Coca-Cola HBC AG (CCH) Earnings Call Transcript & Summary

Good morning. Thank you all for joining Deutsche Bank's Global Consumer Conference virtually in Paris this year. And today's call with Coca-Cola Hellenic Bottling Company. My name is Gerry Gallagher, and I'm a member of Deutsche Bank's consumer team in Europe. It's my very great pleasure to introduce Zoran Bogdanovic, Chief Executive Officer of Coca-Cola Hellenic; and Michalis Imellos, the group's Chief Financial Officer. In terms of the format of today, our call with Coca-Cola Hellenic is going to take the form of a fireside chat. I have a series of questions to ask Zoran and Michalis, but I would like to -- you guys to interject with your questions from the floor. You can ask your questions via the web page you're all linked into. I will ask your questions on an unattributable anonymous basis, so please don't be shy in putting your questions forward, and I will do my best to interject those, as we go through today's fireside chat. We will aim to be ending around 11:45 Paris time, so about 45 minutes from now. So with that, welcome, Zoran, and welcome, Michalis. Thank you for joining us today.

I'm going to start with COVID, as you would expect, so maybe by no surprise. We know April was challenging as it was for many other companies, but at Q1 you did say that you expected April to be the trough. With lockdown starting to ease, albeit, gradually, have you seen any improvement in recent weeks? And had this been driven by any countries, in particular?

Thank you, Gerry. Thank you for having us. And good morning, everyone, and thank you for joining this chat. So exactly, as you said, Gerry, April was that most difficult month and a low point, as we expected with volume decline of 27% and FX-neutral revenue decline by 37%. And then as gradual reopening has started in May, and since then, we do see that also in line with that, our business has started a path of the recovery. Markets that have started with gradual reopening, and by now are open are Switzerland, Austria. Also Italy has almost fully opened, except for discos. And Hungary, Czech, Croatia, Bulgaria, Serbia, so these are the countries that already have opened up. Red threat everywhere is that everyone needs to provide for physical distancing, social licensing measures that out-of-home outlets need to provide for. And with that gradual reopening, we have also seen a slowdown in declines, both in our volumes as well as in the price/mix as single-serve packages that we serve and sell in those channels started to be ordered again. Regarding channel performance, we have seen improved performance in the at-home channel, as it is expected. But we also see that even now, after the lockdowns, this trend of, let's say, more of consumption at home will remain, as we have seen that a number of drinking moments that happen at home are now amplified and are happening more often. So we have seen also that in March, when there was a pantry loading -- in April, things have eased down, people migrated to proximity neighborhood shopping with more conscious shopping list. And just to remind that almost in April, we have cycled the Easter, which this year really was not an Easter as it should be, without really being able to socialize with family and friends. So in a nutshell, yes, we do see gradual reopening everywhere. By end of June, all markets should have finished with their lockdowns, including Russia, which has the last wave of June 23. Nigeria is already pretty much 80%, 90% reopened, except for few states and in line that, our business is also having slow, but sure recovery step-by-step. I'll pause here and over back to you, Gerry.

Yes. Just following on from that. Can you talk about how you're adopting your out-of-home strategy given the current environment to prepare for further relaxation and moving on ultimately to hopefully some sort of recovery?

Yes, sure. Look, out-of-home strategy is absolutely central to our overall business strategy. Out-of-home ranges between around 30% to 40%, depends on the market. So it's a very important part. And we care about it a lot. During COVID period, our teams have kept continuous communication with our out-of-home customers, either with those who have in some form been open with probably home deliveries, but even those that had to close, our teams have remained in a continuous contact to stay in touch and to even help them during this very hard period and prepare them for the opening. And the fact that we have direct access to these outlets and customers is helping us to partner probably in better ways than probably many others. And I can give you some examples of what we have been doing. As I mentioned, we supported and enabled our out-of-home customers to deliver or even build online sales that some of them have done. We further intensified our partnership with food aggregators to increase our beverage penetration in that food delivery, leveraging -- then further on leveraging our at-home channel, we have also supported out-of-home through vouchers and coupons, activated even substitutional HoReCa outlets where we haven't been necessarily before, like some bakeries or liquor stores or drugstores. We have updated also our customer segmentation because seeing -- to be able to shift investments to those outlets that will have more relevance in this new situation. And we also retrained our HoReCa customers, helping them with advices and even how to apply and implement all these new measures that everyone has to apply. So by now, in all of our countries, we have developed HoReCa plans, which have various shapes and forms depending on the country. It may even be sometimes credit extension, in cases how to support them with a well-known, established customers. Of course, this is on a case-by-case basis. Also maybe, their -- support on their initial ordering with some materials and -- et cetera. So this has been a critical part of our preparation for the reopening and how we support customers in out-of-home. To conclude, it's going to take a while till all these customers come back to pre-COVID levels. We should be realistic and know that this is going to take all this year and probably a good chunk of next year. But we are committed to fully stand-by next to our customers and help them go through this for their own business and our joint business. Thank you.

Yes, Zoran, can I just pick up on something you just said there in your answer? You mentioned, in some instances, providing credit extensions to customers. Is that -- is it something we should think about from the cash flow perspective? Or is it at the group level, relatively material event?

I'll let Michalis go with this one.

Yes, look, we don't expect that this will have overall a very material impact, either on the working capital or on potentially the bad debt exposures for the group. So we are trying to help customers to really restart in this environment and also to be able to put some new orders for the coming months. We have assessed the risk. Overall, we monitor very closely. In some cases, we do have those installment plans. In other places, we have other kind of support. So overall, we feel that it's not going to have a material impact overall.

Okay. Thanks, Michalis. Just moving on to at-home. Obviously, there's an opportunity that arises there out of the situation the world finds itself in. Could you talk about what actions you're undertaking in the at-home opportunity?

Yes. So we've seen that -- I think I mentioned earlier, there are so many, now, things that are happening at-home. So we little bit say that there is this whole out-of-home which moved at-home with meals, with socializing, with gaming, with TV screen, even balcony barbecue, if I can call it that way. So we have adjusted our marketing spend, so that together with the Coca-Cola Company, we focus primarily on the shop floor, promoting products that are more specific for all these occasions. And we also have done, during the period and even now, rerouting all our sales force from idle channels and low-intensity channels, these days, to outlets in at-home channel. Also, our focus has been on our core fast-rotating SKUs that maximize sales and profit, both for us and retailers, because we've seen also that retailers needed to make optimization on their end. And we have also shifted our activities and promotions to more simple ones, full-pallet activations to grow our share of visible inventory. We also supported and supporting modern trade customers on e-commerce, with relevant lineup and promotions. We have stepped this up and partnering with many of our customers to help them elevate this. And as I said, we are also promoting either multi-serves, but also multipacks of single serves that is anyway our strategy to develop, to ensure that debt penetration at-home is increasing. So all that has, I believe, resulted with a good result because we see also, based on the latest market shares, that we have been increasing share in a number of -- in majority of countries, which I think is a good checkpoint, a proof point that all the activities that we have done have yielded with a good outcome. Thank you.

I was going to move to price/mix. You did mention e-commerce. Now clearly, that's a relatively small channel at the moment. But clearly, the -- likewise, the situation all-in has accelerated the opportunities there. Could you expand a little bit on what you're doing on the e-commerce side?

Yes. Well, exactly, as you said, Gerry, at the moment, even before COVID, it has been on a relatively low level. However, there are 2 critical areas. First of all, we already had our B2B customer digital selling platform, which we call Hybris. And this has been quickly updated, so that it could enable also more heavy order taking. And we have seen increases in literally all countries that now every one of our teams could leverage this platform, and that was very useful. So in countries where it was on a low level, whether it was 1% or 2%, it was doubling or even, in some cases, tripling during last 3 months. There are a few countries where already ordering through this platform has been around 10% or so. But everywhere, there has been a same trend of increases. Now that pace is not going to continue after COVID with that momentum and level. But for sure, this is going to keep increasing. And that's why we will continue developing our own B2B platform. Just for those who may not know, we also have our own D2C platform in Switzerland, which is called Qwell with home deliveries, household deliveries and that has been working extremely, extremely well. But secondly, also, we have been partnering with our customers to further strengthen their own e-commerce platforms. For example, wholesalers who overnight with out-of-home customers closing temporarily, they had a capacity to do things. So we work with them on their own D2C solutions to help them do deliveries to households and homes. We have also shifted our resources to support more e-commerce. And I said also, we increased the presence with the SKU lineup, improving also how our products are presented in online shops and promotions in the way we do them. So we've seen also that through this moment of truth situation, we have better seen what we need to quickly change and improve. And our teams have been very fast in doing so. And I can only close by saying that our focus, investments and resources going forward is going to be definitely bigger, and we will keep developing this irrespective of the COVID, but for the future, anyway, that's part of our strategy.

So I said that I was looking at price/mix, so I'll move there now. Pack and channel mix is clearly a headwind. Could you talk about any revenue growth initiatives you guys have to mitigate the impact of the negative pack and channel mix? And maybe you can give us a little bit of help as to how we should think about the margin difference between the various channels?

Yes. I'll take this one, Gerry. So first of all, let me start with the margins. To your point, the difference between the out-of-home margins and the at-home channel margins is relatively small at -- and I'm thinking at contribution margin level. So that's within a couple of percentage points, with out-of-home being higher than at-home. And that's because even though the out-of-home has got a higher revenue per case compared to the at-home channel, it also has higher cost of sales, given the SKU in this channel, the out-of-home towards smaller packs. And also, the out-of-home has higher cost to serve because it involves more sales force per case that is being sold, it's more fragmented, more picking up the warehouse, given that we deliver primarily mixed pallets, more cooler placements per case that is being sold. So it has quite a lot more of, let's say, costs and overheads. And therefore, at the end of the day, all things being equal, as I said, margin-wise, not a big difference. At the moment, the whole story that we see in terms of the margin impact of COVID is primarily, and by far, one-off volume deleverage, okay? We've lost -- as Zoran was mentioning earlier as well, we've lost a significant chunk of volume, and this leads to a significant under absorption of fixed costs. So that's one. If you look within the price mix, so putting the volume aside -- the volume decline aside, if you look at in the price mix, by far, the biggest negative impact is around pack mix, okay? So that is, by far, the biggest negative impact. And then we have the channel shift, which is negative, but much smaller than pack. Category is actually positive. If you look at the evolution of categories, excluding the impact of coffee because with discontinued Lavazza last year, we don't have coffee this year. So that is, by its own, a negative development. But if you exclude coffee, sparkling and energy have proven very resilient during the crisis. In the month of lockdown, sparkling was declining at less than half the rate of water, juice and tea. And then going into May, we see sparkling really declining now, high-single digit, which is a very good improvement compared to the nearly minus 20% that we saw in April for sparkling. And energy is back to growth. So low single-digit growth, but positive. Whereas, both juice and tea have recovered a little bit, but not that substantially. So category is in good shape. Price also is in a good shape because we had already taken some pricing in a number of markets, including Russia, before COVID. So all in all, within price/mix, it's all about pack. And as we also see from the May performance, pack mix is starting to recover. So from the lows of April, where single-serve by volume was around 30% compared to something like 45% before the outbreak, we see that in May, the single-serve volume is edging higher from that 30%. It's not yet at the pre-COVID levels, but it's getting better. And it's important to understand that as we recover gradually volume, we recover it primarily in single serves. Because even if you look at April, 80% of the volume lost in April came from out-of-home, which is predominantly single-serve volumes. So as we see margins recovering, we will see that by volume coming back, so the volume deleverage effect alleviating. And within that, the vast majority of that volume being single-serve. Within -- comparing between channels, to your question, not a huge concern right now. I would say it's #3 because exactly to my point earlier, the profitability between out-of-home and at-home is very similar. Now you asked about some of the revenue growth management initiatives. So we are doing a lot of work right now to understand how COVID can affect in the midterm occasions, consumer habits, even the pack preferences? So we are looking also at what impact affordability is going to have on the choices that consumers will make. So all this is now work in progress in order to really identify new occasions, potentially new packs, more premium offerings for at-home consumption, how e-commerce will increase its relevance, back to Zoran's point earlier. And this is what will be coming in the next 2 to 3 months and shaping how our strategy will be modified overall to capture those opportunities.

Thanks, Michalis. So to state the obvious, there's a huge amount of work in moving parts here in terms of product, pack mix, channel, volume, et cetera. But just to summarize and be far too simplistic, but in terms of the main driver of your margin recovery, it is first, volume and then the other variables behind that, would that be fair?

Absolutely. Volume is #1, pack mix is #2 and then all the rest are much, much smaller in terms of impact.

Right. I've had a question come in from our audience, and it's sort of related to this. Based on your experience over the last few months, is your D2C platform in Switzerland something you can replicate in other markets?

In short, yes, in some form and fashion. It may not necessarily mean to be exactly that replication. However, we are very active in looking in other markets, what are the ways, how we can position ourselves in this D2C area? Also in Austria, we bought a stake in the one start-up company. So we are part of that story now, which does household and D2C purchases and deliveries and that has been very insightful. So we are examining, as we speak, what could be the priority markets where we will develop it in some way. And I would be pretty sure that over the rest of the year and even more next year, we will be seeing more of these examples also in other markets.

Great. I'm going to move on to a bigger picture question next. And it's the relationship with the Coca-Cola Company. So how have you adapted it at all the way you collaborate with the total Coca-Cola Company given the COVID environment? And how do you manage potential conflicts that may arise between short-term cost savings and long-term business opportunities?

Yes. Sure. Look, I will highlight that one of the strengths of the business for us and for Coca-Cola Company, I think it's the strength and quality of the relationship that we have before COVID, but I have to really say that during COVID, it passed heavy test as that strength of the collaboration has been very visible at all possible levels. I was very pleased to see how quickly together we have reprioritized. We have been fully aligned in our initiatives that we are doing across the markets. We have been fully aligned that top 3 priorities have been: number one, cash; number two, profit; and third, competitiveness, meaning our share position in the markets. And literally, everything that we have done, none of us has done alone. We've done it together. Everything is in full link and sync of interaction of our teams, which happens on an informal and formal basis on a weekly-daily level. We also had, with the senior leadership of the Coca-Cola Company from James, Brian and John system-wide global meetings where we exchange and share best practices and learn fast from each other. We've learned from China. Many have learned also from us from Italy. So that was on that high level. And then in every single country, our teams have been working very, very closely to focus on high-velocity and high-profitability products; reallocation of resources, whether that's marketing, funds or people; reconsidering also what we do with new launches because in some cases, we have already launched something before the crisis, but we have also aligned how do we face the things that were in the plan for this year, what happens and what will happen next year. And I'm also pleased to say, and I will conclude with that, that we are already -- after we have sorted ourselves for now and pretty much for the rest of the year, we are already putting our heads together for the initiatives what we want to drive towards the end of the year and through the next year, and we are doing that together in full partnership. Thank you.

Right. So you talked of initiatives and we touched [ little bit on ] investment there. Can you sort of expand that answer to capture Costa, what you're doing in terms of the plans to roll out and whether you have to alter things a little bit there, given where we're at?

Sorry, did you say on Costa?

The Costa, yes. Yes.

Yes. Yes, yes. So Costa was right from the beginning in our original plan, critical launch for this year and that never came into question. We only were delayed 3 weeks. So instead of beginning of May, we started end of May. So we started in the first 3 markets, which is Bulgaria, Hungary and Poland. And already, since then, we launched in Romania. And by July, we will be launching in another wave of countries like Greece, Switzerland, Ireland, Northern Ireland, Croatia, Slovenia. And by the end of the year, we will have more markets, including Russia. So relevance has been, I would argue, even bigger because right from the start, our plan was to firstly focus on at-home channel. And this is where we started. And we will then gradually, by the end of the year, start addressing and penetrating in at work as well as out-of-home as bars, restaurants, hotels are opening. And just to say that in our case, we will be looking into all channels and that's why the product portfolio will be all the way from whole beans, roast and ground, pods, ready-to-drink and also the famous Costa Express machines that we will be placing in well-targeted locations. So just for everyone to know when we talk coffee that it's not only ready-to-drink; in our case, it's actually a very small part, but everything else is a much bigger portion of consumption. And we are going after all of that. Thank you.

So Zoran, your answer there, it made me think a little bit about innovation, and you've had a strong pipeline over the last 2 to 3 years. Could you talk about what the current environment means for innovation? Do you intensify it? Do you drop it back? And also, how do you think about the opposite as well? How do you think about the alternative to innovation in terms of rationalizing SKUs given the current situation we are in?

Yes. Well, innovation, even irrespective of COVID, it remains an important driver of our growth algorithm. It has been before, but it will stay in the future. However, together with Coca-Cola Company, we have also gathered some learnings, and we have evolved our thinking that it's not about the quantity of innovation and going -- but going forward, it is more about things that will be more prioritized that will have possibly bigger scale and impact across, at least, several markets for given innovation. Costa is a fabulous example of that or Aquarius or Coke Energy. But sometimes, cases of a flavor, which happens on one brand in one country, I don't think this is necessary, and this is where we are fully aligned. So I think it's going to be more -- you will see going forward, more prioritization, more choices being made for bigger impact and also respecting even with more disciplined element of the profitability. What you asked about the reverse side, this was happening also even before COVID, but now this also heightens the discipline even more when it comes to rationalizing and killing those SKUs and parts of the business that don't perform. We always saw that adding SKUs and new products has to go hand-in-hand, with eliminating also lowest -- performing lowest profitable SKUs. So that discipline and routine stays. I would just say with even more scrutiny going forward.

Okay. If we move on, we've talked a little bit about trading down in terms of pack formats. Could you talk a little bit about the consumer and trading down in the sense of trading out of your products into cheaper alternatives from the competition? And also whether competitive activity has intensified recently around your markets given COVID?

In general, we've seen only a few markets where competition has maintained, I would say, usual way of spending. But experience over 3 months has shown that it's not about the quantity of spend, it's more what is the content and what is the -- really needed and what is relevant in this type of situation, where I think that our teams have responded quickly to focus on the shop floor on various combinations, whether with food items or with premium spirits permissibility at-home, just to name some examples. And as a result of that, we see that in majority of markets, we are gaining share. In some markets quite significantly, which is a proof point that, that quick reaction was very well done and has respected what -- how consumers have been shopping, what they were looking for and what was relevant to communicate. So in majority of markets, we haven't seen anything that was, in any way, worrying. We do see that in some markets, competition has proceeded with some innovation. And like always, it happens, it does give some short-term boost. And in some cases, where this has happened, we have already further readjusted plans as a way of our response.

Great. I'm just going to ask you a couple of questions on specific markets. Firstly, on Nigeria, it's been competitive in the past, causing some rebasing of the market's pricing structure. Could you talk a little bit about the operating environment in Nigeria at the moment?

Yes. Well, I think good thing was that Nigeria was not for too long in lockdown. Obviously, the business has -- had negative trading during the lockdown. However, with lockdown measures being lifted in almost whole Nigeria, not yet fully, but almost fully. Also, the positive trading has resumed. Just as a reminder, we had excellent and above expectations Q4 of last year, very strong Q1, and I'm very pleased that end of May and now in June, we are in a very good trading again. This situation, coupled with the FX movements, driven also by all situation, all that also led to actions that competitors also followed what we have done from beginning of the year, meaning some positive price adjustments in various shapes and forms, whether that's through downsizing while keeping the same price, whether that's reduction of their promo spend or headline pricing increases in a number of regions. So that's -- we read that as a very positive sign because what industry needs in Nigeria is -- it needs, its good balance, healthy balance between volume and also price/mix and that was good to see. So in conclusion, our trading has been quite pleasing, and I'm happy that throughout this whole period, we did not have any interruption of our business and product supply, as our teams have secured continuous supply of all raw materials. This may not be the case maybe for some other players in the market where there were some hiccups. That's why I'm really pleased and proud of what the team has done and how we were constantly present and available with our products for all of our customers.

Great. So it sounds based on your answer that the market's been relatively rational, and it doesn't sound like the oil prices had too much an influence on the Nigerian market. What would you say to the oil price in Russia?

Michalis, maybe you want to take this?

Yes. Gerry, just to say that as far as the oil prices are concerned in Nigeria, we -- it's -- we feel it more on the FX front, okay, because we have seen a depreciation of naira. And right now, there are some challenges in terms of liquidity -- hard currency liquidity in the official market. So I would say at this point in time, that's the more evident, let's say, impact. Less so, I would say, in Russia, even though we did have a short-term spell of the ruble being severely affected by the low oil prices. Since the gradual recovery of the oil prices, we have seen the ruble correcting quite significantly. So now it stands at some very good levels, I would say. And it seems that in that way, it can be conducive to the country weathering the crisis a little bit easier. Now we need to see, obviously, from a macro perspective because also for Russia, the outlook for this year for GDP is for contraction, somewhere in the mid-single-digit sort of level. And with that, we need to see how this will affect consumer confidence and overall disposable income. However, as we were discussing the process of recovery in Russia is a little bit slower, even though not as deep of a contraction in terms of our volumes as we have seen in established markets. So I guess that in the second half of the year, we will see some good meaningful recovery in Russia supported also by the macros and the -- as I said, the good levels of the ForEx.

Right. Thanks very much and for touching on the macro consumer impact as well of the oil price, that was very helpful, Michalis. I've just probably got time for 2 more. Next one, could you just talk a little bit about the regulatory environment, sugar taxes, et cetera, pack sizes or whatever? And what COVID has meant in terms of the topic of regulation, if indeed it has meant anything?

Yes. So that topic has been a big and relevant topic before COVID, and I don't see that it got any more increase than what already it had. So it's going to stay there. However, what we have seen is that some governments, namely Italy and Poland, which we're supposed to introduce sugar and plastic taxation this year, it seems most likely that this is pretty sure that they will be moving this to 2021, which is a very good sign of their sensible thinking, understanding that this would be just unnecessary additional burden for economy, where we are all looking how to revive it for everyone's interest. So by the fact that this is moved to next year, this gives us more time to find even alternative solutions of how to achieve government objectives with solutions that can even better work for all stakeholders. This topic remains. We are actively investing time and resources in our part of responsibility, for which we are active partner in industry and with governments and always trying to find solution. Even in cases, I just want to say when eventually taxation happens, based on so many learnings within our territories, even within broader Coca-Cola system, we do adjust our approach with brands, with packs and sizes and prices. And eventually, I don't see that this is any obstacle to the growth potential that we have across our territories. But I just want to assure that we are very actively working on that and finding -- and are part of the solutions and finding solutions for any country, which has this as a topic.

Great. I've got a number of other questions, but we probably only got time for one more. So I'm going to end with the dividend. Clearly, a number of companies out there have cut the dividend or even in some instances, abandoned the dividend. Could you guys just give us your latest thoughts as to how the Board thinks about your dividend moving forward?

Yes. Gerry, let me take this one. The Board will propose the EUR 0.62 dividend for the full year -- related to the full year of '19 at the Annual General Meeting next week. We see that we had strong overall performance in 2019, which is what obviously this dividend relates to. And given our solid balance sheet and good level of liquidity, which is more than adequate to fulfill all our obligations and also to cover any investment plans and potential bolt-on acquisitions that might come our way this year, we feel that we can comfortably afford to pay the dividend. So we will go ahead.

Well, I'm going to be cheeky, Michalis, on the back of your answer and just ask one more on bolt-ons. Are current events providing opportunities or is it too early and maybe the bid offer spread between potential sellers and potential buyers is too wide and we need a little time to settle down? What's your read of the latest M&A opportunities that are out there?

Yes. Look, I think, Gerry, the general impression out there is that this crisis is very -- will be very short-lived and the impact will be recovered either very quickly or fairly quickly. And to some extent, we see that also in the progress of the stock market. So we don't see any potential seller having any inclination to try to sell at a discount compared to the pre-COVID levels because exactly they feel that this whole crisis is temporary. So unless business is really in some kind of liquidity stress, we don't see that anyone will be moving on the price. So this kind of classic view that this is a good sort of period to find opportunities from a price perspective, it's not something that we see out there. So we continue to do our work on the merits of those target businesses that we have on our pipeline. And as the right opportunity arises from a price and timing perspective, we will move.

Great. We're 2 minutes over time. I'd just like to thank you both, both from Deutsche Bank's perspective, but more importantly, from our clients' perspective, who are dialing in for your answers to my questions, I thought they were very informative and very helpful for all of us who have dialed in. So thank you both, again, and hope everybody stays well. Thank you very much.

Thank you very much. Thank you all for joining. Thank you.

Thank you very much, Gerry. Thank you, everyone. Bye.

Thank you, guys. Goodbye.