Coca-Cola Europacific Partners PLC (NASDAQ:CCEP) Q4 2023 Earnings Call Transcript

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Coca-Cola Europacific Partners PLC (NASDAQ:CCEP) Q4 2023 Earnings Call Transcript February 23, 2024

Coca-Cola Europacific Partners PLC isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Sarah Willett: Thank you for joining us. I'm here with Damian Gammell, our CEO; and Nik Jhangiani, our CFO. Before we begin with our opening remarks, reminder of our cautionary statements. This call contains forward-looking management comments and other statements affecting our outlook. These comments should be considered in conjunction with a cautionary language contained today, as well as the detailed cautionary statements found in reports about the UK, US, Dutch, and Spanish authorities. A copy of this information is available on our website at Prepared remarks will be made by Damian and Nik, we will then turn the call over to your questions. Unless otherwise stated, metrics presented today will be on a comparable and FX-neutral basis throughout. Following the call, a full transcript will be made available as soon as possible on our website. I will now turn the call over to our CEO, Damian.

Damian Gammell: Thank you, Sarah, and good morning, everybody, and many thanks for joining us today. Before I begin, I just want to take this opportunity to thank all of my great colleagues at CCEP for their continued hard work and dedication to our customers and our business. And obviously, today, we welcome our new colleagues joining us from the Philippines, a great coke market and a great addition to the CCEP story. So welcome. And again, a big thank you to everybody at CCEP for your ongoing hard work. 2023 was another great year for CCEP. We continue to execute on our clear strategy. We have an unwavering commitment to stakeholder value creation. Our retail customers importantly continue to share in our success since 2017, we've created more value for them than any of our peers.

And indeed, our tier store speaks for itself, validated by entering the NASDAQ 100 index late last year, we've paid a record dividend last year and now returned more than $6 billion to shareholders since 2016. We are clear on the strategic choices we make. We're making the right decisions on our portfolio to drive a more efficient business for the long-term. And from today, as I mentioned, we welcome Coca-Cola Beverage Philippines to the CCEP family, the acquisition having now formally closed. This creates an even more diverse footprint for CCEP, provides the opportunity to leverage best practice and talent, including supporting our exciting transformation journey in Indonesia. I'll come back on bulk markets a little bit later. And as always, we are supported by our strongly aligned relationship with the Coca-Cola Company and our other brand partners.

So now to our full year key messages. I'm really pleased with our performance in 2023, delivering on all key metrics. We achieved solid top and bottom line growth, value share gains in the market and as always, an impressive free cash flow generation. Top line growth was price/mix led, but also supported by solid volume growth in Europe, Australia and New Zealand, where we also grew transactions at of volume. We continue to invest for the long term in our portfolio, our digital journey, our supply chain, sustainability and, of course, in our people. We are a stronger and better business. We're more diverse and robust in our categories. They remain resilient despite some of the ongoing macroeconomic and geopolitical volatility. This collectively makes us well-placed for full year 2024 and beyond, underpinning our commitment to create continued shareholder value.

As I've talked about before, we are focused on great people, great service, great beverages, all done sustainably. So now let's take a brief look back on last year. Starting with our great people, we achieved an excellent score in our global engagement survey, position us comfortably ahead of our industry benchmark group. And we continue to be externally recognized as being a great and diverse place to work. This included our 2023 inaugural entry into the Forbes Top 200 World's Best Employers and the Top 100 World's Top Companies for Women. Great service and execution are always a key priority at CCEP as we strive to make it even easier for our customers to do business with us. We continue to invest in our supply chain like new state-of-the-art can lines in Australia, Norway and Great Britain.

And we were recognized for our great service in the Advantage survey results where we ranked number one globally among our top retailers up from last year. On our journey to becoming the world's most digitized bottler, we continue to invest in our broader digital capabilities. For example, around 85% of our volume is now captured digitally including our B2B portals which represent nearly 15%. And finally, our great brands and beverages. We are extremely privileged to make move and sell the world's most loved drink brands. We continue to invest and innovate to make them even better and appeal to even more consumers. In fact in Europe, over 75% of households purchased from our NARTD portfolio up 70 basis points from the previous year. And now let's look at our sustainability journey where we continued to make great progress.

We've achieved 55% recycled plastic content up from 48% last year. Having surpassed our 50% commitment, but our efforts do not stop there as we remain focused on our ultimate goal of a 100%. We continue to invest in sustainability focused technology to our CCEP ventures arm and we are proud to be part of the Coca-Cola System Sustainable Venture Capital Fund. A big milestone was the validation of our carbon emissions targets by the science-based targets initiative across all of our markets including API. This includes both our 2030 30% greenhouse gas reduction and our long-term 2040 net zero targets. And importantly, we continue to be recognized externally retaining our inclusion on the CDP's A List for climate and maintaining our MSCI AAA ESG rating.

So now turning to our performance highlights. As I mentioned earlier, we delivered a solid top-line performance. Solid underlying demand in our developed markets alongside grading in-market execution drove volume growth in Europe of 0.5% despite what you will all recall was a very mixed summer in terms of weather. Excluding the strategic choices we've made we saw underlying volume growth in Europe of 1% and in Australia and New Zealand of 2%. In Indonesia, we made good progress with our long-term transformation journey, which I will come on to in a bit more detail later. Execution of our revenue and margin growth management initiatives along with our dynamic price and promotion strategies across a broad pack offering drove solid revenue per case growth of 8.5%.

Headline pricing last year although ahead of pre-pandemic levels was below realized cost inflation as we continue to prioritize relevance and affordability for our consumers. Now to the NARTD category overall. It remains resilient, growing in volume terms by 8% -- in value terms by 8% -- in value terms by 8% in Europe and 9% in API. We gained value share both in-store and online and continue to win with our customers, supported by some great activation. Our strong top line performance, together with our continued focus on efficiency as we close out our full year 2021 to 2023 efficiency programs drove strong operating profit growth of 13.5%. This, in turn, supported impressive comparable free cash flow generation of just over €1.7 billion and the return to the top end of our target leverage range as guided.

I'd now like to hand over to Nik to talk to more detail to the financials. Over to you, Nik.

Nik Jhangiani: Thank you, Damian, and thank you all for joining us today. Let me start by taking you through our financial summary. We delivered comparable revenue of €18.3 billion, an increase of 8%, which I'll come back to shortly. Cost per unit case increased by 7.5%, broadly aligned with our guidance of around 8%. This was driven by our increased revenue per unit case, driving higher concentrate costs through our incidence pricing model, inflation in manufacturing, and commodities. High single-digit growth in commodities reflected higher sugar and aluminum pricing, partly offset by lower gas and power and recycled PET pricing. This equated to gross margin expansion of around 80 basis points with Europe ahead of that number.

We delivered comparable operating profit growth of €2.4 billion, up 13.5%, reflecting our solid top line growth, the benefit of our ongoing efficiency programs, and our efforts on managing discretionary spend. This equated to operating margin expansion of around 60 basis points, reflecting our focus on returning to our 2019 operating margin baseline. In line with our guidance, our comparable effective tax rate increased to 24% from 22% in 2022. This is largely due to the differences in the mix of taxable profits across our different territories and known tax rate increases, such as last year's U.K. tax rate increase to 25%, which comes into full effect in the 2024 calendar year for the full year. This resulted in a comparable diluted earnings per share of €3.71, up 12%.

Free cash flow generation, as Damian referenced, continues to be a core priority, and we delivered an impressive €1.7 billion on a comparable basis, which I'll cover in more detail shortly. Our returns on invested capital increased by 120 basis points to 10.3% on a comparable basis, driven by the increase in profit after tax and our continued focus on capital allocation. And finally, on shareholder returns, we paid a record dividend per share of €1.84, up 9.5% versus 2022. Now, to our revenue highlights. As Damian mentioned, the strong growth in our top line was driven by an increase in revenue per case with reported volumes down 0.5% for the year. This reflects the strategic choices we made driven by our SKU rationalization in Indonesia and the exit of bulk water across a number of our markets, namely in Australia, Germany, and Spain.

Excluding these one-offs, volume overall would have been up around 1%. Specifically, in the fourth quarter, our volumes were up 1%, reflecting resilient consumer demand, supported by great Christmas activation, and in-market execution. Revenue per unit case grew by 8.5% for the full year. This reflects positive headline pricing, continued focus on promotional optimization and revenue growth management initiatives. However we are not complacent. Although consumer spending has held up reasonably well we fully understand that some of our consumers are feeling the pressure. And we are seeing some shifting into retailer brands across a few categories less in colors and flavors but also more shopping and discounters. And this channel will and -- has and will continue to remain a core focus for CCEP, where we continue to grow and gain share.

Our consumer-centric approach remains focused on maintaining affordability and relevance for all consumers. We have great brands across a broad price pack architecture which enables shoppers to access our products across a wide spectrum of price points. It is essential now more than ever that we continue to balance premiumization for those that seek it with more affordable packs for those that need it. For example, in Spain, we've activated a popular and affordable price point on the iconic 1.25 liter pack to continue to drive frequency and household penetration. Revenue by segment is referred to here with more detailed commentary by geography, in the release. As mentioned just now, underlying volume growth of around 1% was driven by core brands where we continue to invest.

Here are a few examples. Coke Zero Sugar continued to achieve good share and volume growth across all key markets with volume 4%, as consumer trends for low and no-calorie beverages continue. In fact these now account for approximately 50% of our total volumes. In Energy Monster continued to outperform driving full year volume growth of 14%. Fantastic innovation continues to drive recruitment and distribution including the launch of Monster Green Zero Sugar, which has had a great start. Sports volumes were up 9% with Power Aid growth across all markets, driven by great activation and continued favorable consumer trends in this category. We will look to replicate the fantastic Women's World Cup activation in Australia and New Zealand last year alongside Coca-Cola Zero Sugar, as we look ahead to the exciting pipeline of sporting events favoring our European markets this year.

Fuze Tea outperformed with volumes up 23%, reflecting continued growth across Europe especially in France and Germany. And finally, we launched Jack and Coke with very encouraging results, in the fast-growing ARTD drinks category. Briefly now to a summary of the strategic choices we're making to ensure we grow our business profitably, and sustainably. We are being more choiceful about where we want to play, as you can see here. The Indonesia, 60% SKU rationalization was successfully executed and Damian will talk to that in a bit more detail later. We've already touched on the strategic exit of low-margin Bulk Water across a number of our markets and this has now largely been cycled through. And as we announced alongside the half year results last year, we have made some further strategic choices on our beverage portfolio and partnerships.

In Australia and New Zealand, we will maximize our extensive knowledge in the ARTD category by launching new scalable offerings aligned with the Coca-Cola Company. In this context, our partnership with Beam Sun will come to an end in the second half of 2025. And in Europe, our partnership with Capri Sun will come to an end this year. As you can see here neither of these choices will have a significant impact to CCEP. They are the right ones for the long-term success of our business, enabling a greater focus on priority categories and with our two key brand owners, the Coca-Cola Company and Monster. Now on to OpEx and our efficiency programs. We've now closed out delivery of our full year 2021 to 2023 program, which, as I mentioned earlier, supported our operating profit growth in 2023.

The entire program ultimately amounted to approximately €375 million of benefits, adding up to more than €700 million in total, together with our first post-merger efficiency program initiated in 2016. At our Capital Markets Day, we announced a new efficiency program aiming to deliver €350 million to €400 million of incremental savings by full year 2028. Overall, yes, it's a big number, but we feel very confident in its delivery. It will largely be enabled by leveraging digital tools, data and analytics. Of course, this is not an area that's new to us. We've been investing in digital capabilities for many years. And as Damian said, already 85% of our volume is captured digitally. For this next phase, we're moving from four legacy systems that we're still operating with today to one system as HANA.

That's going to be -- that's going to enable us to take a huge amount of standardization into our processes and ways of working over the next multiple years. Our large base in Bulgaria and our auto service providers will be pivotal. Already, our capability there has been transitioned from a more traditional shared service center to being a lot more focused around not just reporting but analytics and robotics. And there's a lot more we can do to build out capability beyond finance to people and culture, supply chain and the commercial areas of our business, while incorporating our new and established shared services center in Manila that we're very excited about. We said when we announced this program that the savings would be multiyear from 2024 through 2028.

A woman pouring a freshly made beverage from a large-scale bottling line.
A woman pouring a freshly made beverage from a large-scale bottling line.

With respect to this year, we anticipate savings of around €60 million to €70 million, which back to the previous slide, will help offset inflation. And naturally, there will be cash costs associated to deliver this program. These have been included in un-intercomparable free cash flow guidance of around €1.7 billion per year. So turning to free cash flow in more detail, a hugely important metric for us, and I'm sure for you as well. We generated €1.7 billion of comparable free cash flow in full year 2023, and this slide lays out the key components, including ongoing restructuring cash costs, as I referred to. Recognizing the importance of targeted investment, we spent around $700 million in CapEx, excluding leases on supply chain examples, which Damian gave earlier, digital and other technologies as well as cold drink equipment.

And as you know, working capital remains a core focus for us, and I'm really pleased that we delivered yet another year of significant benefits taking the cumulative amount to approximately $1.3 billion since 2017. Finally, you can see our comparable free cash flow excludes the one-off receipt of proceeds from the disposal of core royalties of approximately €90 million in Australia related to the acquisition of Amatil in 2021. And now for our leverage and balance sheet, we ended 2023 with net debt to comparable EBITDA ratio at three times. This means that we returned to the top end of our target leverage range of 2.5 to 3 times one year earlier than originally guided, thus firmly demonstrating the pace of de-leveraging since we closed the Amatil transaction in mid-2021.

Given the timing of today's closing of the Philippines acquisition, this does not include that related impact. Having said that, this will only have a modest impact on our leverage and given our strong focus on driving cash and further working capital improvements, we anticipate that we will return to within our target leverage range during this year. This, while remaining fully committed to our strong investment-grade ratings. Now, to a quick reminder of our midterm objectives, which we updated at our last Capital Markets Day. They remain unchanged and hear more for context as I come into our full year '24 guidance, which brings me into our full year '24 guidance, which is aligned with these midterm objectives. The guidance reflects our current view of market conditions and is based on an adjusted and comparable basis, which from a modeling perspective, assumes the Philippines was included in our business from the start of last year.

As you may have already seen, we did today provide a separate release incorporating full year '23 adjusted financial information for selected metrics for the Philippines. Please note that these growth rates are all provided on a comparable and FX-neutral basis, as it is really too early to provide specific FX guidance. Of course, we will update you as the year progresses. So we expect comparable revenue growth of around 4% and COGS copper unit case growth of around 3% to 4%, both of which will talk to shortly. With our continued focus on OpEx, as highlighted earlier, we will look to deliver comparable operating profit growth of around 7%. On interest, we do expect our underlying interest costs to be broadly flat, equating to a weighted average cost of net debt of around 1.3%, which clearly reflects a very attractive debt maturity profile.

The Philippines transaction has been funded through existing liquidity and incremental borrowing with a mix of euro public debt issuance completed in November '23 and local peso borrowings. Therefore, this newly acquired debt now takes our total weighted average cost of net debt for this year to be expected around still a very attractive level of around 2%. As I referred to previously, we do anticipate an upward trend on our effective tax rate, reflecting differences in the mix of taxable profits across our markets and known tax rate increases. We, therefore, expect ETR to increase to around 25% this year, up from 24%, including the full transition to the 25% tax rate in 2024 in the UK, as I referenced to earlier. We will continue to update you on our expected ETR, including our assessment of any uncertain tax positions during the course of the year.

On CapEx specifically, given the opportunities that lay ahead, we expect our CapEx guidance to be the top end of our range of 4% to 5% of revenue. This largely reflects two areas. Firstly, the upweighted digital investments we are making, and I spoke to that earlier and then also in the context of our new efficiency program, which will clearly be supported through those investments. And secondly, having now closed the Philippines transaction, which underpins these midterm objectives, we plan to invest a bit faster near term in this established and fast-growing market to position us for long-term success, and Damien will touch on that a bit more later. Given both opportunities are more near term in nature, we anticipate that our CapEx will be at the top end of our range for the next three years or so.

And finally, we do expect to deliver comparable free cash flow of around €1.7 billion, which will be after the tax cost associated with our efficiency programs. Let me provide a bit more color on the COGS guidance before handing back to Damian to talk top line, Indonesia and the Philippines. So on COGS, clearly, these comments are based on what we know today, which per unit case, we expect to increase by about 3% to 4%. Our concentrate costs are tied to our revenue per unit case growth, as you know, albeit much more balanced with volume compared to last year. We anticipate low single-digit commodity inflation. This reflects significantly higher sugar pricing in part offset by lower pricing in the other commodities. And from a hedging perspective, I'm pleased to say that we are now approximately 80% hedged for full year 2024, including the Philippines.

Of course, we continue to see inflationary pressures in labor within the manufacturing line. However, these will be broadly offset with lower gas and power in our plants and our continued focus on efficiency, as I talked to earlier. Finally, on tax, we have the throughput tax impact from the Netherlands change in soft drinks excise tax from €0.08 to €0.26 per liter with the offset, obviously, within revenue. And with that, I'll hand back to Damian. Damian?

Damian Gammell: Thank you, Nik. And now I'd like to spend a bit of time on the revenue opportunities for 2024. We expect top line growth this year to be much more balanced between volume growth and price mix compared to last year. As Nik said earlier, our main priority is to continue to remain affordable and relevant to the consumer. And as such, we continue to manage the business for the longer term with our overall realized pricing tracking below inflation to date. We are, however, still seeing some inflationary pressures across the industry, albeit lower than last year. To that end, we've already closed pricing negotiations in a number of our markets for this year. We have great brands, which our consumers love. And on the back of the ongoing investment and innovation brands, product and packaging, our category and brands continue to support a solid growth platform for all of our customers.

We will continue to invest in Coca-Cola, Zero Sugar and Powerade, taking the success from the Women's World Cup in Australia with some fantastic activation plans around the key sporting events of the Olympics and France and the euros in Germany. We have some exciting innovation plans for the Coke portfolio, including a lemon-flavor extension being launched both for Coca-Cola original taste and for Zero Sugar. In Flavors, we will be launching a new tasting Fanta and also driving a label-free more sustainable Sprite pack in GB. We will build on the success of Jack Daniel's & Coke, already the number one alcohol ready-to-drink value brand in GB, coming with all our packaging this year alongside the launch of Absolute and Sprite. Energy will benefit from the wider launch of the very well-received Monster Green Zero Sugar and the launch of new and exciting flavor extensions and Reign Storm.

And refillable glass remains a focus where we will continue to invest and will become even more relevant with the inclusion of the Philippines for over 5% of the volumes are sold through refillable glass. So now on to the Philippines, a great strategic move for us, the best use of cash and a good deal for our shareholders. The transaction creates an even more diverse footprint for CCEP within what will now be renamed APS, Australia, Pacific and Southeast Asia. The business is established with a proven track record, and it operates in a highly attractive and growing market, led by a great local team. It provides the opportunity to leverage best practice and talent, including supporting Indonesia's transformation journey where the sparkling category, as we know, is much less developed.

We very much look forward to working with a like-minded now joint venture partner, Aboitiz, one of the leading conglomerates in Southeast Asia. Their considerable experience of the market and cultural dynamics will no doubt be invaluable to us as we unlock even more potential together for the Philippines business and of course, all aligned with the Coca-Cola Company. Just by way of reminder, the Philippines operates in a large and attractive NARTD category. Currently, it's valued at around €8 billion, and therefore, take CCEP's addressable market to around €140 billion. The category is fast growing, estimated at around 10% per annum in value terms, so well ahead of CCEP's current group average of 3% to 4%. The market comes with attractive macros.

The Philippines is the 13th largest country globally with solid GDP and population growth and importantly, a fast-growing middle class, all metrics that are clearly ahead of Europe. Within the NARTD category, sparkling is well established, representing around 55% of volume where per caps over 4 times higher than the average for Asia Pacific. There remains attractive presence for growth when compared to more developed markets. Future opportunities would include low, low sugar, energy and ARTD, so lot to aim for and leverage from the rest of the group. And it's a very established business. Last year, the business delivered around 655 million unit cases, translating into APS representing one-third of the total volumes for CCEP. It generated around EUR 1.7 billion of revenue and EUR 105 million of operating profit, so already a business with attractive scale and profitability.

So as you know, the transaction completed today. As we have acquired a majority 60% stake alongside Aboitiz, we will consolidate the business into our results from an accounting perspective with their minority stake recognized as a noncontrolling interest. The business delivered solid top and bottom line growth last year, although some of this did reflect the return to a more normalized performance following adverse weather in 2022, which affected sugar availability. The transaction is, therefore, immediately EPS accretive. And as Nick said earlier, has a modest impact from CCEP's leverage in 2024. Our strong focus on capital allocation and our long-term mindset will ensure we invest in this established business to support the market's long-term 10% growth expectations.

The transaction gives us the opportunity to reset the growth ambitions for this business, and so our capital plans today reflect that. And lastly, before you ask, we will not be talking to specific synergies in relation to the Philippines. They sit within our overall guidance for CCEP. Of course, just like we did with Amatil, we see many opportunities to share learnings and best practices in areas such as digital, technology, procurement, sustainability and indeed shared services given there's already an established capability in that area in Manila. So our legacy, as I'm confident you would agree, we have a strong track record of integrating and driving value creation. So we've already started and look forward to share more with you in due course.

So from one exciting market to the next, I just wanted to close out with an update on where we are with Indonesia. As you all know, we are in the early stages of our long-term transformation journey, and we are making good progress. Unfortunately, as highlighted previously, consumer spending remains under pressure, generally impacted by wider market inflation and the reduction in fuel subsidies. So clearly, that's not helping us right now, but we remain focused on the longer-term opportunity. As I said earlier, the sparkling category in Indonesia is much less developed than in the Philippines at less than 10% of the NARTD category. We've successfully executed our portfolio plans. We now have a much tighter portfolio. We're focused on winning in sparkling and ready-to-drink tea.

Beyond the brand portfolio, we've completed a new price-packed channel strategy, which incorporates a deeper understanding of the Indonesian consumer sensitivities and affordability. We're working on building out new drinking occasions across the calendar beyond the must-win Ramadan period. This is a picture of the annual Jakarta Fair, the biggest consumer event in Indonesia where we executed our biggest activations yet in 2023. And alongside the Coca-Cola Company, we are focused on younger consumer recruitment. We are taking the right decisions to reengineer both our cost base and the route to market for the longer-term. We've implemented a comprehensive productivity program, while starting to move our largely direct route to market to a more fit-for-purpose and indirect model.

We are starting to see progress, a few examples of which I will share on the next slide. Just to talk to a few here. Sparkling transactions, a key metric are growing ahead of volume and Coke Trademark is achieving decade record volumes in what is a traditionally Sprite led market. As you would expect, we are fully aligned with the Coca-Cola Company on our brand priorities in Indonesia. A good example being the recent launch of Coca-Cola Zero Sugar and Sprite Zero, a really great opportunity for the future and off to a promising start. As I said just now, we are focused on recruiting younger consumers. We've step changed our approach to Gen Z, incorporating nearly 900 influencers with a combined following of nearly 370 million. That's more to me.

One of which is on the slide here with around 1.3 million followers alone. On sustainability, we are owning our circularly journey from day one through the right partnerships and investments. You can see here the significant progress we've already made on recycled content, supported by the first-to-market launch of 100% recycled PET bottles in Indonesia achieved through an industry partnership recycling facility just outside of Jakarta. And importantly, despite all of the change, our colleagues are highly engaged in the fact that had a CCEP average, which is great to see. So we remain confident in our future in Indonesia, and as always, look forward to updating you more in due course. So finally, to our closing remarks. As I said at the start, 2023 was another great year for CCEP, delivering on all key metrics.

We continue to execute on our clear strategy. We continue to invest for the long-term in our portfolio, our digital journey, supply chain, sustainability and, of course, in our people. We are a stronger and better business, more diverse, now including the great market of the Philippines, and robust -- and our categories remain resilient despite ongoing macroeconomic and some geopolitical volatility. This collectively makes us well-placed for the full year 2024, and beyond underpinning our commitment to create continued shareholder value. To close, I would particularly like to thank our customers, our brand partners and again, our colleagues whose hard work and commitment mean we're able to go further together for all our stakeholders. So again, thank you very much.

Nik and I will now be happy to take your questions. So over to you, operator.

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