Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Campari Group First Quarter 2022 Results. 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 would like to turn the conference over to Mr. Bob Kunze-Concewitz, CEO of the Campari Group. Please go ahead, sir.
Thank you very much. Good afternoon, and a very warm welcome to our Q1 call. If you join me on page number 2, I'll kick it off with the highlights. As you'll see throughout the presentation, we've had quite a strong start to fiscal year 2022, albeit in a small quarter. As you know, Q1 is our smallest quarter of the year. This strong performance is thanks to both the positive underlying momentum of our brands across markets, as well as some phasing effects due to advanced shipments ahead of price increases, as well as an IT platform change which occurred at the beginning of this month. Clearly, in certain cases such as in Italy, a favorable comp rate also helped.
Net sales at EUR 534.8 million were up 29.4% on an organic basis versus 2021, and that represents a three-year CAGR of 12.8%. Adjusted EBIT at EUR 114.3 million was up 58.5% on an organic basis, representing a three-year CAGR of 17.5%. The strong organic sales performance in the quarter was across all key markets and brand clusters, and it really shows the strong and healthy brand momentum as well as a return in strength of the on-premise in Europe. In particular, this has had a beneficial impact on our high margin aperitifs. The performance, as I said earlier, was also helped by phasing an easy comp basis.
With regards to the organic EBIT, the strong growth and margin expansion in Q1 was driven by a slight dilution of gross margin as the very positive sales mix driven by brand and channels, and in particular, the outperformance of our high margin aperitif business clearly helped compensate and largely offset the input cost inflation. We maintained sustained investments behind A&P and SG&A, but given the strong growth of the top line, those two lines delivered margin accretion. Net debt to EBITDA on an adjusted basis came in at 1.5x , so a slight improvement versus the 2021 year-end. Moving on to slide number 3, which is really a summary. You can see the very strong momentum across all regions and brand clusters. Obviously the on-premise skewed European markets benefited the most from the reopening.
The Americas were up 14.9%. Southern Europe, Middle East and Africa, 61.2%. North, Central and Eastern Europe, 33.2%. APAC, 18.4%. Looking at it on a brand cluster basis, our global priorities had very strong growth of 30.6%. The regional priorities came in equally strong at 31.7%, and our local priorities at 19.6%. Moving on to chart number 4 on performance by regional area. The U.S. were up 6.6%. We've had a positive start to the year against what is effectively a tough comp base. You'll recall that last year we grew by 15% overall in Q1 in the U.S.
It is expected continued strong growth on Espolòn, up 27%, while Wild Turkey Bourbon roughly at the same rate, 27.3%. Aperol accelerating to 51.2% behind our recruitment drives. Campari also doing very nicely, up 22.5% in Cabo Wabo. Grand Marnier shipments grew moderately despite a tough comp base, so actually quite positive. On the other hand, the shipment performance of SKYY was impacted by the unfavorable comp base. You'll recall that we were shipping in the renovated pack and upgraded liquid in Q1 of last year ahead of the relaunch in Q2. On an organic basis versus 2019, Q1 of this year was up 24.3%, representing a three-year CAGR of 6.5%.
Strong up single digit for Canada, 9.4%. Positive overall growth. Key drivers though have been Grand Marnier, Aperol and Campari. We had a temporary decline in Forty Creek due to the very tough comp base from last year. Jamaica growing strongly double-digit, 20.1%. Strong growth driven mostly by Campari and Appleton Estate. The rest of the region grew a very strong 51.6%, and this double-digit growth rate obviously came from the fact that many markets recovered from the pandemic in a small quarter. Moving on to Southern Europe, Middle East and Africa. Italy was up a very strong 70.2%. Clearly this is magnified by an easy comp base.
You'll recall that last year, Italy was down by 0.7% in Q1 as the on-premise was closed, as well as phasing, in particular, ahead of price increases and the change of the IT system. This impacted our stronger brands, our larger brands. Aperol up 101.4%. Campari 118.7%. Campari Soda 24.8%. Crodino 76.5%. The specialty brand also did, the bitters did very well. Our organic growth was of 28% versus Q1 of 2019. Quite robust growth in this key market for us, representing a three-year CAGR of 8.6%. France continues to perform very strongly, also up double digits, 13.8%.
Here, the underlying trends continued to be driven by Aperol, Riccadonna and Campari. The rest of the region was up 56%, and this largely to the thanks to the recovery of the on-premise as well as individual easy comp basis, particularly in Spain and South Africa. Global travel retail also increased on a low base by 50.2% as traffic in airports started to resume. Moving on to North and Central Eastern Europe, with its largest market, Germany, up 41.5%. Very, very solid business performance, albeit in a low seasonality quarter. We must also say that we benefited from some favorable weather conditions. The performance was largely driven by growth in our aperitifs, a very strong Aperol, up 79.2%.
Very good operating performance by the newly launched Aperol Spritz Ready to Enjoy, Campari growing also a healthy 33.1%, as well as Crodino. The organic growth of this market was up 39.6%. Again, very robust to the pre-pandemic period of 2019, representing a three-year CAGR of 11.8%. The U.K. continues to perform strongly double digit, up 26.6%. Again, key drivers here were Aperol as well as Magnum Tonic Wine, which is quite important in that geography. The rest of North, Central and Eastern Europe grew by 29.4% with very nice performances across Austria, Switzerland and Belgium, largely due to the aperitifs.
In Russia, on the other hand, starting from the last month of the quarter, the business has been reduced to the minimum necessary for us to support the local Camparistas and pay their salaries. The rest, we've really tuned down investments, A&P, promotions. I think it's quite clear why. Moving on to APAC. Australia, largest market, up 5.4%. Good growth, I must say, against quite a tough comp base. Last year, we were up 22.6%. Again, you know, the core brands, Wild Turkey Bourbon, bottle as well as RTD, Espolòn and Campari did very well. This despite severe ocean freight constraints, which really impacted our performance in the quarter in that market.
The organic growth of Australia versus the pre-pandemic era is up 51.6%. Again, quite solid, demonstrating leading to a three-year CAGR of 14.9%. The rest of Asia grew 50%. The very strong performance in South Korea, driven by the premium Glen Grant X-Rated, as well as the high-end offerings of Wild Turkey. China, as you can expect, is flattish due to the snap lockdowns in relation to the zero COVID policy. On the other hand, Japan grew double digits with nice growth, again, behind Glen Grant and Wild Turkey Bourbon, and with nice continued momentum across all the other markets and brands. Moving on to our performance by brand global priorities. Aperol, overall very strong, 71.9%. I already discussed the performance in Italy and Germany.
The U.S. up 51.2%, and in France up 79.5%. Clearly, in all key markets, particularly also in the European markets, the brand continues to grow at a very high sustained double-digit growth rate. Campari up 56.6%. Again, Italy, major impact, but the U.S. and Jamaica as well. Jamaica grew by 64.2%. This brand also benefited from phasing ahead of a robust price reposition in Europe. It continues to benefit on a global basis from the strong at-home mixology trend as well as our proprietary cocktails. As you know, the Negroni, Americano, and Boulevardier are in the top 16 of the world. Wild Turkey up 14%. Very nice performance. Solid start to the year with the U.S.
Australia, despite logistic constraints as well as key Asian markets. SKYY actually down by 11.5%. As I said, this is mostly due to the double-digit shipment decline in the core U.S. market. Actually, depletions were positive and the shipment performance was actually marked by a very tough comp pace from last year in connection with the brand relaunch. Importantly, international markets continued to grow very strongly, up 48.8%. Grand Marnier up 8.9%. Continued growth in the core U.S. market, mid-single digits up 5.3%, thanks to the Grand Margarita. This is obviously a shipment basis. Our depletions are actually stronger than that. The brand did quite nicely in Canada, up 14.5% in France and global travel retail.
Our Jamaican rum portfolio up 6.5%. Appleton doing very well overall, up double digit, 22.1%. With premium rums doing well in key markets, but actually Appleton is outperforming its category. Wray & Nephew on the other hand declined, and this is largely both due to a tough comp base. Actually, last year we were up by almost 69% as well as some supply constraints. Moving on to our regional priorities, Espolòn continues to grow strongly double digit up 29.2%. And I say this despite a very tough comp base, last year, we were up by 63.9%. Key driver remains the U.S., as our available liquids are being sent to that key and highly profitable market.
Our Italian specialties, as I said earlier, doing nicely, easy comp base, obviously due to on-premise skewed Italy, where Averna and Braulio were particularly impacted last year. We have overall a nice performance across markets. Cinzano and the other sparkling wines delivered overall a positive performance, 45.6%. Clearly this will be impacted by Russia going forward. Crodino, very nice performance, up 66.6%. Again, impact of Italian comp facing, but as well as very good traction in its new markets in Benelux, Austria, Switzerland, and Germany. The Glen Grant is continuing to benefit from its premiumization and the repositioning, up 46.2% on a value basis. Key driver here is also Asia. The Aperol Spritz Ready to Enjoy, up 33.4%.
Bear in mind that we have this SKU only in 10 markets. We could sell a lot more, we're not allowing the markets to launch it yet. If we look at the rest of the regional priorities, they were up 3.8%, where we have some very positive growth, particularly on BULLDOG, Whisky L'Aubercy], [Monte dei Roari], Ancho Reyes. What depressed was the Forty Creek performance due to the tough comp in Canada. To close the net sales review with our local priorities, very pleased to see Campari Soda continuing to perform very nicely, up 23.8%. Our RTDs in Wild Turkey, our RTDs in Australia are also up double-digit despite supply constraint and logistical issues. X-Rated slowed down to 11.2%.
It's doing very well in its core South Korean market, but it clearly was impacted by the lockdowns in China. SKYY Blue, the RTD business in Mexico, returned to a very nice growth, up 44.7%. Last but not least, Cabo continues to benefit from very strong tequila trends, up 53.2%. This is it so far from my end, and I pass it on to Paolo.
Thank you. Thank you, Bob. If you follow me to page 9 of the presentation, and in particular we focus on the organic change in first quarter 2022 versus a year ago, we can see that EBIT adjusted organically grew by 58.5%, delivering 390 basis point margin accretion versus a year ago. In particular, this was driven by a very healthy gross margin expansion in value, which accounted for 28.7%, with 30 basis point margin dilution as the very positive sales mix, which was driven by the outperformance of high margin aperitives, in particular Campari and Aperol, was able to mitigate the dilutive effect of increased input costs.
The A&P in the first quarter organically was up at 20.3% in value with sustained investments behind the key brands, but grew below top line growth rate and thus drove 110 basis point margin accretion. The SG&A line increased by 13.6% in value against a low base, generating 310 basis point margin accretion, thanks to the strong top line growth. Looking at the reported change, EBIT adjusted on a reported basis was up 66.8% in value, including a slightly negative perimeter effect of EUR 0.3 million or a - 0.5%, which was completely attributable to termination of agency brands.
Secondly, a positive Forex effect of +8.9% or EUR 6.1 million, which drove 30 basis points margin accretion at the EBIT adjusted level. This was clearly driven by the appreciation of the US dollar versus the euro currency. On an EBIT adjusted basis, Steve, you know, reported change increased by 53.7%, of which 46.5 attributable to organic growth, 7.6% for Forex, and -0.4% perimeter effect.
With regards to total financial charges, if we stripped out the positive effect of exchange gains of EUR 3.7 million in the first quarter, the adjusted financial charges came in at EUR 5 million versus EUR 6.6 million of last year, showing a decrease of EUR 1.6 million, which is very attributable to the decrease in net debt in the first quarter of this year versus a year ago. As the average cost of net debt, the coupon in the first quarter remained unchanged at 2.4%. Group profit before taxation came in at EUR 107 million, up 65.3% on a reported basis.
If we adjusted the profit before tax of the operating and other adjustments, the results was EUR 111.7 million with an increase in value of 74.1%. If you move on to page 11, as you can see, net financial debt stood at EUR 834.6 million as of 31st March 2022, almost in line versus December end last year, due to two factors. On one end, we planned an operating working capital increase due to inventory build-up ahead of peak season, due to you know, it's a move which we've decided to implement as the logistics environment looks pretty constrained at the moment.
Secondly, you know, we have the negative effect of the tailwind effect of the share buyback program in the first half. The net debt to EBITDA adjusted ratio stands at 1.5x at the end of March. You know, as you can see, footnote number 2 is that March end, the company held 33.3 million own shares, equivalent to 2.9% of the share capital. I think, Bob, this is it on numbers. I would hand back to you on the update on-
Thank you, Paolo. Let me with some pretty pictures before the outlook. Clearly, we were honored when the Jamaican Prime Minister chose Appleton Estate special edition, the Ruby edition, as a gift for the visiting Duke and Duchess of Cambridge. I hope they'll enjoy that for the months to come and become loyal consumers. Nice update on Campari. In addition to the New York Film Festival and the Venice Film Festival, we've added the other major film festival, Cannes. We'll be sponsors there, and that really solidifies the platform for that key brand of ours.
Aperol, as you can see, we're in full recruitment mode as across the world, across markets, a lot of events, and we really look forward to the key Q2, Q3, where we'll have, obviously, very important activations, throughout the world. Last but not least, premiumization continues with our Rare initiative, and here's an example out of, Asia. Now, to come to the conclusion and the outlook, as you've seen from this presentation, we've had a very positive start of the year, with continuing underlying momentum and strong on-premise recovery, particularly in, the European markets, which are on-premise skewed.
This was also amplified by phasing due to price increases were scheduled at the end one at the beginning of Q2, as well as some caution ahead of a key IT upgrade. Looking at the remainder of the year, there's no doubt we really expect the positive business momentum to continue across all of our key brands and markets. Clearly the overall performance will also reflect a gradual normalization of the shipments due to the phasing effects, different comp bases throughout the rest of the year, as well as the impact of the conflict in Ukraine, not only in Ukraine, but also Russia, obviously, as we're dialing down our operations. Concomitantly, the world hasn't become a nicer place.
Volatility and uncertainty remain, both due to the ongoing pandemic as well as the cited geopolitical tensions. Net in that though, we fully confirm our guidance of flat organic EBIT margin in 2022. There's no doubt that we will continue to leverage adequate price increases as well as a positive mix to mitigate the expected intensification throughout the year of the inflationary pressure on input costs. This is it from us, and I'm sure you have tons of questions.
Excuse me. 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 touchtone telephone. To remove yourself from the question queue, please press star and two. Please pick up the receiver when asking questions. Anyone who has a question may press star and one at this time. The first question is from Andrea Pistacchi with Bank of America. Please go ahead.
Yes. Hi. Hi, Bob. Hi, Paolo. Three from me, please. The first one on phasing, are you able maybe to quantify the impact at group level? Besides Italy, which I think you called out as a market where you saw phasing, are there any other major markets that were impacted by phasing? The second question is really an update on the cost pressures. I think the full year results in February, before the conflict, you were suggesting EUR 60 million headwind, half of which glass, quarter logistics and other. If you could just say how that has evolved, how that has got worse, please. The last one linked to this on gross margin.
Again, at the full year, you had, I think, suggested flat, flattish gross margin for the year, probably more weighted the margin performance at gross margin level to the second half.
Because of the timing of the price increases. Is that still the case? Are you flat for the year at gross margin level and more weighted to H2?
Good afternoon, Andrea. I'll take the first one. Quantifying the phasing, you know, it's not very, very precise, but we quantify as being a little bit less than half of the top line organic growth. With regards to comp basis, I think the major one was Italy, and then we also had some slight benefits from the likes of Spain and other Mediterranean markets. The biggest impact really was Italy. On the contrary, we had, you know, very tough comp base in the U.S. to beat.
Yeah.
Yeah, as you know, as I take to you know, Bob's comment on phasing clearly, you know, that's on top line. Now, if you look at the first quarter in isolation, basically, you know, there are the three components of price increase, COGS increase, and the volume and mix effect. You know, the phasing, you know, looking at the composition of the brands that have been impacted, the mix of the brands that have been impacted, on the phasing effect, you know, it's highly skewed on high margin brands.
Clearly, you know, you have, you know, an implied offset in sales mix that, you know, generates a disproportionate effect of phasing at the EBIT level vis-à-vis net sales in first quarter, just to frame it. You know, with regards to the cost pressure, you know, it is intensifying, you know. It's clear, you know, the trend is now, you know, very, very clear. And again, you know, the plan for the remainder of the year is to properly balance, you know, the three components of, you know, COGS increase, which, you know, we're exposed to, with the two possible offsets that are, you know, the price increase on one end and the mix.
You know, we will try to preserve you know business momentum whilst aggressively taking price. You know, the guidance for the full year is flattish EBIT margin to make sure that we do not kill you know business momentum with a disproportionate increase in pricing. Yes, with regards to the phasing of price increase and COGS increase, most of both you know has to come in in the remainder of the year. You know, the price increase in Continental Europe, in Europe in general, is more skewed in the kind of Q2 and Q3 and Q4.
In the U.S., you know, we have been quick in lifting, you know, prices, but, you know, we'll come back with a further price increase in the fall.
Can I just follow up quickly, Bob, on the first question on the phasing that benefited the quarter. Should this unwind, will it be a gradual unwind over the next few quarters, or will we see the bulk of it in Q2? Thank you.
I think it will be gradual. You know, the start to this quarter has been, you know, quite good. We're not seeing any, you know, major, you know, drift vis-à-vis, you know, the Q1 pattern. There will be some, you know, rephasing, but, you know, I do not envisage, you know, any drop in any particular quarter.
Thanks.
The next question is from Simon Hales with Citi. Please go ahead.
Thanks. Hi, Bob. Hi, Paolo. A couple from me. Maybe just sort of following on around the phasing issue. I think, Bob, back at the full year results, you talked about just inventory levels generally, you know, around the world being, you know, at very low levels. I appreciate maybe there's been a little bit of inventory build, particularly in Southern Europe, given the phasing ahead of the price increases and the IT system change. I wonder if you could just update us more generally on where you think inventory levels are, now, you know, across your regions. Related to that, just on the IT change itself, you know, I assume that's been pretty smooth and has now gone through during Q2.
Just secondly, I wonder if you could just talk a little bit about the scale of some of the pricing that you have been taking in your core markets or plan to take, you know, over the next sort of couple of months where list price changes have been announced.
Yeah, let me take the first two ones, and Paolo can go more into depth. I mean, in terms of inventory levels, practically, you know, we don't have high inventories anywhere in the world. When you're looking at our distributors and the trade, you know, it's very difficult, to be honest, in this environment from a logistics standpoint to actually catch up on inventory. It's a little bit easier in Europe, but, I mean, the rest of the world, it's not done. Our inventories, yes, caught up a little bit at the end of Q1, but they're, you know, far from being hefty. With regards to the IT change, we're in the middle of it.
We actually gave the go ahead last night at midnight, so we're keeping our fingers crossed, but everything looks good so far.
Yes. You know, with regards, you know, to the inventory levels, you know, we need to distinguish between, you know, finished goods sitting in our own network, vis-à-vis, you know, finished goods sitting at, you know, customer or distributor level. With regards to the latter, clearly, as Bob has said, you know, we did not build up further stock. You know, actually, we could not re-establish, you know, the prior to pandemic, you know, level of stocks, because of logistic constraints, and probably it would not be possible in the next quarter. We're, you know, somehow exposed to higher risk of out of stock.
With regards to stock sitting in our own premises, we've moved from, you know, make to order to make to stock to minimize, you know, the risk of out of stock coming from logistic constraints. Basically in a quarter, we've built EUR 110 million of inventories. You've seen, you know, flattish, you know, net financial position in the first quarter, while, you know, the underlying cash flow generation was quite robust. With regards to the FX changes, you know, as Bob said, you know, it's touch wood, plain sailing.
Great. Just on the scale of the price increases in some of the markets?
Well, I mean, in Europe, currently it varies from brand to brand. Obviously, we took higher pricing increases both on the aperitifs as well as the aged distilled spirits. You know, depending on the brand, it's you know, mid-single digit and upwards. In the case of Campari, actually, before the inflationary pressures came, we'd taken the strategic decision to do a repositioning of the Campari price in continental Europe. Depending on the market, Campari's prices increased between 10%-20%. If we move on to you know, the U.S., we're probably more around mid-single digit. In highly inflationary markets, I mean, like Argentina, we take significant price increases every two months. It's very tailored according to the market and the type of brand.
Got it. That's very helpful, Bob. Thank you.
The next question is from Olivier Nicolai with Goldman Sachs. Please go ahead.
Hi. Good afternoon, Bob, Paolo. Just three questions, please. First, going back to the gross margins, which was down 30 bps in Q1. It was a bit surprising because obviously Aperol and Aperitif did very well. Perhaps could you try to you know, quantify the different moving parts on your gross margin in Q1 between the positive mix that you have from your products, the pricing impact, and then the COGS headwind? That's the first question. Second question, you mentioned SKYY Vodka in the U.S., which was down. Actually, could you give us an idea of the depletion and a bit of initial feedback on the relaunch of the brand in the U.S.?
Just lastly, it's been, Bob, I think it's been almost a year since you have announced the Tannico JV with LVMH. Could you please update us on the progress and the sales contribution from this JV? Thank you.
Yeah. I think the last one will be very quick. I mean, yes, we announced the JV, I mean, halfway through the year, but we had to go through antitrust checks and balances, and it has only started operating from the beginning of this year. It's quite early. I mean, obviously, you know, we're cooperating and putting, you know, the best thinking of both companies into delivering it. As you know, we also do not consolidate the Tannico numbers. You know?
Yeah.
As it is a-
Yeah.
-JV.
Mm-hmm.
Now, moving on to SKYY, and then I'll let Paolo get into the meaty first question. SKYY, actually, in the first quarter, depletions were up 20% in the U.S. That obviously also impacted from the price increase, which we took at the beginning of March. January, February were quite strong from a depletion standpoint. If you look at our consumption indicators, we have SKYY Core flattish or slightly down and the flavors currently still significantly down. Having said that, though, you know, when we're tracking awareness and trial and repurchase, all of those are going in the right direction. Together with the strong growth internationally, we would expect SKYY on a full year basis to be either flat or slightly up in the low single digits.
Yeah. With regards to the you know the juicy question of the gross margin in first quarter, you know without reading too much in the numbers of a single quarter, you know basically you know you have to understand you know that you know input costs and price increase you know they have two different phasing. If you look at the input cost, it all started in you know September you know back end of August last year where basically you know cost you know started to rapidly increase. In the first quarter of the year, we don't see you know the full effect but you know you still see you know a good portion of the cost increase-wise.
On the pricing front, which is the offset to cost increase, you know, when you look at the first quarter, you do not have the effects that we're taking, the measures that we're taking in terms of price increase to offset the 2022 inflation. Basically you're comparing first quarter 2022 numbers with last year. Basically you take into consideration the price increase that has been taken last year, in essence. In value, if you look at the first quarter, the price increase more than offset the COGS increase in value.
The remainder is, you know, volume and mix. If you look at, you know, on a percentage basis, the price increase in the first quarter is below the COGS increase. This is where you're having, you know, a dilutive effect that is, you know, partly compensated by positive mix, if that answer your question. Clearly, you know, if you look beyond Q1 into the rest of the year, you know, the COGS increase is expected to stabilize, although at a very high rate. Otherwise, we will benefit from the effects of the price increases, extraordinary measures that we're now taking given the current environment.
Okay. Thank you very much. Very clear.
The next question is from Edward Mundy with Jefferies. Please go ahead.
Afternoon, Bob. Afternoon, Paolo. Three for me, please. The first is the elevation of Crodino and Aperol Spritz from local priorities to regional priorities, the new cluster. Could you talk to what this actually means in effect from a sort of an execution standpoint, presumably more dollars, a bit more TLC? And as a sort of second part to that question, you know, are you seeing any cannibalization from the new ready to enjoy to away from the traditional Aperol Spritz? That's the first question. The second question is, you know, really around the statement within your additional financial information around leveraging new consumption habits across those on-premise and off-premise channels.
Are you able to provide a bit more detail as to what you mean by that? I mean, appreciate there's some, you know, revenge conviviality going on, and, you know, first quarter was impacted by, you know, some shipment phasing. But even still, you know, your underlying growth is pretty strong, you know, both for this quarter and the last couple of years. The real question is, you know, why shouldn't high single digit, low double digit growth be a good proxy for your business, you know, given these new consumption occasions on-premise and off-premise? The final question is really around Brazil and your new agreement with FEMSA. Can you talk a little bit more about the opportunity, and, you know, are there opportunities to do more with other bottlers?
I know you already do quite a lot of work with C-C HBC in Central Eastern Europe.
Okay. Let me kick off with Crodino and Aperol Spritz. I mean, on Aperol Spritz for a very, very long time, there was very huge demand from our markets to actually introduce it alongside the mother brand. We've resisted that for many, many years, and we've waited actually for the penetration of Aperol per capita to reach a certain level before we let it free. There was huge demand from the markets. Now we've actually put it into 10 markets. This will gradually increase over the years as the penetration of the Aperol Spritz and the mother brand increases. In terms of cannibalization, we're hardly seeing anything. We're seeing it's a very different beast.
It is focused on the off-premise, and it's more for conviviality, particularly if people are at home alone or just with their partner, and they might not, you know, want to open a bottle of Prosecco. So then they go for the ready to enjoy. It's really complementary to the mother brand. Crodino on the other hand is, we, you know, centrally we saw the opportunity of low/no alcohol, and we decided to go and test it in a few markets, and the tests have been very positive. We've introduced it, and more and more markets will pick it up as we go, as success breeds success. Clearly this means operationally, you know, the marketing gets done by our central teams as opposed to the Italian team.
The mix changed slightly, both the design, the bottle size, as well as the advertising campaigns and the activation model. We're quite happy about that, and we think it'll give us a lot of satisfaction, going forward. Now, in terms of the new usage occasions, now clearly the pandemic and the first lockdowns have been beneficial to us because it really increased the penetration of our key cocktails, at home. Now making a Negroni is no longer an insurmountable challenge. You know, you have many great Negroni makers, the same with our spritzes and so on, or even the Grand Margarita. That has really driven the penetration of our brands, in-house.
At the same time, revenge conviviality, which is still continuing across all markets where the on-premise is open, is really giving us a second wind. We see those two things continuing, particularly when it comes to our aperitifs Campari Aperol. We're seeing the Campari Spritz and the Aperol Spritz go also into the meal occasion, brunch, lunch, informal dinner. Net in net, we have more traction overall across the portfolio. We feel good about it. Given the volatility, both from an economic, political, and so on, we don't feel like calling out a different top-line guidance.
Clearly, as you can see from the three-year compound annual growth rates across brands and markets, our performance has accelerated. With regards to Brazil, I mean, Brazil is really a relaunch opportunity, if you will, for us. For many years, the local management was convinced that the way forward was the local brands. Unfortunately, that was absolutely the wrong call. Those categories continue to decline significantly. Now for about a year, a year and a half, behind change management teams and strategy, we put the emphasis back on the aperitifs, particularly Campari and Aperol. We're really seeing a strong traction behind those two brands and very good growth.
To be able to increase the penetration of the two brands, we are cooperating with different players in the market. One of them is Coke, but it's not the national deal. In other states, we also cooperate with other players. We think it's a win-win for, you know, all the parties involved. This clearly will be more of a mid to long-term impact as we think that Brazil is potentially a huge market for our aperitifs. I hope this answers the question.
Yeah. Are there any other markets where you might, you know, look to use the or leverage the Coke system, in North America?
Well, we are already in quite a few European markets. It's truly something we look at one at a time.
Got it. Thank you.
The next question is from Ryan Simpson with JP Morgan. Please go ahead.
Good afternoon, Bob, Paolo. Thanks for the questions. Firstly, if you could give a bit more color on your current plans for the Russian market. You said that you've dialed down the activities to the minimal level. Just sort of broadly speaking, what is that minimal, what should we expect going forward? And then secondly, just following on from the last few questions around sort of the reordering of the brand priorities. The SKYY Vodka RTD is not the one that you've given a lot of time to historically. How should we expect that to move up in terms of your order priorities? And, like, would that be something you expand to the U.S. market as well?
Look, I mean, more color for Russia. I mean, practically, we just want, you know, the locally generated revenue. We import everything. So we don't produce anything locally there. We want the locally generated revenue to cover fixed costs, and that's it. We've cut A&P, we've cut other investments. We're not promoting the brands in store, and we'll continue like that till there is a change in the overall situation. With regards to brand priorities and SKYY RTD, I mean, we've had SKYY Blue in Mexico now for 15, 17 years. You know, it's something we haven't really called out before, because it was small. You know, over time, it's become quite a sizable business, so we're calling it.
We have a little bit of SKYY RTD business in Australia as well as in Asia. Let's see how that goes. Clearly, we're pragmatic people. You know, if we see things have legs, we expand them.
Great. Actually, maybe just on that Asia point, like, appreciate the launch or your activation within China, but it has been set back somewhat by the more recent lockdowns. How is that business trending in the few months leading into the lockdown and performance over, like, the Chinese New Year trading season?
Look, I mean, pre-lockdown, we were doing very, very nicely, thank you very much. You know, both X-Rated Aperol, SKYY Vodka, on a slower base, Bisquit & Dubouché, and surprisingly, Campari were doing very well. Actually, the Negroni is doing very well in mixology outlets. Without doing anything on the brand, it's growing at strong double-digit rates. Demand is there. We have the growth models. We just need to be patient and return to recruiting consumers when the zero-COVID policy allows us to do that.
Great. Thank you. Very clear.
The next question is from Trevor Stirling with Bernstein. Please go ahead.
Hi, Bob and Paolo. A few from my side, please. First one is, you know, Bob, you mentioned that roughly half of the organic growth was due to the phasing, which would then say that underlying growth versus 2019 was about 30% up. Is it reasonable to expect that to continue at that underlying rate through the year? I appreciate in Q2 there's gonna be a tough comp from the phasing, but is that the right way to think about the underlying rate at the moment? Second one, Paolo, you mentioned 30 basis points of transactional FX in Q1. Again, is it reasonable to expect that to continue through the rest of the year? And then final question, Bob, I think on the last call, you mentioned there's more Espolòn capacity coming on stream this year. I was wondering what the timing of that capacity is.
Mm-hmm. The timing on that capacity is gonna be end of Q3, beginning Q4. It is a continuous progress because, you know, it's really an engineering feat because as we continue producing, we're adding, you know, bits and pieces to the distillery and the bottling lines, et cetera. This capacity increase will actually continue also in 2023.
Clearly, we have a strong confidence in the brand in the U.S., and we hope we'll be able to start to actively build it in the rest of the world, particularly Europe. Now, on the underlying rate, you know, Trevor, don't have a crystal ball, because one thing is the momentum of the brands, which is very, very strong. You know, if the world would be a nice place, a benign place, I would agree with you, we'd maintain it for the rest of the year. At this stage, it's very difficult to tell. We know there's demand for it. At the same time, you know, we've gone through a major price repositioning of Campari.
We need to see how that plays out, as well as robust price increases throughout the portfolio. You know, we will maximize sales, and we won't shy away from it. We do think we have strong brand equities. Let's see how the consumer will react going forward.
Super.
The second question, if I understand it well, is the you know FX transactional effect in our numbers in the first quarter, whether it is confirmed you know going forward, if that's the question, you know it very much depends on the dollar. Yes, we have a transactional exposure on all the U.S. imports, so basically both the aperitifs, Campari and Aperol, as well as you know the Grand Marnier from France. So yes, in the first quarter you know if I remember it well, the average euro/dollar was at 1.12. You know given the current spot rate, there is an opportunity sitting in the P&L to go. Still you know we would have you know higher effect at bottom line vis-à-vis top line due to the transactional exposure.
Okay, thanks very much. Bob from Paolo.
Thank you, Trevor.
You're welcome.
The next question is from Paola Carboni with Equita. Please go ahead.
Yes. Hi, good afternoon, everybody. I have a few questions. The first one, I appreciate you have confirmed your guidance for EBIT margin, flattish, compared to last year. Just wanted to have a bit more color on how we should think about COGS and pricing. If you can update also the guidance you provided, which was for 7% growth of COGS year-on-year. What's the environment you are expecting now to face in terms of COGS for the year?
Also, looking to the Q1 performance, if you can give us a rough idea of how growth was split between volume and pricing and so volume mix, let's say, on one side and pricing on the other side. How should we think the two components to evolve during the year as a mix of the two components for the year? Last comment, I would like to have a bit more color on the guidance for flat EBIT margin, just to understand if we should think this as the potential result of progressive deterioration of gross margin offset by operating leverage on the other costs.
Just to understand if this is the right way to look at your flat EBIT margin guidance? Thank you.
I'll keep Paolo busy for quite a while.
Yes. Thanks.
Thank you, Paola, for that. You know, clearly, you know, just to put the whole thing into the right perspective, you know, we're living in an unprecedented, highly volatile commodity market. You know, the biggest commodity which we are exposed to is glass, which is highly linked to natural gas COGS. You know, if you check on a daily basis, the TTF index, you know, it moves up and down constantly. What we're trying to do, given the fact that we're at the very beginning of the year, all contracts are indexed to that tracker.
What we're trying to achieve is that, you know, to hit, you know, a flat EBIT margin for this year. You may remember at the beginning of this year, you know, we hoped to recover, you know, the 170 basis point shortfall that we still have to recover vis-a-vis pre-pandemic levels at gross margin level. You know, for this year, we're saying, look, it's a flat EBIT margin. You know, as the time goes by, we will have, you know, better visibility on both, you know, the true trending costs, where, you know, we've alluded to a 7% COGS increase. That's, you know, the goal that we have in mind. You know, how much effective will be, you know, our price increase.
Today is a little bit too early to call. You know, if anything, we see, you know, a potential, you know, area of opportunity in the mix, positive sales mix driving, you know, accretion in the case, you know, the price increase. Although, you know, for sure we'll offset the COGS increase in value, we'll not be able to offset in percentage terms. You know, if you have, you know, a P&L, which has a gross margin on sales in the area of 60%, you totally understand that in order to maintain, you know, flattish gross margin on sales at cost and mix and volumes, you need to increase price more than COGS. That's what we're trying to pursue.
On the other hand, clearly, we do not want to kill the brand momentum, so you know, we're sensible in that. We're saying, look, the objective is to achieve a flat EBIT margin. Clearly, there could be an upside in terms of business momentum, and there could be, you know, an upside risk, there could be a downside risk in our ability not to cover, you know, in percentage terms, the COGS increase in value, for sure. In percentage terms, is a different ballgame.
I don't know whether, you know, I think in terms of timing, you know, once we have the second quarter under our belts, we'll be in a better position to judge and to review the guidance based on actual numbers, where basically you know very well, you know, the second quarter is a key one for us for the high margin aperitifs.
Yes. Okay. I think we just missed the point about the contribution of pricing you had in Q1. I don't know if you can give us a bit of color in this respect.
It's a mid-single digit price increase in Q1.
Okay. Perfect. Thank you very much.
Right. Thank you.
Mr. Kunze-Concewitz, there are no more questions registered at this time.
All right. This is a wrap then. Thanks for joining us, and hope you have many good Negroni. Take care. Bye-bye.
Don't be shy. Bye-bye.
Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones.