Pernod Ricard SA (PRNDY) Q1 FY2026 Earnings Call Transcript & Summary

Good morning to all of you. We're very pleased to welcome you today to our Pernod Ricard Q1 FY '26 sales call. I'm in the room with Hélène de Tissot, Group CFO. Hélène will take you through the numbers with some opening remarks. And after that, we're going to take your questions. Hélène, over to you.

Good morning, Florence. Good morning, everyone, and thank you for joining today's Fiscal Year '26 Q1 sales. So we are reporting today a 7.6% decline in organic net sales for our first quarter. As flagged in our recent full year communication, the slow start to this year was expected with 4 key reasons. First, in the U.S., and while we are encouraged to see that sellout performance in the U.S. is continuing to improve related to the market, our U.S. net sales have declined in Q1, amplified by inventory adjustments. Second, the sharp contraction of sales in China in the context of continuing macroeconomic and consumer sentiment weakness, and also reflecting the impact of some trade inventory adjustments. The impact of the technical effects in those 2 markets on our Q1 means that the underlying performance is significantly better than on net sales by circa 3 points. Third, strong underlying growth in India, though with sales negatively impacted by excise policy changes in Maharashtra State since July. And fourth, global Travel Retail sales are challenged in Q1 as the benefits of the resumption of Cognac sales in the China duty-free channel is expected from Q2. With our broad geographical base, we see positive performances in a number of markets across most regions; in Asia, in Africa, Middle East, North America and Europe, helping to partially mitigate the decline in those top markets. Markets of notes that have enjoyed positive sales momentum in Q1 include Canada, Turkey, Japan and South Africa, and we continue to enjoy positive market share momentum in key markets. Price/mix is largely impacted with the negative market mix. Volumes declined driven by key markets, notably U.S. and China impacted by destocking; and India, impacted by the Maharashtra excise policy changes. Reported sales are minus 14% with a negative FX effect of EUR 143 million, linked to U.S. dollar, Indian rupee and Turkish lira and a negative perimeter impact of EUR 54 million, mainly linked to the disposal of the [indiscernible] brands. Turning now to take a closer look at sales in our markets and regions, starting with our #1 market, the U.S. So net sales, minus 16%. The U.S. market remains subdued for Nielsen and NABCA, we see the market sellout value for total spirits, including RTD for the past 3 months is running at circa minus 1% in Nielsen, minus 2% in NABCA. We are continuing to close the gap with the market despite some softening of the spirits market as Pernod Ricard sales out momentum remains rather resilient at circa minus 6%. Our gap to market and bottled spirits has consistently improved during the past year and that gap is now reduced to circa 2 to 3 points. We have strong performances, beating the respective competitive sets on some of our top 3 brands that are Jameson, Absolut and Kahlua. Beyond those, we also see good momentum amongst our other brand priorities, including the Glenlivet, Martell, Del Maguey and Jefferson's. The sales in the U.S. were also impacted with some inventory adjustments as explained at our full year call. As a matter of fact, fiscal year '25 year-end wholesaler trade inventories were higher than would otherwise have been the case due to the uncertainty regarding trade tariffs during H2 of fiscal year '25. So turning to look at our U.S. marketing. We are maintaining the U.S. marketing investment level above the group average, and we have, I must say, a strong activation program ahead of us as we enter the Q2 festive season. We have as well impactful product innovation, some that are now in their second year, including Kahlua Chocolate Sips, Absolut Cocktails Cosmopolitan and Espresso Martini, Jameson Triple Triple and Jefferson's Rye Whiskey. Newly launched product innovation this fiscal year include Kahlua Dunkin, which is a co-branded Kahlua with Dunkin Donuts for caramel-infused experience. Skrewball 100ml small format and the Glenlivet Jamaica Edition. And we have more, I must say, exciting product innovations scheduled for later this year that we can share details of those with you in February at our H1 sales and results update. Sports sponsorship are important avenues for engaging with our consumers, notably that between Jameson and the Major League Soccer where we are fueling fandom with advertising and out-of-home visuals, city localized key visuals of an on-premise tools with tools for our owners and retailers to activate the brand and as well e-commerce assets. And we are deploying a range of media activation on our priority brands partnering with cultural icons, including Kahlua with Salma Hayek, Jameson featuring Aaron Taylor-Johnson, the Glenlivet featuring Thomas Doherty and Redbreast featuring Andrew Scott. So altogether, an intensive program to support our improving momentum in the U.S. Moving now to India. India net sales are up plus 3%. So while enjoying strong underlying consumer demand dynamics, sales in India are negatively impacted by the excise policy exchanges in Maharashtra state implemented in July. The 50% increase in excise tax from 300% to 450% leads to a significant increase in consumer prices at circa 35% increase, which is having a consequential impact on demand. Elsewhere, India sees strong sales growth both on Royal Stag and especially on international brands, led by Jameson. For the full year, we are expecting the excise policy change to continue to weigh on our overall sales performance, though with continued favorable and dynamic underlying trends. Let's move now to China. China is posting a Q1 at minus 27%. So sales contracted at a similar rate as last year Q1 in a still challenging macroeconomic environment with soft consumer demand over the summer and into the Mid-Autumn festival, an impact from some trade inventory adjustments as expected. Demand was impacted by the tightened regulatory environment in place since Q4 last year, which particularly affects sales in the high-end on-trade. While Cognac sales remain depressed, other premium brands continued to grow in Q1, notably Jameson and Absolut. We remain cautious on the demand environment ahead of the importance CNY period. Let's move now to Global Travel Retail, minus 16%, following the resolution of the Cognac anti-dumping investigation in July, the suspension of Cognac sales in China duty-free has ended. Our sales in that channel are expected to resume from Q2, and so Q1 sales remained subdued. Travel Retail in Asia beyond China remains weak, notably in South Korea. In Travel Retail, in Europe and America, underlying performance has been strong over the summer, while sales were impacted by phasing. Global travel retail expected to be back to growth in fiscal year '26. In other markets, elsewhere in Asia, Rest of the World, we see dynamic sales performance in Japan, in Turkey and South Africa, an easing in the rate of decline in South Korea and a sharp contraction in Taiwan market with softening consumer demand. Let's move to Europe now. So market in Europe over the Q1 is at minus 4%. Spain is stabilizing. There is an easing in the rate of decline in Germany, a soft start in France against a high comparison basis with restock in a major retailer in Q1 last year and soft start in the U.K. Poland is negatively impacted by sales phasings, though sellout remains in growth. Latin America saw a decline in both Brazil, which is due to phasing, and in Mexico, due to continuing weak consumer demand conditions. North America saw a strong start to the year in Canada from RTDs and also Jameson and Absolut performing well. So for the full year, which, as we say, is a transition year, though the environment is challenging, especially in China, we maintain our expectations for improving trends in organic net sales compared to last year, [indiscernible] H2 with a more favorable comparison basis, later timing of Chinese New Year and a rebound in Travel Retail. We will defend our organic operating margin to the fullest extent possible, supported by strict cost control and the implementation of our fiscal year '26 to '29 EUR 1 billion operational efficiencies program, including the adaptation of our Fit for Future organization. We continue to invest to increase our brand's desirability with sharp marketing investments allocation between markets and brands, focused on improving efficiency and effectiveness, focused on innovation and experiences while maintaining our A&P investment ratio at circa 16%. Regarding cash, cash generation remains a focus. Strategic investments, that is CapEx and change in strategic inventories will be less than EUR 900 million in fiscal year '26, and we will apply strong operating working capital management. We expect cash conversion ratio to further improve versus fiscal year '25. Foreign currency exchange impact is expected to be significantly negative. We remain confident in the attractiveness of the spirits markets and in the long-term demographic and consumer trend tailwinds, leveraging our unique broad-based and balanced geographic breadth and diversified portfolio of premium international spirits. We continue to project organic net sales growth in the medium term, aiming for the range of circa plus 3% to circa plus 6% per annum on average with annual organic operating margin expansion. We are confident in our strategy, in our operating model and in the engagement of our teams to deliver sustainable value growth over time. That concludes my opening comments, and we can now open the line for questions.

[Operator Instructions] The first question is from Edward Mundy, Jefferies.

Hélène, Florence, so 2 questions for me, please. I think you have been flagging a softer first quarter and it's very much in line with expectations. And you've kept your guidance unchanged. I think the guidance would imply that as you go into H2, you're probably going to be doing positive revenue growth. Could you perhaps flesh out how you sort of think about that? And what are the main things that are going to be slightly different in the second half relative to what we're seeing in this first quarter, is the first question. And then just a little bit more color on the cost side to defend as much as possible the margin, could you perhaps provide a bit of update on some of the initiatives underway and to what extent you can sort of double down on those, given the environment is still quite tricky.

Yes. Thank you very much, Edward, for those questions. So let's start with the first one. As you said, we were expecting a soft start for the reasons I started my introduction remarks with, and that's why we were obviously sharing that with you at the end of August. So H1 is impacted by technicalities that are materializing in Q1. So why will H2 be stronger than H1, I think that's more or less your question. So first, we have the resumption of our sales in Martell China duty-free, which is only starting as we speak in Q2, and this will obviously contribute to a much stronger H2 for Global Travel Retail, which we'll be lapping last year, a low comp starting probably in December. So that's the first element. Second one, there is as well some easier comps in China, which will be lapping a very weak CNY last year, and we'll have as well a later CNY this year. Then we have as well obviously still quite strong ambition for India, which will very likely be in a very dynamic trajectory in H2 with still some impact of the Maharashtra excise policy, but which could be a bit less impactful in H2. When it comes to the U.S. It's too early to really be, I would say, quite specific on what we expect in the U.S. because, obviously, we are only starting the festive season as we speak. But as you know, our focus is really to keep improving our sellout momentum, which has been quite continuously materializing this improvement for already a few months now. But obviously, there is, as well the impact on the inventory adjustment that will have a weigh on the trajectory in the U.S. on the full year. So this is the key, I would say, drivers of H2, and I must obviously as well, highlight the Rest of the World where we have a resilience or strong growth for already a few quarters that we expect obviously to still be delivering in H2. Your second question is on the margin. Yes, so we are confirming our ambition to protect the margin to the fullest extent possible. And I would say that this is, first, because we have obviously already quite strong track record in terms of delivery of EUR 900 million 3-year program from '23 to '25 with half of it being delivered in '25. So those initiatives have not stopped, obviously, at the end of June last year, and we are continuously accelerating of those efficiency. And as you know, we have now this EUR 1 billion program, which is, as I just said, a continuity on many aspects versus what was already contributing to the margin expansion in the very recent past. So without maybe going through every line on the P&L, I can tell you, it started obviously with the first line, which is the top line and price and premiumization that is the core of our strategy. And we're going to take price where we can and when we can, for sure, with as well some initiatives in terms of revenue growth management and making sure that any promotional efforts is optimized. Then we have all the initiatives on our COGS, which are really covering the full, I would say, scope of our production on procurement to production to supply. And this is obviously something which has been very significantly contributing to the EUR 900 million. So there's much more to come. And then when we look at the A&P, there's as well, strong ambition in terms of efficiency with reinvestments behind the right, I would say, brand market combination. And when it comes to the SG&A, there is a combination of what we call Fit for Future organization, which is adapting the organization to the current environment, but as well to the future growth ambition that we have, plus some, I would say, strict cost control measures that have been already in place for more than 18 months and that are obviously still fully implemented.

The next question is from Laurence Whyatt, Barclays.

A couple for me. Firstly, on the destocking in both China and the U.S.A. I was wondering if you could quantify what you think the numbers would have been in those 2 markets, if you didn't have any destocking, just sort of giving your underlying change in those 2 markets? And also similarly, do you think the change in distribution in the U.S. had any impact on the American level of destocking? Or do you think that was sort of too early to see any of that at the moment? And then secondly, on the changes in Travel Retail in China, you mentioned this as a reason why you expect an improvement throughout the year. Do you expect Travel Retail for Martell in China to go back to where it was as we've sort of removed this restriction from the government. Do you expect it just to go back to where it was in sort of say, Q1 or calendar Q1 of 2025? Or do you think it will still be a little bit of a subdued level in the travel retail channel in China?

Thank you. So let's start by your first question for U.S. and China. So I start with the U.S. So first, let me maybe remind you the key reason for the level of inventory that we started the year with. This is really the traffic -- the tariff uncertainty that we were going through in H2 last year. So that's the main reason. I think the change of distributors is probably quite anecdotical. So the main reason is really this tariff uncertainty. And when you look at our sellout, obviously, looking at the Nielsen and NABCA, we are at circa minus 6%, where the sell-in are at minus 16%. So I think you have clear ability to do the math in terms of underlying performance versus the Q1 trajectory. When it comes to China. So China, it's a bit more difficult in terms of full visibility as we speak because first, this is obviously the impact of Mid-Autumn festival. And as you probably know, this year, it's almost 3 weeks later than last year. This year, it was 6th of October, last year, 17th of September. So it has an impact between the sell-in but as well depletion in September and October. And we don't have yet the full visibility on the depletion in September. So what I can tell you is that getting into Mid-Autumn Festival, our understanding is that the depletion were probably around, I would say, circa mid-teens decline, where you have the numbers for China at minus 27% in terms of net sales. But again, not completely easy to do the math because of the timing of Mid-Autumn Festival. But for sure, this is -- this means that our performance -- underlying performance is better than the Q1 numbers. And when it comes to the full impact on the group performance, as I mentioned in my introduction, it's probably circa 3 points, which is linked to those inventory adjustments. Your second question, for Travel Retail, China duty-free. Obviously, as I said, it's just resuming. So a bit early to tell you what is the consumer demand. But to be fair, there is some link between China domestic demand and China travel retail demand. So the consumer demand in China domestic is very soft. So I would say it would be cautious to assume at that stage that the demand in China, Travel Retail could be a bit lower than it was 1 year ago. But we'll know that obviously in a few months.

Just to clarify on the Travel Retail then. You're getting the same amount of shelf space that you had previously. You're not seeing any differences with that sort of -- any of these sort of changes?

Yes. yes, no difference.

The next question is from Sanjeet Aujla, UBS.

Hélène, Florence, a couple from me, please. Firstly, on Europe, I think you called out some easing of the rate of decline in Germany. But with the region, minus 4%, are there any other markets within Europe, which are a significant drag and how you think about Europe for the balance of the fiscal year, please? And my second question, just wrapping up the conversation on the U.S. So in Q1, how we now have the full unwind of the inventory adjustment? And therefore, would you expect sell-in and sell-out to be aligned for the next 3 quarters of the fiscal year? .

So I'll start with Europe. So Europe in Q1 is impacted with some phasing, especially in Central Europe, not to say, Poland, where sell-out is in growth but there is some quite significant impact due to negative sales phasing. So we expect a stronger performance from Poland in the months to come. For the other markets, so there is not a particular weakening, I would say, in our European spirits market. To be fair, there is some softening within the on-trade. And this is largely due to the cost of [indiscernible]. So continuing pressure on disposable income in major European markets. Having said that, Spain, which is a big market and a big market as well in the on-trade is stabilized in Q1. You mentioned Germany, yes, there is some easing rate of decline in Germany. But to be fair, the consumer demand is quite soft. As we know, in Germany for already a few months now, and this is really linked to the macroeconomic environment. Moving maybe to France. So soft start, but some technicalities in this Q1 with an unfavorable comparison basis because we are recycling a strong pipeline we filled last year in one of our major off-trade customers. We are still gaining share in France despite soft market conditions. So your question on the outlook, I would say that despite this soft start, Europe remains overall resilient. and we expect the full year to be better than Q1 in Europe. Your second question is on the U.S., yes, for the trade inventory situation. So there is some adjustment in Q1, as I mentioned, quite obvious when you compare sell-out with the net sales numbers. To be fair, it's really a bit early to tell you what to expect for the 3 quarters to come, especially now that we are only starting this quite important festive season in the U.S. So the inventory position at the end of December, I'm sorry, it's probably fora bit naive for me to remind you that, but it's very obviously dependent on the O&D performance, for which we are focusing, obviously, on being extremely visible and hopefully, as were exciting for the consumers in terms of the presence of our brands in many moments of consumption, both in the on-trade and in the off-trade.

The next question is from Trevor Stirling of Bernstein.

A couple of questions on India, Hélène. I am wondering if you could tell us, roughly speaking, how much of your sales is in Maharashtra? And then what is your sales trend ex-Maharashtra? So 3% nationally. You mentioned about the strength of Royal Stag and the international brands, is Blenders Pride growing according to your expectations as well?

Yes. Okay. Great. Thank you. So India. So India is in a strong place in terms of performance. So you're absolutely right. We should not be focusing only on what's happening in Blenders Pride even if Maharashtra is one of the largest state in terms of weight in our net sales. So it's circa, I would say, 14% of our business. And this change of the excise policy has, unfortunately, the impact we were expecting to have, which is a significant double-digit decline in Q1. So if we were excluding this impact, our performance in India would be at circa plus 7%. So then the -- one of the brand, which is the most impacted is Imperial Blue. You're absolutely right, Royal Stag is in a good place, and our imported brands are performing very well in India in Q1. I wouldn't be highlighting anything significant when it comes to Blenders Pride. We are extremely ambitious with Royal Stag and Blenders Pride for the future growth in India. So some impact, yes, because of this Maharashtra situation. But this is a great brand for which we have, again, a very strong ambition for the quarters and the years to come in India.

The next question is from Chris Pitcher, Rothschild & Co Redburn.

Could you maybe give just a little bit more color on the sell-in ahead of the festive season. You mentioned, obviously, it's an important time. And we're moving into that. I mean encouraging to see Jameson doing well, but also pointing out Absolut. Maybe give a bit of color on what's driving Absolut. And then on Latin America, it seems like some really different performance between Mexico and Brazil. Could you sort of try and quantify how bad, sharply, is in terms of the decline in Mexico? And then on Brazil, the phasing effect, would you -- does that mean you would expect a better performance going into Q2? .

Yes. Thank you. So your question in the U.S., you're absolutely right. There is some improvements in the sell-out. That's why we are closing the gap versus the market. And 3 of our brands that are strongly contributing to that very positive trajectory are Jameson, Absolut and Kahlua. So focusing on Absolut, which is your question, I would say this was already something for which we were highlighting some positive weak signals back in Q4, which are confirmed in this Q1. And it's probably a combination of different initiatives. And when it comes to the absolute range, we have done, I would say, a quite significant job in terms of Absolut Cocktails innovation, obviously as well the RTD with Absolut Ocean Spray. Absolut, when it comes to the Absolut flavors, Absolut vanilla, for instance, is doing well. So lots of innovation ready -- in terms of ready-to-serve, in terms of ready-to-drink, a strong partnership as well and visibility of the brand. And all in all, this is obviously contributing to a stronger performance of the full Absolut franchise. By the way, maybe just closing on the RTD success story, the Absolut Ocean Spray. We are obviously extremely consumer-centric. As you know, and tracking what is the perception from consumers when they get into the absolute RTD offer. And there is some significant positive trends in terms of then both consumers moving to Absolut Blue, [indiscernible]. All those initiatives, plus a quite strong media campaign and again, visibility of the brand are the key, I would say, success factors explaining the recent improvement of the performance of Absolut that we are obviously quite happy with and that we want to keep improving in the future. But again, I'm just taking the opportunity of that question to say that Jameson is in a great place. Kahlua as well is strong, and we see some positive green shoots and some other brands in the U.S. like the Glenlivet, Martell, Del Maguey, and Jefferson. So more to come. This is a huge focus, of course, for us and for our team in the U.S., strong focus in the excellence in execution and those recent performance trends are quite encouraging, I must say. So -- sorry, I forgot your second question.

Just to understand what's going on in Latin America.

LatAm, absolutely. So LatAm, I would say there is no change in terms of underlying trends versus fiscal year '25, meaning in Mexico, the environment is softer. There is a weak consumer demand, and this is materializing in our Q1 numbers. When it comes to Brazil, there is phasing impacting our numbers in Q1. So we expect a stronger performance from Brazil for the full year.

Gentlemen, there are no more questions registered at this time. I turn the conference back to you for any closing remarks.

Thank you very much. I think this is the end of our call. So thank you very much all for attending. Thank you, Hélène for the presentation and answering the questions. Speak to you all very soon. Bye-bye.

Thank you. Bye-bye.

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