Davide Campari Milano NV

MIL:CPR

Earnings Call Transcript 2019-Q1

[Operator]

Good afternoon, this is the Chorus Call conference operator. Welcome, and thank you for joining Campari Groups First Quarter 2019 Financial Results Presentation. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Bob Kunze-Concewitz, Chief Executive Officer of the Campari Group. Please go ahead, sir.

[Robert Kunze-Concewitz, executive]

Thank you very much. Good afternoon, everyone, and thanks for joining us on our Q1 2019 call. This is my custom. I'll ask you to follow me on Page #4 of our presentation, so I can kick off with the key highlights.

As you know, Q1 is a small quarter for us, an average 20% of our sales, but it's always nice to start the year well, and the figures certainly are testimony to this. Starting off with the net sales. We've had a very positive organic performance in the quarter, up 9.6%, and this is driven by the solid growth of our Global Priorities in our core developed markets, and this, despite the late Easter.

On the other hand, the results were also enhanced by a recovery in emerging markets, which were helped by a favorable comparable base. Looking at it by brand, the Global Priorities are continuing to outperform growing double-digit, up 12.6%, with the usual suspects, Aperol, Campari, Wild Turkey, Grand Marnier and the Jamaican rums. Though I'm pleased to report the SKYY Vodka was slightly up this quarter, up 0.70% -- 0.7%, sorry, driven by the international markets, and we're continuing to reduce the gap between shipments as well as our depletions in the core U.S. markets.

By Regional Priorities, we're up 7.8% driven by Espolon, Cinzano, which made a comeback, Frangelico, Forty Creek and GlenGrant. Looking at it on a geographical basis, we've had solid growth in high-margin developed markets driven by North America and Western Europe with a strong recovery in the lower margin emerging markets particularly Brazil and Russia as well as Argentina, which all had an easy comp base.

It's important to underline that this organic growth excludes actually the positive price effect in Argentina of 90 basis points in the quarter.

On the reported basis, we're up double-digit 10.1% with a positive ForEx effect of 2.6% more than compensating for the negative perimeter effect of negative 2%.

Looking at adjusted EBIT with an organic growth of 15.4% well ahead of the organic sales growth generating so 100 basis points in margin. And this is driven both by the combined effect of the more contained gross margin expansion, mainly due to the dilutive effect of the strong growth in the lower margin emerging markets as well as the tough comparison base. Last year, we were up by 250 basis points in the first quarter.

On the other hand, on the positive side, there is a slower growth in the A&P investments, although, they have grown quite significantly but less than sales as well as a higher absorption of fixed costs due to the strong sales growth.

On a reported basis, we're up 18.5%, again thanks to the positive FX here, which had a 5.1% impact, which more than offset the negative perimeter impact of 2%. Looking at the pretax profit on an adjusted basis up 16.5% and on a reported basis down 17.4%, you will recall that last year in Q1, we had the one-off related to the sale of our soda business.

Net debt on the other hand came in at EUR 893.9 million, so a little bit higher than at the end of 2018, up EUR 47.7 million, and this is due to a change in accounting treatment with an increase of EUR 83.3 million attributable to the first-time application of the IFRS 16 pertaining to leases, and this brings us to a net debt-to-EBITDA pro forma ratio of 2x.

Moving on to chart #9 in the Americas, [ as we'll be ] covering all the other info anyhow in more detail. The Americas, our largest region 48.3% of the total, growing on a reported basis by 19.2% and on an organic basis by 13.1%.

The largest market here, North America, up double digit organically 11.9% driven by the U.S. growing by 11.2%.

In the U.S., we had a solid start to the year, thanks to the double-digit growth in Grand Marnier, albeit with shipments here facing ahead of depletion, solid performance behind Wild Turkey, the whole portfolio, a very strong Aperol, Campari, Espolon and Jamaican rums. The SKYY portfolio declined by a mid-single digit on a shipment basis, and it continues as expected to be affected by the destocking exercise, but it's closing the gap as I said earlier.

SKYY core both in terms of depletions and consumption is actually positive, as we speak. Jamaica had a very strong quarter up 22.9%, very positive mix driven by the double-digit growth in the core Wray & Nephew Overproof, Campari and Appleton Estates. Local brands such as Magnum Tonic Wine also did quite well. The rest of the region was up 5.8%, Canada did extremely well up 15.9%, thanks to Aperol, Forty Creek, Appleton Estate and Grand Marnier, whilst Mexico declined 4.9% largely driven by the phasing of the Jamaican rum brands, which are tied to the late Easter.

On the other hand, SKYY ready-to-drink and SKYY Vodka were positive. Moving on to South America, up 25.6%, this region is clearly impacted by a very weak negative comp base last year, Brazil, up 41.8%, you will recall, we were down 32.1% last year. But overall, with a nice double-digit growth both on the local brands, but most importantly, on Campari, Aperol, very strong growth and SKYY Vodka.

Moving on to Argentina, where we were down by 5.2% last year, this year, we're up 19.6%., clearly the comp base helps a little bit, but very good underlying performance with Cinzano vermouth making comeback; Aperol, very, very strong.

The rest of the region was down 7.2%, as it's mostly partnership markets where the distributors aligned the shipments to arrive in Q2 in time for the Easter.

Moving on to Southern Europe, Middle East and Africa. Very strong results for this region, as seen from their perspective, up 6.4%, with Italy doing very well -- I mean Italy growing by 6.4%, a very solid start to the year. Very nice to see continued sustained double-digit growth of Aperol, up 14.5%, solid growth of Campari, 5.6%, a return to growth of Campari Soda. On the other hand, Crodino was soft. But we expect to improve this as the year progresses.

The rest of the region was up 6.5% doing very nicely in France, thanks to Aperol and GlenGrant. Again here, our shipments were actually lower than our local in market depletions.

Nigeria was quite strong, thanks to Campari, Wild Turkey. South Africa as well, but that's to a large extent due to a very soft comp last year.

Global Travel Retail, continuing its strong progression up 55.8% behind Aperol mostly and GlenGrant as well as Appleton Estate.

Moving on to North, Central and Eastern Europe, a very strong organic growth of 11.6%, the largest market Germany, up 9.7%. On the one hand, yes, it had a easy comp base, but clearly, it didn't have the Easter in Q1, so I would say, those 2 balance each other out.

Very nice double-digit growth of Aperol up 24%, and continued positive performance on Ouzo 12, Frangelico and Cinzano sparkling wines, which more than offset some softness in Averna, although Averna is coming back, and Campari, which was impacted by a price increase which we took in the month of January. As you know, Germany is not really an easy market when it comes to price increases. Having said that, we're pretty happy with how the brand is performing.

Moving on to the U.K., up 10.4%, positive start to the year, continued outperformance of Aperol, Campari, Cinzano vermouth as well as the Magnum Tonic Wine. These are all together offsetting the temporary declines on Bulldog and the Jamaican rums.

Russia, up 18.5%, clearly this is a combination of both an easy comp base as well as very strong growth in our higher-margin brands particularly Aperol, Espolon and Wild Turkey, whilst the Cinzano portfolio we did quite well on the vermouth and Mondoro, the premium sparkling wine continues to do very well. The rest of the region was up double-digit, 12.4%, doing very nicely across markets with Austria driven by the aperitifs, very strong growth in seeding markets for Aperol such as Scandinavia and the rest of Eastern Europe.

Last and but not least, Asia Pacific, this is actually a region which was impacted by the late Easter as most of our retailers decided to destock in the month of March, and we had a very strong actually start of Q2, and month of April related to that.

So overall, Asia Pac down 3.1%, with Australia down 2.3%. This clearly impacted the most the Wild Turkey bourbon portfolio.

On the other hand, Aperol, despite the Easter effect and SKYY Vodka and Espolon are continuing to do quite well. The rest of the region down 5.3%, but here the biggest impact came from Japan, which was down double-digit due to a very, very tough comp base last year where we were up by 140%.

Moving on to Page #13, the only thing I'd like to underline is the share of the pie, which keeps on increasing for our Global Priorities, higher-margin brands, now they're up to 58%, so this is 300 basis points versus last year.

Looking a little bit more in detail, the performance by brand. Aperol, very sustainable growth across the different clusters of markets. Our established markets are growing very nicely double-digit, Italy, Germany, and Austria and Switzerland. And we've had a very, very strong start across the rest of the markets, particularly in the U.S., Russia, U.K., Australia, Spain, GTR, Scandinavia and Eastern Europe. So net-in-net, the brand is progressing nicely up 26.8%.

Campari was up 9.2%, despite the negative impact of the price increase in Germany. The core market Italy is doing nicely up 5.6%, and we have double-digit growth across the rest of its core markets. Clearly, this year is an important year, it's 100 years of the Negroni, so we'll start benefiting from that from June onwards.

Grand Marnier had a very strong quarter, up 10%, but as I said earlier, this growth is particularly driven by shipments phasing in the U.S. where we were up 15.3% and this is ahead of depletion, so we don't have this evening out during the rest of the year.

Canada, giving us satisfaction up 10.1%, and the rest of the markets are a little bit mixed as you know, we're relaunching the brand there.

Moving on to the following page and the American whiskey portfolio overall up 10%, a nice start for the Wild Turkey up 4.6%, had very, very positive contributions from the premium variant Longbranch, and I'll just have to offset the declines in Australia where we were down 4.5% due to the late Easter. The higher-margin Russell's Reserve continue to register double-digit gain as well as the American Honey. Moving on to SKYY Vodka, it's nice to see a positive figure here up 0.7%. As I said earlier, the U.S. is improving its trend but on the other hand, positive growth in international markets compensated for the weakness we have there in terms of shipments. Moving on to the rums up 10%, Wray & Nephew Overproof up 15.3%, very solid trends in international markets but also a very strong Q1 in Jamaica, which benefited from positive shipments ahead of the price increase, which came on at the beginning of April.

Appleton Estate also did nicely up 8.4%, with a broad-based growth across Jamaica, the U.S., GTR and Canada.

Moving on to our Regional Priorities, the Espolon continues its strong double-digit growth, up 22.7%, nice, mostly driven by the U.S. because of the size of the U.S. market on the total brand. Bulldog, on the other hand, slowed down, it came in at 1.6%. We have nice positive growth in Belgium, GTR, Germany and Brazil, which helped offset weakness in its core market of Spain where the gin categories impacted by a lot of craft launches and particularly the so-called 0-kilometer gins where every Spanish city now have different -- 10 different craft chains on the market.

Moving on to the whiskies, GlenGrant benefiting from premiumization and the focus on the age portfolio up 6.4%, and Forty Creek was up 9.8%, thanks to the sterling performance in Canada at 11.5%.

Moving on to the amari, starting up to pick up speed, up 3.7%. We could have done a lot better but we had [ CBO ] restrictions on product availability for the Braulio brand. It's the only one which has aged, and this situation should improve in the quarters to come. The Cinzano brand, as I said earlier, up 11.1%, vermouth up 14.6%, both Argentina and Russia came back. And we also have the positive performance in the Czech Republic.

Sparking wines grew a little bit fast, up 8.3%, mostly thanks to Germany whereas Germany -- sorry, Russia was slightly up, and Italy was soft. The remainder of the sparking wines were down 2.6%, but here what's more important is that the higher-margin Mondoro brand was up at a nice pace, whereas the Riccadonna was impacted more by the Easter promotions. To close it all up with the Local Priorities, Campari Soda starting to give us satisfaction, up 2.3%, whereas Crodino still down mid-single digit, but as we will relaunch the brand, we expect this trend to change in the second half of the year.

Our Australian bourbon ready-to-drink business was flattish, and this was mostly impacted by the late Easter this year, and the April was a good catch-up. The Brazilian brands benefited from the very easy comp base, up 55.7%, whereas the nicely growing and profitable Ouzo 12 brand continue to grow by 5.6%. Cabo, on the other hand, was negatively impacted by shipment phasing, was down 10.2%, but we're relatively confident about the good performance of the brand from a depletion and consumptions standpoint. So this will revert in the remainder of the year. This is the review from a sales perspective. I'll now hand over to Paolo to take you through the numbers.

[Paolo Marchesini, executive]

Thank you, Bob. If you follow me to Page 21, we have the key highlights on EBIT adjusted. Gross profit was on a reported basis was up in the first quarter by 11.9% in value to 60.5% on sales with 100 basis points overall accretion.

In existing business, the gross profit was up 9.9% in value with 20 basis point margin expansion notwithstanding the tough comp of last year when in first quarter, the group delivered 250 basis points accretion.

Organic growth of gross profit was ahead of top line, thanks to a very favorable sales mix overcoming the adverse agave purchase price, which accounted in the first quarter for about 30 basis points as well as due to the dilutive effect generated by the very positive performance of the lower margin emerging markets. ForEx and perimeter combined effect in the first quarter was 2% in value, positive with 80 basis point margin accretion driven by the tail-end effect of the previous year's transactions, mainly the termination of lower margins agency brands distribution.

A&P on a reported basis was up 8.6% in value to 15.9% on sales with the 20 basis points accretion. In existing business, A&P growth accounted for 6.3% in value lower than the strong top line growth thus generating 50 basis point margin accretion.

The combined effect of ForEx and perimeter in the first quarter accounted for 2.3% in value with 30 basis point margin dilution driven by the tail-end effect of termination of low A&P intensity brands distributions.

SG&A expenses on a reported basis were up 9.4% in value to 50 -- 25, sorry -- to 25% on net sales with 20 basis points accretion. In existing business, SG&A expenses grew by 8.2% in value with a 30 basis points margin accretion driven by the higher absorption of fixed structure cost due to the strong top line growth, which in existing business accounted for as we saw 9.6%.

The combined effect of ForEx and perimeter in value was 1.2% with 10 basis points margin dilution. EBIT adjusted came in at EUR 72.4 million with a reported basis increase of 18.5% in value to 19.6% on net sales with 140 basis points EBIT adjusted accretion.

In existing business, EBIT adjusted grew by 15.4% in value with 100 basis point margin accretion, with a negligible impact of IFRS 16 first time adoption, which accounted for EUR 0.5 million in value and just 10 basis points in terms of margin accretion. The combined effect of ForEx and perimeter accounted for 3.1% in value with a 40 basis point margin accretion.

EBITDA adjusted on a reported basis was up 19.9% in value to 24.2% margin on sales, showing 200 basis points accretion. The EBIT adjusted that's factor in EUR 3.1 million incremental depreciation due to the first-time application of IFRS 16. In existing business, EBIT adjusted grew 17% in value with 150 basis point margin accretion, whilst the combined effect of ForEx and perimeter accounted for 2.9% in value and 50 basis point margin accretion.

If you move on to the following page, Page 22, we can see that EBIT adjusted of EUR 72.4 million was up overall by 18.5% on a reported basis to 19.6% margin on sales, showing 140 basis points accretion. Now if you look at the existing business, EBIT adjusted was up by 15.4% in value well ahead the top line driving an overall 100 basis points accretion driven by 20 basis points coming from the gross margin, 50 basis points that come in from A&P and 30 basis points coming from the SG&A.

The FX accounted in isolation for 5.1% in value of EUR 3.1 million driving 40 basis points accretion, and perimeter had a negative impact of 2% in value, it was neutral on margin. If we factor in the negative effect of the comp base on operating adjustments, where last year we recognized EUR 21.6 million of gain on the disposal of the soda business net of last year provisions, the EBIT, following the tough comp base on the one-off side was down on a reported basis by 13.3% in value to EUR 71.7 million.

If we move on now to Page 23, we can see net financial charges at EUR 8.3 million in the first quarter of this year up by EUR 2.6 million versus last year, despite a lower average in that net in the first quarter down from EUR 960 million to EUR 870 million this year.

The increase in the net financial charges was due primarily to an increase in the average cost of net debt to 3.7% up from 2.7% of last year, reflecting the negative carry effect on excess liquidity. And secondly, the effect of the first-time application of IFRS 16, which accounted in the first quarter for almost EUR 1 million, EUR 0.9 million.

Group pretax profit adjusted of the one-off effect was up at 16.5% in value, whilst if we factor in the one-off effect, the group pretax profit lean was down 17.4% to EUR 63.2 million.

If we move on to Page 25, we can see the net financial debt, which stood at EUR 893.9 million as at March end versus EUR 846 million of March last year with an increase of EUR 47.7 million, which clearly is -- as already anticipated totally due to the step-up of the -- due to the first-time consolidation -- application of the IFRS 16 amounting to EUR 83.3 million. On a pro forma ratio, net debt-to-EBITDA at 2x at March 10. And this is it on numbers, Bob.

[Robert Kunze-Concewitz, executive]

Yes, thanks, Paolo. I'll close out with just a quick review of marketing initiatives and the conclusion. I mean this year on Campari is an important year because we're celebrating the first 100 years of the Negroni. As you know Negroni is our star cocktail and the #2 cocktail in premium bars. We -- it was the hero subject of our Red Diaries 2019 film, Entering Red. We're going to follow up with a big emphasis on the Negroni Week next month, and then with the reopening of the Camparino, September in Milan. And on Aperol, the orange wave continues, and some of the statistics are impressive. As you know, we're sponsors of the Australian Tennis Open, and during that month, we actually sold 180,000 Aperol spritzers, and it was by far the #1 most sold beverage at the tournament.

We're doing some interesting fun things such as door-by-door delivery of Aperol spritzers in the U.K., deseasonalizing the brand during ski season. So continuing to execute hopefully even better than previous years our 3-stage success model.

In terms of other brands, we've been getting quite a few awards whether it's been in the world of gin, single malt or Canadian whiskey. On Bulldog, we have a new global campaign leading the way, so we expect that to impact us. As we speak, we're rolling out the relaunch of the Cinzano vermouth range, going back to the original vermouth formula so that makes us the only large vermouth brand going back to the original vermouth formula. And we think this does the brand a lot of good. And at the same time, we're premiumizing at -- with the 1757 range. And continuing to premiumize the Grand Marnier range rolling out the new Cuvée Louis

Alexandre with new packaging and new liquid, which seems to have had quite a positive response in the U.S.

So to conclude, a strong start to the year, despite the late Easter, it was driven by combination of both positive underlying momentum in core developed markets, but also enhanced by the recovery in emerging markets as well as by a favorable comparable base in a small quarter.

For the full year, looking ahead, our outlook remains fairly balanced both in terms of risks as well as opportunities and unchanged to the previous announcements. The underlying performance, we'll see continued positive business momentum and sales growth, this despite the uncertain geopolitical macroeconomic environments. But from quarter-to-quarter, we'll reflect different comparison basis. In the previous year's EBIT organic margin expansion is expected to continue, supported by gross margin accretion, after reinvestments into the business particularly our on-premise capabilities as well as our development of brand houses. Looking at ForEx and perimeter effects, clearly, there's continued volatility of some currencies as well as the tail-end effect of the previous year's transactions, but we expect them altogether to be less adverse than last year.

Net profit reported is expected to benefit from the net positive adjustments of approximately EUR 14 million, which are driven by the patent box tax relief in Italy, in what will be its fifth and unfortunately, it's final year. Net in net, we remain pretty confident in delivering a positive performance across all of our key underlying business indicators in 2019 as well. Having said that, we're more than happy to take your questions.

[Operator]

[Operator Instructions] Our first question comes from Edward Mundy of Jefferies.

[Edward Mundy, analyst]

Three questions please. You've flagged the timing of Easter as a negative for the first quarter, I was wondering if you were able to quantify on how much that impacted your Q1 sales? The second is on phasing of A&P, is this business mix or you're just keeping your powder dry for the summer with Aperol and Negroni activation through the year? And then the third question is on Aperol. I appreciate it's still a very early part of the year, you've got off to a pretty good start, but is it still like a 20% to 30% sort of year? Or does it still like a -- and if this is something you could do a little bit stronger than that range, if you can provide me any color on that?

[Robert Kunze-Concewitz, executive]

Thanks, Ed, I'll take all 3 of them. I mean the timing of the Easter clearly had a negative impact on Q1. But I must say on the other hand, we also had an easy comp base. Without getting too scientific to say that the 2 of those effects, easy comp base is in emerging markets and the delayed Easter to offset each other. With regards to A&P, yes, you're absolutely right, Q2 and Q3 are going to be the key seasons for a lot of our brands but most particularly, the aperitifs, Campari and Aperol, so you'll see a hike in A&P in those 2 key quarters.

With regards to Aperol, what to say, I mean, you know the business model as well as us, the 3-stage model is working and the testimony for that is that the existing, the established markets are continuing to grow double-digit, as we enter new usage occasions, food pairing, and we only have 4 markets in that stage, we have about 5 to 6 markets in the deseasonalization phase, and they're doing very nicely as well, whereas the rest of the world sort of bulk of markets are actually growing at a very, very strong double-digit rate. And we will see what happens. Clearly, we're not shy, we try to execute better every year. But at the same time, we have 2 important quarters in front of us. So I think we'll add a lot more color when we talk next -- at the end of July.

[Edward Mundy, analyst]

Understood, thanks. And just on Aperol within the U.S., I mean, clearly there is an element of deseasonalization that's probably going on, but you've also got some of the warmer states contributing to Aperol growth, are you able to quantify what Aperol growth was in the U.S. in Q1?

[Robert Kunze-Concewitz, executive]

Well, Aperol grew around the 60% in the U.S., if we look at our consumption indicators. In those markets, where you have a warmer climate and where we had our activations, it was growing in the 90% to 100% range.

[Operator]

The next question is from Trevor Stirling of Bernstein.

[Trevor Stirling, analyst]

Can you touch on the question of A&P and SG&A and gross margin of the interlinking between the 3? We've got used to the idea that gross margins across the year most of that will get reinvested into A&P and SG&A, this quarter, given the top line was so strong that, that wasn't the case, would you expect across the balance of the full year that we'll see both A&P and SG&A catch up a little bit?

[Paolo Marchesini, executive]

Hey, Trevor, I'll try and answer your questions. So with regards to the gross margin, we've -- we confirm the guidance that we've given for the beginning of the year, the back end of last year, sorry, which is the group is having a sustainable gross margin expansion all being equal of about 120 basis points. You have to take into consideration that last year due to the very poor performance of the emerging markets that we had the negative impact -- sorry, we had a positive impact last year on gross margin due to a poor performance of emerging markets, which we quantified in about 30 basis points. So then looking into 2019, the 30 basis points accretion driven by poor emerging market performance is destined to bounce back so that will be a negative to gross margin expansion for this year. Now in terms of phasing of this emerging market effect, this is very much front-loaded because the performance of emerging market last year was particularly pure -- poor in Q1, Q2, so you know we're seeing the effect now.

The second effect that we have in the first quarter is the phasing of the agave effect of the agave price hike, we're basically -- we're still currently buying at higher pesos per kilo versus Q1 of last year. And this is destined to normalize over the course of the full year with potentially the decline in prices at the back end of the year, so again, the negative effect is very much front-loaded on agave. For the time being, we're expecting agave to have no effect on a full year basis on our gross margins. So looking into the phasing of gross margin expansion, we are expecting Q2 and Q3 gross margin to expand stronger than in Q1, where basically the effect of the very strong momentum on our Global Priority brands is to more than offset for the 2 negatives of emerging markets and agave effect.

Looking into the A&P line, we confirm our guidance of last year, A&P on sales with a 20, 25 basis points flex up and down. And again, as Bob has just mentioned that clearly to support the strong development of our aperitifs portfolio, Q2 and Q3 are particularly heavy in terms of A&P on sales. Worthwhile noting that fair that even if you look at the Q1, A&P in value terms was not held back because it grew by 6.4% in value. So it's just accretive because the top line is -- in existing business is way faster than the increase of the A&P.

Looking at SG&A for the full year, we're not envisaging a major drift, but clearly, accretion and dilution quarter-on-quarter would very much depend on top line performance, so the stronger is the top line, the higher is the accretion that you've seen, the P&L as it happen in the first quarter of this year. Hope I've answered your questions.

[Operator]

The next question is from Fernando Ferreira of Bank of America.

[Fernando Ferreira, analyst]

I have 3 please. First one on Aperol, maybe for Bob. Can you remind us how relevant are the seeding markets relative to the established markets in terms of sales today, and if you can broadly compare how those 2 groups of countries are growing, please? And then, second one on Grand Marnier, just to check if you think the underlying growth of the brand is still between low to mid-single digits despite this stronger start to the year? And then maybe the last one for Paolo, it's just another one on A&P and SG&A, I mean, in the last couple of years, we've seen the ratios right of A&P to SG&A and SG&A growing way ahead of sales, which we didn't see continuing now in Q1. And as you mentioned, you are going to see, right, we are going to see some pickup in those lines throughout the year, but I just wanted to understand from a medium-term basis, are we reaching a point where the ratios there are reaching closer to a normal plateau in your view, and we're not going to see right that both A&P and SG&A growing way ahead of sales?

[Paolo Marchesini, executive]

Yes. I can start with the third question so that we'll follow up on Trevor's question. Yes, yes, it's confirmed, we're not seeing A&P, SG&A meaningfully moving as a percentage of sales on top line, which would mean that if the top line moves faster than expected, we have a little bit of room to accommodate further A&P step up to fuel further growth on our Global Priorities and particularly the Aperol and the aperitifs. With regards to the SG&A, we don't see any major drift in terms of SG&A on sales. So I mean it's clearly the momentum is on top line is very strong, and that clearly simplifies the management of the 2 lines, A&P and SG&A.

[Robert Kunze-Concewitz, executive]

Let me take the other questions. On Grand Marnier, yes, you're right. I confirm the fact that the underlying growth of the brand is somewhere between low to mid-single digits, so that's what I would take into consideration, and there might be some disruption due to the introduction or the renovation of the Cuvée line this year, so we'll see how that goes.

Now moving on to Aperol. Our seeding markets, so-called seeding markets, so basically it's most of the markets in the world are represent about 20% to 25% of the total. If we take our top 10 markets, they represent about 75% to 80%. If you look at the different growth rates, I mean, our established markets, let's say, the top 4 are growing anywhere between 12% to 15%, 16%, 17%, although Germany, sorry, it's growing faster than that. If we look at the deseasonalizing markets, they're growing much higher than that, I would say at least twice, whereas the seeding markets are growing through 4x to 5x as faster as our established markets, so that gives you a little bit of a perspective.

[Operator]

The next question is from Simon Hales of Citi.

[Simon Hales, analyst]

Just going back to the shipment phasing particular around Grand Marnier but also across the wider business. Are you able to quantify of just how much of the strong sales growth in Q1, it just came as a function of that stockbuild particularly in the U.S. but also in Jamaica? And the second, maybe a quick one for Paolo, obviously you flagged that the average cost of debt, it's creeped up in the first quarter, can you remind us what the guidance is for the full year in terms of how you're thinking about interest costs, [ 2 points ]?

[Robert Kunze-Concewitz, executive]

Yes. I mean in terms of shipment phasing, I mean if you look at it, we'd expect sort of a balanced approach because, yes, in the U.S. and in Jamaica there are some sales which were phased into Q1, but on the other hand, all the other partnership markets, we actually have a phasing more into Q2 because of the Easter. And the same in some established markets such as in Australia. So I would say, it's -- that was pretty balanced. Looking at Grand Marnier, particularly Grand Marnier is growing somewhere between 3% to 5% from a consumption standpoint and depletion standpoint. So that gives you an idea of how much phasing we've had. And in Jamaica, I mean that's a market which goes up and down. I mean we're still growing consumption which is incredible on White Overproof in the high single, low double-digit numbers, so that the brand is in pretty good health. And clearly, there are some speculation due to the price increase which happened at the beginning of April.

[Paolo Marchesini, executive]

With regards to the financial charges for 2019, we are expecting that financial charges to come in at about EUR 35 million to EUR 36 million, including the impact of IFRS 16, which accounts for about EUR 3.6 million, so we would be excluding the IFRS about EUR 32 million interest on outstanding debt. If you take into -- look into the -- more into the long run, our cost of -- long-term cost of debt on the gross debt, excluding liquidity, has been reduced from 2.35% to 1.97%. And this is again attributable to the fact that the new issuance was finalized at 1.6% -- 1.65%. So you know actually we're reducing the cost of debt. But as you know the liquidity piles up, we have a negative carry effect, which is lifting the coupon as a percentage of net debt.

[Simon Hales, analyst]

And Bob, just coming back on your comments. And if I put it all together and look at all the technical moving parts in the first quarter, you flagged for the timing of Easter was clearly a negative, but that probably was offset by the emerging market bounce you've got against an easy comp, and you've then got some shipment phasing, which some puts and takes on, overall, is the 9.6% organic growth you delivered in the first quarter, do you think that's a real guide for what the true underlying organic growth rate is of the business, ex all of those technical moving parts?

[Robert Kunze-Concewitz, executive]

At the current moment, yes, I would say that's the underlying rate. But I mean we're only at the beginning of the year, you know how important Q2 and Q3 is for us. So I'm not making any prognostic at this stage.

[Operator]

The next question is from Ms. Marion Boucheron of MainFirst.

[Marion Boucheron, analyst]

Two questions for me. Just on Germany and Italy and Aperol in these 2 markets. We saw it accelerating strongly last year, and Q1 was again in pace with last year, do you think that's a new run rate for these 2 countries, and what do you attribute this acceleration to there? And the second question, as following up on the SG&A line, where do you stand now in terms of profitability in the markets where you open routes-to-market not so long ago, I mean, by here the U.K., Spain, Peru and South Africa?

[Robert Kunze-Concewitz, executive]

Yes. I mean with regards to Germany and Italy and in Aperol, as I've said, I mean we've got about 4 to 5 markets, which are entering the third stage of the brand development, Italy is further ahead, Germany is following now, where the consumption occasion of Aperol is going beyond just the aperitifs, and people are starting to substitute other drinks, alcoholic drinks over brunch, lunch or even dinner at times. So this is opening a whole new chapter for the brand. We're at the beginning of it. Clearly, we're doing everything to support this from ad hoc advertising campaigns to activations and so on and so forth. So we'll see how it goes, so far, so good.

[Paolo Marchesini, executive]

Yes, with regards to SG&A in new route-to-markets, I would say in developed markets, the U.K. and Spain, we're absolutely in line with our internal plans, potentially marginally better as you know the momentum on our brands is quite good. And probably in emerging markets, Peru and South Africa, we're a little bit behind plan, it's such a smaller market for us, it won't change the picture.

[Operator]

The next question is from Laurence Whyatt of Barclays.

[Laurence Whyatt, analyst]

One on SKYY for me please. There was talk of being able to get SKYY back to sort of 0 growth but also 0 decline during the year. I was wondering if you still think that would be possible? And if you could just let us know what you're doing on pricing on that brand with regards to the competition? And then secondly, on the patent box you've mentioned that the patent box tax regime will end at 2019, can you confirm there's no way that can either be extended or in any other way not end in 2019, so the 2019 is certainly the last year that we'll get that benefit?

[Robert Kunze-Concewitz, executive]

Yes, I mean focusing on SKYY, we'd expect international markets to compensate for the destocking in the U.S., so that we end up the year on a 0 basis or flattish. If we see what's happening in the markets, I mean our born in California campaign and inclusive campaigns seems to be working, core is reacting quite nicely, actually our consumption indicators are up. We're not doing anything significant on pricing. Where we're still suffering is on flavors. But that will be -- take a little bit longer because that's especially the part which we are destocking. So we feel overall, good about how the franchise is trending, given how tough the market is.

[Paolo Marchesini, executive]

Yes, with regards to patent box, the -- I can confirm that the benefit, the allowance will not be renewed unless the government changes its mind. But I very much doubt. They have quite different priorities at the moment. So I think this is on the wish list of the current government.

[Operator]

The next question is from Nico Von Stackelberg of Liberum.

[Nico Von Stackelberg, analyst]

I want to recap 2 points that were just previously raised, I want to make sure I got it right. So Germany, I guess, in my model is around a low single-digit growth rate market. Is it fair to assume that should be maybe at the high end of the low single-digit range now that you're sort of Global Priorities are really kicking off there?

And then I was just trying to square Simon's comment or you'd answered the Simon's question about Grand Marnier. Because I mean I get there's a technical effect there with the shipments ahead of depletions in the U.S., but it seemed like net-net that would -- that will maybe work against the organic growth rate of around 9% I guess, it is right, so how do you circle that square there? And then one final question. I was watching a Bloomberg interview where you sort to seemed to hint, maybe I misinterpreted it really, but some sort of alcohol-free aperitifs, I'm not sure if that was right, are you referring to Crodino there? Or is there maybe a trick up your sleeve that we're not aware of?

[Robert Kunze-Concewitz, executive]

Yes, I doubt there any tricks up my sleeve you guys aren't aware of. But anyhow, I think first, starting with the third question on the aperitif, we have Crodino, which is if you want the grandfather of nonalcoholic, let's say, spirits, and so we would have an oxymoron, but that's what it is. This is something which we are revitalizing in Italy, but most importantly, we're testing very, very positively in the rest of Europe. And at the same time, we're also working on NPD in this area. And I won't say much more on this, I think it will be interesting to see what happens next year. I clearly -- I think we have a very strong competence in liquid development in the nonalcoholic area as well as a strong competence with aperitifs. So that will be interesting. Now, Germany, without having Q2 and Q3 under my belt, I would say conservatively is a mid-single-digit track market. We're doing very well within the market, but clearly, weather can have quite an impact on Germany and so far so good. But I think I'll be able to say more to that when we come to July or even October.

[Nico Von Stackelberg, analyst]

Okay. I guess the final question that was really around the 9%, I wasn't quite sure how you sort of get there really?

[Robert Kunze-Concewitz, executive]

Which one? Germany or...

[Nico Von Stackelberg, analyst]

Well, no, just the group. You sort of seemed to imply that this sort of level of growth was repeatable.

[Robert Kunze-Concewitz, executive]

So I mean there's -- there are so many moving parts because on the one hand, there is the easy comp base, but then there's the Easter which moved. And if you look at, we have advanced shipment phasing on Grand Marnier as well as on White Overproof. But at the same time, we've had the opposite effect from a shipment standpoint on our so-called partnership markets as well as some strong established markets like Australia due to the Easter effect. So I think without being too scientific about it, all of them sort of compensate each other, which is why I'm saying, we have a good momentum behind our brand.

[Operator]

The next question is from Andrea Pistacchi of Deutsche Bank.

[Andrea Pistacchi, analyst]

I have 3 questions please. The first one on the U.S., 11% organic growth. Grand Marnier, you said Grand Marnier shipment phasing added a bit to that performance; on the other hand, SKYY destocking was a bit of a negative. Feels like the underlying performance there is probably close to not quite double-digit but close to that. Given the how the portfolio has evolved there, Aperol, Campari, Espolon, all bigger brands compare to a year or 2 ago, do you think this is the sort of level now high single-digit growth a sensible level for your growth going forward? The second question is on SG&A. I understand a bit where this spend is going. I think in most of the quarters last year, SG&A was growing at around 5%, 6%. SG&A grew faster than that in Q1, there's no new subsidiary. So is it sort of hiring more salespeople and where the focus is? And third question, if you could just give a little bit more color on Crodino, you suggested there's a brand relaunch, could you tell us a little more about that, please?

[Robert Kunze-Concewitz, executive]

Yes. No, with regards to the U.S., I mean if I really focused on this year, I would say, we're probably more on the mid-single-digit range because you need to take a factor in the destocking of SKYY which will continue till at least the first half. So SKYY weighs quite a bit on the overall numbers. But if you take it out, it takes the rest out of the equation, we have a very strong -- I mean Grand Marnier is growing to low to mid-single digits. We have the bourbon portfolio growing high single digits and the rest from a small base, actually growing at a very strong sustained double-digits. So clearly, as we start building mass along the lines of the Aperols and the Espolons and the Camparis, that will mid- to long term have an impact on our average U.S. growth rates. With regards to Crodino, I mean, Crodino will get a relaunch in Italy in the second half of this year, and there will be a complete relaunch. But at the same time, what we've learned quite a bit on Crodino in the European markets last year, so we're going to fine-tune the proposition to take that into consideration, and that will impact also that serving size, et cetera.

[Paolo Marchesini, executive]

Yes, with regards to the SG&A, Andrea. The point is the comp base versus last year, we're basically in terms of value growth not in terms of margins, we're heavier in the first part of the year. As we were at the back end of last year. This is due primarily to the move of the company in the U.S. from San Francisco to New York. So clearly, the ramp-up in costs of core to the back end of last year, so in the first part of the year, running against tougher comps, and then it should level out. So I think that's the reason. But overall, if you look at the SG&A line as a percentage of sales, we're not seeing any drift.

[Operator]

The next question is from Paola Carboni of Equita SIM.

[Paola Carboni, analyst]

I have a few questions. The first one is about SKYY, just to check if I got it right. So you anticipated that there still a some decline in your latest comments in March, whilst I am understanding now it's possible to close the year with a flattish trend, if that is the case, and if so, can you focus on what is possibly getting better than you originally anticipated? The second question is on your outlook for profitability. Actually, I mean the sentence is actually unchanged, and it was exactly the same as in March. And so with margin improvements similar to last year. But in my perception from the tone of this call today is that probably thanks to a buoyant decline, you seems to be more confident about at least the sentence that we might avoid this kind of dilutive impact from growing A&P and SG&A, which we had last year, is that the case again? This is my question.

[Robert Kunze-Concewitz, executive]

Let me start with SKYY. Paola, yes, you're right. I mean if we look at this year, we expect SKYY coming flattish. With international markets, we started to pick up pace particularly in some emerging markets, Brazil, Argentina, South Africa to help compensate for the destocking in the U.S. Having said that, we're also starting to see depletions and consumptions improving on core in the U.S., we're still doing very poorly on the flavors, on the infusions, but core, which is the bulk of it is actually in positive territory now from a consumption as well as from a depletion standpoint.

[Paolo Marchesini, executive]

Yes, with regards to A&P and SG&A on sales, it's confirmed. And as I've said before, we don't see this year the risk of meaningful drifts in both lines as a percentage of sales. Clearly, we have a very good momentum on the top line. We have some [ ups ] on the gross margin as well as a percentage of sales and as well as some threats that is primarily both the agave thing which we cannot control. But we're -- we believe we're quite hedged considering the top vis-à-vis the delivery of satisfactory EBIT performance in value terms due to the very strong top line momentum. And as usual, Paola, we would be more precise on the back of Q2 once we have Q2 under our belts, that is a very important quarter.

[Paola Carboni, analyst]

Sure. Thanks, and sorry, coming back on the agave. Also on this point, you seem to be a bit more worried a couple of months ago whilst now it seems the case that the impact of agave will -- would reflect on a full year basis, so no further impact, we might say?

[Paolo Marchesini, executive]

Yes, that's the game plan. But we do not have the crystal ball, so we're basing our assumption on what analysts are saying. They count the number of plants that are in the field, and they track the volume -- the demand of agave. So the analysts are saying that the agave will start declining at the back end of this year. So it could be demonstrated. But I don't think overall it's a major slide, still if we manage to -- and we are still buying at MXN 25, MXN 26. So if you think that the normal cost for the agave, if we [ were ] into the bubble, it would be about MXN 7, so that there is a big opportunity decision into the agave. When that -- this opportunity materialize, it's a little bit of a question mark. But you know if you take the cost of -- incremental cost of agave sitting in our P&L, it's about EUR 20 million of EBIT, based on the delta between MXN 7 and MXN 26. So it's a big opportunity. I mean that phasing is very difficult to predict this quarter, the other quarter, we don't know for sure, 2020 is for sure this is what they are saying is the year where -- when the price will start declining sharply.

[Operator]

[Operator Instructions] Mr. Kunze-Concewitz, at this time, there are no questions registered, sir.

[Robert Kunze-Concewitz, executive]

All right. Thank you all for joining us and talk to you again at the end of July. Have a nice afternoon. Bye-bye.

[Paolo Marchesini, executive]

Bye-bye.