Full Year 2024 Pernod Ricard SA Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Sanjeet Aujla - UBS AG - Analyst : Hi. Good morning, Alexandre and HTlFne. A couple from me, please. Firstly, can you talk a little bit about the pricing environment in the US? I think we spoke a couple of quarters ago about the landscape maybe becoming a little bit more challenging, but I'd just love to get an update on what you've seen over the last few months through summer on the pricing and promotional environment and how you're responding to that. And my second question is really around the potential for tariffs on cognac in China. Are you embedding anything there in your outlook? And what's your latest understanding on any potential timing on anything that might happen there? Thank you. HTlFne de Tissot - Pernod Ricard SA - EVP - Finance and IT, Member of the Executive Board, & Member of the Executive Comittee Thank you. So I will start with your first question about the pricing environment in the US. So as we mentioned in the second half of this year, '24, it's fair to say that there has been a kind of acceleration in terms of promotional intensity in the US, probably starting at the end of OND. So we're amplifying as soon as January '24. And this is still the environment that we are facing in the US. So there was some probably acceleration of that in Q4, meaning that there were some volume -- slight deterioration. I'm talking about the market in Q4, which was not offset by price mix, probably because of this intensity of promotion activity. This has slightly improved in terms of momentum in the summer. So I would say quite consistent with what we shared before in terms of environment on that front. As far as Pernod Ricard brands are concerned, so we are obviously very closely monitoring the performance of our brands and the pricing of our brands, state by state and channel by channel, to make sure that we are at the right place in terms of brand positioning versus key competitors. So this is already something that we've been accelerating back at the end of December '23 and accelerating as well in the spring, so this clear focus on pricing of our brands, revenue growth management, and activation of our brands in the weeks and months to come. Alexandre Ricard - Pernod Ricard SA - Chairman of the Board, CEO, Member of the Executive Board, & Member of the Executive Committee On your second question, so on the anti-dumping investigation, it is still work in progress. In other words, we're still answering questions and so on and so forth. So the investigation is still ongoing. As to will there be an increase in trade tariffs, and if so, when? My answer is I have absolutely no idea. Maybe two things on that front: number one, we firmly believe we do not do any antidumping, but we are fully collaborating, and we'll see what is needed to be seen. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 29, 2024 / 7:00AM, PERP.PA - Full Year 2024 Pernod Ricard SA Earnings Call But to therefore directly answer your question, to go back to my comment regarding big and diversified is beautiful, the reality is we do believe we can deliver full-year net sales growth this fiscal year despite a very weak environment in China, irrespective of the trade tariffs issue, by the way, because demand is quite weak in China. We believe China will probably follow the same trends as this past fiscal year. This past fiscal year, China was down 10%. But despite that, we do believe we can grow the business globally. Because at the end of the day, we're very diversified from a geographical point of view.

Question: Simon Hales - Citigroup Inc. - Analyst : Thank you. Good morning, Alex. Good morning, HTlFne. Good morning, Florence. I mean, firstly, Alex, could I just follow up on your answer around China that's just so I'm 100% clear? You're obviously talking about sales for 2025 being down around the 10% level again this year. So you're not building any assumption of any incremental tariffs in China at this stage into that forecast? Is that how I should think about it? And therefore, if there was to be a tariff, clearly, your sales outlook for 2025 could be worse than that minus 10%, give or take? Secondly, just around Europe. Clearly, a number of your peers have talked about an increasingly promotional environment in Europe as we've come into the summer months. Is that something you've been seeing? Is there anything you could share there? And maybe if I could just squeeze a quick one for HTlFne. HTlFne, could you give us any guidance at all around finance costs and FX for fiscal 2025, please? Alexandre Ricard - Pernod Ricard SA - Chairman of the Board, CEO, Member of the Executive Board, & Member of the Executive Committee So listen, on your follow-up question on China, again, I think that the real topic for this fiscal year in China is the weak consumer demand. And I also believe that irrespective of tariffs, I'm not talking about a potential impact, we believe that thanks to the rest of the world, which, by the way, represents 90% of our top line, we can drive net sales organic growth with volume recovery and protect our operating margin. I cannot comment further on the trade tariffs, specifically in China. On Europe, well, since all the inflation and price increase, which were driven across the market, now there's been -- normalization is behind us. It's fully normal. And everybody is back to regular, I would say, promotional strategies. Some might be a bit more aggressive than others. Again, we're pretty happy with our performance across Europe with market share gains in most -- not all, but most European markets. HTlFne de Tissot - Pernod Ricard SA - EVP - Finance and IT, Member of the Executive Board, & Member of the Executive Comittee Two last questions. So first, cost of debt. So we were at 3.2% in fiscal year '24, coming from 2.7% in fiscal year '23. Our expectation for fiscal year '25 is closer to 3.5%. And this is clearly the implication of the most recent refinancing, which will lead us to this cost of debt. For FX, we don't give any guidance on that front. It's a bit early. It could be slightly negative. But again, a bit early. As soon as I have more visibility, I will share that, obviously.

Question: Laurence Whyatt - Barclays Investment Bank - Analyst : Good morning. Thanks very much for the questions. A couple for me, please. Firstly, in China, one of your competitors mentioning they're expanding into more southern cities, I'm just wondering if you're seeing any increased competition from that. Is there any real impact from their expansion? And then secondly, on the US, you sort of mentioned it's going to be a weaker full year with a very difficult Q1 due to reduction of inventories. Just wondering how long you think that reduction of inventory is going to last for. Is that just the first quarter, or do you see that persisting longer into the year? Thanks very much. Alexandre Ricard - Pernod Ricard SA - Chairman of the Board, CEO, Member of the Executive Board, & Member of the Executive Committee Thanks. For China, right now, again, I do think that the main issue is a consumer issue and very weak demand. And in that very soft environment, we have gained share across the board, by the way. We've maintained, even though we've adjusted, of course, our marketing investments in China -- they've been adjusted, but we're still investing much more efficiently by the way, behind our brand equities that are growing and becoming stronger over the last year. HTlFne de Tissot - Pernod Ricard SA - EVP - Finance and IT, Member of the Executive Board, & Member of the Executive Comittee So for the US, thanks for the questions, that's going to help me to clarify our expectation for our fiscal year '25. So what you mentioned about Q1 is really linked to inventory adjustments, I would say, rather technical. But obviously, on a quarter, that could have some significant impact. By the way, we were already highlighting that at the end of fiscal year '24. We have landed the year with a level of inventory, which is in line with the historical leverage. It's slightly lower in terms of value, but that's why we believe there could be additional inventory adjustment, mainly at the wholesaler level, that could materialize in Q1 in a market which remains a very attractive market. The market has been growing in fiscal year '24 at circa plus 2%. We believe this environment will remain very valid in fiscal year '25, and we intend to improve our performance in terms of sellout, gradually improving that momentum across the year. So fair to say that the shipments will likely be below the sellout because of this inventory adjustment. But I would not call it a weak outlook, I would say, to the US, but quite technical in terms of inventory adjustments. So then obviously, this strong confidence on the ability of the US market to be back to mid-single-digit growth, which has been -- this is performance for probably more than 20 years in average. The timing of that is obviously quite difficult to be super specific about, because as well, it's linked to other factors like the higher rate environment, which is likely to move in the coming months.

Question: Olivier Nicolai - The Goldman Sachs Group, Inc. - Analyst : Bonjour, Alexandre, HTlFne, and Florence. I got two questions, please. First, the short term in India, when could we expect a resolution regarding your Delhi license? And then secondly, going back to the medium-term guidance, you've maintained your EBIT margin expansion objective of 50 to 60 bps after a few years of really good margin improvement already. Where do you see the biggest area margin upside in terms of regions or perhaps in terms of lines? And then should we assume that we still see a steady 16% R&D spend in the midterm by guidance? HTlFne de Tissot - Pernod Ricard SA - EVP - Finance and IT, Member of the Executive Board, & Member of the Executive Comittee So for the Delhi license, there were some more recent developments in the summer, which was a rejection of the appeal. And we are pursuing the request to renew the license in court. So difficult to be more specific in terms of timing. This is really up to the judicial system in India. When it comes to our performance, it's not going to impact the fiscal year '25 performance because the last quarter which was impacted was Q1 in fiscal year '24. In terms of midterm guidance and margin, I believe I already mentioned in the previous question most of our strategy there. So it's all about premiumization. Strong performance of our portfolio, which is very skewed to the premium part of the market and the right footprint as well in terms of geographical location. And I'm not sure I need to add anything to that.

Question: Celine Pannuti - JPMorgan Chase & Co. Inc. - Analyst : Good morning, Alexandre, HTlFne, and Florence. So my first question is on the outlook for '25. So you expect sales to return to positive. Price mix was plus 1% in fiscal year '24. And I presume there was still some benefit of pricing that you put throughout the year prior. So I just want to understand whether -- first of all, could you give the price and the mix within that? And should we expect potentially this to be flat to even negative as we look into fiscal year '25? And yes, therefore, my follow-up question to just what you said was whether gross margin will continue to expand as well in fiscal year '25? And then my second question is on the mid-term outlook. Alexandre, you reiterated that you are confident in growing -- you are confident on the -- reaching the upper end of 4% to 7% in the midterm. But you also mentioned that there were some extraordinary years post COVID, which benefited the spirits industry. And I think during those years, this midterm outlook was given. So I just want to -- if you could share with us your thinking in terms of how we reconcile what were extraordinary years and what is more midterm growth outlook for the spirits industry and how that fits the mid-term guidance that you have in mind? Thank you. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 29, 2024 / 7:00AM, PERP.PA - Full Year 2024 Pernod Ricard SA Earnings Call HTlFne de Tissot - Pernod Ricard SA - EVP - Finance and IT, Member of the Executive Board, & Member of the Executive Comittee So on your first question, so I'm not going to give you an exact view of what could be at stake in terms of growth between volume, price, and mix. I wish I know, but the environment is quite volatile. So what I know is that we have the intention to keep obviously, looking at price as a very important driver of top-line performance in an environment which is obviously moderating. But I think you asked the question in fiscal year '24. The price impact was mid-single digit, positive mid-single digit, and that's likely to be lower in fiscal year '25 due to the environment. Having said that, we will, again, keep working hard on that pricing impact and revenue growth management everywhere. In terms of mix, again, a bit difficult to be more specific because this is obviously as well quite much driven by market mix, which was negative in fiscal year '24, as I guess you know. So gross margin expansion, I think what matters is that at the end of the day, we believe we have the right strategy. And by the way, the confidence brought by this fiscal year '24, strong performance in terms of operating margin expansion, which is giving us the right, I would say, confidence for fiscal year '25 to sustain organic operating margin, but I cannot go through what will happen in gross margin. And then in operating margin, which you can trust we will focus on, is everything we described in terms of revenue growth management and pricing. We have lots of initiatives in terms of COGS to reduce the COGS increase, for which the environment could be probably quite different from what it was in fiscal year '24. Because in fiscal year '24, we had some, I would say, a sizable increase in terms of wet goods as well in terms of cost of manufacturing because of the volumes' softer trajectory, but some strong initiatives that help us to manage dry goods increase and as well some benefit in terms of lower freight cost, where the year before was very high. So in fiscal year '25, a bit too early to say, but there's a lot that is happening that will help us to manage the COGS increase, which is likely to increase again in '25. So not a tailwind at a COGS level. But then that is really the power of our premium strategy, the strength of the portfolio, and of our footprint. When it comes to the geographical performance, again, I would like to insist that fiscal year '24 has been a quite solid year. We are growing, excluding Russia. This is a lag that we will not have any more in fiscal year '25. And as we mentioned, as well starting in Q1, we will deliver a good performance in the rest of the world, which is something which is already very solid and visible in our fiscal year '24 performance. Alexandre Ricard - Pernod Ricard SA - Chairman of the Board, CEO, Member of the Executive Board, & Member of the Executive Committee And on your second question, before the pandemic, our past two-year trend was 6%. So in 2018, we grew our top line by 6%. In 2019, we grew our top line by 6%, then came the COVID pandemic. So it hit us, travel retail and so on in the on trade, so we were down 10%. Immediately cut up the following year, up 10%, bringing it back to -- rebasing back the business to its theoretical normal trend. And then came that post-COVID super cycle of plus 17% year one, and plus 10% year two, which were exceptionally fast-growing years. And I think the word exceptional is important. We spoke about revenge conviviality, people going back in the on trade, people taking flights again, et cetera, et cetera. Now at the end of the day, that medium-term framework is based on what we call consumer insight-driven fundamentals, including, by the way, socially driven fundamentals, including demographics, LDA, population, and so on. I mean, it's big piece of work that has been done and is based on a number of algorithms that we obviously have shared with you, which we believe fundamentally have not changed. We do believe, HTlFne mentioned it earlier on, the US will get back at some point in time to its historical trend of, whatever, 4% or 5%. We do believe -- HTlFne mentioned it as well, but China's long-term profile is a strong growth profile of high single digit. Back in the past, we've had that kind of volatility in China. We do believe -- I mentioned it that India is a high single or maybe even a low double-digit growth market. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 29, 2024 / 7:00AM, PERP.PA - Full Year 2024 Pernod Ricard SA Earnings Call No need to talk to you about travel retail, where travel retail passenger traffic is now far and above its pre-pandemic levels. Remember, in 2020, people thought it was the end of travel. The softness there is basically related to Chinese travelers. We've been quite impressed by the resilience of Europe. And I have to say, Africa, Middle East is starting to materialize in terms of size as a very serious growth really for the group. It's already playing this role. So I don't see why pre-COVID dynamics of the upper end of that 4% to 7% range should not be the case going forward based on all the insights that we're getting. And again, the headwinds of this year -- despite these technical headwinds for most, we have grown, excluding Russia. So yes, we feel very confident of hitting that high end of the range, and again, thanks to a very diversified profile, both from a geographical standpoint and from a portfolio standpoint.

Question: Edward Mundy - Jefferies Financial Group Inc. - Analyst : Good morning, Alex. Good morning, HTlFne. I appreciate -- it's a little bit too soon to be giving a guidance as the fiscal year's just started, but you sound pretty confident at this stage of an inflection with sales coming back into growth despite the softer first quarter. You grew 1% in fiscal '24, ex Russia. Is it overly simplistic to think about 1% growth in fiscal '25, or are there any other green shoots that you'd want to point to? That's my first question. And the second question is on this topic of agility. What are you doing differently in both China and the US as you adapt your business to come out stronger? HTlFne de Tissot - Pernod Ricard SA - EVP - Finance and IT, Member of the Executive Board, & Member of the Executive Comittee Okay, so thanks for your questions. You started the right way, which is we cannot be more specific at this time of the year. So difficult for me to be more specific in terms of what to expect. But let me just repeat, this back-to-growth expectation and intention for the year in terms of top line is as well very consistent, by the way, not only with what we did in fiscal year '24, excluding Russia, but with as well the continued volume recovery, which materialized in fiscal year '24. Volumes were growing in H2 by 3% in many geographies. So that's why we are able to share that intention and ambition for the year at this time of the year. Alexandre Ricard - Pernod Ricard SA - Chairman of the Board, CEO, Member of the Executive Board, & Member of the Executive Committee On your second question, which is absolutely key, I'll give you a very tangible illustration of what has happened over the last fiscal year. China marketing investments have been revisited. And that revision benefited the US market where they have been revisited the other way around. So we basically decreased a little bit in China and increased accordingly in the US. So some underlying changes allow us to do this in a very swift and agile way. First of all, we now have what we call a rolling forecast put in place. So basically, very regularly during the course of the year, we have assumptions for the next 3, 6, 9, and 12 months. And based on the diversions of these assumptions over time, we then make decisions of reallocations and so on and so forth. A year ago, I was announcing a new organization and a new governance with the suppression of the regions, the creation of these management entities, which means that at headquarters, we're much closer to the business, which means that when China told us, listen, we need to revisit our assumptions, we knew immediately. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 29, 2024 / 7:00AM, PERP.PA - Full Year 2024 Pernod Ricard SA Earnings Call And by the way, with the new governance in place with market companies and the brand codes, and in between, by the way, the operations, we made calls quite quickly. And that's just one example, but speed of decision is really important. And we now have the tools, the organization, and the governance to facilitate this.

Question: Chris Pitcher - Redburn Atlantic - Analyst : Thank you very much. A couple of questions for me. I mean, firstly, on capital employed. I mean, your strategic inventories were higher than we were expecting this year, which I expect is a function of weaker sell through. I appreciate you mentioned CapEx is going to remain high, but should we expect lower investments in strategic inventories this year, even within your committed purchases of ODV helping protect some cash flow? And then just secondly, following up on the China tariffs point, I don't know if you've had it flagged to you yet, but there has been a MOFCOM announcement just out saying they're not going to impose tariffs for now. I don't know if you've had time to read it and contemplate it. Does that affect your outlook for China given there seems to be a stay of tariffs there? Thank you very much. HTlFne de Tissot - Pernod Ricard SA - EVP - Finance and IT, Member of the Executive Board, & Member of the Executive Comittee Okay, so first question on strategic inventory. So you're right, this year, the increase, and I think I mentioned it, has been largely due to lower usage, which is linked to the volumes at fiscal year '24. You need to keep in mind that first, this is obviously a very strategic asset for us in terms of competitive advantage. Because this is the, I would say, the translation in terms of balance sheet of the strength of our portfolio, meaning the aged part of the portfolio, which is more than 60% of our portfolio. So a close monitoring of strategic investment is absolutely critical to protect the future business growth. So this is something that we are closely monitoring. And obviously, if there is some adjustment to take, we are looking at it. But in that context -- which means we don't want to overreact to short-term volume, I would say, volatility that could then undermine the potential of our beautiful portfolio of aged products. For your second comment, I think it happened during the call. So maybe just to repeat that -- this expectation for fiscal year '25 is assuming very weak macro context in China, again, which is more linked to macroeconomic weakness and the impact on the consumer confidence. So I think it remains very, very valid. Alexandre Ricard - Pernod Ricard SA - Chairman of the Board, CEO, Member of the Executive Board, & Member of the Executive Committee I would just say, given what you said in your question, you mentioned for now. So I would remain very prudent.

Question: Chris Pitcher - Redburn Atlantic - Analyst : Understood. Thank you very much. Apologies for dropping it on you, by the way -- thank you.

Question: Trevor Stirling - AllianceBernstein Holding LP - Analyst : Hi, Alex, HTlFne, and Florence. Two questions on my side, please. The first one, returning to the US, Alex, Conor has had several months now, probably a bit more than six months, in the US. What changes are you undertaking in the US that you can share with us to address that context? And I suppose the second one then, I'm intrigued, Alex, you highlighted that you have now got the ability to increase in terms of number of brands you can activate in any one country from 6 to 8 to 15 to 20. What is it you've done that has given that big increase in organizational capability? Alexandre Ricard - Pernod Ricard SA - Chairman of the Board, CEO, Member of the Executive Board, & Member of the Executive Committee Sure. Well, listen, from a strategic standpoint right now in the US, not much change because the strategy is quite clear. The real opportunity, I would say, that Conor is clearly working on and has started working on six months ago is the execution of that strategy and the excellence in execution thereof. So bringing to life all our brands with that portfolio strategy, which was already set up with a bigger balance between the off-trade and the on-trade activation, which is clearly stepping up from that point of view with basically the allocation of the resources which have grown coming from other markets, as I mentioned earlier, allocated both to some of the big power brands, including Jameson, of course, but as well Malibu, Glenlivet, and Absolut but also the very strong growth relays starting with Codigo, Jefferson, and Skrewball, just to mention a couple that I could mention a few more indeed. Which brings me, by the way, to that second very critical point. That digital transformation journey we're on is all about leveraging this tech and data to be able, number one, to indeed activate a lot more brands because we have precision at scale, thanks to algorithms that help us do that and help us understand what threshold levels and what consumer touch points by brand, which is generating, by the way, additional efficiencies on the same amount of money invested, which can be reinvested across more brands efficiently. So today, what tech and data is allowing us to do is to free up additional A&P money, number one; and number two, help us focus on many more brand activations.