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 Third 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. At this time, all participants are in listen-only mode, there will be some prepared remarks followed by a question-and-answer session. [Operator Instructions]. I must also advise that this conference is being recorded today, Tuesday, 31st of October 2023. I now pass the floor over to one of your speakers, Mr. John Dawson. Please go ahead, sir.

Thank you, operator, and good morning, everyone. I'm here with our CEO, Zoran Bogdanovic; and our CFO, Ben Almanzar. 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, waiting for us to answer the first question before asking the other. We have about an hour for the call today, which should leave plenty of time for a good discussion. I will also 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. Thank you for your attention. And with that, I'll now turn the call over to Zoran.

Thank you, John, and good morning, everyone. Thank you for joining the call. I'm pleased to report that we have had another good quarter of sales growth with both volume growth and strong revenue per case expansion. Let me share a few highlights with you. Firstly, we continue to benefit from our focus on our strategic priority categories. Sparkling, Energy and Coffee all grew revenue strongly in the quarter, supported by a robust volume performance in all 3 categories. Secondly, I'm very encouraged that we have further increased our value share in NARTD and Sparkling, even while embedding price increases over the last 12 months. This clearly demonstrates the success of our in-market execution, the strength of our customer relationships and the strength of our brands. Our relationships with key partners are stronger than ever with successful product launches, joined-up marketing initiatives and good commercial planning. This has extended into sustainability where we have worked closely with key suppliers to introduce new packaging solutions and more on that later. Finally, with 3 strong quarters behind us, we are reiterating our guidance for 2023 of mid-teens revenue growth and organic EBIT growth of 9% to 12%. Looking further ahead, despite continued macro uncertainties, we are building an excellent foundation on which to grow as we deliver against the medium-term targets, which we shared in May. With that, let me get into the details before we take questions. Third quarter organic revenue grew by 15.3%, underpinned by volume growth of 2.2% and organic net sales revenue per case expansion of 12.9%. I'm really pleased with this performance despite tougher trading conditions in some of our markets. Our careful planning for the summer season in partnership with the Coca-Cola Company and Monster paid off. This, coupled with effective in-market execution by our teams, meant we continued to win in the marketplace as shown by further share gains. Indeed, we improved our share performance year-to-date, gaining 110 basis points of value share in NARTD and 60 basis points in Sparkling. Our revenue per case growth was largely driven by pricing actions taken over the previous 12 months to recover the high levels of cost inflation. At the same time, our revenue growth management initiatives powered by our ongoing investment in data, insights and analytics allowed us to enhance revenue per case across our markets while addressing both affordability and premiumization. In all our markets, we are offering affordable solutions. For example, smaller entry packs addressing lower discretionary spend. This is particularly true in Romania, Hungary and Czech where there is a more notable pressure on consumer disposable income. And we continue to balance affordability with successful premiumization such as offering multipacks of single service and brand. Our targeted actions also drove positive category and package mix. Category mix benefited from the increased contribution of Adult Sparkling and Energy. Package mix improved due to good activation of single-serve offerings, which drove single-serve mix up 90 basis points with improvement across all 3 segments. Overall, our revenue per case expansion in the quarter represented a slowdown from the 19% growth in the first half of the year. This was in line with expectations. And looking ahead, we expect revenue per case growth to continue to moderate as inflation eases. Turning to look at performance by category. As we said before, our strategic priority categories are less elastic and face less pressure from private label than other areas of NARTD. This is evident from the strong revenue growth and positive volume growth we achieved in all 3 of our strategic priority categories. Sparkling volumes grew by 1.5%. Highlights included an improved performance in Adult Sparkling with mid-single-digit growth driven by Established and Emerging. Coke Zero was the best-performing Trademark Coke variant, supported by a good performance of Coke Zero Sugar Zero Caffeine. Growth in energy continues to be very strong with volumes up nearly 25%. We saw good momentum across all segments, led by Monster in Established and Developing markets and Burn and Predator in Emerging markets. I would call out Egypt, where we continue to make rapid progress with our launches into the category. Coffee volumes grew 34%. The out-of-home channel remains our priority for both Costa Coffee and Caffe Vergano, and in the last quarter, we continued to recruit more outlets. Finally, in Stills, volumes grew by about 1%. Sports Drinks performed well, with volumes up high single digits. Established and Developing markets saw high single-digit and double-digit declines in Stills, respectively, weighed down by Water as we focused on the opportunities for the most profitable revenue growth in the category. On sustainability, I'm delighted to share that the pilot in Austria, I mentioned at our Investor Day in May is successfully up and running. We have launched an industry-leading cargo based alternative to plastic shrink field for 1.5 liter PET multipacks initially saving about 200 tonnes of plastic per year. We also invested $11 million in new equipment to become the first beverage company in Romania, producing recycled PET in-house. I was very pleased to be there for the opening of the rPET unit last month with the Prime Minister of Romania, government officials, partners and many other stakeholders that have supported our sustainability journey. With investment in Romania and transitions to recycled bottle portfolios in Austria, Ireland, Italy and Switzerland, we are on track to deliver almost 50% recycled PET used by the end of 2023 across our EU and Swiss market, achieving our target for these markets a year ahead of schedule. Turning briefly to performance by segment. Established markets delivered organic revenue growth of 7.7%, led by strong price/mix expansion. We benefited from pricing actions taken in all markets over the last 12 months as well as positive mix. Targeted activations of single-serve offerings drove another quarter of good package mix. Volume in the segment declined mainly due to Italy, which more than offset good volume growth in Greece. In Italy, performance was driven by ongoing declines in Water, strong comparatives and poor weather conditions. As a company deeply connected to Greece, we shared a shock and sadness felt by so many as the wildfires and floods devastated the country this summer. Our priority is always the safety of our people and the support we can provide to our customers and communities. We have therefore been staying close to all our colleagues and partners, and we remain committed to playing our part in the short- and longer-term recovery efforts. We responded too in the market carefully executing our plan for the Tourist season. We continued our momentum behind energy with double-digit growth. When I look at the category performance for the segment, I'm very encouraged with growth in Adult Sparkling and Energy on top of a strong performance in 2022. For our Developing markets, organic revenue grew by 15.9%. There was a strong contribution from price/mix. Volumes declined modestly, similar to second quarter, largely reflecting the challenging economic conditions in Hungary and Czech I previously highlighted. On a category basis, Energy delivered another strong performance as did Coffee. Stills volumes were down by double digits, led by Water category. Finally, for our Emerging markets, organic revenue grew by 21.8%. We saw a good improvement in volume growth to nearly 8%, reflecting a strong performance from Egypt and another quarter of growth in Nigeria. Key to success in both countries has been a solid performance from Trademark Coke brand and continued growth in energy, particularly in Egypt. Romania, on the other hand, continues to face a more challenging consumer environment, further impacted by higher value-added taxes from the start of the year. Overall, a strong performance from our Emerging markets. I'm both proud and grateful to see that the engagement of our employees has increased in recent employee surveys. I'd like to take the opportunity to thank all our teams for their tremendous efforts. Not only have they delivered these strong results, but they have done so while supporting many of our communities during periods of terrible weather events and natural disasters. It's their drive and determination and the strong collaboration we have with our brand partners, particularly the Coca-Cola Company that underpins the day-to-day execution of our strategic priorities and the value we create across our markets. Our commitment to delivering strong growth in 2023 and beyond is unchanged. We continue to invest behind our capabilities, and we remain well positioned for future profitable and sustainable growth. Thank you for your attention, and I will now hand back to the operator, and Ben and I will be happy to take your questions.

This is the conference operator. We will now begin the question-answer session. [Operator Instructions] The first question is from Edward Mundy from Jefferies.

First question is really around revenue per case, which has seen a really good step-up over the last couple of years. I think at the group level, you're up 18% versus prepandemic levels, and then the Established over 30%. And clearly, the proof of the pudding is you're still taking share within NARTD and Sparkling. But what I'd love to understand is sort of based on all your launching tools and what type of framework you think about to ensure that you get that right balance of affordability, how do you think about it relative to, let's say, soft drinks or relative to CPG. How do you think about ensuring that your brands still remain affordable despite the very significant expansion in revenue per case?

Thank you, Ed. Look, revenue per case, which was an absolute priority over last year and this year is derived both from pricing as well as mix. Now last year and this year, in this price/mix combination, price had a more dominant role. But I wouldn't disregard importance of mix and especially as we will go forward, where we will see a more balanced also ratio between price and mix. So that plays a role. And needless to say that there are so many levers within mix that in various territories, we are activating, whether that's on the package with various types, multipacks that we are constantly adjusting as we are flexible as we are tailoring the plans, category mix where we are focusing and also channel mix. So we constantly monitor as part of the RGM framework, competitiveness in each market, what competition does, what we need to adjust. And this is also where promotions play a critical role, either for more tactical actions or for some deeper actions where needed and for as long as it's needed. So I would say that -- so far, our RGM framework and management has really proven that it's working very well. I feel very confident about it. And I'm very pleased that we have achieved our objectives while at the same time, growing both NARTD and Sparkling share, which is a good sense check of how we are balancing all these balls that we are juggling.

And second question is really around the European consumer. I think you flagged a bunch of the markets are under a little bit of pressure. Does that represent a significant step down relative to the first half. I appreciate weather was quite a big factor during the third quarter. And I suppose the same part of that question, if we do see a more difficult environment, could you just remind us what your playbook is to make sure you continue to sort of hit your algorithm over the medium term in a tougher environment?

We do see -- on one side, we do see that consumer, let's say, the consumer power is a little bit softening, which is natural given the fact of price increases of all the players in the market across all categories. So we do see that and that there is some kind of a slowdown. We called particularly several markets where this is more visible than the others. But it's visible across Europe that the whole NARTD as well as parking categories are having a slowdown. Now that only informs how we are reacting based on the consumer sentiment, what's going on in each of the markets, and we are immediately adjusting our plans so that whether which packages we emphasize, what kind of promotions we are doing. And that's why I'm really pleased that actually even in these circumstances, we are having now 2 consecutive quarters of volume growth and especially to see that volume performance in our 3 priority categories is positive, and I'm very, very encouraged by that. And just to close on that, Ed, is to say that we are aware that because where consumer is that we have to pay more attention on affordability going forward. Therefore, we said that going forward, we will see more balanced split between price/mix and volume as we will be giving more space to the programs and initiatives that will be behind volumes, exactly for the reason where consumer at this moment is.

The next question is from Simon Hales with Citi.

So just a couple for me. Ben, maybe I could just you first just around the changes in the financial charges line, again, clearly a further improvement in the guidance this quarter, building on what you said at the Q2 stage. I'm just curious to understand what continues to drive that improvement given the backdrop we've got on the raising rates environment sort of elsewhere, is it all just interest income sort of driven? And then secondly, I just wondered whether you could just give us a bit more color about the performance of the Russian business in the period. I see in the statement, clearly, you've seen some organic growth Q3 on Q3, but I'd just be interested in a bit more color there is Zoran, if you can share that.

Very well. Thank you, Simon. So I'm going to start with the finance costs and give you some color about what's driving it and then I'll hand over to Zoran to say a few words about the Russia performance. So look, our guidance implies an improvement of EUR 15 million in finance costs, as you've seen for the full year 2023. And this is really mainly driven by the increased interest rates, as you rightly point out, which benefits our strong group cash position. And I want to underscore here and make it clear that the impact of Russia here is minimum.

Simon, let me just provide input on your second question. Really nothing new to add related to Russia versus what we've been discussing on the previous calls. Just to reiterate that, we are looking here in a quite smaller business on a 2-year stack. We are 40% down on volume even though logically versus last year, we are about for the obvious reasons as in Q3, we have transitioned from the Coca-Cola brands to -- and started with our own, but we are talking about 40% lower volume in the quarter. But everything else is the same, and nothing else new to share. Thank you.

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

Just one question on the outlook for next year. So obviously, you've reiterated your outlook for 2023. Just looking forward to 2024, which areas of the business do you foresee kind of presenting the most difficult challenges from here? And where do you expect to see the most tailwinds? And then just kind of tagged on to that, how do you expect the outlook for COGS in 2024 based on your current level of hedging?

Thank you, Matthew. Look, it's still really early for us. And we will issue and give a better color on the 2024 guidance when we give our 2023 results in February next year after we really put this year behind us, and we will have better reading of everything that's going on as we have witness of how much is really going on. And I'll just say that despite the ongoing macro challenges, we are confident in setting a strong platform in '23 from which we will build on from 2024. And we regard all our segments as playgrounds of driving growth. So we'll give more color in February if you can appreciate that. Thank you.

The next question is from Fintan Ryan from Goodbody.