Coca-Cola Europacific Partners PLC (CCEP) 2018 Q1 法說會逐字稿

Good day, and welcome to the Coca-Cola European Partners First Quarter 2018 Conference Call.

At the request of Coca-Cola European Partners, this conference is being recorded for instant replay purposes.

At this time, I'd 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 2018 results as well as our outlook for full year 2018.

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 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'll 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 everyone joining us today to discuss the results for first quarter of 2018 and our outlook for the rest of the year.

While we faced some challenges during the quarter, our Q1 results demonstrate our continued focus on driving profitable revenue growth and creating joint value for our customers.

We continue to build a beverage portfolio and improve our execution market-by-market.

Revenue increased 1% on a comparable and currency neutral basis led by a 3.5% increase in revenue per unit case, as we continue to benefit from our dedicated efforts to improve the price and mix.

This was offset by a 2.5% decline in volume, primarily driven by unfavorable weather and the impact of our portfolio decisions.

Primarily in the water segment, where we've made conscious decisions to focus on brands and packs that can generate sustainable value for CCEP and our customers, and we also continue to optimize promo investments market-by-market.

Our continued focus on profitable revenue growth led to some volume pressure with some of our customers during the quarter, notably in France.

While we see this disruption as a near-term challenge, our focus on price realization and the reduction of deep promotions is the right thing to do for our business and for the overall category in the longer term.

We also continue to see transactions outpace volume during the first quarter as this remains a key focus and a key success point for our strategy.

This modest revenue growth and continued realization of post-merger synergy benefits helped to drive an operating profit growth of 13% on a comparable and currency neutral basis.

That being said, as you know, the first quarter is our smallest and we still have the important summer selling period ahead of us.

While we'll have some notable challenges in the months ahead, we will continue to focus overall on driving profitable growth and creating sustainable shareholder value.

Now let me turn to performance by territory for the quarter, which I think will further clarify the volume and revenue impact across our BUs.

Iberia revenues were down slightly at 0.5% with growth in revenue per case more than offset by decline in volume.

Channel mix in Iberia continue to support revenue per case growth due to the outperformance of our HoReCa channel, and Coca-Cola Zero Sugar, Aquabona and Monster all performed well during the quarter.

In Germany, I'm pleased that our revenues increased 1.5%, again, driven by strong revenue per unit case growth as we continue to focus on driving price and mix by scaling back a large multipack promotions.

We saw further volume growth in Germany, in Coca-Cola Zero Sugar and Fanta, but this was offset by decline in water volume following our previous announced decision to discontinue some of our less profitable water brands in Germany.

I'm pleased that Great Britain saw a very solid revenue growth of 3%.

This was primarily, again, led by gains in revenue per unit case, as we continue to improve promotional effectiveness and efficiency as well as drive a positive channel and pack mix.

Coca-Cola Zero Sugar, Schweppes and Monster all performed well during the quarter.

Revenue in France was down 4.5% with modest growth in revenue per unit case more than offset by decline in volume.

As mentioned earlier, our continued focus on driving price and mix has led to some customer disruption during the quarter and this has been reflected in our volumes.

Our away-from-home business in France continued to perform strongly.

Finally, revenue in the northern European territories was flat for the quarter, led by growth in the Netherlands and Sweden.

Volumes in Norway and Belgium were negatively impacted by recent changes to soft drink taxes in both markets, but we expect this impact to be short term in nature.

Overall, in northern Europe, again, Coca-Cola Zero Sugar continues to perform well along with Monster and Fanta.

Now, from a brand and volume perspective, our sparkling portfolio declined by 1% during the quarter, with a 2% decrease in our Coca-Cola trademark brands.

As you would expect, these brands would have once most exposed to some of the volume factors that I mentioned earlier.

Coca-Cola Zero Sugar, again, had another solid quarter with a growth of 8.5%.

Our sparkling flavors and energy grew by 1% with encouraging growth in Schweppes following the launch of the premium Schweppes 1783 range and a renewed focus on our Schweppes classic business across Great Britain.

Our energy portfolio was up nearly 15%, as we continue to successfully execute our multi-brand strategy.

Monster brands had another strong quarter benefiting from the growth of the ultra and punch ranges.

Still brands declined by 9%, however, this was driven by a 10.5% volume decline in water as I previously noted and an 8% decline in juices, isotonics and other segments, as we continue to focus on areas that we can generate value for ourselves and our customers.

Looking ahead, we were very excited about the growth opportunities throughout the rest of 2018 and beyond.

We have an outstanding portfolio of brands, solid innovation pipeline and marketing plans to meet consumer's changing preferences.

In particular, we are taking the opportunity to reshape the ready-to-drink tea segments and increase value for ourselves and our customers to decision on pack sizes and listings.

We are pleased with the earlier customer and consumer response to Fuze Tea, and its opportunity alongside Honest Tea brand gives us a good foothold in the exciting tea category.

While 2018 will be a transition year for the ready-to-drink tea segments, we are excited about the start and about the long-term opportunity this represents.

Additionally, from an innovation perspective, we are renewing our focus on Diet Coke this year, and recently launched 2 new flavors in Great Britain.

And we also introduced Sprite Zero Cucumber in several countries as we continue to expand -- and we continue to expand smartwater across Europe.

In March, we launched AdeZ, a plant-based beverage, in Great Britain and Spain, and we are further expanding our portfolio in the growing ready-to-drink coffee segment with Honest coffee, which we launched earlier this month.

So overall, a very dynamic portfolio expansion strategy in conjunction with the Coca-Cola company.

From a pack perspective and in support of our long-term strategy, we will continue to focus on growing small pack transactions and premiumizing our offering to drive total revenue growth.

To further support our innovation efforts, we are continuing to invest selectively behind key growth enablers such as our commercial frontline and digital capabilities and our route-to-market and supply chain.

While we are confident in our approach and our strategy, we continue to remain realistic about the challenges that we continue to face.

In particular, the introduction of the new soft drink industry taxes.

In Great Britain, we've continued to reformulate and reposition our portfolio towards smaller pack sizes for Coke Classic to ensure we meet the needs of our customers and the shopper.

That said, it is still too early to assess the impact of the soft drinks industry tax given it was only implemented on the 6th of April.

Coca-Cola Classic and Monster Green are now the only 2 notable brands in our portfolio subject to tax in GB.

We've implemented a number of pack changes for Coca-Cola Classic and, in parallel, have accelerated support for flavors and our very, very important low sugar cola offerings.

In fact, we've successfully launched a reformulated 24 new drinks with no or less sugar since 2005.

GB, in particular, is one of the world's leading markets when we look at the balance mix of sugar, and no sugar offerings we bring to the market for our consumers and our customers.

So taking into account our first quarter performance and our outlook for the rest of the year, we have affirmed our 2018 guidance today.

We continue to expect low single-digit revenue growth in 2018 with both operating profit and diluted earnings per share growth of between 6% and 7%.

Before I pass over to Nik for more detail on our financial results and outlook, let me share some closing thoughts.

First, our overall focus on driving profitable revenue growth through strong price and mix realization remains firmly intact.

Second, even in the face of some near-term challenges, we are confident in our approach and our strategy, we have the right team in place and we are very much focused on execution.

We will continue to support our frontline teams, offer world-class service to our customers and make sure our great drinks are available when and where consumers want them.

Third and very importantly, our commitment to generating cash and driving shareholder value remains as strong as ever.

We will also continue to do what is right for all our stakeholders and while we are encouraged by what we've accomplished, we recognize there is still considerable work to be done.

I look forward to sharing with you our 2017's stakeholder progress report, which will be published in May.

Thank you very much for your time.

I now will turn the call over to Nik, who will share some more detail on our financial results and our full year outlook.

Nik?

Thank you, Damian, and thank you all for taking the time to be with us today.

Let me start by providing a bit more detail on our first quarter results and then I'll talk about our outlook for the rest of 2018.

So on a reported basis, first quarter diluted earnings per share were EUR 0.25 or EUR 0.33 on a comparable basis, including a negligible impact from currency translation.

Revenue increased 1% on a comparable and currency-neutral basis.

This was driven by 3.5% increase in revenue per unit case, reflecting favorable price, promotion and channel mix with growth across all our business units.

I would also like to point out that this is the fifth consecutive quarter in which, our away-from-home channel outperformed the Home Channel, which clearly supports our focus on favorable mix.

First quarter revenue per unit case also included a benefit of approximately EUR 0.01 or 0.5% from the impact of incremental sugar and excise taxes primarily in Norway and Belgium.

We will provide more color on the impact to revenue and COGS per unit case in future quarters as the impact becomes more significant.

Volume declined by 2.5% in the quarter due to 3 main factors: Unfavorable weather conditions, customer disruptions as we continue to focus on price and mix realization and the impact of our strategic brand management decisions, mainly on low margin water brands in Germany and Spain.

This was partially offset by the benefits of an earlier Easter, albeit, a much colder one.

First quarter cost of sales per unit case increased by 1% on a comparable and currency-neutral basis.

This was driven by modest input cost inflation, mainly aluminum and an increase in our concentrate costs as a result of our strong revenue per unit case realization, links to our incidence model with the Coca-Cola company.

And finally, mix, as we continue to grow the away-from-home and small packs faster than the Home Channel.

These factors were partially offset by favorable sweetener costs and our synergy program.

And overall, we did achieve gross margin expansion during the first quarter.

Our operating expenses were up 2% on a comparable and currency-neutral basis.

This reflects expense timing as well as the impact of select investments, partially offset by the synergy benefits and the continued focus on tightly managing our OpEx.

These factors contributed to operating profit growth of 13% on a comparable and currency-neutral basis.

During the quarter, we realized approximately EUR 30 million in synergies.

Excluding these synergies, operating profit declined by approximately 1% on a comparable and currency-neutral basis as we continue to invest in the business, particularly, behind innovation, field sales and digital.

Now let's turn to our outlook for 2018, which we affirmed today.

For the full year, we continue to expect modest low single-digit revenue growth with operating profit and diluted earnings per share growth between 6% and 7%.

At recent rates, currency translation would have a minimal impact on 2018 diluted earnings per share.

These growth figures are on a comparable and currency-neutral basis.

As a reminder, our revenue guidance excludes the accounting impact of the upcoming soft drinks industry taxes.

We continue to expect these taxes to add approximately 2% to 3% to revenue growth and approximately 4% to COGS growth.

We still expect free cash flow in the range of EUR 850 million to EUR 900 million, excluding an expected benefit from -- including, sorry, an expected benefit from improved working capital of at least EUR 100 million.

This outlook reflects the focus we put on core free cash flow generation and includes the expected impact of restructuring costs, positively offset by our dedicated efforts to improve our working capital.

Our capital expenditures outlook continues to be in the range of EUR 525 million to EUR 575 million, which includes EUR 75 million of CapEx related to synergies.

Weighted average cost of debt is expected to be approximately 2%.

And our comparable effective tax rate for 2018 continues to be expected to be around the 25% point.

We remain on track to achieve our committed synergy savings target by mid-2019.

We have now achieved total savings of approximately EUR 185 million, which includes the EUR 30 million in the first quarter of 2018 that I just referenced to earlier.

We still expect to realize approximately 75% of our target by year-end 2018 and a run rate of at least 98%.

With these factors, currency exchange rates and our outlook for 2018, we continue to expect our year-end net debt to adjusted EBITDA for 2018 to be towards the low end of our target range of 2.5 to 3x.

As I close, let me highlight a few areas.

First, every level of our company is focused on managing the various elements of our business to drive profitable revenue growth.

We've taken bold action when it comes to our pricing, promotional and brand plans and we believe this strategy will strengthen our business for the long term.

Second, it is important that we remain realistic about the environment and the short-term challenges ahead, including the impact of the soft drinks industry taxes, ongoing customer disruptions and a very strong second quarter comparable from last year.

While it's still too early to provide more color on the volume impact of the new soft drinks industry taxes, we continue to believe that the impact will be more short term in nature, as consumers adjust to the new pack and pricing architecture.

And finally, we remain very focused on generating cash, utilizing our flexible capital structure and creating long-term value for our shareowners.

Before we open up to questions, I want to take this opportunity to let you know that Thor Erickson, Head of Investor Relations, will be leaving us at the end of the year.

After 15 years with CCEP and CCE.

This leadership change comes as we continue to transition the last few remaining roles in Atlanta to our corporate office in London.

As many of you know, over the last 11 years, Thor has played a significant role in developing and communicating our investment case as well as representing market views to our board and management.

On behalf of CCEP, I want to thank him for his leadership and significant contributions to the company.

At the same time, we're very pleased to announce that Sarah Willett will join CCEP as the Head of Investor Relations on June 1. Sarah joins us from the European home improvement retailer Kingfisher, where she has worked for last 14 years.

Sarah has a great track record and she along with the rest of the IR team will now be based in London.

Thor and Sarah will work closely together to ensure smooth transition, and Thor will continue to support the IR team throughout 2018.

We wish Thor the very best and great success in his future career endeavors, while welcoming Sarah into the CCEP family.

We also look forward to introducing you to Sarah over the coming months.

Thank you all for the time today, and now Damian and I will be happy to take your questions.

Operator?

(Operator Instructions) Our first question comes from the line of Lauren Lieberman of Barclays.

I want to talk about the retail and your sort of customers disputes, all very understandable and broadly expected, but I just wanted to, I guess, one, understand, if you say that France is probably the market with the most room for improving that promotional effectiveness?

And two, I think it's -- I'm guessing this is a retailer by retailer dynamic because if I recall last quarter, we talked about better promotional effectiveness, but volume was actually a bit better than what you saw this quarter.

So if you kind of talk about the nuances of customer-by-customer negotiations, if it's a seasonal dynamic, it's a combo or something notable in this quarter with this particular retailer and then, again, just France versus the other countries?

In terms of like a rank order of how much room there is to improve the efficiency of the promotional dollars?

Thanks, Lauren.

I think it's important that it really is a French issue and within that, it's really within a very narrow band within France as well.

So I think it's important to call out that across the rest of our business and if you look at our revenue growth by business units, we are enjoying a very collaborative and growth-focused agenda with all our other customers.

So I don't want to make it sound any bigger than it really is.

Obviously, having said that, France isn't important to you, and all of our customers are important to us in France.

But this is a very French-specific challenge and we're working through it.

And again, it only represents within France, well, not a large part of our business, but still, obviously, we would prefer to resolve it and we're working towards that.

In fact, if you look at, for example, in GB, Germany, Benelux, our customer engagement and the execution of our plans is right on track for where we thought will be at this stage.

Particularly, in GB, I have to say that the collaboration between ourselves and our customers in preparation for the sugar tax has gone extremely well.

You can imagine there was a lot of supply chain changes that need to made and merchandising changes, and Nik and I've been in the market recently in GB and we're very pleased that both our customers and our teams seem to manage that extremely well.

So it is something we're working through.

It is related to what Nik mentioned, our objective to create long-term value for our customers and our shareholders.

And by and large, as a percentage of our total revenue in CCEP, you're looking at a very, very marginal amount of impact in the first quarter.

But obviously, when you look at the French where you stand alone, you can see the volume impact.

But that's where we're at the moment, Lauren.

And then, obviously, we're working through it, but I think we demonstrated last year and if you look at our full year results for '17, that also came in the back of making some great decisions around promo prices.

That has worked in terms of the margin and cash generation for ourselves and our customers.

So we believe we're definitely on the right path, albeit, with some small bumps.

And this has also just definitely helped our revenue per case realization in France by ensuring that we're resetting the base with this customer, in particular.

So that helps us.

And obviously, the weather, Lauren, had an impact too.

So it's all kind of together.

And our next question comes from the line of Caroline Levy of Macquarie.

Just want to ask -- on April, you've already -- you've just seen the taxes go into place in the U.K. And what is the retailers do and you do on the shelf fits to prepare?

I mean, could we see the percentage of mix that's in sugar drinks go down further, in your opinion?

And specifically, on energy, you've got big exposure on the sugar side and energy.

If you could just talk to us about what the shelf research look like?

And then you've had an actual experience with the tax increases in Northern Europe.

And what have you seen specifically on mix there?

If you're really seeing people trade into diet as opposed to just trade away from the category?

So let me share some color around that topic.

So if you, as Nik mentioned and as we've commented on the call, I think if you look at our Q1 results, certainly, winter lasted too long in Europe for our liking.

And we have seen a slight rebound coming back in April, which is good news for us as well.

We also -- unfortunately, Easter moved into Q1.

And obviously, an early Easter is great when the weather is good, but when the weather is bad, obviously, it can have a bigger impact.

But even with that, we managed to lever our revenue growth.

As you look specifically at GB, what you'll see in store is, obviously, the taxes being passed on by the retailers as we expected.

You're seeing new platform that's in place.

So for us, you'll recall that we talked about moving Coke Classic to 1.5 liter from 1.75 liter.

And to 1 liter from 1.25 liter, and that's all now in play.

We also moved to 0.375 ml offering and kept our 0.5 liter offering to, obviously, manage the absolute pocket price for the consumer.

That's all in place.

Merchandising is complete.

There hasn't been a dramatic change in the space in store, so we still are quite pleased with the amount of space that we see for Coke Classic, for Coke Zero and for Diet Coke.

It's now really what we're seeing from the consumers in terms of offtake.

And at the moment, early -- early to say, but it's going as well as we could have expected.

I suppose that's how we would sum it up at the moment.

And in terms of learnings from other markets, I suppose the market that we've looked to is Portugal.

If you recall, we had a sugar tax increase at the beginning of '17 in Portugal.

And we've come out of that very well.

Consumers have come back into the brands and the category.

We're seeing similar dynamics as well in the Nordics.

So every tax is slightly different.

And obviously, consumers market-by-market respond slightly differently.

But I think it's more or less in line with what we've baked in when we gave our guidance for 2018.

We'll be happy to give more color on that as we go through the year.

But from an execution perspective, I think we're bang on track.

It's now really up to the consumer to decide, and we believe we've given them the best choice by maintaining value on Coke Classic by downsizing the pack size and we believe that will work.

In terms of energy, I think we're quite pleased with our exposure.

You got to remember the energy consumer can be quite a different consumer to regular Coke Classic.

Generally, our energy business is a single-serve business.

So the percentage of increase on the selling price in GB is a lot lower because as you recall, the tax is on a per liter base, not on a revenue base.

So obviously, the price impact on all our single-serve packs and on Monster is a lot less because it's a single-serve brand.

So we're quite comfortable with our energy business and as you've seen in Q1, it continues to deliver a lot of good revenue growth.

But again, we'll monitor that and we do have a massive range of sugar-free energy propositions as well, so a bit light on our Cola franchise.

And we're quite comfortable if the consumer moves between Green Monster into ultra or between Coke Classic and the Coke Zero, we retain them in our franchise.

And I think, first, that's the most objective and we have the listings and the availability to do that.

So overall, slightly better than we expected would be my view and where we stand today.

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

So I guess, first, just in terms of your revenue guidance, so obviously, Q1 was a little bit tough given the weather issues, but it seems like volume could actually -- could be under pressure in markets like GB with the sugar tax and pricing is already pretty strong in Q1 and you do have a tough comp in the second quarter.

So I'm just curious how you think about the confidence level in achieving that top line guidance for the rest of the year, is my first question.

Thanks, Judy.

Obviously, we reaffirmed our guidance today.

So we are confident in achieving the top line revenue.

I suppose when we look internally at what happened in Q1, there were a number of factors that came into play.

And it is our smallest quarter.

So when we look at our revenue realization per case in Q1, obviously, that supports our guidance for the rest of the year.

When we look at some of the volume headwinds, obviously, you can never predict how greatly we did have a longer winter than planned and -- we don't expect that to continue, and April has been better.

And then when we look at the second half of the year, I think you're right.

Certainly, the second quarter is a tough comp,how we bake that into our guidance, but we certainly see good potential as we move into the summer and into Q4 in 2018.

So overall, we're confident we have very robust brand and pack innovations in place with the Coke Company.

All of our pricing is in place with our customers.

And I have to say there is a -- it's a good place to be, ironically, now that the sugar taxes in place.

So we can start talking about it as a real event.

So that's behind us now and we've got to look forward.

And I'm also pleased that our execution and distribution across all of our BUs continues to improve.

So all of those dynamics certainly support our guidance.

And we remain comfortable with our top line growth.

I have to say, we are particularly pleased with our net price realization per case.

I think that is a -- it's a good number and it builds a very solid foundation for long-term revenue growth.

So we'll continue to focus on that.

You've also got to bear in mind that some of the volume declines you noted in Q1 were deliberate.

And we made some bold choices around water brands that were not creating value for us or our customers.

And as you are also aware, we're very pleased with our transition to Fuze Tea, but again, obviously, most of that impact also came in Q1.

So there were conscious decisions for the long term.

We're happy with them, but, obviously, impacted at 2% volume decline.

So overall, we remain confident and then still a lot of work to do, as I remind my colleagues, but we remain very confident in the rest of the year.

And just building on that last point of Damian's.

As we had built our guidance, we had factored in some of those strategic brand choices that we were making.

So I think the biggest piece really from a Q1 perspective was the weather impact, which obviously, we can't control.

But fortunately, it's been our smallest quarter and we hope that it will lead to a nice warm summer.

Yes, hope so too.

Okay.

So just on the -- the cost per case number in Q1 actually came in a little better than we had anticipating in.

Obviously, you had the benefit of pricing coming in much better than the cost per case growth.

So just a little bit of color in terms of what happened in Q1, and any color just in terms of the rest of the year.

How that will play out?

Yes.

I mean, we still remain on target, we believe, with that circa 2% to 3% COGS per unit case.

I think you're going to see just some lumpiness during the course of the year depending on the comps, and if you take a look at last year, our COGS per unit case was up 4.5% in the first quarter and then tapered down.

So the comps play a role here too.

But I think the pressures that we've seen on aluminum, clearly the pricing that we realize in the market has a real-time impact based on our incidence model with Coke, which is the right thing for us because we both want to grow revenues.

And we'll continue to see how PET costs play out, because remember that's one of the elements that is largely unhedged.

Everything else were pretty well covered.

So you will see some variability during the course of the year, but we feel comfortable with our guidance at this point for the full year.

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

A question on the cost synergies, the EUR 315 million to EUR 340 million guidance, which has been reaffirmed and realization has been on schedule.

So that's been great.

The other side to that, I guess, would be that number was likely viewed as conservative, at least among the street, and that there would be potential upside to that number.

So, Nik, a couple of questions with that.

Can you sort of get us up to speed on your synergy outlook, ability to realize potential upside?

And then the second part of that, maybe how big of a focus is that?

How much time are you spending with respect to that in terms of exceeding that target internally?

So I will be very clear.

Again, we will deliver the EUR 315 million to EUR 340 million, and we do not plan to deliver any upside over and above that.

Clearly, we are focused on it.

We have a whole team that's focused with the BUs and ensuring that we achieve the various buckets of synergies to be captured, be it on procurement, be it on operational efficiencies, cost saves, et cetera.

And we will be very much in line to deliver against the EUR 315 million to EUR 340 million.

And we will continue to look at any further upside to continue to invest in the business in the long term as opposed to dropping to the bottom line.

Having said that, I think you also got to keep in mind, the synergy program will end and we will continue to be focused on productivity initiatives.

And that is something that will continue to help us as we look at our long-term growth algorithm and think about what we need to deliver from a leverage perspective going forward as well.

And just to build on that, Kevin, I think if you look at the overall organization, you mentioned how much time is focused off.

And I think, we've come through a number of significant events.

Obviously, the integration and setup that the company went seamlessly, we're very confident on delivering the synergies as Nik outlined.

We will look for further productivity opportunities like any large organization going forward.

But I do think if you look at our P&L and if you look back over the last number of quarters, I think the management team has really remained very diligent around our cost-based synergy capture, which really allows the rest of the organization focus on top line quality revenue growth.

And so, I'm quite happy that most of the energy in the organization is going where it should be, which is externally on brand portfolio, customer service and building a better route to market.

We have also got through the announcement of our Phase 2 synergy program and that has largely gone extremely well, and we're now in consultation about the changes.

So that reaffirms Nik and I's confidence in being able to deliver the number.

And obviously, we look forward to moving out of the synergy program as we outlined on the deal, adding to a much more regular conversation around productivity and leverage on the P&L.

And so, overall, I think the time allocation is more than appropriate for where we are at the moment.

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

Two questions.

First, did you see any inventory build by retailers ahead of the sugar tax and did that have any impact on your numbers in your view?

That's question #1.

And second question, can you give us just kind of a general overview about the competitive dynamics in your key markets?

Is it looking largely rationale and are people following your disciplined price mix approach?

Or do you see people taking advantage of that in ways it could be detrimental to the markets?

Robert, thank you.

On your first question, we really didn't see any significant inventory build pre the sugar levy.

So that was good news.

And that certainly, if there was any, it was obviously very, very small.

So that hasn't been an impact.

We're clearly now into the new packaging on shelf, as I mentioned earlier.

On your second question, the good news is our markets all remain very competitive.

And we think that's good for the category.

It's good for us because it forces us to continue to raise our game and the quality of our innovation and execution.

I think on pricing, broadly speaking, I think most markets have seen the whole category move up in pricing.

And certainly, in base pricing, I think you'll continue to see and we will continue to see market-by-market competitors taking a different view around promotional pricing.

I mean, that's clearly something that, that they make decisions based on their own financial objectives, and we make our decision based on ours, which is really around value creation and price mix realization.

So as we've moved out of some of those deep promotions, particularly in large PET, we have seen in some markets, some competitors stepping into fill that role for the retailer.

We anticipated that.

Overall, our share is pretty much flat in NARTD.

We have seen some pressure on some of our shares and sparkling, again, mainly due to promotional pricing levels and that's something we will take a long-term view on.

And certainly, we believe the value we're creating for our retailers and our shareholders is sizable and to kind of reverse that by making some short-term promo decisions wouldn't be the right decision.

So it remains competitive, and rational is always a fairly interesting word.

It depends on your definition of rational.

I would say, there's fairly nothing surprising about it, would be the language I'd probably use.

And it remains good and compatible, which I think is good for our customers, our consumers and I think it's also good for us.

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

I was just hoping on the gross margin side, you could kind of just aggregate the drivers a little bit further and really if could try to get a sense of sustainability.

So, for example, obviously, the commodity costs at 1% increase from organic cost of sales and sugar prices are down, probably using less sugar as well.

Some of that feel sustainable, some of that doesn't.

So if you could, first half, just to segregate that, that would be helpful.

And then my second question is back on top line.

If you get us a sense there too in terms of price versus volume going forward for the year?

And then, if you can just tell us about the 2% to 3%, in particular, from the sugar tax and what you expect there from a price versus a volume perspective, I'd appreciate it?

So on the comps, clearly, as I said, you're going to see some lumpiness just based on the comps.

So Q1 last year was up 4.5% and we're cycling that, and then if you look at Q2 through Q4, it was more in that 2.5% to 3% type of range.

So there's clearly that delta that has an impact.

If you look at the elements of it, as you rightly said, the commodities will be up, net-net, we don't break that by in detail, but net-net will be up in the 1% to 2% range.

And part of that, obviously, continues to be the fact that our PET element still remains open as it is traditionally at this time of the year.

And then, concentrate will go up in line with our revenue per case realization.

So you'll see that.

And clearly, that was strong in Q1, but it was offset by some of the manufacturing efficiencies and synergy programs, et cetera, that you'll continue to see going through the course of the year.

So that's pretty much the majority of the color that I can give you.

The last piece that I will also highlight is, we continue to see the away-from-home and smaller packs grow faster.

That clearly has a positive impact on our revenue, but also has a higher COGS impact.

So you will see that come through more, particularly, in the second and the third quarter when you see that away-from-home business actually stronger, just from a summer selling season perspective.

Just on your question, Ali, on the price volume, I think we are obviously pleased that we've been able to realize the price per case that you've seen on our results for Q1 and, obviously, that sets the foundation for the rest of the year.

So we're pleased we could achieve that across all of our markets, with most of our retailers.

Moving into the summer, clearly, we'd expect 3 elements to underpin our revenue growth, that price mix, as Nik referenced, the continued focus on smaller packaging and transaction growth.

And, obviously, we'll see volume playing a role as we move into the summer as well.

We don't, specifically, break that out and we don't break it out by BU.

I suppose the one that we'll be watching the most will really be, will the volume impact in GB, and what will it be relative to our initial expectations coming from the sugar levy.

And again, I think that's probably the variable that we'll be able to give you a lot more clarity on as we probably move into May, June, once we get a number of trading weeks behind us.

I do also think it's important to note that as we brought the new packaging and the sugar levy into GB, clearly, the promotional ways has also reduced because, obviously, it's very difficult to set new pricing and new packaging while you promote.

So I think we'll also get a better read on how robust the volume is as we start to look at price promos coming in back into the GB business as we transition to the sugar levy.

So, overall, those 3 elements are built into our guidance.

And we remain focused on being able to deliver that -- that growth as we've outlined for 2018.

But on the big variables, we'll be happy to share more color on that as we move into May and June.

So just on that 2 to 3 brand, the sugar tax expectations on revenue, can you describe what your expectations would be or have been coming in, so we can compare it to what's actually happening in the marketplace between the pricing and the volume effectively be less to see that you're assuming?

You're just referring to the pure accounting impact of the growth up of the sugar tax, right?

Correct.

Yes.

Sorry, if it's just that, that you're not assuming price loss to sit all in that 2 to 3.

Correct.

That is just the pure growth up.

The price elasticity is built in to what is our revenue and our operating income guidance that we've provided to you, which is on that organic, excluding the sugar tax growth up.

So the 2 to 3 is purely just the accounting implication.

Okay, okay.

Great.

And the volume impact that we expect goes back to what we disclosed last October.

So we haven't changed our position yet.

We'll wait and see how the market response.

But as we mentioned, it's so far so good.

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

Just a couple of questions.

First on the -- on Fuze, the switch and tea to Fuze and the volume hit you took in the quarter on some of the decisions you made in water.

Does any of that carry forward into the next couple of quarters?

Or is that all just a sort of 1 quarter type event?

Bryan, no that will continue.

So if you look at the brands that we've exited, obviously that impacts Q1, but obviously that will roll through more or less in...

In Q2 and Q3.

Q3, the bring ones.

And then most of the changes we made in Q4, so we'll cycle out of it in Q4.

Again, it will impact volume slightly, but from, obviously, a price mix and margin perspective, we're very happy with that decision.

Fuze also, as we repositioned our role into tea category, we went very much more for a value and margin profit play.

So what you'll see, a Fuze packaging, just to give you some proof points versus our previous tea proposition, we're now in a 400 ml versus a 500 ml previously.

We're now in a 1.25 liter versus a 1.5 liter previously.

And our channel focus is much more in the channels where we believe we can generate profit and revenue for our customers and our sales.

So the pack changes in itself will, obviously, flow through to a volume impact, but again, for all the right reasons.

And we're continuing to look at building distribution on that brand.

So that will continue certainly into 2019.

And -- but again, I think a good conscious decision for long-term value creation.

And Fuze is actually doing better than we expected in the markets, and we're very pleased with that.

So more to come on Fuze, I believe.

And then just the last piece is, you've been very successful with pricing and mix really since the merger.

And I know there's a lot of pieces to it.

The work you've done, standardizing a lot, it's like the sales force technology.

And I suppose also Coke, the Coca-Cola Company has sort of stepped up its marketing efforts, but, I guess -- so I guess, if you can just give us kind of describe now that you've this far into it.

Just what are the factors that have really made your -- given you that ability to sort of price mix more consistently than maybe had been the case in the past?

And I guess, the idea is just how is that sustainable going forward.

So I suppose the first kind of strategic element that fits into that space is the alignment with the company on instance pricing.

So we've been working with that now for a few years, but like all changes, the longer you work with it, the more comfortable your teams become with it.

So I do think, the Coke company's focus on revenue as being their key value driver versus volume is a clear foundational benefit in this whole area.

So I'd say, that's definitely a big part of this -- of the success.

Beyond that, I think as we looked at creating value for our customers and our shareholders, premerger, we did identify areas that we felt were not really sustainable for our consumers and our customers, mainly in the area of large discounted PET promotions.

You'll recall, Bryan, last year, we spoke a lot about that during the year as we roll back that investment and redeployed those funds into more profitable packs.

That's certainly continuing to have a benefit.

We have been able to negotiate some headline price increases, which most of our retailers have passed on.

So their margin has been retained, but their absolute profitabilities increased.

And we spent a lot of time working with our retailers and our key account teams understanding the profitability of our category for our customers and where we see opportunities for them to generate more cash, and clearly cash has been a focus for CCEP as well.

And then, I suppose finally, we've invested a lot in coolers.

We've invested a lot in our supply chain to be able to deliver more smaller premium packages to the marketplace.

I would put one caveat that, that last point takes a long time.

So moving mix in our industry is probably of the 3 dynamics of price, volume and mix.

Certainly mix is the one that will take a bit of time.

But once you get it, it tends to be also very sustainable.

So to answer your point, the sustainability, we believe it is sustainable and we do believe as we roll out mini cans and glass and smaller PET, which you'll see across Europe, that certainly builds in that sustainability.

So multitude of factors and slightly different market-by-market, what I would say, they are the key themes that are common.

Our next question comes from the line of Mark Swartzberg of Stifel.

I had a question on France -- or couple on France.

But just from a second quarter perspective, are you all budgeting for revenue to be down in the second quarter given that compare?

We don't provide guidance by quarter and that's really quite builds into our full year number.

So I would hate to start a trend there.

And, Mark, I would let them start a trend.

Fair enough, fair enough.

And then France, is it right to think there is another leg up in pricing with the soft drink tax coming to life first?

And if it is correct, I guess, it's regardless of whether it's correct.

How would you characterize the clarity you've got from retailers in terms of their receptivity, their readiness to pass this through?

I think we've got very good clarity, and we've spent a lot of time engaging with our retailers.

I think going back to a point that Caroline raised earlier, I think we need to keep what's happening in France in context.

It's really one retailer, and we're working through it.

So the rest of the market we've looked at what we believe is going to help us navigate through in GB, and we've applied similar logic to our French business, which is as the tax comes in, you'll see new packaging coming into the market that we believe will give us a better chance to protect our consumer franchise through the price point, generate more margin for our customers and also make sure that we retain some of that level of affordability in the category.

So we will be going through a similar exercise in France in Q2 with pack changes and remerchandising shelves and bringing new packaging to the market, which I think is going to be exciting.

France hasn't had a lot of real pack innovation over a number of years, and I think the category has suffered in France because of that.

It's been very dominated by one pack, which is 1.5 liter.

And ironically, I think this change gives us the chance to potentially stimulate the category for the longer term by bringing more pack innovation.

So we're excited about it.

We're realistic that it'll be disruptive.

That's in our guidance.

We know that.

But I do think potentially for France, in particular, it may give us an opportunity to reassess the category with a stronger focus on value and profit for our customers.

That's certainly our intent.

And we believe the category success is always in direct proportion to the profitability for the customer.

And if we can generate profitability, I think they support the category more and more, and I think that's what we're seeing in other markets.

So Q2 will be interesting in France.

And -- but I'm personally excited about it because I think we would be able to, as I mentioned, bring some pack innovation that really hasn't happened in France for a long, long time.

And that's coming.

The pack innovation is coming in France in the second quarter.

Where are you in communicating your price increase plans vis-à-vis the soft drink tax in France?

That was all done as part of our annual conversations, that took place end of last year and into early Q1.

So that's all in place.

And you've got it...

Yes.

And just to be clear, you'll see the pack changes coming through towards the end of the second quarter as we launch sugar tax July 1.

That's great, that's great.

Sorry to go so long here.

But is there a country that's outperforming?

It seems like France is a little more challenging.

But do you think GB is doing better than planned or Iberia?

I'm just curious.

It seems like something is offsetting this support to your confidence for the full year?

Something is offsetting.

France, is that?

Yes, it seems like France is a challenge, you didn't quite expect to the degree you're getting, but some other market or set of markets are giving you confidence behind your full year guidance, staying the same?

I think that's one of the benefits in why we created CCEP.

I mean, we're now operating with a much bigger geography.

I think Germany has had a great 2017 and that continues to perform well and it's a big market for us.

I think the GB results in Q1 are very solid, but honestly, if I look across all our markets and I look at Q2, which will be a big comp, we understand.

Let's say, you got to look kind of full year.

And we believe all our markets have strong potential for the rest of the year, including France.

I mean, I think Q1 and as we look at our business in France beyond the disruption, it's performing well with other retailers and then away-from-home.

So overall, we -- that gives us confidence, albeit, coming out of our smallest quarters.

So, yes.

Our next question comes from the line of Chris Pitcher of Redburn.

A couple of questions, please.

Firstly, on Germany, where it looks like you're getting very strong price mix coming through probably accelerating from what we saw last year.

Could you give us a sense of how your distribution is changing that?

And importantly, how your pack mix has changed away?

From what level is returnable PET right now?

And then secondly, on Fuze Tea, every markets were encouraged by the roll out of Fuze Tea, but some markets have gone better than others.

What have you learned from the system about how to position Fuze Tea against Lipton and Nestea, particularly, in big markets, like Germany.

And can you give us some reassurance or some idea of how long you're going to keep Nestea in Spain?

And are you rolling out Fuze Tea there in sort of anticipation?

So, maybe I'll just go in reverse order.

And -- we plan to have Nestea in Spain for a number of years more.

We did a separate agreement in Spain.

So we don't expect Fuze to play a role there for a number of years.

And obviously, we'll communicate in an appropriate time if that changes.

And on our overall tea strategy, clearly, we sat down with the Coke Company and we've looked at global markets and where we could learn.

I think our primary learning was to really focus on value and on the product benefits versus volume and price.

So one of our concerns was, there is a lot of brands in the tea category that play on price and volume and that, obviously, is not an area of an interest to us but it's also quite a accredited area.

So we did take some deliberate decisions as I mentioned earlier, like downsizing or packaging, which we believe is more appropriate for the tea occasion, but also is a better value play for our sales and our customers.

And we spent a lot of time investing in advertising to help consumers understand what we believe is a superior product experience and based more from a brood tea heritage than probably what you're seeing in the market.

So lots of learning.

It's going well.

We're still learning, which is good news.

And we will continue to reflect and adapt our strategy as we go.

But overall, we're seeing a good acceptance of the brand and the packaging in what is the competitive category.

So we've seen a strong response from our competitors, and we would expect that to continue.

And on Germany, it's fair to say we have enjoyed good price mix realization and we have taken a decision over the last number of quarters to simplify our product portfolio in Germany.

So from a refillable perspective, we have a very strong refillable glass business, which we are very pleased with.

We have a refillable 1 liter PET business, which remains a big part of our proposition.

We have sharpened up our pricing and promo [investment] on that pack to make it more profitable.

That's worked.

And we've pretty much delisted all of the other refillable PET packaging.

So 0.5 liter, 1.5 liter is now out of the business.

So we are benefiting in Germany of a more simplified pack, SKU range.

We are benefiting from more sensible promotional investment on refillable PET, and the team in Germany have done a good job managing our away-from-home business and our mix.

So all of those elements are contributing to a solid German performance.

Can you give us a sense of what made the refillable part of the business is glass and PET now in terms of volume?

It's probably about a 1/3 to 40%.

Yes, yes.

Our next question comes from the line of Brett Cooper of Consumer Edge Research.

A couple of questions.

Firstly, just where do think you are on realizing promotional efficiency, obviously, knowing the category is highly promoted and likely will be in the future?

Well, it's different by BU.

So I think a short answer to that is, I think that in some way, it is a never-ending journey.

So I think it's something we will continuously to review on a quarterly and annual basis.

We are seeing in some markets the promotional volume dropping to 20%, 30% of total revenue, which we would feel is probably more sustainable level.

We're pleased with that, but it's something we're continuing to evaluate.

And obviously, we don't operate below.

And so -- and ultimate pricing decisions are made by our customers, and also our competitor obviously plays a role.

So it's something we're pleased with in terms of the progress we've made.

I would say, we don't believe that journey is over.

And it's quite a dynamic market anyway would be how [to] see that, Brett.

Great.

And then can you just comment your outperformance in away-from-home versus take-home?

I mean, is that a market dynamic or is that a market share dynamic?

We would say clearly, we are doing a better job internally focusing on the away-from-home business.

So that's certainly something that we believe we've invested in, in terms of coolers.

We shared with some of you, some of the technology into our sales reps to enable that.

And -- so we would believe that's something we are probably taking the lead on in most of our markets.

From a share perspective, obviously, Nielsen or the usual agencies don't cover away-from-home.

So it's quite difficult to get a robust share number, but certainly, we believe we're leading the market.

To what degree, it's hard to put a percentage on to be honest.

And if you just broadly look at the NARTD overall category, it's probably about roughly speaking 60-40 away-from-home home while our business is probably 60-40 home-away-from-home, right?

So clearly Damian's point, that's where we're focusing in.

We're reallocating some of what we're doing in home to actually make sure we're investing in Cola to get advantage and take advantage of that.

So the right strategy for us long term, but it takes time as Damian said.

So if I can squeeze in one last one.

The decision on capital or cash deployment, when should we exactly hear something from you guys on that?

And then I will stop.

That's a good place to stop.

As we said, we said we've got some challenges through the course of this year.

We want to see how sugar taxes play out, both in GB and in France.

And we remain focused on being share on friendly, so we will update you at the right time as we continue to see how the year continues to evolve.

So one last question, operator.

Our next question comes from the line of Eric Wilmer of ABN AMRO Bank.

There has been some rumors in the markets on CCEP also being involved in the deal, whereas CCH is buying African Coca-Cola assets from AB InBev.

Are there any words that you would be willing to address to this?

The words that we would continue to address would be that we are interested in geographic expansion.

Western Europe continues to be where we would like to grow first, but a lot of M&A is opportunistic and we will continue to assess all opportunities in terms of potential franchise, franchises that might be available.

Yes.

I think I'll just build on what Nik said.

Our priority as we created CCEP was to deliver on our commitments, which I think we're doing to fill the balance sheet that allows for M&A, and I think if you look at our free cash flow on a net debt situation, we're definitely in a place to do that and have the organizational capability to be able to take on more territory.

So we believe in those 3 metrics, we are in a good place.

Clearly, to be a buyer, you need a seller.

And we will obviously wait and see if anything comes up, but obviously it wouldn't be appropriate first to comment on some of the rumors that you are hearing in the market.

So that means in theory that you could also look outside of Europe at this stage, just to ensure that I understand correctly.

In theory, yes.

But as I said, our first priority remains to be able to expand into contiguous territories in Western Europe.

But in theory, franchises come up and we would affect them.

So, again, I'd like to thank everybody who took the time to join our call today.

And before we close, I'd just like to share some reflections.

As we stated today, we are on track to deliver a full year guidance.

It has been a good start of the year, albeit, our smallest quarter.

We're very much focused now in executing a very solid plans around portfolio and customer value creation through the selling season ahead.

And we will do that as we continue to navigate through some of the headwinds we discussed on the call today.

As ever, we remain focused on driving profitable revenue growth, generating cash and delivering sustainable shareholder value.

Both Nik, Thor and I look forward to updating you on our journey through 2018 on our next call.

Thank you very much.

Ladies and gentlemen, thank you for participating in today's conference.

This concludes today's program.

You may all disconnect.

Everyone, have a great day.