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Edited Transcript of CPR.MI earnings conference call or presentation 29-Oct-19 12:00pm GMT

Q3 2019 Davide Campari Milano SpA Earnings Call

Milan Oct 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Davide Campari Milano SpA earnings conference call or presentation Tuesday, October 29, 2019 at 12:00:00pm 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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* Alessandro Tortora

Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst

* Andrea Pistacchi

Deutsche Bank AG, Research Division - Research Analyst

* Chris Pitcher

Redburn (Europe) Limited, Research Division - Partner of Beverages Research

* Edward Brampton Mundy

Jefferies LLC, Research Division - Equity Analyst

* Laurence Bruce Whyatt

Barclays Bank PLC, Research Division - Analyst

* Paola Carboni

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

* Simon Lynsay Hales

Citigroup Inc, Research Division - MD

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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 Nine Months 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 Q3 call. If you follow me on Page #4 of our presentation, I'll kick off with the highlights. As you can see, we've had another solid quarter, especially given the comp base as well as the bad weather in Northern Europe.

Starting off with net sales, solid organic growth for 9 months, up 6.9%, up 4.9% on Q3. By brand, Global Priorities continued to outperform, up 8.2% on 9 months, clearly driven by Aperol as well as our brown spirits. Regional Priorities were up by 5.3% in the 9 months, thanks to Espolòn. On the other hand, the Local Priorities accelerated and were up by 5.2%, largely thanks to the single-serve aperitifs in Italy.

By geography, good performance in our high-margin markets, driven mainly by the U.S., Western and Central Europe. Emerging markets continue to recover, many thanks to a favorable comp base. On a reported basis, we have a change of 8.6%, reflecting a slight negative perimeter effect of negative 0.9% and a quite positive foreign -- FX impact of 2.6%, driven by the U.S. dollar.

Moving on to EBIT. On an adjusted basis, up organically 9.9%, ahead of the organic sales growth, leading to 60 bps margin accretion. This is driven by the strong organic growth across the range with gross margin expansion of 80%, driven by the sales mix by brand and market. A&P overall was neutral from a margin contribution standpoint, whereas SG&A were slightly dilutive by 20 bps. We have a very positive EBIT margin expansion in Q3, plus 90 bps, enhanced by phasing effects, particularly of the Espolòn brand. On a reported basis, we are up 11.1%. This takes into account the negative effects of disposals, slightly lower than top line at minus 0.7% and slightly lower positive FX impact on the bottom line of 1.9%.

Group pretax profit on an adjusted basis reached EUR 259 million, was up 10% or almost 20% of sales, 19.9% to be precise. Group pretax profit on a reported basis reached EUR 245.1 million, down by 1.7% because of the delta, whereas last year we had a positive one-offs linked to sales of some assets. This year, we had some restructuring charges.

Net debt. Net financial debt stood at EUR 874.4 million, which is up by EUR 28.1 million versus the 31st of December of last year, and this is entirely driven by incremental debt generated by the adoption of the IFRS 16 on leases. Now if we exclude such an effect, the net financial debt would have decreased by EUR 53.1 million, thanks to quite the positive cash flow generation, especially if we consider that this is after the dividend payment of EUR 57.3 million as well as the purchase of own shares up to EUR 27.2 million. Hence, net debt-to-EBITDA pro forma ratio stands still at 1.9x.

Moving on to Page #5. You can see that by region, with the exception of Asia Pacific, solid growth across all of our regions. The Americas, driven by the core U.S., up 6%; and Jamaica, up 17.3%. Southern Europe, Middle East and Africa was up 8.1% overall, with a very positive Italy up 8.4% and good growth across most of the region. North, Central and Eastern Europe, again, very solid growth, consistent growth, driven by Germany, the U.K. and Russia. Asia Pac, we have good traction in our Australian business, whereas our partnership markets as well as China were impacted by comp basis in previous year. Both Japan and China were up by 30%.

Moving on to the types of brands. The clusters, the priorities did quite nicely. Global Priorities up 8.2%. Bear in mind that we grew by 10.3% last year. Very strong growth on Aperol, the Jamaican rums, Wild Turkey and Campari. We have a shipments driven decline in Grand Marnier, which will recover to a large extent in Q4 and continued weakness in SKYY Vodka, although again here we're gradually improving trends and closing the gap to both our depletions as well as consumption indicators.

The Regional Priorities, very positive performance on a 9 months basis by Espolòn. In Q3, Espolòn is negative, but this is shipment phasing and will recover in Q4.

Local Priorities, quite positive growth, particularly, as I said earlier on, thanks to the single-serve aperitifs in Italy.

Moving on to Page #9, because there isn't much changes in the other pages. We pick up with an analysis of the Americas, which, on a 9-month basis, were up overall on a reported basis by 12.4%, 6.5% organically. Focusing on organic growth on the 9 months, the U.S. is up 6% and this was expected. We've had shipment normalization and destocking to a certain extent in Q3 on some brands. Wild Turkey performing very nicely. Aperol very strong, up 44.6%. Campari as well as Jamaican rums continue the positive trend. SKYY, as I announced earlier, is having a more favorable trend, but still remains negative due to the continued destocking on the flavors business.

Jamaica, another very strong quarter. Overall, on 9 months, up 17.3%, very positive mix, driven by the core Wray & Nephew Overproof up double digits, 22.9% to be specific. Nice drive behind Appleton Estate up 50%, Magnum Tonic Wine up 23.4% as well as Campari.

Brazil up by 6.5%, positive growth in the 9 months. Continued good growth in Q3, despite the tough comp base. Last year, we were up by 36.9%. And our overall results in Brazil are mostly driven by positive performances from Aperol, growing at a very strong double digit as well as Campari and an improved performance on the Dreher brand. Having said that, though, you all know the macroeconomic weakness, employment being difficult as well as political instability, we think will continue to impact the market in the short- to mid-term.

The rest of the region was up 2.1%. Canada up 3.4%, mostly due to Aperol, Campari and Espolòn. We've taken pricing on the rums and that impacted the larger -- its largest brand in the area. Mexico grew as well, accelerated in Q3, thanks mostly to SKYY ready-to-drink as well as Aperol, which is growing from a small base, but at a very, very strong rate. Argentina registered a positive performance, largely due to SKYY, Old Smuggler and again, Aperol. Again, here, we'll have to see how things pan out, especially after the elections and the macro conditions remain quite challenging. And the rest of South America continued to grow, thanks to Aperol and Riccadonna.

Moving on to Southern Europe, Middle East and Africa, on Page #10. Very, very strong performance, up 8.1% organically, with Italy being the strongest driver, up 8.4%. We've had an acceleration in Q3, where we grew by 12.5%, and this is largely driven by the aperitifs portfolio. Aperol is benefiting from the extension into other usage occasions. And you can see the acceleration in the brand, bringing it to 15.1%. This is also having a very positive halo effect on Campari, up 8.5%. And our short aperitifs are reacting very well to our latest marketing initiatives. Crodino growing by 5.6% and Campari Soda up by 6.7%.

With regards to the rest of the region, which is up by 17, 7 -- sorry, 7.2%. France grew positively, up 10.3%. This despite quite a tough comp base. You'll recall that last year we almost grew by 20%, 19.9% to be exact. Very strong, consistent double-digit growth behind Aperol as well as Riccadonna. Spain was positive, driven again by Aperol, up 21.4%, which helped offset most of the weakness coming from Bulldog, where you have a very competitive gin market where you literally have hundreds of new entrants into this very crowded category. In Africa, Nigeria grew very nicely, strong double digit, 34.4%, driven by Campari, American Honey. And South Africa was also helped by SKYY and Bulldog.

Global Travel Retail, on the other hand, was down slightly, 0.8% due -- on the one hand, due to a difficult comp base, we were up 13% last year, as well as some one-offs as we've made some changes in certain regions.

North, Central and Eastern Europe, on Page #11, up 8.3% organically, very strong, consistent growth there, outperforming in all our key markets, Germany up 5.7%. We've had an acceleration in Q3, up 8.7%. This -- clearly, we have strong double-digit growth of Aperol as well as very positive trends in Averna, SKYY, Crodino, Frangelico and GlenGrant. So it's quite a widespread and solid growth in the market, which is relatively stable. All of those together helped to compensate the temporary decline in Campari. You'll remember we've taken a big price increase on Campari at the beginning of the year, which meant that certain promo slots couldn't be used this year. The baseline is solid, and we think we'll recover next year. This recalls a little bit what happened to Averna in 2018 where we'd gone through the same mechanics.

The U.K., very solid growth, up 27.9% on the 9 months organically, very nice acceleration in Q3, 52.6% behind Aperol as well as the Jamaican brands, up by 40.8%, thanks to particularly Wray & Nephew Overproof as well as Magnum Tonic.

Russia, up by 11.6%. Again, a continued positive performance, but here we must also admit that the comp base was quite easy. We were actually done by 16.5% in the first 9 months of '18. Having said that, though, we're playing a game of moving from volume to value and this is, on the one hand, driven by very positive growth in Aperol as well as more softer results on the Cinzano portfolio.

The rest of the region, up 5.5%, very good performance across most of the markets, again, driven by Aperol.

To close off the regions. Asia Pac, up only 0.9% on an organic basis, very positive performance in Australia, 3.7%, where we're growing at double the market rate and continuing to take market share. And bear in mind that in Australia, we had quite a tough comp base last year, where we were up by 12.9% in 9 months. Overall, the growth is driven by Wild Turkey ready-to-drink as well as Aperol, which is continuing its double-digit trend, growing by 34.2% in the period.

The rest of the region declined by 4.8%. And this is, as I mentioned earlier on, on the one hand, driven by comp basis which were particularly challenging as well as shipment phasing.

Moving on to Page #13. Just underlying the fact that our Global Priorities are continuing to grow their share of the pie, reaching 59% of our sales or plus 100 bps versus a year ago.

Looking at the brands on a one-by-one basis, starting off with our largest brand, Aperol, on Page #14. You can see we have very strong continuous momentum, up 28 -- 21.8% on 9 months, 21.5% in Q3, and this despite the fact that we've had pretty poor weather in Germany, most of Northern Europe and particularly in Scandinavia in August, the second half of August as well as September. It's good to see double-digit sustained growth in our 3 largest markets. Italy up 15.1%. Germany 17.1% and the U.S. continuing to grow at a very sustained clip of 44.6%. Clearly, we're growing very strongly in the rest of all of our markets.

Campari up 5% on 9 months, 3.5% on Q3. Solid growth in our core markets, Italy. Double-digit growth in the U.S., Brazil and Nigeria. But the brand clearly penalized by the price increase taken in Germany.

SKYY, we're down to negative low single digits. We're down 2.6% on a 9 months basis, only 1.9% on Q3. And here, we've got the tale of 2 parts of the brand. The core SKYY Vodka in the U.S. was actually flat in Q3. So it's closing nicely the gap to more favorable sellout trends as the destocking has finished on core. On the other hand, there is a slight tale of destocking on the flavors, which will continue for a few months.

Positive growth in international markets, which now account for 26% of total SKYY, and we hope that this will sustain the brand going forward.

Now moving on to Grand Marnier. Grand Marnier, on a shipments basis, is down 4.3% first 9 months in this contrast versus a very robust shipment growth in the first 6 months, quite positive. It's all a question of phasing in its largest market, the U.S., which accounts for roughly 85% of the sales. And in Q3, we basically destocked, we're down by 14.7%, but we expect on a full year basis to end up in a slightly positive territory.

If we move on to our American whiskey portfolio, up 6.7% on a 9 months basis, down 1.1% in Q3, and this is mostly due to the comp basis in Australia as well as in Japan, which are the second and third largest brand of the markets of the Wild Turkey brand. And we're seeing again here a nice shift from volume to value, with our higher-end extensions doing very nicely, Longbranch, in particular, but also Russell's Reserve growing double digit.

Moving on to the rums. Overall, up 6.2%, 4.8% on the quarter. Very nice performance by actually what is the largest brand, which is Wray & Nephew Overproof, up 13.8%, as this brand is growing beyond Jamaica. Now it's becoming quite an interesting and sizable brand also in the U.S. as well as the U.K., and we're starting to seeding it nicely in Canada.

Appleton Estate, on the other hand, was flattish overall. Some temporary weakness in the Canadian market, largely due to both the comp base as well as some pricing and in Mexico. Other core markets were quite positive.

Moving on to our regional brands, kicking off with Espolòn. Espolòn on 9 months basis, up 24.9% on a shipment basis. This is clearly much lower than what's happening in the market where we're having depletions and consumption indicators between the 30%, plus 30%, plus 35% range. We've had a very robust shipment phasing in the first 6 months, like Grand Marnier, and we use Q3 to destock the market. So we expect to recover that in Q4.

Bulldog challenged, down 0.9% in the 9 months, but up 3% on the quarter, as international markets, particularly some interesting new ones, such as South Africa, helping to compensate for softness in the core Spanish and Belgian markets, which are quite impacted by the Gin Mania and the proliferation of gins.

GlenGrant, totally in line with expectations, as we're moving to a focus on the higher-margin and longer-aged premium expressions, which are actually on the -- limited at this stage, and we've also put the markets on standby with regards to the unaged so that we can increase the inventory going forward.

Forty Creek, flattish performance in its largest market, Canada, but we'd expect the brand to return to a nice performance on a full year basis due to an expected strong Q4.

Moving on to the Italian bitters and liqueurs, flattish on 9 months, down 0.4%, down 3.1% on the quarter. Here, we've got, especially Averna registering soft performance in Italy, but this, on the other hand, in international markets, we're doing quite nicely. So this will play out over time.

Cinzano, down 3.9%, on 9 months 9.4%. And the key driver is the vermouth, which we relaunched between a real vermouth formula, which meant taking significant price increases, and this still has to work itself through markets. In Germany, that led to some delisting in our largest account. But we think we're doing the right thing for the brand, especially positioning it as the real vermouth of choice for the on-premise.

Moving on to the other sparkling wines, up 11.7% on the 9 months, 3.1%. We had some weakness in Mondoro, which is driven by Russia, but we'd expect that to be compensated in the last quarter of the year, which is that of high seasonality.

Closing on positive notes, the Local Priorities. Campari Soda is reacting very well to our marketing initiatives, up 6.7% on 9 months, 9.6% in Q3. So we have an acceleration there. Obviously, both on Campari Soda and Crodino, we'd expect some normalization in Q4. Having said that, it's nice to see these 2 brands back into a positive territory.

Our RTD in Australia is doing very nicely, growing at twice the market rate. We're taking market share, up 3.9% on 9 months, 5.8% on the quarter.

Our Brazilian brands, some positive performance, but we have to wait and see. I don't think that this market will return to normal trading for quite a while.

Ouzo up 1.6% on 9 months, accelerating in Q3, and we expect some further acceleration in Q4 as our promo slots kick in.

Cabo, on the other hand, performing nicely, up mid-single digits, 5.6% on 9 months, 5.1% on Q3. Clearly, all of this is driven by a core U.S. market.

At this stage, I pass it on to Paolo who will take you through the 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 21, where we have the key highlights on 9 months P&L. The gross profit came in at EUR 808.6 million on a reported basis, up 10.5% in value, to 62% on sales, showing 110 basis points accretion on sales.

Looking at the existing business. Organic growth of gross profit accounted in the 9 months 8.3% in value, showing 80 basis points margin expansion, driven by favorable sales mix by both brands and markets. In particularly, we want to highlight a strong third quarter, which delivered 70 basis points organic gross profit expansion, thanks to the sustained performance of the operative business, particularly -- in particular, we highlighted a single-serve aperitif performance with Campari Soda up 6.7% and Crodino up 6%, which largely offset a lower-than-expected dilution from agave due to the order phasing of Espolòn into Q4. Clearly, this is a positive when looking at the third quarter. In fourth quarter, Espolòn will bounce back, as Bob has already announced. In terms of shipments, we will have a dilutive effect, and also the shipment phasing of Crodino and Campari Soda in the last quarter of the year will be softer than in the third one, thus leading potentially to a softer margin expansion.

On a reported basis, A&P came in at EUR 232 million, up 10.2% in value, to 17.8% on sales, driving a 30 basis point dilution. In existing business, actually A&P was up 6.9% in value, absolutely in line with top line growth. And therefore, having a neutral impact on margin.

Looking at the SG&A. SG&A came in at EUR 288 million, up on a reported basis by 10.1% in value, to 22.1% on sales, with a 30 basis point dilution on net sales. In existing business, SG&A were up 7.8% in value, slightly above the top line growth, thus leading to 20 basis point margin dilution in the 9 months, due to the already anticipated investments in sales capabilities, which accounted for 20 basis points dilution.

EBIT adjusted came in at EUR 288 million, up in value on a reported basis by 10.1 -- by 11.1% to 22.1% on sales with an overall 50 basis point accretion. In existing business, the performance was quite good with an organic growth of EBIT adjusted in value of 9.9%, well above the top line, thus generating 50 basis point margin accretion. As we said, driven by gross margin expansion of 80 basis point, partly reinvested in the buildup of sales capabilities, which accounted for a 20 basis point.

The EBITDA adjusted came in at EUR 340 million. On a reported basis, was up 13.5% in value, to 26.1% on net sales, including EUR 11.4 million of positive effect from the IFRS 16 reclass, which drove a stronger performance at the EBITDA adjusted level vis-à-vis the performance we've just commented on the level of EBIT adjusted. The organic performance of EBITDA was quite positive, nonetheless, with an increase of 12.2% in value and 120 basis point EBITDA margin accretion.

Moving on to Page 22. So basically, here, we have visually the recap of comments I made before. In value terms, the organic growth of EBIT accounted for EUR 25.8 million or 9.9%. ForEx was positive as well with EUR 4.8 million of positive contribution, corresponding to 1.9% and the perimeter was quite tiny. Worthwhile highlighting the effect of positive and negative one-offs. In the first 9 months, actually in 2019, we had EUR 13.9 million of negative one-offs, primarily attributable to a number of restructuring initiatives, whilst in the first 9 months of last year we had a positive impact of EUR 12.3 million that was primarily driven by the capital gain on the sale of the disposal of the Lemonsoda range. If we factor in the delta impact between negative one-offs for this year and positive one-offs for last year, the impact on the EBIT was big and EBIT came in at EUR 274.1 million, with an increase in value of just 1%.

If we move on to Page 23. As you can see, financial charges came in at EUR 25.4 million, up EUR 3 million versus last year, of which EUR 2.5 million are attributable to the reclass, driven by IFRS 16, which is as well the cause of the main driver of the increase in the average cost of net debt year-on-year from 3.1% to 4.1%.

Group pretax profit came in at EUR 245.1 million, down 1.7 million -- 1.7%, as said, due to the one-off of this -- negative one-offs of this year. But if we stripped out the negative one-offs of this year as well as the positive one-offs of last year, the group pretax profit adjusted came in at EUR 259 million, with a remarkable increase of 10% in value.

If you follow me to Page 25, we have the analysis of the net debt. As Bob already mentioned, overall, there is an increase of the indebtedness by EUR 28 million, which is totally attributable to the reclass, driven by the IFRS 16 of EUR 18.2 million. Again, if we stripped out the impact of the new accounting rules, the net financial debt would have decreased by EUR 53.1 million in September versus back-end of December last year. Thanks to the positive cash flow generation after the already mentioned payment of dividends for EUR 57 million and purchase of own shares of EUR 27.2 million, with a stable net debt to pro forma ratio at 1.9x as at the end of September. This is, I believe, it on numbers.

I would hand back to Bob for his update on marketing initiatives and development.

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

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Thanks, Paolo. Before moving on to conclusion and outlook, some pretty pictures. We're -- our marketers are quite busy at the moment and successfully as well, cinema is becoming a very important platform for the Campari brand. We're sponsors of the Venice Film Festival as well as the New York Film festival, and a few will be added to this in the years to come. We're continuing to paint the world orange with very strong activation across really continents and markets.

With regard to innovation, we're continuing to premiumize our ranges, both on Wild Turkey with the Cornerstone Rye as well as the Cuvée du Centenaire and Grand Marnier. Wild Turkey has just announced a launch of a new approach to advertising, we call it advertainment, which is really some sort of documentaries with very interesting dialogue between Matthew McConaughey and some trailblazers from some quite influential movements.

Now we're also very pleased to see that from a product standpoint we're perfectly in line with our ambitions on GlenGrant. The 2020 Whisky Bible results came out. Our 18-year-old was voted scotch whiskey of the year as well as single malt of the year, multiple casks, and we've done quite well with the rest of the range. So we're definitely on the right track.

On the nonorganic side, on the perimeter, we've announced 2 small acquisitions, but 4 very nice gems have joined or are about to join our portfolios, helping strengthen our offering to the high-end mixology on-premise and premium offering. We announced the acquisition of Ancho Reyes and Montelobos Mezcal which round up our Mexican offering. But this deal hasn't closed yet. We expect it to close before the end of the year. On the other hand, Trois Rivières and La Mauny, which add some nice critical mass in France as well as complete our rum offering, has closed on the 1st of October.

Now conclusion and outlook. Nothing of that exciting to report here, except we have continuous positive organic growth, both in sales as well as the profit indicators. Our underlying sales momentum in core developed markets is quite positive. This is driving continuous sales mix improvement, and it's also enhanced by recovery in emerging markets. So for the full year 2019, our outlook remains broadly unchanged and pretty fairly balanced in terms of risks and opportunities.

On the organic side, we would expect positive organic sales performance, driven by a high-margin combinations of priority brands in core developed markets. Clearly, we wouldn't be surprised if there's some volatility in emerging markets in their key seasonality period.

With regards to organic EBIT growth, we expect it to remain quite positive, with EBIT margin expansion moderated by higher-than-expected increase in agave purchase price, which clearly will be exacerbated by the Espolòn outperformance on a full year basis and the phasing into Q4 of the shipments.

The strengthened U.S. dollar against the Euro will continue to offset weakness from a ForEx standpoint in emerging markets. So we feel quite comfortable on that side too. So net in net, we remain quite confident in delivering a positive performance across all of our key underlying business indicators for this year.

Having said that, we're naturally at your disposition for your in-depth 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, 3 questions, please. The first is on rum. In Italy, you've made the acquisition, which does give you critical mass in France. But I think your Wray & Nephew performance is also very good in Q3 and you're flagging and that rum is a premising category at the heart of the mixology trend and growing cocktail culture. I was wondering whether you can provide a bit more color on exactly what you're seeing, who's really getting into rum, which geographies and just a little bit more color on what you're seeing at this sort of early phase of rum and the potential bounce back of rum. The second is on your single-serve bitters, which saw a good performance in the third quarter. I know that you flagged there's a bit of phasing between Q3 and Q4, but I'd be interested in to what extent you're really putting a lot of money behind both Campari Soda and Crodino, or to what extent these brands are responding to the overall bitters trend that you're developing with both Campari and Aperol. And then the third one is probably one more for Paolo on margins. I think at H1, you had flagged that you'd be seeing about 30 basis points of margin expansion for the full year. Clearly, you're going to get a bit of a shipment catch-up in both Grand Marnier and Espolòn in the fourth quarter. But I was wondering whether you could perhaps provide a bit of an update relative to that 30 bps after what you delivered in the first 9 months and what are the key moving parts to get there.

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

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Thanks for your questions. Let me kick off with rum. Clearly, what we're seeing is Tiki is being premiumized, high-end mixology and particularly in North America, U.S., Canada, but also in the U.K. So those are the 3 markets moving the dial for that category and for us. Now with regard to our single-serve bitters, I think what we're seeing is the brands reacting to our marketing initiatives, where on Campari Soda we feel more confident that we're turning a corner. The brand -- younger consumers are actually reacting very positively now to the new campaign. It's still the beginning of things, but we'd expect it to help us remain in positive territory in the years to come. And Crodino, it's a little bit work in progress. We're doing quite well internationally. Italy is doing quite well this year. Let's see -- I mean we'd like to see a little bit -- a few more quarters behind that trend in Italy to understand how solid it is. But net in net, this is more driven by our own marketing activities, both in Italy as well as the European markets in which we're seeding the brands, particularly Crodino.

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

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And with regards to the margins, we have still -- as you know, Q4 is still to be seen. We would generally confirm the guidance that we've indicated at the beginning of the year where the 30 basis points more or less that you mentioned are basically driven by still solid gross profit expansion. The underlying 120 basis points, that is then partly offset by the impact of agave as well as the impact of the comeback from our performance in the emerging markets, totaling about 60 basis points, partly then reinvested into commercial capabilities as we've seen in the first 9 months. So we don't see major changes vis-à-vis the initial guidance. Worthwhile noting that agave -- the outlook on agave, as you know, over the course of this year deteriorated. Now under -- if we take into consideration both volumes of Espolòn and Cabo Wabo at year-end, the negative impact of agave in our P&L at EBIT level due to the increase of agave is about EUR 30 million. So it's a big number. For 2020, apparently, the prices are not coming down. At least, we're not seeing that at the moment. And we're still buying at 20, 28 pesos per kilo versus the 6 pesos per kilo that was the price at the back end of 2016. So in 3 years, quite an increase. But overall, this is for this year the trend. And clearly, in Q4 -- although Q3, we do recognize is better than originally flagged due to shipment phasing in Q4. As said, we have Espolòn coming back strongly in terms of shipments and Crodino and Campari Soda with softer performance, both driving to margin -- gross margin dilution. So that's what we're currently expecting.

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

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Great. So the gross margins it's partly mix that's the big driver there. But the drop down from gross profit to EBIT, which is about 20 bps dilution in the 9 months so far. You're still confident of 30 bps with sort of an up-weight of expenditure in the fourth quarter. Is that the right message?

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

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Yes, yes, between A&P and SG&A, that's the number that we have in mind at the moment. Yes the picture can change depending on top line performance in Q4, but directionally, this is where we would like to position ourselves at the back end of the year.

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Operator [7]

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The next question is from Simon Hales with Citi.

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Simon Lynsay Hales, Citigroup Inc, Research Division - MD [8]

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I wonder if I could just follow-on, firstly to Ed's question, your comments, Paolo, just to confirm a couple of things. So I think I'm right in taking away from what you've just said and from what you said in the presentation as to a softer margin development in Q4 that you do expect EBIT margins organically to be negative therefore in the fourth quarter? And then also you just mentioned the outlook for agave into 2020. I think at the half 1 stage, Paolo, you were thinking that perhaps half 1 next year would be a drag negative from agave and then you would see some recovery in the second half. It sounds that perhaps that's not the case. Am I right to assume that perhaps 2020 is going to remain, therefore, more challenging than you thought? And then thirdly, just I wonder, Bob, if I could ask you a little bit more about Italy and the drivers of the strong growth that you've seen there through Q3, particularly on Aperol and Campari. Again, at the half 1 stage, I think you were expecting low to mid-single-digit sales growth for the full year. That probably looks a little bit prudent now.

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Paolo Rinaldo Marchesini, Davide Campari-Milano S.p.A. - MD, CFO & Executive Director [9]

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Yes. With regards to margins in Q4 without being too vocal, we're expecting the EBIT margin in Q4 to be marginally negative. That's correct. The magnitude of that clearly depends on top line mix. So that's what we're currently factoring in our numbers. With regards to agave, yes, originally, we hoped we could have a seasonal negative comp in H1 and positive comp in H2. But we've been saying the same for 2 years now. So we would rather scaramantically to stop forecasting a decline in price of agave. If the current trajectory is confirmed in 2020, our estimate is a potential negative impact of EUR 5 million of EBIT -- gross margin and EBIT level. But then who knows where price will go. So that's in our point of view, our worst-case scenario.

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Robert Kunze-Concewitz, Davide Campari-Milano S.p.A. - MD, CEO & Executive Director [10]

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Now with regard to comparing Aperol, Q2, Q3 in Italy, well, I think we started last year, at the end of Q3, beginning of Q4, started the new campaign which had to do with really positioning Aperol in Italy into -- in the informal meals occasion. The first quarters were quite positive, but it was still too early to call this very firmly. What we've seen is actually from quarter-to-quarter, we've been going to -- from strength to strength and this is what is accelerating the growth of Aperol. I mean, 15% is really a very, very nice number on a brand that has been growing double-digit now since 2003, since we bought it. And this is also providing a positive halo effect on Campari with a certain number of consumers switching to Campari Spritz. So a very nice, very sustained trend on both brands.

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Operator [11]

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The next question is from Laurence Whyatt with Barclays.

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Laurence Bruce Whyatt, Barclays Bank PLC, Research Division - Analyst [12]

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Three from me. One is a sort of follow-up on agave pricing question that has been coming up earlier. You sort of mentioned going out to 2020. Do you have an idea of when you think the agave price would start to stabilize and potentially come down? I understand it's to do with when the agave plants are planted and when they're harvested, but that's only sort of a 6- to 8-year period. Are we getting to the peak of that? Secondly, on SKYY. I think at the beginning of the year, we were expecting SKYY to sort of flat line throughout 2019, now sort of getting into around a negative 5% for the year. What are your sort of expectations for the brand? Can we expect SKYY to stabilize in the U.S. at any time? Or is it still struggling with the rest of the vodka category from the growth of Tito's? And then finally, there was a short comment on China. I know you're expanding into China in a sort of tentative way at the moment. What are your long-term expectations for the country and what brands, in particular, would you think would be most likely to be taken up by the Chinese consumer?

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

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Do you want to take the first one, Paolo, on agave?

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Paolo Rinaldo Marchesini, Davide Campari-Milano S.p.A. - MD, CFO & Executive Director [14]

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Yes. With regards to the agave, I mean, there are basically 2 factors, looking at the price of agave. One is the imbalance between demand and supply, that's a long-term trend. And on the other hand, you have the quantities of plants that are waiting in the fields. So the -- that's one thing. And potentially, mid-2020, back-end of 2020, should be where prices should start coming down. Just to give you an idea, over the last 6 months, the incremental increase in the agave price was 2 pesos. So we're coming to the peak of it. Will that then come down? We'll see when that happens. And the second one is also the weather conditions that can have a huge impact. For example, this year, we all -- we've all been quite unfortunate because there's has been droughts. So the yield from the plant was quite poor and that put further pressure on price. So weather condition in 2020, nobody clearly can say. So we're -- we have limited visibility. We believe we're at the peak of the cycle. And mid-2020, back-end of 2020, if all goes as expected, we should see prices to -- coming down.

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Robert Kunze-Concewitz, Davide Campari-Milano S.p.A. - MD, CEO & Executive Director [15]

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Yes. Moving on to SKYY, where are we on SKYY, what are our expectations? I mean, on a full year basis, we'd expect the brand to be flat or slightly down on a low single-digit basis. And here, you've got different moving pieces. Now if you focus on the U.S., we're actually doing quite nicely on core. I mean, core, if you look at its consumption indicators, they're up low single digits. On depletions we're practically flat. And on shipments, we've basically finished, now the destocking on core. The flavor side is a different story. I mean, on flavors, you're seeing consumption continuing to be negative double-digit. And added to that is our discontinuation of quite a few flavors and a significant destocking. Now most of it is behind us, but we still have a little tail-end, probably October, November. So you will see the U.S. numbers being impacted by that.

On the other hand, we have quite nice traction on the brand in international market. So we're sort of flattening the curve on SKYY and gaining more stability going forward. Now on China -- I mean, on China, we have quite a nice business with SKYY Vodka. It's the second largest imported vodka in the market and growing at a very nice pace from a consumption standpoint. Obviously, yes, phasing effect since we're using distribution partners, et cetera, and China is quite complex from distribution. And so that impacts shipments. But overall, we're positive. And on the other thing, I mean, from a very, very small -- it's not all that representative, but we started testing Aperol with the Aperol Spritz in certain neighborhoods, mostly in Shanghai, and we're seeing quite a positive response. So we're going to put more of the focus on that. And we'd hope our Chinese business in the mid-term to be driven by SKYY as well as Aperol and also later done via our whiskeys, both American as well as scotch.

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Operator [16]

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The next question is from Chris Pitcher with Redburn.

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Chris Pitcher, Redburn (Europe) Limited, Research Division - Partner of Beverages Research [17]

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A couple of questions. Following on from the China comment. You didn't mention Grand Marnier and given that it's a strong cognac market. Are you limited from selling Grand Marnier because of your distribution partner in China? And then secondly, following up on Grand Marnier. Could you just give us a bit more color of where the destocking by the different types of Grand Marnier is taking place in the U.S.? What's been going on there? And how the business now looks in terms of the mix of Cuveé and what that means for your working capital and cognac purchases this year because a lot of your cognac competitors have certainly stepped up the level of investment?

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Robert Kunze-Concewitz, Davide Campari-Milano S.p.A. - MD, CEO & Executive Director [18]

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Yes. I mean, Grand Marnier in China, I don't think it is necessarily impacted by our current distribution partnership. It's certainly not helped, but it's not negatively impacted as well. I mean, what we need to do in China is really clean out the market from stock which have been there for quite a long time and move the emphasis to the Cuveés which I think are much more appealing to the Chinese consumers, both from a liquid standpoint as well as from a premiumness standpoint, particularly on the packaging side with regards to gifting, et cetera. And in the U.S., if you look at Grand Marnier, how it's performing on consumption indicators, we're in positive 2%, 3%, 4%, depending on whether you look at NABCA or Nielsen. So that's fine. We've essentially gotten out of all of the flavors. And this year, we're transitioning the Cuveés. So we're basically destocking on the Cuveés and over time, replacing them with the newer ones which are much more premium packaging as well as revised liquids with more cognac into that. Having said that, we've also taken quite nice price increases under Cuveés. So we'll be able to more than compensate for the increases in cognac prices.

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Chris Pitcher, Redburn (Europe) Limited, Research Division - Partner of Beverages Research [19]

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And in terms of cognac purchases?

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Robert Kunze-Concewitz, Davide Campari-Milano S.p.A. - MD, CEO & Executive Director [20]

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Well, I mean, we're -- we actually found the seller is quite full. So with regards to what we need on the Cuveés for many years, we don't need to step them up on Grand Marnier and also not on Bisquit because Bisquit came with really, really full sellers.

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Chris Pitcher, Redburn (Europe) Limited, Research Division - Partner of Beverages Research [21]

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Okay. And just can I confirm one more thing? In China, do your -- does Grand Marnier and Bisquit go through your distribution partner Camus? Or is it through a separate organization because of potential conflict?

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Robert Kunze-Concewitz, Davide Campari-Milano S.p.A. - MD, CEO & Executive Director [22]

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Well, Grand Marnier goes through Camus and Bisquit goes through its previous distributor. I don't remember the name, but I mean, there will be a change next year.

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Operator [23]

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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 [24]

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Bob, Paolo, three questions, please. First one on the U.S., there are a lot of moving parts in Q2, Q3 in terms of shipment phasing and it sounds that -- it sounds like shipment phasing on balance should be a positive in Q4. Can you confirm this, please? And then a question on the tariff situation in the U.S. Now given the announcement of tariffs, my understanding is that Aperol, Campari, Frangelico potentially impacted. Could you possibly give a broad, at least quantification of the impact that you would expect on EBIT, if you were not to pass this on and your thoughts on potential pricing to pass this on? And my third question is on your sort of the top line guidance that you give in the press release. There's a bit of a change in wording compared to what you said at H1. My understanding is that underlying there isn't much change in terms of how you're feeling about the year. Could you confirm that?

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Robert Kunze-Concewitz, Davide Campari-Milano S.p.A. - MD, CEO & Executive Director [25]

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Yes. Andrea, let me start with the third point. I think maybe we got bored with our words. I mean, to be honest, there's nothing really changed in terms of outlook or in terms of how we're trading versus expectations. So we feel quite comfortable about that. I mean, if we've changed anything, it's probably more boredom than anything else.

With regards to the U.S., I mean, yes, we will return to positive territory in Q4, but we will improve things from a phasing standpoint. Having said that, we've always been very clear that the second half will be, from a shipment standpoint, weaker than the first half of this year. So you'll be seeing a normalization and improvement, but net to net, the second half will be softer than the first half.

Now with regards to tariffs, it didn't only impact Campari and Aperol and Frangelico, but also a nice little business which is growing double digits, which are amari. Now if the tariffs stay at the level where they are, we will not have to relocate production. Having said that, we're looking at again some logistics efficiencies as well as taking pricing at the beginning of the year on Campari and Aperol. So that should enable us to compensate for most of the tariffs. But net -- in net, we would -- we're forecasting at this stage a EUR 5 million perk to the bottom line due to the tariffs next year. Paolo, do you want to add anything?

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Paolo Rinaldo Marchesini, Davide Campari-Milano S.p.A. - MD, CFO & Executive Director [26]

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I think that's the number which incorporates factors in the price increase that we have in mind.

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Operator [27]

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(Operator Instructions) The next question is from Alessandro Tortora with Mediobanca.

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Alessandro Tortora, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [28]

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I have just 1 question. If you can, let's say, help a bit to understand the trend in the U.K. market, clearly ahead of, let's say, any potential Brexit. I recently read an article in which you flagged, let's say, some higher level of stocks you made in the U.K. So if you can help us, let's say, to understand the real underlying trend of the U.K. market for you.

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

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Well, I mean, the U.K. for us is the 2-tier market. So what happens in terms of consumption you see it in terms of our shipments? Frankly, there's quite a bit of it which is also off-premise with very large retailers. So stocks do not impact that. The numbers we have in this presentation is basically our consumption which is very healthy driven as we've said both by Aperol as well as our Jamaican portfolio. I mean, the rest of the portfolio is doing well too, but I mean, it comes from a lower base. The comment I made was regarding our own inventories on the island. Clearly, we have our own distribution set-up there, and we increased ahead of Brexit, our inventories depending on the brand from 2, 3 or 6 months. Clearly, this -- to enable us to compensate for any turbulence should and whenever Brexit does happen.

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Operator [30]

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The next question is from Paola Carboni with Equita SIM.

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Paola Carboni, Equita SIM S.p.A., Research Division - Analyst [31]

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Just a quick clarification on 2 points you've mentioned during the call. First of all, if you can come back on what we should expect as a normalization, let's say, of the Italian market after the, let's say, relaunch of the initiatives on Crodino and Campari Soda which are expected to have -- to reverse a little bit in terms of shipments in Q4? And secondly, I was just trying to match your indication of a declining gross margin and EBIT margin in Q4 with your full year guidance. So if you -- I mean, when you say dilution of gross margin or EBIT margin, I'm not sure I got it properly, in Q4 this would imply probably a bit less of 30 bps accretion on organic EBIT for the year. Am I wrong? So just if you can clarify.

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Robert Kunze-Concewitz, Davide Campari-Milano S.p.A. - MD, CEO & Executive Director [32]

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Being a simple person, I'll leave the complex second question to Paolo and focus on the single-serve aperitifs. Historically, on Campari Soda and Crodino, we've been down in the low single digits year after year. Now we've spent a lot of time from the marketing standpoint to really understand how can we reactivate the brand amongst younger consumers. And particularly on Campari Soda, we seem to have hit it and nailed it. So we would expect on a going basis, and I'm not focusing on quarters, but on longer trends, both of these franchises now to return to positive low single digits. Campari Soda will be probably trending stronger in Italy. On Crodino, we still haven't completed the whole marketing transformation. Having said that, Crodino is benefiting from international expansion. Does this answer your first question?

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Paola Carboni, Equita SIM S.p.A., Research Division - Analyst [33]

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More or less, let's say, just to understand how much was, let's say, the shift between Q3 and Q4. So basically, as you said, for the U.S. -- as you said, for the U.S., what you are envisaging for the year if you can provide also indication for Italy.

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Robert Kunze-Concewitz, Davide Campari-Milano S.p.A. - MD, CEO & Executive Director [34]

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Look -- I mean, what -- both brands are representing what's happening in terms of pull from a wholesaler as well as trade perspective. So we're not having any special conditions or any push initiatives behind it. Having said that, these are brands, which in some cases in Q3 grew over 10%. We're not used to this. So I think we're rightfully being cautious going into the fourth quarter.

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Paolo Rinaldo Marchesini, Davide Campari-Milano S.p.A. - MD, CFO & Executive Director [35]

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Yes. With regards to the gross margin trend, the comments were around the impact of shipments in the third quarter and phasing of shipment in the third quarter vis-à-vis shipments in the fourth quarter of the year, where basically the third quarter has been quite positive in terms of gross profit expansion. So the comment was do not expect an expansion in gross profit in Q4 for the reasons I've mentioned. So on a 9-month basis, clearly, we have 60 basis points EBIT adjusted, which means that as we've confirmed the guidance at the beginning of the year with a softer full year EBIT margin expansion, that implies a softer performance in the fourth quarter of the year.

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Operator [36]

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(Operator Instructions)

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

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I guess, there are no further questions. Thank you very much for joining us. With us, it's steady as she goes. So look forward to potentially seeing some of you at next week's reopening of the Camparino in Milan if not catching up throughout the year. Thanks a lot for joining us. Bye-bye.