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

Good afternoon, everyone. I'm Mitch Collett from Deutsche Bank's consumer staples team, and I'm delighted to be joined by Zoran Bogdanovic, Chief Executive Officer of Coca-Cola Hellenic. And I think he's going to give us a few slides before we go into the Q&A with Zoran and also the CFO. Thank you.

Good afternoon, everyone. Thank you for joining and coming for this short session. Just before we start with Mitch, I'll just share a few introductory remarks using the opportunity and say that, 2 weeks ago, actually, we held our Investor Day in Rome, where we provided a detailed update on our company and the strategy that we've been pursuing over the last couple of years, actually, since our last Capital Markets Day, which was in June '19. We introduced also our guests that have joined us to a great number, our senior management who shared their ambitions and what they are working behind the areas where we are investing our resources and monetary funds. We also updated our midterm targets, and today, I will just briefly touch on some of those takeaways. And through that, hopefully, demonstrate the confidence we have about the future and our growth. Coca-Cola HBC is a unique business with a strong mix of 29 different markets spread across Europe and Africa. Since '19, through 4 challenging years of the global pandemic, high level of inflation, war in Ukraine, we have delivered revenue growth of 7%, underpinned by solid volume growth. Despite the high level of inflation in costs, we have also held our margins, delivering 7% EBIT growth and improved our returns on invested capital to over 14%. We have also acquired a range of attractive bolt-ons that strengthen our portfolio and acquired an integrated Coca-Cola bottler in Egypt. We are operating in a market with very exciting growth prospects across different categories, with a combined addressable market value of around EUR 100 billion across 27 of our 29 countries and with strong projected market growth of 4% to 6% for nonalcohol ready-to-drink beverages. We see significant opportunities for sustained growth. Within this growing market, we have a prioritized approach, which has been 1 of the key learnings from operating through the challenging times of the last 3 years. This is particularly true of how we have continued to develop our categories, placing the biggest focus behind sparkling, energy and coffee while making deliberate choices behind other categories for each market. The investments we continue to make in our prioritized capabilities underpin our growth ambitions and plans. Our capabilities have been enhanced with value-added tools driven by data, insights and analytics as well as digital and technology enhancements. These capabilities drive our ability to deliver personalized execution in every outlet, improving our customer experience and sustaining our position as the leading value creator. All our capabilities are fueled by talent development as our lighthouse capability. Our diversified geographic exposure provides both strong growth opportunities and resilience to the business. This is further enforced by the acquisition of Egypt. Despite short-term volatility that we are seeing, the long-term fundamentals for our Emerging segment make them very attractive, particularly given the favorable demographics and share gaining opportunities in many geographies. This combination of markets reinforces our expectation that the NARTD industry in our market should grow between 4% to 6% in the midterm and the sparkling soft drinks market, in particular, growing 5% to 6% per annum. Our growth ambition is further underpinned with the per capita consumption, growth opportunities we have across many markets including Established markets like Italy. All this comes together in a powerful organic revenue growth algorithm driven by the strong combination of market volume and value growth, share gains and the ability to combine and balance price and mix changes across all categories, packs, channels and countries. This confidence allowed us to update our financial targets for the medium term with a sustained focus on organic revenue growth but at a higher level of 6% to 7%. This is then underpinned by our commitment to improving organic EBIT margins by 20 to 40 basis points on average per annum. Return on invested capital and free cash flow will also be areas where we expect further improvements as we continue to invest in the business and drive organic growth for many years to come. Together with the strength of our portfolio, the diversity of our markets and our capabilities, we as one team in Coca-Cola HBC continue our acceleration towards our vision of being the leading 24/7 beverage partner. Thank you very much for allowing these few introductory remarks, and I guess we get now into second part.

Thank you, Zoran, and I think probably the best place to start is, is that new increased medium-term guidance. So you raised your revenue growth guidance from 5% to 6% to 6% to 7%. What gave you the confidence to make that increase?

So first of all, us -- we are playing in a very attractive industry, and let me just say a few facts. When we had Capital Markets Day in June of '19, we -- at that moment, we had estimated that our industry will have a growth around 4%. When we look back last 4 years, we see that the industry has grown 5%, and we have grown, in average, 7%. So first of all, it's the dynamic of the industry, which is excellent, and it's at a more promising level than where we've been in 2019. Secondly is that we see that our ability to do -- to execute with because of strength and capabilities that we have. And with 3 overarching priorities that we have across portfolio, sparkling, energy and coffee, that gives us additional confidence. Apart from sparkling that in itself has a very good estimates for the growth of 5% to 6%, that is very important part of our growth expectation. But we see continued strong double-digit growth in energy over last 7 years, and we expect that to continue in the years to come. And then also, we have a serious play in coffee, which you could see is a huge revenue pool, and we plan to capitalize on that. This is blended with our share gaining ambition. For us, it's imperative, an in-house mandate that we have to grow faster than the industry. So that's additional component. So all that gives us the confidence that we should step up this corridor of the growth expectation.

That's great. And how do you expect that growth to be split between volume, mix and price?

Yes. Well, certainly, more balanced than what we are seeing this and last year. Last kind of 18 to 24 months have been exceptional in terms of evident priority on price/mix. So in this algorithm from next year onwards, we see more balanced growth by both volume and price/mix. So we would see that definitely volume has to come back and price/mix in a far more moderated way. But irrespectively, price/mix will always stay an important component, how we are driving the whole revenue algorithm. And maybe to say that in that, we see all 3 segments playing a role. No segment is excluded from our growth expectation on volume, certainly not in price/mix. So we do see that the generation of volume and price/mix has to come from all 3 segments. Probably Emerging would be the leading one, but then equally Developing and Established, and Established, which I would highlight that I'm particularly pleased that, over a number of last quarters, we see very good performance in the Established segment led by Italy, by Ireland, Greece, just to name a few.

So the obvious follow-up to that is are all 3 divisions capable of delivering at the guidance growth rate. And it sounds like the mix of growth for all 3 is slightly different.

In short, yes. That's why we say that the 6% to 7% is average per year because it can happen that you have a year where we, as a whole group, might be at the lower end, but I'm pretty sure that we will have also years where we will be above that corridor. Equally, it happens with segments. Emerging markets are destined to have sometimes something -- some hiccups like this year in Nigeria with banknotes and elections and all of that. But in average, all 3 segments are of the potentiality to -- with different algorithms but to be there.

Let's move on to margins. So at the Capital Markets event, you discussed 4 drivers of margin expansion. So you've got price, mix, operating leverage and efficiencies. I guess can you talk through each of those factors and which will impact your margins the most?

Well, price and mix are having the biggest impact going forward. I mean as we've seen over the last 18 months and not to repeat myself, but price/mix plays a big role and especially mix because having so many categories in which we play, so category mix then also package mix where we continuously drive single serves, country mix also we see an opportunity as we see that, in the coming years, Nigeria and Egypt will also be evolving in that sense. Channel mix, as out of home has recovered, but out of home continuously represents for us opportunity, I would say, a stronghold that we are constantly nurturing. And I'm not -- the reason I'm not starting with any leverage or efficiencies is because this company has done, over the last decade, serious work in capturing lots of efficiencies, optimization that has been done in infrastructure since 2008 crisis and onwards. But as we continue enhancing our volume, we see that operating leverage is going to be of benefit, and efficiencies are something that, I think, has been said on one of our calls. This is an ongoing focus where every year we don't call it out separately, but every year, there is efficiency and productivity programs and initiatives that we are doing. It's part of the, for us, every day business, how we do that.

Understood. Zoran, after a strong first quarter this year, you indicated that you expect organic operating profit growth to be at the top end of your plus or minus 3% range. Can you perhaps give us some of the puts and takes for the remainder of the year? And linked to that, what would have to happen for you to deliver profit growth above the top of that range?

Yes. So in that last call, we feel very, very strong confidence that we will be at the top of that range. And that came as a result of, honestly, better than expected Q1. We've seen the trading of Q2 also started well, irrespective that in some markets we had unusually wet and cold period. Switzerland, just one example, but Italy had floods. But irrespective of that, we feel confident to be at that top level. Now what could jeopardize that we don't end up there is that if something now turns and that instead of gradual easing of the COGS or commodities that we started slightly seeing and that we expect that suddenly it flips and that there is a new increase way beyond anyone's expectation or if we would have completely unusual rainy summer across key markets, maybe that would impact. But even with that, I think that our ability to quickly adapt to protect the bottom line, I'm pretty confident with that. So with respect to your question that there can be some risks, I'm on more definitely confident side that we will be where we said.

Okay. Understood. I'm glad you brought up inputs. So can you just give us an update on what you're seeing in terms of inputs? And based on current spot rates, what would it look like for F '24 if that isn't too far ahead?

Well, I think we are primarily focused with that on this year and to really see the evidence that -- as we do, that some elements of input costs are going down, like PET and aluminum. You have on the other side the last couple of weeks and months, you've seen some increase in sugar, sweeteners. However, we have seen some good signs that some of that easing is happening. That's also blended with the fact that we are hedged with our key commodities 70%, which puts us in a good position for the year. We are not rushing with locking things for next year. We did say that still for this year, even with this easing, we are in the low teens COGS per case. But for '24, we are not rushing with locking something until hopefully this trend continues and we put ourselves in a more favorable position to do some locking for next year.

And in a situation where inputs do come off, how do you expect pricing and promotion to react?

So the question is would you roll back price? No, we wouldn't. But important element in the RGM, in revenue growth management, is the way we do promotions. There is no expectation that we keep high level of price and that we don't give value to the consumer and shopper, so for sure, the way we then evolve types of promotions, which will be a combination of clear price promotions but also value-added promotions. So promotional element would have an important role to play in this circumstance. And then that would bridge us to the element that we would be then taking as much price as the new circumstance require, not taking more but then counting more on reigniting the volume element.

Let's dive into a couple of markets. So on your slide earlier, you showed that Italy has much lower per capita consumption of nonalcoholic ready to drink and lots of very, very similar markets like Spain, for example. What is the opportunity to grow in Italy? And what are the occasions and consumers that you're targeting?

We are blessed to have a market like Italy, which is big, very established. So comparing Italy with several other Mediterranean type of countries, in our own territories with Greece, we looked as a benchmark, also Spain. So there is no reason that Italy cannot drive faster per capita versus those markets is a fact. That's a huge opportunity for Italy. And I think with more clear, more specific, more relevant types of marketing and our increasing ability in the market, like we added last year and this year 200 people, all behind out of home because we need more lungs, we need more people to be in the street to knock on the doors of customers, have better coverage. And we see the results that out of home is growing really well in Italy, so having more capacity and oxygen behind things that really matter. In Italy, everything starts with food. So key occasion is food. It's up no wonder. And as much as it sounds simple, but only last few years, the team has been really brutally disciplined in following through this. If you take into account that you have probably, on annual level, 2 billion to 3 billion pizzas in Italy, and it used to have a situation that out of 10, 1 was with Coke, so if you -- if we bring that to 2 or 3, that's tremendous growth. So increasing the incidents and increasing per capita like we've seen in the last 2 years that we are doing, that's a great sign of confidence that we should expect more. Then also the portfolio is expanding in Italy. If we look back 5, 6 years ago, Italy was practically sparkling and water. And water was not particularly interesting category because it's a very commoditized market. So it was practically sparkling. What happened since in last 5 years is that at energy, we have doubled our share, becoming a leader in retail, so from 17% to 34%. In the past, with Nestea in iced tea, we never exceeded 1% market share. We are now with 10% share in -- with Fuze tea. We started premium spirits distribution, which gives us more leverage and credibility in the out-of-home channel. And yes, these are some of the examples why, with the tangible reasons, we believe that Italy has a really promising future and growth for whole Hellenic.

Let's go to Nigeria next, which is...

Similar.

Yes. Your original market but clearly has volatility and has faced some specific challenges this year. What are you seeing? Is it improving? And when do you expect Nigeria to be, I guess, back to normal?

Just to say in Nigeria that it's a [ end plate ] emerging market, African emerging market with all the things that really don't make you bored with that market not single day. It's impossible to imagine that, 10 years in a row, there is just going to be 10 years sequentially of normal year. But important is that the trend is going in the right direction. You have few years of very good growth. Then happens 1 year. But then you continue going back up. That's what happened also this year. Nigeria, even in pandemic versus all our countries, has been performing really well and in those days, has been pulling others. Now election always gives the reason that something will happen. This year, it was banknotes that you know affected Heineken, Diageo and so many other companies. I think that we've been least affected in a way because of quick reaction and quickly switching customers to online payments. So why we are now better to respond in Nigeria is that all capabilities that we prioritize for Hellenic, Nigeria is always the first or one of the first countries where we put those, revenue growth management, data insights, analytics, route to market. It was all happening or start -- or was in the first wave. And overall, constantly growing population, not as fast as we want but continuously slowly increasing the middle class and population of people who can afford more things. So in that -- with that background, I feel confident that Nigeria remains a strong growth opportunity. It requires patience, but I can say that we -- any time there is any crisis in Nigeria, we have used it very well. Nigeria, if I tell you sometimes [ '13, '14 ] has been cost most inefficient market in Hellenic as a percent of revenue. Now it's the most efficient markets that we have. So we completely flipped to the whole infrastructure, changed optimization. There are continuous programs, like I said, for the productivity and efficiency. And today, Nigeria is a benchmark for other markets to follow in terms of the cost efficiency.

Got it. So staying in Africa, you obviously recently acquired Egypt. And in that market, you're in the unusual position of being #2. How does that change your approach? And just how big is the opportunity for you in Egypt?

It's not bad. That's -- being #2 reminds you, makes you more humble to realize that you can't be applying some of the very same things that make you successful in other markets, especially when you are #2 against a key competitor like Pepsi, who has a serious play in the country. So one thing that -- I mean, opportunities are amazing. Now how we get to exploit them? First of all, a country of 110 million people, 24 average age, not much alcohol consumption, there is a share opportunity, but that can only be realized if we increase capability levels. That has been our focus, number one, from the beginning of last year with revenue growth management, starting to do data insights, analytics and route to market. That takes time. But last year, we have already done a lot. And I think that the backdrop of the macro where inflation triple, devaluation 100%, gave us more -- gave us the background to act faster. Maybe in a normal circumstance, it would take longer to discuss to -- I think this really fast tracked a lot of changes that we have done in the market, patterns how we sell, the pricing that we had on the water, which was on an unacceptable low level. So we have almost done 100% price increase on water last year. That had a toll on volume, but so be it. We are determined not to sell something that is economically not viable. So it's better to sell less, but then you know why you are doing it. And so sparkling and water, we knew that opportunity is to start with more categories. We started a few months ago with -- in energy with Predator but called in Egypt, Fury, but it's the same thing. And now we started also with Monster. Red Bull, at the moment, is having a great ride. It's 5x more expensive in price than Coca-Cola. So opportunity for energy in Egypt is great. And so we will continue assessing what's the right next category to enter but without rushing because even with these 3, with sparkling, with energy and water, we have a lot of work to do. I'm happy that on a 2-year basis, we are gaining share. So that's part of the game plan. So I feel absolutely optimistic. I mean it would be weird to say anything else. We just bought it.

Okay. Maybe can I ask you a question on Russia? Clearly, there's been some obvious volatility. But how are you feeling about the Russian business and getting that to the right place?

Look, first of all, the situation in which we are all in with this war, it's absolutely unbelievable and unfortunate, and it's very sad. Our priority from day 1 of February of last year has been doing the right things for people in Ukraine and communities and doing the right things there. At the same time, we also are focused on protection of the assets and people in Russia. And with these both countries, we are not applying our regular performance management, strict discipline that we have because the circumstances are different. But in that context, after we have fully finished with the production and having concentrate and finished goods of the Coca-Cola Company that has fully suspended their business, so from August, we are completely on our own there. Nothing to do with the Coca-Cola Company. So we have fully rewired portfolio in Russia to be local, with local brands that have existed there for many years. They were not invention over the last year; juices, 3 brands on which then there are a couple of extensions that the team has done to ensure the economic viability of that unit, which I can say now that it's insured and that it operates in line with expectations. It's fully self-funded and fully self-sufficient in that economic sense. We are not investing and sending any money there as we said. So I would say in that new context, it's performing in line with expectations and quite well.

Okay. I've got a lot more questions, but maybe we should open up the floor and see if there are any questions from the audience. That one. Over here. You have a microphone? It's coming.

So I have a question about the outlook in terms of now you've seen some of the cost pressures start to ease. Across, the overall basket input costs have peaked, now deflating in some cases. Do you think in the retail environment, we'll see more promotions come back, buy 1 get 1 free, et cetera, which all of it is being kind of put aside as prices have been going up? Do you think we're going to be in a period where we see more competition, more promotions, maybe even less price cuts, for example?

I think yes. I think that easing of the pricing element -- sorry, of the cost element will definitely stimulate and motivate some of the players in the market to -- who only play on price. So those players who mostly play on price will be leveraging that. So we cannot be immune to that. We will be responding. And already this year in our plan, we have factored in that this will start happening. So we have planned for more types of promotions that we will already be doing this year as a way of responding. But when we respond, it's never with a debt level of depth of discounts applied in promotions like sometimes aggressive actions, so competitors can -- like they can do it. So I think it's quite realistic to expect that, yes, this will be happening, and we will be responding in a measured way.

Any more questions from the floor?

I'd be interested in hearing more about coffee. And you've been active in coffee even before Costa Coffee was bought by mother Coke. So could you talk about a little more in detail the skill and skill set and expertise you have in the organization to make you a viable competitor against the big coffee players? And maybe adding to that, if you could talk about how you see coffee profitability in margins evolving in the next few years. Are we still in the very early investment phase? Or are we nearing some harvesting period?

Excellent. Thank you for that. So there are 3 phases that we've been so far with coffee, and they are all important in how we are building the serious capability in-house to play in coffee because coffee is not just another category. It's really not like you sell sparkling and then you say, okay, let's have now iced tea. It's completely different. So we first were 3 full years with Lavazza in 5 markets, and that really gave us great education, so that the moment Coca-Cola bought Costa, for us, it was clear that we, as always a strategic partner, want to be fully aligned with the Coca-Cola portfolio. So then came second phase, which is switching from Lavazza to Costa and Costa going to all markets eventually. And then came the third phase where we went and we've seen with our own eyes in the market that if you want to be credible coffee player, you -- it's hard to play only with one brand because one brand cannot get into all consumer segments and tiers that you want to play with. So that's why we saw the opportunity with a great company in coffee, Caffe Vergnano, where we invested 30% to get us into the super premium level. So now playing in the mass premium and super premium gave us the right portfolio, which is blended now with a serious organization. We are talking now about that in all countries where we have launched coffee, which is now 18, 19 markets, we have dedicated teams behind coffee. In all markets, we have baristas who are educating our own people and customers. I mean some years ago, we could not imagine having barista. Then technical service, we started Coffee Academy for people to really gain specific and detailed knowledge about the coffee category because customers will not buy into your story if they feel that you are not educated to talk seriously about coffee. And coffee is so important for customers. Coffee, usually in out-of-home typical outlet like a bar will be usually anything around 25%, 30% of the revenue. That's huge. So you have to be credible in how you talk about coffee, you know things. So we've been doing all of that, as we are fully committed and treat coffee as a serious big bet. Now that takes time because just to show up 1 day in this category with JD, with Nestle, with all the other players. It will be so arrogant to say, well, we just showed up and now we will gain 10% share. Doesn't work like that. Coffee is a huge money pool but so many players, credible players. That's why it takes time for us to build the capability. This is a journey that will take a number of years. So to conclude, coffee for us, at the moment, is not contributive in profit and profitability. We are consciously front loading. Everything I said, it costs money in buying machines to the high percent -- as a high percent of revenue, teams that yet didn't achieve the scale, et cetera. So we are not yet there. I think last year was the rock bottom of where we were, and I see that how we are trending this year is in line expectation that we start slowly coming back up. Down the road, whether that's in 4 or 5, 6 years, I don't know, that with coffee, we have to come to the level of being at the average level of margin and then ideally to be margin contributive. That's why it requires patience not to focus on volume and chase volume and outlets just for the sake and pay whatever. It has to be a good, healthy buildup of the revenue. And I continue to be very confident about this category and that whoever might be sitting here in 10 years that we will look back and really see how we have created a profitable revenue stream that took quite some effort, but now it's a reliable revenue stream for the company.

We're almost out of time. Are there any more questions from the audience? I think I've got one more that would maybe provide a good point to wrap it up. So it seems to me that the overall Coke system is in good health. Do you think the alignment between you and Coke is as good as it's ever been? And do you think you do enough as the leading FMCG brand in all your markets to leverage that scale advantage?

You said it well. I can only confirm that I truly feel that it's on a fantastic level with substance. It's not just to say that it's a good alignment and good relationship, but it's with substance, and the proof of that are the results, how we go through pandemic, how we go through last year with all these reasons that was going on. I think that these tough situations even made us more effective, more aligned, more real focused, talks more honest mirror views, what works, what doesn't work. So I can just say that we feel like that. That's also part of the confidence why we believe that stepping up our growth expectation, it's a very important part in how we work together. Do we leverage that enough? I believe that, yes. Look, we have the widest, as we call it, 24/7 portfolio than probably any other company. We distribute a number of premium spirits brands, which we do as a leverage for out of home. But on the other side, our scale and our capability in the out of home is something that's attractive for premium spirits players that we are doing. And I can see that we are just doing more of these kind of things. Last year, as a testament of that capability and scale, we started our collaboration with Bacardi in 3 countries, which proved to be working extremely well as a great blend of our NARTD portfolio, the way we brought execution. And I see that there are more opportunities in that space for us ahead. So core always remains the core and most important element. But I think that anything that makes strategic sense to add on and leverage, yes, we will be doing that. And hopefully, you'll see that more in the future.

Okay. That's a great place to leave it. So Zoran, thank you very much for your time and insights. Thank you for coming.

Thank you, Mitch. Thank you, everyone.