* Remy seen as too dependent on China, cognac demand
* CEO resignation seen tied to strategy disagreements
* Group looking internally and externally for next CEO
By Dominique Vidalon and Pascale Denis
PARIS, Jan 20 (Reuters) - With Tuesday's quarterly sales data from Remy Cointreau set to show further weakness, attention will likely return to the lack of a permanent chief executive to guide the cognac maker through some tough strategic decisions.
Remy's sales in China, hitherto a key growth market, have taken a sharp downturn and any successor to Frederic Pflanz who surprisingly quit as CEO earlier this month will have to grapple with issues thrown up by slack demand in Asia's biggest economy.
Questions for the company, and for the Herard Dubreuil family which controls over 60 percent of its voting rights, boil down to this: whether to slug it out in China in the hope demand will revive for Remy's mainstay brands such as Remy Martin cognac and Cointreau liqueur; or change tack by refocusing on other markets and by acquisitions in other spirits categories.
So far the jury is out on whether the controlling family is convinced of a need for change.
Some observers tie Pflanz's resignation, which followed a November profit warning, to disagreements with the executive committee on how best to deal with the Chinese crisis and notably what level of marketing support is appropriate in Asia.
Remy says Pflanz's departure was for personal reasons and a spokeswoman said it was "not a sanction" for any strategy disagreements. He is staying on as development director, with Francois Herard Dubreuil, board chairman and member of the controlling family, acting as CEO until a replacement is found.
Yet analysts note the significance of the exit after just three months in the job.
Regardless of why he left, "Pflanz's departure is an important challenge at a time when Remy Cointreau is going through a deep crisis," said analyst Trevor Stirling at brokerage Bernstein.
Like global rivals Diageo and Pernod Ricard , Remy has been hit by a Chinese government crackdown on gift-giving and personal spending by civil servants, as well as slowing growth in the world's second-biggest economy.
With cognac making up 80 percent of operating profit and China about half of that total, investors rewarded Remy's focus on deluxe tipple like Louis XIII cognac, which sells at 2,500 euros a bottle, while Chinese demand was booming.
Now with little clarity on when demand will pick up and whether cognac can return to previous growth rates of over 20 percent, Remy is paying for a lack of diversification.
Despite having plunged some 40 percent to near two-year lows in the past 12 months, against a 2 percent gain in the European drinks sector and a 15 percent rise in the French blue-chip CAC-40 index, Remy still trades at a premium to spirits peers.
The stock is valued at 22.7 times 12-month forward earnings, against 16.5 for Pernod and 17.5 for Diageo, according to Reuters data.
While this pricey rating may be at least in part a hangover from happier times for its upmarket beverages, it leaves the stock exposed to further disappointments which could prove uncomfortable for the controlling family, which has already seen the value of its stake shrink to some 1.4 billion euros ($1.9 billion).
Analyst Pablo Zuanic at brokerage Liberum expects third-quarter sales to drop by around 4.5 pct on a like-for-like basis, having fallen 5.3 percent in the second quarter, a forecast he said was "in line with the market consensus".
Since October's statement, the company has warned that full-year operating profit would fall at least 20 percent and it did not know when Chinese demand would recover..
Some analysts remain cautiously positive on the long-term appeal of Remy's stable of prestigious brands.
"With (China) GDP growth of 7.5 percent, high net-worth individuals growing above that and international premium spirits still less than 2 percent of total local consumption, it is reasonable to assume a normal growth rate of 12 to 15 percent longer-term for cognac," Zuanic said.
Others reckon a broader spread of products and target markets would still make sense. "Once stocks stabilise in China, will Chinese consumers come back to cognac again, or will they gravitate more to other western-style spirits?" asked analysts at investment bank Nomura in a note.
With net debt of 304.6 million euros and debt-to-EBITDA ratio of 1.09 times at end-September 2013, according to company data, and what analysts estimate as a capacity to borrow to 1 billion euros for deals, Remy has the means to widen its portfolio away from cognac and Asia.
By comparison, rival Pernod Ricard had a net det-to-EBITDA ratio of 3.5 times at end-June 2013.
So far Remy has been cautious on acquisitions, buying Scottish whisky distiller Bruichladdich in 2012 for 72.8 million euros and using surplus cash mostly to buy back shares.
Remy has said that while it was keen on buying premium liquors, whiskies or even Chinese "baiju" alcohol, suitable targets were scarce as they were often in the hands of families who did not wish to sell.
Yet in the wake of Pflanz's departure there are questions on how much freedom of maneuver any CEO will have.
CM-CIC analyst Francis Pretre said in a note that while big cognac rivals such as Pernod and LVMH's Hennessy had started shifting some advertising spend to Africa and Latin America and away from Asia, while also cutting prices in China, "Pflanz may have wanted a change in commercial strategy in Asia".
An internal candidate may be best placed to anticipate such issues, though the company spokeswoman, asked if Remy could appoint internally or externally, said everything was open.
Potential candidates inside the company could include Patrick Piana, CEO of the Remy Martin cognac division, as well as two executive committee members - Damien Lafaurie, vice president of global markets, and Christian Liabastre, vice president of brands strategy and development.
While it would be quicker to appoint internally, some company watchers say Remy is more likely to recruit a sector specialist from Pernod Ricard, LVMH's Hennessy division or even from Diageo. The process could take at least six months.
"Remy needs to find a high-profile internal or external professional... with a very good knowledge of the spirits industry," said Bernstein's Stirling. ($1 = 0.7376 euros) (Editing by David Holmes)