Pernod Ricard S A

Hello, everyone. So we're very pleased to welcome you to our Q&A for 24 NetSelf calls. So as you've seen, we've released a press release on our website. So Hélène Le Tissot will give you some very short opening remarks before jumping into the Q&A. And then for the Q&A, as per last time, we remind you that we will take two questions per caller so that everyone has an opportunity to ask his questions. Thank you.

Good morning, Florent. Good morning, all, and thanks for joining our Q24 Q1 sales call today. As you've been reading the press release published on our website this morning, today we are reporting a decline of minus 2% in organic net sales for our first quarter. As expected, the soft start of the year begins notably with USA in decline, reflecting high comparison basis and a normalizing market context. So is China, where we also cycled high comparatives, coupled with soft consumer demand. Echoing Alexandre's quote in the press release this morning, I'm also pleased to see that those declines were largely offset by the performance of our other markets. As a matter of fact, we enjoyed a very dynamic performance in the rest of Asia, modest growth in India due to high comp, some resilience in Europe with dynamic growth in France, Germany, and Poland, and stability in federal retail due to phasing. I would say that this serves as a strong illustration of the combination of two competitive advantages, number one being the diversity of our leading premium portfolio of international spirit brands, number two, our broad geographic breadth across mature and emerging markets. We also report a strong price mix effect of plus 7%, notably benefiting from last year's price increases across brands and markets. So let me zoom now on Q1 in our must-win markets, starting with USA at minus 8%. So consumer demand remained resilient less over the summer as the market continues to normalize towards its long-term average transmissible digit growth. Net sales declined on an unfavorable comparison basis, also reflecting inventory adjustments being made in particular at retailer level. Share gains were made with Jemison, Codigo, Malibu, Kahlua, and the Glenlivet. We have prepared strong activation plans ahead of festive season, and we hold a positive outlook for the full year. Moving now to China, with net sales at minus 8%, so sales declined in a challenging macroeconomic environment with softer consumer demand, and we find a high-comp basis as we cycle a record 53-meter-ton festival. Q1 sees a solid price effect following fiscal year 23 price increases, which happened in May. We are encouraged to see signs of improvement in September, and we have a positive outlook in China. Moving now to India. India is at plus 1% in Q1, which is modest growth against a high comparison base. These are strong consumer fundamentals, as you know, in that market that are supporting strong growth for the full year. with easing comparison basis and very solid activation plans ahead of festive seasons in Q2. We had a good price mix effect for C-RAM whiskeys with continued strategic focus on the higher end of the range and continued strong development of our strategic international brands. Global travel retail is stable in Q1 with a gradual recovery in Asia, but sales have been impacted by shipment phasing and high comparison basis in Europe. Passenger traffic now at circa 90% versus pre-COVID, and we expect strong growth for the full year in travel retail. Looking now at the full year for fiscal year 2024 and why the environment is challenging, we are confident in delivering broad-based and diversified organic net sales growth with a positive outlook on U.S. and China and strong growth in travel retail and India. It is our intention to deliver fiscal year 24 performance within our plus 4% to plus 7% net sales organic growth midterm range, probably towards the lower end of the range. We expect to deliver organic operating margin expansion as we focus on rolling growth management and operational efficiencies with ANP at circa 60% of net sales and disciplined investments in structure. We remain very confident in the attractiveness of the storage market and in the long-term demographic and consumer trend tailwinds. That concludes my opening comments, and now, Florence, I believe we can open the line for questions.

Thank you. This is the conference operator. We will now pitch an end-answer session. Anyone who wishes to ask a question may press star and 1 on their touch-tone telephone. To remove your sub from the question queue, please press star and two. Please pick up the receiver when asking questions. Anyone who has a question may press star and one at this time. The first question is from Edvard Mondi with Jefferies. Please go ahead.

Morning, Hélène. Morning, Florence. Two questions for me, please. The first is on China. I just wanted to pick up on your comment of some signs of early and within September. Could you perhaps talk about what's changed during September relative to the early part of the quarter. And then secondly, on your guidance on margins, I think you're shifting from an organic to reported margin expansion for the year. Does this signal that all-in, including adverse transaction risk, you're still confident in getting margin expansion for the year?

Okay, thank you, Edward. I'll start with the second question. So to clarify that, we are expecting any operating margin expansion for the year. which is exactly what we said a few weeks back. So, no change on that front. Moving now to your first question of China. So, obviously, this is a very early date for the Mid-Autumn Festival. That happened only a few days ago. But that's fair to say that we see some signs of improvement in September that, by the way, are confirmed in this first half of October. So, we just come back... quickly on the summer, so what we were showing at the end of August, early September, was the sub-consumer demands that happened in July and August, where our volumes were declining, modest decline in the on-trade and stronger decline in the off-trade in July and August. And this has improved in September, where we see both and of moving towards stability in September. And I'm talking about value performance. So stability in the on-trade, which is improving. By the way, clubs are doing better, especially in the south. Improvement as well in the off-trade, so moving to stability. And on that channel, for instance, we see very clear pickup in weddings and banquets. So That means, by the way, that Martel will flourish in September, which is, we believe, a good performance in the current environment. Again, citing a very high-record Mid-Autumn Festival last year. So this is going well for our Chinese New Year, and that's why, as well, we are clarifying this positive outlook for the year in China.

Very clear. Thanks, Len.

The next question is from Olivier Nicolai with Glax. Please go ahead.

Hi, good morning, Helen, Florence. Just two questions on my side. You're flagging a positive outlook for the U.S. this year on a full year basis. Is it just because you are starting to face easier comps in H2, or do you actually see also an improvement in terms of underlying depletion in these markets? That's the first question. And then secondly, going back to the guidance, first of all, thank you for clarifying the organic sales growth for food to be at the lower end of the 4% to 7% range. That's very reassuring. But just going back to effects, you provided on page 5 of the press release some sensitivity on effects. However, it's quite difficult from the outside, particularly once you have some hyperinflation adjustment to make to be accurate there. You are expecting a negative effect. partly offset by perimeter. Consensus today has about minus 236 million, negative 34 million positive perimeter impact on operating results for full year 24. Do you think this reflects accurately what you meant by your guidance? Thank you.

Good morning, Olivier. So I'll start with the second question. So first, we don't guide today. It's too early. We don't give a quantitative guidance. What I was sharing with you is our intention to deliver organic net sales performance in the yellow range of plus 4% to plus 7%. So for the Zoom on FX, we are adding some sensitivity for other currencies than US dollar to support a better estimate of what could be FX impact. But again, as we are not guiding for the full year, I cannot comment on where the consensus is on organic nor on reported numbers, but hopefully this additional data we are giving you in terms of sensitivity will help on that front. So now maybe moving to your first question on the U.S. So before moving to the outlook, let me maybe just highlight our Q1 performance in the U.S. The consumer demand has been resilient over the summer. As we mentioned before, we believe the market is normalizing. We believe that it's current at plus 2% in terms of growth, including FTD. As far as penalty car brands are concerned, we are cycling high comp and technical effects. I don't think I need to come back to that, but very quickly, we are cycling less to price increases that happened 1st of October, and there was as well some, I would say, technical impact in Q1 with the easing of supply chain of the year before. So this COVID market normalization is continuing. Our net sales are in decline at minus 8% in Q1, with a similar level of value depreciation that are in decline because of this very high comp of last year. So when it comes to the the outlook for the year. Maybe just a final word on Q1. This is important. We are flagging inventory adjustments, especially at retail level because of that normalization of the market, because of the impact of higher interest rate environment, and because of this last year buying ahead of our price increase in October. This This inventory adjustment at a retailer level is largely limited to Q1, probably, but obviously subject to further adjustment. So the outlook for the year, you're right, it will be easier comps in H2, but that's not the only reason why we have this positive outlook for our performance in our number one market. We have as well quite... I would say an exciting preparation of O&D, which is happening right now with, for instance, strong media support. You will see a lot around the sports pool, activate the Jameson, and probably in the coming days in the U.S., we have some exciting value-added packs for O&D and so on, so ready for what we hope is going to be a very exciting O&D for our brands. There will be as well some distribution gains from our recently acquired brands, meaning naming Codigo and Scruble, that will benefit to our H2 organic growth, quite soon in H2 for Codigo, much later for Scruble. So that's why we have this positive outlook for the year. Adding to that, as you know, that we have increased as well or investment in that market already last year. So we want to be very active and attractive with our full portfolio in the U.S. this year.

Thank you very much.

Next question is from Andrea Pistacchi with Bank of America. Please go ahead.

Yeah, good morning, Hélène and Florence. Two questions, please. First one on India, where Q1 was subdued. Could you say what you're seeing on the ground in terms of environment? And then I believe one of the reasons, probably one of the main reasons for your softer performance was a situation with the Delhi license. Why maybe was this to you more in this quarter than in previous quarters? And when will you be cycling this? And then just to confirm, I think you're outlook for the year is definitely positive. You're saying strong growth there. The second question is about Q2, really. So at the full year results a few weeks ago, you clearly flagged that Q1 was going to be a soft quarter. I don't think you've called out anything specific on Q2 here. Should we infer that Q2 should be a normal quarter? I mean, Chinese New Year will be later. Are there any technical factors to consider here? And where are the Would the areas of main sequential improvement be in Q2, please? Thank you.

Thank you. So, with Q2, I mean, the comps remain elevated. It was growing at just 1% last year. To be very transparent with you, we're not guiding on Q2. We don't give a full year quantitative guidance, so we share with you as much as we can from a qualitative point of view, but Don't expect me to be more specific on Q2. Moving now to India. I think you said it all. The underlying performance is very strong. Consumer fundamentals are still extremely valid in India. That's why we believe this is going to support our ambition to deliver strong growth in the rest of the year and strong growth in the full year in India. Having said that, it's true that we'll have easing in the comparatives because we are cycling into sales to daily last year because the suspension happened in September. So, again, what can I say on India? As you know, the fundamentals are excellent. There's an ongoing criminalization trend. In graphic, our structural we've been gaining share, holding leadership with our Indian whiskey portfolio. We are in strong development with our strategic international brand. This is a key market for us with a very strong potential. That's why our ambition is very strong for the year.

Can I just ask on India and New Delhi, is it fair to say that the New Delhi license is the main reason probably of your slower growth? And the situation in New Delhi is that you're just not selling in New Delhi now because of this. And is there any chance that you could, I mean, get back in anytime soon?

This is obviously our intention. So we are applying to get our license back.

Thank you.

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

Hi, Hélène. All my questions have been answered, Hélène, so I'll pass on to the next person.

The next question is from Simon Hales with Citi. Please go ahead.

Thanks. Morning, Hélène. Morning, Florence. Just two quick ones for me, really. Hélène, you mentioned, obviously, that some of your recent acquisitions will start contributing to organic sales growth. through the second half of the year. I think even in Q1, the scope of bending the sales line was a little bit higher than the market was expecting. I wonder if you could just talk a little bit about some of the underlying performance you're seeing on things like Screwball, the sovereign brands, sort of transactions, et cetera. And then secondly, could you talk a little bit about the planned partnership you've just announced between Absolute and Coca-Cola? I just wonder how the economics of that tie-up will end up working.

Yes, with pleasure. So, starting with our new, to be fair, I don't think a quarterly detailed performance makes lots of sense, meaning that first, for Scoogle, we just got back the distribution in August, and there is some, let's say, very temporary disruption linked to this transition from the previous distributor to the new one. That doesn't change anything. our excitement to have that great brand joining us in the U.S. So all our teams are, again, extremely excited and working to make that integration an excellent one. Same thing for sovereign brands. I mean, this is, as you know, a brand that we believe are adding great value to Pernod Ricard's portfolio. With Coca-Cola, so this is quite exciting news indeed. Combining two great brands, Absolute and Sprite, as you know, the RTG category is quite exciting because this is what consumers want. That's as well quite exciting in terms of recruitment tools for new consumers that we can then bring to the mother brand. So again, quite exciting. This is going to be launched early 2024 in a few markets, including UK and Germany, that are quite exciting markets for RTD. So this is very consistent with our strategy, which is to be consumer-centric and consumers, again, like RTD for many good reasons, especially high-quality RTD. So the combination of those two brands, I think, is obviously important. a very exciting offer for the consumers in the months to come.

Very good. Thank you.

So we're going to take two more questions, two more callers.

The next question is from Sarah Simon with Morgan Stanley. Please go ahead.

Yes, hi. I just had two questions. Firstly, on China, can you just remind us how the comps work? I think, if I'm not wrong, Q2 is still quite tough. And then secondly, just back on the U.S. and the retailer inventories, is your sense now retailers have got through that overstock and that will be completely normal going forward? And what are you assuming that on the basis of, let's say, current off-trade sales trends, or are you assuming any change in that? Thanks.

Okay, so your first question, the song was not excellent, so hopefully I got it right. Was the comparison basis in China last year in Q2? Yeah. Okay. So, I mean, Q2 was a modest decline last year in China, minus 1%, because it's true that this was just before the lifting of the COVID restrictions. and there was as well some impact of the timing of Chinese New Year. So again, minus 1%, so it's not a high count. Q1 was at plus 9, if I remember well, so much softer than Q1, but still much stronger than what we then had in Q3, because Q3 was a very weak period because of the peak of contamination in China last year. And then your second question is on the retailer adjustment inventory in the U.S. So as I said, we believe it's largely in Q1. And again, please keep in mind that for us, there was a specific situation last year because of the timing of our price increase, quite broad price increase that happened 1st of October. So that's why we believe it's largely in Q1. but obviously subject to further adjustment depending on the ONG performance. Okay, thanks.

So we're going to take the last question.

The last question is from Mitch Collette with Deutsche Bank. Please go ahead.

Thanks. Good morning, Hélène. I'll stick with inventories then. I think your statement suggested that the headwinds in Q1 in the U.S. weren't just from retailers. inventory levels coming down. Can you comment on the level of stock in the U.S. within wholesalers? I think you said at the four-year stage that it was normal, so very helpful to know if it's still normal and perhaps to get a number of days of sales at the end of the quarter. And Lee, I appreciate there's some phasing with Mid-Autumn Festival, but can you just comment on where China inventories are as you see them at the end of the quarter? Thank you. Yes.

So starting with the U.S., so you're right, I was more referring to the inventory adjustment at retail level because this is the main one. At wholesaler level, it's much more limited. By the way, we were managing our stock at the end of June 23 to get to a healthy level. And by the way, because of the seasonality of OND, it's as well quite usual for wholesalers to hold a bit more stock ahead of OND. Having said that, for all the reasons I mentioned for the retailer that are quite valid as well for wholesalers, meaning the context of the normalization of the market and the impact of higher interest rates, there is some adjustment at wholesaler level, but probably limited. And by the way, when I was referring to the Prior inventories that are held ahead of OMD, this is a bit less this year than in previous years. So that's why we are talking as well about limited adjustment at wholesale level. So same thing, too early to comment definitely on potential destructing in the rest of the year. So this will depend on the OMD period. But looking forward, we expect tight inventory management within the trade to persist because of that trend. environment of market normalization and higher interest rates. So for China, I mean, that's true that last year it was, and by the way, from one year to the other, there's always some timing difference between 50 seasons. That's the beauty of the Moolah. So last year, math was a bit earlier than this year, so it's not apple to apple, what I was referring to. in terms of September performance. That means that in the context of cautious approach from wholesalers ahead of March that we were sharing with you early September, the situation has improved.

Thank you very much, Hélène. Thank you all for listening. We wish you a very good day and speak to you very soon. Thank you. Thank you very much. Bye.