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CFA Institute Research Challenge
Hosted by
CFA Society France
Team K
Beverages BUY
Pernod Ricard SA Alcoholic beverages
Target Price: €153
January, 22nd 2018 Current Price (as at 01/22/18): €130.0
Exchange: Euronext Paris
Upside: 17.7%
CIQ Ticker: ENXTPA:RI
That’s the spirit
Market data
Current price €130.0
52-week high €133.6
HIGHLIGHTS
(01/11/18)
52-week low We initiate coverage of Pernod Ricard with a BUY recommendation and a target price of
€106.7 €153 (17.7% upside). Pernod Ricard is the #2 largest spirit player globally and is well-
(02/10/17)
Market cap (m) €34,326.7 positioned to take advantage of key trends in the industry.
Shares out. (m) 264.1
Free float 58.3%
Our investment case relies on the following points:
EV (m) €48,409.8 Pernod Ricard is the #2 largest spirit player globally in a profitable industry
EV/EBITDA 2018e 17.8x The industry is concentrated as Top 5 spirits companies (including Pernod Ricard) account
P/E 2018e 29.7x for 63% of global volumes. Pernod Ricard brands portfolio is highly diversified in terms of
Source: Capital IQ categories (white and brown alcohol) or geographies (emerging countries accounted for
38% of Pernod Ricard sales in FY17). Those brands are mainly positioned on the premium
market segment (more than 70% of Pernod Ricard brands are premium), generating high
PERNOD RICARD STOCK margins (the group EBITDA margin reached 29.0% in FY17).
PERFORMANCE OVER 3 YEARS
An attractive industry expected to grow at 4-5% in the next 5 years, driven
by emerging markets and premiumisation
130
The spirits industry has grown from 4% to 5% per year historically due to upscaling and
120 consumption growth in emerging markets: the Chinese and Indian spirits market
respectively grew by 14.4% and 5.6% in revenues between 2011 and 2015 and are
110
expected to continue to do so. Pernod Ricard will benefit from this trend with a 42% market
100 share in cognac in China and a 45% market share in premium spirits in India. Moreover
developed markets are recovering: in the US, growth is expected to reach 3 to 4 % p.a. in
90 the next 3 years despite stagnating volumes growth. This growth is driven by innovation
80 (1/3 of the growth), and increasing prices allowed by premiumisation. We believe Pernod
Ricard is well-positioned to capture future growth from these trends: we assume a growth
of 3.4% (2017-2022e CAGR) for our topline forecast.
Pernod Ricard SBF 120
Pernod Ricard generates strong cash flows
In FY17, Pernod Ricard reached a historical high in its cash flow generation (+61% in 2
Source: Capital IQ years), thanks to efficient operational initiatives (Allegro program). This gives the group an
opportunity to strengthen its balance sheet by deleveraging. The group net debt/EBITDA
decreased from 3.7x in FY14 to 3.0x in FY17 allowing Pernod Ricard to consider M&A
VALUATION SUMMARY (€/SHARE)
opportunities again.
An undervalued company offering a strong upside potential
Trading
159.0 According to our valuation Pernod Ricard is undervalued: the group is trading at 16.0x
comps
2018e EV/EBITDA (according to the market) vs 18.3x for its peers. We believe the market
undervalues the following points: (i) Pernod Ricard has room for improvement in terms of
DCF 149.4
margins and positioning (both categories and geographies), (ii) Pernod Ricard’s
performance could be even stronger in emerging countries such as India and China and
Source: Team estimates (iii) Pernod Ricard has improved its financial position while remaining the #2 largest spirit
player in the world.
KEY FINANCIALS
In €m, as at June, 30th 2013 2014 2015 2016 2017 2018e 2019e 2020e
Sales 8,575.0 7,945.0 8,558.0 8,682.0 9,010.0 9,289.4 9,671.4 10,035.2
% Growth - -7.3% 7.7% 1.4% 3.8% 3.1% 4.1% 3.8%
EBITDA 2,424.0 2,259.0 2,454.0 2,503.0 2,613.9 2,718.0 2,831.2 2,960.8
% Margin 28.3% 28.4% 28.7% 28.8% 29.0% 29.3% 29.3% 29.5%
EBIT 2,104.0 1,815.0 1,588.0 2,094.0 2,230.9 2,308.7 2,405.6 2,514.6
% Margin 24.5% 22.8% 18.6% 24.1% 24.8% 24.9% 24.9% 25.1%
Net income 1,206.0 1,025.0 878.0 1,254.0 1,419.9 1,362.6 1,418.4 1,531.3
% Margin 14.1% 12.9% 10.3% 14.4% 15.8% 14.7% 14.7% 15.3%
FCF 1,725.7 1,427.8 1,473.0 1,815.8 2,065.6 2,262.3 2,353.2 2,459.3
EV/EBITDA - - - - 18.5x 17.8x 17.1x 16.4x
Source: Team estimates, company reports
This report is published for educational purposes only by students competing in The CFA Institute Research Challenge. 1
BUSINESS DESCRIPTION
COMPETITIVE POSITIONING OF THE WORLD #2 IN SPIRITS AND WINES
PERNOD RICARD PORTFOLIO Pernod Ricard was founded in 1975 with the merger of the two anise producers Pernod
and Ricard. Today, the firm is the second spirits and wine player ‒behind the British
Diageo‒ with 70 million liters sold, a world volume share of 4.9% and sales of €9.0 billion
in 2017. The company produces a broad range of liquors (including scotch, whiskey, anise,
cognac, brandies, rums, gin, vodka, wine, and champagne – Appendices 1 and 2) and has
a strong international presence with 101 production sites spread across 23 countries. Asia
100%
100%
100%
100%
100%
100%
and the Rest of the World (RoW) contribute over 40% of the group’s sales with #1 position
72%
in spirits sales in China (Martell) and India (Jameson). Pernod Ricard ranks second
62%
50%
50%
50%
50%
following Diageo in its core regions -Western Europe and North America- which represent
respectively 22% and 16% of its global revenues. Boosted by a strong growth in emerging
markets (China alone grew by 14.4% CAGR in revenues between 2011 and 2015), group
sales have grown at a 4.2% CAGR since 2006.
Gin
Aniseed
Rhum
Liqueurs & Bitters
Bourbon
Whisky
Mezcal
Cognac & Brandy
Overall
Tequila
Vodka
Champagne
For the past few years, the value creation strategy of the company has revolved around
four main axes:
(i) Investing heavily in communication and premiumising its international strategic
brands to attract and gain the loyalty of affluent individuals to boost the growth of
its brand portfolio.
(ii) Seizing emerging markets opportunities (e.g. the IMF expects Asia to grow by
Premium Standard 20% in the next 4 years): Pernod Ricard has been successful in India; in particular
its whiskey portfolio (local brands Royal Stage and Imperial) enabled the firm to
Sources: Company reports, team
analysis
thrive in the Indian peninsula.
(iii) Deleveraging and restructuring following the acquisition of Vin & Spirit in 2008.
(iv) Implementing a Corporate Social Responsibility policy to advocate for
PERNOD RICARD PORTFOLIO IN responsible drinking.
VOLUME
Tequila The most premium portfolio in the spirits industry
Brandy 7% Whiskey Pernod Ricard leads several European and American markets with its Iconic Global Brands
3% 40% (such as Absolute, ranking second on the vodka category in terms of sales volume and
Liquor
Chivas Regal, the number two whiskey worldwide in the super-premium category). Almost
7%
80% of Pernod Ricard’s portfolio is premium, making it the spirits company with the highest
Champagne share of premium spirits in the industry. Nonetheless, most of these brands still have room
7%
for improvement as many of them are ranked #2 or below. Pernod Ricard’s spirits portfolio
Pastis strategy is twofold. First, upscaling its portfolio to create value and accelerate growth by
7% placing its International Strategic Brands at the core of its activity. Second, using its Local
Strategic Brands to penetrate local markets, leverage its distribution platform and ultimately
Gin convince customers to trade up for their most exclusive (and profitable) beverages. This
10% balance enables Pernod Ricard to enjoy a premium positioning whilst its standards brands
Rhum
finance the upscale brands development.
Cognac Vodka
7%
6% 6% In terms of brand growth, results are diverse: Martell grew over 15% in 2017 while Kahlua
shrank by 3%. However, 14% of its International Strategic Brands performed strongly,
Sources: Company reports, team namely Jameson and Martell. 36% of its international brands are ‘cash cows’ with Kahlua
analysis and The Glenlivet having the highest world market shares. A question remains for
Beefeater, Malibu, Ballantine’s and Chivas Regal which grew more slowly and have a weak
market share.
BCG MATRIX: PERNOD RICARD
TOP 13 BRANDS (APPENDIX 6) Overall, Pernod Ricard’s International Strategic Brands exhibit a strong growth and
potential for further improvement.
20%
StarsBrand market share Question
Jameson marks Important marketing expenses to power premium brands
Volume growth
15% Marketing expenses are key to develop brands and increase their value. Since 2014,
Royal Pernod Ricard’s marketing expenses represent around 19% of its revenues. Advertising
Martell Salute
and Promotion (A&P) expenses focus on creating premium brands and responding to the
10% Perrier- needs of new customer categories such as Millennials (which represent 26% of the world’s
Havana Jouët population), who look for innovative and exclusive products. Additionally, the cocktail scene
Club
Chivas Regal is growing and bartenders have an essential role: to set the quality standard and as opinion
2.0% 1.5% 1.0% 5%
0.5% 0.0% -0.5%
leaders. Therefore, an important part of the marketing expenses focuses on training
The Beefeater Ballantine's mixologists to serve Pernod Ricard’s spirits. Further, Pernod Ricard’s size, its
Glenlivet
Kahlua Absolut
0% Malibu
decentralized organization and its large distribution network allow them to increase the
sales of a local ‘craft brand’ overnight, supporting its growth strategy.
Mumm
Dogs
Pernod Ricard was built through acquisitions targeting mainly Premium and Super-
Cash cows -5%
Premium brands that they integrated with great success. On top of that, the group manages
Sources: Team Estimates, Company the new brands to achieve a great performance as the Drinks International Magazine 2017
reports Annual Bar Report proved by naming Monkey 47 as the most trending spirits brand in the
world. This is a key advantage of Pernod Ricard as having the best portfolio and the ability
to develop brands is essential in this industry.
This report is published for educational purposes only by students competing in The CFA Institute Research Challenge. 2CORPORATE GOVERNANCE
SHAREHOLDER STRUCTURE
SHAREHOLDER STRUCTURE
Pernod Ricard is listed on the NYSE Euronext SA Paris Eurolist and belongs to major
indexes such as the CAC 40. Pernod Ricard is originally a family-owned company but the
14.2%
family’s share (Société Paul Ricard) has progressively been diluted to a 15% stake and
19% of voting rights. The majority of Pernod Ricard shares are traded publicly.
7.5%
GOVERNANCE
58.3% 10.2%
Overall we do not foresee any governance issues with Pernod Ricard’s governance which
we rate as strong:
9.8%
Executive Management - Strong: Pernod Ricard executive management is a team of
qualified and experienced managers acquired through several years in the group and/or
Société Paul Ricard * across the Food & Beverages industry. The former CEO retired in February 2015 and
Groupe Bruxelles Lambert * Alexandre Ricard took the head of the company.
Capital Group Companies
MFS Investment Management Rights and Obligations of Shareholders - Strong: One-share-one-vote policy at the
Float exception of shares held for more than 10 years from the 12 May 1986 that are eligible to
* > 10% voting rights double voting rights within the limit of 30% voting rights. This approach tends to protect
Source: Company Data, Capital IQ and support historical and long-term investors.
Board of directors - Medium: 6 out of 15 members are independent directors, one third
are women and two directors are employees’ representatives (Appendix 3). Moreover, Mr
Ian Gallienne is an independent director but also CEO of Groupe Bruxelles Lambert that
GOVERNANCE STRENGH holds 10.9% of voting rights in Pernod Ricard. With the ownership of less than 10% of the
ASSESSMENT (RATED ON 5) shares, the status of Mr Gallienne is compliant with the regulations but we could challenge
the status of independence regarding the capacity of voting rights of this director.
Executive Disclosure, Transparency & Engagement - Strong: Strong investor relations
4 department, providing strong and high-quality reports. Compensation is disclosed.
Management
Resources are deployed to conduct internal audits and compensation incentives are
Rights and consistent with shareholder interests. Three members of the Board are employee
Obligations of 4 representative, one is a non-director.
Shareholders
Takeover Defence - Medium: 58.3% of the shares are floating publicly, the main
shareholder is Société Paul Ricard (14.2% of the shares and 19.8% of voting rights) as of
Board of Directors 3 30 June 2017.
Disclosure, CORPORATE SOCIAL RESPONSIBILITY
Transparency & 4
Engagement By clearly defining its policy and an action plan, Pernod answers expectations from
consumers, builds a story around the group and its brands and consolidates its marketing
position. To do so, Pernod involved more than 1,300 stakeholders through a survey and
Takeover Defence 3
identified four actions to promote in its CSR policy:
Promoting responsible drinking: 86% of affiliates carried out at least one
Source: Company data, Team estimates responsible drinking initiative in 2016/2017
Protecting the planet: Paul Ricard Oceanographic Institute (IOPR) was created in
1966 and promotes the knowledge and protection of marine environments
Promoting engagement: 1,142 suppliers signed the Supplier CSR commitment
Empowering all employees: brand positive impact with the Chivas Venture project
that supports social entrepreneurs.
INDUSTRY OVERVIEW AND COMPETITIVE POSITIONING
Historically the spirits market has grown in value at an average of 4-5% per year. Yet, for
GROWTH BY COUNTRY (GDP future trends we need to differentiate developed and emerging economies.
PER CAPITA)
Traditional markets still hold opportunities
India: 8.7% The US and the European economy are engaged in a slow but consistent recovery,
8% contributing to the disposable income of consumers and therefore the spirits industry. In
China: 7.9% the US and Europe the spirits market is well-established, alcohol has been part of the
culture for decades. Despite a decrease in volume in Europe, the price-mix balances the
6%
downturn. Growth is stable in the US with an expected 3-4% CAGR expected for the next
The US: 3.4% three years. Vodka and Whisky dominate the sales in most Western markets. Premium
4% brands gather most of the growth, overall volumes remain stable but value increase
through upscaling.
2% Strong emerging markets drive economic growth
The Chinese and Indian spirits market grew 14.4% and 5.6% (CAGR) in revenues
respectively between 2011 and 2015 (vs GDP growth of 7.3% and 8.1% respectively).
Growth is expected to continue as IMF forecasts an increase of Asian GDP of 20% over
Sources: IMF, OECD data the next 4 years. China GDP per capita growth should slightly decrease but India’s will
continue to grow reflecting strong economic performance in the region, improved
urbanization and the rise of its middle class. As the effects of the anti-corruption measures
implemented in China since 2013 are now fading, Cognac sales are expected to recover.
This report is published for educational purposes only by students competing in The CFA Institute Research Challenge. 3In India, the restrictions induced by the GST and the highway ban should be more
moderate than initially thought.
LATAM and RoW growths are more vulnerable due to political and economic instability.
Overall, a growth ranging from 3% to 8% is expected in the main emerging markets (see
PRICE EVOLUTION (PRICE PER appendix 5)
UNIT, BASIS 10) Premiumisation: a trend pushed by increasing incomes and millennials
Disposable income increases in both developed and emerging markets. Since spirits
16 consumption is perceived as a social distinction and income increase, there is room for
LATAM
price growth. The premiumisation is also explained by a stronger competition in standard
15 prices. Premiumisation takes different aspects according to spirits type: the production
process of brown spirits (loss in volume with aging) justifies upscale prices and premium
14 brands. In white spirits or liquors however, it is enabled by innovation. We assume that
India
N.America premium brands generate an additional margin after advertisement and promotion.
13
Marketing & innovation are key success factors as Millennials shape the future of
the industry
12
China Consumption of spirits is more popular among younger generations but women recently
also increased their consumption (cocktails). Millennials represent 1.7 billion people in
11 2017, close to 25% of the global population, and their purchasing power is bound to grow
Europe
significantly in the coming years. They are demanding customers, require transparency
10 from companies and look for unique, premium products but also convenience and
experiences.
Since millennials are sensitive to experience new products, innovation is key to reach this
Sources: Statista, Team analysis pool of consumers. Global brands lose their appeal as they lack the capacity to answer
specific and new expectations. Digitalization shapes their expectations and consumption
habits, spirits companies diversify their marketing strategy to compete:
(i) Companies have implemented online platforms to buy their products online (links
MONKEY 47 WEB ENTRIES
towards e-commerce platforms on most of their brands websites).
(GOOGLE MEASURE)
(ii) Brands keep introducing new flavored products and extensions of existing brands,
80 (Pernod Ricard’s Black Barrel is priced 25% above its mother brand, Jameson).
(iii) Brands advertising is strong on social media; promotion also plays on product
65 placement or celebrity sponsorship (US rapper P.Diddy for Ciroc vodka).
(iv) Companies try to influence bartenders, key opinion leaders who set the quality
standard with a growing cocktail scene.
50
A highly regulated industry
Direct and indirect taxes represent most of a retail spirit bottle price (e.g. 50 to 80% of retail
35 price in France or in the United States). Taxes limit profit margins, so price must be high
enough to cover the costs, which is easier to achieve with a premium brand.
To prevent harmful alcohol consumption most countries enforce restrictions: a minimum
20
drinking age (21 years in the US), a minimum purchasing age (sellers are required to ask
Jan-16 Jan-17 Jan-18
for ID in Swedish liquor stores) and production, advertising and sales channels are also
often regulated by governments. Restrictions can extend to ban in several countries
(mostly in Middle East such as Kuwait or Iran).
Sources: Google trends
No major M&A deals expected
The spirit & Wines industry is highly concentrated: Diageo and Pernod Ricard have close
TAXES IN A BOTTLE OF SPIRITS to 15% volume market share in 2016. When considering premium spirits, their share
Whisky, 75cl sold €15 in France increase to 41% as of March 2016. The top 5 represents 63% of the global volume within
this segment. A new wave of M&A started in 2014 (Suntory’s acquisition of Beam, Diageo
100% taking control of United Spirits) and since then, deals have targeted small companies
2.5 focused at the top end of the market (Campari’s takeover on Grand Marnier). High multiples
80% VAT have been paid by acquirers (more than 20x EBITDA), making the operation dilutive in
2.2
most cases. Given Pernod Ricard’s size, we can expect it to play the role of an acquirer in
Social the future.
60%
4.8 contributions
40% Indirect tax COMPETITIVE OVERVIEW
The spirits industry is an attractive industry, highly concentrated and that can be difficult to
Non-taxed enter.
20% 5.4 value Raw materials supply is abundant (A)
There are two main spirits categories: (i) the white spirits, such as vodka or gin and (ii) the
0%
brown or ageing spirits, such as cognac or whisky. Both are produced from agricultural
Source: French government, team products such as grains or other vegetals. Vodka can be made from potatoes, beetroots
analysis and other ingredients, so supply sources are wide, and manufacturers can switch from one
to another. Some raw materials choice can be limited: Brandy or Cognac are made from
wine and global production went down 8.2% in 2017 to reach its lowest in 50 years.
New players can shake the big ones (B)
Despite high entry barriers (capital to set up facilities, instore brand awareness and
licenses to produce), some players managed to play their hand and be successful as
crafters. Tito’s vodka grew 37.4% in volume in 2016 to sell 3.8 million cases and seize
market shares from traditional players (as Absolut) in the US market. Spirit crafters boomed
following the craft brewing trend, and raised equity on crowdfunding platforms (Santamania
raised £400k in less than a week) or from the numerous private equity funds specialized in
spirits.
This report is published for educational purposes only by students competing in The CFA Institute Research Challenge. 4Consumption trends and counterfeit moderately threaten the Spirits Industry (C)
PORTER’S FIVE FORCES Health and wellness trends push consumers to buy more non-alcoholic beverages. In
(APPENDIX 4) emerging markets, such as China, counterfeit is difficult to measure but is common
practice, as empty bottles are refilled with substitute alcohol.
A
5 End-consumers lead the trends but distributors are constrained (D)
4 Alcohol is not a first necessity product and consumers have a strong bargaining power
3 both on-trade and off-trade with low switching costs and a broad range of choice in terms
2 of beverages both alcoholic and non-alcoholic. Despite a large choice of supplier
E B distributors power is more limited, the influence of some brand on customers can push
1
them to sell without margins (Pernod Ricard’s Pastis).
0
Competition is fierce (E)
The industry is strongly concentrated as Top 5 spirits companies account for 63% of global
volumes. To thrive in the beverages industry, a firm must master three key success factors:
(i) be differentiated: players should allocate an important portion of the sales to marketing
D C expenditures to generate brand awareness and customer loyalty – crucial in an industry
Legend where consumer have a myriad of choices; (ii) better segment their customer base and
0 – No threat to the business improve their advertising targeting, invest in big data and digitalization: such investment
5 – High Threat to the business will enable firms to have a more granular understanding of their customer base and hence
Sources: Company data, Team estimates generate customer loyalty and (iii) sell in high volumes to offset the fixed costs incurred by
the producers of alcoholic drinks.
NO PREMIUM FOR SIZE IN VALUATION
30.0x
Rémy Cointreau
Large diversified spirits
25.0x
Brown-Forman
Constellation
Diageo
20.0x Campari Brands
Small
EV/EBITDA
specialists
Marie Brizard
15.0x Pernod Ricard
EV (m€)
10.0x Stock Spirits
Group
5.0x
0.0x
- 1,000 2,000 3,000 4,000 5,000
EBITDA (m€)
Source: Team estimates, Capital IQ
Luxury is an acquired taste
Pernod Ricard is undisputedly the most premium spirits producer of all with almost 80% of
high-end brands. Pernod Ricard made premiumisation one of their priorities after divesting
Orangina in 2001 to clarify in their offer. Since then, the company focused on deleveraging
and carrying out bolt-on acquisitions to build a more prestigious portfolio. As we stated
before, size is a crucial asset in this industry because it enables new brands to be known
worldwide thanks to an extensive distribution network. Pernod Ricard clearly intended to
take advantage of its size and acquired super-premium companies and developed more
craft spirits. This strategy proved to be a success in 2016 as they acquired a majority stake
in Monkey 47. In 2017, the Drinks International Magazine 2017 Annual Bar Report declared
Monkey 47 as the most trending brand in the world. Indeed, thanks to the deleveraging
that the company has achieved, we believe that Pernod Ricard intends to pursue this
differentiation path with Smooth Ambler and Del Maguey, bourbon and mezcal brands
respectively.
Pernod Ricard strong position in India and China
In Asia – mainly China and India which together account for 17% of Pernod Ricard total
sales – the group will benefit from a strong recovery after subdued last 2 years. Especially
as it is positioned on the premium segment, expected to post double-digit sales CAGR
over the next 5 years. In India, Pernod Ricard is only exposed to the fast-growing premium
segment while its main competitor United Spirits is not (only ~50% of its sales). This will
help the group to increase its domination on the local market (45% market share as of
FY16). In China, Pernod Ricard will benefit from the recovery of the cognac market (Martell
represents 80% of the group’s sales in the country). As well as in India, Pernod Ricard is
in the right place to both seize the Chinese premium opportunity and fill in the absence of
International spirits in China (only ~1% of alcohol volumes).
This report is published for educational purposes only by students competing in The CFA Institute Research Challenge. 5INVESTMENT SUMMARY
We issue a BUY recommendation with a target price of €153, an upside of 17.7% from
valuation date’s closing price of €130.0. Our recommendation is based on (i) a steadily
growing market offering opportunities for leading players, especially in emerging markets
(ii) a well-balanced and well-diversified brand portfolio and (iii) an undervalued company
with a strong cash generation.
GOOD GROWTH PERSPECTIVE
We believe that Pernod Ricard has a unique positioning to capture growth especially in
emerging countries. Indeed, the spirits industry is historically steadily growing (in terms of
2017 SALES BREAKDOWN BY value) at a 3% to 5% growth rate p.a. Growth is and will be driven by emerging countries
GEOGRAPHIES (in particular by China and India), with a growth range of 3% to 8% in main emerging
countries next years. Historical markets (mainly Western countries) are engaged in a slow
but consistent recovery: in the US, growth is expected to reach 3% to 4% p.a. growth in
the next 3 years. Simultaneously, spirits industry is affected by 2 major trends: innovation
Americas
Europe 30% and premiumisation. We believe that Pernod Ricard is particularly well-positioned (i) to
31% benefit from growth in both emerging and historical markets when taking into account its
geographical positioning and (ii) to maintain its #2 rank on the market thanks to a voluntarist
Asia / RoW innovation policy and a strong positioning on premium brands. As a consequence, Pernod
40% Ricard’s strategy focused on high-end brands and emerging countries will help improve its
topline and margins.
A STRONG CASH GENERATION ALLOCATED TO DEBT REDUCTION
Sources: Company data
Thanks to the implementation of efficient operating measures and a strong financial
discipline, Pernod Ricard achieved a 5.7% improvement in its cash generation (FCF/sales),
reaching 22.9% of sales in FY17. We believe, this trend will continue in the future (24.5%
EVOLUTION OF FCF/SALES in 2020e). Pernod Ricard historically generated margins above its peers (21.3% 1992-2017
RATIO EBITDA margin in average vs 20.0% for peers). We expect this outperformance to continue
in the coming years (29.5% EBITDA margin in 2020e). This improved cash generation will
24% 24% 25%
23% strengthen the group’s financial position through deleveraging: the group net debt/EBITDA
20% 21%
18% 17% now stands at 3.0x vs 3.7x in FY14. This improvement provide an opportunity to reconsider
strategic acquisitions in the future after years of financial restrictions.
AN UNDERVALUED COMPANY VS PEERS
Our valuation suggests that Pernod Ricard is undervalued: the group is currently trading
at 16.0x 2018e EV/EBITDA (according to the market) vs 18.3x for its peers. Pernod Ricard
is also undervalued compared to its key competitor Diageo (#1 largest spirits player
globally), which is trading at 17.6x 2018e EBITDA (Appendix 9). We believe the market
currently underestimates the quality of Pernod Ricard positioning mainly in India (45%
market share in premium spirits) as well as its ability to deleverage thanks to its cash flow
Sources: Company data generation. Moreover, spirits is a highly attractive industry in which multiples offered are
high (at around 20.0x EBITDA) for craft brands, which are really popular with millennials.
Pernod Ricard is already positioned on this market and has already invested in such brands
(Del Maguey Mezcal acquisition in FY17) and should strongly benefit from these
developments.
FINANCIAL ANALYSIS
EVOLUTION OF PERNOD RICARD A STEADILY GROWING INDUSTRY, DRIVEN BY EMERGING MARKETS
REVENUE (€M)
Pernod Ricard sales reached €9,010m in 2017 compared to €8,682m in 2016
(+3.8% YoY), with the following breakdown: Europe (30%), Americas (30%) and Asia
(40%). Its decentralized business model allows the group to capture growth and benefit
from growth drivers in all countries in which it is present and to gain protection against a
potential slowdown in some areas. Pernod Ricard organic sales growth amounted to 4%
in 2016, in line with the average historic growth in the sector, reaching 3% to 5%. This
performance reflects a strong operating efficiency of the group entities (growth is not only
driven by acquisitions). However, Pernod Ricard’s performance has to be mitigated by a
relatively low 2013-2017 sales CAGR (1.0%). Indeed, the group has been strongly affected
by a challenging environment but has since implemented operational improvement
Sources: Company data projects, such as Allegro.
EVOLUTION OF PERNOD RICARD Pernod Ricard grew in all regions in FY17 but with different profiles:
TOPLINE GROWTH (ORGANIC) America recorded a 7% organic growth in spite of a slowing market (+3.1% in FY17 vs
5.9% in FY 16 according to Nielsen). In the US, the 5% growth was mainly driven by
international strategic brands such as Jameson and Martell (+15% and +25% respectively).
America -excluding the US- achieved a 11% growth driven by Canada with a 6% organic
growth and Mexico, which returned to growth. The latter was mainly driven by Chivas.
Asia RoW recorded a 1.0% organic growth, in spite of the strong Korean decline. In China,
Pernod Ricard achieved a sustainable rebound with a 2% growth in FY17 vs -9% in FY16,
driven by cognac Martell (+6%) which dominates the Chinese market with a 42% market
share. In India, FY2017 was rather difficult (only 1.0% growth) due to changes in
regulations but Pernod Ricard confirms its leading position with a 45% value market share.
Sources: Company data
Europe achieved a strong 3.0% organic growth in FY17 driven by 3 countries: Spain, UK
and Russia. In Spain, Seagram’s gin drove the strong local performance (+5%), and allows
This report is published for educational purposes only by students competing in The CFA Institute Research Challenge. 6EVOLUTION OF PRICE PER 9L Pernod Ricard to keep a 24% market share. In Russia, the group benefitted from a strong
CASES positive pricing (variation in the RUB/EUR exchange rate) and from the growth of strategic
international brands such as Absolut or Ballantine’s. In France, Pernod Ricard maintained
its leading market share (30%) but recorded only a 1.0% organic growth after adjustments
for advance shipments at end of FY15.
Innovation is a key consideration for Pernod Ricard
Innovation accounts for nearly one third of organic growth and is mainly concentrated in
the fastest growing brands. In FY17, innovation delivered 1.0% incremental topline growth.
The group expects that innovation will drive 20 to 25% of the group’s future growth.
Price and volume both increased in FY 2017
Sales in strategic international brands are driven by both growth in price and volume: sales
Sources: Company data, team estimates per 9L cases remain flat between FY17 and FY16 (-0.1% YoY), in spite of a slightly forex
impact but improved by 3.5% yearly between FY14 and FY17. Price per 9L cases
EXPENSES BREAKDOWN IN increased over the period by €11.6 from €106.0 to €117.5. We believe these results
FY17 illustrate the premiumisation strategy undertaken by the group.
PREMIUMISATION AS A CATALYST FOR MARGINS GROWTH…
Pernod Ricard places operational excellence among the “four essentials” to attain
leadership status by 2020
The group tries to improve its business performance delivering significant savings in (i)
COGS, advertising and promotion expenses and (ii) in working capital requirements. As at
2016/17, approximately one quarter of the savings of the operational efficiency roadmap
have been delivered, amounting to €400m over the period 2015-2020.
Gross margin, amounting to 62,2%, improved due to a better product mix, lighter price
Sources: Company data pressure and tight management of cost of goods sold.
Advertising and Promotion (A&P) investments were up +3% to €1,691m. The operational
EVOLUTION OF PERNOD RICARD excellence initiatives drove stronger efficiency: half of savings on costs are reinvested in
PRO A&P. Expenditure on A&P is a decisive factor in the success of a brand, in order to meet
premium clients and to convince bartenders. A&P expenses were refocused on key
markets, including the US, but were also allocated to key projects.
General and administrative costs increased less than sales, due to a strong discipline
(Allegro program) to achieve 60 million euros in savings in FY17. These savings mainly
dealt with supply chain with a better freight and negotiation cost and an optimized
procurement policy.
Profit from recurring operations (PRO) increased by 40bp reaching 26.6% of sales, driven
by the good performance of the Americas (+ 8% on a like-for-like basis) and a 2% positive
forex impact. From a global point of view, PRO breakdown followed the same trends and
Sources: Company data reparation as topline. We note a slight decrease in PRO margin in Asia due to India in spite
of a positive price effect in China.
EVOLUTION OF PERNOD RICARD
A historically strong financial performance compared to peers (Appendix 9)
AND PEER EBITDA MARGIN
To better understand Pernod Ricard’s business, financial performance and environment,
30.0% we analyzed the group financial performance in comparison with a sample of 30 companies
over the world, specialized in spirits, wine or champagne for nearly 30 years. It appears
25.0% that Pernod Ricard margins are well above peers’ average since 2001: Pernod Ricard 2017
EBITDA margin was nearly 8% higher than peers’ average. It is mainly explained by the
20.0% fact that Pernod Ricard’s business model, in comparison with peers, includes businesses
with higher margins such as wine or champagne. At the same time, Pernod Ricard
15.0% historical margins are relatively stable but progressing over the time, at around 26% since
2012. In 2017, the group EBITDA margins increased by 40bp due to the effectiveness of
10.0% the cost savings program implemented in 2015. Consequently, Pernod Ricard achieved
higher operating margins than its peers as described above (Pernod Ricard operating
margins are higher than peers since 2001).
Pernod Ricard EBITDA Despite the rise in the income tax, the net result stood at 16.4%, favorably impacted by the
margin fall in the cost of debt (3.3% in FY2017 vs 3.8% in FY2016) and the rise of the PRO.
Aggregated peers EBITDA
margin A highly profitable company well above peers
Sources: Capital IQ, company reports Net margin amounting to 15.8% in FY17 stood above 5 previous year net margins (550bp
above FY15 net margin) mainly due to a strong decrease in financial expenses and, once
EVOLUTION OF PERNOD RICARD more, effects from the Allegro cost reduction program. Furthermore, Pernod Ricard
NET DEBT TO EBITDA recorded a historical net margin average of 10.5% over 1992-2017 well above peers
average, standing at 5.6% (median 7.3%).
…ALLOWING A BETTER CASH GENERATION…
In FY17, the group generated very strong FCF (+22.4% YoY), reaching a historical high,
with +61% in 2 years, particularly thanks to operational efficiency initiatives.
The working capital requirements decreased between FY17 and FY16, amounting to 184
days of sales vs 194 days, thanks to Allegro program (€50m in savings in FY17) favoring
a better demand and stocks management.
The high cash conversion rate (86.0% in FY17) is based on (i) a 3.3% increase in profit
Sources: Company data
from recurring operations, (ii) a controlled increase in long-term stocks (for whiskey), (iii) a
This report is published for educational purposes only by students competing in The CFA Institute Research Challenge. 7EVOLUTION OF PERNOD RICARD working capital down €123m thanks to improved logistics and (iv) finally capex up to €20m
ROIC in line with sales growth.
The net cash generation comes out at €801m in FY2017 vs €461m in FY2016 and allows
a reduction of the net debt to €7.9bn. The net debt/EBITDA ratio at average rates was 3.0
as at 30/06/17, significantly down from 3.4 at 30/06/16. Indeed, the group pursues a strong
deleveraging strategy for years, improving its credit profile.
…OFFERING AN ATTRACTIVE PROFILE FOR INVESTORS
Strong and stable ROIC
ROIC historical average over 5 years reached 7.9% and stood well above WACC. The
ROIC including goodwill of Pernod Ricard amounted to 8.3% in 2017 against 6.4% in 2015.
Sources: Company data, team estimates This increase and the return to historical levels is explained by (i) an improvement in the
EBITA margin (+ 700bp) and (ii) an optimization of assets. After restating the goodwill
EVOLUTION OF PERNOD RICARD resulting from the acquired brands, the ROIC reached 26.9% in 2017, which is 340bp below
ROE the historical average (Appendix 13).
ROE is quite stable over the period, standing above peers level
10.2% Pernod Ricard ROE is relatively stable over the time at around 10% but the group ROE
9.3% returns to its 2013 level in 2017 and reached 10.6%. A DuPont analysis (Appendix 14)
8.7% shows this is due to lower financial expenses, despite an increase in corporate income tax
rate. According to our historical analysis, Pernod Ricard trailing median ROE over 5 years
6.6% is above peers level that stands at 8.6% vs 9.3% for Pernod Ricard.
An attractive pay-out ratio
Pernod Ricard strongly improved its dividend policy in FY17 which reinforces the
2014 2015 2016 2017
attractiveness for Pernod Ricard stock. The group distributed €2.02/share dividend in FY17
Sources: Company data, team estimates (+7% YoY, +23.2% vs FY14). This represents a pay-out ratio of 36%, which accounted for
around 1/3 of the group net profit from recurring operations. In our forecasts, we expect
Pernod Ricard’s pay-out ratio will follow the same trend (+11.0% in FY18e).
In €m, as at June, 30th 2013 2014 2015 2016 2017 2018e 2019e 2020e
EBITDA margin 28.3% 28.4% 28.7% 28.8% 29.0% 29.3% 29.3% 29.5%
Net margin 14.1% 12.9% 10.3% 14.4% 15.8% 14.7% 14.7% 15.3%
ROE 10.6% 8.7% 6.6% 9.3% 10.2% 9.9% 10.2% 10.9%
ROIC (incl. Goodwill) 8.9% 8.2% 6.4% 7.6% 8.3% 8.3% 8.5% 8.7%
EBIT/interest 3.9 3.6 3.1 4.4 5.4 9.5 9.4 9.5
Net debt/EBITDA 3.6 3.7 3.7 3.5 3.0 2.9 2.9 2.9
Cash conversion 87.5% 87.9% 86.8% 86.7% 86.0% 87.2% 87.2% 87.3%
Source: Team estimates, company reports
VALUATION
Our valuation leads us to a EUR 153 target price which implies a potential upside of
17.7%, based on the discounted cash flow method and trading multiples-based method.
We also conduct a Monte Carlo simulation which supports our buy recommendation
(Appendix 19).
DCF VALUATION – EUR 149.4 TP – 15.0% UPSIDE
We made our forecasts on an 8-year period (2018e-2025e), completed by a terminal value
(TV). Our assumptions are relatively conservative, in line with market trends. We assume
a top line CAGR of 3.3% for the period 2018e-2023e (in line with industry market forecasts),
a 29.5% EBITDA margin in 2020e, a stable level of capital expenditures (3.7% of sales on
the first 3 years of our model) and 7.7% WACC for the first two years of our model, a 7.9%
WACC for the next two years and a 8.0% WACC for the remaining years. We base our
terminal value on a 2.2% sales growth rate, a 30.2% EBITDA margin and 3.3% capex/sales
WACC CALCULATION FOR YEAR
ratio.
1&2
P&L Forecast explanation – We split Pernod Ricard revenues in 3 geographic areas to
WACC calculation
show different growth profiles. The decentralized organization enables the group to seize
Risk-free rate 1.8% every opportunity for growth. Hence, we assume a long-term growth rate of 2.8% (until
Incl. premium of - 2025e). We estimate that sales growth will be stronger in Asia with 3.8% organic growth in
Beta 0.94 FY18e versus 2.3% in Europe, which is the least dynamic zone. We consider that margins
Market risk premium 7.6% will constantly improve thanks to the savings plan that runs until 2020. We maintain stable
Cost of equity 9.0% A&P expenses (in line with recent years) but we favor the savings measures initiated by
Pretax cost of debt 3.2% the group in terms of structural costs. Higher A&P expenses could allow the group to
increase sales as well. We expect (i) a reduction in net debt more conservative than
Marginal tax rate 33.3%
assumed by the group, despite the rise in the cash conversion rate and (ii) an improved
After-tax cost of debt 2.1%
working capital management, in line with the Allegro cost reduction plan.
% equity 81.4%
WACC – We determine Pernod Ricard’s WACC using the Capital Asset Pricing model. To
% debt 18.6% account for the current low level of interest rates (that will probably increase over the next
WACC 7.7% few years), we gradually increase Pernod Ricard’s WACC. Our calculation leads us to a
Sources : Team estimates, company 7.7% WACC for the first two years in our DCF model (i.e. 2018e and 2019e), a 7.9% WACC
reports, Capital IQ for the next two years (i.e. 2020e and 2021e) and a 8.0% WACC for the rest of our DCF
model, from 2022e (please see WACC calculation in appendix 17).
Beta: to reflect market trends as well as possible and since France represents a significant
part of Pernod Ricard’s sales, we used the SBF 120 index as a benchmark to compute
This report is published for educational purposes only by students competing in The CFA Institute Research Challenge. 8WACC SYNTHESIS Pernod Ricard’s beta. Using monthly 5-year monthly returns against this index, we obtain
a 0.94 beta.
8.0%
The market risk premium is based on the average SBF 120 yearly performance over 9
years and is equal to 7.6%.
7.9%
The risk-free rate is based on French government bonds over 30 years to consider the
current low levels of interest rates. As explained above, we assume interest rates will
7.7% increase over the next few years. We applied a 0.2% premium for the first two years of our
DCF model (2020e and 2021e), and a 0.4% premium for the next years. This calculation
leads us to a 1.8% risk-free rate for the first two years of our model.
Cost of debt: We take into account Pernod Ricard credit rating, (i.e. BBB with a positive
outlook according to S&P) and obtain a 3.2% pretax cost of debt and a 2.1% after-tax cost
of debt.
Sources: Team estimates, company
TRADING MULTIPLES MODEL – EUR 159.0 TP – 22.3% UPSIDE
reports, Capital IQ
Given the diversification of Pernod Ricard, we select 2 types of companies, representative
of Pernod Ricard’s core business: (i) global spirits leaders including Diageo ‒that we
identified as Pernod Ricard main competitor‒ and (ii) regional leaders. We decide to
exclude the group regional diversified leaders from our calculation because these
companies are less similar to Pernod Ricard’s core business than the former ones but we
kept them as a benchmark. In the same way, we don’t select companies specialized in
wine or champagne as they are structurally different from spirits (lower A&P expenses and
lower margins for example). As the great majority of Pernod Ricard sales are generated by
spirits, we mainly focus on spirits-based companies. Moreover, as Diageo is the best
comparable for Pernod Ricard due to similar product offering and geographical reach, we
apply a discount of 10% on all trading comparables, except Diageo.
We focus on the EV/EBITDA multiple, allowing the comparison of firm’s ability to generate
cash flow regardless of their capital structure and depreciation policies. We overweight the
first group of trading comparables, i.e. global spirits leader, at 70%. As a result, we obtain
an average of 18.4x 2018E EBITDA multiple, i.e. an enterprise value of €42,021m (€159.0
per share).
EV/Sales EV/EBITDA CAGR Sales CAGR EBITDA EBITDA margin Net debt/EBITDA
Name Country EV
2018e 2019e 2020e 2018e 2019e 2020e 2018e-2020e 2018e-2020e 2017a 2018e 2019e 2017a
Pernod Ricard SA (our est.) France 48,409.8 4.4x 4.2x 4.0x 17.8x 17.1x 16.4x 3.9% 4.4% 29.0% 29.3% 29.3% 3.0x
Pernod Ricard SA (market est.) France 42376.7 4.7x 4.5x 4.3x 16.0x 15.1x 14.3x 4.8% 5.6% 28.8% 29.4% 29.7% 3.0x
Group 1 - Global spirits leader
Diageo plc United Kingdom 85,205.1 6.1x 5.8x 5.6x 17.6x 16.5x 15.6x 3.9% 7.6% 32.2% 34.6% 35.5% 2.1x
Brown-Forman Corporation United States 22,941.2 8.6x 8.1x n.a. 23.8x 22.1x n.a. 6.5% 9.0% 35.0% 35.9% 36.6% 1.7x
Becle, S.A.B. de C.V. Mexico 5,058.9 4.5x 4.1x n.a. 16.6x 14.3x n.a. 5.3% 9.2% 26.6% 27.4% 29.7% n.a.
Average Group 1 5.9x 5.6x 5.6x 18.0x 16.4x 15.6x 5.2% 8.6% 31.3% 32.6% 33.9% 1.9x
Median Group 1 6.1x 5.8x 5.6x 17.6x 16.5x 15.6x 5.3% 9.0% 32.2% 34.6% 35.5% 1.9x
Group 2 - Regional leader
Davide Campari-Milano S.p.A. Italy 8,983.5 4.9x 4.8x 4.5x 20.6x 19.4x 18.2x 5.1% 7.3% 23.6% 24.4% 25.0% 3.0x
Rémy Cointreau SA France 5,879.7 5.1x 4.8x 4.5x 22.2x 20.2x 18.5x 5.7% 8.2% 22.5% 23.1% 23.7% 1.6x
Average Group 2 4.5x 4.3x 4.1x 19.3x 17.8x 16.5x 5.4% 7.8% 23.1% 23.8% 24.4% 2.3x
Median Group 2 4.5x 4.3x 4.1x 19.3x 17.8x 16.5x 5.4% 7.8% 23.1% 23.8% 24.4% 2.3x
Group 3 - Diversified regional leader
Constellation Brands, Inc. United States 42,588.4 6.7x 6.3x 5.9x 17.9x 16.3x 15.0x 5.9% 6.5% 36.9% 38.0% 38.8% 3.2x
Emperador Inc. Philippines 2,565.0 3.7x 3.5x n.a. 15.6x 14.9x n.a. n.a. n.a. 25.1% 23.4% 23.7% 2.4x
Marie Brizard Wine & Spirits SA France 357.6 0.8x 0.7x 0.7x 14.8x 8.9x 6.5x 6.2% 36.4% 3.8% 7.1% 9.0% n.a.
Lucas Bols N.V. Netherlands 253.8 2.7x 2.6x 2.6x 10.1x 9.7x n.a. 7.3% 10.6% 23.0% 25.3% 26.0% 1.8x
Average Group 3 3.1x 2.9x 2.7x 13.1x 11.2x 9.7x 6.5% 17.8% 22.2% 23.5% 24.4% 2.5x
Median Group 3 2.8x 2.7x 2.3x 13.7x 11.0x 9.7x 6.2% 10.6% 24.1% 24.4% 24.9% 2.4x
Peers average (incl. a discount of 10%, except for Diageo) 5.5x 5.2x 5.1x 18.4x 16.8x 15.9x 5.3% 8.2% 27.2% 28.2% 29.1% 2.1x
Peers median (incl. a discount of 10%, except for Diageo) 5.6x 5.4x 5.1x 18.1x 16.9x 15.9x 5.4% 8.4% 27.6% 29.2% 29.9% 2.1x
Source: Team estimates, company reports, Capital IQ
COMPARABLE TRANSACTIONS MODEL – EUR 178.3 TP – 37.2% UPSIDE
Within this methodology, we select a range of key transactions specialized in Pernod
Ricard core business, i.e. spirits industry (group 1 in the table in the Appendix 24). For the
same reasons as above, we don’t consider deals in the wine and champagne industry
because multiples are different from the one of spirits industry. This method provides us a
VALUATION SUMMARY median EBITDA multiple of 20.2x, leading us to an enterprise value of €47,111m (i.e.
(€/SHARE) €178.3 per share). Nevertheless, we believe that a potential acquisition of Pernod Ricard
is not realistic mainly for antitrust purposes. For that reason, we decide to exclude this
Trading methodology for our target price calculation.
159.0
comps
VALUATION CONCLUSION – EUR 153 TARGET PRICE – 17.7% UPSIDE
DCF 149.4 We base our calculations only on the DCF methodology and the trading comparables-
based methodology. We overweight the DCF one at 60%. This results in an equity value
of €40,496.6m, resulting in an enterprise value of €48,409.8m (€153 per share).
Sources: Team estimates, company
reports
This report is published for educational purposes only by students competing in The CFA Institute Research Challenge. 9INVESTMENT RISKS
RISK MATRIX Pernod Ricard faces diverse risks that could impact our recommendation.
BUSINESS RISKS
Overpaying for M&A targets
After a strong deleveraging in 2012-13, Pernod Ricard acquired highly specialized small
companies (Monkey 47, Smooth Ambler). If prices paid were undisclosed, we have
reasons to believe they topped average deals in the sector. Recent acquisitions, such as
Campari / Grand Marnier, reached 20-25x EBITDA. As premiums increase, payback on
acquisitions lengthens. However, we think Pernod Ricard will be able to integrate future
M&A targets as it did in the past.
Pressure on vodka in the US
Absolut vodka is Pernod Ricard’s most selling brand, representing 23% of total sales. It
Source : Team analysis faces pressures in the US coming from fierce competition and new entrants (i.e. Tito’s
ABSOLUT US SALES, NIELSEN vodka) in the premium segment. This country accounts for a third of Absolut volumes and
VALUE $ its growth has been driven by high-end / super premium vodka (+6.9% in 2016 vs +0.9%
for premium vodka). Absolut’s positioning prevents Pernod Ricard from catching this
growth, that’s why the company launched super premium Absolut Elyx in 2015. At a price
2014 2015 2016 2017 of $40 per bottle, it will undeniably head towards growth in the US. As of today, Absolut
Elyx is said to account for 1% of Absolut value sales in the country: that is €1.1 M assuming
-2% a market share of 5% for Absolut in the US.
-3% Failure to achieve cost-cutting promises
In 2015, the group launched a roadmap targeting gross P&L savings of €200m over the
-5% -5% FY16-20 period. Meanwhile, it aims at lowering working capital by €200m through supply
chain improvements. During FY 17, savings were delivered as planned but a failure to meet
Source : Company data
these commitments would impact accordingly future operating margins.
HAVANA CLUB MARKET SHARE ECONOMIC & GEOPOLITICAL RISKS
AND RANK, IN VOLUME US embargo on Cuba goods
Due to the embargo on Cuba, Pernod Ricard is not allowed to sell its Cuban rum (Havana
#1 Club) in the US territory. If Obama administration lifted partially the ban, with US citizens
#1 now entitle to bring back up to $100 of Cuban rum into the US, the embargo is a serious
#1 constraint on Pernod Ricard’s development in the country. In 2016, 24.7m 9-liter cases
25% were sold in the US (respectively #1 and #2 in terms of value and volume). The premium
17% 20% #6 positioning of Havana Club is a serious opportunity in the US, given this segment has been
#3
6% 4%
growing faster than value rum (0.8% vs -3.5% in 2016). Assuming a penetration of 10-15%,
like Western Europe, Pernod Ricard could sell about 2.5m 9-liter cases of its rum (almost
60% of FY17 Cuba volume) in Cuba.
Instability in Africa
Pernod Ricard employs 500 people in 7 Sub-Saharan Africa countries where it has been
experiencing a strong growth (CAGR 2012-17 at 15%). Recent drop of oil prices impacted
Source: Company data, Team analysis
growth of producers such as Nigeria and Angola. In FY17, the group reported only 1%
PERNOD RICARD RECOVERY IN growth, but a rebound is expected from 2018 thanks to stabilization of oil prices. In FY17,
CHINA this region accounted for only c.4% of Pernod Ricard revenues. But the company bets on
its development to stand out in the long term.
30% 8%
15%
Slowdown in China
China weights more than 30% of Pernod Ricard Asia sales (9% of global sales) but growth
0% 7%
has been stalling in recent years. The low penetration of international spirits so far (APPENDICES
APPENDICES
This report is published for educational purposes only by students competing in The CFA Institute Research Challenge. 11Appendix 1 – Pernod Ricard products
Strategic international brands
Strategic wines
Strategic local brands
Appendix 2 – Positioning of Pernod Ricard brands portfolio by category
Premium Premium Standard Standard Total
Brand Unit % Brand Unit % Brand Unit
Whiskey 8 62% 5 38% 13
Vodka 1 50% 1 50% 2
Cognac & Brandy 2 100% 0 0% 2
Rhum 1 50% 1 50% 2
Gin 3 100% 0 0% 3
Aniseed 1 50% 1 50% 2
Champagne 2 100% 0 0% 2
Liqueurs & Bitters 1 50% 1 50% 2
Mezcal 1 100% 0 0% 1
Tequila 2 100% 0 0% 2
Bourbon 1 100% 0 0%
Overall 23 72% 9 28% 32
Source: Company website
This report is published for educational purposes only by students competing in The CFA Institute Research Challenge. 12Appendix 3 – Composition of the Board of Directors & Committee
Related to Nomination,
Mr Paul Strategic Audit Governance Compensation
Board of Directors (30/06/2017)
Ricard Committee committee and CSR committee
Family committee
Executive Directors
Mr. Alexandre Ricard* X X
Mr. Pierre Pringuet X X
Independent Directors
Ms. Nicole Bouton X X
Mr. Wolfgang Colberg X X X
Mr. Ian Gallienne** X X
Mr. Gilles Samyn
Ms. Kory Sorenson X X
Ms. Anne Lange X
Directors & employee representative
Mr. Cesar Giron* X X X
Ms. Martina Gonzalez-Gallarza
Mr. Paul-Charles Ricard (Societe Paul
X
Ricard representative)
Ms. Veronica Vargas X
Directors representing the employees
Mr. Sylvain Carré
Mr. Manousos Charkoftakis X
Mr. Hervé Jouanno (non director)
* Executive member
** CEO of Groupe Bruxelles Lambert, holds 7,5% of Pernord Ricard's shares and 10,95% of voting rights
Source: Company reports
Appendix 4 - Porter 5 forces
Threat of
suppliers
5
4
3
Industry 2 Threat of new
Rivalry 1 entrants
0
Customers Threat of
Power substitutes
0 No threat to Pernod Ricard - 5 High threat to Pernod Ricard
Threat of suppliers – INSIGNIFICANT
Low bargaining power: a myriad of suppliers produces the ingredients.
Low forward integration threat.
Threat of new entrants – MODERATE
High barriers to entry as important capital is required to set up and maintain the equipment and facilities.
This report is published for educational purposes only by students competing in The CFA Institute Research Challenge. 13 To thrive on the spirits industry, an extensive distribution network is key.
Brand awareness and customer loyalty require high expenditures on marketing.
New players need licenses to produce alcohol and they need to deal with tightening government regulations
Profits are strongly dependent on volume sales hence scale economies are essential in this industry
Threat of substitutes – LOW
Competition is spread between alcoholic and non-alcoholic drinks.
Producers compete for a share in the consumer budget regardless of the type of beverage.
Consumers have low switching costs between beverages.
Health and wellness trend might induce consumers to buy more non-alcoholic beverages.
Threat of Buyers – SIGNIFICANT
Low switching costs
Moderate cost sensitivity
Differentiated products
Alcohol is not first necessity product
Rivalry - HIGH
Highly competitive (mostly in international spirits and wine segments) where the production is highly fragmented.
The industry is strongly concentrated as Top 5 spirits companies account for 63% of global volumes
Operational margins are traditionally high (28.5% in 2017 for Top 5 companies in spirits).
Competition is strongly determined by marketing and distribution expenditures: crucial to promote brand awareness and
create customer loyalty.
Appendix 5 – Industry & Macroeconomic key metrics
CAGR (in revenues) Population (in m illions) GDP per Capita (USD) Urbanisation Rate
2015-2017 e2018-2021 2017 e2020 Grow th % 2017 e2020 Grow th % 2016
Europe 2.0% 1.9% 674.6 675.0 0.1% 37,267 39,212 5.0% 73.0%
LATAM 7.5% 5.8% 383.1 394.7 2.9% 9,985 11,330 11.9% 80.0%
Region
Asia 5.0% 3.9% 3,478.2 3,550.7 2.0% 6,754 8,059 16.2% 48.0%
North Am erica 5.8% 3.4% 362.1 369.8 2.1% 57,993 64,255 9.7% 82.0%
China 4.5% 3.0% 1,383.9 1,391.2 0.5% 8,481 10,644 20.3% 57.0%
Country
India 9.7% 7.7% 1,339.3 1,384.3 3.3% 1,850 2,358 21.5% 33.0%
The US 6.1% 3.5% 325.50 332.4 2.1% 59,609 66,194 9.9% 82.0%
Sources: IMF, World Bank, United Nations, Eurostat, Nielsen, Team Estimates
CONSUMPTION EVOLUTION BY GEOGRAPHY
2.8%
Oceania
2.0%
-0.7%
Africa/Middle East
5.4%
3.2%
Asia
3.1%
-3.5%
LATAM
1.2%
-3.4%
Eastern Europe
1.2%
1.6%
Western Europe
0.0%
3.8%
North America
3.5%
-4.0% -3.0% -2.0% -1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0%
Volume % change CAGR 2005-2016
Source: Company reports
This report is published for educational purposes only by students competing in The CFA Institute Research Challenge. 14Appendix 6 - BCG Matrix on International Strategic Brands
Methodology:
Three variables have been considered as we built this chart. On the horizontal axis, the worldwide market share of the brand. On the
vertical axis, we have the brand growth from 2016 to 2017. The size of the bubbles is determined by the relative market share of the
brand in respect with Pernod Ricard’s largest competitor (i.e. Diageo).
The portfolio of Pernod Ricard’s International Strategic Brands has the following characteristics:
On the most dynamic side, Martell and Jameson are its stars accounting with the highest growth and an important market
share.
The cash cows that finance the development of the stars are Kahlua, The Glenlivet, Mumm, Absolut.
The question marks are Royal Salute and Perrier-Jouët who have a fairly high growth but a low market share.
The dogs are Beefeater, Malibu and Ballantine’s and Chivas Regal who according to this chart might be draining the
resources of Pernod Ricard.
Appendix 7 - SWOT analysis
Strength
Pernod Ricard’s brand portfolio is well positioned with 83% Premium brands and famous worldwide (e.g. Absolut, Jameson,
Martell, Havana Club).
Pernod Ricard has one of the best distribution systems in the spirits industry which enables it to integrate successfully newly
acquired brands and almost guarantee successes.
Its sales are balanced between the Americas, Europe and Asia/ Rest of World, each representing a third of the producer’s
revenues. The firm has proven to be successful in India which alone represents 25% of revenues in the Asia – RoW division.
Pernod Ricard’s margins are higher than its peers’ and carried out a smoothly managed deleveraging policy.
Weaknesses
Among Pernod Ricard’s stars, the company has several brands with a weak growth and a low market share such as Malibu
or Ballantine’s.
The French spirits producer is dependent on fluctuations on volatile emerging markets as it derives 38% of its sales in
2016/2017 from Asia, Eastern Europe and Latin America.
As it is a highly internationalized company, Pernod Ricard is strongly exposed to currency risk with sales in different
currencies and an outstanding debt in dollars.
Outsiders can take stakes of Pernod Ricard as 76.4% of its shares are free floating.
Opportunities
Emerging countries, in particularly China and India with revenues having grown to a CAGR of 14.4% and 5.6% respectively
between 2011 - 2015, offer a bright future for the company. Indeed, these countries are going through cultural changes and
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