Coca-Cola HBC AG

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 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 Zolan.

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 three 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 brand. 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 three 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 am 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 SparkLink. 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 multi-packs of single serves and the brand. Our targeted actions also draw 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 three 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 three of our strategic priority categories. Sparkling volumes grew by one and a half percent. 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 Cafe Vergnano, 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 investors day in May is successfully up and running. We have launched an industry-leading cardboard-based alternative to plastic shrink film for one and a half liter PET multi-packs, initially saving about 200 tons 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 ARPET 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 PETUs by the end of 2023 across our EU and Swiss markets, 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 draw another quarter of good package mix. Volume in the segment declined, mainly due to Italy, which more than upset 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 share the 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 all 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 and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. To remove yourself from the question queue, please press star and two. Please pick up the receiver when asking questions. Anyone who has a question may press star and one at this time. The first question is from Edward Mundy from Jefferies. Please go ahead.

Morning, Zoran. Morning, Ben. First question is really around revenue per case, which has been a really good step up over the last couple of years. I think at the group level, you're up 18% versus pre-pandemic levels. And then we 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 monitoring 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. Good morning. 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 the importance of mix And especially as we will go forward, where we will see 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 of multipacks that we are constantly adjusting as we are flexible, as we are tailoring the plans, category mix, you know, 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 Sparking Share, which is a good sense check of how we are balancing all these balls that we are juggling.

Thanks. And the 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 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 of 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 two consecutive quarters of volume growth. And especially to see that volume performance in our three priority categories is positive. And I'm very, very encouraged by that. And just to close on that ad is to say that we are aware that because we're 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. Great, thank you.

The next question is from Simon Hills with Citi. Please go ahead.

Thank you. Morning, Zoran. Morning, Ben. Morning, John. Just a couple for me. Ben, maybe I could ask 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 of a raising rates environment sort of elsewhere. Is it all just interest income sort of driven? And then secondly, I just wonder whether you could just give us a bit more colour about the performance You know, with the Russian business in the period, I've seen the statements clearly. You've seen some organic growth Q3 on Q3. But I'd just be interested in a bit more color there, 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 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, make it clear, that the impact of Russia here is minimal.

Hi, 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 two-year stack, we are 40% down on volume. even though logically versus last year we are above for the obvious reasons as in Q3 we have transitioned from the Coca-Cola brands 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.

Great, thank you.

The next question is from Matthew Ford with BNP Paribas Exxon. Please go ahead.

Hi, Zoran. Hi, Ben. 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 changing? kind of presenting the most difficult challenges from here and where do you expect to see, you know, the most tailwinds and then just kind of tagged onto that, you know, how do you, how do you expect, you know, the outlook for Colts in 2024, you know, based on, on your current level of hedging. Thank you.

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 are witnesses 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 2023 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 Fitnan Ryan from Good Body. Please go ahead.

Good morning, Zora and Ben and John. First question for me, please. If you could just talk about the performance in Egypt. Particularly, I guess there's quite easy comps from last year, but given the growth in waters, how we should think about this with that portfolio mix going forward and given that last in Egypt was quite constrained.

Would you be factoring in margin improvements year on year from that Egyptian business? Hi, Fintan. The audio was a little bit low. So on Egypt, I understood. So first of all, encouraging to see Q3 performance from Egypt, which comes... as a result of us really doing a number of things from the moment we started having this wonderful business in our group. First of all, I reiterate how we are excited to have Egypt as a market which has tremendous long-term potential, but evidently Egypt is going through macroeconomically through a challenging period, which last year saw devaluation this year and also now significant inflation. But at that backdrop, it provided a genuine sense of urgency with which we fast-tracked the way we build our prioritized capabilities our bespoke capabilities in the country, and we see that that already starts to bear fruit, especially in the area of revenue growth management, which we regard as the most critical framework for any market, and Egypt is no exception. And that's why seeing the performance of Sparkling in the country And also water. Water played a good role in Q3 because we've done some significant price increases and adjustments which were needed in the category to make it more economically viable, and that has been achieved with a good success. So in both of those categories of sparkling and water, we've done necessary steps, and good to see that now that bears the fruit. Also, we have launched... two brands, Fury and Monster in Egypt because that was the first priority category where we recognized the opportunity and we are quite pleased how so far these introductions are performing. I would also highlight the extent to which we are really training and educating our sales force as a critical population to drive our results They have gone through our sales academy, reaching, gaining their license to sell, as we call it. That's very important in how we upskill the sales force. Also, the way we have reset the whole approach working with wholesalers in the country, which is a very important segment of customers. I'm really pleased how the team has done the adjustments for a healthy growth So these are some of the things that really are coloring of what we do in Egypt. Needless to say that we are intensifying our investments, coolers in the market that we are doing. There is also focused on digital commerce with e-wholesalers. So I would say on many fronts, we are working very hard and very busy. in strengthening the business. And I'm concluding to say that I'm quite optimistic about the outlook in the years going forward. Great.

Thank you, Zoran. Thank you, Fintan. Just given the pressures that a number of the major beer companies are talking about in the market, I wonder, could you talk about how you're continuing to significantly gain share, gain share approach from the consumer, and would you still be confident on driving volume growth into Q4 and into next year?

Yes, Vintan. The very first thing I will emphasize on Nigeria are the bespoke capabilities that we are developing and heavily investing behind in Nigeria. I always like to remind that Nigeria is always, if not the first, it's always among the first countries where we start and pilot many areas of our capabilities. And the way we have developed revenue growth management capability, also route to market, and now data insights analytics is really critical. We've seen how that carried us through the COVID times and then in post-COVID and at the beginning of the year when the country had issues with the banknotes, because of our proximity, frequency of visits, intelligence of where we need to go, what we do, and that it's not one size fits all, but we take a very segmented approach in the way we plan our initiatives, how we execute them for different regions, how we are now doing pricing in a paced and well-planned ways between different regions. I think all that is very important in how we execute locally adjusted marketing plans from the Coca-Cola company, where I really need to say that we like the way the global marketing programs are adjusted to the local reality and local consumer. And we are actually really encouraged to see how our partners from Coca-Cola company are doing that. And as a result of that, we do see that we are jointly increasing the number of weekly plus consumers, which is a good fact. So when you put that all together, I cannot make one point that is a sole driver, but all these together, is giving us a confidence that this quarter we will see a volume growth. We are cycling very low volume comps in Nigeria from last year. And also our planning for next year is taking both into account price mix, but also volume. So both of those are critical for our revenue generation next year in Nigeria.

Thank you very much, Aaron.

Thank you, Pinta.

The next question is from Alicia Forey with Investec. Please go ahead.

Hi there. I think most of my questions have been answered, actually, but I wondered if, just coming back to Egypt, would it be possible for you to break out, at least roughly, how much of the growth there was due to the new launches that happened and how much is sort of the underlying health of that market. And perhaps, as you just did with Nigeria, if you could dig into a little bit about the kind of consumer backdrop in Egypt a bit more, that would be helpful. Thank you.

Good morning, Alicia. even though we are excited with the new launches in energy, but those still are really not material to call them out. So it's the underlying performance of two well-established categories of sparkling and water that's driving the result in Q3. Consumer sentiment is not easy, given the fact that we are talking about very high general inflation, but especially food inflation is even higher. And we do see that the overall NARTD category market performance is in a small decline, while it is good to see that even in these kind of circumstances, that sparking category is still in the positive trajectory. So We appreciate to see that level of resilience on the consumer side, but we fully acknowledge the sentiment and the burden that is on consumer and that's reflected in our plans and adjustments of our brand, tech, price architecture that is being done in the market. And we feel that really that plays a role to address the consumer needs at this moment. Thank you.

Thank you. The next question is from Andrea Pistacchi with Bank of America. Please go ahead.

Yes. Hi, Zoran, Ben. So two questions, please. first one on on established volumes which obviously had a difficult quarter in in q3 held back by the weather could you comment on to what degree trends may have improved in in september particularly in in italy as the weather was less of a drag and the second question is on on 2023 guidance So Q3 was another quarter of strong top-line growth. You haven't, of course, changed the guidance. Your guidance this year implies quite a bit lower margins in the second half. And historically, margins have been higher in the second half than the first half. So how do you really square this? And what do you see with two months to go as the main areas of uncertainty for your performance in the year?

Good morning, Andrea. Let me start with your first question and then I'll give Ben the pleasure of the second one. So on established, first of all, I really use the opportunity to say how pleased I am with the progress that we are making in the established segment. Just to say that a couple of years ago, if you would ask me how would we be able or to which extent in such inflation environment to pass on pricing and improve our revenue per case. I probably would not be as confident as I am today to really see the testament and the result of revenue growth management that we are doing across all established markets. And I'm very pleased that our conscious choice of focusing on price mix has delivered desired results of very strong revenue per case, where both pricing and mix play the role, we knew that this is going to possibly create a temporary impact on volume, but it was a conscious choice. And also to mention that we know that we were cycling very, very strong volumes in this segment of Q3 of last year. If you remember, we were cycling 10%. So all in all, very pleased with the performance and in line with what our plan was. And going forward, like for the rest, we are going to see a more balanced ratio between price mix and volume as in all segments, but also in this one.

All right. Hi, Andrea. So, look, after a strong first half where we saw organic EBIT growth of 18% that was led by good execution of price increases and that resilient morning performance that you saw earlier in the year, now our guidance for the second half implies a slowdown in the EBIT growth, and that is primarily driven by a moderation in revenue growth driven by price mix, as Soren has earlier said. And basically, the other thing to consider is that on the cost front, while inflation is subsiding, we must also account for more significant transactional FX headwinds that we see in the second half coming from things like the ruble, the naira, and the Egyptian pound. So that's why the guidance remains as it is.

One if I can just one super quick follow-up, please on on on Italy and the sugar tax I think I was reading it's possibly being postponed again Is that you know is that confirmed is that is that right and are you hearing of potential sugar taxes in other markets?

You're right you're right you're right Andrea in Italy I At the moment, this has been pushed to July of 2024, and we remain working with industry on this case, but it has been pushed to July, and then we will probably have a more accurate status of that at our next call. And then, as you said, in any other markets, we do see that in Romania, we expect and there was going to be sugar tax from January. And that's something that we have anticipated now in the preparation of our plans. And we are taking that into account and plans will completely address that. Thank you. welcome for any further questions please press star and one on your telephone gentlemen there are no more questions registered at this time good so thank you operator and let me just uh recap a few key points from the call We had another good quarter of sales growth with resilient volume growth as well as strong revenue per case expansion. We are reiterating our guidance for 2023, providing a strong platform from which to build on in 2024 and beyond. Thank you all for your attention. And with that, I close the call and wish you a good day. Thank you.