Pernod Ricard: Solid Performance in Line With Guidance

29 Aug 2013 --- In 2012/13, Pernod Ricard delivered a solid performance within, as anticipated, a less favourable environment than in 2011/12.

Summary:
- Organic growth in profit from recurring operations was 6%(1), in line with the stated guidance.
- Emerging markets(2) maintained double-digit growth(1) (+10%) despite a slowdown in the second half of the year, particularly in China. Mature markets were stable(1): strong growth in the US (+8%(1)) and declines(1) in the French and Spanish markets.
- The Top 14 continued to drive growth(1). With sustained value growth (+5%(1)) these brands grew more quickly than the Group’s average (+4%(1)). This was particularly due to Jameson and Martell’s outstanding performances(1) and to solid growth in white spirits.
- Premiumisation and innovation remained the Group’s growth drivers, as testified by a still highly favourable price/mix (+5%(1) for the Top 14). Premium(3) brands increased their share of sales from 73% to 75%.
- The operating margin recorded its best growth in three years (+42 bps(1)) due to the combined effect of continued premiumisation and good control of resources.
- The considerable decrease of € 635 million in net debt was due to a cash flow generation higher than in the previous year. The net debt / EBITDA ratio fell to 3.5(4) at the end of June 2013.

Reflecting on these results, Pierre Pringuet, Vice Chairman and Chief Executive Officer of Pernod Ricard, commented: “Despite a less buoyant environment than that of last year, we achieved our guidance.”He continued, “Our global and balanced exposure to emerging and mature markets will allow us to seize all opportunities. We therefore remain confident in our ability to pursue our growth.”

At its meeting of 28 August 2013, chaired by Danièle Ricard, the Pernod Ricard Board of Directors approved the financial statements for the 2012/13 financial year ended 30 June 2013.

Full-year and quarterly sales

Full-year sales totalled € 8,575 million (excluding tax and duties), which included € 5,065 million from mature markets and € 3,510 million from emerging markets(2). This represents an increase of 4%:
- organic growth of € 319 million, or +4%
- a negative Group structure effect of € 70 million (-1%), primarily related to the disposal of certain Canadian activities in 2011/12 and Scandinavian and Australian activities in 2012/13
- a favourable foreign exchange effect of € 110 million (+1%) primarily related to the USD and CNY

Consolidated sales for the fourth quarter 2012/13 totalled € 1,925 million. This growth resulted from:
- organic growth of 5%
- a negative Group structure effect of -1% primarily related to the disposal of certain Scandinavian and Australian activities in 2012/13
- a negative foreign exchange effect of -3% primarily related to the USD, JPY and INR

Analysis of Profit from Recurring Operations

Gross margin (after logistics costs)reached € 5,351 million, an increase of +5%(1).
The gross margin / sales ratioimproved substantially to 62.4%, from 61.4%in the previous year (+98 bps, organic growth of +79 bps). These results were the combination of:
- favourable price effect (+4% for the Top 14): significant price increases
- slightly favourable forex effect

Advertising and promotion expenditure totalled € 1,644 million, an increase of +3%(1). A&P expenditure:
- was targeted on the Top 14, which accounted for almost 90% of the increase(1)
- increased significantly in the US and in emerging markets(2)
- was optimised in certain mature markets: Western Europe -3%(1); France -10%(1)

The advertising and promotion expenditure to sales ratio was stable (19.2%).

Structure costs increased +7%(1) to € 1,477 million. The structure costs to sales ratio was 17.2%.

Pernod Ricard continued to allocate resources to emerging markets(2), which accounted for almost 80% of the increase(1) in structure costs: strengthening of the distribution network (China, India, Russia, Africa, etc.) and creation of subsidiaries in Sub-Saharan Africa.

The increase(1) in structure costs was below inflation in Western Europe and stable(1) in France.

The end of the implementation of the Agility project explains the slowdown in structure cost growth(1) in the second half of the year.

Profit from recurring operations was € 2,230 million, an increase of +6%(1), in line with guidance.

The operating margin recorded its largest expansion (+42 bps(1)) in three years, due to:
- continued implementation of the premiumisation strategy, with a positive effect on gross margin
- good control of resources

The Group structure effect on profit from recurring operations was slightly unfavourable (mainly due to the disposal of the Scandinavian activities) at € 20 million. The positive foreign exchange effect (+€ 19 million) was primarily due to the strengthening of the USD and CNY.

Emerging markets(2) continued to increase their relative significance in profit from recurring operations: 44% in 2012/13 compared to 39% in 2011/12. This increase had a positive impact on margins.

Analysis of Net Profit

Financial income / (expense) from recurring operations was an expense of € 527 million, compared to € 509 million the previous year:
- the average cost of debt was 5.3%: a controlled increase (5.1% the previous year), in line with our forecasts.
- the structural decrease in financial expenses began in January 2013 and will continue in 2013/14. The average cost of debt in 2013/14 is estimated to be less than 5%.

Corporate income tax on recurring operations was a charge of € 430 million, i.e. an effective tax rate of 25.2%. The increase (23.5% last year) was primarily due to new tax reforms, particularly in France (impact: € 25 million).

Group share of net profit from recurring operations reached € 1,255 million. Its sustained increase of +5% was primarily driven by the operating performance.

Non-recurring items included:
- other operating income and expenses, resulting in a net expense of € 124 million, mainly comprising restructuring costs (especially in Spain, Australia and New Zealand), and asset impairment (notably Brancott Estate for € 64 million)
- a net non-recurring financial expense of € 12 million, mainly comprising foreign exchange losses
- corporate income tax on non-recurring items was a net income of € 71 million: technical items mainly related to the discounting of deferred tax rates

The Group share of net profit thus totalled € 1,189 million, an increase of +4%.