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The City

Published:  18 January, 2007

While Brussels and its Eurocrats are decrying the French and Dutch rejections of the European constitution, a measure of relief is being felt in the boardrooms of Europe's major drinks producers.

The reason is simple: the uncertainty generated by the no' votes has depressed the value of the euro against the dollar. Over the past couple of years, the chairmen of Europe's global drinks groups have bemoaned how much higher their profits would be if only the greenback would return to what they regard as a normal' level. Now they must be hoping that that process has begun.

Take Rmy Cointreau. Some 49% of its Cognac sales are to the Americas, and in the year to 31 March that division's operating profits fell from €114.3 million (about 77.5 million) to €99.5 million, despite remarkable growth' of the Rmy Martin brand in the US and China (whose currency is pegged to the dollar). The company reckons the currency effect has wiped about €100 million from its operating profits over the past three years.

Rmy Cointreau's underlying group profits rose by 6.2% in the year to €78.8 million, and it recorded a 14.4% rise in operating profit to €167.7 million on turnover of €905.3 million. So why did annual net profits crash by 68% to just €24.2 million? The answer is that the company received some unpleasant news from an independent consultant's report on the value of some unidentified brands. As a result, the group had to make an exceptional provision of €54.6 million, worth 70% of its ordinary profits.

That hardly cheered the market, but at least Rmy Cointreau's shares are moving in the right direction after slumping from a peak of €45.10 immediately after 9/11. At one point in 2001 they dropped to below €19, and today stand at just above €35. The strategy of combining a consistently high marketing spend while pushing through price increases is paying off. For instance, the Piper and Charles Heidsieck Champagne brands delivered 16.3% organic growth and maintained their operating margin at 12.3%, despite heavily increased promotion.

On the negative side, Rmy Cointreau does not look like being a beneficiary from the pending takeover of Allied Domecq. Pernod Ricard and Fortune Brands seem to have worked out how they will divide the cake, and none of the crumbs look like falling into Rmy Cointreau's lap. It is close to Fortune through the Maxxium consortium, but that relationship remains clouded until details of the brands Fortune wants from the carve-up of Allied are revealed (assuming the Pernod/Fortune team wins the day). So apart from organic growth, Rmy Cointreau's upside looks limited. Further strengthening of the dollar would help.