Investing.com -- Shares of Pernod Ricard (EPA:PERP) rose more than 2% on Thursday after the company reported its first-half results, which came in line with market expectations.
The liqueur company reported a 4% drop in organic sales growth, matching analyst expectations. While cognac faced headwinds and a negative price/mix effect of 6% impacted results, a 2% volume increase partially offset these challenges.
“The results themselves were not meaningfully worse than expected according to Visible Alpha consensus. Profitability was boosted by a 115bps decline in A&P, which doesn’t fill us with confidence, but nonetheless this was not as bad as we had feared it might be,” said analysts at RBC Capital Markets in a note.
Despite selling more units, the shift towards lower-priced products and/or price reductions led to lower overall revenue.
The company’s guidance for FY25 has been revised downward, with a forecast for a low single-digit decline in organic sales growth, which remains broadly consistent with market expectations.
However, Pernod Ricard is still confident in maintaining flat margins for the year. Looking further ahead, FY26 is now viewed as another year of transition, with growth in FY27-29 expected to average 3-6%, supported by unquantified operating margin expansion.
Despite these challenges, the company made a notable decision to cut its A&P (advertising and promotion) spend by 115 basis points in H1.
While this move might raise questions from investors about its potential impact on market share, Pernod remains focused on its broader strategy, which includes a continued commitment to improve cash conversion.
The company has also highlighted that its investment in capital expenditure and inventories peaked in FY24.
Pernod Ricard’s organic EBIT fell 2.1%, outperforming the 5.5% decline analysts predicted. Reported EBIT was down 7% year-on-year, matching consensus. However, adjusted EPS of €5.06 missed estimates by 2% and represented an 11% year-on-year decrease.
Pernod’s performance varied by region. In Asia and the Rest of the World, organic sales in Q2 dropped by 3.2%, with China continuing to face a challenging macroeconomic environment and weak consumer demand. Sales in India showed positive momentum, up 6% for the half-year.
The Americas saw a 3.4% decline in Q2, with the US market underperforming, but expectations for improvement were set for the second half. In Europe, sales were more resilient, though Germany and Spain faced some consumer spending pressures, leading to declines in those markets.
The company is also placing emphasis on improving cash flow, with its net debt-to-EBITDA ratio now standing at 3.5x.
It is focused on extracting savings and expects benefits from disposal proceeds in H2. Analysts from Morgan Stanley (NYSE:MS) noted that despite the challenges, Pernod Ricard’s long-term efficiency initiatives, which are expected to generate €1 billion in savings from FY26-29, remain a key component of its strategy.