Pernod’s Asian division drives growth

Pernod Ricard’s annual results mirror Diageo’s in several ways. Despite the recession profits were up yet again, as predicted, but the market marked down the shares because the figures were below analysts’ expectations despite both groups meeting their own predictions.

Diageo’s organic profit growth was 2%, Pernod Ricard’s 4%. The two leading wines and spirits groups both significantly increased their advertising and promotional expenditure in the year to the end of June, both reduced debt substantially and both generated healthy free cash flow (Diageo more than £2 billion, Pernod Ricard €1.1bn). Both say their internal data is pointing to an accelerating but hesitant global recovery and both are adamant that continued heavy advertising and promotional support for priority premium brands will bring long-term rewards.

There are, however, differences, the most significant being where their profits are sourced. Yesterday, Pierre Pringuet, Pernod Ricard’s chief executive, announced that the company’s Asia/Rest of World Division that includes Australasia, Africa and the Middle East now generates the largest proportion of both sales and profit from recurring operations. Meanwhile, its “Americas” region (including South America) accounts for 28% and 27% respectively. Compare that to Diageo’s focus on North America, which accounts for about 38% of sales and profits, whereas it is proportionately weaker in the faster moving Asian markets.

Pringuet said yesterday that Pernod Ricard had achieved double digit growth in Asia last year: “We have consolidated our leadership in Asia. It’s proof of our long-term investment, where we set up a separate division in the late ’80s. We get by far the highest level of return on our investment in the region than any competitor.”

Both groups are intent on consolidating their positions as the global recovery takes place but whereas Diageo would be in a position to make acquisitions if the right opportunity occurs (see last week’s Finance on Friday), Pringuet says that “acquisitions are not on the agenda” despite a large chunk of the debt incurred to buy Absolut being repaid. Pernod’s net debt is now down to a ratio of 4.9 times earnings before interest, tax, depreciation and amortisation but it wants to cut that to about 4.

Significantly, however, Pringuet said that its target of raising €1bn through disposals of non-strategic brands is effectively complete, so further debt reduction will come from cash flow.

As far as the UK is concerned, Pringuet said that consumer spending, while difficult, is improving. “In London and New York we’re back up to former [pre-crisis] levels of on-trade consumption”, he said. But in a discussion on global wine markets, he stressed that the UK off-trade remained problematic. “There are unbridled promotions we refuse to join in”, he said. “Three bottles of wine for £10 leaves virtually nothing for the producer.” As a result, the group would continue to focus on premium pricing at the expense of volume”, he said, pointing to the group’s increase in gross margins because of its uncompromising stance on price.

Finance on Friday, 03.09.10