Pernod Ricard SA (OTCPK:PDRDF) Q1 2023 EMEA/LATAM Earnings Conference Call November 22, 2022 9:00 AM ET
Company Participants
Gilles Bogaert – Chairman and CEO, Pernod Ricard EMEA/LATAM
Conference Call Participants
Olivier Nicolai – Goldman Sachs
Edward Mundy – Jefferies
Andrea Pistacchi – Bank of America
Jeremy Fialko – HSBC
Operator
Good day, and thank you for standing by. Welcome to the EMEA LATAM conference call. [Operator Instructions] Please be advised that today’s conference is being recorded.
I would now like to hand the conference over to your speaker today, [Charlie Monte]. Please go ahead.
Unidentified Company Representative
Good morning, good afternoon, everyone. We are very pleased to welcome you to our EMEA LATAM conference call. We have today hosted by Gilles Bogaert, our Chairman and CEO of Pernod Ricard EMEA LATAM. I guess most of you would have seen the video we posted on our website this morning. So in the interest of time, I suggest we go straight into the Q&A session.
Operator, could you please open the line to the first caller.
Question-and-Answer Session
Operator
[Operator Instructions] And the first question comes from the line of Olivier Nicolai from Goldman Sachs. Your line is open. Please ask your question.
Olivier Nicolai
Hi, good afternoon, Gilles and Charlie. I’ve got three questions, please. First of all, on Europe, you mentioned a good recovery in the on-trade in many markets. Do you currently see any sign of the on-trade channel becoming weaker? And do you see any sign of down trading across your portfolio?
Secondly, looking at your — at cost and the cost outlook, we’ve seen glass prices coming down quite a lot. Do you expect a relief on glass costs in the region? And is it fair to say that glass concentration is much more of an issue for Europe than it is for LATAM and Africa?
And lastly, a question on Brazil. I mean, you’ve had amazing growth, 50%, you expect this very strong growth momentum to continue? And when can we expect LATAM profitability to get closer to the group average for at least or maybe closer to even your main competitors in the region? Is it just a scale issue? Thank you very much.
Gilles Bogaert
Thank you, Olivier. Good afternoon. I think your first question is on Europe on the recovery of the on-trade and it’s fair to say that we still benefited in the Q1 of the current fiscal year of a strong on-trade recovery in some markets, in particular, in Southern Europe, Italy, Greece and in Iberia, in particular, Spain. So this is probably the last tail of rebound post-COVID that we have in those markets. So it helps the performance in the first quarter. That said, the on-trade demand across most geographies remains quite good. And so we have not seen any signs of deceleration in the on-trade. We just normalize in the quarters to come because we still have a favorable comp in the Q1.
On down trading, we have not seen any evidence to today. Our business is up. Spirits — premium spirits are more resilient than the other FMCG categories, and our portfolio is due towards premium products. And we have a broad portfolio addressing different consumer occasions. It’s an affordable luxury with a lower frequency purchase. And so we have not seen any evidence of down trading so far. I think your first question was about energy costs and glass, I think you know that glass is among the dry goods, which are under pressure from an inflation standpoint, with also some capacity limit from some glass suppliers. I think we’ve been managing well that situation, limiting any particular issue limiting out of stock.
Let’s say, we believe we’ll keep living with that and tough environments from a glass supply standpoint and still with high inflation in the months to come. No major difference between markets as we tend very often to bottle in the country of origin. And so there is no particular difference on that aspect between, let’s say, European markets or Latin America markets.
I think your last question was on the growth in Brazil. I think that Brazil has been quite dynamic in the last year. It’s still dynamic in the first quarter. I think LATAM together with SSA are two continents which have been taking off in the last 12 months, thanks to think the very good work we’ve been doing there. I think the off-trade consumption has been quite strong in Brazil with the development of the cocktail culture, and it remains resilience after the on-trade was back.
We’ve been also able to pass some significant price increases, which has driven value even at higher levels. And as a consequence, in LATAM, it’s about gaining share, growing value ahead of volumes and getting the scale. And that’s what is happening at the time being in Brazil and in the other countries of the region. And obviously, mechanically, it drives margins — operating margins up also. So this is the current dynamic that we have in Latin America and in particular, in Brazil.
Olivier Nicolai
Thank you very much, Gilles.
Operator
Thank you. [Operator Instructions] The next question comes from the line of Edward Mundy from Jefferies. Your line is open. Please ask the question.
Edward Mundy
Good afternoon, Gilles. Good afternoon, Charlie. Two questions, please. I’d love to get an update on the Conviviality Platform. Which market territories are currently live? And what does the road map to rollout look like? Second question, sticking with the digital transformation where you have rolled out some of the KDP such as Matrix [indiscernible] and D-Star. Could you perhaps provide some examples of how does line for stronger execution, principally leveraging data through better sales focus?
And then third question is, I’m going to come back to the question around cocktail culture. Clearly, during COVID, there was quite a bit of home mixology and culture making in Europe. Do you see it can help to accelerate development of cocktail culture in Europe, whether still is a gap versus market such as the U.S.?
Gilles Bogaert
Sorry, the line was very, very bad. So your first question was on KDP and the deployment of the Conviviality Platform. Can you just repeat your second question, please?
Edward Mundy
Sure. First question is, which market and how does the rollout look like? Second question is, where you have rolled it out? How the tools align for stronger acquisition? And then the third question is around cocktail culture in Europe, to what extent you can close the gap to the U.S.?
Gilles Bogaert
Yes. Thank you for your questions. I think on the journey to the Conviviality platform, I think we are well on track in EMEA LATAM. We have an ambitious transformation road maps with, I would say, more than 10 markets involved so far, mainly the largest one. For instance, we have D-Star in Germany, in U.K., Spain and being deployed in South Africa and Turkey.
And as you know, this is about sales. And it drives incremental value with greater OpEx targeting, assortments, optimize the sales team visit planning, new touch points and at the end of the day with the objective to increase our top line growth, improve our distribution.
We also have the deployment of D-Star revamp which is our price optimization IA base to in the U.K. and in Mexico with, I think, some very good results so far that we can leverage, obviously, to help us in our pricing journey, which is obviously, as you know, one of our top priorities.
And Matrix, which is about A&P allocation, helping us to properly allocate A&P by touch points, by brands. We have deployed it in Spain, in Germany, in the U.K., in particular. It’s being deployed in Brazil, in Mexico. And it has also delivered some tangible results, helping in particular, to optimize the number of touch points and to refocus behind the touch point with the best return and — which has been driven some stronger overall performance.
So good progress so far on the Conviviality Platform. We have other markets that will deploy some of those KDPs in the next 18 months. Cocktail culture is definitely something that has accelerated during COVID. And the good news is that it has stayed since then. So it explains the resilience of the off trade, the home consumption.
And we’ve been very active with our brands, with our marketing initiatives to help sustain that cocktail culture. We did it in Europe. We did it in Brazil, where we launched [Bar Aperto] which is a kind of massive shift of cocktails and which has been a great opportunity to engage with people when they were at home, to help them to prepare cocktails.
And this trend is still very strong, and it’s towards premium brands, so it’s very branded, easy recipes and we keep leveraging that in many markets in U.K., in Germany, even in Spain, in Italy and in most LATAM countries. So this trend was reinforced during COVID and has remained quite strong since, and it’s very good for our brands considering the exposure to premium brands for Pernod Ricard.
Edward Mundy
Very good. Thank you, Gilles. Thanks Charlie.
Operator
Thank you. [Operator Instructions] There are no further questions at this time. I would now like to hand the conference over to our speaker, [Charlie Monte] for closing remarks.
Unidentified Company Representative
Operator, can you please just ask if there’s any further questions.
Operator
[Operator Instructions] We will proceed with the next question. And the next question comes from the line of Edward Mundy from Jefferies. Your line is open. Please ask the question.
Unidentified Company Representative
Operator, I think Ed is trying to ask a question, can you please try to connect him?
Edward Mundy
Charlie, can you hear me?
Unidentified Company Representative
Yes, Ed, we can. Please go ahead.
Edward Mundy
Okay. Very good. Sorry, I’ve got bad connection. So the question was around Malfy where I think you’ve increased sales by 7x in the quarter. Can you talk about how you’ve been successful with that model? And does that give you more appetite for further bolt-ons given the brands that are similar to Malfy. And then second question is really the role of wine within the portfolio within Europe. Could you perhaps just remind us what role does it play? And which market is it particularly meaningful?
Gilles Bogaert
Yes, thank you for your questions. First one, on Malfy, I think it’s a great addition to the portfolio, super premium, flavored Gin, Italian origin, great brand, great look and feel, great marketing assets, and we’ve been growing very, very fast. Well ahead our initial forecast and reaching in the region close to 250,000 cases at the end of last fiscal year, growing very strong double digits. And it happens in many, many markets. So it’s — in Italy, in particular, it is the home market, the brand has had a fantastic starts, strong in the U.K., strong in Germany. It’s strong in — it’s starting to be strong in South Africa.
LATAM is interested by the brand also. So it’s a very, very good start, again, leveraging on the brand, which is today largely skewed towards off-trades and that we are gradually building also through the on-trade, but it was larger in COVID. So, let’s say, the focus was mainly put on off-trade at the beginning. And we are quite confident on the growth potential of that brand going forward, which again is at a very high price level, super-premium brand. So it’s quite good also for the — not only the growth of the region, but also the margins.
Your second question is on the wine. As you know, our exposure to wine in the region is relatively limited. It’s 6% to 7% of the whole net sales in the region, mainly in two geographies, U.K. and in the [indiscernible] region and let’s say, the start of the year has been more challenging for wine, first because we had tough comps and there were some phasing elements here also and also because our strategy is really to focus on higher-end brands. It’s not a volume game.
It’s a value game. And so we prefer to focus on the brands, which are at the right price points. So one is largely exposed to the U.K. As you know, when — the U.K. as a whole is probably today in a more complicated macro kind of environments. And as a consequence, wine has been suffering there a bit more.
Edward Mundy
And just one final, if I may. So another question from some other — just really around the healthy — or the health of inventories, that the level of inventories that you’re seeing at wholesale and retail within your region. Any comments you would make on that?
Gilles Bogaert
Now our trade inventories are quite healthy, normal levels, well monitored. We are well equipped with data to be able to monitor our trade inventories and properly manage sell in and sell out. So healthy situation.
Edward Mundy
Very good. Thank you, Gilles.
Operator
Thank you. [Operator Instructions] And the next question is coming from Andrea Pistacchi from Bank of America. Your line is open. Please ask your question.
Andrea Pistacchi
Yes, hi Gilles. Hi, Charlie. Two questions, please. You were talking about Malfy and some of the additions of the portfolio in Europe. You’ve done also a lot of bolt-on deals in the U.S. over the past few years. Jefferson’s and importantly, the recent one with Sovereign Brands, which has, for example, Bumbu, which is growing strongly in the U.S. What potential do you see? What brands — what are these brands do you think are the main — most interesting potential in Europe?
And then the second question, a bit more general on the consumer environment. You’re flagging that you really haven’t seen any significant change yet. Should the environment, let’s say, deteriorate going forward? What shape do you think, though, how do you expect the weaker consumer environment to manifest itself primarily in spirits and in your business is the main issue, in your view, a channel shift or trade down? And how are you positioning yourself? How are you preparing for channel shift? Thank you.
Gilles Bogaert
Yes. Thank you, Andrea. Third question is on the various, let’s say, U.S. Care acquisitions. So we bought different U.S. whiskeys. We bought recently Código, a tequila, which is largely at the U.S. market, and we increased our participation in Sovereign Brands. We announced the deal recently. And even if those acquisitions are mainly done to sustain the growth potential of the U.S. market, definitely, there is an opportunity also in — outside the U.S., in particular, in Europe. I think on the U.S. whiskey, it’s fair to say that we are growing our supply so that we can deliver strong growth in the U.S. and then also start to see the brands in Europe. So it will happen gradually over the years to come.
But let’s say, it will take some time before we can have significant signs of business coming from that. But we have a plan clearly to grow our American whiskey portfolio outside the U.S. in the 10 years to come.
Sovereign Brands is — we are very happy with that acquisition, not only LATAM because we believe a lot in the potential of Belle on the one hand, on Bumbu also. These are culturally led super premium brands, which are very trendy. That’s a model that works very well, and we’ll be very happy to distribute some of those brands in many markets of Pernod Ricard EMEA LATAM with the objective to codevelop and seize the potential of those brands together with Brett Berish and Sovereign Brands because those brands already have some early presence in many, many markets.
And we believe that with his specific know-how in this type of culturally-led brands, his knowledge about the influences and the strength of our route to market, we can definitely see the great opportunity, in particular, in the Prestige portfolio, sparkling wine, champagne and rum. So Sovereign Brands is a good investment for Pernod Ricard for the U.S. but also worldwide.
Your second question is on the consumer environment. As I said, and as you properly noted, so far so good and consumer demand remains strong, and we don’t see any sign of down trading. Let’s say, we remain confident because the momentum is there. We have strong brands. The consumer dynamic is positive. If the environment is getting more difficult and it’s fair to say that some macroeconomic indicators show that the environment could get more difficult, we believe we are well equipped. We have a broad-based portfolio. We are present in many, many geographies.
Premium brands have shown the resilience through crisis. And I remember in the past, including with my previous, has some discussion on “will premiumization go on when times would suffer.” And it shows — history shows us that premiumization go on when times will suffer? And it shows this — history shows this that premiumization is a long-term trend that went through also during slower consumer demand periods.
So with the best of the portfolio, the ability potentially to leverage more some brands than others when the environment is tougher. Our channel exposure also, which — where we can also reallocate resources between channels when needed, as we did, for instance, during the COVID when the on-trade was closed. I think it makes me confident that we’ll have the agility to be able to adjust to the situation.
We can be very reactive also to adjust investment when needed. And we start to be very, very well equipped on data, including predictive data to help us to guide us with agility and speed when there are some changes of environment. So I think that if a slowdown happens, we would be well prepared and well equipped to well adapt to that situation.
Andrea Pistacchi
Thank you.
Operator
Thank you. [Operator Instructions] And the next question comes from the line of Jeremy Fialko from HSBC. Your line is open. Please ask your question.
Jeremy Fialko
Hi, there. A couple of questions from me. Firstly, if you could talk about the performance of the aperitif brand, I guess, mainly Lillet, you talked about that being plus 7, that also being one of the main priorities for the region now. I guess when we look at that versus the major aperitif peer, they’ve certainly grown somewhat quicker. So perhaps you could talk about what your strategy for the brand is and what you think is actually kind of achievable for that brand on a longer-term view?
And then the second question, if you could talk about the volumes within the region. I think you talked about being plus nine in Q1, but with double-digit price mix, which would therefore imply that volumes are a little bit negative at the moment. So could you talk about if that is indeed correct and which parts of the business have got negative volumes and which parts have got positive? Thanks.
Gilles Bogaert
Yes. Thank you for your question. And you’re right to speak about aperitif. This is definitely one of the growing moment of consumption. And it happened during COVID at home. And then when the on-trade was open again, it was very strong also in the on-trade, and it remains strong also at home, even with some times of virtual aperitif which fortunately are becoming not mature anymore nowadays. It’s not just about Lillet, to be fair. I think it’s about a larger portfolio. We have many aperitif brands, historical ones like Ricard, which is mainly about France. But our gin portfolio is also very, very strong in the aperitif moments.
All brands, Monkey, Malfy, D-Star, in particular with the gin and tonic. We have rum and the tea also, our Italian bitter which is quite strong, in particular, in Germany and has had some fantastic innovation in Chile, for instance. And yes, you’re right, Lillet, which is probably our most — our fastest-growing aperitif brand, which was built in Western Europe, in particular in Germany and Austria, city by city, starting with the white Lillet and then growing with new innovations like [indiscernible] which has a very, very good start and very strong in female consumption, low sugar, lower ABV.
And so I think it fits a lot with, let’s say, the trends we see at moment of consumption, conscious drinking, both male and female consumption. And it’s growing in many of the markets. So this is definitely a brand that we want to grow outside its core territory of Germany. We do it in the U.K., in Benelux. We have some ambitions in Brazil, in Spain, in South Africa.
And it’s — we believe that the growth potential is quite significant. And as you know, Lillet is positioned at a quite premium price, especially comparing with the competitive sets which I think highlights the quality of the brand and that allows to command a higher price level. In terms of volumes, I think as we said, most of the growth in Q1 has been driven by price mix, but you need to take into account also that we have a very, very sharp decline in Eastern Europe because of the war in Ukraine.
And so I would say the volumes when we stated by Eastern Europe are resilience. And I think that our view for the future is that the top line growth of EMEA LATAM will still rely more on price mix than on volumes in the current environment and also with our priority to behind price. So that’s the situation on volumes.
Unidentified Company Representative
Operator, I think we’re going to take our last question, please.
Operator
Yes, of course. Thank you so much. [Operator Instructions] And the last question comes from the line of Olivier Nicolai from Goldman Sachs. Your line is open. Please ask your question.
Olivier Nicolai
Thank you for the follow-up. I’ve got three questions actually, so not really the last one. Mostly on Europe. You mentioned the Prestige sales, which have been very strong, 36% growth, champagne was up 51%. Now historically, the share of super premium brands in Western Europe has always been much lower than in the U.S. despite fairly similar GDP per capita. Do you expect the gap to close going forward and about the high-end consumer in Europe will spend much more on premium spirits going forward regardless of the macro. That’s the first question.
Second question is on margins. Margins in Europe have actually increased quite significantly over the last few years. Where are you on the cost rationalization in Europe? And how much cost do you still see in terms of opportunities? And lastly, you have acquired Código recently. Do you see a potential for tequila in Europe and more generally, do you see significant opportunities to fill gaps in your portfolio via M&A?
Gilles Bogaert
Yes, thank you for your questions. Prestige is definitely one of our transistor battlegrounds in EMEA LATAM, in Europe, in Southern Africa, in Latin America also. This is the quintessence of premiumization. We have a very, very strong portfolio, very diversified or is very broad. And we’ve been building some specific commercial organizations to be able to seize the Prestige potential.
So reinforcing our route to market in the most attractive European market, in particular, like Germany, U.K., Italy, and we’ve been doing it also in Latin America, in particular, in Brazil and Mexico. Yes, it’s — the size of Prestige is smaller in Europe than it is in the U.S. or than it is in Asia. I think there are reasons for that, and I think we don’t expect to bridge the gap over the very short term. But there is definitely a potential.
There are consumers who want high-quality products. If we can improve the way we identify them, we interact with them including leveraging some direct-to-consumer opportunities, I think we’ll be able to keep growing at a good double-digit rates, which is our intent.
On margins, you well noted that we’ve been improving our operating margins a lot in Europe over the last three, four years, leveraging all drivers and improving our gross margin rate, thanks to strong pricing and strong mix driven by premiumization. Also on A&P investments over time, and thanks to initiatives like Matrix. We’ve been able to improve our — the effectiveness and the efficiency of our investment and making also the allocation sharper, which has also driven some margin benefits.
And last but not least, on the structural cost side, in the last years, we’ve been very disciplined. We’ve been able to also optimize our organization, in particular, leveraging the management entity concepts, sharing resources between markets, sometimes emerging commercial organizations of markets like we did in Benelux or in Nandina between Peru and Colombia.
And this type of initiatives have driven obviously some optimized structure cost-to-net sales ratio, the growth and the very strong growth we had was another key element to further improve the margins. So we’ll keep focusing a lot on margin. Let’s say, the short-term priority is definitely to protect our margin in the context of very, very high inflation.
And so let’s say, it’s more about defending our margins currently. We plan to keep investing behind our brands at more or less the same level in terms of A&P-to-net sales. And on structure costs, let’s say, this year, we have some reinforcement of some organizations to be able to accelerate the transformation of the market companies towards the Conviviality Platform and also some higher inflation of some series in some markets. But definitely, the margin remains very high on the list. And your last question was on tequila.
So you spoke about Código and say that Código was acquired mainly for the U.S. market. It’s a nice complement to what we have there. And I think it will — it’s priced at the very high level, and that fits well with the portfolio there. That said, outside the U.S., outside Mexico, we clearly start to see a growing trend on tequila.
We happen to be quite strong in tequila outside the U.S. and Mexico, leveraging our portfolio. We have Olmeca, which is very strong in night on-trade. We have Altos, our super premium tequila. We have Avion and Reserva 44 at the higher end.
And we have also the supply, which is increasing to be able to fuel that growth. So yes, we expect the tequila potential to be stronger in Europe in the years to come, even if obviously, it remains today quite small as compared to the size of the U.S. or even the Mexican market.
Olivier Nicolai
Thank you very much, Gilles. Gilles, could you ask about Nigeria or is it — are we running out of time, Charlie?
Unidentified Company Representative
We can take the question.
Olivier Nicolai
Okay. Thank you. So on Nigeria and Africa in general. First, you mentioned Martell Cognac and the bottom [indiscernible]. We often read that the Nigerian consumer are looking at trends in the U.S. rather than in Europe. Within the imported spirits category, where do you see the most potential in Nigeria? Is it Cognac? Is it Scotch or is it something else? And then more generally, in Africa, how do you view the distribution in this region where you are less well represented than elsewhere? And could you talk a bit about the role of e-commerce knowing that you have — you’re seeing on the Board of — on a big e-commerce company, I had to ask you? Thank you, Gilles.
Gilles Bogaert
Yes. Thank you. So you’re right to say that Nigeria is influenced by the U.S. even if they start to influence also the rest of the world because they are becoming so big and they like premium brands. They like, let’s say, show of consumption.
And yes, definitely, cognac is an attractive category, and we see it with Martell. We have Blue Swift, which is the Martell SKU that was not in the U.S., which is growing very fast in Nigeria, together with BS. It’s a very strong market also for whiskeys in particular for Jameson, that we sold more than 200,000 cases last year on Jameson in Nigeria, and we’ve reached the milestone of 1 million cases on Jameson in Southern Africa.
And interestingly enough, the demand was mainly on the higher end of the range, in particular, Black Barrel, which I think shows the premiumization potential of the Nigerian business. So Jameson, Martell, Chivas and let’s say, the whole Prestige portfolio has a great potential in Nigeria, and we are happy to have strong brands in all those categories, which I think is a competitive advantage as compared to other players.
We also decided to play the card of mainstream whiskeys with Seagram whiskeys to be able to leverage the potential of this very strong middle class that we have in Nigeria and in the whole Sub-Saharan region. So back to the whole region and the route to market, I think we’ve been able, over time, to strengthen a lot our route to markets opening some new affiliates over the last 6, 7 years in some new geographies. But in those geographies, strengthening our partnership with some distributors, with some wholesalers, with the modern on-trade, which is also starting to grow from a low basis. And yes, seizing also the e-commerce opportunity, which is starting in Africa at the beginning. It will take time.
But it’s a good way, I would say, to complement our route to market, when you know that most consumers have a smartphone. And that is very convenient to order on an e-commerce platform in the marketplace to be delivered directly. And it starts to grow maybe at a slower pace than what was forecasted a few years ago, but I think the potential is definitely there. So we are quite happy with the route to market we have today in Sub-Saharan Africa. We start also to increase distribution going to more remote areas like India, Nigeria.
We are focusing on the three main cities. We have a plan now to extend our presence to Tier 2 cities. And as you know, in Nigeria, we have many new cities above 1 million inhabitants in the years to come. That will become the third largest country in the world, population wise. In South Africa, we increased also our presence in the townships where there is definitely potential, including for premium brands. And this is part of the strategy to keep extending our route to market in each of the country where we operate.
We may decide to open some new affiliates in some new markets in the future. But for the time being, the priority is to extract the maximum growth potential we can in the markets where we operate. And I think that definitely, it works on. And I think Africa in the last 18 months for Pernod Ricard has been taken off with very, very strong growth which then has led also to a better profitability because obviously, scale matters a lot on that aspect.
Olivier Nicolai
Thank you very much.
Operator
Thank you.
Unidentified Company Representative
Thank you, Gilles. Thank you, everyone. Operator, I think we can close the call.
Operator
That does conclude our conference for today. Thank you for participating. You may now all disconnect. Have a nice day.
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