Rémy Cointreau SA (RCO) Earnings Call Transcript & Summary

Good day, and welcome to the Rémy Cointreau 9-month Sales 2019 to 2020 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to CFO, Luca Marotta. Please go ahead, sir.

Good morning, everyone. Thank you for your participation in the Rémy Cointreau conference call for its 9-month sales '19/'20 covering the period from April to December 2019. Clearly, this year is a challenging year for the group. Sales are down 6.5% in the 9-month period in organic terms. Some drivers of this decline are self-inflicted for the sake of the group's long-term vision and some other are external, but in any case, all are situational. The main driver of this decline, as you know, is the 67.8% decline in the Partner Brands division, which includes around EUR 45 million, EUR 44.7 million, to be precise, sales loss from the voluntary termination of distribution contracts in Czech Republic, Slovakia and the U.S. Now looking at our Group Brands' performance. Organic sales were also down in the 9-month period 1%, including a sharp 7.2% decline in the third quarter. This reflected a number of situational factors that peaked in this quarter. First of all, Q3 was facing very high comps as our Group Brands last year were up 12.8% in third quarter '18/'19. Second one, Q3 was particularly affected by disruption related to the change in route-to-market, particularly in the EMEA region. Third, we got the full impact from the fall in tourists to Hong Kong in the third quarter, which has been impacting substantially our Asian Travel Retail business since August as well as our local business. Fourth one, the U.S. where we continued to be penalized by very slow replenishment trend for our cognac brands in the third quarter in a situation of overstocking at retail level by our largest competitor. In contrast, Asia benefited from a EUR 5 million sales gain related to the early timing of Chinese New Year. Adjusted for these technical factors, the Chinese New Year anticipation phase, total Group Brands sales decline would have been 1.7% in the 9-month period, of which minus 8.9% in the third quarter. Now that was sell-in, so shipments. Let's look at depletion trends, so the best approx to the final sellout consumption. We can say that we are seeing some light at the end of the tunnel as some trends suggest a gradual recovery ahead. Starting from Asia. China Mainland continued once again to show very solid double-digit volume and value growth. This is, however, partially offset by weakness in the last quarter in Southeast Asia. In the U.S., cognac depletions continued to be penalized, as already said, by low retail replenishment, but our depletions are showing a sequential improvement in the last 3 months. Besides that, Cointreau depletion continued to be up double digit. In Western Europe, depletion trends deteriorated in the third quarter and the changes in route-to-market are putting pressure on performance. Besides, we are seeing a slower trend in the U.K., and in contrast, on the positive side, Nordics continued to do -- to perform very well. Eastern Europe is penalized by Russia, which continues to be under pressure. And in Africa, despite high comps in Q3, we are seeing ongoing strength in South Africa, Nigeria and the Middle East. Last but not least, Global Travel Retail in which we have seen a significant deterioration of depletions since August mainly due to the Hong Kong event and partially also to commercial disputes in the Americas. Now let's move to 9-month sales figures in the page, Slide #3. Sales amounted to EUR 814 million, down EUR 34.5 million year-on-year or minus 4.1% on a reported basis. This reflects an organic loss of EUR 55.1 million, which means minus 6.5% organic sales decline and a positive translation currency impact of EUR 20.6 million or plus 2.4%. Let's move to Slide #4. As we just said, currency translation increased sales by EUR 20.6 million in the 9-month period. This was mostly driven by the strengthening of the U.S. dollar versus the euro, which was a gain of EUR 15.7 million even if most currencies were also well oriented. Only the Australian dollar had a minor negative impact on group sales to the tune of EUR 0.2 million, so very marginal. Let's now turn to Slide #5, which shows our quarterly performance over the past 7 quarters and the 12 months moving organic performance of our Group Brands in red. Clearly, this chart shows that '19/'20 is a challenging year for a number of reasons, as we discussed. Some have been decided by group such as the necessary important change in go-to-market; some of which are exogenous factors such the Hong Kong event. This chart also shows that the comps were particularly challenging in Q3, with Group Brands up 12.8% in a year ago quarter. End of December 2019, the 12-month rolling organic growth for the Group Brand stands at plus 1.1%. Now let's turn to Slide #6 to give more granularity and dig into the organic trends by region for the Group Brands. Let's start with Asia Pacific. We delivered low single-digit growth in the 9 months as well as in Q3. Inside Asia Pacific, Greater China remained the main driver of the region, up high single digit in 9 months with solid double-digit growth in China Mainland, in Taiwan, partially offset by strong double-digit declines in Hong Kong and Macau. In China Mainland, specifically, double-digit sales growth was fueled by the continuation of very solid double-digit volume and value depletion trends both in direct and indirect channels of distribution. Also, on a technical point of view, as expected, the region enjoyed a EUR 5 million gain from the early timing of the Chinese New Year that will reverse in the fourth quarter. The Chinese New Year will take place on January 25, tomorrow, 11 days earlier than in 2019 when it was February 5. Outside Greater China, trends deteriorated in a number of markets of Southeast Asia in Q3, along with the slower macro condition but also some different political decision where the window to import spirits was a little bit shrinking. Travel Retail Asia continued to suffer from the drop in number of tourists going to Hong Kong and buying in the duty free malls and the border shop. In Q3, we got the full impact of 3 months versus 2 months in the second quarter, translating into a strong double-digit decline of our business in the quarter. At the end of December, Asia Pacific accounted for 34%, 3-4 percent, of our group sales, up 2 points versus last year. Now let's move to the Americas where Group Brands sales decreased low single digit in the 9-month period. Starting with the U.S., which grew low single digit in 9 months, reflecting the strong performance of Liqueurs & Spirits, partially offset by a slight decline in cognac sales, which were impacted by high comps and slow retailers' replenishment trends. In the third quarter, the group continued to focus on improving sellout final trends for its cognac brands through stepped up A&P investment both in media, digital and merchandising activities. As a result, our Group Brands' value depletions are showing, as you can see in the chart, some improvement in the last 3 months period as they were up 4.2% versus plus 2% in the last 6, plus 2.8% in the last 12 months. Canada remained very volatile, posting a very weak Q3 after a better Q2. LatAm posted a flat performance in the 9-month period, thanks to some improved trends in Puerto Rico and Mexico. And last but not least, the very weak performance in Travel Retail Americas continued in the third quarter as the commercial tensions with 2 major distributors could not be solved. End of December, Americas accounted for 42% of our group sales, up 2 points year-on-year. Let's now turn to Europe, Middle East and Africa region, which posted a low single-digit decline for the Group Brands in the 9-month period, implying a significant deterioration in the third quarter. This deterioration was expected, part of it is just H1/H2 phasing, but the magnitude was greater than we anticipated 3 months ago as was mainly due to disruption related to change in route-to-market in the region. In those markets, the ramp-up of the new distribution footprint is lower than expected at this stage. Now looking at trends by subregion for the Group Brands. Let's start with Western Europe, which turned negative after a weak third quarter. Benelux, Switzerland, Spain were the main reason of the weakness, but also U.K. slowed down a bit compared to the year-to-date 6 months. We are seeing ongoing strength in the Nordics, however. Central and South Europe was flat in the 9-month period, implying a deterioration in the third quarter. Pressure, as already said, was mainly driven by Germany, Czech Republic and Slovakia where we changed our route-to-market in April 2019. Russia and Northeast Europe declined substantially because of Russia, which has been difficult for us this year. Africa is the only subregion of EMEA to post growth in the 9-month period despite a slower quarter -- third quarter due to tougher comps. We are seeing, as already said, ongoing strength in key markets like South Africa and Nigeria. Last but not least, also in Europe, Travel Retail deteriorated in the third quarter, mostly driven by the Liqueurs & Spirits division while the cognac provided -- proved to be a little bit more resilient. And at December, EMEA region accounted for 24%, 2-4 percent, of group sales, down 4 points versus last year. Now let's move to our 9-month performance by division on Slide 8. As already mentioned, our 6.5% organic sales decline was largely driven by the Partner Brands division whose sales dropped by 68% as we wanted to terminate some of the significant distribution contracts. Adjusted for those technical factors, the group's organic growth would have been down a more limited 1.8%. Group Brands were down 1% in the 9-month period, including 1.6% decline, organic decline, for the House of Rémy Martin and plus 0.7% growth for the Liqueurs & Spirits division. Let's now turn to Slide #9 and the analysis per division starting with cognac. As we just mentioned, the House of Rémy Martin posted an organic decline of 1.6% in the 9-month period, implying a 7.6% decline in the third quarter. The significant slowdown was largely driven by EMEA and Americas while Asia Pacific showed some resilience, thanks to ongoing strength in China Mainland. First of all, starting with Asia Pacific. Asia Pacific grew low single digit in 9 months, in line with the H1 trend, and therefore, implying a similar performance in the third quarter. This growth is the consequence of significant declines in Travel Retail Asia due to the Hong Kong event, but also in Macau and a deterioration in Southeast Asia. In China Mainland, however, trends have remained very, very good. Our volume/value depletion has continued to grow solid double digit, and the region benefited from early shipments for Chinese New Year to the tune of EUR 5 million. Americas. Americas region reported mid-single-digit decline in organic sales in 9 months, largely driven by a weak performance in Canada, while the U.S. declined low single digits. As already explained in previous communication, we saw a significant preloading by U.S. retailers of VS Cognac of our largest competitor in the second quarter, ahead of a large competitive price increase during the summer, as well as ahead of possible import tariffs in the U.S. As a result, the replacement for our brand, the Rémy Martin, by retailers has been slower than we anticipated since Q2 and high sales comps in the third quarter also did not help. So the focus has been, in this context, to revive, to revamp, dynamize the sellout, as we've shown in the table. Our depletion trends are slowly, gradually improving with volume depletion down 0.9% in the last 3 months versus minus 3% in the last 6 and 12. Besides, it is very, very important in such a market our value depletions enjoy price/mix gains of 5.5 in the last 3- and 6- and 12-month period ending December. So very strong depletion valorization in the U.S. In the EMEA region, cognac posted low single-digit growth in the 9-month period, led by Africa, solid growth in the U.K. and now this had good resilience in EMEA Travel Retail. Overall, Q3 was similar to the year-to-date performance in Asia Pacific but showed a deterioration both in Americas and EMEA region. Concerning the volume/value equation of the cognac business, the 1.6% sales decline was driven by 6.3% volume drop, partially offset by a 4.7%, around 5 points price/mix gain, which is very healthy. End of December, the House of Rémy Martin accounted for 72% of our sales, 7-2, up 4 point year-over-year. Now let's move to Slide #10 and where we have an example of the vision of the new global campaign, TEAM UP FOR EXCELLENCE by Rémy Martin. On October 21, on the occasion of the launch of the TEAM UP FOR EXCELLENCE campaign, Rémy Martin invited 100 personalities, influencers and media from all over the world to live a disruptive experience for a day and an evening at the Chateau Versailles in France. This event allowed the guests to live immersive experiences related to the history of Rémy Martin. A very strong media impact with around 1 billion impressions and 3,000 articles across the globe -- across the world on the event and the new campaign. Now let's move to Slide #11 and Liqueurs & Spirits division -- business. The Liqueurs & Spirits division delivered 0.7% organic sales growth in the 9-month period, implying 6.1% organic decline in the third quarter. This slowdown was mainly driven by the EMEA region, but the Americas also partially slowed down, largely driven by Canada and by the voluntary destocking of Mount Gay ahead of the brand relaunch. Looking at the volume/value equation of Liqueurs & Spirits for the 9-month period. The 0.7% organic sales growth reflected a low single-digit decline in volumes, more than offset by positive price/mix. End of December, Liqueurs & Spirits division accounted for 25% of our sales, up 2 points versus last year. Now let's review the performance of the major brands. Cointreau. Cointreau posted a very good start to the year, led by double-digit growth in the Americas and more specifically in the U.S. with a strong performance as the consequence of ongoing strength in depletion trends, up 9% over the first 9 months. The lower trend in the past 3 months, plus 3.9%, around plus 4%, reflected very high comps in December of the previous year. We expect January to resume with a high single-digit growth as we saw in October and November. Despite the price increase taken in April, price/mix was neutral in the 12-month period ending December as the positive pricing continued to be offset by negative state and channel mix for Cointreau. Sales of our big brand Metaxa had been largely penalized by change in route-to-market in the EMEA region since the beginning of the fiscal year, in particular, the key markets like Germany, Czech Republic and Slovakia, as well as a poor performance in Travel Retail Europe where we are gradually pulling off the level of promotion. In contrast, we are seeing promising developments in the newer markets of Asia and Americas, that's clearly there. At this stage, it's still marginal in terms of absolute value. Let's move to Slide #12 to look at the other brands of the division, starting with Mount Gay. Mount Gay, after a good start to the year, was a little bit penalized because we decided to slow down our shipment in the third quarter ahead of the gradual restaging of the brands from the fourth quarter. St-Rémy performance has been quite volatile since the beginning of the year because of the volatility of the Canadian market, which is the brand's main market. A word on the U.S. market where we're seeing an interesting development potential in the coming years. St-Rémy XO has a very good alternative to the cognac VS of our largest competitor as we are seeing good reception of the brandy-based Sangria, for example. The Botanist, our premium gin, luxury gin, saw continued strength in the 9-month period with sales up double digit, led by the U.S. and the successful expansion of the brand in Asia Pacific. And last but not least, single malt whiskeys continue to benefit from the positive worldwide momentum in the single malt category, particularly in the Asia Pacific. The next slide is about Bruichladdich. Bruichladdich opened its first boutique in China, a Laddie Shop in Xiamen, that was inaugurated in late '19. This shop promotes our 4 brands from Islay, Bruichladdich: Port Charlotte, Octomore, Single Malt and The Botanist gin. And beyond selling our brands, it also offer testing education to our clients. We chose Xiamen in the Foshan region because it is one of the most important whiskey area in China. And so far, it is promising as the shop inventories have been sold twice since its opening. Let's now turn to Partner Brands division, Slide #14. The division, as already said, posted very strong decline of 68 -- 67.8% organic sales decline in the 9-month period. As you know, this was largely driven by the termination of distribution contracts in Czech Republic and Slovakia linked -- related to the disposal of the subsidiary on April 1 as well as the termination of distribution of Piper Sonoma in the U.S. Overall, this represented EUR 44.7 million sales decline in the 9-month period or 64 points hit on growth. The split of this EUR 45 million is EUR 38 million, EUR 38.2 million, to be precise, hit from Czech Republic and Slovakia; and EUR 6.5 million loss from the U.S. Adjusting from that with a strong technical effect, the Partner Brands were down 3.8% in the 9-month period and minus 5.8% in the last quarter. It's mostly less now in the division, a distribution of Partner Brands in Belgium, which are affected by challenging market conditions in Europe. End of December, Partner Brands accounted for 3% of group sales, down 6 points year-on-year. As a reminder, in the full year '19/'20, the termination of Partner Brands distribution contracts will have a technical impact of EUR 56 million, 5-6, of sales and around EUR 5 million on current operating profit. So now the last slide, the outlook, Slide #15. On the occasion of its change in general management, Rémy Cointreau Group has decided to pause a bit -- to hold off on the previously provided annual and midterm objectives. But it confirms the pertinence and the value of this value strategy, aiming at building an even more sustainable, resilient and profitable business model. The publication of the annual results '19/'20 on June 4, 2020, will be the occasion for our CEO, Éric Vallat, to share the executional roadmap of the group's strategic vision, group vision that is not changing. Thank you so much. And now I'd be happy to answer to your questions.

[Operator Instructions] We will now take our first question from Simon Hales from Citi.

I wondered if I could just start off, Luca, with where you finished on the outlook. I mean, I understand your decision at this stage not to perhaps give any medium-term guidance given Éric really just arrived properly as CEO. But I wondered if you could comment a little bit more on your decision not to provide or confirm guidance for the current year? I mean you only gave guidance for flat operating profit a little over 6 weeks ago with the half 1 results. I'm wondering if things changed significantly since then? You've seen, obviously, some deterioration in trend. Is that what's driving that short-term concern? Is it the coronavirus? Any color there would be very helpful. And then, secondly, just on the coronavirus, I appreciate it's very, very early days, but how are you sort of thinking and modeling different scenarios as to how that situation may play out, if at all, at this stage? Is there anything you could comment on? And then just, finally, just in terms of some of the commercial disputes you've been seeing both in Travel Retail in the U.S., some of the issues in Russia, are we seeing the end of any of those as we head into the fourth quarter? Or should we expect them all to continue for the full year?

Can you repeat the second one because it was a little bit -- it was not clear from here?

Yes. Sure. It was just around the coronavirus really, if there's anything you could say at all. I know it's very early days as to how you're thinking about it, how you're perhaps modeling potential scenarios as to how that may play out, just to give us a little bit of color as to what you think may or may not happen.

Thank you so much. I will start with the first one and we think this is the most important. Every question is important clearly, but why we decide to hold off on, which is a suspension of the guidance. Essentially for 3 different reasons. The first one is that Éric, as the new CEO, clearly confirmed from the early stage or from early days that he's totally aligned with the strategy of value. So the strategy is not changing. But his role, his duty to be the leader or the general, of the economic map, and as every general want to pause a bit, think about the roadmap and to share with the financial community, also internal stakeholders because they're not only financial -- external community in the world, also internally to, all together, be on the same boat and be associated of this roadmap on the execution point of view that will be shared on the 4th of June. So to do that, it's important to take a little bit of [ récuse stratégie ], we can say in France. Nothing is changing in the medium to long term, but need to be totally convinced of the roadmap that we'll be executing in the next coming years. So it's only a suspension of this guidance, but nothing has changed on the medium to long term. The second factor is that the third quarter, we knew that would have been more complicated than the fourth one and we're still expecting some improvement in the fourth one, to be very clear. But some factors are lasting a little bit longer than estimated. Q3 showed that the U.S. recovery is there, but it is not there at the same speed we wanted to realize. So this is causing a little bit of lack of visibility in terms of the next coming quarter. Other crisis like the Hong Kong situation, it's the business, and you know that the weight of Hong Kong business [ bottom lock ] interpreted for us is bigger than our competitors, very sharply in a very strong way in the third quarter. And even if China is -- continue to perform better than expected, I can say better than expected as far as I speak, has been compensated on a negative way by these events and some slower news from some markets in Southeast Asia. And on top, Travel Retail, not only in Asia but also in Europe and in the Americas, the third question that we'll discuss later on, has been not contributing to readdress -- to reinforce the global footprint. Third factor is that it's really early days to modelize that. But the potential coronavirus impact, clearly, if any, will be significant for our business. No scenarios, but we are exposed to China. It is really booming at this moment. I don't think it will be an impact on Chinese New Year in terms of shipment because it's tomorrow, so the shipment's there. But if there will be an on-trade impact because of the coronavirus fear or a measure to be taken will be translating in a slower replenishment by our distributor for the indirect part, also partially on the direct channel, translating in a potential slowdown in the coming months. So all 3 factors, combined together, gave the final decision to suspend, to hold off on the initial guidance. But again, be reassured, the fundamentals are still there and will be shared again by our new CEO in the 4th of June, and nothing has changed. It's only a pause to better explain and to reassure the execution of the roadmap, which is behind the strategy. Second question, I think I answered that a bit. Coronavirus, we do not have any scenarios on a quantified basis, which evolving hour after hour. Clearly, we are concerned because coronavirus, if it impact the Asian territory, knowing that it's important for us, and this year is our major engine of our performance, could be a short threat for the sake of our performance. Commercial tension and what's happening in Travel Retail. Overall, what's happening in Hong Kong with a reduction of travelers and maybe now the coronavirus threat will impact the travelers and the travel spending. And on top, as we already said in the last 2 or 3 conference call, for Travel Retail Americas, we have some commercial disputes with the 2 major customers, which there is a disalignment in terms of pricing. They don't -- we are not selling our products if they are not matching the pricing we want to add on them. So there is this commercial dispute, something which is normal. This year it was visible because there are a number of situational factors that are impacting our performance. So -- but maybe on the outlook, I hope it was clear for you.

That's great, Luca. So just to confirm on that outlook point, I mean, you're basically saying you can't reconfirm that flat year-on-year profit number you gave because, really, as we head into the fourth quarter, you feel that the U.S. backdrop is still uncertain. It's a little bit worse than you expected a few months ago. Asia is probably a little bit slower. And there's then this uncertainty around the coronavirus. That's how I should think about it?

At this stage, we can't. But this is only the consequence of the 3 elements combined. Even if it would have been another situation, nothing would have been changed because the most important thing that you have to understand that our new CEO wants to have the time to write -- endorse the roadmap for the execution. It is his responsibility, his duty. It is normal to step out a moment and to take the time of the thinking process and then the application. He's not a robot. He's a human being and needs to endorse the execution because I repeat myself, it is his entire responsibilities to be the general that drives all the troops.

We will now take our next question from Edward Mundy from Jefferies.

A couple for me. The first is I appreciate, at this stage, it's very hard to talk too much about the potential coronavirus, but I was wondering as to what it could mean for the outlook for pricing for cognac into 2020? There's been some quite good pricing the last few years. Does this put on ice potential price increases, or certainly delay potential price increases given the potentially slightly weaker backdrop? The second question is, you've got about EUR 1.3 billion, I think, book value for cognac on your balance sheet. I was wondering whether you're able to share with us from your methodology as to what you think the market value of that is and how you might get to that? What sort of multiple you think it's worth? And then what type of methodology would you use to justify that? And the third is around the U.S. There's clearly some headwinds in both shipments and depletions. When do you think there's going to be an inflection in the U.S.? And what would you look for to call that inflection?

Thank you. First one, we do not think that pricing will be affected. If there is coronavirus events, for instance, it could have an impact on the global consumption environment, not in pricing. And we were not reacting, trading down our brands to be able to sell some volumes on a discounted basis because we need to. So we'll not jeopardize our strategy. I don't think that will be a call linked to this crisis for a trading down in Asia Pac. Clearly, the price is the consequence of a global strategy. So also on that part, the action of the new CEO will be important. It would be explained to you in the 4th of June 2020. But I can confirm to you that more than price, more than ever, our first lever, driver to be able to perform our strategic execution, the strategic vision, and to be able to deliver future growth and future fuel is the gross margin. So more than ever, we'll be focused on the gross margin improvement. Like this year, even if the top line is less nice than we expected, like this year, you will continue to see improvement in gross margin. And once again, I don't think pricing would be affected. It's the global volume of the business that could be. Market value, cognac, EUR 1.3 billion its global value of stock inventories for all brands in the group, including also whiskey. So it's lower the impact for the cognac. It's bigger than EUR 1 billion as is the cost value. We cannot disclose what is our estimation of market value. What I say every time is that, in our opinion, the market cap of the company could be not enough to be compared to the value of our stock in cognac. So no more than -- the market cap of the company is underestimate compared to the final terminal value of our cognac asset. U.S. disconnection between depletion, sell-out and sell-in, where does it end? Difficult to answer. We are still confident in the recovering on the fourth quarter. But the speediness -- the speed is slower than expected. And we are very satisfied by the 1738 to rebound, for instance. But VSOP, even if it is recovering in terms of depletion, it's taking more time to be normalized in terms of equation. So there will be some recovery in Q4, but the final normalization between the shipment and depletion of final sellout will take a little bit longer than we anticipated.

Okay. If I could just have one final follow-up, just around Global Travel Retail. I think you mentioned in Hong Kong, you've got 3 months' worth of the disruption there relative to the previous quarter, you only had 2 months' worth. If you're able to quantify the weakness in Global Travel Retail at the group level, to what extent is due to Hong Kong? And to what extent is due to commercial disputes in the Americas? Do you want to talk about that?

It's too much of disclosure. We normally don't do that because there's a cross information between a specific region, and specifically, so we do note that. But it's -- it's not marginal, we can say. We feel the heat. It's not marginal, it's significant. It's important. So when we fix it, it will be recovered on that point.

We will now take our next question from Andrea Pistacchi from Deutsche Bank.

Two questions, please. First, please, just going back to what you're saying about pricing in China. Of course, there's no direct connection between pricing decisions and the coronavirus. But if I interpret what you were saying earlier, you -- is it right that given the momentum in the business in China and also the competitive environment there, you seem quite confident that -- or you've seen that the right thing to do is to put through another price increase in April? And then if I could ask you, please, about Western Europe where you said the magnitude of the disruption from the changes in route-to-market has been more significant than what you're anticipating. Could you put a bit more color around that? Why the ramp-up with some of these new distributors is slower than expected, what is going on?

Thank you so much. With pricing in China, our intention is to increase prices 1st of April. Then we are more sophisticated than 4, 5 years ago. You know that we follow channels and sub-channels, so it would be much more granularity on the application by channel and by types -- by range as well because, this year, it's a very good year for CLUB, so we have an annualization of very strong performance of CLUB. So we'd be much more analytical in term of break down the price increase. But globally, and at the end, there will be a price increase in China as well. And once again, even if there'll be a coronavirus impact on the on-trade environment or some channel with 2 -- or 1 or 2 quarters, a little bit more complicated, that will not jeopardize our pricing and value strategy in China. Route-to-market in EMEA essentially why they are taking more time than expected, because we switched from some distributor, one in which we had a joint venture that we're amplifying a little bit too much. That's the reason why also we have changed the volume and market share impact on the country. And the value strategy in the long term, it's the right call; in the short term, could cause some disruption in terms of appeal to some promo plans. And in countries like Germany and Czech Republic, promo plans are very important. So once again, it's more the consequence of the application of our strategy to go up and to be lesser reliance to -- connected to this kind of promotion. That is a little bit longer than expected. But we are not giving up. We are consistent with this strategy. So we think that when will be normalized, the appeal of our brands and with the necessary support in terms of A&P execution, advertising program also on the ground and merchandising level will be paying off. So it's a consequence of the application of our luxury strategy. Also, in this kind of market that historically we're more promotional with partner, distribution partners, they are more concerned by the absorption of fixed costs. Is it clear?

Yes. If I may, please, a quick follow-up on China. Firstly, the situation with the nightlife channel, if you've seen -- which was impacting you less than some peers. But if you've seen some normalization and softness in the nightlife channel? And should -- when you think of your on-trade sales in China, should you lose some sales due to the coronavirus situation now? Are there ways of catching up mainly through greater at-home consumption? Are there ways to offset lost sales?

Clear. At this stage, since 3 months ago, we absorbed totally the impact of the anniversary of the Communist Party and this low KTV night negative impact on outlet. So at this stage, everything is normalized. Now there is the new coronavirus. If coronavirus will be hitting in a moderate to strong way, there will be some impact on the on-trade, on the final channel. But at the same time, we are continuing to boom in terms of e-commerce and direct channel. So we are reconverting what -- sometimes more than what we are losing -- could be losing in the direct channel. And maybe I'm wrong, I'm not an expert, but I don't think that coronavirus will impact the e-commerce demand at this stage because it's a direct link to the final consumer, there's a logistic barrier that could be bypassed. And even more than before, we are happy to have between 20%, 25% of our business with a significantly 8 to 10 points margin, final margin, in bottom line. That is playing an important role even more now that there's a crisis with the future consumption. So I repeat, probably on on-trade and the night environment in the next months to come if coronavirus is confirmed, but it probably rebound even more than what we can modelize right now on e-commerce and direct channels.

We will now take our next question from Fintan Ryan from JPMorgan.

Three questions from me, please. Firstly, you mentioned, in China, you anticipate putting prices through from April. What is your pricing strategy for the U.S.? In particular, would you maybe push back your price increases in order to regain momentum both in the sell-in and sellout? And secondly, you mentioned that you would look to reposition X -- St-Rémy XO in the U.S. against VS. Is this going to be a big push that you'd look to be putting through in the next year? And like do you have the inventories of XO St-Rémy in order to meet that potential demand? Then, thirdly, just in terms of the -- because you mentioned like the investments behind numerous initiatives and the Mount Gay relaunch, would you be able to give us some guidance in terms of how -- what do you think the organic growth in A&P, your marketing spend, could be in FY '20 and FY '21? And just like I assume that the growth of that will exceed your, at this stage, your anticipated organic sales growth. Is that correct way to look at it?

Thank you for your question. Pricing in the U.S., we will increase prices in the U.S. That is -- my answer is to try to be considered like that. It's more than ever, once again, difficulties makes people a little bit more dynamic. So it's even more than before a state-by-state game. It's even more than before a channel-by-channel game. So yes, we'll increase pricing. But also, we'll try to do our best to improve the gross margin delivered by bottle to increase that on absolute value, but also on a percentage compared to the net sales in the U.S. And as comp, in terms of valorization in the U.S., we will have some positive automatic impact because we will be less promotional than this year in some states. So in term of pricing, footprint and valorization more than pricing, we are ambitious and quite optimistic. The question mark in U.S. being the fastness, the speed of the recovery to reabsorb the fork -- the negative fork between depletions and sell-in because this is very important. At the end, the profit and loss is based on the shipment. So this is the first important thing to sort. But on pricing, we are keen to do another price increase. In terms of XO's revenue, already started. We have the inventories. And the goal is not to be a strong alternative to VS, our largest competitors, because we couldn't be playing this game, but to grab some business in some states like California, in which the sangrias [ or the mixers-based ] is coming through at good levels, also with capital strategy sometimes. So it's more command or action to try to grab additional business that usually we don't have it. So no big figures, but interesting actions to grab a position. And the guidance, I can't give a guidance because we are also off/on, on everything on that. With Éric, we will explain everything on strategic, on application mode in June. What I can say to you that at this stage, we want to continue to invest behind our brands the speed, which is bigger than the turnover. So we want to invest more than the increase of the net sales. So the weight of the A&P compared to net sales in next coming years will continue to grow and the first driver to deliver profit will be the gross margin. So gross margin will be the first driver to pay the bills for everybody to increase the profit.

We now take our next question from Chris Pitcher from Redburn.

Three questions, please. Could you repeat the percentage you said that you thought was e-commerce in China? And how can you be confident that, that's direct to the consumer and not going into on-trade accounts by a different channel? And then, secondly, you said that you're fully supportive of the strategy put in place by Valerie. But can you say whether the commercial execution, particularly around the sort of core of the portfolio, rather than the luxury portfolio, whether there were any missteps there, particularly in the U.S.? And if possible, can you give us a view on what LOUIS price is doing in the U.S. versus the rest of the cognac portfolio? Is it very much the sort of the lower-priced products versus LOUIS price that are underperforming?

Okay. And the third one? I missed the third one.

There was only 2 questions. Sorry.

The second was the route-to-market as a cushion in EMEA. Okay. E-commerce, we are confident in -- the weight is 20%, 25%. In the beginning of the year, it's more 25% and then it's slowing down in the third one a bit because it's more indirect driven if we look at our figures on a shipment basis, and then recover a bit after Chinese New Year. So you can modelize '20, '22, '19 quarter-by-quarter. We have a little bit less than 10-point difference on the positive side in terms of final bottom line. So each bottle that we are selling through e-commerce is more accretive to the bottom line. And we share data with our partners to be sure that there have been -- there's not disruption on route-to-market adding these quantities, this volume going directly on on-trade of making some internal [ CBT ] action. So we are confident of the fact that we have data that the final sale is linked to the specific individual. The timing of the cushion or to market changing in Europe, we are quite satisfied with the applications, but if this was your question because I had...

Sorry. It's more on the United States, sorry. So you talk about how you're struggling to get back into retailers. I'm wondering if that was a sort of a VSOP comment or whether -- has the focus been more towards LOUIS price in the U.S. under the new strategy, and therefore, you've lost focus on the others? It's trying to get an understanding of where the problems lie in the portfolio.

We tried a different business model. It's managed that -- there is no link with that. That is a specific brand ambassador, [ PCB ], specific marketing team, commercial. So a specific means that are behind this brand. We are quite satisfied with the performance, and it's not affected by this working capital tsunami that what caused by our largest competitor. So they are not linked. In terms of the way we're managing that is very, very split. The way we are able to influence the reabsorption, the fork between shipment and depletion, we try to speed up depletion as much as we can compared to what we might have been doing. We are not putting strong promotional sell-in activities to be able to increase the sell-in in the short term because, otherwise, we have a negative impact on this fork in the following months. So we are trying to absorb that and we are trying to increase the initiatives in terms of brand appeal as a global brand authority awareness. And on the ground, on the field, to increase merchandising experience even if, as you know, the shopping experience in the U.S. is not the best in the world. So there's a lot to do for everybody, also for our competitors. So we try not to push too much in the short term to increase the final sellout as much as we can to be able to reabsorb this negative fork at this stage as shown between depletions in shipment. But VSOP team is really not impacted by that. It's a different business model. I misunderstood your question, was also on a route-to-market to EMEA if we have the right partners. The answer, just in case is, yes, we have. It's not a problem. The cushion is only that the change on the focus is taking more time than expected.

We will now take our next question from Richard Withagen from Kepler.

I have 2 questions. First of all, on the U.S., how would you judge the current cognac inventories at U.S. distributors? Are we back to more normal levels? Or are inventories still higher as the threat of potential tariffs remains? And then the second question, at the November call, conference call, you talked specifically about the double-digit increase in marketing investments in the second half of the year. Is that still the plan given the current market dynamics?

Stock level in the U.S. is lower at this stage. Then the stock coverage depends on what you consider for your depletion sellout footprint. If you consider the past, even if it's lower, the stock coverage has not slowed down. But if you consider to see that the future, the normalized depletion is it. So in absolute value, it's more limited than before. In A&P, I cannot give you a specific figure. But the aim, I can repeat myself, is to increase investment, advertising and promotion, much more the turnover, this year even more than ever. Because with the turnover we have right now, it needs to be recovered in the last 4 -- 3 months. It would be a significant gap between A&P increase and net sales performance.

We will now take our next question from Marion Boucheron from MainFirst.

Two questions for me, please. The first one on price/mix evolution in cognac. If I dissect the numbers you've given, I get to about 1% price/mix for the third quarter and volume down 8%. So to the mix effect, is it only due to Hong Kong or you've seen mix evolving unfavorably in other regions? And then the second question, on the route-to-market changes, so going forward, are there -- many countries still that -- were you planning to change them? I mean, how should we look at it for next year and to building volatility to the numbers?

Thank you. It was a quarter in which the mix was a little bit penalized by the increase of the Hong Kong impact on figures on Travel Retail. That plays a geographical negative impact, but also brands and product range negative impact. Because if you consider the third quarter of marketing, you understand that the impact of the -- on the pricing and the gross margin model is driven by the performance. It's still to be negative where you're marketing globally. But in terms of geographical footprint, it is 3 months against 2 on Hong Kong and Travel Retail a little bit worldwide and a little bit of downsizing of the global range mix overall inside cognac category. In terms of route-to-market change to be -- to come, as we already highlighted many, many times, we do not disclose that before we decide that. But at this stage, EMEA region will continue to be land of -- land of restructuring, land of reorganization for the next coming years. We'll be more precise also on that on the footprint, on the roadmap with Éric Vallat in June. But we -- the work is not ended on that side for sure.

Okay. And just so -- in cognac, if we think about the next quarter, mix should remain the same. I know you have seen a very big difference in Hong Kong. Now hopefully, you recover a little on the volume and price similar than the third quarter because you would have the pricing at 1st April, but you don't quantify it yet?

I think that could be a little bit better, also in terms of mix, but not substantially different from the -- for the third quarter. In terms of absolute value, clearly, we think that fourth quarter will be better than third one. Now there is the coronavirus, which is very important threat that could hamper and change our vision at this stage because we are entering in, eventually, troubled waters. Everybody, whole world.

Okay. And do you mind just reminding us the weight of on-trade in China?

The weight of...

Of the on-trade in your sales, that's linked to the coronavirus, in case?

We are around 60-40, 55-45 in terms of depletion basis. We have more off and less on.

We will now take our next question from Nadine Sarwat from Bernstein.

So 2 questions from me. First, could you provide some color as to why the cognac trends have deteriorated in Southeast Asia in Q3? And then my second question would be for U.S. cognac. So as everyone has touched on, have those slower replenishments as a headwind over the past few quarters. Is there any chance how much of this would you believe could be due to price increase that you took in, let's say, 2018 hitting demand a bit more than you expected?

The second one, I didn't get it precisely. The second one is, your question if we take too much price increase, where, in the U.S.?

Yes. Price increases, let's say, in 2018 calendar year, could have affected demand more than you anticipated in 2019.

Southeast Asia, it's more a negative third quarter linked to specific geographical situation than -- and not a problem in terms of category, in terms of sellout dynamics. The countries are a little bit more complicated in terms of route-to-market. And we had a lot of negative headwinds on geopolitical basis on some countries like Vietnam, also partially in Malaysia. And on a business point of view, a slowdown in Japan. After the first, second quarter, we were very good. There's the VAT increase that played negatively in Japan as well. And a slowdown also in Australia, which is also it's by different events that were not supposed to happen. So more specific geopolitical or geographical situation than specific prices. In terms of prices in the U.S.A., clearly, we do not think that we increased price too much. We think that the threat from the tariffs with some play on the timing of the price increase by our largest competitor, combined with comeback of the VS business in the U.S., increased, from one side, the threats to have a less profitable business for wholesalers; and the second part, the delay on timing of price increase in August for them compared to ourselves switched the preference to allocate their money, their working capital, on their product more than ourselves. I don't think -- we do not think it is the price per se of Rémy Martin that played negatively. It is more the range and brand power if we're going to say that because, yes, they are bigger than us and when you have a threat to be hit by, worse point of view, of 20%, 25% of tariffs, you start with a bigger contributor to your global profits.

That concludes today's question-and-answer session. Mr. Marotta, at this time, I will turn the conference back to you for any additional or closing remarks.

No, I've nothing else to add. We will talk again end of April for the fourth quarter and final year in terms of turnover. We will try to be very clear as we can in terms of turnover. Once again, we are holding off on the guidance. And we'll give you a rendezvous, an appointment on the 4th of June in which the roadmap will be clearly, analytically explained by Éric Vallat and myself for the next coming years. Strategy is not changing. Thank you so much, and have a nice day.

This concludes today's call. Thank you for your participation, ladies and gentlemen. You may now disconnect.