Rémy Cointreau SA (RCO) Earnings Call Transcript & Summary

[Audio Gap] 2027 First Quarter Sales Presentation. [Operator Instructions] Now I will hand the conference over to your host, Luca Marotta, Deputy CEO and CFO. Please, sir, go ahead.

Good morning, everyone. Thank you for joining us today. And as highlighted in our press release of this morning, Q1 sales grew by 1.3% organically. This performance reflects: first, strong growth in Cognac of plus 7.7%, reflecting a limited decline in the Americas, driven by destocking in Canada and a high base of comparison in LATAM. Meanwhile, U.S. sales growth were particularly resilient. Conversely, APAC generated a strong growth, supported by solid momentum in the remaining part of Asia and a slight reduction in China as expected. Second element is a decline of minus 6.6% of the Liqueurs & Spirits division, driven by a slight decrease in the Americas due to a negative phasing effect following a strong rebound in Q4 of the previous fiscal year and a mixed performance in EMEA region. Q1 sales performance breaks down as follows: a volume decrease of 1.5% and plus 2.7% increase of price-mix effects, largely driven by mix on the back, on the heels of stronger performance of Cognac compared to Liqueurs & Spirits. This performance is in line compared to our expectation for the full year trajectory. Looking inside that, the overall sales performance by region, the Americas were down by low single digit, reflecting destocking in Canada and high comps in LATAM. U.S. demonstrates a very good top line resilience. APAC, Asia was up by high single digit, supported by a good momentum across the rest of Asia, while China demonstrated a limited sales decline in line with expectations. EMEA region was down by low to mid-single digits amid sustained competitive pressure and moderate consumer demand. One last word on the Global Travel Retail, which is a transversal business unit across the 3 regions. It was up by very strong double digit in the quarter, a very good performance to start the year. This is better than expected. In terms of value depletion at group level, value depletion, which is the best approximation of final sell-out in value. Looking down into that, in the U.S., value depletion were slightly negative, including, however, slightly positive volume depletion. In China, value depletion were down low single digit, which represents a good performance considering the current market and the low season. In EMEA, value depletion increased by low to mid-single digit, representing a clear outperformance compared to sell-in trends. So what we can say that overall, Q1 group value depletion grew by low to mid-single digit compared to the previous year, outperforming sell-in trends. So best approximation of sell-out depletion in value better than sell-in trends. To conclude on this very first slide, we are confirming our full year guidance. Before looking at the performance in more detail, I would like to briefly highlight a few encouraging commercial performances from the quarter that you can see -- you can witness in Slide #3. Although Q1 is historically a small quarter, we saw some early green shoots in both China and the U.S., supported by the 2 key commercial moments. In China, 618 e-commerce Festival, where our execution delivered very encouraging and positive result, growing result compared to the previous year and Cinco de Mayo in the U.S. centered clearly around Quatreau. We also witnessed and saw encouraging early sign from our recent innovations, although it is still too early to draw firm conclusions. This include the global launch of Bruichladdich Yellow Submarine Limited Edition, celebrating the brand's 25th anniversary. Mount Gay Silver, which contributed to positive value depletion for Mount Gay brand as the brand continues to recover and the very good performance of Remy Martin VS in South Africa. Turning to Slide #4. Q1 sales amounted to EUR 223.2 million, representing an increase of EUR 2.4 million or plus 1.1% on a reported basis. This performance was shaped by the following factors: an organic growth of EUR 2.8 million, so as said, plus 1.3% performance, with this performance split between a negative effect of minus 1.5% in volume and a positive price-mix of 2.7%. Inside that, inside price-mix, we can say this is totally driven by the strong positive mix linked to the outperformance of Cognac. Second point, a marginal currency translation impact, negative one of minus EUR 0.4 million, so less than EUR 1 million or 0.2% loss, which is the delta between 1.3% and 1.1%, mainly driven by the deterioration of the U.S. dollar for EUR 2.3 million, partially offset by the improvement translationally speaking -- translation speaking, sorry, translation of the Chinese RMB for EUR 1.9 million. So a limited impact in terms of published figure to the top line. Now let's turn to Slide #5 to delve into organic trends by region. Let's start with the Americas, in which organic sales were down by low single digit. This performance includes a mid-single-digit decline in volume and low single-digit growth in price-mix, mostly driven by mix. What we have said at group level is reconfirmed also in the Americas. Inside Americas, a very important part, chunk of it is the U.S., where sales grew by low to mid-single digit in Q1, mostly driven by Cognac despite high comps. In parallel, Q1 value depletion continued to improve sequentially compared to the Q4 of the previous fiscal year, being slightly negative alongside a slight positive volume depletion. This is clearly encouraging, where we are not there yet and it's too early to conclude that this trend is sustainable, it's normative as the change of distribution also is bringing some positive one-off effects in this quarter. In this context, inventory level continued to be improving slightly, but in coverage clearly even more in absolute value and stood more or less 4 months of the end of June. In Canada, we already said sales were down by high single digit in Q1, impacted by continued destocking. And in parallel, in LATAM, Latin America, sales were down by very strong double digit in the quarter, affected by comps. One last word on Travel Retail Americas, which is part of this regional business unit. Sales were strongly down, but from very high comps. End of June, Americas accounted for 39% of our group sales, down 2 points. Turning to the Asian region, Big Asia, APAC. Organic sales were up by high single digits in the quarter. Analyzing the volume value equation, the performance was mostly driven by a positive volume effect. It is a bit of the opposite of the Americas region because here, we have the biggest country, China, in which sales were down by low to mid-single digit in Q1, but in line with expectation. Despite a still challenging -- very challenging market, we observed some green shoot and good performance during the short quarter, a very low season, such as the strong performance we recorded for 618. I want to reiterate that sales were growing and growing more or less plus 12.3% compared to the previous year. In parallel, global value depletion were down by low single digit. Given that depletions are in absolute value above sell-in trends, inventory levels remain healthy across most brands at the end of June. Elsewhere in the region, remaining part of Asia, recorded a very strong double-digit growth in Q1, driven by Cognac and to a lesser extent, Liqueurs & Spirits. Finally, Global Travel Retail APAC, which contributes to this region was up by triple digit from very low comps. You remember, we are lapping also the closing of last year as well, but it's not only a technical factor, was clearly a strong overperformance compared to the expectation. End of June, APAC accounted for 39% of group sales, up 3 points compared to the prior year. Then last but not least, EMEA, in which organic sales were down by low to mid-single digits, primarily reflecting a negative volume effect, while price-mix was positive. Inside that, we have to start with the first subcluster in terms of weight, which is Europe third-party distributors, where sales were down by mid-single digit in Q1, mostly negatively impacted by Germany, where consumption is weak and promotional activity is high and volatile. Second subcluster, U.K. and Nordics, where sales were up by low single digits in Q1, mostly driven by the Nordics. Benelux and France, sales were down very sharply, affected clearly by the discontinuation of partner brands distribution in the Benelux from April. Inside that, I have to highlight that France as a country was more or less flat. And lastly, AMEI and CIS sales were up mid to high single digit, led, as already said, by South Africa, very strong impact of Remy VS, while the Middle East conflict had a slight negative impact on the region, but not so important to change the global footprint. We remain positive for this subregion as well. Overall, Q1 value depletion were up by low to mid-single digit. So being better than sell-in, inventory levels slightly decreased. This is an overall statement because inside that, as you understood, we have very different dynamics country by countries and performance there, here, a little bit Leopard dots and spots characterized. One last word on Global Travel Retail, inside EMEA, it was up by strong double digit. End of June, EMEA region accounted for 22% of group sales, down by 1 point compared to the previous year. Now let's turn to Slide #6 and the analysis by division. So starting with Cognac. Cognac division posted an organic sales growth of 7.7%, driven by a plus 15.9% increase in volume and a negative price-mix of 8.3%, equally split between price and mix. End of June, Cognac accounted for less than 64% of our sales, up more than 4 points compared to the previous year. Let's start with the most important region for Cognac in terms of weight, so APAC, in which China sales, as expected, were down by low single digit in Q1. I repeat in a complicated challenging market marked by soft consumer confidence as regulatory restriction on alcohol consumption. But this performance demonstrates the solid resilience of Remy Martin and the strength of our execution capability during key direct point of touch point with the consumer like 618 e-commerce Festival. Overall, e-commerce sales as a channel penetration increased by 7 points to reach a historical high of 43% compared to Q1 overall China sales. But to that performance for APAC, Hainan, Macau and Hong Kong contributed positively because they clearly improved, while Taiwan remained more challenging. Overall, this was sell-in. Talking about Q1 value depletion, so best approximation of sellout in the region, we were up by low single digit, driven in terms of product by Remy Martin Club. We consider that like a pretty good performance. In the remaining part of Asia, as already highlighted, sales were up by very strong double digit in the Q1, mostly driven also by other types of products like Louis XIII, Remy Martin XO and Remy VSOP. Second region by weight for Cognac Americas and start with North America, so a combination of U.S. and Canada, where sales were up by mid-single digit in the quarter despite high comps. This performance was mostly driven by the U.S. and more particularly by Remy Martin 1738. In parallel, on a negative side, Canada was still affected by destocking. This was sell-in. Talking about value depletion, Q1 value depletion were down by mid-single digit, but sequentially improving compared to the previous quarter. This is clearly thanks to the greater resilience of Remy Martin 1738, slight improvement, even if it's still negative for Remy VSOP, and the solid concrete positive performance of Louis XIII. 12 months value depletion included one negative point or negative price-mix effect year-end year-on-year, so on 12 months rolling basis end of June. Latin America, Latin America sales were down by very strong double digit in the quarter, impacted by high comps. Just remind that last year, at the same stage, sales were multiplied by 3. So the comps are clearly stellar to match this year. In EMEA, Cognac sales grew by strong double digit, so positive note, Cognac inside EMEA. U.K. and Nordics were up by high teens in the quarter, driven by 1738, VSOP and Louis XIII. This performance reflects what market share gains supported by greater pricing agility, new listing and improved in-store visibility. Europe third-party distribution cluster was down by mid-single digit, but is clearly affected by Germany. Germany is playing a big negative role, overshadowing the performance of the cluster in the quarter. This was partially offset by some green positive performance by Czechia and Switzerland, but not enough. Germany is too important to beat, to offset. AMEI and CIS for Cognac were up by strong double digit, boosted by South Africa, which fully offset -- more than offset headwinds in Middle East. And finally, one word on Benelux and France, where we were strong double-digit up. In terms of Q1 EMEA value depletion, we are up by strong double digit, driven by very strong performance in the Nordics, France, Italy and South Africa. Now let's turn to Liqueurs & Spirits division on Slide #7. Liqueurs & Spirits division reported a negative performance, minus 6.6% in Q1, mostly impacted by volumes. At the end of June, Liqueurs & Spirits accounted for less than 36% in sales, down by more than 3 points compared to the previous year. Let's now review the division performance by region. And let's start with the Americas, the most important one, and North America, in which sales were down by low single digit, reflecting some phasing effects following a strong Q4 of the previous fiscal year, as you remember. However, the LT tracker, so which is Q1 U.S. value depletion, showed a solid growth of mid-single digit, led by all key brands and more than the others, Cointreau, The Botanist, Bruichladdich and Mount Gay. This is very positive and bodes well for the future of our recent innovation launches. Additionally, price-mix on Cointreau only, as shown in the spreadsheet in value depletion was down 2 points compared to the previous year for the 12 months rolling period ending in June. In Latin America, sales were down as well by mid-teens in Q1, reflecting, as already said, overall for the region is valid no matter which division in terms of comparison. In EMEA, second region by weight for the Liqueurs & Spirits, sales were down by low double digit. U.K. and Nordics were down mid-single digit, affected by tough market condition and some destocking at 2 important key retailers. Europe third-party cluster was down by mid-single digits. I repeat myself, but it's very important, affected by Germany, but also Italy, partially offset by solid dynamics, but not enough in Greece, Spain and Czech Republic. Benelux and France were down by very strong double digit, while AMEI and CIS also down by strong double digit on the back of Middle East conflict, as most of our footprint in Middle East for Liqueurs & Spirits in UAE. So in this division, we are not able to compensate, so the opposite in Cognac. This was sell-in. In parallel, Q1 value depletion in EMEA were down by mid-single digit. In APAC, in China, sales were down by strong double digit, in line with value depletion, so negative performance. The market was for Liqueurs & Spirits particularly tough in Q1 and was marked by very strong promotional activities and price disruption. Remaining part of Asia was up mid to high single digit, driven by Australia and Japan, mainly with Bruichladdich and Telmont Champagne, while New Zealand continued to face tough market conditions and negative performance. Last but not least, a word on non-group brands, which represent today less than 1% of the group sales, and we were down by more than 0.5 points in terms of ratio compared to the previous year. They recorded a minus 47.9% organic decline, mostly affected by the Benelux following the discontinuation of distribution of partner brands from April in this area. This is what we expected. So it's a negative performance, but it's not more negative than the expectation. Now let me now turn to the last slide before Q&A session and our guidance for the full year '26-'27, Slide #8. No change. We expect a return to organic sales growth for the year after plus 0.2% of the previous one. And for profitability, we expect the operating profit margin, organically speaking, to remain resilient despite the impact of tariffs and to improve slightly organically clearly. The total impact from tariffs is currently estimated at around EUR 20 million negatively, including more or less EUR 15 million in the U.S. and EUR 5 million of price undertaking delta in China based on our current assumption. This represents in global value an increase, an additional burden of EUR 5 million compared to the previous year. But as you know, tariff development and environment in the U.S. continue to evolve rapidly, some good news, some bad news. Despite the recent update more on the positive side, I have to admit, we will continue to remain cautious and to assume in our budget and estimation a cautious approach of 15% tariff rate on European imports and at this stage, a limited impact on refunds. On FX, so on the exchange rates, considering the positive evolution of U.S. dollar and clearly the Chinese renminbi in the period compared to the expectation, so it's better than expected, we now expect a negative impact of around EUR 15 million in sales, equally split between H1, H2, before it was a fork between EUR 15 million and EUR 20 million. And we remain at the same level of negative impact on operating profit from switching to organic to published to minus EUR 5 million to minus EUR 8 million with the most of the impact expected in the H2. At the same time, one word on very disciplined capital allocation that will remain more than ever a key priority, notably through tight management, inventories, working capital needs and capital expenditure. Finally, we maintain and reiterate our debt ratio commitment and guidance to be below 3.5 at the end of the fiscal year, which it is a key commitment for the group. Thank you for your attention. And now I'm happy to drink a bit of water and to answer to your questions.

[Operator Instructions] Our first question comes from the line of Laurence Whyatt at Barclays.

A couple from me. Firstly, your improved performance in the U.S., I was just wondering if you have any evidence of any sort of change in consumer that you're seeing in the U.S., whether you're selling more into the on-trade than before or whether your consumer base has changed in sort of age or any other type of change in your consumer base to sort of drive that improvement in the U.S. sales? And then secondly, you mentioned that Travel Retail had very strong double-digit growth across the group. I was just wondering how much of a benefit you've got from the restocking in China following the sort of lack of sales into the China travel retail system last year? How much that contributed to your significant improvement? Or how much was sort of an underlying improvement in Travel Retail, excluding that restocking benefit?

Thank you for your question. So no particular point to highlight in terms of change of consumer base in the U.S. So the underlying dynamics in terms of consumer, I'm not a marketing expert, I'm not a strategic planning expert, but didn't come to my attention and some significant changes. In terms of channel, we can say that on-trade was a bit more dynamic, but the current trading with sales growth of between low to mid-single digit was clearly also an act of will and performance of our team with a stronger-than-ever focus on the execution despite a negative market. So the most important message from myself today at the company level is that the market is still very complicated in the U.S. And we are doing our best. And so far, in a very humble way, we are beating the market. So we are gaining, winning market share. We do all we can to realize the best performance possible with the means we have because also with the negative threats and the volatility of the tariffs question, you cannot overinvest very easily also because you don't know what will come through tomorrow, come across if it come across normally considers luck. So in that case, it's not the perfect translation. So there is a cautiousness about that. No change in consumer base, strong focus on the execution, unlock every possible means to speed up value depletion. They still remain negative. So we cannot consider that what we realize is a normative one. We improve, we remain humble and we do the best we can to increase our performance in [indiscernible] because at the end, we are all paid and we are all judged on the profit and loss and free cash flow. So it's sell-in. So -- but depletion is nice, but the end needs to match with that. In terms of dynamics by product and by division, as I highlighted, it's important to notice that Cognac did a very good performance in the U.S. despite the difficulties of the moment. So it has not ended. It is not something that maybe will last forever, but we have to be very satisfied what we realized. Performance was driven by 1738. We highlighted also the top of the range, Louis XIII performance. So once again, why we realized that is less of the structural movement of the consumer base of the channel modification is more the strength of the execution. Don't forget also what's happening with the Reyes getting all the -- not all, some of the states of RNDC, some disruption linked to these changes. We had some different news in the last 2 days also for the remaining part of RNDC with Chapter 11 that will cause some additional crystallization of the existing terms and existing situation in some states. So we can really be very satisfied of the performance. I don't want to hide the negative point mathematically speaking on the U.S. of the [indiscernible]. So the Liqueurs & Spirits, we were bad? No, we were lapping a very strong Q4, preparing the Cinco de Mayo and value depletion are clearly better than sell-in. So everything equals, we will continue to realign that. So in a nutshell, sequential improvement, strong focus to execution, teams fighting as never a little bit less than expected in terms of performance because of the slow in the market, we are winning and gaining market share. GTR, no doubt, the performance is only in a minimal way, taking profit or lapping the miss of sales in China last year. It's much more broad, clear, once again, execution, attention, focus. One of the first things Franck Marilly said when I took the helm 1 year ago of the company, a little bit more than 1 year ago, is that attention to the top line and focus of the Travel Retail and as well emerging market, Travel Retail, which is already installed as a channel. So it is also clearly the reflect of the strategic view that is hammering clearly and weighing positively so far in terms of performance. And we are there to continue to serve on the strength of the Travel Retail. We will not be every time so good in every single quarter. But this performance is not dramatically in a terrific way influenced by lapping a miss of sales last year in the China travel retail. It's only marginal.

Our next question comes from the line of Edward Mundy at Jefferies.

Two questions, please. So I appreciate the RT Forward plan is a medium-term ambition, but you hinted at a few changes, I think, in the quarter, such as VS in South Africa and duty free recovery. But are there any other early shifts in the strategy that you can point to that are helping to drive top line growth at the business? And then the second question is, could you provide a bit more color around what's driving the improvement in Macau, Hong Kong and Hainan? And is the environment in China getting any better or worse relative to last year?

Thank you. So in terms of the weight of the new territory or new products, clearly, without giving all the elements that will be discussed in end of November because we'll be part of the new strategic journey, once again, name -- I will name drop Mr. Franck Marilly, our CEO, because it's the result of the intensity is putting on new territories and to shake our heads to try to figure out more top line in new territories, increasing the pressure. So we are starting this journey. So far, we can count on some additional innovation that we highlighted in Slide #3, but they are not so important mathematically speaking, apart from, yes, we will continue to figure out some of that. In Travel Retail, it is not only a matter of commercial aggressiveness, also some specific products that has been created some years ago that is delivering very good performance. One of that is Club exception, which is a specific SKU that's been created for Travel Retail to avoid any face-to-face comparison or competition inside the [Technical Difficulty]

[Foreign Language]

-- from a normal offer to more new user habits change in terms of dynamics to increase the touch point and the wave of consumption. In terms of the second question, how much Hainan, Macau, Hong Kong contributed? The quarter was very strong. As you have seen in the past, it's a bit up and down more for the Macau and Hong Kong. Macau used to be a very strong territory. So if the game industry will be solid enough to be back, we can be back to some extent to part of what we had in the past, not totally 100%. Hainan and Chinese border are the opposite, much more standing and lasting source of growth. So all in all, in the quarter, a strong impact. All around the year will be much more the internal China home, we call market dynamics, that will contribute. And performance like the 618 that combined with the Super Brand Day, now realizing 8%, 10% of the top line of the year, comfort ourselves on this strategy. Last but not least, to be highlighted, the solid resilience compared to the relative performance of the e-commerce in China in which our digital knowledge and commercial, but not only supply chain marketing execution is clearly a competitive advantage in this market.

Our next question comes from the line of Andrea Pistacchi, Bank of America.

Sorry, I just -- and probably other people got disconnected now for like a minute or 2. I know Ed just asked about China, but I -- maybe other people didn't hear the answer. So I just wanted to ask something on China, probably framing it slightly differently from Ed's question. Could you talk about, yes, the situation in Cognac in China? Because on the one hand, you mentioned a still challenging market. But on the other hand, you reported positive depletions, which is good. And also one of your peers earlier this week sounded more constructive sequentially on China. So do you feel that China is, I mean, while still difficult, but on an improving trajectory? And how do you feel as we get closer to the peak season on China? And the second question, Luca, is on the rest of Asia. You reported a very strong double-digit growth there. Can you explain a bit more what is driving that? Is it a comp effect shipment phasing? Or is it maybe a reflection of your recent territory expansion plans? And on this basis, how do you expect rest of Asia to play out for the rest of the year? And can you remind us how much today rest of Asia represents of APAC? I reckon about a quarter.

Thank you. So let's start with the -- let's talk a bit more organically about China current trading and try to explain our performance without entering the comp and bench with the Hennessy communication yesterday, even if it's your question. Q1 sales in China were down low to mid-single digits. Value depletion also were down by low single digits. So mathematically speaking, we are negative compared to previous year. It is what you expected, yes. It is in line a touch better, in line mathematically, a touch better in terms of quality. Because inside a market which is still marked by soft consumer confidence in our opinion and regulatory alcohol consumption restriction and tension has not lifted. And the fact that even if in a small quarter, we have to wait for Mid-Autumn Festival for a clear direction, every time we were able to be in touch directly with the consumer, we were resilient and beating our expectation, helped by clearly Club, which is our most important weapon, and we protect that. We protect in terms of image, in terms of price inside China. Club, which was positive in terms of value depletion. And in terms of channel, not only e-commerce, but also exploring additional way to be even more directly in touch with our consumer. E-commerce continued to overperform compared to the overall performance, plus 7 points to reach 43%. And every time we're increasing that, we are touching new consumer. We are getting new territories because we are not in Tier 2, 3 and 4 cities and going beyond our classical territories. And on top, which is a slight positive element, the performance was homogeneous between a direct and direct channel, weighing for more or less 50% of sales in the quarter. So meaning that -- and this is something important, indirect and wholesaler Tier 1, we are not scared also to be in line with our performance. So clearly negative, but still much less than could have been and in line with the expectation. The remaining part of the equation, which are inventory, inventory remains reasonably healthy across the brands in June. In terms of performance, which is the part linked to the brands of your question, Cognac was clearly showing a great resilience, much better than Liqueurs & Spirits, driven by Club in sell-in and value depletion. High-end brands were more contrasted. In Louis XIII, we need to split that. Louis XIII is more in our journey or change the way we are communicating and distributing that, even if we have to improve the top line and the sell-in impact in the very next future without delaying any further. For XO, it is still something that needs to improve in China specifically and in which also the aggressiveness of our competitors, specifically only an XO was hitting our performance. It is that we are bad compared to others. In my personal opinion, it's more a game of change of route to market inside the rhythm and the pattern of Big Asia for other peers than real consumption. But the final result will be given by what will be published by every peers in the next quarter. Ourselves, looking into our house, XO performance was not in line with the expectation. For Club and other part of the Cognac portfolio was more than -- bigger and more than in line than our expectation. Liqueurs & Spirits, very negative, a bit of deception. So no particularly negative feeling about the Cognac desirability in China and Cognac performance. It's more the other way around, a bit of unsatisfaction and need to correct the performance for BHD whiskey and even more strategic for Cointreau. Rest of Asia is a bit what you said. There is some additional territories that are starting to ramp up. There are additional pressure and aggressiveness, and the performance of Travel Retail that in published figure is embedded in APAC region is clearly visible. I repeat what I already answered to Laurence of Barclays. It is not only a matter of lapping negative performance or absence of top line of last year in China, which is explaining [indiscernible] performance. We are doing things better. And inside that Club exception, it is a clear weapon that we gave some years that is improving in terms of performance inside Travel Retail. And being a specific SKUs makes no direct bench on comp negatively affecting Club into China. This is very important. In terms of weight, today is a minor in part. China is clearly overshadowing the global part of the overall performance of APAC, but will be increasing and starting as it was when I arrived in the group 13 years ago, starting with Travel Retail. Travel Retail used to be very, very much more important inside APAC. The important thing I insist is to develop a complementary offer in order to have a price war inside comp territories and Travel Retail's territories. So playing on different SKUs, different offer over avoiding any face-to-face comparison. Otherwise, this is the destroying of prices of base of consumption. It is the devaluation war internally. We want to avoid that.

Our next question comes from the line of Trevor Stirling, Bernstein.