Good afternoon. This is the Chorus Call conference operator. Welcome, thank you for joining the Campari Group 2018 nine-month results presentation. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. Should anyone need assistance during the conference call, they may signal an operator by pressing star and zero on their telephone. At this time, I'd like to turn the conference over to Mr. Bob Kunze-Concewitz, Chief Executive Officer of the Campari Group. Please go ahead, sir.
Thank you very much. Good afternoon, welcome to our Q3 conference call. If you have the presentation under your eyes, please join me on page number four, where I'll kick off with the usual highlights. As you can see, we've had a pretty strong Q3, which led to a very solid nine-months results. With regards to net sales, on an organic basis, we grew by 6.6% on nine months. This behind an acceleration in Q3, where we grew by 8.9%. 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 continued to outperform, up 10.3% on nine 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 nine-months basis. Improved in Q3, reaching 7.1%, driven by Espolòn 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. We have softness in emerging markets combined to both macro volatility as well as tough comparison basis, this 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 basis points margin accretion. This is driven by the strong organic gross margin expansion of 80 basis points, thanks to the positive sales mix, both by brand as well as market. It takes into account the dilutive phasing of A&P, negative 60 basis points, and the accretive effect of SG&A, positive 30 basis points.
On a reported basis, EBIT was up 0.7%. It takes into account both the disposals as well as the FX. Looking at group pre-tax profit on an adjusted basis, it reached EUR 235.5 million, up 4.8% or 19.6% of sales. On a reported basis, it reached EUR 249.4 million, up 4.7%. Net debt at the end of the period stood at EUR 913.8 million. Quite robust cash flow, bringing the net debt down by EUR 67.8 million.
The proceeds of the LemonSoda business disposal obviously helped, this is also net of the acquisition of Bisquit, the dividend payment, and the net purchase of own shares for our stock options plan. Net debt to EBITDA pro forma is pretty stable at a comfortable two 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 first nine months, clearly this move is considered immaterial. Moving on to the following chart, without getting into the details, you can see how all of 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 seven. The only thing worth underlining here, it's pretty self-explanatory, is that the organic change of 6.6%, largely driven by the high margin global priorities, would result into 8.9% in Q3, would result 9.5% if we include the price effect in Argentina. That gives you a gauge for that accounting change. Moving on to page number eight. Not much to say except that our developed versus emerging markets split is pretty stable at 83 versus 17. Looking at it on a regional basis, the Americas, our largest region on page number nine, 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%. A very nice double-digit growth of Espolòn, Campari, and Aperol, and a very positive trend of Wild Turkey, our rums, as well as Glen Grant. These results, obviously, of the previously listed brands offset the negative impact of SKYY, where shipments are still underperforming sell-out trends due to the announced de-stocking. However, this gap is gradually reducing over time. Grand Marnier, on the other hand, was slightly positive in the nine months because it was impacted by a very tough comp base in Q3 of 2017. Jamaica growing double digits, 14%, continued very positive, sustained growth behind Campari, Wray & Nephew Overproof, and Appleton Estate. Brazil, although it improved in Q3, is down on a nine-month basis of 3.8%. Clearly, the market continues to be impacted by political instability and macro weakness.
Most of the decline was driven by Dreher and SKYY. On the other hand, it was mitigated by our aperitifs, Campari and Aperol. Argentina, down 20.2%. Here, the overall 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 digits, 11.2%, with a nice sustained performance in Canada, up 5.9%, behind the usual suspects. Mexico, double digits, up 12.7%, and Peru up by a strong 65%. You will recall 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 sodas business, generating a negative 8.6% effect.
Italy, robust growth for that market where we're clearly outperforming. We're growing by 3.7%, up 5.2% in Q3. Clearly, our long aperitifs, Aperol up double digits, 13%, and Campari also double digits, up 10.3%, are more than offsetting the softness in the single serve Crodino and Campari Soda aperitifs. 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, Glen 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 nine-month basis, and this is due to the unfavorable comp base last year when we'd 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 third-largest market, grew by 8.8%, 11.5% in Q3. Very positive performance by Aperol, up by 29%, Campari 9.4%, BULLDOG, as well as Cinzano Vermouth, and from a small base, Crodino is becoming an interesting brand there. The U.K. was up a strong 18.2%, driven across many brands, but in particular, Aperol again, up 51.2%, Dewar's, 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 and Campari, are performing very strongly, double digits, 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 11.8%, again, behind the aperitifs. Belgium 5.7% and actually outperforming in a negative market. Switzerland 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. In Q3, we're up 16.9%, outperforming in all the categories where we're active and very strong results, once again of the aperitifs.
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 SKYY 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 basis points increase versus the same period last year. Moving on to the detailed review by brand. You'll see that Aperol now accounts for 18% of our sales, grew by 31% in the first nine months of the year, but quite a strong 43% in Q3. Now we're seeing, and this I think is very positive, very strong performance in the core established markets.
Italy, Germany, and Austria are growing very nicely, double digits, whereas we have very strong double-digit growth rate in all of our high-potential and seeding markets, particularly the U.S., the U.K., France, and so on and so forth. Campari, up almost double digits on a nine-month basis, 9.7%, but decidedly in Q3, up 13.1%. Very strong results in our established markets as well as Jamaica. Brazil turned positive, but its historical second largest market, Argentina, obviously has gone significantly. If we move on to SKYY. SKYY remains down significantly on a nine-month 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 destocking the brand, and we're closing the gap between shipments and consumption indicators. 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 nine-month basis, and that's behind a decline of 15.2% in Q3, which is mostly linked to the phasing issue due to U.S. shipments, where we had a very strong Q3 in 2017. The brand overall is performing exactly in line with expectations, growing at a low single-digit rate. Moving on to our Bourbon portfolio, which is gaining momentum and was up 21.2% in Q3, leading to an overall growth of 11.4% on the nine months. The Wild Turkey portfolio doing very nicely, up 13.7%. Very positive results behind the premium expressions, Russell's Reserve, Longbranch, but also the more premium Wild Turkey expressions. We're also seeing very good results behind the Matthew McConaughey campaign in other markets such as Australia and Japan.
Leading markets are growing at a very sustained double-digit growth rate, but obviously, they're quite small, so coming from a low base. American Honey doing nicely, up 5.6% on a nine-month basis with a good Q3. Moving on to the Jamaican rums. On a nine-month basis, we're up 5%, building momentum in Q3, up 6.6%. The key driver here is Wray & Nephew Overproof, up 8.2%. Appleton Estate grew only by 3.4%, and that's due some pricing readjustment in some markets. Moving on to Espolòn. Espolòn is doing very nicely, up 31.5%. Most of the growth, obviously, is coming in the U.S., which is growing by 34.4%. The brand is also seeding very successfully in international markets. BULLDOG slowed down a little bit, up only 5.5% on a nine-month basis.
This is behind weakness in some of its larger markets, Spain and Belgium, but doing very well in Germany, Portugal, and the U.K., and particularly the growth rates in Germany and U.K. should bring us back into double-digit territory soon. Moving on to the whiskeys. Glen Grant is impacted by the allocation, which we've forced upon the markets. As we're transitioning to a more premier age range, we've put the unaged on allocation. This is having a mixed effect overall, but the brand is performing very nicely on the high side of the range. Forty Creek is up 4.6%, accelerated in Q3, up 15.6% with the main driver here being Canada. The Amari are also accelerated in Q3, up 7.3%, bringing the nine months to 1.3% with nice trading around. With regards to the largest brand there, Averna, we had a 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% on a nine-month basis, 7.7% on Q3. Clearly, the combination of weakness in Russia and Argentina impacts this brand, which is skewed in those two geographies. The other sparkling wines are up 8.7% and 12.2%, also due to the positive halo effect on the Aperol Spritz. 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. Campari Milano down 3.5% on nine months, 7.9% in Q3. Here, we're cycling tough comps due to innovation last year, and expect the brand to be down 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 nine-month basis. The Brazilian local brands are down 10.7% on nine months, but up 25% in Q3. Clearly, 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. It will recover in the remainder of the year. Last but not least, Cabo also building momentum, up 22.3% in the last quarter, down 1% on a shipment basis with regards to the first nine months. This is the sales roundup, and I'll let Davide take it from here.
Thank you, Bob. If you follow me to page 20 and 21, where we have the nine-month consolidated P&L. As well as the key highlights on EBITDA adjusted. Starting from gross profit, we can see gross profit came in in the nine months at €732 million, growing on a reported basis by 1% in value at 61% on net sales from 58.9% a year ago, with 110 basis points gross margin accretion. Most notably, we had a very robust performance in existing business with gross profit organic growth of 8% in value and 80 basis point margin expansion, with just 10 basis in Q3 due to the Agave effect.
Organic growth, as we've already heard, 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 helped offset the dilutive effect of the adverse Agave purchase price, which became progressively more impactful in the third quarter. Most notably, as you may remember, the Agave impact this year is worth €12 million, of which €6 million of incremental costs have already been recognized in the results for the first nine months, and further €6 million to come in in Q4. Forex and perimeter 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 agency brands distribution termination.
On a reported basis was up 4.1% in value to 17.6% on sales from 16.4% of last year, showing 110 basis point dilution on the top line. In existing business, partly due to phasing, the organic growth of A&P was 10.7% in value, driving 60 basis point margin dilution, reflecting, as said, different phasing as well as a minor step up of the A&P 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% in value with 50 basis points margin dilution driven by the disposal of low A&P intensity businesses such as Carolans, LemonSoda, and the terminated agency brands.
The SG&A came in at EUR 262 million, 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 attrition dilution effect. The organic growth of SG&A was 5.2% in value, lower than the top line, which was in existing business 6.6%. Therefore the SG&A drove 30 basis points accretion at the EBIT level. Again, on SG&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 at EUR 259 million on a reported basis, up 0.7% in value with 70 basis point margin accretion. In existing business, EBIT adjusted came in 8.7% higher versus last year in value with 40 basis point accretion.
If we move on to the following page 22. This slide reiterates the message that in existing business, the organic growth of EBIT adjusted was quite robust, 8.7%, I said 40 basis point accretion driven in the nine months by solid gross margin expansion of 80 basis points. As lower growth of the SG&A, which as we saw grew at 5.2% versus 6.6% of the top line, driving 30 basis points accretion. Then we had the negative impact of the phasing of A&P as well as the slight step up in A&P, which accounted for 60 basis points of EBIT margin dilution. With regards to perimeter and FX, as you can see, quite a significant impact, EUR 15 million from perimeter and EUR 5.6 million from FX. EBIT came in at EUR 271.5 million, down by 8.1% versus last year due to lower positive operating adjustments.
Last year, we recognized EUR 38 million of positive adjustments. This year, the positive adjustments accounted for just EUR 12 million in the first nine months of the year. If we move on to page 23, we have the analysis of the pre-tax profit. Very positive containment of net financial charges, which came down by EUR 7.2 million to EUR 22.4 million. We had clear reduction in the average indebtedness in the first nine months, EUR 945 million this year versus EUR 1,181 million last year. On the other end, 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 liquidity that the group still owns. Group pre-tax profit came in at EUR 249 million, up 4.7% in the first nine months. The pre-tax profit adjusted was EUR 435.5 million, 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 EUR 67.8 million versus December of last year, from EUR 981 million to EUR 913.8 million, following, as you can see in footnote number two, the proceeds from the disposal of LemonSoda, the cashing of the proceeds from the disposal of LemonSoda accounting for EUR 80 million, the payment of the Bisquit consideration, EUR 52.7 million, the payment of the dividend, EUR 57 million, and net purchase of own shares accounting for EUR 35.5 million. Quite a healthy leverage ratio with net debt will be the pro forma ratio of the 2x. Page 26, as you can see, the debt maturity profile is quite sound.
We currently still have EUR 1.3 billion of long-term gross debt, and we have available cash for EUR 581 million, which is more than enough to repay the bonds falling due in October 2019. I think this is about it on the numbers. Bob , back to you for the conclusions.
Just a few words on the pretty pictures. As you can see, we're continuing to reinforce the association of the Campari brand with the world of arts, 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, be it 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 our other brand building, we're also doing as category captains in Italian bitters. We're doing quite a bit to educate top bartenders 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 aged variants.
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 first nine 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 first nine months, the positive underlying trends help compensate the expected negative Forex as well as the perimeter effect. Looking at the remainder of the year, our outlook remains broadly unchanged in balance in terms of risks and opportunities. No changes versus our guidance in August of this year. Having said that, I'm sure you have plenty of questions, we're here to take them.
Thank you, sir. This is the Chorus Call conference operator. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. To remove yourself from the question queue, please press star and two. Please pick up the receiver when asking questions. The first question comes from Mr. Edward Mundy of Jefferies. Please go ahead, sir.
Afternoon, Bob. Afternoon, Paolo. Hello, everyone. Three questions, please. First of all, on Aperol, what's specifically driving 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 Aperol. I think 12 months ago, Bob, 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 with 30% as the new run rate? Then the third question is on cognac. Any update on the Bisquit acquisition and opportunity to participate more widely in the cognac category?
Okay. I'll take the last one, which is the shortest. We're ready to relaunch Bisquit in the second half of next year. We have a pretty, I think, strong concept in packaging, and now we're in execution phase. You'll start seeing Bisquit impacting and going into brand building mode as of the second half of next year. What is driving Aperol? 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 the specific stage they're in. To a large extent, it's all about activating the brand, getting liquid on lips, 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.
It's really about driving the Aperol model. Would I be comfortable with 30%? 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. We believe we're at the beginning of the Aperol success story, so we'll see what that brings. We will clearly maximize the opportunity as we view this as one of our, or if not, our biggest growth drivers with solid fundamentals. Important thing is that it's very broad-based, and it is very consistent over time.
Great. Thank you.
I have the next question comes from Mr. Olivier Nicolai 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? Then just going back to your Q3 performance in the U.S., I think the growth was only 1%. Aside from the SKYY weakness, is there anything else affecting your U.S. growth in Q3? Thank you.
Well, thank you for the question. No, if you look at our U.S. portfolio, with the exception of SKYY, we're doing very well. You might have movements from quarter to quarter between shipments, depletions, and consumption. Actually, if you look at the most important indicators, consumption, particularly the most robust indicator, NABCA, you can see that we're outperforming the market and doing well across the range. The SKYY is also improving also from a consumption standpoint, but the brand will continue to be impacted by destocking for the next nine months, more or less.
Thank you very much.
The next question is from Javier Gonzalez Lastra 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 higher in the second half than in the first half. I just wondered how much of that will follow through into H1 2019, if anything? If some guidance there would be very helpful. 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. I just wonder whether you could confirm that that is the case, and when is that destocking expected to finish? Should we expect that to follow through into Q4 should see an improvement given the comps easier? Some color there would be very helpful. Thank you.
I'll take the Grand Marnier question. Grand Marnier is perfectly in line with our expectations and also what we shared with the market for 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 editions, Cordon Rouge, as well as the flavored variants. We'll see a much cleaner and clearer picture of the brand from the next year onwards. So far, so good.
Yeah. With regards to the agave inflation, as I have called out during the presentation, we had EUR 6 million of negative impact in the first nine months. We're expecting to suffer further EUR 6 million of headwinds in Q4 of this year. Luckily enough, on the back of a very positive sales mix, we will be able to offset and compensate the negative impact, and our expectation is for a full year very positive gross margin expansion. Looking into 2019, as you correctly pointed out, there will be somehow a tail end of the agave price effect. Again, nothing that prevent us from achieving a very healthy gross margin expansion as the top-line performance is quite robust at the moment.
Okay. If I can just quickly, another follow-up question on FX. You gave early in the year in Q1 a very specific guidance in terms of the FX impact you expected on EBIT, and you haven't updated that since. Would it be possible to get some update on that, given that the currency exchange rate is very different to what it was back in April?
Yeah. True. We've modified the guidance. We've originally guided the markets toward a negativity to the EBIT line coming from Forex for EUR 24 million. That we've then lowered to EUR 19 million, taking into consideration the change, the movements of the key currencies. That has led us to highlight a potential step up of the AMP spend and investments in on-premise capabilities, directly impacting as general line of about 20 basis point each. That's the current guidance. For the full year, we do not see meaningful upside. Clearly, we don't see downsides. There is, as a new news, the different accounting treatment of Argentina, which clearly has an impact into top-line, less so in the bottom-line. Clearly, the movement of the dollar will compensate the impact at the bottom-line.
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 the local revenues in Argentinian pesos to take into consideration the reduced purchasing power of consumers. Then you apply, that's clearly a negativity in the effects, the period end effects, the pesos Argentinos to EUR. Basically, we've stripped out both the revaluation of the local revenues, of course, the FX that is higher than originally envisaged. We also took the opportunity of stripping out the price mix effect from the organic growth. What you see now is the full organic growth treated for volumes, pure volumes performance. Clearly, this is, to a certain extent, negatively impacting the FX impact on our P&L.
In the first nine months, we have a negative hit in revenues of EUR 4.2 million, 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. There is an impact that will be compensated by the better dollar.
Okay.
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 for Q3 of 8.9%, you said that strips out the pricing in Argentina. Is this completely comparable to the 7.4% organic EBIT growth? How do you treat the inflation that you have in the cost base in Argentina? The second question is on your medium term on AMP. AMP for the nine months was up 60 basis points, I think. You said that for the full year it will be a drag of 20. Last year, AMP was up 50. Clearly, you're supporting the strong momentum of your global priority brands. Now, given this strong momentum probably continues, do you expect to continue to support these brands with increases of AMP on a two to three-year view?
Finally, if you could give us an update 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.
Yeah. Let me take the last two questions, Andrea. Good afternoon. BULLDOG's largest market historically when we bought it was Spain. As you know, Spain, this year, the market softened quite a bit in the first six months, and it also impacted our peers. The weather was very bad, the political situation, people weren't going out that much. One, there's a market effect in general. The second one is, frankly, that there are a lot of now zero 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, the brands is from a lower base, growing at a very strong and sustained double digit growth rate.
We expect to improve upon that with a ad hoc campaign, which we'll be rolling out next spring. We feel good about the brand. With regards to medium term AMP, yes, we confirm what you have for this year, where we're going to be on an organic basis, 20 basis points above last year. I think next year we'll most probably revert to our normal trend on AMP. As you know, there's always a give and take 20, 25 basis points in either direction.
Yep.
Yeah. With regards to hyperinflation under the International Accounting Standard 29, once the country triggers the hyperinflation accounting, you're obliged to reclassify the whole year starting from January. 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 read too much into Q3 because you have that effect to a certain extent. The way we've treated, we've basically stripped out in local currency, the effect of price mix to take into consideration just the volume performance of the local business. With regards to COGS, and therefore, gross margin, we've treated similarly the costs. We stripped out the cost inflation, and the two effects plus the revaluation of revenues and cost have been shifted into FX.
Basically you apply to the local revenues, the worst FX foreign exchange, that is the period and September and FX. That's basically you have treated the net sales COGS and gross margin at variable results.
That's how it works.
Okay, thank you.
You're welcome.
The next question comes from Marion Cohet-Boucheron of Raymond James. Please go ahead, madam.
One of two analysts from the street, any question.
Two questions for me, please. One, could you make a little focus on Espolòn and how you see growth continuing? I mean, it's been very strong so far. Still on FX and the guidance. I understand you lowered this and improved it to EUR 19 million, but this would still imply a very strong FX negative impact on EBIT in Q4, which I'm struggling to find. Maybe if you could comment a bit more on this, just on A&P, if you could update us on what you expect in the full year.
Yes. Well, Espolòn is a brand which we sort of created 10 years ago. We bought a distillery to internalize the liquid production and bottling for Cabo Wabo. We came up with a very strong package concept, and the liquid has always been very good. 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 Espolòn is one of the better performers there. Over time, as the brand gets bigger, obviously the marketing mix also evolves behind that. We'll put a little bit more of a focus on traditional brand building on it next year. We view this as definitely one of the brands which in the medium term could become a global priority brand for us.
Yeah. With regards to the FX, as we've just said, we've reviewed 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 again for the full year. We still stick to that. What we're saying is that we don't see further downsides, that's the starting point. I think I've lost the last question. Is it on.
That was it.
Yeah, that's it. Okay.
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 FY 2018, then that would be offset by roughly 20 basis points of step-up in A&P and 20 basis points of step-up in SG&A, all on an organic basis. Is that all still correct?
Correct.
Okay. Related to that, therefore, at this stage, A&P for the nine months has been a 60 basis point drag on margin, I guess is running well ahead of that guidance. Similarly, but in the other direction, SG&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?
Yeah. With regards to the A&P, as said, there is in the first nine months, a phasing effect that is worth 40 basis points. Basically, this is a positive in Q4. Looking at the P&L of the Q4 in isolation. On the SG&A, clearly, in Q3, we had a very positive top-line development, which drove the 30 basis point accretion that we're not expecting in Q4. We will have a different comp in Q4. We expect SG&A to increase faster in Q4. It's a combination of faster growth of the SG&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 Argentina. 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 therefore, how far is there to go?
Well, frankly, we're only scratching the surface of the U.S. even at this stage. In terms of penetration of per capita consumption per person per year, the U.S. is at 1% of Italy. We're quite a way to go. Yes, if you walk around the right neighborhoods in New York, you'll see quite a bit of orange, the U.S. is vast.
It's still very localized in the Northeast and also L.A.
The West Coast, yes.
Yeah. Okay. Thank you.
The next question is from Alessandro Tortora of Mediobanca. Please go ahead, sir.
Yes. Good afternoon, everybody. Just two follow-up questions from my side. 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 nine months for restructuring activities, and if the guidance you released on the restructuring cost around the EUR 36 million for this year is still valid. The second question, just a clarification. Last year, at the same time, in the nine months, you also released a sort of guidance on the FX side, giving a preliminary impact, considering the US dollar-euro exchange rate trend. Are there any specific reason why you are not giving any positive hints, I would say, considering the US dollar strength for the next year? Thanks.
Yeah. With regards to the restructuring cost, as you've seen, we've recognized EUR 12 million of total one-offs, positive. That is basically, in reality, a positive one-off on the disposal of the LemonSoda business that accounted for EUR 38 million. Then, a number of projects. We'll 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 office from San Francisco 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 markets 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 EUR 12 million of positive that we have in the first nine months 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. Political instability does play a role in setting the FX. We do not have the crystal ball.
No, okay.
Italy has a big impact on this. We need to stay vigilant and see what's going on.
It'll be interesting to see how the midterm elections also go.
Yeah. Okay. Thanks.
The next question is from Nico 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 give an ROI metric. I believe last year, you finished at, was it 13.2? Up 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. It's quite clear that both brands have very high gross margins. They're on the highest scale within our global priority brands. As they grow faster, which they are, that will have a very beneficial effect.
Yeah. It's page five of your annual report. You guys give ROI. You guys define it as operating income adjusted, divided by fixed assets, is 13.2. On a reported basis, it was 13.7. Just wondering if you could maybe You guys haven't looked at the math around this, I take it? No.
No, we don't have it at this stage.
Okay. Interesting.
The ROI on the investments we find in both brands are phenomenal.
Yeah. Is the infrastructure well invested? Would you need to invest in additional capacity given they're growing so fast?
No. We could double or even triple production, we wouldn't need to invest.
Oh my gosh. Excellent. 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, there was a lot discussed today in terms of margins. For the most part, those numbers provided in the half year are more or less
Still the rough guide. Is that right? Then I have one last one.
Yeah. We're basically not changing in the big scheme of things, the guidance. That's the point. Correct.
Perfect. Excellent. I thought I heard that right. 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 understand the plantations are actually quite a significant employer for the island nation. I was wondering, go on.
It's a minor part of our local operations.
Of your overall operations, I'm more wondering of the general health of the island, given that it actually is a contributor. Maybe you're seeking some alternate arrangements to help employ the people that will be out of jobs and presumably help support.
Yeah, in line with the Campari way of doing things, we're very responsible when it comes to the local community. There's a whole activity of re-education 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.
That's wonderful. Excellent, guys. Thanks.
The next question is from Simon Hales of Citi. Please go ahead, sir.
Thank you. Hi, Bob. Hi, Paolo. Just a couple of questions, really, just both related to the U.S. business. Bob, you talked about the ongoing destock at SKYY, I think you said perhaps for another nine months.
Yeah.
Could you expand a little bit on that? It seems a very long destock period. What's actually happening with that brand, and what sort of variants are really dragging that destock, and the period out? Then maybe secondly, just on Aperol in the U.S., 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, 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, I suppose how much is the white space really?
The white space is very white and very large because we're mostly penetrated in New York, in certain neighborhoods, certain parts of Massachusetts, as well in Florida, if you're looking at the eastern seaboard, and then on the western side, it's San Fran, Los Angeles, and a little bit of California. We started seeding the brand in other places, but I can't call it any effective penetration.
Yeah.
Now, with regards to SKYY, 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. This is something we're doing gradually together with our partners. Then there is sort of reallocation, if you will, between states on the core brands. This isn't something which you just press a button and do overnight. We'd rather do it gradually with a plan, which we've worked together with our largest partner.
Understood. Thank you.
Sure.
The next question comes from Andrea Pistacchi of Deutsche Bank. Please go ahead.
Yes. Thanks for the follow-up. Just wanted to ask for an update on Brazil and Russia. Brazil had a strong quarter. Russia, still difficult. Leaving aside all comp effects and shipment phasing, what is the underlying situation in these markets? Are you seeing an improvement yet?
Well, overall in Brazil, what we've seen this year is really ups and downs from one month to the next. No clear trend. The clearer trend overall is that if you're playing in premium, you're doing well. Our premium brands, particularly the aperitifs, and in particular Aperol, are doing 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 have 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 aperitifs, Campari, Aperol, it's Espolòn Tequila, and Wild Turkey Bourbon, which are driving the routes.
We'd expect also Russia to improve and normalize next year.
Thanks.
Sure.
The next question is from Paola Carboni of Equita SIM. Please go ahead, madam.
Yes. Hi. Good afternoon, everybody. I have a few questions. For example, as for Aperol, if you can remind us of the regional breakdown, in particular the incidence of the main markets for the brand as of today, and in particular, referring to Italy, just because of the meaningful acceleration we have seen for this market from +7% in H1 to +13% overall on a nine-month basis. If you can elaborate on that, whether we should think about more sustainable 15% or +7%, or there has been any specific initiative in the summer, or maybe these initiatives are usually more effective during the summer. I was particularly surprised by this acceleration in Italy. A similar question, if I may. Sorry. May I head with the next few ones?
Yeah.
Similar question actually for the organic sales trend overall, which was quite strong. Actually, I remember when commenting on Q2 H1 performance, you suggested us to see more sustainable the overall H1 trend than the Q2, but we are even exceeding the Q2 trend itself. I was wondering, how are you thinking about your overall second half now that you have posted an already such strong performance in Q3? A very quick question on Espolòn.
You have very good memories.
We try. Next question is for Espolòn. If you can give us a sense of how much of growth was driven by price, possibly with transfer of the cost of agave increase, and still on agave, I remember you were expecting sooner or later a normalization of this trend and possibly a reversal. I was wondering whether this might happen already at some point next year. I think that's all. Thanks.
Yeah. Let me do some brain gymnastics and go to what I think was your first question, which was on Aperol and top markets. If you take Italy, Germany, and Austria, they roughly account for 60% of the total. The good news is that they're growing at double-digit growth rates. The change in growth of Aperol in Italy from first half to Q3 is not driven by changes in consumption. Consumption, you will 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 de-stocked. Having said that, consumption is so strong that they've joined the fray, and right now, on a nine-month basis, the shipments reflect the consumption.
With regards to Espolòn, as a guesstimate, I would assume that the price increase is accounting for about 10% of the growth, not more. Most of it is coming from volume because we were the first ones to take price. At that stage, nobody had followed. Even at this stage, there are quite a few big players which haven't followed with price increases.
Then there was a question on agave, I believe.
Yeah.
Yeah. For the time being, looking at 2019, we don't see agave as a big mover of numbers 2018 versus 2019. Clearly, with different dynamics in 2018, we've seen the agave price coming up. As previously highlighted, we may still have a little bit of tail-end effect in the first half of next year. The trend should go opposite direction. Overall, we don't see opportunities in reducing the EUR 12 million, on the other end, we think we're fully edged, and we will not see the EUR 12 million increasing further. That's how we see it. Again, it's difficult to predict because it's primarily driven by balance, imbalance between demand and supply. Depending on how the U.S. market grows, then you may have phasing effects of the change of the cycle on the pricing from upwards to downwards.
Mm-hmm. Okay.
It is the current estimate in Mexico.
Okay, as far as your view on H2 overall, what you said, I noticed.
With regards to the
I'm looking outside, I see more rain as opposed to sunshine. Obviously that will impact. We'll see how it goes. The underlying momentum of the brands is good. As you know, Q4 is a very big month for 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 will continue doing well. We'll see how it comes up, but rest assured, we don't miss a single case if we can.
Okay. Thank you very much.
The next question is a follow-up for Mr. Nico von Stackelberg from Mr. Nico von Stackelberg of Liberum. Please go ahead, sir.
Hi, gents. Thanks again for the question. You're talking about pricing on Aperol, that piques my interest. I personally think it could be probably a little bit more expensive. Here in the U.K., it's around GBP 15 per bottle. I appreciate you need to buy it probably with Prosecco on the side to go with it. Could you just talk more generally about how much, I'd guess, pricing headroom you think you probably have, and why aren't you being more aggressive on the price full stop? Thanks.
You need to understand that price is not just the price which we impact, but it's also impacted quite a bit by excise duties. Aperol having 11% alcohol, it's not fair to compare it to spirits which have 40% alcohol, which is probably what you're doing. Whereas the consumer might not necessarily understand or make that difference, the buyers in the trade certainly do. Aperol is a healthy brand, and 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 we're sticking to our model, and so far, results indicate those.
Excellent. Just keep doing what you're doing, guys. Thanks.
As a reminder, if you wish to register for a question, please press star and one on your touch-tone telephone. For any further questions, please press star and one on your telephone. Mr. Concewitz, so at this time, there are no more questions registered, sir.
We'll go back doing what we do. Thank you. Have a nice afternoon. Bye-bye.
Bye-bye.
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