Coca-Cola Europacific Partners - H1 2021

Transcript

Operator (participant)

Hello, and thank you for standing by. We would like to welcome everyone to today's Coca-Cola EuroPacific Partners H1 2021 conference call. All attendee lines have been muted to avoid any background noise. After the speaker's remarks, we will have a question-and-answer session. To enter today's question-and-answer queue, please press star one on your telephone keypad. To withdraw your question, press the pound key. It's now my pleasure to hand today's conference over to Vice President of Investor Relations, Sarah Willett. Ma'am, I give it to you.

Sarah Willett (VP of Investor Relations and Corporate Strategy)

Thank you all for joining us today. I'm here with Damian Gammell, our CEO, and Nik Jhangiani, our CFO. Before we begin with our opening remarks and our results for the second quarter and half year 2021, a reminder of our cautionary statement. This call will contain forward-looking management comments and other statements reflecting our outlook. These comments should be considered in conjunction with the cautionary language contained in today's release, as well as the detailed cautionary statements found in reports filed with the UK, US, Dutch, and Spanish authorities. A copy of this information is available on our website, www.ccep.com. Prepared remarks will be made by Damian and Nik and accompanied by a slide deck. We will then turn the call over to your questions. Many of the metrics presented today will be on a pro forma basis.

These reflect the results of CCEP and our Australian, Pacific, and Indonesia Business Unit, API, as if the Coca-Cola Amatil transaction had occurred at the beginning of this year. Comparable measures reflect the timing impact of the Amatil deal, which completed in May. The slides and our prepared remarks will distinguish between these two methodologies accordingly. Following the call, a full transcript will be made available as soon as possible on our website. I will now turn the call over to our CEO, Damian.

Damian Gammell (CEO)

Thank you, Sarah, and many thanks to everyone joining us today. Let's start with our half one key takeaways. A strong performance delivered by highly engaged colleagues in quite a dynamic environment, so to all my colleagues, I'm sincerely grateful for the hard work and commitment that you've all shown to CCEP, and continue to show as we close out 2021. We are again the number one FMCG customer value creator in Western Europe, and I'm very pleased to say that we continue to win market share both in-store and online across the NARTD category. Critically, we are continuing to accelerate our investments across two key areas, our sustainability agenda, alongside our ongoing digital transformation, and I'm very pleased that the integration of API is well underway, and we are working on joint growth plans with the Coca-Cola Company as we look forward to an even more exciting 2022.

We have a simple but vital purpose as we move forward as Coca-Cola EuroPacific Partners, to refresh Europe, the Pacific, and Indonesia, and critically, to make a difference for all our communities and our stakeholders. We do believe in a bright future for our business, led by our aspiration to be the world's most digitized Coca-Cola bottler, and as I mentioned earlier, our strong commitment to delivering on our ambitious sustainability agenda. We have a solid track record of delivery and execution, and I'm very pleased we do retain our number one position as customer value creator in Western Europe. We are fortunate to operate in a highly attractive, valuable, and growing category. With our exciting portfolio of brands, products, and packaging, we enjoy scale and a leading position across all our geographies.

We also have a great opportunity to continue to unlock the potential of our newly acquired business unit, API. We continue to position ourselves to be fit and competitive for the longer term. Despite COVID, we have continued to invest for long-term growth, particularly in our portfolio, our people, our digital journey, and our sustainability agenda. We know we will go further together, creating greater, more sustainable value for all of our stakeholders. We have a simple focus around great people, great service, great beverages, done sustainably for a better shared future. So now I'd like to touch on each of these areas as we look back on the first half of this year. As you know, the well-being and safety of our colleagues is our absolute number one priority.

We continue to support our colleagues through the evolving challenges of the pandemic, as well as the recent widespread flooding that unfortunately occurred in Belgium and Germany. We continue to work to break down barriers to inclusion. Our colleagues celebrated Pride across many of our sites and offices and shared photos and stories on our digital communication platform, Redline. In New Zealand, we were thrilled to be named New Zealand's Employer of Choice 2021, the only company to receive a Gold Award in three consecutive years. And across CCEP, we're also recognized as a great place to work, with strong engagement shown in our first global engagement and culture survey as Coca-Cola EuroPacific Partners, which has been recently completed. Great service is critical for our customer growth story and engagement.

Supporting our customers and the reopening of HoReCa has been a key priority, and we launched a number of initiatives across all of our markets, such as We Are HoReCa campaign in Spain and a customized digital support program in France and Germany. In Europe, our focused and creative Euro football activation generated great excitement, not just for our customers, our colleagues, but also, of course, for our consumers, as lockdown eased and people could do what they love to do across Europe during the summer, get out and about, and enjoy a Coke with friends and family. And despite these challenges of the pandemic, we have maintained high levels of customer service in the high 90s, and we will continue to invest in capacity to support our growth and our revenue growth management initiatives.

This includes placing over 50,000 cold drink equipment units in the first half of this year, increasing our canning capacity and efficiency, and accelerating our insourcing plans. This year, we've already installed can lines from Papua New Guinea, an aseptic line in France in the first half of the year. And we've launched StarStock, an online marketplace in GB, and Wabi, a B2B ecosystem platform in Portugal. Both via our ventures, our CCEP Ventures. As we continue to explore and progress new models that make it easier for our customers to do business with us. And lastly, we're extremely privileged to make, move, and sell the best beverages in the world. Both Coca-Cola Zero and Monster continue to outperform across all of our markets in the first half. Our new taste, new look, and new campaign for Coca-Cola Zero Sugar in Europe has been a great success.

Our Monster innovations have supported impressive growth. Mule, Ultra Fiesta Mango, and Monarch launched in eight of our European markets, and we also launched Monster Super Fuel in Australia and New Zealand. We're very excited about Costa Coffee, and we are readily expanding this brand outside of GB. We are making good progress in Germany, Belgium, and Norway, and we recently launched Costa Express in Spain. In Indonesia, we launched a new and well-received Fanta flavor, Coco Pandan, for Ramadan. And Topo Chico continues to be an exciting opportunity, now launched in six of our European markets. As we progress on our commercial agenda, we do this with a mindset clearly focused around sustainability, and we know we need to go further and faster on this agenda.

Carbon reduction is at the heart of our business as we move towards our Net Zero greenhouse gas emissions target by 2040 across our entire value chain. Contributing around 40% of these emissions, packaging is clearly front and center, and I'm pleased that we are making progress on a number of fronts. Across Europe, we are continuing to accelerate our rPET plans toward our ultimate goal of 100%. In Australia, we have signed up to a JV to build and operate a new PET recycling facility, expected to process 1 billion bottles per year and produce over 20,000 tons of recycled PET across the partnership. And likewise, in Indonesia, we have announced an industry collaboration to construct a recycling facility that will have the capacity to save 25,000 tons of virgin plastic each year.

This will help stimulate the recycling industry in Indonesia and accelerate much needed improvement in recycling rates. Both collaborations are a step forward towards creating a circular economy for PET within our industry. Beyond packaging, I'm also extremely proud to achieve carbon neutral status at two of our manufacturing sites in Spain and Sweden, with the aim of extending the certification to a further four sites by the end of 2023. We have met the global benchmark for responsible water stewardship in the Netherlands, making this plant one of just five in the Coca-Cola system to achieve such an accreditation. And finally, we recently signed up to the EU Code of Conduct for Responsible Business and Marketing Practices, which aims to make healthy and sustainable food choices easier for our consumers.

So all in all, a great first half towards a better shared future, with a clear acknowledgement that there's more to do and we must go faster. Just turning now to our performance. We are pleased to report a strong performance in the first half. We continue to win with our customers, having created more than double the absolute value sales increase compared to any of our peers in Western Europe. Supporting the reopening of HoReCa has been a key area, as I touched on earlier. A strong performance from our core brands has led to some great share gains, both in store and critically, online. Across our combined markets, we gained 90 basis points of share in flavors and 170 basis points in energy.

Our European markets. In our European markets, our energy portfolio has gained nearly 300 basis points of value share since 2019. The performance in Europe was supported by the new Monster flavors, wider distribution, resulting in an impressive volume growth of 50% versus 2019. Meaning we are well on track to double the size of our European energy business relative to 2019. All of these elements combine to deliver a very solid top-line performance. The 6% increase in pro forma comparable volume obviously reflect the easing of restrictions in Q2 and the soft prior year comparables. As you will recall, Q2 was the worst impacted period last year. We've been encouraged with the pace of volume recovery, and I'm particularly pleased that our continued focus on revenue growth management has driven growth in revenue per unit case above pre-pandemic levels.

And impressive results, given the mixed headwinds we've continued to face during the first half of this year. We are moving at pace to accelerate our digital capabilities, and I'll come back to this on the next slide. We do remain focused on efficiency and are on track to deliver the efficiency programs and the combination benefits that we shared with you earlier this year. And finally, we've made a great start with the API integration, going further together, and I'll provide a little bit more detail on this later. So to some highlights on our digital transformation journey, a critical journey for all of us at CCEP, as we aspire to lead and to be the world's most digitized Coca-Cola bottler.

We have seen continued share gains and strong performance in online grocery, with our RSV up 28% and our online grocery share up by 100 basis points. In Europe, our beverages were also the most ordered beverages on food aggregator platforms. Our own B2B portal, myccep.com, is on track to deliver a record year of over EUR 1 billion in revenue. We expect the number of customers using the platform to reach 90,000 by the end of the year, an increase of over 150%. In GB, StarStock was launched in partnership with CCEP Ventures. StarStock is an online marketplace which enables licensed venues to order directly from major drinks companies and brewers. It's a great example of how our ventures platform is focused on identifying strategically relevant partners that can help CCEP make our business more efficient, sustainable and future-proof.

I'm also very excited that we've launched Wabi, a new eB2B platform in Portugal. We continue to develop our D2C platform, Your Coca-Cola. Encouragingly, the platform's average order value is increasing. This is aided by recent product innovation, subscription services, and special bundles for special occasions. One recent innovation was the launch of Personalized Cans, a great and fun way for us to engage directly with our consumers. We are taking learnings and generating valuable consumer insights. We're partnering with the Coca-Cola Company to leverage the power and insight of the system as we progress on our digital journey. From a supply chain perspective, achieving a single integrated source-to-pay process and touchless invoice automation through the implementation of SAP Ariba will provide over 100,000 hours of efficiency savings.

In the workplace, we recently launched Compass, which brings all of our workplace digital services together, making it easier for all of our colleagues to find the tools they need when they need them. The use of automated translation is also driving time and cost efficiencies across CCEP. On that note, I would now like to hand over to Nik to talk more in detail to the financials. Nik?

Nik Jhangiani (SVP and CFO)

Thank you, Damian, and thank you all for joining us today. Let me start with our half one financial summary. I will touch on each of these now and go through some more detail shortly in each of these areas. So starting with our pro forma revenues at EUR 7 billion, that's an increase of 11.5% on an FX neutral basis. Our pro forma COGS overall was up 10%, and on a per unit case, increased by 1.5% on a pro forma comparable and FX neutral basis. We delivered pro forma comparable operating profit of EUR 802 million, up nearly 60% on an FX neutral basis, reflecting the growth in our revenues and the benefit of our ongoing efficiency programs and our continuous efforts on managing the discretionary spend areas closely.

Our comparable effective tax rate declined to 21% from 24% last year when calculated on a similar basis. The reduction is driven by the utilization of previously unrecognized losses and reassessment of our uncertain tax positions. This resulted in comparable diluted earnings per share of EUR 1.09, up 87.5% on a comparable and FX neutral basis. Free cash flow generation continues to be a core priority for us, and we generated strong free cash flow of approximately EUR 650 million on a comparable basis. Now, looking at the pro forma revenue highlights, the increase was driven by both an increase in volume and importantly, our revenue per unit case. As mentioned earlier by Damian, we're encouraged by our volume performance in Q2 as we lapped the worst impacted period from last year.

Revenue per unit case grew by 3% versus 2020, reflecting positive pack and channel mix following the re-openings in the away from home channel, positive brand mix and favorable underlying rate increases, and encouragingly, we're up 0.5% versus 2019, despite the mixed headwinds. Unsurprisingly, the most significant improvement has been in our away from home channel, as restrictions eased and mobility generally increased towards the end of the second quarter. As a result, versus 2019, the away from home channel was down 22% in the first half. Strong trading in the home channel continued, benefiting from the increased at home occasions, as well as continued growth in online grocery, with volumes up 3% versus 2019 during half one. Overall, this meant that total volumes were down 7.5% versus 2019.

From a pack perspective, on-the-go immediate consumption was positively impacted across both channels, with volumes doubling in Q2 in Europe due to increased mobility. Now, if you look at revenue by segment, you'll obviously see more detailed commentary by geography in the release. But on an FX Neutral basis, Europe revenues were up 10.5% in half one versus 2020, and down 8% versus 2019, reflecting the reopening of away from home during Q2 and tougher restrictions obviously in Q1 when you compare with last year. On an FX Neutral basis, API pro forma revenues were up 15.5% in half one and flat versus 2019, reflecting the minimal restrictions in place in Australia and New Zealand through the first half of the year, which has obviously changed during the last few months.

As I mentioned earlier, strong second quarter performance was driven by the reopening of away from home in Europe and cycling of softer comparables in both segments. We are now well progressed into the third quarter, a quarter that last year started to see an initial easing of restrictions, therefore resulting in tougher comparables compared to Q2 last year. While we're encouraged by the broad-based recovery we're seeing across our markets and therefore remain cautiously optimistic, we are seeing several challenging factors at play. Generally, the weather has been colder and wetter across most of our markets. Softer international tourism, given ongoing travel restrictions, is impacting markets like Spain, Portugal, and France, and of course, renewed restrictions in Australia, New Zealand, and Indonesia, as I referenced earlier.

As I will talk to in a moment in the context of commodities and OpEx, clearly we're seeing pressure on global can supply, which does remain alongside increasing pressure on cooler availability, especially in Great Britain. As a result, our Q3 quarter to date pro forma volumes for July and August are slightly down versus 2020. We will, of course, update on this at our Q3 trading update in November, and this has been factored into our guidance for the full year that I will discuss in a few moments. Moving now to look at COGS. As you are aware, typically around 85% of our total COGS are variable. This includes our concentrate purchases and finished goods, accounting for 45%, which have naturally increased in line with our incidence model, reflecting the improvement in revenue per unit case that I talked to earlier.

Commodities account for further 25% and have been mainly adverse, with higher aluminum, sugar, and PET prices. I will go into more detail on the upward pressure we're seeing on commodities on the next slide. And finally, approximately 15% relate to manufacturing and D&A, both of which are largely fixed. As expected, we saw positive impacts on our COGS per unit case, resulting from the favorable recovery of fixed manufacturing costs, given the higher volumes during the first half. And as the mix favorably comes back into the top line, this has a COGS impact for us as well. So when you combine all these factors, this has resulted in COGS per unit case increasing by 1.5% on a pro forma comparable and FX neutral basis.

While there continue to be a number of moving parts, I do want to take the opportunity to give some color on commodities as well as the current view on COGS per unit case for the full year. As you can see from this chart, we are experiencing upward pressure, with total commodities up around 2% in the first half. Unsurprisingly, aluminum is a significant driver of the increase due to the movement in global spot prices and pressures on can supply. We're accelerating the use of recycled PET across our portfolio as we progress towards our sustainability commitments, and we're also seeing higher recycled PET prices due to increased market demand versus feedstock. Virgin PET and sugar prices are also increasing, but due to our hedging profile, we expect the impact from these elements to subside next year.

As we look out to the remainder of the year, our commodities exposure is largely hedged at over 90% for both API and Europe for 2021. Taking all this into account, we anticipate commodities inflation of around 3% for the full year, so clearly an upward trend in half two this year versus the first half. This translates to our latest view on COGS per unit case for the full year, assuming volumes continue to recover of an increase of around 2% on a pro forma comparable basis. As you will see here, we are approximately 40% hedged on commodities for next year, so we currently expect to see an increase in the range of mid- to high-single digits when compared to 2021 on our commodities exposure.

We continue to look at the right trigger levels to lock in more of our exposures, depending on market conditions, and will update you as appropriate. We do have several levers to manage through these pressures on a multi-year view.... As you will have seen, we have been successful in driving underlying price during the first half, and we'll continue to focus on this with our customers as we look to create value jointly with them. As our volumes continue to normalize, we expect to benefit from positive mix and continued operating leverage, and we continue to identify and take meaningful actions on our wider cost base to be fit and competitive for the longer term, which I will touch on next.

As we look at the efficiencies, as we communicated earlier in the year, both Europe and API are committed to rebasing their cost base versus pre-pandemic levels, alongside announcing wider efficiency programs. As a reminder, we announced EUR 200-225 million efficiency savings in Europe and about AUD 145 million, or EUR 90 million, for API. We also communicated combination benefits of EUR 60 million-EUR 80 million, weighted to 2022 and beyond, from procurement, supply chain best practice sharing, and group functional costs and listing structures. These pre-announced efficiency savings and combination benefits equate to EUR 350-395 million in total, on which we remain largely on track.

These ongoing programs, along with our continuous efforts on discretionary spend optimization, are helping us protect profits and margins in the short term, while ensuring that we will be fit and competitive for the longer term. In absolute terms, you can see, despite the increases in volumes in the first half, our total OpEx was broadly flat. Or as a percent of revenue, our OpEx is lower now, not only compared to last year, but more importantly, compared to pre-pandemic levels. Although a great achievement at the half year point, we would anticipate some volume-related increases in OpEx as the recovery continues. Our focused investments in DME to support that recovery, and as I mentioned earlier, we also need to manage the business to mitigate as far as possible against some upward inflationary pressures in areas such as labor and haulage.

Now moving to guidance for the full year, which reflects our current assessment of the scale and magnitude of the pandemic and the continued uncertainty around the pace and timing of the recovery. We expect full year revenue growth of 26-28% and operating profit growth of 40-44%. Each of these growth figures are on a comparable basis and therefore reflect the timing of the acquisition of Coca-Cola Amatil, which completed in May and are based on actual FX rates. We are also guiding to a full year effective tax rate of approximately 20%, down from 24% last year, when calculated on a similar basis. The 20% effective tax rate equates to around a EUR 0.18 increase to the current Luma consensus on EPS, which is available on our website.

The expected reduction from 2020 is largely due to the utilization of previously unrecognized losses and reassessment of uncertain tax positions, as I touched on earlier. Our latest estimate for 2022 is between 21% and 22%, and therefore we expect to see some upward pressure, driven mainly by the anticipated increases in corporate income tax rates in certain markets. Finally, we're also reiterating our dividend payout ratio of approximately 50%. This will, of course, be based on the enlarged earnings base of the combined business, on which we will update for 2021 with our Q3 trading update. Finally, as I mentioned at our investor event in May, the Amatil transaction firmly underpins our medium-term objectives, giving us greater confidence in our revenue and operating profit growth ambitions.

We increased our free cash flow target to at least EUR 1.25 billion per annum to reflect the greater incremental cash generation, giving us the confidence to commit to returning to our target leverage range of between 2.5-3x net debt to adjusted EBITDA within a 3-year period. And in line with the guidance I just mentioned for this year, we will continue to maintain our competitive and progressive dividend payout ratio at around the 50%. So with that, I'm going to hand back to Damian for some closing thoughts, and then we'll take Q&A. Thank you. Damian?

Damian Gammell (CEO)

Thank you, Nik. Just now to touch on the very exciting Amatil transaction. As a reminder from our investor event, we truly believe that this transaction is a great move, and it happened at the right time. The recent news of New Zealand being crowned champions of the 2020 Candler Cup, an annual global Coca-Cola system bottler competition, is a great example of us acquiring a business with momentum and a business which we can learn from in Europe. The tangible top and bottom line growth story, combination benefits and best practice sharing, as well as an even stronger relationship with The Coca-Cola Company and our other brand partners, are all reasons that this transaction will create significant value for all our stakeholders.

It is indeed a really exciting opportunity for all of us at CCEP. On the integration, we are well underway, and I'm extremely pleased with the progress we have made in the first 100 days. We have key talents in place, including Jorge, our new GM of Indonesia and Papua New Guinea, who recently joined us from one of the Mexican Coca-Cola bottlers. Jorge has extensive emerging market experience and is a great addition to our team. From a digital perspective, we've started on the journey to bring our people together, systems and processes to allow us to collaborate and operate as one across multiple time zones. We are already sharing learnings and best practices, and one example of this is in the excellent use of analytics that the Australian business has been doing for a number of years.

And as Nik mentioned earlier, we are making progress on our efficiency programs and the combination benefits we are committed to deliver. We've also been simplifying our ways of working, such as acquiring the minority interest in Paradise Beverages, our alcohol business in Fiji. And arguably, most importantly, we are already creating long-term growth plans with The Coca-Cola Company to better align our portfolio, focusing more on the core. The sale of our minority interest in Made Group, a coconut water, premium juice, and yogurt business in Australia, is a great example of this, and we look forward to updating you on further momentum in due course. And close to our heart, as you know, we're all working on aligning our sustainability commitments across the broader CCEP. Now, looking forward to the second half of this year.

In a nutshell, this is a slide we showed at the investor event in May, and our priorities have not changed. We continue to work successfully on the integration of API. We are focused on growing our core and creating value for our customers. And as I said earlier, we are making great progress on our digital transformation, both to maximize the opportunity online and also to better support our customer, consumers, and employee needs. Investment in our people, their development, and well-being is always front of mind as we continue to go further together and navigate the ever-changing situation around COVID. And as always, our focus on sustainability will remain as we want to accelerate our journey to net zero.

As you will have heard today, we are making great progress in this area, and following completion of a review of this area in API, we will be able to align and update our targets at a CCEP level. So with the rest of 2021 in mind, and indeed beyond, here are some examples of what I am especially excited about. We will continue to support our customer as the recovery from the pandemic continues. We will be helping our customers on their journey to Net Zero through, for example, our involvement in the Net Zero Pub and Bar Initiative in GB, a project aiming to raise awareness of the climate impact in the hospitality sector.

On the core, watch out for the new Coca-Cola No Sugar taste and packaging launch in Australia and the exciting new look to our Coca-Cola Zero Sugar and vanilla variants in GB, both of which will be supported by exciting and new marketing campaigns. We will continue to roll out our Costa Express machines across Europe, with new Gingerbread Latte ready-to-drink innovation on its way for Christmas. As I mentioned earlier, we are well on track to doubling our European energy business. Monster will drive more innovation, including new flavors, especially across the performance energy range through the Reign brand. Last but not least, the continued rollout of Topo Chico. It is still early days, but we are seeing positive initial results in all of the six markets in which we've launched.

We will start to move into the away-from-home channel with dedicated plans in Spain and the Netherlands, and focusing on building that brand and category awareness throughout the months ahead. Finally, to close with the key takeaways for half one, which I shared with you at the beginning of this call. A strong performance delivered by highly engaged colleagues at CCEP, to whom I'm sincerely grateful. We are, again, the number one FMCG customer value creator in Western Europe, and I'm pleased that we continue to win share in the market with both gains in volume, value, in store, and online. Importantly, we continue to accelerate our sustainability investments and also to invest heavily in our ongoing digital transformation. As I mentioned earlier, the integration of API is well underway, and it is very much now part of the CCEP family as our sixth business unit.

We're very excited with the growth plans we're developing with the Coca-Cola Company for Indonesia, in particular, over the coming years. Now we would like to open up for questions. Over to you, operator, and thank you.

Operator (participant)

Thank you. As a reminder, if you would like to ask a question, please press star, then one to join the question queue. Once again, that is star one to enter the question queue. We're going to pause for just a moment while we compile that roster. Our first question today is going to come from the line of Bonnie Herzog, Goldman Sachs.

Bonnie Herzog (Managing Director)

Thank you. Hi, Damian and Nik.

Damian Gammell (CEO)

Hey, Bonnie.

Bonnie Herzog (Managing Director)

Hi. I was hoping to get some color on your recent pricing actions and how these have been received in your markets. I guess, you know, in general, have retailers been accepting, and are you finding that your pricing actions have been sticking? And then finally, you know, how are you guys thinking about pricing in the balance of the year, and how aggressive do you think you might need to be to, you know, potentially offset some of the inflationary pressures, you know, certainly that you're seeing? Or maybe touch on what other levers you can pull to offset some of these pressures. Thank you.

Damian Gammell (CEO)

Hi, Bonnie. Yeah, we're on pricing for 2021, as you know, I mean, most of that really was concluded at the end of 2020 and into the first quarter this year, as we finalized our kind of broader customer agreements. So clearly, we are happy with the level of pricing we're seeing in 2021. And, you know, that's definitely supporting, you know, a very strong first half of the year, and we'll continue to support our performance into the second half of the year. We've also been, I think, you know, really starting to benefit from some of the investments we've been making back since 2018 and 2019 around our Revenue Growth Management strategy and tools.

I suppose one of the metrics that I'm particularly happy with is that our revenue per case is ahead of nineteen this year, which I think is a phenomenal achievement, given some of the mixed headwinds from a channel perspective we've endured. So I think we are getting the pricing. We are managing it smarter through RGM. And clearly, as we look through the second half of this year and into 2022, that's going to become a capability that we're going to need to use even more to offset some of the headwinds that Nik alluded to around some of the commodities and ultimate cost pressure. We're having those conversations already. I mean, this is not new news to anybody, so we're engaging with our customers to you know, to look at our pricing plans for 2022.

They will be, as in other years, finalized more towards the end of the calendar year and into the first quarter, and we will obviously be updating everybody on how they're progressing. But obviously, it's going to be a different type of pricing environment when you look at some of the headwinds that, you know, ourselves, our competitors. And let's not forget, our customers in Europe are also big suppliers in their own right. So, these headwinds are really being felt by everybody. So from that perspective, we're confident that we're going to be able to navigate those challenges. We see them more shorter term in nature, so we are not going to do anything that will jeopardize the long-term health of our category of our brands.

But ultimately, a combination of price mix for 2022 will be what we need to offset those headwinds, particularly in aluminum. But we're already working on that, as I said, engaging with our customers. So for 2021, I'm very happy, and I'm particularly happy with our net revenue per case performance. For 2022, great line of sight and visibility on the challenge, which always helps, and critically, good capabilities inside CCEP now to make sure we can, you know, pass on that pricing in a sustainable way so we don't do any, you know, long-term damage to the health of our brands and to our consumers. So, yeah, that's how we're looking at pricing at the moment, and clearly, we'll update as we get into those discussions at the end of this year and into Q1 2022.

Bonnie Herzog (Managing Director)

Okay, thank you. I'll pass it on.

Operator (participant)

Thank you. Our next question is going to come from the line of Eric Serotta with Evercore ISI.

Eric Serotta (Managing Director)

Hi, thanks for the question. Could you address any of the supply constraints that you're seeing across Europe or any of your markets more broadly? Is it impacting your cost of goods more, or are you seeing any top line impact from supply constraints on the can side or the logistics side?

Damian Gammell (CEO)

Hi, Eric. Yeah, we've had, again, in line with the industry, some interesting challenges in 2021, and I suppose the broader one has been around some pressures around aluminum and can supply. I think our supply chain team have done a really good job sourcing cans to minimize our out-of-stocks. Our customer service levels remain in the high nineties, so it hasn't really impacted our top-line performance, or our customer service levels, and that's been critical for us to maintain that. We've had some unique situations, in the UK, where I'm sure you've read there's some haulage shortages, so we're working with our customers to minimize the impact of the haulage shortage. And again, you know, we're looking at innovative ways to mitigate that as we go into 2022, using, you know, different transport solutions.

We've had a couple of one-offs in Germany and in Belgium around flooding in a couple of our water plants, but again, relatively small in the total mix of our business. So, it has been a challenge, but, you know, I have to say, when I look at the service levels that we've been able to sustain, our team has done a great job, you know, mitigating that. And I'll just pass over to Nik in terms of the impact it's had on our costs.

Nik Jhangiani (SVP and CFO)

Yeah, and I think as we've highlighted, you know, clearly some of those challenges that went through in terms of our outlook for half two, in terms of our costs and mainly coming from can supply shortages, and then also just the pricing of aluminum stock prices significantly higher than what we had forecasted. So that's been factored into the costs guidance, but more importantly, then into our overall guidance. We are seeing some OpEx pressures in some of the markets, as Damian just alluded to, GB in particular, with some labor and haulage issues. But again, that's all been factored into our thinking for 2021. Damian just talked about, you know, the type of actions that we'll be taking for 2022 to protect the business longer term.

Eric Serotta (Managing Director)

... Great! And then a quick follow-up. In terms of Australia, I know no transactions have been announced yet, but could you provide us any update on, you know, your big picture thinking about the portfolio cleanup work that you had alluded to needs to be done there? Where are you in the process? Where are you in the evaluation of the process, and any update or high level color you could provide would be helpful.

Damian Gammell (CEO)

Yeah, that work is ongoing, Eric, and it's something that we identified early on in the transaction as being a source of value for the system, both for us and the Coke company, to align our brand portfolio a lot better. So, since we've, you know, concluded the transaction, we've been working with Peter West and the team and the Coke company in Australia to really set out a medium to long-term view of the category. That work is now concluded, and then we're now just finalizing, you know, within that landscape, what are the brands that we believe we need to win and create value, you know, over the next two to five years?

That work is where we're at the moment, and then clearly, that will lead to some decisions around brand ownership and the tidying up of the portfolio. And maybe, Nik, you want to comment on the timing of that piece?

Nik Jhangiani (SVP and CFO)

Yeah. So as Damian said, we're working through that, and we're looking at what we might do with our brand partner, in particular with Coca-Cola, when we look at some of those portfolio choices for water and flavors, as we've alluded to. And then we're spending some time also assessing what is the right, you know, longer term profile of some of the other categories, such as coffee, beer, cider, et cetera. So we're working through that. So I think we'll be able to give you an update, hopefully towards the end of the year, but all very much on track, and on target with our plans.

Eric Serotta (Managing Director)

Great. Thank you very much. I'll pass it on.

Damian Gammell (CEO)

I think the good news on that, Eric, as well is, it's really confirmed a lot of our pre-deal assumptions on our ideas, so we're very happy with that as well. Thank you.

Eric Serotta (Managing Director)

Terrific. Thanks.

Operator (participant)

Thank you. Our next question is going to come from the line of Sanjeet Aujla with Credit Suisse.

Sanjeet Aujla (Managing Director)

Hey, thank you. Thank you, guys. A couple of questions from me, please. Firstly, I guess one for Nik on the commodity cost outlook into 2022. Is it reasonable to interpret that mid to high single digit guidance on commodities as a sort of one and a half to two and a half costs per unit case impact, or should I be assuming some mix impact on top of that? And then just on the tax rate guidance, going up slightly 21%-22% next year, is that a reasonable range to think about more medium term? And are there any cash tax implications we should be factoring in above and beyond that P&L tax rate? Thank you.

Nik Jhangiani (SVP and CFO)

Hey, Sanjeet. On the commodities guidance, right now, obviously we're working through various elements on overall COGS, so it's going to be a little premature. But, you know, as I said, as you're aware, the overall profile of our COGS mix, you know, post the acquisition still remains largely similar. So you're looking at about 25% of overall COGS being the commodities piece. Now, clearly, as Damian alluded to, we will be looking at pricing, which clearly has an impact on concentrate, in line with our incidence model. And then, two other factors. I think recovery will continue, and volumes will come back, which will support us on the manufacturing side. And then, you know, clearly, I think, mix should be a net positive.

Obviously, that will have a COGS impact depending on the revenue mix implications as well. So early days to give you overall COGS guidance, but, you know, you can clearly look at our trends of what we've seen in years, you know, 2018, 2019, and be able to assess some initial estimates based on that commodities guidance. In relation to the tax question, you know, obviously, clearly, we continue to look at this in terms of what is that medium-term impact look like. I think from an angle of 2022, we've given some range. I think that should be doable in 2023 as well. Remember, the one main factor we need to keep in mind is, are there any statutory rate changes that can continue to come about?

Today, the only one that we know about is what is planned for the UK, in that move in 2023 and 2024. But, you know, potentially, that might be reassessed as well. So we'll continue to keep you updated on that. But at least for the next couple of years, absent rate changes, we see that 21%-22% being sustainable.

Sanjeet Aujla (Managing Director)

Got it. And just on cash tax, should that differ from income tax to P&L tax?

Nik Jhangiani (SVP and CFO)

Well, the cash tax piece will continue to defer, but you won't. In the past, we've seen a bigger delta between the effective and the cash tax rate. You know, you will see that delta narrow, so I don't think you will see as much of an impact on the cash tax piece.

Sanjeet Aujla (Managing Director)

Got it.

Nik Jhangiani (SVP and CFO)

But that's in line with what we've been having in the past.

Sanjeet Aujla (Managing Director)

Great. Thanks. I'll pass it on.

Operator (participant)

Our next question is going to come from the line of Edward Mundy with Jefferies.

Edward Mundy (Managing Director)

Afternoon, Damian. Afternoon, Nik. Two questions, please. The first is on your guidance for the full year, and I appreciate it's really difficult to guide when the world's still so fluid, and no one's got a crystal ball. But are you making any specific assumptions around the COVID situation within the guide? For instance, do you think or do you assume that things improve in API into Q4, and do you assume that things deteriorate in Europe into Q4 with the flu season? Then the second is on the EUR 350-395 million of savings. Are you able to update us on sort of how much is done, and any more color on the phasing for the remainder of this year and also into next year?

Nik Jhangiani (SVP and CFO)

Yeah, I mean, on the guidance, we've assumed that, you know, clearly there will be a reopening in API coming about in Q4, and that's based on what is known in the public domain today, which is kind of indicating that, you know, probably September-ish, or end thereof, things should start opening up, so we're continuing to watch that. The good news is that the impact has not been as severe, given some of the restrictions, and the business continues to perform strongly, despite some of those challenges. In Europe, obviously, we are not planning for anything significant or catastrophic in terms of changes for Q4 right now, and we expect and hope that the current trajectory should continue.

So, you know, obviously, it would have been kind of crystal ball gazing if we tried to make all kinds of assumptions because we just have to go with what we know today. In terms of the 350 to 395, I would say to you, everything's very much on track, in terms of that delivery. The phasing, of what we had committed to for twenty twenty-one, in particular, I would say to you, all indications are we will deliver right on, if not slightly ahead of, those numbers, but that's been factored into, the range of guidance that we've provided.

And as we finalize some of our plans, you know, particularly as we look at areas that we might be able to offset some of those challenges from commodities, inflationary pressures, et cetera, we'll work with the business units to see how might we accelerate some of those into 2022 versus 2023 and 2024, but we'll provide you an update on that probably late in the year.

Damian Gammell (CEO)

Yeah. I just wanted to give a bit more color to Nik's comments. I mean, I think on API in particular, you know, we've been very pleased with how that business has performed in spite of these new lockdowns, and I suppose we are learning to operate and perform with lockdowns, and I think API is demonstrating that at the moment, and I think that's great. As we look through the second half of the year, I think it's really a positive that we could give the guidance we gave. I think that demonstrates our confidence in what we're seeing in our business, despite some of the macro uncertainties.

I suppose another element, certainly those of us based in the UK. You know, I'm happy to say that I could talk about the weather being a challenge in the second half of the year, particularly as we came out of June. I think, you know, that's also something that we factored in when we looked at our full year outlook. As a bottler, it's kind of nice to be able to reference the weather on an earnings call again. As we look through to 2022, I suppose we have seen the re-openings in 2021 being a little bit slower and a bit more patchy than we would have liked. Having said that, we're. I still believe we're delivering great results in spite of that.

That will obviously, you know, we believe, come back even stronger in 2022. So when we look at some of those pressures, that we've talked about on the call, there's also going to be a mixed, benefit for us as we see away from home, having a full year of more reopening, as we get through the end of 2021 into 2022. So that's also something that we're, you know, we're excited about as we look through 2021 and into 2022.

Edward Mundy (Managing Director)

Thanks, Damian. Just a quick, quick follow-up on Coke Zero, which has seen really good traction, up 10% versus 2019 levels. Could you perhaps, you know, give us your view on sort of how much more of a penetration opportunity, you know, what's the type of runway you've got for Coke Zero, you know, given the money that's gone behind it and also the reformulation?

Damian Gammell (CEO)

Yeah, I think we've got a lot of runway, Ed. I think we've landed on a formulation that's been really well accepted in the market. I think the visual identity looks great. You know, we've had a number of different graphic iterations on Coke Zero, as we've developed that brand. I think we've now landed on a look and feel that consumers are giving us positive feedback. You know, if you've been in any of our stores, it looks great on shelf. And that momentum has given us more confidence around some flavor innovation, which will be coming, and then also continuing to evolve some of the pack variety. So I see that brand format being a big part of our growth, for a long time to come.

It's playing, you know, against two of the real positives in the category at the moment, you know, obviously, great taste, and the sugar-free momentum. You know, certainly in some markets, that's still got a long way to go. We're excited about it, and it's, as I said, it looks great on shelves. So I think that's gonna be a big part of what we'll be talking about for the next few years.

Edward Mundy (Managing Director)

Great. Thank you.

Operator (participant)

Our next question is going to come from the line of Mitch Collett with Deutsche Bank.

Mitch Collett (Director)

Hi there. I've got a couple of questions back on commodities. Can you give the 40% hedge rate, which is very helpful? Are you able to comment on whether or not that's the normal level of hedging at this stage of the year? I guess we're three-quarters of the way through 2021, would you normally be at 40%? Are you able to also perhaps comment on what that input cost inflation would look like on an unhedged basis? So, you know, what is roughly the spot right now? And I think you mentioned that logistics costs sit within OpEx, and it sounds like there's probably some headwinds there.

Are you able to quantify the increase you're seeing, if any, on logistics costs, and maybe give us a similar steer as to how material logistics costs are for your overall P&L? Thank you.

Nik Jhangiani (SVP and CFO)

Mitch, on the—I think I picked up your question because you were patching in and out, but on the coverage, hedge coverage levels at 40%, I would say to you that that would be lower than where I would have liked to have been at this time of year. Typically, we look at our hedging to be on a rolling 12-month basis, you know, somewhere towards that 80%. So clearly, where the spot prices have been, we've been looking, you know, to lock in as appropriate when we can. And obviously, the areas that we continue to have open primarily is aluminum.

We've done well with some of the sugar, and I think, as I said, you know, given where some of the PX and MEG pricing is, we should see those be okay for next year from a PET perspective. So the real main challenge is around aluminum, and we continue to be able to look at both, you know, the spot pricing and when we should lock in, as well as the Ali premium piece, which is significantly high, you know, that cash piece as well.

So, having said that, I mean, if you look at 2021 as an example, you know, when we go back and look at our hedging, had we not had the type of levels of coverage that we had, just to give you a perspective there, and we went into the year close to about 80%, you could have seen on spot pricing upwards of EUR 100+ million of an impact on our cost number, right? So clearly, our hedging and doing it at the right time does pay off. And, you know, we'll continue to look at that and see what we can lock in, but we also don't want to lock ourselves in, depending on how things might be moving, right?

And we do expect, hopefully, some forecasts that we're hearing, that there might be some reprieve, but again, no crystal ball that any of us have, so we'll see how that plays out. On logistics costs, yes, you're right. That is largely a part of OpEx, because you do have some element of that in costs, depending on your in the freight between plant to a warehouse, et cetera, as well. Clearly, we've managed through that cost, and that's factored into our guidance. I think it would be premature to give you any indications on 2022 for now, until we have a better view. So we'll provide you an update on that in due course.

Mitch Collett (Director)

Okay, thank you. And just to come back on my second question, which maybe my sound quality wasn't great at the time, but I was really looking for, you know, what is the spot today? If you hadn't you weren't hedging for next year, and you had to cover your costs at spot as of now, roughly what sort of level of inflation would you be looking at, you know, versus the mid- to high-single-digit range you gave on a hedged basis?

Nik Jhangiani (SVP and CFO)

It would probably be that high, too, if not even low teens, you know, with that 40% hedge and that lock-in of some of the areas that I talked about.

Mitch Collett (Director)

Okay, understood. Thank you very much.

Operator (participant)

Our next question is going to come from the line of Brian Spillane with Bank of America.

Bryan Spillane (Managing Director)

Hey, good afternoon, Nk, Damian.

Damian Gammell (CEO)

Hey.

Bryan Spillane (Managing Director)

A couple of quick ones. One, just to follow up on that last question, on COGS. Just, can you just... Are there any issues with labor? You know, we've, we're seeing it a lot here in the States. It's not just labor cost pressure, but it's like labor availability, I guess, for lack of a better way to put it. So maybe that's the first question, is just, is there any pressure on, in either one of those, whether it's labor cost pressure, but more importantly, just, you know, staying fully staffed, I guess?

Damian Gammell (CEO)

Hi, Brian. No, I would have to say we've really navigated some of those challenges well at CCP. We've also invested a lot of time and effort to keep all of our employees safe during the pandemic, to minimize any disruption and obviously to protect their health fundamentally. We haven't seen it internally at CCP. We have, I suppose, you know, back to my earlier comment on the UK haulage challenges, which is really external, because as you know, most of our haulage is externally sourced. So we have seen a number of our large contract partners struggling in the UK on labor, particularly drivers. And that's, you know, a combination of demand, Brexit, COVID impact, and people finally going to work.

So I suppose that's the one area that has kind of touched CCEP, but again, it hasn't been a problem for us generally across all of our other markets. And even in the UK, we're maintaining reasonably good service levels despite that challenge, and, you know, we continue to focus on how we can mitigate that. So we haven't, you know, I've been looking at what's been going on in the US, we haven't seen that trend in Europe.

Bryan Spillane (Managing Director)

Okay, thanks, and then-

Damian Gammell (CEO)

Or in API or Indonesia.

Bryan Spillane (Managing Director)

And then the next one is just, Damian, can you, you know, as you're looking at the commercial plans or developing the commercial plans in API, things that you might look to change or swapping best practices, can you just give us some sense of how COVID or just how this environment right now is affecting the planning and then the execution? So I guess what I'm trying to understand is just, well, there are probably more, just, is there going to be any delay or any timing effect in terms of implementing maybe some of the changes that you'd have identified just because the environment is, you know, not conducive?

Damian Gammell (CEO)

I don't see that, Brian. Actually, I think we've, you know, as I mentioned in my comments, we've been, you know, really pleased with how quick we've moved with the integration of API. You know, not just from a, I suppose, a formal integration, but really from getting it in as a six BU, as you said, sharing best practices and from Europe. So I haven't seen anything that's slowing us down because of the pandemic in terms of sharing and reapplying. In some ways, we've been able to, you know, share a lot of what we went through in Europe with Australia in particular now as they've come into, you know, further lockdowns, because we, you know, that's something unfortunately, we've been quite experienced at navigating.

So, no, it hasn't. I suppose we are looking at, you know, the recovery both in Europe and in Australia as we go into 2022, and how can we even go faster together? I'm very pleased that Jorge has joined to lead our Indonesia business, because again, as that recovers from the pandemic, I think there's a lot we can do together with the Coke company. So other than, you know, it being a challenge to physically get to Australia due to some of the regulations, despite that, I'm really, really, really pleased with where we are as a team, and ahead of my expectations, to be honest, Brian, at this stage.

Bryan Spillane (Managing Director)

Okay, great. Thanks. And just last one, I made this request to Sarah. You know, maybe the next slide deck for the next call, you need a picture of you and Nik posing with the Candler Cup.

Damian Gammell (CEO)

In Auckland. You don't want to see us holding it. You want to see Chris Litchfield, our GM in New Zealand, actually.

Bryan Spillane (Managing Director)

Need to see that. Need to see the cup. Thanks, guys.

Damian Gammell (CEO)

Thank you.

Operator (participant)

Our next question will come from the line of Fintan Ryan with JPMorgan.

Fintan Ryan (Equity Research Analyst)

Good afternoon, Damian. Good afternoon, Nik. Thanks for the chance to question. I think most of my major ones have been answered. I'm not gonna go down the route of commodity cost at this point again. But I'd just be interested, now that you've sort of had the reins of API for just over three months, Nik, could you give any insight specifically around the Indonesia business? You know, how have your thoughts developed since you were presenting that a few weeks back, and, you know, the commercial plans there to next year, sort of post-COVID, any sort of COVID welcome. And secondly, again, it sort of relates to the Topo Chico launch in Europe, but any learnings that you're taking from the alcohol business in Australia and, you know, what you can sort of bring to that business in Europe?

And also, I appreciate that I think the Topo Chico launch within Australia is going to be held by a third party, but, you know, how would that conversation come in place and I guess, the relationship with Beam Suntory, is there any tension there potentially? Thank you.

Damian Gammell (CEO)

Thanks, Fintan. So maybe first to touch on, you know, API, as I suppose we've alluded through, you know, it's ahead of our expectations on a number of levels, since we've, you know, taken over that business, and you know, we're very pleased with where we are. On Indonesia in particular, I think it's impossible not to be excited about that market when you look at the macros, when you look at the size of the population, per capita levels, GDP growth. Unfortunately, it's clearly suffering from COVID at the moment, but I'm particularly pleased with a new GM in place. We've you know we've taken the time, as we looked at the API business to do a full, you know, top to bottom analysis of the industry there, the categories, and our business.

And clearly, that's pointing to a number of, you know, decisions that we feel very good about, you know, really focusing on our core brands in Indonesia, particularly Coke, Fanta, Sprite. Building on some of the work that had started under Amit around affordability, particularly on sparkling small packs. And taking the opportunity to look at our route to market and our cost to serve. So that work is ongoing. Obviously, Jorge, with his experience both in Asia and Mexico, is bringing some great insights into that conversation. And, you know, as we look forward to the end of the year and to our next capital markets day, we will obviously be able to share even more around the, you know, the detailed plan for Indonesia.

But a lot happening, very good Ramadan period for our business, so, that's obviously given us some encouragement. On Topo Chico, and on alcohol, as you said, you know, prior to us acquiring Amatil, Topo Chico distribution was through a third party. That's something we'll continuously look at with The Coca-Cola Company, taking in mind, obviously, we have a great relationship with Beam Suntory, and we have a great business there. So that's something that we are continuing to learn from. And as we look at Europe, you know, clearly there's been a lot of, I suppose, experimentation in the Australian business around beer, cider. You know, that's something with Peter we're looking at, as well to see what can we learn.

We've also, you know, as you know, had a number of markets in Europe where we've looked at alcohol distribution and partnerships. So, you know, we're combining all of that together. On Topo Chico, you know, it's been a very interesting move for the system. Would have benefited from a little bit better weather in Europe, if I'm being honest. You know, but it's something that we're encouraged by as a category. And, you know, over time, we just have to look and see, you know, how do we look at that outside of Europe? But ultimately, we're very pleased with the way the business is structured at the moment, and we'll come back to that agreement at a later time.

Fintan Ryan (Equity Research Analyst)

Very clear. Thank you.

Operator (participant)

Thank you. Our next question is going to come from the line of Charlie Higgs with Redburn.

Charlie Higgs (Equity Research Analyst)

Hi, Damian, Nik. Hope you're well. I've got two questions, please. The first one, I was wondering if you could talk about your business and if you've seen any impact from The Coca-Cola Company's decision last year to change its business structure, particularly things like separating, you know, trademark Coca-Cola from the flavors. And then also, if you've seen any benefits from platform services or if that's still to come. And then the second one, Your Coca-Cola, the DTC business here in GB, looks to be going great guns. I was just wondering if you had any thoughts about potentially expanding that into any of your other markets. Thank you.

Damian Gammell (CEO)

Thanks, Charlie. Yeah, maybe I'll start with the last point. Yeah, we've learned we've had a lot of fun and a lot of excitement with our direct-to-consumer business in GB. It's still early days, but I think it's proven to be a really interesting move for us to, I suppose, build brand value and to engage with consumers in a different way. And you know, we're getting a lot of positive feedback of people you know, proposing to people by using one of our cans with a dedicated message and birthdays. And so that's been something that you know, we've learned a lot from, and clearly, we're gonna look at whether we can reapply that to other markets, particularly Australia, Spain, you know, Germany, our big markets. So that's work in progress.

You know, I think on The Coca-Cola Company, you know, we are seeing, you know, improved collaboration, more alignments. I think a combination of the moves they made in their networked organization, and also, candidly, you know, the need to make bigger and bolder decisions due to COVID has just brought us closer, and I think having to align, you know, due to the COVID challenges faster and quicker around priorities, has just moved the system to an even stronger place, in my view, around how we work together and how we collaborate, and I think the decisions on brands, you know, I think they're, you know, made market by market and, you know, very much aligned with us around, you know, the role of flavors.

And obviously, as we mentioned earlier, we're very happy with the new Coca-Cola Zero performance. So overall, a positive. And you know, we've also had the chance to work a lot closer with them, particularly in Australia and Indonesia, as we you know, we wanted to validate some of our deal assumptions around what we can do with those businesses, and in particular, as we talked about earlier, the brand portfolio in Australia. Yeah, so a lot happening, but certainly you know, a stronger level of collaboration and transparency, I think, due to both of those factors.

Nik Jhangiani (SVP and CFO)

Yeah, and I would just add, I mean, in the same vein as having set up what was the cross-enterprise procurement group, with the move to platform services, there's a lot more engagement on a cross-enterprise collaboration group to ensure that both areas such as finance and integrated shared services, business process and technology, there's a lot more sharing of learnings and leveraging that across the system, which I think is a great positive as well.

Charlie Higgs (Equity Research Analyst)

Perfect. Thank you very much.

Nik Jhangiani (SVP and CFO)

Thanks, Charlie.

Operator (participant)

Our next question is going to come from the line of Carlos Laboy with HSBC.

Carlos Laboy (Managing Director)

Hi, good afternoon, everyone. Damian, is your digital capability advanced enough at this stage of your journey, that if you don't get the pricing that you want to cover some of these raw material costs, you can-- you're having up in trade discount management through these tools for next year, that maybe you can offset a lot of this impact?

Damian Gammell (CEO)

... Thanks, Carlos. I think when we look at, you know, some of the digital analytic capabilities that we started building coming out of 2018 and 2019, certainly one of the areas that has, you know, given us the most insights and value has been around the whole promo effectiveness tool and understanding, you know, where we invest on price promos and the return both to our retailers, but also obviously to CCP on a profit level. And, you know, as we look through to 2022, we spend a lot of money on trade promotions. It's our biggest investment in our business when we look at it from the top line. And so clearly, we want to use that capability to, as I mentioned in my comments, to be smart about the pricing we're going to take in 2022.

So clearly, you know, we're hedging, you know, we're becoming more efficient and productive as a company. But ultimately, we are going to take pricing in 2022 to offset some of those headwinds. But we want to do it in a way that doesn't jeopardize the long-term health of our business or our customer relationships. And one of the deltas to that is certainly what you've called out, which is to be a lot smarter about how we use existing investments on price promo. And the analytic tools we've developed, you know, give us that transparency, and, you know, that's something we didn't have a number of years ago. So it's absolutely part of that decision process around how do we take pricing, how do we, you know, mitigate any negatives on our consumer or our customers?

How do we use that big, big, you know, bucket of cash investment on price promo to make smarter decisions? Yeah, short, long answer, but absolutely correct.

Carlos Laboy (Managing Director)

Thank you. And just very quickly, on Indonesia, you spoke about a recycling investment. Can you speak how your thinking is evolving there as you look at that market on refillables?

Damian Gammell (CEO)

Yeah, that's something we're looking at the moment to see, you know, is there a role for refillable packaging in Indonesia? It was there many, many years ago, but the system exited out of it. It's certainly a pack format that I've used in a number of emerging markets to drive affordability and sustainability. So clearly, it's something we're gonna look at to see, you know, should that be part of our future pack pricing mix. You know, that's some of the work we're doing at the moment, Carlos. So as we get clarity on that towards the end of the year, we'll be able to provide, you know, a bit more color on the role of refillables in Indonesia. We're also, you know, continuing to use refillables in Europe.

We just launched a 400 ml OTB glass pack in Germany, resealable. I was in the market there recently, it looks great on shelf, so that's a very different use of refillable. Not so much on the affordability play, but much more around sustainability and premium, and that's in on the go. So you know, we're continuing to look at how refillables can, you know, can play a role, not just on the traditional affordability piece, but ongoing on the sustainability agenda in some markets, so and Indonesia will be key to that. Absolutely.

Carlos Laboy (Managing Director)

Thank you.

Operator (participant)

Thank you. Our next question is going to come from the line of Sean King with UBS.

Sean King (Equity Research Analyst)

Hey, good afternoon. And apologies if I missed this, but, what are you seeing in terms of market shares, in the away-from-home channels as they return, and any efforts that you're making to kind of, you know, lean into that reopening opportunity?

Damian Gammell (CEO)

Thanks, Sean. Yeah, we're seeing obviously in Northern Europe, away from home, reopening very strongly. And you know, we put in a number of programs, you know, coming into the second quarter, actually, to support our customers on reopening from you know, basic cold drink equipment and post mix readiness through to you know, promotions. Digital initiatives, particularly in France and GB, have gone really well. So that's you know, obviously, you know, supporting our customers and supporting our shares. So you know, we continue to perform extremely well in away from home. In other markets, it's reopening a bit slower, particularly in Iberia, and that's mainly on the back of tourism and a slower recovery in tourism during the summer.

But we're seeing about 90% of the outlets reopening, so that's probably higher than we originally anticipated. So it's a very resilient segment in HoReCa across all of our markets. And, you know, so we'd expect that to continue into 2022. And then, obviously, the biggest delta then will be footfall. So as people get back to the office, transportation, tourism, you know, we'll see footfall and HoReCa continue to improve. And we can see that already in markets like the UK, which is probably further ahead than some of our other early European markets. So we can kind of pretty much track how that's going to progress and then work with our customers to make sure, you know, we've got the inventory in place, we've got the promotions in place.

As I mentioned earlier, that will be a benefit as we look through to 2022 in terms of our mix, as the away-from-home channels come back, even stronger.

Sean King (Equity Research Analyst)

Great. Thank you very much.

Operator (participant)

Thank you. And our last question for today will come from the line of Simon Hales with Citi.

Simon Hales (Managing Director)

Thank you. Hi, Damian. Hi, Nik. Hi, Sarah. Well, my first question, you perhaps, Damian, you partly answered this, perhaps in response to Carlos's question around digital capabilities. But now coming back to the whole price negotiations with customers as we head into the year end. Clearly, most consumer companies are facing significant cost headwinds and need to price. I just wonder if there's anything from a CCEP side specifically that you think gives you an advantage relative to other FMCGs to be able to get those pricing negotiations over the line? And then secondly, when we think about the sort of elasticity of demand, you know, to those pricing moves, how have your assumptions there perhaps evolved over the last sort of couple of years, given the portfolio change we've seen, you know, the changes to package mix, et cetera, in the business?

Is there anything you can share with us there?

Damian Gammell (CEO)

Thanks, Simon. Well, clearly, we, we're very focused on that whole pricing strategy, and it's something that we've, you know, I think since we created CCEP, it's been part of our story around price mix and leading those pricing conversations with our customers. What gives me, some degree of confidence is really the value creation story that we've laid out. So, you know, we've consistently, generated the highest amount of revenue for our customers, not just within drinks, but across CPG. And I think that gives us, you know, a good seat at the table to discuss, you know, proactively with our customers, you know, what's the right decision to make, for the category and obviously for both of our businesses.

So I think that value creation platform, if you just look at the size and scale that we now represent of our customers' revenue and profitability, I think that's clearly something that gives us a strong platform. Secondly, brand love. I mean, you know, I think we are very, very fortunate to have some, well, certainly the best beverage brands, but some of the best brands, you know, across CCEP, that our consumers and shoppers love. And we never take that for granted, and that's why we take pricing decisions, you know, not just on a one-year basis, because we don't want to, you know, we don't want to damage that relationship. But clearly, that gives us a lot of confidence in terms of brand strength. And that also flows through to the elasticity point that you've made.

But we clearly know in some channels and in some occasions that we have got a lot more pricing elasticity than we probably realized a number of years ago. I think that's certainly gonna support our pricing objectives. Then next, we haven't talked a lot about pack, pack mix today, but obviously from a beverage category perspective we've introduced a lot of, a lot more premium small packs. On-the-go has been impacted by the pandemic. That should come back and our IC mix should come back. So while that's not direct pricing, clearly it plays in that whole net revenue per case evolution, which is what we're focused on, and getting that ahead of the commodity headroom. All of that together, I think helps.

I think the second aspect that I raised is that we're continuing to invest in our business. So when we sit with customers and we talk about pricing, we're doing that on the back of, you know, multiyear investments with the Coke company in media and advertising. Our trade marketing investment remains, our capital investment remains, and we're still investing in innovation, whether it's with the Monster company or with the Coke company, so it's never easy, and I think anybody who's sat in front of a customer and talked about pricing will, you know, affirm that, but I do think we've positioned ourselves as best we can for those discussions, and as I said, they've already started, and, you know, that gives us confidence in what we've laid out today.

Simon Hales (Managing Director)

Brilliant. Many thanks.

Operator (participant)

Thank you. I would now like to turn today's conference over to Damian Gammell for his closing comments.

Damian Gammell (CEO)

Thank you, operator. And again, I just want to give a big thank you to everybody for joining us this afternoon and this morning. You know, as myself and Nik have laid out, you know, a very strong start to the year in the first half, and we're very, very pleased with that. Also, really pleased that our, you know, integration of API continues to go really well. We are now very much focused on delivering the full year of 2021, and we're looking forward with excitement through to 2022 as we continue to come out of the pandemic and the COVID restrictions that we've seen across our business in 2021. As both myself and Nik have talked to today, we believe we're well positioned to manage some of those shorter term inflationary headwinds.

And in parallel, we're very much focused on, you know, the long term of this great business, across a number of areas, but in particular, our sustainability journey, our digital investment, and finally, and most importantly, our people. So with that, I'd like to end today's call. And again, thank you for joining us, and we very much look forward to speaking to you again, about our great business at CCEP. Thank you, everybody.

Operator (participant)

Once again, we would like to thank you for participating on today's Coca-Cola Europacific Partners Conference call. We appreciate your participation. You may now disconnect.