Coca-Cola HBC AG (Ticker symbol: CCH) Capital Markets Day in London 31 May 2013

Transcription

1 C O R P O R A T E P A R T I C I P A N T S MICHALIS IMELLOS - COCA-COLA HBC AG CFO KEITH SANDERS - COCA-COLA HBC AG REGION DIRECTOR P R E S E N T A T I O N- I N T R O D U C T I O N S E S S I O N Good morning and I want to say a very big thank you for making the time to be with us. Extremely excited to have our first Capital Markets day, being a company listed in the premium segment of the London Stock Exchange. What we would like to do, I m sure you re very familiar with that, what we would like to do today is a couple of things. Start with unbundling a little bit the opportunity, and then I will deep-dive in a few countries, key countries. Then Michalis will take us over the key financials. We re going to have a half an hour Q&A. On the second part, we re going to deep-dive on our strategy. So Michalis and I will take you through, and then Keith, our Regional Director for Russia, U.K., Belarus, Armenia, and the Baltics, will give a deep-dive in Russia. Then we re going to have a Q&A session before we go for a quick lunch break. Let me start by describing where Coca-Cola HBC is today. We are a 7-billion revenue company and we have been focusing on our revenue growth, being consistent with increasing the revenue per case and Q1 was the seventh consecutive quarter. Volume, around 2.1 billion unit cases serving about 50 billion per annum. We are covering 28 countries in three continents, addressing 580 million consumers. Our employees, talented family members, 40 thousand, supporting our 580 million consumers and driving our 71 plants, 366 warehouses and distribution centres, and obviously the fleet to support our distribution. We are the Number 1 in all of the countries we operate with regards to market share in sparkling. If I want to leave one thing behind with regards to the DNA of Hellenic, that s unparalleled distribution and impeccable execution. With that, I would like to present a very short video. Can we please play the video? Video Page 1 of 54

2 Narrator: Coca-Cola HBC s early beginnings were in Nigeria, where in 1951 AG Leventis, the uncle of today s Chairman, George David, established a Nigerian bottling company. His nephew, George s brother Andrew David who graduated from Trinity College in Dublin, was absolutely passionate about the Coke business. During a dinner with some friends from University, he learned that the Coke franchise in Ireland was available. So he called his uncle and they acquired that business and the franchise in Northern Ireland. In 1969, Hellenic Bottling Company was established to be acquired by the family in The businesses grew rapidly, and when in the late 80s and early 90s the Soviet Union was dismantled, they were offered the opportunity to invest in Romania, Moldova, FYROM, Russia, Bulgaria, Serbia, and Armenia. In 1991, Hellenic Bottling Company was listed on the Athens Stock Exchange, and in 2000 the opportunity arose to merge with another big Coke bottler, Coca-Cola Beverages PLC, which had been listed on the London Stock Exchange and operated in 12 countries. The new entity then traded in both London and Athens. That same year, the company was included in the FTSE4GOOD Index for the first time. A year later, in 2001, the new company Coca-Cola Hellenic Bottling Company S.A., as it had become known, acquired that part of the business in Russia it didn t already own; and in 2002 was listed on the New York Stock Exchange. Today we operate in 28 countries, over three continents, with 71 bottling plants and 40 thousand employees selling two billion unit cases of soft drinks, juice, and juice drinks, natural mineral waters, and bottled waters, teas, and coffees. Now, since April 29, 2013, we ve been listed on the premium segment of the London Stock Exchange where our shares are traded today; as well as in Athens, and of course in New York. A few things about the system and how the system works: The Coca-Cola system operates through the franchise model with the bottlers being the franchisees. If I would like to split in three types of bottlers, we have the company-owned bottlers, and a good example is what we see in parts of China and North America. We have the smaller regional bottlers, or bottlers that they are within a country. A good example of that is Japan. And we have the key or anchor bottlers; those are the bottlers that have bigger regional responsibility. In those bottlers usually The Coca-Cola Company has a stake. There are only two countries where we don t have Coca-Cola bottlers yet, and that s Cuba and North Korea. Page 2 of 54

3 What we see here in the chart is the six largest key publicly listed companies being the bottlers of the system. We can see Coca-Cola HBC being the second in terms both of volume and revenue. It s the only bottler having a span in 28 countries. If you will see, the rest of the bottlers are covering regional responsibility which is a lot more condensed. Now, with this, what I would like to do is talk a little bit about how the system works. The bottlers are under a bottler s agreement under which they have the exclusive rights to bottle, distribute, and sell in the region that they are assigned. You will probably recall that our bottler s agreement was expiring at the end of 2013 and we have agreed with The Coca- Cola Company for a 10-year extension until If we would like to describe this relationship in a relatively simplified manner, we would say that The Coca-Cola Company is responsible for creating demand. So what does that really mean? Supporting, developing, expanding on the brand equity for all the brands they have. That in principle extends to also consumer marketing; so driving the consumer marketing. On the other hand, the bottler; the bottler is responsible for delivering demand starting, obviously, with bottling, distributing, the unparalleled reach that s part of our DNA, and eventually impeccable execution. The bottler usually takes also the responsibility of investing behind the infrastructure and assets. When we address marketing, what we call above the line, and here I want to extend it to the consumer marketing, that s something that The Coca-Cola Company is supporting andthe customer part of the marketing that s part of the execution and that is something that we as a bottler take on board. Usually, the split is about 50-50, which gives us the absolute responsibility to win at the point of sale. Let me look a little bit and share with you how we have segmented our market. We have the most diversified portfolio of 28 countries and three continents, and we have split that in three segments; taking into consideration the socio-economic criteria, taking into consideration shopping habits, the state of local beverage market and some macro indicators. We have the established, and those are countries with usually higher GDP, and obviously the portfolio we have in established is not necessarily exactly the same with the portfolio we have in developing and emerging. And obviously, as we increase the per capita consumption, we see different trends in different markets. I will take you through the details of each segment separately, and then I will deep-dive to one key country per segment. Let s look a little bit on our portfolio, and here the message I would like to pass is that we have a full beverage, non-alcoholic, ready-to-drink portfolio covering the different needs of our consumers. In this framework, we work together with our partners in growth, The Coca- Cola Company, and in the past years from 2001 to today we have been also expanding through acquisition to support the non-carbonated part of our portfolio. Page 3 of 54

4 So you see in principle that from to 2012 we almost doubled the volume, and the contribution of sparkling beverages from 90% went down to a little bit less than 70%. We have a total of 136 brands supporting 207 flavours, and that s divided into sparkling, water, juice, ready-to-drink tea, and sports drinks. Together, these represent a very strong and a very diverse portfolio of brands. When you will see the evolution and looking at this evolution, you will also notice that in 2012 out of the 68% contribution from sparkling, 61% is the part that does not include the low calorie. So we have a 6% contribution and this contribution varies a lot in the different segments, and obviously reflects the sophistication of the different markets. Now, this presence across all the key beverage categories enable us, first of all, to be more appealing to our partners, covering all the needs of the consumers. And obviously positions ourselves in a way to capitalize and capture the different needs and the needs also that are addressing in the best possible manner the well-being, the health and well-being. In addition to the global brands that we have, we also are taking into consideration the local tastes and therefore include in our portfolio some local brands. Local brands that in principle they reflect the consumer needs. A very good example, and I m sure that Keith will take you through is Russia where we have Kvass, that s a fermented beverage. We also have in Switzerland a drink, which is an apple-based drink, very local. So with this what I m sharing with you is that we always take into consideration the local brands and tastes in order to reflect the consumer needs. We have been sharing with most of you one of the key elements with regards to the growth potential. In here we see the per capita consumption, and the per capita consumption in our 10 largest in volume countries; comparing that with the EU average, and comparing that also with some other Western-European countries. As you can see even in our established countries the per capita consumption is a lot lower than the average per capita consumption in Europe. Obviously, this allows us to understand that the potentiality in this diversified portfolio is immense. Obviously when I will be covering in more detail the countries, I will give a little bit more colour. A very good example, obviously, in the established countries is Italy having a big difference between the European average, in where they are. Also, a very good example of how this developed is Poland, where back in 2004 the per capita consumption was a little bit more than 160, and today we see that this is close to 226. So big potential driven by the per capita consumption. Very solid track record being the Number 1 in all of the 28 countries, and that s sparkling. Especially as the beverage market in many of the countries is still fragmented, and we do see presence of local small players. Page 4 of 54

5 Here, I would like to also emerge a second big growth potential for Hellenic, and that s arising from the fact that overall our market share is about 40%. Now there s a 60% out there for us, in this 60% there is a big part of it in our territories, and this big part of it lies still with the big brands. So the per capita consumption element is one huge growth potential. The second one would be how the market and how the trade is being in our 28 countries. So here, the message is we are the Number 1 in all of our 28 countries, while still our market share allows us, and how the trade is split, allows us to see our potential and expanding especially taking into consideration the big brands. What I would like to do now is, I would like to take you through the three operating segments and then I would go and deep-dive in one of the key markets, obviously in emerging we will have Keith focusing in Russia. So let me start with emerging, 12 countries covering a population of about 412 million people. These markets are inherently more volatile markets, and they offer the highest growth potential. Within our portfolio we have Russia and Nigeria being the largest contributors, and across these territories the beverage market is more fragmented. It s exactly what I was referring before, the local players account for the majority. The per capita consumption is a lot lower than developing and emerging. The sparkling contribution is in line with the group average, so you will see this at 67%-68%. Here obviously you see the differentiation between the group average on the low or no calories, and emerging being 2%. So the average is about 6%-7%, here the contribution of the low sugar is 2%, again reflecting the sophistication of the market. In this segment, we are focusing on capturing the growth opportunities, obviously, driving revenue ahead of volume. While going forward, we do see a big opportunity behind sparkling, and also the ready-to-drink tea category. In 2012 the financial performance was negatively affected by the higher commodity prices, and some adverse currency movements. Since then we have seen the revenues growing a lot faster than the volume, and obviously we have a more normalized input cost environment. Let me invest a bit of the time to cover Nigeria. We have been in Nigeria for 60 years. In a way, Nigeria is the ideal country, and why is that? Obviously not because of the weather only. Nigeria is the ideal country for a couple of reasons. First of all, the average age is 19. Extremely low per capita consumption, the lowest, 39. Nigeria accounts for 9% of our overall volume, and almost 18% or 19% of emerging markets. If we take the per capita consumption of Nigeria and compare to Egypt, so when Nigeria goes to Egypt per capita consumption, we will add to Hellenic 400 million cases. So that gives, in a quantified manner, an opportunity comparing two countries in the per capita consumption. Page 5 of 54

6 Now key challenges in Nigeria obviously, the Number 1 challenge there is the infrastructure. The infrastructure connected not only with roads, but also with electricity, and mainly it s the distribution of electricity. Now in the last couple of years, this has been greatly improved, and we see pockets of big urban centres like Lagos where in the last, I would say two years, there s a huge improvement in infrastructure. We have the largest footprint of any beverage and food player in Nigeria. We have 13 plants, 57 distribution centres, and our sparkling beverage part covers close to 80% of the total business. Another very unique characteristic with Nigeria is how the trade works. I m saying that because obviously the organized part of the trade is not that evident. With that in mind, obviously we see a different package distribution, and I m saying that because a big part of our Nigerian portfolio is driven by single-serve; it s close to 89%. We are the market leaders in sparkling, we have more than 60% market share. We keep investing behind our sparkling brands, working together with the company, building the brand equity; and that s obviously Coke, Fanta, and Sprite. We have also been investing quite a bit with the company behind our juices and our water. So quite some investments, building the brands. Our strategy focuses on expanding distribution and increasing the volume per outlet, while at the same time addressing affordability and focusing a lot more on the urban centres. Let me now move to established. We have 9 countries covering about 91 million consumers. As you can see, Italy is by far the largest contributor with Greece and Switzerland next in terms of volume. Those are far more developed with a relatively high GDP. This is the segment that has been, and is, the most profitable in terms of contribution and also the highest revenue per case. If you consider the revenue per case between established and developing, it s almost 1:2. In terms of categories, here a very good example of the different consumer habits. You will see that within sparkling is a strong contribution with the low-calorie sparkling beverages, 13%. So that s double the average, and if you recall what we had in emerging was only 2% contribution. We have seen also Coca-Cola Zero doing extremely well, obviously not only in established but across all three segments. And this is an indicative level of sophistication looking at how the product portfolio is being differentiated from one segment to the other. Established has been the segment that has been challenged the most. As we have been sharing, this is the segment where we don t see clear signs of stabilisation. Currently the focus in the established markets is first of all defend revenue per case, while at the same time staying absolutely relevant to our consumers, addressing affordability, and obviously expanding our leadership out in the market. With this, obviously, there is an element of focus behind controlling expenses, the biggest part of our investments, and I m referring now to the restructuring part of the investment was in established. This is something that obviously will continue. Page 6 of 54

7 Italy, a key player within established markets, we are present since 2000, and that was through the merger with CCB, and we acquired the north and the centre part. In 2006 together with the Coca-Cola Company we acquired Fonti del Vulture, that s our water business. In 2008 we acquired the southern Italian bottler, that s Socib. So currently we are covering the whole country but Sicily; the second-largest country with regards to contribution in the total Hellenic portfolio, contributing 15% of our total volume, and at the same time almost 50% of established. Now, as we have been sharing and also started with, Italy is being considered an established country while in terms of per capita consumption we could see Italy as either emerging or developing with 173 servings on per capita. When you compare with the servings, which is the European average, so there s a huge difference between the European average in Italy, which allows us to be very optimistic increasing the per capita consumption in Italy. Coca-Cola and Fanta, our biggest contributors in the sparkling brands, and Zero was introduced back in 07 and has been having a double-digit increase consistently. A key element in Italy, and a key characteristic in Italy that reflects also the brand strategy is that Italy has the highest per capita in water, I think very close to Mexico s per capita consumption in water. So if you will ask me who is your Number 1 competitor where you want to source volume from? Well the answer is water. Here it s very interesting because that s also a cultural element for the Italians. What we have been doing in the last couple of years, first identify this opportunity, working very close with our customers, and the major driver there is profitability. What s the return on investment per square metre when you promote water, and when you promote Coke? This is something that we have been working very closely with the key retailers, eventually driving the discussion on profitability and return per square metre. So going back, one of the key elements and optimism behind Italy is not only the low per capita consumption, but the fact that it s a big water market. Through our customers and working closely with our customers, we can identify the profitability opportunity that s behind our sparkling beverages, and that is driving change. Let me move to developing markets. Seven countries covering a little bit less than 80 million people and these segments are countries that joined EU around 2004 plus Croatia. Poland is the largest contributor followed by Hungary, and overall the developing markets are considered to be in transition, both in terms of economic as well as business perspective. Up until the onset of the global crisis, what we have seen is that the disposable income and the per capita consumption has generally been on the rise. This segment for Hellenic has lower than the average profitability, and we have seen a lot of currency fluctuation, and this is a segment that has been suffering quite a bit behind the increases of input costs, and I m referring to the EU sugar. Page 7 of 54

8 Our focus in this segment is driving profitable volume by striking the right balance between addressing profitability and covering the channel and the package mix in a manner that will promote both volume and revenue growing faster. At the same time, there is a lot of focus on operational efficiencies and tight cost control which remain key elements of our strategy. Now, let me deep-dive a little bit and look at Poland. We have been present in Poland 2000, that s also part of the acquisition of CCB. In 2003 together with The Coca-Cola Company, we acquired Multivita, and that s our water business. When Poland joined the EU, and that was 4 years after we had acquired the country, the per capita consumption was relatively low. With the initiatives that we have been putting ahead we have grown the per capita consumption by 40% from 2004 to Sparkling beverages by far the biggest volume contributing, accounting for almost two-thirds of the volume, and trademark Coca-Cola contributes about 60% of the volume. Here, a very important element also is the water business. For Poland, a big contributor in the non-alcoholic ready-to-drink beverages is water. For us, the contribution of water is about 12%. In terms of channels, in the last- I would say- two years, there is one channel driving growth at those countries, and there is one company that dominates at these countries markets in the growth, that is Biedronka. We have been working very closely with Biedronka. I remember three years ago we had one multi-serve, one SKU, and that was in and out. Today we have a full range in sparkling, including single-serves, and we also have in and out ready-to-drink tea. In terms of growth potentiality, still at 226 per capita consumption is greatly below the European average. So obviously this is another area where we see that Poland is a great market, a growth potential market for Hellenic. With this, I would like to conclude this first part and just share with you why we believe we have a very compelling story; starting with our brands, and the work we have been doing together with The Coca-Cola Company, building brand equity. The portfolio of our countries is very balanced, well-diversified, with very low per capita consumption and additionally a big part of the market in the countries we operate with big brands. Our DNA, and that s winning in the marketplace supported by our unparalleled distribution and impeccable execution. Our focus behind working capital and free cash flow, and obviously the cost leadership element. Taking cost out of the system while moving fixed variable. And on all of those elements, we will have the opportunity to dee in the second part when we deep-dive a little bit to talk and give you a bit more colour. We are absolutely convinced we do have the right strategy, the right strategy for growth and we are in place, well positioned to capture the growth currently in the pockets of growth in emerging, and eventually to leverage when the markets, and I m referring both to developing and established, it goes back to stabilized. With that, let me pass the floor to Michalis and he would take you through the financials. Page 8 of 54

9 MICHALIS IMELLOS - COCA-COLA HBC AG CFO Thank you, Dimitris, and good morning from me as well. It s great to be here today to share with you the financial story of Hellenic. I will start first of all by considering the environment in which we have been operating over the last few years. The onset of the global crisis in 2008 resulted in a rapid transformation of our trading environment. Deteriorating macroeconomic conditions led to austerity measures being implemented in most of our countries in various degrees, which in turn suppressed disposable income and customer liquidity, thereby affecting negatively consumer sentiment. As a result, consumers change their shopping habits, they go out less often, and consume more at home. They shop more frequently but spend less per trip. In addition, despite the global economic recession, input cost prices increased sharply in the last three years. At the same time, we experienced significant currency volatility. Let s take a quick look at our financial track record for the last five years. Overall, our top line has been quite resilient during the economic crisis. We have consistently been growing our reported net sales revenue per case over the last four years in line with our strategic focus. The input cost increases and currency fluctuations have had an adverse impact on our margins and profitability. Over the last couple of years we have seen significant increase in our input cost, 20% on a per case basis currency neutral, predominantly driven by sugar. This has led to some 450 basis points decline in our gross profit margins. At the same time we have been focusing on improving our operational efficiency both via restructuring as well as tighter operating cost management. As a result, comparable operating expenses have improved by 130 basis points since We believe that this business can deliver higher margins, and we are committed to grow them back to the pre-crisis levels. The timing depends to a large extent on the external environment. Becoming a leaner and more efficient organization is a key priority for us. Let s look at our cost structure in two vital areas: cost of sales, and OPEX. The largest raw material that we use is concentrate. It accounts for 35% of our cost of sales. The price that we pay for concentrate is essentially a percentage of the local currency revenues that we generate in each one of our markets. This percentage varies from country to country, and from brand to brand. The average rate for Hellenic has been stable in the last 7 to 8 years. This is what we call the incidence model, the model that aligns the interest of the bottler with the interest of The Coca-Cola Company, as it links the concentrate cost to revenues as opposed to volume. In addition, the calculation of the concentrate cost due is made in local currency, so there is no transactional forex exposure. Overall, our input cost guidance does not include concentrate. Sugar is the next biggest input cost accounting for 14% of our cost of goods sold. Approximately 54% of our total Page 9 of 54

10 sugar costs are in the European Union with the remaining driven by Russia and Nigeria, being exposed to world sugar prices. We have an active hedging policy for world sugar, and we have entered into a minimum 12-month contracts for EU sugar. Resin is used to manufacture the plastic bottles and accounts for 9% of our cost of goods sold. Resin is not a material that correlates well to any single commodity, so it is not hedged. In addition, its supply is quite sensitive to the world capacity being fulfilled by only a small number of producers. Aluminium accounts for approximately 5% of our cost of goods sold. We also hedge aluminium requirements actively in the LME market. In terms of operating expenses, sales and marketing costs account for approximately 50% of our total OPEX. Warehousing, distribution, and administration expenses account for the other half, reflecting our vast infrastructure. We always look for ways to improve operational efficiency and productivity across our territory, and we have been implementing a number of restructuring initiatives that result in longstanding benefits for our business. In this increasingly challenging macroeconomic environment, and volatile commodity markets, effective cost management is an essential part of our long term strategy for market leadership and sustainable growth. We aim to make the business more competitive by creating a lean organization able to exploit efficiencies across our markets. Our focus areas include: Infrastructure optimisation, production and warehousing, logistics and route to market excellence, tight operating expenses control, and working capital management. Such achievements will allow Hellenic to capture future growth opportunities through strategic value-accretive investments. Steps we have taken to support this priority include infrastructure optimisation and warehousing and logistic excellence through the use of SAP. In this environment, cash is king. As you can see, we have solid free cash flow generation despite the challenge in external environment and suppressed operating profitability. This is driven predominantly by improvements in working capital, which has declined by 84% since Going forward, we believe that there is further scope for working capital improvements, albeit at a slower pace. In the medium term, it is our operating profitability that will support strongly our cash generation. In terms of CAPEX, traditionally two thirds of our expenditure is considered revenuegenerating with emphasis on cold drink equipment. In the past five years, we have also invested heavily in SAP. We have a solid track record of returning cash to shareholders in an efficient way. Since 2001 we have returned more than 2.1 billion Euros of cash to our shareholders. For 2012, we will seek shareholder approval for a 34 Euro cents dividend per share in our AGM. Page 10 of 54

11 Looking ahead, and in light of the new corporate enlisting reality, we are assessing our future dividend distribution policy and we ll come back to you with an update next quarter. We are confident that our strong and sustained free cash flow generation will allow us to continue to return value to our shareholders in an attractive and progressively growing manner. We remain committed in maintaining a conservative and diversified financial profile, translating to a net debt to comparable EBITDA ratio in the range of one and a half to two. We are confident about our ability to refinance the 500 million Dollar bond maturing in September this year, and the 500 million Euro bond maturing in January next year. In any event, we have 1 billion Euros available through the un-drawn 500 million Euro revolving credit facility, and the 500 million Euro bond bridge facility. Once these two bonds are refinanced, the bond bridge facility will be cancelled. As you know, we achieved 96.85% participation to the voluntary share exchange offer. Based on these results, the maximum amount that can be drawn out of the 550 million Euro squeeze-out bridge facility to finance the mandatory buy out is approximately 157 million Euros. We therefore cancelled 330 million Euros from the squeeze-out facility on May the 20th. The maximum remaining need of 157 million Euros assumes that all of the 3.15% of the remaining Hellenic S.A. shareholders will opt for a cash payment of Euros per share. We ll consider this extremely unlikely, and in reality we expect a minimal draw-down. Turning to our expectations for the full year of 2013, macroeconomic conditions remain challenging across most of our territory. Austerity measures and rising unemployment especially in our established markets continue to have a negative impact on disposable income. We expect currency neutral net sales revenue per case to continue to grow year-over-year, albeit at a slower pace than We still expect input cost per case to grow in the full year at a low single-digit pace on a currency-neutral basis. In terms of currencies, based on current spot rate, we continue to expect a negative impact on our 2013 operating profitability, lower than the 43 million Euro impact incurred in Taking into account the country mix in light of the underlying trends across our territory, we expect a medium term comparable effective tax rate of 23% to 25%. In addition, our annual net capital expenditure over the medium term is expected to range between five and a half and six and a half percent of net sales revenue. We expect that improvements in working capital as well as increased operating efficiency will support will support solid free cash flow generation in the medium term. During the 2013 to 2015 threeyear period we continue to expect to generate cumulative free-cash flow of approximately 1.3 billion Euros. Page 11 of 54

12 In terms of our shareholder structure, we have two main shareholders with almost a 60-year partnership: Kar-Tess Holding and The Coca-Cola Company. We have quite a broad shareholder base reflecting the international nature of our business. We are listed in three stock exchanges: a primary listing on the premium segment of the LSE, a parallel listing in Athens, and an ADS program trading on the New York Stock Exchange. We are also part of all the major indices in both the LSE and ATHEX. We hope to be eligible for inclusion the FTSE100 in September, following the Quarter 3 FTSE review. We expect the participation of U.K. investors to increase as we leverage our U.K. listing and our FTSE inclusion. Sustainability has been formally embedded in our business strategy, and since 2008 we are also participants in the Dow Jones sustainability index and FTSE4GOOD. A final word on our corporate governance. We already have a strong track record of governance standards. We have been listed on the New York Stock Exchange since 2002 and we have been fully compliant with Sarbanes-Oxley since the latter s first introduction in We are a new listing on the LSE; these standards will improve further in three main areas. One, we are in the process of having an additional independent non-executive director being appointed to the Board. This will bring the number of independent directors on our Board to six out of the 13 members in total. Second, the Board will be subject to re-election on an annual basis, whereas in the past Board members were appointed for three years. And third, in addition to the four committees we have, we established a Nominations Committee comprising a majority of independent directors. In the future, all directors will be nominated by this committee. It goes without saying that we are committed to adhering to the U.K. Corporate Governance Code. This concludes the introduction to Coca-Cola Hellenic, and with that we are ready to take your questions for this first part. Thank you. Q&A SAMAR CHAND - BARCLAYS CAPITAL Thank you very much. Samar Chand from Barclays. Just some comments around the austerity hit markets. Can you please talk about whether you think your volume base can go back to pre-crisis levels in markets like Ireland, Greece, Italy, and so forth? And also, do you think the worst is now behind us in Ireland and in Greece? Just on the emerging markets, I think we kind of make a mistake by trying to sort of follow what the brewers are saying in both Nigeria and Russia, and clearly you ve outperformed Page 12 of 54

13 what the brewers are doing. So how confident are you that you can sort of sustain this level of growth in both Nigeria and Russia, particularly in the short term? And then just lastly, you gave guidance on your 2014 inputs, you said two-thirds of your world sugar is now hedged, I think. Can you just remind us where you are on your EU sugar contract for 2014? Thank you. Let me take the first two, and then Michalis will help us with the input cost. Starting with the established as a general comment, I want to sort of unbundle that in three categories. I would say the first or in three sub-segments if I may. The first sub-segment is in covering Greece and Ireland, those are the countries that have been suffering the most. The second, Italy being almost 50%, and the third one is Austria and Switzerland. So starting with Austria and Switzerland, this segment has been the one that did not follow the same severe challenging conditions. I do expect that things will stabilise earlier in those two countries than the rest of established. For the first segment, and that s Greece and Ireland, I will risk it by saying that if I was at the end of this year and looked back, most probably I would say that the worst is behind. Now, you ask me if we will see Greece going to the pre-crisis levels, well that s a bit of a long shot, and I m saying that because in 2008 I was very lucky to have my region in Greece, and I remember we did 160 million cases. And in 2012 we were just above 100. So I think that it s going to be very challenging going back to 160. With this disclosure also, the quality of the cases is extremely important. And I m saying that because we have been covering quite a bit the revenue growth management. We have been covering quite a bit the package mix and the channel mix. Still Greece is one of the countries with a very high contribution to single serve. So that is the second segment within established, and I m going to go to Italy. Italy has very challenging macros. We don t see any sign of stabilisation, and again if I was to compare to the beginning of the year and now, I would say Italy is a far better place. I was sharing it with some colleagues yesterday that they are in a better place because they have a Pope and they have a government. And that s very important for the Italians. What is definitely the case is that the retail is still suffering quite a bit, all the big retailers.. But we are optimistic, and we are optimistic because of the fundamentals of the beverage market. We have been discussing quite a bit about the per capita consumption and the opportunities we have. We have been discussing quite a bit about the water business, and the opportunities that the customers have identified behind the profitability of sparkling. Page 13 of 54

14 So we are optimistic with regards to Italy, and we have a very strong strategy that has a key element, and the key element is our OBPPC. We ll talk a bit more about OBPPC in the second part. So that s your first question. Second question, emerging, you referred to the two pockets where we are optimistic. So let me start by saying, yes we continue to be optimistic for a couple of reasons. First, we have seen that our strategy works, and you will see that also from Keith s presentation, deepdiving in Russia. It works with all the cylinders firing. In Nigeria, again, we have a very clear strategy behind expanding and accelerating the expansion of distribution, while at the same time focusing on volume per outlet. We have a far more focused approach in the urban centres. At the end of the day, those are the ones that would make the difference in Nigeria. So we are still optimistic both about Nigeria and Russia. Let me pass the floor to Michalis to cover your third question in cost. MICHALIS IMELLOS - COCA-COLA HBC AG CFO On specifically you were asking about EU sugar in So here we see there isn t a concept of hedging; only entering the contracts, into the contracts earlier. There isn t a major concern here because of the regulated regime in Europe. Having said that, at the moment we are at around 25% already contracted in for 2014; small changes that we might expect to have in 2014 come primarily from the different country mix, because the price is not exactly the same across all the EU countries. There s also consideration of the landing cost so the country mix can play a role, and may be some small cycling effects year-over-year. But these are not really of any concern at this point. Yes? Could we have the mic? Ladies first. SE-TING FRENZEL - HSBC GLOBAL EQUITIES Thank you. Three questions, actually. The first one, you mentioned the price of concentrate and the way it is determined as a percentage of revenue. Within that, on revenue, is there any particular preference you feel from The Coca-Cola Company for volume versus pricing? And this percentage of revenue, how may that vary in depending on the pressure you might have on costs is a percentage of revenue, so it protects you in terms of revenue but not really in terms of margin and costs. So I wonder whether in an environment where raw material costs would have a high inflation, whether The Coca-Cola Company might help you in varying this percentage? So that s the first question. The second question is, again within the Coca-Cola system you are distributing a number of brands of The Coca-Cola Company; to which extent can you distribute brands and products of other companies, beverage companies and beyond sparkling? To which extent you could Page 14 of 54

15 go for other beverages? I mean you ve got water, can we consider beer? So that s the second question. And the third question is regarding profitability. Could you give us a sense of difference of profitability between Coke and water for example, the product difference? And I wonder also profitability in terms of distribution channels, supermarkets versus the smaller outlets, or consumption places? You mentioned cold drink equipment, etcetera, so how can we rate the difference in terms of the return on capital employed please? Okay, I ll make a comment on the first one, then Michalis will cover the concentrate, and then I ll cover the brands and say a few things about profitability on the Coke and water, and the channels and. So first of all, let me start by saying, would we be pushing for volume or pricing? And you were referring to The Coca-Cola Company. Let me start with us first. We want both. And I think it has been clear that we want revenue ahead of volume, so that s my answer, and that s a very loud and clear answer. On the brands, your question is, to which extent we can distribute brands or products of other companies. Again, let me step back a little bit and to which extent we won t? And you have seen from our positioning, we are partners in growth. We have 96% to 97% brands that either are Coca-Cola brands, or brands that we own together. And there s a 2%-3% of other brands that we have developed many years. For example, Amita in Greece, the juice, the leading brand, or Avra in Greece, our water brand. So we don t believe that there is a great value contribution looking for brands outside the system, because we do believe that the range that the same has given us is what we are aspiring for. With this, part of our strategy is to distribute premium spirits, and I would like you to keep the word premium, in some of our countries. We are doing that because we strongly believe that these will accelerate further our core business. Why is that? For three reasons. First, premium spirits are far more evident in the immediate consumption channel, in bars and restaurants. With this in mind, there is an element of package base. Obviously we like that because this is single serve. Single serve means higher revenue per case, higher profitability. So that s the first element behind capitalizing and expanding in an accelerated way our core business. Second, they are not premium spirits are not that strong in the organized trade. We are. Now, this will allow us again to accelerate single -serve, and single -serve multipacks. Page 15 of 54

16 And there is a third element, and the third element has to do with aging population. Right now there is a certain age group for our core business. We extend this age group, obviously, with premium spirits. Let me give you an example. In the States, 70%of Jack Daniels is being consumed with Coke. So those are the three reasons that we believe that premium spirits is helping our core business, so that s the second question. Your third question with regards to profitability, and profitability taken into consideration of two different categories, and that s Coke and water. I m not going to give you an exact number, because that definitely has to do with the different SKU, the different package. But by far the profitability of a 500 PET. coke is higher than the 500 PET water. A very good question with regards to channels, and if I split that in three categories, the first would be shops up and down the street, the second is fragmented trade., and the third one, discounters. So obviously the route-to -market in discounters is totally different than the route- to - market in fragmented trade. And we do have the zero touch approach in discounters. The zero touch means the pallet getting out from our production line and our aspiration is without any touch to have this at the retailer s floor. With this in mind, obviously you can see that there is no cost involved with moving the pallet from Point A to Point B other than the direct move of the pallet. And there is no cost with regard to the outlet, because we don t support within discounters. So a lot lighter cost version, when we deal with discounters, obviously this compensates for a different price case. What we have been working a lot is developing further our route- tomarket, and this is exactly capturing and optimising through a demand-driven process the three alternative cases that I have shared with you. Our aim is to drive a lot faster cost out of the system on channels like discounters; those are the channels that in principle grow a lot faster than the rest of the channels. So that is the third question and I ll pass on the first one. SE-TING FRENZEL - HSBC GLOBAL EQUITIES Thank you. As you say you ve got less costs, so does that mean the profitability would be similar? Is that what you re saying in terms of channels? What I m saying is that we are working to improve our profitability taking into consideration the differentiation in cost and in pricing. Still, fragmented is more profitable. Page 16 of 54

17 SE-TING FRENZEL -HSBC GLOBAL EQUITIES Sorry, just to follow up on some of the questions just to make sure I understand everything. You mentioned that you don t really want to spend too much in terms of brands or products. But could you potentially if you wanted? Yes, absolutely yes. Right now we see that the brands that The Coca-Cola Company has, and is working on through the innovation covers our needs. If there is something that could not be covered, yes we can proceed and have a brand that is not part of the The Coca-Cola business, for example our juice brand Amita in Greece. SE-TING FRENZEL -HSBC GLOBAL EQUITIES And you mentioned volume versus pricing in your own objectives. From a Coca-Cola Company point of view, is there is any strategy or your point of view, a difference of strategy depending on the types of markets you re addressing? You mentioned emerging, developing, established I mean I imagine, is there a differentiation of strategy? Obviously the volume element is something that we are definitely focusing. Again, with the revenue growing faster than the volume. In established, the number one priority is to defend the revenue per case. So there is a differentiation, is the answer. MICHALIS IMELLOS - COCA-COLA HBC AG CFO And just to build on this first question about the volume versus pricing. Everybody understands that you maximize your profit as a bottler, or your revenues as a Coca-Cola Company by maximizing the total revenue. That s where we start from, since they take a percentage of that right? So there is always the question, do you maximize your total revenue by pushing on the volume side, or by pushing on the pricing side? And it s a balancing act. It s exactly what Dimitris was saying, it depends on the market, it depends on the channel even. It depends on, you know, what level of maturity this particular market has, or which economic cycle it goes through. These discussions take place together with The Coca-Cola Company. So at the end of the day there is an alignment as to whether in a specific market we will go more for volume or potentially we will go more for defending and protecting the revenue. But the final objective is to maximize total net sales revenue. Page 17 of 54

18 SE-TING FRENZEL -HSBC GLOBAL EQUITIES Earlier in the presentation you were talking about depending on cost, to which extent there might be participation in the risk you are taking on the margin? MICHALIS IMELLOS - COCA-COLA HBC AG CFO The roles of The Company, The Coca-Cola Company, and the bottler are very discreet and very well defined particularly in mature, let s call them this way, categories like sparkling. So you know at the end of the day we have our job ticket and we know what we have to fulfil on our side, just like The Coca-Cola Company on the marketing side knows what they have to fulfil in order to maximize the end result. So you know generally speaking no, there is no need for such a discussion as to how we will share costs if we incur more or we incur less. Because likewise at a period of maybe a big operating leverage, we don t go back potentially to give back a share of the savings, okay, to The Coca-Cola Company. So the roles are very discreet. Other questions? MALE 2: Thank you. I don t know whether this question is best asked now or later, and if it s best asked later. Please tell me. You said, Michalis, that the growth of margin depends to a large extent on the external environment. And I was wondering if you could just expand on that in any way that seems appropriate? MICHALIS IMELLOS - COCA-COLA HBC AG CFO Okay, it s clear I think that you can t hope to sustainably grow your margin simply reducing cost. You have to have growth in the top line as well, and with that, it s obvious as well that once the established markets stabilise or even turn around at the varying degrees that these presumably will happen. Where we see the very big opportunity that we drive or accelerate the margin growth is the huge opportunity we have on the operating leverage. So you know and you re aware that over the last four years we have been restructuring significantly, particularly in our established markets, the majority of our structuring investments take place in our established market. We have not compromised in any way our capacity to fulfil the demand even at a higher level than where see it today. We have been more efficient, we have become more efficient. And therefore there is a massive opportunity in terms of the operating leverage when those markets stabilise or even turn around. Because with the more efficient infrastructure which contributes less to the overall cost, we are able to fulfil higher levels of volume. MALE 2: Can I come back on that? Because my understanding is you ve reduced your fixed cost a lot in your established market. Now that suggests to me that if volumes go up, if there s less fixed cost, there s more variable cost. Actually there won t, there ll be if anything, less operational leverage. But clearly I ve got it wrong somehow, so can you explain that? Page 18 of 54