Pernod Ricard S A

Good morning, everyone. We're very pleased to welcome you to our nine-month sales call. Hélène de Tissot, our group CFO, will take you through the presentation of those results, and then we will take your questions. Hélène, over to you. Thank you, Florence.

Good morning, everyone. I'm pleased to report very strong vote-based growth in our first nine months of fiscal year 2023 in a normalizing environment with a high single-digit pricing in all regions. So organic growth is at plus 8% at book level, with Asia and the rest of the world growing at plus 12%, very strong growth led by India, travel retail, and Turkey, offsetting China. Solid performance in Japan, in Thailand, in Korea, and continued rebound in Southeast Asia. Europe is growing at plus 6%, the value-driven growth led by Spain, travel retail, and Germany. Americas is growing at plus 2% with growth driven by LATAM. Our reported growth for the nine months is at plus 13%, benefiting over the last nine months from the positive FX impact, which is currently starting to fade with euro gaining some strength versus US dollar. We have a very significant price impact at plus 9% across regions. Volumes are resilient, growing at plus 1%. As already mentioned during the H1 call, the environment is normalizing with a strong gradual recovery in China following the end of the COVID policies, its positive impact on our travel retail business, and a normalization in the U.S. after a few years of very strong growth. We see strong momentum behind our diversified spirit portfolio with six categories driving 90% of the growth. This diversification, I must say, is a key driver of our performance. We've been consistently delivering a broad-based and diversified growth across geographies and across categories. We are leveraging the industry's broadest and most comprehensive premium portfolio. Those six categories that are driving 90% of this first nine-month growth are Scotch whiskey, Irish whiskey, Indian whiskey, vodka, gin, and as well, Merlot drinks, mainly Lillet. So our strategic international brands are growing by 7%, notably with the Scott portfolio, Jameson, and Absolute. Our strategic local brands are very dynamic, growing at plus 11%, driven by growth of Seagram Indian Whiskeys, Seagram Gin, and Kalua. We have as well continued momentum in specialty brands, growing at plus 10%, notably with Lillet that I mentioned already, but as well Aberlour, Altos, Malfi, and Red Breast. wines are at minus 2%, softness mostly from the UK. So moving now to our performance by geographies and starting by our four must-win markets, which are delivering a strong underlying performance. I'll start with the US. So USA, the nine-month top line is at minus 1% due to high complex Germany in Q3. So spirits depletion are growing at plus 2%, which is a solid performance. in a normalizing environment. Q3 in fiscal year 2023 has been impacted by the H1 phasing and as well a high comparison basis. Please remind that last year the Q3 was going at 23%. We have a strong high symbiotic price effect across the portfolio this year, a solid performance of Jameson through St. Patrick's Day, and we are expecting strong sales in Q4 against low comparison basis along with additional price increases on some brands that are happening as we speak. China, the nine-month performance is at minus 5% due to sub-CNY and inventory adjustments. We have seen very dynamic sell-out at the end of Q3, meaning the month of March, with good post-CNY season activity. We are expecting very strong sales in Q4, as consumer demand recovery is further amplified by favorable comparison basis. Last year, Q4 was very subdued. So, strong rebound, as I just mentioned, in March, best market sales in January and February have been impacted by a soft festive season and as well some adverse phasing, and we did adjust our inventory in Q3. We have a continued development of the wider portfolio, including Absolute and the Glenlivet. And we've been announcing a portfolio-wide price increase that are going to be executed in May. Global travel retail, the nine-month performance is at plus 33%, very strong sales recovery with a gradual resumption of Chinese travel. We are on track for profit recovery to pre-COVID levels at year-end. We've been increasing our price at a high single-digit level, Our net sales are currently at circa 80% of pre-COVID levels, and there is another recovery driving very strong premium Scotch development. Moving now to India, India is at plus 15% in these nine months, with a continued excellent performance with strong premiumization, strong value growth with a favorable mix led by a rally style, and as well the strong development of our strategic international branch portfolio. We've been increasing prices at mid-single digits, which is excellent in the context of India, with as well very strong revenue growth management initiatives. Moving now to other geographies, with strong value-led growth across regions and dynamic pricing executions, America's 9-month is up just 2%, with a low single-digit growth in Canada, with strong share gains on most brands. Brazil is putting a good growth, driven by Chivas, Regal, Valentine's, and Absolute, with a strong solid pricing. Mexico is in double-digit growth from Scotch portfolio, Absolute, and Mattel, excellent pricing. Nine months in Europe is at plus 6%, with France flat with market share gains and good growth for America. Spain is posting a double-digit growth with solid pricing. There is a non-trade rebound, notably with Absolute, Valentine's, and Gin. UK is in modest growth with dynamic spirit portfolio upset by wine performance, and we are as well increasing our price strongly. Germany, dynamic growth mainly from strong Lille performance. Asia restored the world. Minimum is up to 12%. Strong double-digit in Japan with Shiba, Spaya, Jwet, and Valentine. Korea, as well, very strong double-digit growth driven by premium Scotch Portfolio and Jensen. Taiwan and Southeast Asia continued to rebound on a low-competition basis, and Turkey continued excellent growth, notably behind Scotch Portfolio. Moving now to our recent acquisition in our number one market, the U.S. So fiscal year 23 has been a very active year of investment with acquisitions, enabling us to reinforce our existing comprehensive portfolio in the U.S. We already mentioned Sovereign Brands and Codigo in the first half, so I will insist a bit more on Scruble, which is the most recent addition in a very attractive category, the flavored whisky. So this is complementing our portfolio, and we are very much in tune with the consumer demand in the U.S. On Codigo, you can see on that slide, we are launching an ambitious media campaign for the summer in key states, and there will be some large rules in trendy neighborhoods. So more to come on these brands. And then moving to the outlooks. So in a persistently volatile environment and a normalizing market, we are confident in delivering the strong performance in fiscal year 2023 with very strong Q4 sales on favorable comparison basis while ensuring healthy levels of inventory at your end everywhere. We continue focus on revenue growth management and operational efficiencies to offset cost pressure in a high inflationary environment The E&P ratio for the year would be at circa 16% of net sales, and we continue disciplining investment and structure. The capex is estimated at circa 6% of net sales, and we keep accelerating investments in strategic inventories. We're going to launch imminently a final €300 million trench to complete our share-buy-back program, which I remind you will amount to circa €750 million for the fiscal year 2023. we expect some positive currency effect. So our guidance for 5,023 is to deliver an organic growth of circa 10% in profit from recurring operations with some expansion in organic operating margin.

Thank you, Hélène. Now turning to your question. So please, maximum two questions each because you've got a number on the call this morning. So, operator, if you can direct us to the first question, please.

This is the conference operator. We will now begin the question and answer session. So, the first question is from Edward Mundi of Jefferies. Please go ahead. Sorry. The first question is from Simon Hales of Citi. Sorry. Please go ahead.

Thank you. Morning, Hélène. Morning, Florence. So two questions. First, just on China, can you just give us a little bit more colour around your comments you made there? You know, are inventory levels normal at the end of March or are you still going to have to make some phasing adjustments to inventory as we head into Q4? And are you able to provide any sort of headline numbers when you talk about strong exit rate in March? Can you talk about, you know, what level of consumer offtake you're actually seeing at all? And then secondly, just on the U.S., you highlighted normalizing depletion trends at 2%. I just wanted to confirm, is that a number for you of 2% or is that a market number of 2%? And how do you think about depletion trends in the U.S. over the coming couple of quarters? Do you think we'll return back towards 3%, 4% rates or is 2% the new normal for now?

Okay, thank you very much. It's more four questions than two, but I'll try to answer quickly. So starting with the U.S., so the depletion at plus two are numbers. We were already anticipating a normalization of the market, as you know, which means that we believe that it's going to come back to the pre-COVID growth, which was more material digits. Right now, it's fair to say that the market is probably more at a kind of low single-digit, circa plus 2%, plus 3%. So with our depletion at plus 2%, we are quite aligned with these trends. Our expectation is still that the normalization to meet single-digit will happen. Difficult to say exactly when, but that's our strong convictions. China, as I said, the month of March has been quite strong in both channels, I must say. The on-trade traffic is back probably to circa 80%. We have central China, which is a bit faster than south. My club are still softer, but we see a good recovery in KTVs. When it comes to the off-trade, we see as well good demand in shops. Our numbers for the March intake on Martel are very, very strong. So the level of inventory in China at the end of Q3 is where it should be, I must say. So the inventory adjustment has been made quite fast. That's why we are in a strong position to fully capture the opportunity of the recovery in China for Q4. and as well execute our point increase in excellent conditions, those point increase being implemented in May.

Brilliant. Very clear. Thank you.

So the next question is from Edouard Mundi of Jefferies. Please go ahead.

Morning, Hélène. Morning, Florence. Two questions, please. The first is on your margin guidance. I think previously you were guiding for sustaining operating margin, and now you're guiding for some margin expansion. Can you perhaps talk about what's changed in terms of that outlook? And then second of all, on India, there's been some recent media speculation in New Delhi. Perhaps you could provide some color on to what extent that could be contained as that particular region, or whether there's a risk that could spread a little bit further.

Yes, thank you very much. I will start with the margins. I think first, we are obviously now almost at 10 months of the fiscal year, so we have a strong visibility of the underlying demand, which remains quite strong. That's why we are delivering this type of performance. We keep increasing our prices. We did it strongly in H1, as you remember. We did it again in Q3 in many markets like the U.S., like many markets in Europe, like France, like Germany, like Spain, like the U.K., like Italy, and as well in many other markets. So this is obviously giving us the confidence that we can protect our gross margin because the inflation is still quite high in terms of impact on our COGS. So pricing is as well to continue. And we're going to accelerate the ENP versus H1 to achieve the 60% of net sales and continue investing in a very disciplined way on structure costs. That's why at the end of the day, thanks to this very dynamic top line, which is as well obviously quite a good thing to absorb fixed costs, we believe we can improve and deliver some operating margin The second question on India. So India, the rate of daily is circa 5% of the net sales in the country. The license has been suspended since early September, so you see our performance despite that suspension. Having said that, we are obviously working hard to to have this license renewed in the coming weeks and months. So it's more or less, as I said, circa 5%, which means at group level it's less than 0.5% of our top line. I take the opportunity of your question to say that India, for us, is a must-read market. The performance is excellent. We've been increasing prices to the highest level versus the recent past. All the Fundamentals are very strong in terms of consumer confidence, in terms of demographics, in terms of urbanization, and we have very strong brand equity that we've been building over the past 20 years, even more than that. So we are very ambitious for India in the short and mid-long term.

Very good. Thank you.

The next question is from Trevor Sterling of Bernstein. Please go ahead.

Morning, Hélène. My two questions, and it is true. So the first one is, you've done a lot of deals in the US, Hélène, and very underlying high-growth businesses. How much do you think that's going to enhance your growth rate in the US? If you roughly said, could you give us a percentage in terms of the improvement you think you'll get in your organic growth rate in the US? And second question, In terms of costs and the outlook for next fiscal year, spot commodities have fallen a long way, energy prices are down, but should feed through into lower glass prices. Do you think that means that the outlook for fiscal 24 should be one of margin expansion?

So I'll start with the second question. Please give us some time to fine-tune what should be the right level of ambition for fiscal year 24, but Coming back to your question on the pressure coming from inflation, as I was alluded to, it's still high on many components of our COGS, wet goods, dry goods. What I can share with you already is that there is some moderation in terms of distribution and logistic costs. But moderation, that doesn't mean that we are benefiting from, I would say, Now, tailwind versus the headwinds that we are facing, but it's moderating. So we'll have, obviously, and hopefully more visibility in the months to come to give you a better forecast for fiscal year 24. On your first question, in the U.S., as I shared before, we are very excited with the addition of those brands in our portfolio. It's our number one market. We want to be... obviously very consumer-centric in the U.S. and everywhere else, but in the U.S. as well. Those brands are very exciting, very well positioned as well, very dynamic and exciting categories. And they are already quite sizable, I must say. When you look at Squibble, it's 600,000 cases. Bamboo is probably around 300,000 cases. Predigo, close to 100,000 cases. So our teams are already working hard to build sees the opportunity coming from the growth that those brands are going to deliver. To be a bit more technical, this contribution to growth will still be in our perimeter effects for the months to come, so contributing to the organic growth probably starting in fiscal year 2025.

Super. Thank you very much, Hélène.

The next question is from Olivier Nicolet of Goldman Sachs. Please go ahead.

Hi, good morning. Just one question on my side to bring down the average. So on duty-free, you actually flag that you're on track for profit recovery, but at the same time, you said that in terms of net sales, you're at 80% to pre-COVID levels. When would you expect net sales in duty-free to reach back to the level that you had pre-COVID? Thank you.

Yeah, thank you. I mean, First, I must say that our expectations for the weeks and months to come for travel retail are very positive, obviously, because there was already a strong recovery happening in many geographies. Things are getting much better now in China. We are still obviously not back to pre-COVID. I think the estimates for the calendar year 23 is probably that we could be globally back to maybe half of what Chinese travel used to be by the end of December. If it's happening sooner, obviously we'll be quite happy to see that opportunity. So the reason why we were already indicating the fact that we should be back to pre-COVID level in terms of profits is that we don't believe that the full recovery versus pre-COVID will happen as fast as by the end of June. But thanks to China, and pricing will be back to the pre-COVID level in terms of profits by the end of June. So to answer your question, I think it's obviously depending mainly from the base of the recovery of Chinese travel, for which there could be as well some administrative constraints in the months to come in terms of visa, in terms of airline traffic and so on. But obviously the the environment is getting much, much better, and this is good news. We are very strongly and positively exposed to the travel retail. This is as well a very premium part of our portfolio, and our teams are fully ready to be very visible in the airport and attract the travelers.

Thank you very much.

The next question is from Celine Panuti of JP Morgan. Please go ahead.

Thank you very much. Good morning, everyone. My first question, I would like to come back to the U.S. You said depletion is running at two. At H1, you said depletion was running at three. So, I mean, roughly speaking, it implies flat for the third quarter. Could you give us a bit more details details of what's going on because you have high pricing. But so, I mean, are you seeing people down trading? Are you seeing volume pressure? And at which point, you know, the recovery in the market may mean that there will be a need of moderating that pricing strategy. My second question is on Europe. I think there's been a bit of normalization there. Could you give us a bit of a flavor of how the market is evolving in Western Europe? Especially, I think some of the corporates have been talking maybe about the consumer weakening a bit. Thank you for that.

Thanks. So I'll start with Europe. Honestly, Europe, the trend is very similar to each one. So I quite dynamic performance in Europe with a strong price increase which are necessary in a context where again we are facing high inflation in terms of COG so we've been increasing prices mainly in Q3 so it's true that there was some timing effect H1 versus Q3 because of the phasing of this price increase but the underlying demand is a is quite solid. So the first question on the U.S., so it's true that your understanding is correct. We're talking about plus two versus plus three, which I would say is very consistent with the normalization of the environment that we were expecting. As I said, the market is probably now at this level of losing all the chips, so that's the normalization we were expecting. Having said that, it's still keeping the benefits of COVID, which was a very strong growth in the U.S., as I said, for a few years now. So the normalization is expected. So then your question in terms of value ahead of volume, the price increases key value level as we speak. That's true for the funds and probably as well for the market. The volumes are softening. which for us is probably mainly linked to that normalization of the market. We are obviously tracking and monitoring the brand elasticities and as well the price increase policy of competition. Having said that, our brands are really more exposed to the premium parts of the market, which are naturally less expensive less elastic. So we don't see any down trading, to answer your question. And when I look at the value growth that we did deliver over the last nine months, for instance, we have very good numbers from Jemson, from our specialty Irish whiskeys that are quite super premium and above. I'm strong double digit. Jefferson as well is in double digits in terms of depletion, so I have no no down trading as far as we can see.

Thank you. The next question is from Mitch Collett of Deutsche Bank. Please go ahead.

Good morning. I've also got two questions. So my first one, apologies if you've already given this, but given some of the puts and takes in terms of phasing in Q3, could you just give us a, depletion number for the group for Q3 worldwide. And then secondly, I guess it's linked to your final point there about not seeing any downtrading. I think in the nine months, your volume growth was plus one, pricing was plus nine, and sales growth was plus eight. I appreciate there may be some rounding, but that implies mix is minus 2%. So can you comment on how much of that negative mix is country mix and how much of it is product mix?

Yes, sorry, the sound was really not good, but I hope I understand your question correctly. So we don't give a number for depletion worldwide, but what I can tell you is that this is something that we are tracking market by market to make sure that we have a shipment following depletion. meaning that we started the year with a very healthy level of trade inventory everywhere, and this is exactly as well our intention for the end of June, to close with a very healthy level of trade inventory everywhere. The second question in terms of mix, so it's true that there is some slightly negative mix in the nine-month figures. It's mainly a market mix, and to be very clear, it's coming from those technicalities in Q3 in China and in the U.S.

Got it. Thank you.

The next question is from Chris Pitcher of Redburn. Please go ahead.

Thank you very much. Could I go back to China again, please, and try to understand? Can I confirm that you were down over 30% in the third quarter, just in terms of the mass of that? And then on that basis, how do you think you're doing in terms of market share in China? There's a lot of mixed messages coming out of your competitors. Do you think the industry as a whole perhaps misjudged sell-in ahead of Chinese New Year? It sounds like you've now removed all the excess stock, just to confirm that. And then secondly, on CapEx, I know you've guided previously to elevated CapEx, but given where we are today, can you give us a bit more color perhaps on how long you expect that elevated level to remain and break out in a bit more detail where the extra couple hundred million is being spent? Sorry, just to check that. Thank you.

Yeah, thanks. So China, I think, please first keep in mind that there was some timing effect of the earlier Chinese New Year versus last year. So that's why H1 was anyway reflecting this earlier phase, whatever was the expectation for the, I would say, dynamic of CNY. Honestly, I think we were not expecting an amazing CNY, knowing, as you remember, that starting in October, and it was still the case in November and December, the situation linked to the COVID restrictions was quite strong in terms of restrictions, so there was no expectation of a spectacular CNY, so I think our selling was we managed to make sure that we would be able to seize the opportunity of what could have been a good CNY. So CNY was soft. And that's why there was a need to obviously adjust the inventory to make sure that we could again land in a very healthy position at the end of June. And as I mentioned before, we're already at the end of March in a good place. So that's why we expect a strong Q4. In terms of market share, we don't track it on a monthly basis, but I can tell you that we've been consistently investing behind our brands to keep strong equity, and the fact that we are implementing this level of price increase in May is a good sign in terms of confidence on where we are in terms of brand equity. And to be even more specific, in terms of media spend for Martel, we believe that we have increased our share of voice So we are in a good place, again, to really seize the recovery of the Chinese consumer demand in the weeks and months to come.

Can I confirm that the destocking in China, it would be over 100 million euros, if I've got the calculation right. Could you confirm that?

We don't give numbers by quarter, but this is a significant decline in Q3 for all the reasons I mentioned. And again, we expect a strong Q4. So for the CAPEX, we gave this number circa 6% for this year. So it's stronger than it used to be. And I think we've been quite explicit in terms of what are the very significant and strategic projects that we'll be implementing in the months and years to come, especially in Scotland and in Ireland, but as well in the U.S. and most of them are really to increase our production capacity and as well to do that with a very strong SNR ambition in terms of carbon neutrality. So those initiatives are obviously not going to happen in a few months only. It's going to be over a few years. So you can expect some innovation in our CAPEX to deliver this project in the years to come.

Thank you.

The next question is from Jeremy Fialco of HSBC. Please go ahead.

Hi, morning, Jeremy, HSBC here. A couple of questions. So first one is on the U.S., and we talk about this normalization of the market. Now, when you dive a little bit deeper into that, you look at the different kind of metrics through which the market grows, be it the penetration of spirits, the frequency of consumption, the pace of premiumization. If you were to look at those different components, which ones have necessarily slowed the most, could you pick any out or just talk a little bit more about what is it that's made this market so amongst the different potential drivers of that? And then the second question is on Russia. Could you just clarify what you have now started doing in Russia in terms of resuming shipments. We know you started doing Absolute, but you're not going to do that anymore. So could you say what you're doing in Russia and I guess what the underlying rationale behind that is? Thanks.

For the U.S., I mean, the normalization, as I said, was expected. When it comes to your question in terms of premiumization, I would say the pace of premiumization is moderating, but we don't see down trading. The premium category is growing. It's true that the ultra and super premium categories are in slight decline, but the value category as well. In terms of specificity, it's true that there were probably as well some impacts from the withdrawal of the COVID stimulus program, especially for the cognac category and as well the high-end tequila. Key trends remain, I would say, quite consistent versus the recent past, meaning that the strength, for instance, of mixology and of convenience. So the normalization of the consumption patterns is as well to be taken into consideration in the context of price increases that are ensuring the the value growth, so the volume softening, again, is a result of the normalization of the market. So your second question on Russia, let me come back on the broader situation. First, we firmly condemn this war, and we have done so from the very beginning. We have as well immediately provided substantial assistance to Ukrainians, via international relief programs, but as well directly to our local teams in many different ways. So activity in Russia is not business as usual. Not only do we fully comply with all international sanctions, but we go beyond them, as we have stopped marketing investment and we have significantly reduced the number of brands imported. So our primary focus remains the protection of our local teams wherever they are.

So we're going to take the last question.

Mr. Tresarieux, this was the last question. Oh, sorry. Okay. Thank you. Thank you very much. Thank you, Hélène, and thank you all for your questions. Okay. Thank you.

Thank you to all. So, again, this was a very strong nine months for us in terms of performance. We've got some technicalities in Q3, which I hope I explained you well. We are guiding for a strong full year with organic growth of our profit from recurring operation at circa plus 10% with some operating margin extension. Thank you very much for your attention and talk to you soon.