Rémy Cointreau SA (RCO) Earnings Call Transcript & Summary

Hello, and welcome to the Rémy Cointreau Full Year Sales 2020 and '21 Call. My name is Molly, and I'll be your coordinator for today's event. [Operator Instructions] I would now like to hand the call over to your host, Luca Marotta, CFO, to begin. Thank you.

Good morning, everyone. Thank you for your participation to the Rémy Cointreau conference call for its full year sales 2021 covering the period from April 2020 to March 2021. This morning, we have 4 messages to highlight. The first one, we have to say a word on the global context in which we operate in during the fiscal year. Nothing very new there, but it's hard to present our figures without reminding everyone what the COVID-19 pandemic meant for us over the past 12 months. First, overall, it translated into a shortfall in our duty-free sales, which accounted for around 10% of our total sales pre-COVID, along with the international airline traffic. Second, the on-trade channels, which accounted for about 30% to 35% of our global sales before COVID, was fully or repeatedly closed in many of our markets. More specifically, the closure of bars, hotels and restaurants has been particularly impactful on our European business as well as on many markets of Asia, Africa and LatAm. In contrast, on the positive side, we benefited and continue to benefit to profit from a booming at-home spirit consumption in a number of markets, including, clearly, the U.S., U.K. and Australia. And the other positive is that Mainland China has now been pretty much back to normal for 6 to 8 months with both the on- and the off-trade channels having normalized since last summer 2020. The second key message is that in that context, the group showed strong resilience, delivering organic sales growth of plus 1.8% in the full year 2021. This performance included ongoing strength in the last quarter, with sales up more than 15%, 15.1% after a very strong Q3. As expected and as guided, the Q4 performance was mitigated by strategic inventory management essentially in the U.S., implying some tangible phasing effect that will be favorable and reverse in a positive way for the Q1 '21, '22. The third message is about final consumption or the best approx to that. Our value depletion trends showed strong growth in the full year, largely outpacing our sales performance. This was also very true in the last quarter. All this makes us confident, very confident for the year '21, '22. So looking at the value depletion trends by region. Let's start with Americas with U.S. depletions, grew very strong double digit, driven by booming at-home consumption combined with uptrading trends. Canada depletion were satisfactory overall, up high single digit, while LatAm was strongly impacted by the lack of tourism and the closure of the on-trade. In Asia Pacific, strong trends in Mainland China and Australia and New Zealand were partially offset by lingering weakness in the rest of South Asia and Japan as well. Inside the big EMEA region, our depletion were generally quite negative, quite depressed across the region. But inside, within that context, a few markets enjoyed positive depletion trends, including clearly the U.K., but also Benelux, Switzerland and Germany. Lastly, Global Travel Retail experienced very, very poor trends across all subregions even if we saw a sequential improvement in GTR Asia in H2 led by Hainan. Our 4 message of today concern the 2021 outlook, for which we are increasingly confident. Our full year sales performance came in slightly above our internal expectation. And as a result, we now anticipate our current operating profit for the year to grow around 10% in organic terms, better than our previous expectation. Let's move to the next slide to the full year sales analysis. Sales amounted to EUR 1,010.2 million, down EUR 14.6 million year-on-year or a 1.4% decline on a reported basis. This reflects 3 things: First of all, an organic gain of how much, EUR 18.5 million or plus 1.8% organic sales increase; second, a negative mathematical currency effect of EUR 36.3 million top line or 3.5% hit; and lastly, a small scope benefit as already guided of EUR 3.2 million, i.e., a gain of 0.3% from the partial consolidation of Brillet and de Telmont, the champagne brand. Let's move to Slide #4. As we just said, currency translation decreased sales by EUR 36.3 million in the full year. This was largely driven, very largely driven, by the U.S. dollar, it's very clear in the spreadsheet in the slide, which contributed to that result for EUR 26.1 million. And most of our other currencies also deteriorated, including the Chinese yuan, Russian ruble, Canadian dollar and the British pound. Of the 2 currencies, in a very marginal way, it's very clear Swiss franc and Taiwanese dollar, generated currency gains. Let's now turn to Slide #5, which shows our quarterly performance over the past 12 quarters, the last 3 years, and the 12 months' rolling organic performance of our group brands in red, which stands at around plus 2%, plus 1.9% to be precise, at the end of March. After 6 challenging quarters, the second half, it's very clear, of 2021 equal to plus 20.9%, more than 20%, finally marked the beginning of the group's turnaround improved top line perspectives. Now let's move to our full year sales trend by region, Slide #6. You can see that Americas was the engine of the group growth with a remarkable plus 18.6% increase in the full year, boosted by very, very strong plus 38.7%, around 40% rebound in H2. Asia Pacific, overall, as a global region was down to a very limited minus 4.5% during the full year, despite a plus 20% rebound in the second part of the year. EMEA was clearly the weakest region with a 21.7% decline. While still down, H2 sales recorded a sequential improvement being minus 11.5%. So overall, at group level, sales grew plus 1.8% organically in the full year and rebounded, it's very important, more than 20%, around 21%, 20.9% in H2, as we already mentioned. Now let's begin into organic sales trends by region in more granular way, Slide #7. And let's start the biggest region, Americas, which grew 18.6% in the full year. The main driver was obviously the U.S. where sales were up very strong double digit, led by most brands. But even if our sales performance was outstanding and demand was even stronger in the context of home premises consumption. In fact, with 40% of value growth according to Nielsen, Rémy Cointreau was the #2 fastest-growing spirit brand owner within the top 20 suppliers in the 12-month period ending March 2021. Our global value depletions point to the similar growth, up 52.5% in the 12 months period. The momentum slows down slightly in the last 3 months only into bracket, plus 33%, 1/3, plus 33% as we started cycling the pantry-loading of last year in March. Besides that, the growth rate is automatically mitigated by our strategic inventory management decision, which is impacting what wholesaler can sell to retailers. So very strong and good result. Canada sales were slightly down in the full year despite good depletion trends, led by Cointreau, St-Rémy as well as by Rémy Martin, whose depletions enjoyed an encouraging catch-up in the last quarter. Finally, LatAm and Travel Retail Americas have been very weak all along the year. At the end of March, globally, the Americas region accounted for 52% of our group sales, up 7 point. So more than 50% of our sales is now represented by the Americas. Let's move to the Asia Pacific where sales declined 4.5% in the full year despite very strong double-digit growth in the last quarter. Looking at the subregions, Greater China sales grew double digit in the full year, led by strong double-digit growth in Mainland China, very strong, and good momentum in Taiwan, partially mitigated by ongoing weaknesses in Macau and Hong Kong. Greater China and, clearly, Mainland China Q4 sales were up triple digits, partially benefiting from the later chinese New Year, which was February 12 this year versus January 25 in 2020. And mathematically, we estimate around 8 million worth of shipment that were postponed from Q3 to Q4. We already said that, but it's important to remind. Mainland China value depletions were up strong double digit in the full year, including an excellent, stunning Chinese New Year performance in the last quarter for both our cognacs, but also our Scottish Single Malt Whiskies. From a channel of distribution standpoint, our China sales were pretty consistent in the full year with similar growth rate in the direct, indirect channels, thanks to a clear pickup in the indirect wholesaler confidence in the second part of the year. The other subregion of Asia Pacific recorded a weak year. Southeast Asia was down double digit in the full year despite strong performance in Australia and New Zealand as the other market were penalized with the closure of the on-trade and even their borders for most of them. Lastly, Travel Retail Asia, an important subregion, posted a weak year despite a sequential improvement, as we said, driven partially by Hainan in the H2. End of March, the whole Asia Pacific region accounted for 30% of our group sales, 3-0, down 1 point versus last year. EMEA sales declined 21.7% in the full year, despite some resilience in the last quarter in domestic market, which were only down in the low single digit. Overall, the full year sharp decline was driven by Africa, Central and Western Europe and the Travel Retail channel in Europe, which all recorded significant strong double-digit decreases -- declines. With that said, a few markets, as already said, enjoyed positive sales and efficient trends in the period. So we had some exception, positive exception. U.K., where Nielsen data points, were around plus 35% sellout growth; Switzerland, Benelux and Germany. End of March, EMEA region accounted for 18% of our group sales, 1-8, down 6 points versus last year. Now let's move to our full year system by division, Slide #8. Cognac. Cognac grew 3.7% in the full year, including plus 18.2% organic growth in the Q4. Liqueurs & Spirits recorded a 3.2% decline in the full year despite plus 7.1% organic growth in the last quarter. And lastly, Partner Brands sales were down a limited 1.5% in the full year, including an 18.7% increase in the last quarter. End of March, Partner Brands accounted for 3% of our sales, stable year-on-year. Now let's dig Slide #9 in the analysis of turnover by division, starting with cognac. As we just mentioned, the Cognac division grew 3.7% in the full year, and growth was entirely driven by the Americas as a macro region standpoint while Asia Pacific and EMEA were in decline. So let's start with the Americas, the clear engine of this growth, where cognac sales grew strong double digit in the full year, led by an excellent performance in the U.S. while Canada, LatAm and Travel Retail declined for cognac. In the U.S., strong sales were fueled by outstanding, really outstanding depletion trends, up plus 64.4% in the last 12 months period ending March, boosted by strong at-home consumption, consumption uptrading and recruitment into this category. The strong depletion performance continued into the Q4, up 33%, despite very high comps from March and despite our decision to master and to apply our strategic inventory management for the very near future, in particular for 1738. As for price/mix effects, they were slightly negative in the last 12 months period ending March 2021, due to the unfavorable product and state mix. Cognac sales in Asia Pacific were down mid-single digits in the full year as double-digit growth in Greater China was more than offset by declining sales in the Southeast Asia, Japan and Travel Retail Asia despite an improved performance in the second part of the year. Looking at Greater China specifically, sales grew in the high-teens in the full year, including triple-digit growth in the last quarter. While this was partially aided by the latest time with the Chinese New Year, the main driver of the growth was the strong demand of our cognacs and regained confidence from our wholesalers, in particular since the mid-Autumn festival 2020. Clearly, this confidence was strengthened further with the excellent performance of our cognac and whiskey portfolio during the Chinese New Year 2021. All this bodes very well for '21, '22 perspective in Mainland China. We also expect to see some improvement in Macau where casinos and hotels have reopened, while Hong Kong could have finally touched the bottom as Chinese New Year showed a slower decline than what we have used to experience in the previous months in the mid-Autumn festival 2020. So still negative, but seems to have normalized since then. In the Europe, Middle East and Africa, cognac sales declined double digit, led by weakness in most market as well as in Travel Retail. The other exception, I repeat, was the U.K., which enjoyed double-digit growth, fueled by good at-home consumption for cognac. Regarding the volume value equation of Cognac business, 3.7% organic sales growth reflected a high single-digit volume increase, partially offset by negative price/mix in terms of top line due to an adverse product and geographical mix. End of March, cognac accounted for 73% of our sales, up 1 point year-over-year. Let's move to Slide #10. You can see the Maison Rémy Martin, which opened in Guangzhou in January 2021 for a few weeks during the run-up to the Chinese New Year celebration. The Maison was located in impressive Opera House of Guangzhou and offered the digital immersive experience into the expertise of the brand. On January 10, we organized digital version of the experience, thanks to the partnership with Tmall e-commerce platform, which live streamed the event. Almost 300,000 spectators connected to Tmall.com to follow this live event, which generated both high traffic and high purchase conversion on our online shop on the Tmall platform. Now let's move to the U.S., next Slide #11, where we launched the Rémy Martin Mixtape VSOP Limited Edition in February 2021. This limited edition revisits the style of the VSOP bottles sold in the '80s and the '90s and pays tributes to the music culture, which is very much tied to the cognac category and to Rémy Martin, in particular. 240,000 bottles of this vintage VSOP were shipped to the U.S., Canada and LatAm with a recommended retail price of $80. Now let's now turn to Slide #12 to dig inside the figures of Liqueurs & Spirits division. Liqueurs & Spirits division posted a 3.2% organic sales decline in the full year, despite a 7% rebound in the second part. There, again, Americas posted good growth, but it was more than offset by declining sales in EMEA, Asia Pacific and Travel Retail. Looking overall the division in volume value equation for the full year. The 3.2% organic sales decline was driven by low double-digit volume decline, partially offset by strong positive price/mix, positive news. At the end of March, Liqueurs & Spirits accounted for 24% of our sales, down 1 point compared to the previous year. Let's talk -- let's say a word about the major brands of the division. Cointreau delivered a very strong performance in the full year, led by double-digit growth in the H2. Overall, it was driven by double-digit growth in the U.S., Australia, New Zealand, U.K., Benelux, Russia, so not only U.S., partially offset by some weakness in the rest of Europe, Travel Retail and China. The good U.S. performance continued to be fueled by very strong at-home consumption and the success of the Margarita, the cocktail in that case. In the past 12 months ending March, brand volume depletion grew plus 24% in the U.S., a remarkable performance given, pre-COVID, the on-trade channel for Cointreau accounted for more than 50%, 55% of our brand sales. In the last 3 months period, depletions have been accelerating further to plus 34%, boosted by the gradual reopening of on-trade, U.S., as well as the benefits of the SuperBowl advertising. Price/mix benefits added 6 points to volume depletions in the 12-month period, driven by very favorable product size mix. In contrast, sales of our Greek brand, the Metaxa, declined double digit, both in the full year, driven by the shortfall in Global Travel Retail and poor performance in Central and Western Europe. These were partially offset by a good performance in Eastern Europe and some resilience in Germany. Mount Gay sales also declined the full year, down low double digit, driven by weakness in Barbados and Travel Retail, while the brand enjoys strong growth were in the U.S. and the U.K. And St-Rémy fell in the low double digit in the full year, hit by Travel Retail and Africa. However, brand enjoyed strong growth were in the U.S. and Canada, this time, where depletion were up 8% in the full year. And despite double-digit sales growth in H2, led by the U.S., The Botanist also recorded a decline in the full year. European on-trade closure playing a role on the topics. Last but not least, the Single Malt Whiskies delivered a strong year with double-digit sales growth across all 3 macro regions, partially mitigated by weakness in Global Travel Retail sales. We are particularly pleased with the excellent performance of the portfolio in -- during the Chinese New Year 2021. Let's move to Slide #13. For the first time in its history, Cointreau company advertised during the SuperBowl, the most watched sporting event in the U.S. Cointreau displayed the 30-second ad spot titled, Love Letter, which is in support of the on-trade community in the U.S., hit hard, very hard with the pandemic. This ad has 2 clear objectives: to assert Cointreau's position as a continued support of the hospitality in the industry by urging consumers to support their favorite place as they reopen and recover; and strengthen, clearly strengthen, the [indiscernible] and reliance of Cointreau among consumers and by positioning it as the key historical original ingredient of the classic Margarita. And we are quite encouraged by this result. The advertising was ranked 8th, #8, the most effective ads during the SuperBowl. 51% of the viewers were emotionally engaged by the ad versus U.S. normal, 32%. And Cointreau mentioned on SuperBowl Sunday increased by 157%, more than double on social networks, and Cointreau website searches increased by around 200%, 3x. And last but not least, there's more cherry on the cake. We estimate USD 1.3 million incremental sales value favorably linked to that. So let's turn to Slide #14 and talk about the outlook. Starting with 2021, for which I think it's clear, we are increasingly confident. Our full year sales 2021 came in slightly above, slightly better than our internal expectation. As a result, we are raising our guidance and now anticipating our current operating profit to grow around 10% in organic terms. But as you all know, this performance should be somewhat mitigated by adverse currency and scope. We now expect currency to reduce scope by only EUR 5 million, so around 2% of our historical figures versus EUR 8 million previously. While we continue to anticipate the scope impact of the new acquisition to be around EUR 2 million negative. We also feel confident, very confident, in our '21, '22 prospect, all things alike. The group anticipates a strong start to the year, supported by a very favorable base of comparison, shipment phasing benefits and structurally more buoyant consumer trends essentially and mainly in the U.S. I'll be now very happy to take your questions.

[Operator Instructions] The first question today comes from the line of Mitch Collett calling from Deutsche Bank.

Luca, I have 2 questions, please. Can you perhaps comment on your year-end stock in the U.S., given the strategic inventory reduction? And perhaps also if you're able to comment on where you see your stock levels elsewhere around the globe. And then secondly, can you give us some color on the price increase you've taken and specifically how it varies by SKU, if that's possible?

Thank you so much. So in the U.S. specifically, our decision to manage our strategic stock all over Q4 and Q1 is -- and the fact that our depletions are still booming, makes our level inventories back to very low levels, around 1 month in terms of coverage for VSOP in just a few days or weeks for 1738. As expected, as already guided, the level is down compared to our December result, the January conference call, when our levels of inventory was more or less 2 months after a catch-up in between shipment and depletion in the Q3. So in the U.S., very low level. For the other region in China, sell-in and sell-out were quite aligned in the last quarter. So our level of inventories was and remains the reality end of March. So no major disalignment, a little bit more [ tense ] on CLUB, a little bit more stock on the higher part of our portfolio, but we're talking about some days. So no clear disalignment. In the rest of the world, we think that we have done a good job into bracket, cleaning up our inventories and in particular, in Europe when we hope to start '21, '22 in a pretty healthy situation. So even if the situation is still complicated in terms of on-trade reopening, Europe is quite complex to predict. Stocks starting point will not be an issue. Price increase for the 2021. One word before that, towards that, please do not forget that the delayed decision for ethical reason to switch the price increase on April 2022, 1st of October, as top line in pattern may be negatively the year that we are closing. But now combined with the new price increase, the 1st of April 2021, is giving additional valorization for next year to come. So you have a compound positive factor on valorization. How big it is, the price increase in April 1? Cognac, overall, all over the world, no major differences here, 1 or 2 points between region, but no major, mid to single -- mid-single-digit price increase, mid -- for the cognac. Clearly, a little bit more for the QSS+, a little bit less on intermediate. But overall, mid-single-digit price increases. Liqueurs & Spirits, a little bit less, low single digit or sometime very small on some specific market, which we want to be more active in terms of market share. Even no price increase if we consider that this is the right strategy, knowing that Liqueurs & Spirits we have a lot of brands in which the gross margin is accretive compared to the group average.

The next question comes from the line of Edward Mundy calling from Jefferies.

Three questions from me. The first is around the comment that you expect structurally more buoyant consumer trends in the U.S. Is this a comment that you think the spirits industry is going to grow more than 4%, which is a sort of long-term average? Or is this a comment on Cognac? Or is this a comment on sort of premiumization trends remaining sticky on the other side of the pandemic? Can you perhaps just sort of flesh out what you mean around more buoyant consumer trends? The second is on the slow depletion trends in Q4 or sort of more moderate depletion trends in Q4, the plus 33% that you called out. I think you mentioned that's partly as tough comps cycled, but to what extent was these depletions held back by inventory shortages at wholesale and retail? And then the third question is around this double price increase benefit you're going to get given the timing of pricing this year relative to last year. I mean how much of that do you think is going to fall to the bottom line in the first half? And how much is going to get reinvested?

Thank you. Very interesting question. So let's start with the depletion. And so what can we consider -- this acceleration is going to consider a new normal or not. So we think that in the U.S., we are enjoying a new paradigm. So what happens, very negative events, in our case, help to increase the off-trade consumption at-home mixology that remains at this stage -- will remain structurally above pre-COVID levels. E-commerce in the U.S. stands as a new and sustainable driver growth for the spirit industry. Uptrading trends seen a year ago now are more structural and continuing. The increased penetration of the Cognac category inside the -- within the high-end spirits with plus 5 to 6 points in 1 year. And also the desirability of our brands is stronger than last year's. And positive momentum, we think that will continue. So all that, we think will last. And this is a new paradigm. So if this is a new paradigm, this is lasting, comes to your second question, we can say on a mature mathematical way that the magnitude, the growth, has slowed down with partially -- with the cycling of the last year pantry loading phenomenon started in March 8, but it's still very positive overall, beating also, it is important also for you to know that, our internal expectation that we are adjusting month-after-month. Still Nielsen, which is panel covering for the market of around 40%, 37%, 33% for us, show strong growth trends for [ LC ] brands even if we are cycling that. VSOP, up plus 33% in March versus 39% in the last 3 months period. 1738, up 36% as well in March versus 54%, so very strong increase as well. And this compares with only plus 14% for the cognac category as a well in March and plus 25% in the last 3 months. So buoyant and more buoyant than the dynamic than the average of the category. We do expect, mathematically speaking, some slowdown in a more meaningful way, but mainly because there are math comps that are quantitively impressive to match. And -- but we can say that the underlying consumption patterns are very, very healthy. Your suggestion that some changes could be linked to the fact that the stock equation with the retailers will say there could be more tests, it is true. But it's something that everybody has to be used -- has to understand what the new paradigm imply because being in a tier, just imagine that what we are doing every week, adjusting our estimation, has to be done also in a wholesaler at retail level. So it will be maybe some disruption on the chain, remaining very, very healthy. But the new paradigm standing and lasting will be accretive in a very strong way for all the next quarters. So we are very positive, and we think that will last. And if any disruption between wholesaler and retailers apply will be sold in the next quarters, getting more used to this new world, new equation. The double price increase overall at group level will impact our theoretical top line in a clear sensitive way. But then this is translated automatically in bottom line, not necessarily. It will be translated automatically in our gross margin. You will see, I don't know if there will be some question about that, but what we see at last in June that our gross margin compared to the previous guidance for the year, which we were flattish, slight negative, now it's improved. Because not only we are able to reach higher level of sale compared to our expectations, but despite the fact that the mix on the top line is less accretive compared to start of the year. In terms of gross margin, it's more accretive. So this double price increase will improve our gross margin, everything equals in the last -- in the next 12, 18 months in a very important way. And this will be used, first of all, to increase our A&P. We need to dramatically increase even more our A&P because this new paradigm is not cheap. It needs to be fed, need to be reminded. You have to increase our brand expression, our programs. We want to be more e-commerce, will be more investments. So the A&P investment will be the first source of investment of the gross margin. Bottom line, we'll improve. But as a mix between the gross margin-accretive impact, which is not totally used for the A&P and by the deleverage of the OpEx because we need to increase OpEx, but we want to control that to grow less than the top line. So bottom line will be positive, but the first source of investing of our gross margin is A&P. I hope it is clear. It is not, please feel free to ask.

The next question comes from the line of Trevor Stirling calling from Bernstein.

Luca, just looking for a little more color on cognac, I guess, particularly in the U.S. Cognac, I think organic sales growth in Q4 was 18%. If you haven't done your strategic inventory management in the U.S., how high do you think -- how much higher would cognac growth have been in Q4? And secondly, looking forward to Q1 and beyond, it sounds like you said your assumption is that we've got a significant increase in demand in the U.S. As we look forward, we can grow from this new base. So far, the evidence in the [ U.S. ] says there's still underlying growth from new base. Do you have enough product to be able to supply that growth?

Thank you so much. So we need, as you know, to manage our strategic inventory, in particular for the U.S. cognac. Without quantifying that in a very precise way, it is -- the strategic impact is important. So another way to answer to yourselves is to give you 2 different information. The Q4 2021, restated by this theoretical impact and be compared to 2 years ago, so '18/'19, would have been higher than '18/'19. And Q1 '21, '22 will be very strong, clearly beating level of Q1 '18/'19, so 4 years ago. I will not be more precise, but I think it's very important. Q4 compare, I repeat myself, to '18/'19, restating that would have beat '18/'19 in absolute value, and Q1 of next year will be clearly beaten. We are more than finding back the level of '18/'19 both in Q4 and Q1. Do we have enough products? Yes. At this stage, we can feed our plan, and we can feed our short to medium term. Then it's more sometimes a matter of phasing because, first of all, we want to profit our pricing power because allocation gain gives you more pricing. It gives you the more opportunity to improve gross margin to invest more and also to, as yet again, improve our profitability because we are committed in the long term to reach 33% in 10 years of profitability. So we are not forgetting that, not at all, but it's a consequence. And the second point is that our global manufacturing tool is a mix of liquid, the time to marry the liquids to build our ranges, to bottle all the operation and then to deliver with all the implication that the lead time of our product between the first step and being available on a shelf mix. So not probably an absolute value, we might have sometimes some quarter differences between one or another. But at this stage, we don't see any major problem. And the end, even if you might have some difference, you have some fat quarters, you will have some lean quarters sometimes. But at the end, we are very positive in terms of the ability of our business to shine in the next coming periods. So we are quite bullish there.

The next question comes from the line of Laurence Whyatt calling from Barclays.

A couple of questions from me, if that's okay. There have been a few states in the U.S. where we've seen a reopening. I'm just wondering if you have any learnings from those states and particularly the relationship between the on-trade and the off-trade and how those 2 channels are differing, especially particularly, I suppose, for your Cointreau brand has benefited significantly from the at-home cocktail-making, and whether the reopening of the on-trade has impacted any of those sorts of trends. And then secondly, on China, have you -- since China has been in reasonable growth now for a number of months, have you seen any shifts in Chinese consumption patterns, whether that's a channel shift or preferring different brands or categories within cognac? Or is it simply just a continuation of existing trends that perhaps accelerated? And then finally, on China. During Chinese New Year, I suppose the same sort of question, but more precisely on Chinese New Year, were there any particular categories or qualities that performed particularly well or slightly worse than your expectations? Just wondering if you could give some color on that.

Thank you so much for your questions. So on-trade in the U.S. The on-trade is gradually coming back, but it's still around 50% overall. Most places have reopened, but they are running, even if they reopen at 25%, 50%, 75% of capacity rates, following according to different cities and different states considering the sanitary constraints. We expect our internal assumption, clearly elaborated by our local team, is to be back at 70% global overall recovery by this the summer. Today, we are around 50%. And the remaining 30%, taking 1 or 2 years because also globally where a lot some bankruptcy and some disruption in terms of distribution. Overall, is there an impact on-trade reopening? Slightly positive, but not massive. So yes, but not so massive. We have some data, 2 example. Texas depletions, plus 58% in March compared to the 40% in the full year. So an improvement. And New York City, plus 71% in March is more important compared to the 26% year-to-date. But our 2 examples, overall, in other states, including Florida the difference between the year-to-date and the short term is less meaningful in terms of an acceleration. So even if it is opened in the minds of the client being at home with the new paradigm, some profiting of this moment for ourselves, consider the sanitary constraints the fear and the fact that some time you spend a little bit less, makes that the new way of consumption is really installed. China. China, it is true that, listening to your question, we are now less impressed by the continued Mainland China performance double digit. So it is huge. So okay, we are talking about the U.S. because it's very important, and more than 50% in the Americas. But China recovered, and China experienced very good result. I will start, if you allow me, from the third one question, the Chinese New Year, to give color on what happened. For ourselves, the feeling that was for everybody in general, in terms of market, Chinese New Year in February was quite successful. For us, it was close to triple-digit growth for Rémy Martin, very strong for Rémy, of course, for the CLUB, you would think. But it was even more successful than CLUB this time. So not only CLUB, so also the QSS+ in terms of our performance in Chinese New Year. So also an update trading. Very good performance award without giving any figures for LOUIS XIII. Good momentum after some depression because even trade was blocked for the first part of the year. It was already starting the Mid-Autumn Festival, but that was very clear in Chinese New Year. And we were very well, very much into the triple-digit growth for our Single Malt Whisky. This is the category waited, hoped, desired also the exception in terms of switch because they're really accretive and they're changing also the part in the consumer in China because are younger, are more sophisticated, and they do not represent the threat of cannibalization. This is an additional consumer. It's additional cake for everybody in China. More for the Single Malt, for the sophisticated brands than the mainstream in our personal, humble opinion. But we had some SKUs inside the Single Malt Whiskey brands that experienced 5, 6 times the sales of 1 year ago. So it's really boom. The figures are not so big because we cannot compare in size. But there is something, which is building there in the channel in terms of category -- channel. The increased confidence and the weight of the indirect channel and long-haul distribution for part of that, just remember that direct, indirect before COVID were 1/3, 2/3. Now we have more 40-60, makes the channel performance was a little bit more balanced compared to what we witnessed until 9 months, until end of September, end of December, meaning that increased confidence and the global footprint is more positive. Overall, the indirectable sale population increased their confidence and the buying in advance to be able to feed the new paradigm, the new acceleration trends on the depletion expectation. So what does it mean that the channel performed in a quite balanced way? E-commerce was 20% before COVID, had an acceleration beginning of the year. And now it is back at the 20% growth, meaning that the weight remain the same between 2022, sometimes higher. At the end of the year, it's lower because Chinese New Year is a game in which the indirect channel is very strong. And it is quite balanced. All channels are performing with one point to highlight the switch direct, indirect, 1/3, 2/3 before COVID, now 40-60. It seems nothing. It's very, very important because the more we are able to touch the client directly, even more in China with the pricing power when the price perception is higher than everywhere will be very important, not only for financial, but for the health of the brand. So promising switch also on this channel picture. I hope it was clear for your question.

Your next question comes from the line of Sanjeet Aujla calling from Credit Suisse.

Luca, a couple of questions from me as well, please. Just going back to the U.S. supply comments you made earlier. Would I be right in thinking that you can get inventory levels in the U.S. back to normal at the end of fiscal '22? Is that the implication? And then just the comment on A&P, clearly, a lot of appetite to step up A&P investments. Should we be thinking about that in just absolute terms or going up as a percentage of the sales from the 18% level in fiscal '20?

Thank you so much. So in terms of when will be back to normal, it's a very complicated question because -- in terms of stock because it depends on the new paradigm factor that, estimate the depletions and the best approx to sell out for the next coming quarters and revert back to a coverage in absolute value, increasing the absolute value that we have now. I think that we will be back to good coverage even before 1 year. And then if the depletion rhythm continue to improve the same task then maybe it would be short again -- a little bit short again in the Q3, Q4, Q1 '22, '23. Because it's not a linear game, it's a progressive game. So what I'm saying to you that, it's clearly stated, we count on a strong start to the year '21, '22 in which U.S. would play a big part of that, not only, but clearly. It's important. And this normalization should arrive sooner than we might expect, so end of Q2 at the latest. This is for Cognac because Liqueurs & Spirits are the right level inventories. Even if the Cointreau was booming, less into bracket problems of under stock at this stage on the Liqueurs & Spirits of the brands. A&P. Two answers to your question. You have to expect an increase of A&P for this year and next year higher than the top line increase. So the weight of A&P compared to the top line is higher. So once again, gross margin will be delivering a theoretical growth of x. Part of x will be invested in the A&P. You will have a deleverage stronger this year, 2021, much more modest than next year, 2022, for the OpEx. And as a result, you will have an impact in positive bottom line. This year will be clearly increasing. We already said that because if we guide on 10% increase, the bottom line for 2021 when you have plus 1.8%, you can calculate that we are increasing in important way the organic profitability of the group. Next year, 2021, '22, we cannot say because we do not guide on top line. And as we already said, when you have a strong year in top line with strong gross margin, we profit to step up our A&P footprint. Deleverage partially compared to the top line have resulted in a positive EBITDA. But maybe in some years, we might have profitability, which is growing in absolute level at a lower pace compared to top line. It's not the case. It will not be the case. But don't -- you will have an increase of the A&P. So profitability will continue to grow.

Understood. If I can just clarify one comment on the new paradigm you're talking about in the U.S. Based on some of the consumer behavior you've seen in March, April as we're lapping some of those tougher comparatives, do you think that the new paradigm means double-digit growth again in the U.S. for cognac in fiscal '22?

Yes.

The next question comes from the line of Andrea Pistacchi calling from Bank of America.

Yes. I have 3 questions, please. The first one, so in the past, you've said that for the medium and longer term, you could sustain about 2%, 3% volume growth in cognac and, of course, price/mix on top of that. So the question is, does this growth algorithm still apply? And for how long can you grow faster than that? The second question, 2 questions on the U.S. On your sort of portfolio mix there in the fiscal year just gone by, we saw some slight outperformance from VSOP. What shape do you expect this coming year? Do you expect the VSOP to continue to outperform or that to reverse? And also on the U.S., on the market share performance within cognac. In the past 12 months, you've been pretty consistently growing ahead of the category in the U.S. What do you think really underpins that? Is it sort of different supply situations among the various players? Or is it what you've been doing differently, a more focused on VSOP, and you think you can continue to outperform the category?

Thank you. So effectively, Éric Vallat, when presented some months ago the new strategy, said very clearly that our CAGR expectation in terms of category where for cognac, 2 to 3, maybe 3 to 4 sometimes in volumes and -- in which yet to add quite the same impact in terms of value to reach 7 to 8 in CAGR for the next 10 years. And for the Liqueurs & Spirits, even more with a more volume impact being the price/mix quite aligned with the volume, so [ 8.08 ] in that case. This acceleration is clearly changing the rules in the short term at this stage. For the next 4 to 5 years, we are covered. But clearly, internally, every month, we need to try to anticipate this new paradigm will be the impact. So what will be the impact? As you know, the first source of our capital allocation for the operational flows, so out of dividends and other point is buying strategically to be able to feed the future. And the near future recovered for the very [ exclusive ], we have to improve even more the working capital requirement for the next coming years. On that point, we continue to guide to around EUR 80 million working capital linked to ODV for this year, next year. This is more than enough for the next -- for the first part of the strategic plan, we need to improve them more for the years 5, 6 to 10. So far, no issue, but clearly, the stretch need to be readdressed to avoid to consume too much in the short term, which is good news also for the price as well. VSOP, I think that question 2 and 3 are quite linked. VSOP is clear. The change of gear in terms of advertising, global commercial expression and the way we think VSOP in the last 12 months even before COVID has determined the impact on the result and the change of EBIT and also the reason why we are partially running at the category and on top of [indiscernible] that had no clear comparison, no clear range. So we changed our stance on VSOP, getting freed ourselves a bit from the theoretical $50 price target. This freedom allow ourselves to step up investment with additional size behind VSOP to increase the relevance, so education, [ intervene ] status. We think that we'll continue to support VSOP, and we continue to improve -- to increase prices. So for the first year, VSOP is still very important. Then less important is the more volume, price increases because we cannot use all the liquid that we have to feed this increase. So at one time, VSOP in volume will stabilize, albeit less growing than the average -- weighted average volume of the category in the U.S. And its role will be taken by the other areas of the portfolio, starting with 1738 in the U.S. and clearly, the other part of the portfolio. At this stage, for instance, VSOP relevance in China has clearly diminished a lot. This CLUB is far more important in the VSOP in China, and this strategic shift also is able to feed our internal footprint supply without changing lower feature rather retail negative performance gives ourselves opportunity to sell the same quantities at the higher price in other parts of the world starting for the U.S.

Can I just follow up one quick clarification on your answer to Sanjeet's question on double-digit growth for cognac in the U.S. Is that comment -- is that referred to shipments to your sales in the U.S?

Yes. Then in terms of depletions because I don't want to deal with ambiguity in that case. For the next year, our assumption is that depletion with paradigm will be low to mid-single-digit volume on which you have to apply, mainly for cognac, the valorization impact of the 2 price increases and the format and state mix that should be quite accretive next year. So clearly, double digit next year for the top line, sell-in will impact the profit and loss, but also dynamic depletions as well. I repeat, in volume, low to mid-single digit next year compared to this year, which was very, very strong.

The next question comes from the line of Simon Hales.

A couple of things for me. Can I just also clarify a couple of things to start with. With regards to the stock replenishment in the U.S., when you talk about normalization, does that still mean you expect inventory levels to move back to around the 3-month level in trade over the next sort of couple of quarters? And then secondly, just sorry to come back to the sort of U.S. sort of growth rate again in cognac. But obviously, you're talking about low to mid-single-digit volume growth in fiscal '22. Do you also expect to see depletion growth in cognac in the first half, particularly in Q1 given what you've seen already as we've moved into April? So they were the 2 clarifications. Thereafter, the 10% organic EBIT guidance you've given for the year, clearly, you said that that's been driven by the better sales delivery versus your expectations. Is there anything to say from a sort of cost management standpoint? Have you managed costs better in the year than you hoped? Or has that been in line? And then finally, I wonder if you could just update us on your thoughts on Travel Retail, how you're thinking about the shape of recovery in...

Sorry, sorry, I didn't get the last one. Travel Retail, sorry.

Travel Retail, how you're thinking about the shape of recovery there as we move into fiscal 2022?

Thank you so much for some questions. Three hours for the answers. So I will try to be more synthetic than my habits. You know Italians are not so synthetic with the exception of Andrea, which is not Italian, he's German. So 2 months, not 3, 2 months on the new paradigm in the maximum at the end of the second quarter for the U.S., for the normalization of stock. Second question, growth rate. I repeat myself because maybe it was not clear. Let's start with selling shipments, what you have in the P&L. Next year, vision is that we'll be able to perform at double-digit level. And volume depletion trends, low to mid-single-digit volume in the full year in which -- to which we have to add positive price/mix because to price increase, size and positive sales mix. It is the linear straight line is your question. No, because on depletions, on volumes, you are benching some high comps, pantry loading, even if the -- then you have -- sometimes you may have had some disruption between retails and wholesaler, and then there's the frozen manufacturing. It's not linear in terms of depletion. But top line with strategic mastering end of Q4 and the strong start to the year of the Q1 and the fact that, even if you have depletion for the -- starting at 0, you have mathematically 10 to 15 point or selling catch-up for the stock level. Top line, it will be clearly higher than that. So don't have any fear in the short term. The volume all of a sudden are declining because the sell-in, considering the Q4 strategic inventory management and the fact there is a stock normalization level in paradigm, will be improving. The overall year is one thing. The short term is a little bit more de-correlating more mathematical visual earthquake. But everything is fine. We have the joystick. The third question, EBIT, plus 10%. Why? Let's try to be simple. Better-than-expected sales in Q4 giving more absolute value. Better gross margin expectation, so double positive effect. We are richer than expected, increased A&P in absolute value. And in -- compared to the weight to the top line, we guided between flat. Now A&P will grow more than top line. So the NPL ratio will be increasing end of 2021. OpEx deleverage, higher than we expected. So more gross margin, more investment for the medium and long term, more action, a result of our action on OpEx. The fact that we are still in lockdown, so just in measure what happens to T&Es, Travel and Entertainment, they are quite -- stick to 0. And finally, as a result, plus 10% in organic terms. So you start from 215, you apply plus 10% and then you carried back about EUR 7 million, EUR 5 million on ForEx impacted EUR 2 million scope. I'll give you all the figures in the this slide actually around this. But 10% is a commitment, at least 10%. Travel Retail, complicated question. Complicated question because the expectation to be back the Travel Retail were used to be, nobody knows. Now we are more in the 2022, 2024. So it's not for tomorrow. But there are also some good news because we are able, in some parts like Hainan, to begin to start with a new way of working with some operators. So it is a unique and big opportunities that this zone is offering for tourism, huge potential for the future, not only in terms of financial business, but also to boost the visibility and education of our high-end portfolio in that zone and to announce client engagement with our key target of the audience. For only some flavor of figures in Hainan, the duty-free sales doubled between January and mid-December 2020. But in January 2021, they multiplied by 3. So there's a clear acceleration. They will definitely have faith and put a lot of means in Hainan. Only into brackets important point, being very aware that we need to be consistent in term of brand expression and pricing power to avoid cannibalization or eventual downtrading between domestic sales, China Mainland, Hainan. But we are confident on that because we are very professional there. Complicated battle, but an interesting opportunity for the future. Travel Retail used to be with a lot of travels. It's not for tomorrow, at best 2023. So we were quite more depressed in terms of expectation for the next future that we were -- everybody was, I think, 6 months ago.

The final question today comes from the line of Richard Withagen calling from Kepler Cheuvreux.

Yes. I have 2, please. First of all, in the press release and you mentioned also in the prepared remarks, you talk about the temporary House of Rémy Martin in Guangzhou. Can you share a bit of the main learnings from that? Do you plan to do this more often? Is -- could it be something less temporary in the future? So what are your key learnings there? And then the second question is on -- yes, coming back to the ODV strategy. With the recent weather with the frost and so on, does that change in any way your ODV strategy? Do you expect to invest more in ODV? Can you give some highlights there, please?

Thank you for your question. So the House of Rémy Martin was an additional occasion to combine an event, important event, with the need to increase the distributor of our brands and their deep bonding, deep link with our consumer. Sometimes we have to get rid of this mathematical direct relation between clients and the product. It's more to be able to feed this subliminal feeling that link the consumer for the very long term with the brand. We are clearly starting to do that. We have already done a lot of this experience. Creating Maison is more that a place in which you feel not alone and you feel a little bit at home. You find back some things that remind you element of the past, but it's more on -- wasn't this soft important part than on clearly the mathematical consumption effect that you may have immediately on the events. In terms of the frost, the frost happen -- in our estimation is not so strong in terms of impact. Clearly, it's bad news, but we don't think we will impact neither the volumes, neither the engagement we have with our base vineyards to -- it will not impact our purchases campaign for the next -- could be a slight impact because the insurance would be increasing in OpEx, maybe it will be 1 or 2, but [indiscernible] and could be some additional discussion for the buying pattern. It's not there, the real issue, the problem. The interesting thing of the sector that in a fixed environment of liquid availability, we have to fight with our competitors to be able to continue to buy our more than fair share of ODV to feed our very ambitious journey for the future. So it's putting additional pressure eventually, slightly on the buying side. Okay, fine. We are not talking about millions. And you will find that eventually, slightly negative cash flow is not find -- then in cost of goods before 5 to 6 years. So no major impact neither in financial nor in a concrete operation.

We have no further questions coming through on the line. I'd like to hand the call over to you, Luca, for any closing remarks.

So thank you so much for this morning. We are very happy with the turnover, the year 2021. In humble way, we look at the future '21, '22 that we think we continue to be very positive for Rémy Cointreau brands and for our regions. So rendezvous early June to the presentation or the yearly results and the opportunity also to add some more strategical, if any, questions to Éric Vallat that will be clearly there endorsing, representing the general management of the company, giving you from his very, very point of view his vision on the next medium and future -- medium term and long term. Thank you so much, and have a nice day.

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