Pernod Ricard SA (RI) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining us to Pernod Ricard's Fiscal Year '26 Full Year Results. I'm joined today by Alexandre Ricard, Chairman and CEO and Mauve Croizat, Group Deputy CFO. We are delighted to welcome Mauve to her first earnings call with us. Alexandre, over to you.

Thank you, Joelle, and good morning, ladies and gentlemen. Maybe just before starting, I'd like to introduce Mauve Croizat, our Deputy CFO; and soon to be CFO as of October 1. Maybe Mauve, can you say a few words about you?

Yes. Thank you, Alex. Very happy to be with you today. So I usually say that I'm born and raised Pernod Ricard. I was very lucky to move in many different countries, U.S., Sweden for many years. across multiple affiliates. So we're a brand company, brand company, market company, headquarter and different functions because I started with cash and then more FP&A and core finance with some years as general managers and lately within transformation. So we are very happy to be with you today, very honored to take on the role and very prepared.

Well, thank you very much, Mauve. And without further ado, let's start with our fiscal year 2016 sales and results. Overall, our fiscal year 2016 was characterized by a contrasted environment. with indeed continued softness in the U.S., amplified by some inventory adjustments and weak demand in China, all of it's being mitigated by improving trends and growth across the rest of the world though impacted by the Middle East come in our fourth quarter. We strongly defended our organic operating margin with the acceleration of our EUR 1 billion operational efficiencies program delivering half of the target in fiscal year '26 and with full delivery now expected by fiscal year '28, instead of fiscal year '29, i.e., 1 year ahead of anticipated. Driving as well sustainable cash generation to preserve a strong balance sheet with materially improved cash conversion in fiscal year '26 at 91%. And optimizing as well our strategic investments for future growth, maintaining balance sheet discipline to support our deleveraging trajectory and sustainable shareholder returns. Maintaining a stable dividend per share with the final dividend of EUR 2.35 to be offered either in cash or in shares. So we fully leveraged the breadth of our portfolio and the balanced geographical footprint of Pernod Ricard to capture growth opportunities at speed and scale across diverse and increasingly diverse, should I say, consumer dynamics. And our operating model leverages its digital capabilities, accelerating to a fully digitally enabled organization. So I won't go back on the environment that I just described. What I would underline is our net sales are down roughly 4% organically and 14% reported related to currency and perimeter impacts. That being said, we have experienced improved momentum in the second half of our fiscal year with organic growth improving from remember, minus 5.9% in our first half to minus 1.3% in the second half. And in fact, excluding the U.S. and China, which we'll go through in detail later, Growth was positive for our fiscal year in the rest of the world up at plus 0.5%. From a PRO standpoint, down roughly 5% organically and roughly 18% reported for the same reasons as the net sales. We have done quite an amount of work to defend the organic operating margin in a contrasted environment. We have accelerated the operational efficiencies program I mentioned, enhancing as well marketing effectiveness and partially mitigating tariffs and COGS inflation. As you'll see in more detail, our structure costs are down 8%. They were already down 4% in the previous year with the implementation of our Fit for Future operating model. and disciplined cost managers. As for cash, at EUR 1.2 billion of free cash flow, a progression of 6%. We have strengthened our cash generation. and strongly improved our cash conversion, as I mentioned, at 91% through disciplined investments and working capital management. We continue the active portfolio management. Notably, fiscal year was a year where we disposed of Imperial Blue. I will not spend time on this slide as Mauve will go through all of these numbers in detail other than stress the EPS at EUR 5.85. So yes, I mentioned the contrasted environment and our top line was notably impacted by market-specific weakness. In the U.S., you see the U.S. down 14%. I'll talk about this in a couple of minutes. In China, down 19%. And finally, the Middle East skewed towards our fourth quarter, which was down 29%. These 3 specific areas impacted our top line and we roughly 1/4 of our top line. When I mentioned mitigation, mitigation came from broadly the rest of the world with improving trends in many markets -- we have now roughly 40% of our all sales that are in growth. As I mentioned, excluding U.S. and China, the rest of the world would be growing. And by the way, the remaining top 16 markets sell-out value grew at double the market rate at plus 2%. That's a mix of Nielsen, NABCA and IWSR data. So we estimate that for the top 16 markets, the market grew 1%. We grew double that rate. You have here a number of examples, both of emerging markets and mature markets. And by the way, you see that slight acceleration for Pernod Ricard, excluding China and the U.S., H1 was flat, H2 was up 2%. Of course, we've done a lot of work to adapt and continue to do so at pace to evolving consumer trends and to growth opportunities, leveraging our data and technology capabilities and as well our new simplified organization following Tomorrow 1 and Tomorrow 2. And the name of the game in a way is really speed and agility. Consumers have always changed over time. I would say the major difference here is the speed at which they change. So we've done a lot of work around convenience and affordability, which is on the convenience side, a trend that we had already identified before COVID as emerging and which has significantly accelerated ever since, more recently post strong inflation affordability with a lot of work done on small and fun size formats, on what we call affordable premiumization, working on our RTD portfolio extension on the route-to-market adaptation to our RTD portfolio as well and as well on a number of initiatives and increased capabilities on revenue growth management and promotions optimizations, as I said, leveraging our digital capabilities. We are on the other hand of the spectrum, lagging the depth of our portfolio, including prestige with the development of unique brand experiences through very high-end partnerships. We have a global approach to build our prestige and brand desirability and direct high net worth individuals, consumer approach. We have accelerated, and I'll talk about it in a couple of minutes, our consumer-centric innovation with the inflection point being innovation at scale or should purposeful innovation at scale with a number of big successes around Malibu, around Absolute and as well into a new promising segments such as no low ALK segments. Finally, we are continuing to invest in elevating cultural relevance consumer experiences and brand associations and partnerships. Now moving into our sales by must-win markets. So starting with the U.S. market, which was down 14%, as I said. So we have sustained improvement in our sellout gap to market. albeit we still haven't reached the market level yet with excelling responses to what I was mentioning earlier, changing consumer needs. The spirits market slowdown with economic moderation and subdued consumer confidence. We have narrowed the gap to market through accelerated responses. Just to mention, our sellout is roughly down 7% versus the minus 14% sell-in. This is where our sales have been impacted, as we mentioned, by some inventory adjustments. Good performance around Jameson and Caluwe, which outperformed their competitive sets. Screwball and Malibu sellout are improving, helped by strong success of smaller formats and innovation, particularly Malibu pink, which is turning out to be the big success of this summer. Rapid adaptation to evolving market conditions, focusing on consumer recruitment, consumer activation our GM, as I mentioned, innovation, ready-to-drink small fund formats, on-premise activation and cultural partnerships. We'll talk about this later. And finally, the route-to-market reorganization, which has finally after a lot of work being implemented over the full fiscal year '26 and with adaptation to subsequent -- I would say, significant industry changes in the mill here with some degree of residual impacts on trade inventory. So that's for the U.S. Well, for India, it's a radically different story. India is, as you all know, now our second largest market in terms of sales, very strong momentum, reflecting underlying consumer demand and premiumization trends and a market where we are gaining share. So we see an accelerated performance, which is underpinned by very dynamic consumer demand. market share gains, further benefiting from the Imperial Blue disposal, which was at a segment which is less dynamic than the more premium segments, good growth on our local brands, notably a Stag. What you may have seen in the news is now the world's #1 whiskey with roughly 32 million cases sold and wandered as well, which is quite successful and the recent launch of Xclamat!on. Double-digit growth on our strategic international brands led by Jameson's exceptional performance, which is now the #1 imported premium spirit brands in India and good growth as well in the rest of the portfolio, particularly on Ballantine's and Chivas if I had to name a couple. As I mentioned, we disposed the Imperial Blue business, which is now immediately accretive to margins and growth. We had mentioned the excise policy changes in Maharashtra just exactly a year ago, which were finally now lapping since this summer. And more recently, in fact, as of July 15, last month, we now have the India, U.K. trade agreement, which is in full effect. Moving to China, which now represents 7% of our total sales. down 19%, basically characterized by challenging macroeconomic conditions, continued weak consumer sentiment and regulatory measures impacting demand. We have experienced a sharp decline within our prestige categories, which are under pressure and basically, that's Martell. Our premium brands continue to grow quite nicely supported by the rise of casual dining occasions and increasing penetration of premium sits among the growing middle class. So we experienced market share declines in cognac, basically impacted by Martell's channel exposure. That being said, and it's the first time in a while where we can be in a position to say this. We are getting feedback of cautious optimism from the trade sentiment ahead of Mid Autumn Festival. So let's see what happens in the next couple of months on that front. Finally, in terms of must-win markets, Global Travel Retail, down 3%. Basically, the resolution of the cognac suspension in China, which occurred exactly more or less a year in a month ago. strong brand activations across Asia and a dynamic traveler numbers in Europe and Americas are what basically characterized Global Travel Retail for fiscal year International passenger traffic continues to grow. It is now 10% ahead of pre-COVID levels. We have experienced a strong recovery of sales in China Duty Free with strong Martell sale growth during Chinese New Year, but the Asian region was also negatively impacted by weakness particularly in South Korea. Europe benefited from U.S. tourism and Americas benefited from quite dynamic growth, particularly in cruises. Strong innovation execution was quite successful, particularly around Travel Retail exclusive ranges notably on the Glenlivet and our other single malt Aberle. We also gained market shares in that channel. And as you all know, our fourth quarter was impacted by the Middle East conflict which is also expected to weigh in our first quarter of this new year. More broadly speaking, when it comes down to the regions, but by Europe, we see sales declining in France, while maintaining market leadership and gaining share with PJ and Bamboo in very strong growth. Spain and Germany, unfortunately, are both in decline amidst continued, I would say, soft market conditions. U.K. is in modest decline with growth on Jameson, Absolut and the champagne, although we see some degree of improving market trends there. And finally, Eastern Europe is in continued growth, notably on Jameson, Ballantine's and Absolut. Poland was in modest decline following a strong excise tax increase, though we're gaining share there. In Americas, beyond the U.S., we see solid continued growth in Canada, driven by Jameson, Absolut and our RTD portfolio. in what we could qualify a soft market, and therefore, translating into market share gains. Brazil was in modest growth, recovering by the way, in the second half from the methanol crises, which is just ahead of Christmas in Brazil with good performance on Beefeater and Absolute, notably, though we're experiencing a slight share loss there. Mexico is and was in sharp decline over fiscal year '26 with share loss in what I would call like quite difficult market conditions there. Finally, for Asia, rest of the world, Japan continues on its great strong growth trajectory with strong market share gains, very strong performance of PJ. South Korea returned to growth after what we can qualify as a significant reset which has hit us in the past, as you may recall. Taiwan market sales continued to decline with continued softness in that market. very strong growth in Turkey, notably with Chivas and Ballantine's and also Absolut, and I would say as well the rest of the portfolio. South Africa is in good growth. We're gaining share there, driven by the exceptional performance on Martell, not just, by the way, in South Africa but across sub-Saharan Africa. Australia is in modest growth with content brand performance, growing on Jameson, growing on our TD portfolio and champagne, again, a market where we are gaining share. This is a brief outlook after the regional description, which makes us quite let's say, unique in terms of geographical mix and exposure. The other uniqueness I believe, of Pernod Ricard our broad portfolio of brands are diversified and broad portfolio of brands with very solid brand performance in a number of markets. And with our strategic brands, which would have been in growth, putting U.S. and China side. And you have here a number of illustrations. By the way, the first are not taken as a coincidence, they're our 4 largest brands. Jameson being our largest brand, Martell, Absolut Ballantine's and Chivas or -- sorry, the 5 largest brand of Pernod Ricard. I mentioned PJ's amazing performance, up 20% throughout the fiscal year. And just to note, tip for Martell, TD means triple-digit growth in South Africa. Just below that, you have Nigeria, what Martell is now leading in that market. Now moving on to the financial update, Mauve, up to you.

Thank you. So indeed, let's go on the financial performance. So I'll be quick because you have all the numbers on the slide. but our profit from recurring operation declined by 5.2% organically and minus 17.9% on a reported basis. So we told you that we were going to protect the margin, and we delivered limiting the impact to a minus 35 bps. If we zoom into the impact, it's mostly driven by the gross margin impact, where we experienced a negative price mix in a soft pricing environment, as you know, and experiencing some adverse market mix. We had also the impact of the tariffs, though a little bit less than what we feared at the beginning of the year in both U.S. and China. And as we anticipated on the COGS, we had inflation, lower volume absorption and as anticipated as well increase on our wet goods impacted by past inflation. But we also very much benefited from the acceleration of our operation efficiency, managing to limit the impact and offset the normative inflation. If we go on A&P. So here, we maintain significant investment behind our brand, and we slightly benefited from decreased nonworking A&P, highlighting as well the improvement of our effectiveness. On structure cost, as Alex mentioned, the reorganization is in place as from January 1, so allowing us to showcase a decline on our structure cost as it was combined with a very strict disciplined cost control, so leading to a minus a favorable impact of 77 bps on this line. Overall, you can see on the slide as well that our reporting operating margin was significantly impacted by FX. That was only partly offset by the perimeter sorry, perimeter impact, where we had the benefits of our brand accretive disposals. So all in all, what I note on this slide is that despite -- and would we not have such significant FX impact, our margin would have even expanded. So on the earnings per share, we are landing at EUR 5.85, down 19%, which is mainly the result of the soft profit from recurring operation. And we can see here on the financial expense, a slight decrease as well, though we had a slight increase in our cost of debt from 3.2% to 3.4% as a result of higher interest rate. And we had also a lower income tax in line with the decrease in our PRO. On the group share of net profit, here, we declined at a slightly higher rate at minus 26%, which is mainly driven by a slight increase in our nonrecurring operation and charges, which is mainly driven by our restructuring cost. On free cash flow, I think you all know that this has been a strong focus from the organization this year. So I'm very pleased to see that we are delivering a free cash flow increasing by 6%. This is driven by a strong and material improvement of our cash conversion, overpassing our target of 80% and lending at 91%. This is due to a strong and strict monitoring and discipline on our operating working capital and the optimization of our strategic investments on both strategic inventories and capital expenditure, while at lending at a level that we believe is the relevant level to protect our assets and our future growth prospects because it was really following a year of peak in FY '25. So on the net debt, needless to say that as a newly appointed CFO, that would be one of my key point of attention. This year, our net debt remained broadly flat over the past 12 months, benefiting from a strong free cash flow delivery, as I mentioned, but also the proceeds of our disposal. And because of the softer EBITDA, we are experiencing an increase net debt EBITDA ratio up to 3.7%. But our intention is definitely to decrease this level below 3x by FY '29. Back to you.

Thank you, Mauve. As we have now gotten a little bit accustomed to do over the last 18 months or so. I think it's worthwhile sharing with you strategic update on Pernod Ricard. In today's case, in this presentation, it's split into 3 sections. The first one on our purpose and transformation journey. The second one is what I would call a consumer-centric growth strategy, turning consumer insights into action. And the third one is our capital allocation strategy and financial policy. When it comes down to our purpose and transformation journey. First of all, I strongly believe and we, at Pernod Ricard all collectively strongly believe that our purpose is absolutely anchored in timeless human needs. We're not even talking here about consumer insight. We're talking into about deep human needs. And that purpose of crater the quality is probably more relevant than ever in a world seeking absolutely authentic human connections. And it is true, and I think all of our industry peers have identified this recent evolution, consumers drink more intentionally. They need a purpose, They need the reason. They need an occasion to do so. So we create more reasons to come together and more meaningful experiences around our brands. I fundamentally believe growth will come from enriching existing occasions and creating new ones, expanding the shared experiences that at the end of the day, bring people together around our brands. Our long-term drivers, and I won't dwell too much on that because it's a slide we've been showing and sharing with you for some time now. The long-term drivers do remain attractive despite these short-term headwinds and tailwinds. So you know the attractive long-term fundamentals around demographics, middle class and by way, specifically for international spirits. Also the near-term cyclical pressures we are facing in some specific markets related to consumer confidence and pressure on discretionary trend. And finally, the evolving at pace, as I mentioned the evolving consumer needs around premiumization, around experiences around consumer convenience and finally, around lifestyles and occasions and frequency. Again, I do believe that our operating model has bare serious competitive advantage and so far as our broad and balanced geographic footprint, very well balanced, both across all different regions and key, I would say, continents, but also in terms of that ideal balance between mature markets and emerging markets. Here, you have all the details. I think that is what makes us quite unique from that point of view and is a competitive advantage. And so is as well our diversified portfolio of premium international spirits, which I believe is well exposed to the growing segments. By the way, we are present in every category that matters. You see this on the pie chart. We are also present on every single, I would say, a price point segment from [indiscernible], which represents roughly 15% of our portfolio, all the way through to prestige and as well, you see on the extreme right there, the RTDs as well. When I mentioned that we're ideally exposed as well, if you look at total beverage alcohol, there are a number of segments that are still in good growth or growth. If you look at international spirits for the last calendar year '25, which is the latest number we have, that segment has grown by 1% and I look at Indian whiskeys, overall, they grew 7% versus an underlying trend for us of 9%, by the way. But anyways, champagne is up 5% versus 20% for PG, but anyways, and spirit-based RTDs, which is the segment in which we operate today and want to operate even further tomorrow, up 13%. These are industry numbers. So all of the segments in which we operate, from that point of view are growing. And then if you look at international spirits, which is the majority of our positioning, there on the right, you have the different rates of growth or decline in some cases by categories. Of course, and we have been on a journey over the last 4 to 5 years of significant transformation. And I'd like to hand this story over to Mauve, because before being Deputy CFO and soon to be CFO of Pernod Ricard, Mauve has served as our global Senior Vice President for transformation. So in a way, you kind of drove what we see on this slide.

Some of it, not all of it. The rest was really managed by the organization and the teams. But indeed, for us, this has been a continuous journey, I would say. And the initiative that you see on the slide is a result of action over multiple years and across multiple dimensions. So if we start with the organization. So as you know, over the time, we've been really focusing on simplifying our organization for further agility. We have been also intensifying our efficiency program in order to deliver further efficiency. And we have been doing so without jeopardizing on our ability to invest behind our digital transformation that we believe is also going to fuel further and the future opportunities. Lastly, we have also been constantly looking at sharpening our portfolio. So on the organization, as mentioned, we have been taking a 2-step approach, which we call Tomorrow and became Tomorrow 1, Tomorrow 2. The first step was really focusing on delayering with the removal of our regions and really bringing market together under 10 management entities. And the second step was more on the way we're managing the portfolio. So really simplifying our global functions and also bringing our 8 market companies into 2 brand units in order also to reflect the differentiated business models that we have within our portfolio. So this allowed us to really constantly deliver tight and controlled structure costs with a decrease and reaching this year minus 8%. And a second consecutive year of decrease. This has been also helped by a strong delivery on our operational efficiencies. So we communicated that we were going to deliver a very ambitious program of EUR 1 billion over FY '26 til FY '29. And here, we are able through the acceleration to already deliver half of it as from FY '26, which makes me very confident also to inform you that we are able and we will be delivering the full program of this EUR 1 billion no later and at least by FY '28, at least 1 year earlier than anticipated. And as I said, this was done in order to improve our efficiency, but also to allow us to really invest behind our digital transformation. So we started by proving all the benefits that it could give us with the successful execution and implementation of our key digital program. And now the focus of the organization is really to make sure that we can scale these benefits to its full extent at pace and with agility. So we are really focusing now on building the relevant -- sorry, I'm losing my voice, building the relevant foundations also common processes, building tighter and creating tighter governance and ensuring that we have higher quality data because we know that this is where relies all the power of this digital transformation in order for us to become a fully digitally enabled organization that will really allow us to operate, reshape the way we operate and ensure that we will be delivering at speed -- at scale with this ability to adapt constantly to a fast-evolving consumer need. One proof point of that is also what we have been able to deliver on our A&P spend because here by optimizing our touch point and leveraging the digital media ourselves to significantly improve our effectiveness. We also manage through that to decrease our nonworking to really increase what's going to be impactful toward our consumer and showcasing significantly improvements of the impact of our spend towards the consumer. In parallel, as I said, we've been constantly looking at our portfolio, sharpening it by disposing of nonstrategic dilutive brands. As we saw last year, notably the sale of Imperial Blue, that allows us to be more tighter margin and better margin and with a better growth profile in a key strategic market. We are definitely counting on continuing this effort as illustrated by the sales of lumps last month.

Thanks, Mauve. So the second chapter of our strategic update from insights to action, from consumer insights into execution on the ground what I call our consumer-centric growth strategy. As I mentioned, there is a rapidly evolving consumer landscape where the speed has significantly accelerated, which really requires insight-led decisions and faster -- much faster execution. . We have identified, along with our consumer insight teams around the world, a number of consumer insights, broad number of 9 very specific consumer insights, which all are translating into tangible underground execution and activation. The first one is spirits exploration. And by the way, I think you probably saw in more recent research and studies, GMV continues to engage in spirits. Repertoires, however, are growing to include many, many categories, and it's a very dynamic, I would say, need segment, which represents an opportunity. Second, and that's not new. Affordability, which is somewhat of a headwind with low confidence, as I mentioned earlier, pressured discretionary spend, fear of inflation. Number three, novel/innovation. So a real desire and openness of our consumers for innovation, for flavors, for formats, when I talk about formats for fun and attractive formats. Convenience, as I said, an emerging trend before COVID, which has accelerated quite significantly ever since. So in what we call a cluttered and time pressured environment for people, they want quick and easy options, should I say, mindful moderation. No need to mention this too much. You all know about it with rising health consciousness with clean spirits moderation, widespread, of course. And finally, craving connection where, as I mentioned, as introductory notes for our purpose, Conveviare is really evolving from purely spontaneous connections to plant meaningful and intentional events, and we have a big role to play there. More specific, I would say, to emerging market trends, which is half of our business, I won't go through this much more in detail because you're all too familiar with this, the demographics, the emerging world class and status-driven premiumization, not only in India, but in many, many emerging markets. Very briefly one by one, starting with spirits exploration. We are leveraging our capabilities, which we're now familiar with, including our simplified organization that Mauve described. To really leverage and really create these occasions and also evolve our media targeting and shifting towards the most active and the most efficient media channels. Affordability, I mentioned, addressed through revenue growth management capabilities through our portfolio press ladders through formats as well. The reality is small and fund formats, really satisfy consumer dire for premium products despite economic constraints. So when we give the opportunity for consumers that are under I would say, purchasing power pressure, they do go for the premium proposition if it's at the right price point Here, you have an illustration U.S. example, I think it's New York. If you see all of our different price points that we cover with a brand franchise in that very specific case, Jameson starting at EUR 399, EUR 499, EUR 999 basically all of the different price points with one brand, different formats, different expressions. We have this for all our relevant brands across all the states, if I take the U.S. example. But I would say a lot of work is going on, on 3 things to address this opportunity. The first one is the offering. So making obviously, these propositions, a reality, which involves, obviously, ideation, innovation and let's not forget, supply chain. By the time we have the idea and it comes to shelf time there is a minimum number of time. Number two, which I would say is equally an operational challenge is the implementation, execution and deployment, i.e., having these propositions at the right price on the right shelf facing the right consumer because from a route-to-market standpoint, it's a big job to be done and which is as well underway. And third is pace. The speed at which we go to market with these offerings. So these are the 3 things we're working on, the offering, the market presence in terms of points of distribution with the right offerings and finally, the speed at which we do that. Novelty is another one. And here, you have 3 examples. Now innovation has moved to purposeful innovation at scale in a way fewer but bigger and better. And here, you have our key innovation pipeline. It's broader than that. But here, you have the key ones. The ones we launched in fiscal year '26, which are going to continue be deployed across our markets throughout this new fiscal year, plus new innovations to come down the road during this fiscal year. The fourth insight is indeed convenience. I mentioned it earlier, but spirit-based RTDs are the fast and growing RTD segment, and this is somewhere we can play quite seriously in. We also know that Gen Z over indexes amongst RTD drinkers, which, in a way, represents a great recruitment opportunity into our brand franchises if we engage in the right way through the right channels with our consumers, leveraging our brands. And you see here a few examples of our enhanced portfolio with different format solutions, there's the RTDs, but it doesn't stop there. We also have, and it's been launched now over the last couple of months, 100 ml, what we call fund size formats that are very dynamic. We have multipacks, mini formats and smaller formats as well and many other initiatives around that consumer inside of convenience. Mindful moderation, which we address through a number of initiatives around premiumization on one side, amongst the expansion of lower no low ABV offerings. And let's be clear, there is a drink less but better trend, which works well if we engage with the right propositions with our consumers. The absence rate has remained stable over the last 5 or 6 years. We are seeing, as I mentioned, that trend of less but better. And you see here a few examples of what we're doing in terms of premiumization through a brand franchise and innovation through addressing lighter consumption occasions with the Aperitif trend and some of the non-alc propositions we have innovated over the last 18 months. Number six, creating connections. I do, going back to our purpose of intentional consumption through experiences. This is where I really believe we have a role to play through the right associations through the right partnerships. We have a specialized team of experts that -- how to basically work on partnership you have here a number of partnerships, and these are increasing. And behind every one of these partnerships, we have a very specific and clear execution strategy. What I would say is I would just take one example. People in key Asian markets, for instance, really want to see their friends, 25% more than they currently are. And it is our role in a way, as rated convey to create these meaningful occasions to bring them together with our portfolio, which I believe is very well positioned to do so. And then finally, the last 3 trends, all in one, what I say is -- which are skewed towards emerging markets, which are demographics. I won't go through the numbers, you know them. which is the emerging middle class. I won't go through the numbers, you know them. And finally, which is status-driven premiumization, which we still see basically everywhere in emerging markets. And finally, to the last section of our strategic update on allocation and financial policy.

I think this one is for me. So indeed, with this slide, we really wanted to reiterate our strong intent to bring our leverage ratio down below by FY '29 and really illustrate the thing that we have already been doing this year and confirm that this is our intention to maintain it over time. So first, on our strategic investments on both capital expenditure and strategic inventories, where we are decreasing our level and capping it to EUR 700 million. and also maintaining and combining it with a strong effort on our operating working capital and really also increasing our target from 80% to circa in the coming years as we have been already delivering this year. So that's our intent. And the below.

Yes. And subject, of course, to shareholder approval. We propose to maintain our dividend at EUR 4.70 per share. As part of our commitment to our deleveraging trajectory, we will offer our shareholders the choice of receiving their final dividend of EUR 2.35, either in cash or in shares. And I think it's worthwhile noting the support our reference shareholder for this proposition, the fact that they will opt for the shares.

On our financial policies, I think it reflects a balanced approach to capital allocation. So while maintaining our investment-grade rating. And as mentioned, our deleveraging focus, we are really reiterating very clear priorities: first, to invest behind our future growth; two, to really continue actively working in sharpening our portfolio; three, maintaining a progressive dividend policy; and last, the share buyback when all of both priorities will be fulfilled.

So in terms of outlook, let's start with fiscal year '27. So for this fiscal year, we expect organic net sales to be broadly stable in a contrasted and uncertain environment. Basically, with 2 messages here. First of all, declines in the U.S. and China impacted by inventory adjustments as of the first quarter. And with underlying trends that are expected to improve in China. And second, continued positive momentum in the rest of the world with ongoing strong growth, notably in India, but not just in India. Continued investments behind our brands with our A&P to net sales ratio to be maintained at circa 16%. And will strongly defend our organic operating margin supported by strict cost control on one side and the acceleration of the implementation of our operational efficiency initiatives whilst investing in our digital transformation. We expect strategic investments to be at circa EUR 700 million versus EUR 800 million previously guided. We also expect strong operating working capital management with cash conversion now expected to continue at circa 90% versus 80% previously. When it comes down to our medium-term framework, not guideline, but framework. While noting the current softness, I would say, in the U.S. market, we are projecting organic net sales growth, aiming to be, on average, close to the lower end of our plus 3% to plus 6% range over fiscal year '27 through to fiscal year '29, i.e., close to 3%. We expect organic operating margin expansion, supported by the acceleration of our operational efficiencies of EUR 1 billion, which we mentioned earlier, which will be done 1 year ahead of plans while maintaining as well consistent investments behind our brands, as I mentioned, at roughly 16% in [indiscernible] ratio. We expect a strengthened cash generation, aiming now for 80% -- for 90%, sorry, versus 80% cash conversion, fund our financial policy priorities with strategic investments normalizing to no more than EUR 700 million. We are targeting a net debt-to-EBITDA ratio below 3x by fiscal year '29. We continue to adapt our strategy to capture growth opportunities and our operating model to meet those changing circumstances, including through our ongoing digital transformation that will unlock further efficiencies. And I would conclude by stating that we are confident in the continued engagement of our teams and that we remain focused to deliver sustainable value growth over time. And on that note, I thank you very much. [Presentation]

We're going to kick off the Q&A, so we can open the operator. [Operator Instructions]

[Operator Instructions] First question is from Gen Cross, BNP Paribas.

The first question is just on the U.S. I think in your outlook commentary, you comment on expectation of an improvement in underlying trends in China. But I just wondered if you could comment on whether you expect your underlying trend to also improve in the U.S. in FY '27. And the second question is on India. You saw a nice acceleration in growth in Q4. The question is specifically on the potential for an India IPO. I think it's something that is regularly discussed at the Board level. Does that continue to be the case now?

Sure. Listen, I'll take these questions. Listen, the key reason for I would say, skewing towards the lower end of that midterm tank of plus 3% to 6% top line over fiscal year '27 through to fiscal year '29. i.e., close to 3% comes from the acknowledgment that the U.S. market will remain soft over that period. It's as simple as that. And it's difficult to say more than that, but that's what our current algorithm takes into assumption and that drove that revised, I would say, framework towards the lower end. On India, yes, the Board continues to discuss the India IPO opportunity. Again, it's a question of the strategic opportunity it may represent in terms of shareholder value creation. And they're weighing the strategic rationale, the pros and cons in terms of these kind of situations. It's not an obvious yes or no. It is a clear process of analysis and discussion. And so I can confirm the discussion is still ongoing and that in the meantime, we are taking some legal preparatory steps in order to maintain the flexibility around the India IPO and keep our options open. But at this stage, we're still at discussion level at Board.

Next question is from Mitchell Collett, Deutsche Bank.

Two questions, please. So for your full year '27 guidance of flat organic growth, you said it's predicated on improving trends in China. Can you give us some color on what drives that confidence about improving trends in China? And then my second question is also on the '27 guidance. So you said you're going to strongly defend organic operating profit margin in fiscal '26, a similar statement equated to a 40 basis point decline. But clearly, you had the support of lower A&P. So can you give us the sort of rough moving parts for fiscal '27 and with a similar level of organic operating profit margin decline be a correct interpretation of your guidance today?

Sure. Thank you. On your first question, maybe predicated is a little bit of a strong word. We have -- and again, I'm very cautious on that front. And by the way, our assumptions remain cautious for China for this fiscal year when it comes down to sharing with you our fiscal year '27 guidance. What I have mentioned is we are seeing some degree of underlying improvement, number one. Number two, we are getting some cautiously optimistic trade sentiment feedback ahead of Mid Autumn Festival. And number three, our assumption anyway is based on some degree of stock overhead that we need to destock which is probably going to impact more than Q1 than the rest of the year. But -- so our guidance is not predicated on China, which represents, remember, 7% of our toll business.

So on our defense on our operating margin. So indeed, we know that we will be facing similar but different headwinds, I would say, because we can also already anticipate similar impact on our wet goods. As I mentioned, it's really because of the past inflation in our aged spirits. We know as well that we will be impacted by the Middle East conflict that has been not that much impacting us this year, but impacting today our logistic costs and our commodity prices, as you can imagine. On the other side, we also see some positives. So as you see with our guidance, we expect some easing top line trends that mechanically will also create better fixed cost absorption. And we are also expecting less of an impact on tariff because the U.S. and China situation will be offset by the India FDA. So all in all, we will be continuing our strong discipline, grabbing any opportunities accelerating our operation efficiencies and maintaining our E&P while continuing our strong effort on structure costs. I hope it answers your question.

Next question is from Sarah Simon Morgan Stanley.

Two from me. One was, can you give us a bit more color on where the savings, the EUR 500 million that were achieved in fiscal '26 actually fell in terms of maybe a split between COGS, A&P and structure costs. . And the second point was on your midterm guidance. Alex, you talked about an average towards the low end of the range of around 3%. But if we do -- if we say around 3% across a 3-year period and the first year that would imply 4.5% or so in years 2 and 3. Is that what you imply? And if so, how do you think you're going to get there?

I'll address your second question immediately before Mauve gives you some color. First of all, it's not a medium-term guidance. I'm sorry to have to reiterate it's called medium-term framework. It's not around 3%, but I don't know what the terminology difference may mean, but it's close to i.e., around maybe. Yes, fiscal year '26 was a little bit softer than what we expected it to be. Bear in mind, a number of factors that impacted fiscal year number one, destocking in the U.S., which we don't expect to be that severe in the coming year and, obviously, years, for sure. Number two, some degree of destocking in China for the year to come, which we don't expect as well to carry on forever. Number three, going back to an earlier question on underlying trends. Bear in mind, we're also lapping in China a number of decisions that were taken exactly a year ago, which we're now lapping, I would say, positively. Number four, the Middle East conflict at some point I'm not a geopolitical expert, but I'm just saying it has impacted our Q4. We expect it to continue to impact us over the coming few months to some degree. We're already seeing things starting to normalize to some extent. So basically, at the end of the day, when you look at during the presentation, our geographical mix, and you see where we're present. And if you see those markets were growing quite significantly, those markets where growth, in fact, is accelerating. Those markets that used to be in strong decline that are stabilizing, even maybe growing. I took the example of Korea, but there are a number of other ones. But at the end of the day, it worked.