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PATRICK RICARD OF PERNOD RICARD: LIFTING SAGGING SPIRITS

With major Seagram liquor brands now part of its portfolio, this family-controlled business must prove it can get a decent return on such storied names as Chivas Regal and Martell.

Patrick Ricard, chairman and chief executive of Paris-based spirits group Pernod Ricard, had good reason to hoist a glass at the end of 2002. In a horrid market Pernod Ricard's share price rose 6 percent last year, to E92.30 ($96.45), outperforming major competitors that it had lagged for years. The reason: the company's acquisition of portions of the Seagram Co. liquor empire from Vivendi Universal a year earlier. For his $3.15 billion, Ricard got such premium brands as Chivas Regal and Glenlivet scotches, Martell cognac and Seagram's Gin. They nearly doubled annual sales in Pernod Ricard's core wines and spirits division and lifted its profit margin to an estimated 15.2 percent, from just 9.9 percent.

Still, the charming, easygoing Marseilles native faces some tough challenges as the new year gets under way. Investors are skeptical about Ricard's ability to jump-start growth in the brands he bought as part of Vivendi's breakup of the venerable Canadian liquor maker. Chivas, Martell and Seagram's Gin have suffered a decadelong sales decline. The scotch and cognac brands have also steadily lost share, especially in the world's biggest liquor market, the U.S., to rival Diageo's Johnnie Walker Black scotch and to Hennessy, the cognac maker owned by LVMH Moët Hennessy Louis Vuitton. If Pernod Ricard's share price is to sustain its recent run, the 57-year-old CEO will have to prove that his family-controlled business can reverse recent sales trends.

A large inventory overhang with wholesale and retail distributors, created as Vivendi scrambled for revenue in 2001, left Martell, Chivas and Seagram's Gin with little room to grow in the first half of 2002. The inventories have been worked down. Now, says Michael Bleakley, a beverage analyst at Credit Suisse First Boston in London, the real danger "is that marketing costs could increase as Pernod Ricard tries to reposition the Seagram brands," hurting the company's margins.

Ricard's father, Paul, who died in 1997, founded Ricard in Marseilles in 1933 to produce pastis, France's hugely popular anise-flavored liquor. Patrick Ricard became chief executive in 1972, and in 1975 the company merged with Pernod.

With the Seagram acquisitions, Pernod Ricard jumped from fifth-largest spirits group in the world to second, with estimated sales of E4.65 billion last year. But London-based market leader Diageo, which also bought part of the Seagram business, is roughly three times the size of the French company and has a return on invested capital of 15 percent, against Pernod Ricard's relatively meager 8.2 percent. Through the Paul Ricard holding company, the chief executive's family owns 18.6 percent of Pernod Ricard, while allies have a further 19.6 percent, leading some investors to question whether Ricard will seize investment opportunities if it means diluting those controlling stakes.

The Seagram brand acquisitions largely complete a two-year transformation of the company. In 2001 Ricard began selling off low-margin, nonalcoholic drink businesses like Orangina and Yoo-Hoo that had made up 40 percent of sales. With the proceeds he reduced the company's E3.7 billion debt -- mostly picked up through the Seagram acquisition -- to E2.7 billion. That deleveraging, combined with 3.9 percent sales growth for traditional brands, including trademark Ricard pastis, Jameson whiskey and Havana Club rum, boosted pretax profit an estimated 29.5 percent last year, to E544 million.

Ricard has no college degree, but under his father's tutelage, he spent five years working in every company department before succeeding him. The hunting and opera fan recently discussed the challenges facing him with Institutional Investor Staff Writer David Lanchner.

Institutional Investor: For the past decade sales of Chivas Regal scotch, Martell cognac and Seagram's Gin have been in decline. Can you rekindle strong growth for these brands?

Ricard: We are sure we can increase sales over the long term because the three brands were not the No. 1 priority for Seagram. They were neglected as the company focused on building up Absolut vodka and Captain Morgan rum. Boosting sales of Chivas Regal and Martell, which account for more than 70 percent of the turnover of the former Seagram business, will become our principal concern, and that's a big change. Also, we will be targeting Chivas and Martell exclusively at the premium end of the market, which is seeing the best growth in the spirits industry.

Where have the marketing campaigns for Martell and Chivas gone wrong?

In recent years both these brands were positioned to appeal more on price than quality. Martell's current campaign is being pitched to non­cognac drinkers. They are trying to open up the market, and that is the role of the leading brand. When you are the global No. 3, as we are, you should confine your advertising to confirmed cognac drinkers who appreciate quality rather than trying to find new consumers. With Chivas the marketing is just not focused on the premium nature of the brand. You don't promote the brand with a free $15 Kelton watch, as I saw in Tokyo and Singapore. You promote it with a Cartier. We are launching new advertising and promotion campaigns for these brands this quarter that will change everything.

Are you satisfied with the sales of Seagram's Gin, the third major brand you acquired from Vivendi?

Considering our expectations, yes. When we were modeling the acquisition, we used very negative figures for Seagram's Gin. What we've found is that the sales volume has been much better than we anticipated, declining only 3 percent in the first nine months of 2002, despite the overstocking problem that all of the Seagram brands struggled with in the first half. That decline is basically in line with the market. We are also launching Seagram's vodka this year, which we hope will help firmly establish the brand name as a midmarket favorite in the U.S. We would also like to use the well-known Seagram brand name more outside the U.S., although as of now we have no specific plans where, when or how we will export it.

Some analysts fear that new marketing and advertising campaigns for the Seagram brands will put pressure on your operating margins or free cash flow.

No. Seagram's was already spending 20 percent of sales on advertising and marketing, which is the percentage we've always devoted for Pernod Ricard brands. The money is already there; we just want to use it differently. In fact, we may even be able to do things more cheaply than Seagram since we spend less than they did on advertising agency fees.

Now that your presence outside of Europe is much larger, will you bring in executives with more global experience?

Absolutely not. In this business you have to operate locally even if you have a global position. Thanks to Seagram we now have big sales staffs in North America and Asia, and that's all we need. Brand managers will continue to develop marketing strategy and then go market by market to see how branding and advertising should be adapted to local conditions. We've always had the kind of decentralized organization and expertise we need to promote our brands globally but at the same time locally.

You are still considerably smaller than Diageo. Are you looking for further acquisitions to improve your competitive position?

Let's be honest, we are not going to start challenging Diageo tomorrow for the No. 1 spot in the drinks industry. They are just too big. As I say, if you want to dream, do it at night, not at work. Of course, if someone offers to sell us a real jewel, we will take a good look at it. We are opportunistic, but we are not actively seeking acquisitions. For the moment, our priorities are to get rid of the debt we took on as a result of the Seagram deal and to build up volume in the brands we just acquired.

You've already brought debt down considerably. Will the fast pace continue?

Asset sales helped the sharp reduction in debt last year. This year, although the debt will come down, the fall won't be as sharp. Within the next three years, however, we can easily return to the 50 percent debt-to-equity ratio we had before the Seagram acquisition. It's important to remember, however, that even with a debt-to-equity ratio of 100 percent, the current level, we already have the wherewithal to make major investments or acquire brands if there are attractive opportunities.

Would you be willing to relinquish family control of Pernod Ricard?

We will do whatever we have to do to bring our shareholders a decent long-term return. I'm happy the group is family run because I believe it makes our thinking more long-term oriented. But I'm ready to relinquish that control if it is necessary to finance a key acquisition, or to ensure the financial health of the company, which is obviously not the situation. At the end of the day, we are here to make money for our shareholders, and I think that as a family-controlled company we've proved we can do that.

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