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Pernod Ricard brought forward its H1 results to Thursday last week as it downgraded guidance for the full year. The company now expects a low single-digit decline in organic sales for the full year, driven by particularly weak markets in the US and China. The market was relatively relaxed about the downgrade however, since much of the weakness was already anticipated, while underlying margins were robust.
The company also celebrated a significant improvement in cash flow, which was up +46% versus last year at EUR 440m. Management cited strong discipline on cost (A&P was down) and a focus on cash generation (see extract from the management presentation below).
On the call, the EVP of Finance, Helene de Tissot, was quick to highlight the achievement:
“This is obviously a very strong focus, and we have improved free cash flow by circa EUR 150 million versus December '23. So this year, this first half, it amounts to EUR 440 million. We are continuously optimizing ordinary working capital, with this semester notable improvement in finished good inventory level”
However, a closer look at the balance sheet in the press release shows a massive increase in the use of factoring, from EUR 1.1bn at the end of 2024 to EUR 1.6bn at the end of December 24 (see extract below). The increase in factoring would have benefited cash flow by nearly EUR 500m. In other words if the sale of receivables had stayed at the same level, then cash flow would in fact have been negative in the first half. It would appear this was not an operational improvement, but the impact of financial engineering.
To be fair, the use of factoring is clear if you read to the end of the press release, but it was not discussed at all in the text, nor on the call. We question the degree to which the market has really picked up on this. In the context of falling profits and rising debt, the lack of underlying cash flow should be concerning to investors.
Note that stripping out the sold receivables we see that “Trade receivables before factoring/ securitization” has moved up in the past 6 months from 2.6bn at June 24 to 3.8bn in December 24. It is also higher than the same point in June 23 despite falling sales. This is concerning in itself as it raises questions about collectability, particularly when we consider an existing flag dating from the FY24 financial statements on ageing of receivables. This flag showed a sharp increase in receivables past due more than 30 days from 5% to 14%.
While there is nothing inherently wrong with factoring receivables as a form of financing, we think it’s somewhat disingenuous of management to claim that strong cash flow was the result of an improvement in working capital. The sharp growth in receivables, the deterioration in the ageing profile and the underlying weak cash flow paint a somewhat different picture once we adjust for these sales.
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