Half Year 2025 Pernod Ricard SA Corporate Sales Call Transcript

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

Question: Simon Hales - Citi Investment Research (Europe) - Analyst : So I suppose a couple for me, please. I mean, firstly, can I just ask a little bit more about the guidance that you've laid out both sort of shorter and longer term. I mean, Alex, on fiscal 2026, you're clearly saying that it's going to be another transition year. Visibility is still quite low there, but you do expect to see an improvement in trend. Does that mean we should expect to see some return to growth next year from the declines this year? Or are you a bit more cautious than that? And then when we think about the building blocks for the new 3% to 6% midterm target, how do we think about your expectations there for normalizing growth rates in your big markets like the US and China? I think, historically, we have talked about, I think, growth in the US perhaps trending on average at about 4% for the industry. Historically, in China, you've talked about high-single-digit to low double-digit growth rates being the norm there. What are your new expectations on those markets? And then briefly, secondly, I wonder if you could just comment on where we are now on inventory levels in your major markets around the world? Alexandre Ricard - Pernod Ricard SA - Chairman of the Board, Chief Executive Officer, Member of the Executive Board, Member of the Executive Committee So maybe I'll let HTlFne talk about the short term and next year. And I'll address your last question on the medium-term framework. Helene Denise Marie De Tissot - Pernod Ricard SA - Executive Vice President - Finance and IT, Member of the Executive Board, Member of the Executive Committee And maybe I can start with your second question on inventory level because I think we can move fast on this one. As you know, this is something we are very closely monitoring. At the end of December, I think they are appropriate, especially in our key geographies that we are really laser-focused on. And as you know, the focus for us as well is to make sure that we are closely monitoring the evolution of those trade inventory until June ending to make sure that we land this fiscal year as the previous one with a healthy level of trade inventory. So nothing to flag on the inventory front. So starting with probably this year and next fiscal year in terms of top line expectation, so maybe just to clarify for fiscal year '25. As you noticed, H1 lending is, I would say, exactly in line with our expectation. So what's really driving this update is the worsening situation in China and this technical suspension of the Duty Free regime impacting Travel Retail Asia, to be more specific, China Duty Free and cognac in China Duty Free. So this is the main reason for this revised outlook for fiscal year '25. Having said that, we are expecting some improvement in H2. Maybe let me flag one, which is some sequential improvement in the US and I think that was well highlighted in terms of green shoots, but there's probably more to come in H2. So gradual improvement in the US, which we still expect to be in decline for the full year. So China worsening versus our initial expectation. Having said that, we have a quite favorable comp in H2. So we expect full year not to be as down as H1 so far, but would be significantly down due to the consumer confidence, which is quite low. Travel Retail, our assumption for the second half is that despite all our efforts, obviously, to fix the situation, we might be facing this suspension of the Duty Free regime for the full year. So now moving to fiscal year '26. So we are talking here about sequential improvements in terms of top line, which means to be quite direct that we don't expect full recovery in China. It's probably more going to be at least in our central case about stability compared to where we are today knowing, and I'm sure we'll get back to that, that we are obviously including in our outlook, the implementation of tariffs, which are so far temporary. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 06, 2025 / 9:30AM, PERP.PA - Half Year 2025 Pernod Ricard SA Corporate Sales Call But again, I'm sure we'll have the opportunity to come back to tariffs. When it comes to the other big markets, so Travel Retail, again, difficult to predict. But if we were to still be in that situation of the suspension of the Duty Free regime that will probably put us more in a kind of a soft trend for next year in Travel Retail, not some decline as this year. India, we expect this very strong momentum to be delivered again next year and by the way, for the midterm. And for the rest of the other geographies, I mean, I believe you saw that they are solid to strong already in H1, and that is our ambition for next year, knowing obviously that issue as well. A clear illustration of the strength of our geographical footprint and diversification. Maybe back to you, Alex, for '27 to '29? Alexandre Ricard - Pernod Ricard SA - Chairman of the Board, Chief Executive Officer, Member of the Executive Board, Member of the Executive Committee Yes. Thank you, HTlFne. Thank you for the question because it's the perfect opportunity to give you the underlying fundamentals to that framework, which I would qualify as I'd like to say in Pernod Ricard, we're grounded in the real and pragmatic. First of all, we strongly believe in the underlying fundamental growth of our portfolio. Some of these brands have a lot of growth fundamentals in them. And following three years of normalization, what we did take into account to be pragmatic is a gradual, but prudent recovery for the US and China, as HTlFne was mentioning, starting by the way, next year, but in that plan as well. The US, we believe, in that gradual and prudent recovery. By the way, cycling fiscal year '24, down 9% and our first half in the US, down 7% and based on what I was mentioning earlier in terms of the initiatives, both from a marketing standpoint and a commercial standpoint that we're deploying as we speak. China, again, very prudent expectation. So we're not relying on a full recovery of China. But we do believe, again, that we're going to have a pretty favorable comparable basis after fiscal year '24, down 10%. And the first half, down 25%. That's a big chunk of business that's been rebased. Then I could keep on with India, which is ongoing momentum and so on. But I would only mention two final things. Degree of the performance in that range will depend on the pace of the recoveries and the scenario to achieve the bottom end of that range, which, by the way, is not our base case, but I think it's important to get a good feel for that is no growth from China and modest low single-digit growth in the US, and we still achieved the low end of that range, which is, again, not our base case, but which gives us reassurance regarding that framework. I hope that helps.

Question: Edward Mundy - Jefferies - Analyst : 3 questions from me, please. The first is, Alex, your big picture views around the cyclical versus structural debate. The industry has been around a long time. Why do you think this is cyclical and not structural? And then from an affordability standpoint, are you doing much work to start looking at some of the small packs, which seem to be doing quite well given this market such as the US? The second question is around the efficiency program, perhaps for HTlFne. Could you perhaps talk to some of the key drivers, maybe the split between the operational piece and the structural piece as we think about that fiscal '26 onwards, EUR1 billion? And then the third question is around China. I tend to agree with that the -- to have a flat China after the last couple of years, it has been quite conservative. But could you talk about what you're doing to accelerate the shift and the route to market towards the new channels and pushing your broader premium portfolio, which you start to develop over a decade ago. What are you doing to diversify your sort of growth across categories and also within connect? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 06, 2025 / 9:30AM, PERP.PA - Half Year 2025 Pernod Ricard SA Corporate Sales Call Alexandre Ricard - Pernod Ricard SA - Chairman of the Board, Chief Executive Officer, Member of the Executive Board, Member of the Executive Committee So maybe I'll take your first question. By the way, in appendix, you do have a couple of slides, which address at least partly your question. First of all, in terms of alcohol consumption, by the way, globally, our volumes have been growing for four consecutive quarters. So volume is growing at least for us globally. Demographics are still tailwinds for us. If -- and you have these slides in appendix, but basically alcohol, total beverage alcohol penetration, by the way, in the US because a lot of questions on moderation are mainly focused on the US, but it's true as well elsewhere It has been and is still stable. One American out of two, broadly speaking, drink some kind of alcoholic beverage. It was the case 10 years ago, and it's still the case. If you look at frequency, frequency has gone down, but intensity has gone up. The sum of the two, if you do the calculation, has gone down a bit. And this is where we believe, by the way, in terms of servings. This is where we believe that the less, but better trend, which is not new, which we've been focusing on for the last 20 years is indeed happening. Finally, and by the way, and this is our conviction and belief. The current -- the biggest part of the moderation we are currently seeing, and it was inferred a little bit in your question with lower format is economic-driven moderation. Again, American households, middle class, American households disposable income has been under pressure after a couple of years of huge inflation, and therefore, their discretionary spend has gone down. Then finally, regarding specifically Gen Z. So Gen Z drink less, but they do drink better. So they definitely drink less beer and wine to be fair, and penetration, we do see has gone down for these two segments. At the same time and in parallel, penetration for spirits amongst that segment of the population has gone up by 3 points over the last decade. There are a bit more abstinence amongst Gen Z. But regarding the rest of the Gen Z population, basically, what we see, and we have all the data to suggest it, they will drink less frequently, which regular drinking tends to skew towards beer and wine. And more occasionally. And when they do, they will trade up, if they have the right purchasing power, to stronger upper value spirit brands, which is the segment in which we operate. So all in all, we do believe and we're not the only ones that -- the headwinds we're facing are mainly cyclical for the vast majority. There's a little bit of less drinking. By the way, the Gen Z starts drinking spirits earlier than Millennials did back in the day. And the dynamic emergence, I would say, of spirit-based RTDs tends to accelerate this phenomenon. So the less, but better is there, I agree. But all in all, I do think right now, the moderation is mainly driven by economics. Helene Denise Marie De Tissot - Pernod Ricard SA - Executive Vice President - Finance and IT, Member of the Executive Board, Member of the Executive Committee So efficiency. Maybe just to make it very tangible on what to expect in the future. Let me come back to the track record and what we have been delivering in the recent past, and including this year. So EUR900 million, two-thirds on ops, one-third on SG&A. There's lots of details again in the deck. But if I can come back to the main sources of optimization in terms of ops, let's start with one which really delivered a lot, which is procurement. We have been working very strongly on procurement, and this is definitely optimizing many lines of our cost base, wet goods, dry goods, logistics, CapEx, A&P and many other indirect expenses. So this is something very sizable and again, sustainable for the future. I mentioned already some of the examples are making supplies, but all those operational initiatives account to two-thirds of the efficiency. Maybe let me zoom on the SG&A front, structure cost initiative. So we have here too, as well, a sizable type of initiative, one which we call fit-for-purpose organization, where we are really working on simplifying the organization. By the way, many of those simplification have been anticipated and started before fiscal year '24, but have a full impact in fiscal year '24. So if I can name a few, we had simplified our organization in terms of regional layer by closing the regional hubs in EMEA and Asia. We REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 06, 2025 / 9:30AM, PERP.PA - Half Year 2025 Pernod Ricard SA Corporate Sales Call had as well adapted our teams in France, and we are as well adapted very recently, the size of our organization. In China, we are as well taking quite fast the opportunity of closing of our disposal to adapt our route to market. For instance, we have adapted our teams -- the size of the team in Czech Republic after the disposal of Becherovka and that can obviously go on. In terms of cost discipline, which is the second part of the efficiency program contributing to the structural cost trajectory. We have, I would suggest, accelerated a lot in terms of very strict cost discipline. And if I can name two very concrete example. We have moved to a non-business essential travel ban already a few months ago and as well to a global recruitment freeze, except critical position. So this is the past, but obviously, nothing is stopping at the end of June. We have a significant ambition that we mentioned of EUR1 billion from '26 to '29. I'm not going to go into the specifics on what will be the weight of operation versus structure, but you can expect operations to account for more than 50% of this global envelope because obviously, this is a continuous journey. What I can as well add to that is that we have a very accurate monitoring of those efficiency in terms of hard savings versus cost avoidance. And a big part of it is definitely hard savings and that's our intention as well for the future. I think there was a question on China in terms of premium brands versus the rest of the portfolio? Alexandre Ricard - Pernod Ricard SA - Chairman of the Board, Chief Executive Officer, Member of the Executive Board, Member of the Executive Committee Well, listen, as I mentioned during the presentation, it is clearly our intent to diversify our sources of growth in China. Martell is still 85% of our business in China, but we see that the other 15% are growing. So obviously, we'd love for Martell to grow as well. But in the meantime, as Martell is suffering in China, and we've adapted our strategy behind Martell in China, including from a marketing standpoint. We are investing behind the rest of the portfolio behind the likes of Absolut, behind the likes of Olmeca and behind the likes of Jameson and a few other brands because they are growing, they have momentum, and they are benefiting from basically that emergence of that channel that started, I think, 18 months ago now, which is these neighborhood live venues, very accessible, very skewed towards the new Chinese generation, the Gen Z's and early millennial's drinks. You can buy by the glass, they're perfectly affordable. There's an increasing taste for cocktail driven spirit cocktails in these areas. And again, it's not like the nightclub or KTV venues, where you have to buy by the bottle skews towards the higher marks, particularly on cognac. And so our goal is really to increase the proportion of our premium brands portfolio because we're lucky to have it across the market.

Question: Sarah Simon - Morgan Stanley & Co. International Plc - Analyst : Yes. I had a couple of questions. One was on the thorny question of US tariffs. Have you given any -- I mean I assume you have given thoughts to kind of the potential impact based on different kind of input assumptions if US tariffs would be put on European imports? Second question was on tax. Is it true or is it correct that the higher tax in France is now going to be imposed. So can you give us a sense of what you think the tax rate will be in fiscal at '25, please, and '26? And then can you just remind us about disposal proceeds and what we should expect to be coming in on a net basis in the second half of this year? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 06, 2025 / 9:30AM, PERP.PA - Half Year 2025 Pernod Ricard SA Corporate Sales Call Helene Denise Marie De Tissot - Pernod Ricard SA - Executive Vice President - Finance and IT, Member of the Executive Board, Member of the Executive Committee I guess I can take those three questions, if that's okay with you, Alex? Alexandre Ricard - Pernod Ricard SA - Chairman of the Board, Chief Executive Officer, Member of the Executive Board, Member of the Executive Committee Perfect. Helene Denise Marie De Tissot - Pernod Ricard SA - Executive Vice President - Finance and IT, Member of the Executive Board, Member of the Executive Committee So I start with tariffs. By the way, I will -- my answer will as well cover our estimate on the antidumping impact because we mentioned that already in the recent past. So let me reiterate the numbers. So obviously, we are taking very seriously in our scenario, what could be the impact of tariff. So both antidumping measures that are already impacting us on a preliminary basis in China, which is the main impact for us, to be clear. And what could happen in the US, so the global envelope -- referring to an annualized basis would be EUR200 million for both China and US China, we mentioned already that our estimate was around EUR150 million to EUR140 million, no change on that. So you can estimate what is at stake in the US with obviously lots of uncertainty, but these numbers is covering our estimate of what could be the impact of the 25% tariff in Canada, Mexico and 10% in Europe. Obviously, we are not favorable to this very difficult trade tension environment, but you are asking me for estimates of -- these are my answers. Tax in France, this is an interesting question. I'm sure you know, many things can happen or cannot happen in those days in France. So I'm obviously not taking any risk in terms of what to expect from the parliament, but there's obviously, some measures that could impact our tax. We gave already some estimate last time we talked, which I can reiterate, which is that depending on how many measures would be implemented. We estimate that impact in terms of effective tax rate for us would be, let's say, around 0.3% so our expectation for the year is 25.1%, it could move up to 25.4%. If nothing is happening elsewhere. And as I'm sure you know, there's always something happening in the world, when we can -- when we talk about tax and disposal proceeds, we don't mention the exact numbers for H2, but that will be obviously quite visible, when it comes to our full-year communication. But what I'm meaning by disposal proceeds is the closing of the wine disposal, which we expect to happen around spring.

Question: Olivier Nicolai - Goldman Sachs International - Analyst : Just two quick questions, please. First on the US, could you talk through Conor McQuaid's key learning during his first year as a new CEO there. And partly around what's been missing for the Jameson brand according to you over the last, let's say, two years? And then secondly, going back to the 80% cash conversion target that you gave, have you also changed the top executive incentives to reflect this in full year '25 and beyond? Alexandre Ricard - Pernod Ricard SA - Chairman of the Board, Chief Executive Officer, Member of the Executive Board, Member of the Executive Committee So on your first question, obviously, I speak to Conor, not daily, but several times per week. The key learnings, maybe the main one is really working on the operationalization of our field strategy. I think this is absolutely critical. From a strategic standpoint, again, our portfolio strategy, there was some fine-tuning, some clarity given to it, but it's there. It doesn't need to change. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 06, 2025 / 9:30AM, PERP.PA - Half Year 2025 Pernod Ricard SA Corporate Sales Call It all sits around the power brand there are six of them and then some of the growth relays and so on and so forth. But very simple, very straightforward from that point of view. From a marketing standpoint, a lot of work has been done and I think that the brand plans from a marketing point of view are very strong. I mentioned during the presentation, which is a good transition that Jameson's brand plan, again, is extraordinary strong around must be at Jameson. Jameson, if you look at the latest Nielsens, is back to growth. The number one priority around Jameson is Jameson Original, of course. Jameson Original is almost a mature brand in some big markets such as California and New York. But it's still a nascent brand in other big markets such as Texas and Florida, for example, where we believe we don't have our fair share yet and where the initiatives are there to grow the brand. We've accelerated on Black Barrel and it's already paying dividends, if I may say so. So we had our first-ever media campaign for Black Barrel, which is a trade-up to Jameson. And finally, we fine-tuned our innovation strategy with a very recent launch of Triple Triple, which again, the early qualitative feedback we're getting from the field and from our trade partners is very positive. So listen, I mentioned there are some green shoots. We have, I believe, a great management team, which is now full. And I think we'll have the opportunity or should I say Conor will have the opportunity to share a lot of his own learnings with you in May -- in next May because there'll be a call focusing on the US in a couple of months from now. And I'm sure Conor will be happy to share these insights with you. But the main one is really operationalizing our strategy, our portfolio strategy, which is great on the field and backed by media campaigns, knowing that we've increased our media intensity in the US, while at the same time, we've lowered it in China for obvious reasons. Helene Denise Marie De Tissot - Pernod Ricard SA - Executive Vice President - Finance and IT, Member of the Executive Board, Member of the Executive Committee So second question on the cash conversion. So maybe let me clarify what we are aiming at. So as I mentioned before, cash conversion is going to improve from fiscal year '26. And one of the quite explicit driver of this improvement is going to come from the strategic investments, which will be capped at circa EUR1 billion, where in the recent past, including fiscal year '25, we are both that with circa EUR700 million of CapEx and strategic investment at similar level than last year beyond '26, and we want to be back to a cash conversion rate at circa 80% and above. We have obviously many drivers to that, starting with the PRO growth and profitable growth. But as well, as I just mentioned, normalization of strategic inventories and many initiatives in terms of working capital improvement. So your question on incentives. So as I just said, we are not, I would say, counting an incentive cuts to deliver sustainable, profitable growth and cash generation. Even if, of course, depending on where we are in terms of achievements of our ambition for the year, we will assess what is at stake and adjust the business achievement accordingly. But I would say this is more short-term measures that we're obviously looking at every year. And back to what I said before in terms of efficiency programs especially SG&A, we really want to work on structural initiatives, that's exactly what we've been doing and not only count on what I would suggest is more short-term measures that could happen and that happened already in the past might happen in the future, such as bonus adjustments.

Question: Celine Pannuti - JPMorgan - Analyst : So my first question is on price mix. So you noted that volume has recovered, price/mix remains negative, more than 6% in the first half and in the quarter. Could you talk -- and I saw on your strategic brands that many of the top five clients have as well negative pricing themselves. So could REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 06, 2025 / 9:30AM, PERP.PA - Half Year 2025 Pernod Ricard SA Corporate Sales Call you talk about the pricing environment in US, Europe and China, let you know I'm a bit surprised about the 5% price increase in Martell in China, if you could maybe talk as well above that. The second question on Europe, we saw a sequential deterioration in the market, you flagged Germany. Can you talk about what's going on in the market in terms of the competitive environment? And then lastly, just want to clarify your fiscal year '26 margin target. You said you want to defend this to the fullest extent possible, does that mean flat? Or do we mean that it's going to be down, but A&P will be a part of the equation for you to define that? Helene Denise Marie De Tissot - Pernod Ricard SA - Executive Vice President - Finance and IT, Member of the Executive Board, Member of the Executive Committee Okay. Thank you. So I'll start with price. So we have a price mix, which is mainly negative because of mix. But price is obviously much more muted than in the recent past for all the reasons you know in terms of normalization and moderation of the inflation. And as well in terms of -- I would suggest more busy promotional environment. And this is definitely true in US and Europe. And in US, we are -- this is one of our key initiatives as well in terms of delivering sequential improvement of performance of the brands to make sure that their price positioning is where it should be. So we are carefully, but actively working on profitable promotion activity and as well when it's required, adjusting price. So this is what we've been doing for a really few months in the US. And this is as well one of the reason why the volume improvement is where they are, as highlighted by Alexandre a bit earlier this morning. Europe. I'm sure you know it has always been a place, where price negotiation can be tough, and they are, but we are very determined to protect our price. China, your question on Martell. As you might remember, we didn't increase price last year before, we've been consistently increasing price to this type of range of mid-single digit for Martell, which is as well, obviously the reflection of what can impact our COGS. So that's why we are increasing our price per CNY this year.

Question: Sanjeet Aujla - UBS Limited - Analyst : A couple for me, please. Firstly, on India, can you just comment a little bit to what extent you had a benefit from the opening up of Andhra Pradesh in the last quarter? And how significant that was and how that might play out over the second half of the year? Is that behind some of your optimism there? And just coming back to the US, Alex, do you think about your portfolio as it is today in the medium term. You sound upbeat about the US getting back to historical growth rates of the category. But do you think your portfolio is fit for purpose to grow in line or ahead of that, which has been a long-term ambition? Alexandre Ricard - Pernod Ricard SA - Chairman of the Board, Chief Executive Officer, Member of the Executive Board, Member of the Executive Committee Maybe the first one? Helene Denise Marie De Tissot - Pernod Ricard SA - Executive Vice President - Finance and IT, Member of the Executive Board, Member of the Executive Committee Yes. So I'm sorry, but I'm not going to be specific as you asked in terms of what is the size of the Andhra Pradesh opportunity. What I can tell you is, for sure, it is great news, contributing to the performance of India. But as usual, it is very amazing country. Sometimes there are opportunities. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 06, 2025 / 9:30AM, PERP.PA - Half Year 2025 Pernod Ricard SA Corporate Sales Call Sometimes there are challenges -- but this is one. Again, India, our expectation for India is to be in line with the algorithm ambition for the year and for the years to come, but you're right, this is -- this is a great business opportunity that we are capturing. Alexandre Ricard - Pernod Ricard SA - Chairman of the Board, Chief Executive Officer, Member of the Executive Board, Member of the Executive Committee And on your question on the US, so I was saying earlier, we have six power brands, Jameson, Absolut, Glenlivet, Malibu, Skrewball and Kahlua. That represents basically two-thirds of our business. And then we have what we call , I mentioned growth relays, internally, we call them export brands. With our Tequila C=digo, our Mezcal Del Maguey, our bourbon Jeffersons and our nascent store Redbreast, let's put it that way. So these two portfolios, the power brands and the export brands represent a little bit more than 80% of our business. Are we still underexposed to tequila relative to the market? Yes, but we have very strong focus on C=digo, and our aim is really to grow C=digo. Are we still underexposed to some extent, to bourbon? Listen, we have Jefferson today, which is not tiny. And we're focusing on Jefferson's bourbon for that category in the US. Now bear in mind, and this is why I think it's -- the US, everybody is talking about tequila and ready-to-drinks. But the reality as well is there are other segments that have still some pretty strong growth potential. The most important one we're playing in is Irish whiskey with both Jameson, as I mentioned, which still has good growth to grow. And Redbreast, which is, by the way, growing quite nicely. So do we have the right portfolio? That's what we've been doing over the last few years from an M&A standpoint, getting exposure to bourbon, getting exposure to tequila. And now we do believe we have enough of the right portfolio to operationalize that portfolio strategy on the ground and get that portfolio to grow.