Remy Cointreau SA (REMYF) CEO Valérie Chapoulaud Floquet on Q4 2019 Results - Earnings Call Transcript

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About: Rémy Cointreau SA (REMYF)
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Earning Call Audio

Remy Cointreau SA (OTCPK:REMYF) Q4 2019 Earnings Conference Call June 6, 2019 3:00 AM ET

Company Participants

Marc Hériard Dubreuil - Chairman

Luca Marotta - Chief Financial Officer

Valérie Chapoulaud Floquet - Chief Executive Officer

Conference Call Participants

Ed Mundy - Jefferies

Nico Von Stackelberg - Liberum Capital

Operator

Good day and welcome to the presentation of the Full Year Earnings 2018-2019 Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Marc Hériard Dubreuil. Please stand by. The conference will start now.

Marc Hériard Dubreuil

Yes, Valérie Chapoulaud Floquet will make a business review of the year just ended 2018-2019. Then, as usual, our Chief Financial Officer, Luca Marotta will give you all the financial details of the results of the year. And then, before we – I should say, before we answer to your questions, Valerie will present the outlook for the Group and for the year to come and the year maybe after.

So, we are extremely pleased with the results we have had in 2018-2019, because we have faced last year quite a series of issues in quite a few markets around the world.

So, it looks like a smooth achievement, but in fact, one year ago, just one year ago, where we basically released some points that we had to correct to achieve these results and the Board of Remy Cointreau is extremely pleased with what the management did to achieving the results that we are going to see now.

And so, to look on the results, you know, we are not interested at all in volumes. We are – the reason for being up for Remy Cointreau is not to sell as many – as many cases as of alcohol as possible. We are interested in increasing prices we are increasing in turnover and of course, turnover of Group Brands of the premium quality Group Brands that we produce.

So, our sales, as you know, have grown by 7.8% on an organic basis. Much more importantly, the figure in turnover that you should look for, the Group Brands sales increased always in organic terms by around 10%. And these has made the Group achieve record for the Group of operating profit close to €264 million, which is of course the best year ever and an organic growth of 14.2% .

This has been of course achieved in spite of the big increase of spending that we did in advertising, promotion and dedicated sales force by an increase of the percentage of gross margin that we have had to the price increase that is exceeded to do and of course, this is something or in terms of gross margin that we are going to see more in the years to come.

So, the current operating margin achieved 21.7%, 1.3 points above last year or which in organic terms and first IFRS 15, 16 & 9. We achieved the record percentage of 23.5%. Are we pleased with that figure? No, definitely not. This is not at the level where we should be and this is since Valérie has joined us, the work with the management has worked hard to achieve. And of course, you are going to see more, an increase of that percentage points in the years to come.

Net profit, a record figure, €157.1 million plus 11.5% on an organic basis and of course much more significantly, net profit excluding non-recurring items close to €168 million, plus 16.3% on an organic basis. So, the net earnings to our share is going to be explained clearly to you by Luca later, achieved a very good figure of €3.14.

And again, excluding non-recurring items, which is the key figure to look, €3.35 per share, an increase of 10.2% compared to the year before. So, record results in every field. The ratio of net debt on EBITDA is a low figure of 1.08.

But it’s not the best year ever. But this has been achieved with a very big increase, the highest level ever of inventory of not only cognac, but rum, whiskies from around the world also other spirits. So we have increased the size and the quality of our inventory during the year and of course, we have been able to buy our own shares, 1 million shares at the variable price, as you know, compared to the price of today.

So, the Board of Remy Cointreau is extremely pleased with the very satisfactory results that we have had. That’s why I am very pleased now to hand he mike to Valerie for more details.

Valérie Chapoulaud Floquet

Good morning. As Marc mentioned, it’s a quite interesting 2018-2019 year and if I want to comment the year in a very few before your questions, of course, in very few words, I would say that, in terms of brands and markets, what is important to keep in mind is the fact that, as you know the cognac market is booming. So, as a result, and is booming, it’s quite unusual on both continents. Asia on the one side and Americas on the other side.

So, the House of Rémy Martin which is Rémy Martin brand and it has achieved almost plus 12% growth which is quite remarkable and what we are looking at as a market leader as I mentioned is the fact that we are looking at market share in value.

So we are looking at it, because we just got some interesting figure of last year. We are looking at the market share, but logically our market share in value should have taken a good increase last year and it’s almost across all geographic regions and we will answer in detail when we will detail the Rémy Martin House results.

In terms of regions, as I mentioned, the two big regions of the Group did very, very well. Asia-Pacific continued very strongly in Greater China, which is very important as you know and especially footing what happened five years ago. So the catch-up is very solid and is very strong for the medium, long-term and not only in Greater China, but as well in Southeast Asia we did a remarkable year and Japan is very solid as well.

Americas, strong momentum going on. We never had any big issue in the last six seven years. So, the momentum is there. And we gained market share for sure globally as a Group. What is interesting in our results of last year is the fact that, the organic growth of the Group is very close to 10% which is much bigger than the market for sure, which we estimate around close to 5% much more than 4% and 5%.

So, let’s – I would say, is I need to keep in mind one element is that we grow roughly two times faster than the market. And of course, and you will see why the global figure is likely the word, because as you know, our strategy is definitely to reduce and limit as possible the noncurrent impacts within our activity.

In terms of results, quite significant with an increase of 12% - 14%. This is coming from different elements. First, very good evolution of the gross margin over last year, but comes from as well last year, plus 1 to 1.2 points.

And this is and you will see by brand, this is very interesting because this is one of the few years during which we balance very well the volume growth which is important to confirm to get a growth that is, I would say, consistent with our strategy not too fast and mix and price effect.

The mix effect is important as well, of course, I think we are one of the most aggressive brand and Group in terms of price increase in all continents, more difficult in some markets, as you know, like, Europe and America. But we the most aggressive usually, but as well, we have a mix effect which is quite important, because we are pushing the SKUs that are more expensive.

So there is a mix effect that is fetching after it. So it’s a good balance between volume and value and within the value good balance between mix and price.

Very good growth of our investments of A&P and we know that first of all, A&P is not only media or above the – or below the line which is as well or thin people like brand ambassadors or product line directors that are helping us within our business model that is quite different. So, a very good investment globally in A&P and people.

We control of course, our cost and overheads and we have a very little currency effect this year, but Luca will comment and our current operating margin is up by 0.7 points, which is good and 1.3 points in organic. So, the net profit is up by 16.3 points organically, which is what we are looking for most likely.

An interesting focus we wanted to do because, the Group is quite committed for details on the sustainability is very – I would say, up to speed now and trending around the globe. But we need to have in mind that it’s not something new for the Group. We committed for many years in different ways. So sustainability is definitely accelerating because it makes sense.

We have for the last year very solid plan in terms of agriculture. You know that we have our engineers in cognac, but not only we bought some lands in everywhere in the world. Something very interesting that maybe you heard about it is Alliance in Champagne corporate in cognac. We started a program about environment and I was very pleased two months ago to be in cognac and to give the award to 88 partners while reaching the highest level of the environment award.

And today, we have a quite important percentage of our partner who are ready at this level, which is the maximum one and I would say that, we are leading the trend at the moment in the region. Not only cognac, because we have exactly the same approach in Islay with the Bruichladdich series.

We have the same approach in glass which was a little bit, maybe only before the others in France in the whisky sales, which is by the dynamic approach and certification and well we started quite interesting approach as well for Cointreau because as you know, we buy orange peels and it’s extremely important to understand the weight reduction and control the whole chain.

Biodiversity as well, not only in France for the wood, but as well in the U.S. and we are very interesting approach in cattle for wetlands. People, of course, this is part of our approach. We have a lot of programs in terms of responsible consumption. We have just signed last Monday with Spirits Europe which is the association of the spirits industry the commitment of labeling.

You know that there is a lot of debate about labeling for the spirits industry which is not following the rest of the food industry so far. And so, we have signed with a part of our competitors and partners this new approach on labeling that is going to take place very soon and what is interesting to have in mind is that we have – we had lot of initiatives in the past.

But we have unified our initiatives with for the team of partners in the world. And we have a – what we call we care day and this year in June, it’s going to be the second year about sustainability and all the employees of Remy Cointreau are welcome to join us for one day around the globe together.

China, as you know, we have sustainability all of our time as well. We have started our eco conception program quite few years ago. It’s running quite well to be honest and we are going to be very aggressive in terms of packaging in the coming year and we just announced during our global conference that was a theme two months ago in Copenhagen that plastic is banned in the Group.

So, all our future development will be then without any plastic in the Group and this is quite a big change for the team and we are extremely pleased and it was extremely well welcome by everybody in the Group around the globe. And it’s going to be a quite different mindset of the coming years.

Last but not least, but you know about it already, because we are not the first time we discuss about this with you. We are still listed GC advance. You know the UN Global compact for the fifth year and we are extremely happy to be part of it and to continue to perform.

So if we look at the figures, as Marc already mentioned, it’s a record year in terms of supply. We achieved over 1.2 billion. So it’s 1.2 - €16.5 million euro, which is a record and as you can see, there is a very little impact coming from currencies which is in a way quite a good news. And Luca will of course look at it in detail with you.

When we look at the balance per division. So, as I said, a very strong year of double-digit year on cognac, almost plus 12%, 11.9%. Liqueurs & Spirits, as Marc mentioned, we started the year although bit slow.

You’ll remember after the first semester, so we had a lot of ambition and programs on the Liqueurs & Spirits which are the brands that are – which need much more investment for the future. So, we have a very good second semester and we are very pleased because all what we put in this first semester started to deliver second semester.

So logically, this starting year should be the year of Liqueurs & Spirits, so plus 4% and for global performance of plus 10 and as you can see, which is part of our strategy, the partner brands are decreasing quite strongly, but we will enter in detail as well, because it’s all under control following some contracts that we decided not to renew in few markets.

So, without excluding technical factors, because part of these minus 13% in non-Group brands are coming from technical factors, global growth of almost plus 8%.

If we look at the breakdown of the Group, per division and per region, as you can see, as a consequence because of the drop of partner brands and the growth of Remy Martin, Remy Martin share is reaching 70% of our sales.

Liqueurs & Spirits being almost flat and what is interesting is in some regions is to see that Asia-Pacific which grew up pretty much in the last year is definitely back at 34% catching up with Americas and it’s a balance that we like pretty much in the Group is not anymore one-third, one-third, one-third.

But logically, Americas and Asia-Pacific should be bigger than EMEA. So it’s exactly what’s happening today and Americas is reaching almost 40% of our sales. So catching up and holding extremely well. If we look at the breakdown per division, so, it’s quite consistent with what happened in the last years.

Americas, at plus reaching 42%. We know that it is a cognac region for Americas. A good catch up of Asia-Pacific which is leading now, or Asia-Pacific being the number one for Remy Martin House, very close to Americas at 44% of our sales and we know that EMEA is not much a cognac region even if the markets are quite strong and we will enter in detail.

Liqueurs & Spirits, it’s almost the opposite. It’s the EMEA region, so approximately 7% and no big difference. Asia-Pacific taking some points, because there are few things going on especially in Greater China and I will enter in detail. So, no big differences when we enter in detail per division.

When it comes to current operating profits, if you look at the bridge, you can see that the volume mix and price mix are leading and it’s going to be quite different from a division to another one. So, plus €45 million for volume mix and plus €35 million for price mix.

A&P quite significant and others of which part of it is people on the field, so reported growth of 11.3% would give us a COP of 21.7 points at €263.6 million.

The net profit, as Marc mentioned, plus 13.3% growth in organic change at €167.8 million which is quite high for us because this is our record and no big deal in the net profit between non-recurring and recurring items.

When it comes to division, so, we know you remember that we usually breakdown our sales with cognac business on one side and the rest of the business on the other side. When it comes to the House of Remy Martin which includes two brands and we don’t give the breakdown of it. You see what I mentioned before which is very interesting which is the breakdown between volume and price. So, out of 12% growth for Remy Martin, half of it is coming from volume and half of it is coming from value which is a very good news.

Very good growth in Greater China, Southeast Asia and Travel Retail for Asia. In Americas the momentum continues and it took us to be completely on it with a very significant price increase, because we are able to increase our price twice last year in America in April and September which is quite unusual with very good results to be honest.

EMEA, here we know it’s a much more here and there market in terms of cognac. So, the two cognac markets did extremely well last year across the board with the start of the year a little more tricky but with a very good come back second part of the year. So, Russia, UK, Middle East, Switzerland and France which is quite good news, because it’s more than two or three markets and a very good performance of globally of the nations over 200 – €816 million.

When it comes to activity, what happened in terms of initiatives last year, I would say, two very important for Remy Martin. One which is quite well known now which are over temporary or how across the globe. It started in London as you remember and what’s value of the Group and now it’s almost everywhere in the world.

China took over quite strongly, but as well, Russia and we have initiatives in the rest of course. We have quite a lot of initiatives and in terms of offer and products, we have a very interesting artistic collaboration with much more given a lot of visibility to the brand across the globe in a very modern and actual way and with a very, very strong visibility globally.

We’ve had different positioning and mindset of course. We launched in second part of the year or even last quarter what we call Smart Decanter. You can see the top of the Decanter with a connected option and we started with – to launch it in our own store in China. But it’s going to be rollout everywhere in the world.

So, now, each time a client buys a Decanter, he can connect with his mobile and then he directly contact with us and be part of the global client delivery place. So this is quite new different and unique and we definitely betting on our clienteling and the direct contact with the client. So, very, very important initiative for us and of course, because we are still in the campaign of 100 years.

We organized a lot of, lot of, lot of very interesting dinner around the globe. Very qualitative and here you can see a very nice picture of what we are achieving in most of the countries in the world. When it comes to figures, as I mentioned, you can see the way the current operating profit has been built.

So, a good impact of volume mix, price mix, important investment and on the House of Remy Martin, as you have much more than in other houses, we have a big investment in people which you can see on the top of A&P in the other parts of the investment. So, an organic growth of 17.9% for the profit at €235.6 million, which we are very pleased.

Liqueurs & Spirits is a bit more complex, because it’s a portfolio of many brands and many categories and as I mentioned, the first part of the year was a little bit more tricky. But a very good come back and catch up in second part of the year. In particular for Cointreau, Cointreau is a little bit beauty of the Group is the third house that we have and we decided to revamp Cointreau last year with a very strong and new positioning and the commercial approach, media approach and it took us a little time to get some results, especially in the U.S. But since the second part of the year, we are facing a very, very strong growth of double-digit, which is going on months-after-months since September last year. So we are extremely pleased on seeing that we have the business model now between investment in media and the other investment and we have a 360 toolbox for Cointreau. So, very good second part of the year and very good new positioning of Cointreau and the Art of the Mix campaign worked and delivered.

Regarding Metaxa, a little bit of decline after two very good year of double-digit for the simple reason that we are moving up market. So we have decided to get some volume on the entry price of the brand in some key markets in Europe in particular and we focused on first half and we have opened new markets which is a good news like China, like Middle East, and US at the end of February, so end of the fiscal. So – and we have a new positioning of Metaxa regarding its strategy, very promising in most markets.

St-Rémy very good year. The upper part of the activity start to deliver. The XO approach and the cask finish proposition. So, quite good confirmation that our strategy works on St-Rémy.

Mount Gay is, as you know, it is a brand that we are revamping every moment. So the best is to come, so, as well we are definitely we have chosen to lose some volume at the entry price of Mount Gay in order to reposition the brand for the years to come.

When it comes to The Botanist and whiskies, excellent year. The Botanist continues to fly and it’s a massive success. Liquid Tulips is a definitely a big winner and on whiskies, we are – we have relaunched Port Charlotte, our version of our Scottish Whisky which is a massive success.

We see the – again the campaign. The campaign was very unique and different with a claim of WeAreIslay and globally, we are quite pleased with the way Bruichladdich, Port Charlotte and Octomore behave in most markets, especially the new markets.

When it comes to initiatives, as I mentioned, a lot of initiatives for Cointreau. The new advertising campaign, but as well limited edition and the celebration of the anniversary of the margarita. You know that Cointreau is part of more than 350 original classic cocktail recipes and we preempt the margarita territory for the long-term definitely. It makes sense for the brand.

When it comes to other brands, as I mentioned, the new patch and the new advertising of Port Charlotte which is extremely original and extremely true to the brand to the DNA of the brands. The latest initiative very high end initiative of Metaxa. Cask number two and one of the limited edition of St-Remy which was a very successful and very fast.

When it comes to Liqueurs & Spirits, you can see that the COP is definitely because of all what we have done in terms of overinvesting on Cointreau and limiting some volume on our brands that the COP is declining and organically by 6%. But this is for the investment of the future and we believe that this is the right direction to go.

Partner brands I am not going to stay long, because it’s exactly what we want to do. As you can see what is quite interesting is to see what is the evolution – you see the evolution over the last four years, three years the partnered brands are reaching roughly 7% of our sales last year. It was 15% five years ago. So you see the trend. So, no many comments on that and Luca will reenter in detail on – from the contract that we ended last year, but this is a good direction and we are very happy for that.

In terms of profits, as you can see, one of the consequence of the partner brands is that, not only in lot of our brands, but additionally, we don’t make a lot of profit. So no big deal about it. It’s a very small impact on our activity globally.

I give the mike to Luca.

Luca Marotta

Thank you, Valerie. Now let’s move to a detailed analysis of the financial statement. Let’s begin with the income statement. Like in November when we reported our H1 earnings, we would focus our comments on the pro forma figures, i.e. before IFRS 15, 16 & 9 in order to be able to compare them with the last year.

Based on organic sales growth, on organic basis of 7.8% current operating profit was up 14.2% on an organic basis implying an organic increase of 130 basis points in current operating margins.

This very solid performance was once again mainly driven by the gross margin, up 9.8% year-on-year on organic basis outpacing growth in sales, thanks to the positive leverage from volumes and the mix but also in especially this year, thanks to price increases across all world regions.

This very strong momentum in phasing gross margin allowed us ourselves to fund a further significant organic increase in sales and marketing expenses up 7.2% organically and book inbound in two different components. First, investment in communication, so advertising, PR, digital, media and promotional expenses from the field, in other words, A&P were up 7.4%.

But among this A&P investments, we have broadened the line parts through the classical media, digital and PR was up double-digits with below the line on premises activation and promotions were up low-single-digits including cuts in our reassessment in promotional expenses.

The second element in component is that distribution cost grew high single-digit on an organic basis. As already mentioned, we are talking the year about investments to strengthen, adopt and diversify our route to market with two key areas of focus, developing direct distribution on high end cognac through stores, ecommerce and direct sales force and on the other hand, getting our distributor partner to adapt to our brand elevation strategy.

Our administrative expenses grew 10.4% on organic basis, but mostly as a result of higher trademarks and brand protection investments, as well as higher employee variable remuneration and long-term incentive plan IFRS through costs. In contrast, as you know, holding cost at pretty much flat.

All in all, our current operating profit was up 14.2% organic basis and up 11.3% on a reported basis, i.e. after taking into account adverse currency effects on the current operating profit.

Now let’s move to the analysis of the Group’s current operating margin which grew on a reported basis 0.7%, 70 basis points to reach 21.7 over the full year. This breaks down into organic growth of 130 basis points and an adverse currency effect of 0.7. There was no scope effect this year.

The organic improvement of the current operating margin was driven, it’s very clear by notable significant increase in gross margin, while the A&P all A&P considered and distribution cost ratio were pretty much flat in terms of impact of margin.

Taking each of these items in turn, first of all the 1.2 uplift in gross margin was driven as mentioned very much important to the periods by positive product mix and currency effects. Thanks to the outperformance of our high-end portfolio from the product perspective and the Southeast Asia including clearly Greater China from a market spend perspective.

However, I repeat, this year in particular, it was also driven by very significant price increase across all world regions.

Second element is the A&P expense ratio overall decreased by 0.1, 10 basis points. But a positive factor to the current operating margin as I mentioned in previous slides is largely due to a sizable cut in the promotional expenses while strategic A&P investments were up double-digits.

Third point, the ratio of the distribution cost and other cost was flat due to the strict control of the holding company cost which helped to offset higher distribution and branding costs.

Now, let’s take a look at the rest of the remaining part of the income statement beginning with the other operating income which totaled €1.7 million, mainly consisting of gains of disposal of non-core assets.

Finance costs. Finance costs increased to €35.2 million in the full year, driven by two factors, one which is non-recurring and the second one which is non-cash. I come back to this on a later slide.

Tax rate rose from 26.6% to 28.9%. Yet, excluding the non-recurring factors, debt flattered last year rate. The tax rate declined to 28.5% from 29.7% last year out of the non-recurring items is an improvement.

The associates line is a loss of €6.7 million, which mainly reflects the €7 million non-recurring charge related to the exit of Diversa. Diversa was the joint venture we had in Germany. This change in route to market is part of the well known shared evolution of the Group’s distribution network that will be also very, very present in Europe EMEA region.

A word concerning Dynasty. So, the share that the Group has in the Chinese company wine company 27%. The situation remains unchanged. So with our investments, in terms of valuation, valued at €13.9 million at the 31st of March 2019 which imply a valuation per share at 0.36 Hong Kong dollar per share, the same of last year.

There is only a small difference from 13.9 to 12 something last year which is the effect of currency without any impact on the profit or loss because it's taken into account in the retained earnings.

Net profit attributable to the Group came in at €157.1 million, up 6% year-on-year, excluding nonrecurring items, net profit came in at €168.8 million, up 10.9% in reported terms and up 16.3% in historical value on an organic basis. Net margin excluding nonrecurring items came in at 13.8%, up 40 basis points year-on-year.

Now, let’s look at the reconciliation spreadsheets between net profit and net profit to the nonrecurring items. Globally, nonrecurring items amounted to around €11 million, €10.7 million as expenses being neutralized in the full year.

Three main factors inside that. First, a positive element which is the €1.7 million gain mainly related to the disposal of non-core assets as allotted before with this profit has been neutralized as we deducted.

Then two expenses, the first one, €5.2 million expense is linked to the early repayment of the vendor loan by the API group and corresponded to the difference between the amount repaid, 86.8 and the balance sheet value of the loan €92 million. If you remember, it was already highlighted at the end of September, because it was part of the H1 earnings.

This difference mainly corresponds to the interest not due on the loan even its earlier repayment. As a reminder, this vendor loan should have been repaid in July 2020. So, it’s not the component of free cash flow but globally, up to a more money to be used during this fiscal year and the next.

Second expenses is €7 million expense related to the disposal of the stake and Diversa joint venture as already highlighted net of the exit cost.

Now, a technical, but very important in my opinion strategy because starting from 1st of April 2019, now we are switching to post-IFRS 15, 16 & 9. So, all the analysis consensus dialogues will be on this new base, because it was very important to bridge it up and to understand what’s happening between the pro forma and the post-IFRS 18, 19 results.

Let’s start with this most important one, the IFRS 15 which applies to income from ordinary activities derived from contracts with customers. As you know, the main impact of that norm is to reclassify some promotional expenses as deduction against these sales. The amount to reclassify this year was, in absolute value €118 million with €90.5 million against sales than the actions. So, around 7.5% and €27.5 million recognized as an additional cost of goods sold.

The second one is the IFRS 16 which cover leases main result in adjustment to the balance sheet with Group leases totaling around €31 million, not capitalized in non-current effects in the debt. That is consequences on the P&L is as more gain, €0.6 million in operating profits because we have depreciation and no more cost and the financial component of €1 million is now increased the finance cost.

So, all in all, as you can see, ask us tax effect there is a negative impact and as a result of €0.3 million and I actually have seen, I am not allowed before, but it's only a reclassification no impact in absolute terms but an accretive positive impact in terms of margin structure.

Last, the more technical one, is a more volatile, IFRS 9, which leads to financial instruments entails reclassifying the time value of foreign exchange option and for what adjust within balance sheet capital. What’s the consequence?

The pretax financial expenses of €3.7 million was reclassified in the post-IFRS 9, as the balance sheet time inside the shareholder equity. So the effect that we continue to analyze over the four months on a pro forma figure on the specific items penalized the net result by around 2.4 million and the operating one above €3.7 million.

Net, net impacts of net profit excluding no recurring items is, as you can see, €2.1 million positive impact, while our net debt-to-EBITDA ratio increased lightly by 0.11 from 10.8 to 1.19.

Another chart about the post-IFRS world, very important because as the basis once again of all thinking about 1920 and the year after.

Slide number 28, the new IFRS boosts the current operating margin by 1.8, 180 basis points over the year, better than initially expected. We guided for 150. The result is 180. The Group’s new current operating margin is therefore 23.5%, I repeat 23.5%. We compare to a 21.7% on a pro forma basis pre-IFRS on a reported basis.

What are the main variances? First one, gross margins declined by five points because we deduct from phase. So now the gross margin is 63.1 end of March 2019.

And this is the result, I repeat to myself, it’s very important, of some promotional expenses being reclassified as deduction against sales, an increase also of cost of goods sold for some operations that before what accounted inside the promotional part like gifted purchase and purchase with purchase. We initially expected a 5.5 points decrease. The decrease is lower for 0.5, 50 basis points.

A&P ratio froze by 7.2 points to reach 16.2% due to a number of such promotional expenses being reclassified as deduction of the phase and extra COGS is the reverse impact. We initially expected an 8% drop.

What we can argue here, what is very important to highlight the – the difference between eight point and 7.2 reflects clearly the cuts in promotional expenses I mentioned earlier in 2018, 2019, we are clearly visible and why also on a pro forma basis, the A&P on a partial basis are going only into Brexit by 7.2 because the promotional part that now is offset was clearly cut.

Last but not least, distributional cost rise by very modest 0.4, 40 basis points, up to 23.4 due to a lower sales value while distribution cost remain broadly unchanged. We initially expected an one point increase that is better than expected.

So, bottom-line, no more 150 basis points increase, but 180 and I repeat, 23.5% is a operating profit, current operating profit margin is the base you should use to start your forecast from 2019 to 2020.

Now, a very important spreadsheet to be analyzed or will be a little bit long because this is particularly complex, but it’s very, very important and be able to answer all your questions you may have.

This is the cash flow generation. All cash flow slate into free cash flow and other components and net debt variation. End of March 2019, our pro forma net financial debt stood at €315 million, up €30.2 million compared to the March 2018.

This is the consequence, the mathematical consequence of the significant reduction in recurring free cash flow, as you can see and the share buyback program, partially offset by the early repayment, reimbursement of the vendor loan by the API Group.

Let’s start with the most important one. The recurring free cash flow, which was a net cash generation of €2.1 million in fiscal 2018, 2019, we compare to around 151, 150.9 in 2018. First of all, as you can and see in the top of the table, EBITDA grew by €29.1 million in the fiscal year which is very strong performance.

This increase was reinvested as expected as guided in strategic working capital including more than needed, more than needed purchases of cognac, but also an increase in the whisky and you run the inventory.

As a result, as you can see, strategic working capital increased by around €50 million, €50.5 million in 2019, 2018-2019 to reach 85.6. We also spud up CapEx investments by €11 million to reach 44.6 [Indiscernible] cognac region and more production capacity in general.

But mathematically, there was a significant change in another line which is other working capital element. Partially increasing by €106.4 million. It was the same situation at the end of H1.

First explanation, there is a clear rebalancing effect, last year, you can see we ended with a positive, not normative negative impact, negative to positive free cash flow of around €27 million, while normally, if you look our performance of the year to the 25 to 50. So, of this 106, €50 million are non-comparable, because the comp was clear, very positive and at normal cost.

But the reason of this increase for the main part are the consequence with significant sales increase on receivables on the last part of the year in the last quarter combined with an adverse geographical mix. What does it means? The fast growing countries at the end of the year were also those for which the collection length, U.S. on top of the list was the longest compared to the average collection length of the Group. This is clear.

The second point is the reverse negative effects of the ForEx. If the dollar is strong, we have an higher value in terms of accounts receivable or other working capital elements in terms of conversion, talking about conversion. And then there is a fourth one, which is the consequence of our strategic vision to continue invest in the brand compared to the previous year to deliver the Group partner now invest more in more constant spread out way.

So in terms of free cash flow, the supplier would bring at a different phasing more spread out all year round and this year was clearly visible offsetting the comp last year. So, comp increased on accounts receivable because this last quarter was very, very strong increasing in the part of the world in which the average length of collection is higher.

ForEx and the difference of spread out supplier footprints. At the end, the result is still weaker free cash flow compared to the previous year. That’s explained it is not the base for the next year to come.

Other cash outflows, financial expenses and taxes also slightly increased versus last year. That is clear. The reason why because higher than net results, the reason higher cash out. Non-operating cash flows were also negative in the full year overall, why? Share buyback program, which is – was done at very good price that impacted the net debt for €103.6 million, more than offset the early repayments for €86.8 million of the vendor loan from API.

And overall, given the strong increase in EBITDA, a dilutive increase in net debt. Our net to debt EBITDA ratio pro forma continue to decline falling from 148 at the end of March 2018 to 1.08 at the end of March 2019.

Let’s take a look at net financial expenses it was a charge of €35.2 million in the full year 2018, 2019 implying a €13.2 million increase versus last year figure €22 million. This increase that was driven by two key factors. First the deterioration on net currency losses from €2.9 million loss last year to €7.7 million loss this year, which is a non-cash charge.

As y you know, this is a non-cash charge which is very volatile as it corresponds to mark-to-market of the portfolio currency hedging instruments and as we saw earlier, under IFRS 9 application, this year €3.7 million would have been disappeared from this figure. So, it would be something everything equal positive. As once again it’s very volatile. We cannot predict that. We can only analyze that. But it’s very complicated to predict that.

The second point is the early repayment of the vendor loan from API which had two impacts on net financial expenses, first a nonrecurring €5.2 million expense corresponding as we have said many times to the difference between the balance sheet item and what we got. And second, the non-payment or the interest of vendor loan this year while we accounted for €4.6 million in interest payments in 2017, 2018 where there is a comp effect.

Meanwhile cost on the gross financial debt, the clean financial cost fell by €1.8 million to reach €12.6 million. Thanks to the lower average debt of the period, as well as a further optimized cost of debt which is now at 1.17 to be compared to 1.25. When three four years ago it was 5%. Two years ago it’s 3. So it’s very good and clean indicator.

Cost of interest is a non-recurrent item, financial cost amounted to €27.3 million in fiscal year 2018, 2019. This is the base you should use to make your forecast from 19 to 20 onwards.

So, a very interesting part now on ForEx. For the year, and for the 2019-2020 as well. As I mentioned earlier, the Group reported adverse translation and translation effect on current operating profit around €6.8 million, €7 million negative in the full year. This impact was below the last guidance, you remember it was €11 million provided in November, as the U.S. dollar remained strong in the latter part of the year.

In fact over the full year, U.S. dollar and Hong Kong dollar impact was positive on operating profit, but it was more than offset by other currencies like weaker Chinese yuan, weaker Russian ruble and other currencies.

As you can see in the chart, the average euro/dollar translation conversion rate is shown by the green line, came out an 116 of the full year to be compared with 117 over the same period last year and t he average hedge rate, the red line under our currency hedging policies was 1.18 over the full year to be compared to 1.19 over the same period of last year. Once again, dollar was positive, but other currency offset that.

So, let’s two minutes about the new chart which is the currency outlook for 2019, 2020 and let’s try to be clear also to give you all the means to major estimation. Generally speaking, our Group do not use spots of day to make the simulation of the unit and conversion rate. We have an hedge situation that we use for the profit or loss for the transactional part, for the conversion, we consider what the consensus.

We talk with our expert with different banks is do we project ourselves for better part of the orchestration when you see that our estimation for the conversion part sometimes is disconnected for what the reality now. So, for the year to come in terms of conversion our estimation is 118. So we are estimating in conversion a negative development in dollar in the remaining part of the year.

So we are not making estimation 1 to 12, but we gave you the sensitivity. I want only to be clear to speak the same language. Assuming an average euro/U.S. dollar spot rate simulated of 1.18 on conversion going forward and that euro/U.S. dollar hedge rate because that’s sure what we know today at 1.17 we anticipate €20 million headwind negative impact on sales at a zero neutral impact on operating profit.

The neutral impact on operating profit will be split at the opposite way compared to the 2018-2019., €5 million gain H1 and €5 million headwind in H2.

Now, I can say that, we reckon that the current spot rate in the euro/U.S. dollar is close to 1.12 and moves 1.18. So if the euro/U.S. dollar was to remain around that level, so, the year is what is the spot now, the currency impact could improve versus our expectation.

Sensitivity, everything equal versus our expectation, versus our expectation not that with the closing is that $0.01 increase in the U.S. dollar versus the euro is €5 million to €6 million gain on sales conversion and €3 million to €4 million gain on operating profit, all things alike, if everything remains at the same level, all the phasing that would be the same which is impossible because we realize everything is moving.

But I repeat myself, if the spot remained at that level, €5 million to €6 million on sales positive and €3 million to €4 million in operating profit, all things alike.

In terms of hedging, at this stage, we already cover 85% of our U.S. dollar exposure, of which around 50% of option average hedge rate as is written here it is at this stage 117. Sorry, it was a little long, but I hope it is clear now compared to what is reckoned on this slide in a very brutal way.

Balance sheet structure, let’s move to the balance sheet where structure strengthened slightly over with total assets and liabilities of 2.6, 2.59 billion on a pro forma basis, compared to 2.54 billion at the end of last year.

This was mainly driven by an increase in inventory value. Stocks increased by €76 million to reach 1.25 billion at costs end of 2019 due to the increased capacity across our various categories in spirits including cognac, but not only whisky and rum. Stocks accounted for around 48% of our total assets, up from 46% last year.

On the other hand, the decline of current assets mainly reflects the early repayment of the vendor loan from API. Net gearing, the Group’s net debt to the APT ratio slightly increased over the period from 20% to 22% pro forma as we increase in the net debt, but was not fully offset by a higher equity level at the same proportion.

We continue to see, generally speaking, this level as slightly to low for an optimized balance sheet structure. Last but not least, pro forma net debt i.e. IFRS 15, 16, and 9 totaled €315 million equating to 25% of the accounted stock value one fourth. Post-IFRS 15, 16 & 9 Group net debt totaled to €343.3 million with around €30 million more corresponded to the capitalized value of Group leases because of the switch to IFRS 16.

ROCE, return on employed capital, the ratio declined by 1 point to reach 20.9 end of 2018-2019. But down 0.20 basis points in organic terms. This is the consequence of two main factors. First the increase, significant increase in cognac capital employed by 16 which will reflect the strategic step up in purchase of Odyssey this year given the constraints of the cognac supply we think buying more already than what we need actually is a very good investment, the best investment for the future.

As a result, cognac’s return on capital employed is up 30 basis points in organic terms which is a limited performance with the strong growth or the operating margin. The second factor, negative one is the lower profitability of the Liqueurs & Spirits division which translates into a 4.2, 420 basis points organic decline in ROCE.

Again, we see this as investment. As a consequence, we will step up on A&P and structure expenses in order to accelerate in a sustainable manner to grow the division all the time. Capital employed bridge grows by €168 million on a pro forma basis excluding currencies. As you can see, this is mostly driven by significant increase in the House of Remy Martin which is largely explained by the rise on aging inventories as well as some CapEx investments. All those going to lower expense and we continue to invest in employed capital to the Liqueurs & Spirits division as well up 15.5 stepping up significantly production capacity, the laying down inventories in whisky and rum.

Key events of the full year, 2nd of July, the Group signed a €100 million syndicated loan from the pool of six banks, maturity of five years and more assessing margin rates than for the previous syndicated loan. 10 of July as we mentioned very important, the API Group decided to repay early the vendor loan that was for the business of champagne sold in July 2011.

On 24 of July of General Meeting, shareholders approved a payment of the dividend of 1.65 per share with an option allowing a full payment share in auction that was opted by 89% historical record of our shareholders.

On 18 of November – or October, Remy Cointreau was awarded the third place by Gaia Rating, EthiFinance's ESG rating agencies in the category of companies with sales over €500 million recognizing very clearly the Group’s CSR strategy.

26 of October, Standard & Poor's upgraded Group rating from BB+ to BBB-. This means that we are now rated investment-grade by both S&P and Moody's. We are rated by BAA3 and with B investment grade.

21st of December, the Group signed a share purchase agreement for the disposal of distribution of share of subsidiaries and shares in Czech Republic and Slovakia to Jagermeister. On December 27th Remy Cointreau ended its share buyback program in 2018 between September and December, the Group acquired 1 million shares representing around 2%, 1.96% to the capital. Average price of acquisition was 103.6 per share which is good business.

As a consequence of this share buyback, on January 28, the Group canceled 800,000 of treasury shares. So 1.57% of its capital.

Now post-closing events, three things to highlight since the closing of March 31, April 1st Remy Cointreau sold its stake in Diversa. As you may remember, Diversa was our 50-50 joint venture with Underberg in Germany. On the same day, we appointed the new distributor which is Eggers & Franke. This is not joint venture mode. This is a clear normal distribution collaboration with the distribution of Remy Cointreau in Germany.

Also on April the 1st, we closed the deal of the disposal of our Central European subsidiary, Czech and Slovakia, with Jagermeister. The impact on the financials on an recurring items would be seen in the next fiscal year in 2019-2020 end of September. But I can say to you already this stage that it is a net-net class value positive impact of €4 million.

That has not to be taken into account into the operating profit, it is something which is out of the current operating profit. Only positive for the net results.

Last on May 2019, 29, we announced having entered into exclusive negotiation with Brillet family in order to acquire the Maison de Cognac Brillet and part of its vineyard estate.

We are approaching the end for my part. Let’s move to the yearly dividend. The chart that is showing historical journey of the dividend of the Group. An ordinary dividend of 1.65 per share will be put to shareholders’ vote on the AGM on July the 24th 2019. Besides, given the strong growth in annual results and the historical year, the Board of Directors has also decided to propose an exceptional dividend of 1.00 euro. Both dividends will be paid in cash. Shares will trade ex dividend on July the 30 and dividend will be made payable starting on September 16, 2019.

Overall, the total dividend 2.65 is combined the ordinary and exceptional equates to pay out of 79% of the EPS excluding non-recurring items and a yield of 2.4% on the average share price over the financial year is average share price was 112.4.

Thank you for your attention and I will now hand it over to Valerie Chapoulaud Floquet.

Valérie Chapoulaud Floquet

Thank you, Luca. So, as you can see, 2018-2019 record year across the board and as we started already the new fiscal, we wanted to give you some outlook. Of course, as Luca mentioned, including what happened at the end of the year and what happened at the beginning of this year, this new fiscal year, a lot of projects and a lot of activity.

So in terms of outlook, let’s go back to the – to our positioning and our strategy for the Group. As you know, we want to be the leader of Liqueurs & Spirits and it’s quite interesting and important every year to look and to share together what is the evolution of the markets.

If we break down the market between the entry price and different segments and the segment that we are interested in which is the price points over US$50, we can see that the trends continues.

So, here you have the latest figure that we have received from IWSR of 29 18, which continues to demonstrate that effectively the segment we are focusing is definitely the most dynamic and growing two times faster than the market. So, plus 11% for the segments we are interested in as CAGR and plus 5% for the global market. So we are definitely focusing on the most dynamic parts of the market.

Whereas, we as a vision want to achieve a minimum of 50% and plus of our activity in this segment. We – it’s important to remind that we had four years ago, a breakdown that was the opposite of today meaning that 45% of our business was focused on this segment of US$50 and 55% below US$50 and at the closure of the last fiscal is the opposite. So we gain almost ten points, exactly nine points.

So, now, we have achieved in 2018, 2019 54% of our activity above US$50 and 46% below US$50. That’s quite good turnaround. It’s not a straight-line. It’s going to be 1 point, 2 points depending on the year. There are lots of elements make it up and because it’s the value of course. So, lot of, lot of elements being part of it.

But this is a direction is it going to be done in three year, five year, six year, ten years, we don’t know, but we don’t care, what is important for us is the trend and the trend is good and it’s just a start. So, we confirm that definitely we want to be the leader of exceptional spirits. We focus on this segment over $50 and it works.

And it works and not only as a result for the business but as well in figures as Luca mentioned and it’s interesting to look at the figures over four to five years that as a consequence, we were able to increase our gross margin. You can see that we gain more than four points in four years which is quite interesting. So, the business model works and delivers.

Not only in gross margin but as well in COPS or in profits, more than 5 points in four years for exactly 5.5 points in four years. So the COP is moving to the right direction and not only moving to the right direction, but most likely a little bit earlier than what we forecasted, because when we share together our outlook, I would say, ambition in reality, the result of 18, 19 is not only the record year for the Group, but we have achieved our results one year earlier.

So, as everybody mentioned, this is a figure of our COP post-IFRS 23.5, but we know that we are still below the average of not only the split and we combining this chart the industry and the benchmark that we take of some interesting luxury competitors. Or if we look at, and it is our choice to venture some key competitors in our industry and outside of our industry, we know that we still have some room to grow, which is a very good news. So, it means that we have very good opportunity.

So, my message is definitely would be good catch up in the last four years. We have seen the results in terms of COP more than five points higher than four years ago. One year earlier than what we imagined is we forecasted. But still, the good news that we can only do better in the coming years.

So we are working on it and we just started the new fiscal and it’s exactly the mindset that we have. So, you are going to ask me what are your outlook and projection? We know that the environment in which we work today anywhere in the world is extremely unpredictable from many good reasons, not only I would say economic reasons, but geopolitical reasons or especially with what’s happening today.

What is very clear for us is, what I just mentioned, we want to become the leader of exceptional spirits and we are on the right track. We want to increase the share as a consequence of our activity above US$50 and we are on the right track.

We want to continue to improve our current operating margin and of course, while continuing to invest in A&P investments and investment not only behind our brands, in order to fuel our equities, but as well in people in order to make it happen people who represent our brands over the globe.

So indefinitely, we want to be – to have a business model that is medium long-term, sustainable and resilient and of course profitable. So, that’s a good confirmation. For this starting fiscal, we are going to be absolutely in line with this strategy and this vision for the Group for sure. So within the vision in medium long-term.

You all may remember that is actually important to understand for this starting fiscal is a consequence of the fact that we sold our affiliate in Czech Republic and Slovakia, because we are going to get a 50 – a bit more than €50 million, €56 million drop of sales, that’s where our own sales including partner brands. So there will be one we are going to look at the figure for 2019-2020.

We are going to have a look at the official figure of – and the special figures and the like-for-like and the like-for-like is going to be quite different from the global figure of course, in terms of top-line and in terms of the bottom-line.

Top-line €56 million, which was the global sales of this two affiliates and €5 million in terms of COP. And in terms of phasing, the Q1 will be a bit less aggressive than the rest of the year. This is the way we built the year at the purchase time. So, don’t be surprised that Q1 will be slightly lower than the past in order to catch up during the year, Q2 and semester two, H2.

For one single reason, not only because of the combination of the two affiliates, but because we have passed very aggressive price increases including in the U.S. earlier than in the past, as April 1. So, you know that, as a consequence I am always a little in time before catching up in terms of sales. So, absolutely normal. This is the way we get in the year and that will be no surprise in Q1 for us.

Thank you very much. So we are happy to answer any questions you have after the presentation of the results of 2018-2019.

Thank you.

Question-and-Answer Session

Q - Ed Mundy

Hi can you hear me?

Valérie Chapoulaud Floquet

Sure.

Ed Mundy

Good. First, thanks for the presentation. Ed Mundy from Jefferies. I’ve got a couple of questions. I will just ask them one-by-one. I guess, the first is on China. Are you seeing any impacts yet from the rumors around the client and the traditional KTV channel? And could you just quantify how big KTV is for you in China, traditional as opposed to family?

Valérie Chapoulaud Floquet

So, no impact so far on China. Just for you to know, we just gotten a figure which is the largest figure than volume. But what we just analyzed regarding 2018 is the fact that we have very, very, very strong growth in China in 2018. 2.5 times faster than competition. So we are gaining market share in volume and in value.

KTV, there were some – I am quite sure you are talking about the very recent announcements about some KTV closure or different way of doing business, I would say, in some cities we are very focused. What we have done in the last five years is to do – to rebalance our activity globally in China. So to be less dependent on trade and competition was a bit ahead of it.

So we started to rebalance our activity in outside of on-trade. Within the on-trade, we started to move from traditional on-trade to more than on-trade. So the traditional on-trade is becoming very smaller in China for us. So we are not trying to expose, but we are not very much exposed to that. And then, outside of the on-trade, which is now below – far below 50%.

We are focused on more than off-trade which is moving fast with different new business models. We are focused on e-commerce remaining that e-commerce for us is around 20% of our activity. It was 20% there last fiscal. Direct activity, especially for researching with our stores. We have two stores. One in Beijing and one in Xi'an, with stronger activity selling directly to the clients with our private client direct.

So we are moving from a much more on-trade and traditional on-trade activity five years ago, to a much more direct and off-trade activity and moving to e-commerce in particular, allows us to address the new clientele and the new generation. So there is a massive switch between what was the situation five years ago and what is the situation today.

So, we are looking at what’s going on today in China which is not national for the moment. There is a trend and we know that the traditional on-trade/KTV in particular are little bit the previous business model of a lot of countries, for example in Korea it almost disappeared. So, most likely, we can imagine that from the coming years and with the new generation, it will happen.

Having in mind that the KTV that is not the traditional KTV with hostesses, are still very booming up because the young generation, because they have to celebrate between friends at the end of the month when they get their bonus if they are in the sales business. And so far, it’s still culturally very important.

But within the KTV, you have the – what I would say the traditional KTV with hostesses and the recent announcement that has been done by China and you have the regular or the more than KTV, which is across the board in old China, old generation, still very active. So we need to be very cautious not to mix generations.

So the right days are a little trend of maybe cleaning the situation today in China as well because next year China is going to celebrate a lot of things. And I think they want to move forward to a second direction. So, it’s not a massive part of the business and it is not the massive part of the business for us that KTV with hostesses, for sure.

Ed Mundy

And so, I didn’t catch up with the less than 10%, did you say of your business or well under 10%?

Valérie Chapoulaud Floquet

I don’t remember to be honest, but it is not significant for sure. The KTV with hostesses is not significant.

Ed Mundy

Thank you. The second question, Luca, maybe one for you on the margins. So you said the historical development 400 basis points let’s say with the shift of 900 BPS from the mix but for you it’s not as a reasonable proxy as you get out to your target 60% to 65%. Is that really what’s going to close the gap to the luxury piece?

Luca Marotta

Partially yes. Partially yes, but in terms of accretive impact on margin, we have also consider what we are realizing between $40 and $50, because it is very important also to highlight that not only 54% of our turnover which is composed by products higher than $50 but we have around 80%, 80% to 81% of our sales higher than $40.

At some times the accretive impact in some markets in terms of the cost of doing business for the higher part of the mix is even better in terms of increase for the $40, $50. So we look, for sure at the higher than $50, but as well, we try to increase in every way it’s profitable the rates of the $40 to $50 inside these spent dollars every time we are able to increase the average price from 42, 43, 44, 46.

There is really a benefit for our profit and loss. This is also the reason why we continue to increase prices in some regions like the U.S. Every time we are able to pass through some price increase in this speed. We think the case of the strategic needs, because we don’t want to sell too early products that can be sold with an higher pricing pattern.

We use that to rebalance and to be even more coherent with our strategy consider the different states with other major competitors and we are in a very important accretive impact on our profitability. All in negative impact is that the higher U.S. and the more increased prices and more frequently in the U.S. you have a disconnection in terms of volume deflation and replenishment. But value catch up and the result is clearly very positive.

Ed Mundy

I guess, some other way of asking the question, you have given us sort of benchmark of 28% for your – actually pace…

Luca Marotta

It is a reference, it’s not an objective. It is a reference of profitability overall to be able to catch up as a reference in theoretical point of view, we have to be able to increase gross margins. So, what I have just said makes a lot of sense.

Gross margin is the clear driver, the first one. On the negative side, we continue to increase significantly our A&P to be able to increasing the value to reduce the weight of OpEx because even if there is a very important component which is strategic 23% is a point to be – which is a weak point compared to our competitors, because of Liqueurs sales of scale. As a result the catch up on bottom-line will be realized. Thanks to gross margin and the leverage of OpEx.

A&P are not yet at the right levels. So we continue to invest. More than the faster which is higher compared to the top-line.

Ed Mundy

And then just a final technical one. Given where the Euro/dollars moved, are you starting to look and hedging for transactions for the next fiscal at the current rate?

Luca Marotta

2021? 2021, you mean?

Ed Mundy

Yes.

Luca Marotta

Yes. That’s the reason why also sometimes that you are a bit – you have deception because our policy which is very cautious. Determine that we crystallize some average hedge also more in advance compared to our competitors.

So, but we are starting by the added value beginning for 2021. But normally, you are right knowing that we are negative on the outlook about a mix months to come. We are clear and so we start to cover for 2021, because it seems there is a good price now. Good opportunity.

Nico Von Stackelberg

Hi this is Nico Von Stackelberg from Liberum. I was wondering if you could pull to slide 29 on the cash flow and maybe just walk us through for 2020. Some rough numbers that we should be thinking about for eaux-de-vie, spirits aging, other working capital items, CapEx for the year ahead?

And maybe if you could comment to something around €100 million for recurring free cash flow for 2020? I am not sure if there is a rough number that you can provide to help us guide on cash flow, but given the cash flow ramp 150 to 200, I think investors are looking ahead for next year and trying to work that out. Thanks.

Luca Marotta

We cannot commit to specific figures. But I can give you to some elements that are very important to consider. We will continue to increase our eaux-de-vie – strategical eaux-de-vie buying and working capital needs.

This was quite strong, very, very strong. It would be strong maybe not to the same extent, but it depends. If you have the opportunity, we will go for this. With the free cash flow, it is not an objective or reference per se. If the negative would be done, would be realized, thanks to the increased eaux-de-vie buying partner, we will do it.

In terms of other working capital, this year is a little bit abnormal, because the eaux-de-vie element we explained. So we expect to realize a better performance compared to this year. What expense, I can’t commit at this stage, but we lower cash utilization on the specific line this year. On the other side, we have to modelize as we said already in November, capital expenditures to increase big time, big, big time.

The €44 million consider €80 million to €90 million, we have increased a lot the production. So, in terms of cognac warehouse, storage, whisky, production tools, rum, a lot of investments. 2019-2020 and 2020-2021 would be two strong years of the investments, capital investment for the company.

And then in terms of financial cash out, nothing to – nothing different. Taxes cash out, beside that is a record year. I think that – the result, I cannot say you it is, 80, 100, 150. It will not be two for sure. This year it was really specific linked to some elements that I hope I was clear explaining.

Nico Von Stackelberg

That’s really helpful. Thank you. I guess, my question is for CapEx. On a going forward basis, this 80 to 90 that you mentioned, do you consider that a one-off? This is sort of another investment year and we are going to go back to a more normal level or is this a new normal that we need to be modeling.

Luca Marotta

It is not the new normal, but for two years, it’s 80 to 90. The new normal at this stage will be more something around 50 to 60. New normal started from 21, 22. Two years at 80, 90. It is clear.

Nico Von Stackelberg

Sorry, just to make it 100% clear, because I am…

Luca Marotta

Sorry, you may have one thing which is very important. So, guidance is very important. Cash for cognac and long-term vision company like Remy Cointreau is even more because without cash we cannot feed our future vision and needs. The guidance needs is strong cash and EBITDA in the medium to long-term will grow in significant and constant way. EBITDA will be there. For the first-line would be improving over the year.

Nico Von Stackelberg

Sorry, just to be 100% clear, that’s €80 million to €90 million of CapEx per annum for fiscal 2020 and 2021 or is it cumulative?

Luca Marotta

Sorry, I didn’t get.

Nico Von Stackelberg

What is the CapEx spend in fiscal 2020? Is it €80 million to €90 million? Or is that a two year expenditure, 45, 50?

Luca Marotta

No, every year €80 million to €90 million.

Nico Von Stackelberg

But two years dropping to 50?

Luca Marotta

160 to 180 in two years.

Nico Von Stackelberg

Thank you.

Luca Marotta

We are scaling up big term.

Valérie Chapoulaud Floquet

In terms of business, it makes sense, because we need two things. First of all, we need eaux-de-vie. But when you bring additional eaux-de-vie you need space and you need barrels and to give you just a little idea, each time we built a new warehouse it costs between the shed itself and barrels roughly more than €10 million.

Additionally, we just, as Luca mentioned, we just built the new distillery for Remy Martin last September in cognac. So next time you come to Cognac, please let us know because this is a quite a very high-end one and very striking one and we are doing the same with our two new acquisitions of two years ago. One in the Domaine des Hautes Glaces where as we speak, building a new distillery and a new warehouse space and we will do exactly the same very soon in Seattle.

So we need effectively new tools and new facilities in order to make it up. And so it’s across the board for aging liquids, as Luca mentioned. And we have specific needs in order to prepare the future, not only in cognac, not only in rum, not only in whisky, we continue to build some warehouses and we are going to build a malting facility in Islay for example, we are going to build and we are building at the moment in the Domaine des Hautes Glaces in the French Alps a new distillery and a new storage facility and we will do the same in the U.S.

So, this is two years that I have planned, because as I said, the new distillery of cognac has just been open just an year ago. But we have a two year plan that is very strong and which in fact demonstrates the trust the vision of the Group, because investing so much which is almost two times higher than we are just to do.

Usually, we have a CapEx investment of €40 million to €50 million to go to €90 million to €100 million two years in a row, means that we are totally confident in the future.

Nico Von Stackelberg

So, it is at 90 to 100 and it was 80 to 90.

Valérie Chapoulaud Floquet

I am optimistic than Luca.

Luca Marotta

Because… sorry, because an accountant – CFO, CEO don’t – 80 to 90.

Valérie Chapoulaud Floquet

Don’t get what I say, 80 to 90. I am more optimistic.

Luca Marotta

€80 million to €90 million.

Nico Von Stackelberg

I am sorry. Now my question, this is a slightly, an unfair observation, but your industry works in cycles and the last time we had this sort of optimism in cash distribution and pre-date by about a year a major downturn which was due to the exogenous impact of the Chinese government? Was that with unknown tariffs potentially coming in the U.S.?

Or whether you can comment on what the update is there? And what is that gives you the confidence at this point in the cycle to be returning a euro a share, stepping up CapEx, now that with ten years into or almost uninterrupted sort of uptick in international spirits you put there?

Marc Hériard Dubreuil

To partly first, to your question. That’s why we have the system of dividend. The dividend is unchanged 1.65 and as we did twice before, we have the one euro, because we think that this time and the results we have had on the previous years, we can do it. But the reason for that split is exactly to be already in case some events that we don’t know yet like what you mentioned could happen.

This is our way. Yes, we are – we go through cycles. That’s why we have not decided to increase the dividend. The clear sign is that we are already in terms of dividends planning to face a new cycle.

Nico Von Stackelberg

But it’s specifically, could you give us an update on where you think the proposed tariffs are in the U.S and confirm where they to be introduced, that your EBITDA would be sufficiently protected to be able to maintain debt coverage ratios to support investment levels that we are talking about today?

Valérie Chapoulaud Floquet

I will answer the first part of the question and maybe, Luca, the second part. First of all, you are right. We work in cycles and when I joined the company, I have been told that there is cycles of lots of ten years of between bond spirits and non-bond spirits, both spirit.

Honestly, the markets are changing so fast that I am not sure these cycles still exist or will happen, we have no clue, whereas in the past basically, you are right, it was very much – very predictable. Why I think it’s less predictable to globally except there is any accident like the one you are mentioning and I am going to answer to this one.

Less predictable, because I think the clients’ attitude and behavior is very different with the new generation. There is a lot of things going on. If you just take cognac in Asia and in China, first of all, there was a massive drop when I arrived a bit earlier, so, six years ago. So, you are right, if we look at the U.S. the trend is there.

The last six years were very good for cognac, but it was not the case on the other side of the ocean. So, if I look at China, China, we know that there will be some steps or thresholds, but China, which very interesting and important to see that as for the crisis, cognac is even stronger than in the past across the board old generation and the new generation stick to cognac big time, much bigger than whisky and by the way the crisis demonstrated that the Chinese client is looking for quality.

One very good example is that the blended whisky dropped like crazy and they are moving very fast to single malt, so, maybe sure, but higher quality.

Cognac is stronger after the crisis in terms of share of imported spirits than in the past. So very interesting. China, we know that every single year more than €60 million young people annversarize their 18 year old. So they have the official age of drinking and we consider that there is a reservoir of new clientele and they are very quite different.

On one hand, they are quite loyal to cognac which was a question we could have and second, the by difference in different channels and they are much more open additionally to cognac and whisky to other segments. So, cognac is strong and even stronger than in past and across the board in terms of generation.

We have every year, 60 million – officially 60 million people globally, not all in big cities, but who cannot access to alcohol. And on the top of cognac and whisky, they are very much keen to test very new options of which cocktail and other segments. So, honestly, of course, maybe there will be some up and downs, but globally the trend is there for China.

What we look at as well is, what’s happening in China in terms of other consumption of this generation. What we can see is that within the luxury and selective beauty, it’s literally booming at the moment, whereas the classical FMCG or cars and so forth are struggling today in China. So, we see that clearly there is spirits, beauty, luxury that is booming.

So how to treat yourself, so it’s very much in terms of indulgence and the rest that is much more the commodity in a way or much more investments like cars and so forth. So, there is a trend and we see that this young generation will most likely continue like in the rest of Asia to live with their parents. They have disposable income and they want to treat themselves.

They want to spend their money. They want to have friends. They want to have a good lifestyle. So, the trend is there. I am not sure it’s going to change, big time, maybe there will be some slowdown, but there is a massive trend in terms of consumption but a certain way of consumption.

When it comes to America, honestly, today, the trend is there. We don’t see any slowdown and let’s put aside for the moment any other accident that can happen. That has nothing to do with the behavior of the clients. The trend is there. The trend is there as well in terms of moving to much more high-end and more qualitative liquids.

On-trend is very dynamic. Mixology is there. Cocktail is a massive trend, not only in the U.S. but across the board in the world. And I think we are well positioned with a lot of our brands like Cointreau, in particular, but not only. So, globally, the trend in the two key continents are there in terms of clientele and consumption.

When it comes to potential accidents, you are right to mention, because of course, we work on it quite early. We took some key decisions already to protect eventually what could happen in the U.S. There is no clear understanding if it’s going to happen or not. You will have maybe 50% of our stakeholder would tell us in the U.S. that it is going to happen and 50% are going to tell us that it’s not going to happen.

What we know is that the industry did a massive lobbying in order to stop it. On our side, we – is to anticipate, we started to anticipate a lot of things in order to protect 2019-2020 fiscal and I am happy to tell you that we are quite positive yet. More to come in terms of stock and shipping. We’ve been said honestly, this can change overnight.

We know that there is no decision yet. If it comes, it could be September, maybe it will not happen, we have no clue. Nobody can predict. I think it’s a 50-50. If you listen to the people who were front-line to discuss with Washington, they will tell you, it will not happen. But doesn’t mean anything, doesn’t mean anything and if it happens, is it for three months?

Is it for six months? We have no clue. So we consider that our job is to protect ourselves as we are protected for the – for example our UK market as opposed to Brexit April 1. So we did what we have to do. But we have no clue what’s going to happen either. So, in the U.S. it’s more massive. Of course, as you can imagine. So we have protected a big part of the year.

More to come, because we are looking on it every week. We have no understanding of what could happen. If it happens, the uncertainty is that we are going to increase our price, because our job is not to absorb the tariffs, clearly. And we understood that mostly likely whatever the industry is going to be part of it, most of them are going to do the same, because our job is not to decrease our profit.

So, this is going to be as a consequence, price increase which is quite different from a product or a brand to another one. We know more or less what could happen and we know that some brands and some segments like more sensitive to price increase to others. I think because, we think because of our positioning, and because we are much more high-end than the average of the industry by far that logically, we have a better resilience to price increase.

So that’s the good news of it and what we have achieved in the last two to three years in particularly in the years with price increases demonstrated the cast that we are more resilient than what eventually even I can imagine. We will be extremely pragmatical and reactive. What we have done so far is to protect a big part of the year we see it happens.

We see – but we have no idea what is going to happen. The experts will tell us today that most likely it’s not going to happen honestly. Nobody has any idea about it.

Nico Von Stackelberg

I just repeat, sorry just to be very specific, when you say you protected yourselves, is that the movement of finished goods from Remy in France to Remy USA? So no impacts on – it’s not the wholesale level? And when should we expect an update, July? You have no idea?

Valérie Chapoulaud Floquet

It change every day. You know, it's the beauty of the situation today.

Nico Von Stackelberg

Thank you.

Valérie Chapoulaud Floquet

Unpredictable.

Luca Marotta

Yes, we have to stop that. Only to add two points. Chris, you have seen the outlook. The official communication starting with this in certain economical and geopolitical context. The guidance taken to account, all that for the medium to long-term. So, we are taking all the measures to be able to deliver.

Does this imply that in even quarter or semester would be some shaking up? No. There would be some shaking up, but on the medium to long-term, we are committed to that. And we will take all the protection that’s what we said on a short-term basis for sure, increasing prices will be also impacted eventually on volume. But all the guidance, all the vision of the future are considered and simulated in uncertain geopolitical and economical frameworks.

Unidentified Analyst

Yes, hi. I have just two questions. One was just another clarification on an aspect of your medium-term objectives on the reinvestment side, you say, keep investing significantly in strategic A&P and structure costs you have been investing significantly.

Is this in line with what we have seen or is it a step up? And the second one – no more technical on the tax rate, I think this time last year, Luca, you said when guiding to the year just combined tax rate was more or less stable. But you said you are expecting probably a decline in fiscal 2020, because all fiscal reforms in France. Whether that is still the case?

Luca Marotta

Okay. We will start with the last one. At this stage, we are guiding at the same level, because there is we have – there is no absolute certainty about that. So we are internally – our vision is that, 28 to 29 would be the tax rate of next fiscal.

We will try to do our best to improve it like every year. But the geographical mix in this moment is a little bit penalizing. And in terms of investment you want me to answer as well. We have increased the lots. But we still need to increase more. So, A&P, new A&P after post-IFRS 15, so clean A&P has to increase more than the top-line for some years.

In terms of OpEx, it’s a bit different, because in a way you will see some increase in the strategic part of the OpEx, Brand ambassador, PCG are seeped inside OpEx. These are not A&P. If we are building some new subsidiary, it is inside OpEx. So this part will be included in growing big time, but part of – big part of my job is to be able to cut ordinary and normal cost to be able to run it as – possible flat.

There are also some increases, but at the cleanest, the leanest level possible. So the OpEx will be as a global result would be a line which to grow would be lower compared to the A&P but inside that two different souls and two different sub-line working at different process. We are not yet mature in that in A&P, not at all.

Marc Hériard Dubreuil

So, we thank you very much. And we look forward to the next set of results mid-year.