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Edited Transcript of CPR.MI earnings conference call or presentation 30-Jul-19 11:00am GMT

Q2 2019 Davide Campari Milano SpA Earnings Call

Milan Aug 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Davide Campari Milano SpA earnings conference call or presentation Tuesday, July 30, 2019 at 11:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Paolo Rinaldo Marchesini

Davide Campari-Milano S.p.A. - MD, CFO & Executive Director

* Robert Kunze-Concewitz

Davide Campari-Milano S.p.A. - MD, CEO & Executive Director

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Conference Call Participants

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* Andrea Pistacchi

Deutsche Bank AG, Research Division - Research Analyst

* Edward Brampton Mundy

Jefferies LLC, Research Division - Equity Analyst

* Marion Boucheron

MainFirst Bank AG, Research Division - Research Analyst

* Nico Von Stackelberg

Liberum Capital Limited, Research Division - Research Analyst

* Paola Carboni

Equita SIM S.p.A., Research Division - Analyst

* Trevor J. Stirling

Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst

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Presentation

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Operator [1]

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Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Campari Group 2019 First Half Results Conference Call. (Operator Instructions) At this time, I would like to turn the conference over to Mr. Bob Kunze-Concewitz, CEO of the Campari Group. Please go ahead, sir.

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Robert Kunze-Concewitz, Davide Campari-Milano S.p.A. - MD, CEO & Executive Director [2]

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Thank you. Good afternoon, and welcome to our first half year call. As you can see from our press releases and the rest, the first half has been pretty good with consistent solid performance across all of our key underlining indicators, driven by the strong sales momentum. If you have the presentation under your eyes, we move on to Page 4. I'll start commenting on the key highlights.

Importantly, continued sales mix improvement drove key -- high-margin global and regional priorities in core developed markets with also a nice recovery in emerging markets.

Net sales. You'll recall that we had a strong start to the year, we were up by 9.6% in Q1. Actually, Q2 was also pretty good. And this is important, given that it's a high seasonality quarter for aperitifs. So net-net, we were up 6.9%. And this, yes, on the one hand, was helped by the late Easter effect. But on the other hand, we had quite a challenging comp base. Last year, we were up by 8%. And as you all know, also from our other peers as well as brewers, the weather was pretty bad in May, so that had a negative effect. So net-net, we feel pretty good about the results.

Looking at it by brand, we have positive growth across all of our brand clusters. The global priorities outperformed. They were up almost double digit, 9.8% despite the tough comp base. Last year, they were up by 8.7%. Behind the key suspects: Aperol, Campari, Grand Marnier as well as the brown spirits. While SKYY as we programmed it, continued declining in line with our destocking exercise.

The regional priorities, they were up nicely, double digits, 10.8%, gaining momentum, driven by Espolòn, Averna, and Riccadonna. And Local Priorities returned to growth, up by 4%.

Looking at it on a geography basis, positive growth across all of our regions, with very solid growth across our high-margin developed markets, particularly North America and Western Europe.

On the other hand, lower margin emerging markets continued their positive trend, notwithstanding the quite impactful volatility from a macro as well as economic and political standpoint in those regions.

Reported a net sales change of 9%, reflected a slightly negative perimeter effect, which was negative 1.4%. That was the tail end of the discontinuation of the Brown-Forman distribution in Italy, which was more than compensated by a quite positive FX, driven by the dollar of plus 2.3%.

Looking at EBIT on an adjusted basis, we had a very nice organic growth of 10.6%. So this is ahead of the organic sales growth, leading to a 50 bps margin accretion. And this is clearly driven by the strong organic gross margin expansion of 90 bps, thanks to the positive sales mix by both brand and market.

And this, it's important to underline, despite the dilutive effect of the emerging market recovery and the worse-than-expected agave impact.

Looking at reported change, it was up 12.3%, and this takes into account the negative effect of disposals as well as the positive ForEx.

Net profit on an adjusted basis was up 11.8%. On a reported basis, was down by 16.6%.

To close off the highlights, net debt -- net financial debt stood at EUR 937 million (sic) [EUR 937.1 million], which is an increase of EUR 90.9 million versus the beginning of the year, and this is mostly driven by the first-time adoption of the IFRS 16 leases accounting principle. Net-net -- this brings us to a net debt-to-EBITDA pro forma ratio of 2.1x at the end of June.

Now I'm not going to dwell much on Page #5 because I'm going to go into the details, but it's always nice to see all of the regions and all of the brand clusters growing.

Moving on to Page #8, just we're underlining the fact that the U.S. now accounts for 29.3% of our total sales. So it's, by far, the most important and nicely growing region. And on that note, I'll move on to Page #9, analyzing the Americas, where you can see nice overall growth, organic growth of 9.9%. ForEx also helped with a 5.5% positive impact.

Looking at it by sub-continent. North America was up double digits, 10.3%; led by the U.S., up 10.9%, very nice half year performance with a strong Q2, up 10.7%, driven by the continued outperformance of Espolòn, Aperol, Campari, the Wild Turkey portfolio -- all grew at double-digit rates. And we also had the positive contribution of Grand Marnier as well as the Jamaican rum portfolio.

SKYY, as I commented earlier, the portfolio declined by 5.8% as it continues to be affected until the end of Q3 by the destocking exercise.

Jamaica, very strong, up 18.6%, continued very positive mix, driven by the high-margin Wray & Nephew Overproof, up almost 20% and Campari up almost 16%.

If you look at the rest of the region, it was only up by 1.9%. Canada did quite nicely, up 7.4%, largely thanks to Aperol, but also SKYY Vodka and Campari. Whereas Mexico declined slightly, and this despite the core -- I mean the main largest brands, SKYY ready-to-drink doing quite nicely, but was impacted temporarily by the weakness in the Jamaican rums.

Moving on to the Southern Cone. South America was up 6%, with Brazil up 6.9%. We had positive growth in the first half, albeit on the back of a pretty easy comp base. You'll recall, we were down 27% last year. But the good news is that, again, here, the mix is quite positive with Aperol, SKYY Vodka and Campari doing very nicely.

Argentina, up double digit, and this after accounting for hyperinflation. Up 14.2%. A positive performance, but largely due to Cinzano Vermouth as well as to the growing importance of the SKYY brand, and again, of Aperol. The rest of the region, down 17%, but this is our partnership market, so it's mostly shipment phasing.

Moving on to Southern Europe, Middle East and Africa, on the following page, up 7.7% organically. Quite impressive results in Italy, up 6.7%, very solid, with continued growth in Q2 despite the very poor weather in May -- in Q2, we were up 6.9%. Again, here it's the core aperitifs business driving it, with double digit, strong growth behind Aperol, 12.2%; followed by solid growth on Campari. And I'm also pleased to see our mono, those small size aperitifs, Crodino and Campari returning to robust health with Crodino up by 3.2% and Campari Soda by 5.8%.

The rest of the region was up double digit, 10.9% with a very strong performance in France, up 26%, again, mostly driven by Aperol and then obviously, Riccadonna, which goes in tandem with Aperol and the Aperol Spritz.

Spain grew low-single digit. Again, nice growth behind Aperol and Cinzano Vermouth. Some temporary phasings on promo slots on Campari, but the brand most affected there is Bulldog due to the vinification of the gin category.

Looking into the African markets. Nigeria, although the market is not all that healthy, we grew nicely, 22.2%, behind Campari and American Honey. And South Africa also grew, thanks to SKYY and Bulldog.

GTR was flattish at 1%. And this is, on the one hand, due to the comp base with last year -- that business being up 15.3%. Continued positive trends in Aperol and GlenGrant and Appleton Estate and then some phasings on the promo slots on the rest of the portfolio.

Moving on to the rest of Europe. North Central and Eastern Europe, up 7%. Very nice performance in Germany, up almost 4%. And here, clearly, the weather was very impactful and slowed down our aperitifs business quite a bit in May. And bear in mind that we also had quite a tough comp base in this area as we grew by 14.9% last year. Aperol doing nicely. And again, positive trends across most of the portfolio: SKYY Vodka, Frangelico, Averna, and GlenGrant. This helped offset the negative trends on the Cinzano portfolio and Ouzo 12, and Campari also returned to growth following the price -- significant price increase we put through in January of this year.

U.K., continuing to grow double digit, 14%, very solid results. Aperol doing very nicely, up by 25.8%, as well as the whole Jamaican brand portfolio, up by a cumulative 35%.

Russia also up by 10.9%. Again, this is one of the markets where the comp base is quite easy. Last year, we were down by 25.2%. We have nice growth behind Aperol, which is really becoming a significant brand in that market. And Cinzano and -- Vermouth as well as sparkling wines doing a little bit better in a quite highly volatile market, especially when looking at mainstream brands.

The rest of the region was up 8.4%, with very strong performances across Austria, Benelux, Scandinavia, and most of it, again, was driven by aperitifs. But not only Aperol and Campari, but also Crodino, which is becoming a meaningful brand in those areas.

To close up the regions, Asia Pac, up 1.1%. The largest market, Australia, doing nicely, up 3.5%. We're actually doing quite nicely because bear in mind, that last year, we had a comp base of 10.7%. We're growing twice as fast as the market across categories, so taking share. Again, Aperol doing very nicely, growing double digit, 26%. And we're doing also pretty well in the Wild Turkey brand, both on the ready-to-drink as well as on the Bourbon, with the premiumization helping marginality.

The rest of the region was down 4.3%, and this is mostly due to a double-digit decline in Japan. But this, again, is something driven by both comp bases as well as phasings.

China was back up around 17.5%. And this is an area we'll pay more and more attention to looking forward.

Looking on Page #13, the only thing worth underlining is that the Global Priorities now account for 59% of our sales, which is a nice 200 basis points increase versus last year.

Looking at -- into detail by brand, kicking off with our largest brand, Aperol now accounts for 20% of our sales, growing in the first half on an organic basis, very, very robust 22%. This, despite the bad weather impacting the core European markets.

We're continuing to grow double digit in those markets and by a very strong double-digit in our high potential and seeding markets across the globe.

Campari, up 5.8%. Solid performance, again, in Italy, double-digit in very profitable markets like the U.S., Jamaica, Brazil and Austria. Flattish performance in the key market Germany where we took a big price increase in January. So we had quite a few declines in the first few months of the year, and we're now recovering ground.

Moving on to our Bourbon portfolio, up 11.4%. This is across the core U.S., which was -- which has grown by 15% as well as Australia. And the -- both of these markets also through their premiumization and the success of Longbranch, helped offset the temporary decline in Japan.

American Honey registered double-digit growth in the U.S. as well as in some other key markets, particularly in Nigeria.

Now the one brand which is suffering on a shipments basis is SKYY Vodka, which is down by 3%. This, you all know, has been piloted by us, the U.S. down 5.8%, whereas we're having very nice positive growth in the rest of the world.

Our rum portfolio, up 7%, and the hero is Wray & Nephew Overproof, up 14.5%. Solid trends, not only in Jamaica, but particularly in the U.S. and in the U.K. and in Canada. Appleton Estate, on the other hand, grew a little bit slower, 2.9%, with Canada, which is its second largest market, actually slowing it down due to the price repositioning.

Sticking to our regional priorities, Espolòn, very strong, up 46.5%. Clearly, this is driven by the core U.S. market, which is up by a healthy 50%. And it saw an acceleration in Q2. And we're also seeding very effectively in other markets, particularly Australia, Italy and Canada.

Bulldog, as I said earlier is impacted by what's happening in its core market of Spain, but also Belgium. These are 2 markets impacted by the craft gins. We think that the brand will weather this out.

On the other hand, we're continuing to do very nicely in all other regions.

GlenGrant, on the other hand, is down 11%. And this, again, is a choice we took. We've put all of our markets on reduced volume allocations as we're transforming the brand from a nonage into a longer-aged premium expressions, and this is something which will continue. Forty Creek slowed a little bit down, 1%, and this is some temporary weakness in the core market of Canada, but we expect it to return to nice sustained growth in the second half of the year.

Moving on to the bitters, the amari. Up 1%. This is mostly driven by Braulio, which -- where we, again, took a robust price increase in Italy, and it slowed us down a little bit. There's some weakness in Cynar in core Italy and seeding U.S. But we were able to compensate via Switzerland, Brazil and France. Averna, on the other hand, positive results, not only in Italy, but particularly in the more profitable German and U.S. markets. Last and -- but not least, flattish performance on Frangelico, where good growth in Germany was offset by weakness in the U.S., Spain and Australia.

Cinzano, down 1.1% with the Vermouth being relatively flattish. Positive growth in core markets, such as Russia, Argentina, and the Czech Republic, but offset by weakness due to the relaunch of the brand and the repositioning of price in rest of Europe. Our sparkling -- the wines were down 1.9% due to the weakness in the core markets of Germany and Italy, whereas Russia turned positive.

Moving on to Mondoro and Riccadonna, our other sparkling wines, up double digit, where Riccadonna more than compensated some weakness in Mondoro.

Last and -- but not least, our local priorities, very pleased to see Campari Soda growing by 5.8%. Again, this is all driven by Italy. Crodino, it's a balance of a nice return to positive performance in Italy, but also a strong growth in our seeding markets, particularly in Benelux, Germany and the Czech Republic.

On the Bourbon ready-to-drink in Australia, Wild Turkey, we're taking market share and accelerating. The Brazilian brands are up to a modest growth, but slowed down in Q2. So this will remain a challenged area of the business. Not the case on Ouzo 12, which is more impacted by the scheduling of promo slots, slightly up 0.7%. But if you look at it by the end of July, it reverts to trend. In Cabo, to close it all up, up by a nice 5.9%, accelerating in Q2.

This is it on the commercial overview, and now I pass on to Paolo for detailed financials.

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Paolo Rinaldo Marchesini, Davide Campari-Milano S.p.A. - MD, CFO & Executive Director [3]

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Thank you, Bob. If you follow me to Page 20, the analysis of net sales and EBITDA (sic) [EBIT] by region. There we can see that the Americas remained the group's largest region in terms of both net sales and profitability, with regional net sales at 45% of group net sales and regional EBIT at 42% of the group's EBIT.

And as we can see in the following slide, Page 21. You know the performance in the largest region, in Americas, has been in H1 quite robust with an organic top line growth of 9.9%. And an EBIT organic growth of 8.5% in value with 20 basis points dilution -- as you can see to the right-hand side of the slide, driven by both gross margin and A&P dilution partly offset by SG&A. But in particular, looking at the gross profit, the gross profit expanded in value by 9.5%, showing a 20 basis point margin dilution which was driven by 2 factors: first and foremost, the increase in the agave price that create a massive dilution impact in the region as well as in group's result, as we will discuss later. And second factor was the recovery in emerging markets, most notably, Brazil and Argentina.

With regards to the A&P. A&P in the region grew by -- in value by 15.8%, driving 100 basis point margin dilution. Dilution totally driven by different phasing of A&P investments in the region behind key global brands.

With regards to the SG&A, on the contrary, the increase in value in existing business accounted for 4.5%, well below the top line growth, driving 100 basis point margin accretion as a consequence of the downsizing of the local structures in South America.

On a reported basis, EBIT grew by 15.6% year-on-year, achieving 19.8% of sales at EUR 76.1 million.

Moving on to Page 22. We have the analysis of the performance of the SEMEA region. Again, also here, a very solid performance with organic net sales growth of 7.7% and an organic EBIT increase of 14.9% in value. That disproportionate increase of EBIT drove 130 basis point accretion at the EBIT level, driven by gross margin expansion, A&P containment as a percentage of sales, partly offset by SG&A dilution effect.

Looking at the gross profit, the very robust, strong -- a very robust gross margin expansion, 110 -- which accounted for 110 basis point was clearly driven by a solid performance of high-margin aperitif portfolio, particularly Aperol and Campari in high-margin markets.

A&P grew in the first half by 1.5% in value, driving 90 basis points accretion. And this, contrary to the Americas region was driven by a phasing effect, which had a lighter impact of A&P in H1 vis-à-vis H2. With regards to the SG&A, the increase in the region in value accounted for 10.4%, leading to 70 basis point dilution, and was primarily attributable to the strengthening of central structure at group level.

On a reported basis, EBITDA (sic) EBIT grew by 11.7% year-on-year, achieving 20.2% of sales with 150 basis point EBIT margin expansion.

Moving on to Page 23. We have the analysis on the North Central and Eastern Europe. Again, also, for this region, a very solid organic top line performance and sales up 7% in value, and a robust bottom line increase of the EBIT at 6.9% in value, with basically neutral impact on margin, driven by very strong gross margin expansion, totally offset by dilutive effect, which is visible at both the A&P and SG&A level.

With regards to the gross profit, gross profit grew ahead of net sales, 10.1% in value, driving 190 basis point expansion on the back of a very solid sales mix improvement; led by the positive performance of the high-margin aperitif portfolio, in particular Aperol, which grew by double-digit in core high-margin markets such as Germany and the U.K.

The A&P increase, which was 11.7% in value, drove 80 basis points dilution on the back of stronger support on the aperitif portfolio in the key seasonality period.

SG&A, again, they grew quite strongly in H1 at 14.2%, driving 110 basis points dilution, reflecting the enhancement of this organization in selective high-potential markets. So this is the markets where we open up our own distribution company.

On a reported basis, EBITDA (sic) EBIT grew in value by 6.9%. And in so doing achieved 29.7% of net sales at EUR 49 million (sic) [EUR 49.1 million].

Moving on to the last region, APAC, Page 24. The region delivered in existing business a moderate top line growth of 1.1%, but a very solid bottom line performance with an increase of EBIT in value of 35%, driving also 3% EBIT margin expansion, 290 basis point precisely. With gross margin and A&P, driving accretion -- accretive effect on the EBIT level, partly offset by the dilutive effect due to the increase of SG&A ahead of the top line.

Gross profit expansion, 280 basis points, was driven by the positive sales mix. In particularly, the biggest market, Australia, performed nicely in the first half.

With regards to the A&P, we -- in that region, we had a decline of A&P due to phasing -- different phasing of our marketing initiatives, which drove 190 basis point accretion. On the contrary, SG&A grew by 9.1%, below top line growth, driving 180 basis points margin dilution, totally driven by lower absorption of fixed costs, given the contained top line growth, and that was due also to the combined effect of the enhancing of our sales organization in our largest market, Australia.

Looking at the overall performance on a reported basis, the regional EBIT expanded by 26% in value, achieving 11% of net sales.

Moving on to the full year results. As Bob has just highlighted, at Page 26, we have the P&L in one page, most notably top line organic growth of 8%, coupled with an EBIT adjusted organic growth of 10.6%, this could be seen as a very robust performance. Taking in consideration in H1 of last year, the EBIT adjusted increase in value accounted for 9.5% -- so 10.6% over 9.5% is a remarkable performance.

More in detail, as we can see on Page 27. We have started from gross profit. On a reported basis, the gross profit grew in value by 11.4% to 62% on sales, driving on an overall basis 140 basis points accretion.

Looking at the organic performance, the increase in gross profit in value accounted for 9.5%, showing a 90 basis point gross profit expansion. The organic growth of gross profit -- well ahead top line -- was due to the particularly favorable sales mix by both brand and market. And that was achieved despite the dilutive effect of EMs, emerging markets, particularly South America, which performed nicely as well as due to the increasingly more adverse effect of the agave purchase price. In the first half, the dilutive impact of still rising agave prices accounted for roughly 30 basis points, which is a lot, considering that we delivered in the first 6 months 90 basis point organic expansion of gross margin, which would have been 120 basis points.

On the A&P front, on a reported basis, A&P grew in value by 12.3%, achieving 17.9% on a percent of sales, with 60 basis point dilution. In existing business, the increase of A&P accounted for 9.4% in value above the top line growth, thus leading to 30 basis point margin dilution at the level of A&P, which reflected the higher marketing investments, particularly behind global brands such as Aperol, Campari, SKYY and Grand Marnier as well as certain selected regional priority brands, particularly Espolòn, which is positively reacting to the A&P stimulus.

With regards to the SG&A, on a reported basis, SG&A grew in value by 9.9%, achieving 22.9% on sales and leading to 20 basis point dilution. But in -- more in particular, if you look in the existing business, SG&A organic growth in the first 6 months of the year accounted for 8.6% in value, slightly above top line growth, leading to 10 basis points of margin dilution.

With regards to the EBIT adjusted on a reported basis, first half delivered an increase of EBIT on a reported basis of 12.3% in value, with EBIT on sales at 21.3% and driving 70 basis point EBIT margin expansion. But looking at the existing business, the performance, the organic performance was quite solid, with an EBIT adjusted increase in value of 10.6% above top line and still 50 basis points of margin accretion, notwithstanding the 30 basis point agave negative impact in the first half, and notwithstanding the reinvestments in the A&P line, which I said before, accounted for in existing business, 30 basis points.

With regards to the EBITDA adjusted, the performance was even more robust with an increase in value of 14.4% to 25.4% on net sales. Bear in mind that the disproportionate increase in EBITDA adjusted versus EBITDA is attributable to the incremental depreciation that we have in 2019 due to the first-time adoption of IFRS 16 on leases.

The organic performance of EBITDA adjusted was quite strong with an increase of 12.7% in value and with a very solid 100 basis point margin expansion.

Page 28, we have the breakdown of the waterfall for EBIT adjusted from EUR 160 million to EUR 180 million coming from organic and a little bit of ForEx. Organic, EUR 17 million uplift, corresponding to 10.6% of increase as a percentage, with 50 basis points. The perimeter -- sorry, the ForEx is positive as well, with EUR 4.3 million uplift at EBIT level, 10 basis points accretion. This is driven clearly by dollar and euro in the second half of the year.

Clearly, dollar will be still a positive, although with a less meaningful impact, and that we will suffer from the adverse comp on emerging market currencies in peak season, so the EUR 4 million uplift contribution from ForEx at EBIT level in H1 has to be seen as the overall contribution that we are currently expecting for the full year.

Again, perimeter is quite tiny. So they're attributable to the termination of certain distribution agreements in Italy, which, on one hand, drove EUR 1.5 million EBIT erosion, but on the other hand, was accretive to the EBIT line.

Moving on to Page 29. We have the analysis of financial charges, which stood at EUR 15.1 million versus EUR 14.8 million of last year. So more or less unchanged, despite the lower average indebtedness, EUR 892 million this year versus EUR 955 million for last year -- average indebtedness. With an average cost of net debt of 3.7%, which is reflecting the negative carry on excess cash. On top of that, we have the negative effect of the first-time application of the IFRS 16, which accounted for EUR 1.7 million.

Worthwhile noting the EUR 3 million charge in the line put option, earn out and hyperinflation effects are primarily driven by a hyperinflation effect in Argentina, which accounted for EUR 2.3 million.

If you look at Page 30, we have the analysis of the group net profit, with the year-on-year performance. The level of pretax profit, EUR 162 million versus EUR 145 million for last year, still is a double-digit performance at the level of pretax profit, up 12.1% in value. And the net -- the group net profit adjusted is still up 11.8% at EUR 116.7 million. If you look at the comp in terms of total adjustments, this year, we have a EUR 6.1 million positive effect, which clearly takes into consideration the positive impact of patent box, EUR 12.5 million -- which more than offset the negative impact of operating adjustments and the relating fiscal effects, respectively, EUR 8.6 million and EUR 2.2 million.

Last year, clearly, we had in the first half, EUR 42.8 million of positive one-offs, primarily driven by, again, patent box. But also the disposal of Lemonsoda. And so we have a delta of -- a meaningful delta, which creates a shortfall at the level of group net profit, once we factor in the adjustments of 16.6% in value.

If you move on to Page 32, we have the analysis of free cash flow. In the first half, free cash flow reported came in at EUR 81.2 million, down EUR 29.7 million versus last year on a reported basis. With a recurring free cash flow that is what we see as a sustainable cash flow at EUR 86.2 million, meaningfully down versus last year, EUR 52.3 million. The key drivers were the increase in EBITDA. The underlying EBITDA was a positive factor with an uplift of EBITDA in the first half of EUR 27.1 million. Which was totally offset, more than offset by a temporary big variation in operating working capital of EUR 56 million, driven -- primarily driven by lower change in receivables, which accounted for EUR 66.4 million due to the shift in sales orders from May to the back end of Q2. And that was clearly, as already highlighted, linked to the adverse weather conditions in May and the beginning of the quarter.

On the other hand, we still have as a negative impact, a higher increase in inventory, which generated a negative impact of EUR 4.9 million, and that was partially offset by an increase in delta payables of EUR 15.2 million versus last year, which is a positive -- but still, in total, the delta change in operating working capital accounted in the first half for EUR 56 million. But it is a temporary effect that will be absorbed by year-end.

Page 33. We have the operating working capital. Operating working capital at June end came in at EUR 718 million versus EUR 636 million of last -- of December end. So an organic expansion of EUR 77.2 million, with changes in inventory payables and receivables that are totally attributable to the peak and the seasonal factor. Worthwhile highlighting the change in receivable on a like-for-like basis versus June of last year, as I have just explained before, which accounted for EUR 66 million of the EUR 77 million that we see here. So for the year-end, we confirm basically the target of achieving a working capital on sales in line with prior year, which stood at 37.2%.

Moving on to Page 34. We have the net financial debt, which stood at EUR 937.1 million, up by EUR 90.9 million versus last year due to the impact of first-time adoption of IFRS 16, which clearly also lifted the net debt-to-EBITDA pro forma ratio from 1.9% of last year to 2.1% -- sorry, 1.9x of last year to the level of 2.1x of June end this year.

Page 35, we have the debt maturity profile. It was quite solid. Long-term gross debt of EUR 1.2 billion. Exceeding -- well exceeding the overall indebtedness of EUR 937 million. And at the short end of the maturity curve, you see that net of the euro bond that it is to expire in October of this year, accounting for EUR 200 -- almost EUR 220 million, we still have in excess of EUR 500 million of cash available to fund potential acquisitions.

I think this is it on numbers. Bob, I would hand it back to you for the comments on marketing initiatives and developments.

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Robert Kunze-Concewitz, Davide Campari-Milano S.p.A. - MD, CEO & Executive Director [4]

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Yes. Thanks, Paolo, a quick marketing recap before moving on to conclusions, but most importantly, your questions. This year is an important year for us. We have 2 major celebrations: 100 years of Aperol, which we kicked off with a big bash in Venice, with a live concert in St. Mark's Place (sic) [St. Mark's Square]. Lots of influencers, journalists, customers that went on TV afterwards, and we duplicated to a certain extent that in many other markets.

Campari, on the other hand, benefited from the 100 years of the Negroni cocktail. The Negroni, as you know, is our proprietary cocktail, and it's the second cocktail in terms of sales in premium bars. The Negroni week this year was very successful. We reached almost 13,000 venues. And it's becoming much, much more international. So this will have a nice impact on Campari when we move into the second half.

On SKYY, we're continuing on the diversity agenda as well as innovating on the flavor side, doing the right things on the gin and relaunching Averna behind the Sicilianity.

To round it up, some very nice awards collected recently on our brown spirits. And clearly, the one we're most proud of is GlenGrant 18 Year Old, which was voted by Jim Murray as the best whiskey in the world for the second year in a row, and this clearly vindicates our aging and premiumization strategy on the brand.

With regard to conclusion and outlook, I think it's quite clear. This is a very strong first half driven by a combination of both positive underlying sales momentum in core developed markets and thanks to really the high-margin global and regional priority brands, but as well enhanced by a recovery in emerging markets.

Now for the full year, our outlook remains actually fairly balanced in terms of risk and opportunities. Looking at it from an organic perspective, we expect the positive business momentum to continue. Clearly, we wouldn't be surprised if there is volatility in emerging markets in their key seasonality periods. As you know, Argentina, Russia, as well as Brazil are pretty skewed to Q4.

On the EBIT front, we see sustained value growth in EBIT, driven by the positive business momentum. However, our EBIT margin expansion will be moderated by the higher-than-expected increase in agave purchase price, which, at the same time, is exacerbated by the outperformance of the Espolòn brand.

The strengthening of the U.S. dollar against the euro, as Paolo was saying earlier, is expected to lessen in the rest of the year. On the other hand, emerging markets currencies are expected to remain volatile during the second half peak season. So tail end and perimeter effects will phase out during the second half of the year.

The reported net profit is expected to benefit, both from the net positive adjustments of approximately EUR 14 million, driven by the patent box tax relief in the year 2019, which will be its fifth and final year, net of restructuring provisions as well as related fiscal effects.

So net-net, we remain confident in delivering a positive performance across all of our key underlying indicators on a full year basis. And at this stage, we'll open it up to your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Edward Mundy with Jefferies.

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Edward Brampton Mundy, Jefferies LLC, Research Division - Equity Analyst [2]

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Bob, Paolo. Three, please. First of all on Aperol, still growing at a very good clip, but slightly slower in Q2 versus Q1. I appreciate that we shouldn't take 1 quarter out of context, and I appreciate that comps were also tougher. But was it really just weather that was the main drag on Aperol within Q2?

The second question is on rum. I appreciate that the potential Martinique-based rum bolt-on is pretty small and it's more about getting critical mass in France, but I'm interested in what you're seeing at the grassroots level in rum and how the brand may complement Appleton?

And then the third is on, Paolo, on margins. I think in the outlook today, you're flagging that EBIT margin expansion will be moderated by higher than expected increase in agave purchase price, which you flagged at sort of 30 bps in the first half. So I was wondering whether you could flesh out how you see margins for the full year in light of this outlook piece.

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Robert Kunze-Concewitz, Davide Campari-Milano S.p.A. - MD, CEO & Executive Director [3]

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Ed, I'll take the first 2. I mean on Aperol, very quick answer, yes: It is clearly weather because we saw the brand do very well till the end of April, slowed down significantly in May and then ticked back up, returning to normal growth rates in June and seeing very nice progression in July. So it's very healthy, very sustained growth on the Aperol brand.

With regard to rum, I mean, we're believers in rum, we think that rum, high-quality dark aged rums as well as craft rums like Martinique rums will do well, and they're growing and taking share and mixologists are behind it. There is the return of premium [tiki]. So we're starting to see some action there. And it was a nice complement to our rum portfolio. But as you said, in the, let's say, foreseeable future, it's going to impact more our critical mass in France.

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Paolo Rinaldo Marchesini, Davide Campari-Milano S.p.A. - MD, CFO & Executive Director [4]

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Yes. And with regards to the EBIT margin, you're right, we wanted to call out the agave effect. It was unexpected at the beginning of this year. So we were expecting to have a neutral impact of agave this year, as you know, last year, we had a major increase in agave price which overall cost us EUR 10 million at EBIT level. On the contrary, we believe the 30 basis points margin dilution, gross margin, EBIT margin dilution coming from agave is expected to continue to be there in the second half of the year. So for the full year, we're expecting adverse agave effect of 30 basis points, corresponding to EUR 5.5 million, call it, EUR 6 million negative impact at both gross margin and EBIT level.

So in order to recap where we are on margins overall, we've said that the underlying EBIT margin expansion trajectory is 120 basis points. That has been confirmed both in 2017 and 2018. From there, a number of haircuts. The first one is the comeback of EM, so emerging markets that, as we said, are costing us about 30 basis points. With a more visible impact in H2, clearly, where the EMs have their peak season. Then we have further 30 basis points that are coming from agave. And so we end up with a potential net gross margin uplift of about 60 basis points.

And then, probably, we may have a little bit of drift in A&P and SG&A on a cumulative basis -- I do not have a crystal ball but would have said in the region of 30 basis points. So the EBIT margin expansion this year, unfortunately, is not big. But I would like to underline with regards to agave that if we applied the 2016 agave prices to the 2019 volumes in our business, both -- Espolòn for sure -- but also Cabo Wabo, in total, we're talking of a EUR 30 million negative impact at EBIT level. That potentially, we see that as an opportunity going forward. Clearly, in the short run, agave is not favoring us at all. But in the long run, clearly, as our tequila business expands further, the opportunity becomes bigger and bigger, if and when the agave price would eventually come back.

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Edward Brampton Mundy, Jefferies LLC, Research Division - Equity Analyst [5]

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Very clear. And I appreciate you don't have a crystal ball, but do you have a sense as to when or if the agave price may come back?

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Paolo Rinaldo Marchesini, Davide Campari-Milano S.p.A. - MD, CFO & Executive Director [6]

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Yes. We believe that 2020, at least, should be neutral. No fully marginally positive. So our -- seeing the further risk in agave, so basically we're shifting everything by 6, 12 months. So for the time being, our assumption is neutral full year 2020. With, clearly, H1 negative impact; in H2, positive. As you know, the price will start coming down. And neutral for the full year. And thereafter, 2021, accretive impact. Then from 2021 onwards, we believe if the analyst forecasts are met, that the agave price will fall quite dramatically. So it won't take much to go back to normality, but the inflection point is not yet achieved -- that's the point, not in 2019.

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Operator [7]

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The next question is from Trevor Stirling with Bernstein.

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Trevor J. Stirling, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [8]

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Bob and Paolo, 2 questions on my side, please. One is, I wondered, Bob, can you just give us a little bit more color on Aperol in the United States? Has there been a weather impact there as well? Because -- the beer companies have been talking about that.

And secondly, Paolo, just looking at the phasing of the margins, it looks as if there was maybe flat margins in H -- sorry, Q2, maybe slightly down, but it also looks a lot of that, that was the ramp-up in A&P and the sales enhancements. Is that the right way to look at it?

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Robert Kunze-Concewitz, Davide Campari-Milano S.p.A. - MD, CEO & Executive Director [9]

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I'll take the first one. Trevor, I mean, there was a slight slowdown in May, but I mean, Aperol is growing at a very strong rate in the U.S. And we were especially very pleased to see -- I mean you might have noticed that there was quite a negative press, I mean, press clipping and article, which came out in a major national newspaper. And then within 48 hours, really, thousands of our consumers, celebrity, normal people retaliated very, very fiercely defending the brand and underlining their love for the brand, and that really encouraged us to think that we've got a bright future in the U.S. We're growing in the 45%, 50% clips, which is quite nice because every year, the base is getting bigger.

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Paolo Rinaldo Marchesini, Davide Campari-Milano S.p.A. - MD, CFO & Executive Director [10]

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Yes. With regard to the margin progression in the second quarter of this year, we clearly had an acceleration of growth in existing business -- of gross profit expansion. In Q1, group achieved 20 basis points. In Q2, the gross profit expansion accounted for 130 basis points, so quite a change. And that was clearly driven by the aperitif portfolio in high-margin geographies.

And on the other hand, as we have guided in March, the A&P phasing is quite adverse in Q2 and Q3. So the step-up of A&P in the second quarter was strong, so that drove to a lower EBIT margin expansion in the second quarter of this year.

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Operator [11]

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The next question is from Marion Boucheron with MainFirst.

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Marion Boucheron, MainFirst Bank AG, Research Division - Research Analyst [12]

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3 questions for me, please. The first one, just following up on A&Ps. I figure the phase in Q2, Q3, but in full year are we still looking for a flattish level, give or take 20 bps?

And then the other question is on rum. So you mentioned that you reached critical mass in France. So does this imply that you could open your own routes to market there once the deal is finalized?

And then just on Aperol, when you were saying that June, you were back to normal growth level, what do you really call normal growth level there? Is it more than 25%, so we're getting somehow used to see that last year and then in the beginning of the year?

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Robert Kunze-Concewitz, Davide Campari-Milano S.p.A. - MD, CEO & Executive Director [13]

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Yes, let me start with the last question you had. I mean Aperol, if you look at markets like Germany, on a half year basis, it ended up growing by 10%. If you look at it now, at the end of July, we're back to about 18% growth. On a market-by-market basis, there's clearly a nice boost to it. Yes. I mean I'm not going to comment on the overall number because it's going to be a strong, sustained double-digit growth going forward, exactly difficult to pinpoint. I mean the good thing on the brand is that if you look at its core markets, 15 years down the road, it is continuing to grow double digit, and that's thanks to its benefiting from the new location, so the strategy is working. And this, more and more is being picked up across other markets in Europe. So we feel pretty good about the market.

With regards to France, I didn't actually say that the rum helps us reach critical mass, I said that it helps add to our critical mass in France. I mean at the end of the day, France is clearly a large and strategic market for us. When we reach critical mass, we'll end up having our own route to market. The question is not if, it's more when and how.

With regards to A&P, yes, we pretty much reconfirmed the -- in line with last year, give or take 20, 25 bps, either way.

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Operator [14]

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Our next question is from Nico Von Stackelberg with Liberum.

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Nico Von Stackelberg, Liberum Capital Limited, Research Division - Research Analyst [15]

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Some really strong results out of Italy and the U.S.A. for the first half. If you look at the first half growth versus the last 3, 4 years' worth of organics, it's broadly double for both of these 2 markets. So I was just wondering how much of this is shipment phasing, and as we think about the full year growth for these 2 big important markets, should we expect some deceleration?

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Robert Kunze-Concewitz, Davide Campari-Milano S.p.A. - MD, CEO & Executive Director [16]

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Yes. We'd expect -- I mean both markets to normalize. Looking at Italy, we'd expect Italy on a full year basis to be low- to mid-single-digit growth, which is excellent in this market, and the U.S. to normalize around mid-single digit.

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Nico Von Stackelberg, Liberum Capital Limited, Research Division - Research Analyst [17]

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Okay. And I guess, just one more question on the free cash flow. So a little bit softer than maybe it was, at least last year for the first half. Could you just comment, again, so what you were guiding for is really just the operating working capital as a percentage of sales to be in line with the previous year's. Is that right? And is there anything else you can provide to help us model that free cash flow for the full year?

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Paolo Rinaldo Marchesini, Davide Campari-Milano S.p.A. - MD, CFO & Executive Director [18]

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Thanks for the question. Yes, we confirm the guidance of targeting for full year, the 39.2% on sales, that was last year. And what we've seen in H1 is due to different weather conditions in a peak quarter, Q2 has to be seen as a temporary effect -- it's not structural. It will not impact the full year performance of the cash levels.

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Operator [19]

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(Operator Instructions) The next question is from Paola Carboni with Equita SIM.

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Paola Carboni, Equita SIM S.p.A., Research Division - Analyst [20]

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Just a very quick one on the margin indication you gave for -- you have given for the year. Actually, if I got it right, you said the 60 basis point gross margin uplift could become something more in the tune of plus 30 bps at EBIT level, which would imply a 30 bps dilution from A&P and SG&A. Then you reaffirm that A&P could be flattish on a full year basis. And also, if I think back to the latest call in May, you seem to allow for a possibly flattish incidence of both of these 2 lines in the light of the -- I mean quite robust top line growth, which is being confirmed at the end of the day. So I was wondering whether we can still hope for a flattish A&P and SG&A incidence on revenues given the healthy top line.

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Paolo Rinaldo Marchesini, Davide Campari-Milano S.p.A. - MD, CFO & Executive Director [21]

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Yes. Paola, with regards to the gross margin, I confirm that 60 basis point is net gross margin uplift is at the moment, the best case scenario. Clearly, there are upside and downside risks, but these are fairly measured and balanced. Clearly, there is an opportunity sitting on Aperol, but we do realize that there are also certain risks we need to manage. So I think the 60, including the dilutive effect of emerging markets accounting for 30 basis points and the unexpected agave impact of the 30 basis is a fair estimate and guess at this stage of 2019.

With regards to A&P and SG&A, clearly, we're exploiting the very solid top line momentum to take the opportunities that we see on our aperitif and global priority brands. So clearly, the guideline is flattish on sales, but we believe that between A&P and investment in on-premise capabilities and route to market, there could be a chance of seeing accumulated 30 basis point dilution in -- on a full year basis, you've seen the trajectory in H1 has been quite indicative of that.

The [default] is, clearly, when we look at A&P and SG&A as a percentage of sales, this is a function of the top line development. So it will depends on how quickly our top line will develop in second half. So that's still the question mark parts -- we plan A&P and SG&A in value terms. And so that's still too early to call, but we flagged that risk.

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Paola Carboni, Equita SIM S.p.A., Research Division - Analyst [22]

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Okay. And sorry, just to follow-up on said on Grand Marnier. You commented the Q2 weakness with material phasing, but I would be more interested in understanding, I mean, what's the state of the art for your business in Europe, where, I mean, clearly, the launch is a bit delayed compared to the U.S., which -- that is growing nicely. And so I was wondering what is going on in Europe at the moment, and what the next steps will be?

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Robert Kunze-Concewitz, Davide Campari-Milano S.p.A. - MD, CEO & Executive Director [23]

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No. Actually, Paola, Europe is going according to plan. In some markets, slightly better than plan. We've always said that it's going to take a lot longer to go from the plate -- dessert plate -- back into the cocktail glass in Europe. So we're taking our time. We're doing the right things. And we feel very good about the brand.

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Operator [24]

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The next question is from Andrea Pistacchi with Deutsche Bank.

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Andrea Pistacchi, Deutsche Bank AG, Research Division - Research Analyst [25]

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Bob, Paolo. Yes, a couple of questions, please. The first one, just if you could give a bit more color on the U.S. on some of the phasing aspects of the U.S. in Q2 and think for the rest of the year? I mean Espolòn was very, very strong in Q2, there's good underlying momentum. What would you think is the underlying momentum of Espolòn? And if there was a phasing effect in Q2, what drove this?

Second question, please, if you could give a little bit more color on the opportunity that you see for Espolòn, particularly outside of the U.S.? I think in the presentation, you mentioned seeding markets like Italy, Australia, Canada, if you can give a bit of color on the progress that's making -- you're making there and the opportunity?

And the final question, again, probably phasing things. But Latin America, you had a strong Q1 -- Q2 seemed to be down double digit in some markets, particularly -- particularly Brazil. Is this mainly phasing or are you seeing a bit of a sort of underlying deterioration in the business and the market there? You'd seen a bit of improvement, but now, is it getting a bit worse again, maybe?

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Robert Kunze-Concewitz, Davide Campari-Milano S.p.A. - MD, CEO & Executive Director [26]

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Well, Andrea, on Lat Am, where we see volatility, I mean, frankly, we're going to have ups and downs throughout the year. Having said that, on a full year basis, we'd expect the whole region to come in mid-single digit. So nothing to worry about, but we can't also expect miracles from the region.

With regards to Espolòn in the U.S., I mean, Espolòn, if you look at NABCA and Nielsen, it is running anywhere between 35%, 40%, sometimes a little bit higher than that. There is a little bit of a shipment phasing in Q2 as we have a major marketing campaign, which kicked off last week, actually, behind the brand, so we wanted to ensure we had the stocks in place throughout the [free-tier] channel. The brand is developing very, very nicely outside of the U.S. I mean if you look at the likes of Italy, it's the largest tequila brand in Italy. But having said that, the tequila category is still small. So the brand is doing a very nice job.

But you know that tequila is concentrated in the U.S. and Mexico, and it will probably take a few years for the international numbers of Espolòn to impact the overall brand.

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Operator [27]

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The next question is a follow-up from Nico Von Stackelberg with Liberum.

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Nico Von Stackelberg, Liberum Capital Limited, Research Division - Research Analyst [28]

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Can you just give me a quick breakdown in the U.S., the rough, just, portfolio? Can you just tell us how big is SKYY now? How big is Espolòn? How big is Aperol? Maybe some of the big trademarks roughly by sales, please?

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Robert Kunze-Concewitz, Davide Campari-Milano S.p.A. - MD, CEO & Executive Director [29]

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So this is not anything I have top of the mind, Nico. I mean we'll have to look at some of the data.

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Nico Von Stackelberg, Liberum Capital Limited, Research Division - Research Analyst [30]

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Okay. No worries.

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Robert Kunze-Concewitz, Davide Campari-Milano S.p.A. - MD, CEO & Executive Director [31]

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Now I mean, Grand Marnier is roughly about, on a value basis, around 21%. SKYY is about 18%. Wild Turkey is around 13%. Espolòn, 13%. American Honey, 7%. Aperol, 6%. Campari, 5%. So we can go on and on, but...

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Nico Von Stackelberg, Liberum Capital Limited, Research Division - Research Analyst [32]

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And that's as of the half year?

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Robert Kunze-Concewitz, Davide Campari-Milano S.p.A. - MD, CEO & Executive Director [33]

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Yes.

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Nico Von Stackelberg, Liberum Capital Limited, Research Division - Research Analyst [34]

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Okay. I really appreciate that.

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Robert Kunze-Concewitz, Davide Campari-Milano S.p.A. - MD, CEO & Executive Director [35]

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Yes, yes. We have a pretty balanced portfolio now in the U.S. We've come really a long, long way.

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Operator [36]

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

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Robert Kunze-Concewitz, Davide Campari-Milano S.p.A. - MD, CEO & Executive Director [37]

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Thank you all for joining us. We wish you a wonderful summer with lots of Aperol Spritzes and Negronis. And looking forward to catching up after we've been back from vacation. Thanks. Bye.

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Paolo Rinaldo Marchesini, Davide Campari-Milano S.p.A. - MD, CFO & Executive Director [38]

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Bye-bye.