Pernod Ricard H1 Profit Up 1%; Lowers FY20 Profit Growth Outlook

Pernod Ricard H1 Profit Up 1%; Lowers FY20 Profit Growth Outlook

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Sales for H1 FY20 totaled €5,474m, with organic growth of +2.7% and reported growth of +5.6%, with a favorable FX impact linked to USD and Emerging market currency appreciation vs. Euro.

Pernod Ricard delivered solid results in a challenging environment, with broad-based growth:
•    Diversified growth across Regions, with the robust performance of Must-win markets USA, India, and China, further enhanced by earlier Chinese New Year
•    The dynamic performance of Strategic International Brands, in particular Jameson, Martell, The Glenlivet, Malibu, Ballantine’s, Royal Salute and Beefeater
•    Continued strong pricing: +2% on Strategic brands
•    Focus on operational excellence and resource allocation, driving strong organic improvement in PRO margin +51bps.

We continued to roll-out the Transform & Accelerate the 3-year strategic plan:
•    Implementation of 2030 Sustainability & Responsibility roadmap
•    Launch of Reconquer project to resume growth in France and reorganization of the Wine business to reignite its performance
•    Active portfolio management: completion of TX, Rabbit Hole, and Castle Brands acquisitions.

Sales growth was robust, with a very strong basis of comparison: +2.7% vs +7.8% in H1 FY19. The Must-win markets posted the following performance:
•    USA: +4%, good growth driven by Whiskies and Specialty brands
•    China: +11%, strong H1 on a high comparison basis (H1 FY19 +28%), enhanced by earlier Chinese New Year3
•    India: +5% good H1 in a volatile context, with a high basis of comparison (H1 FY19 +24%)
•    Travel Retail: robust Sell-out, but H1 FY20 impacted by shipment phasing.

There was diversified growth throughout the Regions:
•    Americas +2%: good growth in the USA partially offset by weaker Mexican market and phasing in Travel Retail
•    Asia-RoW +3%: growth driven mainly by China and India, dampened by the transfer of Imperial Korea to a third-party distributor
•    Europe +3%: strong growth with improving trends, driven by Germany, UK, and Eastern Europe acceleration, but difficulties remaining in France.

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Q2 Sales were €2,991m, with +3.8% organic growth (+6.9% reported), following a soft Q1 FY20 (at +1%), and enhanced by earlier Chinese New Year.

H1 FY20 PRO was €1,788m, with organic growth of +4.3% and +8.1% reported. For full-year FY20, the FX impact on PRO is estimated at c. +€70m4.

The H1 organic PRO margin was up by +51bps, thanks to:
•    Strong pricing on Strategic brands: +2%
•    Gross margin in slight decline -15bps, following particularly strong H1 FY19 (+71bps):
•    The positive impact of earlier Chinese New Year but the negative mix of India
•   Cost of Goods headwinds (in particular agave and grain neutral spirit (GNS) in India)
•    A&P: increase broadly in line with Sales, with strong arbitration and focus behind strategic priorities
•    Structure: -2% thanks to the strong discipline and favorable phasing (growth expected for full-year FY20)
•    Positive FX impact of +€59m thanks mainly to USD (EUR/USD 1.11 in H1 FY20 vs. 1.15 in H1 FY19) and Emerging market currency appreciation vs. Euro

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The H1 FY20 corporate income tax rate on recurring items was c.24%; the rate is expected at c. 25% for full-year FY20.

Group share of Net PRO was €1,216m, +10% reported vs. H1 FY19, thanks mainly to a strong improvement in PRO.

Group share of Net profit was €1,032m, +1% reported vs. H1 FY19, despite strong improvement in PRO due mainly to non-recurring items.

Free Cash Flow was €570m while increasing Capex and the aging stock inventory build, as expected.

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Net debt increased by €1,608m5 vs. 30 June 2019 to €8,228m at 31 December 2019 due mainly to increased M&A cash-out, increased dividend payment and the start of the share buy-back program with €223m purchased in H1 FY20. In H2 FY20, the programme6 will continue, with a new clip of €300m maximum, to be executed by 30 June 2020.

The Net Debt/EBITDA ratio at average rates7 was 2.7x on 31 December 2019.

As part of this communication, Alexandre Ricard, Chairman, and Chief Executive Officer declared,  “H1 FY20 demonstrated solid growth and resilience of our business model. Our 3 year-plan Transform& Accelerate is driving success, as evidenced by the diversification of the sources of growth in terms of geographic footprint and categories, continued strong pricing and ultimately the improvement in operating leverage.
Looking to H2 FY20, the environment remains particularly uncertain from a geopolitical standpoint, with the additional pressure related to the COVID-19 outbreak.  While we cannot currently predict the duration and extent of the impact, we remain confident in our strategy.  Our first priority is to ensure the safety and wellbeing of our employees and business partners. I would like to praise the exemplary behavior of our teams during this difficult time.  We fully support their efforts, as well as those of the Chinese people and authorities to contain the epidemic.

Assuming a severe impact of COVID-19, mainly on Q3 FY20, we are at this stage providing guidance of organic growth in Profit from Recurring Operations for full-year FY20 of +2% to +4% and will continue to closely monitor our environment.  We will stay the strategic course and maintain priority investments in order to continue maximizing long-term value creation.”

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