Pernod Ricard Seeks To Lift Margins After Arrival Of Activist Investor
French spirits group Pernod Ricard, which is being targeted by activist investor Elliott, has vowed to improve profit margins and shareholders' returns in a new three-year strategy plan.
Pernod, the world's second-biggest spirits group behind Diageo, also raised its profit growth outlook for the 2018/19 full year after first-half operating profits beat forecasts, helped by strong demand for premium cognac in China.
U.S. activist fund Elliott, which has built a stake of just over 2.5% in Pernod, has called on the family-backed group to raise profit margins to bring them more into line with Diageo.
Elliott also wants Pernod to improve corporate governance and has suggested €500 million in cost cuts and options such as merging with another spirits company.
Pernod Ricard said on Thursday that its goal for the 2019-21 period was to lift operating profit margin by 50-60 basis points per year, provided it could deliver annual organic sales growth of 4-7%, having achieved 6% in the 2017/18 year.
The company also announced a new round of €100 million in cost savings, to drive this margin expansion
Pernod added it would progressively raise its dividend payout ratio to 50% of net profit from recurring operations by 2020, compared to 41% at present.
Last month Pernod Ricard took a step towards improving its governance, naming business veteran Patricia Barbizet to the newly created role of Lead Independent director.
Alexandre Ricard, the 46 year-old grandson of the firm's founder made sales growth his top priority when he took over in 2015. He has defended his long-term value strategy which - helped by a recovery in Chinese demand for premium spirits - saw sales growth rise to 6% in 2017/18 and 7.8% in the first-half of 2018/19 alone.
Given this sales growth, Ricard and his troops have now more leeway to focus on improving operating profits and they had been working since the summer of 2018 on a new three-year strategy plan "Transform and Accelerate".
There have been already cost cuts under Pernod's existing efficiency plan, and the group on Thursday said it expected to have delivered by June 2019 a promised €200 million in savings - one year ahead of their initial target.
However, analysts have said more could be done at Pernod Ricard, which had a profit margin of 26.23% in 2017/18 against rival Diageo's 31.4%.
First half group sales reached €5.185 billion, marking an organic rise of 7.8%. Profit from recurring operations reached €1.654 billion, an organic rise of 12.8%, mostly driven by a 28% jump in China sales.
This compared with analysts' forecasts in a company-compiled poll for a 9.3% organic rise in first-half profit from recurring operations, and an 8.2% rise in sales.
Pernod Ricard's robust first half performance reflected very strong first quarter growth of 10.4% when the group benefited from advance shipments of cognac in China ahead of the Mid-Autumn and Chinese New Year.
Pernod reiterated on Thursday it expected second half sales growth to moderate notably for Martell cognac in China.