Pernod Ricard SA (RI) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining our Q1 FY '27 sales call. I'm joined today by Mauve Croizat, our EVP, Finance and Tech. Unless specified otherwise, all sales growth rates are organic. Mauve, over to you.

Thank you, Joelle. Good morning, everyone. Very happy to be with you this morning. I trust you have all received the press release this morning. So I'm just going to read through it relatively quickly to leave time for the Q&A. . So we are reporting net sales of minus 1%, a sequential improvement on Q4 last year despite a mixed environment. which is consistent with our full year expectation and broadly stable organic net sales. volumes in Q1 are back to growth at plus 6% with strategic international brand volumes growing plus 2%. Sales in the U.S. declined by minus 10%, and in China by minus 25%, with both markets being impacted by inventory adjustments as expected. The underlying deflation in China are returned to growth confirming the cautious trade optimism ahead of the mid-autumn festival as flagged during our full year communication. Excluding the U.S. and China, Rest of World sales grew by plus 4% with strong performance across a number of Asia, rest of world markets. India was a particular highlight, with sales up plus 19%. We report softer results in Europe and in Latin America. The global environment remains volatile and uncertain with ongoing conflict and cost of living pressures in some markets. At the same time, sales momentum is improving in a number of markets, demonstrating the benefits of our diverse portfolio and our geographic footprint as well. as our ability to adapt quickly to changing market conditions. So let me start with our #1 market, the U.S., where sales were down minus 10%. Market trends have slightly improved over the summer. The total spirits market has declined by circa minus 2% and bottled spirits by circa 4%. As highlighting the consumer sentiment remains low with affordability, a particular issue for some consumers. Our sellout in Q1 is at circa minus 6%, and our gap to market continues at circa 2 points. The difference between sales down minus 10% and sellout down minus 6% reflects the impact of inventory adjustments. Looking at our brands. Jameson and [indiscernible] are performing ahead of their respective competitive sets. We are also seeing a marked improvement in scrub and a strong rebound in Malibu benefiting from the success of Malibu Ping. Sales are supported by our Q1 innovations, including small formats for Malibu coconut and pink as well as Cuba peanut butter and jelly. Jameson distiller batch is also extending the Jameson Irish whiskey portfolio. These launches build on the innovation we already introduced last year. ahead of the important holiday period, we have a strong campaign program across the portfolio. We are particularly excited about the significant initiative of Jameson with the NFL sponsorship, which kicked off in September and will be supported by a full 360 campaign throughout the NFL season with a key activation peak during the O&D period. In India, we report sales growth of plus 19%. The market continues to enjoy dynamic consumer fundamentals and sales are driven by strong consumer demand as well as the continuation of the premiumization trend. Underlying sales grew in the high single-digit range with an additional benefit from the Marastra comparison base and from pipe fill effects linked to proprietary steps for a potential IPO. For clarity, I remind that the decision to proceed with an IPO remains subject to a board approval. In China, sales declined by minus 25%. This is mainly driven by trade inventory adjustments as underlying depletion returned to growth in the quarter. This is a significant improvement from last year's sharp decline and confirmed the cautious trade optimism we mentioned at the start of the summer. For Martell, we have seen a return to growth in our off-trade depletion with a successful midterm festival campaign that has been driving consumer and trade engagement. In Beyond trade, we are lapping the regulatory crackdown, which gives a more favorable base However, the channel continues to be under pressure, leading to decline there. Underlying trends for the rest of the portfolio remains resilient overall, notably supported by a strong performance of [ Begleivet, ] Royal salutes and premium brands such as Jameson and Olmeca. If I turn to Global Travel Retail, sales were down minus 4%. Overall, global traveler numbers remain strong, with -- but sales have been impacted by the ongoing Middle East conflict. And this has particularly affected some of the Asian travel retail market. In the meantime, Europe Travel Retail delivered strong growth. In other markets, we report good growth in Asia Rest of World, largely driven by Japan, which continues its dynamism. Korea and Taiwan, both returning to solid growth and Turkey's continued good momentum. Europe had a soft start to the year, reflecting phasing in some markets and continued pressure in the on-trade. In Western Europe, sales declined in France and Spain with a persisting sharper decline in Germany. Eastern Europe was also soft with Poland impacted by ongoing customer negotiation. In the Americas, sales declined in Brazil due to phasing and in Mexico with continued weak consumer demand. in North America, Canada saw also a modest decline. As it relates to what our full year and medium-term outlook, the full wording is in this morning press release, but the key message is that we are confirming our guidance including broadly stable sales in a contrasted and volatile environment, and we strongly defend organic operating margin supported by strict cost control and the acceleration of our operational efficiency program. In conclusion, Q1 sales were mixed but improved sigisequentially with encouraging momentum in a number of key markets, notably in Asia. In China, underlying sales have returned to growth. Our broad geographic footprint and diversified portfolio provide clear source of resilience in this volatile environment. At the same time, we continue to adapt our brands, our activation to the evolving consumer trends and occasions. Thank you for your attention. That concludes my prepared remarks I will now be happy to take on your questions.

Thank you very much, Mauve. So operator, we can open the line for questions. [Operator Instructions]

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

First question is on China, please. You confirmed the cautious optimism in the trade ahead of Midor festival and your positive depletions. This is clearly very encouraging, but it is in contrast to what other companies, particularly in luxury are saying and what they reported so far in the quarter. [ Joelle, ] what do you think is underpinning this more positive sentiment? Is it the comps, the lapping the crack down or maybe something else? And I don't know whether you have much visibility yet on mid-autumn festival sellout, but how do you feel therefore, about China as we head towards CNY and for the full year. And then the second question, please, is on the strong performance -- the very strong performance in Asia, rest of the world, when you exclude both China and India. I calculate that China and India, the region was up probably something like mid- to high teens, which is a material acceleration from last year. I know there's many different countries there. And I think you called out good performance in a few, Japan, Korea, Taiwan. But could you provide a bit more color on this strong performance and whether you're confident that this positive momentum, I mean, not quite at this level, but the positive momentum in the region can continue.

Thank you for the question. So I will start with China. So indeed, we are very glad to see our depletion return to growth, marking a significant improvement. it's very fair to say that the macroeconomic environment remains challenging as you point out. So we need to take it cautiously. That being said, I think you're right to 1 point out that the base was really lapping and was relatively favorable. But I think it's also fair to say that we have been experiencing within the industry, different type of adjustments. So it was not only driven by the consumer environment, but really by the crackdown by the tan onto then. So I think it's also confirmation that the consumers are there and are adapting their way of consumption. So I think it's also testament that we are now seeing the consumer shifting to different type of occasion, more private occasion, and we have been also to adapt to this situation, adjusting the way we are interacting with our brands and with the consumer shifting the channel mix and shifting as well our marketing channels to more digital and adapt to this moment of consumption. So we stay pushes. But also, we are very glad to see our depletion return to growth as we were expecting. As it relates then to your second question, which I think was more on the underlying trend. So that's true that on the quarter, we have a lot of technical effect and mainly in India, we have some phasing and pipe fill effect. We still believe that the underlying trend is around the high single digits. We once restated from both the Maharashtra impact and the pipe fill effect. On the rest of the region, we have been seeing very positive momentum, lapping as well a favorable trend. But on the other side, we also see significant turnaround in our key markets and very significant markets. So overall, if we restate on all these technical effect, I would say, on both U.S., China and India. So the negative impact of the inventory, the positive impact of the pipe field effect in India. We are in slight growth, which I think is also in line with the true sellout. And when we look at our sellout in the last 3 months, we are also in this vein. So confirming that we are seeing some resilient consumption while remaining fragile.

The next question is from Olivier Nicolai, Goldman Sachs.

First of all, on Europe, could you give us more details on the underlying trend and what was the impact from phasing or even the customer negotiation that you mentioned? And how should we think about Q2? And then if you could give us -- go back to the comments about China cognac. If you have any color that you can give us in terms of the channel, the growth in different channels? And what kind of actions you've taken for Martell to actually have a much better off-track performance.

Thank you for the question. So if I start with Europe, indeed, we have been seeing some soft start of the year in Europe. This has been mainly driven by Germany and Poland, where we see the underlying trends being in the higher range of the single-digit decline. Similarly, we saw softer decline in Spain and France. In France, in particular, our net sales have been probably more impacted by phasing where the underlying trend are better. And we see that we are also gaining share in France. We see some overall, also improvements in the U.K. So the U.K. trend is improving. So we do see underlying trends being soft over the summer. That has definitely not been helped as well by the on summer that we experienced most notably on the on-trade. But we would see probably Europe to be in the single-digit -- low single-digit decline from an underlying standpoint. We have also suffered from a phasing most like significantly in Poland, where we had some customer negotiation that will be resuming in Q2. Then in China, as I said, indeed, the cone consumption is evolving. So we definitely saw that the depletion of Martell significantly improved in the off trade. The on-trade remains challenged and under pressure because we see some further restriction taking on in some of the states. And we see really the consumption shifting to more private occasion. So we have been as well shifting from Martell, the activation and the way the brand is positioning. So we see overall the cognac category improving. And we see as well that the pricing has not been that significantly impacted, and we are back into much stronger ground, but remaining very cautious at this point.

The next question is from Sanjeet Aujla, UBS.

Two for me, please. Firstly, on the U.S., can you just give us a sense if the destocking is now done? Or is there more to happen over the next 3 quarters? And my second question is just coming back to China. Can you just give us a sense of how your channel mix has evolved over the last few years. I think in your earlier remarks, you had highlighted quite a big shift in occasions. And in particular, how significant is the on-trade in your business today versus a few years ago?

So in the U.S., we have been guiding on the fact that the inventory adjustment will have some effects over the full year, even if it's fair to say that Q1 was particularly impacted. So we will and we are constantly monitoring the situation, but we are not guiding on a quarter-by-quarter, but some further adjustments need to be expected on the full year. Then on China, so indeed, we have seen, as mentioned, a shift and the on-trade being more impacted because of the crack down. To be honest, I don't have the exact evolution. We are now on roughly 60% of trade and 40% on trade. Even if it's fair to say that some on-trade are buying in the off-trade in China. So it's not a pure channel mix. in this market.

The next question is from Laurence Whyatt, Barclays.

In terms of the U.S., you've had a distribution change for over a year now where you split your portfolio into the 3 parts and put it through a number of distributors. Given you've had that for about a year, could you give us an update on the impact you think it's had whether you think it's been a success and whether there are any sort of teething issues in doing that over the past 12 months? And similarly, when you shifted a lot of the business away from R&D C towards the end of the year, how has that -- how the new distributors picked up those lines and whether there are any teething issues and getting that underway over the past sort of it's just 9 months now since that shift has taken place. And then secondly, on India and the potential IPO, I was just wondering, could you give us any more information as to what are the key decisions that you need to be making? What are the factors that are going to influence decision whether to list the Indian business? And once you -- once the Board takes that decision, how long after that decision would this thing take place potentially.

Thank you, Laurence, for these questions. So if I start with the U.S. So Indeed, we have been shifting in some key markets. The transition is now fully done and has been relatively smoothly. We have not been -- and we do not believe that there was any material impact from a sellout standpoint. Now I think the key focus is indeed to make sure that we are all locked and loaded for the O&D period. That is the key period for the market. So all the program activations are well in place, and we will now focus on the execution, which is a key in this market. So I would say on this one, the focus is now OMV. That is the key period that will allow us also to demonstrate that we are now focusing on execution execution and solid execution. If I now go into your second question on India. So indeed, no decision has been taken at this point. So the Board has been asking us to continue on the preparatory steps for a potential IPO. That being said, so it's really for us to taken these steps and be prepared would the decision be made in the coming months. In Q1, we were indeed impacted by these steps because we had to change the name of the company, which created the need to adjust the label amount of product. So this is why we had some pipe field effect in Q1 because we were anticipating some of the shipments to ensure we would avoid any type of disruption with the consumers. So there is still a process that will be ongoing and discussion that will be ongoing with the Board. So be sure that when the decision will be made, it will be the first 1 to know.

The next question is from Celine Pannuti, JPMorgan.

My first question is on North America. So I think sequentially, the market seems to have improved in decline, but slightly improving. At the same time, you sounded somehow cautious about affordability. So can you help us understand what the read of the market is now in the U.S.? And as you look at the O&D period, are you expecting more promotion? Or are you expecting that relatively relative improvement sequentially to hold. My second question is on China. There has been a big gap. It seems unseen sellout. Are we expecting more of that or rather bounce back in the second quarter. And for the year, are we expecting to have an impact on this selling sell-out difference in China.

Thank you for your questions. So I will start with North America. So indeed, the latest sellouts were promising and showing some progressive improvement and slight improvement. Fair to say that most of the categories remain in decline, but at the pace and the rate of decline is easing. So we are expecting this trend to continue, but it's very slight. We still expect RTD to gain share in the Spirit evolution and spirits category. That being said, we are not counting on a material bounce back of the U.S. at this point. We do see that the consumer sentiments remain historically low. So we are more indeed focusing on execution for the R&D. We do believe that indeed, consumers are adapting and adjusting their consumption. So we see them growing more because of affordability towards smaller formats as an example. The promotional activities are not significantly increasing. So in Q1, we are seeing relatively stable pricing. And we see now that we seeing also a positive mix. So all in all, I would say we expect this slight improvements, but we are not counting on the material bounce back. Then the second question, sorry, I was losing on China in the inventory adjustment. So here as well, we have been guiding on the fact that we would have an inventory adjustment effect throughout the full year in both U.S. and China. That being said, Q1 was particularly impacted. The confirmation of the return to growth in the underlying trend is also promising in our ability to go there. So the material impact in Q1 will most likely ease on a full year basis.

The next question is from Richard Withagen, Kepler Cheuvreux.

Two questions for me. First one on the U.S. I mean you mentioned a slight improvement in your sellout gap versus the U.S. bottled scales market now around 2 percentage points. So what explains the remaining underperformance? And what initiatives do you have to improve the underperforming brands? And then the second question is, I think you report volumes growing 6%, organic sales down around 1%. And so we have this negative price mix over the quarter. Can you talk about the product mix? And how should we think about the implications of this for gross margins?