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Pernod Earnings Miss Estimates on Increased Marketing

Pernod-Ricard SA Chief Executive Officer Pierre Pringuet
Pernod-Ricard SA Chief Executive Officer Pierre Pringuet. Photographer: Daniel Acker/Bloomberg

Pernod-Ricard SA, the maker of Absolut vodka, reported first-half earnings growth that missed analysts’ estimates after it boosted spending on advertising and promotions to drive sales of major brands in emerging markets.

Earnings before interest and taxes, excluding the effect of acquisitions and disposals, rose 8 percent in the six months ended Dec. 31, less than the average 9 percent increase predicted by analysts surveyed by Bloomberg. Revenue excluding acquisitions advanced 7 percent, the company said today in a statement. That missed estimates for a 7.7 percent increase.

Pernod declined as much as 4.2 percent, or 2.98 euros, to 67.65 euros in Paris trading and was down 3.6 percent at 11:23 a.m. The stock has gained 19 percent in the last 12 months.

The distiller increased advertising and promotional spending “absolutely in line with what we said when we started the year,” Chief Executive Officer Pierre Pringuet said in a telephone interview. “We need to invest more in the fast-developing markets, but we also need to invest in markets including the U.S., where there are some good signs that the market could recover, even slowly.”

Pernod and other liquor makers are increasing spending on their major brands and in emerging markets to drive growth as record budget deficits force cutbacks by European governments, puncturing consumer confidence and reducing sales of spirits.

Competitor Diageo

Diageo said Feb. 10 that it increased so-called organic marketing spending by 10 percent, with more than half focused on developing countries. Pernod raised its spending to 17.9 percent of sales in the fiscal first half from 17 percent a year earlier, reaching the same level as “before the crisis,” the CEO said.

Pernod and Diageo are “showing no real operating leverage” by increasing such expenditure, Matthew Jordan, an analyst at Matrix Group in London, wrote today.

Pernod raised its full-year profit target today after it sold more expensive liquor in countries including China in the first half. Organic Ebit will be close to 7 percent, up from previous guidance for a gain of close to 6 percent, the Paris-based distiller said.

“Business was buoyant in emerging markets and the group also benefitted from a gradual recovery in North America and an improvement in Western Europe,” the company said.

Exceeding Expectations

Jason DeRise, an analyst at UBS in London, said the company may do better than it predicts. “Typically Pernod guides conservatively, and we would view this guidance as conservative as well,” he said.

Total revenue advanced 13 percent to 4.28 billion euros, helped by the strengthening of the U.S. dollar to the euro. Net income rose 10 percent to 666 million euros.

Sales at Pernod’s Europe unit, which garners about 31 percent of revenue, rose 2 percent, led by countries in central and Eastern Europe. The company said it had “moderate” growth in western Europe. Organic revenue gained 5 percent in France on increased sales of Pernod’s “Top 14” brands, which include Ricard and Mumm champagne. The company declares results from its home market separately from the rest of Europe.

Diageo has declined almost 5 percent in London trading since its results missed estimates on sluggish demand in Europe. The company, based in the U.K. capital, reported sales and profit growth that was slower than Pernod’s.

‘Robust’ Europe

“Although, as Diageo highlighted, Spain and Greece are likely to have been tough, these are relatively small parts of the group’s European exposure,” Andrew Holland, an analyst at Evolution Securities in London, wrote in a note before Pernod’s report. “Pernod is skewed more to the still-robust markets of France and Germany and higher-growth central and eastern Europe regions.” He has a “buy” recommendation on the stock.

Profit was aided by the “Top 14” brands, which increased revenue more than volume. Martell cognac sales surged 32 percent on an organic basis, while Absolut vodka’s 7 percent gain “confirmed the recovery initiated” in the second half of last year in the U.S., Pernod said.

Sales of the more expensive brands, which include Glenlivet and Chivas Regal whiskies and Havana Club rum, are “further evidence” that consumers are returning to premium drinks, analysts including Andy Smith at MF Global wrote today.

Asian consumers are buying more Scotch whisky and cognac, according to Pernod, which estimates that it controls about half of the Chinese whisky market and 40 percent of the cognac market, and is the market leader in higher-priced cognac.

Chinese New Year

Revenue in the “Asia and the rest of the world” unit, which contributed 30 percent of profit in the last fiscal year, soared 17 percent. Early shipments of spirits to China and sales before the Chinese New Year, when celebrants traditionally give expensive gifts, “magnified” sales, Pernod said.

Operating profit in the Americas unit edged up 1 percent, the company said, as it increased advertising spending and boosted the sales force in the U.S., Brazil and Mexico. Sales in the U.S. rose between zero and 0.5 percent, Pringuet said.

“The market is recovering” in the U.S., Pringuet said. “That’s why we decided to reinvest significantly, and particularly on Absolut.”

Diageo Chief Financial Officer Deirdre Mahlan said last week that the company “feels really good” about the North American market, though it remains “fragile.”

Pernod, which has the highest net debt to Ebitda ratio of the major European distillers according to Bloomberg data, said today that it reduced debt by 864 million euros.

The French company has sold units including the Wild Turkey bourbon brand to cut borrowings after buying V&S Vin & Sprit AB in 2008. Pernod has no plans to make acquisitions, Pringuet said in January. He declined to comment on a report today in the Daily Telegraph that the company may be interested in buying Fortune Brands Inc.’s spirits portfolio, or part of it.

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