Remy Cointreau Sa Ord

Hello, and welcome to the Rémi Cointreau Q2 Sales Conference call. Please note this conference is being recorded, and for the duration of the call, your lines will be on listen only. However, you'll have the opportunity to ask questions after the presentation, and this can be done by pressing star 1 on your telephone keypad to register your question. You are kindly asked to limit yourselves to two questions only.

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I will now hand you over to Luca Marotta, CFO, to begin today's conference. Thank you. Good morning, everyone.

Thank you for joining us today. As highlighted in our press release, H1 sales decreased by... 4.2% organically. This performance includes a minus 11% decline in Q2, which should be, as expected, the lowest quarter of the year. It reflects some adverse phasing effect in a still challenging macroeconomic environment. This result stems from mixed regional trends mainly driven by, on one hand, strong sales growth in the U.S. cognac division for a second consecutive quarter, supported clearly by low comps, but also improved sequential depressions. They are definitively improving, depletion, but less than expected, and they are still negative. On the other end, depressed cognac sales in China affected by an increasingly difficult market and unfavorable calendar effects due to the shift of the Mid-Autumn Festival and some residual disruption in travel retail China. This effect weighed in for 0.7 points in Q2 or in H1, 1.4 points at group level. Specifically, the Q2 sales decline breaks down as follows. Volume decrease of minus 4.7% and minus 6.2 in price mix effects, largely driven by the underperformance of high-end brands, cognac, and some price adjustment. Now, looking into the overall sales performance by region, America recorded a plus 12.8% sales growth in H1, including a slight growth in Q2, mostly driven by a solid, robust performance in Konya. In parallel, the Lacrosse and Spirits division turned negative, affected by adverse phasing in Q2, but following a very strong Q1, and despite a resilient depletion environment. APAC is a Pacific sales decrease by 14.8%, with Q2 strongly impacted by China, which is facing tighter market condition and an unfavorable Mid-Autumn Festival calendar effect.

At the same time, the rest Asia generated a mid-teens growth over the quarter.

EMEA, big EMEA region, declined by 9.2, posting in Q2 a similar performance to Q1 in an environment, global markets, still affected by subdued consumer demand. This was sell-in. Now let's look at H1 value depletion estimation, a group level, so the best approach of what is the final sell-out. In the U.S., value depletion declined by mid-to-high single-digit year-on-year, including a decline of mid-single-digit in Q2. So, better, improving, compared to what we recorded in Q1, but still negative. Compared to pre-COVID, six years ago, H1 value depletion are down mid-to-high single-digit, but stripping out the

the SOP range, they are at plus 40.

In China, value depletion down mid-teens year on year in H1 and up by high teens versus H1 19-20. Beyond unfavorable calendar effects in China, this performance is clearly disappointing for us and reflects tougher more complicated market condition. In EMEA, value depletion decreased by mid-single digit year-on-year, and they are performing more or less the same level, negative mid-single digit compared to H1 and T20. But what we can say overall in terms of sell-in, sell-out equation at group level? We can say that H1 value depletion fell by a single digit year-on-year, more or less minus 8, underperforming, clearly, facially, selling trends that were at minus 4.2. Why? Because, essentially, the U.S. restocking from a very low base without increasing level of stock waived positively on selling, even if depletion dynamics were still improving but still negative. To conclude on this very first slide, considering all that, we have decided to lower our full-year organic guidance. And I will come back to the main drivers at the end of presentation. All in all, we now expect the organic full-year sales to be between stable and up low single digits. while we expect organic full-year COP to decline low double-digit to mid-teens. The latter one, clearly, includes the estimated impact from tariffs in the U.S. and price undertaking in China. Page number from 3 to 5. I would like to come back very briefly on the main marketing initiatives of the quarter.

I start with U13, which is a standard.

Brand Universe Beyond Tasting, with the launch of its very first Art de la Table collections. The initiative is fully aligned with our long-term strategy to reinforce the Maison position at the very top of luxury to enrich and complete the consumer journey and to create new opportunities for differentiation across our three standing stores, boutiques, and key markets. To bring this project to life, Louis XIII partnered with chef Alain Passart, a trim Michelin star chef at L'Arpège in Paris. This collection was created in partnership with the French porcelain house JL Coquet. Each collection consists of six pieces to start with, designed and crafted by over 40 artisans. They translate to the Maison founding pillars. terroir, and time. From a commercial standpoint, this launch also plays a pivotal role in animating our boutiques, enhancing visibility, and driving traffic. Overall, our relatively reinforced brand cultural equity expands its experiential ecosystem and underlines our ability to innovate and

in the codes of ultimate luxury. Page number four.

I'd like to highlight our last innovation and belongs to the brand Cointreau. He's entering Cointreau in a new territory this year with the launch of his very first ready-to-serve spritz in the United States. Why ready-to-serve rather than ready-to-drink? Because ready-to-drinks represent close to 12% of the alcohol market, ready-to-serve remains a fast-growing niche. Today, we're more than half a billion dollars in the U.S., and actually outpacing ready-to-drinks subcategory in terms of growth and potential. Ready-to-serve cocktails are strongly associated with hosting occasions, when consumer wants both convenience and the ability to impress. We see clear spikes in sales around the holidays, confirming that ready-to-serve has become a trusted solution for entertaining. Looking ahead, this will continue to grow through premiumization, flavorful proposition, and ease of consumption. Our objective with this launch is to extend Quantro footprint into new daytime occasions, to recruit a younger consumer who are seeking convenience, to modernize even more the image of the brand, and to gain additional shelf visibility in a highly competitive and quieted environment. The product itself has been carefully designed as a ready-to-share 750ml bottle at 10% 0.5% ABV. It comes with three variants, orange and blood orange, lemon and lime, and grapefruit and tangerine. Each recipe is crafted with Quintroc, Ciheli, French white wine, Cytos juices, and natural flavors.

But without any artificial flavors or colorants.

Consumer testing results are excellent. We launched End of September, two flavors across nine key U.S. markets with a retail price of $19.99. Distribution is already confirmed in more than 1,000 points of sales in terms of numeric distribution through major Lycor chains, and Celine is ongoing to support a national progressive iterative rollout, including the third flavor in March 2026. Lastly, for the marketing and colorful experience from the business and brands, on page number five, a few comments on a minor point, which is Mid-Autumn Festival in China, 25% in terms of weight of our sales in China, so it's a very important one. It was clearly joking. During the Mid-Autumn Festival, our priority was to sustain demand and engagement in what is a softer consumption environment, even if first result showed that we continue to gain market share. I'll be back on that point even more in Q&A session. We therefore focused our effort on a few high-impact, cost-efficient activations, designed to keep our brand visible and relevant during this key consumption moment. Starting clearly with the Remy Martin Club, we celebrated the brand's 40th anniversary with a strong, integrated campaign running from August to October. We leveraged our brand ambassador, Lixian, across digital, social, live stream channels, building strong reach and engagement at the limited cost. The limited edition design and creative gift with purchase mechanics have stimulated the sales across key markets, so mainland, but not only, also Hong Kong and Macau. Campaign generated a lot of press clippings and a high immediate return, GMV from live stream session, along confirming demand a good consumer traction despite the muted and depressed environment. At the same time, Remy Martin XO gained exceptional visibility in Mid-Autumn Festival in China with the launch of the Anish Kapoor Limited Edition, a creative collaboration reinforcing the brand's prestige and desirability. Altogether, this initiative allowed us to maintain strong brand visibility support our partners during the peak season, and reinforce confidence among distributors. They also demonstrate to stay disciplined and impactful in our marketing investments, keeping our brand aspirational while driving the best we can sell-out efficiency during a very and more challenging festival season. Turning now to slide number six, so turning now to numbers, H1 says amounted to 489.6 million euros, representing year-on-year decrease of 44.1 million or minus 8.3% on a reported basis.

This performance was shaped by the following first factor. Goal.

an organic decline of 22.3 million euro, which is minus 4.2. This performance is split between plus 2.4 of positive volume effect and minus 6.6 of price mix. Price mix negative impact results from a slightly negative pricing effect and low to mid single digit negative mix effect. Why? This is linked to the underperformance of high end products inside any given brands, and clearly by the cognac division performance compared to the weighted average. Second, a negative currency translation impact of 21.7% or minus 4.1% loss, mainly driven by deterioration of the U.S.

dollar, which accounted for minus 11.3 million. which accounted for 7.9 million euros.

Let's now turn to slide number seven, dig and delve into organic trends by region. Let's start with the Americas, in which organic sales increased by 12.8% in H1, i.e. down more or less 15% on a six-year basis. This year-on-year performance includes a meeting growth in volume, and a low single-digit negative price mix impact, reflecting an unfavorable mix, first of all, and some adjustments on the SOP. In the U.S., sales grew by a mid-single-digit quarter, Q2, driven by a strong performance in cognac linked to a low base of comparison and a continued sequential improvement in value depreciation. not as much as expected, but improving nonetheless. In this context, inventory level in the U.S. remained close more or less to four months at the end of Q2. Canada sales were down mid to high single digits in the quarter, impacted by phasing effect between Q1 and Q2. Why? Because overall, sales were up high single in H1. And Latam, Latin America, Sales were also affected by phasing effect between Q1 and Q2, down strong double-digit in Q2, but up strong double-digit in H1. So Canada and LATAM, a bit of phasing between Q1 and Q2. End of September, America's big region accounted for 39% of group sales, so increasing 5 points compared to the previous year. Clearly, plus 12.8 on top line compared on average, performance minus 4.2. Turning to APAC, Asia-Pacific, organic sales declined by 14.8% in H1, but clearly increased by more than 20% on a six-year basis. So, on the short term, China is performing, and APAC is performing, negatively compared to the Americas, but if you compare the two biggest regions to six years ago, the dynamics are reversed. Analyzing the volume-value equation of APAC, the performance was impacted by high single-digit volume decline, while the value part was negative and more than mid-single-digit, driven by the underperformance of the high-end brands and more promotional activity. In China, sales were down approximately minus 25% in Q2, impacted by tighter market conditions, including stricter discipline and austerity measures, which should lead to a global overall as in markets soft mid-autumn festival. This performance also reflected an unfavorable calendar effect and some residual disruption to retail, So if you compare this technical effect to a pack level only, not a group level, we have 1.5 points negative impact in Q2 and 3 points in H1. This technical effect will normalize from Q3 onwards. By China, direct e-commerce was the only growing channel in China, with sales up more than 10% in this quarter. bringing the overall e-commerce ecosystem penetration rate at the end of the H1 at more or less 25%. This was selling. In parallel, global value depletion in China were down mid-teens year-on-year and up high-teens versus 1920. But once again, during Q&A, we'll talk about the calendar effect and what is a more normalized performance.

Given the position and the line with selling trends in H1, inventory levels in China remained healthy, more or less at the same level before at the end of September.

Compounders are saying the same things in terms of stock coverage. As it were, in the region, the rest of Asia showed a strong improvement compared to Q1, posting a mid-teen sales growth in Q2. led by Cognac and to a lesser extent by the Lacrosse Spirit Division, with two gross regional engines of this quarter, Australia and Japan. End of September, APAC accounted for 39%, so the same weight of the Americas, but in this case it's down 5 points compared to the prior year. Last but not least, EMEA, in which organic sales were down 9.2 in the H1, and more or less we are down minus 10 compared to 6 years ago. primarily reflecting a negative value effect. Inside that, we need to analyze by subcluster, subregion within Europe. Let's start with what we call the third-party distributors region, 3PD, recorded a mid-to-high single-digit decline in the quarter, impacted by Germany and Greece. In parallel, Czech and Poland, Czech and Poland, showed good momentum in the quarter.

Overall, talking about

Since Metaxa was strongly up, and Cointreau gained market share in many markets, but the category is declining, partially offsetting the rest of the portfolio. Second subcluster, UK and Nordics, faced a positive at low single digit in the quarter, showing solid sequential improvement versus Q1, led by Cointreau, Mungay, and the Botanist. The performance reflected a significant rebound in Cognac versus Q1, which was almost flat in Q2. Rebound, but still cumulative on the H1 negative 45. Benelux and France. Sales were clearly declining, with strong double digits in the quarter, impacted by competitive promotional pressure in cognac and softer trends in Lagos and spirits. Last but not least, in MI and CAS, sales were down low double-digit in Q2, impacted by Remy VSOP. While the launch of Remy VS in South Africa and Nigeria is giving and bearing some promising fluids. In H1, value depletion, so talking about sell-out, declined mid-single-digit year-on-year, and on sixth basis, excluding Russia, is more or less the same performance.

Overall, inventory levels remain healthy across most areas.

And end of September, the MIA region accounted for 22% of group sales, which is stable compared to the previous year. Let's now turn to slide number eight and the analyzed by division, and we start with the queen division, which is CONIAC. Cognac division posted an organic sales decline of minus 7.6 in H1, driven by a 0.7 increase in volume. So volume of cognac is anywhere positive. And a negative price mix of 8.4. End of September, cognac accounted for 61% of our sales, down 2.5 points compared to the previous year. Starting with the APAC, only cognac. In mainland China, sales declined by around minus 25% per quarter, so it's the same performance if you consider the global portfolio or only cognac in China. IE emitting decline in H1, but up to more than 60% versus H1 19-20. Comps clearly, overall, over this year, were building some blocks that are clearly high. This performance has been affected by tighter market conditions, including a stricter discipline, austerity measures, which clearly do not allow consumer confidence to recover quickly. In addition, the sharp decline includes an unfavorable calendar except from the late month, as well as regular travel and retail disruption, now on a path during the Q3 or normalization.

In this context, an indirect channel remains untapped.

cash pressure, while direct e-commerce was the only growing channel, turning up, increasing its performance more than 10%. Elsewhere in China, Hong Kong and Taiwan reported weak performance in both serine and depletions, impacted by same challenges in China. Macau, even from very low figures, was strongly upped, helped by clearly favorable facing some promotion, but a little more dynamism. Overall, H1 value depletion in China were in line with the ceiling, so down mid-teens. On a six-year basis, this is equivalent to a plus 20% growth. The remaining part of Asia says we're up strong double-digit in quarter and corner, led by Australia and the Philippines. In America, let's start to begin with North America, so the combination of U.S. and Canada. Cognac sales were up by mid-teens in the quarter, supported by a low base of comparison and continued sequential improvement and depletion, mostly in volume. Q2, specifically for the U.S., varied depletions, declined by mid-to-high single digits, of which down low to mid in volume, mostly driven by and remarking the SOP improvement. Given this factor, Konya can vent recovery still close to four months at the end of Q2, and on a 12-month basis, very depressions, so include minus 5 points or negative price mixed effect year-on-year, but on a six-year basis, price mix remains very up at plus 11 points. Latin America, the remaining pieces of America, says we are down for Konya by a strong WGT in Q2, impacted by negative phasing, sales were up by a very strong double digit in H1, driven by the SOP and E13. And then, the third region, inside the coin in terms of weight, EMEA, which sales declined by mid-teens in Q2, affected by very strong and competitive promotional pressure across most major markets and sub-demands. UK and Nordics, inside that, were flat in Q2, The pork, given by Louis XIII, released in 1938 in a category marked by intense promotional activity. Europe's third-party distributor was down by double digits, mainly due to Germany, where the market emerged very soft and highly promotional. And at the end, an eye, sales declined by mid-teens, even if early results are encouraging for Q3, following the launch and the follow-up of VS in South Africa and Nigeria. Last but not least, H1 EMEA value depreciation went down for cognac, double-digit year-on-year, down very strong double-digit versus six years ago. Now, let's talk of the remaining more or less 40% of the sales, because 61% was the cognac, in which we have, for 37%, Lacrosse and Spirits. Slide number nine. Lacrosse and Spirits division reported a plus 4.1 organic sales growth in the H1, driven by a very solid volume increase, plus 5.2, and a slight minor negative price mix effect on minus 1. End of September, Lycos and Spirits accounted for 37% of sales, up 3 points. Let's now review the division performance by sub-region. And let's start with Americas and North Americas, in which sales were down by a mid-single digit in the quarter, affected by adverse phasing after a very, very dynamic Q1. Sales were up a single digit in H1. Both key brands, Cointreau and the Botanist, delivered solid performance over the semester, supported by a resilient... ...depletion.

The success of their latest campaign...

the recent launch of the ready-to-serve Quantro Cytospirits. In parallel, Quantro in the bottom Q2 US value depletion, so best approach allowed, were flat year-on-year. In terms of price mix, it was down only one point compared to last year for the 12-month period on September and increased 18 points on a six-year basis. In Latin America, sales were down by strong double digits in the quarter in a softer consumer environment for Lycosispirit. Second region in terms of weight for Lycosispirit is EMEA, in which sales decreed by mid-single digit in Q2, so declined, affected by all sub-regions except the UK, while H1 value depletion were up slightly year on year, breaking down sales further, UK and others posted a sequential improvement with sales up by mid-single in Q2, led by Cointreau, which is gaining market share, Moongate, which is benefiting also from a lower ABV for version of Eclipse, and Botanist, which continues to secure new distribution listings. And Europe, third-party distribution cluster, which sales decreased by low to mid-single digit in Q2, impacted by Germany, Greece, and Spain. In parallel, Poland, Czechia, and Romania forced strong momentum. Overall, in terms of brands, the growth from Metaxa, Sanemi, and Mungay partially offset the impact of the softer consumer environment. Finally, Benneux and France were down by a strong double digit in Q2, while Emael CIS was down only by a mid-single digit. Third region by weight is AIPAC. in which China says we are up by a low double digit in Q2, driven by Brookladdy and Botanist. In terms of value depletion, H1 value depletion, we are up slightly. The remaining part of Asia was up by a mid-single digit in Q2, driven by Australia and Japan. Strong momentum for Brookladdy, notably the release of the Octomore Series 16 in Japan, and the further market share for Quantor in Australia and New Zealand. This was 37% of our sales, Lycosis spirit division. So if you combine 37% Lycosis spirit and 61%, which is cognac, it doesn't give 100% because we have no group brands, which represent now more or less 1.5% of group sales. Sales were down 0.5 points year-on-year, 1.5 compared to 2, and they recorded a very strong decline in H1 of minus 2%. 35.7%, mostly affected by the negative, sharp negative performance of grants in Benelux and the UK. To conclude, let's now talk to slide number 10, which I think is an interesting one, for a few comments on our lower guidance for the full year 2025-2026. The deterioration of market conditions in China and the weaker-than-expected sales rebound in the U.S., even if it's positive, but it's weaker than expected, have led ourselves to revise our assumption for the year. For China, we had already adopted Keshu's assumption for China, and we are anticipating a slight annual decline. However, market conditions have further tightened following the implementation of the new alcohol consumption restriction for official, while increased Strongly increased promotional activity is also prompting us to show greater flexibility on pricing. Regarding the U.S., we still expect a strong growth for the year, supported by the continued ongoing improvement and depletion.

But this is clearly not enough to maintain the initial forecast for the U.S.,

Consequently, we now expect groups of organic stage growth to range between flat and low single-digit, and before was mid-single-digit. In this context, we now expect groups of organic COP to decline between low double-digit to mid-teens, and before was mid-single-digit decline. Beyond the revised top line, which is clearly the trigger of the margin deterioration, I'll be back on that point on Q&A, because we have to remember the weight of the top line, more or less $1 billion, and the weight of the operating profit of last year, more or less a bit more than $200 million. So we are on a scale of 1 to 5. Behind the revised top line, this new guidance reflects the fact that we intend to support the recovery of the underlying depletion sell-out, which is clearly improving in some key regions like the U.S., continuing our investment in AMP with a sales ratio maintained at the level before pre-COVID. So we are not doing also mad things as well. Keeping a tight control over our overheads cost while maintaining strict operational discipline. But remember that in the last two years, we already made a strong cost cutting. So in the end, we need also some people and operational OPEX to be able to to favorize and contribute to the rebound, or otherwise the rebound will be weaker. In parallel, we have updated tariffs net impact to 25 million on COP, in line with our lower expectation in sales, of which 5 million in China and 20 million in the U.S., net impact. These estimates include the mitigation plan, because the gross effect is clearly higher, which accounts for the 55% more than the half the gross impact. as well, as I already said, an increased AMP support in China and the U.S. to favorize the rebound. In addition to this organic performance, there are also additional negative currency effects, which remain very negative and highly volatile.

While our hedging policy

As to mitigate partial adverse impact, the recent evolution of the dollar and the RMB leads us to expect now on sales between minus 50 and minus 60 million euro in terms of translation, top line, which is unchanged compared to our previous estimation. 40% of this impact should occur in H1 and 60 in H2. And operating profit between minus 25 to minus 30 million euro. Before it was minus 15 to minus 20. Two-thirds should be booked and realized in the H1, and one-third in H2. Exchange rate volatility is likely to persist throughout the year, which is why I will continue to keep you updated in any occasion that we will talk. So, six times a year. Thank you for your attention, and now I am happy and open to answer to your questions.

Thank you, sir. And as a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. If you change your mind and want to withdraw your question, please press star 2. And again, we kindly ask you to limit yourself to two questions only. And please ensure your lines are unmuted locally when you'll be prompted when to ask your question. So again, to join the queue for questions, please enter Press star 1 on your keypad. The first question today comes from a line of Lawrence Wyatt from Barclays. Please go ahead, Lawrence.

Morning, Luca. Thanks very much for the questions. A couple for me, if that's okay. Just firstly, on the guidance, I was wondering if you could give us a bit more detail on what specifically changed between the end of Q1 and now, and whether that was really the disruption in Q2 that caused you to make the change, or is it more about... your expectation for the second half of the year. And similarly, you talked around specifically the U.S. being a bit weaker, China being a bit weaker, travel retail not recovering in the way that you were hoping in the U.S. I was wondering if you could say if any of those were dramatically more than any of the others in causing you to make that change. And I suppose you didn't really mention Europe in terms of your expectations there. versus where they were at Q1 with regard to the guidance change and whether the changes in Europe have caused you to change your guidance as well. And secondly, you sort of flagged it when you were making your comments around the ongoing normalized performance in China and where that currently is. I was wondering if you could tell us where you think the current normalized performance is in the market and whether you're seeing any let-up of the government crackdown on alcohol consumption at all, if that's sort of reducing towards the end of the year, what you're seeing in the travel retail channel, if you're seeing a bit of an improvement in selling, and whether you think the soft mid-autumn festival is going to lead to a soft Chinese New Year when it comes the next year. Thank you very much.

Thank you so much, Lawrence, for your question. They are very broad and wide, so I'll be a bit long. I will try to talk slowly because they are very important answers and questions as well. So the change in the guidance, which is sales and profit warning, because they are combined, has been driven by by the fact that some key compounders to be able to deliver the sell-in were not supported enough, even if improving, compared to our trajectory. In terms of importance, drivers of the sales warning, because I repeat, the operating profit is a consequence, but the main triggering point is the sales performance, which is not going the way we expect it. It is, first of all, China, because Q2 was clearly worse in terms of performance of what we expected until mid to end of July. And I will be back on this point, so I will remain, I don't want to confuse you, so I will remain very factual now. First is China. Second is the U.S. Even if it's growing, you have noticed that it's still growing, Cognac is performing, but depletion even if improving, are still negative. And with the mix, it is slightly negative compared to volumes. So it is inferior, our expectation. The H2 big rebound based on the heels of the mathematical restocking, if you don't have, I repeated many times, a solid and at least marginally positive depletion, is more fragile. So in this moment, in terms of

Dynamics is the top line. We are well aligned. But we need two aligned depletions.

And the reality is, which is improving, but it's not still positive, with the top line to come. So China, second U.S., and third, you're right, I didn't mention because... It is less important in terms of impact compared to China and the U.S. But EMEA is growing the same way, negatively. So, clearly, EMEA, even if it has a lower impact, it is not respecting its budget footprint as well. That is less important in terms of compounders. And, sorry, I don't want to say that for the European people, but it's less strategic in terms of the quality of the mix. So I repeat, these are the mechanics of the warning in terms of sales, which is the first triggering point. Second point, it is the mechanics of the P&L, because I read some first notes by some analysts today, not you specifically, but some. So please remember, relation 5 to 1. Now we are company, which is $1 billion, more or less top line, 200 and something million in operating profits last year, published rates, which is the organic base of this year. Five to one. When you decline top line of, if you consider zero is 50 million from five to zero, if you consider two is 30 million, and you consider our gross margin expected, the decline should have witnessed and bottom line is higher than what we are highlighting. It means that compared to some comments like Edward, Jeffries, for instance, there is not the leverage, quite the opposite, because the mechanical one should have been bigger than a switch from minus five to organically, because then we would talk about Forex, which is something else. There is some leverage, even if we are maintaining our key investment. So in terms of mechanics, You do the exercise. You have 30 to 50 million. You apply our gross margin. And you see that at the end, we are declining to low double to mid-teens. If you consider you stretch at the maximum, which is mid-teens, it is 10 points compared to minus 5. It's 22 million. So mathematically, you have a leverage of something which is between 10 and 50 million. So let's talk very analytically so you can do your model. Clearly, You are very aware of the fact we declined the impact of tariffs. Tariffs are giving everything equals $5 million because it was $30 million. So there's some marginal additional leverage. So after the math, which was important, let's relook at the main engine of the warning. Sales, I repeat, China, U.S., and to a lesser extent, EMEA. Gross margin, because even if the $5 million, are playing positively compared to the previous guidance. In terms of mechanics, compared to the previous year, China is more promotional. We want to continue to influence our improvement and depletion everywhere in the world, also in the U.S. Even if we are not at the right spot we want to be, we cannot give up looking only to the bottom line, because the bottom line is influenced by the top line. As I said, the top line is the first reason why we are reducing that. So we don't want to unfuel too much. And on top, don't forget that China, in terms of cost of operation, is more costly than previously, because price undertaking has been a relief compared to the anti-dumping, but it's clearly more costly. Don't forget that tax duties last year were 5%. This year are 10%, because it was an exception.

So the cost of doing business in China, everything... equal has increased.

AMP ratio, we are focusing to try to maintain it stable compared to the top line in terms of weight, which mechanically means that we need to save some money because otherwise the rigidity of this line, it is bigger than the volatility of the top line. And last point, we continue to apply strong pressure and control over our overhead cost as a percentage of sales, but we don't have any big material, further savings in absolute value, considering the big, big effort we have made in the last two years. You remember 230 million, of which more than 100 million overrides. And part of that, they were temporary. So there's a reintegration, this one off. So all in all, these are the mechanics of the wording. I repeat, it's the sales, and there is some leverage on the structure of the property laws. Now, let's back to your question, which is what is China and what's happening. Please forgive me.

I need to be a bit longer on that as well.

trying to remember all the points in China, and let's start with the negative evidence. So, overall, Mid-Autumn Festival, on a market perspective, is soft. It's soft because the temperature is more cloudy than expected, and the austerity and measure has put... a more complex environment and less confidence for the world's sailors and for overall the ecosystem. So we are operating in a more complicated environment. Value depletion where, as we highlighted in Q2, more or less mid-to-18s, negative, but there is a mechanical effect of delay, more or less three weeks of mid-auto festival. Despite the all negative situation and also impact on Celine, when we measure, that will measure the real performance stripping away this kind of calendar effect, real performance are less negative. We are still negative, but not at this extent. If we consider only specifically our Mid-Autumn Festival performance, we are positive. So we are realizing volume depreciation specifically for Moton Festival at mid-to-high single digit, meaning with the increase of promotional activity and the fact we are more skewed to the entry ranges of our portfolio, something between a flat plus for Moton Festival performance in terms of value depreciation. This is clearly not reflected in the selling. Why? Because of the confidence, because of the cash pressure. because this is waving on the reordering patterns. But the fundamentals in the Mauditon Festival, even if I am very humble, are giving in value flat to positive value depletion and in volume positive performance in the Mauditon Festival between... mid to mid-wide single digit, clearly influenced by cloud as the first tools. What's happening? So what's that? Because I repeat myself, and the proof is that direct-to-consumer sub-channel inside direct commerce, which is growing 10%, every time we are able to get out of this cloud environment, the consumer preference and choice seems to be a lot better for us in China compared to some other operators. So, because in the very tough Mid-Autumn Festival context, we are able to deliver growth. That means that retailers are increasing their stock because according to final retail performance, they are able to support it. So, it is not something that Like in the past, we can consider that they anticipate price increase because it's quite the opposite. Pricing power is far less than the previous year and quarters, and they are more in the promotional activities. So the fact that Tier 1 and Tier 2 are able to sell more stock to retailers is an healthy sign of combined to direct e-commerce. Once again, I'm very humble. I repeat, the main trigger of the sales and product warning is China, so I don't want to say that everything is going the right way.

No.

At the same time, this warning is more a combination of evidence, transparency, and us that want to be credible to you, to highlight you in a very complicated situation, our performance, and not give soft hopes for the future. At the same time, everything is not so black as it should seem looking at arid figures that are published. Sorry, I was very, very long, and I hope I was clear enough, but it was important. In other words, China is the negative trigger. Underlying compounders in China, the model should to the consumer as less negative than that.

Very comprehensive. Thanks, Luca. The next question comes from the line of Edward Mundy from Jefferies. Please go ahead, Edward.

Morning, Luca. Thanks for the presentation. So two questions for me. The first is your guidance. seems to imply some sequential improvement in the second half. I know you're seeing underlying improvement within the U.S., and your commentary just now on Mid-Autumn Festival is probably, from a sellout standpoint, probably better than could have been expected. But what gives you confidence that H2 sales will be better than H1 is the first question. And then second of all, I think there's commentary from a profit standpoint that, you know, that you plan to continue on investing ahead of the recovery in both, you know, China and the US. You know, clearly the impact from tariffs on a net basis is worth, I don't know, 11% or 12% to EBIT. So you're reinvesting, you're taking it on the chin in terms of the tariff piece, but you're also cutting costs. Can you talk about that third element? What's allowing you to not see greater operating deleverage, you know, given the impact of the tariffs plus the investment?

Thank you for your question. So our building blocks are clearly more moderate compared to the previous estimation, the H2. So in terms of math, once again, I start with the math part, and then we comment more qualitative. Q3 should be flat plus, so improving, but not a med one. And last quarter, coherent with the flat to low single-digit, will be a double-digit increase on Q4. On this, a very, very, very low comps for last year. What gives this confidence is the continuing improving on depletion, even if they are calling, I'm talking about for all countries out of China, which is more complicated and erratic to analyze. And it is clearly something which is sustainable with an improvement in the second part of the year of depletion in the U.S. and major European countries, but not clearly factoring the budget one. So we reduced as well depletion trends and not only saline trends. We directly and indirectly, we are able to support this kind of journey, with some more additional millions on AMP and specific OPEX, and also sometimes specific operation in terms of market share, in terms of penetration of top line, without changing the gear, the picture of the weight of any given cost line compared to the top line. So top line is declining, but we are able to get still a leverage and not a deleverage. I insist on that because otherwise P&L should be worse. It is not massive. We are talking about a leverage which is at the end within 10 and 20 million.

But for a company like us, which is now, we are smaller.

We are no more at 1.5, we are at 1 billion. So our boats, the sailboats we are, we are not a trans-ceramic boat, it needs to be able to hoist on sails when the wind is there. The point is that the wind, mainly in China, is not yet there. even if our performance is better. So we are confident, being very cautious in terms of adjustment of the top line and depletion estimation forecast for the second part of the year. In terms of rhythm, we'll be essentially on the Q4 because Q3 will be flat plus. AMP ROI, it is measured in a very artisan, crafted way, I can say. So Frank is clearly instructing ourselves to try to inject additional money to be able to have additional sales even if they are not so visible compared to our hopes because the environment is very complicated. So it is a complex job to do because we are talking more in terms of what I get in terms of sales that otherwise would be avoided. The point is that if you unlock this additional money, we are able to be able maybe to land a plus two, and if we are more on the cost-cutting side, plus two becomes the lowest bracket of the fork. And as I said, with the gross margin we still have as a company in terms of business model, top line is the first trigger. Top line, top line, top line. Now that you have one billion company, top line is the most important one. Last point, exit rate. Inside all that, current trading in October. What's happening? To give you some color. In term of sales, without giving specific figures, because I can't, we are positive. And so mainly more important in term of value depletion, U.S. depletion, are improving, but still negative. EMEA and the rest of Asia, out of China, are slightly up in terms of value, not volume. Volume is better. In China, they are very strongly positive, clearly, very strong, because there is a boost of the positive calendar effect. So if you normalize mid-autumn festival on a comparable calendar compared to last year, I repeat, Apart from the yo-yo effect from the calendar, we are more or less in value depletion, flat plus, flat to low single-digit increase in China, in Mid-Autumn Festival, and more positive in volume because we are between mid-to-high single-digit increase. So the point, start to get confidence. Confidence is the wind. It's the wind for the sales. We need to be able to hoist that. If there is nobody, we cut all the OPEX, then we cannot hoist that.

Luca, just on your commentary on Mid-Autumn Festival, obviously volume is ahead of value, but does that surprise you that it's as resilient as that, given all the pressures on China from a macro and also sort of a regulatory standpoint?

For us, you can say it's resilient. There is a negative impact, let me say, five to eight points, which is for us. It is something negative, very negative compared to our previous habits. And the environment in terms of competitive footprint is much more around 15, 20 points of value destruction. So I agree with you. It's quite resilient so far at Trista. in China. The promotional activity is increasing, so this is why in the prepared part and remarks I said very clearly that we need to be ready also to be present not only in the pure IMP battle, maybe also in the promotional activity battle when we have the strong market share position to maintain in a country in which One line is very important for us, which is club. So more than Remiko and Tro, club needs to be protected.

And if there is a promotional war, we need to be a little bit more flexible than in the past because volumes are very important for us in China for club.

Thank you. And we'll now take our last question, which comes from a line of Chris Pitcher from Rothschild & Co. Redburn. Chris, please go ahead.

Yes, good morning. A couple of questions. Firstly, on the U.S. price mix, which is now cycling the period of negative momentum, Are you able to give us a bit more color on that negative price mix? How much of that is you being more competitive, as you've referred to? How much of that is perhaps negative mix within the portfolio or channel mix? And when we should think of that price mix potentially stabilizing. And then secondly, again, coming back to the margin point, the largest supplier in the industry is, is reporting operating margins that are materially below the previous lows for the industry. Have you and Frank had a chance to really rethink the fundamental profitability of your cognac business, particularly in light of the comments you've just said around the higher cost to compete in the US and China, and the need also to invest in new markets to generate growth? Should we expect at the first half results a more comprehensive review of of what you think the real longer-term profitability of this business is now, or is it still too soon with the complex market backdrop? Thank you.

Thank you. Very important question. Price mix negative in the U.S. and the cognac, it is negative because you remember price adjustment and BSOP, which is now bearing some fruits in most states and more the more fighted one. Take the example of Illinois, $49.99. So now we are cycling that. It is more installed in 12 months in this line. Some price adjustment made on XO. And also a mixed effect because we have the segment underperformance. On Louis 13 as well, even if we don't dig into many details, but Louis 13 also is quite a yo-yo in terms of performance. in terms of valorization, not because of the price, but because that one year you have some special edition, you have a rare cask, year after you have less rare cask, it's playing a role very, very easily, and the price reposition already. All in all, this deterioration of the price mix in the U.S. has been cyclied. What we have to expect and when we land, we still need to be very cautious in terms of pricing superiority, pricing increase in terms of price per price or price per plus mix because the environment is still very promotional. We are not in some fight category. At the same time, we cannot sing totally another song inside this environment. So we'll be adjusted and we'll be recovering progressively. But I will not bet in the next 12 months to have a price mix turning positive in the U.S., both on selling or in depletion. What does it mean? And you have heard also my subliminal messages that we are, compared to the previous past, without denying the strategy, strategy is not changing, but also listening and watching more attentively to volumes. Absolute value more than profile. which leads ourselves to your second question, marginality, business model group, and vision of the future. I can't answer that, because CREAR is part of what needs to assess with us, with all the teams during this month. It is very complicated to do that when you have a very complicated field like this one, which disturbs our ability to be totally focused on the medium to long term. We are a company to be long term, but at the same time, the short-term issues are quite annoying. Clearly, something that will be addressed with Frank during next month's quarters. So far, I cannot answer for that because it will be only a personal point of view, which is not yet discussed yet. And if there is a reset, it needs to be embedded by Frank and validated by the board of directors. Today, we are not there.

Would it be fair to say that we don't have a clear view on how the competition are acting, and therefore it's very hard in a way to assess what the real cost of competition is, because it's still very uncertain out there, particularly as you mentioned.

In terms of business model as a group or in terms of actions in the U.S.? ?

More globally, how the big players, Hennessy, now Corbazzi, have responded to get their own volumes moving?

We have some hints, we have some ideas, but this part also, when I said it belongs also clearly, not also, Frank and the board of directors, because we have some hints, we have some discussion, we look into what the competition is doing, this is some adjustment necessary to us, but this part of the final footprint, the final output, it is not yet ready. So we are looking at that. We are looking at that dynamism in auto brands. We are looking at their obsession, their change of gears.

Yes, we are looking into that. No new plan that will be

has been decided and approved by the Board of Directors so far.

Okay, thank you very much. And this ends today's Q&A session, so handing back over to you, Luca Marotta, to conclude.

So, thank you so much for your attention today. Today was a sales conference, but at the end it turned out to be much broader because of our warnings, both on sales and on profits. Even if this is the most important part, I insist is the sales element, and the second point is that if you look at arid numbers like they are, the situation is not getting also some positive hints that are there. First of all, improvement in the U.S., even if not the scale of what we expected. Second, on a comparable basis, our performance on the field in China are less negative, sometimes positive in a in a moment when somebody else is doing minus 20-25% on the field. Europe is still soft, but is less strategic in this configuration. All these points, including the guidance and a more strategic point of view that I'm not ready to give today because it's not my job as well, will be delivered during the first half of conference call, end of November, with our CEO, Franck Marie, and Maria Meridius.

Thank you so much, and have a nice day. Thank you for joining today's call. You may disconnect your line.