Davide Campari Milano NV

MIL:CPR

Earnings Call Transcript 2021-Q1

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Campari Group First Quarter 2021 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Bob Kunze-Concewitz, CEO of Campari. Please go ahead, sir.

[Robert Kunze-Concewitz, executive]

Thank you. Good afternoon, and welcome, everybody, to our Q1 call. If you have the presentation in front of you, I'd ask you to join me on Page #4, where I'll kick off with the general overview.

As the numbers speak for themselves, we had a pretty decent start to the year, pretty good momentum, driven by home consumption, and all this despite the third wave of lockdowns.

Looking at net sales on an organic basis, they were up 17.9%. Obviously, Q1 is a small quarter. And the underlying momentum in our core off-premise markets was amplified to a certain extent by an easy comparison base versus Q1 2020, where you will recall we were down by 5.3%. There was also a slight early Easter effect as well as some shipment phasing in selected markets.

We've seen continued sustained growth in the off-premise skewed markets, while clearly, on-premise and GTR continue to be heavily impacted by the renewed restrictions.

Looking at it on a geographic basis, very good momentum in the Americas overall. Quite nicely in core off-premise skewed U.S., up 15%, 28% in Canada and almost 34% in Jamaica. And we also saw a recovery in Latin America with Brazil up 61%; Argentina, almost 100%.

Off-premise skewed Northern European markets continue to do very well as well as Australia, which was up 22.6%. On the other hand, the on-premise skews Italy and Spain as well as GTR can be expected continue to suffer the effects of the lockdowns.

Looking at it on a brand basis, growth for our global aperitifs was held back by softness in the on-premise market, obviously, in a small seasonality quarter. Strong continued momentum in Wild Turkey, up 30.9%. Our Jamaican rum's growing even faster, up 44.6% as well as a nice recovery in Grand Marnier and SKYY Vodka.

Our regional priorities were up 26.4% overall, driven as usual by Espolòn, up 63.9%. Forty Creek, GlenGrant and sparkling wines also did quite nicely. Looking at local priorities, they were up 25.5%, driven by Aperol Spritz ready-to-enjoy. This is the first time I think we're isolating those numbers, Campari Soda as well as Wild Turkey ready-to-drink.

Our overall organic growth came in at 12.1%, showing nice, solid business underlying momentum. The reported change of 10.5% positive reflects, on the one hand, a flattish perimeter effect of minus 0.8%, but quite a negative ForEx effect of minus 6.6%, driven by the devaluation of the U.S. dollar as well as some emerging market currencies.

Looking at EBIT adjusted. We have an organic growth of 63.6%, which is a nice 520 bps margin accretion. This is largely due to an easy comp base. You remember, last year, we were down by 35.3%, and we had a 620 basis points margin dilution.

Gross margin overall was slightly dilutive, only minus 20 basis points and driven by an unfavorable sales mix, clearly impacted by the outperformance of lower-margin Espolòn, still feeling the impact of very high agave costs. The overall positive effect in EBIT adjusted reflected growth in A&P, slightly behind top line, and an organic decrease in SG&A down 2.2%, leading to a 490 points accretion compared with the same period last year.

If we look at organic growth, it was up 6.7% and 90 bps margin dilution versus Q1 2019, clearly largely driven by the unfavorable sales mix. The reported change came in at 43.1% positive after the negative perimeter effect of 7.6% and negative ForEx effect of minus 13%.

Moving on to profit before taxation. On an adjusted basis, it came in at EUR 64.1 million, up 84.7%, and on a reported basis, EUR 64.8 million, up 112.1%. To close it all off, net financial debt came in at EUR 1,067,900,000, down EUR 35.8 million versus the end of the calendar year. And it was mostly driven by the positive free cash flow generated by the business, leading to a net debt -- to net financial debt to EBITDA adjusted ratio of 2.5x, down from 2.8x in December 2020.

Moving on to Chart #5. Not much to say except that, clearly, home mixology is continuing to drive a nice growth of consumption across all of our key markets, and we're continuing to outperform our reference markets. The same would be if we included Germany, which is our third market and many, many others. I mean, in the vast majority of markets, we are benefiting from the trend but also outperforming versus the reference markets.

Moving on to sales results. I'll skip Page #7 because we will analyze that in detail later on. Page #8, just to stress the fact that now the U.S. is by far our largest market at 32%. It's twice as big as Italy, and it's clearly performing very, very nicely.

And looking at that into more detail on Page #9. I think what's nice to see is that all of our key clusters in the Americas grew double digit versus Q1 2020. But beyond that, most importantly, they -- we have double-digit growth across all of the clusters versus Q1 2019. So it's a very, very nice recovery here.

The U.S., as mentioned earlier, was up 15%, a very, very positive performance. We have the continued outperformance of Espolòn, Wild Turkey and the Jamaican rums as well as the shipments recovery in Grand Marnier and SKYY Vodka. Essentially, by the end of last fiscal year, the stocks had come down so low that we had to replenish a little bit the pipeline. But bear in mind that, if we compare inventory at U.S. wholesale level versus 2019, we're still at half that level. So we're at very healthy inventory levels.

The aperitifs on the other Aperol and Campari on a shipment basis, they declined due to a very tough comp base. You will recall that, last year, when the tariffs were introduced by the administration, we increased prices at the beginning of April. So we had quite a bit of advanced shipments ahead of the price increase in Q1 2020. Importantly though, if we look at both depletions as well as consumptions, our aperitifs are continuing to grow nicely double digit in the U.S.

Our brand momentum in the off-premise is quite strong despite the tough comp base versus previous year, which you will recall was also boosted by pantry loading at the beginning of the pandemic. The off-premise sellout for our portfolio was up 14% in the first quarter, growing approximately 30% faster than the overall market. Our sellout in the off-premise showed strong double-digit growth for all of our core brands and nice performance by our newly acquired Mexican Brands, Ancho Reyes and Montelobos.

We're continuing to see a very solid growth in e-commerce, growing by triple digits, outperforming most of our peers. Canada, up 28.2%. A lot of strength from Forty Creek, but most importantly, also Appleton Estate and Grand Marnier, which are more premium.

Jamaica, up 33.9%. Nice growth. Again, it's an easy comp base, and it's pretty broad the growth with Wray&Nephew Overproof, Campari, Appleton Estate and Magnum Tonic, all of our heavy hitters doing very, very well.

If we look at the rest of the region, it was up 31.4%. Obviously, we have some benefits from an easy comp base across South America. Brazil was up 60.8%. Here, we were also benefited from a change in distribution in our local brand, Dreher. Argentina was almost up twofold, 99.1%. The only market which was down was Mexico, 5.2%, impacted by the restrictions, clearly, which also have a double impact, not only on the local population but also on tourism.

Moving on to Southern Europe, Middle East and Africa, a slightly different picture. Please see these are markets, particularly Italy, Spain, but also global travel retail, which are impacted by the pandemic, the closure of the on-premise and limitations on travel. So although the figures versus 2020 are pretty good, I think the flattish performance in Italy is actually very, very good given the circumstances. We're still clearly not recovering versus previous year. In the case of Italy, we're still down roughly 1/4 versus Q1 2019.

Now focusing on Italy, slightly negative performance where very strong performance actually in the off-premise helped to compensate the weakness coming from the ongoing restrictions due to the third wave of the pandemic on the on-premise. Clearly, we also benefited from an easy comp base. We were down 24% last year and a little bit from the early Easter.

And importantly, though, we're seeing very positive performance from Campari Soda and Aperol Spritz ready-to-enjoy as both brands are benefiting from the very positive cocktail-to-go trend and the increase from consumption of aperitifs. This helped offset the weak performance of Crodino, Campari and the bitters, which have a very on-premise skew. Aperol, on the other hand, was broadly flat.

We have very positive off-premise sale trends in Italy. So nice confirmation of strong momentum. Importantly, it's really across the range with the exception of Crodino, which is still a little bit lagging behind.

France, very strong, up 65.7%. Continued positive brand momentum as well as a favorable comp base. You will recall, we changed our route to market in France in Q1 of last year.

Our growth was mainly driven by Aperol, Riccadonna, the newly acquired Trois Rivières rums, Grand Marnier returning to growth as well as Campari.

Global Travel Retail, not much to say, except that it's down close to 39% as everybody active in this channel is highly impacted. The rest of the region, up 11.7%. We're quite happy to see South Africa returning to growth, also helped by progressive restocking against an easy comp base in the previous year. Spain, unfortunately, continued to decline due to the weakness in the on-premise, which is highly impacted by restrictions.

Moving on to Business Unit, North, Central & Eastern Europe. Here, again, a very positive picture, strong growth versus 2020 and also very strong growth versus 2019. So extremely strong momentum in this region. Germany, which is our third-largest market, grew by 8.1%. We are outperforming from a sales perspective in that market as well. We're seeing sustained home consumption, clearly an easy comp base, but not as easy in other regions as Germany was flat the previous year.

The U.K., up a very strong 36.2%, double-digit growth of our Magnum Tonic wine, Wray&Nephew, Aperol and Campari. We've got very good momentum in the off-premise, and we've seen a very strong reaction in the on-premise as soon as consumers were allowed to go back to restaurants, bars and pubs. And on e-commerce in this key market, we're also seeing triple-digit growth rates.

Russia came in with a nice performance, up 25.6%. Overall, quite positive across the portfolio with quite a bit of strength in Mondoro and Aperol. The rest of the region was up 16.2%, again, positively impacted by the aperitifs thanks to home consumption. And in particular, we've seen double-digit growth in Switzerland, Belgium and Austria.

Moving to our last region, APAC. APAC too, very strong, not only versus 2020, but even more versus 2019. Australia up 43.6% versus 19%. The other countries 52%. Clearly, here in this region, we're starting to reap the dividends of our investments of the new organization, the move to Singapore, the hirings as well as the changes in route to market.

Focusing in Australia, up 22.6%, continued strong growth in this off-premise skewed market. And this is all driven by all the key brands, particularly Wild Turkey RTD, which is a substantial part of the business there, Wild Turkey glass business, Aperol as well as Espolòn.

The rest of the region grew at a very sustained 128.6%, clearly, very positive results in all key markets, Japan, New Zealand, China and South Korea, where we benefited from shipment recovery post our route-to-market changes.

Moving on to net sales by brand, not much to interpret in Chart #13.

Moving to Page #14, and Aperol, I would like to start by saying it's really heartwarming to see the consumer love for this brand, and you have some 3 interesting vignettes there from different areas. One is the Page 1 BBC News, that picture taken just as the High Street and pubs reopened, and you can see a big wave of orange glasses in consumers' hands. The next one is actually the cover page of the main newspaper in Italy, where our prime minister is hugging a Magnum bottle of Aperol. Last but not least, one of our unofficial brand ambassadors, who is a big fan of Aperol Spritz, Lady Gaga, enjoying a great Spritz during the shooting of the Gucci Saga.

Remaining on qualitative indicators, clearly, the brand is on everybody's lips. It is in the top 5 most mentioned brands and the only cocktail with Aperol Spritz in the top 20 on social media worldwide in Q1. We've had overall a stable performance in this low seasonality quarter. That growth was driven by strong double-digit growth in Germany, France, Russia, Austria, Switzerland, the U.K. and Australia, which help compensate the shipment weakness in the U.S.

I mentioned the advanced shipments last year ahead of the price increase. Actually, if we exclude the U.S., Aperol would have grown by 14% versus 2020. Had we included -- had we reflected the depletion and consumption figures into the total, it would be in the U.S., the figure would obviously be stronger than 14%, as we're seeing strong off-premise sellout data across all of our markets.

Moving on to Campari. Campari continues to benefit from strong home consumption trends. The brand is up 6.5%, driven by Jamaica, Germany, the U.K., Switzerland, France and South America. This helped offset the decline in core Italy due to on-premise closures. The U.S., as in the case of Aperol, was also penalized by a tough comp base with the advanced shipments linked to the price increase. Excluding the U.S., the growth of Campari would be equal to almost 20% versus previous year. Net in net, another brand in very strong health.

Moving on to the remainder of our global priority brands on Page #16. You can see Wild Turkey growing very nicely both versus Q1 2019 and Q1 2020. The core U.S. market is doing very nicely, where we have not only strong category momentum, but our premium offering is actually doing overproportionately well there.

Canada, Australia and Japan also grew nicely. And clearly, now we're anniversary-ing the route-to-market changes, which impacted us negatively in Japan last year.

SKYY also here to 2 nice numbers, up 5.4% versus '19, 10.4% versus '20. We have a shipment recovery in the core U.S. as we're transitioning from the old SKYY to the relaunched SKYY, and this will obviously impact Q1 and Q2. Core continues to outpace flavors.

We have double-digit growth in international markets, particularly Germany, Argentina and South Africa. Grand Marnier is also giving us quite a bit of satisfaction, up 16.4% versus '19 and 29.7% versus '20. Again, we have the shipment recovery in the core U.S. market, but I must say that the -- if you look at the consumption indicators, they're also stronger than the shipments. So it's not just the slight restocking we've had to bring it to healthier levers.

We're also seeing [indiscernible] nicely. And last but not least, our rum portfolio going from strength to strength, growing more than 40%, both versus '20 versus '19 with strong growth across all key markets.

Our regional brands, again, Espolòn remains the hero, up 82% versus '19 and 64% versus '20. Again, very strong performance. The same can be said also about Australia and Canada. Bulldog is accelerating its growth 2% versus '19, 24% versus '20. We're seeing continuous weakness in Spain, which is its largest market, but that's been compensated by Germany, Belgium and Argentina.

The GlenGrant, despite the weakness in GTR, is reacting very positively to the premiumized range. So it's up 32.5%. Forty Creek continuing to do very nicely in its core market, Canada. The one negative note is -- are the Italian bitters, Cynar, Braulio Averna, and Frangelico, which are down by 4.8% versus '20 and 18% versus '19. Clearly, they are mostly affected by the closure of restaurants, not only in Italy, but also in Central Europe, or particularly Germany is a core market for them.

Cinzano has accelerated the pace, going from minus 1.2% in '19 -- '20 versus '19 to plus 6.9% in '21 versus '20. Here's it's a vermouth, which is leading the dance, whilst the sparkling wine continues to be impacted by the core Italian and the German markets.

On the other hand, our more premium sparkling ones, Mondoro and Riccadonna are growing at a very strong double-digit rate, 53.6% versus '19, 76% versus '20.

To close it up for local priorities, we're actually very, very pleased to see consistent and healthy growth in Campari Soda, which is able to recruit new consumers now into the franchise and also to benefit from the cocktails-to-go phenomenon. So growing double digit and particularly at the beginning of this year, up 43.8%.

Crodino, which is undergoing a relaunch is unfortunately not in that position. And our key aim is to really improve that track record throughout the year. Aperol Spritz triple-digit growth, 3 years in a row. This year, we'd expect that to accelerate as we make this SKU available for the first time in other established adult market such as Germany, Australia and so forth.

Our Australian Wild Turkey RTDs growing double digit, very nicely at a sustained pace and continuing to take market share in that market. The same with Magnum Tonic. X-Rated in Asia and particularly in China, doing very, very nicely. And to close it all out, also Cabo Wabo, benefiting from the tequila trend in the U.S.

This is it in terms of sales update, and I pass it on to Paolo.

[Paolo Marchesini, executive]

Thank you, Bob. If you follow me to Page 20, where we have the P&L. They glance, we can see net sales coming in at EUR 397.9 million in first quarter 2021 and EBIT adjusted coming in at EUR 68.5 million showing an increase of 10.5% and 43.1%, respectively, in value.

If you look at the organic performance, the increase over prior year was even stronger, both for net sales and EBIT adjusted with net sales up 17.9% in value and EBIT adjusted, up 63.6% in value.

Looking at the organic growth of EBIT adjusted in value, you can see below that organically, it was worth EUR 30.4 million, primarily coming from an increase in gross margin, which in value accounted for EUR 36.6 million, but also thanks to SG&A containment of EUR 2.3 million, the 2 positive factors were partly offset by an increase, a step-up in A&P spend of EUR 8.4 million in the first quarter of this year versus a year ago.

With regards to organic performance of EBIT as a percentage of sales in the first quarter, group achieved 520 basis point EBIT margin expansion coming primarily from SG&A, which drove 490 basis point EBIT margin expansion, 40 basis points from A&P and the 2 of them were partly offset 2 -- those 2 factors that were partly offset by a gross margin dilution, which was tiny, but still there up 20 basis points in the first quarter.

The combined effect of perimeter and FX in the first quarter accounted for EUR 9.8 million and 130 basis points as a percentage of sales.

Worthwhile noting that if you look at 2021 first quarter performance in comparison to first quarter 2019, 2 years ago. Top line was quite robust organically, up 12.1% and bottom line as well with EBIT adjusted organic growth of 6.7% over the 2 years period.

Moving on to Page 21. EBIT adjusted commentary line-by-line. Gross margin on a reported basis was up 10.8% in value to 58.2% on sales, showing 20 basis points organically, gross margin was up 17.5% in value, slightly lower than the top line growth, leading to 20 basis point margin dilution, as we saw before. And this was driven by unfavorable sales mix, which was affected by the outperformance of Espolòn, which was impacted by the high agave purchase price.

With regards to gross margin, organic performance versus first quarter of 2019 in value, gross margin grew by 7.2%, showing still at 260 basis point dilution due to a combination of factors, first and foremost, the unfavorable sales mix driven by the outperformance of Espolòn, but also of low-margin local priority brands, combined with the outperformance of certain aperitifs, particularly Crodino in the domestic market that was still not recovering entirely the level of sales of 2019.

A&P on a reported basis was up 9.6% in value to 15.7% on sales with 10 basis point accretion. Organically, A&P grew in value by 14.7%, lower than top line, driving a 40 basis point margin accretion in a low seasonality quarter.

During the quarter, A&P investments remain mostly focused on digital and off-premise activations. We clearly are aiming at stepping up the A&P spend in the key quarters, Q2 and Q3 for the aperitif portfolio. Versus 2019, A&P organically was up in value by 9.3% with 40 basis point accretion.

SG&A on a reported basis were down 3.3% in value to 25.3% on sales with 360 basis point accretion. Organically, SG&A were down by 2.2% in value compared with the first quarter of last year, which was not impacted by cost mitigation actions. Actually in the first quarter of 2020, SG&A, as you may remember, grew in value by 8.7%. Organically, SG&A were down by 6.2% versus first quarter of 2019, mainly driven by route-to-market changes. Margin accretion of 130 basis points, driven by strong top line growth.

EBIT adjusted on a reported basis was up, as I said, by 43.1% with 390 basis point accretion. Organically, the EBIT adjusted grew by 63.6% with 520 basis point margin accretion; and versus 2019, the increase in value accounted for 6.7%, and the dilution accounted for 90 basis points.

If we move on to Page 22. Below EBIT adjusted, we have negative operating adjustments for EUR 2.1 million, mainly attributable to tail-end effects of restructuring initiatives that we've launched last year. We then had net financial charges of EUR 3.4 million in the first quarter of this year, EUR 9.4 million lower versus first quarter of 2020, and this was mainly due to a positive variance from exchange gain/losses of EUR 6.3 million. Namely, this year, we had EUR 3.2 million gain in first quarter 2021 versus in the first quarter of 2020, we had EUR 3.1 million loss.

Now if we carve out the effect of exchange gain and losses, the net financial charges came in at EUR 6.6 million in the first quarter of this year versus EUR 9.7 million in the first quarter of last year. The overall saving in the first quarter of EUR 3.1 million was achieved thanks to lower average cost of net debt, 2.4%, in the first quarter of this year versus 4.7% in the first quarter of last year. And the reduction in net financial charges was of EUR 3.1 million was achieved despite the higher average level of net debt in the first quarter of this year, EUR 1.085 billion versus EUR 832 million of last year.

Profit related to associates and JV was EUR 2.3 million and was mainly due to a gain generated by the reassessment of the group's participation in the South Korean JV, which the group acquired -- for which the group acquired a controlling stake at the beginning of 2021. Group profit before taxation came in at EUR 64.8 million, up 112%. On an adjusted basis, excluding one-offs, the group profit before taxation came in at EUR 64.1 million, up 84.7%.

Moving on to Page 24. As you can see, we have quite a strong deleverage in the first quarter of this year, which was driven by positive cash flow generation. The net debt came down by EUR 35.8 million in the first quarter of this year from EUR 1,103.8 million of December last year to the current level of EUR 1,067.9 million. And the leverage ratio and debt-to-EBITDA adjusted ratio is now down to 2.5x from 2.8x of December last year.

I think this is it on numbers, and I would hand back to Bob for his comments on RARE.

[Robert Kunze-Concewitz, executive]

Thank you. Thank you, Paolo. Before moving on to the conclusion and outlook, just some update on marketing initiatives and obviously the most important one is the establishment of our new RARE division, which is a new and dedicated approach to establishing our group as a key purveyor of luxury offerings globally but in particular in the U.S.

You can see that, over the years, we've built an impressive portfolio actually in high-end expressions moving from upwards of $40 to beyond $700. Actually, if you look at that Grand Marnier bottle at the top there, it's more around $1,200. So clearly, we have a very wide and very attractive portfolio there. And we want to develop this super premium and above expressions to reconquer the high-end consumers. You all know that the high end of our industry is growing faster than the mainstream. So this is an important initiative for the mid- to long term.

This division will have its dedicated organization -- marketing and sales organization in the U.S., and it will share the same back office, obviously, in the U.S. Whereas in the rest of the world, we will have dedicated sales within our existing organizations. We'll kick off with a pilot project in the U.S. This year we'll only extend to 3 states: California, Texas and Florida, gather those learnings and extend it further next year.

Moving on, our brand houses are continuing to win awards. Camparino, which we opened unfortunately right before the lockdown in Italy, was awarded really Best Bar by the Italian Bar Awards, and we're looking forward to hopefully entering the top 50 in the world pretty soon. It's become quite a cult destination in Milan as soon as the region turns yellow with queues forming outside of it.

We're continuing to work very, very focused on reinforcing home consumption worldwide across our brands but particularly for aperitifs, which have a higher skew to the on-premise historically, as you know. And judging by the off-premise sellout data, we're quite successful at that.

And last but not least, we're also quite proud to see that all of our distillates are winning a lot of prizes across the world, be it Wild Turkey, Appleton Estate, Trois Rivières, Espolòn or the GlenGrant, really a testimony to the quality of the liquids and I think to the potential of our RARE division where most of these higher-end expressions will be sold.

Before moving on to your questions, the conclusion, I think it's quite clearly a satisfactory start of the year. The market is benefiting from sustained home consumption, and thanks to the health of our brands and strong momentum, we're over proportionately benefiting from that.

Clearly, there is some magnification from an easy comp base as well as an Easter effect in the quarter, but we estimate that to be about only 1/3 of the growth we had versus previous year.

Now looking at the remainder of 2021, our underlying performance is quite solid. We see really positive brand momentum. We expect that to continue. We're going to fuel it also by sustained marketing investments, which we will accelerate in Q2 and Q3, which are the peak aperitif seasons and benefit from the -- like we did last year from the gradual reopening of on-premise channels across our key different markets, and we'll continue to build on our very strong e-commerce momentum.

Having said that, though, whilst we're starting to turn positive, we still wouldn't be surprised by volatility as well as uncertainty, which is driven by ongoing restrictions as well as the timing of the vaccine rollout in the European Union, which has been slower than in the U.S. and in the U.K., where we already see a very strong return to the on-premise. Global travel channel. Travel retail, we also think will continue to be effective.

You also need to bear in mind that on a quarterly basis, we'll continue to be impacted by different comp bases throughout the rest of the year. Clearly, Q2 is an easy comp base. Q3 is a challenging one, and Q4 is another easy one.

Last one but not least, when we look at ForEx and perimeter effect on our adjusted EBIT for this year, we expect a negative ForEx effect to marginally worsen, particularly versus our previous guidance. But on the perimeter, we see stability so far. This is it from our part, and happy to take your questions.

[Operator]

[Operator Instructions] The first question is from Andrea Pistacchi with Bank of America.

[Andrea Pistacchi, analyst]

I had 3 questions, please. The first one on the shipment phasing. I probably missed what you said right at the end of the prepared remarks. Did you say that the benefit from sort of Easter selling and shipment phasing explained about 1/3 of the strong growth in the first quarter? If not...

[Robert Kunze-Concewitz, executive]

That is correct.

[Andrea Pistacchi, analyst]

Okay. And can you say what -- apart from Asia, where there was clearly restocking as you change the distribution, what drove the shipment phasing? It is this related to -- or have you started to restock the channel, the on-trade channel, or must that still come? The second question is actually on the import tariffs in the U.S., which have obviously been suspended. Now assuming the suspension is made permanent, would you expect to recover -- fully recover the EUR 19 million EBIT, which hit which you suffered last year, as you told us at full year results? And how much of that would you expect -- again, if the suspension is permanent, how much of that would you expect this year?

And my last question, please, is on Aperol in the U.S. Aperol, I mean, hasn't had quite as positive trends this year as you've had in other markets. Given obviously, it's very exposed to the on-trade, maybe the fact that it's not quite established as in some other countries. What do you think it will take? And how long will it take to rebuild the momentum that you're enjoying with Aperol before lockdowns in the U.S.?

[Robert Kunze-Concewitz, executive]

Andrea, I'll take the first and the last question. I mean, the point on shipment phasing, clearly, Easter was early this year, so there was some move from -- of shipments we would have had in Q2, which moved into Q1 because of that Easter effect. But I already disclosed what the overall impact of that and the comp base was.

The other mention we did was obviously in the U.S., where we have very strong momentum across the portfolio. And in the case of certain brands, the sellout was such that our stocks really came to very unhealthy levels at the end of last year. So our distributor partners out of -- tried to -- not tried, I mean they basically covered themselves better to avoid out-of-stock situations.

But as I said earlier on, compared to 2019, if we look at the end of Q1, stock inventories in the U.S. across the vast majority of our franchises, they are half of where they were in 2019. So it's quite a healthy situation.

Now, Aperol in the U.S. actually has good momentum. Obviously, we weren't able to build the momentum last year with the closures in the on-premise. Just with the off-premise, we're seeing 20% to 30% growth rates, which are quite positive. That means that the existing consumers are actually increasing the amount they're consuming on a regular basis, and that points to consumer loyalty and love for the brand.

Now that the on-premise has reopened. And if we look at the stats we received from our distribution partner, we're back to 97% on a numeric basis and weighted basis of the on-premise outlets reopening. We expect the brand to go back into recruitment mode. So we feel pretty good about it.

[Paolo Marchesini, executive]

With regards to the tariff suspension, if that is confirmed and the suspension becomes permanent, we're expecting to pocket 50% of the EUR 19 million potential profit uplift this year and the remainder in 2022. This is clearly due to [ inventory ] sitting in the U.S. ahead of the tariff suspense. The goal for this year.

[Operator]

The next question is from Trevor Stirling with Bernstein.

[Trevor Stirling, analyst]

So 3 from my side, too. The first one, Bob, if you look at the U.S. and, in particular, the states that have been leading the reopening process, so Texas and Florida, any learnings from those states about what the net impact of the reopening is?

Second question, I appreciate this is really difficult to start to project forward from -- based on 1 quarter. But if I take the 12.1% up versus 2019, I take out the 6% easy comp. That leaves me at 6% up on a 2-year stack even though Europe on-trade still closed and GTR is still largely closed. That's a potentially -- actually underlying growth is faster coming out of COVID than it was going into COVID, is that something that's too early to start making projections on?

And the final one, a relatively trivial one, Bob. Magnum Tonic keeps cropping up time and time again. Is that growth just coming inside the Jamaican community or Jamaican heritage community in the U.K.? Or is it starting to spread outside that community?

[Robert Kunze-Concewitz, executive]

I'll take the last one, and I'll recommend the conception. It's quite an exceptional drink. Now what we're seeing is that growth in the U.K. is coming outside of the Jamaican community. I mean it's reached the size where it's spilled into the friends of the Jamaican community. So this is becoming a little bit of an oil spill approach and it's growing month-to-month. So quite exciting, which leads us to start thinking about what the potential of the brand could be, maybe in other geographies as well.

Now with regards to your first question on the U.S. and those states which have opened, I mean, we've seen actually very, very good momentum in the on-premise. So we're very positive about that. And the benefit we're seeing from the lockdown periods and how it impacted overall consumers' habits is that the penetration of cocktail culture has grown significantly in home and the preparation of cocktails or buying ready-to-drink cocktails.

So having a lot of brands, which are key ingredients in the top 10, top 20 cocktails in the world, we're benefiting from that momentum as well as a return to the on-premise. So I think overall, our underlying growth is probably stronger than it was in 2019 due to that factor.

[Operator]

The next question is from Simon Hales with Citi.

[Simon Hales, analyst]

Three also sort of please.

[Robert Kunze-Concewitz, executive]

Seems to be the magic number.

[Simon Hales, analyst]

Always a magic number. Can I just ask you a little bit more about the RARE division? I just want to make sure I understand the plans here. It sounds like you're testing it in a few states this year with a hope to maybe roll it out more broadly in 2022. How do we think about the incremental investment that may be required into that division? Is it too early to talk about that? Or will it simply be a transfer of existing resource within the organization? So that's the first one.

Secondly, just coming back to the stock levels in the U.S., 50% of 2019 levels. I mean, how do you expect that to sort of move by the end of this year? Do you think we'll see stock levels sort of back where they were pre-COVID? Or do you think we'll have seen wholesaler inventory permanently reduced?

And then the final one was just wondering if you could talk a little bit more about the performance of SKYY, clearly, good shipment trends, but what are you seeing in terms of underlying consumer depletions, consumer reactions to the brand now, please?

[Robert Kunze-Concewitz, executive]

Yes. Simon, thank you for your questions. Now with regards to RARE in the U.S., you're right about the overall scheme. And it's not just reemploying existing employees. We're looking at the new route to market and new marketing model, and we're trying to target more premium consumer, so that requires also hiring people with a good feel for that market. So there is incremental investment, but we're able to absorb that from within this year. And then obviously, judging by the success of it and learning on how best to structure and organize it, we'll see further next year. So no impacts this year.

On the stock levels, we wouldn't expect our distribution partners to actually increase their stocks in the remainder of the year. We think we're in a very healthy position. They're happy. We're happy. So we'll try and make sure that our shipments mirror our depletion and consumption trends.

With regard to SKYY, it's a little bit too early to tell. I mean, we've got a few anecdotes here and there, a very positive reaction. But frankly, the product hit the distributor shelves at the end of Q1, and now they're starting to hit retail shelves. So the big boost is going to come towards the end of Q2 and then in Q3.

[Operator]

The next question is from Edward Mundy with Jefferies.

[Edward Mundy, analyst]

A couple from me as well, please.

[Robert Kunze-Concewitz, executive]

Please three questions Ed.

[Edward Mundy, analyst]

Three from me then. First about RARE just to follow up from Simon's question. How big as a percentage of the portfolio is your RARE portfolio today, if you will. And I think in the ambition, you talk about unlocking accelerating growth in existing and future super premium and above portfolio. So perhaps you could talk about where the gaps are from an inorganic perspective?

The second question is really around some of the nontraditional formats. Can you talk about Aperol ready-to-enjoy, Campari Spritz and Campari Tonic. I mean, could you perhaps talk about what the opportunity is for these nontraditional formats of these very strong brands?

And then the third question, a bit of a housekeeping question. Just there's very, very strong growth in APAC, x Australia, 129% in the first quarter. Can you just talk about the sustainability of that growth?

[Robert Kunze-Concewitz, executive]

Yes. Thanks, Ed. Now with regards to RARE, I mean, if you take all those expressions, which we put into that pyramid, they account for slightly less than 5% of our total sales, yes.

With regard to the future, I mean, it's clear that if you look at all our acquisitions and our innovation, they're all aimed at further premium-izing our portfolio. So it's not like we see any particular gaps or are hunting for something, but having the choice, we'd rather go premium, and this is a part of the business, which we look very forward to growing in the years to come.

Moving on to the ready-to-go, I mean, the opportunity. If you take all of our ready-to-drink expressions together, so if you take the RTDs in Australia, you take SKYY Blue in Mexico and Asia, you take the Aperol Spritz, the Negroni ready-to-go, they amount to quite a bit. I mean, it's 10% of our sales on a global basis. And they're really spot on in terms of the consumer need right now. So we're looking at driving them forward.

With regards to the Aperol Spritz, we've been very cautious in the past, and we're only introducing it this year in those markets, large markets such as Germany or Australia, where Aperol and the Aperol Spritz are already very well-established, but we see very good run rates there as well as for the SKYY RTD potentially in a wider geographic footprint in the years to come. Clearly, consumers are reacting very positively to this. I mean, we're not looking at going crazy on line extensions across our brands. It's very selective, and we'll keep to the ones we are, and we will not have a plethora of line extensions or, let's say, RTD versions. But what we have currently, we think, has a lot of legs, and we will leverage them in a way that we also build brand equity.

With regards to APAC, obviously, I mean, this quarter is a special quarter because Q1 '20 was really impacted by a lot of route-to-market changes. So the comp base was quite easy. Having said that, we would expect our rest of Asia to grow nicely at a double-digit level in the near to mid-term.

[Edward Mundy, analyst]

Just coming back to RARE. I mean, tequila is not part of this. Is that because the price [ leveling ] of your portfolio is not necessarily there? Or is tequila just doesn't need much help, given it's on fire?

[Robert Kunze-Concewitz, executive]

No, the price [ leveling ] in our portfolio is currently not there, but wait and see, we might surprise you.

[Operator]

The next question is from Laurence Whyatt with Barclays.

[Laurence Whyatt, analyst]

Three from me as well. It seems to be the trend of the day. Firstly, on the various returns the on-trade that we've seen sort of mentioned a few in America in a few of states, but now parts of Europe and particularly the U.K. is recovering, and we're starting to go back to the on-trade. Have you seen any changes in consumer behaviors as they do go back the on-trade, particularly spirits versus beer or within your particular portfolio? Any consumer changes going towards or away from certain brands and certain products?

Secondly, your travel retail results were potentially quite a bit better than some of your peer group, sort of only down around 50% versus pre-COVID levels and only 40% on the quarter. Do you think you're doing anything differently in travel retail that your peer group are not? Or why do you think you're slightly ahead of the rest?

And then finally, perhaps following on from Ed's question on tequila, are you seeing any early stages of prices potentially coming down at all? I think you had a few mentions of...

[Robert Kunze-Concewitz, executive]

You man tequila prices or agave prices?

[Laurence Whyatt, analyst]

Agave prices, not tequila.

[Robert Kunze-Concewitz, executive]

I hope nobody is taking prices down on tequila. That would be suicidal. Let me take the first 2. I mean, with regards to the on-trade, I mean, in consumer behavior, we're seeing consumers returning to the on-trade with a vengeance. I mean they're there to recover lost time. They really missed conviviality, and we're seeing them return to their favorite cocktail. So we aren't seeing much of a change, quite on the contrary, probably spirits and aperitifs doing slightly better over proportionally. And we're seeing it across all of the markets. And we hope that if through vaccinations, we're able to open up further and have consistency throughout the year, that could be quite interesting.

Now with regards to GTR, bear in mind, I mean, GTR, for us, has always been a small business. I mean, pre COVID, it was 2% of our sales. So I wouldn't read too much into that versus our peers. I mean, the way we treat GTR, for us, the focus is, it is really a brand-building channel. So we're continuing to invest in the channel irrespective of the fact that there isn't much action there, but it's the right thing to do because, sooner or later, consumers and travelers will start going through those shops.

[Paolo Marchesini, executive]

With regards to the aggregate prices, although prices are still stable vis-à-vis last quarter of last year, qualitatively, we can say that there is an increased sense of confidence that we're probably at the end of the tunnel. And also the incumbent Mexican player gave some commentary around a more benign prospect on agave prices. So that bodes well, I believe. So we are positive with future trends.

[Operator]

The next question is from Robert Rampton with UBS.

[Robert Rampton, analyst]

Three from me as well. Just in terms of the first question, can you update us on what underlying growth rates you think can be achieved by your global priority brands and whether or not that's changed in light of your comments today?

The second question is just in terms of competition. I get the sense that you've basically had -- there's been less competition in terms of advertising in the off-trade, but everyone's keen to take advantage and compete in the on-trade as that reopens? Can you give us any color there?

And then finally, if you'd be able to share how big the Aperol Spritz RTD in terms of contribution to sales is related to Aperol? That would be great.

[Robert Kunze-Concewitz, executive]

Yes. I mean, the current Aperol Spritz RTD versus Aperol is about 3% to 4% of the total, yes, because, bear in mind, it's in very little markets, particularly at this moment in time. We're starting to roll it out across some key markets throughout the end of Q2 and Q3.

With regards to underlying growth rates for priority brands, as you know, we do not provide any guidance on these. But as I mentioned earlier in the call, I do think that we will have a long-lasting benefit of consumers' reaction to the lockdowns with them really learning how to appreciate our cocktails, more importantly, how to make them.

So to having our cocktails take more share of fruit at home and, at the same time, really benefit from the return of consumers to the on-premise. So we'll probably look back into this, and I'm crossing my fingers as I speak that consumers' reaction to the lockdowns will be positive for us for the mid- to long term.

With regards to competition, I mean, we're not seeing competition actually decreasing the pressure in the off-premise, whether it's in Northern Europe, North America or Australia, quite on the contrary. And we're not seeing them in those markets that have opened, reduced their pressure there either. So everybody is trying to maximize their slice of the pie.

[Operator]

The next question is from Fintan Ryan with JPMorgan.

[Fintan Ryan, analyst]

I've just actually got 2 questions to be slightly different. Firstly, just on your RTD portfolio. I appreciate you putting more investment behind some of the areas like in the Aperol ready-to-enjoy. But just more broadly, how should we think about the gross margin profile of the RTDs, presumably some nuances between markets, but how would they sort of compare versus sort of the core mother brands or just the gross margin of the group as a whole?

And then secondly, my line did cut for a while, so you might have answered this already. But in regards to raw material inflation, excluding agave, do you have any concerns around what we're seeing in the sort of the headline commodity markets or any increases in sugar, glass and other sort of transport and energy commodities is something that we should be concerned about or something to think about going into sort of 2022 or the second half of this year?

[Robert Kunze-Concewitz, executive]

I'll take the first question. Now as you said earlier, obviously, there are differences between geographies. Obviously, gross margins in South America and Mexico are lower versus what we have in Australia and other parts of the world. Having said that, though, I mean, if you look at the brown spirit-based RTDs as well as aperitif-based RTDs, they have very strong growth margins which are in line or if not above group average. So they're the only ones which are below are the vodka-based SKYY Blue, mostly in Mexico.

[Paolo Marchesini, executive]

With regards to the inflation on raw material front, excluding agave, we expect that probably in 2022, we'll see some increase in raw materials as consumption pick-ups, but we don't see that as a major threat or nothing that we cannot offset via the ordinary price increase. We have a portfolio of composition of brands that most of them are -- have a lower price sensitivity. And so we can grow prices to offset inflation without losing momentum. As you know, the brands are quite in a healthy position at this stage.

[Fintan Ryan, analyst]

And just in the short term, are you -- would you be looking to take some additional price increases to sort of get ahead of the raw material inflation?

[Paolo Marchesini, executive]

We constantly take price on all. We've been more aggressive on tequila in prior years. We've taken price on Aperol and compare it to a state to offset the tariff impact. And we keep on taking price in coming years.

[Operator]

[Operator Instructions] There is a follow-up question from Robert Rampton with UBS.

[Robert Rampton, analyst]

I'm so sorry for the follow-up. Just to your earlier answer, you mentioned you weren't seeing any change in competitive intensity in the off-premise, and if anything, you were seeing an increase. I'm just curious, in the on-premise, I guess it's hard to judge given it's been closed, but how would you characterize the competitive intensity there maybe compared to 2019?

[Robert Kunze-Concewitz, executive]

Yes. Thanks for the question. I view it pretty much in line with 2019. I mean, everybody tried to prepare where they could the reopening of the on-premise. But at the end of the day, it's much more, I think consumers irrespective of that preparation going for their habitual brands. And in most cases, actually having more than in the past.

[Operator]

The next question is a follow-up from Andrea Pistacchi with Bank of America.

[Andrea Pistacchi, analyst]

Yes, I had a follow-up, please, on marketing spend. You said that you're thinking of stepping up further marketing spend to obviously benefit as the -- for the peak aperitif season. At the full year, I think you said you expected the impact on -- of A&P on margins to be broadly neutral this year. So is that still the case? Or you may be planning to spend a bit more to take advantage...

[Robert Kunze-Concewitz, executive]

Andrea, we're confirming that on an organic basis, as a percentage of sales, we see A&P remaining very stable versus last year, around 17.5%.

[Andrea Pistacchi, analyst]

Perfect. Well, that was my question.

[Paolo Marchesini, executive]

My comment was more around the phasing of the A&P spend. Actually, we're expecting gross margin to start growing in Q2, Q3 and Q4 to recover the -- at least part of the shortfall. Clearly, the A&P will be highly skewed on Q2 and Q3. And on the other end, with regards to SG&A, we're expecting to start growing again as of Q2 onwards.

[Operator]

[Operator Instructions] Gentlemen, there are no more questions registered at this time.

[Robert Kunze-Concewitz, executive]

We were expecting -- actually, Paolo was expecting the usual last question but not materializing this time.

[Paolo Marchesini, executive]

Paola Carboni is off-line then.

[Robert Kunze-Concewitz, executive]

Thank you all for joining us. Stay well, get vaccinated. Have a few Spritz and Negronis. Bye-bye.

[Paolo Marchesini, executive]

Bye-bye.

[Operator]

Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.