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UPDATE 2-Pernod warns China to stay weak through June

Dominique Vidalon
Thursday, 13 Feb 2014 | 6:06 AM ET

* Pernod eyes 1-3 pct growth in 2013/14 underlying profit

* Sales fell 18 pct in China in H1, weakness to persist in H2

* Pernod H1 sales flat, Q2 showed improvement over Q1

* Pernod shares up 2.4 pct, erasing early losses.

(Adds CEO comments to Reuters, shares, analysts)

PARIS, Feb 13 (Reuters) - French drinks group Pernod Ricard cut its annual profit growth goal on Thursday, saying demand for its Martell cognac and Ballantine's whisky in China, its second-largest market, would stay sluggish through end-June.

The owner of Mumm champagne and Absolut vodka, which posted an 18 percent fall in first-half sales to China, had previously expected demand to start improving from the second half of its financial year to June 30.

"The recovery in China will take longer than expected," CEO Pierre Pringuet told Reuters in a telephone interview.

"We had anticipated an upturn from the start of the Chinese New Year (in February) but the government kept its tough stance on ostentatious behaviour."

Like rivals Diageo and Remy Cointreau, Pernod has been hit by a government crackdown on luxury gift-giving and personal spending by civil servants in China, as well as by slowing economic growth in the world's second-biggest economy.

The world's No. 2 spirits group behind Britain's Diageo said it now expected a rise of between 1 percent and 3 percent in full-year underlying operating profit against an October forecast of 4-5 percent growth.

The guidance cut hardly surprised investors as recent trading updates from rivals Remy Cointreau and Diageo had revealed further pressure on the Chinese market and stirred doubt over Pernod's ability to hit its profit target.

A Reuters poll of six analysts showed Pernod Ricard was seen to be on course for 2.3 percent growth.

By 0946 GMT, Pernod shares gained 2.3 percent, reversing earlier losses, as investors focused on a new cost savings plan and second-quarter sales that showed a sequential improvement due to a robust performance in Europe and a return to sales growth in the United States.

WORST OVER

"True, the guidance, new cost cut plans, and even negative price/mix for Martell imply things in Asia will take time to recover, but the worst may be over for Pernod and given the share price and conservative estimates (vs peers), this may provide a good entry point for the long-term minded," Liberum analysts said in a note.

Pernod trades at 16.8 times 12-month forward earnings, against 23.4 times for Remy and 17.22 times for Diageo, a discount that already prices in some of the Chinese woes.

"I don't know when Chinese consumption of super-premium and luxury drinks will recover ... but I remain confident over China's medium-and long-term potential," Pringuet told Reuters.

Pernod Ricard makes 12 percent of sales and 15 percent of profits in China, its second-biggest market after the U.S.

Estimates that 20-25 percent of the group's Chinese sales came from gift-giving, banqueting and karaoke bars, which have been hit by the toughened stance on prestige drinks, were "correct", Pringuet added.

To adjust to the tough situation in China, Pernod banked on the recent launches of Martell Distinction and Ballantine's Finest, two brands aimed at capturing middle income consumers, who have a taste for premium tipples but cannot afford deluxe drinks, he added.

First-half underlying sales were flat at 4.57 billion euros ($6.2 billion), while underlying operating profit rose 2 percent to 1.359 billion, beating expectations, thanks mostly to cost control.

"The results overall are a bit better than we anticipated ... (though) we doubt they will change investors' view on the stock," Citi analysts said in a note.

"We believe that short term, the emerging markets slowdown and situation in China will continue to weigh on the shares and longer term, as a result of the structural slowdown in China, Pernod will need to maintain a high level of investment in its other emerging markets and this will limit operational leverage."

Pernod on Thursday unveiled a plan to improve operational efficiency that it said would save an annual 150 million euros over three years and whose proceeds would be partly reinvested to support brand development. ($1 = 0.7359 euros)

(Additonal reportingby Pascale Denis in Paris, Editing by Andrew Callus, James Regan and Elizabeth Piper)

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