Remy Cointreau SA
PAR:RCO
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Remy Cointreau SA
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Welcome to you, one and all.We're meeting here to take a look at the Rémy Cointreau Group first half results as of the 30th of September.Of course, you already know our growth in sales. You know that, for us, we're not looking for volume growth. We're much more interested in value growth. You've already seen these figures. We're very pleased with the growth we've had of 7.7% organic and even more importantly 8.9% of our own brands. And an important event today I'd mention, growth in our current operating profit. You know that, this year, in the first half, versus last year first half, we had some headwinds. Nevertheless, came up with a very good operating profit. The first slight thing was the drop in the dollar in the first half of the previous financial year that had a real impact on us. You know that we're very exposed to a drop in the dollar or an increase in the dollar, with the hedges have expired. And then a second possible impediment to growth in operating profit, and this is intentional, we made a strategic decision a while back now to strongly increase our communications spending, which is to say we're very proud of the organic growth we see here, 10.1%, double-digit growth. Yet again, I'd remind you that, over the past 3 years, our profit has grown by 33%. And so logically, in terms of what I said earlier, our current operating margin has continued growing. Its percentage has grown organically 0.6 points after IFRS. Luca will be explaining the difference to you once again, of course, in a moment. Organic growth stands at 26.2%.Now the net profit group share, earnings per share, all of these results grew somewhat less than current operating income -- current operating profit. All this will be explained to you in detail, of course, in a moment. But the important thing to bear in mind, the difference in percentage of growth is absolutely not in any way negative in terms of our overall financial standing, financial health. And you can see this clearly because our debt continues to melt like snowflakes in the sun. The net debt-over-EBITDA ratio is now 1.17. This, we feel, is very much a record figure.I'd like to give the floor now to Valérie Chapoulaud-Floquet, our CEO, who will be talking to you about the group's business. And then the CFO, Luca Marotta, will give you further explanations about the financial results. Afterwards, as is our custom, we will be pleased to field any questions you might have.
Good morning, everyone. Thank you, Marc.To talk to you about our business review in the first half. You've already gotten the sales figures a few days ago, but Luca will be talking to you more specifically about the income statement and earnings.In the first half, a takeaway point, we can say it's a positive half yearly period pretty much in line with our expectations and our budget. First of all, great growth in our business, top line activity, i.e. sales. And as Marc Hériard Dubreuil said, we're interested in 2 things. First of all, growth in our group owned brands are in the neighborhood of 9% organic. That's very good performance, very much in line with our expectations. We'll see in a few moments the breakout of volume versus value, very favorable; and also very much in line with what we intend to do -- we began doing and intend to do in long, medium term in this group.Now let's give a summary -- a review of the first half. We'll dive into detail in a moment, putting that by geography and brand and houses.Basically, our growth, we can say, continues to be very strong in Asia Pacific. I know that you'll have many questions regarding China. Everyone in the industry and especially in our area has been good growth there, also in the Americas. So great growth in both areas. I'd remind you the U.S. is the #1 country, first region. We'll look at that in a moment. Can further confirm we're very pleased with our overall geographical balance in the group. EMEA, which is a huge cluster, a varied mix of countries, you've got the key countries that are doing very well. It's very much good news. Some countries you know by heart such as in Western Europe continues to be more complicated. Nevertheless, in areas where we have this potential, group business activities are doing very well.Let's talk about earnings, profits.This is the third first half running that we've seen growth [ particularly in ] China. You can get the exact figures. 2 years ago, our growth was around 7% -- almost 12% last year and then 10% organic growth this year. As you can see, it's very much continuity, very important, and reassuring. Up 10% if we look at the current operating profit. 10% growth organic this half year period, several factors relating here, no major surprise. It's a good thing, though, because it shows long-term confirmation. We're seeing growth in our gross margin, very important. This year especially, we'll see this in detail, you've got the mix effect, price/mix effect, which is major. This is a combination of several things. We'll give you further details. So this is further confirmation. Over time, this has already begun yielding very positive results last year. Even more, it seems more the case this year. Of course, we're continuing to keep our overhead under control both centrally and also in the markets.Another very important point. We've very much supported and maintained our investments over the months. Sometimes, there might be adjustments. This wasn't the case in the first half. So we've made major investments at a quicker pace than growth in revenue. This will be even picking up further in the second half, an important phenomenon.And again, a big impact in direct, particularly in certain countries and regions. That's fundamental in luxury brands such as LOUIS XIII.Current operating margin up in a regular fashion, organically in the first half up 0.6 points. Overall net profit, up strongly organically by 7.2%.As you can see here, we've got the bridge between last year and this year. Currency effect, Luca will come back to that point. We can say that this is a little less the currency effect we'd expected. We explained already that the first half might well be complicated and mainly, not only but mainly, due to the dollar. But in the end, the currency effect is a little bit lesser than we'd expected, so that's pretty much a piece of good news.If we look at this growth by business line. You know that we've got cognac with the House of Rémy Martin, LOUIS XIII and other brands of the group. There is a gap that's fairly interesting difference, and this will be rebalanced globally on the second half for many reasons. We've got great growth, double digit, almost plus 12% for cognac, which is growth. If we look at that specifically by market for cognac, we're talking mainly about the U.S.; Asia, including China, of course; plus several European countries that are growing above market, that were gaining market share in value. And you know we're not looking for volume but value, and we're gaining market share. In that respect, very good news. You could say to me, "That's fine and dandy, but your growth just makes for success because the cognac is doing well worldwide." That's certainly true. We're growing faster than market. We're outpacing market growth, and it's good news. Liqueurs & Spirits, we can say that there are phasing phenomenon here. We invested well in the first half. We've got good visibilities of second half. We can say we're quite confident of the rebalancing sort of a blend of several items here, brands and so forth, we'll see further detail; and also regional elements.Partner Brands, no big surprises since, as you know, we wish to work mainly with our brands. You realize, 4 years ago, our Partner Brands made up around 15% of our sales. Currently, it's standing at around 8%. You can see the trend further confirmed. There was negative growth, slight negative growth of almost 5%, which is intentional; some technical effects, but these will smooth out over the second half of the year.When we look at -- this breaks down by region and division, the major proportions here. You see de facto revenue rate in this half year period due to the growth in House of Rémy Martin gaining 2 points, 70% of our sales.So if we look at the regions, no big surprises. We're comfortable with this balance, the Americas 40% but, as you can see, a clear turnaround in Asia Pacific, an uptick. 5 years ago, remember, 5, 6 years ago, Asia Pacific was the #1 region. After the crisis in China and strong growth double digit basically for 5 years in the Americas, the Americas now have become the #1 region. We're very comfortable with this balance. Consumption of Asia is pretty logical really.Now if you look at the same geography broken down by house, no big surprises here either. Makes perfect sense, considering growth. And this growth isn't just from the Americas, but Asia's growth is substantially higher than the Americas. We can talk about that later. Asia Pacific looking good again for Rémy Martin. We like this balance.Liqueurs & Spirits now, fewer effects due to the proportion of Europe making about 50% for Liqueurs & Spirits, so less of a rebalancing effect that we've done in this product area.Talking about current operating profit. Now look at the bridge, important points, a couple of effects here. As we just heard a moment ago, what we're interested in, what's important to us and what we like very much, this is something we're quite pleased with actually, is to see the -- what I'm saying is to see this balance of price/mix, volume/mix. You can see in this half year period, and we'll see this throughout the year, the volume/mix and price/mix situation with a lot of phenomenon that are coming together at the same time: a rebalancing of the geographies. We just talked about it. It's obvious. It's -- Asia's price positioning is higher. That's a plus, but it's not only coming from that. We also got higher quality and brands whose positioning is higher which are doing well. That's a plus for us, but most importantly there's a price effect which is quite substantial. Some brands increased quite significantly, starting in the fiscal period 1st of April, maybe in a more uniform fashion than the past. A second price hike in the brand Rémy Martin in the United States which occurs in the second half, which as we said there's greater momentum in prices. It's doing quite well. It varies from one country or region to another. In Europe much more complicated, as you know. Nevertheless, I can say it's been quite uniform in the half year period.So a combination of 3 factors: geography, increase in prices and price/mix and brands. A very good effect.Volume doing well. And as you can see, advertising and communications investments played an important role in the first half.Net profit now. No major comment here. You can see the net profit excluding nonrecurring items up 7% organic, up 6% in net profit group share. No main changes here. Luca will come back to the points.Let's talk about the houses news in the first half.House of Rémy Martin, as you saw, great balance in terms of overall sales, value versus volume, very buoyant growth for House of Rémy Martin. It's the same growth in the first half in Greater China, Asia generally, Greater China, Japan and Southeast Asia.Greater China, everyone is particularly interested in because of the presence of cognac there and so forth. Growth is very significant. We see no slowdown whatsoever, so far. We can talk about that. This is equally true for all of Southeast Asia, especially Singapore which is a major market and a showcase for the world and for Asia. Japan, as I mentioned, starting the year very, very well. Then Travel Retail Asia Pacific also playing its role well, which is also looking good again.The customer base, it's newer in Asia, particularly China. You know the Chinese now are going to these airport stores, and the momentum is shifting and shifting in our direction.The Americas, great growth and outpacing the marketplace, very good growth in cognac but also several other Group Brands. What we're also very interested in is to see that basically we're an interesting player at the high end of every segment. I'd remind you, for a few half years, we were announcing that we would be addressing the portion above $50. And it's an interesting thing for us, for instance, in the U.S., a country that is very much a mass-market country but we can see very clearly that in all segments this is happening. If you look at, for instance, the rum category. Rum overall is seeing negative growth in the U.S., but the high-end rum is growing strongly. Basically, the stretch that we can imagine is taking place in all the segments in the U.S., and we're particularly well positioned in terms of the high-end, high-range qualities in all segments and categories.Europe now, and EMEA. There are some hubs and there are different countries. Some of the performance necessarily is contrasting; like in the case for everyone, no major surprises, mixed performance. Specifically, important countries that's doing very well, such as U.K., Russia, the Middle East and India. More complicated countries, you can imagine, in Western Europe, Continental Europe, their performance is quite unequal.Now news and some pictures here, some important pieces of news that continue to be important to us. First of all, a limited-edition in Art with Matt Moore. This was wildly successful. And especially, it helped us really make a clear statement, a very clear, clever visual statement; high impact; very well covered in all the countries; very successful. The objective was to seek out younger customers and appeal to contemporary customers. This is a good job of bringing in new customers. And in terms of building the house, you know now the house with Rémy Martin starting a few years ago. The initiative in London, the U.K., the House of Rémy Martin, taken over by several countries. And we're continuing using the same model, and we're going to see very high-end events covering several days. We did it in China. There'll be 2 further this year in China, Chengdu, first; the second one being in Moscow.The market, we fine tuned, upgrading the quality even further and appealing to the influencers and the customers we're very interested in. The U.K. started this 4 years ago, wanting to evolve the concept. If you go to London, do go to visit -- and I'm sure you're all familiar with Bibendum. Visit the ground floor, where for a month -- for a year, sorry, we've had a permanent presence of the House of Rémy Martin. It's a location, a place where we can meet with our customers and potential customers so they can discover Rémy Martin. And we can also help them discover several other group products such as Rémy Martin [indiscernible].Now LOUIS XIII. You know that, a year ago, we launched the second campaign, the 100 Years campaign. The campaign was updated a year ago with a very successful launch in Shanghai. We're continuing with these events in all of our markets. Here we see events, top-quality events, that took place basically throughout the world. We selected Singapore, Toronto and London to show you here, but there are many others. This is where we invite our customers as well as potential customers and stakeholders to come discover LOUIS XIII, to understand the positioning, to understand what makes it unique and its true luxury positioning. So great initiatives worldwide in all the markets.We've also got a lot of interactions with customers on LOUIS XIII. We know many of them individually. We've also brought better direction further forward, such as for LOUIS XIII website where you can very easily, in all the countries you travel to, discover the various possibilities of discovering LOUIS XIII and particularly nontrade.Here's the bridge for Rémy Martin. We saw the group bridge. Now we see the House of Rémy Martin bridge. I said to you earlier the mix -- price/mix effects are quite substantial, also the volume/mix effect, but especially the price/mix effect is substantial. Investments continue in the house and markets. Organic growth, EUR 13 million and a little over 11%.Liqueurs & Spirits, a little bit more of a mix in the half year. Several decisions were taken; nothing new here, though. One big new thing is starting the fiscal period with a new Cointreau campaign. Unfortunately, it can't be viewed in France but has been rolled out to all other markets, particularly the long-standing markets such as the U.S. There was an investment phase. So the house Cointreau is very much a beautiful brand, needs to be slightly polished and continue shining beautifully. The campaign is done very, very well for Cointreau. Now it's up to us to continue supporting it over time and repeat it. We're expecting further effects in the second half.In our long-standing markets, things are doing well. Cointreau is in the cordials markets. Cordials, overall, the volumes tend to be dipping down, but we are doing very well in the market, particularly in value terms. So we're doing well. In markets such as the United States and the U.K., we're very confident. Things are doing -- going well. We're gaining market share. Now new markets, we talked about this previously, China and Russia, we radically changed our strategy there just over 2 years ago. We've got significant growth there now, very encouraging for the future; appealing to new customers, particularly in cocktails, which is very much our positioning. That also means more significant nontrade positions in bars, hotels and restaurants.Now Metaxa. Great start of the year. You know we've upscaled Metaxa. Our priority has been the 12 Stars. This is doing very well, particularly in the new market China which we moved into about a year ago. It's been possible for us to reposition. We'll talk about this later, but Metaxa, we've repositioned particularly in tender bars and mixology. This is a new attack which is doing very, very well; and we're continuing to boost that, speed it up.St-Rémy, we're upscaling further. This might be a little more complicated, but all in all we can say that the strategy is very clear and will be beneficial in the future. Mount Gay, clearly the brand that we're repositioning now. We'll talk about this further, I suspect, maybe 6, 12 months down the road. Lots of things are underway, work in progress. Mount Gay, for the time being, isn't the brand that's helping us move forward in Liqueurs & Spirits. On that the end, The Botanist, wildly successful. Our ambition was to be the second gin brand in the high-end segment. We are winning that wager in a big way and uniformly throughout the world. It's phenomenal. People have realized this for quite some time now. When you have people test The Botanist, liquid lips as it's called, basically the success rate is 100%, so all the people that test like it and buy it. That's very, very important, and something we'll continue speeding up; phenomenally successful.Whiskey is doing well also. You may have seen the launch of Port Charlotte, our peaty whiskey, which is very well received in all the markets, recent starting this fall or summertime, depending on region. All in all, all of our whiskeys are doing very well: Westland, for the time being, mainly in North America; and another one in France, the little historic markets.Two interesting initiatives. I mentioned to you earlier a relaunch. This is the global visual of the Cointreau campaign. We're taking our cocktails again, margaritas. Cointreau is the main ingredient in the margarita when it was originally designed. So we're taking the margarita back. It's important. It's the biggest and most likely consumed cocktail worldwide. That's, I mean, launched. And this is the relaunch of Port Charlotte with a campaign. It's not that kind of advertisements of whiskey, but this is a visual we used a lot and particularly digitally. Great positioning, very clear, fairly original, very successful. We are early. And we're continuing to position the 3 brands in Scotland in a very distinctive way.Here is the bridge for Liqueurs & Spirits. So you can see that the mix/price effect is more complicated in this category. First of all, this is more in Europe which is a little more complicated. Furthermore, these are products that for the time being are quite well positioned in their categories, so less elasticity in terms of pricing.Partner Brands, no surprise, as I said to you. There's a downtick, but it was intended, more the down in volume than you would say. There's one -- a couple of phenomenon right now: first of all, halting the distribution of Campari. Campari wanted to change partner in the Czech Republic and Slovakia. That goes in the right direction because that's also what we intend to do in the future. They took over their autonomy as of 1 April this year. On the other hand, we continue the distribution of Russian Standard. We're the global partner for Travel Retail Russian Standard. Typically, we've reorganized in Travel Retail, particularly in Europe, and we couldn't continue distribution, so there as well Russian Standard left us on April 1.The scope effect isn't entirely like-for-like. There's a small operation which was down in the second half of the -- second quarter of the U.S. where we sold some inventory that we still had in our warehouse. There's a slight technical effect there, but all in all for other Partner Brands that we distribute mainly in Europe we can say that momentum is really pretty good.We can see the results here. This is a strategic choice. The Partner Brands aren't part of our operating profit. This is a small portion here. Good news, we're stepping back, but there's no major effect on the group in terms of current operating profit.I'll hand over to Luca, who will give you the details now on all these figures that you've been given in a very summary fashion, so far.Thank you.
Thank you, Valérie.We're now going to move on to a detailed analysis of the financial statements. As you know, as of April 1, Rémy Cointreau Group has started applying the IFRS 15, 16 and 9 standards. However, in order to allow us to compare and analyze our 2018 figures against 2017, our comments will relate to the pro forma figures before the roll-in of the new accounting norms. Then we'll have a look at our post-IFRS reported figures.So let's start with the income statement. Based on organic sales growth of 7.7%, current operating profit was up 10.1% on an organic basis, which basically corresponds to an organic increase of 0.6 in our current operating margin. This solid performance was once again mainly driven by gross margin growth of 9.1% year-on-year on an organic basis, therefore more than sales, outpacing growth, thanks to positive leverage from volumes and mix and also and especially this year thanks to notable price increases all over the world.Strong momentum in sales and gross margin thus allowed us to fund a further significant increase in sales and marketing expenses that are up 8.9% in the half year on an organic basis, broken down into 2 components. Firstly, we have investments in communication, advertising, PR, digital and media; and promotional expenses in the field, up 9.5% in the half year on an organic basis, which outpaces sales growth by around 25%. Among these A&P investments, it's the above-the-line part, i.e. classic media, digital and PR, that was up in solid double-digit growth; while the below-the-line segment, on-premise activation, was up by high single digit. Secondly, distribution costs grew double digits on an organic basis. As already mentioned, we're talking here about investment to strengthen the depth and diversify our route to market with 2 key areas in focus: developing direct distribution of high-end cognac through stores; and e-commerce and direct sales force and other ways getting our distributor partners to adapt to our brand elevation strategy. Finally, our administrative expenses are well under control and up 5.1% on an organic basis.All in all, our current operating profit was up 10.1% on an organic basis. On a reported basis, it was up to 2.9% after taking into account adverse currency effects, nevertheless less than we feared in June, EUR 13 million over the half year.Okay. Let's move on to the analysis of the group's current operating margin, which fell 0.5 percentage points to 24.1% over the half year. This breaks down into organic growth of 0.6 points and an adverse currency effect of 1.1. There was no scope effect this year, contrary to last year. The organic improvement of the current operating margin was driven, as expected, by notable increase in the gross margin and a slight decrease in the ratio of distribution costs, enabling us to observe an increase in the A&P ratio.Let's look at these various items in turn. First of all, the 0.9 uplift in the gross margin was driven, as mentioned earlier, by positive product mix and country effects, thanks to the outperformance of our high-end portfolio from product perspective and of Greater China from a market perspective. However, this year in particular was also driven by significant price effects across all world regions. Secondly, the modest 0.1% improvement in the ratio of distribution costs was mainly down to strict control over holding company costs, which helped to offset higher distribution and branding costs. And thirdly, the A&P expense ratio increased by 0.4%. As you know, management is really keen to step up investment in brand building to help move our brand portfolio up market and drive significant organic growth, thus helping achieve the group's profitability targets.Let's now take a look at the rest of the income statement, beginning with other operating income, which totaled EUR 2 million, mainly consisting of gains on disposals of noncore assets. Financial costs increased to EUR 19.6 million in the half year, driven by 2 factors, one nonrecurring and the other noncash. I'll come back to this in greater detail in a later slide. Our tax rate rose from 27.9% to 29% due to changes in our geographical mix. Over the whole of 2018, '19, all things being equal, we are still expecting a tax rate of around 30%.There has been very little change in the associates and minorities lines, with amounts close to 0. Let me simply note that the group's investment in the Chinese wine company, Dynasty, had no impact over the period. The situation remains unchanged, with our investment valued at EUR 13.5 million as of September 30, 2018, which is equivalent to the value of HKD 0.36. This is equivalent to the value posted 30 September 2017 and 31 March 2018, in other words no effect whatsoever on our income statement.The net profit attributable to the group thus came in at EUR 85.4 million, down 4.3% year-on-year, but excluding nonrecurring items, net profit came in at EUR 87.5 million, down 3.1% but up 7.2% on an organic basis. Net margin, excluding nonrecurrent items, thus comes in at 15.3% in the half year and at 16.5 (sic) [ 16.6% ] in organic terms.Now let's look at the reconciliation table between net profit and net profit excluding nonrecurring items. Nonrecurring items amounted to EUR 2.1 million in the first half and all in all are a negative item. There are 2 key factors that explain this. On the one hand, we had a EUR 2.1 million gain mainly related to the disposal of noncore assets for EUR 2 million. And then we had a EUR 5.2 million nonrecurring expense linked to early repayment of the vendor loan by the EPI Group that corresponds to the difference between the amount repaid and the balance sheet value of the loan. The difference mainly corresponds to interest not due on the loan by virtue it's having been repaid early. Because as a reminder, this vendor loan was due to be repaid in July 2020. In total, this is a EUR 3.2 million accumulated charge that comes down to EUR 2.1 million after tax. So that's what you see on the table here.Now let's move to something that's very important, especially if you think of future of the company. Let's take a look at our post-IFRS 15, 16 and 9 reported figures and the reconciliation between the pro forma pre-IFRS figures and the reported post-IFRS figures over the first half.Starting with IFRS 15, which applies to income from ordinary activities derived from contracts with customers. The main impacts of -- are really now the norm is to reclassify some promotional expenses as deductions against sales. The amount that's reclassified in the half year was EUR 56.2 million, of which EUR 44.4 million deducted against sales and EUR 11.8 million recognized as an additional cost of goods sold.Now moving to IFRS 16, which covers leases. This mainly results in adjustments to the balance sheet, with group leases totaling around EUR 30 million now capitalized in noncurrent assets and in net debt. This has direct consequences on the profit and loss account. We're going to have EUR 0.3 million in additional depreciation under administrative expenses and on the other side a EUR 0.5 million increase in financial costs. In other words, this is tantamount to reducing our net result by EUR 0.2 million, but this is simply requalification without any actual impact on our bottom line.And finally, a highly technical change with the rollout of IFRS 9, which relates to financial instruments. This change entails reclassifying the time value of foreign exchange options and forward hedges within our balance sheet capital. The consequence of that is a pretax financial expense of EUR 3.4 million that was reclassified as a balance sheet item, in shareholders' equity. The net impact on net profit, excluding nonrecurring item, is therefore positive by EUR 2.1 million, while our net debt-to-EBITDA ratio increases slightly by 0.04 percentage points.If we now move to the next slide. We've tried to transcribe here the various items I just mentioned from the point of view of our current operating margin, which is one of the most significant indicators for our company. So if you look at Slide 27, you see that the new IFRS norms have boosted our current operating margin by 2.1 points over the first half. Our new current operating margin is therefore 26.2%, as against 24.1% on a pro forma basis pre-IFRS. Thus, this 26.2% value is what you should use as a base for your forecasts of H1 2019, 2020. The main variances are as follow. The gross margin declines because of IFRS 15 by 5 points, to be -- come in just below 62.5% as a result of some promotional expenses being reclassified as deductions against sales and increase in cost of goods sold. Conversely, the A&P ratio is down by 7.6 points to 13.2% due to a number of such promotional expenses being reclassified as deductions. And finally, the distribution cost ratio rises. Ratio has risen by a modest 0.5% to 23% due to a lower sales value, while distribution costs have remained in absolute terms largely unchanged.In other words, this has been all in all a positive impact knowing that it's mainly IFRS 15 that has impact our figures, whereas IFRS 16 and 9 have had quasi 0 impacts.I would like to take this opportunity to remind you of the guidance we had published when last we met. We're expecting a 500.5-point (sic) [ 5-point ] decline in our gross margin, an 8-point decline in the A&P ratio and a 1-point increase in the distribution cost ratio. In other words, on a yearly basis we're expecting an increase in our current operating margin of around 150 basis points and against the 210 basis points that have been announced. I wanted you to clearly understand the impact of our going by these new IFRSes.[Foreign Language] September 30, 2018 pro forma [Foreign Language] relative to 31 March 2018, for reference, working capital reaches a seasonal peak in September. The key items to note are as follows. Firstly, there was a significant change in recurring operating cash flow over the half year period. While there were a net cash generation of EUR 6.9 million in H1 2017, 2018, there were a net cash outflow of 1.1 -- EUR 101.9 million in the first half. With EBITDA almost EUR 5 million higher, this deterioration was mainly due to substantial variations in other components of working capital, representing a net outflow of EUR 100 million versus last year mainly driven by phasing effects mostly related to trade receivables and supplier payables. We therefore expect a significant improvement in this item in H2.The deterioration in recurring operating cash flow also reflects an EUR 8 million increase in CapEx, mainly relating to investment in manufacturing and IT capacity and a EUR 7 million increase in finance costs. The variation in finance costs mainly reflects the end of interest payments on the vendor loan by the EPI Group to -- in H1 given its early repayment. While cash interest received on this loan in H1 last year totaled EUR 5 million, other cash outflows were more or less the same as last year. As far as the eaux-de-vie and spirits working capital is concerned, the expected acceleration will take place in H2.Nonoperating cash flow was substantially positive over the first half for 3 main reasons. Dividend payments were down by around EUR 16 million, with 89% of shareholders opting to take their dividend in shares this year compared with 70% last year. The share buyback program started later than last year, resulting in a first half saving of EUR 25 million. Conversely, outflows in the second half will be higher. By last Monday, we had bought back 377,000 shares for a total of around EUR 39 million. Thirdly, the EPI Group repaid its vendor loan early, generating an EUR 86.8 million inflow.Overall, with EBITDA higher and net debt lower, our net debt-to-EBITDA ratio continue to come down, falling from 1.66x at September 2017 to 1.17x at September 2018.Now let's take a look at our net financial expenses, which was a charge of EUR 19.6 million in H1 '18, '19, implying a EUR 10.8 million increase versus last year's figure of EUR 8.8 million. Now again, there are 2 main factors explaining the increase of EUR 10.8 million: first of all, EUR 3.5 million deterioration in net currency losses, which is a noncash charge; and the second, EUR 7.5 million one-off impact related to the early repayment of the vendor loan, EUR 7.5 million year-on-year impact. Why? Firstly, let's start with the more technical point.The noncash net currency losses went from being an accounting gain of EUR 0.7 million to a EUR 2.7 million expense this year. For reference, this very volatile item corresponds to the mark to market of the portfolio of currency hedging instruments. Under IFRS 9, it will henceforth disappear from the income statement and be recognized only in equity. So for this year, for 2018, '19, in order to ensure comparison with previous series, we will have to have this impact on the pro forma. In other words, this is a volatile variation that is very hard to forecast. The second element is the early repayment of the vendor loan, EUR 86 million, that at the P&L level had EUR 7.5 million. Why so? There is a nonrecurrent EUR 5.2 million expense corresponding, as we've already said, to the difference between the amount repaid and the loan's balance sheet value. That's EUR 5.2 million, but you shouldn't forget the nonpayment of interest and the vendor loan this year, whereas we had booked EUR 2.3 million in interest payments over the same year. So the EUR 5.2 million will remain at that value, but the EUR 2.3 million will be doubled because -- when we move to a full year computation. So that will -- differential negative impact of about EUR 10 million.Well, after having looked into these 2, nonrecurrent for the first and noncash for the second, effects on our net financial expenses, we see that the gross financial debt fell by EUR 0.4 million to EUR 6.7 million, thanks to lower average debt over the period but also because the cost of debt has continued to drop. Now our cost of debt stands at 1.17%, knowing that all our long-term activities are at about 7-year maturities. In other words, this is very important because we're moving towards the time value of our stock. And it's very important for the future. For fiscal 2018, 2019, after these very technical discussions, we are expecting our finance costs to increase, due entirely to the early repayment of the vendor loan, nonrecurring expense and end of interest payments, by 4.6, but know that -- you have to note that the net currency losses are, as usual, very unpredictable and will need to be recalculated at year-end. But this is the last time that this nonrecurring item will appear in our accounts.Okay. Now a very important element, which is the impact of currency hedges. As mentioned earlier, the group reported adverse translation and transaction effects totaling EUR 9.6 million in the first half. This impact was negative but well below the original guidance of EUR 13 million due to the U.S. dollar having strengthened since the summer. The average euro-dollar translation rates, the gray line, came out at $1.18 over the half year, as compared to $1.14 over the same period last year. Meanwhile, the average hedge rate, the red line, under our currency hedging policy, which is very cautious and absolutely nonspeculative, was $1.19 over the half year compared with $1.16 over the same period last year, which explains that we have such a small difference over the year. But EUR 9.6 million as against EUR 13 million.For fiscal 2018, 2019, we now expect an average hedged rate of $1.18, as compared with $1.23 as we said in our previous guidance.Okay. What does this mean on a yearly quantitative basis? We now expect a negative currency impact of around EUR 3 million on sales compared with about EUR 10 million according to our previous guidance and EUR 11 million on current operating profit as compared to EUR 17.7 million in our previous guidance. In other words, this is better.So if we assume an average translation rate of $1.16 over 2018, 2019, with a spot rate assumption of $1.14 over H2, and I stress that this is an assumption, and an average hedged rate of $1.18 over the whole -- full year 2018, 2019. So the impact on our second half would translate into a very small downturn, but I wanted to be -- this is a bit detailed. If we assume the spot rate to be at $1.14, we would have this very minor dip.Let's move now to an overview of our balance sheet, the structure of which has strengthened over the half year with total assets, liabilities of EUR 2.54 billion, as against EUR 2.40 billion last year. This was driven by an increase in inventory value and a better cash position. Stock increased by EUR 50 million to EUR 1.17 billion at the end of September 2018 due to the increased capacity across our various categories this period, including in particular whiskey and rum and also -- and as already mentioned, increased purchases of cognac will become more visible in the second half. Stocks account for 46% of total assets booked at their historical value, not in dominant market value.The significant increase in cash currently stands at EUR 162 million mainly reflects the early repayment of the vendor loan by the EPI Group, with -- whose value, on the other hand, is deconsolidated from noncurrent assets. Our net gearing -- net -- our net debt-to-equity ratio improved over the period, down from 32% to a 21% pro forma value, thanks to lower net debt and higher equity.And lastly, pro forma net debt totaled EUR 303.9 million, equating 26% of the accounting stock value. Post IFRS 15, 16 and 9, group net debt totaled EUR 331.7 million, with the EUR 30-or-so million extra equating to the capitalized value of group leases under IFRS 16.Now let's review the key events in the first half of 2018, 2019. On July 2, the group signed a EUR 100 million syndicated loan funded by a pool of 6 banks, with a 5-year maturity and a much more attractive margin grid than what we had negotiated for previous syndicated loans. So this is much better. On July 10, the EPI decided to repay early the vendor loan that Rémy Cointreau had granted it in July 2011. The vendor loan was originally taken out for a period of 9 years and was supposed to be repaid in July 2020. Over the period, annual interest rate charges of 5.6%, depending on the year, were due to Rémy Cointreau.On 24 July, at the AGM, shareholders approved the payment of a dividend at EUR 1.55 per share, with an option allowing a full payment in shares. As I mentioned earlier, we had a record number of shareholders opting to take payment in shares, 89% of them in total, as opposed to 70%, which was already huge last year. And this generated a full year cash savings for the group of EUR 16 million. And finally, on August 1, 2018, the group decided to implement a share buyback program authorized by the Board of Directors for up to 1 million shares before April 30, 2019, at the latest. As you see, we started this program late and a bit slowly, but since then, we, the group has bought back 377,000 shares for a total of around EUR 39 million.Close to the end now with 2 post-closing events we would like to mention. One is something that we're very proud of. On 18th October, Rémy Cointreau was awarded third place by Gaïa Rating, EthiFinance’s ESG rating agency, in the category of companies with sales of over EUR 500 million, thus recognizing our global corporate responsibility strategy. We're very proud of this. And on October 26, to come back to something slightly more financial: Standard & Poor's upgraded group's rating from BB+ to BBB-. We are now rated investment grade by both S&P's and by Moody's. Moody's rates us Baa3.I will now give the floor back to Valérie Chapoulaud-Floquet for a look at the full year outlook.
Thank you, Luca.No big surprises in terms of full year outlook in light of the great results in the first half, I'd recall. We're very comfortable with our guidance in growth and current operating profit. We're giving no actual guidance. We confirm growth in current operating profit as in the 2 previous years.Thank you. I'd like to give the floor -- open up the floor for questions now.
I have a couple brief questions. First of all, China. You mentioned China continues to be very dynamic. Could we find out about depletion rates right now? And then in terms of H2, are you expecting early buying in Q3 for the new -- Chinese New Year? Or do you think that will be more in Q4? Another question, on marketing spend, very big investments here in H1. Can we expect something similar? I think you're expecting some events in H2. Can we expect such large spend in the second half as in the first half? What are the highlights in the second half in terms of product events?
In terms of what?
Products, launches or what have you.
First of all, in China, I believe many of other players in the industry have also confirmed that currently China continues to be very dynamic with long-, medium-term outlook. That's reassuring. Now will there be any leveling of? Nobody is a soothsayer. What we can say so far is that, when it comes to first half growth in the neighborhood of 30%, that's a great beginning of the year. Now depletions, the most recent figures, you're familiar with the Double 11, a good barometer, so to speak, of the market activity. We're in the neighborhood of 20% of sell-out. What we see in the market, there's a panel in China, but at minimum it'll be about an order of magnitude even terrific in China. So invoice, plus 30; some activities, Double 11; great performance last year already, standing at around 20% growth. So all in all, depending on circuit, brand and region, we can say it's between plus 20% and plus 30% growth actual in China. So no slowdown, especially since it's the third year running, strong catch-up effect. You'll remember in the first 2 previous years, particularly 2 years ago, plus last year. We're continuing at sustained pace. Basically, in spite of some of the macroeconomic factors we're all familiar with that lead us to -- well, we're careful. We pay attention to the market. We're very much watching the market in China. Things can change overnight in a blink of an eye. But any rate, today the macro known factors are what they are, not necessarily all that positive considering what's going on between China and the U.S., the stock exchange, the currency and so forth. Nevertheless, if you think of Chinese customers and the ones we are targeting, the figures have shown us that we can be very confident. That's basically all we can say so far, plus a very good Mid-Autumn Festival. I don't know if there's any rule and such in China as in other markets since the market is very volatile. Nonetheless, I would say what we do know is, when you've got a good Mid-Autumn Festival January, have a very good Chinese New Year, the Double 11, digital, e-commerce, very highly sensitive to the market. So things are looking very good. Very good festival. So we're expecting to have a very good Chinese New Year. Chinese New Year is towards the beginning of February. We're not expecting any major impact on Q3, possibly a few million, EUR 2 million, EUR 3 million, EUR 4 million, but no big effect in Q3. What we're realizing is that our partners in all the different tiers have a little bit shorter lead times. We're expecting more of a purchase impact, a buying impact beginning of January. We can tell the various wholesalers are paying careful attention to their cash and inventory levels. So maybe less repurchasing than previously, which is also why we're not expecting there could be a surprise, but we're not expecting any manufacturing in Q3 due to the date for February for the Chinese New Year. Lastly, on your second question, which is on communication spend: Our second half, pretty good pace as well in terms of advertising spending or equivalent we put above the line. It includes the media, mainly digital today but not only, mainly though; plus events; plus public relations. The second half will also be sustained in terms of spend in this area. We're thinking about 3 main brands that are assuming these investments, Rémy Martin, of course; LOUIS XIII, not unusual advertising but mainly events in public relations with our campaign, cognac campaign, nonetheless because there's a lot involved. It's a 360 for LOUIS XIII. Plus the new ad campaign for Cointreau. Our investments continue to be quite sustained in the second half. We're highly confident. The first half has gone well. No reason to adjust downward our investments. These are the 3 brands where we'll be focusing our efforts. Now Rémy Martin, this was already the case last year but even more focused this year. Investments will be focusing on XO. This is why we have this visual reading again, XO. We use this, especially in events and certain establishments during meetings with customers. It's not an official picture as such. However, investments for Rémy Martin have prioritized XO. When not XO, we've got a mix with intermediate quality, as we term it, mainly in the Western world such as -- and CLUB in Asia. And it's important because, in point of fact, since we want to upscale, it's very important for XO to be the spearhead of our communication or image. The next-level qualities, these are grades that are uniquely positioned, no equivalent for the time being among the competitors. It's important for us to state our uniqueness in that area as well. Another important point of recall in terms of success in the 2 intermediate qualities, 738 (sic) [ 1738 ] and CLUB: In Asia, for instance, CLUB in some countries is growing well above VSOP. In Asia, volumes are a lot more CLUB than VSOP. Price positioning is much higher. So you can see our strategy is doing well. It's successful. In some areas in Asia, we're now only beginning with the CLUB quality. [ In some of the shelves ] it's CLUB, XO and LOUIS XIII, of course. So this is the 3 houses that will fill the bulk of our investments significantly so in the second half, but Rémy Martin XO in the Western part of the world. 1738 and Eastern will be CLUB in addition. And no major launch in the second half of any new products.
I wanted to supplement what you just heard in terms of vision and how that translates for the second half. Context, first of all. We have this pro forma like-on-like vision, which is 10.1%. We told you so. We manage the company, with the organic growth as our main goal. And we're working for an ultimate goal of 13.5%. So what are the levers that we're going to have to work on to reach our goal, which is even higher than what we achieved over H1? The 10.1% we currently clocked in is certainly in line with our forecast, if not a little bit better, because we have a historical sharing out of the year between first and second half, with more activity in one than the other. So what are we expecting that might lead to an increase in our profitability rate over the second half? We're still extremely confident regarding sales, China in particular but also for the rest of the world, with some slight exceptions for Europe, but 7.7% is going to mean quite a lot in organic growth. Second point, we noticed that our gross margin is 90 basis points. That's certainly going to remain our main strategic lever to increase our profitability. Obviously, we're investing. We're also investing in strategic distribution. We're doing some OpEx. We've renewed partnerships with some operators, so some of the OpEx is highly strategic. And that will lead to an increase in our results in order to meet our goals in terms of organic growth, so plus 13.5%. So we're going to increase our gross margin, increase our investment. I just wanted to share with you these elements that are the financial underpinnings of what was said.
Aurélie Husson, Kepler. 2 questions. First, on an accounting front, what are your medium-term goals in terms of gross margin, with the role of IFRS 15, 16 and 9? Otherwise, you said that performance in Western Europe was a bit mixed. What exactly is the problem, your brand positioning or the markets themselves?
Okay. I'll deal with the market. And then I'll give you the floor, Luca. Let's look at Western Europe. Historically, our position is extremely strong on some markets, especially in Belgium and Luxembourg. We're traditionally very strong there, huge market shares. But as you know, Belgium adopted over 2 years ago price -- tax hikes, which led to a complete collapse of the spirit market. Initially, we thought that consumption would remain fairly stable, but in actual fact what we witnessed was utter total disaster. And for that matter, the same decision taken in other countries went to the same awful results. So we think the market contracted by at least 1/3 of its previous value. And surprisingly, and this is true also in other sectors I've been active in, what usually happens when you have that sort of situation, you'd see that there is a spillover in adjacent countries, whereby you can possibly think that, "Okay, Belgium is a small country. Consumption is way down, but we're going to see consumption go up in Germany, the Netherlands, France," but no. We were hoping to get 20%, 30% of our business back, but it didn't happen that way because in actual fact it's really consumption patterns that changed. So we've had a considerable drop in market. We had the feeling that this was going to stabilize, but it's not even totally the case. So what are we trying to do? We're trying to keep our market share, the same share of a smaller pie. We're -- the pie is shrinking, but we're trying to be as significant as the originator part of the pie. And we're true -- it's true that our brands are very good, but the situation is extraordinarily complex. And it's a fact for everybody in the industry. And in finis, not only have we not really clocked in what results we hope -- what we hoped, but we can't really see how this is going to happen. France is really pretty stagnant. It's very hard to develop activities here. We're fairly stable, but we -- we're suffering more of an impact on our mass-market activities, Cointreau in particular, but you know we have 2 partners in France, subsidiaries. Cointreau is now distributed by William Grant France, which used to be called Lixir. We used to have a joint venture. We moved out of that. Today, mass-market players are focused on one thing, to the exclusion of everything else, buying for less. So when you go see buyers and you tell them, "Okay, everything else that's happening, we're going to increase our prices by a bit." They'd say, "Okay, we'll see you next week because we're interested in lower prices," period. So we're doing all right in France, but there is no growth for Cointreau, but in a market that's fairly negative even in value, we're at least maintaining our share. And we're growing by 25% for the other part of the market, where we're partnering with Bollinger even with good contacts with resellers, et cetera. So we're witnessing further growth -- further decrease in growth in Belgium. Germany is a bit of a problem. We changed partners in Italy recently. As you know, when you do that, usually the first year is pretty terrible because you have to get to know each other. You have to position your brands on a different circuit; concentrate on the -- on nontrade, which is very high in Italy. And it usually takes 12 to 24 months worldwide usually for that to become a smooth process. So we think normally, it takes that long to restabilize things. We've also partially changed our distributing arrangements in Spain, and this is a bit more business as usual because we're changing -- we renewed the contract. And the U.K. is doing really rather well simply because the market is very buoyant. It's not even our brands. So that, when you look at what's happening in other market, so -- and what our competitors are doing, nobody is jumping up with glee regarding Western Europe being prospects. On the whole, we're fairly well represented there. And Eastern Europe has proved complicated during the first half of the year, although the market is pretty buoyant. We had a few commercial issues at the first -- during the first half. We were negotiating agreements in Russia. And we had a very tough beginning of the year in Ukraine, where things are typically very yoyo like. You've got a very good quarter, then a lousy quarter and back again. So we're very confident in terms of second half. Western Europe shouldn't change much, as opposed to Eastern Europe. We think the Middle East and India have started the year very well indeed. We changed our strategy there a while ago, and now we're finally reaping the benefits in terms of brands. And Africa remains a very strong potential area with huge differences, depending on the time, depending on the brand, depending on the market. Over the last 18 months, we had fairly high oil prices, countries like Nigeria. We're probably likely to have more foreign currency, but we didn't really see that translate into increased consumption. Europe is very diverse, and you have to retain. Western Europe is hard for everybody. U.K. is doing fine for the time being. We'll see what happens after Brexit, but it's a significant market because, remember, we brought back our activities there about 4 years ago and we're still on a rising trend. Luca?
Yes. I'll start with respect to financials. First of all, we'll see what guidance we have to publish in June, but for the time being, with a view to 2019, 2020, we are going to see the impact of what has been decided in the past. But at a 2019 scope: We finished the year with a profitability rate of 21% and guidance would be that we'll be up by 110 or 170 basis points at a 5-year horizon. Our landing point, we'll be 22.1% to 22.7% in terms of profitability, which will mean an improvement of organic profitability in the 55 to 85 basis points range. But what's important is the change in accounting standards. So our sales are going to shrink, but we're going to have profitability up by 150 basis points. This was something we did very well on in the first half, but with this goal of 150 and the dollar at $1.19, we might hit the 24.2%. We'll have to recompute everything on the basis of exchange rates at the end of the period. We think that -- post IFRS, we think that our organic profitability will be between 23.6% and 24.2%, after therefore the rollout of IFRS 15, 16 and 9.
Do you have further questions?Everything appears to be very clear. Thank you very much. Have a great day.