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 results presentation full year ended 31st December 2021. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Bob Kunze-Concewitz, CEO of the Campari Group. Please go ahead, sir.

Thank you, very much, and good afternoon, and welcome to our call, to all of you. If you follow me to Page #3, I'll kick off with the overall business performance. As you can see, 2021 was strong overall performance with clear double-digit growth rates across all key financial indicators. Net sales crossed the EUR 2 billion mark. They came in at EUR 2,172.7 million representing a 25.6% organic growth rate. EBIT came in -- adjusted EBIT came in at EUR 435.2 million, which represents a growth of 42.3%. Now the double-digit organic sales growth was driven by continued strong and very healthy brand momentum with overall increased consumption as well as penetration and consumer recruitment versus the pre-pandemic year. Our strong EBIT organic growth as well as the margin expansion in fiscal year '21 was driven by gross margin recovery, closing half of the margin gap experienced in 2020 as expected as well as thanks to operating leverage. In Q4 of 2021, we had very strong top line performance, and this is demonstrated despite logistics constraints, whilst EBIT on the other hand reflected the enhanced A&P investments which we chose to make in peak season as well as the beginning of intensified cost inflation. The year was characterized by very strong cash generation, up 55.7% recurring free cash flow year-on-year, leading to significant deleverage. Effectively, our net debt-to-EBITDA adjusted ratio is down from 2.8 at the end of 2020 to the current level of 1.6. On the back of these very strong results, we're proposing full-year dividend of EUR 0.06 per share, up 9.1% versus last year. Moving on to Chart #5, where you can see really very strong momentum across all regions and brand clusters. And importantly, I'd like to underline this, this continued in Q4 despite the COVID fourth wave disruption at year-end, which impacted the on-premise particularly. And at the same time, we faced quite a bit of logistics headwinds. Moving on to Page #6. You can see that what is really important is that cocktail culture has penetrated home, and home mixology is here to stay. If you look at it on a 2-year stack perspective, clearly, we're way ahead of where we were pre-pandemic, and depending on the market, we're either slightly ahead or slightly below where we were in 2020. So this bodes quite well for us in the future. Moving on to Page #7. The Americas, our largest region, up a very strong 23%. Our largest market, the U.S., was up 18.9% versus 2020 and 22.8% versus '19, so versus the pre-pandemic benchmark, with solid growth across all of our core brands with quite a positive performance in Q4. In Q4, we were up 6.8% in the U.S. This is on the back of a very strong comp base of plus 20.2% the previous year. In the U.S. we've benefited from on-premise reopening as well as the sustained consumption in the on-premise -- the off-premise, sorry. Clearly, key drivers here are the Espolòn brand, Grand Marnier and Aperol, which all registered double-digit growth rates, quite strong. Wild Turkey came in with its hat and expressions outperforming. Campari grew by single-digit and SKYY was flattish on the full-year. The overall sales performance was up 22.8%, as I said earlier, versus '19, and this is again strong -- really momentum across the whole portfolio of brand. Moving onto Canada. After the double-digit as well, 10.9%, strong overall growth. Clearly, again, here, the heavy hitters for that market, Forty Creek, Appleton Estate, Grand Marnier, SKYY Vodka and Espolòn. Jamaica was up quite a strong 28%. A very nice, continued recovery in the on-premise, driven by both the domestic trade as well as recovering international tourism. A strong performances here were driven by Wray&Nephew Overproof, Campari, Appleton Estate and Magnum Tonic. The rest of the regions were up 44.1% with double-digit growth across all of them, including Brazil, Mexico and Argentina where we're seeing improved brand momentum, which, to be fair, also is magnified by an easy comp base. Moving on to SEMEA, our second largest region, up here, too, a very strong 36.7%. The largest market, Italy, was up 36.4% versus '20 and 12.8% versus '19. Clearly, we're continuing to see revenge conviviality in the on-premise and overall increased frequency of consumption across channels. Our core operatives were strong. Aperol was up 46.7% versus '20 and 24.4% versus '19. Campari similarly up 39.2% versus '20 and 23.9% versus '19. Our single-serve aperitifs are also doing very, very well, and that's quite important for that geography. The relaunch of Campari Soda continues to be very positive. The brand is up strong double-digits, 45.5% versus '20 and 22.3% versus '19. And Crodino as well grew low double-digits versus '20 and partially recovered versus '19. Q4 was particularly strong, we were up 60% on the back also of a favorable comp base as Italy was shut most of the time in Q4 '20. Moving on to France. France is up 22.1%. Again, very positive underlying trends with growth driven by the heavy hitters in that market. Aperol, Riccadonna, Trois Rivieres rums, Campari and Grand Marnier. The rest of the region was up a very strong 64.4% with positive performance across all markets, thanks to the on-premise recovery, combined with an easy comp base, particularly Greece, Spain, where we've seen a beginning of a return of the tourism trade and very good performances in South Africa and in Nigeria. Global travel retail was up 70.2% with an acceleration in Q4 as mobility started to increase and people started to travel across major markets. However, this channel continues to remain down versus 2019. Moving on to our third largest region, North, Central and Eastern Europe. Continued very strong performance, up 18.6%. We continue to outperform the industry across all our markets. Germany, the largest component, up 10.7%. This is despite having a very tough comp base. You'll recall that Germany, which is mostly an off-premise market, was up by 8.6% in '20. Key driver here continues to be the Aperol brand, up 16%, and this obviously doesn't -- that number doesn't incorporate the Aperol Spritz ready-to-enjoy, which has been launched separately to a great success in that market. Campari grew as well. Crodino, our nonalcoholic ready-to-drink, is up double-digit, and it's starting to become a meaningful business. Strong momentum in Q4 up double-digit, 12.4, and this is notwithstanding the restrictive measures, which were implemented in the key month of December. Our off-premise sell-out data in Germany remains very solid with our subsidiary outperforming the market at twice the rates. The U.K. continues very, very strong, up 39.1%. Key drivers: Aperol, Wray&Nephew Overproof, Campari and Magnum Tonic. We have also clearly a very good momentum in the on-premise channel. Russia also gave us a good satisfaction, up 25%, very positive performance, with double-digit growth in the key Q4 versus both 2020 and 2019. Strong double-digit growth of Aperol, Mondoro and Campari. The rest of the region also grew double-digit, 19.4%, with the aperitifs, particularly Aperol being a key driver. Last but not least, an area where we've been investing consistently in capabilities, route-to-market and A&P for the past few years, APAC, up 22.9%. Australia unfortunately was flattish versus 2020. This is both, on the one hand, a reflection of a very tough comp base, we were up 20.2% previous year. But at the same time, Q4 was a slowdown, both due to the comp base but also to very, very poor weather and that's a high seasonality moment for Australia. And with the high weather, there aren't many barbecues or people partying in beaches. At the same time, unfortunately, this country was -- this market was impacted by Transocean shipments delays and constraints. If we look at the rest of the region though, and this is were clearly we're investing significantly, we're up 109.4%, triple-digit growth in all key markets. Thanks to our enhanced investments across all our levers. China was up a 126.4%, driven by X-Rated, SKYY Vodka and Aperol. South Korea, driven by X-Rated and high-end Wild Turkey offerings. And Japan grew low single-digits over the year. This market was impacted clearly by strong restrictions on the key on-premise market. Moving on to Chart #12. I think we're very proud and very happy to communicate that after 8 years as the runner-up, the Negroni is finally the #1 cocktail in premium bars. We are also very pleased to say that Aperol Spritz actually moved up to rank #6 from 11 last year. So this adds up to 2 proprietary cocktails in the top 10. However, if we add the key Negroni variants, such Boulevardier and Americano, which are ranking at 12 and 16, you will see that Campari actually has 1 out 4 of the top 16 cocktails as proprietary cocktails. And I think that is quite an achievement and augurs very well for future years. Clearly, all of our key brands are very well skewed against all the other top cocktails with the Old-fashioned, Martini, Margarita and so on and so forth. And at the same time, our brands continue to gather many important accolades, such as those from the Drinks International Brands Report 2022, where you see across the portfolio doing very, very well. Moving on to Aperol. Aperol, our largest brand, 20% of group sales, growing at 32.8%. Clearly, with the reopening of the on-premise channel in most markets, we have renewed consumer recruitment and coupled with the sustained home consumption that is clearly driving increased penetration. Core established markets, such as Italy, the U.S., France, U.K., Russia, Switzerland, Belgium and Austria continue to grow by strong double-digit numbers. Spain grew triple-digits and newer markets such as China and Mexico as well. And we've had to return to nice double-digit growth rates in South America. Clearly, Q4 was also very strong, up 45.8%, boosted by deseasonalization activities and particularly the presence of the brand in skiing resorts. Versus 2019, we're up 32.2%, so it's really an incredible momentum continuing on this brand. And if you see on Page #15, clearly, we're back in major activation mode, deseasonalization. And at the same time, we continue to see that some VIP afficionados of the brand continue to render homage to it. And we'd like to thank Mr. Beckham for actually posting -- voluntarily posting, I might underline, 3 or 4 great posts last week enjoying Aperol Spritz in a French premium skiing resort. Moving on to Campari on Page #16, second largest brand, at 10%, growing also a very healthy 30.1%. Solid growth across all our major markets. And here, clearly, we're benefiting from positive home mixology trends as well as positive on-premise momentum. I mean, out of the top 16 cocktails in the world, 3 of them are Campari-based, and this is clearly testimony for the strong brand-building which we've been putting behind the brand in the past 10 years or so. The brand -- the liquid is very versatile. And in addition to the proprietary cocktails, clearly one Hero cocktail, which is emerging spontaneously from consumers and the bar trade across markets is the Campari Spritz, which is becoming very meaningful. We're also very proud to say that the Camparino, our brand house here in Milan, 2 years after we bought it and relaunched it, has entered into the World's 50 Best Bars at rank #27, and this still is something to be proud of and it is something we will leverage in the brand building on a more international scale going forward. Our Kentucky bourbon, Wild Turkey, doing very nicely, up 10.9%. Positive growth driven by the core U.S. market as well as high-end offerings across market, unfortunately, though this growth was partly mitigated by a decline in core Australia and Japan where we were severely impacted by logistics disruptions in Q4. In the U.S. the brand is continuing to preimmunize, the franchise grew by 9.8% despite the deceleration in Q4 due to a tough comp base. In the previous year, we were up 36.3%. Importantly, though, Wild Turkey Longbranch and the high-end Russell's Reserve continue to grow at a very strong double-digit growth rate. American honey also grew double-digit, up 10.6%. And compared versus to the pre-pandemic era, overall, the franchise was up 16.1%. Moving on to Grand Marnier, which gives us a lot of satisfaction, up 43.2%. The U.S. is driving quite a bit of this, up 44.6% versus '20, 24.5% versus '19. Again, here at the same trends with homemade cocktail consumption going up and the success of the Grand Margarita across both channels clearly fueling growth. Doing very nicely in France and Canada and from a lower base also in the other markets, such as Italy and Germany. SKYY, overall up 8.2% with a very positive performance driven in the international markets, in particular South Africa, which was up triple-digits, Argentina, China, Canada and Mexico. These clearly helped compensate softness in the U.S. where shipments were slightly negative by 0.7%. Now this franchise is in the midst of its relaunch behind a new range packaging and liquid. And if we start digging into the internals of the brand funnel, we can see that we're starting to recruit again younger consumers into the franchise. So I think this will be positive and will reflect itself in years to come. Our Jamaican rum, 6% of the total, up 22.7%. Again, here it is across core markets as well as seeding markets. And what's very positive is that we're really preimmunizing the range with both limited editions as well as those which are part of the normal range. And again, this is having a very positive impact both on, let's say, net sales marginality as well as a halo effect for the brand. Espolòn, up 37.5%. Clearly, since we relaunched in 2008, this has been an incredible success story. We're one of the top 100% on agave-based brands in the U.S. And you recall that at the beginning, this was a EUR 36 million acquisition of a distillery where we only had 2,000 cases, and today, we're at the 1 million cases benchmark in the U.S. and continuing to grow very, very strongly. We're expanding the brand, and we'll probably be able to accelerate the expansion in the second half of this year when more capacity comes on stream at the distillery. Moving on to the rest of the portfolio. You'll see that all the regional brands are growing double-digit versus the 2-year stack. The only one is -- and also versus '20. The only one, which is in this, is Forty Creek. Again, Forty Creek is outperforming the Canadian whiskey market and its home market. Our local brands also doing very nicely. Importantly, Campari Soda and Crodino are growing versus previous year. And we'll start talking more and more of our Aperol Spritz which we've introduced in, I think, 9 or 10 markets. [ It is less ] markets than those are actually requiring it, and it's very, very successful. And clearly, these are all additional volumes to the mother brand. Wild Turkey RTD was impacted and only grew 1.6% versus last year. And here, it was impacted both like tough comp base as well as one-off such as weather and logistics issues. Magnum is giving us a lot of satisfaction, growing very strongly in the core U.K. as well as Jamaica. And last but not least, X-Rated is doing very well across Asia, but particularly in South Korea and China. So this is it so far on the top line, and I'll pass from accolades to Paolo.

Thank you, Bob. If you follow me to Page 28, we can see in the chart that EBIT adjusted in 2021 came in at EUR 435 million. If we focus on the organic performance, organically EBIT adjusted was up 42.3% in value, delivering 240 basis point margin accretion versus last year. In organic terms, gross margin expansion accounted for 140 basis points, thanks to favorable sales mix, which was driven by, on one hand, the outperformance of aperitifs and, on the other end, the very strong performance of premium spirits expressions. Additional factor was combined with a suspension of the U.S. import tariffs as well as a stronger absorption of fixed production costs on the back of the higher production volumes of 2021. Worth mentioning also that versus last year, we had an easy comp base year on the volume side. These positive effects were on the other hand more than offset by the increased input costs and logistic costs as well as the dilutive effect of Espolòn, which in 2021 accounted for 50 basis point dilution due to the high cost of agave with the latter lessened, thanks to the price increase that we introduced on the back end of last year. Organically, A&P increase accounted for 29.1% in value, showing 50 basis point margin dilution and, moreover, reflecting the strong investment behind key brands. The A&P step-up did accelerate in the last quarter of the year. As you can see in the chart in Q4, A&P was up in value 33.5%, delivering in the quarter a 200 basis point dilution. SG&A organically in 2021 versus 2020 increased in value by 16.8%, but quite a strong growth, but that growth was lower than the top line and that's generating 160 basis point margin accretion, reflecting, on one hand, the investments to strength the group capabilities and the business infrastructures as well as the expected structure cost phasing, where basically, mainly incentives and hiring catch-up, had some phasing effect in our P&L, which negatively impacted the last quarter of the year. As you can see, in Q4, organically, the SG&A step-up in value accounted for 29.6%, leading to 140 basis points margin dilution. If you look at the performance over the 2-year horizon, the organic change in EBIT versus '19 was up 15% organically, generating 140 basis point dilution still, the catch-up to be done, which was mainly driven by the gross margin dilution accounting for 150 basis points due to dilutive effect of the Espolòn, that is growing quite fastly, recovering half of the margin shortfall that we've experienced in 2020 versus 2019, as expected, as we've guided. The dilution effect of the A&P was broadly offset by the operating leverage of the SG&A on the back of strong top line growth. So we're at 80 basis point dilution in A&P and 80 basis point accretion in SG&A. If you look at the reported change, the overall performance, including perimeter and FX versus last year 2020, in 2021, EBIT adjusted grew by 35.2% in value, delivering 190 basis point margin accretion, where the negative perimeter effect of 2.6% accounted for EUR 8.3 million and was neutral on margin, and on the other end, the ForEx effect was a negative 4.6% in '21 with a negative impact of EUR 14 million in value at 50 basis points in terms of margin. And this was clearly driven by the depreciation of the dollar versus the euro currency. All right, we move on to the following page. In one page, we have the summary of the segment reporting by region where you can see that the Americas region, that overall, in terms of size accountable for 42.4% of the group. In terms of vivid, that region was remarkably growing at 44%, clip, driving also 310 basis point margin accretion, with gross margin expansion of 170 basis points, thanks to positive sales mix as an overall for the group with outperformance of import brands, particularly high-margin brands like aperitifs and premiums spirits, which more than offset the dilutive effect of Espolòn. A&P was dilutive by 100 basis points and that was due to the step-up of marketing investments behind global priorities. The SG&A has a percentage of sales, that can mean with an accretive effect of 240 basis points. This was clearly due to the very strong top line growth of the region, which accounted to 23%. If you look at SEMEA, overall, it accounts for 16.4% of the overall profitability and was up 129% year-on-year. In 2020, clearly, the region was heavily hit by COVID given its strong exposure to the on-trade market as well as to the GTR where China, which is recognizing this region. And this year -- sorry, last year and 2022 sic [ 2020], largely encouraged -- largely improved its EBIT weight on the overall group profitability, thanks to the very strong profit record, business recovery. The margin improvement is also in this region quite staggering with the 470 basis point margin accretion, driven on one hand by gross margin expansion of 70 basis points where basically the lion's share comes from the margin accretion driven by the aperitifs, but also to the very strong top line growth in the region accounted for 36%. The A&P was accretive by a 100 basis point notwithstanding the heavy investment behind the key brands in the region and particularly the investments that we've finalized on the on-premise channel. The SG&A expenses were as well accretive by 260 basis points given the robust top line growth. Northern and Central, Eastern Europe, which overall accounts for 37.3% of the overall group, was up in terms of EBIT by 26% and also, in this region, we delivered 210 basis point margin accretion, with gross margin expansion of 170 basis point, again driven by a positive sales mix. A&P was slightly dilutive by 50 basis points due to the accelerated investments behind the key brands, particularly the aperitif portfolio, whilst the SG&A on the contrary were accretive by 90 basis point, driven by significant efficiencies on the back of strong top line growth of the region. If we move on to APAC, still profit was [ flat at that time ] in the overall scheme of things with 3.9% of the overall profitability we had and value decline of 13% of EBIT versus last year as well as dilution of 370 basis points, which was totally driven by the dilutive effect of the A&P on the region profit and loss due to the accelerated investment behind key brands in some strategic Asian markets. Its gross profit was clearly accretive also in these regions, whilst the SG&A were -- notwithstanding the significant investment in the region, were in line and neutral on -- in line with sales and neutral on margin. If we move on to the following page, we show operating adjustments accounting for EUR 34.3 million, mainly attributable to restructuring initiatives, write-offs on minor brands and nonrecurring last mile long-term incentive schemes, only partly mitigated by the positive adjustment resulting from the positive closure of a tax dispute in Brazil and one-off refund from our insurers. Total financial charges came in at EUR 17.1 million, showing a reduction of EUR 21.7 million versus a year ago. And now, if we exclude the exchange gains, the financial expenses accounted for EUR 25 million versus EUR 35 million of last year, showing a decrease of EUR 9.8 million despite a slightly higher level of average debt in '21 versus 2020. Actually, this is driven by the compression of the average cost of net debt that now is 2.5%, notwithstanding the significant negative carry with quite meaningful improvements versus a year ago of 100 basis points. And this is due to lower average of coupon for our long-term debt, following the liability management initiatives that we've taken in 2020. On the exchange -- still on the financial income, we report exchange gains of EUR 7.9 million this year versus a loss of EUR 4.1 million a year ago. Financial adjustments accounted for EUR 4.7 million, and this is the interest component positive of the -- benefit from the positive outcome of the fiscal dispute in Brazil. Profit before tax adjusted came in at EUR 415 million, up 48.9% versus year ago. The total taxation accounted for EUR 105.6 million on a reported basis with recurring income tax equal to EUR 109 million. Therefore, group net profit adjusted came in at EUR 307.9 million, up EUR 52.4 million versus a year ago. The recurring tax rate came in at 26.3%, improving compared versus a year ago when -- where it came in at 27.9%, and this is due to favorable country mix. Deferred tax related to amortization of goodwill and brands amounted to EUR 15 million in value. And excluding the impact of noncash component linked to deferred taxes, the group recurring cash tax rate stood at 22.7%, slightly down versus a year ago 23.2% in 2020. Clearly, the improvement was mainly attributable to the tax benefit generated by the step-up value of brands and goodwill in Italy that we have already anticipated in the previous calls. The group net profit report came in at EUR 284 million, up 51%. And the basic earnings per share adjusted was up 53.3% at EUR 0.27 per share. Looking at the free cash flow, again, a very solid delivery. I think it's the highest ever with recurrent free cash flow of EUR 407.5 million, up EUR 145.8 million, 55.7% up in value versus a year ago. This EUR 145.8 million increase in free cash flow is driven by EUR 115 million increase in EBITDA due to the very strong business momentum. Taxes paid remained broadly unchanged with slight reduction of EUR 10.5 million (sic) [ EUR 10.8 million ]. Very solid operating working capital management with a minor increase of EUR 5 million, notwithstanding the very strong business performance. Worthwhile noting additional further improvement of EUR 5 million comes on top of EUR 43.4 million of operating working capital compression in 2020. Then we have minor effects from hyperinflation accounting in Argentina. And then on other noncash items, so we had EUR 54.7 million primarily related to accrual in provision, STIs and the MTIs and including the effects of the incentives catch-up. Lower financial charges by EUR 9.6 million. Maintenance CapEx, EUR 81.9 million, up EUR 17.3 million versus last year. Extraordinary CapEx in 2021 accounted for EUR 53.8 million. And then the ratio of recurring free cash flow to EBITDA, that is, further grown from 65.4% of last year; in 2021, it came in at 79.1%. So very, very strong. 3 years in a row of increase in recurring free cash flow on EBITDA. Page 34 was the page of historical and projected and expected CapEx. In 2021, CapEx investment accounted for EUR 135.7 million, including ESG-linked CapEx of about EUR 10 million. The breakdown of those investments is EUR 81.9 million on maintenance CapEx and then EUR 53.8 million of extraordinary CapEx. If we look at the projected CapEx for next year, we're expecting to invest EUR 170 million with about 60% investments on the maintenance CapEx front and 40% investment on production capacity expansion projects, ESG-linked projects, IT and brand housing. We then move to Page 35. We have the picture of the operating working capital changes. Operating working capital in 2021 increased by EUR 22.6 million. Organically, the decrease accounted for EUR 5 million as you saw before. Within this EUR 5 million decrease in operating -- in organic operating working capital decrease, we highlight an increase in inventory of EUR 60 million with ageing liquid increase of EUR 23.8 million to support this [indiscernible] development of The GlenGrant, our Jamaican rums and Espolòn. On the other hand, receivables were flat, and the payables increased by EUR 65.4 million, driven by the business growth. Perimeter is timing-wise, ForEx on the back of -- on the movement of depreciation of the dollar had an uplift -- impact on uplift operating working capital of EUR 25 million. As a percentage of net sales, operating working capital came in at 29.5%, down 540 basis points versus a year ago and down 810 basis points versus 2 years ago. With regards to net financial position, year-end, the indebtedness stood at EUR 830.9 million, down by EUR 272 million versus a year ago, thanks to the quite strong free cash flow generation, of EUR 332 million or $407 million on a recurring basis. Dividend has been paid regularly and was EUR 61.6 million cash flow outlay. What is important to highlight is that net debt to EBITDA ratio came down in a meaningful manner from 2.8x to 1.6x. I'm done with the numbers, I would hand back to Bob for his comments on sustainability and conclusion.

Thank you, Paolo. Yes, I'm very happy to share the progress we're making in the sustainability area, starting with people, which together with our brands are our most important assets. And as an asset, we invest in our people. In terms of commitments and focus, we're very committed on Diversity, Equity and Inclusion. We're fostering this in a workplace with a multitude of multi-function governance projects at all organizational levels. We're monitoring the progress through an internally developed Campari Group DEI index, which is built both on the people surveys which we do as well as the GRI-based KPIs. On the learning front, we're significantly dialing up what we're able to offer our people. We've developed a brand-new digital ecosystem, which allows anytime, anywhere learning experiences. With regards to rewarding and engagement, which is one of our strengths, clearly, we're very happy to communicate that 51.6% of Camparis have adhered to the employee stock ownership plan, and this is quite impressive figure for the launch of a new plan and benchmark incredibly favorably versus other case studies. Moving onto responsible practices. We're continuing to remain very committed on responsible drinking. We have ad hoc and continuous training across the global marketing community with a deep dive clearly on digital communication. Significant amount of educational sessions on responsible drinking for Camparistas as well as with key stakeholders outside and particularly the bartenders community. At the same time, we'll continue to invest in building our NOLO alcohol offerings across the world. We're very proud on our achievements in the environment. Well, first of all, I would like to underline the fact that we're committing to net-zero emissions by 2050. Now if we look at the various elements on energy, we've already hit this year the 100% renewable electricity pledge for our European production sites, that has enabled us to reduce significantly our emissions per liter of average produced, which were actually down by 22%. Also on water, we reached last year our 2025 targets, but we're revising these. And lastly also on waste management, we remain committed to zero-waste landfill by 2025 and have very good process -- progress on a per liter produced basis. Last but not least in terms of community involvement, we're clearly continuing to contribute to the fight against the pandemic by supporting our business partners, consumers as well as hospitals in our main markets. And at the same time, we continue to be very active in our communities, both in terms of our sponsorships of involvement in the world of art as well as through our foundations, which promote assistance training, education, charity in favor not only for Camparistas but also our local communities. And this takes me to our conclusion and outlook. Now clearly 2021 was a very successful year for us, and this is due to the very healthy brand momentum, which is also benefiting from revenge conviviality and home mixology. This is leading to increased consumption and penetration across all of our brands and bodes very positively for the future. Now looking at 2022, we remain very confident -- highly confident in continued strong business momentum. And we actually see accelerated consumer recruitment across our key brands. And we will continue to fully leverage our new consumption habits across both the on-premise and the off-premise channel. So very good momentum there. Regarding profitability, though, we will continue to leverage price increase opportunities and really focus on mitigating cost headwinds. Having said that, temporary, and we think it's more a question of this year, input costs pressures, which are expected to intensify particularly in the first half of this year and mostly considers packaging, raw materials, including agave, which isn't decreasing the way we expected to as well as logistics costs. And this leaves us to postponing our gross margin accretion which we've highlighted previously at 70 bps through the following year. But on the other hand, you know us very well, we're quite a long-term-focused organization, and we will continue to build our brands to our best of our abilities and maintain a very competitive level of investments behind our brands as well as our capabilities in order to be best positioned, continue to fully benefit from the gradual phase-out of the pandemic-induced challenges and to really benefit from the trends, which -- consumer trends, which have come up and which we will benefit from in mid- to long-term. This is it in terms of 2021, you probably have tons of questions, so we're happy to take them.

[Operator Instructions] The first question is from Simon Hales with Citi.

A couple of questions from me, please. Firstly, I want to -- could you just talk a little bit more about the moving parts in terms of the outlook for the flat EBIT margins for 2022? Specifically how big is the COGS per case inflation that you are now facing in the current fiscal year? And how long do you think those pressures on gross margins are going to last? Is it really just a 2022 issue and then we should see some sharp recovery in 2023? Or do you think this could weigh into some of those outer years? So that's the first question. And then secondly, with regards to the pricing outlook in 2022, clearly you are going to push harder on pricing and I imagine revenue management initiatives sort of generally in the year, but what sort of scale of price increases could we expect? What have you been putting through in the second half of 2021 into 2022? How big of an offset could we see to help mitigate some of those cost pressures?

Thank you, Simon, for the 2 questions, and I'll try to walk you through little bit more the rationale of the guidance that we've given. First and foremost is the question whether what we feel. Clearly nobody has a crystal ball that the input cost pressure is temporary or not. Definitely we believe it is a temporary effect, and we believe in 2023 onwards, the pressure will relieve. Actually when looking at 2022, we believe that the first half of the year might be worse than the second half. This is what we're seeing in the market. So if it is temporary or not, if it is temporary, clearly vis-a-vis in our last guidance, the input cost pressure has further intensified. And so basically, we're now guiding towards an additional EUR 15 million to EUR 20 million cost of goods sold risk due to inflation, that is about knowing value another 2%. So overall, if you may remember, last time we reached out, we've guided the market for a 5% in value. Increase of cost now hovering in the region of 7%. So this is about cost and volumes clearly, all being equal. 7% means about EUR 60 million of cost increase, that is primarily coming from packaging materials, I have to say. Of that overall increase, 50% of it is coming from packaging materials, but it's really glass that is negatively heated by the energy costs rise. So on glass, we're seeing across all suppliers double-digit growth of the cost. Then the second component is within the ingredients. We have another 25% of that EUR 60 million increase, and it's clearly coming from alcohol and sugar. We're again -- we're seeing double-digit growth in value increase of cost. And then you have the remaining 25% that is coming from logistics primarily. It is, I would say, high single digit and other costs. So the guidance that we're giving now is fully factoring in the agave factor, that as Bob just said, we hope it could be more benign, but in reality given the surge or the rise of the tequila category in the U.S. market is not coming down as fast as we believed. Clearly, there are mitigation factors in top line. The biggest one is and will always be the sales mix. So we're quite confident on the trajectory of our global priority brands, all of them, none excluded, probably SKYY is more flattish, but the other brands are clearly in a very good position. And then price increase, which we've alluded, we'll be more aggressive this year on the strong, particularly on specialties and brown spirits, so brands with lower price sensitivity. And then still looking into the top line opportunities, we have implemented few years ago, and we're reaping the fruits of it. Interesting revenue growth management initiatives in developed markets, and this is clearly putting us in a position of spending less and better on promotions. It's to the benefit of our average selling price. Now if we look at the cost opportunities, because still the charge is not insignificant, we have first and foremost operational leverage due to fixed cost, which overall as a company, they account for about, I would say, 1/3 of the total spending, and particularly in production, about 20% of production cost is fixed within A&P 10%, within SG&A 85%. So it's big. And then of course, we're not sleeping, and we've launched productivity initiatives. The few of them just to mention, we've been more aggressive on the project of centralizing procurement of product-related and nonproduct-related products and services, some production efficiencies -- efficiency programs in our '22 plans. And then we've aggressively started the decentralization of certain supporting activities in the -- into support function, finance, IT and HR. For example, in finance, we now moved into the central delivery of reporting and analytics and that is clearly delivering efficiencies. And then the biggest project for us this year is the migration to SAP S/4HANA platform that enables us to use the artificial intelligence that would lead to higher efficiency and efficacy of the overall supporting function. So this is another important project that we have ahead of us. Clearly, as you mentioned before, in terms of phasing this year, it's a little bit unfortunate because we have stronger increase -- the cost increase is more skewed in H1, as said before, whilst the positive effect of the price increases are more still into H2, so we will have 2 tough quarters in terms of margins to manage in Q1 and Q2 and then we expect an improvement in the second half of the year.

That's really helpful, Paolo. Can I just sort of just come back in terms of some of those pricing, sort of mitigation actions that you're hoping to take, I know you don't like to comment on or give any top line guidance on a forward-looking basis. But if I look at where just consensus expectations are at the moment for 2022 looking for 7% organic sales growth for the group. Now given you're looking for more aggressive pricing, again you talk about more effective and efficient promotional activity, is it possible that you think you could do better than what the market currently expects at the moment or is it too early to say?

I think it's too early to say, but we all hope that we'll be in a position of delivering better results. Q1 is a very small quarter, and we'd see the effect of what's driving in the market and also you have to take into consideration the fact that we're to a certain extent limited by logistic constraints that you know in the back end of the year. And you know, minor effect, I would say, particularly in Asian markets and on selected SKUs, but the CPI market is not improving at all at the moment. So that's another variable that we need to put into our equation. So in that sense, I think it's too early to call, but on pricing, we're definitely moving quite, quite aggressively on that rather. Having said that, we have very good momentum behind our brands. I mean consumer demand is very solid. And I would say also that the trade is ready to accept the fact. Across the board, all categories of players are taking price. So it's an easier discussion, if you will, in comparison to prior years.

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

I have 3 please. The first one is a bit of an outlook for Europe. We talk a lot about the new normal in the U.S. How do you see the new normal in Europe? If the higher base, which is 15%, 20% above 2019 levels, do you think this is really a new base upon which to grow? And how do you see the, let's say, growth algorithm going forward in places like Italy, Germany? Is it probably little bit better than it was pre-pandemic? Then Paolo going back to the margins, and I know, of course, you can't speak for your peers, but some of your peers seem to be a little bit more optimistic on the margin outlook, at least they were a few weeks ago. Is there anything that could explain why you would be more exposed to some of the cost pressures compared to the peers? And then again on margins please, on the A&P, which has been increased significantly, 26% over 2 years, 80 basis points higher than it was in 2019. And you're emphasizing the continued reinvestment behind the brands. So thinking of 2022 and also more medium term, should we interpret this as -- of course, you'll reinvest behind your brands, but will the A&P to sales ratio continue to trend up, maybe?

Andrea, I'll take the first 2 questions answering with the last one. We see great opportunities for our brands. And frankly, we're using that opportunity to accelerate our growth and that's where the heightened A&P comes in. Having said that, we've increased it quite a bit over the years, and we feel comfortable that the current ratio will enable us to reach very good results in the years to come. So we see that's more stable. With regards to the outlook for Europe, I mean, what we're seeing in Europe is clearly a stronger penetration of cocktail culture at home, and we think this is here to stay. And at the same time, though, as soon as the on-premise opens and the climate helps along, revenge conviviality comes back very, very strongly. So we feel very good about the overall environment in Europe and particularly of our brands within that environment.

Yes. With regards to the margin guidance, that is quite prudent and cautious as you highlighted, and I cannot comment for competitors, it's not my role. I think our guidance is prudent as other CPG companies did before without being specific, but you can just read, and probably that misalignment is also due to the different perspective. Our fiscal year is January to December. So I'm focusing on the 12 months to come to December. So I think probably that might explain, but clearly, the growth trajectory of cost is there, and we're not the only one seeing that. And if that changes over time, we will see, but at the moment, this is total [ transparency ] what we're seeing.

Bob, if I could just follow-up on what analysts are saying earlier about Italy, Germany, do you see any growth in these markets? Potentially could it be, I mean, at least in line with what it was pre-pandemic or slightly more, as you, of course, got more and more momentum going forward even in the sort of activities at home occasion?

Well, I think we have very, very good momentum and growing. I wouldn't see why we shouldn't be able to achieve mid-single-digit growth in Italy and high single digit growth in Germany, potentially more, but that will depend a lot on what happens from a pandemic standpoint in the openings of the on-premise. Clearly, consumer demand is there.

The next question is from Laurence Whyatt with Barclays.

The first one for me is regarding your balance sheet. It's now running extremely strongly, and you've had a very good track record in the past of doing acquisitions. I remember you saying over the past few calls that you would be looking at any opportunities that came up. What's stopping you from making that acquisition? Is it the availability of the assets or the valuation or perhaps fitting into the portfolio? My second question on Q4 in particular. How much do you think the Omicron impact that either caused increased restrictions or changed consumer behavior, how much do you think that was responsible for Q4? And do you have any sense of what Q4 would have been had that not happened? And then finally, you mentioned travel retail at a level for the full year. Do you have the exit level for travel retail during Q4 or perhaps at the end of Q4 versus pre-pandemic levels?

Yes. What's keeping us from making deals, frankly, we always look at making the best deals for our investors. We're very active in this area. There are many discussions happening. Sometimes one needs to be patient to hit really the right, I think, cocktail between quality of the asset, price and alignment with the seller. Having said that, cash is not burning any hole in our pockets, and we believe that we'll have very nice opportunities going forward. And as I said, we're quite active on that front. So we'll see when things go through. Now the impact of Omicron on Q4, it's very difficult because we'd have to go and dissect it by market by market. Obviously, what we saw is that as soon as Omicron hit in December, there's been a huge slowdown. The first 2 months, October and November, were quite strong and then in December, outlets were empty. So is it third, is it more? Who knows, but it definitely had an impact on it. With regards to GTR, I need to get back to you. GTR is a little bit less than on a going basis of 2% of our sales. I don't have such minute details on that. We view GTR as a great brand-building channel for us. So we're not necessarily chasing the dollars there.

The next question is from Edward Mundy with Jefferies.

3 questions for me, please. Congratulations, first of all, on Negroni taking the top spot. Anecdotally, what proportion of your sales do you think is from the Negroni and what proportions from the non-Negroni-based Campari drinks? And how does that compare to say 5 years ago? You mentioned that there are 3 Campari-based drinks in the top 16, and you go on your website, there are dozens of Campari-based drinks. I'd love to understand better how the versatility of Campari is increasing. The second question is on The Notes Collection. It strikes me that given your experience and expertise with bitters, this is something you should be able to really leverage. Can you talk a little bit more about The Notes Collection and what are you doing to really get some scale there? And then the third question is coming back to the whole pricing point. Your brands are very healthy. Aperol and Campari as a product is a very, very small part of the cocktail, and then you've got some great specialty brands where there was good pricing power. Why are you not taking more pricing at this stage? Can you just talk around some of the nuances there?

Yes. Let me kick off with the Negroni. And yes, when you're looking at our range of drinks, I think you need to segment them on the type of outlets. Clearly, Negroni is our top seller in the high-end mixology outlets, and there, I would expect the Negroni to do probably half of our sales. Then if you go into more mainstream or lounge-like outlets, you'll start having easier drinks coming in. I mean, take a case in point, in Italy, the Campari Spritz is already a 1/4 of our sales, and we're seeing the Campari Spritz growing very, very rapidly internationally. So you've got a wide range, but it varies enormously from the type of outlet. Having said that, most of the Americano and the Boulevardiers are actually variations of the Negroni. So we have to add a little bit more to that total. Now with regards to The Notes Collection, we're coming out with a range of big bottles where you have an aperitif, a digestif as well as more of a mixer. They're very, very high-quality liquids, and these come at quite a premium price. And our focus -- in the first 3, 4 years, we're only going to focus on high-end mixology outlets and do the right job in building and driving the brand. So it's not about getting a quick win to boost quarterly numbers by pushing it into the off-premise. We're not going to do that. We believe in the brand, and we're going to build it over time. Clearly, regarding the pricing, as Paolo highlighted earlier on, it is very varied, and there is a stronger push on our aperitifs, which are proprietary brands as well as selected aged brown spirits. So we are maximizing it as we speak. So there's no fears there. We will not miss any opportunities.

The next question is from Trevor Stirling with Bernstein.

So 3 questions on my side as well, maybe 2 related questions. If we're looking forward to more normalized growth of this new base, Bob and Paolo, how should we be thinking about SG&A? We've had dilution over the last couple of years. We've also had some extraordinary growth over the last few years. Should we think that as a roughly constant as a percentage of sales or continuing to drift on? And the second thing is really on tax. Again, I think, exceptional growth rates given tax came down due to country mix. Is it likely to be stable from here going forward? And final question, just a point of clarification, Bob, when you say net-zero by 2050, is that across scopes 1, 2, and 3?

Yes. I'll take the last one. Yes, it is across scopes 1, 2, and 3, no question. So it's an important commitment on our part and something we're going to tackle, and then we're working on, as we speak, to develop an aggressive brand over the years.

Yes. Well, you asked the question with regards to the SG&A base versus for -- to project our future expectation. We're not expecting any [indiscernible] as a percentage of sales. On the contrary, potentially, this is an opportunity given the very strong top line that we're seeing. And on the tax, recurring tax rate, we expect to be pretty stable going forward.

The next question is from Mitch Collett with Deutsche Bank.

Given what you said about logistics constraints, and I guess looking at your Slide 6, where, I guess, if you think about it on a 2-year stack sell-out, which I appreciate is on off-trade only. Looks like it's maybe lagging sell-in. Can you maybe comment on where your inventories are globally and whether there are any areas where you haven't shipped quite enough and there's scope for that to catch up this year? And then my second question is you talk about accelerated consumer recruitment. Is there any reason why that wouldn't lead to an accelerated revenue growth in 2022 and beyond? And I guess, I'm thinking about that relative to the type of CAGR you've achieved across 2020 and 2021.

Thank you for the questions. Yes, clearly, the sell-off data is off-premise and the gap between that and the trend in our shipments is the on-premise. We've had very, very strong growth in the on-premise across all of our markets. And honestly, with regards to inventories, we're running very, very low in inventories across markets. So yes, there could be some recovery, but I think the consumer demand is strong. So I don't think we will see meaningful moves in inventory at the trade level. Now the accelerated consumer recruitment means we're going to have more events. We're going to identify our digital efforts. And if the environment remains benign, we would expect an acceleration of the top line. Having said that, the environment is not benign. I mean we have strong inflationary pressures. We have strong geopolitical pressures. And at this stage, we think it's a little bit premature to have an outlook towards the upside. We feel good about the brands. We feel good about the plans. But we have to see what happens in the external world, how that will impact the psyche of the consumer.

Let me add something. Yes, with regards to operating working capital and transitory, what are we going to expect for next year. Given the fact that we run stocks down at both the distributor level but also within the company and we've ended up with an operating working capital on sales that is at an all-time low. Our goal is looking at 2022 to have working capital on sales to be at the level of 2020. So 2 years ago, 34.8% versus 29.5% of this year because this very low level of stock is clearly creating pressure on our supply chain and increases the chances of ending up in out-of-stock situation whenever you have issues with CPL or suppliers of raw materials. So that's something we wanted to highlight.

The next question is from Chris Pitcher with Redburn.

A couple questions for me. Firstly, could you give us a bit more detail on your CapEx, which is running at just under 8% of sales this year, which is certainly high versus your clearly long history. How much are you expanding production capacity by? How would you expect these levels to be maintained? Because you're spending more than double depreciation, which shouldn't really create margin pressure this year and in the next year. And then secondly, to follow up on the tequila question. How much of Espolòn's gross margins have fallen from the peak? Are they below 50%? Because to justify the 50 basis point drag, it has to be more than just sales mix. And when we look at the agave, has the cost of agave production gone structurally high such that you expect it to rebase now at an elevated level, certainly much higher than as we would have thought 2, 3 years ago?

With regards to CapEx, a good portion of the extraordinary CapEx is made to step up our production capacity in plants where we produce brands that are on a very fast growth trajectory, mainly in our aperitifs. We have plans to expand capacity in Italy, in Mexico as well. Then we have also a project in Jamaica for waste treatment purposes. So these are -- and on top of that, of course, there are investments that are more marketing, like the brand houses typically, which are a very effective marketing tools to build the equity of our brands.

Clearly, also, there's one big impact in this year, which is due to the purchase of an office in the U.K. With the change in the IFRS and actually -- and the fact that your hold lease becomes debt, it makes a lot of sense to actually start investing in fixed assets, and we found a great location, and we're renovating it. So that is something which I think will be a benefit to the group for the long term.

Perhaps looking on the maintenance CapEx, which will be running at around EUR 100 million, which is EUR 40 million above where it was 2 years ago. But if that's an ongoing maintenance CapEx number, does that drop off as well as the extraordinary CapEx on equity?

Yes. You have to see it as a new level, I would say, you cannot be 100% precise it will be between, I would say, EUR 80 million and EUR 100 million something like this.

There was, I think, a question on Espolòn. And that's clearly -- Espolòn is driving margin dilution. So we do not disclose profitability by margins by brand, but it's clearly driving a meaningful dilution going forward. Still, we believe that the aggregate price will retrench. It will become -- it will get back to its original position that is a key contributor to group gross margin expansion. Typically, the price positioning of tequila and particularly of Espolòn is quite healthy. And the cost of production is comparable to the cost of production of our other brands. The product fits with the other ingredient. The day that is sorted out, it will become another source of gross margin expansion going forward.

The next question is from Fintan Ryan with JPMorgan.

2 questions for me, please. Firstly, just actually following up on that last question regarding price. Can you confirm that...

Sorry, it's very difficult to hear you because there's noise in the background.

Can you hear me now?

Yes.

Sorry about that. So I was just saying in terms of the agave prices, can you confirm that -- I think you had expected back in Q3 that the agave prices to come down to, I think, low to mid-20s. Can you confirm that at this point your view for 2022 agave price to stay strictly mid-to-high 20s price point generally? And then follow-up is, well, in terms of buyer momentum, clearly, the Espolòn brand has always done quite well in the market over the last 2 years, but we have seen a step-up in some of the competition from some of the celebrity-owned brands, and in particular I'm thinking of the Teremana. Around that, the price point where agave is now, are you seeing any risk to the Espolòn franchise from these new brand entrants? And do you think is there a potential for showcase of these smaller brands within the segments? And then also the Cabo Wabo brand momentum that hasn't been a focus within the super-premium segment. But what are you doing to give yourself scale within the upper end of the tequila market?

Yes. Espolòn is clearly our priority and when it comes to constraints in agave availability, we've privileged Espolòn over Cabo. The brand is really on fire across and has huge opportunity. We're currently going through capacity expansion, which, over time, will triple the expansion. And that will enable the brand to actually grow at a faster rate versus the rate at which it's capped at currently. So we feel very, very confident about the brand. And particularly, we will be able to revert to international expansion starting in the second half of this year as that capacity starts coming in online. On agave pricing?

On prices, we're expecting still a minor reduction versus a year ago. Last year, the average price was at about MXN 27 per kilo. So for this year, we're expecting to come down a little bit but not in a meaningful manner. We're not seeing a huge drop in prices, MXN 1, 2, 3 possible, but not more than that.

So there's an exacerbated pace of innovation of the market with new plants coming in, which are currently sucking up what would have been available in terms of additional agave in normal times.

Okay. And actually just with regards to your expansion challenges in China, have they done broadly in terms of what you're speaking to back in 2021 and what are your ambitions there for the markets in 2022? Also how has trading been over the Chinese New Year period?

Our ambitions in China haven't changed. But clearly, execution has become more challenging with the Zero COVID policy. Because as soon as a few patients pop up in a city, that city gets shut down for a few weeks. That not only has an impact on consumption overall but it clearly creates havoc with events planning, promotional and activations. Having said that, we're continuing to grow triple digit across the key brands. So we feel good about it. Having said that, though, if it were a normal situation from a, let's say, COVID perspective, clearly, we would be trending even stronger.

The next question is from Alessandro Tortora with Mediobanca.

I have 2 questions, if I may. The first one is related to the -- just a curiosity on the pricing policy. If this is, let's say, policy widespread across the brand portfolio, for instance, you have, let's say, fast track on the Global Priority brand? The second question is a follow-up on Espolòn now, which I think is for people who officially joined the Global Priority team for you. Can you clarify the capacity expansion, which should try for just a better idea of the existing production capacity on Espolòn? And the last question is on the SG&A side. If I understood well, in the last part of the year, basically you had some nonrecurring, let's say, incentives, on this line. I would like to understand, let's say, if this is correct or not?

Let me take the first 2. I mean I'm not sure I understood what your question was with regard to pricing policy. I can only reiterate that clearly across the portfolio, we focus much more on pricing on our proprietary brands, on the aperitifs as well as on aged brown spirits brands. So that is, if you want the policy and the reality of things. With regards to Espolòn, you might have more of a crystal ball than me because you're already seeing it as a Global Priority where we're still seeing it as a regional priority. And the reason for that is not, let's say, the potential of the brand, the potential of the brand is clearly global, no question about that. But as I highlighted earlier, currently, we are constrained from a production standpoint, from a distillation standpoint. And the new capacity will still start coming in line -- online in the second half of this year. So we'll be able to start expanding the brand in more markets. We actually even supply international markets the -- on other product which they're currently requesting. So no question about that. And we do not disclose what the capacity of our different distilleries are. And clearly, there has been a huge change over these 10 years, the size, the scope and the capabilities of our distillery. I mean, it's a completely different production facility compared to what we started with 10 years ago.

Yes. With regards to the SG&A, as I said, overall, the 2021, [indiscernible] project. It's a trend going forward. Although if you look in isolation the fourth quarter of the year and you compare it to the first quarter of last year, there are some distortions that are [indiscernible] that on one hand in 2020 due to the pandemic and the poor performance of the business incentive scheme. The incentive plans have been negatively impacted. And therefore, you have the accruals were artificially -- on the other hand this year, we're in an opposite position. Very strong performance is leading to making higher accruals. This is true for yearly bonuses, but also for long-term bonuses. We are basically every year given our long-term policies, the catch-up of those bonuses is based on envisaged projection of the business. So yes, we have, as I said, very adverse fourth quarter comparison versus the first quarter a year ago. But looking into 2022, we confirm that the overall base is a solid base to project future expectations.

The next question is from Paola Carboni with Equita. Ms. Carboni just withdrew her question. There are no more questions registered at this time.

Okay. Well, thank you very much for joining us. We appreciate the interest, and we'll continue to maximize our sales and go back to building the business. Talk to you soon. Thank you. Bye-bye.

Bye-bye.