Coca-Cola Europacific Partners PLC

NASDAQ:CCEP

Earnings Call Transcript 2018-Q3

[Operator]

Good day and welcome to the Coca-Cola European Partners Third Quarter 2018 Conference Call. At the request of Coca-Cola European Partners, this conference is being recorded for instant replay purposes. At this time, I would like to turn the conference over to Sarah Willett, Vice President of Investor Relations. Please go ahead, madam.

[Sarah Willett, Coca-Cola European Partners Plc]

Thank you and good afternoon, Europe and good morning in U.S. thank you all for joining us today.

Before we begin discussing our third quarter results for 2018, I would like to remind you of our cautionary statements. 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 this afternoon's release, as well as the detailed cautionary statement found in reports filed with the UK, U.S., Dutch and Spanish authorities. A copy of this information is available on our website, www.ccep.com.

Today's prepared remarks will be made by Damian Gammell, our CEO; followed by Nik Jhangiani, our CFO. Following those remarks, we will open the call for your questions. Following the call, a Q&A transcript will be made available as soon as possible on our website.

Before I hand over to Damian, we are as of today starting to publish our financial calendar on our website. So I encourage you to sign up to newsletter (00:01:25) to ensure these fit into your calendar as soon as they are released. Our reporting dates will no longer be announced via press release. Our next announcement will be our full year 2018 results on Valentine's Day, February 14, 2019 at 7 AM GMT followed by a conference call later in the day.

So, back to our third quarter results, I will now turn the call over to our CEO, Damian.

[Damian Paul Gammell, Coca-Cola European Partners Plc]

Thank you, Sarah. And again I'd like to thank everybody for taking the time to join us today. We very much look forward to discussing our year-to-date and our third quarter 2018 results, as well as our outlook for the full year 2018. Overall, we are very pleased with our results so far this year. Importantly, the momentum in the business provides us with the license to continue to build for the future. We are continuing to make the right investments now in both our portfolio and in our core capabilities to support our long-term growth agenda. And this explains why we are not yet seeing more operational leverage in our P&L. Nik will talk a little bit more about this later. Driving value for our customers and our shareholders remains at the heart of our business. And we are fully committed to the mid-term growth objectives, which we provided at our recent Capital Markets Day in Wiesbaden, Germany.

So, now, on to our results year-to-date. Our revenue increased 4.5% on the comparable currency neutral basis led by a very healthy 5% increase in our revenue per unit case. Excluding the impact of incremental soft drinks taxes, our revenue per unit case increased by approximately 3% as we continue to benefit from our efforts and strategy to improve our price and mix over time. On our year-to-date volumes, which were slightly down, the volume impacts of softer trading over the summer in France and Spain. New soft drink taxes on our strategic portfolio and pricing initiatives were almost fully offset by the favorable weather in Great Britain, Germany, and Northern Europe that we enjoyed over the summer months. Very importantly, our transactions have continued to outpace volume year-to-date. And this remains a key metric for us as we highlighted at our Capital Markets Day. Solid revenue growth and continued realization of post-merger synergy benefits have helped us to drive our operating profit growth of 8% year-to-date on a comparable and currency neutral basis.

Now, I'd like to turn to performance by territory to share with you how we performed in the third quarter. In Iberia, our revenues were 3.5% led by strong volume growth in Portugal. Volumes in Spain suffered from weaker tourism trends over the peak summer months particularly impacting the HoReCa channel. Growth in cans and our glass packages help drive revenue per unit case in Iberia. Coca-Cola Sugar, Zero Sugar, Nestea and Aquabona all performed well during the quarter, and we continue to gain distribution of our new premium mixer, Royal Bliss.

In Germany, our revenue increased 11.5% driven by both strong volume and revenue per unit case growth. Obviously, our volumes benefited from excellent weather conditions throughout the summer, particularly during August. Strong growth in glass and cans as well as the continued benefit from scaling back a large multipack PET promotions helped to drive a strong revenue per unit case gain during the third quarter. We saw solid volume growth from Coca-Cola Classic as well as the continued momentum behind our Coca-Cola Zero Sugar brand. And in addition to that, we saw healthy growth from Fanta, Fuze Tea and our Vio water brand.

In Great Britain, we saw revenue growth of 21%. This reflects underlying gains in revenue per unit case as we continue to improve our promotional effectiveness as well as the impact of the soft drinks industry tax. Excluding the sugar tax, revenue in Great Britain increased by a very healthy 8.5% on a currency-neutral basis. Volume growth was stronger during the quarter helped by record-breaking summer as well as the strong execution during the industry-wide shortage of CO2, which I'd like to call out is a credit to our supply chain colleagues and all of those that helped us minimize any disruption to our business during that challenging period.

In terms of the soft drinks industry tax, the prolonged period of unusually warm winter in GB continues to make it difficult to give a full assessment of the impact of the sugar tax. That said, I am pleased with the overall transactions for our Coke trademark brands here to-date that are broadly stable versus last year with growth in Diet Coke and Coke Zero offsetting the decline in Coke Classic. In fact, Coca-Cola Zero saw another quarter of over 50% volume growth in GB and I'm very pleased that our Diet Coke brand grew over 10% with promising results from the recently-launched Diet Coke flavors. As we get better insights on the impact of the sugar tax in GB, we will obviously share that with you going forward.

Turning to France, our revenue was up 10.5% mainly driven by strong growth in revenue per unit case, owing to a positive package and brand mix, as well as the impact of recent soft drinks tax changes. Our volumes grew modestly partially (00:07:02) helped by the recent resolution of a customer dispute. However, transaction significantly outpaced volume during the third quarter following the successful reset of our Coke trademark price and pack architecture. For example, we have now replaced the 1.5 liter and 2 liter Coke trademark PET bottles with a much more competitive 1.25 liter and 1.75 liter options as we focus on driving more profitable revenue growth for our customers and for our business in France over the longer term.

Finally, revenue in our North European territories was up 12% in the quarter, again driven by strong volume gains, driven by very favorable weather trends over the key summer months. Belgium and Luxembourg, and The Netherlands, in particular benefited from extended summer trading additions, overall, in Northern Europe, our Zero Sugar brand continued to performance well, and we're very pleased with the performance of the recently-launched Fuze Tea brand in these territories.

Looking a little bit closer to our brand performance. From a volume perspective, our sparkling portfolio increased 5.5% during the quarter, with a 3.5% increase across our Coca-Cola trademark brands. Again, Coca-Cola Zero had another solid quarter with growth of over 18% while Coca-Cola Classic's volumes declined slightly by approximately 1%.

Our sparkling flavors including energy grew 9.5%, with that growth coming from a strong performance from Fanta, Schweppes and Sprite. Within this category, energy was up over 15% as we continue to execute successfully our multi-band strategy. Monster brands had another very strong quarter benefiting from the continued growth of the Punch, Ultra and Hydro ranges.

Our still brands grew by 4%. This was driven by a 9% increase in water volumes, again helped by that favorable weather I talked about earlier. The juices, isotonics and other categories declined slightly by 1% reflecting portfolio decisions in the ready-to-drink tea category as well as a decline in fruit drinks. Fuze Tea, Vio and Smartwater all saw a solid volume growth in the quarter.

So taking into account our performance for the first nine months of 2018, we're very pleased to affirm our 2018 guidance today. We expect comparable diluted earnings per share in the €2.27 to €2.29 range including currency translation at recent rates, and an immaterial benefit from a share buyback of up to €500 million this year. So, overall, we've got good solid momentum in the business and we are excited about the growth opportunities that lie ahead.

As you know, we've recently spent a lot of time talking about some of the long-term category and channel opportunities we see over the next 10 years at CCEP, and how we will ensure that we capture the least if not more than our fair share of that growth. This means we must continue to make the right strategic investments today in areas such as digital, our route-to-market, our people, and our portfolio innovation.

We are aligned with The Coca-Cola Company and we want to continue to make sure we diversify our portfolio to become a bigger and better total beverage company in terms of both our product and our packaged mix. We are particularly pleased with the customer and consumer reaction to Fuze Tea, which is already the number two ready-to-drink tea in most of our markets, and we are continuing to gain distribution. We've also rolled out AdeZ, Honest Coffee, and expanded Smartwater into new markets outside of Great Britain. And The Coca-Cola Company's recent acquisition plans for the Tropico brand in France are again another great opportunity for us to bring our Beverages For Life strategy to markets such as France.

On the packaging side, we will continue to focus on growing smaller packages and premiumizing our offerings against consumer preferences. For example, we've already seen a growth of over 30% in our small cans in the third quarter and a growth of over 7% in glass, both of which contributed extremely positive to our mix and to the consumer drinking experience.

We are leveraging the understanding of drinking occasions starting to take a much more segmented approach for an engagement with our customers. We believe this will allow us to provide even higher levels of service across the market and build our outstanding marketplace execution as we continue to offer our customers and consumers the right products, in the right packs, at the right time. No doubt, this is something we will continue to talk about as we move into 2019.

We are starting already to see the positive impacts of the route-to-market changes that we've made since we created CCEP, most notably through our ability to grow our away-from-home channel, which again has outpaced the growth in our home business year-to-date.

So, finally, I'd like to share some closing thoughts on our year-to-date performance. Firstly, we are pleased with our performance in 2018, and this is a strong testament to the commitment, the motivation, and the dedication of all of our employees at CCEP. However, we are not complacent and we know that we've got a lot of work ahead of us to achieve and exceed our mid-term goals.

Secondly, as we talked a lot about in Germany, we have an aligned vision with The Coca-Cola Company. And this sets us up to win. We have a clear and collaborative vision and strategy to drive sustainable long term profitable growth for our shareholders.

Third, our commitment to driving our shareholder value remains as strong as ever, and we are on track to return up to €500 million through our share buyback program this year as well as increasing our Q4 annualized dividend payout ratio to approximately 50%. We will also continue to do what's right for all our stakeholders.

We are hugely proud that CCEP has recently been listed on the Dow Jones Sustainability Index for the third year running. Our listing on this index demonstrate the continued progress we are making on sustainability across our business less than one year on from the launch of our sustainability action plan. This is forward.

And finally, you will have seen in our release today that we will be changing our ticker from CCE to CCEP. This will be effective from November 7 on all exchanges and better reflects our company's identity going forward.

So, thank you very much for your time. I'll now turn the call over to Nik for more detail on our financial results and our full year outlook, and I look forward to taking your questions later in the call. Nik?

[Manik H. Jhangiani, Coca-Cola European Partners Plc]

Thank you, Damian, and thank you to all of you joining us today. So let's go straight into the results in a bit more detail. So, on a reported basis, year-to-date diluted earnings per share was €1.58 or €1.76 on a comparable basis. Currency translation has had a negligible impact on our earnings per share to-date. In the third quarter, revenue increased 11.5% on a comparable and a currency neutral basis. This is driven by a 6% increase in our revenue per case or approximately 3%, excluding the impact of the soft drink industry taxes, reflecting favorable price, promotion and package mix.

Volumes grew by 5% in the quarter reflecting an excellent summer across particularly Great Britain, Germany, and Northern Europe. This was partially offset by softer trading in France and Spain. Volumes in France were mainly impacted by the recent pack size changes as well as the gradual rebuild of staff following the resolution of a recent customer dispute. Meanwhile, our volumes in Spain suffered from weaker tourism trends across the key summer months.

Third quarter cost of sales per unit case increased by 7% on a comparable and currency-neutral basis. Cost of sales per unit case increased by approximately 2%, excluding the impact of the incremental soft drinks industry taxes. This was partly driven by mix and higher volumes, but also the continued year-over-year increases in key inputs, principally aluminum, PET, and of course concentrate, which is in line with our incidence agreement linked to our revenue growth.

These factors were partially offset by lower sweetener costs and the continuation of the delivery of our synergies. Because if you look at the third quarter, then our gross margin was down about 75 bps, but ex-tax was up about 50 bps, so all-in-all a good result. If we look at the full year, we continue to anticipate broadly stable gross margins and a full year 2018, when including the impact of incremental industry taxes, we would see slight gross margin expansion when excluding these taxes.

Operating expenses were up 7.5% on a comparable and currency-neutral basis. This reflects the impact of volume growth, expense timing, as well as select investments in areas including digital, our route-to-market and joint investment with The Coco-Cola Company on innovations and new products. These costs were partially offset by synergy benefits and a continued focus on managing operating expenses. All these factors that contributed to operating profit growth of 11.5% on a comparable and currency-neutral basis in the third quarter.

Also during the quarter, we realized another €30 million in synergies taking our year-to-date total to approximately €90 million. Now, on a pure math perspective, when excluding these synergies, operating profit growth year-to-date would have been broadly flat on a comparable and currency-neutral basis. This is mainly due to four key factors.

Firstly, we stepped up our investment behind our new product development as part of the Beverages For Life strategy aligned with The Coco-Cola Company for brands such as Honest, AdeZ and Fuze. While these investments are essential as we build our portfolio for the future, naturally they do not to deliver an immediate return as I've highlighted before.

Secondly, our results reflect some of the bold strategic decisions, which we've spoken about previously. These include the removal of unprofitable SKUs in Germany, challenging customer negotiations in France, and the reset of the attractive ready-to-drink category with Fuze replacing Nestea in the majority of our markets. Thirdly, as you all know, Spain in particular has had a very difficult summer trading period contrary to most of Northern Europe including GB, which has impacted our leverage from a country and a margin mix perspective. However, I'm pleased to say that trading in Spain has now improved, and in this instance, we can hope for easier comp for the next year in this market.

And finally, our continued investments in key areas to ensure our competitiveness for the future as previously mentioned digital, our route-to-market, and our business capabilities program. Importantly, our free cash flow generation continues to be strong and was ahead of last year driven by continued success in managing working capital and tight management of our restructuring expenses.

Now, turning to our outlook for 2018, for the full year, we have reaffirmed our guidance for 2% to 2.5% revenue growth and operating profit at the top end of the 6% to 7% range. We continue to expect diluted earnings per share growth in the 7% to 8% range on a comparable and currency-neutral basis.

When including a slight negative currency impact, we expect full year comparable diluted earnings per share in a range of €2.27 to €2.29. This also includes the impact of our share buyback program, which is negligible for 2018 given the late timing of the repurchases in the year. This will of course positively impact us in 2019. As a reminder, our guidance excludes the impact of the incremental soft drinks industry tax; we continue to expect these taxes to add approximately 2% to 2.5% to revenue growth and approximately 3.5% to 4% on the cost of goods growth. We still expect underlying cost of sales per unit case growth to be at approximately 2.5% on a comparable and currency-neutral basis, excluding the impact of the soft drink taxes.

2018 free cash flow is expected to amount to approximately €1 billion including a benefit from improved working capital of approximately €200 million. It's worth touching on a small modeling point relating to free cash flow. As you will have seen today, we have already reported year-to-date free cash flow of just over €1 billion. Please bear in mind that some of our capital expenditures for 2018 is backend loaded particularly CapEx related to our business capability program and certain supply chain initiatives to get us ready for the 2019 summer selling season. We continue to expect 2018 CapEx to be at the top end of the €525 million to €575 million range, and year-to-date, we've spent just under €300 million – approximately €330 million. Therefore, as noted, you will see a step-up in CapEx in the fourth quarter.

On synergies, we've now achieved total savings of approximately €245 million, including €30 million in the third quarter of 2018. We continue to expect to realize at least 80% of our target by the end of 2018 and a run rate of almost 100%.

So given these factors, currency exchange rates, our outlook for 2018, as well as the share buyback, we continue to expect year-end net debt to adjusted EBITDA for 2018 to be towards the low end of our target range of 2.5 times to 3 times and a ROIC improvement of approximately 80 basis points, which on top of a 100 basis points improvement last year is a great result.

In terms of our buyback program, we're on track to repurchase up to €500 million by the end of the year. Our latest share buyback filing at the end of last week stated we had repurchased 5 million shares amounting to a cash outflow of just under €200 million.

To close, let me highlight a few key areas. First, we're very pleased with our financial performance so far this year and remain committed to driving profitable revenue growth. This has meant making some difficult strategic choices relating to our brand, our pricing and our packaging, all of which was spent in our business going forward.

Second, we're continuing to invest in our employees and capabilities to capture the growth opportunities ahead of us. And we talked a lot about this at our Capital Markets Day in Germany. These investments are critical as we seek to expand our portfolio, strengthen our relationship with our customers, and further widen outlet coverage.

Third and finally, we remain committed to the mid-term annual growth objectives we laid out in Germany. In particular, free cash flow generation remains at the very core of our business, and ultimately our aim is to create long-term value for our shareholders. This is evidenced by share buyback program and yet another sizable increase in our quarterly interim dividend.

So, thanks for your time today. And now Damian and I will be happy to take your questions. Operator?

[Operator]

Ladies and gentlemen, we will now conduct a question-and-answer session. Thank you. Your first question comes from the line of Dara Mohsenian with Morgan Stanley. Please go ahead.

[Dara W. Mohsenian, Morgan Stanley & Co. LLC]

Hey, good morning, guys.

[Damian Paul Gammell, Coca-Cola European Partners Plc]

Hey, Dara.

[Manik H. Jhangiani, Coca-Cola European Partners Plc]

Hi, Dara.

[Dara W. Mohsenian, Morgan Stanley & Co. LLC]

Clearly, pretty impressive top line results in the quarter itself, but obviously, we also had very good weather and some industry pricing post the tax increases. And you guys clearly outlined your longer-term algorithms to us back in September. But I'm just hoping you could take a step back and just give us some perspective on if these short-term top line results in the quarter give you more confidence in the long-term algorithm. And specifically, I was focused on a couple of areas. Clearly in the UK it looks like the volume demand elasticity has gone better than expected post the price increases, even if you would adjust for the good weather. Does that impact the way you think about pricing in other geographies going forward? Or how you manage pricing holistically in markets where you don't have tax increases? Or is this more sort of specific to what happened in the UK? And then also you continue to do well on outside of carbonated soft drinks and see stronger growth there. So any perspective on increase confidence in the sustainability of that strength going forward? And again, as we look at these sort of two areas, do you think it has favorable longer term implications as you look at where the results have been coming in more recently? Thanks.

[Damian Paul Gammell, Coca-Cola European Partners Plc]

Thanks. I think you managed to get at least five questions into one. So apologies if – myself or Nik miss any one of the components, maybe I'll just tackle the pricing question first. I think our GB pricing obviously we're pleased with what has landed in the market pre-tax and post-tax. I think the team did a great job getting ready for the new tax – the packages have been well accepted by the trade, by our consumers. And as I mentioned in my remarks, it's probably hard to give any firm feedback on the impact of the tax, because clearly we benefited from an amazing summer in GB. Having said that, we are looking at the learnings out of that for our other markets, but we will continue to price – our pricing strategy will continue to be locally driven.

And certainly we run elasticity models in each of our markets to see what we think our consumers will accept on our brands. I would say, we are seeing across all of our markets strong uptake for our more premium pack sizes. So as we offer the consumer higher quality packaging like glass and cardboard for example in retail, we are seeing consumers willing to spend a little bit more on our brands. So I think that's something that gives us confidence for the long term. And we've reflected that in our capital going forward to make sure we've got the supply chain to deliver those premium packs.

Overall, I think if you go to look at our year-to-date results and going back to what we talked about in Germany, the category continues to be healthy across Europe. So that annual growth rate of 1% to 2% on revenue in the category continues to be there. And clearly, our expectation is that we would meet or exceed the category growth rate. So that confidence remains in our business and is reflected in our guidance.

We're quite realistic about the bounce we got on weather. So as we look at our business, clearly, we got a benefit, and we did, as Nik outlined, we did take the opportunity on the back of a solid year to continue to invest to make sure that 2019 and 2020 are also solid years. So I think that's something that we've taken advantage of. We saw the opportunity to deliver on our guidance in 2018, but also to take the chance to do what's right for 2019 and 2020. And we're pleased we got that opportunity and we've taken it.

So, overall, we see that the growth algorithm remaining intact. We see more demand for more premium packaging that we think supports that. We believe our brands are getting stronger with The Coke Company in terms of marketing and the execution. And obviously over time that gives you a bit more pricing power. But we're also mindful that we operate in a very competitive category. So, as I said, all our pricing decisions will be made local. So, hopefully, that covers most of the questions. If I missed anything Dara, please let me know.

[Dara W. Mohsenian, Morgan Stanley & Co. LLC]

Okay. I have more, but I'll come back in queue. I'll give others a chance. Thanks.

[Operator]

Your next question comes from the line of Lauren Lieberman with Barclays. Please go ahead.

[Lauren R. Lieberman, Barclays Capital, Inc.]

Okay. Thanks. Good morning. I was curious if you could talk a little bit, I know, Nik and Damian, you both mentioned kind of continuing to invest ahead for the future. But I was curious about the process by which you go through in any given period of time, when you have the kind of revenue upside that you did this quarter. So there's a lot of, if you will, "extra profit dollars" floating around. How do you make the decision about where to invest and when sort of rank ordering priorities when you've got some extra flexibility in the P&L, it would be great to learn a little bit more about that process.

[Damian Paul Gammell, Coca-Cola European Partners Plc]

Yeah, we – Lauren, we'd always like more extra profit dollars floating around. So, yeah, I mean I think one factor in our results and we touched on it is, Spain is a fantastic business for us. And clearly there was a mix impact in Spain in terms of our overall results. So while we did see a lot of incremental revenue, as Nik outlined, there were some elements that also impacted on our level of profitability. But we did get a chance to share with you in Wiesbaden, some of the longer term priorities. So we continue to sit with The Coke Company and with their own BU leadership and look at areas that we feel we've got a winning proposition, whether that's on brands like Fuze Tea and where we believe we can add sustainable profitability to the business. So when Nik and I sit down and look at our investment plans through 2019 and 2020, we look through the lens of what's going to be invested against a brand or a pack that we believe we've got a competitive advantage on and one that's going to over time generate the margins we require and the cash we require in the business. So, it's pretty much a local decision market-by-market, I mean, some of the initiatives that we've launched go across Europe, like Fuze Tea, Smartwater. So, those initiatives clearly are across more than one BU.

I'd also have to say that as we do take a view on investments much longer than a quarter, it is quite difficult in our business when you get the gift of weather to respond as quick as you may like to. So I think a lot of the investments, we actually talked about them in Q1 and Q2 and they flow through to Q3. So, it is done over an annual basis rather than by quarter, I suppose would be other point I'd make.

Nik, do you want to?

[Manik H. Jhangiani, Coca-Cola European Partners Plc]

No. The only point I would add to that is clearly as Damian said, we have a number of priority areas that we're focused in on, and there are some areas where we as executive leadership team are meeting weekly. And depending on the outlook and how things are going, we might make some decisions to fast-track something that we had said, well, let's wait until we see how it's going. So, Q3, is a good example of some of that fast-tracking that we did to actually help us in Q4 in 2019 in particular or 2020. So, there will be some areas. But to Damian's point, when it's kind of revenue and brand related you can't suddenly just do a big step-up; when we are making investments in capabilities, et cetera, you might choose to prioritize and fast-track some of that. So, hope that answers it, Lauren.

[Lauren R. Lieberman, Barclays Capital, Inc.]

Yeah. And then turning to like some of those things that you might have fast-tracked this quarter, what are areas where there were things that were giving you enough reason to say let's put more money behind that now to fast-track whatever our plans were in Q4 into next year.

[Manik H. Jhangiani, Coca-Cola European Partners Plc]

Digital is a great example of that. You know?

[Damian Paul Gammell, Coca-Cola European Partners Plc]

Yeah, I think also, as Nik said, we probably got a bit more confidence to build out some more of our cooler universe as well. We know over time that we need to continue to grow our cooler universe to give space to all of the new products and brands we're bringing. So that's an example of where we could go a bit faster in the quarter and in the half year.

Nik mentioned digital and we also took the opportunity in some of our markets to support some of our brands a bit more in-store. So that could be a few extra promotional features on this thing. So it's quite a varied opportunities that we look at market-by-market and case by case, but nothing that is outside of our medium to long-term strategy, Lauren. So you maybe – you're looking at maybe bringing things forward a quarter or maybe a half year, but nothing that we weren't going to get to anyway, we just took the opportunity to get there a bit quicker. And obviously that's something that helps our employees to stay motivated because as they see our business performing, mainly primarily due to their efforts, and then they see us bringing forward investment, you do start to create momentum from a culture perspective, and that's something that we're very focused on with our people.

[Lauren R. Lieberman, Barclays Capital, Inc.]

Okay. Great. Thanks very much.

[Operator]

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

[Judy Hong, Goldman Sachs & Co. LLC]

Thank you. Hi, everyone. So I guess my first question is on France. So I know I think you said revenue was up 10.5%. What was the underlying growth x the tax impact? And then, Damian, I think you did talk a little bit about some of the impact you're seeing in the French market post the tax changes, so maybe a little bit more color on that front? And if we think about the volume trajectory as you get back into the large retailer, would you expect a meaningful improvement on that front as well as we head into the fourth quarter?

[Damian Paul Gammell, Coca-Cola European Partners Plc]

Thanks, Judy. So our underlying growth was 6%, so very solid absent the tax impact. We've gone through a lot of change in France this year. And we felt it was time to bring the category forward in terms of the level of pack price maturity in the trade. I mean France as you know has been a very single focused business around more than the half liter for many, many years. And as we looked at our business, actually at the time of creating CCEP, we identified that as a market where a more sophisticated pack offering could unlock more value for our customers and for our consumers. So, we took the decision to delist that pack, which was a big decision for the French team, and move to 1.25 liter and 1.75 liter. That 6% is really on the back of that move, so that is a very solid revenue growth.

Clearly, underlying that was not all of our customers let's say enjoyed our strategy as much as we had hoped, and we did have significant business disruption in the second quarter and third quarter in France. That is now ended. Thankfully, we're back trading with all of our customers. It's taking us a bit longer to get back in terms of distribution, but we're pleased that the third quarter and fourth quarter will look better in France as we move into 2019. So – but overall, I think what excites us about France is we've now created space in our packaging portfolio to allow us to bring into France some of the strategies that we've seen driving a lot of revenue and profit in markets like Belgium and even Germany; if you look at our German results, they're extremely solid.

Both of those markets are probably a year ahead of where we are in France in terms of pack differentiation and segmentation. So, it was important for us to get through that change in France. It was difficult, again, I want to call out our employees did an amazing job during that period. The new packs are in. I would probably feel more comfortable giving you specific data around household penetration levels or repurchase rates as we get into Q1, Judy, it's probably still a bit early. But, obviously, 6% is not a bad result. So, I think we're pretty pleased with that coming out of France in particular. But over time, we'll share a bit more of insights. But we think it was maybe a brave move but it was a move that was made at the right time and I think we're through it now. We're all happy for that.

[Judy Hong, Goldman Sachs & Co. LLC]

Got it. Okay. And then just a quick clarification on share buyback, Nik, you said this year that's obviously up to €500 million. If we look at the run rate of $200 million so far maybe it's coming in a little bit ahead of that €500 million. So, is the €500 million basically set in stone or can you actually go above that?

[Manik H. Jhangiani, Coca-Cola European Partners Plc]

Well, nothing's ever set in stone, Judy. But I think we're committed to doing the €500 million. And I think if you just look at what we have modeled based on the trading liquidity, the fact that there will be holidays, Thanksgiving, Christmas, et cetera, in November and December, we feel that that's a realistic number to achieve.

[Judy Hong, Goldman Sachs & Co. LLC]

Got it. Okay. Thank you.

[Damian Paul Gammell, Coca-Cola European Partners Plc]

Thanks, Judy.

[Operator]

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

[Bonnie L. Herzog, Wells Fargo Securities LLC]

All right. Thank you. Hi, everyone. I...

[Damian Paul Gammell, Coca-Cola European Partners Plc]

Hey, Bonnie.

[Bonnie L. Herzog, Wells Fargo Securities LLC]

Hi. I had a question on your guidance specifically your full year currency-neutral revenue growth guidance, which implies a bit of a deceleration in revenue growth in Q4. So I guess I'm wondering what you guys see as the main headwinds maybe other than lapping a little bit of a difficult comp. And then in other words maybe just touch on how conservative that might be. And I guess I'm wondering if some of the recent favorable weather trends, the gift that you guys mentioned might be masking what could be a slightly less favorable macro environment?

[Damian Paul Gammell, Coca-Cola European Partners Plc]

So, Bonnie, we don't see a less favorable macro environment. So I think we still remain confident as iterated. We've been very careful to look through the weather impact and really have a solid view of the underlying performance of the business. And that gives us confidence both in our 2018 guidance and what we've talked about for 2019. So nothing on the macro side. In reality, December is a very big month for us. And when we look at our Q4, we are cycling a solid quarter at the end of last year. So we're mindful that we've got good comps. And we're also mindful that December is a big month particularly in markets like Germany and in Spain. So – and we've just reflected that into our full year guidance. So nothing beyond that. I suppose you could view it as – we view is as being realistic rather than conservative, but I think there is nothing that would – that we're seeing that would make us feel nervous about the quarter. Obviously, it's a big slowdown from Q3, but Q3 was just a breakout quarter on the back of great weather. But underlying, we still feel very confident. Nik, I don't know if there is...

[Manik H. Jhangiani, Coca-Cola European Partners Plc]

No, and I just remind you to that point, the comp that we are cycling is 4% revenue growth Q4 2017. So, it is a big comp, and again, just remember, December is a big month for us. So, more to come.

[Bonnie L. Herzog, Wells Fargo Securities LLC]

Okay. That was helpful. And if I may just ask another quick question on your operating expense, which was up fairly significantly during the quarter both year-over-year and then on a sequential basis. So, just wondering if you guys could give us a sense as to how much that reflected expense is specifically associated with the strong volume that you saw during the quarter. And then how should we think about that in Q4 relative to what your expected comparable volume growth will be?

[Manik H. Jhangiani, Coca-Cola European Partners Plc]

You know, clearly, we did see a step-up. Part of that is just some of the timing, part of that is some of those investment choices that we made particularly behind some of the NPDs. So the AdeZ, the Honest, Fuse, et cetera, that have been going extremely well. I don't guide towards an OpEx number for Q4. I would just say it's kind of built into our guidance number. And the trends on the full year are very much in line with what we've indicated. So, that's all I can say on that.

[Bonnie L. Herzog, Wells Fargo Securities LLC]

Okay.

[Damian Paul Gammell, Coca-Cola European Partners Plc]

No surprises really.

[Operator]

Your next question comes from the line of Ali Dibadj with Bernstein. Please go ahead.

[Ali Dibadj, Sanford C. Bernstein & Co. LLC]

Hey, guys. Just want to drill deeper on two topics please. One is around those investments. Nik, in particularly you're talking about and giving us some color on, balancing fast-track versus the long-term, where do you think we are on digital or route-to-market business capabilities? How far along are we, I know you've just started, but how long do you think you'll kind of be comfortable investing or you'll need to invest in each of those aspects? And how much do you think in total that would be? That's kind of one question.

And then the second question is just around stills results, so water volumes clearly drove that and they're up very, very strongly and I understand the weather piece to it. But the other stills were down. I totally get the Tea transition. Is that the big driver of it or are there others and we clearly saw juices are under pressure, so can you just talk strategically about stills as well? That would be great. Thanks.

[Damian Paul Gammell, Coca-Cola European Partners Plc]

So, hi, Ali. I'll maybe take the second question and then let Nik share some color on the investments. I think, overall, we're very pleased with our performance in stills. I mean you're absolutely correct; the volumetric piece is the switch out of Nestea into Fuze, so that's something that we plan for. I think the great thing about our business now in that space is it gave us the opportunity to build the brand in a slightly different way. So if you look at our strategy, it's much more around small packs and less about large discounter packs. So we've taken a chance to reshape our tea business. Clearly, that's impacting our margins in a positive way, and it's allowing us to build a more profitable stills business. So bulk of our NPD in that space, we're also pleased with because with the company we prioritize smaller packaging, immediate consumption, less big retail, less big PET pack. So, again, that supports margin and cash flow over the short term and longer term.

So I think, our sales business is ahead of where we thought would be this year, if we look at it from a strategic perspective. Volume-wise, it's better than we expected in terms of the switch out. So I think, overall, that is a positive part of our business, and it gives us confidence with the company and with our sales force to probably go a bit faster on some of the new initiatives coming down the track. And again, that kind of flows into that reimbursement strategy because as we see the momentum, we see the margin on the cash, it does give us the confidence to go a bit faster.

So maybe on that, Nik, just share some color on how that investment will play out over the next periods.

[Manik H. Jhangiani, Coca-Cola European Partners Plc]

Yeah. So this is a journey we started up on. It's not one that we see that it's a race to a finish. So I think I'd highlight three main areas for you. One is really around digital, and I talked about maybe even fast tracking some of that. But a lot of what we're doing and we highlighted some of that at the Capital Markets Day, is about actually getting a lot of the basics right to help us move faster on that journey, which some might say compared to some of the others, we're further along or others might even say that we're actually still pretty far behind where the industry is moving, and how quickly we can move that.

So a big part of that is our whole business capability of roadmap and plan around our IT infrastructure and systems as well. That's going to be at least a three-year to four-year investment. But as we continue to do that, we're focused on the top line revenue-generating activities first which hopefully will support the type of revenue growth that we've been seeing and support our long-term algorithm of that low-single digit revenue growth. So that's one.

The other area is route-to-market, right. And I would say to you even in a market like Iberia, Spain, in particular, where we probably have a great market grip, we have opportunities in that market to continue to improve our route-to-market in certain regions and parts of Spain. So that's a big part of the investment. But that's actually going to follow then what's been happening in other markets or some that's happening in parallel where we're already working with wholesalers in a different way based on some of our digital capabilities. We demonstrated dash milk (45:54) for instance when we were together at the Capital Markets Day. Every dealer survey, that just gives us huge opportunities on how we need to position ourselves to be able to win with every one of those outlets that we now are discovering more and more, right, that we didn't have access to or even ability to think of servicing. So that's the second area that I would talk about.

And then the third is going to continue being in capabilities that we need in our people, right. Whether it's a sales force, whether it's finance capabilities, the world – the markets are changing, our commercial capabilities need to evolve. And that's an area that we will continue to invest heavily behind our people and our capabilities. So I think all of those, you're on a journey, we were not racing towards it. And we'll continue at least over the next two years to three years at an accelerated pace, I would say.

[Damian Paul Gammell, Coca-Cola European Partners Plc]

Yeah. Just to add Ali on – we're a very focused on EPS profitability and free cash flow. So that's our – that's what we're focused on and we're very pleased that we can continue to deliver or exceed on those numbers, but also ensure that we're building the business that's going to deliver great shareholder value over the medium-term. And I think if you extrapolate and – you guys are better at this than probably we are. If you extrapolate out the amounts that we are reinvesting, it's also quite a reasonable amount. I mean it's not impacting our ability to deliver on our EPS and on our free cash flow. It's quite balanced and measured, and we will continue to look at it through that lens. But we are being realistic when you look at the growth opportunities for this business in terms of profit and revenue, it would be crazy not to start investing in some of these areas because it will unlock a lot of great profitability and free cash flow over the medium-term to long-term.

So, but Nik and I will continue to update you on a quarterly basis because we're realistic and pragmatic about the pace of that. We're very disciplined about where we do it. So, again, we've got a very clear IRR expectations around any investment in our business. And it will always remain balanced in terms of the total P&L delivery. So I think that's something we've demonstrated since we created CCEP. So – but something we're very happy to keep talking about, we think it's a good story. I think it's great to have a business that can deliver great short-term results, and in doing that also lay the foundations for great long-term results. And I think as a CEO, I think that's my primary responsibility.

[Ali Dibadj, Sanford C. Bernstein & Co. LLC]

Okay. That's really helpful. One more just more from a shorter-term perspective. You mentioned in the release that Coca-Cola Classic volumes are down for a tax – impacted by taxes. Is that just a pack size change? Or have you seen any shelf price differences actually, or shelf space differences? Is it just the pack size change, that's the only thing?

[Damian Paul Gammell, Coca-Cola European Partners Plc]

Yeah. I think there are – I mean, obviously volume-wise we downsized the packaging to keep the pricing what we feel...

[Ali Dibadj, Sanford C. Bernstein & Co. LLC]

Yeah.

[Damian Paul Gammell, Coca-Cola European Partners Plc]

... is good for our consumers. So that's in there. From a transaction perspective in GB, it's obviously ahead of expectations. But again we believe the weather played a big part of that. I suppose the positive thing is when the weather shines still lots of people want to drink Coke Classic. So, for us, that underpins strength of the brand. I think, generally, across Europe, we're seeing our Coke Classic business perform better. We're seeing transactions hold up a lot more. We're seeing in some of our markets that brand return to revenue growth. And so, that's something that excites us. It's a big part of our business. And it is performing a lot better in 2018 than it has done for many years in Europe, so that's encouraging.

We'll be able to give a better read on the sugar tax impact in GB as we get into Q1 and Q2. We did suffer certainly in GB; retailers did take the opportunity with the sugar tax to over space Coke Zero and Diet Coke. And again, that's the benefit of us in those brands. We are very conscious that that shouldn't come at the expense of Coke Classic, so that's something our sales teams are very focused on. But overall, I think that brand is continuing to prove its resilience and also its consumer loyalty is phenomenal, so it's great.

[Ali Dibadj, Sanford C. Bernstein & Co. LLC]

Thank you so much, guys.

[Operator]

Your next question comes from the line of Steve Powers with Deutsche Bank. Please go ahead.

[Stephen Powers, Deutsche Bank Securities, Inc.]

Yes. Hey, good morning. I realize this is maybe a little bit premature just because the Costa Coffee deal for Coke has not yet closed, but I was wondering if you could just talk a little bit about how you're thinking about that asset and how you think it might have evolved since the Capital Markets Day. And I'm specifically thinking about this from three perspectives. First, I don't think those doors are CCEP doors today, those Costa Coffee outlets just from a sales perspective. So, hoping you can just confirm that and think about because I think that's an incremental business that lies ahead. Second, I'm curious what role you think CCE might play specifically in Costa's convenience and vending business? And just to what extent that is appealing to you at least in principle? And then third Costa as a potential incubator, as that comes into the Coke system I would think that would be potentially a place where you could place new products before they're in water distribution to see what kind of consumer response might be. I just want to test whatever you agree with that. Thanks.

[Damian Paul Gammell, Coca-Cola European Partners Plc]

Thanks, Steve. I mean obviously we're not party to that deal, so all of my comments are based on an outsider's perspective, but I'm happy to share my own personal views on the deal. I mean, overall, I think it's very exciting and obviously the deal hasn't closed yet. But if it does close, I think it's a great move for The Coke Company to build scale in a category that's extremely exciting globally. So I fully can see the logic behind KO's move. And I think for the bottling system, it's great that they're looking at big asset acquisitions that can transform our presence in a big category. So, no debate there.

You're absolutely right. Within GB, there is about 2,700 outlets today that don't sell our products within Costa. It's actually the only coffee shop of scale that we're not partnering with. That business is something that we, as you would expect, on an ongoing basis, absent this deal we're competing for anyway. So we believe our brands in Costa is good for Costa before this deal and obviously after this deal, we feel even stronger about it. So there is potentially, but again that's going to be an arms-length commercial decision with the Costa management that we believe we could get into those outlets over time. We have a big vending business. So, clearly, across our markets, particularly Germany, Belgium, Nordics, we have got a lot of coffee business already within CCEP. So, clearly, beyond the ready-to-drink opportunity with Costa, we would look at being able to bring a more premium brand into those – into that universe which is exciting.

And, yeah, I mean back to the first point, if over time, KO acquires that business and you have got 2,700 outlets in fantastic high street locations, airports, transportation. So, they exactly fit in an environment that will give you a great opportunity to bring new brands and experiences to consumers quite quickly so we're excited about that for sure. And I think that's something – obviously we will wait with patience for the deal to take its course and hopefully it's successful and then obviously we're sitting with KO, looking at what could it mean for CCEP. But as you've highlighted across three areas, there are maybe even more that we haven't explored yet, it's an exciting deal potentially for CCEP.

[Stephen Powers, Deutsche Bank Securities, Inc.]

All right. Great. Thank you. And then if I could just follow up with a separate question on the HoReCa channel, which you called out at the Capital Markets Day as a big focus for you guys going forward. I was hoping you could just talk a little bit more specifically about what steps you are taking to improve your standing there even further? And really specifically as we think about in the next 12 months, where should we be looking for the most immediate incremental benefits? Are they wide spread or should we expect improvement to be focused on one geography or one market more than another, that would help. Thanks.

[Damian Paul Gammell, Coca-Cola European Partners Plc]

Yeah. So, Stephen, I mean is that – that's a journey where we've got opportunity across all our markets. So this is a pan-CCEP route-to-market strategy. The first step, as we've talked about is we're increasing our coverage. So we're visiting more outlets, we're talking to more customers, we're working with different routes-to-markets with our wholesalers to make sure that we can get our products there efficiently, we're doing some innovative approaches like our joint venture in Germany with a couple of the large brewers to see if that unlocks more growth in that channel. So really it's across all of our markets, and it starts with coverage and then execution, and then obviously an efficient delivery system. You see that and you are seeing that coming through consistently in our results. So I mean clearly that drives smaller package growth, it drives our stills portfolio, it was generally – that's an area where we don't participate as well in. And you'll see it in our channel mix as well.

So, the good thing is that's something that will sustain our growth over a number of years. And we're excited about it, I think some markets for example like Spain are probably ahead with the level of market grip that they have and other markets for example like France as we've unlocked the package mix in France in retail, it's made us more competitive in away from home. So some of our retail strategies were clearly chosen to help us to be more competitive in away from home, and you'll see markets like France and probably accelerating a bit faster going forward. So, it's across the business, it's a multi-year journey, it's incremental. So it's great and it's something that I think builds profitability for the long-term. And it's a slow burn, I mean as you look to build your coverage, it is about people, it's about relationships. So those takes time, but the good news in our business is when you do it, it also sticks for a long time. And you just got to look at our margins in Spain as a point or two when you get this right, the mix and profitability your business can achieve is very exciting.

[Stephen Powers, Deutsche Bank Securities, Inc.]

Perfect. Thanks so much.

[Operator]

Your next question comes from the line of Sanjeet Aujla with Credit Suisse. Please go ahead.

[Sanjeet Aujla, Credit Suisse Securities (Europe) Ltd.]

HI, just looking to get your thoughts on where you think you are with some of the resets you've done on the price architecture across a few of your markets for the last couple of years. Are we largely at the end of that process or is there a couple of more things to do there?

[Damian Paul Gammell, Coca-Cola European Partners Plc]

Hi, Sanjeet. I think on the big ones I think we've taken just bring everybody back to the end of 2016, 2017, we started off with the promotional price changes, so they're largely behind us. So we reset our promo price pack in Germany, Belgium, France, GB. So I think that's something that we feel good about. So that's behind us. I think France was the last big market where we felt we needed to take a big step in terms of our packaging and retail. And so we did out in 2018 I talked about that earlier. So I would say broadly where we are at the end of the big I suppose structural changes that we wanted to make, we're now much more focused on mix. So as we've got the new packaging in place, our ability to improve our mix going forward is obviously a lot clearer. So I think you're going to see a lot more mix rather than big, big changes and price promo strategy. I think that's – again that's subject to what happens with our competitors and retailers. But from our perspective, we feel pretty pleased that we – in the last two years we executed probably a bit faster than we originally thought the bigger moves. So I think in 2019 we're forecasting a more stable price environment going forward.

[Sanjeet Aujla, Credit Suisse Securities (Europe) Ltd.]

Got it. And just to follow up on input costs, any early thoughts on how 2019 is shaping up?

[Manik H. Jhangiani, Coca-Cola European Partners Plc]

Well, early days, but I think there is enough out there as you all are probably reading about in terms of pressures particularly on the oil front, which clearly has a correlation and an impact on our PET prices. So if I look at the full year estimates right now for 2018 that I alluded to earlier, ex-tax we're looking net-net at about a 2.5% COGS per case increase. In that number, commodities have been roughly kind of flattish, right, because while we've seen some ups and downs and I think particularly more back end weighted because of the moves in PET and aluminum that's been flat. If you now look at that going into 2019, our estimates at this point are probably that you're looking at circa somewhere around a 2.5% to 3% inflation on the commodities piece. Now, again, to remind you commodity is about 30% of our total COGS. Then you've got the elements around concentrate, which is very much linked to our incidence model. So what we can realize in terms of pricing will have an impact on our concentrate, and that's another 45% of our COGS.

And then the last element that I would call out which is kind of linked to what Damian was just talking about is the mix settlement, right. Because as we want to continue moving to a smaller packs, more premium packs, that clearly has a positive impact on revenue but has an impact on our COGS as well. Net-net for a margin improvement opportunity but you will see that coming through as well. So that should give you some color in terms of some of the challenges that we'll be facing as we go into 2019, but early days still and we're still continuing to work on our plans, so more on that in February.

Operator, we have time for one more question.

[Operator]

And your final question will come from the line of Chris Pitcher with Redburn Partners. Please go ahead.

[Christopher Michael Pitcher, Redburn (Europe) Ltd.]

Hi. Good afternoon. If I could ask two, hopefully quick questions, I'm just following on from the COGS question, you didn't mention sugar. Given the changing shape of the portfolio, could you give us an idea of how much you think sugar will be as a percent of your COGS going into 2019? And are you able to lock in these much lower prices. And I appreciate that there's a lot of uncertainty but how do you see sugar purchasing for GB in 2019 playing out with Brexit?

And then secondly, on the volume side, I appreciate Q3 was heavily distorted by weather. And forgive me if I missed this on the call, but are you able to give us a sort of a shape with the volume through the quarter, because I would imagine September would have had less of a weather impact certainly in a market like GB, just to give us an idea of where you exited the quarter? Thanks very much.

[Manik H. Jhangiani, Coca-Cola European Partners Plc]

Yeah. Just saw one the second question real quick. Clearly, July and August, we had much more favorable volume trends versus September. So, I wouldn't go into details month by month. But there was definitely a much slowing down of that trajectory in September versus July and August, which were very, very solid.

In terms of your question around COGS, we don't break out each of the elements within the commodities. So I wouldn't go into more details around that other than that guidance that I've given you. If I look at the split of those, not from a percentage perspective, but where the pressure is going to be, I think you're going to see the pressure more on PET and our cans. On the sweetener piece, I would expect today based on what we know outside of Brexit implications, sweetener should be roughly flattish because we've actually enjoyed some very good pricing contracts that we put into place towards the end of 2017 that have benefited us in 2018 and we'll do so in 2019 as well. But you're not going to see a year-on-year further improvement based on where we are today.

Again, I would caution that we just – none of us know where Brexit's going to come out and what that's going to mean. So I'll keep that out of the equation for now. But overall, that commodity is at 2.5% to 3% that I referenced to earlier.

[Christopher Michael Pitcher, Redburn (Europe) Ltd.]

Okay. Thanks very much.

[Damian Paul Gammell, Coca-Cola European Partners Plc]

So thanks, Chris. Again, on behalf of Nik, Sarah, and myself, we want to thank you for taking the time today to join us as we talked about our results. Nik and I are very happy with the results that we shared with you today and we'd like to echo that we continue to share these results on behalf of all the employees at CCEP, who continue to do a great job. So thank you everybody and we hope you have a great day.

[Operator]

Thank you to everyone for attending today. This will conclude today's call. And you may now disconnect.