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Executives

Jean Touboul - VP, Financial Communication & IR

Julia Massies - Finance Director, Pernod Ricard UK

Pierre Pringuet - Vice Chairman & CEO

Alexandre Ricard - Deputy CEO & COO

Gilles Bogaert - MD, Finance

Analysts

Ian Shackleton - Nomura

Simon Hales - Barclays Capital

Hermine de Bentzmann - Raymond James

Trevor Stirling - Sanford Bernstein

Melissa Earlam - UBS

Catherine Rolland - Kepler Cheuvreux

Andrea Pistacchi - Citigroup

Olivier Lebrun - Natixis

Anthony Bucalo - Santander

Pernod Ricard S.A. (OTCPK:PDRDF) Q4 2014 Earnings Conference Call August 28, 2014 3:00 AM ET

Jean Touboul

Hello everyone, so it's with mixed feeling that I'm with you today, well, not because of the result that Pierre, Alexandre and Gilles will present today but because it's the last financial communication that I will coordinate. But on the other hand I've very thrilled to have been offered the opportunity to go and head our distribution company in Taiwan where I will be as of October.

So before we start I would like to take this opportunity to introduce you Julia who will take over from me as of October 1. And the best way to do so is just to let Julia speak for herself. Julia, the floor is yours.

Julia Massies

Thank you, Jean, good morning all. So, I'm Julia Massies, I've been with the Group for 13 years. I started in business development and worked through the Seagram and Allied Domecq acquisitions, then moved onto a brand company and more recently in a market company as Finance Director for the United Kingdom.

So without further ado let's move to the results presentation and I hand over to our Vice Chairman and CEO, Pierre Pringuet.

Pierre Pringuet

Thank you, Julia, good morning to you all. So, we'll go through this presentation. So as you can see on this format there are some changes in the way we present the result and I hope it will be even clearer than ever. The overall analysis is that well, simply our performance is in line with the objective we published in -- we gave last February.

Quantitatively first we have our EBIT organic growth at plus 2%. I remind you that the guidance was between plus 1% and plus 3%, so plus 2% we can say they are just in the middle. And what I would also highlight is that have been delivered in a very sound manner. First of all our stock level are particularly healthy and we'll talk that in more details that's the case in the US and even more in China. And that will be reflected in our numbers, you will see that.

And the second factor is that we respect a strict pricing policy and for instance it has shown that the top 14 post a plus 2% in terms of price effect. So that's really -- I would underline this, this result are very sound.

You have on this chart all the key numbers, sales just below €8 billion, EBIT €2,056 million, EBIT margin 25.9%, net profit €1,185 million. I won't comment on all the rest because that will be in the rest of the presentation. But just keep in mind that on page 6 you have all the key numbers. So let's enter into the details.

So yes, our sales were impacted by basically two major factors. First of all ForEx at minus 6% it's a record high impact, €535 million ForEx impact on our net sales, and of course of China. So if we -- first of all if we exclude the ForEx impact on an organic basis our sales have been basically stable. And of course that performance has been primarily impacted by China. For instance looking at the emerging market globally they are at minus 2% on an organic basis but at plus 7% excluding China.

The mature market showed an improvement and they are at plus 1%. If you look by categories we had a slight decline in top 14, but again if we exclude China the top 14 will have delivered plus 3%. And I also highlight what I said earlier that will have been achieved not at the detriment of our prices, top 14 plus 2% in terms of price impact, pricing effect.

The priority premium wines were stable that reflects a mixed performance of Jacob's Creek, which was more than compensated by Brancott Estate and in particular Campo Viejo, it is a very, very successful wine. Our key local brands, globally at plus 4% that reflects in particular the performance of the Indian whiskies, but also I would mention brands such as, for instance, ArArAt or Passport Scotch whiskey, we had the decline of Imperial in Korea.

At the EBIT level now, operating margin at 25.9% which is a clear improvement we will show the numbers. So it represents 2% organic growth at the EBIT level. The operating margin is the best improvement over the last four years. We will see the numbers, Gilles will present it in details.

The ForEx impact again the record high level but in line with what we announced to you. We announced it would be broadly around €200 million, its €199 million as announced. And that is of course impacting the reported growth and the net debt to EBITDA ratio despite the fact that we reduced our debt. The net debt was reduced by €374 million leading to €8.4 billion of net debt at the end of June.

Looking now at the sales over the last 12 months, so just below €8 billion, as you can see the organic growth basically zero. The Group's structure basically no impact, 1% is the disposal of some Scandinavian activities by the way with a very low profitability so it has a very, very minor impact on the EBIT. And the major factor was the ForEx, €535 million as I said earlier, minus 6%. This reflects obviously the rate of exchange of the US dollars but also the impact of many emerging market currencies. And in particular I would highlight the Indian rupees.

For the Q4 the organic growth is at minus 2% and as I said earlier this is precisely what we decided to do in order to finish the year with a good and a sound inventory situation. It is nothing more than that, it's not a -- and there are even some improvements in markets like China for instance in the underlying demand.

By geography you have the three regions and of course the sum up on the worldwide basis. In blue you have the growth rate of the previous fiscal year and in yellow, orange, the performance of the fiscal year 2013, 2014.

As you can see there is decline. The growth rate in both the Asia, rest of the world region and the Americas maybe again so in Asia plus 7% the previous year, minus 4% this year. Excluding China the decline would have been much more modest. It would have been at plus 5%, so plus 7%, plus 5%, so there is clearly the Chinese market impact.

The Americas a slowdown in the US basically and in the travel retail. But I think we're on a solid situation now. On the contrary Europe post an improvement because we were at minus 2% the previous year and this year we are at plus 2% and that's -- we will see that in details. And I will just hand over to Alexandre to present that with even more color. Alexandre.

Alexandre Ricard

Thank you very much, Pierre, and good morning to all. Let's dive directly into Asia and rest of the world which posted a 4% decline clearly mainly driven by the Chinese market. China was down 23%, actually it related to the macro economic slowdown on one side but more specifically to our industry regarding the stricter measures against conspicuous consumption.

Three key things, volumes were down 20%, price increases were still positive, the price impact is still positive at plus 1%. It was 6% the previous year, but it's still positive. And an unfavorable mix, specifically driven by Martell, the mix was minus 5%.

Channel performance is mixed. Actually the traditional channels such as the KTVs, the gifting business posted a sharp decline. But you have a clearly better resilience in the more modern channels such as the family KTVs or the modern western style bars for instance.

Now, the decline in China is partly due to our specific desire to maintain healthy stocks at the end of the year or at the beginning of this new fiscal year. So we have proceeded with a significant destocking. The stocks are down by 20% from a value point of view. And if you look at the first nine months in China we were down 21% and the Q4, quarter four, Q4 in China was down 38% this is specifically related to our desire to destock China. And as I mentioned it before a strict pricing policy, we did not have recourse to unreasonable discounts in China.

Now, just to go a little bit more into detail given the importance in China. Depletions over the year and what we mean by depletions is tier 1 and tier 2 wholesaler depletions were down 13%. Our shipments to wholesalers were down 20%, difference being our desire to destock. Now, Martell has been resilient this year depletions were down just 5%, shipments were down 16%. And the key driver from a positive point of view there is Noblige, we gained market share on the cognac category.

From a Scotch whiskey category the decline is in line with the market. Our depletions were down 18% if you look at shipments down 28%. Resilience of Chivas, down 14%, gaining share. Decline in Ballantine's, but there's a mixed effect. Actually Ballantine's Finest is growing and this is translating the shift in -- or the normalization in the Chinese market; continued heavy good performance of The Glenlivet which grew 20% from a depletion point of view in a pretty buoyant segment.

We're still investing behind our future growth drivers, actually some of them growing. Ballantine's Finest I spoke about it, Absolut, The Glenlivet, Perrier Jouet and a Martell distinction which was launched exactly one year ago.

Now, just one last point, Q4 has shown signs of improvement. Now, it's a little season period, but it has shown signs of improvement. And the first two months of this fiscal year tend to be in line with Q4. If you take our two key brands, Martell first nine months depletions, tier 1, tier 2 depletions were down 7%, Q4 was actually positive with depletions up 5%.

Likewise Chivas was down 16% on the first nine months to March 2014 and half that, so down 8% in Q4. So early signs of improvement that tend to confirm themselves over the first two months of this New Year.

Now, as Pierre mentioned earlier, outside of China good resilience of Asia, rest of the world which actually posted 5% growth. Very good performance in India, up 17% driven by our local whiskies, and actually as well our strategic international brands. Local whiskies posted double-digit growth in the mid-teens, good growth of Imperial Blue above 30% net sales organic growth, market share gains as well in that segment and 100 Pipers very buoyant in the Indian market. Top 14 posted strong double-digit growth, Chivas, The Glenlivet and Absolut as well grew significantly. Travel retail posted good growth driven by Martell and Royal Salute.

South Korea on the other hand double-digit decline, minus 11% in line with the first nine months, principally driven by a channel issue; the traditional channels of KTVs are in structural decline. There is a clear shift a structural shift into modern channels, modern bars which are posting good growth, but obviously, Imperial, which is our key brand in the traditional channels is still 60% of our profits over there. Very good development of Absolut and The Glenlivet which both posted strong double-digit growth, in Korea we now have a new commercial organization a little bit lighter and more skewed towards the modern trade.

Japan posted a good growth, double-digit growth by the way for the top 14 with Chivas which has had a very good year driven by Mizunara, Chivas Mizunara which is an excellent innovation; Chivas rested in Japanese oak. And extremely good growth, high double-digit growth for Perrier-Jouet, we also had a very positive, favorable mix for the top 14.

Sharp decline in Thailand, we won't go into detail there. Clearly related to the political unrest in China, when everybody needs to be home by 10 it doesn't help either. And the regulatory environment which is not friendly for imported spirits. There has been very significant destocking by our distributors at our request during the year. And we now have a new organization in place since last April clearly focusing on our imported spirits with two clear priorities, Absolut and Chivas our two icons.

Australia posted very strong growth. If you look at our Nielsen panels for some of our big brands, they all posted higher performance than their segments. So good market share gain in Australia for us.

And finally Africa, Middle East which posted 16% net sales growth driven by Sub-Saharan Africa, including South Africa, driven by Turkey, driven as well by travel retail. Our top 14 grew double-digit, Jameson, Chivas, Martell, Ballantine's all growing at double-digit rates. Olmeca and Passport as well that are solid and growth relays for us.

Now, diving into the Americas region, Americas posted a 2% net sales growth compared to 7% the previous year. Let's start with the US which posted a net sales growth of 1% versus 8% the previous year. The market is indeed less dynamic than in 2012, 2013 specifically with some slowdown in the on-trade.

Our top 14 brands were resilient and there was a good price mix we'll see it in the next slide with extremely good performance for the likes of Jameson and The Glenlivet; a challenging year for Absolut in a very competitive vodka market. Solid growth for our key local brands in the US with the likes of Wiser's and Olmeca and innovation is becoming in the US for us a significant growth driver.

Actually innovation over the last year in the US represented roughly 50% of our growth with the likes of JP Wiser's Rye, with the likes of Martell Caractere which was launched November of last year with Avion, which we announced -- we bought a majority stake last July, and with good performance -- very good performance early signs of Absolut Elyx.

We mentioned it a few times, destocking in the second-half of the year. Year-to-date March net sales in the US were up 4%, Q4 was down 5%, specifically dedicated to destocking so monitored by ourselves. We can today say we have a healthy stock situation with stocks perfectly in line with those we had last year at the same time.

Now, from an underlying trend point of view, these are the Nielsen, the latest Nielsen value trends for our brands. Now, Absolut I mentioned down 2% from a value point of view within a category which is highly competitive but with good growth from Elyx. Jameson, up 15% with a good price impact and as well very good performance for Black Barrel driving as well a positive mix. Malibu up 2% therefore some slowdown of the growth due to some unfavorable comparatives, as you can recall last year we had launched quite a few innovations regarding Malibu.

The Glenlivet, up 8%, strong competition in the super premium single malt category and North American whiskies, but good growth. And finally Martell up 6% we're now investing behind Martell in the US and with a very important price and mix for Martell.

We have now signed our new distribution agreements with our two key distributor partners, one being Southern Wine & Spirits the other one being Republic National Distributing Company. Now the partnerships have been strengthened. On the ground we're going to have more sales representatives dedicated specifically, exclusively to Pernod Ricard brands. Better alignment as well in the terms of these agreements of the distributors to Pernod Ricard's strategic objectives, so we've worked on the incentive schemes therefore.

And finally, just to be clear and managing expectations. It is about a gradual implementation over this fiscal year. It's about recruiting the additional sales reps and training them, so it's going to take some time. This is all aiming at a clear objective in the US which is excellence in execution, what we call internally the last three feet.

Regarding the other markets, Canada posted good growth, confirmation of the rebound of the first nine months with a good Q4. Good growth for the top 14 clearly driven by Jameson and The Glenlivet with very strong double-digit growth. Excellent performance as well of our wines; driven by Jacob's Creek which as well posted strong double-digit growth.

Good performance in Brazil, double-digit growth on our top 14 strategic brands, clearly in line with our strategy. Underlying trends you can see them here on the slide, better growth than the segments both with Absolut in vodka and with Ballantine's and Chivas in the whiskey category, slight, very slight decline of our local brands.

Slight decline of our sales, very slight decline of our sales in Mexico but a good growth for our top 14 strategic brands, in line with our strategy, with double-digit growth on Chivas, Ballantine's or Havana Club. And very good performance by the way, we need to underline it because it's very good, for Passport. Difficulties on our local brands, particularly our Mexican brandy brands.

Travel retail Americas has had a challenging financial year. This is due to destocking of some of our distributors in the region. Also some trade disputes related in a way to as well some heavy currency impacts in that region with South America.

Now, going into Europe, globally a good year in Europe which posted a 2% growth, let's start with Western Europe which was stable. France, net sales up 3% so a good performance, let's be clear helped by some favorable comparatives. The underlying performance in France is probably stable to slightly positive.

Ricard gained market share, Ricard was up 1% -- these are Nielsen numbers in a declining market at 3%. You see here a good performance of Clan Campbell and Chivas in a slightly declining market. You see as well Absolut gaining market share with double-digit growth or again Havana Club up 16% gaining share as well.

Spain down 7%, perfectly in line with last year; our leadership position has been maintained. Beefeater posted growth for the second consecutive year. You see here the Nielsen achievement launch of the Virtual. And I will add for the first two months of this fiscal year we're being cautiously optimistic that we seem to have some signs of an improvement of the trend in Spain.

Germany up 7%, double digit-growth on our top 14 strategic brands, particularly Jameson being one of them, Chivas, and Havana Club with innovation on Havana Club in Germany. Positive pricing in a market with relatively or no inflation, and as well an improved mix.

UK as well accelerated its growth mainly driven by our top 14 strategic brands and a return to growth for our wines clearly driven by Campo Viejo and as well Brancott Estate, still some difficulties on Jacob's Creek. Market share gains on Absolut, on Martell and on Jameson and Glenlivet as you can see on these numbers.

Ireland posted a slight sales decline which is actually a good performance relative to the whole market and this market has been heavily impacted by the strong excise duty. I have to say €2 on a retail sales price for a consumer is pretty hefty as say our Irish friends. Italy basically stable this year with a marked improvement compared to the previous year.

Going from a stable Western Europe to a growing Eastern Europe, up 8%. Let's start with Russia which posted good growth of 5% but it is a slowdown of the growth rate compared to the previous year where we had posted 16% growth. This is why we qualify this as a less dynamic market, but still, still good growth. Out-performance in the modern off-trade compared to traditional off-trade and on-trade driven principally by our Armenian quality brandy called ArArAt but as well by Ballantine's, Jameson, Absolut or again Becherovka.

Strong growth, 13% in Poland despite an increase, a pretty heavy increase, 15% increase in excise duty in January, last January. Performance driven by double-digit growth of Ballantine's, good performance as well of Wyborowa and a rebound of our local vodkas as well, and market share gains driven by the excellent performance of Ballantine's.

Now, Ukraine we declined by roughly 9%, a sharp decline driven, I won't dwell into it by the unstable environment both from a political and economic point of view over there. Strong growth sales in Czech Republic, actually double-digit growth in the high teens for our top 14 strategic brands, with a rebound by the way of our strong local icon in Czech Republic, which is Becherovka.

And finally we have to mention Kazakhstan which posted very, very strong growth and which is increasingly becoming a very serious growth relay for us in Eastern Europe driven by our whiskies such as Jameson and Chivas, but as well by Absolut.

By brand I'll go a bit faster because we've seen quite a lot of brand performances market-by-market. But globally let's start with our top 14 strategic brands both spirits and champagne. So volumes were slightly down by 1%, sales were down by 2%. This is a direct result of the mix impact particularly Martell in China, because we have a positive price impact on our top 14 which is plus 2%. Premiumization is actually working here.

We have, and Pierre mentioned it at the very beginning, we delivered our performance with no compromise and specifically no compromise on pricing. Our 12 -- 12 of our 14 key brands posted positive pricing movement which has strong exposure to the highly competitive French market and Kahlua which is a brand which is still a challenge, were the two exceptions.

So, specifically I'll just go into detail on Martell, Martell down 9% due to China. Actually outside of China Martell grew 13% perfectly in line with our strategy of globalizing Martell. Chinese still impacted, I won't go into it, I already spoke about it. Depletions on Martell down 5% versus shipments down 16%, so clear destocking on Martell, the price mix, I already spoke about it, and outside of China double-digit growth.

Excellent performance of Jameson, up 12% which was the number one contributor to Pernod Ricard's growth over the last fiscal, continued double, strong double-digit growth in the US, mid-teens, 15% and in South Africa. As we presented during our Capital Market Day before summer our ambition after 25 consecutive years of growth on Jameson we want to double our sales to above €1 billion by 2020 on Jameson.

Regarding white spirits, stability, Absolut down, slightly down by 1% driven by a challenging year in the US. There has been a significant impact of destocking in travel retail America, in Israel due to a distributor change and more importantly due to the change in tax and excise schemes on spirits in Israel.

In Thailand I spoke about the significant destocking in Thailand. Good performance basically almost everywhere else. Growth in Western Europe, Eastern Europe volumes and pricing was positive, double-digit growth in Korea, double-digit growth in India, double-digit growth as well in South Africa. Nielsen panel's up 17% in France. Nielsen panel's up 19% in Brazil.

Havana Club up 5% driven principally by Germany, I mentioned it, the UK and France. And Beefeater, flat with strong acceleration in the UK offsetting a decline in our shipments in US and Spain, underlying performance in Spain being actually very positive.

Our Scotch whiskies decline of Chivas, Ballantine's and Royal Salute clearly related principally to China more than Asia. Good performance of Ballantine's Finest which was up 2% globally driven by many, many markets across the world being China, India, Russia, Poland, South America as well, Brazil, Mexico and Africa. The Glenlivet as well, I won't dwell into it.

Good performance of Ricard which gained market share. Sales growth was up 4% but there was some favorable comparatives to explain this as well. Strong growth of our champagne brands which were up 17%, extremely good performance of PJ, Perrier-Jouet, double-digit growth and a rebound of Mumm champagne.

Our priority premium wines, volumes slightly declining with stable sales, therefore slight positive price mix. With good geographical diversification with double-digit performance in Australia, Canada, slight good performance in the UK but difficulties in China. This performance is specifically driven by very good performance of Brancott and Campo offsetting Jacob's Creek difficulties.

If I move into the 18 key local brands, volumes up 9%, sales growth of 4% which is a mechanical impact of the extremely good performance and dynamic growth of our three Indian whiskies, they all grew significantly. I have to underline the decline of Imperial, I mentioned it with South Korea, or 100 Pipers, I mentioned it with Thailand. A very good performance of ArArAt and Becherovka and not to forget to mention Passport and Olmeca which both posted double-digit growth.

Marketing initiatives and innovations, I won't go into all of these. But as you know this is absolutely fundamental for Pernod Ricard. So working on craftsmanship we've launched Beefeater London Garden as an exclusive gin with the opening of our visitor center in the center of London. Jacob's Creek Double Barrel, which is aged or rested in actually whiskey casks, or Seleccion de Maestros which is selected by our four maestros in Cuba. Limited editions you have here Martell Cordon Bleu or again the Summer Bottle of Ricard.

From a digital communication point of view we just took a few, but there are many more. I invite you to read this on your own time.

Strong innovation in wine with partnerships with Wimbledon for instance on Jacob's Creek. Flight Song, which is proving to be successful which was launched in the US, we're again in terms of activation around Campo Viejo. Sponsorships as well, Formula 1 we announced the partnership with Romain Grosjean known by French people. Or as well our partnership with Art Basel in Miami just to name a few.

New products, Ballantine's Brazil, which was launched in France in Q4, which is being rolled out, or Cafe de Paris which is going to be launched in the US with Pear and Pomegranate. Finally on our iconic brands you have Absolut Craft dedicated to the bartender community. Or again, and I mentioned it earlier, the extraordinary success of Chivas driven by Chivas Mizunara, and all this, without forgetting our commitment to our social consumption responsibilities.

And now I'll pass on to Gilles for the finance.

Gilles Bogaert

Thank you, Alexandre, good morning everybody. So, let's start with the overview of the P&L you find here all the key figures that Pierre and Alexandre have already highlighted. Organically broadly stable sales, operating profit growing quicker than net sales thanks to continued premiumization and good control of both A&P and structure costs. And as a consequence we had again an improvement in the operating margin.

So let's start with the different impacts on the operating profit variation, so you find here the 2% organic growth, Group structure impact was minor. And we had an exceptionally high negative ForEx impact minus 9%, minus €199 million which is the figure we had anticipated and communicated to you in our Q3 communication. It was largely due to the dollar and the related currencies. The dollar and related currencies explained 30% of that variation and also all the other currencies, in particular the emerging market currencies, the first impact being the Indian rupee devaluation.

Let's move to the gross margin, as you can see again we had some improvements of the gross margin rates this year. You have below a chart showing the impact of premiumization on our gross margin in the last four years. So we now have a gross margin rate of 62.8%. So this improvement again is coming from sustained premiumization, some strong pricing up 2% for the top 14. And we had many price increases in many markets and on many brands. And we kept a strict pricing discipline even in the tougher markets.

On the other hand the quality mix on sales was negative by 5% impacted in particular by the decline on the super qualities, in particular Martell in China. And at the same time we kept a very good cost control with our input cost increasing by less than 2% including mix during the last year.

A&P, so A&P was slightly down 4% organically with the targeted resource adjustments in particular in China because of the tough market conditions, in a market where everybody adjusted the investments. But if you look at it in broad terms with a historical perspective, as you can see we keep a very high level of investment, near from 19%, we made more or less stable in the last four years and it's still one of the highest in the industry.

Structure costs, they were up 2%. If we exclude the other income and expenses from recurring operations the increase was even lower than that. It was just 1%. It's well below our estimation of what would be a normalized growth which is 4.5% per year. We already benefited from the first impacts of Allegro in 2013, 2014, €30 million in this year. We'll come back on Allegro with more details with Pierre.

And as a consequence the profit from recurring operations was up 2% organically with a further improvement in the operating margin for the reasons I mentioned before. And you have here again the evolution in the last four years as you can see, we posted positive movement of the operating margin year-after-year and it was even the highest increase in 2013, 2014.

I'll hand over to Pierre to speak about Allegro.

Pierre Pringuet

Well, we promised to present you the Allegro project and we will indeed give you all the details. I would like to insist that Allegro is first and foremost an operational efficiency project. Of course it will generate savings, but the main goal is improving our efficiency. And with one key goal, it is maximizing our ability to capture future growth.

And you will see that there are three key principles which are the basis of Allegro, prioritization, simplification, mutualization. These are the three key principles. So let's review one after the other.

Prioritization, it is all about clarifying roles and responsibilities. For instance brand companies their role is defining the brand strategy and developing operational activation tool which can be used by the different markets. So it's all about creativity. The result is that we remove the brand development team which we merge into the marketing team, and of course with some shortfall in term of headcount.

By the side of that the market companies, their role is the brand activation in the market and we insist upon the excellence of this activation. At the holding company we reconcentrate the holding to what it is major role, all about governance, which is strategy, M&A, legal, corporate communications and of course the HR with the talent management and the social responsibility as Alexandre said just a minute ago.

We also have some group projects, some initiatives like for instance digital, the luxury, the innovation and the portfolio management. This is to be taken by a new division in the holding company resulting from the merging of the marketing and the sales development team. And of course we have shared resources, I would mention the Pernod Ricard research center or the IT and we'll see that later on that we have a clear view about what we need to achieve in terms of IT. So that is prioritization.

The second is simplification, with one goal it is to speed up our decision making process. So, to simplify the organization, at the holding level there will be a direct reporting of the COMEX members to the future CEO that will take place in February 2015. It means that two positions, the Managing Director for Brands and the Managing Director for the Distribution Network, won't be replaced in February 2015. Alexandre is the head of the digital network. When he will take the full responsibility of CEO, he won't be replaced in his current role, and the same for Thierry Billot as the head of the brands.

We will merge the sales development and the marketing team with one simple goal, to have an holistic approach of the consumer decision, I mean the famous last three feet. What is basically when the consumer makes the decision whether it be in a supermarket or in the bar, to decide which brand he would consume. At the level of Pernod Ricard EMEA, Europe, we will pool 42 markets into 10 management entities and obviously there will be mutualization as a result of that.

A very, very important part of Allegro will be the digital development. We want to develop collaborative digital platforms, for instance business information sharing in order to simplify the reporting. All the information will be filled in, into a same platform which will be accessible by anyone, of course entitled to have access to this information, but whether that be the brand or the market company, the region, the holding.

My Brands will be that on our iPad anyone within the Group will have access to any information regarding the brands. And all the brands, the top 14 in particular, the brand strategy, the media campaign, the activation in different markets, any initiatives that have been developed in any market, all accessible on the iPad with one or two clicks.

And MyPortalTouch it will be a very interactive intranet which basically will concentrate all the information within the Group. That represents a significant investment and by the way we'll show you it is just about to be introduced. So that about simplification.

Third mutualization, all about pooling resources, avoiding duplication, for instance at the level of the back office, as you know we decided the merger of Pernod and Ricard back office, and that will be in a single location. And we balance the possibility of having it in Creteil or in Marseilles, and we decided that eventually that would be in Marseilles.

The same way we will create regional hubs in Asia, in Singapore and Hong Kong, again taking all the back-office role for the affiliate of Pernod Ricard in Asia and, again, a single back office for Australia, New Zealand and travel retail Pacific.

Intellectual property, we will create a single hub for the legal management of all our brands worldwide. And that would be located here in Paris.

IT, I highlighted the role of this new development. So there are basically two principles. First of all, increased convergence and second, reorganizing the Group IT with two main objectives; one of global management of infrastructure and second, development of shared business solution. The important thing is shared, which will be used throughout the Group.

So I presented to you the three main principles. In terms of -- would I change the Group culture of the Group organization principle? The answer is no. For instance, decentralization remains the cornerstone of our organizations. I remind you that -- what is decentralization in Pernod Ricard. It's first of all the duality between brand companies and market companies.

The brand companies, as you know, represent their brand; we do not centralize the marketing of the holding-company level, not at all. We want to remain within the culture of each brand, its origin. Remember that basically all our brands have defined origin, and each entity has a boss who is responsible for the P&L and the free cash flow.

That's what it means for decentralization. And the benefit of it is that it's a quick decision-making process, as close as possible to the brand or to the consumers. But it doesn't mean that everyone has to do everything. No, it's all about expertise sharing, mutualization of resources, and I gave some examples, and networking; networking throughout the Group.

And the -- of course, it would be very important to have those digital platforms in order to have access to all the information.

Then the culture and values. We have three values that will remain; entrepreneurial spirit; mutual trust, which is mutual confidence, a contract of confidence between the Group and its employees and, of course the sense of ethics.

Conviviality. Conviviality or we say, way of life, in fact it's more a question of way of working. And in fact it's a very informal, straightforward way of managing the Group; everyone can talk to anybody. That's extremely important.

So that's remained our DNA.

Implementation, the design is completed. All the reorganization in each entity has been announced, and everyone knows its own personal fate. The implementation is either completed -- and this is the case in all the brand companies, ongoing in some other entities and, for instance in France, we have to respect the legal framework, which means that we are -- there are ongoing negotiations with an end date in November.

And of course the rollout of the collaborative platforms, and you have the example of the business information sharing on the left-hand side, an example of My Brands, with Havana Club, and MyPortalTouch on the right-hand side.

That's generated a lot of changes in the appointments. I would like to highlight some, the most important one being, obviously, Julia, in the financial communication at the bottom left.

But I would like also at the top left -- it's not very clear on this chart, but it is the appointment of Jonas Tahlin, as the Managing Director for Elyx. We consider Elyx as such a strategic project that we want to have a Managing Director who will be totally dedicated to the development of that brand, and that Jonas Tahlin was former the Marketing Director for Absolut.

In the appendix we have the list of all the appointments in details, so that is communicated, obviously, to the external of the world; obviously all these people know.

So of course your question is -- what about the savings? So let's come to this topic. On this graph you have the evolution of the structure costs, which means -- I remember you -- selling costs and general expenses; all about these elements.

Over the last three years we have been growing, in average, by 8% on an organic basis. That was in particular due to the developments of some projects, for instance the BIG, the Breakthrough Innovation Group, or the Pernod Ricard University. But also the reinforcement of our position in emerging markets, like in Asia, China, Russia, not to mention Latin America or Africa.

What we anticipate for these coming years, well last year, with already €30 million savings, is to slow down this evolution to 1%; from 8% to 1%. So you can see the extraordinary impact of Allegro on the restructure cost. And again that compares to what Gilles said earlier; it is the normative growth rate, which would have been 4.5% -- just the impact on inflation and promotion of people.

So the bottom line is that from 8% annual growth over the last three years to 1% per year in the coming years.

How these savings will split over time, well €30 million have been delivered in the last fiscal year 2013/2014. €75 million, an additional €75 million will be delivered this year, which means that in total it will be €105 million, so basically the bulk of the savings. And the final €45 million to be delivered between the two subsequent years, and obviously the sooner the better, but we don't know yet the final split.

In order to deliver this €150 million recurring savings, there will be a one-off implementation cost, which would be in the range of €180 million, which is 1.2 times the expected savings, out of which €119 million have been already recorded in last fiscal year, either because we already spent it, basically €20 million, or because we made an accrual in our accounts at the end of June.

And we want to re-invest this margin of maneuver and, and as it's said on this slide, the bottom of this slide, we want to re-invest at least one third of these savings, which means €50 million. And my dream would be more at the half of it, over the next two years.

And this again highlights the fact that we consider Allegro as the way of maximizing our future growth. That's very much the objective; the main target of Allegro.

That's all, but of course if you have questions we'll be very pleased to answer later on. I'll hand it back to Gilles, to now -- to continue to present the P&L.

Gilles Bogaert

So let's go through the financial performance by region.

I won't comment on net sales because Alexandre did it a bit earlier. Let's start with Asia, rest of the world. It was obviously a tough year, but I would say that the decline in operating profit was very similar to the one of net sales. Organically, net sales were down 4% and profit from recurring operations was down 3%.

The gross margin was adversely impacted by a lower price and a negative mix, and we compensated for that with a targeted adjustment of resources, in particular in China, in particular in A&P. At the same time, to protect our sales force strength, we -- our structure costs were virtually stable over the period.

Let's move to the Americas. We have the strong increase in operating profit, of 8% organically, whereas sales were up 2%. Clearly there were some -- on the one hand an improvement in gross margin, thanks to favorable price and also favorable mix, with Top 14 brands growing quicker than the rest for the portfolio.

And at the same time the strict management of resources in all American subsidiaries, both in A&P and structure cost.

Europe, there also we had a high growth of operating profits, 3% higher than net sales, 2%, with a marked improved sales trend in Western Europe, and still a sustained growth in Eastern Europe.

Gross margin rates was up, thanks again to a better mix with a strengthened weight of Top 14. We had a growth of A&P, 5%, largely targeted on Eastern Europe.

And structure cost was stable in Western Europe, whereas we grew in Eastern Europe, but at a lower pace than net sales. And, as a consequence, operating margin was up also in Europe.

You have here the split of net sales and operating profits by region, and as you can see we had a good geographic balance between our three key regions, which allows us to seize all growth opportunities.

Same splits for seven, operating profit between mature markets and emerging markets -- in broad terms you can say that we have 60% of the sales and profit coming from mature markets, and 40% coming from emerging markets.

And because of the decline in China, last year we had a better performance of mature markets, which have increased this year in net sales and profits.

Let's go down the P&L, below the operating profit, starting with the financial income from recurring operations; a very, very good year, as you can see. Financial expenses were down €98 million, with a cost of debt which was down 70 basis points, from 5.3% to 4.6%. It was even better than what we had anticipated at the beginning of the year.

You have below the chart showing the evolution of the cost of debt in the recent years, and for 2014/2015 we expect it to further decrease, to 4.5%.

You have here the evolution of the net debt. It was down €374 million, down to a bit less than €8.4 billion. On the one hand we had a free cash flow of €755 million. It was down, but it was exclusively due to unfavorable ForEx impact of €170 million.

There was some M&A impact. Last year we had done some disposals, hence we had a positive €42 million. This year we did some acquisitions, particularly Kenwood and, hence, we had the cash-outs linked to that of €55 million. And we also benefited this year of the favorable translation impacts of €209 million, because of the evolution of the closing rates of euro/dollar. It was $1.31 one year ago and we finished the year with $1.37. This is obviously the virtuous consequence of our natural debt hedge; we have more than half of the debt in dollars.

Let's have a look at the cash flow with more details. As you can see, the free cash flow from recurring operations was €839 million; down €106 million versus last year. But it was exclusively due to good ForEx, because excluding ForEx impact the free cash flow from recurring operations would have been €1 billion. So that is to say a €65 million increase.

You have here the different elements impacting the free cash flow; the self-financing capacity from recurring operations has evolved in line with the operating profit. In terms of strategic inventories and investments, first of all we can say that we stabilized the variation of strategic inventories, so they were up €255 million, and they now represent more than €4 billion in the balance sheet.

We also had a good control of capital expenditure; €274 million; a decline by €21 million vis-a-vis the previous year. But we can say that we continued our strategy of securing our long-term growth in our key brand categories; whiskies and cognac, and also in champagne.

Operating working capital, there was a slight increase in the change of operating working capital; €56 million. Whereas net sales were flat in organic terms, and down because of the ForEx. The main reason is that the working capital in days of sales was slightly up; 23 days against 21 a year before.

We had the impact of tougher commercial terms in Asia. We used to depend immediately on some of the sales in China in particular, and now we are back to more normal payment terms, between 30 and 60 days, depending on the months of the year.

And the other items, net/nets had a minor impact of €12 million

The leverage, net debt/EBITDA ratio, it was slightly up, from 3.5 to 3.6. This increase was entirely attributable to the currency evolutions, in particular obviously the currencies other than dollars; the currencies on which we don't have a debt in those currencies. And, as I said before, we had 70% of the negative ForEx on the EBIT, which was due to non-dollar-related currencies. So hence it had, obviously, an impact on our leverage.

Excluding Group structure and ForEx impacts, the ratio would have been down by 0.1.

Corporate income tax on recurring items, it has stabilized in line with our anticipations; around 26%. The exact figure is 25.8%.

So as a consequence we had the decline of 3% in net profit from recurring operations. It's well below the 8% reported decline in operating profit, due to the sharp reduction of financial expenses and the stabilization of the current tax.

The organic growth in the profit from recurring operations is strongly positive, 9%.

Let's have a quick look at the non-recurring items, starting with the restructuring cost. They were -- it was a charge of €122 million. Almost all of it, €119 million, was due -- was related to the cost of implementation of Allegro. For the rest we had some movements on intangible assets.

First of all a negative impact of €160 million on asset impairments, including €120 million on Kahlua, and some negative impairment also on Lamb's, Hiram Walker and certain Mexican brands, particular our brandies.

On the other hand we had the positive impact of €100 million due to reversal of provisions on Spanish wine brands. This is directly related to the very good performance of Campo Viejo. And we also had some costs related to some litigation and risks.

The non-recurring financial items are largely linked to some foreign-exchange losses, in particular on -- the ForEx impact on the cash in Venezuela.

And the last point, corporate income tax on non-recurring items, it was a positive impact of €111 million. It's largely due to some technical items, in particular linked to the impact of deferred tax liabilities on brands. We benefited from a decline of the UK tax rate and we also had the tax impact from intangible depreciation, and also the tax impacts linked to the Allegro implementation cost.

And, as a consequence, the Group share of net profit was down 13%, so this decline is more significant than the one of operating profit from recurring operations, which was minus 3%, largely due to the implementation cost of Allegro; the €119 million we referred to earlier.

Dividend, we will propose to our shareholders a stable dividend; €164 per share, which gives a payout ratio of 36.7%, which is broadly in line with our customary policy of cash distribution of one third of net profit from recurring operations.

I hand over to Pierre for the conclusion.

Pierre Pringuet

Well, there are views that I should present to you the conclusion and the outlook. Well, I will be 65 on January 31. By the way, it is just to remind you to send me a happy-birthday message on that date.

But there is another consequence -- is that my mandate will automatically terminate on February 11, the first Board meeting after my birthday. So it means that, exactly like Jean, it's the last presentation I will attend. And by the way I should have highlighted that it is one of the most important moves in the Group, and we expect a lot from you in Taiwan [indiscernible].

So in the next presentation we can say the successful development you have implemented in this country.

So it means that I won't attend the full fiscal year, that's why it seems very natural that it would be -- that would be presented to you by Alexandre.

Alexandre Ricard

Well, thank you very much, Pierre. From a conclusion point of view, to start with, objectives have been achieved, despite two key difficulties. We spoke about the sharp decline in China and, of course, about the historic, unprecedented unfavorable ForEx impact.

But despite this, Pernod Ricard achieved its organic-profit-from-recurring-operations growth target of 2%. We had announced in February anywhere between 1% and 3%. Once again, we have improved our operating margin, organically, which is the best improvement in the last four years.

And finally, and as Gilles presented, we have continued to reduce our debt, which now stands at €8.4 billion.

The performance has been developed -- delivered with no compromise, specifically on prices, and this is absolutely key, and also with healthy stock levels. And finally, and certainly not least, Allegro project was launched, and we have so far incurred €30 million savings in the last fiscal.

Now from an outlook point of view, first message is we expect a gradual -- I'd like to focus on that objective -- gradual improvement of our sales growth, driven by a gradual improvement in the Chinese market. I refer to it initially, a gradual improvement.

But, and it is important to underline the US market, our first market, which is -- which will remain soft. We have more favorable comparatives in the second half of our fiscal, generally to June 2015 but, overall, the business environment will remain challenging at global level, and particular in terms of pricing. So the 2% positive price increase -- price impact we had on our Top 14, you should expect next year's to be lower than plus 2%.

From a ForEx point of view, well so far so good. We expect an appreciation of the dollar and, therefore, a more-positive impact on our accounts. Continued implementation or execution of Allegro, again focusing on operational efficiency. Pierre went through the details of the split of the €150 million savings.

Major proportions of the costs from a cash point of view, most of them have been accrued or incurred in the last fiscal, to come out in this new fiscal year.

And finally, and certainly not least, again we are going to use part of the savings at minimum one third of the Allegro savings, to invest additionally behind our key brands globally, for future long-term growth.

So this is our outlook for this new fiscal year.

Question-and-Answer Session

Jean Touboul

Thank you to all of you. So there will now be time for your questions. We may start within the room, if there are some questions here, and we will take some from the phone as well? No, so I'll let you think about your question and we start on the phone, please.

Ian Shackleton - Nomura

Yes. Good morning, gentlemen. Two questions. Firstly, it's very nice to hear a slightly more positive tone on China. Perhaps you can just give us a little bit more granularity on where stock levels are at the beginning of the year and how you see depletions versus shipments in the next couple of quarters.

And the second question was around the Allegro savings and the reinvestment rate. Pierre suggested it could go up to at least half being re-invested, and I just wonder what the variable was that would move that from a third investment to a half.

Alexandre Ricard

Hello, Ian. On China, we -- as we presented, we significantly de-stocked the market impact, from a value point of view 20%. We started the year with a healthy stock situation. Basically, if you take Martell, the key brand, 60 days. So this is regarding stocks.

Regarding depletions in shipments, frankly -- the phasing, we are not going to give detail from a phasing point of view. The two key things we can say is, if you look at Q3 depletions on Martell -- Q4, sorry -- depletions on Martell were up 5%; on Chivas were down 8%, for instance.

And the second key message is that we have more favorable comparables on the second half, in China.

Pierre Pringuet

So regarding the re-investment of the Allegro savings, we already committed in our internal budget one third. So that's really ring-fenced. And when I said that it could go up to one half, very pragmatically it would depend upon the market environment and the development of our sales.

Ian Shackleton - Nomura

Just going back -- just going back quickly on the China situation, are you still expecting shipments in Q1/Q2 to be running negative? That was the impression I was taking away.

Pierre Pringuet

I think we can say that the start of the year is good, and we are more in the positive than in the negative.

Operator

We have a question from Simon Hales from Barclays. Sir you have the floor.

Simon Hales - Barclays

Good morning everyone, a couple of questions if I can. Firstly, just on the destocking in the second half of the year. Gilles, I don't know if you can actually quantify just the absolute level of impact of destocking, particularly in the fourth quarter you saw across the Group.

And also related to that, can you just confirm that -- from your comments I understand that the destocking is complete now in the US and in China at the end of the fiscal year, so there's no ongoing destocking in the new fiscal year.

But perhaps also are there any other areas, any other markets where we should expect some ongoing residual destocking in the new fiscal year? I'm thinking perhaps around places like Russia.

And secondly, just going back to some of Ian's questions around China, obviously you have seen that improved depletion trend in the fourth quarter and the first couple of months of this year. Can you give us a bit more granularity as -- where you are really seeing that from a trade channel point of view?

Is it just in the modern trade, or have you actually seen some improvement in some of the traditional trade channels as well?

Pierre Pringuet

So Gilles, for the first question.

Gilles Bogaert

Yes, good morning Simon. Maybe to give you more flavor on the destocking impact in Q4. I think in the US in Q4 we were down 5%, whereas our underlying trend is more around the 1%/2%, which is a performance we posted for the full year, and which has not changed across the full year. So clearly between minus 5% and up 1%, the impact is entirely due to destocking.

And in China I think we had a Q4 which was minus 38%, so far higher than the decline that we had in the full year, and at the same moment when depletion was starting to get better.

So clearly the decline -- organic decline by 2% in the last quarter of the year was entirely due to destocking. I -- there were no change in underlying trends, except some first positive signs in China in depletions.

Pierre Pringuet

Regarding the situation in China, I would like to cool down some enthusiasm about the situation. We have already talked about a gradual improvement to the situation, which obviously reflects our strategy; the widening of our range, for instance with the new development with Ballantine's Finest, with the development of Absolut and Martell Distinction.

The -- we will have a clearer view of the situation with this very, very important period of the year, which is the Chinese New Year. By the say, I should also mention that the Chinese New Year is, this year, later than last year, so it will certainly have a negative impact on the first half, just because of this calendarization of the Chinese New Year.

So yes, let's be confident, but not too enthusiastic at this time.

Simon Hales - Barclays

And can I just come back to some of our comments on destocking, just to confirm that the destocking is completed at the end of the year, Gilles, and whether there's any other residual destocking in Thailand or Russia that we should be thinking about into the first half?

Gilles Bogaert

I think we can say that we start the year in Thailand with very sound inventory, that's the case in China. Inventories in the US are at the same level at the beginning of the year, so consistently with the evolution of the activity.

While you may -- what you may have as we have every year is from one quarter to another one, you always have some discrepancies between shipments and depletion trends, obviously, because of the seasonality. But in terms of inventories I think yes, we can say that we have overall some healthy inventories in the world.

Simon Hales - Barclays

Perfect, thank you gents.

Jean Touboul

Maybe a question from the room here, if someone wants to ask one. Yes.

Hermine de Bentzmann - Raymond James

Good morning, I'm Hermine de Bentzmann, Raymond James. I have two questions, please, the first one on the US market. What makes you so cautious about US trends this year?

And the second question, on Eastern Europe and particularly Russia, do you see worsening trends since the beginning of the summer? Thank you.

Alexandre Ricard

On the US market, two years ago we grew 8%; last fiscal we grew approximately 1%, basically in line by the way with the -- our initial Nielsen panels for us, or Nadcap for that matter, that are between let's ay 1% and 2% for us, and between 3% and 4% let's say for the market.

The reason why we're being cautious on the US is just that 1% is relatively soft. It is positive; it's not minus 23% like in China; it is positive.

The on-trade is actually soft as well, so we'd rather be cautious on the US.

Regarding Eastern Europe, which grew 8% last fiscal, for the time being the trends -- the first two months it's too early to say, but are still in line.

Clearly on Russia, as you know we are monitoring the situation very closely. For the time being we have not been impacted by the situation, but we are monitoring the situation closely.

If you put this aside, the trends are still in line with last year.

Jean Touboul

Another question here in the room, maybe?

Unidentified Analyst

Good morning, a small question about A&P, where there has been a slight inflection. Could you be more specific about the targeted resource adjustments?

And the second question, if Marseilles has won, what's going to happen to Creteil?

Alexandre Ricard

Can you answer on the A&P?

Gilles Bogaert

I think your question is on 2013/2014, huh? Yes, there was a slight inflection. There was a decrease by 4%. We have adjusted our A&P on the market, which were most affected by the difficult situation, as all competitors have done, so -- in particular in China. Excluding China, A&P have been flat between the two years.

Unidentified Analyst

And what happens now -- sorry. Can you say something about the future of A&P?

Gilles Bogaert

I think, as Alexandre said in the outlook, the intention is to increase the A&P and, in particular, also a further investment of part of the Allegro saving. So our objective for next year is to have an increase in A&P.

Pierre Pringuet

To the second question, I would like to start by one comment. It's not a question that Marseilles won against Creteil; not at all. We had to make a decision and -- in connection -- with the respective size of the Company. And obviously Ricard being a bigger company than Pernod, in terms of sales for instance, at the end of the day it was a natural way of doing the merger.

What will happen to Creteil? Well, in fact it will remain, for the reason that, as we said, the two companies in terms of sales and marketing will remain independent. So obviously you will have in Creteil still the marketing teams, still the national commercial team, not to mention about the regional team for the Paris region.

So yes, Creteil will remain and we have, by the way, a comprehensive program of re-model -- modernizing the whole site.

Jean Touboul

We have another question on the phone, and we will come back to the room after.

Operator

Yes, we have a question from Trevor Stirling from Sanford Bernstein. Sir, you have the floor.

Trevor Stirling - Sanford Bernstein

Good morning and congratulations, Pierre, on the last presentation and, Jean, on the move to Taiwan.

Three questions from my side. The first one -- in China -- I appreciate you've got many moving parts at the moment -- it's positive that the volume depletions trend on Martell. Could you talk a little bit about the mix?

Is the growth coming slightly more from the lower end and are you expecting a negative product mix within the cognac category?

Second question, if we look at overall A&P, the investments, the absolute scale of the investments you are expecting, do you think that will nudge up you're A&P percentage as well?

And third question -- if we look at the US and the stocking/destocking dynamics, the stocking in the US, did that take place mostly in the second quarter, Gilles?

Alexandre Ricard

Good morning, Trevor. On China, we -- what we did mention is actually the positive signs are coming -- from a positive point of view -- are coming for instance from Noblige, which is really the one member of the Martell family which is driving that early sign of recovery, versus the prestige segment, which is clearly still suffering, albeit at a lesser scale, but still clearly suffering.

Likewise, we mentioned Ballantine's, where Ballantine's Finest has positive depletions but overall Ballantine's is still in decline through the aged range, again meaning that the prestige side of the segment is still suffering.

And it's the same for other brands, including Chivas and Royal Salute. So that's what we can say on China.

Trevor Stirling - Sanford Bernstein

Thank you.

Alexandre Ricard

What was your --?

Gilles Bogaert

Maybe on your point on the US discrepancies between shipments, depletions and impact on inventories. So as we said, we start the year with some inventories, which are the same level as what we had one year before.

That said, last year -- so 2013/2014 -- the full-year growth was 1%, whereas the first-half growth was 5%. So obviously last year shipments were ahead of depletion in the first half.

As a consequence, we'll have a tough basis of comparison in the first half in the US. So we would expect our figures to be better in the second half than in the first half in the US, which is also a comment for the whole Pernod Ricard Group.

Pierre Pringuet

Can you repeat the question on A&P, because we missed it?

Alexandre Ricard

Trevor?

Pierre Pringuet

So, the question -- the second question on A&P, which we missed.

Trevor Stirling - Sanford Bernstein

Yes, can you hear me?

Pierre Pringuet

Yes.

Trevor Stirling - Sanford Bernstein

Can you hear me, Pierre?

Pierre Pringuet

Yes, yes.

Trevor Stirling - Sanford Bernstein

Okay. There was interference on the line. So the second question, A&P, was you've talked about the reinvestment of the Allegro savings. The absolute euro is being re-invested in A&P -- do you think that will be enough to start to bring the ratio of A&P/net sales in a positive direction?

Pierre Pringuet

The answer is yes.

Jean Touboul

Okay. Maybe next question on the phone, please?

Operator

We have a question from Melissa Earlam from UBS. You have the floor.

Melissa Earlam - UBS

Thank you, good morning everyone. Three questions, please.

Firstly, just going back to A&P, I noticed there was a pull back on A&P relative to sales growth in the Americas, and I was wondering whether you could explain the dynamic there.

The second question, staying in that region, can you talk a little bit on the strategy for the Absolut core brand in the US? I understand you are very much focusing on Elyx, but can you talk about what your plans are for the core?

And the third question is just on Martell Distinction. You flagged Noblige as a big driver in China, of some improved momentum. Is that brand, Martell Distinction, living up to your expectations? Thanks.

Alexandre Ricard

To start with, A&P on the Americas region, from an organic basis it was almost -- it was down 2%. So it's not a major -- major disruption in trends. And the A&P/net sales ratio remained almost the same, going from 19.6% to 19.3%. So -- all in all it's the same kind of levels as last year; no inflection either way on A&P in the Americas region.

On Absolut core, we are focusing as well on Absolut base -- we call in Absolut base. There is a specific focus on Absolut Elyx, with a separate team, focusing on the SKU Elyx per se. But as well there will be some halo impact, that's at least our objective.

On Absolut base there is a key focus. It's all about the Transform Today campaign, which we are developing across the US. Now, in terms of point-of-sale material, going back to that excellence-in-execution terminology we used earlier, focusing on the last three feet and point-of-sale material in stores, and in the on-trade on Absolut base.

So we are definitely focusing on the base as well in the US, given the size of the importance of Absolut. That being said, it is a challenging environment for the vodka category, but we are investing heavily behind Absolut in the US, including and of course, the base.

Regarding Distinction, in China it was launched in October of last year. Two comments. First we didn't launch it at the right price, so we'll be very honest about it. So we have recalibrated the retail price of Distinction, so it has gone slightly down. This is what happens when you launch a new product, and you fine-tune, so this is what we did.

Initial signs, it's really too early to tell. We are now developing Distinction in -- throughout the whole market. It's being deployed, so by the next time we meet hopefully we'll have clear -- a clearer view on the success of Distinction, which is a clear source of investment for us in China.

Melissa Earlam - UBS

Many thanks. Could you just specify what the new price is?

Alexandre Ricard

Well, we basically lowered the price by 15%, if I'm not mistaken; close to $25.

Melissa Earlam - UBS

Thank you so much.

Jean Touboul

We have a question in the room, I think.

Catherine Rolland - Kepler Cheuvreux

Good morning. Catherine Rolland speaking, from Kepler Cheuvreux. I have several questions actually. First of all, regarding the Allegro program, could you tell us what should be the split of the savings by region?

And also, regarding the A&P reinvestment by region, could you give us some color about what could be the split?

Second question, about China, can you tell us what was the magnitude of the EBIT decline in China in fiscal year 2013/2014, after the decline in A&P, please? Thank you very much.

Pierre Pringuet

Regarding the savings of Allegro, we won't disclose the detail by regions. What I can say that basically half is achieved for the brand -- by the brand companies and the support functions, including the holding, and the other half in the various regions.

Just to give you a flavor, we can say that probably Asia is less impacted by the savings, just because the level of structure costs are particularly low in that region, with of course some exceptions, one being Thailand, where the business just collapsed and we had to downsize the Company significantly, but it's a small part of the region. So half brands and support function holdings and half in the region.

Gilles Bogaert

Maybe your third question, of the organic growth of -- or better said organic decline of China, it was -- net sales were down 23% and the EBIT was down at a slightly higher level, but not a major difference.

There was a second question?

Catherine Rolland - Kepler Cheuvreux

Yes, I had a question about the split by region of the A&P reinvestment. Are you going to invest more, for instance in Americas, or in Asia? What could we expect about that?

Pierre Pringuet

No guidance on this.

Catherine Rolland - Kepler Cheuvreux

Thank you.

Pierre Pringuet

Sorry.

Jean Touboul

Okay, we may take another question from the phone.

Operator

We have a question from Andrea Pistacchi from Citigroup. Sir you have the floor.

Andrea Pistacchi - Citigroup

Hi. Good morning. Two questions, please. One, on the debt and cash generation, which even when you strip out the FX it was probably a little worse than expected. Now, going forward, should we expect the cash conversion to improve from current levels, and what should be driving this?

And then, again a bit on the reinvestment, a similar question to the previous ones, but I'll phrase a bit differently. Just wanted to know if there are any specific areas of the business in terms of regions or categories where you think you'll be focusing the reinvestment, or should we think about it as across the board?

Pierre Pringuet

I'll take the last bit. Obviously, the answer should be the same, with one just detail. It won't be an increase across the board. When I talk about the reinvestment of Allegro saving, yes, it will be dedicated to clearly identified projects, but I can't be more specific than that. Sorry.

Gilles Bogaert

And on your question on cash, well, we expect our free cash flow from recurring operations to improve, and we remain obviously very disciplined. You'll keep an increase in strategic inventories next year which will be similar to the one you had in 2013/2014.

CapEx should be up; we expect to invest more or less €350 million of CapEx next year. And please have in mind also that in 2014/2015 we'll have an important cash-out link to some non-recurring elements. We'll obviously have to pay for the largest part of the €180 million of Allegro implementation cost. And we'll also have some cash out linked to some tax litigation coming to maturity.

But from a -- I would an operational standpoint, we expect the free cash flow from recurring operations to improve in 2014/2015.

Andrea Pistacchi - Citigroup

Do you -- sorry, just to more quantify roughly the cash outflow for the tax litigations, if possible.

Gilles Bogaert

Well, as you know, in our balance sheet the provision for risks and litigations is more or less €580 million. Well I think you can expect, in the next two years, to have probably one third to be cashed out, so in 2014/2015 and 2015/2016. But obviously this is a rough estimation.

Andrea Pistacchi - Citigroup

Thank you.

Jean Touboul

We have a question in the room.

Olivier Lebrun - Natixis

Thank you. Olivier Lebrun from Natixis. Just a question on Elyx. Can you give us a little more flavor on maybe not the targets you are setting the team, but the way this team dedicated to Elyx as a project will be working? Will they be based in Sweden or in the US?

And to what extent does this new team specifically dedicated to that project is, let's say, different from the way you handle the business usually with brand owners and regions? You stressed very much that the Allegro project does not at all change the DNA in terms of decentralization. It would be interesting to understand how this team works in this prospect. Thanks.

Alexandre Ricard

And we also mentioned it's all about reinforcing our culture and values, one of them being entrepreneurship. And what Jonas has accepted to do is move out to the US, so based in the market, with a specific project and resources allocated to him and his team. He's going to be based in New York, actually, in what he's going to call actually setting it up the Elyx house, so I think he's going to live in a bar, in a way.

And it's a model we have -- we are familiar with. It's what we call the agitator model, so basically we'll have Jonas and his team based -- dedicated in the US. It's a little bit -- like Avion, with Ken Austin, Jenna and their team on Avion.

Obviously he'll have the full support of PR USA, deleveraging the PR USA back-office sales force distributor model. But they'll be there to agitate the brand, in the right places in the right cities, and in the right accounts, so there's a list of accounts, etc., etc.

So it's something innovative, in a way, but re-enforcing the entrepreneurial on a new brand of strategic importance for us.

Jean Touboul

And we have the last question on the phone.

Operator

We have a question from Anthony Bucalo from Santander. Sir you have the floor.

Anthony Bucalo - Santander

Good morning everyone. A quick question on the -- two questions about the USA, actually.

First is Wiser's -- I guess you are starting to pay a little bit more attention to that brand. Can you give us an update on where it is in terms of distribution, velocity, brand awareness, etc., and what kind of plans you have for the near future in terms of stoking investment with that agitator model there?

And the second is a follow up to Melissa's question about Absolut in the US, or in general -- what do you see is the fundamental problem in the US vodka market right now? What's the structural issue in the market that's causing big vodka producers all of the concerns that we've had over the past few years?

Alexandre Ricard

Maybe just a couple of words on Wiser's, which is one of our key local brands in Canada that has been rolled out, and launched and then rolled out in the US over the last 18 months. And in a way it's going to be related as well to your second question.

What -- we're not going to give you velocity numbers and distribution numbers. Obviously we don't have full distribution yet; we don't have the same distribution levels as for instance we have on Absolut, which is close to 100%, so we are redeveloping the brand.

We have a -- invite you to check it out online; pretty cool advertising on Wiser's; Colt kind of advertising.

We won't go into specific details.

On Absolut in the US, maybe we can say three things. One, that the highly-competitive nature of the category, this is clear. Second, you do have craft brands that are emerging in that category. I won't mention one, but one of them is pretty dynamic.

And this is why, by the way, on the Absolut base we are on a point-of-sale, a material point of view, we are going to focus a lot -- we've already started -- on product quality. You all need to know that Absolut is the best vodka in the world.

And finally there is -- you do have cycles in the US. Right now there's a little bit more buoyancy, clearly, on whiskies, and this is where you see the 15% -- a nice growth on Jameson. This is where you see the strong growth on The Glenlivet as well. This is why you see us developing Wiser's Rye, but as well other North-American whiskies, such as Pike Creek, such as Lot 40, etc., etc.

So -- the good thing when you have a large portfolio of brands, such as we do globally and specifically in the US, is you tap into all the opportunities. So these are the three factors that may explain the challenge around Absolut.

Anthony Bucalo - Santander

Thank you very much.

Jean Touboul

So we have no more questions, so this will conclude our conference today. Thank you all. I will meet many of you during the road show, upcoming road show, together with Julia. So we will be good opportunity for in-person meetings, and thank you Pierre, thank you Alexandre, thank you Gilles, for the mark of confidence you are showing, and talk to you very soon. Bye-bye.

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