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Edited Transcript of RCO.PA earnings conference call or presentation 28-Nov-19 7:30am GMT

Half Year 2020 Remy Cointreau SA Earnings Call

Paris Dec 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Remy Cointreau SA earnings conference call or presentation Thursday, November 28, 2019 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Luca Marotta

Rémy Cointreau SA - CFO

* Marc Hériard Dubreuil

Rémy Cointreau SA - Chairman of the Board

* Valérie Chapoulaud-Floquet

Rémy Cointreau SA - Former CEO

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Conference Call Participants

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* Chris Pitcher

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

* Laurence Bruce Whyatt

Barclays Bank PLC, Research Division - Analyst

* Marion Boucheron

MainFirst Bank AG, Research Division - Research Analyst

* Simon Lynsay Hales

Citigroup Inc, Research Division - MD

* 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 day, and welcome to the Rémy Cointreau First Half Results 2019/2020 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Marc Hériard Dubreuil. Please go ahead, sir.

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Marc Hériard Dubreuil, Rémy Cointreau SA - Chairman of the Board [2]

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Thank you. Good morning to all of you. So once again, we are presenting to you the interim results of Rémy Cointreau, this time from the 1st of April 2019 to the 30th of September 2019.

You know already the turnover, as Luca Marotta announced them to you on the 18th of October. So as a reminder, our sales were stable for the first 6 months on a reported basis and a bit down on an organic basis by 3.6%. But much more importantly, our group sales were -- Group Brands sales were up 5.5% on a reported basis and 0.8% on an organic basis. And more importantly, both divisions, cognac and Liqueurs & Spirits, were up for that time.

So what about the current operating profit? The current operating profit for the last 6 months was stable on a reported basis and down on an organic basis by 4.7%, and this of course is going to be very much explained in detail for you soon.

But the important figure I think to see is what happened for Group Brands. And you can see that for Group Brands, we were up 5.5% on a reported basis and 0.8% on an organic basis, so more or less in line with the evolution of the turnover. Why was it so? Of course, we were able, during the period, to increase significantly our gross margin both in value and in percentage as we are pursuing our value strategy with success. But confident in that strategy and that approach, we also decided to increase again significantly our advertising and promotion expenditures, so which gives for Group Brands this increase of 5.5% on a reported basis for the operating profit and plus 0.8% on an organic basis, which is more or less in line with the evolution of turnover.

On our current operating margin, we were up 0.2% on a reported basis, minus 0.3% on an organic basis. We like to remind you that 26.4% is a figure much higher that we were achieving not long ago.

For the group net profit, we are top of the class with profit above EUR 90 million, plus 3.5% on a reported basis, plus 8% on organic basis. So our earnings per share is, this time, above EUR 1.80 per share, again, up 4.1% on a reported basis and 1.3% on organic. Of course, we are going to explain to you that excluding nonrecurring items, it was a bit different for reasons which are, in fact, not so important for the future of the group. So the net profit, excluding nonrecurring items, still higher compared to previous figures some years ago, EUR 84.6 million, minus 5.6% on a reported basis and minus 8.2% on organic. Again, this will be explained.

The net debt on EBITDA ratio looks a little bit less positive. But in fact, we are delighted with these results, because one of the reasons why we increased a little bit our gearing is that we were able, for the first time, on our balance sheet to report on the 30th of this September an inventory at, of course, group value -- I mean, reported value at above EUR 1 billion, EUR 1.270 billion, which means that, in fact, we are more than ever able to provide to our clients in the future more extremely good-quality cognacs and, of course, now not only cognacs, rums and, more and more, whiskies, which is of course a very, very good sign for the future.

And of course, you won't be surprised to notice also that our net financial cost, which means really the cost of the debt, was the lowest ever, really, the lowest I can remember in more than my 40 years with the group. Only EUR 6 million above -- a little bit above EUR 6 million for the last 6 months, which is, of course, a very good time to have a very good, high-quality inventory of top-quality spirits.

So now, as usual, Valérie Chapoulaud and Luca Marotta are going to give you more details about these results, are going to give you perspectives. And we'll also answer, as usual, to your questions.

As I hand over the mic to Valérie, I would like, on behalf of the whole Rémy Cointreau Group, to thank Valérie and her team for the -- I can only say the word amazing results that he -- that she and her team have achieved for the last 5 years. I mean the growth that we have had in profit during that time, the quality of profit that we have had and, of course, the increase of value of our shares are extremely, extremely positive. And of course, Valérie and her team have prepared the group for the future. Next time, it will be Eric Vallat, as confirmed, and Luca Marotta which will present those results.

For your information, Eric Vallat is also present here in Paris in that room. So for those of you who can't wait for the next 6 months and would like already to ask questions to Eric Vallat, it's still possible. But, of course, it will be very difficult for him to answer to your questions about the last 6 months.

So again, thank you, Valérie. And this is for you.

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Valérie Chapoulaud-Floquet, Rémy Cointreau SA - Former CEO [3]

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Thank you, Marc. Good morning, everybody. What can we say about this first semester? As Marc mentioned, the most important for us are the Group Brands sales, which grew almost by 3%, 2.8%, which is, I would say, a mitigated situation taking into account 2 important evolutions: first of all, finally, after years of efforts, a good -- a very, very good start of the Liqueurs & Spirits division, almost 5% growth; and the cognac division, which is slightly lower but definitely affected by some very temporary situation, one that you know for most of the groups, spirit groups, which is the Hong Kong situation, local and Travel Retail, and the second which is a very unusual replenishment in the U.S.

So a very good start of the year for the liquor division -- Liqueurs & Spirits division. A little bit slower for cognac, but we know that it is definitely coming from external factors.

What is quite consistent with the past and with our strategy is the fact that Partner Brands continue to drop significantly. Part of it has been, of course, anticipated to you and explained to you extensively with the sale of our Central Europe affiliates into Czechoslovakia. But most likely, this is part of our strategy. I'll remind you that the non-Group Brands were close to 14%, 1-4, 5 years ago. And they are going to be below 3% this year, which is a gap of more than EUR 100 million that has been compensated at the group level.

Regarding the COP, which is not the most important but an important element of this call. The COP is very resilient in this first semester. The first semester is definitely a phasing -- is facing a phasing situation, but the COP is quite resilient. And what would be very interesting in this COP is the fact that we continue to invest heavily, and we are going to look at the figures together. We continue to invest heavily being behind our brands and, in particular, in S2 that started recently.

By the way, it is Thanksgiving today, so it's -- the holiday season started, and this is a peak moment for us in terms of investment and then early Chinese New Year's to come in January. So very good resilience of the COP based on the fact that we continue to accelerate on our investments behind our brands, but more to come in S2 for sure.

So the Group Brands COPs. COP is almost flat, plus 1%. What is very interesting as well is the fact the way the P&L is balanced for the semester 1 is the fact that we have very, very strong evolution of the gross margin, almost plus 4 points. 4 points, it's massive. And you will see per division how it is split. But globally, it's very consistent across the board, and it's a massive value strategy that is delivering. And, of course, we are not looking for volume and it is balanced by a volume drop, but it is exactly what we want to achieve.

So we have -- the value strategy works. It's significant in this -- during this last 6 months and very visible at every single level. Strong communication investment, almost plus 11%, so totally in line with our strategy as well. We have a slight currency gain, a little bit less than 7% that, of course, we factored in the COP. And globally, a very good resilience of the current operating margin at 26.4%, which is almost flat.

The net profit growth is led by a gain on Central Europe affiliates; and globally, the nonrecurring items, which is not massively significant, as the net profit declined by almost 6%.

If you look at the bridge, as we like to do to understand the -- how it works, you can see that, in fact, the organic and the currencies balance each other. So it's not a big difference.

In terms of organic growth per division. So House of Rémy Martin, plus 2%, 2% plus 1% (sic) [2.1%], almost 5% on Liqueurs & Spirits. The Group Brands, which is the most important to us, almost 3% growth. Partner Brands, a massive drop, which is Czechoslovakia, of course, decommissioning and a slight -- we will commence a slight decrease on some Partner Brands that still remain in Benelux. So total group, minus 3.6% in total.

If we look at the breakdown of our activity per division and per region, you can see that Rémy Martin house continued to fly at 72% of our share. Liqueurs & Spirits, plus 2%, which is good news. And the massive drop of Partner Brands, as I said, is going to be less than 3% for the fiscal. And by region, the Americas, and we'll see why, still continue to grow, still not 50% of our activity but getting there at 45%, many thanks to Liqueurs & Spirits for this fiscal and many thanks to Cointreau.

Within each division, Americas, almost flat for Rémy Martin; whereas on Liqueurs & Spirits, plus 5 points, which is coming from Cointreau; and the rest is quite stable.

In terms of COP, our current operating profit, the bridge is very interesting. You can see that the price/mix, as I was mentioning, the value strategy works, plus EUR 30.9 million. It's massive, balanced by volume/mix at almost minus EUR 21 million. It is exactly what we want to achieve. The price/mix is absolutely one of the best evolution for the last 5 years and demonstrating that month-after-month, semester-after-semester and year-after-year, we continue and it delivers.

The A&P, the investments, are the plus 11% that I was mentioning, plus EUR 7.5 million. And the best is to come because effectively, as I mentioned, the holiday season just started this week. So in reality, when you look at the bridge, you understand why the current operating profit is quite stable in value, EUR 138.3 million.

The net profit, not a massive change. Net profit excluding nonrecurring items, minus 5.6%. We are talking about EUR 5 million. It's not very significant. And when we look at net profit group share, it's the same reported, plus 3.5%. We are talking about EUR 3 million difference.

When we look at each division in terms of activity, what happened in semester 1? As I said, Rémy Martin, we are looking for value, not for volume. So we can see that the volume is at minus 5%, which is in a way going to the right direction, having in mind that for some qualities, we are definitely -- and it is our own decision, we are under allocation. So there is a balance between the regions. It's quite obvious for S1. We'll see what's going to happen in S2 because the macroeconomic factors are very complicated today and very volatile and very complicated today to anticipate.

So Asia Pacific. We know that on China home, we had a massively good Mid-Autumn Festival. It's confirmed, but not only Mid-Autumn Festival. For the first -- we are looking at the Board this week -- during the Board this week at the first 8 months. It's a massive success in China. The Mid-Autumn Festival does confirm double-digit on most qualities, and it's usually a very good signal for Chinese New Year, which is going to come very soon, late January.

Unfortunately, this performance of China home is massively balanced by a very unique situation in Hong Kong home and Travel Retail. Today, because of our cognac situation, we are much more maybe exposed than others to Hong Kong and the borders. And Travel Retail Asia is a massive part of our activity in Travel Retail. So we are -- as per today, we will see what's going on in Hong Kong, but we are facing a quite negative situation on Hong Kong home and Hong Kong Travel Retail and borders.

In Americas, we just got last night the last NABCA figures. We can see that we are catching up. For your information, we are facing the anniversary of the second price increase in cognac of 2018, of last year. We can see that our depletion and sell-out start to recover which is very good news. But today, effectively, we have a slower start of America, U.S. -- you could see Americas, U.S. in particular. But we are very confident for the second part of the year. And as the holiday starts, we will have, very soon, a very good idea of the temperature of the market. But the last NABCA, Nielsen and depletion are going and moving to the right direction.

EMEA, very uneven, as usual. You know that EMEA is a massive patchwork. We have a very good start of the year in Africa, and you know that we are betting on Africa for the medium, long term, so very good dynamism. And we have as well a very good start of the year in U.K. and Nordic and Travel Retail EMEA, which is the opposite of Travel Retail Asia.

In terms of newness and activity, we just launched a new quality in the U.S., which name is Tercet, very, very interesting sophisticated launch and positioning above USD 100 retail price with a fantastic welcome from the market. Just a start. We are going to build it step-by-step, mostly in on-trade and very, very few fine wine stores, but fantastic and unique positioning of Tercet. And in few months, we will look at it in China as well.

New campaign that just -- it's just on air, as we speak, in most continent of the world, Asia, Africa, a little bit of Europe and U.S. We call it Team Up for Excellence, very good welcome as well. This is a fantastic opportunity to express who we are as Rémy Martin, and the campaign will be tuned mostly on XO, 1738 in Americas and Europe, and CLUB, of course, in Asia.

When it comes to LOUIS XIII on regarding The House of Rémy Martin, we just introduced, for the first time, a limited edition that we call André Hériard Dubreuil to pay tribute to André Hériard Dubreuil. It's a Black Pearl offer. For the first time, it's a 50 cl, absolutely unique. It's a different liquid. It's a different decanter. But for the first time, this offer is not available in retail. We sell it only to direct clients, the clients we know, and it's impossible to find this offer today in any retailer in the world. So it's a new format of approach for LOUIS XIII, as we speak.

If you travel to Singapore, I invite you to stop by our pop-up store in Changi Airport. This is a very interesting and important moment because we are totally able to express what is LOUIS XIII about. It's like one of the best boutiques that we can offer. This boutique will rotate in Changi Airport for 12 months from a terminal to another one. And of course, we have a limited offer and special approach of the brands within this pop-up store.

When you look at the bridge of the COP, of the current operating profit of Rémy Martin, the House of Rémy Martin, you see fully the value strategy, how it works: a massive price/mix effect, plus EUR 26 million; balanced by volume/mix that we like, minus EUR 14 million; and the A&P that are quite a little bit shy to start in S1 because the new campaign just started in October, so you will see it with Eric and Luca for semester 2.

When it comes to Liqueurs & Spirits, it's a great news because we are looking at this kind of results for a few years now. And you will see that it is fueled by different brands. The most interesting and important is definitely Cointreau for many good reasons. Cointreau, as you know, we totally repositioned a year ago, a bit more, 18 months ago. It took us 6 months to start to see some results behind our heavy investments, in particular, in the U.S. I'm very happy to mention that Cointreau in the U.S. is double-digit now for almost more than a year. And what is very interesting is that Cointreau is starting to catch up in many, many other countries following the U.S. because now we have the right business model and the right toolbox.

Canada, Puerto Rico, Mexico and most likely Australia, and you know that the mixology triangle of the world is U.K., U.S. and Australia. So it's not a big surprise that Australia is picking up double digit as well on Cointreau, and they are investing behind Cointreau with the new campaign for already a year. So Cointreau starts to pick up. It's a massive success, and we are sure that it's just a start for the brand.

On the rest of the portfolio, Metaxa is doing very well in new frontier, like Asia and Americas. Slightly more complicated in Europe because we have some route-to-market change, but we know that Greece for example, which is massive for Travel Retail, is doing extremely well. We had a very good summer, which is a key moment for Metaxa, which gives us a lot of confidence, in particular, on the quality we want to support, which is 12 Stars.

St-Rémy, solid performance. We have a very good marketing initiative. I don't want to reveal anything, but we have a very, very interesting and strategic initiative to come next year. But the key markets are delivering, Canada in particular. U.S. is waking up, and Travel Retail, which I remind you that St-Rémy's number one in Travel Retail in the world, is doing very well and very -- is very solid for the start of the year.

The Botanist, big success. It's a massive double-digit growth. We continue our strategy. We know that liquid to lips is fundamental, is key and is 100% success. We are looking at accelerating our distribution strategy, in particular, in the U.S. And even in Asia Pacific where white spirits are not so big, we can see a very interesting -- a very big interest behind The Botanist.

When it comes to Whiskies, we have a very fast growth almost everywhere, in EMEA, in China, in Japan and Travel Retail. We have a much more high comps in the U.S., but we know that when it comes to our Scottish brands, Bruichladdich, Port Charlotte, Octomore, we are where we should be with a selective approach now. We have refaced everything in the last 18 months. We are starting to expand a little bit but step-by-step Westland in some markets, a little bit in Asia, a little bit in Europe, as we speak. It's happening now. So for example, a market like France is one of the few markets, if not the only market in the world, that is able to sell our 3 distilleries: Bruichladdich distilleries, Westland and Domaine des Hautes Glaces. And we will see, step-by-step, how we are going to roll out Westland in particular. Domaine des Hautes Glaces, it's another story. We are organic. We are very small. We are building stock. And by the way, the new distillery is on air, as we speak, in late '19.

When it comes to Mount Gay, you remember that Mount Gay is under full repositioning. We are presenting all over the world the repositioning of Mount Gay. That is going to happen most likely at the end of Q4. Very nice welcome to start. It will take a bit of time, but we are very confident that it's the right direction for the brand.

In terms of actuality and newness, a big push of Cointreau because it was the anniversary, 170th anniversary of Cointreau. Big events in Q1, in particular in Paris, but not only. We are delivering, as we speak, the limited edition of Vincent Darré, the French designer which -- for which we have a big, big, big welcome. So it's going to be an interesting end of the year.

Metaxa continues its international expansion. We have a very interesting partnership with The Clumsies. I remind you that The Clumsies is #6 bar in the world and based in Athens. By the way, the Athens Bar Show just ended few days ago and is becoming a key, key moment, which is excellent for us, by the way, a key, key moment during the year, ahead of London, and we think is going to become, by the way, as important in terms of halo effect as Berlin bar show. So this is great news. And our partnership with The Clumsies is definitely helping us to reposition the brand on a cocktail approach and mixology approach, which the brand deserves.

When it comes to Octomore, and that's why maybe we are a little bit late in S1, the series -- the 10th series just been issued. That's why we have some -- sometimes some phasing issues on whiskey. But Octomore is, as we speak, delivered. And the 10th series is a very interesting liquid, as we like to have.

When it comes to the bridge of COP for Liqueurs & Spirits, we report growth of 1.6%. You can see that there is almost no effect on the volume, but a very good price/mix, which is good for this kind of positioning and because it's quite complicated for some of these brands to go for price increase. But the price/mix is very good, plus EUR 4.5 million. And you can see that we continue to invest behind the brands, but as well, the holiday season starts. So the best is to come.

Not going to be long on Partner Brands. You know exactly what happened, big drop in value and in volume. It's a quite interesting acceleration. And of course, we are -- we know exactly what's happening, and we are going to be below 3%. It's a combination of Czech Republic and a little bit of leftover of stock of Piper Sonoma in the U.S. And as I mentioned, the little Partner Brands we have, mostly in Benelux, is still suffering because of the Belgian market in particular.

So I'm very happy now to pass the mic to Luca Marotta, who is going to enter in detail regarding the financial part of the S1.

Luca, the mic is yours.

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Luca Marotta, Rémy Cointreau SA - CFO [4]

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Thank you, Valérie. Now let's move on to a very detailed analysis of the financial statement. And so let's begin by analyzing the income statement on Slide #21.

Again, the key message of this slide is the very good resilience of group's current operating margin at 26.4%, up 0.2 point on a reported basis and a limited decline of 0.3, 30 basis points, in organic terms. And this despite a mathematical 3.6% decline, organic decline in sales.

This very good resilience was achieved thanks to another very strong performance of the gross margin, up 3.9 points in organic terms. And this was achieved thanks to the positive leverage of our mixed strategy, but also and especially more than ever this year, thanks to notable significant price rises across all world regions.

This allowed us to fund a further significant increase in sales and marketing expenses, which is up 4.7% in organic terms, which breaks down between a 10.8% increase in communication investment, advertising and promotion, and a very slight growth, 0.5%, in distribution cost. This distribution cost and modest increase reflect some phasing effect and fairly high comps.

On the opposite, administrative expenses rose by 17.8% in the first half, largely reflecting the usual classical volatility in holding costs for our group. But admittedly, this year, the volatility was greater than usual for holding costs in H1 with the combination of 2 factors: sizable reorganization costs; and second one, the known recurrence of the provision reversal, which lowered the level of holding costs in H1 last year, which is not totally comparable.

So for the year, we expect a more normalized H2, leading in a total global value for holding costs in the full year between EUR 18 million to EUR 20 million.

All in all, our current operating profit was down 4.7% on organic basis but stable in reported terms, after taking into account favorable currency effect for EUR 6.5 million.

Now let's dig, Slide #22, into the analysis of the group's current operating margin, which is a very important slide. The 20 basis point margin improvement to 26.4% breaks down into a 30 basis point organic decline and a 50, 5-0, bps of currency benefit. At this stage, no scope or perimeter impact. As you can see in the chart, the very strong gross margin gain was used by -- with significant increases in A&P, advertising and promotion, and structural cost.

But let's start with the first very important and positive point, the gross margin, which delivered an increase of around 400 basis points, enormous. As mentioned earlier, this was driven by positive product mix and country effects with, for instance, the termination of low-margin Partner Brands distribution contracts on the one hand; and very strong performance on Mainland China, which over-indexes in terms of gross margin, on the other. Gross margin were also fueled by significant price effect across all world regions.

Second element is that A&P expense ratio increased by 1.9%, 190 basis points. As you know, management is really keen to step up investment brand building to help move our brand portfolio upmarket. Besides that, despite the slowdown in sales in August and September, we decided to keep investing constantly behind our brands, in particular, ahead of our launch of our new global campaign for Rémy Martin. And besides that, we have to add the weight of the digital expenses increasing, accounting now for around 20% of the global total advertising promotion indicator.

Last but not least, the third factor is the distribution and special costs ratio, which rose of -- by 230 basis points, so 2.3%. This can be explained by 3 factors because at first sight could be -- could seem a little bit higher than expected. The first one is the volatility of the holding costs for 0.8%, as already explained. The second one, which is very important for a group of our size, is the under-absorption of fixed cost due to the sudden sales slowdown for 1.2%, so 1.2% plus 0.8%. The running rate increase of the remaining normative part of the distribution and special cost was 0.3 points.

Now let's take a look at the rest of the income statement, Slide #23. Other operating and nonrecurring expenses were labeled significant this year at EUR 0.6 million in the first half in a negative side. Finance costs decreased to reach EUR 14.4 million in this half year, led by lower gross debt-related financing costs, as Marc Hériard Dubreuil highlighted before, and the non-recurrence of the charge related to the early reimbursement of the vendor loan to EPI that hit last year profit and loss for EUR 5.2 million. But we will come back very analytically to that point later.

Taxes. The tax rate rose from 29.2% to 31.7%. This change, negative change for the profit and loss was due entirely to the geographical mix and specifically to the underperformance of our business in Hong Kong and Travel Retail Asia compared to the strong performance in China. There is a difference in terms of tax rate between China Mainland and Hong Kong business, very significant one.

Over 29 -- over 2019 -- in 2020, all other things being equal at yearly levels, so we are now expecting as a guidance a tax rate of around 32% to 33% because this shift in terms of geographical mix is there. And we are very proud of our result in Mainland China that are very positive in terms of current operating profit and the sales, but in terms of net result are a little bit less -- more dilutive compared to the same result that were achieved in Hong Kong.

Now let's move to profit from discontinued operation. We recorded a EUR 6.3 million net profit linked to the disposal of our Czech and Slovakian distribution subsidiary in H1. As a result, our net profit came at total group level at an historical level of EUR 90.5 million, up 3.5% year-on-year.

And even more important, the group's net margin stands at 17.3%, up 0.7 points, an historical record for the group at the end of September. Excluding nonrecurring items, net profit came in at EUR 84.6 million, down 5.6%, and the net margin stands at a strong resilient 16.2% level.

Now let's look at the reconciliation table, Slide #24, between net profit and net profit excluding nonrecurring items, which is [registered forward] in the half year. Nonrecurring items amounted to around EUR 6 million, EUR 5.9 million to be precise, in the first half. This was mostly driven by the EUR 6.3 million net gain of the disposal of Central European distribution subsidiary, as already highlighted and mentioned also last year. This gain was partially offset by the EUR 0.6 million other nonrecurring operating expenses and the associated tax gain of EUR 0.2 million. So EUR 6.3 million, less EUR 0.4 million, and that is EUR 5.9 million of reconciliation.

Now let's move to a very, very important spreadsheet, which is Slide #25, and is the cash flow generation and net debt analysis of the period. At the end of September 2019, our net financial debt reached EUR 458.9 million, so up EUR 127.2 million to be compared with September 2018 and up EUR 115.6 million versus March 2019.

To make this simple, this was largely due to EUR 132 million dividends paid this year, a generous important amount that included an exceptional dividend of EUR 1 per share on the top of the EUR 1.65 ordinary dividends. Besides, we have to remind that 100% of the dividends we have paid in cash this year, while 89% of the dividend were paid in shares the previous one, as most shareholders had opted previous year for the scrip option. So the difference is, as you can see in a net-net cash flow, EUR 123 million, EUR 132 million cash out this year versus EUR 9 million the previous one.

Now let's look into the cash flow statement more in detail, and starting with the total recurring free cash flow, which was at EUR 5 million cash generation H1 this year versus a cash outflow of around EUR 100 million, EUR 98.6 million in H1 last year.

So the free cash flow improved for around EUR 104 million, EUR 103.6 million. This significant improvement was due again to substantial variation in other components of working capital, for which the outflow was EUR 86 million lower compared to the previous year.

Last year, if you remember, the outflow was amplified by phasing effects related to trade receivables and supplier payables. This year, there was no phasing effects. And besides that, H1 '19/'20 this year benefited from an increased level of factoring program that helps the free cash flow on the half year.

Cash related to strategic working capital was also more favorable than last year by EUR 31 million. While H1 is not representative of the full year trends because the eaux-de-vie purchases are mainly done in the H2, the working capital benefited from easy comps as last year we accelerated payable terms and we are now cycling this effect. On the negative side, CapEx expenditure increased as expected versus last year. And still, we now anticipate CapEx a little bit different compared to our June guidance, so we are now anticipating a yearly level between EUR 70 million and EUR 80 million in the full year versus the previous guidance that was EUR 80 million to EUR 90 million. This is due not to a change of our strategy but only to a phasing of the execution of the program. Nothing has changed in terms of vision. It's only a phasing of the execution.

Also in the negative free cash flow side, there is a tax outflows which increased. That is a consequence of the strong profit growth posted the last year.

So after the analysis of the free cash flow, we have now to talk a little bit more, but very [synthetically], of the nonoperating cash flow, that -- where EUR 120.7 million outflow in H1 to be compared to a EUR 49.7 million inflow in H1 last year, i.e., an important and negative delta in total cash position of around EUR 170 million. As already mentioned, this negative nonoperating cash flow variance was mainly due to the dividend payment yet mitigated by the proceed we received for the disposal of the Central European subsidiary. Moreover, very important, last year, cash in H1 took profits from the earlier repayment of the vendor loan from EPI on the champagne sale for EUR 86.8 million. Our net debt-to-EBITDA ratio stood at 1.39 at September 2019 versus 1.21 at September 2018, still a very healthy and low level.

Now as already promised, take a look at our financial expenses more in detail, which was a charge of total EUR 14.4 million in H1, down EUR 2.3 million compared to last year. As you can see in this spreadsheet, this reflected a EUR 1 million reduction in gross debt servicing costs. Thanks to a further optimized cost of debt, now we are at 1.15%, a very low level, and 2 bps lower than previous year and around 400 bps lower if you compare to 4, 5 years ago.

We also took profits from lower other financial expenses because we have to recall that last year, they were burdened by a noncash nonrecurring charge of EUR 5.2 million related to the early repayment of the vendor loan. Obviously, this year, there was no such charge in H1. In cost -- contrast on the negative side, net currency losses amounted EUR 2.4 million this year while they were a EUR 0.6 million gain last year post IFRS 9 application. As you know, this is a volatile noncash charge related to the aging of group's non-euro debt and future [noneffective] flows.

Slide #27. This is the analysis of -- and the impact of the currencies hedged. As mentioned earlier, the group reported favorable translation and transaction effect for a global amount of EUR 6.5 million on profit in the first half. This impact was slightly above the original guidance for the H1, which was EUR 5 million, thanks essentially to sustained U.S. dollar strength since our publication in June. For your information, the only negative transaction currency effect was the ruble with minus EUR 2 million. Average euro-dollar translation rate, as shown by the green line, came out at 1.12 over the half year compared to 1.18 over the same period of the previous one. At the same time, the average hedged rate, the red line under our currency hedging and cautious policy, was 1.16 over the half year to be compared to 1.19 over the same period the last year. For the fiscal global year '19/'20, we now expect an average hedged rate of 1.16 to be compared to 1.17 previously guided in June.

But to be more precise and to help you also in your estimation, on Slide 28, we're now expecting the following impacts: The positive currency impact of our around EUR 25 million to EUR 30 million on sales, so it's more translation conversion effect, to be compared with an initial estimate of minus EUR 20 million in June. Now this is based on a conversion rate of around 1.11; and EUR 9 million to 10 million gain on current operating profit compared to 0 previously. EUR 6.5 million was already achieved, so the remainder, in our opinion, is between EUR 2.5 million to EUR 3.5 million. Again, this new assumption are based on an average translation conversion rate of 1.11 over 2019/2020 on a yearly level with a spot rate assumption of 1.11 on H2 because the spot rate [would be lower] clearly, and an average hedge rate of 1.16 over this year 2019/2020.

As a reminder, for your model, $0.01 increase in U.S. dollars versus euros is giving EUR 5 million to EUR 6 million in gain on the sales on conversion and EUR 3 million to EUR 4 million more of operating profit on a full year basis that -- all things alike. And do not forget that we are very cautious, we cover it in advance and our cost and the volatility and the time value that play a role in the final accounting picture.

After this very technical but important slide to be -- to talk the same languages between your model and our forecast, let's move to an overview on our balance sheet, a very important slide, in Slide #29. The structure has slightly strengthened over the half year with total assets and liabilities of EUR 2.58 billion to be compared to EUR 2.57 billion at the 30th of September the previous full year. It was mainly driven by an increase in inventory.

Stock rose by EUR 96 million to reach a level of EUR 1.27 billion at the end of September 2019, an historical record in value due to increased capacity across our various categories [periods], but also due partially to high level of finished goods sent in the U.S. ahead of the potential tariff increase. Now stock accounts for 49%, around 50% of our total assets, up 3 points versus last year.

Net gearing, which is the indicator of group's net debt-to-EBITDA ratio, increased over the period up from 23% to 33% due to the higher net debt and a lower equity due to the significant amount of dividends paid in cash in H1. However, it remains at very healthy and low levels.

Let's now review the key events happened in the first half of financial year '19/'20. On the 1st of April in 2019, the group announced the disposal of the distribution subsidiary in Czech Republic and Slovakia to Jagermeister. At the same time, we know that Jagermeister will become the distributor of our brands in those two markets. On May 29, we announced that we have entered into exclusive negotiation with the Brillet family in order to acquire the Maison de Cognac JR Brillet, and part of the vineyard estate. On July 24 at the general meeting, shareholders approved the payment of an ordinary dividend of EUR 1.65 per share and an exceptional dividend of EUR 1 per share. Payment, all in cash this year, were made on September 16. And on the 9th of July, the group announced that CEO, Valérie Chapoulaud-Floquet, will step down by the end of the year 2019. And on September 11, the group announced that Eric Vallat will join as the new CEO from December 1.

Two subsequent events, post-closing events, on Slide #31. On October 15, very good events. Rémy Cointreau was awarded the first place, #1 by Gaia Rating, EthiFinance’s ESG rating agency, in the category of companies with sales of over EUR 100 million, recognizing that group's corporate, social and environmental strategy is going in the right direction, more than that actually. And 26th of November, Rémy Cointreau Board of Directors officially named Eric Vallat as the new group CEO, Chief Executive Officer, of the group starting December 1, 2019.

It was a little bit longer than the usual. Now thank you for your attention, and I will now hand this over to Valérie Chapoulaud-Floquet for the full year '19/'20 and midterm outlook.

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Valérie Chapoulaud-Floquet, Rémy Cointreau SA - Former CEO [5]

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Thank you, Luca. So within this environment, what can we say? First of all, we think that volatility is going to be more than ever part of the reality. So what we can say as we speak with the information that we have is that we expect for the year a slight organic growth in Group Brands' current operating profit, which makes sense, massively or mainly fueled by solid group gross margin gains, as you already could see in S1. And as a result, a stable current operating profit for the group.

The technical factor will have global impact in terms of sales of EUR 56 million, EUR 5-6 million, which is a combination of most likely the Czech Republic/Slovakia affiliate and the United States (inaudible) remaining stock, and has a COP effect of EUR 5 million.

What is the most important is that as we just ended and presented to the Board our 5-year midterm plan, our outlook doesn't change. On the opposite, it's more than ever confirmed. We are -- our ambition is to become the world leader in exceptional spirits. As a target, we aim to reach more than 60% of our sales over USD 50 retail price, and might happen quite soon in the coming years.

Our COP, our current operating margin, will continue to benefit from the group value strategy. You've seen already what happened in S1. So we are on the right track. And of course, the most important behind this first objective is to continue to shield our brand and to continue to invest importantly behind our brands and, of course as well, on our distribution network.

So in total, we want to have a sustainable and resilient and profitable business for the future, and we are getting there.

Thank you very much. And now we leave you the mic for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will now take our first question from Simon Hales from Citi.

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Simon Lynsay Hales, Citigroup Inc, Research Division - MD [2]

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A couple of questions, please. I wonder if you could just sort of help us understand your guidance for the full year and the assumptions you're making with regards to trading in your core businesses in the second half? I mean, specifically, what are you assuming with regards to the outlook for the Hong Kong and Macau business through H2? Are you expecting the difficulty we saw in the Q2 period to continue throughout the second half? And also, sort of, any comments around the ongoing net double-digit growth you might expect to see in Mainland China for the cognac business? And how you see the U.S. replenishment cycle sort of coming through for the second half?

And then just secondly on marketing spend. I mean Valérie, you talked a lot about the incremental programs that are coming at the back end of this year and into 2021 fiscal year. How do we think about sort of marketing spend in aggregate for the second half of this year? Should we see any rollback at all in spend? Or are you going to continue to reinvest at the rates that we've seen in the first half?

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Valérie Chapoulaud-Floquet, Rémy Cointreau SA - Former CEO [3]

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So let me answer regarding the business. So we don't see as of today any improvement in Hong Kong. So Macau is not much part of it but, as of today, we don't see any improvement. And of course, we don't have any crystal ball about what's happening there. So we are quite cautious when it comes to Hong Kong, local markets and Travel Retail. We are not sure at all that it's going to be solved very soon and that we are going to see any improvement. The only, I would say, interesting news that we have, because we were in Cannes for the Tax Free a few weeks ago, is the fact that Hong Kong airport fortunately benefit from transit passengers. So what we lose with people who arrive and depart from Hong Kong airport, we -- is partially balanced by transit passenger, people going to Australia for example, and Hong Kong is a big hub. So in fact, we are not dropping as we could imagine in Hong Kong airport. It's slightly less because it's partially balanced. So at least it's not -- it's a bit, as we say in France, less worse than we could imagine, but still, it's quite bad.

For Hong Kong, we don't expect some improvement as we speak. When it comes to China, honestly, the trend is very good. We fly, so we consider that there is no reason that it is going to change. So I would say quite -- on H2, a quite stability on both sides, still quite bad in Hong Kong and borders and still quite good in China. And usually, and I think for the last 5 years, the Mid-Autumn Festival gives you the tempo of what's going to happen in Chinese New Year. So it will be quite surprising that the Chinese New Year is not good in China because the Mid-Autumn Festival for us was very good. And of course we need to be prepared with the right program, but the team of course knows how to make it happen. When it comes to the U.S., as I mentioned, we are quite confident for H2. I think the turmoil that we faced -- sorry, we faced is behind us for many good reasons. We've seen the last -- so it's difficult to read the U.S. because the figures are not fully representative of the market and each group has a different penetration of channels and states. But still, we have background so we can see trends. And what we can see in the last weeks, it's improving quite well and it's better than our expectations. So it's quite good.

When it comes to investment, as I mentioned, while a plus -- almost plus 11% in H1, we are not going to give up in H2. On the opposite, because we have the new campaign of Rémy Martin. So we are going to continue to invest double-digit in H2, and our #1 priority is definitely to invest behind our brands. The 2 key brands for which we have classical, I would say, advertising campaign, mostly digital campaigns and not just PR or whatever, is definitely Rémy Martin and Cointreau. And we are investing heavily behind the brands and we don't want to give up. It will be the right -- it would be the wrong decision and the wrong strategy. It works, so we continue to keep the speed and we continue to invest behind the brands big time. So it's going to be a double-digit investment in H2 follow-up.

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Simon Lynsay Hales, Citigroup Inc, Research Division - MD [4]

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That's very clear. I wonder if I can just follow-up with just a brief one for Luca around the holding company costs going forward. Obviously, lots of moving parts in that in the first half of the year. How big are the reorganization costs that you've taken in the first half? And how should we think about holding costs as we move into a normalized year in fiscal year '21?

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Luca Marotta, Rémy Cointreau SA - CFO [5]

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Okay. I will answer to this question, and then I'll be back on the quality and the forecast of the guidance of the year because it's important not talking only about figures, but the way the figures are achieved.

The first question. Holding costs for our group are obviously a bit volatile, because compared to other group, our reorganization are not affecting specific brands or regions, but more done at a centralized level to add volatility in holding costs. But brands and regions costs, they are more comparable and recurring year after year. If there is an increase, it's the result of a specific decision in the region. If there is a decrease, the same. But no reorganization, main reorganization. It's the P&L of region. [Our brands] are more centralized at the holding level.

For this year, we are normalizing our expectation between EUR 18 million and EUR 20 million. Mathematically speaking, the noncomparable exceptional variation compared to the previous year for both element, reorganization and nonrecurring reversal of the provision, is something around EUR 5.5 million, EUR 6 million, split half and half. EUR 3 million is the nonrecurring reversal and EUR 3 million is the impact of the reorganization that was took at the holding level. H2 will be more normal. But if any decision of new reorganization will happen following next quarters -- next years, you will witness always variation in this line, holding cost. I repeat, it is our politics to centralize reorganization in this line. For this year, EUR 18 million to EUR 20 million exceptional costs, non -- or nonoccurrence of the same reversal, around 6 year -- EUR 6 million on the first half.

But I want to be back to your question. What is the guidance? The guidance, it is clear in terms of mathematical, in our opinion, impact. For the full year, it is to be positive, slightly positive for the operating profit on Group Brands. With a quality profit and loss, it means continue to increase the gross margin. This is the most important thing that we achieved in the first half. We increased the 400 basis points, 240 were linked to the exit [termination] brand, but 160, so 40% of the increase, is organic, it's for the rest of the brands. The [stance] is there. So there's no mechanical exit or Partner Brands that will play a negative -- a positive role in the future anymore out of the EUR 30 million net sales. So this is something important. This is a building block, in my opinion, the more that you have to build some block with some logic like gross margin to be improved. A&P, as Valérie just highlighted, a big, big investment behind our brand because we increased the internationalization of our brand, even more for Liqueurs & Spirits compared to Rémy Martin. So we have to be consistent and continue to increase. Clearly, if the second half of this year, we continue to witness softness in Hong Kong and the recovery in the U.S. would be even more Q4 than Q3, which is quite possible, we will adjust. But the aim, the strategic view has not changed. We will invest. And also the strategic cost will be the same. So Group Brands to be increased in bottom line operating profit, with increase in gross margin, increase in A&P according to the fastness of the net sales. So the more we grew in net sales, the more we put on the table, A&P. And on a specific cost, strategic one, an increase that normally, as I already -- always said, it is able in the medium to long term to get a leverage effect. This was not the case for the H1, because the top line was not there at our expectation, and we factored that because it were a specific impact. And the run rate increase on a comparable basis was only 0.3. This impact was the holding costs. So once again, we have to disconnect the medium term to the short term. The increase in Group Brands would be done, gross margin, A&P costs. As a result, increase in bottom line, which may be more than we expected, but this is linked not to the change of our strategy. This is linked on the situational factors that are lasting a little bit more than expected on top line because expansion is important for us. Turnover is important.

Then the last thing -- sorry, I will continue because it is important also for other people. This is Group Brands. Then you have the total group. Total group is also improved but -- by the holding cost. What happens to the Partner Brands? We are losing, half year, a little bit more than EUR 3 million. We highlighted that would be a hit on a yearly level EUR 5 million. It is considering organic one, so we are not doing like other company that strip off the decision they made. For us, it's organic. But in the last year performance, you have EUR 5 million for the full year, and EUR 2.8 million for H1, EUR 2.2 million. The EUR 2.8 million of last year now translates in minus 0.6. It means that not only we are facing a technical effect, but the remaining part of the Partner Brands within Benelux, we are not matching our expectation. That's nothing important, but on specific (inaudible) basis, [play over all]. So on a full year, you start from a positive impact in Group Brands profits, current operating profit. And then you arrive at that flattish considering the decrease of technical factors, so Partner Brands; the hit on holding [for a total] this year, EUR 18 million to EUR 20 million; and then the ForEx is there, play a compensation role. And today, we are guiding EUR 9 million to EUR 10 million. If the spot will be at 1.11, it could be better. If it is 1.09, it could be worse. So flattish at operating profit level is a consequence of our group brand strategy, ForEx, technical effect are only mechanical adjustment. This year, some nonrecurring reorganization and nonrecurring reversal provision will hit the holding cost but is not something normative.

Sorry, it was long, but for the -- I think for everybody, it is interesting. And I repeat, the strategy is not changing. We're continuing to invest. We will adjust if -- partially if the softer top line will be there more than expected. It is very important for our sales to be -- even before you started to say that, but we are very, very committed on EBITDA and free cash flow.

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Operator [6]

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

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Trevor J. Stirling, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [7]

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Luca and Valérie, two questions from my side please. One is, have you started to see any pickup in Mainland as sort of people compensating for Hong Kong? We've seen that in other luxury groups that some of the lost sales in Hong Kong are now being compensated in Mainland purchases. And second question, that's a more technical one. Looking at Page 15, Luca, and on the bridge for Rémy Martin, there's a EUR 7.6 million increase in others. I just wonder if you can give us a little bit of color about what goes into that line in the P&L.

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Valérie Chapoulaud-Floquet, Rémy Cointreau SA - Former CEO [8]

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So regarding China and Hong Kong, honestly, you know that there is no official panel in China, so it's very complicated to assess. Additionally, compared to luxury brands, we don't have our own network and boutique. So there might be some transfers, of course, because people are traveling less to Hong Kong and consuming less in Hong Kong. I'll remind you that Hong Kong is a massive on-trade activity and which is totally not stopped but almost stopped today. But when it comes to transaction and buying in Hong Kong, for sure, there might be some transfers. For us, it's absolutely super complicated to assess because, as you know, the way the market is -- the route to market is organic in China with the tier wholesale system is very complex. So logically, we should have some transfers. But we know that when a channel or a market does not work very well, part of it is lost, unfortunately. So on the opposite of luxury, it's very -- where we can look at [stock-based] boutique-by-boutique, if they can get some transfer for us, it's almost impossible to quantitatively assess. But there might be, for sure, but not 100% of it, that's obvious. It's all what I can say today, but yes, there might be some of it. But I would be surprised if there's more than 50% transfer.

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Luca Marotta, Rémy Cointreau SA - CFO [9]

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And on the technical side, the main elements are around EUR 2 million are increase of cost of goods and logistic costs for Rémy Martin. The remainder, it is around EUR 1 million of increase of brand costs, mainly for protection of our trademarks around the world, the increase of our brand expression inside the brands of Rémy Martin out of A&P, because this is our OpEx. And the remaining part, around EUR 4 million, is something that you don't see at the company level. Of course, this is distribution costs because the loss of weight of Partner Brands makes that Rémy Martin absorb more fixed costs compared to the past. So it is an increase, but it's not totally comparable. It is the opposite side, the other side of the moon, or the fact to lose non-Group Brands because they were paying part of the bill at the end of the month, and now it's Rémy Martin, which is the biggest town -- guy in town, that has to pay that. So EUR 7 million, EUR 3 million is the real increase -- EUR 3 million to EUR 3.5 million, and the rest is an allocation switch.

And Trevor, if I add something on Mainland China, we are experiencing very, very good trends as well. Okay, there's Chinese. But our guidance has not changed. On Mainland China, we are targeting double-digit growth [off of volume] add value for here. So it is a more-than-expected complication on top line because of many reason, but China Mainland is still very strong. This is not so nice for net result, and shareholders may be would like also to have a little more Hong Kong because there are more taxes. But in terms of business-wise, we are really, really comfortable and we are really performing in a very strong manner, stunning manner there.

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Operator [10]

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We will now take our next question from Laurence Whyatt from Barclays.

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Laurence Bruce Whyatt, Barclays Bank PLC, Research Division - Analyst [11]

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Just a couple. In the U.S., you've said the replenishment a bit slow. Do you think that's entirely down to the price rises or is there anything else going on in that market? And secondly, also in the U.S., the acceleration on Cointreau, would you put that solidly down on the increase in marketing spend you put in that brand? Or again, is there something else going on? And finally, on Mount Gay, how long is the strategic repositioning going to go on for? I think it's going for about maybe 4 or 5 years now. You mentioned this additional in Q4. I'm just wondering when you expect that strategic repositioning to be complete.

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Valérie Chapoulaud-Floquet, Rémy Cointreau SA - Former CEO [12]

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Okay. Thank you very much. So I will start with the last question. So Mount Gay, it took us a bit of time because, within the portfolio, we started -- our priority was to reposition other brands. And as a consequence, we took care between brackets of Mount Gay a little bit later than other brands. So the repositioning of Mount Gay is in the box. It is presented as we speak to most markets, including the U.S., and the first shipments are going to happen in Q4. So it's going to be full speed for our next fiscal. So it's operational, we have produced already. We are absolutely on time, and you will see the first new proposition in the U.S. in particular at the beginning of the new fiscal, meaning end of March 2020.

When it comes to Cointreau. Cointreau definitely, the new positioning and the advertising and the investment behind the brand is mostly part of the success, but not only. It's a 360 approach in investment. If you just advertise and you don't do your job in on-trade, in off-trade in terms of visibility, in terms of education, in terms of PR, et cetera, et cetera, you have less interesting results. So of course, it's cumulative investments for the last 18 months. But on the top of it, it's a 360 approach in terms of toolbox and the way we invest and the way we are visible in the U.S. What is interesting, the U.S. is our #1 market. We, I would say, experimented what is the toolbox and the 360 approach in the U.S. And starting this fiscal, we rolled out in other key markets for Cointreau. And of course, the local team's job is to adjust this toolbox to the reality of their own markets. So this is exactly what's happening now. And this is why we're extremely happy that for the last months, we can see some pickup in Canada, in Puerto Rico, in Mexico and Australia, that are key markets for us. Meaning that what has been achieved and fine-tuned in the U.S. is exportable and is absolutely taken in account by these markets, meaning that the other markets have more to offer in the future and the best is to come.

When it comes to U.S. markets, and cognac in particular, I think as I mentioned, there are 2 factors. The fact that we increased our cognac prices 3 times in 1 year, April '18, September '18 and April '19. So as a consequence, you can understand what can happen, effectively, because the U.S. market is definitely very sensitive to price. But we could see last year that we were very high double-digit in September before the first -- the second, sorry, price increase. And after the second price increase, we catch up quite fast. So it means that the market absorbs it quite easily. And it's true that this year, I think that was a combination of the third price increase in April '19 plus the fact that competition increased in June and had some stock effect in the market. So this year, it's much more combination of these 2 factors, while last year, to be honest, it was quite absorbed quickly and the volume catch up quite fast. So we are looking at -- very closely at the market. We can see that after 3 months, after price increase of competition, starting September-ish, October, we can see that we are back to speed and slightly higher than our expectations, especially because we are facing the anniversary of the price increase of last year of September '18. So that's why the team is very confident. Our plan is very strong. We start the new campaign in the U.S., but not only. But in the U.S., we start the new campaign I just mentioned. So we are full speed. The investments are behind the brand. And we will see very soon -- because the holiday season is starting this week, we will see the result. But as of today, with the latest week and months result, 2 months result, we are confident for H2 definitely.

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Operator [13]

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Our next question from Chris Pitcher from Redburn.

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Chris Pitcher, Redburn (Europe) Limited, Research Division - Partner of Beverages Research [14]

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A couple of questions. Firstly, on the outlook for the tax rate. Luca, you mentioned it's predominantly driven by geographic mix. Is there anything that you can do to mitigate that 32% to 33%, if for example the purchasing has structurally shifted to Mainland China? And I'm mindful you said you can't work out how much is shipped into Mainland China. And then secondly, on Cointreau, I can see where the gross margin expansion in cognac is helping fund increased A&P. But can you give us a sense for how Cointreau's gross margin has developed and whether you're able to fund that -- or whether you're just having to fund A&P out of margins? And in terms of the investments you're putting in, can you give us a sense of what's balanced between the growth markets, i.e., U.S., China, Russia, and balanced between sort of trying to stabilize Europe?

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Luca Marotta, Rémy Cointreau SA - CFO [15]

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Okay. Sorry, I don't think -- in terms of action to change the geographical mix, I don't see many, many actions that we [received]. We would like the base of profit before tax, [net of] production, building a bit maybe different, but we're also very proud of what we are experiencing in Mainland China. So if you travel to Hong Kong, maybe buy some of our products, it will help us marginally to improve our footprint. But I don't see any structural, and we do not manage the group that way. We explained what the consequence are, but we are not playing the game of tax planning before current operating profit, sourcing, considering natural business trends.

The second point, it is -- the third one is the balancing between mature and emergent -- mature or not countries. Clearly, if you consider Mainland China, it is emerging -- they played a role in terms of growth on the H1. We think that we over-indexed the performance of the group on the second part, and are more the mature country. Even biggest countries of Europe, they are more in a complicated situation. Inside Europe, we highlighted the most developed -- not developed but booming or increasing countries are more in the emerging countries inside Europe. So it is more a year in which emerging are better than the classical mature country.

In terms of Cointreau, as you know, we don't disclose brand by brand, but I understand that you say that we are to increase our investment in Liqueurs & Spirits, and Cointreau is very important in terms of dynamics of the Liqueurs & Spirits division. So to help you a bit with your model, 2 very good news, in my opinion. Not only Cointreau is, mathematically speaking, hit by the increase of A&P, which is a negative element for the profit and loss, but it's more than absorbed by increase in gross margin, global value generation and profit. Without disclosing the value, we increase the profit of this brand, which account for an important part of total Liqueurs & Spirits division at the September end, and we think and we are convincing ourselves of the fact that we think we are able to improve our profitability in global value and percentage compared to sales in this important brand and also in the medium term to all Liqueurs & Spirits division, because the turnaround in terms of profitability of the Liqueurs & Spirits division to be more coherent with the profile of the group can be happen without a strong Cointreau. So the increase in A&P is well digested. There is already a payback in absolute value and also in margin value in terms of percentage of sales. We are improving compared to previous year and compared to our expectation. So no fear at this stage for Cointreau. The increasing footprint in A&P is not creating an additional dilutive impact on the Liqueurs & Spirits profit and loss. And Cointreau is very important for that. Is this clear, Chris?

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Chris Pitcher, Redburn (Europe) Limited, Research Division - Partner of Beverages Research [16]

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Yes. And just in terms of the investments you're putting behind the brand, you've obviously got U.S. in growth, you've got these fast-growth markets, but also are you spending more to try and stabilize sustainably Europe?

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Luca Marotta, Rémy Cointreau SA - CFO [17]

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Yes. It is a 360. Yes, yes. The answer is yes, not only in the U.S.

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Operator [18]

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We will now take our next question from Marion Boucheron from MainFirst.

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Marion Boucheron, MainFirst Bank AG, Research Division - Research Analyst [19]

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Just 2 follow-ups. So going back to the Cointreau margin and all you've explained now, what has been then driving the deleverage? Is it the investment with all other brands? And when could we see, do you think, some operating leverage in this division? And then on cognac, would you expect H2 to go back to volume growth? Or we're still looking for a decline?

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Valérie Chapoulaud-Floquet, Rémy Cointreau SA - Former CEO [20]

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I can answer for the second question. As I mentioned before, we are looking for value and not for volume. So whatever is the external factors and geopolitical situation, anyway, we didn't build our budget and our fiscal on massive volume growth on cognac. On the opposite, because in the entry qualities like VSOP, we are looking at shrinking this quality and moving very fast to 1738 and CLUB, what we call the intermediary qualities and XO and more. So anyway, we are not looking for volume. So the H1 is maybe slightly lower than what we expected, but we are not looking for volume for sure, definitely. And I give the mic to Luca for the first question.

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Luca Marotta, Rémy Cointreau SA - CFO [21]

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Liqueurs & Spirits division journey to improve -- or in terms of improving our profitability, it's not only (inaudible). So we will continue to invest behind our brand as we did mainly for Cointreau, but not only for the last 18 months. The goal, as I already highlighted is to internationalize our brands so that we will be more worldwide, to build the critical mass in order to achieve a sustainable profitable division not so different from the weighted average of the group. We are not there yet. We'll keep investing, but we are also trying to improve the position of each brand. Cointreau was one of them clearly inside the Liqueurs & Spirits division. There are also other brands which are less profitable and that needs also, in [terms of] their sales, even more attention and investment, not only Mount Gay, but also whisky is a different and more business model with a lot of teaching, training, education.

Cointreau, in a way, you have maybe more speed. For other type of business, it's a little bit longer. So we'll be consistent, but you cannot expect to switch from 16% to 26% in 1 year. So it will be a little bit longer in terms of realignments.

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Operator [22]

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I will now hand the call back for any additional or closing remarks.

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Marc Hériard Dubreuil, Rémy Cointreau SA - Chairman of the Board [23]

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No. Thank you. We don't have.

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Operator [24]

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Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.