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

Good afternoon, everyone. Thanks again for joining us on the last day of the Barclays Global Consumer Conference. I'm very happy to have Zoran Bogdanovic here from Coca-Cola Hellenic to talk us through their recent trading and results and what's next for the future. So Zoran, thank you very much for joining us.

Thanks, Laurence.

So if we just have quick overview questions on the business. There was quite a big reaction to the latest set of results. Were you happy with the achievements? And how would you describe the highlights? What are the key areas that you're trying to improve?

Yes. First of all, thanks for having me here. Very happy with the results that we reported in August for the first 6 months with 9.9% revenue coming both from price/mix and from volume as we are really focused that all levers of the revenue generation work and 6 months have really demonstrated that together with the share growth. Seeing that focus -- disciplined focus behind strategy really works and our work on capabilities underpins that. So that was a good testament to the hard work that really happened. So -- also at that time, we -- as you remember, we clearly said that in the guided range, both on the top line and bottom line, we made a clear point that we see ourselves at the top of that range, which reflects the confidence in that result delivery, in spite of a mixed environment that we are seeing and that we really have to respect.

So you mentioned you're going towards the top end of the guidance range, but I think you delivered 11.8% in the first half, which was ahead of the guidance range. So what's the key concerns as we go into the second half of the year?

Look, second half of the year is a big period. As I said, in the mixed environment where we see that there are a number of markets where we see more consumer softness, more -- I think this is a red thread that everyone has been talking about here. We do see in several markets that there is more of a price elasticity, need for the affordability. So we know that there is still a good number of months that simply we have to be mindful of that. And to be at the top of guided range, we really think it keeps us at the top of the game. So that's really what was in our mind. Equally encouraged that there are a number of markets, to say, where we see increasingly good performance. We said that Italy will be positive after the first 6 months. Very pleased to see that, that really happened. Czech is continuously performing well, Ireland. So when I say mixed combination, that really means that on the other side, there are some markets where inevitably, there is some slowdown, but we are used to that. We've seen this kind of periods, but we have complete variety of tools, how we can really sail through that. I would really want to highlight the fact that we have such a vast portfolio like probably no other company with so many categories that we have in our 24/7 strategy of total beverage company, which really helps us that with various categories, we can tackle various segments of consumers, both the needs in various segments within affordable proposals as well as in the premium one. So we see that working really well. And we just cannot rest. We have to constantly be on our toes to monitor what happens in every single market and quickly adapt. And that's exactly what we've been doing this year, which keeps us busy.

You mentioned a couple of the markets there, but one of the key themes around this conference has been the various levels of consumer confidence around the world. But specifically within your markets, how are you seeing the current level of consumer confidence?

Look, we -- for the last couple of results calls, we've been indicating that there are various pockets where we see that it's clearly softer. So cumulative year-on-year increasing pricing levels across not only CPG products, but overall cost of living for people over the last couple of years has gone up. So one has to really have very strong capability in the revenue growth management to take all that into account. And that's why I'm very happy that from 2016, we've been working very hard in bringing that capability to the very strong level. I can't imagine how we would go through last years without that level of capability and teams that we have in every single country. So we have to respect the state of consumer as a reality. But that's -- I wouldn't call that as something which is uncontrollable. Actually, it is controllable as long as we read, honestly, with facts, good insights, the situation on the ground. This is where I see that our data insights, analytics really helps us so that our capabilities, primarily RGM and route to market, customer management, this really helps us to play smarter and faster.

We're going to go through a few of the markets in a bit more detail later on. But first, let's chat through some of the categories that you're in. And I think energy has been one of the most dynamic categories for you. What's really driving that growth? And are you confident that, that will continue?

I am. Look, this year will be 10th consecutive year that we are having a strong double-digit growth of energy -- in energy category. That can only happen, first of all, with very close, constructive, well-working partnership that we have with Monster. Our teams are working on a weekly basis quickly, fast. Continuous stream of exciting innovations that Monster gives us works very well, not only such a cool flavor combinations, this year, Rio Punch, Ultra Strawberry. But now Q3, we are rolling out Lando Norris flavor. I don't need to say that this creates such an excitement, more to come. Reformulations also on the Zero variants, very important. These guys have been tapping into well-chosen assets, which are touching consumer passion points. We know that Monster has been for long in GP Motocross. The work that Monster has done with Formula, which is booming in terms of interest and awareness and appeal to younger population and exploiting that very well in promotions and what we do. And look, people sometimes ask why energy? I just have to say that we do observe that in the lifestyles that happen in people's lives, people need energy. And somehow people connotate that energy primarily comes from these kind of energy drinks, even though in our portfolio, Coke Original taste or coffee also give you that boost. Interesting is that this consumer base is increasing. 26% of energy drinkers have entered the category in the last 12 months. I think that's a good indication that consumer base is increasing. And energy as a category is being consumed in more occasions. So on top of that, our teams are executing very strong, continuously every year increasing number of coolers, which is important for energy, which majority of purchases are impulse purchases, and that's correlated with our cooler purchases and placements. So I'm very confident as well as the whole team that we will continue with energy performance, which will be above our average rate of growth.

Okay. Well, let's move on to coffee. There have been a few reports recently that Coca-Cola is looking to sell -- potentially sell the Costa business. How important is coffee to your growth? And how does Caffe Vergnano fit into that portfolio as well?

Yes. Well, let me first say that these headlines that were there, I really can't comment on that. I'm not part of that, and so I really cannot comment on that. But more importantly here, I would say that we recognize that in what we aspire to be as a company, as a 24/7 strategy total beverage company, coffee is very important strategically because -- why? Because coffee is such a big profitable revenue pool in any country. For our customers, especially in out-of-home, coffee is a great important generator of their revenue and even more profitability. So to have in our portfolio coffee and not only one proposition, but options, we thought it's an essential part of the strategy. That's why we call out coffee in three enterprise-wide priorities next to sparkling and energy. And just to remind maybe for those who don't know, even before Coca-Cola Company has acquired Costa, we've been already 3 years in coffee with another brand, which then we discontinued for obvious reasons that we go with our partner, which is Costa. And then as we recognize that you need to simply have multi-brand strategy these days because you can't be same proposition for every segment of customers. That's why we recognize that Caffe Vergnano as a premium coffee with a strong family heritage of 140-plus years, Italian type of coffee, really fits well so that we have a portfolio and choices. And this is what we see on the ground that customers sometimes prefer Costa. The other types of customers prefer Vergnano because people are very picky, and they are very demanding when it comes to coffee taste and profile of coffee and also different segments. So I want to say that we, as Coca-Cola Hellenic, we are -- we see the value, importance, and we are committed to coffee category, and we continue building and developing it.

Innovation delivered quite a lot of growth to your system over the past few years. What are the key innovations that you're launching at the moment? And how do you expect them to drive both volume and mix over the next few years?

Yes. Every year, there is something in that space. So firstly, with the Coca-Cola Company, we are very pleased to see that every year, there is something that in almost every category brings excitement and news. Whether -- now, one cluster is the flavors, innovative flavors, whether that's in Fanta, this Tutti Frutti Zero Sugar. In Schweppes, we had a very exciting tasting and looking Purple proposition, which with mixability creates something very exciting. That's why the experiential segment that we are focused in out-of-home is very important in how we deploy that. Coke Zero, which per se is not innovation, but it's good to see the -- what used to be called then innovation continues to perform very strong. But now there is another version, which is Coke Zero, meaning zero sugar, zero caffeine, is really performing very well, and you will see us doing more behind that as people recognize that after a point in day, maybe they don't want to have caffeine. And we have a proposition for them, which is so well tasting. In Powerade, also more innovations in a category -- sports category, which is working extremely well. I think zero sugar, Blackcurrant. Then in juices and lemonades, which are better performing part of the category. We also have lemonade zero sugar. So there has been a number of things there. And that's complemented with exciting activations, which are part of innovation. Share a Coke, with names, I think it's one of those things that only Coke can do. And our teams have been so excited to do it, but even more to see acceptance of consumers. I'm saying that because these type of things really create excitement and affinity and closeness to brand. And I'm super excited to see what it will do in Nigeria where soon we start to launch it, believe it or not, with a variety of 1,000 names. I just talked about Monster, various flavors that we are getting there. Finlandia that we bought in April this year, we started with new campaign. And I would say maybe it's not innovation, but it's innovative approach in the way we have repositioned the brand to be closer to the lifestyle of younger adults and to a little bit depart from very serious way of positioning to a little bit more creative, witty, not so serious. And it seems that, based on the feedback, that this has been received very well. So every year, there is -- there are things that we do. And I'm also happy that the pipeline not only for the next year, but the years to come, I'm not worried about that.

You just -- you mentioned Finlandia, and I suppose that's a different approach to your spirits portfolio, owning the brand itself. Could you let us know what you learned from actually having that ownership and how that interacts with your existing portfolio of brands that you distribute to others?

Yes. It's good to clarify that in the whole premium spirits space, first of all, why? We see the opportunity and how much premium spirits can be leveraged in driving more transactions of our non-alcohol portfolio because through blending, mixability, we have more opportunities to activate portfolio. And we clearly see how that's driving transactions, how that's increasing the leverage with our customers. They really appreciate that. So it's very complementary and goes well together. Secondly, majority of our business in the premium spirits space is that we are exclusive distributors to our chosen key partners. And that's the core. Finlandia came as a very unique and relevant opportunity for us because 60% of the global volume is in our territories, whereas before acquisition, we were distributing only 12%. So with acquisition, we have immediately unlocked that in 60% of the global volume could be activated in all our countries. And then, of course, there are some well-selected markets outside of the Hellenic territories where it's exported. So what we learned is that it gives us the opportunity to really creatively activate it, to test what more we can do in mixability, working closely with customers. And I can only say that following the very successful integration that has been done last year, we are very pleased how it's performing. But we only see that as the beginning. There is a lot more work to be done, but we are very excited how much we can push the needle with that.

Do you think we should be expecting any more transactions like this in the future?

Look, I said for Finlandia that, that was something very specific and unique where we recognized the click. While I am not saying no, however, we are primarily focused on distributing brands of partners and really taking Finlandia to the next level. That's our focus. And we are not actively looking for anything else.

Okay. Well, let's go into a few of your regions and a few of the countries. We start off with the Established space. Volume growth has been pretty tough in that part of the world for you and for a lot of other people as well. And you mentioned Switzerland and Austria seeing a bit of weak consumers. What are the key reasons behind that? And do you expect that to improve as we see a bit of an improvement in consumer health?

Starting with the end of your question, the answer is yes, we do expect. We really expect that the Established segment is going to be a contributor to volume growth as well as the other two segments. Now countries in that segment, all of them have certain reasons of what currently we've been seeing. But starting with Italy, as I've said, very happy that -- we are very pleased what Italy has been achieving and doing over the last several years, where we primarily intentionally focused in Italy and in other markets on price/mix for the obvious reasons. But to see now positive volume in Italy performance, that's what we really expect and what we want to see. Then Ireland, as I said, really working well. Switzerland, we did have, I would say, a temporary situation with one of our big customers that eventually has been resolved, and we have been resuming full cooperation. So I'm optimistic of Switzerland. Austria started with the DRS. Usually, when that starts, that always impacts the price of the product because deposit is embedded in the price of the product. So that's one of the reasons for some of that. However, we are very pleased with overall performance of the Established segment. And when I see what we've done over the last 3, 4 years in that segment in all these inflationary commodity situations that we went through and how much price mix we've been able to achieve in that segment, I mean, if you ask me 7, 8 years ago, I would be doubtful if we would be able to do that. But exactly because of what I was saying at the beginning, because of revenue growth management and capability that we have, I think we have sailed through that well. And that's why just staying with two feet on the ground, looking what more and better we can do in that segment as well as the other two.

You mentioned that Austria put a DRS system in, and I think Ireland did one last year as well. Can you just run us through what happened and how you responded to it? And if there are any other countries that are considering these sorts of schemes?

Yes. DRS is already in 9 markets, Poland and -- so Austria started. Poland, Greece are soon to come, maybe end of next year, beginning of next. And then there are other 9 countries which are preparing. So we actively advocate together with other industry players that to -- for well-designed DRS systems in the countries because we've seen that, that's best proven way how to ensure return of the packaging to collection points, which are mostly with retailers, but not only because that's the starting -- that's the first step of the whole positive cycle of returning, collecting and then recycling, producing recycled material, which we then buy and in-house, mostly already, producing our own preforms from recycled PET material, and that's how we are achieving all the targets for the recycled PET. So we really advocate and I think we are probably already by now recognized in -- for sure, in the system, also in the industry among the best, if not those, how we prepare for DRS. And then how do we adjust our pack price architecture, recognizing that introduction of deposit is almost like a price increase. Because initially, it's increasing your price of the product until you get your deposit back. So it takes a while until people really learn how that works. But we fully advocate for the DRS as a sustainable good solution that is good for us, but the whole -- as well as for the whole industry.

You mentioned Poland as well, and I think there's quite a big change of the competitive landscape there. But are you seeing any more fundamental concerns in that part of the world? And how is your market share in the region, even if we exclude what's happening in Biedronka?

Look, it was expected that our key competitor will sooner or later return in that customer. It was unrealistic to expect that they would not be back. But irrespective of this period when key competitor was not in that customer, our team in Poland has done phenomenal job with the fact that over the last 4, 5 years, we have strengthened our position, continuously gained share, established a very well working relationship with customers with our joint value creation programs that we do together with customers. So even now, if you exclude this customer outside of the pool of customers, we are gaining share in the country, both in the NARTD as well as sparkling, which just is a testament that quality work continues as well as deeper and even stronger relationship with the customer itself. So I don't have concerns. Actually, we remain very excited about the potentiality of Poland as a very big market, very well developing. We just had in June our Board meeting in Warsaw because we really wanted to demonstrate to our Board members and let them see how Poland is developing. And I have to say some of them have never been in Poland. Some of them have not been for 20 years. Everyone left impressed how Warsaw has changed and how the whole country is evolving. So Poland will be an important driver of growth for Hellenic.

If we move on to the Emerging space, I appreciate the macro in Nigeria has been pretty tough for yourselves and a lot of other people as well. But I think we are seeing some signs of lower inflation there. But how have you navigated these pretty challenging conditions, especially given the number of price increases that you've had to take? Has that made an impact on demand?

On demand, yes. Look, operating in Nigeria, learning is the cradle of this company. So we've seen, I believe, all kind of situations. And that gave us the experience, knowledge, how to operate in this kind of market. That's why 4, 4.5 years ago, acquiring Egypt, source of confidence was how much experience we have from Nigeria. Nigeria is a market where when we introduced some of our biggest initiatives, when we started with RGM, when we did serious evolution in route to market, when we start with data, insights, analytics, Nigeria is first or among the first two markets where we go because we know that in such a challenging market, having stronger capability enables us to perform better, and we have to be at our best in this type of market. So that's why last several years, seeing the progress, how much share gain we have achieved, the way we work with customers is reflected in the Net Promoter Score, which I think in Nigeria now is the highest in our group. And I could now talk much more about Nigeria, but I would only point to the recent Bitesize event that our Chief Operating Officer, Naya, and Nigerian team have done together in July. So it's there on our website, and we really wanted to demonstrate what and how we do things in Nigeria. Also, what's encouraging, I have to say also with the current administration that runs the country, we see that they are doing smart step-by-step moves which -- now it's visible that there is more hard currency inflow in the country. So there are some structural refinements evolutions that give us confidence. And if I can say immediately with Egypt, it's not been easy the last couple of years. But if anything, many things that came together as a headwind just gave us the preset to do things faster and bolder. And irrespective of the challenges that we faced with, one learning is to -- if we believe in the strategy, it's very -- it's important to stick to that consistently. And all the investments that we planned when we did acquisition case, we did not pause or stop. So everything that has been going on, we proceeded with executing everything that we imagine that we have to do. And we see very good results over the years. And this year, particularly, Egypt is performing really well. And we are absolutely certain that this market is -- offers abundance of profitable growth in the future.

So just to complete the Emerging division then, I guess Russia has been a very different business than it has been over the past 3 years. But since you've come out of the Coke brand there, what have you learned within Russia from building a business on entirely local brands?

Look, very difficult, complex situation, but kudos to very capable team with expertise and knowledge that has rewired the business on leveraging already existing local brands and doing the extensions just to have and maintain healthy business in the interest of protection of our people and assets. And I have to say that they've been doing a good job in this self-managed, self-financed way where we, as a group, are not doing any investments into the country, as we've said many times. And just hoping and waiting that this absolutely unfortunate crazy situation hopefully finishes as soon as possible.

Well, very much fingers crossed. We've only got a few minutes left, and I want to touch on a few of the financial questions here. Margins have been generally on an upward trajectory for you. What's really been driving that? And should we expect that to continue sort of over the medium term?

Primary driver is our orientation that we see ourselves as a growth-focused company. So we see that we have so many opportunities in driving growth represented in the revenue growth and secondarily verified by our market share progress. So it's volume and it's price mix. Those are the key drivers that drove our P&L and cash flow. Every year, we don't lose sight on productivity, cost efficiency, that's deeply embedded in continuous reviews and work. So that's been there as well. Third, last 4, 5 years, we have almost tripled the rate of investments that we are doing behind digital technology. And that also has contributed that we do a number of processes faster and cost-wise, more efficient. So when you blend all that together, so I can't call out one big thing, but putting that all together, enables us to drive these improvements and in line with how we guided that in midterm, we see the opportunity to drive margins forward.

Your balance sheet is one of the strongest within European beverages. What leverage levels are you comfortable at? And can you describe what your main capital allocation priorities are?

Yes. We guided on the leverage of 1.5 to 2. We are -- we finished last year at 1. And that demonstrates that we have the capacity and firepower. We always remind that, first of all, investing in the -- organically in our business. Our range of CapEx is 6.5% to 7.5%. And we see ourselves being at the upper end of that. So we are keen to continue investing to increase the capacity and also our technical capabilities to do more and better. Secondly, we have a progressive dividend policy of 40% to 50% that we've been sticking to and delivering on that even during COVID years. And then lastly, we see the opportunities that strategically can make sense, either in the bolt-on space or in the geographical expansion. I mean it's logical that for us as the strategic partner of the Coca-Cola Company, it's logical that if the opportunity comes up to discuss more territories that -- of course, that we would be interested. Any successful and growth-focused bottler will be keen to do that, and we are. So among these areas, I'm sure we will find ways to deploy that balance sheet in a smart way.

Well, I think we've done a pretty good run round of the key parts of the business. But is there anything at CCH that you think analysts or investors just don't focus on, that we really should spend more time on? What question should we be asking you?

That's not an easy question because I have to give credit that even in short meetings of 35 minutes or -- people cover a whole variety of things. So however, if I would highlight one thing that is deeply embedded also in the way we do business, and it matters is the focus on sustainability. In the Dow Jones now called Best Practice (sic) [ Best-in-Class ] Index. For 13 years, we are in the top 3 globally. And 8 times, like last year, we are a global beverage leader. It's not about the ranking per se. It's how we constantly evolve the business that we achieve the results, but in a good way. And why does it matter? It matters because you've seen recently what James has done with Carrefour, first partnership of such kind in the sustainability space. And one of our countries, Romania is in the first wave. So we like to be at the forefront of doing things right in a rational and meaningful way because we do see that it positively impacts the business. We do see that customers really want to partner with us. And sometimes that's a deciding factor why they work with us on a given initiatives or more and better than with others. And I could talk for -- a lot about that. But that's one area just to remind. And as much as recently, there have been some question marks. For us, there is no question mark that we want to do things in an ambitious way but done in the right way.

Well, Zoran, thank you so much for spending your time with us, and...

Thank you for having me. Thank you, Laurence.