Pernod Ricard Vows To Lift Margins After Activist's Arrival

By Publications Checkout
Pernod Ricard Vows To Lift Margins After Activist's Arrival

French spirits group Pernod Ricard, which is being targeted by activist investor Elliott, vowed to improve profit margins and shareholders' returns in a new three-year strategy plan.

Pernod, the world's second-biggest spirits group behind Diageo, also raised its profit growth outlook for the 2018/19 full year after first-half operating profits beat forecasts, helped by strong demand for premium cognac in China.

U.S. activist fund Elliott, which has built a stake of just over 2.5% in Pernod, has called on the family-backed group to raise profit margins to bring them more into line with Diageo.

Elliott also wants Pernod to improve corporate governance and has suggested €500 million in cost cuts and options such as merging with another spirits company.

Lifting Profit Margins

Pernod Ricard said on Thursday that its goal for the 2019-21 period was to lift operating profit margin by 50-60 basis points per year, provided it could deliver annual organic sales growth of 4-7%, having achieved 6% in the 2017/18 year.


The company also announced a new round of €100 million in cost savings, to drive this margin expansion

Pernod added it would progressively raise its dividend payout ratio to 50% of net profit from recurring operations by 2020, compared to 41% at present.

Last month Pernod Ricard took a step towards improving its governance, naming business veteran Patricia Barbizet to the newly created role of Lead Independent director.

Alexandre Ricard, the 46-year-old grandson of the firm's founder made sales growth his top priority when he took over in 2015. He has defended his long-term value strategy which - helped by a recovery in Chinese demand for premium spirits - saw sales growth rise to 6% in 2017/18 and 7.8% in the first half of 2018/19 alone.

Given this sales growth, Ricard and his troops now have more leeway to focus on improving operating profits and they had been working since the summer of 2018 on a new three-year strategy plan "Transform and Accelerate".


There have been already cost cuts under Pernod's existing efficiency plan, and the group on Thursday said it expected to have delivered by June 2019 a promised €200 million in savings - one year ahead of their initial target.

However, analysts have said more could be done at Pernod Ricard, which had a profit margin of 26.23% in 2017/18 against rival Diageo's 31.4%.

Strong China Performance

First-half group sales reached €5.185 billion, marking an organic rise of 7.8%. Profit from recurring operations reached €1.654 billion, an organic rise of 12.8%, mostly driven by a 28% jump in China sales.

This compared with analysts' forecasts in a company-compiled poll for a 9.3% organic rise in first-half profit from recurring operations, and an 8.2% rise in sales.

Pernod Ricard's robust first-half performance reflected very strong first quarter growth of 10.4% when the group benefited from advance shipments of cognac in China ahead of the Mid-Autumn and Chinese New Year.


Pernod reiterated on Thursday it expected second-half sales growth to moderate notably for Martell cognac in China.

Last week, key rival Diageo beat half-year earnings and sales forecasts on stronger demand from China while Remy Cointreau has struck a confident tone on China even as increasing fears about a slowdown in that country have started to hit global markets.

In the United States, the group's top market, sales rose 4% with Jameson Irish whiskey continuing its strong growth but Absolut vodka sales were still in decline.

Pernod Ricard shares have gained 3% so far this year, and are trading at 21.88 times estimated 2019 earnings against 21.38 times for Diageo

News by Reuters, edited by Checkout. Click subscribe to sign up for the Checkout print edition.

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