Coca-Cola Europacific Partners PLC (CCEP) 2018 Q2 法說會逐字稿

Good day, and welcome to the Coca-Cola European Partners First Half 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 Sarah Willett, Vice President of Investor Relations.

Please go ahead, madam.

Thank you, and good afternoon Europe, and good morning in the U.S. This being my first call having joined CCEP just over 2 months ago, I am especially pleased to welcome and thank all of you for joining us today.

I would also just like to gently remind you, if you haven't already and wish to do so, to sign up to our investor event next month in Germany, just let us know directly.

So before we begin discussing our second quarter and half year results for 2018, alongside our updated outlook for the full year, I would like to remind you of our cautionary statements.

This call contains forward-looking comments and statements reflecting our outlook.

These should be considered in conjunction with the cautionary language contained in this afternoon'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, followed by Nik Jhangiani, our CFO.

Following those prepared remarks, we will open the call for your questions.

Following the call, a transcript will be made available as soon as possible on our website.

So without further ado, I will now turn the call over to our CEO, Damian.

Thank you, Sarah, and many thanks to everyone joining us today to discuss our results for the first half of 2018 as well as our outlook for the rest of the year.

In May, we celebrated our second year as Coca-Cola European Partners, and we're encouraged by the strong progress that has been made.

We delivered another solid performance in the first half of 2018 despite facing some challenges.

Our results demonstrate our ongoing focus on driving profitable revenue growth as we continue to make the right strategic decisions for both ourselves and for our customers to create value in the nonalcoholic ready-to-drink category over the mid- to long-term.

First half 2018 revenue increased 1% on a comparable and currency neutral basis, led by a 5% increase in revenue per unit case.

Excluding the impact of incremental soft drinks taxes, revenue per unit case increased by approximately 3.5%, as we continue to benefit from our dedicated efforts to improve price and mix.

First half volume declined 3.5%, impacted by several factors, which are detailed in the release and will be discussed in more detail shortly.

While we are facing some near-term challenges, we continue to see volume growth as a key component of our top line growth strategy over the longer term.

Importantly, we continued to see transactions outpace volume during the first half, and this remains a key metric for us in regards to the health of our overall brand franchise.

Modest revenue growth overall and continued realization of post-merger synergy benefits helped drive operating profit growth of 5% in the first half on a comparable and currency neutral basis.

Now let me turn to performance by territory for the second quarter.

In Iberia, our revenues were down 6% as unseasonably cold weather in Spain led to weak volumes.

June was a month that was particularly affected, resulting in a slow start to the summer, in particular in our HoReCa Channel.

Despite difficult trading conditions, a number of our brands, namely Coca-Cola Zero, Royal Bliss and Monster, all grew volumes during the quarter.

And fortunately, the weather has since improved, and I am encouraged by our return to strong volume growth in July.

In Germany, I am particularly pleased that our revenue increased 4.5%, driven by strong -- again, by strong revenue per unit case growth, as we continued to focus on driving price and mix by scaling back on large multipack promotions.

We saw good volume growth from Coca-Cola Zero Sugar and Mezzo Mix.

Fuze Tea continues to gain traction with our customers and consumers, and we've been pleased overall with the initial reaction to the brand launch.

These volume gains were offset by a decline in water volume following our previously disclosed decision to make the right choice and discontinue some of our less profitable water brands in Germany.

Great Britain saw revenue growth of 6.5%.

This reflects underlying gains in revenue per unit case again, as we continued to improve promotional effectiveness and drive a positive pack mix as well as the impact of the soft drinks industry tax.

Excluding the sugar tax, revenue in GB declined by 1% on a currency neutral basis.

This principally reflects the soft drinks industry tax impact on volume both from a price elasticity perspective, but also due to the proactive reduction in select packaging sizes, mainly in our Coca-Cola Classic range.

While it is still early days, the impact of the soft drinks tax in GB has so far been broadly in line with our expectations.

Although it is fair to say that the prolonged period of unusually warm weather in GB has made it difficult to fully assess the impact so far.

That said, I am particularly proud of our supply chain and commercial teams, who worked extremely hard to introduce an unprecedented number of reformulations and pack changes ahead of the tax introduction.

While Coke Classic volumes declined in the quarter, as expected, Coca-Cola Zero Sugar saw growth of nearly 50%, and we saw promising results under recently launched Diet Coke flavors.

I will provide a little bit more color on brand performance shortly.

In France, our revenue was down 9.5%, again, with solid growth in revenue per unit case.

However, this was more than offset by a sharp decline in volume largely due to further customer disruption in delistings, following the strategic decisions we made ahead of the recent tax changes.

In particular, we have taken this opportunity to holistically reset our price and pack architecture in Spain.

For example, we've now upgraded our offer on trademark Coke in the Home Channel by replacing the legacy 1.5 and 2-liter PET bottles with the 1.25- and 1.75-liter options as we focus on driving more profitable revenue longer term.

We are also introducing a wide range of smaller-pack offerings into the French market.

It's fair to say not all of our customers were initially aligned with our strategy, and this is reflected in our volumes and something we flagged last quarter.

While this has been disruptive in the short term, we are pleased to have recently resolved these Home Channel customer issues and our products will gradually be introduced across the shelves in France.

Finally, revenue in the Northern European territories was up 6.5% in the quarter, with growth in both revenue per unit case and volume.

Norway, Belgium, Luxembourg, the Netherlands and Sweden all performed very well during the quarter.

Our revenue growth was supported by pack mix, favorable weather and the recent changes to soft drink taxes in Norway and Belgium.

Overall, in Northern Europe, Coca-Cola Zero continued to perform well, along with Monster, Fanta and Fuze Tea.

Turning briefly now to brand performance.

From a volume perspective, our sparkling portfolio declined by 4% during the quarter, with a 5.5% decrease in our Coca-Cola trademark brands.

As you would expect, these brands were the most exposed to some of the volume factors that I alluded to earlier, particularly in GB and France.

However, Coca-Cola Zero Sugar had another solid quarter, with growth of over 7%.

Sparkling flavors, including energy, were broadly flat with encouraging growth coming from Schweppes and Mezzo Mix, while within this category, energy was up over 10% as we continue to execute our winning multi-brand strategy.

Monster brands had another strong quarter benefiting from the continued growth of Ultra, Hydro and the Punch ranges.

Still brands overall declined by 9.5%.

This was driven, however, by an 8% volume decline in water and a 10.5% decline in juices, isotonic and others.

This reflects the right portfolio decisions in the ready-to-drink tea and water categories as well as the decline in the sports category mainly due to the aforementioned unfavorable weather in Iberia.

Fuze Tea, Vio and Smartwater all saw solid volume growth throughout the quarter.

So clearly, as you've heard, there were lots of moving factors in the first half.

But overall, we believe it was a solid performance given the -- some of the challenges we faced.

Looking ahead, we remain excited about the growth opportunities throughout the rest of 2018 and beyond, and we have good momentum across the business.

We continued to expand our total beverage portfolio across our markets, and we are very pleased with the early customer reaction to Fuze Tea.

We've also continued the rollout of AdeZ, Honest Coffee and Smartwater.

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

For example, we saw volume growth of over 20% in small cans in the second quarter, driven by strong distribution gains of mini cans, particularly in Belgium, Luxembourg and the Netherlands.

Improving our commercial capability is critical to driving our innovation efforts and our growth longer-term.

We continued to invest in order to provide the right tools and technology for our sales force, to enhance our route to market and to increase the availability of our products.

We're also working to further strengthening our relationships with our key customers, which we believe will help us increase co-range availability and drive new product distribution and visibility.

We are seeing the positive impact of these initiatives from a revenue perspective.

Most notably to our ability to grow our away-from-home channel and drive growth in the more profitable premium packages.

In fact, this quarter was the sixth consecutive quarter in which we grew our away-from-home business faster than our home business.

I look forward to sharing more about these initiatives and how we are shaping our future at our Capital Markets event in September.

So taking into account our first half performance, we are pleased to affirm our 2018 revenue and profit guidance today and are very much encouraged by a strong start to the third quarter.

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

We've also modestly raised our free cash flow guidance today, which Nik will cover shortly, along with more detail on our financial results and outlook.

Before I give some closing remarks, I wanted to touch on the recent CO2 issue and the shortage that our industry faced at the back end of June.

As a business, we were well placed to leverage our relationships and scale within the Coca-Cola system and with our suppliers.

Our teams worked hard to source CO2 from across the continent and allocate them to our sites in GB.

I'd like to thank everyone (technical difficulty) in minimizing any disruption to our business and maintaining supply for our valued customers.

So finally, let me share some closing thoughts.

First, when I step back and think about our first 2 years as CCEP, we have indeed accomplished a lot, but there is still plenty of opportunity ahead of us.

Working together with the Coca-Cola company, we have a clear and collaborative vision and strategy to achieve sustainable long-term profitable growth for our shareholders.

We will continue to work closely with our customers to navigate through a dynamic trading environment, and our recent results are a testament to our operating strategies as well as our commitment and agility of all our employees.

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

We continue to make bold, strategic decisions when it comes to our portfolio, our packaging and our capability -- capabilities.

These are the right choices to be made for making our business more sustainable in the long term despite some near-term disruption.

Thirdly, our commitment to generating cash and driving shareholder value remains as strong as ever, and this is reflected in our 2018 free cash flow guidance, which we raised today.

This is why we continued to invest in our business across a number of areas, from coolers, supply chain, route to market and, critically, more and more in the area of digital capabilities.

And finally, as we work to build our company for the benefit of all stakeholders and maintain our commitment to delivering profitable long-term growth, it is critical that we continue to do so sustainably and responsibly.

We are at the center of some of the most important debates of our time: the use of plastic in packaging, the amount of sugar in our diets, and the role businesses should play in society.

We have clear targets and ambitious goals in our journey to becoming a more and more sustainable business, and we will continue to play an active and productive role in developing long-term solutions with our stakeholders, anchored in our strategy of great beverages, great service and great people.

Thank you very much for your time.

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

Nik?

Thank you, Damian, and thank you to all of us -- to all of you for taking the time to join us today.

So let's turn to the results in bit more detail.

On a reported basis, first half diluted earnings per share were EUR 0.85 or EUR 1 on a comparable basis.

Currency translation had a negligible impact on earnings per share in the first half.

In the second quarter, revenue increased 1% on a comparable and currency neutral basis.

This was driven by a 6% increase in revenue per case or approximately 3.5% in revenue per unit case, excluding the impact of the soft drinks industry taxes, which is reflective of a favorable price, pack and channel mix that Damian referenced earlier.

In fact, this is now the sixth consecutive quarter in which we -- our away-from-home business has outperformed the home channel, as we continue to drive our business more in the fragmented trade.

And also, as Damian mentioned, our transaction growth continues to outpace our volume growth.

Overall volumes declined by 4.5% in the quarter driven by several factors, which Damian spoke about earlier.

These include the commercial disruption with one of our customers in France, which is now resolved; the unfavorable weather in Iberia; our strategic portfolio and pricing initiatives, mainly in Germany; as well as the impact of the new soft drink taxes, notably in GB.

We estimate that these factors in totality accounted for approximately 3 to 3.5 percentage points of volume decline for the quarter.

Second quarter cost of sales per unit case increased by 5.5% on a comparable and currency neutral basis.

Cost of sales per unit case increased by approximately 1% excluding the impact of the incremental soft drinks industry taxes.

This was partly driven by mix but also, as previously noted, the continued year-over-year increases in key inputs, principally PET and aluminum, and, of course, concentrate, which is -- which, just as a reminder, is in line with our incidence agreement linked to our revenue growth.

These factors were partially offset by lower sweetener cost and synergies.

Overall, we did achieve gross margin expansion during the second quarter and the first half.

Further, we anticipate a broadly stable gross margin for the full year 2018 when including the impact of the incremental industry taxes and a slight gross margin expansion when excluding these taxes.

Operating expenses were up 1.5% on a comparable and currency neutral basis.

This reflects expense timing as well as the impact of select investments in the areas of digital, our route-to-market and joint investments with The Coca-Cola Company on innovation in new products such as Fuze, Honest and AdeZ.

These costs were partially offset by the synergy benefits and a continued focus on managing operating expenses.

All these factors contributed to an operating profit growth of 1.5% on a comparable and currency neutral basis in the second quarter.

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

While the calculations would indicate an operating profit decline, excluding synergies, of approximately 5% on a comparable and currency neutral basis, this quarter is a little more complicated than most quarters.

When adjusting for the volume deleveraging impact from the various factors highlighted and the impact of the synergies, we believe that the underlying growth in operating profit would have been broadly flattish in the second quarter, which we continued to be pleased with.

Finally, we continued to focus on driving free cash flow, and while we encountered several challenges during the first half, our free cash flow generation was ahead of last year, driven by our continued success in managing working capital and tight managing of our restructuring expenses.

Now turning to our outlook for 2018.

For the full year, we've affirmed our guidance for modest low single-digit revenue growth, with operating profit and diluted earnings per share growth between 6% to 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.

While we are pleased with the first half results and encouraged by a solid start to the third quarter, we believe that we need to continue assessing the impacts of our business from several factors.

Remember that the new sugar taxes in France only came in to effect in July, and it has been more difficult to read the GB sugar tax impact, given recent weather trends.

And finally, while we are very pleased to have resolved the customer conflict in France, we will now need to build back on-shelf presence over the next weeks and months in that market.

So with all that said, we should have a better read of the second half outlook once we have traded through the remaining important summer months of August and September, and we'll update you when we next meet.

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

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

We now expect underlying cost of sales per unit case growth to be at the low end of our 2% to 3% guidance range on a comparable and currency neutral basis.

This mainly reflects product mix as well as a slight reduction in the headwinds from aluminum costs versus where we were earlier.

Also bear in mind that the cost of sales comparables become more challenging in the second half when compared to what we had in the first half of '17 versus '16.

We now expect free cash flow within the range of EUR 900 million to EUR 950 million, up from our previous guidance of EUR 850 million to EUR 900 million.

The higher free cash flow outlook includes an expected benefit from improved working capital of at least EUR 150 million compared to our previous expectation of at least EUR 100 million.

Our capital expenditure outlook continues to be in the range of EUR 525 million to EUR 575 million, which includes approximately EUR 75 million of capital expenditures related to the synergy captures.

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

We have now achieved a total savings of approximately EUR 215 million, which includes EUR 30 million in this quarter or the second quarter of 2018.

We now expect to realize at least 80% of our target by the year-end 2018 and a run rate of nearly 100%.

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

To close, let me highlight a few areas.

First, we're pleased with our financial performance so far despite the challenges highlighted, and remain committed to driving long-term profitable revenue growth.

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

Second, we continued to invest in our employees and our capabilities to capture the growth opportunities ahead of us.

These investments are critical as we seek to expand our portfolio, strengthen our relationship with our customers and further widen our outlook coverage.

And finally, free cash flow generation remains at the very core of our business, and we remain focused on pursuing disciplined investments, optimizing our working capital and ultimately creating long-term value for our share owners.

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

Operator?

(Operator Instructions) Our first question comes from Stephen Powers with Deutsche Bank.

Great.

I don't mean to start off on a negative, but, Damian or Nik, I guess, it just feels like every year we're talking about some form of retailer conversation or dispute in France.

And maybe that's a bit of an exaggeration, but it feels sort of directionally correct.

And I guess just in that context, maybe just provide a bit more detail as to what drove the most recent discussions and the path from here to recovery?

It sounds like it's largely resolved, which is great.

But then just more broadly, also step back and assess, whether you see it possible that a more constructive status quo evolves in France, where future discussions may be more streamlined, or whether you think that the current state is more likely to remain business as usual?

Stephen, maybe I'll take that one.

So not to start off on the negative, but just to talk a little bit about France.

So I mean, firstly, I would say you've got to look at the market in total, and what Nik and I've referred to today relates to one customer.

And while that's a very important customer and a customer that I'm particularly happy that we're back doing business with.

It's fair to say that across all of the other customers, we had reached a good, strategic alignment.

So I think it's important to note that it was one customer, a very important one and thankfully, as you mentioned, one that we're now back in business with.

Prior to that, I think we haven't had this level of disruption in France before, and it's certainly not something that we would foresee going forward.

This was slightly a unique event this year for a number of factors, but primarily we had to change our packaging as we moved into the reshaping of the French sugar tax.

And clearly, that was a bigger change than some people anticipated.

As I said, the majority of our customers have bought into the strategy and see it as a way of creating long-term category value, and now we've got through the disruptions.

So it's not something that we would see as being a routine in France.

Our French business is great.

Over the last number of years, we've had solid revenue performance, particularly in away-from-home.

But we do see the opportunity for the category being a lot higher.

And a key enabler of that was getting the right pack price architecture in place.

And unfortunately, that came with some disruptions.

But as you called out, we are now back selling to all our customers.

But just to reiterate, it was one out of many, many customers.

So hopefully, that answers your question.

And clearly, we look forward to solid business performance in the second half of the year in our French business, and a good start to 2019 on the back of the changes we made.

Great.

And maybe I'll turn more positive, if I could.

Just in follow-up, I guess this one is really for Nik.

You've clearly prioritized working capital improvement this year and the results have been extremely impressive, as evidenced, I guess, by the free cash flow performance this quarter and the full year guidance raise.

I just would like if you could just step back and talk about the sustainability that you see as -- of that lever as an incremental source of cash flow as you go forward?

Just talk about the runway there.

And the same kind of question on synergies.

It looks like you're realizing things a bit ahead of schedule, which is great.

But just does that have any implications -- does that pull forward have any implications as you think about medium-term profit growth -- the runway for medium-term profit growth runway?

Sure.

So I think on the working capital piece, remember, we -- this has been already the start of what we have indicated would be a multiyear journey.

And I think as Damian and I both went into this and talked about this across the business, we were very clear that whatever we did was not about a year-end or a quarter-end number.

In window dressing, this was about sustainability that we needed to have in regards to working capital improvements.

So I think the things that we've done, if you think about last year, where we delivered over $250 million of net working capital benefits, was very much about getting some of our house in order, things like invoicing disputes that we had that were causing issues with our customers in terms of paying us timely.

We did some stuff on our framework in terms of how we wanted to pay and not go ahead and make early payments and not take things that we're taking too long to pay with some of our customers -- some of our suppliers causing issues with them.

So it's a lot about housekeeping.

And then we've now spent a lot more time around relooking at how we can actually engage with our top customers and suppliers as well as continuing to look at our inventory levels.

So I think everything that we're doing is very measured and paced and clearly will have sustainable impacts outside of what will normally be working capital growth that comes just as the business continues to grow.

So I think we feel very good about what we've achieved.

And I think we still have runway ahead of us as we look at the next 3 years, obviously, at a lower rate than what you've seen in '17 and what we've now guided to for '18.

In terms of the elements, obviously, that translates to solid free cash flow and where we feel we're performing well there.

The next element -- question was around synergies.

I think we have continued to say that getting synergies captured was an important part of this transaction, but clearly, we saw greater opportunities for productivity and growth going forward as well.

So I don't think the timing of the synergy capture in any way compromises our belief in being able to deliver against our long-term growth algorithm of low single-digit revenue growth and mid-single digit OI growth.

In fact, I think it just reinforces we've got that base right of which we can continue to grow.

And just to add a point.

I mean, I think we outlined a couple of years ago that we had changed incentive plan to include free cash flow.

And I think that's been a key driver of the right behavior in the organization, and it's something, as a management team, we're committed to retaining going forward.

So again, that will increase the curiosity of all of our people at CCEP to not just improve working capital, but to look elsewhere for free cash flow opportunities and that gives us confidence going forward as well.

Our next question comes from Judy Hong with Goldman Sachs.

So first in GB, so, obviously, a little bit difficult to read the trends just given the weather impact, et cetera.

But your revenue, I guess, ex Fx and ex tax impact was down 1% in the quarter.

So maybe a little bit more color just in terms of how much was that driven by pricing ex taxes?

So just trying to understand how much volume was actually down in the quarter?

And so with the revenue being down 1%, how would that compare to your expectations, because it seems like the weather did help in the quarter?

Sure, Judy.

I mean, again, we don't breakdown our volume pieces by market.

And particularly given this issue, I think it's even more challenging to give you a specific number.

But I think our revenue per case, ex the sugar tax, continues to be solid.

And keep in mind on the volume side, there's a twofold effect.

One is coming from the fact that you're seeing people, obviously, based on what we saw as initial sugar tax and sticker shock that comes in from the pricing, choosing not to buy, right?

But the other most important piece is, remember, there's a volume impact that's coming just from the downsizing, right.

And if you look at that, that revenue piece, a larger part of what's coming from that revenue decline ex the sugar tax is the volume coming down as a result of the downsizing on key packs.

The 1.75-liter down to 1.5-liter and our 6-pack, 8-packs going to 6-packs -- 4- or 6-packs in the multi-can strategy.

So that's where you would actually see the impact.

What we are also seeing, which is encouraging, is the transactions continue to get better as we have seen the months evolve, which kind of indicates also that there's much more of an acceptance of that new pricing architecture on the sugared products from the consumer.

And then finally, both Zero and Diet Coke continue to perform well but, obviously, not enough to offset fully that impact that we would have expected to see.

And just to maybe add Judy, I mean, I think, as we said in the statement, that was broadly in line with our expectations, and we've been particularly pleased with the lack of disruption to the business as we moved into those new packages and formats that Nik outlined.

Our business in away-from-home remains very robust.

So clearly as you would expect where the price elasticity is a little bit less, we still see very strong performance on our brands in away-from-home.

Going forward, I think one of the opportunities for us is also to make sure that we continue to feature Coke Classic on our displays and on our activations.

So as we've come through the sugar tax, that's also been a priority for us, as we realized there is still a very robust and loyal consumer user base for Coke Classic.

It still remains the biggest brand.

It's still the biggest driver of profitability and cash for retailers.

And as we reshape package offers, there's no reason to believe that, that brand can't continue to be part of our revenue growth plan going forward and that's the way we're viewing it.

It will take a couple of quarters to get through it.

But by and large, we're -- on the back of the weather as well, we're slightly ahead of where we thought we'd be coming into the middle of Q3.

Got it, okay.

And then...

Also one other point, Judy, just to highlight and just to remind you again that if you remember GB, all markets had a great second quarter last year and GB in particular had a very strong volume quarter.

So just think about what you're cycling as well.

Yes, got it, okay.

And then just a quick follow-up on France.

So the post-tax increase in July, any early read in terms of what you're seeing in terms of the tax increases being fully passed onto to the other retail prices and any sort of competitive dynamics that you can read into at this point?

No.

Broadly speaking, I mean, that tax was a reshaping of an existing tax.

So it was slightly different to what was happening in GB.

So the impact was always going to be less.

By and large, we've seen the whole category respond well to the tax.

Again, we've -- absent our customer issue and all of our other customers and channels in France, we were very pleased with the way our businesses performed in the second quarter.

So as we strip out that one-off event, which, again, is now resolved, we continued to be positive on our French business going forward.

Our next question comes from Lauren Lieberman with Barclays.

So, Damian, in your prepared remarks you mentioned efforts that you're putting into kind of, you called it, the fragmented trade.

And so I was hoping if you could just talk a little bit about things you're doing specifically to target, more or less, particularly its untracked channels with some of that fragmented trade?

And where you think, in market, the greatest incremental opportunity would be, right?

We know Spain, obviously, has a very big strength in HoReCa, but I'm admittedly less familiar with France in terms of your HoReCa presence and even kind of, again, that fragmented trade opportunity.

So any color you could offer on sort of markets with biggest opportunity for fragmented trade and HoReCa would be great.

Pretty much -- thanks, Lauren, and that's a topic actually we will recover in a little bit more detail in September.

But just to share with you some of the highlights, as you quite rightly say, probably Spain is one of -- is probably our most developed market in terms of diversified revenue from home, and if you want to call it, a fragmented trade.

Having said that, even in Spain, we see opportunities to further build out our fragmented business.

For example, areas like artwork, education, healthcare are also underdeveloped in our Spanish business.

And if you take that as being our lead market, obviously, as you move back from Spain, big markets like France, GB and Germany, all have an opportunity and are growing faster in the fragmented trade than they are in retail.

So when you look at our pack performance or our channel performance, you are seeing our fragmented business growing anywhere between 2 to 3x what we're achieving in retail.

Clearly, that's being driven by a number of factors.

One, when we put together CCEP, we inherited Europe's largest sales force, so over 5,000 frontline sales operatives.

And that clearly is the muscle of our business.

What we realized is that in a lot of our markets, that asset wasn't being as productive or as effective as it could be.

So we spent a lot of time and money putting digital capabilities into the hands of our sales force.

That is allowing us to increase calls per day, in many cases doubling the calls per day, a sales rep can do.

We are then reallocating that extra call capacity into the fragmented trade.

So we're starting to visit customers, and that we didn't visit are spending more time with customers to grow distribution on our call range and pack.

So that is a multi-year journey.

It's a journey we're very excited about because -- and across these channels our brand and pack relevance is high.

And today, in a lot of those channels you will always find a Coca-Cola Classic and a Diet Coke or a Coke Zero, but the rest of our portfolio is significantly underrepresented.

So as we think about the volume being a bigger part of our revenue story, going forward, a lot of that volume will come from the channels that we're talking about.

So multiyear journey.

I think we're making good progress.

It's being driven by digital.

Spain is at the forefront, but even in that market, we see opportunity, which gets us excited as we look at other big markets, like France, GB and Germany.

But honestly, Lauren, it's an opportunity across all of our markets, and it's something that we believe contributes to our revenue growth in a profitable way going forward.

Okay, that's so helpful.

And then on top of that, you just -- just a quick follow-up, is that, you've mentioned that as volume becomes a bigger part of the equation going forward, it comes from these channels, but I'd also think that price mix should also be positive.

I mean, as you get growth in these channels, it is going to tend to have a more beneficial price mix than traditional big box retail.

So that also suggests great runway on price mix as well.

Yes.

I think we are delivering very, very solid price mix on a per case level since we created CCEP.

Some of that is coming already from progress in the fragmented channels.

So that's starting to come through.

Obviously, to date, the bulk of that price mix realization has come from some bold decisions around promotional pricing, delisting unprofitable brands, particularly in Germany, and working with our sales force to pass on headline pricing.

All those elements will play a role going forward.

I suppose we're calling out volume a little bit more now because as we expand our beverage portfolio, clearly, that contributes to volume, as a lot of these new categories and brands participate in volume.

Our fragmented trade strategy delivers volume growth.

And as we cycle some of the decisions we made in retail, obviously, that will benefit volume going forward as well.

So we still remain very passive about price mix because we believe that is something that's really sustainable.

But probably 1/3 of our revenue growth going forward, a little different by market, will start coming through on volume as well, which gives us a bit more leverage on our P&L as we start to, obviously, absorb a bit more through our supply chain in particular.

So again, more to share in September on those topics there.

They are high in the agenda for our meeting in Wiesbaden.

Our next question comes from Kevin Grundy with Jefferies.

I wanted to pick up -- this is a question for Nik, on cost synergies, which have been, clearly, a material contributor to the company's profit growth.

How do you think about your ability to drive mid-single-digit profit growth as we sort of get to the other side of these synergies?

And I guess I asked that the quick back-of-a-napkin math suggests that your profit growth in '17 and what you're anticipating in '18 is relatively flattish, if we back out the synergies.

And also to, Nik, of course, we recall that you had a productivity program in place prior to the CCEP deal.

Is that something we should expect as you sort of make your way through the synergies, because it just seems like it is driving -- the synergies are driving an outsized portion of the company's profit growth here in recent years?

So any commentary there would be helpful, and then I have a follow-up.

Sure.

So I think, just to be clear, we were very transparent about that as we went into this transaction that the early years you're going to see the profit growth ahead of that mid-single-digit OI growth guidance because of the fact that we were going to be delivering on the synergies.

And we were also focused on making the right decisions and investments to support what will be future profitable top line growth.

So if we then think about what Damian just talked about, things that we're doing in terms of growing our away-from-home, things that we're doing in terms of resetting and making sure that the home business is on the right footing in a lot of ways to give us improved profitability there, but allow us to do some of the things we want to do in the away-from-home, which was, quite honestly, stopping us.

So when we were deeply discounting our products in the home business, that was leading to leakage in the away-from-home business.

That was precluding us from getting our fair share of the growth opportunity there.

So I think if we think about the mid-single-digit OI growth, clearly, we see leverage coming through from the fact that we will now be seeing volume, which we have made strategic decisions and choices to forgo because we wanted to reset that base, as Damian said.

And then the fact that there's continued focus around pricing mix that will come from the channel mix as well as our pack and brand mix going forward.

So I think both those will give us that leverage through the P&L.

Add to that, absolutely to your point, and I've alluded to this several times, synergy capture does not in any way mean that we don't have opportunities for productivity going forward.

And clearly there will be opportunities for that as we continue to look at our business to stay competitive and stay foot -- fit for the future.

So there will always be those opportunities, and I think we will talk a little bit more about that when we're together in September as well.

So more to come in September.

That's helpful Nik, I appreciate that.

One follow-up, if I may, for Damian.

A lot of focus on CCBA, which has moved a bit slower than, I think, all parties anticipated, at least initially.

So James Quincey has talked about the expectation to receive offers in the coming months.

So, Damian, any developments there that would change your view with respect to M&A preference to contiguous territories versus regions that are not adjacent to your current footprint?

So any update there around M&A and CCA -- CCBA thus specifically would be helpful.

Thanks, Kevin.

No change from our side.

I mean, I think we've made it quite clear that we would continue to like to grow the footprint of CCEP.

We've made our preferences clear in terms of areas that we feel would fit best with our current capabilities and footprint.

We've remain focused on managing what we can manage at the moment, Kevin, which is delivering on our commitments, building a healthy balance sheet, paying down our debts, working strategically very closely with the Coke company on a multiyear plan.

And I think that puts us in the best place we could be in to potentially benefit from any M&A activity going forward.

I honestly don't have any insights on CCBA.

You guys probably know more than I do, to be honest.

But clearly, we're watching with interest to see what evolves.

But at the end of the day, we can manage what we can manage and that pretty much is within our control today and we remain focused on that.

Just back to your earlier comments as well, I would also -- if you look back at the first 2 years of CCEP, on the side of synergies, on the other side, we also took the opportunity in '17 to reset our price promo architecture across most of our big markets, and we've had the impact of sugar tax in GB this year.

And I think both of those were, obviously, significant events in parallel to delivering the synergies.

So just to give a bit more color on your comment on synergies.

Our next question comes from Ali Dibadj with Bernstein.

So just, it used to be in the past that a lot of your regions effectively were pulling in the same direction from a client perspective.

And you know more recently since CCEP, but really just over the past year or so, and most questions demonstrate this.

It's been a little bit different, right, so there's been more variability, different features, a little bit more volatility, France and the retail battles a couple of times now, Iberia, with weather, today U.K. sugar taxes, et cetera.

And so I've a few questions about those.

First is does the volatility or the variability change, how you manage and organize the business at all?

Or is everything so decentralized, it really doesn't matter, it doesn't put stress on the organization or on delivering numbers, et cetera?

Second, I know you talked a little bit about France with Steve, but what's the broader struggle here, because we've heard about it before.

Is it the (inaudible) or the retailer, the unknown retailer isn't happy with the profit splits?

Is it health and wellness?

Is there something else going on there that's broader so this could be a little bit more recurring?

And then the third is on GB, again, on the sugar taxes.

I guess the weather is difficult to predict what's going on.

It looks like things are going okay so far.

Are they things you see signs of caution through that uncertainty of weather?

Are there channel shifts going on?

Is there market share losses to Pepsi MAX, given that brand doesn't have to take taxes?

So really trying to get underneath that kind of variability in regions questions.

Ali, I think you got great value out of one question.

So let me start, and I apologize if I missed anything, but I'm sure you'll come back to it.

So on the volatility by market, I think it's very difficult to compare CCEP to what was before.

If you look back, I mean, we're now a business that added to previous CCE, 2 of the world's best Coca-Cola markets, Germany and Spain in particular.

So we added a lot of scale, and we added 2 big markets.

And if you look back at CCEP, the only market that would have been comparable to either of those maybe had been GB, so it is a much bigger business.

And that's a great thing for the management of CCEP and, I think, for the shareholders because it allows us to make choices across a portfolio of markets with scale.

So I think if you look at the results for the first half of this year, if you had a market like Spain, which struggled due to weather, and that was a single business, you would struggle to deliver the results we've delivered.

I think you're seeing the power of our portfolio of countries coming through in our results, in the same period where you had the introduction of a tax in GB.

So we very much view it as a positive.

We manage it strategically.

So we're very clear centrally.

As we do our annual business plans, as we do our 3-year planning, what role we expect each market to play in that period, what are the challenges or opportunities by market, and how do we make the right decision so we can meet or exceed our guidance based on those criteria?

So overall, very positive.

And as we build CCEP, our operating model was designed to get the benefit of the additional scale and allow us, at the right times, to take some difficult choices in a particular market for the longer-term health of the business.

And I think CCE, that was, obviously, a challenge, given that we really didn't have the market to scale that we have today.

If you strip out the markets that we called out today, specifically, you'll see across the other 8 markets extremely healthy revenue growth year-to-date.

So I think our underlying business model is demonstrating the results that we would expect.

On France, it's not a broad issue at all.

As I mentioned earlier, as we've gone through the opportunity mapping for France, we clearly saw that our pack architecture was not mature enough to unlock some of the longer-term opportunities for ourselves or our retailers.

All of the retailers bar one have bought into that strategy and understand the long-term cash generation that will bring for them and also the long-term profitability.

So it's not a wellness or a portfolio challenge.

It was really changing pack architecture.

And that was, obviously, on the back of us also passing on pricing and that was the challenge with the retailer in France.

Having said that, when we look at our share in France, clearly, we can become a bigger player in AOTD.

We are still very much a smart -- sparking player, and we do see an opportunity to broaden our portfolio and we're doing it in France with Honest, particularly in tea, Fuze Tea, to become a bigger beverage player against the health and wellness trend.

So nothing, I would say, structural, nothing that I believe will impact our growth going forward.

In fact, we're quite pleased that we've got through the changes because we do see the power of having a more mature pack-mix architecture being a big benefit for us in France.

On GB, again, nothing to call out significant in terms of channel mix or shifts, no real change in market share.

I suppose we've seen the strength of our competitor in the cola-light category.

We've responded, I think, well with Coca-Cola Zero Sugar, but we are now seeing the benefits of our dual strategy, as Diet Coke continues to play a bigger role in our GB franchise.

So we would expect that both of those brands will participate in the growth of the cola-light or sugar-free category going forward.

There've been no significant channel shifts.

As I mentioned earlier, by and large, our away-from-more or on-premise businesses continue to perform well.

We have benefited from fantastic weather in GB, although it is raining today.

And I would expect, as Nik called out, we'll be able to give a lot more clarity as we get to the end of the year on the longer-term trends, particularly around the sugar tax.

But I would say so far so good.

I hope I didn't miss anything, Ali?

Our next question comes from Bonnie Herzog with Wells Fargo.

This is actually Sam Reid dialing in for Bonnie.

So quick question here.

You've talked a lot about stepped up investments in your employees and your sales force in the past and it really sounds like that's continuing.

That said, I'm just curious kind of as to where you are in terms of that investment process, and how you think about this more broadly in terms of how it will impact your at-home and your away-from-home mix over the long term?

So that investment is kind of coming from 2 pillars.

One is reflected in our CapEx guidance for both '18 and beyond.

So a significant amount of our IT investment, which is reflected in our CapEx, has been to benefit our frontline sales force, our call centers, et cetera.

So that's pretty much baked in to the guidance we've given today on our full year.

On the OpEx cost side, it's really been a productivity drive.

So we had that cost in our P&L already.

We clearly identified that there was inefficiencies getting in the way of our sales force being productive.

So using digital new ways of working and a more segmented approach has allowed us to get more from the same cost base, and we'd expect that to be a benefit going forward into '19 and beyond as well.

Over time, we haven't guided, but we would expect continuously that our away-from-home or fragmented trade will outpace our growth in retail.

I mean, that may differ quarter-over-quarter.

Clearly, our retail business is doing well in a lot of markets.

But I think as we look at where we're allocating our sales resource, where we see consumer spending more time, because frankly in Europe people are spending more time out of home; they're eating on-the-go more.

And we'd expect our revenue mix to reflect that trend.

So as a guiding principle, we'd expect away-from-home to outpace retail growth going forward.

We'd expect small packs to outpace large packs on the back of that, and clearly, that supports our margin and profit goals going forward.

Excellent, and thank you for -- oh, go ahead.

I would just -- sorry, and I would just add to that one point, Sam, that at the end of the day we did indicate that some of these investments were going to be stepped up as we continue to see both the synergy delivery and the business momentum, and those are the right investments to get us ready for the future.

So I think if we look at what we will continue to do going forward, that's kind of baked into how we see our business algorithm.

And just, I mean, another proof point on our focus on operating margin going forward as we innovate into new categories, if you look at our products portfolio of MPD, it is pretty much all focused in IC packaging, glass, small cans, small PET.

So we are quite deliberate about the choices we make in terms of the categories and how we play going forward to make sure we continue that profit mindset into '18 -- at the end of '18 and into '19.

That’s super-helpful clarity really appreciate it.

And then maybe on another topic here.

It's really good to see some of the continued strength we've been seeing in Coke Zero Sugar.

Just curious, though, kind of how long you expect the momentum here to continue?

Well, as we look at our consumer data in addition to our consumers and our customers, I think across our territories, we still see the sugar-free, low-calorie, no-calorie trends continuing.

So we'd expect Coke Zero Sugar to continue to be a brand that leads our growth going forward.

We'd expect to augment that with a stronger role for Diet Coke and Coke Life.

I think that's something that we've missed over the last couple of years.

And we're also seeing the same trend having a positive benefit on brands like Fanta Zero and Sprite Zero.

So no reason to see that slowing down.

We're also particularly excited about the Coke company's marketing platform and some of the package changes we're making around Coke Zero Sugar, particularly moving it to more of a red platform in line with our Coke Classic proposition.

That's something that we're rolling out, starting now in Spain.

And initial results are positive, so we can provide consumers with a chance to drink a classic Coke with or without sugar and in packaging that they're happy with.

So there's a number of initiatives that, we believe, will continue to give that brand and that segment momentum over the next 2 to 3 years and beyond.

Our next question comes from Richard Withagen with Kepler.

I have 2 questions.

First of all, on GB, can you perhaps talk a bit about consumer behavior, especially with regards to Coke -- or classic Coke drinkers?

Have you got any sense of whether they switch out of the classic Coke brand, and where they switch to?

And then the second question, I guess, for Nik, on the free cash flow guidance.

Last year, you made more than EUR 800 million in free cash flow in the second half of the year.

Your guidance for 2018 suggests a free cash flow in the second half of the year of something like the EUR 550 million, EUR 600 million.

So that's quite a big gap with 2017 -- with second half of 2017.

Am I missing something over here?

Thanks, Richard.

On Coke Classic, I think there's a number of dynamics at play.

One, we have proactively downsized some of our packaging, and we've also, as we've talked about previously, backed off some of our really deep revenue promotions.

So I think the volume number on Coke Classic needs to be looked at through -- with those factors considered.

On a revenue level, we see the brand holding up quite strongly.

And I think absent the one-off effects, based on our price mix strategy, in a number of our markets we've seen Coke Classic revenue flatten or, in some cases, even start to grow again.

So I think, that's something that we will continue to look at going forward.

If consumers move out of the brand, and we have seen that, they generally stay within the category, but they move to sugar-free option.

So again, we see Coca-Cola Zero Sugar playing a role there, but more importantly, Diet Coke.

And we also see some consumers moving to flavor and sparkling water.

So initially, they would be the brands that they would move to.

Also the tea category starts to play a bigger role, which is why we're also quite pleased with the launch of Fuze.

So tend to move across a number of beverage options.

However, remain -- the brand remains with a very strong and loyal user base, and we believe the changes we're making on pack pricing will support that going forward, but that's generally where they tend to move to.

And, Richard, on your question in regards to free cash flow, 2 very key points just to keep in mind, that would explain that.

One, remember, we delivered almost EUR 250 million of working capital benefits last year and that was very much back-half-weighted, in fact a lot of that came through towards the end of the year, as we had put those programs and started then seeing the benefits of some of that.

While this year, you're already seeing, if you look at the first half of the year, for instance, a very solid performance on free -- on operating working capital.

And then the second piece is just the timing of some of our CapEx as well.

So those would be the 2 main factors that would have the differences between what you're seeing in half 2 versus of half 2 last year.

Our next question comes from Bryan Spillane with Bank of America Merrill Lynch.

Just 2 quick ones for me.

The first one, Nik, I think if you look at cost of goods per unit for the first half, you strip out the excise and sugar tax in fact, I think it's up about 1%.

So as we're looking into the back half of the year, given what you've said about maybe aluminum cost being a little less than you thought, is it still in that sort of same range in the back half of the year, or will it be any different kind of first half to second half?

No, you will see a step up in the second half, but mostly that's coming from timing issues and when you compare what the comps were for the second half last year versus what they were for the first half.

So the overall guidance of the 2 to 3, an indication that the lower end of that range is what we'd have for the full year means that there will be a step up in the second half of the year.

And that -- but that step-up is more just a function of the year-to-year comparisons more than something sort of inflating?

Exactly, exactly.

And then my second question is just around CapEx.

I think this year capital spending includes $75 million for the capture of the synergies.

So as we're looking out into, I guess, '19 and beyond, does CapEx -- would we expect the capital spending would maybe step down a little bit?

And then maybe related to that, as we're thinking about a mix shift over time that's maybe more away-from-home in away-from-home packages versus at-home.

Does that come with any sort of need for investment in manufacturing to make sure you've got enough capacity to produce maybe different types of pack types?

So, Ron, maybe, on the last comment, that's something that we've been doing since, really, we created CCEP.

So within our underlying CapEx guidance, we've talked about 1/3 coolers, 1/3 supply chain, 1/3 IT as a broad segmentation of our CapEx.

Within the supply chain number that we've talked about, we are including the capability to produce smaller packs, more glass packaging, move to cardboard on some of our can packaging.

So we've started to make that investment a number of years ago as we saw the trends accelerating towards smaller premium packs.

And we'd be -- by and large, we'd expect to be able to deliver on those trends over the coming years within the capital guidance that we've given.

Absolutely.

So I think just to add to that, I think a large part of this synergy capture, CapEx spend will be behind us in -- by 2018.

And as Damian said, investments in new capabilities have been happening and it's not a one-off, right.

You don't suddenly put in 10 new lines anyway.

You're going to continue to build on that, whether it's glass lines, aseptic, et cetera.

So I think we feel comfortable with that midpoint of that 4.5% up to the maximum of 5% of revenue.

But we'll continue to provide guidance on that.

So we're comfortable with that as our free cash flow guidance.

And just, Bryan, just a little bit of context, in that if you are in Europe and you visit any of the supermarkets now across our territories, compared to a couple of years, you'll see glass multipacks available across our brands.

You'll see a lot of mini cans available across our brands.

So we started to diversify our pack mix in retail a couple of years ago, and we've been investing against that.

And that, obviously, reduces our dependence on large PET, which again strategically, we've called out as being a priority for us a couple of years ago.

And, operator, can I just say that we've got time for one more question, please.

Our last question is from Andrew Holland with Societe Generale.

It is just a quick question.

Just building on some of the earlier questions on phasing of how the margin is going to look in the second half.

So the first half margin was up around 60 bps.

You've pointed to a slight step-up in Cokes in H2.

Just taking account of all the other moving parts, how do you expect the second half margin to compare with the first half in terms of growth?

Not at those levels just because you would have the COGS step up.

So I would indicate we've guided towards slight expansion excluding the sugar tax impact in our gross margin for the full year.

So that would, obviously, give you the math for the second half.

And when you say small growth in gross margin, would you expect that to drop through to the EBIT margin?

Absolutely, at a higher rate.

Okay.

But overall, not as big as the first half?

No, clearly not.

Again, go back to timing of what you look at between the first half comps and the second half comps from last year, too.

So I think the more important piece is what we've guided towards for the full year.

Thanks, Andrew.

So thank you, everybody, for taking the time to join our call today.

Just some quick closing remarks from my side.

So overall, we believe we've had a very good first half of 2018.

As you've heard today, our focus remains on driving profitable revenue growth in terms of reshaping our portfolio and building a stronger route to market.

We continue to make some bold strategic decisions for the long-term, in terms of not just portfolio but also pricing.

We're pleased to maintain our profit guidance for 2018, and we're encouraged by the start we've made to quarter 3. Cash remains our focus, and we're very happy to say we've raised our free cash flow guidance today.

And Nik and I and the team look forward to sharing more about CCEP and our growth strategy at our meeting together in September.

Thank you very much, and have a great day, everybody.

Ladies and gentlemen, this concludes today's conference.

Thanks for your participation.

Have a wonderful day.