Pernod Ricard S A

Good morning, everyone. We're very pleased to welcome you to our H1 FY25 sales and results presentation. Alexandre and Hélène will take you through the slides before we take your question. Alexandre, over to you.

Well, thank you very much, Florence, and good morning to all of you, and welcome to today's first half fiscal year 25 sales and results presentation. We will cover as well our full fiscal year 25 outlook and we have decided to take this opportunity as well to share with you an update on our medium term taking in a way a longer term perspective. We are meeting, in fact, a week earlier than planned. So let me just begin by sharing with you why we have moved our results release today. So as you know, we had expressed in our previous financial communication that it was our expectation to return to growth, albeit modest growth, for this full fiscal year. We have now begun to receive early signs that Chinese New Year is likely to be very soft. In addition, the challenge posed by the technical suspension of the duty-free regime on cognac in China due to the anti-dumping measures, which started in December, is still ongoing and is now expected to impact heavily our second half. So taking those impacts into account leads us to update our expectations for our top line to low single-digit decline for the full year, fiscal year 25. Given this change in outlook, we have to communicate earlier than planned to comply with our regulatory obligations, hence today's call, which we're delighted to have with you. So first and foremost, I think the two most important pages of this presentation are the two I'm going to cover with you. at the beginning of this presentation. I think that the title perfectly summarizes our state of mind here at Pernod Ricard. We are all, all 20,000 colleagues around the world, determined to navigate the current cyclical headwinds with resilience and agility. Our first half performance is in line with our expectations, with a sequential improvement in Q2 over Q1, with Q2 down 2.5% in terms of net sales versus negative 6% for Q1, marking four consecutive quarters of volume growth. So volume growth has now been stabilised. volumes are up a little bit more than 2% over the first half. And over the MAT period, the calendar year 2024, volumes have grown roughly a little bit less than 3%. Our strong first half organic operating margin has grown by 65 basis points and this is following 80 basis points increase of our operating margin last fiscal year and despite 18 months of soft top line. And this is clearly due to continuous improvement initiatives that are driving 900 million euros, roughly, of efficiencies since fiscal year 23, so over the last three years, including our full fiscal year 25. Ongoing challenging macroeconomic environment and intense geopolitical uncertainties, which we don't have to discuss in detail, you all know about them, continue to impact the spirits market, particularly the worsening context in China and travel retail Asia that I mentioned in the introduction, and strongly impacting particularly Martel. Finally, we anticipate, as I said, a low single-digit decline in organic net sales for the full fiscal year 2025, while sustaining our operating margin organically. So moving on as well to next fiscal year, which we qualify as a transition year. So conditional on the degree of challenges posed by the global tariff environment. Obviously, we've made a few scenarios and sensitivity analyses, but there's a bit of a lack of visibility on that front, which we're taking clearly into account. We do expect fiscal year 26 to be a transition year with improving trends in organic net sales in our top line. And amidst extraordinary trade tensions, which we're currently experiencing, we are determined and focused on defending organic operating margin to the fullest extent possible for fiscal year 26. And finally, cash conversion will improve. Finally, after having spoken about fiscal year 25 and the transition year, fiscal year 26, if we look a little bit beyond, particularly from fiscal year 27 to fiscal year 29, we're projecting stronger organic next sales growth, aiming for a range of plus 3% to plus 6% on average with growth. Organic operating margin expansion. Now, this expansion will be driven by delivering continuing efficiency initiatives to optimize operations and simplify the organizational structure. And these initiatives are expected to deliver roughly a billion euros in efficiencies over the next four years, fiscal year 26 all the way through to fiscal year 29. We are focusing as well on strong cash generation, aiming for roughly 80% and above cash conversion to fund our financial policy priorities with strategic investments. And what I mean by strategic investments is the sum of capex and increase in strategic inventories, normalizing to roughly a billion euros from fiscal year 26 and onwards. Finally, we are confident in our strategy, in our operating model, and in the engagement of our teams around the world to deliver sustainable value growth. We're determined to continue to navigate, as I mentioned, with resilience and agility, these cyclical headwinds. So let's deep dive briefly into our first half sales and results performance. So first half, as I mentioned, organic operating margin has expanded despite sales decline and amidst ongoing challenges in our two largest markets, which are the U.S. and China. So volumes over the first half, I mentioned, up 2%. with Q2 up 4%, which marks a sequential improvement in resilient underlying consumer demand. Organic next sales have declined 4%. I mentioned sequential improvement, minus 2.5% in Q2 versus minus 6% in Q1. I mentioned the volume growth, which didn't offset a negative price and mix, which were down 6%, principally driven by market mix, U.S., China, to name a couple. H1, margin expansion of 65 bits, as I mentioned, through very strong revenue growth management across the board, through marketing agility, obviously very strong agility from our team in China to mention it. We're still investing in our long-term sustainable growth with strategic investments in CapEx and inventories. which have peaked last year and have started to decline as of this year. We'll talk about this in more detail later with Hélène. Finally, this has led to an improved free cash flow of roughly 440 million euros. Last point, H1 has been unfavorably hit by a negative foreign currency exchange. The impact on PRO is 110 million euros. But since December, November, December, rates have evolved and we're now in a more positive, I would say, cycle from an FX point of view. And we expect FX for the second half to be positive. So the 110 negative impact over H1 should improve over the full fiscal year. I won't dwell into these numbers which summarize the financial performance. You'll see most of them in more detail in a few minutes. In terms of our top line, the minus 4% would have been flat. The rest of the world, excluding our two largest markets, U.S. and China, is flat. You see America is at minus 4%, up 2%, excluding the U.S. You see Europe... Minus two, but plus one, excluding Russia, which, by the way, is the last time you'll see a bubble with the excluding Russia number, because since December of 2023, we were no longer selling in Russia. And finally, Asia, rest of all, down 5%, but up 3% if we exclude China. I think this is an important graphic because what this graphic clearly shows is that the volume recovery is there and continues following the post-COVID normalization. So there you have it. We're back to four consecutive quarters of volume growth for Pernod Ricard. I think it's also worthwhile noting that despite soft top line on the ground, in the field, basically across most, almost all markets, but the vast majority of markets, with obviously one notable exception, which I'll dive into, which is the U.S., we are either maintaining our share or gaining a share. And this is the result. of basically all of the top-line initiatives we've been carrying throughout the group in terms of revenue growth management, but also in terms of building the desirability of our brands and the efficiency of our marketing spend, the return on spend we get, both from a short-term point of view in terms of immediate uplift in sales, but also building brand equity over the longer term. The elephant in the room, if we may call it like this, is the US. But I'll deep dive in the US in a few minutes. Very briefly, in terms of our must-win markets, here you have the U.S. Organic net sales down 7%. We believe the market is roughly – is growing at roughly plus 1% in value. Our sellout, Pernod Ricard's sellout, is down roughly 6%. We've seen improving trends for – our performance, particularly on Jameson, over the OND, October, November, December period, and we expect to see improvement in sell-out throughout the second half. India, well, nothing really to say other than there's a strong broad-based and dynamic growth, perfectly reflecting the underlying consumer demand, with strong growth as well of our imported brands, notably Jameson, Ballantines, the Glenlivet and Royal Salute, with ongoing premiumization as well. Good growth of our local whiskies, notably Rolstag. And finally, we do expect continued strong momentum over the second half. China, I mentioned it in the introduction, clear ongoing challenges from a macroeconomic standpoint, very weak consumer demand. which are leading to sharp declines, particularly on Mortel and Royal Salute. And this despite some pretty good growth on our premium brands such as Absolute, such as Jameson or such as Olmeca. And as I mentioned again, the quality insight or feedback we started getting from our team in China is we expect a very soft Chinese New Year, driven principally by a significant decline in gifting this year and very poor consumer confidence. We announced as well A mid-single-digit price increase for Martel post-Chinese New Year. Finally, travel retail. Very good growth, in fact, across Americas and Europe, but which doesn't or cannot offset, particularly from a portfolio mix standpoint, the weakness around Chinese Asia, around duty-free Chinese Asia, which has hit since December by that technical suspension. I mentioned earlier, for the rest of the world, which, by the way, represents more than 55% of our business, as I mentioned, Europe down 2%, up 1%, excluding Russia. America's down 4%, but with very good performance in Canada and Brazil, just to name a few, where we're gaining share. And Asia, rest of the world down 5%, but up 3%, excluding China, with very good performance in Japan or Turkey, just to name a few. Now to Hélène for the financial update.

Thank you, Alexandre. Good morning, everyone. So let's move right away to the financial update for this first semester. So starting, obviously, with the P&L. So we delivered minus 2.2 organic profit from recurring operation with 65 bps margin expansion and minus 7.4% reported. As already mentioned, but I think it's worth insisting on that, sustaining and expanding our margin is a key element of our financial framework and one we have been consistently delivering through the years, regardless of the top line trajectory, as we will see later in the presentation. Gross margin is down 20 bps on this first half. In particular, we are impacted by the negative market mix. Obviously, when you look at the decline of the US and China, But helping mitigate that mixed effect is our efficiency program. These have been running over recent years. They are now accelerating. To be fair, it's probably circa 50% of those efficiencies that we will deliver this year and that have started in fiscal year 23. So they are significantly contributing to the margin expansion this semester, and they will obviously contribute as well to the gross margin for the full year. ANP has a favorable impact of 115 bps. As usual, we always have some phasing between H1 and H2, and I'm sure you remember that H1 is bigger than H2, so in terms of ratio, we always have a lower ratio in H1 versus H2. Having said that, we are adapting. ONP spend where it matters, and especially in China, considering the very deteriorated consumer environment. So this is mainly what you can see here in terms of infliction for the ANP spend. Structure costs, minus 30 bps. which is a solid result considering the top line, as our very strict cost control and continuous improvements in our organization enable us to reduce our structure cost by minus 2% organically in this first half. FX, Alexandre, you mentioned them, has been a headwind. This H1 partially compensated by perimeter. Now, with the USD strengthening, we expect a positive FX impact in H2, assuming spot rates. Moving now to our efficiency programs. You probably remember last time I spoke to you at our Q1 results, I explained that efficiencies are the forefront of my priorities as a group CFO. I think it makes sense. So let me come back to that theme with much more details. Efficiency at Pianorica is a continuous process of ongoing improvement in the way we operate and in the way we are organized. The impacts are material. You see here the numbers, 900 million euros. They are sustainable and they encompass the entirety of the cost base, including balance sheet, mainly P&L, but as well including balance sheet. Between fiscal year 23 and 25, and here, to be very clear, I am including an estimate for the full fiscal year 25, we have been delivering 900 million efficiency through continuous improvement, again, across operations and structure. So operation efficiency, you have lots of detail, I believe, on that slide. We are delivering productivity on main aspect on our COGS basis, plus as well improving cash with finished good inventory reduction. Together, these are expected to reach circa 600 million euros for this period of 2023 to 2025. So they account for two-thirds of the overall efficiency contribution. Three main areas of contribution. Procurement, which is obviously critical, and you see the weight of this efficiency of the three-year period. We have as well some significant efficiency in the making, which mainly means production footprint, but as well, obviously, in the supply with logistic and as well reduced finished goods inventory that I was referring to a few seconds ago. If I move now to the structure cost efficiency, We want to ensure that we are running a consistent, sustainable, fit-for-purpose organisation with very strict discipline and as well adapting to the changing circumstances we faced without obviously jeopardising our ability to capture growth opportunities. So those structural efficiencies account for one third of the total efficiency And let me maybe just highlight, I believe, a telling illustration of this impact by flagging the 9% reduction in SG&A headcount since fiscal year 23. So I emphasize that these are continuous programs, and so we can look forward to future efficiency gains, which I will obviously come back to later in the presentation. Moving now to the earning per share, down on H1 at minus 11% due to lower reported profit from recurring operation, increased financial expenses as expected as we refinance bond debt that was issued in a much lower rate environment, partially compensated by a reduced income tax on recurring operation. Moving now to cash flow and debt. So first, free cash flow and cash generation. This is obviously a very strong focus. And we have improved free cash flow by circa 150 million euros versus December 23. So this year, this first half, it amounts to 440 million euros. We are continuously optimizing ordinary working capital with this semester notable improvement in finished goods inventory level. Our strategic investment being capex and increase in strategic inventories remain elevated compared to historical standards as we invest in our future growth. But as already mentioned by Alex, they are however coming down from their peak reached in fiscal year 24. For fiscal year 25, we expect circa 700 million euros in capex and strategic inventories increase to be comparable to last year. Moving now to the net debt, our net debt to EBITDA ratio is at 3.5 at the end of December, which reflects also the timing of our dividend, which, as you know, is always paid in full in H1. This ratio should come down in the full year versus H1, but will remain above 3%. We don't have a specific range in terms of debt to EBITDA. Nonetheless, we are keen on gradually getting back to three and inside, as reported profit recurring operation growth normalise, strategic investments come off their peak, and we benefit from the proceed from previously announced M&A. Back to you, Alex, for the mid-term update.