Pernod Ricard hails a “symbolic step” as sales exceed 10 billion euros


Last week, the premium drinks company announced record annual sales, but Pernod Ricard remains unable to close the gap between itself and Diageo.

Record annual sales and profits up a fifth, market share gains in key markets and the company’s highest ever free cash flow. Add to that the dividend which will be increased by 32% and a new share buyback program worth up to 750 million euros to further boost investor returns, and it’s quite a success.

Any CEO would be proud to make such an announcement, and Alexandre Ricard, Chairman and CEO of Pernod Ricard, welcomed it, calling the year ended at the end of June a “symbolic milestone” during which the figure of business of the French group exceeded 10 euros. billion.

Yet despite all the positives, its share price has fallen, albeit slightly. Many expected him to rise, especially as he was oozing confidence for the new exercise which began in July and which Ricard said had started well.

It’s not that the financial markets were party animals, but there were three factors at play.

First, Ricard had revealed in early June that he expected to report bumper results in early September, so he dismissed his own news.

Second, global equity markets are on the wane as political uncertainty increases and inflationary pressures soar. Even resilient sectors like premium beverages are struggling to attract investors.

Third, its competitors in the global beverages business reported equally impressive numbers, so despite the undoubted achievements, Pernod Ricard had an air of “me too” about them.

Current operating income increased by 19% to 3.024 billion euros, slightly above analysts’ forecasts of an increase of 18.1%, stopped after the presentation of Ricard in June.

Revenue of €10 billion represented organic growth of 17%, up 8% in the key US market, 5% in China and 26% in India.

About 6% of the growth came from higher prices, including two rounds of increases in the United States in response to soaring costs.

Two major milestones for the brand were achieved with Absolut vodka surpassing 12 million cases sold and Jameson Irish whiskey surpassing the 10 million case mark.

Ricard said the French group had gained market share in most markets and raised prices by a mid-single-digit average, helping to offset cost inflation. Further price increases are coming in the US and China this month.

Yet just a month ago, Diageo reported organic net sales growth of 21.4%, for the same 12 months, again with strong double-digit growth across all regions. Its organic operating income increased by 26.3%, still with growth in all regions.

Against this backdrop, Diageo shares have fallen around 7% this year, while those of Pernod Ricard are down around 14%. Diageo’s share price is around 21.5 times forward earnings forecasts, while Pernod Ricard’s is priced slightly lower at 22 times.

Over the year to the end of June, Pernod Ricard’s turnover increased by 12% in the United States, the most profitable spirits market in the world, generating 29% of the group’s revenues. But over the same period, Diageo (including sales in Canada) grew 14%, accounting for nearly 40% of its business.

Diageo is valued at around £85bn, while Pernod Ricard accounts for around half that.

When he took office six years ago, Ricard said his long-term ambition was to make Pernod Ricard the world leader in premium drinks.

Yet, despite the huge progress made since then, the financial gap between the two has hardly changed.

Pernod Ricard continues to achieve personal bests but the bar keeps rising.

It’s much the same picture from Kentucky where Jack Daniel’s owner Brown-Forman released quarterly results last week that also easily eclipsed analyst forecasts.

Sales over the past three months increased 11% to US$1 billion, beating estimates of US$978 million. Earnings jumped 30% to $249 million, or 52 cents per share when analysts had expected 47 cents per share.

Organic growth was ahead by 17% and it should be noted that some sales were limited by the persistence of glass shortages. The company had to change the production of some of its lines to ensure that the flagship Jack Daniel’s product was fully stocked.

Jack Daniel’s achieved organic net sales growth of 21%, while premium brands including Old Forester and Woodford Reserve were up 35% from a year ago.

Like Alexandre Ricard, Brown-Forman Chairman and CEO Lawson Whiting is confident about the immediate future.

“While uncertainty persists in the market, I remain optimistic that we can build on this momentum and achieve our short and long-term growth ambitions,” he said.

Shares of Brown-Forman are up around 10% so far this year, but that’s largely due to the deal with Coca-Cola to produce canned Jack and Coke, but they’ve been little budged on numbers and Whiting’s optimism.

While all global producers are keenly aware of the pressures on input costs, particularly for glass, none are unduly anxious.

For Hélène de Tissot, financial director of Pernod Ricard, the primary objective is to protect the group’s gross margins, which will require rigorous cost control and active use of price increases.

Ricard said “Premium plus spirits are an affordable indulgence” and he saw no evidence of declining consumption. It was a theme taken up almost to the word by Whiting.

The French group is determined to achieve its objectives until 2025 of annual growth in turnover of between 4% and 7% (Ricard wants it to be upwards). It also aims to raise its operating margin by 50 to 60 basis points per year.

The group expects “dynamic and generalized sales growth, on a normalizing comparison basis, with a good start to the first quarter”, which began in July.

Brown-Forman also took price increases in the spring and plans to do so again later this year. Whiting recognized that the consumer is less resilient to higher prices when all growers raise them together rather than a single isolated company.

Meanwhile, Diageo is aiming for roughly the same level of growth as its French rival, but is determined to grow its current share of the total alcoholic drinks market from just over 4% today to 6% by here 2030.

Pernod will maintain pressure on its “must have” markets such as India and China, where demographic forces and the enrichment of the middle classes are increasing to increase the demand for quality spirits.

Global demand for spirits has increased by 11% since the pre-Covid era, says Ricard, and he expects that to continue, especially as the wanderlust returns.

The group expects “dynamic and generalized sales growth, on a normalizing comparison basis, with a good start to the first quarter”, which began in July.

He believes Pernod Ricard will reach pre-pandemic levels of profitability in travel retail this year, and highlights its pricing strength by revealing that, while volumes remain depressed, profitability has increased as premiumisation continues.

After the early spring restrictions, the larger reopening of Chinese travel “would be the icing on the cake”, he said.


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