Coca-Cola Europacific Partners PLC (CCEP) 2016 Q2 法說會逐字稿

Good day, and welcome to the Coca-Cola Enterprises first-half 2016 conference call. At the request of Coca-Cola Enterprises, this conference is being recorded for instant replay purposes. At this time, I would like to turn the conference over to Mr. Thor Erickson, Vice President of Investor Relations. Please go ahead, sir.

Thank you, and thanks to everyone for being on our call today. We appreciate your interest and for joining us to discuss our first-half 2016 results and our outlook for 2016.

Before we begin, I'd like to remind you of our cautionary statements. This call will contain forward-looking management comments and other statements reflecting our outlook for future periods. These comments should be considered in conjunction with the cautionary language contained in this morning's release, as well as the detailed cautionary statements found in our interim financial report which we filed this morning with the UK, US, Dutch, and Spanish authorities. A copy of this information is available on our website at www.cokeCCE.com.

Today's prepared remarks will be made by John Brock, our CEO, and Nik Jhangiani, our CFO. Damian Gammell, our COO, is also with us on the call today.

(Caller Instructions)

Now I'll turn the call over to John Brock.

Thank you, Thor, and we thank each of you for joining us as we discuss our first-ever earnings results for Coca-Cola European Partners. Let me begin by saying that in the nearly four months since the creation of our new Company, we have become even more convinced of the solid opportunity for CCEP to create meaningful, value-building, long-term growth.

Our management teams and, importantly, our people are committed to this new Company, and fully engaged in making it a tremendous success. This reflects our sustained focus throughout the creation of CCEP on four key areas: business integration, managing our day-to-day business effectively, restoring growth, and realizing important operating synergies. This focus is helping us to successfully integrate the new territories into our Company, to share best practices, and to begin realizing important operating synergies. As we move forward, we continue to believe in our Company's long-term potential.

Now as you've seen in our news release this morning, our results include comparable diluted earnings per share of EUR0.83. This reflects a decline of 1.5% in revenue, and flat operating income results. It's important to remember that the numbers we discuss are pro forma and currency-neutral, and include results as if CCEP had existed in the periods represented.

These results come as we continue to face the impact of a soft consumer environment. They clearly demonstrate the need for the creation of CCEP, which will drive renewed efficiencies and achieve important synergies. As I mentioned, we've already begun to implement many of the initiatives that will drive these synergies. We remain on track to deliver run-rate savings of between EUR315 million and EUR340 million by mid-2019.

Beyond these synergies, we have a proven track record of managing each of the levers of our Business effectively. We see this in first-half 2016 results, as revenue per case, while flat, was slightly ahead of cost of sales per case, which was down 1%.

As industry and market conditions warrant, we remain focused on maintaining or expanding gross profit margins. Pro forma operating expenses declined 0.5% during the first half. We have ongoing programs in place to ensure that we minimize expenses while fully meeting the needs of our customers and the Business, and as we realize some benefits from restructuring.

Now looking further at our first-half 2016 results, our results reflect the combined impact of poor weather, soft marketplace and economic conditions, a tourism decline in France, and a supply chain disruption in Great Britain associated with the new software implementation. Sparkling brands declined 1.5% as growth in Coca-Cola Zero partially offset other declines.

Energy continued to provide important growth as we executed well against our multi-brand energy strategy, and benefited from the new distribution of Monster, which began in the first quarter this year in Spain, and the second quarter of 2015 in both Germany and Norway. Water grew 4%, led by smartwater in GB, Chaudfontaine in Belgium, and Vio water in Germany.

As we work to seize growth opportunities, we are implementing customer marketing programs that are more compelling at the point of sale, and we're utilizing marketing assets that drive consumer awareness and action. We're also looking for ways to drive growth with diversity in all areas of our portfolio, with the launch of Honest Tea in GB and the expansion in energy with Monster Ultra. In Germany, we're working with the Coca-Cola Company to leverage the success of VOVO with a sparkling version of VOVO lemonade made with organic juice.

Some examples in our core business include the relaunching of Coca-Cola Zero as Coca-Cola Zero Sugar in GB, with new packaging and a new formula that tastes more like regular Coca-Cola. Other examples include future consumption My Coke multi-packs in the Netherlands, and implementation of small basket programs as consumers move to more frequent shopping occasions. In Iberia, we've made significant packaging innovations, including glass bottle changes in immediate consumption channels and lightweighting 0.5 liter PET.

We also continue to execute in support of the Taste the Feeling campaign, which unites each Coca-Cola trademark product under one brand, while providing unique messaging for each product. This campaign is having a positive impact, and we look forward to working with the Coca-Cola Company to further its success.

Now let's look at our outlook for the remainder of the year. Given current conditions, we now expect full-year 2016 revenue to be flat, with modest mid-single-digit operating income growth. In addition, we expect diluted earnings per share to grow in a mid-teens range.

This outlook reflects first-half results that were impacted by some one-off events, as we've discussed. It also reflects our expectation that, based on improving results to date in the third quarter and the operating plans we have in place, our second half will show meaningful improvement. Nik will provide more color on this in a few minutes.

Let me also discuss another important action we've taken. Today, we announced our first dividend payment, a key step towards our goal of creating long-term value for shareowners. We are dedicated to this goal, which is at the heart of our Company.

Today's dividend announcement is an important indication of CCEP's commitment to shareowner value creation. As we work to build value, we will also communicate clearly and provide regular updates of the steps we're taking to integrate the Business and to achieve long-term growth. In this spirit, I want to remind you that next week we will share more information about our Business as we host an investor conference in Barcelona. This will include a webcast of a series of presentations from our Management team on Tuesday, September 27 through our website, www.CCEP.com.

Now before I close, I want to briefly review our work on corporate responsibility and sustainability. As a leading consumer product goods company in Europe, it's important that we lead the industry in transparency and choice, so our consumers can make informed decisions. And we are pleased that our Company has been listed on the 2016 Dow Jones sustainability world and European indices.

We are in strong alignment with the Coca-Cola Company in these areas, as we strive to lead in sustainability while driving value for our Business and our customers. Sustainability will remain a critical pillar of our overall business strategy. It is essential to our success and our ability to achieve our primary goal, building shareowner value.

So in closing, let me share some key thoughts. First, though the retail environment remains challenging, there are opportunities for meaningful growth in each of our territories. We have a compelling business combination, and a clear plan to deliver that growth.

Second, we have seen a return to growth in the third quarter, and affirmed our 2016 guidance for mid-teens growth in diluted earnings per share. Third, we have a solid strategic partnership with the Coca-Cola Company and a shared vision of the future of our Business. And last, as the leading Coca-Cola bottler and a major European CPG Company, Coca-Cola European Partners presents a proven commitment to driving shareowner value, a commitment that was at the very heart of the decision to create this Company.

Thanks very much for your time. And now I'll turn the call over to Nik for more detail on our financial results, as well as our full-year outlook.

Thank you, John. And we appreciate each of you taking the time to be with us today as we discuss our first half year results, and importantly our outlook for the remainder of 2016.

On a reported basis, first-half earnings per diluted share were EUR0.74, or EUR0.83 on a comparable basis, which includes a negative currency translation impact of EUR0.02. Pro forma comparable first-half revenue was EUR5.2 billion, down 1.5%, and operating profit was EUR603 million, which was flat, both on a pro forma comparable and currency-neutral basis. Pro forma comparable and currency-neutral net pricing per case was flat, and cost of sales per case declined 1%, which allowed us to achieve some gross margin expansion.

Volume declined 1% on a pro forma and comparable basis, after adjusting for an additional selling day in the first quarter. This reflects a mid-single-digit decline in Coca-Cola trademark brands, primarily Red Coke, offset by gains in energy and water, as John stated earlier.

Operating expenses declined 0.5% on a pro forma comparable and currency-neutral basis. This reflects a continued focus on expense control, as well as the decline in volume. It also includes the impact of the supply chain disruption, and certain marketing expenses for our [euro] 2016 program.

Now looking forward at our 2016 full-year guidance, we now expect revenue to be flat, reflecting the softer market conditions in the first half of the year. We have affirmed operating profit growth in a modest mid-single-digit range, reflecting the benefits of ongoing cost control and the initial benefits of our restructuring programs. We've also affirmed diluted earnings per share in a mid-teen range.

In addition to operating profit growth, full-year 2016 diluted earnings-per-share growth is benefiting from differences in interest and tax rates between comparable 2015 figures and our 2016 outlook. Based on recent rates, currency translation would negatively impact full-year 2016 diluted earnings per share by approximately EUR0.07.

The weighted average cost of debt is expected to be approximately 2%, and the comparable effective tax rate for 2016 is expected to be between 24% and 28%. Our year-end 2016 net debt to EBITDA is expected to be just over 3 times.

Now as we continue to look at the overall financial framework that guides us, first within this framework we know it's essential that we grow free cash flow by generating sustainable operating income growth, and improving free cash flow conversion, while delivering consistent earnings in line with our long-term objectives, including mid- to high-single-digit growth in EPS. Second, we continue to stay focused on maintaining an optimal capital structure that provides us with the necessary financial flexibility. Third, we will continue to have a disciplined approach when pursuing new investments, whether M&A, capital investments, or investments in restructuring activities.

Our focus on these three areas will help us achieve our fourth objective, returning cash to shareowners to create shareowner value. As John mentioned, we announced this morning a significant milestone towards that goal. Our Board has authorized a payment of our first dividend of EUR0.17 per share on a quarterly basis, or EUR0.68 annualized. This is in line with the expected dividend rate of 30% to 40% of our profit after taxes that we have previously communicated, but is another step demonstrating our commitment to creating shareowner value.

As we focus on this goal, creating shareowner value, we realize that successes lie in our ability to enable the Business to deliver in several key areas. For example, we're committed to improving our growth outlook. It is imperative that we seize the opportunities to grow, even as we work through the sustained challenges of the consumer goods environment.

We must also continue to successfully manage the levers of our Business, including managing our cost of sales, tight OpEx control, and realizing the benefits of restructuring. As John mentioned, we continue to be on track to deliver EUR315 million to EUR340 million of run-rate savings by mid-2019. While our 2016 guidance includes the benefits of synergies, for the purpose of measuring our synergies against our three-year target, we will only count savings after the close of the transaction. In the coming months, we will develop and provide more detail to you on how we intend to track and report these synergy benefits versus our core business performance.

Let me now turn to a couple of modeling notes. Our first half year report today includes pro forma and comparable income statement information for 2015 and first-half 2016, including quarterly breakdowns. This information is presented as if CCEP had been in place for the periods reported, and is reflective of Management's view of the Business.

As previously noted, going forward, we will be reporting under IFRS in euros and also in one operating segment. However, you can see that we now report revenues by country, which adds a lot more insight into the business results, on the top line in particular.

As for the full-year 2015 financials, there are a couple of differences from the numbers that we provided after the transaction closed. Notably, there was a reclassification of approximately EUR195 million to cost of sales from selling and distribution expenses for freight in Iberia, thereby reducing the gross margin with no impact on the OI margin.

Second, there's a purchase price accounting adjustment which, as you know, we said would be subject to adjustments post close. And this typically happens within that one-year window post close. This adjustment added approximately EUR17 million and EUR19 million to depreciation in cost of sales and OpEx, respectively. This represents a EUR36 million increase to depreciation and a corresponding decrease in operating income, but all of this is a non-cash item.

We do expect to have our purchase price accounting exercise to be substantially completed by the end of the year, and will appropriately update you as we go along. Neither of these adjustments reflect any change in how Management views the Business, and that's an important piece for me to highlight.

Moving forward, it is this set of financials that we intend to measure ourselves against through the first half of 2017. Beginning in the second half of 2017, we will be able to compare ourselves to the actual reported and comparable financials.

Let me also add just a few words on our first-half results versus our implied second-half guidance on a pro forma, comparable, and currency-neutral basis. With respect to revenue, which was down 1.5% in the first half, we still anticipate the full year to be flat. Supporting this are a few key points. One, our first-half 2016 was impacted by several one-off items, including the Great Britain supply chain disruption, poor weather, and declines in tourist travel, notably in France and Belgium.

Second, when looking at the prior-year growth rates, the first half of 2015 was up, and the second half of 2015 was down. This does represent a more favorable growth hurdle for the second half of 2016.

Finally, while we're still in the third quarter, we have seen improving quarter-to-date trends supported by the late summer arrival in Europe, and expect modest low single-digit revenue growth in the third quarter. Also, when we look at operating profit growth rates for the first half, Germany had two non-recurring events, favorability in sugar contracts and changes in route to market, both in 2015, which negatively impacted the first-half year-over-year operating profit growth rate for CCEP.

To close our prepared remarks, we remain committed to managing each of the levers of our Business to achieve our guidance and our objectives for the remainder of the year. And importantly, we remain focused on generating cash and creating long-term profitable growth, all in support of our most important goal, delivering increasing levels of shareowner value. Thanks for your time. And now John, Damian, and I will be happy to take your questions. Operator?

Thank you.

(Operator Instructions)

Our first question is from Kevin Grundy with Jefferies. You may begin.

Thanks. First question, just to drill down a bit on the guidance. So you talked about some of the one-off factors that hurt the business in the first half.

Can you give us an update -- I think, Nik, if I understood you correctly there, are you already up mid-single digits quarter to date through 3Q? If you could just clarify on that. And then with respect to reaffirming the EPS and OI guidance, is it that productivity and synergies are coming in a bit better despite the fact that the top line has been impacted by the factors that you discussed?

Nik, go ahead.

Yes, sure. So just to clarify, yes, we're pretty late into the third quarter, and what I just indicated was that we would expect modest low-single-digit revenue growth in the third quarter. And this obviously supports our view in terms of affirming our EPS guidance and operating income guidance, and obviously is in line with the revenue growth that we've indicated being flat, reversing the trend of being down really in the first half by 1.5%.

Okay.

And to your point on operating income, as we said, the guidance that we have provided was always inclusive of whatever we would see in terms of synergy benefits, which we remain on track to deliver in terms of the EUR315 million to EUR340 million. I won't be able to break out for you today what amount we expect to come through in the second half of the year, because we're still working through that and there will be some confrontations, et cetera. But we're committed to being able to deliver on those targets by mid-2019.

Okay, that's helpful. If I could just ask one more. Nik, on cash flow, is there anything more you can give us there for 2016 with respect to cash flow from ops or free cash flow, cash costs you can highlight for us this year and maybe over the next few years?

You've indicated CapEx as a percent of sales would be 4% to 5%. I guess that's the ongoing expectation. Any guidepost you can give us as far as free cash flow conversion getting back to 100%?

I think that's the target. Can you lay that time line out for us? Thanks.

Yes. If we look at the conversion, clearly, that's going to be coming probably closer to the 2019 period. Because we're going to have our restructuring programs that we need to go through, and that is going to have a drain on the cash. There are some positives that will offset that, but clearly not at that magnitude, i.e. we've got some tax NOLs as well as the extra benefits in the US that hopefully will offset some of that, but not all the way.

So we're still targeting to get towards that, close to the 100% conversion, but it's probably going to be 2019 and beyond. But we'll be able to provide you more details on that over the next months as we continue to lay out all of our programs, and look at the timing of some of the accruals and then the cash payouts.

Okay. Very good. Thank you.

Thank you.

Thank you. Our next question is from Steven Powers with UBS. You may begin.

Great, thanks. I was hoping we could just get a little bit more color on the Q3 improvement that you called out. I'm just curious how broad based it's been or if it's focused on any particular markets? And as you talk about that, maybe if you could just highlight any call outs, particularly in Spain and Germany, if you think about Q3 and Q4 in terms of what they may be cycling year over year.

Let me ask Damian to give some commentary, color commentary there. But I would say the improvement we've seen is across all markets. It's broad based, and I think we all have to admit the weather in the second half of the summer for Europe has been much better than the first half, which basically didn't exist.

It was a tough weather summer in the beginning. So that's made a big difference and it's broad-based. But, Damian, give it a little bit more context.

Thanks, John. Thanks, Steven.

As John mentioned, we've enjoyed a later summer which obviously affected our second quarter. We're seeing the benefits of that coming in the third quarter.

That's also being supported by a number of marketing initiatives. We had the Euros coming out of Q2, that allowed us to build a lot more displays, inventory and activation in the markets across Europe.

We've had the relaunch of Zero Sugar Coke in GB which is going extremely well. We're very happy with that.

Broadly across all our markets, we're seeing the benefits of improved execution at the store level. And also some brands performing well, as I mentioned Coke Zero, but we're also seeing the energy portfolio continue to hold up well. Our water businesses are doing well.

So it's a pretty broad-based improvement. The good news is, as John mentioned, it's across all our markets.

Thanks. If I could follow up real quick. Damian, you mentioned energy, and, John, I think you mentioned the rollout of Ultra Zero across your markets going forward. Just any commentary you can give there in terms of the pacing of that rollout, either over time, and then what your expectations of the uptake there by retailers and consumers.

Well we've been able to leverage the experience we've had in GB with our energy portfolio, particularly Monster. More recently into markets like Spain and Germany, where we've recently taken over the distribution of the Monster franchise. And a key part of that, as you highlighted, has been the rollout of Ultra.

So across all our markets, we're seeing strong uptake of the Ultra format and we're seeing a particularly good business in Germany and Spain as we've been able to leverage the best practice we want to call it that from GB. But we've talked a lot about this merger being about being able to take examples from one market, migrate it, an make it better in another market. And I think a real example of that has been what we've been able to do at our energy franchise, in Germany in particular and more recently in Spain.

Okay, great. Thank you.

Thank you.

Thank you. Our next question is from Bill Schmitz with Deutsche Bank. You may begin.

Hey, guys, good afternoon. Hey, -- .

Hello, Bill.

When does market share start to matter again? I understand there's probably some disruption as the deal got done, and I know you try to down-play some of the Nielsen stuff.

But it looks like there's pervasive share losses, at least in carbonated soft drinks in the [skein] channel data we look at. So is that data directionally right, and is there an urgency to reverse that?

Damian, do you want to give a I think a broad-based view about how we're seeing market share, losses and gains and what we're doing about it and what our perspective is?

Yes, but it was a bit hard to hear the full question. So apologies if I can't answer everything that was mentioned.

But generally on market share, from our perspective, we've seen some weakness in GB over a period of time. That situation is actually recovering. If you look at the latest Nielsen data, we're seeing better share performance out of GB and mainly that was in the Zero Sugar or sugar-free cola category and obviously we feel that the new formula and the new packaging around Zero Sugar is helping contribute to a stronger performance in GB.

Across the rest of our markets, we continue to hold our share generally in sparkling and in some markets we are actually improving that. I think historically our biggest challenge has been in the GB market, and again, I think the actions we've taken throughout this summer and during fall that addressing that.

But it is a focus for us, we don't like to lose share in GB. Some of that share loss came on the back of very aggressive pricing as we took a good decision not to follow, we believe, as it wouldn't have been right for our shareholders, or for our retailers. And we prefer address that with a better product and packaging which we're doing at the moment.

So overall, in measured channels, which again we've often talked about, in some of our markets account were around 60% of our total business. So it's not a read through for our total performance, we're generally doing better in away from home.

But clearly, we're also focused on growing the category and growing our share in measured. That's going to remain a priority for us. And when I talk share there, obviously I'm talking value share.

Yes, and Damian has explained that extremely well. I just would add one comment. Which is, if you see us having some slight declines in market share in any of the markets, two things to keep in mind as Damian said.

One, it's only reflected in measured channels. Two is, generally those are moves that while we don't like to see market share losses, we're making very conscious decisions around value and not chasing price if competition is going in an area and a direction that doesn't make a lot of sense.

So we're very pleased to see that broadly our share is improving. But again, I think it's important to recognize most of the kinds of situations you see are ones that we are very actively a part of.

Okay, great. And then just, are you seeing any rebound in on premise and immediate consumption in France and Belgium? Obviously because of the horrible circumstances there, it was slow. But is it coming back at all?

There was immediate consumption, Damian, in Belgium.

You're quite right. I think John and Nik both mentioned it.

We've had some hopefully one-off events in both Belgium and in France at the beginning of the summer, which certainly had an impact there. And if you look at tourism figures and if you look at eating out figures, both of those markets suffered as a result. We believe certainly the good weather has come at the right time as people have hopefully moved on from that.

We have seen a pick up in consumption in both of those markets, but obviously it will remain a challenging 2016 for tourism in both France and Belgium given the timing of those tragic events. But it has improved through the third quarter, and obviously it's welcome not just for us obviously but for the economies of both of those countries as well.

Great. Thank you very much.

Thank you.

Thank you. Our next question is from Bonnie Herzog with Wells Fargo. You may begin.

Hello, everyone.

Hey, Bonnie.

I have a question on your revenue guidance for the year, which implies accelerated top line in the second half, which you did allude to given the modest low-single-digit revenue growth you're expecting in Q3. So I guess I was hoping you could drill down a bit further on the key top line growth drivers in the second half, and then possibly gives us a sense of your expectations for price mix and volume? And then maybe even some color on your expectations for these top line drivers in Q3 versus Q4.

Go ahead, Damian. You've talked a bit about some of these value drivers, but give a little more color.

So hello, Bonnie.

Hello.

Clearly just to reflect on what I said earlier, we have benefit from a late summer in Europe. So that's certainly been one of the top line drivers of our performance in Q3. We've had a number of strong brand initiatives, again, talking mainly about our Zero Sugar Coke relaunch in GB which has gone very well and we're very happy with that.

But across all of our markets, since the beginning of the year we've been talking about a number of initiatives, and obviously they are starting to pay back dividends. Whether that's our portfolio expansion on the back of Monster and energy brands, and particularly doing well in Germany and Spain where we've taken over distribution. Whether it's our ongoing growth of smartwater in GB, we've also just launched Honest Tea into GB which is a brand we're excited about in the tea category.

And we've had a number of packaging initiatives, whether that's from smaller IC packs, but also looking at how we can effectively manage our large PET packaging smarter from a performance perspective or promotions perspective. So that applies across all markets. We've had a good experience with our 1.25-liter launch in Norway, which we're very pleased with.

So that hopefully gives you a flavor, Bonnie. But it's quite a broad based and revenue growth focus which we've already talked about from category, pack and brand, and it's on the back of a very late summer.

So most of our pricing, all of our pricing actually, had been in market prior to the summer and we've talked about that in earlier calls. So we'd expect those drivers to continue through the rest of the year, and that's reflected in the guidance Nik articulated earlier. Hopefully that gives you a bit of a flavor.

Damian, the one thing I'd add to that is I think your team, your general managers, are really doing a terrific job of exchanging best practices across the market. So beyond all the portfolio initiatives you just described, there are a number of marketplace execution things that are really beginning to take hold as you look at what's working in Spain in terms of up and down the street and applying that in some of the other markets.

Where you look at the way the German businesses have historically handled discounters and expanding that into the other markets. So I think some of the benefits of best practice in marketplace execution really are beginning to take hold, and that's a significant part, beyond the portfolio.

I think one real good example of that, John, and thanks for raising it is the [aldi] listing in Belgium. We've gone into aldi with four SKUs as an initial listing, which generally is not typical for those type of customers.

And we've been able to work across our business, particularly with the German team, to help leverage insights to help us achieve that. So the number, as I mentioned in my previous call, a number of examples of replication or stealing with pride and leveraging it into the markets is happening as we go through the year as well.

Okay, that's really helpful. And then I just had one final quick question on Coca-Cola trademark, which declined 3.5% in the first half and then in Q2 you did touch on some of the positives like the one-brand strategy.

So I'm really trying to understand what's driving the declines? How much of it is the weakness related to the Great Britain supply chain disruption? And then maybe give us a sense of what you're doing to improve these trends for the trademark brand.

So I think if you look at the guidance that we've given for rest of year, that's a fair reflection. As that obviously doesn't have any impact of any supply chain challenges that we had in GB which really related to the first part of the year. So the guidance Nik has given reflects obviously all our brand's performance in the second half of the year.

On trademark Coke, obviously we're particularly happy with a zero format. We see also Coke Life and Diet Coke performing slightly better, and we see Coke Classic obviously being the more challenged within our cola portfolio. But a number of our packaging initiatives and I think the current advertising campaign that has just hit Europe this year is certainly helping us to manage that better than we did previously.

But we still see some of those challenges continuing throughout the rest of this year, and candidly into 2017. But we are taking steps along with the Coca-Cola Company to address that decline, and also to continue to diversify our product range. And not just within cola, but across labels and other NCDs.

So that all ends up leading to the guidance that Nik talked about. So better performance, but candidly, we still recognize the challenge we have around the brand.

Okay. All right. Thank you.

Thank you.

Thank you. Our next question comes from Judy Hong with Goldman Sachs. You may begin.

Thank you. Hello, everyone. So the first question is on just drilling down into Germany. It looks like volume was up but price mix was down 2% or 3%, and I know you had called out some packaging changes there. So can you elaborate on what's going on with that change and when we start to lap that change in that market?

And then, Nik, just on the commodity side, obviously you've been seeing pricing coming ahead of cost per case. And just wanted to get a sense of how that looks going forward with sugar prices potentially coming up, how much are you hedged on that front? And any color just on the broader commodity view.

Damian, why don't you take the first one and Nik the second one.

Yes. Thank you, Judy. As you know, we have been going through a number of packaging change initiatives within Germany, primarily from our refillable packaging into more consumer friendly [one-way] packaging. And that affects our net sales lines, predominantly because most of, if not all of our one-way packaging goes straight into central warehousing, Judy, in Germany. That is reflected obviously within the net sales number as customer covers the bulk of the logistics costs.

Refillable clearly has traditionally gone through our operations. So the expenses related with logistics were below the net sales line.

So as we continue to migrate out of refillable into one way, and we're doing that in a very conscious fashion because there is a strong consumer franchise, particularly for the 1-liter refillable pack in Germany. The crate, which is a fantastic pack. But at the moment, 1.5-liter, 0.5 liter now are being migrated to one way.

And you're seeing that impact on the net sales line. And that's really the biggest impact within Germany on the revenue line. So hopefully that helps explain that. Nik?

Yes, on commodities, Judy, obviously as you said, we've seen that continue to trend favorably for us for 2016, particularly as we had our PET exposures open and that benefited some. So if we look into 2017, the first point I would make for you is that you referred to sugar in particular.

The only place where we buy sugar on the world market is Norway, so that's a very small part of it. And as you realize, the EU sugar regime is being changed, dismantled towards the end of 2017. So we'll have to see how that plays out for 2018, but it's early days.

Currently on commodities, we're not necessarily seeing anything outlandish or moving up significantly at this point. I wouldn't be able to guide you on that.

But again, keep in mind commodities is that circa 30% of our COG and there's other elements including concentrate, manufacturing efficiencies, et cetera, that will be driving through. So we'll provide you more color on outlook for COGS for 2017 probably towards the end of the year.

Nik, just a quick follow-up on the tax rate. So year-to-date pro forma, it looks like it's trending at the low end of the 24% to 26% long-term guidance. So wanted to just get a sense of if that's what you're expecting for the full year.

And if I -- I think if I heard you correctly, I think this year you were commenting on 24% to 28%. Or is it still 24% to 26% for the full year, and potentially at the low end, just given where we are year to date?

So 24% to 26%, not 28%, just to clarify, and that's our guidance. I wouldn't be able to say anything more towards that. It's always impacted by timing of profits and [lid] of countries, et cetera.

Got it. Okay, thank you.

Thank you.

Thank you. Our next question comes from Ali Dibadj with Bernstein. You may begin.

Hey, guys. A couple things. One is, I wanted to ask a little bit more about the change in the COGS trajectory though, given -- especially given, Nik, what you just said about commodities not changing much. Because it looks like it was negative 1% per case in H1, and plus 1% per case in Q2, gross margins up 40 basis points H1, negative 70 basis points Q2. So I know you've talked about a couple drivers, but can you be a little bit more specific about what happened and what you think keeps that benefit going forward from a COGS perspective?

And in that, Damian, you talked about Germany recyclable's versus returnables from a top line perspective. Can you talk about it from a cost perspective as well?

I understand the short-term costs, but can you articulate and ideally quantify the longer-term benefits? What are the things it doesn't allow you to do? You mentioned a route to market change in Germany, some more detail would be great on those. Thanks.

Maybe I'll take the thing, and maybe I'll take the last question first, Ali, and then Nik will come in.

We've seen obviously over a number of years we've seen the one way packaging formats growing in Germany, and there are clearly a number of benefits. I won't quantify them, so to disappoint you up front, but clearly from a marketing perspective it allows us to vary pack sizes. It allows us to run a lot more promotional activity. It allows us to collaborate better with customers as we go through their logistics network, which is clearly something they prefer. And it allows us to offer a variety of different pack sizes.

And one of the areas that we're very focused on in Europe, not just in Germany, is having a broader-based packaging offering, particularly on Coke classic. And so you will continue to see us launch different pack sizes to make sure we're appealing to a broader range of consumers. And that will both be in cans, obviously, which are traditionally and always one way but also within PET.

So it's really flexibility. There are downstream benefits. It is a simpler supply chain.

It allows us to blow in house our bottles, so you go straight from PET resin right to filling. Obviously with refillable, you're shipping a lot of empty bottles around in crates. You've got to wash them, you've got to put them back to the supply chain.

So it is a simplified supply chain. That brings benefits. And obviously productivity on a one-way line is significantly higher than a refillable line.

And again, that's just the process. You strip out a lot of sorting, you strip out a lot of washing.

There are multiple benefits, starting with the consumer working back into our supply chain. We're very focused on sustainability. And in markets like Germany, we get nearly 100% of our PET bottles back, regardless whether they're refillable or not, and they are then recycled and put back into the supply chain.

So there is no down side from a sustainability perspective. Arguably, you use less water so you could argue there's some benefits.

It's a long answer, but clearly we've thought long and hard over a number of years about this migration in Germany. And it started a number of years ago and we're not at the end, but certainly we're probably two-thirds of the way through.

If that clarifies that, I'll ask Nik to talk about -- I think your question was around margin expansion. Maybe you could repeat it. It was difficult to hear at the beginning of the question.

Sorry. So it's about COGS in particular, and especially given what you said about commodities not changing very much. It looked like from H1 it was negative 1% per case impact COGS change, and Q2 it looked like it was plus 1% COGS. So a reversal of the benefits.

And if it's not commodities, I'm trying to figure out what that is. Maybe it's Germany route changes, maybe it's something else. But I want to get an understanding of that as you go forward, Nik.

Ali, I'm still not clear. I understand you talk about what we've indicated in terms of half 1 being down 1% on a COGS per case. And you're saying that's reversing in half 2?

In Q2, yes. Looks like it's reversing in Q2 or it got worse. Is that not right?

Ali, if you remember from what I said on my prepared remarks, we did have some benefits that came through in 2015 in Germany in particular that came from both route-to-market changes as well as some sugar contracts. So it's more just the timing and when those flow through as opposed to anything else.

So it's that, okay. And then if I can switch just for a moment to revenues. I get --

Sure.

Thank you. I get that the volumes from weather are going to get better. I get it's market share tradeoff that you have to deal with.

But as you think longer term, do you need positive price mix to grow your top line? And if so, I think the answer is yes, but if so, what are some of the hurdles? And I guess some are in your control, pack sizes, this type of stuff, some are out your control, whether it be macro, whether it be retailers, and when do you think you'll be able to say look, consistently we can raise price mix in this industry if you're not already there? Thanks.

The simple answer to the question is absolutely, we have to. And, Nik, you can add a little more color to that, but for sure we plan to do that and can do that.

And quite honestly, Ali, that's our algorithm there is at the end of the day when we were looking at modest low-single-digit growth or low-single-digit growth going forward on a revenue basis, we continue to ramp up our efforts. So a lot of the things that Damian talked about, be it innovation, be it looking at brands that are out there, looking more closely at our pack strategy.

This is -- it's going to be a lot around price and mix that we need to achieve, and primarily a lot of mix as well. So that's what we'll be focused in on.

And the fact is, it's difficult to get pricing in Europe. We understand that in a number of our markets, but we have broadly been able to do that and anticipate going forward.

It's all about the value-added equation that we bring to our customers, and when we sit down with them and go through it, it's challenging. But it's doable. And it's absolutely a part of our strategy going forward.

Thanks very much, guys.

Just a final commentary. I think the benefit not just for the merger, but clearly we're now in business with a bigger portfolio of markets, but also products and brands. So when you look at how we want to manage top line growth, obviously on a holistic level we will leverage volume, price and mix.

But in certain categories where we have either low share or a new entry, you may see volume playing a bigger role. Then other categories it may be more around mix and price.

So we're very focused on managing that equation brand by brand, rather than on a generic holistic level. Because one of the benefits of the portfolio is it allows us to do that in market, by brand, and in some cases by customer channel. It's something we're very focused on, and we spend a lot of time making the right decisions around volume, pack and price mix.

Thanks a lot.

Okay. Thank you.

Thank you. Our next question is from Caroline Levy with CLSA. You may begin.

Good morning, everyone. Thank you.

Hate to be bringing this one up, but I think it's really important for just to ask for an update on sugar tax regulation as you see it in Great Britain. Is there this chance do you think that the planned increase in a couple of years actually doesn't happen, and if there's anywhere else in other countries where we should be aware of any things going on? And then to ask you if you think the Coke trademark declines have to do with the consumer -- a growing negative opinion about sugar or if you think it's something else.

Hello, Caroline. Let me make a comment about Europe in general. That is, we are remaining very vigilant and monitoring what's going on in the world of taxes around our markets. And while there are often conversations and discussions and rumors about other taxes that could be forthcoming, there are none that are immediate out there.

The principal issue is GB where there is, as you know, this proposal on the table. We're just beginning some serious conversations, and of course it doesn't take place until 2018.

But, Damian, do you want to add a bit more perspective to that, the issues and the approach we're taking with the Coca-Cola Company on this important issue?

I think we're obviously working on this issue hand in hand with the Coca-Cola Company, but also with the rest of the industry. So clearly this tax goes just beyond Coca-Cola or CCEP.

So we have a very active dialogue with the trade around -- but also with retailers, because clearly they're affected, all those retailers, and also the suppliers. And obviously we're taking that into consultation with the government and trying to understand how we can help them understand, not just our concerns but also why we don't think it's going to work. So it's a -- as you said, it's a very active debate at the moment.

It's led by the trade, not just by us. We think that's critically important, because there's a broader issue than just Coca-Cola.

And is it affecting trademark Coke's performance? I think choice has always been a factor, and I think consumers are continuing to make choices around beverages. I think that was the case before this tax was announced, and it's the case afterwards.

I think our challenge is to make sure when they make choices that they choose one of our other brands, and that's what we're focused on. And also they understand the benefits of Coca-Cola, which I think the Karma Campaign is bringing more relevance to why having a Coke tastes great and we're going to continue to do both with the Coke Company. So working on a number of fronts around that issue, and as things become clearer, obviously we'll communicate as appropriate.

Thanks so much.

Thank you.

Thank you. Our next question is from Pablo Zuanic with SIG. You may begin.

Thank you. Just, Nik, a question for you. When I think about the synergies of EUR315 million to EUR340 million, what assumption just of how much of that will flow to the bottom line embedded into your medium-term EPS growth guidance? I'm getting it's about half, but if you can confirm that.

And related to this, in terms of the guidance for [synergy] growth in mid-single digits for this year, what assumption about synergy realization there? Is that something that really starts in 2017, or can you capture, some of that in the second half? Thanks.

Nik?

Pablo, so on the first question, we have indicated and continue to hold the position that the EUR315 million to EUR340 million of synergies that we have committed to will be delivered to the bottom line. So I'm not sure where your assumption of half of that falling to the bottom line is coming from, but we have always maintained that would all fall to the bottom line.

On your question in relation to timing of when they would start, we would see some synergies come through in the second half of 2016. And as I said, we are only counting synergies that are coming through close to close of the transaction towards that EUR315 million to EUR340 million. I would not be able to give you a number today of what you'd expect to see in 2016, but that is included in our modest mid-single-digit range for growth for OI for 2016.

Thank you. And can I just ask a quick follow up on Germany. Not to harp too much on the second quarter, which I understand there's the moving parts and one-offs. But when we look at what happened in the other markets, France, Spain, it sounds like Germany was up around 4%.

Is that number the underlying number, or is there a distortion there on that growth because of the packaging changes? And related to that, when you're shifting from these refillables or returnables into more one way, in terms of per liter is that (inaudible) to [EBIT] per liter or is there an effect there? Thank you.

I'm not sure what the 4% you're referring to, so -- .

To get to minus 1% volume growth for the -- go on, I'm sorry.

Go ahead, sorry.

My point is that when we tried to decipher the volume growth for the individual markets and to reconcile with your minus 1% for the second quarter, I work out that Germany must have been up about 4% in terms of volumes. Correct me if I'm wrong.

But the bigger question is given that Germany was the market that did the best in the second quarter in terms of volume growth, I want to get an idea what was the number, was it around 4%. And was that number the underlying growth number, or was that distorted because of a packaging shift that you've talked about?

So firstly, just to be clear, while we have not given volume by country, you have revenue by country listed in our press release. And you can see that Germany was down 0.5% for the second quarter on revenue, and also down 0.5% for the six months.

So I'm not sure where that 4% number is coming from in terms of your calculation. You might want to just take a look at that. So that's just a number.

In terms of the package change, just to clarify, there is a transitional impact on the move on the NSO line, as I talked about, as you move some of your costs above that because the retailer's take the logistics. So that's a factor in the number for Germany.

On an overall net-net level, we continue to see the move to one way being beneficial for a lot of the reasons I talked about earlier. I think Thor is happy to follow up with you just to understand the 4% question in a bit more detail. So if that's okay, maybe we can take that after the call.

Thank you.

Thanks, Pablo.

Thank you.

Thank you. Our next question comes from Rob Ottenstein with Evercore. You may begin.

Great, thank you very much. Realizing that it's very early days in terms of the integration, can you give us any kind of granularity in terms of what you're seeing positive and negative on the integration efforts? And any kind of assurances that the issues that you're having in GB or other sorts of issues like that won't come up through the integration process as you try to you align the various systems?

Let me just say, we've had a team at work, some 70 people or so on a full-time basis really since we announced the transaction over a year ago as part of the integration management office led by Victor Rufart. And they have done a phenomenal job in putting together all of the programs around how to integrate the businesses.

So when we closed on the transaction on May the 28, we were ready to go. And since then the teams have continued to roll ought all of the plans and programs to the business units, as well as the functions all know exactly who is in charge of which different program and they're off and running exactly as we expected.

Our view, our confidence in the synergy numbers is higher than ever. We continue to reiterate those.

And in terms of specifically systems, the issue we had in Great Britain clearly was not an integration issue at all, it was a very specific issue dealing with supply chain and software implementation there. It is now behind us, and as we look at systems integration across the whole we don't anticipate any significant issues. There are some projects that have to be done, but we think they're well under control and will continue to roll out in line with what our expectations are.

Great. So what I'm hearing is that you're pretty confident -- I have a lot of confidence you're going to get the synergy number and bring it to the bottom line. My only concern and it seems that it's been taken care of, is that your actions that you're doing won't have a significant impact on the top line delivery.

That's certainly our intention. Obviously some of the things we're doing have significant change management programs as part of them. But we think we're in a pretty good place to do that.

We think we know what we're doing, and we have all three former business units very committed to working as a team with a combined culture to go make things happen. So we think we've taken the right steps to mitigate the risk.

Terrific. Thank you very much.

I think just to add to that, John, I think we're also working at a new level of collaboration with the Coca-Cola Company around that revenue growth objective which is clearly their number one priority as well. That's helping us retain a very crystal clear focus on growing our top line across all the countries with joint business planning, which is well under way for 2017 already. So that's also a big factor in where we are today.

Terrific. Thank you, guys.

Thank you.

Thank you. Our next is from Mark Swartzberg with Stifel Nicolaus. You may begin.

Thank you. Good morning, gentlemen. Two questions. One on Germany, one on Iberia.

Damian, on Germany, at least from where I sit, it seems like there's a big opportunity for aluminum CSDs now that the infrastructure is there to recycle and I know that historically it's been an area of challenge because of taxation. But when I then see this emphasis on recyclable PET, it just makes me think that is indeed an opportunity you see of size in that particular market. So a simple binary question, do you think that's a large opportunity?

And then on Iberia, could you give us some perspective both category and competitive? I believe you had 3% revenue growth in Iberia in 2015, 1.5% here in the first half, so some perspective on that slowdown. I've heard what you said about weather, but looking for some added color there.

Okay. Thanks, Mark. So on Germany, you're absolutely right. Particularly for us as a system, cans were not a tool that we could use within Germany for many years due to the regulation that came in place and the speed at which the retailers and the industry got the recycling system up and running.

That's now behind us, and for a number of years now and we've seen cans growing in our mix. Actually, more recently you've seen us selling cans to [Reed] and [Rinaldi]. Which is a major breakthrough in terms of us being able to offer a very good pack at a very good price in retailers that represent nearly 50% of the market.

So that will continue. It's a very flexible pack for us in terms of size and logistics, and it's been one of our fastest growing packs for the last couple years in Germany.

On Iberia, I think the weather comment also, as you mentioned, reflects on Iberia. We had a late summer in Iberia overall, so benefiting throughout the summer and into the third quarter with record tourism numbers in Iberia. So we've seen the tourism market hold up well there, and we've seen, again, a late summer.

So that makes us pretty happy with our Iberia performance, on top of a number of very strong years of growth. So obviously the comps in Iberia are somewhat different, they've had a couple years of strong growth. So that's where we are at with Iberia.

Keep in mind, just to add, that 3% that you referenced to for 2015 is a full-year number and they had a very strong third quarter, particularly July with terrific weather there last year. So we'll be cycling that as we go into Q3 for Iberia, just to keep that in mind.

Got it. And a follow up on the Germany comment. Aldi Lidl, when did that happen and I presume other retailers you see similar opportunity to make those introductions?

That's already happened.

I know. But when did it -- excuse me?

That's already happened.

I know. But when did it happen? I'm trying to get a sense if it was recent or two years ago, just trying to get a sense of -- .

It's been happening periodically over the last four years.

Okay, so it's not a big change. Got it, okay. Thank you, gentlemen.

Discounters have come at the end of the cycle because they were obviously more challenging, but they're now listing cans as well. So discounters within the last 12, 18 months, the rest of the market it's been there for quite a while.

Got it. Great. Thank you, gentlemen.

Okay, thank you. Operator, we have time for one more question.

Our last question is from Andrew Holloman with SG. You may begin.

Hello, thanks for taking the question. Two just very brief ones, mainly aimed at Nik.

Just on your indication of purchase price allocation, EUR36 million annualized. Can I just confirm you're going to treat that as a normal depreciation expense, you're not going to include that as an exceptional? That's my first question.

My second one is you've twice said you're not yet in a position to give any update I guess on the timing of synergies. When will you know the phasing of synergies, and when you know, will you tell us?

I will definitely tell you guys. We will definitely tell you guys when we know. Just keep in mind, we have to go through consultation periods here, and so essentially depending on the timing and phasing, the timing and phasing will be impacted by that.

So I would say to you, we'll probably have some indication towards the end of the year in terms of what does that look like, particularly when we get into 2017. So that's the first piece.

In terms of your first question in relation to depreciation, yes. And just to give you a little more color, when we had to do our very preliminary PPA as a part of the prospectus and reporting the financials, we had expected based on asset values and some write-offs, et cetera, of EUR41 million favorable depreciation versus historic numbers.

Having now looked at it and relooked at some of the step ups in value, et cetera, that favorability has now become EUR5 million, and hence you've got that delta of EUR36 million which goes into your base and is not an exceptional item going forward. So that's in our base numbers for 2015 against which we'll be comparing ourselves going forward.

Okay. So that obviously affects the pro forma if we're doing your numbers on a statutory basis, then that's an incremental number on an annualized basis?

Correct, and that's what we've just indicated. We've restated the pro formas for 2015 to make sure that's reflective of what was appropriate. Again, that's pro forma as we're indicating our view of what number looks like for CCEP now going forward.

Sure. Okay. I get it, I think. Thank you.

Okay. Let me just close then by saying thank you to all of you for joining us today. We appreciate the opportunity to tell you about CCEP, and have a great day. Thank you.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day.