Remy Cointreau Sa Ord

Good day and welcome to the Rémi Cointreau first half results 2020 conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Marc-Éric Dubré. Please go ahead, sir.

Thank you. Good morning to all of you. So, once again, we are presenting to you the interim result of Rémi Cointreau. This time from the 1st of April 2019 to the 30th of September 2019. You know already the turnover as Luca Amarota announced them to you on the 18th of October. So as a reminder, our sales were stable for the first six months. on a reported basis and a bit down on an organic basis by 3.6 percent. But much more importantly, our group sales were – group brand sales were up 5.5 percent on a reported basis and 0.8 percent on an organic basis. And more importantly, both divisions, cognac and liquor and spirits, were up for that time. So what about the current operating profit? The current operating profit for the last six months was stable on a reported basis and down on an organic basis by 4.7%, as this, of course, is going to be very much explained in detail for you soon. The important figure I think to see is what happened for group grants. And you can see that for group grants, we were up 5.5% on the reported basis and 0.8% on an organic basis. So more or less in line with the evolution of the turnover. Why was it so? Of course, we were able during the period to increase significantly our gross margin, both in value and in percentage. As we are pursuing our value strategy with success, but confident in that strategy and that approach, we also decided to increase again significantly our advertising and promotion expenditures, so which gives for group brands this increase of 5.5% on a reported basis for the operating profit and 0.8% on an organic basis, which is more or less in line with the evolution of turnover. On our current operating margin, we were up 0.2% reported basis, minus 0.3% on an organic basis, We would like to remind you that 26.4% is a figure much higher that we were achieving not long ago. For the group net profit, we are top of the class with above 90 million, plus 3.5% on reported basis, plus 8% on organic basis, So our earnings per share is this time above 180 per share, again up 4.5% on reported basis and 1.3% on organic. Of course, we are going to explain to you that excluding non-recruiting items, it was a bit different for reasons which are in fact not so important for the future of the group. So the net profit excluding non-recruiting items, still higher compared to previous figures some years ago, 84.6 million minus 5.6% on a reported basis and minus 8.2 on organic. Again, this will be explained. The net debt on EBITDA ratio looks a little bit less positive, but in fact, we are delighted with this result because one of the reasons why we increased a little bit our gearing, is that we were able, for the first time, on our balance sheet to report on the 30th of September, an inventory at, of course, group value, I mean reported value, at above 1 billion euro, 1 billion 270 million, which means that, in fact, we are more than ever able to provide to our clients in the future more extremely good quality cognacs, and of course now not only cognacs, rums, and more and more whiskeys, which is, of course, a very, very good sign for the future. And, of course, you won't be surprised to notice also that our net consumption financial cost, which means really the cost of the debt, was the lowest ever, really the lowest I can remember in more than 40 years with the group. Only 6 million, a little bit above 6 million euros for the last six months, which is, of course, a very good time to have very good high-quality inventory of top-quality spirits. So now, as usual, Valérie Chapulot and Luca Marotta are going to give you more details about those results, are going to give you perspectives, and will also answer, as usual, to your questions. As I hand over the mic to Valérie, I would like, on behalf of the whole Rémi Cointreau group, to thank Valérie and her team for the, I can only say the word, amazing results that she and her team have achieved for the last five years. I mean, the growth that we have had in profit during that time, the quality of the profit that we have had, and of course, the increase of value of our shares are extremely, extremely positive. And of course, Valérie and her team have prepared the group for the future. Next time, It will be Eric Valla, as confirmed, and Luca Marotta, which will present those results. For your information, Eric Valla is also present here in Paris in that room. So for those of you who can't wait for the next six months and would like already to ask questions to Eric Valla, it's still possible. But of course, it will be very difficult for him to answer to your question about the last six months. So again, thank you, Valerie. This is for you.

Thank you, Marc. Good morning, everybody. What can we say about this first semester? As Marc mentioned, the most important for us are the group run sales, which grew almost by 3%, 2.8%, which is, I would say, a mitigated situation, taking into account Two important evolutions. First of all, finally after years of effort, a very, very good start of the liquor and spirit division, almost 5% growth. And the cognac division which is slightly lower but definitely affected by some very temporary situation, one that you know for most of the groups, spirit groups, which is the Hong Kong situation. local and travel retail, and the second, which is a very unusual replenishment in the U.S. So a very good start of the year for the liquor division, liquor and spirit division, a little bit slower for cognac, but we know that it is definitely coming from external factors. What is quite consistent with the past and with our strategy is the fact that partner continue to drop significantly. Part of it has been, of course, anticipated to you and explained to you extensively with the sale of our Central Europe affiliate in Czechoslovakia. But most likely, this is part of our strategy. I remind you that the non-group brands were close to 14% 5 years ago, and they are going to be below 3% this year, which is a gap of more than 100 million euros that has been compensated at the group level. Regarding the COP, which is not the most important, but an important element of this call, the COP is very resilient in this first semester. The first semester is definitely a phasing It's facing a phasing situation, but the COP is quite resilient. What is very interesting in this COP is the fact that we continue to invest heavily, and we are going to look at the figures together. We continue to invest heavily behind our brands, and in particular in S2 that started recently. It is Thanksgiving today, so the holiday season started, and this is a peak moment for us in terms of investment, and then early Chinese New Year's to come in January. So very good resilience of the COP, based on the fact that we continue to accelerate on our investment behind our brands, but more to come in S2 for sure. The group-run COP is almost flat, plus 1%. What is very interesting as well is the fact that the way the P&L is balanced for the semester one is the fact that we have very, very strong evolution of the gross margin, almost plus four points. Four points, it's massive. And you will see per division how it is split. But globally, it's very consistent across the board, and it's a massive value strategy that is delivering. And, of course, we are not looking for volume, and it is balanced by a volume drop, but it is exactly what we want to achieve. So we have the value strategy works. It's significant during these last six months and very visible at every single level. Strong communication investment, almost plus 11%, so totally in line with our strategy as well. We have a slight currency gain, a bit less than 7%, that of course we factored in the COP. And globally, a very good resilience of the current operating margin at 26.4%, which is almost flat. The net profit growth is led by, again, on Central Europe affiliates. And globally, the non-recurring items, which is not massively significant, the net profit declined by almost 6%. If you look at the bridge, as we like to do to understand how it works, you can see that, in fact, the organic and the currencies balance each other. So it's not a big difference. In terms of organic growth per division, so also Rémy Martin plus 2%, 2 plus 1%, almost 5% on liquor and spirit. The group brand, which is the most important to us, almost 3% growth. Partner brand, a massive drop, which is Czechoslovakia, of course, decommissioning. And a slight, we will comment, a slight decrease on some partner brands that still remain in Belux. So total group, minus 3.6% in total. If we look at the breakdown of our activity per division and per region, you can see that Rémy Martin house continued to fly at 72% of our shares. Liquor and spirits, plus 2%, which is good news. And the massive drop of partner brands, as I said, is going to be less than 3% for the fiscal. And by region, the Americas, and we'll see why, still continue to grow, still not 50% of our activity, but getting there at 45%, mainly thanks to Liquor and Spirits for this fiscal and many thanks to Cointreau. Within each division, Americas almost flat for Rémy Martin, who has on Liquor and Spirits plus five points, which is coming from Cointreau, and the rest is quite stable. In terms of COP, current operating profits, the bridge is very interesting. You can see that the price mix, as I was mentioning, the value strategy works, plus 30.9 million. It's massive, balanced by a volume mix at almost minus 21 million. It is exactly what we want to achieve. The price mix is absolutely phenomenal. one of the best evolution for the last five years and demonstrating that month after month, semester after semester, year after year, we continue and it delivers. The ANP, the investments are the plus 11% that I was mentioning, plus 7.5, and the best is to come because effectively, as I mentioned, the holiday season just started this week. So in reality, when you look at the bridge, you understand why the current operating profit is quite stable in value, 138.3 million. The net profit, not a massive change. Net profit excluding non-recurring item, minus 5.6%. We are talking about 5 million. It's not very significant. And when we look at net profit group share, the same reported 3.5%. We are talking about 3 million difference. When we look at each division in terms of activity, what happened in semester one, as I said, Remy Martin, we are looking for value, not for volume. So you can see that the volume is at minus 5%, which is in a way going to the right direction, having in mind that for some qualities, we are definitely, and it is our own decision, we are under allocation. So there is a balance between the regions. It's quite obvious for S1. We'll see what's going to happen in S2 because, you know, the macroeconomic factors are very complicated today and very volatile and very complicated today to anticipate. So Asia Pacific, we know that on China Home, we had a massively good Mid-Autumn Festival. It's confirmed, but not only Mid-Autumn Festival. For the first, we are looking at the board this week, doing the board this week at the first eight months, It's a massive success in China, so Mid-Autumn Festival does confirm, double digit on most qualities, and it's usually a very good signal for Chinese New Year, which is going to come very soon, late January. Unfortunately, this performance of China Home is massively balanced by a very unique situation in Hong Kong Home and travel retail. Today, because of our cognac, situation we are much more maybe exposed than others to Hong Kong and the borders and travel retail Asia is a massive part of our activity in travel retail so we are as per today we will see what's going on in Hong Kong but we are facing a quite negative situation on Hong Kong home and Hong Kong travel retail and borders In America, we just got last night the last NAPCA figures. We can see that we are catching up. For your information, we are facing the anniversary of the second price increase in cognac of 2018 of last year. We can see that our depletion and sell-out start to recover, which is very good news. But today, effectively, we have a slower start of America. U.S. in particular, but we are very confident for the second part of the year, and as the holidays start, we will have very soon a very good idea of the temperature of the market. But the last NABCA, Nielsen, and depletion are going and moving to the right direction. EMEA, very uneven as usual. You know that EMEA is a massive patchwork. We have a very good start of the year in Africa. You know that we are betting on Africa for the medium-long term, so very good dynamism. And we have as well a very good start of the year in UK and Nordics and travel retail EMEA, which is the opposite of travel retail Asia. In terms of newness and activity, we just launched a new quality in the U.S., which name is Tercei. Very, very interesting, sophisticated launch and positioning, above 100 US dollar retail price, with a fantastic welcome from the market. Just the start, we are going to build it step by step, mostly non-trade, and very, very few fine wine stores, but a fantastic and unique positioning of Terce, and in a few months, we will look at it in China as well. New campaign that is just on air as we speak in most continents of the world, Asia, Africa, a bit of Europe, and U.S. We call it Team Up for Excellence. Very good welcome as well. This is a fantastic opportunity to express who we are as Rémi Martin, and the campaign will be tuned mostly on EXO, 1738 in America and Europe, and club, of course, in Asia. When it comes to Louis XIII regarding the house of Rémy Martin, we just introduced for the first time a limited edition that we call André Herdiard-Dubreuil, to pay tribute to André Herdiard-Dubreuil. It's a black pearl offer. For the first time, it's a 50 CL, absolutely unique. It's a different liquid. It's a different decanter. But for the first time, this offer is not available in retail. We sell it only to direct clients, the clients we know, and it's impossible to find this offer today in any retailer in the world. So it's a new format of approach for Louis XIII as we speak. If you travel to Singapore, I invite you to stop by our pop-up store in Changi Airport. This is a very interesting and important moment because we are totally able to express what it is we are talking about. It's like one of the best boutiques that we can offer. This boutique will rotate in Shanghai airport for 12 months from a terminal to another one. And of course we have a limited offer and special approach of the brand within this pop-up store. When we look at the bridge of the COP, of the current operating profit of Rémy Martin, the house of Rémy Martin, you see fully the value strategy, how it works, a massive price mix effect, plus 26 million, balanced by the volume mix that we like, minus 14, and the NP that are quite a little bit shy to start in S1 because the new campaign just started in October. So you will see it with Eric and Luca for semester two. When it comes to liquor and spirits, it's great news because we are looking at this kind of result for a few years now. And you will see that it is fueled by different brands. The most interesting and important is definitely Cointreau for many good reasons. Cointreau, as you know, we totally repositioned a year ago, a bit more, 18 months ago. It took us six months to start to see some results behind our heavy investment, in particular in the US. I'm very happy to mention that Cointreau in the US is double digit now for almost more than a year. And what is very interesting is that Cointreau is starting to catch up in many, many other countries following the U.S. because now we have the right business model and the right toolbox. Canada, Puerto Rico, Mexico, and most likely Australia. And you know that the mixology triangle of the world is U.K., U.S., and Australia. So it's not a big surprise that Australia is picking up double digit as well on Cointreau. And they are investing behind Cointreau with a new campaign for already a year. So Cointreau starts to pick up. It's a massive success. And we are sure that it's just a start for the brand. On the rest of the portfolio, Metaxa is doing very well in new frontier like Asia and America. Slightly more complicated in Europe because we have some route to market change. But we know that Greece, for example, which is massive for travel retail, is doing extremely well. We had a very good summer, which is the key moment for Metaxa, which gives us a lot of confidence, in particular on the quality we want to support, which is 12-star. Saint-Rémy, solid performance. We have a very good marketing initiative. I don't want to reveal anything, but we have a very, very interesting and strategic initiative to come next year. But the key markets are delivering. Canada in particular, U.S. is waking up, and travel retail, which is, I remind you that Saint-Rémy is number one in travel retail in the world, is doing very well and is very solid for the start of the year. The botanist, big success. It's a massive double-digit growth. We continue our strategy. We know that liquid tulips is fundamental, is key, and is 100% success. We are looking at accelerating our distribution strategy, in particular in the U.S. And even in Asia Pacific, where white spirits are not so big, we can see a very big interest behind the botanist. When it comes to whiskeys, we have a very fast growth almost everywhere. in EMEA, in China, in Japan, and travel retail. We have much more high comps in the U.S., but we know that when it comes to our Scottish brands, we are where we should be with a selective approach now. We have refazed everything in the last 18 months. We are starting to expand a little bit, but step-by-step, Westland in some markets, a little bit in Asia, a little bit in Europe. As we speak, it's happening now. So, for example, a market like France is one of the few markets, if not the only market in the world, that is able to sell our three distilleries, Brooklady Distilleries, Westland, and Domaine des Hauts-Glaces. And we will see, step by step, how we are going to roll out Westland in particular, Domaine des Hauts-Glaces. It's another story. We are organic. We are very small. We are building stock. And, by the way, the new distillery is on air, as we speak, in late 2019. When it comes to Mange, you remember that Mange is under full repositioning. We are presenting all over the world the repositioning of Mange. That is going to happen most likely at the end of Q4. Very nice welcome to start. It will take a bit of time, but we are very confident that it is the right direction for the brand. In terms of actuality and newness, a big push of Cointreau because it was the 170th anniversary of Cointreau. big events in Q1, in particular in Paris, but not only. We are delivering, as we speak, the limited edition of Vincent Daré, the French designer, for which we have a big, big welcome. So it's going to be an interesting end of the year. Metaxar continues its international expansion. We have a very interesting partnership with Clemsis. I remind you that Clemsis is... number six bar in the world and based in Athens. By the way, the Athens Bar Show just ended a few days ago and is becoming a key, key moment, which is excellent for us, by the way, a key, key moment during the year ahead of London and we think it's going to become, by the way, as important in terms of halo effect as Berlin Bar Show. So this is great news and our partnership with the Clemson is definitely helping us to reposition the brand on the cocktail approach and mixology approach which the brand deserves. When it comes to Octomore, and that's why maybe we are a bit late in S1, the 10th series has just been issued, that's why we have sometimes some phasing issues on whisky, but Octomore is, as we speak, delivered, and the 10th series is a very interesting liquid as we like to have. When it comes to the bridge of COP for liquor and spirits, we report growth of 1.6%. You can see that there is almost no effect on the volume, but a very good price mix, which is good for this kind of positioning, because it's quite complicated for some of these brands to go for price increase. But the price mix is very good, plus 4.5 million. And you can see that we continue to invest behind the brand, but as well, the holiday season starts So the best is to come. Not going to be long on partner brands. You know exactly what happened. Big drop in value and in volume. It's quite an interesting acceleration. And, of course, we know exactly what's happening. And we are going to be below 3%. It's a combination of Czech Republic and a little bit of leftover of stock of Piper Sonoma in the U.S. And as I mentioned, the little partner brands we have mostly in Bellox is still suffering because of the Belgian market in particular. So I'm very happy now to pass the mic to Luca Marotta, who's going to enter in detail regarding the financial part of the S1. Luca, the mic is yours.

Thank you, Valérie. Now let's move on to a very detailed analysis of the financial statement. And so let's begin by analyzing the income statement, slide number 21. Again, the key message of this slide is the very good resilience of groups' current operating margin at 26.4%. up 0.2 points on a reported basis and a limited decline of 0.3, 30 base points in organic terms. And this despite a mathematical 3.6 organic decline in sales. This very good resilience was achieved thanks to another very strong performance of the gross margin, up 3.9 points in organic terms. and this was achieved thanks to the positive leverage of our mixed strategy, but also and especially more than ever this year thanks to notable significant price rises across all world regions. This allowed us to fund a further significant increase in sales and marketing expenses, which is up 4.7% in organic terms, which breaks down between a 10.8% increase in communication investment, advertising and promotion, and a very slight growth, 0.5%, in distribution cost. This distribution cost and modest increase reflects some phasing effect and fairly high comps. On the opposite, administrative expenses rose by 17.8% in the first half, largely reflecting the usual classical volatility in holding costs for our group. But admittedly, this year, the volatility was greater than usual for holding costs in H1, with the combination of two factors, sizeable organization costs, and second one, the known recurrence of the provision reversal, which lowered the level of holding costs in H1 last year, which is not totally comparable. So, for the year, We expect a more normalized H2, leading in a total global value for holding costs in the full year between 18 to 20 million euro. All in all, our current operating profit was down 4.7% on organic basis, but stable in reported terms after taking into account favorable currency effect for 6.5 million euro. Now, let's dig slide number 22 into the analysis of the group's current operating margin, which is a very important slide. The 20 basis point margin improvement to 26.4% breaks down into a 30 basis point organic decline and 50, 5-0, dips of currency benefit. At this stage, no scope or perimeter impacts. As you can see in the chart, the very strong gross margin gain was used with significant increases in AMP, advertising promotion, and structure cost. But let's start with the first very important positive point, the gross margin, which delivered an increase of around 400 base points. Enormous. As I mentioned earlier, This was driven by positive product mix and country effect with, for instance, determination of low margin pattern brand distribution on one hand and very strong performance on mainland China which over-indexes in terms of gross margin on the other. Gross margins were also fueled by significant price effect across all war regions. Second element is that AMP expense ratio increased by 1.9 base points. As you know, management is really keen to step up investment brand building to help move our brand portfolio up market. Beside that, despite the slowdown in August and September, we decided to keep investing constantly behind our brands, in particular ahead of our launch of the new global campaign for Remy Martin. And beside that, we have to add the weight of the digital expense is increasing, accounting now for around 20% of the global total advertising promotion indicators. Last but not least, the third factor is the distribution and structure cost ratio, which rose by 230 base points, so 2.3. This can be explained by three factors, because the first side could seem a little bit higher than expected. The first one is the volatility of the holding cost for 0.8, as already explained. The second one, which is very important for a group of our size, is the under-absorption of fixed costs due to the sudden sales slowdown for 1.2. So, 1.2 plus 0.8, the running rate increase of the remaining normative part of this distribution and such a cost was 0.3 points. Now let's take a look at the rest of the income statement, line number 23. Other operating and non-recurring expenses were little significant this year at €0.6 million in the first half in the negative side. Finance costs decreased to reach €14.4 million in the first half year, led by lower gross debt related financing costs. as Markerad Roy highlighted just before, and the non-recurrence of the charge related to the early reimbursement of the vendor loan to API that hit last year profit and loss for 5.2 million euro. But we will come back very analytically to that point later. Taxes. The tax rate rose from 29.2 to 31.7. This change, negative change for the profit and loss, was due entirely to the geographical mix and specifically to the underperformance of our business in Hong Kong and travel retail Asia compared to the strong performance in China. There is a difference in terms of tax rate between China mainland and Hong Kong business, very significant one. Over 2019 and 2020 all other things being equal at yearly level so we are now expecting as a guidance a tax rate of around 32-33% because this shift in terms of geographical mix is there and we are very proud of our result in mainland China that are very positive in terms of current operating profit and net sales, but in terms of net result are a little bit more diluted compared to the same result if it were achieved in Hong Kong. Now, let's move to profit from discontinued operation. We recorded 6.3 million euro net profit linked to the disposal of our Czech and Slovakian distribution subsidiary in H1. As a result, our net profit came at total group level at an historical level of 90.5 million euro, up 3.5% year-on-year. And, even more important, the group's net margin stands at 17.3%, up 0.7 points in historical record for the group at the end of September. Excluding non-recurring items, net profit came in at 84.6 million euro, down 5.6%, and the net margin stands at a strong, resilient 16.2 level. Now let's look at the reconciliation table, slide number 24, between net profit and net profit excluding non-recurring items, which is pretty straightforward in the half year. Non-recurring items amounted to around 6 million, 5.9 to be precise, in the first half. This was mostly driven by the 6.3 million Euro net gain on the disposal of Central European Distributional Subsidiary, as already highlighted and mentioned also last year. This gain was partially offset by the 0.6 other non-recurring operating expenses and the associated tax gain of 0.2. So, 6.3 less 0.4 and that is 5.9 of reconciliation. Now, let's move to a very, very important spreadsheet, which is slide number 25, and it's the cash flow generation and net debt analysis of the period. At the end of September 2019, our net financial debt reached 458.9 million euro, so up 127.2 million euro. to be compared with September 2018 and up €115.6 million versus March 2019. To make this simple, it was largely due to the €132 million dividends paid this year, a generous, important amount that included an exceptional dividend of €1 per share on the top of the €1.65 ordinary dividend. Besides, we have to remind that 100% of the dividends were paid in cash this year, while 89% of the dividends were paid in shares the previous one, as most shareholders had opted previous year for the script option. So the difference is, as you can see, in net cash flow, 123,132 cash out this year versus 9 the previous one. Now, let's look into the cash flow statement more in detail and starting with the total recurring free cash flow, which was a 5 million euro cash generation H1 this year versus a cash outflow of around 100 million euro, 98.6 million in H1 last year. So, the free cash flow improved for around 104 million, 103.6. The significant improvement was due again to substantial variation in other components of working capital, for which the outflow was 86 million lower compared to the previous year. Last year, If you remember, the outflow was amplified by phasing effects related to trade residual and supplier payables. This year, there was no phasing effect. And besides that, H1-19-20 this year benefited from an increased level of factoring programs that helped the free cash flow on the outfield. Cash related to strategic working capital was also more favorable than last year by 31 million euro. While H1 is not representative of the full year trend because the ODD purchases are mainly done in the H2, the working capital benefited from easy comps as last year we accelerated payable terms and we are now cycling this effect. On the negative side, CAPEX expenditure increased as expected versus last year and still we now anticipate CAPEX. It will be different compared to our June guidance. So we are now anticipating a yearly level between 70 and 80 million euro in the full year versus the previous guidance that was 80 to 90. This is due not to a change of our strategy, but only to a phasing of the execution of the program. Nothing has changed in terms of vision. It's only a phasing of the execution. Also on the negative free cash flow side, there is the tax outflows, which increased, but is a consequence of the strong profit growth posted last year. So, after the analysis of the free cash flow, we have now to talk a little bit more, but very synthetically, of the non-operating cash flow, that there were a €120.7 million outflow in H1 to be compared to a €49.7 million inflow in H1 last year, i.e. an important negative delta in total cash position of around €170 million. As already mentioned, this negative non-operating cash flow variance was mainly due to the dividend payment, yet mitigated by the proceeds received for the disposal of the central European subsidiary. Moreover, very important, last year cash in H1 took profit from the early repayment of the vendor loan from API on the champagne sale for 86.8 million euro. Our net debt to EBITDA ratio stood at 1.39 at September 2019 versus 1.21 September 2018, still a very healthy and low level. As already promised, take a look at our financial expenses more in detail, which was a charge of a total 14.4 million euro in H1, down 2.3 million compared to last year. As you can see in the spreadsheet, this reflected a 1 million euro reduction in gross debt servicing cost, thanks to a further optimized cost of debts. Now we are at 1.15%, very low level, and two bps lower than previous year, and around 400 bps lower if you compare to four or five years ago. We also took profit from lower and other financial expenses. because we have to recall that last year they were burdened by a non-cash, non-recurring charge of €5.2 million related to the early repayment of the vendor loan. Obviously, this year there was no such charge in the H1. In contrast, on the negative side, net currency losses amounted €2.4 million this year while there were a 0.6 million gain last year post IFRS 9 application. As you know, this is a volatile non-cash charge related to the aging of groups, non-euro debts, and future non-effective flows. Slide number 27. This is the analysis and impact of the currency edge. As mentioned earlier, the group reported favorable translation and transaction effect for a global amount of 6.5 million euro on profit on the first half. This impact was slightly above the original guidance for the H1, which was 5 million euro, thanks essentially to sustained US dollar strength since our publication in June. For your information, the only negative transaction currency effect was the rubble with minus 2 million. Average euro-dollar translation rate, as shown by the green line, came out at 1.12 over the half year, compared to 1.18 over the same period of the previous one. At the same time, the average hedged rate, the red line, under our currency hedging and cautious policy was 1.16 over the half year to be compared to 1.19 over the same period of last year. For the fiscal global year 19-20 we now expect an average hedged rate of 1.16 to be compared to 1.17 previously guided in June. To be more precise, and to help you also in your estimation, in slide 28, we're now expecting the following impact. A positive currency impact of around 25 to 30 million on sales, so it's more a translation, conversion effect, to be compared with initial estimate of minus 20 in June. Now, this is based on a conversion rate of around 1.11 and a 9.10 million gain on current operating profit compared to zero previously. 6.5 was already achieved, so the reminder in our opinion is between 2.5 to 3.5. Again, these new assumptions are based on an average translation conversion rate of 1.11 over with a spot rate assumption of 1.11 on H2, because the spot rate will play a role, clearly, and an average edge rate of 1.16 over the year 2019-2020. As a reminder for your model, one cent increase in U.S. dollars versus euros is giving 5 to 6 million euros in gain on sales, on conversion, and 3 to 4 more million on operating profits on a full year basis. They're all things alike. And do not forget that we are very cautious. We cover in advance and the cost and the volatility and the time value that play a role in the final accounting features. After this very technical but important slide to talk the same languages between your model and our forecast, let's move to an overview on a balance sheet, a very important slide. In slide number 29, the structure slightly strengthened over the last year with total asset liabilities of 2.58 billion to be compared to 2.57 at the 30th September of the previous year. It was mainly driven by an increase in inventory. Stock rose by 96 million to reach a level of 1.27 billion at the end of September 2019, an historical record in value. Due to increased capacity across our various categories of spirits, but also due partially to high level of finished goods sent in the U.S. ahead of the potential tariff increase. Now stock accounts for 49, around 50% of our total assets, up 3 points versus last year. Net gearing, which is the indicator of the group's net debt to equity ratio, increased over the period up from 23% to 33%. due to the higher net debt and a lower equity due to the significant amount of dividends paid in cash in H1. However, it remains a very healthy and low level system. Let's now review the key events happened in the first half of financial year 1920. On the 1st of April 2019, the group announced the disposal of its distribution subsidiary in Czech Republic and Slovakia to Jägermeister. At the same time, we announced that Jägermeister would become the distributor of our brands in those two markets. On May 29th, we announced that we had entered into exclusive negotiation with the Brie family in order to acquire the Maison de Cognac, and part of its vineyard estate. On July 24, at the general meeting, shareholders approved the payment of the northerly dividend of €1.65 per share and an exceptional dividend of €1 per share. Payments, all in cash this year, were made on September 16. And on the 9th of July, the Group announced that CEO Valéry Chapulot-Floquet would step down by the end of the year 2019, and on September 11, the group announced that Eric Vara would join as the new CEO from December 1. Two subsequent events, post-closing events, slide number 31. On October 15, a very good event, Rémy Cointreau was awarded the first place, number one, by GAIA Rating, AT Finance ASG Rating Agency, in the category of companies with sales of over 500 million euros, recognizing that Group's corporate, social and environmental strategy is going in the right direction, more than that, actually. And 26th of November, Rémy Cointreau, Board of Directors, officially named Éric Varin as the new Group CEO, Chief Executive Officer of the Group, starting December 1st, 2019. It was a little bit longer than usual. Now, thank you for your attention and we will now hand it over to Valérie Chapulot-Floquet for the full year 19-20 and mid-term outlook.

Thank you, Luca. So, within this environment, what can we say? First of all, we think that volatility is going to be more than ever. part of the reality, so what we can say as we speak with the information we have is that we expect for the year a slight organic growth in group grants current operating profit, which makes sense, massively or mainly fueled by solid group growth margin gains, as you already could see in S1, and as a result, a stable current operating profit for the group. The technical factor will have a global impact in terms of sales of 56 million euros, which is a combination of most likely the Czech Republic, Slovakia affiliate and the United States Piper Sonoma remaining stock, and has a cop effect of 5 million euros. What is the most important is that as we just ended and presented to the board our five-year midterm plan, our outlook doesn't change. On the opposite, more than ever confirmed. Our ambition is to become the world leader in exceptional spirits. As a target, we aim to reach more than 60% of our sales over 50 US dollar retail price. And it might happen quite soon in the coming years. Our current operating margin will continue to benefit from the group value strategy. You've seen already what happened in S1. So we are on the right track. And, of course, the most important behind this first objective is to continue to fuel our brand and to continue to invest importantly behind our brand. And, of course, as well, on our distribution network. So in total, we want to have a sustainable and resilient and profitable business for the future, and we are getting there. Thank you very much, and now we leave you the mic for the Q&A.

Thank you. If you wish to ask a question at this time, please press star 1 on your telephone keypad. Please ensure the mute function on your telephone is switched off to signal to reach our equipment. Again, please press star 1 to ask a question. We will now take our first question from Simon Hales from Citi. Your line is open. Please go ahead.

Thank you. Good morning, everybody. A couple of questions, please. I wonder if you could just sort of help us understand your guidance for the full year and the assumptions you're making with regards to trading in your core businesses in the second half. I mean, specifically, what are you assuming with regards to the outlook for the Hong Kong and Macau business through H2? Are you expecting the difficulties we saw in the Q2 period to continue throughout the second half? And also, you know, sort of any comments around the ongoing double digit growth you might expect to see in mainland China for the cognac business and how you see the U.S. replenishment cycle sort of coming through through the second half? And then just secondly, on marketing spend, I mean, Valerie, you talked a lot about incremental programs that are coming at the back end of this year and into 2021 fiscal year. How do we think about sort of marketing spending aggregate for the second half of this year? Should we see any rollback at all in spend? Or are you going to continue to reinvest at the rates we've seen in the first half?

So let me answer regarding the business. So we don't see as per today any improvement in Hong Kong. So Macau is not much part of it, but as per today we don't see any improvement. And of course we don't have any crystal ball about what's happening there. So we are quite cautious when it comes to Hong Kong local market and travel retail. We are not sure at all that it's going to be solve very soon and that we are going to see any improvement the only I would say interesting news that we have because we were in a can for the tax free a few weeks ago is the fact that Hong Kong airport fortunately benefits from transit passengers so what we lose with people who arrive and depart from Hong Kong airport is partially balanced by transit passengers, people going to Australia, for example, and Hong Kong is a big hub. So, in fact, we are not dropping as we could imagine in Hong Kong airport. It's slightly less because it's partially balanced. So at least it's not a bit, as we say in French, less worse than we could imagine. But still, it's quite bad. So Hong Kong, we don't expect some improvement. As we speak. When it comes to China, honestly, the trend is very good. We fly, so we consider that there is no reason that it is going to change. So I would say quite on H2, quite stability on both sides. Still quite bad in Hong Kong and borders, and still quite good in China. And usually, and at least for the last five years, Mid-Autumn Festival gives you the tempo of what's going to happen in Chinese New Year. So it would be quite surprising that Chinese New Year is not good in China because Mid-Autumn Festival for us was very good. And of course we need to be prepared with the right program, but the team of course knows how to make it happen. When it comes to the U.S., as I mentioned, we are quite confident for H2. I think the turmoil that we face is behind us for many good reasons. It's always difficult to read the U.S. because the figures are not fully representative of the market, and each group has a different penetration of channels and states. But still, we have backgrounds so we can see trends and what we can see in the last weeks. it's improving quite well and is better than our expectations. So it's quite good. When it comes to investment, as I mentioned, we are at almost plus 11% in H1. We are not going to give up in H2 on the opposite because we have the new campaign of Rémi Martin. So we are going to continue to invest double digits in H2. And our number one priority is definitely to invest behind our brands. The two key brands for which we have classical, I would say, advertising campaigns mostly digital campaigns and not just PR or whatever, is definitely Rémi Martin and Cointreau, and we are investing heavily behind the brands, and we don't want to give up. It would be the wrong decision and the wrong strategy. It works, so we continue to keep the speed, and we continue to invest behind the brands, big time. So it's going to be a double-digit investment, H2, for the group.

Brilliant. That's very clear. I wonder if I could just follow up with just a brief one for Luca around the holding company costs going forward. There's lots of moving parts in the first half of the year. How big are the reorganisation costs that you've taken in the first half? And how should we think about holding costs as we move into a normalised year in fiscal year 2021?

Okay, I will answer specifically on this question and then I'll be back on the quality and the forecast of the guidance of the year because it's important not talking only about figures but the way the figures are achieved. The first question, holding costs for our group are always a little bit volatile because compared to other groups, all organizations are not affecting specific brands or regions, but more on a centralized level to have volatility and holding costs, but brands and the region costs are more comparable and recurring year after year. If there is an increase, it's the result of a specific decision on the region. If there is a decrease, the same, but no organization, main organization, it's the P&L of region of rent and more centralized resulting level. For this year, we are normalizing our expectation between 18 and 20. Mathematically speaking, the non-comparable exceptional variation compared to the previous year for both elements, reorganization and non-recurring reversal of the provision is something around 5.56 million, split half and half. Three is the non-recurring reversal and three is the impact of the reorganization that was took at holding level. H2 will be more normal, but if any decision of new reorganization will happen following next quarters, next years, you will witness always a variation in this line, holding costs. I repeat, it is our politics to centralize reorganization in this line. For this year, 18 to 20, exceptional cost, non-occurrence of the same reversal, around six million on the first half. But I want to be back to your question. What is the guidance? The guidance, it is clear in terms of mathematical, in our opinion, impact. For the full year, it is to be slightly positive for the operating profit on group rents. with the quality profit and loss, which means continue to increase the gross margin. This is the most important thing that we achieved in the first half. We increased 400 base points. 240 were linked to the exit termination brand, but 160, so 40% of the increase, It's organic. It's for the rest of the brands. It stands. It's there. So it's not mechanical, excitable, that will play a negative, positive role in the future anymore out of the 30 million euro . So this is something important. This is a building block. In my opinion, the model you have to build some block with some logic like gross margin to be improved. AMP, as Marie just highlighted, big, big investment behind our brand because we increased the internalization of our brand even more for Eccles & Spirits compared to Remy Martin. So we have to be consistent, we continue to increase. Clearly, if the second half of this year we continue to witness softness on Hong Kong, and the recovery in the U.S. will be a little more Q4 than Q3, which is quite possible. We will adjust, but the aim, the strategic view is not changing. We will invest. And also on strategic cost, it will be the same. So, group brands to be increased in bottom line operating profit with increasing gross margin. increase in AMP according to the fastness of the net sales, so the more we grew in net sales, the more we put on the table AMP, and on a specific cost, strategic one, an increase that normally, as I already always said, it is able in the medium to long term to get a leverage effect. This was not the case for the H1 because the top line was not there at our expectation. We factored that because there was a specific impact and the running rate increase on a comparable basis was only of 0.3. The specific impact was the holding cost. Once again, we have to disconnect the medium term to the short term, the increase in group will be done gross margin, MP, cost, as a result, an increase on bottom line, which may be more moderate than we might expect, but this is linked not to the change of our strategy. This is linked of the situational factors that are lasting a little bit more than expected in top line because expansion is important for us. Turnover is important. Then you have... No, no, no, sorry. I will continue because it is important also for other people. This is group rents. Then you have the total group. Total group is also influenced by the holding costs. What happens to the partner brands? We are losing, I fear, a little bit more than 3 million. We highlighted that it would be on a yearly level of 5 million. It is considered an organic one. So we are not doing like other companies that strip off the decision they made. For us, it's organic. But in the last year performance, you had 5 million for the full year and 2.8 for each one, 2.2. The 2.8 last year now translates in minus 0.6. It means that not only we are facing a technical effect, but the remaining part of the partner brands, mainly Benelux, we are not matching our expectation. That's nothing important, but on a specific, punctual basis, play a role. So, on a full year, you start from a positive impact on group brands, profits, current operating traffic, and then you arrive at a flattish, considering the decrease of technical factors of partner brands, the heat on holding, point all of this year, 18 to 20, and then the Forex is there to play a compensation role. Today we are guiding 9 to 10 if the spot will be at 1.11. It could be better if it's 1.09, it could be worse. So the flattish at operating profit level is a consequence of our group brand strategy, Forex. Technical effects are only mechanical adjustments. This year, some non-recurring reorganization and non-recurring reversal of provision will hit the holding cost, but it's not something normative. Sorry, I was long, but I think for everybody it is interesting. And I repeat, The strategy is not changing. We continue to invest. We will adjust partially if the software, the top line, will be there more than expected. Not all of that. That's very helpful. It's very important for all cells. Even before you, sorry to say that, but we are very, very committed to EBITDA and free cash flow.

Perfect. Thank you.

We will now take our next question from Trevor Sterling from Bernstein. Please go ahead.

Morning, Luca and Valerie. Two questions from my side, please. One is, have you started to see any pickup in mainland of people compensating for Hong Kong? We've seen that in other luxury groups that some of the lost sales in Hong Kong are now being compensated in mainland purchases. And second question, a more technical one. Looking at page 15, Luca, and on the bridge for Remy Martha, There was a 7.6 million increase in others. And I wonder if you could just give us a little bit of color about what goes into that line of the P&L.

Thank you. So regarding China and Hong Kong, honestly, you know that there is no official panel in China. So it's very complicated to assess. Additionally, compared to luxury brands, we don't have our own network and boutique. So there might be some transfers. of course, because people are traveling less to Hong Kong and consuming less in Hong Kong. I remind you that Hong Kong is a massive on-trade activity, which is totally not stopped, but almost stopped today. But when it comes to transactions and buying in Hong Kong, for sure, there might be some transfers. For us, it's absolutely super complicated to assess because As you know, the way the market is, the route to market is organized in China with a tier wholesale system is very complex. So, logically, we should have some transfers, but we know that when a channel or a market doesn't work very well, part of it is lost, unfortunately. So, on the opposite of luxury, it's very where they can... Look at store by store, boutique by boutique. If they can get some transfer for us, it's almost impossible to quantitatively assess. But there might be, for sure, but not 100% of it. That's obvious. It's all what I can say today. But yes, there might be some of it. But I would be surprised that there is more 50% transfer.

Thank you.

On the technical side, The main elements are around 2 million are increase of cost of goods and logistic cost for Remy Martin. The reminder, it is around 1 million of increase of brand cost, mainly protection of our trademarks around the world, increase of our brand expression inside the brands of Remy Martin out of AMP because our OPEX. And the remaining part, around 4 million, is something that you don't see at the company level. It is distribution cost, because the loss of weight of partner brands makes that Remy Martin has to absorb more fixed costs compared to the past. So it is an increase, but it's not totally comparable. It is the opposite side. the other side of the moon, or the fact that to lose non-group brands, because they were paying part of the bill at the end of the month, and now it's Remy Martin, which is the biggest guy in town that has to pay that. So seven million, three is a real increase, and three to 3.5, and the rest is an allocation switch.

Understood. Thank you very much, Luca and Valerie.

And Trevor, if I add something on mainland China, we are experiencing very, very good trends as well. Okay, this is Chinese, but our guidance has not changed. On mainland China, we are targeting double-digit growth, half volume, half value for a year. So it is more than expected complicated on top line because of many reasons, but China, mainland China, is still very strong. This is not so nice for net result and shareholders maybe would like also to have a little bit more Hong Kong because there are more taxes, but in terms of business-wise, we are really, really comfortable and we are really performing in a very strong manner, stunning manner there. Very good. Thank you, Luca.

We will now take our next question from Lawrence White from Barclays. Please go ahead.

Hi, thanks very much for the question. Good morning, everyone. Just a couple on in the U.S., you've said the replenishment's a bit slower. Do you think that's entirely down to the price rises or is there anything else going on in that market? And secondly, also in the U.S., the acceleration on Cointreau, would you put that solely down to the increase in marketing spend you put on that brand? Or again, is there something else going on? And then finally, on Mount Gay, how long is the strategic repositioning going to go on for? I think it's been going for about maybe four or five years now. You mentioned there's an additional in Q4. I'm just wondering when you expect that strategic repositioning to be complete. Thank you very much.

Okay. Thank you very much. So I will start by the last question. Mount Gay, so it took us a bit of time because within the portfolio, we started our priority was to reposition other brands. And as a consequence, we took care between brackets of Mange a little bit later than the other brands. So the repositioning of Mange is in the box. It is presented as we speak to most markets, including the US. And the first shipments are going to happen in Q4. So it's going to be full speed for next fiscal. So it's operational. We have produced already. We are absolutely on time. And you will see the first new proposition in the U.S. in particular at the beginning of the new fiscal, meaning end of March 2020. When it comes to Cointreau, Cointreau definitely, the new positioning and the advertising and the investment behind the brand is mostly part of the success, but not only. It's a 360 approach and investment. If you just advertise and you don't do your job in on-trade, in off-trade, in terms of visibility, in terms of education, in terms of PR, et cetera, et cetera, you have less interesting results. So, of course, it's a cumulative investment for the last 18 months. But on the top of it, it's a 360 approach in terms of toolbox and the way we invest and the way we are visible in the U.S. What is interesting is the U.S. is our number one market. We, I would say, experimented what is the toolbox and the 360 approach in the U.S. And starting this fiscal, we roll out in other key markets for Cointreau. And of course, the local team job is to adjust this toolbox to their reality of their own market. So this is exactly what's happening now. And this is why we're extremely happy that for the last month, we can see some pick-up in Canada, in Puerto Rico, in Mexico and Australia that are key markets for us, meaning that what has been achieved and fine-tuned in the U.S. is exportable and is absolutely taken into account by these markets, meaning that the other markets have more to offer in the future and the best is to come. When it comes to the U.S. market and cognac in particular, I think, as I mentioned, there were two factors. The fact that we increased our cognac prices three times in one year, April 18, September 18, and April 19. So, as a consequence, you can understand what can happen. Effectively, because the U.S. market is definitely very sensitive to price, but we could see last year that we were very high double digits in September before the first the second price increase. And after the second price increase, we catch up quite fast. So it means that the market absorbs it quite easily. And it's true that this year, I think there was a combination of the third price increase in April 19, plus the fact that competition increased in June and had some stock effect in the market. So this year, it's much more a combination of these two factors, whereas last year, to be honest, it was quite... absorbed quickly and the volume catch up quite fast. So we are looking at very closely at the market. We can see that after three months of the price increase of competition starting September-ish October, we can see that we are back to speed and slightly higher than our expectations, especially because we are facing the anniversary of the price increase of last year of September 18. So that's why the team is very confident. Our plan is very strong. We start the new campaign in the U.S., but not only, but in the U.S., we start the new campaign I just mentioned. So we are full speed. The investments are behind the brand. And we will see very soon, because the holiday season is starting this week, what is the result. But as for today, with the latest week and month result, two-month result, we are confident for H2, definitely.

That's all really clear. Thanks very much, Valérie.

We should now take our next question from Chris Pritchard from Redburn. Please go ahead.

Good morning. A couple of questions. Firstly, on the outlook for the tax rate, you mentioned it's predominantly driven by geographic mix. Is there anything that you can do to mitigate that 32% to 33% if, for example, the purchasing has structurally shifted to mainland China? And I'm mindful you said you can't work out how much has shifted to mainland China. And then secondly, on Quantro, I can see where the gross margin expansion in Cognac is helping fund increased AMP. But could you give us a sense for how Quantro's gross margin has developed and whether you're able to fund that or whether you're just having to fund AMP out of margins? And in terms of the investment that you're putting in, can you give us a sense for what's balanced between the growth markets, i.e. U.S., China, Russia, and balanced between sort of trying to stabilize Europe? Thank you.

Okay. Tax rate, I don't think, in terms of action to change the geographical mix, I don't see many, many actions that we can see. We would like the base of profit before tax, native production building, it may be different, but we are also very proud of what we are experiencing in mainland China. So, if you travel to Hong Kong, maybe buy some of our products, it will help us marginally to improve our footprint. But I don't see any structural, and we do not manage the group that way. We explain what the consequences are, but we are not playing a game of tax planning before current operating profit sourcing considered a natural business trend. The second point, it is, the third one is the balancing between mature and emergent, mature or not countries. Clearly, if you consider mainland China, it is emergency, they played a role in terms of In terms of growth on the H1, we think that we over-indexed the performance of the group on the second part and are more than match of country, even biggest country of Europe, they are more in a complicated situation. Inside Europe, we had the most developed, not developed, but booming or increasing countries are more in the emerging countries inside Europe. So it is more a year in which emerging are better than than the classical mature country. In terms of Coentro, as you know, we do not disclose brand by brand, but I understand that you say that we have to increase our investment in Lycos and Spirits, and Coentro is very important in terms of dynamics of the Lycos and Spirits division. So to help you a bit with your model, Two very good news, in my opinion. Not only Cointreau is, mathematically speaking, hit by the increase of AMP, which is a negative element for the profit and loss, but is more than absorbed by the increase in gross margin global value generation and profit. Without disclosing the value, we increase the profit of this brand which account for an important part of the total Lacrosse and Spirit division at the September end and we think and we are committing ourselves to the fact that we think we are able to improve our profitability in global value and percentage compared to sales to this important brand also in the medium term to the whole Lacrosse and Spirit division because the turnaround in terms of profitability or the lack of spirit division to be more coherent with the profile of the group can be happen without a strong point through. So the increase in EMP is well digested. There is already a payback in absolute value and also in margin value in terms of percentage of sales, we are improving compared to previous year and compared to our expectation. So, no fear at this stage for Cointreau. The increasing footprint in AMP is not creating an additional dilutive impact on the Lycos spirit's profit and loss. And Cointreau is very important for that. It is clear, Chris?

Yes, thank you very much. And just in terms of the investment you're putting behind the brand, you've obviously got U.S. in growth, you've got these fast-growth markets, but also are you spending more to try and stabilize sustainably Europe?

Yes, it is a 360, yes, yes. The answer is yes. Thank you. Not only in the U.S.

We will now take our next question from Marion Beauchamp from Maine First. Please go ahead.

Hi, good morning. Just a few follow-ups. Going back to the Cointreau margin and all you've explained now, what has been then driving the deliverage? Is it the investment with all other brands? And when could we see, do you think, some operating leverage in this division? And then on cognac, would you expect H2 to go back to volume growth or we're still looking for a decline?

I can answer for the second question. As I mentioned before, we're looking for value and not for volume. So whatever is the external factors and geopolitical situation, anyway, we didn't build our budget and our fiscal on massive volume growth on cognac on the opposite, because on the entry qualities, like VSOP, we are looking at shrinking this quality and moving very fast to 1738 and club, what we call the intermediary qualities, and XO and more. So anyway, we are not looking for volume. So the H1 is maybe slightly lower than what we expected, but we are not looking for volume for sure, definitely. And I give the mic to Luca for the first question.

Life of Spirits division journey to improve, in terms of improving profitability, it is not only a matter of quarter. So we will continue to invest beyond our brand as we did mainly for Cointreau, but not only for the last 18 months. The goal, as I already highlighted, is to internationalize our brands, to let them be more worldwide. to build their critical mass in order to achieve a sustainable profitable division not so different from the weighted average of the group. We are not there yet. We keep investing, but we are also trying to improve the position of each brand. Cointreau was one of them. Clearly, inside the Lycos and Spirit division, there are also other brands which are less profitable and they need also in person to their sales even more attention and investment, not only in Mungay, but also whisky is a different and more business model with a lot of teaching, training, education. Cointreau in a way you have maybe more speed. For other type of business, it's a little bit longer. So we'll be consistent, but you cannot expect to switch from 16% to 26% in one year. So we'll be a little bit longer in terms of realignment.

All right. Thanks.

I will now hand the call back for any additional or closing remarks.

Thank you.

That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.