Pernod Ricard Earnings Call INSIGHTS: Prioritizing Organic Growth, Gross Margin Rate Evolution

On Thursday, Pernod Ricard NV (RI) reported its fourth quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Organic Growth a Priority

Alexandre Ricard – Managing Director, Distribution Network: In terms of regional trends, this year, as you know, emerging markets that represent 40% overall of our net sales, have grown by 17% organically and mature markets represent the other 60%, have grown by 2%. What we can say is, as mentioned earlier, we do expect the U.S. to continue in a virtuous cycle where the on-trade is picking up, where the higher end of the market premiumisation is continuing. So, we do expect good growth in the U.S. In terms of Asia for instance as well, again as Pierre mentioned, we expect a strong momentum as well over there. There might be maybe in India, we do see some slight deceleration in terms of growth rates, due to the macro outlook regarding the Indian economy, but overall we do expect Asia to keep on a very good growth rate. Eastern Europe as well is still doing extremely well. So we don’t foresee any issue for the time being in Eastern Europe as well. Africa, at the end of the day, Africa is a conquest region for us. We are investing heavily behind Africa and frankly Africa is doing a pretty well. Now as Pierre mentioned earlier. Southwestern Europe namely Greece, Italy, Portugal and Spain, which represent roughly 6% of our net sales cumulatively, it’s no news. It’s still going to be a struggling region but bear in mind that other parts of Western Europe, such as Germany, for instance or some of the Nordics country or the Netherlands are performing pretty well. Inventory, inventories, in terms of the trade inventories were all basically versus last year in line. There is no hike or its basically normal status for inventories. Regarding France, in particular, because we obviously had the significant inventory ahead of the duty increase. We can say that at the end of June, it’s (indiscernible) 95%. So, we think, so we’re talking in the 100,000 liters compared to pre-buying in the range of 13 million liters or 16 million liters so it’s really something which now is behind us. Acquisition, Gilles, you want to spend some money?

Gilles Bogaert – MD, Finance: Well, I think that’s – clearly our priority is still organic growth. I think we have now a very strong portfolio, a very good geographical exposure and we have what we need to be able to keep growing in that level of rates. That’s said, I think we are open to, yes, what we can call bolt-on acquisition. If they can help to seize new occasional consumption, if they can help to improve our growth profile in emerging markets or in the U.S. we are prepared to move. Well, we have no strong brand in all key categories, so it’s not just – it’s not so much about categories, it’s about complementarity to portfolio attracting new consumers, new occasional consumption. It’s not so much about I would say categories.

Gross Margin Rate Evolution

Xavier Croquez – Cheuvreux: I have two questions. The first one is trying to reconcile the price and mix effect that you have in sales and the gross margin which was up 30 bps, but I’m trying to understand looking ahead if what are the underlying trends. With the price and mix effect you gave us on top brands, the key brands in champagne you can probably guess that Group leverage – at Group level the split of growth was 3% volume and 5% price mix, that’s my rough guess. If you have 5% price mix why don’t you have more gross margin expansion on an underlying basis. I calculated 30 bps. It’s fine, but can I hope for more or what is driving only 30 bps when I have 5% price mix, is my first question and the second question, there has been hikes on CapEx and working cap that have diluted underlying free cash flow growth this year. How should we understand the future? Is this a related one-off or help us a little bit on this if you can?

Gilles Bogaert – MD, Finance: On your first point, I think gross margin rate evolution was very positive. It was more than 100 basis points. It’s safe to say that the ForEx has been helpful. On the price and mix we communicate on the Top 14, which makes sense. We made a calculate for the full Group, it gives a price and mix around 4%, but it includes so many different things and sometimes some sell through can be bulk and so on, which doesn’t make a lot of sense right. I would say that’s premiumisation which is the backbone of the strategy is driving the gross margin up and it has been the case for the last years and we have a positive decade and positive price/mix each year. So I think all this appears to me very consistent. On the question on CapEx and strategic inventories, I think that we are confident in the growth of our Scotch portfolio, of Jameson, of Cognac and I think we had the opportunity to discuss about that in previous meetings and Capital Market Days. And clearly, to fuel that future growth, we want to have already today the right inventory. We want also to increase the CapEx. The CapEx has remained steady since the crisis more or less in the last three years, and clearly between 2011 and ’12 and between – and in the year ’12, ’13, it was two years. This is clearly a period for us to increase our CapEx, and as you know, CapEx don’t increase, you know, on a gradual basis, it’s step-by-step, and we are at the moment because of our growth profile, when we have decided in that period of two years to step up the CapEx level. As far as strategic inventories are concerned, we will keep increasing both strategic inventories year-after-year to be able to fuel the growth on Martell, on also Scotch portfolio and on Jameson, and the champagne also in particular.

Pierre Pringuet – CEO: For Scotch whisky and Cognac, we distill today what we will sell in 10 years. Keep that in mind.