Coca-Cola Europacific Partners PLC (CCEP) 2017 Q1 法說會逐字稿

Good day and welcome to the Coca-Cola European Partners first-quarter 2017 conference call.

At the request of Coca-Cola European Partners, 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.

We appreciate your interest and for joining us to discuss our first-quarter 2017 results and our outlook for the full year of 2017.

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 reports filed with the UK, US (technical difficulty) Dutch and Spanish authorities.

A copy of this information is available on our website at www.CCEP.com.

Today's prepared remarks will be made by Damian Gammell, our CEO, and Nik Jhangiani, our CFO.

Following these prepared remarks, we will open the call to your questions.

In order to give as many people as possible the opportunity to ask questions, please limit yourself to one question and we will take follow-up questions as time permits.

Now I will turn the call over to Damian Gammell.

Thank you Thor.

Again, I'd just like to thank everybody for joining us this morning and this afternoon as we discuss our results for the first quarter of 2017.

As you will have seen in our news release today, our results include comparable diluted earnings per share of EUR0.31, including a negative currency impact of EUR0.01.

We achieved revenue growth of 1.5% and volume growth of 0.5% with a 15% growth in operating profit, all on a comparable and currency neutral basis.

Given CCEP was created in late May of last year, these growth numbers represent the combined performance of each of our territories as if CCEP had existed in the first quarter of 2016.

Now, as we look closer at our first-quarter results, our sparkling portfolio was flat with a 0.5% decline in our Coca-Cola trademark brands.

Coca-Cola Zero Sugar continues to perform extremely well with growth of 16%, and we will continue to expand and build on this success throughout the summer and across our territories.

Sparkling flavors, which include energy, grew 1.5%, led by Fanta with a growth of 2% during the quarter.

Energy was up more than 20% as we continue to execute our multibrand strategy, and we achieved solid gains from Monster and benefited from distribution in Spain, which began in February of 2016.

Our still brands portfolio grew 3.5%.

Sports drinks grew 2% primarily, through the Aquarius brand, and water grew 1%, reflecting our focus on value and reflecting growth in Aquabona, Chaudfontaine, and Vio.

During the quarter, we also continued to make important progress towards our stated goal of EUR315 million to EUR340 million in synergies by 2019.

We remain very focused and diligent in working towards this goal as we enhance the effectiveness of our operations.

We are very happy to continue to share best practices and work to improve our efficiency across all functions and territories, allowing all of our markets and people to learn from each other as we continue to build and grow CCEP.

Each of these factors contributed to our solid first-quarter results with a combination of volume and revenue per unit (technical difficulty) growth benefiting from both -- benefiting both revenue and obviously our operating profits.

We did see our gross margin decline during the quarter largely due to some one-off practice which Nik will discuss with you in a moment.

So, given our results to date and our effort for the year, we have affirmed our operating targets for the full-year 2017.

However, as always, it is important to remember that the first quarter is our smallest, and we firmly are aware that much work lies ahead of us as we move into our key summer selling season.

Reaching our full-year goals will continue to require standing execution of the field level, and a continued focus on achieving our senior objectives.

We are confident in our approach yet realistic about the months that lie ahead and the challenges we continue to face.

Our results today support our confidence that we have the initiatives in place to achieve our full-year goals.

For example, we are committed to continue to make bold moves on package innovations for the folks in smaller convenience packaging, including the new Fanta twist bottle and a 250 milliliter can for Schweppes Sparkling Juice.

We continue to invest in our digital capabilities and we are improving our execution, merchandising and displays to ensure our product flow through our supply chain more efficiently and critically are presented to the consumer more effectively in our outlets.

We also have a solid program with brand innovation expansion in conjunction with the Coca-Cola Company and our other partners.

This is highlighted by the Coca-Cola Zero Sugar launch, new months of flavors, low or no calorie products and initiatives such as Vio which is proving very successful in our German business.

We also have excellent plans in place across our other categories in stills, tea, water with initiatives for Aquarius expansion, Honest Tea expansion, and continued innovation with our Capri-Sun brand, and we will continue to build on the success we've seen with our Smartwater proposition.

And as I mentioned earlier, we are entering the critical and very important summer selling season.

We are excited about the new joint campaigns with the Coca-Cola Company like the evolution of the Share a Coke campaign which now focuses on dream holiday packs across all our business units.

This marketing is expected to reach more than 255 million consumers across Europe, fully supported by great execution and partnership with our customers across CCEP.

As we work towards achieving our objectives for the rest of the year, we firmly believe it's important we maintain a shared focus on three key areas.

First, we must continue to execute every day at the highest levels.

We have great brands.

We support them with marketing programs and outstanding field execution, all focused on driving value for our customers and satisfaction for our consumers.

Our people, who are the most talented in the business and are highly motivated to win every day, have proven their ability to accomplish this.

Secondly, we must continue to deliver on our synergy objectives, which includes, as I stated earlier, a pretax goal of EUR315 million to EUR340 million by mid-2019.

We are making good progress and, importantly, we are realizing the benefits in our results.

And finally, we must continue to work in partnership with the Coca-Cola Company to deliver sustainable, profitable growth.

Our two companies have shared goals and a consistent view of the marketplace.

We both want to create sustainable, long-term growth through a focus on revenue and profit, and we are working diligently together to reach that vision.

Now, in closing, before I hand over to Nik, let me share some key thoughts.

As I've stated before, we have a compelling business combination with the world's best brands in categories that offer significant opportunities for profitable growth.

We continue to be realistic about the environment, but we remain confident about our ability to capitalize on all these opportunities.

We have a talented, experienced leadership team, and employees who, with the excellent support of our Board of Directors, are driven to achieve success.

We have a company that has important operating assets and advantages that are second to none across Europe, and create excellent opportunities for enhanced effectiveness.

Importantly, we are on track to deliver our senior objectives and achieve the full potential of our new company, CCEP.

We are committed to creating a workplace that is dedicated to the shared success of all our stakeholders.

This requires a diverse and inclusive culture that inspires the personal growth potential for each of more than our 24,000 employees.

It also requires and builds on our continued pledge to do this sustainably, which remains a key part of our business proposition for our employees, our customers, our consumers, and our communities.

And importantly, CCEP has a commitment to driving increasing levels of shareholder value, building on a strong heritage and a track record of success.

This commitment was at the very heart of the decision to break this company and it remains a key focus of our work.

So, thank you very much for your time.

I'll now turn it over the call to Nik, who will share some more details on our financial results, and I look forward to answering some of your questions after Nik.

Thank you.

Thank you, Damian, and we appreciate each of you taking the time to be with us today.

I will now discuss the results of the quarter in a bit more detail as well as our outlook for the remainder of 2017.

Looking at the quarter on a reported basis, first-quarter diluted earnings per share were EUR0.30 and on a comparable basis were EUR0.31.

Currency translation reduced earnings Per Share by about EUR0.01.

Revenue grew 1.5% on a comparable and currency neutral basis.

This reflects the reported volume decrease of 0.5% and revenue per unit case growth of 2.5%.

This revenue per unit case growth is driven by several factors, including favorable mix, promotional timing and rate increases.

First-quarter cost of sales per unit case increased 3.5% on a comparable and currency neutral basis.

While there has been modest cost inflation, this increase is magnified and largely driven by the accounting for bottles and crates in Germany, which was a one-time favorable adjustment in the same quarter last year.

While we expect some impact in our quarterly year-over-year growth figures for COGS in our packs versus One-Half 2016, we do not expect any material impact to operating profit or full-year growth figures.

Importantly, for the full year 2017, we expect cost of sales per unit case to be at the higher end of our previous range, and increase by approximately 1.5% on a comparable currency neutral basis.

This slight increase is driven by year-over-year cost increases and key inputs, principally PET and cans and the impact of currency rates, notably the GB pound to euro, or partially offset by the benefits from our cost reduction programs.

While we did have some gross margin contraction in the first quarter, this is largely related to the factors that I just discussed, and we remain committed to maintaining and even expanding gross margins over time, and expect to see modest gross margin improvements in 2017.

In the first quarter, operating expenses were down 5% on a comparable and currency neutral basis.

This reflects the impact of synergy benefits, cycling last year's increased costs associated with the supply-chain disruptions in GB, [one] US selling day in the quarter and the impact of the year-over-year accounting differences and overall timing.

These factors contributed to operating profit growth of 15% on a comparable and currency neutral basis.

Additionally, these results reflect solid overall performance and the benefit of synergies, partially offset by the impact of one less selling day in the quarter.

During the quarter, we realized approximately EUR25 million in synergies.

Excluding these synergies, core operating profit growth was approximately 2.5% up and ahead of our revenue growth, importantly.

Let's now look at our outlook for 2017.

For the full year, we continue to expect modest low single-digit revenue growth with high single-digit operating profit growth and diluted earnings per share growth as well.

For the full year, the synergies delivered are expected to benefit COGS slightly more than OpEx.

Excluding these synergies, we expect core operating profit growth to modestly exceed revenue growth.

These gross figures are on a comparable and currency neutral basis.

At recent rates, currency translation would reduce 2017 full-year diluted earnings per share by approximately 1%.

We continue to expect free cash flow in the range of EUR700 million to EUR800 million, including an expected benefit from improved working capital of at least EUR150 million.

This free cash flow outlook is after the expected impact of restructuring costs, integration and deal costs.

This reflects the focus we put on free cash flow generation, reducing our leverage and our dedicated efforts to improve our working capital position.

Capital expenditures continue to be in the range of EUR575 million to EUR625 million, including EUR75 million to EUR100 million of capital expenditures related to the synergy programs.

Excluding capital expenditures related to these synergies, CapEx is expected to be less than 5% of revenues.

Our weighted average cost of debt is expected to be approximately 2%, and our comparable effective tax rate for 2017 is expected to be in the range of 24% to 26%.

As Damian indicated, we remain very much on track to achieve pretax run rate savings of EUR315 million to EUR340 million through the mid-part of 2019.

We have already achieved savings of approximately EUR60 million through the first quarter of 2017, including the EUR35 million in the second half of 2016 and EUR25 million in the first quarter of 2017.

We expect to exit 2017 with run rate savings of approximately one half of our total target.

We continue to expect net debt to EBITDA for 2017 to be just under three times, and our outlook for cash cost to achieve the planned synergies remains at approximately 2.25 times expected savings.

That said, we continue working to find ways to lower cost to achieve these synergies as we manage our business efficiently, leverage the strength of our balance sheet, and diligently work to create shareowner value.

One last note, as previously stated, we do not have plans to repurchase shares in 2017.

That said, we are evaluating nominal repurchases to offset dilution which may occur as a result of employee stock plans.

As part of this evaluation, we expect to include a share repurchase resolution at our upcoming AGM.

If a repurchase plan occurs in 2017 to offset this dilution, given likely timing and size, we would expect little to no impact on our outlook, including that for EPS.

To close, let me highlight a few areas.

Every level of our Company, from front-line employees to executive management, is focused on managing the various elements of our business to improve our growth outlook and deliver value.

Next, we remain focused on generating cash, utilizing our flexible capital structure, and creating long-term, profitable growth.

These proven capabilities enhanced by the synergies created by CCEP improve our ability to accomplish our most important objective, continuing to drive shareowner value.

Thanks for your time, and now Damian and I will be happy to take your questions.

Operator?

(Operator Instructions).

Judy Hong, Goldman Sachs.

Thank you.

Good morning.

Hi everyone.

So Damian, I guess I was hoping to get a little bit more color just in terms of the competitive environment and the share performance in GB.

It looks like it was a good quarter, but obviously you're lapping an easy compare there.

So I wanted to get a better sense of what you're seeing from an underlying perspective and the pricing environment as I think some of the UK grocers are obviously starting to see more inflation coming through.

We have seen I think, towards the end of 2016 and into this year, improving performance in GB.

Obviously, as we talked about before, Nielsen doesn't cover all of our business in GB, but where it does track, we've seen a recovery.

I think that's been on the back of a couple of initiatives that I mentioned during the call.

One, GB was the first market where we launched Zero Sugar Coca-Cola, and that was a segment in which a lot of our share challenges have been in in the sugar-free cola segment.

So, that was a good, solid response to that opportunity, and that's working well.

We also see our flavor business performing well in GB.

That is supporting our share as well.

So a number of the marketing initiatives that we brought in at the end of 2016 have definitely helped shore up and grow our share of 2017.

On your second point, we have seen retailers obviously on their own discretion making moves around promo pricing.

And you will see a number of the offers, which traditionally, for example, in their case, a number of retailers would have promoted two 1.75 liters for GBP2.

We've seen throughout Q1 a number of cases where that has now gone up for B=GBO2.50 for two 1.75 liters.

So, significant inflation in the promo price, and that seems to be continuing into Q2.

So, some inflationary moves on promo pricing, not so much on shelf price.

They've remained pretty constant, but, as you know, in GB, a lot of the product and volume is sold on promotion, so the promo price really is the biggest read-through for inflation and value in GB.

So there are two of factors that are at play, and we would expect both of those to continue into Q2 and into the summer.

Okay, thank you.

And Nik, if I could just follow up on the gross margin performance, I know there is that one-time impact.

But can you just sort of bridge the impact from that one-time item, how much the cost savings offset that, and just a little bit more color on the bridge and gross margin.

Thank you.

Yes.

If you look at the cost savings piece, remember it's roughly that 55/45 in terms of the split between COGS and OpEx.

So, you have an indication of what impact that's had on the first quarter.

If you actually exclude the one-time impact that had 2016 up, it essentially would say our gross margin was slightly down, but I would say very slightly down, but we would continue to see that normalizing over the course of the year.

And more importantly, I think there will be some noise, as I said, as we just cycle through some of the first half of 2016.

But the full year very much intact to have slight gross margin improvement, which obviously includes the benefits of some synergies as well.

Okay.

And the lower sugar prices, at this point are you embedding any of that into your outlook on the cost commodity piece?

Most of our -- are you referring to [417]?

Yes.

Everything that we have guided to -- remember the main areas that were open for us was essentially PET, and we had some element of aluminum open.

And that's what's really driven now with -- at least in the aluminum and currency fully covered.

The sugar benefits that we had we also were benefiting in prior years because, as the whole sugar regime was in the phase of being dismantled, we did get some favorable pricing in 2016 as well.

But I think our COGS outlook today, outside of, again, the one variable being PET, I think we are pretty comfortable with that.

Got it.

Thank you.

Lauren Lieberman, Barclays.

Great.

Thanks.

Good morning or good afternoon.

If you could just talk a little bit again about price mix.

So, I know, Nik, you guys shared that it was all elements of what you would hope to be driving price mix.

But anything specific on price pack architecture versus product mix and portfolio mix that could help us understand some of the positive swing?

Thanks.

As we've stated on earlier calls, and as we talked about coming out of 2016, you are seeing a number of common initiatives in play across all our markets.

First, maybe I'll just talk about headline pricing.

So we were able to meet our pricing plans as we moved into 2017, so that obviously supports some of our revenue growth.

Secondly, we have been spending a lot of time and investment with our customers on driving pack mix benefits, smaller packaging, and looking at actually building on some of the learnings out of the US from our learning trip there last year looking at diversifying, particularly in grocery, around smaller packaging and taking some of the pressure off large multipack, particularly PET cans.

That is starting to play a role, but I would caution that that's quite a journey.

That's not something that gets transformed within a quarter for sure.

But it's the right thing to do to build a more sustainable consumer franchise and offer more choice.

That's helping.

We are seeing, again, from a mix perspective, continued strength across our sparkling portfolio.

I call that Fanta and obviously Coca-Cola Zero Sugar.

So, that continues to support good margin.

So, again, each market has slightly different dynamics given where we are coming from, but those three factors of headline price, package mix and product mix are definitely contributing to the revenue figures that Nik shared with you.

Over a longer period of time, we are very much focused on also channel mix, on building our business and continue to leverage our strengths outside of top end retail.

I think that's one of the strengths of this business.

We have good got businesses up and down the street in (inaudible).

Clearly, that's a mix benefit as well that's in our business going forward.

So, the first three really are playing 2017, the fourth one is something we believe is a strategic advantage and we'll continue to cherish going forward.

Nik, do you want to add anything?

No, I would just say just keep in mind, obviously, I think, if you look at the first quarter, remember the rate increases, particularly in some of the larger markets, will start coming through more going forward because, depending on timing, it's either a February or March type of an impact.

So, we did have some good brand and pack mix that supported those numbers as well.

So, it really is a good combination.

That's great.

In Germany, I know it's hard to sort of disaggregate Easter shift and so on, but it did look like revenue in Germany maybe is under a little bit of pressure this quarter.

Is it just a slow start to the year?

Is there anything more specific around that market?

No, nothing specific.

If you recall, when we talked about our full-year results in March, we did call out that January was a bit of a slow start.

You could see that from the Nielsen data, particularly in Germany.

So, there was definitely a function of a slow start.

We were not as intensively active on promotions in Q1 in Germany.

Two of factors at play there -- one, we were in discussions with our customers around some pricing moves.

And obviously, there, I suppose, in those cases, you're just not featured as much.

And then secondly, Easter is a huge holiday for us in Germany as it is in all our markets.

So, the traditional promotional activity, some of that fell into Q2.

So, they were the two reasons at play for Germany, and certainly we are happy with where that business is at going forward for the rest of 2017.

Okay, great.

Thank you so much.

Keep in mind, Lauren, we did have both volume and value share growth in Germany in the first quarter, and that reinforces Damian's point that we are doing the right things.

Great.

Bonnie Herzog, Wells Fargo.

Hi everyone.

I have a question on France.

With the election coming this weekend, there is certainly a lot of uncertainty about the outcome, but it seems that, if Le Pen is able to win, France's withdrawal from the Eurozone is really a foregone conclusion, which certainly has implications on the euro more broadly.

So if I'm just curious if you guys could comment on how that may potentially impact your business, maybe in the near term, what ways, if any, you're preparing for that possibility, and then perhaps a broader long-term implications of a Eurozone breakup.

That's a CNN question, Bonnie.

I couldn't resist.

Well, it's dangerous to ask Damian that is what he would say.

Clearly, we, like I'm sure as you are and everybody else, is watching intently with what decisions the French people will make over the weekend.

Clearly, if it was to go the way that you've articulated, which, again, none of us are pollsters so we can debate what the probability of left or right is, we factored in both eventualities, so we thought about what happens.

Clearly, it would be still subject to a referendum, so it would still have to go to the French people regardless of the margin of victory.

So, we would wait and see.

We clearly would like to see stability across all of our markets, and obviously the political environment contributes to consumer confidence and stability.

So we'll watch within intense, but, again, it would be remiss of me to really comment on what I think will happen.

I think you know what we would like to happen, but I think, if we bring politics into these calls, they may last two or three hours going forward.

So, we have it in mind.

We are confident that our business there is performing well.

Clearly, coming into an election, there is a degree of uncertainty, but likewise, as you come out of it, then I think France will have a clear path forward for the coming years, and I think that will be a good benefit for us going into the summer season.

So, we will watch, as I'm sure you will, with intent at the weekend.

We hope all the French continue to celebrate with lots of Coke.

Good point.

Then if I may, a broader question on the macro environment, which I guess, on the margin, things seem to be improving.

So, I'd like to get a sense from you guys if you're actually seeing this, and if you are now more confident you will be able to hit your low single-digit topline growth guidance for the year.

And then if you could maybe drill down a little bit on the markets that are improving.

You called out, for instance, improvements in local market conditions in Iberia.

And then maybe touch on some markets that are still pressured.

Thank you.

As we said on the call, we have reaffirmed our guidance for the full year, so I think that reflects our confidence in achieving our revenue target for the full year.

What we are particularly happy about is, as we look at our performance coming through the first quarter, all of our markets have continued to perform well.

And as we stated, there were reasons for a couple of them being slightly behind the others in terms of absolute revenue growth, but, again, we factored it into our full-year guidance.

So, I think we are pretty confident that all of the markets will contribute to our revenue growth objectives and profit and margin objectives for the full year.

It's challenging to call out any one that stands out either on the upside or on the downside.

I think, in Iberia, we did talk about a slow start to the year, as we did in Germany, but both of those markets have responded extremely strongly through the back end of the quarter and into the second quarter, so both of those issues have been addressed.

So, overall, pretty consistent growth across markets.

I mean there are pockets of some brands doing better here or there, some packages doing better here or there, but overall it's a pretty consistent picture for us.

Nik, anything to add?

No, you said it all.

All right, thank you.

Stephen Powers, UBS.

I just have -- actually, it's I guess a little bit of a bigger picture question.

Thinking about your CAGE presentation and other interactions with us in the last couple of months, you definitely prioritized growth, new growth priorities, not only across colas but also across sparkling flavors and energy, juices, teas, waters, etc.

And at the same time, we've heard from the Coca-Cola Company about them also thinking more about leveraging the total portfolio for growth, elevating innovation outside of CSDs, really trying to break down historical barriers preventing speed to market.

And so I'd love just a general update for you on your optimism on portfolio growth initiatives broadly, but specifically in terms of whether there are valid reasons for incremental optimism just based on some of the changes occurring at Coke aimed at making the system overall more agile, and if that is something that you are encouraged by and if there are some tangible examples as to how it's playing through.

Thank you.

Clearly, with James moving into the CEO role, James was -- had a key role to play in creating CCT.

He was operating in this region prior to moving into his previous role.

So I think, clearly, we know that James understands the opportunities across Western Europe.

I think that's a positive for us.

Beyond that, though, obviously the Company's strategic intent around total beverages and speed to market, productivity and cost savings we believe supports a very similar objective to the one that we articulated on the creation of CCEP.

So, obviously having a line of objectives really helps us make faster decisions and win together.

I would want to come back to your comment on growth.

So, I mean we see value creation as being a primary objective of profitability.

So while we will look across all of those categories, it will be with a view to where can we make a good return rather than where can we just grow.

And I think a testament to that is most of the initiatives that we've taken on water, whether it's Smartwater, on tea, Honest Tea, on energy, we have and will continue to prioritize areas that we believe will contribute long-term to value creation.

And therefore all of those brands are only sold in immediate consumption of small packs, because I know there is a question out there.

With the levels of revenue guidance we are giving, why is it not higher?

Well, a lot of the new initiatives we are launching, we've deliberately kept them in profitable segments of those categories so we can build a more sustainable long-term value business.

That ties back into the Coca-Cola Company's objective.

As you know, we are on an instance pricing model, so obviously that fits with their revenue goal as well.

So, I think it's very much aligned.

We are looking forward to continuing to expand our portfolio with the Coca-Cola Company.

You will see that throughout 2017; you'll see that into 2018.

We are having those conversations already.

But I'd go back to my point.

We will do it in a way that makes sense for shareholders, and in a way that we can create value, and I think that requires alignment and, thankfully, that's what we have now at the Coca-Cola Company.

That's great.

Is it too early to cite some examples of where there have been improvements in speed to market and agility, or can you offer some?

I think, to be fair, the Company has been on that agenda with [New Tab] for a number of years, and I think they have restructured their operations with a view to being faster to market, with a view to funneling more innovation.

So, in some ways, I think it's an acceleration of that strategy that was articulated by James last week.

So, we have seen benefits.

And obsolete creating CCEP in Western Europe took three decision entities in a bottling system to one.

And obviously, that's allowed us to be more efficient on the bottling side with the Coca-Cola Company as well.

So, I don't think we would be where we are without that, and that really goes back to decisions that were taken in 2016.

So, clearly, we look forward to seeing the acceleration of that under James, but it has been a theme of the Company's strategy for a number of years and, as I said, we look forward to continuing.

Great, thank you.

Ali Dibadj, Bernstein.

I'll follow up with a larger one.

Just the two smaller ones.

You mentioned just a second ago and also in the prepared remarks that, in water, (technical difficulty) value.

I just want understand what that means.

I think I know what that means.

I think that means I see it, but I just want to understand more.

And then, on the UK, I would love to just learn more about what you think kind of a normalized, whatever that means, market growth should be volumetrically.

This quarter, you're clearly lapping some of the IT issues you had last year.

But -- and I would have thought volume would have come back even more so.

But just on a normalized basis, what do you think the volume is there?

Just on your first part, I think a good example is our Smartwater proposition where we've kept it in IC.

We've just broadened that whole proposition into sparkling recently, and we are now moving into sparkling flavors.

So also in (inaudible) Vio, Chaudfontaine, again, we've prioritized IC and glass on that water business, because they are the packages that command generally a higher consumer price, and then therefore we share in a higher margin with the retailers.

So when we talk about value, it is really about where we can make sustainable, good margin by focusing on packages and increasingly on channels that just generates higher revenue for us and our retailers, and we both share that.

And that's less on large bulk pack water sold at retail at very competitive value prices -- or very competitive low prices.

That's not a business that we believe that, one, we can add a lot of value to for our retailers.

And secondly, it's not a business that we think is kind of good for our shareholders over the longer term.

So it is about IC, as you mentioned, it is about glass, and it is about packaging and channel innovation.

And on GB, again, we are focused much more around revenue than volume.

We certainly had a good comp quarter in GB; that's fair.

We had the SAP issues we talked about last year in Q1.

We haven't given any guidance for revenue growth by market, but clearly we would expect GB to participate in our overall guidance, probably slightly ahead, given that we had some issues last year, so we do get a slight benefit from that 2017, but that's all factored in already.

So again, it's that low single-digit revenue guidance that we've given for the whole business pretty much fits all of our markets consistently.

Okay.

That's helpful.

And the bigger question is more of a kind of an organizational question.

And I'm just trying to think about how taxing it is on the organization, especially to do integrations, so clearly lots of integrations right now bringing the bottlers in Iberia, as an example, Germany, etc.

How taxing is that on the organization?

So structurally, is there kind of a different integration team, kind of a separate team?

Is there a synergy PMO?

What's the infrastructure, if any, because sometimes you (inaudible) don't to integrate?

And I guess I'm asking that question in the context of how stretched do you think your organization is from a human resources perspective, or could it, in short order, integrate even more territories without too much stress on the Company?

That's a good question.

I've been involved in a number of integrations, and this, by far and away, has been the best planned and best executed that I've been involved in.

Clearly, there was a lot of work.

I think the most important aspect of that is we started very early, so, if you'll recall, when we talked about the creation of CCEP, we obviously were planning for that for quite a while.

We took out a lot of our key executives throughout the end of 2015 and into 2016 to work on planning the integration and to pre-prepare for a lot of the process work that we needed to do.

So, we definitely brought forward a lot of the work.

And because of that, certainly the integration has gone extremely well.

The synergy capture is on track.

We've maintained a very small but very lean team just to complete some of the longer-term aspects of the integration.

But again, as I said, it's very small; it's very lean.

It doesn't interfere with the business, as you can see from our results in Q1 and in the second half of last year.

On a positive note, certainly what we've learned would help us integrate other businesses even better.

So we have a model that we know works for the bottling business.

We have people that have led this integration and are part of our senior leadership team.

And clearly, we would advocate that would give us a lot of benefit if and when we have the opportunity to acquire more territories if that comes about.

Are you pre-preparing anything now?

We are always prepared.

It's just that other people are.

Thanks very much guys.

Richard Withagen, Kepler.

Yes, good afternoon.

Can I ask if you can give us an update on the sugar taxes in Spain.

I think the Catalan region has implemented a tax on May 1. How do you plan to react to this specific tax?

And also the country-wide tax seems to be on hold for now in Spain, but perhaps could you give us the status of that tax?

Yes, so we are working with the Spanish team and also the Spanish authorities to look at the structure and mechanics of that tax.

Clearly, we have some learnings from what we've gone through in GB; we've got previous experience in France and Portugal.

So, I suppose the most important thing is we are applying that learning and knowledge back into our Catalan business.

And we will respond in accordance, as we've talked about before, with obviously pas1sing on the tax, looking at package differentiation to maintain affordability and relevance for the consumer.

We have already been accelerating our non- or low-sugar products and variance, so that obviously minimizes the impact of the tax.

And obviously, we are as interested, as I think all of our competitors and customers are, around what will the national government do based on the regional tax.

So, it's in our plans.

We are responding to it.

Clearly, like all of these taxes, we would question the viability and whether they will really change behavior.

We don't believe it will.

We think there are other ways to deal with this challenge.

Having said that, they made their decision.

Obviously, we will honor that and we will execute against the law, and within that, it really put more emphasis on us to diversify faster in packaging and product.

And we're doing that in GB, we're doing that in Portugal, and we are doing it in Spain.

And we will see how the consumers respond to that as we move through the summer, but it's clearly on its way.

And can I also ask, on Honest Tea, how is that performing in the UK right now?

And I've seen it in a couple of other European countries.

Have you introduced it now across all countries or it's still in a selected number (technical difficulty)

We are being quite selective.

I think, if you look over medium-term, our objective would be to have a multibrand tea strategy in all our markets.

And we are working with the Coca-Cola Company to understand, market-by-market, what's relevant.

You've obviously seen the announcement regarding our association or the Company's association with Nestea.

So, we will roll out Honest.

We are happy.

We think it's a brand that has got relevance.

It's an organic platform.

Its products are great.

But I suppose it's also a category with consumers and with customers that, one, you need to be segmented.

That's the nature of that brand.

And two, you need to be patient.

And we are applying both of those principles.

So, you will not find it everywhere.

Hopefully, you will find it somewhere, but you won't find it everywhere.

And again, in the interest of long-term value creation, we want to make sure that we prioritize channels and customers that generate a reasonable selling price for that product.

That's what we've done in GB.

It's worked well.

And we are looking at new variants and new flavors that we can bring in to support that brand.

But overall, the response from retailers and consumers has been very positive.

And as I said, over the next 18 months, you will see that brand move across all of our territories.

All right.

Thanks.

Brett Cooper, Consumer Edge.

Thanks guys.

Can you just talk about your capacity, both from an infrastructure standpoint and then from a people standpoint, to begin putting more brands or more launches through the business?

I guess this is on the heels of coax plan to invest more you guys -- your desire to diversify your portfolio.

Thanks.

We feel well-positioned to add more.

I think one of the great things about the bottling business is we have a fixed cost base.

We have a sales force of over 4,500 people in Europe.

We have great customer relationships, and we've got a great route to market.

So all of those assets are expandable to take on more brands and more packages.

So it's something we welcome.

Clearly, you've got to do it in a way that both customers and our people can absorb, so planning them with the Coca-Cola Company and phasing them is something that we are very focused on.

On the manufacturing side, a lot of the innovation is coming in packaging and formats that run on our existing lines, so smaller cans, smaller PET.

We have existing accepted capacity, so a lot of these new steel products are unaccepted.

We have capacity.

In 2016, we upgraded a number of our production lines, particularly on energy sold to in-house Monster, so we have that capacity in place.

So certainly manufacturing is not a barrier.

We believe our customer relations are an asset because, clearly, we are operating in a category that's growing.

So if you look at any [ORTD], it's growing revenue.

And so from a consumer growth perspective, we are in the right space in terms of the category we operate within.

They are looking for innovation.

They are looking for new products.

They are looking for lower sugar, which, again, we can clearly deliver.

And then from a sales force perspective, if you look at our existing sales force, we have expanded our association with salesforce.com, and we've rolled out proprietary technology to all of our sales reps, which we are seeing driving increased engagement, so our sales force are happier to be working on tablets.

We are seeing a lot of productivity because we've simplified processes, we've takeaway bureaucracy, and we've enabled them with a state-of-the-art software solution.

And as a result of that, they've got extra capacity.

And so without increasing a cent of OpEx, we are generating incremental sales capacity, and that allows us to filter in some of these new products and packs.

So certainly not a barrier for us, and clearly it's about phasing.

In our CapEx numbers, we've also reflected the need for extra cold space for all these new product.

So when Nik talked about our CapEx guidance in the full year, baked into that is an expectation that some of these new products will require incremental cold space, and that's also factored into our CapEx guidance.

So, overall, it's an exciting journey with the Coke Company.

I'll just come back to my second point.

Probably, from a leadership perspective, what we've just got to do is be very smart about phasing in those initiatives.

So, we give people time to adapt and our customers to accept new products and packs, so that's probably the art and the science, and that's something we are very focused on.

Great, thank you.

Stoyko Moev, JPMorgan.

Good morning, gentlemen, and thank you for taking my questions.

I've got two, if I may.

So, firstly, I notice a relatively weaker performance in France, so I appreciate your comment in the press release on the timing of promotions.

But I was wondering whether you could provide a bit more color in terms of to what degree that was driven by industry weakness and to what degree these were kind of CCEP specific issues.

And then secondly, a follow-up question on GB.

You provided some color on your performance, but I was wondering whether you have seen a bit more rational pricing from your key competitor in the market, especially more recently, and whether they have mirrored your price increases.

And also in GB, last year, you launched your biggest marketing campaign behind Coke Zero.

Should we expect you to continue to support the brand to quite a significant degree this year?

Thank you.

Thank you.

Maybe -- you did a good job of fitting three questions into one there, so congratulations.

I'll start with -- in reverse order.

As I said, we are extremely happy with the Zero Sugar performance.

So, that's a long-term investment from us and the Coke Company buying that brand, so that will continue; it is continuing in 2017.

As I said, we're bringing that format and taste profile to all our markets.

So, we are very happy and we continue to invest behind that brand.

I don't know what our competitors have done on pricing in GB.

All I can do is look at what our retailers have done on pricing.

And certainly, as I mentioned, earlier we've seen retailers taking up pricing on their promotions.

That seems to be reflected across the category.

So, I think you are seeing overall the category promo pricing levels rise in GB since January, end of January.

That has been the case through Easter, which was probably the first -- was the first big holiday event.

So we are seeing that being maintained.

But again, that's fully up to the retailers' discretion.

But it seems to be across category.

It is certainly happening in their brands because we know that.

And if we look at Nielsen, we would see that's also the case across the other brands.

So that seems to be the dynamic at play and we obviously believe it is a good way for the retailers to create more value in the category, and we would support that.

So I think that's good news.

On France, we did talk, on our last call, about changing our promo strategy in France.

We have, in Q1, not just reduced some of the promotions with Easter moving, but we also have started to promote smaller packages.

So, if you know our French business, we have, for a number of years, had a very dependent volume around large PET packages.

We believe there's a bigger opportunity with smaller packaging, smaller PET, smaller cans size.

And we have redirected some of our support into those packages.

Clearly, in the short-term, they don't generate the absolute volume or absolute revenue given the selling prices of the large PET tax, but it is, we believe, the right thing to do for the long-term.

And clearly, that was a big change with some of our retailers, and candidly, like all of these changes, when you change pricing or promo, there is a period of disruption in the market.

That's what occurred in January.

We talked about that.

And we are happy, when we look at our price realization in France on a per-case level, it is reflecting that strategy.

But clearly, through the summer, we will get a better understanding of how the consumer responds to the new offers.

But again, it was a conscious decision and we believe the right one for the long-term health of the business.

Okay, thank you.

Robert Ottenstein, Evercore.

Great.

I want to follow up on some of the answers that you gave in terms of capacity for new products and specifically sparkling water, sparkling Smartwater.

Do you see that as having more geographic potential than just plain Smartwater, which has largely been a UK product?

That's question -- or part one.

Innocent, do you believe that you have the capacity in terms of the cold storage, whatever you need on the logistics side, for Innocent, and any plans to get that?

And then third, in the Coke system, Coke in Japan is starting to introduce more premium Coca-Cola variants that have a health and wellness angle with added ingredients.

Do you see that as something that may make sense in your markets?

Thank you.

Thank you for the questions.

So, on Smartwater, the simple answer is yes.

Actually, in some of our markets, particularly like Germany, we know that carbonated water is the preferred choice.

So, we would expect that, over time, having a carbonated and a flavored and is still variance on Smartwater makes sense.

We launched it first in GB because that's where we've had the longest experience with Smartwater.

We've got a good consumer franchise.

So we'll see how it goes.

But from a consumer perspective, if you look at our other markets, it is easy to see a path to expansion over the next couple of years.

But it's early days on sparkling flavored, so we just got in.

So, we'll probably be able to give you more color around that in the second half of the year.

On Innocent, that's currently not in our plans.

That's something that we continue to reflect on with the Coca-Cola Company in terms of what's right for that brand, and can CCEP add a lot of value to that proposition and can Innocent add a lot of value to our shareholders.

That's our number one question.

It's quite a different business.

As you mentioned, it's chilled.

So, I think, if it was the right decision for the system, the aspects of the supply chain that we would need to address are not that complex.

As you called out, it's really about chilled distribution.

That's readily available in Western Europe through partnerships.

So I don't think that would be a barrier.

I think the real question is, given where that brand is at and its success and the level of investment that goes behind that success, is it a brand that would add value to CCEP?

We continually reflect on that with the Coca-Cola Company, but, at the moment, we don't have any plans to build that chilled capability at CCEP.

That may change in the future.

I am aware, but you probably know more than I do, if I'm being honest, about what's going on in Japan.

But clearly we have a session with the Coca-Cola Company coming up with all of the large bottlers.

As part of that conversation, we will look at what innovations are working across the globe and what can we take back into Europe.

And I've now added what you've told me to my list of questions.

So, I'll know more by the end of May and that may be some think it would work well in Europe.

But I've got to learn a bit more about it.

I have heard about it but I haven't seen any results.

But following (inaudible) it might be something that would work well given the similar demographics in Western Europe.

Terrific.

Thank you very much.

Mark Swartzberg, Stifel Nicolaus.

Good afternoon gentleman.

Thanks for taking the questions.

I had two.

One, Damian, Iberia specifically, I know there's -- the ones (inaudible) but it looks like, even after you just for that, there was a slowdown in organic revenue growth in the quarter after -- either by comparison to last year entirely or by comparison to the second half of last year where you had a nice pickup in growth.

So, am I interpreting that correctly?

And if I am, what's going on there?

And then my second question is for either you or Nik.

It does -- in spite of Iberia, which seems very manageable, it looks like you're in a position where you could have some earnings upside as you move through the year.

If that were to be the case, is your emphasis -- I'm trying to get a sense of where the priority might be.

Is it to put more money against a particular part of your sparkling portfolio?

Is it to put more money against this emphasis on water or this greater emphasis on being properly positioned in water?

I'm just trying to get a sense of where the priorities are there for that.

Just on Iberia, there's nothing really to read through on the quarter in Iberia.

As you said yourself, Iberia had a really strong year last year with a good Quarter 4. Easter moved.

We did have a slow January in Iberia, but that's really it.

There's nothing else going on in Iberia.

In fact, it is fantastic business and it continues to deliver solid revenue growth over a number of quarters.

So I think probably the biggest factor is a selling day.

That gets you back to around flat.

Easter again is a big factor.

So, we are not concerned at all about Iberia.

Sorry, just to be clear, with the one additional selling day, we actually are up about 1%.

It's flat on a reported basis.

(multiple speakers)

So, as I said, it's a slight slowdown from where it was, but, again, I wouldn't underestimate a slow January, but overall it's still a good quarter.

When you take Easter out, I think we are very happy with Iberia.

Are you saying it's only Easter, because I see a 1 and then I see a 3.5 last year and I look at the second half, which implies of course the first half was an easier compare.

So it makes me think it's more than Easter, so I'm just -- and more than January.

So, is that all it is or is there something else going on?

That's all it is.

And also there's an impact from Portugal.

Remember you have the sugar tax, so that has an impact in terms of the volume revenue pace.

I mean in fact, if we look at our execution metrics, if we look at our channel mix in Iberia and if we look at our innovation pipeline with the Coca-Cola Company, that business is performing very well.

So, nothing else going on there.

And we actually had a strong Q1 2016 hurdle as well in Iberia.

Remember, obviously, it wasn't part of the Group but we did talk about what Q1 looked like too.

So I think all those factors, as Damian said, there's nothing outside of that that we see.

We actually continue to be very pleased with the performance there.

Great, great.

Maybe you could just -- we got so caught up in the first one, we forgot your second question.

Your second question, if you could restate it, please?

I apologize, he is no longer in the queue.

I think your question was in relation to, if the business performs better, how would we be thinking about potential opportunities.

And I think, one, keep in mind, again, it's only the first quarter.

We've still get the summer selling season ahead of us.

We've got some tough comps in Q3 and Q4 to hurdle as well.

So we don't want to get ahead of ourselves.

Obviously, we continue to look at things that we would like to do jointly as a system to think about reinvigorating and sustaining that topline growth.

And if and when that arises, we will update you.

Bryan Spillane, Bank of America Merrill Lynch.

Hi.

Good morning everyone.

Just one question about cash flow.

Nik, can you maybe update us on your thinking in terms of sort of how you're thinking about returning cash to shareholders, and especially putting aside if there is the possibility for M&A, just how you will think about like excess cash flow, the bias towards share repurchases or dividends, kind of where you're thinking as you're getting closer to that point where maybe you will be in a position to return more cash to shareholders.

No closer than we were last quarter a couple of months ago, or maybe a couple of months closer.

Listen, I think, in all fairness, a couple of things I would say to you.

And again, this is obviously absent other investment opportunities, including M&A.

The first thing is obviously we continue to want to steadily increase the dividend payout ratio, and I think I indicated that last time as well.

We had planned to move towards that 40% dividend payout, which we did with the increase to EUR0.21 a share per quarter.

But we are probably still at the lower end of our peer range in terms of dividend payout.

So I think that would be a steady increase there, nothing big or dramatic.

Second is, obviously, as we get down towards that leverage range and with the interest of wanting to continue to maintain flexibility for opportunities going forward but at the same time optimizing that capital structure, we would do some form of return if that was appropriate.

Again, I think I'll reiterate what I said last time.

There is no bias or preference for a special dividend versus a share repo.

The board would need to consider that.

We have talked about that.

I don't think there's anything that precludes us from doing either one.

And what form it ultimately takes will be the decision of the board, and could be a combination thereof.

So, our thinking continues to be in the same direction as we've had since day one.

Thanks, Nik.

Andrew Holland, Societe Generale.

Hi.

Given the success that you are having with Zero Sugar in the UK, can you give us an update on the proportion of your GB volume that you would expect to be captured by the sugar tax when that comes in next year.

And related to that, could you give us your estimate of what the retail prices will have to do if that taxes passed on in full, given the sort of channel mix and brand mix of your business?

So, directionally, we will be less than half of our range of our volume let's say, more in terms of range would fall into that tax spend.

And so if you look at some of the data from last year, we are really accelerating our low and non-sugar brands, so maybe even higher than that.

But clearly we understand what's coming, and therefore, if we look at reformulation and investing (inaudible) brand, etc., we continue to grow our non-sugar and low-sugar variants much faster.

So that means it's just going to go one way.

But at the moment, it would be less than half.

On your second question, it's too early.

At the moment, we are just looking at what will the tax mean?

What will it mean by customer, by channel, by pack?

We've been doing a lot of modeling.

I suppose the only commitment we will make is we are committed to pass on the tax to the consumer and -- or to the customer, and then we would expect the customer to pass it on to the consumer.

But again, that's their choice.

The reason I can't be more specific is, obviously, from a competitive perspective, we are looking at packs sizes and variance and affordability concerns.

And only when we really finalize those will we be able to kind of be clear on what it may mean in terms of potential selling prices.

So, we will do that as we move through the year, but, at the moment, it is still work in progress.

So, hopefully, you can appreciate that.

Okay.

Just pressing you a bit on your less than half of volume, less than half could be 10%; it could be 49%.

Might it be sort of 40% to 50%?

Is it in that sort of range that you are expecting?

Yes, I think, to be fair, we've been hitting -- we've been over 50% non-sugar in GB coming out of last quarter.

And if you take our growth rates, you kind of get exactly into the range of what you've just said, absolutely.

And again, keep in mind, as we've always said, it will just be two products, Red Coke and Monster Green.

That would be (multiple speakers).

So, we have or will have reformulated all of our brands and varieties below the sugar tax level.

So as Nik said, it will be Coke Classic and our Green energy Monster brand.

So from a product perspective, then obviously the percentages are a lot different but from a volume perspective, it lands within the range that you said.

So I think we've got time for one more question.

Kevin Grundy, Jefferies.

Good morning guys.

A question for Nik on mix implications on margins as you look out, so not just for this year, Nik, but as you look at the next three to five years.

And given the puts and takes from a geography perspective where Germany clearly lags other regions, pack and channel strategies, which you guys have spoken a lot about.

And then from a product perspective, with two-thirds of the portfolio still levered to trademark Coke, but trends there are weak and that's likely to persist, particularly given sort of a deemphasis on the Coca-Cola Company now.

So understanding that synergies are going to be the key margin driver here over the next few years, as we think about those moving parts, what's your expectations as you kind of pull all those pieces together for mix on margins, kind of on a per annum basis?

Any sort of help there would be great.

Thanks.

Sure.

A tough one to give you really straight direction on, but I think you've hit the highlights.

There will be obviously markets such as Germany that are bit more of a drag given their lower margin structure, but I think we are doing a lot of things that are right in that marketplace, both from a restructuring as well as what Damian even highlighted from a pricing promotional plan perspective.

That should help, over time, continue to drive margins up in that market.

Our focus is clearly to be able to get a favorable pack architecture mix coming through, channel mix with a lot more focus around the cold immediate consumption channel.

And obviously, with new product introductions, a lot of what we are looking at would be much more in the IC space, which, over time, should continue to have a positive impact on our mix as well.

And I say over time because, clearly, there will be some early costs associated to invest behind those brands, but, net-net, we would continue to see, over time, mix to be a positive.

Thank you.

Good luck.

Again, thank you, everybody, for taking the time to join us.

I just wanted to share with you some closing thoughts before we end the call.

Clearly, as you've heard from Nik and I, we are very pleased with the solid start to 2017.

Again, we'd like to emphasize it is our smallest quarter, and our focus in the near term is really preparing the organization for our key summer selling season and working particularly with the Coca-Cola Company on product brand innovation to build and sustain long-term shareholder value for all of the shareholders at CCEP.

So we look forward to talking to you again during the year, updating on our progress.

And again, thank you very much for taking the time.

Goodbye.

This does conclude today's conference call.

You may now disconnect.