COCA-COLA EUROPACIFIC PARTNERS Plc annual report, Q4 FY2017

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Coca-Cola European Partners plc — FY 2017 Form 20-F

Reporting period: Fiscal year ended December 31, 2017. Although the request identifies 2017 Q4, this is an annual report, not a standalone quarterly filing. The issuer reports as Coca-Cola European Partners plc, not Coca-Cola Europacific Partners plc.

Business context

CCEP is a UK-domiciled, IFRS-reporting Coca-Cola bottler operating in 13 Western European countries, with about 23,500 employees. Formed in May 2016 through the combination of CCE, Germany and Iberia bottling operations, it makes, sells and distributes ready-to-drink beverages. 2017 was its first full year of combined operations; prior-year reported results include Germany and Iberia for only part of 2016. The filing’s comparable measures adjust for merger timing and items affecting comparability and are non-GAAP measures.

Financial results and position

  • Revenue: €11.062 billion reported, up 21.0%; comparable revenue was €11.055 billion, up 1.5%, or 3.0% on a comparable, foreign-exchange-neutral basis. Comparable volume rose 0.5% and revenue per unit case rose 2.5% on a comparable, FX-neutral basis.
  • Profit and margins: Reported operating profit was €1.260 billion; comparable operating profit was €1.478 billion, up 9.0% (10.5% comparable and FX-neutral). Reported operating margin was approximately 11.4%; comparable operating margin was approximately 13.4%, versus approximately 12.5% in 2016 comparable results. Reported net profit was €688 million, compared with €549 million in 2016; comparable net profit was €1.035 billion, up 13%. Reported diluted EPS was €1.41 versus €1.42; comparable diluted EPS was €2.12, up 13%.
  • Costs: Comparable cost of sales rose 2.0% reported and 3.5% FX-neutral; comparable cost of sales per unit case increased 3.0%, reflecting mix, manufacturing and higher concentrate and sweetener costs, partly offset by synergies. Comparable operating expenses declined 2.5% (1.5% FX-neutral), primarily from synergy savings and cost control.
  • Cash flow: Operating cash flow was €1.623 billion. Free cash flow, a company-defined non-GAAP measure, was €1.041 billion. Capital expenditure was €484 million and interest paid was €94 million.
  • Debt and liquidity: Borrowings were €5.748 billion and cash was €360 million, giving net debt of €5.454 billion. Net debt to Adjusted EBITDA was 2.8x. Current assets of €3.314 billion were slightly above current liabilities of €3.287 billion. The company had no drawings on its €1.5 billion revolving credit facility, which matures in 2021 and has no financial covenants affecting liquidity. Moody’s and S&P ratings were A3 and BBB+, both with stable outlooks.
  • Balance sheet: Total assets were €18.194 billion, total liabilities €11.509 billion and equity €6.685 billion at year-end. The prior-year balance sheet included the combined company following the 2016 merger.
  • Dividends: The 2017 dividend was €0.21 per share quarterly after an increase during the year. In February 2018 the Board raised the quarterly dividend to €0.26 per share (€1.04 annualised).

Changes versus the prior comparable period

Comparable revenue grew 1.5% and comparable operating profit 9.0%; FX-neutral growth was 3.0% and 10.5%, respectively. Volume growth was modest at 0.5%, with pricing and mix contributing to revenue growth. Reported revenue and operating profit rose much faster because 2017 included a full year of Germany and Iberia, unlike 2016. Reported EPS was broadly flat, while comparable EPS increased 13%. The reported effective tax rate rose to 40.6% from 23.6%, substantially affected by a one-off US tax reform charge.

Outlook, commentary and material items

  • 2018 guidance: Low-single-digit comparable, FX-neutral revenue growth; operating profit and EPS growth of 6%–7%; and free cash flow of €850–€900 million. Capital expenditure is expected at €525–€575 million, including about €75 million related to synergies. Management expects a comparable effective tax rate of about 25% and weighted-average debt cost of about 2%.
  • Guided revenue growth excludes the accounting impact of incremental soft-drink industry taxes. These taxes are expected to add approximately 2%–3% to revenue growth and approximately 4% to cost-of-goods growth. Management said currency translation at recent rates would have negligible impact on full-year 2018 diluted EPS.
  • CCEP remains on track for €315–€340 million of annual pre-tax synergy savings by mid-2019, with about 75% expected by year-end 2018. Restructuring cash costs to achieve the savings are expected to be about 2.25 times expected savings. 2017 restructuring charges were €235 million; cumulative charges since the merger were €495 million.
  • Unusual tax item: The US Tax Cuts and Jobs Act led to a provisional, non-recurring €320 million book tax expense in Q4 2017, including an estimated €125 million transition-tax charge and a €178 million reduction in deferred tax assets, principally related to foreign tax credits. Management did not expect an increase in cash taxes from the Act or a continuing effective-tax-rate impact at that time.
  • Management priorities: Expand low- and no-sugar and other beverage offerings, strengthen customer execution and route-to-market, and invest in sales, coolers, production, distribution and digital capabilities. Management highlighted Coca-Cola Zero Sugar volume growth of about 15% for the year.
  • Key risks: Changing health preferences and sugar reduction; new beverage taxes and packaging rules; competition and customer bargaining power; raw-material and commodity costs; integration and delivery of synergies; cyber and IT disruption; product quality; economic, political and currency volatility, including Brexit and Catalonia-related uncertainty; water, climate and packaging pressures; and dependence on TCCC. More than 90% of 2017 revenue came from beverages distributed under TCCC agreements, whose marketing support is discretionary and whose bottling agreements expire in 2026, subject to renewal.
  • Contingencies and subsequent events: A €235 million Spanish VAT receivable relates to a dispute over which tax authority must refund the amount; the arbitration ruling was pending. The company also disclosed approximately €285 million of guarantees related to litigation and €826 million of non-cancellable purchase commitments. In January 2018, CCEP proposed closing a UK manufacturing site and distribution centre in 2019, subject to consultation; the cost was not yet estimable.
  • Management concluded the Group was viable over a three-year assessment period and had adequate resources for at least 12 months. Auditors issued an unqualified opinion, and management and the auditor reported effective internal control over financial reporting at year-end.

Most important facts for investors to verify

  • Reconcile reported results with comparable and FX-neutral measures; confirm the merger-period adjustments and excluded items.
  • Track underlying volume, price/mix, and cost per case, including whether sugar-free and new-product growth offsets declines in other brands.
  • Assess cash conversion and whether €850–€900 million of 2018 free cash flow can be delivered alongside planned investment, dividends and restructuring costs.
  • Monitor synergy delivery, remaining integration charges and cash costs, and leverage against management’s 2.5x–3.0x target range.
  • Follow the €235 million Spanish VAT dispute, tax-audit exposures, and the final accounting and cash-tax consequences of US tax reform.
  • Test sensitivity to new sugar taxes, packaging requirements, commodity costs, customer pricing pressure, and CCEP’s dependence on TCCC and its bottling agreements.