Davide Campari Milano NV

MIL:CPR

Earnings Call Analysis

Campari Delivers Strong H1 2023 Growth

Campari has witnessed a robust first half of 2023, with organic sales surging by 14% and a continued double-digit growth trajectory into Q2 at 10.1%. This uptick has been propelled by core brands like aperitifs and premium bourbon. Despite some temporary setbacks due to weather and retailer negotiations, growth persisted, pushing the organic EBIT adjusted up by 15.1%, expanding the margin by 20 basis points. Strong regional performances include the Americas at 10.6%, Southern Europe, Middle East, and Africa at 16.6%, and the Asia Pacific, the fastest-growing at 26.2%. Firm market leadership is evident in the U.S., Italy, Germany, and China, backed by flagship products Aperol and Campari, among others.

Strong Organic Sales Growth and Brand Performance

The company reported organic sales growth of 16.7%, with some brands showing remarkable strength. Espolon, for instance, saw a market share increase with growth of 43.3% in the first half and 30.8% in the second quarter. GlenGrant's premiumization strategy led to a 30.9% increase in value, with Asia driving demand. Similarly, Magnum Tonic Wine surged by 46.9% thanks to its performance in the U.K. and Jamaica, and Campari Soda grew by 10.6% as one of the larger brands.

EBIT-Adjusted Growth with Slight Margin Pressure

EBIT-adjusted growth reached 15.1% in value, and despite a robust increase, the company experienced a margin dilution of 50 basis points due to organic growth in gross profit that reached 13.3% in value.

Coping with Cost Inflation and Investment Increases

The company successfully offset the inflation in the cost of goods sold (COGS) by implementing price increases. However, advertising and promotion (A&P) spend and selling, general and administrative costs (SG&A) both grew, which led to some margin dilution.

Regional Contributions to EBIT-Adjusted

The Americas led with a 42.1% contribution to the group's overall EBIT-adjusted, showing a robust increase of 13% in value. The SEMEA region demonstrated significant growth in EBIT-adjusted value (29.9%) with a substantial margin improvement of 230 basis points. Northern, Central, and Eastern European markets also contributed significantly, but with some margin pressure due to cost inflation. The APAC region, however, faced a decrease in value of 14.7%.

Financial Expenses and Net Profit

Financial expenses saw an increase mainly due to higher average net debt and the average cost of debt. Nevertheless, the company's profit before taxation increased by 10.2%, with a group net profit on an adjusted basis up by 6.2%.

Operational Cash Flow and Investments

There was an impressive 36.6% increase in recurring cash flow from operating activities, excluding working capital changes. However, the recurring free cash flow was negative due to significant increases in operating working capital and extraordinary capital expenditures (CapEx) for production capacity expansion projects.

Working Capital Management and Debt

Operating working capital saw an uptick to 39.1%, and net financial debt increased by €268 million year-over-year, reflecting negative free cash flow partially offset by increased inventories supporting consumer demand and expansions.

Outlook for 2023 with Continued Growth and Margin Expectations

Looking forward, the company provides guidance for flat organic EBIT-adjusted margin in 2023 despite macroeconomic volatility. The expectation is for continued positive business momentum and strong brand equity, especially in the on-premise channel. Medium-term expectations remain positive, with confidence in delivering strong organic top line growth and margin expansion.

Earnings Call Transcript 2023-Q2

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Campari Half Year 2023 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.

[Bob Kunze-Concewitz, Chief Executive Officer]

Thank you very much. And good afternoon, and a very warm welcome to all of you to our H1 conference call.

If you join me on Page number 2, I will kick off as usual with the overview. I think as clearly demonstrated by the very positive first half results, our brand portfolio is clearly en route health and skewed to the most exciting categories in our industry. Organic sales grew by 14%, so very fast, and we continued growing double digit in Q2, 10.1%. The solid brand momentum continued, as I said, in the second quarter, driven in particular by the usual suspects, aperitifs, tequila and premium bourbon and it must also be said that all of those categories were boosted by successful pricing as well. The performance in Q2 reflected the expected reversal which we'd flagged in our Q1 results of the temporary phasing effects, but also reflects very poor weather across our core Southern and Central European markets as well as some temporary delisting from selected European retailers due to the commercial negotiations in connection with the price increases. But I'm very glad to say that these were subsequently passed through very successfully across the board.

Looking at organic EBIT adjusted, also a very solid growth of 15.1%, generating 20 bps margin increasing in the first half. We're up 5.3% in value and down 120 bps from a margin dilution perspective in Q2. This margin dilution in Q2, gross margin dilution, is due to the negative reversal of Q1 as well as the disproportional inflationary impact, particularly as you might expect with the high season aperitifs and COGS inflation overall fully offset by price increases in value terms. The phasing of A&P is actually linked to a late start of the summer activations, which were impacted by bad weather. Overall, our full year guidance of that organic EBIT adjusted margin is confirmed in the current volatile macro environment.

Moving on to Page #3. You see we have very solid growth across all of our regions. Actually, all our regions are growing double digit as well as our brand clusters, global priorities and regional priorities grew double digit, whilst local priorities only grew by 8% as they were held back by X-Rated and Wild Turkey RTD in Q1.

Moving on to the net sales organic performance by key markets. The Americas, which represents 43% of our net sales, grew at a very healthy 10.6%, very positive overall growth in the U.S. where we're outperforming the market. In Q2, our shipments were up only 3.3%, but this contrasts versus Q2 depletions of 16.3%, which accelerated versus the 11% we had in Q1. So clearly, we reflected the expected shipment phasing reversal from Q1 as well as the destocking in Grand Marnier, but the underlying business is very, very solid. The positive performance in the first half was mainly driven by strong growth of Aperol going from strength to strength in the key growth market, Espolon, Appleton Estate as well as Russell's Reserve, where we're driving the premiumization of our bourbon portfolio. Jamaica grew by 15.3%, again, very positive also in Q2, up 12.8%, thanks to Magnum Tonic Wine, Appleton Estate, and Wray & Nephew Overproof. The rest of the region grew by 6.1%.

Moving on to Southern Europe, Middle East and Africa, 30% of the total, growing a very strong 16.6%. Italy, our largest market in the region, grew by 13.4%. Clearly, a very solid underlying trend in core Italy with a very positive Q2, we were up 8.1%, driven by pricing, including the most recent round despite some phasing reversal from Q1 and very poor weather in the month of May. The growth in the first half was led again by Aperol, Campari, Campari Soda and Crodino, so the whole aperitifs portfolio. And the Italian specialties also grew and Espolon off a small base as we're starting to resupply the market. Strong growth in France, up 31.1% in Q2, again, driven by the aperitifs, Aperol and Campari as well as Riccadonna sparkling wine and Lallier champagne. The rest of the region grew by 24%, again, very positive overall performance across all markets, including Spain and Greece, thanks to the continued momentum in a still resilient consumer environment.

Moving on to North Central and Eastern Europe, 19% of our total, also growing strong double digit, 14.5%. Our largest market, Germany, growing even faster, 16.4%, and this is quite a contrast to the market, which is actually down. Our underlying momentum in Germany remains very solid, and we've had a nice acceleration in Q2, up 19.3% and again, driven by the aperitif portfolio, including Aperol, the Aperol Spritz Ready to Enjoy, Campari, all growing double digits as well as innovation. We launched last year into the on-premise brand called Sarti Rosa, which is an aperitif targeted at younger legal drinking age women, and it's proving very, very successful. I think you'll hear more about that in the years to come. The non-alcoholic Crodino continues to grow off a small base as well very nicely.

The U.K., again, quite a striking contrast to the market, which is quite depressed, our business grew by 20.9%. And the key drivers here are Aperol, Magnum Tonic Wine, Campari and Wray&Nephew Overproof. All of those brands obviously up double digit. The rest of the region, also up double digit, 10.6% and good underlying trends despite the poor weather earlier in the quarter.

Moving on to our last region, the smallest one, Asia Pac, 7% of our sales, but the fastest-growing region, up 26.2%. Australia, the largest market, up 7.5% on the half, but actually accelerating Q2 10.1%, and this is largely led by the recovery in Wild Turkey ready-to-drink as expected, thanks to the recovery in shipments as well as strong momentum in the core bourbon [indiscernible] as well as Aperol. South Korea is doing very, very nicely, growing double digits in H1. Again, it's all the high end of the portfolio, which is driving this growth, particularly the whiskeys, Wild Turkey and GlenGrant. In Q2, the performance was slightly negative due to a very tough comp base. You'll remember that last year, actually, that market grew by 139%.

Last thing that not least, we're also happy to see China getting back to strong double-digit growth, obviously, again, it's an easy comp base. But we're seeing the broad portfolio reacting very nicely, SKYY, GlenGrant, Wild Turkey as well as X-Rated. But very strong growth in India, driven by aperitifs, particularly Campari and Aperol, and Japan also did very nicely, registering strong growth thanks to our brown spirits.

Moving on to the performance by clusters. Our global priorities, which represent now 59% of our sales grew at a very healthy pace of 15% and our largest brand, Aperol, which represents 26% of our sales, growing by almost 1/3, so 32.4%, very strong momentum across the board, supported also by positive pricing. The U.S. up 122.5%. Italy, 20 years after we bought the brand continuing to grow double digit at 18%; Germany, the third largest market, growing by 22%, France by 27.5%. Clearly, the U.K., Spain, Canada, Australia and all the other European markets grew double digit. Global Travel Retail, triple digit.

The Q2 performance was quite positive, up 26.6%, driven by all our core markets, including the seeding markets in Asia Pacific. And it is also important to underline the fact that we've obtained these results despite some temporary delisting in France and in Germany in connection with our price increases as well as taking the poor weather conditions into account. Campari, our second largest brand, up 13.2%. Again, solid growth across all its core markets, Italy, the U.S., Brazil, Germany and doing very nicely in future prospects like the U.K., Greece, France and the Asian market. The brand was also positive in Q2, up 5% despite the expected negative phasing reversal, which impacted quite a bit the U.S. as well as the temporary delistings, which I had mentioned a little bit earlier on as in the case of Aperol.

Wild Turkey, 8% of our total sales, up 12.5%. Again, core markets swing very nicely, U.S., Australia, Japan and South Korea. And it's also important to underline [indiscernible] of our sales growing a very nice 7.3%. And here, we have international markets, China, Australia, South Korea, Japan and GTR, obviously boosting the growth. But we're also happy to say that the U.S. also grew overall after the expected reversal in Q2.

Grand Marnier is the only negative one here of negative shipment performance impacted by the destocking which we flagged last quarter. And we're balancing out inventory levels in the U.S., but clearly, this performance of minus 30% doesn't reflect the underlying trends, which were much, much healthier. Our Jamaican Rums also growing double digits, 13.9%. Appleton Estate really the premium end growing by 18.2%. We're really starting to leverage the very favorable category trends in the premium end of rum. Wray&Nephew Overproof grew by 12.4%, thanks to core Jamaica and the U.K.

Moving on to our regional priorities, representing 24% of our sales. Overall, organic sales growth of 16.7%. Espolon going from strength to strength, taking market share, up by 43.3% on the half and 30.8% in Q2. Clearly, this whole momentum is being proven in the U.S. because that's where we've dedicated the stocks so far. Our Sparkling Wine and vermouth were only up 1.1%. And here, the main driver has been Riccadonna. Italian specialties flattish, down 1.1%, and that's due to mostly Averna in core Italy. Crodino, doing very nicely, growing 7.4%. Obviously, in core Italy as well as growing very fast at a much faster pace in Central European markets despite the poor weather. Aperol Spritz ready to enjoy double digit, 10.6%. And again, you need to take into account the weakness due to the weather in core Italy in the month of May.

GlenGrant, premiumization is very, very successful. We're up 30.9% in value terms. And clearly, Asia is a major driver here with South Korea, Australia, Japan and China, which are really benefiting from the high-end expressions which we launched into those markets. Magnum Tonic Wine, doing very nicely, growing almost by half, 46.9%, with strength in its 2 core markets, U.K. and Jamaica. The rest of the regional brands also doing quite nicely. We are at positive growth across the portfolio. And important, we'd like to underline the very positive trend of [indiscernible] Montelobos, our pepper liquor Ancho Reyes, Lallier champagne and Trois Rivieres French rum brand.

Last and but not least, our local priorities, as I said earlier, they represent 9% of our sales and only grew by 8%. Campari Soda, the largest brand there is doing very nicely, growing by 10.6%, Wild Turkey RTD returned to growth, you remember that it was negative in the first quarter and is starting to build momentum again. X-Rated again, was handicapped by Q1 and has turned double digit in Q2. So we expect to see those 2 brands trending more favorably in the second half of the year. Whilst our SKYY RTD continued to go from strength to strength in Mexico, up 36.5%.

Now before passing on to Paolo, who will dissect the financials, I just would like to underline that our very unique marketing model is alive and thriving and [indiscernible] are raising the bar both in terms of creativity as well as the scale of our experiential events, which are proving very, very successful, and we'll continue driving these across the board, across markets and across all of our key brands. This is it. I hope you enjoy the nice pictures. And Paolo?

[Paolo Marchesini, Chief Financial Officer]

Thank you, Bob. If you follow me to Page 15 of the deck. Looking at the organic performance, EBIT-adjusted growth accounted for 15.1% in value with a 20 basis point organic margin expansion. Now if you look at the second quarter on a stand-alone basis, organically, EBIT-adjusted growth accounted in value for 5.3% with 120 basis point dilution. In the first half, gross profit organic increased by 13.3% in value with a 50 basis point margin dilution. It was impacted by cost inflation, as we know, which was only partly mitigated by strong positive pricing and positive sales mix. In the second quarter, the gross margin dilution accounted for 100 basis points due to negative reversal of shipments of the first quarter, negatively impacting the sales mix in the second quarter as well as the disproportionate inflationary impact, which particularly hit the aperitifs in their high peak season.

The COGS inflation overall was fully offset by price increases in value terms. The A&P spend increased by 10.7% in value with sustained investments behind key brands. So if you see, there is fine margin accretion driven by A&P phasing due to very poor weather conditions impacting the start of the summer activation programs. SG&A increased by 13.1% in value, reflecting the continuous investments in business infrastructure but generating 20 basis point margin accretion, thanks to the very strong top line growth in the first half. If you look at the second quarter on a stand-alone basis, both SG&A and A&P grew slightly above top line with a combined margin dilution of 10 basis points.

On a reported basis, EBIT-adjusted came in with a growth of 15.7% in value, including a negative ForEx impact of a negative 1.9% to €6 million, mainly attributable to the depreciation of the U.S. dollar. The positive perimeter on the contrary generated €7.8 million of positive contribution corresponding to a plus 2.5% with 10 basis points accretion on net sales due to primarily the consolidation of Picon and to a minor extent, the first-time consolidation of Wilderness Trail Distillery. With regards to Wilderness Trail Distillery, the contribution was lower than originally guided contribution due to the prioritization of liquid allocation from back sales to third parties to future growth of high-margin owned brands. The EBIT-adjusted came in at €411 million with a reported change of 15.4% in value, which 15.1% was the organic contribution, 3% the perimeter effect and a negative 1.6% due to ForEx effect, primarily with the dollar.

If we move on to the following page, where we have the segment reporting. The Americas region, as a whole, it represents 42.1% of the Group overall EBIT- adjusted. It showed an increase of 13% in value with a margin accretion of 80 basis points. The gross margin dilution accounted for 80 basis points, and that was due to COGS inflation, as we know, and less favorable sales mix due to the outperformance of Espolon, which continues to be impacted by the very high agave purchase price. And that effect was only partly mitigated by positive pricing, which, of course, we took in all the market. A&P and SG&A were both accretive by 30 and 100 basis points, respectively, thanks to the sustained top line growth of the region.

SEMEA accounted for 28% of Group adjusted EBIT with a growth in value of 29.9% and a margin improvement, a very healthy margin improvement of 230 basis points, which was driven by both gross margin expansion of 20 basis points caused by very, very strong pricing, including the second round of price increases introduced in 2022 in the fall of 2022 as well as a positive sales mix, both more than offsetting the COGS inflation. The A&P was highly accretive by 110 basis points due to delayed activation programs with a very poor weather condition in the SEMEA market. The SG&A were also accretive by 100 basis points with strong top line driving operating leverage.

Northern Central and Eastern European market as well. This region contributes by 28% of the overall organic EBIT. And it grew by 8.8% with a margin dilution of 190 basis points, which was driven by a gross margin dilution of 180 basis points, where the COGS inflation was only partly offset by the pricing effect kicking in towards late second quarter. In fact, in 2022, we did not implement it in the Northern and Central European region, the second round of price increases in therefore as we did in SEMEA. The A&P, although it grew, was accretive by 70 basis points following the delay in the start of the summer activation due to poor weather condition. The SG&A, on the contrary, they were diluted by 80 basis points due to strengthening of our commercial capabilities in key Northern and Central European markets.

APAC as a region accounted for just 1.5% of the overall Group EBIT adjusted, and it was down by 14.7% in value, with a margin dilution of 310 basis points. Actually, in this region, we had a healthy gross margin accretion of 270 basis points, thanks to also here very strong pricing, very favorable sales mix, which was driven by continued premiumization and those effects more than offset the COGS inflation in the region. Both the A&P and the SG&A grew faster than the top line. On the contrary, leading to margin dilution of 200 and 380 basis points, respectively, and those were driven by robust investments behind premium brand and build up over route to market capabilities.

If you move on to Page 17, you can see that the operating adjustments totaled €16 million, and they were primarily attributable to provisions linked to restructuring initiatives, long-term extension schemes as well as nonrecurring costs related to certain IT projects. The total financial expenses came in at €32.4 million, with a significant increase of €27.7 million versus the first half of last year. The financial expenses, if we exclude the exchange, the exchange rate effects came in at €21.9 million versus €10 million of last year, showing an increase in value of €11.9 million, and that was due to the combined effect on one end of the higher level of the average net debt from €890 million to €1,664 billion as well as the higher average cost of net debt, which increased in the first half from 2.2% of last year to 2.6% of this year.

The exchange losses accounted for €10.5 million versus exchange gains of €5.3 million of first half of last year. And those losses were linked to cross currency transactions involving certain emerging market currencies, including pesos and ruble, for which the hedging will not be cost efficient. And then hence, we did not activate hedging for those currencies and intercompany transactions. Both hyperinflation effects as well as the profit related to associates and joint ventures, came in at €1.2 million positive and a negative €1.1 million. The profit before taxation came in at €311 million, up 10.2% in value. And on an adjusted basis, the profit before taxation came in at €326 million, up 7.2% in value versus first half of last year.

Page 18, the taxation totaled €93 million on a reported basis with recurring income taxes equal to €91.6 million. The Group net profit on an adjusted basis came in at €234 million, up 6.2%. The recurring tax rate stood at 28.1% in first half, 60 basis points higher than first half of last year due to the unfavorable country mix. The deferred taxes related to the amortization of goodwill and brands for tax purposes came in at €10.9 million with a value change positive of €2.8 million versus a year ago. Now if we exclude the impact of noncash component, the recurring cash tax rate stood at 24.7% with a decline of 20 basis points, and that's good, thanks to the higher deferred taxes component.

The Group net profit on a reported basis came in at €216.9 million, up 8.9% and basic earnings per share on an adjusted basis at €0.21 was up 6.6%.

With regards to the free cash flow, Page 19, the recurring cash flow from operating activities, excluding the working capital changes came in at €340 million, remarkably up by 36.6% in value versus a year ago, in value, €91.3 million. And this was driven to an increase in EBIT-adjusted of €58 million, as you can see to the right-hand side of of the page. The higher taxes paid accounted for €40.8 million, reflecting the stronger business performance as well as certain tax payment cycles. And then you have tiny effects for Argentina hyperinflation accounting, €5.2 million, and changes in accrual from operating activities of €39 million in orders due to excise taxes, VAT and so forth.

The recurring free cash flow overall was negative by €91.7 million with the reduction of €190 million versus a year ago clearly due to present form of a significant step up in operating working capital, which totaled €372 million. Net interest paid by €18.5 million and maintenance CapEx of €41.5 million. The extraordinary CapEx component in the first half amounted to €46.9 million, and they were mainly related to the production capacity expansion projects that we've announced the back end of last year.

Looking at the operating working capital, Page 20, as a percentage of last 12 months rolling revenues. Operating working capital came in at 39.1% versus 28.8% over year ago and 32.4% on a comparable basis at June end 2022. The reported increase of operating working capital accounted for €354 million versus December last year. Organic was €372 million, as we saw before, where the back of the increase is coming from increase in inventory, which accounted for almost €231 million with an increase of €57 million due to ageing liquid investments in both whiskey, rum, tequila and cognac, and on the other hand, we have a step-up of other than ageing liquid inventory for €171 million, which was driven by the planned inventory buildup to support the consumer demand ahead of key summer season for the aperitifs as well as the buildup of certain temporary safety stock in connection with the plant capacity expansion programs in the 3 business production sites in Italy, the U.S. and Mexico.

Also receivables were up by €128 million. This was due to the combined effect of a very strong business performance. And on the other hand, at constant volumes, the significant price increase increase is generating a corresponding increase in receivable. A slight decrease in payable by €12 million, perimeter was tiny €9.8 million and ForEx as well tiny another negative €8 million. Operating working capital on net sales on a pro forma basis is not far from a reported basis at 38.9%.

Page 21, net financial debt at June end stood at €1.823 billion, up €268 million versus a year ago, reflecting the negative free cash flow, which I just commented, €454 million. largely due to the cash absorption tied to the inventory buildup as well as cash outlays for a dividend, €65 million and acquisitions of energy stakes and other investments for €13 million. Cash and cash equivalents accounted for €624 million, up €188 million. Long-term euro bonds and loans accounted for €1.937 billion, and those are paying an average nominal coupon of 3.61%. Leverage ratio, net debt-to-EBITDA came in at 2.5x at the back end of the year with a tiny increase versus December, where it was 2.4x.

I think that I have dissected the numbers. The floor is yours for the outlook.

[Bob Kunze-Concewitz, Chief Executive Officer]

Yes, before we open up to your questions, a brief underlying the outlook we have. Looking at the remainder of the year, we're providing a full year guidance of flat organic EBIT-adjusted margin in 2023. So we're confirming what we said in Q1, and this despite the current volatile macro environment. The positive business momentum across our key brand market combinations is clearly expected to continue, reflecting albeit business seasonality and expected normalization and volume growth. And clearly, this momentum is driven by very strong brand equity and our continued strength in the on-premise, which is the one channel which across all markets is still en route health.

Margin trends are expected to reflect the sales mix evolution, different comparison basis for pricing effects as well as the initial easing effects on input cost inflation. I'm sure you'll have questions for Paolo on this. On side phasing of A&P as well as continued sustained investments to strengthen our commercial capabilities, in particular, route to market. On ForEx and perimeter, unfortunately, the negative ForEx trends are expected to accelerate, reflecting the weakening U.S. dollar as well as some other key glue currencies. And as highlighted by Paolo, the perimeter effect is expected to be approximately €10 million to €15 million on EBIT-adjusted on a full year basis, reflecting the prioritization of bulk liquid allocation or with the necessary distillery to the future development of our own brands. So this gives clearly a further confidence on the future prospects of our bourbon portfolio.

In the medium term, looking beyond 2023, we remain quite confident to continue delivering strong organic top line growth as well as margin expansion, leveraging both mix improvement as well as input cost inflation normalization. So this is it from our end and looking forward to your questions.

[Operator]

This is the Chorus Call conference operator. We will now begin the question-and-answer session. [Operator Instructions] The first question is from Simon Hales of Citi.

[Simon Hales, Citi]

As you suggested, Bob, maybe one for Paolo to start with around the margin guidance for the full year, please. Obviously, clearly, we still saw 20 bps of margin expansion in the first half. So you didn't see that full unwind of the H1 benefit in Q2. Obviously, you called out A&P spend delay perhaps accounting for that better Q2 delivery. But I'm still trying to reconcile that full year guidance was still flat margins, given that we have got those eating COGS pressures, lower logistics costs, I think you called out back at Q1 as well as well as the benefit of flow-through of the Q2 price increases. So what are we missing that's going to drive H2 EBIT margins down organically? That's the first question.

And then sort of a couple of brief points around sort of current trading, really. Could you talk a little bit about trading through the end of the quarter and into perhaps Q3 in some of your core markets, particularly maybe in Western Europe, whether we've seen any weather impacts in particular regions to call out in the early part of Q3? And then associated with that, just what the inventory position is generally in your main markets at the end of the half year, particularly in areas like the U.S. Bob, should we be expecting now shipments to match depletions through the second half?

[Paolo Marchesini, Chief Financial Officer]

So Simon, I'll take the first one on margin guidance. So as you correctly pointed out, in EBIT terms, we've delivered 20 basis point margin expansion in the second quarter. But if you address that to the A&P phasing that has been delayed to the third quarter due to the poor weather condition. Actually, the EBIT margin was down by 20 basis points. We have about €6 million of A&P phasing into the third quarter. So that's one. Vis-a-vis the COGS, the view that we had is completely confirmed. So costs are coming down, driven by the reduction of commodity prices, logistic costs and most importantly, the agave which is now significantly below spot price vis-a-vis the average ARS28 to ARS30 per kilo that we've been paying over the last few years.

So if we look into the remainder of the year, I think the point is, now, we still have to cycle through the third quarter of the year, where we have another heavy quarter for aperitifs that is extremely important. I remind you that last year in third quarter of 2022, we had a gross profit dilution of 430 basis points due to inflation. So the quarter that is the most exposed to inflation typically for us is second and third, but with a higher proportion of exposure to third quarter. So clearly, we hope we could surprise you on the positive side, weather condition in SEMEA, certain delistings prevented us from achieving in the second quarter, the upside, and we see third and fourth quarter still is out. We're in a good spot, I think, pricing, very, very good news.

So we really managed to deliver the expected price increase, average price increase. So all the negotiations with the trade have been finalized. And so we think we're really in a good spot there, very solid 2 consecutive years of price increase, high single digit price increase for 2 years in a row.

If you look at the cost trend, clearly, it's all a matter of timing, when we'd be able to recover the and decrease cost of materials, packaging materials and the other price. I think with regards to the biggest component that is agave, I think clearly, we have contracts in place for this year. So we will have marginal benefits in Q4 of this year. And the big price is in 2024 as already anticipated, vis-a-vis logistic cost and this is happening as we speak because there you place pulp prices and vis-a-vis glass that for us, accounts for 18% of our cost of goods sold, clearly, we're having interesting discussions with our suppliers. So more to come as we finalize the contracts for 2024 with our key glass suppliers.

[Bob Kunze-Concewitz, Chief Executive Officer]

I'll take the second question on current trading. Q2, Q3. Actually, the very positive business momentum of our brands is continuing. We're quite skewed to the on-premise. And as I said earlier, the on-premise is actually thriving across all of our core markets. And we're also continuing to outpace both the market and our competition in the off-premise. So from our side, pretty good. In certain markets, you've seen also from the consumption data, which came out yesterday and the day before, that there is an acceleration in the U.S., which is very positive. Weather is impacting us to a certain extent. But what we see is at the moment to send returns, the consumer stocks like crazy to the on-premise and make up for what they've been missing before. So overall, I think pretty good there.

With regards to inventories, let's be very clear. We have quite low inventories actually in the U.S. in the first 6 months of this year, we've decreased our inventories by 15 days. So that's quite a bit, and we're below our contractual obligations. And in the rest of the world, particularly also in Europe, there's hardly anything worth mentioning. So we're low on inventories at the trade wholesaler level. But clearly, we have plenty of inventory in our own warehouses. So we'll be able to satisfy the robust demand for our brands.

[Simon Hales, Citi]

That's really helpful, gentlemen. And just to clarify, sort of, Bob, the delistings that we saw in the first half, those issues are now resolved or as we head into Q3.

[Bob Kunze-Concewitz, Chief Executive Officer]

Yes, yes, yes. They are resolved. I mean, there was 2 large retailers in France and in Germany reacted with a loose-loose mentality to our price requests. We were delisted for about 2 months at both of them between Q1 and Q2. Then they realized we were quite serious holding our ground. And at the same time, their shoppers actually switched and went to their competitors to a large extent. And we found then an agreement and where we listed in line with the conditions which we had presented at the very beginning.

[Operator]

The next question is from Mitch Collett of Deutsche Bank.

[Mitchell Collett]

I've got 2 questions, please. So I think at the 1Q stage, Bob, you talked about an underlying growth rate of around 13%. You just reported 14.2% for the first half, and that's despite a number of headwinds, including the poor weather and the delisting that you've talked about and also a lower level of stock in the U.S. So could you perhaps provide an update on what you think the underlying level of growth is now? And if there are any things that you think will make that better or worse as we move into the second half and beyond?

And then my second question is on the longer-term opportunity for margin. Paolo, could you perhaps give us some quantification of how much margin upside you think there is in 2024 or beyond some of the cost pressures you face to start to reverse?

[Bob Kunze-Concewitz, Chief Executive Officer]

Mitch, thank you for your questions. Look, we're definitely outpacing our reference markets and doing that in a consistent manner, both in the off-premise and the on-premise across our portfolio. At the same time, though, it must be said that our markets are slowing down. Clearly, comp base effects due to pricing as well as volume reactions. So I think overall, we're in a very, very good position. We'll continue trending. But I think there's no point in providing an exact number at this space. It's quite clear that we have very strong marketing programs, which will be kicking in, have actually kicked in now from July onwards, and we look forward to maximizing our sales. So we feel good about the top line.

[Paolo Marchesini, Chief Financial Officer]

Yes. Mitch, with regards to the long-term opportunity, '24 and beyond on gross margin expansion, I think in our point of view, the opportunity is quite sizable. And given the 2 rounds of price increases, in 2023, we're really in a very good spot. With regards to COGS, clearly, the biggest opportunity sits in agave price. Just to frame it, any pesos of price reduction is worth about $5 million for us of profit. So it's quite sizable. We think to be defined exactly which part of the overall opportunity we'll be able to reap in 2024, but we believe it is meaningful. And then, of course, the glass, the logistic costs, those are all on top of that.

Basically, if we compare our running 12 rolling months gross margin as a percentage of sales organically versus prepandemic level, we’re still clipping at 300 basis points below prepandemic and we’ve stepped up the price in a meaningful manner. Clearly, if you look at EBIT, the impact versus prepandemic is much lower. It’s probably 1/3 of that. And this is due to the fact that the top line, the operating leverage delivered significant offset to the gross margin dilution coming from COGS increase. So we think it’s definitely achievable to recover the 300 basis point gross margin expansion. We will be able to recover that all in 1 year. It’s bit questioner because Mexico is not Switzerland. And we all know that the glass industry is an oligopoly of few suppliers, but we think it’s at our reach.

[Operator]

The next question is from Edward Mundy of Jefferies.

[Edward Mundy, Jefferies]

Three questions from me, please. The first is Aperol within the U.S., which again was very, very strong. Could you perhaps talk about what's driving the momentum? And any perspective you're able to share at this stage on sort of how pushing Aperol within the U.S. might be different to let's say, Europe?

Second question is, unfortunately, we didn't manage to go through the very detailed slides around some of your activation programs. But I'd love to know a little bit as to sort of how much of your marketing today is experiential relative to traditional above-the-line advertising. I appreciate this is commercially sensitive, but how do you think about that relative to, let's say, 5 years ago or perhaps relative to some of your spirits peers, how much of your marketing is really experiential?

And then the third question is around pricing. You've had 2 very strong years of pricing, high single-digit growth. how to understand what do you think this is going into 2024? Or do we go back to sort of more normalized low single-digit cadence as some of the commodities roll over?

[Bob Kunze-Concewitz, Chief Executive Officer]

Ed, thanks for your questions. Yes, I mean, with regards to pricing, clearly, as inflation gets [ trained ] in, our pricing will also normalize in the years to come. With regard to the marketing mix, we hardly have any classical media anymore. I mean, frankly, I would say, over 95% of what we spend goes into experiential and digital media. So we're very, very focused on there. I mean, jokingly, I always say that we've become an entertainment company because we really create the content which is very alluring for our consumers. And then they basically broadcast that via their own social networks. So it's a great system, and it's working very, very well.

And we can see that also working very well in the case of Aperol in the U.S., where the one difference we're doing is we're doing not only the local activations in the on-premise, et cetera, but going for very sizable events like [Fotela] and we'll have another very interesting one at the end of August, early September in New York. So that's where we capture consumers from all over the U.S. and we get liquid to lips and we know that once we do that, then they become converts. So working very nicely. You've seen our consumption data, we're growing by 60% in the U.S., and this brand is becoming very, very meaningful, and it's starting to get to a tipping point.

[Edward Mundy, Jefferies]

And I think I've asked on previous calls that there's sort of no bottleneck with Prosecco when it comes to make apple spirits in the U.S., you managed to sort of get around that potential barrier unlike where there's plenty of [indiscernible].

[Bob Kunze-Concewitz, Chief Executive Officer]

Yes. No, there’s no issues.

[Operator]

The next question is from Trevor Stirling of Bernstein.

[Trevor Stirling, Bernstein]

I'd like to follow-up, please a little bit on the agave, Paolo. The first thing is you talked about spot prices being much lower. We're seeing some reports of spot down to 16 and falling. Is that consistent with what you're seeing?

And the second one is regarding the upside. 3 years ago, Paolo, I think you said that the upside was north of €30 million. And at that stage, probably your tequila business has doubled since then. Would it be too simplistic to say the upside is in the order of €60 million today, if you go back down to ARS 6.

[Paolo Marchesini, Chief Financial Officer]

Yes. With regards to agave price, yes, I confirm, 16 seems to me on the low side. It’s, I would say, south of 20 in a consistent manner. Then, of course, sometimes you can find something at lower prices. But of course, the point is the lag effect because we have contract as all industry players. They have long-term agreements. You have annual agreements. You don’t buy basically anything on the spot in terms of you buy the current price. So clearly, we’re already discussing the contracts for next year. And we hope and we believe that we will have significant savings next year in the agave space. The sensitivity, which I was alluding to is, for us, given the size of our tequila portfolio is $5 million of cost compression and in pesos of price reduction. So that’s the conversion of pesos to cost compression. For us, starting from, I would say, a base of 28 for 2023 and 2022. So that’s the size of the price.

Yes, in terms of timing at Trevor, I think back end of July, September, October, we will start tackling the suppliers, the [indiscernible] and also probably between October and February, we will shed more light on the outlook for the agave costs in 2024.

[Operator]

Next question is from Andrea Pistacchi of Bank of America.

[Andrea Pistacchi, Bank of America]

I have 3 questions, please. First one, Bob, on India. You opened a subsidiary a few months ago. It's obviously still a very small market for you, but if you could comment on the initial performance there on how also Aperol and Campari being received by Indian consumers, but also your sort of portfolio priorities longer term in India on a 5-year view, considering that it's clearly a whiskey market in India.

And then, Bob, just going back on the stock levels in the U.S., please, on Grand Marnier. I probably didn't understand earlier, but if the destocking on Grand Marnier, would you say is it complete now? Should we expect the performance of Grand Marnier to trend towards depletions in the second half? And from a depletions point of view, at least based on Nielsen, the brand seems to be growing, if you could confirm that.

And Paolo, please, going back to all the point about the margin. In Q4 margin last year, EBIT margin was only around 11%, which is much lower than Q1, Q2, Q3. Is there any reason why margins in Q4 should be structurally much lower than other quarters? Because I don't think before the pandemic, that was not the case.

[Bob Kunze-Concewitz, Chief Executive Officer]

We actually opened our subsidiary last year. Midterm, we're focusing clearly on the aperitifs, Campari, Aperol, but also Bulldog Gin and GlenGrant whiskey. And I think eventually, when we have more volume, we'll also be endorsing our bourbon offerings in that market. We're focusing on not the whole country, but mostly where affluent consumers are. So it's Mumbai, it is Delhi as well as Goa. And consumer reaction is very, very positive. I mean, currently, I'm told that the Negroni is the #1 cocktail in India, and we're getting quite very good repurchases on Aperol and the Aperol Spritz. Obviously, the whiskeys and the gin are fine. Sorry, I also forgot to mention that we're [ boxing ] locally [indiscernible] vodka, which is also doing very well. So it's a pretty broad portfolio. and we have high expectations for that market going forward because as you know, the Indian consumers palate is clearly very well adapted to Western experience.

With regards to Grand Marnier and stock levels, I suspect that we've done most of it. Could there be a tail in July? Potentially. But we would expect in the second half the shipments to track the depletions and consumption. The new campaign kicked in May, and we're already starting to see its positive effect on the consumption data. So we feel good about the brand.

[Paolo Marchesini, Chief Financial Officer]

Yes, vis-a-vis the comp base Andrea for the fourth quarter of the year. I think if I remember it well, in fourth quarter of last year, we had a combination of factors there. We had significant A&P on revenues, a big spend in Q4 of last year. I remember we had a very strong performance of Espolon, which was driving dilution. And also, overall, we had very high COGS inflation, whilst just in SEMEA, we managed to take price for a second round of price increases. And in Northern and Central European markets, we've been exposed to input cost hyperinflation. So these were the reasons. But of course, yes, of course, the peak season for aperitifs is Q2 and Q3. And on those brands, we all know we have higher than average gross margin as a percentage of revenues.

[Andrea Pistacchi, Bank of America]

But no reason why in the long term sort of margins in Q4 should remain so significantly below the other quarters, right?

[Paolo Marchesini, Chief Financial Officer]

No. It shouldn’t. Structurally, clearly, Q4 is not benefiting of the peak season for aperitifs and the A&P phasing, it’s a little bit [indiscernible] in volatility, depends on weather condition and opportunities. Outside of that, I don’t see any structural reason why it should be as low as 11%.

[Operator]

The next question is from Isacco Brambilla of Mediobanca.

[Isacco Brambilla, Mediobanca]

I have a quick one, which is on operating working capital. Is there any sort of indication you can provide to us on the level you would like to achieve by the end of the year compared to the [indiscernible] interest rate posted in the first semester.

[Paolo Marchesini, Chief Financial Officer]

Yes. As we've highlighted, we intentionally referred to build up significant amount of stock in the first half coupled with the 2 objectives or issues, call it, on one end, we're in the middle of the CapEx program in key sites. So what to have stock in our warehouses and plans available for shipment, particularly given the peak season of the aperitifs, we did not want to end up in a trap of putting on markets in out-of-stock positions. So basically, the plan is to run down inventory in the second half and target is confirmed. So the 31% operating working capital on revenues, which was the number that we've aired is so far confirmed then, of course, last quarter comes with volatility, but that's where we will land.

[Operator]

The next question is from Paola Carboni of Equita SIM.

[Paola Carboni, Equita SIM]

I have a few questions. The first one was about your reference in the press release to a normalization of volumes in the next few quarters. Can you better elaborate on what are you referring to in particular with this word normalization because we had positives and negatives. So I was wondering what do you really mean apparently, the statement on the top line also from the conference call is quite positive. So I would expect the normalization might imply a bit of improvement in the volume trend. But just to be sure on what you meant with this statement.

And second point, sorry, is on the CapEx phasing. I was expecting a bit more in the first half. So based on your guidance that you gave in February. I was wondering if it's just a matter of phasing, and we should expect a catch-up in the H2 and if there is any reading behind that?

Then a further question is about the SG&A line. You have mentioned the strengthening of commercial capabilities in APAC, which I clearly understand, but also in Northern Europe. So if you can elaborate a bit on that, what are the initiatives and in which market, in particular?

And also possibly, if you can help us in guiding for the full year trend of SG&A going forward?

And last question, sorry, on the cost of glass I was wondering whether the positive discussions you are experiencing with your suppliers might start having an impact maybe in Q4 and not simply waiting for 2024.

[Bob Kunze-Concewitz, Chief Executive Officer]

I'll be quick with the first one. What we mean with normalization of volumes is actually with regards to markets. Clearly, post-COVID, the markets grew very, very quickly at a rate, which wasn't the normal rate of the spirits market. And now we're returning to that. And you also need to take into account that consumers are obviously in this volatile macro environment and inflation, et cetera. Overall, end markets are getting a little bit more weary and potentially consuming a little bit less than usual. Having said that though, the markets will normalize, but we'll continue to outperform our reference markets. Paola, with regards to CapEx, which I think is your first question. The guidance is confirmed. So for this year, we have maintenance CapEx in the region of €100 million, €110 million. We've announced a 3-year program of between €550 million and €600 million of CapEx this year, probably depending on, because these are big projects, the phasing of those projects, we believe we may end up in a position between €200 million and €250 million of extraordinary CapEx. So more to come in H2 given the fact in the first quarter, CapEx progression was, how can I say, the low pace. So we will see an acceleration in the second half.

With regards to the SG&A investments and trends on at really Asia is a priority market to us. So we keep on investing in that geography. But also, as you saw correctly spotted, in Northern Europe, we're building commercial capabilities in key markets, existing markets like Germany, for example, but also recently, market where we recently our in-market company like the U.K. that are extremely promising. We are definitely investing to support the development of our brands. Vis-a-vis the trend of SG&A for the full year, we expect SG&A to come in fairly flattish as a percentage of revenue. So we don't see any meaningful lift.

I the cost of glass, the contracts are structured in a fashion where basically you have the commercial discussion with the suppliers, which are basically aimed each and any year at defining sort of standard cost and then you have true-up mechanisms whereby based on trends of commodities you entrust at year end the conditions. So we’ll see, clearly, the procurement teams are at the moment focused in redefining first and foremost the cost for year 2024. That’s key, given the significant compression of ETF energy costs and so on and so forth. And then we will adjust accordingly this year. I think the Q4, we will see, this is an ongoing discussion at this stage, it’s too early to call. So as I said, both agave and glass, we would like to give you updates as soon as we have better visibility, which would be back end of October as we announce third quarter results or worst case as we announce the full year results.

[Operator]

The next question is from Gen Cross of BNP Paribas Exane.

[Gen Cross, BNP Paribas Exane]

A very quick one for me. I was just wondering if you could give us an update on your view of net finance costs for the year. I think you said on an underlying basis previously that you're looking for around €45 million.

[Bob Kunze-Concewitz, Chief Executive Officer]

Sorry, we didn't get the question. Could you repeat it?

[Gen Cross, BNP Paribas Exane]

Yes, sure. I think previously, you mentioned expectation of around €45 million of underlying net finance costs for the full year. I was wondering if you could just give us an update on that.

[Paolo Marchesini, Chief Financial Officer]

Yes. On the interest charges, given the significant rise in interest rates, there is an increase of €10 million from €45 million to €55 million.

[Operator]

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

[Bob Kunze-Concewitz, Chief Executive Officer]

Thank you. Thank you all for joining us. We appreciate it. We wish you a very nice vacation and plenty of Aperol Spritzs, Negronis and Campari itself.