Pernod Ricard SA (RI) Earnings Call Transcript & Summary

Good morning. This is the conference operator, welcome and thank you for joining the Pernod Ricard First Quarter Fiscal Year 2023 Sales Conference Call and Webcast. [Operator Instructions] At this time, I would like to turn the conference over to Ms. Hélène de Tissot, Group Finance, IT and Operations Director. Please go ahead, madam.

Thank you. Hello, ladies and gentlemen, and welcome to Pernod Ricard Q1 FY '23 net sales call. So we're hosted by Hélène this morning. We will take you through the presentation and take your questions thereafter. Hélène, over to you.

Thank you, Florence. Good morning, everyone. So let's start with the exact summary of our Q1 and fiscal '23 year sales. So this is a dynamic start of the year, with diversified sales growth, growing by 22% on a reported basis and increased 11% organically, with a strong price effect of plus 7%. I must say this is quite a remarkable performance through COVID, with the Q1 organic CAGR growth of circa plus 8% over the last 3 years. So let's start first with the performance across markets. So strong broad-based performance, with the U.S. that are enjoying strong distributor depletions, with shipments being impacted by phasing. Strong growth in China and India. Travel Retail continues to rebound despite ongoing softness of Chinese travelers. We have as well continued strong dynamism in Europe, which is enhanced by an excellent tourist season, supporting as well the on-trade growth. So strong pricing, with effects of fiscal year '22 increases, along with new increases implemented, notably in the U.S. in the month of September and mainly starting from the 1st of October, with volumes growing across our 3 regions. If we look now at the performance across our brands, so diversified double-digit growth across all spirits segments. Starting with the Strategic International Brands that are growing at plus 12%, very dynamic growth, which is driven mainly by the Scotch portfolio but as well by Jameson, Absolut, Beefeater and Martell. Our Strategic Local Brands are growing by 13%, mainly driven by strong double-digit growth of Seagram whiskeys in India. Specialty Brands growing very strongly, plus 16%, with continued excellent developments driven by Lillet, by Malfy by Redbreast and as well by our U.S. whiskey, Jefferson's. Strategic Wines at minus 8% with a soft start, notably in the U.S. and in the U.K., with some phasing effects but as well a dynamic start in Canada and India. So let's start first with our must-win markets. So there is a continued portfolio momentum in those 4 must-win markets, starting with the U.S. So U.S. net sales growth is at plus 2%, but the underlying depletions are growing by mid-single digits. So the softer shipments are entirely due to phasing, with a very strong start of Jameson, The Glenlivet, Malibu and Jefferson's. We have some further price increases that have been implemented as planned. There is as well a very dynamic consumer-centric innovation, in particular with the Jameson Orange. And we have as well a very rapid development of the RTD portfolio. Moving then to China. So China is growing at plus 9%, with a record sales quarter in China, with strong Mid-Autumn Festival, lapping a very high comparison basis, with positive pricing due to fiscal year '22 price increases, mainly at the end of spring last year. Double-digit growth on Martell despite ongoing COVID-related disruptions. And a continued widening of the market footprint with our Scotch portfolio and with Absolut. Moving now to Travel Retail. Travel Retail is growing at plus 24%, with a continued recovery outside of China, and we are on track to deliver our profit back to pre-COVID levels, with increased consumer basket size and solid price effects. Moving now to India. India is growing at plus 21%, very strong growth, continuing with premiumization trends, supported as well by revenue growth management initiatives. So continued very dynamic performance of Royal Stag and Blender's Pride, which is driving favorable mix. And as well excellent growth of our Strategic International Brands, in particular Jameson, the Scotch portfolio and Absolut. Moving now to other key markets. So broad-based growth as well across all regions, starting with Europe. So Europe is growing at plus 4%, and it's a double-digit growth, if you exclude Russia and Ukraine. France is having a soft start on a high comparison basis but strong growth in the on-trade. Spain is growing double digits, notably driven by gin portfolio but as well as Absolut and whiskey. The on-trade is rebounding in Spain with as well strong tourism while the off-trade remains resilient. Germany had a very strong growth, driven notably by Lillet and Ramazzotti. In the U.K., it's a soft start, notably from wine portfolio and as well a high comparison basis with significant staycation in summer -- fiscal year '22, so summer '21. Eastern Europe is in sharp decline, fully driven by Russia and Ukraine, with a good start in Central Europe. Americas. Americas is growing by 6%, with Brazil, which is continuing to grow double digits, enhanced by good pricing and strong mix with faster growth of Strategic International Brands. A strong start as well in Mexico with Absolut and Chivas. And Canada is growing high single digits on a low comparison basis driven by Absolut, The Glenlivet and as well the wine performance. Asia, rest of the world growing at plus 20%. Japan is posting a double-digit growth, notably driven by Ballantine's but as well by Chivas and Perrier-Jouët. We have a strong start in Korea, with a full on-trade recovery driven in particular by the whiskey portfolio. Southeast Asia as well is posting a very strong rebound. Africa and Middle East continued excellent growth of Martell and Jameson in Nigeria, and South Africa is in double-digit growth on a low comparison basis. Turkey is as well growing double digits, both from volume and price, and this is led by Chivas and Ballantine's. So let's move now to a special focus on our active portfolio management with a very special focus, I would say, on the reinforcing of the U.S. market footprint. I must say I'm very pleased and excited to present that slide today. This is a result of long effort from our team. So U.S., obviously, is the #1 market for Spirits. It is our #1 market and our leading must-win market. This is a market which is structurally dynamic, resilient to downturn with increasing premiumization trends, which is obviously motivating our ambition to reinforce our footprint. And these 3 investments, as you can see on that slide, are doing exactly that, with a highly attractive premium brands in fast-growing categories. We are starting -- or reinforcing partnership with leading spirits entrepreneur, highly regarded within the industry, I must say. They are bringing their passion, their creativity and entrepreneurship. And these brands are very complementary to our existing comprehensive portfolio in the U.S. So let me say a few words on each of them. Starting with Sovereign Brands, where we are increasing our stake with an acceleration growth for the exciting superpremium brands, such as the sparkling wine, Luc Belaire and Bumbu Caribbean Rum. As you know, Luc Belaire is already 1 million cases. This is a French sparkling wine, and Bumbu is already around 300,000 cases. The second investment I would like to highlight is Código, where we are buying a majority stake in Código 1530 Tequila, which is a range of ultra-premium and prestige tequila. So this is obviously going to broaden our agave portfolio in the U.S. market across different price brands and occasion, with a special focus and exposure to the ultra-premium and prestige tequila category, which means that we're going to have a strong portfolio, again across the different price points and occasion. Código has been growing very fast. This is probably getting closer now to 100,000 cases in the calendar year '22, starting last year from 40,000 cases. So you see a very impressive growth. And I would like as well to highlight Nocheluna, where we are joining forces with Case Lumbre, which is already a strong parter for us. With this newly emerging and highly promising brand in the sotol category, with as well the support of Lenny Kravitz. So these are great illustration, I must say, of the execution of our bolt-on acquisition strategy. I'm talking about illustration, you can see as well on that slide how successful we have been in the integration and scaling up of high-potential premium brands over the recent past. We have listed here a few examples of the net sales growth that we delivered since acquisition to June '22 on all those brands, which are, I must say, growing quite impressively triple digits. So this is, I think, a very strong illustration of what we want to do with our active portfolio management. By the way, it mirrors, as well, very well the performance of our Specialty Brands portfolio, which has been doubling, as you know, in the space of 3 years. So we are very excited to start our journey with Código and Nocheluna and to accelerate even further with the Sovereign Brands. Moving now to conclusion and outlook. So for this fiscal year '23, we are confident in delivering diversified, balanced growth. The start of the year is dynamic, with a diversified sales growth of plus 22% reported and plus 11% organic, with the strong pricing effect of plus 7%. Despite what we believe is going to be a persistently volatile context, we remain confident in the resilience of our portfolio, and we continue to expect, for the full year, dynamic, broad-based net sales growth, albeit moderating on a normalizing comparison basis. We are intensively focusing on revenue growth management and operational efficiency in a high inflationary environment. We are expecting to keep investing A&P in a very dynamic way, with a A&P to ratio -- A&P ratio to net sales at circa 16%, and continuing investment in structure. And we are, as well, expecting a significant positive currency effect for fiscal year '23. We're going to actively invest for sustainable value creation with 4 priorities that you know: first priority, fueling future growth through strategic inventory and CapEx, with CapEx that should be at circa 7% of our net sales; with as well active portfolio management, which is clearly illustrated with our recent investments, reinforcing our U.S. market footprint; with as well a dividend with payout at circa 50% of the prior year recurring net profit; and with a share buyback program of EUR 500 million to EUR 750 million to be executed during the fiscal year.

Thank you very much, Hélène. So now we can turn to your questions. Operator, if you can open the call, and then let's have the first question, please.

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

Three questions, please. First of all, on China, you pointed to a strong Mid-Autumn Festival. Was that both on sell-in and sellout? And are inventory levels broadly healthy going into the second quarter? Second question is on the U.S. Can you provide a bit more color around the phasing in the U.S. versus depletion trends? Is it due to a tough shipment comp from last year? Or is it around phasing ahead of price increases? And then the third question is Europe, ex Russia, seeing pretty strong performance in Spain but slower growth in both France and the U.K. Are you seeing any change in consumer purchasing patterns, for instance, downtrading or channel shift across Europe?

Okay. Ed, thank you very much for those questions. So let's start with China. So indeed, in China, we are delivering a strong performance across Mid-Autumn Festival and National Day, with our value sellout that are growing low double digits. So this is, I would say, quite consistent with the optimism that we mentioned last time we talked 6 weeks ago, which was, at the time, the optimism of the trade earlier in the summer, which was driving the selling. And now that we have the sellout vision, we can confirm this strong performance. So I would say, first, this performance is both coming from volume and price, in a context which remains a bit disrupted, but with the off-trade, which is growing and more than covering a kind of softness in the on-trade, I must say, knowing that the Mid-Autumn Festival is rather of an off-trade occasion. As you know, we were starting that year with a very healthy level of trade inventory everywhere, by the way, but especially in China. So this is a strong performance, particularly given the fact that the environment is still disrupted. As you know, there's some limited intercity travel, and the on-trade is disrupted, which is probably showing first that consumers are adapting to the environment and that we have built a strong brand in China. Moving then maybe to your second question on the U.S. So yes, I will take the opportunity of your question to clarify this phasing. I think you alluded to that. This is definitely pure phasing, meaning coming from 2 main drivers: first and foremost, the management of the distributed inventory ahead of the price increase and as well the impact on the Hurricane Ian that has impacted Florida and Georgia at the end of September, with some supply chain disruption. So no -- nothing in terms of weaker underlying consumer demand, and there's absolutely no slowdown. The depletion volumes are growing, and we have as well a strong price effect. So it's purely phasing. Third question was on Europe. So Europe, as you mentioned, this -- first, some low comp in Q1, for instance, in Spain, where last year the on-trade was still quite disrupted. But globally, we have a strong start in Europe with a very good summer, a very good tourist season. There is a softer start in France and in the U.K., which is mainly due to the high comp last year. So there is no change in the consumer purchase pattern, and I take the opportunity on that question to clarify that we don't see any change in Europe or anywhere else.

Very helpful. Just coming back to the first question on China, just to completely understand it. So your shipments then were plus 9%. Your sellout was low double digits yet low inventories going in to the quarter. And therefore, the inventory picture going into Q2 is also healthy. Is that the right read?

Yes, that's the right read.

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

I have 2 questions, please. First one on the buyback. You've reiterated EUR 500 million to EUR 750 million for this year. But if -- I don't think the buyback has been started. If you could provide a reason, please, why it hasn't started and potential timing for that. The second question I have is on the deals that you were discussing, Sovereign Brands, Código 1530. They've been growing strongly, as you said. What is the potential to really scale these up across your geographies? I mean are there any supply constraints or capacity constraints of any sort, which would prevent you from growing these brands strongly to several hundred thousand potentially over time if demand were there? And then if I may, sorry, one quick third one. If you could just provide a bit of a granularity on the price increases you have put through and also whether those -- whether you've taken price increase in this sort of second round also in Europe.

Okay. Thank you very much. So let's start with the share buyback. So confirmation of this -- the execution of the share buyback before the end of the fiscal year, as I mentioned in the conclusion. You know, I think, very well different financial policy priorities, meaning that we are focusing first on the investments for the organic growth but as well then on M&A and dividends. And I must say this has been a quite active M&A quarter, as you know. So confirmation, the execution will happen before the end of the fiscal year. For Código and the potential of tequila, obviously, it's very early days. I was flagging the quite impressive growth that Código had over the recent past. We are very excited by this new investment. [ There ] will probably be some supply constraints as always with a great, I would say, booming brand that we will handle in due course. But this is obviously a very exciting news for us to add Código to our agave portfolio. Then on pricing, so I think you nicely summarized what would be the key drivers of pricing, which is the carryforward of last year price increase but as well new price increase in this fiscal year '23, which is, as I said, already starting with the U.S. So maybe let me just clarify what is the current pricing impact across geographies. So for the total Q1, it's plus 7%. In the U.S., it's mid-single digits. In China, it's probably more high single digits. For EMEA, Lat Am, it's probably more high single digit to low double digit. And I would say circa mid-single digit in other geographies like Global Travel Retail and India. So this is the Q1 impact in terms of net sales growth. And again, this is going to be a key focus for us in the coming months to keep implementing a new price increase and to, obviously, focus as well on the quality of the execution of the price increase, which I must say, so far, has been quite strong, fully in line with our expectations.

The next question is from Simon Hales with Citi.

Three quick ones for me as well, please. Firstly, Hélène, just coming back to the U.S. shipment phasing and sort of comments that you were making. I just wanted to confirm that, as we look into Q2, we should expect shipments really to be running ahead of depletions as we see some normalization from those Q1 headwinds. And just to clarify with that, you're not -- you're saying you're not seeing any wholesaler destocking in the U.S. That's the first one. Secondly, just coming back to the timing of the potential share buyback. Are we really waiting for the AGM statement? Do you need to get the shareholder approval before you can actually start executing in the market? So that's the second question. And thirdly, obviously, lots of bolt-on M&A deals you've been doing of late. I know you haven't disclosed the cost individually of those deals. But can you give us any idea of the amount you've spent in total year-to-date on M&A?

Okay. So I hope you will -- apologize, but I'm going to answer your 2 last questions quite far, so to say. So timing on the share buyback, I think, I made it clear and that this will be executed by the end of the fiscal year, and there is no constraint linked to the shareholders' meeting. On the cost of the different investments, I'm not going to share that with you today. And then moving to the first question on the U.S. So again, I think the phasing is very clearly linked to the inventory management ahead of price increase, and the price increases are happening 1st of October, so meaning Q2 will be benefiting from the pricing increase. We are not going to comment what could be Q2 performance right now. And as you know, obviously, this is a very important quarter with O&D. So we are focusing our efforts to make that quarter a very good one, with as well some strong brand activation. So -- and then I think your last question was on destocking of the wholesalers. As I mentioned, the depletion are growing mid-single digit.

The next question is from Celine Pannuti with JPMorgan.

So my question is coming back on Europe. You mentioned the strong growth ex Russia and Ukraine -- to know whether you've seen any change throughout the quarter because obviously, we had a strong summer tourist season and whether there was any September weakening there. Still on Europe, you didn't mention pricing. So can you tell us what is the pricing like in Europe, please -- going to implement it going forward? Second question would be on cost inflation, which you mentioned. Can you give us an idea of where we are in terms of the different moving parts? I presume the shipping rates are weakening, salary probably increasing and whether you -- how you are dealing with glass ahead. And then maybe lastly, just to -- what you just said about the U.S. So you said pricing in the U.S. in Q1 was mid-single digit -- effect on top of that, the new pricing in Q2. Did I understand that correctly?

Okay. So I hope I'm not going to miss any of the questions. I start with the last one. So pricing, your understanding is correct. So it's mid-single digit in the U.S. in Q1, and we are implementing new price increase starting 1st of October. Your second question is Europe in terms of any weakening in September. So the answer is no. We don't see any change in the consumer purchase pattern, as I said at the introduction, and this is relevant for Europe and for all the other geographies. Pricing in Europe, I mentioned EMEA Lat Am, it's low double digits. And finally, your question on curves and the inflation. So let me spend a bit more time on this one. So as you know, inflation remains quite elevated. And I must say it's more impacting us in this beginning of fiscal year than it did last year because it impacted us mainly in H2 last year. So we are, right now, let's say, lapping low comparison basis in terms of cost evolution last year. This is driven largely -- the inflation is driven largely by the impact of energy prices across our costs, meaning across dry goods mainly, as well freight and wet goods. So dry goods, this is especially true for the glass cost, which is increasing significantly because of high energy costs. So we are impacted by double-digit inflation on glass. Freight, I mean, you mentioned some more positive trend in terms of freight. I must say it's not yet our case, especially because we are exporting mainly from Europe, I would say, to the U.S. And on that flow, there's no significant improvements. Last year was obviously quite exceptional in terms of very high increase of the freight cost, but it remains quite elevated as we speak, I must say. I think your last question was on the way we manage the security of supply. So this is obviously a very strong focus on our team. We are very carefully managing the supply of commodity to really minimize any risk in our ability to production. So this is very true for the [indiscernible] availability, where we have long-term contracts to secure the supply. And this will protect us for the fiscal '23 production. We are as well obviously very carefully managing the supply of glass, and this is a high priority, and we are as well managing what could be a potential tension in terms of gas supply by, for instance, optimizing management of our plan to really anticipate everything we can ahead of winter. These are, as well, some, I would say, good news in terms of gas supply. For instance, in some countries, there is some protection coming from the, I would say, the state policy, which is, for instance, what's happening in Sweden, where we should be protected for as an industry.

The next question is from Olivier Nicolai with Goldman Sachs.