Coca-Cola Europacific Partners PLC (CCEP) 2017 Q3 法說會逐字稿

Good day, and welcome to the Coca-Cola European Partners Third 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 call 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 third quarter 2017 results as well as our outlook for full year 2017.

Before we begin, I would like to remind you of our cautionary statement.

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 U.K., U.S., 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 prepared remarks, we will open the call for your questions.

(Operator Instructions)

Now I'll turn the call over to Damian Gammell.

Thank you, Thor, and many thanks to everybody who's joining us on the call today.

Nik and I look forward to discussing our third and full year 2017.

We continue to make strong progress in building our foundation of providing great beverages and great service to our customers.

Some key factors in the third quarter included unfavorable weather, some strong year -- prior year comparables and the continued impact of our new promotional strategy.

And then on the positive side, we did see continuing focus on improving revenue per unit case, and we continue to deliver our post-merger synergy benefits.

All of these factors are reflected in our third quarter results, where we have reported a slight decline in revenue and operating profit growth of 3.5%, both on a comparable and currency-neutral basis.

During the third quarter, our revenue declined by 0.5%, with a 3% increase in revenue per case offset by a 3.5% decline in volume.

As you can imagine, we are quite pleased with our revenue per case increase.

We continue to remain focused on driving profitable revenue growth.

This has led to improving revenue per unit case, helping us to maintain gross margins.

While we continue to see the impact of our new promotional strategy in the quarter, we see this as a near-term headwind and are focused on driving profitable revenue growth through price realization, and reduction of these promotions continues to be the right thing to do for our business in the long term.

From a brand and volume perspective, our sparkling portfolio in the quarter declined by 3%, with a 4.5% decrease across our Coca-Cola trademark brands.

However, within this, we continue to see strong growth from Coca-Cola Zero Sugar with a growth rate of just over 8% in the quarter.

Our sparkling flavors and energy portfolio grew at 1.5%, with another solid quarter from Fanta, which continues to benefit from our new packaging and marketing initiatives.

The category continues to offer significant growth opportunities over the long term.

Energy was up nearly 20% as we continue to execute our multi-brand strategy.

Monster brands had another strong quarter, particularly benefiting from the continued growth of Ultra and the recent launch of our Lewis Hamilton 44 range.

Turning now to revenue performance by territory.

Iberia revenues were up 0.5% as revenue per unit case growth offset the decline in volume.

This was supported also by a favorable channel and package mix as the HoReCa channel continues to outperform.

Coca-Cola Zero Sugar, Aquabona and Monster all performed well during the quarter in Iberia.

In Germany, our revenue declined 1%, with the decline in volume partially offset by strong revenue per unit case growth as we continue to scale back on our large multipack promotions and focused the business on driving price and mix.

We saw further growth in our energy and premium flavors, such as ViO Bio in our German business unit.

Great Britain had strong revenue growth, up 2.5% on a currency-neutral basis with gains both in revenue per unit case and in volume.

This growth was driven by solid performance in flavors, particularly Fanta, and our energy portfolio.

On a reported basis, Great Britain revenues were down 3%, reflecting a decline of the British pound versus the euro.

In our French business unit, revenue was down 6.5%, again, with volumes off due to lower promotional activity versus last year.

On the positive side, our away-from-home channel in France grew in the third quarter, reflecting our new customer wins and the actions we've taken year-to-date to strengthen our field sales team and our overall route to market in away-from-home.

Finally, revenue in the North European territories was flat, led by Norway and Sweden and the inclusion of Iceland, all offset by declines in Belgium and Luxembourg due in part to unfavorable weather and cycling very strong prior year comparables.

I'm pleased that, during the quarter, we also continued to make important progress towards our goal of achieving EUR 315 million to EUR 340 million in synergies by mid-2019.

We remain firmly on track to deliver that target.

We continue to share best practices across CCEP and work to improve our efficiency across all functions and all territories.

Turning now to our 2017 outlook.

Given our results for the first 9 months, we've affirmed our full year outlook and guidance today.

We expect comparable diluted earnings per share in the EUR 2.10 to EUR 2.13 range, including currency translation at recent rates.

Nik will discuss our financial results and outlook in more detail shortly.

We continue to remain confident that our emphasis on driving positive mix, improving promotional profitability and strengthening our route to market will best position the business for future growth and also to deal with the headwinds.

Our strategy is focused on the exciting growth opportunities ahead of us.

We will continue to innovate as we expand our portfolio across a number of initiatives, such as smartwater, Fuze and Honest Tea and also through the strengthening of brands such as Schweppes with our 1783 launch, Sprite and the continued focus on our successful Fanta strategy.

We will also continue to focus on driving the growth of our non-sugar portfolio, building on the success of recent relaunches of Coca-Cola Zero Sugar and Fanta.

From a pipe perspective and in support of our long-term strategy, we continue to focus on driving more convenient packages such as small cans and premium packaging like our small glass bottles.

Importantly, our ability to seize all of this opportunity and to drive continued growth relies on our ability to provide outstanding marketplace execution to both new and existing customers.

We remain focused on driving growth via single-serve packs and in away-from-home channels in particular, leveraging best practice across all our markets as we continue to evolve a more efficient and effective route to market.

So in closing, let me share some key thoughts.

First, we are pleased with the strong start since the creation of Coca-Cola European Partners.

We are optimistic about the opportunities ahead of us and remain focused on investing in and driving long-term growth.

Secondly, we are confident in our approach.

We are realistic about the headwinds that lie ahead.

In 2018, we will face the continued need to improve revenue per unit case as we see inflation pressures coming on our COGS line.

And at the same time, we will face the introduction of new soft drinks industry taxes, notably in GB.

Nik will talk more about these factors shortly, but I want to highlight that we are proactively working on limiting the impact from these headwinds.

Thirdly, we will continue to build on our strategic partnership with the Coca-Cola Company, focusing on profitable revenue growth and aligning our portfolio expansion plans with the beverages-for-life vision.

And finally, we will continue to do what's right for our stakeholders.

Yesterday, we launched a new sustainability plan and are focused on 3 leadership priorities.

Firstly, action on drinks.

We will be a total beverage company offering consumers an even greater choice of drinks with reduced sugar.

Secondly, action on packaging.

We would collect all of our packaging so that none of it ends up as litter or in the oceans and finally, action in society.

We will be a force for good by championing inclusion and economic development in society with our employees and with our communities.

These commitments, along with our long-term growth plans, are central to our journey to becoming a great company and are key to driving long-term shareholder value.

We strongly believe that we have the right vision and the right people in place to drive growth in 2018 and beyond.

And I'd like to thank you for your time.

And now I'll turn the call over to Nik with some more detail on our financial results and our full year outlook.

Nik?

Thank you, Damian, and we appreciate each of you to taking the time to be with us today to discuss our third quarter results and 2017 outlook.

So on a reported basis, third quarter diluted earnings per share was EUR 0.62 or EUR 0.68 on a comparable basis.

Currency translation reduced earnings per share by about EUR 0.01.

Revenue declined 0.5% on a comparable and currency-neutral basis.

Revenue per unit case increased 3%, driven by favorable price, lower promotions and positive package mix.

However, this was offset by about a 3.5% decline in volume, reflecting strong prior year hurdles, unfavorable weather conditions and the impact from customer disruptions as we focus on driving profitable growth in our home business and improving our away-from-home business over the longer term.

Third quarter cost of sales per unit case increased 2.5% on a comparable and currency-neutral basis.

This was partly driven by channel and brand mix but also due to manufacturing costs and the continued year-on-year increase in key inputs, principally concentrate, although this was partially offset by synergies.

In the third quarter, operating expenses were down 3% on a comparable and currency-neutral basis.

This reflects synergy benefits, volume-related costs, expense timing and a continued focus on managing operating expenses.

These factors contributed to operating profit growth of 3.5% on a comparable and currency-neutral basis.

For the 9 months, revenue was up 3% and operating profit was up 11.5%, both on a comparable and currency-neutral basis.

This includes synergies of approximately EUR 90 million, with EUR 30 million realized in the third quarter.

Excluding synergies, operating profit for the first 9 months of 2017 grew by about 3%, broadly in line with our revenue growth.

Now as we turn to the outlook for 2017, we continue to expect low single-digit revenue growth and operating profit growth at the top end of the high single-digit range.

Built into our guidance for the full year 2017, we now expect cost of sales per unit case to be up approximately 3% on a comparable and currency-neutral basis.

This increase versus our previous guidance is driven by several factors: first, our focus on driving price and mix in smaller packages, both of which are positive for revenue per case and gross margins over time, but they also have an associated cost impact; second, we expect some modest deleveraging in our manufacturing costs, which are largely fixed, due to decreases in planned production volumes for Q4 as a result of lower volumes in Q3; and finally, we expect some incremental year-over-year cost increases in key inputs, principally aluminum.

These factors were partially offset by the benefits from our cost-reduction programs.

With our continued focus on driving strong revenue per unit case growth throughout the first 9 months and with our incidence model with the Coca-Cola Company, this has also had an impact on our full year outlook for concentrate costs on a per unit case basis, all factored into our guidance.

Capital expenditures are now expected to be approximately EUR 550 million, including approximately EUR 50 million to EUR 75 million of capital expenditures related to synergies.

We now expect higher free cash flow in the range of EUR 850 million to EUR 900 million.

This free cash flow includes an expected benefit from working capital of at least EUR 175 million and is after the expected impact of restructuring, integration and deal costs.

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

Our weighted average cost of debt is expected to be approximately 2%, and the comparable effective tax rate for 2017 is now expected to be just under 25%.

So all in, we expect full year 2017 comparable diluted earnings per share in a range of EUR 2.10 to EUR 2.13, including an expected negative currency impact of approximately 2%.

As Damian discussed, we remain on track to achieve pretax run-rate synergy savings of EUR 315 million to EUR 340 million by mid-2019.

We have already achieved savings of approximately EUR 125 million through the third quarter of 2017, including EUR 90 million in the first 9 months of 2017.

We continue to exit 2017 with a run-rate savings of approximately 1/2 of our total target, in line with our plans.

As previously mentioned, for the first 9 months, our operating profit growth ex synergies has been broadly in line with our revenue growth.

However, looking forward, while we expect operating profit leverage, including synergies, in the near term, the leverage excluding synergies may be negatively impacted as we make select investments to secure the growth opportunities ahead of us.

Areas we are investing in include improving our sales force capabilities, enabling digital technologies and evolving our route to market and overall operations.

Given these factors, currency exchange rates and our outlook for 2017, we continue to expect year-end net debt to adjusted EBITDA for 2017 to be under 3x.

While we're not providing specific guidance for 2018 today, I wanted to pick up on the headwinds that Damian referred to earlier, namely the soft drinks industry taxes and rising cost of goods.

So first, we have the soft drinks industry taxes.

While the introduction of these taxes will clearly be a headwind in 2018, we have been proactively tailoring our portfolio to low- and no-sugar variants for a number of years.

We have continued working with the Coca-Cola Company on reformulation, and a lot of our brands that are driving our growth are coming from the sugar-free variance.

Importantly, we know our consumers want choice and that taste is very important in beverages.

Looking at GB for a moment.

We expect that approximately 60% of our portfolio will fall below the industry tax threshold when it is introduced in April.

That said, the remaining 40% of the portfolio will be subject to tax, notably 2 brands, Coke classic and Monster green.

As we've said before, we will be passing this tax on to our customers.

However, when it comes to consumer prices, they, our customers, have the sole discretion on setting the final price.

We've also accelerated support for flavors in our low-sugar colas and will continue to invest behind our core brands, such as Diet Coke, Coca-Cola Zero Sugar, Fanta and Sprite.

We will continue to reformulate across the portfolio, ensuring that taste is at parity or better than the recipes that it replaces.

And we will also introduce new products and flavors to the market as well.

Coca-Cola Zero Sugar, smartwater and Monster Ultra are excellent examples of where we've had considerable success.

While we're still working actively on our 2018 business plans, at this stage, we anticipate these soft drink taxes will negatively impact our 2018 operating profit growth by approximately 2% to 3%.

We believe this will be a one-time adjustment.

We will continue to refine our plans and will provide a further update to you in February.

Then secondly on COGS.

In 2017, increases in aluminum, PET and FX headwinds have been driving COGS per unit case inflation in the back half of 2017, and we expect this trend to continue into 2018.

We will continue to focus on protecting our gross margin in '18 by continuing to drive growth in revenue per unit case.

We expect to provide more details on the 2018 guidance with our full year 2017 earnings call in mid-February.

Please note that we do not expect to have an outlook call in December.

To close, let me highlight a few points: first, we remain committed to creating a platform that will enable us to reach our full long-term growth potential, including profitable revenue growth and the capture of our synergy objectives; second, it is important that we remain realistic about the environment.

That said, we are addressing our headwinds by focusing on improving price/mix to offset rising COGS, optimizing our promotions to drive profitable growth and mitigating, where possible, the impact of new industry soft drink taxes.

We do have a solid history of and a commitment to managing the levers of our business to deliver value, and we will continue investing in order to secure the long-term growth opportunities ahead of us.

And finally, we remain very focused on growing free cash flow, and our plan is to deliver long-term profitable growth by driving sustainable top line growth.

We're also committed to operating with a strong balance sheet that provides us with significant flexibility.

By growing free cash flow, maintaining an optimal capital structure and pursuing disciplined investments, we expect to be able to drive significant value to our share owners over time.

Thanks for your time.

And now, Damian and I will be happy to take your questions.

Operator?

Your first question comes from the line of Robert Ottenstein with Evercore ISI.

I'm just wondering if you could go into a little bit more detail on the promotion strategy, the idea of limiting promotions and how you're thinking about that, what kind of impact you're seeing on volumes, how the competitors are reacting and how you can kind of give us confidence that this is the right strategy.

Thanks, Robert.

Well, I think there's a couple of factors that I'd point to.

I mean, we haven't disclosed that level of detail but I would just share with you some perspectives.

I think, on is it the right strategy, I think if you look at our net price per unit case realization, I think that's where we see the sustainable long-term benefit of that strategy.

So I think we're seeing that in our numbers.

You're quite correct that, short-term, there are some volume impact as both customers and consumers adjust to the new level of promotions in the marketplace.

And I think if you look at our business, particularly in markets where we've had a significant change, in France and Germany, in the quarter, we've seen -- if you look at Nielsen, you've seen some of the volume offset.

But on a per case level, we've still been able to deliver for CCEP more net revenue per case.

From a consumer perspective, we are seeing a pickup in smaller packaging, which is good for the long term.

We are seeing consumers participating more with some of our new package initiatives, on multipack cans in particular and smaller PET.

So overall, I think we're happy that we've made the right choices for the business for the long term and also for our customers because we believe it's a more sustainable promotional strategy as we broaden our packaging footprint.

But in a given quarter, with the combination of weather and also some of the new promo strategies, the volume offset can be hard to achieve.

So -- but on the year-to-date level, we continue to be pleased with the new strategy.

And I think, in Q2, it was in place.

But clearly, as we called out in Q2, we had the benefit of better weather in Q2, which offset some of it.

But I think our net pricing per case is what we're really focused on.

And Robert, I would just add that from a share perspective -- from a value share perspective, we're broadly flat when we look at it for Q3.

So in effect, that's very important too.

And just on your competitors, are they -- how are they reacting?

Well, I mean, we -- obviously, we don't know specifically.

But I mean, ultimately, the customers set the price on shelf.

But I think if you look across the markets, certainly promotional strategies in markets like GB seem to move up.

In other markets, a lot of the packaging initiatives, we were leading.

So in France and Germany, it was really led by us.

And we haven't seen any significant change in the marketplace from our competitors.

And as Nik said, we continue to maintain our share, which is also a positive sign for us, and it also allows us to recruit new consumers as well.

So on a longer-term basis, offering a more diverse promo strategy will help us build the franchise, but that will take time.

Your next question comes from the line of Bonnie Herzog from Wells Fargo.

I have a question on Coke's One Brand strategy.

I guess in the context of this, I was a little surprised that Coke Zero Sugar was up 8%, yet total brand Coke was actually down 4.5%.

So I guess I expect to see total brand Coke performing better by now, so I was hoping you guys could talk further on what's actually going on.

And then could you give us a sense of how some of the other Coke brands performed during the quarter?

Thanks, Bonnie.

I think it's important -- the numbers we've talked about today specifically relate to a quarter, and on a year-to-date basis, obviously, the numbers are more favorable.

If you look at what's behind, clearly, the promo strategy that we referenced to Robert, that will have the biggest impact on trademark Coke because that's -- and on Coke classic in particular because that was a brand that really was leading all of those deep-cut promotions.

So proportionally, that brand obviously had the biggest volume impact.

But we continue on a year-to-date basis to see both Coke, Coca-Cola Zero Sugar and our other trademark and trademark Coke perform well.

Obviously, one quarter, as I said, with 2 significant factors, weather and promo.

But overall, the multi-brand strategy behind Coke, we're quite confident.

I think what you will see, and you'll see coming in Q4 already in GB, is also renewed focus around Diet Coke and Coke Light.

And we believe that's also a positive, particularly for markets where Diet Coke remains a significant brand, in GB, and Coke Light, for example, in Germany.

So overall, positive.

For sure, in the quarter, there were a couple of significant impacts.

Yes.

And Bonnie, I think, as Damian rightfully said, that's the third quarter.

If you look at the year-to-date number, which quite honestly, if you're looking at that from an angle of the positive in Q2 and the negative in Q3 from a weather angle, we're roughly down about 0.5 point overall on trademark Coke.

Okay, that's helpful.

On less volume.

On less volume, so -- yes.

Your next question comes from the line of Kevin Grundy from Jefferies.

Question on margins.

So Nik, thanks for the gross -- I'm sorry, the Great Britain commentary with respect to the excise tax.

That's helpful.

But I'm just trying to look at some of the bigger areas, so input cost pressure now, which you're contending with, what's your view on pricing and the ability to offset that in Q4 and looking out to next year?

And then, of course, the other big area is synergies, and the commentary has been that that will flow through, at least the first EUR 315 million to EUR 340 million.

Is that still the expectation at this point?

Or has the environment worsened here, where the need for reinvestment is sort of higher?

And then just related to that, Nik, any potential upside now as you sort of work through this program and the synergy capture so far has been great?

Do you see any potential upside there?

So let me work backwards.

From a synergy perspective, I would say to you we're committed to delivering the EUR 315 million to EUR 340 million to the bottom line, so no change there.

From an angle of upside, I think we've always maintained this is a gross and a net number.

And if there is upside, those are things that we will continue to do to drive investments in the business.

And I think as we've continued to see the business perform well in 2017, we are making the necessary investments to drive and support long-term growth.

From a perspective of margins and COGS pressures, I think, as Damian said upfront and as I made comments in the prepared remarks, we are very focused on rate realization through better price realization, less promotional activity in the Home Channel, reinvesting in the Cold Channel and continuing to drive the right mix.

So clearly, we see COGS pressures, and I would say to you we're working through our plan, in line with what we've demonstrated in 2017, to be able to realize price/mix to be able to offset that.

But again, we're working through that, and we'll provide you more update on 2018 in February.

But clearly, strong focus on protecting our margins.

Your next question comes from the line of Judy Hong from Goldman Sachs.

So just following up on Kevin's question about sort of '18 comment and the tax impact.

I just wanted to get a little bit color just in terms of some of the components.

You're assuming that that builds up to that 2% impact.

So volume elasticity, the share sort of outlook, the ability to get your non -- low-calorie products to do better, so some of the components and how you're thinking about as you kind of build up to that 2% number that you've given us.

So Judy, maybe I'll just take that, and then Nik may want to add a comment.

I mean, clearly, we're working and have been working extremely hard with the Coke company and with our customers since the outset of the GB tax.

And as we've talked about in previous calls, we've continued to reformulate our products, and then also we've continued to reshape our Coke classic packaging landscape.

So some of the promotional changes that we've made, particularly in GB, were to move funding to smaller packs, et cetera, which we believe, as we move into the new 2018 reality, will give us more flexibility in terms of price points and give our consumers more choice.

So at this stage, we've looked at it on a baseline price sensitivity analysis.

So we've modeled assuming that all of the tax is passed on to consumers, based on what we believe will be our pack mix at that moment in time and then for the remaining 9 months of 2018, what type of impact that could have on the business.

As I'm sure you can appreciate, that is a view today.

We clearly are still looking at how our customers want to deal with that because they're currently working on their own strategies.

There will be a competitive aspect to it as well, and that will play out over time.

So clearly, it's a range that we feel it's worth highlighting, given we're 4 to 5 months away from the implementation of the tax.

We'll continue to challenge ourselves on wanting the more positives, so accelerating our Zero Sugar and smaller package formats and then also trying to mitigate some of the headwinds.

So we haven't broken it down to the level of detail.

We haven't externally talked about it at that level, but that's broadly how we're thinking about it.

Nik, I don't know if there's anything you want to add.

No, I think you've covered it.

And I think, Judy, as Damian said, we'll provide some more color around that in February when we also have a lot more discussions with the customers because, remember, most of our customer plans are typically discussed in detail during Q1.

So as we get into that discussion, clearly, we'll be doing this in a couple of phases as we look at '18 and specifically in GB with the industry tax, so I think we'll be able to provide you some more color then.

And just to be clear, the base in which you think that the 2% impact gets put on is kind of thinking about operating profit growth in '18 that's sort of similar to '17, based on the synergies that are still coming through, not against sort of the mid-single-digit operating profit growth that you have laid out as a long-term target.

Correct, absolutely.

It's against the '17 all-in number, not against our long-term algorithm, absolutely.

Got it.

And then just quickly, Nik, just on free cash flow guidance.

Clearly, it's been encouraging to see this number continuing to improve.

I'm just trying to get a sense of the changes to the cap -- restructuring cost components because that seems to be more timing related and then some of the other components like working capital improvement that may be more sustainable into '18.

Yes.

So I would say to you it's largely 2 factors.

I think, roughly speaking, our cost to capture the synergies are very much on track.

There might be some phasing there, but there's not too much of a difference there.

I think, one, our CapEx is a little lower, and that's, again, very much part of a focused effort and seeing where we want to continue investing.

And where we have continued to build out our investments has been in cold drinks.

So that's the right thing, and it supports our strategy in terms of what we want to do with growing cold, smaller packs and as we also look to becoming a total beverage company.

So some CapEx reductions and then, two, sustainable working capital improvements.

And obviously, in February, we'll give you a full update on what we delivered in '17, but more importantly, how we see this as a multiyear journey too.

And clearly, we'll be able to see some sustainable additional improvements in '18 as well.

Your next question comes from the line of Ali Dibadj from Bernstein.

I want to talk a little bit more about this operating profit idea.

So look, you've lowered the target of how fast operating profit grows above sales over the course of the year.

So I think you see modestly above, and it became in line now to deleverage.

And we clearly talked about this a little bit already, but can you offer kind of further clarity on the deleverage language?

Why specifically has deleverage happened this year, for how much longer?

How does it tie perhaps to the consumer or the customer disruptions you've seen?

And I ask that trying to figure out the breakpoint, if there is any, between what we've seen so far, more and more deleverage versus "the headwinds that lie ahead" that you, I think, have keyed in on the taxes.

So I'm just trying to figure out why it's been happening.

And are we seeing another step down in happening in 2018 because of taxes plus everything else that's going on?

Or are we just now focused on taxes for next year?

So I think, just looking at '18 right now, the 2 main areas of focus are: obviously, what we will continue to do from a momentum perspective in terms of maintaining focus on revenue per case realization to manage through the COGS inflation; and then, obviously, clearly, the second piece, as we've highlighted, we will see a one-time impact from the industry tax implementation.

In terms of the deleveraging, I think, as we went into the year, we have seen the performance continue to be in line, if not slightly ahead, and our focus has been wanting to continue making this a fit for the future company in terms of making the right investments in the areas that we're talking about that are right for route-to-market opportunities, continuing to build our away-from-home, sales force capabilities, cooler placements, et cetera.

So I think that has come much more from what we see as the upside and continuing to want to invest ahead of the curve, as opposed to anything else.

We are working through our plans for '18.

We will continue to see what needs to be done, but we'll provide more color on that as we go into February.

But for right now, it's much more what we see as those investments that we've started up that will have an impact in Q4 and then, obviously, rolls into what the full year number looks like.

Okay, that's very helpful.

And one aspect of it, which is, in this quarter, the 2.5% increase in cost of sales per unit case, you talked about channel and brand mix, manufacturing costs and then concentrate price increases.

Can you talk a little bit about each of those in more detail?

So channel and brand mix, I would have thought channel might help you out now, but maybe not, so just some clarity there.

Manufacturing costs, I get the volume deleverage perhaps.

Maybe that's the only driver, and that's the end of that one.

But concentrate price, in particular, I would also like to hear more about sort of that.

Sure.

So clearly, from a perspective of brand and channel, that goes back to -- if we actually look at our overall results for the 9 months, our Home Channel is roughly flat and our Cold Channel is growing.

So quite honestly, that's a positive, and you've seen that in terms of the top line and also our revenue per case realization.

But then that has an offsetting impact on our COGS as well because, clearly, the smaller packs and how you're actually getting your product to the market has a cost implication that comes with it.

So that's on that piece.

On the manufacturing, absolutely, as what you said, with the lower volumes coming from both the weather implication as well as some of the customer disruptions, et cetera, in the Home Channel, that has an impact on our fixed cost infrastructure base, so there's just some costs that come with that.

And then the third element is, remember, we have an incidence model.

So as we have a increase in our revenue per case realization, that has a corresponding COGS impact as well to make sure that the same level of pricing that we're realizing in the marketplace is what you get through in COGS as well from a concentrate perspective.

So that's again a positive, but remember that concentrate is about 40% of our COGS.

So those are the 3 impacts, just to break those down to explain what's driving that increase.

Your next question comes from the line of Mark Swartzberg from Stifel Financial.

Also on this topic of pricing, certainly, the input environment and the soft drink taxes motivate taking more pricing.

But is it fair to say that we should think of this as also a capability and a strategy-motivated thing with refranchising and the success that price/mix has had in some other markets as an increased area of focus?

That's kind of part A. And then part B is, when you think, Damian, about your 4 largest markets and the opportunity to get more out of package mix, is there a market where you see that opportunity being larger than the other ones?

Or -- looking for a little bit of color on a Spain or an Iberia versus a GB, what you think the opportunity in that regard is.

Thanks, Mark.

So just to your first point, I mean, as we've talked about previously and as we've seen in our year-to-date 9-month results, we firmly believe that price/mix is a key value lever for us in Europe going forward.

You can compare it to other markets, maybe like North America.

Our only caveat there would be that our prices were pretty high compared to North America.

But regardless of that, in line with other bottlers' conversations, focusing on pipe mix, channel mix and more premium brands is certainly a key part of our strategy.

And just to echo what Nik said earlier, if you take -- if you stand back and look at our business since we created CCEP, you'll see some common themes.

You'll see smaller packs growing faster than larger packs.

You'll see away-from-home growing faster than home market.

You'll see Zero Sugar growing faster than sugar.

You'll see revenue growing faster than volume.

And all of that leads to a better price/mix realization.

So there may be quarters where we get a great benefit from the weather, like we did in Q2, and there may be quarters where we don't.

But the underlying themes will remain consistent.

So we certainly see that as a growth lever in terms of our operating profit and free cash flow going forward.

I think it's definitely a capability that we're building.

If I look at it by market, I suppose the market where we probably made the biggest changes certainly on our promo pricing strategy is France.

That's probably a market that has, from a packs mix perspective, a lot of opportunity.

It's traditionally been a very 1.5-liter, large PET market, and we're trying to work through that with our customers to provide more variety.

I think GB has done a good job broadening its pack mix, as has Germany, and I think Spain is probably at the front.

I mean, they have -- traditionally had a very strong HoReCo, away-from-home business, good glass business.

So each market is on a different -- I suppose on a different part of the continuum, Mark, but I think all of them have opportunity, which is what excites us.

And some of the changes that we've made in 2017, particularly on the price promo strategy, are key to allowing us to grow and diversify our package range, and that is the right decision for the long term.

I think what's encouraging for us is that we can do that, still grow our net revenue per case and more or less maintain our market share.

And I think if you look at our French business, you'll also see it allows us to grow our away-from-home business a lot faster than we have done for many, many years.

So overall, it will continue to be a core part of the strategy into 2018.

And on a market-by-market level, as I said, there's a lot of opportunity, even in some of our more developed markets like Spain.

I don't know, Nik, if you have any -- sorry, Mark.

Nik, were you going to say something?

No, no, no.

Damian said it all.

And if I could follow up on Spain.

Could you give us a little more color, because it is your largest market, how much opportunity you see there, where historically you've had a lot of success there in that regard?

Yes.

I think, I mean, Spain is a very strong business for us.

But like all of our markets, it's developing.

It has a very strong tourism industry.

We certainly benefited from that rebounding in recent years.

Clearly, there's some macro issues that are on the horizon or have developed in Spain.

When we look at our business, it's probably similar to a lot of our other markets.

It is about a little bit more pack differentiation in home market.

It is about winning across all of that customer base.

And I think it is, with the Coke company, being in a position to bring more innovation to the consumers.

So you'll see some of that coming in 2018, where we will look at new packaging and new brands to bring into our Spanish business that we believe have a good long term, not just in Spain, but across Europe, but more to come on that in 2018.

Your next question comes from the line of Lauren Lieberman from Barclays.

Last conference call, you guys talked a bit about a plan or desire to move faster in the second half of the year on portfolio diversification.

So I was wondering if you could just kind of give us an update there.

In particular, this quarter you talked specifically about discontinuing some lines in water.

I think that was -- I know the intention's been there, but I think the actual discontinuation of some products has been news.

So can you give a little update on what you've moved faster on through the third quarter and into the back of the year?

Thanks, Lauren.

So I think if you look at on the top line side of the business, we've certainly seen a number of innovations around Zero Sugar continuing to move faster in the second half of the year, not just on Coke but also on our other brands, particularly Fanta.

We've also seen our sugar-free Ultra varieties and Monster, their performance has accelerated through the second half of the year.

And by and large, if you look at our trademark performance, Nik called it out, trademark Coke on a 9-month basis is down 0.5 points on volume.

Pretty much all of our other categories are growing quite well.

One exception is water, which is down 1 point, and that's basically a conscious decision where we've exited, particularly in Germany, businesses and brands that we didn't feel had a long-term value creation opportunity.

So we've scaled back some of our Bonaqua SKUs in Germany.

That's had an impact on volume, which will continue certainly from a margin and mix perspective.

We believe it's the right thing to do long-term, as we could focus on brands like ViO Bio and Apollinaris, that we'd have a longer-term higher value creation opportunity for ourselves and our customers.

So it's mainly discontinuing brands that both ourselves and the Coke company feel for our customers and for our business have run their course and redirecting energy behind brands that we believe have a long-term value creation opportunity, as I said, like ViO and like Apollinaris.

So we'll transition through that at the end of this year and into '18.

But by and large, I think we've been very encouraged that all of our brands and all of our categories are in growth in the 9 months, excluding trademark Coke, which is down 0.5 point, and that is including the impact of the promo strategy changes that we've made.

So I think that gives us a lot of confidence going forward, not just on trademark Coke but on our other flavor brands and our still portfolio.

Your next question comes from the line of Bryan Spillane from Bank of America.

Just, I guess, a question -- maybe one more just thinking about 2018.

And in your long-term algorithm, there's some implied leverage below the operating profit line to EPS.

And given kind of you should be closer to your leverage or at -- in your leverage target ranges by the end of the year, what would prevent that from being a factor in 2018, getting -- whether it's through share repurchases or just getting some leverage below the operating profit line to EPS next year?

Today, we're still working through those plans, so a little early for me to give you a clear indication.

But on the surface, outside of what we might do from a cash return perspective and if it's in the form of share repurchase, we would still expect that we should be able to get leverage down through the EPS line.

And keep in mind, as I said to the earlier question from Judy, that this was not of a long-term range.

This was really of what we would see as a growth number and then, obviously, the fact that we would have synergy realization continuing to happen in 2018 as well.

And as, obviously, we're looking at our plan, we're looking to make sure that our organic profit growth continues to perform well as well.

Now from a perspective of balance sheet, clearly, our debt will continue to come down.

We will be just under 3x, and we are looking to operate in that 2.5x to 3x.

So even as we try to move towards that midpoint of that range, clearly, that will have a positive impact on our interest expense.

I don't think, from a tax perspective, we would expect a significant change, but part of that, obviously, is driven by country mix.

And then, as I said, we will continue to evaluate what's in the best interest for all share owners with our board in terms of some excess cash returns to share owners maybe even in '18, but that's for the board to decide as we continue to review our plans one and two, more importantly, as we continue to deleverage.

Your next question comes from the line of Robert Ottenstein from Evercore ISI.

Just as a follow-up question, you've talked a lot in the past, and I think you've intimated increased investments here in terms of getting closer to your customers in the on-premise in France and Germany.

Can you talk about -- a little bit about the kind of progress that you are making on that this year and what the time line looks like?

Yes.

Thanks, Rob.

We focused a lot in the setup of CCEP of empowering our frontline sales force with better technology.

So we've moved all of our sales force to a new platform running on iPads, which we're seeing a good uplift in terms of productivity and effectiveness.

So that's working extremely well.

In markets -- so that allows them to call more customers, so that was the first step.

Beyond that, we've also taken some steps to reinvest back into our business, for example, in France, where we're seeing the benefits of strong growth in away-from-home as we reengage with a lot of our customers and our wholesale partners.

So we're pleased where we are on that journey.

We believe that that strength would allow us to drive more value from our portfolio and will secure our long-term revenues in a more balanced and through a better mix.

So overall, we're quite pleased.

It will continue in 2018.

We'll continue to leverage technology and best practice as we look to continue to drive a lot of frontline execution through our sales force.

But where are you in being ready to do the direct invoicing with customers?

At the moment, we have -- well, we do a lot of direct invoicing already.

Our primary focus has been to work on transfer ordering, so work with our existing partners where our sales force can capture orders and pass them on to our wholesale or distributor partners.

So across CCEP, we've now built the capability to do direct, which we have, but also indirect ordering, which retains the partnership with our current route-to-market partners but also allows us to have more influence on pack mix and brand portfolio.

So both of those capabilities are in place, and that will continue to help us drive profitable growth into 2018.

Your next question comes from the line of Laurence Whyatt from Soc Gen.

Actually, it's Andrew Holland here.

Just to ask a little bit more about the U.K. So you're saying that you think that the tax impact will be around 2% to 3% at group level.

If the U.K. is about 1/5 of your business, you're thinking more like 10% to 15% of the U.K., and your -- the sort of affected bit of the business is 40% of it.

It's starting to come through as sort of quite a significant impact.

Well, it feels like quite a significant impact on the bit that is impacted, if you see what I mean.

Just to clarify that the 2% to 3% that you're talking about, that is for calendar 2018, I take it.

In other words, the tax is only coming in for 9 months, so it's a little bit more than 2% to 3% on an annualized basis.

Can you just comment on whether that sort of thought process is accurate?

Yes, your thought process is accurate.

Again, I won't go into any more details around that just for a variety of different reasons: one, we're still working through our plans, two, we're still working with our customers, and three, we just want to make sure that we're not providing too much more in terms of our competitive positioning.

But directionally, yes, that's the way we should be looking at it, and we'll provide you more color on that in February.

And just to build on that, I do think that as we've looked at other examples across other Coca-Cola markets and the impact of similar initiatives, there is an initial phase of disruption.

And in January, there is a strong rebound as consumers adjust to the new pricing and the brands and the packages that we put in place respond.

So that has been pretty much the learning as we've sought counsel across other markets and other geographies that have gone through this.

So we factored that in.

But as Nik said, this is a point in time and a view today.

It will evolve as we continue to work closely with our customers, as we believe it's in their interest also to try and manage and mitigate as much as we can the impact.

But that's the current perspective, and we will continue to provide more detail as we get more clarity on some of our customer plans moving into 2018.

So thank you.

I'd just like to close with a few comments.

So again, thank you all for joining the call and for the questions.

We've had a very solid first 9 months, and we are very happy with how our journey with CCEP is progressing.

As I highlighted on one of the questions, we continue to see progress in terms of our smaller packs growing faster than our large packs, away-from-home growing faster than home, Zero Sugar growing faster than sugar, and that's delivering a very solid improvement in terms of our price/mix, and obviously, our revenue growing ahead of volume and very solid performance on our revenue per case.

We have made some adjustments to improve our promotional profitability and impact on our consumer.

That is the right decision for the long-term health of the business, but it has resulted in some short-term volume impact.

Our synergies remain on track.

We are taking the opportunity to invest in longer-term growth opportunities, expanding our portfolio and investing in a more capable route to market.

We're extremely excited about the future growth plans, and we are well prepared, particularly for some of the headwinds in 2018, such as the sugar tax, which we talked about today.

We will continue to have a strong focus on driving free cash flow.

As you will recall, we changed our incentive plans to include that for 2017.

That will remain in 2018.

And ultimately, we'll continue to do what's right for our shareholders and creating value in the long term.

So on behalf of Nik, Thor and I, we'd like to thank you for joining us today, and we look forward to talking to you again in the near future.

Thank you very much.

This does conclude today's conference call.

Thank you for your participation, and you may now disconnect.