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CFA Institute Research Challenge
Hosted in
France
Team N
PERNOD RICARD SA
CFA Institute Research Challenge
Consumer Goods | Food, Beverage & Tobacco | Distillers & Vintners
BUY Performance 1m 3m 12m Ratings Long-term Short-term Outlook
Price 15/01/2018 130.60 € Pernod 0.69% 12.73% 28.17% Fitch F3 BBB POS
12m Target Price 152.00 € CAC40 -1.12% -0.32% 9.26% Moody's P-2 Baa2 STABLE
Upside 14.86% SBF250 -0.72% -0.17% 11.02% Standard & Poor's BBB A-2 POS
Source: Team Analysis, Bloomberg
Figure 1: 12m’s Stock Price SUMMARY
Performance and Trade Volume As the 2nd largest manufacturer in the alcoholic beverage industry with focus on premium spirits and
1,200,000 wine, Pernod Ricard operates with its unique brand portfolio of 86 market companies worldwide.
140 €
HIGHLIGHTS
900,000
We issue a BUY recommendation with a 12-months target price of 152.00 € per share, which
130 €
represents a 14.86% upside based on the 15th January 2018 closing price of 130.60 €. We used 70:30
600,000
DCF method and multiple valuation. Our valuation is based on the industry and GDP growth analysis,
120 € taking into account Pernod Ricard’s specific strategy and growth drivers. We identified the following
key drivers to support our recommendation:
300,000
110 €
• Strong branding contributes strong business strategy
The strong portfolio mix, based on local and international brands over a premium to prestige-
100 € - range grants the company access to different markets. The high brand awareness attracts
potential customers and helps to distinguish from competitors.
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• Positive economic development in emerging markets boosts growth
Source: Team Analysis, Bloomberg The strong engagement in Asia, which is characterized by dynamic demographics, continuing
globalization and travel activity, and an increasing wealth of the population is a key advantage
Market Profile and is expected to provide a compound annual growth rate (CAGR) of 7.60% until 2022, while
overall CAGR expected to reach 5.72%.
Stock exchange: Euronext Paris
• Social changes offer possibilities to attract new customers
Ticker: RI FP Pernod Ricard’s decentralized organization accelerates the adaption of digitalization and social
trends. Social trends are seen to decrease overall alcoholic beverage consumption but might
ISIN: FR0000120693
also shift demand towards premium sector. Adversely impacts of the liberalization of Marijuana
No. of Shares: 265,421,592 are expected to be minor.
Par Value of Shares: 1.55 € • Efficiency program strengthening operational excellence
Pernod Ricard’s target to save 200 m€ in Operating Working Capital. Further, digitalization in
Market cap: 34,664 m€ operations, marketing, and sales ease pressure on costs. Correspondingly, profitability is likely
to increase.
52-weeks: low 105.25 €
high 133.40 €
• Adequate financial structure with room for improvement
Successful deleveraging reduced Debt to Equity from 0.69 in 2016 to 0.62 in 2017. Improve-
Volatility: 12.78% ment in the cash conversion cycle and liquidity sharpens Pernod Ricard’s financial profile.
The main risks remain the high sensitivity to unforeseeable changes in the regulatory environment,
substitution due to increasing rivalry and lower product differentiation along with decreasing
Source: Team Analysis, Bloomberg margins, a downturn in the economic development, especially in emerging markets.
Key Financials
2016/2017 2017/2018e 2018/2019e 2019/2020e 2020/2021e 2021/2022e
Revenues (m€) 9,010 9,465 10,118 10,775 11,366 11,897
Rev. growth yoy 3.8% 5.1% 6.9% 6.5% 5.5% 4.7%
EBIT (m€) 2,380 2,461 2,681 2,855 2,955 3,093
EBIT-margin 26.4% 26.0% 26.5% 26.5% 26.0% 26.0%
ROA 4.6% 5.0% 5.4% 5.6% 5.6% 5.6%
ROE 10.2% 10.7% 11.0% 11.3% 11.1% 11.0%
Debt/Equity 0.62 0.56 0.53 0.52 0.50 0.48
EPS (€) 5.28 5.78 6.33 6.91 7.28 7.62
DPS (€) 1.92 2.37 2.60 2.83 2.99 3.13
DPS growth yoy 2.3% 23.4% 9.5% 9.1% 5.4% 4.7%
1 Source: Team Analysis, S&P Capital IQ
CFA Institute Research Challenge
BUSINESS DESCRIPTION
Pernod Ricard SA (RI.PA), incorporated 1975, is an alcoholic beverages producer, one of the leading
worldwide international groups: 2nd in wine and spirit and 1st in premium/ultra-premium and
prestige spirit. (1) With a decentralization strategy and a geographically segmented business, the
entity has a headquarter for each region: Europe, the Middle East and Africa/Latin America
(EMEA/LATAM) in Paris, France, North America in New-York, US, and Asia in Hong-Kong, China.
Pernod Ricard is structured with six brands companies in charge of the strategic brand development,
the production and management of industrial facilities and 86 market companies tasked with market
strategies. On the 30th June 2017, the group counted 96 industrials production site, 18,442
employees.
Products: Pernod Ricard owns 38 premium brands that are classified under five categories:
international strategic brands (13), strategic wine brands (4), innovation (3), luxury (3) and
domestic strategic brands (15). The product range is wide: Whiskey, Liqueurs, Cognac, Brandy,
Bitters, Anise, Gin, Vodka, Champagne, Tequila and Wine. Two third of the sales (in term of volume)
come from 2 categories of alcohol: white spirits and rums and whiskeys, for which the group ranked
Figure 2: Pernod Ricard’s respectively 3rd and 2nd position among international groups. The creation of value is completed
Geographical Sales from the harvest of the raw material to the customer’s delivery throughout production infrastructure
modernization and capacity upgrade.
Geographic location: The group has expanded into 86 regions. Its decentralized organizational
structure enables flexibility and agility to meet customers’ and consumers’ needs and market’s
expectations. Sales are originated for 29% in the Americas, 40% in Asia and the rest of the world and
40% 31% 31% in Europe (see Figure 2). The 96 industrial sites are located worldwide. This geographic
scattering enables the group to locally embed its activities, is sometimes necessary to respect
“appellation of origin” requirements and creates a network enhancing the synergies between sites:
29% • Wine production: France (Champagne), Spain, Australia, New Zealand, Argentina, California
and China;
• Production of distilled alcohols: Sweden and Poland (vodka), UK and Germany (gin), Cuba
Europe Americas Asia, Rest of the World (rum), Scotland, Ireland, India, Canada and Brazil (whiskey), France and Armenia (cognac),
Mexico (tequila);
Source: Team Analysis, Bloomberg • Production of liqueurs and various spirits: Europe (France, Spain, Italy, Finland, Czech
Republic and Greece), Asia (India) and Americas (USA, Brazil and Argentina).
COMPANY’S STRATEGIES
Adaptation to new consumption ways and new markets
• EMEA/LATAM: winning strategy, market share gains. In Europe, Pernod Ricard aims to
consolidate its position and wine market share (leader with 30% of market share in France)
through two key growth drivers: prestige and innovation. In Latin America, the
international brand’s penetration should be done through a portfolio of local brands.
• North America: “rebound in world’s largest market”, Pernod Ricard restructured sales and
marketing organization around consumption occasions. In addition to the new
decentralized-market approach, marketing and sales teams are working more closely,
intermediate elimination, to have a better and faster understanding of consumer needs and
decision-making process. Pernod Ricard’s top brands of this market are Jameson and
Absolute, followed by Malibu, Martell and Altos. Innovation plays a key role in the sales
growth for all these brands.
• Asia: “ideally positioned in a high-potential market”. Pernod Ricard aspires to take
advantage to the intense economic and demographic dynamic of the region in order to
develop its global market and sales. Inspired by the increasing purchasing power, they
decided to implement a premium/super-premium strategy and to develop their portfolio in
this specific sector. They have developed an excellent knowledge of the local routes to
market, which is essential for their market penetration. Accounting for 74.4% of the Asia-
Pacific wine market value, 59.4% of the spirit-market and reflecting a high growth potential,
China is a targeted market for the group. (12) Despite of the GST, India recorded and is
expected strong wine and spirit industry growths which confirms Pernod Ricard’s aim to
maintaining its leading position in India: 45% market share in term of value, by attracting
the growing upper middle class to the existing premium international brands through the
construction of a strong local brands portfolio.
Innovations: Pernod Ricard is paying a big attention to the development and implementation of both
Core Business (incremental innovation) and New Business innovations (breakthrough innovation) in
order to increase its future growth. Therefore, the Group creates new beverages such
as Jameson Caskmates, Chivas Regal Extra and Absolut Lime, in order to introduce new flavors and,
thus, satisfy more costumers. In addition, Pernod Ricard focuses on the premiumization by creating
attractive designs and services for their consumers, positioning itself as a premium
company. Moreover, they have a BIG (Breakthrough Innovation Group), devoted to establish the
future group’s conviviality.
Organic growth: Pernod Ricard’s medium-term objective consists of reaching the organic growth of
between +4% and +5% from its recurring operations. To achieve that, the group focuses on operatio-
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CFA Institute Research Challenge
Figure 3: Shareholder Structure
14.20% nal excellence: a more efficient and simplified organization leading to a better expense management.
Concretely, they operate through three headquarters. Moreover, they consider talent development
either by improving their employees or by attracting and acquiring new ones. In 2017, Pernod Ricard
has built a campus to ensure a qualitative training for its employees (700 per years). Another
9.82% important strategic decision regards the route-to-market/consumer. Pernod Ricard’s objective is to
7.50% improve the distribution channel targeting, and also select the best among the traditional distribution
66.24% channels (large retailers, bars, restaurants), travel retail (ecommerce) and the home trade. Travel
1.50% retail represents a key challenge for the group. Finally, the group promotes sustainability and
0.74% responsibility for their performance on the long run. They set themselves medium term goals to be
achieved by 2020 focusing on four main pillars such as governance, supply chain, brand and
consumers, and resource stewardship. Thus, Pernod Ricard aims to achieve 100% of certified
Societe Paul Ricard vineyards, 100% of recyclable packaging, 0% of waste at production sites, as well as 20% and 30% of
Massachusetts Financial Services reduction of energy consumption and CO2 emission.
Groupe Bruxelles Lambert
External growth - “A targeted M&A strategy”: Pernod Ricard targets to enhance its portfolio
Caisse des Depots et Consignations management and a premiumization to position itself as a luxury brand and to attract wealthy
Other stagnant shares consumer. In addition of constant development and innovation, Pernod Ricard acquired the majority
Free float
stake of four promising brands: Monkey 47 (04.2016), Domaines Pinnacle (09.2016), Smooth Ambler
(01.2017) and Del Maguey (08.2017). This enables the company to provide additional high-quality
Source: Team Analysis, Bloomberg products. In the same time, the group decided to divest of four non-core assets (brands). Today, the
company’s portfolio, consisting with the most popular and luxury brands, shows how well the
Figure 4: Executive Board company is diversified with high quality products.
Alexandre Ricard CORPORATE GOVERNANCE
Chairman & Chief Executive Officer Shareholders structure: Pernod Ricard’s capital stock consists of around 265 millions of common
Executive Director stocks that are listed on numerous market indices, including: CAC 40, London Stock exchange, the
SBF 120 and the SBF 250 French indices; Euronext 100 and DJ EuroStoxx. Pernod Ricard has
Conor McQuaid implemented only one stock split, the two-for-one split of 2008.
Global Business Development Director The share capital is broken down as follows: 38.9% of the share capital is hold by various US
institutional investors, 15% by the société Paul Ricard, 11.2% by UK institutional investors, 10.6% by
Cédric Ramat
Human Resources and Sustainability & French institutional investors, the remaining capital is shared by other institutional investors,
Responsibility Director individuals, boars-management-employees, and Groupe Bruxelles Lambert (see Figure 3). Moreover,
Ian FitzSimons Pernod Ricard Family own 21% of voting rights.
General Counsel
Corporate management: The management structure consists of the General Management,
Gilles Bogaert represented by Alexandre Ricard (Chairman & CEO), the Executive Board and the Executive
Managing Director, Finance &
Committee. As the third generation, Mr. Ricard got back the control of Pernod Ricard after the
Operations
retirement of the CEO in 2015, Mr. Pringuet, the only non-family member having enrolled the
Source: Team Analysis, Pernod Ricard
executive role. At that time, he also became chairman, succeeding his mother.
Figure 5: Members of the Board of The executive board gathers four directors (see Figure 4) and the CEO; it assists the CEO in his
Directors (in blue the independent responsibilities. All of them have been working for Pernod Ricard or an affiliate for at least more than
directors) 15 years and have also developed a comprehensive understanding of the company and its industry.
The executive committee is comprised of 15 members: the executive board and the managing
01. Anne Lange
directors of the affiliates. Five of them started they career at Pernod Ricard as (internal) auditors and
02. Manousos Charkoftakis a great majority have been working for the group for at least 15 years as well. They meet every
Employee Director month to enhance the coordination between headquarters and affiliates. In addition, they work to
03. Wolfgang Colberg improve Pernod Ricard’s business activities performance, to set financial and operational objectives
Chairman of the audit committee
and to ensure Pernod Ricard’s policies maintenance.
04. Kory Sorenson
05. Gilles Samyn Corporate governance: The board of directors is made of 15 members, including the chairman and
06. Veronica Vargas CEO Mr. Alexandre Ricard, Vice Chairman, four Directors, six Independent Directors, two Directors
07. Pierre Pringuet representing employees and one Director representing employees (see Figure 5). With 35.7% of
women on the board of directors, the company’s gender disposition is in accordance with the AFEP-
Vice-Chairman of the Board of Directors
08. Nicole Bouton MEDEF code. The remuneration of the CEO is displayed in the annual report. Pernod Ricard makes
Chairman of the nomination CSR great emphasis on business transparency, organizing general shareholders meetings, investors
& compensation committee conferences, and on ethic, preventing of corruption and anti-competitive practices, in order to ensure
09. César Giron a positive relationship among stakeholders: employees, shareholders, customers, consumers,
10. Sylvain Carré
suppliers.
Employee Director
11. Martina Gonzalez-Gallarza
SOCIAL RESPONSIBILITY: SUSTAINABILITY AND RESPONSIBILITY
12. Paul-Charles Ricard Being included in major CSR indexes such as the Ethibel Sustainability (ESI) Excellence Europe and
Permanent Representative of Société Paul Global and the FTSE4Good or Euronext Vigeo Eiris ‘World 120” / “France 20”, Pernod Ricard
Ricard demonstrates its high social responsibility involvement. The Group responsibilities are based on four
13. Ian Gallienne main areas of engagement, which include promoting responsible drinking, protecting the planet,
14. Alexandre Ricard
empowering employees, developing communities and engaging partners. Thus, to promote the best
Chairman & Chief Executive Officer practices and to be responsible toward the alcohol consumption, the Group created an event
+ Chairman of the strategic committee
“Responsib’All Day”. In addition, Pernod Ricard founded the Fondation pour la Recherche en
Alcoologie (FRA), an organization that finances and publishes studies on alcohol consumption and its
Source: Team Analysis, Pernod Ricard
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CFA Institute Research Challenge
impact on consumer’s health. Finally, they participate to educational programs and awareness-
raising campaigns targeting young people and pregnant women. The company is also proud to
observe that “86% of affiliates carried out at least one responsible drinking initiative (2016-2017)”.
Moreover, the company makes a lot of partnerships with different countries financing, for example,
the Paul Ricard Oceanographic Institute that protect aquatic biodiversity and marine ecosystems in
Figure 6: Global Alcohol Market - France or helping the World Wide Fund on Nature (WWF) to protect snow leopard in Russia. Pernod
Product Segmentation Ricard also takes actions to reduce CO2 emissions by installing 5,000 m2 of solar panels in India and
500 60% to protect the planet’s water resources by saving, reusing and recycling it. In addition, the Group is
caring about their employees by highly respecting human and working rights and by training talents
400 50% in Pernod Ricard University developed in 2011.
in bn€
40%
300 INDUSTRY OVERVIEW AND COMPETITIVE POSITIONING
30% In 2015, wine and spirits contributed only 21.1% to the global alcohol consumption in volume terms,
200 while in value terms these two segments accounted for 47.4% for the overall value of the alcoholic
20% beverage industry, which in total accounted for about 760 bn€ (see Figure 6). (13) Thereby, demand
100
dynamics and drinking habits are very diverse and cultural influenced. Meanwhile, the trend towards
10% premiumization and regional diversification with a focus on emerging markets appears to become
the new priority for international brand companies.
0 0%
Beer Spirits Wine
Macroeconomics
Source: Team Analysis, Frent, M. (2016) The key determinant of the consumption of wine and spirits, especially in the premium segment, is
the increasing disposable income of potential customers, which in turn correlates positively with the
economic growth. The World Bank expects the global real GDP to grow moderately by 3.1% in 2018
with significant distinctions between mature and developing markets. (14) High growth rates, in
combination with favorable demographic development, higher personal wealth and continuing
Figure 7: Historic yoy-GDP
globalization are interpreted to drive the increasing demand for premium alcohols in emerging
growth (%)
markets. In connection with this, the historically strong population growth in developing countries
France US China India represents an assisting factor to increase the consumer base. (15) In contrast, the premiumization and
digitalization in mature markets such as North America and Europe might be one of the solutions to
2006 2.37 2.67 12.72 9.26 face modest growth and new drinking habits. In combination with the positive economic situation
2007 2.36 1.78 14.23 9.80
and outlook this translates into overall strong expectations towards growth for the alcohol market
(see Appendix 7).
2008 0.20 -0.29 9.65 3.89
2009 -2.94 -2.78 9.40 8.48 France: Economic revival of the “Grand Nation” takes time
The main ambition of the French President Macron is the reduction of the unemployment (9.5% in
2010 1.97 2.53 10.64 10.26 the third quarter of 2017), the achievement of a sustainable level of public debt, and the stop of the
2011 2.08 1.60 9.54 6.64 eroding competitiveness. The labor market reforms are interpreted to support the GDP growth, even
though they may partly contradict the traditionally strong private consumptions and investments as
2012 0.18 2.22 7.86 5.46
real wages tend to decrease. In addition, the appreciation of +15% of the Euro towards the US-Dollar
2013 0.58 1.68 7.76 6.39 within the last twelve months shortens the possibilities for the export sector. Nevertheless, the
progressive reduction in corporate taxation should help the inflation rate to slowly muscle up to 1.30
2014 0.95 2.37 7.30 7.51
% and GDP to grow by 1.80% in 2018, respectively, underlining the positive overall outlook for
2015 1.07 2.60 6.90 8.01 France. (16) The tax adjustment in France is not expected to have any significant impact, as Pernod
2016 1.19 1.62 6.70 7.11
Ricard’s business is globally diversified.
US: FED’s dilemma of strong labor market but low inflation
Source: World Bank - The real GDP growth of 3.2% in the third quarter of 2017 confirmed the good shape the US economy
is currently in. (17) The strong labor market with an unemployment rate close to full employment and
positive consumer spending favor the business friendly environment. Confronted with such a good
development, the FED may see itself forced to increase interest rates gradually to prevent an
overheating of the labor market even though inflation is clearly below its target. (18) But inflationary
pressure is likely to be generated when the foreign demand for US exports accelerates due to the
global economic growth and relatively advantageous USD weakness. Uncertainty arises from the
replacement of FED chairwoman Yellen and the foreign affairs, especially with regard to protectionist
measures conducted by President Trump. The tax reform however will have a positive on the US
economy in general in 2018.
-
- China: Structural transformation dethrones two-digital growth
China is simultaneously characterized by stability and a deceleration of growth. The inflation rate,
CPI +1.9% in December 2017, (19) is in line with the target area. In spite of a mining and steel-
producing industry that lost its momentum and does not stimulate excessive foreign investments
anymore and a weakening export sector as increasing wages reduce the competitiveness, the outlook
for China is very positive. (20) (21) China’s Premier Li Keqiang announced a robust GDP growth of 6.9%
for 2017, which is above the targeted an annual real GDP growth of 6.5%. (22) That rate would imply a
doubling of the country’s economy between 2010 and 2020. The accessibility of this ambitious target
depends significantly on the success of the initiated transformation process. It includes an increase in
innovation in the form of higher qualitative competitiveness, focusing on the tertiary sector, and a
growing domestic consumption, which complementary underpins the potential for the premium
beverage sector in China. In the long run, the implementation of a social insurance system would fur-
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CFA Institute Research Challenge
Figure 8: Pernod Ricard’s Historical
Sales Growth in China ther contribute to the domestic demand as gross savings remain at 46.1% of GDP. (23)
30%
India: Challenges in demonetization and GST will be rewarded in the long-term
The demonetization as well as the standardization of the tax system and the harmonization of the
domestic market by introducing a national Goods-and-Service Tax (GST) in 2017 led to massive
10%
disruptions in India. GDP growth decreased from 9.1% in the first quarter of 2016 to 5.7% in the
second quarter of 2017. (24) In the long-run, both lays the foundation for sustainable growth. Given
the robust domestic demand and the possible stimulus for investments and increasing exports as
-10% transportation shell benefit from the GST, negatives effect will be temporary and the Indian economy
is likely to recover with a GDP growth of 7.30% in 2018.
Industry
-30%
2 3 4 Regulative situation plays a key role for success of the industry
01 01 01 15 16 The alcoholic beverage industry is highly sensitive to regulatory measures and legally binding
/ 2 / 2 / 2
/ 20 / 20
1 2 3
1 1 1 14 15 restrictions. Country-specific regulations regarding minimum drinking age, sale days and times and
20 20 20 20 20 the prohibition of public drinking, reduce the availability of alcohol while restrictions or bans on
Source: Team Analysis, Pernod Ricard advertising and promotion of alcoholic products limit the product awareness through marketing
channels. (25) The federal implementations of the Chinese anti-corruption campaign, initiated in
Figure 9: Porter’s Five Forces 2012/2013, impacted the alcohol beverage industry. Pernod Ricard’s sales materially dropped from
24% and 9% in 2012 respectively 2013 to -23% in 2014 (see Figure 8). (26)
Entrance Barriers
Though competitive environment
The alcoholic beverage industry is characterized by high entrance barriers due to capital and
Bargaining operational requirements, difficulties in fulfilling regulatory standards, and market access to
power of Rivalry potential customers via brand awareness. While the wine segment is highly fragmented with various
customers
local and international players, the spirit segment is more concentrated. The product differentiation
is limited thus the switching costs for end-consumers are relatively low. To compensate this lack of
differentiation, alcohol manufacturers are striving for innovative products and the coherent
marketing mix as key element for customer acquisition. The bargaining power of suppliers depends
-
Bargaining Substitution on the origin of products and/or services: suppliers from the agricultural sector are powerful
- risk because they are highly specialized in monocultures and induce relatively high switching costs for
power of
suppliers - manufacturers based on the uniqueness and required quality of their products. Industrial suppliers
- (cork, bottles, labels, carton) have low bargaining power due to a low degree of specialization and
Source: Team Analysis, Frent, M. (2016)
consequently low switching costs. However, the premium segment remains highly attractive as wine
and spirits are offering higher margins compared to other consumer goods and growth-promoting
factors (see Figure 9 + 10, Appendix 9).
Drivers and trends
Figure 10: Global industry Aside from an increasing population and wealth as main determinants, the industry is driven by
attractiveness by margin highly divergent consumption habits. In mature markets such as Europe and North America, a
growing awareness of health issues and a modern, sportive lifestyle contradicts alcohol consumption
Avg. Com- as frequency and volume go down. Simultaneously, occasional drinking patterns allow premium
Food,
petitor manufacturers to promote their products and specialize on a new target group. In this context,
Beverages Beverages
Premium product innovation and also individualization of product services are growing. The digitalization
and Tobacco
Segment
does not only offer the chance of using Big Data to systematically contact customers via smart
Gross 27.60% 40.30% 52.60%
advertising, but also boost e-commerce and reduce costs. Further, higher travel propensity
Margin
throughout the world offers travel retail opportunities for leading beverage brands, i.e. duty-free
EBIT- 12.40% 16.30% 20.90% shops. The forecasted growth for Pernod Ricard’s key markets with focus on fine wine and spirits is
Margin very positive.
Competitive positioning
Source: Team Analysis, S&P Capital IQ Pernod Ricard is positioned 2nd globally in terms of sales after Diageo. With regard to its critical
market size, adequate capital facilities, wide distribution network and tight supplier relationships the
group is well equipped. Its well-known product portfolio, its power in innovation as demonstrated
with its Absolute Vodka variations and its success of the Irish whiskey brand Jameson, its strategic
orientation towards a comprehensive premiumization and its broad geographical presence ensure
Pernod Ricard’s good competitiveness (see Appendix 8).
INVESTMENT SUMMARY
Investment Thesis
We issue a BUY recommendation on Pernod Ricard with a target price of 150.00 € which represents
an upside of 14.86%, based on the closing price on 15th January 2017. Our estimation is based on a
combination of a DCF-Equity cash flow method and relative valuation. Aware of the fact that peers
have different strategies that impacts the accounting treatment and consequently the multiples, we
prefer to limit the influence of the relative valuation by devoting a weight of 70% to the intrinsic
valuation. As crucial key drivers of our evaluation we detect:
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CFA Institute Research Challenge
Strong industry growth: The alcoholic beverage industry benefits from the pickup in consumption
Figure 11:Historic sales growth due to increasing economic conditions worldwide. In recent years, the growth of the industry
and future trend of fine wine/ outperformed the GDP growth. Especially in emerging markets, the sound environment and the
champagne and spirits increasing wealth leading to a broader middle-class drives the premium segment. While mature
markets such as France and the US are expected to grow from 4.2% to 3.2% and from 6.5% to 4.2%
30% in the next five years, China and India are characterized by growth rates between 7.9% and 6.8%,
12.9% and 5.1%, respectively. Despite the adaptions triggered by the Chinese anti-corruption
20% campaign, the Indian introduction of the GST and demonetization, which will cause a lower growth
for Pernod Ricard in 2018, we believe that the strategic and geographic positioning will boost Pernod
10% Ricard’s sales and help them to gain even more market share in Asia. This development is
accompanied by our positive macroeconomic prospect.
0%
Cost efficiency: While do not see great room for improving the gross margin due to the strong ties
20 e
e
06
08
10
12
14
16
with (specialized) suppliers, especially for high-quality agricultural products, the initiated cost
18
20
20
20
20
20
20
20
-10%
20
efficiency program is likely to affect Pernod Ricard’s margins. The internal optimization in the cash
France US conversion cycle by reducing the inventory of finished goods as well as externally reduced net
-20%
China India interest expenses contribute an increasing EBT margin, which we assume to increase from 20.6% in
2017 to 21.8% in 2020e. Further, gradually growing structuring costs and the management’s signaled
Source: Team Analysis, Euromonitor target margin for advertising and promotion expenses to remain at 19% of the net sales sending a
strong commitment towards increasing cost efficiency. We think that modern marketing channels
(digitalization, e-commerce) can be a supportive instrument to ease the cost pressure.
Product innovation and brand awareness: Pernod Ricard’s competitive advantage is its wide
portfolio of premium brands in different price ranges. With its local brands, the company already
gained great awareness in domestic markets. The decentralized, consumer-centric organization
Figure 12: Forecasted Sales Growth allows to serve various markets individually, which is proven by the innovation track record
(Jameson, Chivas, and Absolute).
0% 2% 4% 6% 8% Social & technological development: As mentioned, digitalization will strengthen the direct
2017/2018f
channel between Pernod Ricard and its customers and represents an important marketing
instrument. Not only can it reduce conventional advertising costs but adapt to and identify trends in
2018/2019f consumer behavior. Pernod Ricard has signaled that the company is eager to invest early in this field
to secure market shares. We believe that healthy lifestyles and occasional consumption patterns not
2019/2020f necessarily have negative effects on Pernod Ricard’s business as they might shift demand to premium
2020/2021f
segments.
2021/2022f VALUATION
Intrinsic valuation
Europe (France) Americas (US) Asia (China & India)
We decided to use a Discounted Cash Flow (DCF in the form of Free Cash Flow to the Firm) approach
because Pernod Ricard is a mature company that generates stable cash flows. In our opinion, the
Source: Team Analysis company’s demonstrated capacity to sustainably achieve sufficient free cash flows to the firm
represents a sound base for our valuation. It also enables us to particularly pay tribute to the
company’s short-term future growth as well as factors the company’s performance is sensitive to.
Explicit growth period
Based on Pernod Ricard’s 2016/2017 geographically allocated revenues, we examined the future
industry growth and assessed Pernod Ricard’s revenue growth for the key markets France, the US,
China and India. Subsequently, we applied these with regard to the particular market share on a
specific year-to-year forecast until 2021/2022 (see Figure 12). While we believe that in 2017/2018
Figure 13: Forecasted Shift in
Regional Sales Pernod Ricard’s growth will still suffer slightly from difficulties in the US with its leading vodka brand
Absolute and the last extensions of the Chinese anti-corruption campaign as well as the GST
100%
introduction, alcohol ban and demonetization in India, we assume that the following years are overall
characterized by high one-digital growths (see Appendix 5). Pernod Ricard may participate above the
80% market growth because of its existing distribution network, brand awareness and product mix that
60% covers the premium, super premium and prestige price range. The differentiation in growth rates
consequently leads to a shift in market contribution to the revenue composition (see Figure 13).
40%
20% Terminal Growth: We orientated our residual growth rate, namely 3.62%, on the historical 11-years
0% GDP growth rate for the four key markets and on the historical 11-years industry specific growth for
these countries. We weighted them 95:5. In our opinion it is appropriate to consider this weight for
8f
9f
0f
1f
2f
7
01
01
01
02
02
02
the GDP as it will define a natural limit to the company’s growth in the long-run, while it includes the
/2
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/2
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/2
16
17
18
19
20
21
positive industry dynamics, which are even likely to continue beyond the explicit planning horizon.
20
20
20
20
20
20
Europe (France) Americas (US) Asia (China & India)
By taking the last 11 years we make sure that we cover at least one business cycle and by using the
regional revenue strength we respect the variation in growth dynamics according to the projected
Source: Team Analysis revenue pattern in 2021/2022 (see Appendix 5). However, as Asian markets are likely to mature, we
expect growth rates to converge.
Capital Expenditure (CapEx): Hence Pernod Ricard invested steadily in property, plant and
equipment, we do not identify an investment lag. However, as operations continue to grow,
6
CFA Institute Research Challenge
additional capacities may be required. We therefore assume a growth in CapEx, which correlates with
the sales, as sufficient capacities are required to maintain an effective production process.
Change in Operating Working Capital (OWC): Linked to the efficiency project, Pernod Ricard was
Figure 14: Cost of equity already able to save 50 m€ in OWC. The ambitious target of saving a total of 200 m€ by 2020 is
realistic. However, we do not believe that this means cutting OWC in general but optimize its
Beta 0.7874 utilization to inherently achieve this goal.
Expected market return 9.01% Capital structure: To follow the deleveraging trend and securing a high investment grade is one
Risk free rate (1) 0.59% fundamental principle of Pernod Ricard’s capital structuring. Hence, we believe that next year,
outstanding debt of 357 m€ will be repaid fully. Due to the growth, we assume that no further cuts in
Risk free rate (2) 1.79%
the debt will occur but that Pernod Ricard may steadily increase its debt at a low rate. Retained
Cost of equity (1) 7.22% earnings may mainly achieve the deleveraging. Further, we anticipate the change with regard to
Cost of equity (2) 7.47% implementation of IAS 17 in 2019/2020, which may lead to an excursive increase in the long-term
debt, as operating leases will be treated as financial leases from that accounting period on.
Source: Team Analysis
Cost of equity: We computed two costs of equity, taking into consideration a “normalization” in the
interest rate level in the long-run. Hence, cost of equity was calculated according to the Capital Asset
Pricing Model: the current German 10-years BUND (0.59%) was used as risk free rate for the specific
forecasting period, while the last monthly 5-year’s average of the German 10-years BUND (1.19%) is
Figure 15: Peer Analysis applied for the residual value calculation. The Beta of 0.7874 and the expected market return of
9.01% are estimated with the help of the SBF 250 on a weekly basis over the last 5 years (see Figure
15, Appendix 5).
Multiple Valuation: Peer analysis/Relative valuation
For our relative valuation, we first selected peers from Distiller & Vintners industry, that share the
same objective to become market leader, have similar geographical presence, and have the same
strategy, consisting in the premiumization, innovation as well as portfolio diversification. After
identifying the major industry players (see Figure 15), we compared their performance indicators, in
order to eliminate outliers and create a reliable peer group. We used a sale indictor, because the
growth of well-established companies is mostly driven by sales, and a ROIC indicator, showing the
efficiency of mature companies to generate returns. Calculating ROIC, we used the EBIT instead of the
net income to avoid the influence of different tax systems and capital structures. Thus, we identified
four comparable companies: Diageo plc, Constellation Brands, Inc., Davide Campari-Milano S.p.A., and
Rémy Cointreau. Accordingly, considered P/E, EV/FCF and EV/Net Sales as the most appropriate
Source: Team Analysis
multiples to realize the valuation.
P/E multiple: it can serve as a growth and risk estimator for companies but is biased by the
company’s payout strategy. As denominator, the diluted EPS allows to consider the impact of any
stock option or conversion on the price. Pernod Ricard’s P/E ratio that equals to 24.87x, which is a
little bit lower than its peers’ P/E average, indicating also that the company is undervalued.
EV/FCF multiple: it well indicates how fast mature groups with stable investments generate and
reinvest cash. To calculate this ratio, we took the enterprise value and unlevered FCF, making
companies more comparable and removing the impact of capital structure on a firm’s valuation.
Pernod Ricard has a positive ratio, equaling 32.74x, which is one of lowest compared to other
companies. Therefore, it indicates that investors of Pernod Ricard will receive their investments back
more quickly than its peers.
EV/Net Sales multiple: As indicated, the sales highly affect the growth a company such as Pernod
Ricard. To buy the sales of the group the price equals to 4.72x of its sales, which is lower than the
comparable companies’ ratio average. Thus, we can perceive that the market undervalues Pernod
Ricard. Therefore, buying the stock of Pernod Ricard can be consider as a good investment because
investors will receive benefit out of it. Finally, to get our Enterprise and Equity Value we took the
Source: Team Analysis average of multiples, which is quite lower than the median, in order to be more conservative. We
elaborated a range for the Equity Value from 137.86 € to 210.37 € and the Enterprise Value from
Figure 17: Revenues (€) 167.52 € to 192.61 €. Our analysis concludes on Pernod Ricard’s price of 170.40 € (see Appendix 6).
14000 10%
Millions
12000
10000 5%
8000
FINANCIAL ANALYSIS
0%
6000 Increasing sales volume through opportunities in established & growth markets
4000 -5% Pernod Ricard achieved an increase in revenues of 9.68% (see Figure 17) over the last five years,
2000 highly driven by the global economic upturn mainly propelled by China and India. Pernod Ricard has
0 -10% been able to capitalize on these markets and still create growth thanks to the implementation of
various strategies such as the launch of the new Chivas Extra 12, a dedicated brand for the Chinese
3
5
7
9e
1e
01
01
01
01
02
/2
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/2
market, through a multi-year partnership with NBA China, and the use of Amaro Ramazzotti for a
/2
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12
14
16
18
20
20
20
20
20
20
campaign on social responsibility as well as for fair and equitable trade in India. Currently, the
Revenue Growth growth is attenuated by some regulatory changes occurred during 2017 in India, i.e. the total ban of
Source: Team Analysis, Pernod Ricard
7
CFA Institute Research Challenge
Figure 18: Gross Margin
65%
alcohol in the state of Bihar and liquors selling near highways. However, we assume that these key
markets will continue to observe a positive growth in the future, given the strategies implemented by
64%
Pernod Ricard to cope with these events reported above. Indeed, it became also evident in the 1QFY
63% 2017/2018 where net sales in Asia/RoW exhibit an organic growth of 7%. This fact, together with a
62% solid growth in the other main markets, led us to establish a positive outlook for Pernod Ricard’s
61%
revenue generation and growth. (27)
60%
Operating costs: Stable & under control
The gross margin of Pernod Ricard is very stable, floating around 61.4-62.8% over the last five years
3
5
7
9e
1e
01
01
01
01
02
/2
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(see Figure 18). We believe that this will continue to be the case for the forecasted future given the
12
14
16
18
20
20
20
20
20
20
dependency on high quality supplies and production. The main cost drivers stem from raw materials,
Source: Team Analysis, Pernod Ricard labour and marketing/selling costs. In 2017 labour costs account for 18.98% of operating expenses
and is in line with industry peers. This might change if the firm decide to increase its production in
countries with lower labour costs, however this is not likely to be implemented in the short
foreseeable future.
Figure 19: Industry Comparison of
‘Normalised’ ROA Profitability: the impact of the intangible assets
In 2017, the ROA of Pernod Ricard’s ROA is 4.9%, which is significantly lower compared to its peers.
35%
This ratio, however, is affected by the significant amount of intangibles held by Pernod Ricard, which
30%
have a book value of 11,775 m€, representing 57.01% of its total assets. Nevertheless, the weight of
25%
the intangibles decreased over the last five years from its maximum of 61.18% in 2012. Such a
20% decrease is also due to impairments, observed almost every year. In particular, during the fiscal year
15% ending on the 30th June 2017, impairment of intangible assets, resulting primarily from brand
10% impairment, amounted to 73 m€. These were mainly driven by the 58 m€ impairment of Imperial
5% brand. However, since the company has now adjusted the amount of these assets to reflect their
0% current value, we believe that this issue is not going to affect the future profitability of the company
Pernod Ricard Davide Campari-
Milano S.p.A.
Rémy Cointreau significantly. In relation to the past, instead, we believe appropriate to analyse a ‘normalised’ ratio,
adjusted to remove the effect of the intangible assets. It resulted in a ROA equal to 18.33%, in line
Source: Team Analysis, S&P Capital with the performance of its competitors, with a 4.23% increase in comparison with the last year (see
Figure 19).
Figure 20: Debt and Equity Financing Deleveraging to enhance growth opportunities
(€) Pernod Ricard has actively been decreasing its Debt/Equity ratio from 92.7% in 2012 to 61.6% in
2017 (see Figure 20). This deleveraging strategy, together with the improvement in profitability
16,000 100% (EBIT +15.21% in last five years) and a reduction of the financial interest expense (-24.67% over the
Millions
14,000
80%
same time period), resulted in a significant improvement of some important solvency ratios like the
12,000 Net Debt/EBIT (-14.33% over the last five years) and the coverage ratio (+38.89% over the same
10,000 60% time period). This highlights a commitment of Pernod Ricard to increase the solvency of the company
8,000
and decrease its financial risk, in order to get a better rating to reduce future financial expenses. In
6,000 40%
addition, the deleveraging increases the firm’s flexibility to efficiently finance new acquisitions. It
4,000
20% gives us a final positive overview on the real effectiveness of company’s effort to improve its
2,000
solvency, which is also supported by the analysis of the Altman Z-score that reveals a 5-years average
0 0%
2012 2013 2014 2015 2016 2017
score of 3.76. This implies that Pernod Ricard has a very low probability of bankruptcy (see Appendix
10).
Total debt Total equity
Debt/Equity ratio Liquidity supported by structured factoring plan
The past and current liquidity situation of Pernod Ricard shows a positive trend as indicated by an
Source: Team Analysis, S&P Capital increase of +41.50% in the cash ratio (from 0.12x in 2013 to 0.18x in 2017), of +12.74% quick ratio
(from 0.43x in 2013 to 0.49x in 2017) and of +20.00% in the current ratio (from 1.50x in 2013 to
Figure 21: Quick Ratio 1.80x in 2017) (see Figures 21 and 22). Pernod Ricard is also exhibiting a good performance in its
cash generation cycle. The number of days of sales outstanding decreased to 44.61 (-14.39% over the
0.55
last five years) while the number of days of payables increased to 71.17 (+26.34% over the same time
0.50
period). It indicates that Pernod Ricard collects its receivables before paying its suppliers, which
indicates a good working capital management. In addition, a multi-currency revolving credit facilities
0.45 of over 2,500 m€ and Euro- and foreign currency-denominated factoring agreements in Europe and
in the Asia-Pacific and Oceania areas, sustain Pernod Ricard’s liquidity and flexibility.
0.40
0.35 Changes in accounting standards
Source: Team Analysis, S&P Capital
FY2013 FY2014 FY2015 FY2016 FY2017 On 30th June 2014, the International Accounting Standards Board (IASB) issued some amendments to
Quick ratio 5-Year avg.
IAS 16 - Property, plant and equipment and IAS 41 – Agriculture, in relation to bearer plants, effective
from the 1st January 2016. These amendments required bearer plants being accounted for in
accordance with IAS 16, i.e. using either the cost or the revaluation model, moving away from IAS 41
Figure 22: Current Ratio where they were measured at fair value less costs to sell. Pernod Ricard introduced these
amendments from the fiscal year started in 1st July 2016 accounting for the vineyards in accordance
1.85
with IAS 16. It caused a net decrease in the value of the vineyards, and a corresponding decrease in
1.75 the equity, for 99 m€ (0.32% of the FY 2016/2017 total assets) which, in line with the assessment of
1.65 the firm, we do not consider material. Over the next fiscal years, the company may be also affected by
1.55
the introduction of the new IFRS 15 –Revenues from contracts with customers, IFRS 16 – Lease, and
IFRS 9 – Financial Instruments. After an analysis of the business of Pernod Ricard, we assessed that
1.45
the impact of these new standards will not be material for the company. (28)
1.35
FY2013 FY2014 FY2015 FY2016 FY2017
8
Current ratio 5-Year avg.
CFA Institute Research Challenge
Satisfactory reported earnings quality
We performed the 8-variable Beneish M-score analysis for the last five year-end financial statements
to evaluate Pernod Ricard’s earnings quality. We observe an average M-score of -2.32 during the last
five years, which is below the -2.22 threshold considered a concern in terms of financial reporting
quality. Accordingly, our analysis indicates that Pernord Ricard exhibits a lower probability of
earnings manipulations. Thus, we assess earnings quality of the firm to be adequate (see Appendix
11).
INVESTMENT RISKS (see Appendix 14)
Economic risk 1: Deceleration in the global economic growth (Impact: High/Prob.: Low)
An extensive downturn in global economic growth would negatively affect the sales in the alcoholic
beverage industry as spirits and wine consumption is negatively correlated to economic recession,
unemployment and decreases in purchase power. Especially, the premium strategy makes Pernod
Ricard suffer in two ways: first of all, the demand sensitivity for premium spirits is higher than for
low quality spirits, allowing consumers to down-trade from premium to standard products. Secondly,
Pernod Ricard has a limited chance to react on decreasing demand as its premium strategy pursues
an exclusivity character and therefore restricts its price range. The risk is partly mitigated by Pernod
Ricard’s diversified business activity with. A sensitivity analysis in Appendix 13 exemplifies the
target price changes due to changes in the terminal growth as consequence of altered economic
Figure 23: Risk Matrix conditions.
Economic risk 2: Troubling emerging markets (Impact: Moderate/Prob.: Moderate)
It is seen that the economic and demographic development as well as the low international branded
consumption of alcoholic beverages in emerging markets provide significant growth potential.
However, an over-estimation of the increasing wealth and wider consumer base in combination with
an intensifying competition between international alcoholic beverage companies and local producers
can harm the expansion in the emerging markets. Pernod Ricard is sensitive to this risk especially
due to its operations in leading emerging markets such as China, India or Russia.
Market risk 1: Change in lifestyle & consumption habits (Impact: High/Prob.: Moderate)
In the light of the spreading awareness of alcohol-related diseases and general health concerns,
maintaining a healthy and sportive lifestyle became the new “luxury” for younger generations.
Supported by federal governments and NGOs, new drinking patterns following wise drinking-mottos
discourage the excessive consumption of alcohol. While the reduction of the consumption quantity
and frequency negatively affects the producers of alcoholic beverages, the change towards more
occasionally drinking can be interpreted as a chance for premiumization as the quality of spirits and
wine gathers relevance.
Market risk 2: Decriminalization of marijuana raises competition (Impact: Low/Prob.: High)
The recent liberalization process in North America with regard to a regulated production,
distribution, marketing and consumption can make marijuana not only available for medical but also
Source: Team Analysis recreational reasons, creating a potential substitute to alcohol. While surveys indicate marijuana’s
health concerns being lower or in line with alcohol, the consumption is mainly driven by younger
generations and the potential growth to a valuable market size may take time. (29) Accordingly, the
substitution effect is seen to be low.
Market risk 3: Competition & Market Consolidation (Impact: Moderate/Prob.: High)
Despite the high market entry barriers in general, the competitive environment in the alcoholic
beverage industry depends on the product. While few, global operating competitors and many small
local spirit makers characterize the spirit sector, the wine sector is highly fragmented. The recent
consolidation of the market intensifies the competition and emphasizes the risk of losing market
share. Also, a growing success of local, artisan producers is recognizable. The risk of inorganic growth
extends to the difficulties going along with the effective integration of the acquired company into the
group’s operational and organizational structure. Pernod Ricard’s decentralized structure strongly
contributes to a successful integrate as it ensures an extensive scope of independence to its brands.
Political risk 1: Tightening of regulatory & legal conditions (Impact: High/Prob.: Moderate)
The alcoholic beverage industry is considerably regulated, both statutory, i.e. based on federal or
state law, and non-statutory. (30) Besides regulations on production, sales and consumption
(prohibition of public drinking) as well as limitations of access to alcohol (minimum drinking age),
legal binding restrictions also cover marketing and advertising activities. Possible marketing bans or
tightening in the existing regulations as well as the introduction of package regulations in the form of
health warnings can be seen as political instruments to curb alcohol consumption. (31) The risk of
regulatory interventions similar to the Chinese anti-corruption campaign is regarded to be more
likely in developing countries. The geographical and jurisdictional diversification of Pernod Ricard
mitigates the impacts of changes in the regulatory environment. Nevertheless, they can indirectly
affect Pernod Ricard’s revenues from limited product placement and brand awareness, damage
reputation and increases in costs.
9CFA Institute Research Challenge
Political Risk 2: Protectionism & tax regimes (Impact: Moderate/Prob.: Low)
The high sensitivity of the wine and spirit sector to variations in tax regimes, which are not
foreseeable, represents a major threat. Similar to future tax increases, protectionist instruments such
as import barriers and excise duties become the most important aspects under the global
diversification strategy and can adversely affect the profitability of Pernod Ricard. (32) (33) Moreover,
the outcome of the Brexit negotiations will influence Pernod Ricard’s Scotch whiskey segment. The
widely located manufacturing and distribution network of Pernod Ricard partly diminish the extent
and the impact of such actions.
Operational Risk 1: Price volatility & increasing operational costs (Impact: Low/Prob.: Low)
As products of the alcoholic beverage industry are primarily made out of agricultural products, the
industry is sensitive to price volatility of these commodities, which are mainly influenced by the
weather conditions, the possibility of natural disasters and climate changes. If the suppliers are
confronted with a poor harvest, shortages in supply can either lead insufficient production volume or
significant appreciation in the raw materials’ prices. This can result in higher operating costs.
Besides, increasing energy, transportation, distillation and other operating costs might also put
pressure on the margins. Pernod Ricard mitigates the risk of increasing prices and supply shortfall by
entering non-physical hedge agreements and physical supply contracts. In addition, wine yards in
possession of the company increases its autonomy from global commodity markets.
Operational Risk 2: Product quality (Impact: Moderate/Prob.: Low)
Regarding the necessity of a good reputation/image, it is a company’s inevitable responsibility to
Figure 23: Credit Ratings ensure product quality. The risk of contamination of the beverage and defect of relating materials are
inherent in the manufacturing process. Pernod Ricard minimizes this risk by implementing an ISO-
Ratings Long-term Short-term Outlook certified management and control system to actively monitor the procurement of raw materials, the
distillation or fermentation process as well as packaging. Further, the company works closely with its
Fitch F3 BBB POS
suppliers by introducing partnership agreements and integrating quality-ensuring measures such as
Moody's P-2 Baa2 STABLE the Responsible Procurement Policy, the supplier CSR Commitment, and CSR Risk Mapping Tool.
Standard &
BBB A-2 POS
Poor's Financial risk 1: Increasing interest rates (Impact: Low/Prob.: High)
The signals of the ECB’s quantitative easing coming to an end and the expectation of the FED to raise
Source: Bloomberg
the federal funds in 2018 may lead to a slow drain of the extensive market liquidity. As a result,
interest rates are likely to increase. The linked risk of higher financial costs is partly mitigated by
interest rate risk hedges on a medium and long-term horizon, Pernod Ricard entered.
Financial risk 2: Liquidity and Solvency (Impact: High/Prob.: Low)
The lack of fulfilling its short- and long-term obligations is a major risk for corporations thus it
consequently harms credit and supplier relationships. It can arise from an insufficient cash
conversion cycle, insignificant revolving credit facilities, and a poor debtor management. Further,
unsatisfying operational results threaten the capability to serve long-term debts in the form of
interest payments and reimbursement. Various financing products allow Pernod Ricard to have
sufficient short, medium, and long-term credit facilities and provide adequate financial resources to
the company. The long-term credibility is further confirmed by the external credit ratings, which are
all Investment grade.
Financial risk 3: Exchange rate risk (Impact: Low/Prob.: Moderate)
The divisiveness of the US-American and European monetary policy, the Brexit and global
uncertainty cause fluctuations in foreign exchange rates to which Pernod Ricard is substantially
exposed due to its global branches and operations. Though, the decentralized structure of Pernod
Ricard guarantees natural hedges. Moreover, the company entered fair value and cash flow hedges in
the form of cross currency swaps and forwards in the main currencies USD, GBP and SEK to reduce
potential losses going along with variations in exchange rates.
Unpredictable risk 1: Explosion risk (Impact: Moderate/Prob.: Low)
The risk of explosion is highly present as the alcohol is a very flammable product. It threatens not
only the company’s facilities, but also employees. Therefore, Pernod Ricard has to be sure to
implement all sources of protection and prevention as required by the European Directive ATEX
Directive 2014/34/EU.
Unpredictable risk 2: Terrorism acts and declaration of war (Impact: High/Prob.: Moderate)
In Europe in recent years, terrorism acts were an important subject of concern not only for the
government, but also for industries and businesses. In fact, it highly impacts event, travel and tourism
industry. As a consequence, it negatively impacts the number of tourists, the sharing moments
between friends, evening events, and thus decreases the alcohol consumption.
Unpredictable risk 3: Natural disaster risk (Impact: High/Prob.: Low)
As the Group is presented in different countries the risk of natural disasters such as earthquake,
flooding, hurricane is usually not predicted, but can highly damage places of alcohol storage. Pernod
Ricard has to implement specific preventive measures to cover this risk, either by insuring or by
distributing the risk with “cat bonds”, for example.
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