Grin and tonic

While investors continue to fret about a new global financial crisis triggered by Greek, Portuguese and Spanish debt, the world’s big drinks groups have been given a tonic.

Pernod Ricard has increased its guidance on full-year profits after releasing encouraging results for the first three months of this year. This comes on the back of Diageo saying earlier this month that it was seeing “green shoots” of recovery for premium products.

Pernod Ricard’s chief executive, Pierre Pringuet, said: "We clearly see an improvement in the economic environment,” but noted that Europe remained a “dark zone” after a 6% fall in organic growth in comparison with the first quarter of 2009. However, sales in the Americas rose by 3% and by 10% in Asia and the rest of the world. The company said that conditions in key markets such as the US, Russia and duty free had improved.

The positive trend is predicted to improve in the present quarter, allowing Pernod Ricard to say that its full-year figures will now be at least 3% ahead of last year’s, compared with previous predictions of organic growth of between 1% and 3%.

While Pernod Ricard’s figures were bolstered this time by technical factors such as destocking at the same time last year, the underlying trend was positive. Organic sales were up 16% in the quarter, compared with brokers’ forecasts of an 11% rise, and the group’s 15 strategic brands grew by 21%.

In the first nine months of Pernod Ricard’s financial year they have grown by 3% in value, with the best results coming from Martell, Absolut and The Glenlivet. Montana remained stable but Jacob’s Creek fell by 2% and Champagne recorded double-digit declines, although the trend is now improving.

The group is seeking to benefit from more encouraging global conditions by increasing its advertising and promotion spending on strategic brands and markets to about 18% of sales compared with 17% in 2008-2009.

One factor that the French group highlighted was the negative effect on its margins and profitability caused by dollar depreciation. That, however, may be about to change. Currency experts have suggested for the past year or so that the euro was too strong (as the UK wine trade knows to its collective cost), but the sovereign debt turmoil is bound to hurt the single currency.

A weaker exchange rate will boost returns to European exporters such as Pernod Ricard. UK importers will also feel the benefit of a weaker euro. It may not happen immediately but Capital Economics, the respected forecasting house, suggests that sterling, despite the size of the UK debt, could recover to about €1.35 during next year at the same time as the pound remains stable at approximately €1.50.

However, exporters, notably in Scotland, will be less pleased as sterling strengthens over the medium-term. Meanwhile, everyone has the post-election turmoil to negotiate in the short-term.

Finance on Friday, 29.04.10