Coca-Cola Europacific Partners PLC
Q1 2017 Earnings Call Transcript

Published: 4 May 2017

[Operator:]

Good day and welcome to the Coca-Cola European Partners First Quarter 2017 Conference Call. At the request of Coca-Cola European Partners, this conference is being recorded for instant replay purposes. At this time, I would like to turn the conference over to Mr. Thor Erickson, Vice President of Investor Relations. Please go ahead, sir.

[Thor Erickson:]

Thank you and thanks to everyone for being on our call. We appreciate your interest and for joining us to discuss our first quarter 2017 results and our outlook for full year 2017. Before we begin, I'd like to remind you of our cautionary statements. This call will contain forward-looking management comments and other statements reflecting our outlook for future periods. These comments should be considered in the conjunction with the cautionary language contained in this morning's release as well as detailed cautionary statements found in reports filed with the UK, U.S., Dutch, and Spanish authorities. A copy of this information is available on our website at www.ccep.com. Today's prepared remarks will be made by Damian Gammell, our CEO; and Nik Jhangiani, our CFO. Following these prepared remarks, we'll open the call to your questions. In order to give as many people as possible the opportunity to ask questions, please limit yourself to one question and we'll take follow-up questions as time permits. Now, I'll turn the call over to Damian Gammell.

[Damian Paul Gammell:]

Thank you, Thor, and again, I'd just like to thank everybody for joining us this morning and this afternoon as we discuss our results for first quarter of 2017. As you will see in our news release today, our results include comparable diluted earnings per share of €0.31 including a negative currency impact of a €0.01. We achieved the revenue growth of 1.5% and volume growth of 0.5% with a 15% growth in operating profit, all on a comparable and currency-neutral basis. Given CCEP was created in late May of last year, these growth numbers represent the combined performance of each of our territories as if CCEP had existed in the first quarter of 2016. Now, as we look closer at our first quarter results, our sparkling portfolio was flat with a 0.5% decline in our Coca-Cola trademark brands. Coca-Cola Zero Sugar continued to perform extremely well with growth of 16% and we will continue to expand and build on this success throughout the summer and across our territories. Sparkling flavors, which include energy grew 1.5%, led by Fanta with a growth of 2% during the quarter. Energy was up more than 20% as we continue to execute our multi-brand strategy, and we achieved solid gains from Monster and benefited from distribution in Spain, which began in February of 2016. Our still brands portfolio grew 3.5%; sports drinks grew 2%, primarily through the Aquarius brand; and water grew 1%, reflecting our focus on value and reflecting growth in Aquabona, Chaudfontaine, and Vio. During the quarter, we also continued to make important progress towards our stated goal of €315 million to €340 million in synergies by 2019. We remain very focused and diligent in working towards this goal as we enhance the effect of the sub-operations (03

[Manik H. Jhangiani:]

Thank you, Damian, and we appreciate each of you taking the time to be with us today. I will now discuss the results of the quarter in a bit more detail as well as our outlook for the remainder of 2017. Looking at the quarter on a reported basis, first quarter diluted earnings per share were €0.30 and, on a comparable basis, were €0.31. Currency translation reduced earnings per share by about €0.01. Revenue grew 1.5% on a comparable and currency-neutral basis. This reflects the reported volume decrease of 0.5% and revenue per unit case growth of 2.5%. This revenue per unit case growth was driven by several factors, including favorable mix, promotional timing, and rate increases. First quarter cost of sales per unit case increased 3.5% on a comparable and currency-neutral basis. While there has been modest cost inflation, this increase is magnified and largely driven by the accounting for bottles and crates in Germany, which was a onetime favorable adjustment in the same quarter last year. While we expect some impact in our quarterly year-over-year growth figures for COGS and OpEx versus one-half 2016, we do not expect any material impact to operating profit or full year growth figures. Importantly, for the full year 2017, we expect cost of sales per unit case to be at the higher end of our previous range and increase by approximately 1.5% on a comparable, currency-neutral basis. This slight increase is driven by year-over-year cost increases in key inputs, principally PET and cans, and the impact of currency rates, notably the GB pound to euro, or partially offset by the benefits from our cost reduction programs. While we did have some gross margin contraction in the first quarter, this is largely related to the factors that I just discussed, and we remain committed to maintaining and even expanding gross margins over time, and expect to see modest gross margin improvements in 2017. In the first quarter, operating expenses were down 5% on a comparable and currency-neutral basis. This reflects the impact of synergy benefits, cycling last year's increased costs associated with the supply chain disruptions in GB, one fewer selling day in the quarter, and the impact of the year-over-year accounting differences and overall timing. These factors contributed to operating profit growth of 15% on a comparable and currency-neutral basis. Additionally, these results reflect solid overall performance and the benefit of synergies, partially offset by the impact of one less selling day in the quarter. During the quarter, we've realized approximately €25 million in synergies. Excluding these synergies, core operating profit growth was approximately 2.5%, up and ahead of our revenue growth importantly. Let's now look at our outlook for 2017. For the full year, we continue to expect modest low single-digit revenue growth with high single-digit operating profit growth and diluted earnings per share growth as well. For the full year, the synergies delivered are expected to benefit COGS slightly more than OpEx. Excluding these synergies, we expect core operating profit growth to modestly exceed revenue growth. These growth figures are on a comparable and currency-neutral basis. At recent rates, currency translation would reduce 2017 full year diluted earnings per share by approximately 1%. We continue to expect free cash flow in a range of €700 million to €800 million, including an expected benefit from improved working capital of at least €150 million. This free cash flow outlook is after the expected impact of restructuring cost integration and deal costs. This reflects the focus we put on free cash flow generation, reducing our leverage, and our dedicated efforts to improve our working capital position. Capital expenditures continue to be in the range of €575 million to €625 million, including €75 million to €100 million of capital expenditures related to the synergy programs. Excluding capital expenditures related to these synergies, CapEx is expected to be less than 5% of revenues. Our weighted average cost of debt is expected to be approximately 2%, and our comparable effective tax rate for 2017 is expected to be in the range of 24% to 26%. As Damian indicated, we remain very much on track to achieve pre-tax run rate savings of €315 million to €340 million through the mid-part of 2019. We have already achieved savings of approximately €60 million through the first quarter of 2017, including the €35 million in the second half of 2016 and €25 million in the first quarter of 2017. We expect to exit 2017 with run rate savings of approximately one-half of our total target. We continue to expect net debt to EBITDA for 2017 to be just under 3 times and our outlook for cash cost to achieve the planned synergies remains at approximately 2.25 times expected savings. That said, we continue working to find ways to lower cost to achieve these synergies, as we manage our business efficiently, leverage the strength of our balance sheet, and diligently work to create shareowner value. One last note, as previously stated, we do not have plans to repurchase shares in 2017. That said, we are evaluating nominal repurchases to offset dilution which may occur as a result of employee stock plans. As part of this evaluation, we expect to include a share repurchase resolution at our upcoming AGM. If a repurchase plan occurs in 2017 to offset this dilution, given likely timing and size, we would expect little to no impact on our outlook including that for EPS. To close, let me highlight a few areas; every level of our company from frontline employees to executive management is focused on managing the various elements of our business to improve our growth outlook and deliver value. Next, we remain focused on generating cash, utilizing our flexible capital structure, and creating long-term, profitable growth. These prudent capabilities enhanced by the synergies created by CCEP improve our ability to accomplish our most important objective

[Operator:]

Thank you. Your first question comes from the line of Judy Hong with Goldman Sachs.

[Judy E. Hong:]

Thank you. Good morning, or hi, everyone.

[Manik H. Jhangiani:]

Hello.

[Damian Paul Gammell:]

Hi, Judy.

[Judy E. Hong:]

So, Damian, I guess I was hoping to get a little bit more color just in terms of the competitive environment, the share performance in GB. It looks like it was a good quarter, but obviously, you're lapping an easy compare there. So, just wanted to get a better sense of what you're seeing from an underlying perspective, and the pricing environment as, I think, some of the UK grocers are obviously starting to see more inflation coming through?

[Damian Paul Gammell:]

Thanks, Judy. Yeah. We have seen I think towards the end of 2016 and into this year improving performance in GB. Obviously, as we talked about before, Nielsen doesn't cover all of our business in GB, but where it does track, we've seen a recovery. I think that's been on the back of a couple of initiatives that I mentioned during the call. One, GB was the first market where we launched Zero Sugar Coca-Cola, and that was the segment in which a lot of our share challenges had been in, in the sugar-free cola segment. So, that was a good, solid response to that opportunity and that's working well. We also see our flavor business performing well in GB, that's supporting our share as well. So, a number of the marketing initiatives that we brought in at the end of 2016 have definitely help shore up and grow our share in 2017. On your second point, we have seen retailers, obviously, on their own discretion making moves around promo pricing. And you'll see a number of the offers which traditionally, for example, in their case, a number of retailers would have promoted two 1.75 liters for £2. We have seen throughout Q1 a number of cases where that has now gone up for £2.50 for two 1.75 liters. So, signification inflation in the promo price, and that seems to be continuing into Q2. So, some inflationary moves on promo pricing, not so much on the shelf price. They remain pretty constant, but as you know in GB, a lot of the product and volumes sold on promotion, so the promo price really is the biggest read-through for inflation in value in GB. So, they're the two factors that are in play and we would expect both of those to continue into Q2 and into the summer.

[Judy E. Hong:]

Okay. Thank you. And, Nik, if I can just follow-up on the gross margin performance, and I know there was that the onetime impact, but can you just sort of bridge the impacts from that onetime item, how much the cost savings offset that, and just a little bit more color on the bridge in gross margin? Thank you.

[Manik H. Jhangiani:]

Yeah. So, Judy, if you look at the cost savings piece, remember it's roughly that 55%-45% in terms of the split between COGS and OpEx, so you have an indication of what impact that had on the first quarter. If you actually exclude the onetime impact that had 2016 up, it essentially would say our gross margin was slightly down, but I would say very slightly down, but we would continue to see that normalizing over the course of the year. And more importantly, I think there will be some noise, as I said, as we just cycle through some of the first half of 2016, but the full year is very much intact to have a slight growth margin improvement, which obviously includes the benefits of synergies as well.

[Judy E. Hong:]

Okay. And the lower sugar prices, at this point, are you embedding any of that into your outlook on the commodity piece?

[Manik H. Jhangiani:]

Most of our – are you referring to Q4 2017?

[Judy E. Hong:]

Yeah.

[Manik H. Jhangiani:]

Yeah. I mean, everything that we have guided to – remember, the main areas that were open for us was essentially PET, and we had some element of aluminum open, and that's what's really driven now with at least in the aluminum and currency fully covered. The sugar benefits that we had, we also were benefiting in prior years, because as the whole sugar regime was in the face of been dismantled, we did get some favorable pricing in 2016 as well. But I think our COGS outlook today, outside of again the one variable being PET, I think we're pretty comfortable with that.

[Judy E. Hong:]

Got it. Thank you.

[Operator:]

Your next question comes from Lauren Lieberman with Barclays.

[Lauren Rae Lieberman:]

Great. Thanks. Good morning or good afternoon.

[Damian Paul Gammell:]

Hello.

[Lauren Rae Lieberman:]

Hi. If you could just talk a little bit again about price mix. So, I know, Nik, you guys shared that it was all elements of what you would hope will be driving pricing mix, but anything specific on price pack architecture versus product mix and portfolio mix that could help us understand some of the positive claim? Thanks.

[Damian Paul Gammell:]

Thanks, Lauren. I mean, we – as we stated on earlier calls, and as we talked about coming out of 2016, you're seeing a number of common initiatives in play across all of our markets. Firstly, maybe I'll just talk about headline pricing. So, we were able to meet our pricing plans as we moved into 2017, so that obviously supports some of our revenue growth. Secondly, we have been spending a lot of time on investing with our customers on driving pack mix benefits, smaller packaging, and looking at – actually building on some of the learnings out of the U.S. from our learning trip there last year, looking at diversifying particularly in growths here (22

[Manik H. Jhangiani:]

No, I would just say, just keep in mind, obviously, I think if you look at the first quarter, remember, the rate increases particularly in some of the larger markets will start coming through more going forward, because depending on timing, it's either February or March type of an impact. So, we did had some good brand and pack mix that supported those numbers as well. So, it's really is a good combination.

[Lauren Rae Lieberman:]

Okay. That's great. In Germany, I know it's hard to disaggregate Easter shift and so on, but it did look like revenue in Germany maybe is under a little bit of pressure this quarter. Is it just a slow start to the year or is there anything kind of more specific around that market?

[Damian Paul Gammell:]

No, no, nothing specific. I mean, if you recall, when we talked about our full year results in March, we did call out that January was a bit of a slow start. You can see that from the Nielsen data particularly in Germany. So, there was definitely a function of a slow start. We were not as intensively active on promotions in Q1 in Germany. Two factors have played there. One, we were in discussions with our customers around some pricing moves and, obviously there, I suppose in those cases, you're just not featured as much. And then secondly, Easter is a huge holiday for us in Germany as in all of our markets. So, the traditional promotional activity, some of that's set into Q2. So, they were the two reasons at play for Germany and, certainly, we're happy where that business is at going forward for the rest of 2017.

[Lauren Rae Lieberman:]

Okay. Great. Thank you so much.

[Manik H. Jhangiani:]

And keep in mind, Lauren, we did have both volume and value-share growth in Germany in the first quarter.

[Damian Paul Gammell:]

Yeah.

[Manik H. Jhangiani:]

And that reinforces Damian's point that we're doing the right thing.

[Lauren Rae Lieberman:]

Yeah. Okay. Great.

[Operator:]

Your next question comes from Bonnie Herzog with Wells Fargo.

[Bonnie L. Herzog:]

Hi, everyone.

[Manik H. Jhangiani:]

Hey, Bonnie.

[Damian Paul Gammell:]

Hey, Bonnie.

[Bonnie L. Herzog:]

I have a question on France. With the election coming this weekend, there is certainly a lot of uncertainty about the outcome, But it seems kind of Le Pen is able to win, France's withdrawal from euros is really a foregone conclusion, which certainly has implications on the euro more broadly. So, I'm just curious if you guys could comment on how that may potentially impact your business, maybe in the near-term, what ways if any you're preparing for that possibility? And then, perhaps broader long-term implications of the eurozone breakup?

[Damian Paul Gammell:]

Well, that's a CNN question, Bonnie.

[Bonnie L. Herzog:]

I couldn't resist.

[Damian Paul Gammell:]

Well...

[Manik H. Jhangiani:]

It's dangerous to ask Damian, that is what he is saying.

[Damian Paul Gammell:]

No, let me take the question. I mean, clearly, we like I'm sure as you are and everybody else is watching intently with what decisions the French people will make over the weekend. Clearly, if it wants to go the way that you've articulated, which again, I mean, none of us are (27

[Manik H. Jhangiani:]

And we hope all the French continue to celebrate with lots of Coke.

[Damian Paul Gammell:]

Yeah.

[Bonnie L. Herzog:]

Good point. And then if I may ask a broader question on the macro environment, which I guess on the margin things seem to be improving. So, I'd like to get a sense from you guys if you're actually seeing this, and if you're now more confident you'll able to hit your low single-digit top line growth guidance for the year? And then, if you could maybe drill down a little bit on the markets that are improving; you called out, for instance, improvements in local market conditions in Iberia, and then maybe touch on some markets that are still pressured. Thank you.

[Damian Paul Gammell:]

Well, as we've said on the call, we've reaffirmed our guidance for the full year. So, I think that reflects our confidence in achieving our revenue targets for the full year. Where we're particularly happy about is as we look at our performance coming through the first quarter, all of our markets have continued to performance well. So – and as we stated, there were reasons for a couple of them being slightly behind just in terms of absolute revenue growth, but again, we factored that into our full-year guidance. So, I think we're pretty confident that all of the markets will contribute to our revenue growth objectives, profit and margin objectives, for the full-year. It's challenging to call out any one that stands out either on the upside or on the downside. I mean, I think in Iberia, we did talk about a slow start to the year, as we did in Germany, but both of those markets have responded extremely strongly through the back-end of the quarter, and into the second quarter. So, both of those issues have been addressed. So, overall, pretty consistent growth across markets. I mean, there are pockets of some brands doing better here or there, some packages doing better here or there, but overall, it's a pretty consistent picture for us. Nik, anything to add?

[Manik H. Jhangiani:]

No. No. You said it all.

[Bonnie L. Herzog:]

All right. Thank you.

[Operator:]

Your next question comes from Stephen Powers with UBS.

[Stephen R. Powers:]

Hey, guys. Thanks.

[Manik H. Jhangiani:]

Hey, Stephen.

[Damian Paul Gammell:]

Hey, Stephen.

[Stephen R. Powers:]

I just had a – it's, I guess, a little bit of a bigger picture question. Thinking about your CAGE presentation and other interactions with us in the last couple of months, you definitely prioritized growth – new growth priorities not only across colas but also across sparkling flavors and energy juices, teas, waters, et cetera. And at the same time, we've heard from The Coca-Cola Company about them also thinking more about leveraging the total portfolio for growth, elevating innovation outside of CSD, they're really trying to break down historical barriers preventing speed to market. And so, I'd love just a general update for you on your optimism on portfolio growth initiatives broadly, but specifically, in terms of whether there are valid reasons for incremental optimism just based on some of the changes occurring at Coke aims at making the system overall more agile, and if that's something that you're encouraged by and if there are some tangible examples as to how it's playing through? Thank you.

[Damian Paul Gammell:]

Yeah. I mean, clearly, with James moving into the CEO role, James had the key role to play in the creation of CCEP. He was operating in this region prior to moving into his previous role. So, I think, clearly, we know that James understands the opportunities across Western Europe. I think that's a positive for us. Beyond that, though, obviously, the company's strategic intent around total beverages, speed to market, productivity and cost saving, we believe supports a very similar objective to the one that we articulated on the creation of CCEP. So, obviously, having aligned objectives really helps us make faster decisions and win together. I would want to come back to your comment on growth. So, I mean, we see value creation as being the primary objective of profitability. So, while we will look across all of those categories, it will be with a view to where can we make a good return rather than where can we just grow. And I think a testament to that is most of the initiatives that we've taken on water, whether it's Smartwater; on tea, Honest Tea; on energy, we have and will continue to prioritize areas where we believe will contribute long-term to value creation. And, therefore, all of those brands are only sold in immediate consumption of small packs. Because I know there is a question out there on with the levels of revenue guidance we're giving, why is it not higher? Well, a lot of the new initiatives we're launching, we deliberately kept them in profitable segments of those categories, so we can build a more sustainable, long-term value business. That ties back into the Coke Company's objective. And as you know, we're on a incidence pricing model, so obviously, that fits with their revenue goal as well. So I think, it's very much aligned and we're looking forward to continue to expand a portfolio with the Coke Company. You'll see that throughout 2017, you'll see that into 2018, we're having those conversations already. But I'd go back to my point, I mean, we will do it in a way that makes sense for our shareholders and in a way that we can create value. And I think that requires alignment and, thankfully, that's what we have now at the Coke Company.

[Stephen R. Powers:]

Yeah. That's great. Is it too early to cite some examples of where there have been improvements in speed to market and agility, or can you offer some?

[Damian Paul Gammell:]

No. I think, to be fair, the Coke Company has been on that agenda with Muhtar for a number of years and I think they have restructured their operations with a view to being faster to market, with a view to funding more innovation. So, in some ways, I think it's an acceleration of that strategy that was articulated by James last week. So, we have seen benefits. And obviously creating CCEP in Western Europe took three decision entities in the bottling system to one. And, obviously, that's allowed us to be more efficient on the bottling side with the Coke Company as well. So, I don't think, we would be where we are without that and that really goes back to decisions that were taken in 2016. So, clearly, we look forward to seeing the acceleration of that under James. But it has been a theme of the company strategy for a number of years and, yeah, as I said, we look forward to continuing.

[Stephen R. Powers:]

Great. Thank you.

[Operator:]

Your next question comes from Ali Dibadj with Bernstein.

[Ali Dibadj:]

(35

[Damian Paul Gammell:]

So, hi, Ali. Just on your first point, I think a good example is our Smartwater proposition where we've kept it in IC. We've just broadened that whole proposition into sparkling recently, and we're now moving into sparkling flavors. So also, on constant zero for (36

[Ali Dibadj:]

Okay. That helpful. And the bigger question is more of a kind of organizational question, and I'm just trying to think about how taxing it is on the organization to actually do integrations. So, clearly, lots of integrations right now in bringing the bottlers in Iberia and Snapple (38

[Damian Paul Gammell:]

That's a good question. I've been involved in a number of integrations and this by far in a way has been the best planned and best executed that I've been involved in. Clearly, there was a lot of work. I think the most important aspect to that is we started very early. So, if you recall, when we talked about the creation of CCEP, we obviously were planning for that for quite a while. We took us, a lot of our key executives, throughout the end of 2015 and into 2016 to work on planning the integration and the pre-prepare for a lot of the process work that we needed to do. So we definitely brought forward a lot of the work. Because of that, certainly, the integration has gone extremely well. The synergy capture is on track. We've maintained a very small, but very lean team just to complete some of the longer-term aspects of the integration, but again, as I said, it's very small, it's very lean, it doesn't interfere with the business, as you can see, from our results in Q1 and in the second half of last year. On a positive note, certainly what we've learned would help us integrate other businesses even better. So, we have a model that we know works for the bottling business. We have people that have led this integration and are part of our senior leadership team and, clearly, we would advocate that that would give us a lot of benefits if and when we have the opportunity to acquire more territories, if that comes to that.

[Ali Dibadj:]

Are you pre-preparing anything now?

[Manik H. Jhangiani:]

(40

[Damian Paul Gammell:]

Well, we're always prepared, Ali. It's just that other people are.

[Ali Dibadj:]

Okay. Thanks very much, guys.

[Operator:]

Your next question comes from Richard Withagen with Kepler.

[Richard Withagen:]

Yes. Good afternoon. Can I ask if you can give us an update on the sugar taxes in Spain. I think the Catalan region has implemented tax on the 1st of May and how do you plan to react to this specific tax? And also the country-wide tax seems to be on hold for now in Spain, but perhaps could you give us the status of that tax?

[Damian Paul Gammell:]

Yeah. So, we are working with the Spanish team and obviously the Spanish authorities to look at the structure and mechanics of that tax. Clearly, we have some learnings from what we've gone through in GB. We've had previous experience in France and Portugal. So, as far as the most important thing is we're applying that learning and knowledge back into our Catalan business, and we will respond in accordance as we've talked about before with obviously passing on the tax and looking at package differentiation to maintain affordability and relevance to the consumer. We have already been accelerating our non- or low-sugar products and variance, so that obviously minimizes the impact to the tax. And, obviously, we're as interested as I think all of our competitors and customers are around what will the national governments do based on the regional tax. So, it's in our plans. We're responding to it. Clearly, like all of these taxes, we would question the viability and whether they will really change behavior. We don't believe it will. We think there are other ways to deal with this challenge. Having said that, they've made a decision. Obviously, we'll honor that and would execute against the law. And within that, it really puts more emphasis on us to diversify faster in packaging and product, and we're doing that in GB, we're doing that in Portugal, we're doing it in Spain, and we'll see how the consumers respond to that as we move through the summer, but it's clearly on its way.

[Richard Withagen:]

And can I also ask on Honest Tea, I mean, how is that performing in the UK right now? And I've seen in a couple of other European countries, have you introduced it now across all countries or still in a selected number of (43

[Damian Paul Gammell:]

We're being quite selective. I think if you look over the medium-term and our objective would be to have a multi-brand tea strategy in all our markets, and we're working with The Coca-Cola Company to understand market-by-market what's relevant. You've obviously seen the announcement regarding our association – or the company's association with Nestea. And so, we will roll out Honest. We're happy. We think it's a brand that has got relevance, its organic platform, its products are great. But I suppose it's also a category with consumers and with customers that when you need to be segmented, that's the nature of that brand and, two, you need to be patient. And we're applying both of those principles, so you will not find it everywhere. Hopefully, you'll find it somewhere, but you won't find it everywhere. And again, in the interest of long-term value creation, we want to make sure that we prioritize channels and customers that generate a reasonable selling price for that product. That's what we've done in GB, it's worked well. And we're looking at new variants and new flavors that we can bring in to support that brand. But overall, the response from retailers and consumers have been very positive. And as I said, over the next 18 months, you will see that brand move across all of our territories.

[Richard Withagen:]

All right. Thanks.

[Operator:]

Your next question comes from Brett Cooper with Consumer Edge.

[Brett Cooper:]

Thanks, guys. Can you just talk about your capacity, both from an infrastructure standpoint and then from a people standpoint to begin, putting more brands or more launches through the business, I guess on the heels of Coke is planning to invest more, you guys – your desire to diversify your portfolio? Thanks.

[Damian Paul Gammell:]

Yeah. We feel well-positioned to add more. I think one of the great things about the bottling business is, we have a fixed cost base, we have a sales force of over 4,500 people in Europe. We've great customer relationships and we've got a great route to market. So, all of those assets are expandable to take out more brands and more packages. So it's something we welcome. Clearly, you got to do it in a way that both our customers and our people can absorb. So, planning with the Coke Company and phasing in is something that we're very focused on. On the manufacturing side, a lot of the innovation is coming in packaging formats that run on our existing lines. So, smaller cans, smaller PET. We have existing accepted capacity. So, a lot of these new still products are on accepted; we have capacity. In 2016, we upgraded a number of our production lines particularly on energy, so to in-house Monster, so we have that capacity in place. So, certainly manufacturing is not a barrier. We believe our customer relations are an asset, because clearly we are operating in a category that's growing, So if you look at any RTD, it's growing revenue. So, from a consumer goods perspective, we're in a right space in terms of the category we operate within. They're looking for innovation and looking for new products. They're looking for lower sugar, which again we can clearly deliver. And then from a sales force perspective, if you look at our existing sales force, we have expanded our association with Salesforce.com and we've rolled out proprietary technology to all of our sales reps, which we're seeing driving increased engagement. So, our sales force are happier to be working on tablets. We're seeing a lot of productivity because we've simplified processes, we've taken away bureaucracy, and we've enabled them with a state-of-the-art software solution. And as a result of that, they've got extra capacity. So, without increasing €0.01 of OpEx, we're generating incremental sales capacity and that allows us to filter in some of these new products and packs. So, certainly, not a barrier for us and clearly it's about phasing. In our CapEx numbers, we've also reflected the need for extra cold space for all these new products. So, when Nik talks about our CapEx guidance in the full year, baked into that is an expectation that some of these new products will require incremental cold space and that's also factored into our CapEx guidance. So, overall, it's an exciting journey with the Coke Company. I'll just come back to my second point, probably from a leadership perspective, what we've just got to do is be very smart about phasing in those initiatives. So, we give people time to adapt and our customers to except new products and packs. So, that's probably the art and the science, and that's something we're very focused on.

[Brett Cooper:]

Great. Thank you.

[Operator:]

Your next question comes from Stoyko Moev with JPMorgan.

[Stoyko Moev:]

Yeah. Good morning, gentlemen, and thank you for taking my questions. I've got two if I may. So, firstly, I noticed a relatively weak performance in France. I appreciate your comment in the press release on the timing of promotions, but I was wondering whether you could provide a bit more color in terms of to what degree that was driven by industry weakness and to what degree these are kind of CCEP-specific issues? And then secondly a follow-up question on GB. You provided some color on your performance, but I was wondering whether you have seen a bit more rationale pricing from your key competitor in the market, especially more recently, and whether they have mirrored your price increases? And also in GB, last year you launched your biggest marketing campaign behind Coke Zero. Should we expect you to continue to support the brand to quite a significant degree this year? Thank you.

[Damian Paul Gammell:]

Okay. Thank you. You did a good job of fitting three questions into one there so congratulations. I'll start with – in reverse order. As I said, we're extremely happy with the Zero Sugar performance. So, that's a long-term investment from us and the Coke Company behind that brand. So, that will continue and it is continuing in 2017. And as I said, we're bringing that format and taste profile to all our markets. So, we're very happy and we'll continue to investment behind that brand. I don't know what our competitors have done on pricing in GB, and all I can do is look at what our retailers have done on pricing, and certainly, as I mentioned earlier, we've seen retailers taking up pricing on our their promotions. That seems to be reflected across the category. So, I think you're seeing overall the category promo pricing levels rise in GB since January, end of January, and that's kind of – that has been the case through Easter, which is probably the first – was the first big holiday event. And so, we're seeing that being maintained, but again, that's fully up to the retailers' discretion, but it seems to be across category. It's certainly happening on our brands, because we know that, and if we look at names, then we would see that's also the case across the other brand. So, that seems to be the dynamic they're playing. We obviously believe it's a good way for the retailers to create more value in the category and we would support that. So, I think that's good news. On France, we did talk on our last call about changing our promo strategy in France. We have in Q1 not just reduced some of the promotions with Easter moving, but we also have started to promote smaller packages. So, if you – in our French business, we have for a number of years, have a very dependent volume around large PET packages. We believe there's a bigger opportunity with smaller packaging, smaller PET, smaller can sized, and we've redirected some of our support into those packages. Clearly, in the short-term, they don't generate the absolute volume or absolute revenue given the selling prices of the large PET packs. But it is, we believe, the right thing to do for the long-term and, clearly, that was the big change with some of our retailers. And candidly like all of these changes, when you change pricing or promo, there is a period of disruption in the market. That's what occurred in January, we talked about that. And we're happy when we looked at our price realization in France on a per case level, it's reflecting that strategy. But clearly, through the summer, we'll get a better understanding of how the consumer responds to the new offers. But again, it was a conscious decision and we believe the right one for the long-term health of the business.

[Stoyko Moev:]

Okay. Thank you.

[Operator:]

Your next question comes from Robert Ottenstein with Evercore.

[Robert Ottenstein:]

Great. I want to follow-up on some of the answers that you gave in terms of capacity for new products, and specifically, sparkling water and sparkling Smartwater, do you see that as having more geographic potential than just plain Smartwater, which has largely been a UK product? So, that's question – or part one. Innocent; do you believe that you have the capacity in terms of the cold storage, whatever you need, on the logistic side for innocent and any plans to get that? And then, third, in the Coke system, Coke in Japan is starting to introduce more premium Coca-Cola variance that have a health and wellness angle with added ingredients. Do you see that as something that may make sense in your markets? Thank you.

[Damian Paul Gammell:]

Hi, Robert. Thank you for the question. So, on Smartwater, yeah, simple answer is yes. I mean, actually in some of our markets, particularly like Germany, we know that carbonated water is the preferred choice. So, we would expect that over time having a carbonated and a flavored and a still variant on Smartwater makes sense. We launched it first in GB because that's where we've had the longest experience with Smartwater. We've got a good consumer franchise. So, we'll see how it goes, but from a consumer perspective, if you look at our other markets, it is easy to see a path to expansion over the next couple of years. But it's early days on sparkling flavored, so we just got in. So we'd probably be able to give you more color around that in the second half of the year. On innocent, that's currently not in our plans. That's something that we continue to reflect on with The Coca-Cola Company in terms of what's right for that brand and can CCEP add a lot of value to that proposition and can innocent add a lot of value to our shareholders. That's our number one question. It's quite a different business, as you mentioned, it's chilled. So, I think if it was the right decision for the system, the aspects of the supply chain that we would need to address are not that complex. As you called out, it's really about chilled distribution that's readily available in Western Europe through partnerships. So, I don't think that would be a barrier. I think the real question is, given where that brand is at and its success and the level of investments that goes behind that success, is it a brand that would add value to CCEP? We continually reflect on that with the Coke company, but at the moment we don't have any plans to build that chilled capability at CCEP. That may change in the future. I'm aware, but you probably know more than I do if I'm being honest about what's going on in Japan. But, clearly, we've – we have a session with The Coca-Cola Company coming up with all of the large bottlers. As part of that conversation, we'll look at what innovations are working across the globe and what can we take back into Europe. And I've now added what you've told me to my list of questions. So I'll know more by the end of May and that may be something that would work well in Europe. But I've got to learn a bit more about – I have heard about it, but I haven't seen any results. (55

[Robert Ottenstein:]

Terrific. Thank you very much.

[Operator:]

Your next question comes from Mark Swartzberg with Stifel, Nicolaus.

[Mark Swartzberg:]

Good afternoon, gentlemen. Thanks for taking the questions. I had two. One, Damian, Iberia specifically, I know there's – the one fewer selling day, but it looks like even after you adjust for that, there was a slowdown in organic revenue growth in the quarter after either by comparison to last year entirely or by comparison to the second half of last year where you had a nice pick-up in growth. So, am I interpreting that correctly? And if I am, what's going on there? And then my second question is for either you or Nik, it does – in spite of Iberia which seems very manageable, it looks like you're in a position where you could have some earnings upside as you move through the year. If that were to be the case, is your emphasis – I'm trying to get a sense of where the priority might be, is it to put more money against a particular part of your sparkling portfolio, is it to put more money against this emphasis on water or this greater emphasis on being properly positioned in water, just trying to get a sense on where the priorities are there for that?

[Damian Paul Gammell:]

So, just on the Iberia, Mark, I mean, there's nothing really to read through on the quarter in Iberia. And as you said yourself, Iberia had a really strong year last year with a good quarter four, Easter moved, we did have a slow January in Iberia but that's really it. I mean, there's nothing else going on in Iberia. In fact, it's a fantastic business and it continues to deliver solid revenue growth over a number of quarters. So I think probably the biggest factor is the selling day, that gets you back to around flat. Easter, again is a big factor, so we're not concerned at all about Iberia.

[Manik H. Jhangiani:]

Sorry, just to be clear, with the one additional selling day, we actually are up about 1%. It's flat on a reported basis.

[Damian Paul Gammell:]

Yeah. Sorry. Yeah. So – and again as you said...

[Mark Swartzberg:]

Yeah.

[Damian Paul Gammell:]

Go ahead. Sorry.

[Mark Swartzberg:]

No, go ahead, Damian. Sorry.

[Damian Paul Gammell:]

So, as I just said, it's a slight slowdown from where it was, but again, I wouldn't underestimate slow January, but overall still a good quarter, and when you take Easter out, I think we're very happy with Iberia.

[Mark Swartzberg:]

And are you saying it's only Easter because I see a 1% and then I see a 3.5% last year, and I look at the second half, which implies of course the first half was an easier compare, so it makes me think it's more than Easter, so I'm just – and more than January. So is that all it is or is there something else going on?

[Damian Paul Gammell:]

That's all it is.

[Manik H. Jhangiani:]

That's all it is. And also there's an impact from Portugal, remember, we have a sugar tax that has an impact...

[Damian Paul Gammell:]

Yeah.

[Mark Swartzberg:]

Fair enough.

[Manik H. Jhangiani:]

...in terms of the volume and revenue piece.

[Damian Paul Gammell:]

Yeah. Now, there's a – I mean, in fact, if we look at our execution metrics, if we look at our channel mix in Iberia and if we look at our renovation pipeline with The Coca-Cola Company, that business is performing very well. So, nothing else going on there.

[Manik H. Jhangiani:]

And we actually had a strong Q1 2016 hurdle as well in Iberia. Remember, obviously, it wasn't a part of the group, but we did talk about what Q1 looked like too. So, I think all those factors and, as Damian said, there's nothing outside of that that we see. We actually continue to be very pleased with the performance there.

[Mark Swartzberg:]

Great. Great.

[Damian Paul Gammell:]

And maybe you could just...

[Manik H. Jhangiani:]

We got so caught up in the first one, we forgot your second question.

[Damian Paul Gammell:]

Yeah. So, your second question, if you could restate it, please, Mark?

[Operator:]

I apologize. He's no longer in the queue.

[Manik H. Jhangiani:]

I think, Mark, I think your question was in relation to, if the business performs better how would we be thinking about potential opportunities. And I think, one, keep in mind again, it's only the first quarter, we still got the summer selling season ahead of us. We've got some tough comps in Q3 and Q4 to hurdle as well. So, we don't want to get ahead of ourselves. Obviously, we continue to look at things that we would like to do jointly at the system to think about reinvigorating and sustaining that top-line growth. And if and when that arises, we will update you.

[Thor Erickson:]

Operator, next question please. Thank you.

[Operator:]

Thank you. And your next question comes from Bryan Spillane with Bank of America Merrill Lynch.

[Bryan D. Spillane:]

Hi. Good morning, everyone.

[Manik H. Jhangiani:]

Good morning.

[Bryan D. Spillane:]

Just one question about cash flow. Can you – Nik, can you maybe update us on your thinking in terms of sort of how you're thinking about returning cash to shareholders and, especially, putting aside if there is the possibility for M&A just how you'll think about like excess cash flow, the bias towards share repurchases or dividends, just kind of where you're thinking as you're getting closer to that point where maybe you'll be in a position to return more cash to shareholders?

[Manik H. Jhangiani:]

No closer than we were last quarter a couple of months ago, Bryan, so – or maybe a couple of months closer. No, but listen, I think, in all fairness, a couple of things I would say to you and, again, this is obviously absent other investment opportunities including M&A. First thing is obviously, we continue to want to steadily increase the dividend payout ratio, and I think I indicated that last time as well. We had planned to move towards that 40% dividend payout which we did with the increase to €0.21 a share per quarter. But we're probably still at the lower end of our peer range in terms of dividend payouts. So, I think that would be a steady increase there; nothing big or dramatic. Second is, obviously, as we get down towards that leverage range and with the interest of wanting to continuing to maintain flexibility for opportunities going forward, but at the same time, optimizing that capital structure, we would do some form of return if that was appropriate. Again, I think, I'll reiterate what I said last time, there is no bias or preference for a special dividend versus a share repo. The board would need to consider that. We have talked about that. I don't think there's anything that precludes us from doing either one. And what form it ultimately takes will be the decision of the board and could be a combination thereof. So, our thinking continues to be in the same direction as we've had since day one.

[Bryan D. Spillane:]

Okay. Thanks, Nik.

[Operator:]

Your next question comes from Andrew Holland with Société Générale. Andrew Holland - Société Générale SA (UK) Yeah. Hi. Given the success that you're having with Zero Sugar in the UK, can you give us an update on the proportion of your GB volume that you would expect to be captured by the sugar tax when that comes in next year? And related to that, could you give us your estimate of what the retail prices will have to do if that tax is passed on in full, given the sort of channel mix and brand mix of your business?

[Damian Paul Gammell:]

Hi, Andrew. So, directionally, it will be less than half of our range or of our volume, let's say, more in terms of range would fall into that tax spend. So, if you look at some of the data from last year, we are really accelerating our low and non-sugar (01

[Damian Paul Gammell:]

Yeah. I think to be fair, we've been hitting, we've been over 50% non-sugar in GB coming out of the last quarter, and if you take our growth rate, you kind of guessed exactly into the range of what you're – what you've just said. Absolutely. Andrew Holland - Société Générale SA (UK) Okay. Thank you.

[Manik H. Jhangiani:]

And again, keep in mind, as we've always said, it will just be two products red Coke and Monster Green, that would be... (01

[Damian Paul Gammell:]

So, we have a little reformulated all other brands and varieties below the sugar tax level. So as Nik said, it will be Coke classic and our Green energy Monster brand. So, from a products perspective, then obviously, the percentages are a lot different but from a volume perspective, it lands within the range that you said. So, I think, we've got time for one more question.

[Operator:]

All right. And your next question comes from Kevin Grundy with Jefferies.

[Kevin Grundy:]

Hey. Good morning, guys.

[Manik H. Jhangiani:]

Morning.

[Kevin Grundy:]

Question for Nik on mix implications on margins as you look out, so not just for just year, Nik, but as you look out like the next three to five years. And given the puts and takes from a geography perspective where Germany clearly lags other regions pack and channel strategies, which you guys have spoken a lot about. And then product perspective with two-thirds of the portfolio still levered to trademark Coke, but trends there weaken and that's likely to persist particularly given sort of a de-emphasis from The Coca-Cola Company now. So understanding, Nik, that synergies are going to be the key margin driver here over the next few years, as we think about those moving parts, what's your expectations as you kind of pull all those pieces together for mix on margins kind of on a per annum basis? Any sort of help there would be great. Thanks.

[Manik H. Jhangiani:]

Sure. Tough one to give you really straight direction on, but I think you've hit the highlights. There will be obviously markets such as Germany that are bit more of a drag given their lower margin structure, but I think we're doing a lot of things that are right in that marketplace both from a restructuring as well as what Damian even highlighted from a pricing promotional plan perspective. That should help over time continue to drive margins up in that market. Our focus is clearly to be able to get a favorable pack architecture mix coming through, channel mix, with a lot more focus around the cold immediate consumption channel. And obviously with new product introductions, a lot of what we're looking at would be much more in the IC space, which over time should continue to have a positive impact on our mix as well. And when I say over time, because clearly there will be some early cost associated to invest behind those brands. But net-net, we would continue to see, over time, mix to be a positive.

[Kevin Grundy:]

Okay. Thank you. Good luck.

[Damian Paul Gammell:]

Thank you. So, again, thank you, everybody, for taking the time to join us. Just wanted to share to you some closing thoughts before we end the call. Clearly, as you've heard from Nik and I, we're very pleased with a solid start to 2017. Again, we'd like to emphasis, it is our smallest quarter and our focus in the near-term is really preparing the organization for our key summer selling season and working particularly with The Coca-Cola Company on product brand innovation to build and sustain long-term shareholder value for all of the shareholders at CCEP. So, we look forward to talking to you again during the year updating you on our progress. And, again, thank you very much for taking the time. Good-bye.

[Operator:]

This does concludes today's conference call. You may now disconnect.