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

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Description

The results for FY22 and nan outlook for FY23 were successful statement pinch expectations. While Europe performed somewhat amended than expected successful 4Q22, API fell short. API measurement fell by 3% year-over-year successful 4Q22 arsenic a consequence of SKU rationalization successful Indonesia. Although Coca-Cola Europacific Partners PLC (NASDAQ:CCEP) has precocious raised prices, nan institution has done a bully occupation of keeping their products affordable, creating worth for their customers, and expanding their marketplace share, each of which bodes good for continued beardown request for their products. Also, guidance person observed that contempt a imaginable power situation successful Europe, mild wintertime upwind has kept consumers' wallets mostly sound. Despite nan setbacks, I'm still optimistic astir CCEP's promising early arsenic a marketplace leader successful 1 of nan fastest-growing sectors of nan consumer-packaged equipment industry.

I am optimistic astir CCEP's early maturation prospects fixed nan advancement it has made since acquiring Amatil and its adjacent alignment pinch Coca-Cola (KO). The company's proviso concatenation elasticity allows for accelerated loop of merchandise and promotion changes to support them competitory and easy accessible, and nan company's ongoing committedness to productivity and costs ratio should service to safeguard profit margins. However, Despite nan company's coagulated underlying results, I fearfulness that rising commodity prices and macroeconomic pressures will soon put downward unit connected nan valuation of nan company. As a result, I urge a clasp standing for now.

FY22 results review

Revenue ex-FX for FY22 grew by 15.5%, driven by a 10.5% summation successful 4Q. As expected, volumes were low, pinch nan away-from-home transmission seeing measurement maturation of 5.5% twelvemonth complete twelvemonth and nan at-home transmission seeing measurement declines of 1% twelvemonth complete year. On nan different hand, if we disregard nan effect of nan customer disruption, nan at-home volumes would person been favorable. Importantly, guidance besides mentioned that nan customer problem was resolved successful 4Q22. That said, nan betterment successful nan away-from-home transmission was capable to offset nan weaker volumes done a affirmative operation displacement and pricing. Keep successful mind that away-from-home (40% of revenue) request is typically much unchangeable than at-home demand. On nan whole, expenses remained a resistance connected gross margins. EPS for FY22 was €3.39, acknowledgment successful ample portion to CCEP's meticulous attraction to costs control.

Innovation

In nan power portion marketplace and for MNST successful particular, CCEP's attraction connected invention is continuing to output results. Management claims that nan beardown pipeline of innovations astatine MNST helped nan institution proceed to turn marketplace stock done FY22. While I expect CCEP's caller momentum successful gross maturation to proceed into FY23, I expect COGS ostentation to effect margins. The bully news is, successful FY23, guidance now anticipates a commodity ostentation headwind of 10%, which is overmuch little than FY22. That said, 10% is still exceptionally high. Conversely, CCEP anticipates delivering nan past €30 cardinal of its operating disbursal ratio scheme successful FY23 and has announced a caller €350-400 cardinal ratio programme that should thrust further savings from FY24-FY28. Although I person assurance successful CCEP's expertise to make top-line growth, I expect that nan accrued costs of equipment sold will time off small room for operating leverage successful FY23.

Indonesia stake

CCEP now owns 100% of its Indonesian bottling task aft buying retired nan remaining number shareholder. This action suggests that CCEP is optimistic astir nan company's prospects, arsenic it indicates that they expect per capita depletion to emergence successful nan future.

Guidance

CCEP guided 6% to 8% integrated gross growth, pinch pricing and operation being nan superior drivers, acknowledgment to an expected value increase, promotions, and nan annualization of value increases implemented successful 2022. In comparison to erstwhile guidance of nan mid-teens, CCEP now anticipates 8% COGS maturation pinch commodity ostentation of 10% and higher revenue-correlated cost. As such, nan guided for operating income maturation is little astatine 6% to 7%, pinch profit maturation successful 1H23 successful nan debased azygous digits because of nan timing of COGS inflation.

Summary

I proceed to beryllium heartened by CCEP's coagulated capacity contempt nan challenging environment, and I deliberation nan institution is successful a bully position to value against immoderate of nan costs pressures it is experiencing. Also, CCEP's ongoing efforts to trim costs are bully news. Nonetheless, I americium keeping a neutral stance connected CCEP for nan clip being because I fearfulness that ongoing costs pressures will obscure CCEP's beardown top-line description .

I see an finance perfect if it performs its halfway business successful a assemblage projected to acquisition structural (organic) maturation successful excess of GDP maturation complete nan adjacent 5-10 years; profits from sustainable competitory advantages that construe into charismatic portion economics; In nan hands of competent, ethical, and semipermanent thinkers; pinch a adjacent valuation