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 2024 Third Quarter Trading Update. We have with us Zoran Bogdanovic, Chief Executive Officer; Anastasis Stamoulis, Chief Financial Officer; and Joanna Kennedy, Head of Investor Relations. [Operator Instructions] I must also advise that this conference is being recorded today, Thursday, October 31, 2024. I now pass the floor to one of your speakers, Joanna Kennedy. Please go ahead. Thank you.

Good morning, everyone. Thank you for joining the call and a bittersweet one for me because after 7 fantastic years at CCH, today's call will be my last as Head of Investor Relations. I have learned so much in my time, perhaps most critical of all the importance of culture within business. This is a special business: ambitious dynamic, but also focused and disciplined, and it has been a privilege to tell the CCH story in the capital market. As you may know, I'm not moving on to another company, but I'm rather go to take a pause to spend more time with my recently extended family. I will miss it, not least the ongoing discussions with investors and analysts. I have a lot of thank yous, et cetera, but I will save you that for now. And instead say, for the last time, I am here with my CEO, Zoran Bogdanovic; and our CFO, Anastasis Stamoulis. We'll start with some opening remarks with Zoran and then open the floor to your questions. [Operator Instructions] We have about an hour for the call today, which will give us plenty of time for a good discussion. Finally, I must remind you that this conference call contains various forward-looking statements, and these should be considered in conjunction with the cautionary statement in our trading update this morning. And with that, I will turn the call over to Zoran.

Thank you, Joanna, and good morning, everyone. Thanks for joining the call. Before we get started, let me take a moment to thank Joanna for her dedication and huge contribution to Coca-Cola HBC over the last 7 years. During these dynamic and challenging years, to say the least, we all appreciate Joanna's professionalism, passion and care for our business and its people. We wish her all the best for the future. I'm very happy that Joanna is passing the torch to Jemima, who has been a key part of the team for the last 3 years and who most of you will already know well. Anastasis and I are really looking forward to working with Jemima in her new role when she formerly takes over from the 1st of January, and we wish her every success. Moving on to the results we published today. Let me start by calling out 3 key highlights from my perspective. First, we've achieved another quarter of strong revenue growth with good volume momentum, as well as revenue per case expansion. I'm pleased that our Q3 results build on the strength of our first half and really demonstrate how this business can deliver quality growth in a range of market conditions. Second, our ongoing investment in our bespoke capabilities is what is enabling the agile and focused execution, which is driving these results. And thirdly, we are updating our guidance to reflect the strength of our performance in the first 9 months and also the confidence we have in our portfolio and capabilities to continue to allow us to win in the marketplace. And now I'll share some detail on the Q3 performance. After which, Anastasis and I will be happy to take your questions. Organic revenue grew 13.9% and with volumes up 4%, and price/mix up 9.5%. Reported revenue grew 8.9%, even as we continue to face currency headwinds. I'm really pleased by the continued top line momentum in Q3. Volumes expanded at a consistent pace compared to Q2 despite a mixed consumer backdrop in some of our markets. And we delivered both volume and revenue growth across all 3 segments and all 3 strategic priority categories. This is a testament to the hard work and agility of our teams, suppliers and partners who work tirelessly to deliver for our customers day in, day out. Revenue per unit case has also showed continued momentum with both price and mix expansion. When it comes to pricing, we are seeing different trends across regions. In our European markets, we have moderated the level of price increases versus 2023 and early 2024, to reflect a lower level of inflation. However, in Africa, we continue to drive pricing as we navigate the currency devaluation and the inflation we have experienced this year. Our revenue growth management toolkit enhanced by data insights and analytics allows us to continue to address and adapt to the range of affordability and premiumization needs of our consumers. We have deployed a wide range of RGM initiatives so far this year, which we continue to benefit from in Q3. Let me give you just a few examples. The summer period, as you know, is a great opportunity to maximize our potential in the hotel, restaurant and cafe channel, where we have focused on driving premium glass bottles. In the at-home channel, we launched smaller premium cans of Kinley in select markets over the Q3 period. When it comes to affordability, we have remained agile with promotions and continue to see good results from our returnable glass bottles in Nigeria and Egypt. This ongoing focus on improving package mix is driving good results, with total single service mix up 60 basis points overall in the quarter. Just while we are talking about capabilities, I hope you were able to watch our Chief Operating Officer, Naya Kalogeraki, and our Head of DIA, Ruchika Sachdeva, earlier this month,when we hosted our first Bitesize investor event. This deep dive into our data insight analytics capability shared how we turn data into actionable insights. We also explored how DIA acts as a connector and accelerator of our other key capabilities underpinning our growth ambitions. We've had great feedback. So thank you. And the event is available on our website if you missed it. Now turning to performance by category. Sparkling performance remains robust with volumes up 3.9% in the quarter. Trademark Coke grew low single digits with Coke Zero ahead of this, up mid-single digits. The summer season is an important period when we work even more closely with the Coca-Cola Company capitalizing on our innovations and new launches for the first 6 months of the year, particularly in the out-of-home channel. We also benefited from new innovations launched in Q3. We launched new Coke Creations flavors, including K-Wave and Oreo, and one especially created for the Nigerian market. In September, we launched Fanta Beetlejuice in targeted markets ahead of Halloween, and we've seen good results from the Marvel activations throughout the season. These initiatives all help to drive new consumer recruitment and excitement about the portfolio. Energy momentum remains strong with volumes up 28% even on top of high comparatives. We continue to benefit from our close work with the Monster Energy team in creating a broad Energy portfolio, both in terms of price points as well as flavor and recipe innovation. Affordable Energy brands have been a particularly important part of our growth in the emerging segments. We continue to see strong growth from Predator in Nigeria, while in Egypt, the Energy category is performing ahead of our expectations despite some of the macro challenges in that market. Coffee is making excellent progress, with volumes up over 35% and with strong performances in all geographic segments. Growth of both Costa Coffee and Caffè Vergnano was driven by out-of-home segment, which is where we see the greatest long-term revenue and profit potential for the category. Still volumes grew 3.4%. Water grew mid-single digits. I'm pleased to report that Sports Drinks continue to grow strongly, up high teens. Powerade had a great summer as we leveraged the Olympics through July and August and added dedicated Powerade coolers in key markets. Moving to ESG leadership. We are continuing to make progress on packaging circularity. The recently launched deposit return schemes in Romania, Hungary and Ireland are showing good results in increasing collection rates, and we are seeing customers and consumers really embracing the schemes. Now turning to performance by segment. In Established, net sales revenue grew by 3% with continued volume growth in the segment. I'm pleased with this performance which was delivered against the backdrop of more consumer sensitivity in some markets, which we flagged at half -- H1. Italy, Austria and Switzerland are markets where we have seen signs of consumer sensitivity to pricing. And Switzerland also had very poor weather this summer. When it comes to categories, we achieved good performance in Established from Coke Zero Energy, Coffee and Sports Drinks. In Developing markets, net sales revenue grew by 12.6% and led by strong price/mix of nearly 10%. Volumes continued with a similar momentum in the first half, up 2.5%, with a good contribution from all our strategic priority categories as well as from sales in Premium Spirits. Lastly, in our Emerging markets, we delivered organic revenue growth of 24.1%. As has been the case throughout 2024, price/mix has been the main driver of our revenue growth as we have navigated the impact of currency devaluation in both Nigeria and Egypt. That said, volume growth has also been a strong contributor with growth of 5.6% in the quarter. I'm particularly pleased that despite significant volatility in individual markets, we have achieved very consistent volume growth in this segment in 2024. At this point, I'd like to call out the fire that happened at the start of the quarter in our Bambi plant in Serbia, which created significant challenges. Our team there have managed this situation with such resilience and agility, and the true focus on delivering for our customers. It's how our people pulled together at these challenging times that makes the difference, and I'm incredibly proud of the team. And now let me say a few words about our expectations for 2024. We are mindful of the challenging macroeconomic and geopolitical backdrop and a continued uncertain consumer environment in some markets. However, reflecting our strong performance and execution in the first 9 months, and our confidence that we can continue to win in the marketplace, we are updating our guidance for 2024. We now expect organic revenue growth of between 11% and 13% and organic EBIT growth of between 10% and 12%. Finally, I would like to thank all our people and partners for their ongoing support. I look forward to working together to deliver our ambitions for the year and to prepare for the years ahead. As always, it is this collaboration that allows us to drive sustainable, profitable growth, and continue to create value for all our stakeholders no matter the external backdrop. Thank you for your attention. And with that, let us now open the floor to questions.

[Operator Instructions] We will now take our first question from the line of Simon Hales.

So just a couple for me, please. Zoran, you mentioned, obviously, you've raised the guidance range there for the full year today. Obviously, the revenue growth guidance has been raised at the top end, but you haven't raised the top end of your operating profit guidance despite perhaps a lower cost to the COGS backdrop. Why haven't you raised that profit guidance? Why aren't we seeing the full drop-through to profitability or what could potentially be a better revenue picture? And then secondly, just a couple of technicals. You mentioned the impact of the fire at Bambi? How do we think about the full year impact that, that is potentially having on the business now? You gave, I think, sort of a worst-case scenario about a 200 bp headwind back at the half 1 stage. And then associated or very slightly separate to that, last week, we heard about product recall of some Coke products in Austria. How should we think about the impact that could have on your Q4 Established business?

Simon, thanks. Let me start and then Anastasis will also give some details based on your questions. First of all, let me just say, with the top line, as you see, we have done and guided for a range simply because we do see that it's a very dynamic environment across the market. First of all, I want to emphasize that I'm very pleased that because of our very strong execution and performance in the 9 months, we felt confident to upgrade the guidance. But equally, remain very mindful that there is still 2 months, very important trading season, ahead of us. And knowing that we do see some sensitivity of consumers in several markets, we simply cannot -- we certainly know how consumers might react and evolve. That's why we see this range. And let me answer the Austria question, and then Anastasis can close the loop on how this flows through together with -- connected with Bambi impact. On Austria, this is one unique case where it's a result of a technical fault, which was really an extraordinary situation. And we have acted immediately based on one consumer complaint, and reacted very fast. And the whole -- all the products, either retail, warehouse retail outlets, are blocked and pulled into their warehouses, or the product is locked in our warehouses. So while in the in the communication to the public we have talked about the total theoretical number of bottles affected, because of the nature of the incident, we are very certain that maybe only a small number of bottles might be affected, which we are going to check with the procedure that we have developed with the local authorities. And we are going to -- after the product is verified, we are going to return it back to the market, ensuring absolute full safety for our consumers. So having that in mind, we do not expect any material impact. Reminding you that Austria is 3.5% of our total group and 13% in the Established. And whatever the impact may be, it is fully embedded in our guidance. Anastasis.

Yes. As Zoran very well said, we still have 2 months to go with a critical -- with the certain volatility in the market sensitivity. You're right, we have upgraded the revenue slightly more than the EBIT. And of course, we're well aware of that. What this implies on the margins when we look at -- from the 2 extreme ends of the ranges, right? Now within our previous guidance, there were also this dynamic of the extreme of ranges, so nothing really changes from that perspective. Now that said, there are 2 elements that are impacting EBIT more than revenue. So as Zoran was highlighting, the fire of the Bambi plant and the impact of Austria as well, they have more of an EBIT impact rather than revenue impact. And they are fully covered within the guidance ranges we provided today. Now overall, we are very confident that we'll be able to execute the plan and deliver our guidance for the full year.

Our next question comes from the line of Edward Mundy.

I just want to echo, Zoran, your words of thanks to Joanna for the help over the years, and wishing you the very best for your next stage of family life. So 2 questions, please. I'll ask the first one first. Just a really big picture question, Zoran, for you. And you just sort of highlighted a relatively mixed consumer backdrop, but the business is still very resilient on volumes, price/mix, categories across the piece. But given your advanced data analytics, what gives you confidence that you're not going to get volume elasticity impact like what we're seeing across a lot of other parts of consumer staples as we go into 2025?

Look. I mean that's the whole story why we recognize that both revenue growth management and data insight analytics in combination. They serve the purpose to give us all possible insight and granularity of understanding consumers and micro segments across the market, so that we can fully adjust and tailor the -- both affordability and premiumization initiatives that we have across the market. So this is very dynamic. And as Naya likes to say, always [ form a novel ] approach that we have. So I can only say that how this works is that we have already anticipated importance of our profitability for the year. That's why this was embedded as a starting point in our business plan for the year. As we go through the year, we continuously monitor what is happening in every single market, and we are adjusting the plan. That also means that we are adjusting not only the possible intensity, but also the nature of the promotions that we are doing in the market, which play an important role. So there is a whole range of affordability initiatives. And at the moment, we all see that there is importance on that, but it's also blended with premiumization. So I cannot put my finger on how much we will be able to grow the volume. However, as we said this year, at the beginning of the year, we were -- we felt confident that we will drive and have positive volume. And I'm very pleased that we will deliver on that commitment and what we laid out at the beginning of the year. And I have the same feeling for the next year, that we are aiming for the positive volume situation.

And my follow-up is really around Energy and also Spirits. We're seeing quite a big slowdown in the U.S. Energy category, but there's no slowdown at all in your business. Is it just lower levels of penetration? Is it the relative affordability and some of your more affordable brands that's leading to that difference? And then on Spirits, perhaps any learnings from the Finlandia deal and your broader Spirits portfolio, how easy has it being to integrate these into the business? And what benefits have you managed to get from a commercial standpoint from having Spirits alongside your other parts of the portfolio?

Yes. Yes, we are touching on 2 important parts of our total 24/7 portfolio strategy. So Energy, we will be, this year, just to lay out one fact, it's going to be the ninth year, ninth consecutive year of strong double-digit growth in Energy. And I can't fully say the situation in U.S. I've seen a fantastic execution of Energy last week in U.S. However, we know that in a number of our markets, we have still ample space for growth, knowing that in many markets, even though we are gaining share, there is still a lot of share that is opportunity to capture. Secondly, the category itself is growing with a very good pace. And this is a result of the fact that the cohorts are expanding and the consumer base is continuously expanding, which is a result of a continuous reformulations, introductions of new recipes, which also include now zero sugar variants, innovative flavors that Monster Energy team is every year bringing. Very relevant properties. So I can say that -- and last thing that I said -- forgot to mention, I really want to highlight that we play intentional multi-brand strategy. So playing with 2 brands or even in 3 brands in some markets is really done in a very specific manner, so that we hit the relevant price points and we target relevant consumers. When you combine that with our strong focus on core equipment execution in the market, I can see that these are the ingredients which we don't take lightly, and we constantly keep very high and strong focus behind this category. And we are confident and optimistic about what we can do with Energy over the next couple of years. Turning to Premium Spirits, which as a category are growing for -- because of 2 reasons. One is the Finlandia, I'll come back to that. And second is also how we are developing and growing business with our brand -- with our partners, brand owners, meaning Brown-Forman, Edrington, Bacardi primarily. Turning back to Finlandia. I'm really excited and very pleased that this whole transition has been going very smooth. Now this is also because we have in-house capability of the team that is dealing with Premium Spirits. So acquiring Finlandia for us was not a new thing. However, we already knew the brand, we knew all the characteristics and dynamics of this whole category. And this year, we are taking over from previous distributors, starting the business. And I'd like to say that the car is still in the garage, getting ready for a ride next year as we are taking over businesses, and we are on the marketing front preparing exciting things. So more to come. But I can just wrap up to say that we feel very pleased and very confident with what we can do with this brand. And last point especially because it is sold as a stand-alone brand is great, but also in terms of mixability and how it combines with a number of categories and brands that we have in our portfolio. This is where the exciting combination and potentiality exists.

Our next question comes from the line of Matthew Ford.

So I'll just my first question, and I'll come for a follow-up as well. Just on the markets in which you're seeing kind of consumer pressure. Obviously, you've called out a few and you called out several at the H1 stage as well. If we kind of compare your comments today versus those made 3 months ago, are there any markets where you've seen things get sequentially worse in terms of the consumer pressure and kind of macro situation? And are there any markets that you'd call out where potentially we're seeing an improvement? That's my first question.

Matthew, we don't see anything dramatically different than H1. I would -- we do see that this consumer sensitivity on pricing, I mean, this is not something that 2 months you see it, then 2 months, you don't see it. It's a period where in a few of these markets it's there. And I can only highlight that in Italy, we do see that consumer sensitivity is there, maybe to a slightly bigger extent than we thought 3 or 4 months ago. But based on that, we have adjusted and have been adjusting our plans. But equally, I want to point out that I'm very pleased with the last 4 months consecutive share gain that, in such markets, we are gaining, which is proving that our quickly adjusted and adapted plans are really in tune with the market situation and development. So this leads me to say that we are used to operating in these kind of situations. And all the levers and drivers within revenue growth management really help us to adjust to this whatever consumer situation we are seeing across the market.

Right. That's great. And then my follow-up just on COGS. Obviously, you've lowered the cost of unit case outlook for 2024. But any early thoughts on the outlook for 2025? Clearly, there have been some movements recently on sugar and energy prices and gas. So any thoughts on the outlook for '25 from here?

Yes. Well, first of all, just to close 2024, yes, we have updated our guidance to a low single digit. Of course, that's based on our confidence. We are coming with a very high coverage position in terms of hedges, we're about 100% for the year. So that helps a little bit of predictability. And also, I would like to remind us all that in the first half of the year, we could also benefit from foreign currency translation on the reported COGS per case, right, due to the weaker currencies in the emerging markets. So we look at the full year basis, then we are going back to a low single digit. Now for 2025, obviously, it's too early to provide the guidance. We will be doing that during our full year results in February. What we can comment right now is that we still expect a certain level of COGS inflation. I mean lower than obviously the previous year, but still, they're there. We have already engaged with our hedging positions, and we are -- we can say that today, we are at a higher coverage position than we were on the same period last year. Especially when it comes to sugar, we are over 60% covered when it comes to sugar. Yes, we have seen some reduction in the sugar prices this year. We expect that there. But still, as I said, we would see an additional pressure on COGS per case.

Our next question comes from the line of Mandeep Sangha.