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Good day, and welcome to the Pernod Ricard 2018/'19 First Quarter Sales Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Julia Massies. Please go ahead.
Good morning, ladies and gentlemen, and welcome to our first quarter sales call. We will follow the usual format and run through a quick presentation, and then lead the floor to your questions.So this morning, we are hosted by Hélène de Tissot, our Executive Vice President in charge of finance, IT and operations. Hélène, over to you.
Good morning, everyone. So let's start with the executive summary of our presentation. So we are posting a very strong start in this Q1 figures, as expected. You remember that we mentioned that we're going to have a strong start last August at the time of the communication of the full year performance.So very strong start, plus 10.4% organic sales, plus 7.2% reported sales, which is clearly favored by a technical impact. So the growth is going to moderate in the full year.Let's start with the Americas. So modest growth, plus 2%, and this is mainly due to a slow Q1 in the U.S. due to the phasing of our shipments. The underlying trend remaining broadly in line with the market and strong performance of Travel Retail America. Very dynamic Asia-Rest of the World, so plus 23%. This is boosted by technical impacts on our 2 key markets, China and India, and as well a bit in Travel Retail Asia. I'll come back to that.So starting with China. Strong growth across all categories with advanced shipments boosting that performance. Advanced shipments ahead of the festive season there.Moving to India. So good Q1 -- a very good Q1 with strong market condition and as well the benefit of a value strategy. This is clearly reinforced by the favorable basis of comparison, meaning a low Q1 last year. And as I mentioned, strong performance in Travel Retail Asia, but as well Africa and Middle East and ongoing difficulties in Korea.Europe, plus 1%. Mixed performance there with strong sales in Eastern Europe and France and Spain in decline in challenging markets.So if we move to the next slide on the key figures. You will see the figures for this net sales Q1, EUR 2,387,000,000, plus 10.4% organic, which is made of the plus 2% growth for major markets and plus 23% growth for emerging markets. You can see as well on that slide, non-significant impact from the group structure, meaning [ permit ] effect, and a negative FX impact of EUR 62 million, which is mainly due to the Indian rupee and the Turkish lira, and you have some details in the appendix of our presentation.Moving to the vision of this growth by region. So a very strong start driven by the very strong dynamism of Asia-Rest of the World. I will start with Americas. So the plus 2% in Q1 to be compared to the 6% last year, so modest growth, but this is driven by the slower Q1 in the U.S. linked to phasing. I'll come back to that in a minute. Strong growth in Travel Retail; and LATAM with Brazil in decline -- sorry, in strong growth, and some decline in Mexico mainly due to phasing.So Asia-Rest of the World, plus 23%, to be compared with a plus 7% last year, so this is very dynamic, enhanced by technical impacts, mainly in China with the strong growth which is boosted by advance shipments; and India, strong growth as well, very strong growth there boosted by the favorable basis of comparison.Europe, so mixed performance, plus 1%. I mentioned already those strong sales in Eastern Europe, but challenging markets in France and Spain. And we have as well some high comparison basis, which is leading to a decline in U.K. and Germany due to that technical impact.Globally -- so worldwide, plus 10% compared to plus 6% last year with the positive technical impacts I already mentioned, and the growth to moderate in the full year, fiscal year '19.If we move at the sales growth by key categories. So this acceleration is driven by our Strategic International Brands growing at plus 12% and by our Strategic Global Brands growing at plus 15%.Let's start with the Strategic International Brands, so plus 12% compared to plus 8% in the Q1 last year. So this is a broad-based growth acceleration with improved growth from Martell and Scotch and continued strong performance from Jameson, with Absolut in decline mainly due to the phasing in the U.S.Moving to the Strategic Local Brands, so plus 15% compared to plus 2%, and you can see here clearly the impact of the low comparable basis last year in India and the strong growth this year. So that's largely driven by our Seagram Indian whiskey's performance, but as well a good performance from ArArAt, Passport and our tequila brand, Olmeca Altos. Strategic Wines, the figures of this quarter is minus 7% compared to plus 8%, so there was very high basis of comparison last year, mainly on Campo Viejo, but we have as well the implementation of clear value strategy on Jacob's Creek, notably, in the U.K. with a choice to have lower volumes at a better pricing. For this, plus 1% compared to plus 2%, and this is mainly the very strong performance of Lillet and Monkey 47 contributing to the growth in that category.So total number this time, with the growth to moderate in the full year and this is, in particular, due to Martell, which will come back in line with our midterm target of high single-digit volume growth.Innovation is contributing as well to this performance, delivering plus 2% incremental top line growth in this quarter. And I'd like to highlight as well the positive figure, price/mix of plus 2.9%.Moving now to Americas. So the U.S., plus 2%. Our view is that the market growth is stabilizing around 4%. And looking at the Nielsen, which is good translation of the consistent implementation of our strategy, we are benefiting from a continued double-digit growth on Jameson, and Caskmates is posting a very strong growth and improving our mix.Absolut is in decline with some softer performance in the recent months. You know that this is a category that remains difficult. But we have very dynamic growth relays contributing to the performance this quarter, in particular, Martell and Altos. You see here the Nielsen figures, a very strong one, plus 62% for Martell, plus 24% for Altos.So all sales in the U.S. are negatively impacted by phasing, that is the main explanation of this plus 2%, although the underlying trends are in line -- broadly in line with the market.Canada, plus 3%, so return to growth, and this is due to the performance of our Strategic International Brands.Travel Retail Americas with strong performance here as well driven by Strategic International Brands and, in particular, Martell and the Scotch.Latin America. So Brazil, very strong start with some technical impact here because we had a soft landing in FY '18 due to the truck strike in Brazil. So this is explaining the very strong start there. In Mexico, a decline, which is linked to the high basis of comparison, the underlying trends are good, especially on whiskey and Absolut.Moving now to Asia-Rest of the World, so plus 23%, very dynamic. And as I mentioned already, this is favored by technical impacts, especially on China, India and Travel Retail Asia.So starting with China, plus 27%. So dynamic demand across all key categories. Sell-in are ahead of depletions, so that's what we mean by technical impact here. And this is due to wholesalers that are securing the inventories in advance of a festive season, and this is especially true for Martell.H1 will benefit from an earlier Chinese New Year. You have here the information on these 11 days impact in H2, which will benefit H1 figures. So sales to normalize for the full year '19 in China and especially for Martell, of course.So Martell had strong growth across all our price segments, all qualities are growing. Chivas is as well in double-digit growth, which is the continuity of the relaunch we did last year, quite positive news here. And very good performance of our growth relays, what we call the premium brands, in particular, Absolut, the Glenlivet, Jacob's Creek and Mumm.Moving to India, so plus 34%, very dynamic here. As a reminder, we were posting a plus 2% last year in Q1. So we have definitely a low comparable basis, which is due last year to the implementation of the GST and as well from remaining impact of the highway ban, but this is a very dynamic growth across our portfolio.Travel Retail Asia, so very strong growth here as well. And with similar impact of customers building inventories as well in advance of festive season, but as well good dynamic coming from Chinese and Korean travelers. Selling impact expected on H1 because of the earlier Chinese New Year.Korea is still in decline in a difficult context despite the positive impact of the innovation we launched a few months ago on our Imperial brand.Africa and Middle East, double-digit growth, and this is particularly due to Turkey and Nigeria.Europe now, mixed performance, plus 1%, with France at minus 4%, so conditions are still difficult here with a market which is in decline. The whiskey and Aniseed category are under pressure and we have a strong exposition on those categories, as you know.Spain. So the market is now flattish and still highly competitive, and our sell-in here are impacted by destocking.Germany. So here, definitely, some phasing of the shipment translating into a decline because we are fighting a very strong Q1 last year. We continue to benefit from the very strong developments of Lillet in the aperitif segment.U.K., slight decline, again linked to phasing and mainly in the wine category where we had a strong Campo Viejo promotional phasing last year. And we are, as well, as I mentioned before, implementing a value strategy mainly behind Jacob's Creek in the U.K. All Strategic International Brands are strongly growing double digits in the U.K. with a very good performance for Beefeater, Absolut and Jameson.Travel Retail Europe. So modest decline with soft starts on Absolut and whiskeys. And last but not least, Russia, so strong sales across portfolio as well boosted by some phasing here and early shipments to secure the festive season to come in Russia.So going to the outlook now, so we will continue to execute on our strategy in a consistent way with clear resource allocation and the right support behind our must-win brands and markets.For the full year and in uncertain environments, both on a geopolitical and monetary point of view, we expect our broad-based sales growth to continue with moderation versus the Q1 in Asia; improved pricing versus last year; pressure on input costs; and FX impact that we had -- we viewed that should be slightly negative using the 1.16 euro-U.S. dollar rate. So in that context, we are confirming our guidance for the full year, meaning, an organic growth in profits from recurring operation between plus 5% and plus 7%.
Thank you very much, Hélène. We will now turn to your questions, please.
[Operator Instructions] We have a few online now. Fernando, your line is open.
I have 2 questions, please. First one on India. How do you see the evolution of sales growth for the year? And also, what's the underlying growth rate in the country when you adjust for the easier comps versus Q1 last year? And second, in Europe, if you can talk how much of the weakness was driven by wine, specifically? And if you see any sign that performance for the region as a whole could improve throughout the year or it's too early to say, maybe when we look at Spain and France? I mean, how do you see the remainder of the year evolving?
Okay, thank you. So let's start with India. As I mentioned, so that this plus 34% is boosted by the easy comp of plus 2% last year. Having said that, we have very positive demand in that market. Positive impact as well on the route-to-market change in some states, positive impact as well on last year's price increases. You remember, we did some price increase last year as well to offset the GST impact. So we believe our current rate is double digits. And our medium-term objective for India is low double digits, so we are still confident with that medium-term objective. We know that this is a country where we can have some volatility, obviously. And last year and even the year before were a good example of negative volatility. So we could have a better and worse years compared to this mid-term objective, and this one could be better. So this is for India. Your next question was on wine, I believe?
And Europe as a region as well.
Yes, okay. So I start with wine, if I may. So as I mentioned, we had some negative phasing impacting our Q1 for wine, definitely. And this is mainly the case for the U.K. market and the U.S. market, so performance is better than these figures for sure. And we are as well continuing to implement this value strategy we are [ working to ], so we are committed to that strategy and the rest of the year should be better. Then your next question was on Europe. So Europe, what I can say is that we have some, let's say, positive -- sorry, there is some noise here in Paris. There are some positive phasing in Eastern Europe, as I mentioned, so this should be moderating a bit in the rest of the year. I hope you can hear me clearly. I'm sorry, there is some noise in the street here. Can you hear me?
Yes.
Okay. So for Eastern Europe, the trend could be a bit lower in the rest of the year, but probably still quite positive. And coming to phasing, it's true that, as I mentioned, Germany and the U.K. were impacted by phasing in this first quarter, and this should be better in the rest of the year. Then we have Spain and France. As I mentioned, France, it's a difficult [ market, ] so difficult for me to tell you more what would be the performance in the year. But the market itself is challenging. And for Spain, as I mentioned, we are [ reciting ] a low -- sorry, a high Q1 last year, and we still have a some destocking as well this year. So hopefully, the performance there could be better in the rest of the year in a market which is probably, as I said, flattish.
[Operator Instructions] We'll take the next question from Sanjeet Aujla from Crédit Suisse.
Three questions from me, please. Firstly, on China. Have you seen any noticeable change in trends -- in underlying trends in recent weeks? On India, appreciate the easier comparatives there, but can you also talk a little bit about the competitive dynamics there and do you feel like you're gaining share in that market? And then the acceleration we've seen in price/mix at the group level, the 2.9% from 2.3%, is that mainly driven by pricing or mix?
Okay. So I start with China. So in China, I think your question was, do we see any change in trends. So well, in terms of macroeconomic position, obviously, you know what is the situation there. We are having a moderate GDP growth at present. And this is mainly driven by the domestic consumption, but as well industrial investments. There are obviously uncertainty due to the dispute with the U.S. And well, I think it's too early to see any impact of tariffs as far as consumer demands are concerned, and we are definitely monitoring the situation. In terms of business, we don't have yet the depletion for the September months, so for the festive season and the Golden Week. So it's too early to know, but we are monitoring the situation.
Got it. And then on India, the competitive dynamics there?
Yes. So on India, I think, well, if we compare our performance versus competitor, I must say we are holding and probably even firming up our share. We are, as you know, the leader of the local premium whiskey category, and our aim is to continue to grow the markets, rather than our market share. But we are in a very strong position in terms of market share. And as you can see in the figures, our most recent performance is significantly stronger, so that's very good news here. Price/mix, so we don't comment on the split between price and mix. As you know, we did increase our prices last year on Martell, and we're going to have this full year benefit, and this is already materializing in our figure in this quarter. That's all I can say, on top of the fact that we believe that the pricing should improve this year compared to last year.
We'll take the next question from Edward Mundy from Jefferies.
Three questions, please. The first is on China where you grew 27% in the first quarter. If you back out the advanced sell-in ahead of depletions, what do you think your depletions grew at in China? Second one, at a group level, obviously, there are some positives and negatives. If you were to normalize for both those positives and negatives, what do you think your growth was in Q1? And then the third question is on Africa and Middle East, where looks like you had some very strong growth in both Turkey and Nigeria. Are you able to quantify what that growth was?
Okay. Well -- so let's start with China. So as we said, this plus 27% is boosted, and it's mainly boosted by advanced buying from the wholesalers to secure stuff for festive season, meaning, Mid-Autumn Festival, Golden Week and Chinese New Year, and this is going to normalize for the full year. Our current run rate is double digits. We have a price/mix, which is positive. And to come back to that, I just mentioned in terms of pricing this is as well largely due to the mid-single-digit price increase we put on Martell back in February '18. So as I just said, we don't have the depletion -- the most recent depletion, so that's something, of course, we will be looking at. Having said that, our depletion are strong and solid and in line with our expectations. So not as high as our sell-in because of the advanced buying I mentioned, but good and solid. Then your next question was, can we normalize the Q1? I don't think we're going to be able to share that with you. I mean, you know the major technical impact, so that's all I can say. And on Turkey and Nigeria, we don't give the exact number for every market there.
We'll take the next question from Chris Pitcher from Redburn.
Firstly, on the U.S., you're talking about phasing impacting the first quarter. I mean, should we expect you return to sort of underlying growth of near-to-market 4% in the first half? And then within that, the Jameson performance of double-digit growth, can you give us a feel for how that growth is being driven by more mature states versus distribution gains? And a follow-on for that, could you give us a bit more color on the press reports for the EUR 150 million investment in the Jameson production facilities, how we should expect that to be phased, where capacity is? And where you expect to fill that up, whether that's U.S. growth or the internalization of Jameson?
Okay. So the U.S., so again, the plus 2% is definitely linked to phasing and a high comparable basis last year. To be a bit more specific, we see here in terms of different factors, mainly in one market, which is California, which is, as you know, a very big market for us, and that has a weight on our short-term performance. So we are lapping a very strong year-on-year comparable there with the timing of promotional periods and as well the price increase we did last year, mainly on Jameson, which had an impact in terms of very strong Q1 last year. So your question in terms of midterm ambition. I mean, as you know, last year, we were growing at plus 4%, in line with the market, which was at plus 4%. Midterm, our objective is to be slightly ahead, mid-single digits. So for this year, the objective would be to do at least as well as the market. I think your next question was...
On Jameson investment, whether that's to support U.S. growth or whether it's more to support international growth, and can we get a phasing of the EUR 150 million investment that's been reported?
Okay. So I'm not going to be too specific here. It's an investment which is required to support the global ambition we have on Jameson moving forward. So it's on the brand globally. The exact phasing is, as I said, not something we're going to share, but it's, let's say, already going to be a significant investment this year and probably as well next year. So I'm talking CapEx here, obviously. And as you know, globally, our CapEx envelope is more or less 4% of our net sales, some years it's a bit lower. So with this level of ambition we have in terms of acceleration of our business, it's fair to expect that we're going to be around this 4% and sometimes a bit higher than that. So Jameson investment is already scheduled and, let's say, budgeted in our CapEx starting this year.
We'll open the next question to Mitch Collett from Goldman Sachs.
One question on Brazil, please, and then a unrelated follow up. You said Brazil had a very strong start because -- partly because of Q4 being weak. Can you maybe comment on the underlying market conditions? Are they improving for you? And then, I guess, to come back to the group performance ex all the shipment/phasing/timing issues and benefits. When you were thinking about the 5% to 7% for the full year, I guess, would you expect that the growth rate outside of the China moderation is also going to slow or is that the only reason why the 1Q growth might slow at the top line? And I appreciate there's a few reasons why you may have top line growth ahead of organic profit growth, but can you perhaps comment on the factors that drove you to keep guidance of 5% to 7% for organic operating profit growth despite such a strong start to the year?
Okay. So thanks, and let's start with Brazil. So just to be clear here. What I said is that we have a very good trend there, but fair to say that Q1 is benefiting from the national truck driver strike that happened at the end of last year, meaning that pushed some sales that should have happened in Q4 last year into Q1 this year. So having said that, again, we have a very good trends there. So we -- I think we can say some share gains for our business in Brazil. Coming back to your second question now in terms of overall trends and full year guidance. Well, first, of course, as I mentioned at the start, we are confirming this guidance, meaning that this Q1 is not changing our view. And as I mentioned as well, we were expecting this very strong start in Q1, and we mentioned that in August. So that's the first element [indiscernible]. As you know, we are not giving guidance in terms of top line growth. Our guidance is on the profit from recurring operation. And on the Q1, on top of China that you mentioned, we have as well this low comparable basis in India. But as well, I must say, as probably for every first quarter, some phasing in different markets. But all in all, we are confirming our guidance, meaning, that our ambition as well in terms of top line is consistent with the assumption we used to base on our bottom line guidance.
Okay. Sorry, I don't think I asked it very well, but I was trying to say, I guess, if you stripped out China and India as being abnormally strong this quarter, that would imply a run rate of, I guess, closer to 7% for organic sales growth, and I appreciate there are other moving parts. But is that the right sort of run rate in terms of sales to think of for the full year once we try and take out all the other items? And then if that's true, I guess, that would imply margins flattish would get you to the top end of your guidance ranges. Is there anything wrong with that logic?
So maybe I can clarify a bit. As I said, we don't give guidance in terms of top line for the full year. But as you know, we have a midterm objective that we shared a few years ago with some of you, which was, at that time, 4% to 5% top line midterm objective. So with the current trend, our top line expectation is more, let's say, mid-single digit than 4% to 5%.
And we'll take the next question from Simon Hales from Citi.
A couple of questions. Just, Hélène, you talked about the technical effects of the destocking we saw in the period, and you called out the U.S. and Spain. Can you confirm that the destocking is actually completed in the Q1 period and it won't roll over into Q2 in either of those particular areas? And was there anything specific or brand-wise that was driving the destock in those 2 major markets? And then secondly, you also talked about some phasing benefits. I think you mentioned in Russia, also in China in terms of buy-in by the wholesalers ahead of, perhaps, Christmas season in Russia and ahead of still Chinese New Year in China. It seems very early to be seeing those trends -- those buy-in trends in Q1, rather than in Q2. Is there anything specific that we should be aware of that's driving that from a wholesaler standpoint?
Okay, thank you. Well, let's start with your first question, maybe to clarify. When I mentioned the phasing in the U.S., I didn't mention any destocking impact. What I mentioned is that there were some phasing in terms of wine in the U.S. with some promotion phasing and so on. But I mean, compared to the size of the U.S. market, this is really small. So the clear message for the U.S. market, it's small phasing due to the lapping of a very strong Q1 last year, especially in California. So no mention of destocking here. You're right to say that I mentioned some destocking in Spain, and that's probably why I said as well that the trend could be a bit better moving forward because there was 2 impacts on our performance in Q1 in Spain, some destocking this year and as well, probably some high comparable basis last year with some shipments that were a bit stronger than the underlying trend. So that's for the question, the destocking; the second question on the phasing. So for Russia, your understanding is right, it's more to be fully ready for the, let's say, Christmas season. So, of course, it is, let's say, impacting positively Q1, and this would have an impact negative on Q2 in Russia. In China, my comments was really more global. And you're right, Chinese New Year is still in 3 months' time. So it was more to say that there are some early buy-ins from wholesalers to secure their stock for the festive season, starting with Mid-Autumn Festival, Golden Week and maybe as well some anticipation of Chinese New Year. So it's really to, let's say, secure volumes and especially for our cognac, Martell, where there is a clear understanding that we have some limitation here, so wholesalers are probably securing those stock in advance of the full festive season, starting with MAF and ending with Chinese New Year.
Okay, understood. And then just...
Please, go ahead.
Sorry, just to follow on, Hélène. Just to confirm with regards the technical effects on the U.S. and Spain then. As I look to Q2, the technical effect should normalize in both of those markets, really, is the message?
Yes.
All right, the next question comes from Trevor Stirling.
One question from my side, Hélène. In Q2, there's a lot of moving parts. I assume some wholesalers will be carrying excess stock after Mid-Autumn Festival. There's also then the effect of the timing of Chinese New Year. Can you give us any steer at all on what you think the shift in terms of [ reported ] shift from Q3 into Q2 might be as a result of the earlier Chinese New Year?
Okay. Well, as we mentioned in the presentation, so Chinese New Year this year is 11 days earlier. So it's going to be on the 5th of Feb versus 16th of Feb last year. So -- and the year before, we have 90 days impact. So I'm not going to give you an exact figure, but I'm sure you can do the math. It's, let's say, it's 11 days. So you know that China is roughly 10% of the group net sales, so I'm sure you can -- that could give you the quantum of the impact.
And the last question comes from Andrea.
Just one question, please. There's a lot of technical factors in Q1, as we've discussed. Just focusing on the underlying trends, which are clearly -- remain clearly strong, very strong. Would there be anything you'd call out on underlying trends that has changed in the past few months, either things getting better or worse?
Well, that's a good question. I must say that the main market I can think about is India because this plus 34%, as I mentioned, is boosted by the low Q1, but we have a very strong growth there. As I said as well, it was the categories, both on Strategic Local brands, with the Seagram whiskey franchise, and Strategic International Brands. And we see as well some benefits from the price increase, so it's really a good news and great performance.
Okay. So India, out of all the markets, is one where probably there is also an acceleration in underlying momentum.
Okay, that brings our call this morning to close. Thank you very much, ladies and gentlemen. And Adam and I remain available, should you have any further questions.
Thank you, everyone. Bye-bye.