Coca Cola HBC AG – Annual report – 31 December 2018
Industry: food and drink
Definitions and reconciliations of Alternative Performance Measures (APMs)
1. Comparable APMs1
In discussing the performance of the Group, ‘comparable’ measures are used, which are calculated by deducting from the directly reconcilable IFRS measures the impact of the Group’s restructuring costs, the mark‑to‑market valuation of the commodity hedging activity and certain other tax items, which are collectively considered as items impacting comparability, due to their nature. More specifically the following items are considered as items that impact comparability:
1. Restructuring costs
Restructuring costs comprise costs arising from significant changes in the way the Group conducts business, such as significant supply chain infrastructure changes, outsourcing of activities and centralisation of processes. These costs are included within the income statement line ‘Operating expenses’. However, they are excluded from the comparable results in order for the user to obtain a better understanding of the Group’s operating and financial performance achieved from underlying activity.
2. Commodity hedging
The Group has entered into certain commodity derivative transactions in order to hedge its exposure to commodity price risk. Although these transactions are economic hedging activities that aim to manage our exposure to sugar, aluminium, gas oil and PET price volatility, hedge accounting has not been applied. In addition, the Group recognises certain derivatives embedded within commodity purchase contracts that have been accounted for as stand‑alone derivatives and do not qualify for hedge accounting. The fair value gains and losses on the derivatives and embedded derivatives are immediately recognised in the income statement in the cost of goods sold and operating expenses line items. The Group’s comparable results exclude the gains or losses resulting from the mark‑to‑market valuation of these derivatives and embedded derivatives. These gains or losses are reflected in the comparable results in the year when the underlying transactions occur, to match the profit or loss to that of the corresponding underlying transactions. We believe this adjustment provides useful information related to the impact of our economic risk management activities.
3. Other tax items
Other tax items represent the tax impact of changes in income tax rates affecting the opening balance of deferred tax arising during the year, included in the ‘Tax’ line item of the income statement. These are excluded from comparable after‑tax results in order for the user to obtain a better understanding of the Group’s underlying financial performance.
1. Comparable APMs refer to comparable cost of goods sold, comparable gross profit, comparable operating expenses, comparable EBIT, comparable EBIT margin, comparable Adjusted EBITDA, comparable tax, comparable net profit and comparable EPS.
The Group discloses comparable performance measures to enable users to focus on the underlying performance of the business on a basis which is common to both years for which these measures are presented.
The reconciliation of comparable measures to the directly related measures calculated in accordance with IFRS is as follows:
Reconciliation of comparable financial indicators (numbers in € million except per share data)
Figures are rounded.
1. Net profit and comparable net profit refer to net profit and comparable net profit respectively after tax attributable to owners of the parent.
Reconciliation of comparable EBIT per reportable segment (numbers in € million)
Figures are rounded.
2. FX-neutral APMs
A business like ours, operating in 28 countries and with many different currencies, is bound to be affected by foreign exchange movements, and we report our financial results to reflect this. However, we manage the business against targets which are set to be comparable between years and within them, for otherwise foreign currency movements would undermine our ability to drive the business forward and control it. Through this Report, as in previous years, we will highlight comparable results and foreign‑exchange‑neutral results as well as the audited results which reflect the actual foreign currency effects experienced. It is through the relentless focus on managing by using comparable figures that we have succeeded in delivering significantly improved performance, although we recognise that in the shorter term currency movements may distort the underlying trends.
The Group also evaluates its operating and financial performance on an FX‑neutral basis (i.e. without giving effect to the impact of variation of foreign currency exchange rates from year to year). FX‑neutral APMs are calculated by adjusting prior year amounts for the impact of exchange rates applicable to the current year. FX‑neutral measures enable users to focus on the performance of the business on a basis which is not affected by changes in foreign currency exchange rates applicable to the Group’s operating activities from year to year. The most common FX-neutral measures used by the Group are:
1. FX‑neutral net sales revenue and FX‑neutral net sales revenue per unit case
FX‑neutral net sales revenue and FX‑neutral net sales revenue per unit case are calculated by adjusting prior‑year net sales revenue for the impact of changes in exchange rates applicable in the current year.
2. FX‑neutral comparable input costs per unit case
FX‑neutral comparable input costs per unit case is calculated by adjusting prior‑year commodity costs and more specifically, sugar, resin, aluminium and fuel commodity costs, excluding commodity hedging as described above; and other raw materials costs for the impact of changes in exchange rates applicable in the current year.
The calculations of the FX‑neutral APMs and the reconciliation to the most directly related measures calculated in accordance with IFRS are as follows:
Reconciliation of FX-neutral net sales revenue per unit case (numbers in € million unless otherwise stated)
Figures are rounded.
3. Other APMs
Adjusted EBITDA and comparable Adjusted EBITDA
Adjusted EBITDA is calculated by adding back to operating profit the depreciation and impairment of property, plant and equipment, the amortisation and impairment of intangible assets, the employee share option and performance share costs and items, if any, reported in line ‘Other non‑cash items’ of the consolidated cash flow statement. Adjusted EBITDA is intended to provide useful information to analyse the Group’s operating performance excluding the impact of operating non‑cash items as defined above. The Group also uses comparable Adjusted EBITDA, which is calculated by deducting from Adjusted EBITDA the impact of the Group’s restructuring costs and the mark‑to‑market valuation of the commodity hedging activity. Comparable Adjusted EBITDA is intended to measure the level of financial leverage of the Group by comparing comparable Adjusted EBITDA to Net debt.
Adjusted EBITDA and comparable Adjusted EBITDA are not measures of profitability and liquidity under IFRS and have limitations, some of which are as follows: Adjusted EBITDA and comparable Adjusted EBITDA do not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments; Adjusted EBITDA and comparable Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs; although depreciation and amortisation are non‑cash charges, the assets being depreciated and amortised will often have to be replaced in the future and Adjusted EBITDA and comparable Adjusted EBITDA do not reflect any cash requirements for such replacements. Because of these limitations, Adjusted EBITDA and comparable Adjusted EBITDA should not be considered as measures of discretionary cash available to us and should be used only as supplementary APMs.
As a result of IFRS 16 adoption we expect Adjusted EBITDA and comparable Adjusted EBITDA to increase in 2019 as operating lease expense will be replaced by depreciation and interest.
Free cash flow
Free cash flow is an APM used by the Group and defined as cash generated by operating activities after payments for purchases of property, plant and equipment net of proceeds from sales of property, plant and equipment and including principal repayments of finance lease obligations. Free cash flow is intended to measure the cash generation from the Group’s business, based on operating activities, including the efficient use of working capital and taking into account its net payments for purchases of property, plant and equipment.
The Group considers the purchase and disposal of property, plant and equipment as ultimately non-discretionary since ongoing investment in plant, machinery, technology and marketing equipment, including coolers, is required to support the day‑to‑day operations and the CCHBC Group’s growth prospects. The Group presents free cash flow because it believes the measure assists users of the financial statements in understanding the Group’s cash‑generating performance as well as availability for interest payment, dividend distribution and own retention. The free cash flow measure is used by management for its own planning and reporting purposes since it provides information on operating cash flows, working capital changes and net capital expenditure that local managers are most directly able to influence.
Free cash flow is not a measure of cash generation under IFRS and has limitations, some of which are as follows: free cash flow does not represent the Group’s residual cash flow available for discretionary expenditures since the Group has debt payment obligations that are not deducted from the measure; free cash flow does not deduct cash flows used by the Group in other investing and financing activities; and free cash flow does not deduct certain items settled in cash. Other companies in the industry in which the Group operates may calculate free cash flow differently, limiting its usefulness as a comparative measure.
The Group uses capital expenditure as an APM to ensure that the cash spending is in line with its overall strategy for the use of cash. Capital expenditure is defined as payments for purchases of property, plant and equipment plus principal repayments of finance lease obligations less proceeds from sale of property, plant and equipment.
As a result of IFRS 16 adoption we expect capital expenditure to increase in 2019 as a result of increased principal repayments of lease obligations due to the recognition of nearly all leases on the balance sheet.
The following table illustrates how Adjusted EBITDA, free cash flow and capital expenditure are calculated:
Figures are rounded.
Net debt is an APM used by management to evaluate the Group’s capital structure and leverage. Net debt is defined as current borrowings plus non-current borrowings less cash and cash equivalents and financial assets (time deposits and money market funds), as illustrated below:
Figures are rounded.