Davide Campari-Milano N.V. (CPR) Earnings Call Transcript & Summary

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Campari Group's Nine Months 2020 Results Presentation. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Bob Kunze-Concewitz, Group Chief Executive Officer of Campari. Thank you. Please go ahead, sir.

Thank you. Good afternoon, and a warm welcome to all to our Q3 call. As you can see, our overall performance in Q3 improved markedly, boosted by the impact both of staycation as well as a continued good trading in the off-premise. Moving on to Page #4. I'll cover the highlights. Overall, I would like to underline the fact that our underlying brand health is confirmed in all of our core markets and we've had a temporary on-premise recovery in a continued challenging environment. Net sales on a 9-month basis showed a marked improvement, down only 2.8%, driven by a very positive Q3, up by 12.9%. Whilst the ongoing effect of the COVID-19 pandemic is still active and challenging, many markets of restrictive measures, we've continued to benefit from a recovery in Q3, driven by the increased consumption in consumers' home countries where they spent their holidays rather than traveling abroad. So the -- so to say staycation effect which affected, in particular, our activities and importantly, their peak summer season. The on-premise skewed Italian market was up a very strong 35.4%, boosted also by the favorable weather conditions. There was continued sustained consumption in off-premise skewed Northern European markets, Australia and Canada. A flat performance in the U.S. was achieved after a quite positive Q3, up 8.9%, driven by Espolòn and the Jamaican rums, thanks to strong category momentum whilst destocking is continuing at the wholesaler level. Looking at it by geography. We have an overall decline on 9 months in SEMEA, driven -- despite the very positive Q3 result, clearly driven by the temporary on-premise recovery in Italy alongside positive shipment phasing in France after the new route-to-market setup. And obviously, what impacted negatively the area was mostly weakness in Spain, Africa and global travel retail. We have continued positive trends in core off-premise markets, particularly our third largest market, Germany, the U.K., Russia, Canada and Australia. The U.S. was flat overall as destocking continues, while shipments in Espolòn and the Jamaican rums grew. The on-premise skewed and tourism-reliant markets within Latin America as well as the Caribbean declined. Looking at it by brand. In the 9 months, Global Priorities declined by 2.6% despite both Aperol as well as the Jamaican rums registering growth. Our Regional Priorities were down 1.3% although Espolòn registered very, very strong growth, and our Local Priorities were down or basically flattish, down 0.9%. In Q3, growth was mainly driven by recovery across the high-margin and on-premise skewed aperitifs portfolio. So Campari, Aperol, Crodino and Campari Soda led the advance and as well as the acceleration of Espolòn in the U.S. market. On a reported basis, net sales were down 1.6%, reflecting the positive perimeter effect of plus 2.7%, which has been compensated by a negative foreign FX effect of minus 1.5%. EBIT adjusted on an organic basis declined by 15.1% on 9 months, which represents a 280 basis points margin dilution. And this due to the negative sales mix as well as the lower absorption of fixed costs in connection to COVID-19, which was also partly mitigated by an improved performance in Q3, up that quarter by 11.2% with a 30 basis point dilution driven by the A&P step-up. On a reported basis, adjusted EBIT was down 13.7% with a positive foreign effect of EUR 9.3 million or, in other words, 3.2% and a negative perimeter effect of EUR 5.4 million, minus 1.9%. Pretax profit on an adjusted basis reached EUR 220 million, down 15.1%. Group pretax profit on a reported basis is up -- reached EUR 190.2 million, down 22.4%. Net financial debt stood at the end of the period at EUR 1.068 billion, which is up EUR 290.8 million versus December 2019, and it's mainly due to acquisitions such as that of Rothschild France Distribution Champagne Lallier, the investment in Tannico, the tax payment related to the disposal of Villa Les Cèdres as well as the dividend payment and the share buyback. All of those put together amounted to EUR 461.6 million, or up by only EUR 6.7 million versus the 30th of June 2020, which means that the positive free cash flow generated was quite good in the quarter. Net debt-to-EBITDA on an adjusted ratio basis reached 2.4x at the end of the period. Moving on to Chart #7, because we will be discussing what's on #6 in the following charts in more detail, #7. What we'd like to underline is the very strong brand momentum in the U.S. across our portfolio as well as across our aperitifs portfolio in Europe. On the top left, you see how from the beginning of the lockdown to the end of the period, how we've outperformed the U.S. market on a Nielsen basis. On the left axis, you have the volume changes. Actually, on a value basis, we've done even better than that. And on the right-hand side, you see the outperformance versus the market. To the right, you see the performance by our key brands in the U.S. market. On the bottom half, you see the outperformance of both Aperol and Campari across key European markets versus the category. But given actually that the 2 brands make up quite a bit of the category in terms of share, clearly, the outperformance versus the benchmark overall market is much stronger. Moving on to Slide #10 and kicking off with the Americas. The Americas, overall down only 3.6% over 9 months, with the U.S. flattish. The overall flattish performance in the U.S. was affected clearly by the ongoing destocking at the wholesaler level. Depletions on a cumulative basis, are up by 11.3%. That's quite a contrast. The positive shipment performance in Q3, which was up by 8.9%, was largely driven by the strong performance of Espolòn and the Jamaican rums, as we mentioned earlier, coupled also with a favorable comp base. Last year, the U.S. was down 2.8% in Q3. The very strong performances of Espolòn, particularly as well as the Jamaican rums, helped offset the shipment declines in SKYY and Wild Turkey, which continued to be affected by the destocking as well as Grand Marnier and Aperol, which suffered from their strong exposure to the on-premise channel. Depletions continued to grow above shipments, 13% up, double -- strong double digit, 13.4% in Q3. And the brand momentum across the portfolio and the off-premise continues to be quite strong, with sell-out on average at plus 30.8% overall and a strong double-digit growth in our core brands since lockdown. So we're consistently outperforming the local market by 10.4 percentage points as shown by the earlier chart. Jamaica was down by 7.6%. This overall decline is due to on-premise restrictions as well as the highly reduced touristic flow, amplified also by quite a tough comp base. Last year, Jamaica was up 17.3% over the 9 months period. The good news is that Wray & Nephew Overproof, which is quite a high marginality brand, is continuing to register robust growth. Canada continuing to grow double digit, up 11.1%, very resilient growth continued in the largely off-premise market. Key drivers are Forty Creek, Grand Marnier and the Jamaican rum portfolio, whilst we have also nice growth on Campari, SKYY and Aperol in Q3. Brazil is down by 11.4%. This is an on-premise skewed market, which remains challenged with a negative performance across the portfolio, particularly in Campari, Aperol and SKYY while the local Brazilian brands registered some weakness in Q3. The rest of the region, so South America, including Mexico as well, was down 23.5%. Mexico declined by 34.3%. Q3 was better. We were only down 6.8%, thanks to the positive momentum in SKYY RTD as well as Aperol. Argentina grew by 4.6%. This is quite positive, given that we're tracking the volumes here as we do hyperinflation accounting. Moving on to our second largest region, Southern Europe, Middle East and Africa. Overall, down by 14.2% on an organic basis, almost compensated by the perimeter, which was up by 10.3%. Italy, down 11.6%. So clearly, the strong decline we saw in the first half of the year was mitigated by the very positive Q3, where we were up by 35.4%. It's an on-premise focused market. As you know, 70% of the market's net sales are on the on-premise. And as on-premise progressively reopen during the key summer season, we clearly benefited from it. The entire portfolio registered growth in the third quarter, most importantly our high-margin aperitifs, both the big-bottled Aperol and Campari as well as the single-serve aperitifs, Campari Soda and Crodino. And the latter were also helped by a seasonal rebound. This outperformance was driven by the short-term reaction to the lifting of restrictive measures as well as the so-called staycation effect, which really drove domestic consumption, and this helped offset the lack of international tourism. The evolution, unfortunately, towards the end of Q3 in the on-premise is characterized by renewed signs of uncertainty due to the resurgence of the pandemic. And as you know, the government also introduced new measures last Sunday, which will negatively impact the on-premise. The rest of the region was down 21.6%. France grew double digit as we benefited from the positive shipment phasing after having destocked in the beginning of the year, ahead of the route-to-market setup. The key driver there is Aperol followed by Riccadonna and Campari, and our sell-out data is very positive in that market. Unfortunately, Spain declined by 45.4%. It's a heavily on-premise skewed market, and it is severely impacted both by the pandemic, the subsequent restrictions as well as the significant reduction in tourism, which occurred over the quarter. Within Africa, Nigeria grew by low single digits, while South Africa's decline was amplified by the route-to-market change. And last but not least, and this is not unexpected, Global Travel Retail was down almost 65%, and it remains clearly a very highly challenged channel. Moving on to quite a star, North, Central and Eastern Europe, up 11.3% organic growth. Germany, our third largest market, up 11.6%. Very solid growth overall, and this is a predominantly off-premise market with quite an acceleration in Q3, where we grew by 25.5%. We were expecting the staycation, so we tailored our plans accordingly, and we reap the rewards. The staycation boosted our core aperitif, Aperol up 36.8%; Campari, 28.4%; and although it's coming from a low basis, Crodino has also grown very nicely at 40.8%, and we expect good things on that brand in future years. We've had positive overall growth in Bulldog, The GlenGrant as well as Ouzo 12, whose sales are highly concentrated in that market. The U.K. continues to grow double digit, up 22.8%, a very resilient market which grew mid-single digits in Q3. Bear in mind that the comp base was very, very tough. We grew by almost 53% in 2019. And it's clearly, the growth is being led by Aperol, Wray & Nephew White Overproof, Magnum Tonic and Campari. Russia, also strong double-digit growth, almost 20%, 19.8%. Continued very positive performance, with a nice acceleration in Q3. Again, we maximize the season, growing by 20.6%. This is a predominantly off-premise market. And Aperol, Cinzano vermouth, Mondoro and Campari led the way. The rest of the region grew mid-single digit, up 4.5%; with the exception of Switzerland, up double digit, 12.8%. Closing our regions on Page #13. Asia Pac, 5.5% organic growth, with Australia growing by 21%, so quite strong, compensating for the decline in the rest of the regions. In Australia, very positive growth in a predominantly off-premise market. Again, a very nice acceleration in Q3. But here as opposed to the aperitifs, it was mostly the bourbon portfolio and the ready-to-drinks leading the way. And we've also seen some nice growth behind the GlenGrant, Campari to now Vermouth, Frangelico and Espolòn. With regard to the rest of the area, China declined after a negative shipment phasing in Q3, but we have very nice growth in X-Rated Fusion Liqueur and also very positive results so far on the micro bottles on Aperol. New Zealand also declined, although trends improved there. And Japan, in line with expectation, declined double digit in connection with the route-to-market change. Importantly though, we're starting to turn the corner in Japan as a good set of data is starting to come through. Moving on to Page #15, the analysis by brand, starting with the Global Priority brands of our largest brand, Aperol. On a 9-month basis, growing by 2.6%, very strong, plus 26.2% in Q3, nice acceleration in the peak Q3 period. Clearly, Italy contributed quite a bit since it represents 35% of the brand sales. And as I mentioned earlier, we benefited strongly from the staycation effect, not only in that market, but also in the core German market. Elsewhere, the brand registered quite a resilient performance with strong off-premise and online sales in other core markets, particularly France, Switzerland as well as high potential and seeding markets, in particular, Russia, Canada and the U.K. We've had a temporary shipment decline in the U.S. due to destocking given the on-premise skew of the brand, while both depletions which were up by 7.5% and sellout trends, which were up by 40%, remain very positive in the off-premise. Campari, flattish on 9 months, up by 19% in Q3. Again, a very positive Q3 in Italy, up double digit, benefiting from the same factors as Aperol. Resilient growth in other key markets such as Germany, Nigeria, the U.S. and France, which then was offset by a decline in important markets such as Jamaica, Brazil and Global Travel Retail. On a shipment basis, Grand Marnier was down by 10.4% on 9 months; 11.9% in Q3. Very positive performance in Canada, but this was more than offset by the destocking, which is continuing in the U.S. as well as the poor performance in the Global Travel Retail environment. Importantly though, if we look at its core market, the U.S., both sellout and depletions are quite positive. Sellout in Nielsen in the off-premise is growing double digit, around 30% week after week; and depletions are up mid-single digits on a year-to-date basis. SKYY, also on a shipment basis, down 15.3% on 9 months; 12.9% on the quarter. Continued overall decline in the core U.S. market, or were down 6.9%. This is clearly being driven by the destocking, which we expect to continue into Q4 on some selected SKUs. But if we look at sellout, the brand is doing much better, both depletions as well as our sellout trends in the mid-single digits; and particularly, the core is doing well. Internationally, we were impacted by the shipment phasing in China by real in-market performance in Canada and Italy. Moving on to the bourbon. Overall, down 4.3%, up 2.5% on the quarter. Positive growth overall for the Wild Turkey bourbon in Q3, clearly driven by the core markets, the U.S. and Australia. The brand is continuing to catch up to a more positive depletion and sellout trends, which are actually double digit in the core U.S. market. This growth was partly mitigated by the double digit in core Japan and this, again, is due to destocking, but in this case, in connection with the route-to-market change. Positively though, the high end of our bourbon portfolio is doing very nicely and accelerating. Q3, we've seen Russel's Reserve and Wild Turkey Longbranch growing by 9.4%, with a nice acceleration in that quarter. American Honey declined overall but registered growth in the Q3 period, up 17%. We actually had some out-of-stock issues, which impacted Australia in Q2, so we're cycling these and returning to a healthier pattern. Moving on to the rums to close our Global Priority brands, up 6.2% on 9 months, 8.5% on Q3. This growth was mostly driven by Wray & Nephew White Overproof, which grew almost by 25%; continued positive trend in Jamaica as it is consumed mostly by locals; and very nice pickup in international markets in the U.S. and the U.K., which are large markets as well as in Canada where it's starting off a small base. Appleton Estate registered an overall negative performance or, let's say, basically flattish despite the acceleration in Q3, and this was largely driven by Canada, the U.S. and New Zealand, which are helping compensate South American markets as the relaunched brand-new packaging and a new brand visual identity is proving to be quite successful in the Northern market. Moving on to our Regional Priorities. Espolòn, growing from strength to strength, up almost 30% on 9 months; more than doubling, plus 107% in Q3. Clearly an outperformance driven by the core U.S. market, where on a shipment basis, we were up 34.3%; on a 9-month basis, almost 132% in Q3. We have very strong category momentum, but within the category, the brand is also outperforming very, very strongly, as highlighted by very solid depletion and sellout trends. Importantly, the brand is also becoming meaningful in markets such as Canada and Australia, which are growing healthily. Unfortunately, Bulldog is down double digit, 20.2%. And it's continuing to be impacted by Global Travel Retail and core Spain, which are really impacted by the COVID-19 pandemic. If we move on to the whiskey, The GlenGrant also impacted by Global Travel Retail, down double digits, 27%. Here, it's not only Global Travel Retail, but also the route to change in South Africa which is impacting it. Forty Creek, on the other hand, is in positive territory, up 7.5% on a 9-month basis, slightly down on a Q3 basis. Nice double-digit performance in Canada, but the U.S. remains weak. Moving on to the Italian bitters and the liqueurs. Down double digit, although improving in Q3. This overall negative performance is clearly impacted by the on-premise skew of these bitters and liqueurs and largely due to declines in the core Italy and the U.S. over the 9 months period. Q3 improved, particularly for Averna, which responded very positively to the new packaging as well as the new campaign. So we expect to improve these trends in the quarters to come. Sparkling wine and vermouth, the Cinzano brand down 8.1% year-to-date, but a nice catch-up in Q3, up 10.5%. And this is mostly due to the vermouth, which had a very solid double-digit growth in Q3, up 18.6%, thanks to the recovery in its 2 core markets, Russia and Argentina. Sparkling wines were down 10.5%. Again, improving trend in Q3 at 4.8%, and this thanks to Eastern European markets as well as the recovery in Germany. Last but not least, our Local Priorities. You see there was a very strong recovery in core Italy for Campari Soda and Crodino in Q3. Soda was up 46.3%; Crodino, 24.2%, so significantly reducing the decline which we saw in the first 6 months of the year. Moving on, the Wild Turkey RTDs in Australia, growing very strongly and also accelerating in Q3. Again, this is led by our overall outperformance in the Australian market. The Brazilian local brands are up on a 9 months basis but down almost 10% in Q3 as that market continues to be impacted both by the pandemic as well as the very, let's say, weak economic environment. Ouzo 12, growing double digit, mostly sales concentrated in Germany. Again, brand reacting very well. Last but not least, Cabo Wabo, benefiting from category momentum, growing double digit as well, and these sales are most concentrated in the U.S. So this was it from a sales perspective. And now Paolo will take you through the financials.

Thank you, Bob. If you follow me to Page 22, we can see that gross profit on a reported basis was down in 9 months by 5.2% in value to 59.4% on sales, showing 260 basis points dilution. Looking at the existing business, the gross profit organically was down by 7.1% in value, leading to 270 basis point margin dilution in the first 9 months of this year. The dilution was driven by 2 factors, unfavorable sales mix and lower absorption of fixed production cost. Looking at the unfavorable sales mix, we have 3 factors there. First and foremost, the outperformance of the lower-margin Espolòn due to the high agave price. Secondly, shipment declines in higher-margin Grand Marnier, Campari and Aperol brands in the U.S. This is all due to destocking effect. And thirdly, weak results in the aperitif portfolio in Italy, which was strongly received by the on-premise closure in the second quarter of this year. If you look at the third quarter in isolation, on the contract, we have quite, quite solid results and improving trends. Gross profit organically was up 10% in value, showing a more contained dilution at 160 basis points versus 260 basis points on 270 basis points on a year-to-date basis. The reduction of the margin dilution was driven by positive sales mix. But on the other hand, the margins were -- continue to be affected by negative sales mix, mainly driven by combined effect of strong growth in the lower-margin Espolòn and shipment declines in higher-margin Grand Marnier and aperitif business in the U.S., whilst on the contrary, in Italy, we had quite encouraging results in the third quarter in isolation. A&P on a reported basis was down 7.3% in value to 16.8% on sales, showing 100 basis points margin accretion. In existing business, A&P was down in value by 6.9%, driving 80 basis points margin accretion, thanks to cost containment measures, the postponement of certain initiatives in the on-premise channel, particularly in the second quarter of this year. On the contrary, in the third quarter of this year, A&P increased in value by 17.9% organically, leading to 80 basis points margin dilution, driven by accelerated investments behind the high-margin aperitif business which hit its peak season, together with continuous investment in proposed digital brand building and online brand activation as well as the new e-commerce initiatives. The SG&A on a reported basis were up 3.2% in value to 23.2% on net sales, showing 110 basis points dilution. In existing business, we had a quite contained increase of SG&A with a value increase of 0.7%, driving just 80 basis points margin dilution mainly due to the lower absorption of fixed costs and SG&A account for about 85% of the total deal, with cost containment measures mainly related to variable and discretionary costs. Again, during the third quarter, if we look at the third quarter in isolation, SG&A grew at a very contained pace, with an increase in value of 1.8%, significantly behind the top line growth of 12.9% in the third quarter, leading to 200 basis points organic accretion of margins. If you follow me to Page 23. EBIT adjusted on a reported basis was down 13.7% in value, at 19.4% on sales, down from 22.1% from 2019. In existing business, EBIT adjusted organically declined by 15.1% in value leading to 280 basis point margin dilution in the first 9 months of this year, and that was largely due to negative sales mix, lower absorption of restructure costs given the top line decline, coupled with somehow a tough comp base as the first 9 months of last year grew by -- EBIT grew by 9.9% in value. In the third quarter, on a stand-alone basis, EBIT adjusted performance was quite robust. In value, up 11.2% or EUR 12.1 million with a very contained EBITDA dilution in terms of margins by just 30 basis points, and that was due to positive top line results while margin continue to be affected by negative sales mix, acceleration of A&P investment, which grew by 80 basis point in the third quarter. And that effects were partly mitigated by SG&A efficiencies, as we saw before. EBITDA adjusted on a reported basis was down by 9.7% in value to 23.9% on net sales. And in existing business, EBITDA adjusted declined by 11.7% in value, generating 240 basis point margin dilution. Moving on to Page 24. Group, we recorded operating adjustments for an amount of EUR 48.3 million, of which EUR 27.3 million have been registered in the first half of this year primarily due to the recognition of impairment loss of EUR 16.3 million on the Bulldog trademark. That is, as you can see below, totally offset by the write-off of the Bulldog earnout for a corresponding amount. And on top of that, we -- group made some donations to support the sanitary emergency and then following the completion of 3 deals, we registered some M&A transaction fees. In the third quarter, we've recorded further operating adjustment for an amount of EUR 20.9 million due to the restructuring program in Jamaica, where we're exiting the agri business. And that is a one-off cost of EUR 11.2 million topped up by some costs relating to re-domiciliation and some other initiatives, again, M&A transaction fees primarily. Net financial charges came in at EUR 27.4 million, EUR 2 million higher versus the first 9 months of last year. We incurred EUR 2.3 million of negative variances due to exchange rate differences. And although the average indebtedness in the first 9 months is higher versus last year, EUR 948 million versus EUR 888 million of last year, such effect has been compensated by lower average cost of net debt, 3.8% this year versus 4.9 -- 4.1% in the first 9 months of last year, with both period highly impacted by negative carry effect due to the large amount of cash sitting on our current accounts. The decreased cost of net debt is largely attributable to the reduced average gross debt coupon. On the put option and earnout, we have a positive impact of EUR 15.4 million, the bulk of it sits with the write-down of -- the write-off of the earnout in the -- on the Bulldog acquisition. Group pretax profit came in at EUR 190.2 million, down 22.2 -- 22.4%. Group pretax profit adjusted came in at EUR 220 million, down 15.1%. If you move on to Page 25, we have the net financial position. The net financial position came in at EUR 1.068 billion, up EUR 290.8 million from EUR 777 million, primarily driven by the acquisitions, whose cost totaled EUR 126.6 million. The tax payment related to the disposal of Villa Les Cedrès for EUR 60.1 million, the dividend payment for EUR 62.9 million and the share buyback, which at -- in the first 9 months totaled EUR 212 million for an overall amount of EUR 461 million. Overall, the net financial debt was up by EUR 6.7 million versus the back end of June with a very solid recurring free cash flow which has been generated in the third quarter, which was totally broadly offsetting the accelerated buyback program, which accounted for EUR 116 million in the third quarter of this year. With regards to the buyback program, worthwhile noting that the total program accounts for EUR 350 million. As said, we bought shares for EUR 212 million. We're expecting to buy further EUR 82 million in the fourth quarter of this year so that we'll be in a position of having bought back EUR 300 million by December end 2020. And then we will complete the buyback program in the first quarter of 2021 with further EUR 50 million share buyback. Net debt-to-EBITDA ratio adjusted came in at 2.4x as of the end of September, broadly unchanged versus the back end of June. After the 9-month period closing, 6th of October, the group completed the issuing of a new 7-year Eurobond for a consideration of EUR 550 million with a very interesting coupon of 1.25%, which will enable us to extend the overall debt maturity profile as well as to improve the average nominal coupon for bonds and term loan, which will decline from 2.15% to 1.42%. I think this is it on numbers. I would hand back to Bob for an update on marketing initiatives and corporate development as well as conclusion and outlook.

Thank you, Paolo. Just a quick recap on the very intense marketing initiatives before moving on to the outlook. On the Campari brand, we've been able to benefit from the temporary opening. So we are proud sponsors of both the Venice as well as the New York Film Festival and received very, very strong and positive coverage for that. At the same time, in September, we kicked off a slightly different Negroni Week, where we ask consumers to actually donate money to their favorite bars, and that was also very, very well received by the on-premise. And lastly, at the end of the quarter, we launched the new fully digital Campari campaign on a global basis. Aperol is -- has also moved basically all digital with edutainment and digital competitions and digital animations, and that seems to be working quite well as we saw very strong results over the quarter. Again, a very strong digital push on Wild Turkey Longbranch as well as on Espolòn. And these are, again, very strongly growing brands, so we feel good about that. In terms of new initiatives, we've managed finally to roll out a new pack size and much more premium and visual identity on Crodino in international markets, and that has been quite nicely received by the on-premise, and we're starting to see nice numbers behind the brand. Last but not least, we've also had a very positive reaction to the relaunch of the Averna brand behind the Proudly Sicilian new platform. So moving in conclusion. Looking forward, I think it's fair to say that we see persistent uncertainty in the short term, but good confidence for the long-term business momentum. Now with the progressive uplift of the restrictive measures towards the end of the second quarter, our performance in the third quarter largely benefited from the staycation effect. This temporary effect impacted, in particular, our aperitifs business in their peak summer season in core on-premise markets, notably Italy and were also boosted by favorable weather conditions. It must also be said that we really, from a marketing and sales execution standpoint, have done a very, very good job in that period. We've had also strong brand momentum across the portfolio in the off-premise across all of our markets. However, unfortunately, towards the end of the quarter, the evolution of the on-premise has been characterized by some renewed signs of uncertainty due to the inevitable resurgence of the pandemic in many areas of the world. And that has led to a series of different forms of measures across different markets, which clearly will impact the on-premise in the months to come. Looking at the remainder of 2020, we believe that it will be marked by uncertainty due to the evolution of the pandemic, the restrictive measures which are being re-introduced by the governments of many affected markets are expected to potentially generate an adverse effect on consumption in the on-premise channel, the trend of which remains obviously highly unpredictable, particularly during the key holiday season at year-end. For all you know, we might have a staycation effect there, too, but impossible to predict at this stage. Moreover, shipments in the U.S. continue to be affected by the ongoing destocking activities, particularly the SKYY brand and only some SKUs of that brand. So we'll have -- we will see a progressive catching up with the positive sellout trends across the rest of the portfolio. Long term, there's no question that we will continue to undertake all of the necessary nonstructural actions to contain the effects of the pandemic on the business in the short term. But we will remain highly focused on pursuing our long-term strategy because we know that this really pays out. We remain highly confident about our long-term consumption trends and growth opportunities. We will continue to leverage the strength and resilience of our brands, our business model as well as strategy, ensuring that it is strongly positioned and ready to accelerate the growth as soon as consumers can resume their habits in the on-premise. As a very committed and long-term brand builder, we will remain focused and highly engaged in the on-premise opportunity with our distinctive brand portfolio. We're firmly convinced that the out-of-home social experience as well as the conviviality will remain absolutely essential to consumers' lifestyles as demonstrated clearly, very clearly by consumers' consumption behaviors in the third quarter. So this is it on our end, and happy to take your questions.

[Operator Instructions] The first question comes from Simon Hales of Citi.

Just a couple of questions, please. Firstly, Bob, obviously, you're talking it rightly more cautiously about the outlook as we head into Q4. Could you maybe sort of talk a little bit about maybe the exit rate that you saw across some of your businesses from a sales point of view through the end of Q3, that particularly perhaps what you've seen in September maybe in some of your European markets? And if there's anything you can say as to how that trend has perhaps evolved through the early part of October, given those on-premise restrictions that we're seeing increasingly come through. And then secondly, I want to sort of ask you around stock levels in a couple of your markets. From a French standpoint, you called out the benefit of shipment phasing in Q3. Was that all completed in the third quarter? Or should we expect shipments to run ahead of depletions in Q4 in France as well? And then on the U.S. business, you referenced some ongoing destocking particularly around some of the SKYY SKUs into the fourth quarter. When should we expect the shipments just really start matching depletions in totality in the U.S. market? How much more destocking? Or how many more months worth of destocking you think we've got to go?

Yes. Thank you, Simon. Now with regards to the Q3, I mean, the end of September, we said it was more a question of feeling and we started seeing a slowdown in the on-premise, particularly in Italy in October and most towards the end of the month. I mean last week, we started seeing the signs where from being double digit ahead versus the same period a year ago, we're down mid-single digit on a day-by-day basis. So who knows where it's going to go. But it's important to say that whilst the measures taken, the government will undoubtedly have an adverse effect on the on-premise in Italy in Q4. It's worth mentioning that Q4 is very different from Q2. It's very different from a brand focus standpoint. Clearly, it's not high seasonality for our aperitifs business. Also, if we look at the measures taken currently, they're not as totalitarian as in Q2. There are parts of the day where the on-premise remains open. There are certain areas of the country where it remains open. And last and but not least though, we've also learned quite a bit in Q2 in Italy on how to do our brand building in the off-premise. And so we were prepared for things to happen, and we'll do our best possible. So net in net, yes, it will affect us, but most probably not as badly as in Q2.

Yes. With regards, Simon, to the destocking effect, based on our current visibility and analysis, we have estimated that the 9 months impact of destocking will be around EUR 35 million to EUR 40 million. So it's a big number. And we believe in the third quarter in isolation, the destocking accounted for about EUR 5 million. So when looking at the fourth quarter of the year, worthwhile calling out a potential further destocking effect, which will be south of the EUR 5 million. We don't know exactly to be EUR 3 million or within the EUR 5 million, and so that's how we see it. Clearly, the destocking has impacted the imports brands primarily, the heavy cases where distributors have implemented a more effective way of managing inventory levels. And this is clearly driving the most of the margin dilution that we've seen in the 9 months of the year topped up by what we said on Espolòn as well as lower absorption of fixed cost. But then with regards to fourth quarter, the last point that I wanted to call out is the FX. That is moving opposite direction with regards to dollar. And so we will recognize that EBIT level a further EUR 5 million negative EBIT impact on the FX. So destocking and FX are the 2 major movers in the Q4 of this year.

Yes. It is also worth underlining that without the destocking in the U.S., our net sales on a 9-month basis would have been actually flat versus a year ago, which is quite a good performance within this environment.

That's great. Can I just clarify, Paolo, your comments and your -- the numbers you gave on the destocking impact, is that the impact on the U.S. business destocking alone? Or is that total across group destocking?

Yes. It's total, but it's primarily coming from the U.S.

Got it. And then just in terms of my question on France for the fourth quarter. Is there any further lingering benefit on shipment phasing? Or is that done in Q3?

So it's -- most is done, we believe. We do not see major impact in Q4.

We're pretty much operating on a full model across all of our markets. Clearly, the one exception this year is the U.S. because of the destocking happening at the wholesale level.

Got it. And just one final point of clarification. Sort of Bob, in terms of Italy and seasonality of your business to the on-premise, how do we think about the 70% exposure to the on-premise that you typically see through the year? What is that in Q4? Is it still around 70% or is it a lot lower?

It should be lower. I don't have the exact figure in mind, but clearly, Q4 starts moving more into the brown spirits and sparkling wines.

Next question is from Olivier Nicolai of Goldman Sachs.

Just a couple of questions. Just a follow-up on the shipment depletion question. If you wouldn't mind, you gave us some comments on U.S. and France, which is very useful. But just you have very strong growth, obviously, in Italy and Germany. The strong double-digit growth you've seen in the quarter, is that completely matching the underlying demand? Or is there still a bit of a mismatch here elsewhere between shipments and underlying depletion? And then just on Aperol, you've done -- in previous year, you've done a lot of work to try to deseasonalize the brand, which obviously was heavily skewed towards the summer but you've been pushing it in ski resorts and so on. Now how big is Q4 for the brand? And could you comment perhaps on the initiatives you're taking to stay relevant in the off-trade for the winter month?

Yes. I mean with regards to U.S. and France, I mean, we have very robust both depletions as well as sellout data or double digit across both. In the U.S. and in France, we're outperforming the market. So we feel very strongly and very positively about the business in both markets. In Italy and Germany as well over the quarter, frankly, the -- our shipments mirror the sellout. And our -- we were planning on a strong quarter because we thought there would be a staycation effect, so we really did plan that. Having said that though, our supply chain had really to react to a very, very strong demand coming from consumers. Now on Aperol, yes, we have -- we seasonalized it. Bear in mind that a lot of, let's say, the activations would habitually happen in Q1 in skiing resorts and stuff like that, which obviously will not happen. But with regards to the brand and its opportunities in the off-premise, we're really focusing on visibility in-store, in-store features and activating it very strongly via digital.

The next question is from Laurence Whyatt of Barclays.

Could I just have a follow-up on the U.S. business? And just if you could give us an idea of your normal level of stock in terms of number of data stock in the channel and what it currently is? Secondly, your advertising went up in Q3. And now it seems you've got to advertise in both the on-trade and the off-trade in slightly different quantities than normal. As we have a continued sort of work from home and reduction of use in the entree, do you think the current level of advertising that we saw in Q3 will be more normal as we go into sort of 2021 and perhaps beyond? And then finally, just on M&A. We've seen a lot of activity in the spirits world, especially in premium gins. How do you see your current gin offering? And do you think there's any opportunity for premium gins in that space?

I'll take -- thanks, Laurence. I'll take the last 2 questions, starting with the last one. Premium gin, we think that category has almost turned into wine. I mean the shelves are so full of so many different labels that we really don't see the benefit of making any acquisition in that area. So we're happy with the 3 gins we have, and we will nurture them and grow them. There's no point spending money adding franchises in that category from our point of view. With regards to A&P, I mean, we expect that on a full year basis this year as well as next year to be around, like-by-like level to be in line as a percentage of sales on an organic basis versus last year. So not much of a big change on A&P. It's much more a question of the mix, which is changing. We have moved significantly from off-line to online.

Yes. With regards to the normal level of stocks in the U.S. business, as Bob has just mentioned, we've strongly moved towards a pull model, whereby consumption drives depletion which drive shipments. So you cannot give a number for the whole portfolio because it very much depends on whether brands are import or are locally produced brands. Typically on locally produced brands, you have lower inventory days. On imports, you have higher inventory days given the fact that the lag time to supply the market is longer. So basically, the wholesalers are reviewing their numbers to make sure that they are as effective as possible in managing their inventory levels. On average, we can say that 60 days, a couple of months, is a sensible number which can vary with lower inventory days on locally produced brands and higher inventory days on imports.

Understood. And just on -- 60 days is normal. Where would you say you currently are? Are we at half that level? Or...

Yes. We're about there.

The next question is from Trevor Stirling of Bernstein.

Just one question from me available to be answered. With the phenomenal growth of Espolòn, is there any risk of supply problems?

Yes. Thank you. I mean our supply chain has really been [ dancing on knife ] this year trying to ensure we supply the market. No, we don't think we have any supply issues. But clearly, the strong demand across the category is not helping reduce the price of agave, which remains flat.

The next question is from Edward Mundy of Jefferies.

Three from me. The past has been very successful at capturing the shift to the off-trade during the pandemic. Are you able to share with us what your off-trade split was pre pandemic and where you think it might be today? Second question is, again, similar questions for me but the first is around the off-trading. As restrictions were lifted in the third quarter, is there any evidence that the consumption dynamic in the off-trade stayed firm and then we got the added benefit of the on-trade coming back, i.e. people searching as much at home and then you're getting a bit of an uplift as people go out? And then the final one is around deseasonalization of Aperol. I think some celebrities are out there potentially mixing Aperol with things like apple cider much more with Aperol spritz. I mean do you think there's an opportunity medium term to do more with Aperol from a recipe standpoint similar to what you've done with Campari? Or are you going to keep it to its sort of core [ Prosecco ] and water and the core serve?

Thanks. Thanks for your question. Starting with the last one, I think in most markets, we're serious. We're really still in the building phase of the brand, so we'd like to stick on just one brand call and one signature drink, which is the Aperol spritz. Now consumers and celebrities feel free to up their Aperol spritz, adding different things, good for them. But we're highly, highly focused also in our edutainment initiatives on the perfect serve of the Aperol spritz. Now with what happens to the off-trade and the on-trade when markets reopen. I think clearly, the habits which are being instilled now with consumers in Western countries, getting into the habit of making themselves and offering them their guests as well as cocktails, I think that is here to stay, I think, for the years to come. That's a real positive of the pandemic, and we're even starting to see some of that in Italy. So -- but as the -- on reopens, as seen by Q3, we see a very big growth in that channel. So overall, we see -- we expect that once the pandemic over that the new normal will be overall quite positive with a strong on-premise returning as well as the at-home spirits and spirits cocktails, taking market share from other alcohol categories. With regard to the split on the on, off per market and how it's varied, we haven't really calculated it, but I would expect that in all of our markets, the off-premise will have increased by probably 10% its share of the total or even more in markets like Italy where the on-premise was shut in Q2. But these are just guesstimates from my side, and we need to calculate them and come back to you with more precise numbers.

The next question is from Andrea Pistacchi of Bank of America.

Three from me, please. The first one on Aperol in the U.S. Are you doing anything maybe a bit different in the U.S. compared to other markets to maintain the brand's momentum, given the, I mean, the very significant on-trade exposure it has in the U.S. and the slightly earlier maturity in the U.S. compared to other markets? Then a slightly broader question on the competitive environment across your markets, if you've seen any change maybe with some of the smaller players, the craft players being weakened in the current environment? Or is it too early to tell? And then just an update, if you can, please, on Jamaica. Do you have an update on the potential cost savings for the business there?

Andrea, let me take the first 2 questions. On Aperol in the U.S., clearly, in those markets where the on-premise is open, we're trying as much as possible to continue with our normal activation method, whereas in all the rest and in general, where we've strengthened our visibility in the off-premise and as well as all of our digital activation initiatives. So if you look at the Nielsens, we're growing very nicely, around 50%, which in this environment, I think is quite good for the brand and we'll continue to do so. We don't see the need to do anything really different in the U.S. What's working in the rest of the world is working in the U.S. It's just that we need to dose our activations by channel, depending on the situation of the individual state. With regards to the competitive environment, I mean, during the full lockdown, obviously, discounting came down significantly across markets. Now it's picking up a little bit, but nothing really major. Clearly, in the U.S., there is weakness on the part of craft brands.

In Jamaica, the bleeding that we intend to stop on our sugar and agricultural business is currently EUR 12 million per year, per annum. So the restructuring, which will be finalized by the end of this year, will put us in a position of achieving efficiencies for about EUR 8 million year 1, 2021. And thereafter, we'll capture the remainder. The cost of the reorganization for this year, as I've highlighted, is EUR 11 million.

Next question is from Ryan Fintan of JPMorgan.

Fintan Ryan here from JPMorgan. Just 2 questions from me, please. Firstly, just in terms of the margin drivers as we look through into Q4 and into 2021. Firstly, just around SG&A [indiscernible] talked about A&P earlier. But SG&A, as you said, was around 200 basis points year-on-year in Q3. Given the strong momentum in sales methods that's coming during Q3 and I guess the outlook for Q4, would you be expecting a number of like employee bonuses or any sort of overhead or other allocation costs to come through in either Q4 or into '21 that we should be thinking about? And then secondly, just a more broad question. Your RTD portfolio in Q3 did quite well, including Campari Soda, Crodino and Wild Turkey RTDs. What are you thinking about the RTD space more broadly? And in particular, do you consider either going in launching any type of range of -- into the hard seltzer category or even bring the Aperol brand into a more widely available RTD?

Yes. With regards to the margin trends in Q4 and in coming year, in starting from the gross margin, it very much depends on the sales mix and how the high-margin rents will be affected given the current restrictions. With regards to the SG&A trend, we expect SG&A to grow very little in the fourth quarter as they did in third and second quarter of this year. With regards to the A&P, we intend to step up the A&P in the first quarter. Clearly, it will be sensible and we will manage A&P spend also given the business conditions and given our ability to activate the brands. So it will very much depend on the market conditions in Q4. Going forward, we believe trends in -- the trends in gross margin will highly depend on our ability to execute the strategy. Fundamentally, it has been proven by the strong performance in the third quarter of this year if -- in normal conditions where the on-trade is open. And missing the stocking, the ability of the group to deliver gross margin expansion is, in our view, unchanged. And SG&A and A&P, as said, we don't see SG&A and A&P has to significant levers to achieve EBIT margin expansion. There could be opportunities, of course, but the EBIT margin expansion going forward in any normal condition will be primarily driven by gross margin expansion.

Now with regard to your question on RTD, I mean, frankly, being long-term brand builders, we're not great fans of line extensions. We haven't been there in the past. We're not going to be it in the future. Clearly, we try to maximize and do high-quality brand building work on our existing portfolio of RTDs, which is mostly concentrated in Australia and Mexico, which are 2 big RTD markets. We're looking at the opportunity in China, but we'll see how that goes. With regards to Aperol, we've only extended the Aperol ready-to-enjoy to a very few markets. Actually, most of the business is in Italy, which is the most mature market for the brand. And by the way, our Aperol numbers do not include the Aperol ready-to-enjoy numbers, which are significant on their own. But -- so given the overall situation, we'll consider to potentially test and extend in those markets where Aperol is the most mature, but it's not going to be anything massive. We'd rather build things the right way for the long term.

Great. But just back to the first question, in terms of the -- some of the SG&A and overhead costs into next year, is there anything that we should be thinking about now in terms of, say, employee bonuses coming back, rehiring costs, consultancy fees? Or should -- as you said, should we just expect SG&A to sort of broadly increase in line with sales?

Right. I expect that, of course, for this year, bonuses will not be paid in their totality. So that's a fair assumption. So there would be some further savings that we can achieve in Q4. And then in 2021, it will very much depend on the results of the group to deliver on targets. So yes, that's a variable part. As said, our SG&A line contains 85% of costs that are fixed and uncompressible at 15% of the costs that are variable, including commissions, bonuses and on and so forth. So this is the part of the SG&A that is destined to flow according to the top line and the overall results of the group.

The next question comes from Nico von Stackelberg, a private investor.

I just want to ask you a quick one on e-commerce initiatives and your thoughts around the viability of direct-to-consumer. So for example, I'd be happy to buy your new 24 pack of 17.5 centiliter Crodino, a bottle of Aperol, 2 Cinzanos, maybe an orange and a small soda. Have you considered doing that as a sort of package for a consumer? Why can't I buy directly from your site?

Yes. Thanks for the question. Now clearly, we see e-commerce as a great opportunity going forward. We've been working on this for the past year or so. I mean markets like the U.K. are the most advanced. It's about 5% of sales. The rest, the U.S., Germany are more around 2%. But importantly, they're all growing triple digit. And we're managing that via third-party providers who are specialized in that, the likes of Amazon, Drizly, Minibar and so on. The direct-to-consumer model is something which we're trying to evaluate. And clearly, the Tannico acquisition is more for us to learn and then decide what we want to do in that area. It's not our core competence before making a big impact there. We would like to learn about it. Having said that, though, I think there's ample opportunity for you to go shopping on any of those providers and find a range -- our total portfolio.

Absolutely. And 2 quick questions. Do you have a number for recurring free cash flow for the 9 months? And also, can you tell me more about your appetite for M&A in this environment?

Yes. The recurring free cash flow in the first 9 months accounted for EUR 190 million, of which EUR 65 million has been generated in the first half and EUR 125 million in the third quarter on a stand-alone basis. So very robust free cash flow generation in the third quarter of the year.

The appetite for M&A remains. Our wallet is a little bit thicker, as you know. Now we've got to find the chefs.

The next question is from Robert Rampton of UBS.

You commented earlier on October trends for Italy. Any broader comments about how other markets are doing over the last month? My second question is, any chance you can quantify the impact of the Espolòn growth on margin? Or alternatively, can you help us understand the regional gross margin movements this quarter? And then finally, leading on from one of your earlier -- the earlier questions. Can you tell us how the Aperol pipeline is kind of going or evolving? For example, do you think you can continue the momentum in places like Germany, Russia and the U.K. next year when obviously, the bar context will be very different?

Yes. Let me take the last 2 questions. I mean we feel very good about the prospects of the Aperol brand. I mean it's performing very well also in off-premise markets. And bear in mind that the penetration or the consumption per capita outside of Italy is very, very low. And even in Italy, where we are at 30 centiliters per person, it's only 1% of total beer. So the opportunity is there for us to seize, and the brand health is very good. The model is working, so we'll continue doing that.

Yes. With regards to the Espolòn margin, of course, we cannot -- we don't disclose profitability by brand. So I cannot be too specific on this one. Clearly, the -- currently, given the significant increase in the agave price, the gross margin as a percentage of sales on the Espolòn brand is well below the group average, well below group average. And we've pointed to a potential opportunity based on the current brand size of about EUR 30 million of EBIT uplift if the agave price moved from the current level of roughly MXN 29 to MXN 30 per kilo to the original price of MXP 6 per kilo. Now if you ask me, do you believe that the agave price will go back to MXN 6 per kilo? Probably not and probably not in the short run. But that said, there is a big opportunity there to recover the brand profitability and have another cylinder that is higher into the right direction of EBIT margin expansion on top of the competitive portfolio. So the Espolòn brand has achieved a size that now is quite meaningful in the overall context of the overall gross margin trend. And the sooner the agave price declining, the better it is and for -- with regards to our ability to deliver gross margin expansion.

The next question comes from Paola Carboni of Equita SIM.

I had a question, a similar question on the impact of Espolòn, let's say, looking at least to the indication you gave at the beginning of the year in terms of potential impact from rising agave prices, so you said about EUR 8 million on a full year basis. I just wanted you to comment on this now. So is this indication still valid? Or are we going to see a larger impact on a full year basis? And maybe if you can quantify the impact from agave price in Q3 on gross margin. Second point is about your comment that clearly, the seasonality of aperitif is very different in Q4 from Q3 overall, but you were commenting in particular in Italy. And so I was wondering how we should think about your digital brand building when this has to be addressed more to brown spirits, for example, instead of aperitif. Do you think it is going to be as effective as with the aperitifs? Do you see anything different probably in the approach we are going to apply? So I was curious on that. And third point, sorry, when you commented about September, October, you said we went from being double-digit ARPU to down mid-single digit. Just to be sure, you intended for Italy overall or just for the on-premise overall?

I was just commenting on the on-premise in Italy on a daily sales basis, that's to clarify. Now with regards to our brand building, we've really come a long way and have had a very, very steep learning curve globally, but also especially in Italy, how to do marketing in this new environment. So we've been expecting the pandemic to have negative impact on the on-premise so we're prepared for the Q4. We'll see how it goes. And clearly, whatever tools we're using are working. So we'll try to make the most out of it. Having said that, although it's not a high seasonality for the aperitifs, there's still some business to be had. So it's not like we're going to take off our feet from the gas pedal from continuing to build the brands such as Aperol, Campari, Crodino, Campari Soda.

With regards to the impact of the agave inflation, guidance was negative EUR 8 million for the full year. It could be marginally higher, but nothing meaningful and the impact is almost evenly split among the different quarters. The -- clearly, we are implementing a number of actions to mitigate the pressure given the surge of the tequila consumption in the U.S. and worldwide, like entering into long-term agreements with agaveros as well as co-sourcing agreements, which puts us in a more comfortable position when looking at the coming year still. The unanswered question is when the price of agave will start falling. We can't buy -- we wait and see. We do not have an answer at this stage. Probably, beginning of next year, we'll have better visibility on this point.

The next question comes from Isacco Brambilla of Mediobanca.

Just a very brief follow-up on France. You recorded a very strong growth, more than 100% year-over-year in the third quarter. Can you help us understand how much of this outstanding performance may be seen as sustainable also in the coming quarters?

I'll give you an idea on what our uptake is. I mean Aperol is growing double digit, Campari and GlenGrant are somewhere on mid-single digit in the market. The rest is our shipment phasing.

[Operator Instructions] Mr. Kunze-Concewitz, at this time, there are no questions registered, sir.

Thank you all very much for joining us. And if it's homemakers having Negroni or an Aperol spritz, everything will look brighter. Thank you. Bye-bye.

Bye-bye.

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