Rémy Cointreau SA (RCO) Q2 FY2026 Earnings Call Transcript & Summary

 Hello, and welcome to the Remy Cointreau Q2 Sales Conference Call. Please note, this conference is being recorded. [Operator instructions]. I will now hand you over to Luca Marotta, CFO, to begin today's conference. Thank you.

 Good morning, everyone. Thank you for joining us today. As highlighted in our press release, H1 sales decreased by 4.2% organically. This performance includes a minus 11% decline in Q2, which should be, as expected, the lowest quarter of the year. It reflects some adverse phasing effect in a still challenging macroeconomic environment. This result stems from mixed regional trends, mainly driven by, on one hand, strong sales growth in the U.S. Cognac division for the second consecutive quarter, supported clearly by low comps, but also improved sequential depletions. They are definitively improving depletion, but less than expected, and they are still negative.  On the other hand, depressed cognac sales in China, affected by an increasingly difficult market and unfavorable calendar effects due to the shift of the Autumn festival, and some residual disruption in Travel Retail China. This effect waving for 0.7 points in Q2 or in H1, 1.4 points at group level. Specifically, the Q2 sales decline breaks down as follows: volume decrease of minus 4.7% and minus 6.2% in price/mix effects, largely driven by the underperformance of high-end brands, cognac, and some price adjustment.  Now looking into the overall sales performance by region. Americas recorded a plus 12.8% sales growth in H1, including a slight growth in Q2, mostly driven by a solid robust performance in cognac. In parallel, the Liqueurs & Spirits division turned negative, affected by adverse phasing in Q2, but following a very strong Q1 and despite a resilient depletions environment. APAC, Asia Pacific sales decreased by 14.8% with Q2 strongly impacted by China, which is facing tighter market conditions and an unfavorable mid-Autumn festival calendar effect. At the same time, the rest of Asia generated a mid-teens growth over the quarter. EMEA, big EMEA region declined by 9.2%, posting in Q2, a similar performance to Q1 in an environment, global markets still affected by subdued consumer demand. This was sell-in.  Now let's talk H1 value depletion estimation at group level, so the best approx of what is the final sellout. In the U.S., value depletion declined by mid- to high single digit year-on-year, including a decline of mid-single digit in Q2. So better improving compared to what we recorded in Q1, but still negative. Compared to pre-COVID 6 years ago, H1 value depletion are down mid- to high single digit, but stripping out the VSOP range, they are at plus 40%. In China, value depletion were down mid-teens year-on-year in H1 and up by high teens versus H1 '19/'20. Beyond unfavorable calendar effect in China, this performance is clearly disappointing for us and reflects tougher, more complicated market conditions.  In EMEA, value depletion decreased by mid-single digit year-on-year, and they are performing more or less the same level, negative mid-single digit compared to H1 '19/'20. So what you can say overall in terms of sell-in, sell-out equation at group level. We can say that H1 value depletion fell by high single digit year-on-year, more or less minus 8% underperforming clearly partially sell-in trends that were minus 4.2%. Why? Because essentially, the U.S. restocking from a very low base without increasing level of stock would be positive on sell-in even if depletion dynamics were still improving, but still negative.  To conclude on this very first slide, considering all that, we have decided to lower our full-year organic guidance, and I will come back to the main drivers at the end of presentation. All in all, we now expect the organic full year sales to be between stable and up low single digits, while we expect organic full year comp to decline low double digit to mid-teens. The later one clearly includes the estimated impact from tariffs in the U.S. and price undertaking in China.  Page just from 3 to 5, I would like to come back very briefly on the main marketing initiatives of the quarter. Let's start with Louis XIII, which is extending its brand universe beyond testing with the launch of its very first Art de la Table collections. The initiative is fully aligned with our long-term strategy to reinforce the Maison positioning at the very top of luxury to enrich and complete the consumer journey and to create new opportunities for differentiation across our freestanding store boutiques and key markets. To bring this project to life, Louis XIII partnered with Chef Alain Passard, a [Indiscernible] Michelin-star chef at L'Arpege in Paris. This collection was created in partnership with the French Porcelanhouse, J.L Coquet. Each collection consists of 6 pieces to start with, designed and crafted for -- by over 40 artisans. They translate to the Maison's founding pillars, tire and time.  From a commercial standpoint, this launch also play a pivotal role in animating our boutiques, enhancing visibility and driving traffic. Overall, Art de la Table reinforced the brand's cultural equity, expands its experiential ecosystem, and underlines our ability to innovate within the codes of ultimate luxury.  Page #4, I'd like to highlight our last innovation and belongs to the brand Cointreau, is entering Cointreau in a new territory this year with the launch of its very first ready-to-serve spirits in the United States. Why ready-to-serve rather than ready-to-drink? Because ready-to-drinks already represent close to 12% of the alcohol market, Ready-to-serve remains a fast-growing niche today worth more than $0.5 billion in the U.S. and actually outpacing ready-to-drink's subcategory in terms of growth and potential. Ready-to-serve cocktails are strongly associated with hosting occasions when consumers want both convenience and the ability to impress. We see clear spikes in sales around holidays, confirming that ready-to-serve has become a trusted solution for entertaining. Looking ahead, this segment should continue to grow through premiumization, flavorful proposition, and ease of consumption. Our objective with this launch is to extend Cointreau's footprint into new daytime occasions to recruit a younger consumer who are seeking convenience to modernize even more the image of the brand and to gain additional shelf visibility in a highly competitive and crowded environment.  The product itself has been carefully designed as a ready-to-share EUR 750 miller bottle at 10.5% ABV. It comes with 3 variants: orange and broad orange, Lemon Lime, and grapefruit and tangerine. Each recipe is crafted with Quatreauly, French white wine, cyos juices, and natural flavors, but without any artificial flavors or colors.  Consumer testing results are excellent. We launched end of September 2 flavors across 9 key U.S. markets with a retail price of EUR 19.99. Distribution is already confirmed in more than 1,000 points of sales in terms of numeric distribution through major Liqueurs chains, and sell-in is ongoing to support a national progressive iterative rollout, including the third flavor in March 2026.  Lastly, for the marketing and colorful experience from the business and brands on Page #5, a few comments on a minor point, which is Mid - Autumn Festival in China, 25% in terms of weight of our sales in China. So, it's a very important one. I was clearly joking. During the Mid - Autumn Festival, our priority was to sustain demand and engagement in what is a softer consumption environment, even if first results show that we continue to gain market share. I'll be back on that point even more in Q&A session.  We, therefore, focused our effort on a few high-impact, cost-efficient activations designed to keep our brand visible and relevant during this key consumption moment. Starting clearly with the Remy Martin Club, we celebrated the brand's 40th anniversary with a strong integrated campaign running from August to October.  We leveraged our brand ambassador, Li Xian, across digital, social, live stream channels, building a strong reach and engagement at a limited cost. The limited-edition design and creative gift purchase mechanics have stimulated the sales across key markets, so Mainland, but not only also Hong Kong and Macau. Campaign generated a lot of prescribing and a high immediate return GMV from live stream session alone, confirming a good consumer traction despite the muted and depressed environment.  The same time, Remy Martin XO gained exceptional visibility in Middletown Festival in China with the launch of Anish Kapoor limited edition, a creative collaboration, reinforcing the brand's prestige and desirability. Altogether, this initiative allowed us to maintain strong brand visibility, support our partners during the peak season, and reinforce confidence among distributors. They also demonstrate our ability to stay disciplined and impactful in our marketing investments, keeping our brand aspirational while driving the best we can sell out efficiency during a very and more challenging festival season.  Turning now to Slide #6. So, turning now to numbers. H1 sales amounted to EUR 489.6 million, representing a year-on-year decrease of EUR 44.1 million or minus 8.3% on a reported basis. This performance was shaped by the following factors. First of all, an organic decline of EUR 22.3 million, which is minus 4.2%. This performance is split between plus 2.4% of positive volume effect and minus 6.6% of price/mix.  Price/mix negative impact results from a slightly negative pricing effect and low to mid-single-digit negative mix effect. Why? This is linked to the underperformance of high-end products inside any given brands and clearly by the Cognac division's performance compared to the weighted average. Second, a negative currency translation impact of 21.7% or minus 4.1% loss, mainly driven by the deterioration of the U.S. dollar, which accounted for minus EUR 11.3 million, and the Chinese renminbi, which accounted for EUR 7.9 million.  Let's now turn to Slide #7, dig delve into organic trends by region. Let's start with the Americas, in which organic sales increased by 12.8% in H1, i.e., down more or less 15% on a 6-year basis. This year-on-year performance includes a mid-teens growth in volume and a low single-digit negative price/mix impact, reflecting an unfavorable mix, first of all, and some adjustments on VSOP.  In the U.S., sales grew by mid-single digit in the quarter, Q2, driven by a strong performance in cognac linked to a low base of comparison and a continued sequential improvement in value depletion, not as much as expected, but improving nonetheless. In this context, inventory level in the U.S. remained close more or less to 4 months at the end of Q2. Canada sales were down mid- to high single digits in the quarter, impacted by phasing effect between Q1 and Q2. Why? Because overall, sales were up high single in H1.  And LatAm, Latin America, sales were also affected by phasing effect between Q1 and Q2, down strong double digit in Q2, but up strong double digit in H1. So, Canada and LatAm, a bit of phasing between Q1 and Q2. End of September, Americas big region accounted for 39% of group sales, so increasing 5 points compared to the previous year, clearly, plus 12.8% on top line compared an average performance minus 4.2%.  Turning to APAC, Asia Pacific, organic sales declined by 14.8% in H1 but clearly increased by more than 20% on a 6-year basis. So, on the short term, China is performing and APAC negatively compared to the Americas. But if you compare the 2 biggest regions to 6 years ago, the dynamics are reversed.  Analyzing the volume value equation of APAC, the performance was impacted by high single-digit volume decline, while the value part was negative and more than mid-single digit, driven by the underperformance of the high-end brands and more promotional activity. In China, sales were down approximately minus 25% in Q2, impacted by tighter market condition, including stricter discipline and austerity measure, which should lead to a global overall as a market soft mid-term festival.  This performance reflected an unfoldable calendar effect and some residual disruption in travel retail. So, if you compare this technical effect to APAC level only, not a group level, we have 1.5-point negative impact in Q2 and 3 points in H1. This technical effect will normalize from Q3 onwards. By channel, direct e-commerce was the only growing channel in China with sales up more than 10% in this quarter, bringing the overall e-commerce ecosystem penetration rate at the end of the H1 at more or less 25%, this was sell-in.  In parallel, global value depletion in China were down mid-teens year-on-year and up high teens versus '19/'20. But once again, during Q&A, we will talk about the calendar effect and what is a more normalized performance. Given depletion and aligned with sell-in trends in H1, inventory levels in China remained healthy at more or less at the same level as before at the end of September. Compounders are saying the same things in terms of stock coverage.  As were in the region, rest of Asia showed a strong improvement compared to Q1, posting a mid-teen sales growth in Q2, led by Cognac and to a lesser extent, by the Liqueurs & Spirits division, with 2 growth regional engines of this quarter, Australia and Japan. End of September, APAC accounted for 39%, so the same weight of the Americas, but in this case, it's down 5 points compared to the prior year.  Last but not least, EMEA, in which organic sales were down 9.2% in the H1. And more or less, we are down minus 10% compared to 6 years ago, primarily reflecting a negative value effect. Inside that, we need to analyze by subcluster subregion within Europe. Let's start with what we call the third-party distributors region, 3PD, recorded a mid- to high single-digit sales decline in the quarter, impacted by Germany and Greece. In parallel, Czech and Poland, Czech Republic showed good momentum in the quarter.  Overall, talking about brands, Metaxa was strongly up, and Cointreau gained market share in many markets, but the category is declining, partially offsetting the rest of the portfolio. Second subcluster, U.K. and Nordics, sales turned positive at low single digit in the quarter, showing solid sequential improvement versus Q1, led by Cointreau, Mount Gay, and The Botanist. The performance reflected a significant rebound in Cognac versus Q1, which was almost flat in Q2, rebound still cumulative on the H1 negative quarter.  Benelux and France, sales were clearly declining by strong double-digit in the quarter, impacted by competitive promotional pressure in Cognac and softer trends in Liqueurs & Spirits. Last but not least, in MI and CIS, sales were down low double digit in Q2, impacted by Remy VSOP performance, while the launch of Remy DS in South Africa and Nigeria is giving -- bearing some promising fruits. In H1, value depletion, so talking about sell-out, declined mid-single digit year-on-year. And on CS basis, excluding Russia, is more or less the same performance.  Overall, inventory levels remain healthy across most areas. And end of September, EMEA region accounted for 22% of group sales, which is stable compared to the previous year. Let's now turn to Slide #8 and the analysis by division, and we start with the Queen division, which is Cognac. Cognac division posted an organic sales decline of minus 7.6% in H1, driven by a 0.7% increase in volume. So volume of Cognac were positive and a negative price/mix of 8.4%. End of September, Cognac accounted for 61% of our sales, down 2.5 points compared to the previous year.  Starting with the APAC only Cognac. In Mainland China, sales declined by around minus 25% in the quarter. So the same performance if you consider the global portfolio or only Cognac in China, i.e., a mid-teens decline in H1, but up more than 60% versus H1 '19/'20. Comps clearly overall over this year, we are building some blocks that are now clearly high. This performance has been affected by tighter market condition, including a stricter discipline austerity measure, which clearly do not allow consumer confidence to recover quickly.  In addition, the sharp decline includes a calendar effect from the late month as well as travel retail disruption, now on a path during the Q3 on normalization. In this context, indirect channel remained under cash pressure, while direct e-commerce was the only growing channel, turning up -- increasing its performance more than 10%. Elsewhere in China, Hong Kong, and Taiwan reported weak performance in both sell-in and depletions, impacted by same challenges in China. Macau, even from very low figures, was strongly up, helped by clearly favorable phasing, some promotion, but a little more dynamism.  Overall, H1 value depletion in China were in line with the sell-in, so down mid-teens. On a six-year basis, this is equivalent to a plus 20% growth. The remaining part of Asia, sales were up strong double digit in quarter in Cognac, led by Australia and the Philippines. In Americas, let's start to begin with North America, so the combination of U.S. and Canada. Cognac sales were up by mid-teens in the quarter, supported by a low base of comparison and continued sequential improvement in depletion, mostly in volume. Q2, specifically for the U.S. value depletions, declined by mid- to high single digits, of which down low to mid in volume, mostly driven by Remy Martin VSOP improvement.  Given this factor, Cognac inventory coverage still close to four months at the end of Q2. And on 12-month basis, value depletions so include minus 5 points of negative price/mix effect year-on-year. But on a six-year basis, price/mix remains very up at plus 11 points. Latin America, the remaining pieces of Americas, sales were down for Cognac by strong double digit in Q2, impacted by negative phasing. Sales were up by a very strong digit -- strong double digit in H1, driven by VSOP and Louis XIII. And then the third region inside the Cognac in terms of weight, EMEA, in which sales declined by mid-teens in Q2, affected by very strong and competitive promotional pressure across most major markets as soft demand.  U.K. and Nordics that were flat in the pork driven by Louis XIII, Remy 738 in a category marked by intense promotional activity. Europe third-party distributor was down by double digit, mainly due to Germany, where the market remains very soft and highly promotional. And at the end, MI sales declined by mid-teens, even if early results are encouraging for Q3 following the launch and the follow-up of VS in South Africa and Nigeria. Last but not least, H1 EMEA value depletion were down for Cognac double digit year-on-year, down very strong double digit versus six years ago.  Now let's talk of the remaining more or less 40% of the sales because 61% was the Cognac, in which we have for 37% Liqueurs & Spirits, Slide #9. Liqueurs & Spirits division reported plus 4.1% organic sales growth in the H1, driven by a very solid volume increase at plus 5.2% and a slight minor negative price/mix effect of minus 1%. End of September, Liqueurs & Spirits accounted for 37% of sales, up 3 points. Let's now review the division performance by subregion, and let's start with Americas and North Americas, in which sales were down by mid-single digits in the quarter, affected by adverse phasing after a very, very dynamic Q1.  Sales were up high single digits in H1. Both key brands, Cointreau and The Botanist delivered solid performance over the semester, supported by a resilient depletion, the success of the latest campaign, the recent launch of the ready-to-serve Cointreau Citrus Spritz. In parallel, Cointreau and The Botanist Q2 U.S. value depletion, so best approx sellout were flat year-on-year. In terms of price/mix was down only 1 point compared to last year for the 12-month period ended September, and increased 18 points on a six-year basis. In Latin America, sales were down by strong double digits in the quarter in a softer consumer environment for Liqueurs & Spirits.  Second region in terms of weight for Liqueurs & Spirits is EMEA, in which sales decreased by mid-single digit in Q2, so declined, affected by all subregions, except the U.K., while H1 value depletion were up slightly year-on-year. Breaking down sales down further, the U.K. and Nordics posted a sequential improvement with sales up by mid-single in Q2, led by Cointreau, which is gaining market share; Mount Gay, which is benefiting also from a lower ABV for version of Eclipse and Botanist, we continue to secure new distribution listing.  And Europe third-party distributor cluster, which sales decreased by low to mid-single digit in Q2, impacted by Germany, Greece, and Spain. In parallel, Poland, Czechia, and Romania posted strong momentum. Overall, in terms of brands, the growth -- solid growth from Metaxa, Cointreau, and Mount Gay, partially offset the impact of a softer consumer environment. Finally, Benelux and France were down by strong double-digit in Q2, while MI and CIS was down only by mid-single digit. Third region by weight is APAC, in which China sales were up by low double digit in Q2, driven by Brucladio and Botanist. In terms of value depletion, H1 value depletion were up slightly. The remaining part of Asia was up mid-single digit in Q2, driven by Australia and Japan, strong momentum for Bruichladdich, notably the release of the Octomore Series 16 in Japan and the further market share for Cointreau in Australia and New Zealand. This was 37% of our sales, Liqueurs & Spirits division. So if you combine 37%, Liqueurs & spirits, and 61%, which is cognac, it doesn't give 100 because we have non-group brands, which represent now more or less 1.5% of group sales. Sales were down 0.5 points year-on-year, 1.5% compared to 2, and they recorded a very strong decline in H1 of minus 35.7%, mostly affected by the negative -- sharp negative performance on good rents in Benelux and the U.K. To conclude, let's now turn to Slide #10, which I think is an interesting one for a few comments on our lower guidance for the full year '25, '26. The deterioration of market conditions in China and the weaker-than-expected sales rebound in the U.S., even if it's positive, but it's weaker than expected, have led ourselves to revise our assumption for the year. For China, we had already adopted caseous assumption for China, and we're anticipating a slight annual decline. However, market conditions have further tightened following the implementation of the new alcohol consumption restriction for official while increased - strongly increased promotional activity is also prompting us to show greater flexibility on pricing. Regarding the U.S., we still expect a strong growth for the year, supported by the continued ongoing improvement in depletion, but it is clearly not enough to maintain the initial forecast for the U.S. Consequently, we now expect group's organic sales growth to range between flat and low single digit, and before was mid-single digit. In this context, we now expect the group's organic comp to decline between low double digit to mid-teens, and before was mid-single-digit decline. Beyond the revised top line, which is clearly the trigger of the margin deterioration, I'll be back on that point on Q&A because we have to remember the weight of the top line, more or less EUR 1 billion, and the weight of the operating profit of last year, more or less a bit more than EUR 200 million. So we are on a scale of 1 to 5. Beyond the revised top line, this new guidance reflects the fact that we intend to support the recovery of the underlying depletion sell-out, which is clearly improving in some key regions like the U.S., continuing our investment in A&P with the sales ratio maintained at the level before pre-COVID. So we are not doing also mad things as well. Keeping a tight control over our overhead costs while maintaining strict operational discipline. But remember that the last 2 years, we already made a strong cost-cutting. So at the end, we need also some people and operational OpEx to be able to pulverize and contribute to the rebound, or otherwise, the rebound will be weaker. In parallel, we have updated tariffs' net impact to EUR 25 million on COP, in line with our lower expectation in sales, of which EUR 5 million in China and EUR 20 million in the U.S. net impact. These estimates include the mitigation plan because the gross effect is clearly higher, which account for the 55% more than the gross impact as well, as I already said, an increased A&P support in China and the U.S. to favorize the rebound. In addition to this organic performance, there are also additional negative currency effect, which remain very negative and highly volatile. While our hedging policy has to mitigate part of the adverse impact, the recent evolution of the dollar and the RMB leads us to expect now on sales between minus EUR 50 million and minus EUR 60 million in terms of translation top line, which is unchanged compared to our previous estimation. 40% of this impact should occur in H1 and 60% in H2, and operating profit between minus EUR 25 million to minus EUR 30 million before it was minus EUR 15 million to minus EUR 20 million. 2/3 should be booked realized in H1 and 1/3 in H2. Exchange rate volatility is likely to persist throughout the year, which is why I will continue to keep you updated in any occasion that we will talk, so 6 times a year. Thank you for your attention. And now I am happy and open to answer to your questions.

[Operator Instructions] The first question today comes from the line of Laurence Whyatt from Barclays.

A couple for me, if that's okay. Just firstly, on the guidance, I was wondering if you could give us a bit more detail on what specifically changed between the end of Q1 and now, and whether that was really the disruption in Q2 that caused you to make the change? Or is it more about your expectation for the second half of the year? And similarly, you talked around specifically the U.S. being a bit weaker, China being a bit weaker, Travel Retail not recovering in the way that you were hoping in the U.S. I was wondering if you could say if any of those were dramatically more than any of the others in causing you to make that change? And I suppose you didn't really mention Europe in terms of your expectations versus where they were at Q1 with regard to the guidance change and whether the changes in Europe have caused you to change your guidance as well? And then secondly, you sort of flagged it when you were making your comments around the ongoing normalized performance in China and where that currently is. I was wondering if you could tell us where you think the current normalized performance is in the market and whether you're seeing any letup of the government crackdown on alcohol consumption at all, if that's sort of reducing towards the end of the year. What you're seeing in the travel retail channel, if you're seeing a bit of an improvement in sell-in, and whether you think the soft mid-Autumn festival is going to lead to a soft Chinese New Year when it comes early next year.

Thank you so much, Laurence, for your question. They are very broad and wide, so I'll be a bit long. I will try to talk slowly because they are very important answers and questions as well. So the change in the guidance, which is sales and profit warning because they are combined, has been driven by the fact that some key compounders to be able to deliver the sell-in were not supported enough, even if improving compared to our trajectory. In terms of importance drivers of the sales warning because I repeat, the operating profit is a consequence, but the main triggering point is the sales performance, which is not going the way we expected. It is, first of all, China because Q2 was clearly worse in terms of performance of what we expected until mid to end of July. And I will be back on this point, so I will remain -- I don't want to confuse you. So I remain very factual now. First is China. Second is U.S. Even if it is growing, you have noticed that it's still growing, cognac is performing. But depletion, even if improving are still negative and with the mix with a slightly negative compared to volumes. So it is inferior our expectation. The H2 big rebound based on the heels of the mathematical restocking. If you don't have, I repeated many times, a solid and at least marginally positive depletion is more fragile. So in this moment, in terms of dynamics of top line, we are well aligned, but we need to align depletions as the reality is, which is improving, but it's not still positive with the top line to come. So China, second U.S., and third, you're right, I didn't mention because it is less important in terms of impact compared to China and the U.S., but EMEA is growing the same way negatively. So clearly, EMEA, even if it has a lower impact, it is not respecting its budget footprint as well. But it is less important in terms of compounders, and sorry, I don't want to say that for the European people, but it's less strategic in terms of the quality of the mix. So I repeat, these are the mechanics on the war in terms of sales, which is the first triggering point. Second point, it is the mechanics of the P&L because I read some first note by some analysts today, not you specifically, but some. So please remember, relation 5:1. Now we are a company which is EUR 1 billion, more or less top line, EUR 200-and-something million in operating profit last year, published rates, which is the organic base of this year. 5:1. When you decline top line of -- if you consider zero is EUR 50 million from EUR 5 million to zero. is EUR 30 million, you consider our gross margin expected, the decline should have witnessed in bottom line is higher than what we are highlighting. It means compared to some comments like Edward or Jefferies, for instance, there is not a deleverage, quite the opposite because the mechanical one should have been bigger than a switch from minus 5 to organically, because then we will talk about ForEx, which is something else. There is some leverage even if we are maintaining our key investment. So in terms of mechanics, you do the exercise, you have EUR 30 million to EUR 50 million, you apply our gross margin. And you see that at the end, we are declining to low double to mid-teens. If you consider you stretch at the maximum, which is mid-teens, it is 10 points compared to minus 5 is EUR 22 million. So mathematically, you have a leverage of something which is between EUR 10 million and EUR 15 million. So let's talk very analytically, so you can do your model. Clearly, you are very aware of the fact we declined the impact of tariffs. Tariffs are giving everything equals EUR 5 million because it was EUR 30 million. So there's some marginal additional leverage. So after the math, which was important, let's relook at the main engine of the warning, sales, repeat, China, U.S., and to a lesser extent, EMEA. Gross margin because even if the EUR 5 million are playing positively compared to your guidance, in terms of mechanics compared to previous year, China is more promotional. We want to continue to influence our improvement in the -- also in the U.S. Even if we are not right at the right spot we want to be, we cannot give up looking only to the bottom line because bottom line is infused by the top line. As I said, the top line is the first reason why we are reducing that. So we don't want to unfuel too much. And on top, don't forget that China in terms of cost of operation is more costly than previous year because price undertaking has been a relief compared to the antidumping, but it is clearly more costly. Don't forget that tax duties last year were 5%. This year at 7% because it was an exception. What gives us confidence is the continue improving on depletion even if they are calling -- I'm talking about for all countries out of China, which is more complicated and erratic to analyze. And it is clearly something which is sustainable with an improvement in the second part of the year depletion in the U.S. and major European country, but not clearly factoring the budget one. So we reduced as well depletion trends and not only selling trends. We directly and indirectly, we are able to support this kind of journey with some more additional millions on A&P and specific OpEx and also sometimes a specific operation in terms of market share, in terms of penetration of top line, without changing the gear, the picture of the weight of any given cost line compared to the top line. So top line is declining, but we are able to get still a leverage and not a deleverage, I insist on that because otherwise, P&L should be worse. It is not massive. We are talking about a leverage, which is at the end, between EUR 10 million and EUR 20 million. But for a company like us, which is -- now we are smaller. We have no more than EUR 1.5 billion, EUR 1 billion. So our boat -- the sale boat we are, we are not a transoceanic boat, needs to be able to hoist on sales when the wind is there. The point is that the wind, mainly in China, is not yet there, even if our performance is better. So we are confident being very cautious in terms of adjustment of the top line and depletion estimation, and forecast for the second part of the year. In terms of rhythm will be essentially on the Q4 because Q3 will be flat plus. A&P ROI, it is measured in a very art-crafted way, I can say. So Franck is clearly, very clearly instructing ourselves to try to reinject additional money to be able to have additional sales, even if they are not so visible compared to our hopes, because the environment is very complicated. So it is a complex job to do because we are talking more in terms of what I get in terms of sales that otherwise will be avoided. So the point is that if we unlock this additional money, we are able to be able maybe to land at plus two. And we are more on the cost-cutting side, plus two become the lowest bracket of the fork. And as I said, with the gross margin we still have as a company in terms of business model, top line is the first trigger, top line, top line, top line. Now that we have EUR 1 billion company, top line is the most important one. Last point, exit rate. Inside all that, current trading in October, what's happening? To give you some color. In terms of sales, without giving specific figures because I can't, we are positive. And mainly more important in terms of value depletion, U.S. depletion are improving, but still negative. EMEA and rest of Asia out of China are slightly up in terms of value, not volume, volume is better. In China, they are very strongly positive, clearly, very, very strong because there is a boost to the positive calendar effect. So if you normalize Mid-Autumn Festival on a comparable calendar compared to last year, I repeat, apart from the effect from the calendar, we are more or less in value depletion flat plus, flat to low single-digit increase in China in Mid-Autumn Festival, and more positive in volume because we are between mid- to high single-digit increase. So the point, start to get confidence, confidence is the wind. It's the wind for the sales. And we need to believe to hoist that.

Just on your commentary on Mid-Autumn Festival, obviously, volumes ahead of value. But does that surprise you that it's as resilient as that, given all the pressures in China from a macro and also sort of a regulatory standpoint?

For us, it is -- you can say it's resilient. There is a negative impact, let me say, 5 to 8 points, which is for us, it is something negative, very negative compared to our previous EBIT. And the environment in terms of competitive footprint is much more around 15, 20 points of value destruction. So I agree with you, it's quite resilient so far, at least in China. The promotional activity is increasing. So that's the reason why in the prepared remarks, I said very clearly that we need to be ready also to be present not only in pure A&P battle, maybe also in the promotional activity battle when we have a strong market share position to maintain in a country in which one line is very important for us, which is club. So more than Remy Cointreau, club needs to be protected. And if there is a promotional war, we need to be a little bit more flexible than in the past because volumes are very important for us in China for club.

And we'll now take our last question, which comes from the line of Chris Pitcher from Rothschild & Co Redburn.

A couple of questions. Firstly, on the U.S. price mix, which is now cycling the period of negative momentum. Are you able to give us a bit more color on that negative price mix? How much of that is you being more competitive, as you've referred to? How much of that is perhaps negative mix within the portfolio or channel mix? And when we should think of that price mix potentially stabilizing? And then secondly, again, coming back to the margin point, the largest supplier in the industry is reporting operating margins that are materially below the previous lows for the industry. Have you and Franck had a chance to really rethink the fundamental profitability of your cognac business, particularly in light of the comments you've just said around the higher cost to compete in the U.S. and China, and the need also to invest in new markets to generate growth. Should we expect at the first half results, a more comprehensive review of what you think the real longer-term profitability of this business is now? Or is it still too soon with the complex market backdrop? Thank you.

Very important question. Price mix negative in the U.S. and the cognac it is negative because you remember price adjustment in VSOP, which is now bearing some fruits in most states, the more fighted one, take the example of Illinois $49.99. So now we are sickling that. It is more installed in 12 months baseline. Some price adjustment made on XO, and also a mix effect because the high-end segment underperformance. On Louis XIII as well, even if we don't dig in too many details, but Louis XIII also is quite low in terms of valorization, not because of the price, but because that year, you have some special edition, you have a CASK. The year after, you have less CASK's paying a role very, very very easily, and the price reposition of Remedy. All in all, this deterioration of the price mix in the U.S. has been cycled. What we have to expect and when we will end, we still need to be very cautious in terms of pricing superiority and pricing increase in terms of price, price plus mix, because the environment is still very promotional. We are not in some fighted category. At the same time, we cannot sing totally another song inside this environment. So we will be adjusted and we'll be recovering progressively, but I will not bet in the next 12 months to have a price/mix turning positive in the U.S., both on saline or in depletion. What does it mean? And you have heard also my subliminal messages that we are compared to the previous past without denying the strategy that is not changing, but also listening and watching more attentively to volumes, absolute value more than profile, which drips ourselves to your second question, marginality, business model group Roust Group, and vision of the future. I can't answer that because clearly, it's part of the -- what needs to Franck to assess with us, with all the teams during next month. It is very complicated to do that when you have a very complicated period like this one, which disturb our ability to be totally focused on the medium to long term. We are a company to mid long term. At the same time, the short-term issues are quite annoying. Clearly, something that will be addressed with Franck during next months, quarters. And so far, I cannot answer for that because it will be only a personal point of view, which is not yet discussed. And if there is a reset needs to be embedded by Franck and validated by our Board of Directors. Today is -- we are not there.

Would it be fair to say that we don't have a clear view on how the competition are acting, and therefore, it's very hard in a way to assess what the real cost of competition is because it's still very uncertain out there, particularly as you mentioned.

In terms of business model as a group or in terms of action in the U.S.

More globally, how the big players, Hennessy now to get their own volumes moving.

We have some means. We have some ideas, but it's part also when I said it belong also clearly, not also Franck, the Board of Directors, because we have some means, we have some discussion. We look into what the competition is doing. There is some adjustment necessary to us, but it's part of the final footprint, the final output that is not yet ready. So we are looking at that. We are looking at the dynamism in auto brands. We are looking at their obsession or the change. We are looking into that. No new plan that has been decided and approved by the Board of Directors so far.

And this ends today's Q&A session. So handing back over to you, Luca Marotta, to conclude.

So thank you so much for your attention today. Today was a sales conference by the end, turned out to be much broader because of our warnings, both on sales and on profit, even if it is the most important part, I insist is the sales element. And the second point is that if you look at added number like they are, situation is not getting also some positive hints that are there. First of all, improvement in the U.S., even if not the scale of what we expected. Second, on a comparable basis, our performance on the field in China are less negative, sometimes positive in the moment, which somebody else is doing, minus 20%, 25% on the field. Europe, still soft, but is less strategic in this configuration. All these points, including the guidance and a more strategic point of view that I'm not ready to give today because it's not my job as well, will be delivered during the first half conference call end of November with our CEO, Franck Marilly, and Marie-Amelie De Leusse. So thank you so much, and have a nice day.

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