Davide Campari Milano NV

MIL:CPR

Earnings Call Transcript 2022-Q3

[Operator]

Good afternoon, this is the Chorus Call conference operator. Welcome, and thank you for joining the Campari Group 9 months 2022 results. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Bob Kunze-Concewitz, CEO of the Campari Group.

[Robert Kunze-Concewitz, executive]

Good morning to all. I hope you appreciate the visual of the Aperol glasses bringing some sunshine in a rainy environment. Having enjoyed that, if you follow me on Page 2, I'll pick up with the highlights as usual.

As you can see, we continued in Q3 with a very, very strong performance. Clearly, we have a very robust brand momentum and the pricing effect started to kick in. Net sales at EUR 2.5 billion, almost EUR 2.6 billion, clearly generate strong organic growth of 19% in 9 months, or actually plus 47% if we compare ourselves to the pre-pandemic era, the first 9 months of 2019. So we've almost grown the company by half. The strong growth continued in Q3, where we grew by 18.6%. In particular, the performance was led by the aperitifs in their key peak season, where we thankfully also benefited from favorable weather conditions, and we continued to create quite well in brown spirits despite constraints.

Adjusted EBIT at EUR 557.8 million grew also strongly by 21.5%, or actually plus 58.6% versus the pre-pandemic benchmark of the 9 months 2019. We've had limited margin expansion, reflecting the widely expected margin dilution in Q3, which is due to the heightened COGS inflation, and particularly what impacted us are our logistics in the quarter. This has led to a gross margin dilution of 160 basis points in 9 months and 430 basis points in Q3.

Sustained investments continued behind A&P and SG&A, and we've been able to deliver margin accretion overall, thanks to strong top lines. With regards to FX, very positive FX effect, EUR 51.7 million impact -- positive impact on the adjusted EBIT, clearly mainly driven by the strong U.S. dollar. Net debt adjusted EBITDA came out to 1.5x, so a slight decrease from the end of last year, but obviously reflects significant amount spent on acquisition, stock repurchase, dividends and taxes.

Moving on to Page #3, what we can see, the big picture, how we're doing across our regional clusters and the brand clusters. Starting on with the regional clusters, you see that our 3 largest regions all grew double digit. The only one which grew only mid-single digit is APAC, which was significantly impacted by supply constraints on the one side as well as the flash closures in China. And this is also mirrored in the brand clusters with the global and regional priorities growing strongly double digit, whereas the local priorities grew only by 7.2%. Clearly, the -- Wild Turkey ready-to-drinks in Australia were significantly hampered in terms of bulk availability and that impacted the whole cluster.

Moving on to Page #4, and this is organic performance by market. We see the Americas overall growing by 18.7%, the U.S. up 14.6%, very positive in Q3, up 30.2%, thanks to a continued positive momentum in the on-premise as well as resilience on consumption, which benefited also from pricing effects. We have also seen some recovery in wholesale inventory levels for Espolòn to avoid out of stocks. Actually, we were in a very dire situation at the end of June, where we had less than a week stock at our distributors, and that put us in a very precarious position. So with the additional capacity coming online in our distillery, we were able to bring it back to healthier levels.

Now the positive performance accelerating after a very successful summer, up 56.7%, and Campari continued to do very nicely, up 33.2%. Grand Marnier shipments were slightly negative in the first 9 months despite a partial recovery in Q3, and the brand continues to be impacted by glass constraint issues. And on the other hand, the SKYY portfolio declined. If we look at the organic growth of the U.S. versus the first 9 months 2019, we have an overall growth of 40.7%, which leads to a 3-year CAG of double-digit 12.1%, quite a nice result.

Canada in the 9 months was up 7%. Again, overall growth quite good with an acceleration in Q3, where we grew by 12.1%. Here, the key drivers are Campari, Grand Marnier, Espolòn, Aperol and SKYY. The core Forty Creek Canadian whiskey brand shipments reflected some temporary weakness due to phasing linked to the new packaging relaunch.

Jamaica continues to do very well, up 26.3%, with strong Q3 results, up 32.5%, with the key brands Wray & Nephew Overproof and Campari performing very strongly. The rest of the region was up 35.2%. Again, strong double-digit growth across all key markets, particularly Brazil, Mexico and Argentina, which are really responding very nicely to strong consumer demand.

Moving on to Southern Europe, Middle East and Africa, up 23.3%. Italy, the largest market, up 21.5%, and very positive trends in Q3, where we were up 7.9%, bringing us to a 3-year CAGR of 14% versus 2019. Clearly, here, the key drivers is the aperitifs portfolio in its peak season. Aperitifs delivered strong results in 9 months, Aperol up 25.5%, Campari 44.1%, Campari Soda 9.2%, and the nonalcoholic, ready-to-enjoy Crodino up 20.6%. Clearly, the on-premise is quite strong and healthy, and at the same time, pricing started kicking in. The amari portfolio, last but not least, also grew strongly as well as SKYY. But obviously, that is off a small base.

Italy, our second largest market, grew by 39.3% versus the first 9 months of 2019. So that generates a 3-year CAG of double digit, 11.7%. France, a market which is becoming more and more important to us, grew by 10.7%. Again, very strong growth driven by core Aperol as well as the Riccadonna sparkling wine, and Champagne Lallier as well as Cynar did very nicely. The rest of the region grew very strongly, up 48.9%, with some particularly very positive performances in Spain, which was up 56.8% and South Africa by 63.4%. Global Travel Retail have doubled, up 100.4%, with very nice momentum continuing in Q3, up 85.7%, benefiting obviously from the recovery in tourism.

Moving on to North, Central and Eastern Europe, overall, 18.3%, the largest market up an even stronger 22.5% with a strong overall performance. In Germany, we're seeing on our portfolio brand continued resilient home consumption, combined with a very strong on-premise, which obviously was also boosted by pricing and very favorable weather conditions this year. The performance was largely led by Aperol, which grew more than 1/3 by 35.4%. The Aperol spirits ready to enjoy actually more than doubled, up 106.7%, Crodino up almost by 1/3, up 31%, whereas Campari was slightly positive following the significant price repositioning.

Q3 was up 5.8%, leading to a 3-year CAGR of 12.2%, with clearly Aperol and our broad spirits RTD continuing to grow by double digits. This helped offset softness in Cinzano sparkling wine, which is a big business in that market, where the brand was heavily impacted by glass availability. In Germany, our organic growth versus the first 9 months of 2019 was up 45%, leading to a 3-year CAGR of 13.2%. The U.K. continued to grow double digit, up 13.1%, a very positive performance against quite a tough comp base. In the first 9 months of last year, we were up by, you would remember, 42.5%. Clearly, the aperitifs and particularly Aperol are driving this, helped also by favorable weather conditions. And we're doing -- continuing to do very nicely with Magnum Tonic. And at the same time, the launch of Crodino has gone off a very good start, growing triple digits off a small base. The rest of the region is up 16.7%. And again, a very strong double-digit growth for our aperitifs, including Crodino.

Last but not least, APAC only grew by 5.6%, as I indicated earlier, Australia flattish at 1.3%. This key market continues to be impacted by ocean freight constraints, which really temporarily affected the availability of the core Wild Turkey ready-to-drink, leading unfortunately to out of stocks in that market. On the positive side, the growth was mainly driven by Campari, Wild Turkey bourbon and SKYY. Our organic growth in this key market is up 29.4% versus the pre-pandemic era, leading to a 3-year CAG of 9%.

The rest of APAC grew by 13.3%, Very, very strong performance in South Korea, more than doubling. As you know, we've taken full control of our subsidiary in South Korea at the beginning of this year, and it's going from strength to strength, particularly driven by the high end of our portfolio, the Wild Turkey offerings, and the high-end GlenGrant, X-Rated and SKYY. China, unfortunately, was negative, but that shouldn't be a surprise. Clearly, we continue to be impacted by snap lockdowns in relation to the zero-COVID policy. Japan was overall negative from a shipment standpoint, but it's actually positive in a local depletions perspective. And we're continuing to see strong momentum elsewhere, including New Zealand, thanks to our enhanced investments across all our key levers.

Moving on to our brands on Page 6. Our Global Priorities grew organically by 21.2%. Our largest brand, Aperol, grew by 31.4% with very, very strong double-digit growth across all of our key markets, and in particular, in our core Italy, which grew by 25.5%. And bear in mind that we bought the brand 19 years ago in Italy and have grown it every single year double digit. So very nice momentum continuing there. Germany, up 35.4%; the U.S., 56.7%; Spain, 100.8%; France 29.4%; and the U.K. 21.6%. The peak season Q3 performance was strong overall, up 23.1% despite clearly the continued elevated compare base. Bear in mind that we have a 3-year CAGR of 21.4% driven by very strong and numerous activations across all of our markets, leading to strong recruitment in the on-premise, whilst at the same time, home premise consumption remains stable. It's also important to underline that these results do not include the Aperol Spritz ready-to-enjoy, which is also growing at a very sustained double-digit growth rate.

Campari, up 29.9%, very positive growth, continued momentum in Q3, where we grew by 26%. This performance was largely driven again by core Italy, up 34.1%, the U.S. 33.2%, Brazil, 108.1%, as well as Jamaica, 45.7%. Looking at this other strongholds, Nigeria, Argentina, GTR and Spain also grew double digits. And the brand overall, we must say, continues to benefit from the at-home mixology trend. The success of our consumer-driven Campari spritz as well as the upward price repositioning, which we actioned this year across key European markets.

Wild Turkey bourbon portfolio up 22.1%, nice acceleration in Q3, where we're up 30.2%, with outperformance of the high-end variance. In the 9 months, the Wild Turkey core bourbon grew 28.4%, mainly thanks to the core U.S., up 27%; Korea, up 188.4%; and Australia, up 9%. The high-end Russell's Reserve brand grew 36.6%, and this is clearly thanks to the U.S. and South Korea as the volumes of this brand are quite constrained and we're dedicating them to the 2 most important markets.

SKYY, unfortunately, was down 3.7%. Overall, this decline in shipments was driven by core U.S. and China, but was partly mitigated by the rest of the world, where the brand is very healthy and growing by 51.8%, with the key drivers being Argentina, Italy, Germany, South Africa and Canada. Grand Marnier, up only 1.4%, overall positive performance, thanks to Canada, France and GTR, which more than offset the weak shipment performance in the U.S., where despite the positive Q3, we were primarily impacted by glass and logistics constraints as well as a tough comp base. I remind you that in the first 9 months of 2021, Grand Marnier grew by 43% in the U.S.

Last but not least, our Jamaican Rum portfolio. Appleton Estate positive overall, up 4.9%, both against a tough comp base, 38.2% as well as some supply constraints. Wray & Nephew Overproof grew by 22.3%, and again accelerated in Q3 where it grew by 40.1%, thanks to Jamaica and the U.S.

Moving on to our Regional Priorities, which grew by 23.5%. Espolòn doing very nicely, up 32% despite quite a tough comp base. Last year, the brand grew in the first 9 months by 41.1%. We saw an acceleration in Q3, up 53.9%, and this was clearly driven by the core U.S., partially due to the -- thankfully, our ability to recover inventory levels to avoid out of stocks. International markets continue to do well, but I think they'll come more online once more capacity hits our network.

Moving on to the Italian bitters, the specialty is up 22.9%. Strong growth all across. Averna and Braulio grew largely thanks again to the on-premise in Italy, with Averna also registering strong growth in the U.S. and Austria. Frangelico grew in the U.S., Spain and Germany, while Cynar grew double digits across many markets, notably Italy, France, Argentina, the U.S. and Brazil. Our sparkling wine portfolio was up 24%. Very positive performance, thanks to France, where the key hero brand is Riccadonna, as well as Mexico and Argentina, where in this case, it's much more Cinzano driving it all. We've had some positive growth across Italy, Spain and Germany. However, in Germany, the results could have been much better hadn't we had the glass constraint issues.

Moving on to Crodino, up 22%, 22.2%. Again, very positive performance, very strong growth in its core market, Italy and seeding markets are doing very, very well, particularly Germany, Benelux, Austria, Switzerland and the U.K. And the brand will continue to expand its international footprint, and we believe will become the go-to non-alcoholic aperitif.

The GlenGrant doing very nicely, up also 38.1%, strong performance overall, driven by the premiumization, and in particularly, very strong results in South Korea. Moving on to Aperol Spritz, which are the ready-to-enjoy, which I also nominated earlier, up 43%. Again, very strong growth across all our markets and particularly in Germany.

Magnum, down unfortunately, 3.3%. Clearly, this brand was impacted by continued procurement constraints, with ingredients and glass becoming quite challenging throughout this year. The other brands, very nice positive growth across the portfolio, particularly Bisquit & Dubouché, our cognac, which is in its first year, the relaunched Montelobos, Ancho Reyes and Maison La Mauny. As mentioned earlier, Forty Creek declined due to phasing into the new packaging.

To close it all off with the Local Priorities, organic growth here was only, only in brackets, 7.2%, with Campari Soda up 8.9%. And clearly, we see the culprit, the 2 culprits here in terms of size, the Wild Turkey ready-to-drink business obviously impacted, down 0.4%. The ocean freight constraints were very, very challenging. The situation is improving. But unfortunately, it's not going to be the most positive year in the brand's history. X-Rated down 8.9%, doing very nicely in South Korea, but clearly down in China due to the snap lockdowns. SKYY grew in core Mexico, up 19.1% and Cabo Wabo continuing to perform double digit, up 32.4%, thanks to the core U.S. market.

At this stage, I'll then pass on to Paolo.

[Paolo Marchesini, executive]

Thank you, Bob. If you follow me to Page 10, where we have the analysis of the P&L. As we saw before, the top line net sales came in at EUR 2.006 billion, showing a very healthy 27.3% reported change and a year-to-date organic growth of 19%, which is totally confirmed by the trend in the last quarter of this year, Q3 was an 80.6% organic change.

EBIT adjusted came in at EUR 492 million showing, again, a very healthy 36.8% reported change and an organic change of EBITDA adjusted of 21.5% in value, with a 50 basis point margin accretion. Such very healthy results were achieved on the back of gross margin increase of 15.8% in value, with a dilution of 160 basis points, largely driven by the expected dilution in the third quarter of this year, which accounted for a 430 basis points. Such dilution was due to heightened cost inflation, particularly glass and logistic costs had a negative impact; and second, due to the favorable -- to the less favorable sales mix due to the outperformance of Espolòn in the South American region. Those 2 negative factors were only partly mitigated by the initial impact of successful price increases. It's worth noting that some of our price increases were implemented at the back end of the quarter in August and September.

A&P expenses were up in value by 14.8% organically, reflecting our sustained investments behind key brands. But due to the very strong top line growth of 19% on a year-to-date basis, they showed a 60 basis point margin accretion. Same trend for the SG&A expenses, which increased by 10.5% in value and again, lower than top line. And in so far, they generated 150 basis point margin accretion.

If you look at the reported change in EBIT adjusted, as I said, 36.8% in value included a positive perimeter effect of EUR 3.3 million, driving 20 basis points margin accretion, which was due to the combined effect of agency brands termination on one hand and first-time consolidation of Picon on the other end. And then secondly, again, a positive forex effect of 14.4% in value, corresponding to EUR 51.7 million with very healthy 100 basis point EBIT margin accretion, which was driven by the appreciation of the group currencies versus euro, in particular worth mentioning the positive transactional effect of the U.S. dollar, so imports to the U.S. Overall, the EBITDA adjusted on a reported basis grew, including all the perimeter and FX effect, by 180 basis points, from 22.8% to 24.5%.

If we move on to the following chart, below EBITDA adjusted we see operating adjustments of EUR 26.1 million due to the 3 factors: provisions, first and foremost linked to the Russia-Ukraine conflict; ongoing restructuring initiatives; and long-term retention schemes. Financial expenses came in at almost EUR 11 million, EUR 10.9 million, with a reduction of EUR 0.5 million, for which nonrecurring exchange gains accounted for EUR 7.6 million in the first 9 months versus EUR 3.9 million of last year, coupled with negative financial adjustments of EUR 4.5 million versus positive adjustments of EUR 4.7 million in the first 9 months of last year.

Now if you exclude those nonrecurring effects, the net financial expenses came in at EUR 14.1 million versus EUR 18.5 million over the first 9 months of last year, showing a reduction of EUR 5 million. The average cost of net debt was then 2.1%, with a healthy improvement of 30 basis points versus last year on the back of higher interest income generated by existing liquidity. We still have a negative carry. If we carve out the negative effect, the negative carry effect, the average cost of net debt, excluding carry, would be 1.5%.

Group profit before taxation came in at EUR 452.7 million, up by 32.7% in the first 9 months of this year. And group EBITDA adjusted, excluding operating adjustments of EUR 26 million and negative financial adjustments of EUR 4.5 million, came in at EUR 483 million with a value growth of 40.8% versus the first 9 months of last year.

Moving on to the following page, 12, we see net debt of EUR 961 million as of 30 September 2022, up EUR 130 million versus December last year, but following some significant cash outlays, namely acquisitions for EUR 150 million, purchase of own shares for EUR 107 million, the dividend payment of EUR 67 million, as well as the expected increase in working capital as we progressively rebuild our internal buffer stock to manage prospectively the risk of out of stock.

In terms of leverage ratio, net debt-to-EBITDA came in at 1.5x as of the end of September, with a slight improvement versus the December of 0.1x, on the back of the huge increase in EBITDA versus last 12 months.

I think I'm done with the numbers. I would hand back to you, Bob, for some updates, interesting updates. Yes.

[Robert Kunze-Concewitz, executive]

Thank you, Paolo. I'll kick off with the business development updates.

As you know, in August 22, we acquired an initial 15% interest in Howler Head, which is a banana-flavored bourbon whiskey from Catalyst Spirits. And clearly, we have a medium-term route to total ownership of this key brand. And -- but from the very get-go, we obtained exclusive global distribution rights. Howler Head is a very interesting proposition. It is the official flavored whiskey partner of the UFC and it is one of the fastest-growing whiskey brands in the U.S. by leveraging the UFC's unique and really massive consumer audience. The brand currently is also available in Canada and recently expanded into the U.K., so we're very much at the beginning of its trajectory.

Bourbon whiskey is clearly one of our global priority brand pillars, and this is some area where we'll continue to focus in the future. The brand itself is an ideal fit to our bourbon portfolio. As you know, we've always said we're not going to do any flavor expansions on the Wild Turkey core brand, so clearly this is our way to address the opportunity, which is huge in the U.S., for flavored whiskey via a dedicated brand with a very, very unique flavor profile. We will leverage our established route to market and expect to take this brand to the next level.

At the same time, though, we also recently acquired a minority stake in London-based Catalyst Spirits, which is a global spirits brand incubator company and currently is the main shareholder of Howler Head. So this is a very interesting, I think, development for us. Catalyst is headed by industry veteran Simon Hunt, and its mission is to build digitally native brands, matching each brand in the pipeline with the right entertainment and marketing platforms to build and rapidly grow premium brands. So this is going to be very exciting going forward.

Moving on to Campari. A lot of key initiatives following the Cannes Film Festival. We were the main sponsor of the Venice International Film Festival. Again, that has been very, very positive for the brand. At the same time, in September, we kicked off the 10th anniversary of the Negroni Week, which has now reached 79 countries and 10,000 bars. As you know, the Negroni is the world's #1 premium cocktail. And some very interesting things are happening to it. I don't know if you followed it, but there's currently a Negroni Sbagliato craze, which was kicked off by the actress Emma D'Arcy of the House of the Dragon star fame, through in a TikTok interview, clearly underlining the fact that the Negroni Sbagliato is her favorite cocktail. And this has really generated huge buzz in the social world, a lot of coverage. And I wouldn't be surprised if the Negroni Sbagliato becomes the fourth dedicated Campari cocktail in the top 16 in the world.

Moving on to Crodino. As you've seen from the numbers, the international expansion is actually proceeding very, very nicely with very strong consumer reaction to the brand in the U.K., in Australia, as well as Spain and France and the Germanic part of Europe. Espolòn, we are -- we just launched, in the U.S., the Espolòn Cristalino. This is a very premium new variant that cost twice as much as the base Espolòn Blanco. Again, we will see the very strong consumer reaction to that, and we look forward to driving this and having very nice mix effect on the brand. The bitters also had very strong activations.

So this brings us to the conclusion and the outlook. Clearly, the strong top line performance continued in our key summer season, thanks to very robust brand momentum, continued on-premise strength and favorable weather, which helped as well. We also started seeing the initial impact of our successful price increases.

Now looking at the remainder of the year, we remain quite confident about the positive business momentum with the outperformance of our key brands versus our reference markets, where thanks to strong brand equity, we will continue to take market share. Shipments are expected to normalize, and that's normal in the last quarter because it will reflect the seasonal sales mix with -- clearly, it's not the peak season for aperitifs, and at the same time, it is peak season for some developing markets in South America and other parts of Europe, particularly Russia, although as you know, we're only selling them as necessary to cover costs there. And we will continue, unfortunately, for a while still to have supply chain challenges in selected areas, particularly in APAC.

Concurrently, the environment is what it is. Volatility and uncertainty will remain due to both, on the one hand, the ongoing pandemic as well as the heightened geopolitical tensions, which have also, due to the squeeze on energy prices, has generated elevated inflational pressure, which we will mitigate via pricing, adequate pricing. Notwithstanding the margin dilution in Q3 due to the expected heightened COGS inflation and less favorable sales mix, we still confirm and are quite confident on our full year guidance of that organic margin in adjusted EBIT. We expect to continue to see a positive contribution in forex to be driven mainly by the U.S. dollar.

Now looking at the medium term, we remain confident in the strength of our brands. We're confident in passing adequate pricing actions as well as doing whatever it takes to navigate throughout these current challenges. This is it from our side, I'm happy to take your questions.

[Operator]

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

[Andrea Pistacchi, analyst]

Two questions, please, the first one for Paolo. I'd like to dig a bit deeper, please, on the gross margin. So if you could talk about and ideally maybe quantify some of the moving parts that led to the 430 basis point decline in Q3? And what of these moving parts get better? What doesn't? How you expect gross margin to develop maybe in Q4? And if you could say something about next year?

And then the second question for Bob, please, on Italy. I mean Italy is up almost 50% from 2019. What gives you confidence that the business will be resilient in the next 12 months? And also, how would you assess the risk of potential destocking in Italy? I mean I don't think it's an issue for you now, at least. But a brewer last week, as you know, called out some destocking affecting them at the end of -- at the end of Q3.

[Paolo Marchesini, executive]

Thanks, Andrea, for the good questions. So with regards to the margin trend, clearly what we're seeing at the moment, in an environment that is clearly extremely volatile, is that at least on 2 cost components, that are glass and logistics cost, there is -- had cost and volumes and mix. Now clearly, there are some offsets. Clearly, the price is what we're trying to manage to its full potential. I said before, we've taken further measures of the price increase at the back end of the quarter, August and September, in selective markets. So some of the offset will materialize in the coming months.

And secondly, the mix. Clearly, the mix is a plus and a minus at the same time. It's clearly -- it's been a plus in the third quarter because clearly, we have a positive mix that on top of price increase help us offset the COGS increase. But paradox between -- in the peak season of aperitifs vis-a-vis COGS, we have a higher impact of cost increases. It is the fact that, differently from aged spirits in aperitifs where you have the higher weight of glass on the overall cost of goods sold, it's where you see the highest risk in inflation.

So I think looking forward, in the third quarter, we will realize it on positive mix. But on the other hand, the COGS increase per -- in value per SKU will be smaller. Then of course, there is another element that is extremely important, that drove 100 basis point EBIT margin expansion is the transactional effect -- the FX transactional side, driven by the appreciation of dollar versus the euro currency. And this is tied to the export of Campari, Aperol and Grand Marnier into the U.S. market. So this is destined to remain in the fourth quarter of the year and also in 2023.

And then, of course, last but not least, the very strong top line growth is generating some interesting operational leverage, primarily the level of SG&A, we have to say, because we're backing up A&P spend. Marginally we will have some positive effect in A&P on sales, but I would say marginal. But most of the operational leverage is coming from SG&A that are not growing as fast as the top line, not enough. With regards to 2023, our objective is 21st of Feb comes as we disclose the full year results, we would like to review the guidance for margins on the back of having finalized all the 2023 agreements with our suppliers, and having had the opportunity of seeing a little bit better how the cost trend goes in the back end of this year. So that's our current game plan.

[Robert Kunze-Concewitz, executive]

Andrea, with regards to your question, there's quite a gap between the doom and gloom which is being depicted in the media and actually what is happening in the marketplace. I mean we're continuing to see very strong consumption and demand for our brands in the on-premise. I mean if you go around in any Italian city, you'll see everybody is out every single evening, the terraces are full. And again, you see waves of orange and of red. So there is a very, very big difference.

Now going forward, you could tell me, yes, consumer sentiment is bound to worsen overall. I would agree with that. But bear in mind that the long aperitif, which is an Italian tradition, is a great, let's say, compensation in moments of crisis as people transition from going out to restaurants to actually spending their evenings in more lounge-style aperitif places, where for the price of an Aperol aperitifs, an Aperol Spritz or Campari spritz or a Negroni anywhere between EUR 5 and EUR 10, you have free of charge access to food buffet. We've seen this many times. We've seen this in the global financial crisis. We've seen it during the European crisis a few years later. So we feel pretty good about maintaining strong consumer demand in Italy. And bear in mind that currently, although the Italian numbers are strong, actually we weren't able to supply Italy with all the Aperol and Campari which they requested. I mean the brands are on fire globally and we are having capacity constraints on them as we speak.

Now with regard to the second part of the question, destocking risk, frankly, there isn't much stock at wholesale level on our brands to destock. So currently, the demand is feeding directly -- consumer demand is feeding directly into shipments pool from wholesalers.

[Andrea Pistacchi, analyst]

Just one quick clarification on Paolo's answer, please, on the gross margin. So looking into Q4, from what I understand and what you said is that there are obviously some moving parts. Pricing will benefit gross margin into Q4. Mix, there are some puts and takes. But it sounds as if maybe it improves a bit, but not significantly, the gross margin into Q4. Is that a fair understanding?

[Paolo Marchesini, executive]

Yes. In -- we expect in the fourth quarter to have, as you know, the top line, the [ phasing ] normalizes. We will rely less on operational leverage vis-a-vis year-to-date. Whilst on the other hand, the negative effect of gross profit as a percentage of sales organically will get reduced, so that's what we're trying to achieve for this year. So that's the underlying idea. But the goal -- our goal is to have a full year EBITDA on sales flat, that's the goal.

[Operator]

The next question is from Simon Hales of Citi.

[Simon Hales, analyst]

Two questions from me. I mean, Bob, just sort of following up on your answer around sort of the resilience that you're seeing in Italy there. I just sort of wondered more generally if you are seeing any real signs across your geographies of changing consumer offtake trends towards the end of the quarter and into perhaps early Q4. Clearly, we're hearing mixed picture out of some of your other alcoholic beverage peers at the moment. Is there any channel shift going on that you're seeing any down trade more generally within the spirits industry that you would perhaps call out? So that's the first question.

And then secondly, in your outlook sort of, Bob, and you flagged in the presentation shipments normalizing in Q4. I just wonder if you could just clarify those comments. I mean you flagged the fact that obviously it's not an aperitifs quarter and sort of the portfolio mix is perhaps different. But you're not calling out any particular phasing sort of change, i.e., stock build in Q3 and now some destocking within the trade in Q4, are you?

[Robert Kunze-Concewitz, executive]

Thank you, Simon. Well, I mean first of all, with regards to stocks, not only in Italy but in all of our key markets, our stocks are currently very low. I was referencing the Espolòn brand. Espolòn at the end of June, had less than weeks stock in the wholesale in our distributors' warehouses. We've had significant out of stock across our portfolio most of this year. As I said, demand is stronger than our ability to supply at this stage. And so coming back to your question, it's not a question of phasing changes.

With regards to any change in sentiment, frankly, on our portfolio, we're not seeing any change in sentiment anywhere else. I mean yes, the off-premise has had a slowdown in its growth. So it's usually flattish or slightly down in most markets, but this is from a very, very high level. And on the other hand, frankly, we're seeing revenge consumption in the on-premise. I mean the on-premise is very vibrant across all of our markets.

[Simon Hales, analyst]

Got it. That's very helpful. And just sort of following up with regards to the price increases that were going in, in sort of late in Q3. Were some of those second round price increases on Aperol and Campari in Europe?

[Robert Kunze-Concewitz, executive]

Yes.

[Simon Hales, analyst]

And have you quantified the magnitude of those price increases this time at all?

[Robert Kunze-Concewitz, executive]

No, we're not quantifying them, for competitive reasons.

[Operator]

The next question is from Laurence Whyatt of Barclays.

[Laurence Whyatt, analyst]

Couple from me, if that's okay. Firstly, on your advertising, I understand you have a target of getting to around 18% of sales. That would required quite a considerable step-up in the fourth quarter, just given the fourth quarter is not too much of a aperitif quarter. Is that still the intention?

And then secondly, I understand your travel retail mix is going to be a little bit less Asia exposed than some of your peers. Is it right to assume that your travel retail is now back to the pre-pandemic levels? Or would you still expect a step up in travel retail if we get our Chinese consumer returning to the airports?

[Robert Kunze-Concewitz, executive]

Laurence, thank you. Now with regards to GTR, I mean unless there's any major wave of COVID-related lockdowns, we would expect it over time to continue growing and within probably next year getting back to the pre-pandemic levels. So we're not fully there yet.

With regards to A&P and advertising, yes, we are looking at coming back at our usual levels on a full year basis. First Q, it's not strong for aperitifs in Europe. But obviously, we have opportunities in South America, in Asia Pac. So we will continue investing behind them in those regions. And on the other hand, it is the peak season for brown spirits in Europe and North America.

[Laurence Whyatt, analyst]

Great. So just to clarify then, you would expect to hit that 18% this year?

[Robert Kunze-Concewitz, executive]

Yes. I mean, give or take, 25, 30 bps.

[Operator]

The next question is from Edward Mundy of Jefferies.

[Edward Mundy, analyst]

Three for me, please. The first is, I appreciate that the on-trade is still very, very strong, but if it does weaken, do you think that habit formed from consuming at home during the pandemic will allow you to sustain growth in a soft environment through not losing consumers from adverse channel mix?

The second is on M&A. I appreciate that there's not so much you can comment on M&A, but you've done a number of small bolt-ons, Howler, Picon, and then the Catalyst move. And some of your peers have done some recent bolt-ons as well. Do you think this is the more likely route for M&A rather than major transformational deals for Campari?

And then just a third one on the Campari brand itself. I was wondering you had a split as to how it's served between its various variants, Negroni, Boulevardier, Campari soda. And essentially, I'm trying to sort of understand how big is the Negroni Sbagliato.

[Robert Kunze-Concewitz, executive]

The last one is a tough one because I don't have any up-to-date numbers here. We usually do them on a full year basis. All I can say is that in many markets, we've seen Campari really accelerate in the past 2 weeks with strong demand from the on-premise. So we suspect that it is the Negroni Sbagliato pushing that. If you look at a market like Italy, one important factor is the Campari spritz, which is currently 1 out of 5 Camparis growing very, very strongly. And we're seeing also that basically expanding across all key Campari markets.

We historically haven't pushed the Campari spritz because we wanted to focus on the Aperol Spritz. But the consumer demand is coming from the ground up. And at this stage, we're also highlighting it. So we would expect the Negroni and its variants, because the Americano, the Sbagliato, the Boulevardier and the Negroni, they're all related to be a substantial part of the business. But then -- and this is in the serious high mixology. And on the other side, we have the larger volume opportunities with the Campari spritz, Campari [ seltzer ], Campari Soda.

[Edward Mundy, analyst]

And the Sbagliato, is it a bit more gender-neutral in terms of who's consuming it?

[Robert Kunze-Concewitz, executive]

Yes. I would say if the Negroni, traditional Negroni skews a little bit more male, the Sbagliato skews a little bit more female. With regards to your question, what if the on-premise tanks, well, we still don't see that happening, but if it does happen, and I think we've proven amply to the market how agile we are. And the way we pivoted during the first lockdown, clearly, we'll be able to pivot that same way from an organizational standpoint.

Having said that, at this point, though, we will start from an advantage because people have already built their bars. They already have the know-how. So we'll have to do less, I think, educational efforts, but much more focus on rotation and driving initiatives.

[Edward Mundy, analyst]

And then on M&A, Bob?

[Robert Kunze-Concewitz, executive]

I was trying to skip that one. Look, I mean with regards to the M&A, I never say never. I think clearly, big transformational deals aren't things which happen overnight, yes. I mean they take their time. We've done some bolt-on deals, nice ones, which will have, I think, quite an impact in the mid- to long term. Having said that, our teams are quite active. So you never know.

[Operator]

The next question is from Chris Pitcher of Redburn.

[Chris Pitcher, analyst]

A couple of questions from me. Bob, you mentioned you were selling the minimum amount in Russia. Can you give us a sense of how much Russia is down? Because obviously, Q4 last year was a big quarter for Russia. I just wanted to understand how much of a drag that could be on the final quarter of the year.

And then, Paolo, with regard to CapEx. Forgive me if you've touched base on it. But with the strong growth and talking about supply constraint, does the current CapEx guidance still stand? Or are you having to up that further given the momentum?

[Robert Kunze-Concewitz, executive]

I'll take the first one, Laurence -- I mean Chris, sorry. Yes, I mean in Russia, we're going at a very, very low flame, and that's the reason why we said there's going to be also a normalization on our overall shipments in Q4.

[Paolo Marchesini, executive]

Yes. With regards to CapEx for this year, we've given a guidance of EUR 170 million, of which about EUR 100 million maintenance and EUR 70 million one-off. On the other hand, given the pressure, unexpected pressure on demand on our aperitifs portfolio, we've decided to double the [ Negroni ] brand. So there is an additional EUR 50 million in investment. Clearly, that would not fix the short-term pressure on supply. So we also are finalizing outsourcing [ some manufacturing ] agreements to hedge the risk for 2023 in terms of supply constraint for our aperitifs portfolio.

So I think with regards to 2023, at the moment we believe that we will not be constrained, thanks to the contract manufacturing agreement that we have to finalize in a very short period of time. But on the other hand, we need to think at the future. And so we've decided to double now with Negroni brands, because the brands are growing quite quickly. And every cycle, we keep on reviewing our demand when it comes to a point where you've completely saturated your available production capacity seasonal, where we are now.

[Chris Pitcher, analyst]

Okay. So you said that was an extra EUR 50 million. Is that phased over the year?

[Paolo Marchesini, executive]

5-0. Yes.

[Chris Pitcher, analyst]

5-0, all this year or into next year as well?

[Paolo Marchesini, executive]

Well, it depends also supply of equipment is constrained. So we're living in a very volatile environment. So we don't know whether we will be able to invest all that amount of money this year. Most likely, it will take more than a year.

[Operator]

The next question is from Trevor Stirling of Bernstein.

[Trevor Stirling, analyst]

Three questions from my side, please. The first one, Bob, you talked about normalization of growth. First 9 months was a 13.7% CAGR versus 2019. Are you expecting that to slow down? I appreciate you don't want to put a number -- precise number on it, but is it going to be something in the order of 10%? Could it go below that? Are you -- any sort of directional steer you can give would be great.

Second one, Bob, you're talking about the cost inflation being very high. Presumably, assuming energy prices stay high, the glass prices will stay high, but the freight rates should start to drop out. Any comment on how you think that might happen and the phasing of that would be great.

And then finally, Bob, Paolo probably as well, FX, I think, was 180 bps benefit to margin in Q3. You said that probably continues into Q4 and H1 '22 -- '23 rather. Is it right to think about the same order of magnitude of benefit on margin?

[Paolo Marchesini, executive]

I'll take the second answer. With regards to the cost inflation, yes, the 2 biggest components are, as said, glass and logistic costs. With regards to logistic costs, directionally, we believe they are resting to come down. With regards to cost of glass, that is driven by the cost of energy. We think, again, prospectively, costs will come down. I don't believe in the very short term.

I think when it comes to both glass costs as well as freight cost, demand has a huge impact. If you think at glass suppliers, furnaces, they have very high fixed cost. At the moment, the glass suppliers, they are enjoying quite healthy EBIT margins at an all-time high. And this is not just driven by cost of energy because this is a wash. They have higher costs and they pull through higher costs. But it's also due to the fact that they are taking price disproportionately due to imbalance between demand and supply. So we believe the installed capacity is well below the current demand. The daily demand comes down, hopefully not on our portfolio, I think we will see a significant decrease in cost of glass. But for the time being, if anything, we've seen an acceleration. So I'm with you. I think Q4, the first half of next year, potentially the [ plan is ] to stay, and thereafter, we believe we will have easier comps and easier trends.

[Trevor Stirling, analyst]

Super. Thank you, Paolo. And the FX benefit, the margin benefit from FX?

[Paolo Marchesini, executive]

Yes, the FX is, to stay here, it is way stronger in 2022 versus 2023, so in Q4 is still a positive. And I think nobody has a crystal ball where the FX goes. But I think a low to mid-single-digit positive value effect for next year is at the moment in the cards.

[Robert Kunze-Concewitz, executive]

Yes. Trevor, now one other point with regards to freight. You need to bear in mind this year that due to the constraints in trans-ocean shipments, we actually had to fly quite a bit of product on planes. So that clearly had an additional impact. I mean we preferred serving the market and taking the hit to going out of stock much longer than needed.

With regard to the normalization of growth. I mean as I said earlier to Chris, I mean clearly, Russia is going to impact Q4. And the month of December has historically been huge in Russia, and that impacted the overall group. This year, it's not going to. If you look at the mix issue, again, that will happen. And also bear in mind that we do have very strong demand, but we are actually constrained. So that is going to impact that and result in normalization of shipments over the quarter.

[Operator]

The next question is from Paola Carboni of Equita.

[Paola Carboni, analyst]

[Technical Difficulty]

[Robert Kunze-Concewitz, executive]

Are there any further questions?

[Operator]

Yes. Yes. Paola Carboni is on the line. Can you hear us? Can you hear me? Ladies and gentlemen, please hold the line. The conference will resume shortly.

[Technical Difficulty]

Okay. Your line is open. Ms. Carboni, you can go ahead.

[Robert Kunze-Concewitz, executive]

Apologies, first of all, to all. We've had a technical issue here. We don't know if it's on our side or on the operator side. But Murphy definitely came and made his presence felt. So now we're back in another room, and I'm happy to take any additional questions.

[Paola Carboni, analyst]

Okay. Yes. My first one, which is about the SG&A line in the third quarter, I have seen an acceleration compared to the previous quarter, both year-on-year and also on a 3-year stack, which is a bit above my estimates compared to the acceleration we saw in terms of revenues, especially when considering that most of this line speaks for you. So can you elaborate on this, if there is anything that we should be aware of for the third quarter and what we can expect for the current quarter?

Then the second question is on the COGS inflation. Your latest indication was of about EUR 70 million, 7-0, if I remember correct, has an impact of COGS inflation based on full year '21 cost base, so at the same volume clearly. So I was wondering if you can update us with the same kind of indication as of now.

And the last question of that is still about COGS inflation, but looking more to the fourth quarter, let's say. I was wondering to what extent the profitability, the gross margin we are going to see in the fourth quarter and in particular, the gross margin risk that we are going to see in the fourth quarter is indicative for at least the first part of 2023. In particular, just on COGS inflation, if I look to glass in particular, I was wondering whether your negotiation, let's say, would already have an impact in the fourth quarter. So what's the timing of any revision you might have from your suppliers? Thank you very much.

[Paolo Marchesini, executive]

So with regards to the SG&A trend on a quarter-by-quarter basis, we wouldn't read too much into the third quarter trend. So I say, confirm our objective of extracting operational leverage of -- on SG&A on a full year basis. So yes, that's -- so SG&A will grow for this year, the lower base vis-a-vis top line with regards to the cost trend.

So the question is the negative gross profit as a percentage of sales number that you've seen supported indicative of like end of the year or the beginning of next year, I think it's a moving target for this year. I think we will stay negative in the first quarter, but we're catching up with price increases. On the other hand, we already said before, we can leverage on transaction effect and operational leverage to offset the negative trend, EBIT level.

[Paola Carboni, analyst]

And sorry, an update on the COGS inflation. The magnitude you had indicated of EUR 70 million or what would be at present for the year?

[Paolo Marchesini, executive]

It is marginally higher, it is rationally higher. But conversely, we're taking more price than [indiscernible] foreseen.

[Operator]

The next question is from Pinar Ergun of Morgan Stanley.

[Pinar Ergun, analyst]

Mine is on your pricing strategy. You have some excellent brands. You're telling us that demand is so strong for your brands that you're struggling to supply them, so that's all fantastic. And then on the other hand, you're also telling us that costs are going up and are likely to stay challenging as we head into next year, especially on the glass side.

So here's my question, why not take pricing more aggressively, given how popular your brands are and how challenging the cost environment is? Because quite frankly, the gross margin evolution was maybe a little bit less ideal than what we would have expected so far. So I would love to get your thoughts on that.

[Robert Kunze-Concewitz, executive]

Pinar, thanks for answering your own question.

[Pinar Ergun, analyst]

All right. So you're going to raise pricing more aggressively is how I should read it?

[Robert Kunze-Concewitz, executive]

Well, it will vary across the portfolio, But clearly, there is opportunity. And we said in our presentation that we will take adequate price increases.

[Pinar Ergun, analyst]

And what's held you back year-to-date, if I may ask, please? Is it just a timing impact?

[Robert Kunze-Concewitz, executive]

Well, we've taken our usual price increases in the first half of the year. And in certain markets, we've taken a second round of price increases in August.

[Operator]

[Operator Instructions] Excuse me, there is one more question as a follow-up from Paola Carboni of Equita.

[Paola Carboni, analyst]

Just, let's say, to a definite message on profitability. If I understand correctly, you said that the impact on COGS is marginally higher than was envisaged a few months ago. At the same time, you are raising pricing more aggressively. So in the end, I appreciate you have confirmed your flat margin guidance for the year. But can we say at least we are a bit more, and now also given that we are already at the end of October, let's say. Thanks.

[Paolo Marchesini, executive]

So I'm not sure I totally got your question. Your question is are we totally confident that we are achieving the EBIT margin flat this year?

[Paola Carboni, analyst]

Yes, exactly, or even largely confident, I'll say.

[Paolo Marchesini, executive]

It's a crystal ball question. We are highly confident we will achieve that. Clearly, it's so many moving parts. We also have to consider that we have supply constraints, we have logistical strains and so it's not -- it's not a scenario where you can give the market 5 basis points, that's the right indication. So we are very confident to achieve that. And the business is quite strong. We're shipping all the product that we have agreed and that is higher. So we don't see any reason why -- the price increase that we've taken in sticks, so which proves the fact that particularly on high-margin brands, we are not exposed to high price sensitivity.

Clearly, when you have a huge drive on inflation, and we've seen that in hyperinflation economies, of course, you offset value increase in costs. So we're -- from a value perspective, we're not losing anything. From an optical perspective, we see dilution because when you have brands that have gross margin exceeds 70%, [indiscernible] inflation drives disproportionate increase in price, if you want to keep margins flat as a percentage of sales. That's the point that we're talking. But even if you park aside the positive mix effect, we're not losing in value vis-a-vis absorbing in value becomes increase. You see what I mean? So we are confident. It takes time. As we take price over the months and the quarters, we will also absorb the negative margin effect driven by the high marginality of our brands.

[Operator]

At the moment, we have no other questions registered.

[Robert Kunze-Concewitz, executive]

All right. Thank you very much. Just one last tip for the Negroni Sbagliato substitute, the gin with Prosecco, and build it the same way. So thanks for your questions and joining us. I guess we'll be active in the month of November. So we'll probably catch up with quite a few of you there. Thank you. Have a good day and bye-bye.

[Operator]

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