Coca-Cola Hellenic Bottling S.A. Management Discusses Q4 2012 Results - Earnings Call Transcript

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Coca-Cola Hellenic Bottling S.A. (CCH) Q4 2012 Earnings Call February 14, 2013 9:00 AM ET


Thank you for standing by, ladies and gentlemen, and welcome to the Coca-Cola Hellenic conference call on the fourth quarter 2012 financial results [Operator Instructions] I would like to remind everyone that the purpose of this conference call is to talk with investors and therefore, questions from the media will not be addressed. Media participants should contact Coca-Cola Hellenic International media contact if they have questions. I must advise you that this conference is being recorded today, Thursday, February 14, 2013.

I will now pass the floor to one of your speakers, Ms. Oya Gur. Please go ahead.

Oya Gur

Thank you for joining our call to discuss our fourth quarter 2012 results. Today, I'm joined on the call by our Chief Executive Officer, Dimitris Lois; and Chief Financial Officer, Michalis Immelos.

Before we get started, I would like to remind everyone that this conference call contains various forward-looking statements. These should be considered in conjunction with the cautionary statements contained in our latest press release and the company's most recent filings, copies of which can be found on our website at

Let me now turn the call over to Dimitris.

Dimitris Lois

Thank you, Oya, and thank you to everyone for joining our call today. 2012 has been another year where we extended market share gains, making our business stronger while growing revenue ahead of volume. We also continue to manage our cost base through significant restructuring initiatives and group-wide cost leadership projects.

We generated solid free cash flow despite the significant ongoing external challenges that our territories face. We are leaders in the sparkling beverages category in every market we operate. In 2012, we have built on this strength and continued to win in the marketplace. We grew or maintained volume shares in the sparkling beverages category in 21 out of our 28 markets.

Equally important, we gained or maintained value shares in the overall nonalcoholic, ready-to-drink beverage category in 23 of our markets. For the sixth consecutive quarter, we delivered on our strategic commitment to grow currency-neutral net sales revenue per case despite the volatile external environment. Our OBPPC strategy enabled us to grow revenue in a sustainable way by tailoring our offering to the needs of different channels and taking pricing appropriately, addressing the affordability issues that our consumers face.

In 2012, we expanded OBPPC to more of our markets and product categories. We are proud of the expertise we are building in this area as we share lending across the countries, fine tune its elements and improve our action plans year-over-year.

Looking at our volume performance, this was our second consecutive quarter of volume growth. We delivered 2% growth compared to a 3% decline in the fourth quarter of 2011. Volume increase in the fourth quarter was driven by an 8% increase in emerging and a 1% increase in developing markets. Volume in our established markets declined by 5%. We maintained our volume in the full year.

Let's now move to the specific performance of our categories and brands. Category mix improved both in the fourth quarter and in the full year with all key brands growing. This positive performance was the result of the growth in our sparkling beverages category by 4% in the fourth quarter and 1% in the full year.

In the fourth quarter, Brand Coca-Cola grew by 5%, with positive performance in emerging and developing markets. This result includes solid growth of 21% in Russia, 16% in Ukraine, 13% in Nigeria, 10% in Romania, 9% in Poland, and 8% in the Czech Republic.

Coca-Cola Zero grew by 17%, with strong double-digit growth in all reporting segments. Fanta and Sprite grew by 3% and 8%, respectively, with positive performance in both emerging and developing markets.

Our energy brands grew by 14% in the quarter and 7% in the full year. The positive performance in the last quarter was driven by strong double-digit growth in Greece, Poland, Russia and Romania. Our ready-to-drink tea products grew by 6% in the quarter and 4% in the full year, driven primarily by emerging markets reflecting a strong double-digit growth in Russia in the last quarter.

Our volume in juice category increased by 1% in the fourth quarter, driven by very -- by strong performance of Multon in Russia. In the juice category, we are focusing on immediate consumption and the most profitable future consumption packages. Our volume in water category declined by 6% in the quarter, mainly resulting from lower sales in Greece, Ukraine, Romania and Poland. Package mix improved in the water category in line with our strategy focusing on immediate consumption packages.

Turning to each of our reporting segments. Our established market segment continues to face difficult trading environment. Volume decline by 5% in both the fourth quarter and the full year. Decline in all key categories in Greece and weak performance of sparkling beverages in Italy were the key drivers of the volume decline in the fourth quarter.

Volume in Italy declined by mid-single digits in the fourth quarter and by 4% for the full year. We expect another challenging year in Italy, particularly in view of the uncertainty around the upcoming elections and a 1 percentage point VAT increase to come into effect July 2013. We will increase our focus on the organized trade channel including discounters, while defending our performance in the HoReCa channel.

Volume in Greece declined in the mid-teens in the fourth quarter and by 14% in the full year. 2012 was the fourth year of volume decline in Greece. The latest austerity tax is expected to reduce disposable income further. We remain focused on addressing affordability while improving efficiency across our operation.

Volume in Switzerland declined in the mid-single digits in the fourth quarter and by 4% for the full year. In the fourth quarter, we listed our products in [indiscernible], and we're able to reach 100% presence in the retail channel for the first time. Package mix improved in the quarter due to our targeted OBPPC initiatives. Our major challenge remains the strong Swiss franc. Key customer collaboration and careful execution is enabled again in Switzerland, and these are both areas that Hellenic excels in.

In 2012, we gained volume share in the sparkling beverage category. In Ireland, volume declined in the mid-single digits in the fourth quarter and by 6% in the full year. Package mix improved in both the quarter and the full year. We expect a more stable but still difficult trading environment in 2013. We will focus on improving category and pack mix.

Our developing market segment reported a volume increase of 1% in the fourth quarter, while volume declined by 2% in the full year. Volume in Poland grew in the mid-single digits in the fourth quarter, reflecting our effective OBPPC strategy and strong Christmas activation in the organized trade channel. We continued to see a shift towards organized trade and mainly discounters, which is the only channel growing. In the full year, volume declined by 1%. We outperformed competition and gained volume and value share in the sparkling beverages category. Volume in Hungary declined in the mid-single digits in the fourth quarter and by 5% in the full year. Package mix improved in the fourth quarter, with single-serve packs outperforming in both sparkling beverages and the water category.

During the quarter, we cycled fully the impact from the introduction of the health tax in September 2011. Volume in Czech Republic declined in the low single digits in the fourth quarter, driven by a decline in the water category. In the full year, volume declined by 4% as a result of reduced disposable income and a 4 percentage point increase in the VAT rate. In 2012, we gained volume share in the sparkling beverages category.

Our emerging market segment reported 8% volume increase in the fourth quarter as a result of our strong performance in Russia and Nigeria. For the full year, volume grew by 4% in our emerging markets, reaching a historic high in terms of absolute unit cases. Volume in Russia grew in the mid-teens in the fourth quarter and by 10% in the full year. This fourth quarter result in Russia was broad-based, with strong double-digit growth seen in all beverages categories except water. We delivered another quarter of strong growth of our 2 key brands in Russia, growing Coca-Cola by 21% and Fanta by 28% year-on-year. Additionally, our core juice brand, Dobry, and our premium juice brand, Rich, grew by 21% and 35%, respectively. This was the ninth consecutive quarter of share growth for Brand Coca-Cola as we continue to outperform competition.

In Nigeria, volume grew in the high single digits driven by sparkling category and in particular, Coca-Cola regular, which grew by 13%. Volume in the full year declined by 2%. Our strategy in Nigeria remains focused on increasing availability and expanding distribution coverage of our core brands.

In Ukraine, volume declined in the low single digits in the fourth quarter, showing an improvement over the trend of previous quarters. Volume decline in the full year was 6%, outperforming a mid-teens decline in the overall market. We gained both volume and value share in our sparkling beverages category in the full year.

On the cost side, we are continuously working to improve efficiencies and optimize our cost base. This past year, we pursued cost leadership through accelerated restructuring initiatives, targeting infrastructure optimization, operating expense control, shared services and SAP Wave 2 efficiencies. We launched personnel cost ownership initiatives group-wide, identified opportunities at every expense line and leading a mindset change so that every one of our employees thinks and acts like an owner.

On January 1, 2013, our operations in Armenia, Estonia, Latvia, Lithuania and Russia all had a smooth SAP Wave 2 go-live, allowing us to place 26 countries or 92% of our total revenue on the SAP Wave 2 platform. SAP Wave 2 deployment for Coca-Cola Hellenic is planned to complete on the 1st of January 2014, with the implementation in Nigeria. We are continuously exploring the many opportunities this investment offers. Just to remind all of you, it enabled us to reduce the time between invoicing and payment that's helping us to improve working capital and cash flow. It ensures full visibility of the value generated by our key customers, supporting joint value creation initiatives.

Turning to the outlook for 2013. We expect that this will be another challenging year, particularly for our established markets. We have not yet witnessed signs of sustainable improvement in disposable income or any concrete evidence of economic recovery in most of our markets. Our strategy remains unchanged. We will continue to focus on winning at the point of sale every day and in every occasion.

In the past 2 years, we improved our leadership position in most of our markets, extending our market share in both the sparkling and the total nonalcoholic, ready-to-drink categories. We firmly believe that growing share against competition is of critical importance in this environment as it makes our business stronger. To deliver on this strategic imperative, we are committed to invest together with the Coca-Cola Company in the market and support our brands in key categories.

Revenue growth management remains another key strategic priority to drive currency-neutral net sales revenue per case growth. OBPPC is our most important strategic initiative that enable us to offer the optimal package and ties alternative to consumers. It also helps us to manage the shift in channel mix while addressing affordability. We will continue to tailor our OBPPC strategy by market, addressing the different dynamics of each market.

Pricing is a complementary element, and we will take pricing as market conditions allow. On the cost side, we will capture additional opportunities with the view to reduce fixed costs. Our target is to control expenses and introduce efficiencies factored through exploiting systems and leveraging our scale. Relentless and continuous cost reduction is in our DNA.

Finally, by delivering on these 3 critical areas and through continued focus on working capital management, we expect to sustain a strong free cash flow generation outlook in 2013 and beyond. 2013 will also be the year when we expect to see the Coca-Cola Hellenic group listed in the premium segment of the London Stock Exchange. We are making very good progress in line with our most recently announced timeline. We expect that the acceptance period for the offer will open shortly after the completion of our full year audited financial statements in March. And we expect to be listed on the premium segment of the London Stock Exchange in the early part of the second quarter.

In my closing remarks, I would like to reiterate that our focus on executing a consistent strategy enable us to build a stronger business, able to capture the significant opportunities that our business and geographic portfolio present.

And with that, let me now turn the call over to Michalis.

Michalis Immelos

Thank you, Dimitris, and hello, everyone. In line with our practice, as I take you through our financial results for the fourth quarter and the full year, I will refer to comparable figures excluding the impact of restructuring cost incurred in all periods under review, the mark-to-market valuation in part of commodity hedges, as well as nonrecurring items pertaining to costs related to the share exchange offer announced in October 2012. In addition, where applicable, I will refer to figures excluding the impact of Belarus. Please note that going forward, the year-over-year comparison will be on a like-for-like basis and therefore, there will be no further need for the specific adjustment related to Belarus.

I would like to draw your attention to a change in our financial reporting effective from quarter 4 2012. We have decided to early adopt IFRS 10, 11 and 12 regarding consolidated financial statements, joint arrangements and related disclosures, as well as the revised IAS 19 regarding employee benefits. The reason for the early adoption of these standards was to ensure consistency of the disclosed information in the course of this year, given the announcement of the 2012 results today, the upcoming share exchange offer transaction financial disclosures, as well as our potential future debt refinancing transactions.

The decision for early adoption of the new standards resulting in certain changes in the way we consolidate some of our joint ventures, these are as follows: first, our water business in Austria, Romerquelle, co-owned with The Coca-Cola Company, is now consolidated 100% in our results compared to 50% previously; second, our joint ventures with Heineken in Bulgaria and former Yugoslavia Republic of Macedonia are now consolidated through equity into our results compared to 50% proportional consolidation previously; third, our juice business in Serbia, Fresh & Co., co-owned with The Coca-Cola Company, is now consolidated through equity into our results compared to 50% proportional consolidation previously.

In our press release, you will find the comparison of select P&L items before and after these adjustments, as well as adjusted figures for both the fourth quarter and the full year 2011 to facilitate comparability. As a general comment, I would say that these adjustments do not affect significantly the year-over-year growth rates, as they have a small impact on the absolute P&L figures and certain balance sheet and cash flow items of both 2012 and 2011.

As Dimitris highlighted earlier, we achieved volume growth for the second consecutive quarter. In addition, we grew revenue ahead of volume for the sixth consecutive quarter delivering on our strategic priorities. This achievement becomes more important in light of the deterioration in the economic conditions in our established markets.

Total net sales revenue increased by 5% in the fourth quarter, reflecting the 14% increase in emerging and the 6% increase in developing markets, partly offset by a 5% decline in our established markets. For the full year, total net sales revenue grew by 3%, even though volume remained flat year-over-year. Currency-neutral revenue per case, excluding the impact of Belarus, grew by 1% in the fourth quarter. This deceleration over the trend of previous quarters was expected and reflects the unfavorable base effect from the 8% increase in the same period last year. In addition, our established markets, which are characterized by higher revenue per case, contributed less to our total volume in the fourth quarter compared to the full year.

Currency-neutral net sales revenue per case was marginally positive in both our established and developing markets, while it increased by 3% in our emerging markets. For the full year, currency-neutral net sales revenue per case, excluding the impact of Belarus, increased by 2% across the group on the back of a 2% increase in developing and a 6% increase in emerging markets, partly offset by a 0.5% decline in established markets.

Currency-neutral input cost per case, excluding the impact of Belarus, grew by 8% in the fourth quarter. This growth is attributed to a combination of higher EU sugar prices, as well as growing sparkling category mix in our developing and emerging markets, driving higher sweeteners contribution to the overall input cost per case. In the full year, currency-neutral input cost per case, excluding the impact of Belarus, grew by 6%, in line with our expectations for mid-single-digit increase in 2012.

Currency-neutral operating expenses per case, excluding the impact of Belarus, posted a marginal year-over-year increase in the quarter. This was driven by a 6% increase in emerging markets, which more than offset a 1% decline in established and a 0.5% decline in developing. A combination of higher warehousing and distribution cost in Russia and Nigeria, as well as certain nonrecurring costs related to the implementation of SAP in Russia, contributed to higher operating expenses in the segment in the fourth quarter.

For the full year, currency-neutral operating expenses per case, excluding the impact of Belarus, increased marginally year-over-year, while OpEx as a percent of net sales revenue was down by 60 basis points year-over-year.

Tight operating expense control is a top priority and in this context, standardization and centralization of certain processes is of key importance. During 2012, we continued the expansion of our shared service center in Sofia, Bulgaria, where certain processes of our finance and human resources functions are centralized. As we are approaching the end of phase 1 of this initiative, we currently have 19 countries serviced by our shared service center. More processes will start transitioning later in the year as part of the initiative's second phase.

Also in line with our expectations, the fourth quarter witnessed a relatively low negative impact from currency movements. In the full year, we recorded a EUR 43 million negative impact on operating profit from currency movements, the vast majority of which is a result of transactional exposures on input costs.

Our comparable EBIT for the fourth quarter, as adjusted for the impact of the financial reporting changes I described earlier, stood at EUR 56 million, registering a EUR 16 million decline year-over-year. The benefits from higher volume and our revenue growth initiatives were more than offset by higher input costs and increased operating expenses year-over-year. Similarly, comparable EBIT in the full year of 2012 was EUR 453 million, declining by 13% year-over-year. Excluding the impact of the adjustments for the newly adopted accounting standards, comparable EBIT closed at EUR 465 million for the full year of 2012.

Turning to the individual reporting segments performance. In our established markets, comparable operating profit declined to EUR 13 million in the fourth quarter and to EUR 160 million in the full year. Lower volume and increased input costs more than offset the improvement in price mix and the benefits from our restructuring initiatives, which resulted in lower operating expenses in the fourth quarter.

Our developing markets posted operating losses of EUR 5 million in the fourth quarter, while for the full year of 2012, comparable operating profit was EUR 27 million. In the fourth quarter, increased input costs, driven by higher EU sugar prices, more than offset the benefits from our revenue growth initiatives, the OpEx improvements and the slightly higher volume. In our emerging markets, comparable operating profit increased by 14% in the fourth quarter. The positive impact of our revenue growth initiatives, volume growth and improved category mix more than offset the negative impact of increased input costs, unfavorable transactional currency impact and higher operating expenses year-over-year. For the full year 2012, comparable operating profit grew by 35%.

Below the operating line, net financing cost for the quarter stood at EUR 22 million, down 26% year-over-year. For the full year, net financing cost reached EUR 91 million, declining by 5% year-over-year. In both cases, the decline is mainly the result of this year's lower losses on net monetary position linked to the hyperinflationary impact of Belarus. Our full year effective tax rate on a comparable basis stood at 23%. This lower rate is driven by the fact that currencies with lower than the group average tax rate such as Russia, had been key contributors to profit growth. On the other hand, profitability has been under pressure in countries with higher than the group average tax rates such as some key established markets. Taking into account they are both dynamics, we expect the comparable group effective tax rate to range between 23% and 25% over the medium term.

We generated free cash flow of EUR 341 million in 2012, including a free cash outflow of EUR 21 million during the fourth quarter. The solid cash generation in the year was driven by tight working capital management, leading to cash generated from working capital to reach EUR 84 million. In the fourth quarter alone, cash generated from working capital was EUR 19 million.

As we have updated you in the past, in the fourth quarter, we accelerated the implementation of certain restructuring initiatives. As a result, we incurred pretax restructuring charges of EUR 107 million in 2012. The total benefits from our restructuring initiatives in 2011 and 2012 reached EUR 48 million in 2012. In addition, as part of our ongoing to improve operational efficiency, we have identified further restructuring opportunities for 2013, which are expected to cost approximately EUR 50 million, with expected annualized benefits of EUR 30 million from 2014 onwards. Taking into account all of the above, we expect that total benefits from restructuring initiatives of 2012 and 2013 will reach EUR 65 million in 2013.

Before we open the floor for questions, I will provide some views on how we see things evolving in the near future. As Dimitris highlighted, we have yet to witness concrete signs of a broad-based recovery in our territories. In fact, austerity measures and high unemployment in our relatively higher revenue per case established markets continue to have a negative impact on disposable income. Against this backdrop, we remain focused on growing both volume and revenue. Based on current trends across our territories and in light of the persistent challenges in our established markets, currency-neutral revenue per case is still expected to increase year-over-year, albeit at a slower pace than 2012, particularly in the first half of the year.

In line with our communication in November, we expect the most favorable input cost environment in 2013. Having said that, we still expect currency-neutral input cost per case to increase in the low single digits year-over-year. In terms of currencies, based on current portraits and the hedging positions we have taken, we expect a negative impact on our 2013 operating profitability. This is expected to be of lower mark [indiscernible] to the EUR 43 million negative impact incurred in 2012.

Execution of our strategic priorities, together with improvements from working capital management, will support solid and sustained free cash flow generation. During the 2013 to 2015 3-year period, we expect to generate cumulative free cash flow of EUR 1.3 billion. In addition, our annual net capital expenditure for the same period are expected to range between 5.5% and 6.5% of net sales revenue. We have consistently prioritized capital expenditure on revenue-generating activities and therefore feel that linking them to our revenue growth dynamics is a more appropriate metric to use. The range we provide you is in line with the industry average and is consistent with our historic capital spend over the last 3 years.

Finally, I would like to update you on the bridge financing related to the share exchange offer proposal announced in October last year. As you know, we have a EUR 1.05 billion total facility available, and we will extend this facility in order to accommodate the revised timetable of the transaction.

And with that, Dimitris and I are ready to take your questions.

Question-and-Answer Session


[Operator Instructions] Your first question today comes from the line of Stam Draziotis of Eurobank.

Stamatios Draziotis - Eurobank EFG Securities SA, Research Division

Yes, this Stam Draziotis, which is actually from Eurobank. I guess, my main question relates to your free cash flow guidance over the next 3 years. I mean, this seems to be a bit lower than the cumulative free cash flow guidance for the period over 2012, 2014. I mean, just looking at your guidance for tax, which seems to imply a lower tax rate and taking into account that we should probably expect working capital to continue improving, I was just wondering whether this implies, let's say, a longer path to recovery in terms of profitability and margins or I don't know whether it relates to a more cautious view about volumes going forward. And a second question do relate to your policy regarding returns to shareholders, if we could have more -- some color on that and how this might change upon listing in London, please.

Dimitris Lois

To start with your first question, comparing our future between year 2013 and 2015 guidance to previous guidances, obviously when the previous guidance was set, as it is a 3-year rolling estimate, it was taking into account circumstances and outlooks of that particular point in time. So we are coming today, having completed our planning cycle, as we said in our last call, and taking into account the prospects of our EBITDA developments, as well as the working capital, the CapEx, and of course, the tax. We see for the 3 years, 2013 to 2016, the cash flow -- the free cash flow generated to be in the region of EUR 1.3 billion. And effectively, this supersedes the guidance that has been given for the 2 3-year rolling periods, 2010 -- 2011 to '13 and '12 to '14. Now with regard to your second question, the policy on the returns to the shareholders. First of all, we view dividends or capital returns as 2 ways of returning value, returning cash to the shareholders and in view of the transaction, which is right now in the pilot stage and as we have said, we are about to announce and complete in the early quarter 2. It would not be appropriate at this point in time to give a specific dividend or capital return, potentially guidance. We will come back after completion of the transaction with the full update. Having said that, we remain committed to continue with our returns to the shareholders on an annual basis. It's just that we cannot give right now anymore details pending completion of the transaction.

Stamatios Draziotis - Eurobank EFG Securities SA, Research Division

That's fair. And can I also ask another question with regard to the transactional currency impact for this year? I know you mentioned this would be lower than 2012, maybe -- do you want to be more specific or not?

Dimitris Lois

It's very difficult, as such, to be more specific because you just take a snapshot view of where the rates are and what the current level of hedging is. Where we feel comfortable that as things stand and as the outlook stand at the moment, that we will be lower. It could be something like potentially in the region of 25% to 30% lower than where we were in 2012. But that obviously is something that we see -- as we see it today.


Your next question comes from the line of Adam Spielman of Citi.

Adam Spielman - Citigroup Inc, Research Division

Yes, I have a couple of questions really, which are driving at how I should think about margins. And the first question of that is, when you say that revenue per case will increase but more slowly than before, wouldn't it be right to think that the revenue per case increase you've gotten this fourth quarter of 2012 is a pretty good guidance or a measure or indicator of what we might get for 2013? So I guess that's one question. And then you've obviously given guidance for input costs for 2013, but I'm also interested in how I should think about input costs on a longer-term horizon. Obviously, they fluctuate, and I'm not asking for really specific things. But is it reasonable to think that on an ongoing basis, I should be thinking about, let's say, mid -- low-single-digit input cost inflation? And the third question is slightly a separate question. If you could give some more color on how you see Nigeria developing in the next few quarters, that would be very helpful for me.

Dimitris Lois

Okay, let me start with your last one with regards to Nigeria. We were very happy to see Nigeria progressing well both in Q3 and Q4. We do expect and we are very positive for Nigeria, both for Russia and Nigeria for this year, for 2013. And the strategy in Nigeria is, in principle, keeping investing behind our key brands, and I'm referring to my Coke and Fanta, expanding absolutely our distribution and the volume per outlet, developing our execution and developing also our go-to markets. Availability across the board is the name of the game, and we have selectively started working with our OBPPC initiatives, and I'm referring to our 50-cl expansion, I'm referring to our PET, we have introduced a multi-serve. And obviously, I want to conclude with Nigeria saying that January 1, 2014, is our SAP launch. So very positive for 2013 and obviously for the years to come, focused on very clear items behind our strategy. On your second question with regards to revenue and revenue per case, what I would like to do is say a few things with regards to our top line strategy, which remains unchanged. We are focusing on winning in the marketplace while growing currency-neutral revenue per case. We will be growing currency-neutral revenue per case in 2013, and that's mainly through our OBPPC initiatives and selective pricing. As we referred and we highlighted, we have seen that established markets have been challenging, and we expect that the established markets will continue to be challenged. They are the ones with the higher revenue per case, so obviously, there is a contribution from the established markets. Additionally, in developing the channel that is expanding is discounters and a very good example in Poland is [indiscernible]. So definitely, there is a mix element there. So overall and in light of these elements and the color, we will grow but at a slow pace. Now you have a third question with regards to the input costs. Michalis will take this one.

Michalis Immelos

Well, starting with 2013 where we can focus a little bit more certainty, I would say. First of all, we expect currency-neutral input cost per case to grow by low single digits. And if we were to unbundle this a little bit, starting with the EU sugar, we see here a normalization compared to 2012, which was a major growth driver. We still have -- we will still have a small growth, primarily because we are exiting some favorable contracts in 2012 and therefore, will each have a cycling effect in 2013. In terms of the volume in sugar, we see there a small improvement in terms of world sugar, primarily here, we are talking about Russia and Nigeria. And the good news is that in Russia, we are nearly fully hedged; and in Nigeria, I would say around 2/3 of our exposures are hedged. There are some other countries as well, which can take these very small decline to sort of flattish -- to turn it flattish year-over-year. Resin, as you know, we cannot hedge. What we see right now for 2013 is a low single-digit growth. And in terms of aluminum, where we are approximately 70% hedged for 2013, we also see a low single-digit growth. So this is how, overall, the low single digit is coming together. Now it's very early, I would say, to have a reliable view further out from 2013. We have experienced huge volatility in commodities and in input costs over the last 2 to 3 years. Obviously, EU sugar is something that is an element which is more reliable in terms of outlooking. But in terms of all the rest, we wouldn't like, at this point in time, to give any further view.

Adam Spielman - Citigroup Inc, Research Division

If I can come back on this, I mean I suppose a wasn't really looking for a precise view because we all know these commodities go up and down. But I'm wondering how you, in that case, how you think about it. You must have in your mind some sense that on average, these things are going to go up over the course of the next 5 years, I don't know, low single digits? Or do you -- I mean you can't literally think it's a black box over which it's impossible to forecast because I suppose -- what I'm driving at is this, my numbers and many others numbers have margin growth in them. Obviously, that depends partly on your volume, which you control. It depends partly on your price and your mix, which you can control in different ways as well. But obviously, input cost is the other thing, and I'm trying to gauge how I should think in the medium term about the relationship between price and mix, which I sort of feel I understand, and input costs?

Michalis Immelos

Look, obviously, as part of our long-range planning, we do have a view. It's just that we don't feel comfortably being so far out and with the volatility we have experienced to give out some sort of indication or guidance in this respect.


Your next question comes from the line of Lauren Torres of HSBC.

Lauren Torres - HSBC, Research Division

Not to dive a little bit deeper -- just to dive a little bit deeper on the input cost and how -- as you said, for this year, just to get a clarification knowing what you know, you mentioned sugar and aluminum and I guess blending in PET and any other issues or any other big costs, the visibility that you have on that low single-digit increase for this year is relatively good. I know it's very volatile last year, so I was just curious, basket of goods, the hedges that you have in place if that low single digit -- you're pretty comfortable as far as visibility for the full year.

Dimitris Lois

Lauren, as I said, in terms of EU sugar, we are 100% covered. We have the contracts signed. In terms of world sugar, as I said, Russia nearly fully hedged; Nigeria, around 2/3; aluminum, we are around 70% hedged; and resin is, if you like, the one that is uncertain. Let's put it this way. So with what we know today about resin and taking into account all the positions, the hedging positions we have taken on world sugar and aluminum, we expect low single digits.

Lauren Torres - HSBC, Research Division

Okay, that's clear. And if I can also ask about the mix improvement. It seems like you've historically done a good job selling higher-margin products and improving the mix, but it seems like it's initiative that you've been working on and being successful at for quite some time. So I don't think there's examples by market or by package that you can talk to us about with respect to where some upside could be coming from this year. It seems like a lot of the easy winter done, so I was just curious from a mix perspective what plans do you have for this year?

Dimitris Lois

Lauren, there are 2 elements, and that's what we have seen in Q4. The first element is the strong, positive category mix improvement, and this is mainly driven by emerging, sparkling in Russia, sparkling in Ukraine, sparkling in Nigeria. Also, the developing countries contributed. Poland did a great job in sparkling, Czech Republic did an excellent job. So in the category elements, that is improving with regards to all of our countries. Now with regards to package, 2 areas there. The first area is with water and a clear strategy behind improving our pack mix, and this has been consistent throughout the year in all of our quarters. The package mix in sparkling, depending on the market, we see different cases. I mean we see countries like Switzerland doing an excellent job, Ireland doing an excellent job. Of course, we see countries where, especially during the Christmas, the multipacks are growing faster. So it's a mixed situation between the different countries on the pack mix. Now for the way forward, definitely OBPPC will allow us to focus a lot more on single-serve and single-serve multipacks. This is a long-term investment that we are doing, and we are very strongly committed behind that. And also within the multipacks, these are alternatives for our consumers going from 1.5 to 1 liter or from 2 liters to 1.5. So also within the multipack, there is an OBPPC-driven initiative that will take us to eventually improving our revenue per case.


Your next question comes from the line of Andrew Holland of SG.

Andrew Holland - Societe Generale Cross Asset Research

Yes. Can I just ask about your -- again, your margins and in particular, the margin fall in your established markets, quite a sharp fall. Can you tell me whether you're still profitable in all of the markets in that division? Or are you now loss-making in any of them?

Michalis Immelos

It's Michalis. We don't provide specific information by country. I can give you some color about the established markets profitability, in particular in quarter 4. The primary driver of reduced profitability in quarter 4 was obviously lower volume and increased input costs. On the other hand, we had some improvements in price mix and operating expenses as a result of all the restructuring activities, the bulk of which are happening in the established markets. Clearly, it's a segment that -- where the trading conditions are very challenging, disposable income is reduced, unemployment is rising. And even despite this very challenging environment, quarter 4 saw a marginally positive currency-neutral revenue per case growth. It's the first quarter in 2012 where we had growth. Input costs were affected by EU sugar, as I mentioned earlier. And also, as I said, the bulk of our restructuring activities are happening in the established segment. And as a result, the benefits from these activities have driven currency-neutral operating expenses per case down 1%. So this is the dynamic that is going on in the established markets overall.

Andrew Holland - Societe Generale Cross Asset Research

Okay. But I'm just -- directionally, without perhaps singling out any countries, are you able to say whether there are any loss-making countries in that division?

Michalis Immelos

I can't answer this question unless I go into detail by country. So -- but we don't give this type of information, Andy. You have the total segment profitability by quarter in our published results.


Your next question comes from the line of Edward Mundy of Nomura.

Edward Mundy - Nomura Securities Co. Ltd., Research Division

Three for me, please. First of all, your margins in the developing markets in light of the improving input cost outlook, as well as some signs in improving consumer sentiment in the key market in Poland. I mean, can you comment on how quickly you think the margin in the developing markets should bounce back? Secondly on your new 3-year free cash flow guidance of EUR 1.3 billion, can you comment as to whether you still expect the phasing here to be quite back-end loaded? And then finally, just on Romania, that's another big market for you. It's unclear as to whether it fits in the Russia and Nigeria camp or whether it's in the Italy and Greece camp? Can you provide a bit of color as to how you see that one trending in 2013?

Michalis Immelos

Okay, I'll take your first 2 questions, this is Michalis, and Dimitris will take the last one about Romania. So in terms of the profitability in the developing markets, here, I would say developing markets was a segment that was most severely hit by the EU sugar year-over-year impact, primarily because they exited in 2011 and early 2012, very favorable contracts. So they had a very negative cycling effect. Currency-neutral revenue per case in developing markets was flattish, was 0.3% growth, and we have some mix dynamics there. I mentioned earlier, we had very good category mix. Dimitris mentioned a few countries in this segment improving their category mix. But at the same time, Poland, which is the biggest contributor in this segment, faces major channel mix pressures from discounters, which are growing very fast. In fact, it's the only channel that is growing and in fact, a double-digit growth rate. In terms of input costs, the EU sugar is the one that drove double-digits increase during the quarter, and that was accentuated exactly by the fact that the sparkling mix was very strong in this segment in the quarter. In terms of operating expenses per case, we had a decline, 1% in quarter 4, currency-neutral. That comes, to an extent, from the phasing of our marketing expenses. This year, the marketing calendar was more skewed towards the middle of the year due to the euro in Poland, but also benefits from restructuring activities because the developing segment attracts, if you like, 2013 -- between 20% and 40% of the restructuring initiatives that we deploy. So this is the dynamics of profitability in developing markets. In terms of your second question on the free cash flow and whether it is back ended, I believe, yes, you can say to an extent that the later years carry a bigger weight in terms of the free cash flow generation. In terms of your third question, Romania, Dimitris...

Dimitris Lois

Yes, I will take this. What we have seen in Romania was a marginal growth during Q4. And eventually, this marginal growth contributed to a 1% increase in '12. To give you a little more color there, sparkling and our focus behind sparkling, we have seen a mid-single-digit increase in Q4 on the back of a low double-digit growth from Coca-Cola. Additional -- and this is one of the markets that package mix has been improving and has been improving across the board, and I'm referring to sparkling and I'm also referring to water. And these are the markets that we have been winning across. We have been expanding our leadership both in volume and value share in sparkling, as well as value share in NARTD. Now for next year, what we see in overall, the environment in Romania are still we are talking about an unemployment which is a high single digit, also a mid- to low-single-digit inflation. So it's a market that has been severely challenged in the past. Now if you ask me if Romania has reached the bottom, it is not; most probably very, very close, but -- and we have been winning in the market. So that's the view for Romania.

Edward Mundy - Nomura Securities Co. Ltd., Research Division

Okay, that's very clear. But -- sorry, just going back to my first question, but it strikes me that the margin in the developing markets has been hit extremely hard and as you've highlighted, due to the impact of sugar cost and there's also some currency flushing around there as well. I appreciate on the one hand, you've got the negative channel mix with the likes of [indiscernible] in Poland, your key market there. But assuming that volumes start to show some recovery in Poland and also assuming that input costs are relatively stable, should we not expect the margins to bounce back a bit in the developing markets?

Dimitris Lois

This is Dimitris. Here, you have been focusing a lot on Poland, which is a key contributor in developing markets. Now there are 2 different areas, one is Poland and the other area is Hungary and Czech. Hungary and Czech have been challenged, and we see that will continue to be challenged, both of them. We have seen a 4 percentage points VAT increase, we have seen another percentage point VAT increase this year, January 1, in Czech Republic. Also, Hungary has been really challenged as far as the environment is concerned. So that's why we would like to sort of split the 2. Now on Poland, definitely, this is a market that we have been winning, winning across. We do accelerate the work behind getting far more efficient and effective with regards to discounters. So we believe that next year, Poland is going to be the major contributor to the developing markets. I think this gives you a little bit more color on developing.

Edward Mundy - Nomura Securities Co. Ltd., Research Division

So for 2013, that is?

Dimitris Lois

Absolutely correct. Yes, I'm referring to 2013.


Your next question comes from the line of Olivier Nicolai of UBS.

Olivier Nicolai - UBS Investment Bank, Research Division

Just 2 quick questions, first around the input cost. I'm not sure you mentioned it before, but should we expect any big difference between H1 and H2 and in terms of inflation. Just another follow-up question on Nigeria, can you just comment about your growth rate compared to the remote-based product and if you see these kind of products out of a competitor? And also, if you could remind us the difference in terms of price points for a similar kind of volume, let's say, a 500-ml or 600-ml bottle.

Dimitris Lois

I would take Nigeria, and then Michalis will cover your first question. Now in Nigeria, overall, as I said, we are very positive, and we are very, very positive looking at the growth rate we have seen in Q3 and Q4. Also, the start of the year looks optimistic. And what is really driving all this is sparkling beverages. And it's not only the sparkling beverages area, but those who were expanding our distribution, both in water and in juice. So that's why our position is very positive in Nigeria. With regards to price points, this is a very big market and a market where you have the 2 major competitors, plus some other competitors. So I think, overall, commenting about price points would not be appropriate. Always, price points reflect the brand equity, and Coca-Cola with the products, have a superior brand equity. With that, I will turn that to Michalis to cover your first question.

Michalis Immelos

In terms of the phasing of the input costs, very difficult to give any sort of guidance as such on a quarterly basis. But clearly, in 2012, the first half was more challenged. So potentially, you might have an easier cycling effect in the first half of 2013. But I think, overall, what is important is to look at the full year and the impact versus the full year of 2012 because 2012 incorporates different mix -- different dynamics with much higher input costs at the beginning of the year of 2012, and then resin easing in the second half of 2012.


Your next question comes from the line of Iakovos Kourtesis of NBG.

Iakovos Kourtesis - National Bank of Greece SA, Research Division

My first question relates to the immediate and future consumptions, if you could provide us some, taking into account your increase in attrition, more than 30 trade channels recently. If you could provide us where you stand at the moment on a group level and maybe if you could provide this number in terms of the different segments you operate. The second thing, probably you have some data for 2013 until now. If you could give us some feedback on what do you -- how do you see the situation in Italy and how should I think of it? Should I think that -- do you see some stabilization in the country or do you see further decline in 2013? And if you would expect that taking into account that you're going to have tougher comps in Russia for 2013, if you would expect that a low double-digit increase would continue in 2013? Or how do you see the situation in the country?

Dimitris Lois

Iakovos, let me start with your first question, which refers to immediate consumption and future consumption. Here, I would like to clarify that as far as the channel is concerned, we have seen immediate consumption in most of our countries being challenged in the last 4 years, with a considerable number of outlets closing. Now what is extremely important is not the immediate consumption only, but the immediate consumption packages. And this is something that we have been focusing quite a bit behind our OBPPC, taking single-serve and single-serve multipacks and through the OBPPC, the execution and the communication behind the OBPPC expanding. And this is an investment which we consider a long-term investment. So under that, you have heard quite some examples throughout the year, examples of how well these OBPPC strategy is working. And to reiterate, I would like to highlight markets that have been extremely challenged, and I'm referring to Ireland. They have been increasing the single-serve tax and obviously, this is the single-serve multipacks. Also, Switzerland and other countries, that has been challenged because of the Swiss franc. So we do have evidence that the OBPPC strategy and initiatives that are specific by market are working. Now going to your second question, and that is Italy. We have seen that Italy has been challenged, has been challenged throughout the year. We have seen a mid-single-digit decline in Q4 and a full year -- and a 4% decline in the full year, and that's mainly due to sparkling. As far as the outlook is concerned, in the short term, we do expect that the volatile trading and economic environment and especially in view of the fiscal development and the 1% VAT increase in July. Also, we see that consumer confidence remains low. Unemployment, if you see unemployment in November, it was 11.1%, so double digit and one of the highest, if not the highest unemployment for many years in Italy. Ongoing austerity measures, property tax, salary and pension cuts, so these will reduce further the disposable income. So we don't see anything that will allow us to believe that the outlook is going to be better. We are focusing and we are far more aggressive in things that we control. And let me sort of highlight a few things in our strategy. First of all, winning in the marketplace; gaining share, and sparkling is a top priority, Coke and Fanta; and then obviously, addressing affordability; connecting a lot better with the consumers; and finally, focusing a lot more on discounters, which is a channel that grows. That's one element with regards to winning in the marketplace. Second element of our strategy, that has to do with costs and cost control exploiting system, optimizing infrastructure, improving our go-to-market and eventually, cash is king. Working capital and strict management behind working capital. So those are the 3 elements, and that's why we said that we're going to be far more aggressive in things that we control. Your last question was with regards to Russia. Yes, we are positive, and that was one of the things that I've shared. Positive both for Russia and Nigeria. We have seen Russia doing very well, winning across the board, expanding all of our key brands. And I am not referring only to sparkling, I'm referring also to tea, I'm referring to energy, I'm referring to juice, an excellent turnaround. So yes, we are very positive for 2013.

Oya Gur

[Operator Instructions]


Your next question comes from the line of Jon Fell of Deutsche Bank.

Jonathan P. Fell - Deutsche Bank AG, Research Division

Apologies, but I think I might have asked this question or something very similar before. But if I look at your results over the last 4 years, your volumes and sales are basically flattish. So one could argue, you've not really had a really big sales problem across the group. But it's a cost problem because your profits are down by about 1/3, your margin is down by about 1/3, and you're probably making return on capital, which is about 1/2 the cost of capital. So with respect to the last answer, I can see why absolutely the stuff you've got to do is to fight to win in the marketplace and protect that top line. But we know for next year we still got austerity, we've got input cost inflation still, a difficult pricing environment. What is it that's within your control that's going to get returns back to a respectable level? Or are you just at the mercy of The Coca-Cola Company and what happens to input cost in the long run?

Dimitris Lois

Jonathan, let me -- I mean, obviously, you are referring to margins. So what I'm going to do -- you know that we don't provide guidance on profitability, but I will be glad to give you more color and to take you step-by-step because we do believe that we have the right strategy. Let me start with volume. Yes, the external environment remains challenging, particularly in our established. We have been very vocal with winning in the marketplace, and we will continue this one. We believe that's the right thing to do. We believe Hellenic is getting stronger. While saying that, we are driving revenue, and we will be driving revenue ahead of volume. That remains core strategy. And overall, with regards to volume, we look to emerging leading the race. Now you're absolutely right, there are austerity measures across European Union that expect to continue and affect disposable income, the high unemployment. But still, we are targeting to increase our revenue per case, FX-neutral, and we said that 2013 is going to be at a slow rate. With this in mind and what we have heard and shared with you with regards to input cost, input cost will grow back at a lower pace. Also, we remain extremely focused on operating efficiencies, and it's not only the part that refers to restructuring, and we are expecting a EUR 65 million benefit next year. But there are a lot of other initiatives, exploitation of our systems, the shared services, SAP Wave 2, go-to-market. So we are very confident that these will also contribute to our margins. And finally, based on the current spot rates, we expect a negative impact with regards to FX that's a lot less with what happened in 2012. All in all, we believe we have the right strategy to emerge stronger, leaner, more efficient, and we will improve our margins in 2013.


Thank you. Please continue.

Dimitris Lois

Thank you. Thank you all for joining us today and for all the questions that facilitated a very good discussion around our fourth quarter performance and 2013.

I would like to reiterate that we remain committed to strengthen our business by executing a successful strategy. We have an attractive, diversified geographic footprint characterized by low per-capita consumption and the world's most known and loved brands. These fundamental competitive advantages will allow us to capture in the long run the growth opportunities that our market presents.

Thank you all, and we look forward to speak with you very soon.


Thank you. That does conclude our conference for today. Thank you all for participating. You may now disconnect.

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