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

Thank you for standing by, ladies and gentlemen, and welcome to Coca-Cola HBC's Conference Call for the 2023 First Quarter Trading Update. We have with us Mr. Zoran Bogdanovic, Chief Executive Officer; Mr. Ben Almanzar, Chief Financial Officer; and Mr. John Dawson, Head of Investor Relations. [Operator Instructions] I must also advise that this conference is being recorded today, Wednesday, the 3rd of May, 2023. I now pass the floor to one of your speakers, Mr. John Dawson. Please go ahead.

Thank you, operator, and good morning, everyone. We'll start with some opening remarks from Zoran, and then open the floor to your questions. Please keep to one question and a follow-up. We have about an hour for the call today, and that should leave plenty of time for questions and answers. [Operator Instructions] Finally, I must remind you that this conference call contains various forward-looking statements. These should be considered in conjunction with the cautionary statements in our trading update press release, which we published this morning. And with that, I'll turn you over to Zoran.

Thank you, John, and good morning, everyone. Thanks for joining the call. As you will have seen from our trading update today, we have had a good start to 2023. The strong Q1 performance underpins my key messages today. First, our 2025 growth strategy is working, delivering great commercial execution, securing necessary price increases, while also increasing market share and nurturing our deep customer relationships. Second, our portfolio has been instrumental to our success. Our categories with our most widespread focus, Sparkling, Energy and Coffee, have all performed strongly. Still, driven by Water, has been impacted in some of our emerging markets by the macroeconomic environment. And third, the good start gives us increased confidence that we are on track for another year of strong performance in 2023. As a result, we are updating our guidance in a positive way and I'll discuss that at the end of my remarks. With that, let me get into the detail. We are very pleased with our performance in Q1. A key measure of success has been the effective use of price and mix levers to recover the inflation effects we are seeing in the cost of goods sold. Volumes have remained solid, particularly in Established and Developing, and we've improved our market share in non-alcoholic ready-to-drink and Sparkling overall. Our exceptional teams, our strong and close partnerships with our customers and the effectiveness of our combined commercial initiatives with the Coca-Cola Company and other partners have been critical enablers to our success. As a result, first quarter organic revenues were up 22.2%, excluding Russia and Ukraine. Including them, group organic revenue growth was 16.2%, again, very strong. This growth was fueled by an increase of 21% in organic revenue per case, an acceleration from the 16% delivered in 2022 as a whole. This continues to reflect our responsible approach to pricing and mix decisions enhanced by data and insights. It is essential that we always try to provide value to shoppers and customers, balancing premiumization and affordability and ensuring relevant propositions are available for all consumer segments. We are encouraged to see continued market share gains, particularly given the price increases taken over the last 12 to 18 months. In the first quarter, we've gained 70 basis points of value share in non-alcoholic ready-to-drink and a further 10 basis points in Sparkling on top of the 120 and 170 basis points achieved, respectively, in 2022. This reflects the strength of our brand portfolio, effective marketing and the strong commercial offer and execution we bring to our customers. Looking at the performance by category, we can differentiate some of the trends. Please note the following volumes are organic, excluding Russia and Ukraine. Sparkling volumes were up nearly 3%. Within the category, Trademark Coke volume grew mid-single digits. This quarter, we prepared for the exciting launch of Jack Daniel's and Coca-Cola in Poland, Ireland and Hungary in Q2 and the re-launch of the Adult Sparkling Kinley brand in several markets. Energy performance continues to be strong, up nearly 24% with sustained volume growth across all 3 regional segments. Within this, Predator is doing very well in Poland and Nigeria with other markets like Czech, Ireland, Italy and Romania, all making strong contributions to the overall Energy growth. We are also making good progress building out the Energy category in Egypt. Coffee volumes were up 25%, reflecting good growth across all segments. Costa Coffee continues to make good progress, particularly in the out-of-home channel, as does Caffe Vergnano. Indeed, we are preparing for further rollouts of Caffe Vergnano in Czech and Slovakia in second quarter. Still volumes fell 11.2%, largely reflecting weakness in Water in emerging markets. This masks some strong performances and good activations, particularly in Sports Drinks with Powerade up 33% and with Premium waters, which performed particularly well in Ireland, Greece and Italy. Turning to some highlights in our segmental performance. Established segment, organic sales grew by 20.6% with both good volumes and revenue per case contribution. Volume growth momentum was maintained in all markets, but it was especially strong in Greece, Ireland and Switzerland. I am particularly pleased with the high single-digit Sparkling volume growth and within that mid-teens volume growth of Adult Sparkling. Strong double-digit growth of all single-serve packages reflect well our focus behind driving single-serve as an important lever to drive positive mix impact. In the Developing segment, organic sales grew by 26%. This was driven by improved revenue per case also up 26%. Within this, positive channel and package mix made a meaningful contribution alongside the cumulative benefit of pricing initiatives taken over the last 12 months. Overall volumes were flat, although Sparkling and Energy grew well, offset by volume declines in sales. In the Emerging segment, we achieved a good overall revenue performance, protected market shares in Sparkling and Energy and only saw material volume reductions in Stills, particularly Water. We met consumers' needs on affordability and thoughtful pricing and mix, resulting in emerging market organic revenues growing by 9.5% and up nearly 22%, excluding Russia and Ukraine. In Nigeria, the team have done a great job of navigating the shortage of bank notes, delivering strong execution that supported value share gains. Energy was particularly strong with strong double-digit volume growth. Integration in Egypt continues to progress well, helping the organization manage the challenging macroenvironment. We remain very confident that the business will achieve our vision of healthy share gains and improve profitability over the medium term. As you know, our position as the leader in sustainability is an important part of our license to operate. I'm delighted that for the seventh year running, we've been A-rated by CDP as a supplier engagement leader on climate change for working with our suppliers to cascade the environmental action across our supply chain. We have also been recognized as one of Europe climate leaders in the Financial Times-Statista list for the third consecutive year. We continue to invest in projects that drive organic growth and support our journey to net 0. A good example of this is our new returnable glass bottle line in Austria, which will come online in the second quarter. This investment also taps into the funds created by our first green bond issued in 2022. Let me conclude my remarks by commenting on our guidance for 2023 before we open up to questions. As I said at the beginning of this call, the good start gives us strength and confidence that we are on track for another year of strong performance in 2023. As a result, we continue to believe we will deliver revenue growth above our 5% to 6% medium-term guidance range. On EBIT, we are now confident that we will deliver positive organic EBIT growth in 2023 at the top end of our minus 3% to plus 3% guidance range. That said, there is no room for complacency and we are mindful of uncertainties ahead and are ready to adapt with well-prepared actions to ensure we deliver our plans if needed. Our Q1 performance demonstrates the good progress we are making towards our vision of being the leading 24/7 beverage partner, and against our 5 strategic growth pillars, this is of critical importance. I won't provide a detailed update on strategy now as we look forward to sharing more at our Capital Markets Day in Rome in 3 weeks' time. This will be a highly interactive event for those who can attend and we look forward to seeing you there. Before I close, I really want to emphasize that this strong performance is down to the continued hard work and dedication of all of our people to whom I'm very grateful. In addition, I thank all our customers, the Coca-Cola Company and other partners for their support. Ben and I are now happy to take your questions. Back to you, the operator.

[Operator Instructions] The first question is from Edward Mundy from Jefferies.

I've got one question, one follow-up. So the first is on Russia. Volumes are down 30%, which represents sequential improvement versus the second half of last year despite the quite tough comp in the first quarter. Are you able to provide a bit more color around sort of numerical distribution of your new local brands within Sparkling and also the respective price points versus the old Coke brands? And then the follow-up is really around the guidance. You've got off to a very strong start. Pricing is sticking, portfolio is in good shape. The COGS environment arguably a little bit more benign. Appreciate the first quarter is a small quarter. But what are the key uncertainties as you see it, that are holding you back from becoming more optimistic on EBIT growth at this stage?

So let me start with just brief note on Russia where -- you know very well that from August of last year, we are not producing nor selling any of the Coca-Cola company brands. And the team locally has done few extensions within the existing brands, which are performing in line with expectations. I can only say that any distribution level and the overall business is lower where we used to be with the Coca-Cola portfolio. I remind that market there is extremely dynamic with so many new entrants and things that are happening in the market. So unpredictability and the visibility of how the whole market develops is really not easy. And I think on your question on pricing, it is slightly lower than where the previous portfolio was. On the guidance thing, look, we are very pleased with the Q1 performance, which came -- which did come even better than we expected. We are very mindful of the fact that, as you said, Ed, yes, it is the smallest quarter. We all know that. We genuinely think it's early in the year. And given the continued macroeconomic environment, which is really not easy, we do see that in the markets that we already recognized in Q4 of last year where we do see some signs of consumer pressure and we called out those markets, that we really need to be mindful how the consumer will react with a rollover of the last year pricing and the pricing execution that we are doing in Q1 and the beginning of Q2. So it's still so much ahead of us. We are only entering into the pre-season and season. So we are just very mindful that there is so much still to digest. And therefore, we really think that at this point, what we are guiding for is very real and prudent.

The next question is from Sanjeet Aujla from Credit Suisse.

A couple from me. Can you talk a little bit about the competitive landscape on pricing across your major markets? There's a lot of pricing coming in. I appreciate there's a big mix component as well, but would love to get your thoughts on how competitors are responding to that? And secondly, just on some of your emerging markets, in particular, in Nigeria, Egypt, where there was a lot of caution I think, going into '23. Just love to get your assessment of how volumes have evolved there relative to your expectations, particularly given some external shocks there, particularly in Nigeria recently?

On the competitive part, I would say that the whole pricing competitive landscape is broadly rational. There are a number of markets where it's good to see that we are all aligned in the way our pricing happens. Then there are a few markets where we are somewhat ahead of the competition, but also there are a couple of markets where we've seen that competitors have been doing faster and moves over a bigger magnitude. So that all fits very well into our continuous reading, who does what and how the landscape evolves. And based on that, I'm very pleased that the team has this very agile approach of adjusting the plans based on the consumer elasticities, but very much also back to your question, what competition does, always making sure that we are not significantly over the range, but also that we are not under the range, not leaving money on the table. On the emerging -- on Nigeria and Egypt, first of all, I would highlight that, knowing that both countries are having quite challenging macroenvironment and the whole setup, but both markets have performed in line with the expectations. That means that we have factored in that volume will be under the pressure both in Q1 and we are foreseeing that also for the next quarter or 2. We have confidence how in Egypt, the team has been handling and really very fast doing so many things last year when the whole devaluation as well as inflation has happened and the market started this year quite well. And also in Nigeria, in spite of the fact that the whole country has dealt with flavor of the elections this time, bank notes, the team has done a very strong job leveraging on the so well-built capabilities there to sail through the Q1. And we do see that from end of March into the April, there is -- while there is still negative volume, but we do see some positive trends happening there. So on volume front, to conclude, yes, we know that this is going to be under pressure. But in both countries, we are very mindful that this is the time where price mix is the leading priority in the way we generate revenue.

And if I could just sneak another one in quickly, just on the phasing of the profit growth between H1 and H2. I guess, given the strong start in Q1 and the level of pricing that in, is there anything you'd be able to call out on how we should think about H1, H2 phasing on profit growth?

Let me take that one. We've said that Coke's [ headwinds ] -- expectations for this year are likely to be weighted to half 1 with the potential for some easing in the second half. Also, if we think about comparative half 1, is tougher, given how we delivered last year. So therefore, all of that taken in is sensible to think that organic EBIT growth should be weighted a bit more to the second half.

The next question is from Mitch Collett from Deutsche Bank.

I'd like to go back to those markets where you're seeing some impact of a tough consumer, and having -- through the statement, it sounds like markets you're seeing that are Hungary, Nigeria and Egypt. Could you comment on what's driving the headwinds within those markets? Are there countries that I've missed? And is it getting better or worse? And then my follow-up would be, can you perhaps comment on what you'd expect for COGS in 2024 based on current spot? I appreciate it's early, but really interested to hear what you'll [ be able to ] say.

I'll start with the first one and then Ben will take the second one. So in my answer to Sanjeet, I highlighted that Egypt and Nigeria for -- very evident quite strong macro challenges that countries are at the moment going through. And so knowing that consumer is not as resilient as European one, that's why this is what drives that dynamic in those 2 markets. In Europe, we called out before Hungary and Romania. And apart from the inflation that puts pressure on the consumer, those 2 markets also have one another thing. In July, Hungary introduced a taxation on a wide range of CPG products, which then triggered additional wave of pricing not only by us, by everyone in the market, and that has put additional burden on the consumer. And it's logical that this would have the effect on the consumer and we have factored that into our plans for '23. Also in Romania, a reminder that from January 1, VAT went up by 10 percentage points. So that increased, again, the consumer prices, putting additional pressure there. So overall, we expected that there is going to be some continued softness that we do see in the market. I would call out here another market where we do see also some signs of consumer slowdown, which is Czech and Slovakia. And I'm very pleased that the team has been very flexible in adjusting our course of action based on the variety of plans that we have available. Actually, the whole new [ pack ] price architecture has been launched as we speak, which gives me huge confidence in how the country will -- how our team will manage through this in the next quarter. So those are the markets that I think are worthwhile highlighting. Ben?

All right. Mitch, from the visibility we have today, I would say that the picture is mixed for 2024. Just like this year, we have started to see some relief on key commodities, for example, aluminum and PET, but actually further inflation in sugar and sweetener. So when we look ahead also at 2024, that picture doesn't look very unchanged from where we can stand right now. That's why for us, it's absolutely vital that we remain very focused on improving price mix on hedging strategy and long-term supply contracts and continuous focus on productivity as we keep on navigating this volatile environment.

And just to clarify, unchanged means sort of flattish rather than the same level of inflation again?

Sorry, I didn't catch that, Mitch. Can you repeat?

Yes. I guess given what you said about relief on aluminum and PET, but inflation on sugar and sweeteners, does that equate to unchanged, meaning flattish? Or does it mean a similar level of inflation year-on-year?

Yes. Look, we're not providing guidance on '24 because it's a little bit early. But all in all, we would hope that commodities keep on easing.

The next question is from Andrea Pistacchi from Bank of America.

2, please. First, if I could just follow up, please, on the cost situation and in particular on sugar, if you're able to share -- explain a bit how your contracts are for sugar, how long term they are and how hedged you are for '23 and '24? And how you're really thinking about covering further with, obviously, sugar at high levels at the moment? The second question is, Zoran, on the market share development, 70 basis points value share. You're continuing to gain at -- sort of across your footprint. Are you able to share how trends are -- market share trends are developing in countries maybe where you're seeing the softer consumer environment? I think you're gaining in Nigeria, but also in your developing markets and Egypt, how market shares are there?

Let me give you a bit more color on how our hedging picture is. For 2023, we are hedged over 70% on key commodities associated with input costs and that is more skewed to half 1 and half 2. So when you think about your question on contracts, they vary by commodity and by supplier, depending on a number of factors. But generally, it is safe to say that most of our contracts tend to be long-term. As we look ahead to 2024, our hedging position now is comparable to where we were last year and we'll continue to make inroads in there as the year progresses.

Andrea, on market share, just to say that on -- well, it's a little bit of a mixed bag. And in several of the markets, we are gaining share, and in some of them, I want to highlight in line with the expectation. We are slightly losing share like in -- I can tell you, in Hungary, for example, and in Czech, in Sparkling. But we anticipated that, given that we've done planned price increases, in Czech, in Q1, we did not have yet new [ pack ] price architecture that has been rolled out now. And also, we've seen that there is kind of a pattern that at the beginning of the year, some of the competitive pressures, especially on the depth and intensity of the promotions happen, which we don't follow one-to-one. So I reiterate that the fact that in the short-term, there is potentially some market share loss that doesn't concern us as we stay the course to do the right things. And we look also on the share performance, not only on a quarterly basis but on a full year as well as even on a 2-year basis. So it's a dynamic play where we juggle all the elements of value share as well as the volume share, revenue per case volume. So everything so far, quite frankly, is in line with expectations and there has been nothing that came as a surprise.

The next question is from Simon Hales from Citi.

A couple for me then. Zoran, I wonder if you could just talk a little bit more about the performance in Russia of the Multon business in the period? Obviously, you're fully consolidating it, but I wonder what you're seeing in terms of underlying trends within that business? A bit more color there would be useful. And then secondly, you provided new updated translational FX guidance for this year. How should we think about transactional FX headwinds for 2023 now, please?