Edited Transcript of CPRI.MI earnings conference call or presentation 28-Jul-20 11:00am GMT

Actually, I mean the Italian on-premise was shut down for 10 weeks out of the 12 weeks of the quarter.

Meanwhile, Wild Turkey, Grand Marnier and SKYY also declined largely due to destocking in the key U.S. market. The Jamaican rums on the other hand, were quite resilient. Regional Priorities were down 11.5%, with declines across the whole brand cluster with the exception of Espolòn and Forty Creek. Our Local Priorities were down 13.1% overall due to double-digit declines in the single-serve aperitifs in Italy, which offset quite resilient performance across the rest of the portfolio.

On a reported basis, net sales were down 9.4%, reflecting a positive perimeter effect of 2.1% as well as a slightly negative ForEx effect of minus 0.2%.

Moving on to adjusted EBIT. On an organic basis, it declined by 30.8%, which is a monthly 470 basis points margin dilution, clearly against a tough comp base, but largely due to COVID-19 impact, hitting, in particular, our high-margin and on-premise skewed aperitifs business.

Our cost containment initiatives in Q2 across both A&P and SG&A helped to mitigate the dilution, which was still heavily impacted by top line decline and lower absorption of fixed costs. On a reported basis, EBIT declined by 27.7% with a positive ForEx effect of EUR 8.9 million and a negative perimeter effect of EUR 3.4 million.

Net profit on an adjusted basis came in at EUR 77.6 million, down 33.5% and on a reported basis to EUR 73 million, down 40.6%. Net debt in the period reached EUR 1.61 billion versus the EUR 777 million, which we had at the end of the year, so up by EUR 284 million. Clearly, this was due to the 3 acquisitions we did in the period as well as the increased dividend payment, the share buybacks as well. This all of it put together led to net debt-to-EBITDA on an adjusted ratio basis of 2.4x.

Moving on to Chart #6. I think it’s just graphically important to see the impact of SEMEA and Italy from a regional and geographic standpoint, whereas you can see that from a brand basis, the performance hasn’t been so divergent across the different clusters. And importantly, our Global Priorities continued to outperform the rest of the portfolio. What is more, I think, interesting to look at is our strong brand momentum across the off-trade in the U.S. during the lockdown. And you can see that perfectly portrayed on Chart #7, where you see on a weekly basis, our performance in Nielsen terms versus the market. And on average, you see that throughout the period from week 11 all the way to week 28, we’ve strongly outperformed the market on average by growing 50% faster than the market.

Below, you see the performance by brand. It’s also important to underline that the same level of outperformance in the off-premise occurred also in key European markets. If you look at the lockdown volume percentage gains on Aperol and Campari, in Italy, Austria, Germany and the U.K., you see that, on the 1 hand, we continue to perform at a double-digit base in all of the markets.

The growth rate would have been, versus the market, even bigger because, clearly, we make a large part of the category. So we’ve outperformed the market even more significantly. And on average, our Campari subsidiaries also grew 50% faster than the market referenced across all key markets.

Moving on to Chart #10. Just to illustrate the fact with the strong decline in Italy. The Italian business only accounted for 59.9% of the — our sales in the first half, which, on the other hand, allowed the U.S. to grow to 32.1%.

Whilst we’re talking about the U.S., let’s move on to the Americas on Page #11, overall, an organic decline of 7.6%. Having said that, looking at it by different markets, we see the U.S. down by 4.1%. This overall decline is due both to a very tough comp base. We were up 10.9% last year as well as the negative impact from COVID-19 on on-premise restrictions, and this was particularly amplified in Q2.

Some key brands such as Espolòn, Wray&Nephew, Aperol and Campari continued to grow, but this was unable to offset declines in SKYY, Grand Marnier and Wild Turkey, which suffered from a destocking effect at the wholesaler level. Brand momentum in the off-premise remains very strong across our portfolio as we’ve seen and consistently above the market average. Clearly, destocking at wholesaler level impacted shipments which are lagging behind more positive depletions, which are on a high single-digit on a total company basis and even stronger sell-out trends.

Jamaica was down 8.9%, an overall decline due to the closures of the on-premise as well as reduced touristic flows as Jamaica is quite a tourist destination. And this was also amplified as in the case of the U.S. by a tough comp base, where we grew very strong double-digit last year by 18.6%.

Canada, which is a prevalently a off-premise market, had a very strong first half, up 9.6%, very positive results across the portfolio of brands. Brazil was down by 8.5%. This is an on-premise skewed market. And here, we also had a little bit of a mix issue in that the more premium brands and higher profitability brands, Campari and SKYY suffered, whereas the more value-based and lower profitability local brands actually did well. The rest of the region was down 34%. Mexico was heavily impacted by restrictions on alcohol sales, down by 48.3%. And Argentina did, I think, decently given the circumstances of both the economic situation as well as the pandemic, down 22.1%.

Moving on to SEMEA, Middle East and Africa, we see where we’ve taken the brunt of the hit. Overall, this region is down 32.8%, with its largest component, Italy, down 33.1% on an organic basis. There was a strong decline driven by the full on-premise closure. You’ll recall that 70% of our consumption in Italy happens in the on-premise. And this was clearly a reaction to the pandemic and there were also limitations, particularly in the first half of the quarter on customer traffic in the off-premise.

The whole aperitifs portfolio declined, and unfortunately, this occurred in a peak seasonal quarter, which was also amplified by a reduced tourism traffic. The on-premise recovery from late June started gradually as consumers began to return to bars with outdoor spaces. But clearly, it’s not a return to the normal.

The rest of the region was down 32%, France was flattish with a positive Q2. Q2 was up double digit. Importantly, Q1, we had the — on paper destocking effect due to the route to market change as we acquired our distributor.

Spain, on the other hand, had a real decline, down 49.3%, clearly impacted by its on-premise skew as well as reduced tourism. Looking at Africa and Nigeria, it continued to grow, mainly thanks to Campari, Wild Turkey and American Honey, whilst clearly, South Africa is strongly impacted by the closure of alcohol selling outlets as well as the amplification brought about by the route-to-market changes. Global Travel Retail comes as no surprise, down by 60.7%, and as there was very little shopper traffic. And we don’t expect a major recovery on this part of the business, at least in the short term.

Moving on to Chart #13, North Central Eastern Europe, had a very solid first half of the year, up overall, 5.9%. Germany was up 3.4%, a resilient growth with a nice acceleration in Q2 as — and this is prevalently in off-premise market, where we have positive sell-out trends continuing to outpace shipments in a key market for the group.

Growth in our aperitif brands was strong, Aperol, up 9.8%, Campari, 4.7%, and that’s particularly positive, given the big price positioning we did last year. However, you’ll recall from the chart I showed at the beginning that the sell-out trends are actually much, much stronger, double-digit trends. We’ve also seen modest growth in Ouzo 12, GlenGrant and Bulldog, which helped offset declines in agency brands as well as the on-premise skewed liquors, Averna [liquors] and Frangelico and Cinzano Sparkling.

The U.K. continues to grow from strength to strength, up a very strong 36.2%. Robust growth continued into Q2, driven mostly by Aperol, Wray & Nephew Overproof, Magnum Tonic as well as Campari. We have very strong growth in the off-premise. And I must say, an unparalleled growth three digit in e-commerce channel, which really contributed to the overall performance.

Russia, very positive, up 19.2%, strong growth despite the tough comp base, we were up 10.9% last year. Again, this is a largely off-premise market. The key drivers here have been Mondoro, Aperol and Cinzano Vermouth. On a smaller base, though, Espolòn, Wild Turkey and Campari continued to grow nicely.

The rest of the region was down 3.2%. We’ve had resilient growth in Austria and Switzerland, particularly behind our aperitifs. Belgium was flattish, but we saw some small declines in Eastern Europe and Scandinavian markets.

To round up our geographies, Asia-Pac also had a quite good first half, up 7.1%. Australia, on a full semester basis, was up 18.7%, this following a weak start to the year, you’ll remember the Jan-Feb were impacted by bush fires. We have an overall great performance across the portfolio.

Wild Turkey RTD, which obviously is very important there, Campari and Espolòn also grew double digit. The rest of the region was down 19.2%, and was divergent performances. China, which is a predominantly on-premise, actually registered a double-digit growth as it recovered [successfully] to post-COVID pandemic. In Q2, for instance, we were up 60.4%. And on the other hand, Japan declined 48.6%, and this is mostly due to the continued destocking, which occurred ahead of our route to market change, which is occurring as we speak.

Moving on the brand-by-brand analysis, Page #16. Aperol, impacted by Italy, SEMEA, down 11.6% on the half. If we exclude Italy and GTR, we would’ve been up by 4%. We have strong off-premise and online sales in all of our core markets and feel very good about the prospects of the brand going forward. Campari similarly reflects the same performance — similar performance to Aperol, down 10.6%. Again, it’s the — its largest market, Italy, which impacted it due to the closures in the peak period in Q2.

On the other hand, strong growth and nice for the mix with the U.S. up double digit, Germany up mid-single digit.

Grand Marnier was down overall 9.7%. Again, here, different performances, very positive performance in Canada, up 13.6%, but this was unable to offset weak shipments in the U.S. market. As you know, Grand Marnier is a 50-50 split between the 2 channels. So despite very positive off-premise sell-out trends, we were not able to recover what we lost in the on-premise as well as were impacted by destocking at the wholesaler level.

Moving on to the following page in our Bourbon portfolio, down 7.7%, building momentum in Q2. Clearly, this overall negative performance needs to be seen also against a tough comp base. They were up 11.4% last year. And it’s largely due to destocking in the U.S., where actually, in the case of Wild Turkey, we were the ones pushing the destocking in Q1 as we were preparing the brand for the relaunch of 101 behind new packaging, which then we had to postpone due to disruptions from COVID. Sales in Q2 are progressively more positive and very strong growth in the second largest market, Australia.

American Honey, on the other hand, registered a decline overall, and this is mostly due to destocking in the core U.S. market, which more than offset positive results in Australia and Nigeria.

SKYY overall was down 16.5% decline in the core U.S. market, but this is mostly due to destocking at the wholesaler level in Q2, where the brand was down 20%. We have very nice performances in terms of sell-out on core vodka, which is growing in the high single digits and roughly in line with the vodka market. So that’s quite positive. We have nice growth in China, but this was unable to offset the declines across the other international markets. Our rum portfolio is positive, up mid-single digits, 4.9%, with a slight acceleration in Q2.

Key driver here is Wray & Nephew Overproof, doing very nicely in its 3 core markets. The negative performance was driven by Appleton Estate, and this is mostly due to the destocking which happened across all of our markets ahead of packaging change in Q1. Clearly, on-premise closures, and particularly, in Jamaica, didn’t help either.

Moving on to our regional brands, Espolòn, up 3.3%, big difference between shipments and positive depletions as well as higher sell-out trends. Our depletions were up 47% in the period in the U.S., and our sell-out trends were even stronger. We’re also continuing to see encouraging sign in seeding markets, such as Russia, Canada and Australia.

BullDog, on the other hand, was impacted by its large prevalence in on-premise markets such as Spain as well as GTR. And unfortunately, improving consumption trends in Germany, the U.K. and Belgium, weren’t strong enough to offset the declines elsewhere.

GlenGrant was also impacted by GTR in Italy, down 32.1%. And Forty Creek, which has the bulk of its sales in Canada, benefited from the strong growth across our portfolio in that market, up 13.8%.

The Italian bitters were down, unfortunately, 23.5%. Again, they’re quite skewed towards the on-premise and also have a large share of their sales in the core Italian market.

Cinzano, the Vermouth declined by 16%. On the positive side, the core Russia and Australia are doing quite nicely, but they weren’t able to compensate for declines in GTR, Argentina and the rest of European markets, where you’ll recall, we repositioned the brand towards the end of last year behind a subsequent price realignment.

So that will take a while to iron itself out of the market. Sparkling Wines were down 18.7%. Clearly, there aren’t many celebratory moments during the pandemic so anything with bubbles suffering.

On the other hand, though, Mondoro and Riccadonna were flattish, particularly thanks to a very strong performance of Mondoro in Russia at 19.1%.

To close it up with our local priority brands, we see that, unfortunately, this cluster was impacted by the negative performance of the mono use Italian aperitifs, Campari Soda and Crodino, which were down in the 30% range, 30.5% on Soda and 34.7% on Crodino, which is a little bit of shame because the rest of the portfolio did quite nicely. Most importantly, the quite profitable RTD business in Australia was up 23.5%.

The lesser profitable local brands in Brazil were up 22.4% and our 2 local heroes, Ouzo 12 in Germany and Cabo Wabo in the U.S. also did quite nicely.

This is it from the net sales perspective. So I’ll pass on to Paolo, who will dissect the financials.

——————————————————————————–

Paolo Rinaldo Marchesini, Davide Campari-Milano N.V. – MD, CFO & Executive Director [3]

——————————————————————————–

Thank you, Rob. If you follow me to Page 23, we have the analysis of the Americas region performance in the first half of 2020. As you can see, the EBIT came in at EUR 69 million versus EUR 76 million of last year, showing a reported — an overall reported change of a negative 9.3% and 50 basis point EBIT margin dilution.

Looking at the organic performance, EBIT adjusted organic decline accounted for 19.3% in value with 250 basis point dilutions. At the level of gross profit, the region suffered from a declining value of 14.5% stronger than top line, which were down 7.6%, and in so leading to a decline of 440 basis points in terms of our margin. 3 factors here to highlight.

First and foremost, the unfavorable sales mix by both brands namely high-margin Global Priority suffering in the U.S. and China with skew from on-trade to the off-trade channel. Secondly, we call out the negative agave purchase price impact. And thirdly, the lower absorption of fixed production costs, given the top line decline of 7.6% organically in the region.

A&P has been contained by 27.1% in value, more than top line, driving a 420 basis point margin accretion. Key drivers were cost mitigation initiatives as well as different phasing of investments from Q2 into Q3. And thirdly, a shift from off-line to online investments.

SG&A showed a moderate increase in value by 3.6%, still driving 230 basis point margin dilution due to the lower absorption, again, of structural cost, given top line decline, and that was partly mitigated by the streamlining of some local structures, particular in South America. The combined effect of FX and perimeter generated 200 basis point on margin accretion.

If we move on to the SEMEA region, the EBITDA came in with a negative EUR 1.8 million versus a positive EUR 49 million of the prior year, showing on a reported basis, a decline of 103.6% in value and 21% as a percentage of sales.

Looking at the organic performance, the strong EBIT adjusted organic decline was heavily hit by COVID, and particularly the high-margin aperitif business in Italy, the GTR channel in Spain were the most affected.

Gross profit in value declined by 35.2%, actually higher than the top line decline of 32.8%, driving 240 basis point margin dilution. And again, even in this region, we have the very same performance driver with unfavorable sales mix driven by on-premise closure, particularly in the Mediterranean markets in Italy and in Spain, hitting the high-margin aperitif business.

The A&P investments have been contained in value by 14.9%, but less than top line, resulting in 420 basis point margin dilution due to the combined effect of cost containment and shift from on-prem to online brand building investments behind particularly the aperitif portfolio to fuel the consumption momentum.

The SG&A has been contained by 3.9% in value, but remained highly dilutive, as you can see, 13.8% the dilution impact as a consequence of a lower absorption of fixed structure cost, given the stronger double-digit top line decline. The dilution of marginality was partly mitigated by cost containment actions, reducing variable structural costs, including the usual suspect traveling ban, hiring freeze and on and so forth.

The combined effect of FX and perimeter accounted for 70 basis points dilution, totally driven by the first-time consolidation of the French distributor, which we’ve recently acquired, which was negatively impacted by 1 of destocking as well as COVID-19 impact.

If we move on to Page 25. Northern and Central, Eastern region analysis of our performance. EBIT came in at EUR 57.4 million versus EUR 49 million of last year, showing a reported — positive reported change of 16.9% and 370 basis point EBIT margin expansion.

Looking at the organic performance, even here, the performance is quite strong. EBIT adjusted organic growth accounted for 16.8% in value, well ahead of top line, leading to 310 basis points accretion. Gross profit actually grew in value by 2.9%, slightly lower than top line, which was up 5.9%, generating 180 basis point dilution, again, driven by unfavorable geographic sales mix, where the outperformance of Russia drove some dilution in the Northern and Central European P&L accounts.

The A&P decreased in value by 13.4%, leading to 330 basis point accretion. Again, also in this region, worthwhile mentioning cost containment initiatives, different phasing of A&P investments and on and so forth. SG&A decreased in value by 3.7%, generating 160 basis point accretion, reflecting the cost containment measures that were implemented in Northern Europe.

The combined effect of FX and perimeter on marginality accounted for an accretive effect of 60 basis points, primarily driven by the termination of low-margin agency distribution contract in Europe.

If you move on to APAC, Page 26. Overall, EBIT on a reported basis came in at EUR 5.7 million versus EUR 6 million over prior year, with a reported change decline — of 4.8% in value and 80 basis points margin dilution. Looking at the organic performance, EBIT adjusted organic growth accounted for a positive 6.3%, slightly below top line performance of 7.1%, leading to 10 basis point dilution. Gross profit in APAC was up 8.6% in value, well ahead of top line, leading to 60 basis point accretion with positive sales mix by brand and markets within the region. A&P was slightly down in value, negative 0.7%, driving 90 basis point margin accretion, again, mix and phasing of marketing initiatives played a key role.

The SG&A were up in value, double digit, actually 14.3%, leading 160 basis point dilution due to tail-end effect of the relocation of the regional head office from Australia to Singapore.

The aggregate, the combined effect of FX and perimeter in APAC accounted for a negative impact of 70 basis points, driven by — totally driven by FX.

If we move on to the consolidated P&L, Page 29. As you can see up there overall in the first half of 2020, the EBIT declined from EUR 180 million to EUR 130 million. So it was overall down by EUR 50 million, with an organic decline of EBITDA adjusted of 27 — 30.8% in value with 470 basis point margin dilution, EUR 55.5 million in value. 3 drivers. Just to summarize, we had a tough comp base, going into the first half of last year, EBIT was up 10.6% in value, and that clearly played a key role in driving this double-digit negative performance. Then, of course, COVID, hitting, in particular, our high-margin aperitif business in its peak period and then a lower absorption of fee structure costs, given the top line decline.

ForEx and perimeter combined effect accounted for a positive 3.1% in value with 40 basis point margin accretion. Actually, perimeter effect was negative, mainly due to the disproportionate effect of the first-time consolidation of RFD, which was, I said before, impacted — negatively impacted by the one-off destocking ahead of the acquisition of the distributor as well as COVID-19.

If we move on to Page 30, the gross profit on a reported basis was down in value, 13.9% with 310 basis point dilution to 58.9%. Organically, gross profit was down 16.3% in value, driving 350 basis point margin dilution. I will not reiterate the drivers, which I’ve already mentioned. A&P on a reported basis was down in value 19.6% with 200 basis point accretion effect on EBIT. Organically, the A&P was down by 20.2% in value, driving 180 basis point margin accretion, thanks to cost containment measures, postponement of some initiatives in the on-premise and the GTR channels to the back end of the year, and that enabled us to sustain investments into digital brand building and online brand activation as well as e-commerce initiatives.

The SG&A on a reported basis were down 3.5% in value with 320 basis point margin dilution. Organically, SG&A were flat in value, driving 300 basis point margin dilution, mainly due to lower absorption of fixed cost. Actually worthwhile calling out that the combined effect at group level of cost containment measures starting in the second quarter led to 7.5% organic decline of SG&A in the second quarter, it’s seen in isolation on a stand-alone basis.

If you move on to Page 31, operating adjustments of EUR 27.4 million — negative EUR 27.4 million were primarily related to the impairment of the Bulldog trademark for EUR 16.3 million, which at the level of the overall P&L has been compensated, as you can see, underneath by the write-off of the vast majority of the earn-out liabilities for 15 amount — sorry, for the earn-out for EUR 16.8 million.

Net financial charges came in at EUR 19.2 million in first half with negative exchange rate differences and effects on the current valuation of financial assets, generating a negative — an overall negative impact of EUR 3.9 million. We actually call out an increase of the average cost of net debt to 3.9%, mainly due to the negative carry on the recent round of refinancing.

Actually, in H1 2020, the — the average net financial position accounted for EUR 908 million versus EUR 892 million of last year, and that was the second driver of the overall increase of the net financial charges. I’ve already given my comments on the production and earn out write-down.

Profit before taxes came in at EUR 101 million, down in value by 34.3%. If you move on to Page 32, group net profit adjusted came in at EUR 77.6 million, down in value by 33.5% in the first half of this year. With a recurring effective tax rate, which stood at 29.7%, slightly up from 28.1% of last year. With a recurring cash tax rate at 23.6% and again, slightly up compared to last year on — when it accounted for 23.2%.

The group net profit came in at EUR 73 million, down 40.6% versus H1 of last year.

The cash flow, Page 34. The cash flow was actually negative in the first half at EUR 4.5 million, down from EUR 85.7 million of last year. But if you look at the recurring free cash flow, it came in at EUR 65 million, down just EUR 21 million versus first half of last year.

Key drivers of the reduction in recurring free cash flow is the, of course, the decrease in EBITDA adjusted, which accounted for EUR 45.4 million. Taxes paid had a negative impact as we paid the taxes on the capital gain relating to the sale of the Villa Les Cèdres accounting for EUR 60 million in the first half of — actually, in the second quarter of this year. And then we had a lower increase in operating working capital in the first half, EUR 55 million this year versus EUR 77 million of last year.

CapEx came in at EUR 26.9 million, of which maintenance CapEx accounted for EUR 24.1 million.

If we move on to Page 35, we have the analysis of operating working capital. It came in at EUR 744 million versus EUR 694 million of last year, up on a reported basis by EUR 50 million.

Looking at the organic increase of operating working capital, it accounted for EUR 55.4 million, due primarily to the increase in inventory, which accounted for EUR 59.2 million, of which ageing liquid increase accounted for EUR 22.3 million, mainly due to the business seasonality and the stock increase that we have laid down in anticipation of the gradual reopening of the trade activities in Q3.

The decrease in payable and the decrease in receivables had basically — generated basically a wash. The negative ForEx impact accounted for EUR 35 million and the perimeter relating to the acquisition of our French distributor and the Champagne Lallier accounted for a EUR 29.8 million.

Operating working capital as a percentage of net sales came in at 42.2% or 40.5%, taking into account the 12-month sales effect of the acquired businesses, basically brought in line with H1 of last year.

Moving on to Page 36. We have the analysis of net group indebtedness. Net debt came in at EUR 1. 0615 billion, up EUR 284 million versus December of the last year, mainly driven by the acquisition of RFD, which accounted for roughly EUR [55] million, the acquisition of Lallier, which accounted for about EUR 44 million as well as the investment in Tannico, which accounted for roughly EUR 24 million.

Dividend payment accounted for EUR 62 million. And through June end, the share buyback program accounted for roughly a EUR 96 million, totaling an overall cash outlay of — nonrecurring outlook for EUR 281 million.

The leverage ratio and debt-to-EBITDA came in at 2.4x versus 1.6x as at December and last year.

Page 37, debt maturity as you can see, we add in our gross debt that accounts for EUR 1.181 billion, of which EUR 600 million are recognized as long term, with the vast majority of it expiring at the back end of the maturity curve.

On the contrary, as you can see in the footnote, we have a euro bond that is for — accounting for EUR 581 million that is expiring in September of this year, and whose repayment is already clearly covered by the existing excess cash, EUR 787 million. And then, of course, we can rely on credit lines in excess of EUR 1 billion at the moment.

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

——————————————————————————–

Robert Kunze-Concewitz, Davide Campari-Milano N.V. – MD, CEO & Executive Director [4]

——————————————————————————–

Thank you, Paolo. Well, I’m not going to go into detail on the marketing initiatives. I think you’ll see these pretty pictures really highlight the fact that our sales and marketing folks have done a great job pivoting very, very quickly to a new business model, which is the right 1 for the COVID period with a big focus on the off-premise and on building driving frequency of consumption of our key cocktails by moving into full digital from off-line to online.

We’ve done that very successfully across the portfolio. Where physically possible, also we continue to premiumize our portfolio by adding premium line extensions or relaunching existing brands such as (inaudible).

Now I think more important are the corporate initiatives on Page #43. It’s not only the marketing and sales force who work very hard, but we also had a very intense period on the corporate level. Clearly, we were able to complete the domiciliation of the company into Holland.

The settlement of the withdrawn shares was done, and the cash outflow was lower than what we expected.

Today, though, it’s important to underline that the Board of Directors resolved to propose to an extraordinary shareholders’ meeting, which has been called for September 18, 2020, to grant shareholders holding special voting shares C, which jointly with the underlying ordinary share grant 10 voting rights with the right to convert such shares into a special class of shares, granting multiple votes, each of which granting 20 voting rights, and they will be called special ordinary shares.

The right to convert is in line with the company’s strategy to further strengthen our group stability as well as foster the development and the continuous involvement of a stable base of long-term shareholders.

The acquisition of Champagne Lallier went through and we’re busy integrating this little gem, which I think will give us a lot of satisfaction in the years ahead. We’ve also completed our financial investment into Tannico, which will give us significant insights into e-commerce and help develop our skills in that area. I think what is new for the market is our announcement today of a restructuring program for the sugar business in Jamaica. We’re launching this program to restructure the agricultural sugar business, subsequent to the significant losses we have accumulated over the years, which have been further penalized by the COVID-19 pandemic.

Currently, a consultation process with local authorities as well as trade unions is ongoing, and we aim to reach the best possible outcome for the local community, hopefully soon. This will lead to a one-off provision which will cover the expected restructuring costs, but these will be included in the group’s results at a further date (inaudible) who has offered the consultation process, which, as I said, is still ongoing.

Looking forward, I think it’s quite clear that we’re quite confident for the long-term momentum of our business. In the short term, we expect uncertainty to remain with regards to both the extent as well as the timing of the economic recovery, which we all hope will happen in the context of a gradual lifting of the restrictive measures across different markets as well as under government economic impetus.

With most of our key markets being affected by COVID, our performance clearly has been strongly impacted in the second quarter, which unfortunately, is a peak season for the high-margin and highly on-premise skewed aperitif business.

On the other hand, strong brand sellout momentum in the off-premise continued across key markets. But again, here, this outperformance wasn’t fully reflected in shipments as we underwent destocking across numerous markets.

Looking at the remainder of the year, with regards to the organic performance, we expect the pandemic to continue to affect, in particular, the beginning of the third quarter. The negative impact could lessen in the gradual lifting of the restrictive measures across markets based on current visibility. Moreover, we expect shipments to progressively catch up with the positive sellout trends once the destocking activities are completed at wholesaler level, and in certain markets, actually at retailer level.

On a reported basis, full year results are expected to be impacted also by an incremental one-off costs for an overall estimated amount of approximately EUR 25 million. This is in addition to the nonrecurring costs already registered in the first half and are mainly related to business reorganization initiatives as well as transaction fees in connections with the recent acquisitions and the transfer of our legal office to the Netherlands.

Whilst we will continue to undertake all necessary nonstructural actions to contain the effect of the pandemic on the business in the short term, we will remain focused on pursuing our long-term strategy.

Clearly, we’re long-term focused and orientated. We remain confident about the long-term consumption trends and the growth opportunities for the group. We will continue to leverage the strength and resilience of our brands, business model as well as strategy, ensuring we’re strongly positioned and ready to accelerate our growth as soon as consumers can resume their habits in the on-premise.

Talking about the on-premise as a committed and quite long-term brand builder, we will remain focused and highly engaged in this key channel opportunity thanks to our distinctive brand portfolio as we are firmly convinced that the out-of-home social experience and conviviality will remain essential to consumers’ lifestyle, and it will be important for us as we mainly use the on-premise to recruit new consumers into our franchises.

So this is it on our end, and we’re looking forward to your questions.

================================================================================

Questions and Answers

——————————————————————————–

Operator [1]

——————————————————————————–

Operator Instructions) The first question comes from Mr. Simon Hales of Citi.

——————————————————————————–

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

——————————————————————————–

Just a couple of questions, please. I mean, Bob, maybe just sort of kicking off where you left off, just around stock levels. Across the group. How you feel stock levels are in the different regions? You mentioned maybe there’s still a little bit of destocking going on into the third quarter, where is that relative to where you think stocks are at the right levels?

And as we look forward to shipments going back to matching depletions, is that what we should expect by the end of Q3 or the end of the second half? Or is there an opportunity to see some restocking perhaps in some markets where inventory has gotten a little bit low? That was the first question.

And then the second question was around some of the cost elements. How do we think about sort of the A&P line as we move through the second half? You referenced a number of phasing perhaps issues around the relaunch around packaging of some brands. Is that really shifting into Q2, into Q3 from an A&P perspective? And then more broadly, around cost containment, do we expect to see a continuation of the Q2 levels of SG&A reduction continuing through the second half?

——————————————————————————–

Robert Kunze-Concewitz, Davide Campari-Milano N.V. – MD, CEO & Executive Director [3]

——————————————————————————–

Okay. I’ll take the first question and the first half of the second 1, leave the rest to Paolo. Honestly, I think that in this environment, it wouldn’t be realistic to expect a new restocking going forward. I think that throughout the second half, whether it’s going to be in Q3 or in Q4, we would expect the realignment between shipments as well as depletions or sellout figures, but we don’t think that wholesalers or key retailers are going to go and restock themselves. Now with regards to A&P phasing, yes, to a certain extent, there is a rephasing into Q3.

But having said that, we’re also — we’ve frozen quite a bit of A&P, and we’re waiting to see how trading goes. I mean, we need to understand, for instance, how tourism goes and whether we can revert to some events the way we used to do them in the past, probably not. But having said that, yes, there will be more A&P into Q3.

——————————————————————————–

Paolo Rinaldo Marchesini, Davide Campari-Milano N.V. – MD, CFO & Executive Director [4]

——————————————————————————–

Yes. With regards to the phasing of the A&P spend and the cost containment measures, as Bob has just said that, clearly, the third quarter of the year is still a big season for aperitif. So we’ll try to get the best out of it, given the current circumstances. But with the on-trade partially open in selected markets, we’re trying to exploit that opportunity window. So we’re expecting A&P to build up in the third quarter.

Clearly, the fourth quarter of the year, we still have very limited visibility, and we actually cannot say. It will depend on consumption patterns, but also the evolution of pandemic, which actually we don’t know.

So it’s very difficult for us to give a guidance for the full year on A&P.

With regards to the to the second question that is the SG&A trend, again, with a relatively limited visibility, what we can say is that also in Q3, we’re expecting to generate some efficiencies. Hopefully, if the market completely reopens and things go to its normality, we should be in a position in Q4 of having a more regular trend in SG&A. So savings will be primarily in Q3 and following a positive trend in Q2 and to a lesser extent in Q4.

——————————————————————————–

Simon Lynsay Hales, Citigroup Inc., Research Division – MD [5]

——————————————————————————–

Got it. That’s helpful. Can I just sort of come back on the reply to the stock level question. [There], Bob, are you still seeing destocking into the third quarter. Is it in all the markets you saw in Q2? Or is it specific regions that are still seeing the destocking ongoing?

——————————————————————————–

Robert Kunze-Concewitz, Davide Campari-Milano N.V. – MD, CEO & Executive Director [6]

——————————————————————————–

Well, we’re seeing it to a small extent, continuing in Europe as we’re outperforming our markets, and we’re not seeing the sellout numbers being reflected in the shipments. But it’s probably will be more impacted by the U.S.

——————————————————————————–

Operator [7]

——————————————————————————–

The next question comes from Edward Mundy of Jefferies.

——————————————————————————–

Edward Brampton Mundy, Jefferies LLC, Research Division – Equity Analyst [8]

——————————————————————————–

2 questions from me. The first is on Italy. You talked about some on-premise recovery from late June as consumers coming back to bars in outdoor space, you’re not quite seeing a return to normal. I think on the 1 hand, the mobility data does look quite good, I think, for Italy.

But on the other hand, tourism is quite slow. I was wondering if you’re able to provide a bit of an exit rate as you got to the back end of June and to July (inaudible) or certainly some more color on the Italian market?

The second question is on Bitter aperitifs. As a category, I mean you highlighted some pretty good performance in Aperol ex-Italy and GPR and you put some very good performance with Campari, especially in the U.S. I think you mentioned that you’re seeing some quite good frequency of consumption. But to what extent do you think you’re getting more trial and recruiting more consumers into both Aperol and Campari and the broader (inaudible) aperitifs occasion. And then the third question, apologies, if this was covered in the opening remarks, is really around the ordinaries — sorry not the ordinary, these special ordinary C class shares, which carry the 20 votes.

My question is, a, how many are there? Given that some shareholders hold them for shares for a long time. But, b, do they need to continue to hold on to shares for 10 years to get these 20 votes? So [don’t know if] you could just provide a bit more color on around the 20 votes elements of the C class.

——————————————————————————–

Robert Kunze-Concewitz, Davide Campari-Milano N.V. – MD, CEO & Executive Director [9]

——————————————————————————–

The on-premise in Italy, we opened in the second half of June. I mean, when it first reopened, was very much to empty houses. Gradually, those outlets, which have been able to really grow their outside space, [outdoors]– have started doing well, but there’s still social distancing measures. And we’re seeing still more of a younger crowd going to the on-premise than the 30-pluses.

Clearly, it is running below normal regimen. And I think the big question for us is what’s going to happen this summer. Is the local tourism going to be able to compensate for the loss of international tourism and so forth? I think only time will tell there.

Your questions around on the aperitifs with regards to frequency versus trial. We’ve been very, very good at remodeling our marketing mix and as well as our refocusing our sales forces. But all the data we get so far indicates that it is much more an increase in frequency as opposed to growing trial. We firmly believe that you need an on-premise presence and activation to effectively get liquid on lips and people to try. Yes, it is happening selectively, but it’s a far cry from what we were able to do and used to do before the pandemic.

So with frequency, we’re doing very nicely. But I think going forward, we will need trial to maintain momentum. On — or at least grow the momentum because I think the brands have good momentum.

With the vote share, well, with the current C class votes, those people who had already registered then had 2 years just needed 8 more years to get to the 10 years to qualify for the enhanced voting mechanism of 20.

——————————————————————————–

Operator [10]

——————————————————————————–

The next question is from Trevor Stirling of Bernstein.

——————————————————————————–

Trevor J. Stirling, Sanford C. Bernstein & Co., LLC., Research Division – Senior Analyst [11]

——————————————————————————–

Just 1 question really of mine, I guess, the others have been answered already. But the U.S. on-trade, Bob, we’ve seen opening and closing going on in parallel with some states, particularly in the Northeast relaxing restrictions and then states in the south reimposing restrictions. What’s your impression of the net momentum at the moment? Are we plateauing? Or is it still positive? Or are we actually starting to see a net negative for the U.S. on-trade?

——————————————————————————–

Paolo Rinaldo Marchesini, Davide Campari-Milano N.V. – MD, CFO & Executive Director [12]

——————————————————————————–

Well, we think there’s more of a net negative on the U.S. on-trade, which then reverts into a positive for the off-trade.

——————————————————————————–

Operator [13]

——————————————————————————–

The next question is from Chris Pitcher of Redburn.

——————————————————————————–

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

——————————————————————————–

A couple of questions from me. Following up on the U.S. business and some of the earlier questions from Simon and Trevor. Can you say what you think wholesaler stock levels have gone from and to and also decide what you think retailer stocks have gone to? And then within that context, you quote the Nielsen number, plus 40. Can you say whether you think that’s reflective of the whole off-trade or whether it’s inflated versus the rest of that?

And then secondly, following on from the redomicilation question. It’s a bigger picture question, but the use of equity, is this because you see, believe the bigger transactions or a seller, smaller companies that are looking perhaps to greater equity participation. And have you missed out on deals in the short-term because of your equity structure?

——————————————————————————–

Robert Kunze-Concewitz, Davide Campari-Milano N.V. – MD, CEO & Executive Director [15]

——————————————————————————–

Well, I’ll just give you a few figures, and you can figure the rest with regards to the U.S. I mean, our shipments, in value terms, were down 4% in the period. Our depletions were up 9% and our set up numbers, Nielsen wise, were the figure you quoted. In terms of NAPCA, we’re talking more around 11%, 12%.

So you can calculate from there onwards. Clearly, there is quite a difference, I think, going from sell-out to depletions to our shipments. And we’ll see how far it will go.

——————————————————————————–

Paolo Rinaldo Marchesini, Davide Campari-Milano N.V. – MD, CFO & Executive Director [16]

——————————————————————————–

With regard to equity, I mean, I don’t think that in the past, we’ve suffered from the structure we’ve had. The reason we did the rebound was much more looking forward, looking into the long-term and having the flexibility to generate different types of deals than we’ve had in the past.

——————————————————————————–

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

——————————————————————————–

Okay. Perhaps can I just have 1 quick follow-up on Mexico while I have the microphone? Can you say whether there was a meaningful sequential improvement in Mexico during the quarter?

——————————————————————————–

Robert Kunze-Concewitz, Davide Campari-Milano N.V. – MD, CEO & Executive Director [18]

——————————————————————————–

No. We haven’t seen, at least on our portfolio, any meaningful improvement in Mexico.

——————————————————————————–

Operator [19]

——————————————————————————–

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

——————————————————————————–

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

——————————————————————————–

2 very quick questions. First of all, I come back on the U.S. market. I was wondering whether you noticed at least like a bit closing of the gap between sell-out and your shipments compared to, let’s say, April, May, June.

So if at least sequentially, you’ve seen the wholesaler trade, let’s say, becoming a little bit less cautious and approaching a little bit more the sell-out trend?

So just to understand what could be the [excess paid] of this destocking process in the space.

And is that a second point, sorry, is about the impressive, from my point of view, growth of the off-trade channel in Northern Europe. I was wondering whether, I call it your perception or your understanding, that this might be a structural lift up of consumption, spirit consumption or is a more, let’s say, kind of psychological effect of the lockdown.

So do you believe that spirit consumption has increased to a structurally higher level? Possibly?

——————————————————————————–

Robert Kunze-Concewitz, Davide Campari-Milano N.V. – MD, CEO & Executive Director [21]

——————————————————————————–

Okay. Yes, I mean, with regards to the — yes, the U.S., we’re seeing (inaudible) closing of the gap between the various indicators. But as we’ve indicated, we think that our shipments will end up meeting and correlating perfectly with our sell-out values sometime during the second half. And I think we don’t have any visibility now to tell you when that will occur.

Now with regards to the growth of the strong growth in the off-premise, I think there’s something important happening here. I think on the consumer level, the resistance to making cocktails at home is seriously coming down. Consumers have experienced that they’re able to prepare themselves a Negroni or even Aperol spritz or an old fashioned or what have you. We have done really a lot, a lot marketing wise to educate the consumer and make it as easy as possible for them. I think that contributed to it. I think this is — we, as a industry — our category are sourcing quite a bit from beer, and we’re seeing that across different categories.

So net to net, I think it’s positive for us, particularly when — if you consider certain cocktails such as the Negroni, which people habitually would order in the on-premise, not necessarily knowing what’s within a Negroni.

And we’ve seen an acceleration on Campari since because we’ve been hammering on the message no Negroni without any Campari, and clarifying to consumers that a Negroni is built around the Campari, and it’s also not that difficult to make at home.

So I think this is more here to last for a while.

——————————————————————————–

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

——————————————————————————–

Sorry, if I may go on on that. This is — I’ve seem your comments about Northern Europe. Do you see anything in one.

——————————————————————————–

Operator [23]

——————————————————————————–

Miss. Carboni, could you please closer to the microphone?

——————————————————————————–

Paola Carboni, Equita SIM S.p.A., Research Division – Analyst [24]

——————————————————————————–

Can you hear me?

——————————————————————————–

Robert Kunze-Concewitz, Davide Campari-Milano N.V. – MD, CEO & Executive Director [25]

——————————————————————————–

Yes. Now we can.

——————————————————————————–

Paola Carboni, Equita SIM S.p.A., Research Division – Analyst [26]

——————————————————————————–

Okay. Sorry. No, I was saying, I assume your comments were mainly about Northern Europe.

——————————————————————————–

Robert Kunze-Concewitz, Davide Campari-Milano N.V. – MD, CEO & Executive Director [27]

——————————————————————————–

No. My comments were general because I think those mega trends are true for also Australia as well as North America.

——————————————————————————–

Paola Carboni, Equita SIM S.p.A., Research Division – Analyst [28]

——————————————————————————–

Okay. No, I was mainly referring to Italy where off-trade has been also impressively strong. But in that case, do you also see a structural change or more correlated to the drop of the on-trade and so to the lockdown and possibly, I mean, the net balance to stay unchanged on a structural level, let’s say?

——————————————————————————–

Robert Kunze-Concewitz, Davide Campari-Milano N.V. – MD, CEO & Executive Director [29]

——————————————————————————–

Well, I think we’ve got a long way to go in Italy. I mean, Italy, 70% is on-premise. We’ve seen the off-premise grow, but more behind simpler cocktails, and it’s all behind our aperitifs.

I mean if you look at the IRI data, we’re the ones moving the needle. It’s Campari and it’s Aperol, it’s not anything else. So we’re coming from a very low base in Italy, positive, encouraging, but I do think that the on-premise will continue to be the channel impacting and moving the needles in the dials in Italy going forward.

——————————————————————————–

Operator [30]

——————————————————————————–

Next question is from Ryan Fintan of JPMorgan.

——————————————————————————–

Fintan Ryan, JPMorgan Chase & Co, Research Division – Analyst [31]

——————————————————————————–

Just 1 question for me, please, just around the balance sheet and free cash generally. Just wondering if you could walk us through some of the moving parts that we should expect into the second half of the year, particularly around working capital and CapEx? And also, could you confirm whether your comparison is continuing with the rest of the EUR 350 million share buyback for the balance of the year?

——————————————————————————–

Paolo Rinaldo Marchesini, Davide Campari-Milano N.V. – MD, CFO & Executive Director [32]

——————————————————————————–

Yes. I will take this question. With regards to the the share buyback. In Q3, we have acquired 7.7 million shares in the context of the withdrawal mechanism, accounting for roughly EUR 65 million that has to be added as a cash outlay with an overall, let’s call it, negative carry, not cost because it will not be recognized in the P&L, it will be recognized in the equity of EUR 3.4 million based on the difference between the withdrawal price of [83.76] and the price of the settlement date. So that’s one. With regards to the CapEx as you may remember, we’ve cut our CapEx spend by EUR 10 million. But on the other hand, we have incremental CapEx due to the newly acquired businesses in Mexico and Martinique (inaudible), which in aggregate, will account for EUR 6 million.

So for the full year, we’re still confirming our CapEx guidance of about EUR 90 million, 9-0. And then, yes, with regards to the operating working capital, there is a part of operating working capital that is not compressible. That is the ageing liquid, which at June end, accounted for roughly EUR 380 million. And the rest of the operating working capital will basically float according to top line strengthening payable, receivable and the rest of the inventory.

So if you take as a benchmark last year, the rest of the operating working capital that is not excluding maturing inventory accounted for 17.9% of top line of net sales. So we’re not expecting or being equal major drifts in operating working capital.

——————————————————————————–

Operator [33]

——————————————————————————–

Your next question comes from Marco Baccaglio of Kepler.

——————————————————————————–

Marco Baccaglio, Kepler Cheuvreux, Research Division – Deputy Head of Research, Italy [34]

——————————————————————————–

Clarification of the corporate governance. If I have understood well, in 2028, the shareholders who will have matured and ask for the 10 votes for 1 share will be able immediately to go to 20 vote for 1 shares? Or to 30 votes for 1 share and from when?

——————————————————————————–

Robert Kunze-Concewitz, Davide Campari-Milano N.V. – MD, CEO & Executive Director [35]

——————————————————————————–

20.

——————————————————————————–

Marco Baccaglio, Kepler Cheuvreux, Research Division – Deputy Head of Research, Italy [36]

——————————————————————————–

To 20 immediately, basically. So they go from 5 to 20, basically?

——————————————————————————–

Paolo Rinaldo Marchesini, Davide Campari-Milano N.V. – MD, CFO & Executive Director [37]

——————————————————————————–

No. For those who are entitled to SVS Class C so they already have the 10 voting rights. They can convert the SVS Class C plus the relevant ordinary share that is linked to the SVS Class C into 1 special ordinary share giving 20 votes.

——————————————————————————–

Marco Baccaglio, Kepler Cheuvreux, Research Division – Deputy Head of Research, Italy [38]

——————————————————————————–

Okay. But your capital will be unchanged. It’s only about voting shares.

——————————————————————————–

Paolo Rinaldo Marchesini, Davide Campari-Milano N.V. – MD, CFO & Executive Director [39]

——————————————————————————–

So you do not have to add the 10 plus 20, it’s 20 in total.

——————————————————————————–

Operator [40]

——————————————————————————–

Next question is from Pinar Ergun of Morgan Stanley.

——————————————————————————–

Pinar Ergun, Morgan Stanley, Research Division – Equity Analyst [41]

——————————————————————————–

I have 3 quick ones. Bob, I was quite intrigued about some of the things you’ve said. On — the first 1 is longer term, with more people consuming your products at home, do you think that might lead to any changes in consumer behavior in the future? For example, could this change consumers’ willingness to pay what they used to pay in the on-premise now that they’re more accustomed to easily preparing Aperol spritz at home? And the second 1 is, I also found it interesting to hear that you don’t expect restocking. Could you please elaborate a little bit on that? And finally, a quick 1 on gross margins. Given the strong negative mix impact, actually, I thought the decline in gross margin was not too bad. So in terms of moving parts, were there any positive offsets?

——————————————————————————–

Robert Kunze-Concewitz, Davide Campari-Milano N.V. – MD, CEO & Executive Director [42]

——————————————————————————–

Well, I’ll take the first 2 questions. I mean with regard to the first one, consumer behavior, how will they react? Will they be willing to pay what they used to pay in the on-premise? Frankly, I don’t have any crystal ball at this stage. And we haven’t been able to gather any insights out of that. I think time will tell. Clearly, 1 thing has happened, it is the consumer has identified that they can actually make themselves rather good cocktails at home. So the off-premise opportunity for cocktails as taking share from beer will continue going forward. With regard to the restocking, why we think we don’t expect any restocking. I mean, given the economic environment and also the fact that quite a few on-premise outlets haven’t reopened. Depending on the market, we’re talking from 20% to 30%. That is obviously creating quite some pressure on the working capital of wholesalers and on the credit, which they have extended to their customers. So we don’t see them restocking within that overall environment.

——————————————————————————–

Paolo Rinaldo Marchesini, Davide Campari-Milano N.V. – MD, CFO & Executive Director [43]

——————————————————————————–

Talking to the gross margin trend and more broadly to the operating leverage being positive or negative as we have already highlighted, basically, under the current circumstances, our P&L is negatively impacted by 2 key factors. Number 1 is the short-term negative sales mix. As you may remember, we were under a long-term gross margin expansion trend driven by positive sales mix prior to COVID. So what we’re seeing now is the effect of a situation where the high-margin Global Priorities and particularly the aperitif are badly hit by the restrictions in the on-trade channel in multiple markets. And that’s one.

And secondly is the negative operating leverage that is driven to the fact that if you look at our P&L, overall, 35% to 40% of our spending is fixed. Talking to the gross margin, we did the cost of goods sold, actually 1/4 of 25% is fixed. So whenever you have a top line decline, you basically have the double whammy of adding negative sales mix, plus a negative operating leverage.

10% of the A&P spend is fixed, and 80% of our SG&A are fixed. If — as we do, you do not want to implement drastic reorganizations, which would compromise the ability of the group to bounce back once the business gets to its normality mode.

So that’s the key driver of the gross margin trend. Of course, we’ve implemented some measures to contain those negative effects, but when you have such a negative sales mix and deleverage, there’s that much that you can do.

But what we can say is that we remain fairly confident and bullish, vis-à-vis the ability to — of the group to get back to its trend of gross margin expansion in the midterm as soon as the market conditions do stabilize.

That’s something which is, I think, to stay. And for the short term, you need just to navigate through the store.

——————————————————————————–

Operator [44]

——————————————————————————–

The next question is from Marion Boucheron of MainFirst.

——————————————————————————–

Marion Cohet Boucheron, MainFirst Bank AG, Research Division – Research Analyst [45]

——————————————————————————–

I have 2 questions, please. One on the sugar business. So I just wanted to make sure I understood correctly. But do you mean that now you might be looking to exit it or not operate it yourself after consultation and the impact on social consequences?

And if so, could you remind us what was the good drag to gross profit from that business? And my second questions would be on the American markets. How do you see trends evolving there and the sell-in, sell-out playing out, mainly thinking about Latin America?

——————————————————————————–

Paolo Rinaldo Marchesini, Davide Campari-Milano N.V. – MD, CFO & Executive Director [46]

——————————————————————————–

So with regards to the — clearly, discussions with the unions and the relevant stakeholders are occurring as we speak. So we do not anticipate much. What we can say is that our operations in Jamaica can be basically logically dividing into 3 pieces. You know the first piece is the sugarcane field, the operations. The second 1 is the sugar mill. And the third 1 is the distillation process, distilling and bottling. So the last piece is untouched. So this is and bottling, it works where we’re incurring in significant losses is the first 2 pieces. So the agricultural operations and the sugar mill.

In aggregate, in prior years, the losses that we’ve generated following the macro changes in the sugar market accounted for roughly EUR 12 million a year. So with a run rate of EUR 1 million a month. Clearly, the COVID pandemic has exacerbated the losses. And so we felt it was time to intervene and stop the bleeding, as the first 2 pieces were not sustainable. So we’re clearly trying to find the best possible solution for the 2 pieces. And again, we’ll have some negative one-offs in the second part of the year, which we have not yet quantified and disclosed in isolation on a stand-alone basis.

And there will be efficiencies that will highly depend on the outcome of the discussions with relevant stakeholders. So it’s a little bit premature to give you a sense of the magnitude of the efficiencies that we’ll be able to (inaudible) so the loss containment that we’ll be able to achieve. We believe by year-end, we’ll be in a position of giving more color once the union [side] will be finalized.

——————————————————————————–

Robert Kunze-Concewitz, Davide Campari-Milano N.V. – MD, CEO & Executive Director [47]

——————————————————————————–

With regards to trends in emerging markets, I think the rule of how dependent is the market on versus the off, which we’ve seen in Western markets also impacted in 1 way or another trading in emerging markets. Now if your specific question is South America, we’ve also seen consumers down-trading in the off-premise to better value brands.

——————————————————————————–

Marion Cohet Boucheron, MainFirst Bank AG, Research Division – Research Analyst [48]

——————————————————————————–

Okay. And just 1 follow-up on the sugar business, the one-off for this year, they’re included in the EUR 25 million incremental you’ve mentioned in the release?

——————————————————————————–

Robert Kunze-Concewitz, Davide Campari-Milano N.V. – MD, CEO & Executive Director [49]

——————————————————————————–

Yes. They are.

——————————————————————————–

Operator [50]

——————————————————————————–

We have a follow-up question from Mr. Ryan Fintan of JPMorgan.

——————————————————————————–

Fintan Ryan, JPMorgan Chase & Co, Research Division – Analyst [51]

——————————————————————————–

Just following on from the previous question around sort of changing consumption patternings, short term, but what the long-term implications could be. I know you mentioned that you’ve put a lot more of your A&P spend in terms of e-commerce, particularly given the Tannico minority stake that you’ve taken, could you give us a sense of how big e-commerce sales are of your mix currently, or how they grew during like the first half of the second quarter particularly during the COVID crisis? And if you have — that’s give any color in terms of your long-term ambitions for e-commerce sales and maybe how they can vary between different markets, U.K., Europe versus North America?

——————————————————————————–

Robert Kunze-Concewitz, Davide Campari-Milano N.V. – MD, CEO & Executive Director [52]

——————————————————————————–

Well, with regards to e-commerce, what we’re seeing is basically triple digit growth, but from a very low base across markets. I mean, very strong growth, but the base is very different. The most advanced market is the U.K. where currently probably accounts around 5% of our sales, whereas in the U.S., depending on the month, it’s between 1% and 2%. And I would say the rest of the world is closer to the U.S. than to the U.K. Clearly, this is an area which will develop itself, but I think it’s not only interesting from a commerce standpoint, but also from a brand-building standpoint.

So this is something we’re looking into very, very seriously. But with regards to also clarifying, clearly, in this moment, there’s more action in off-premise and consumers have overcome their hang ups with regards to making cocktails at home. So I think this generation will be impacted by that. But we also think that mid to long term, there’s absolutely no reason why the on-premise shouldn’t come back.

I mean, if you look at the Spanish flu, the on-premise came back. If you look at the Hong Kong flu in the ’60, ’70, the on-premise came back. Any of the major global financial crises, the on-premise came back. So it will come back. And I think it will be much more dependent on progress science does in the area of really medical relief and vaccines as opposed to any other reason.

——————————————————————————–

Fintan Ryan, JPMorgan Chase & Co, Research Division – Analyst [53]

——————————————————————————–

And just — just a follow-up. And so the technical investment you made, is that just a sort of a one-off for the Italian market? Or would you consider some of the partnerships elsewhere in the world?

——————————————————————————–

Robert Kunze-Concewitz, Davide Campari-Milano N.V. – MD, CEO & Executive Director [54]

——————————————————————————–

I mean we would consider them. But obviously, the regulatory environment is very different from country to country.

——————————————————————————–

Operator [55]

——————————————————————————–

Next question is from Mr. Alessandro Tortora of Mediobanca.

——————————————————————————–

Alessandro Tortora, Mediobanca – Banca di credito finanziario S.p.A., Research Division – Research Analyst [56]

——————————————————————————–

I have 2 questions, very quick question, if I may. The first 1 is on the agave prices. I would like to understand if you have any evidence of stabilization for the price of agave as I recently heard from another competitor.

The second question is on the dynamics on the EBIT margin side. I know that there are a lot of moving parts. What I would like to understand is, if only for the perimeter effect, change perimeter, you can give us an idea of the full year impact, considering all the companies entering your perimeter?

——————————————————————————–

Paolo Rinaldo Marchesini, Davide Campari-Milano N.V. – MD, CFO & Executive Director [57]

——————————————————————————–

Yes. With regards to the agave, the very good news that we have that actually, notwithstanding the significant increase in the category, in tequila category in the U.S., it’s still — the price that is unexpected in a way and another. The price is not negatively reacting to the increased request and demand from the industry. So the price remains stable. But notwithstanding the double-digit increase in demand, which bodes very well for 2021.

We believe that if the demand stabilizes at the current level, it’s potentially more likely that the agave price will start falling.

But at the moment, basically, we’re still buying at the same price as we were buying a quarter, 3 months ago. So we’re not seeing yet the decline in agave price. But we’re more confident now that things should go better going forward.

With regards to the full year, expect a perimeter impact. Actually, we will have a dilutive effect due to the fact that the acquisition of RFD, our French distributor accord in a very unfortunate period of time with profit impacting the market. And on top of that, we had to destock the distributor ahead of and following the acquisition.

So basically, technically, whenever you have the first-time consolidation of an acquired business, the stock that is sitting at distributor level is reclassified as your own stock.

So basically, you’re impairing a portion of your shipments to distributor. So overall, for the full year perimeter is expected to come in at about EUR 40 million with about overall a loss of EUR 5 million to EUR 6 million, including the negative impact of termination of certain distributor — distribution agreements and the effects of consolidation of RFD, (inaudible) , and Ancho Reyes, (inaudible) both brands highly skewed to the on-trade channel. So they will not generate profits this year. So that’s the visibility that we have at the moment.

——————————————————————————–

Operator [58]

——————————————————————————–

Mr. (inaudible) , at this time, sir, there are no questions registered.

——————————————————————————–

Robert Kunze-Concewitz, Davide Campari-Milano N.V. – MD, CEO & Executive Director [59]

——————————————————————————–

Well, thank you very much for joining us. We wish you a very nice August, nice summer. Stay safe, stay well and grant yourself some little luxuries like Aperol spritzers and Negronis. Look forward to sooner than later, getting to meet in-person. Thanks. Bye-bye.

——————————————————————————–

Paolo Rinaldo Marchesini, Davide Campari-Milano N.V. – MD, CFO & Executive Director [60]

——————————————————————————–

Bye-bye.

——————————————————————————–

Operator [61]

——————————————————————————–

Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.