Good afternoon, this is the Chorus Call Conference operator. Welcome, and thank you for joining the Campari Group Nine -Months 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.
Good morning to all. I hope you appreciated the visual of the Aperol glasses bringing some sunshine in a rainy environment. Having enjoyed that, if you follow me on page two, I'll kick off with the highlights as usual. As you can see, we continued in Q3 with a very, very strong performance. Clearly we have very robust brand momentum and the pricing effect started to kick in. Net sales at EUR 2.05 billion, almost EUR 2.06 billion, clearly generates strong organic growth of 19% in nine months, or actually +47% if we compare ourselves to the pre-pandemic era, the first nine months of 2019. We've almost grown the company by half.
The strong growth continued in Q3, where we grew by 18.6%. In particular, the performance was led by the aperitifs in their key peak season, where we thankfully also benefited from favorable weather conditions, and we continued to grow quite well in brown spirits despite constraints. Adjusted EBIT of EUR 557.8 million grew also strongly by 21.5% or actually plus 58.6% versus the pre-pandemic benchmark of the nine months 2019. We've had limited margin expansion affecting the widely expected margin dilution in Q3, which is due to the heightened cost inflation and in particular what impacted us are logistics in that quarter.
This has led to a gross margin dilution of 160 basis points in nine months and 430 basis points in Q3. Sustained investments continued behind A&P and SG&A, and we've been able to deliver margin accretion overall, thanks to strong top lines. With regards to FX, a very positive FX effect, EUR 51.7 million positive impact on the adjusted EBIT, clearly mainly driven by the strong U.S. dollar. Net debt to adjusted EBITDA came out at 2.5x . A slight decrease from the end of last year, but obviously reflects a significant amount spent on acquisitions, stock repurchase, dividends and taxes.
Moving on to page number three, what we can see, you know, the big picture, how we're doing across our regional clusters and the brand clusters. Starting with the regional clusters, you see that our three largest regions all grew double-digit. The only one which grew only mid-single-digit is APAC, which was significantly impacted by supply constraints on the one side, as well as the flash closures in China. This is also mirrored in the brand clusters with the global and regional priorities growing strongly double-digit, whereas the local priorities grew only by 7.2%. Clearly, the Wild Turkey ready to drink in Australia were significantly hampered in terms of bulk availability, and that impacted all clusters.
Moving on to page number four, this is organic performance by market. We see the Americas overall growing by 18.7%, the U.S. up 14.6%. Very positive in Q3, up 30.2%, thanks to a continued positive momentum in the on-premise as well as resilient home consumption, which benefited also from pricing effects. We have also seen some recovery in on-sale inventory levels for Espolòn to avoid out of stocks. Actually, we were in a very dire situation at the end of June, where we had less than a week's stock at our distributors, and that put us in a very precarious position. With the additional capacity coming online in our distillery, we were able to bring it back to healthier levels.
Now, the positive performance in nine months was mainly driven by Espolòn, up 33.1%. Wild Turkey bourbon also doing very nicely, up 27%. Aperol accelerating after a very successful summer, up 56.7%. Campari continued to do very nicely, up 33.2%. Grand Marnier shipments were slightly negative in the first nine months, despite a partial recovery in Q3, and the brand continues to be impacted by glass constraint issues. On the other hand, SKYY portfolio declined. If we look at the organic growth of the U.S. versus the first nine months 2019, we have an overall growth of 14.7%, which leads to a three-year CAGR of double-digit 12.1%. Quite a nice result. Canada in the nine months was up 7%.
Again, overall growth quite good with an acceleration in Q3 where we grew by 12.1%. Here, the key drivers are Campari, Grand Marnier, Espolòn, Aperol, and SKYY. The core Forty Creek Canadian whiskey brand shipments reflected some temporary weakness due to phasing linked to the new packaging relaunch. Jamaica continues to do very well, up 26.3%, with strong Q3 results up 32.5% with the key brands Wray & Nephew White Overproof and Campari performing very strongly. The rest of the region was up 35.2%. Again, strong double-digit growth across all key markets, particularly Brazil, Mexico and Argentina, which are really responding very nicely to strong consumer demand. Moving on to Southern Europe, Middle East and Africa, up 23.3%. Italy, the largest market, up 21.5%.
Very positive trends in Q3, where we were up 7.9%, bringing us to a three-year CAGR of 14% versus 2019. Clearly here, the key drivers are the Aperitifs portfolio in its key peak season. The Aperitifs delivered strong results in nine months, Aperol up 25.5%, Campari 34.1%, Campari Soda 9.2%, and the non-alcoholic ready to enjoy Crodino up 20.6%. Clearly, the on-premise is quite strong and healthy, and at the same time, pricing started kicking in. The Marnier portfolio, last but not least, also grew strongly, as well as SKYY, but obviously that is off a small base. Italy, our second-largest market, grew by 39.3% versus the first nine months of 2019.
That generates a three-year CAGR of double-digit 11.7%. France, a market which is becoming more and more important to us, grew by 10.7%. Again, very strong growth, driven by core Aperol as well as the Riccadonna Sparkling Wine. Champagne Lallier as well as Cynar did very nicely. The rest of the region grew very strongly, up 48.9%, with some particularly very positive performances in Spain, which was up 56.8%, and South Africa by 63.4%. Global travel retail doubled up 100.4%, with very nice momentum continuing in Q3, up 85.7%, benefiting obviously from the recovery in tourism. Moving on to North, Central, and Eastern Europe, up overall 18.3%.
The largest market up an even stronger 22.5% with a strong overall performance. In Germany, we're seeing on our portfolio brand continued resilient home consumption combined with a very strong on-premise, which obviously was also boosted by pricing and very favorable weather conditions this year. The performance was largely led by Aperol, which grew more than a third by 35.4%. The Aperol Spritz ready to enjoy actually more than doubled up 106.7%. Crodino up almost by a third, up 31%. Whereas Campari was slightly positive following the significant price repositioning. Q3 was up 5.8%, leading to a three-year CAGR of 12.2%, with clearly Aperol and Aperol Spritz RTD continuing to grow by double digits.
This helped offset softness in Cinzano sparkling wine, which is a big business in that market, where the brand was heavily impacted by glass availability. In Germany, our organic growth versus the first nine months of 2019 was up 45%, leading to a three-year CAGR of 13.2%. The U.K. continued to grow double digit up 13.1%. A very positive performance against quite a tough comp base. In the first nine months of last year, we were up by, you would remember, 42.5%. Clearly, the aperitifs, and particularly Aperol are driving this, helped also by favorable weather conditions. We're doing, continuing to do very nicely with Magnum Tonic.
At the same time, the launch of Crodino has gone off to a very good start, growing triple digits off a small base. The rest of the region is up 16.7%. Again, a very strong double-digit growth for our aperitifs, including Crodino. Last but not least, APAC only grew by 5.6%, as I indicated earlier. Australia, flattish at 1.3%. This key market continued to be impacted by ocean freight constraints, which really temporarily affected the availability of the core Wild Turkey ready-to-drink, leading unfortunately to out of stocks in that market. On the positive side, the growth was mainly driven by Campari, Wild Turkey Bourbon and SKYY.
Our organic growth in this key market is 29.4% versus the pre-pandemic era, leading to a three-year CAGR of 9%. The rest of APAC grew by 13.3%. Very strong performance in South Korea, more than doubling. As you know, we've taken full control of our subsidiary in South Korea at the beginning of this year, and it's going from strength to strength, particularly driven by the high-end of our portfolio, the Wild Turkey offerings, the high-end Glen Grant, X-Rated and SKYY. China, unfortunately, was negative, but that shouldn't be a surprise. Clearly, we continue to be impacted by snap lockdowns in relation to the Zero-COVID policy. Japan was overall negative from a shipment standpoint, but it's actually positive in a local depletions perspective.
We're continuing to see strong momentum elsewhere, including New Zealand, thanks to our enhanced investments across all our key levers. Moving on to brands on page number six. Our global priorities grew organically by 21.2%. Our largest brand, Aperol, grew by 31.4%. We have very, very strong double-digit growth across all of our key markets, and in particular in our core Italy, which grew by 25.5%. Bear in mind that, you know, we bought the brand 19 years ago in Italy, and have grown it every single year double digits. Very nice momentum continuing there. Germany up 35.4%, the U.S. 56.7%, Spain 100.8%, France 29.4%, and the U.K. 21.6%.
The peak season Q3 performance was strong overall, up 23.1%, despite clearly the continued elevated comp base. Bear in mind that we have a three-year CAGR of 21.4%, driven by very strong and numerous activations across all of our markets, leading to strong recruitment in the on-premise. While at the same time, off-premise consumption remains stable. It's also important to underline that these results do not include the Aperol Spritz ready to enjoy, which is also growing at a very sustained double-digit growth rate. Campari up 29.9%. Very positive growth, continued momentum in Q3, where we grew by 26%.
This performance was largely driven again by core Italy at 34.1%, the U.S. 33.2%, Brazil 108.1%, as well as Jamaica 45.7%. Looking at its other strongholds, Nigeria, Argentina, GTR, and Spain also grew double digits. The brand overall, we must say, continues to benefit from the at-home mixology trend. The success of our consumer driven Campari Spritz, as well as the upward price repositioning, which we actioned this year across key European markets. Wild Turkey bourbon portfolio up 22.1%. Nice acceleration in Q3, where we're up 30.2%, with outperformance of the high-end variants.
In the nine months, the Wild Turkey core bourbon grew 28.4%, mainly thanks to the core U.S., up 27%, Korea up 188.4%, and Australia up 9%. The high-end Russell's Reserve brand grew 36.6%. This is clearly thanks to the U.S. and South Korea as the volumes of this brand are quite constrained, and we're dedicating them to the two most important markets. SKYY unfortunately was down 3.7%. Overall, this decline in shipments was driven by the core U.S. and China, but was partly mitigated by the rest of the world, where the brand is very healthy and growing by 51.8%, with the key drivers being Argentina, Italy, Germany, South Africa, and Canada. Grand Marnier up only 1.4%.
Overall positive performance thanks to Canada, France, and GTR, which more than offset the weak shipment performance in the U.S., where despite the positive Q3, we were primarily impacted by glass and logistics constraints, as well as a tough comp base. Remind you that in the first nine months of 2021, Grand Marnier grew by 43% in the U.S. Last but not least, our Jamaican rum portfolio. Appleton Estate, positive overall, up 4.9%, both against a tough comp base, 38.2%, as well as some supply constraints. Wray & Nephew Overproof grew by 22.3%, and again accelerated in Q3, where it grew by 40.1%, thanks to Jamaica and the U.S. Moving on to our regional priorities, which grew by 23.5%.
Espolòn doing very nicely at 32%, despite quite a tough comp base. Last year, the brand grew in the first nine months by 41.1%. We saw an acceleration in Q3 at 53.9%, and this was clearly driven by the core U.S., partially due to thankfully our ability to recover inventory levels to avoid out of stocks. International markets continue to do well, but I think they'll come more online once more capacity hits our network. Moving on to the Italian bitters, the specialties up 22.9%. Strong growth all across. Averna and Braulio grew largely thanks again to the on-premise in Italy, with Averna also registering strong growth in the U.S. and Austria.
Frangelico grew in the U.S., Spain, and Germany, while Chinato grew double digits across many markets, notably Italy, France, Argentina, the U.S., and Brazil. Our sparkling wine portfolio was up 24%. Very positive performance thanks to France, where the key hero brand is Riccadonna, as well as Mexico and Argentina, where in this case it's much more Cinzano driving it all. We've had some positive growth across Italy, Spain, and Germany. However, in Germany the results could have been much better hadn't we had the glass constraint issues. Moving on to Crodino, up 22%, 22.2%. Again, very positive performance. Very strong growth in its core market, Italy, and seeding markets are doing very, very well, particularly Germany, Benelux, Austria, Switzerland, and the U.K.
The brand will continue to expand its international footprint, and we believe will become the go-to non-alcoholic aperitif. The growing brands doing very nicely, up also 38.1%. Strong performance overall, driven by the premiumization and in particular very strong results in South Korea. Moving on to Aperol Spritz, which I, they're ready to enjoy, which I also nominated earlier, up 43%. Again, very strong growth across all our markets and particularly in Germany. Magnum down unfortunately 3.3%. Clearly this brand was impacted by continued procurement constraints with ingredients and glass becoming quite challenging throughout this year. The other brands, very nice positive growth across the portfolio, particularly Bisquit & Dubouché, our cognac, which is in its first year of the relaunch, Montelobos, Ancho Reyes, and Maison La Mauny.
As mentioned earlier, Forty Creek declined due to phasing into the new packaging. To close it all off with the local priorities, organic growth here was only 7.2% with Campari Soda up 8.9%. Clearly we see the two culprits here in terms of size, the Wild Turkey ready-to-drink business obviously impacted -0.4%. The ocean freight constraints were very challenging. The situation is improving, but unfortunately it's not gonna be the most positive year in the brand's history. X-Rated -8.9%, doing very nicely in South Korea, but clearly down in China due to the snap lockdowns. SKYY Blue in core Mexico up 19.1%, and Cabo Wabo continuing to perform double digit up 32.4%, thanks to the core U.S. market. This stage I'll then pass on to Paolo.
Thank you, Bob. If you follow me to page 10 where we have the analysis of the P&L. You know, as we saw before, the top line net sales came in at EUR 2.006 billion , showing a very healthy 27.3% reported change and a year-to-date organic growth of 19%, which is totally confirmed by the trend in the last quarter of this year, Q3 was an 18.6% organic change. EBIT adjusted came in at EUR 492 million, showing again a very healthy 36.8% reported change, and an organic change of EBIT adjusted of 21.5% in value with 50 basis points margin accretion.
You know, very healthy results were achieved on the back of a gross margin increase of 15.8% in value, with a dilution of 160 basis points, largely driven by the expected dilution in the third quarter of this year, which accounted for 430 basis points. Such dilution was due to heightened cost inflation, particularly glass and logistic costs had a negative impact. Secondly, due to the less favorable sales mix due to the outperformance of Espolòn in the South American region. Those two negative factors were only partly mitigated by the initial impact of successful price increases. Worth noting that some of our price increases were implemented the back end of the quarter in August and September.
A&P expenses were up in value by 14.8% organically, reflecting our sustained investments behind key brands. You know, due to the very strong top line growth of 19% on a year-to-date basis, they showed a 60 basis point margin accretion. Same trend for the SG&A expenses, which increased by 10.5% in value and again, lower than top line. Insofar, they generated a 150 basis point margin accretion.
If you look at the reported change in EBIT adjusted, as said, 36.8% in value included a positive perimeter effect of EUR 3.3 million, driving 20 basis points margin accretion, which was due to the combined effect of agency brands termination on one end and first time consolidation Picon on the other end. Secondly, again, a positive Forex effect of 14.4% in value, corresponding to EUR 51.7 million with very healthy 100 basis points EBIT margin accretion, which was driven by the appreciation of key group currencies versus the euro. In particular, worth mentioning the positive transactional effect of the U.S. dollar, you know, for imports to the U.S..
Overall, you know, the EBIT adjusted on a reported basis grew, including all the, you know, perimeter and FX effect by 180 basis points from 32.8% to 24.5%. If we move on to the following chart, below EBIT adjusted, we see operating adjustments of EUR 26.1 million due to the, you know, three factors, provisions, first and foremost linked to the Russia-Ukraine conflict, ongoing restructuring initiatives and long-term retention schemes. Financial expenses came in at almost EUR 11 million, EUR 10.9 million with a reduction of EUR 500,000 of which non-recurring exchange gains accounted for EUR 7.6 million in the first nine months versus EUR 3.9 million of last year.
Coupled with negative financial adjustments of EUR 4.5 million versus positive adjustments of EUR 4.7 million in the first nine months of last year. Now, if we excluded those non-recurring effects, the net financial expenses came in at EUR 14.1 million versus EUR 18.5 million of the first nine months of last year, showing a reduction of EUR 5 million. The average cost of net debt was then 2.1% with a healthy improvement of 30 basis points versus last year on the back of higher interest income generated by existing liquidity. You know, we still have negative carry.
If we carve out the negative effect, the negative carry effect, you know, the average cost of net debt, excluding carry, would be 1.5%. Group profit before taxation came in at EUR 452.7 million, up 32.7% in the first nine months of this year. Group EBIT adjusted, excluding operating adjustments of EUR 26 million and negative financial adjustments of EUR 4.5 million, came in at EUR 483 million, with a value growth of 14.8% versus the first nine months of last year. Moving on to the following page 12, we see a net debt of EUR 961 million as of 30 September 2022, up EUR 130 million versus December last year.
You know, following some significant cash outlays, namely acquisitions for EUR 150 million, purchase of own shares for EUR 107 million, the dividend payment of EUR 67 million, as well as, you know, the expected increase in working capital, as we, you know, progressively rebuild our internal buffer stock to manage, you know, prospectively, you know, the risk of out of stock. In terms of leverage ratio, net debt to EBITDA came in at 1.5x as at the end of September, with a slight improvement versus the December of 0.1 x, on the back of, you know, the significance of the huge increase in EBITDA versus last twelve months.
I think, you know, I'm done with the numbers. I would hand back to you, Bob, for some interesting updates.
Yeah. Thank you, Paolo. I'll kick off with the business development updates. As you know, in August 2022, we acquired an initial 15% interest in Howler Head, which is a banana-flavored bourbon whiskey from Catalyst Spirits. Clearly, we have a medium-term route to total ownership of this key brand. But from the very get-go, we obtain exclusive global distribution rights. Howler Head is a very interesting proposition. It is the official flavored whiskey partner of the UFC, and it is one of the fastest-growing whiskey brands in the U.S., via leveraging the UFC's unique and really massive consumer audience. The brand currently is also available in Canada and recently expanded into the U.K. We're very much at the beginning of its trajectory.
Bourbon whiskey is clearly one of our global priority brand pillars, and this is some area where we continue to focus in the future. The brand itself is an ideal fit to our bourbon portfolio. As you know, we've always said we're not gonna do any flavor expansions on the Wild Turkey core brand. Clearly this is our way to address the opportunity, which is huge in the U.S. for flavored whiskey via dedicated brand with a very unique flavor profile. We will leverage our established route to market and expect to take this brand to the next level.
At the same time, though, we also recently acquired a minority stake in London-based Catalyst Spirits, which is a global spirits brand incubator company, and currently is the main shareholder of Howler Head. This is a very interesting, I think, development for us. Catalyst is headed by industry veteran Simon Hunt, and its mission is to build digitally native brands, matching each brand in the pipeline with the right entertainment and marketing platforms to build and rapidly grow premium brands. This is gonna be very exciting going forward. Moving on to Campari, a lot of key initiatives following the Cannes Film Festival. We were the main sponsor of the Venice International Film Festival. Again, that has been very, very positive for the brand.
At the same time, in September, we kicked off the 10th anniversary of the Negroni Week, which has now reached 79 countries and 10,000 bars. As you know, the Negroni is the world's number one premium cocktail, and some very interesting things are happening to it. I don't know if you followed it, but there's currently a Negroni Sbagliato craze, which was kicked off by the actress Emma D'Arcy of the House of the Dragon stardom, who in a TikTok interview clearly underlined the fact that the Negroni Sbagliato is her favorite cocktail. This has really generated huge in the social world, a lot of coverage, and I wouldn't be surprised if the Negroni Sbagliato becomes the fourth dedicated Campari cocktail in the top 16 in the world.
Moving on to Crodino, as you've seen from the numbers, the international expansion is actually proceeding very nicely with very strong consumer reaction to the brand in the U.K., in Australia, as well as Spain and France and the Germanic part of Europe. Espolòn, we just launched in the U.S. the Espolòn Cristalino. This is a very premium new variant. It costs us as much as the base Espolòn Blanco. Again, we will see the very strong consumer reaction to that, and we look forward to driving this and having very nice mix effect on the brand. The bitters also had very strong activations. This brings us to the conclusion and the outlook.
Clearly, the strong top-line performance continued in our key summer season, thanks to very robust brand momentum, continued on-premise strength and favorable weather, which helped as well. We also started seeing the initial impact of our successful price increases. Now, looking at the remainder of the year, we remain quite confident about the positive business momentum with the outperformance of our key brands versus our reference markets, where, thanks to strong brand equity, we will continue to take market share.
Shipments are expected to normalize, and that's normal in the last quarter because it will reflect the seasonal sales mix with clearly it's not the peak season for aperitifs, and at the same time it is peak season for some developing markets in South America and other parts of Europe particularly Russia, although, as you know, we're only selling the minimum necessary to cover costs there. We will continue, unfortunately, for a while still to have supply chain challenges in selected areas particularly in Asia. Concomitantly, the environment is what it is.
Volatility and uncertainty will remain due to both, on the one hand, the ongoing pandemic, as well as the heightened geopolitical tensions, which have also, due to the squeeze on energy prices, generated elevated inflation and pressure, which we will mitigate via pricing, adequate pricing. Notwithstanding the margin dilution in Q3 due to the expected heightened COGS inflation and less favorable sales mix, we still confirm and are quite confident on our full year guidance of flat organic margin in adjusted EBIT. We expect to continue to see a positive contribution in Forex to be driven mainly by the U.S. dollar. Now looking at the medium term, we remain confident in the strength of our brands.
We are confident in passing adequate pricing actions as well as, you know, doing whatever it takes to navigate throughout these current challenges. This is it from our side, and happy to take your questions.
Excuse me. This is the Chorus Call conference operator. We will now begin the question and answer session. Anyone wishing to ask a question may press star and one on their telephone. To remove yourself from the question queue, please press star and two. We kindly ask you to use handset when asking questions. Anyone with a question may press star and one at this time. We will pause for the moment as callers join the queue. The first question is from Andrea Pistacchi of Bank of America. Please go ahead.
Yes. Hi, Bob. Hi, Paolo. Two questions, please. The first one for Paolo. I'd like to dig a bit deeper, please, on the gross margin. So if you could talk about, ideally maybe quantify some of the moving parts that led to the 430 basis point decline in Q3 and what of these moving parts gets better, what doesn't, how you expect gross margins to develop maybe in Q4, and if you could say something about next year. The second question for Bob, please, on Italy. I mean, Italy is up almost 50% from 2019.
What gives you confidence that the business will be resilient in the next 12 months? Also, how would you assess the risk of potential destocking in Italy? I mean, I don't think it's an issue for you now at least. A brewer last week, as you'll know, called out some destocking affecting them at the end of Q3.
Thank you, Andrea, for the good question. You know, with regards to the margin trend, clearly, you know, what we're seeing, you know, at the moment in an environment that is, you know, clearly extremely, you know, volatile is that, you know, at least on two cost components that are glass and logistics cost, you know, there is significant pressure. And this is causing, you know, a marginal increase in costs increase when measured at constant volumes and mix. Now, clearly, you know, there are some offsets. You know, clearly the price is what we're trying to manage to its full potential.
You know, I said before, you know, we've taken further measures of price increase at the back end of the quarter, say August and September in selected markets. Some of the offset will materialize in the coming months. Secondly, the mix, you know, clearly it is a plus and a minus at the same time. It's clearly, you know, it's been a plus in the third quarter, because clearly we have a positive mix that, you know, on top of price increase help us offset the COGS increase.
Paradoxically in the peak season of aperitifs, you know, vis-à-vis COGS, you know, we have a higher impact of COGS increases due to the fact that, you know, differently from aged spirits in aperitifs, where you have, you know, the higher weight of glass on the overall cost of goods sold, it's where you see, you know, the highest drift in inflation. I think, you know, in the third quarter we will rely less on positive mix, but on the other hand, the, you know, the COGS increase per unit value per SKU will be, you know, smaller.
Of course there is another element that is extremely important, you know, that drove 100 basis points EBIT margin expansion is the transactional effect driven by the appreciation of the dollar versus the euro currency. This is tied to the export of Campari, Aperol and Grand Marnier into the U.S. market. You know, this is destined to remain in the fourth quarter of the year and also in 2023. Of course, you know, last but not least, you know, the very strong top line growth is generating some interesting operational leverage, you know, primarily at the level of SG&A, we have to say because, you know, you know, we're backing up A&P spend, you know, marginally we will have some positive effect in A&P on sale, but that would be marginal.
But, you know, most of the operational leverage is coming from SG&A that are not growing as fast as, you know, the top line, luckily enough. With regards to 2023, you know, our objective is, you know, 21st of February comes as we disclose the full year results, we would like to review, you know, the guidance for margins on the back of, you know, having finalized all, you know, the 2023 agreements with our suppliers and having, you know, had the opportunity of seeing a little bit better how, you know, the cost trends goes in the back end of this year. That's our current game plan.
Andrea, with regards to your question, there's quite a gap between the doom and gloom, which is being depicted in the media and actually what is happening in the marketplace. I mean, we're continuing to see very strong consumption and demand for our brands in the on-premise. I mean, if you go around any Italian city, you'll see everybody's out every single evening. The terraces are full, and again, you see, you know, waves of orange and of red. There is a very big difference. Now, going forward, you could tell me, yeah, consumer sentiment is bound to worsen.
Overall, I would agree with that, but bear in mind that the long aperitif, which is an Italian tradition, is a great, let's say, compensation in moments of crisis, as people, you know, transition from going out to restaurants to actually spending their evenings in, you know, more lounge style aperitif places, where for the price of an aperitif, an Aperol Spritz or a Campari Spritz or a Negroni, anywhere between EUR 5-EUR 10, you have free of charge access to a food buffet. We've seen this many a times. We've seen this in the global financial crisis. We've seen it during the European crisis, a few years later. We feel pretty good about, you know, maintaining strong consumer demand in Italy.
Bear in mind that currently, although the Italian numbers are strong, actually we weren't able to supply Italy with all the Aperol and Campari which they requested. I mean, the brands are on fire globally and we are having capacity constraints on them as we speak. Now, with regards to the second part of the question, de stocking risk, frankly, there isn't much stock at wholesale level on our brands to destock. Currently, you know, consumer demand is feeding directly into shipments pulled from wholesalers.
Thanks. Just one quick clarification on Paolo's answer, please, on the gross margin. Looking into Q4 from what I understand and what you said is that there are obviously some moving parts. Pricing will benefit gross margin into Q4. Mix, there are some puts and takes, but it sounds as if maybe it improves a bit, but not significantly the gross margin into Q4. Is that a fair understanding?
Yeah. You know, you know, we expect in the fourth quarter to have, you know, as you know, you know, the top line, you know, the FXing normalizes, you know, we will rely less on operational leverage vis-a-vis year -to -date. While on the other hand, the negative effect of gross profit as a percentage of sales organically will get reduced. That's what we're trying to achieve for this year. That's, you know, the underlying idea. You know, the goal, our goal is to have a full year, if you don't say the flat. Yeah.
Thank you.
That's the goal.
Yeah. Thank you very much.
The next question is from Simon Hales of Citi. Please go ahead.
Thanks. Hi, Bob. Hi, Paolo. Two questions from me. I mean, Bob, just sort of following up on your answer around sort of the resilience that you're seeing in Italy there. I just sort of wondered more generally , if you are seeing any real signs across your geographies of changing consumer offtake trends towards the end of the quarter and into perhaps early Q4. You know, clearly we're hearing mixed picture out of some of your other alcoholic beverage peers at the moment. Is there any channel shift going on that you're seeing any downtrade more generally within the spirits industry that you would perhaps call out? So that's the first question.
And then secondly, in your outlook, sort of, Bob, you know, and you flagged in the presentation shipments normalizing in Q4. I just wonder , if you could just clarify those comments. I mean, you flagged the fact that obviously, it's not an aperitif quarter and it's, you know, sort of, you know, the portfolio mix is perhaps different, but you're not calling out any particular phasing sort of change, i.e. stock build in Q3 and now some destocking within the trade in Q4, are you?
Thank you, Simon. Well, I mean, first of all, with regards to stocks, not only in Italy, but in all of our key markets, our stocks are currently very low. I was referencing the Espolòn brand. Espolòn at the end of June had less than a week's stock in the wholesale, in our distributors' warehouses. We've had significant out of stocks across our portfolio most of this year. As I said, demand is stronger than our ability to supply at this stage. Coming back to your question, it's not a question of phasing changes. With regards to any change in sentiment, well, frankly, on our portfolio, we're not seeing any change in sentiment anywhere else.
I mean, yes, the off-premise has had a slowdown in its growth, so it's usually flattish or slightly down in most markets, but this is from a very, very high level. On the other hand, frankly, we're seeing revenge consumption in the on-premise. I mean, the on-premise is very vibrant across all of our markets.
Got it. That's very helpful. Just sort of following up with regards to the price increases that were going in sort of late in Q3, were some of those second-round price increases on Aperol and Campari in Europe?
Yes.
Have you quantified the magnitude, you know, of those price increases this time at all?
No, we're not quantifying them for, you know, competitive reasons.
Understood. Thank you.
The next question is from Laurence Whyatt of Barclays. Please go ahead.
Afternoon. Thanks very much for the questions. A couple from me, if that's okay. Firstly, on your advertising, I understand you have a target of getting to around 18% of sales. That would require quite a considerable step up in the fourth quarter. Just given the fourth quarter is not too much of a aperitif quarter, is that still the intention? Secondly, I understand your travel retail mix is gonna be a little bit less Asia exposed than some of your peers. Is it right to assume that your travel retail is now back to the pre-pandemic levels, or would you still expect to step up in travel retail if we get a Chinese consumer returning to the airports? Thank you.
Hi, Laurence. Thank you. Now, with regards to GTR, I mean, unless there's any major wave of COVID-related lockdowns, we would expect it over time to continue growing and, you know, within probably next year getting back to the pre-pandemic levels. We're not fully there yet. With regards to A&P and advertising, yes, we're looking at, you know, coming back at our usual levels on a full year basis. Fourth Q is not strong for aperitifs in Europe, but obviously we have opportunities in South America, in Asia Pac, so we will continue investing behind them in those regions. On the other hand, it is a peak season for brown spirits in Europe and North America.
Great. Just to clarify then, you would expect to hit that 18% this year?
Yeah. I mean, give or take, 25–30 basis points.
Thank you very much.
Thank you.
The next question is from Edward Mundy of Jefferies. Please go ahead.
Afternoon, Bob. Afternoon, Paolo. Three from me, please. The first is, I appreciate that the on-trade is still very, very strong, but if it does weaken, do you think that habits formed from consuming at home during the pandemic will allow you to sustain growth in a softer environment through not losing consumers from adverse channel mix? The second is on M&A. I appreciate that there's not so much you can comment on M&A, but you've done a number of, you know, small bolt-ons, Howler, Picon, and then this, you know, Catalyst move.
You know, some of your peers have done some recent bolt-ons as well. Do you think this is the more likely route for M&A rather than major transformational deals, you know, for Campari? Just a third one on the Campari brand itself. I was wondering whether you had a split as to how it's served between, you know, its various variants, Negronis, Boulevardiers, Campari Soda, and essentially I'm trying to sort of understand how big is the Negroni Sbagliato.
The last one is a tough one because I don't have any up-to-date numbers here. We usually do them on a full year basis. All I can say is that in many markets we've seen Campari really accelerate in the past two weeks with strong demand from the on-premise. We suspect that it is the Negroni Sbagliato pushing that. You know, if you look at a market like Italy, one important factor is the Campari Spritz, which is currently one out of five Camparis growing very strongly. We're seeing also that basically expanding across all key Campari markets. We historically haven't pushed the Campari Spritz because we wanted to focus on the Aperol Spritz, but the consumer demand is coming from the ground up, and at this stage we're also highlighting it.
We would expect, you know, the Negroni and its variants because the Americano, the Sbagliato, the Boulevardier, and the Negroni, they're all related to be a substantial part of the business. Then, you know, and this is in the serious high mixology. On the other side, we have, you know, the larger volume opportunities with the Campari Spritz, Campari Seltz, Campari Soda.
Is the Sbagliato a bit more gender neutral in terms of, you know, who's consuming it?
Yeah, I would say, you know, if the Negroni, the traditional Negroni skews a little bit more male, the Sbagliato skews a little bit more female.
Thank you.
With regards to your question, what if the on-premise tanks? Well, you know, we still don't see that happening. If it does happen, and I think we've proven amply to the market how agile we are and the way we pivoted during the first lockdown, clearly we'll be able to pivot that same way from an organizational standpoint. Having said that, at this point, though, we will start from an advantage because people have already built their bars, they already have the know-how, so we'll have to do less, I think, educational efforts, but much more focus on, you know, rotation, driving initiatives.
On M&A, Bob?
I was trying to skip that one, actually. You caught me on it. Look, I mean, with regards to M&A, never say never. I think, clearly big transformational deals aren't things which happen overnight, yeah? I mean, they take their time. We've done some, you know, bolt-on deals, nice ones, which will have, I think quite an impact in the mid to long term. Having said that, you know, our teams are quite active, so you never know.
Great. Thank you.
The next question is from Chris Pitcher of Redburn. Please go ahead.
Thank you very much. A couple of questions from me. Bob, you mentioned you were selling the minimum amount in Russia. Can you give us a sense of how much Russia is down? Because obviously Q4 last year was a big quarter for Russia. I just want to understand how much of a drag that could be on the final quarter of the year. And then, Paolo, with regard to CapEx, forgive me if I'm off base on this, but with the strong growth and talking about supply constraints, does the current CapEx guidance still stand, or are you having to up that further given the momentum? Thanks.
I'll take the first one, Laurence. I mean, Chris, sorry. Yes, I mean, in Russia we're going at a very low flame, and that's the reason why we said, you know, there's gonna be also a normalization on our overall shipments in Q4.
Yeah. With regards to CapEx, you know, for this year we've given a guidance of EUR 170 million of which about EUR 100 million, you know, maintenance and EUR 70 million, you know, one-off. On the other hand, given the unexpected pressure from demand on our operative portfolio, we've decided to double, you know, the Novi Ligure plant. You know, there is an additional, you know, EUR 50 million in investment. You know, clearly that would not fix, you know, the short-term pressure on supply. You know, we also are finalizing outsourcing some manufacturing agreements to hedge the risk for 2023 in terms of supply constraints for our operative portfolio.
I think, you know, with regards to 2023, you know, at the moment we believe that we will not be constrained, thanks to the contract manufacturing agreement that we are to finalize in a very short period of time. On the other hand, you know, we need to think of the future, and so we've decided to double Novi Ligure plant because, you know, the plants are growing quite quickly and, you know, every cycle we keep on reviewing our demand. It comes to a point, where you've completely saturated your available production capacities is, you know, where we are now.
I can't say you said that was an extra EUR 50 million. Is that phased over this year into next?
50, yeah.
50. All this year or into next year as well?
Well, it depends also, you know, supply of equipment is constrained. You know, we're living in a very volatile environment. You know, we don't know whether we will be able to invest all that amount of money this year. You know? Most likely it will take more than a year.
Thank you very much.
The next question is from Trevor Stirling of Bernstein. Please go ahead.
Hi, Bob and Paolo. Three questions from my side, please. The first one, Bob, you talked about the normalization of growth, and your first nine months was a 13.7% CAGR versus 2019. Are you expecting that to slow down? I'd appreciate you don't want to put a number, a precise number on it, but is it gonna be something in the order of 10%? Could it go below that? Or you're any sort of directional steer you can give would be great. Second one, Paolo, you talked about the cost inflation being very high. Presumably, you know, assuming energy prices stay high, the glass prices will stay high, but the freight rates should start to drop out.
You know, any comment on how you think that might happen and the phasing of that would be great. Finally, Paolo probably as well. FX, I think, was 180 basis points benefit to margin in Q3. You said that probably continues into Q4 and to H1 2022, 2023 rather. Is that right to think about the same order of magnitude of benefit on margin?
I take the second and the third. You know, with regards to the cost inflation, yes, you know, the two biggest components are glass and logistic costs. You know, with regards to logistic costs, you know, directionally, we believe, you know, they are destined to come down. With regards to cost of glass, that is, you know, driven by the cost of energy. You know, we think again, you know, prospectively, you know, costs will come down. I don't believe, you know, in the very short term. I think, you know, when it comes to both glass costs as well as freight costs, you know, demand has a huge impact.
You know, if you think about glass suppliers, you know, furnaces, they have you know, very high fixed cost. You know, at the moment, you know, the glass suppliers, they are enjoying quite healthy, you know, EBIT margins, you know, at an all-time high. This is not just driven by you know, a cost of energy because this is a wash. You know? They have higher costs, and they push through higher costs. It's also due to the fact that they are taking price you know, disproportionately due to imbalance between demand and supply. You know, we believe the installed capacity is well below the current demand.
The day the demand comes down, you know, hopefully not on our portfolio, I think, you know, we will see, you know, a significant decrease in cost of glass. You know, for the time being, you know, if anything, we've seen an acceleration. I'm with you. You know, I think, you know, Q4 and first half of next year, potentially the trend is destined to stay. Thereafter, you know, we believe we will have, you know, easier comps and, you know, easier trends.
Super. Thank you, Paolo. The FX benefits, the margin benefits from FX?
Yeah. The FX is destined to stay strong. It is way stronger in 2022 versus 2023. In Q4, it's still a positive. You know, I think nobody has a crystal ball where the FX goes. You know, I think low- to mid-single-digit positive value effect for next year is at the moment in the cards.
Super. Thank you.
Yeah. Trevor, now one other point with regards to freight. You need to bear in mind this year that, you know, due to the constraints in transoceanic shipments, we actually had to fly quite a bit of product on planes. That clearly had an additional impact. I mean, we preferred serving the market than taking the hit to going out of stocks much longer than needed. With regard to the normalization of growth, I mean, as I said earlier to Chris, clearly, Russia is going to impact, you know, Q4, and the month of December has historically been huge in Russia. That impacted the overall group. This year it's not going to.
If you look at the mix issues, again, that will happen. Also bear in mind that we do have, you know, very strong demand, but we are actually constrained. That is gonna impact and result in normalization of shipments over the quarter.
Super. Thank you both.
The next question is from Paola Carboni of Equita. Please go ahead.
Have we lost the line or?
No. Hi. Good morning, everybody.
Hello?
Hello?
Yes, we can hear you.
Yes. Hi. Good afternoon. Hi, Bob and Paolo.
Are there any further questions?
Yes, yes. Paola Carboni is on the line. Can you hear us?
Can you hear me? Hello?
Ladies and gentlemen, please hold the line. The conference will resume shortly.
Ladies and gentlemen, please hold the line. The conference will resume shortly. Thank you. Ladies and gentlemen, please hold the line. The conference will resume shortly. Thank you. Ladies and gentlemen, please hold the line. We're trying to reconnect the speaker line. Thank you. Ladies and gentlemen, please hold the line. The conference will resume shortly. Thank you for your patience. Ladies and gentlemen, please hold the line. The conference will resume shortly. Thank you. Okay, your line is open. Miss Carboni, you can go ahead.
Yes. Hi. Good afternoon. Hi, Bob and Paolo. I have three questions.
Hi. Apologies first of all to all. We've had a technical issue here. We don't know if it's on our side or on the operator's side, but Murphy definitely came and made his presence felt. Now we're back in another room and happy to take any additional questions.
Well, with my first one, which is about the SG&A line in the third quarter. I've seen an acceleration compared to the previous quarter, both year-on-year and also on a three-year stack, which is a bit above my estimate, compared to the acceleration we saw in terms of revenues, especially when considering that most of this line is fixed for you. Can you elaborate on this, if there is anything that we should be aware of for the third quarter and what we can expect for the current quarter? Then a second question is on the COGS inflation.
Your latest indication was of about EUR 70 million, if I remember correct, as an impact of COGS inflation based on full year 2021 cost base. At the same volume clearly. I was wondering if you can update us with the same kind of indication as of now? The last question is that is still about COGS inflation, but looking more to the fourth quarter, let's say I was wondering to what extent the profitability, the gross margin we are going to see in the fourth quarter, and in particular, the gross margin risk that we are going to see in the fourth quarter is indicative for at least the first part of 2023.
In particular, just on COGS inflation, if I look to glass in particular, I was wondering whether your negotiation, let's say, would already have any impact in the fourth quarter? What's the timing of any revision you might have from your suppliers? Thank you very much.
With regards to the SG&A trend on a quarter by quarter basis, you know, you shouldn't read too much into the, you know, third quarter trend. You know, we, you know, let's say, you know, we confirm our objective of extracting operational leverage of on the SG&A on a full year basis. Yeah, that's, so, you know, SG&A will grow for this year, the lower base vis-a-vis, you know, top line. With regards to the COGS trend, you know, the, you know, if the question is, you know, the negative gross profit is the percentage of sales number that you've seen so far is indicative of, you know, by end of year or the beginning of next year. No.
You know, I think it's a moving target, you know, for this year. I think, you know, we will stay negative in the fourth quarter, but as we're catching up with price increases. You know, on the other hand, like I said before, we can leverage on transactional effect and operational leverage to offset that negative trend, you know, at EBIT level.
Sorry, an update on the COGS inflation. The magnitude you had indicated of EUR 70 million. What would be at present for the year?
It is marginally higher. Yes. It is marginally higher. You know, conversely, we're taking more price than initially foreseen.
Okay. Thank you very much.
Thanks, Paola.
The next question is from Pinar Ergun of Morgan Stanley. Please go ahead.
Thank you very much for taking my question. Mine is on your pricing strategy. You have some excellent brands. You're telling us that demand is so strong for your brands that you're struggling to supply them. That's all fantastic. On the other hand, you're also telling us that costs are going up and are likely to stay challenging as we head into next year, especially on the glass side. Here's my question. Why not take pricing more aggressively given how popular your brands are and how challenging the cost environment is? Because quite frankly, the gross margin evolution was maybe a little bit less ideal than what we would have expected so far. Would love to get your thoughts on that. Thank you.
Well, hi, Pinar. Thanks for answering your own question.
All right. You're gonna raise pricing more aggressively is how I should read it.
Well, you know, it will vary across the portfolio, but clearly there is opportunity. You know, we said in our presentation that we will take adequate price increases.
What's held you back year -to -date, if I may ask, please? Is it just a timing impact?
Well, we've taken our usual price increases in the first half of the year, and in certain markets we've taken a second round of price increases in August.
Okay. Well, thank you so much.
Thank you.
As a reminder, if you wish to register for a question, please press star and one on your telephone. For any further questions, please press star and one on your telephone. Gentlemen, there are no more questions registered at this time. Excuse me, there is one more question. It's a follow-up from Paola Carboni of Equita. Please go ahead.
Yes, sorry, Bob and Paolo. Just
Is it changing our recipe or?
No, no, just let's say to add a definite message on profitability. If I understand correct, you said that the impact on COGS is marginally higher than what envisaged a few months ago. At the same time, you are raising pricing more aggressively. In the end, I appreciate you have confirmed your flat margin guidance for the year. Can we say at least we are a bit more confident now also given that we are already at the end of October, let's say. Thanks.
You know, I'm not sure I totally got your question. The question is, you know, are you quite totally confident that we are achieving the EBIT margin flat this year?
Yes, exactly. Even largely confident, let's say.
You know, it's a crystal ball question, you know. We are, you know, highly confident to achieve that. You know, clearly, there are so many moving parts, you know. You also have to consider that we have, you know, supply constraints. We have, you know, logistics constraints. You know, it's not a scenario where you can, you know, give the market, you know, five basis points left or right indication. I think, you know, we are very confident to achieve that. You know, the business is quite strong. We're shipping all the product that we have. Agreed amount is higher. We don't see any reason why, you know, the price increase that we've taken, you know, sticks.
which proves the fact that, particularly on high-margin brands, we're not exposed to high price sensitivity. You know, clearly, you know, when you have a huge rise of inflation, and we've seen that in hyperinflation economies, of course you offsetting value increase in costs. You know, we're—from a value perspective, we're not losing anything. From an optical perspective, you see dilution. Because when you have brands that have a gross margin that exceeds 70%, you know, EUR 1 cost inflation drives disproportionately increase in price if you want to keep margins flat as a percentage of sales. That's the point that we're talking.
You know, even if you park aside the, you know, the positive systemic effect, we're not losing a penny vis-a-vis, you know, absorbing in value the cost increase. You see what I mean? We are confident. It takes time, you know, as we take price, you know, over the months and the quarters. We will also, you know, absorb, you know, the negative margin effect driven by the high marginality of our brands.
Okay. Thank you. Thank you very much.
Thank you.
At the moment, we have no other questions registered.
All right. Thank you very much. Just one last tip for the Negroni Sbagliato. Substitute the gin with prosecco and build it the same way. Thanks for your questions and joining us. I guess, you know, we'll be active in the month of November, so we'll probably catch up for quite a few every day. Thank you. Have a good day, and bye-bye.
Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones. Thank you.