Remy Cointreau SA

PAR:RCO

Earnings Call Transcript 2021-Q1

[Operator]

Good day, and welcome to the Rémy Cointreau Q1 Sales '20/'21. Today's conference is being recorded. At this time, I would like to turn the conference over to Luca Marotta. Please go ahead, sir.

[Luca Marotta, Chief Financial Officer]

Good morning, everyone. Thank you for your participation to the Rémy Cointreau conference call for its first quarter sales '20/'21, so covering the period from April to June 2020.Today, we have 4 key messages to highlight. The first one, which is our performance during the first quarter. Clearly, obviously, the COVID-19 pandemic strongly impacted our business, as the on-trade channel was closed in most markets and we faced selective restriction of spirits sales, and we suffered collapse in the duty-free sales, along with the global airline traffic. Besides, these weak sell-out trends were amplified by some destocking actions decided by our wholesalers. As a result, our organic sales declined by 33.2% in Q1. With that said, with this negative performance, minus 33%, and that's my second message, our Q1 performance came in slightly above, slightly better our expectation. As a reminder, our June guidance was calling for a 45% decline. This is thanks to the consumption resilience in the U.S., strong consumption resilience, and the U.K. as well since the lockdowns. Excluding COVID, we estimate that our sales would have been slightly down in Q1, in line with our expectation.The third message of today is that concerning -- is concerned about depletions. So our Q1 value depletions, value, I repeat, have been trending slowly down year-on-year better than our sales trend, i.e., and reflecting the destocking that, as already said, we experienced in the past 3 months.In Asia Pacific, depletion trends showed a strong double-digit decline driven by Southeast Asia and Japan. But at the same time, China Mainland was flat, slightly down in terms of value depletions. In the Americas, depletion trends were up strong double digit, driven by booming at-home cocktail trends in the U.S., while at the same time, Canada and Lat Am were weak. In Europe, Middle East and Africa, depletion trends were down double digit across most subregion. Only notable positive exception were the U.K., which enjoyed strong at-home consumption; and to a lower extent, Germany and also Russia, even if on a very, very low basis as a comp.Global Travel Retail trends have been literally collapsing since March, with COVID-19 taking its toll on global air traffic. While air traffic stood at minus 80%, it is now back to minus 60%. But duty-free sales are decidedly lagging behind this kind of trend.The fourth message is the outlook. On the heel of this better-than-expected Q1 and unchanged, as we will see, Q2 expectation, we are calling for a moderate decline of organic sales in the second quarter, and we now anticipate our H1 operating profit for '20/'21 to decline by 35% to 40% in organic terms versus a minus 45% to 50% decline previously announced. So it's an improvement of the semester guidance in terms of operating profit.Now let's move to the next Slide #3 with the Q1 sales analysis. Sales amounted to EUR 150.1 million, down EUR 73.1 million year-on-year or a 32.8% decline on a reported basis. This reflects an organic loss of EUR 74 million, so which is 33.2% organic sales decline and a very slight positive translation currency impact of less than EUR 1 million, EUR 0.9 million, or 0.4% gain.Let's move to Slide #4, the usual one. As we just said, currency translation increased sales by EUR 0.9 million in the Q1. This was largely driven by the U.S. dollar with a gain of EUR 1.6 million, partially offset by the Chinese yuan and a number of other currencies. A little bit spread off, this negative effect for Canadian, Australian dollar and Russian ruble.Let's now turn to Slide #5, which shows our quarterly performance over the past 9 quarters and the 12 months moving or rolling organic performance of our Group Brands, which are shown in red. Mathematically, it stands at minus 16% at the end of June. And as you know, '19/'20 was a challenging year for us, and COVID-19 made even worse for the Q4. Now we feel confident that the worst is behind us, and we expect a gradual improvement in trend from Q2 onwards.Let's now turn to Slide #6, and let's start to dig into organic trends by region. Let's start with Asia Pacific, whose organic sales declined, dropped significantly double-digit into Q1 despite very good resilience in China Mainland. Greater China declined double digit in Q1 as the gradual improvement in value depletion trends was more than offset by wholesaler destocking actions decision. From a subregional standpoint, the good -- very good resilience seen in China Mainland and partially also in Taiwan was more than offset by weakness in Hong Kong, as you know, and in Macau.Looking at China Mainland, specifically, China home, value depletion were flat, slightly down in Q1, with June being back to growth, June being back to positive territories led by, in terms of product lines, Rémy Martin CLUB, LOUIS XIII and also our Single Malt Whiskies. From a channel standpoint, which is very, very, very important to highlight, the big contributor for China Mainland were: e-commerce, which accounted in the quarter for 36%, 3-6 percent, and up 35% year-on-year; and off-trade, which were clearly outperforming, making the direct sales global channel clearly reversing the previous trend compared to the indirect channel; while on-trade is lagging, clearly linked to the COVID consequence, but still growing start from June. So our balance for China Mainland is slightly positive, flat to slightly negative in depletion and positive compared to expectation in sell-in, but our expectations are improving day-by-day in China.The other subregion inside Asia Pacific were negative. Southeast Asia and Japan reported significant declines. While lockdowns have been gradually lifted, the on-trade channels remain largely closed or under strict social distancing restriction.Finally, sales in Travel Retail Asia literally collapsed, along with the air traffic in the region. End of June, Asia Pacific at sell-in at shipment level accounted for 24% of group sales, down 7 points versus last year.Let's talk about Americas now. America's organic sales were down low double digit in Q1. U.S. sales were down mid-single digits due to wholesaler destocking in cognac, partially offset by solid growth in Liqueurs & Spirits. From a sell-out standpoint, Rémy Cointreau brands grew clearly ahead of the market in the past 3 months driven by strong consumers' appetite for legacy brands, strong -- very strong at-home cocktail trends and growth of the e-retail. As a result, our Group Brands value depletion skyrocketed by 57% increase over the last 3 months, implying a plus 21% growth in the other 6 and plus 11% double digit over the 12 months' period ending June. We are talking about value depletions, I repeat.In Canada, the good St-Rémy performance was offset by weak cognac sales. And in Lat Am, sales dropped from double-digit due to weak domestic consumption and the fall in tourism. We also experienced a very limited sales, very, very limited in Travel Retail Americas. End of June, the Americas accounted for 56%, more than half of our sales, up 12 point.EMEA organic sales were down significant double digit in Q1. Generally speaking, we experienced a very weak performance in all EMEA subregion due to generally limited spirits at-home consumption and closed on-trade outlets during the quarter. The U.K. was the main exception with strong at-home consumption across our brands portfolio, offsetting the on-trade weakness. Some resilience and good result also in Germany. Russia was mathematically robust, but albeit on easy comps. In EMEA as well, not different from the other regions, Travel Retail channel, was under very, very strong pressure. End of June, the EMEA region accounted for 20% of our group sales, down 5 points versus last year.So let's now move to Slide #7, our Q1 sales trend by division, no more by region but by brands, by division. Our 33.2% organic sales decline for the group was driven by a sharp, strong 39.2% decrease in cognac sales, while Liqueurs & Spirits were down a more limited 17%, and Partner Brands declined 21.1% due to the significant exposure to Western Europe.Let's now turn to Slide #8 and the analysis by division and by brands, and let's start with cognac. As we just mentioned, the House of Rémy Martin posted a strong organic decline of almost 40%, 39.2% in the Q1. Within Asia Pacific, for House of Rémy Martin, Greater China reported a double-digit organic sales decline despite, as already said, good resilience in Mainland China. As already mentioned, the sell-in -- the shipment were impacted by COVID-19, as the on-trade channel only gradually recovered during the quarter starting from June as well as destocking from wholesaler were decided by them in a cautious manner. In Mainland China, value depletion trends were flat, slightly down in Q1 but positive, I repeat, in June led by e-commerce, very good off-trade trends in terms of products exposure, CLUB and LOUIS XIII. And also on a minor note, but it's important on a dynamic note, improved -- improving the on-trade performance.Sales in Southeast Asia and Travel Retail Asia declined -- both declined a strong double digit due to significant on-trade restriction in most markets of the region and the collapse international flights and duty-free purchases. One exception was Australia which showed good resilience with strong at-home consumption, which is quite the same thing on a lower extent compared to the U.S. and the U.K.In the Americas, cognac sales declined double digits, mostly driven -- negatively driven by the Travel Retail business, Canada and Lat Am, while U.S. sales only declined in the low teens. Despite the stock impression from very cautious wholesaler across the cognac category, our 1738 Accord Royal sales were up double digit in the quarter. And looking at the cognac depletions in the U.S., very strong at-home consumption more than offset the on-trade weakness. So this translated into a whopping plus 76.5% increase in our volume depletion the last 3 months. And on top of this strong volume trends, price/mix effects were positive by 1 point in the 12-month period ending June 2020. But we need to say negative in the last 3 months in terms of valorization at depletion level as a result of the product mix evolution.In Europe, Middle East and Africa, cognac sales declined strong double digit, led by weakness in most markets as well as in Travel Retail. And the only exception, as I already mentioned, were the U.K., with strong at-home consumption; and Russia, which benefited from easy comps; and partially Germany.Concerning the volume/value equation for the cognac business, the 39.2% cognac sales decline was driven by a 31% volume drop and 8% price/mix loss. End of June, the House of Rémy Martin accounted for 66% of our sales, so down 6% year-over-year.Let's now move to Slide #9, an example of partnership in the e-commerce e-retail channel and the case with the Drizly in the U.S. Drizly is the #1 e-commerce platform in the U.S. for spirits, with more than 2,500 sourcing retail partners. Our Q1 partnership consists of the enhanced search result and product pages, including recipes, for instance, as well as banners on the cognac category. Rémy Martin sales on Drizly were multiplied by nearly 6x over the past 3 months with top states, including California, New York and Massachusetts, playing a big role inside that performance.Let's now turn to Liqueurs & Spirits division, Slide #10. Liqueurs & Spirits division posted 17% organic sales decline in Q1, so better than the weighted average of the group. The decrease was entirely driven by EMEA and Asia Pacific region, while the America showed good growth in Q1. Looking at the volume value equation for Liqueurs & Spirits for Q1, the 17% organic sales decline was entirely driven by volume, while price/mix was a 7-point gain. End of June, Liqueurs & Spirits division accounted for 31%, up 6 points compared to last year.Let's now review in a very synthetic way the performance in major brands, most important brands for the division, starting with Cointreau. Cointreau posted a slightly positive organic growth in the Q1, which is a remarkable, very important and significant performance in the COVID context. This was driven by strong -- very strong double-digit growth in the U.S. but mitigated by EMEA, Asia Pacific and Travel Retail. Very strong U.S. performance was fueled by strong at-home consumption and the success of Cointreau focus on the original Margarita Cocktail, plus 25% depletion trends the last 3 months despite the closure of the on-trade channel, which we have to remember, it's not the same as the cognac in the U.S. Here, we are talking about 45% off-trade and 55%, 5-5, on-trade. So the closure should have been impacted -- should have impacted much more than witnessed. So the result are really, really good and really encouraging.Besides, price/mix benefits added 1- to 2-points in the 12 months' period ending June 2020. So very strong Cointreau, both on sell-in and sell-out and on top, marginal valuation and value depletion level.Sales of our Greek brand, Metaxa, declined double digit into Q1, mainly driven by the shortfall in global retail and -- Global Travel Retail and weakness in some key European markets, while Eastern Europe proved to be resilient.Mount Gay recorded a low double-digit sales decline as the -- the relaunch of the brand portfolio is starting to kick in.St-Rémy posted double-digit sales decline led by shortfall, like Metaxa, in Global Travel Retail, while the brand enjoyed a strong growth in the U.S. and also in Canada.Similarly, The Botanist and Single Malt Whiskies sales fell double-digit due to shortfall in Global Travel Retail. The whiskies continue to enjoy solid growth in the U.S. at the same time.Now let's turn to Slide #11 with a focus on the relaunch of Mount Gay's portfolio range. First, a word on the philosophy of the relaunch. We see a significant opportunity in the high-end rum category, which has been growing close to 20% per year in the past 5 years. Discerning clients are looking for brands with expertise, heritage and craftsmanship, and we think Mount Gay has all the assets to succeed. As you know, it's the world's oldest room with a unique terroir in the Barbados Island. Our ambition is to establish Mount Gay in the league of high-end aged spirits.To start to achieve that, we just launched a new portfolio with new blends and upgraded packaging in addition to a new communication and activation platform around more than a rum. The new portfolio consists of Eclipse whose blend is unchanged; a new Black Barrel, slightly more aged and now finished for 6 months in bourbon cask; and a new, more rich -- richer XO, also slightly more aged but more importantly, agent write-up of cask, American whiskey, bourbon and cognac, given to this product a richer profile and a round of taste easier to sip. Shipment to the U.S., Western Europe and Asia Pacific have started in the Q1, but the launch in Travel Retail, which is a very important market for Mount Gay, has been postponed to 2021 because of the COVID.So let's now turn to the last slide, Slide #12, and the '20/'21 outlook. With better-than-expected Q1 sales and unchanged Q2 expectation that we see in a moderate organic decline, we now anticipate H1 '20/'21 operating profits to decline by 35% to 40% in organic terms before we were guiding to 45% to 50%, clearly at same scope and same exchange rate. Despite limited visibility, the group expects a strong rebound in H2 2020/2021, led by U.S. and Mainland China.And I will now be very happy to take your question to try to answer. Thank you.

[Operator]

[Operator Instructions] We will take our first question from Laurence Whyatt from Barclays.

[Laurence Bruce Whyatt, Analyst]

Three from me, if that's okay. You've posted some very strong numbers in the U.S. in terms of the sell-out, but your sell-in was obviously quite a long way below that due to destocking. Could you give us an idea of what level of stock you think the wholesale channel will be holding throughout Q2? And whether we should expect some of that to return going into Q2, particularly in the U.S.? And secondly, in China, I was wondering if you could characterize the current level of trade felt in the restaurant and bar channel throughout China and what you're seeing on the ground there.And then finally, throughout Travel Retail, previously, you stated that you didn't expect many of the sales from Travel Retail to materialize in other parts of the off-trade. Given the outperformance this morning, are you still of the view that those sales will not go into the other parts of the off-trade? Or are we actually seeing some of those lost Travel Retail sales elsewhere?

[Luca Marotta, Chief Financial Officer]

Thank you. So let's start with the U.S. So in the Q1, we have a clear difference between sell-in shipments, so profit and loss, in a way; and depletion, which is the best approx of sell-out and final sell-out even more. So I will start with the general -- with general contribution on my side on what does it mean, a moderate decline in the Q2 at the group level because you will understand a lot of things, not only for the U.S. A moderate decline is the result of many different specific situation. In the Q2, we will have a very strong contributor, the first one being U.S. So Q2 sell-in would be strong double-digit growth for the U.S., catching up in terms of stock equation, the disconnection that mathematically we are experiencing at this stage between depletions and sell-in. The second biggest contributor will be Mainland China in the second quarter. Mainland China, not Greater China because Hong Kong is very severely hit. And the third one, some of the European countries, but on top U.K. Out of this very good news and some 0 countries, so flat compared to the previous year but were very minor, we have also very strong negative situation. Travel Retail now is flirting with minus 90%, minus 95%. So this is part of your third question. Travel Retail is clearly collapsing. And probably, you're right, part of that is translating at-home, but it is only marginal. I think that we fear, and that's a future element to address for every, every company, that part of the consumer that we used to travel and to buy in [ total ] channel, can't be catched up until 18 to 24 months. So part of that is translating the on-consumption, but only part of that. And in the Q2, the figures will be very strongly impacted by Travel Retail. For us, Travel Retail, it's around 9% to 10%. It used to be in terms of weight of top line.And other negative performer inside Americas. Canada was a better performer, will be reversed in the Q2, but still, it is less flamboyant and less positive than the U.S. Why? Because St-Rémy is performing very well, but at the same time, cognac is another type of consumption compared to U.S., and Canada is a lot of on-trade, much more on-trade compared the U.S. habit in terms of cognac. So it will weigh on the calendar performance. And Lat Am, we have -- we don't see any sign of recovering yet.Inside Asia Pacific, out of China Mainland, Hong Kong is clearly very difficult. Macau, we discussed also, last year has been switched inside the flows of Mainland China. And we have recovered part of that. But clearly, the local consumption is not yet totally there compared to the previous year. And Taiwan is performing correctly, but it is a low, low, low figures, low basis.And other Asia Pacific countries are in a very negative land because the on-trade is still very, very lax, very blocked, starting from Japan. And with the exception of Australia, we have a partial positive on consumption. The remaining part of Southeast Asia is really very, very difficult, Singapore and other, Vietnam and other Southeast Asia countries.In Europe, with the exception of U.K., which is good -- very good at this stage, more than compensating the on-trade performance with the strong off-trade, with the exception of the U.K. and partially Germany. Russia was driven than ever by lower comps. So the second part of the year or starting for the Q2 would be maybe a little bit more difficult. And the other remaining part are not so positive. So the South Europe, or the Central and South Europe, it remained quite complicated.So the moderate decline is not generic cautious approach by the group to try to have a nice figure to announce beginning of October to you. It is more a result of our construction with strong acceleration in key countries like U.S. and strong decreases in other one.So coming back to your question for U.S. and China, why we are expecting to grow in the second quarter. In the second quarter, we expect solid double-digit growth. The magnitude will depend on the evolution of the sell-out trends in the coming weeks and the coming months. Wholesalers in the U.S. tend to be cautious, by nature, and tend to understand the situation, looking back to the past -- to the historical depletion pattern. And now with a strong drop and a stronger acceleration, they try to understand what part of this panic of buying or pantry loading will remain, so they are able to reorder, and what part is not. And at this stage, they are a little bit more cautious than expected. But in the second quarter, we are confident that we'll be back to strong growth in sell-in.On top of that, on a little bit more cold and freezing note, there are also a degree of uncertainty, global macroeconomic in the U.S. because Presidential election [ learnt ] of the COVID pandemic because they just relocked in California. We have some good news. But at the same time, it is a stop-and-go situation in the on-trade; potential economic downturn impact in consumption; and last but not least, both for our industry, the imported tariff carouseling next date, which is scheduled the 12th of August, that could be a threat. More in terms of attitude than in terms of figures because in that case, we might see to some prebuying habit by the decision by the wholesaler.So a global cautious situation affecting the wholesaler attitude, a depletion that are still complicated to detect in what is the new normal. But all in all, a strong rebound in second quarter for the U.S., we are very confident on that.For China, what are the trends? We expect a growth acceleration in China, Mainland, wholesaler being still prudent with regards to replenishment and Mid-Autumn Festival trends will be key. So the acceleration we are witnessing in June will continue, we hope, in the next coming months, but the key moments will be what will happen for Mid-Autumn Festival. Before Mid-Autumn Festival, so the sell-in act between July and August, and also what the sell-out, the real consumption performance at the time of the Mid-Autumn Festival. So we are very confident in China, Mainland. Negative globally, Greater China for some technical specific situation, one which is also a little bit more political for Hong Kong. But the real trend of the year for Greater China will be highlighted beginning of October, knowing that we count a lot, and we are very confident in that to guide our second part of the year.June depletion, I said we're back to growth. All channel of distribution are well oriented. And in terms of product, I repeat, outperformance of CLUB, LOUIS XIII and Single Malt Whiskies.But very important element that I already highlighted during the presentation is the channel, let me say, twist at this stage we are witnessing. Historically, direct sales in China were 1/3 and indirect, 2/3. End of the Q1, so we have to understand what will last and what will also link to the cautiousness of the direct wholesalers' channel. The weights are quite reversed. 60% of sales were direct and 40% were indirect. What is direct? It is e-commerce, 35% of sales -- 36% of sales Q1, plus 35% compared to last year. It is key account of freight. It is PCD, personal client director. It is direct sales with our boutiques. So it's type of sales in which we can touch the final consumer. And suddenly, normally, we have a gross margin, which is bigger than the weighted average of Greater China. And as a result, for some sub-channel like the e-commerce, even more corrective on the bottom line. So this switch gives also more means to China to invest, to solidify more through -- like the future months more robust in terms of investment. So it is important in terms of economics, in terms of financials, but it's important in terms of strategical switch.I was very long in my answer, I know that, but I prefer to give you more color, also for everybody, on the Q2 and not only remain on the simple question, what we're -- why we are confident for U.S. and Greater China for the Q2 and the remainder part of the year.At this stage, I repeat, strong -- stronger confidence but also a reasonable cautious approach by ourselves, not only by our wholesaler, because we might collectively have some downturns in the future because COVID is not ended, because we have some macroeconomic and political potential topics to be addressed on a worldwide basis. And in that case, we will deal with that, but we cannot influence -- have an influence on this kind of situation.

[Operator]

We will now take our next question from Richard Withagen from Kepler Cheuvreux.

[Richard Withagen, Research Analyst]

Luca, I have 2 questions. First of all, on the Mid-Autumn Festival, you already mentioned it. Can you explain how you are preparing for the upcoming Mid-Autumn Festival? Will your communication be different compared to other years?And then the second question is, are you increasing your brand support spending again, as the business is returning to growth in the second half of the year?

[Luca Marotta, Chief Financial Officer]

Yes. Thank you for your question. Mid-Autumn Festival is -- every year is a very important moment. We think that now, Mid-Autumn Festival and Chinese New Year account for 35% to 40% of the year, of which -- more than that, sorry, 55% to 60%, [ 19 and 34 ]. And the Mid-Autumn Festival, this year, we'll see more activation communication than in previous year, maybe a little bit more channel-oriented because we have to follow where are the opportunities of consumption.Also in on-trade, but compared to previous year, will be a little bit more off-trade and even more dynamic on the e-commerce part, essentially on B2C part of the e-commerce. We will put in place limited deals because promotion is not the game we are in. So we will not try to chase volumes at the price of devalorization in the Mid-Autumn Festival for the sake to increase our performance. So this will be something which is a constant element compared to previous year. No price devalorization; no promo strong game compared to the global competition, so a little bit less probably; and more direct support with a twist by channel, trying to prioritize e-commerce and off-trade.Press Support. At this stage, we -- as already said, we try to focus on the strategic priority investment for the first part of the year to try to have, not a strong disconnection between a sell-in and A&P. But then, we have -- we are not in a perfect financial world, if a financial world is perfect, meaning that our strong -- a very important moment to invest everywhere in the world, not only in the U.S., is OND, October, November, December, so it's the second part of the year.So we are preparing all weapons to increase our strength, our exposure in terms of brand support, strategic, above the line, technically, and also below the line, but mainly activation of the brands that will last in the long term, focusing on the third quarter, so October, November, December. Meaning that the -- our increase of the consensus, of our expectation of the semester operating profit is more driven by additional top line compared to our expectation than cost saving. But at the same time, we need a strong rebound in the H2 because we will continue to invest strongly in the second part of the year and in Q3 even more, in A&P, in brand support, and knowing that we are sailing in a better way compared with our expectation. It's not impossible that we'll increase the means -- put more means on the table to be able to have an increase in depletion, final consumption and makes this strong COVID depletion acceleration in some country, something which is lasting more. Because the situation is quite absolute.In a way, the COVID is impacting negative sell-in. There is a cautious attitude by the wholesaler or everywhere in the world, not only in the U.S., when you have 3 or 4 or 6 -- 5 or 6 tier system. And at the same time, since the COVID has determined consumption acceleration, so we have to deal with this kind of impossible dilemma to try to grab this additional artificial, in a way, consumption and let this additional consumption something which lasts. To do that, the better way is not to increase promotion. It's not the commercial acceleration in terms of more money to the intermediate layers. The better -- the best way is try to grab the consumer, keep them forever, increasing in brand support. So strong rebound in the top line, but even stronger in terms of -- over A&P. So that's the reason why, additional point to your question, even if not asked. At this stage, we are okay with your consensus on a yearly level, slightly negative, because we think that it will make sense with our constructions with the year. So we'll not translate the beating guidance on the H1 in improving guidance compared to expectation on a yearly level. It is in here, at this stage, to -- I think we have to hammer in terms of A&P in October, November, December, January, and grab this additional consumption that COVID has given us forever. So nothing is forever, but let's try to -- the most time we can.

[Operator]

We will now take our next question from Edward Mundy from Jefferies.

[Edward Brampton Mundy, Equity Analyst]

A few questions, please. The first is on LOUIS XIII in Q1. I was wondering whether you're able to disclose what your depletion trends were for that brand.And then second of all, very strong outperformance of your cognac portfolio in the U.S. relative to the overall U.S. cognac market. I appreciate that this time last year, you lost a fair amount of value share, given quite slow retailer replenishment. I mean, to what extent would you characterize your outperformance due to the easy comps? Or are you seeing some early indications of improving brand preference towards your brands?

[Luca Marotta, Chief Financial Officer]

So LOUIS XIII depletion, we do not disclose. They are -- were better than expected in some markets, starting for China. But really, I can't give you the exact figures. We are satisfied with the performance, both on depletions and sell-in; at this stage, a little bit more on depletion than sell-in because if I will say that it's cautious, it's even more cautious with the upper part of your range. So that's the reason why, as you have understood, all over the world and also in the U.S., the price/mix was a bit down-trading compared to the previous year because there is a product impact more in intermediate, a little bit less in the QSS+.The comp was not so -- maybe I'm wrong. I'm not wrong on here, but I'm sure, but we are wrong compared to what would you think and I have a different opinion. So the comp for the U.S. in cognac in the last year was not flamboyant, but was not easy at all. And then we have strong price increase. I think that the comp element for the U.S. is not there. Otherwise, you will witness a much stronger sell-in performance in U.S. It is really something that is linked to the way we imagine the year, is better than expected, much better in depletion and also in sell-in. The correlation is really linked to the fact that the business sell-in and sell-out. The depletion did not determine an adjustment of the stock coverage by the wholesaler. So they have a little bit delay-- sorry. They're a bit delaying the reordering and we will witness that in the second part of the year.Last but not least, remember that in sell-in figures, you have a clear negative element in terms of figures, in terms of valorization as well. Last year, we increased price the 1st of April. This year, we are postponing price increase on the 1st of October in the U.S. So this is something which is missing in terms of sales as well in terms of value.

[Edward Brampton Mundy, Equity Analyst]

Talk about Q2 shipment trends in the U.S., up double digits, I think is what you said earlier. I mean, what do you think your value depletion can still maintain at that plus 57% level? Trying to get a -- this number is obviously quite big. I'm just trying to get a feel for how you're thinking about that.

[Luca Marotta, Chief Financial Officer]

No. I think that we will lower a bit. We'll be lower a bit. I think -- I don't know because I never thought that we would be talking about this figure. So nobody has a crystal ball. But normally, we should catch up on sell-in, a slow down a bit on sell-out because depletions should improve. Once again, maybe it's not clear for everybody, but we have 3 key measures, sell-in. So one, the company sells to the wholesaler. Depletions, the logistic way, so logistic movement between a wholesaler and final retailer and sell-out with some panel, they grab it. That was the final consumption. In some states, like Texas, you have 40 years because you have 2 different wholesalers: one is for the on-trade; one is the off-trade. So it's even more -- it's even longer. So probably, if I have to bet, final consumption will decrease a bit compared to this skyrocketing figures. Depletion should improve a bit, and sell-in will clearly improve with a strong double-digit figure for the U.S. in terms of sell-in for the second quarter.And price increase we apply, everyone in the world. Lower spend in the previous year, but price increase will apply. 1st of October, you remember, I told you 3 months ago.

[Operator]

We will now take our next question from Trevor Stirling from Bernstein.

[Trevor J. Stirling, Senior Analyst]

Two questions from my side, please. So first of all, you've been very generous in terms of giving us information. And I just wanted to check one thing, Luca. So returning to the U.S., the 75% increase in depletions, what do you estimate was the underlying sell-out performance in the quarter? Apologies if you've given that number already. That's the first question.And the second question, in China, we've seen the improvements in underlying demand in China. Do you think that by the end of Q1, the Chinese wholesaler stocks are back to normal? And that so as we go into Q2, whatever Mid-Autumn Festival is, that the trade is now actually pulling stock from you rather than from their own internal stocks?

[Luca Marotta, Chief Financial Officer]

Thank you. I start with stock in China. I think that globally speaking, because it is different by channel and by range. Globally speaking, now we are okay, slightly on the low side. But this answer, once again, which is also something important for the U.S. on your first question, it is, once again, the extrapolation of our vision. At the end, when you are in a -- partially in an indirect channel, you cannot oblige somebody to buy to stock himself compared to a depletion trend that is improving. But exactly, as you're just saying, you do not know what will be the right figure. So the cautiousness imply delay.In China, I think that we are in the low to the medium side, and there will be no stock issue that prevent us to realize a very good Mid-Autumn Festival. Then it's different quality by quality. CLUB has clearly outperformed VSOP, for instance, in China. For the U.S., what is the underlying? It is a very easy question. At the same time, we do not know what is the underlying of the -- exactly underlying of the sell-in. We said that's slightly negative out of COVID. And this -- clearly, the divisions are influenced in a positive way by the COVID. But we think that overall, the 75% could translate in a strong double-digit growth, a normative level, so more than 10%, for sure. So we are clearly beating the market, whatever the market is, not only in the U.S. we think that we are beating the market. Whatever the market is, not only on official figures, but also on underlying.

[Operator]

We will now take our next question from Chris Pitcher from Redburn.

[Chris Pitcher, Partner of Beverages Research]

A couple of questions from me. Can you give us an update on the other brands in the U.S.? You talked about 1738 being -- performing well, and you kind of alluded to it in your comment on LOUIS XIII, whether you can give some more specific U.S. comments on LOUIS XIII.And then on Tercet, your recent brand which you launched. There was no mention of that. How has that been accepted?And then on the Cointreau performance in the off-trade, can you say how much of the Liqueurs & Spirits sort of A&P budget you've migrated across to sort of at-home activation? Has this been very much a sort of a Rémy marketing-led push behind people making Margaritas at home? Or has it come at perhaps a lower cost to you guys?

[Luca Marotta, Chief Financial Officer]

Okay. Thank you, Chris. So try not to disclose too much. Tercet, it is -- in terms of financial impact, it's not so big. It is overperforming compared with our expectation and -- in the U.S., and we are satisfied with the positioning and the realization. So it's important to the elevation of the brand. In terms of financial, doesn't make a major change at this stage in terms of financial impact.1738, clearly booming more than expected at budget time, and our aim is continue to invest and to differentiate 1738 from VSOP because also there is a different client base. And with some differentiation in terms of positioning, pricing and knowing that in terms also of accretive impact for our financial, it is better than VSOP. So 1738 performing clearly double digit and better than expected.Cointreau. Cointreau, your question is very, very analytical. I will not answer. Cointreau is, in many markets, a nontrade brand. So the fact that the at-home consumption and the cocktail at-home reacted so well surprised also a bit ourselves. It's true that part -- as you said, part of our means were more balanced in terms of channel. But clearly, our major, major activation part was on the on-trade. So if you continue to perform like that even if on a lower extent because we are cycling also high comp, it is difficult to continue to perform at plus 45% to 50%. I'm talking about U.S.We need to, Cointreau even more than other Liqueurs & Spirits brands, invest more in R&D to be able to reconvert this acceleration in more stable way in the on-trade. At this stage, what we have achieved has been influenced by our investment but can be improved because investment will increase much more in the coming -- in the next months -- to the next months.

[Chris Pitcher, Partner of Beverages Research]

Could I just quickly follow-up on the U.S.? You mentioned that the 1738 is double-digit performance, obviously outperforming VSOP. And given the timing of price increases, the negative price/mix in the quarter is, therefore, all mixed because there's no price effect at all. How have you gone to sort of minus -- calculate minus 5% price/mix in the U.S. with 1738 outperforming VSOP?

[Luca Marotta, Chief Financial Officer]

It's a very complicated question because we have not only price and ranges here but also state mix. So state mix plays a big role, and we have format mix because when COVID consumption played, mathematically speaking, a negative depressing effect in terms of partially formats and internal mix inside each range. So it's not only 1738 [ and ] VSOP. Then we are cycling the price increase we have not. And on top, we overperformed also in a global environment, overperforming, because we are performing in nearly all states. We have no single state in negative lands. But clearly, in some states, more are performing better than other. Illinois is performing better than California, for instance.

[Operator]

And we will now take our last question from Pinar Ergun from Morgan Stanley.

[Pinar Ergun, Equity Analyst]

I have 2 quick follow-ups. The first one is in cognac. You mentioned that price/mix was down 8%, and I appreciate you've just answered the question on the specific -- on this, specific to the U.S. But more generally, is that because of a geographic shift? Or do you see down-trading in any of your markets? And secondly, if the USTR were to impose tariffs on cognac, would you expect to fully pass it on through higher pricing?

[Luca Marotta, Chief Financial Officer]

Thank you so much. So the minus 8% is a worldwide equation. The question of Chris Pitcher was more on the U.S. clearly. The minus 8%, for sure, you are right, is influenced also by the geographical mix. Because when you have some key Southeast Asia country that are not performing, when you have Travel Retail Asia who are not -- it's not performing, it's negative for the cognac price/mix overall worldwide. So Travel Retail, remember, 9% to 10% of weight of our sales has also an important role, not only in terms of consumer, in terms of share of market footprint, but also in terms of accretive financial figure. In terms of tariff, at this stage, it's too early to say if it will dampen or not. Clearly, we are in business. We are not in charity. So we are -- we will assess the situation. At this stage, like the years before when the threat was there, we anticipate eventually the event putting more stock already to be secured actually to be -- to feed the Q2 and partially the Q3, and then we will assess the situation. But remember that, as already said, overall in H2, we are planning to put in place price increase everywhere. So the window is already there. Then it will be different by country, different by state, in which case, the U.S., different by quality. I'm not committing the same to you will recover 100%, and I will go straight to the financial compensation. No, we are not acting like that. But in case, we'll assess the situation, and we already [indiscernible] to increase the prices we've already set out of the tariff element. Clearly, if the tariff is not voted or decided, we prefer everybody.

[Operator]

And that would conclude today's question-and-answer session. I would now like to turn the conference back to Luca for any additional or closing remarks.

[Luca Marotta, Chief Financial Officer]

Thank you so much. Have the best summer you can. Stay safe. Looking forward, talk to you mid-October on the heels of improved Q2 compared to the Q1 figures. We are very confident on that. It's not easy. But we think that we will win this battle. Thank you so much.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.