Pernod Says Profit Margins ‘Under Pressure’ in Short Term

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Pernod Ricard SA, the world’s second-largest distiller, fell the most in two years in Paris after saying its profit margins remain constrained by a difficult business climate.

Gross profit margins are “still under some pressure,” although less so compared with last year, the maker of Absolut vodka said in a presentation in Paris Tuesday. The shares fell as much as 4.8 percent, the steepest intraday drop since June 2013, and were down 4.4 percent at 109.35 euros as of 2:42 p.m., the biggest decline in France’s benchmark CAC 40 Index.

China’s crackdown on extravagant spending has weighed on distillers’ margins as it’s depressed sales of Scotch whisky and the most expensive varieties of cognac. The slowdown has also hurt competitors Diageo Plc and Remy Cointreau SA.

“Margins are under pressure because pricing is still shy,” Chief Financial Officer Gilles Bogaert said at the conference. “We’re confident that the pricing mix will recover in the mid-term.” Pernod’s Chinese sales declined 3 percent in the first nine months of its fiscal year.

The distiller also said margins should widen in the medium term, and forecast organic sales growth of 4 percent to 5 percent over the same period. The maker of Chivas Regal scotch said it will focus on growth markets including the U.S., China, India and Africa amid challenging conditions in Europe. Acquisitions will be part of its strategy, and Bogaert said a deal for 1 billion euros ($1.1 billion) is “not out of the question.”

The sales forecast “might disappoint investors hoping for between 5 percent and 6 percent from Pernod, but a 4 percent drop in the share price is an overreaction,” said Trevor Stirling, an analyst at Sanford C. Bernstein.