Davide Campari Milano NV

MIL:CPR

Earnings Call Transcript 2023-Q1

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Campari First Quarter 2023 Analyst Results Conference Call. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. [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.

[Bob Kunze-Concewitz, Chief Executive Officer]

Thank you, and a very warm welcome to all to our call. I'll kick off with the general overview on Page number 2. Whilst Q1, as you know, it's quite a small quarter for us. It still gives us quite a bit of satisfaction to have started with a bang. With our organic sales performance continued to be strong, up 19.6% here are the key drivers are our core aperitif, tequila and bourbon. And clearly, we have very solid brand momentum in a resilient consumer environment, particularly in the on-premise where we are overweight, as you know. We're benefiting also from the full effect of the previous year's multiple price increase rounds and are also favored by some temporary effects, including some shipment phasing and the early Easter calendar.

Moving on to adjusted EBIT growth, up 32% on an organic basis. We also have margin expansion of 220 basis points on an organic basis, driven by a very positive sales mix. Obviously, the aperitifs make a difference. Pricing effects as well as operating leverage on fixed costs, which more than offset the cost inflation. Now if we exclude the estimated temporary effects, net sales organic growth in the quarter would be approximately 13%, whilst adjusted EBIT organic growth will be in line with net sales, leading to flat EBIT adjusted organic margin. Based on all of this, our full year guidance is confirmed despite the current quite volatile macroenvironment.

Moving on to the analysis of our sales across regions, you see clearly that we're growing double digits in all of our regions and also doing very well in the different clusters of our brands. Global Priorities up by 22%, regional priorities up 27% whilst local priorities are up only 3.8% as they were held up by contemporary issues on the RTD business in Australia.

Moving on to the analysis by region on Page #4, the Americas, which weigh 47% of total group sales, up 19.5%. The key market, the U.S. on an organic basis, up 23%. Clearly, it was a very strong start to the year in the U.S. Thanks to the continued very strong performance of Espolon, up 66.9%, while Turkey Bourbon, also up double digit 18.9% and a very strong quarter for the aperitifs up 153.6% and Campari 72.6%. The only blot here is Grand Marnier which declined double digits, impacted by destocking as we decided to balance up inventory levels after the normalization of logistics, particularly transocean shipments.

If we move on to Jamaica, up 17.9%. Again, very strong growth. Key drivers Wray Nephew and Appleton Estate. The rest of the region, up 13.1% and again, double-digit growth across all of our markets, also in Latin America. Southern Europe, Middle East, Africa, 29% of our sales. Again, here, a key driver, the largest market, Italy, up 21.6% where we continue to have very strong momentum, despite, I must say, the very tough comp base. You'll recall that last year, we were up by 70.2% in Q1. Key driver, again, Aperol, up almost 1/3, 32.9%; Campari 18.6%; and Crodino 19.2%. In this market, we've clearly benefited from the full year effect of the two rounds of price increases we did last year and we were also favored by shipment phasing ahead of this year's price increase as well as the early Easter calendar. We have a very nice and positive underlying trend in France against the tough comp base. We were up by almost 39% last year. And key drivers are the aperitifs, Aperol, Campari as well as Champagne Lallier and Trois Rivieres rum.

In all the other markets, very positive performance, up 46.2%, largely driven by the continued strong momentum in both the on-premise and off-premise by Aperol and Campari. Global Travel Retail was up very strongly, 126.5% with a triple-digit growth in Aperol, Grand Marnier, The GlenGrant, SKYY vodka, and Wild Turkey Bourbon. Moving on to North Central and Eastern Europe, 16% of our global sales growing by 16% on an organic basis. Key market, Germany, up double digit, 11.1%. Again, a strong start to the year in this key market, and we benefited obviously also from the Easter calendar shift. Core Aperol grew double digit, 15.9%, Ouzo 12 which is a regional brand or local brand, actually, they're up 15.2%. Aperol Spritz ready to enjoy up by quarter, 24.9% and continues to grow very strongly from a small base of 15.1%. Campari was slightly negative after a significant price repositioning last year in a tough account base. Clearly, we had a very strong Q1 last year, up 33% as customers face shipments ahead of our price increase. The U.K., which is our second largest market in the region, doing very nicely, up 21.5%, again, driven by the continued positive trends in Aperol, Magnum Tonic and Wray and Nephew.

The rest of the region, up 17.9%. Again, very strong overall performances across all of our markets, including Austria, Switzerland and Belgium, with the hero is being the aperitifs. Last but not least, Asia Pacific, 8% of total group growing again double digit on an organic basis, 14.5%. Australia was held back by the RTDs. So it only grew by 5.1%, but we have very nice performances by Aperol as well as the -- well Wild Turkey Bourbon.

If we move on to other key markets, our new route-to-market, which we consolidated last year, South Korea, up by 90.9% and what's interesting is the mix here, it's driven by high-end Wild Turkey offering X-Rated as well as the high end of the GlenGrant. Well, if we look at the other markets, overall, up 30.4%. China remains volatile. It's growing mid-single digits, largely thanks to positive shipments, of course, Sky Vodka, and we have very good momentum in all the other regions.

Moving on to the analysis by brand clusters. Our global priorities now account for 58% of the company and are growing by 22%. Aperol, our largest brand, growing by a very strong 43.6%, clearly, very good momentum in all core markets, Italy, Germany, France, Spain, the U.K., as well as a triple-digit growth in the U.S. and global travel retail. We're benefiting from a resilient consumer environment, particularly in the on-premise and have been favored by the shipment phasing, particularly in the U.S. and Easter calendar shift.

The brand is building pace in both mature markets, and we're upping up our game in those with the highest potential, particularly the U.S. Campari, up 23.9%, double-digit growth in Italy, the U.S., Brazil and Argentina, which allowed us to offset some temporary weakness in Jamaica. Wild Turkey, growing more than a quarter, up 26.9%. Again, here, a very start of the year, mix also very good with the high-end Russell's Reserve outperforming, up 88%. And the overall performance is driven by the core U.S., up 22.5%, and South Korea as well as Global Travel Retail, which grew triple digits.

Moving on to Sky, positive shipment performance, up 20.8%, sorry. Also in the core U.S., thanks to restocking. You'll recall that we relaunched the brand in Q2 of last year, so we destocked significantly the whole pipeline, distributors as well as stores in Q1 last year. So the comp effect is quite beneficial now. But we're seeing continued very strong trends in key markets such as Argentina, South Africa, Italy, China and Global Travel Retail.

Grand Marnier as highlighted earlier, is down 30.7% in the small quarter, and these negative shipments performance are impacted by the destocking. We decided to drive with our distribution partner in the U.S. in order to balance out the inventory levels, which were brought a little bit out of kilt by all the issues we had in Transocean shipments last year.

Last but not least, our Jamaican rums, up double digits as well, 15.7%, with Appleton Estate doing very nicely, up 26.3%. Wray Nephew up 13.2%. Moving on to our regional priorities, 25% of our sales, growing 27.3% organically. Espolon continues to go from strength to strength, up 62.4% with a very strong momentum in the core U.S. market.

Sparkling Wine and Vermouth up 7.5% overall positive, thanks to growth in Germany, Spain, the U.S. and South America, the Cinzano brand particularly was up by 11.8%.

Our Italian specialties, strong growth across all the brands in the portfolio, up 20.3% and key drivers here are core U.S. and Germany, whilst the European markets where we're starting to build the brands are also doing nicely. Crodino, up 19%, very positive performance, driven by strong growth, both in its key market, Italy as well as in all the seeding markets where the brand is coming very nicely from a small base, but growing very, very nicely.

Aperol Spiritz ready to enjoy up 19.3% and key drivers here, Italy and Germany. As you know, we haven't expanded this expression in many markets. They're only in a handful. Moving on to the GlenGrant, continuing to benefit from premiumization and innovation, up 34.3%, doing very nicely, all around, particularly in Asia Pac. Magnum Tonic wine going very nicely as well, up 30% with very strong momentum in the core U.K. market.

Last but not least, local priorities, 9% of our sales, growing only by 3.8%. Campari Soda doing nicely 6.5%, driven by Italy. Here, the blotch is, obviously, Wild Turkey RTD in Australia, down 1.3%, where we're showing temporary weakness due to some temporary, let's say, issues with our key customers there. We were -- we had many other stocks last year, so we lost promotional slots, and we're regaining them one at a time as we speak. X-Rated growing by 9%.

Key driver here is South Korea as China still needs to recover as there's quite tepid and say demand in the nightlife channel in that key market for the brand. Last but not least, Sky RTD, up 31.2%. As you know, this is a business mostly focused on Mexico. Before handing over to Paolo, I'd like to underline two key accolades we've had. We have three impact hot brand awards: Aperol, Campari and Espolon.

And Campari was also nominated best selling the current, top trending the curve by Drinks International. Just a few pictures. We've decided to significantly up our game in terms of activations of Aperol in the key U.S. market, and this is the first kickoff here, the Coachella Music Festival which has been very, very positive for us. Innovation continues to drive the growing brands, premiumization.

We introduced a 21-year old. We're also continuing to activate very nicely the Appleton Estate high end, taking a very, very strong position in its home market at the Sangster International Airport, Montego Bay, where really millions of tourists go by return. And last but not least, we're also very pleased to announce the launch of a new Tequila brand, super ultra premium actually, 100% Agave brand called Mayenda priced at $70. So it roughly a 1/3 premium to top brands such as Don Julio. This is it from the marketing standpoint, and now we get, I think, to the heart of the matter, the financials.

[Paolo Marchesini, Chief Financial Officer]

Thank you, Bob. If you follow me to Page 15 of the deck. You can see that EBITDA adjusted on an organic basis grew by 32% in value with a 220 basis point margin accretion. Gross margin organically in value increased by 20.5% with 40 basis points accretion, thanks to the combination of three factors: First and foremost, a very positive pricing effect, benefiting largely from the phasing of the previous year's price increases with multiple rounds, the last round in September of last year. Secondly, a favorable sales mix with the outperformance of high-margin Aperitifs in the first quarter as well as certainly the operational leverage on fixed production costs.

The combination of the three more than offset the still high cost inflation that we saw in the first quarter of the year, particularly on the glass front. A&P increased in value by 10.4% with the sustained investments behind key brands, showing 110 basis point margin accretion, thanks to the strong top line growth of the first quarter. SG&A were up in value by 16.1%, reflecting the continuous investments in business infrastructure and route-to-market, generating 60 basis point margin accretion, again, thanks to the strong topline growth. Excluding the temporary effects, net sales organic growth in the quarter would be approximately 13%, with EBIT-adjusted organic growth of, again, 13% in line with net sales, thus leading to flat EBIT-adjusted organic margin in the first quarter of the year.

On a reported basis, EBIT-adjusted came in at plus 39.4% in value, including positive perimeter effect of 4.1%, thanks to the first-time consolidation of both Picon and Wilderness Trail Distillery as well as positive ForEx FX for 3.3%, mainly driven by the appreciation of the U.S. dollar versus the first quarter of 2022 worth noting that in the second part of the year, the trend is expected to reverse given the current spot exchange rate between euro and dollar. Again, on a reported basis, EBIT-adjusted was up 36.8% with 29.3% organic growth, positive 3.2% ForEx impact and a positive 4.3% perimeter impact. Moving on to Page 16. We see operating adjustments of a negative €6.8 million primarily attributable to provisions linked to restructuring initiatives as well as long-term retention schemes. Net financial charges came in at €16.1 million with an increase of €14.8 million versus first quarter of last year.

Excluding the exchange rate effects, the financial expenses came in at €12.9 million, showing an increase of €7.9 million due to the combined effect of, on one hand, the higher leverage level of average net debt in the first quarter, €1.5 million versus €800 million of last year as well as a higher average cost of net debt, 3.3% in Q1 of this year versus 2.4% in Q1 of last year. Exchange losses of €3.3 million versus exchange gains last year -- first quarter last year, accounting for €3.7 million. The group PBT, profit before taxation, came in at €133.6 million, up in value by 24.8%. Whilst the PBT adjusted was €139.2 million, up 24.6% versus the first quarter of last year. As you can see at Page 17, the net debt remained broadly unchanged at €1.616 billion, slightly up versus last year by €63.6 million, mainly due to strong cash absorption of the announced -- already announced CapEx investments as well as inventory buildup in our own warehouses ahead of peak season to support the very strong demand that we see at the moment.

The net debt-to-EBITDA adjusted ratio came in at 2.3x on a reported basis. But if we factor in the pro forma factor of the Wilderness Trail Distillery, the leverage ratio came in at 2.2x. Some new route-to-market development in the APAC region, where the group continues to pursue its strategy, further strengthening its route-to-market capabilities and enhancing its brand focus in two key markets: Japan and New Zealand, by anticipating the call option exercises. More, in particularly, in March of this year, we acquired the remaining outstanding shares in the distribution JV in Japan, for which we already had initial noncontrolled stake. And as a consequence of that, the JV -- so the company is now a wholly owned subsidiary of the group.

Worth noting that the key brands in these geographies are Wild Turkey, Campari and GlenGrant and Grand Marnier. And then secondly, following the quarter end and as a subsequent event in April of this year, we gained the majority stake, 60% of Thirsty Camel Ltd in the New Zealand, where, again, we had an initial non-controlling stake. Worth mentioning here the key brands are Jamaican Rum portfolio, Wild Turkey and Aperol. And then prior coming to the outlook at Page 19, we've took the opportunity of revisiting our ESG targets. So here, we have an update where we show more ambitious environmental commitments, thanks to solid progress we made on that front.

But particularly, on the energy efficiency and decarb ,the target, we reduce the greenhouse gas emission intensity from direct operations. So Scope 1 and 2 by 70% by 2020 -- 2030, with interim target of 55% compression by 2025, using 2019 as a baseline. Worth mentioning the previous target was 50% by 2030 and 20% by 2025. And then again, reduce greenhouse gas emissions intensity from total supply chain, so including Scope 3 by 30% by 2030 using again, 2019 as a baseline where the previous target was set at 25% by 2030. And then source 90% renewable and electricity in all groups production sites by 2025 versus the previous target of 100% compression limited to the European production sites.

Water, again, reduce water intensity by 62% by 2030, with an interim target of 60% by 2025. Again, same baseline where the previous target was set at 40%. Waste -- Zero Waste to Landfill from direct operation by 2025 that stayed unchanged versus previous commencements.

So this is it on numbers. I would happily hand back to Bob for the outlook.

[Bob Kunze-Concewitz, Chief Executive Officer]

Thank you, Paolo. I'll be brief because I'm sure you've got tons of questions, hopefully, more for Paolo than for me. So in terms of the outlook, looking at the remainder of this year, our full year guidance is of a flat organic EBIT-adjusted margin in 2023, and we maintained that and we confirm it despite the current volatile macro environment. We expect a positive business momentum across all of our key brand combinations continue, thanks to our very strong brand equities continued strength in the on-premise.

But inflation on input costs is showing some initial easing effects. Margin trends are expected to show the pricing effect increasingly entering into the base over the course of the year. Alongside, obviously, sales mix evolution and normalization throughout the year in volume growth. In terms of ForEx, trends are expected, unfortunately, to reverse mainly due to the weakening of the U.S. dollar.

In the medium to long term, clearly, looking beyond 2023, we remain quite confident to continue delivering strong organic top line growth and mix improvement leading to organic margin expansion. This is it from our side, and we're here to answer your questions.

[Operator]

[Operator Instructions] The first question is from Simon Hales from Citi.

[Simon Hales, Citigroup]

A couple of integrated questions to start, please. I wonder if you could just help me understand the scale of some of the phasing benefits in individual regions in the period. Bob, you called out in your presentation, certainly some phasing benefits that you saw in Italy and North and Central Europe. Is that where there was really the concentration of shipments ahead of price increases. And then associated with that, I wonder if you could just run us through what price increases you've taken as we've moved into the second quarter, where they've been taken on which brands? Any more color there would be great. And then just a second question around inventory levels. You flagged the destocking of Grand Marnier. Is that now all done? And are you happy with the inventory situation, both on Grand Marnier in the U.S. and your broader portfolio?

[Bob Kunze-Concewitz, Chief Executive Officer]

Okay. Thanks, Simon. Now the scale of the phasing benefits is a combination of things. It's clearly -- the phasing is one dictated by the calendar with Easter shifting earlier on. But it's mostly customers buying ahead of price increases. We've had price increases in February and March in most markets. Italy has a price increase in May, but actually this year, beyond the one month's notice, we gave our customers two months' notice. So clearly, March was quite impacted by that. We've had -- we took two rounds last year, taking a nice round across the whole portfolio, clearly more behind the aperitifs. And so far, so good.

With regard to inventory levels, I need to explain a little bit what happened to Grand Marnier. Grand Marnier is a large brand for us in the U.S. So the way it works is with direct shipments from our plants via container ships to our distributor partners. Last year, as the ports were being all backed up they were placing more and more orders where clearly, for us, as soon as something leaves the factory, it's a shipment credit, whereas they haven't received it in their warehouses, so they didn't have the inventory levels. So this year, we decided to rebalance all of that, and I think we'll be pretty much done at this stage and the brands will continue on a full year basis, hopefully reflect the depletion growth of mid-single digit.

If you look at all the other inventory levels in the U.S. They're all pretty normal. We're happy to say that we are in a situation where we'll not place out of stocks. Those really impacted us very negatively last year, and we are able to return to normal levels.

[Simon Hales, Citigroup]

That's really helpful, Bob. And so just to confirm going back to the whole phasing sort of debate. I think when I calculated on my numbers, it looks like it was about a €35 million benefit to your sales line in Q1. You would expect that to be reversed out of the numbers in Q2. That's how we should think about?

[Bob Kunze-Concewitz, Chief Executive Officer]

Yes. Our estimation is more like €30 million.

[Operator]

The next question is from Andrea Pistacchi from Bank of America.

[Andrea Pistacchi, Bank of America]

Three from me, please. The first one on the U.S. Now after some of your peers reported last week, there has been a bit of concern on the U.S., what is going on in the U.S. market? It should be interesting to hear about your assessment of what is happening in the U.S.? Clearly, you're very decoupled probably from some of the softer market trends. And are you able possibly to share a depletion number for the U.S. in Q1? And what do you expect for the rest of the year? And then a second question, probably for Paolo on logistics costs.

What you're seeing there, logistics costs starting to decline year-on-year? I think some non-spirit companies recently have actually called out they're seeing a decline in transatlantic freight cost. And then the third question really about the consumer environment in Europe. In your outlook, comments, Bob, you're talking about, you expect continued strength in the on-premise. So I guess, that would suggest that you're clearly not seeing any signs of slowdown there.

So it would be interesting to hear even from the sense that you're getting from wholesalers, their level of confidence that the environment in Europe, which has been fine until now will continue to be fine or pretty strong, in fact.

[Bob Kunze-Concewitz, Chief Executive Officer]

I'll take the first and the last question. What's going on in the U.S.? I mean it's very interesting because there are two spades depending on the channel and depending on the type of consumers you're going to. And obviously, the shape of the brand portfolio impacts a lot how one trades in the U.S. Now it's clear that the off-premise has slowed down and depending on the month, it turns negative because value price increases have impacted consumers as well as the overall macroeconomic situation.

Having said that, though, the on-premise remains quite And if you look at our key categories, which are American whiskey, Bourbon, Tequila, those are very strong categories as well as the aperitifs, which we, obviously, are the only ones playing there. And the reason is, compared to some of our peers, we're actually targeting more young urban professionals who aren't really being impacted currently by the economic situation and are maintaining a very active lifestyle. So that's a difference versus some of our peers, which, although they're selling more premium, let's say, aged spirit categories. They've been catering more to blue-collar consumers, which have been impacted by the return to normality and the challenges currently from a macro standpoint, and employment standpoint. With regards to the consumer environment in Europe, I mean the off-premise in Europe too is, let's say, stable or slightly declining but from a much higher level compared to 2019.

But what we're seeing on the on-premise gives us a lot of reassurance. I mean, currently, all of our customers, cash and care as well as both sellers are doing very, very well and are actually very keen to make sure that they get hold of our key brands. So we're looking with confidence at the rest of the year. Having said that, weather it could make a difference, but we'll see how that goes.

[Paolo Marchesini, Chief Financial Officer]

Andrea, I think you have a question on logistics costs, which I will exploit to give a little -- shed a little bit of light on gross margin results for the first quarter and trends going forward. The question is logistic costs, particularly Atlantic costs are coming down, yes. But if you look at the first quarter, given the still high cost inflation, we're seeing high single digit to low double-digit cost increase versus last year, which not visible in the number we've disclosed where you see 40 basis point gross margin accretion in existing business due to a combination of factors. On one end, we've mentioned this -- the effect of those multiple price increases around. So the fact of having taken price last year was not another meaningful increase in September put us in a position this year to take price over a price that has been raised twice.

So basically, what you see, if you look at the average price increase of this year, clearly, the average price increase that we're targeting is very much front-loaded because we have easier comp in Q1, and then the price effect to get diluted quarter after quarter. So that's why. Then we mentioned the favorable sales mix. And of course, given the very robust top line growth, the operational -- the operating leverage on fixed production cost is there. So this is all another hiding the fact that if you look at procurement costs, the costs are growing very, very quickly versus a year ago.

That said, on pricing, we have a big price gain in Q1, which is then reduced as you know, the comps get tougher and tougher quarter after quarter. On the costs, on the other hand, it's should be opposite as -- we've guided towards cost inflation increase that will start to ease towards the back end of the year. But in the first quarter, clearly, we're using -- we're consuming products that have been produced and stored a year ago near the end of first quarter, it doesn't show its totality, the COGS increase. Now if you factor in all the different elements of the equation. So the petrol price increase, the mix, that is an important one as well as what I've said on COGS trend.

Now if you strip out everything in the first quarter, would have been dilutive by about 70 basis points in the first quarter. So that's why we're still targeting a flat EBIT margin for the full year, given the fact that, as Bob just said, second quarter, we will see another reversal of the positive effect. And then following June, this is when we believe that we will be able to leverage truly on procurement cost reduction. So that's the [indiscernible] we remain extremely confident towards the midterm. So back end of 2023 and particularly 2024, we just need to be a little bit patient to see on the whole gross margin opportunity flowing through the P&L.

[Andrea Pistacchi, Bank of America]

Two very quick clarifications here. One, you said I think in Q1, you saw high single to low double digit. Is that COGS increases, I think you said? And then the second thing, if you were able, Bob, pleased to share a depletion number for the U.S. if you have it?

[Bob Kunze-Concewitz, Chief Executive Officer]

Yes. Sorry, Andrea. I forgot that. In the U.S., we grew by 11% in the first quarter on a basis.

[Paolo Marchesini, Chief Financial Officer]

Yes, the high single digit to low double digit is procurement cost increase, not COGS. COGS, clearly, like you have said that we're using last year -- products that had been produced last year at lower costs.

[Operator]

The next question is from Mitch Collett from Deutsche Bank.

[Mitchell Collett, Deutsche Bank]

A follow-up to the last one actually. So -- just so I understood the phasing of profitability for this year, given that you've got off to such a strong start. So would it be right to think that gross margin expansion is more in the second half than in the first half and that there will be other cost lines that offset that to keep profitability flat on an organic basis. And then I think there was €6.8 million of provisions. Can you just give a bit more color on what that was for?

[Bob Kunze-Concewitz, Chief Executive Officer]

Yes. On COGS -- sorry, on phasing of results, yes, clearly, the second quarter in terms of gross profit, gross margin will be impacted -- on one end that will be the reversal effect of Q1 temporary effect. And secondly, we have the big season for the aperitifs portfolio, that is the most exposed to inflation, given the fact that on aperitifs, you cannot rely on liquids that have been distilled 12 years ago. And so you have an immediate translation and inflation into increase of cost of goods. Then in the second part of the year, there will be opportunity of recovering that gross margin dilution. I think we're extremely positive with the negotiations and the discussions with the trade. So I think we're in a good spot there. So on pricing, I think mission has been, I would say, accomplished. And the rest is, as we said, unchanged. We're targeting flat EBIT margin this year.

And clearly, the half of the top line and the robust demand puts us in a comfortable position to keep on investing on our brands and our structure to control distribution in as many markets as possible.

[Mitchell Collett, Deutsche Bank]

Understood. And then 13% that you said is the underlying rate for Q1, I guess, is remarkably similar to the CAGR you had by the end of last year, I guess, at least versus pre-pandemic. I appreciate you're not going to give a top line guidance in specific terms for this year or beyond. But how should we think about that 13% going forward? Is that something that can be sustained? Or are there reasons why that might start to flow?

[Bob Kunze-Concewitz, Chief Executive Officer]

No, you're right. We're not providing any guidance. But clearly, our portfolio has very good momentum.

[Operator]

The next question is from Edward Mundy from Jefferies.

[Edward Mundy, Jefferies]

A couple from me, please. Bob, you famously coined the phrase of revenge conviviality a couple of years ago. Are you seeing any signs of major fatigue in revenge conviviality or -- what exactly are you seeing from that perspective? Second question is on this new tequila launch Mayenda. Could you talk about what's differentiated relative to some of the peers within that price point in a quite high end tequila? And then the third question is really on Asia Pac, where you're bringing in distribution in-house in a number of new markets. Can you talk about sort of how much of your sales in Asia is now through your end distribution? And in those markets where you're bringing distribution in-house, what are the main things you're going to be doing differently?

[Bob Kunze-Concewitz, Chief Executive Officer]

Okay. Now first question, revenge conviviality. I think revenge conviviality is alive and kicking -- doing very well in the on-premise, but it's a little bit more subdued in the off-premise. And you see that clearly also in our results and any Nielsen numbers from the industry. So people are still going out, having drinks, meeting people, but they're doing less so at home.

Now with regards to Mayenda, what differentiates it, it's a very proprietary process, which makes it a much rounder liquid. I will not go into the details, but if you taste it, there's a night and day difference between our higher-end competitors. And I think that we have also a very nice story to tell. Now going to Asia Pac, we're probably at more than 3/4 of sales for our own subsidiaries. But bear in mind, we're still leading very strongly in the Pacific area with Australia and New Zealand impacting quite a bit.

Having said that, you can see the very, very positive development of our business in new markets such as Korea, now Japan, which has come online. And what we're doing is having control of it, obviously, the A&P commitments increase. And we're much more focused on bringing to the market our growth models. So it becomes a little bit clearer as to what the priorities should be in the market and how they should be executed from a marketing standpoint.

[Edward Mundy, Jefferies]

And on Japan, I mean, you highlighted the key brands are selling there -- it's the Wild Turkey franchise Campari, GlenGrant and Grand Marnier. Do you see an opportunity for Aperol Japan? Or is that something a bit further down the line?

[Bob Kunze-Concewitz, Chief Executive Officer]

Aperol Japan is coming, but it's our usual focus on the oil strategy and currently, we're focusing on different neighborhoods in Tokyo. So that's going to take a while.

[Operator]

The next question is from Laurence Whyatt from Barclays.

[Laurence Whyatt, Barclays]

Couple from me, please. Firstly, your advertising spend is slightly below even the sort of run rate of 13% growth. Is that an intention to slightly lower A&P as a percent of sales? Or would you expect that to increase in subsequent quarters? And then secondly, on Agave prices, at the full year results, you're expecting them to be a slight positive in this year? Is -- are they going in the right direction? Are you seeing slightly lower Agave prices? And slightly related to that, are you seeing -- you mentioned that you were seeing an improvement in agave supply, do you think that there's a bit more opportunity to take tequila more globally? It's been more a bit of a U.S. phenomenon to date. Do you see a bit more opportunity in Europe and perhaps Australia and some of your other markets?

[Bob Kunze-Concewitz, Chief Executive Officer]

I'll take the first question, Laurence. I mean we -- our outlook on A&P for the year is basically flat on an organic basis as a percentage of net sales versus last year. Clearly, you're going to see a strong concentration of A&P in Q2 and Q3 and particularly in Q2, as we are having a major [indiscernible] activating our aperitifs, Campari, and Aperol in all markets, but in most -- particularly in the U.S.

[Paolo Marchesini, Chief Financial Officer]

Yes. With regards to the agave price guidance, this is unchanged. So we still see a slight positive effect this year, but that's totally confirmed. We're getting more and more access to liquids and to agave being used to be distilled. So in 2024, I think we can start kicking off our international expansion campaign for our tequila brands, particularly Espolon, yes, where we see a lot of potential and that potential given the prior year's constraint on supply.

[Laurence Whyatt, Barclays]

And just following on the tequila. Are there any countries that you'd call out as being the key areas where you would aim to roll out further?

[Bob Kunze-Concewitz, Chief Executive Officer]

Yes. I mean most European markets as well as Australia, in some Asian markets, tequila is starting to become, I think, a global phenomenon. Consumers are yearning for it. I think key driver there is more the Paloma and the Margarita, it's slightly different than in the U.S. But we, like all the other players, currently were constrained and the volumes are mostly going to the U.S. and hopefully, this will start improving in the second half and then improve significantly more at the beginning of next year.

[Operator]

The next question is from Alessandro Tortora from Mediobanca.

[Alessandro Tortora, Mediobanca]

Two brief questions. The first one is if you can help us to understand the impact of let's say, on the gross margin side because I see, let's say, the perimeter effect -- positive perimeter effect on, let's say, the adjusted EBITDA. So I would like to understand if, let's say, the company contributed also at the gross margin level. The second question is on, let's say, the volume component considering, let's say, picking out the temporary effects you mentioned. So just to understand if the volume component considering the 15% organic growth is still positive, considering the channel mix you mentioned before this quarter, let's say positive on the company side and, let's say, negative territory for the .

[Bob Kunze-Concewitz, Chief Executive Officer]

I'll just say that I think volume is growing. I mean, we have positive volume across -- with the exception, obviously, Grand Marnier across the portfolio.

[Paolo Marchesini, Chief Financial Officer]

Yes. The other question is on -- if you could repeat it is?

[Alessandro Tortora, Mediobanca]

And gross margin.

[Paolo Marchesini, Chief Financial Officer]

Within Australia, as a business as a brand is accretive given its price positioning. But yes, it's timing.

[Operator]

The next question is from Trevor Stirling from Bernstein.

[Trevor Stirling, Bernstein]

Just one question from my side. There was one fact you didn't mention, Bob, in terms of the phasing, and that's the weather comps. From memory, they're reasonably tough this year as you get into Q2 and Q3, -- is that still a factor that we should be bearing in mind?

[Bob Kunze-Concewitz, Chief Executive Officer]

Yes. I mean that's a key point, Trevor. I mean, weather was very, very good last year. We've had very good weather actually in Q1. Now at the beginning of Q2 is less good.

I mean we've got more rain in Continental Europe and in England as far as I understand. But we don't have any crystal balls, we don't see how it is going to develop over the rest of the year. But rest assured, with climate warning, I mean it's a long-term positive trend, unfortunately, for us.

[Operator]

The next question is from Paola Carboni from Equita SIM.

[Paola Carboni, Equita SIM]

I have a few questions, first of all, on the, let's say, your statement in the press release that you are anticipating the normalization of volume and you were pointing also on -- I mean some attention on the evolution of the mix. Can you better elaborate on this? What did you mean in the press release and whether you were referring simply to the reversal of the temporary phasing effect that we saw in Q1? Or with a longer view to the whole year, let's say? Another question is about the evolution of organic profitability we saw in Q1.

If you can comment on how the main drivers would have performed excluding the temporary effect, so kind of gross margin organic without temporary effect SG&A. Sorry, I was also wondering in particular without the temporary effect, how this would have performed? And a further question, sorry, still on this temporary factor, you seem to expect a reversal in Q2. But at the same time, if I got it right, you mentioned when commenting on the financial position, an inventory buildup ahead of the peak season to support a very strong demand. So in theory, I mean, I don't know to what extent we are going actually to see this €30 million reversal in Q2?

[Bob Kunze-Concewitz, Chief Executive Officer]

I'll take the first one. Yes, I was referring to mostly the reversal. And then you also need to take comp basis into consideration, obviously.

[Paolo Marchesini, Chief Financial Officer]

Yes. If I understood it well, Paolo, your point was to understand a little bit the margin evolution in Q1 once you factor in all the temporary effects. So I said, the normalized net sales level would be 13%. As we said, I've alluded to one stripping out all the FX, gross margin dilution of about 70 basis points. As Bob just said, for the full year, we're targeting A&P neutral on revenues. So there would be a reduction of what you see -- an increase of what you see and then SG&A given the top -- the robust topline would have been slightly accretive, so leading to organic EBIT margin. With regards to the second question, the inventory buildup is not -- which we've alluded to is not a trade level or distributor leverage within our own warehouses. So it was a comment to explain why we had a significant cash absorption in the first quarter of this year. This is not impacting on top of the reversal of Q1 effect in the second quarter.

[Paola Carboni, Equita SIM]

Okay. And just a follow-up on the SG&A. You were commenting before on organic basis and without temporary effect. I was just wondering if we should account for any acceleration in the second part of the year for investment in route-to-market with your now directly controlled subsidiaries.

[Paolo Marchesini, Chief Financial Officer]

Not really. The two APAC regions where we're going right, they account in total of 1% of our revenue, so not a major drift there. There might be something, but we will trim the SG&A growth also in light of the top line development. So still too early to call. Let's wait.

June comes -- as we announce the first half results, we will disclose more for the full year, the trend in gross margin as a percentage of sales still leading to flat EBIT organic margin.

[Operator]

[Operator Instructions] The next question is a follow-up from Paola Carboni from Equita SIM.

[Paola Carboni, Equita SIM]

I was wondering about Campari in Germany. You referred to it as a temporary effect, temporary negative trend. Can you elaborate a bit on what you are seeing in terms of financial demand, if -- I mean to what extent this might be temporary and for how long do we expect it to impact?

[Bob Kunze-Concewitz, Chief Executive Officer]

Paolo, that's Q1 versus Q1 effect. I mean, it's comp basis because we had a significant price repositioning of Campari in Europe and particularly in Germany last year, which kicked in, in Q2. So obviously, that impacted in Q1. So overall, if you look at the brand that is doing quite nicely, particularly starting to, I think, trend more in the on-premise and also the Campari spreads is starting to play a role.

[Operator]

Mr. Kunze-Concewitz. Gentlemen, there are no more questions registered at this time.

[Bob Kunze-Concewitz, Chief Executive Officer]

Thank you. Thank you very much all for joining us. I'm sure we'll touch base in the next weeks and months. Stay well and enjoy your Negronis and Spritz. Thank you.

Bye-bye.

[Paolo Marchesini, Chief Financial Officer]

Bye-bye.