Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Coca Cola Hellenic Bottling S.A. (NYSE:CCH)

Q4 2008 Earnings Call Transcript

February 17, 2009 at 9:00 am ET

Executives

George Toulantas - Investor Relations Director

Doros Constantinou - Managing Director and Chairman

Rob Murray - Chief Financial Officer

Analysts

Ian Shackleton - Nomura

Andrew Holland - Dresdner Kleinwort Wasserstein

Jonathan Fell - Deutsche Bank

Jason DeRise - UBS

Lauren Torres - HSBC

David Tovar – Merrill Lynch

Operator

Thank you for standing by, ladies and gentlemen, and welcome to the Coca-Cola Hellenic Conference Call for the full year 2008 Financial Results.

We have with us Mr. Doros Constantinou, Managing Director, Mr. Rob Murray, Chief Financial Officer and Mr. George Toulantas, Director of Investor Relations.

(Operator Instructions). I must advise you that this conference is being recorded today Tuesday, February 17th, 2009.

We now pass the floor to one of your speakers today, Mr. George Toulantas. Please go ahead, sir.

George Toulantas

Thank you, operator. Good afternoon to Europe and good morning to the US. We appreciate you joining us today to discuss our full year 2008 results. I am pleased to be joined by Doros Constantinou, our Managing Director and Rob Murray, our newly appointed Chief Financial Officer.

I would like to remind everyone that this conference call contains forward-looking statements including long-term volume and earnings projections and should be considered in conjunction with the cautionary statements contained in our related news release and the Company's most recent filings. I will now turn the call over to Doros.

Doros Constantinou

Thank you, George. I thank George for joining us today. Before I begin discussing the results, I would like to address few recent developments. First, I would like to introduce Rob Murray to you for the first time in his capacity as our Chief Financial Officer. As many of you already know, Rob has been in the Coca Cola system for over 20 years and has held general manager roles with us in both Hungary and Switzerland since 2001. In July 2008, he joined us here in Athens to work alongside Nik Jhangiani and subsequently assumed the position of Deputy Chief Financial Officer before being appointed our new Chief Financial Officer in December.

Rob’s appointment frees Nik to assume new responsibilities as Strategy and Business Development Director, a new position to which Nik brings record excellence, commitment and energy. I look forward to working with both Rob and Nik in their new roles.

Second, I would like to express my delight that our two major shareholders Kar-Tess Holding and the Coca-Cola Company have agreed to extend their shareholders’ agreement for another 10 years through the end of 2018. We believe that this extension demonstrates the commitment supporting Coco-Cola Hellenic and our vision of driving sustainable growth and value creation for the long term.

Finally, I would like to note that we completed our acquisition of Socib’s bottling operations in Southern Italy this past December. We believe that increasing the scale of our operation in Italy and sharing best commercial practices would benefit us by promoting stronger relationships with national customer accounts as well as providing our consumers in Southern Italy an expanded product offering.

We have begun the process of integrating Socib’s operations into our business and we are targeting both revenue and cost efficiencies under our plans. Rob will comment further on the impact of Socib’s 2009 results.

Now let me turn to our full year results. 2008 as a whole was a challenging year for the global economy and these last few months of the year in particular were marked by extreme economic volatility. Such volatility includes a significant deterioration of local currencies in certain of our countries of operation.

Under these circumstances, I am pleased to report that we achieved volume growth of 6% in the fourth quarter ahead of our own expectations with successful pricing initiatives supporting revenue growth of 9%. For the year, we achieved the 5% increase in volumes following strong growth of 15% in 2007 and net revenue growth of 8%.

This growth was balanced across our reporting segments and product portfolio. We also maintained all gained market share in most of our countries of operation.

For the full year, sparkling beverage volume grew 3% with the positive consumers’ response to Coke Zero continuing to drive growth in trademark Coke and light sparkling beverages of 4% and 7% respectively. Meanwhile water and still beverage volumes grew by 7% driven primarily by growth across the juice, water and ready to drink tea categories.

As part of our strategy to focus on the high growth, high value segments of the market, we expanded the Nestea Vitao range of natural flavored teas. Nestea Vitao is now present in 14 of our countries of operation and is consolidating our leadership position in the flavored tea category within our countries of operation.

We also launched our three-way joint venture with Illy Café and the Coca-Cola Company. Illy branded ready to drink coffee products are now present in 10 of our countries of operation and have been very well received in the marketplace.

Although we are impacted by consumers who are choosing discretionary spend in higher margin immediate consumption channels, we still managed to achieve goals of 5% in single shot packages. We believe that these were the result of our ongoing focus on quality added execution in channels as well as continued investment in cold drink equipment with over a hundred thousand coolers being added to the marketplace in 2008.

In terms of segmental performance, each of our three reporting regions record a growth in volume and net sales in both the fourth quarter and the full year. In our established markets excluding the impact of Socib acquisition, volume grew by 2% in both the fourth quarter and the full year.

Despite weakening commerce in Italy and Ireland, and social unrest in Greece leading up to the key Christmas period, net sales revenue in our established market segment grew by 3% over the course of 2008. The Euro strengthened against the pound, higher commodity cost and adverse channel mix however negatively impacted operating profits for the fourth quarter and the year.

Turning to our developing markets, volume grew by 6% in the full year lead by Holland achieving double digit increases in both periods under review driven by strong growth in the sparkling, juice and ready to drink tea categories. Despite material favorable currency movements in both Holland and Hungary in the fourth quarter, strong pricing contributed to net sales revenue in our developing market segment growing by 14% in 2008.

Operating profit in this segment grew 3% in the full year as strong top line growth more than offset the adverse impact of higher commodity cost and operating expenses during the year.

Finally, in our emerging markets, volume grew by 6% supported by strong pricing, a continued focus on growing premium sparkling beverages, up in the mid single digits as strong growths of our high value ready-to-drink tea and energy beverages. Although net sales revenue grew by 11% in 2008, operating profit declined as a result of higher commodity and operating cost and significant adverse currency effects late in the year in our key markets of Russia, Ukraine, Romania and Nigeria. In Russia, volumes decline over both periods under review as the weakening ruble and falling oil prices impacted consumer confidence. However we continue to outperform the market in Russia with emphasis on effective marketing activities and continued strong hardware execution. This focus led to our market share growing across the total alcohol free beverage category in Russia for the sixth consecutive quarter.

2008 was a challenging year for our business with a number of external factors impacting the group’s profitability during the year. Higher commodity cost, one of the items in the first half and unfavorable weather conditions were all compounded by the rapid deterioration in the global economic environment and adverse currency impact in the latter part of the year.

In spite of this, we generated solid top line growth illustrating the strength of our business model. We are taking proactive measures to manage our cost-base which is expected to support profitability in 2009 and enhance our competitiveness both in the near and long term.

In addition, I would note that we ended the year with a strong balance sheet and cash position. We also successfully completed the bond issuance in November that provides ample liquidity to fund our near term funding requirements. We believe that all of the above will serve us well in the year that appears to be more challenging than 2008.

Looking ahead, we continue to witness weakening consumer sentiment in each of our reporting segments. In addition, currency weakness in certain of our key territories including Russia, Ukraine, Holland and Romania will have a negative translation effect on our earnings if they remain at current levels.

Having completed our business current reviews with all countries, I continue to feel confident in both our strategy and the execution. We will continue to do what is right for the long term health of our business. Our plans are solid and we will continue high quality execution which will drive value for our business in the future. We will come out of this challenging period a stronger and more efficient organization. We expect to benefit from easing input costs as we move through the current year which together we will report the effects of our cost savings and efficiency programs should help to mitigate the effect of the economic challenges our markets are confronting.

Recent restructuring programs in Poland, Russia, Ukraine, Italy and Romania are examples of our continued efforts to right size our cost-base in line with current involvement. At the same time, we continue to monitor our individual markets to identify any opportunities to initiate price and make improvements always carefully balancing any decisions against market share performance to ensure that we are not adversely impacting our competitive position.

We believe that in the current environment, managing the business for cash is essential and have always initiated a tight focus on working capital. Our past investments in revenue growth areas ensure that we are well placed to benefit when economies recover while enabling us to preserve cash in the current environment.

The strength of our cash flow, a point that Rob will discuss shortly, will also enable us to maintain dividends within a payout ratio of between 20% and 30% of comparable net income. We believe this illustrates the confidence we have in our operational strength and the commitment we have to our shareholders in driving value creation even through challenging market conditions.

As I am sure you will have heard from other consumer based companies already, visibility for the current year is poor and volatility in all front is high. And that makes it difficult to provide a responsible earnings guidance. In line with our group wide focus on driving improved cash flow over the current three-year business plan period, we are targeting free cash flow generation of Euro 1.2 billion from 2009 to 2011.

Before I hand you over to Rob, I want to emphasize that our strategy remains intact. We are continuing to plan for the long term and continue to be very positive on our portfolio of geographies and products particularly given our extensive outside reach and proven selling capabilities in the market place. We believe we will successfully navigate through these challenging times and deliver on our long term strategy.

I will now hand the call over to Rob who will provide for the details on our financials and expand on some of the initiatives that I have just mentioned.

Rob Murray

Thank you, Doros. I would like to start off by thanking both Doros and our entire board for giving me the opportunity to take on responsibility of Chief Financial Officer for Coca-Cola Hellenic. I would also like to thank Nik Jhangiani for his support as I transitioned into my new role. I am personally looking forward to having the opportunity to meet up with you all over the coming months. I will briefly discuss our 2008 results before commenting on our 2009 plans that we are currently prioritizing to continue managing our business for long term success.

Unless otherwise indicated, any financials I refer to for both the fourth quarter and full year will be on a comparable basis. That is excluding the impact of the Euro189 million impairment charges in the fourth quarter related to operations in Ireland and Serbia, the effect of the fire to one of our plants in Nigeria as well as the small contribution from the Socib business acquired in mid December.

In 2008, we achieved EPS of Euro 1.16 below our full year earnings target. This shortfall was primarily driven by the rapid and significant devaluation of currencies in some of our key markets late in the fourth quarter. The negative forex impact on net income was approximately Euro 35 million in the fourth quarter or around Euro 0.10 a share.

If you exclude the impact of this forex, we would have only had a slight miss to our full year guidance. We are extremely pleased with our continued top line growth momentum with revenues up 8% in both Q4 and a full year result. Higher pricing supported currency neutral revenue per case growth of 5% in the fourth quarter and 4% in the full year.

Volumes grew 5% in the fourth quarter ahead of our expectations despite taking incremental pricing in several of our markets in the second half of the year. I believe this is an exceptional performance and truly highlights the strength of our local management teams in effectively managing the volume and price equation.

Operating expenses per case were up Euro 0.05 for the full year. The launch of Coke Zero in the further eight countries of operations during 2008 as well as support of the Euro 2008 Football event contributed to a Euro 0.01 increases in marketing expense. Sales cost were up Euro 0.01 and warehousing and distribution were up Euro 0.03 driven by increased fuel, transportation cost across most of our markets as well the lower absorption of fixed cost from the softer than expected volume of 2008.

Overall this led to a profit decline of 6% in 2008. our full year effective tax rate was 20% above our expected rate of approximately 18% as we were underprovided on taxes as identified during a Greek tax audit covering 2003 to 2006 period.

In 2008, our operating cash flow grew by 2% to approximately Euro 880 million as the decline of operating profit and higher taxation was more than offset by some improvements in working capital.

Turning now to 2009, we expect a continuation of the challenging operating condition that impacts the whole industry. While we will not be providing earnings guidance this year, we have built our business using various scenarios based on a range of economic outcomes and an expected impact in volumes.

We have also developed detailed contingency plans to protect our margins and cash flows, some of which are in place given the movements in currencies we have witnessed. As a management team we are focused on 4 key areas that we believe will strike on our competitive position in the marketplace and support increased free cash flow over the next three years.

Firstly, the quality of our balance sheet and solid credit rating afford us sufficient financial flexibility to manage through this challenging economic period. We successfully completed a five year Euro 500 million bond issuance in December with the proceeds partly used to fund the acquisition of Socib in Italy. As of the end of 2008, we had over Euro 700 million on cash on hand providing us with sufficient liquidity to meet our future funding requirements. Part of this cash will be drawn upon to repay a Euro350 million bond that matures at the end of March. Other than the bond maturing in March, we have limited short term debt maturities while our debt gearing remains at sufficiently low levels to selectively pursue any value accretive acquisition opportunities.

Secondly, we remain focused on growing our market share. We will continue the price in mind with local country inflation to maintain our competitiveness while also maintaining a high level of media weight and marketing pressure. Given easing media rates, we expect to reduce overall marketing expenses while improving the efficiency of our spend.

Thirdly, we will adjust our cost-base through an ongoing focus on driving productivity initiatives and operating expense reductions. We expect an additional Euro 100 million of cost savings in 2009 from our continued focus on reducing operating expenses across discretionary spend areas as well as from rationalizing the number of SKUs we sell.

Although we will continue to innovate, we will discontinue our lower selling SKUs. This rationalization is expected to lead to reduced cost from improving both line efficiencies and freeing warehouse space.

A significant amount of cost savings are expected to come from managing our head count. To date, we have achieved a head count reduction of 3,000 since July 2008. This is largely through natural nutrition. In addition, we have announced today that we are implementing a restructuring plan which we expect to incur one-time cost of approximately Euro 30 million in 2009 related to right sizing initiatives resulting in cost savings of approximately Euro 15 million to Euro 20 million in 2009 and Euro 25 million to Euro 30 million on an annualized basis going forward.

Finally in line with our focus on group-wide managing our business for cash, we are adjusting our capital investment requirements over the next few years as we benefit from our past investments in production capacity and cold drink equipment. We expect net capital expenditures from 2009 to 2011 to be approximately Euro 1.4 billion.

This reduced targeted annual CapEx spend over the next few years is expected to free up approximately Euro 300 million of incremental cash flow compared with our preceding three years. We also expect an improvement in our financial working capital over the next three years.

We expect to benefit also from the easing commodity cost environment this year. We anticipate significant cost reductions in PET through 2009 as a result both of lower oil prices possibly feeding through the resin value change and the current over supply in the market.

On sugar, with the exception of Nigeria, we fixed all of our sugar requirements for 2009 last year and expect overall cost to decrease relative to 2008 as we benefit from the recent sugar regime reforms in the EU.

For aluminum, we have fully covered supply for 2009 and we expect slightly higher costs than 2008 mainly driven by increase conversion cost partially offset by a favorable Euro hedge against the US dollar. Our concentrate price negotiations with the Coca-Cola Company were successfully concluded last year with incident rates remaining unchanged. Taking all the above into consideration, even under our worst case scenario, we believe that we can generate at lease Euro 1.2 billion of free cash flow over the next 3 years representing an increase of over 30% compared with the preceding 3 years.

In 2009, our results also include a financial impact from the recently acquired Socib business in Italy. We estimate that this will contribute around 2.5% volume growth in 2009 and that it will be slightly diluted to our earnings per share.

On phasing we expect Q1 to be soft although this is a small volume in profit quarter for us. Our performance is expected to be impacted by Catholic Easter shifting back to Q2, also our operating profit grew 10% in the first quarter of last year so we will be cycling a strong prior year performance while we expect that adverse currency fluctuations will also impact our Q1 performance materially.

Finally the benefit of lower PET prices is not expected to be fully realized until the second and third quarters when we cycle the high oil prices over this period. With the current market conditions remaining challenged, we continue to believe that the strength of our brand, the local expertise of our management team and the strategies we are deploying will enable us to successfully manage through these difficult times.

The territories we operate in continue to offer long term growth potential for our business and we are taking action now to capitalize on this opportunity in the future.

Thank you all for your attention today. Operator, we would now like to open it up to questions.

Question-and-Answer Session

Operator

Thank you. We will now begin our question and answer session. (Operator Instructions).

Your first question comes from Ian Shackleton from Nomura. Please go ahead.

Ian Shackleton - Nomura

Good afternoon, Doros and Rob. Two questions. Firstly on currency, can you give us some idea of the magnitude of that assuming current spot rates when I look at 2009. It looks like in Q4 you had a rate of something like 7% or 8% going to what Rob said earlier of the net income level. And secondly I know that at the end of last year, with Nik’s new role, you talked quite a lot about the new move initiatives you are looking at tweaking around distribution the way you could maximize that. Could you give us an update on your thinking on that area?

Rob Murray

I guess the key things for us to keep in mind for currency is that we manage our currency on a portfolio basis and that from a hedging point of view, our policy in the past has been really focused on forward buying where we cover 50% of our exposure on a going forward basis and with that weighted very heavily to the near period. However, in a lot of our markets, the cost of hedging has become too expensive for that method and we have developed some other method to protect ourselves. I think the other thing to keep in mind for us is that some of our risk is mitigated with our incident concentrate deal with Coca-Cola Company as they share in that risk. We are using our cost savings as another lever to offset any currency risk. As far as detailed guidance, we are not going to provide that at this time due to the volatility of the situation.

Doros Constantinou

Ian, this is Doros. I will take your second question regarding leveraging our distribution strength. I guess you are referring to the explore part of our strategy to look into areas where we can use our existing infrastructure and distribution network. I will say that we continue to do that and the appointment of Nik will enable us to look more closely in a more structured way at opportunities however as I said, we always do that in a very balanced and very careful way and in a way that does not jeopardize the core business. We are looking at opportunities that we can use synergies and extract additional value, no really something that will make or break our 2009 numbers.

Ian Shackleton - Nomura

Is that something we would expect to have more detail from in the next quarter or so or is that a much further out type timetable, Doros?

Doros Constantinou

Ian it is like every other deal that we have done unless it is final, we cannot talk about it. We are looking at a couple of opportunities. That much I can say, but we are not at a stage where we can announce anything officially.

Operator

Your next question comes from Andrew Holland of Dresdner. Please go ahead.

Andrew Holland - Dresdner Kleinwort Wasserstein

Yes, hi, just a couple of questions. Firstly, as I look at your fourth quarter, you actually seem to accelerate, perform better in the fourth quarter with volumes up 6% and sales up 9% and yet the sort of shortfall in EBIT was a good deal worse than it had been for the year as a whole. Can you tell us a bit more what was going on in the fourth quarter; can we assume that that was a shot reversal in the immediate consumption channel? And can you say how the year has started, whether we have seen some more of those trends in the fourth quarter as we are now through two-thirds of the way through the first quarter?

And the second question, I am suddenly intrigued by your reference to the impact of the British pound against the Euro. Can you just tell me where that is impacting your P&L.

Rob Murray

Okay, hi Andrew, this is Rob. I guess really in the fourth quarter when you looked at our results, at the EBIT line, we had about Euro 30 million of forex impact and if we were to add that back in, as I said we would have basically a slight miss to our guidance. Regarding our IC business, we see that that business is holding up, we had growth of around, for year to date actually that was in line with our total volume growth. It was below where we were originally targeting, it is still growing and we are pleased about that.

As far as, I guess your second question was really around Ireland, I guess the real question in Ireland, is 40% of our business in Ireland is in the north and obviously with the drop of the currency there, that had a pretty significant impact. Also really around the operating environment, it has definitely changed the dynamic in the market there.

Doros Constantinou

Andrew, this is Doros. Just to add something regarding the mix of our immediate consumption packages, they have grown slightly ahead of our market [shelves], however that both came from water. So yes the mix between immediate consumption and single shot packages in multi serves continue to be favorable not to the extent we had budgeted anyway but the mix within the category was not really favoring our results.

Rob Murray

Andrew, the other question that I missed was regarding Q1 of this year. Right now, we have a positive start. Part of that is driven by the fact that we have Socib in our numbers and we also have 3 extra days in January. If we take out those two factors we are relatively flat with last year which we are looking at that as a positive considering the current situation.

Operator

Your next question comes from Jon Fell from Deutsche Bank. Please go ahead.

Jonathan Fell - Deutsche Bank

Hi everybody. There are two things that I wanted to ask about. The first one was Cokes and both happen in the fourth quarter and in 2009 as well and now because it looks like Cokes per case were up 5% in the fourth quarter, 4% over 9 months. And I am wondering how much the exchange rate movements had to do with that. To what extent imported Cokes and the devaluation they say in Europe are causing problems. Is that going to be a material impact on cost of goods sold per case in 2009 and to what sort of level?

Rob Murray

Hi Jon. We definitely had an impact from currency in Q4 and as far as commodities and the transaction impact of that. We also had some improvements in several areas across the area of cost of goods that were offset by this impact of currency. Roughly we had around Euro 7 million of transaction impact in that line.

Jonathan Fell - Deutsche Bank

Okay, if I looked at the Euro30 million EBIT impacts, would it be fair to say that Euro 20 million of that was translational and about Euro 7, 8, 9, 10 million would be transaction?

Rob Murray

Roughly, total was around Euro25 million was transaction impact.

Jonathan Fell - Deutsche Bank

Oh 25 for transaction, okay. So most of the transaction impact is coming from… not in Cokes but in the other cross lines.

Rob Murray

We also had some impact in our operating expense line for that also. I would say it was about half and half of that between the two.

Jonathan Fell - Deutsche Bank

Okay perfect. Thanks. Could you give us then an estimate of what the revenue impacts from FX would have been in the fourth quarter?

Rob Murray

We will come back to you on that question Jon a little later.

Jonathan Fell - Deutsche Bank

There is one more thing I wanted to ask which is, you mentioned acquisitions and you wanted to keep the balance sheet ready for selective opportunities. What is going on in the market and the economy at the moment changing your attitude towards acquisitions? Do you think there might be things that become available at attractive prices that maybe would not have been available before or are you seeing the probability that is sort of [Inaudible 35:55] and get on with what you have got rather than for expansion opportunities?

Doros Constantinou

Hi Jon. This is Doros. What you just said is absolutely correct. Some opportunities may be available at this point in time at more attractive prices. We clearly would not be interested in adding capacity to our business which is something we did once or twice in the past. We will be looking for something that will really add value to the business. A good grind in our water or juice segment or portfolio in that part of the world, in those countries that we are not strong in that. And so we continue to be active looking at those opportunities irrespective of what is happening around because as you said they may be available at better prices. So any value adding opportunities, any bolt acquisition that will fill a gap in our portfolio in this specific geography, is part of our horizon.

Jonathan Fell - Deutsche Bank

Okay thanks a lot.

Rob Murray

Okay Jon, just to come back to you on the impact of revenue. For the full year we had an impact of about Euro 87 million negative.

Operator

Your next question comes from Jason DeRise from UBS. Please go ahead.

Jason DeRise - UBS

Hi this is Jason DeRise of UBS. I just want to come back on this comp side [Inaudible] First of all I just want to make sure I heard all these correctly. So the gross profit for transactional impact was 7%, at EBIT it was 25%, is that correct?

Rob Murray

Yes.

Jason DeRise - UBS

I guess I am surprised also that it is so much more of a transactional impact below gross profit because the cost you have, sugar is not necessarily in your local currencies and PET is not always in your local currencies and so on so I was expecting more of the transactional impacting cost. So maybe can you talk about what cost items are not matching this translational impact that we are seeing at the top line in your operating expenses?

Rob Murray

I guess Jason when the currencies dropped dramatically, we had some impact from our working capital and some of those transactions that we were not able to cover at that time but we have implemented some new strategies that were going to protect us going forward. So some of that we see in Q4 is being a bit of a one off in the period and we are better mitigating that impact so that is why it is a little bit more at a whack from what you expected.

Jason DeRise - UBS

Okay. And then if we look at [Inaudible38:57] for the rest of the year, we really have not seen much of the currency impact in terms of the actual translation which means that the actual transactional impact is going to be much larger at the [39:10] because PET is not all in rubles, sugar is in Euro and your concentrates in dollars. So I guess how much of an impact should we look at in terms of that for 2009.

Rob Murray

I guess Jason as we said, one of the things that is quite difficult in this environment is we have several different scenarios that we are looking at and that is why we have done a scenario planning because we do not feel we have really reliable forecast on what is going to actually happen with currencies. We know that commodities are coming down so what we are doing is covering ourselves against those different scenarios. I cannot give you a specific number while I would love to be able to do that. We are just trying to cover ourselves for what would be the worst case scenario and that is what we have reflected in our guidance on free cash flow going forward.

Jason DeRise - UBS

Should we assume that the cost saving center when it comes to Euro 100 million that that is basically just going to offset the currency impact, more or less?

Rob Murray

I wish I could say it was again. I do not know exactly what it is going to be because I have different scenarios that we are looking at. The currencies are moving and are still extremely volatile right now.

Jason DeRise - UBS

Could we work it on a spot basis?

Rob Murray

I cannot tell you that number, sorry.

Jason DeRise - UBS

Is it alright if I just kind of change directions on the questions, I just wanted to understand if you were taking share in your markets or if you were just holding market share constant?

Doros Constantinou

Jason this is Doros. It is clear and as I said, we are pleased to see that we are not losing market share. Actually a number of our markets, we are gaining market share, maintaining a number of them and in most countries we are gaining. And I can quote a few countries if you wish, like Russia, which I know is a country that [Inaudible], we have not lost, we have gained market share in Russia according to Canadian recent data. The same for Austria, Romania, and Bulgaria even Ukraine, Poland. So in most of our countries, we are not only defending our market share, we are gaining.

And as Rob said, we need to be in a position to manage through difficult times; we have different scenarios, depending on how things go, how well the currencies trade, or whatever else is happening in those countries. We have different things but always we will try and balance between defending our profitability and increasing and between the longest help from the business and making sure that we produce our volume and our market share.

So it is a very delicate act in 2009 but we have the country management with appropriate skills and the control from head office to make sure that these things will happen in 2009. We just cannot give you one solution that will apply in all of our countries.

Jason DeRise - UBS

The one thing that surprises me is that maybe there is more pricing changes. Your volumes are going to take share. I mean you could have protected your probability by taking price. I am wondering if maybe there is too much focus on taking share when maybe you could have taken more price and market share would have been flat.

Doros Constantinou

No Jason. We are balancing. We know this business. We have the people in the marketplace that have the skills to bring back all the information and get it from the marketplace and would not go as far as damaging the profitability of your products is part of our strategy, profitability of products, availability etc so would not go as far as damaging availability but always projecting our profitability. We have demonstrated we can do that in the last 7 or 8 years and I believe we have all the necessary information and skills to continue doing so.

Rob Murray

Jason, just to remind you our pricing strategy is that we are more in line with what the local inflation is for that market. And we believe over time that that will correct itself with the currency impact, but in the short term, that is the situation. Some of our markets we see some fairly decent inflation if you want to look at it from that point of view where Russia, Ukraine inflation is in place but some other markets that has not really come in yet.

The other point you made, I just want to correct something you said about us buying concentrate in dollars, we buy it in Euros and the incident model basically adjust that Euro price back to the translated revenue in the local currency.

Jason DeRise - UBS

So in the 70% Euro-base, is it a catch up mechanism or is it a look forward in terms of the translation impact on the currencies.

Rob Murray

I am sorry, could…

Jason DeRise - UBS

I guess I just do not understand how there is a translation adjustment because basically you are negotiating in local currencies, if I understand that correctly.

Rob Murray

Basically for example, in 9 Euro countries, in a country if we have an incident rate of let us say 22%, that number, if the revenue realized after it is translated back to Euro is lower than our concentrate price will be adjusted down if we can achieve higher revenue and if the currency strengthens, then we would have a higher price for currency over time.

Operator

Your next question comes from Nico Lambrechts of Merrill Lynch. Please go ahead.

Nico Lambrechts – Merrill Lynch

Good afternoon gentlemen. Just back to the impact of cost on margins. One thing that you talked about the import inflation, the step change in currencies but the biggest downside surprise in the margin was in the established region which is really Euro regions and that is where the biggest fall was from 7% to 3%, while you had an increase in developing and emerging markets the fall was not so great. So it is difficult to understand, it if is mainly ethics, why did it happen in the established market. Could you elaborate or just explain that. And secondly, around price you mentioned that you want to continue pricing at the local inflation. Could you indicate what or give us broad indications of the pricing for the different regions where previously it was 9%, 2%, and 1%, should those be lower in 2009? And you also mentioned when you talked about price that you want to price at that level, but you will protect market share. And have you seen growth in no name or private label or other products against your branded goods. Thank you.

Doros Constantinou

Hi Nicko , this is Doros. I will address the last part of your question regarding market shares and then Rob will go back to cost of goods and the established markets etc. I would say that as I said right a few minutes ago. It is not one thing that we would do in all of our countries. We need to monitor the situation in each country and balance what we have to do in the market place. We manage this business for the long term. We will not take a big hit in our volume or in our profitability in any one year but you need to balance between what is right for the business in the long term. And as I said, we have been successful in doing that so far, we believe we are capable of continuing doing so. The pricing, we have taken some pricing in Q4 of 2008, that will have an impact in 2009 and that was primarily in our emerging markets. Traditionally in established markets, we do that in the early part of the year, January or February.

Nico Lambrechts – Merrill Lynch

In terms of the competition from lower priced products, I understand that you manage your business and you balance price and volume, are there any markets where you are currently seeing discounting or pressure from brands, any of the significant markets. Could you maybe be a little bit more specific?

Doros Constantinou

Yes sure Nicko. The answer to the value brands gaining share is no, not at our expense. In situations like this, what usually happens and our experience says that the guys in between gets squeezed. They will always be that part of the population that will continue to be buying value brands because that is what they can afford but people that were buying the brands in between, they have to decide whether to go further down the value brand or upgrade. And in our experience say in those cases, we are gaining market share.

Now in some countries, the whole volume goes down, maybe our overall volume has been impacted as in Russia in Q4 and for the whole year it was slightly down, but as I said before we are not losing market share even in these situations. So a short answer to your question is that we are not losing market share to value brands. They have always been there, they have always been competition in the markets where we are present and we have managed to face that and defend and even grow our market shares.

Nico Lambrechts – Merrill Lynch

Thank you very much.

Rob Murray

I guess your question on gross profit in the established markets; I just want to come back to you. Number one for us in this segment, the IC business represents over 50% of the mix and that was more heavily impacted in this segment. On top of that the growth that we did see in the segment in IC was more heavily weighted to water. So we had also a compounding negative mix situation in this segment. On top of that, the British pound devaluation had a significant impact in Ireland and we also had impacts in Greece with the unrest in the market during the month of December so it affected our sales in that period.

Nico Lambrechts – Merrill Lynch

Maybe we are overemphasizing that what the margin needs is transactional effects in fact maybe it is more less immediate consumption, more water sales and the one-off issues of Greece, etc.

Rob Murray

Yes. That is right.

Nico Lambrechts – Merrill Lynch

Because I think the call is emphasized on the FX’s potential impact on cost but you are highlighting that as our number showed that the biggest margin it was not established. And maybe it is more…could you maybe elaborate or maybe reconfirm what is the specific impacts on the margin.

Rob Murray

I think the bigger part to also keep in mind in Ireland that the pound, there is a knock down effect in Ireland with the pound declining. And that has to do with the shoppers moving over to Northern Ireland and so forth. So we saw some significant movement there during the forth quarter in particular with shoppers moving into the north and buying. We had a shift in volume between the north and the south.

Operator

Your next question comes from Lauren Torres from HSBC. Please go ahead.

Lauren Torres - HSBC

Hello everyone. Rob, do you have, just as a follow on to your last comment, what in the fourth quarter your immediate consumption versus future consumption performance was?

Rob Murray

Hi, Lauren. We are just double checking that number. In Q4 our mix was basically 39% single serve versus multi-serve of 61%. And we had growth of 9% for single serve and multi-serve growth was 3%.

Lauren Torres - HSBC

Okay, that helps thanks. And also I was just curious if you could comment on your relationship and have things changed with yourselves and the Coca-Cola Company. They have made comments in the last month in just last week about working more closely with bottlers particularly in the light of the times we are going through. So I was just curious I know you have had a very strong and good relationship, but curious of how things have evolved if anything is changed, if how you receive support payments or any support from the Coca-Cola Company has changed over the last couple of months or quarter or so.

Doros Constantinou

Hi Lauren, this is Doros. The relationship has always been strong with the Coca-Cola Company, to point out that these days nothing significant has changed. In fact, the fact of the challenging market environment, country involvement is getting the two organizations even closer to make sure they will both do the right things in the marketplace. But I will say that we are very lucky to have strong brands and that is something we appreciate in this kind of challenging environment. As I said, good brands will not suffer in the downturn, maybe it is an opportunity to gain market share.

As to whether we are getting additional payments from the Coca-Cola Company, no, we never have this kind of practice, we just share into the marketing spend. And that has always been negotiated and discussed and if there was a need to increase what needs to be spent, we will talk about it and go together.

Rob Murray

I think Lauren the other thing I would highlight too, Doros mentioned in his opening comment, that we renewed the shareholder agreement, where the shareholder agreement was renewed between Kar-tess and the Coca-Cola Company, as well as we agreed on our incident rates for 2009 and I think that reinforces also our alignment.

Lauren Torres - HSBC

And with that said, as Coke has spoken about bottlers and their hospital ward and kind of spinning them off and moving on from there, I was just curious from that front, have you talked about acquisition or just expanding your territory. Is that something near term that would be of interest to you?

Doros Constantinou

Near term, we do not have anything on the table, but as I have said before Lauren, it is something that the company needs to offer to us and then we need to look at it and see whether it will fit the portfolio of countries and skill set of our people. I will not claim that we can grow any market so we need to see what is available, what is offered to us and whether we have the right skills and people to send there and get additional value out of that specific territory. But for the time being, there is nothing on the table.

Operator

Your next question comes from Costas Theodorou from Cheuvrux. Please go ahead.

Costas Theodorou - Cheuvrux

Yes, thank you, good afternoon. Just a couple of questions. My first question is just a follow up just to understand on the emerging markets. Do you see any increase in the markets of big brands in these markets as a total not related to what Coca-Cola Hellenic is achieving related to these big brands, that is my first question. My second question is with respect to the water business, do you see any slowdown in this business and then a shift from the consumer to tap water? And a couple on financials, could you give us guidance on the tax rate for 2009 and given you Euro 1.2 billion target of free cash flows, what is your target for gearing at the end of 2011. Thank you very much.

Doros Constantinou

Hi Costas, this is Doros. I will say that value brands have always been a player in emerging markets. We have actually have our own lower value brand in a number of those countries just to make sure that we can play into that segment of the market as well, while trying to get the consumers to trade up to premium brands of our portfolio. We do not see them gaining market share in those places yet, but maybe eventually they will start gaining market share of the expense of the middle brands. We continue to have our lower value brands to make sure that we keep competition away from our franchise. Now regarding water, no we have not seen consumers trading or walking away from bottled water, premium water or enhanced water to tap water because water has been growing in all of our markets. We have strong local brands which carry a lot of brand equity, those markets and clearly we have not experienced any impact on our brands.

Rob Murray

Regarding your other two questions around tax guidance, we are not going to provide that, we are not giving any guidance on the in between lines. And the last question you had is regarding our gearing, our policy is to be between 35% and 45%. Today we are at around 36% and we expect to be within that range.

Rob Murray

Operator, we have only got time for one more question.

Operator

Your next question comes from David Tovar from Merrill Lynch. Please go ahead.

David Tovar – Merrill Lynch

Hi guys. This is actually David Tovar from Merrill. Just give me a quick follow up question on two things really. I know you mentioned that you are not going to give any further guidance on the financing lines but is it fair to assume given your 9% floating rate that your coupon will be coming down in 2009? And then secondly, you mentioned in your comments earlier that the underlying volume X extra trading days and extra were broadly flat in January. Could you possibly a little more color if possible across some of the at least at the divisional level so at least we could get a feel of what is happening across your different regions?

Rob Murray

I will answer the first question on financing. Your assumption is correct. Obviously we have swapped everything into floating and we expect improvement there on that line. Doros is just taking a look at the volume by segments.

Doros Constantinou

I would not go into details by countries. We have never done that David regarding the growth. But I would say there is a mix there, countries continue to be a challenge and I can mention Russia which continues to be a challenge and some other countries. But overall as we have said, I will take out the extra days and Socib, etc, we are flat. And January last year was not a bad month. So it is not a bad result, should be flat versus January last year.

David Tovar – Merrill Lynch

So you cannot give any more color on sort of how established [Inaudible] divisions started the year aside from saying that Russia was relatively weak again at January.

Doros Constantinou

I would say that January being flat is encouraging.

David Tovar – Merrill Lynch

Fair enough. Thank you.

Doros Constantinou

Thank you very much for joining us today. We look forward to updating you further in May. Thank you very much.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Coca Cola Hellenic Bottling S.A. Q4 2008 Earnings Call Transcript
This Transcript
All Transcripts