CocaCola Enterprises Inc. 2009 Outlook Conference Call Transcript

| About: Coca-Cola Enterprises (CCE)

CocaCola Enterprises Inc. (NYSE:CCE)

2009 Outlook Conference Call

December 18, 2008 10:00 am ET


Thor Erickson Director, Investor Relations

John Brock Chief Executive Officer

Sandy Douglas – President Coca-Cola North America

Bill Douglas Executive Vice President and Chief Financial Officer

Steven Cahillane Executive Vice President and President, North American Group

Hubert Patricot Executive Vice President and President, European Group


Bill Pecoriello – Morgan Stanley

Judy Hong – Goldman Sachs

Lauren Torres – HSBC

Kaumil Gajrawala – UBS

John Faucher – JP Morgan

Carlos Laboy – Credit Suisse

Mark Swartzberg – Stifel Nicolaus

Christine Farkas – Merrill Lynch

Celso Sanchez - Citigroup


Welcome to the CocaCola Enterprises business outlook conference call. At the request of CocaCola Enterprises, this conference is being recorded for instant replay purposes. At this time, I would to turn the conference over to Mr. Thor Erickson, Director of Investor Relations.

Thor Erickson

Thank you, and good morning everybody. We appreciate you joining us this morning to discuss an update on our business, including our outlook for 2008 and 2009. Before we begin, I would like to remind you all of our cautionary statements.

This call will contain forwardlooking management comments and other statements reflecting our outlook for 2008 as well as future periods. These comments should be considered in conjunction with the cautionary language contained in this mornings earnings release as well as detailed cautionary statements found in our most recent annual report on Form 10K. and subsequent SEC filings.

Our release also contains a reconciliation of nonGAAP comparable figures referenced during this call. A copy of all information will be available on our website at

This morning's prepared remarks will be made by John Brock, our CEO, and Bill Douglas, our CFO. Steve Cahillane, President of our North American Group, and Hubert Patricot, President of our European Group, are also with us on the call this morning.

Additionally, we have a guest speaker, Sandy Douglas, President of the CocaCola Company's North American Group. Sandy will be providing insight on CCNA's outlook on key areas where we are working together to revitalize our system in North America.

Following the prepared remarks, we will open the call for your questions. In order to get as many people as possible the opportunity to ask questions, please limit yourself to one question. And we will take followup questions as time permits. Please note, this is a call for CCE investors and questions should be directed to the CCE leadership team. Now I will turn the call over to John Brock.

John Brock

Thank you, Thor, and thanks to each of you for joining us. We appreciate the opportunity to discuss with you our current business outlook and the work we've done to begin the process of restoring sustained profitable growth to our company.

As you read in our news release this morning, there are some encouraging signs. In North America, we achieved better than expected volume results after implementing our September price increase. In Europe, our performance remains solid. These factors have enabled us to raise our comparable earnings per share guidance for 2008 to a range of $1.28 to $1.31. Bill will discuss our outlook with you in more detail in a few minutes.

Although we're encouraged by this trend, we recognize that 2008 results remain below initial expectation and will not reflect the full potential of our business. This demonstrates the importance of our work to find solutions to the key marketplace and operating issues that have restricted our performance. We have conducted this work within the framework of our 120day review.

We believe our efforts have identified opportunities and produced tangible plans that, over time, will drive renewed growth, enhance our efficiency and effectiveness, and strengthen our work in the marketplace.

An important factor in the success of this review has been the close participation by the CocaCola Company. We are pleased that Sandy Douglas, President of CocaCola North America, has joined us on the call today. Sandy will have remarks in a few minutes and outline our joint efforts to restore sustained growth in North America.

As we move through our discussion today, here is our agenda. First, we will identify the key objectives of our 120day review and then detail how these initiatives will help reinvigorate our North American operations. Next, we will look at Europe and our efforts to win in the marketplace while insuring we have the most efficient, effective organization possible. Then Bill will discuss with you our financial outlook and provide details on the economic factors that will affect our results. I will return to summarize our call.

So in July, we began our 120day review as difficult business conditions and macroeconomic weakness in North America, combined to drive our results well below expected levels. At the time, we said the review would determine specific actions to accelerate the scope and pace of change in key operating areas with a particular focus on North America. We said we would develop strategies to address vital, fundamental issues, including our system supply chain, operations, and price package architecture. We said this work was essential to our future and that we could not wait any longer to develop solutions.

As we move through our discussion today, you will see that we have acted on those words and developed new ideas to longterm problems.  We still have more work to do, but we have set in motion an environment of improvement that we believe will restore profitable growth to our business as well as insure a continuous stream of valuecreating initiatives.

As you know, in 2007 we initiated our global operating framework to focus our company on three key strategic objectives. First, being number one or strong number two in every category in which we compete. Second, being our customers' most valued supplier. Thirdly, establishing a winning and inclusive culture in our work force. These objectives have strengthened our company.

For example, we have significantly broadened our brand portfolio. We are more efficient at every level, and we're on the path to serve our customers more effectively than ever. In addition, our employees continue to excel in their daytoday work across the system.

Our operating framework and its destination remain the right longterm vision for our company. Our objective remains to be the best beverage sales and customer service company, a vision that will allow us to drive consistent, longterm profitable growth.

There are key tangible examples of the benefits of our work in North America. We have a new supply chain initiative that will integrate common supply chain activity, improve product flow, and create incremental annual operating income of about $150 million for CCE and the CocaCola Company by 2011.

We have developed new price package architecture initiatives that will create more value for our consumers and customers while enhancing brand equity. These initiatives will drive recruitment and meet needs in single serve and multiserve packages.

We've developed a new incidence-based economic model with the CocaCola Company that more closely aligns our two companies and the creation of profitable growth.

We have reorganized our U.S. operations, reducing business units from six to four, sharpening accountabilities, and enhancing our ability to match labor costs with demand.

We've enhanced corporate efficiency with optimization programs for finance, HR, and business information systems. Beyond these specific actions, we have identified other opportunities with significant potential that, with the CocaCola Company, will enable us to meet new customer needs for greater package diversity to expand sales and delivery methods for food service customers, and create additional selling synergy between bottle, can, and fountain sales.

We look forward to discussing these initiatives with you in the future. These programs will produce results, and they are a key step toward achieving consistent longterm sustainable profit growth. As we finish 2008 and move into 2009, we will continue to execute our three strategic priorities  brand development, strengthening effectiveness and efficiency, and creating a talented, diverse work force, and work to complete the transformation of our business.

In spite of the current business conditions, we now expect comparable EPS of $1.28 to $1.31 per share this year, ahead of our guidance in October. In 2009, we expect comparable currencyneutral EPS growth in a midsingledigit range.

Offsetting this EPS growth, we anticipate negative currency impact on reported results if the current exchange rates continue. Bill will discuss this in a bit more detail.

We remain focused on the value drivers designed to protect margins and improve free cash flow. We continue to believe our business will generate sustained longterm growth, and we are retaining our longterm growth targets. Admittedly, these targets are challenging, but they are attainable.

Now, let's take a look at the outlook for North America and detail our key initiatives here. As you know, the current economic climate makes these very challenging times. Despite this challenging environment, there are encouraging signs about the future.

For example, we have dedicated energetic people committed to winning in the marketplace. We also have an improved alignment with the CocaCola Company. Additionally, we are seeing slightly improved business trends in North America, including betterthanexpected volume in response to our September price increase driven in part by improved execution and signs of relief from historically high commodity cost increases.

So, given this set of operating factors, can we ultimately restore growth in North America? Yes. Yes, we believe we can; and Steve Cahillane and his team are working very hard on a number of initiatives to drive our business forward. These initiatives will reduce expense, reallocate assets to the most effective opportunity, recruit new consumers to our brands and reenergize our field level teams.

For example, RED, or right execution daily, focuses on getting the right product in the right place with the right package and messaging. We will work to revitalize our sparkling beverage business and accelerate still beverage growth with brand, packaging, and execution strategies in both immediate and future consumption channels. We will talk more about these plans in a few minutes.

We will also win in nonpremise accounts with more contact with our customers and a commitment to serving each customer with the brands, people and technology that they need.

We will improve execution with existing programs such as customercentered excellence and by making our supply chain more efficient and effective. We will accomplish this with an even tighter focus on operating expense control.

As we move into 2009, our business plan includes several important brand initiatives. We have ongoing activity for our successful Red, Black, and Silver program that continues to create wins in the marketplace. We have solid brand plans for both Sprite and Fanta and the benefits of the industry's strongest energy brand portfolio.

Our new distribution agreement for Monster Energy brands, which is the leading U.S. energy brand by volume and is absolutely a clear win for CCE, and will create benefits in a majority of our territories, not only in North America, but also in Western Europe.

In still beverages, we will build on the success of glaceau with new products and expanding distribution. We'll continue to seize opportunities for PowerAde, maximize growth in profitability for our water brands, and continue to identify ways to improve the performance of our juices and teas.

We will also work to restore growth through price/package architecture initiatives, which are a key result of our 120day review. New, diversified package configurations will better meet consumer and customer needs and relieve pricing pressure on 12pack cans and twoliter bottles.

These new initiatives include new diversified packages, such as 20, 18, and 8pack can configurations and shrinkwrapped big bottle multipacks. This approach also uses new big bottle designs, including a new twoliter contour bottle that's being rolled out in the southeast.

In addition, we will continue to implement a pricing strategy that invests against new promotional brands and packages, focuses on covering costs, and reduces deep discounting.

Our single serve acceleration approach is designed to increase consumer transactions and support our recruitment strategies. This approach utilizes a pricing structure with entry price singleserve packages, and it includes 14and 16ounce bottles and 16ounce cans. We've seen the benefits of this strategy in our own test markets and in markets outside North America.

Now let's turn to supply chain, a core part of our efforts to renew profit growth in North America. Here you see our vision for our supply chain. To be an integrated network of people and assets in North America that is a strategic asset, that enables brand building and allows us to meet our customer growth agenda. This is a joint initiative with the CocaCola Company, and we're confident we're on the right path to delivering substantial system operating savings by 2011, savings that will be critical to our effort to restore North American growth.

Our new supply chain initiative will consolidate common supply chain activities across the two companies, including infrastructure planning, sourcing, production planning, and transportation. This will create a strategic asset that will optimize product flow and ultimately create value among all North American bottlers who choose to participate by enabling growth, while reducing waste and inefficiencies, the benefits will be substantial, including improved quality in our work, greater flexibility, and most importantly, improved service to our customers.

This approach is essential to our success and the savings achieved are vital to our ability to meet the financial targets we will discuss with you today.

We've also implemented a new incidencebased economic model that will better align our two companies on package profitability and gotomarket approach. We will simplify our relationship by netting the majority of funding for 2009 into the concentrate price. Let me add that not only do we have a new economic model, we also have better alignment in our planning process and believe that our business plan for the next year reflects improved collaboration between the two companies.

While 2009 will be a transition year, as we develop and refine this model, we believe this is an important step forward in North America.

Beyond these initiatives, we are working in other areas such as SKU rationalization, improving execution, and enhancing shopper segmented merchandising.

So, as we look at the business in North America for 2009, there are several primary drivers. First, we have plans in place that allow us to focus on revitalizing sparkling beverages and continue being the fastest growing still beverage company in North America. Second, we will drive productivity with a new supply chain initiative and a renewed focus on costs that will allow us to invest in growth and system capabilities. Third, our partnership with the CocaCola Company. We have a variety of joint initiatives that will align the marketplace interests of our companies much more closely on volume and profit growth. Fourth, the people of CocaCola Enterprises have the skills, the brands, and the drive necessary to win in the marketplace.

We also have very strong operating plans; and I am especially pleased to welcome Sandy Douglas, President, CocaCola North America, to our call today to provide insight on CCNA's outlook and on key areas where we are working together to revitalize North America.

Sandy Douglas

Thanks, John. Our teams have been working hard together to build a winning plan for our business, and I am glad to be here with you guys today to discuss how we, as a system, return our North America business to profitable growth.

As everyone knows, the North American beverage business has faced significant challenges over the past several years; and the difficult external environment has made the situation even more challenging. It's against this backdrop that the leadership teams of Coke North America, Coke Enterprises, and our bottling partners across the country have faced and I would say are seizing the opportunity to tackle some very important issues and opportunities.

As we move into 2009 and beyond, we are aligned on a consumer and customer focused plan to achieve four strategic goals. First, to revitalize and grow sparkling beverages. Second, to lead profitable growth in still beverages. Third, to develop bestinclass commercial and customer service capabilities as a total system. Fourth, to drive productivity in everything we do to improve performance and enable reinvestment.

Addressing the first two of these goals from a marketing perspective, our system has an aligned plan in place for 2009. While I won't use this time to cover all the details, let me expand for a minute on John's preview with a summary of the main elements.

Regarding our first goal to revitalize and grow sparkling beverages, our plan is all about sustainable brand building of the world's greatest beverage brands: CocaCola, Coke Zero, Diet Coke, Sprite, and Fanta. These brands are the core of everything we do to drive growth in our sparkling business.

In 2009, we will continue to lead with our CocaCola trademark as John said, our Red, Black and Silver focus. We will expand new proprietary packages for both immediate and future consumption to connect to core sparkling occasions, for example meals and onthego, and for core consumers, for example, teens.

Our changes in packaging are designed to create value by meeting unmet consumer need for portion size and other key functional attributes.

On our brand Sprite, we will execute an exciting series of marketing programs, complete with packaging and advertising, youth marketing, and innovation to be announced later.

On Fanta, we'll continue to build on the existing growth momentum with new graphics and continued execution focus.

Our second goal to lead profitable growth in still beverages. As everyone knows, for the past few years, we've been focused on creating the fastest growing still beverage brand portfolio through organic growth of our internally developed brands as well as by leveraging our recent strategic acquisitions.

In 2009, we will further enhance the market's fastest growing still beverage, Vitaminwater, through exciting marketing and innovation, as well as continued increases in availability.

We'll execute strong plans for PowerAde that will change the way consumers think about sports drinks. We'll expand the FUZE and Nos franchises through continued availability expansion, new packaging, and continued marketing and innovation.

And we'll continue to build the momentum in our categoryleading portfolio of juice and juice drink brands. And we'll continue to think innovatively and build upon our strategic investments and alliances such as Honest Tea and, as John mentioned, our new distribution agreement with Monster.

So, from a marketing perspective, while you will still have to stay tuned for more details as we head into the year, we are optimistic that our marketing plans, when combined with the consumer and shopper focused changes we're making to our packaging architecture, will position our sparkling portfolio to return to profitable growth in the future while continuing to build on our still portfolio momentum.

With regards to the third and fourth goals, John has already touched on the key points. But I do want to add that as CCE launched its 120day review, we have been engaged with CCE throughout the review. And we are well aligned on a series of short and longterm actions that, as John discussed, will position CCE and our total system to win in the North American market. Working together, we have agreed on the specific steps announced today that will drive this work.

First, the creation of a supply chain initiative that will significantly improve effectiveness and efficiencies of our system, creating incremental operating capability and flexibility. Second, the implementation of a new incidencebased economic model that better reflects our gotomarket approach simplifies our business relationship, and increases our joint focus on volume and value growth. Third, commitment to an aligned business plan for 2009 that will enable us to maximize the benefits of our brand and operating initiatives.

Today, I want to assure everybody that we are aligned with CCE on our plans and the steps we are both taking to restore sustainable and profitable growth to our North American business. I want to add that all of us at the CocaCola Company are excited about the leadership that Steve Cahillane is bringing to CCE North America. He's a strong leader and we look forward to continuing to collaborate together to win in the marketplace. Now, I will turn it back over to John.

John Brock

Thank you, Sandy, and we very much appreciate your partnership and your support. We agree there is still great potential ahead in North America. Now, let's take a look at our outlook in Europe, which has continued to generate solid performance throughout the year.

In Europe, we have continued to deliver volume growth fueled by strong execution and solid brand development. In addition, our European team has done an excellent job of managing the expense side of the business. We remain optimistic about Europe's outlook, but despite these advantages we continue to monitor the economic situation there closely as well as its potential impact on our business.

We know, for example, that GDP growth is slowing and consumer buying habits are changing and that retailers are more focused on price and value as traditional retailers consolidate and hard discounters gain strength.

The profitability of our business in Europe is well balanced by package, brand, and channel, enabling us to seize each growth opportunity. Even as we monitor changing economic conditions, we believe our business has important advantages in Europe. For example, low per capita consumption rates in sparkling beverages continue to create good growth opportunities.

We also believe we have excellent 2009 operating plans in place for each category, including sparkling and still beverages, energy, sports drinks, and water. And we will more fully utilize and leverage the scale of our European business to maximize efficiencies.

In addition to these plans, we have a proven record of expense management driven by a systematic approach to the transformation of our business. Steve Cahillane implemented this approach while he was our European president, and Hubert Patricot is continuing it.

The approach includes work to improve back office efficiency, optimize our gotomarket strategy, and manage expenses through ownership cost management. These efforts to promote efficiency and effectiveness will result in significant additional savings in 2009, and we look forward to Steve implementing these same kind of initiatives and programs in North America.

Of course, at the heart of our business is our brand portfolio. For 2009, we have strong brand plans and initiatives in place to enable us to continue our solid performance in Europe. Foremost is our work to develop further our three-cola strategy that has been a foundation of our success this year, fueled by outstanding growth of CocaCola Zero on the continent and the renewed success of trademark CocaCola in Great Britain. With new packaging and marketplace initiatives, we will build on this momentum.

We will also benefit from a step change in our presence in sports and energy drinks with the launch of Monster brands early in the year and strong support of both PowerAde and Aquarius throughout the year.

Our juice drink portfolio anchored by Capri Sun, Minutemaid, and Oasis is winning in the marketplace; and we'll build on that success in 2009 by expanding our Fanta still line.

We will continue the expansion of glaceau with initiatives in Great Britain and with expansion into continental Europe next year.

We will scale our presence in water as we benefit from the acquisition of Abby Well in Great Britain and build on Chaudfontaine in Belgium and the Netherlands. With these initiatives, we expect still beverages to provide more than half of European volume growth next year.

In summary, we continue to face a challenging business environment in Europe. We are closely monitoring the impact of the economy, and we will react very quickly if conditions dictate. We are moving from solid performance in 2008, and we honestly believe we can build on the momentum we have achieved. We have strong growing brands with solid marketplace initiatives that will drive profitable growth. And we will extend our presence in underdeveloped channels, including higher discounters and we'll strengthen our relationship with core customers. We are taking a systematic approach to the transformation of our business, investing wisely to sustain our growth, both in cold drink and in our supply chain and continuing to manage expenses effectively while insuring the efficiency and effectiveness of our operations at every level.

Now, before we discuss North America and Europe in a bit more financial detail, there's an additional factor that is vital to our longterm success. Throughout our company, we are investing in corporate responsibility and sustainability or, CRS as we call it, which is where our business touches the world and where the world touches our business.

We have five strategic CRS focus areas that are interlinked to our strategic business priorities. We've also established measurable goals and will continue to embed CRS across every function of the business.

For example, we're demonstrating our commitment to energy conservation with the continued expansion of our hybrid truck fleet. In addition, our production facilities are implementing water stewardship initiatives that include much more efficient water treatment processes.

Our commitment to sustainable packaging and recycling includes the establishment of CocaCola Recycling, a subsidiary of CCE that has an aspirational goal of recycling the equivalent of 100% of our packaging.

We're also committed to offering consumers the right product and package at the right place at the right moment and in the right way.

The fifth CRS focus area, our employees, is the most important element of our work to restore growth in the company. We believe it is essential to create a diverse, winning, and inclusive culture because our people are at the very core of every action, strategy, and initiative we undertake.

Over the past few month, I have visited with employees across our company; and I continue to be impressed with their dedication, skill, and determination to win every day in the marketplace. These talented, motivated employees have proven their ability to adapt to new realities in our business.

For example, in Europe, our employees rallied around the new cost management program that gives each individual responsibility for controlling expenses; and it has achieved impressive results. We are implementing this program in the U.S., and I have confidence, great confidence, in the ability of our employees to make it work.

Our vision continues to be the best beverage sales and customer service company. And at the end of the day, it will be our people who make that happen. Now, I would like to ask Bill Douglas to discuss our financial outlook for the remainder of 2008 as well as for 2009.

Bill Douglas

Thanks, John. As mentioned earlier, we have seen betterthanexpected volume trends in North America during the fourth quarter that have, in part, have enabled us to raise our EPS guidance for the year. We now expect a North American volume decline of approximately 1.5% for the full year with a fourth quarter decline of approximately 7%, which was favorable to our prior guidance in October of Q4 volume decline of approximately 10%.

For the full year, North American net revenues per case should increase on a net singledigit range and cost of goods sold per case will increase in a high singledigit range. In Europe, for the full year, we continue to expect low singledigit increases in volume, net revenue per case, and cost of goods per case. These figures are on a comparable and currencyneutral basis.

On a total consolidated basis, we now expect full year 2008 earnings per share in a range of $1.28 to $1.31. Cash flow from operations, less capital spending, is expected to be approximately $650 million, with capital spending of approximately $1 billion. The comparable effective tax rate for 2008 is currently expected to be approximately 25% for the full year.

I also want to note that as part of our annual routine, we conduct impairment tests for intangible assets. This test compares book value versus fair value. Fair value taking into account our outlook as well as the market's outlook as determined by our share price.

Though our outlook in North America has improved, our share price has declined in the recent months. We will continue to analyze whether this will result in any additional impairment.

Now, let's turn to commodities. Commodity costs growth is likely to remain above historical level of increase, which have been around 2% to 3% annually and continue to demonstrate a very high degree of volatility. However, our outlook has seen some improvement over the last several weeks, particularly from the impact of falling oil prices.

With declines from recent highs in oil and other commodities, we now expect 2008 commodity cost growth in North America of approximately 4.5%. For 2009, we expect a commodity growth of approximately 7% in North America. The benefit from the decrease we have seen in commodity costs over the last several months will be weighted to the back half of 2009 as a result of existing hedge positions.

We are continuing to monitor these trends closely and will focus on reducing our overall needs through ongoing PET [light weighting] projects as well as many recycling efforts.

Now, we will turn to debt and liquidity. We continue to strengthen our balance sheet; and at this point, we project our yearend net debt to be approximately $8.5 billion. We remain confident that we will have the resources and cash flow necessary to cover future funding requirements. For example, in October, CCE raised approximately $500 million in commercial paper and, in early November, raised an additional $1 billion from term debt issuances.

In November, we repaid a $600 million U.S. note maturity. And in December, we repaid a 350 million Euro note maturity. Based on current estimates, we expect to have a cash balance of approximately $400 million at 12/31/08.

We believe we are well positioned to meet our future needs, including satisfying approximately $400 million in notes maturing during the first half of 2009. We have confidence that we can continue to manage our debt portfolio and access commercial paper and term debt as needed. Furthermore, just as a reminder, we continue to have a $2.5 billion credit facility if needed.

Turning to other metrics for 2009, we continue to seek ways to improve our return on capital. For 2009, we expect capital spending of approximately $900 million, which represents a reduction of approximately 10% from 2008 spending levels and will represent less than 4.5% of expected net revenues for 2009.

We will accomplish this with focused planning and more efficient use of our existing assets throughout our entire territories. We remain confident that it will not impact the longterm ability of our company to capture future growth opportunities. We expect to again generate strong free cash flow from operations less capital spending, which will total more than $650 million for 2009. Should currency rates change, this will have a corresponding impact on our free cash flow estimates.

The majority of our free cash flow will continue to be used for debt reduction as we will defer implementation of any share repurchases until we have a clearer understanding of future economic trends.  

One additional note on our U.S. pension plan, at some point during 2009, it may be necessary to make an additional contribution to our pension plan. We are currently evaluating what that may be as well as monitoring any potential legislative changes and will update you as appropriate.

As we look to the full year, we expect a midsingledigit growth in revenue in North America, with cost per case increasing approximately 10% resulting in flat operating income growth.

In Europe, we expect revenues to grow in the midsingledigit range with a cost per case increase in a low singledigit range. We expect overall operating income growth in a mid to highsingledigit range.

On a total consolidated basis, revenue will rise in a midsingledigit range with a high singledigit increase in cost per case and a low singledigit increase in operating income.

We expect modest decreases in interest expense and an overall 25% to 26% tax rate. We expect comparable currencyneutral earnings per share to grow in a midsingledigit range. However, as previously discussed, based on recent rates, when you face headwinds from currency in 2009, that would negatively impact reported earnings per share by approximately $0.15. However, if you factor in the rates over the last couple of days, it would be somewhat less than $0.15 impact.

You may note that we have not included specific volume guidance in our outlook for 2009. Going forward, our guidance will more closely match our longterm objectives and we will focus our outlook on revenue, operating income, and earnings per share growth. We will continue to proactively manage and balance the price volume equation, and we will continue to report actual price and volume results on a quarterly basis. Also note that all figures are on a comparable and currencyneutral basis.

With this outlook, John and I believe it is important to reemphasize two key points. First, we still have tremendous strength, even as we battle through the weak macroeconomic conditions to capture opportunities in our North American business.

Two, we are taking actions to maximize our strengths and to achieve the levels of growth we know this company can provide.  Our current performance does not meet our longterm objectives of 4% to 5% revenue growth, 5% to 6% operating income growth, or high singledigit earnings per share growth.

By working closely with the CocaCola Company, we believe our business can reach these levels and we continue to aspire towards them. Please note that our longterm goal for annual return on invested capital improvement has changed to 20 basis points, down from 30 basis points. This has adjusted to reflect the change in our capital structure after the recent impairment charge we took this past summer and is not indicative of deteriorated operating income performance.

Thanks for joining us. Now I will turn it over to John for a few final words before we open the line up for questions.

John Brock

Thank you, Bill. I do completely agree on the achievability of our longterm growth objectives. And I have to say I am encouraged by our efforts to reach those levels of performance. Now, let me leave you with a few key points.

First, our business continues to face challenging economic conditions that we cannot control. However, we have a solid 2009 business plan that is based on the things we can control  outstanding marketplace execution, diligent cost management, and world-class effectiveness and efficiency. We are helped in our efforts by the benefits of our three strategic priorities, which focus on brands, the effectiveness of our system, and our people. These priorities have better positioned us to overcome the obstacles we face today.

We made significant progress with our 120day initiative and produced tangible benefits, including accelerated plans to improve performance and an enhanced working relationship with the CocaCola Company. And, importantly, there are some encouraging signs in our current performance, which have enabled us to raise our 2008 guidance to $1.28 to $1.31 per share; and for 2009 we expect comparable currencyneutral EPS growth in the midsingledigit range.

We believe 2009 will be a step forward to restoring growth that will allow us to reach our longterm goals and objectives. We thank you for your attention today. Again, I want to thank Sandy Douglas for his support; and we are very appreciative of his participation with us today. Now, operator, we would like to open it for questions.

QuestionandAnswer Session


(Operator Instructions) Our first question is from Bill Pecoriello Morgan Stanley.

Bill Pecoriello Morgan Stanley

My question is on the price volume tradeoff for 2009. You put in a sizable price increase postLabor Day. The volumes are turning a little bit better. I know you are not giving the components of that revenue guidance for 2009, but do you see the pricing to continue at the level that you have taken? You have that new price pack architecture you are testing that's going to help out. How are you thinking about the pricing relative to what we have been seeing in the fourth quarter?

John Brock

Good question. Let me ask Steve to address that.

Steve Cahillane

We are pleased with the way the price increase as gone in the fall, as John and Bill both mentioned. As we look to next year and we see the environment in front of us, we would anticipate a price increase in February around 2% or so. And then we will obviously look towards the balance of the year, in the back half of the year, to see if there's any opportunities. But we'll be very conscious of the volume value equation going forward.

Bill Pecoriello Morgan Stanley

If I can just followup, will Coke's concentrate move up with this incidence new model kind of in line with that pricing or would it move up, you called it a transition year?

John Brock

Let me ask Bill Douglas to address that question.

Bill Douglas

I will try to keep it simple. Clearly, we are transitioning to a new concentrate model which is difficult to compare it on a likeforlike basis. But if I add it all in and we look at the average concentrate price we expect to pay in 2009 versus the average concentrate price that we paid in 2008, we are expecting that netnet increase to be approximately 2% on the P&L, but the components will be somewhat different.

Bill Pecoriello Morgan Stanley

So longer term, if you had the revenue per case up 6%, you would expect to concentrate up 6% but in the transition year, we are going to see a disconnect between those two.

Bill Douglas

That's a fair representation. Going forward, the basis of the incidence is the concentrate would track fairly closely the net wholesale price increase realization.


Our next question comes from Judy Hong Goldman Sachs.

Judy Hong Goldman Sachs

John, can you just talk about how these initiatives really improve your takehome profitability. Clearly that's been a key issue for a lot of the bottlers and just trying get a sense of how significant takehome profitability could improve and how quickly that you would see takehome profitability more aligned with the immediate consumption.

John Brock

I think there are a couple of things happening there. First of all, the price increase that we put in place in September was heavily weighted to future consumption, takehome business. So that's been a big step in the right direction. Then beyond that, as we look at the 120day initiatives, all of these items are aimed at improving profitability across the whole.

We have a whole series, as you heard Sandy describe, on price package architecture, which are both future consumption and immediate consumption focused. And then superimposed on top of that is the new economic model.

When you put it all together, our objective over time is, I think, really twofold. One is to have an improved economic relationship with the CocaCola Company where we more effectively have similar alignment on various packages and then the other one is to get closer to our European model, where we have profitability across all packages. I think what you're seeing here is a combination of all of the things I just described. We're moving pretty substantially in that direction.

Judy Hong Goldman Sachs

If I can just followup. In the fourth quarter, the improved volume performance in North America, is that primarily improvement in takehome? I know the immediate consumption has been relatively challenging. Has there been improvement from that perspective?

John Brock

Let me ask Steve to address that question.

Steve Cahillane

Judy, it's mostly in future consumption where we've seen a very good performance relative to what our expectations were. Immediate consumption did have a pretty good November, which had more to do with the falling of the holiday.

We unfortunately have not seen a real turnaround in the overall industry trend. But we've been very pleased with our future consumption performance, and I think it just goes to prove that we represent a great portfolio of brands and the consumer is willing to come back and pick them up.


Our next question comes from Lauren Torres  HSBC.

Lauren Torres HSBC

Good morning. Over the years, John, we have seen a number of restructurings at CCE. I was just curious if you could just talk about the flexibility that you have to realign your businesses. You made comments that you're matching your labor costs with demand. I was just curious thinking a little bit longer term that your ability to kind of build up your business once that demand returns as we've seen this occur, restructures over the years, just curious to hear about what you would do and how you can pare back so quickly and then your ability to build up that business again.

John Brock

Let me just say that we know that you and others have heard about restructurings over the years. We understand that and we appreciate it. I think what we've been going through over the last four months is dramatically different. I think the overall approach that, first of all Steve has brought to the party here, is significantly different.

We have restructured our North American business so that it is much simpler, more standardized, more streamlined. We have four business units in the U.S. instead of six. We have dramatically simplified some of the major staff activities here in Atlanta.

Beyond that, as that organization restructuring has gone throughout the whole of North America, we have been very systematic and aggressive in getting our business the way we want it from a structure standpoint. I feel very good about where we are, and I would characterize this one as different than the ones in the past. Although I know we need to demonstrate that through our actions going forward, so that you and we can see that.

Just in terms of your question around temporary labor, actually, it's a lot easier to flex up than it is to flex down. So, we flexed down in the fourth quarter understandably, because we had less volume and so we did it. It is a very easy thing to flex up. In this economic environment, it's easier than ever because you got such a high level of unemployment. Steve, if you want to add anything, to that, feel free. It's very easy for us to flex up. Don't stay awake at night worrying about whether we can get account managers and merchandisers as our volume increases.

Steve Cahillane

The only thing I would add, right on obviously, is we are already planning on some flex up in 2009 in terms of revenuegenerating positions. The type of cost savings that we're doing are very much with the goal of reinvesting in top line initiatives and revenue generators.

Lauren Torres HSBC

If I can ask a quick followup on Bill's question with respect to the incidence pricing, I am not sure if you can talk about this, but as far as how this relationship is with Coke as far as sharing a percentage of sales. Is sales not profits? I guess is the first question. Beyond 2009, how do we think about this multiyear agreement? Can that percentage shift over time or is it somewhat established beyond 2009?

John Brock

Let me ask Bill to address that.

Bill Douglas

What we are striving to do is optimize the revenue generating capability of the system and the operating income growth of the system. The agreement that we've reached is working for 2009. It's the intention of the parties that it will continue. But this is a groundbreaking territory for North America, so we reserve the right to working together, collaboratively to modify it to make sure that it's delivering the intended results, which is to motivate both sides of the system to grow packaging equally between the various channels. I think at this juncture, that's the most detail I can go into. As we have some experience working with it during the course of 2009, we will be as transparent as we can.


Our next question comes from Kaumil Gajrawala UBS.

Kaumil Gajrawala UBS

As we think about the supply chain, the new supply chain company, to what degree are you relying that some of the independent bottlers need to sign up to extract some of those cost savings? And have any of them signed up so far?

John Brock

Excellent question. A number of discussions have taken place, and there's certainly a high level of interest out there. But the numbers that we've talked about with you, so far, are only involving CocaCola Enterprises and the CocaCola Company. If other bottlers, and we would expect others to join over time, any kind of savings that would be realized would be over and above the numbers that we passed on to you.

Kaumil Gajrawala UBS

If I could ask a bit on the marketing side and, Sandy, if you are still on the call, we're clearly seeing some deflation in media spending. Does that mean there could be a decrease in overall spending or potential increase in what we see to be consumer impressions as you look at 2009 versus 2008?

John Brock

I am not going to try to answer for Sandy, but I think I would say that's a call that will need to be addressed by the CocaCola Company in February, when they have their results announced for 2008 and talk about an outlook for 2009. Steven can make some comments appropriately about it, though, and I will ask him to do that.

Steve Cahillane

What I can say is that we've worked collaboratively on this 2009 plan. We're optimistic that we have a very good program going into 2009 from a marketing standpoint that's end to end. So, more from Sandy in February, I'm sure; but right now we're feeling very good about where we are in the plans that we have in place to win in the marketplace in 2009.


Our next question comes from John Faucher JP Morgan.

John Faucher JP Morgan

Quick question on the CapEx guidance. Bill, you mentioned the fact that it's being impacted by currency, and it seems like that may be sort of the majority of the yearoveryear reduction in CapEx. Can you talk about X the impact of currency, do you feel like you are making significant cuts in terms of the budget and can you keep CapEx flat relatively over the next couple of years as you go to this more, sort of pricingfocused business model? Therefore, are we going to see limited volume growth going forward? What's the longterm outlook for CapEx?

Bill Douglas

The capital reduction that we're making, the 10% cut, is effectively currency neutral. If you look at the amount of capital spend between North America and Europe, as well as the timing of when the European capital was spent, it is actually a 10% reduction on a currency neutral basis.

Second part of your question, I think we are focused on driving return on invested capital. As our business returns to growth, I think it's reasonable to think we would keep the capital reinvestment rate somewhere between 4.5% and 5% focused of our net revenue. And the growth of our business would be driving that.

John Faucher JP Morgan

Taking this to the next step, you talked about your reduction in your ROIC improvement guidance. Aside from the lower base issue, which obviously is a problem, what is the big delta there? Is that just, you haven't changed your longterm growth targets, doesn't sound like you're changing your capital spending targets, what's the differential there in the ROIC?

Bill Douglas

If you do the math, if we significantly reduced the denominator of the capital employed, we get a very inflated ROIC number, albeit from the impairment. I think if you would like to, Thor and I can talk offline and we can run through the calculation with you.

John Faucher JP Morgan

It's more about the manageable level of invested capital as opposed to sort of the artificial level from the writedowns.

Bill Douglas

It's both.


Our next question comes from Carlos Laboy Credit Suisse.

Carlos Laboy Credit Suisse

John, when you look at your incidence model and you benchmark it against the others out there, why is this a good model? You get one year, the Mexicans get 10 years of economic clarity and you don't really have any contractual reassurance that you are going to be able to keep your cost reductions.

John Brock

We think it's an excellent first step. We are not necessarily trying to replicate what anybody else around the world had, in fact, we don't necessarily know what they have. I don't think that's particularly appropriate.

From our standpoint, we really put our best minds to work on how we can put something together that would work for North America, and what I can tell you is we didn't come up with a secondrate proposal. We came up with a proposal that we thought was right for us, and I know that CocaCola feels the same way. We're excited about it. In fact, we were no more interested in having a multiyear agreement here than CocaCola was.

I think we need to try it out and make sure it all works in transition and then we'll move forward a year from now. I am very optimistic that this is going to be right for us and that it will become a multiyear kind of approach. But it needs the kinds of agreements on both sides.

Carlos Laboy Credit Suisse

Can you expand on the progress you're making in the discussion with fountain and food service?

John Brock

We look forward to having more to talk about in days to come there. We've done a lot of work in that arena. It's not simple. It's not easy. But we and the CocaCola Company have a keen interest in trying to figure out a way of making that total business situation better for everybody. We are hard at work on it. We're going to continue to work on it.

We recognize that we have some very unique situations here in North America which aren't really replicated anywhere else in the world. We have an outstanding fountain business here and a market share probably higher in fountain than anywhere in the world. We got to figure out how to make this thing work from everybody's standpoint. All I can say is we're all committed to working on it hard and you're going to hear more about it in days to come.


Our next question comes from Mark Swartzberg Stifel Nicolaus.

Mark Swartzberg Stifel Nicolaus

John, on your outlook for Europe, if I got it right, it's mid to high singledigit operating income. Could you talk a little bit more about beyond what you've told us about your revenue view? But a little bit more about your view of mix as a driver of that. Within that, the role of Monster, what your expectations, or at least directionally, what your expectations there are?

And then on the cost side, anything notable other than what you have already told us in the cost of sales per case, really on the op ex expense level, what are you thinking about there as a source of profit growth?

John Brock

Thanks for asking a question about Europe. It's been a terrific business for us this year; and we are, again, optimistic about what it's going to do next year. Hubert Patricot, who runs it, is here; so let me ask him to address your question.

Hubert Patricot

Let’s start by saying we are really stick with the economy context in Europe, which is a tough one, too. But we consider we have a good strategy to continue to grow in Europe. We will combine the top line growth. I guess it's the bulk of your question, where will the revenue growth come in Europe? It will come from three Coke strategy first, with Coke Zero continuing to grow strongly next year. At the same time, we are going after the Icee opportunity, which is still huge in Europe. Leveraging at what we call the boost zone strategy. Which is coming to the takeaway outlets in a very [identified] environment. This is leveraging a good growth on the 500ML PET bottles, which is a huge and high margin package for us. Combined with three Coke strategy, the Icee acceleration, and our entry with Monster in the four European countries, this is the basis of the solid revenue and mix management for next year. In terms of op ex, we'll continue the trajectory of what we've achieved this year. Basically, we will launch what we call the ownership cost management initiative by [mid-May] this year and we will have the full benefit of this initiative next year. And on top of that, some new approaches in food service vending, cooler services, that will also deliver some additional benefit. If you combine the top line and the bottom line approach and strategy, we are quite confident we can deliver the figures you are talking about.

Mark Swartzberg Stifel Nicolaus

If I could follow on the Icee element of what you just said. Could you a little bit more about (a) what you're seeing in the way of Icee trends presently in Europe and (b) how much incrementality you expect from Icee, simply by putting more coolers out there.

Hubert Patricot

I think we have to refine approach when we look at Icee in Europe. I would say it's true in [inaudible] of four countries. The traditional Icee channel, cafes on the continent in GB. It’s suffering quite a lot, a decline of 10% basically. At the same time, the takeaway, the bakeries, what we call the fast lunch activities, are doing quite okay. This is really what we are targeting for next year. Implying a larger range, focusing on [inaudible] and with a launch of Abby Well water in GB. So with the meal deal strategy, which is a clear focus of us. It’s not only about placing a cooler. In each outlet, having the right [inaudible], combining range, meal deal activation. We know by experience. And when you place a meal deal in a takeaway business in Europe, you increase your sales by 20% to 25%. This is really what we are driving for next year.

Mark Swartzberg Stifel Nicolaus

Your comment about midtier, you're talking about the price point? When you call it midtier you are talking about the price? The retail price?

John Brock

I didn't understand that. Midtier?

Mark Swartzberg Stifel Nicolaus

I might have misunderstood you. I am just trying to figure out that 500ML product that's going to be out there a lot more aggressively. How is it priced at retail? For the consumer who's feeling some pressure, how does it price versus other alternatives that are out there?

Hubert Patricot

It varies by channel, but you can say that on average, in the takeaway business in Europe, it would be from 150 to 2 Euros.


Our next question comes from Christine Farkas  Merrill Lynch.

Christine Farkas Merrill Lynch

Just a quick followup if I could on the supply chain. I guess I am trying to get a sense of how broad this could go. I didn't hear it, forgive me if it was mentioned. I didn't hear much discussion about any plant shutdowns or capacity rationalization, but does it include or do you envision that kind of planning and then as a follow up to that, the $150 million in incremental savings expected by 2011, does the word incremental, is that meant to imply net of planned reinvestment? Or gross of reinvestment?

John Brock

Let me ask Steve Cahillane to address that.

Steve Cahillane

Right now, we view the supply chain as an excellent first step. Right now, what we're calling CocaCola supply will not be managing plans on a daytoday basis. But they will be managing largescale infrastructure planning, other customer service elements. So, one could envision as you look at the footprint between CCE and CocaCola North America, that there would be opportunities to rationalize in the future. We will look very much at that.

If you were to design the supply chain from scratch today, you clearly wouldn't design it the way it is. Part of putting the teams together is to get to that stage in the future. We can't promise that for next year, but we clearly are looking in that direction. Because we have big opportunities to rationalize our supply chain in the future.

Christine Farkas Merrill Lynch

Then on the $150 million?

John Brock

The question on the $150 million?

Christine Farkas Merrill Lynch

Just the language in your press release suggested incremental savings to the system. I am trying to understand if the incremental savings is meant to imply that's after planned reinvestment. I suspect there's some reinvestment behind the brands and initiatives or if that's a gross number and there may be reinvestment taken from that.

Steve Cahillane

That is a gross number, and that's what we plan on achieving as a run rate going forward, thinking in terms of the back half of 2010 and into 2011.

John Brock

If I can just, Mark, back up to the question you raised. I think I just realized what the confusion was. Hubert was talking about meal deals and how important they are in Europe and how it drives soft drink beverage consumption. I think you might have heard that as midtier. I just wanted to make sure we had that straight. It's meal deals. That's what is so effectively driving our immediate consumption business in our boost zones.


Our next question comes from Celso Sanchez Citigroup.

Celso Sanchez - Citigroup

I was hoping you could give a bit more color on the price/pack architecture initiative, and specifically how the rest of you see that roll out, that expansion, is it something that's targeted to be rolled out fully by the middle of 2009 and end of 2009. Is it a multiyear phasein? And also, how might we gauge progress on that initiative?

John Brock

Let me ask Steve to address that one.

Steve Cahillane

We're actually, I would classify this as a fairly aggressive launch. We are going in the cold vault, and we're going in in a big way with immediate consumption entry-level packages. We have seen a host of examples where the consumer is looking for value, you can think 99¢ meals and so forth. We think 99¢ is a very good price for a 16ounce PET bottle in a large portion of our geography. Other geographies, a 14ounce PET would be appropriate and we've also seen great success with 16ounce cans, again priced at 99¢.

So, we will be very aggressively pursuing this strategy in 2009. We are very optimistic that we've got the right mix, based on the testing that we've done in 2008 and we continue to do. And to be able to gauge our success because on things like the type of incidence we're driving. We're really looking at this as a significant way to drive recruitment, and it's a key part of our recruitment strategy and we're confident we'll be able to get the lift necessary with the 14 and 16ounce packages to make up for any cannibalization that we'll see in the 20ounce.

Celso Sanchez - Citigroup

So at the margin, if we see a bit of tweak down in volume, then we should see, obviously, an improvement on the mix.

Steve Cahillane

Can you repeat that?

Celso Sanchez – Citigroup

If we see a bit of a decline in volume that reflects the downsize, we should certainly see that balanced out by the price mix?

Steve Cahillane

Yes. That's a fair way to characterize that.

John Brock

Operator, we will take one more question if we could please.


Your last question comes from Mark Swartzberg Stifel Nicolaus.

Mark Swartzberg Stifel Nicolaus

Thanks for the meal deals clarification there. Bill, quick question on currency. Can you tell us, do you have any hedges? Can you give us some idea of how hedged you are for 2009?

Bill Douglas

If we look at currency, just as a reminder to everybody, typically what we do is we hedge our transaction exposure, where we are cross currency raw material, for example, where we buy products in Canada in U.S. dollars we would hedge that currency exposure. And in Great Britain, where we have commodity exposure in your Euros, we would hedge that exposure. From a transaction perspective, we are fairly fully covered for 2009. We do not, however, hedge translation, and that's always been our practice. If you look at core commodities, we're hedged between 50% and 75% on both aluminum and HFC S and a lesser degree on fuel in the U.S. We are unable and do not hedge PET.

On the translation, we try to have Euro and Canadian debt outstanding so we try to use debt as a natural hedge from that perspective. So that would affect our interest expense line.

John Brock

On that note, let me say thanks again to all of you for joining us today. We appreciate your tuning in and we wish all of you a very happy holiday season.


Ladies and gentlemen, thank you all for your participation. This does conclude today's conference call. Have a wonderful day, and you may disconnect.

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