EU CONSUMER CYCLICALS: Pernod Ricard; 1H results (6m to dec)
(RIFP; Baa1/BBB+)
Some early read-through from earnings call for China macro "we have now begun to receive early signs that Chinese New Year is likely to be very soft." (CNY: 29 Jan -12 Feb)... "driven principally by a significant decline in in gifting this year and very poor consumer confidence". Worth noting it has been raising prices there that may be exacerbated the trends it is facing. Like airlines, there was also a special call out to Germany who " has gone into recession and, and we see consumers suffering...promotional intensity has significantly gone up...the rest of our European markets are doing pretty well."
On the worries around Europe/US alcohol consumption trends Pernod is indicating India could more than offset that; "roughly 25 million additional legal drinking age people every single year for the foreseeable future." (UK's population is ~69m for ref). On US habits it says "one American out of two, broadly speaking, drink some kind of alcoholic beverage. It was the case 10 years ago and it's still the case...frequency has gone down but intensity has gone up. The sum of the two if you, if you do the calculation has gone down a bit." It does not young Americans are abstaining more (21% to 23% over last 5 years) but notes drinkers in the age group will spend more on upper value spirits (premiumisation trend peers refer to).
Net net, the volume trends point to a recovery in the market but Pernod is riding high-beta to China weakness. We do see it hanging outside Moody's gross<3.5x threshold - Moody's was giving it leeway on the ~€2b cash it holds + expected earnings turnaround. Still weak guidance may see rating action. Secondary levels are uninteresting, €1.3b due this year unclear how much it will refi based on guidance (do not expect full refi).
- 1H organic -4%, net of FX -6%. This is price/mix driven (-6%) while volumes were +2%.
- USA -7%, Asia-RoW -5% (China -25%, India +6%), Europe -2%, Global Travel Retail -9%
- Says anti-dumping measures from China on duty-free Cognac will continue to "heavily" impact travel retail sales.
- Pernod generally runs 40% exposure to Asia, 30% to US and 30% to Europe. That compares to Diageo's 20% and Campari's 8%.
- 85% of its China sales is Martell brand - that was down -25% in sales (-19% volume)
- EBIT margin organic +65bps at 32.1% (revenues/margins seasonally higher in 1H)
- FCF €440m (+139m yoy), on better WC and lower capex
- Net debt at €12b (+1b), levered net 3.5x. m
- expects this to fall including from "proceeds on announced disposals" but to stay >3.0x (for now).
FY25 (to June '25) Outlook
- LSD decline in organic sales (i.e. continuing pace from 1H)
- Sustain the EBIT margin (2H last year was a low 8.8%)
- It has some longer term growth targets as well but little relevance to us/here
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EUROSTOXX50 TECHS: (H5) Bull Cycle Extends
- RES 4: 5097.00 High Oct 14
- RES 3: 5080.00 High Oct 15
- RES 2: 5068.13 0.764 proj of the Nov 21 - Dec 9 - 20 price swing
- RES 1: 5050.00 Intraday high
- PRICE: 5039.00 @ 14:43 GMT Jan 7
- SUP 1: 4921.43 50-day EMA
- SUP 2: 4829.00 Low Dec 20 and key short-term support
- SUP 3: 4800.87 76.4% retracement of the Nov 21 - Dec 9 bull cycle
- SUP 4: 4775.00 Low Nov 29
A bull cycle in the Eurostoxx 50 futures contract remains intact. Yesterday’s strong rally and today’s follow through, highlights a reversal of the recent corrective pullback. Resistance at 5040.00, the Dec 9 high, has been pierced. A clear break of this level would confirm a resumption of the bull cycle that started on Nov 21 last year and open 5068.13, a Fibonacci projection. On the downside, initial firm support lies at 4921.43, the 50-day EMA.
US DATA: Strong Domestic Demand, Investment Underpin Wide Trade Deficit
November's trade deficit - incorporating both goods and services - came in almost exactly in line with expectations at $78.2B (a little higher than October's, which was revised $0.2B lower at $73.6B).
- Imports rose sharply in nominal terms ($11.6B, biggest increase in 2.5 years), and on a broad-based basis with all categories of imports increasing - reflecting a rebound in a dip in October imports, but also potentially reflecting some front-running of possible Trump administration tariffs.
- We also note that "other" goods exports contracted sharply in November (around one-third), reflecting methodological issues with the Canadian customs authorities after a 75% jump in Oct, and which are likely to be revised out of the series with an annual benchmarking later this year.
- By our estimates, the deficit as a percent of GDP remains above 3.0%, where it has stood since April (after briefly dipping below that mark in 2023), with a roughly 1% of GDP services surplus offsetting a 4.1% goods deficit.
- While the wide trade deficit is to be expected given such robust domestic demand, so far, the external sector's impact on Q4 GDP growth is tracking to be relatively neutral vs Q3. Real goods trade continues to grow at a solid clip, with real exports up 4.9% Y/Y and imports 8.2%.
- Real goods exports momentum appears to be slowing though, falling by 2.5% in November on a quarterly annualized basis (weakest since Q2 2023), even as imports remain robust (rising 4.6% on that basis in November). Though again, the Canadian export figures may be distorting the picture.
- Within the latter we note that while both consumer and capital goods imports are growing at a solid clip (over 12% Y/Y each in November), capital goods have exceeded consumer goods for most of the last 2.5 years.
- As we have written many times, we see capital goods demand as being broadly positive for longer-term growth dynamics, but the degree to which tariff front-running is affecting the propensity to import is unclear.
EURIBOR OPTIONS: Upside call spread
Euribor upside, looking for deeper cut into the end of the Year.
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