Pernod Ricard S A

We're very pleased to welcome you today to our Q1 FY25 sales call. I'm joined today by Hélène de Tissot, our group CFO. I guess you all have seen a press release on our website. And so before moving into questions, Hélène will say a few opening remarks. Then we'll move into questions. And as every time, we will remind you to ask only two questions for callers so that everyone has an opportunity to have their questions posted. Thank you.

Thank you, Florence, and good morning, everyone. Thank you for joining our fiscal year 25 Q1 sales call. So we are reporting today a minus 5.9% decline in organic net sales for the first quarter, which is minus 8.5% reported. Excluding Russia, the organic sales decline is at minus 5%. As we have previously flagged, the slow start to the year was expected, notably within the U.S. and in China. together which, when combined, accounts for circa 50% of our annual sales footprint. And with both markets facing challenges, those are quite different reasons. The quarterly sales result is softer than we previously anticipated, as the weakness in China is greater and is also affecting Asia for the retail. India, where the underlying growth is strong, faced sales phasing, which are expected to fully reverse in Q2. market in Europe and adverse weather conditions over the summer. As you know, our broad geographic base is a core strength, and there are a number of markets where we can collaborate with strong performances in each of our regions, including Japan, Canada, Poland, Brazil, Turkey, and Nigeria, as well as strong travel retail performances in America and Europe. We achieved market share gains in over 70% of our main markets, including in China, in India in the segments of the market we operate in, in France, in Spain in the off-trade, in Germany, in the UK in the on-trade, in Poland, in Brazil, in Canada, and in Australia. The list can go on. Overall volumes are stable. Price makes FX of minus 6%. in a moderated pricing environment and with a negative market mix, notably due to the performance in U.S. and China. Naturally, given the challenging environment and our expectation to sustain our operating margin, we are consolidating and expanding on the efficiency efforts that last year contributed to our strong margin expansion. Operational efficiencies are including production efficiency initiatives as well in marketing with a focus on continuously improving return on investment, particularly leveraging the key digital programs, and across the business, a very strict cost discipline with an evolving fit-for-purpose organization. These efficiencies are, I must say, at the forefront of my priorities as Group CFO. Our motto is agility and discipline. So let's deep dive into the net sales performance by market, starting with our must-win markets. USA, minus 10%. Market sell-out continues to normalize, currently running at circa plus 1%. We welcome the start of an easing in the rate cycle, which will be positive for consumers and customers, though it may take some time before the beneficial effects become visible. Pernod Ricard sell-out declined in Q1 at circa minus 5%. which is slightly better than Q4. And Jensen is broadly in line with its competitive sets, and momentum is improving. Our net sales in the U.S. were impacted with inventory adjustments, as expected, with retailers continuing to tightly manage their stock level and promotion intensity remains strong. Wholesale inventory is in line with the historical level in terms of volumes, while value is down a bit. In support of Q2 festive season, we have a strong marketing activation program planned. And for the full year, we expect to see a gradual improvement in our sell-out performance. Moving to India, plus 2%, so solid sales growth, though impacted by phasing. And again, this impact is expected to fully reverse in Q2. With double-digit growth on Jensen and our C-gram whiskeys, Royal Stag and Venice Drive. Underlying sell-outs are strong, with the market continuing to enjoy dynamic consumer fundamentals. We are performing ahead of the industry, consolidating our leadership position, and strong growth is expected for India for the full year. China, minus 26%. Sharp sales decline in a challenging macroeconomic environment with soft consumer demand over the summer and into the mid-autumn festival, which is expected to be weak. We see net sales decline on Martel, Cognac, and Scotch, while the depletions are growing strongly on premium brands, including Jemison, Beefeater, Kahlua, and Olmeca. Actions are being taken to mitigate the impact of the group's performance, caused both by the weak macro environments and by the implementation of the preliminary tariffs on Martel, which are technically duty deposits. We expect to see a more significant full-year decline than last year due to the very weak consumer demand. Global solar retail, plus 3%. Strong growth in all regions except Asia. We put growth for Absolute, Jensen, and Valentine's. We can expect for the full year to see continuing strong growth in regions outside Asia. Asia reserves the world, so the organic sales growth is at minus 8%. We had a good performance in Japan, continuing weakness in Korea, and a decline in Taiwan, which is a result of saving. Moving to Europe now. Markets in Europe are resilient, with the organic sales growth at minus 3%, but which is plus 1% excluding Russia. A little slower than expected, with Western European markets in particular impacted by adverse weather during the summer. Latin America, organic sales growth of plus 3%, So a strong result in Brazil, lapping favorable comparison basis and stabilized market environments, with a decline in Mexico, which faced a weak tourist summer season. And North America saw a strong start of the year in Canada. For the full year, for fiscal year 2025, the global environment remains challenging. We expect organic net sales back to growth, albeit probably modest growth, given the ongoing consumer demand weakness in China. We expect to sustain organic operating margin. We are deploying our resources with agility and adapting our fit-for-purpose organization. We retain our focus on the delivery of operational efficiencies along with strict cost discipline. We aim to maximize value creation while maintaining consistent investment behind our brands with A&P ratios to net sales expected at circa 16%. We remain confident in the attractiveness of the spirits market and in the long-term demographic and consumer trend tailwind, which allows us to reiterate our confidence in our medium-term financial framework. That concludes my opening comments. And now, Florence, we can open the line for questions.

Thank you, Hélène. So now the line is open for questions. A quick reminder, two questions maximum per caller, please.

Thank you. This is the conference operator who will now begin the question and answer session. Anyone who wishes to ask a question may press star and 1 on their touch-tone telephone. To remove yourself from the question queue, please press star and 2. Please pick up the receiver when asking questions. Anyone who has a question may press star and 1 at this time. The first question is from Andrea Pistacchi, Bank of America. Please go ahead.

Good morning, Elaine. Two questions then, please. The first one on China and the provisional tariff increase, which took effect on Friday. So given the current environment there, I guess it seems reasonable to assume that you and the industry might not pass on the full impact of the tariff to the consumer. So if you assume a more moderate retail price increase versus a full pass on, are you able to share any thoughts on what sort of volume elasticity one should expect, I guess, in a base case scenario? and also timing of potential price increases. If there are price increases, would you wait to see first whether the tariff increases become permanent? And then the second question, please, is on price mix. The minus 6%, are you able to broadly separate the country mix impact or suggest, yes, how much country mix impacted? And on the pricing environment that you're seeing, could you talk about that? Any specific countries? You called out the promotional environment in the US when you were speaking earlier. Thank you.

Thank you, Andrea. I think it's probably more six questions than two, but I tried to give you two answers. So, starting with China. So, yes, you're right. The implementation started from 11th of October. By the way, let me start by telling you that we regret the imposition of tariffs, and we remain convinced that there is absolutely no dumping of martel in China. So the impact of tariffs, it's obviously early stage. We have some estimates for an annualized amount. We are working already to obviously reduce the net impact on our settlements as soon as this year when it comes to passing the tariff as price increases. Let me say that it's much too early, and I cannot give you specific responses in terms of what we're going to do to tariff. We will adapt. That's for sure. Passing on the tariff as a price increase is one option. Again, very sensitive. We need as well to monitor what the competitor will be doing And to be fair, the market conditions are not conducive to large price increase. But again, let me reiterate, the impact of tariffs is embedded in our outlook for the year. So a second question in terms of price mix. So yes, price mix is at minus 6% in Q1. It's mainly negative mix. Price is modest. In terms of country mix, no surprise, I guess, it's mainly linked as well to... China and the U.S., which means, by the way, that we expect for the year this negative mix to improve. So pricing, the question in the U.S., as we said before, the environment is quite aggressive in terms of promotion. We highlight that back in focus for the 12-month communication. No change on that front.

Can I just, sorry, ask quickly on the tariffs. Given the the level of stock in trade, which is possibly quite high. Is it, again, reasonable to assume that it will take some time before we actually see any potential impact on your cogs? Probably not until the second half.

Well, first, I think what we'll need to answer your question, which I don't have yet, is the preview of the Middleton Festival performance. We have some qualitative feedback, but I'll keep that for your colleagues, because I think the question is going to happen soon, but we don't have a full quantitative view, which obviously would be key to assess what is the level of inventory plus math and what would be the sale to the trade for the coming weeks ahead of Chinese New Year. So that's really what will help us to have a final view of what is the impact for the year, but I would say that's not what matters. What matters is that we are ready to adapt and, again, to reduce as much as possible the impact on the group performance.

Absolutely. Thanks very much.

The next question is from Olivier Nicolai, Goldman Sachs. Please go ahead.

Hi. Good morning, Hélène and Florence. Two questions, please. You've maintained the guidance for FOIA-25, which assumes organic sales growth and flat margins. Now, that would imply about 2% to 3% growth for the rest of the year post this Q1. So can you help us perhaps understand the key building blocks to get there, considering that two of your most profitable markets, China and the U.S., are not improving? And then secondly, on the corporate tax rate proposal in France, can you help us understand the impact this could have at a global level, please? Thank you.

Thank you. So I'll start with the question on the outlook. So as I said in my introduction comments, we expect organic net sales back to modest growth for the full year, which is taking into consideration a kind of softer Q1 versus our expectation, and again, which is mainly linked to the China very weak consumer demand situation. and as well the bad weather in Europe. Obviously, summer is over, so we won't have that impact for the rest of the year in Europe. And China is in this situation, which we expect to persist during the year. That's why for the full year, we expect a more significant decline in China than the initial estimate. doesn't mean we expect China to be at the same trend that it is in Q1, to be fair. So then for the other markets, U.S., the expectation for this year is that the net sales are likely to be in decline, but with a gradual improvement in the underlying sell-outs in a market which is still normalizing, but with some inventory adjustments sold. To be clear, it's expected to be better than Q1. China, I mentioned it already. Travel retail, there is a very dynamic growth in the other regions, including Asia. That's our expectation for the year. India has been impacted by phasing, as I said, reverting into Q2, and we expect India to be in a strong growth this year. When it comes to the rest of the world, which, by the way, accounts for 50% of our sales, We expect the rest of the world to be delivering resilience to good performances, and we won't have any more Russia impact. So, second question was on the effective tax rate. Yes, linked to the French potential tax reform. So our current assessment is that it will probably increase our effective stress rates by circa 0.3 percentage points, so moving from, let's say, 25.1%, which was our current estimate, to 25.4%.

Okay, perfect. Thank you very much.

The next question is from Sanjit Awila, UBS. Please go ahead.

Hi, Mauling, Helen, Florence. A couple from me, please. Firstly, just coming back to the outlook for stable organic margin, can you just help us bridge how you're thinking about gross margin, particularly with the more moderate pricing and negative country mix you're seeing? Is the expectation still for AMP to be 16% of sales this year? And so I guess by implication, are you expecting structure costs to be down year over year, as those efficiencies that you highlighted are stepping up? Thanks.

Thank you. So yes, we expect to sustain organic operating margin. I confirm that in my introduction. I'm not going to disclose how we will deliver that through gross margin, ANP, structure costs. But what I can tell you is that I think your question was more focusing on structure costs. It's much more upstate. So we'll start, we'll say, from the top line. So the environment in terms of pricing is more modest than last year, for sure. Doesn't mean that there's nothing to do in terms of, for instance, leveraging our revenue growth management leveraging our key digital program, Vista and Rubber, to really maximize our pricing power. In terms of market mix, which was one of your questions, it's obviously a bit early to be very specific. We are only three months behind us. So let's see. But as I said, for the top-line expectation for the year, we expect the market mix to be less negative than it is in the So, another strong focus in terms of efficiency, obviously, is going to be cost, easing inflation so far, for sure, but we're not in a deflationary environment. But there's a lot of initiatives that we started already a month ago that are going to deliver significant efficiency in terms of cost. I completely confirm what you say in terms of A&P. We intend to invest circa 16% of net sales. By the way, again, with a strong focus on improving effectiveness and with, obviously, very strong agility in terms of deployments. So when it comes to structure costs, without giving you a specific quantification of the As I said earlier, we are in a very strict cost-discipline mood, which is including everything, including control of the head. And again, our key motto is agility and discipline with a fit-for-purpose mindset in terms of organization.

Got it. And just a quick follow-up on cash flow. I guess with... with the top line growth outlook maybe a little bit less positive than at the start of the year. Does this perhaps force you to also revisit CapEx plans and working capital efficiencies as well, just considering where cash conversion is and leverage?

Yeah, to be fair, cash generation is obviously a key priority, whether we have a softer start of the year or not. Everything you mentioned in terms of working capital efficiency is obviously a top priority. In terms of capex, as you know, this is a number one priority in our financial policy. Capex and strategic investment doesn't mean that there's not a strong focus in managing those capex very efficiently. And of course, with a top priority as well in terms of prioritization and return on investment.

Thank you, Hélène.

Thank you.

The next question is from Edward Mundy Jefferies. Please go ahead.

Morning, Hélène. Morning, Florence. Two questions, please. So the first on China, I think you said just now that you don't expect China to be minus 26 for the year. Can you perhaps talk about some of the reasons why it should get less bad from here, whether it's comps or what else are you seeing? And then I'd love to focus a little bit more on some of the markets that are doing a little bit better Japan, Canada, Poland, Brazil, Turkey, Nigeria. I clearly don't want to go through all of them, but what's going on in those markets that's allowing you to find an offset to both the weak China and U.S.?

Okay. I hope I got your first question. The sound is really bad. So I think your question on China is, yes, we don't expect China for the full year to be at minus 26%. In terms of underlying trends, To be fair, the Q1 has been softer than expected, as I mentioned, and this is quite true across channels. The untrade has been very soft with low traffic, some downtrading happening as well in the untrade, which, by the way, last year was better, so that's as well an explanation why we had that downtrend. decline in Q1 because last year on-train was better than what it is right now. What I mentioned for Middleton Festival is that again, a bit too early to have the full view, but from a qualitative point of view, what we have discussed with our teams there is that it's likely to be weak. So for the rest of the year, obviously much too early to say, there was some good news in terms of stimulus package with the immediate impact in terms of traffic in the on-track, but honestly, much too early to say what could be the impact for the full year on that trend. The stronger the package is, the better, and obviously we would encourage that big time. Next big milestone, obviously, is the Chinese New Year, which is much too early to say. The sentiment, obviously, is quite cautious at that stage, but again, too early. So the second question on the rest of the web, but I would say we are obviously leveraging our very strong portfolio of brands and a very strong geographical footprint. So that's one of our, we believe, strong competitive advantage that we've been building and investing behind for many years, which is delivering. So you're right, there is a strong performance in those markets by the way. This was already a strong contribution to growth last year and the year before, so this is why we have those expectations for the rest of the year. Again, a very strong theoretical footprint and a very broad-based portfolio of brands across categories.

Thanks, Hélène.

The next question is from Mitch Collette, Deutsche Bank. Please go ahead.

Morning, Helen. Morning, Florence. Sorry to return to the guidance for this year again, but you said specifically that Q1 was weaker than you expected. And you say in the statement that China will be softer than you thought at the time of the full year results. So are there any markets at all that are getting better than you thought back in August to offset the markets that are clearly softer and the Q1 performance that is weaker than you expected? And then my second question is on China tariff pricing. I appreciate it's somewhat commercially sensitive, but do you think you'll be able to take any pricing to reflect the tariff ahead of Chinese New Year? And is there any spillover of the tariff impact into fiscal 26? Thank you.

Okay. Thank you. So the first question, I believe I answered it, but I'm happy to confirm. So softer start of the year. but maintaining our expectation to be back to growth, to modest growth for the full year. And again, with, I would say, different big blocks. U.S. first, which is likely to be in decline, but better than Q1, with improvements in the underlying sell-out. And obviously, I'm sure you noticed that in Q1, there's a gap between the sell-out, which is at minus 5%, And the selling on itself, which is linked to inventory adjustment. So U.S. improving versus the start of the year. China, sharper decline, but not to the extent of Q1 performance. And I think I'll just explain why, especially when you think about the on-trade last year. GTR, this is obviously a key channel for us where the performance is stronger. in Europe and America, and we expect that to be consistent during the year. India has been impacted by technical phasing in Q1, reversing in Q2, and the ambition for this market, which is obviously a must-win market for us, and now our number two market in terms of top line, is to deliver strong growth. And the rest of the world, again, which is 50% of our net sales, is expected to be resilient to goods with no more Russian impact So your second question on Chinese tariffs, I think... Sorry, if I can jump in.

I just wanted to... What I really wanted to understand is, are any markets better now than you thought they were back in August? Because it's pretty clear that China is softer and Q1 is softer. So I'm wondering if there's an offset that we might have missed. Are there any markets that have got better relative to your expectations back in August? Sorry if I wasn't clear.

Well... Again, sorry, the sound is very bad, but the outlook for the year is slightly moving to modest growth versus back to growth, which means that we are obviously taking the full implication of these softer starts. And then, I mean, we are in probably close to 70 markets, so I cannot list you which market is better than the initial expectation, but Anyway, what matters, I believe, is that this sort of start is bringing us to modest growth versus the initial intention. So it's reflected there. And again, there are many countries, I think I listed probably like 10 of them in my introduction that are in a very good place. So on the tariff in China, I answered already on the price increase too early to be very specific in terms of what we're going to do to reduce the net impact as much as possible. But what I can tell you, and I think that was well enough your question, is the first estimate of the gross quantum of the tariff on an annualized amount is circa 4% of our EBIT, when I'm referring to the fiscal year 2024 EBIT, so it's circa 130 million euros. on an annualized basis before any mitigation measures. So, again, our expectation to sustain operating margin includes the net impact of tariffs.

Understood. Thank you, Alain. You're welcome.

The next question is from Jen Cross, BNP Paribas. Please go ahead.

Good morning, everyone. Thank you for the question. My question is just on the U.S. spirits market, which I think you've commented is continuing to normalize. Are you seeing any improvement in demand for core spirits? And then specifically for the second quarter, is it fair to assume that you continue to expect further inventory adjustments? And if you could quantify whether you expect them to be smaller than the Q1, that would be helpful as well. Thank you.

Thank you. Yes, so the market, as I mentioned, is running at circa plus 1%. It's quite similar in terms of trend than it was at the end of Q4, and same thing, by the way, for our brands. Quite similar, but to be a bit more granular, it's true that volumes are improving a bit with three-month basis, so a bit too early to... extrapolate on that, but volumes are improving both in terms of market trends and our brands. When it comes to Q2, first, let me start by asking what matters. Q2 is October, November, December, a very important festive season in the U.S., so the key focus of our team is to really maximize the impact of our brands, the visibility of our brands during this quarter. which is just starting. And we have quite a strong brand activation plan for the weeks to come, which we are quite excited about. So the inventory has leveled. I mentioned it quickly, but maybe worth coming back to that. Our trade inventory at the end of Q1 is in line with a historical average in terms of volumes. And it's a bit down in terms of value, especially because of the adjustments of the inventory at wholesaler's level for the high-value brands, such as Cognac and Scotch. So now I would say the focus, not only from our team, but on the whole sector, is to protect and deliver a strong O&D. So that's where we are today. So in terms of inventory adjustments for Q2, I cannot elaborate on that, but again, it's not the focus. We'll see where we are at the end of H1, so after OND. If there's a need to adjust more, we will do it.

Thank you.

We're going to take the last question.

So the last question is from Simon Hales City. Please go ahead.

Thanks. Morning, Ellen. Morning, Florence. So just two quick ones then, Ellen. Firstly, could you comment on your FX expectations now for the full year? I think back in August, you were looking at about 70 to 80 million headwind on EBIT from FX. Can you provide us with an update on your thoughts now? And then just secondly, on Mexico, clearly a little bit of incremental weakening going on in that market. What's driving that on the ground? Can you provide a bit more color and what you're seeing in terms of consumer offtake trends there, please?

Thank you. So on FX, I think we are even more specific than we were. We said during the 12-month call that it's too early that we expect a slightly negative impact. So I'm sorry, but 7.30, too early, and same expectation so far. On Mexico, I mean, basically that's quite simple. It's really linked to the tourist aspect. impact and summer has been a bit weak. That's why we are posting this decline for the summer.

Okay, so it's not that consumer confidence has deteriorated that you're seeing on the ground in Mexico. You think it's just the Q1 impact?

Yeah, it's really linked to a kind of weak summer.

Got it. Thank you.

Thank you. Thank you very much, everyone. So this is concluding our Q1 self-call. Thanks again for your questions and speak very soon. Thank you. Bye.

Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones.