Pernod Ricard SA
PAR:RI
Earnings Call Analysis
Q4-2023 Analysis
Pernod Ricard SA
Investors saw a strong performance from the company in fiscal year 2023, underpinned by robust growth across all regions and categories. This result was achieved despite normalization from an unusually dynamic market due to COVID-19. The commitment to maintaining a high gross margin paid off, with margins sustained and even expanded. Record-level brand investments and strategic inventories were made to bolster future growth, highlighting the company's confidence in its long-term growth potential. Premium Plus brands were the drivers of growth, contributing to approximately 80% of the increase. Shareholders were rewarded with 18% total shareholder returns and can anticipate a buyback of shares between €500 million and €800 million this fiscal year.
Sales rose by 10% organically, thanks to a mix of volume growth and strong pricing. The Americas achieved a modest 2%, Europe advanced by a solid 8%, and Asia along with the rest of the world showed a vigorous 17% increase. Leading the pack were premium brands like Scotch, Irish whiskey, and Cognac, all reporting double-digit growth, and innovation in products like the soon-to-launch Absolut and Ocean Spray collaboration.
Sustainability is not just an accessory but a core part of the company's growth model, as yearly targets point towards ambitious 2030 goals in nurturing terroir, valuing people, circular making, and responsible hosting. The company's digital transformation pushes boundaries further, facilitating a transition to 15-20 actively promoted brands, driven by precision at scale using technology and data. The impressive performance keeps pace with the company's top-line growth forecasts of 4% to 7%, coupled with a margin expansion by about 50 to 60 basis points annually.
The company has adapted its operating model by restructuring into a new executive committee, 10 management entities reduced from 22, and an expanded leadership team. This streamlined operational structure is equipped to steer the company towards its strategic financial objectives and accelerate its conviviality platform for future growth.
In the U.S., stability was the theme with sales aligning with the normalizing market post-COVID surges, delivering growth for key brands such as Jameson. In China, despite mixed circumstances, the company achieved 6% growth; and in the robust recovering sector of global travel retail, a significant 40% increase was observed, led by the uptick in Asian passenger traffic with China contributing notably to a strong expected start to the new fiscal quarter.
The company's forward-thinking approach is illustrated by continuous innovation, such as the new ready-to-drink (RTD) product, Absolut Ocean Spray, and successful acquisitions like Código Tequila and Skrewball peanut butter flavored whiskey. The emphasis on agility in managing inventory and continued premiumization through strategic brand positioning has laid down a resilient foundation for the coming fiscal quarters.
Looking ahead to fiscal year 2024, the company intends to keep strategic inventory levels similar to 2023 and anticipates CapEx investments between €800 million and €1 billion for the year. This projection is part of a long-term strategy aimed at ensuring continuous growth and sustainability over the next few years.
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Alex and Helene, we’ll go through the presentation which is available on our websites after which we're going to run a short Q&A session. But before we begin, we'd like to showcase a short video highlighting our recent Chivas Regal Global Campaign.
[Video Commercial]
Well, good morning to all of you. First of all, I do hope you had a great summer period, sipping the right cocktails based on the right brands. So let's, let's present to you our fiscal year 2023 sales and the results.
Well, first of all, we had a very strong fiscal year 2023 performance in an environment which is normalizing. We had a very strong and diversified performance, basically with growth driven across all regions, and across all categories. One of our key objectives was to protect our gross margin. And we did, we sustained our gross margin and expanded our operating margin. We kept on investing in our brands at sustainable growth and desirability with record level of investments in A&P, in CapEx and in strategic inventory to fuel our future growth. We continue to actively manage our portfolio focusing on priority Premium Plus brands. Our on-going transformation continues and accelerates. We are progressing towards our 2030 sustainability and responsibility targets. And we continue to deploy our conviviality platform. Of course, all of this is translating into long-term shareholder value creation, you see our total shareholder return of 18% in fiscal year 2023. And today, we're announcing our intention to do a share buyback this fiscal year, somewhere between €500 billion to €800 million
Here you have the key highlights I won't dwell into them. Helene will give will present them to you in more detail. As I mentioned, our growth is really broad based. It's been driven by all regions, with also very strong pricing execution across the globe and resilient volumes. So our 10% global organic net sales growth is composed of 1% resilient volumes 8%, strong pricing execution, and a 1% positive mix, you see 2% organic sales growth in Americas 8% across Europe, and 17% in Asia, rest of the world, and strong pricing basically across the globe.
Also, and this is core to our strategy, which is to diversify the sources of our growth. You see here six categories have driven approximately 85% of our growth, and premiumization. Also being at the core of our strategy, you see premium plus brands that has driven roughly 80% of the growth and with the prestige segment growing at plus 15%. So if you look at our Scotch portfolio, it grew organically 17% You look at our Irish whiskey portfolio driven, of course by Jameson double digit with 11% growth, same growth rate for Cognac & Brandies same growth rate of double digit 11% for Vodka 8% growth for Gin and same as for Cognac, Irish whiskey and Vodka for Indian whiskies at double digit 11% growth and you see that contribution is very well balanced, perfectly in line with our intent.
Still obsessed by our consumers, consumer centricity really fueling our innovations, driving consistent brand investments as well across the globe. Strong innovation strategy, I would just like to underline the soon to come lunch of Absolut and Ocean Spray, which are which is our first cobranded RTD range. And you see a few other initiatives and let's pause here with a small, small commercial
[Audio Commercial]
Okay. This past fiscal year has been our most active year in terms of portfolio management. In a decade, we've invested more than €1 billion to complement our portfolio in attractive categories in North America. So after North American whiskey and our latest investment there with Jeffersons a few years back, we've increased exposure to Tequila. We've penetrated the flavored North American whiskey market. And we've increased our exposure to Ready-to-Drinks. By the way, Tequila and North American whiskey flavored whiskey and RTDs are the fastest growing categories in North America. So it's we didn't this is not just a coincidence, it's perfectly in line with our strategic roadmap. And we also strengthened our partnership with sovereign brands, which is the most innovative and creative beverage alcohol company in in the U.S. So very active year, as well with the divestment of Clan Campbell here in France, which we announced just ahead of summer.
Just a quick, quick focus on our capacity to integrate bolt on acquisitions. We took that example amongst many, which is Malfy. And you look at our capacity to integrate these acquisitions into our distribution network to increase, of course, significantly the volumes. So ever since we acquired Malfy in 2019, our sales volumes were multiplied by three, and even more so in value, driving even more margin improvement as well, and increasing the number of markets where the brand is present. So this is the perfect illustration of our bolt on acquisition strategy with Pernod Ricard’s distribution network.
Again, very important sustainability and responsibility being at the core of our growth model based on four key pillars. Nurturing Terroir, number one, Valuing People number two, Circular Making number three, and Responsible Hosting, number four. Within each of these pillars, we have a number of very clear ambitious targets, some by 2030 others by 2025. It's something that we monitor, of course, very, very closely. Around Nurturing Terroir, I think regenerative agriculture is one of the most important topics, which on which we are working. On Valuing People, we are perfectly in line with our ambitions, where we want to get to top management, balance in terms of gender. We also have gender pay equity, in terms of Circular Making, and we'll, we'll talk about this a bit later in the presentation.
Of course, we're investing heavily in terms of reducing our carbon footprint, both on scope one and two, but also with very strong initiatives on scope three, through partnerships with our partners, supplier partners, whether it's agricultural or industrial. And finally, Responsible Hosting, which is very specific to our industry, and where we leveraged the power of our brands to drive responsible consumption messages around the globe and engage with our consumers.
So delivering sustainable and stretched profitable growth. This is what we're here to do. We want to build on the strengths of our growth model, which is a triptych, the most comprehensive portfolio of brands in the industry, the most comprehensive route to market with a presence across all regions, and most importantly, winning, winning culture. And I'd like to take this opportunity as well to, to thank all of our teams around the world for the very strong results Pernod Ricard delivered.
And of course, beyond that triptych our growth model which is powered by what we call the Conviviality Platform, and the key digital programs, leveraging algorithms or leveraging artificial intelligence to be able to activate a lot more brands. So moving from six to eight brands activated across the globe to 15 to 20 brands, what we like to call precision at scale, leveraging tech and data.
So we already gave you in the recent past, I think it was last February, some clear examples around some of our key digital programs. The first one being nice VR, which is mapping thanks to consumer insight mapping all the moments of consumption in any given market and addressing all of these with a clear portfolio strategy matrix as well Again, maximizing or marketing investments by touch points, leveraging again, very insightful data and our algorithms. Same thing for promotional efficiency, using our tool and algorithm called Vista Rev-Up and finally, around D-Star, which is sales force automation, again, leveraging the power of tech and data. And it's all about having the right brand at the right time, at the right place, at the right price, with the right message targeting the consumer.
And of course, all this delivering the -- our performance, our roadmap, as we announced it, we're perfectly in line with what we said we would deliver. As you can see, despite the small blip in 2020, with COVID, we came back to exactly our ambition, which is the upper end of the 4% to 7% top line growth, with margin expansion of roughly 50 to 60 bips per annum.
And this of course, results in a sustainable long-term value creation for all of our stakeholders. You see here, the TSR over a one, a three and a five year period. But also when I mean all stakeholders, it's also from an S&R point of view. It's also our colleagues from around the world that deliver these results. We're happy and proud to be part of Forbes 2022 World's Best employers. We also received in 2023, a great gold rating from EcoVadis for our sustainability. And finally the engagement, the commitment of our teams around the world, despite the challenging environments. So again, thank you to our teams.
And of course, adapting our operating model to all of the above should I say as we have transformed ourselves over the last few years as we deploy our digital transformation, which we call the Conviviality platform. We've also adapted our operating model and governance with a new XCOM [Ph] executive committee to lead our ambition with of course, Helene and finance and IT, but also with somebody representing global brands Vista Rev-Up, alongside and who represents North America. Maria Pia De who joined us six months ago, who is driving our operations S&OP Cedric, which most of you know on HR, Ann Marie our General Counsel. And finally, Conor McQuaid takes care of Corporate Communications, S&R and Public Affairs. So this is a resized XCOM. We have also an executive leadership team, which regroups basically; headquarter functions around the Digital IT but also 10 management entities we used to have 22. We now have 10 and six global brand companies.
So a resized, reshaped operations for Pernod Ricard to adapt ourselves for future growth leveraging our Conviviality Platform. And with a clear, medium term financial framework, which we've presented to all of you during capital markets day last year, we aim of course the upper end of the four to seven, top line growth. We will continue to focus on revenue growth management enhanced by our proprietary digital predictive tools. One of them being Vista Rev-Up already mentioned. Of course, continuous improvement in operational efficiency, building on our culture of excellence, which is something we're now nurturing every single year. Significant investments I mentioned, its record level maintained at roughly 16% of our net sales to drive very strong consumer driven brand equity, brand awareness, brand consideration, with even higher return on investment, leveraging, again, our conviviality platform, keeping discipline on our structure costs, investing in priorities, while maintaining an agile organization, you've just showed it. Aiming at a rate of cost increase below of course, the top line, and finally delivering therefore operating leverage of circa 50 to 60 basis points on average, within that framework. So that's what we call driving long-term sustainable value creation.
A few words on our sales starting with the U.S. So for this last fiscal year stable sales within a normalizing market. As you know after three years, post COVID a very strong growth with underlying spirits value depletions or net sales growth, circa 2% for us, and strong consumer resilience. So we underwent good depletions value growth for Jameson, for Kahlua, for Malibu, Redbreast, Jeffersons, Altos, Del Maguey a slight decline for Absolut, but strong resilience of the brand for this last fiscal. A very strong price effects of high single digit share gains in the Irish and North American whiskey categories in the single market category, and share gains for both Malibu and Kahlua. We've continued to deploy our RTD portfolio in the U.S. enjoying very strong, double digit growth. And as I mentioned, we're looking forward to the launch of Absolut Ocean Spray RTD. The successful very recent integration of Código Tequila and Skrewball peanut butter flavored whiskey, which I recommend for those of you who can have access to it in the U.S.
Agility in our inventory management, and declining sales expected in our first quarter on a high comp basis, but with a positive outlook for the year. So remember, that last year, we significantly increased our prices, October 1, which obviously led to retailer selling ahead of these price increases. And we also sold into our wholesalers ahead of an windy [Ph] period back in a time where as supply chain disruption was quite huge, which thankfully, is over now. So declining sales for Q1, but positive outlook for the full year due to the technicalities I just mentioned.
Moving on to China, plus 6% frankly a strong performance throughout the fiscal year in a contrasted year. So if you recall, we started the year very well, with a very strong mid-autumn festival performance. In fact, it was a record performance. And then the environment became more challenging with a soft Chinese New year's season. Remember, they were lockdowns ahead of Christmas. And then the zero COVID strategy was what stopped but created quite some disruption and which led to a very soft Chinese New Year, and followed by a very strong rebound in the fourth quarter with a resumption of consumer activity amplified by a low basis the year before.
We ended the year with a very healthy level of inventories by June end in China. We did increase prices. We have a high single digit price effect. We increased our prices again during the month of May as we do every year in fact; the growth was driven by Martell but as well by our premium brands portfolio led by Absolut and Jameson. We have maintained our value market share in China. And we do expect a soft Q1 in China due to challenging macroeconomic conditions and also a high compare basis, which is clear really expected to ease from Q2. Remember we're recycling a record Mid-Autumn festival in China.
And yes, well excellent growth with continued premiumization momentum. China up 13% growth was led both by price and mix. Our strategic international brands continue to enjoy very strong momentum with strong double digit growth and notably on our Scotch portfolio, Jameson Absolut, etcetera, etcetera. Our strategic global brands continue to premiumise and we have a strong focus on Blenders Pride and Royal Stag. And we maintained our very strong market leadership position in the segment in which we operate. And we just launched L77, Longitude 77 in the very dynamic Indian Single Malt category.
Global travel retail which is continuing to normalize and will continue to normalize this fiscal year with strong recovery as passenger traffic resumes in Asia. So for this last fiscal year, travel retail group 40%. Passenger numbers are roughly at 90% of pre-COVID levels globally. We have a double digit price effect and a very favorable mix as a result of the resumption of travel in Asia, led by China.
Strong performance notably on Scotch, on Martell as well as an Absolut we've maintained our value leadership. And we expect a solid start of the year, this fiscal year with continued recovery in Asia. Then, on the other regions, so for Europe, up 8%, which is very strong performance for Europe, resilient volumes across the region, with as well a high single digit price effect. We've had very strong growth in Spain, with a very strong on trade recovery last summer remember, driven by our Gin portfolio, but also by our Scotch and Vodka brands.
Germany also had a very strong year with 8% growth across basically all channels. The U.K. grew 2% but we're keeping gaining share in the U.K. with very strong share gains in the On-trade. Listen modest growth of Ricard in France up 1% after a year of growth as well. So two years of consecutive growth for Ricard, which is really gaining traction again in France.
And finally, dynamic performance in Eastern Europe notably with double-digit growth in in Poland. The Americas up 2% Canada 3% which is a good overall sales results with strong growth on Absolut, Jameson, Glenlivet and our specialty brands, and very strong ready-to-drink performance as a category but ourselves within that category.
Brazil 1% growth with a slowdown in H2, this is probably one of the markets where you know we were very aggressive on price and it hit a little bit our volumes. Mexico double digit 12% growth driven by Absolut and our Scotch brands in particular Chivas.
Asia, Rest of the World excellent growth at 17% with 21% growth in Japan, 19% growth in Korea, double-digit growth in Taiwan, very strong growth as well in Turkey 44% led by Chivas and with share gains across the portfolio. 15% growth in in Africa led by South Africa, Nigeria and Kenya with our whiskey brands and Martell.
And again, I won't dwell upon it I already touched upon that but growth across all our spirits segments with double-digit growth for strategic international brands. A word on Jameson, up double digit 10%, strong growth across Europe and Asia. Volumes continue to grow in fiscal year 2023 building on our last year's 10 million case, milestone and therefore driving us to invest a little bit of money in capacity expansion. We'll talk about it a bit later. Very strong pricing, very strong brand equity. U.S. enjoys the mid-single digit value depletions growth with very strong growth for Jameson Orange, very successful innovation. I think it was rated one of the most successful innovations over the last fiscal year in the industry in the U.S. and the continuation of the globalization of the brand. Outside the U.S. Jameson grew 22% and to be fair, this growth is driven by all regions and within all regions, I would say all markets.
Our Scotch grew 17% and double digit pricing building on the strong global demand for Scotch. Chivas we just broke the 5 million case milestone. Chivas is now up 25% in terms of net sales, with a clear premiumization on-going within the whole range, the 18 year old performance, the 13 year old performance and so on. Ballantine's again, double-digit at 13% with strong growth as well across Asia, but also in European markets such as, such as Spain, and as well, in some of our LATAM markets, principally Brazil.
Royal Salute up 32%. I mentioned our prestige range is up to 15 in particular driven by Royal Salute up 32% with a strong recovery in travel retail, but also growing in many other markets. And Glenlivet up 9% led as well by premiumization within the range, notably in the U.S. where we gain share in Single Malt, but as well in Taiwan, and India and to be fair in many other markets.
Absolut up 10% and with broad based growth, so coming from all regions, and again, building on the 12 million case milestones we broke last year with strong pricing on Absolut because of its strong brand equity, with a very strong performance across Western Europe. The strong international development of the brand, led principally by China and India, but without forgetting Mexico, Australia, etcetera. And the strong rebound in travel retail.
And Martell up 10% principally led by Asia and global travel retail with a strong price effect in line with our value strategy, which is not new, of course with favorable mix, offsetting a very slight volume decline. As I mentioned, we had a record mid-autumn festival last year. And the year was softer in the U.S., and very, very strong development in Africa, Middle East, notably in Nigeria perfectly in line with our internationalization strategy for Martell.
More broadly, the rest of the portfolio, very dynamic performance. Ricard plus 1% for France, is very good. I mentioned 15% for our prestige portfolio. Beefeater up double digit, led by a dynamic U.S. performance for Beefeater in, in the U.S. Havana Club up club 6%, Malibu 4%, with a nice rebound in the U.S. in H2, and our Champagne portfolio, which grew 1% with a strong rebound in H2.
And on that note, over to you, Helene.
Thank you very much, Alex. So let's move into the profit section. So that we can have a deep dive into the financial translation of this very, very solid performance that Alex just detailed with you.
So starting first with the P&L, and with the margin evolution I must say, I'm sure you remember sustaining the gross margin was a key ambition for us this year, especially given the unprecedented pressure coming from inflation. And I must say we are very pleased that collectively, we managed to sustain that gross margin, you see the performance here plus three bips in terms of organic expansion. And this is obviously mainly linked to a very solid pricing, increase price increase across the brand across the portfolio across the world. Alex already covered the performance by brand and by market on that front. It's obviously a strong testimony of the strength of our portfolio. And I must say as well, a very solid demonstration of the very strong execution of price that has been done everywhere, which is obviously linked to our capabilities in terms of revenue growth management.
We have as well kept very stronger A&P accelerated our investment in key market like the U.S. with A&P sales ratio quite stable at 16% as already announced. When it comes to our teams, obviously investing in our teams, attracting and retaining talent is critical for sustained long-term growth. So we kept investing but in a disciplined way in structure with a growth which is below topline at plus 8% organically. So this is then getting to the report profit from recurring operation performance growing at plus 11% organically and as well on a reported numbers translating into this operating margin expansion.
When it comes to the FX, so FX has been negative especially in Q4, I will say and this is linked to the deterioration of currencies, especially in emerging markets that has been a bit stronger than expected in Q4, and this is partly offset by perimeter impact.
So moving now to the earnings per share growth, so our very strong performance in terms of profit from recovering operation is translating into a strong group share of net profit from recurring operation growing at 10% and further improves to EPS growth of plus 11%. So, let's maybe have a quick view on where it's coming from. So, starting with the financial expenses, due to the rapid rise in interest rates, our financial expenses higher than last year, but we managed to maintain an average cost of debt, which is well inside the 3% guidance we provided a year a year ago with an average cost of debt at 2.6%.
Tax rate on recurring items, it's virtually stable at 22.6%. And the earning per share has the equity benefit of the share buyback program of €750 million that we executed in fiscal year 2023.
So bridging now from the group's share in profit from recurring operation at plus 10%, we report an increase in group share of net profit at plus 13%. This improvement is due to nonrecurring expenses after tax being lower than last year with nonrecurring expenses driven by reorganization and restructuring costs, partially offset by assets disposal, and positive and nonrecurring corporate income tax.
So let's move now to cash flow and balance sheet. So first, we are consistently generating strong cash, which is obviously key to provide us the means but as well, the confidence to strongly invest to prepare our future in a sustainable way. So recurring free cash flow at €1.7 billion, which is minus 14%, lower than last year, due to primarily a significant increase of strategic investment to future growth.
With well over €1 billion in total invested in fiscal 2023 in CapEx and strategic inventory. We have as well a modest increase in working capital. So maybe let's come back to the strategic investment. CapEx investments, we are notably directed toward expanding our production capacity in each product. And I will share some example a very concrete example of an exciting one I must say with you in a moment. So our CapEx amounted to circa 6% of net sales. We have as well doubled our investment in strategic stocks versus fiscal 2022, investing circa €500 billion in fiscal year 2023. And this is absolutely critical to protect our future growth, notably, obviously, with our aged portfolio.
So moving now to concrete highlights of our investment program. Again, dealing with both capacity expansion, but also very importantly, investing in sustainable technologies, such as mechanical vapour compression in Ireland and Scotland. Needless to say that as well, new builds in Ireland and in the U.S., will include the top technologies, I must say to ensure that our production is carbon neutral. So you have here beautiful pictures of our investment to come in Ireland with a new distillery in Middleton, in Scotland with additional investment in the U.S. with a new distillery in Kentucky and as well we kept investing as I mentioned in strategic inventories.
So let me give you a bit more flavor on what to expect for fiscal year 2024 on that front. So we share with you a guidance for our strategic investments with a range between €800 million and €1 billion for CapEx for fiscal year 2024. And strategic inventories level to be similar to fiscal year 2023. And we anticipate as well that we will have elevated investments for that precise reason, very strategic reasons for the next two years.
So moving now to the balance sheet. So our net debt increased by €1.6 billion and we maintain a strong balance sheet with a net debt to EBITDA ratio of 2.7 while deploying a very dynamic financial policy. So you have the numbers here starting with a very significant M&A activity that Alex went through a few minutes ago with notably increasing shareholding into sovereign brands. And as well, acquisition of majority share into Código and Skrewball. We have as well executed our share buyback program for €750 million in fiscal 2023. A quite consistent obviously, financial policy when it comes to dividend for close to €1.1 billion and some positive effects impact on the debt coming from the U.S. dollar euro evolution.
So, this has enabled us to accelerate our return to shareholders, given this very consistent performance, strong performance that we have delivered over the years. So we are proposing a dividend of €4.70 per share subject obviously to the vote at coming shareholders meeting, which would be a plus 14% versus fiscal year 2022. We are as well announcing a share buyback program with a range of €500 million to €800 million. And let me remind you of financial policy with four priorities in the following order while maintaining investment grade rating.
So number one priority, investing in future organic growth in particular through strategic inventories and CapEx. Number two, continued active portfolio management, including value creating M&A, and by the way active portfolio management means acquisition but as well, disposal and we've been quite active during the summer as you know. Dividend distribution at circa 50% of net profit from recurring operation aiming at consistently growing dividends. And finally, share buyback.
Back to you Alex for the outlook.
Well, thank you very much Helene. I think the most important message on this slide and for the outlook is our confidence to deliver our 2023 through 2025 medium term financial framework. Aiming, of course at the upper end of that 4% to 7% top line range and delivering as well 50 to 60 bips of operating margin. For this specific year in a challenging environment, we anticipate, but number one broad based and diversified net sales growth for the full year with as we already mentioned it a soft start in Q1 amplified by a high comparable basis. We have and we are experiencing easing inflationary pressures, which is good news. We will continue to focus on revenue growth management and operational efficiency. We will continue of course, to invest at record levels behind our brands and brand equity at around 16% of our net sales, which is optimized, leveraging our key digital programs. We'll continue to be even more so disciplined in our investments in structure, and all of this leading to organic operating margin expansion.
As Helene just mentioned it, you should expect significant investments to fuel our future growth in CapEx between circa 800 million and a billion and as well as behind our strategic inventories to a similar level as this last fiscal year. And again, as Helene announced it, we will have a share buyback program throughout the fiscal year expected to be between half €0.5 billion and €800 million and as well finally, we should expect at least based on current exchange rates, negative FX impact. I think that's it.
Thank you Alex and Helene. We can now turn into the Q&A. So if you don't mind limiting yourself to two question each and guess the operator can open the call with the first question.
Thank you this is the conference operator. [Operator Instructions] The first question is from Simon Hales with the Citi. Please go ahead.
Thank you, and morning Helene, Florence and Alex. So obviously two questions from me then please. Just first, I want to start off on the outlook for Q1. Just make sure I understand the drivers of the weakness there. On the U.S. specifically, can you just confirm that that you're not expecting any further destocking in the U.S. in the first quarter that the weakness really I think you said Alex is primarily just driven by the top selling comps ahead of the price increase last October? And if that is the case, how do we think about overall depletion expectations for the U.S. for both full year 2024 and for Q1?
And then secondly, also related to that, from a China standpoint, I appreciate as you said, Alex, you've got a tough mid-autumn festival, comparative but the headline comparative from last year's Q1 I think 9% growth in China doesn't look overly tough. You highlighted the softer macro in your comments. Are you already seeing some changes in consumer behavior there? And how does that make you think about full year trend growth in China? So that's my overarching question.
And then just a quick second one, maybe for Helene. You talked about weak FX into 2024 being negative; can you give a bit more guidance on how negative you expect FX to be this year?
I'll start with; I'll start with the U.S. China one. Listen, we mentioned agility and inventory management. The basis to be fair is basically inflated by price increases, which led to strong selling to the retail ahead of October 1. That was when we increased our prices quite significantly, should I say number one. And number two as well, for very strong demand that wholesaler level ahead of the OND period. Again, remember last year, at that same time, and we were not just ourselves, by the way, we were all struggling with supply chain disruptions. And the one thing you want to avoid is out of stock situations during the key festive period of OND.
So this is what we're recycling in the U.S. The underlying dynamics are positive. I mentioned consumer resilience for the U.S. We're not at the 4% to 5% underlying growth, medium term level, as we are normalizing. We believe right now the market, from a consumer demand standpoint is probably anywhere between 1 and 2. And then the rate at which and the timing to get to the 4% to 5% I would say your guess is as good as mine. But it's not going to happen in years from now on. It's a question of, is it 6 months, 12 months, or 18 months max? This is something we'll see. That being said for the full year, we said we expected a positive full year in the U.S. Just one thing on China, by the way, the famous 9% to which you're referring of last year, Q1, and the previous year was up 23%. So just bear this in mind that 2023 plus nine plus now recycling a record mid-autumn festival. So this is also something to bear in mind. So on FX, Helene.
Yes. So by the way, Simon, I think it makes it three questions for you. But so how negative it would be very difficult to quantify that at this time of the year, you have the average rate for main currency and they can we ended the year with the euro, U.S. dollar at 105. The spot rate is where it is more close to 1.10. So that's why we expect negative FX impact. I cannot quantify it more at this time of the year.
Thank you. And just to confirm on the China points, sort of [Indiscernible] you mentioned the softer economic backdrop that we're seeing there. I mean, are you seeing a change in consumer behavior on the ground already in recent months?
The channel’s which is probably suffering most related to the economic environment is the on-trade. So the on-trade I mentioned nightclubs are clearly suffering big time. The on-trade overall is, is being challenged due to the environment. That being said, we're seeing I was there a couple of months ago the strong emergence of live bars. So basically bars where you have live entertainment music bands, and the strong emergence as well the cocktail which is spreading. So we are seeing consumer resilience. However, to be fair, there is some softness related to the macroeconomic environment.
Brilliant. Thanks ever so much. I’ll better pass it on.
The next question is from Edward Mundy with Jefferies. Please go ahead.
Morning, Alex, Helene, Florence. I've got two questions and so the first is on the recent organizational changes that she announced last night. Alex, when it comes to execution, what are the sort of two or three behaviors that you're looking to achieve and drive following this organization evolution?
And as a second part of that question, Helene, how should we think about the financial impacts of these moves is that some of the delayering takes effect? And then the second question is on margin expansion, I think you laid out some of the key moving parts after fiscal 2024, quite a confident turn on driving margins. Could you perhaps elaborate on this? And do you think fiscal 2024 will be a year where you are able to grow margins 50 to 60 basis points, in line with that medium term framework?
Well Ed, thanks for your question. I think that that's these changes. This last fiscal year, is probably one of the most significant change we've operated during the course of the year. The name of the project, by the way, just to share it with you, it was called Project Tomorrow. And by the end of September, we'll say that tomorrow has now become today and the project is over. We have significantly delayed, by the way, no more regions. Headquarters is directly linked to now the big management entities, the 10, management entities on one side and the six brand companies on the other.
From a behavioral point of view, maybe I will stress three key words, or three key philosophies we based all of these changes on. The first one is simplification. So we simplified some of the layers, we simplified functions function by function. In today's world, it's very simple to complicate things, and it's very complicated to simplify things. But simplicity, simplification is critical. So the only thing that matters to us is our consumer and our consumer centricity and the relationship between our consumers and our brands.
So number one, simplification. Number two, we always talk about centralization, decentralization, to be fair pragmatism, being decentralized way matters being centralized, where it also matters. Should IT be centralized? I think the answer is at least on the hardware piece, of course, infrastructure and so on; I could go on and on. But the key word, there is no longer these kinds of things. It's empowerment, we now have a framework. By the way, the one we have that we share with you is the global one. But the beauty of that framework is that we can cascade it by brand and management entity with a very strong portfolio strategy in place, leveraging our tech and data. That framework is sufficiently clear and straightforward, and in a way simple, that we can easily empower people just to get the work done.
Once we agree on that framework, and we call this freedom within a frame, people are empowered to make the right decisions very swiftly, where it matters. And this I think is at the core of what we're doing. And we've seen it in the recent past, it is already having an impact.
And the third and final philosophy around Project Tomorrow is what we call a discipline, discipline, execution. This year is going to be an execution year. We are delivering market by market brand by brand or our framework, we really want to focus on that clarity of execution. And now that we have the framework, so simplification, empowerment and discipline, all at the service of our consumers that are at the core of a model. That's the behavior I expect from my teams around the world. And that's to be fair, what they expect as well.
So moving to the following question in terms of financial impact. So, as Alex just mentioned, this evolution of the organization is really to deliver stretch profitable growth. So this is not a cost cutting exercise. This is an evolution to deliver on our strategic journey. Having said that, you just mentioned discipline and that’s obviously discipline as well has been an obsession on many aspects, including in our investment in structure. So we're going to keep having that very strong discipline in terms of investment in structure. And you can expect some synergies because of the simplification the delivering of the organization, some simplification and utilization that will contribute to that journey of discipline investment restructure cost growing below top line.
Talking about margin expansion for fiscal year 2024, so maybe let me just start by saying, thanks for this very solid performance of fiscal year 2023. We are starting the year in a very solid position when it comes to the business and when it comes to our margin. So first, our brands have been very resilient in the context of strong price increase, and we're going to keep that benefit in this fiscal year 2024 with some carryover of last year, in terms of price increase and some new price increased, they are going to still be implemented in the months to come, probably not in a more specific way and, and, to some extent, a bit more moderate in a context where as we mentioned in outlook, we believe that we will be moving to, I would say, some easing in terms of inflationary pressure. So pricing, premiumization will obviously be key for performance in fiscal year 2024.
Moving to COGS. So easing inflationary pressure doesn't mean we will turn into tailwinds. We believe that, especially when it comes to our dry goods or wet goods, it could be still quite significant in terms of pressure, but not to the same extent and in the fiscal year 2023. And we're going to keep benefit from all the initiatives we put in place in terms of operational efficiencies. And we'll have finally, good news coming from logistic cost, which already materialized to some extent in H2 of fiscal 2023. So especially for instance, a demo of deep sea freight that will support our margin expansion in fiscal year 2024.
Moving now to A&P so quite consistent policy here, aiming at circa 16% of net sales. And as I mentioned, discipline structure that's why we are confident at this beginning of the year to share with you this ambition to expand organic margin in fiscal year 2024. But we are not guiding on that topic at this time. Again, we as well reiterating sorry, our confidence into delivering our midterm framework by fiscal 2025, which is, as you know, both in ambition in terms of top line growth and organic margin expansion of 50 to 60 bips.
Great, thanks. Alex as a quick follow up on the three philosophies. I mean, how does having much better data and visualizing the business? How does that help you with those three philosophies?
Well let's be very clear, a fact based data fact based decision making very swiftly when you get the information and the data to make your investment decisions in terms of A&P when you get the data swiftly as well and reliably, to make your promotional decisions. What this is going to do, by the way, is your full year strategic planning, from an executional point of view and operational point of view, in terms of what brands to activate, in what conditions throughout the year and at what time. There is I was mentioning when these are critical, festive time in the U.S. But to be fair, every month is critical on a specific brand or specific set of brands. There's the month of May for Tequila, there's summer for a number of our brands. I cannot not mention St. Patrick's Day, and so on and so forth. But what this will do is, we will be a lot more precise in terms of our strategic planning and execution. On the brands we activate everywhere in the world. It's as simple as that if I simply said, now we need to execute it. It's a new mindset.
Great, thank you.
The next question is from Olivier Nicolai with Goldman Sachs. Please go ahead.
Hi, good morning, Alex, Helene and Florence. Just got two questions, first of all on the portfolio management slide that you mentioned earlier. You have acquired enrichment of brand in the U.S. this year; could you give us an indication of the organic sales growth boost that you would get? I mean, U.S. for instance this year was flat. What would have been the rate if those brands were in organic? And then secondly, you also mentioned some disposals I think we sold Campbell recently in France. This is obviously a small brand. So not to say going to ask you more detail much details about this one specifically, but can you share us some insight to what's the catalyst for this decision in general, what's the trigger for you to dispose of a brand?
And then just a follow up part of the presentation you mentioned 2.6% interest coupon in both full year 23. Looking at the debt maturity profile and the need to refine it for next year, how should we think about the next year, if there was a good one right. Thank you.
So if that’s fine with you, Alex. I'm going to cover all those questions. Thank you, Olivier. So, portfolio management. Yes, obviously, this year 2023 has been very active, especially for North America. This will be still in a very much impact mainly in H1 of fiscal year 2024 starting to contribute to organic growth in H2 of fiscal year 2024. By the way, that means that a very much impact in fiscal year 2024 will be quite significant thanks to this active portfolio management.
And this will partly offset the negative FX impact I was referring to. So, more to come, our focus right now is obviously to integrate those brands in the U.S. and in Canada as soon as it's very rich, as efficiently and as dynamically as we can. There’s a lot to come in terms of investment behind those brands. So, I must say we are extremely enthusiastic to have those brands joining already quite comprehensive portfolio.
Clan Campbell is exactly what I was referring to when I was talking about disposal. By the way, again for us active portfolio management has always been both acquisition and disposal, even if we've been probably even more dynamic in terms of acquisitions recently. But we've been selling brands other recent past as well. So, what I mean the strategy and the way we are looking at a portfolio is again to see what are the brands that are contributing to the growth. What is the value that we can keep creating behind those brands moving forward. And if we believe that some brands are a bit less dynamic and not as critical for global portfolio in relative markets, we are looking at an opportunity to sell them. And then when we come to the financial expense projection for fiscal year 2024, you’re right, cost of debt was 2.6 in fiscal year 2023 in the current context of increase of interest rates. Sorry, we believe that the cost of the average cost of debt for fiscal year 2024 could be between 3 and 3.5.
Thank you very much.
The next question is from Laurence Whyatt with Barclays. Please go ahead.
Morning. Thanks very much for the questions. A couple for me then please. Firstly, on your travel retail business, I think you had a target to get to the 2019 level of profit this year. I'm assuming you hit that pretty well. Just wondering if you think there's further growth to come from the travel retail business as the world continues to return to travel and China is getting on more planes and the like and what are your sort of expectations on travel retail? Do you think I'll be growing ahead of the rest of the group?
And then secondly, you built your digital capabilities. I think in 2020 and you announced and to us at the capital markets day last year. Of course, those years were pretty impacted by various restrictions and lockdowns and the like. And now we've had a more normal year of operations this year. Have it has everything performed to your expectations. Have you had any learnings as people are operating slightly differently than they did during the pandemic. What can you take away from that sort of change to more physical meeting? Thank you very much.
Sure. Laurence thank you for your questions. On GTR, so I mentioned a traveler is at 90% versus 2019. But in terms of profit, we're in fact above. We were aiming at being back to 2019 levels. And at the end of the day, we ended up even above that. So great news. Of course, related to the increase in travel numbers. Number one, if we call normalization. But number two, to very strong and good positive pricing. Number three, indeed due to mix both in terms of brands. But also as well in terms of regions with the Asian region being the last one to rebound. That rebound is expected to continue throughout fiscal year 2024. So we do expect a dynamic GTR for this new fiscal year growing faster than the rest of the world for sure. Unless there's another pandemic and all these kind of things, let's not get there.
Digital capabilities, yes we've been building digital capabilities on one side and from that point of view I'm very confident. But even more importantly, we've been gathering the data. Initially the data was gathered manually, and now we're starting to automate our data gathering processes. The data is becoming more reliable as well. We're starting to use it with a lot more precision, etcetera, etcetera. And on that front, I would say that the data piece is never ending. It's endless because we will keep gathering data year in, year out, which will enrich our models. As you know, we have algorithms for our KDPs’ whether it's on the marketing front, whether it's on the promotional front. And they will constantly being enriched by the data. So we have a big change management piece, of course, and now that I talk about execution for this year, a lot of it is going to be around change management to make sure that everybody adopts these tools, which is underway.
And the ultimate vision, which I call the cockpit vision, is to have all these tools not work in silos, but work overall, getting to an excellence in execution from a strategic planning point of view.
That's already clear. Thank you very much.
The next question is from Celine Pannuti with JPMorgan. Please go ahead.
Good morning. Alex, Helene and Florence thank you for taking my questions. My first question will be on the U.S. I saw in my note, last year, that you're sell in was 2% ahead of sell out last year. So it seems that you have a tough comparative for the first half of the year. Plus you mentioned that the market is bringing the loose single digit range. So I'm just wondering how what makes the bridge from starting the year. And they get to lead a tough comp if I'm right in selling and ending the year positively in the U.S.
My second question will be on the outlook. You mentioned that you are confident on your midterm algorithm at 4% to 7%. Do you think that this year 2024 will be within the 4% to 7% corridor? And within that, could you as well help us understand how your pricing dynamic those two volumes should evolve in 2024 versus I think 2021 where pricing was 1%.
And then maybe just lastly to make sure I'm right. Could you say how big Russia is in terms of sales and EBIT for fiscal year 2023, and is that going to be accounted for in the organic number for 2024? Thank you.
Okay, so thanks for all those three questions. I've started with the U.S. So your right things have been a bit volatile from one quarter to the other last year in the U.S. By the way, the year before as well, which I will call agility in the inventory management, because situation was very different with a strong COVID recovery. And so putting pressure, very positive pressure in terms of demand. At the same time, very significant disruptions in terms of supply chain. So there were some movement from one quarter to the other that could be very different. At wholesalers level and at retailers level. And our ambition was obviously to be very agile to monitor our shipments accordingly. So things were different from one quarter to the other, taking the example of Q1 versus Q2 last year.
As Alex already mentioned, your right Q1, we had shipments below depletion. And then in H1 the situation was different, because there was in Q1 and I will come back to it briefly. Some significant impact coming from a supply chain being much better than the previous semester, and as well, ahead of pricing increase in Q2, things were normalising versus I would say kind of abnormal Q1. In a context that was changing dramatically. So let me just pose a second in terms of the high-comp in Q1 that we are now cycling this year. Because we already mentioned there are two main drivers that I will call technical, by the way, this has nothing to do with consumer demand. So there was the price increase, I don't think I need to come back to it. But as well, those global supply chain tensions that were created, strong depletion in Q1. So that again, wholesalers and retailers, we are confident with the level of finished goods. They were getting ahead of very important season that are summer [Ph] and OND.
And our level, which has an impact on in terms of shipments, we were as well adjusting the level of wholesalers inventory at a time where we were exiting a very difficult time during which lead times have doubled. I'm talking about H2 of fiscal year 2022. So our shipments in Q1 were as well in a way boosted by our ability to ship our own finished goods to wholesalers mainly in July, fiscal year 2023.
So and that's what we're going to be recycling this year. Good news is that those supply tensions have been resolved and as well in the current context, especially so with that confidence that this I would say normalization of supply chain is giving to the trade and as well the rise of interest rate, we are expecting some tighter management of trade inventory at trade level. So we're going to keep a very agile way of managing our inventory across the year. As you know, this is our focus, we've been I would say quite consistent and in doing that over the recent past, despite a very chaotic [Ph] environment. So we're going to do that again this year. Having said that, please expect that we are not monitoring that on a quarterly basis because that doesn't make sense from a business point of view, but our ambition is always to land with a healthy level of inventory and that will be again the ambition in fiscal year 2024.
When it comes to the top line corridor, we are not giving at that time the corridor that we could deliver in fiscal year 2024. We are reiterating probably that we are going to end by 2025 our ambition, as I mentioned already. This year, we are confident with a broad-based and diversified -- and growth. Again, starting the year with a very solid position, you mentioned the combination of price, volume and mix, obviously difficult to know so early in the year, but last year, we are very resilient and volume we are at plus 1%. Again, we are confident in the resilience of our portfolio moving forward. When it comes to pricing, we would expect a pricing which would be probably more close to a mid-single digit for fiscal year 24, especially because of the environment and the easing of the inflationary pressure and this will be a combination of carryover and new price increase.
When it comes to [Indiscernible] I think we share that number already a few times. This is below 3% of our net sales pre-war and the exit from our share will be in our organic performance already in fiscal year 2023 and in fiscal year 2024.
Thank you. Just to make sure I'm clear so what you were saying about the half-comp on H1 of fiscal year 2023 will be mainly felt in Q1 and not necessarily in Q2.
Yes, I was focusing on Q1, you're right.
Thank you.
The next question is the last question from Trevor Stirling with Bernstein. Please go ahead.
Morning Helene and Alex. Just one question from my side and it's coming back to your commentary Helene on input costs for next year. I'm talking about wet goods and dry goods and it seemed to be that glass bottle supply is one of the stickiest areas of pricing where even though energy prices are falling, the price of the glass bottles is not yet falling. Would you concur that that's probably one of the more problematic areas of the dry goods?
I do concur with the fact that it is not moderating significantly. I would say we are now used to deal with this type of pressure, so that’s I would say part of our ways of working right now, together with all the efficiency that we want to deliver. So that's our main assumption. That's very fair to say for fiscal year 2024 that this will not be dramatically moderates when it comes to dry goods.
Thank you Helene.
This was the last question. I’ll turn the conference back to the speakers for any closing remarks.
Thank you very much for attending this presentation and then for all your questions and we wish you a very good day and we see you for Q&A [Ph].