UPDATE 2-Remy holds to China strategy ahead of expected upturn

Tue Jan 21, 2014 7:55am EST

* Q3 cognac sales down 32 pct vs 8.3 pct fall in Q2

* China New Year won't provide sales recovery

* Cognac inventories de-stocking to continue in Q4

* Sees China returning to growth in fiscal 2014/2015

* Shares hit lowest in 27 months, recover to be up 2.6 pct (Recasts with CFO call, details)

By Dominique Vidalon

PARIS, Jan 21 (Reuters) - French spirits group Remy Cointreau SA has forecast a return to growth in the key Chinese market next year on the back of increased promotional efforts, hoping to buck a trend that sent cognac sales down 32 percent in the third quarter.

Like global rivals such as Diageo Plc and Pernod Ricard SA, Remy has been hit by a Chinese government crackdown on gift-giving and personal spending by civil servants, as well as slowing economic growth in the world's second-biggest economy.

The clampdown proved tougher than expected in the past three months and Remy said on Tuesday it would further cut cognac shipments to China in the current quarter. But it also saw an upturn in its next fiscal year starting in April and would stick to its sales and marketing efforts.

The comment is significant given that the surprise departure earlier this month of Chief Executive Frederic Pflanz was linked by some analysts to what they believe was his preference for targeting other growth markets and acquisitions to cut its reliance on cognac, rather than slugging it out in the troubled Chinese market.

"We are keeping a cool head and sticking to our strategy of avoiding excess inventories and increasing promotional spend to boost (China) sales," Chief Financial Officer Luca Marotta told analysts.

"We are bracing ourselves strategically and financially for a cognac sales decline in the fourth quarter, though hopefully it will be less than 32 percent (in Q3)," Marotta added. He said the cognac division aimed to return to "mid-single to low-double-digits growth" in China in the next fiscal year.

However Remy, which does not foresee any significant recovery during the Chinese New Year which starts next month and usually boosts sales, reiterated it expected a significant double-digit decline in full-year 2013/14 operating profit.

The group had in November warned that full-year operating profit would fall by at least 20 percent, again blaming China.

The dismal performance is likely to add pressure on the maker of Remy Martin cognac, Cointreau liqueur and Mount Gay Rum to quickly find a permanent CEO to replace Pflanz, who quit only three months into the job for what the company said were personal reasons.

Marotta did not discuss the search for a new CEO.

Remy shares fell nearly 4 percent in morning trade, hitting their lowest level in 27 months, but recovered to trade up 2.6 percent by 1123 GMT.

NO LET UP

Marotta said there was no "let-up, on the contrary" in the Chinese crackdown, which had now spread from big cities to the whole country. Yet the group's more positive tone for next year is in line with predictions from some analysts that cognac will return to growth of 12 to 15 percent in the medium term, against previous rates of more than 20 percent.

Cognac accounts for 80 percent of Remy's operating profit, with China making half of that. In addition, Remy's focus on deluxe tipple like Louis XIII cognac, which sells for 2,500 euros a bottle, makes it more vulnerable than some rivals to the Chinese government fight against extravagance consumption, analysts say.

Marotta said it would be a strategic error to cut prices in China or start selling cheaper cognac brands to lure consumers.

Group sales reached 287.6 million euros ($390.1 million) in the three months to Dec. 31. On a comparable basis, sales fell 18.9 percent in the quarter, against a 5.3 percent drop in the second quarter.

Sales came in well below analysts estimates for a 4.5 percent decline.

Cognac sales slumped 32 percent, having fallen 8.3 percent in the second quarter and 12.9 percent in the first quarter.

"The knife continues to fall ... Remy Cointreau continued to be hit by a stock overhang in China and continued consumer weakness from the Chinese anti-conspicuous consumption policy," said analyst Trevor Sterling at brokerage Bernstein.

"However, this impact was worse than expected," added Sterling, who had expected cognac sales to be down 10 percent in the quarter.

On the bright side, the United States continued to deliver good cognac sales, as did Russia, Japan and Africa. The liqueurs and spirits division achieved quarterly growth of 0.1 percent on a comparable basis, with Cointreau growing in the United States and France. Metaxa saw renewed growth in Greece.

Despite its difficulties in China and its management vacuum, Remy still trades at a premium to 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.

($1 = 0.7373 euros) (Editing by Leila Abboud and David Holmes)