Pernod Sees Savings Plan Supporting Brands Amid China Drop

Pernod Ricard SA said today it’s starting a cost-saving project to support brand development as Europe’s second-biggest distiller trimmed its forecast for full-year profit growth, citing declines in China.

Pernod said it wants to “improve organizational efficiency” while delivering annual savings of 150 million euros ($205 million) over three years. The project will focus on faster business-plan execution and may lead to some job cuts, Chief Executive Officer Pierre Pringuet said on a call today. The company will reveal a more detailed plan later this year.

Pernod, the maker of Absolut vodka and Chivas Regal whisky, has been hit by a slowdown in emerging markets. Crackdowns on lavish spending in China have weighed on sales of expensive cognacs such as Pernod’s Martell, traditionally used for toasts at banquets or as gifts. Remy Cointreau SA, the maker of Remy Martin cognac, said in January it anticipated no relief from declining sales for the Chinese New Year, when expensive liquor is traditionally given as gifts. Pernod’s sales fell 18 percent in China in the first half.

“Last summer we thought the difficulties in China would be over by Chinese New Year, but today we say it’ll take the full fiscal year to enjoy a better situation there,” Pringuet said today. The company “wants to retain a sound commercial policy, and we don’t want to compromise on the price” of drinks sold.

Shares Rise

Pernod reduced its growth forecast for this fiscal year, forecasting earnings before interest and taxes, excluding some items, to increase 1 percent to 3 percent on an organic basis. At the time of its first-quarter results in October, it anticipated growth of 4 percent to 5 percent.

Pernod’s shares rose 2.7 percent at 10:38 a.m. in Paris, its seventh day of gains. The stock has added 3 percent this year for a market value of 22.6 billion euros.

“The guidance, new cost cut plans, and even the negative price and mix for Martell imply things in Asia will take time to recover, but the worst may be over for Pernod,” Pablo Zuanic, an analyst at Liberum in New York, wrote in a note today.

So-called organic sales were unchanged in the company’s fiscal first half, Pernod said today in a statement, compared with the median estimate of 11 analysts for a 0.5 percent decline. Earnings before interest and taxes, excluding some items, totaled 1.36 billion euros, a 2 percent organic increase.

Mature Catchup

“I’d describe the situation today as clearly a slowdown in emerging markets,” worse than anticipated at the start of the year, Pringuet said. “At the same time the mature markets are catching up.” While sales of very high-priced brands in China have waned, less-expensive so-called premium spirits such as Absolut and Ballantine’s Finest whisky are selling well.

“This is a sort of normalization of the Chinese market,” he said. “It was an exception to have imported liquids selling only at the top end.”

Organic sales slid 4 percent in the Asia Rest of World region, and rose 3 percent in the Americas and 4 percent in Europe, aided by improvements in the U.S., France and Germany.

Pernod’s cost-cutting project follows an announcement by larger competitor Diageo Plc Jan. 30 that it’s examining ways to reduce spending by 200 million pounds ($333 million) a year by the end of fiscal 2017. Alcohol companies including Heineken NV and SABMiller Plc are also seeking ways to strip out costs from their operations in regions including Europe through more efficient purchasing of goods and services.

Organic measures exclude the effect of acquisitions and currency fluctuations.

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