Pernod Ricard SA (PDRDF) Q4 2022 Earnings Call Transcript

Sep. 01, 2022 9:53 AM ETPernod Ricard SA (PDRDF), PRNDY
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Pernod Ricard SA (OTCPK:PDRDF) Q4 2022 Earnings Conference Call September 1, 2022 3:00 AM ET

Company Participants

Florence Tresarrieu - IR

Alexandre Ricard - Chairman and CEO

Hélène de Tissot - EVP, Finance, Operations and IT

Conference Call Participants

Simon Hales - Citi

Ed Mundy - Jefferies

Olivier Nicolai - Goldman Sachs

Laurence Whyatt - Barclays

Sanjeet Aujla - Credit Suisse

Chris Pitcher - Redburn

Mitch Collett - Deutsche Bank

Jeremy Fialko - HSBC


Good day, ladies and gentlemen, and welcome to Pernod Ricard 2022 Full Year Sales and Results Conference Call.

At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator instructions]

I'd now like to hand the conference over to your speaker today. Please go ahead.

Florence Tresarrieu

Good morning, ladies and gentlemen, and welcome in Paris at The Island for FY '22 full year sales and results presentation followed by a Q&A. Before I leave the floor to Hélène and Alexandre, you're going to see a short movie from The Glenlivet.

[Video presentation]

Alexandre Ricard

Well, good morning to all of you and I do hope you have spent a very nice summer, enjoying very convivial moments and more importantly, around the right brands. So welcome to The Island for our fiscal year '22 full year sales and the results and let's start directly with the executive summary maybe. And then I'm going to grab yours. Nope, there we go.

So fiscal year '22 has been a historic year for Glenlivet [ph] with our net sales growing by 21% hitting the €10 million milestone at €10.7 billion with market share gains across most markets, leveraging both our very wide portfolio of brands and our geographic breadth. We've increased prices, basically everywhere with an average mid-single digit price increase globally. And our growth has been driven by the strong recovery of the on-trade by the strong resilience as well of the off-trade and the rapid rebound of the travel retail channel.

Strong growth as well driven by balanced and diversified sources; I think this is absolutely important and if we start with our must-win markets, strong dynamism across all must-win markets. You see India at a whopping plus 26%. Travel retail at plus almost 50%; the US at plus 8% and China at plus 5%. Performance has been outstanding across all regions, but in particular in Europe, in Africa and Central and South America. And finally, excellent broad-based growth across the portfolio with our strategic international brands growing by 18%, our specialty brands growing by 24% and finally, our strategic local brands in particular, our Indian whiskeys growing by 18%.

And this has delivered a record profit from recurring operations at €3 billion, driven as well by revenue growth management, as I mentioned, but as well by operational efficiencies, which have offset the impact of the inflation. This has also allowed us to deliver growth margin expansion, and finally, delivering a record operating margin of €28.3 with an expansion of 80 basis points or 52 basis points on an organic basis.

These results demonstrate the strength, the agility and the resilience of Pernod Ricard's business model. We are deploying the Conviviality Platform at pace. I hope most of you were here for Capital Markets Day before summer, where we presented the Conviviality Platform and by the way, I'd like to take this opportunity as well to mention that we will be announcing in the coming days, a partnership with a very emblematic French partner company regarding the data portal we have been developing over the last three years. So stay tuned for that new news.

So anyways, we are developing -- we are deploying our consumer-centric strategy at scale; now leveraging our portfolio of brands, leveraging our distribution network to really further stretch our growth and now accelerating, thanks to data.

We have strengthened our portfolio of brands through additional investments, through innovations, and of course continuing our bolt-on acquisition strategy, which this year included the whiskey exchange, more recently, Château Sainte Marguerite and a minority stake in sovereign brands.

Our specialty brands portfolio is now double what it was just pre-COVID in 2019, and now represents 6% of our net sales and this growth and the development of our strategic roadmap has been done responsibly. So we're well advanced as well on delivering our sustainability objectives within good times from a good place.

We've also delivered a record high cash generation and continuing to leverage our business. So we have the highest ever free cash flow at €1.8 billion and finally, net debt-to-EBITDA ratio at 2.4%. We are investing in the future growth of our business with increased strategic investments and all these results allow us to accelerate the returns to our shareholders with a strong dividend growth of plus 32% versus last year. And the announcement of a new share buyback program of roughly €500 million to €700 million for this fiscal year. You see here the key figures. I won't dwell upon them. Hélène will go through them in detail. Just to underline the reported net profit up at 53%.

And I think it's important to just sit back for a second and look at our willing formula or the way I like to see it, which is our unique, competitive advantages, our fundamentals, which number one are comprised of what we believe is the widest, the largest or the most comprehensive portfolio of premium spirit brands; number one. Number two are diversified and global footprint and scale, which is even more so important when the environment is volatile and cycles are uneven between regions, between segments, between markets. And most importantly our unique culture, which blends, conviviality and performance where people really want to go the extra mile with a very high level of engagement. And by the way, we recently had a very successful participation to our second ever employee stock ownership plan.

This is also -- this formula is also fueled by very favorable underlying dynamics or drivers, demographics to start with the legal drinking age population and the growth of middle and affluent classes in emerging countries, not just China, not just India, not just Sub-Saharan Africa, not just LATAM, basically all these markets, consumer trends and that's true for the whole world with premiumization which is an established long-term fundamental trend and the resilience and we've seen it over the last few years of wine in spirits during economic downturns. Finally, the global spirits market value growth of plus 11% versus pre-COVID 2019 shows that premium plus spirits are outperforming.

Again, and I think this is critical, diversification of the sources of growth of Del Maguey, which is, was, still is, and is going to continue to be a very strong strategic intent, having diversified sources of growth, which is a big change versus, 10 years ago, 80% of our growth comes from six spirits categories.

You see here by category. The contribution of each category to our fiscal year is growth and the weight in the portfolio I'd like to stress the scotch whiskey performance, which has weighed for 30% in Del Maguey growth and that represents a little bit more than 20% of our net sales. Irish whiskey as well, very strong contributor to our growth with 16% contribution to growth and weighing for 12% of our business. The Seagram's whiskey as well, 11% contribution, and weighing for 9% of our business; vodka in particular, Absolut, of course weighing 9% of our growth and 8% in our business. Gin has been a strong contributor to growth and finally, cognac and brandy as well.

So really diversified sources of growth when it comes to our portfolio of brands and by the way, with a clearest queue to premium plus. 76% of our net sales come from premium and above categories and they contribute to 80% of our growth. And likewise, not just from a portfolio standpoint, but as well from a geographical standpoint, you have here the similar analysis where you have the contribution to growth from our regions, the weight of our regions in our business and the growth of our regions for fiscal year '22. Well, there's double digit everywhere. I won't go through these numbers. I just think that what they clearly stress and underline, is the balanced nature of our growth, the diversified sources of our growth which is absolutely critical.

And as I mentioned, our growth, our excellent results were driven responsibly. So you have here our strategic roadmap from an S&R point of view. It is at the core of everything we do. Our S&R objectives are now embedded throughout the whole business. It's really every single function in the business is today perfectly concerned. You have here progress to date on a number of objectives we set ourselves. As you know, this roadmap was launched back in 2018. We updated regularly and I'm particularly proud of the recent investments we made, especially in Scotland and in Ireland with more announces to come. So please stay tuned.

And again this is perfectly in line with our long-term sustainable value creation strategy. This is a quick recall of what we presented to you during Capital Markets Day. Our medium term financial framework where it's all about growing our top line between 4% and 7% growth aiming at the up range of that interval powered by what we call the conviviality platform leveraging data at scale.

Focus on pricing, of course for sure. Continuous improvement in operational efficiency as well and as we've done this year again with significant investment behind our strategic priorities in terms of brands with efficiency on return on spend of course, discipline, of course, on our structures and on the organization to drive operating leverage of roughly 50 Bps to 60 Bps on average every year.

Financial policy, as I mentioned, our objective has been and will continue to be, to maintain investment grade rating of course. Number one, priority number one is to invest in the future organic growth of our business in particular, through our strategic inventories and CapEx, which we've done this year and will highlight what we intend to do in the coming year.

Continued active portfolio management, including value-creating M&A. So please expect our bolt-on acquisition strategy to continue. Dividend the distribution of roughly 50% of our net profit from recurring operations, and finally, share buyback when the above priorities are fulfilled. And this is what happens.

So, our strategic plan four years ago, which was updated this year for the next three years. What this shows is we say what we do and we deliver what we say we will deliver. We're perfectly in line with our plan and just to remind you what our plan is about. It's a story that started with top line growth; focus on growth, which then became focus on profitable growth with profit margin expansion of roughly 50 Bps to 60 Bps per year. Focus on diversifying the sources of growth and of course, by delivering strong cash flow. We said we would deliver this, and we have delivered this.

Very briefly; you have here our sales, as I mentioned very strong growth, pretty well balanced and broad based by region. Number one, a quick focus on our must win markets with the US that has grown on average 8% over the last three years, delivering again, 8% over the last fiscal year. I would just stress maybe two things on the US. First of all, very strong price mix, falling basically broad based price increases in fiscal year '22 with additional price increases to be implemented as early as now, in fact in September and October.

Number two, I would also stress the very strong performance of our specialty brands portfolio in the US in particular, our American whiskeys Jefferson, Rabbit Hole,, TX whiskey, Smooth Amber, but as well, our Agave-based portfolio and Redbreast.

China, while again a three-year average growth rate of 9% delivering 5% over the last fiscal year. We've had a good start of the year, last fiscal year, which was a little bit impacted by strict containment measures, as you know, which impacted our Q4 at Del Maguey. The trend has improved since the month of June with the easing of restrictions and so far we've had a pretty good start to the year in China.

Travel Retail up roughly 50% with a three-year CAGR still negative down 13%. However, I would trust two things. Our value leadership has been reinforced quite significantly in Travel Retail and for this new fiscal year, we expect Travel Retail profit to be back to pre-COVID levels, which I believe is great news for the channel. And of course for Del Maguey given the weight of the channel.

And finally, India, which has grown on average 7% over the last three years with a clear acceleration over the last fiscal year where India grew 26% where we reinforced our leadership position and not only did the strategic local brands performed well, our strategic international brands performed exceptionally well, principally led by our Scotch portfolio by Jameson Whiskey, which is becoming a cult brand in India and finally by our vodka Absolute.

I think it's worthwhile also spending a couple minutes on the rest of the world because there's been a very strong performance as well with pricing across all markets as well. If you look at Europe a three-year average growth rate of 6%, I think that's really what surprised me. Strong, continued growth with a whopping plus 19% for the last fiscal year. If you look at the performance of Spain, up 36% and again, where we've had a good start of the year with a great summer in Spain.

There was some growth as well in France albeit with a margins squeeze given the inflationary context here in France. Very strong growth in Germany, up 10% with a very strong on-trade rebound, whopping 42% in Italy, which had a great summer as well. When it comes down to Eastern Europe, well, very strong performance in Poland, but obviously the performance is impacted by the conflict, the war in Ukraine since mid-February. And you should expect, again, a significantly subdued activity for fiscal year '23 particularly in Russia.

Stronger on-trade rebound in the UK with great sales growth driven by Jameson, Absolute, Havana Club and more generally our specialty brands like Monkey 47, and Malfy.

With regards to Americas, which is up 12% with a strong CAGR, a three-year CAGR of 8%. We just stressed the whopping 52% growth in Brazil, Asia rest of the world up 19% with a three-year average growth rate of 4%. Would just stress while Korea up 33%; South Africa, up 38%; Nigeria up 81%; outstanding performance in Turkey and very strong performance for our champagne and scotch in Japan.

From a category point of view, in terms of segments, as I mentioned strong growth across all spirit categories, soft performance though for our wine portfolio, which was particularly hit by a lower harvest for our Soviet coming from New Zealand.

I would just like to stress the excellent performance of Jameson up 24% with a three-year double-digit CAGR of 12%. We've broken the 10 million case milestone for Jameson this year, which is just amazing with a fastest growth rate in 30 years for the brand. Double-digit growth in the US with a very successful launch of our innovation, Jameson Orange, but I'd like to stress as well, the success of the internationalization strategy of Jameson with growth accelerating to 38% outside of the US with great performance in India, as I mentioned, but South Africa as well, Nigeria and many, many other markets across the world. And I'd like also to underlying the very strong performance of Jameson Black Barrel up 43%.

Absolut up 19% with a 4% CAGR. Again we've broken a milestone with Absolut 12 million cases this year with global expansion driving an acceleration of the performance for Absolut. European markets are core growth drivers for the brand where the brand grew double digit, but as well growth basically everywhere else.

Scotch is up 25% with a 5% average annual growth for the last three years and this growth is driven by the entire portfolio brands. You see Chivas up 29%, Ballantines up 28%; Glenlivet, up 21% and Royal Salute, up 38%. Martell finally, which grew 7% with good growth on the basis of a very high comparison notably in China, excellent growth with Martell Blue Swift in the US and with a very successful marketing campaign. Some moderate growth in China, as I explained especially between March, April and May due to some of the lockdowns and continued global expansion of the brand with particularly strong results in Sub-Saharan Africa.

As I mentioned in the introduction, specialty brands have now doubled in the last three years. You see our specialty whiskey up 23%, our specialty Agave brands up 21%; specialty gin 43% growth and finally, I would like to stress as well, the great performance of Lillet and Italy, that has doubled over the last fiscal year.

Finally, rest of the portfolio; I won't dwell upon it, but good balanced growth across all brands and particular Beefeater and finally I'd like to stress the very, very strong growth of our RTD portfolio, particularly in the US and in a number of European markets,

Innovation has been a strong contributor to growth perfectly in line with our strategic roadmap. Our innovation portfolio grew 45%. I mentioned the very successful lunch of Jameson Orange, and we have also launched Jameson RTDs with Ginger and Lime. Avión Cristalino, great success such a great success.

We ran out of stock. So if you find any bottles of Avión on shelf, just make sure you buy them. Some more to come. Great performance of our innovation around the Beefeater as well. And the launch of Royal Salute 21 Blended Grain.

And before handing over to Hélène, we've really stepped up in terms of media investments and media activation. You have here a number of examples and why not introduce the Jameson Campaign before handing over to Hélène. So please enjoy

[Video Presentation]

Hélène de Tissot

Thank you, Alexandre. Hi everyone. So let's look at the profit. So this strong top line that you've been describing Alexandre, our purposeful investment driving margin expansion. Look at the growth of our profit from recurring operations. So it's growing by 25% from a reported point of view and plus 19%, when you look at the organic performance with margin expansion of 80 basis point reported and 52 basis point organic. So our gross margin is expanding by 12 Bps as price mix and fixed cost absorption I've said the COGS increase.

We have maintained our E&P ratio at 16% of the net sales with a very dynamic allocation of our resources between brands, markets and as well activities with enhance efficiencies. Thanks to the digital transformation and as well, enhancing the focus on working and the one that our consumer are exposed to.

Purposeful increases as well in structure cost notably with recruitments to support the digital transformation and as well, benefiting from a favorable effects impact of CIRCA €160 million due mainly to USD and the Chinese Yuan appreciation versus Euro.

Moving now to the earning per share. So a very significant EPS growth in fiscal '22, a growth of 33% and this is increase -- this increase is driven by the growth from our profit from recurring operation, but as well, lower recurring financial expenses and the share buyback. We've been successfully refinancing the bank debt and this is driving lower financial expenses in fiscal '22. We an average cost of debt of 2.3%. It used to be 2.8% a year ago.

We have recurring effective tax rate at 23.2% and these as well, a reduction in number of shares as a result of the execution of a €750 million share buyback during the year.

Moving now to the net profit. So the net profit is growing very strongly at plus 53%; net profit, which is slightly below €2 billion and this increase is a combination of the growth of our profit from recurring operation, a reduced financial expenses and the positive FX impact, I was just referring to.

Moving now to the cash performance and as well, the evolution of our debt. So let's look first at the cash generation; record high generation that we have delivered this year. The recurring free cash flow is at €1.9 billion with an increase in strategic inventories to support the future growth of our brands, especially obviously the aged product and this investment is expected to accelerate further in fiscal '23.

We have as well increased strongly on CapEx, which represent roughly 4.5% of the net sales in fiscal '22 to support key investment priorities and this as well is expected to increase further in fiscal '23. These negative working capital requirement variation, which is explained by the strong business momentum we had this year in a context of supply chain tensions. And we have been increasing our finished goods inventories across the world to protect the growth of our business.

There is this reduced financial expenses that I mentioned for the P&L, which is as well impacting favorably our cash generation due to the successful refinancing and cash tax is increasing following the business profit growth and the recovery post COVID. Our non-recurring items are mainly impacted by a restructuring and bond debt, early repayment cost. And we are delivering highest ever free cash flow at €1.8 billion.

Moving now to the evolution of our depth. So this strong performance is driving our leverage down with a net debt to EBITDA ratio at 2.4% at the end of June, plus 2.6% at the beginning of fiscal year 2022. So an increase of the net debt of €1.2 billion, which is mainly linked to the increase M&A and share buyback. So quite active year for us in term of M&A.

You have here the exact amount of cash-out, and this is obviously the execution of our transaction with sovereign brands, The Whisky Exchange, and Château Sainte Marguerite. We have as well, an increase in dividend, and you have all the numbers on that slide, a resumption of the share buyback with the execution of the €750 million program in fiscal year '22, and some negative FX impact impacting or debt.

In this context, we are accelerating the returns to shareholders in line with our financial policy, with a proposed dividend €4.12 per share, which is a 32% versus the previous year. This is obviously subject to the approval of our shareholders at our next shareholders meeting and we are announcing today a new share buyback program for fiscal '23 of €500 billion to €750 million following our financial policy priorities.

Back to you, Alexandre for the conclusion and outlook.

Alexandre Ricard

Well, thank you very much, Hélène. So listen for fiscal year '22, it's been a historic year for Del Maguey with an excellent performance, which as I said really demonstrated the strength of resilience and the agility of our business model in an environment that we can qualify as turbulent.

With regards to our medium term over the years, fiscal year '23 to fiscal year '25, we remain absolutely confident to deliver our strategic ambition leveraging our key fundamentals, which is our portfolio, our geographical footprint, deploying at pace our consumer-centric conviviality platform and our ability to adapt very swiftly to volatile situations.

So for this new fiscal year for fiscal year '23, what do we expect? First of all, we expect dynamic broad-based net sales growth, obviously on a normalizing comparison basis with a pretty good start to Q1. We'll continue to focus intensively on revenue growth management and pricing, of course, as well as on operational efficiencies in what we can qualify as a high inflationary environment.

We'll maintain our A&P ratio at approximately 16% of net sales with continuous improvement of return on spend or return on investment. We'll continue to invest in our structures, notably supporting the rapid deployment of the conviviality platform that we presented to you just before summer.

We expect as well to increase our CapEx at roughly 7% of net sills and our strategic inventories well to fuel our future growth, as you may have seen. As Hélène mentioned we will proceed with a share buyback of roughly €500 million to €750 million, and finally, and based on current spot rates which of course are not locked in, but at least if we project the current spot rates, we should expect as well, a very significant positive currency effect.

And I think before handing over to Florence for the Q&A, I thought it quite appropriate as well just because summer is not completely over to showcase another of our media activations in that case behind Absolut.

[Video Presentation]

Florence Tresarrieu

Thank you, Hélène and Alexandre. Let's now move to the Q&A session and opening the line. Please have two question maximum per caller and then we will take turn Alexandre and Hélène, back to you,

Question-and-Answer Session


[Operator instructions] The first question from Simon Hales from Citi.

Simon Hales

Thank you. Morning, Hélène, Alex and Florence. So, I've got two questions then please. Firstly, I wonder if you could just provide a bit more color on the current situation in China when Alex, you mentioned that trading trends have clearly improved since June. I appreciate that you were also managing inventory through your Q4, but perhaps you could talk a little bit about the underlying depletion trends you've seen in recent months and into Q1 and in particular, how you are thinking about mid-Autumn festival and how wholesalers are preparing for mid-Autumn festival.

And then secondly on the whole issue of COGS inflation in fiscal 2023, clearly, we're seeing higher energy costs and they'll be impacting I suppose your glass supply in particular, but how vulnerable are you to that ongoing energy cost volatility were seeing other, any areas in your supply chain where you are experiencing disruption or could be vulnerable to disruption in the coming months. So any color there would be very helpful. Thanks.

Alexandre Ricard

Thank you, Simon. I'll answer the first question. I'll let Hélène answer the second question. Listen, on China, the answer is more or less in your question. First of all, Q4 was difficult in particular April and May because of the lockdowns to put it bluntly. As we mentioned in the presentation since the month of June, we've seen clear improvement in trends in China. So over the month of June, July and August.

So I would say maybe two things. First we started the year, this fiscal year, or we ended last fiscal year in China with very, very healthy stock levels which is very important, which allowed us to pass by the way pretty good price increases in May.

And second the trade has been preparing quite intensively for mid-autumn festival, which by the way is next week. And the sell in to the trade has been particularly stronger. Now, how will sell-out perform through mid-Autumn festival? I don't know, is the answer. I'll have the answer in approximately -- I'll have a qualitative answer in a couple weeks from now and a more detailed mathematical answer in six to eight weeks from now and we'll look at stock and trade, but so far so good for China.

Hélène de Tissot

So transition to inflation so far, not so good I must say and that's obviously a very fair question. We've been facing inflation already in fiscal year '22, as you know. This has been probably accelerating in each tool and impacting our COGS. We were obviously expecting that ready to face that and working hard to offset the COGS inflation with all the initiative we mentioned in term of price increase and operational efficiency.

Back to your specific question for fiscal '23, so we believe that this is obviously something which will remain in the coming months. Your point on the glass supply is very relevant and we believe that the high cost of energy is going to impact us in fiscal '23 in terms of dry goods, because of the impact on glass supply. And again same focus for us to have said that, and then protect margin with the price increase revenue growth management and all the operational efficiency.

Back to the specific question and the energy and the risk in term of having energy across the year to protect our operations. So obviously this is as well, something that we are definitely monitoring very, very closely and very carefully through first optimization of our plant production management, meaning what we are producing and sectoring the production of our vintage goods as we speak and ahead of what might be much more tougher times in the coming weeks and months.

These as well something which is I believe important to flag is that some countries are less exposed to that risk. For instance, UK and Ireland are probably less exposed and France to the Russian gas. So this is obviously a good thing for us when, you know how big is our business in Scotland and Ireland, and that there are even some countries for which there some protection to get the supply of energy for our industries among others. Like for instance Sweden,

Simon Hales

That's very helpful Hélène and just to check, obviously you were able to absorb the cost inflation that you saw in 2022 through pricing and the revenue management action you took. Do you expect to be able to do a similar sort of thing, therefore in 2023?

Hélène de Tissot

Let me answer that question a bit more broadly in term of margin expansion. This is a key focus as Alexandre and I mentioned. So we are already working hard on it, I would say. So in term of top line dynamics, there's a lot that we've been doing in the very recent past in term of pricing increase everywhere starting in H1 fiscal year '22, probably with some acceleration as well in H2. And we will benefit from that carryover price increase in fiscal '23.

But we are not only let's say leveraging that. We're working already as you so far, two key markets China and the US an additional price increase in China as of May. So we'll have the full year impact in year '23 in the US in the coming days and weeks and these more to come in many markets, I would say all the markets. So this is obviously something that will definitely help.

Again, promotional intensity is something that we will as well improve and optimize very strongly and we have the support and our key digital program on that front operational efficiency is as well, something which will be very intense. And when I talk about operational efficiency, it's very broad. It's going to impact the manufacturing, the procurement obviously, the packaging, lots of value engineering as well and supply chain obviously S&P and so on and so on. So all the objective of that is to protect our margin.

Starting with gross margin, we want to secure a deployment of solid investments in term of A&P and structure. And we have the intention to deliver some operating margin into fiscal '23.


Thank you for your question. We are now taking one next question. The next question from Ed Mundy from Jefferies. Please go ahead.

Ed Mundy

Good morning, Alex, Hélène and Florence. Two questions for me please. First all in your guidance, you're talking about broad based growth on a normalizing comparison basis, as opposed to a normalized comparison basis. When you look at slide 15 and 16, you can see the travel retail is still down on a three year basis in a relative to where it probably, you know, would've been had, COVID not taken place and you, and, and Asia as well is still probably you know, running slow than what it would've done.

Could you talk to which parts of the business still have some bounce back potential in that context? And then the second question is really around any changes in consumer behavior that you're seeing, you know, clearly we read a lot about the cost of living crisis and the papers, you talk about either channel behavior down trading from premium to mainstream packed format changes or geographical changes, anything you can highlight.

And as, I guess as a second part of that question, one of your peers yesterday, your US peers yesterday was talking two spirits is an affordable luxury and an affordable indulgence. You subscribe to this theory that could give you a degree of protection we could consumer environment.

Alexandre Ricard

Sure. Maybe you want to start with the first question.

Hélène de Tissot

So normalization, obviously what we want to flag is that our performance this year is delivered on a favorable comparable basis and is obviously boosted by the recovery of the on trade, which is obviously a key channel for us. And I'm sure that you sell the excellent performance this year that we are definitely benefitting from that recovery and leverage that I would say at pace.

So this let's say is almost normalized in many, many countries. So that's why the environment we believe would be normalizing for fiscal 23. I think you flagged the two main geographies are channels for which there might be still some room for improvements in terms of recovery, or I would say additional dynamism. So travel retail, as you, as you mentioned is not yet back to and what it used to be pre COVID.

And obviously this is mainly linked to the Asia situation and the, the, the, the gradual recovery in passenger traffic in Asia, which is happening quite recently, outside China. By the way, when you think about fiscal 22 the passenger traffic was still quite down in H1. There was some improvement probably around October and November, then again, some additional restrictions because of the environment and, and, and the recovery gradually materializing, especially in Americas and Europe.

So long story short there's some room for recovery, additional recovery in travel retail. And as Alex mentioned, there's already a strong performance in year '22, and we expect travel retail for our business to be back to where it used to be a pre COVID in term of profit, which is obviously great news.

And then Asia, and probably more specifically, China has been back to WT and H2 with the zero code policy and with some significant lockdown of cities like Shanghai early spring. So we are obviously very aware of the volatility of what could still be at stake in term of COVID restrictions in China. The, the year is starting in a positive way in term of shipment. We will be obviously monitoring the situation very closely across the year, starting with what would be the outcome of Midtown festival in nine days now

Alexandre Ricard

Ed, on your second question, there are a few things I'd like to highlight in the post-COVID world. The first one and the most important one and that we have witnessed and I'm sure you have witnessed it over summer. Basically everywhere in the world is what I like to qualify as the new found appreciation for conviviality people getting back in the trade.

People still home obtaining as well, basically people getting together around our brands, not just our brands, but our brands to, to celebrate what, what I like to call to togetherness. This is more pronounced than ever before, and I think this is a clear, positive, and we've seen it across summer in terms of sales a second. And you said it you know it, it is our, our premium plus spirits are what we like to call affordable indulgence.

And we see a number of studies that show that premium plus periods tend to be very resilient in difficult times. So the, the first things consumer consumers will do when things get difficult are not about spirits behaviors, be spirits, linked behaviors we're a lot more resilient than many, many other categories, then it all depends on which way the economy is heading and if there's a hard landing, a soft landing and so on and so forth, and I would just stress a couple of other topics post-COVID again, in terms of behavior, convenience is increasingly big and we're playing in that space.

Home payment is extremely resilient as well. So as people go back in the on-trade and we've recovered quite significantly in terms of on-trade, the off trade has remained quite resilient, which means that our increased household penetration across the world is sticking to some extent clearly and this is also by convenience ready to serve cocktails and so on and so forth.

So, listen, I don't know if there will be some trade down. I often go get the question. At this stage, as far as our portfolio is concerned we have not yet seen any kind of trade down, but it's going to be interesting to see to see what happens in the coming months.


Thank you for your question. We're now taking our next question. Please stand by. The next question from Olivier Nicolai from GS. Please go ahead.

Olivier Nicolai

Hi, good morning, Alex, Florence and Hélène. Got two questions, please. First of all pricing was meeting a digital across a group in '22, as you said initially. I wasn't looking at the strategic brands price mix was more than 3% and many of the key brands like Jameson, Chivas, Absolut and Martell were actually below that. Should we expect more pricing power for these strategic brands in full year '23? Now acknowledge that this table is on Slide 37, is globally, and obviously you have some different between countries, but that will be interesting to, to hear your thoughts on pricing for these key brands.

And second question on the FX guidance; could you please help us quantify the very positive FX impact that you are expecting in full year '23? Now looking at the historical sensitivity that you have provided, is it fair to expect at least €200 million positive FX impact on a bit in full year '23 or my math isn’t correct? Thank you.

Alexandre Ricard

Hélène, answer your question on price, on currency. You have the answer in the appendix at least for one currency, which is the impact of the dollar. So for every single percent of appreciation of the dollar you have on a full year basis 14 million euros of additional profit from recurring operations. And that's just the dollar. So if you take our average of our average rate last year of one point 13, if you take current spot rates, then again, we're not hedged, have what we call we like to call a natural hedge, so nothing is locked in.

But if you take one, that's a 13% on average 13% over the full year, assuming rates stay at this level, which frankly I have no clue, but if they were to stay at this level, you already have 13% times 14%, and that's just for the dollar. So I hope this helps for your calculation. And so, Hélène, what are we doing on pricing?

Hélène de Tissot

What are we doing? I'm not going to give a such a quantified view on pricing, but let me first clarify, because as, as you mentioned earlier, the price mix is what it is for strategic brands knowing that we have as well, some quite positive mix coming from specialty brands that are impacting those numbers. So back to price the pricing impact in fiscal '22 is meeting all digits.

I think that's really the number you should have in mind and what to expect in fiscal 23. So we want to work intensively on additional pricing increase, and we are executing that strategy quite soon in the year with China in May and with the US number one market in the coming days and weeks.

So that means that in fiscal year '23 we expect pricing to be a strong and probably hopefully even stronger than what it was in fiscal '22, because of the carry forward impact of fiscal '22 price increase and additional price increase. We are going to implement with again, a focus on the excellence in the execution across the world.


Thank you for your question. And now taking our next question. Please stand by. The next question for Laurence Whyatt – from Barclays.

Laurence Whyatt

Good morning. Thanks very much for the questions. A couple from me, please. Firstly, on your travel retail expectations of getting back to pre or 2019 profitability levels; do you have any expectations on what might happen in the travel situation in China? Of course at the moment there's quarantine period required. And of course, if the Chinese travellers were to start traveling a bit more, then that would help travel retail. What baked into your expectation of getting back to FY '19 profitability?

And secondly, on your net debt levels, we're now at 2.4% net EBITDA. I think historically used to have a target of between 2.5% to 3%. Just wondering, given with below that historic target if you could update us on any current target you have, that'd be great, but given the share buyback this year is currently expected to be a little bit lower than last year. I was just wondering if you were to have net EBITDA below that level if you would consider changing your share buyback target. Thank you.

Alexandre Ricard

So maybe on your first question and I'll let then speak about our, our target or our non-target in fact, but anyways on GTR yeah, clearly we expect for this new fiscal year to be back to pre C profit levels. So to the profit we had delivered back in 2019, by the way, it's quite interesting to see that versus 2019 volumes will be down and value will be significantly up. And that's how we're going to be delivering a similar number of profit than pre-COVID for China. Listen it can only be what I would call the, the cherry on the cake so far.

Our duty free sales in China are focused on, on high none where the situation can be volatile as well with lockdowns and goes and no-goes etcetera. And we we've that's our key assumption for the current year, but irrespective of this we will be delivering pre-COVID level profits, which I think is quite impressive. What it does show is the strong resilience of GTR if you allow people to travel. So we'll see what happens to Chinese travelers, but in the meantime, it's great to see a travel retail coming back to pre-COVID levels in terms of profit.

Hélène de Tissot

So financial policy just to clarify, as you alluded to Alexon, we don't have a target in terms of Theda. So the announcement of this share buyback program for this year is very consistent with our financial policy priorities, knowing that the share buyback is the number four priorities. I'm sure you, I remember the first three priorities, which are strategic investment M&A, and dividend, and by the way, this is a range which is quite consistent with what we've been executing in fiscal year '22.


The next question from Sanjeet Aujla from Credit Suisse.

Sanjeet Aujla

Hi morning, Alexandra Helen a couple from me, please. Firstly, can you give us the sense of how your sell-out trends are evolving in the US? Q4 seems to be a little bit, so I appreciate that was impacted by some shipment facing, but love to get an update on underlying sellout trends and, and where imagery levels are at the moment there.

And my second question is just on India. One of your competitors there has been pulling back some of the sculpture portfolio to try and seek pricing. Just curious how your handling the pricing situation down yours scotch portfolio. Thank you.

Alexandre Ricard

Yeah, I'll start with India and I'll let Hélène answer on inventory levels and sell out in the us Vivi India. We, we, we are continuing to, to sell our brands and as you've seen our performance is quite remarkable up 26% overall in India with very, very strong double digit growth levels of our imported brands.

Of course we are working to increase our prices. So the way we are doing it is through discussions and dialogues with the key the key people there to increase our prices. And we'll see how this pens out. In the meantime our performance is very strong in India and across the whole portfolio and the country.

Hélène de Tissot

So the US in Q4 first, as you rightly mentioned, we have money, dollar shipments on net sales in Q4 to land with very healthy level of train inventory. That's what we've been announcing back in Q3, and that's exactly what we've been doing in Q4 meaning that our selling performance in fiscal year at '22 reflects exactly the wholesalers depletion when you come to the sell-out.

And especially if you look at Niels and NACA, as you know, the coverage is quite limited. So we are tracking that of course, but as well using all the information, our whole sellers are sharing with us to monitor our performance and to land with this very healthy level of trade inventory in the US, by the way, I use the opportunity of that question to clarify that we've have very healthy level of trade inventory everywhere in the US, but for instance, as well in China.


We're now taking our next question. Please stand by. The next question from Chris Pitcher from Redburn. Please go ahead.

Chris Pitcher

Good morning. Thank you for, for the questions a, a follow up question on the cogs and pricing comments that, that you said earlier, Hélène forgive me if you did quantify this, but do you think that the mix of pricing that you've talked about is enough for you to be able to expand gross margins in fiscal '23? For, as I say, you've already said this, but it be useful to understand. And then secondly, on your higher CapEx number 7% is, is significantly ahead of the long term average.

How, how long do you expect this to remain elevated? And can you give us some, a bit more color on where the extra spend is going and is, is there an element of inflation within your sort of maintenance CapEx here? Is that all driven? For growth? Thanks.

Hélène de Tissot

Okay. So maybe I take both if that's okay with you. So on, on pricing and COGS evolution I didn't quantify it, obviously there's a lot that can happen. What I can iterate is our ambition and our confidence to protect gross margin thanks to pricing and operational efficiency despite cogs inflation, which will remain quite high. So on CapEx you're right.

It's an acceleration makes lots of sense when you look by the way at our strong performance especially when you look at the performance of our aging portfolio whiskeys in in the scotch whiskey, Irish whiskey, but as well, us whiskey and as well, obviously the ambition from, from tail. So the main driver, this acceleration is to protect the future growth of those brands meaning our distillation capacity, task and warehousing. There is some inflation impacting those numbers, but I think what is really a key to have in mind is this acceleration of growth that we are protecting through those investments.

Chris Pitcher

And perhaps to qualify that is it a one year investment to make the capacity for a five-year growth scenario or are you, is it a two to three year program to sort of catch up and just trying to model how elevated CapEx will be because your competitor is talking, your main competitor is talking elevated CapEx for a few years. Thanks.

Hélène de Tissot

Yeah. Thanks for the additional question. It's fair to say that when you talk about expanding your distillation capacity, things are unfortunately taking more than few months. So there will be some increased investment in over the next few years, but this this guided numbers is for fiscal year '23.


And the next question from Mitch Collett from Deutsche Bank. Please go ahead.

Mitch Collett

Good morning. I know you've reiterated the medium term guidance, but I just wanted to ask for my first question, whether you expect FY '23 to be within that medium term guidance range. And then my second question is, can you maybe comment on amp to sales in FY '23? It was flat as a percentage of sales this year. Do you expect it to be flat again or potentially to go up and do you think you are holding share of voice within spirit? Thank you.

Hélène de Tissot

Maybe I start with the first one. Sure. so for the guidance, I think for fiscal 23, obviously we are leveraging the excellent performance of fiscal '22, which is giving us confidence for delivering our medium term strategy framework of the fiscal '23 to fiscal '25, which is obviously a three-year strategic plan.

And fiscal '23 is the first year of that plan. So when it comes specifically to the guidance of fiscal '23, you have what we believe is, is quite a solid qualitative guidance starting with this dynamic broad based net sales growth and again with this ambition intention to deliver some operating leverage

Alexandre Ricard

And maybe on your second question, in terms of A&P we are guiding towards a similar ratio similar, which is approximately 16%, as it's been over the last few years. I really believe, and we collectively believe in that this is at this day the right type of ratio with which we can clearly maximize return on spend return on investment. And as you may have seen during couple of Markets Day the key digital project called matrix is all about maximizing and optimizing this ratio.

And by the way, we've gained market share basically almost everywhere with that kind of ratio. We've been growing brand equity across our portfolio, almost everywhere as well with that kind of ratio. And it's always nice to give a free a framework to our teams because otherwise there's never any limit.

And this is typically the kind of framework I believe, maximizes value creation over a long period of time. Maybe that ratio can move on in a few year's time, but so far at this stage, we believe it's an optimal ratio where we can maximize return on spend through brand equity building across markets and by the way we've significantly increased our media spend within A&P just to give you that example.

So that's one example we've done this year and you saw all the new media campaigns. There's a slide on that. And we showed you three new commercials that have been launched or are about to be launched as we speak. So you should stay tuned to see more of that, but I think 16%, not only do I think I'm convinced it's currently the optimal ratio to do what it is we want to do.


Thank you for your question and now taking next question. The next question from Fredrick [ph] from Stifel. Please go ahead.

Unidentified Analyst

Thank you very much. Good morning. All two follow ups on, on questions that have been raised already on, on CapEx and on the midterm guidance on the '22 guidance for the margin on CapEx maybe could you help us understand which will be the main project where, where you will lift investments considerably.

You mentioned this, maybe can you help us understand where it happens and what's a big driver for raising to, from five to seven, you already flagged some stronger during your CMD, but could you be a little more precise for us to, to understand your day to day business and the second one on the mid guidance plus 50 basis points, 60 basis points on margin expansion?

Is it fair to assume that this average over this few period will be more back end loaded given all the short term pressure, especially if you, if you utilize the co inflations to stable plus gross margin, you think you have enough room on operating leverage to offset of cost inflation this year, or does it look too ambitious and will 2025 help you to come back on this trajectory of 50, 60 basis points?

Alexandre Ricard

Maybe just before handing over to Hélène on CapEx we will be making pretty significant great announcement next week. And I, I don't want to spoil the news for the teams who have been working on that. So I, I usually am very happy when we invest because it's not a cost, it's a real investment.

So we will be announcing something pretty, pretty nice next week on, on that front, by the way, we've already announced a number of CapEx initiatives during this past year, which are impacting this new year, we don't invest in one day. It takes time when we announce significant investments both in Scotland and as well in, in Ireland with the aim, by the way, in Ireland to become a carbon neutral in 2026.

So more to come on that front I'm afraid to say next week, I don't want to spoil the, the news. But again, it's for the good cause. When you look at our growth rates and our medium term ambition, which is a great transition to for, for an end we, we need the strategic stock and the capacity to fuel that growth.

Hélène de Tissot

So I was not about to spoil anything I would too nervous to do so. I cannot say add to what you said, Alex, that this is our number one pro in term of financial policy CapEx and strategic inventory. This is absolutely critical to protect the future of growth and as well to protect our current investment, because this is as you flag around maintenance around expansion capacity again of distillation cask, warehousing there's as well, some significant investment to deliver on our sustainability roadmap could happen from a good place. And all of that will contribute to this CIRCA 7% of net sales next year.

On the midterm guidance. I'm sorry. I'm probably going to repeat myself. So the fiscal '23 to fiscal '25 ambition is a three year ambition. First year is fiscal 23. At this beginning of fiscal '23. What I can share with you again, is our ambition and our intention to deliver some operating leverage. So let's see later what would be then the exact contribution of every year to that operating leverage target. What I believe matter is our confidence and our focus to deliver that by fiscal '25.

Alexandre Ricard

So I'm being told there's time for one last question.


And the next question from Jeremy Fialko from HSBC.

Jeremy Fialko

Good morning. Couple of questions from me, a bit more detail on some parts of the business we haven't discussed. Ah, so firstly if you could give your views on Cognac in the US and how you think that category really.

And the second area of great strength has been Latin America phenomenal growth from that business. And so again would you think that sort of, not 50% growth, but the sort of dynamism that you had in markets like Brazil can continue into next year or whether there's some elements which you think could end up reversing. Thanks.

Alexandre Ricard

Do you want to talk about cognac in the US?

Hélène de Tissot

I would love to. So I think this is obviously a very exciting category for us. We have a fantastic brand Mattel. We have as well solid strategic inventory. We build building over the years back to the previous question to support the growth of Mattel and the growth of Martel, not only in Asia and obviously us is a very exciting market for Mattel.

We had quite an active year in fiscal '22 with as well, some great media campaign. And this is as well, a key contributor to the growth in fiscal '22, back to what we said, a very broad based wealth coming from many strong brands and especially in the US, this is as well, again, a key contributor to growth together with Jameson together with the Glen Levette together with us whiskey together with Agave portfolio and with a Malibu and Havana. So a lot to be excited about for us solid investment acceleration of those investment to deliver as well future growth in the US.

Alexandre Ricard

And with regards to LATAM, we don't give specific guidance by region, but what I can tell you is we do expect dynamism to continue across Latin America driven by our scotch was key portfolio in particular Chivas, Ballantine's and to a lesser extent, Jameson and Absolut and Absolut Vodka. So across LATAM.

Alexandre Ricard

And I think, that is it. Yes, I am being told that unfortunately, we need to stop here. So again, thank you for joining us this morning and wishing you a great day.

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