Pernod warns China could stay weak until 2015

PARIS Thu Mar 27, 2014 2:05pm EDT

Pierre Pringuet, Chief Executive Officer of French drinks maker Pernod Ricard, poses before the presentation of the group's 2013/14 half-year sales and results in Paris February 13, 2014. REUTERS/Benoit Tessier

Pierre Pringuet, Chief Executive Officer of French drinks maker Pernod Ricard, poses before the presentation of the group's 2013/14 half-year sales and results in Paris February 13, 2014.

Credit: Reuters/Benoit Tessier

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PARIS (Reuters) - French drinks group Pernod Ricard (PERP.PA) expects its underlying operating profit in Asia to decline this fiscal year, warning that demand in China could remain sluggish until 2015.

It, however, said it believed the medium and long-term growth potential for Asia remained intact and that it could deliver strong sales growth in China in the future.

Like rivals Diageo (DGE.L) and Remy Cointreau (RCOP.PA), Pernod has been hit by a government crackdown on luxury gift-giving and personal spending by civil servants in China, as well as by slowing economic growth in the world's second-biggest economy.

The owner of Martell cognac, Mumm champagne, Ballantine's whisky and Absolut vodka predicted underlying operating profit in Asia would fall by a low single-digit percentage in its 2013/14 fiscal year which ends on June 30.

"The first-half (China) impact is likely to last through fiscal year 2013/14, possibly to the end of calendar year 2014," Pierre Coppere, CEO for Asia, said during a call on the region.

"If our assumptions are correct and if the market rebounds, we should be in a position to deliver high single-digit (sales) growth in China in the medium and long-term," he added, without being more specific about the timeframe.

The world's No.2 spirits group by sales after Britain's Diageo makes 12 percent of sales and 15 percent of profits in China, its second-biggest market after the United States.

Sales and underlying profit in Asia both fell 4 percent in the first half ended December 31, hit by an 18 percent drop in sales in China.

Coppere said the Chinese government drive against corruption and extravagance had intensified recently, with a clampdown on karaoke clubs - which make 20 percent of Pernod's business in China - creating "a disturbance to our business".

Asia accounts for around 40 percent of sales and 46 percent of annual profits for Pernod.

Last month Pernod cut its annual group profit growth forecast to a rise of between 1-3 percent, from an October forecast of 4-5 percent, mostly due to weakness in China.

Pernod stock closed up 0.62 percent on Thursday, underperforming a 0.98 percent rise in the European food and beverage sector index .SX3P.

"We do not think this will be a vintage year in beverages and Pernod has work to do to get China on its feet, but Pernod remains a strong play on global consumption trends, especially premiumisation and emerging market growth," analysts at Grupo Santander said in a note after the call.

Pernod trades at 16.97 times 12-month forward earnings against 17.17 times for Diageo and 25.03 times for Remy Cointreau.

ROBUST INDIA

Pernod's forecast for Asia excluding China was more positive. It predicted full-year underlying profit would grow by a high single-digit percentage, helped by robust demand in India, the group's fourth largest market, and improving travel retail demand.

In China, Pernod said demand during the Chinese New Year celebrations, a key sales period for spirits which started at the end of January and traditionally last 15 days, was disappointing for the industry as a whole.

Cognac sales volumes were down 20 percent for the sector compared with the same period a year earlier, and around the same levels seen in the first half. Whisky volumes were down 9 percent after a 15 percent fall in the first half.

Based on sales volume to wholesalers in big cities, Pernod's cognac volumes were up 1 percent over the Chinese New Year. But they were down 6 percent for the period of its fiscal year to February 14, compared with the same period in 2012/2013.

The Martell brand gained market share and high-end Martell Noblige had a "relatively good performance" during the celebrations, the firm said.

The firm's whisky volumes were down 22 percent over the Chinese New Year and down 9 percent for the year to date. Its high-end brands - namely Ballantine's 16-17, Chivas 18 and Royal Salute - suffered the most.

(Editing by Andrew Callus and Pravin Char)

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