Good day, welcome to the Pernod Ricard 2018-19 first quarter sales conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Julia Massies. Please go ahead.
Good morning, ladies and gentlemen, welcome to our first quarter sales call. We will follow the usual format, run through a quick presentation, leave the floor to your questions. This morning we are hosted by Hélène de Tissot, our Executive Vice President in charge of finance, IT, and operations. Hélène, over to you.
Good morning, everyone. Let's start with the executive summary of our presentation. We are posting a very strong start in these Q1 figures, as expected. You remember that we mentioned that we're going to have a strong start last August at the time of the communication on the full-year performance. Very strong start, +10.4% organic sales, +7.2% reported sales, which is clearly favored by a technical impact. The growth is going to moderate in the full year. Let's start with the Americas. Modest growth, +2%, this is mainly due to a slower Q1 in the U.S. due to the phasing of our shipments. The underlying trend remaining broadly in line with the market, strong performance of Pernod Ricard Travel Retail Americas. Very dynamic Asia rest of the world, +23%.
This is boosted by technical impacts on our two key markets, China and India as well, between Pernod Ricard Travel Retail Asia. I come back to that. Starting with China, strong growth across all categories, with advance shipment boosting that performance, advance shipments ahead of the festive season there. Moving to India. A very good Q1 with strong market condition as well, the benefit of our value strategy. This is clearly reinforced by the favorable basis of comparison, meaning a low Q1 last year. As I mentioned, strong performance in Pernod Ricard Travel Retail Asia, as well Africa, Middle East, and ongoing difficulties in Korea. Europe, +1%, mixed performance there with strong sales in Eastern Europe and France and Spain in decline in challenging markets.
If we move to the next slide on the key figures, you will see the figures for this net sales Q1, EUR 2 billion, 387 million, +10.4% organic, which is made of a +2% growth for mature markets and +23% growth for emerging markets. You can see as well on that slide, a non-significant impact from the group structure, meaning perimeter effect and a negative effect impact of EUR 62 million, which is mainly due to the Indian rupee and the Turkish lira, and you have some details in the appendix of our presentation. Moving to the vision of this growth by region. A very strong start driven by the very strong dynamism of Asia rest of the world. I will start with America. The +2% in Q1 to be compared to a +6% last year. Modest growth.
This is driven by the slower Q1 in the U.S., linked to phasing. I come back to that in a minute. Strong growth in travel retail and LATAM with Brazil in strong growth and some decline in Mexico, mainly due to phasing. Asia rest of the world, +23% to be compared with a +7% last year. This is very dynamic, enhanced by technical impacts, mainly in China, with a strong growth, which is boosted by advance shipment and India, strong growth as well, very strong growth there, boosted by the favorable basis of comparison. Europe, mixed performance, +1. I mentioned already those strong sales in Eastern Europe, challenging market in France and Spain. We have as well some high comparison basis, which is leading to decline in U.K. and Germany due to that technical fact.
Globally, worldwide, +10% compared to +6% last year with the positive technical impacts I already mentioned and the growth to moderate in the full year fiscal year 2019. If we move at the sales growth by key categories. This acceleration is driven by our strategic international brands growing at +12% and by our strategic local brands growing at +15%. Let's start with the strategic international brands. +12% compared to +8% in the Q1 last year. This is a broad-based growth acceleration with improved growth from Martell and Scotch, and continued strong performance from Jameson. But Absolut in decline, mainly due to the phasing in the U.S. Moving to the strategic local brands. +15% compared to +2.
You can see here clearly the impact of the low comparable bases last year in India and the strong growth this year. That's largely driven by our Seagram Indian whiskies performance. We have as well, a good performance from Ararat, Passport, and our Tequila brands, Olmeca, Altos. Strategic wines, the figures for this quarter is -7 compared to +8. There was a very high basis of comparison last year, mainly on Campo Viejo. We have as well, the implementation of our clear value strategy on Jacob's Creek, notably in the U.K., with a choice to have lower volumes at a better pricing. Others, +1 compared to +2, and this is mainly the very strong performance of Lillet and Monkey 47 contributing to the growth in that category.
total number +10 with the growth to moderate in the full year, this is in particular due to Martell, which will come back in line with our midterm target of high single-digit volume growth. Innovation is contributing as well to this performance, delivering a +2% incremental top-line growth in this quarter. I'd like to highlight as well the positive figure of price mix of +2.9%. Moving now to Americas. The U.S., +2%. Our view is that the market growth is stabilizing around 4%. Looking at the Nielsen, which is a good translation of the consistent implementation of our strategy, we are benefiting from a continued double-digit growth on Jameson, and Casamigos is posting a very strong growth and improving our mix. Absolut is in decline with some softer performance in the recent months.
You know that this is a category that remains difficult. We have very dynamic growth relays contributing to the performance this quarter, in particular, Martell and Altos. You see here the Nielsen figures, a very strong one, +62% for Martell, +24% for Altos. Our sales in the U.S. are negatively impacted by phasing. That is the main explanation of this +2%, although the underlying trends are broadly in line with the market. Canada, +3, return to growth, this is due to the performance of our strategic international brands. Travel Retail Americas with a strong performance here as well, driven by strategic international brands and, in particular, Martell and the Scotch. Latin America.
Brazil, very strong start with some technical impact here because we had a soft landing in actual 2018 due to the truck strike in Brazil, this is explaining the very strong start there. In Mexico, a decline which is linked to the high basis of comparison. The underlying trends are good, especially on whiskey and Absolut. Moving now to Asia, rest of the world. +23%, very dynamic. As I mentioned already, this is favored by technical impacts, especially on China, India, and Travel Retail Asia. Starting with China, +27%, dynamic demand across all key categories. Selling are ahead of depletion, that's what we mean by technical impact here. This is due to wholesalers that are securing the inventories in advance of festive season, and this is especially true for Martell. H1 will benefit from an earlier Chinese New Year.
You have here the information on this 11 days impact in H2, which will benefit in our H1 figures. Sales to normalize for the full year 2019 in China and especially for Martell, of course. Martell in strong growth across all the price segments. All qualities are growing. Chivas is as well in double-digit growth, which is the continuity of the relaunch we did last year. Quite positive news here, very good performance of our growth relays, what we call the premium brands, in particular, Absolute,[uncertain] and Jacob's Creek and Möet. Moving to India, +34%. Very dynamic here. As a reminder, we were posting a +2% last year in Q1, we have definitely a low comparable basis, which is due last year to the implementation of the GST and as well some remaining impact of the highway ban.
This is a very dynamic growth across our portfolio. Travel Retail Asia, very strong growth here as well and with a similar impact of customers building inventories as well in advance of festive season. As well, good dynamic coming from Chinese and Korean travelers. Same impact expected on H1 because of the earlier Chinese New Year. Korea is still in decline in a difficult context despite the positive impact of the innovation we launched a few months ago on our Imperial brand. Africa and Middle East, double-digit growth, this is particularly due to Turkey and Nigeria. Europe now, a mixed performance, +1% with France at -4%, conditions are still difficult here with the market which is in decline. The whiskey and anise category are under pressure, we have a strong exposition on those categories, as you know.
Spain, the market is now flattish and still highly competitive. Our selling here are impacted by destocking. Germany, here, definitely some phasing of the shipment translating into a decline because we are fighting a very strong Q1 last year. We continue to benefit from the very strong development of Lillet in the aperitif segment. U.K., a slight decline, again linked to phasing, mainly in the wine category, where we had a strong comparable promotional phasing last year. We are as well, as I mentioned before, implementing a value strategy mainly behind Jacob's Creek in the U.K. Our strategic international brands are strongly growing double digits in the U.K. with a very good performance for Beefeater, Absolut and Jameson. Travel retail Europe, a modest decline with a soft start on Absolut and whiskeys. Last but not least, Russia.
Strong sales across the portfolio as well boosted by some phasing here, early shipments to secure the festive season to come in Russia. Going to the outlook now. We will continue to execute on our strategy in a consistent way with clear resource allocation and the right support behind our must-fit brands and markets. For the full year and in the uncertain environment, both from a geopolitical and monetary point of view, we expect our broad-based sales growth to continue with moderation versus the Q1 in Asia, improved pricing versus last year, pressure on input costs, and FX impact that we had reviewed that should be slightly negative, using the 1.16 EUR/USD rate. In that context, we are confirming our guidance for the full year, meaning an organic growth in Profit from Recurring Operations between +5% and +7%.
Thank you very much, Hélène. We will now turn to your questions, please.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow the signal to reach our equipment. Again, please press star one. We'll just pause for a moment to allow everyone to signal for questions. We have a few online now. Fernando, your line is open. You can go ahead.
Thank you. I have two questions, please. First one on India. How do you see the evolution of sales growth for the year? Also, what's the underlying growth rate in the country when you adjust for the easier comps versus Q1 last year? Second, in Europe, if you can talk how much of the weakness was driven by wine specifically, and if you see any signs that performance for the region as a whole could improve throughout the year, or it's too early to say, maybe we're going to look at Spain and France. How do you see the remainder of the year evolving? Thank you.
Okay, thank you. Let's start with India. As I mentioned, it's true that this +34% is boosted by the easy comp of +2% last year. Having said that, we have very positive demand in that market. Positive impact as well on route to market change in some states. Positive impact as well on last year price increases. You remember we did some price increase last year as well to offset the GST impact. We believe our current rate is double digits. Our medium-term objective for India is low double digits. We are still confident with that medium-term objective. We know that this is a country where we can have some volatility, obviously. Last year and even the year before, a good example was negative volatility. We could have better and worse years compared to this medium-term objective.
This one could be better. This is for India. Your next question was on wine, I believe.
Europe as a region as well.
Yeah. Okay. I start with wine, if I may. As I mentioned, we have some negative phasing impacting our Q1 for wine, definitely. This is mainly the case for the U.K. market and the U.S. market. Our performance is better than these figures, for sure. We are continuing to implement this value strategy we are referring to. We are committed to that strategy and the rest of the year should be better. Your next question was on Europe. Europe, what I can say is that we have some positive phasing in Eastern Europe, as I mentioned, this should be moderating a bit in the rest of the year. I hope you can hear me clearly. I'm sorry, there are some noise in the street here.
Can you hear me?
Yes.
Okay. For Eastern Europe, the trend could be a bit lower in the rest of the year, but probably still quite positive. Coming to phasing, it's true that, as I mentioned, Germany and the U.K. were impacted by phasing in this first quarter, this should be better in the rest of the year. We have Spain and France. As I mentioned, France, it's a difficult market, difficult for me to tell you more for what would be the performance in the year. The market itself is challenging. For Spain, as I mentioned, we are recycling a high Q1 last year, we still have some destocking as well this year. Hopefully, the performance there could be better in the rest of the year in a market which is probably, as I said, flattish.
Okay, very clear. Thank you.
You're welcome.
If you find that your question has been answered, you may remove yourself by pressing star two. We'll take the next question from Sanjeet Aujla from Credit Suisse. Your line is open. Please go ahead.
Hi. three questions from me, please. Firstly, on China, have you seen any noticeable change in underlying trends in recent weeks? On India, appreciate the easier comparatives there, but can you also talk a little bit about the competitive dynamics there? Do you feel like you're gaining share in that market? The acceleration we've seen in price mix at the group level to 2.9% from 2.3%, is that mainly driven by pricing or mix? Thanks.
Okay. I start with China. In China, I think your question was, do we see any change in trends? Well, in terms of macroeconomic position, obviously, you know what is the situation there. We are having a moderate GDP growth at present, and this is mainly driven by the domestic consumption, but as well as industrial investments. There are obviously uncertainty due to the dispute with the U.S., and, well, I think it's too early to see any impact of tariffs as far as consumer demands are concerned. We are definitely monitoring the situation. In terms of business, we don't have yet the depletion for the September month, so for the festive season and the Golden Week. It's too early to know, but we are monitoring the situation.
Got it. On India, the competitive dynamics there?
Yeah. On India, I think, well, if we compare our performance versus competitor, I must say we are holding and probably even summing up our share. We are, as you know, the leader of the local premium whisky category. Our aim is to continue to grow the market rather than our market share. We are in a very strong position in terms of market share. As you can see in the figures, our most recent performance is significantly stronger. That's quite good news here. Price mix, we don't comment on the split between price and mix. As you know, we did increase our prices last year on Martell, and we're going to have the full year benefit, and this is already materializing in our figure in this quarter.
That's all I can say, on top of the fact that we believe that the pricing should improve this year compared to last year.
Got it. Thank you.
Thank you. We'll take the next question from Edward Mundy from Jefferies. Your line is open. Please go ahead.
Morning, Hélène. Morning, everyone. Three questions, please. The first is on China. We agree with 27% in the first quarter. If you back out the advanced sell-in ahead of depletions, what do you think your depletions are grew at in China? Second of all, at a group level, obviously, there are some positives and negatives. If you were to normalize for both those positives and negatives, what do you think your growth was in Q1? The third question is on Africa and Middle East, where looks like you had some very strong growth in both Turkey and Nigeria. Are you able to quantify what that growth was?
Okay. Well, let's start with China. As we said, this +27% is boosted, and it's mainly boosted by advanced buying from the wholesalers to secure stock for festive season, I mean Mid-Autumn Festival, Golden Week, and Chinese New Year. This is going to normalize for the full year. Our current run rate is double digit. We have a price mix which is positive. To come back to what I just mentioned in term of pricing, this is as well largely due to the mid-single-digit price increase we put on Martell back in February 2018. As I just said, we don't have the most recent depletion. That's something, of course, we will be looking at. Having said that, our depletion are strong and solid and in line with our expectations.
Not as high as our selling because of the advance buying I mentioned, but good and solid. Your next question was, can we normalize the Q1? I don't think we're going to be able to share that with you. You know the major technical impact. That's all I can say. On Turkey and Nigeria, we don't give the exact number for every market there.
Okay. Thank you.
Thank you. We'll take the next question from Chris Pitcher from Redburn. Your line is open. Please go ahead.
Thank you very much. Good morning. Firstly, on the U.S., you're talking about phasing impacting the first quarter. Should we expect you return to sort of underlying growth of near to the market of 4% in the first half? Within that, the Jameson performance of double-digit growth, can you give us a feel for how that growth is being driven by more mature states versus distribution gains? A follow-on for that, could you give us a bit more color on the press reports of EUR 150 million investment in the Jameson production facilities? How we should expect that to be phased, where capacity is, and where you expect to fill that up, whether that's U.S. growth or the internationalization of Jameson. Thanks very much.
Okay. The U.S. Again, the +2% is definitely linked to phasing and a high comparable basis last year. To be a bit more specific, we see here some different factors, mainly in one market, which is California, which is, as you know, a very big market for us and that has a weight on our short-term performance. We are lapping a very strong year-on-year comparable there, with retiming of promotional periods. As well, the price increase we did last year, mainly on Jameson, which had an impact in terms of a very strong Q1 last year. Your question in terms of midterm ambition, as you know, last year we were growing at +4%, in line with the market which was at +4%. Midterm, our objective is to be slightly ahead at mid-single digits.
For this year, the objective would be to do at least as well as the market. I think your next question was-
On Jameson investment, whether that's-
Yeah
to support U.S. growth or whether it's more to support international growth. Can we get a phasing of the EUR 150 million investment that has been reported?
Okay. I'm not going to be too specific here. It's an investment which is required to support the global ambition we have on Jameson moving forward. It's on the ground globally. The exact phasing is, as I said, not something we going to share, but it's, let's say, already going to be a significant investment this year and probably as well next year. I'm talking CapEx here, obviously. As you know, globally, our CapEx envelope is more or less 4% of on sales. Some years it's a bit lower. With this level of ambition we have in term of acceleration of our business, it's fair to expect that we're going to be around this 4% and sometimes a bit higher than that. Jameson investment is already scheduled and let's say budgeted in our CapEx starting this year.
Thank you very much.
You're welcome.
Thank you, Chris. We'll open the next question to Mitchell Collett from Goldman Sachs. The line is open. Please go ahead.
Hello. One question on Brazil, please, then an unrelated follow-up. You said Brazil had a very strong start partly because of Q4 being weak. Can you maybe comment on the underlying market conditions? Are they improving for you? I guess to come back to the group performance X all the shipment phasing timing issues and benefits. When you were thinking about the 5%-7% for the full year, I guess, would you expect that the growth rate outside of the China moderation is also going to slow? Is that the only reason why the 1Q growth might slow at the top line? I appreciate there's a few reasons why you may have top-line growth ahead of organic profit growth.
Can you perhaps comment on the factors that drove you to keep guidance at 5%-7% for organic operating profit growth despite such a strong start to the year? Thanks.
Thanks. Let's start with Brazil. Just to be clear here, what I said is that we have very good trends there. Fair to say that Q1 is benefiting from the national truck driver strike that happened at the end of last year, meaning that pushed some sales that should have happened in Q4 last year into Q1 this year. Having said that, again, we have very good trends there. I think we can save some share gains for our business in Brazil. Coming back to your second question now in terms of overall trends and full-year guidance. We are confirming this guidance, meaning that this Q1 is not changing our view. As I mentioned as well, we were expecting this very strong start in Q1, and we mentioned that in August.
That's the first element of answer. As you know, we are not giving guidance in terms of top-line growth. Our guidance is on the Profit from Recurring Operations. On the Q1, on top of China that you mentioned, we have as well this low comparable basis in India. As well, I must say, as probably for every first quarter, some phasing in different markets. All in all, we are confirming our guidance, meaning that our ambition as well in terms of top line is consistent with the assumption we used to base on our bottom-line guidance.
Okay. Sorry, I don't think I've asked it very well, but I was trying to say, I guess if you stripped out China and India as being abnormally strong this quarter, that would imply a run rate of, I guess, closer to 7% for organic sales growth. I appreciate there are other moving parts. Is that the right sort of run rate in terms of sales to think of for the full year once we try and take out all the other items? If that's true, I guess that would imply margins flattish would get you to the top end of your guidance range. Is there anything wrong with that logic?
Maybe let me clarify a bit. As I said, we don't give guidance in terms of top line for the full year. As you know, we have a midterm objective that we share a few years ago with some of you, which was at that time, 4%-5% top line midterm objective. With the current trend, our top-line expectation is more, let's say, mid-single digits than 4%-5%.
Understood. Thanks.
You're welcome.
Thank you, Mitch. We'll take the next question from Simon Hales from Citi. Your line is open. Please go ahead.
Thank you. Morning, Helene. Morning, Julia. A couple of questions. Helene, you talked about the technical effects, the destocking we saw in the period. You called out the U.S. and Spain. Can you confirm that the destocking is actually completed in the Q1 period and it won't roll over into Q2 in either of those particular areas? Was there anything specific or brand wise that was driving the destock in those two major markets? Secondly, you also talked about some phasing benefits. I think you mentioned in Russia, also in China, in terms of buy-in by the wholesalers ahead of perhaps Christmas season in Russia and ahead of still Chinese New Year in China. It seems very early to be seeing those buy-in trends in Q1 rather than in Q2.
Is there anything specific that we should be aware of that's driving that from a wholesaler standpoint?
Okay. Thank you. Let's start with your first question, maybe to clarify. When I mentioned the phasing in the U.S., I didn't mention any destocking impact. What I mentioned is that there were some phasing in terms of wine in the U.S., with some promotion phasing and so on. Compared to the size of the U.S. market, this is really small. The clear message for the U.S. market, it's more a phasing due to the lapping of a very strong Q1 last year, especially in California. No mention of destocking here. You're right to say that I mentioned some destocking in Spain. That's probably why I said as well that the trend could be a bit better moving forward because there was two impacts on our performance in Q1 in Spain.
Some destocking this year. As well, probably some high comparable basis last year with some shipments that were a bit stronger than the underlying trend. That's for the question of destocking. The second question on the phasing. For Russia, your listening is right. It's more to be fully ready for the, let's say, Christmas season. Of course it is, let's say, impacting positively Q1, and this would have an impact negative on Q2 in Russia. In China, my comments was really more global. You're right, Chinese New Year is still in three months' time. It was more to say that there are some early buying from wholesalers to secure the stock for the festive season, starting with Mid-Autumn Festival, Golden Week, and maybe as well, some anticipation of Chinese New Year.
It's really to, let's say, secure volumes and especially for our cognac Martell, where there's a clear understanding that we have some limitation here. Wholesalers are probably securing those stock in advance of the full festive season, starting with March. Ending with Chinese New Year.
Okay, understood.
Thank you, Hélène.
Please go ahead.
Oh, sorry. Just to follow on, Hélène, just to confirm with regards to the technical effects on the U.S. and Spain, as I look to Q2, the technical effects should normalize in both of those markets really is the message?
Yes.
Perfect. Thank you. Sorry, Julia.
I'm sorry. We'll take two final callers, please. Sorry, Simon.
No worries. All right. Thanks, Simon. All right, the next question comes from Trevor Stirling. Your line is open. Please go ahead.
Good morning, Helene. One question from my side, Helene. Clearly, Q2, there's a lot of moving parts. I assume some wholesalers will be carrying excess stock after Mid-Autumn Festival. There's also the effect of the timing of Chinese New Year. Can you give us any steer at all on what you think the shift in terms of proportionate shift from Q3 into Q2 might be as a result of the earlier Chinese New Year?
Okay. Well, as we mentioned in the presentation, Chinese New Year this year is 11 days earlier. It's going to be on the 5th of Feb versus 16th of Feb last year. The year before we have 90 days impact. I'm not going to give you an exact figure, but I'm sure you can do the math. Let's say it's 11 days. You know that China is roughly 10% of the group net sales, I'm sure that could give you the quantum of the impact.
Thank you very much, Helene.
You're welcome.
Thank you, Trevor. The last question comes from Andrea. Your line is open. Please go ahead.
Good morning, Hélène and Julia. Just one question, please. A lot of technical factors in Q1 as we've discussed. Just focusing on the underlying trends, which clearly remain clearly strong, very strong. Would there be anything you'd call out on underlying trends that has changed in the past few months, either things getting better or worse?
That's a good question. I must say that the main market I can think about is India, because this +34%, as I mentioned, is boosted by the low Q1. We have a very strong growth there. As I said as well, it's across the categories, both on strategic local brands with the Seagram's whiskey franchise and strategic international brands. We see as well some benefits from the price increase. It's really good news and great performance.
Okay. India, out of all the markets, one where probably there's also an acceleration in underlying momentum. Thank you.
You're welcome.
Okay. That brings our call this morning to a close. Thank you very much, ladies and gentlemen, and Adam and I remain available should you have any further questions.