Rémy Cointreau SA (RCO) Earnings Call Transcript & Summary

Good day, and welcome to the Rémy Cointreau Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Luca Marotta, the Chief Financial Officer. Please go ahead, sir.

Good morning, everyone. Thank you for your participation to the Rémy Cointreau conference call for its 9 months' sales 2021 covering, so the period from April to December 2020. This morning, we have 4 key messages to highlight. The first one is that the global context in which we operate has continued to be impacted by the COVID-19 pandemic in the last 3 months. The shortfall in duty-free sales is showing a little improvement as tourism remains muted, given the international borders are still largely closed. The on-trade channel continues to be strongly affected by the closure of restaurants, bars and clubs, in particular, in Europe, where the channels suffered from renewed stopping of lockdowns as well as in many markets of Southeast Asia, Africa and LatAm. But in contrast, we continue to benefit from booming at-home spirits consumption in a number of markets, including the U.S., U.K., Australia. Last, but not least, China Mainland is pretty much back to normal with both the on- and the off-trade channels having normalized since last June. In that context, and this is my second message of today, Q3 enjoyed a significant sales rebound, up 25.1% in organic terms, bringing, so 9 months' sales trend close to stability at minus 1.6%. This very, very strong Q3 performance was very largely driven by the U.S. and China Mainland, as expected and shared with you in the previous contrast in previous months. While a few other markets also enjoyed a sequential improvement, in particular, in Eastern Europe and in Southeast Asia. Duty-free Central, Western Europe and LatAm remained the key area of weakness in the quarter. The third message of today is that our value depletion, so the best approx of the finance allowed, accelerated further in the Q3 and we are now showing strong double-digit growth in the 9 months' period. Despite our shipment catch-up in Q3, our 9 months' sales performance is still substantially trailing the positive depletion trends. And this makes us confident for Q4, but even more mechanically for the full year '21, '22. Now looking at the value depletion trends by regions, and starting with Asia Pacific. Asia Pacific enjoyed accelerated depletion trends in China Mainland, Australia, New Zealand and also on a small basis, but quite consistent, is the performance in Vietnam. But it was partially offset inside Asia Pacific by lingering weakness in the rest of Southeast Asia and in Japan. Americas region depletions continued to show strong double-digit growth, driven by booming at-home consumption and restocking retail level in the U.S. Canada depletions showed some sequential improvement, while LatAm remained very challenging. Inside big Europe region, general weakness continued across this region. Within that context, a few markets enjoyed positive depletion trends, including, as already said, U.K., but also Germany, Switzerland, Russia and Nigeria. Lastly, Global Travel Retail remained depressed, even if Travel Retail Asia enjoyed some small sequential improvement led clearly by Hainan. Fourth message of today, an important one, and we are very confident in the group's 2021 outlook. As promised, we are in the process of delivering a strong performance in the second half of this fiscal year. As such, we expect a buoyant growth in the Q4, albeit less strong than the last quarter, in Q3, due to strategic inventory management and mastering. We also remain confident in the group's ability to deliver positive organic growth in the full year 2021. Now let's move to Slide #3 and the 9 months' sales analysis. Sales amounted to EUR 780.9 million, down EUR 33.2 million year-on-year or minus 4.1% on a reported basis. But this reflects an organic loss of EUR 13.3 million, which means 1.6% organic sales decline, a negative currency translation conversion effect of EUR 22.5 million or a 2.8% hit. And lastly, a small scope benefit of EUR 2.6 million, i.e., a gain of 0.3% in the period from the consolidation of Brillet and the champagne de Telmont over the 9 months. Let's move to Slide #4. As we just said, currency translation decreased sales by EUR 22.5 million in the 9 months. This was very largely driven by the U.S. dollar, which contributed for EUR 14.5 million to the total loss over the period. Most of our other currencies also deteriorated, including Chinese yuan, Russian ruble and Canadian dollar. Only 2 currencies, Swiss franc and the Taiwanese dollar, generated marginal but existing currency gains. Now let's turn to the important slide, Slide #5, which shows our quarterly performance over the past 11 quarters and the 12 months' rolling organic performance of our group brands in red, which stand at around minus 7% end of December. After 6 challenging quarters, Q3 2021 finally marked the beginning of the group's turnaround and improved top line prospects with 25.1% organic sales growth in the Q3. Clearly, this quarter's performance is a very important one. It's the second best in the last 10 years for the group. Now let's turn to Slide #6, digging into organic sales, starting by regions. Let's start with Asia Pacific, whose sales were still down double digit in the 9 months' period despite a positive growth last quarter. Greater China, inside Asia Pacific, posted low single-digit growth in the 9 months, led by double-digit growth in the Q3. This was driven clearly inside Greater China by accelerated trends in China Mainland, whose sales are now up double digit year-to-date and by continued growth in Taiwan. In contrast, Hong Kong and Macau remained weak in the Q3. Looking inside China Mainland, more specifically, value depletion trends grew low double digit in the 9 months' period, driven by continued strong growth in the last quarter. Importantly, value depletions grew faster than volume depletions, implying a good performance of the upper end of our portfolio and also a valorization effect. During the quarter, our Cognacs and also Scottish Single Malt Whiskies experienced strong end demand during the Mid-Autumn Festival and Double Eleven, 11th of November, Singles' Day. Our team is very optimistic ahead of the upcoming Chinese New Year. As a reminder, this Chinese New Year will take place on February 12, while it was earlier January 25, 2020. As such, we estimate that around EUR 8 million of sales were postponed from Q3 into Q4. For the remaining part of Asia Pacific, while we're still weak overall, we saw a sequential improvement in Southeast Asia, driven by Australia, New Zealand and Vietnam, but the rest of the region continue to be impacted very strongly by weakness in the on-trade channel and lack of tourism as borders remain closed in most markets. As said, sales in Travel Retail Asia enjoyed a sequential but yet limited improvement, driven by the takeoff of Hainan. End of December, Asia Pacific accounted for 29% of our group sales, down 5 points compared to the previous year. Let's talk now of the Americas. Americas delivered strong double-digit organic sales growth in the 9 months, led by a significant catch-up in the last quarter. The main driver was obviously the U.S., which enjoyed triple, I repeat, triple-digit growth in Cognac sales and a very strong double-digit growth in Liqueurs & Spirits in Q3. Despite this acceleration, this catch-up, U.S. sales growth still trails value depletion's performance year-to-date. In Q3, group brand depletions showed sustained growth, led by buoyant at-home consumption, strong appetite for our brands and some restocking at retail level. As shown in the slide, value depletion were up 59% in the last 3 months, consistent with the 6 and 9 months' trend, up 58%, more or less 60%, and above the 12 months' trend of plus 43%. Clearly, we can say that our brands have continued to gain market share in their respective categories. Canada also enjoyed the sales rebound in Q3, mirroring good brand depletions, yet we expect a more modest Q4 performance as Cognac depletions remain penalized by down-trading trends in the current pandemic environment in Canada. Lastly, we saw continued weakness in LatAm and Travel Retail Americas due to a total fall in tourism. End of December, Americas region accounted for 52%, more than 50% of our group sales, up 10 points, 1-0, year-on-year. Then we have EMEA organic sales. We're still down double digits in the 9 months. In Q3, renewed weakness in Central and Western Europe due to the repeated lockdowns in those markets was partially mitigated by sequential improvement in other subregions, in particular, in Western Europe. And in that context, a few markets enjoyed positive depletion trends in Q3. First and foremost, U.K., where growth was driven by the off-trade Nielsen data pointing out to a 30% increase in our brands over the 9 months' period; and e-commerce, with sales up 114%, so more than doubled. But we also enjoyed positive depletion trends in Germany, Switzerland, Russia and Nigeria in the quarter. In contrast, we saw continued very poor performance in Travel Retail sales for EMEA region. End of December, EMEA region accounted for 19%, 1-9, of group sales, down 5 points year-on-year. Now let's move to Slide #7, a 9 months' sales trend by -- trends by division. And let's start with Cognac. Cognac achieved in the 9 months flat sales, thanks to a terrific plus 33.1% rebound in the Q3. Liqueurs & Spirits also enjoyed a sales bounce in the last quarter, up 7.2%, leading to a 6.2% decline year-to-date. In contrast, after a rebound in the second quarter, Partner Brands deteriorated in Q3 with sales down 16.6% as its key Belgium market was affected by a renewed lockdown of the on-trade channel. As a result, year-to-date sales of Partner Brands are down 5.8% in organic terms. End of December, Partner Brands accounted for 3%, stable year-on-year. Let's now turn to Slide #8 and the same analysis by division or by region, starting with overall Cognac. As we just mentioned, our Cognac division was up 0.1% in organic terms year-to-date, including a 33.1% rebound last quarter. While this sequential improvement was driven by all regions, the main driver were clearly the Americas with triple-digit growth in the quarter for the U.S. But let's start with Asia Pacific, in which Greater China recorded for Cognac low single-digit organic sales growth in 9 months, with double-digit growth in the last quarter. This Q3 performance was driven by accelerated double-digit sales trends in China Mainland despite an estimated EUR 8 million shipment delays, already said, from Q3 to Q4 due to the later CNY, Chinese New Year, timing. And this was clearly driven by a very strong performance in Mid-Autumn Festival and Double 11, 11 November performance. While our direct sales and e-commerce on top remain a key growth driver, the sales acceleration in the last quarter has been driven by the indirect channel with wholesalers replenishing in coherence with the strong depletion trends, so ahead of the Chinese New Year. In that count, as already said, our teams are very optimistic about the upcoming Chinese New Year. And besides that, while prospects for Hong Kong remain bleak, Macau, where casinos and hotels have recently reopened, could benefit in the next future from improved trends going forward. In the Americas, Cognac sales grew strong double digit in the 9 months, led by a significant catch-up in the U.S. and in Canada in the Q3, while Travel Retail Americas and LatAm remain weak. Let's focus in U.S. In the U.S., triple-digit growth in the last quarter was driven by 1738 Accord Royal, VSOP and Tercet. XO as well showed very nice acceleration in the last quarter. Depletions continued to grow at a very strong piece in the quarter. In fact, Rémy Martin as a brand has fairly -- has been fairly consistent as the second fastest-growing spirit brands among the top 20 U.S. suppliers since the beginning of the pandemic. As shown in the slide, our Cognac volume depletions grew 78% in the last 3 months' period and 73% in the last 6, boosted by clearly, on top of everything, strong at-home consumption as well as some restocking at retail level and shelf space gains in this kind of retail level. As for price/mix effects, they were slightly negative, talking about depletion equation, down 1 point. In the last 12 months' period ending December 2020, and due to the unfavorable product range and partial state mix. In Europe, Middle East and Africa, no real change in Cognac. Cognac sales were still down double digit in the Q3 in the 9 months, led by weakness in most markets as well as in Travel Retail. The only exception, but important one, as already mentioned, was the U.K., which enjoyed good at-home consumption for Cognac and Internet e-commerce sales increased. Concerning the volume value creation of the Cognac business, as a division, flat overall organic sales performance reflected a high single-digit volume increase, offset by similar price/mix loss due to adverse products and also geographical mix. End of December, Cognac accounted clearly for a strong part of our sales, 73%, up 1 point year-on-year. Now let's move to Slide #9, an important slide in my opinion, because, as you know, since the beginning the year and the pandemic as well, we have been stepping up our advertising and promotion logic and investment behind VSOP and 1738 in the U.S. to increase -- to boost their relevance among the high-end spirit drinkers. In order to achieve that, we focused on 3 themes: education, in particular, focused on the production, superiority and content of our products; its own entertainment; and status. Talking about at-home entertainment theme, music and cooking have been 2 areas of focus and partner for Rémy Martin over the past 9 to 12 months. This time, we shared with you one of Rémy Martin's initiative to celebrate community and collective excellence in the global music scene in the U.S. Here, Rémy Martin teamed up with multi-platinum grammy-nominated artists, Black, to release Ground's Melody, a 2-part video series paying tribute to the Atlanta and Los Angeles communities and music scene. Now let's turn to Liqueurs & Spirits division, Slide #10. Liqueurs & Spirits division posted a 6.2% organic sales decline in the 9 months, but implying a very solid 7.2% bounce positive performance in the Q3. Again, the Q3 improvement were mostly driven by strong performance of the America regions, but Asia Pacific as well showed positive growth in the quarter. Looking at the volume value equation of the Liqueurs & Spirits division for the 9 months, the 6.2% organic sales decline was entirely driven by volumes, while price/mix was a 6-point gain, so an important element to highlight. End of December, Liqueurs & Spirits accounted for 24% of our sales, down 1 point year-on-year. Now let's talk briefly about the performance of major brands inside the division. Clearly, Rémy Cointreau delivered a slightly positive growth in the 9 months, led by double-digit growth in Q3. Year-to-date, double-digit growth in the U.S., Australia, New Zealand, U.K. and Belgium, was partially offset by weakness in the rest of Europe and in Travel Retail. The good U.S. performance continued to be fueled by strong at-home consumption and around the success of Margarita Cocktail, for which Cointreau, on top of the Classic Margarita, launched a margarita winter version with cinnamon clearly inside this cocktail. And the brand's volume depletion grew between 15% and 20% in the last 3, 6 and 12 months. Despite the closure of the on-trade channel, which account, just to remember, 55% of brand sales in the U.S., so a performance which is even more important if they need to be highlighted because of the channel mix prior to the pandemic. Besides that, price/mix benefits, another very important element to highlight, were as strong as 10 points of valorization in the 12 months' period ending December 2020, driven by very favorable product size mix. So very good performance, and we are very proud of Cointreau performance at this stage. In contrast, inside the Liqueurs & Spirits, there were other brands hit much more by the pandemic, like sales of our Greek brand, Metaxa, declined double digits, both in Q3 and the 9 months, caused and driven by the shortfall in Global Travel Retail and a poor performance as well in Central and Western Europe are very important countries for Metaxa. This was partially offset by a good performance in Eastern Europe and some resilience in Germany. Mount Gay sales were up in the Q3, leading to a single-digit organic sales decline in 9 months, so limited decline. This was driven on the negative side by weakness in Barbados and Travel Retail, while the brand enjoyed strong growth in the U.S. and the U.K. St-Rémy also enjoyed a nice double-digit rebound last quarter but sales remained, of the 9 months, down low double digits. While Travel Retail sales continue to be -- to mute to the brand's performance, St-Rémy enjoyed strong growth in the U.S. and Canada, where it continues to benefit from the trade-up from lower end brands. Botanist, our gin, also posted double-digit organic growth in the last quarter, limiting its decline in the 9 months' period. There, again, U.S. was the main engine of growth as well as some better trends in Europe. Lastly, Single Malt Whiskey business returned to growth in the 9 months' period, thanks to a further acceleration in the last quarter. Solid trends in all 3 macro regions more than offset ongoing weakness in other parts of the world like Global Travel Retail. Now let's move to Slide #11. In December, Mount Gay, XO and Port Charlotte 10 have been awarded, respectively, Rum and Whiskey of the Year to come, 2021, by the Whiskey Exchange, one of the biggest online drink retailers in the world. We are particularly pleased with these awards as our ranking was achieved thanks to online votes from the Whiskey Exchange worldwide clients. With these awards, we think that our strategy, which consists in positioning each of our brands in a specific way or the reference of the categories is well on track. Now let's start at the last page before passing the microphone to you for the Q&A session. Let's talk about 2021 outlook, in which we feel very confident. As promised, we are well on track to deliver a strong top line performance in H2. We expect a buoyant growth in the Q4, albeit less strong than in Q3 due to strategic inventory management, and as a result, as a consequence, we are very confident in the group's ability to deliver positive organic operating profit growth in the full year 2021. But with this should be in published level, somewhat mitigated by the adverse currencies, adverse scope. So now we are updating our specific guidance on these 2 components, that now we expect a reduction of operating profit for ForEx of EUR 8 million and a reduction of scope, which has improved compared to the previous one to EUR 2 million, respectively. So EUR 10 million of negative elements that will impact the published operating profit of the group. But again, confident to deliver positive organic operating profit growth for the full year 2021. Thank you for your attention. Now I'll be happy to answer your strategic questions.

[Operator Instructions] We will now take our first question.

Three questions from me. Firstly, in the U.S., you're going to be coming up with some pretty difficult comps as we enter next financial year. What -- do you have confidence that you'll be able to get underlying growth, particularly in the Cognac business despite those extremely high comps? Or will next year be a bit of a year of coming back from those very high numbers? And perhaps attached to that, could you just comment on the recent tariff news, and in particular, which categories of Cognac you think it applies to within your portfolio? Secondly, in China, now that we're back to a more normal footing, where are you seeing the particular levels of growth coming from within your portfolio? Are we very much in the club level? Or are you seeing some impact from the relaunch of XO earlier? Then finally, I wonder if you could quantify the level of online sales that you're seeing around the globe, in particular what you're seeing in the U.S. market and in Chinese markets. That would be great.

Thank you so much. So first question. U.S. 2021, '22, confidence are not compared to the high comps. We are very confident in the U.S. for the next year. And clearly, we think that what's happening is not a positive wave linked to the pandemic. It's something that will last in terms of switch of at-home consumption, and we'll capitalize on that. And on a mathematical element linked to the lower growth then Q3 into Q4, linked to the strategic management of our inventories, this is clearly applicable to the U.S., will grant a very strong to the year '21, '22. So both because the underlying is very solid in our opinion witnessed by very strong depletion and retail also performance and some mechanical effect linked to the realignment between sell-in, sell-out that would be performed in the next coming quarters. We are very, very optimistic for the U.S. for next year, starting with a strong -- very, very strong Q1. So at this stage, we don't see any clouds on the underlying consumption in U.S. Tariffs. Tariffs in the U.S. clearly was a bad news but we have to put that in a context and say that the theoretical impact on our business is marginal at a group level. Why? Because what happened at this stage that import taxes will be applied to Cognac, whose import price is higher than $38 proof liter, which means translate with some mathematical calculation, for a 75 centiliter bottle, 40% degrees of alcohol, means a price of USD 22.8. So as far as we are concerned, only the high end of our portfolio, meaning Tercet, XO and LOUIS XIII, talking about Cognac, will be taxed. So as said, the impact is marginal, small part of our business compared to 1738 or VSOP at this stage. And to offset that, we expect to pass on the tariff increase on April 1, along with some correction to avoid the negative impact with increase of tariffs. And then considering that the stock we have in our warehouse locally for the -- this kind of plus qualities, XO, LOUIS XIII and Tercet, before getting the -- take prices increase, the consumer level will have some time because the restock, that will not be hit by the specific tariff increase. In terms of China range expectation for the future, it is clearly club on top, but not only because it is also an XO grew lastly in Mid-Autumn Festival double digits, we have a strong objectives for XO for Chinese New Year. So will be a contributor, but on sell-out depletion and sell-in level for the next quarter to come. LOUIS XIII also after suffering for the on-trade closure in the beginning of the pandemic and also sometimes the stop and go that might happen, happen, it might happen, it is very comfortable stocking trade level and with renewed energy. And the performance on depletions and final sell-out are very positive, not only in Mid-Autumn Festival, but also during these months and the objective, the target for Chinese New Year are clearly positive and improving compared to the previous year in volume and value. So it is quite a balanced journey for the China pattern, growing pattern for next year. In terms of e-commerce vision for Rémy Cointreau, we were estimating before the pandemic, so 9 to 12 months ago, that 4% to 5% of our sales were e-commerce and digital oriented and driven. Now we are between 8% and 10%, difficult to be more precise. Just remember the target 2030 is 20% of our group sales. So why we are doubling -- we doubled our weight? Because, clearly, China is still between 20%, 25%, following the quarter; and the 9 months, it's more in the range of 20%, 21%. So decreasing EBIT compared to the 6 months. Why? Because, as I said, in direct channel, here for Chinese New Year, retake the lead on the sell-in EBIT, but then will be normalized. So it is normal to have between 20%, 25% for China as a part of our sales; 10%, 15% for U.K.; around 8% for the U.S. Even if it's not difficult -- it's very difficult, sorry, to track it analytically because we have to pass through the 3-tier system. So it's always done with wholesaler. But we estimate that our sell-in is now around 8% linked to the online sales. So this is the actual situation, and the expectation for the future are clearly even stronger because we want to invest a lot behind this channel with a mix of e-shop proprietary initiatives, but also in e-retail and marketplaces depending on brands and markets. So there will not be one-fit-all strategy but more tailor-made by brands and by market. It will be also something that -- in which it is important to invest behind it in terms of capital expenditure and strategic OpEx, but it's more with also because remember that apart from figures, apart for the fact that at the end it's accretive to the bottom line, e-commerce gives you knowledge on the final customer. This is something we were clearly missing on a logistic way in this profession, not only in Rémy Cointreau right now.

That's already clear. If I could just push you on the first question in terms of what you expect for the U.S. next year. If we don't think about your levels of restocking that may or may not take place, just on underlying depletions, would you expect growth in the U.S. market during 2020 -- in the 2022 fiscal year?

In -- yes, we expect growth. Yes, yes, clearly, both on sell-in and depletions level. And automatically, even if you take depletions 0, which is an hypothesis in which we do not believe, we are much more optimistic than that, there is a mechanical positive bounce back of sell-in in the next coming quarter, starting for the Q1. Clearly, everything we are not selling in the Q4, which will be still positive, but a lower piece than the triple-digit growth, would be sold between April and July and September at higher prices in the U.S. on the basis on very healthy consumption basis and trailing at this stage, sell-in compared to sell-out, but profiting in the future for this mechanical bounce back. So we are optimistic, very optimistic..

[Operator Instructions] So the next question.

Richard Withagen at Kepler Cheuvreux. I have 2 questions, please. First of all, a follow-up on those e-commerce. Is that also an opportunity for Rémy Cointreau to push bigger into new markets? I mean, we talk a lot obviously about e-commerce in China, the U.S. and the U.K., but is this also a tool for you to maybe penetrate markets where you would normally not be that present in physically? And then the second question I have, Luca, is on the Liqueurs & Spirits portfolio. For which brands have you already launched a new campaign? I noticed that, for example, The Botanist accelerated, especially in the U.S. in Q3. Is that on the back of a new campaign or extra efforts? If you could give some more background on that, that would be great.

Thank you for your questions. E-commerce, there is clearly an opportunity. But before opening new market, I think there is an opportunity to improve our presence in some countries like China, China, China, China, in which our presence in some regions, some tier 3 and 4 cities is not yet comparable to our competitors. So there is an improvement to find in this -- all the regions as well. Then it could be a penetration element for new markets also in Europe. But before doing that, the backbone of the market's pressure need to be set. So we don't want to go too early also to avoid to have a positive effect, which is not last in the long term. So it is an opportunity, but even more is an organic accelerator in some countries in which we are stronger, less for a new area of conquering. For the Liqueurs & Spirits, a new campaign, clearly, you have seen what have been done on Cointreau, which still it is a clear picture for the group. For Botanist, there's not only campaign, but also education to be. With gin tonic alone, it's a huge opportunity in the U.S., which is not so known as a cocktail. So one day, we'll have the aim, the final goal to have [ the same ] authority we have with margarita for the gin tonic, just imagine what will happen. And so there's more education than normal campaign. We have done something also, in specific countries, Nigeria and Canada, for St-Rémy. Metaxa as well are less known, but we are moving in a very dynamic way for the Liqueurs & Spirits. Because you are right, on the long-term journey, we bet a lot on the increase on the Liqueurs & Spirits division. So to do that, we need to have the perfect coherence between ambitions and advertising and promotion programs. So it depends brand by brand. Some brands are more education, brands are more classical advertising. We have a lot of initiatives. Apart from Cointreau, which is a little bit more worldwide, the expression is sometimes more regional. And every brand's put in advance the clear positive weapon he has, Botanist, education, training, St-Rémy, other values of the brands on the specific markets. And for Single Malt Whiskey is a lot of testing, education for the population, which is not reacting the same extent with global campaigns like we are in -- we are doing for the Cognac. And then I think that in the future, more months, you will see also something very interesting from other brands like champagne de Telmont with something important also. There's a scale to improve and rejuvenate the brand image.

We will now take our next question.

Two questions from me. You mentioned you see a very positive outlook for the upcoming Chinese New Year. Is there any nervousness at all from some of your key customers around the recent flare-ups in Northern China? And then the second one, coming back to the U.S., clearly, you see a pretty buoyant category going into next year. Are you still confident you'll be able to outperform the Cognac category as you've done in this year as well?

Thank you so much. So Chinese New Year, I repeat, despite the new traveling restriction, our team remain very optimistic about the Chinese New Year performance, both on sell-in, depletions and finance sellout. So we are not increasing selling expectations for the fourth quarter in China and I don't think it will increase the stock in trade or the opposite. So we are very confident in known part of the chain. The new COVID cases, real lockdowns, not on China, for us, is marginal. It's less than 5% of our business. A very large part of our business in the south and the east of the country, we continue to see strong depletion trends for our business in this key region week-after-week. So we are all really confident. In terms of U.S. category, I repeat myself, it's important. We are confident to have to experience a strong '21, '22 year, both on a sell-in, depletion, sellout level. And our aim is to beat the average of the category. So we continue to grow our value market share.

And Luca, is that because your -- you don't have VS -- your portfolio starts with VSOP, i.e., in a more premium level? Or is there something else you'll be tweaking more about the strategy to continue to outperform the category?

Yes, we think that even if we don't have this kind of VS because it's not part of our strategy, we think that on the global picture and this segment we were playing, we'll continue to outperform our competitors. Also because, as I said during the presentation, without being very humble, we think that our image, our advertising promotion behind our brands in the U.S. was positively twisted during the last 12 months. So to be able to support in a stronger way, also the -- all the historical pillars like VSOP and also 1738 in the U.S., to be able to give more content at-home entertainment, the status behind this brand. So this is something also that contributed, in our opinion, to have a different image of our brands and to be able to make this at-home consumption habit installed more lasting for our brands, for their DNA. And the pricing power is still there. We'll continue to increase prices the next fiscal year. So we are not fearing a volume war. We are still following our key criterion, which is to sell the best price possible.

We will now take our next question.

It's Mitch Collett from Deutsche Bank here. Just one quick clarification on guidance. You said you expect to grow profits organically. Can you just confirm you would also expect to grow profits on a reported basis given the inorganic offsets? And then secondly, on stock levels, can you perhaps give a number of days of stock in the U.S.? And I think you said that at the 1H stage that your stock levels in China were fine. U.S. was obviously below, and you've recouped that a bit, but you also said that the rest of the world was on the high side. Can you perhaps comment on stock levels outside of China and the U.S. as well?

Thank you. So as you know, we guide on operating profit on organic terms, but not in public because as you have seen with a wiggling EBIT of the dollar compared to the euro in the last quarters, up, down, and it's very difficult to master that estimation. The best we can do is to give you our estimation in any given occasion. But what I can say to you to try to help you is that at this stage, if you consider the consensus, we are okay. We are comfortable with the global consensus on organic comp growth. At this stage, the consensus, if I'm not mistaken, is more around plus 5% in organic terms. And then to achieve a published configuration, we will add the ForEx effect, at this stage estimated at minus EUR 8 million. It was EUR 5 million. So this is worse than before because the spot rate is different. It's 1.21, 1.22; and the scope impact, which is EUR 2 million negative, it used to be EUR 3 billion. So EUR 10 million to deduct from on this consensus. So at this stage, I repeat myself, we are okay. Comfortable with the consensus in terms of organic comp growth. Stock. The U.S., end of December, considering the triple-digit growth of sell-in, which on a specific [indiscernible] basis, what was higher or the buoyant, the fantastic sell-out, means that the stock were back to an increased level of around 2 months. We expect to consider the Q4, there will be still a strong growth, but lower than the Q3, will be lower EBIT. So we fall back to around 1 month, 1.5 months end of March in the U.S. Meaning that, as I said, considering that the depletion pattern are on the right side and our expectations are very positive, we have a mechanical strong start to the year in the U.S. In China, sell-in and sellout are more aligned overall. And our level of inventories remained very, very, very healthy. So before 6 months ago, 3 months ago, we might have a little bit less on CLUB, a little more on VS plus now it's much more aligned. So it is on the healthy side and no tension on a negative or positive side. Rest of the world, EMEA, I could be a little bit liar, saying we have done a good job. But the consequence of the fact that we are lacking sales, we have done a very good job cleaning up our inventories because the same was not there, so particularly in Europe. So we are in a pretty healthy situation. Nielsen also in Europe are quite good. So also in Europe, we are in terms of replenishment into '21, '22, reasonably confident in terms of sell in, that's the clear difference between Europe and the U.S., is the fact that you are far less confident on the stability of the sellout because Europe with pandemic, clearly in locking down, stop and go, we are more negative worldwide macroeconomic mood at this stage for Europe that we are maybe, I don't know, 2 months ago. So the mechanical positive tool engine is there also in Europe, but the expectations and the confidence on the depletion of Europe and far less stronger than in the U.S. For what concerned the stock level, they are very, very low. We did a very good job lowering things.

We will now take our next question.

Just 2 quick ones from me, please. Can I just sort of follow up on Mitch Collet's question around the U.S. stock levels? I mean, clearly, as you say, at the end of March, you expect wholesaler levels to be back at 1, 1.5 months. What's the right level of inventory that you would expect to have in that market, perhaps on an ongoing basis in a normal calendar year post pandemic? And secondly, you highlighted you've seen some pickup in Asia in Travel Retail because of performance in Hainan. Is that really driven by just some stock building in that market rather than consumer depletion at this point?

Thank you so much for your question. So the U.S.A. stock lab on a normalized level, I have 2 answers. The mathematical one, the normalized level, in our opinion, is around 3 months. But 3 means nothing. 3 means to be applied to the expectation and what you witness in terms of increased depletion partners. So the 3 months over 3 years ago was clearly a lower case number. Then what is this year, what will be next year. So it's 3 months on the basis of the future expectation of depletions. In terms of Hainan, we don't think so. We are very cautious. Hainan is a big opportunity for the Chinese consumer, for the Chinese client. It is something that we want to follow, being also a leader in terms of expression of our brands, but not at the price of the image and the prices of our key SKUs in this territory. So we will be very cautious before approving specific while we're getting orders for this territory. And the price and the expression of our brands where the products are sold needs to be comforted by a real exchange with our distributor partners. It is the case, and we started at the low level. So we highlighted because it's positive in a moment where Travel Retail Asia is -- it is in 0. So it is -- it's something that is important in a moment in which a given subsidiary, a given region is doing 0 sales. But in terms of value, we are talking about a marginal amount. I don't disclose that, but it's more important in terms of intention that real figures. And this is not stock building for the sake of the stock. It's clearly to build something more really consistent in this important opportunity for us for the Chinese consumer.

Understood. And could I just clarify, Luca? I think you said in your presentation that you expected Hong Kong sales to improve from here. Did I hear that right? Or was that just maybe a comment around Chinese New Year, maybe you're down from Hong Kong sales?

No, it was more on Macau region, starting from the next peak sale. We expect to have some opportunities because these things were depressed more than Hong Kong per se. It is more on Macau because this year is clearly a very negative year. So some positive dynamics could happen there, starting for '21, '22, less than for the fourth quarter. We are not betting on Hong Kong and Macau to build our performance goal over Chinese New Year. Chinese New Year, very ambitious goal and you will see realization are based on China Mainlands on all channel, with a more balanced pattern compared to the 6 months between direct and indirect. And an improvement in the Q3 of the indirect channel because of the structure of the market, then the normalization with the rebound of old channels like e-commerce on top. Hong Kong and Macau, crazy numbers to put there trying to achieve on Q4. It is clear?

Got it, yes. That's great.

We will now take our next question.

Luca, it's Trevor. Two questions from my side, Luca. The first one, concerning the U.S., with this amazingly the strong growth that you're seeing, where is it actually coming from in terms of the consumers? Is this new consumers existing consumers drinking more, if it's new, what were they drinking before? Just some idea of the sources of the growth in the U.S. would be great. And the second one just around the strategic inventory management. I presume this is really just affecting the VSOP in the U.S., and it sounds as if you're saying it's only for Q4. And then as we get into Q1 and Q2 of next year, supply, you'll actually be able to do some catch-up. But maybe a little bit more color on that would be great.

Thank you so much. In terms of base of consumer, it is not only old consumers, also new consumer because new habit linked to the pandemic, the smart work-at-home consumption has driven to new people having access to the cognac. Penetrations also increased a bit from 22% to 27%. And so it is a combination of old fellow upgrading their experience and also new consumer. And we think that part of this new consumer preferring to treat themselves with high-end cognac, high-end whiskey, high-end tequila compared to other type of competitors' liquors will last. In terms of strategic inventory management, it is more for the intermediate, so VSOP and 1738. And strategic inventory management do not -- they need to be translated as liquid allocation or liquid issue, it's not that. It's that you have to remember that we are -- what we are selling today in VSOP is now an XO for tomorrow and also that we are in a pricing power game and in 1 month will be price increase. And there is a logistic and supply chain to feed those, starting for the manufacturing. So it is more an intermediate plus, and then if you consider that could be a constraint, it is not. And that's the reason why this management, this mastering of the situation, we allow ourselves to start, I repeat, the year in the U.S. in the Q1 and Q2 with strong growth at sales level. Depletion will be also growing in our opinion. But even if you take the assumptions that you are on a negative side, as an analyst, you take 0 depletion compared to previous year, the mathematical bounce back gives a very important growth in the Q1 and the Q2 in the U.S. And there is no problem for the Q1 or the Q2 in terms of products to be sold at our partner.

We will now have our next question.

Olivier from Goldman Sachs. Most of my questions have been asked already, but just a quick follow-up on Hainan in China. Could you perhaps quantify how big it is as a percentage of yourselves today and if the product mix is very different from the rest of China? That would be one question. Then the second question, perhaps it's a bit unusual to ask you about whiskeys, but we've seen some phenomenal growth on whiskeys there. Define gravity. So just wondering if you perhaps could give us a bit of an update on your plans for Bruichladdich and how big do you think it could become?

Thank you. The Hainan size for the future is crystal ball. I mean everybody knows that it is -- it will be huge, and we have a lot of plans. Every competitor is doing that, but we cannot just say a figure because it will be wrong by definition. We are planning to put all our energy behind this opportunity. But we are not able to quantify that at this stage in a clear way. The size is not so important. I don't give you the -- as I already said, I don't give you -- I don't disclose specific figures because it's too sensitive. But as per today, the impact of figures is marginal. Tomorrow, we think will be tangible. It will be an accretive business in terms of KPIs. It will be something which is less profitable than the average of China. What will be the means to put behind what the price control, what the -- are all points that are making our global-specific attention right now. And we have not yet decided the specific route to achieve these objectives. But we think that is a good opportunity. We have to jump in and we put all our energy behind that. At this stage, no real figures to disclose. And despite all that, no real want -- will from our side also to disclose clearly our plans. Whiskey performance was improved in the last months in the Asia Pacific. In the U.S., there is some macro-economical effect linked to the pandemic that some part of the world, like the U.S., people want to treat themselves. So the single high-end whiskey has improved. We had also some natural endorsement in the U.S. 1 year ago that we cycled. So it was supposed to be an artificial rebound from some of your colleagues, it is not because we are performing year-on-year. So something which is more lasting. But it is a business that needs different point of touch, touch points. So a classical campaign, a classical advertising doesn't fit. So it's a lot of point of connection, testing, education, training. So I think that the actual performance need to be put in positive perspective. Because with the pandemic, we have less occasion to have some classical celebration. So the training, the education is done on Internet, has been positive. And even more, I think -- we think the overall consumption habits that we've witnessed also with the cognac has had an impact for our brands. We continue to invest behind our Bruichladdich brands. We have a lot of new initiatives. I cannot share, but are clearly part of the 10 years' plan. The 10 years' plan is clearly bit on -- built on Cognac. But as I said, Liqueurs & Spirits has to play a big role and Whiskies is clearly are in the top 5 contributor to our journey.

We will now take our next question.

Fintan Ryan here from JPMorgan. Just 2 questions for me, please. Firstly, I'm wondering, could you comment on the pricing environment in China, particularly given that your overall demand seems to be quite strong in terms of the sell-in, sellout in the outlook for Chinese New Year and noting as well that some of the more high-end [ bulging ] pricing seem to also be increasing? Do you see this as an opportunity to take some significant extra price increases? Or are you happy just in terms of the long-term volume growth in the market? And then secondly, just as we start thinking around the outlook into FY '22 and the profitability side of the things, I'm wondering, will you be able to give us a sense of your intentions around A&P spending and other sort of structural OpEx costs? I know you sort of economize some margin in FY '21 in the environment, but should we expect to see a rebound in a number of those cost items as we look into FY '22? And just generally, like if you -- for FY '22, should we be anticipating the margin level in aggregate to be back to pre-COVID levels? Would that be a fair assumption? Or is there anything else that we should be bearing in mind?

Easy question, second one. We didn't start budget yet. But if you want, I will invite you, so you can help me. Pricing environment in China, we are confident on the at-home situation. We are not playing on promo games on Chinese New Year. Our pricing consistency is there. We also had witnessed some positive increase on the street price, different prices on some iconic products. So without disclosing the magnitude because it's too sensitive for the competition. In the fiscal year '21, '22, also in China, we will continue to play a valorization game, so we'll continue to increase prices. In terms of model, for -- already, let's start for this year. I already said that, what's important. This year, the model profit and loss will be considering the negative geographical and product mix compared to a theoretical perfect year. Consider the 10-year strategic plan, we'll see flattish minus, flattish, flattish minus gross margin, which need to be highlighted because the gross margin is the first engine, the first weapon to realize the operating profit growth in the long term. We'll be flattish A&P with a clear increase in the second part of the year, the second half. I'm talking about 2021. And the bottom line improvement in terms of profitability compared to net sales because even if I don't give specific figures, you understood very clearly that we expect the organic operating profit to grow at higher speed, higher speed compared to our plan, means that in 2021, with the increase of profitability, will be set by the operating expenses deleverage. Also, because we took some decision for the pandemic, EUR 30 million cost base cut between A&P and OpEx, of which 1/3 will last, so EUR 10 million. Next year, we are not yet in a perfect budget vision. But the things I can say is that the milestones of our profit and loss will be gross margin, will be back on gross margin, I think growth in terms of percentage of our top line. A&P acceleration and OpEx also to be distinguished, we the strong acceleration in [ basic ] to build a more direct-to-consumer model, to increase our presence in the commercial [ weapon ] in some key states to invest in e-commerce and a very, very squeezed nonstrategic OpEx. Meaning that overall, the OpEx for the group next year will be growing by the lower extent to the top line. So the bottom line in '21, '22 compared to the turnover, if our hypothesis will be respected, because clearly we have to give ourselves some credits to be able to say these kind of things in the global pandemic 2-year situation. Talked about the plan at 10 years and the expectation on modern P&L for next year. When I could answer, let's see quarter-by-quarter. But our vision that '21, '22, the operating profit compared to the 2021 will be growing more than the top line. So meaning an increase of profitability, not only in 2021, but in '21, '22. The difference being, at this stage, is in 2021, the increase on profitability point compared to the turnover is given by the OpEx deleverage, and next year will be a mix between slight operating expenses deleverage and increase of gross margin.

We will now take our next question.

It's Andrea here. I have 2...

Andrea, how are you? For 6 quarters, you don't ask a question. Where are you? I was worried for your health.

All good. Two questions this time, please. Question on the U.S. again, on the depletions. The depletions are, I mean, quite significantly ahead of what Nielsen shows. Now is that mostly the effect of retail restocking? Or are there other factors there? And how are stock levels at retail now? Has that been mostly caught up or even at retail levels? Are the stocks still low? And then an update on China, on your sort of channel exposure in China. There have been a lot of moving parts in the past 12 months, fast growth in online. If you could give a bit of an update on your channel exposure on trade. And also, how much is corporate event banquet of your sales? I imagine it's a pretty small portion these days.

Thank you for your questions. So U.S., depletions and reconciliation with Nielsen NABCA. So difference is not so huge. You're talking about 10, 15 points. It is stocking at all or it is a difference between coverages. So I think that is half and half. So there is a part of restocking at retail level, as we already said. We also gained shelf and some distribution on some brands like Botanist. So you have an impact at that level, but also the fact that Nielsen is covering for the market by maybe 37% of our sales, it's not 100%. And for [ our size 33 ], NABCA is 18%. So overall, we can combine channels for the real consumption at 51% for us and 59% for the market, if I'm not mistaken, at maximum. So we are still missing, and we know that we are under representing the DNA of these 2 panel part of distribution in which we think we are strong. So if the worry is that deceleration between the 2, the 15 points, is only stuck at retail level, it is not. It's half and half. In terms of China channel's vision, it's a question to answer a little bit more augmented way. So before and now and maybe tomorrow, but tomorrow, nobody knows, before COVID, direct or indirect, we were 1/3 direct-to-consumer, China, more or less; and 2/3, undirect. In the H1, you remember, you said 50-50. Now in the 9 months, because of the weight of the wholesaler, which is indirect, we are more on 40-60. And we think that the goal is to try to normalize to a 50-50, 40-60 for the next 12 months. Would be some quarters of acceleration of one channel. Clearly, the beginning of the year is more direct, pandemic -- on a pandemic. When you have mass Mid-Autumn Festival and Chinese New Year, it is a little bit more mainly Chinese New Year undirect. Because part of the market is still dominated in terms of EBIT by quarter, the certain types of partner that are there. The real game changer to change this kind of weight will be e-commerce, B2C and e-commerce to improve even more the actual very strong performance. If we want to talk about e-commerce, we were in China. We were at 20%, more or less, before COVID. We have a huge start to the year in e-commerce, being at plus 32%. So we are at around 27% at H1 sales. Now 9 months, because not of the performance of e-commerce, but because of the overperformance on sell-in, of the indirect channel, wholesaler, is back to 20%, 22% the 9 months. That will be normalized quarter-by-quarter at the end of the year between 2025 year after year. The real game is to try to accelerate more because also to be able to reach 20% of e-commerce at worldwide level, it will be built of, we think, 1/3 of that of the weight of the sales of China in e-commerce. E-commerce, all subchannel included B2C, B2B, the retail and marketplace. Third point on channel on trade, off trade. We were quite balanced before COVID, 35 on or 55 off. Now we are clearly off, 20-80, but expect some better balance in '21, '22. This is something that is subject to more erratic changes. Last question. We estimate the banquet and gifting, but real gifting, not -- no official gifting is there, the real gifting, it is during Chinese New Year between 2/3 and 80% maximum compared to what it is normally, 40% to 50%. It's part of our DNA. So there is an acceleration, but is no more than 20, 25 points during the Chinese New Year.

It appears there are no further questions at this time. Mr. Marotta, I'd like to turn the conference back to you for any additional or closing remarks.

Only to say, please stay safe. The situation, sanitary level, is still a bit complicated, mainly in Europe. We'll be back, this kind of conference call, end of April for the full year and then beginning of June. And hope the best for you and your families and have a nice start of 2021 year in a very confident way as we are. Thank you.

So this concludes today's call. Thank you for your participation. You may now disconnect.

Thank you, Ryan.