Rémy Cointreau SA (RCO) Earnings Call Transcript & Summary

Good day, and welcome to the First Half Sales 2020-2021 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Luca Marotta. Please go ahead, sir.

Good morning, everyone, and thank you for your participation to the Rémy Cointreau conference call for its first half sales 2021 covering the period from April to September 2020. This morning, we have 4 key messages to highlight to you. The first one, our performance. Our performance continued to be impacted by the COVID-19 pandemic in the first half of the year. While most markets were no longer under lockdown in our fiscal Q2, the on-trade channel, so bar and clubs remain closed in most markets. We also continued to face spirits sales restriction in some market and continued to suffer from a collapse in duty-free sales, given that the international borders remain largely closed. Main exception has been, clearly, China Mainland, where we have seen a normalization of selling condition, both in on and the off-trades in June and the U.S., where the off-trade strength more than offset the on-trade freeze. In that context, we suffered from significant destocking efforts by our sellers, which tend to show deep cautioners overall in those periods. As a result, and that's my second message, our organic sales declined by 16.4% organically in the H1. So after a 33.2% decline in Q1, Q2 marked a significant improvement as sales only declined by 4%, 4-0, 4.0. As a reminder, we had guided for a modest decline in Q2 and this minus 4% is, therefore, somewhat better than what we anticipated. This was driven by improved trends across all regions, except in Global Travel Retail, which suffered from ongoing weaknesses. But the main driver of the Q2 improvement was clearly the U.S., which delivered a robust, very robust double-digit organic sales growth. China Mainland also confirmed its recovery is well on track. And on top of that, U.K., Germany, Benelux, Australia were also good performers in Q2 and even in H1 year-to-date. The third message of the day it is linked to our value depletion. So the best approx of what is the final sell-out. Value depletion are now showing good growth over the first half of the year, thanks to a sizable pickup in the Q2, driven by the off-trade and e-commerce channels. This positive value depletion trends compare with our 16% organic sales decline, suggesting, as already highlighted, that there has been a mathematical substantial destocking during that period. Inside this global message by region, Asia Pacific depletion -- value depletion trends were still overall, overall the region, negatively oriented, down double-digit due to the ongoing weakness in Southeast Asia, in Japan and clearly also the Asian Travel Retail. And this, despite a very strong, I repeat, strong acceleration in China Mainland in Q2 confirmed by robust, robust in our -- meaning, it means double-digit and better-than-expected sell-out during the Mid Autumn Festival and also ongoing strength in Australia and also in Taiwan, which is not big, but it's important in terms of our image and presence. In contrast to the Asia Pacific overall region, the Americas overall region showed depletion trends, up very strong double-digit driven by booming at-home consumption in the U.S., while Canada and LatAm showed ongoing weakness. So clearly, the U.S. was the main engine, clearly beating engine of the period in the Americas. Last but not least, Europe, Middle East and Africa, in which depletion trends were down low single digit in H1. This limited decline was helped by clear improvement in Q2 in some Western European market, such as Germany, Benelux and also in -- for its part in Spain and ongoing strength in the U.K. In contrast, Africa, Middle East and Rest of Southern Europe and part of Eastern Europe remain weak. And overall, as already said, highlighted, in each region, Global Travel Retail played a negative role because the trends have remained very, very weak, with little sign of improvement. The fourth message of the day is the 2021 outlook. On the heels of a better-than-expected geographical mix in H1, we now anticipate our H1 operating profit in 2021 to decline by 25% to 30% in organic terms compared to a 35% to 40% decline previously communicated. So we continue to anticipate, even more than before, a strong performance in the second part of the year. Now let's move to the H1 seasonality, Slide #3. Sales amounted to EUR 430.8 million, down EUR 93 million year-on-year or a 17.8% decline on a reported basis. This reflects 3 things: an organic loss of EUR 86.2 million. So it means 16.4% declined, it's slightly negative translation currency impact of EUR 7.4 million or 1.4% loss and lastly, a smaller scope premier benefit of EUR 0.6 million, so 0.1 in percent from the consolidation of our Cognac Brillet over the period. In terms of scope estimation for the year, on a yearly level, we expect -- and you can take into consideration a scope effect in terms of positive impact on top line of around EUR 3 million on sales, of which more or less half for Cognac Brillet and half for the Champagne J. de Telmont. Let's move to Slide #4, as we just said, currency translation decreased sales by EUR 7.4 million in H1. This was largely driven by the U.S. dollar, which weakened during the summer compared to the euro, implying a loss of half of that, EUR 3.6 million in the half year. And most of the -- our other currency deteriorated, including Chinese yuan, Russian ruble, Canadian dollar. Only 2 currencies, Swiss franc and Taiwanese dollar generated currency gains. Let's now turn to Slide #5, which shows our quarterly performance over the past 10 quarters and 12 months rolling organic performance of our group brands in rank, which stand at minus 16% end of September. On a global note, we can say that '19/'20 last fiscal year was a challenging year for us and COVID-19 added additional weakness since Q4 '19/'20. With that said, now with depletion trends having turned positive in Q2 and fairly easy comps ahead of us, we are clearly, clearly confident in seeing a strong rebound in H2, starting from the next quarter, the Q3. Now let's move to our H1 sales trend by region, Slide #6. Americas were almost stable in terms of turnover, net sales in the first half, minus 0.7%, thanks to double-digit sale growth in Q2. At the same time, Asia Pacific and EMEA globally, also improved sequentially in the second quarter, but their performance overall remained weak in the first half at minus 27.4% for Asia Pacific and 31.6% negative for EMEA, where overall minus 16.4%. Let's dig in the performance by region, Slide #7, talking about the organic trends. And we start, as usual, with Asia Pacific, whose organic sales declined 27.4% in H1, implying an improved performance in the second quarter, largely driven by China. China, Greater China, declined mid-single digit in H1, implying a flattish performance in the second quarter after a double-digit decline in Q1. But inside that was 2 very positive contributors, China Mainland and Taiwan, while Hong Kong and Macau remain muted. Looking at China Mainland specifically, value depletion were up mid- to high-single digit in H1, led by a return to double-digit growth in the second quarter. Besides that, we are pleased to say that the feedback we are getting from our Chinese team suggests that the Mid Autumn Festival was strong for us, driven by Rémy Martin, but also our Scottish single-malt. On top of that, from a channel standpoint, MOT and TOT, Modern on Trade and Traditional on Trade have been the main drivers of the channel recovery and off-trade and e-commerce have been key to the very robust performance of the Mid Autumn Festival. A word about e-commerce in China Mainland, in the H1 accounted for 27% of our sales and continue to grow strongly over the period at plus 32% year-on-year. The other Asia Pacific and subregion, like Southeast Asia and Japan, continue to report very, very significant declines in the second quarter. While lockdowns have been gradually lifted, the on-trade channel remains largely closed or under strict social distancing, the distancing restriction. The only exception in that region, positive one, is Australia, where strong at-home consumption has been offsetting the weak on-trade. Finally, I repeat, it's very important for Asia, sales in Travel Retail Asia, has shown weakness, a small little improvement even if borders have not reopened in the region. Overall, it remains very weak. End of September, Asia Pacific accounted for 27% of group sales, down 4 points versus last year. Second region, I'd like to talk about, is Americas. Americas organic sales were down 0.7% in H1, almost flat, we can say, led by high single-digit growth in the U.S., which enjoyed a double-digit rebound in the net sales in the Q2. Strong U.S. growth in the first half was driven by Rémy Martin, Cointreau and the Scottish single-malt. From a value depletion and volume depletion standpoint, our brands are growing significantly ahead of the market. So we are gaining market share both in volume and value, driven by impressive up-trading consumption pattern, strong appetite for legacy brand, buoyant at-home cocktail trends and very robust e-retail. As indicated in this spreadsheet on the slide, our group brands' value depletions are up 55.6%, 56% over the last 3 months, 56% the same figures, more or less, over the last 6; and plus 25% over the last 12 months ending September. In contrast, Canada has been penalized by the on-trading consumer trends negative for our cognac sales and in LatAm, sales remained under pressure due to the weak domestic consumption and the total fall in tourism. We also experienced very, very limited sales in Travel Retail Americas. End of September, Americas accounted for more than 50% weight of the group sales, 53%, up 8 points year-on-year. The third region is EMEA. EMEA organic sales were down 31.6% in H1, despite some improved trends in a few Western European markets in the second quarter. The weak performance of the region was mainly driven by Africa, Middle East, Southern and Central Europe, which continue to be impacted by the on-trade closures and a very poor touristic summer season, like in Greece for instance. The Travel Retail channel, which remained under significant pressure also contributed to the weak performance. With that said, there were also some bright spots. U.K. continue to enjoy a strong at-home consumption. Germany; Benelux; and also, for its part, Spain, benefiting from the reopening of -- partial reopening of the on-trade channel during the summer. End of September, EMEA region accounted for 20% of group sales, down 4 points compared to last -- the previous year. And now let's move to our H1 sales trend by division Slide #8. While cognac recorded an 18.1% organic decrease in H1, the second quarter showed a significant improvement and sales were down a very limited 2.5% after a 39.2% drop in the Q1. Liqueurs & Spirits also improved in the second quarter, but on a lower extent, with the second quarter down 11% compared to minus 17% in the Q1. Partner Brands grew 2.1% in the H1, led by a strong rebound of around 30%, 26.5% in the second quarter, and by the strong performance of key Belgium non-group brands performance during the summer. Let's now turn to Slide #9 and the analysis by division, and we start with cognac. As we mentioned, our Cognac division posted an organic decline of 18.1% in H1, implying a limited minus 2.5% in the second quarter. While the sequential improvement was driven by all regions, the Americas was clearly the main driver with double-digit growth in the second quarter. Digging in by region, inside the Asia Pacific. Greater China recorded a mid-single organic sales decline in H1 because good growth, very good growth in Mainland China and Taiwan was more than offset by very strong declines in Hong Kong and Macau, which were hit by the poor on-trade consumption and significant destocking from local wholesalers. As already mentioned, but it's even more important to remind that for cognac, Mainland China confirmed its recovery in the second quarter with double-digit value depletion trends after a flattish Q1. Besides ongoing strength in the key e-commerce channel and very strong double-digit Mid Autumn Festival trends bode well for the remainder of the year. In contrast, sales in Southeast Asia, in Travel Retail Asia both continued to decline strong double-digit in the second quarter due to significant on-trade restriction in most markets and the continued closure of borders. Inside the Americas, cognac sales grew low single-digit in H1, as high single-digit growth in the U.S. was mitigated by Travel Retail Americas, Canada and LatAm. In the U.S., growth was mainly driven by 1738 Accord Royal, VSOP and Tercet, which have been enjoying amazing depletion trends in the past 6 months, fueled by at-home consumption. As shown in the slide on the spreadsheet, our cognac volume depletion grew 69% in the last 3 months period and 73% in the last 6. And as of -- for what concern price/mix effect, they were neutral on depletions in the last 12 months period ending September 2020 and negative in the last 3 and 6 months period as a result of the product mix evolution and the cycling of last year price increase. Please remind that we took our price up, but only on the 1st of October this year compared to the 1st of April 2019 and it plays a role in the valorization of at-home selling and depletion. In Europe, Middle East and Africa, cognac sales declined stronger double digit, led by weakness in most markets as well as in Travel Retail. Only notable exception, as we mentioned, was for cognac U.K., which is enjoying strong at-home consumption for this category. Concerning the volume value equation for the cognac business, the 18.1% organic sales decline was driven by an 8% volume drop and a 10% price/mix loss due to the adverse product mix. At the end of September, cognac accounted for 71% of our sales, down 1 point year-on-year. On Slide #10, we'll give you an example of communication initiatives that Rémy Martin conducted in the U.S. during this summer and building on the barbecue occasion. Rémy Martin teamed up with Celebrity Chef, Kwame Onwuachi to launch a series of 4 short films, titled "Flavor by the Grill", where the chef proposes some seasonal barbecue recipes associated with Rémy Martin VSOP or 1738 Accord Royal to have some cocktails like Royal Collins or VSOP sangria. This benefited from a large media plan, both digital, social and digital [indiscernible] platforms, driving clients directly to e-commerce platform. Results so far have been excellent. This partnering with this chef has only just begun as he will be an ambassador for Rémy Martin for the next 10 months. And the next slide, looking on the China, our initiatives are back to full speed with 2 different and recent openings. On the left side, Rémy Martin interactive pop-up store in the larger luxury shopping center in Xiamen, in the Fujian region. This is a traveling pop-up store that will move around China to educate clients to the know-how of the brand. On the right side, we opened our third Louis XIII Boutique in China mid-September after Beijing and Xi'an. This boutique is located in the well-known luxury mall MiX C in Shenzhen in Southern China. Let's now turn to Liqueurs & Spirits division, Slide #12. Liqueurs & Spirits posted 13.6% organic sales decline in the H1, implying 11% decline in Q2 after minus 17% decline in Q1. This was mostly driven, from a regional standpoint, by the EMEA region and in particular, by some Western European markets which particularly rebounded in the second quarter. Looking at the volume value equation of the Liqueurs & Spirits division for H1, the 13.6% organic sales decline was entirely driven by volume, while price/mix was here positive for 5 points. End of September, Liqueurs & Spirits accounted for 26%, 2-6, up 1 point compared to last year. Now let's talk a little bit about the performance of the major brands of the division. Starting with Cointreau. Cointreau performance was slightly negative in the H1 as robust growth in the U.S., but also in the U.K., Germany, Belgium and Australia was offset by weakness in the rest of Europe, Asia Pacific and Travel Retail. The good USA performance was fueled by strong at-home consumption and the success of Cointreau's focus on the original Margarita cocktail. The brand achieved plus 24% depletion trends in the last 3 and 6 months despite the closure of the on-trade channel, which is a very strong result because for Cointreau in the U.S., we are 45 off and 55 on-trade, which is quite the opposite of what happens for the cognac brands, which we are 80-20 in the other side -- the other type of mechanism. Besides that, price/mix benefits added 2 points positively in the 12 months period ending September 2020 helped also clearly by price/mix. Talking about Metaxa. We have to say that sales of our Greek brandy declined double-digit in the H1, mainly driven by the shortfall of Global Travel Retail and weakness in this original market, Greece, where the summer season was disappointing. This was partially offset by good growth in Germany and West -- Eastern Europe, but overall the result declined of double digit. Mount Gay recorded a double-digit sales decline in the H1 due to the weakness in Barbados and in Travel Retail, only partially offset by good growth in the U.S. and the U.K. St-Rémy, our brand posted a double-digit sales decline, led by shortfall, once again, by Global Travel Retail, while the brand enjoyed a strong growth in the U.S., where the brandy-based sangria, has been a successful cocktail over the summer. The Botanist also recorded a double-digit decline in H1 led by Global Travel Retail, but also some stock readjustment in the U.S. in a challenging on-trade environment. Last, but not least, Single-Malt whiskey sales were almost flat in H1, thanks to a very nice rebound in the second quarter, particularly driven by the U.S. and China. Let's move to Slide #13, where we highlight 2 new launches among our Liqueurs & Spirits portfolio. On the left side, a new Port Charlotte edition, the OLC: 01 2010, which is part of our Casks Collection series, is still back in 2010 from the 2009 crop of Scottish barley. This every piece of the Single-malt was aged into ex-bourbon, ex-Syrah, ex-wine cask. Retail price is GBP 90. On the right side, you can see the St-Rémy fifth expression of the Cask Finish Collection, which is the Oloroso Sherry Cask. This is a limited edition with 17,800 bottles that was launched in domestic market starting September 2020. We are also planning to launch it in the Global Travel Retail market in 2021. Now let's move to Slide #14. And I would like to say a word about our most recent acquisition, so the control of the Champagne J. de Telmont. As indicated in the press release, the Rémy Cointreau Group acquired a majority stake in this J. de Telmont, including brands, inventory, production facilities, property assets as well as vineyard in the Champagne region. We think that the brands offer substantial growth potential, in particular in international market will provide sales synergies with the existing brands of the group. And as you all know, the champagne category is a great on-trade door opener, which will help us to strengthen in additional way. Our position in that channel well normalized post COVID-19. Now the last slide, if I'm not mistaken, #15. Let's talk 2021 outlook. With better-than-expected estimated geographical mix in H1, meaning the U.S. and China Mainland driving the positive surprises versus our initial expectation, we now anticipate H1 2021 operating profit to decline by 25% to 30% in organic terms compared to our previous guidance, minus 35% to 40% at constant currency and constant scope. Despite limited visibility, the group continues to anticipate a strong rebound in H2 2020, 2021, starting on the next quarter, the Q3, led by U.S. and Mainland China. I'll now be very happy to drink a bit of water and to take your questions.

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

I have 3, please, Luca, if I can. Can I just sort of pick up first on your outlook comments and the change in the EBIT guidance? Obviously, the geographic mix, as you say, is certainly helping. Has there been any change at all in the way you planned your reinvestments back into the business as we've moved through Q2 and as we look forward into the second half of the year, any changes there we should be aware of? Then secondly, on stock levels. Can you just sort of update us on where you think we are at the end of the half year as regards to wholesaler stock levels in China or in the U.S. and how we should think about perhaps replenishment in those areas as we head into the second half? And then finally, just on Mid Autumn Festival, you're clearly confident that you've had a sort of a good festival season. Do you think you're gaining share and have been gaining share, particularly in cognac over the last sort of few months and into the beginning of the Q3 in the Chinese market?

Thank you so much. So why we increased the H1 EBIT guidance compared to the previous guide -- the business announcement because the geographical mix has been supportive. Inside the geographical mix, U.S. because in a world, more U.S., more China is accretive to our overall profit in terms of operating profit. On top of that, channels has been also accretive, more e-commerce, not only in China, worldwide, is accretive. So there is a geographical in China positive impact and less emerging markets, South East Asia, Africa, LatAm, which are in average dilutive to the overall were not performing, so were mathematically positive to the final result. Also, and I want to highlight that you will see more clearly end of November within the half year results, I think that we are highlighting a new guidance because profit of the measure we've taken in March and April. Very strict control of our expenses, starting with OpEx. We remember, I already said, we cut around EUR 30 million, 3-0, in terms of expenses, 2/3 on a temporary basis, 1/3 will last and also to focus on the important strategic guidance, so that's the reason why we increased our guidance. In terms of the second part of the year, we will be more precise end of November. We will invest even more clearly, compared to expectation in this market, our main engine because it's important to continue to follow this moment and be able to add this trend last, not only in the Q3, but in Q4, if it's possible and next year, so we have to increase already said our A&P spend. Sometimes our operating expenses spend when it's important to structure in a better way to market to continue to beat the market in this specific market. So clearly, yes, we'll try to invest even more than expected. In this market, they are clearly the positive engine for actual and future growth. The second question, stock level at this stage, knowing that there is a mathematical disalignment between sell-in and depletion in the U.S. In the U.S., the stock is very low. So starting from the next quarter, there will be a progressive clear realignment between depletions and sell-in. So we expect strong U.S. in the next quarter and also in the next periods overall. We are fairly low on some qualities or healthy in others in China, with some difference by region, by -- clearly China Mainland is lower than Hong Kong or Taiwan is very low. But overall, it's fairly low on some qualities and healthy, not a problem in others. And on the rest of the world, clearly knowing that we are in a negative performance evidence, they are on the high side. So once again, the stock is a never-ending debate because the level -- the right level of inventories can be done, can be obtained by mathematical formula because it depends even more when you have 3 tiers or more than that go to market, but the expectation of the sellout when it increased dramatically, like in the U.S., and suddenly, you are very, very low. When there is the opposite suddenly with the same absolute value, you are at very, very high level. So it will depend in a world what will come next. And in terms of math, we think that we gained market share. I don't talk about competitor, but we are very satisfied of our performance, clearly better than our expectation, clearly double-digit on the heel on top, very strong, if you remember, very, very strong math with Autumn Festival 2019. So that's important for the confidence also of the indirect part of China because at this stage, direct selling in China is performing better than that, meaning that even if we are performing better than expected, even if the China is very strong, the cautions within entire China where seller is still there. So the more we are able to show the direct part in the overall performance when you have this kind of iconic occasion called math is beating expectation, even more the sell-in will be automatically aligned by China by region. I hope it was clear for you.

Fairly clear. Can I just sort of check with regards to you -- that we are talking about share gain in the Mid Autumn Festival, do you think you're gaining share in all the different trade channels within China?

Sorry, I didn't get it. I think -- you think that I'm gaining share?

Do you think you're gaining share in all the trade channels in China? Or do you think just your success in e-commerce has really accelerated your share gain around Mid Autumn Festival?

I think it is a little bit overall because clearly e-commerce is a main engine, but on in and out because there is some intermediate stock. But I will say it's quite spread out in terms of qualities, all qualities performed better than the previous year, all qualities from the intermediary to [ DDS plus ] were beating the expectation. Clearly, the main engine is and will be CLUB.

We will now take our next question from Laurence Whyatt from Barclays.

Three also for me. If I could follow-up on Simon's question around stock levels, particularly in the U.S., you mentioned that the wholesalers are being a bit cautious at the moment due to the pandemic impact. Would you expect that caution to continue given that the high level of sellout that we're seeing, particularly in the off-trade, would you expect the wholesalers to return to normal levels? Or do you expect this caution to be maintained as we go into the Christmas period? And then 2, on Travel Retail, if that's okay? Firstly, in China, are you seeing any impacts of the improvement in domestic flights in China? Is that impacting your Travel Retail sales at all? Or the impact of Hainan Island now being able to sell spirits Travel Retail prices? And secondly, could you let us know what the size of Travel Retail is in the Liqueurs & Spirits division? On the presentation, you highlighted it as pretty much a main impact across all the brands, could you give us an idea of how big Travel Retail is in Liqueurs & Spirits?

Okay. So 2 questions on Travel Retail. Stock level in the USA, they are on the very low side. We expect realigned, meaning that we expect this cautiousness to be partially gone. The mechanics of the U.S. are very solid. We are very comfortable. Only potential risk could be on more macro political, economical environment. So out of our end and which we might be as everybody penalized by, I don't know, some complicated situation on a macro economic level, election, something like that, but external factor. Internally with our plans, we clearly think that the second part of the year in the U.S. will be stronger than first one, then there might be some volatility around the quarter, but we are very confident that this realignment will translate an increased performance in sell-in. So our sales and our profit and loss. GTR. GTR weight for the group is strong. It is around -- it used to be around 10% top line. And it clearly, with an overexposure in the Asian market; second, Europe and used to be stronger in Americas in the last 2 years. Already even before COVID-19, we reduced part of this activity because it was less in line with our pricing policy in our premium division of our brands. In terms of GTR, we noticed a little sign of improvement, as highlighted, but it remained marginal. The real question, which is a very complicated one, what will be worth the Hainan opportunity inside China duty free? Clearly, it's an opportunity for everybody. It's a quite complicated one, though because it is partially Travel Retail, partially home market. We will embrace this opportunity. We are not turning our back, our vision for the future. This is the future. We will find the right solution. The point is in the next coming months to try to find the right balance between this commercial penetration of strong opportunity that has to be done and followed, following the code, the image of our brands and not at the expense of our pricing power. Pricing is not our ultimate goal, but it is the expression of the respect that we need to give and we demand to other people to have for our brands.

And just on -- you mentioned that Travel Retail was 10% of the group, would you be able to split out what it was for the Liqueurs & Spirits division in particular?

Smaller, much smaller. It depends by brand. Inside, for instance, St Rémy it is important. Inside Metaxa, used to be important. In the last 2 years, we already reduced the expense because of the lower exposure. So at the end, cognac was very strong. So the overall weight is, it depends brand by brand.

We will now take our next question from Trevor Stirling from Bernstein.

I've got 3 questions, 2 please. First one is, I just wanted to make sure I got the math right here. With sales down -- reported organic sales down 16% first half, but value depletions in growth. And presumably, we're talking about a 20 percentage point gap there. I know that it's very difficult to forecast exactly how much restocking or alignment there might be in the second half, but that's the scale of the opportunity. The second question is, as you pointed out, we're seeing extraordinary growth in NABCA and Nielsen for cognac and particularly for Rémy Martin in the U.S. part of that probably supported by the $600 unemployment checks. With those checks now being reduced, are we seeing a little bit of a slowdown in momentum in the U.S.? And the third thing is with that exceptional momentum in the U.S. what your supply situation like? Would you be able -- if that continues, would you be able to continue to supply enough VSOP into the U.S. market?

Thank you so much for your easy 3 questions. So the gap between minus 16% and positive -- very positive, there is clearly a scale of opportunity that need to be quantified. We have it. I will not disclose it. But only one point is very different region-by-region, brand-by-brand. So at the end, what seems to be enormous giant overall level needs to be considered on a specific market and what is possible to handle on a math level and what is possible to handle also considering all the route to market constraints, the manufacturing capabilities because it's not only a matter of liquid, it's a matter of the production engine, production tool to follow this kind of huge acceleration. Clearly, there is a substantial, that I will not disclose, positive impact in the second part of the year, reasoning on math level. Then we are very confident, very positive, please remind the element of cautiousness that we are still very much impacted over the world by the COVID-19. Macroeconomics and policies could play a role. So a touch of cautiousness is also necessary to be highlighted to mitigate the clear -- partially -- the clear opportunity that the math are giving to ourselves. We remain very, very confident in the second part of the year, and the scale opportunity is important, it's huge. The level of confidence in the U.S. market, knowing that the fiscal stimulus will be reduced, we think that compared to one of our competitors' speech, we think that it plays a role, but not so important. So it plays a role, but more on a tactical basis. The strength of the market is not just about state subsidiaries. The strong growth of spirit consumption at-home started as early in March before. Our view is more that the U.S. market and part of the off-trade sales at-home consumption will remain strong, also without considering this external help as long, which is more important, as people keep on working even if the on-trade reopens, but the smart working at home is clearly more important to discuss stimulus. And in a way, the more the COVID-19 remains, the more the on-traders hit. But part of this switch in habits of consumption, we think will be -- will remain. So we think that in the future, even after COVID world, a part of these habits by the companies regulating more smart working because we need a better balance of life and events like COVID-19 shown the limit of our social behaviors in the old world might profit, at least it's our vision, in a more lasting way to our future depletions and sell-in. So fiscal stimulus plays a role tactically, but I think the smart working and the change of habits will play in a much higher positive role for companies that have a strong at-home consumption appeal. And supply of USA. As you know, we are always with an eye on the performance of this year and an eye to the next and the valorization. The -- on a mathematical point of view, the -- it is clearly -- it's clearly seen by the volume value equation of the cognac, which is negative in price/mix. Also determined a price/mix devalorization in the short term because there is a more cautious approach on the price increase in terms of timing. We did that this year, we switched from April to October. And even if we are increasing prices, the entry point is clearly overrepresent -- overweighted by the habits of consumption. So it's more intermediate plus than it used to be. Doing that, we have to protect. So our stock making that we are able to feed the future growth and the future switch maybe. So it's not only an allocation by default, by necessity, it's an allocation by decision and to try to profit for the future price increase. And on top of that, Rémy Martin and Rémy Cointreau, it's a big, small company. So our industrial and manufacturing tools are fine for world -- for a consumption habit that is quite linear. Sometimes, we might have some big acceleration and in terms of industrial and manufacturing capabilities, we are not equipped to follow it in a total flexible way. So it's not only constraints in terms of liquid, it's more liquid management allocation and the acceleration from 1 week or 1 quarter to another, sometimes could have some limit in terms of manufacturing. That's what happened partially in the U.S. Partially, at the end of September, it's clearly linked in terms of this alignment between a sell-in and depletion, the fact that during the first 2 months of lockdown, March and April, we were with no activity or a very limited one in our plan. And -- so the security stock and the trading stock was lower than expected. So we worked hard to catch up that. But we have to take into account the COVID-19 also played an additional impact in terms of volatility of manufacturing outputs. I hope it is clear.

We will now take our next question from Oliver Nicolai from Goldman Sachs.

Just 3 questions on my side. Just to start with Hong Kong and Macau. You mentioned in the presentation actually that they were weak partly due to destocking from wholesalers. So just more specifically on this. Do you have a visibility on when the level of inventories in Hong Kong, as you expect that you are mentioning Hong Kong here, will kind of normalize? And when can we expect to essentially [indiscernible]? And also for Macau, what kind of trends are you seeing as and when casinos are reopened, but it would be good to have an update on this? And to -- just to finish on cognac, you mentioned that the U.K. was an exception in Europe. Again, being the only dynamic market in the region, is there any specific things you've done in this market, which could be applied for other countries in Europe?

Thank you so much. I will start, if you don't mind with the U.K. and also partially Australia is quite the same model of the U.S. So it's more the -- maybe the Anglo-Saxon culture, I don't know, there is a more appeal to celebrate at-home than other Italians, that I know very well, I'm Italian, that needs also to be out of this house to celebrate because there's some cultural also impact on that. So it is no specific promotion, no specific actions. The only additional element that not only in China, but also in the U.S. and the U.K., the e-commerce has been there to beat the drum more than before. Overall, you know that our strategic journey is pointed out in 10 years to have 20% of our net sales done with the e-commerce, overall, B2B, B2C, retailer, all size and all the sources. But at this stage, we are between 4 and 5, you can estimate, overall at a worldwide level, with increasing growth, not only in China, but clearly, exponential growth in the U.K., in the U.S. on a small basis, are more complicated to track because you need to, mostly in the U.S., to use a classical wholesaler, but it is playing a role. And also, when we talk about stock equation, think about it, it's even more positive because the time to market will be lower. So nothing special out of the e-commerce acceleration and more a cultural habit and some smart working habits that will, we think, potentially change drastically for the future, the consumption habit. Hong Kong and Macau. A small sign of recovery in Macau, but it's too early. And the stock is high, why? Because depletions were for some months 0 also because the political tension were ever so strong. So even if you have 12 bottles in a store, you think it's too much because you have 0. You have 1 in 3 months. So as soon as some sign of a clear recovery be showing, I'm sure that the stock issue will be solved. It's more that we do not see any lasting and any concrete sign of reopening of recovery in the old habits in these 2 markets. Part of Macau, part of the Hong Kong has been recovered inside the Southern China.

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

I have 2 questions, please. First of all, Luca, can you comment perhaps a bit on your views on investment in aging inventories with the buoyant growth in cognac, especially in the U.S. and China. Should we expect more investments from you in the next couple of years? And then the second question is on e-commerce in the U.S., you talked, I think it was in July about Drizly, and I think there is another initiatives that you're doing with Drizly over the coming months, but what other initiatives do you have towards other online distribution platforms in the U.S.?

Okay. Thank you so much. Starting with the aging inventory. We guided, mathematical point of view, EUR 55 million to EUR 60 million negative working capital per year in terms of aging inventory additional. Sorry, it was the CapEx, EUR 75 million to EUR 80 million. I repeat because I answered on the CapEx. It was EUR 75 million to EUR 80 million every year of additional orderly buying in terms of negative working capital. We are clearly trying to grab more because the combination of our strategy and the success that we think we will last with some acceleration need to drive to an improvement also of our footprint. Harvest this year is good, quality and quantity. So the sign of the short-term direct one, we are trying to increase our buying footprint to increase even more this EUR 75 million to EUR 80 million per year. In terms of e-commerce, I can't disclose what we are doing even more because of confidential and because the 3-tier system makes them this kind of initiative needs to be reassessed and signed with the wholesaler. It is very buoyant. There is a lot of enthusiasm, and we are clearly increasing, I cannot say it, also the performance are ridiculous, are 300%, 400%. It was small base, but I can reestimate that we used to be low single digit, now it is 7%, 8%, 10%, sometimes some state of the performances on e-commerce. But having said that, this is very positive for the consumption for the top line. In terms of accretive impact on the bottom line, if you want to modelize that, you need to be more cautious because it's not the same thing in China. You do not own the e-commerce channel in the U.S. So at this stage, there is not this kind of giant accretive impact on bottom line. It is positive in terms of speed of consumption, it is positive in terms of new type of consumer, it's positive in terms of logistics, everything, but at this stage, it is an acceleration that needs to be changed in terms of business model in the future, if it's possible, to give to the companies that are able to profit of that, more profits compared to the classical channel. Sorry for the confusion for the CapEx and aging, I repeat, EUR 55 million to EUR 60 million was the CapEx answer, EUR 75 million to EUR 80 million which is the normative aging working capital -- negative working capital impact of full year that we try to increase even more. Hope it's clear?

Yes, it's clear, Luca. That's very clear. Just one thing on that e-commerce in -- or online in the U.S., do you think your market share online is bigger than your market share off-line?

For Cointreau, for sure. For the other, I can't say. I will say something that I don't know too much. For Cointreau, clearly beating it.

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

I've got 2 questions on cognac in the U.S., just broader category questions, if I might? The first is, I mean, you mentioned the new sort of barbecue occasions. Do you think you're recruiting new consumers into the category? Or do you think that its existing cognac consumers are drinking more frequently, first of all? And then second one, you mentioned the sort of more permanent channel shift from on to off. Do you think this is beneficial for more expensive products like cognac, for instance, with consumers, maybe saving or not spending $10 or $15 on a cocktail in the on-trade, and that allows them to treat themselves into more expensive products within the off-trade?

The second one, the third one, you said 3...

Actually just 2.

Just 2. Okay. Because I understood 3. So in terms of the impact of this barbecue event on the consumer, I think it is a new consumer. We have yet to understand the retention loyalty, whether it is grabbing new consumer on our brands. We need to understand what is the level of loyalty. So new recruitment. And we have to try to grab it because it's a new occasion. And we might understand that it's more or less loyal than the previous one. Normally, it's less, but we do not have any insight of that. So what is good is that there is a new dimension of the brand because if you remember, before COVID 1 year ago, the intermediate plus VSOP mainly, we were a little bit more under attacked by some of our competitors, [ I'm hesitant ] to say. Now we are changing with these kind of initiatives also and -- with more advertising in a holistic sense with social, with this kind of occasion, the major brands to be able to change a more classical approach of VSOP that we had done in the past. So I can't answer on specific initiative. We think that overall, all these initiatives in some state also partnership with local DJ and other more modern way to touch the consumer, will give global dimensioning, more modern, more young to the brands, then increasing recruiting and then trying to grab them for the future. Future trends. The trend is clearly in upgrading. This is compared to the past. This is witnessed by the fact that comparing them 1738, which is accretive compared to VSOP, is performing better than the VSOP. Considering that also in terms of consumption, in terms of depletions, XO as well in the U.S. has been positive. So there is an upgrading of the qualities of Rémy Martin core. So the overall impact at group level could be in downgrading because we have more VSOP because some other markets are performing less well than the past, but in the U.S., per se, it is in upgrading.

I guess what I'm just trying to get my head around a little bit more is why do you think cognac had such a good run during COVID? Do you think it's the move from the on to off, think it's to Trevor's question, [indiscernible] stimulus? What do you think is really driving this big step-up in cognac within the U.S.?

In general, not only cognac, but the main categories in the period that has been positive in cognac, tequila and single-malt whiskey because we have lot of success. So we think that in this context, we tend to have to -- people want to have more pleasure, are spending less on leisure and travels, they treat themselves with what they can in a better way, in a more luxurious way. So clearly, it is the category, not only us. It's cognac, which is beating other categories that are suffering like vodka or blended mixed drink whiskey. So we can say that also by our single malt. People, less leisure out of the house, want to treat themselves at a little improved upgrade inside their homes.

And my second question, Luca, which is if people are drinking more at home instead of out, and it's generally cheaper to drink at home than in a bar or restaurant, do you think that helps trading up within categories in the home occasion?

Could be. Could be. It could be. It is clearly an element. But we do not know yet the global analysis what will be the consequence, but it could be. That is more true for the brands where the on-trade is stronger. So cognac was already 80-20. Could be -- if you were in a big champagne brand, it could be more true because you are more convenienced to buy now champagne and drink it at home, but cognac is less different in -- that you have less difference in terms of buying pattern.

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

I have a couple of questions from me, Luca, please. Firstly, you mentioned on the margin that you were benefiting from positive geographic and channel mix. Could you talk a little bit more globally about product mix? You haven't discussed liqueurs or XO, perhaps as much as in the past. And certainly, XO was a focus of the new strategy to get an idea how those brands are performing and perhaps give the mix of performance by brand in China. And then secondly, apologies, going back to the U.S. again. I mean you've obviously done a very good job in driving at-home consumption with a focus on barbecues, which I imagine, sits well with customers entertaining in their gardens. How are you tailoring brand support as we go into winter and perhaps consumers are less willing to have people around to party inside the house?

Sorry, I didn't get the second one. Can you speak slowly, the second question? You are too quick in English.

You've been very successful in supporting demand for cognac and Cointreau in the barbecue occasion. But as we go into winter in the United States and perhaps consumers are willing to entertain with friends inside the house rather than outside, are you tailoring your brand support to try and focus on in-home entertainment rather than in-garden entertainment, which is important for COVID considerations?

I think, frankly speaking, the second question is a very good one. I think that the U.S. was to -- at this stage, as already said, barbecue were very important for the image for recruiting new consumer. We did not take into account the factor based in pattern quantitative, but your question is legitimate. The answer is, I don't know. I don't know what we will do in winter because -- also because we can be -- you can be many, many -- in a single house because of COVID that is a limitation. So I don't know what to answer. I don't know. I will be very, very frank and transparent with you. Product mix globally. The geographical mix is positive. Product mix compared to previous year will be, in this part -- the first part of the year, negative. Why? Because overall, performance of some brands inside Rémy Martin are less gross margin accretive competitive weighted. This is not a problem per se because the long-term journey, that we'll be highlighting in November, is always based and will be based on the gross margin evolution. As you remember, Éric Vallat stated that we need in 10 years to reach 72% of gross margin to be able to invest more behind the brand. It's more in MP, and that's more strategical OpEx and to give more back to the shareholder with a gross profit of 23%. But in this particular momentum, the product mix is negative and could impact in the short term, the gross margin because of this mathematical event.

And can you say in terms of China, the mix? You talked about the U.S. being driven by 1738. Is China being driven by CLUB? Is it better? Is it higher up...

Are the number one, we have old products from VSOP to LOUIS XIII included. The Autumn Festival beating last year performance and beating our expectation. Mid Autumn Festival has strong acceleration. All product on green performance comparing in China Mainland compared to previous year, all beating our expectation, more CLUB than the other product. CLUB is the clear tool engine of the group.

There are no further questions at this time. I would like to turn the call back to your speakers for any additional or closing remarks.

Thank you for your attention. We'll be more analytical on some profit and loss, clearly, an expectation for the next 6 months, profit and loss profile and cash flow estimation end of November when the result on the first half will be delivered. I rehearse, I repeat, we are cautious for the future because COVID is still there. We are cautious because we have a macroeconomics and politics element that could play a gray cloud role for the future. And in terms of the fundamentals of our business, what is on our end, we are doing better than expected, we are satisfied. We are confident for the future and starting for the Q3 also this kind of rebalancing between sell-in, sell-out will be more visible playing also a positive role in terms of net sales and strategic disposal to be invested in many ways, one way is MP, one way is OpEx, one way is also profit. So we are cautious, but very confident, calm and looking forward to talking with you at the end of November. Thank you so much.

Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.