REMYF - Remy Cointreau SA (REMYF) Q2 2024 Earnings Call Transcript

2023-11-30 14:52:02 ET

Remy Cointreau SA (REMYF)

Q2 2024 Earnings Conference Call

November 30, 2023 01:30 ET

Company Participants

Marie-Amélie de Leusse - Chairman

Éric Vallat - Chief Executive Officer

Luca Marotta - Chief Financial Officer

Conference Call Participants

Edward Mundy - Jefferies

Olivier Nicolai - Goldman Sachs

Simon Hales - Citi

Mitch Collett - Deutsche Bank

Chris Pitcher - RedAlantic

Trevor Stirling - Bernstein

Presentation

Operator

Hello, and welcome to the Remy Cointreau H1 2023-2024 Results Call. My name is Laura and I will be your coordinator for today's event. Please note, this call is being recorded and for the duration of the call, your lines will be on listen-only. However, you will have the opportunity to ask questions at the end of the call. [Operator Instructions].

I will now hand you over to your host, Maria-Amélie de Leusse, Chairwoman, to begin today's conference. Thank you.

Marie-Amélie de Leusse

Good morning, everyone and thank you for being with us this morning for Remy Cointreau's first half results. I'm here with Eric Vallat, CEO; and Luca Marotta, CFO. Both of them will, of course, take you through the detailed results.

But before starting, I would like to take a step back to give you a wider view about the headwinds we and our industry are facing. Despite such a context, our group remains confident in its long-term strategy while navigating the year as best as possible. That means, first, focusing on bringing our cognac stocks in the U.S. back to a healthier footing. And second, absorbing the effects of the normalization to head into next fiscal year in the best possible conditions. We aim to be back on the trajectory we've set for [indiscernible] as quickly as we can.

Beyond the short term, I know that we can rely on very solid foundations. They are even stronger than in previous times and I absolutely remain confident in our ability to get through this. We will achieve this thanks to the strength of our business model, the attractiveness of our brands, a relevant strategy and the Liquor & Spirits division that is now ramping up. We can also rely on a stronger balance sheet than in the past.

Today, our strength lies in our ability to maintain a long-term vision. Rémy Cointreau is founded on brands that are centurial old, almost 300 years for Rémy Martin and all of which have a unique heritage, recognized know-how and quality. In other words, brands that have [indiscernible] to this test of time. Being well ahead of our long-term strategic plan today is one more factor that allows me to reconfirm our medium-term objectives with confidence.

I will now let Eric take you through the H1 business review. Eric, the floor is yours.

Éric Vallat

Thank you, Marie-Amélie. I will now propose you some French accent. And good morning, everyone. Thank you for joining us today. I begin with a quick overview of H1 '23, '24. Luca will then detail our financial results and I will conclude by giving you an update of the group situation and the outlook as usual.

I am now, as you can see on Slide 5. As you've seen from the press release this morning, H1 results are roughly in line with our expectations, bottom line, despite a sharp decrease in sales. Back in October, you saw our sales numbers. As a reminder, we talked about a minus 22.2% in organic terms. In terms of profitability, current operating profit stood at €169 million, down 43% on an organic basis which means up 16.1% compared to H1 '19, '20, leading to a current operating margin of 26.6%, down 9.8 points on an organic basis.

Beyond the high comparatives; as a reminder, the group recorded in H1 '22-'23, the equivalent of 12 months of copper. This deterioration reflects obviously the sharp decline in sales a solid resilience of the gross margin which was up 0.3 points organically, while we continued to invest in A&P which grew 6.5% organically. And we showed a strict control of our costs down 5.2%.

As part of the €100 million of savings that we are targeting for the year, we did already €25 million which Luca will detail in the coming slides.

I am now moving to Slide 6 which gives me the opportunity to remind you very briefly our H1 sales numbers by division. Cognac which reported in H1, 65% of our sales, was down 30.1% organically versus last year. Liqueurs & Spirits which contributed to 33% of our sales were flat versus last year. And lastly, our partner brands, 2% of our group sales were down minus 3.2%.

On Slide 7, just a word on the regions. The slide shows that the total performance was mostly impacted by the Americas, while the rest of the world showed strong trends. Americas declined by almost 50% and you know already the main regions. APAC posted a strong growth of 16.6%. And finally, EMEA was up 8.5% organically.

Let's now focus on the Cognac division profitability whose key figures are summarized on Slide 8. Current operating profit was down by 47.2% on an organic basis which led to a decrease of the margin of 12 points to 34.9% on a reported basis. This breaks down into an organic decline of 11.5 points and a negative currency effect of 0.5.

The organic deterioration includes a good resilience of the gross margin which is up 0.2 mainly resulting from a positive price/mix effect of 2.1 points which more than offset the negative impact of COGS inflation. If the group value strategy value-driven strategy, sorry, helped hold the gross margin high tight management of overheads only partially offset the fall in sales combined with a rise in marketing and communication expenses.

Let us now have a look at Liqueurs & Spirits profitability division, whose key figures are encapsulated in side. Current operating profit retreated by 3.5% on an organic basis, representing a margin of 14.7%, almost stable, as you can see. This performance reflects a slight decrease organically alongside the favorable currency effect of 0.3 points. This evolution includes a strong improvement of the gross margin of 2.5 points as a result of a very positive price and mix effect alongside the slight negative effect linked to COGS inflation. In the meantime and as planned, we kept a sustained level of marketing and communication spend aiming at preparing future growth. The ratio is slightly up by 0.9 points.

Finally, structural cost ratio was up 2.2 points. As you can see on the slide, let me now give the mic to Luca, who will take you through the more financial slides.

Luca Marotta

Thank you, Eric. Now let's move on the detailed analysis of the financial statement and let's begin with the H1 income statement. Slide is not moving. Okay.

So as already mentioned, organic sales were down 22.2%, i.e., equal to up 20.9% versus 4 years ago, H1 '19, '20. On that basis, gross profit decreased by 21.9% in organic terms, implying a 30 bps organic improvement in gross margin, i.e., very sustained plus 4.5 points on a 4 year basis, reaching a new all-time eye. This performance reflects an unfavorable COGS evolution but more than offset by a positive price effect.

Sales and marketing expenses were up plus 6.2% in organic terms reflecting our decision to keep a long-term vision by nurturing the brand equity despite a very tough current trading. Within this total, we have to split A&P expenses on one side.

APN spend grew plus 6.5% organically to reach 21.8% of sales. i.e., an organic increase of 6.9 points on a 4-year basis. So in this time frame 4 year, we had a 4x faster increase of NPE compared to the sales growth. Most of the spending comes from the above-the-line part, i.e., classic media, digital and PR, for around 60% of the total NPE, of which 55% were digital. As a consequence, more than 30% of overall A&P spending is digital.

In parallel, distribution costs increased by 5.7% organically, mainly driven by China, where we continue to expand our direct-to-client and retail channel. On a 4-year basis, it corresponds to a very contained expansion of 11.4%.

Administrative expenses decreased sharply by 18.9% on an organic basis. This evolution reflects a series of optimization on overhead costs in response to current economic condition. Overall combined SG&A expenses in terms of optimization will ramp up in H2, as already said. All in all, the current operating profit was down minus 43% on organic basis and down 47% on a reported basis, i.e. after taking into account a negative currency impact on bottom line of €13 million.

Beyond very high comparatives, this decline reflects a sharp decrease in sales, partially offset by a gross margin improvement and a reduction in overage cost. If you compare to 4 years ago, operating profit is up plus 16.1%. COGS margin stood at 26.6%, down at 9.8 points on an organic basis versus last year and down minus 1.1 point versus 4 years ago.

Now let's move to the analysis of the group current operating margin, Page 12. It was down reported of 10.3 points, reaching 26.6% and this breakdown in an organic decrease of 9.8 points and a negative currency effect of 0.4 points.

The organic deterioration of the current operating margin reflects an improvement of gross margin reinvested into A&P and a solid control of our distribution and structure costs in absolute value. In more details, gross margin was up, as said, plus 0.3 points. Why? Thanks to price increases we passed last April and more than offset negative impact on inflation on COGS. As you can see in the slide, in the spreadsheet, mix effect was neutral in the period as a consequence of the strong underperformance of cognac versus Liqueurs & Spirits.

Second important point, A&P ratio which increased by 5.9 points. The strong increase of the NPE ratio reflects obviously the sharp decrease in sales as well as an increase in absolute value of the A&P, mostly driven by 3 factors: China to support depletion around the mid-autumn festival; second, sales recovery in travel retail channel; and third, last but not least, a sustained level of investment compared to the top line in the U.S. to support depletions improvement journey.

Third point, the ratio of distribution structure cost was up 4.2 points but down €8.7 million in absolute value reflecting a very strong and excellent control of our cost basis in a very short period of time to mitigate the effect of the strong sales decrease.

Overall, this around 10 points margin deterioration reflects the sharp decrease in sales which is partially offset by some cost savings for around €25 million in the 6 months, part of the $100 million on 1-year basis of which 45% on the semester are a one-off saving and $55 million, so more than half our structural savings, so they will remain, they will stand, they will last. We achieved it in a relatively short period of time.

We can split this optimization in terms of nature on manufacturing, industrial logistics cost representing more or less 50% of total savings and the overhead cost for the remaining 50%. In parallel, only in H1 will be different in H2. No savings have been implemented on A&P.

So Slide number 13, let's take a look of the remaining part of the income statement, Slide 13. In the H1 '22 '24, the operating profit, as you can see, did not include any other noncurrent expenses. In parallel, financial charges increased as expected, as guided from €5.1 million to €15.7 million. I will detail that on them in the next slides.

Reported tax rate decreased from 28% last year to 26.6%, reflecting essentially the positive evolution of the geographical mix. At this stage, we continue to expect full year tax rate to remain more or less stable versus last year, even slightly down at 27% to maximum 28%. So far, this is the guidance for the full year.

As a result, net profit group share came in at €113 million, down 49.5% on a reported basis, i.e. a net margin of 17.7%, down 8.1 points on a reported basis. Reported EPS on the period on the 6 months came out at 2.24% down symmetric figure, minus 49.1% on a reported basis. In a natural net profit in absolute value is far better than 4 years ago, as you can see on the slide.

Slide 14, free cash flow generation and net debt evolution on Slide 14. Free cash flow was negative at minus €99 million in H1 '22, '24 compared to plus €16.6 million last year, i.e., a negative variance of €115.6 million. This evolution reflects clearly a sharp decrease of the EBITDA which was partially offset by 2 major elements; first element, a decrease of the other working capital items outflows positive cash effect in variance of €40.7 million because while the working capital outflow at the same time, [indiscernible] rated and Spirit in aging process was slightly up; so negative variance in cash of €2.9 million.

In a nutshell, the overall working capital evolution reflects a lower increase of our stock compared to H1 '22 '23 still an increase by the lower piece in terms of finished goods, cognac ADV, age liquids out of cognac and raw materials packaging element and a decreased positive cash element of account receivable for €70 million compared to last year.

Second element on free cash flow, a decrease of €15.4 million of the tax outflow, reflecting a lower level of the expected profit. On top of these 2 components, CapEx outflow was up, reflecting the strategic purpose of the cash allocation of the company for €14.1 million and financial expenses cash out on cash basis, up €9.2 million. This was the free cash flow.

In parallel, other cash flow inflow strongly increased by €56.7 million. These were largely driven by the absence of the share buyback in H1 compared to last year as well as a higher level of early redemption of the existing OCEAN convertible bond; €50.8 million in H1 this year versus €42.3 million in 2023. As a result, at the end of September 2023, our net financial debt stood at €590.5 million, up by €242 million from September last year. Consequently, a ratio is up from 0.65 in H1 '22 to 1.57 in H1 '23, '24, still remaining on the lower side compared to our peers.

Slide 15; that's it. Some interesting comment, I think, I guess, on net financial expenses on Page 15. Which were a charge of €15.7 million this year, H1 '22 '24, up from €5.1 million charge last year.

Net debt servicing costs were up in absolute value, reflecting a context of rising interest rates, including the recent -- very recent €380 million private bond placement an average of 10-year maturity at 5.58% of global weighted interest rate as well as the use of more credit lines to finance our short-term cash needs on a monthly basis. As a consequence, our cost of debt was up from 1.25% last year to almost 3%, 2.97%. But it was the semester. For the year, we expect our financial charges to more than double this year. Since the last full year publication, we have completed the private bond placement which is now booked in our financial charges pro rata templates. So as a consequence, on increased of the maturity in terms of resources at the expense of the increased yearly charge.

Net currency decreased from a gain from €1.4 million last year to a loss to minus €1.4 million this year, so a net difference of €2.8 million. These charges are related to the edge of intra financing element, not related to the flows of the commercial -- the commercial flows of the period. Last but not least, other financial expenses stood at €2.6 million in H1 '22, '24. Now let's move on the overview of the balance sheet with total assets and liabilities of €3.54 billion, up more or less €400 million, €399 million compared to H1 last year.

On the asset side, on the left side, global inventory increased by around €200 million, €191 million to reach billion due to the purchase of Xi'an ODD as well as an increase of our level inventories in our context. Inventories, global stock internal stock account for 52% of total assets, stable in terms of weight versus last year.

On the liability side, the right side, shareholder equity is up €38 million, mainly driven by the strong progression of the net income and the early redemption of the ODD Xi'an. This has been partially offset by the payment of the cash dividend, clearly and net gearing, so the indicators Net debt-to-equity ratio was up over the period from 20% to 33%, reflecting the increase of our financial debt.

So, now I will pass the mic to Eric again on Slide number 18.

Éric Vallat

Thank you, Luca. And I am indeed moving to Slide 18. It will be no surprise to you that the outlook gives me the opportunity to confirm once more our value strategy and our ambition to become the leader in exceptional spirits. This is not a denial of the environment which is currently very challenging. But it is a fact that most of the headwinds are cyclical. This is a point I will elaborate on in a focus on the U.S. which I believe you expect in this context.

More importantly, the current headwinds do not question our value strategy based on the belief that traceability and the strong link to terrier [ph] play a key role in the desirability of our brands in the long run while driving potential scarcity of course. The future remains about drinking better, not more, a long-lasting trend that is moving back this year but that has not disappeared which is why we are staying the course and holding on prices. This is not helping short term but this contributes to reinforce brand equity and this will help emerge stronger.

Slide 19 now; we are driven by a vision that is unchanged. I consider it a good news as it is probably easier to anticipate the next 10 years than the next 6 months. But being long term can only work if you manage short-term challenges properly. Holding prices is reinforcing brand equity and preserving our gross margins but it has a short-term negative impact on our volumes and sales. This is why we have worked on an ambitious savings plan which I will detail in the coming slide. And more importantly, we have launched a sales boost plan, working on 4 main levers. The first lever focuses on the awareness and the desirability of our brands in our key markets.

There is a lot going on as we can roll out a very rich content developed in the past months. To quote a few examples, our collaboration with Usher in the U.S. has given birth to a third campaign called Life is a melody. And guess what, Usher will take over the Super Bowl Halftime Show in 2024.

We are also hosting events all around the world to launch [indiscernible]. And still in the U.S., we just launched in October, our new Control campaign, Tipico. The second lever is innovation to drive premiumization and to boost sales. The innovation pipeline for Q3 and Q4 this year is the densest ever. To be honest, I have prepared a slide first with the pictures of the products, full page but the page was not nice but there's a lot coming. The Botanist will leverage its know-how in Islay and we launched a unique proposition with rested and aged liquid. Meanwhile, Mount Gay is launching a single estate room with the gain from the plantation in Barbados, where it all started more than 300 years ago, pioneering a new approach to rum.

The third lever refers to distribution. Distribution in spirits has pros and cons. Let's leverage the pros and among them, the many channels that can be activated, starting with GTR, of course and e-commerce as well. We just consolidated the results of 11/11 in China. While it looks like the results overall were not that great. We managed on our side to grow double digit versus last year and to exceed our targets. Brand e-commerce also beyond e-commerce, sorry, we keep expanding on D2C, particularly with [indiscernible]. We will now start to open stores on a franchise model with a partner who works with the best watchmakers in China, an opportunity to address Tier 2 and Tier 3 cities but also a great recognition of the unique status of the brand.

In a more challenging environment; we are also investigating more productivity channels like B2B whose potential for some of our brands is material and on trade in the countries where we still see the recovery to channels where we cannot pride ourselves of being leaders today. Last but not least, we have launched a number of Blitz projects. First, to accelerate portfolio management and the expansion of non-cognac brands. And second, to support VSOP but I will get back to it when speaking of the U.S.

So moving on to Slide 20 now; beyond stimulating our sales performance which I just referred to, we have decided to mitigate the impact of these headwinds with a very pragmatic approach on costs. As mentioned during our Q2 sales, we are going to reduce our cost base by around €100 million, of which €25 million were already achieved in H1.

Let me be perfectly clear on this point. Through this reduction, there is no question of jeopardizing future growth. To the contrary, after 3 years of exceptional growth, the objective here is to question ourselves. Step back and look at what can be optimized in our way of operating. This corresponds to what we call structural savings, 40% of the total savings.

In addition, some of quick and temporary gains can be done. This is what we call the one-off savings which account for something like 60% of the total. Starting with the A&P that will represent around 50% of the total and this includes, first, one-off savings spread around the globe, mainly in the cognac division, with, of course, a bit more emphasis on the U.S. market. Here, the objective is to protect below-the-line spend and to be more selective on above-the-line spend.

Second, structural savings mostly linked to the nonrenewal of the Super Bowl which corresponded to at the time an investment opportunity made in the context of exceptional growth and profitability that year.

Regarding overheads; this 20% of manufacturing savings and 30% of pure overhead optimization, one-off savings only encapsulate overheads savings linked to variable compensation benefits. Structural savings integrate both optimization of the industrial and logistic costs and some savings in pure overhead costs.

Let us now focus on Slide 21 on the US and more particularly on Rémy Martin as the rest of the portfolio is resisting much better, comforting us in our decision years ago to accelerate on non-Cognac brands. I am on Slide 21, as I said and I would like to start by our view on what is happening there with our cognacs.

First, Tequila has been cannibalizing cognac, no doubt. But less and less so, tequila growth is now normalizing, particularly on the high end. And this is not the first time that the category is taking share from Cognac, nor the last for sure. Cognac is timeless and always comes back. Second, normalization. Normalization is structural, in essence and we expected it. But it is amplified by inflation which led to a more promotional environment, while we have been holding on prices. And while we have little to propose below the $40 to $50 range. There is no downgrade from VSOP in our Rémy Martin offer. This has been driving depletions down. Third, this is, of course, amplified by the 3-tier system, the cash tensions within the trade and our wind to destock. The chart on the upper right shows you our estimate of the weight of fear of each factor in our downward trend comparing to a record year.

Meanwhile, has the desirability of Cognac and that of Rémy Martin weakened? No. No, if I refer to the feedback I get from the market and I do a lot of market visits and I was in the U.S. not so long ago in Texas and in New York and could speak to a lot of people in the field. And also no, if I refer to the surveys, we make with partners like Ipsos in France which are very independent, of course, when talking about the share of heart, cognac remains in the top 5 categories in the U.S. and Rémy Martin is now number 2 versus number 3 in desirability in 2020. So we've made good progress which is normal as we have invested way more than we had in the past.

I am now moving to Slide 22. As you can see, the consumers of Rémy Martin are well balanced. It's interesting to note, by the way, the growth of the Hispanics as a result of our efforts in the past few years and thanks to 1738 or so which is more multicultural. But let us be honest. VSOP is more exposed to black African-American communities who are more impacted by inflation.

Consequently, it is also our product which is the most exposed to price war. Is it a bad thing from a strategic standpoint? No. No, because the growth of VSOP was not sustainable from a sourcing standpoint in the long run. And no, because it is less profitable than the rest of the range. Plus this year, results show that this SKU is not the most strategic in our quest for value.

Is it a good news? No, neither. The loss while mostly cyclical or cyclical is too much. We must support VSOP to protect our share on shelf and share on cash and to preserve our ability to keep on investing in the future grades -- upper grades, sorry, in the future in our upper grades.

Moving on to Slide 23. Of course, as I said, you will not be surprised by our priorities, consequently, 1738 XO and [indiscernible] remain our top priorities and we will keep activating them with more than 500 events in a record ever, the number of events. But we will also support VSOP by including it more systematically in ATL above the line and below the line campaigns. There is a lot more planned, of course, on VSOP and I will be happy to address questions on the topic should there be. And of course, we will smartly promote VSOP as well during O&D October, November, December period, like we do every year.

I just want to insist here as some of you might be surprised by pricing in some stores in the U.S. but this is business as usual, not more. And more than 80% of our O&D promotions are trade driven to drive velocity, they are not for 80% of them consumer-facing. We stay the course on pricing, we do not reprice our products but we are not crazy either and we play by the rules during key periods of the year.

Moving on to Slide 24 and 25, by the way, I will conclude and I would like to reconfirm the guidance that we updated end of October. I will not detail the underlying assumptions that you already know. But basically, for this year, we expect to record a decline between 15% to 20% in sales on an organic basis.

Contained organic decrease in comp margin, including a resilient gross margin and a selective reduction of E&P, mostly in cognac, as you have understood. To do so and based on what I've just presented, we will be strongly focused on supporting sell-out and depletions growth, maintaining a strict pricing policy, selecting A&P that drive impact, leveraging below the line and digital to drive volumes and implementing the €100 million cost-cutting plan.

In parallel, our 4 strategic priorities will remain, of course, a day-to-day focus. We aim at continuing to make progress throughout the 10-year plan which is reconfirmed today. One last word on Slide 25 on our midterm targets. Rémy Cointreau is today well ahead of its strategic plan and we have already achieved strong progress on gross margin and comp margin.

We are convinced that our strategy is relevant and our fundamentals are very strong. These give us all the confidence to reach our '29, '30, target. At the same time and as already flagged by Luca, end of October, visibility over the next 12 months remains poor and the growth equation still uncertain for next year.

While we maintain our guidance of a high single-digit growth in the medium term, '24, '25 should be considered with caution as the timing of the rebound is not known yet. So it is more realistic for next year to anticipate a growth below high single digits as some important parameters are still pending. And these parameters include the impact of the geopolitical context on consumption, especially in EMEA.

The exact timing of the U.S. recovery in terms of sell-out depletions and sell-in, is it H1 or H2? At this stage, it's not possible to answer this question. The level of U.S. stocks at end of March '24 which is strongly correlated to depletions recovery.

And finally, the pace of growth in China, although the context is different of the U.S., the level of growth will be key to assess the global equation.

I now would like to thank you all for your attention and we are now prepared and ready to take and answer your questions. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] We'll now take our first question from Edward Mundy at Jeffries.

Edward Mundy

So first question really is, I mean you start out pretty clearly that holding price helps to protect equities and emerge stronger from the current situation. But I guess 2 parts to it, A, how do you think philosophically about a price reset on VSOP to bring it down to sort of below that $50 a bottle price. And I know that you cut VSOP back in 2009. So you have done it in the past in [indiscernible] clear about a price reset, number one. And then second of all, financially, what does it mean from a financial perspective on the one hand, you probably get low gross margins from [indiscernible]. On the other hand, it would serve to clear out the inventory and get velocities moving again. So just discussion around that point?

And then the second question is really an update on China. I think you mentioned quite good performance in November. But where are we on the destocking cycle in that fiscal Q3? And can you talk to any more underlying performance quarter to date?

Éric Vallat

Okay. Thank you. And so starting with the U.S. and the potential price reset of VSOP. So as you can imagine, this is not planned. We did a price reset in the past in '28, '29 and it took us 10 years to recover our proper pricing. So again, we favor long term and this is not what we are going to go for.

Now indeed, in a very promotional context, you could wonder about the velocity and we do wonder as well. And I believe that Velocity today is not solely a matter of pricing. It is partly -- I would like to tell you a bit more about what's behind the VSOP. As we explained, VSOP is the SKU that is the most exposed to Black African-American clientele and that is the most exposed to lower purchasing power. So it is the one that is the most affected. Does it mean that it should be repriced? I believe -- does it mean that we should activate the velocity and work on it, yes. That is why we are indeed activating promotions currently in October and December period, like we do every year, smartly, probably more smartly than previous years because we have some more intelligence there on the efficiency. And we do not refrain from this and we do not consider it a contradiction with our pricing policy.

So, no repricing but smart and active promotion, obviously, in the current month, it takes time to be implemented, it is currently being implemented and we do expect it to contribute to velocity. It will not impact the gross margin as it is compared to what we are doing every single year. It is part of the business as usual, obviously. Now activation is not only a matter of price promotion. And I would like to insist there, there are many levers to activate VSOP. And there are even more levers as we have not activated it in the past 3 years as much as we are in the process of doing it today. So I'll just give you a few examples of what we can do. Take Illinois, Michigan, Ohio which are states where price sensitivity is more. We are working with quite a refined level on activating the smaller formats. And of course, this is where also we focus more on promotions.

Take Florida, California, Texas, it's, interesting to see that the Hispanics, for instance, have been growing in the share of our clients, thanks to 1738. But this opens the door also to VSOP and VSOP is now included in our targeted Hispanic campaigns which it was not before. Take another example, Usher, Usher is very relevant for the black African-American clientele. And we are lucky enough to have chosen for the halftime show. You can imagine, we are going to activate this as well. But there are many other examples on trade.

On trade, we are now activating a plan on-trade, where VSOP is a fantastic liquid for cocktails, for instance. And last but not least, we now have 50 ambassadors in the U.S. which is way more than what we had in the past. These ambassadors, they are part of this 500 events, we are speaking about tasting, activations, trainings and so on. And these ambassadors have now in their priorities to activate which was not the case in the past years in the past month. It's also in the top 5 priorities for our wholesalers because as we said, it's not a long-term priority but it is a short-term priority to protect our volumes. So I hope this answers your question. I've been a bit long, sorry.

And second on China and I'll be shorter here. If you ask me about the business, so let's say, the depletions, October and November have been very good, particularly October, very strong growth of depletions. To be honest, partly inflated by the fact that Mid-Autumn Festival turn festival was 3 weeks later. So obviously, this has helped. So it is not a constant perimeter, let's say. But it's interesting to see that sales have been picking up and picking up very fast. Still can expect a sharp distorting in Q3 as -- because of the trust the trade, we did very good sales during Mid-Autumn Festival was not as good and we want to keep a healthy level of stocks. So you can expect a strong down trading in Q3 before recovery in Q4. This down trading is also linked to the fact that there are some cash tensions also in China with the wholesalers.

Luca Marotta

One element important to add on the gross margin question which was related to VSOP. But I think it's important to give you some additional elements for the H2. As highlighted, the H1 results are positively influenced by €25 million savings which more or less half of that are in [indiscernible] manufacturers. So they are playing a role mathematically on half year of sales. So without changing anything because, as Eric explained, the magnitude of the activation in October, November, December, VSOP will not play a major role in gross margin is the fact that the savings that accounting for the whole year are already done for the industrial part and the first part of the year.

So mechanically, everything equal to our plans, it is normal consider the H2 gross margin at group level will not be improved slightly, down a year that will remain very resilient in gross margin but it will not be to be considered as a consequence of kind of activation which are quite comparable is the fact that the savings are already installed a plain mathematical role which is more important in the H1.

Sorry, it was longer, that is worth for the future explanation. And for the -- your eventual question for the investigation. So it's a mathematical reverse that you have already the saving in H1 for essentially the whole year

Operator

We'll now take our next question from Olivier Nicolai at Goldman Sachs.

Olivier Nicolai

Just two questions, please. A follow-up on the U.S., first of all, going back to the headwinds that the industry is facing and that's what you showed on Slide 21. Could you perhaps give us a bit more detail on the variability of cognac in the U.S., what makes you think that the Cognac demand will bounce one back once the normalization ends? Do you see the discounting from your competitors, for instance, is damaging the whole category. And ultimately, do you really think that Cognac become more than 7% to 8% of the total U.S. starts market. I would appreciate some details there.

And then secondly, just on Slide 18, to become the global leader in exceptional Spirits. Obviously, Cognac is not the only premium category. So could you remind us of your ambition in terms of M&A? If you have any interest in getting more scotch brands, Tequila, champagne? And how would you be willing to finance those acquisitions? Was it debt, equity or both?

Éric Vallat

Okay. Luca you will answer the very last part of the second question and I will take the first 2 questions until there. So the headwinds and what makes us believe that cognac will bounce back. And the questions about discounting; so the headwinds were detailed in the slide and maybe I can try and come back to the slide. I don't know if you still have the slides anyway, so no. But basically, the headwinds, first, we expect as we -- I think we were among the first groups to speak of normalization. 1 year ago. And so this is something structural that is happening that we expected. What we did not anticipate was the normalization to be that harsh this year. And this is due to a number of factors which we believe are for most of them cyclical.

As you have understood to give you some more color; we cannot be the fact that Tequila has been taking share from Cognac but it is now normalizing ready-to-drink are also taking share from spirits in general but probably less from cognacs. What is probably today impacting us the most is the promotional environment and the purchasing power which is less this year. And what makes us feel that we will bounce back; first, we believe that these headwinds, as I said, are cyclical. And second and I think it's important to remember, if we look at depletions versus 4 years ago and even if we look at Cognac only in the U.S., depletions are plus 70% include VSOP versus 4 years ago. The one that is impacted is the VSOP. So for me, what it says, it's not the health of the brand, it's not the health of cognac. It's the purchasing power of the VSOP clients that is impacted this year. That's why we need to smartly adapt to this but this is it. So once it should recover, we will start bouncing back and bouncing back quickly, I believe.

And the question is when? And this is harder to say. But no doubt there. Even more so as again, the brand desirability, the brand equity is strong. And I strongly believe that what we are doing with our pricing is even reinforcing the brand equity. When you're our clients and when you don't know attract price, you when you see the price going up or down and doing like this, then you end up being a bit lost and you lose trust. So I believe we are building trust in the long run. So obviously, we need to manage short term. But when you look at depletions, because selling is a different story for all the reasons we know. What it tells us is that cognac is still a desirable category and Rémy Martin, in particular, thanks to our investments. So we will bounce back that's how I believe. When? I don't know.

Can cognac achieve more than 6% or 7% or 8% of the total spirits? This is as well hard to say, as you know, more in value than a volume strategy ourselves. So we believe we can recover. We believe we can grow in shares of the total spirits. We are not obsessed by it, much more obsessed in value than in volumes, of course, yes, I believe we can afford it. We have the liquid because we have organized ourselves for such. And I believe in the ability of cognac as a category to bounce back as well. For the reasons I just shared.

As to question number two which is referring to M&A, no change here in what I'm going to answer is, we believe in the value of M&A and external growth. We believe in strategic complementarity of Tequila Forest. It fits our value. There is a strong link to Terra. There is a strong culture element and aspect into it, plus for [indiscernible] and margarita, it makes total sense.

We believe also in the value of champagne, strong linked to Terra as well, obviously but then it would have to be a very different campaign from Telmont. So there are a number of potential strategic acquisitions to complement the portfolio. There are also acquisitions we could look at for, let's say, to address our weakness in Europe. Because we are driven by Cognac and our route to market in Europe is more made of distributors than subsidiaries. Acquiring a brand that is strong in Europe would help us gain time. Nothing has changed there.

We also believe it's a weakness and a strength in meaningfulness beyond speed there. Clearly -- and I'm not saying one strategy is better than the other but if we were less obsessed by the other question with values and so on, we probably would have acquired already a tequila but this is not our way. So this is why it's a weakness sometimes speed but it's also a strength as we speak to people who, I think, speak to very few other people because we have a certain level of legitimacy there.

Now is it a topic for the day? No. Not that we are not looking at what is happening, not that we are not considering, obviously but our focus short term, our organic growth, as you can imagine. And I believe it's -- what is happening is also an opportunity. A tougher environment is driving to questioning ourselves, posing, stepping back and I think that after 3 years of a huge growth where we focused mostly on development, it's a healthy exercise and we should emerge stronger if we do the exercise properly.

Luca, maybe you want to answer the...

Luca Marotta

Today, as you in terms of, let's say, main acquisition and how much we can put on the table and which kind of hypothesis of a financing debt. So clearly, the more structural and transforming the acquisition will be eventually. Clearly, we have to go out of our exceed our actual resources. But today, our balance sheet is very solid. We have recently raised additional resources. We have more than €1.1 billion of resources. Our A ratio, even if now is bigger than €1 billion, is still very healthy. So also in stand-alone you can clearly easily do the math if the target is a little bit profitable in terms of EBITDA, we can easily along with our own legs could make the deal bigger than €1 billion in terms of price.

Then for sure, the bigger and transforming the deal is, we have to think to other ways of financing new ways and what if equity or not, I cannot answer to that. But clearly, more transformative deal is, the more the global opportunity will be discovered. But today, in terms of the internal organic potential deal, we have already a lot of weapons to play with to be able if there is the right target to put some money on the table without jeopardizing our net debt structure out of the actual covenants. So I'm not scared about that.

Operator

We will now take our third question from Simon Hales from Citi.

Simon Hales

So just a couple for me as well then, please. I mean maybe, Luca, just following up on the discussion around capital allocation sort of plans you've talked about the possibility of M&A. I just wonder how you think about the possibility of a share buyback program in the current environment, particularly given the level your stock has been trading. And obviously, you've returned cash in the past. The balance sheet is healthy, as you talked about, you've had the private placement. How do you think about the possibility for share buyback? So that was the first question.

And then secondly, Eric, just a real point of clarification. In your closing remarks, you talked about perhaps fiscal '24, 2025, in terms of growth perhaps being below high single digits. I just wondered what you were referring to specifically there. Is that an expectation that organic sales growth is going to be below high single digits, you would think in next fiscal year? Any clarification would be great.

Luca Marotta

Okay. In terms of capital allocation, I was answering specifically to an M&A question. So it does not mean that we changed our priority. So priority number 1 to use our cash, invest cash, is invest behind our organic growth levers. So strategically, as you can see, there's a lower increase but still an increase on the stock, it's clearly visible, production manufacturing capacity, direct selling retail model and portfolio capabilities. This is the first priority.

Then the second one which is very important. That is second one because if you don't invest for the future, the second one is not possible. It is a combination between dividend and share buyback and third one in this kind of priority, M&A, not saying that it's less important but it's the way our Board of Directors put the priority very ready for Eric and myself. Share buyback specifically; this is clearly a decision called not only by us clearly, endorsed by the Board of Directors. The Board considers that the price is today quite attractive. So share back could make sense, so that it could be a hypothesis. But having said that, I repeat in this very singular year, we have to be sure to invest the cash behind the organic labor; this is more than ever priority number one.

Managing cash now is a very important matter, even more important than profit and loss and is a key focus for myself. So why not? It is a decision that belongs also to the Board of Directors. It depends also on the way we are able to feed and to answer to the first priority given to us which is invest behind the our brands. The shares buyback could make sense clearly because we believe that it is a very good investment for the future.

Éric Vallat

Second question, the below high single digits which is our medium-term guidance. So yes, it is organic growth, I'm referring to. Don't consider it as a proper guidance today. The visibility is little. We are still we still have 5 months to go. But the point here is more to say that, in fact, we don't know when sales and depletions will pick up in the U.S. And this obviously is instrumental to the group. Is it second or first semester, we believe that the rebound will be more as soon as the depletions recover because our stock levels are not so high in absolute value. So in a number of months, they will decrease very quickly as soon as depletions recover. Question is when. As we don't know when, we believe it makes sense to anticipate with the very little visibility we have today, below high single-digit growth.

Simon Hales

And just to confirm, Eric, you are talking about your total shipments when you talk about organic sales growth of below high single digits, it's not a comment on depletions. Because obviously, you will lag through the destocking of this year next year. So technically, organically, your sales picture should look stronger but your depletion picture is still unknown? Or am I reading that incorrectly in terms of your commentary?

Éric Vallat

So if you look at depletions, it's been months, they have been much better than shipments in the U.S. Having said that, we still have stocks which are a bit high, again, in number of months more than in absolute value. As to depletions, we believe in the sequence in the sequential improvement which is what we've been witnessing lately but they are still negative currently. So until they turn to positive. It's hard to anticipate a rebound as soon as they will get positive. The rebound in selling should be even more because then there would be some restocking. And this is something that we'll be keen on managing properly by the way.

Luca Marotta

Simon maybe to try to help. High single digit as a guidance. We are talking about an algorithm in the medium term in compound [indiscernible] growth rate. So it's not linear. It is a compounded growth rate on the remaining part of the 10-year journey. With some up and down considering the sell-out depletions, selling level. So maybe some volatility but high single digit is selling, it is a top line overall value CAGR KPI.

Operator

We'll now take our next question from Mitch Collett at Deutsche Bank.

Mitch Collett

Can I ask about the structural cost savings. Can you give a bit more color on what the structural overhead cost savings are specifically perhaps some tangible examples of cost that you're planning to cut or cut already. And then, I guess when you laid out the long-term targets, there was no expectation of any structural cost savings. So I'm interested in what's the offset from that structural cost saving when we think about the 2030 target? Is it a lower level of sales? Or is there something else that's offsetting it to keep you at the same level of profitability in the long term?

Luca Marotta

Okay. So as already highlighted by Eric, overall, 40% are structural and 60% are one-offs. So let's focus on the 40%, so €40 million. It is 50-50 between A&P and overheads. And the overheads as already said, manufacturing and logistics is structural because we changed some manufacturing proceeding to be more efficient on some brands, not only in Cognac because we have made some rightsizing project inside the way we are doing logistics in terms of containers replenishment, in terms of optimization, the way we manage the transportation. Some initiatives that are also positive for the planet are also positive for the profit and loss. Maybe you are ready with less speed. So you cannot react to some volatility but less transportation using and chip and pollution -- polluting vehicles will play a role. So this part has already been implemented in the H1. So the good point that we are already capitalizing in H1 or some structural savings side the manufacturing and industrial.

On top, you have some which is linked to the overheads. I can't be very precise because mainly we are talking about salary and benefits. As you know, so far, there is nothing inside of this element which is a classical restructuring plan are more tough efficiency that are accounting not only for this year because it will last. In terms of the mix of the salaries, of expenses being able to make some selection, the way we are replacing people, being able to do the same thing or less activities. So we are doing a structural savings in environment, as already mentioned by Eric, in which we invested a lot in the last 3 years in all elements, including overheads. So we are not tackling the backbone of the company. We are not putting a risk of the future growth. They are lasting but very sustainable actions.

Operator

We'll now take our next question from Chris Pitcher at RedAlantic.

Chris Pitcher

Luca, I know you've given a lot of detail on the gross margin. But I suppose there wasn't perhaps a stronger product mix than the 70 bps that you about particularly given the underperformance of VSOP in the U.S. and the geographic mix shift to China. Can you give us a bit more color on what the product mix specifically was like in China Are you seeing any similar impact on purchasing power that perhaps you're seeing in the United States or willingness to trade down? And then to follow up on one of your comments, you mentioned you have 500 more additional brand ambassadors in the U.S. Can you say how much of a fixed cost are the variable because obviously, Diageo talked about increasing investment in the United States. Have you spent enough in absolute terms, both in terms of marketing and selling resource?

Éric Vallat

I think there is a mistake. This is not 500; it's 50 ambassadors and 500 events. Just to make it clear; zero too much [ph]. Yes, my profit and loss is shaking.

Luca Marotta

No. So on the question on the gross margin, I'll take it, in fact, in China and the product mix in China, more particularly, do we see some trade down? Here, the answer is yes and no. And it's the opposite of the U.S. In fact, we do see some -- to be honest, we struggled on the high end. So I would say Liqueurs & Spirits are more impacted than club which is resisting quite well. Being a very strong queue and that's the good news because club is today the backbone of our business which is why China is doing good.

And for me, there are reasons to that. One is if you take [indiscernible], a fact that we have been addressing 4 years, the real estate millionaires and needless to say that their life has changed and that they are clearly spending less. It doesn't mean there is no wealthy clients. There are no wells clients to address, there are -- their numbers; if you take, for instance and second and third generation in some of the businesses. So we are proactively working on it with retrace. And to be totally honest, I think that the current trend which is, as you have understood, more impacted than the club is also related to the turnaround of our business model. And I think I should be humble there. I must say that this turnaround is taking more time than I would have anticipated. We still believe and are totally convinced that it's the right move. But moving from, let's say, wholesale to retail model and moving from a wholesale classic model to the wholesale partnership model whereby we improve pricing, we improve the level of execution takes time.

And probably more time than expected. And this is also hurting [indiscernible]. But I would like to point out that in this current context, the channel that is resisting best Autres in China is actually the direct to client channel. So it's boutiques, private client directors or e-commerce, these are resisting the best this makes sense because we know our clients and we build loyalty with them. We have programs for them. So this reinforces us in our strategy in the long term. That's paradox but in the short term, it is hurting us a bit. So yes, in China, there is an impact of the -- on the higher end of the portfolio. More particularly on [indiscernible] and XO, we are gaining market share. But on a franchise that is not necessarily growing. I hope this answers your question. And I'm sorry because we were trying to figure out the 50 -- 500 [ph]. I'm not sure I listen to the question full speed. But the question was, are we still investing enough behind our U.S. business, right? Okay?

So here, I think it's probably this year, our second year, whereby we invest the most in the U.S. in our whole history. So nothing to be ashamed of less than last year because we are not going to do the Super Bowl indeed. The Super Bowl, as I said, was an opportunity we seized for Rémy Martin last year because we were profitability to afford such. But if I look at it beyond, yes, we are cutting NP. It is still the second or third record year second or third in spend. And second, for sure or even first in number of activations. Don't underestimate something. You saw our A&P growing in first semester. They grew more than 5%. This is bringing a windfall of activations for H2. Because part of the spend of H1 is dedicated to H2, it's content.

So if I take H2, we are launching a new campaign with [indiscernible] we have life isolates. We are going to work on Usher; with him also on the Super Bowl. We have a number of activation on all the brands. We are launching activations for the Asians in the relevant states leveraging Chinese New Year. We are enlarging the subareas activation on Hispanic. So honestly, I think it's a very, very active and productive year in terms of A&P. And the same applies to ambassadors and to their in-the-field activation, Reason being that we have more ambassadors than we had a year ago because we have of course, started working on optimizing our organization in the U.S. and part of the optimization was to reallocate some of our resources to Ambassador ship which we believe is a business driver.

That's also what we mean when we say that the focus will be more on below the line. It's also -- it's qualitative below the line but it's clearly more volume-driven. I hope this clarifies but this is what I wanted to answer about the U.S.

Operator

We'll now take our last question from Trevor Sterling at Bernstein.

Trevor Stirling

Just one from me, please. Thank you very much for Slide 21. I think for following up on some previous questions. So very, very helpful indeed. And I'm trying to put that in -- Eric, I think in the context of long-term growth in the U.S. for your cognac business. So if we do get back to an industry that grows 2% to 3% in volume as it did pre-2019 and assuming maybe there's a little bit of share loss for Cognac to Tequila but not much sure. Then we have a Cognac category that's flat to up a little bit. Then I would expect that VSOP and above quality should do much better than the overall Cognac.

And then within Rémy Cointreau, we should be expecting price and mix going forward. Is that the right way to think about the long-term algorithm in the U.S.A?

Éric Vallat

Yes. Yes, indeed, thanks for your question and the previous questions also. Which -- yes -- but -- so to make it clear, I think that, yes, it's going to be -- as you know, we are focused on value and the 2%, 3% for us, whether it's 1%, 2% or 3% doesn't matter so much, so much as it is growing, of course, back to growth. Of course, the year it will start recovering from this challenging year. So next year, H1 or H2, it will be more than 1% or 2% in volumes. But it should normalize at 1% or 2%. And then the focus will be on value. And the mix will play a key role indeed, this for sure; we still believe we have a wealth of opportunity with 1738.

We still believe that it is a SKU that we own that is not exactly competing with our direct competitors but that is potentially a good hook to benefit and leverage the tequila boom for a number of regions. So 1738 will help improve the mix. XO also which is I mentioned and I referred to the Asians, we're small with the agents. This came as a surprise to me, to be honest, when we received our brand health tracker this year. I was positively surprised by the Hispanics and negatively by the Asians and we are now reactivating. And this should help on XO for sure. And XO has been well repositioned.

Pricing as well; we -- I don't know if there were -- I'm not the best expert here but I don't know whether inflation would go back to 2% or not. But for sure, on our side, we aim at preserving our gross margin and this will come also clearly with pricing, probably more particularly on the SKUs that have more pricing power, typically 1738. But as well the VSOP. I believe probably a bit more in mix than in price short-term. But if you look at it long term, both should play a role. This is why we don't want to give up and compromise this year. It's because this is the way we look at it long term.

That's why we won't give up on A&P and investing behind our brands, including this year because this can only come with a good level of desirability which has improved but which can see improved for sure.

Luca Marotta

And Trevor, Slide number 21, it's your slide. We call it a Trevor Sterling slide.

Éric Vallat

Because you've noticed and the question is of interest as well because indeed, we are almost at our 10-year vision. So you could say we will give up on pricing. No. To be honest, next year, we are aware also of the purchasing being less short term. So last year, we will take advantage of the fact that we are way ahead and we will be more selective in our price increases and smart of course. But if you look at it medium term, yes.

Operator

Thank you I hand back to Eric for closing remarks. Thank you.

Éric Vallat

Thank you. So I had not prepared any closing remarks but first, I would like to thank you for your attention. As you can see, we are confident and still very long term driven while being obviously opportunistic and pragmatic in the short term. We believe the strategy is still right. We believe that the headwinds are for many of them cyclical which is why we are not going to question 100 years value strategy because of '22, '23.

Thank you very much for your attention and speaking, looking forward to speaking to you soon. Thank you. Bye, bye.

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Remy Cointreau SA (REMYF) Q2 2024 Earnings Call Transcript