Morning Equity Briefing
Pernod Ricard
(RI FP)
FY results in line with expectations; continuation of trends seen in Q3; strong FCF and significant increase in A&P spend
Brian Fagan, CFA
| Closing Price: | 6274c | Rating: | Neutral | 27/04/10 | Previous: | Underperform | 11/01/10 |
FACTS: Pernod Ricard has this morning (September 2nd) announced FY 2010 results. As the company had already provided a trading update last month, there were few surprises in the headline numbers. Full-year sales totalled 7,081m (Davy estimate 7,042m) a reported decline of 2% but organic growth of +2%. Organic sales growth in H2 was +9%.
The Top 14 brands (55% of group sales) grew by 2% in volume and 4% in value. Two of these reported double-digit growth, Martell (+12%) and Jameson (+12%), and seven others continued to grow in particular The Glenlivet (+7%), Absolut (+6%), Chivas (+5%) and Havana Club (+5%). Mumm (-7%) reported a decline due to the French champagne market, which proved especially difficult in the on-trade channel.
The 18 key local spirits brands grew by 4% in value, driven in particular by continuing strong growth by local whisky brands in India (Royal Stag up 30% and Blenders Pride up 22%) as well as renewed growth by premium Scotch whisky Imperial in South Korea (+12%).
ANALYSIS: Q4 sales amounted to 1,755m, an increase of 7%, reflecting organic growth of 3%. The trends observed since the start of the 2010 calendar year were confirmed in the fourth quarter, including strong growth in emerging markets, a rebound in certain markets (Russia, South Korea and Duty Free), a gradual recovery in the US and persisting difficulties in Western Europe especially in Spain, the UK, Ireland and more recently in Greece. Group sales for this quarter were also affected by the timing of Easter this year and sales achieved ahead of price or excise duty increases
Advertising and promotion (A&P) spend was up 5% to 1,262m. As announced, Pernod significantly increased investment behind its brands, as reflected in the A&P to sales ratio of 17.8% (compared with 17.2% in 2008/2009 and 17.9% before the crisis in 2007/2008).
Profit from recurring operations rose by 4% to 1,795m. The operating margin was 25.4% of sales compared with 25.6% over the previous financial year. This breaks down as strong growth (+14%) in Asia/Row, driven by Martell in China and local brands in India; marginal growth (+1%) in the Americas; and a marked improvement in the US in H2. PRO in Europe declined by 3% as the situation remains challenging in a number of countries; France grew +7%, driven by improved performance of a number of key brands and a focus on cost control.
Net debt was 10,584m compared with 10,888m last year. While strong free cash flow of 1,110m was generated during the year, this was largely offset by a 786m negative foreign exchange move primarily due to the dollar rate (/$ rate of 1.23 compared with 1.41 at June 30th 2009). Excluding foreign exchange movements, the 2009/2010 reduction in debt was very substantial (down 1,090m). Disposals of Tia Maria and Scandinavian assets account for about 200m of the pay-down. The average cost of borrowing came to 4.3% over the full 2009/2010 financial year, which was an improvement compared with the 4.8% noted over the previous financial year. Based on current interest rates, the 2010/2011 target is to maintain the average cost of borrowing below 5%.
DAVY VIEW: This is a solid set of numbers from Pernod. The organic sales performance matches that of Diageo (+2%), but Pernod delivered better EBIT growth (+4% versus +2% at Diageo). The company achieved a substantial increase in gross margin due to the Top 14 brands, with virtually all key brands benefiting from a favourable price/mix effect. Pernod continues to benefit from better emerging market exposure and higher operating leverage given its premium portfolio in these markets.
The debt position remains high as despite the strong FCF generation, the absolute level of debt has not changed materially given unfavourable foreign exchange moves. Performance in Asia and other emerging markets remains strong, and it is encouraging that it has confirmed that the improving trends seen since the start of the year in the US, Russia and Duty Free remain in place. However, there is no indication that conditions in Western Europe are set to improve.
As done in the past, Pernod will communicate its earnings guidance for the current year at the AGM to be held on November 10th.