Coca-Cola Europacific Partners PLC (NASDAQ:CCEP) Q4 2022 Earnings Call Transcript

Coca-Cola Europacific Partners PLC (NASDAQ:CCEP) Q4 2022 Earnings Call Transcript February 16, 2023

Sarah Willett: Thank you all for joining us today. I’m here with Damian Gammell, our CEO; and Nik Jhangiani, our CFO. Before we begin with our opening remarks on our results for the fourth quarter and full year 2022, a reminder of our cautionary statements. This call will contain forward-looking management comments and other statements reflecting our outlook. These comments should be considered in conjunction with the cautionary language contained in today’s release as well as the detailed cautionary statements found in reports filed with the U.K., U.S., Dutch and Spanish authorities. A copy of this information is available on our website at www.cocacolaep.com. Prepared remarks will be made by Damian and Nik and accompanied by a slide deck.

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. Any growth rate will be also presented on a pro forma basis. With the full year financial year of Coca-Cola Europacific Partners behind us, please note that pro forma growth rates will no longer be relevant when talking about FY ’23 and beyond. Following the call, a full transcript will be made available as soon as possible on our website. And finally, before I turn over the call to our CEO, Damian, if you live in GB, please not worry about the recent news coverage about the much loved brand and one of my personal favorite Lilt. It is not disappearing, but being rebranded as Fanta pineapple and grapefruit.

So on that positive note, over to you, Damian.

Damian Gammell: Thank you, Sarah, and many thanks to everyone joining us today. Before we start with our key messages, I’d particularly like to thank all of my colleagues at CCEP for their incredible commitment and hard work throughout what was our first full year as Coca-Cola Europacific Partners. And indeed, what a great year it has been. I am delighted with our financial performance achieving strong top and bottom line growth with revenue and profits both ahead of 2019 levels, value share gains and a very impressive free cash flow generation. This has allowed us to pay a record dividend to our shareholders. As a diverse and sustainable bottler, we firmly believe we are well placed for growth in 2023 and beyond. We also operate within a resilient and growing category with great brands that our consumers continue to love.

We will continue to invest and innovate in these brands and their packaging supporting a solid growth platform for all our customers. We are confident in the future and are fully committed to the higher midterm objectives announced at our Capital Markets Day in November. And finally, we are very proud of our strong relationship and alignment with the Coca-Cola Company, and all other valued brand partners. So this slide and graphics will be familiar. We have a clear but vital purpose to refresh Europe and API and critically to make a difference for all our communities and our stakeholders. And we have a clear focus around great people, great service, great beverages, all done sustainably for a better shared future. So now I’d like to touch on each of these areas as we look back at 2022.

CCEP’s ambition for growth and sustainability depend on our great people and the well-being and safety of our colleagues remains our number 1 priority as a company. We finished 2022 with a world-class safety performance. We are committed to encouraging all our employees to live happy, healthy lives so that they’re engaged at work and able to perform at their best. I’m pleased many of you got to see this for yourselves during the market and plant tours as part of our recent capital markets event in London. We now offer a new employee assistance program or EAP in all markets, providing all our employees with access to counseling, advice or specialist information. We accelerated our diversity and inclusion progress, and this continues to be recognized externally, too.

I am pleased that we are recently included on the 2023 Bloomberg Gender Equality Index for the third year running. This demonstrates our commitment to gender diversity and equality and fostering an inclusive culture for everyone at CCEP. We continue to encourage a culture of innovation and improve our digital tools in the workplace and we were awarded gold at the U.K. Employee Experience Awards in recognition of our program. Great service remains a key priority and is a critical driver of our performance. Once again, we were the largest creator of value in the retail channel for our customers within FMCG in Europe and in NARTD and API according to Nielsen. And in Australia, we were the largest value creator within the alcohol category to gaining over 250 basis points of value share in the RTD space.

I’m extremely proud of the way we successfully navigated supply chain challenges throughout the year and importantly, continue to invest ensuring our products were available on shelf and online and maintaining our high levels of customer service. This year, we installed 4 new lines and upgraded 2 existing lines, helping us to meet the growing consumer demand for our beverages whilst also delivering a range of sustainability benefits. For example, our new state-of-the-art can line in Moorabbin, Victoria, is able to make up to 1,700 tons per minute in a variety of formats, including mini cans, while also using less water and less energy than our existing lines. In recognition of world-class customer service and execution, the Netherlands were the runner up in the annual global Coca-Cola Bottler competition, the Candler Cup.

And we’ve seen some great activation, particularly around the World Cup and throughout the really important festive periods of Ramadan and Christmas. On digital, we continue to accelerate our B2B platforms hitting record revenues of €2 billion in 2022. That was up 50% versus 2021. And finally, through our ventures program, we recently partnered with 2 universities who will be undertaking academic research into direct air capture at our sites to help us reduce carbon emissions on our journey to net zero. We are extremely privileged to make, move and sell the best beverages in the world, and we continue to recruit new shoppers across our portfolio. In fact, in Europe, over 75% of households purchased from an NARTD portfolio in 2022, that’s up 70 basis points versus last year.

You will recall that we rolled out a new taste, new look and a new campaign for Coca-Cola Zero Sugar across our markets throughout 2021. This has been a great success, driving volume growth of 10% in 2022 or an impressive 23.5% when you compare it to 2019. Coca-Cola creations were also a great success in 2022 with more excitement and new flavors to come this year. Within flavors, new Fanta flavor launches and the latest What the Fanta campaign continues to drive excitement for our consumers, particularly over Halloween. We also launched Sprite Lemon plus, with added caffeine, in Australia with really promising early results. Monster continued to gain share through innovation with more flavors launched in the Juice and Ultra ranges during 2022.

In coffee, we launched a new Costa Frappé range. And in Australia, Suntory’s Minus 196 double lemon, a brand that has proved really popular in Japan, continued to deliver solid growth. And all of this will continue to be done more sustainably. Our This is Forward commitments were extended to our API markets in 2022, resulting in a unified action plan for CCEP. We continue to make great progress against our commitments and are taking action where it matters most. In Europe, we launched tethered closures on our PET bottles in 7 markets with more to follow in 2023. This new design, which includes a lighter weight neck, is estimated to save at least 1 gram of plastic per bottle, equating to approximately 15,000 tonnes of CO2 and over 9,000 tonnes of plastic a year by 2024.

In Australia and Indonesia, we invested in new PET recycling facilities. These collaborations are a step forward towards creating a circular economy for PET and we’ll continue to further accelerating our journey towards the ultimate goal of using 100% recycled or renewable plastic. Four more of our production facilities became carbon neutral in 2022, totaling 6 to date across different markets. Our progress continues to be recognized and we are proud to have retained our coveted CDP and MSCI ratings for the 7th consecutive year. CCEP was also recognized for sustainability leadership within the Coca-Cola system by winning the prestigious 2021 J. Paul Austin Award. And finally, I have the pleasure in sharing that CCEP recently became a member of the Ellen MacArthur Foundation, an important partnership as we continue our efforts to transition to a circular economy.

So all in all, a great year of progress. Turning now to our 2022 performance highlights. We’re really pleased with our top line performance. The continued recovery of away-from-home and further growth in the home channel helped drive a 9.5% increase in comparable volumes. Our continued focus on revenue growth management and in particular, our efforts to actively manage headline pricing and optimize promotions across our broad pack offering, drove solid revenue per unit case growth of 6%. This is ahead of pre-pandemic levels but below realized cost inflation, reflected in our margins as we continue to prioritize relevance and affordability of our brands for the consumer. We continue to win with our customers, and this momentum is evidenced by our NARTD value share gains and value creation.

Our continued focus on driving efficiencies which Nik will cover in more detail shortly, helped drive solid operating profit growth of 12.5%. This all resulted in an impressive adjusted free cash flow generation of €1.8 billion enabling us to pay a record dividend to our shareholders. And as mentioned earlier, we’ve made great progress on sustainability initiatives. And I’d now like to hand over to Nik to talk in more detail to the financials. 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 total revenue of €17.3 billion, an increase of 15.5% and our COGS per unit case increased by 9%, both of which I’ll come back to shortly. We delivered comparable operating profit of €2.1 billion, up 12.5%, reflecting our solid top line growth, the benefit of our ongoing efficiency programs and our efforts on managing discretionary spend. In line with our guidance, our comparable effective tax rate increased to approximately 22% from 21% in 2021. This is largely due to differences in the mix of taxable profits across our different territories and the reassessment of our uncertain tax positions.

This resulted in comparable diluted earnings per share of €3.39, up 14%. Free cash generation continues to be a core priority, and we delivered an impressive €1.8 billion on an adjusted basis during 2022, and I’ll cover that in more detail in a few moments. And finally, on shareholder returns, we paid a total 2022 dividend per share of €1.68, up 20% versus 2021. In absolute terms, this equates to total dividends paid of approximately €760 million, which as Damian mentioned, is the largest payment in our company’s history. So now if I turn to our revenue highlights. The strong growth in our revenue was driven by both an increase in volume and importantly, our revenue per case. Unsurprisingly, the most significant improvement has been in our away-from-home volumes given last year’s base was still impacted by lockdown restrictions.

That said, we are pleased that our away-from-home volumes have broadly returned to 2019 levels, with traction in immediate consumption and the rebound in tourism. GB has been the standout here with away-from-Home volumes in double-digit growth versus 2019 and Iberia with strong recovery to slightly above 2019 levels as well. Strong trading in the home channel continued, benefiting from the increased at-home occasions as well as continued growth in online grocery with volumes up 4% versus 2021, or up 6.5% versus 2019. So volumes were slightly softer in the fourth quarter, up 1.5%, impacted by some customer disruption in Germany as well as tougher prior year comps. Excluding this customer disruption, volume growth in the home channel would have been positive in the fourth quarter versus the minus 1% detailed in the release.

I am pleased that we were able to resolve this customer negotiation during the quarter. And as Damian referenced earlier, our priority is and will continue to be, to lead the category for sustainable value creation for all our customers. Moving now to revenue per unit case, which grew by 6% for the full year, reflecting the strong growth in away-from-home, but also a testament to our revenue growth management initiatives with positive headline price, pack and brand mix. Unsurprisingly, pricing took a bigger role in 2022 compared to previous years, given the inflationary environment, and we successfully implemented both our first and second round headline pricing strategies across all markets, and I’ll update on 2023 shortly. Revenue by segment is also referred to here.

You can see more detailed commentary by geography in the release, but at a headline level, Great Britain and Iberia were the stand outs, but with both Europe and API ahead of 2019 levels on a revenue basis. So moving now to COGS per unit case, which increased by 9%, slightly ahead of our 8.5% guidance. This difference was primarily driven by higher concentrate costs as a result of our incidence pricing model. This is, as you know, directly linked to our revenue per unit case growth, which was stronger than anticipated as a result of our successful RGM and second round pricing initiatives. As expected, we saw commodity inflation in the low 20s, in line with our guidance, reflecting higher aluminum and rPET pricing as well as the impact of higher gas and power pricing on our conversion costs, this past being more second half weighted.

Now moving to OpEx and our efficiency programs. We have now delivered over 90% of our full year ’21 to ’23 program, which ultimately will amount to approximately €375 million of benefits in total. We will deliver the final €30 million during 2023. And in November, we announced a new efficiency program aiming to deliver €350 million to €400 million of incremental savings by full year 2028. As a reminder, these benefits will be weighted towards 2024 and beyond. You can now see on this slide that as a percent of revenue, our OpEx continued to decline in 2022, reflecting our extremely disciplined focus on driving efficiencies throughout the cost base more than offsetting our underlying cost inflation as well as the increase in our volume-related costs and of course, TME which has naturally increased to support our top line growth.

Importantly, our OpEx has declined not only compared to last year, but more importantly, around 200 basis points lower as a percentage of revenue compared to 2019. Going forward, we will continue to manage costs very tightly, but do anticipate further inflationary pressures in areas like labor and haulage as well as a certain element linked to volume growth this year. So turning to free cash flow in more detail, a hugely important metric for us and for you as well. We generated €1.8 billion of adjusted free cash flow in full year 2022 and this slide lays out the key components. Recognizing the importance of targeted investment, we spent approximately €600 million in CapEx, excluding leases, on supply chain, 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. This included a notable improvement in API as we rolled out our proven working capital initiatives in that region. For example, we have now aligned API’s annual incentives to Europe so that incorporates free cash flow as a targeted measure, which has naturally encouraged more focus on delivering improvements. This has helped drive approximately €120 million of working capital improvements in API since the acquisition, taking the cumulative amount, including Europe to approximately €1.2 billion since 2017, a remarkable performance. Finally, you will see our reported free cash flow also includes the benefit of a VAT tax refund in Spain amounting to approximately €250 million.

We have excluded this from the adjusted free cash flow to allow for better comparability, given the unusual nature of this item. And now to our leverage and balance sheet. We ended 2022 with a net debt to adjusted EBITDA ratio of 3.5x demonstrating the pace of deleveraging since we closed the Amatil transaction in May 2021. Given our strong focus on driving cash and working capital improvements, we remain confident that we will reach the top end of our target leverage range of 2.5x to 3x by the end of 2023, while remaining fully committed to our strong investment-grade ratings. We have a strong and flexible balance sheet. And as a reminder, we won’t need to refinance any of our existing debt for another 2-plus years, which is certainly helpful in the current volatile rates environment.

Moving now to API and an update on some of our portfolio initiatives. We have now exited beer and cider in Australia as planned, and the majority of the proceeds have been received from the sale of our CCEP-owned NARTD brands as well. And we have a more streamlined portfolio in Indonesia, focused on our core Sparkling and tea categories, which has allowed us to manage our supply chain more efficiently and deliver even better service to our customers across key calendar events like Ramadan and the Chinese New Year. Indonesia is a hugely exciting and attractive market for us, and so we’re really pleased to announce the purchase of the Coca-Cola Company’s 29.4% minority stake in our Indonesia business, increasing CCEP’s ownership to 100%. This was for a total consideration of €282 million, and please note that this price includes a significant amount of cash on the local balance sheet and represents KO’s fair share of that cash.

While this transaction will be EPS accretive, it will have a minimal impact at the group level for full year 2023. This now simplifies our ownership structure while demonstrating our commitment to the future of this exciting market. In fact, the more time Damian and I spend in Indonesia, the more excited we get about the opportunities ahead. This is a market with a fantastic growth opportunity in the NARTD category of over 10% a year. We’ve already seen promising results from some of our portfolio initiatives, evidenced by a 7% increase in revenue per unit case versus 2019 and so we’re looking forward to the longer-term value creation opportunities that this market offers as we continue to reshape our route to market to be fit for purpose. So let me move on to guidance for full year 2023, which now reflects our view of the current market conditions.

We expect revenue growth of 6% to 8% and COGS per unit case growth of approximately 8% both of which I’ll talk to more on the following slide. With our continued focus on OpEx management, we will look to deliver operating profit growth of 6% to 7%. From a phasing perspective, we anticipate low single-digit operating profit growth in the first half, reflecting the COGS per unit case comp. Please note that these growth rates are all provided on an FX-neutral basis. And whilst too early to provide specific FX guidance, for modeling purposes, we do expect to see a translational FX headwind on for the year at current rates. We will, of course, continue to update you as the year progresses. On interest, we do expect a small increase versus 2022, given the impact of higher rates on our floating note exposure at around 10% of our debt, as well as the loss of interest income associated with the net cash outflow from the Indonesia minority buyout.

As I referred to last year, we do anticipate an upward trend on our effective tax rate driven by known tax rate increases. We, therefore, expect our ETR to increase to around 23% this year, with the U.K. tax rate increase from 19% to 25% effective from April this year, being the main driver. We will continue to update you on our expected ETR, including our assessment of any uncertain tax positions as the year progresses. We will continue to maintain our progressive dividend payout ratio of approximately 50%. And finally, we expect to deliver free cash flow of at least €1.6 billion after our capital expenditures, which this year are expected to be in the range of 4% to 5% of revenue, excluding lease payments. So let me now provide a bit more color on our revenue and COGS guidance.

First to revenue. In terms of shape, revenue growth will be mainly price mix-led, driven by our anticipated headline price increases in 2023, combined with the annualized impact of last year’s second round of pricing. We will also continue to focus on driving promotional efficiency, all of which will help us to offset some of the inflationary pressures that we are still seeing across the industry. Our main priority is to remain affordable and relevant to the consumer and as such, we continue to manage the business for the longer term with overall realized pricing tracking below inflation to date. We have great brands, which our consumers love and on the back of ongoing investment and innovation in brands, product and packaging, our category and brands continue to support a solid growth platform for all our customers.

The NARTD category remains resilient to date. Ultimately, we believe we can at least maintain or grow our share of the category, led by our great brands and best-in-class capabilities and execution, all underpinning our guidance of 6% to 8% revenue growth this year, and our customers will continue to share in our success, too. We’ve made structural changes to our business in recent years, which has positioned us more favorably from a volatile macroeconomic environment. As you know, approximately 40% of our volumes come from the more inelastic away-from-home channel, which is naturally somewhat more resilient in challenging times. And in the home channel, we’ve made bold strategic decisions in recent years, targeting value over volume and improving the underlying profitability of the channel.

We’ve step changed our recommended price pack architecture to address different consumer needs and now confidently play across a spectrum of package formats and recommended price points. We also continue to actively manage our headline pricing and optimize our promotions through smart RGM. So we feel good about our category and our leadership position within it. And despite what we see as a very dynamic external environment, recent trading has not indicated any significant changes in the underlying consumer demand. Moving now to COGS. And clearly, these comments are based on what we know today. We expect COGS per unit case to increase by approximately 8% weighted more to the first half given the comps from last year as previously disclosed.

This reflects higher concentrate costs tied to our revenue per unit rate growth, which as we mentioned earlier, will be the main driver of revenue growth this year. You’ll notice on this chart that concentrate now accounts for approximately 45% of our total COGS versus the 50% previously indicated, given the inflationary pressures we saw in 2022 through the commodities line. We now anticipate commodity inflation of approximately 10% versus mid-teens previously communicated as we’ve seen some respite in spot prices for certain raw materials such as aluminum. That said, our indirect exposure to the higher energy and transport costs continue to drive inflation through our conversion cost line, accounting for approximately half of our total commodities exposure.

From a hedging perspective, I’m pleased to say that we’re now approximately 85% hedged for 2023 and approximately 45% for 2024. Of course, we will continue to see other inflationary pressures within COGS such as labor, gas and power, mainly through the manufacturing line. Clearly, all this guidance is based on what we know today, given that there is still some volatility, particularly in our indirect non-hedged commodity exposure, we will continue to update you as the year progresses. And on that note, I’ll pass back to Damian, who will share a bit more on what you can expect from our portfolio this year. Damian?

Damian Gammell: Thank you, Nik. And indeed, we have plenty to look forward to with some great plans in place with all our brand partners. We will continue to invest in Coca-Cola Zero Sugar with some fantastic activation plan around the FIFA Women’s World Cup in Australia and New Zealand. In Flavors, we’ll continue the excitement with What The Fanta, launch Kirks Orange in Australia, and refresh Sprite across Europe with a new irresistible taste. And our smooth campaign will drive consumers to try our great tasting Costa ready-to-drink range. Innovation will continue to be a core driver of our growth in energy. We will launch even more flavor extensions and the first ever energy coffee offering in Australia with Monster Java Loca Moca and Mean Bean.

And of course, we’re extremely excited to be launching our Jack & Coke assortment in GB, Spain and the Netherlands. Hopefully, many of you are able to sample this at our recent Capital Markets event. If not, watch out, it will be here soon. Before we close, I wanted to take this opportunity to recap the new objectives we set as part of our capital markets event in November. We have a lot to do. But as we build on our current momentum, I’m confident that we have the right strategy to deliver on these ambitious targets. So finally, to recap our key messages. 2022 was another successful year for CCEP, with strong revenue growth, share gains and further value creation for our customers. This, alongside our continued focus on driving efficiencies, drove solid bottom line growth and free cash flow, enabling us to pay a record dividend to our shareholders.

Importantly, we continue to accelerate our sustainability investments and invest in our ongoing digital transformation. We are operating in a dynamic environment, but as the leader in what is a resilient and growing category, we are confident in our plans for 2023 and are firmly committed to our ambitious midterm objectives. And of course, the foundation of success is great alignment and partnership we have with the Coca-Cola Company and our other brand partners. So to close, I’d like to once again thank all of my colleagues at CCEP, can rightly be very proud of what we all achieved in 2022. So thank you very much, Nik and I will now be happy to take your questions. Over to you all.

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Q&A Session

Operator: Our first question comes from the line of Edward Mundy from Jefferies.

Edward Mundy: Damian, Nik, just got one question then. So you saw some pretty strong revenue per case in Q4. Could you talk about progress in pricing so far year-to-date and the cadence of pricing through 2023, given your joint value creation model with key customers.

Damian Gammell: Yes. So we’ve been really pleased, I suppose, going back a number of years of CCEP at our focus around revenue growth management and our NSR per case realization. And I think even during COVID, was one of the highlights of being able to deliver strong NSR per case growth. On top of that, we’ve seen our customers also expand our margins as well, which I think is great for our business and for theirs. So clearly, we’re in the middle of negotiating pricing for 2023. We’ve successfully landed it in a number of our markets. So we’re very pleased with that. We’ve got the flow-through of our pricing from the second half of ’22. It was unusual for us to go back to the market for a second price increase. And that’s something that will remain an option as we look at 2023, again as well.

So as we see how the year turns out. Clearly, it’s something that we look at again. Overall, I’m quite pleased with where we are today as we’re in February, some of our markets, Iberia, Nordics and Australia are already done. France is clearly under negotiation at the moment. But we had a great ’22 in France. And clearly, we looked at being the best value creator for our customers within FMCG in France with a good balance between price mix and volume. But we also know that those cost headwinds that Nik outlined at the beginning remain in ’23, and so it’s critical for us to kind of price against that going forward. But again, I come back, I suppose what’s good is we’ve seen our volume hold up. We’ve recruited more households. We’ve gained market share and our customers, in most cases, have expanded their margins.

And I think that’s a pretty good formula for long-term value creation for us and our customers. So more to come on pricing as we go through ’23. And obviously, it’s something we’ll update as we get through the first quarter.

Edward Mundy: As opposed — as part of the same question as opposed to taking a second question. I think in the April remarks, you indicated that recent trading has not really indicated any significant changes in underlying consumer demand and volumes are holding up. Why do you think consumption for your products is holding up so well?

Damian Gammell: I can’t say, they taste great. I think that’s the first reason. And I think it’s a robust category. And I think we’ve invested as have our partners, particularly the Coca-Cola Company and Monster sustainably over a number of years. And I think that solidifies that consumer preference. I think on top of that, I think Monster and the Coke Company continued to improve their marketing and product innovation. So if you look at our brands on shelf now in Europe, Australia, in Indonesia, I think they look fresh, they look young. They taste great. We’ve innovated a lot around sugar-free. I think that continues to open up the category to new users. We’ve broadened our portfolio. So if you look at where we’re now playing, we’re participating in more categories.