Coca Cola HBC AG

LSE:CCH

Earnings Call Transcript 2022-Q4

[Joanna Kennedy, IR]

Good morning. Thank you for joining the call. Zoran and Ben will present our full year 2022 results, and then we will open the floor to questions. We have just over an hour available for the call today, which should leave 30 minutes for questions. Please, could you keep yourself to one question and one follow up before joining the queue again. As you know, this conference call will include various forward-looking statements These should be considered in conjunction with the cautionary statement in our press release issued this morning and included at the end of this presentation.

Now let me turn the call over to Zoran.

[Zoran Bogdanovic, CEO]

Thank you, Joanna. Good morning, everyone, and thank you for joining the call. 2022 was a year in which we continued to make clear progress in our vision to be the leading 24/7 beverage partner. It is a testament to the strength of our business, our culture, and our team spirit that we have continued to perform so well, especially during a year where the business and so many of our colleagues also dealt with the unimaginable consequences of war. I want to thank our passionate and engaged people for making Coca-Cola HBC a better business every day.

Also, I want to extend a very big thanks to all our stakeholders, particularly our customers, The Coca-Cola Company, the Monster Energy team and all other partners for their trust, support and collaboration. Five things stand out to me from 2022. One, our Growth Story 2025 priorities are driving our continued strong performance. Two, the strength of our portfolio and capabilities ensure we continue to win in growing markets. Volumes grew across all our markets, except for Russia and Ukraine. We have expanded revenue per case, executed double digit revenue growth and achieved solid share gains. Three, our focus on customers is at the heart of what we do.

Our people are committed to enabling our customers' success in many ways. One important indicator is that we remained the #1 contributor to revenue growth for our retail customers in 2022. Four, we have navigated historically high levels of inflation while delivering strong financial performance, record levels of comparable EBIT, excellent ROIC and a strong balance sheet. Five, our vision of being the leading 24/7 beverage partner opens tremendous opportunities today and in the future. We continue to invest behind these opportunities, and 2022 had some notable examples: adding Egypt as a strategically important long-term investment; increasing investments behind digital commerce and data capabilities; and accelerating our sustainability agenda with the opening of another rPET facility, this time in Italy; and issuing €500 million green bond. Ben will review our financial performance in more detail, but key highlights for me are strong double digit organic revenue growth with and without Russia and Ukraine, ongoing organic EBIT expansion despite cost pressures, and record high free cash flow generation with consistently high levels of ROIC. Moving on to the consumer environment in our markets. We are lucky to operate in a growing industry with very strong brands.

NARTD and Sparkling industry revenues grew well in 2022 and we are gaining share both versus branded and private label. Within our portfolio, our higher revenue per case categories, Sparkling and Energy, remained the most resilient. We do see that in some markets there is more demand for affordable options, but we have the revenue growth management capabilities to handle this in a balanced way, giving consumers the price that they want at the revenue per case that supports our business, for example, with the 850 ml bottle in Poland where we are seeing double digit volume growth. And we continue to see smaller package formats and indeed small premium packages growing faster than multi-serves. A good example of this is in Italy, where glass packs were the fastest growing of all. There are a handful of markets where we have seen changes in consumer behavior and signs of slowdown in underlying category volumes.

I'm thinking of Egypt, Nigeria, Romania and Hungary. But we have been proactive in deploying our ready-to-go plans in those markets. In our other markets, we remain vigilant and well prepared. So overall, despite more challenging conditions in a small number of markets, consumer demand for our products has remained healthy. We are growing share in growing markets and growing our top line too. Let's get into the categories that are driving our growth. In each of the following cases, I will focus on organic volume growth, excluding Russia and Ukraine, to give a better feel of underlying momentum.

We continue to actively prioritize opportunities in our portfolio, focusing on the areas of highest potential. Sparkling remains our largest opportunity and the single most important driver of growth and profit. We have continued to gain share in Sparkling in '22, benefiting from strong activations throughout the year, particularly around the summer season and Christmas. Coke with Meals is always an important focus, and in each market, we adapt to locally relevant opportunities. To give a sense, more than 1.5 billion pizzas are consumed each year in Italy and our activations have successfully focused on this as a must win occasion. Fanta and Sprite both saw good volume growth, with Fanta benefiting from activations focused on snacking as well as flavor launches, including What The Fanta.

Meanwhile, Sprite's new Heat Happens campaign is delivering good results. Low and no sugar variants maintained good momentum, with volumes up double digit in the year, growing ahead of regular offerings in all segments. We launched Coke Zero Sugar Zero Caffeine across a range of markets in 2022, and we'll continue to scale this innovation in 2023. Our Adult Sparkling portfolio gained share overall, while volume growth benefited from strong performance in the established and developing segments. Adult Sparkling activations focused on socializing occasions, where mixability plays an important role, and we are seeing broad based strength across brands. We benefited from a range of new flavor launches in Adults in 2022 and we will continue this theme in 2023 with a variety of zero tonic flavors.Energy continues to increase its share of our business and in the market.

With volumes up by 32% in 2022, this category now makes up 7% of our group revenue. This year, we focused on partnering to enable successful activations, one example being Monster with gaming company Apex Legends, which has good results. Within our emerging segment, Nigerian Energy volumes nearly doubled. Our established markets also grew strongly led by 33% volume expansion in Italy, where we took the #1 position last year and continued to gain share. We see great potential for this category to continue to expand per capita consumption in our market driven by innovation, wider distribution, and an increasing focus on women and older adults. Coffee continued to make good progress in the year with volumes up 45% and market share growing. Costa Coffee performed strongly across all markets.

In particular, 2022 was a successful year for recruiting out-of-home customers and we doubled the number of Costa outlets to 8,000.We also saw an acceleration in the rollout of Caffe Vergnano with 13 market launches in 2022, bringing our total to 14 markets, more than initially planned. Although it's still early days, we are getting great feedback on rate of sale. In 2022, we launched a Coffee Academy, and we are investing in coffee experts and training centers. We are continuing to invest in coffee for the future, and I'm excited to see growth in our coffee capabilities across the group. Moving on to one of the drivers of the strong price mix we've achieved in 2022. Our RGM framework allows us to improve revenue per case across our portfolio through driving price and mix, and we see significant potential to continue doing that through all macroeconomic environments. On mix, we have 3 main areas in which to drive improvements.

First, category mix. We have shown in the last few slides some of the ways in which we are making active choices in our portfolio to drive positive category mix. Indeed, our continuous focus on Sparkling and Energy is showing tangible results. Second, deliberate actions to drive package mix led to improved single-serve mix by 3.5 percentage points in 2022. And this number doesn't give full credit to the improving quality within the single-serve part of our portfolio. For example, can packages grew 22% and our 250 ml premium glass spec grew by 24%.Finally, channel mix was also accretive in 2022 with out-of-home recovering post-pandemic and benefiting from strong execution in the summer season. Pricing is a critical part of our RGM framework.

Pricing decisions are data-driven, proactive and agile. Based on our profound understanding of demand elasticities and the broader competitive environment, we can make changes to a particular pack within a category in a specific channel. It is due to the strength of this capability that we have ensured that all pricing was executed according to plan and while gaining share and driving value for our customers. Digital commerce continues to be an important driver of incremental revenues. In 2022, we continued to invest in and develop our digital commerce platforms to serve the growing number of consumers and customers choosing to shop online. We can think of these opportunities as split between route to consumer and route to customer. When it comes to route to consumer, we are partnering with e-retailers and food delivery platforms.

This area of our business grew by 59% in 2022. In our route to customer, Customer Portal is our largest B2B platform, which allows our customers to buy CCH products at their convenience any time of the day. We saw good growth in the number of customers, orders and revenue delivered, excluding Russia and Ukraine. We have seen a standout performance from Czech Republic and Slovakia, where Customer Portal reached 34% of total orders placed and Ireland where it reached 36%. We also launched Service as a pilot in Italy in Q3. Service is our B2B marketplace for the HoReCa channel, offering a 24/7 multi-category ordering experience as well as a range of services.

We are pleased to have seen a positive response to the platform and are planning an expanded rollout in 2023.We made further progress using our advanced data insights and analytics capabilities to strengthen our revenue growth management and route to market. Segmented execution is where we use our capabilities to identify customer needs in different locations and distinct types of outlets to better target product assortment and marketing activities. This year, we focused on improving micro segmentation of our customers using artificial intelligence to combine rich external data with our own internal data to generate unique insights.Using micro segmentation, we can identify outlets for accelerating certain packs and products, personalized marketing activities, and we can choose where to locate coolers to optimize productivity. For example, for the launch of the 300 ml PET bottle in Bulgaria, we used micro segmentation to target outlets, which had higher than average traffic and younger demographic. This next generation of segmented execution is now live in 10 markets with further rollouts planned for 2023.Our ambition is to become a truly data-driven organization.

We launched the Data & Analytics Academy in 2022 to build the capabilities of our people and accelerate the culture of data-driven decision-making, all with the goal of better serving our customers and creating more value. Turning to Egypt, which is a great addition to our group that I want to touch on. The market has tremendous potential due to its size, demographics and headroom for increasing per capita consumption and market shares. However, there is no denying that Egypt faced severe economic headwinds in 2022. That's why we remain focused on developing Egypt over the midterm while adapting to today's realities on the ground. Let me tell you a bit about both. Midterm, we continue to develop our capabilities in the market and are expanding our portfolio into white spaces.

A clear example of that is the launch of affordable Energy brand, Fury, at the start of 2023. From the cost optimization perspective, we are rapidly integrating teams and back-office systems, ensuring efficiency and an upskilled organization, and we are incorporating our sustainability goals and programs. Short term, we have responded to the weaker currency with decisive price increases. Despite this, we are pleased to see strong share gains throughout the year, enabled by the refresh of our sales force and distribution. We are also adapting our offering, fully utilizing our glass portfolio as an affordable option, and we are upping investments behind our brands together with the Coca-Cola Company. We are creating a healthy, resilient business in Egypt, and I remain truly excited about the long-term opportunity in that market. We made good progress towards our Mission 2025 and net zero by 40 goals this year.

I'm proud our work has been recognized as we were ranked as the world's most sustainable beverage company by the Dow Jones Sustainability Index for the sixth time. Just a couple of examples to highlight. In packaging, we continue to prioritize a circular approach. We began to transition to 100% rPET portfolio in Austria and Italy, following the successful move to 100% rPET for our locally produced portfolio in Switzerland in Q2.Also in Italy, we opened a plant that can convert up to 30,000 tonnes of PET per year into 100% recycled PET preform bottles with a much lower carbon footprint than the virgin plastic equivalents. We also set up in-house recycled PET production capability in Poland and are planning to launch the same capability in Romania in 2023.In September, we issued our first ever green bond, which was very well received by the market.

We raised €500 million in support of our ambitious sustainability agenda that will further accelerate our progress into 2023 and beyond.

Now let me hand over to Ben to take you through the financials in detail

[Ben Almanzar, CFO]

Thank you, Zoran, and good morning, everyone. We closed the year with good top line momentum, leading to organic revenue growth of 14.2%, including Russia and Ukraine, which negatively impacted performance. Excluding these 2 markets, organic growth was 22.7%. Volume growth was 8.1%, excluding Russia and Ukraine, with our strategic priorities as the best-performing categories. Pricing was the largest contributor to revenue per case, accounting for approximately 2/3 of the improvement in the period. The remaining 1/3 came from mixed levers led by package and category mix.2022's top line performance came on top of the 21% organic revenue growth achieved in 2021.

The point being that we have well and truly stepped up our performance in the last 2 years with 2022 revenues 28% ahead of 2019 levels. 2022 was dominated by inflation and supply chain challenges. Just like the broader industry, we have been wrestling with sharp inflation across COGS lines. Let me give you a flavor of some of the pressures we've seen. Raw materials, packaging and finished goods were adversely impacted by inflation across all major commodities. These were amplified by embedded higher energy prices, resulting in increased conversion costs.

Our own production in haulage costs were affected by labor and energy inflation across our markets. Concentrate costs also increased as revenue per case expanded. We have used every tool at our disposal at both top line and productivity efficiencies to manage these headwinds. As a result of this focus and discipline, we have achieved organic EBIT growth expansion in 2022. We are proud of that performance given the challenging macro backdrop compounded by the war in Ukraine. It's important to add that we have continued to invest across the business. Marketing spend was up 11.5% year-on-year.

We are fully funding newer categories such as coffee, big bets in digital and data as well as investments to deliver on our sustainability agenda, all in the service of our vision of being the leading 24/7 beverage partner. Turning now to the drivers of performance on a segmental basis. In the established segment, organic revenues grew by 18.6%. Strong revenue per case expansion of 8.6% was achieved through improvements in category and package mix as well as pricing actions throughout the year in all markets. Volumes in this segment were robust with volumes accelerating in half 2 versus half 1 on a 3-year stack. All the main markets achieved high single-digit volume growth in 2022.We have been pleased with the strong performance on package mix in the segment with single-serve mix up 4.5 percentage points.

For example, the excellent results from our 330 ml premium brands portfolio, growing 40% in Italy and 50% in Switzerland and Austria. While Sparkling and Energy were the main growth drivers in established, we are also pleased by the strong performance in some of the smaller categories. Juice and tea volumes grew over 20% in Italy. We also became the #1 player in sports drinks in the market with impressive results from Powerade. For the segment, organic EBIT grew 1.3%. As a reminder, in 2021, the established segment benefited from a one-off property sale in Cyprus, which we're lapping this year.

Without it, organic EBIT growth was 9.5%.Moving to the developing segment. Organic revenue grew 29%, benefiting from very good price/mix expansion and sustained volume growth. All the main markets gained share and achieved double-digit volume growth in the year, led by Sparkling and Energy. We are also seeing success from our focus on multipacks of single-serve, particularly in Poland and Czech Republic. Poland delivered excellent volume growth, and we continued to accelerate share gains as the category recovered from the 2021 sugar tax.

Low no-sugar variants saw another year of robust volume expansion. This area will receive even more attention in 2023, particularly in the Adult Sparkling range and with the launch of Coke Zero Zero. Developing segment organic EBIT grew by 12.7%.In the emerging segment, organic revenue finished up 5.5%. Top line growth was negatively impacted by the war in Ukraine. Without Russia and Ukraine, organic revenue grew by 23.5%, demonstrating the health of the non affected areas of the business.

Organic volume contracted 41% in Russia, with most of that decline in the second half after the depletion of The Coca-Cola Company brands in the market at the end of July. While volumes were in steep decline, we saw a surprising strong ruble, which generated transactional and translational currency benefits. FX combined with the impact of consolidating Multon meant that Russia's comparable EBIT was higher in 2022 than 2021. We have seen weakness in the ruble at the start of 2023 and continue to expect currency volatility for the rest of the year. Returning to the emerging segment as a whole, organic volume declined by 10.9% and grew 4.3% if we exclude Russia and Ukraine. Segment revenue per case expanded 18.4% as we took decisive action on pricing and mix across all countries to manage inflation and currency weakness in selected markets. Segmental organic EBIT declined by 1.1%.Further down the P&L, we see comparable EPS expansion of 7.7%.

Finance charges increased by €15 million as we consolidated Egypt into the P&L. Our comparable tax rate of 26% was in the middle of the guided range of 25% to 27%. Consistent growth in comparable EPS has allowed us to recommend a dividend of €0.78, up 10% from 2021, in line with our progressive dividend policy. This will place the dividend payout ratio at 46%.CapEx increased by €49 million in 2022 as we continued to deploy capital into critical growth projects. In particular, we are investing behind upgrading our manufacturing facilities in selected markets, expanding our base of energy-efficient coolers to drive single-serve growth and delivering our sustainability goals.

CapEx finished at 6.4% of revenue, at the bottom of our guided range, following suspension of CapEx investment in Russia in 2022.Free cash flow increased by €44 million year-on-year to €645 million, a record high for our company. Our balance sheet remains very strong. At the close of the year, net debt to EBITDA was 1.2x. The business is well insulated from interest rate exposure by having most of our debt on fixed rates. Our next bond repayment is not due until November 2024.Prudent financial management of our balance sheet is a source of strength and flexibility, providing ample capacity for investments both organically and through M&A.

As we've said before, if we do not see more effective uses for this capital at attractive returns in the midterm, we will return it to shareholders. As I think about the performance of this business, return on invested capital is one of our most important KPIs. To be the leading 24/7 beverage partner, we need to make thoughtful choices, ensuring that we deploy capital efficiently and effectively in the service of profitable growth. That's why I'm pleased to see another year of good ROIC performance even as we faced a tremendously challenging environment. Moving to our outlook for the year. While we remain attentive to macroeconomic and geopolitical risks, we have high confidence that our portfolio capabilities, attractive markets and talented people would allow us to continue to make progress on our strategy in 2023. We expect another year of organic revenue growth above the 5% to 6% average midterm range guidance. While we have seen signs of improvements in some commodities, overall inflation levels remain high, and we expect COGS per unit case to increase by low teens.

Given the good momentum, combined with our proactive management of the P&L, we now expect organic EBIT growth in the range of plus to minus 3%.With that, I hand over to Zoran.

[Zoran Bogdanovic, CEO]

Thanks, Ben. I'm proud of the strong performance we reported today, and even more than that, the groundwork and investments we are making to capture the potential in our markets. We have enormous opportunities. The industry we operate in is large and growing, and our 24/7 portfolio allows us to address every beverage consumption occasion. We operate in highly attractive geographies with growth opportunities across emerging, developing and established markets. We are successfully navigating short-term challenges and investing for the long term.

Our strong balance sheet continues to support the business, allowing us to seize opportunities today and in the future. Our people, culture and capabilities remain a distinct competitive advantage, and we continue to make tangible progress on sustainability and are determined to remain leaders here. Looking to the future, we remain confident in our strategy and our ability to continue to deliver long-term growth and shareholder value. Thank you for your attention. I will now hand over to the operator, and Ben and I will take your questions.

[Operator]

[Operator Instructions] The first question is from Edward Mundy with Jefferies.

[Edward Mundy, Jefferies]

Two questions, please. So the first question is really around pricing. You ended the year with very strong revenue per case. Could you perhaps talk to the split between price and mix? I appreciate the mix is a function of a number of factors, package, category and channel.

And as part of the same question, can you talk to perhaps the pricing environment today and how your strong relationship with your retailer partners is helping with joint business plans and avoiding things such as delistings or customer pushback? That's the first question around pricing. And then my follow-up question, perhaps one for Ben, is really around scope EBIT, which was a little bit stronger than we had anticipated at €49 million for 2022. Could you talk perhaps about the split between Egypt and Multon? I think you previously talked about Multon being €15 million to €20 million. And as part of this question, if you're successful with the rollout of innovation on the Multon portfolio in Russia, does this get booked within the scope line until August and then within the organic line thereafter?

[Zoran Bogdanovic, CEO]

Let me start, and then Ben will also do his part. So on price mix overall, as you've seen, it's been consistently strong over quarters and across the segments. As we mentioned in our remarks, 2/3 of that comes from pricing. And I'm really pleased that our whole pricing plan in '22 has been executed very well, which is a result of a very thoughtful plan across all countries where it's not one size fits all. We really take into account competitive landscape, elasticities.

Everything that we leverage through our revenue growth management is coming to play.Pricing was 2/3, but let's not also neglect the fact that mix really played an important role as we really consciously drove priorities in our portfolio, therefore, category mix, about which I'm really pleased. And I really wanted to highlight in the remarks, package mix, which moved 3.5 percentage points in the year. And I'm very pleased that our glass package particularly has been growing so strong. This gives me opportunity, Ed, to highlight that out-of-home performance in '21 has been really strong. When we see total Hellenic, excluding Russia and Ukraine, out-of-home grew 13%. And that's together with at-home channel continuously growing.

But also in the at-home channel, we are focusing consciously more on single serves for in-home consumption. So coming back to the point that you said about retailers, I can say that I'm very pleased how the teams are doing joint business planning. There are very early conversations with -- fact-based conversations and coming blended with a strong marketing plan that we do in conjunction with pricing trends. So therefore, we have not seen any issue with pricing plans in any of our customers. And Ed, this gives me confidence for our pricing plan also for this year as we continue to do so across all markets as we did also in 2022. I hope that answers your first question, Ed.

[Edward Mundy, Jefferies]

Yes. Very clear.

[Ben Almanzar, CFO]

All right. So let me give you a little bit more color on the scope as you think about 2022 and indeed 2023. In 2022, we saw group scope benefit of €48.7 million, and this was driven by the emerging segment. And within that, the majority came from Multon. As you know, we consolidated Multon for 4.5 months in 2022, and we will have Multon under scope for further 7.5 months this year, 2023.

However, one caveat is you will not simply scale up those 4.5 months into 7.5 months since Multon saw a very significant one-off benefit from double-digit pricing and FX tailwinds. So we don't expect this necessarily to reoccur in 2023. In addition, we won't have Egypt in scope in 2023, which was a positive contributor. And to your question on the local brands, yes, local brands are part of organic growth.

[Edward Mundy, Jefferies]

The local brands, they'll be in the scope -- if you're able to innovate on the local brands through flavors and other sparkling, that will come within the scope line until August and then within the organic line after August? Or will it come into the organic from day 1?

[Ben Almanzar, CFO]

That's organic, Ed.

[Edward Mundy, Jefferies]

That's in the organics. Got it. Very clear.

[Operator]

The next question is from Simon Hales with Citi.

[Simon Hales, Citi]

A couple for me as well, please. Maybe I could just sort of follow up on Ed's question around scope, sort of generally. I'm just sort of trying to understand -- and maybe this is one for Ben still -- some of the moving parts within the emerging market profit beat that we saw this morning. Clearly, you had a big FX benefit, probably bigger than the market expected. What was driving that?

I think that wasn't ruble related, was it, because I imagine most of the ruble benefits came in the scope line within emerging through Multon? Is that how I should look at it? I'm just trying to sort of get the build right in terms of what drove that headline EBIT number in emerging in '22.And maybe associated with that, I mean, could you give us an idea of what the absolute level of contribution was still from Russia in 2022? I think you said in your presentation, Ben, that it was bigger in aggregate than it was in 2021. But a number there would be useful. And then my second question comes back to the outlook for cost inflation in 2023.

Clearly, you're talking about low teens COGS per case inflation. Is there any opportunity for you potentially to renegotiate some of the hedges that you've got in place for this year, particularly against the backdrop of falling energy costs? Some of your beverage peers seem to be hinting that, that might be an opportunity later in the year for them. Do you have that benefit potentially too?

[Zoran Bogdanovic, CEO]

So let me start with basically the EBIT delivery. So our business maintained strong momentum from Q4, and that resulted in better-than-expected financials throughout the year. And hence, the guidance beat. Specifically on emerging, we benefited for 2 things. On the one hand, there's the favorable currency, which I already referenced.

And then there's a consolidation of Multon, which mechanically drove that emerging EBIT higher. Again, Multon had also that currency benefit, which delivered more in scope than we had initially anticipated. So really, these are the factors that drive the beat in emerging. You also asked about Russia. And we've already said that all of these one-offs combined together, currency, scope and also the -- I suppose the extraordinary trading environment that we had at the beginning, where we were phasing out the inventory of the Coca-Cola Company brands, led to that higher EBIT in Russia.Your third question was about COGS and essentially our hedges and whether there are opportunities to benefit more. We are hedged at the moment over 50% of the main commodities considering input costs.

And those hedges are skewed towards the first half of the year. So that limits a bit of the upside, Simon. But you have also the opportunity that if energy prices continue to go down, then obviously, that will result in lower input costs for our suppliers as well, and we should be seeing that benefit. But typically, it takes 1 to 2 quarters for the benefit to flow through the P&L.

[Simon Hales, Citi]

Got it. That's useful. And are you able to give us an EBIT number for Russia at all, Zoran, just to give us a bit more clarity for what it was in the year so we can work back what it might come back down to this year when you've got some ruble headwind?

[Zoran Bogdanovic, CEO]

No, I think we've basically communicated sufficient at a market level, which will give us a good indication.

[Operator]

The next question is from Mitch Collett with Deutsche Bank.

[Mitchell Collett]

I've got one quick question. The guidance range is only 600 basis points, which, I guess, given the uncertainty seems quite narrow. I just wondered if you could give us some color on the puts and takes to get you towards the top and the bottom of that guidance range?

[Ben Almanzar, CFO]

Yes, absolutely. So we've said again that we expect organic EBIT in the range of close to minus 3% in 2023. And we're planning for another inflationary year, as I mentioned with the COGS per case in low teens, including the transaction effects headwinds that are baked into it. Then we have, obviously, the revenue management capabilities, and pricing is going to be critical for us in 2023. And we have said that in order to ensure the right decisions that we navigate this environment, we want to focus primarily on organic EBIT. So when you put that all together, our guidance considers several scenarios and the external risks that we're facing.

So let me walk you through some of those factors, what would take us to the low end or to the high end of that range. So we will be towards the lower end if we see a significant deterioration in the consumer environment. There could be COGS per unit case inflation that could accelerate beyond what we're currently expecting with sustained transactional effects and cost headwinds. So on the other part of the spectrum, we will be towards the upper end if we see a stronger top line momentum across our markets, and very importantly, that COGS per case inflation is less significant than we're currently anticipating thanks to a more benign input cost environment with better-than-expected transactional effects. This is how we see it based on today's visibility.

[Operator]

The next question is from Andrea Pistacchi with Bank of America.

[Andrea Pistacchi, Bank of America]

I have 2, please. The first one on volume. There's still pretty limited evidence of volume slowdown, except maybe in Egypt. So are you more confident now after a couple of quarters of weaker economic environment -- that with your elasticities holding up nicely, are you more confident that, that could continue to be the case going forward, even maybe in some of the lower-income markets? And volume consensus, I think, is around a 2% volume decline for 2023.

Is that a realistic view in your opinion of what volumes could do next -- this year? And the second question, if I could, please. It's on Russia again. I wanted to ask if you can give a bit more color on what the business looks like now, what it could like in 12 months' time? And in particular, I'm referring to the new sparkling business, the Dobry brands that you've launched in what is a very fragmented sparkling market at the moment in Russia. What do you reckon your share is?

And what could your share be maybe 12 months down the line?

[Zoran Bogdanovic, CEO]

Let me start with volume. So in the algorithm how we see this year and what we guided for, we do see that volume would be on a slight decline. So I think broadly and directionally, the consensus is in a fairly good place. We are mindful of the fact that we have quite some cycling that we will have this year in established and developing as those were the 2 segments which really performed very well with volumes. And then it is quite for sure that we are going to have volume declines in Russia. Now this confirms what we said, is that we prioritize for this year, and we continue to prioritize as we did last year.

Price/mix is our primary driver of the revenue generation. And when and if we need to choose between the price mix or volume, for all the right reasons, we are focusing on the price and mix. Now moving on to Russia. As I said last time, after we have completely depleted all the brands and products of The Coca-Cola Company in July, in August, we started with this reshaped business focused only on the local brands. And since then, there were a few extensions within the sparkling -- in the sparkling category, which now fully is with this local portfolio. Now how this is going to perform? You said yourself very well, it's extremely fragmented -- it's an extremely fragmented market.

There is a complete population of a number of various cola brands. Our primary objective over there is focused on protection of our assets and focused on our people. And it's extremely hard to estimate how this will be in 12 months, neither to say what our share is today or what it could be in 12 months.

[Operator]

The next question is from Sanjeet Aujla Credit Suisse.

[Sanjeet Aujla, Credit Suisse]

Two from me as well, please. Firstly, as we think about the minus 3% to plus 3% organic EBIT growth outlook for the year, how would that look excluding Russia, just mindful of some of the volatility there? And my second question. Just taking a step back and looking further ahead at some of your 2025 targets. I think back in 2019, you came out with a 20 to 40 bps annual kind of margin guidance.

And I appreciate we've had a considerable amount of input cost volatility. But on the assumption if input costs were to stay where they are today, do you still feel confident in delivering that margin algorithm over that time horizon?

A - Ben Almanzar

So again, when we think about Russia, it's already incorporated into our guidance. So if you want, we can perhaps step back and think about -- 2023, this is a market that is going to be very volatile, as we said. So it's any caveat that we can add. The other thing for you to consider is that the one-off that business benefited from in 2022 will not be reoccurring. So -- nor, obviously, the phase out of the portfolio, nor the currency benefits.

It's quite the contrary. So therefore, if you were to step back and think about how that market and compare it versus 2022, it's reasonable to expect there will be a lower contribution. So that's when it comes to Russia. If you think about how those -- the recent years affect our midterm algorithm, what I would say is that this is clearly a normal period. The combination of war, a sharp inflationary backdrop, we have the consolidation of Egypt as well, all of these things have put pressure on near-term margins. But if we look beyond 2023, we still believe that, that midterm algorithm is right for the business.

And we remain confident behind the fundamentals of EBIT. On the one hand, input cost inflation should start to ease in the future. We also will realize more logistic efficiencies and manufacturing efficiencies and better leverage our fixed costs as the business continues to grow. Zoran talked about our drive behind the strategic parts of the portfolio, which support our margins as well. And there's a number of geographies where we expect to improve margins as we go forward.

[Operator]

The next question is from Yubo Mao with Morgan Stanley.

[Yubo Mao, Morgan Stanley]

Maybe just 2 from me. One is on the margins in established and developing. I think H2 was a bit weaker relative to H1 and the expectations. Could you just talk about the key moving parts there? I think you called out a stronger COGS inflation, but pricing was also stronger and the mix was positive.

So any additional color on these dynamics and how things bottom out in those 3 would be helpful. And secondly, just very quickly on FX. On the guidance, you're guiding to a translational impact of €25 million to €35 million. Can I just confirm that's calculated based on the latest spot rates.

[Ben Almanzar, CFO]

So yes, when we think about the margin evolution for the established and developing segment, the reality is that we're actually very pleased with that. We delivered an organic EBIT growth in both segments of 1.3% and 12.7%. And as a reminder, the established segment benefited from a one-off property sale in Cyprus in the prior year. So therefore, without this, the organic EBIT growth was up 9.5%. So that's a consideration. And your second question was regarding the FX guidance and essentially what is included in there.

So when we think about the 2023, we expect transactional FX headwind of 25 -- translational FX headwind, I apologize, of €25 million to €35 million, which is mainly impacted by the Egyptian pound, the ruble and the naira as well as some other smaller currencies in there. So most of this is actually calculated on the spot rates, except with the naira, where we expect -- we're anticipating a depreciation.

[Operator]

The next question is from Charlie Higgs with Redburn.

[Charlie Higgs, Redburn]

My first one is just on the free cash flow and the net debt EBITDA. I mean, very strong free cash flow in the year, and you're now down to 1.2x leverage, which I think is a bit below the long-term target. Can you just talk about how you see that over the next coming quarters and years? What you'd need to see to maybe do a capital return? Then also maybe just your view on M&A in the near term.

Are you seeing any interesting distressed assets maybe that would keep the leverage low for now?

[Ben Almanzar, CFO]

Let me start, and then I'll hand over to Zoran to say some more on M&A. So yes, indeed, our net debt to comparable EBITDA ratio ended at 1.2x, which is slightly below our midterm guidance of 1.5 to 2x. And this was indeed helped by the strong cash generation that we saw last year in the business. Look, our strong balance sheet and liquidity position has allowed us to continue to invest in future opportunities despite all the disruptions that we've seen recently in the environment. And we have always said that if we don't see good uses of cash on the horizon, then we'll return to investors by a special dividend.

[Zoran Bogdanovic, CEO]

Yes. Charlie, just to add on the second part. Just before saying a word on M&A, I just want to reinforce that with this type of balance sheet and financials that we have that our first objective is strengthening our business organically. We are very clear about 3 pan Hellenic prioritized categories that we believe will continue driving the -- most of the profitable revenue generation. Secondly, we are significantly investing behind capabilities which are tremendous investments behind data, digital commerce, insights, revenue growth management. So all that really makes a difference in how we are shaping the business to be as resilient and even more for the future. And then we are on the lookout.

This current environment does not stop us in any way. And given the fact that such financials and balance sheet give us the optionality that we can react if and when the right opportunities come up -- and I emphasize the word the right opportunities that really make strategic sense and also that there is a financial sense. And I can say that, yes, we are active. We are evaluating a couple of opportunities. And the time will tell whether those prove to be the right ones to increase and drive shareholder value.

[Charlie Higgs, Redburn]

And then my follow-up was just on Nigeria. It looks like another strong year. I know beforehand, you were maybe talking about the consumer weakening. But could you just maybe talk a little bit about what you're seeing in the market there with the consumer and maybe the outlook for Sparkling, in particular, Energy with the launch of a few of the affordable and how you see that progressing in the year?

[Zoran Bogdanovic, CEO]

Yes. Look, Nigeria had a couple of years of very strong growth. And in '22, we were cycling very strong volume and price mix growth. Therefore, last year, we knew that there is going to be impact on the volume side. In all the previous calls, I believe, whenever a Nigeria question came up, I always said that we are prioritizing price mix, is the right thing to do.

And that's what we have been doing. And that's why I'm very pleased and very much encouraged that throughout all quarters, we've been very consistent with our price/mix in the country. And on top of that, gaining share in all categories. So yes, consumer in Nigeria is not as resilient as in Europe. We know that. That's why through our flexible plans and revenue growth management, we are extremely mindful in how and where and to which extent and how frequently we are doing pricing.

That's why we always prioritize Nigeria as the lead country for our prioritized capabilities. In this case, it is the blend of data insights and analytics that really strengthen our revenue growth management thinking and planning. And this is what led to such execution that balanced to the extent possible our price increases with consumer demand. We are mindful and we know that consumer is going to be challenged on the affordability. That's why we are paying attention to those packs that really play that role. That's example of RGB, which is a very important pack for us in Nigeria for affordability.

But having such a big country that I just learned also has bigger population than Brazil. Also, there is a segment of population that still, even in these times, wants premiumization type of products. And we are doing those because affordability and premiumization have a space for Nigeria in consumer.

[Operator]

The next question is from Richard Felton with Goldman Sachs.

[Richard Felton, Goldman Sachs]

Just one question for me, please, and it's a more medium-term question on the Energy category. Zoran, you mentioned in your presentation that you see upside for per capita consumption in the Energy category. I was wondering if there's any numbers that you can share to help us frame that opportunity? And what markets are you looking at as a benchmark? And where do you see the biggest gaps in your portfolio?

[Zoran Bogdanovic, CEO]

Let me just first say that coincidence or not, for the past 7 years, we had -- for the past 7 years, we had a continuous double-digit growth, which now led to having this close to 10% in our group revenues. And I can say with pretty good certainty that this category is going to continue with above the average growth also for the next couple of years.I can't say that we have a portfolio gap, because I think that what we have done over the years with 3 different brands and activating those in markets where it makes sense -- and Nigeria is a good example, where we started with this affordable Energy called Predator, which is performing extremely well. You have markets where we have that affordable Energy proposition. Then we have like a mainstream plus, which is Monster. And then more on the premium level we have Burn, an example of such a country is Poland.So we see the need for product proposition in all 3 segments.

And that's why we are very pleased that there are excellent brands with their own respective properties and activations and marketing plans that really drive each segment. Now the beauty of this category is that it's constantly expanding into new occasions. It's becoming more relevant not only to teens, which it used to be in the past, there is a more balanced consumption pattern between men and women. There are also extensions of Energy into certain adjacencies like performance energy with the brand Reign. And it's growing consumption across more parts and more time parts in the day.So through -- a number of these elements contribute on top of our strong execution, continuous distribution increases, cooler penetration and excellent innovation that comes from the Monster team.

This has been a proven formula which really serves well. But together with Monster team, we really keep raising the bar and challenging ourselves how we can drive this category further. And that's why I think you can see also my excitement about it and believe that it will continue with a strong growth.

[Operator]

Gentlemen, Ms. Kennedy, there are no more questions registered at this time. I turn the conference back to you for the closing remarks.

[Zoran Bogdanovic, CEO]

Thank you all for your time. We look forward to speaking to you all again soon, and we look forward to seeing as many of you as possible at our Investor Day in Rome on May 25. Thank you all, and I wish you a great rest of the day. Thank you.