Coca-Cola HBC AG (CCHBF) 2023 First Half Year Results Earnings Call Transcript

Coca-Cola HBC AG (OTCPK:CCHBF) 2023 First Half Year Results Earnings Conference Call August 9, 2023 4:00 AM ET

Company Participants

John Dawson – Head of Investor Relations

Zoran Bogdanovic – Chief Executive Officer

Ben Almanzar – Chief Financial Officer

Conference Call Participants

Mitch Collett – Deutsche Bank

Sanjeet Aujla – Credit Suisse

Simon Hales – Citi

Edward Mundy – Jefferies

Mandeep Sangha – Barclays

Charlie Higgs – Redburn

Fintan Ryan – Goodbody

Alicia Forry – Investec

Matthew Ford – BNP Paribas Exane

Jared Dinges – JP Morgan

John Dawson

Good morning and thank you for joining the call. Thank you operator. In a moment, Zoran will share his highlights of the first half of the year, and our strategic progress before Ben takes you through our financial performance in more detail and discusses the outlook for the balance of 2023. Zoran will then return to summarize before we open up the floor to questions. We have just over an hour available for the call today, which should leave over 30 minutes for questions. We will therefore ask you to keep to one question and one follow up before joining the queue again. Let me remind you that this conference call contains forward-looking statements and these should be considered in conjunction with the cautionary statements in our slide pack, and in our results statement issued today.

With that, now let me turn the call over to Zoran.

Zoran Bogdanovic

Thank you, John. Good morning, everyone, and thank you for joining the call. I’m very pleased with our strong performance in the first half of 2023, which has been achieved against a mixed backdrop. Key to our success has been our committed, passionate and engaged people, who have overcome a variety of challenges, guided by their outstanding sense of purpose. As a team, we are making Coca-Cola HBC a stronger business every day. Also a very big thanks to our customers, The Coca-Cola Company, Monster Energy and all our other partners for their trust and collaboration in jointly driving sustainable growth.

I’d like to highlight five things that stand out for me over the next – over the last six months. First, our focused execution against clear strategic priorities, and our revenue growth management capabilities have helped drive strong organic growth in both revenue and EBIT. We’ve made choices to strengthen the business, including delivering price and mix improvements to offset cost inflation. For example, we’ve focused on the most profitable revenue growth in the Water category, leveraging our premium positions in advanced hydration, including enhanced waters and sports drinks.

Second, we’ve seen good outcomes in our strategic priority categories of Sparkling, Energy and Coffee. We delivered robust volume and market share performance, across our markets and in all three segments, despite varying degrees of economic pressure and consumer demand. Third, our teams across all our regions were flexible and fast moving, handling a range of challenges and opportunities well. Our supply chain continues to be resilient, our hedging policies effective, and our management team adaptable. For example, our team in Nigeria navigated the country’s bank note crisis in the first quarter and the currency devaluation in the second. They delivered a solid performance, growing volumes in second quarter while executing the price and mix changes needed to offset external pressures.

Fourth, sustainability continues to be embedded in our strategy, as shown by the consistent investments we’ve made, including a new returnable glass line in Austria. And finally, at the same time as delivering financial and sustainable performance improvements, we have continued to invest behind our strategic priority categories, our core capabilities and other targeted opportunities in the portfolio, for example our acquisition of Finlandia and more on that later.

Turning to the financial highlights of the first six months. Our organic revenue growth of 17.8% was very good, with solid volume performances from our priority categories, while delivering strong price/mix improvements. Better-than-expected operating leverage contributed to a strong second quarter for EBIT. As a result, our comparable EBIT in the first half was €561 million, up nearly 18% on an organic basis, and resulting in a margin of 11.2%. Finally, our earnings per share was up 22.3% led by strong performance throughout the P&L. Ben will take you through the drivers of this in more detail, but let me share some commercial highlights, starting with our category results.

Sparkling continues to be our main growth engine, representing around 70% of group revenues. Sparkling volumes grew by 1.6% overall, with growth in all three of our segments. Excluding Russia and Ukraine, growth in Coke variants was broad-based, with Coke Zero in particular mid single digits in Established and developing markets. And we further accelerated the roll out of Coke Zero Sugar Zero Caffeine. I’m also excited about our fourth ‘What the Fanta’ campaign with innovative new flavours launched in 14 countries.

Adult Sparkling growth was held back by a tough consumer backdrop in several central European markets, as well as strong comparatives. However, Established markets delivered double-digit revenue growth. In particular, I would call out the good performance of Schweppes in Greece, as well as the Kinley relaunch, especially in Italy. Turning to Energy, volumes grew by over 20%. Growth was strong in each segment, but particularly Emerging, with successful launches in Egypt of Monster and Fury. Established and Developing growth was led by Monster – helped by the very successful launch of Monster Lewis Hamilton Zero Sugar, now present in the majority of BUs in Europe.

Volume growth in Coffee was a very strong 22%, with excellent results in the Established and Developing segments. We are continuing our journey to scale and invest in Coffee. With the Costa Coffee and Caffe Vergnano brands, we have a segmented portfolio approach that allows us to cover multiple price tiers from mass premium to super premium. This has driven good progress on out-of-home customer recruitment, and we’re now reaching 10,200 outlets at the end of the half, up from 8,000 at the end of last year. Finally for our categories, Stills performance was mixed. Water was impacted by our deliberate focus on more profitable revenue growth. As a result, while we grew revenue and single serve packs, volumes for water were down 14%, with the biggest drop in the at-home multi-serve offering.

Elsewhere in Stills, Sports Drinks performed well, with volumes growing mid to high single digits in our Established and Developing segments. Juices were down, with declines in Developing and Emerging more than offsetting positive growth in our Established markets. Premium Spirits volumes were strongly ahead. Turning to sustainability, I’m pleased we have been rated triple A by MSCI for the ninth consecutive year, as we continue to deliver on our Mission 2025 and NetZeroby40 goals. In particular, we made good progress with sustainable packaging and coolers.

To increase the range and capacity for returnable glass bottles we’ve installed a new line at our factory in Edelstal, Austria, which has been in commercial production since May. I visited the plant last month and saw the line in operation, processing a new returnable and resealable 400 ml bottle as well as our current 1 litre universal bottle. It’s impressive what the team are delivering at this state-of-the-art facility.

I’m also really pleased to share that at the end of June, we exceeded our target of 50% energy efficient coolers by 2025. And together with The Coca-Cola Company and seven other bottling partners, we recently committed $15 million to a new venture capital fund. At nearly $140 million, the fund will focus on innovative solutions to drive carbon footprint reduction, supporting our goal to be net zero by 2040.

Let me now share a few reflections on some market and strategic developments. As I touched on earlier, one of the highlights for me in the first half has been the consistent growth performance across our three segments. Each of our segments delivered double-digit organic growth in both revenues and profit. There are of course many moving parts behind this outcome, and Ben will discuss these in a moment, but it just shows the flexibility and strength of our local management teams.

How they’re able to use our prioritized capabilities, their experience to manage through changing market and consumer conditions. This consistent and strong performance has been achieved despite mixed market conditions and demonstrates the strength of our category, our portfolio of brands, our disciplined focus on execution and the capabilities we deploy to adapt to win.

NARTD and Sparkling industry revenues grew in the first half of the year, and we are gaining share in NARTD both versus branded and private label. But we are not without challenges in our markets. As I have said to you in previous calls, we do have some countries with persistently high inflation, including Czech, Hungary and Romania where we have seen changes in consumer behavior and more demand for affordable options.

The post-pandemic boost I talked about last year, which propelled a very strong out-of-home performance, has moderated somewhat. There have been also significant macro challenges in Nigeria and Egypt, related mainly to inflation and currency devaluation. In every market, we apply our well-developed revenue growth management capabilities, to address both affordability and premiumization, helped by the strength of our brands.

For example, we developed new pack formats in Czech, Slovakia and Romania, focusing on multi-serve entry packs to address affordability. We continue to be vigilant, watching out for changes in consumer behavior. However, we remain cautiously optimistic about market conditions going forward.

The signs are that in key markets, demand for our core portfolio is remaining robust and the price increases we have delivered in the first half have had a better-than-expected impact on volume elasticities to date.

Our investments in Data, Insights and Analytics have helped underpin this performance. Every year we deploy significant spend behind promotions to stay competitive in the market, to be the preferred partner for our customers and the first choice for our consumers. We aim to drive higher volume uplifts and better return for every Euro invested.

Supported by data and advanced analytics algorithms, we can now quantify the true incremental value of promotions at the most granular level, incorporating a holistic view that considers the impact of forward-buying, competition and cannibalization. The consequence of this is that in the first half of the year we’ve been able to target promotional spend at specific points of maximum impact, managing dynamically the necessity to support our price increases and balance those with affordability and volume elasticities. The benefit can be seen in our improved profitability and margin.

Turning briefly to M&A. The acquisition of Finlandia vodka presents a unique opportunity for us to acquire an excellent brand we’ve worked with for 17 years. Over 60% of Finlandia’s total sales are in our geographies, but we only distribute a smaller proportion. This will strengthen our offering to key customers in the HORECA in those markets, growing our revenue as we leverage its proven mix ability with our core NARTD portfolio.

Poland is a good example where Finlandia is one of the country’s top vodka brands – a must-have for many of our target HORECA customers, and yet is not part of our offering. Bringing Finlandia into our family gives us the chance to leverage reputation and position of this consumer relevant product and strengthen our business in the country.

At our recent Investor Day in Rome, we showcased our team and shared important developments that are critical foundations for our medium-term growth. Our markets have exciting growth prospects with a combined addressable market value of around €100 billion, and projected growth of 4% to 6% per annum.

We unpacked how the pillars of our growth strategy are delivering results, how we are activating our unique 24/7 portfolio, winning in the marketplace, working in strong customer partnerships, and investing to fuel growth. All of this underpins our updated mid-term guidance of organic revenue growth of 6% to 7% on average per year, from 2024, ahead of our previous guidance, and ahead of the industry.

We confirmed confidence in our ability to grow EBIT faster than revenue, and our expectation to grow organic EBIT margins in the range of 20 basis points to 40 basis points on average per year. We are a stronger business. We are delivering a stronger 2023. And we are well-positioned for sustainable profitable growth into the medium-term.

Let me now pass over to Ben to take you through the half year financials in more detail.

Ben Almanzar

Thank you, Zoran, and good morning, everyone. Another strong set of results building on momentum, we delivered consistent top line growth, with organic revenues up 17.8% and organic revenue per case up 19%. Pricing was the main contributor to revenue per case, accounting for more than 80% of the improvement in the period. The rest came from mix levers, led by package and category.

Volumes were marginally down 1% on organic basis with our strategic priorities the best performing categories as Zoran mentioned. Gross profit increased by 22.6% leading to a 90 basis point improvement of gross profit margins. I am pleased to see these results even as we continue to wrestle with still elevated inflationary pressures, resulting in COGS per unit case up by 13.1%.

We are proud to have delivered the highest half year comparable EBIT in history, reaching €561 million, and up 17.7% on organic basis, supported by a strong Q2 performance. Comparable EBIT margins were 11.2%, unchanged on organic basis. We benefited from strong operating leverage thanks to double-digit top-line growth and hedging strategy, which offset input cost pressures and increased operating expenses in the period.

Turning now to the drivers of performance on a segmental basis. In the Established segment, organic revenues grew by 16.9%. We saw strong revenue per case expansion of 16.7%. We benefitted from price increases in all markets through the period as well as improvements in category and package mix. Single serve increased 3.8 percentage points, and our premium glass portfolio grew high-single digit in the period. Volume in Established markets was broadly in line with last year. We delivered good growth in Sparkling, Energy and Coffee, which was offset by declines in Stills, mainly Water.

Ireland and Greece closed with very good volume performance in the first half. In Ireland, we saw strong growth in Sparkling led by Coke Zero and an impressive resulting Energy, the second-best in the Group. In Greece, our decision for early activations for the summer season is paying off, with volumes up high-single digits in the first half, despite cycling tough comparatives.

For the segment, organic EBIT grew 20.8% and organic EBIT margins were up 30 basis points, with price and mix more than offsetting higher COGS. Organic revenue grew 23.6% in the Developing segment. This was driven by improved organic sales per unit case, thanks to pricing initiatives. Category and package mix were also positive, the latter helped by improvements in single-serve mix. Volume growth in Sparkling and Energy was offset by declines in Stills. Coffee continued momentum, growing mid-30s.

During the second quarter we also successfully launched Jack & Coke in Poland, Hungary and, by the way in Ireland in Established. Performance to date has been ahead of expectations. I want to call out Poland, which continued to deliver a good volume trajectory in the second quarter and sustained share gains. Low/no sugar variants retained their strong momentum with volumes up by low-20s.

Organic EBIT increased by 27.2%. Comparable EBIT margins improved by 20 basis points on organic basis, with better price mix and mix actions covering inflationary pressures for countries in the segment. In the Emerging segment, organic revenue grew 16%, with NSR per case increasing by 17.7% on organic basis. This was driven mainly by pricing initiatives in our markets to proactively manage currency devaluations and mitigate cost inflation.

Organic volumes were down 1.4% mainly affected by the decline in Stills. Sparkling grew by low-single digits, and Energy grew almost 30%. In Nigeria, the challenges with the shortage of bank notes have normalized. Our strong execution in the market, delivered volume growth in the second quarter and share gains for the period. All under the umbrella of carefully considered RGM initiatives.

In Egypt, we are expanding the Energy portfolio, with the launch of the Monster brand in May, following the successful introduction of Fury at the end of 2022. We have continued deploying key RGM capabilities in the market, helping us to drive revenue per case. Serbia and Bulgaria delivered very good performance for the period backed by share gains in non-alcoholic ready to drink.

Emerging segment comparable EBIT increased by 13.9% on organic basis. Organic comparable EBIT margins were down by 20 basis points as a result of adverse transactional FX impact mainly from the Nigerian Naira and Egyptian Pound. Further down the P&L, we delivered comparable EPS growth of 22.3%. Net finance costs were down 26.5% as we secured higher interest income from increased interest rates. We now expect improvements in net finance costs with full year 2023 in the range of €65 million to €75 million.

Our comparable tax rate of 27% was at the higher end of the guided range, due mainly to country mix. We expect our tax rate to be around that level for the full year. CapEx as a percentage of revenue was below our guidance range in H1 and €39million higher than in 2022. We expect an increase in the second half as we accelerate investments in our strategic priorities and capabilities. This includes deploying capital behind capacity expansions in growth markets, placing more energy efficient, connected coolers to drive single serve mix, and investing towards our sustainability commitments. We expect full year CapEx as a percentage of revenues to remain within our guided range of 6.5% to 7.5%.

Free cash flow for the period was down €76 million versus the prior-year, mainly due to working capital phasing as well as increased capital expenditure. Our balance sheet remains a source of strength for the business. We have significant fire power for all our capital allocation priorities including organic investment and M&A. The unique opportunity to acquire the Finlandia vodka brand, which is expected to be completed in Q4 2023 and the increased CapEx to enable the growth of the future, are recent examples of our continued investments in attractive, value-enhancing opportunities.

We are maintaining our progressive dividend policy. In June we paid a dividend of approximately €290 million, a pay-out ratio of 46%. With these considerations in mind, we expect to see net debt to EBITDA in the lower end of the 1.5 to 2 times targeted range by year end.

Turning to the outlook. We delivered strong top-line growth in the first half of the year, and now expect mid-teens organic revenue growth for the full year. We expect to continue to benefit from our pricing actions and retain our focus on mix improvements. We have seen some moderation in input cost pressures, which means that we now expect COGS per unit case to increase by high single digit for 2023 as a whole. As a result, we reiterate the upgraded guidance we provided early in July, of organic EBIT growth for the year of 9% to 12%.

We have high confidence in the strength of our business, our broad portfolio, led by the exceptional Coca-Cola brands, and underlying growth in our categories, to achieve those results despite mixed market conditions.

With that, I’ll hand back to Zoran.

Zoran Bogdanovic

Thanks, Ben. To summarize. We are executing on our strategy, focusing on our priorities, and have delivered strong organic growth on both revenue and EBIT in the first half. We remain cautiously positive about market conditions going forward, and we have an even stronger platform off which to grow revenues, margins and returns from 2024 onwards. Our people remain at the centre of what we do, and it is their passion and dedication, with the commitment and trust of our partners, that enables us to keep delivering for our customers and consumers.

Thank you for your attention, and we’ll now hand you back to the operator for questions.

Question-and-Answer Session

Operator

This is the conference operator. We will now begin the question-and-answer session. [Operator Instructions] The first question is from Mitch Collett of Deutsche Bank. Please go ahead.

Mitch Collett

Good morning, Zoran. Good morning, Ben. I have got one question, please. Your guidance, which you updated a month ago, clearly implies a lower level of organic EBIT growth in the second half. But presumably input costs are better in the second half than the first half, and you have a much easier comparator in terms of the performance of your Russia business. Perhaps could you give us some of the puts and takes as to why the second half profit growth is expected currently to be lower than the level of profit growth in the first half?

Ben Almanzar

Thank you, Mitch. Good morning. Yes, let me give you a bit more color about what is happening at the second half guidance. Obviously, you’ve seen that we delivered strong first half with organic EBIT growth of 18%, led by good execution of price increases and a resilient volume performance across our markets. And you are right that implies a slowdown in EBIT growth in the second half. What we are expecting to see is a moderation of the revenue growth driven by price mix, while COGS inflation is subsiding, we are still growing on a very high-COGS base from H2 2022 reflecting a more significant transactional FX headwinds in the second half. Also, we expect the lower contribution of EBIT from Russia in half two, which means that there is a big swing between half one and half two.

Mitch Collett

Understood. Thank you.

Operator

The next question is from Sanjeet Aujla of Credit Suisse. Please go ahead.

Sanjeet Aujla

Hi, good morning, Ben, Zoran. Just following up on that outlook comment, can you give a sense how significant Russia is from a profit contribution perspective in H1, and a little bit more context around the moving parts between H2 and H1 there? Would be really helpful, Ben what is driving that big swing in H2 versus H1 profitability in Russia? That is my first question.

Ben Almanzar

Thanks Sanjeet. So look, Russia’s contribution to absolute half year EBIT is slightly higher than 2022, but this is due to the consolidation of Multon. You remember that we have a full six months this year coming in. One thing that I want to stress is that Russia did not drive our half one organic EBIT performance and our subsequent full year upgrade in July. Actually, if I look at the organic EBIT growth of the group, excluding Russia, it would have been quite a bit higher. So from today’s visibility what we expect is a lower EBIT contribution in Russia full year.

Sanjeet Aujla

Got it. And is there anything in particular that is driving that second half swing in contribution, Ben?

Ben Almanzar

If you remember last year, the currency was in a different place. There was a number of one-offs, a lot of pricing and so on. Those conditions have changed this year.

Sanjeet Aujla

Got it. Thank you. And my second question is just to contextualize a little bit more the mixed market environment. Zoran, you were talking about, I think in the past you have called out some signs of weak consumer behavior in Czech, Hungary, Romania. Are there any other markets you would add to that list throughout Q2, where volumes are becoming a little bit more of a concern. And on the flip side, any markets where you are seeing more consumer resilience, then perhaps you expect a few months ago? Thanks.

Zoran Bogdanovic

Yes, thanks, Sanjeet. The markets you mentioned are the ones as especially we see that inflation levels persist on higher level plus in Hungary and Romania, I need to remind you we had either VAT or excise tax increases, which just kind of has added cream on the cake. But then, apart from these markets, we did see in the first half more challenge behavior in Egypt of consumers because the food inflation level is on a very high level there, but also with the things that the team is doing in how dynamically we adjust the plans, I am really encouraged with the last month performance in Egypt.

And then, look, I just want to say that there are a few markets, where – when you see the volume performance, actually, the underlying thing is not as volume indicates because in few markets, we have made a conscious choice that we focus on the price mix in water segment. We focus on more premium segments of the water, and focused on a single serve as I had in my remarks. If you strip out water just for temporary case, actually, several markets would be in the positive and would not be in the negative volume. And then, yes, there are several markets on the flip side that like, as Ben talked in his remarks, Greece, Ireland, Serbia, Bulgaria have performed quite well. Let me highlight here, last three months, very, very encouraging trend and performance of Nigeria. But, I can just pause there to see if you have anything further that interest you.

Sanjeet Aujla

Yes, I would just like to pick up from the Nigeria comment, particularly when most of the consumer companies are talking about a much tougher consumer backdrop to get a bit more color about return to volume growth and perhaps how I think the second half.

Zoran Bogdanovic

Yes, look, I really think that this performance and the way we manage through Q1 and Q2 really comes as a consequence of something that has been done earlier. The fact that we really consistently invest and significantly in Nigeria to build our capability. Nigeria is always our lead market whenever we start with our prioritized capabilities, whether it is 2017 with revenue growth management, then was a significant reshape of route to market, then was the data insights analytics.

All that has enabled that the ability of team to react quickly in Q1, as we had bank notes. I mean, I cannot comment how other companies have managed through that, but I was really, really pleased to see how the team quickly reacted, and this is where route to market and proximity to customers have helped a lot. Our ability to switch them to online has helped us.

Then also in Q2 and devaluation happened, this is where again you see the effect of our revenue growth management because there is a constant monitoring of what is happening in the market on consumer sentiment elasticities by region, by category. The team has quickly adjusted the plans, and that was also blended with really consumer relevant marketing plans that are really touching the hearts of consumers, and it plays a role. Bottom line of that, in a country, as important as Nigeria is for us, we’ve seen as soon as the bank notes crisis normalized, Nigeria has delivered very good performance in May, June and that trend has continued also now in July. That gives us cautious optimism for the rest of the year of what we expect from Nigeria.

Sanjeet Aujla

Well, thank you very much, Zoran, Ben.

Zoran Bogdanovic

You are welcome.

Operator

The next question is from Simon Hales of Citi. Please go ahead.

Simon Hales

Thank you. Morning Zoran, morning Ben, morning John. So yes, couple from me then. Maybe just following up on Sanjeet’s earlier question there around for the market performance. I wonder if you could just talk a little bit more about the trading you are seeing into Q3, maybe particularly in established markets, in July. I am just obviously very conscious of the mixed weather we have seen across Europe over the last month and a half, as well as potential disruption you might be seeing in your business in Greece given the wildfires that we have seen there. That is the first one.

And then secondly, on the changes to some of the below the line guidance that you highlighted that been in the presentation. Can you explain some of the drivers behind particularly that improving finance cost line, clearly a much bigger interest income coming in than you and we originally expected? Is that being driven by interest income really on the track, €250 million of cash in Russia, and that being higher than you thought or would be more broad based. And with regards to the tax increase for the full year, you highlighted geographic mix. Does that include also potentially at the higher windfall profit tax now in Russia on foreign company earnings that was announced earlier this week?

Zoran Bogdanovic

Hi, Simon. That is a good line up of a couple of questions. I will start, and then Ben will be very pleased to answer the other one. So, in July, trading was really in line with expectations and in line with the guidance that we have provided and how we see the year going on. You said very well that we have seen really mixed bag of unexpected weather impact as we also could see on the news. That did have certainly some impact because, Italy, Slovenia, Croatia, Hungary, Serbia have had really issues with incredible rainfalls and flood at the same time. We have seen those horrifying things of wildfires in Greece.

It did for sure in those areas impact because then when this happens, it is not about performance, it is about really doing the right thing for our employees, helping anyone we can, that becomes priority. That is the purpose of there. It has been in line with expectations. What we have seen also that what I made as comment for the first six half, we continued our strategy execution in terms of focus on the price mix, the same effect on the water. But bottom line is that, overall, but also in established segment, the performance has been really in line with expectation.

Ben Almanzar

All right, so thanks Simon. So on your first question, related to the improved finance cost; most of our debt structure is in fixed rates. What that means is that the increasing interest rates do not materially affect the finance costs in the near-term. On the other hand, that increasing rates do provide us with higher interest income from our deposits. That is really the main driver of our finance cost decline when you look at the half year 2023 versus last year, and also for the updated guidance for the full year. Addressing specifically your question in Russia, if you have been following the market, you see that interest rates in Russia actually are coming down there rather than not.

Your second question was about the tax rate, and why are we guiding towards the top end. A reminder, our Group’s effective tax rate varies depending on the mix of taxable profits that we have by territory. Also other items, like non-deductibility of certain expenses, non-taxable income, other one tax, one-off tax items that happen across different countries. I would also like to remind you that our half one ETR of 27% is actually consistent with when we have been in 2022. So that’s what we expect the year 2023 to remain based on the visibility that we have today. We have incorporated everything we know so far, and over the mid-term, we expect that to return to our 25% to 27% guidance.

Simon Hales

That is really helpful. And can I just check Ben, I mean, you said in your prepared remarks that overall, you expect Russia for the full year to be a smaller percentage of group EBIT than it was in 2022. Is that comment also true at the net profit level, which you take account of some of the further down the P&L impact you will see from the trapped cash in Russia on finance line et cetera?

Ben Almanzar

Indeed because, remember the biggest driver of also the bottom, bottom line is going to be EBIT as well. So yes, it is applicable.

Simon Hales

Brilliant. Thanks very much.

Ben Almanzar

Thanks.

Operator

The next question is from Edward Mundy of Jefferies. Please go ahead.

Edward Mundy

Morning Zoran, morning Ben. I appreciate you showcased to the capital markets’ event your revenue growth management toolkit that is getting increasingly sophisticated and it gives you a lot of insights and analytics to think about affordability and premiumization. As you think about 2024, and given this focus on joint value creation plans for your big customers, what is your level of confidence and ability to not just hang on to price taken over the last couple of years, but continue to grow revenue per case into next year? And as part of that same question, could you perhaps talk about the outlook for COGS inflation, given it is moderating into the second half of the year for 2024?

Zoran Bogdanovic

Good morning, Ed. Thank you. Look we talk almost on every call about revenue growth management as a critical capability. And it is because, through everything that we have been going through the last couple of years and whatever will be ahead of us, we really find revenue growth management as a foundational capability, which I feel even more confident in the last two years exactly because we see the value when it is enabled, and supported by data insights and analytics because it really gives us opportunity to play at a different level, granularity of so many parameters that we now take into account. All that comes into a play because the segmentation is really in the very heart of what we do. Not only that every country has it is own dynamic, but the beauty of this is that, this really gives us the ability to play unique game and algorithm within the country, whether that is a region, that is a category, follow the elasticities of categories and packages.

So this really gives me a very strong confidence that as we go forward, we only get – I dare to say, better and smarter. And this is the process with the, like even example of promo effectiveness. The more we do it, the more we learn, the more we are capable to really make the improvements. Evidence of that is the fact that also in the first six months of this year, we have had a better promo effectiveness play than we even anticipated, and that was one of the drivers of our better profitability and overall result. So we are getting really excellent insights, which are helping us to constantly adjust our plans. That is why, even though next year the pricing is not going to be at the levels, probably with the visibility we have at with what we have experienced at the beginning of this year and last year, but revenue growth management is far more than just price. It is about price. It is about promotions. It is about mix. So all that will play a role, and in our future algorithm, price mix will remain and I am confident that it remains a driver of how we will generate revenue.

Ben Almanzar

Ed, hi, and your second question about 2024 CGOS per case. As you know, it is a bit early for us to talk about 2024 and provide guidance. We will do it on the full year results as usual. But what I can share now is that we certainly do not foresee the same level of inflation that what we have seen recently in 2023. Obviously, we are not assuming that we will go back to 2021 levels, but we should see some benefit in terms of easing of commodities and energy prices, and perhaps the exception there is sugar. It is the key main commodity where we are seeing big increases this year, and we can expect some more pressure next year as well.

As you can imagine, we have some hedges in place, and will continue to look for the right opportunities to increase the coverage. The last thing to highlight, as you think about 2024, it is that concentrate represents about a third of our COGS, and we had excellent top line delivery in pricing work that we have been doing over the past 18 months, then concentrate costs are expected to increase proportionally. So very important, we continue to focus on improving price mix, as Zoran rightfully said, continue driving our hedging strategy and long-term supply contracts and the focus on productivity as those key levers to help us navigate the 2024 COGS environment.

Edward Mundy

All right, thank you. And as my follow-up really on the energy category, which is at 6% of your volumes are still growing 20% or so. I know it is seen a lot of growth over the last four or five years. How do you think about the opportunities to continue to broaden distribution and expand the range there?

Zoran Bogdanovic

So look we have been continuously doing exactly that, Ed, and that is been the driver of growth. I think we, like no one else play in the energy category with stratified brands. In most cases, two, sometimes even three brands, and really expanding number of occasions. The distribution is constantly increasing. Number of coolers, it is constantly increasing because we know that in this category, roundabout 60 plus percent is all coming from impulse, and spontaneous purchase. So there is a constant recruitment of new consumers and innovation plays continuously a role. We see that very well.

And the beauty of that is that while innovation plays a big role, there is also foundational flavor of a green monster, which now will come also with zero sugar. So that is again, innovation of reformulation happening in energy as see also in the sparkling. So all that really gives us a really strong confidence how energy is going to continue to perform and best estimate of that is these last seven years of very strong performance and our plans are very, very robust, and to cut a long story short, I really, really believe that we will continue seeing strong performance there.

Edward Mundy

Great. Thank you.

Zoran Bogdanovic

Thanks, Ed.

Operator

The next question is from Mandeep Sangha of Barclays. Please go ahead.

Mandeep Sangha

Good morning, Zoran. Good morning there, Ben. Thank you for the questions. My first one very much relates to the cost phasing into the second half. So you mentioned that obviously the second half revenue will – revenue growth will slow down as price mix normalizes. You obviously spoken about cost inflation at the COGS line item into the second half. How should we think about OpEx that you think, I mean, it is certainly stepped up in the first half, about 14% per unit case. Is there anything we should be aware of in terms of phasing between 1H and 2H, or do you think like OpEx per unit case level is probably a good case to be for the second half also? That is my first question.

Ben Almanzar

All right, thanks Mandeep. So look when we think about OpEx, we take a very disciplined approach. That said, you have seen that 30 bps as percentage of sales that we’re delivering the increase in the first half. This has to do with our continuous investment to further enhance our in-market execution with our customers as well as some phasing to half one of our OpEx spending. We also increase marketing, strongly in half one. To give you, Zoran mentioned some of the examples in his prepared remarks for Fanta, WTF, which is being deployed in around 14 markets. There is also the introduction or further acceleration of Coca-Cola zero sugar and zero caffeine as well. As Zoran mentioned energy as a very important category for us to continue to drive marketing support behind. Naturally, we invest behind coffee and preparation for the summer season, particularly in the out of home channel. So for half two, we expect to continue to invest in marketing, but we are also mindful of some the comparatives of last year. We will continue to be disciplined in OpEx and the idea is that we should see an improvement as the year progresses.

Mandeep Sangha

Absolutely. That is great. And then I guess my follow-on question really relates to Nigeria. As you pointed out in this slide, there was a strong sequential improvement in 2Q and obviously returning to positive growth. Are you confident there then that sort of the worst of the market is now behind us potentially? And if we look at the second half of the year, do you do have more favorable comparatives? Is there anything that maybe you should call out on a more cautious note or do you think that the momentum we see in Nigeria in the second quarter can certainly continue over the next half? Thank you.

Zoran Bogdanovic

Yes, Mandeep, so look, with the visibility we have, elections behind us bank notes topic is out. Look we see – we are monitoring to see with the new President how some of the new policies are panning out. We have seen devaluation, which should be seen as a positive move, but that still needs to be surrounded with a couple of more things that we hope will happen. The fact that fuel subsidies are out, potentially, we see conversation debate, and probably something will come – would come with a minimum wage increase in Nigeria. While this could be like a short-term cost impact to certain degree, however, overall, that is a positive sign that consumer will be better off and will be positioned to have increased consumption.

So there are some signs that really, some things, some good things should start happening with policies. And therefore, as I said, I do expect that performance for the rest of the year in Nigeria will be quite positive. And you said, well, we see that we are now entering into Q3 and Q4 where we are cycling negative volumes that we had last year. So that is also something to bear in mind. So overall, as I said, I have to use this word cautiously, but certainly, optimistic, about Nigeria and about next year. And in line with that, we are also looking, and continuing with our investments to support the growth.

Mandeep Sangha

Excellent. Thank you very much.

Operator

The next question is from Charlie Higgs of Redburn. Please go ahead.

Charlie Higgs

Yes, good morning, Zoran, Ben, thanks for the question. My first one is on Russia and the sugar tax. It was implemented there on the 1st of July. I was just wondering if you could give any early color on what reception has been from the consumer on the ground, and then also any competitor reaction. Have we seen any falling away? And then just was there any pre-buying in H1 that influenced the numbers of ahead of that sugar tax? That’s my first question.

Zoran Bogdanovic

Hi, Charlie. Yeah, so indeed, the sugar tax has happened nothing new as per se. It is a flavor of main markets. So it happened and it drove local team to do immediate price increase as we always do. That is the way how we treat those taxes, never absorbing them. And I assume that competitors have also done the same thing. And just to say that on the market, there is nothing much different, quite dynamic, and market became quite more fragmented with many more players that have emerged, but basically, no change over there. Ben?

Ben Almanzar

No, nothing to add. I think you said it very well, Zoran.

Zoran Bogdanovic

Okay.

Charlie Higgs

Thank you. My second one is just on the water category and some of the de-productization. How should we think about that in H2 in terms of volume drag perspective? And where is it mainly situated in the established region in Italy? And how we should think about that from volume, but also an improving category mix perspective?

Zoran Bogdanovic

Yes, we will stay the course with what we are doing. We see this as, not just a quarter play, but it’s a full year play where we deliberately focused on enhancing the value from the category. Actually, very good, very good element to highlight there that apart from a very healthy price mix that is an element of the price in a number of markets where we really have not been shied to do what had to be done, but also mix plays a very important part. This year, we are having around 4 percentage points increase of the single-serve mix, and that comes at the back of I think 3, 4 percentage points that we had last year.

So we are continuously doing that while also doing more on the enhanced and advanced hydration kind of those subcategories, which are kind of leaning onto water like Vitamin water, which we launched a few months ago in Switzerland. There is the Smartwater in a couple of markets. So that is the play, and we will stay consistent to for the rest of the year to executing that strategy whilst building respective relevant for next year from this kind of a rewired base. Thank you, Charlie.

Charlie Higgs

Thanks, Zoran.

Operator

The next question is from Fintan Ryan of Goodbody. Please go ahead.

Fintan Ryan

Good morning, Zoran, Ben and John, three questions for me, please, so two technical and maybe one sort of bigger picture. I will start in the technical questions. Firstly, could you call out what specific FX transactional headwind you saw in H1, and what broadly is in your guidance for H2? And I appreciate there was a lot of moving parts, particularly in the Naira, but at this points in time, what you would anticipate as a potential FX transactional headwind into 2024? First question.

Ben Almanzar

Hi Fintan, so one thing, very, very important. We talk about translational effects in our guidance, and we say that there is €50 million to €60 million based on the spot rates that we see for this year. When it comes to transactional FX, that is baked into our guidance for EBIT.

Fintan Ryan

And you are not calling out what is baked in that?

Ben Almanzar

No. So basically, what we do is to help guided, we take all the puts and takes including the transactional impact, which is operational because you remember we hedged for that, as part of how we manage our costs, et cetera, et cetera. And therefore, that is included already within our guidance of organic EBIT expansion this year of 9% to 12%.

Fintan Ryan

Thanks for clarifying. My second technical question would be around the free cash flow dynamics. I appreciate your call out working capital flows in the first half and CapEx increasing in the second half; could you give us a sense of where you think the full year free cash flow is going to come out at, and in particular as well, the regional dynamics behind that. Like you say, you called out the €250 million cash that is stuck in Russia, how much do you think that will be increase in the second half?

Ben Almanzar

Let me tackle that question about the duration and to what extent it is a phasing issue. So what we saw is that despite the higher profitability in the first half of the year, we saw that free cash flow was lower, and that was indeed adversely impacted by working capital movements. What is happening there, so we all understand, is that our receivables increase with that strong NSR growth performance that we delivered in the first half of the year.

Personally, I am very reassured because there is no issue with collections, in fact, we are performing better than prior years. There are no one-off impacts, quite the contrary. So, this is really a phasing aspect of working capital, and we see that improving as the year progresses. The other thing that I mentioned also in my prepared remarks is also CapEx. We will continue to invest, to support the growth of the business, and I expect that the free cash flow will continue to improve as the year progresses.

Fintan Ryan

Thank you. And just my final question is the bigger picture, in the coffee category you have talked about getting to 10,200 outlets, and I think in the past you talked about you are aspiring to low to mid-single digit share of the coffee category in your markets. What does that look like in terms of the ultimate number of out of home outlets targeting coffee, 40,000 in time or 50,000, to sort of put that 10,800 number into context?

Zoran Bogdanovic

Thank you, Fintan. Look, as you have seen also at our Investor Day in Rome, where we featured what we are really doing with coffee, you will see, and just for the benefit of everyone, we are really seriously allocating resources to build the capability and to strengthen our right to win. And all that is reflected through continuous outlets and customer acquisition and penetration.

I can only say that I do expect that quarter by quarter we are in more outlets, and I am pretty sure we will be. One caveat to say is that this is not about account and outlet acquisition at any cost; we want to get into the right outlets from the right segment and with right proposition, both for customer and us. And I am happy that the team is very conscious of the types of outlets we are doing and converting from obviously competitors. So I see this as a journey that has a multi-year plan, and progress so far has been, A and B, in line with our expectations on quantity and quality. I hope that answers, Fintan.

Fintan Ryan

Yes. Thank you very much.

Ben Almanzar

Thank you.

Operator

The next question is from Alicia Forry of Investec. Please go ahead.

Alicia Forry

Thanks. Good morning, everyone. Two questions from me. The first one on the cost inflation that is now moderating. Can you say whether that is broad based across your COGS based or is that a few key inputs? And also is that market driven or due to specific actions that you yourself have taken hedges or some other activity?

And then the second question is on Finlandia, I think the rationale is very clear in terms of strengthening the relationship with HORECA customers. I was wondering if you could talk about the timeline to full integration of that brand; I expect it would likely be shorter than we have seen with coffee because you are already well-versed with the proposition and with the brand. Also, are there any investments required to deliver on the full potential of including that brand within your portfolio? Thank you.

Ben Almanzar

All right. Good morning, Alicia. Let me start with your first question around the COGS per case and what’s driving it. So that improvement that we are signaling where to finish the year in high-single digit inflation of our COGS per unit case is driven primarily by a couple of factors. First and foremost, we saw already in half one a better-than-expected delivery, and we see that continuing into the second half, and more favorable comps. We also are seeing a relief in key commodities like aluminium and PET, and that’s starting to benefit us.

We see that coming through in the P&L. We are also experiencing more normalized energy costs, which for us it’s important, both indirectly, because it affects input cost, but also directly with the lower utilities. And again, particularly in the second half, we were lapping a very high energy inflation from last year. So those are the fundamental drivers, and we see that generally across the businesses.

Zoran Bogdanovic

Thanks, Ben. Good morning, Alicia. On Finlandia, firstly, I’m very glad to hear that you also find the rationale very clear. Now, indeed this is different than coffee. In coffee, we started from scratch. Here with Finlandia as well as with our premium spirits capability, we have it for 17 years. We have dedicated the teams in the countries.

We have dedicated the Premium Spirits Academy to constantly improve the skills and knowledge for this respective category. We know this brand really well because we have been working with it already in several markets. So there are – first of all, brand is known, there are developed toolkits, there are proven mix ability programs. So we are already – we are not in a phase where we start growing, but we are already here in speed walking if not running. So the moment the transaction closes, I expect Q4 of the year, next year we press the pedal.

Alicia Forry

Thank you.

Operator

Next question is from Matthew Ford of BNP Paribas Exane. Please go ahead.

Matthew Ford

Good morning, Zoran. Good morning, Ben. Most of my questions been answered, so just one from me, really. Obviously mentioned the Finlandia acquisition, and recently we have heard from CCEP, quite a major acquisition there. What is your current thinking on kind of more large scale M&A, and what is the kind of outlook, if there are any options that are potentially on the table that you are considering?

Zoran Bogdanovic

Good morning, Matthew. So I mean, we just have the ink on the contract from Finlandia is still fresh. As I always say, we are very open. We are very open, whatever, strategically come our way. Ben highlighted that our fire power is clearly there. We always welcome and are always keen to look for sound opportunities that will support our growth.

Are we looking in the background for those kind of opportunities? Yes. And I can only say that we are a growth mind-set company looking for avenues for growth that make strategic complementary fitting sense. And whenever those occur, we will seriously evaluate them, and if ever valuation is good for our company and shareholders, we will go ahead. That’s all I can say now.

Matthew Ford

Great. Thank you.

Ben Almanzar

Thank you. Operator, I think we are going to timeout. So if actually…

Zoran Bogdanovic

There is someone. There seems to be someone.

Operator

If I can move the last question from Jared Dinges of JP Morgan. Please go ahead.

Jared Dinges

Yes. Thanks guys for letting me sneak one in here at the end. I wonder if you could talk about profitability in Nigeria, actually. So it sounds like you guys are feeling much better, at least on the volume side and top line side, but I wonder if you could talk about kind of the profitability outlook there especially given what we have seen with the currency, is it a market where you can sustain your margin or should we expect that to be kind of single digit, maybe even lower end of that on the EBIT margin side for some time? Thanks.

Zoran Bogdanovic

Good morning. Good morning, Jared. We don’t provide such data by country. The only thing I can say is that we focus constantly and are really doing work on all the levers that impact profit and profitability. That’s why we talk a lot about price mix, because in these days and years that is especially critical.

And for that reason, we are front loading our capabilities investments in Nigeria. And I also just want to say that we’ve done exceptional work on the cost efficiency and productivities in Nigeria over years, making it one of the absolute most efficient markets cost wise that we have in the group, so that helps a lot.

Jared Dinges

Got it. Thank you, guys.

Ben Almanzar

Thank you.

Operator

Mr. Bogdanovic, that was the last question back to you for any closing remarks.

Zoran Bogdanovic

Well, thank you for all your time, questions, and your really – your interest, we really appreciate it. Let me just conclude to say we believe that these strong results we announced today underline the fundamental attractiveness of the markets where we operate as well as the proven strengths of our execution and capabilities.

I strongly believe that we are well prepared to adapt and seize the future opportunities in our industry this year and going forward. We look forward to speaking to you all again soon. Wishing you a great day. Thank you very much.

Ben Almanzar

Thank you.