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Edited Transcript of CCH.L earnings conference call or presentation 13-Feb-20 9:30am GMT

Q4 2019 Coca Cola HBC AG Earnings Call

Zug Feb 17, 2020 (Thomson StreetEvents) -- Edited Transcript of Coca Cola HBC AG earnings conference call or presentation Thursday, February 13, 2020 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Joanna Sherratt Kennedy

Coca-Cola HBC AG - IR Director

* Michalis Imellos

Coca-Cola HBC AG - CFO

* Zoran Bogdanovic

Coca-Cola HBC AG - CEO & Executive Director

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Conference Call Participants

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* Alicia Ann Forry

Investec Bank plc, Research Division - Consumer Analyst

* Edward Brampton Mundy

Jefferies LLC, Research Division - Equity Analyst

* Ewan Mitchell

Barclays Bank PLC, Research Division - Research Analyst

* Fintan Ryan

JP Morgan Chase & Co, Research Division - Analyst

* Nico Von Stackelberg

Liberum Capital Limited, Research Division - Research Analyst

* Sanjeet Aujla

Crédit Suisse AG, Research Division - European Beverages Analyst

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Presentation

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Operator [1]

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Thank you for standing by, ladies and gentlemen, and welcome to the Coca-Cola HBC's conference call for the 2019 full year results. We have with us Mr. Zoran Bogdanovic, Chief Executive Officer; Mr. Michalis Imellos, Chief Financial Officer; and Ms. Joanna Kennedy, Investor Relations Director. (Operator Instructions) I must also advise that this conference is being recorded today, Thursday, February 13, 2020.

I will now pass the floor to one of your speakers, Ms. Joanna Kennedy. Please go ahead.

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Joanna Sherratt Kennedy, Coca-Cola HBC AG - IR Director [2]

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Good morning. Thank you for joining our call today to discuss Coca-Cola Hellenic Bottling Company's results for the full year 2019. Today, I am joined by our Chief Executive Officer, Zoran Bogdanovic and our Chief Financial Officer, Michalis Imellos.

Following the presentation by Zoran and Michalis, we will open the floor to questions. As usual, can we ask you to ask your questions one at a time, waiting for us to answer one question before you ask another. The operator will keep your line open until we have answered all of your questions.

Before we get started, I would like to remind everyone that this conference call contains various forward-looking statements. These should be considered in conjunction with the cautionary statements on the screen, and this information can also be viewed in our press release issued today.

Now let me turn the call over to Zoran.

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Zoran Bogdanovic, Coca-Cola HBC AG - CEO & Executive Director [3]

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Thank you, Joanna. Good morning, everyone. Let me start by giving an overview of the year. Michalis will then take you through the financial performance before I discuss our operational performance in 2019 and outlook for 2020.

We are very pleased to report another year of strong progress. Overall, the results we released this morning put us well on track to meet our targets for 2020 and also position us well as we progress on our 2025 plan. In 2019, we delivered currency neutral revenue growth of 4.4% or 3.7%, excluding the impact of the Bambi acquisition. We are pleased to see the expected acceleration in the fourth quarter after unusually poor weather impacted industry volumes in our markets during the summer months. Overall, for the full year, we believe weather had a roughly 1 percentage point negative impact on our top line growth.

This view is supported by the very strong rebound in our own performance in the fourth quarter of 2019 where weather has a much lower impact. In the fourth quarter, we delivered currency neutral revenue growth of 7.4% or 6%, excluding Bambi. This was despite cycling a very strong result from Q4 '18 and without the benefit of Lavazza coffee sales in Q4 '19. As you may recall, Lavazza coffee was discontinued in October, which negatively impacted revenue growth by 70 basis points in Q4 and 20 basis points in the full year. Of course, we are only a few weeks away from our launch of Costa Coffee in at least 10 of our markets. I think it is important to also highlight the significant improvement in volume growth in Nigeria and Russia towards the end of the year, which I will explain in more detail later.

Our market share performance continues to progress very well. During the course of '19, we gained or maintained share in the majority of our markets in, both nonalcoholic ready-to-drink and sparkling, and good progress on top line growth along with our continual effort to control costs and drive efficiency in the business-generated strong operating leverage. Comparable EBIT grew by 11.5% to EUR 759 million and comparable EBIT margin expanded by 60 basis points to 10.8%. Excluding the impact of Bambi, comparable EBIT grew by 9.5% and EBIT margin expanded by 50 basis points.

Comparable earnings per share grew by 10% to EUR 1.44. We are particularly pleased with this strong result given that it incorporates higher financing costs this year due to the raising of EUR 1.8 billion of gross debt. Importantly, we also generated strong free cash flow, closing the year at EUR 443 million, the highest level of free cash flow generated since 2010. This financial growth was accompanied by continued progress in our commitment to build a more sustainable business, and I will say more about this later.

In line with our progressive dividend policy, the Board of Directors proposes a full year dividend of EUR 0.62 per share, an 8.8% increase on the 2018 dividend. This dividend is in addition to the special dividend of EUR 2 per share, which we paid in July.

With that, I will turn the call over to Michalis to go through some of these numbers in more detail.

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Michalis Imellos, Coca-Cola HBC AG - CFO [4]

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Thank you, Zoran, and good morning, everyone. In line with our practice, as I take you through our financial results for the year, I will refer to comparable figures, which exclude the impact of restructuring costs, the mark-to-market valuation impact of commodity hedges and specific nonrecurring items.

As Zoran just mentioned, in 2019, currency-neutral net sales revenue grew by 4.4% or 3.7%, excluding Bambi. Reported net sales revenue grew by 5.5% as we benefited from 1.1 percentage point of positive impact from currency movements in the Russian ruble and the Swiss franc against the euro. This growth was primarily driven by volume growth of 3.3% or 2.6%, excluding Bambi. All 3 segments grew volumes in 2019 while accelerating in the fourth quarter.

Currency-neutral revenue per case grew by 1% or 1.1%, excluding Bambi. Excluding Nigeria, where we have made targeted price investments over the course of 2019, currency-neutral revenue per case increased by 2.1%. We are seeing strong results from our strategy in Nigeria, with volume growth in the fourth quarter accelerating to 24%. Gross profit margin declined by 20 basis points, while OpEx as a percentage of sales improved by 80 basis points. I will return to the components of our OpEx leverage in more detail later.

Comparable EBIT increased by 11.5% year-on-year and comparable EBIT margin expanded by 60 basis points to 10.8%. 10 basis points of this margin improvement is attributable to the Bambi consolidation in the second half of the year.

Depreciation of currencies, mainly the weakening of the Russian ruble and the Nigerian naira against the U.S. dollar, result in a EUR 7 million currency headwind, better than what we had initially anticipated. Financing costs increased by 62% to EUR 67.1 million due to the raising of EUR 1.8 billion of gross debt in May and November.

Our comparable effective tax rate reduced from 26.2% in 2018 to 25.8% in 2019. Comparable EPS reached EUR 1.44, 10% higher than the prior year period. The growth was slightly lower than the comparable EBIT growth of 11.5% due to the higher financing costs mentioned earlier. Our working capital balance continues to be in triple-digit negative territory at the end of the year, and we generated strong free cash flow of EUR 442.6 million, a 19.6% improvement compared to 2018.

Turning to input costs. Currency-neutral input cost per case grew marginally by 60 basis points, in line with our low single-digit guidance for the year. The main driver for this benign input cost growth was resin, while sugar and aluminium improved. Good management of contracts, favorable hedges, mix shift to low and no sugar variants and our ongoing efforts in lightweighting helped us to deliver in line with expectations.

Comparable operating expenses as a percentage of revenue improved by 80 basis points in the full year to 26.9%. 30 basis points of improvement is due to operational leverage on logistics and administration cost efficiencies in the year. The rest of the improvement is due to lower marketing expenses as we are cycling the investments behind the FIFA World Cup as well as other one-off items.

Turning now to the key financial drivers on a segmental basis. In our established markets, currency-neutral revenue growth of 1.3% was driven by 80 basis points of volume growth and 40 basis points expansion in price/mix. This price/mix improvement is due to selective price increases in several markets as well as strong package mix, which improved by 1.1 percentage point in the segment. We also saw transactions growing by 2.4%, evidence of the ongoing progress we are making on our revenue growth management initiatives in the segment. On the other hand, the discontinuation of Lavazza in the fourth quarter was a headwind to price/mix in the segment.

Established comparable EBIT grew by 6.4% and comparable EBIT margin expanded by 40 basis points to 10.2%. This strong margin improvement was mostly due to operational leverage of OpEx. To a lesser extent, we also benefited this year from the strengthening of the Swiss franc.

In developing markets, currency-neutral revenues grew by 4.2%, with volume up 50 basis points and price/mix growth of 3.7%. The acceleration in price/mix in the year was due to selective price increases in several countries as well as positive category mix, driven by strong sparkling and energy growth. We also saw excellent progress on single-serve mix, up 3.9 percentage points year-on-year.

In terms of operating profit in the developing segment, comparable EBIT grew by 6.9% and comparable EBIT margin expanded by 30 basis points to 10.8%. The main drivers here were the positive pricing and mix mentioned earlier.

The emerging markets saw currency neutral revenue growth of 7.1% or 5.6%, excluding Bambi. This strong result was driven by volume growth of 5.7% or 4.4%, excluding Bambi. We achieved particularly strong performance in the fourth quarter with volume growth of 13.5% or 10.6%, excluding Bambi. These strong trends were broad-based across the segment, but it is also important to note the significant improvement in volume growth in Nigeria and Russia.

Currency-neutral revenue per case grew by 1.3% or 1.2%, excluding Bambi. This is a slowdown in price/mix expansion compared to the 2.4% we delivered in 2018 due to the targeted investments in pricing that we have undertaken in Nigeria. Given the timing of these investments, you should expect the impact to continue into 2020 with similar effect on the country and segment price/mix.

Excluding Nigeria, emerging price/mix would have increased by 3.6%. The point here is that outside of Nigeria, we have seen improving trends on price/mix. Zoran will give you more insight on our progress in Nigeria later on.

In terms of operating profit, comparable EBIT grew by 17.5% or 13.2%, excluding Bambi. This drove an improvement in comparable EBIT margin of 80 basis points to 11.3%, of which 30 basis points were due to Bambi. The remaining 50 basis point improvement was driven by operating leverage from our revenue growth, which more than offset the negative transactional effects impact due to the movement of the Russian ruble and the Nigerian naira against the U.S. dollar.

Turning to restructuring. We incurred charges of EUR 37.8 million in the year, with a majority of this being spent in the established and emerging segments. Restructuring benefits within 2019 from 2018 and 2019 initiatives amounted to EUR 30 million. Looking ahead to 2020, we expect restructuring costs of approximately EUR 15 million, with estimated annualized benefits of EUR 7 million from 2020 onwards. The benefits in 2020 from initiatives taken in 2019 and those expected to be taken in 2020 are estimated to reach EUR 32 million.

We generated strong free cash flow of EUR 442.6 million, up EUR 72.5 million from prior year. Strong operational profitability and working capital management allowed us to accelerate CapEx investments ahead of the strong revenue growth and, at the same time, generate the strong cash flow in the year.

Net capital expenditure as a percentage of revenue increased by 50 basis points to 6.9%. Of this 50 bps growth, 10 bps is attributable to the acceleration in CapEx investments while we benefited from an extra 20 bps of increased idle asset sales proceeds year-on-year. The remaining 60 basis points of growth are attributable to the impact of the adoption of IFRS 16 as of the 1st of January 2019. As you are aware, IFRS 16, which requires the recognition of all leases on the balance sheet, came into effect in 2019. This accounting change leads to a one-off CapEx as a percent of revenue increase of 0.5 to 1 percentage point of revenue. Therefore, taking into account the impact of the adoption of IFRS 16 in 2019 going forward, our restated annual capital expenditure target range has become 6.5% to 7.5% of net sales revenue. We see CapEx remaining within this range as we progress towards our 2025 plans. The working capital balance remains on our target level of triple-digit negative.

Turning now to our balance sheet. During the course of 2019, we raised 3 bonds and a total of EUR 1.8 billion of debt. We also redeemed EUR 223 million of our June 2020 EUR 800 million bond, leaving EUR 563 million outstanding. Financing costs in 2019 were EUR 67.1 million, an increase of EUR 25.8 million due to the higher level of gross debt on our balance sheet. The average interest rate on our bonds reduced by 60 basis points to 2.1% during the year. We would anticipate this interest rate reducing by a further 40 basis points after June 2020 when we redeem the last EUR 563 million of our 2020 bond.

Our net debt to comparable EBITDA stands at 1.54x at the end of 2019 compared to 0.61x at the end of 2018. We continue to expect this to move towards the upper end of our 1.5x to 2x target range by the end of 2020.

With that, let me now pass the floor to Zoran, who will take you through the operational performance in the year.

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Zoran Bogdanovic, Coca-Cola HBC AG - CEO & Executive Director [5]

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Thank you, Michalis. Now let me review the performance by category before we get back into a more detailed discussion of country and geographical segment. Sparkling Beverages volume grew by 3.5%, higher than our total portfolio, a strong performance in a year where we experienced unusually poor weather in the critical summer months in several of our markets.

What is particularly encouraging is that trademark Coke fueled our growth, and we saw even stronger growth in our areas of strategic focus, low and no sugar variant and Adult Sparkling. Low and no sugar sparkling grew by 26.7%, cycling 25.9% growth in the prior year. Adult Sparkling grew by 7.1%, cycling 6%. And there are some very strong trends at the brand level. Let me give you a flavor. Coke Zero grew by 26.2% while Fanta and Sprite low and no sugar variants grew by 90% and 157%, respectively. Within Adult Sparkling, Schweppes grew by 8.3% and is gaining share. We also see good trends from our other adult sparkling brands such as Royal Bliss, which grew volumes by 30%. What's particularly interesting is that Adult Sparkling grew the fastest in our established segment, up 13.4%.

Energy growth continues to be extremely strong, up 28.3% in 2019, cycling growth of just over 30% in 2018. Innovations are helping drive interest and sales in the category. And here, I'd like to highlight Coke Energy in the premium end of the market: Predator at the more affordable end, and a very successful flavor innovation of Monster Mango Loco.

Water volumes grew by 1.4%, a slowdown from the previous year, impacted by the weather, some pricing competition in Russia and Hungary and cycling the successful completion of a program in Poland designed to increase water volumes. Within Water, it is encouraging to see good growth in smaller single-serve package types, up 4.7%, and to see transactions growing faster than the volumes, up 2.1%.

Juice volumes declined by 1.7% impacted by a declining category. However, price/mix in the category expanded 3.5% as we focused on premium packages and brands. And we continue to gain value share in the category with high share gains in Russia.

Ready-to-drink tea volume declined by 8.4%, particularly impacted by the final delisting of Nestea in its large 3 remaining markets. Nestea volumes were up marginally by 10 basis points. We have seen some heavy promotional activity by competitors in a few countries. Nevertheless, we remain focused on building the strength of the brand and its justifiable premium position with our customers. We are also encouraged by the very strong performance of Fuze in Italy, where we grew volumes by 48% in 2019 and doubled our market share.

Premium Spirits volume grew by 4.9%. We now have Premium Spirits offerings in 19 of our markets and have more launches planned. Our Premium Spirits portfolio is a perfect complement to our Adult Sparkling portfolio. This combined portfolio really strengthens our offering to our customers in the crucial HoReCa channel and helps us to activate out-of-home evening occasions.

And let me also share a few words on coffee. As you may remember, we're only a few weeks away from our launch of Costa in at least 10 of our markets. Our preparation work has been progressing well, and our teams are excited to get going with this great brand and high-quality coffee. Coffee is a huge opportunity, nearly equal in size to the total nonalcohol ready-to-drink market in our territories. We believe we are uniquely placed as a Coke bottler when it comes to coffee since we have benefited from the past experience of selling a full portfolio of coffee in several of our markets for the last 3 years. This experience and the capabilities that we have developed gives us the opportunity of targeting all channels across our markets with Costa Coffee with a range of product and packaging offerings to serve at work, at home and out-of-home, with HoReCa being a key opportunity as well as on vending machines.

Coffee is just one of the examples of innovation in the portfolio. During the course of 2019, 4.2 percentage points of our volume growth came from packages, flavors or brands launched in the previous 12 months. These new products we have introduced allow for profitable revenue growth today and into the foreseeable future by providing the right product, package and price combinations across our channels and consumption occasions. We will remain focused and disciplined when it comes to innovation, which means choosing the right products for our markets and activating them in the correct way to generate profitable growth. The key is quality rather than quantity. By picking the right opportunities, we can back them with a relevant route-to-market approach and talent of our sales force to generate profitable revenue growth.

Turning now to our performance by segment and focusing on some of our bigger countries. In our established market segment, volume was up by 80 basis points in the full year. Sparkling volume grew by 1%, fueled by Trademark Coke, and we are pleased to have made significant progress in areas of strategic focus like Adult Sparkling and low and no sugar variants. Low and no sugar grew high single digits while Adult Sparkling growth was even better, up 13.4% versus last year with growth across all of our portfolio brands, namely Schweppes, Kinley and Royal Bliss.

Italy returned to growth in the year, with volumes up by 2.2%. Sparkling volumes grew by 1.2%, with good performance from Coke Regular as well as from low and no sugar variants. Coke Zero grew by 14.7%, Sprite Zero by 7.6% and Fanta Zero by 90%. We benefited from strong growth in ready-to-drink tea volume while energy increased by 30.7%, with Monster driving the positive result and supported by the launch of Coke Energy. We continue to benefit from the targeted route-to-market investments we have made in the country, the pack/price architecture changes we implemented in 2018 and strong marketing promotions, which are focused on driving transactions.

In Greece, volume grew by 0.8% with growth mainly from Sparkling, Energy and Water. The key contributors to growth and share gains in sparkling were Coca-Cola Zero, Fanta Zero and Schweppes. Adult Sparkling saw excellent performance, growing double digits in the year, fueled by the launch of new flavors. Energy continued to perform well, supported by new variants in Monster and the launch of Predator.

In Switzerland, volume declined by 5.2% as the country was adversely impacted by bad weather during the summer months. Having a negative impact on the whole NARTD industry. The pack/price architecture changes we implemented in Q4 of '18 are yielding good improvements in price/mix.

FX-neutral revenue per case grew by 0.4% in the period with volume growth, price increases and favorable package mix more than offsetting the unfavorable channel and category mix.

In our developing markets, volume grew 0.5%. Sparkling volumes grew by 2%, led by our low and no sugar variants, increasing by 9.1% in the year. Energy continues to see strong double-digit performance. In Poland, volume grew by 1.4%, despite cycling a very tough comparable of almost 10% last year. Sparkling was up by 2.2%, driven by Coca-Cola Regular and Coca-Cola Zero. Our Adult Sparkling portfolio saw excellent performance throughout the year with double-digit growth in Kinley, our adult brand in the country. Energy continued to deliver excellent results, with volumes in Monster increasing by 49% and the category being supported by the launch of Coke Energy.

Water was impacted by poor weather in the country during the summer period and the cycling of the water acceleration plan in 2018.

Volumes decreased by 1.8% in Hungary. However, we recorded good growth of 2.4% and gained value share in Sparkling during the period on the back of a good performance in Trademark Coke with growth in Coca-Cola Regular and Coca-Cola Zero.

Energy continued to deliver very strong results in the country. Volumes declined in both water and ready-to-drink tea, the latter impacted by the delisting of Nestea.

In the Czech Republic, volumes declined by 3.4% with all categories declining, except for energy. The acceleration we experienced during Q4 helped offset some of the volume loss due to the bad weather throughout the summer months. Sparkling declined low single digits as the good performance in Coca-Cola Zero and Fanta was offset by declines in the rest of Sparking portfolio.

In the energy category, Monster continued its good performance, growing double-digit in the year. Currency-neutral net sales revenue per unit case increased by 3.7% due to our successful revenue growth management initiatives.

Volume in our emerging markets was up by 5.7% or 4.4%, excluding the Bambi acquisition, with nearly all of our countries in the segment posting growth. Sparkling, Energy and water were the main growth drivers for the segment. Schweppes, our main Adult Sparkling brand in the segment grew high single digits in the period and our low and no sugar propositions grew by 80.9% in the year.

Volume in Russia was marginally up in the year by 0.1%. We cycled the tough comparable in the country. As in 2018, we had the FIFA World Cup combined with very good weather. The adverse impact of cold and wet weather during summer this year impacted the entire NARTD industry. Despite this, we saw good growth and market share gains in Sparkling and energy.

And in Juices, strong share gains driven by relevant innovation and improved promotions helped to offset the overall decline in the category. The other 2 categories where we experienced declines were water and tea, which happened to be particularly sensitive to weather. We are pleased with the mid-single-digit acceleration in volumes we witnessed in Q4, especially given the tough comparables in the period. Nigeria returned to growth in 2019 with volumes up by 9.1%. There is continued intense competition in the market and consumer affordability is still a concern, but the price investments that we have made in 2019 have been very successful at driving growth. As a reminder, we made price investments in PET in the sparkling category in October of 2019, which complemented those we made in last -- during the last quarter of 2018.

Following these adjustments, we've seen a strong acceleration in our volume growth during Q4, with volumes growing double digits. Other categories outside of sparkling have had excellent performance in the year, with water and Energy growing double digits. Volume in Romania increased by 5.6% with an acceleration in the second half. The country had strong results across all categories except for ready-to-drink tea. Romania is another country that has been impacted by the delisting of Nestea. Sparkling saw excellent results growing by 5.9% in the period with the contributions from all brands except for Sprite. Innovation supported growth with the launch of new flavors, including Coca-Cola Peach and Baobab Lime Raspberry.

Within Adult Sparking, new variants in Schweppes helped fuel its double-digit growth in the period. Currency-neutral revenue per case grew by 1.3% in the year or 1.2% if we exclude the Bambi acquisition. Removing the negative impact from Nigeria, FX-neutral revenue per case was up 3.6%.

Building a more positive social and environmental impact is integral to our long-term growth and to creating value for all our stakeholders. In 2019, our actions across 17 commitment areas, again, demonstrated our commitment to doing exactly that. Our progress was reflected by our Dow Jones Sustainability Index ranking as Europe's most sustainable beverage company for the sixth time in 7 years. We were also ranked second globally. Alongside this, we have the highest level of rating in MSCI, CDP water CDP CO2 and FTSE4GOOD, but rankings and ratings are secondary to action and impact. So let me give you just a few examples of what we have actually done.

First, in the area of packaging, we collected 48% of our primary packaging, up from 45% in 2018. We launched 4 of our water brands across 5 markets in bottles made from 100% recycled PET. In 3 markets, we have 50% recycled PET packaging in half liter packs of Trademark Coke. We have also announced that we will replace plastics shrink field on can multipacks with recyclable paperboard by the end of 2021.

On water, let me highlight 2 projects. In Poland, we have been able to save 60,000 metric tons of water annually through installing a reverse osmosis treatment step at our plant in Radzymin. In Nigeria, we set out to improve water availability for the communities around our production plant in Challawa. We invested in water infrastructure, drilling several new shallow wells, replacing aging pipe and supporting the refurbishment of the local state water boards, water analysis laboratory. Through this, we have helped to ensure that 1 million people have greater access to clean water.

And finally, on reducing our CO2 emissions. In Austria, we are powering our largest plant with a photovoltaic system installed on the roof that allows us to save 725 tonnes of CO2 per year. The annual emission equivalent to 400 midsized cars. Overall, use of renewable electricity at our production sites in the EU and Switzerland increased from 87% in '18 to 89% in '19. And our penetration in energy-efficient coolers with our customers rose from 19% in 2018 to 28% in 2019.

These are just a few examples of the significant work we are doing. We intend to be as accountable on our sustainability targets as we are on our financial ones. So as we did last year, we will provide comprehensive reporting against our mission 2025, sustainability commitments in our integrated annual report, which we publish in March.

According to external forecasts for 2020, the economic outlook in our territories continues to progress well, albeit not without global risks. And as we noted in the release this morning, we are aware of the potential for discriminatory taxation in our Italian and Polish businesses during the course of 2020, and we are preparing for any potential outcome. Overall, we expect volume to continue to grow in all 3 segments and at a faster pace relative to what we've seen in '19. This is particularly the case for the established and the developing segments, which were most impacted by weather.

We expect to deliver FX neutral net of revenue per case improvement at a similar level to that achieved in 2019. We would expect slightly better expansion in the established segment to be offset by slightly slower expansion in the developing segment, while the emerging segment should be broadly similar. We expect the impact on EBIT from foreign currency to be flat year-on-year, considering current spot rates. We have good visibility for our commodities, and overall, we expect our input cost per case to increase by low single digits on an FX-neutral basis.

With the continued positive impact of operating leverage as we grow our revenue, we expect to deliver further reduction in operating expenses as a percent of net of revenue in the year.

In summary, we expect another good year of FX-neutral revenue growth and profit margin expansion and full delivery of our 2020 strategic targets.

With that, I will now hand over to the operator, and Michalis and I will be happy to take your questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from the line of Edward Mundy calling from Jefferies.

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Edward Brampton Mundy, Jefferies LLC, Research Division - Equity Analyst [2]

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Three questions, please. First is on your guidance. I appreciate that you're not sort of explicitly quantifying it. But given the good momentum from Q4 and given the unchallenging weather comps in Q2 and Q3, I was wondering whether you could provide your level of confidence in hitting your medium-term guidance of 5% to 6% sales, and then 20 to 40 bps in fiscal '20. That's the first question.

The second question is on Bambi. How are you using the business to leverage your portfolio to target a 24/7 beverage model? In particular, you're seeing much cross merchandising within -- from your existing portfolio and integrating that with Bambi and are you also widening distribution of Bambi products into new markets? And then the third question is on Nigeria. Very good recovery in the fourth quarter. Are all the price reductions now done? And have you seen any competitive response post your price reset in PET?

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Zoran Bogdanovic, Coca-Cola HBC AG - CEO & Executive Director [3]

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Thank you for the questions, and I'll take them one by one. First of all, our 5% to 6%. Yes, that's exactly what we are shooting for. Driven by several strong reasons and drivers for our belief. As I mentioned several times, we know that we are going to cycle not very well weather that we had last year in Q2 and Q3. So what we are planning this year, as always, is just normal weather. We are not expecting anything crazy well, and also we are not expecting that we are going to have disastrous weather. So just normal.

Second thing is, this year, we are having EuroCup. And a number of our market countries have qualified, and we are having strong preparations to activate this tournament, as we have always proven that we know how to do that quite well. And our marketing plans have been adjusted for that. On top of that, we also have new wave of innovations that are coming this year. Q2, we are starting with Costa Coffee. So we are back in the coffee category. That's important to note as well as expansion of Coke Energy. Various innovations that we are having, both with product, packages and flavors in sparkling, in water in our ready-to-drink tea. So a strong pipeline.

And last point I would just say is that we are operating across our territories in a quite solid, positive environment. Economy in a number of our markets across our markets remains to be quite positive. Maybe in few markets, there is a little bit of a slower growth, but we are still seeing that we are operating in a growth environment. And that's also important to note. So all that blends to the fact that we are shooting for 5% to 6% that we have talked about in June of last year.

Moving on to Bambi, now more than 6 months with Bambi in-house, we really see that this high quality, complementary and innovative portfolio indeed is performing even better than our case was. And as you mentioned, Ed, in your question, exactly, we do see that complementarity in cross-promotions and cross-merchandising working really well in various occasions all the way from the morning occasions with AdeZ, our plant-based beverage, and then through snacking throughout the day. We have already been adjusting our various displays equipment that can facilitate such cross-merchandising and promotions, and we will continue doing more of that as we are also innovating and preparing new products with the Bambi portfolio.

We are also encouraged with what we see. We are definitely preparing ourselves to strengthen Bambi footprint in the countries where this portfolio is already present as well as to penetrate some of the new markets where Bambi is not yet present, but we have already preliminary very positive feedback on some tests that we have done. So yes, definitely, we see that complementarity, and we plan to leverage it definitely more and not less going forward.

On Nigeria, with investments that we have done, both in glass and then from September in PET, it has resulted with what we expected, the acceleration of the growth, I would say, even stronger than we thought, which really shows that our revenue growth management insights, analysis and decisions have really proved very valid. And I'm also seeing that we have started this year with a very, very positive trading in Nigeria. We do see limited competitive reactions, but nothing that wasn't part of our considerations what might happen. But now with the price premium that we have of approximately 20% per liter versus the competitors, I really believe that with additional activities, marketing investments that we are doing, that level of premium is fully justifiable in the context that Nigerian consumer is today.

So I'm quite positive about the prospect of Nigeria for the year. We are increasing capacity. We are strengthening marketing plan, which I think separates us from others in the market. And also we are having a number of innovations that also Nigeria is going to see. So that gives me the confidence for a good, strong year of Nigeria this year. Thank you, Ed.

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Edward Brampton Mundy, Jefferies LLC, Research Division - Equity Analyst [4]

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Very good. And just to my first question, I think you highlighted why you've got a high degree of confidence in your medium-term 5% to 6% target on sales. But the 20 to 40 bps on margin, perhaps any color you could pick up on that one?

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Michalis Imellos, Coca-Cola HBC AG - CFO [5]

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Yes. Look, specifically for 2020, our, let's say, target, as we have said, is a minimum of 11.2% EBIT margin. The 20 to 40 bps growth is more from 2021 onwards on an average every year. So we reiterate the 11.2% as the minimum target for 2020.

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Operator [6]

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The next question comes from the line of Sanjeet Aujla calling from Credit Suisse.

Okay. So the next question comes from the line of Ewan Mitchell calling from Barclays.

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Ewan Mitchell, Barclays Bank PLC, Research Division - Research Analyst [7]

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Three questions from me. The 70 bps headwind from Lavazza in Q4, can you just give us a bit more color as to when that will drop out and how we should expect your launches to kind of be tied in behind that drop out and kind of the intensity that you're going with them?

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Zoran Bogdanovic, Coca-Cola HBC AG - CEO & Executive Director [8]

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Ewan, Thank you. Yes. So yes, 70 bps because we had a Q4, let's call it, a coffee dry quarter. And also Q1 of this year will be such. And then in waves, we are going to start kick in countries, starting in Q2 with the first wave, then Q3, Q4. So we will have more and more countries starting with Costa. So I would say that you will see gradual increasing positive impact from the coffee through the year and then into the next year.

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Michalis Imellos, Coca-Cola HBC AG - CFO [9]

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Yes, just to build technically Lavazza on its own will be a year-over-year impact until the end of quarter 3 2020. Because we will start fully cycling from, let's say, October 2020. But then, as Zoran said, Costa will start kicking in from quarter 2, slowly, slowly in a number of markets.

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Ewan Mitchell, Barclays Bank PLC, Research Division - Research Analyst [10]

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Sure. So just to clarify, the noncompete will run until Q3. So those markets that you were with Lavazza, you won't be able to launch Costa until then.

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Zoran Bogdanovic, Coca-Cola HBC AG - CEO & Executive Director [11]

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That finishes -- that noncompete finishes, depending on a country, either in April or May. So fully respecting that, this is how we lined up also the country launches.

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Michalis Imellos, Coca-Cola HBC AG - CFO [12]

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And just to clarify, Ewan, my point is that since we finished with Lavazza from 1st of October 2019, it will take 12 months to fully cycle the discontinuation of Lavazza. It's nothing to do with the noncompete.

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Ewan Mitchell, Barclays Bank PLC, Research Division - Research Analyst [13]

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Okay. Very clear. Second point was on OpEx, declined by 80 bps this year as a percentage of sales. And 50 of that looked like it was marketing spend. I appreciate we've got the Euro football this year. Can you just give us an idea of where that might be versus last year and versus sort of the Russia World Cup year? And what sort of level we should kind of expect on a kind of more normalized year going forward?

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Michalis Imellos, Coca-Cola HBC AG - CFO [14]

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Okay. So yes, as we said, marketing expenses were down primarily because of cycling the FIFA World Cup investment and some other one-offs. So into 2020, of course, Euro is coming. We will invest there as well. So I would say that comparing on a normalized level without the cyclings of the FIFA and so on, we would expect that 2020 marketing expenses as percent of revenue will be slightly up in 2020 versus the baseline as a result also of the Euro.

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Ewan Mitchell, Barclays Bank PLC, Research Division - Research Analyst [15]

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Sure. And then 2018 -- 2019, sorry, would be a sensible year to kind of think of as a baseline?

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Michalis Imellos, Coca-Cola HBC AG - CFO [16]

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Yes, 2019, with the exception, of course, of some small one-off benefits that we have. On the other side, 2020 will have, call it, one-off investments related to the euro because we don't have them in 2019. So all in all, you would see a very small increase in marketing expenses in 2020.

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Ewan Mitchell, Barclays Bank PLC, Research Division - Research Analyst [17]

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And then final one, innovation. Could you just give a bit more clarity on how you're defining that? And the 4.2% of volume growth that was driven by innovation, can you just give us a bit of color as to how you kind of expect that to evolve as these innovations in Costa and Coke Energy and everything sort of come to bear more across your portfolio?

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Zoran Bogdanovic, Coca-Cola HBC AG - CEO & Executive Director [18]

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Yes, sure. So as I mentioned several times, innovation is really now a critical part of how we do business. And that when we say innovation, very sizable part of that is new package formats. Second is various new flavors that we are doing in various categories. And then come new categories and new brands. So what we will be seeing as well this year is that we are materializing on various new formats that we introduced either last year or we are going to see a new wave of formats this year that are part of also our key promo campaigns. So when you see last year, we have now completely moved to sleek cans on our sparkling portfolio, we've launched a number of nonreturnable glass in the markets, which trade in the retail modern trade channel, not only in HoReCa.

We also increased number of multipacks, for example, mini cans, that we have now in more and more markets. During Avengers and Star Wars promotions, we had a dedicated cans and PET packaging behind that. We see excellent, returnable glass innovation in Multon on juices, sports bottle, kids bottle. So this gives you a flavor of the things that we've done this year and that we will be -- along the similar lines, we'll be doing next year.

Second thing is that we see that one important part of how we keep our brands relevant in the eyes of consumers is various new flavor combinations that we are doing. And we are leveraging those, and we have more plans. We have more plans this year. There is also dedicated mixers line. You heard about coke and coffee. Schweppes is such a fertile ground where we are introducing a number of exciting flavors, which consumers and our customers appreciate because of their mixability potential. We are introducing also new Fuze tea variants both as the formulation or having 0 variant on top of new exciting combinations between the herbs and the fruits. And then Coke Energy, which only started last year.

This year, this is going to have a more sizable rollout across our markets. Overall, the energy category is very vibrant, dynamic and with a strong growth. We are also launching Predator in more markets, which is like a lower-end or more affordable segment of energy. So now with 4 brands in the energy, we are so well positioned to target and shoot for every segment in the market. And yes, so these are some of the most critical, I would say, buckets of innovation that either we've done last year from which we expect a full benefit, plus new wave that happens this year.

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Operator [19]

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The next question comes from the line of Alicia Forry calling from Investec.

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Alicia Ann Forry, Investec Bank plc, Research Division - Consumer Analyst [20]

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I just wanted to ask about the implications of Costa on your existing business. For instance, in vending machines or convenience stores, where do you think the shelf space for those products is going to be coming from? And what can you say about the expected margins on Costa versus your existing portfolio? Should we see a margin mix benefit or not? Secondly, the Italy beverage tax. I was just wondering if you could us on your thinking about that. Whether anything has changed? And what assumptions you're putting into the FY '20 guidance that you've issued today with regards to that issue? And then finally, Coke Energy. How many markets is that in now?

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Zoran Bogdanovic, Coca-Cola HBC AG - CEO & Executive Director [21]

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Thank you, Alicia. So on Costa, first of all, to clarify that. I maybe understood from your question that maybe you are having in mind a ready-to-drink version of Costa, where I would say that that's only one of the -- that's one of the product offerings that we will have much bigger part are beans in packages for in-home use or (inaudible) use. On top of that, there is -- there are capsules for in-home or at-office machines. And then there is also the unique express vending machines that Costa has that we will also be placing in the market. So this is a 360 approach to coffee, across all channels and with various product formats and types.

So we do plan to be positioned in the retail in the coffee section, as we really believe that there is a clear customer proposition. We are already in conversations with our customers, presenting the proposition and portfolio. And on top of that, we are going to do additional secondary displays as we usually do that will complement sampling activities that we'll do so that consumers can really have the opportunity to taste this high-quality coffee.

On margins. Look, coffee, first of all, is a tremendously important category, so sizable, as I said in my introductory remarks. Also I need to say it's very competitive and fragmented. That's why our priority over the next 2, 3 years is to do high-quality job in building a strong business. And that's why, as we roll out in waves this and next year, we are going to be also investing ahead of the curve. That's why it is not -- we are not expecting this and next year to already have, let's say, accretive impact from Costa. So I would expect that after full second year and then into the third year or so that we will start seeing, definitely, impact on the top line and then accretive impact on the bottom line.

But to be sure, I do expect that over years, coffee is going to be important contributor of our profitability as we build that business. But this is not a fast chase. It's not easy money, but it's hard work and building a quality business. And this is what we see as our competitive advantage and how we want to differentiate ourselves to be really recognized as a full-service provider to our customers across the markets where we go.

Italy beverage tax, absolutely, we are fully into it, monitoring, having on our own as well as industry conversations. And it's not totally final yet. You've seen already from the initial proposal to today that it has evolved, becoming more reasonable. And we will see what happens until really this becomes a law. Irrespective of what happens, we have a capability. This is where our revenue growth management capability is a critical one so that in every country, we look its individual case, given also competitive play, how do we adjust to any of such taxation because then we are adjusting pricing because, of course, we are passing any such new taxation to consumers.

But pricing is not the only element, but it is also through then adjusting pack sizes because we are respectful also to various price points that we want to have with our packages. So we are fully -- in full preparation, and I'm confident that with various adjustments that we are going to do in the business, we will be able to mitigate those and to continue with our growth trajectory in the new context. So I'm pretty confident on that.

And then Coke Energy, at the moment, with 12 markets. We will be expanding further. These are yet early -- it's early to say, but we've been some very, very encouraging feedback from the first countries. Both in trial, awareness, both with the energy consumers as well as the sparkling consumers. So our intention is to bring incrementality to the category as this trade in a very distinctive segment does not compete with the rest of our energy portfolio. As well as also as you heard from the -- from James' remarks in Coca-Cola Company call, there is also a second version and formulation. So we will be seeing across markets which of the 2 best fits to the consumers, and we will leverage those to the maximum. And I really believe that there is going to be some very good traction in this year with Coke Energy.

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Operator [22]

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The next question comes from the line of Fintan Ryan calling from JPMorgan.

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Fintan Ryan, JP Morgan Chase & Co, Research Division - Analyst [23]

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Two questions from me, please. Firstly, with regards to your input cost guidance outlook, could you break out what within the low single-digit per hectoliter case growth is coming from mix than areas, I guess, like Costa Coffee and the -- and Premium Spirits versus overall raw material inflation? And particularly as regards to sugar, what are you seeing there in terms of the -- what proportion of your COGS last year is related to commodity sugar? And given the recent spike in sugar prices, should this -- we see this as a potential headwind into late 2020 and 2021? And in terms of second question, just quickly in term -- with regards to your interest costs, what -- given the retirement of the bonds in 2020, what full year interest charge for 2020 would you be looking for?

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Michalis Imellos, Coca-Cola HBC AG - CFO [24]

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Thanks, Fintan. So on the input costs, first of all, the guidance for 2020 is low single-digit increase. We have some different trends compared to '19. So in terms of sugar, we expect in 2020 a mid-single-digit increase, and that is coming from both EU sugar, where we have enjoyed for a number of years some very favorable contracts and now we are seeing prices edging upwards in the low to mid-single-digit increase. Whereas, when it comes to world sugar, depending on the period when our hedges have fallen and any open quantities will be settled, we expect a flattish to low single-digit increase. So that is what is driving together with a small impact from mix is driving the mid-single-digit guidance.

We have good coverage when it comes to sugar. We are in terms of EU, nearly fully covered. And when it comes to world sugar, in terms of the 2 big countries, in Russia, we are pretty much fully covered; in Nigeria, we are more than half. So we have some good visibility about this mid-single-digit increase. When it comes to aluminum, there, we expect another benign year, low single-digit increase. Rates at the moment are -- look pretty good, flattish to low single digit versus prior year.

And the one that -- the commodity that will drive improvement in 2020 is resin. We expect a high single-digit decline in 2020 compared to '19. We already see favorable prices in the market, which are driven both by the supply-demand curve, but also the lower oil prices. And also with ongoing lightweight initiatives, this is going to give us a tailwind to get to the high single-digit decline in '20. So those 3 are the primary commodities. Now when it comes to finished goods, we should expect a low single-digit increase as an impact overall in the mix. Let's not forget Lavazza is coming out, which is a positive. Costa will come in very gradually during 2020. Premium Spirits, okay, is a business that we see some volume growth. So overall, this is not going to move the needle in terms of input cost per case. So we do expect a low single-digit increase overall in 2020.

You asked also going into 2021. I think it's too early, really. We have some hedges and some coverage in terms of sugar, but not, of course, in resin and little in aluminum. It's too early really to call 2021 as we are only in the beginning of 2020.

Now on your second question about the interest cost. So looking at 2020, we expect that interest costs will be at the levels that we experienced in '19, maybe slightly higher. And this small growth is going to come primarily, from 2 factors. One is that interest income is getting lower and lower as negative interest rate hit and the mix of where our funds are kept is changing within the countries. But the other factor is the fact that as we grow CapEx, and therefore, we grow finance leases within the CapEx spend, the interest cost of those finance leases based on the new standard, the IFRS 16 hits the financing costs. And therefore, with the growth of CapEx and growth of finance leases, we have a corresponding growth also in the financing cost. So in summary, pretty much at the levels of '19 with a small increase coming from those 2 factors.

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Operator [25]

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The next question comes from the line of Nico Von Stackelberg calling from Liberum.

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Nico Von Stackelberg, Liberum Capital Limited, Research Division - Research Analyst [26]

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I have 3 broad questions on Diet or Light Coke, free cash flow and ROIC, but let's do one at a time, as you've requested. So on Diet Coke or Light Coke. It appears to be in decline. Could you just tell me a little bit about the strategy? Are you positioning it more for women, like it is in Western markets? And can you just talk maybe a little bit broadly about, I guess, the commercial plans for that variant, please?

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Zoran Bogdanovic, Coca-Cola HBC AG - CEO & Executive Director [27]

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Nico, we have Coca-Cola Light or Diet Coke in several of our markets. And we have kept that variant of Coca-Cola in markets where it's sizable, where it really has targeted consumers. And we are also planning to bring some innovation in that part as well, where in line like you've seen some of other markets globally with various flavors in the -- in cans. We will be doing that as well. So however, in the Zero and Light, across majority of our markets, our primary focus is behind the Coca-Cola Zero, and that's where we are putting majority of our investments and flavor innovations, et cetera. However, just to close the loop on Diet Coke in the markets where we are and where we have a significant part of the business, we will be doing more things to also ignite that part as well.

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Nico Von Stackelberg, Liberum Capital Limited, Research Division - Research Analyst [28]

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Okay. Excellent. On the free cash flow. I appreciate it's a bit early maybe to comment, but do you -- after the strong year this year, do you expect it to grow year-over-year? Can you give any sort of guidance at all for 2020 and any sort of one-offs to mind?

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Michalis Imellos, Coca-Cola HBC AG - CFO [29]

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Yes, Nico, as you said early in the year, however, the objective is with the improved profitability and the good management in working capital to be in the levels that we achieved also in 2019, which are very, very strong.

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Nico Von Stackelberg, Liberum Capital Limited, Research Division - Research Analyst [30]

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Excellent. And then finally on ROIC. Can you please provide the return on invested capital for the year? I mean I can calculate it, but actually, what I was really looking for was the ROIC excluding Bambi just to get a feel for how it's developing.

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Michalis Imellos, Coca-Cola HBC AG - CFO [31]

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Okay. It would be difficult to isolate Bambi, especially with the methodology that we follow, which is the capital employed as an average over 5 quarters. But I would say that our ROIC for 2019 is around the 14% mark.

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Operator [32]

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The final question comes from the line of Sanjeet Aujla calling from Credit Suisse.

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Sanjeet Aujla, Crédit Suisse AG, Research Division - European Beverages Analyst [33]

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Just a couple of questions from me, please. Firstly, on the balance sheet. Michalis, you've been talking quite a bit over the last year about releveraging to 2x, you did a special dividend last year. However, if you do nothing through the course of '20, you still have a little bit of firepower. I know you've hinted at bolt-on M&A. Is that proving a bit more difficult or happening a bit slower than what you envisaged? And is that the way you envisage to deploy the capital?

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Michalis Imellos, Coca-Cola HBC AG - CFO [34]

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Yes. Sanjeet, yes, as you said, in 2019, we closed just in the targeted range in terms of net debt to comparable EBITDA, 1.54x with all the debt we raised and the uses of cash that we saw in 2019. So going into 2020, we estimate that in order to reach the higher end of the 1.5 to 2 range, we are looking at the firepower of anything between EUR 500 million to EUR 700 million. And we do have a good pipeline of bolt-on targets, which we are working through. Now clearly, the timing, you can never sort of fully control in these cases. However, we feel that -- we feel optimistic that in 2020, quite a bit of this firepower will be utilized. And with this plan, we are going to be at the upper end of the 1.5 to 2, even if we have to struggle over into 2021, early 2021. But that's the primary objective of how to utilize this firepower.

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Sanjeet Aujla, Crédit Suisse AG, Research Division - European Beverages Analyst [35]

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And presumably, that will be done with the cash sitting on the balance sheet today, which is, I think, as you alluded to, is generating little income?

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Michalis Imellos, Coca-Cola HBC AG - CFO [36]

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That's correct. This firepower is by utilizing cash that we already have, plus cash that will be generated, obviously, within 2020.

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Operator [37]

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We have no further questions coming through, so I'd like to hand the call back over to your host for any concluding remarks.

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Zoran Bogdanovic, Coca-Cola HBC AG - CEO & Executive Director [38]

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Well, thank you for your questions and the discussion today. I would like to leave you with a few thoughts.

We remain laser-focused on delivering this final phase of the 2020 commitments, while also looking forward towards the next phase of growth. We continue to leverage our product portfolio, and that portfolio is stronger, broader and more consumer and customer-centric than ever. With this portfolio, we are able to address more consumer occasions than ever before as we strive to become the leading 24/7 beverage partner in our geographies. In line with our improving portfolio, we are continuously strengthening our route to market and partnering with our customers to bring this 24/7 portfolio into the hands of our consumers faster and with greater efficiency.

Our route to market is increasingly segmented to offer more customer service options, aiming to capture the full potential of each individual outlet rather than just the channel. At the same time, the broader portfolio requires greater sales force specialization with dedicated teams for premium, HoReCa, for example. And this is an important part of how we activate these great brands in the market. And the ability to be more granular in how we slice the market and how we go after the highest potential opportunities is improving every day by investments in digital capabilities.

We are similarly investing in tools that enhance the productivity of our sales force in connected coolers that can monitor both the performance and productivity of our chilled space in the market as well as serve push notifications to consumers and in Big Data and advanced analytics, which is providing our teams with outlet-specific order suggestions. And of course, we are also applying innovation to our manufacturing and logistics to expand our technical capabilities while ensuring productivity and cost savings. These are the investments that will allow us to accelerate progress, and it is through this that we can create additional value for our customers and our shareholders, too.

Thank you very much for your interest in Coca-Cola HBC, and I look forward to speaking to you soon.