Coca-Cola Europe Partners: Short-Term Stress from Price Growth

Coca-Cola Europe Partners

Coca-Cola Europacific Partners PLC (NASDAQ:CCEP)

Both FY22’s outcomes and FY23 projections met or exceeded anticipations. While 4Q22 European performance was marginally above forecasts, API’s performance fell short. In the fourth quarter of 22, API volume dropped by 3% annually due to SKU optimization in Indonesia. Recent price increases by Coca-Cola Europacific Partners PLC (NASDAQ:CCEP) are countered by the company’s success in keeping goods cheap, providing value to consumers, and increasing market share, all of which point to sustained demand for CCEP’s products. Also, the administration has seen that pleasant winter weather, despite a possible energy crisis in Europe, has maintained customers’ wallets relatively sound. Notwithstanding the difficulties, I believe that CCEP will emerge as a market leader in a rapidly expanding consumer packaged goods business segment.

CCEP’s acquisition of Amatil and subsequent integration with Coca-Cola has me confident about the company’s long-term prospects. Profit margins should be protected by the company’s dedication to productivity and cost efficiency and by the supply chain’s inherent flexibility, which permits fast iteration of product and promotion modifications to keep them competitive and readily accessible. Even though the firm has shown strong underlying performance, its value will soon come under pressure due to increasing commodity costs and macroeconomic factors. So, for the time being, I advise a hold rating.

Analysis of FY22 Outcomes

The 15.5% increase in FY22 revenue ex-FX was driven by a 10.5% rise in 4Q. Away-from-home channel volume increased 5.5% year over year, while at-home channel volume decreased by 1%. On the contrary, the home-viewing numbers would have looked better if we excluded the effect of a customer disturbance. Management also highlighted that the issue with the client was finally fixed in the fourth quarter of 22. However, a favorable adjustment in the mix and higher prices helped the away-from-home channel rebound and make up for the lower volumes. Remember that demand outside the house (40% of revenue) is often more consistent than demand within the home (50% of revenue). Overall, costs continued to be a burden on gross margins. During FY22, CCEP’s earnings per share were €3.39 due largely to the company’s efficient management of expenses.

Innovation

CCEP’s efforts to innovate in the energy drink industry, particularly for MNST, are bearing fruit. Management at MNST states that the company’s continued growth in market share is due in large part to the company’s robust pipeline of innovations through FY22. The current revenue growth trend at CCEP should continue into FY23, but rising costs of goods sold will hurt margins. The good news is that the 10% commodity inflation headwind expected by management in FY23 is far smaller than what was expected in FY22. Ten percent is still a very high number. CCEP, on the other hand, has launched a new €350-400 million efficiency program that could create further savings from FY24-FY28 and expects to achieve the last €30 million of its operational expenditure reduction plan in FY23. I believe CCEP will be able to raise its top line in FY23. Still, I expect minimal space for operational leverage due to the rising costs of goods sold.

Indonesia Stake

By purchasing the remaining minority stake in its Indonesian bottling operation, CCEP now controls 100% of the company. Assuming future increases in consumption per person, CCEP has taken this step, which bodes well for the company’s future.

Guidance

The anticipated price rise, promotions, and annualization of price hikes started in 2022 all contributed to CCEP’s forecast of 6% to 8% organic revenue growth. CCEP has lowered its forecast for COGS growth from the mid-teens to 8%, based on a 10% increase in commodity prices and a stronger revenue correlation between cost and revenue. As a result, due to the timing of COGS inflation, operating income growth is forecasted to be lower, at 6% to 7%, with profit growth in 1H23 in the low single digits.

Summary

CCEP’s continued strong performance despite the industry’s current climate gives me hope. The firm is well-positioned to price against some of its cost challenges. The fact that CCEP is still working to reduce expenses is also encouraging. For the time being, however, I will maintain a neutral approach to CCEP because of the concern that its robust top-line growth will be overshadowed by persistent cost pressures.

Featured Image: Unsplash @ James Yarema

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