Pernod Predicts China Improvement as Inventories Improve

Pernod Ricard SA predicts an improvement in China next year as the marker of Martell cognac entices customers with its less expensive liquors and inventory levels in the country level out by the end of next month.

France’s biggest distiller is focused on growing overall sales and expects gradual gains over the next two to three years, Chief Financial Officer Gilles Bogaert said in an interview yesterday at an investor conference in Cork, Ireland. Profit growth will also be aided by cost savings announced in February, which will focus on cutting overhead expenses.

Bogaert expects a return to “high single-digit” growth in China in the mid-term. “The only uncertainty is the exact timing,” he said.

The maker of Absolut Vodka and Chivas Regal whisky and rivals have been hit by plunging demand for cognac in China caused by the government’s crackdown on lavish spending. Competitor Remy Cointreau SA today predicted a return to growth in the current fiscal year after annual profit plunged due to Chinese customers cutting back purchases and using up inventory. Pernod predicts that stock levels in China will settle by the end of July, Bogaert said.

Pernod can also benefit by offering less expensive liquors, such as its Martell Distinction cognac, Ballantine’s whisky or even Absolut, as drinkers increasingly move away from very high-end brands, the executive said. Pernod last year generated more than a third of its revenue from Asia.

The shares rose 1.3 percent to 89.72 euros at 11:47 a.m. in Paris trading. They have advanced 8.3 percent so far this year.

Structural Shift

“There is a big structural shift that happened in China that started a couple of years ago,” Alexandre Ricard, the company’s incoming chief executive officer, told investors yesterday. “China is becoming a normal emerging market,” he said.

Bogaert reiterated Pernod’s forecast for organic annual profit growth of 1 percent to 3 percent. Pernod, which will elaborate further on its cost-saving program at its full-year results on August 28, said the company expects to reduce structural costs and that it will invest some of the anticipated savings of 150 million euros ($205 million) a year in promoting brands.

Pernod, which sold its first euro-denominated bonds in two years in March, is content with having about 90 percent of debt in bonds with the remainder in loans for flexibility. Conditions for issuing debt “have been excellent,” said Bogaert.

Credit Rating

“The bond markets are open to Pernod Ricard,” he said. “We can be pragmatic and seize good windows, but we tend to go to the market when we need to refinance.”

The company, which Bogaert said won’t repay much debt this year due to lower profit growth and unfavorable exchange rates, wants to maintain an investment-grade rating, but could also make bolt-on acquisitions of up to a billion euros, the executive said, without elaborating further.

If net debt to earnings drop to below a ratio of three times, Pernod may consider measures, including returning cash to shareholders. The company had a ratio of 3.5 times in June, he said.

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