Following a palate-pleasing run, some of the fizz has dissipated from Coca-Cola HBC (CCH) on Thursday, the shares off 4.6% to £25.69 despite the soft drinks colossus reporting strong revenue growth and margin expansion for the 2018 calendar year. Forward-looking investors appear spooked by the FTSE 100 firm’s warning that slowing economic growth across a range of emerging and developed markets is likely to crimp consumer spending this year.

One of the largest bottlers of The Coca-Cola Company’s brands, Coca-Cola HBC’s full year results reveal encouraging sales growth, up 6% to approaching €6.66bn. That marks a second successive year of top-line growth above management’s 4-5% target range. Coca-Cola HBC also serves up news of 70 basis point EBIT margin expansion, bubbling up from 9.5% to 10.2% last year.

UNCERTAIN CONSUMER OUTLOOK

Yet in the outlook statement, Coca-Cola HBC cautions: ‘Economic growth in 2019 is forecast to slow down in a number of our markets, which is likely to negatively impact consumer spending in the Established and Developing segments.’

The company insists it can withstand these ‘more challenging conditions’, drawing confidence from its ‘strong marketing programmes’, as well as ‘the new product launches in 2018 which we expect to gain momentum with increased distribution and repeat sales.’

COUNTING THE COST

Shares in Coca-Cola HBC have been strong New Year performers, yet the news of a worse-than-expected €51m currency hit to profits in 2018, driven by the weakness of the Russian Rouble, Nigerian Naira and the Swiss Franc, knocks some of the froth off of its market tag today.

Furthermore, Coca-Cola HBC expects the adverse hit to EBIT from currency to amount to roughly €50m in 2019. And given that the company’s €800m Euro bond matures in June 2020, it expects to refinance this bond in 2019 in a move that will nearly double this year’s finance costs.

CEO Zoran Bogdanovic remains confident however, commenting: ‘In 2018 we delivered another very good performance with revenue growth above our target range and another step up in margins. Strong volume growth in all our segments was helped by a record number of new product launches, whilst price/mix improved for the eighth consecutive year. This growth supported margin progress, which we delivered while increasing our investment in marketing.

‘Our sharp focus on cost efficiencies continues while we invest in the business for growth. The shape of the business, capabilities and commitment of our people and our overall commercial proposition give us confidence in our ability to continue to grow revenues and margins.’

COMPETITIVE STRENGTHS

Shares has previously outlined the competitive strengths of progressive dividend payer Coca-Cola HBC. These include its broad geographic footprint - operations in 28 countries ranging from Russia and Nigeria to Ireland, Greece and Ukraine provide a staggeringly large addressable market of 600m plus people.

The business also churns out oodles of cash; copious free cash flow of €370m was generated last year, albeit lower year-on-year following a step-up in spending on production equipment and facilities.

An additional advantage is the sheer diversity of the group’s mainly non-alcoholic beverages spanning the sparkling, juice, water, sport, energy, tea and coffee categories, which only adds to its allure for many investors. In fact, Coca-Cola HBC introduced more new products than ever before in 2018 including FUZE Tea and GLACÉAU smartwater. Sparkling beverage volume grew 4.3%, the highest pace of growth in a decade, spearheaded by healthier tipples such as Coke Zero.

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Issue Date: 14 Feb 2019