Pernod Ricard SA (RI) Earnings Call Transcript & Summary

Good morning, everyone. We're very pleased to welcome you today to our Q1 FY '25 sales call. I'm joined today by Helene de Tissot, our Group CFO. I guess you all have seen our press release on our website and so before moving into questions Helene will say a few opening remarks. Then we'll move into questions. And then as every time, we will remind you to ask only 2 questions per callers, so everyone has an opportunity to have their questions posted. Thank you.

Thank you, Florence, and good morning, everyone. Thank you for joining our fiscal year '25 Q1 sales call. So we are reporting today minus 5.9% decline in organic net sales for the first quarter which is minus 8.5% reported. Excluding Russia, the organic sales decline is at minus 5%. As we have previously flagged, the slow start to the year was expected notably within U.S. and in China, together which when combined, accounts for circa 50% of our annual sales footprint and with both markets facing challenges, those are quite different reasons. The quarterly sales result is softer than we previously anticipated as the weakness in China is greater and is also affecting Asia Travel Retail. India, where the underlying growth is strong, sales phasing, which are expected to fully reverse in Q2. Market in Europe endured adverse weather conditions over the summer. As you know, our broad geographic base is a core strength, and there are a number of markets where we can call out with strong performances in each of our regions including Japan, Canada, Poland, Brazil, Turkey and Nigeria, as well as strong travel retail performances in Americas and Europe. We achieved market share gains in over 70% of our main markets, including in China, in India, in the segments of the market we operate in, in France, in Spain, in the off-trade, in Germany, in U.K., in the on-trade, in Poland, in Brazil, in Canada and in Australia, the list can go on. Overall volumes are stable. Price/mix effects of minus 6% in a moderated pricing environment and with a negative market mix, notably due to the performance in U.S. and China. Naturally, given the challenging environment and our expectation to sustain our operating margin, we are consolidating and expanding on the efficiency efforts that last year contributed to our strong margin expansion. Operational efficiencies are including production efficiencies initiatives as well in marketing with a focus on continuously improving return on investment, particularly leveraging the key digital programs and across the business, a very strict cost discipline with an evolving fit-for-purpose organization. These efficiencies are, I must say, at the forefront of my priorities as Group CFO. Our motto is agility and discipline. So let's deep dive into the net sales performance by market, starting with our Must Win markets. U.S.A., minus 10%. Market sell-out continues to normalize, currently running at circa plus 1%. We welcome the start of an easing in the rate cycle, which will be positive for our consumers and customers, though it may take some time before the beneficial effects become visible. Pernod Ricard sell-out declined in Q1 at circa minus 5%, which is slightly better than Q4. And Jameson is broadly in line with its competitive set and momentum is improving. Our net sales in the U.S. were impacted with the inventory adjustment as expected, with retailers continue to tightly manage their stock level and promotion intensity remains strong. Wholesale inventory is in line with the historical level in terms of volumes, while value is down a bit. In support of Q2 festive season, we had a strong marketing activation program planned. And for the full year, we expect to see a gradual improvement in our sell-out performance. Moving to India by plus 2%, so solid sales growth, though impacted by phasing and again, this impact is expected to fully reverse in Q2 with double-digit growth on Jameson and our Seagrams whiskeys, Royal Stag and Blenders Pride. Underlying sell-out are strong with the market continuing to enjoy dynamic consumer fundamentals. We are performing ahead of the industry, consolidating our leadership position and strong growth is expected for India for the full year. China, minus 26%. Sharp sales decline in a challenging macroeconomic environment with soft consumer demand over the summer and into the Mid-Autumn festival, which is expected to be weak. We see net sales decline on Martell Cognac and Scotch while the decisions are growing strongly on premium brands, including Jameson, Beefeater, Kahlúa and Olmeca. Actions are being taken to mitigate the impact of the group's performance caused both by the weak macro environment and by the implementation of the preliminary tariffs on Martell, which are technically duty deposits. We expect to see a more significant full year decline than last year due to the very weak consumer demand. Global Travel Retail, plus 3%, strong growth in all regions except Asia with good growth for Absolut, Jameson and Ballantine's. We can expect for the full year to see continuing strong growth in regions outside Asia. Asia rest of the world, so the organic sales growth is at minus 8%. We had a good performance in Japan, continuing weakness in Korea and a decline in Taiwan, which is a result of phasing. Moving to Europe now. Markets in Europe are resilient with the organic sales growth at minus 3%, but which is plus 1%, excluding Russia, a little slower than expected with Western European markets, in particular, impacted by adverse weather during the summer. Latin America, organic sales growth of plus 3%. So a strong result in Brazil lapping a favorable comparison basis and a stabilized market environment with a decline in Mexico, which faced a weak tourist summer season. And North America saw a strong start of the year in Canada. For the full year for fiscal year '25, the global environment remains challenging. We expect organic net sales back to growth, albeit probably modest growth given the ongoing consumer demand weakness in China. We expect to sustain organic operating margin. We are deploying our resources with agility and adapting our fit-for-purpose organization. We retain our focus on the delivery of operational efficiencies along with strict cost discipline. We aim to maximize value creation while maintaining consistent investment behind our brands with A&P ratio to net sales expected at circa 16%. We remain confident in the attractiveness of the spirits market and in the long-term demographic and consumer trend tailwinds, which allows us to reiterate our confidence in our medium-term financial framework. That concludes my opening comments. And now, Florence, we can open the line for questions. Thank you. And so now the line is open for questions. A quick reminder, 2 question maximum per caller, please.

[Operator Instructions] The first question is from Andrea Pistacchi, Bank of America.

Two questions then, please. The first one on China and the provisional tariff increase, which took effect on Friday. So given the current environment there, I guess it seems reasonable to assume that you and the industry might not pass on the full impact of the tariff to the consumer. If you assume a more moderate retail price increase versus a full pass on, are you able to share any thoughts on what sort of volume elasticity one should expect, I guess, in a base case scenario and also timing of potential price increases, if there are price increases, would you wait to see first whether the tariff increases become permanent? And then the second question, please, is on price mix. The minus 6% are you able to broadly separate the country mix impact also suggest yet how much country mix impacted and on the pricing environment that you're seeing, could you talk about that? Any specific countries you called out the promotional environment in the U.S. when you were speaking earlier?

I think it's probably more questions than 2, but I try to give you 2 answers. So starting with China. So yes, you're right. The implementation started from 11th of October. By the way, let me start by telling you that we regret the imposition of tariffs, and we remain convinced that is absolutely no dumping of Martell in China. So the impact of tariffs, it's obviously early stage. We have some estimate for an annualized amount. We are working, ready to obviously reduce the net impact on our performance as soon as this year when it comes to passing the tariffs as price increases. Let me say that it's much too early, and I cannot give you specific responses in terms of what we're going to do to tariff, we will adapt. That's for sure. Passing on the tariff as price increase is one option. Again, very sensitive. We need as well to monitor what the competitor will be doing. And to be fair, the market conditions are not conducive to large price increase. But again, let me reiterate we are -- the impact of tariff is embedded in our outlook for the year. So second question in terms of price mix. So yes, price mix is at minus 6% in Q1. It's mainly negative mix, price is modest. In terms of country mix, no surprise, I guess, it's mainly linked as well to China and the U.S. which means, by the way, that we expect for the year, this negative mix to improve. So pricing question in the U.S., as we said before, the environment is quite, I would say, aggressive in terms of promotions. We highlighted that back in focus of 12-month communication. No change on that front.

Can I just -- sorry, I ask quickly on the tariffs. Given the level of stock in trade, which is possibly quite high, is it again reasonable to assume that it will take some time before we actually see any potential impact on your COGS probably not in -- not until the second half?

Well, first, I think what we'll need to answer your question, which I don't have yet is the review of Mid-Autumn Festival performance. We have some qualitative feedback, but I keep that for your colleagues because I think the question is going to hop into and so -- but we will have a full quantitative view, which obviously would be key to assess what is the level of inventory post [ math ] and what would be the sales to the trade for the coming weeks ahead of Chinese New Year. So that's really what will help us to have a final view of what is the impact for the year. But I would say, that's not what matters. What matters is that we are ready to adapt and again, to reduce as much as possible the impact on the group performance.

The next question is from Olivier Nicolai, Goldman Sachs.

Two questions, please. You've maintained the guidance for full year '25, which assumes organic sales growth and flat margins. Now that would imply about 2% to 3% growth for the rest of the year post the Q1. So can you help us perhaps understand the key building blocks to get there considering that 2 of your most profitable markets, China and the U.S. are not improving? And then secondly, on the corporate tax rate proposal in France, can you help us understand the impact this could have at a group level, please?

So I'll start with the question on the outlook. So as I said in my introduction comments, we expect organic net sales back to modest growth for the full year, which is taking into consideration a kind of softer Q1 versus our expectation. And again, which is mainly linked to the China very weak consumer demand situation and as well the bad weather in Europe obviously similarly lower. So we won't have that impact for the rest of the year in Europe. And China is in this situation, which we expect to persist during the year. That's why for the full year, we expect a more significant decline in China than the initial estimate. Doesn't mean we expect China to be same trend than it is in Q1, to be fair. So then for the other markets, U.S., the expectation for the full year is that the net sales are likely to be in decline, but with a gradual improvement in the underlying sell-out in a market which is still normalizing, but with some inventory adjustments. So to be clear, it's expected to be better in Q1. China, I mentioned it already. Travel Retail is a very dynamic growth in the other regions and excluding Asia. That's our petition for the year. India has been impacted by phasing, as I said, reversing in Q2, and we expect India to be in a strong growth this year. When it comes to the rest of the world, which by the way, accounts for 50% of our sales. We expect the rest of the world to be delivering resilience to good performances, and we won't have any more Russia impact. So second question was on the effective tax rate. Yes, linked to the French potential tax reform. So our current assessment is that it will probably increase our effective tax rate by circa 0.3 percentage points. So moving from, let's say, 25.1% which was our current estimate to 25.4%.

The next question is from Sanjeet Aujla, UBS.

A couple from me, please. Firstly, just coming back to the outlook for stable organic margin. Can you just help us bridge how you're thinking about gross margin, particularly with the more moderate pricing and negative country mix you're seeing? Is the expectation still for A&P to be 16% of sales this year? And so I guess by implication, are you expecting structure costs to be down year-over-year as those efficiencies that you highlighted are stepping up?

So yes, we expect to sustain organic operating margin, I confirm that in my introduction. And so I'm not going to disclose how we will deliver that through gross margin in the structure costs. But what I can tell you is that I think your question was more focusing on structure cost is much more uptake. So we start -- we say from the top line. So the environment in terms of pricing is more modest than last year, for sure. Doesn't mean that there's nothing to do in terms of, for instance, leveraging our revenue growth management capabilities, leveraging our key digital program, Vista and Rev-Up to really maximize our pricing power. In terms of market mix, which was one of your question, it's obviously a bit early to be very specific. We are only 3 months behind us. So let's see, but as I said, for the top line expectation for the year, we expect market mix to be less negative than it is in Q1. So another strong focus in terms of efficiency, obviously, is going to be cost easing inflation so far for sure, but not -- we are not in the inflationary environment but there's a lot of initiatives that we started already a month ago that are going to deliver significant efficiency in terms of cost. I completely confirm what you say in terms of A&P. We intend to invest circa 16% of net sales. By the way, again, with a strong focus and improving effectiveness and with obviously very strong agility in terms of deployment. So when it comes to structure cost, without giving you a specific quantification of the improvement. As I said earlier, we are in very strict cost discipline mood, which is including everything, including control of overhead. And again, our key motto is agility and discipline with a fit-for-purpose mindset in terms of organization.

Got it. And just a quick follow-up on cash flow. I guess, with the top line growth outlook maybe a little bit more less positive than at the start of the year. Does this perhaps force you to also revisit CapEx plans and working capital efficiencies as well just considering where cash conversion is and leverage?

Yes. To be fair, cash generation is obviously a key priority whether we have a softer start of the year or not. So everything you mentioned in terms of working capital efficiency, obviously, a top priority. In terms of CapEx, as you know, this is the #1 priority in our financial policy. CapEx and strategic investment. It does mean that it's not a strong focus in managing those CapEx very efficiently. And of course, with that priority as well in terms of prioritization and return on investment.

The next question is from Edward Mundy, Jefferies.