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Cognac bounces back for Remy Cointreau in US, with Moet Hennessy in its sights - Analysis

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Having cycled tough comparisons for Cognac in the US in its first quarter, Remy Cointreau yesterday reported "normalised" sales in the category and market in Q2. For the rest of its fiscal year, Moet Hennessy's current stock issues appear to present the group with a golden opportunity.

Earlier this year, Remy Cointreau released a limited edition Remy Martin XO, retailing at around US$230

Earlier this year, Remy Cointreau released a limited edition Remy Martin XO, retailing at around US$230

Remy's Cognac operations have performed an impressive turnaround since the dark days of fiscal-2014, when they posted a 23% tumble in sales: For the 12 months to end of March this year (fiscal-2017), the Remy Martin Cognac portfolio delivered a year-on-year sales lift of 10%.

The best could yet be to come, if one analyst's forecasts come true. In a note to clients this morning, JP Morgan's Komal Dhillon estimates a 12% sales jump for the Remy Martin division in the current fiscal-year.

"Remy Cointreau's premiumisation strategy is well-placed to capitalise on global trends and drive margin expansion," says Dhillon in his investment thesis. "With improving top-line and accelerating margin expansion, we expect Remy Cointreau to deliver organic EBIT growth of low-double-digits, significantly ahead of the sector."

The group's revised focus on the US means the market has become its sales engine. In the last fiscal-year, The Americas accounted for 44% of combined sales. The US is by far Remy's biggest market in the region.

In a trading update this week for the second quarter of fiscal-2018 - the three months to the end of September - Remy's Cognac volumes to the US increased 15%. The company credited the current tribulations at rival Moet Hennessy for helping drive its own growth.

On at least three occasions this year, Moet Hennessy has been moved to highlight an issue with securing enough Cognac stock. "Hennessy Cognac saw volumes increase significantly, which could impact the availability of stocks for the rest of the year," the group warned in April's Q1 results. The message was echoed in July and then again last week.

Flip around the saying that one man's meat is another man's poison, and Remy is clearly benefiting from Moet Hennessy's problems.

"Management highlighted that the category depletions were impacted by Hennessy running out of stock of VS in the market, with price increases thus reasonably expected," notes Trevor Stirling at Bernstein.

JP Morgan's Dillon concurs. "Remy is expecting to take advantage of the weak US Dollar and Hennessy's supply constraints, and invest in the US."

One other possibility suggested by Dhillon is that Remy might return the acquisition arena in the next year or so. "Remy's balance sheet is rapidly de-gearing," he writes. "We estimate it should reach 0.9x/0.7x net debt/EBITDA by Mar18/Mar19.

"This would provide firepower of around EUR500m for M&A or for a capital return."


Sectors: Company results, Spirits

Companies: Remy Cointreau

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