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

Good evening or good afternoon, and thank you very much for joining us at such a short notice. What we'd like to do today is go through the commitment we have to acquire the Courvoisier brand. As you can see, Christmas came early to come party this year. We're very excited by this acquisition opportunity. Clearly, it is a unique opportunity to enter the cognac category, an exciting category for us within 1 of the top 4 historical houses, which are also both world-renowned brand credentials. Clearly, our aim is over time to reestablish Courvoisier as a global icon of luxury, priming cognac to become also 1 of our 4 largest legs, actually the [indiscernible] largest leg along with aperitifs, bourbon and tequila. And clearly, the objective is to continue premiumizing our portfolio, and it is a significant step up in our U.S. presence as well as it presents us with a nice long-term transformational potential in strategic Asia. Just to go quickly overview on Maison Courvoisier, quite a historical has, Maison founded in 1828 in Jarnac, obviously in the Charente region of France. It is the youngest, but actually the most awarded of the big 4 historical cognac houses. Its signature styles reveal the intricate nuances of the cognac craft, which have led the house to become the most awarded cognac house based on the 20 top spirits competition since 2019. And most importantly, it is the only cognac house to ever win the coveted Prestige de la France title. In its range of VS, VSOP and XO, it has also topped up and reinforced by a premium range augmented additions. And the brand has built solid credentials across a multitude of versatile liquid styles. Talking about versatility, the VSOP is quite versatile. It was designed back in the 1950s especially for cocktails, and it has made inroads [indiscernible]. The Courvoisier Chateau serves today as the main headquarters of the brand in Jarnac. It's absolutely a beautiful building. Its hosts for the Museum, a visitor center as well as maturing sellers. The Maison Tour will bring you to the heart of its history from Paris to Jarnac and really describe the special features of Courvoisier cognacs, complemented by the discovery of an ageing seller and tastings. The key facts about the brands in fiscal year 2022 has had net sales of USD 249 million, the contribution after A&P of USD 78 million. If we look at this year, in the year up to the 31st of October 2023, net sales amounted to USD 148 million, which represents a decline of 33% versus 2022, and a cap of USD 37 million. Clearly, the performance of the brand was impacted by the recent market-driven trends, such as the normalizing consumption in the U.S., particularly in cognac after peak post-COVID sale as well as destocking at the wholesaler level in line with the wider cognac district. The brand is sold in 160 markets, and the U.S. as is by far its largest market, accounting for 60% of its net sales followed by the U.K., China and global travel retail and the geographic mix reflects the current VS and VSOP SKU. So clearly, there's a very good overlap with our in-market companies. The volume at the end of 2022 was 1.29 million 9-meter cases. The acquired business includes a very enviable inventory of maturing liquid with a book value of USD 365 million, as of, again, the date of 31st of October 2023. And what's really good is that it consists of well-balanced age profiles and really a super mix of [indiscernible] quality, which will support future brand development. Now what's in it for us? Clearly, this is a unique opportunity for Campari Group to enter the top league of the superpremium cognac category. As you well know, the top 4 cognac suppliers account for 90% of worldwide sales and have different SKUs into markets and liquid variants with Courvoisier currently SKUing strongly to the U.S. with its VS offering. China dominates clearly in value terms, the cognac category by premium variance of VSOP plus XO and Prestige, while it's conversely in the second largest market in the U.S., that market is dominated by entry-level VS and plus VSOP, while VSOP and XO high-end offerings are growing off a pretty small base in line with premiumization trends. The third largest market is global travel retail, and that's dominated by XO and Prestige and VSOP plus are increasingly popular. Now despite the recent negative trends, which are driven by destocking following as I said earlier, the strong pandemic end use growth and is also amplified by inflation in our circumstances. And at the end of the day, we believe this is just clearly more of a cyclical issue. And that on the structural side, premiumization trends in the industry, most relevant in markets such as U.S., China and GTR will continue to drive the long-term prospects of the category, which is also supported by scarcity value and its superior liquid quality. Now, the fifth within our portfolio is absolutely fantastic. You can see how it strengthens our really premium offerings, starting at $35, going up to $2,000, and it will be a very nice addition to our rare division, which is driving the premiumization of the group. Now clearly, this is a brand which fits into our playbook. And we expect to relaunch it, like we've done and grow it substantially as we've done with some of the other brands highlighted on Page #7. Clearly, we'll be able to give it more focus and really leverage our brand development capabilities. As you all know, Espolon, under our ownership grew 47x as we really updated it with disruptor style branding alongside premiumization over time. The Aperol brand grew 20x since acquisition, and that included a total brand overall and strategic internationalization, it's become 1 of the hottest brands in the world currently. Wild Turkey bourbon, which we acquired when bourbon was really a dusty category, grew 3x. Again, thanks to portfolio premiumization and a very consistent brand messaging on its craft credentials and liquid quality. Grand Marnier grew 1.3x, and again, here with a complete brand renovation, and we focused on to the high-end expression. And we've really stopped all the mainstream flavor variants. So actually, if you take them out of the base, it's probably more at 1.5x growth. Appleton Estate grew 2.2x, again, a total brand overhaul with 8 statements focused premiumization. And GlenGrant last but not least, grew 1.4x following it strategically focused on long-aged expressions. When we bought it, it was more of an ingredient into a large blended brand and we're selling some unaged expressions in mostly Italy. Now clearly, it is a very respectable brand, which has also reached the auction prices above $200,000. So cognac will become our first leg, and this leads to a true diversification of the group across the spirits categories. There's a very healthy exposure to multiple premiumizing categories. Aperitifs will account for [ 46% ] of our sales. Tequila and Mezcal, 8%, bourbon 8%; and cognac 8% with the rest spread almost all regional and local priority brands, so a perfect addition to the portfolio. Now clearly, this is our largest acquisition to date. So Courvoisier will enter our Global Priority brands category, and it will have a significant boost on our business in the U.S. and China, but also in the U.K., which will grow by 50% and grow GTR by 30%. So the global brand priorities cluster will receive even more enhanced focus reaching its full potential. We will also strengthen, thanks to Courvoisier, our premium portfolio, particularly in age brand spirits as well as supporting future long-term premiumization ambitions in all of our key strategic markets. It will boost overall Campari Group net sales by 9%, which is a significant step up in some of those BRCA markets, which I highlighted below. Now, I will pass on to Paolo.

Thank you, Bob. The Courvoisier business has a strong fit with the group's French operation, supporting our French icons portfolio that includes Grand Marnier and Champagne Lallier. The cognac [indiscernible] and in the future, become brand. The Courvoisier operation addition would definitely increase our distilling infrastructure in France, bottling and warehousing capacity, supporting the group's other local operation, coupled with the relationship with the wine growers and suppliers in the cognac region where, of course, we're already present with the Grand Marnier business. Courvoisier has true state-of-the-art facilities across 5 production sites. The biggest 1 is the 1 that you see on the map is [indiscernible] where we have the bottling plant, essentially 5 fully automated bottling lines, maturing warehouses and again, fully automated finished goods and raw material warehouse. Then the business comes with, again, state-of-the-art distillery containing 28 [indiscernible]. There is the [indiscernible], which contains 30 hectares of [indiscernible]. And then further site [indiscernible], where we have maturing warehouses and blending stations. Of course, in Jarnac, the business comes with headquarters, [indiscernible], and a visitor center overlooking the Charente river. If we move on to the following page, a few comments on the acquisition traction and the metrics. Campari Group has entered into an exclusive negotiation with Beam Suntory and granted there are 2, in such context, a put option with a view to acquire 100% of the outstanding share capital of being hold in France SAS, which also, in turn, 100% of the share capital of Courvoisier, which is the legal entity owning the Courvoisier and the [indiscernible] brand as well as the operation, which I've mentioned. The enterprise value for the deal is in dollar, [indiscernible], corresponding to EUR 1.2 billion at today's exchange rate. And the consideration of enterprise value is based on a cash-free, debt-free basis. The enterprise value is composed of a fixed upfront purchase price of $1.2 billion, corresponding to EUR 1.1 billion at today exchange rate, which is subject to the customary price adjustment mechanism and as well as to -- and also to an earn-out consideration for a maximum amount of $120 million corresponding to EUR 110 million. Such earn-out will be payable in year 2029 based on the achievement of net sales targets that are realized in fiscal year 2028. The corresponding enterprise value of [indiscernible] is equivalent to a multiple of about 17x the contribution after A&P of the business in fiscal year 2022. The perimeter, of course, include the trademarks, comprehensive production facilities, consisting of distillation, warehouses, viners branding facilities, ageing sellers, the automated bottling lines and warehouses and the branded quarter with [indiscernible] visitor center. As said before, the value of maturing inventory, which is an aging liquid as of the end of October 2023 with well-balanced stage profile to support the future brand development is worth $365 million. Vis-a-vis, the funding following page, the signing of this transaction is subject to the information and consultation of the French employees' representatives and the closing of the transaction will be subject to the completion of the appropriate regulatory processes as usual as well as the customer antitrust approvals. The closing is expected to occur of the transaction is expected occur in year 2024. The funding of the acquisition is fully committed by a bridge loan of EUR 1.2 billion with a tenor up to 2 years, 24 months from closing date by a consortium of banks that comprises Bank Intesa, Bank of America, Credit Agricole, Goldman Sachs and [ Mediobanca ]. Campari Group in terms to fund the transaction with a mix of debt, existing cash, equity and/or equity-like instruments, with timing and amounts yet to be determined. Campari will continue to monitor the market conditions in order to assess the best financing alternatives. As a result of this contemplated acquisition and assuming a fully debt-funded transaction, Campari Group's pro forma net debt-to-EBITDA adjusted ratio would be expected to increase from the current 2.6x as of end of September to roughly 4x upon the deep closing thereafter, a sustained leveraging is expected, which will be fueled by positive cash flow generation. I think you already see it on funding. Now, I would hand back to Bob for his conclusions.

Thanks, Paolo. We'll quickly go through the conclusions and we can pass on then to the many questions you probably have. Clearly, this is a unique opportunity for our group to enter the top league of superpremium cognac category with a beautiful world-renowned brand. Courvoisier clearly will benefit from Campari Group's focus and brand development capabilities, leveraging the group's enhanced operational and business infrastructure. We are poised to leverage the heavy expertise in cognac, which we have at the Board level. As you know, we have the ex-CEO [indiscernible] as well as the ex-CEO of [indiscernible] Board as well as the ex-CEO of the [indiscernible] Brand who is in our executive management team. So there is a great expertise for cognac. They're all excited by this acquisition, and we aim to re-establish the brand credentials as a global icon of luxury with their supporting. This is clearly the largest deal in our history, enables further portfolio premiumization, and it is a significant step-up in the U.S. with also long-term transformational potential in Asia, which, as you know, is a very important must-win battle for us. So this is on our side, and happy to take your questions.

[Operator Instructions] The first question is from Sanjeet Aujla with UBS.

Three questions from me, please. Firstly, can you give us a sense of the 2028 net sales target upon which the earn-out is contingent upon? Would you expect sales to go back to or ahead of 2022 levels? Secondly, can you just comment on your expectations, if any, on cost synergies from the transaction? And thirdly, can you just give us a sense of how well invested the brand has been in recent years, A&P as a percentage of sales and gross margins would be very helpful.

Let me take the last question, and Paolo will handle the first one. I mean the brand has been well invested, but we think the quality of the investment could have been different and its allocation to the market different as well.

So with regards to the 2028 net sales target, unfortunately, we cannot disclose that number.

And cost synergies?

Cost synergies, no. Even there, we can add a little bit more color on what we've envisaged in terms of pro forma effect of [indiscernible] consolidation of the business, assuming year 2022, actual for Campari and actual for Courvoisier business. Clearly, the level of gross profit, the Courvoisier business at this stage as a gross margin on revenues that is below group average in year 2022. And therefore, we envisage potentially a dilution of roughly 80 basis points at the level of gross profit. The A&P as a percentage of sales is quite in line with group A&P on revenues. On the SG&A, for the time being, we believe we should be fine in the future, taking into consideration that we need to beef up a little bit our organization with roughly 4% of top line intact and top line of year 2022, so roughly EUR 9 million. This is highly accretive to group EBIT by about 130 basis points. Thereafter, we believe at the level of EBITDA [indiscernible] as the business will deliver the day it is fully consolidated 50 basis point accretion based on year 2022 deliver numbers. Thereafter as we're debating on the effect of the consolidation, interest on coupon on the additional debt assuming the funding will be 100% debt financed would be again in the region of 4% of the consideration. So [indiscernible] EUR 50 million. In France, you pay taxes at 25% tax rate worth mentioning the fact that not only the operations, but also the brand is sitting in France and therefore, the vast majority of the brand profitability in the future will be sitting in France. And in France, you pay 25% tax -- corporate income taxes. So net-net, based on 2022 numbers, the deal would be accretive by about 2%, low single-digit accretion effect. Worth noting that the intangible, so the potential value of the [indiscernible] would not be deductible for tax per opposite it's not. And that's about it. In terms of D&A, about 2% of sales, which is basically matching the historical CapEx. Given the fact that the plant and all sites are in state-of-the-art and pristine conditions, we are not envisaging to step up the CapEx spend in the future.

That's really helpful color. Can I just squeeze in 1 more follow-up, please. Obviously, there's been a big sales decline this year, the 33% decline you've seen in the first 10 months, do you think that's pretty much in line with the sell-out or those sales are below the sellout globally?

No. The sales decline has been greater than the sellout. So there's been destocking.

The next question is from Olivier Nicolai with Goldman Sachs.

Congratulation on the acquisitions. And it comes at a time when the demand for cognac is weak. So first question would be, actually, could you give us your long-term view on the cognac category, especially in the U.S. and in China and if you see upside elsewhere? Second question is, how are you planning to develop the brand in China since Courvoisier is mostly U.S., mostly in the VS segment and have a very small market share in China? And then the last question, if I may, on the U.S., the brand you enter have momentum for decades. So as BIM Century passed Courvoisier to you, excuse me, for the [indiscernible]. What do you think has been missed on the brand? And what will be the first step to reestablish a brand to its former glory?

Well, look, Olivier, we're pretty bullish on the long-term perspective of the cognac category. If we weren't, we wouldn't be spending $1.2 billion to make an acquisition. We think that what is happening in the U.S. currently is not structural, not really cyclical. And if you look at the progression of the category in recent months, it's starting to normalize. And 1 thing which everybody is a little bit missing that if you take a step back and look at the volumes and value of the category versus 2019, they're actually ahead, particularly on the value side. So this is -- it's a category -- it's a category which has to normalize after the very frothy pandemic eras and then what happened in terms of significant price increases due to being on allocation and at the same time, compensating inflationary pressures. The players in the industry clearly overdid it, and it is a short-term backlash, but there's nothing fundamentally wrong with the category. Now, in China, yes, it is a small brand, but it's nice to start with a clean slate. And we think it's not just a China play, but it's a broader play in Asia, in many markets as well as a very interesting play in Eastern Europe. Last but not least, we think with our usual playbook, tender loving care and focus back on the fundamentals with our marketing model, we can get this brand to perform at a very different pace. I wouldn't comment on what the current owners did or didn't do. Clearly, we think that the frenchness of the brand and its history and all of these archives, it has an incredible latent equity, and we're sure that we can bring that back to life, as well as benefit from the expertise in the cognac category, as I said earlier, of our 2 Board members as well as our Managing Director of a key geography of ours.

The next question is from Edward Mundy with Jefferies.

Congrats on getting this deal across the line. A couple of questions. First of all, in the past, you have walked away from potential opportunities to buy Dusty brands such as [indiscernible]. What makes this brand different, is the first one. The second 1 is, clearly, there's a lot of VS at Courvoisier. Is the plan ultimately to shift from VS to VSOP and above? And how do you think about doing that? And sort of with what investment? And then the third one, you've obviously got quite a lot of inventory in cognac through Grand Marnier. What's the opportunity to integrate the 2? And is that part of the thinking behind this transaction?

Yes. I mean, what makes this brand different. I mean, this brand has really solid latent equity from 1828, was the official cognac for the 2 emperors of France, Napoleon first and the third. It's 1 of an incredible award that has an incredible liquid. And if you really focus on its fundamentals, you can get it back to growth. It's not a brand invented 30 years ago or whatever with a liquid, which anybody can copy. I mean, as you know, this is a very special category. And it's a premium category, growing very nicely, if you look at it from the right perspective. And we see it's got really the credentials to do well in that. Now in terms of shift, et cetera, I mean, these are all things, which we will study and do, we're currently studying it in detail. The good news is, is that we have plenty of inventory to actually grow the brand and premiumize it further. So there are no limitations from that side. With regards to Grand Marnier, et cetera, this makes us a bigger player in the region, no question about that. But our #1 priority here is really the commercial synergies and drive those forward as fast as possible across our key subsidiaries.

Can I just ask a quick point of clarification. You gave -- you gave the potential accretion of 2%. When we do modeling and you've given us the coupon, what EBIT should we be using for 2024? Any help you can give on that side?

Actually, that's difficult to say at this stage, honestly, put aside the side that 2024, will not be the -- so given the fact that the signing and then the closing are deferred, we cannot say what is impacting the P&L of the acquired business in 2024. Regulatory approvals take time, particularly in France. So we sense for next year, we will most likely benefit of just a portion of the overall business profitability. As Bob just said, 2023 has been massively impacted by soft demand, but even most importantly by significant destocking, particularly in the U.S. market. So we feel pretty confident in year 2025, which will be the first full year of consolidation of the business, we will have good results. But at this stage, it's a little bit crystal ball exercise.

The next question is from Trevor Stirling with Bernstein.

I think probably you've answered my questions, Bob, because it really was around [indiscernible] most excited about the opportunity to develop the brand. I think you probably touched on it in terms of premiumization and geographic expansion. So I'll probably has it on to the next question.

Yes. But just to underline it, this isn't something we will do for first time. This is quite -- this is quite -- a repeat of what we've done many times in the past. And what is different, it's a new category, but we have the right people to advise us.

[Operator Instructions] The next question is from Paola Carboni with Equita SIM.

Congratulation for this achievement. I have a couple of questions, which probably go back to the indications Paolo gave on the profitability. So actually, I was wondering whether the development of Courvoisier will entail different profile or stronger investments in marketing compared to the current average for the group. So I understood that at the moment it was in line, but I was wondering if you expect your brand building activity to leverage on -- or to need a stronger push on marketing? Or it would rather be more a matter of SG&A support -- commercial support, like strengthening more your rare organization, for example, in some geographies. So I was wondering if you can elaborate a little bit on this.

I mean, I think vis-a-vis the future development of the brand the premiumization strategy that we intend to take clearly is also aimed at expanding the gross margin of revenue. That's the first target that we set, which we define. So definitely, in cognac, the marginality, typically at the level of gross margin is way higher than historical 1 that is below 50% in year 2022 for the business. So we see a lot of opportunity of expanding this ratio of gross profit and revenues. And it will come by a combination of positive sales mix and premiumization of the offering and the price increase. Vis-a-vis the A&P, likely enough, we're starting off a good base of a pure revenue. So there is -- the brand is being funded. We may decide to do probably different things, but we do not envisage a significant step-up in A&P on revenues. Of course, if we are extremely successful in lifting the gross profit on revenues, we may decide to release a little bit of the gross -- of the EBIT margin accretion into the A&P spend for the brand. It has clearly a lot of potential, not only in its current big markets of the U.S. and the U.K., but most importantly, in Asia, where we have a strategic objective of bidding further our business. Vis-a-vis the SG&A, I said in the region of EUR 9 million, something like that, it's a fairly prudent assumption. Thereafter, we have said many times, a scalable model from our business. So we rely on centralized GBS organization, functions, IT and delivery -- service delivery and I suppose we don't need to be up supporting functions to absorb this business. So the investment which I've alluded to put just in the area of commercial and marketing. And we sense that this is enough to cover the business taking into consideration in 2 markets, the largest markets that I've mentioned, we already have our own in-market companies. So in the future, we would expect that the contribution after A&P as a percentage of revenues and say the pro forma business EBIT or revenues will grow over time.

And importantly, this is a brand which will benefit the rest of the rare portfolio because clearly, cognac open stores, which will be very interesting for the rest of our portfolio.

So in particular, as far as my question on the rare organization, you don't expect to...

But that's within the number, which Paolo already shared with you.

The next question is from Chris Pitcher with Redburn Atlantic.

Very quick question. Is there anything that you've seen in Courvoisier's performance and make you think you're buying this towards the bottom of the cycle? Or is it more your confidence in the long term positioning of cognac in sort of 2025 and beyond that gives you the confidence to do the transaction now?

Look, I mean, we clearly see great long-term potential for the category. And at the end of the day, this is a better time to make such an acquisition than when the category is really frothy. So it makes a lot of financial sense as well. What really convinced us are about the brand is really the latent brand equity and the very high quality of the liquids. And every single element is there. I mean, from the state-of-the-art production facilities to an incredible brand house. We just need to make the asset a focus for us and make it work and sweat much more than it has for the previous owners, which had other priorities.

I suppose, specifically, you've not seen any sort of sequential improvement in the declines that you've quoted publicly?

Look, I mean, you have the same Nielsen numbers or [indiscernible] numbers we all do when you can have a look at it, and you can see them normalize throughout the year.

The next question is from Gen Cross with BNP Paribas Exane.

I just wondered if you could offer any perspectives on what you see as the mid- to long-term profile of the Courvoisier brand and if to any extent that's limited by any volume constraints or it's not at all?

No, we don't have any volume constraints. I mean, really, the aged inventory is fantastic, very well rounded, very balanced, so we can drive this forward. No issues there.

[indiscernible] 9 years.

[Operator Instructions] The next question is a follow-up of Paola Carboni with Equita SIM.

Yes, just a clearly quantitative question. You have indicated in the press release that the debt-to-EBITDA ratio would rise to 4 times, let's say, at the moment of the acquisition. Can you give us a sense of how fast can leverage be? So when do you expect to come back to around 2.5 to 3x, which is the starting point?

As you know the first time is the assumption that we consolidate the asset day 1, which is not the case so it would most likely be sometime next year. And so the leverage ratio, the starting point will no longer be [indiscernible] lower. There would be a deleveraging. But yes, we think we can qualitatively in direction, I can tell you. We will accelerate the leveraging, but we're not setting targets of deleveraging because first and foremost, we need to understand exactly what is the exact funding strategy, taking into consideration the timing of the closing, first and foremost, the market conditions and understand exactly what is the ideal mix between that equity, equity-like securities and so forth, and the use of existing cash. So once we have a clearer picture, then we will give you a target for through leverage and subsequent deleveraging.

But as you know, Paola, we have much more flexibility in our capital structure now. So I guess, clearly, this deal doesn't affect our appetite or ability to do further deals.

Yes, very clear. No, I was -- actually my question was more on the intrinsic cash generation power of this business and also on the desirable level of inventory, whether you think the starting point is correct or maybe do you -- do you believe the business will make higher or will be run also with a lower inventory going forward. So just to understand whether there is an opportunity in terms of cash generation to see anything specific going forward?

No. In terms of effects of first-time consolidation, I said we have this $365 million of working capital that is the fixing as of October. It's a cyclical business, so then you enter into the selling period, it goes up and it goes down. We sense overall, the current level of inventory is more than adequate to support the future development of the brand. If anything -- if anything, given the stocking that has occurred in the U.S., potentially we have more headroom to accelerate the growth trajectory with the existing ageing liquid inventory. On top of -- then if you look at payables and receivables, a consolidation immediately after they would offset each other. The business comes with roughly $30 million of finished goods sitting in the sellers in market companies, which are part of the consideration included. So we will not have to forecast any further dollar to get that finished goods. And in the future, we feel operating working capital for the business will grow proportionally to the development of the business revenues.

Next question is from Alessandro Tortora with Mediobanca.

Just let's say, to follow up. The first 1 is just related to the last point that you touched. So considering everything we discussed on the liquid, but also on the [indiscernible] you mentioned just before. So, can you give us an idea of the working capital on sales which is running today, let's say, this Courvoisier brand? That's the first question. And the second question is related to the year-to-date trend, the 10 months trend -- let's say, you described in the presentation. Can you give us an idea of the split of the 33% decline between volume and prices for Courvoisier?

Yes. I mean, I can take the last one. There's no major difference between volume and value, honestly, in terms of trends.

Vis-a-vis, the operating working capital on revenues, receivables and payables, as I said, would offset each other. Then you have the $365 million based on October, and then it will change at closing depending on the cyclicality. You have the $30 million finished goods and $365 million plus %30 million over, if you take the 2022 actual net revenues of $249 million.

I mean that's very normal in the cognac category.

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

All right. Well, thank you all very much for joining us, and we look forward to talking about -- more about cognac in the years to come. Thank you. Bye-bye.

Bye-bye.