CCEP - Coca-Cola Europacific Partners: Near Term Pressure From Cost Inflation

Summary

• CCEP's FY22 results met expectations, with revenue ex-FX growing by 15.5%, driven by a 10.5% increase in 4Q.
• I am optimistic about CCEP's future growth prospects, given its adaptable supply chain and persistent focus on productivity and cost efficiencies.
• Rising commodity costs and macroeconomic pressures could overshadow the company's solid underlying results and put pressure on its valuation in the near term.

Description

The results for FY22 and the outlook for FY23 were in line with expectations. While Europe performed slightly better than expected in 4Q22, API fell short. API volume fell by 3% year-over-year in 4Q22 as a result of SKU rationalization in Indonesia. Although Coca-Cola Europacific Partners PLC ( CCEP ) has recently raised prices, the company has done a good job of keeping their products affordable, creating value for their customers, and expanding their market share, all of which bodes well for continued strong demand for their products. Also, management have observed that despite a potential energy crisis in Europe, mild winter weather has kept consumers' wallets generally sound. Despite the setbacks, I'm still optimistic about CCEP's promising future as a market leader in one of the fastest-growing sectors of the consumer-packaged goods industry.

I am optimistic about CCEP's future growth prospects given the progress it has made since acquiring Amatil and its close alignment with Coca-Cola ( KO ). The company's supply chain flexibility allows for rapid iteration of product and promotion changes to keep them competitive and easily accessible, and the company's ongoing commitment to productivity and cost efficiency should serve to safeguard profit margins. However, Despite the company's solid underlying results, I fear that rising commodity prices and macroeconomic pressures will soon put downward pressure on the valuation of the company. As a result, I recommend a hold rating for now.

FY22 results review

Revenue ex-FX for FY22 grew by 15.5%, driven by a 10.5% increase in 4Q. As expected, volumes were low, with the away-from-home channel seeing volume growth of 5.5% year over year and the at-home channel seeing volume declines of 1% year over year. On the other hand, if we ignore the impact of the customer disruption, the at-home volumes would have been favorable. Importantly, management also mentioned that the customer problem was resolved in 4Q22. That said, the recovery in the away-from-home channel was enough to offset the weaker volumes through a positive mix shift and pricing. Keep in mind that away-from-home (40% of revenue) demand is typically more stable than at-home demand. On the whole, expenses remained a drag on gross margins. EPS for FY22 was €3.39, thanks in large part to CCEP's meticulous attention to cost control.

Innovation

In the energy drink market and for MNST in particular, CCEP's focus on innovation is continuing to yield results. Management claims that the strong pipeline of innovations at MNST helped the company continue to grow market share through FY22. While I anticipate CCEP's recent momentum in revenue growth to continue into FY23, I expect COGS inflation to impact margins. The good news is, in FY23, management now anticipates a commodity inflation headwind of 10%, which is much lower than FY22. That said, 10% is still exceptionally high. Conversely, CCEP anticipates delivering the last €30 million of its operating expense efficiency plan in FY23 and has announced a new €350-400 million efficiency program that should drive additional savings from FY24-FY28. Although I have confidence in CCEP's ability to generate top-line growth, I anticipate that the increased cost of goods sold will leave little room for operating leverage in FY23.

Indonesia stake

CCEP now owns 100% of its Indonesian bottling venture after buying out the remaining minority shareholder. This action suggests that CCEP is optimistic about the company's prospects, as it indicates that they expect per capita consumption to rise in the future.

Guidance

CCEP guided 6% to 8% organic revenue growth, with pricing and mix being the primary drivers, thanks to an expected price increase, promotions, and the annualization of price increases implemented in 2022. In comparison to previous guidance of the mid-teens, CCEP now anticipates 8% COGS growth with commodity inflation of 10% and higher revenue-correlated cost. As such, the guided for operating income growth is lower at 6% to 7%, with profit growth in 1H23 in the low single digits because of the timing of COGS inflation.

Summary

I continue to be heartened by CCEP's solid performance despite the challenging environment, and I think the company is in a good position to price against some of the cost pressures it is experiencing. Also, CCEP's ongoing efforts to cut costs are good news. Nonetheless, I am keeping a neutral stance on CCEP for the time being because I fear that ongoing cost pressures will obscure CCEP's strong top-line expansion.

For further details see: