Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Campari Group 2018 9 months results presentation. As a reminder, As time, I'd like to turn the conference over to Mr. Bob Consek Concewitz, Chief Executive Officer of the Campari Group.
Please go ahead, sir.
Thank you very much. Good afternoon, and welcome to our Q3 conference call. If you have the presentation under your eyes, please join me on page number 4 where I'll keep off of the usual highlights. As you can see, we've had a pretty strong Q3, which led to a very solid 9 months result. With regards to net sales, on an organic basis, we grew by 6.6% on 9 months.
This is behind an acceleration in Q3 where we grew by 8 0.9%. We've seen a continued improvement in sales mix, thanks to the consistent outperformance of our higher margin brands, in core developed markets. If we look at it on brand basis, category basis, our global priorities continue to outperform, up 10.3% on 9 months basis, 13.4% in Q3. Clearly, strong results by Aperol Campari as well as our brown spirits. Our regional priorities were up 5.6% on a 9 months basis and improved in Q3, reaching 7.1% driven by Espolon And Bulldog.
On the other hand, our local priorities were down 1.9%, mostly due to a decline in the Brazilian brands. From a geographic standpoint, solid growth in our higher margin developed markets, driven by the U. S, Western Europe as well as Australia, However, we have softness in emerging markets combined to both macro volatility as well as tough comparison basis, especially in South America. On a reported basis, we're down 2.5%, which reflects the negative perimeter effect expected of 3.7% as well as the negative FX effect of negative 5.4%. Moving on to EBIT, on an adjusted basis organically, it grew by 8.7% ahead of the sales growth, organic sales growth.
Leading to a 40 bps margin accretion. This is driven by the strong organic gross margin expansion of 80 bps, thanks to the positive sales mix book by brand as well as market, and it takes into account the dilutive phasing of A and P. 60 negative 60 basis points and the accretive effect of SG and A positive 30 basis points. On a reported basis, EBIT was up 0.7% and it takes into account both the disposals as well as the FX. Looking at group pretax profit on an adjusted basis, it reached $235,500,000, up 4.8% or 19.6% of sales On a reported basis, it reached $249,400,000, up 4.7%.
Net debt at the end of the period stood at 913,800,000, quite robust cash flow, bringing the net debt down by 67,800,000 the proceeds of the Lemonsetta business, disposal obviously helped, but this is also net of the acquisition of this fee. The dividend payment and the net purchase of own shares for our stock options plan. So net debt to EBITDA pro form a is pretty stable at a comfortable 2 times. The one thing we'd like to underline here is that we've decided to move to hyperinflation accounting for Argentina. Clearly, this reflects the trading of the currency and the inflation in that country.
Argentina accounts only for 0.9% of our consolidated net sales in the 1st 9 months. So clearly, this move is considered immaterial. Moving on to the following chart, without getting into the details, you can see how our geographic areas are in solid, positive organic growth territory. Looking at it from a brand perspective, very strong results in terms of global and regional priorities, whereas weakness in South America impacted the local priorities. Moving on to, chart number 7, the only thing worth underlining here is pretty self explanatory is, that the organic change of 6.6 percent largely driven by the high margin growth priorities would result into sorry, 8.9% in Q3 would result 9.5% we include the price effect in Argentina.
So that gives you a gauge for that accounting change. Moving on to Page number 8 not much to say except that our developed versus the margin market split is pretty stable at 83% versus 2017. Looking at it on a regional basis, the Americas, our largest region on page number 9, you can see the heavy headwinds from ForEx which had a negative 9.5% impact. Having said that, quite robust performances, particularly in the U. S, up 4.3%.
Very nice double digit growth of Espolon, Campari and Aperol, and a very positive trend of Wild Turkey. Our rums as well as congrats. These results, obviously, of the previously listed brands, offset the negative impact of SKYY, our shipments are still underperforming sellout trends due to the announced destocking. However, this gap is gradually reducing over time. Grand Marnier on the other hand was slightly positive in the 9 months because it was impacted by a very tough comp base in Q3 of 2017.
Argentina growing sorry, Jamaica growing double digits 14% continued very positive, sustained growth behind Campari Reign nephew overproof in Appleton Estate. Brazil, although it improved in Q3, is done on a 9 months basis, 3.8% Clearly, the market continues to be impacted by political instability and macro weakness. Most of the decline was driven by Drayer and Sky, the other hand, it was mitigated by API Deeps, Campari and Aperol. Argentina down 20.2% Here, the overall conditions, macroeconomic conditions are deteriorating. We're also tightening and maintaining tight credit policies, leading to a decline in our largest brands.
The rest of the region was up double digit, 11.2%, with a nice sustained performance in Canada, up 5.9% behind the usual suspects, Mexico double digit, up 12.7%, and Peru up by a strong 65%. You will recall that this is the last subsidiary which we created last year. Moving on to Southern Europe, Middle East and Africa on page 10, very good organic performance of 5.8%. However, this is where we have the highest negative perimeter effect with the dismissal or the sale of our soda's business generating a negative 8.6% effect. Italy, robust growth for that markets where we're clearly outperforming.
We're growing by 3.7% up 5.2% in Q3, clearly, our longer therapies, Aperol, up double digit, 13% and Campari also double digit, up 10.3%. Are more than offsetting the softness in the single serve for Dino and Campari Soda operators. The rest of the region grew by 12.9% very positive Q3, where we were up 22.5%, largely driven by France, up 19.9% mostly, thanks to Aperol going Grant and Campari. Spain vastly outperforming this market. Which has been soft all year.
We're up 6.9%. Again, behind Aperol and Campari, and very strong growth in Nigeria as well as global travel retail. South Africa on the other hand is down on a 9 months basis, and this is due to the unfavorable comp base last year when we set up the subsidiary. Moving on to the rest of Europe on page 11, North Central Eastern Europe, very strong 9.3% growth. Germany, which is our 3rd largest market, grew by 8.8%, 11.5% in Q3.
A very positive performance by Aperol, up by 29%. Campari, 9.4%, Pudog as well as Shinzano Vermouth, and from a small base, Crodino is becoming an interesting brand there. The UK was up a strong 18.2% driven across many brands, but in particular Aperol again, up 51.2%. The Rams and Campari and Bulldog also contributing significantly. Russia, down 16.5%, and this to a large extent is impacted by a very unfavorable comp base last year, where we were up almost 92% as well as some market volatility.
Having said that, our higher margin brands, Aperol air, Campari, are performing very strongly double digit, and this is obviously impacting the mix and the bottom line. If you look at the rest of the region, it's up 19.2%. Austria up to 7.8%, again, behind the Aperitif's Belgium 5.7% and actually outperforming in a negative market to return up 7.1%. And strong results in the rest of Eastern Europe. To close-up our regions on Page Number 12, Asia Pac, very strong results, continuing the trend from the beginning of this year where we're up organically 16.3%.
On the other hand, this is where we also have quite a significant ForEx headwind. Of negative 8.7%. Australia was up our largest market, 12.9%, accelerating in Q3. Bear in mind though that this is ahead of their key seasonality, which is Q4. So, in Q3, we're up 16.9% are performing in all the categories where we're, active and very strong results once again of the Aperitis.
If we look at the rest of the area, we're up 24.2%, with positive performance across markets, double digit growth in Japan. This is also driven by Wild Turkey Bourbon as well as the Sky ready to drink, China and New Zealand. Moving on to Chart number 13, not much to say except that global priorities are continuing to steadily increase their share of the pie. They're up to 58%, which is a 400 bps increase versus the same period last year. Moving on to the detailed review by brands.
You'll that Aperone accounts were 18% of our sales, grew by 31% in the 1st 9 months of the year, but quite a strong 43% in Q3. Now we're seeing in this, I think, is very positive, very strong performance in the core established markets, Italy, Germany and Austria are growing very nicely double digit, whereas we have very strong double digit growth rate in all of our high potential and seeding markets, particularly the U. S, the UK, France, and so on and so forth. Campari, up almost double digit on a 9 months basis, 9.7%, but decidedly in Q3, up 13.1%. Again, very strong results in our established markets as well as Jamaica.
Brazil turned positive, but it's historical 2nd largest market. Argentina obviously has gone significantly. If we move on to Sky, Sky remains down significantly on a 9 months basis down 8.1% but almost stable in Q3 down 1.1%. Clearly, what's driving the numbers here is the U. S.
Where, we're a destocking brand and we're closing the gap between shipments and consumption indicators. So this trend should improve in the quarters to come. Internationally, the brand is doing very nicely, growing strongly in China, Mexico and Italy. Moving on to Grand Marnier. Grand Marnier is flattish on a 9 months basis, and that's behind decline of 15.2% in Q3, which is mostly linked to net phasing issued due to U.
S. Shipments or wet a very strong Q3 in 2017. The brand overall is performing exactly in line with expectations growing at the low single digit rate. Moving on to our bourbon portfolio, which is gaining momentum, it was up 21.2% in Q3. Leading to an overall growth of 11.4 percent on the 9 months.
The Wild Turkey portfolio doing very nicely, up 13.7 very positive results behind the premium expressions, Russell's reserves, long French, but also the more premium wild turkey expressions. And we're also seeing very good results behind the Mackie Mcconi campaign in other markets such as Australia and Japan. Seating markets are growing at a very sustained double digit growth rates, but obviously they're quite small, so coming from a low base. American Honey doing nicely, up 5.6% on a 9 months basis with a good Q3. Moving on to the Jamaican rums on a 9 months basis, we're up 5%.
Building momentum in Q3, up 6.6%. The key driver here is Rainey, if you overproof, up 8.2%, they grew only by 3.4% and let's do some pricing readjustment in some markets. Moving on to Espolon Espolon is doing very nicely, up 31.5%. Most of the growth, obviously, is coming in the U. S, which is growing by 34.4%.
But the brand is also sitting very successfully in international markets. Bulldog slowed down a little bit, up only 5.5% on a 9 months basis. This is behind weakness in some of its larger markets, Spain and Belgium. But doing very well in Germany, Portugal and the UK, and particularly the growth rates in Germany and UK should bring us back into double digit territory soon. Moving on to the whiskey.
Glenn Grant is impacted by the allocation with which we've, forced upon the markets as we're transitioning to a more premier age range, we've put the unaged on allocation So this is, having a mix effect overall, but the brand is performing very nicely on the high side. Of the range. Forti Creek is up 4.6% accelerated in Q3. Up 15.6% of the main driver here being Canada. Yamalis are also accelerated in Q3, up 7.3% bringing the 9 months to 1.3%.
With a nice trading around, with regards to the largest brand there, Avaya, We are the temporary decline in Italy. However, the good news is that after having taken a big sizable price increase in Germany, the brand is back on a positive trajectory. Cinzano is impacted. It's down 6.5 percent on a 9 month basis, 7.7% on Q3. Clearly, the combination of weakness in Russia and Argentina impacts this brand, which is skewed in those 2 geographies.
The other sparkling wines are up 8.7percent12.2percent also due to the positive halo effect on the apparel space. The last page to round up with Campari Soda flattish down 1.9%. We'd expect this brand to do a little bit better on a full year basis. We've grown down 3.5% on 9 months, 7.9 percent in Q3. Here we're cycling tough comps due to innovation last year and expect to brand to be done in the low single digits.
Doing very nicely on our Wild Turkey RTDs where we're continuing to take market share in Australia, up 8.4% on a 9 months basis. The Brazilian local brands are down 10.7% on 9 months, but up 25% in Q3. Clearly, we had a we have a comp base issue here too. Moving on to OuzO 12, down 2.1% here, we have an unfavorable comp base in Q3 last year. Where we had quite a bit of promotions in Germany around the brand, and we dedicated them to Aperol this year.
So we'll recover in the remainder of the year. That's some but not least. Cabo also building momentum up 22.3% in the last quarter. Down 1% on a shipment basis with regards to the 1st 9 months. This is the sales round up, and I'll let
Thank you. Thank you, Bob. If you follow me to page 20 21 where we have the 9 months consolidated P and L, as well as the key highlights on EBIT adjusted. And starting from gross profit, we can see gross profit came in in the 9 months and 732,000,000, growing on a reported basis by 1% in value at 61% on net sales. From 58.9 percent a year ago with 210 basis points gross margin accretion.
Most notably, we had a very robust performance in existing business with a gross profit organic growth of 8% in value. 80 basis point margin expansion with just 10 basis in Q3 due to the aggregate effect. Organic growth, as we've already heard, was, in the gross profit, was ahead of the top line, thanks to the favorable sales mix by brand and market. On the back of outperformance of our high margin global and regional priorities in high margin developed markets. The positive sales mix help offset the dilutive effect of the adverse aggregate price, purchase price.
Which became progressively more impactful in the third quarter. Most notably, as you may remember, the agave impact this year is worth 1,000,000, of which 1,000,000 of incremental costs have already been recognized in the results for the 1st 9 months and further EUR 6,000,000 to come in, in Q4. ForEx and perimeter combined combined effect on gross profit was a negative 7% in value, with a positive 140 basis point margin expansion driven by the disposal of low margin businesses, as well as the agency branch distribution termination. JMP came in, I to 1,000,000 on a reported basis was up 4.1% in value. 17.6 percent on sales from 16.4 percent of last year, showing 110 basis point dilution on the top line.
In existing business, partly due to phasing. The organic growth of A And P was 10.7% in value. Driving 60 basis point margin dilution, reflecting, as I said, different phasing as well as a minor step up of the AMP spent on net sales. That we have highlighted a quarter ago in about 20 basis points. ForEx and perimeter, combined effect had a negative 6.5 percent in value with 50 basis points of margin dilution driven by the disposal lower MP intensity businesses, such as Caronas, Lemonsoda, and the terminated agency brands.
The SG and A came in at 1,000,000, down on a reported basis in value by 1.2% to 21.8% on sales from 21.5% showing 30 basis points dilution. Actually in existing business, we saw opposite direction on the, on the, attrition dilution effects. The organic growth of SG And A falls 5.2 percent in value, lower than the top line, which was in existing business, 6 point percent. And therefore, the SG and A drove 30 basis points accretion, at the EBIT level. Again, on SG and A, forex and perimeter combined effect was a negative 6.4% in value, with 60 basis points margin dilution, again, driven by the consolidation of, disposed businesses.
With regards to the EBIT adjusted, it came in to 1,000,000 on a reported basis, up 0.7% in value with 70 basis point margin accretion. Existing business, EBIT adjusted that came in 8.7 percent, higher versus last year in value with 40 basis point accretion. If we move on to the following page, page 22. This slide, reiterates the message that, you know, in existing business, the organic growth of EBITDA adjusted was quite robust, 8.7%. As said, 40 basis point accretion, driven in the 9 months by solid gross margin expansion of 80 basis points as lower growth of the SG and A, which as we saw grew at 5.2% versus 6.6% of the top line driving 30 basis points accretion And then we had the negative impact of the phasing of A and P as well as slightly the slight step up in A and P, which accounted for 60 basis points of yield margin dilution.
With regards to perimeter and FX, as you can see, you know, quite a significant impact, €15,000,000 from perimeter and €5,600,000, from, from, from FX. EBITDA came in at €171,500,000, down by 8.8.1% versus last year. Due to lower positive operating adjustments. Last year, we recognized 1,000,000 of positive adjustments this year, the positive adjustments accounted for just 1,000,000 in the 1st 9 months of the year. If we move on to page 2023, we have the, you know, the the analysis of the of the, pretax profit, a very positive containment of, net financial charges.
Which came down by €7,200,000 to €22,400,000. We had, you know, clearly a reduction in the average indefinite in the 1st 9 months, 1,000,000 this year versus 1,000,000,000 last year. And on the other hand, the reduction of the average indebtedness has been partly offset by a slight increase of the average cost of net debt up from 2.9% to 3.1% totally driven by the negative carry that is, affecting the, the liquidity. That, you know, the group, I see, owns. Group pretax profit came in at 149 1,000,000, up up 4.7% in the 1st 9 months.
And the pretax profit adjusted was at 1,000,000, up 4.8%. If we move on to page 25, we have the analysis of net financial debt. As you can see here, we have a reduction of the overall indebtedness, of 1,000,000 versus December of last year. From €981,000,000 to €913,800,000. Following, as you can see in footnote number 2, the, the proceeds from the disposal of Lemonsada, the cash in of the proceeds from the total of Lake Palle Munson accounting for 1,000,000.
The payment of the Biscuit consideration, 1,000,000 the payment of the dividend, 1,000,000 and net purchase of Aon shares accounting for 1,000,000. Quite a healthy, leverage ratio with net debt will be the pro form a ratio of the 2, 2x. Page 26, as you can see, the debt maturity profile is quite sound. We currently still have 1,000,000,000 of long term gross debt. And we have, available cash for 1,000,000, which is, more than enough to to repay the bonds following you in October, 2019.
I think this is Bob. It on the numbers. I will hand back to you for
the conclusion. Yes, just a few words on the pretty pictures, as you can see, we're continuing to enforce the Association of the Campari brand with the world of ours, both cinema as well as the Plastic Arts. And that is, doing quite a bit of good to the equity. The rest of the world is being painted orange via the U. S, Central Europe, Brazil, Germany, anywhere you go.
We've been very active this summer and you can see that our recruitment efforts have been quite successful. In terms of their other brand building, we're also doing as category captains in Italian bitches. We're doing quite a bit to educate top brand across the world and expect to reap the benefit of that in the years to come. Whereas on Appleton Estate, we're continuing to premiumize the brand with high end stage variants. Now coming briefly to the conclusion and outlook before we come to your questions, as you can see, very positive organic growth, both in sales as well as profit indicators in the 1st 9 months.
Very nice acceleration of the top line in Q3 and a continued sales mix improvement driven by the higher margin brands and our core developed markets. On a reported basis, in the 1st 9 months, the positive underlying trends compensate the expected negative ForEx as well as the perimeter effect. Now looking at the remainder of the year, our outlook remains broadly unchanged imbalance in terms of risks and opportunities. So no changes versus our guidance, in August of this year. Having said that, I'm sure you have plenty of questions, so we're here to take them.
Thank you, sir. This is the Chorus Call conference operator will now begin the The first question comes from Mr. Edward Mundy of Jefferies. Please go ahead, sir.
Good afternoon, Bob, afternoon, palo. Hello, everyone. Three questions, please. First of all, on Aperol, what specifically driving the acceleration in Q3 versus the first half? Is it new geographic distribution?
Is it increasing consumption amongst existing consumers? What's really behind that? The second one is also on April. I think 12 months ago, Bobby, you were sort of comfortable with a growth rate of about 20% or so. For Aperol, clearly you're growing well in excess of that.
Are you comfortable 30% as the new run rate? And then the third question is on cognac. Any update on the biscuit acquisition and opportunities to participate more widely in the cognac category?
Okay. I'll take the last one, which is the shortest. We'll be we're ready to relaunch biscuit in the second half of next year. We have a pretty, I think, strong concept in packaging. And now we're in execution phase.
So you'll start seeing basically impacting and going into brand building mode as of the second half of next year. Now what is driving Aperol? I mean Aperol has a very clear, brand building model. We call it the success model with 3 different stages. And where we're sticking to our knitting and doing exactly what should be done in every given market, given specific stage they're in.
I mean, to a large extent, it's all about activating the brand, getting liquid on lip and, recruiting new consumers into it. If you look at the more established markets, clearly frequency has increased. As we've been going into other usage occasions, such as meals. So it's really about driving the Aperol model. Now would I be comfortable with 30%.
I mean, rest assured that irrespective of what the percent is, the brand has very good momentum and we have strong plans for it for the years to come. And we believe we're at the beginning of the Aperol success story. So we'll see what that brings. But we will, clearly maximize the opportunity. As we view this as one of our or if not our biggest growth drivers, solid fundamentals.
Important thing is that it's very broad based and it is very consistent, over time.
May I
have the next question comes from Mr. Olivia Nicola of Morgan Stanley. Please go ahead, sir. Hi,
good morning. Just a question on SKYY. You mentioned that you have some destocking in the U. S, how long is it going to last? And then just going back to your Q3 performance in the U.
S, I think the growth was only 1%. Aside from the Sky weakness, is there anything else affecting your U. S. Growth in Q3? Thank you.
Thank you for the question. No, I mean, if you look at our U. S, portfolio with the exception of Sky, we're doing very, very well. I mean, you might have movements from quarter to quarter between shipments, depletions and consumption. But actually, if you look at the most important indicators, consumption, particularly the most robust indicator in APCA, can see that we're outperforming the market and doing well across the range.
The Sky, Sky is also improving on standpoint, but the brand will continue to be impacted by destocking for the next 9 months, more or less.
The next question is from Javier Gonzalez Lasta of Berenberg. Please go ahead, sir.
Yes. Hi. Good afternoon. Could I ask two questions. Firstly, on agave inflation, you've guided us to inflation impact on margins to be way high in the second half than in the first half.
But I just wonder how much of that will follow through into H1 'nineteen, if anything. So if some some guidance that would be would be very helpful. And on Grand Marnier, we've seen a big decline in shipments. We had a very strong H1. I think back in the last call, you mentioned that the brand was going somewhere between low single digit and mid single digit.
Just wonder what you could confirm that that is the case. And when is that destocking expected to to finish. Should we expect that to follow through into Q4 or Q4 should see an improvement given the compasses here? Some color, that would be very helpful. Thank you.
I'll take the Grand Marnier question. I mean, Grand Marnier is perfectly in line with our expectations and also what shared with the market. Our first half results, we expect the brand to grow in the low single to mid single. We'll see how the Christmas season goes, clearly, there's some tail end effects. That's probably what you're referring to as destocking of our discontinuation of limited additions, Cordeaux, as well as the flavored variance.
We'll see that a much cleaner and clearer picture of the brand from the next year onwards. But so far, so
Yes, with regards to the Agaveen, in the presentation, We had 1,000,000 of negative impact in the 1st 9 months. We're expecting to to suffer further 1,000,000 of headwinds in Q4 of this year. Luckily enough, on the back of a very positive active sales mix, we will be able to offset and compensate the negative impact. And our expectation is for a full year, positive, very positive gross margin expansion. Now looking into 2019, as you correctly pointed out, there will be somehow a tail end of the price of the aggregate price effect.
But again, nothing that prevent us from, achieving very healthy gross margin expansion as the top line performance is quite robust at the moment.
Okay. And if I can just quickly, another follow-up question on FX, you very you gave earlier in the year in Q1 very specific guidance in terms of the FX impact you expected on on EBITA. And you haven't updated that since. Would it be possible to get some, some update on that, given that the currency exchange rate is very different to what it was back in April?
True. We've modified the guidance. We've originally guided the markets to our negative line coming from ForEx for 1,000,000. That would then lower to 1,000,000. Taking into consideration the change, the movements of the key currencies.
So you know, and that has led us to highlight a potential step up of the A and P spend and investments in on premise capabilities, directly impacting SG and A line of about 20 basis points each. So that's the current guide for the full year, we do not see meaningful upside. We clearly, we don't see downsides. There is, as a new news, the different accounting treatment of Argentina, which clearly has an impact in the top line less so in the bottom line. But clearly, the movement of the dollar will compensate the impact at the bottom line.
So in a nutshell, I don't know whether you had the opportunity of looking at Slide 36 in the annex of the presentation deck. That is a very comprehensive explanation of how we've treated hyperinflation in a nutshell. Basically, you revalue that the revenues, the local revenues that in on Argentinian pesos to take into consideration the reduced, purchasing power of consumers. But then you apply, that's not really a negative impact. So the year over year effects, the pesos are continuous to Europe.
So basically we've stripped out both the devaluation of the local revenues. The, of course, the effects that is higher than originally in business, but we also took the opportunity of stripping out the pricemix effect from the organic growth. So what you see now is the full organic growth treated for volumes, pure volumes performance. So clearly this is to a certain extent negatively impacting the FX impact on our P and L. In the 1st 9 months, we have a negative hit in revenues of 1,000,000, if I'm not mistaken, 0.2% of the top line.
Clearly due to seasonality, the impact on full year will be higher in top line, but not significant, on the EBIT line.
I mean,
there is an impact I would be compensated by a better dollar.
The next question is from Andrea Pistacchi of Deutsche Bank. Please go ahead, sir.
Yes. Hi, Bob. Hi, Paolo. I have three questions, please. Just one quickly to clarify here on the hyperinflation accounting in Argentina.
The organic sales growth Q3 of 8.9%. You said that strips out the pricing in Argentina. Is this completely comparable to the 7.4 percent organic EBIT growth. I mean, how do you treat the inflation that you have in the cost base in Argentina? The second question please is, the second question is on your medium term on A and P.
A and P the 9 months was up 60 basis points. I think you said that for the full year, it will be a drag of 20. Last year, A and P was up 50 clearly you're supporting the strong momentum of your global priority brands. Now given the strong momentum probably continues, do you expect to continue to to support these brands with increases of A and P on a 2 to 3 year view. And finally, if you could give us an update on on Bulldog where the brand is compared to your plans, what you've done with the brand in the past 18 months, and why is the brand a bit soft in Spain?
Thank you.
Yes, let me take the last two questions. Andrea, good afternoon. Now, Woodstock's largest market historically when we bought it was Spain. As you know, Spain, this year, the market softened quite a bit in the 1st 6 months and that also impacted our peers. The weather was very bad.
The political situation people weren't going out that much. So one, there's a market effect in general. The second one is, frankly, there are a lot of now 0 kilometer local gins creeping up. This is a phenomenon craft gins in Spain, which is impacting the mainstream brands, which I think will need to wash out of the system. Belgium to a lesser extent, it's the same situation.
So it's not brand specific. Having said that, in all the other markets, runs is from a lower base growing at a very strong and sustained double digit growth rate. We expect to improve upon that a ad hoc campaign, which will be rolling out next spring. So we feel good about the brand. With regards to medium term A and P, yes, we confirm what you have for this year where we're going to be on an organic basis, 20 basis points above, above last year.
I think next year we'll, most probably revert to our, normal, trend on, on A and P. But as you know, there's always a give and take 20, 25 bps in either direction.
And, Chandra, with regards to hyperinflation, under the international accounting under number 29. Once you know, the market, the country triggers the hyperinflation accounting, then euro oblige to reclassify the whole year starting from January. So basically what you see in Q3 in isolation is the catch up of the effects of hyperinflation from January to September. So this is the whole thing, clearly, you cannot treat too much into Q3 because you have that effect to a certain extent. Now the way we've treated, we've basically stripped out in local currency, the effect of pricemix to take into consideration just the volume performance of the local business.
And with regards to COGS, and therefore, gross margin was treated similarly, the costs. So we stripped stripped out the cost inflation. You know, and the 2 plus the 2 effects plus the revaluation of revenues. And and cost have been, you know, shifted into FX. And then, basically, you apply to the local, to the local the local revenues, the worst FX foreign exchange, that is the period end September and the FX.
So that's basically you have, basically, you know, treated the net sales comp and the gross margin at variable results. That's how it works.
The next question comes from Marion Boucheron of Raymond James. Please go ahead, madam.
I'm one of 2 Analystmen Street. Give me a question.
Two questions for me, please. 1, could you make a to focus on Espolon and how you see growth continuing. I mean, it's been very strong so far. And then is there on ForEx and the guidance. So I understand, you know, it improved it to 19,000,000, but, this would still impact a very strong effect negative impact on EBIT in q 4, which, struggling to find, to find.
So maybe if you could comment a bit more on this. And then just on A and P, if you could update us on what you expect in the full year?
Yes, Swala. Espolon has brand, which we sort of created, 10 years ago, we bought a distillery to internalize the liquid production and bottling for Cabo Wago. We came up with a very strong package, concept and the liquid has always been very good. And since we've launched it's been growing at a consistent strong double digit growth rate. As you know, tequila is very much on fire in the U.
S. And Espolon is one of the better performers there. Over time, as the brand gets bigger, obviously, the marketing mix also evolved behind that. And we'll put a little bit more of a focus on traditional brand building on it next year. But we view this as definitely one of the brands which in the medium term could become a global priority brand for us.
Yeah. With, with regards to the to the effects, yeah, you know, as, as we've just said, you know, we've reviewed the the guidance with a less negative forecast for the full year. Due to the high volatility of currencies, and due to the effect of the Argentina hyperinflation effect, we're not in a position of reviewing the guidance for a gain for for the full year. So we'll still stick to that. What we're saying is that we don't see further downsides that's the starting point.
Any further questions?
Yes, sir. I apologize. I wasn't sure if you had finished that one. The next question is from Mitch Collett of Goldman Sachs. Please go ahead.
Hello. I've got one question and one related follow-up, which depends on the answer to the first one. I think we've had most of the components of your margin guidance from 1H, but just to check, I've understood this correctly. You said at 1H that you thought there should be about 60 basis points of gross margin expansion during 2018. And then that would be offset by roughly 20 basis points of step up in A and P.
And 20 basis points of step up in SG And A all on an organic basis. Is that all still correct?
Correct.
Okay. And then related to that, therefore, at this stage A and P for the 9 months has been a 60 basis point drag on margin. So I guess it's running well ahead of that guidance. And similarly, but in the other direction, SG and A has been a 30 basis point headwind, sorry, 30 basis points accretive to margins. What's going to change in the fourth quarter to move those numbers back to what you've just guided to?
Yes. With regards to the E and P, as said, there is, in the 1st 9 months, a phasing effect that is worth 40 basis points. So believe this is a positive in Q4. Looking at the P and L of the Q49 in isolation, And then on the SG and A, clearly, in Q3, we had a very positive top line development which drove the 20 sorry, the 50 basis points accretion that we're not expecting in Q4. You know, we'll have a different comp in Q4.
And so we expect SG and A to to increase faster in Q4. So it's a combination of faster growth of the SG and A potentially lower top line growth. Also, you have to take into consideration that with regards to the top line in Q4, we had the negative impact of our Tina that is denting the organic top line.
Very clear. Thank you. Can I ask one follow-up that is completely unrelated, which is can you just give us an update on, the penetration of Aperol in the U? S? How far have you got geographically now and and therefore how far is that to go?
Well, frankly, we're only scratching the surface of the U. S. Even at this stage. I mean, in terms of penetration, of per capita consumption per person per year, the U. S.
Is at 1% of Italy. So we're quite a way to go, I mean, yes, if you walk around the right neighborhoods in New York, you'll see a quite a bit of orange, but the U. S. Is vast.
But it's still very localized in the Northeast and and also the
West Coast. Yes.
Okay. Thank you.
The next question is from Alessandra Tortara of Mediobanca. Please go ahead, sir.
Yes, hi, good afternoon to everybody. Just to follow question from my side. Very, very brief. The first one is on the restructuring cost. If you can give us an idea of the amount that you spent in the 9 months for restructuring activities?
And if the guidance you released on the the restructuring cost around the EUR 36,000,000 for this year is still valid. And the second question, just a clarification on last year, same time in the 9 months, you, let's say, also released a sort of guidance on the FX side, giving a preliminary impact considering the used oil lava, euro exchange rate trend. Are there any specific reason why you you are not, let's say, giving any positive wins, I would say, considering the used dollar strength for the next year?
Yes. With regards to the restructuring cost, as you've seen, we've recognized 12,000,000, €12,000,000 of total, total 1 offs, you know, positive that is basically in reality, a positive one off on the disposal of the Lemonsada business. That accounted for 1,000,000 and then a number of projects, we're not be specific project by project, as you can imagine, but we've announced the closing down of one plant in Brazil. We've announced the transfer of the U. S.
Corporate head office from San Francisco to to New York. We've announced the closing down of Sugar field operations in Jamaica. And few other minor projects. Clearly, we've guided the market towards an overall flattish impact, on the one off line, which means that in Q4, we will still have some more negative one offs to recognize, which clearly will offset the million of positive that we have in the 1st 9th month of the year? With regards to FX, the reason why we're not changing the guidance is due to the very limited visibility that we have on FX movements.
It's clearly a market that is event driven. And political instability, task play a role in setting the effects. So we do not have the crystal ball.
Italia,
you know, Italy has a big impact on this. So we need to stay vigilant and see what's going on.
It will be interesting to see how the midterms of actions also go.
The next question is from Nicole Von Stackelberg of Liberum. Please go ahead, sir.
Hi, guys. I was wondering if we
take a step back and, think bigger picture here as Aperol and Campari become a bigger part of your pie and overall footprint, could you give me a rough guide as to, what sort of return on investment You guys did an ROI metric. I believe last year, you finished at, was it 13.2, from 11.2 the previous year, Say, for example, Aperol and Campari together represent 25% of your portfolio, 30%, 40% of your portfolio, can you give me some sort of scenario analysis of what ROI might do given that they have no aging profile?
I'm not sure what ROI KPIs you're referring to. I mean, it's quite clear that both brands have very high gross margins. I mean, they're on the highest scale within our global priority brands. So as they grow faster, which they are, that will have a very beneficial effect.
It's page 5 of your annual report. You guys give ROI, you guys define it as operating income adjusted divided by fixed asset is 13.2% on a reported basis, it was 13.7%. I'm just wondering if you can maybe you guys hadn't looked at the math around this. I take it.
No, we don't have it at this stage. Okay. Interesting. The ROI on the investments, we find both brands are phenomenal.
Yeah. Yeah. And is the infrastructure well invested? Do you would you need to invest in additional capacity given they're grown so fast?
No. No. I mean, we we could double or even triple production, we wouldn't need to invest.
Oh my gosh, excellent. And also in terms of the breakdown that you provided in the half year, it sounds like there are a lot of moving parts. Were there any material? I mean, there was a lot discussed today in terms of margins But for the most part, those numbers provided in the half year are more or less still the rough guide. Is that right?
And then I have one last one.
Yes. We're basically not changing the in the big things, the guidance. That's the point, correct.
Perfect. Excellent. I thought I heard that right. And then the last one, I thought I just heard you mention something about the Sugar fields in Jamaica. Did you close all of the sugar fields?
I I understand the, the plantations are actually quite a significant employer for the for the Island nation. And I was wondering
Go on.
It's a minor part of our local operations.
Of your overall operations, but I'm more wondering if the general health the island given that it actually is a contributor. Is there maybe you're seeking some alternate arrangements to help employ the people that will be out of jobs and presumably help
I mean, in line with the Campari way of doing things, we're very responsible when it comes to the local community. So there's just a whole activity reeducation and reconversion of the fields into new crop, working with external experts beyond the transitional support we've given to each individual who stopped working for us.
The next question is from Simon Hales of Citi. Please go ahead sir.
Just a couple of questions really just both related to the U. S. Business. So Bob, you talked about sort of the ongoing destock Skye, I think you said for perhaps another 9 months.
Could you expand a little bit on that?
I think it's a very long destock period. What's actually happening in with that brand, what sort of variants are really dragging that destock, and it sort of period out. And then maybe secondly, just on Aperol in the U S. So could you just talk a little bit more about the penetration that you've got there now, which you highlighted on some of the slides at the back, you know, the success you've had in the Hamptons and things over the summer. But now how well penetrated are you on the Eastern seaboard and, you know, I suppose how much is the white space, really?
Well, I mean, the white space is very white and very large because we've, we're mostly penetrated in New York in certain neighborhoods certain parts of Massachusetts, as well, in Florida, if you're looking at the seaboard. And then on the Western side, it's on prem, Los Angeles and a little bit of California. So you know, we started seeding the brand in other places, but, I can't call it any effective penetration. Yeah. Now with regards to, to Sky, I mean, the destocking is impacting a lot more of our flavors business.
Because obviously we're rationalizing significantly the range, both in terms of flavors as well as in terms of sizes. And this is something we're doing gradually together with our partners. And, and then there is sort of reallocation, if you will, between states on the core brands. So this isn't something which you just press a button and do overnight. We'd rather do it gradually.
Plan, which we've worked together with our largest partner.
The next question comes from Andrea Pistacchi of Deutsche Bank. Please go ahead.
Just wanted to ask for an update on Brazil and Russia. Brazil had a strong quarter,
Russia still difficult. I mean, leaving
a side or comp effects on shipment phasing, what is the underlying situation in these markets? Are you seeing an improvement yet?
Overall, in Brazil, I mean, what we've seen this year is really, ups and downs from 1 month to the next. So no clear trend. The clearer trend overall is that, you know, if you're playing in premium, you're doing well. I mean, our premium brands, particularly the API teams and in particular, Aperol are doing very, very well in Brazil. The rest, which are much more in mainstream, our local Brazilian brands, they're the ones suffering.
We'd expect now that the election is behind them. And if we have coherent economic policies coming out, that the situation should improve next year. Russia, you had some volatility as well, but it's more on the, let's say, depletions or trading side of it, less on the consumption side. Again, we're seeing a very positive bias to our more premium brands. It's the Aperitis Campari Aperol.
It's, Espolon Tequila and, Wild Turkey Bourbon, which are driving the routes. We'd expect also, Russia to improve and normalize next year.
The next question is from Paolo Carboni of Equita SIM. Please go ahead, madam.
Yes, hi. Good afternoon, everybody. I have a few questions. Like, for example, as for Aperonda, if you can remind us of the down in particular the incidence of the main markets for the land as of today and in particular referring to Italy just because of the meaningful acceleration we have seen for these markets from plus 7% in H1 to plus 13% overall in 9 months basis. So, if you can elaborate on that, whether, I mean, we should think about, more, more sustainable 15% or plus 7% or there has been any specific initiative in the summer or maybe, these initiatives are usually more effective during the summer.
So I was particularly surprised by this acceleration, in Italy.
A
similar question, if I may. Sorry. May I have the with the few ones. Similar question actually for the organic sales trend overall, which was quite strong. Actually, I remember when commenting on q2honeperformance, you suggested us to see a more sustainable, the overall, H1 trend than other Q2, but we are even seeding the Q2 trend itself.
So I was wondering how are you thinking about, your own second half now that you have posted an already such strong performance in Q3. Then a very quick question on Espolonnam.
We have very good memories.
We we I mean, we'll just try. So next question is, for Responder. If you can give us a sense of how much of growth was driven by price, possibly, with, transfer of the cost of the increase. And the state of Nagave, I remember you, were expecting a sooner or later an harmonization of this, trend, and possibly a reversal. I was wondering whether this might happen already some, some point next year.
And, but I think that's all. That's all. Thanks.
Let me do some brain gymnastics and go to what I think was your first question, which was, on an opera on top markets. Now if you take Italy, Germany, and Austria. I mean, they roughly account for 60% of the total. The good news is that they're growing at double digit growth rates. Now the change in growth of Aperol in Italy from first half to Q3 is not driven by changes in consumption.
Consumption, you'll recall, I've always said, has been growing double digit. It had more to do with some, policies we have with regards to pricing to the trade. Where we had some discussions with some customers on price increases in Q2 and some of them didn't like them. So slowed down and destocked. Having said that consumption is so strong that they've joined the fray.
And right now, on a 9 months basis, there's the shipments reflect the consumption. With regards to Espolon, I mean, as a guest image, I would assume that the price increase is about counting for about 10% of the growth, not more. Yes, most of it is coming from volume because we were the first one to take price, and at that stage, nobody had followed, even at this stage, there are quite a few big players which haven't followed with price increases.
Yeah. For the time being, looking at 2019, we don't see agave as a big mover of number. '18 versus 'nineteen. Clearly, with different dynamics in 'eighteen, we've seen the agave price coming up. So, you know, as previously highlighted, we may still have a little bit of tail tail end effect in the first half of next year.
But then the trend should go opposite direction. So overall, we don't see opportunities in reducing the EUR 12,000,000, but on the other hand, we think we're fully enhanced and we will not see the 1,000,000 increasing further. So that's how we see it. But again, it's difficult to predict because it's primarily driven by balancing balance between demand and supply. So depending on how the U.
S. Market gross, then you may have phasing effects of the change of the cycle on the price from upwards to downwards.
The current
estimates in Mexico.
Okay. And as far as, I mean, your your view on H2 overall, you know, what you said in your case?
With regards to this?
Well, I mean, I'm looking outside and I see more rain. I'm supposed to say. Obviously, that will impact, we'll see how it goes. I mean, the underlying momentum of the brands is good. But as you know, I mean, Q4 is a very big month, for our geographies such as Russia, as well as for Argentina, which is their summer.
Brazil as well, and they're not exactly in the most robust health, whereas in the rest of the world, I think we'll continue doing well. We'll see how it comes up. Rest assured, we don't miss a single case if we can.
The next question is a follow-up to Mr. Van Stackelberg of Liberum. Please go ahead, sir.
Hi gents, thanks again for the question. You're talking about pricing on Aperol and that piqued my interest. I personally think it's probably a bit too, it could be probably a little bit more expensive here in the UK. It's around £15 per bottle. Now I appreciate you to buy it probably with Perseco on the side to go with it.
But, could you just talk more generally about how much, I'd guess like pricing headroom you think you probably have and why aren't you being more aggressive on the price full stop? Thanks.
Yes, you need to understand that the price is not just the price which we in but it's also impacted quite a bit by excise duties. Aperol having 11% alcohol, it's not fair to compare it to Spirit which have 40% alcohol, which is probably what you're doing. And whereas the consumer might not necessarily understand or make that difference, the buyers in the trade certainly do. Aperol is a healthy brand. We take pricing regularly.
But I don't think there's any possibility at this stage to do any radical repositioning of the price. The brand is in its growing phase and, you know, we're sticking to our model and so far results have indicated us.
Excellent. Just keep doing what you're doing guys.
Mr. Kunze Concewitz, at this time, there are no more questions registered, sir.
So we'll go back doing what we do. Thank you. Have a nice afternoon. Bye bye.
Ladies and gentlemen, thank you for joining.