at home, and then when the Entrez was open again, it was very strong also in the Entrez. And it remains strong also at home, even with some virtual apparatus, which fortunately are becoming not virtual anymore nowadays. It's not just about Lille, to be fair. I think it's about a larger portfolio. We have many operative brands, historical ones like Ricard, which is mainly about France. But our gin portfolio is also very, very strong in the operative moments. All brands, Monkey, Malfi, Befitter, in particular with the gin tonic. We have Ramazzotti also, our Italian brand. Peter, which is quite strong in particular in Germany, and has some fantastic innovation in Chile, for instance. And yes, you're right, Lille, which is probably our fastest growing brand, which was built in Western Europe, in particular in Germany and Austria, city by city, starting with the white Lille and then growing with new innovations like the Rose, which has a very, very good start. and very strong in female consumption, low sugar, lower ABV, and so I think it fits a lot with, let's say, the trends we see, moment of consumption, you know, conscious drinking, both male and female consumption, and it's growing in many other markets, so this is definitely a brand that we want to grow outside, you know, its core territory of Germany. We do it in the UK, in Benelux. We have some ambitions in Brazil, in Spain, in South Africa. And we believe that the growth potential is quite significant. And as you know, Lille's position has a quite premium price, especially comparing with the competitive sets. which I think highlights the quality of the brand and that allows to come on a higher price level. In terms of volumes, as we said, most of the growth in Q1 has been driven by by price mix, but need to take into account also that we have a very, very sharp decline in Eastern Europe because of the war in Ukraine. And so I would say the volumes when restated by Eastern Europe are resilience. And I think that our view for the future is that the the top line growth of Yemin Atam will still rely more on price mix than on volumes in the current environment and also with our priority behind price. So that's the situation on volumes.

Okay, great. Thanks very much.

Operator, I think we're going to take our last question, please.

Yes, of course. Thank you very much. Now we're going to take our last question. Just give us a moment. And the last question comes from the line of Olivier Nicolas from Goldman Sachs. Your line is open. Please ask your question.

Thank you for the follow-up. I've got three questions, actually, so not really the last one. Mostly on Europe. You mentioned the prestige sales, which have been very strong, 36% growth. Champagne was up 51%. Now, historically, the share of super premium brands in Western Europe has always been much lower than in the US, despite fairly similar GDP per capita. Do you expect the gap to close going forward and that the high-end consumer in Europe will spend much more on premium spirits going forward, regardless of the macro? That's the first question. Second question is on margins. Margins in Europe have actually increased quite significantly over the last few years. Where are you on the cost rationalization in Europe and how much cost do you still see in terms of opportunities? And lastly, you have acquired Codigo recently. Do you see a potential for Tequila in Europe? And more generally, do you see significant opportunities to fill gaps in your portfolio via M&A? Thank you.

Thank you for your questions. Prestige is definitely one of our transnational battlegrounds in the Emirates, in Europe, in Sub-Saharan Africa, in Latin America also. This is the quintessence of freemization. We have a very, very strong portfolio, very diversified, very broad, and we've been building some specific commercial organizations to be able to seize the prestige potential. So reinforcing our virtual markets in the most attractive European market in particular like Germany, UK, Italy, and we've been doing it also in Latin America, in particular in Brazil and Mexico. Yes, the size of prestige is smaller in Europe than it is in the U.S. or than it is in Asia. I think there are reasons for that, and I think we don't expect to bridge the gap over the very short term. But there is definitely a potential. There are consumers who want high-quality products. If we can improve the way we identify them, we interact with them, including leveraging some direct-to-consumers opportunities, I think we'll be able to keep growing at good budget rates, which is our intent. On margins, you well noted that we've been improving our operating margins a lot in Europe over the last 3-4 years, leveraging all drivers, improving our gross margin rates thanks to strong pricing and strong mix driven by criminalization. Also on ANP investments all the time, and thanks to initiatives like Matrix, we've been able to improve the effectiveness and the efficiency of our investment and making also the allocation sharper, which has also driven some margin benefits. And last but not least, on the structure cost side, in the last years, we've been very disciplined. We've been able to also optimize our organization, in particular leveraging the management entity concepts you know, sharing resources between markets, sometimes merging commercial organizations of markets like we did in Benelux or in Andina between Peru and Colombia. And these type of initiatives have driven, obviously, some optimized structure cost to net sales ratio. The growth and the very strong growth we had was another key element to further improve the margins. So we keep focusing a lot on margin. Let's say the short-term priority is definitely to protect our margin in the context of very, very high inflation. And so let's say it's more about defending our margins currently. we plan to keep investing behind our brands at more or less the same level in terms of A&P to net sales. And on structure costs, let's say this year, we have some reinforcements of some organizations to be able to accelerate the transformation of the market companies towards the community platform and also some higher inflation of some salaries. in some markets. But definitely, the margin remains very high on the list. And the last question was on Tequila. So you spoke about Codigo and said that Codigo was acquired mainly for the U.S. market. It's a nice complement to what we have there. And I think it's priced at a very high level and that fits well with the portfolio there. That said, outside the U.S., outside Mexico, we clearly start to see a growing trend on tequila. We happen to be quite strong in tequila outside the U.S. and Mexico, leveraging our portfolio. We have Olmeca, which is very strong in night on trade. We have Altos, our super premium tequila. We have Avion and Reserva 44 at the higher end. And we have also the supply, which is increasing to be able to fuel that growth. So, yes, we expect the tequila potential to be stronger in Europe in the years to come. even if obviously it remains today quite small as compared to the size of the U.S. or even the Mexican market. Perfect. Thank you very much, Gilles.

Gilles, could you ask about Nigeria, or are we running out of time, Charlie?

We can take the question.

Okay. Thank you. So on Nigeria and Africa in general, first you mentioned Martel, Cognac, and the bottom shoe there. We often read that the Nigerian consumer are looking at trends in the U.S. rather than in Europe. Within the imported spirit category, where do you see the most potential in Nigeria? Is it Cognac? Is it Scotch? Or is it something else? And then more generally in Africa, how do you view the distribution in this region where you are less well-represented than elsewhere? And could you talk a bit about the role of e-commerce, knowing that you have a You are, I think, on the board of one of the big e-commerce companies. I had to ask you. Thank you, Eugene.

Yes, thank you. So you're right to say that Nigeria is influenced by the U.S., even if they start to influence also the rest of the world because they are becoming so big and they like premium brands. They like, let's say, sure consumption. And, yes, definitely cognac is an attractive category, and we see it with Martel. We have Blue Swift, which is the Martel SKU that was launched in the U.S., which is growing very fast in Nigeria, to be able to use BS. It's a very strong market also for whiskeys, in particular for Jameson. We saw more than 200,000 cases last year on Jameson in Nigeria, and we reached the milestone of 1 million cases on Jameson in sub-Saharan Africa. And interestingly enough, the demand was mainly on the higher end of the range, in particular Black Barrel, which I think shows the compromisation potential of the Nigerian business. So Jameson Martel, Chivas, And let's say the whole Prestige portfolio has a great potential in Nigeria, and we are happy to have strong brands in all those categories, which I think is a competitive advantage as compared to other players. We also decided to play the card of mainstream whiskeys, with the Seagram whiskeys, to be able to leverage the potential of this very strong middle class that we have in Nigeria and in the whole sub-Saharan region. So back to the whole region and the route to market, I think we've been able over time to strengthen a lot our route to markets, opening some new affiliates over the last six, seven years in some new geographies. But in those geographies, strengthening our partnership with some distributors, with some wholesalers, with the modern off-road, which is also starting to grow from a low basis. And yes, seizing also the e-commerce opportunity, which is starting in Africa. It's the beginning. It will take time, but it's a good way, I would say, to complement our virtual markets where you know that most consumers have a smartphone and that it's very convenient to order on an e-commerce platform, on the marketplace, to then be delivered. directly, and it starts to grow maybe at a lower pace than what was forecasted a few years ago, but I think the potential is definitely there. So we are quite happy with the route to market we have today in sub-Saharan Africa. We start also to increase distribution going to more remote areas like India and Nigeria. We are focusing on the three main cities. We have a plan now to extend extend our presence to tier two cities. And as you know, in Nigeria, we have many new cities above one million inhabitants in the years to come. That will become the third largest country in the world, population-wise. In South Africa, we increase also our presence in the townships, where there is definitely potential, including for premium brands. and this is part of the strategy to keep extending our virtual markets in each of the countries where we operate. We may decide to open some new affiliates in some new markets in the future, but for the time being, the priority is to extract the maximum growth potential we can in the markets where we operate. And I think that definitely it works on, and I think Africa in the last 18 months for PENORICA has been taking off with very, very strong growth, which then has led also to a better profitability because, obviously, scale matters a lot on that aspect. Thank you. Thank you very much.

Thank you.

Thank you. Thank you, Gilles. Thank you, everyone. Operator, I think we can close the call.

That does conclude our conference for today. Thank you for participating. We now all disconnect. Have a nice day.