Coca-Cola HBC AG Management Discusses Q3 2013 Results - Earnings Call Transcript

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Coca-Cola HBC AG (CCH) Nine Months 2013 Earnings Call November 7, 2013 4:00 AM ET

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

Lauren Torres - HSBC, Research Division

Andrew Holland - Societe Generale Cross Asset Research

Adam Spielman - Citigroup Inc, Research Division

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

Olivier Nicolai - UBS Investment Bank, Research Division

Henry Davies - BofA Merrill Lynch, Research Division

Operator

Thank you for standing by, ladies and gentlemen, welcome to the Coca-Cola HBC AG Conference Call on the 9 Months Results ended 27th of September, 2013. We have with us Mr. Dimitris Lois, Chief Executive Officer; Mr. Michalis Imellos, Chief Financial Officer, and Ms. Oya Gur, Investor Relations Director of the company. [Operator Instructions] I must advise you that the conference is being recorded today, Thursday, November 7, 2013. And we now pass the floor to one of your speakers today, Ms. Oya Gur. Please go ahead

Oya Gur

Thank you for joining our call today to discuss our third quarter results. I'm joined by our Chief Executive Officer, Dimitris Lois and our Chief Financial Officer, Michalis Imellos. Following the presentation by Dimitris and Michalis, we will open the floor for your questions. 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 coca-colahellenic.com.

Let me now turn the call over to Dimitris.

Dimitris Lois

Thank you, Oya. Good morning, everyone, and thank you for joining our call today. During this quarter, we continue to deliver on our key strategic priorities. We reinforced or maintained our position in the marketplace in the majority of our markets. We grew currency neutral net sales revenue per case for the ninth consecutive quarter. I am particularly pleased that, this quarter, we have delivered margin improvements, both at the gross profit and EBIT levels. This comes after 11th consecutive quarters of decline. Our focus on improving operational efficiency, as well as working capital, resulted in solid free cash flow generation for the third quarter and for the 9-month period. Volume remains our biggest challenge in the quarter, with mixed trends across our territories. Difficulties in macroeconomic and trading conditions across Europe continue, while we have been experiencing varying levels of performance and profit comparables in our emerging markets.

Michalis will now provide you with details on our financial performance in the third quarter. Then, I will discuss our top line performance, as well as our strategy and outlook for the remainder of 2013.

Michalis Imellos

Thank you, Dimitris, and good morning, everyone. In line with our practice, I will take you through our financial results for the third quarter and the 9-month period. I will refer to comparable figures, excluding the impact of restructuring costs incurred in all periods under review, the mark-to-market valuation impact of commodity hedges, and specific nonrecurring items.

As Dimitris has pointed out, the difficult macroeconomic and trading conditions across a large part of our territories during the third quarter resulted in a 3% volume decline. This led to a 2% volume decline for the first 9 months of the year. Total revenue declined by 5% in the third quarter, on the back of a significant currency hit, particularly in our emerging markets segment. For the 9-month period, total revenue declined by 3%. We are pleased with the sustained growth of our currency neutral net sales revenue per case for both the third quarter and the 9-month period.

Overall, in the third quarter, we delivered a 20 basis points improvement in gross profit margin, and a 20 basis points improvement in operating expenses as a percent of revenue, leading to a 40 basis points improvement in operating profit margin. This growth reflects our improved operational efficiency across our business, with a reduction in total operating expenses and total unit costs, outpacing the rate of decline in total revenue.

Our total operating expenses continued to improve year-over-year for both periods under review. In the third quarter, this improvement, combined with a benefits from our revenue growth initiatives and the improvement in total input costs in absolute terms, was not enough to compensate for the decline in volume and unfavorable currency movements. As a result, comparable operating profits reached EUR 207 million in the quarter, posting a EUR 3 million decline.

In the 9-month period, the comparable operating profit margin remained flat, at 7.3%. Comparable operating profits declined by approximately EUR 12 million or 3% year-over-year, reaching EUR 386 million.

At the bottom line, our third quarter comparable net profit declined by approximately EUR 8 million, with lower comparable net financing costs being more than offset by higher year-over-year comparable tax charges. In the 9-month period, our comparable net profit declined by EUR 4 million or 2% year-over-year, supported by lower comparable net financing costs. For the 9-month period, our comparable earnings per share was EUR 0.71 and 1% below prior year.

In the third quarter, we generated EUR 248 million of free cash flow, supported by a EUR 79 million improvement in working capital. In the 9-month period, free cash flow reached EUR 345 million, posting a 5% decline year-over-year.

Let's take a closer look at our top line performance during the third quarter. Currency neutral revenue per case has moderately accelerated since the beginning of the year, increasing by 1.4% in the third quarter, and 1.1% in the first 9 months of 2013. This is in line with our expectations as, overall, for the full year we'll continue to expect the pace of growth to be slower than the 2012 growth levels.

In our established markets, currency neutral net sales revenue per case declined by just under 1% in the third quarter, while marginal decline for the first 9 months of the year. Benefits from positive packaged mix in both sparkling and still drinks were more than offset by negative price and channel mix.

Developing markets posted the biggest sequential improvement in currency neutral net sales revenue per case, increasing by 1.5% in the third quarter. Benefits from positive price mix more than offset the slightly negative category mix and persisting challenges towards discounters, particularly in key countries like Poland. For the first 9 months, currency neutral net sales revenue per case was flat in our developing markets segment.

The emerging markets segment, the main growth driver, with currency neutral net sales revenue per case increasing by approximately 3% in both reporting periods.

Currency neutral input cost per case grew by 0.5% in the quarter and by 0.6% in the 9-month period. With our revenue growth management initiatives having delivered a 1.4% growth in currency neutral net sales revenue per case, gross profit margin for the quarter grew by 20 basis points.

Looking at the key components, higher EU sugar and PET prices were partly offset by lower white sugar and aluminum prices in the quarter. We have covered fully our sugar requirements in the EU, Russia and Nigeria for the remainder of the year. At the same time, we have fully covered our aluminum requirements. As we approach the year end, we are now covered for 90% of our revenues.

For the full year, we continue to expect currency neutral input cost per case to grow by low single digits. 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 percent of net sales revenue continued to improve in the quarter, declining by 20 basis points year-over-year, leading to a 30 basis points improvement for the first 9 months of the year. The improvement in the quarter was primarily due to reduced sales and administrative expenses. These reflect the benefits of our ongoing restructuring initiatives, leading to better operational efficiency across our business, despite the negative operating leverage due to lower volumes.

On a segmental basis, the main drivers of the improvement in operating expenses as a percent of net sales revenue was the developing markets, which improved by approximately 300 basis points, as well as the established markets, which improved by 60 basis points. In our emerging markets, comparable operating expenses as a percent of net sales revenue increased by 110 basis points, mainly driven by increased year-over-year sales and marketing expenses in Russia, in relation to the Sochi Winter Olympics activity.

Turning to operating profitability. The benefits from our revenue growth initiatives, the lower operating expenses and a slightly lower input costs in absolute terms year-over-year were more than offset by lower volume, as well as the accelerated negative impact from currency movements, mainly from emerging markets. As a result, comparable operating profit declined by approximately EUR 3 million in the third quarter, and by EUR 12 million in the first 9 months of the year, leading to a comparable operating profit of EUR 207 million and EUR 386 million, respectively.

Turning to our reporting segments' third quarter performance. Our established markets improved their comparable operating profit by approximately EUR 2 million despite the lower volume. Benefits from our restructuring initiatives and tighter operating expense management offset the lower volume, negative price mix and higher input costs.

Our developing markets were, for yet another quarter, the best performing segment in terms of operating profitability improvement. Comparable operating profit improved by EUR 11 million, primarily driven by lower operating expenses, improved price mix, and lower input costs, more than offsetting the negative volume and unfavorable currency movements, primarily in Czech and Hungary.

In our emerging markets, comparable operating profit declined by EUR 17 million. The benefits from our revenue growth initiatives were not enough to offset the adverse currency impact, mainly in Russia, Ukraine and Belarus. The lower volume, as well as the negative impact of higher marketing expenses in relation to the Sochi Olympics in Russia, and the overall higher total operating expenses.

We continue to make good progress on execution of our restructuring plans and expect to incur just over EUR 50 million of restructuring costs for the full year, 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 2012 and to be undertaken in 2013, will reach EUR 65 million within 2013.

During the first 9 months of the year, we incurred EUR 24 million in pretax restructuring charges, approximately EUR 2 million of which was incurred in the third quarter, with a majority of it taking place in our established markets.

We continue to generate solid free cash flow and working capital improvement. We generated free cash flow of EUR 248 million in the third quarter. Cash generated from the working capital reduction reached EUR 79 million. Overall, working capital continues to improve year-over-year across the 3 reporting segments, both in terms of absolute balance, as well as in total days. The positive contribution from working capital to free cash flow generation is gradually diminishing, as we approach our 0 working capital target.

During the third quarter, free cash flow was positively impacted by a EUR 14 million decline in capital expenditure, in line with the decline in our revenues, as well as a EUR 16 million improvement in tax payments. Overall, in the first 9 months of the year, free cash flow declined by EUR 17 million to EUR 345 million. This was primarily driven by a decline in the pace of improvement in working capital, and the lower operating profits, partly offset by the lower capital expenditure and tax payments.

Let me now touch upon the financing costs of our business. Total comparable net financing cost for the quarter stood at EUR 19.7 million, down 20% year-over-year, or EUR 5 million in absolute terms. This decline was driven by lower net interest expenses, as well as the reversal of ineffectiveness charges from our interest rate and cross currency swaps hedging instruments, relating to the USD 500 million bond, which matured and was paid in September. Total comparable net financial costs in the 9 months declined by 12% year-over-year, or EUR 9 million in absolute terms.

Looking ahead into 2014, we expect that our successful refinancing last June at very competitive rates and the reduced level of gross debt from 2014 will result in annual savings in our reported financing costs of approximately EUR 18 million. Overall, we remain committed to maintaining a conservative and diversified financial profile, translating to a net debt to comparable EBITDA ratio in the range of 1.5 to 2.

Turning now 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 still expect input cost per case to grow in the full year by low single digit on a currency neutral basis. In terms of currencies, taken into account the performance of our hedged positions, our latest forecast and the improved visibility we have as we go through the last quarter of the year, we now expect a negative impact from currency movements in 2013 to be lower than the EUR 43 million impact incurred in 2012.

We'll continue to 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, 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 color on our operational performance for the quarter.

Dimitris Lois

Thank you, Michalis. Volume declined by 3% in the third quarter, following a 2% increase in the same period last year. Established and developing markets remain on a negative trend, reflecting the ongoing difficult environment in Europe. This quarter, emerging markets' performance turned negative, facing tougher comparables and higher levels of performance, with volume declines in Romania, Ukraine and Serbia. On the other hand, we witnessed strong performance in Nigeria and, to a lesser extent, in Russia. We do not expect the current difficult trading conditions to change for the rest of the year. In emerging markets, in particular, we face continuing challenging comparables, and we expect the varying levels of performance to continue in the fourth quarter.

We are leaders in the sparkling beverage category in every market we operate, and I am pleased to report that we continue to improve our leadership position in the majority of our countries pursuant to our strategic priorities. We continue to focus on impeccable execution at the point-of-sale. Specifically in the third quarter, we grew or maintained our volume share in the Sparkling Beverages category in 20 out of 24 markets, including most of our key markets, while we gained or maintained value share in the overall nonalcoholic ready-to-drink market in 17 out of our 24 markets, as measured by Nielsen.

In the third quarter, volume in Sparkling Beverages declined by 0.5%, following a 4% growth in the prior year. Trademark Coca-Cola products grew by 3%, reflecting volume growth in all 3 reporting segments. These results include a solid performance of 14% in Nigeria, 11% in Ireland, 10% in Russia and 8% in Poland. Coca-Cola Zero maintained its positive momentum grown with 18%, with double-digit growth across all of our reporting segments. Volume of our Energy brands grew by 2%, marking the 14th consecutive quarter of volume expansion in the category. The positive performance in the third quarter was driven by double-digit growth in Hungary, Switzerland, Ireland and Russia.

Ready-to-drink Tea products declined by 11% in the quarter, following an 8% growth in the prior year. The decline reflects negative performance across all segments. Volume in the Juice category improved by 2%, as lower volume in our established markets was offset by volume expansion in the other 2 segments, driven by strong growth in key countries such as Russia, Poland and Romania. In Juice, we have a tailor-made approach per country, focusing on quality superiority, taste preference and more profitable packages and channels.

Volume in the Water category declined by 10% in the quarter, mainly resulting from lower sales in Italy, Greece, Russia, Romania and Ukraine, reflecting both the overall trends in most of these markets, and our strategy to rationalize our SKUs. In line with this strategy, packaged mix in the category improved for the 11th consecutive quarter.

Turning now to each of our reporting segments. Overall, microeconomic conditions continue to be challenging in our established market segment, particularly in Italy and Greece. Disposable income remains under pressure and the level of unemployment stood at a record high of 12% in the EU. At the same time, political uncertainty in some countries continues to add pressure to consumer sentiment. Against this backdrop, volume declined by 4% in the third quarter, with Italy and Greece accounting for most of the shortfall. In Italy, trading conditions remains difficult. Austerity measures continue to filter through the economy, negatively affecting disposable income. This quarter, we have accelerated the pace at which we gained volume and value share in both Sparkling Beverages and overall NARTD categories.

In the midst of a fragile political environment, a 1 percentage point VAT increase has now been enforced as of October 1. We expect the trading environment in Italy to remain difficult over the next few quarters. 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, with a rate of decline moderating in the third quarter compared to previous quarters. Sparkling Beverages remained the most resilient category, led by a marginally negative performance in Trademark Coca-Cola.

Disposable income is expected to remain under pressure, while unemployment remains near record high levels and the highest in EU, at 28%. We remain focused on addressing affordability, while improving operational efficiency and winning in the marketplace.

In the third quarter, we outperformed the market, growing volume share by nearly 1 percentage point in the Sparkling Beverage category. In Switzerland, volume grew across most key categories, except for a marginal decline in Juice. In Sparkling Beverages, Trademark Coca-Cola products was the key growth driver, registering a mid-single digit growth. Fanta grew by double digits, supported by increased activation and improved distribution.

Package mix improved in our established markets, both in Sparkling Beverages and Water category. This mix improvement in Sparkling Beverages was supported by our successful "Share a Coke" campaign, particularly in Austria and Ireland. Our strategy in established markets is to protect net sales revenue per case while addressing affordability.

We are also continuously looking into 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 2% volume decline in the third quarter, following a flat performance in the year before. The macroeconomic and trading environment in Central Europe remains volatile, negatively affecting volumes, particularly in Hungary. This volume decline was mainly driven by our Water and Tea categories. Volume in Trademark Coca-Cola was up by 5%, while volume in the Energy and Juice category grew by mid-single digits. In Poland, volume grew across most of our key categories, with the exception of Water and Energy, both of which declined by high single digits.

Sparkling Beverages grew by low single digits, driven by Trademark Coca-Cola products. Juice grew by strong double digit for a third consecutive quarter as a result of successful switch from tetra to 1-liter packages. Despite the encouraging performance witnessed in Poland, we remain cautious, as unemployment has stabilized at low teens levels, and the market is experiencing persisting channel shift towards discounters. We continue to execute on our strategy in Poland, focusing on OBPPC implementation, operational efficiency and tight cost controls.

In Hungary, volumes declined across all key categories, except Energy. The external environment remains volatile. The economy is still fragile, at the same time, unemployment is at double-digit levels, while consumer confidence is one of the lowest in the European Union. Coca-Cola Zero continued its double-digit growth in the third quarter. Energy continued solid performance, supported by recent launches of Burn Blue and Monster Rehab.

We increased our volume shares in the Sparkling category during this quarter. In Czech, volumes declined by low single digit, predominantly driven by declines in Water and Tea. Sparkling grew in the mid-single digits, driven by strong performance in Trademark Coca-Cola, while Fanta grew in the double digits, supported by the launch of new flavors and introduction of 1.5- and 2-liter multipacks.

Our emerging market segment reported a 4% volume decline in the third quarter, following a 7% increase in the same period last year. The decline was predominantly driven by Romania, Ukraine and Serbia, concealing the strong performance in Nigeria, and to a lesser extent, in Russia. Volume in Russia grew moderately this quarter, cycling a low double-digit growth in the prior year. This was the eighth consecutive quarter of volume growth, with growth in Sparkling Beverages and Juice more than offsetting declines in Water and Tea.

Brand Coca-Cola grew by 11%, reflecting the flawless execution of the Olympic Torch Relay campaign, and our ongoing OBPPC. Our Multon Juice business continued to grow by low double digits for the seventh consecutive quarter. We expect Russia to continue growing at a moderate pace.

As the macroeconomic growth continues to decelerate, we expect this to continue to filter through the consumers, as reflected by the decline in consumer confidence and the slower pace of growth in the overall NARTD market. In the third quarter, the NARTD market declined by 2%, following a 4% growth in the second quarter. We continue to outperform the market, growing volume share in both Sparkling and NARTD. Volume in Nigeria continued to grow strongly, building on the positive momentum of previous quarters.

Sparkling grew by low double digits in the quarter, supported by strong performance by Trademark Coca-Cola, as well as Fanta and Sprite. Growth was driven by our strong activation, as well as improved availability. 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.

Romania was a country that experienced the highest volume decline this quarter. Volumes declined by mid-teens, following a high single-digit growth in the year before. Volume declined in all key categories, with the exception of Juice. The latter grew by low double digits as a result of our launch of Cappy Pulpy Orange.

Overall, the macroeconomic and trading environment remains under pressure, negatively impacting disposable income and consumer confidence. As a result, the pace of decline in the NARTD market accelerated significantly, while we gained volume and value market share in both Sparkling and the overall NARTD. Together with Muhtar Kent, we recently inaugurated a EUR 22 million aseptic bottling line in Ploiesti. As a result, Romania will become a regional production hub, exporting Cappy Pulpy to 6 European countries.

Looking ahead, we do not anticipate the current trading condition to change in the last quarter of the year. Although we are pleased to see the rate of decline in the established and developing segments moderate in the third quarter, we are cautious, as the consumer sentiment remains under pressure. We expect emerging markets to continue to be characterized by variable levels of performance and tougher comparables. We'll continue to focus on elements we can control, becoming stronger, leaner and more efficient. To this end, we remain consistent with our strategy, we are particularly pleased this quarter as we accelerated both the pace and the number of countries in which we gain or maintain market shares, both in Sparkling Beverages and overall NARTD. We grew currency neutral revenue per case for the ninth consecutive quarter while continuing to address affordability.

We delivered 20 basis points improvement in gross profit margin, and a 20 basis points improvement in operating expenses as percent of revenue, leading to a 40 basis points improvement in operating profit margin. This follows 11 consecutive quarters of margin decline at both levels. This reflects our continuous commitment to cost leadership in every aspect of our business.

In closing, I would like to reiterate that we remain committed to strengthening our business and managing 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 working to make 2013 the year of margin inflection. 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 a diversified geographic footprint with low per capita consumption, present us with an ample opportunity to grow.

As a final remark, this quarter, we celebrated 2 key milestones: our inclusion in the Dow Jones Sustainability Index for the sixth consecutive year, ranking first in Europe and second in the world in the beverages sector; as well as our inclusion in the FTSE 100 in the FTSE All-Share indices, which we believe will benefit our shareholders through the enhanced liquidity.

With that, Michalis and I are ready to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Lauren Torres from HSBC.

Lauren Torres - HSBC, Research Division

My question is, looking into next year and your thoughts on -- and a lot of these macro pressures persisting, you saw the effect of austerity measures in a number of your markets. So both ways [ph] are hearing more about excise tax increases. And I guess, in my mind, I'm thinking about the sugar tax that we're hearing about in Mexico next year, affecting the companies there. Can you give us any visibility on how you're thinking about next year in certain markets, if these external pressures persist, if there's any new additional pressures that you foresee? And the strategy that you put in place this year to kind of maintain your business, is it kind of, that's good enough, if these bigger pressures do continue?

Dimitris Lois

Hi, Lauren. What we see overall is very difficult trading conditions. So as you heard, we don't see these trading conditions changing. You referred to the tax that we have seen in Mexico, in our territory, specifically in our countries, for the time being, we don't see any immediate pressures. And the 2 teams working together have been managing extremely well the pressures we have seen. Now overall, as I said, next year is going to be another difficult year. We do have some very strong pockets. We have seen Nigeria doing very well. We see growth at the moderate pace in Russia. This quarter, we have been suffering in the 3 markets: Romania, Ukraine and Serbia. And overall, a lot of volatility in the developing markets, and mainly that's Hungary and also Poland, to some extent. And the established markets, at this point of time, we don't see any real signs of improvement, especially looking at Italy and Greece. So this, I believe, overall is our view with what's to be expected in the next couple of quarters.

Lauren Torres - HSBC, Research Division

Okay. And if I can just ask a follow-up, I appreciate the fact that we have seen 9 consecutive quarters of revenue per case growth. I was just curious if there is a point though that you'd sacrificed out of it to get some of the volume back, or if you think the pricing lever is still there for you as we look into next year?

Dimitris Lois

We are consistent on this one. And we have been managing, I think, pretty well. And this is one of our key strategies. Now the revenue growth management has couple of pillars there. The major pillar that we have been consistent is our initiatives behind OBPPC and, obviously, the single-serve. Now we are taking pricing also. And we grew our currency-neutral revenue per case of 1.4% in Q3, also looking at the very challenging trading environment. We always aim to strike the right balance between volume, pricing, share gains, so that we can continue to offer our consumers affordable beverage choices, while managing our top line. We cannot price ourselves out of the market. So that's why we strongly believe that the revenue growth management is the right strategy, OBPPC is the right tool, both to develop, design and obviously, execute the strategy. So that's where we stand overall with regards to our overall top line.

Operator

Now from SG, you have a question from Andrew Holland.

Andrew Holland - Societe Generale Cross Asset Research

Yes. I was just looking at your operating expenses, you've mentioned in your narrative that in emerging, operating expenses had gone going up, partly as you're paying for the Winter Olympics in Russia. Can you give us an idea how long that's going to last? What the phasing of that spend is going to be? Is there more to come in Q4, presumably once the Olympics are out of the way, that will fall away. Can you just give us an idea of the phasing of that? And is it the case that like in developing markets, had it not been for that operating expenses, would have been lower?

Michalis Imellos

Hi, Andy, it's Michalis. With regards to the Sochi Olympic activation, the cost is actually peaking now in quarter 3 and quarter 4. And it will finish by the end of the games, so quarter 1, I would say. Clearly, we expect the benefits to be more in the longer term, with this type of marketing support. I'm not sure I get your question about the developing markets, is it specifically on DME?

Andrew Holland - Societe Generale Cross Asset Research

Yes. No, it's just operating expenses were lower in the developing markets. Would they have been lower in the emerging markets had it not been for this additional spend on the Winter Olympics?

Michalis Imellos

Okay. Clearly, the Sochi activation is a major part. On the other side, there is, as expected, more inflationary pressure when it comes to payroll and fuel and the outsourcing costs in the emerging markets. So that is also a significant element, bigger relatively, than developing markets and established markets.

Andrew Holland - Societe Generale Cross Asset Research

Okay. A couple of very quick follow-ups. Just you mentioned what's going on in Poland with the continuing rise of the discount retailers, can you just remind me of your presence in those discounters, are your products in them? And secondly, referring to input costs, I think we're all looking for lower input costs next year. Can you give us an idea of how that benefit will be used by you? Are you going to use that to increase brand support? Or is that going to drop through entirely to the bottom line?

Dimitris Lois

Andrew, your first question with regards to discounters, yes, Poland is a market that only the discounters channel has been growing, for, I would say, the last 1.5 years, maybe more. Out of that, a very strong element behind Biedronka, and that is the discounter that definitely grows ahead of the rest. And yet, the answer is we are present, and we are expanding also our portfolio there. Let me turn now to Michalis to give you a bit more light on input cost.

Michalis Imellos

Yes. So with regard to input costs for 2014, clearly we are, right now, at the point of building our plan, so we'll be able to give more specific guidance in our February call. But if I was to give some preliminary color on what we expect for 2014, first of all, on EU sugar, we expect price decline in 2014 versus 2013. And that's clearly on the back of the downward pressure that we see in EU sugar prices as a result of the quota abolition in the EU from 2017. In terms of world sugar, we expect cost to remain overall flat year-over-year. And we have now covered fully our needs in Russia. We have hedged fully our needs in Russia, and more than 3 quarters in Nigeria. So we have, we believe, pretty good visibility in terms of this development. In aluminum, we expect overall the cost to increase, not so much because of the price, because we have seen the market coming down, but more because we are exiting supplier contracts with more favorably conversion costs. So we expect, going forward, this to hit us on a year-over-year basis. And finally, when it comes to resin, we expect prices to increase in 2014. Of course, there, we are working on certain light-weighting efforts and increase use of recycled resin. So overall, there are some compensating actions, but right now where we are and, as you know, we cannot hedge resin, but where we are now, we expect prices to increase in 2014.

Andrew Holland - Societe Generale Cross Asset Research

That's very helpful. If you were to sum all that up, and I suspect you're not going to answer this, but would you say that, that is going to end up with low single-digit input cost inflation?

Michalis Imellos

Andy, it's too early to say. As I said, we are at the planning stage. We will be able to give this guidance in the February call.

Operator

Now from Citi, you have a question from Adam Spielman.

Adam Spielman - Citigroup Inc, Research Division

I actually have 2 questions, please. The first one is that you have been reducing many, I think, Water SKUs in emerging markets. And I wonder how long the that process will go on for, whether I should feel that it's completed by the end of calendar 2013, or whether it will continue after that? And my second question is, perhaps, more important. You said, if I heard you correctly, that you are working to make sure that 2013 is a year of margin inflection, I was very impressed that you managed to get margins up in developing markets this quarter, despite the fact that revenue was still very tough. I was wondering, is that very strong performance in developing markets really a good guide to 2014, or should we expect a much more modest increase in 2014, given the fact you've already said the macro conditions will remain difficult? I hope that's clear.

Dimitris Lois

Let me start with your first question which has to do with Water and overall Water decline in the emerging. So here, there are a couple of elements, the strategy element and the strategy element is behind rationalizing SKUs and, in principle, also focusing a lot more to profitable packaging. And to that extent, we are very successful looking at the package mix improving with the single-serve. So that's 2 areas that we are focusing. There's the third element. The third element is the overall market. And I'm saying that because if you see Romania, for instance, there has been a tremendous decline overall in the market. So the 2 elements that are characteristic for this quarter is, one, obviously, our strategy behind rationalization of SKUs and focusing on more profitable channels, while at the same time, there is a market element that we have seen far more evident this quarter in emerging. Now let me move to your second question with regards to margin, and this is something that we have been discussing -- and we have been working. Obviously, we are extremely pleased to see the margin improvement both -- at both levels. We have seen also developing markets turning around. Now we need to be very cautious with developing markets, and this is something that we have highlighted. And a key example there is Hungary, also the Polish market. So while being very happy seeing the markets for Q3 and obviously the margin improvement, we need to be focused when we extrapolate. But overall as a comment, what I want to leave behind, is we are working to have 2013 an inflection point, and obviously, we are working to keeping this trend of improving margins. Because we have been sharing consistently, that we believe our business definitely can drive a lot better margins.

Adam Spielman - Citigroup Inc, Research Division

Can I ask just a follow-up on both of those things. So talking kind of a Water question, I'm talking about the area you control, i.e., your plan and your strategy. Is it right to assume that the -- that you -- from a strategic point of view, you won't be cutting the unprofitable SKUs next year because you've already completed that?

Dimitris Lois

This is gradual. And Obviously, getting out and rationalizing our SKUs cannot be done either in 1 quarter or in 2 quarters. So we do expect that we will see a spillover effect also next year.

Adam Spielman - Citigroup Inc, Research Division

Excellent, that's very clear. And on the margin, just to bring it together for me, you're obviously working very hard and done a great job. But I assume it's correct to assume the margin expansion next year is likely to remain fairly modest.

Dimitris Lois

Well, first of all, I'm very happy that we are all talking about margin expansion. Now the level of moderate remains to be seen. The key element here is improving margins, and we are working towards that direction.

Operator

Now from Nomura, you have a question from Edward Mundy.

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

I've got 2 from this end. You saw moderation in the rate of decline in the established and the developing markets in the third quarter. Can you comment on the weather impact on trading in these 2 divisions, in particular, Switzerland, Ireland and Poland? And my second question is, on the improvement in currency neutral revenue per case you saw in the developing markets in Q3, can you perhaps split up the impact here from headline price increases, positive geographic mix, i.e., Poland growing ahead of the rest of the division and positive packing product mix?

Dimitris Lois

Ed, let me take the first one with regards to weather. I usually don't like to comment about weather, to be honest with you. We would like to see our business on a de-weatherized base. Overall, what I can say is that definitely, especially in our emerging markets, weather was not a tailwind. Now, yes, we were supported a lot by weather in Ireland. So Ireland has been really helped by weather, and I am not referring only in July, but it was an extended -- I would say, an extended summer. So 1 market that has been really supported by weather, was Ireland. Everything else, definitely not a tailwind. And obviously, that's on top of bad weather in Q2. Now let me turn to Michalis to take your second question, Ed.

Michalis Imellos

Ed, what I can say about the developing markets and the revenue per case, currency neutral, we definitely had an acceleration in quarter 3, substantial acceleration. On the pricing, specifically, and that is a combination of taking new price but also managing discounts, we have improvements, I would say, across the board in the segment, with exception of maybe Croatia. Across the board, we had improvements in the pricing mix. We also had some good news on the pack mix, in Hungary and Czech Republic, and that -- but that was compensated partly by developments in Poland. So overall, I think you were asking more of the pricing, it was a consistent good performance in the quarter across the board in the segment.

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

Okay. Can I just ask a quick follow-up on Romania, in particular, what you flagged as a very tough market at the moment. What exactly is happening to the Sparkling Beverage category here? Are people drinking less frequently? Or they're purchasing different pack sizes? Is the consumption occasion changing? Are they downtrading to tap water? What exactly is going on in Romania vis a vis the Sparkling Beverages category?

Dimitris Lois

Well, it's not only the Sparkling Beverages. First of all, I mean the macro and trading environment remains under extreme pressure. The private consumption disposable income, they have been falling and accelerating downward trend. And obviously, consumer confidence remains very low. Just to give you, for this quarter, 2 numbers that I think will help. And that's why I said, it's not only Sparkling. NARTD year-to-date September is a little bit less than minus 8% and Q3 was minus 14.5%. So almost double. And that NARTD, we have seen the same trend, but to a lesser extent, it's Sparkling. So Sparkling was a little bit less than 7% negative in that year-to-date September, when Q3 was almost 10% negative. So it's the overall market NARTD.

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

And are people just consuming less frequently, or are they downtrading out of sparkling into tap water?

Dimitris Lois

I wouldn't say tap water, and this is not something that we can comment. The overall consumption, the overall consumption goes down.

Operator

Now from UBS, you have a question from Olivier Nicolai.

Olivier Nicolai - UBS Investment Bank, Research Division

I've got 2 questions, actually. First of all, your EBIT margin in Q3 in emerging market was down around 120 bps. How much of its decline is due to the faster growth that you have in Nigeria where, presumably, the margin is lower than in Russia or Ukraine? A second question is in Russia, in Q3, did you see any impact yet on your volumes from the fact that some of the kiosks are to close, following this legislation on beer?

Dimitris Lois

Let me start with your second question, and that refers overall to the beer legislation. Yes, you are absolutely right. What we have seen is the overall kiosks universe shrinking. Now that eventually, short term, is having an effect. We believe that medium term, and that's next 2 to 3 years, the beer legislation will have positive overall effect for our business. We are definitely expanding our positions in the kiosks that are still in business. So if I want to put a headline here, in the medium term, yes, the beer legislation will have a positive effect. We are working towards attracting more consumers, more beer consumers to our franchise and obviously this is going to be supporting us. Let me shift now to Michalis, so can help you with your first question.

Michalis Imellos

Yes. Rather than focusing on specific countries in emerging, just -- I will focus on really what had driven the margin developments in quarter 3 in emerging markets. And first of all, if you look at revenue per case and the input cost per case on a currency neutral basis, this has been pretty consistent over the quarters. And that equation is strong because revenue per case currency neutral is growing by more than 3%, and the input cost, currency neutral again, is growing by just under 1%. The big issues, I would say, that we face, particularly in this quarter were 3. One is a major ForEx -- transactional ForEx impact, and that was particularly in the emerging markets: Russia, Ukraine and Belarus, in particular. The second one is that, clearly, we have had some volume deleveraged in emerging market this quarter. And finally, what we mentioned earlier around the OpEx as a percent of revenue. Because of the impact, the accelerating impact of Sochi and overall in emerging markets, the inflationary pressures which are more obvious than developing and established. These are the 3 key drivers that pressurized the margin in this particular quarter.

Operator

And now the last question that we have comes from Bank of America from Henry Davies.

Henry Davies - BofA Merrill Lynch, Research Division

I have 2 questions, please. First, on your margin expansion in established and developing markets, clearly, the rate of cost reduction in the third quarter has accelerated versus the first half. And I am just wondering if you could help us think about that, I think you've guided the similar cost saves in the second half as the first half, at your last result. So can you maybe give us an update on, one, the cost save delivery, and then the other factors as well, I guess, is there some transactional FX impact that have selling and marketing expenses? That's the first question. Second, I see -- I think from your media conference, there's a comment on the wires, suggesting it's been a slow start to the fourth quarter due to poor weather. If you could just expand on that, and maybe where is this weather poor, that would be great.

Dimitris Lois

Let me take the second one, Henry. As for my previous comment, we don't like and I don't like talking about weather. So let me reiterate, Q4 had a challenging start with October performance, but we did not refer to weather. Overall, we do not anticipate the current trading condition to change in the remainder of the year. Now again, looking at the segments, we are consistent. Established, challenging, and that's Italy and Greece; in developing, Hungary, continues to be a very difficult market, and Poland is very volatile. And we have seen the performance in emerging, with the 3 markets driving Q3, and that's Romania, Ukraine and Serbia. So on top of that, just to reiterate that Q4 is, especially in emerging, cycle in Q4 is a little bit stronger than what we have seen cycle in Q3. So this is what we have commented. And we reiterate exactly the same for Q4. Now let me turn to Michalis to give you more light on margins for established and developing.

Michalis Imellos

Yes, Henry. Taking the established, first of all, I would say that despite the fact that revenue per case decline accelerated on a currency neutral basis, we have significant input cost growth slowdown in established, obviously, by about 2 percentage points. So that, obviously, was a major contributor. We had a slightly better volume leverage overall, and we are consistent in this segment, with the OpEx as a percent of revenue decline, particularly as a result of our restructuring in [indiscernible] and the vast majority focused in this particular segment. Now with regards to developing, the story is not dramatically different. Our revenue per case, decline was marginal. The only marginal figure in this quarter. But at the same time the input cost decline accelerated also in developing markets by around 1.5 percentage points in quarter 3. We also had slightly better volume leverage, and the OpEx as percent of NSR improvements are also accelerating in quarter 3. So these are the main drivers that have helped us in established and developing to see margin expansion.

Henry Davies - BofA Merrill Lynch, Research Division

Can I just ask a couple of quick follow-ups? Maybe first, on the margin point, were input costs still growing in established and developing and maybe if you could split up the, I think it was 0.5% at group level [ph] into the 3 divisions, just roughly, that would be great. And then on the initial question, just looking at the consumer environment going into next year, clearly, all the comments on the fourth quarter sound fairly cautious. Do you think you'd be able to get back to volume growth next year, or should we be expecting another year of kind of weakish trends?

Michalis Imellos

So, Henry, on your first question, the input costs in established is still growing, but as I said earlier, has dramatically slowed down. In developing, the input cost is declining, and this decline is accelerating.

Dimitris Lois

On your overall volume, we don't give volume guidance, as you know, Henry. It's the overall commentary that we have been sharing per segment, and that's exactly where we stand right now. Overall, very difficult trading conditions.

Oya Gur

Operator, let's see if there's another question. We can take one more, if there is. Otherwise, let's hand the call over to Dimitris for his closing remarks.

Operator

[Operator Instructions] No, there are no further questions. So I'll pass the floor back to Dimitris Lois for closing remarks.

Dimitris Lois

I want to thank you for joining us today and for all the questions that facilitated a good discussion around our third 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 the external conditions start to stabilize. Thank you, and we are looking forward to be in the position to report on the year of a margin inflection for Hellenic when we speak to you in the next quarter.

Operator

And with many thanks to all our speakers today, that does conclude our conference. Thank you for participating and you may now all disconnect. Thank you, Mr. Lois.

Dimitris Lois

Thank you very much, operator. Have a nice day.

Operator

All the very best to you. You too, sir. Bye-bye.

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