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Rémy Cointreau SA (REMYF) CEO Éric Vallat on Q4 2022 Results – Earnings Call Transcript – Seeking Alpha

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Rémy Cointreau SA (OTCPK:REMYF) Q4 2022 Results Conference Call June 2, 2022 1:30 AM ET
Company Participants
Marc Hériard Dubreuil – Chairman
Éric Vallat – CEO
Luca Marotta – CFO
Conference Call Participants
Laurence Whyatt – Barclays
Olivier Nicolai – Goldman Sachs
Edward Mundy – Jefferies
Richard Withagen – Kepler
Fintan Ryan – J.P. Morgan
Jeremy Fialko – HSBC
Trevor Stirling – Bernstein
Operator
Hello, and welcome to the Remy Cointreau Full Year Results 2021 to 2022. My name is Josh, and I will be your coordinator for today’s event. Please note that this conference is being recorded, and for the duration of the call, your lines will be on listen only. [Operator Instructions]
I will now hand you over to your host, Marc Heriard Dubreuil, Chairman, to begin. Thank you.
Marc Heriard Dubreuil
Good morning, everyone, and thank you for being with us this morning for Remy Cointreau’s full year results. I’m here with Eric Vallat, CEO; and Luca Marotta, CFO. 2021 was a historic year for Remy Cointreau, and I would like to thank and congratulate our 2,000 people around the world. Once again, they have demonstrated their expertise, passion and strong commitment.
The Group achieved record financial KPIs, including sales growth, gross margin, current operating profit margin and earnings per share. In 2021, all stars have shined for this historic performance, and we strongly outperformed the worldwide wine space market. Remy Cointreau gained market share in all regions and on most of our brands. But beyond these spectacular figures, we have continued to prepare the future, sticking to our long-term vision, by investing in our strategic inventories, capital expenditures and more importantly, behind our brands. As you know, this represents an important step up compared to the past, including now, all our global brands.
We are also proud of our CSR performance, which reflects our ambition to grow responsibly and share value with all our stakeholders. This includes our employees, of course, as Eric will explain, but also all our equity shareholders through a dynamic shareholders’ return policy this year, including the 1 million shares buyback program launched in June 2021, and €2.85 of dividend per share, that will be proposed by the Board of Directors at the next shareholder meeting on July 21 this year, up by more than 50% compared to last year. This would represent the highest dividend ever paid.
So now I will turn it over to Eric, who will take you through the fiscal year business review.
Éric Vallat
Thank you, Marc, and good morning, everyone. Thank you for joining us today and a special thanks to our English participants, as I know, today is a bank holiday with the Queens Jubilee. I am happy to take the mic now to share with you our solid progress on our strategic journey and our overall results. Luca will then, obviously, as usual, go further into detail.
I am now moving to Slide 5. As Marc explained, we hit new records this year. Beyond the absolute value, I would like to stress that they have been achieved, thanks to an outstanding and record growth of our sales compared to last year. But also to 2019, as you’ve seen from the press release this morning. Back in April, you saw our sales numbers. We talked about a 27% organic sales growth, thanks to the very strong contribution of all regions, with a plus 29% of organic growth versus 2019, our sales ended the year well above the pre-pandemic level.
In terms of profitability, the COP, current operating profit, stood at €334 million, up almost 40% on an organic basis, representing 25.5% margin. As mentioned by Marc, this is the highest level ever. COP grew by 57% compared to 2019. This performance has been driven by a strong increase of the gross margin, 1.5% more organically to 68.6% and a good control of our overhead costs, while investing massively, and I’ll get back to it, behind our brands to prepare tomorrow. Finally, net debt stood at €353 million, leading to a very healthy A ratio of 0.79, down 0.54 versus last year. We rely on a very sound basis, which gives us a strong flexibility to further expand in the midterm.
Our record results have been achieved, thanks to a record growth. But more importantly, in this challenging environment, our growth is probably healthier than it has ever been, as shown in Slide 6. First, it is driven by favorable consumer trends, which are going to last. To quote only one of them, the up-trading trend, the trend of drinking less but better, preexisted COVID, and has accelerated sharply. We have gained years. It is no secret that with our portfolio of brands, we are well positioned to take advantage of it.
Second, the key to success, whether you speak volumes or value, is the desirability of our brands, and the motivation of our clients is both rational, with the quality of the product and emotional with the storytelling and the values of our brands. We’ve always paid great attention to our products, and we keep doing so. There is not much you can do, if your product is not great. But we are now boosting the desirability of our brands, by scaling up the activations, building on their strong stories and values with good results overall.
I will share some examples in the next slide. As a consequence of these favorable trends, combined with leveled up investments, our growth is driven by end demand. This is why also we call it healthy. We are in a real pull mode, which is much healthier and fits better our D2C approach to the business.
Allow me to also say a word about pricing, which has sharply improved in the past 2 years. We took advantage of the tailwind and strong demand, not only to invest more behind our brands. We also took some strong decisions to reinforce the consistency of our pricing worldwide, beyond price increases themselves, improving gross margin, of course, and controlling our route to markets better overall. This puts us also in a very healthy situation.
And lastly, as part of our portfolio management priority, we have improved commercial efficiency and strengthened partnerships with key distributors, allowing for better visibility and piloting of our business overall. We still have work to do, of course, a lot, but we are clearly less blind than we were.
As I said, and moving on to Slide 7, these remarkable results have been led by a strong step-up in our A&P investments. We are proud to have launched several powerful campaigns that will help and are helping already to unleash the potential of our global priority brands.
At Louis XIII, to start with our king, we have launched the Believe in Time campaign, which is highlighting the unique relationship to time of Louis XIII. It will be relayed by more D2C investments in the future, as our goal is to turn around the business model in the next 10 years, making it a pioneer of D2C in the industry.
The aim at Remy Martin has always been and remains to create value, by improving the mix and leveraging our pricing power. The Team Up for Excellence campaign with Usher featuring 1738 has proven great success and contributed to our fast growth in the U.S. where we continue to gain market shares. We also launched a new campaign to relaunch XO in China in January. With the lockdown, it’s too early to assess the results, but we are confident in our ability to regain our fair market share on XO, with the 360 activations that have been designed.
Third, Cointreau; Cointreau refocused on cocktails in 2017, leveraging a trend that is only gaining momentum. Its communication has been smart and consistent since then, with the Margarita a clear drink hero. Consistent and crowned by great results, not only in the U.S. but also in the U.K. or in Australia, to name a few countries. We partnered with Jessica Alba as shown on the slide, but more to come soon.
On The Botanist, we know we have a hidden jewel, and it’s not any more such a hidden jewel. The liquid is truly fantastic. If you try it, you buy it, hence, the challenge on awareness and desirability of the brand. Being part of our global priority brands, The Botanist will benefit from accelerated investments as shown already with the ad for the Super Bowl. More to come soon as well. And last but not least, we are very proud of our latest, We Also Make Whisky campaign for Bruichladdich, which is very thoughtful, like the brand is. It has been launched only a few weeks ago, but the first results are extremely promising.
Just for those who haven’t seen it, it says a number of things about Bruichladdich, we like starting small, but being big — thinking big, we also make whisky. So this is basically the approach, telling a lot about the brand, and of course, highlighting the fact that we do an exceptional whisky, and if we do it, it’s because of the way we do it, our values and our relationship to [Indiscernible].
This should also help us accelerate and leverage even more, a key category, which is now also booming in China. This stellar here is also the result of the strong progress on our 4 strategic priorities, which I guess you all know by heart now. I am on Page 8 here, as you may recall, the first priority is to increase value per case. Throughout the year, we have continued to leverage up-trading consumer trends being fully focused on retail price through price increases and product mix. The results are tangible and very promising. We recorded a positive mix price sales effect of 9.2 points at Group level, driven by an increase of 13.8 points in Cognac, and 7.1% in Liqueurs & Spirits. So even in Liqueurs & Spirits, the price mix has played a big role.
These great results for Remy Martin, are mostly driven by the success of our intermediate quality products in Cognac, such as the 1738 in the U.S. and CLUB in China. 1738 grew at more than 60% in ’21-’22 and its contribution to VSOP sales rose by 12 points versus ’18-’19, which is massive. Meanwhile, CLUB grew at more than 30% this year and its contribution to total sales grew by 13 points versus ’18-’19 in China. We know who our champions are.
And if you look beyond retail price, the gross margin increased by 1.5 points organically, as I said, versus last year at Group level. This has been achieved, thanks to the investment behind our accretive and strategic brands, both in Cognac and Liqueurs & Spirits and the improvement of our gross to net management.
Priority number 2, enhanced portfolio management. As you know, we have assigned clear roles to each brand, and we have split them in 3 Groups, with a clear set of priorities for each; global priority brands, regional power brands and incubator brands. The ultimate objective is, of course, to maximize our gross margin by growing our most accretive brands, while improving the metrics of our regional power brands.
After 2 years, we can say that we have unlocked the growth potential of our global priority brands beyond Cognac. Cointreau sales were up at more than 35% versus last year worldwide and at more than 40% versus 2 years ago. The Botanist grew at around 50% versus last year, and finally, our single malt whiskies increased by more than 30% versus last year, and by more than 45% versus 2 years ago, which explains why, for the first time since long, our Liqueurs & Spirits division grew faster than our Cognac division.
In parallel, transformation is also on its way for our regional power brands. Among our regional power brands, Telmont Champagne is the one that we have taken the farthest. In a little over a year, we have totally rethought its positioning, and are already starting to reap the benefits.
The third priority is to implement client-centric model, as you may remember. We have accelerated sharply on e-commerce with the opening of more than 10 e-boutiques this year, leveraging a new common platform. I will come back to that later. In the meantime, we also now rely on 8 boutiques, including the last one in Hainan for Remy Martin, and alongside the solid opening roadmap for the coming years. The results are particularly visible in China, where our direct sales grew way faster than the non-direct sales at 40%.
And finally, our fourth priority, which is achieving responsible growth around 3 pillars, Preserving Our Terroir, Acting For Our People and Committing Through Time, but I’ll get back to it in the following slides. We are today allocating an important level of investments, €80 million over the next 10 years, that will be invested in terms of CapEx, but also OpEx.
Beyond sales, the Slide 9, precisely allows me to stress that we are even more proud of the progress we made on CSR-related matters. What makes me proud actually, is the commitment of everyone in the team now on a daily basis, and whatever the position in the organization. I believe this has been achieved, thanks to a new and much more granular organization, with the nomination of around 100 sustainability champions throughout the organization. This is how we will make it.
On Terroir, as you can see on the slide, 78% of our agricultural land is now engaged in responsible and sustainable certification, which confirms the steady increase observed over the past 5 years from 36% in ’17-’18, sharp acceleration. Certifications are an important first step towards responsible and sustainable agriculture, but we also want to accelerate further on the protection of our Terroir by 2030. For that, we will deploy the project New Generation Terroir, which is twofold.
First, we need to make sure our soils are ready to face more heatwaves and less water. And answer to that is agroecology, that puts soil health at the core of its farming methods. It is proven, regenerated and healthy soils are more resilient to face climate change in the years to come. They are also fantastic carbon sinks. So we are part of the solution in a way. That can capture more CO2 from the atmosphere. The goal is to gradually install more transversal and scientific indicators, that will measure the actual soil health of our terroirs. You progress only on what you measure properly.
Second, we will continue to invest in R&D, so that by 2030, we have identified 100% of climate resilient varieties, varieties — pardon my English accent here, ready to be planted.
On people, we welcome 3 more women in our ExCom this year. So now the proportion is 30% remain at ExCom coming from 10%. But also among the top managers position within the Group, regional and worldwide, women also account for 35% of the key positions versus 30% last year. Work in progress, but good progress.
To drive engagement among our employees. As Marc said, we also launched an employees’ shareholder plan in France last June 2021, that was subscribed by as much as 70% — 77% of our employees versus an average of 52% in France. So we will now be launching it in our international markets. We have also decided to accelerate on responsible consumption, of course, by launching our internal responsible drinking ritual, which is being spread worldwide.
And last but not least, on time, we are on track when it comes to the reduction of our carbon footprint. Our CO2 footprint per bottle is down 9% in ’21-’22 versus last year. We are well on track to achieve our minus 50% reduction target by bottle by 2030. As an example, 44% also of the energy in our distilleries, our own distilleries and production sites is now renewable versus 26% last year. This sizable increase was largely driven by the switch to biogas, particularly in Cognac and [Aging], and the goal is to reach 100% by 2030.
And the other and last example I would like to share, is the removal of secondary packaging gift boxes. 76% of the Group’s bottles are now naked compared to only 21% in ’19-’20, which gives you an idea of the magnitude of the progress, which was achieved there. Our goal is to have 85% naked bottles by 2025. So we keep moving forward.
Beyond the organization, which is briefly referred — which I briefly referred to, I believe the great progress was also achieved because we now have turned our vision into tangible and more granular objectives, which are measurable and which are tangible for all our teams. There are 9 of them, as shown in this Slide 10, split evenly between terroir, people and time. These 9 objectives, which I am not going to read as otherwise, I’d be way too long, but will define our roadmap for the coming years.
To conclude on this ESG chapter with Slide 11 now, you have certainly noticed that we are the first spirits group to be carbon neutral. We’re very proud of it. We achieved it, thanks to 6 projects in China and in the U.S., which are truly relevant and in line with our values. These projects will secure carbon neutrality for the next 4 years. But this is only the beginning, as the real challenge for us is to reduce our own emissions, which we much prefer to compensation, of course, and which, as you’ve seen, we are working harder. We are making good progress, as I said, but I would also like to say, that it’s still a long way to go, we have to acknowledge it. And that beyond CO2, we are now also tackling some critical topics, like water usage and diversity when it comes to people. So more to come and to share next year on this ESG topic.
Let me now take you through a quick business review, before giving the mic to Luca. And I’m moving to Slide 13, which gives me the opportunity to remind you of our full year sales number by division. I will be quick, as they were already detailed by Luca in April. Cognac, which represented 72% of our sales, grew 26% organically and 31% versus ’19-’20. Liqueurs & Spirits, which contributed to 25% of our sales, recorded a 32% increase and a 27% increase on a 2-year basis. And lastly, our partner brands, 3% of the Group sales were up 15% this year.
On Slide 14, now just a word on the regions. The slide shows that total growth is well balanced across regions, with all of them contributing to the overall performance. Americas generated an excellent growth of 30%, up 52% compared to ’19/’20, confirming a new paradigm that is being installed. In APAC, the solid growth was up 26%, representing a 20% increase in sales compared to ’19-’20, despite a collapse of the travel retail activity. And finally, EMEA benefited from the economic recovery and the strong momentum of the on-trade China, being up 22% this year, the region is now on track to quickly return to its ’19-’20 activity levels.
Let’s now focus on the Cognac division profitability, whose great key figures are summarized here on Slide 15. COP grew by 44% on an organic basis, so 59% versus 2 years ago, representing an increase of the margin of 4 points to 34% over the year. This is a record. This breaks down into an organic increase of 4.2 points, a slight negative currency effect of 0.2 points and a neutral scope effect. The organic improvement reflects a strong gross margin improvement of 1.4 points, resulting from a well-balanced contribution in volume and mix price.
On top of the price increases, we benefited from the strong performance of our top end portfolio, including intermediate quality products, such as 1738 and CLUB. These gross margin gains have been reinvested behind our brands in A&P, which were up circa 25%, particularly in the U.S. and in China. The stable ratio reflects the fact that we continued to invest to grow the awareness of our brands and fuel their future growth. The strong operating leverage of the division has thus largely absorbed the significant increase in investments, in marketing and communication. The ratio contribution is up 2.6 points.
Let’s now have a look at the Liqueurs & Spirits profitability division, whose — division profitability; whose key figures are encapsulated on Slide 16. COP grew by 10.6% on an organic basis, 16.5% versus 2 years, representing a margin of 10.6%, down 2.7 points. This performance reflects a decline of 2 points in organic terms, alongside a negative scope effect of 0.8%, linked to the consolidation of Belle de Brillet in May ’20 and Telmont in October ’20 and a favorable currency effect of 0.3 points. Being ahead of its strategic roadmap, the Group has decided to reinvest a large part of its gross margin gains, 1.5% versus 2021 and 3.5% versus ’19-’20 in marketing and communication, to increase the awareness and the desirability of our brands, particularly Cointreau, the Botanist and Bruichladdich and to prepare tomorrow.
The Botanist campaign in the U.S. is probably the best example to illustrate. The Botanist is one of our priority brands, and we invested far more than its current U.S. market share would typically warrant. But it was commensurate to our hopes for this unique gin, and we will continue to mobilize all necessary resources to achieve our goal to become the undisputed leader in high-end gin, with obviously a short-term impact on profitability. But again, the investments of today are the sales of tomorrow. At the same time, the Group maintained a strict control of its structural costs, so the ratio contribution was up 1.7 points overall.
And let me now give the mic to Luca, who will take you more into details.
Luca Marotta
Thank you, Eric. Now let’s move on, on the detailed analysis of the financial statement and begin with the full year income statement. So as already mentioned, organic sales were up 27.3%. On that basis, gross profits increased by 30.2% in organic terms, implying a plus 1.5% organic improvement in gross margin, i.e., 2.1 points on a 2-year basis, reaching an all-time high. This good performance was driven by a well-balanced combination of, first of all, a strong volume effect of €92.1 million, led by Cognac division in our key markets, U.S. and China. But as well, even stronger mix price effect of more than €100 million, €113 million, including splitting between a pure mix effect, €60.1 million, resulting from our value strategy, as well as a pure pricing effect, €52.9 million, following price increases in all regions.
Sales and marketing expenses were up 24% in organic terms overall, reflecting our decision to reinforce our investment behind our brands. But within this total, we have to split between, first of all, the A&P expenses that grew 37.4% organically; i.e., an organic increase of around 50% plus 45.8% on a 2-year basis, so much more than our organic sales growth. Being ahead of our long-term plan, we have decided to reinvest most of our gross margin gains in A&P, to unlock on a long-term basis, our brand’s midterm growth potential, and by developing their awareness and desirability.
Most of the increase comes from the, technically speaking, above the line part, i.e., classic media, digital and PR, around 70% of the total. Besides that, around 40% of our total [Indiscernible] considered A&P spending was digital.
In parallel, second element, distribution costs increased by only 7% organically. But even more important, that means an organic reduction, organic decrease of around 4% on a 2-year basis, reflecting an increase of this last year, in terms of key accounts in our international subsidiary, as well as some strategic OpEx to accelerate on retail, direct to client, commercial excellence and optimization of the gross to net, net revenue management. This was partially offset by some efficient savings initiated during the pandemic.
Administrative expenses increased by 28.2% on an organic basis, meaning plus 24% on a 2-year basis, in line with our sales growth. This evolution, however, includes some specific costs. First of all, this year, €2 million donation to the Remy Cointreau Fondation; and second, around €5 million, €4.9 million of charges related to mid long-term retention measure, profit sharing programs and the employee stock ownership plan. And then, the remaining part was mainly composed by brands’ OpEx that reflects some additional headcounts and some key investments in e-commerce, CRM and brands development and protection.
All in all, current operating profit reached an all-time high at €334.4 million, up 39.9% on an organic basis and even more on a reported basis, plus 41.6%. After taking into account a favorable currency impact of €6.4 million on the bottom line and a negative impact of €2.4 million linked to the scope effect. More important, on a 2-year basis, this represents on organic basis, an increase of 56.9%. Operating profit margin stood at 25.5%, up [Indiscernible] 2.3 points on an organic basis versus last year and up 4.6 points versus 2 years ago.
Now let’s move to the analysis of the Group’s current operating margin, which is an important and sensitive slide. It was up 2.1 points to reach 25.5% over the full year. Again, this is an all-time high, an all-time record. This breaks down into an organic increase of [2030] points, a natural currency effect, a slight negative scope effect of 0.2 points, linked to the consolidation of Brillet in May and Telmont in October 2020.
The organic improvement of the current operating margin, basically reflects a strong increase of the gross margin, first driver. now and for the future year, fully invested into A&P and an excellent control of our global distribution and structural cost ratios. In more details, first of all, gross margin was up 1.5 points, as a result of a well-balanced strong volume and price/mix contribution. Second point, as said, A&P ratio increased in the same proportion at minus 1.5%, as an impact on the bottom line. The acceleration in A&P was particularly focused in our key markets, U.S. and China, and largely dedicated to our global priority brands.
And at the end, as a last element, the ratio of distribution structure cost decreased by 2030 basis points, reflecting an excellent control of our cost despite a strong recovery of the business, despite some strategic investment on that line as well.
Now let’s take a look at the rest, the remaining part of the income statement. So what’s happening between operating profit and net result. Other non-recurring operating expenses stood at €14.1 million, representing essentially provision for international customer risk related to prior periods and booked already in H1 2021-2022. Second important element, the reported tax rate decreased from 35.1% last year to 31.1% in ’21-’22, profiting from the drop in tax rate in France, as well as a positive geographical mix. But excluding non-recurring element and items, the effective tax rate was 29.3% for the year, to be compared to the 33.5% clean tax rate of last year. At this stage, we expect tax rate to be around 30% in ’22-’23, alongside the gradual decrease of the tax rate in France.
As a result, net profit share came in at €212.5 million, up plus 47% on a reported basis. But excluding non-recurring items, net profit came in at €228.1 million, up more than 50%, 52.6% organically, i.e., almost doubling, plus 82.4% on a 2-year basis. Net margin, excluding non-recurring items to the very strong level 2, an all-time high of 17.4%, up plus 2.9 points versus last year and plus 5.2 points versus 2 years ago. Last but not least, a very important financial element, excluding non-recurring items, clean EPS came out at €4.52, up plus 52.8% on a reported basis and 81.5% versus 2 years ago.
Now Slide 21, let’s move to the analysis of the nonrecurring items, i.e., the reconciliation table spreadsheet between net profit and net profit, excluding non-recurring items. Non-recurring items in ’21-’22 mainly integrated 3 components. First of all, as said, €14.1 million provision, which mostly essentially reflect the provision for international customers, relating to the prior periods and a minor goodwill impairment on DHG for €0.5 million. Second element, €3.4 million of positive non-recurring tax items linked to this provision.
And third, a net €4.9 million charge on deferred taxes related to the impact of 3 sub-elements; first of all, the decrease of the legal tax rate in France on a deferred tax asset. So the switch from 28.4% this year to 25.8% has some negative non-recurring implication in terms of revaluation of this tax — deferred tax asset. And on the opposite, the increase of the legal tax rate in the U.K. on deferred tax liabilities, from 19% to 25%. And third element, the decrease of the legal tax rate increase on deferred tax liabilities on trademark, from 24% to 22%. All in all, these elements have been neutralized for the non-recurring and clean profit.
Now one of the most important slides, number 22, the analysis of the cash flow generation and net debt. Free cash flow generation stood at €90.4 million in ’21-’22, compared to €123 million last year. This evolution reflects, first of all, a huge spectacular increase of the EBITDA, plus €110.9 million on the back, as you have seen, of significant operating profit growth, more than offset by a strong increase of the total working capital outflows. This increase of these outflows, needs to be split between; first of all, another strong increase of the working capital outflow related to ODV and spirits in aging process. This is the consequence, as said many times, of a higher level of purchases in cognac ODV, and other aging liquids to prepare and to secure and to feed the future, compensated by a huge level of demand, especially in the U.S.
Second element, important, other working capital items, outflows that were up more than €100 million, €118.4 million. And we have 3 elements that need to be detailed to explain this evolution. First of all, the base of comp, 2021 was not a normative year, this is demonstrated by this positive variation last year of €35.8 million. Second, a meaningful increase of accounts receivable of €43.3 million linked to a lower level of factoring. This year, end of this year, only around €50 million, €14.7 million receivable were subject to early collection, via factoring programs as of 31st of March, 2022, to be compared to €55 million end of March, 1 year ago.
And third element, an increase of €30.2 million in other stock, excluding ODV and other strategic hedging, [decreased] for the remaining part, to avoid any product disruption, in a [context marked by continued] logistics and supply chain.
Second element to explain the free cash flow generation, is clearly the increase of €17.1 million of the tax outflow, reflecting the higher level of profits, this is a mathematical consequence. In the meantime, capital expenditure investment outflow were stable, more or less minus €0.4 million and below our initial expectation, due to the pandemic that limited the physical execution of some CapEx programs. In parallel, other non-operating cash flow decreased versus last year.
Once again, we need to explain a bit, because we recorded an outflow of €129.3 million in ’21-’22 versus an inflow of €13.6 million last year, so a swing. This was largely driven by the payment in cash of the dividend, €94 million, more or less, then share buyback, €170 million, partially offset on a positive side by the early redemption of 58% of the OCEANE for €155 million more or less. As a result, at the end of March, our net financial debt stood at €353.3 million, up from €314.3 million in March 2021, leading to a decrease of the ratio from €1.33 to €0.79.
So Slide #23, few comments on net financial expenses, which were a charge of €13.2 million this year, slightly down from 14.6% the year before. First of all, net debt servicing costs was slightly down in absolute value, reflecting a decrease of the monthly average debt. However, our cost of debt was slightly up from 1.01 to 1.15, reflecting a lower use of the reliance of which part of them have non-usage fees. Net currency increased slightly to €0.7 million loss this year, versus almost comparable loss of €0.4 million in the previous year. As you know, this is a volatile non-cash item related to the hedging of the Group’s non-euro debts and future flows. Finally, other financial expenses, which amounted to €2.1 million this year, were almost stable compared to the previous one.
So now Slide #24, move to the impact of currency hedges. The Group reported a positive translation impact, translation of €24.6 million positive impact on sales and transaction of €6.4 million operating profit in ’21-’22, better than our expectation. This mainly reflects, in terms of currency mix, the favorable evolution of the Euro-CNY. In addition, we enjoyed an improvement of the average euro-dollar translational rate of the period, which came out at USD1.16 per euro this year compared to USD1.17 last year. At the same time, our average hedge rate was stable at around USD1.17 per euro in ’21-’22 versus last year.
But this is the past. As said, this is very important to talk to each other every quarter, and now looking at our forecast for the future. For ’22-’23, assuming as is written highlighted, an average euro-dollar conversion rate of €1.08 and hedged rate of €1.13, we anticipate an impact between €70 million and €80 million on sales, with most of the effect recorded in H1, about 2/3 of that. And between €30 million and €40 million positive impact on published COP, with also the same — most of the positive recorded in H1, 2/3. So a huge contribution expected in terms of published element for the ’22-’23. As the evolution of the euro-U.S. dollar exchange rate remains very volatile, we will share with you an update every quarter. It’s very important.
Additionally, as a reminder, the sensitivity of the Group versus our expectation is the following: USD0.01 increase in our — in the U.S. dollar versus the euro simulation, including additional impact of other currency pegged to U.S. dollar, is around €11 million to €12 million gain or loss, depending on the variation on sales and €7 million to €8 million gain on operating profit, all things alike. Bearing in mind that hedging in advance, like we do, we are a very cautious company, implies cost of USD0.04 to USD0.05 on the hedged theoretical rates. At this stage, for ’22-’23, we already cover 80% of our net U.S. and pegged currency exposure, U.S. dollar exposure, of which around 40% are options.
Now Slide 25, move on the overview of the balance sheet, with total asset liabilities of around €3 billion, €2.98 billion, slightly up compared to last year. On the asset side, global inventory increased by €122 million to €162 billion due to purchases of young ODV, and that’s the reason why inventories account for 54% of total assets, stable versus last year. But in absolute value, this is a very important all-time high. At the same time, on the liability side, the shareholder equity is up by €113 million, reaching another historical level, mainly driven by the strong progression of net income and the early redemption of the OCEANE. This has been partially offset by the share buyback program and the dividend recognition. Net gearing indicator, so the Group’s net debt to equity ratio was almost stable over the period from 20% to 21%.
Now Slide #26, moving to the ROCE, return on capital employed. Our ratio came in strongly at 22.2% in ’21-’22, up 5.1 points on a reported basis and 4.9 points in organic terms. This was driven by 5.4 points increase in the ROCE of the Group brands, and the positive swing in the partner brands’ ROCE from minus 50 to minus 1%, is a minor indicator, but mathematically, has a slight impact. The organic improvement was clearly driven by the strong performance of our numerator, our operating profit, up €39.9 million, while employed capital also grew, but at a much slower pace, 9%.
Looking at the performance by division, it is the Cognac ROCE rose by 7 points to reach 26.7% on a reported basis, and that was up also 6.5 points already, as that drives this journey. Clearly, the outstanding organic growth of the division, plus 43.8%, more than offset the plus 8.1% organic increase in the employed capital.
On the opposite, Liqueurs & Spirits division, the ROCE slightly decreased — declined by 0.9 points to reach 12.1% and was broadly flat in organic terms. This evolution reflects our decision to intensify, increase our investment behind our brands. Eric Vallat mentioned just some minutes ago, the example of [The Botanist] investment during the Super Bowl, which is a good illustration. But beyond profit and loss effects, we also reinforce — we will continue to reinforce our medium to long-term investment on CapEx and inventories.
Now Slide 27, looking at the denominator, the capital employed more closely. The overall amount increased by around €128 million, mainly splitting between an organic increase of 123.9% and a positive currency impact of €3.8 million. On the organic side, the employed capital had an increase of 9%, reflecting a very strong increase in hedging inventories, around 60% of the total increase and to a lower extent in manufacturing storage capacity and other inventories. So basically, most of the increase is linked to strategic long-term investment.
Finally, let’s move to Slide #28 and move to the yearly dividend. Given our strong annual results and our confidence and serenity for the coming years, an ordinary dividend of €1.85 per share in cash will be put to a shareholders vote at the AGM on 21st of July 2022. In addition, an exceptional dividend of €1 per share will be proposed, with the option to be paid in cash or share. Overall, it will represent an increase of 54.1% versus last year, and it is an all-time high. For your information, shares will be traded ex dividend on July 27, and the dividend will be made payable starting from October 3, 2022. Overall, total dividend equates to a payout ratio of 63% of the recurring EPS and a yield of 1.6% on the average share price, over the financial year that was €178.59.
Now let’s go back to Eric, Slide #30.
Éric Vallat
Thank you, Luca. It’s quite a challenge to speak of the outlook in the context, which is clearly hardly predictable, and not necessarily made of only good news with the first quarter, marked by the war in Ukraine, the lockdowns in China, inflation and the supply chain tensions. But you know what, provided we are agile and reactive, we are confident and positive for the year to come and there are regions to that.
Region #1 on Slide 31 is related to the fact that we have a roadmap, which is now clear and well understood and which has been validated by the consumer trends emerging from the past 2 years, as I said. As a result, we are ahead of our 10-year plan, which is certainly not common. And this gives us means to invest more, than we would have expected in the future of our brands. And sorry for hammering this again, but the investments of today are the sales of tomorrow.
We are also confident because in the past 2 years, we have strengthened our organization and business model, as written on Slide 32. I said 2 years ago that the focus for the first 2 years would be on our transformation. I must admit, that in a world which is changing ever faster, transformation will never end and we will always need to be agile and to adapt, which is why we have appointed a Chief Transformation Officer. But we made good progress, more particularly on 2 fronts, commercial excellence and D2C activities.
I am now moving to Slide 33. The only thing we know about the short-term future is that, we do not know what it’s going to be made of. This reminds me of my experience in Japan after 3 years, the one thing that I had learned is that the Japanese culture, which I loved, would always be a mystery to me. Same here, I will not pretend I know what our future will be made of, it’s unpredictable, whether it comes to macroeconomic, with inflation and stagnation, health with the pandemic or geopolitics with what is happening in Ukraine.
But there’s something positive about it. First, it forces us to evolve our business model even more quickly, which is a focus of a Group of our size for the better, and this inflationary context being high end, is definitely — potentially a competitive edge for us. Also, we shall not underestimate the fact that Travel Retail is meant to recover in the coming years, and accounted for 11% of our sales in the past. This year will also benefit from positive exchange rates. But more importantly, again, the trends emerging from COVID are favorable to us, trading, obviously, but also the rise of cocktails, of Internet, and of consumption at home, which are driving D2C.
I would like to conclude by the rise of environmental consciousness, which echoes our strong focus on terroirs. Hence, our confidence in our potential, while not obviously, ignoring the challenging environment.
Which drives me to the conclusion before we take your questions on Slide 34. I am fully confident that we will continue to outperform the exceptional spirits market in ’22-’23, while ensuring the best execution possible of our strategic roadmap. We expect ’22-’23 to be another year of strong sales growth, but also of strong investments, particularly in A&P again. We are in the favorable position of being ahead of our long-term targets. This has freed up resources for further investments, and despite the current environment that I have just described, we expect to pursue our profitable growth trajectory, led by, first, a solid resilience of our gross margin, which will notably benefit from the price increases that we have realized last April, this April, across the board. And also thanks to a continued good control of our OpEx.
Again, on the gross margin, I would like to stress that our positioning is quite unique and helps us afford this. We will also benefit obviously from the exchange rate positive impact, which could be up to €30 million or €40 million on the COP. And of course, this remains particularly volatile and Luca will keep you updated every quarter.
So I would like to thank you for your attention, and we are now happy to answer your questions. Thank you very much.
Question-and-Answer Session
Operator
[Operator Instructions] And our first question comes from the line of Laurence Whyatt from Barclays.
Laurence Whyatt
Marc, Luca. Eric, thanks very much for the questions and the call. Three for me, if that’s okay. On the — you mentioned a few things around inflation and the current situation that consumers are facing. Do you have any insights in terms of the current trading and any recent impact that you’ve seen from consumers across your different brand portfolios? You imply that there’s much less impact on the high-end products, and maybe perhaps slightly more on the lower-end products. Wondering if you can break that out by — if there’s any sort of comments you can make by brand or by price point, that would be very helpful?
Secondly, between your 2 divisions — 2 main divisions, your Liqueurs and Spirits margins are still well below historic levels, and of course, you’ve increased A&P significantly in Liqueurs & Spirits. But as we look forward to the 2030 targets, should we expect more of the margin to come from the Liqueurs & Spirits division and with the Cognac division to remain at similar levels, or would you expect Cognac to also contribute meaningfully to the 2030 targets?
And then finally, when we look at consensus for FY ’23, it’s looking for around just over 10% organic sales growth for the year. You’ve made a comment of strong growth into 2023. Historically, I think that’s meant well into double digits. Are you — could you make any comments on consensus, with that sort of 10% being forecast at the moment?
Éric Vallat
Okay. I will answer part of the second question as well, but I’ll let you [Indiscernible] Liqueur. So on inflation and current trading, so first, you know what, not to be misunderstood, but what I said is that clearly being on the high end is being in a favorable situation when it comes to inflation. And so you hinted that potentially the lower entry price points, brands could be more affected. I would say that for me, high-end applies to every single category. Being the exception in every single category is being high end, even in a category which is more entry price points. When you are high end, you are less affected than when you are entry price point. And we are high end on every single category. So I would say that whatever the category, we are probably more resilient than one could imagine at this stage, and we do not witness at this stage a slowdown.
We expect a double-digit growth in the first quarter, despite very high comps. I remind you that last year, we were growing 105% in the first quarter. Also, despite the total closure of Shanghai and a number of cities in China. And this is not only and solely driven by our cognacs. It’s driven by a number of brands. And it’s across the board when it comes to markets, except obviously, Russia and China. So it doesn’t mean there would be no impact. Of course, I cannot predict the future, but at this stage, if we look at the current trading, we see a strong resilience of our brands.
As to the second question, but Luca feel free to complete about the margin. Of course, indeed, it’s been lower this year. Again, don’t forget and don’t underestimate the exceptional investments we’ve done behind our brands. If we hadn’t done the Super Bowl, the picture would have looked very different and Super Bowl is not meant to deliver on last year. It’s meant to feed the growth for this year and the coming years as well as all the actions we take. So we take the hit last year, but we take the benefits in the following years.
And of course, I would just like on my side, and I will let Luca complete more, but to say that definitely the reason why we over invest today is because we believe in the strong operating leverage in the longer term, for sure, on these brands, which are accretive from a gross margin standpoint. So it’s all about volumes, and that’s what we are aiming at. And as of today, this is what we witnessed. But Luca…
Luca Marotta
I don’t think that I have much to add because it was very clear. But in terms of contribution to the long-term journey, in terms of expansion of the bottom line Liqueurs & Spirits will be clearly more important than cognac. But the absolute value that are related to the divisions are clearly different. So cognac will still be the needle of the group performance that the expansion is meant to increase in the 5- to 10-year plan more than the cognac. So it’ll be less reliant on top and bottom line to cognac than today. But to be able to do that with some brands that are already a very high gross margin, we need to have more size. To have more size, we need to invest. So chicken and eggs, but I don’t know what is it chicken with the eggs, but we need to spend and back on the factor that the spend are well done and lasting for the future. And then we have bear fruits on top line and increase the absolute value of the profit of the division.
Éric Vallat
And spend in proportion of sales will decrease over time.
Luca Marotta
Yes, definitely, yes. Consensus will be an year of strong growth, beating the market in gaining value market share. As you know, we do not guide precisely. At this stage, the consensus organically is plus 10.2. We are comfortable with that. So we are comfortable with this kind of consensus in terms of top line. In terms of balancing of semester, we will start strongly in the Q1 with a double-digit growth.
Operator
Our next question comes from the line of Olivier Nicolai from Goldman Sachs.
Olivier Nicolai
First of all, just part of the — on the long-term guidance that you gave, not a lot of companies are giving guidance to 2030, which actually I’ve noticed it’s now 2029. Considering the progress you’ve made and also the fact that FX is in your favor, could we expect you to reach your targets partly on gross margin before 2029? That’s the first question.
Just a second question, going back on the U.S. Could you perhaps give us a bit of an update on the supply chain issues that the cognac manufacturers have been facing, including you, the level of inventories in the trade today and if you are concerned at all about any pricing elasticity on VSOP or 1738.
And then lastly, on the FX guidance. I was just wondering if you could give us a rough split of that guidance of €30 million to €40 million impact on EBIT between what’s coming from the transactional FX compared to translational?
Éric Vallat
You take questions 1 and 3, Luca. Okay?
Luca Marotta
Yes. I’ll start. Okay. Long-term guidance. So maybe our line was not clear. It is still the same. 2030 for us was meant to be March 2030. So it’s the year 2029, 2030. So we just ended year 2. So the year 5 will be ’24/’25 and then ’29/2030 will be the year 10. And the FX always on this question, doesn’t play a role because we recalculate every year. The performance, the same scope and same exchange rate of ’19/’20. So everything is comparable because when we build the road map at 72% and 33% in terms of gross margin bottom line, this has been done this without Brillet and Telmont and has been done with the exchange rate of more or less 114 being an average between conversion and transaction of ’19/’20.
The split between 2020 and ’30, it is — I have it, but clearly, I don’t disclose because that’s the reason why I keep a fork of this estimation because the more the dollar will beat the 108 in terms of spot rate to the unhedged part, which is at this stage around the 20% considering the volumes of the budget, the more is accretive or the opposite, and this is being not covered is automatically positive or negative for the global profile of the P&L and the end.
So at this stage, the 30/40 is linked to the cautious or less cautious position of the conversion component, which is by far the most complicated part to predict because it’s linked to the changes — the volatility of the dollar, but also to the net exposure because we have a global amount, just imagine that we are maybe performing better or less worse than budget, the absolute value, which are uncovered changed. So the global impact will be different. But the only thing that I can grant you in total transparency, I think we are one of the most transparent company on that to share our reports with the markets every quarter, even if it’s not a result-oriented conference call, even if it’s a sales, we’ll precise our state-of-the-art estimation in terms of how much we cover, how much is the impact on top line, so pure conversion and bottom line, so a mix. Every quarter, we will discuss that so you can adjust the hypothesis and the published reported basis consensus on every other 2 months.
Éric Vallat
Thank you, Luca. And as to your second question with the focus on the U.S. First, you referred to potential supply chain issues. So yes, there are supply chain issues. If you take one issue we have, for instance, is the difficulty to get the drivers for the trucks in the U.S., which is delaying some of the shipments knowing that at least the merchandise is in the U.S., but definitely, we do struggle with that. So I’m not speaking here of huge delays, but I’m speaking of some delays.
We also see the Port of New York being more and more busy. We are better prepared than we were 2 years ago, of course. So the impact shouldn’t be as dramatic as it was 2 years ago. But yes, there are some logistic tensions. You also asked about the level of inventories. So our stocks were quite lower at the end of our year — of the fiscal year by end March. Maybe 2 weeks on VSOP and a month on 1738. So very healthy stocks.
We are currently restocking, but not in big quantities, marginally, maybe 2 weeks because demand remains strong because of some logistic issues and also because we will manage our stocks throughout the year. But we are in the process of restocking and the issues we are currently facing are not that severe.
As to price elasticity, particularly on VSOP, we don’t witness it today, but it could be. It could be. But I wouldn’t take it as a bad news, in fact, because — so first, we have increased our prices on VSOP and we haven’t witnessed any negative impact. So it’s pure conjecture at this stage, there’s nothing uncertain about it for sure. But if this is to happen, it will be on formats, for instance, that are not necessarily strategic for us, and it would give us an opportunity to accelerate the optimization of our mix. And our price sensitivity is certainly much, much less on 1738 products behind which we invest a lot, whose demand is very strong. So here, we are quite comfortable. And this would also give us potentially the opportunity to arbitrate more in favor of 1738, which would not be solely a bad news, obviously, and even a good news. So it would help us accelerate the improvement of the mix.
But as of today, we do not witness yet at least any impact on VSOP, don’t forget VSOP is very strong for Remy Martin. It’s — we are the absolute leader on VSOP. And we clearly benefit also from the huge investments we’ve done behind our brands, which has increased their level of desirability.
Luca Marotta
One additional point, which is not relating to your question, which is overall — it’s a complicated year. We have some inflation all over the world, macropolitical, all that considered combining strengths and threats of the market, also of our company. 2022/2023 will be another year in which the gross margin will improve, will be higher than ’21/’22. So gross margin remains the first driver of the journey even considering this company. I don’t know how many companies are saying that today. We are saying that.
Olivier Nicolai
Congrats on your results.
Operator
The next question comes from the line of Edward Mundy from Jefferies.
Edward Mundy
3 questions from me, please. First, Eric, is just on China. We’re hearing consensus reports on the level of reopening. I appreciate to have a crystal ball, but could you share perhaps some perspectives on your key regions and what you’re seeing on the ground and what you’re hearing from key customers about the road map from here?
The second question, again, for Eric. You’ve appointed a Chief Transformation Officer. You mentioned there’s — the business is much stronger relative to history, but could you provide a bit more color on what the brief is for the Chief Transformation Officer.
And then the third question, perhaps for Luca, coming back to Slide 25 and the currency piece. Clearly, the — where you’re hedged at the moment is much higher than where spot prices are. Are you able to talk about fiscal ’23 and ’24 to what extent you’re locking in at current levels? And should we assume a similar impact for fiscal ’23/’24 as we’re seeing for ’22, ’23?
Éric Vallat
I’m sorry, can you just repeat your question 1? Sorry about that. Just to be —
Edward Mundy
First question is on China. What are you seeing on the ground? And what are you hearing from key customers on the road map from here?
Éric Vallat
So China, to start with, obviously, this past 54 days or 55 days of confinement have been very tough for the teams. Obviously, it’s been a very strict confinement with a very severe impact on our business for Q1, for sure. Now what we see — what we hear is 2 things, is one small survey that was made not so small actually on a number of confined people in China showed that there was an appetite for revenge, not only spending, but revenge living in a way, and that we could expect people go back to restaurants, clubs and so on. So some kind of revenge attitude. We already witnessed it in retail. So we see not in our stores, but in the fashion stores and so on, you see people queuing already like after a number of days of frustration, it will take a bit more time for us, but we are quite confident that we will see consumption bouncing back.
So in the short term, we are quite confident in our ability to recover in China. And I would say, recover even more quickly as our stocks are very healthy. So this is — it’s not only a sellout. It’s a sell-in and sell-out topic. But on both sides, we’re quite confident there.
If you look at it more medium term or long term, obviously, I cannot, as you said, I have no crystal ball on the political front. But what I can say is demographics are very positive for our business. Definitely, the middle class growing fast is not a bad news for us, considering the fact that we are accessible and affordable luxury in a way. So it’s — and we have a very strong level of awareness in China.
And second, what the wealth equalization matter, which is something that is not totally clear, but it’s not bad for us either as clearly it would increase the overall wealth of the middle class, which is again something which is positive for us. So China, apart from the political unpredictable happenings, which we don’t see coming now for sure, but we are quite confident in the short term and in the medium term for the regions I hoped.
Also, we have a great team. I would like to say that one difficult thing also in China is to secure a good level of trust and great teams that and great consistency between the brand strategy and the market implementation. And this is what impressed me the most when I came back to Remy Cointreau is the level of our teams in China and how good they work with — well they work with our brands. And again, we cannot go to China. So it’s very important, this level of trust.
Now moving to your second question and the CTO appointment. So it is, first, an acknowledgment of the fact that the world is changing fast. We need to adapt ever faster. The idea is not to create a kind of a big business unit with a number of people. This is not the way we work. The idea is to have someone very senior with a very short small team that will help us address a number of topics that we consider strategic and where we know we need to evolve not only our organization, but also our processes.
To make it clear, this year, the focus will be on 2 main topics. One is commercial excellence, which is still ongoing. It’s a change of culture. And it’s been kicked off in the U.S. It’s been rolled out in some European countries, but it’s still something that needs to scale up, and that will be her #1 mission. And the #2 mission is on D2C and more particularly on the digital transformation. And here, I’m not speaking necessarily of communication, which is handled by the brand, but I’m speaking more of every sales-related activities on e-commerce. And e-commerce is not only about opening our own e-boutiques. It’s about addressing the whole ecosystem. And this is where there’s a level of complexity and the level of adaptation required it’s already in progress, but we will accelerate with her as she’s a lady, and she’s a woman. And obviously, we do have some other topics that you will take over later. But her mission #1 for the 6 months to come is this one, these 2 topics.
Luca Marotta
’23/’24 ForEx for U.S. dollar, considering same amount of net exposure of ’22/’23. So the expansion is not taken into account because we need to reevaluate that more complete way all around the year, the budget process. At this stage, we cover between 30% and 35% over the estimated needs. We are — we have locked in a rate 112, then the option part is lower than the EBIT because considering the volatility of the dollar on the positive side at this stage. We have to combine a very cautious hedging policy of the group with the fact that covering too soon could crystallize some position too soon as well.
So I repeat, around 30% to 35% to ’23/’24 needs of considering the same amount of this year, so it will be lower because we’ll continue to improve, hopefully, in the U.S. dollar next year, 112 and of which only 1/3 of options.
Operator
Our next question comes from the line of Richard Withagen from Kepler.
Richard Withagen
Yes, Eric, I actually had a question on the consumer excellence that you just mentioned as the key focus point for the current fiscal year. So what are you doing? What are the changes? What are you implementing in ’23 more specifically? And you mentioned you already implemented it for example, in the U.S., what kind of results do you see after that implementation? So that’s the first question.
And then the second question I have is on ready-to-drink products. I mean certainly in the U.S., we see a lot of propositions coming to the market, a lot of margaritas, especially as well. So what are your thoughts on how that could impact the demand for Cointreau as far as I know, you’re not playing in that category specifically. So maybe your thoughts around that.
Éric Vallat
Okay. So question one first. So it’s — I’m not sure — I think you said consumer excellence, but maybe I understood wrong. So it’s commercial excellence, which is obviously related to the consumer and the client, but it’s really about our commercial internal matters. So I would say it’s — we are working on 4 layers. The #1 is clearly distributors management. So I’m not going to go into detail here. But clearly, with all the possibilities now you have to manage data differently. There’s much more we can work on together with our distributors for a better understanding of the market of the consumer behaviors of everything that could help us drive us — drive more our commercial teams.
The second one, which is related to that is commercial planning. Commercial planning is really key. It’s driven by a good collaboration between the distributor, our commercial teams and our marketing teams marketing in the field. And here also, we are working on anticipating more planning more so as to secure more impact for everything we do.
The third driver is the gross to net. Clearly, we — there’s a lot of room for improvement of the gross to net at Remy Cointreau, and this is typically something we’re working on, implementing tools that will be used also by our commercial teams, training our commercial teams on this gross to net topic, which is not necessarily something obvious, and which is key when you move from being very cognac driven to managing a real portfolio.
And the last one is the consequence of all this is the organization of our teams. Obviously, we’ve gone through a reorganization in the U.S. to adapt to this new environment made of more e-commerce, made of more direct to client activities and so on. And this has been keeping us busy in the past six months, notably in the U.S., as I just said. So these are the 4 main, let’s say, areas. There are, of course, others we’re working on. So we have streams. They are rolled out for every single stream, we have a region taking the leadership and then we scale up.
Is it proving to deliver? It’s obviously early to say. But when you look at our gross margin, the way we have improved the portfolio management, I see a lot of results. And I am truly convinced even though I cannot quantify precisely that a lot is coming from it. You know myself, I worked in a store for 3 years. I was a store manager and even an assistant manager at Louis Vuitton. And I can tell you that when your teams are briefed properly, when they have a good understanding of the drivers of the business of how the gross to net is built and so on, if they are properly briefed, they deliver way more. And I’m sure that this is going to contribute sharply in the coming years as much as it contributed last year.
As to the question on ready-to-drinks. So ready-to-drink were very fashionable 20 years ago are fashionable again. It might be more long lasting. I’m not denying it. I think it’s more competing with beer and some other potentially alcohols than ours, but it’s still a reality for us. Our value strategy is made of drinking less but better. And it’s certainly not of, let’s say, selling more non-alcohol. We are focusing on our liquid. It does not mean — plus — sorry, it is today not necessarily generating value and not necessarily a very let’s say, magnifying the liquid. So I’m not denying that for some of our brands, like Cointreau, which you referred to, it could be of interest to do it the Cointreau way, certainly not the way it’s done today to kind of reinvent this ready-to-drink topic. It’s something that I am not denying as a potential topic of interest that we might test in the near future. But again, it is not strategic. There is so much we can do with our liquids as they are with the growing cocktail culture. And this is our main focus, and this is where the gross margin will come from much more than from ready-to-drinks.
Operator
The next question comes from the line of Fintan Ryan from J.P. Morgan.
Fintan Ryan
3 questions from me, please. Firstly, during the presentation, you mentioned the increasing waste of the intermediate products 1738 in U.S. and CLUB in China and that’s improved over the last 2 to 3 years. Can you give us a sense of what the current split is now in both of those key markets in terms of the VSOP, intermediates and XO and above within your cognac portfolio? And what does the optimal portfolio look like if you sort of go out to your FY ’30 margin targets?
Secondly, just more on the sort of short-term gross margin drivers. Clearly, gross margin has been a key driver of expansion in FY ’22. As you think into FY ’23, what should we be thinking about in terms of the levers of mix, absolute and product mix absolute pricing and the maybe offsetting factors of incremental COGS or input cost inflation.
And thirdly, just maybe back on the free cash piece for next year. You mentioned that the — your CapEx plans have been a bit slower than you had anticipated. Could you just give us a sense of what CapEx you look what you’re looking at for FY ’23 and also the other working capital items, would you anticipate them being a big delta in overall free cash delivery for FY ’23?
Éric Vallat
So Luca, you take question 2 and 3, okay? And I’ll take the one, number one. So on the intermediates and actually the whole cognac portfolio and in the various regions, the situation is obviously very different from one region to another. I would say that if you take the U.S., the whole portfolio is very healthy. I mean we see healthy growth on the whole portfolio. VSOP, obviously, but more importantly 1738, growing way faster. As we said, it’s gaining share against VSOP. It’s also partly our decision of improving our mix. But clearly, we see very strong traction on VSOP — on the 1738, which is clearly driven also by the strong investments behind.
So — and also not to be underestimated, we enjoy a strong growth on XO. I’d like to say that I remember 6 years ago on XO, our XO was $110 and our lovely competitor, our main competitor in the U.S., XO was at $190. We have repositioned XO. We are now on par with our competitors. We lost 50% of our volume overnight and we’ve regained the volume, and we are enjoying a steady growth in the U.S.
I would also like to quote Louis XIII, which is enjoying a very interesting momentum in the U.S. As we said also, Louis XIII was probably the #1 brand to suffer from the pandemic and the closing of the on-trade, but it’s also the #1 brand that we covered from the reopening of the on-trade. And we also see the benefit of the up-trading with Louis XIII clearly, we do have a momentum. So I would say that Remy Martin brand in the U.S. is very healthy. That’s probably why it’s gaining market share as a weakend witness.
Europe is very different. Obviously, Europe is a myriad of countries. The brand is very healthy there as well. It depends on the regions. But overall, I am currently the Interim CEO of EMEA. And I can tell you as a CEO of EMEA that I have to manage countries, which every day are crying for more cognacs. So I’m discovering part of the job of my successor soon, which will not be easy, which is to manage this.
And as to China, we spoke a bit of China. I would like first to start with Louis XIII because I said during the presentation that we are going through a reengineering of the business model. I would like to insist that if we achieve our plan, and I believe we will, Louis XIII might be the only luxury brand even more than the brands I have been working for in the past, in fashion or whatever, that will be fully integrated because we are in the process of integrating downstream, but upstream we are very integrated. So if we manage this with Louis XIII, we will definitely create a lot of value.
And this is in progress. We are making good progress. Just so you know, we have divided by 2 the number of wholesalers we are working with this year. So it’s a great step forward, working in a very different way with them. And actually, despite this division by 2, we are going probably — and we are going certainly to achieve more sales with Louis XIII than last year, and we do enjoy an interesting momentum. Let’s see with the reopening now, but we are quite confident.
For the rest of the portfolio, CLUB is very healthy, gaining market share. This is not new. We launched a 360 plan in XO years ago, and it’s really proving very efficient. We are increasing prices and increasing volumes. So all good here.
And then XO, XO is our game changer in the future. I’m not saying it’s a make it or break it, but it’s a fantastic opportunity. We do not have our fair market share today. We probably have 8% market share, while our market share is between 14% and 16%. So there’s a lot to regain there, which is why we are proactively working on this 360 plan I referred to, telling you that it’s delivering, it’s too early, of course. We saw before COVID, some interesting growth. We believe in the opportunity of e-commerce for XO as well as a good driver. So let’s see how it pays off once it reopens, which is the case since the day before yesterday.
Luca Marotta
Gross margin in ’22/’23, so as said, I will elaborate a little bit more to the question, are we expecting as many other companies of our sector to see a stability or deterioration in gross margin due to the global environment. No, we don’t. We think that gross margin global or group level will be higher in terms of ratio to turnover compared to ’21/’22. So even if we are not denying there are some headwinds, macropolitical, or specifical earning little bit cost, we highlighted that also 12 months ago, that the cost of good even before the rise of the inflation before the political situation, the world confusion at this stage was ’22-’23 was meant to be more costly year in terms of costs, packaging, COGS components, logistic contents with — on top, e-com and digital journey increasing means additional pressure on logistics, on gross margin, CSR is very positive as a global value, but sometimes could be specifically on a short-term negative internal gross margin. So we are not denying all that. But we have much more.
And in terms of dimension, things of the absolute value of the COGS and logistics, the absolute value of the growth when Eric talks to gross to net, what is gross. It is the theoretical top line we are delivering without before counting the discount to the trade of the final client. If you’re able to improve that in qualitative also quantitative basis, 1 point is 4-to-1 compared to the COGS. So we have a lot to deliver. We have a lot of elements to mitigate this and even beat these inflation issues, price increases, mix improvement, mixes, format, ranges, states, brands, geographical, channels, we are really on this moment on a positive momentum.
And a very important price increase had been done in April. We have still a strong pricing power. So even if difficulties are there more than ever even for us, areas, we think that we will increase the gross margin group ratio compared to the turnover overall at group level. I’m not saying that it will be the same thing brand by brand at the group level in ’22/’23 compared to the previous year. We are very proud of that.
Free cash flow. Free cash flow before non-operational element like dividend and so on, share back this year will be higher than this year because, okay, capital expenditure, your question will be higher than what we experienced this year will be between €70 million and €80 million, which is our normative guidance for a normal year. If you are not able to reach it, it’s not because we don’t have plans because the pandemics and times makes things go slower than we want, that is €70 million to €80 million. And as well, strategic working capital outflow will be higher than this year, will be between €70 million and €80 million.
So technically speaking, we have €40 million to €50 million more in terms of headwinds in the cash flow. But even if, let me say that, we’ll be beating that. Why? EBITDA, first of all, because cash is cash. In cash, you can publish the result. It’s not organic. So in this moment, you have the conversion at a dollar that play a role. On top, we cannot consider the other working capital item of this year as €118.4 million as an exit as a normative one. So clearly, some technical elements of this year will reverse and also the amount of trade — the account receivable is linked to the way we are doing business. This year was a low point in terms of factoring. Historically, we have more than €100 million in factoring. So the free cash flow, even if we are increasing strategic working cap and capital expenditure will be higher than this year.
Operator
The next question comes from the line of Jeremy Fialko from HSBC.
Jeremy Fialko
A couple of questions from my side. I’d like to start on elements of your guidance for ’22/’23. So the first one is on the top line and the circa double-digit consensus organic growth, which you said you’re happy with. Is there any expectation that there will be a degree of restocking included within that? Or would you anticipate ending to ’22/’23 with a similarly low level of inventories that ended ’21/’22? And then if you were to decide that you want to set your inventory in the system, would that constitute some upside to that current consensus where it is?
And then secondly, on the operating profit side, obviously, you’ve signaled that your gross margins will be up in ’22/’23. The comments you make on control of OpEx imply, you’d expect some sort of leverage through the sales line there. Can you just confirm whether that’s the case or whether you think the kind of A&P and OpEx will grow roughly in line with sales in the current fiscal year?
Luca Marotta
Feel free to — because maybe I will be too dry on the answer. So feel free to include some comment. So we are not happy, we are comfortable. So we are okay with the guidance. Year of strong growth, starting with a strong H1 because we are not — this is slightly different. Technically, we simplify that and re-simplify that saying we are restocking. We are realigning. It is more correct. We ended the year with overall less stock than we wanted to, not only in terms of sell in because the sellout, the final retail was not able to grab the product to drink the product they wanted.
So there is no restocking in a negative way that would be considered. It is a realignment. At this stage, the year is designed to be more balanced compared to the ’21/’22. We are starting strong, but even if on the yields of very, very huge comps will be more balanced between H1, H2 and also between quarters. So at the end of the year, if the world was the main paradigm of 2021, we will end it with a more coverage.
But now let’s talk about chicken. In 2021, we invited 10 people to a dinner and everybody was meant to have a chicken because they are — they like chicken. And we ended with 3 chicken, 4. And now we are inviting them again, and we are restocking. But actually, we are not. We are partially realigning, switching from 3 to 6 chicken. But now they wanted 10 and the good — so we are still missing some part. And the good news is that they like very much our chicken. So they wanted not 1, 1.2. So we need 12 chicken.
So even if the year is more balanced, mathematically, I’m not excluding that in terms of mathematical coverage of the new paradigm will be ending at a lower pace, even more in volume than in value because the gain between formats and ranges will amplify the VSOP, 1738, in China, this will be [Indiscernible] CLUB, this kind of chicken, so red label, blue label. So it was a little bit metaphor, but to try to explain that this is more balanced, but having said that, we might end with a low level that means that probably, if the final consumption is still there, like we think is still developing, we will have a strong Q1 in ’23/’24 as well.
You are perfectly right on the second assumption. Gross margin increase next year, A&P increasing as well, but OpEx overall, even if we are not giving up on strategic investment in OpEx as well, will be growing less than the top line. So if your global collective guidance is double digit, plus 10.2% in top line, operating expenses at group level without stopping any important program will be growing by the lower piece compared to the top line. And on that point, it’s a great achievement, but what we call — we have the technical [Indiscernible] So even that is a great achievement because there is inflation also on salaries, salaries are very important for our people, and we treat well our people as well.
So growing in OpEx less than top line because the environment is at least a huge achievement as increasing gross margin. So you are right, but I wanted to highlight some additional color on that.
Éric Vallat
And I don’t think you were dry, and I will not elaborate as we’re still on your chicken story and even the furniture was moved by the story. So we will stick to this.
Operator
So we’ll be taking our last question. It comes from the line of Trevor Stirling from Bernstein.
Trevor Stirling
3 questions. Sorry to ask 3 at the end of the day. The first one, Luca, I was just going back to your waterfall chart on cognac margins, I was struck by that 2.6% margin expansion coming from distribution and others. And I wonder if you could just give us a little bit more color on is that mainly operating leverage, what’s going on behind that?
Second one, bigger picture stuff is liquid availability. I think through the year, you’ve been a bit short of liquids. You haven’t as much age liquid you would have liked. I think you’ve been prioritizing 1738 over VSOP. As you move into F ’23, do you think your liquid supply or availability is more in line with your expected demand?
And third thing, Eric, coming back to your point on ESG and 78% of acres is under sustainable cultivation. Is that your own acres? And what under you tracking the acres that are under the cultivation of the growers [Indiscernible]?
Éric Vallat
Can you repeat the last question, sorry?
Marc Heriard Dubreuil
Land?
Trevor Stirling
Sorry, on your ESG section, you talked about 78% of acres being sustainably cultivated. I’m just wondering if that was the company-owned acres. And are you also tracking the acres that are under the control of the wine growers and [Indiscernible]
Éric Vallat
You want to answer question one?
Luca Marotta
Yes.
Éric Vallat
Okay.
Luca Marotta
Yes. Okay. This is the impact of the leverage of global cost structure for the cognac was spectacular also because it’s linked to the increase of the size. In a world, the cognac means are already there even to support an even stronger top line at the same stage, the Liqueurs & Spirits division, which is more composed by different brands have, at this — has, at this stage, some more headcount, some more investments if you compare that to the structure of the top line. But as we said before for A&P, for Liqueurs & Spirits, also for the OpEx, this is the first part of the journey, then increasing the size, we will stop and declining also the ratio of OpEx and not only of A&P compared to top line.
So at this stage, this important cognac leverage ratio, so profit to the global profit is linked to the fact that the global means are already there and adapted to top line, which is totally accretive. So the additional dollars, the additional euro made with the cognac has a much more accretive impact on the global profit bottom line than liquors so far. It won’t be the same case in some years.
Éric Vallat
So as to your question on liquid availability, supply and the 2030 plan, the first thing I’d like to stress is that, first, we have the liquid to achieve our 2030 vision. Obviously, it’s a vision that was also drawn taking into account our sourcing capacity. I would even say that we can achieve more on the upper grades, particularly on XO. As you have understood, we have an ambitious plan, and we do have the liquid to achieve more on XO. So there is way to do more on the upper grades.
The thing is, indeed, we are growing way faster than we had originally planned. So I think it’s good news in a way because it will help us achieve — it is going to drive value even more than we had planned, should demand remain that much stronger than the offer. So it will have — it can have a positive impact on value. Of course, it is creating tension on the liquid, which is not something new, which is something that we’ve been facing over the past few years. So we’ve been working on our side on how to optimize our sourcing, how to gain sourcing. I will not tell you it’s easy. I will tell you it’s a focus, of course, and we are working on securing liquid to achieve even more than the vision, but it is work in progress.
We do have some interesting assets to achieve such starting with the fact that we have this unique relationship with the wine growers driven by our business being probably more family driven. But obviously, it’s not only and solidly about this, even though it matters, I don’t underestimate that the one growers, they are family owners and managing their patrimony like we are and it’s very important for us as an asset. But obviously, we are working on new tools to secure additional sourcing.
The only effect of sharing our ambition with the wine growers, I think, has been a very interesting step forward in the past few months. And whether we indeed the 100% target. So of course, it is direct and indirect. So it’s not only our [Indiscernible] not only our acres. If you take cognac, we are already certified 100%, and we’ve been pioneering in the region. So it’s clearly the 15,000 acres that directly or indirectly contribute to our products that are at stake.
And we are working with our orange suppliers. We are working with our cereal suppliers and so on. We’ve been doing it for long. We are just accelerating on a topic that has always been the focus for us anyway, being very [indiscernible] driven.
Operator
Okay. So we’ll hand you back over to the speakers.
Éric Vallat
Sorry. So thank you very much, everyone. I hope that you got it, obviously. It’s been a record year for us. So it’s pride for our teams. I would like also to congratulate them worldwide, records when it comes to sales, when it comes to gross margin, when it comes to COP. I would like to insist that this has been achieved, thanks to the heritage of sometimes up to 300 years of craft. It starts with a great product, and this is our heritage. This is what we need to transmit to the next generation. But it’s not solely this, of course. It’s also driven by our solid investments and by trends that we believe are long lasting. Hence, our confidence while not denying, of course, the global environment. So thank you very much for your attention and looking forward to speaking to you soon. Bye-bye.

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