Davide Campari Milano NV

MIL:CPR

Earnings Call Transcript 2022-Q1

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Campari Group First Quarter 2022 Results. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Bob Kunze-Concewitz, CEO of the Campari Group. Please go ahead, sir.

[Robert Kunze-Concewitz, executive]

Thank you very much. Good afternoon, and a very warm welcome to our Q1 call. If you join me on Page #2, I'll kick it off with the highlights. As you see throughout the presentation, we've had quite a strong start to fiscal year 2022, albeit in a small quarter. As you know, Q1 is our smallest quarter of the year, and this strong performance is thanks to both the positive underlying momentum of our brands across markets as well as some phasing effects due to advance shipments ahead of price increases as well as a IT platform change, which occurred at the beginning of this month. Clearly, in certain cases, as in Italy, a favorable comp rate also helped.

Net sales at EUR 534.8 million, were up 29.4% on an organic basis versus '21 and that represents a 3-year CAGR of 12.8%. Adjusted EBIT at EUR 114.3 million was up -- sorry, 58.5% on an organic basis, representing a 3-year CAGR of 17.5%. The strong organic sales performance in the quarter was across all key markets and brand clusters, and it really shows the strong and healthy brand momentum as well as a return in strength of the on-premise in Europe, and particularly, this has had a beneficial impact on our high-margin aperitifs. The performance, as I said earlier, was also helped by phasing an easy comp basis.

With regards to the organic EBIT, the strong growth and margin expansion in Q1 was driven by the slight dilution of gross margin as the very positive sales mix driven by brand and channels and in particular, the outperformance of our high-margin aperitif business, clearly, help compensate and largely offset the input cost inflation. We maintained sustained investments beyond A&P and SG&A. But given the strong growth of the top line, those two lines delivered margin accretion. Net debt on EBITDA on an adjusted basis came in at 1.5x, so a slight improvement versus the 2021 year-end.

Moving on to Slide #3, which is really the summary. You can see the very strong momentum across all regions and brand clusters. Obviously, the on-premise skewed European markets benefited the most from the reopening. The Americas were up 14.9%. Southern Europe Middle East and Africa, 61.2% and North, Central and Eastern Europe, 33.2% and APAC, 18.4%. Looking at it on a brand cluster basis, our global priorities had a very strong growth of 30.6%. The regional priorities came in equally strong at 31.7%, and our local priorities at 19.6%.

Moving on to Chart #4, on performance by regional area. The U.S. were up 6.6%. We've had a positive start to the year against what is effectively a tough comp base. You'll recall that last year, we grew by 15% overall in Q1 in the U.S. As expected continued strong growth on Espolon, up 27%, while Turkey bourbon, roughly at the same rate, 27.3%, and Aperol accelerating to 51.2% behind our recruitment drives, Campari also doing very nicely, up 22.5% (sic) [ 23.7% ] in Cabo. Grand Marnier shipments grew moderately despite a tough comp base, so actually quite positive. And on the other hand, the shipment performance of SKYY was impacted by the unfavorable comp base. You'll recall that we -- we're shipping in the renovated pack and upgraded liquid in Q1 of last year ahead of the relaunch in Q2.

On an organic basis versus 2019, Q1 of this year was up 24.3%, representing a 3-year CAG of 7.5%. Strong up single digit for Canada, 9.4%, positive overall growth. Key drivers though have been Grand Marnier, Aperol and Campari and we've had a temporary decline in Forty Creek due to the very tough comp base from last year. Jamaica growing strongly double digit, 20.1%, strong growth, driven mostly by Campari and Appleton Estate. The rest of the region grew a very strong 51.6%. And this double-digit growth rate obviously came from the fact that many markets recovered from the pandemic in a small quarter.

Moving on to Southern Europe, Middle East and Africa. Italy was up a very strong 72%. Clearly, this is magnified by the easy comp base. You'll recall that last year, Italy was down by 0.7% in Q1 as the on-premise was closed as well as phasing in particular, ahead of price increases and the change of the IT system. So this impacted our stronger brands, our larger brands, Aperol, up 101.4%; Campari 118.7%; Campari Soda 24.8%, Crodino, 76.5% (sic) [ 75.6% ]. And the specialty brands also the bitters did very well. Our organic growth was up 28% versus Q1 of 2019. So quite robust growth in this key market for us representing a 3-year CAGR of 8.6%.

France continues to perform very strongly, also up double digit 38.8%. And here, the underlying trends continue to be driven by Aperol, Riccadonna and Campari. The rest of the region was up 56%, and this is largely to the -- thanks to the recovery of the on-premise as well as an individual easy comp basis, particularly in Spain and South Africa. Global Travel Retail also increased a low base by 50.2% and traffic in airports started to resume.

Moving on to North and Central Eastern Europe with its largest market, Germany, up 41.5%, very, very solid business performance, albeit in a low seasonality quarter, and we must also say that we benefited from some favorable weather conditions. Performance was largely driven by growth in aperitifs, very strong Aperol, up 79.2%, very good operating performance. The newly launched Aperol Sprtiz ready to enjoy. Campari growing also a healthy 33.1% as well as Crodino. The organic growth of this market was up 39.6%, again, very robust to the pre-pandemic period of 2019, representing a 3-year CAGR of 11.8%. The U.K. continues to perform strongly double digit, up 26.6%. Again, key drivers here were Aperol as well as Magnum Tonic which is quite important in that geography. The rest of North, Central and Eastern Europe grew by 29.4% with very nice performances across Austria, Switzerland and Belgium, largely due to the aperitifs.

In Russia, on the other hand, starting from the last month of the quarter, the business has been reduced to the minimum necessary for us to support the local Camparistas pay their salaries. The rest, we've really tuned down investments, A&P, promotions. I think it's quite clear why.

Moving on to APAC. Australia, largest market, up 5.4%. Good growth, I must say, against quite a tough comp base. Last year, we were up 22.6%. Again, core brands, Wild Turkey bourbon bottle as well as RTD, Espolon and Campari did very well. And this despite severe ocean freight constraints, which really impacted our performance in the quarter in that market. The organic growth of Australia versus the pre-pandemic is up 51.6%, again, quite solid, demonstrating leading to a 3-year CAGR of 14.9%. The rest of Asia grew 50% with a very strong performance in South Korea, driven by The GlenGrant, X-Rated as well as the high-end offerings of Wild Turkey.

China, as you can expect, is flattish due to the snap lockdowns in relation to the Zero COVID policy. On the other hand, Japan grew double digits with nice growth again behind GlenGrant and Wild Turkey bourbon, and we have nice continued momentum across all the other markets and brands.

Moving on to our performance by brand. Global Priorities, Aperol, overall, very strong 71.9%. I already discussed the performance in Italy and Germany, the U.S., up 51.2% and in France, up 79.5%. Clearly, in all key markets, particularly also in the European markets, the brand continues to grow at a very high sustained double-digit growth rate. Campari up 56.6%. And again, Italy a major impact, but the U.S. and Jamaica as well. Jamaica grew by 64.2%. This brand also benefited from phasing ahead of a robust price reposition in Europe. And it continues to benefit on a global basis from a strong growth mixology trend as well as our proprietary cocktails. As you know, Negroni, Americano and Boulevardier are in the top 16 of the world. Wild Turkey up14%, very nice performance, solid start to the year with the U.S., Australia despite logistics constraints as well as key Asian markets.

SKYY actually down by 11.5%, as I said. This is mostly due to the double-digit shipment decline in the core U.S. market. Actually, depletions were positive. And the shipment performance was actually marked by a very tough comp base from last year in connection with the brand relaunch. Importantly, international markets continued to grow very strongly, up 48.8%. Grand Marnier up 8.9% at continued growth in the core U.S. market, mid-single digit, up 5.3%, thanks to the Grand Margarita. And this is, obviously, a shipment basis. Our depletions are actually stronger than that. The brand did quite nicely in Canada, up 13.5%, in France and Global Travel Retail.

Our Jamaican rum portfolio, up 6.5%. Appleton doing very, very well overall, up double-digit, 22.1%. Premium rums doing well in key markets, but actually Appleton Estate outperforming its category. Wray&Nephew on the other hand, declined, and this is largely both due to a tough comp base. Actually, last year, we were up by almost 69% as well as some supply constraints.

Moving on to our regional priorities. Espolon continues to grow strongly double digit, up 29.2%. And I say this despite a very tough comp base. Last year, we were up by 63.9%. Key driver remains the U.S. as how available liquids are being sent to that key and highly profitable market.

Our Italian specialties, as I said earlier, doing nicely in the comp base, obviously, due to on-premise skewed Italy, where Averna and Braulio were particularly impacted last year but we have overall a nice performance across markets. Cinzano and the other sparkling wines delivered overall positive performance, 35.6%. But clearly, this will be impacted by Russia going forward. Crodino, very nice performance, up 66.6%, again, impact of Italy and some phasing as well as very good traction in new markets in Benelux, Austria, Switzerland and Germany.

GlenGrant is continuing to benefit from its premiumization and the repositioning, up 46.2% on a value basis. Key driver here is also Asia. The Aperol Sprtiz are ready to enjoy up 33.4%. Bear in mind that we have this SKU only in 10 markets. We could sell a lot more, but we're not allowing the markets to launch it yet. If we look at the rest of the regional priorities, they were up 3.8% where we have some very positive growth, particularly on Bulldog, Bisquit&Dubouche, Montelobos, Ancho Reyes. What's depressed was the Forty Creek performance due to the tough comp in Canada.

To close the net sales review with our local priorities, very pleased to see Campari Soda continuing to perform very nicely, up 23.8%. Our RTDs in -- Wild Turkey RTDs in Australia are also up double digit despite supply constraints and logistical issues. X-Rated slowed down to 11.2%, doing very well in its core South Korean market, but it clearly was impacted by the lockdowns in China. SKYY grew the RTD business in Mexico, returned to a very nice growth, up 44.7%. And last but not least, Cabo continues to benefit from very strong Tequila trends, up 53.2%.

This is it so far from my end, and I'll pass it on to Paolo.

[Paolo Marchesini, executive]

Thank you, Bob. If you follow me to Page 9 of the presentation. And in particularly, we focus on the organic change in first quarter 2022 versus a year ago. We can see that EBITDA adjusted organically grew by 58.5%, delivering 390 basis point margin accretion versus a year ago. And in particularly this was driven by a very healthy gross margin expansion in value, which accounted for 28.7% with 30 basis point margin dilution as the very positive sales mix which was driven by the outperformance of high-margin aperitifs in particular Campari and Aperol was able to mitigate the dilutive effect of increased input cost.

A&P in the first quarter organically was up 20.3% in value with sustained investments behind the key brands, but grew below top line growth rate and thus drove 110 basis point margin accretion. The SG&A line increased by 13.6% in value against a low base low, generating 310 basis point margin accretion, thanks to the strong top line growth.

Looking at the reported change, EBITDA adjusted on a reported basis was up 66.8% in value, including a slightly negative perimeter effect of EUR 0.3 million or a negative 0.5%, which was completely attributable to termination of agency brands and a positive -- and secondly, a positive forex effect of plus 8.9% or EUR 6.1 million, which drove 30 basis point margin accretion at the EBITDA adjusted level. And this was clearly driven by the appreciation of the U.S. dollar versus the euro currency. On an EBITDA-adjusted basis, reported change increased by 53.7%, of which 46.5% attributable to organic growth, 7.6% for forex and negative 0.4% of perimeter effect.

With regards to total financial charges, if we strip out the positive effect of exchanging gains of EUR 3.7 million in the first quarter, the adjusted financial charges came in at EUR 5 million versus EUR 6.6 million of last year, showing a decrease of EUR 1.6 million, which is totally attributable to the decreased indebtedness in the first quarter of this year versus a year ago. As the average cost of net debt, the coupon in the first quarter remained unchanged at 2.4%.

Group profit before taxation came in at EUR 107 million, up 65.1% on a reported basis. But if we adjusted the profit before tax of the operating and other adjustments, the results was EUR 111.7 million, with an increase in value of 74.1%.

If you move on to Page 11. As you can see, net financial debt stood at EUR 834.6 million as of 31st March 2022, almost in line versus December and last year due to two factors. On one hand, we've planned an operating working capital increase due to inventory buildup ahead of peak season due to -- it's a move which we decided to implement as the logistic environment looks pretty constrained at the moment. And secondly, we have a negative effect of the tail-end effect of the share buyback program in the first half. The net debt-to-EBITDA adjusted ratio stands at 1.5x at the end of March. And as you can see improved number to as at March end, the company have EUR 33.3 million own shares, equivalent to 2.9% of the share capital.

I think, Bob, this is it on numbers. I would hand back to you on the outlook update.

[Robert Kunze-Concewitz, executive]

Thank you, Paolo. And here are some pretty pictures before the outlook. Clearly, we were honored when the Jamaican Prime Minister shows Appleton Estate special edition, the Ruby Edition as a gift for the visiting Duke and Duchess of Cambridge. I hope they'll enjoy that for the months to come and become loyal consumers. Nice update on Campari. In addition to the New York Film Festival and the Venice Film Festival, we've been had to add the other major festival Cannes, so we will be sponsors there and that really solidifies the platform for that key brand of ours.

Aperol, as you can see, we're in full recruitment mode across the world, across markets, a lot of events, and we really look forward to the key Q2, Q3, where we'll have, obviously, very important activations throughout the world. Last but not least, premiumization continues with our rare initiative and here's an example out of Asia.

Now to come to the conclusion and the outlook, as you've seen from this presentation, we've had a very positive start of the year with continuing underlying momentum and strong on-premise recovery, particularly in the European markets, which are on-premise skewed. This was also amplified by phasing due to -- we have price increases we've scheduled at the end, one at the beginning of Q2 as well as some cautions ahead of a key IT upgrade.

Looking at the remainder of the year, there's no doubt we really expect the positive business momentum to continue across all of our key brands and markets. But clearly, the overall performance will also reflect a gradual normalization of the shipments due to the phasing effects, different comp basis throughout the rest of the year as well as the impact of the conflict in Ukraine, not only in Ukraine but also Russia, obviously, as we're dialing down our operations.

Concomitantly, the world hasn't become a nicer place. Volatility and uncertainty remain, both due to the ongoing pandemic as well as the psycho geopolitical tensions. That in that, though, we fully confirm our guidance of flat organic EBIT margin in 2022. There is no doubt that we will continue to leverage adequate price increases as well as a positive mix to mitigate the expected intensification throughout the year of the inflationary pressure on input costs. This is from us, and I'm sure you have tons of questions.

[Operator]

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

[Andrea Pistacchi, analyst]

Three from me, please. The first one on phasing, are you able maybe to quantify the impact at group level? And besides Italy, which I think you called out as a market where you saw phasing, are there any other major markets that were impacted by phasing?

The second question is really an update on the cost pressures. I think the full year results in February before the conflict, you were suggesting EUR 60 million headwind, half of which glass quarter logistics and other. If you could just say how that has evolved, how that has got worse, please?

And the last one, linked to this on gross margin. Again, at the full year, you had, I think, suggested flattish gross margin for the full year, probably more weighted the margin performance at gross margin level to the second half because of the timing of the price increases. Is that still the case? Are you flat for the year at gross margin level and more weighted to H2?

[Robert Kunze-Concewitz, executive]

Andrea, I'll take the first one. Quantifying the phasing, it's not very, very precise, but we quantify as being a little bit less than half of the top line organic growth. With regards to comp basis, I think the major one was Italy, and then we also had some slight benefit from the likes of Spain and other Mediterranean markets, but the biggest impact really was it. On the contrary, we had a very tough comp base in the U.S. to be.

[Paolo Marchesini, executive]

As I take to Bob's comment on phasing, clearly, that's on top line. Now if you look at the first quarter in isolation, basically, there are the 3 components of price increase, cost increase and the volume and mix effect, the phasing, looking at the composition of the brands that have been impacted. The mix of the brand that has been impacted on the phasing effect. It's highly skewed on high-margin brands. So clearly, you have an implied offset in sales mix, that generates a disproportionate effect of phasing at the EBITDA level vis-a-vis net sales in first quarter just to frame it.

With regards to the cost pressure, it is intensifying. It's clear. The trend is now very, very clear. And again, the plan for the remainder of the year is to properly balance the 3 components of COGS increase, which we're exposed to with the two possible offsets that are the price increase on one end and the mix. And so we will try to preserve business momentum wise aggressively, taking price. So the guidance for the full year is flattish EBITDA margin to make sure that we do not kill business momentum with a disproportionate increase in pricing.

And so yes, with regards to the phasing of price increase and cost increase, most of both has to come in the remainder of the year. So the price increase in Continental Europe and Europe in general is more skewed in the end of Q2 and Q3 and Q4. In the U.S., we have being quick in lifting prices, but we'll come back with a further price increase in the fall.

[Andrea Pistacchi, analyst]

And can I just follow up quickly, Bob, on the first question on the phasing, the benefit of the quarter, will should this unwind, will it be a gradual unwind over the next few quarters? Or will we see the bulk of it in Q2?

[Paolo Marchesini, executive]

I think it will be gradual. The start to this quarter has been quite good. So we're not seeing any major drift vis-a-vis the Q1 pattern. So there will be some rephasing, but I do not envisage any drop in a particular quarter.

[Operator]

The next question is from Simon Hales with Citi.

[Simon Hales, analyst]

A couple for me. Maybe just sort of following on around the whole the phasing issue. And I think to back at the full year results, you talked about just inventory levels generally around the world being at very low levels. I appreciate maybe there's been a little bit of inventory build, particularly in Southern Europe, given the phasing ahead of the price increases in the IT system change. But I wonder if you could just update us more generally on where you think inventory levels are now across your regions. And related to that, just on the IT change itself, I see that's been pretty smooth and has now gone through during Q2.

And then just secondly, if you could just talk a little bit about the scale of some of the pricing that you have been taking in your core markets or plan to take over the next sort of couple of months where list price changes have been announced.

[Robert Kunze-Concewitz, executive]

Yes. Let me take the first two ones and Paolo can go more into that. I mean in terms of inventory levels, practically, we don't have high inventories anywhere in the world when you're looking at our distributors and the trade. It's very difficult, to be honest, in this environment from a logistics standpoint to actually catch up on inventory. It's a little bit easier in Europe, but I mean, the rest of the world, it's not done. So our inventories, yes, caught up a little bit at the end of Q1, but far from being hefty. With regard to the IT change, we're in the middle of it. We actually gave the goal ahead last night at midnight. So we're keeping our fingers crossed, but everything looks good so far.

[Paolo Marchesini, executive]

Yes. With regards to the inventory levels, we need to distinguish between finished goods sitting in our own network vis-a-vis finished goods sitting at customer or distributor level. With regards to the latter, clearly, as Bob said, we did not build up further stock. Actually, we could not reestablish the prior to pandemic level of stocks because of logistic constraints and probably it would not be possible in the next quarter. So we're somehow exposed to higher risk of out of stock.

With regards to stock sitting in our own premises, we've moved from make to order to make to stock to minimize the risk of our stock coming from logistic constraints. And so basically, in the quarter, we'll be EUR 110 million of the inventories. You've seen flattish net financial position in the first quarter, whilst the underlying cash flow generation was quite robust. With regards to the IT changes, as Bob said, it's touching [indiscernible].

[Simon Hales, analyst]

Great. And then just to understand the price increases in some of the markets?

[Robert Kunze-Concewitz, executive]

Well, I mean, in Europe, currently, it varies from brand to brand. Obviously, we took higher pricing increases, both on the aperitifs as well as the aged distilled spirits. And depending on the brand, it's mid-single digits and upwards. In the case of Campari, actually before the inflationary pressures came, we've taken the strategic decision to do a repositioning of the Campari price in Continental Europe. So depending on the market, Campari prices increased between 10% and 20%. And if we move on to the U.S., we're probably more around mid-single digit and highly inflationary markets. I mean, like Argentina, we take significant price increases every 2 months. So it's very tailored according to the market and the type of brand.

[Operator]

Next question is from Olivier Nicolai with Goldman Sachs.

[Jean-Olivier Nicolai, analyst]

Bob, Paolo, just three questions, please. First, going back to the gross margins, which was down 30 bps in Q1. It was a bit surprising because obviously, Aperol and aperitifs did very well. So perhaps could you try to quantify the different moving parts on your gross margin in Q1 between the positive mix that you have from your products, the pricing impact and then the COGS headwind? That's the first question.

Second question, you mentioned SKYY Vodka in the U.S. which was down. But actually, could you give us an idea of the depletion and a bit of initial feedback on the relaunch of the brand in the U.S.

And just lastly, it's been -- Bob, I think it's been more -- almost a year since you have announced the Tannico JV with LVMH. Could you please update us on the progress and the sales contribution from this JV?

[Robert Kunze-Concewitz, executive]

Yes. I think the last one will be very quick. I mean, yes, we announced the JV halfway through the year, but want to go for antitrust checks and balances, and it has only started operating from the beginning of this year. So it's quite early. I mean, obviously, we're cooperating and putting the best thinking of both companies into delivering it. But as you know, we also do not consolidate the Tannico numbers as it is with the JV.

Moving on to SKYY, and then I'll let Paolo get into the -- meet the first question. SKYY, actually, in the first quarter, depletions were up 20% in the U.S. That, obviously, also impacted from the price increase, which we took at the beginning of March. So Jan-Feb were quite strong from a depletion standpoint. If you look at our consumption indicators, we have SKYY Core flattish or slightly down and the favor is still significantly down. Having said that, though, when we're tracking awareness and trial and repurchase, all of those are going in the right direction. So together with the strong growth internationally, we would expect SKYY on a full year basis to be either flat or slightly up in the low single digits.

[Paolo Marchesini, executive]

Yes. With regards to the juicy question of the gross margin first quarter, without reading too much in the numbers of a single quarter. So basically, you have to understand that input cost and price increase, they have two different phasing. If you look at the input costs, it all started in September, back end of August last year, where basically cost started to rapidly increase. So in the first quarter of the year, we don't see the full effect, but you still see a good portion of the cost increase wise on the pricing front, which is the offset to cost increase.

When you look at the first quarter, you do not have the effects that we're taking the measures that we're taking in terms of price increase to offset the 2022 inflation. So basically, you're comparing first quarter 2022 numbers with last year. So basically, you take into consideration the price increase that has been taken last year in essence. So in value, if you look at the first quarter, the price increase more than offset the COGS increase in value, and the remainder is volume and mix. But if you look at on a percentage basis, the price increase in the first quarter is below the COGS increase. This is what you're having a dilutive effect that is partly compensated by positive mix if that answers your question. Clearly, if you look beyond Q1 into the left to go, the COGS increase is seen to stabilize also at a very high rate, whilst we will benefit from the effects of the price increases, extraordinary measures that we're now taking given the current environment.

[Operator]

The next question is from Edward Mundy with Jefferies.

[Edward Mundy, analyst]

Three for me, please. First is the elevation of Crodino and Aperol Sprtiz from local priorities to regional priorities, but the new cluster. Could you talk to what this actually means in effect from a sort of an execution standpoint, presumably more dollars to a bit more TLC. And as a sort of second part of that question, are you seeing any canalization from the -- from traditional -- from the [indiscernible] to enjoy to away from the traditional Aperol Sprtiz. That's the first question. .

The second question is really around the statement within your additional financial information around leveraging new consumption habits across base on-premise and off-premise channels, are you able to provide a bit more detail as to what you mean by that? I'd appreciate there's some revenge conviviality going on and first quarter was impacted by some shipment phasing. But even still, your underlying growth is pretty strong basically this quarter and the last couple of years. So the real question is why shouldn't high single digit, low double digit growth be a good proxy for your business, given these new consumption occasions on on-premise and off-premise?

And then the final question is really around Brazil and your new agreement with FEMSA. Can you talk a little bit more about the opportunity? And are there opportunities to do more with other bottlers? I know you already do a lot of work with CCH in success in Europe.

[Robert Kunze-Concewitz, executive]

Okay. Let me kick off with Crodino and Aperol Spritz. I mean on Aperol Spritz for a very, very long time, there was a very huge demand from our markets to actually introduce it alongside the [indiscernible] brand. And we've resisted that for many, many years, and we've waited actually for the penetration of Aperol per capita to reach a certain level before we let it free. So there was huge demand from the market. And now we've actually put it into 10 markets, this will gradually increase over the years as the penetration of the Aperol Sprtiz and the mother brand increases. In terms of cannibalization, we're hardly seeing anything. We're seeing it's a very different -- it is focused on the off-premise and it's more for conviviality, particularly if people are at home alone or just with their partner, and they might not want to open a bottle of [indiscernible]. And so they go for the ready to enjoy. So it's really complementary to the mother brand. .

Crodino, on the other hand is we -- essentially, we saw the opportunity of available alcohol, and we decided to go and test it in a few markets, and the tests have been very, very positive. So we've introduced it in more and more markets. We'll pick it up as we go and success breeds success. Clearly, this means operationally the marketing gets done by our central teams as opposed to the Italian team. The mix changed slightly, both the design, the bottle size as well as the advertising campaigns and the activation model. So we're quite happy about that, and we think it will give us a lot of satisfaction going forward.

Now in terms of the new usage occasions, now clearly, the pandemic and the first lockdowns have been beneficial to us because it really increased the penetration of our key cocktails at home. Now making a Negroni is no longer an insurmountable challenge. You have many great Negroni makers, the same of our Spritzs and so on or even the Grand Margarita. So that has really driven the penetration of our brands in-house. And at the same time, region revenge conviviality, which is still continuing across all markets where the on-premise is open, is really giving us a second win. So we see those two things continuing, particularly when it comes to our aperitifs Campari, Aperol, we've seen the Campari Sprtiz and the Aperol Sprtiz go also into the meal occasion, branch launch, informal dinner. So that's in that we have more traction overall across the portfolio. We feel good about it.

We're not -- given the volatility, both from an economic, political and so on, we don't feel like calling out a different top line guidance. But clearly, as you can see from the 3-year compound annual growth rates across brands and markets, our performance has accelerated.

With regards to Brazil, I mean, Brazil is really a relaunch opportunity, if you will, for us. For many years, local management was convinced that the way forward was the local brands. Unfortunately, that was absolutely the wrong call. Those categories continue to decline significantly. And now for about 1 year, 1.5 years behind change management teams and strategy, we put the emphasis back on the aperitifs, particularly Campari and Aperol, and we're really seeing a strong traction behind those two brands and very, very good growth. To be able to increase the penetration of the two brands, we are cooperating with different players in the market. One of them is Coke, but it's not a national deal. In other states, we also cooperate with other players. We think it's a win-win for all the parties involved. But this clearly will be more of a mid- to long-term impact as we think that Brazil is potentially a huge market for our aperitifs.

[Edward Mundy, analyst]

Yes. And are there any other markets where you might look to use your leverage click system?

[Robert Kunze-Concewitz, executive]

Well, we are already in quite a few European markets. So it's really something we look at one at a time.

[Operator]

The next question is from Fintan Ryan with JPMorgan.

[Fintan Ryan, analyst]

Firstly, you give a bit more color on your current plans for the Russian market. You said that you dialed down the activities to the minimal level. But just sort of broadly speaking, what is that minimal should we expect going forward? .

And then secondly, just following on from the last questions around the reordering of the brand priorities. SKYY is not largely been one that you've given a lot of time to historically. How should we expect that to move up in terms of your order priorities? And like would that be something you expand to the U.S. market as well?

[Robert Kunze-Concewitz, executive]

Yes. Look, I mean, more color for Russia. I mean, practically, we just want the locally generated revenue. We import everything. So we don't produce anything locally. So we want to locally generated revenue to cover fixed costs. And that's it. We've got A&P, we've got other investments. We're not promoting the brands in store, and we'll continue like that until there is a change in the overall situation. .

With regard to brand priorities and SKYY RTD, I mean, we've had SKYY Blue in Mexico now for 15, 17 years. It's something we haven't really called out before because it was small. But over time, it's become quite a sizable business. So we're calling it. We have a little bit of SKYY RTD business in Australia as well as in Asia. Let's see how that goes. Clearly, we're pragmatic people. If we see things have legs, we expand them.

[Fintan Ryan, analyst]

Great. And actually, maybe just on the Asia points. I appreciate the launch of your activation within China using set back somewhat by the recent lockdown. So how is the -- how is that business trending a few months leading into the lockdown performance over that the Chinese New Year occurrence?

[Robert Kunze-Concewitz, executive]

Look, I mean pre-lockdown, we were doing very, very nicely. Thank you very much. Both X-Rated, Aperol, SKYY vodka, [indiscernible], Bisquit&Dubouche and surprisingly, Campari, were doing very well. Actually, the Negroni is doing very well in mixology outlets. And without doing anything on the brand, it's growing at strong double-digit rates. So demand is there. We have the growth models. We just need to be patient and return to recruiting consumers when the Zero COVID policy allows us to do that.

[Operator]

The next question is from Trevor Stirling with Bernstein.

[Trevor Stirling, analyst]

A few from my side, please. First one is Bob you said that roughly half of the organic growth was due to the phasing, which would then say that underlying growth versus 2019 was about 30% up. Is it reasonable to expect that to continue at that underlying rate through the year. I appreciate in Q2, there's going to be a tough comp from the phasing. But is that the right way to think about the underlying rate at the moment? .

Second one, Bob you mentioned 30 bps of transactional FX in Q1. Again, is it reasonable to expect that to continue through the rest of the year?

And then final question, Bob, I think on the last call, you mentioned there's more Espolon capacity coming on stream this year. I was wondering what the timing of that capacity is?

[Robert Kunze-Concewitz, executive]

The timing on that capacity is kind of the end of Q3, beginning Q4. And -- but it is a continuous progress because it's really an engineering feat because as we continue reducing, we're adding bits and pieces to the distillery and the bottling lines, et cetera. So this capacity increase will actually continue also in 2023. So clearly, we have a strong confidence in the brand in the U.S., and we hope we'll be able to start actively build this in the rest of the world, particularly in Europe.

Now on the underlying rate, Trevor, I don't have a crystal ball because one thing is the momentum of the brand, which is very, very strong. And if the world would be a nice place, a benign place, I would agree with you, we maintain it for the rest of the year. At this stage, it's very difficult to tell. We know there's demand for it. At the same time, we've gone through a major price repositioning of Campari. We need to see how that plays out as well as robust price increases throughout the portfolio. So we will maximize sales and we won't shy away from it. We do think we have strong brand equities. Let's see how the consumer will react going forward. .

[Paolo Marchesini, executive]

The second question, if I understand it, is the FX transaction affecting our numbers in the first quarter, whether it is confirmed going forward, if that's the question. It very much depends on the dollar. Yes, we have transactional exposure on all the U.S. imports. So basically, both the aperitifs Campari as well as the Grand Marnier from France. So yes, in the first quarter, if I remember it well, the average euro-dollar was at EUR 1.12. Given the current spot rate, there is an opportunity sitting in the left to go. And still, we would have higher effect at bottom line vis-a-vis top line due to the transactional exposure.

[Operator]

The next question is from Paola Carboni with Equita.

[Paola Carboni, analyst]

4

I have a few questions. The first one, if you can -- okay, I update you have confirmed your guidance for EBIT margin, flattish compared to last year. I just wanted to have a bit more color on how you should think -- we should think about COGS in pricing. So if you can update also the guidance you provided, which was for a 7% growth of COGS year-on-year. So what the environment you are expecting now to face in terms of COGS for the year?

Also, looking to the Q1 performance, if you can give us a rough idea of how growth was split between volume and pricing. And volume mix, let's say, on one side, on pricing on the other side? And how should we think the two components to evolve during the year as a mix of the two components for the year?

And then last comment, I would like to have a bit more color on the guidance for flat EBIT margin. Just to understand we should think at this as the potential result of progressive deterioration of gross margin offset by operating leverage on the other costs. So just understand in the right way to look at your flat EBIT margin guidance.

[Robert Kunze-Concewitz, executive]

[indiscernible] busy for quite a while. Clearly, just to put the whole thing into the right perspective, we're living in unprecedented highly volatile commodity market. And the biggest commodity, which we are exposed to is glass, which is highly into natural gas cost or if you check on a daily basis, that ETF index it moves up and down constantly. So what we're trying to do, given the fact that we were at the very beginning of the year, ad all sort contracts are indexed to that tracker. What we're trying to achieve is that to hit a flat EBIT margin for this year, you may remember at the beginning of this year, we hoped recover the 170 basis point shortfall that we still had to recover vis-a-vis pre-pandemic levels, at gross margin level.

So for this year, we're saying, look, it's a flat EBIT margin. As the time goes by, we will have better visibility on both the truth trending costs where we valued to a 7% cost increase. So that's the goal that we have in mind. And how much effective will be our price increase. So today, it's a little bit too early to call. But if anything, we see a potential area of opportunity in the mix, positive sales mix, driving accretion in the case, the price increase, although for sure, we will offset the cost increase in value will not be able to offset in percentage terms.

So if you have a P&L, which has a gross margin on sales in euro 60%, you totally understand that in order to maintain flattish gross margin on sales at cost and mix and volumes, you need to increase price more than COGS. So that's what we're trying to pursue. But on the other hand, clearly, we do not want to kill the brand momentum. So we're sensible in that. So we're saying, look, the objective is to achieve a flat EBIT margin. There could be an upside in terms of business momentum. There could be an upside risk, there could be a downside risk in our ability not to cover in percentage terms, the COGS increase in value, for sure, but percentage terms is a different one.

So I don't know why the -- I think in terms of timing, once we have the second quarter under our belt, we'd be in a better position to judge and to review the guidance. Based on excellent numbers, where basically you know very well the second quarter is a key one for us of already high-margin aperitifs.

[Paola Carboni, analyst]

Yes. Okay. And so I think we just missed the point about the contribution of pricing you had in Q1. I don't know if you can give us a bit of color in this respect.

[Paolo Marchesini, executive]

It's a mid-single-digit price increase in Q1.

[Operator]

Mr. Kunze-Concewitz There are no more questions registered at this time.

[Robert Kunze-Concewitz, executive]

All right. So this is a wrap. Thanks for joining us, and I hope you have many good Negronis. Take care. Bye-bye.

[Paolo Marchesini, executive]

Don't be shy. Bye-bye.

[Operator]

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