The Wehring Interview - Pernod Ricard

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February's Wehring interview comes ten days late, due to the early arrival of Wehring Junior shortly after our editor returned from France, where he was granted 30 minutes with the CEO of Pernod Ricard, Pierre Pringuet. In their time together, Pringuet discusses the first six months of Pernod's fiscal 2011, as well as Absolut, China and war-chests.


It may be a brisk February morning outside, but in Pernod Ricard's Paris headquarters the staff's beaming faces suggest that the sun is out and it's here to stay. Indeed, at the company's press conference for its first-half results earlier today, CEO Pierre Pringuet and Gilles Bogaert, Pernod's MD of finance (who just-drinks met last year) both seemed so happy with the firm's performance that a round of 'The Sun Has Got His Hat On' looked in the offing at one point.

While fronting up to the press earlier, Pringuet had looked like he'd been out celebrating the night before. The odd stifled yawn coupled with his smiling face suggested a good time had been had by all. “I had a dinner last night,” he explains, “and today's been quite a busy day. But, yes, we're very happy indeed”.

As well he should be. With a 13% jump in net sales and a 10% rise in net profits for the six months to the end of December, it's little wonder that Pringuet took great joy in upping Pernod's full-year profits guidance – a feat all the more impressive given Pringuet's bullish performance forecast back in October.

In spite of all this, however, Pernod's share price took a hit the morning of the results announcement, falling by 4% in early trading. Do the analysts know something we don't, I ask Pringuet. “If we knew in advance what would trigger a share price increase or decrease,” he smiles, “we'd be very rich! When Diageo, LVMH and L'Oreal announced their results, they all suffered the same sort of decline.

Pierre Pringuet

Pierre Pringuet, CEO of Pernod Ricard

“We discussed with our advisers what we should expect for this year,” he continues. “Definitely, the economy is recovering, but there is a lot of nervousness amongst investors. We should assume that the high level of volatility will prevail through the year. If you look at our share price in the last two years and compare it to where it was before, it has completely changed – there is much higher volatility today.”

True, but some analysts pointed to Pernod's A&P spend in the period, which, with an 11% year-on-year lift, made its presence felt on the company's bottom line. “Analysts would like us to sell more, of which more would be premium, with less A&P and fewer salesmen on the payroll, which means more profit,” counters Pringuet. “I'm sorry, but I don't have the recipe for that. We sell more premium products, yes, with more A&P. This premiumisation produces higher EBIT margins at the end of the day.”

Of those premium products, one of the big surprises in the first half of Pernod's fiscal year was how well Absolut performed in the US. Having been available for over 30 years in the country, where consumers have been more prone to stay at home due to the downturn and the cocktail boom has entered maturity, a 6% lift in volumes (according to Nielsen) compares even more impressively with a 1% dip in the first half of 2009/2010.

“It's down to a combination of factors,” says Pringuet. “The first one is obvious – when you transfer a brand of almost 5m cases from one company to another, in a particularly favourable environment (back in October 2008), it's not the easiest thing to do. We knew that there would be some disruption. But that's behind us now, and the brand is fully integrated.”

The other main factor, according to Pringuet, is a case of good idea, bad timing. “Before our acquisition, at the beginning of 2008, the V&S people made a very good decision: To increase the price of Absolut to just above US$20. Before, the price of a standard 75cl bottle of Absolut in the US was between $18 and $20. At some stage,” he notes, “you have to go over the $20 cap. So, they moved the price point to between $20 and $22, and that was an excellent decision.

“The problem is that, between the decision being taken, at the beginning of 2008, and the actual implementation in October 2008, it's now clear that it was a very good decision, but at the wrong moment. Our US affiliate talked to the Absolut Company at the beginning of 2009, and they concluded that it would be better to scale back the price increase. By the Autumn of 2009 it was back to its original price. Definitely, the brand reacted very positively to that.” Pringuet points out, however, that the reversion is only a “temporary measure”.

“We have the clear intention to increase the price again,” he says. “Probably not this fiscal year, but possibly next year.”

Market-wise, hands down, the star performer for Pernod was China, which seemed to soak up anything brown that the company could throw at it in the six-month period. “Well, yes, provided it's branded and at least 12 years old,” corrects Pringuet.

Where is it all going right for Pernod in the country, I ask Pringuet partly for the benefit of arch-rival Diageo. “We have two advantages,” he says. “First, we have a complete portfolio. We can combine Scotch whisky and Cognac – both are equally important. Secondly, we are the leader because we started first (in China). Being first in this business is important; if you're not first, you lose a great deal of the benefits.”

While brown is the colour for Pernod in China, Diageo seems to have stolen a march on the company, with its plans to move into the country's white spirit market through Shui Jing Fang. Is Pernod missing an opportunity here? “We are well-known for combining international and local brands, it's one of the key features to our strategy,” says Pringuet. “A local brand will give you critical mass if necessary, as well as better integration in the local culture.

“We are looking around to see what's available,” he admits. “In the medium-term, we'll look seriously at what could happen, but we have a clear policy of no acquisitions.”

Now, this policy of no acquisitions has always struck me as a curious statement to make. It's always been a fair position to take soon after an acquisition, sure. But, having passed its EUR1bn (US$1.36bn) asset disposals target following its purchase of Vin & Sprit in 2008, what has prompted Pernod's CEO to be so adamant that the company will not buy? Maybe, he's just tired of the likes of me asking the same old M&A questions?

“No,” he counters, it's not a statement. "But when I'm asked if I'm interested in Remy Cointreau's Champagne, for example, or this brand or that brand, I'll say: No, no acquisitions. I never said no acquisitions forever,” he qualifies. “I said no acquisitions for the time being, that's it.”

Perhaps, then, the longer any kind of auction process for Beam Global Spirits & Wine's portfolio takes to play out, the better that would be for Pernod? Pringuet doesn't take the bait. “Our position is extremely clear today,” he reiterates. “In the medium-term, however, yes, we want to be seen as a consolidator, definitely.”

With net debt heading south – currently at EUR9.72bn (US$13.52bn) – and free cash flow heading in the opposite direction – EUR716m in the first half of the current fiscal year – it would appear that Pernod may be able to scrape some cash together, should it want to go shopping. The size of such a war-chest is, according to Pringuet, less simple than a number on a piece of paper. “The war-chest is your company plus the target company,” he says. “At the end of the day, you will look at the leverage of the combined entity, and take into account the synergies you can generate through the acquisition.

“In the case of Absolut, we were able to generate EUR150m of synergies for a business which has sales of about EUR1bn; in Allied Domecq, we generated EUR350m in synergies for a business with sales of EUR3.7bn. So, the proportion was much higher for Absolut than it was for Allied. The reason for that is simple,” he adds. “The bigger we are, the less additional structure we need when we incorporate the new brand.

“So, the size of our war-chest depends on what the target is, what the brands are, which markets and what sort of synergies we can generate.”

As our time together draws to a close, I ask Pringuet, who celebrated his second anniversary as Pernod's CEO in November, if he's enjoying his tenure at the top. Leaning back, he smiles. “Well,” he asks, “how do I look?”

Like he's just been partying.

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