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

Well, thank you all very much for joining us at the Barclays Global Conference again today. I'm very pleased to have Zoran Bogdanovic from CCH, CEO of CCH, joining us. So we're going to have an interesting discussion about the evolution of Coke across a lot of European and African markets.

Zoran, why don't we kick off with the first half because you had a very strong set of figures. Were you happy with how the first half went? What were the highlights? And where are the sort of key areas you're looking to improve things?

Thank you, Laurence. We are very happy with the first half. I mean it came as a result of very hard work of really working close with customers, focusing on executing excellent initiatives that we had in the first half, of which, of course, the FIFA World Cup was highlight, but that also overlapped with our preparation for the season, which was really done well. So all that resulted in this very strong 9.6% and 7.5% volume, which is acceleration of our underlying volume versus Q1. Very pleased with the profit improvement that that resulted with. And I'd like to highlight that we are very happy with the consistency that this is 13th quarter in a row consecutively of having volume growth. So for us, even in the times when there was a quite inflationary environment, where price mix was a big thing, we really maintain focus that in the overall -- RGM and volume and mix and price -- all have to play their role. So it's easy to say I'm pleased. That's why I'm just elaborating more, like, why that there is consistency and quality and focus, and kudos to the teams for really doing that. What we can do better is that, look, every day, we are looking whenever anything doesn't work. And for that, we have our own internal listening. All employees are rating our own functions. We are constantly identifying and listen where maybe there are pain points, where we need to improve processes, where we have to be faster. So there are always opportunities to improve, and I love this mindset that it's never good enough. We recognize that it's good, but there is so much more that we do. And we put also our foot where our mouth is, that we also invest more behind initiatives together with our partners, starting with Coca-Cola Company, but then we are also investing in our own capabilities capacity, digital, AI, all kind of things, which can always and continuously make us better.

You mentioned profitability there, and I couldn't help but notice your profitability result for the first half was well in excess of where the guidance is for the full year. So I guess that sort of assumes a bit of a slowdown in the second half. What really gives you cause to concern around the second half, and sort of what needs to happen in order to hit the high end of the range versus the low end of the range?

Look, this first half, I just referred to, gave us confidence to do this update and upgrade of the guidance, clearly. Having done that beginning of August, we recognize the fact that there are 4 days less in Q4, particularly in December, which is a big trading period for us. So we have to take that into account. We did say at the beginning of the year that our split between H1 and H2 will be more skewed towards H1. Then we simply have to recognize also that any week, many things can happen. We know very well that we are managing through this situation in Ukraine -- between Ukraine and Russia. You never know what happens there. Equally, Middle East -- I mean, we literally see it these days. We do see in many of our countries the impact on the energy cost. How will possibly this trickle down on the consumer behavior? Because sometimes you really see that consumers have this cliff behavior. Everything is fine until one day when suddenly they start maybe pulling the brake. So while we feel confident about the full year outlook for which we did upgrade. We have a very good program, what's ahead of us for the remainder of the year, but we simply have to be responsible in recognizing many variables to which we don't have an answer. So that's how it all comes together.

I want to come back to some of the volatility you mentioned. But I suppose as part of that, we have seen a bit of a change in consumer sentiment in a number of markets, which you alluded to. Where are the key areas where you're seeing that pressure? Are there any markets you'd really call out, where the consumer is perhaps a little bit more under pressure from these increased costs?

Well, overall headline would be that there is nothing dramatically different, materially different versus last year. We know that already from last year, we went into this year preparing that consumers in general have more sensitivity and more need for affordability. So in our overall revenue growth management umbrella, affordability plays an important role, yet affordability in country X versus country Y is different. But it's very well embedded what we do there, and I can elaborate more. But particularly, there are a few markets where that sensitivity and elasticity is bigger. Romania, which simply in a sequence of several years now has been going through some regulatory changes of VAT, of sugar tax, of DRS. So it has to boil down on the consumer -- or we see more politically-driven in Bulgaria, they are getting used to the fact that they are now with euro. We know that sometimes it really creates bump in the prices overall and of course, Ukraine. On the other hand, you see countries that are -- continue to perform strong this year and in sequence of last year, Hungary, Czech, you see Ireland. Switzerland had a very good first half. I'm also pleased how also Italy went through the first half. So we see a number of markets. Austria had a very good bounce back because last year, they were dealing with their own DRS introduction. So in balance, we do see that still consumers, while being mindful, they are the ones with which we delivered these results. And we feel responsible that we constantly pulse and read how they are and that we dynamically react with adjusting initiatives whenever needed.

And of course, this is going to affect your own cost line as well. You're going to be exposed to some of the raw materials that have been inflating as a result of these various changes. What levers can you still pull in order to mitigate those increased costs? And would you expect pricing to have to materially step up as we go into next year?

Look, I like -- even in this, I like football analogy. Best way to defend yourself is to attack. And we've been always front-footed and focused on driving top line growth. I think that's the best way to drive cost leverage. To drive top line growth is infinite. With costs, there is a floor. So that's why our investments behind the 24/7 portfolio that we are developing with a number of categories, where each one of them play their role in a given market, where with our partners we are actually stepping up investments in marketing exactly for that reason that we can support broader portfolio range and brands that we do with excellent initiatives, with supporting more events where we give consumers and customers really chance to activate our products, drive transactions more. Also, we see that with digital -- actually, first of all, I would say that one of the key areas where we are investing through digital and with the support of meaningful AI is micro-segmentation, because that really helps us to deploy our assets and investments in a much more targeted, relevant way. In the past, way back, it was like one size fits all. Now we know that for certain brands, even for certain packages, these are the types of outlets we really need to go versus the other ones. So that increases our effectiveness of resources that we deploy and the time of our people. So all that plays a role. Then not to be misunderstood, we have every year productivity initiatives that's constant where we are constantly finding ways of increasing productivity, enhancing efficiencies, reducing costs wherever necessary. And that also plays a role. I'm also very happy with the very robust governance that we have with the overall hedging approach that we do in our purchases of materials. So when you blend that all together, I feel that there is a lot that is in our control even in these circumstances. And that's one of the key learnings that we have from last 6, 7 years, from COVID onwards, that irrespective of what's going on, there is a lot in our hands that we can react, and we do have tools and resources to do that.

And just staying on the topic of volatility, of course, you're very acutely exposed to the Russia-Ukraine situation. You mentioned the Middle East earlier. We've had this FX volatility across Africa, and for which you're going to have increased exposure to with the closure of the CCBA deal. How is your framework of managing these sort of geopolitical currency type risks evolved? And what do you consider resilience really looks like once you consider the consolidation of CCBA?

Look, even before COVID, we had -- because I mentioned that period because that changed so many things in how we run, constantly run scenario simulations, risk management, which again is based on a number of estimating various scenarios. But our academy for that was Nigeria. This is where we went through all kinds of things, and we went through political, macro, fiscal, supplier issues, all kinds of things tested us there, from which we were capturing learnings, which really came useful then in a number of other territories of running scenarios. Even when every single country, when they present business plan, of course, they have to have one core scenario. But then there are risks and opportunities and there is scenario, how can it look more on upside and what if things go -- and what could go wrong. So our people are empowered to bring their own locally relevant knowledge and insight and their own understanding. And I think that's the strength of our model, where we rely on the expertise of our general managers and the local country teams to really bring that. So they identify what are the possible things that can potentially be worse. And immediately, they are asked to tell us, okay, if that happens, what do you do? So there is a constant iterative way of what if with quantification. So if we see that all the risks come down to amount x, we have to see if that happens, how will we overcome it? We don't leave that now, 'Well, let's see if it happens', and then something happens in April. If something happens in April to think through, then it's late. We have to have already some thinking in that. And also, we, as a Hellenic overall management team, we constantly are out there on the search for more opportunities where we can unfold something that we haven't been doing so far. It's always more on the commercial front, where are the additional customers, how we can work better and closer with them. So I correlate that also with the way we constantly increase the intimacy and loyalty with our customers, which is reflected in a constant growth of our NPS score with them and listening. And that's where we get lots of ideas that -- this is a time where curiosity has to be at its best. You never know what's tomorrow. But solutions are there. It's only a matter of us allowing ourselves and to be disciplined to listen, never underestimate. Everyone has a view. When we talk and walk with our market developers, it's so useful to listen to them what they think. You get great ideas when you talk to line operator. I mean, these people have great ideas. So it's our responsibility to listen. And as much as this might sound trivial, but this overall also plays a role.

It sounds very similar to our job as well. The best ideas come from the team. So I want to talk a little bit about some of your markets. Just let's start off with the emerging side of things because, of course, I think you're getting a lot of questions on that space, and it's a lot of change happening there. Many of us came out to Egypt with you a few months ago now. And I suppose when I saw the aspirations of getting double-digit growth every year, it sort of appears relatively lofty until you see it on the ground. So for those who weren't able to travel to Egypt, how do you -- why are you so confident you're able to deliver growth at that sort of level?

Yes. Well, it was great to have you and others on July 7, for this day in Cairo. And I can encourage anyone who would like to listen to that. It's available on our website to listen what we shared very openly that day. We believe that from the moment we decided to go after this acquisition in agreement with Coca-Cola Company, we were then and now even more excited about the immense opportunity that this country offers. First of all, the size of 110-plus million people that is going in the right direction when you see the whole infrastructural development and many things what -- how the country is progressing. And within that context to -- we know that this market is far from its developed level. So investing further, prioritizing commercial capabilities to be able to deliver on the great portfolio that we have there, making meaningful additions right from the start, where apart from the focus on sparkling and water, which were 2 key categories there, then we started also with energy, which was proven as the right thing, and that has provided more additional growth, relevance to our customers. So we immediately invested in raising the commercial capabilities, which starts from even basics. Every single salesperson has gone through sales academy to learn, re-learn on the way how we educate all of our people and train them constantly to be able to more effectively and better connect with customers. And seeing the market in June, when we had all general managers meeting in the north of Egypt, and then later on when we were there together, it's mind-blowing to see the difference of 18 months, how much has been achieved. And not only for the business that we have in Egypt for the unit itself, but we also use Egypt for our broader capability development. In July, we opened our new digital hub in Cairo, where currently we have 250 people. By Q3 next year, we will have 450. And that's part of the intentional in-sourcing specific roles and capabilities that we want to have in-house for various solutions, platforms that we are developing, as they are forming the competitive advantage that we then, through those solutions, deploy in all countries. So I would say the joint belief, commitment with our partners, Coca-Cola Company and Monster Energy, knowing what needs to be done, the right locally relevant investments and then deploying them with a great disciplined focus. So we are ambitious. That's why we say that this is a market that has to be double-digit. It has to. Now can it happen at 1 year, it's not double-digit? Yes, if God knows what happens. But we have to be ambitious. If you are not ambitious with this type of market and say that it needs to be double-digit growth, then what else? Which market can be? So -- and when we have the strong ambition, that's pushing us to really constantly think what do we do more? How do we do better? And Egypt is really market for something like that.

And of course, it was an acquisition a few years ago, and you're expected to close the CCBA deal later on this year. How transferable are the learnings that you've taken from integrating Egypt to the CCBA business? What's similar? What's more different?

Many things are transferable. For us, 4 years ago, integration of Egypt was a great learning ground. And we reflected what were the things that really went well. We also incorporated some of the learnings that we saw we can do even better. So now myself and my team, we personally, and -- every one of us has personal ownership for all the chapters of the integration plan that we are developing, that we started from January, from the moment CCBA closed its books of 2025. We really didn't want to touch them, leave them alone to do that. But then from end of January, we really started a very disciplined, systematic approach in preparing, in parallel, while all the regulatory process work was happening. And as it's soon, sometime Q4 -- will happen that the closing really happens. We -- I'm confident how ready we will be for day 1. But we also phased all the thoughts and ideas and initiatives, okay, what's day 1 and first 6 months, what's 6 to 12 months and beyond. We cannot do everything at the same time. We need to respect that there is -- it needs to be faced. So many things are transferable. I also have to highlight that we also need to never forget -- while many things are transferable, we have to be respectful that every single market within CCBA has its own dynamics and insights. We need to learn that. And that will happen through on-site visits, meeting our teams, customers, to really understand what are the specificities of every market. End of July, we went for the first visit, South Africa, Tanzania, Ethiopia. It was fantastic to really learn on the ground. And I can tell you, Laurence, if anything, when we finished the trip, we really were boosted. We can really see tremendous opportunity.