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Executives

Oya Gur - Investor Relations Director and Member of Disclosure Committee

Dimitris Lois - Chief Executive Officer, Executive Director and Chairman of Operating Committee

Michalis Imellos - Chief Financial Officer, Member of Operating Committee and Member of Disclosure Committee

Analysts

Samar Chand - Barclays Capital, Research Division

Adam Spielman - Citigroup Inc, Research Division

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

Henry Davies - BofA Merrill Lynch, Research Division

Dirk Van Vlaanderen - Jefferies LLC, Research Division

Coca-Cola HBC AG (CCH) Q2 2013 Earnings Call August 8, 2013 4:00 AM ET

Operator

Thank you for standing by, ladies and gentlemen, and welcome to the Coca-Cola HBC AG Conference Call on the Second Quarter and Half-Year 2013 Financial Results. We have with us Mr. Dimitris Lois, Chief Executive Officer; Mr. Michalis Imellos, Chief Financial Officer; and Ms. Oya Gur, Investor Relations Director. [Operator Instructions] I must advise you that this conference is being recorded today, Thursday, August 8, 2013. We now pass the floor to one of your speakers, Ms. Oya Gur. Please go ahead.

Oya Gur

Thank you for joining our call today to discuss our second quarter 2013 results. 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 Coca-Cola HBC AG's most recent filings, copies of which can be found on our website at www.coca-colahellenic.com. We will now turn the call over to Dimitris.

Dimitris Lois

Thank you, Oya. Good morning, everyone, and thank you for joining our call today. I'm pleased to be here with Michalis and Oya to discuss with you our performance during the second quarter of 2013.

We delivered on our key strategic priorities in the second quarter of the year. In the majority of the companies, we've maintained or reinforced our positioned in the marketplace, while growing currency neutral net sales revenue per case for the eighth consecutive quarter.

Volume was our biggest challenge in the quarter due to the continued difficulties in the macro economic and trading conditions across the large part of our territories. In addition, most of the Central Europe experienced unseasonably cold and rainy weather, particular at the end of May and early June. Italy, Ukraine, Greece, Romania and Hungary registered the largest year-over-year declines.

We generated strong free cash flow in the quarter, despite the relative weak supply.

Michalis will now provide you with details on our financial performance in the second quarter. Then, I will give you some further details on our top line performance, as well as our strategy in the outlook for the remainder of the year.

Michalis Imellos

Thank you, Dimitris. Hello, everyone. In line with our practice, as I take you through our financial results for the second quarter of the year, I will refer to comparable figures, excluding the impact of restructuring costs incurred in all the periods under review, the mark-to-market valuation impact of commodity hedges and specific nonrecurring items.

As Dimitris pointed out, the tough macroeconomic and trading conditions across a large part of our territories during the second quarter will drive in a 2% volume decline. This led to a 1% volume decline for the first 6 months of the year.

Total revenue declined by 2% on the part of the more active currency here in the quarter. We are pleased with the sustained growth of our currency neutral net sales revenue per case for both the second quarter and the half-year.

Our total operating expenses continued to improve year-over-year. This improvement was more than offset by the volume decline, the higher input costs and unfavorable currency movements, resulting in a decline of EUR 9 million of operating profit level for both periods under review.

At the bottom line, our second quarter comparable net profit was flat, supported by lower comparable net financing costs and lower comparable tax charges.

In the first half, our comparable net profits are growing by 3% year-over-year, with the EBIT decline being more than offset by lower comparable net financing costs and tax charges.

Our comparable levels per share declined by EUR 0.01 this quarter, while we are EUR 0.02 above prior year for the first half.

We are delighted about working capital focus has delivered a EUR 21 million year-over-year improvement in our second quarter free cash flow, which closed at EUR 137 million.

In the first half of the year, free cash flow reached EUR 98 million, growing by 15% year-over-year.

Let's take a closer look at our total line performance during the second quarter, focusing on the evolution of currency neutral net sales revenue per case. Dimitris will give you more details regarding our volume trends across our 3 operating segments later in the call.

Currency neutral revenue per case increased by 1% in both the second quarter and the first half of the year. This is in line with our expected deceleration in growth compared to the 2012 growth trends.

It is important to note that in established markets, which are traditionally characterized by higher revenue per case, currency neutral net sales revenue per case was flat in both periods.

In developing markets, second quarter currency neutral revenue per case was flat, showing a small improvement over the previous quarter. The benefits from the positive package mix were fully offset by the continued channel shift towards discounters, particularly in big countries like Poland.

For the first half of the year, developing markets currency neutral net sales revenue per case declined by 1%.

The emerging markets segment was the main growth driver, with currency neutral net sales revenue per case increasing by 3% in the second quarter and 4% in the first half of the year.

Currency neutral input cost per case grew by 1%, both in the quarter and the first 6 months of the year.

Looking at the key components, highest EU sugar prices and the highest sugar contribution due to the increased part in contribution in the total volume mix was partly offset by lower world sugar prices and slightly lower aluminum prices in the quarter.

We have covered fully our sugar requirements in both EU, as well as Russia and Nigeria for the remainder of the year. At the same time, we have covered roughly 80% of our aluminum requirements.

We continue to expect currency neutral input cost per case to grow by low single-digit in the full year. Our revenue growth initiatives are expected to fully offset the increase in full year currency neutral input costs in absolute terms.

Comparable operating expenses as a percentage of net sales revenue continued to improve this quarter, declining by 24 basis points year-over-year, leading to a 41 basis points improvement for the first half of the year.

The improvement in the quarter was primarily due to reduced warehousing and sales expenses, reflecting the improved flexibility in our warehousing and distribution structure, the benefits of tighter operating expenses management, as well as our restructuring initiatives.

On a segmental basis, the main drivers of the improvement were the developing markets, which improved by 140 basis points, as well as the established markets, which improved by 60 basis points. This is despite the negative operating leverage due to lower volumes.

In our emerging markets, comparable operating expenses as a percent of net sales revenue increased by 64 basis points, mainly driven by increased year-over-year marketing expenses in Russia, in relation to the Sochi Winter Olympics activation.

Turning to the operating profitability. The benefits of our revenue growth initiatives, as well as lower operating expenses, were more than offset by lower volume, the expected higher input costs year-over-year, as well as the accelerated negative impact from currency movements mainly from emerging markets.

As a result, comparable operating profits in both the second quarter and the first 6 months of the year declined by EUR 9 million, leading to a comparable operating profit of EUR 179 million in the second quarter of the year and EUR 178 million for the first half.

Turning now to our reporting segment second quarter performance. In our established markets, the comparability decline was primarily driven by lower volume and to a lesser extent, mix, which more than offset the benefits from our restructuring initiatives and tighter operating expense management.

Our developing markets was the best-performing segment in terms of operating profitability improvement. Comparable operating profit improved by EUR 30 million, primarily driven by lower operating expenses and positive currency movements from the Polish zloty, more than offsetting the negative volume and mix.

In our emerging markets, comparable operating profits declined by EUR 5 million. The benefits from our revenue growth initiatives, as well as higher volume, were more than offset by the negative impact of higher marketing expenses in relation to the Sochi Olympics in Russia, higher total operating expenses and adverse currency movements, mainly in Ukraine, Belarus and Romania.

We continued to make good progress on restructuring and expect to meet our targets for the full year of approximately EUR 50 million of costs, with the expected benefits reaching EUR 30 million on an annualized basis from 2014 onwards.

At the same time, we continue to expect that the total benefits from restructuring initiatives undertaken in the last year and to be undertaken this year will reach EUR 65 million within 2013.

We continue to execute on our restructuring plans for the year. We have incurred EUR 16 million of pretax restructuring charges in the second quarter and EUR 22 million in the first 6 months of the year, the majority of which took place in our established markets.

We are very pleased with our free cash flow performance in the second quarter amid very challenging trading conditions. We generated EUR 137 million of free cash flow, growing by EUR 21 million compared to prior year. This was mainly driven by our continuous focus on working capital management, resulting in a EUR 47 million improvement in the cash generated for working capital, which significantly offset lower operating profit.

Capital expenditure was practically flat year-over-year. Overall, in the first half of the year, free cash flow improved by EUR 13 million to EUR 98 million. This was primarily driven by improved working capital, lower capital expenditure and tax paid, which more than offset the lower operating profits.

We expect capital expenditure to continue to catch up as we progress through the remainder of the year, closing within our full year guided range of 5.5% to 6.5% of revenue.

We are also very pleased to have successfully refinanced in June approximately EUR 950 million of upcoming comp maturities at very competitive rates.

Following the completion of our new group holding company's listing on the Premium Segment of the London Stock Exchange, we successfully issued a new 7-year fixed rate bond of EUR 800 million at an all-in cost of 2.46%.

As you can see in this chart, this was the most favorable point in time over the last 18 months, helped by both EMEA record-low market rates and the reduction in our spreads. We believe that the latter encapsulates the benefits of our relisting and redomiciliation.

At the same time, we completed a fixed price tender offer to early purchase from the market the outstanding EUR 500 million bond, maturing in January 2014. As a result of this tender offer, we purchased approximately EUR 183 million at a fixed price of EUR 104.35.

The net proceeds from these 2 transactions will be used towards the refinancing of the upcoming maturities, mainly our EUR 500 million bond due in September 2013 and the remaining EUR 317 million from the bond maturing in January 2014.

Our net bond maturity is not due until September 2015 and amounts to USD 400 million.

Following the successful refinancing of our upcoming bond maturities, we canceled the EUR 500 million Bond Bridge facility that we secured back in October.

On the 17th of June, we completed the statutory buyout whereby Coca-Cola HBC AG acquired the remaining shares of Hellenic S.A., that we did not acquire upon completion of the share exchange offer.

The cash consideration paid during the statutory buyout remains at the very low level of EUR 1 million. As a result, we have now cancelled in full the EUR 550 million with our facility.

Overall, we remain committed in maintaining a conservative and diversified financial profile, translating to net debt to comparable EBITDA ratio in the range 1.5 to 2.

Our gross debt level will therefore come down by EUR 150 million from January 2014 onwards, by which time both the September 2013 and January 2014 bonds will have matured and been paid.

We expect that the improved coupon cost and reduced level of gross debt will give annual savings in our financing costs of approximately EUR 18 million starting from 2014.

Coming back to this quarter, it should be highlighted that during the second quarter, we had a net one-off impact of EUR 6.9 million on our net financing cost due to the early tender of a 2014 bond and another EUR 2.3 million relating to other nonrecurring financial costs in relation to the share exchange offer and the refinancing.

Excluding this one-off impact, comparable net financing costs closed 7% lower year-over-year in the second quarter up to EUR 20.5 million. These led to an 8% decline in the first half of the year, with comparable net financing expenses reaching EUR 40.2 million.

Turning to our expectations for the full year of 2013. We expect currency neutral net sales revenue per case to continue to grow year-over-year, albeit at a slower pace than 2012. As discussed, we're still expecting cost per case to grow in the full year at a low single-digit pace on a currency neutral base.

In terms of currencies, based on current spot rates, we now expect the negative impact on our full year 2013 operating profitability to be close to the EUR 43 million impact that we incurred in 2012. This is mainly driven by the recent depreciation of some currencies, predominantly in our emerging markets.

Taking into account the country mix in light of the underlying trends across our territory, we expect the medium-term comparable effective tax rate of 23% to 25%. In addition, our annual net capital expenditure over the medium-term is still expected to range between 5.5% and 6.5% of net sales revenue.

We expect that improvements in working capital, as well as increased operational efficiency, will support solid free cash flow generation in the medium-term. During the 2013 to 2015 3-year period, we continue to expect to generate cumulative free cash flow of approximately EUR 1.3 billion.

And with that, let me now pass the floor to Dimitris who will give you some more follow-up on our operational performance during the quarter.

Dimitris Lois

Thank you, Michalis. Volume declined by 2% in the second quarter. The trend in our established and developing markets was similar to the third quarter.

Our emerging markets continued to drive volume growth, albeit at slower rate. We do not expect the current fiscal physical trading conditions to change materially in the rest of the year.

We are the leaders in the sparkling beverage category in every market we operate, and I'm pleased to report that as we continue to improve our leadership position in the majority of our countries pursuant to our strategic priorities. We continue to focus on the impeccable execution of the point-of-sale. Specifically in the second quarter, we grew or maintained our volume churn in the sparkling beverages category in the majority of our markets, including Austria, Ireland, Italy, Czech Republic, Romania, Russia, Serbia and Ukraine.

Additionally, we gained or maintained value share in the overall non-alcoholic ready-to-drink market in Austria, Italy, Switzerland, Czech Republic, Romania, Russia and Serbia, among others.

In the second quarter, Premium Sparkling Beverages category grew by 1%. Brand Coca-Cola grew by 2%, reflecting mid single-digit growth in our emerging and low single-digit growth in our developing markets. These results include solid growth of 15% in Nigeria and the Czech Republic; 11% in Russia; 8% in Ireland; 6% in Ukraine; and 3% in Poland.

Coca-Cola Zero grew by 18%, with double-digit growth in all 3 reporting segments.

Volume of our Energy brands grew by 4%, marking the 13th consecutive quarter of volume expansion in this category. The positive performance in the second quarter was driven by double-digit growth in Hungary, Switzerland, Ireland and high single-digit growth in Russia.

Ready-to-drink Tea products declined by 1% in the quarter, driven primarily by developing markets.

Volume in the Juice category declined by 4%, as the 10% volume growth of our Juice business Russia was more than offset by weak performance in established and developing markets.

Volume in the Water category declined by 8% in the quarter, mainly resulting from lower sales in Ukraine, Greece and Italy. Having said that, package mix once again improved in the Water category, in line with our strategy of focusing on single-serve and the most profitable market-serve packages.

Turning now to each of our 3 reporting segments. Overall, macroeconomic conditions continue to be challenging in the established market segment. Based on Oxford [ph] economics, disposable income is expected to decline in 2013 both in Italy and Greece, and unemployment continues to rise, despite having already reached all-time high levels. This was further accentuated by unfavorable year-over-year weather conditions in some countries such as Austria and Switzerland.

Against this backdrop, volume declined by 6% in the second quarter of this year with Italy and Greece accounting for most of this shortfall.

In Italy, the decline in the overall non-alcoholic ready-to-drink market accelerated in the second quarter, reaching 7%. In this difficult trading environment, we outperformed the market in both Sparkling beverages and other non-alcoholic ready-to-drink, gaining market share. The 1 percentage point VAT hike that was due to be enforced in early July has now been postponed to September.

Our strategy is focused on winning in the marketplace, especially by increasing the points of interaction we have in each outlet, controlling costs by exploiting systems, optimizing infrastructure and strict working capital management.

Volume continued to decline in Greece. Unemployment reached new record levels of 27% and is expected to increase further. We remain focused on addressing affordability, while improving operational efficiency.

In Switzerland, prolonged winter conditions and unseasonably wet weather compared to last year had an adverse impact on demand, particularly in the immediate consumption channel.

We maintained value share in both Sparkling Beverages and the overall non-alcoholic ready-to-drink category.

Package mix improved in our established markets, both in the Sparkling Beverages and in the Water category. The former is driven by our successful share “Share a Coke" campaign.

Our strategy in established markets is protecting net sales revenue per case, while addressing affordability. We are also looking into continuously improving efficiencies and optimizing our cost base. And as part of this, most of our restructuring initiatives in 2013 are taking place in this segment.

In our developing markets, we registered a 3% volume decline in the second quarter of the year. This segment was impacted the most by adverse weather conditions.

This volume decline was driven mainly by our Water and Tea categories. Volume of Premium Sparkling Beverages was up 1%, while volume in the Energy category grew by high single-digits.

In Poland, our performance improved sequentially over the previous quarter. We grew Sparkling Beverages by low single-digits, while our Juice category grew by strong double digits for a second consecutive quarter, as the result of our successful switch from Tetra to 1L PET packages.

We've continued to execute on our strategy in Poland, with a focus on our OBPPC implementation, operational efficiency and tight cost control.

Hungary was impacted significantly by the overall volatile microeconomic condition, while consumer confidence remains amongst the lowest in Europe.

In the Czech Republic, the volume decline was driven by Tea beverages, whereas Sparkling beverages posted strong double-digit growth.

Our emerging markets segment reported a 2% volume growth in the second quarter as the result of our performance in Nigeria, Russia and Belarus. All 3 categories, except Water, registered volume growth in the quarter.

Volume in Russia continues its solid performance for the second consecutive quarter, reflecting growth in all categories, except Water. We have robust plans in the second half of the year, leveraging Sochi Winter Olympic Games sponsorship and Christmas.

Our Water business continued to grow in double-digit for the sixth consecutive quarter, as we capture all the benefits of our integration projects. We are encouraged by the strong growth in Nigeria, almost by double-digit during the quarter.

Trademark Coca-Cola products were up 15%, supported by our strong activation, improved availability and revenue growth initiatives. We continue to execute on our strategy in the country, focusing on investing in our brands with emphasis on Sparkling beverages, expanding further distribution and volume per outlet, driving availability across-the-board, and finally, selectively introducing OBPPC initiatives.

Volume in Romania was negatively impacted by both competitive promotional pleasures, mainly in market-served packages and improved weather.

I would like to spend a few minutes on our new summer marketing campaign, “Share a Coke”, in which the names of individual consumers are placed on Coca-Cola bottles and cans. This is a unique campaign that allows Trademark Coca-Cola to connect with consumers. At the same time, this campaign is helping us to deliver on our strategy of growing net sales revenue per case in the -- since the packages involved are mostly single-served. More importantly, “Share a Coke” is also supported by our customers. It enables us to increase revenue per square meter and traffic in the store. The campaign was launched across Europe, including 24 of our markets in May, and it will run through most of the third quarter.

Today, we have received very positive feedback from consumers and improved market share performance in the vast majority of our markets where the campaign was launched.

Let me now reiterate the key elements of our strategy in light of the environment in which we operate. We continue to focus on the elements we can control, becoming stronger, leaner and more efficient. Key areas that we continue to focus are: winning at the point-of-sale every day and in every occasion; growing currency neutral revenue per case consistently, while continuing to address affordability; cost leveraging in every aspect of our business as we work on improving efficiencies and optimizing our cost base; and finally, focusing on working capital improvement and continuing to generate strong free cash flow.

We have a clear focus on driving strong and sustainable cash generation. And as you know, we currently expect to generate approximately EUR 1.3 billion in free cash flow during the 3-year period ending December 2016. Our first priority is to reinvest this cash in our business in order to secure profitable volume growth.

In terms of CapEx, historically, 2/3 of our expenditure is considered revenue-generating with emphasis on holding equipment. We are always looking for opportunities to expand our business, provided it makes economic sense and is value-accretive.

In terms of M&A, we focus more on small bolt-on acquisitions in the territories that we operate to strengthen our position in Tea Beverages.

We also have a strong track record of returning values to our shareholders. In the last 12 years, we have returned more than EUR 2 billion of cash to our shareholders. Our Board of Directors approved a new dividend policy, which aims to increase dividend payments progressively, with a payout ratio of 35% to 45% on a comparable net profit.

We will continue to pay dividends once a year after our annual general meeting, in line with our prior practice.

Before I open the floor to questions, let me give you an update regarding the completion of our relisting and redomiciliation process.

As you all know, our new group holding company, Coca-Cola HBC AG, started trading in the Premium segment of the London Stock Exchange on the 29th of April. Soon after that, we initiated a statutory buyout procedure for certain minority shares that were not held.

This was completed on June 17. Today, Coca-Cola Hellenic Bottling Company S.A. is a wholly-owned subsidiary of the Swiss Holding Company and has been listed from the Athens Stock Exchange. We are looking forward to the Fuji committee decisions in August and September for inclusion of our shares in the Fuji 100 index.

In closing, I would like to reiterate that we remain committed to strengthening our business and continue to manage it for the long-term, investing in our brands. We are focused on improving those areas of the business we can control to ensure margin improvement. We are absolutely convinced that we have the right strategy, which, together with the world's most known and loved brands in our portfolio and an attractive, diversified geographic footprint with lower capital consumption present us with ample opportunity to grow. And with that, Michalis and I are ready to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Samar Chand of Barclays.

Samar Chand - Barclays Capital, Research Division

I just had 3 questions, please. The first one is around your margin performance in the emerging market. I'm quite surprised of the lack of leverage that you generated in this division, especially given you had 5% sales growth. So you have said that there was the AMP around Sochi, the increased OpEx and the FX, but just a bit more detail around why we didn't get that margin leveraged this quarter. And also, what you're quoting about the phasing of the AMP campaign and perhaps the margin leverage returning in the second half for the emerging market. Secondly, on your key Russian markets. It looks to me that everything was doing quite well there, except for your Waters business, which on my numbers was down pretty strong double-digit. So I just want to have more color on what's driven the decline in Waters and Russia. Is it just the case of the pack mix changing and perhaps, what we would expect in the future around that strategy, around Waters? And then just lastly, we're hearing some very positive comments around trading in July from Carlsberg, from Danone and so forth. Any comments from you would be very helpful.

Dimitris Lois

Let me start with the second question with regards to Water in Russia. What I'd like -- I would like to give him a bit of a -- more color with regards to the Water strategy. So overall -- and then I'm going to shift to Russia. Overall, in Q2, the Water declined by 8%. So the main countries there was Ukraine, Greece, Italy, Russia, Czech, and to a lesser extent, Romania. Now what the strategy is, is to rationalize brands and packaging. And as part of our strategy, to focus on more profitable packages. And you will see that proven with the fact that the pack mix is improving quarter-after-quarter. The pack mix in Q1 with single-serve was improving and also in Q2.

Now in terms of Russia, this is exactly what we are doing. We are optimizing our SKU portfolio, and this is what you have seen. And additionally, there was also an impact from weather. So those are the 2 major elements. First, focusing more on the overall Water strategy, and that's for the group. Also, including Russia. And then second, particularly for Russia, there was a weather element that drove Water down. Now allow me to tell you a few things about Russia and what we have seen in Q2. First of all, Q1 was an 8% increase; Q2 was a 4% increase. Sparkling continued doing well, with Coca-Cola growing 11%, and this being the 11th consecutive quarter in which we are growing share. Fanta's price switch, they all grew well, 6% in this quarter versus 7% in Q1. Juice did also extremely well, double-digit with both the [ph] drinks doing very well and our premium brand, Rich, doing well. Tea did 16%, outperforming competition. So all in all, there is a good, healthy growth in Russia. We've -- also, what we have shared with you overall on the Water.

Now on your last question, with regards to current trends and volume growth. Well, first of all, the current condition with regards to macro environment remains as a key challenge. And I'm referring to disposable income, the higher unemployment in most of our markets. So conditions overall are very challenging in the established markets. And obviously, Italy and Greece are the ones challenged the most. We expect also volatility in developing, Poland and Hungary. And the last focus in the emerging markets, that would be driving the volume. Now in the second half of the year, we are cycling a far more difficult year-on-year comps. H1 was -- we were cycling a 2.5% decline. And in H2, we are cycling a 2% increase. Now focusing more on Q3, in Q3, also, we are cycling a 2% increase. Now with regards to July performance, this was a challenging start. We have seen in some part of Western Europe good weather conditions, but that was not the case in our territories. So a challenging start in July. We have very strong plans for Q3 and also Q4. And we are cycling a 2% increase year-on-year in Q3. So this is where we stand with regards to trading condition. Now let me give the floor to Michalis to take your first question.

Michalis Imellos

First of all, just to lay out the fact in quarter 2 in emerging markets, the EBIT margin was 11.7. It was down, as you said, 70 basis points, more or less. But on a year-to-date basis in the first half, it was at 7.1 and it is flat, in fact, growing by 10 basis points. Generally speaking, because in emerging markets, you have a lot of different countries with very different sizes and different characteristics. Countries like Russia and Nigeria have, on a growth side, but countries also like Ukraine and Romania, which are very challenged volume-wise. It's very difficult when you amalgamate all this to really make a lot of sense in an isolated quarter about the margins and their trends in the second. Having said that, and bearing in mind that we don't give detailed margins by country, what I could say is, first of all, you have the element of the country mix, as I mentioned earlier, particularly with countries like Romania and Ukraine, where the volume has been very challenged in quarter 2. That leads for some of these markets with relatively higher profitability to some volume deleveraging, which has a negative impact on the margin. You have the DME phasing, as you mentioned, if you recall from quarter 1, we didn't mention, but there was certain element of year-over-year DME phasing. It was favorable in quarter 1, it was less favorable in quarter 2. And to the biggest extend this relates to the Sochi Olympics spend and the acceleration of the spend in preparation of the activities there. And also, you have, in particular, in quarter 2, we have the FX deterioration. There is some transaction impact, but mostly translation. And VAT is coming from certain emerging countries, particularly Ukraine, Belarus and Romania. Russia, joined, I would say, a little bit later in the quarter 2. So these are the factors that more or less drive, specifically, in this quarter, this margin decline.

Operator

Your next question comes from Adam Spielman of Citi.

Adam Spielman - Citigroup Inc, Research Division

After that pretty comprehensive answer on what we had in driving the margins in Q2, I was wondering if you could talk about the phasing of the sponsorship of the expense associated with the Olympics. Because certainly, I haven't been expecting the margin to decline as much as it did in emerging markets. So I was just wondering if you could give any sort of guidance on that going forward. And the second point is about the benefits of the world sugar price decrease. Now that's obviously continuing to decrease. You've already said you've locked in entirely for 2013 your sugar input costs. But I was wondering where you are in 2014, how much of a benefit that would be? And what potentially of that is already hedged in as well?

Dimitris Lois

Let me take your first question with regards to the Sochi phasing. So the overall Sochi Olympic investment is approximately USD 60 million. This is 50-50 split with The Coca-Cola Company, and is spread within a span of 2 to 3 years. A portion of that is OpEx, like dedicated events, personnel and so on and so forth. There is a marketing expense element with the activation event and the largest Olympic Torch Relay that we are starting in October. And there's a much smaller portion of the CapEx is used out in element like coolers. Now as Michalis referred to, for 2013, there was an element in Q1 and Q2, obviously. As we move on in Q3 and Q4, the phasing is a lot stronger. So that is what we will be expecting to see in the second half of the year. Now let me turn to Michalis to give you a bit more color on your question with regards to sugar.

Michalis Imellos

Yes. So specifically on the world market sugar, you're absolutely right. We have seen the price in the world market coming down. And secondly, this gives us a benefit in 2013. Bearing in mind that usually based on our hedging policy, you should look at a 6-month -- 6- to 9-month hedging in advance of the actual cost being incurred. So we were effectively locked into prices that were pertaining the markets 6 to 9 months ago for the period that we are now. Having said that, we do see the world market sugar in 2013, in our results, being a small decline on a per case basis, currency neutral. And indeed, we are fully hedged in Russia and Nigeria, with regard to world market sugar. In terms of 2014, although we have not shared a guidance yet because we are in the process of building our plans for 2014, what I can share is that we have already hedged around 2/3 or just about 2/3 of our needs in Russia and Nigeria in terms of world market sugar, taking, of course, advantage of the favorable pricing that exists right now. Having said that, let's not forget also that if you go today to forward hedge, for example, on sugar for 12 months or 24 months, you're not going to get obviously exactly the price, at least in the market today. That would be $2 to $3 more than what you experience right now in the spot price. Okay. So it doesn't necessarily -- this particularly good price, spot price that we have at the moment, doesn't necessarily mean that you can lock into it for 12 to 24 months ahead.

Adam Spielman - Citigroup Inc, Research Division

Can I just can back with just a very quick follow-up on the Sochi question. If I'm comparing your marketing spend or your plans for the second half of 2013, will that be more or less than the first half of 2014? Because I would have guessed, it was more around the Olympics itself, most of it obviously, there's a seasonal -- your seasonal business is taken into account as well.

Dimitris Lois

We expect that's going to be higher than the second half of 2012.

Adam Spielman - Citigroup Inc, Research Division

Sorry. If I'm comparing the second half of 2013 against the first half, the increments in investments in the second half of 2013 against the first half of 2014, yet, where you will be putting more dollars or more euros?

Dimitris Lois

Yes. So if I understand correctly, your question is H1 2013 to H2 2013, Sochi? Is that your question?

Adam Spielman - Citigroup Inc, Research Division

I'm sorry. It's not a very good line, obviously. I suppose the question -- let me explain, I was surprised by your margin decline in this quarter. And it was driven by the -- partially, by the Olympics. So I'm trying to work out whether I should be, as I model going forward, I should be putting enough big decline into the second half or a decline into second half, and how that compares to whatever decline I might want to put in through the first half of 2014. That's what I'm trying to drive at.

Dimitris Lois

Okay. Let me advance it a little bit. The discussion prior was Michalis giving a lot more light with regards to overall emerging. Now in the overall emerging profitability, there are couple of elements. Those elements are: a, input cost; b, FX; c, there's also an OpEx element. Now within the OpEx element, Michalis highlighted, as an example, the Sochi, which connects with Russia. So right now, we are moving from the emerging going to Russia. And in Russia, H1 Sochi if compared with H2 Sochi, then H2 is higher than H1. I hope I have given light to what you were asking.

Operator

Your next question comes from Edward Mundy of Nomura.

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

A couple just to stick on the margin topic. First of all, what proportion of the EUR 65 million cost savings actually fell in H1? Secondly, your comments on reduced warehousings and sales expenses as drivers of the lower OpEx, 40 basis points lower in H1. What's your medium-term target for OpEx as a portion of sales? And thirdly, if you're able to comp [ph] at all in 2014, assuming the volume and pricing outlook remains broadly unchanged, and how should we think about margin progression next year?

Dimitris Lois

Okay, Ed, let me start with your third question. And then, what I would like is to give you an overall positioning. First of all, you know by now, we don't give specific margins profitability and guidance -- guidance in margins and profitability. But I would like to say a couple of things. First of all, we have shared our commitment to improve margins over time, and we are staying this course. We strongly believe that our business commands higher margins, and we are targeting to go back to the precrisis level. Let me unbundle a little bit the different elements. First of all, external environment, and I'm not referring only to H2. I'm referring to what we see currently, as the next 12 months being very challenging. And that's far more evident in established markets, with a lot of volatility in developing. Now we do expect that we will have focus in emerging that will be driving the growth. We have been vocal about winning in the marketplace, and that stays on top of our agenda. Definitely, there are always opportunities to improve execution, expand distribution and connect better with our consumer. Revenue growth management, this is something that we are communicating and we are consistent. This is the eighth consecutive quarter, and we are staying the course on currency neutral revenue per case increase. And I will connect that with the 3 elements, the 3 key strategic elements behind the revenue growth management, which is OBPPC. And we are focused single term, and obviously, pricing. And we are taking pricing. With regards to input cost, we have seen the environment in '13, with currency neutral input cost per case being low single digit. And also, we have heard from Michalis where we stand with regards to '14. We are very focused on improving our operational efficiency, and we have seen a consistent improvement in our OpEx as percent of NSR. We have seen that in the full year '12, we have seen that in Q1, we have seen that in Q2, and we are seeing the cost. We talked about the EUR 65 million of restructuring initiatives, the benefits will be EUR 65 million from our restructuring initiatives. Also, we talked a bit about the FX headwind, and we now see that, that is going to be at the same level. So all in all, yes, we are committed to improve our margins, starting even from '15. So I guess, this gives you a positioning also on '14. Let me pass -- on the other 2 questions, let me pass the call to Michalis.

Michalis Imellos

Yes. In terms of the question on the benefits, the quick answer is that, I would say, more or less it is evenly phased. The benefit of EUR 65 million is evenly phased across the quarters. Why is that? The majority of the EUR 65 million is effectively benefits that are coming from the initiatives that we took in 2012. Generally speaking, the restructuring costs are incurred towards the end of the year, in the majority of the cases. And the benefits start accruing from the following year. So what -- the majority of what you see in the EUR 65 million relates to 2012 initiatives. And that's why I would say, more or less, equally phased. Now the 2013 initiatives, because these initiatives, the benefits from these initiatives are included in the EUR 65 million, they are more back-phased as normally as the restructuring in actions. And therefore, I will say that they have a major impact in the 2013 financials, particularly as we spend EUR 107 million in 2012 in restructuring costs. Whereas in 2013, we are going to spend something like EUR 50 million. I think you also had a question about the OpEx as percent of NSR target. Clearly, we don't give guidance specifically on the OpEx as percent of revenue. But you will appreciate that it's one of our major strategic priorities to drive efficiency, to drive cost out of the system. So clearly, we expect to see it scaling down on the OpEx as a percent of revenue in the years to come.

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

Okay, Michalis. Just to really follow-up on the margin outlook then for H2. You both can be very upfront to say that you're up against a tougher volume comp in H2. You've got some high spending related to Sochi. Is there any reason why your EBIT margin in H2 shouldn't be any materially different than it was H1? Are you 20 basis points down? Or should we expect a further decline in H2 over and above that?

Dimitris Lois

Well, Ed, this was what I was taking you through. Yes, we do believe, and that's what I said closing. Even from 2013, which, in principle, means the second half of this year, we will be able to improve our margins.

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

Sorry. You think you can improve margins in 2013, sorry was that?

Dimitris Lois

That's what I was covering, giving the analysis of all the leverage. And yes, we believe that even from '13, we will be able to improve our margins.

Operator

The next question comes from Henry Davies, Bank of America Merrill Lynch.

Henry Davies - BofA Merrill Lynch, Research Division

Three questions, please. Firstly, you're guiding to a transactional FX hedge of around EUR 43 million. How much of that was already in the first half? Second question is on your refinancing. Once all of the refinancing is done, what coupon should we -- or cost of gross debt should we be thinking about going forward? And then, I think, you also mentioned an EUR 18 million saving on net finance costs from all of the refinancing. Should we be comparing that to the rough run rate of EUR 18 million per annum based upon the EUR 40 million taken in the first half? And then final question on input costs, I appreciate it's quite early to give any guidance on 2014. But if input prices stay where they are today, would input costs be down for you next year?

Dimitris Lois

Henry, taking your questions in turn. So first of all, the EUR 43 million sic [ph] was the figure for 2012 versus 2011. Now what we are saying is that we expect that in 2013 as well, we expect to see a similar steep around about this area. But that's not just transactional, now it's a total FX thing. So both transactional and translational. What we saw in quarter 1 and quarter 2 this year has been quite a different dynamic. In quarter 1, for example, we did have some negative transaction impact, whereas translation was more or less flat. With the deterioration of the emerging currency or some of the emerging currencies in quarter 2, transaction sheet actually improve as we're expecting, because we have an active hedging policy in place, and we were expecting that we will see an improvement. But what deteriorated substantially was the translation impact in quarter 2. And what we see going ahead is that we will see half in the majority of this incremental sheet, the majority of this incremental sheet, coming from translational FX. Whereas transactional, because we have taken already significant hedging positions, we don't expect it to be materially different. It will be, still, impacted, but not as much as translation.

Henry Davies - BofA Merrill Lynch, Research Division

So on transactional, it's a similar hit in the second half as the first half?

Dimitris Lois

No, no, no. Not in absolute terms because obviously, quarter 3 is a very big quarter. And in absolute terms, we are going to encourage it. What I'm trying to say is that it's not going to be different to what we expected at the beginning of the year because we have already taken positions in it. What is going to deteriorate versus quarter 1 and quarter 2 is translation currency.

Henry Davies - BofA Merrill Lynch, Research Division

Does the hedging essentially mean that the transactional hit from weakening currencies is essentially just pushed out to 2014? Have I understood that correctly? Once the hedges roll off?

Michalis Imellos

The hedging policy that we have is like more heavily weighted towards the next 6 months on a rolling basis, of course. And as we go towards the 12, 24 and 36 months, the relative weight decreases. So taking into account that things turn, let's say, end of May, beginning of June, you would expect that the hedging policy has covered us to the greatest extent until, more or less, end of quarter 3, mid-quarter 4. So already, in 2014 and '15, we will expect to have transactional ForEx sheet because the hedging has worked only partially, not fully. Because CapEx only partially, [indiscernible] exposed [ph] .

Henry Davies - BofA Merrill Lynch, Research Division

Okay, perfect. And just where we are on margins before the other 2 questions. So if I look at the key drivers first half versus second half, it sounds like organic top line, you're not expecting much improvement, given the tougher comps. Costs -- so transactional FX, you're saying is similar in the first half versus the second half. Cost saves is a split about 50-50, which actually is more beneficial for the margins in the first half versus the second half. [indiscernible] half year is going to be slightly higher in the second half year-over-year. So what am I missing? What is going to drive your margins from down 20 bps to actually increasing for the full year? There must be some piece of the puzzle I'm missing there.

Michalis Imellos

Well, Henry, this is very much what Dimitris covered earlier in quite a lot of detail in terms of the different dynamics between first half and second half. So really, it would be a repetition now to go through this again.

Henry Davies - BofA Merrill Lynch, Research Division

Again -- okay. Let's move on to the gross debt and the cost questions then.

Michalis Imellos

Okay. So in terms of the refinancing and the debt, based only on coupon costs, the effective interest rate or interest cost overall has come down by about 50 basis points to just over 3%. That will be upon settlement of all outstanding maturities early 2014. So you should think of it like this, but only with relation to the coupons of the bonds. And yet, the EUR 18 million saving is the annualized saving. It's not going to be exactly EUR 18 million when you compare 2014 to '13 because a small benefit from refinancing will accrue in 2013. Maybe that would be EUR 3 million -- more or less EUR 3 million less than that for 2014. But yes, the majority of those savings are expected to be there for 2014 versus 2013.

Henry Davies - BofA Merrill Lynch, Research Division

And -- okay, perfect. So going forward, we can think about a 3% -- the coupon on your gross debt? Is that right?

Michalis Imellos

Yes.

Henry Davies - BofA Merrill Lynch, Research Division

That seems quite low, given the proportion of emerging markets in your portfolio. Is there a reason for that? Do you not match the profits to your debt? I just had assumed that would be higher than that going forward.

Michalis Imellos

You asked me about the financing cost, if I'm not mistaken. And I'm talking about the -- specifically, I'm focusing on the coupon. We are not taking now into account bonds overdraft, but maybe local operations might have and so no so forth, which create a higher blended financing cost, okay, as percent of total gross debt. Having said that, keep in mind that clearly the group issued the bonds centrally for the benefit effectively of all the operations. So the fact that we are exposing emerging markets or any other markets, with regard to the bond financing, doesn't make any difference.

Henry Davies - BofA Merrill Lynch, Research Division

Got it. Sorry, I wasn't clear. I'm after that blended number on your total gross debt.

Michalis Imellos

Okay. The blended would be just under 4%, I would say, upon everything maturing. Okay? And finally, on the input cost of 2014, as I said, we are now in the planning cycle, and we are actually looking at all the different dynamics. But what I can share is, first of all, as I said earlier, world market sugar just over 2/3 already hedged, and we are seeing prices for world market sugar for next year, based on the hedges that we have already taken, to be pretty much flattish compared to what we will experience by the end of 2013. In terms of EU sugar in the next 2 to 3 months, we will be entering into the contract for 2014. We are already about 1/4 of our exposures covered. And there, for EU sugar, I would say also that we will have, what we can see as flattish position, given also the fact that in 2013, we have a small increase as a result of the exiting of some favorable contracts. Now I would like to go into emerging [ph] and because it's a currency -- a commodity that cannot be hedged, and therefore, there are dynamics that can change [indiscernible]. Please bear in mind that when we post the input cost per case, this is not completely driven by prices. This is predominantly driven by commodity price, but not only by commodity price. It is also the mix of the different raw materials. And more importantly, sugar, because as, essentially, the category mix is changing, maybe starting to grow faster than others, for example, that has an impact on the input cost per case.

Henry Davies - BofA Merrill Lynch, Research Division

Perfect. So is that mix running positive or negative to input costs? And then maybe you could share -- you said you're already quite hedged for aluminum for next year. Is that also flattish like sugar? Or is that moving up or down?

Michalis Imellos

For aluminum, did you say?

Henry Davies - BofA Merrill Lynch, Research Division

Yes, aluminum.

Michalis Imellos

No, aluminum, we're seeing that there will be a small increase in 2014. It's a little bit early though. And this should be taken as very preliminary. Now in terms of the mix, your question, so for what we see and we know is that Sparkling is doing a lot, lot better than Water, for example. So that has an impact also on the input cost per case.

Oya Gur

Operator, we have time for one more question, then let's hand the call over to Dimitri for his closing remarks.

Operator

Your last question comes from Dirk Van Vlaanderen of Jefferies.

Dirk Van Vlaanderen - Jefferies LLC, Research Division

I guess, just a question really on use of cash. And that you've highlighted the dividend policy going forward in 2014. I was wondering if there was any specific stated policy on share buybacks and whether there was authority or indeed interests to do that on this cash item. Also, maybe just a word on sort of the M&A sort of policy. I know previously, you said that not particularly interested in any large scale M&A. But is there any interest in maybe in entering smaller adjacent countries to maybe where you already have scale? Or would the interest more be in the sort of local brands within the markets you're already in. So those are my questions.

Dimitris Lois

Let me take your second question. No, there is no interest in adjacent countries. And as we've shared with you, our #1 priority is to reinvest back in the business for profitable growth. Then obviously, we have a 5.5% to 6.5% on saves with regard to CapEx. And the third one, yes, we do have a 9 [ph] for acquisitions. We are focusing in the countries we operate, huge opportunity there. And the area, the space, we are focusing more is tea beverages. So obviously, the third element is -- the fourth element is returning cash back to our shareholders. So that takes care of your second question. Michalis will take your first question.

Michalis Imellos

I think it also covers the first. I will make one specific point on the share buybacks, just for clarity. Share buybacks, meaning, basis of shares, not capital returns of course. And because one of the requirements for the inclusion in the FTSE 100 is for us to have a minimum of 50% free flow, and right now, the free flow data of 54%. Based on where we are today and the way things are structured, it would be extremely unlikely that we will go into any share buybacks, exactly because that would reduce the free flow and would jeopardize our inclusion in the FTSE 100 Index.

Dirk Van Vlaanderen - Jefferies LLC, Research Division

Okay, great. And maybe would just one last follow-up, maybe to Dmitris. And thinking about investors events in London a few months ago, you mentioned that you thought that as we look back on 2013, you would think that things would -- that would be the low point, I guess, and things can only improve from there. I was wondering if that sort of was still your thinking.

Dimitris Lois

That's what I said, and that was responding on specific markets. The question was more on established, and within established, the question was focusing more on the ones that have been suffering the most, and that's Ireland. And yes, I do believe that at the end of the year, looking back, we would say the worst are behind. The second market that we have been referring to -- responding to was Greece. Greece has been suffering quite a bit. And I do believe that at the end of year, looking back, we will say the worst are behind. So that was my comment, to clarify. And thank you for bringing it up. Good.

I would like to thank you all for joining us today and for all the great questions that facilitated a good discussion on our second quarter performance. Before we end this call, let me reiterate that we believe we have the right strategy to successfully respond to the challenges in the marketplace and capitalize on the significant growth potential of our country portfolio when external conditions start to stabilize. Thank you, and look forward to speaking again with you soon.

Operator

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

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