Remy Cointreau

Stock price: €44.9
Conclusion: A strong start in cognac, but comps will be more difficult for the rest of the year. We think that F11 and F12 growth prospects are well reflected in the 20%+ stock premium.

Q1 sales up 23.6% reported to €171m (+19.3% organic). No guidance but management “maintains its long term value strategy and is confident in the efficiency of its distribution”.

Q1 even better than expected thanks to cognac.
-Remy Martin sales grew 38% driven by China, Travel retail and to a lesser extent the US and Europe.
-Champagne sales only partly recovered (+20%) from a very low base (sales last year were down 41% in Q1) while liqueurs sale (-3%) remained impacted by lower demand in Europe.

We now look for 8% organic growth (vs 6.5% previously)
Comps for the rest of the year will be more challenging, as sales increased by 17% between July-March. We assume +6% organic growth for the rest of the year.
We expect full year reported sales to increase 15% to €932m, helped by positive forex and net profit to reach €118m (vs 114m previously).

Bridging the gap with peers on the margin front looks ambitious
We feel Remy Cointreau might struggle to get to 26-28% operating margin.
First, the battle in Asia requires huge marketing spending.
Second, Pernod Ricard and Diageo’s volumes enable greater economies of scale.
Third, the jury is still out in champagne where Remy Cointreau lacks brand equity.

Remy Cointreau trades at 19.3 and 15.7x P/E based on our 2010 and 2011 calendar estimates, implying 20% premium to peers. Our valuation range (€46-€48 per share) suggests limited upside potential.

Remy Cointreau

Stock price: €43.4
Conclusion: Booming sales in China coupled with a strong dollar bode well for 2010. Nevertheless, we feel that good news are largely priced in (19x-15.4xP/E based on calendar 2010 and 2011 estimates).

F10 results: Sales up 13% to €714m. Net earnings €86m (unchanged vs last year). No guidance for F11 but management “very confident”..

Key reasons behind management’s confidence for F11
-Positive outlook in Asia Pacific. Asia Pacific is the number one market , accounting for 35% of group sales and 53% of Remy Martin revenues. China accounts for the bulk of sales (26% of revenue) which bodes well for 2010-2011 given the booming macro environment. China, combined with a return to slight growth in the US should more than offset subdued demand in Europe.
-Investments are paying off. Remy Martin is gaining share in cognac following the recruitment of 400 new sales people and marketing step up (+21% spending last year). According to management Remy Martin has become the second largest brand in value in China behind Hennessy, ahead of Martell.
-Competitive environment structurally favourable in cognac. CEO acknowledged that it is easier to maintain pricing under control in cognac than in vodka, given the limited number of key players.
-Positive swing from the dollar. According to CFO, forex could lift operating earnings by €15m this year, and another €15m next year.
In conclusion we look for €924m sales (+6.5% organic) and €114m net profit (+32%).

Medium term target might be difficult to reach.
Margin was slightly disappointing last year, owing to advertising spending. Nonetheless, management expects to become the most profitable player in the industry within 3-4 years. Operating margin reached 19% adjusted for central costs in F10 (excluding third party distribution), against 26%-28% for peers.
-Gross Margin (58%) looks in line with competitors.
-The difference stems from higher marketing spending and lower economies of scale. Management made it clear that marketing spending will continue to increase, notably in Asia where the group is gaining market share. Consequently, spending level should remain 2-3 percentage points higher than competitors. We were also surprised to hear from management that “distribution costs are globally in line with competitors”. If it is the case, we struggle to explain the gap with Pernod Ricard or Diageo. We think that smaller volume should lead to lower economies of scale and higher distribution costs. As a result, Remy Cointreau might find it difficult to bridge the gap.
-Last, champagne (12% sales) will continue to weigh on margin. Remy Cointreau lost €4m last year and projects to break-even in F11. Management believes a medium target of 15% is reachable. However, Remy Cointreau’s brand equity looks weaker in champagne than in cognac and we wonder whether it can lift pricing in a highly competitive market place.

Remy Cointreau trades at 19xP/E and 14EV/EBITDA based on 2010 estimates, implying 28% premium to peers. Premium remains substantial based on 2012 (15.4xP/E). We think F11-F12 growth prospects are well reflected in the stock price. Our valuation range of €44-€46 per share suggests limited upside potential.

Remy Cointreau

Stock price: €42.9
Conclusion: Huge beat in sales but growth in China is expensive. Remy cointreau looks fully priced based on our valuation range of €41-€43 per share.

Fiscal 2010 sales: €808m, up 13% (+12% organic), implying +100% in Q4.

Remy Martin sales jumped by 28% organic, boosted by price increases and improved mix from superior qualities. Q4 growth (+200%) was spectacular, helped by market share gains in China, positive timing from the late Chinese New Year and easy comps.
Liqueurs and spirits (Cointreau, Passoa, Mount Gay Rum) sales increased by 5%, again driven by a strong Q4 (+42%).
Champagne remained depressed with a 24% decline in sales.

Management guided to an “organic profit growth” instead of a “slight like for like ebit growth” suggesting some upgrade.
We are now looking for €1.96 vs €1.80 previously (+9%). Much will depend on the magnitude of the step-up in avertising expenses (18.5% of sales last year). Details will be provided early June.
Fiscal 2011 should benefit from three key drivers. First, continuing growth in China, helped by the booming economy and share gains led by the move to owned distribution in Asia. Second, improved sales in Champagne combined with the positive impact from restructuring measures. Third, positive swing in forex expected from a stronger dollar. We expect EPS to move up to €2.36 (+20%).

Remy Cointreau trades at 19xP/E and 14xEV/EBITDA based on calendar 2010 estimates, implying 20% premium to the sector. We feel that the stock is fully priced and see better return elsewhere.

Remy Cointreau

Stock price: €37
Conclusion: Slight decline in sales in Q3. Notwistanding a stong rebound expected in Q4 (down 47% last year), we confirm our valuation range of €30-32. We think the stock remains too expensive.

-Sales in Q3 fell 0.9%. Sales were impacted by 11% decrease in liqueurs and spirits and a 20% decline in champagne. Cognac sales rebounded by 7% thanks to good growth in China and higher demand in Russia.
Sales in Q4 should benefit from a very easy comparison base, combined with the impact of a later Chinese New Year.
As a result we are looking for €728m sales, up 2% vs -2.6% in the first 9m. Management confirmed a slight increase in operating earnings, leading us to expect €1.79 EPS (-2.2%) for F2010.
-We remain cautious for F2011, as booming sales in Asia contrast with continued subdued growth in developed markets. In addition, Remy Cointreau’s key competitor Pernod Ricard said it is committed to increase marketing spending this year, which leaves little room for manoeuvre.

Remy cointreau trades at 19xP/E and 14xEV/EBITDA based on 2010 calendar estimates, implying a 35% premium to peers. Such a premium looks more justified by take-over speculation rather than fundamentals.

Remy Cointreau

Stock price: €34

Conclusion: Reported results better than cash earnings. Remy cointreau looks fully valued trading at a 20% premium to Diageo and Pernod Ricard.

H1 results: sales down 1% reported to €362m , down 7% organic. Adjusted EBIT up 4.8% reported, 2% organic. Guidance: slight organic growth in operating profit for the full year.

Surprisingly good numbers at first sight.
Adjusted Earnings before tax increased by 18% to €54.5m, owing to +100bp gain in EBIT margin (18.1%) and lower “other financial costs”.
Margins improved thanks to the liqueurs division and the swing to profit generated by the partner brands.

Negative volume impact on cognac and champagne margin.
In spite of its “ambitious pricing policy”, Remy Cointreau was not able to offset the negative volume/mix impact in cognac (-€25m in H1).
The decline in champagne was even sharper (-46% H1) leaving no room for price increases. As a result, Remy Cointreau lost €38m in H1 due to lower volume and gained only €23m through pricing.
H2 should benefit from an easy comparison base as sales were down 25% last year. We expect a return to high single digit growth in sales while margin could slightly increase owing to higher volume combined with savings in general and administrative expenses and lower media costs.

Cash management under pressure.
Operating cash flow decreased by 17% to €16.5m. In addition “other cash expenses including Capex” doubled to €25m, resulting in a cash outflow (-€8.2m vs +8m free cash last year). Average debt went up in H1 (€647m vs €477m last year) and borrowing costs increased.

Remy Cointreau trades at 17.4xP/E, implying a 20% premium to peers. Our DCF suggests a valuation closer to €30-32 per share. However, we think that Remy will find it hard to achieve peers margins given its lack of scale, which might continue to fuel speculation around future partnership.

Remy Cointreau

Stock price: €28
Conclusion: Huge premium to the sector looks expensive in light of a tough start…

Q1 sales (April-June): down 7.5% reported and down 14% organic. No guidance given for the year.

Remy Cointreau first quarter numbers confirm that the spirits industry keeps struggling, with reduced spending from consumers both on the on and off-trade and continued destocking from distributors. Growth in China could not compensate for lower cognac sales in the US and in global retail (cognac sales down 15% organic). The extent of the decline in champagne (-40% organic) was even greater and partly due to the planned reduction in non branded champagne shipments to the UK. Liqueurs and spirits sales remained negative, down 7.5%.

Q1 numbers lead us to downgrade our expectations for the year.
We forecast sales to fall by 8% this year and net earnings to decline by 26%, as result of operating deleverage, higher expenses related to the transition to owned distribution and also financial expenses driven by projected cash outflow.

Remy trades at 19x 2009 estimates versus 11-12x for peers in the sector (Diageo and Pernod Ricard). Such a premium could be justified by an eventual take-over scenario. We do not expect it at a time when management is taking a long term view and investing in its own distribution network.

Remy Cointreau

Stock price: €28,34
Conclusion: Too expensive considering the lack of visibility

Fiscal 2009 results: Sales down 12.7% to €714m (-11.6% like for like), EBIT down 14% and net earnings down 12.5% to €86m. No guidance given for fiscal 2010.

It could have been worse, considering the magnitude of the downturn in wines and spirits. RC managed to maintain margin at 19%, despite falling volumes in cognac (-19.5%), champagne (-14.5%) and liqueurs (-7.8%). We were surprised by the increase in gross margin, up 360bp, which helped to offset higher distribution and administrative expenses. In addition, earnings benefited from two other factors: positive exchange gains and €14m related to the exit from Maxxium.

In the absence of guidance, we believe that the decline in earnings could be more pronounced in fiscal 2010 (-22% projected) for three reasons. First, price increases that boosted earnings by €35m last year should be increasingly difficult to implement at a time when distributors keep reducing inventories (notably in champagne) and consumer reduce spending both on the on-trade and the off-trade. Second, although we view the transition from Maxxium distribution JV to owned distribution as a plus in the long term, we think the timing won’t help. As a result of a depressed environment the gains in gross margins could be offset by weaker volumes and heavier commercial and admistrative costs. However, there is still some room for manoeuvre on the A&P front, given the continuing decrease in media rates. Last, we do not expect the financial charges to diminish, as a result of heavy inventories (up 11%). We predict a cash outflow €20-30m, which could be less if inventories decrease.

The stock (-4% YTD, +74% 6m,-28% 1y) trades at high multiple of 18x P/E and 13x EV/EBITDA, well above Diageo and Pernod Ricard. We feel that the premium is too high in the absence of visibility for the next 12 months. A take-over scenario looks also improbable at a time when management is investing into its own distribution network.

Remy Cointreau

Stock price: €19.5

Conclusion: Fairly priced

Q4 sales down 49% like for like

Remy Cointreau full year sales, down 10.5% like for like, imply almost 50% decline in the last quarter (January-March2009). Sales have been heavily impacted by destocking ahead of Maxxium exit on April 1rst coupled with lower sales to wholesalers in Russia and in the US. We find surprising the lack of guidance given by management at the time of the 9m sales release (end of January). It remains to be seen whether this massive shortfall in sales is a one-off. Visibility remains very low as sales in Asia might further slowdown while other key markets (US, Russia) should continue to suffer in fiscal 2010.

The wonder of it all is that management reiterated full year fiscal 2009 guidance of a 15% decline in operating earnings,which we feel looks great considering the poor fourth quarter. Management also expects to resume growth in fiscal 2010, which again looks difficult to predict in the current environment.

As a result of a poor visibility, we prefer to remain cautious and expect sales to consolidate in fiscal 2010, as a stronger dollar and the establishment of its new distribution network could be offset by weaker demand in Asia and in the Rest of the World. Consequently, margins should remain under pressure due to the costs attached to the extended distribution network. We think it is too early to predict a rebound in earnings this year.

The stock trades at 14x earnings based on our 2010 assumptions. This is expensive considering the poor visibiliy. On the other hand, the market cap is in line with book value which provides a floor. In addition, Remy Cointreau remains a very attractive target for key players such as Bacardi. We expect the stock price to remain within a valuation range of €18-20 as long as sales in cognac and champagne remain depressed.