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UPDATE 2-Pernod warns of slower profit growth as spirits dip in China

Dominique Vidalon
Thursday, 24 Oct 2013 | 6:28 AM ET

* Q1 2013/14 underlying sales down 1 pct vs poll 1.7 pct rise

* Q1 underlying sales in Asia down 6 pct, China falls double-digit

* Eyes 4-5 pct underlying 2013/14 profit growth

* Expects China to start recovering from H2 - CFO

PARIS, Oct 24(Reuters) - Pernod Ricard warned profit growth would slow in its current financial year after weakness in Chinese demand for its Martell cognac and Ballantine's whisky hit sales in the first quarter.

The world's No.2 spirits group by sales after Britain's Diageo said it expected demand in China to start improving only from the second half of the year, which ends in June 2014. China is its second-largest market after the United States, accounting for 12 percent of sales.

"We expect a difficult first half in China," Chief Financial Officer Gilles Bogaert told Reuters. "From the second half we should have more favourable comparables and we could see a gradual improvement. But there are still uncertainties over the pace of the recovery."

Pernod, which has expanded in emerging markets to offset slow sales in austerity-hit Europe, relies on Asia for about 46 percent of its profits.

Like its rivals, including smaller peer Remy Cointreau , Pernod has been hurt by a government clampdown on luxury gifts in China, in addition to the slowdown in economic growth in the country.

In light of such problems, Pernod has said it plans to tap Africa's thirst for whisky, vodka and cognac and bets the continent will become a key growth area within 10 years. The group also plans to expand in the thriving Indian whisky market.

The owner of Absolut vodka and Mumm champagne predicted growth in underlying profit from recurring operations of between 4 and 5 percent for the year ending June 30, 2014.

That would be down from the profit growth of 6 percent in 2012-13.

SALES LAG EXPECTATIONS

Pernod achieved sales of 2.013 billion euros in the quarter, a like-for-like decline of 1.0 percent and down from the 5 percent growth in the fourth quarter 2012/13.

This was below analysts expectations of a like-for-like rise of 1.7 percent on average in the quarter and also lagged the 3 percent growth achieved by rival Diageo.

"We read the Q1 as a material miss to expectations and consistent with our bearish thesis on the spirit sector," said Investec analyst Martin Deboo.

At 0814 GMT Pernod shares were down 2.31 percent, underperforming their European sector which was down 0.43 percent.

Pernod said the weak performance reflected unfavorable comparables with the year-ago quarter, including in the United States, and a slowdown in emerging markets including Asia - where underlying sales fell 6 percent, dragged down by China.

China saw a double-digit decline in underlying sales, as the gifts clampdown hit sales of premium spirits like Pernod's Royal Salute scotch, as well as Martell cognac and Ballantine's whisky.

The emerging markets slowdown was widespread, extending to Russia, but India was resilient, still recording double-digit sales growth thanks to Pernod's production of whisky through Indian subsidiaries.

In western Europe, there was a strong performance in Germany, Britain and France, Pernod said. But Spain was still difficult and hit by an increase in excise duty in July 2013 of 10 percent.

Asia-Pacific accounts for 40 percent of group sales against 26 percent for North and South America including 15 percent for the United States, and 23 percent for Europe including France.

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