Pernod Ricards Martell Cognac found good growth in H1 results

Pernod Ricard's Martell Cognac found good growth in H1 results

Sales teams for major spirits producers in China and India have not had it easy of late. Both Asian giants have been buffeted by the kind of macro-economic headwinds far out of the control of the business world. Take, for example, the Chinese government's corruption clampdown that put paid to high-margin spirits, or an increase in political temperance that led to the highway alcohol ban in India. 

Pernod Ricard suffered through both of these disruptions. But in new H1 figures released yesterday the company showed the worst may well be past as India and China powered the first half of its financial year to what analysts at Bernstein describes as Pernod's best organic performance for almost half a decade. A 5% jump in organic sales was down to an 8% rise in China on the back of improved Martell Cognac performances and a 9% increase in India as the highway ban effect worked its way out of the system.

The China bounce, says Bernstein, was even more impressive considering that Chinese New Year - a major selling period for those China sales teams - will fall later this year (next week, in fact), affecting Q3 instead of Q2. Cash tills across the country should already be ringing to the sound of premium spirits purchases as people gear up for next week's celebrations - music to the ears of Pernod Ricard, Diageo and the other international suppliers.

According to Stifel's Mark Swartzberg, the better-than-expected performance in China is partly down to a "sustained" Cognac recovery across all of Pernod's price tiers, a rebound that has been flagged in the past but now appears set in stone. It is not just Pernod benefiting from the bounce - Cognac rivals including Remy Cointreau have enjoyed upticks for their own brands in China.

Swartzberg also said that better vodka and wine sales further boosted China H1 sales - a fillip for Pernod as Absolut continues to stagnate in the US. But the good news doesn't stretch to all categories. Pernod warned that the return of Scotch sales in China has yet to be confirmed, but the company should still be happy that Chivas is now showing signs of growth following the decision last year to restart investment behind the brand in China

Overall, then, the future looks bright for Pernod in India and China. In a note today, Societe Generale's Laurence Whyatt predicts both countries will grow sales by 15% for the full-year as Cognac continues to accelerate in China and there is preferred weighting for India's H2.

Elsewhere, though, some long-term cracks in the Pernod Ricard business edifice continue to cause concern.

As noted above, US vodka sales remain in the doldrums despite concerted work from Pernod to revive the Absolut brand there. Indeed, according to JP Morgan, the vodka brand's woes are the key headwind on Pernod's global pricing. 

Western Europe also weakened for Pernod as difficulties in France and Spain hampered sales. Along with the US headwinds, Pernod's mature market sales decelerated to +2% in 1H from +3% in 1Q, according to Stifel's Swartzberg.

But looking ahead, the biggest pitfall that awaits Pernod at the end of its fiscal year will be currency fluctuations. As with weather, Pernod Ricard has minimal control of the global exchange rate market (outside of hedging), so spends little time complaining about it. However, in yesterday's results, the company said it has updated its FY18 FX guidance to account for an estimated EUR180m hit to EBIT (Bernstein estimates a EUR175m). It is a hefty price to pay for what in essence is a tax on Pernod's global reach.

However the hit should not take away the company's underlying strength, which was highlighted yesterday by management's decision to upgrade its FY operating profits expectation to between 4% and 6% (net profits were up 5.7% in the half-year).

As Pernod makes changes to its executive bench, the company appears in rude health.

Pernod Ricard performance trends 2013-17 - results data

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