Pernod Ricard

[weijian]

An analysis of Pernod Ricard, on of the largest listed wine/spirit conglomerate of premium/mass market brands. It has grown mainly via acquisitions. Noticeable ones - 1988: Jameson whisky. 2001: Seagram consisting of Chivas Regal, Royal Salute, Martell (cognac). 2008: Absolut Vodka. As of end FY23, it has ~240brands (end FY23), a mixture of international and local brands.

Asset
- The BS's asset portion is made up of Intangibles/goodwill (110% of equity) due to its growth by acquisition business model, working capital (40% of equity) and PPE (20% of equity). It is balanced out by liabilities - borrowings (60% of equity) and provisions (10% of equity).

~90% of its borrowings are fixed rate MTNs. As of 1H24, the majority of them were company issued in FY19-20 at low rates of largely 0.5-1.75%. Latest 5-10yr MTNs issued in 3Q23 are at 3.75%. So the rise of interest rates have had a lagging effect and only started to affect them from 2H23.

- After excluding whisky/cognac aging inventory, inventory turnover~210days, payables turnover~250days, receivables turnover~50days. CCC is <1month and looks good even though it does not have retail outlets. Some of the receivables are sold and that may explain the "low receivables turnover" to an extent.


Business
- Sources raw materials (grain, sugar cane, grapes) from farmers and has its own distilleries/blending/bottling facilities (although it also outsources some of it). Since it is premium, some of its production are still localized at its heritage sites - cognac in France, tequila in Mexico, rum in Cuba and whisky in Scotland.

- BU is divided based on brand type - (1) International brands (65% of revenue). (2) Local brands (20% of revenue), (3) Wines/Speciality brands (10% of revenue). Overall, the business economics: GPM~60% and NPM~19%. ROE~13% and ROIC~9%.

- Spirits have outgrown beer in the last decade. In value terms, spirits~41% in 2022 (Beer~38%, wine~16%). Back in FY22, it was beer~40%, spirits~35% and wine~22%.

- Premium brands are a proxy to the mass market and they professed themselves to be the leader in emerging market China/India, especially with their mixture of local and international brands.


Structure

- Founding family (Société Paul Ricard) owns 14% (20% voting rights) and 2nd largest shareholder is a listed investment holding company Groupe Bruxelles Lambert (Belgium) at 6% (11% voting rights). The current chairman/CEO is a scion of the founding family.

- Has an active sharebuyback (SBB) program where shares are mainly cancelled, with the remaining treasury shares used for their ESOP.

- In the last 2 full fiscal years (FY22/23), FCF was splited 50-50-50 between SBB, dividend and acquisition. The extra 50% was borrowed.

[LionFlyer]

- Premium brands are a proxy to the mass market and they professed themselves to be the leader in emerging market China/India, especially with their mixture of local and international brands.

China is their worst performing market among their various international markets (-10%) as per their annual report. The problems in China is not so easy to fix due to a change in the consumption patterns away from Martell, which is their key product. The acquisition of Chuan distillery also didn't fit very well with their product mix and they are trying to align that.

https://www.pernod-ricard.com/en/media/f...nd-results

[weijian]

- Premium brands are a proxy to the mass market and they professed themselves to be the leader in emerging market China/India, especially with their mixture of local and international brands.

China is their worst performing market among their various international markets (-10%) as per their annual report. The problems in China is not so easy to fix due to a change in the consumption patterns away from Martell, which is their key product. The acquisition of Chuan distillery also didn't fit very well with their product mix and they are trying to align that.

https://www.pernod-ricard.com/en/media/f...nd-results

Hi LionFlyer,

Admittedly, I finally had the chance to catch up to its latest results (full year and 1Q25 ending Sept) recently.

A few notes:

(1) On an absolute revenue basis, I would think that the US market (-9%) is worst off than China (-9%) for FY24. This is because US makes up ~20% of revenue, while China is ~10%. India is an even bigger market than China at ~12%. Of course, I don't think the Royal Salutes/Martells are the main sellers in India.

(2) From 1Q25, China is sky diving though. And it will only get worst as it hasn't captured the effects of the tariffs that had only been implemented last month. But then again, US been its largest market is still having the "inventory adjustments" with its -10% revenue drop.

(3) Overall, Pernod Ricard is seeing ~-6% YoY drop in organic revenue, which is similar to LVMH's Moet/Hennessey -7% and much better than Remy Cointreau's -16% in the same comparable July-Sept period. This doesn't suggest that its luxury brands are losing much relevance, although I have to admit that Pernod Ricard's breadth of brands is helping a lot too.

(4) I am not an insider to this industry and admittedly, will never pay up for any Hennessy or Cordon Bleu. Therefore, if you don't mind, would you be able to elaborate more about your statement of "The acquisition of Chuan distillery also didn't fit very well with their product mix"?

[LionFlyer]

(1) On an absolute revenue basis, I would think that the US market (-9%) is worst off than China (-9%) for FY24. This is because US makes up ~20% of revenue, while China is ~10%. India is an even bigger market than China at ~12%. Of course, I don't think the Royal Salutes/Martells are the main sellers in India.

(2) From 1Q25, China is sky diving though. And it will only get worst as it hasn't captured the effects of the tariffs that had only been implemented last month. But then again, US been its largest market is still having the "inventory adjustments" with its -10% revenue drop.

I am only familiar with their APAC business (ex India) so I can't comment on the other markets. Without going into specifics due to commercial sensitivity, the actual picture on the ground is poorer than what the annual report paints and is sort of alluded in Q12025 forecast that you mentioned. I believe it is the same for the rest of the other business.

The other point to note is they had been undergoing a global transformation, which has been upending everything, from finance, sales, to supply chain. One side effect is the APAC busines was completely restructured, HQ moved from HK to Singapore with a new leadership team.

https://www.marketingweek.com/pernod-ric...ing-spend/

(4) I am not an insider to this industry and admittedly, will never pay up for any Hennessy or Cordon Bleu. Therefore, if you don't mind, would you be able to elaborate more about your statement of "The acquisition of Chuan distillery also didn't fit very well with their product mix"?

I qualify that this is my personal opinion: The consumption of premium products is tied to their business cycle. Business cycle bad, businessmen not buying. Cognac (Martell) used to be one of their top seller in the premium category because of foreign premium is seen as a USP. Post covid, this is lesser relevant, since there is a switch to other spirits (baijiu (Kweichow Moutai, Wuliangye), or wine). The good thing for PR is at least they have Chivas in their portfolio, which is popular.

The challenge with Chuan is it is new. There isn't any brand awareness yet and they have only just started to hit the market in 2023. It is basically a long play but the current challenge is short term.

In the whiskey category, Chuan is also competing with its stable mate (Chivas) although technically, they are different (one is single malt, the other is blended).

Edit: In case you are wondering, I am a management consultant, retail & luxury, wine & spirits were my main clients. But just exited the industry.

[weijian]

Hi LionFlyer,

Thanks for your reply. A couple of thoughts on my side, and I hope you could help to improve/correct on them as necessary:

(1) I thought that baijiu has always been the staple number one spirit of choice in Mainland China. And whisky/cognac are the foreign intruders trying to gain a foothold in the mindshare of PRC business/entertainment circle. As like most other consuming products, the Chinese market is probably big enough in depth and breadth for every type of drink whom have learnt the know-how, to survive and strive.

(2) Anecdotally, I have heard folks making big money importing red wine into China in the previous decade. But the bubble seemed to have assuredly burst. PR's annual report has the global market share of each alcoholic drink by value. Wine has been getting lower over the years - FY15:22%, FY22:16%, FY23:15%. Do you think this is an irreversible trend? And what really caused it? Wine fatigue? Lack of marketing evolution compared to its competitors? Or poor quality grape harvests?

(3) PR recently announced that it is selling its international wine portfolio (Aus/NZ/Spain) and in the process, recognized ~700mil euros of PPE/intangibles write-offs in its FY24 financials. Together with prior write-offs, ~1bil euros has been accumulatively deducted from its balance sheet's equity. IMO, that's a good move - both strategically (focus on international brands which command premium or local brands which command mindshare) and optically (its high single digit/low double digit ROIC will improve).

(4) A new brand probably needs to take at least a decade to show some promise? In probably a decade, we will know whether the Chuan Pure Malt Whisky, distilled/bottled in Emeishan partly using Chinese barley and fully using Chinese single oak casks, will be acceptable to the future Chinese businessmen. Now, that's some long term thinking! And when we talk about luxury, we need to have long term thinking, isn't it?

[LionFlyer]

China market is big and foreign brands usually play on their foreign = sophistication / better quality USP to differentiate from local competitors. That approach has largely been blunted as consumers become more (1) discerning (2) price conscious in China. 

Re wine, PR's portfolio is largely New World wines. Didn't help that a large part of that was Australian (tariffs only ended in Feb 24). The category that is growing post covid is RTD (ready-to-drink). Not only a china trend but global.