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Historic sales growth and accelerated profitability growth in the 1st half year of the 2007/2008 financial year

02/28/2008

Operating profit from ordinary activities: € 966 million (+15.3%(1)) Net profit Group share: € 588 million (+17.7%) Upward revision of 2007/2008 full-year profit growth guidance

Historic sales growth and accelerated profitability growth in the 1st half year of the 2007/2008 financial year

The Board of Directors of Pernod Ricard, meeting on 27 February 2008 under the chairmanship of Patrick Ricard, approved the financial statements for the first half year and outlined prospects for the 2007/2008 full year.

In respect of the 2007/2008 first half year (1 July to 31 December 2007), Pernod Ricard recorded historic sales growth and accelerated profitability growth. These performances were achieved thanks to the success of its 15 strategic brands, in particular in emerging markets(2), as well as to the dynamic sales in mature markets.  Volume growth, significant price increases and a markedly improved mix resulted in a very substantial rise in operating profit from ordinary activities, in spite of significantly increased advertising and promotion expenditure.


2007/2008 interim sales

Pernod Ricard consolidated net sales (excluding duties and taxes) for the 2007/2008 1st half-year increased by 5.9% to € 3,713 million, being 10.1% organic growth (2.5% negative foreign exchange effect, 1.5% negative group structure effect).

The 15 strategic brands were the main drivers of this growth.  They grew +7% in volume and +13% in value(1), thereby demonstrating the very positive impact of price increases and mix effects. In particular, premium(3) spirits grew +17%(1).

All geographic regions contributed to consolidated sales growth, with an accelerated contribution from emerging countries (+25%(1)). China, India and Russia were, in that order, the leading three contributors to the sales growth.


Improved contribution margin from portfolio

Gross margin after logistics costs increased by +12.8%(1) to € 2,126 million, due to sales growth and a very significant improvement in gross margin ratio, which rose from 56% to 58% on sales, on a constant foreign exchange basis.  This resulted from the larger relative size of premium and Top 15 brands and from the implementation of the value strategy throughout the whole portfolio.


This performance enabled the Group to accelerate advertising and promotion expenditure growth by +14.8%(1) to € 623 million, which was primarily focused on premium brands and emerging countries. The Top 15 benefited notably from 80% of such expenditure growth in the 2007/2008 first half year.

Overall, the contribution after advertising and promotion expenditure grew +12%(1) to € 1,503 million, and represented 40.5% of sales, an increase of 110 bp on a constant foreign exchange basis compared to the previous financial year.


Decrease in Structure costs / Sales ratio

Structure costs increased by 6.5%(1) to € 538 million.  This growth was focused on emerging countries, in particular China, Russia and India. Strong sales growth enabled a further reduction in the structure costs / sales ratio to 14.5%, a decrease of 30 bp on a constant foreign exchange basis compared to the previous financial year, in line with Group targets.


Operating profit from ordinary activities

Operating profit from ordinary activities increased by 15.3%(1) to € 966 million, along with a 26% operating profit margin, an improvement of 140 bp compared to the previous financial year, on a constant foreign exchange basis.

All geographic regions reported double-digit organic growth in operating profit from ordinary activities:

• Particularly dynamic growth in Asia/Rest of World and Europe.  The spectacular development of these two regions was notably due to the significant growth of premium brands in emerging markets.
• In France, growth was accelerated by well-controlled structure costs and advertising and promotion expenditure.
• The foreign exchange and group structure effects primarily concerned the Americas region, whose relative size in the Group’s sales and profits decreased, in spite of organic growth similar to other regions.

Negative currency fluctuations (primarily USD and currencies tied to the USD) reduced the growth of operating profit from ordinary activities by € 49 million in the first half year.
 

Net profit from ordinary activities

Financial expense from ordinary activities totalled € 176 million, comprising € 168 million of debt finance charges (average borrowing cost of about 5.0%, stable compared to the previous financial year), the structuring costs for the funding arrangements for € 6 million, as well as € 2 million in other expenses.
 
The tax charge on ordinary activities was € 183 million, representing an average rate of 23.1%, slightly down from the previous financial year (23.9%). Finally, the share of minority interests in net profit from ordinary activities was stable at € 13 million.

Overall, net profit from ordinary activities Group share totalled € 594 million, being a 18.6% increase on a constant foreign exchange basis compared to the first half of 2006/2007, and diluted earnings per share from ordinary activities was € 2.76, being an increase of 18.1% on a constant foreign exchange basis.


Net profit

Other operating income/(expense) was a € 5 million income while non-current financial items mainly related to exchange losses comprised a charge of € 9 million . The tax charge in respect of the non-current result amounted to € 2 million.

As a result, net profit (Group share) totalled € 588 million, a 17.7% increase compared to the 2006/2007 financial year.


Debt

Net debt at 31 December 2007 amounted to € 6.6 billion, stable compared to 30 June 2007 (€ 6.5 billion).  In the first half year, the debt was, as expected, impacted by the cognac restocking programme, the rise in trade receivables due to higher sales at the end of the year in 2007 and the payment of cash dividends.
 
This resulted in an improved Net Debt (excluding treasury shares)/EBITDA ratio of 3.8 compared to 3.9 at 30 June 2007. 


Conclusion and outlook

Patrick Ricard, Chairman and CEO of the Group stated: “The first half of our 2007/2008 year was exceptional both in terms of the strength of sales and the growth in margins.  The increase in profit was such that we decided to accelerate the growth in advertising and marketing expenditure, thus strengthening our growth prospects. This enables us to revise upwards, once again, our 2007/2008 full year guidance and to aim at a growth in operating profit from ordinary activities of at least 12%(4) on a like-for-like basis (foreign exchange and group structure).”

 

(1) Organic growth
(2) GNP/capita < USD 10,000
(3) Spirits with a price positioning higher or equal to that of Chivas Regal 12 year old or Martell VS, champagne and wines > USD 10 per bottle
(4) Versus about 12%

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