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 Half Year Results. 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, 9th August 2023. I now pass the floor to one of your speakers, Mr. John Dawson. Please go ahead.

Good morning, and thank you for joining the call, and thank you, operator. In a moment, Zoran will share his highlights of the first half of the year and our strategic progress before Ben takes you through our financial performance in more detail and discusses the outlook for the balance of 2023. Zoran will then return to summarize before we open the floor to questions. We have just over an hour available for the call today, which should leave over 30 minutes for questions. We will, therefore, ask you to keep to 1 question and 1 follow-up before joining the queue again. Let me remind you that this conference call contains forward-looking statements, and these should be considered in conjunction with the cautionary statements in our slide pack and in [indiscernible] statements issued today. With that, now let me turn the call over to Zoran.

Thank you, John. Good morning, everyone, and thank you for joining the call. I'm very pleased with our strong performance in the first half of 2023, which has been achieved against a mixed backdrop. Key to our success has been our committed, passionate and engaged people who have overcome a variety of challenges guided by their outstanding sense of purpose. As a team, we are making Coca-Cola HBC a stronger business every day. Also, a very big thanks to our customers, the Coca-Cola Company, Monster Energy and all our partners for their trust and collaboration in jointly driving sustainable growth. I'd like to highlight 5 things that stand out for me over the last 6 months. First, our focused execution against clear strategic priorities and our revenue growth management capabilities have helped drive strong organic growth in both revenue and yield. We made choices to strengthen the business, including delivering price and mix improvements to offset cost inflation. For example, we are focused on the most profitable revenue growth in the Water category, leveraging our premium positions in advanced hydration, including enhanced waters and sport drinks. Second, we've seen good outcomes in our strategic priority categories of Sparkling, Energy and Coffee. We delivered robust volume and market share performance across our markets and in all 3 segments despite varying degrees of economic pressure and consumer demand. Third, our teams across all our regions were flexible and fast moving, handling a range of challenges and opportunities well. Our supply chain continues to be resilient, our hedging policy is effective and our management team adaptable. For example, our team in Nigeria navigated the country's banknote crisis in the first quarter and the currency devaluation in the second. They delivered a solid performance, growing volumes in second quarter, while executing the price and mix changes needed to offset external pressures. Fourth, sustainability continues to be embedded in our strategy, as shown by the consistent investments we have made, including a new returnable glass line in Austria. And finally, at the same time as delivering financial and sustainable performance improvements, we have continued to invest behind our strategic priority categories, our core capabilities and other targeted opportunities in the portfolio. For example, our acquisition of Finlandia and more on that later. Turning to the financial highlights of the first 6 months. Our organic revenue growth of 17.8% was very good, with solid volume performances from our priority categories, while delivering strong price/mix improvements. Better-than-expected operating leverage contributed to a strong second quarter for EBIT. As a result, our comparable EBIT in the first half was EUR 561 million, up nearly 18% on an organic basis and resulting in a margin of 11.2%. Finally, our earnings per share was up 22.3% led by strong performance throughout the P&L. Ben will take you through the drivers of this in more detail, but let me share some commercial highlights, starting with our category results. Sparkling continues to be our main growth engine, representing around 70% of group revenues. Sparkling volume grew by 1.6% overall, with growth in all 3 of our segments. Excluding Russia and Ukraine, growth in coke variance was broad-based with Coke Zero in particular, growing mid-single digits in Established and Developing markets, and we further accelerated the rollout of Coke Zero Sugar Zero Caffeine. I'm also excited about our fourth What the Fanta campaign with innovative new flavors launched in 14 countries. Adult Sparkling growth was held back by a tough consumer backdrop in several Central European markets as well as strong comparatives. However, Established markets delivered double-digit revenue growth. In particular, I would call out the good performance of Schweppes in Greece as well as the Kinley relaunch, especially in Italy. Turning to Energy. Volumes grew by over 20%. Growth was strong in each segment, but particularly Emerging with successful launches in Egypt of Monster and Fury. Established and Developing growth was led by Monster, helped by the very successful launch of Monster Lewis Hamilton Zero Sugar, now present in the majority of BUs in Europe. Volume growth in Coffee was very strong, 22%, with excellent results in the Established and Developing segments. We are continuing our journey to scale and invest in Coffee. With the Costa Coffee and Caffe Vergnano brands, we have a segmented portfolio approach that allows us to cover multiple price tiers, from mass premium to super premium. This has driven good progress on out-of-home customer recruitment, and we are now reaching 10,200 outlets at the end of the half, up from 8,000 at the end of last year. Finally, for our categories, Stills performance was mixed. Water was impacted by our deliberate focus on more profitable revenue growth. As a result, while we grew revenue in single-serve packs, volumes of Water were down 14%, with the biggest drop in the at-home multi-serve offering. Elsewhere in Stills, sport drinks performed well with volumes growing mid- to high single digits in our Established and Developing segments. Juices were down with declines in Developing and Emerging, more than offsetting positive growth in our Established markets. Premium Spirits, volumes were strongly ahead. Turning to sustainability. I'm pleased we have been rated AAA by MSCI for the ninth consecutive year as we continue to deliver on our mission 2025 and NetZeroby40 goals. In particular, we made good progress with sustainable packaging and coolers. To increase the range and capacity for returnable glass bottles, we've installed a new line at our factory in Edelstal, Austria, which has been in commercial production since May. I visited the plant last month and saw the line in operation, processing a new returnable and resealable 400 ml bottle as well as our current 1-liter universal bottle. It's impressive what the teams are delivering at this state-of-the-art facility. I'm also really pleased to share that at the end of June, we exceeded our target of 50% energy-efficient coolers by 2025. And together with the Coca-Cola Company, and 7 other bottling partners, we recently committed $50 million to a new venture capital fund. At nearly $140 million, the fund will focus on innovative solutions to drive carbon footprint reduction, supporting our goal to be net zero by 2040. Let me now share a few reflections on some market and strategic developments. As I touched on earlier, one of the highlights for me in the first half has been the consistent growth performance across our 3 segments. Each of our segments delivered double-digit organic growth in both revenue and profit. There are, of course, many moving parts behind this outcome, and then we'll discuss these in a moment, but it just shows the flexibility and strength of our local management teams. How they are able to use our prioritized capabilities and they are experienced to manage through changing market and consumer conditions. This consistent and strong performance has been achieved despite mixed market conditions and demonstrates the strength of our categories, our portfolio of brands, our disciplined focus on execution and the capabilities we deploy to adapt to win. NARTD and Sparkling industry revenues grew in the first half of the year, and we are gaining share in NARTD, both versus branded and private label. But we are not without challenges in our markets. As I have said to you in previous calls, we do have some countries with persistently high inflation, including Czech, Hungary and Romania, where we have seen changes in consumer behavior and more demand for affordable options. The post-pandemic boost I talked about last year, which propelled a very strong out-of-home performance, has moderated somewhat. There have been also significant macro challenges in Nigeria and Egypt, related mainly to inflation and currency devaluation. In every market, we apply our well-developed revenue growth management capabilities to address both affordability and premiumization, helped by the strength of our brand. For example, we developed new PET formats in Czech, Slovakia and Romania, focusing on smaller multi-serve entry packs to address affordability. We continue to be vigilant, watching out for changes in consumer behavior. However, we remain cautiously optimistic about market conditions going forward. The signs are that in key markets, demand for our core portfolio is remaining robust and the price increases we have delivered in the first half have had a better-than-expected impact on volume elasticities to date. Our investments in data insight analytics have helped underpin this performance. Every year, we deploy significant spend behind promotions to stay competitive in the market, to be the preferred partner for our customers and the first choice for our consumers. We aim to drive higher volume uplift and better return for every euro invested. Supported by data and advanced analytics algorithms, we can now quantify the true incremental value of promotions at the most granular level, incorporating a holistic view that considers the impact of forward buying, competition and cannibalization. The consequence of this is that in the first half of the year, we've been able to target promotional spend at specific points of maximum impact managing dynamically the necessity to support our price increases and balance those with affordability and volume elasticity. The benefit can be seen in our improved profitability and margin. Turning briefly to M&A. The acquisition of Finlandia Vodka presents a unique opportunity for us to acquire an excellent brand we worked for 17 years. Over 60% of Finlandia total sales are in our geographies, but we only distribute a smaller proportion. This will strengthen our offering to key customers in the HoReCa channel in those markets, growing our revenue as we leverage its proven mixability with our core NARTD portfolio. Poland is a good example where Finlandia is one of the company's top vodka brand, a must have for many of our target HoReCa customers and yes, it's not part of our offering. Bringing Finlandia into our family gives us the chance to leverage reputation and position of this consumer-relevant product and strengthen our business in the country. At our recent Investor Day in Rome, we showcased our team and share important developments as a critical foundation for our medium-term growth. Our markets have exciting growth prospects with a combined addressable market value of around EUR 100 billion and projected growth of 4% to 6% per annum. We unpacked how the pillars of our growth strategy are delivering results, how we are activating our unique 24/7 portfolio, winning in the marketplace, working in strong customer partnerships and investing to fuel growth. All of this underpins our updated midterm guidance of organic revenue growth of 6% to 7% on average per year from 2024, ahead of our previous guidance and ahead of the industry. We confirm confident in our ability to grow EBIT faster than revenue and our expectation to grow organic EBIT margins in the range of 20 to 40 basis points on average per year. We are a stronger business. We are delivering a stronger 2023, and we are well positioned for sustainable, profitable growth into the medium term. Let me now pass over to Ben to take you through the half year financials in more detail.

Thank you, Zoran, and good morning, everyone. Another strong set of results building on the Q1 momentum. We delivered consistent top line growth with organic revenues up 17.8% and organic revenue per case of 19%. Pricing was the main contributor to revenue per case accounting for more than 80% of the improvement in the period. The rents came to mixed levers led by package and categories. Volumes were marginally down 1% on an organic basis with our strategic priorities, the best-performing categories, as Zoran mentioned. Gross profit increased by 22.6%, leading to a 90 basis point improvement of gross profit margins. I am pleased to see these results even as we continue to wrestle with still elevated inflationary pressures resulting in COGS per unit case up by 13.1%. We are proud to have delivered the highest half year comparable EBIT in CCH history, reaching EUR 561 million and up 17.7% on an organic basis, supported by a strong Q2 performance. Comparable EBIT margins were 11.2%, unchanged on organic basis. We benefited from strong operating leverage, thanks to double-digit top line growth and hedging strategy, which offset into cost pressures and increased operating expenses in the period. Turning now to the drivers of performance on a segmental basis. In the Established segment, organic revenues grew by 16.9%. We saw strong revenue per case expansion of 16.7%. We benefited from price increases in all markets through the period as well as improvements in category and package mix. Single-Serve Mix increased 3.8 percentage points. And our Premium Glass Portfolio grew high single digits in the period. Volume in Established markets was broadly in line with last year. We delivered good growth in Sparkling, Energy and Coffee, which was offset by declines in Stills, mainly Water. Ireland and Greece closed with very good volume performance in the first half. In Ireland, we saw strong growth in Sparkling, led by Coke Zero and an impressive result in Energy, the second best in the group. In Greece, our decision for early activations for the summer season is paying off, with volumes up high single digits in the first half despite cycling tough comparatives. For the segment, organic EBIT grew 20.8% and organic EBIT margins were up 30 basis points with pricing mix more than offsetting higher COGS. Organic revenue grew 23.6% in the Developing segment. This was driven by improved organic sales per unit case, thanks to pricing initiatives. Category impacts and package mix were also positive, the latter helped by improvements in Single-Serve Mix. Volume growth in Sparkling and Energy was offset by decline in Stills. Coffee continued strong momentum, growing mid-30s. During the second quarter, we also successfully launched Jack and Coke in Poland, Hungary and by the way, in Ireland in Established. Performance to date has been ahead of expectations. I want to call out Poland, which continued to deliver a good volume trajectory in the second quarter and sustained share gains. Low/no sugar variants retained a strong momentum with volumes by low 20s. Organic EBIT increased by 27.2%. Comparable EBIT margins improved by 20 basis points on organic basis with better price/mix actions, covering inflationary pressures for countries in the segment. In the Emerging segment, organic revenue grew 16%, with NSR per case increasing by 17.7% on an organic basis. This was driven mainly by pricing initiatives in our markets to proactively manage currency devaluations and mitigate cost inflation. Organic volumes were down 1.4% mainly affected by the decline in Stills. Sparkling grew by low single digits and Energy grew almost 30%. In Nigeria, the challenges with the shortage of banknotes have normalized. Our strong execution in the market delivered volume growth in the second quarter and share gains for the period, all under the umbrella of carefully considered RGM initiatives. In EBIT, we are expanding the Energy portfolio with the launch of the Monster brand in May, following the successful introduction of Fury at the end of 2022. We have continued deploying key RGM capabilities in the market, helping us to drive revenue per case. Serbia and Bulgaria delivered very good performance for the period, backed by share gains in Non-alcoholic Ready-to-drink. Emerging segment comparable EBIT increased by 13.9% on an organic basis. Organic comparable EBIT margins were down by 20 basis points as a result of adverse transactional FX impact, mainly for the Nigerian naira and Egyptian pound. Further down the P&L, we delivered comparable EPS growth of 22.3%. Net finance costs were down 26.5% as we secure higher interest income from increased interest rates. We now expect improvements in net finance costs with full year 2023 in the range of EUR 65 million to EUR 75 million. Our comparable tax rate of 27% was at the higher end of our guided range due mainly to country mix. We expect our tax rate to be around that level for the full year. CapEx as a percentage of revenue was below our guidance range in half 1 and EUR 39 million higher than in 2022. We expect an increase in the second half as we accelerate investments in our strategic priorities and capabilities. This includes deploying capital behind capacity expansions in growth markets, placing more energy-efficient connected coolers to drive Single-Serve Mix and investing towards our sustainability commitments. We expect full year CapEx as a percentage of revenues to remain within our guided range of 6.5% to 7.5%. Free cash flow for the period was down EUR 76 million versus prior year, mainly due to working capital facing as well as increased capital expenditure. Our balance sheet remains a source of strength for the business. We have significant firepower for all our capital allocation priorities, including organic investments and M&A. The unique opportunity to acquire the Finlandia Vodka brand which is expected to be completed in Q4 2023 and the increased CapEx to enable the growth of the future are recent examples of our continued investments in attractive value-enhancing opportunities. We are maintaining our progressive dividend policy. In June, we paid a dividend of approximately EUR 290 million, a payout ratio of 46%. With these considerations in mind, we expect to see net debt-to-EBITDA in the lower end of the 1.5 to 2x targeted range by year-end. Turning to the outlook. We delivered strong top line growth in the first half of the year and now expect mid-teens organic revenue growth for the full year. We expect to continue to benefit from our pricing actions and retain our focus on mix improvements. We have seen some moderation in input cost pressures, which means that we now expect cost per unit case to increase by high single digits for 2023 as a whole. As a result, we reiterate the upgraded guidance we provided early in July of organic EBIT growth for the year of 9% to 12%. We have high confidence in the strength of our business, our growth portfolio led by the exceptional Coca-Cola brands and underlying growth in our categories to achieve those results despite mixed market conditions. With that, I'll hand back to Zoran.

Thanks, Ben. To summarize, we are executing on our strategy, focusing on our priorities and have delivered strong organic growth of both revenue and EBIT in the first half. We remain cautiously positive about market conditions going forward. And we have an even stronger platform of which to grow revenues, margins and returns from 2024 onwards. Our people remain at the center of what we do, and it is their passion and dedication with the commitment and trust of our partners that enables us to keep delivering for our customers and consumers. Thank you for your attention, and we'll now hand you back to the operator for questions.

[Operator Instructions] At this time. The first question is from Mitch Collett of Deutsche Bank.

I've got 1 question, please. Your guidance, which you updated a month ago clearly implies a lower level of organic EBIT growth in the second half. But presumably, input costs are better in the second half than the first half. And you have a much easier comparator in terms of the performance of your Russia business. So perhaps could you give us some of the puts and takes as to why the second half profit growth is expected currently to be lower than the level of profit growth in the first half.

Thank you, Mitch. Yes, let me give you a bit more color about what's happening in that second half guidance. Obviously, you've seen that we've delivered a strong first half with organic EBIT growth of 18%, led by good execution of price increases and a resilient volume performance across our markets. And you are right that our guidance implies a slowdown in EBIT growth in the second half. Well, we are expecting to see some moderation of the revenue growth driven by price mix. While COGS inflation is subsiding, we're still growing on a very high COGS base from half 2 2022, reflecting a more significant transactional FX headwinds in the second half. Also, we expect the lower contribution of EBIT on Russian half 2, which means that there's a big swing between half 1 and half 2.

The next question is from Sanjeet Aujla of Credit Suisse.

Just following up on that outlook comment. Can you give us a sense of how significant Russia is from a profit contribution perspective in H1. And a little bit more context around the moving parts between H2 and H1 there would be really helpful then. What's driving that big swing in H2 versus H1 profitability in Russia? That's my first question.

So look, Russia's contribution to absolute half year EBIT is slightly higher than 2022, but this is due to the consolidation of Multon. You remember that we have a full 6 months this year coming in. One thing that I want to stress is that Russia will not drive our half 1 organic EBIT performance and a subsequent full year upgrade in July. Actually, if I look at the organic EBIT growth of the group excluding Russia, it would have been quite a bit higher. So from today's visibility, what we expect is a lower EBIT contribution from Russia for the full year.

Got it. And is there anything in particular that's driving that second half swing in contribution then?

Sanjeet, if you remember last year, there was -- currency was in a different place. There was a number of one-offs, a lot of pricing and so on. And those conditions have changed this year.

Got it. And my second question is just to contextualize a little bit more the mixed market environment, Zoran, you were talking about. I think in the past, you've called out some signs of weaker consumer behavior in Czech, Hungary and Romania. Are there any other markets you'd add to that list throughout Q2 where volumes are becoming a little bit more of a concern? And on the flip side, any markets where you're seeing more consumer resilience than perhaps you expected a few months ago?

So the markets you mentioned are the ones, especially, we see that inflation levels persist on higher level plus in Hungary and Romania. I need to remind, we had either VAT or excise tax increase, which just kind of has added the cream on the cake. But then apart from these markets, we did see in the first half more challenged behavior in Egypt of consumers because the food inflation level is on a very high level there. But also with the things that the team is doing in how dynamically we adjust the plans. I'm really encouraged with the last month's performance in Egypt. And then, look, I just want to say that there are a few markets where when you see the volume performance, it's actually the underlying thing is not as volume indicates because in few markets, we have made a conscious choice that we focus on the price mix in Water segment. We focus on more premium segments of the Water and focused on Single-Serve, as I had in my remarks. If you strip out Water just for temporary case, actually, several markets would be in the positive and would not be in the negative volume. And then, yes, there are several markets on the flip side that like, as Ben talked in his remarks, Greece, Ireland, Serbia, Bulgaria have performed quite well. And let me highlight here the last 3 months, very, very encouraging trend and performance of Nigeria. But I can just pause there to see if you have anything further that interest you.

Yes. I just look to pick up in the Nigeria comments, particularly when most of the consumer companies are talking about a much tougher consumer backdrop. Just to get a bit more color on that return to volume growth and perhaps what you think of the second half.

Yes. Look, I really think that this performance and the way we manage through Q1 and Q2 really comes as a consequence of something that has been done earlier. The fact that we really consistently invest and significantly in Nigeria to build our capability. Nigeria is always our lead market whenever we start with our prioritized capabilities, whether it's 2017 with revenue growth management, then what was a significant reshape of route to market, then was data insight analytics. So all that has enabled the ability of team to react quickly in Q1 when we have banknotes. I mean I can't comment how other companies have managed through that. But I was really, really pleased to see how the team quickly reacted. And this is where route to market and proximity to customers have helped a lot. Our ability to switch them to online has helped us. Then also in Q2 when devaluation happened, this is where, again, you see the effect of our revenue growth management because there is a constant monitoring of what's happening in the market on consumer sentiment, elasticities by region, by category. So team has quickly adjusted the plan and that was also blended with really consumer-relevant marketing plans that are really touching the hearts of consumers, and it plays a role. So in bottom line of that in a country as important as Nigeria is for us, we've seen as soon as the banknotes crisis normalized, Nigeria has delivered very good performance in May, June, and that trend has continued also now in July. So that gives us cautious optimism for the rest of the year of what we expect from Nigeria.

The next question is from Simon Hales of Citi.

So a couple for me then. And maybe just sort of following up on Sanjeet's earlier question around for the market performance. I wonder if you could just talk a little bit more about the trading you're seeing into Q3, maybe particularly in Established markets in July. I'm just sort of obviously very conscious of the mixed weather we've seen across Europe over the last sort of 1.5 months as well as potential disruption you might be seeing in your business in Greece given the wildfires that we've seen there. So that's the first one. And then secondly, on the changes to some of the below-the-line sort of guidance that you highlighted sort of, Ben, in the presentation. Can you explain some of the drivers behind particularly that improving sort of finance cost line, clearly a much bigger interest income sort of coming in then sort of you and we originally expected. Is that being driven by interest income really on the trapped EUR 250 million of cash in Russia, and that's being higher than you thought or be more broad-based. And with regards to the tax increase for the full year, you highlighted geographic mix. Does that include also potentially the higher windfall profit tax now in Russia on foreign company earnings that was announced earlier this week.

Simon, that's a good lineup of a couple of questions. So I'll start and then Ben will be very pleased to answer the other ones. So in July, July trading was really in line with expectations and in line with the guidance that we have provided and how we see the year going on. You said very well that we've seen really a mixed bag of unexpected weather impact as we also could see on the news. And look, that did have certainly some impact because Italy, Slovenia, Croatia, Hungary, Serbia have had really issues with incredible rainfalls and floods. At the same time, we've seen those horrifying scenes of wildfires in Greece. So it did for sure, in those areas, it impacts, because then when this happens, it's not about performance. It's about really doing the right thing for our employees, helping anyone we can. That becomes priority and that's the purpose of what we do there. And so it has been in line with expectations. What we've seen also that what I made as comments for the first 6 half, we continued our strategy execution in terms of focus on the price mix, the same effect on the Water. But bottom line is that overall, but also in Established segment, the performance has been really in line with expectations.

All right. So on your first question related to the improved finance cost. But look, most of our debt structure is in fixed rates. What that means is that the increase in interest rates don't materially affect our finance costs in the near term. On the other hand, that increasing rates do provide us with higher interest income from our deposits. And that's really the main driver of our final cost decline when you look at the half year 2023 versus last year, and also for the updated guidance for the full year. Addressing specifically your question on Russia. If you've been following the market, you'll see that interest rates actually are coming down there rather than up. So your second question was about the tax rate. And why are we guiding towards the top end? And I remind you that our group's effective tax rate varies depending on the mix of taxable profits that we have by territory, also other items like nondeductibility of certain expenses, nontaxable income, other one tax -- one-off tax items that happened across the different countries. And I would also like to remind you that our half ETR of 27% is actually consistent to where we finished 2022. So that's where we expect the year 2023 to remain based on the visibility that we have today. We've incorporated everything we know so far. And over the midterm, we expect that to return to our 25% to 27% guidance.

That's really helpful. And can I just check then. I mean you said in your prepared remarks that overall, you expect Russia for the full year to be a smaller percentage of group EBIT than it was in 2022. Is that comment also through at the net profit level, when you take account of some of the -- further down the P&L impact you'll see from the trapped cash in Russia on finance line, et cetera?

Indeed, because remember the bigger driver of the bottom line is there's going to be EBIT as well. So yes, it's applicable.

The next question is from Edward Mundy of Jefferies.

Appreciate you showcase to the Capital Market event, your revenue growth toolkit, that's getting increasingly sophisticated. And it gives you a lot of insights in analytics to think about affordability and premiumization. As you think about 2024, and given this sort of focus on joint value creation plans for your big customers, what's your level of confidence in ability to not just hang on to price taken over the last couple of years, but continue to grow revenue per case into next year? And as part of that same question, could you perhaps talk about the outlook for COGS inflation given it's moderating into the second half of the year, also for 2024.

Look, we talked almost on every call about revenue growth management as a critical capability, and it is because through everything that we've been going through the last couple of years and whatever will be ahead of us, we really find the revenue growth management as a foundational capability which I feel even more confident in the last 2 years exactly because we see the value when it's enabled and supported by data insights and analytics because it really gives us opportunity to play at a different level, granularity of so many parameters that we now take into account and all that comes into play because the segmentation is really in the very heart of what we do. Not only that it's every country has its own dynamics, but the beauty of this is that this really gives us the ability to play a unique game and algorithm within the country, whether that region, that's a category, follow the elasticities of categories and packages. So this really gives me a very strong confidence that as we go forward, we only get, I dare to say, better and smarter and this is the process with like even example of promo effectiveness. The more we do it, the more we learn, the more we are capable to really make the improvements. Evidence of that is the fact that also in the first 6 months of this year, we've had a better promo effectiveness play than we even anticipated and that was one of the drivers of our better profitability and overall result. So we are getting really excellent insights which are helping us in our constantly adjusted plans. That's why even though next year, the pricing is not going to be at the levels probably with the visibility we have with what we have experienced at the beginning of this year and last year. But revenue growth management is far more than just price. It is about price. It is about promotions. It is about mix. So all that will play a role. And in our future algorithm, price mix will remain, and I'm confident that it remains a driver of how we will generate revenue.

On your second question about 2024 COGS per case. As you know, it's a bit early for us to talk about 2024 and provide guidance. We'll do it under the full year results as usual. But what I can share now is that we certainly don't foresee the same level of inflation that we've seen recently in [ '22 and '23 ]. Obviously, we're not assuming that we'll go back to 2021 levels, but we should see some benefits in terms of leasing of commodities and energy prices. And perhaps the exception there is sugar. It's the key, main commodity where we're seeing big increases this year, and we can expect some more pressure next year as well. As you can imagine, we have some hedges in place, and we'll continue to looking for the right opportunities to increase the coverage. The last thing to highlight as you think about 2024, is that you remember a concentrate represents about 1/3 of our COGS. And with that excellent top line delivery and pricing work that we have been doing over the past 18 months, then concentrate costs are expected to increase proportionately. So it's very important, we continue to focus on improving price mix, as Zoran rightfully said, continue driving our hedging strategy and long-term supply contracts and the focus on productivity as those key levers to help us navigate the 2024 COGS environment.

And as my follow-up, really, on the Energy category, which is 6% of your volumes. They're still growing 20% or so. And I know it's been a lot of growth in the last 4 or 5 years. How do you think about the opportunities to continue to broaden distribution and expand the range there?

Well, look, we've been continuously doing exactly that, and that's been the driver of growth. I think we, like no one else, play in the Energy category with stratified brands, in most cases, 2; sometimes even 3 brands and really expanding number of occasions. Distribution is constantly increasing, number of coolers is constantly increasing because we know that in this category, round about 60-plus percent is all coming from impulse and spontaneous purchase. So there is a constant recruitment of new consumers and innovation plays continuously role. We see that very well. And the beauty of that is that while innovation plays a big role, there is also a foundational flavor of a green Monster, which now will come also with 0 sugar. So that's, again, innovation of reformulation happening in Energy as we see also in the Sparkling. So all that really gives us really strong confidence how Energy is continue to perform and best estimate of that is these last 7 years of very strong performance and our plans are very, very robust. And -- long story short, I really, really believe that we will continue seeing strong performance there.

The next question is from Mandeep Sangha of Barclays.

My first one very much related to sort of the cost phasing instead of second half. You sort of mentioned that obviously, the second half revenue growth will slow down as sort of price mix normalizes. You've obviously spoken about sort of cost inflation at the COGS line item into the second half. How should we think about OpEx savings? It certainly stepped up in the first half, about 14% per unit case. Is that anything we should be aware of in terms of phasing between 1H and 2H or do you feel like OpEx per unit case level is probably a good place to be for the second half also? That's my first question.

All right. So look, when we think about OpEx, we take a very disciplined approach. That said, you've seen that 30 bps of a percentage of sales that we deliver in the increase in the first half. And this has to do with our continuous investment to further enhance our in-market execution with our customers as well as some phasing to half 1 of our OpEx spending. We also increased marketing strongly in half 1 to give you -- Zoran mentioned some of the examples in his prepared remarks, for Fanta, WTF, which is being deployed in around 14 markets. There's also the introduction or further acceleration of Coca-Cola Zero Sugar and Zero Caffeine as well. As Zoran mentioned, Energy is a very important category for us to continue to drive marketing support behind. Naturally, we're investing in Coffee in preparation for the summer season, particularly in the out-of-home channel. So for half 2, we expect to continue to invest in marketing. But we're also mindful of some of the comparatives from last year. We'll continue to be disciplined in OpEx and the idea is that we should see an improvement as the year progresses.

Absolutely. That's great. And then I guess my follow-on question really relates to Nigeria. As you pointed out in the slides, there was a sequential -- strong sequential improvement in 2Q and obviously returning to positive growth. Are you confident there that the sort of the worst of the market is now behind us potentially? And if we look at the second half of the year, you do have more favorable comps. Is there anything that maybe you should call out on a more cautious note? Or do you think that the momentum we see in Nigeria in the second quarter can certainly continue over the next half?

Yes, Mandeep. So look, with visibility we have elections behind us banknotes topic is out. Look, we see -- we are monitoring to see with the new President, how some of the new policies are panning out. We've seen devaluation, which should be seen as a positive move. But that still needs to be surrounded with a couple of more things that we hope will happen. The fact that [ fuel ] subsidies are out. Potentially, we see conversation, debate and probably something would come with a minimum wage increase in Nigeria. While this could be like a short-term cost impact to a certain degree, however, overall, that's a positive sign that consumer will be better off, and we'll be positioned to have increased consumption. So there are some signs that really some things -- some good things should start happening with policies. And therefore, as I said, I do expect that performance for the rest of the year, Nigeria will be quite positive. And you said, well, we see that we are now entering into Q3 and Q4, where we are cycling negative volumes that we had last year. So that's also something to bear in mind. So overall, as I said, I have to use this word cautiously, but certainly optimistic about Nigeria and about next year. And in line with that, we are also looking and continuing with our investments to support the growth.

The next question is from Charlie Higgs of Redburn.

My first one is on Russia and the sugar tax that was implemented there on the 1st of July. I was just wondering if you could give any early color on what the reception has been from the consumer on the ground and then also any competitor reactions have you seen any falling away? And then just was there any pre-buying in H1 to influence the numbers ahead of that sugar tax? That's my first question.

Yes. So indeed, the sugar tax has happened. It's nothing new as per say. It's a flavor of many markets. So it happened and it drove local team to do immediate price increase, as we always do. That's the way how we treat those taxes, never absorbing them. And I assume that competitors have also done the same thing. And just to say that on the market, there is nothing much different, quite dynamic and the market became quite more fragmented with many more players that have emerged. But basically, no change over there. Ben?

No, nothing to build. I think you said very well, Zoran.

And then my second one is just on the Water category and some of the [indiscernible] prioritization. How we should think about that in H2 from kind of a volume drag perspective? And where is it mainly situated in the Established region in Italy? And how we should think about that from a volume but also an improving category mix perspective?

Yes. We will stay the course with what we are doing. We see this as not just a quarter play, but it's a full year play where we deliberately focused on enhancing the value from the category. Actually, very good element to highlight there that apart from a very healthy price mix, there is an element of the price in a number of markets where we have really have not been shy to do what had to be done. But also mix plays a very important part. This year, we are having around 4 percentage points increase of the Single-Serve Mix. And that comes at the back of, I think, 3, 4 percentage points that we had last year. So we are continuously doing that while also doing more on the enhanced and advanced hydration, kind of those subcategories which are kind of leaning on to Water, like vitaminwater, which we launched few months ago in Switzerland. There is a smartwater in a couple of markets. So that's the play, and we will stay consistent for the rest of the year to executing that strategy, while building respective relevant plans for next year from this kind of a rewired base.

The next question is from Fintan Ryan of Goodbody.

Three questions from me, please. So 2 technical and maybe 1 sort of bigger picture. I'll start with the technical questions. Firstly, could you call out what specific FX transactional headwind you saw in H1 and what broadly is in your guidance for H2? And I appreciate there's a lot of moving parts, particularly in the Naira. But at this point in time, what you'd anticipate potential FX transactional headwind into 2024. That's the first question.

So 1 thing very, very important. We talk about translational effects in our guidance, and we say -- but that is EUR 50 million to EUR 60 million based on the spot rates, that's what we see for this year. When it comes to transactional effects, that's baked in into our guidance for EBIT.

And you're not calling out what is baked in within that?

No. So basically, what we do is that to help guide the market, we take all the puts and takes, including the transactional impact, which is operational because you remember, we hedge for that. It's part of how we manage our [ COGS ], et cetera, et cetera, and therefore, that's included already within our guidance of organic EBIT expansion this year of 9% to 12%.

Thanks for clarifying. My second technical question would be around free cash flow dynamics. I appreciate you call it working capital flows in the first half and CapEx increasing in the second half. Could you give us a sense of where you think full year working capital -- full year free cash flow is going to come at us and in particular as well, the regional dynamics behind us, like you called that the EUR 250 million cash stuck in Russia. How much you think that will be increasing in the second half?

Okay. So let me talk to that question about the deterioration in the first half and to what extent is a phasing issue. So what we saw is that despite the higher profitability in the first half of the year, you saw the free cash flow was lower. And that was, indeed, adversely impacted by working capital movements. And what is happening there, so we all understand is that our receivables increased with that strong NSR growth performance that we delivered in the first half of the year. Personally, I'm very reassured because there's no issue with collections. In fact, they're performing better than prior years. There are no one-off impacts quite the country. So this is really a phasing aspect of working capital, and we see that improving as the year progresses. The other thing that I mentioned also in my prepared remarks, it's also CapEx, where we continue to invest to support the growth of the business. And I expect that the free cash flow to continue to improve as the year progresses.

Great. And just my final question is a bigger picture. Within the Coffee category, you've talked about getting to 10,800 out-of-home outlets. And I think in the past, you talked about you're aspiring to a low- to mid-single digit share of Coffee category in your markets. What does that look like in terms of the ultimate number of out-of-home outlets that you'll be targeting in Coffee, about 40,000 in time, 50,000, just to sort of put that 10,800 number into context?

Thank you, Fintan. Look, as you've seen also at our Investor Day in Rome, where we featured what we are really doing with Coffee. You're seeing just for the benefit of everyone, we are really seriously allocating resources to build the capability and to strengthen our right to win. And all that is reflected through continuous outlet and customer acquisition and penetration. I can only say that I do expect that quarter-by-quarter, we are in more outlets and I'm pretty sure we will be. One caveat to say is that this is not about account and outlet acquisition at any cost. We really want to get into the right outlets from the right segments and with the right proposition, both for customer and us. And I'm happy that team is very conscious on the types of outlets we are doing and converting from obviously competitors. So I see this as a journey that has a multiyear plan. And progress so far has been, a, encouraging and b, in line with our expectations on quantity and quality. I hope that answers, Fintan.

The next question is from Alicia Forry of Investec.

Two questions from me. The first one on the cost inflation that is now moderating. Can you say whether that is broad-based across your COGS based? Or is that a few key inputs? And also, is that market-driven or due to specific actions that you yourselves have taken, hedges or some other activity? And then the second question is on Finlandia. I think the rationale is very clear in terms of strengthening the relationship with HoReCa customers. I was wondering if you could talk about the time line to full integration of that brand. I expect it would likely be shorter than we've seen with Coffee because you're already well versed with the proposition and with the brand? And also, are there any investments required to deliver on the full potential of including that brand within your portfolio? Thank you.

Let me start with your first question around the cost per case and what's driving it. So that improvement that we are signaling were to finish the year in high single-digit inflation of our cost per unit case, is driven primarily by a couple of factors. First and foremost, we saw already in half 1, a better-than-expected delivery, and we see that continuing into the second half on more favorable comps. We also have seen a relief in key commodities, like aluminum and PET. And that's starting to benefit us. We see that coming through in the P&L. We've also experienced a more normalized energy costs, which, for us, it's important, both indirectly because it affects input costs but also directly with the lower utilities. And again, particularly in the second half, we were lapping a very high energy inflation from last year. So those are the fundamental drivers, and we see that generally across the businesses.

So on Finlandia, firstly, I'm very glad to hear that you also find the rationale very clear. Now, indeed, this is different than Coffee. In Coffee, we started from scratch. Here, with Finlandia as well as with our Premium Spirits capability, we have it for 17 years. We have dedicated teams in the countries. We have dedicated Premium Spirits Academy to constantly improve the skills and knowledge for this respective category. We know this brand really well because we've been working with it already in several markets. So there are -- first of all, brand is known. There are developed toolkits. There are proven mixability programs. So we are already -- we are not in a phase where we start crawling, but we are already here in speed walking, if not running. So the moment the transaction closes, I expect Q4 of the year, next year, we press the pedal.

The next question is from Matthew Ford of BNP Paribas Exane.

Most of my questions have been answered, but just 1 for me, really. Obviously, mentioned the Finlandia acquisition. And recently, we've heard from CCP major acquisition there. What's your current thinking on kind of more large-scale M&A? And what's the kind of outlook if there are any options that are potentially on the table that you're considering?

So I mean, we just have the contract on Finlandia is still fresh. As I always say, we are very open. We are very open whatever strategically fitting can come our way. Ben highlighted that our firepower is clearly there. We always welcome and are always keen to look for sound opportunities that will support our growth. Are we looking in the background for those kind of opportunities? Yes. And I can only say that we are a growth-mindset company, looking for avenues for growth that really make strategic complementary fitting sense. And whenever those occur, we will seriously evaluate them. And if ever, valuation is good for our company and shareholders, we will go ahead. That's all I can say now.

If I can move -- the last question from Jared Dinges of JPMorgan.

Thanks for letting me sneak 1 in here at the end. I wonder if you could talk about profitability in Nigeria, actually. So it sounds like you guys are feeling much better, at least on the volume side and top line side, but I wonder if you could talk about kind of profitability outlook there. I think especially given what we've seen with the currency. Is it a market where you can sustain your margin? Or should we expect that to be kind of single digit, maybe even lower end of that on the EBIT margin side for some time?

We don't provide such data by country. The only thing I can say is that we focus constantly and are really doing work on all the levers that impact profit and profitability. That's why we talk a lot about price mix because in these days and years, that's especially critical. And for that reason, we are front-loading our capabilities, investments in Nigeria. And I also just want to say that we've done exceptional work on the cost efficiency and productivities in Nigeria over years, making it one of the absolutely most efficient market cost-wise that we have in the group. So that helps a lot.

That was the last question. Back to you for any closing remarks.

Well, thank you for all your time, questions and you're really -- your interest, we really appreciate it. Let me just conclude to say that we believe that these strong results we announced today, underline the fundamental attractiveness of the markets where we operate as well as the proven strength of our execution and capabilities. I strongly believe that we are well prepared to adopt and seize the future opportunities in our industry this year and going forward. We look forward to speaking to you all again soon, wishing you a great day. Thank you very much.

Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones. Thank you.