Coca-Cola Enterprises Inc. (NYSE:CCE)
February 20, 2013 5:30 pm ET
John F. Brock - Chairman, Chief Executive Officer, Member of Executive Committee and Member of Corporate Responsibility & Sustainability Committee
William W. Douglas - Chief Financial Officer and Executive Vice President
John A. Faucher - JP Morgan Chase & Co, Research Division
Judy E. Hong - Goldman Sachs Group Inc., Research Division
Bryan D. Spillane - BofA Merrill Lynch, Research Division
Okay, if we could take our seats. We're ready to get started with the next presentation.
Okay, thank you. Our next presented is Coca-Cola Enterprises. In an era where corporate actions and balance sheet management is proving to be a meaningful driver of shareholder value, CCE has excelled by balancing the needs of the business and the needs of the shareholders. I want to thank Chairman and CEO, John Brock, and CFO, Bill Douglas for spending time with us today. And John, I'll turn it over to you.
John F. Brock
Thank you, and good afternoon, everyone. We're really pleased to be here today to provide an overview of Coca-Cola Enterprises, our outlook, our objectives and, at the end, answer any questions you might have.
Joining me today, as you just heard, are Bill Douglas, who is our Chief Financial Officer, who will discuss a little bit later some of our financial highlights; and Thor Erickson, who is Vice President of Investor Relations.
Before we begin, I'd like to remind you that today's presentation will contain forward-looking comments that should be considered in conjunction with the cautionary language in our most recent annual report on Form 10-K, as well as other SEC filings. A copy of this information is, of course, available, if you want it, on our website.
As you probably know, Coca-Cola Enterprises is the leading Western European Coca-Cola bottler, and one of the Coca-Cola Company's largest global bottling partners. Today, we're going to demonstrate our operating focus and how we will continue to build on our proven track record of success to capture the very significant growth opportunities, which are ahead of us. We'll also discuss our focus on creating value for shareowners.
Since our transaction in 2010, some 30 months ago, we have unlocked significant shareowner value, and we have reenergized a company that is focused very clearly on driving growth and creating value.
We'll also share with you our continued commitment to managing our business the right way, creating opportunities for our people, supporting our communities and incorporating a very strong concern for the environment into literally everything we do.
Let's start by taking a quick look at the CCE of today. We're a company with 2012 net sales of USD 8.1 billion. We serve some 170 million consumers across 7 countries and 1 principality. These people consume more than 30 billion servings of our products every year. We produce our products in 17 state-of-the-art factories, which all comprise our Pan-European supply chain. We have a total workforce of some 13,000 employees, including one of the largest, if not the largest sales force of any consumer packaged goods company in our territory.
Most importantly, the CCE of today has the size, scope, plans and teams to continue to be an effective competitor in an attractive category, with the ability to navigate a challenging macroeconomic environment.
We are optimistic. We're optimistic about our ability to be able to create sustained growth in line with our long-term growth objectives. Part of the reason for this optimism is our track record, as well as the fundamentals of our business.
The growing nonalcoholic, ready-to-drink category, or what we call NARTDs, generate some USD 65 billion in retail sales each year. Within this category, we have brands that our consumers prefer, and we have a successful position in both volume and value share across all of our territories.
As you can see by our performance over time, we have a proven history of achieving our long-term targets, by successfully managing and executing through dynamic and often challenging economic times.
Importantly, we have a solid and flexible balance sheet, strong free cash flow and a clear focus on creating value for each stakeholder of our company.
At the very core of this growth is a focused approach to our business. For more than 5 years, our work has been guided by a very clear global operating framework, which creates a clear vision, clear priorities and clear financial objectives.
Our plans and our actions are guided, again, by 3 very clear strategic priorities: first, to be #1 or strong #2 in every brand category in which we choose to compete; second, to be our customers' most valued supplier; and third, to create a winning and inclusive culture that attracts, develops and retains a highly talented and diverse workforce.
These priorities are absolutely essential to our success as we continue to drive consistent, long-term, profitable growth. Our results and our actions clearly demonstrate our commitment to driving shareowner value. We continue to create value through increased dividends, instituting a 25% increase earlier this month with a 3-year compound annual growth rate of some 20%.
In addition, in 2012, we completed our second share repurchase program since 2010, bringing the total shares that we have repurchased to USD 1.8 billion. This year, we began another, a new $1.5 billion share repurchase program, and we have the goal of at least $500 million in repurchases by the end of this year.
So by achieving our long-term operating targets, we will be successful in achieving our ultimate goal, which is creating sustained, long-term value growth for our shareowners.
Now, let's discuss the opportunities, strategies and initiatives that are at the very heart of that growth and enable us to continue to deliver value for each of our stakeholders.
First, let's look at the size and scope of the retail space in which we operate. Liquid refreshment beverages, or what we call LRB, has retail sales of about USD 160 billion annually. Now within that, many of us focus on the, again, what we call the NARTD category, and more specifically, the measured channels within that category. This represents retail sales of some $25 billion.
If you include the non-measured channels, with retail sales of some $40 billion, then the total NARTD category is actually more like $65 billion. And clearly with this size, we believe the NARTD category offers very significant growth opportunities for us.
For example, within the European liquid refreshment business, the NARTD category comprises a significantly smaller portion of total consumption when you compare that to the United States. The total NARTD category today in our territories is much less developed than that category in the U.S. And the primary reason for that is the European tea and coffee consumption that is, in fact, about double that of the U.S. And while we expect that the European market will always maintain some contrast with the U.S., we believe this difference clearly demonstrates the opportunity for the NARTD category, and specifically Sparkling segment growth.
So when we look at the NARTD category from a volume and value share perspective, it's clear we operate in a highly competitive beverage market. Yet, we have a very successful position in both volume and value share, with 19% of the total NARTD volume share and 28% of the total NARTD value share.
Given the highly competitive nature of the category, and the challenging macroeconomic conditions that persist, it's clear that we must continue to focus on meeting both customer and consumer needs to sustain our success, and, in turn, to drive category growth.
As we look at our position within the NARTD category, it's clear to see that our brands are preferred. They are the preferred brands among consumers.
Overall, we have a successful position within the category in both volume and value share, and we are #1 in colas and in flavored sparkling beverages.
And even as we work to grow our business within those segments, we also continue to focus on growth in both energy and Stills. In energy, we hold the #3 position with both volume and value share. We're convinced that our multi-brand portfolio will enable us to continue to achieve significant growth going forward. And in Stills, we continue to build on our presence profitably through a balanced portfolio of offerings.
As we work to broaden our portfolio, it's important to remember that we benefit from a favorable profit mix within the overall NARTD category. The majority of our volume, in fact, some 85%, is generated through Sparkling beverages, which of course, are a high-value segment of the category, and which create a really solid profit base from which to grow and to expand our business.
Now let's take a look at the brands, the market initiatives and the strategies that will enable us to capture the marketplace opportunities and to drive future growth.
At the heart of our work are 3 vital elements: our successful brand portfolio, first; second, the outstanding marketing and day-to-day execution that we bring to the marketplace, in partnership with the Coca-Cola company; and third, our people, whose talent and dedication bring our business to life each and every day.
Clearly, our core Coca-Cola trademark Sparkling brands, including one of the world's most recognized and most iconic brands, Coca-Cola, remain integral to our success, and will continue to drive a substantial amount of our growth. They represent some 68% of our total volume mix.
In addition, we have other popular flavor brands like Fanta, Sprite, Dr. Pepper and Schweppes. And these add depth to our Sparkling portfolio, and we continue to achieve important volume and profit growth through our energy brands, which include Monster, burn and Relentless.
We also continue to drive growth through a broad Still portfolio, with excellent juice and juice drink brands such as Minute Maid, Capri-Sun and Ocean Spray, and in imported waters like Schweppes Abbey Well and Chaudfontaine.
Even as we broaden our portfolio, Coca-Cola trademark brands remain at the very core of our business and are #1 in both volume and value cola share in every one of our territories. Several factors combined to create this successful platform. And of course, while brand Coca-Cola remains our most popular brand, Coca-Cola Zero continues to achieve significant growth, with a compound annual growth rate of more than 12% over the past 3 years.
Importantly, we continue to innovate. We must make certain that we match the packages with consumer and customer preferences, and that we create brand extensions to match evolving consumer tastes.
This year, as an example, we're going to offer new price points with the 375 ml and the 1.75-liter packages, and we'll be offering new brand extensions such as Coca-Cola Zero Cherry and the expansion of Vanilla Coke into additional territories.
While our overall volume mix and volume growth continues to be led by trademark Coca-Cola brands, our ability to successfully compete in other segments demonstrates the value of our strategy to broaden our portfolio. With Sparkling flavors as an example, we're introducing new flavors and packaging, including the expansion of Sprite with Stevia, to enhance this important segment of our portfolio. In fact, we remain #1 in both volume and value share in the Sparkling flavors segment.
We also continue to build on our very successful multi-brand strategy in the energy segment. With package, flavor and sweetener expansions for our Monster, Nalu, burn and Relentless energy brands, we have consistently achieved significant volume and value share growth in a segment that continues to outpace the growth of the overall category.
And in fact, even with the large growth in the energy segment, CCE energy brands grew at approximately twice that rate in 2012.
Now, while Stills represent a smaller portion of our total volume mix, this segment of our business continues to provide important growth opportunities for us. To capture this growth, we continue to innovate with brand extensions, new flavors, new sweeteners and new packaging.
Capri-Sun, Ocean Spray and vitaminwater have been successful additions to our portfolio. And we continue to develop our sports drink brands, building on a dual platform of Aquarius and Powerade. Additionally, we have relaunched our Nestea brand with the alternative no-calorie, natural sweetener, Stevia. And in water, we're building on our key brands such as Chaudfontaine and Schweppes Abbey Well. Going forward, selectively growing our share within the Stills segment really does continue to remain an essential element of our overall portfolio strategy.
A robust marketing plan is essential, absolutely essential to activate our brands and to drive growth. For 2013, we have a solid calendar planned, including events that support the 30-year anniversary of the introduction of Diet Coke and Coke light in Europe, as well as a year-long focus on Coke with meals. In addition, we're going to have an expanded online presence with consumers. We have special summer promotions through a taste of summer effort. And then we have, of course, our traditional holiday and our Christmas programs. Television commercials will support these efforts in a very significant way. And we'd like to just take a moment here to share 3 of these commercials in Europe with you now. Let's take a look at these 3 commercials.
So I hope you enjoyed those. The Coke Zero one, as you can appreciate, is all about driving trial and awareness, and the Coke Light commercial is an amazing hit on YouTube, close to 2 million views have been registered on YouTube with that commercial.
Beyond our marketing efforts, customer service, which, of course, is all about being our customers' most valued supplier, is a key element of our strategic operating framework, and it's absolutely central to continuing to move our company forward.
This means that excellence with regard to procurement, production and logistics is absolutely essential to what we're doing. We'll continue to enhance our customer-centric, Pan-European-wide supply chain. We'll leverage our flexible distribution system and we will drive increasing efficiency and effectiveness.
Importantly, we're going to do this in a very responsible and sustainable way, with a clear goal to strengthen our customer relationships and constantly improve our service, ultimately creating sustainable growth and value for our customers.
1 example of our methodology is the combination of both direct and indirect delivery methods that we use to reach the market. In each of our territories, we distribute a majority of our products through indirect or third-party channels. Yet in 2 markets, Belgium and Sweden, we utilize a larger percentage of direct store delivery.
In Norway, we are transitioning away from direct store delivery to entirely indirect delivery. In every case, our goal is to maximize our presence at the store level, and to serve our customers in the most effective and efficient way.
So creating growth not only requires outstanding service and a successful brand portfolio, but it also means we have to have a balanced approach to every aspect of our business, including revenue management capabilities, efficiency and effectiveness initiatives, and importantly, prudent technology management.
So as an example, through revenue growth management, we offer customers price and package options that maximize the value for them while growing the category in our brands at the same time. And whether it's investing in, in-outlet technologies that enable a more effective sales force, or refining our value creation model, or working to increase our online presence, we're committed to continually evolving our revenue growth management practices to serve both customers and consumers more effectively.
Going forward, ensuring our future success also demands that we make certain our organization is structured in an optimum fashion to achieve our desired results.
So to strengthen our effectiveness going forward, we have initiated a Business Transformation Program. It's aimed at enhancing several aspects of our operations. This new integrated commercial structure, which has been proven throughout our Benelux regions over the last several years, will deliver increased productivity. It will step change our operating efficiency and it will enhance the adoption of best practices. And we'll accomplish all of this while ensuring we continue to remain focused on delivering high levels of customer service.
As we optimize this organization structure and continue to provide high levels of service, we also will continue to seek ways to extend our overall market presence. This includes growing relationships with what's called the Hard Discount channel, which is a very fast-growing segment in the European retail market.
Our objective's very simple. We want to be available whenever and wherever our customers are, and through our customer value creation model, we continue to build collaborative and profitable business with both traditional, as well as non-traditional customers.
As an example, while we continue to benefit from offerings in Lidl, in 2013, we're benefiting from new listings with Aldi and France and in Great Britain that began in mid-2012. And in fact, I'm also pleased to report that another new listing that just began within the last 2 months is going to be Aldi in The Netherlands.
Most of you know that about 1 year ago, we began transforming our business in Norway. Our goal is to better match our distribution system to the desires of our customers, and to unlock value by offering our products in a variety of packages that will, in fact, meet both customer and consumer needs. I'm pleased to report we've made excellent progress, and we've introduced recyclable, non-refillable PET packaging into the marketplace. Further, we're going to transition away from direct store delivery to customer and central warehouse delivery in the next few months. These changes have both operating and commercial benefits, and by reducing our overall operating impact, there are significant environmental benefits as well.
Of course, with every business decision, we evaluate the impact on our people who are absolutely core to our business. One of our 3 key strategic priorities, you've heard me mention, is to attract, develop and retain a talented and diverse workforce. So in every decision we make, we consider our people, the strength they bring to the business and the opportunities that we can provide for their careers.
It's very important to note that all of our employees are working to grow our business in a responsible, sustainable way. In fact, in a recent employee survey, our people listed corporate responsibility and sustainability as one of the top 3 drivers in their overall engagement with our company.
Now, I'd like to ask Bill Douglas, our Chief Financial Officer, to come up and discuss our financial outlook, as well as our work to create shareowner value. Bill?
William W. Douglas
Thanks, John, and thanks to each of you for hanging in there with us to the end of the day. It's a pleasure to be here to discuss what we believe is a solid financial outlook for Coca-Cola Enterprises. We have a clear set of financial priorities that guide us in our financial decisions:
First, it is essential that we deliver consistent earnings growth in line with our long-term objectives; second, we want to maximize free cash flow and optimize our capital structure while continuing to maintain our financial flexibility. Finally, we will increase return on invested capital and drive shareowner value.
Ultimately, we have a clear goal for the future, drive shareowner value through organic growth, value-creating investments and optimized capital structure, and by returning cash to shareowners.
To achieve our goals, we must adopt and execute a sound financial approach to our business. There are several key steps in this process, including generating solid cash from operations, as well, and importantly, effectively managing working capital. We must invest our cash prudently, while maximizing the utilization of our asset base.
In addition, we will continue to take advantage of the current low interest rate environment and leverage our balance sheet to reach our net debt-to-EBITDA target, which, as you know, is a range of 2.5x to 3x. Further, we will maintain a disciplined approach to M&A and will return cash to shareowners through a competitive dividend payout, as well as share repurchase program. All of this is essential in our efforts to create increasing value for shareowners.
Key to this long-term growth is continuing to meet the demanding growth objectives that we established with the creation of our company in the fall of 2010. Long term, we expect annual net sales growth of 4% to 6%, operating income growth of 6% to 8% and high single-digit earnings per share growth. We also target at least a 20 basis point improvement in return on invested capital on an annual basis.
We expect these results to be driven by a balance of both volume and price/mix growth combined with the benefits of disciplined operating efficiencies, capital management and, as always, cost-containment. By effectively driving top line growth in operating leverage, we will continue to generate the solid free cash flow that has fueled our business.
Another important element of our future success is our ability to reinvest in our business, both to create growth and to maintain our facilities and operations. Our long-term goal for capital expenditures is a range of 4% to 4.5% of total net sales revenue.
For 2013, we expect capital expenditures to be approximately $350 million [indiscernible] this amount supports growth initiatives, while the remaining 1/3 is reinvesting our existing plant and facilities.
As we invest in long-term growth, we will continue to seek ways to utilize the flexibility in our balance sheet. As we have discussed, we are currently below our net debt-to-EBITDA target. And as a result, we see a leverage opportunity of at least $700 million in 2013. We will utilize this opportunity, and, over time, maintain flexibility in our debt levels within our long-term range, again, of 2.5x to 3x. Whether we ultimately invest in value creating M&A, return incremental cash to shareowners or a combination of the 2, the route we choose will be focused on driving value for shareowners.
Beyond this future flexibility, it's important to note that our current debt is well structured with a balance of maturity dates. Also, a great benefit, our weighted average cost of debt remains at approximately 3%.
Going forward, we will use the leverage of our balance sheet as we carefully evaluate high-return investment opportunities, including potential acquisitions. We will determine which strengths CCE can bring to the business, and decide whether the acquisition will create incremental value. Importantly, any opportunity will be evaluated for its impact on cash flows, the incremental value it may bring to our core business and the risk and cost associated with the opportunity. Ultimately, any action would be evaluated against all alternatives, including the incremental return of cash to shareowners.
We continued to achieve a solid return on our invested capital. By driving operating growth, investing in high-return opportunities and tight management of working capital, we will continue to improve our returns. In 2012, we achieved a 14% return on invested capital, and long term, as I mentioned earlier, aspire to at least a 20 basis point improvement, annually.
Our goal of creating increasing value for shareowners is supported by a demonstrated commitment of increasing dividends. As you can see, we have increased our dividend rate each year for the past 6 years. In fact, earlier this month, we increased our dividend by 25% to $0.80 per share on an annualized basis. This is more than double the dividend rate of 2009, before the transaction.
We also have continued to demonstrate our commitment to returning cash to shareowners through our share repurchase efforts. In 2012, we completed our second share repurchase program since 2010, repurchasing $1.8 billion cumulatively under both programs. And as John mentioned, earlier this year, we initiated a new $1.5 billion program with at least $500 million in repurchases during the course of 2013.
In total, through share repurchase, cash returns and dividends, we have returned over $5.5 billion to shareowners from the time of the transaction in 2010 through year end 2012. Again, as a reminder, that's more than double the amount returned to shareowners in the first 23 years of CCE's history.
As you may recall, approximately 1.5 years ago at our investor conference in Paris, I presented this slide. I told you that we saw the opportunity to have up to $4.5 billion available by the end of 2014 to invest in high-return opportunities or return to shareowners by delivering our operating targets and by utilizing our balance sheet capability. This was an ambitious target. Now, the question is, how are we doing against that target?
I'm pleased to report that we are on track to reach our goal. The $4.5 billion we estimated over time consisted of approximately $2.5 billion in free cash flow and another $2 billion available from our balance sheet.
I'm pleased to report, despite the operating headwinds that we've discussed with you previously and continue to face in 2013, we are on track to reach the combined total opportunity of $4.5 billion. This continues to enable our efforts to create shareowner value through either cash returns or investments in high-value acquisitions.
Now as we look at our outlook for 2013, we expect net sales and operating income to grow in a mid-single-digit range, both on a comparable and currency-neutral basis. We also expect comparable currency-neutral earnings per diluted share growth of approximately 10% above 2012 results. We expect 2013 capital expenditures of approximately $350 million and free cash flow in a range of $450 million to $500 million. This level of free cash flow, importantly, is after an expected increase of $125 million in cash restructuring cost, which is funding our Business Transformation Program that John described.
In closing the financial discussion, let me summarize with a few key thoughts.
First, we have a solid history of managing all the levers of our business to deliver sustained bottom line growth.
Second, we continue to have a flexible capital structure that provides significant opportunities with regard to acquisitions, returning cash to shareowners and ultimately creating shareowner value.
Third, we have long-term objectives that are challenging yet achievable and represent levels of performance that we believe will drive value.
And last, we have an EPS target for 2013 that exceeds our long-term targets, again demonstrating our ability to consistently deliver bottom line results.
Thanks for your attention. Now I'll turn it back over to John for a few closing thoughts, and then we'll be happy to take a few questions.
John F. Brock
Thanks, Bill. As we work to build our company for the benefit of all of our stakeholders, one of the things that we think is really important, is absolutely imperative, in fact, that we do so in a sustainable responsible way. And for that reason, we continue to integrate what we call CRS into every aspect of our business. More than ever, our customers, our consumers and our communities are expecting us to work toward world-class sustainability in our operations. As a result, CRS is a pillar of our operating framework, and it's a part of every decision we make. In fact, our new sustainability plan, which we call Deliver for Today and Inspire for Tomorrow, offers 3 strategic priorities.
First, to deliver against the commitments that we have made today. Second, to lead the industry in 2 areas: Energy and climate change being one of those, and then sustainable packaging and recycling being the other. These are the 2 areas in which we think we can make the biggest difference. And finally, third, to innovate for the future by finding opportunities for innovation, collaboration and partnership.
So you can see, we do have a really strong commitment to CRS. And in fact, we intend to be the CRS leader in our industry.
Beyond being a CRS leader, our journey has driven ongoing significant business benefits for us as well. We have found new operating efficiencies. We reduce waste. We've enhanced employee engagement and we've strengthened our overall relationships with customers. These are very important milestones that are beneficial to our business, as well as to our bottom line. These benefits, coupled with the value that has been created by our enhanced reputation, are a demonstration of why we place at CCE such an important priority on our CRS work.
We have tangible results from our CRS efforts as well. For example, we've continued to reduce our water usage ratio. We now have a ratio of 1.4 liters of water used for each liter of product. This is a reduction of about 15% since 2007, and is the best in the Coca-Cola system.
We have reduced our carbon footprint in part by reducing the footprint of our coolers, some 600,000 of them, using new technologies. And we've continued to move to a leadership position in recycling. We have formed new joint ventures in both Great Britain and France to further develop our capabilities, and we've launched studies through a university to understand better how we can increase the recycling of our products.
Importantly, our leadership with regard to sustainability continues to be recognized. In 2012, we were named the #1 beverage company for environmental, social and governance performance by Goldman Sachs. We were also named Vehicle Operator of the Year at The Low Carbon Vehicle Partnership Champions Awards in London, and we've been recognized in the U.K. by the Carbon Trust for year-over-year carbon reductions.
So in closing, let me discuss with you a few of the risk we face, as well as a few key takeaways. As I hope you've heard today, we remain confident about our ability to drive value for our shareowners in 2013 and beyond, but you should know we're realistic, and there are risks that lie ahead.
For example, we continue to face the ongoing impact of a dynamic and challenging macroeconomic environment in Europe. Commodity cost remain volatile as well. We face evolving consumer taste and preferences with an increasing focus on health and well-being, and we're continually working with the Coca-Cola Company to meet these changing needs. And of course, there's always the potential for new taxes on our products and packages.
So while we are aware of these risks, we remain confident in the ability of our team to manage through these challenges, and for our business to thrive and to grow. We are executing against our strategic priorities, and we're building on our history of solid and balanced growth.
Our financial priorities are to drive consistent, long-term profitable growth that will, in turn, lead to increasing shareowner value.
And while the current economic environment certainly remains challenging, we are in a position to deliver renewed growth in 2013 with earnings per share growth that exceeds our long-term growth targets.
So thanks very much for your time today and your interest in our company. We'll now be glad to take a few questions.
A question about your core brand intentions, John. You're saying that they're intended to drive growth this year. They were down collectively last year. So what gives you the confidence that they'll actually grow? And what significance is spending in that confidence? Are we going to see a pickup in spending rates behind those brands?
John F. Brock
Yes, I think the drive behind our core brands and the view that we have that they'll grow in 2013 is not based on just 1 thing. I mean, our business is all about doing a whole host of things right, and we plan on doing that along with the Coca-Cola Company in 2013. So first of all, it's the fact that we and Coke together have a marketing program for 2013, which definitely does have increased spending as part of that program. And that's increased media spending on 1 hand, as well as in-market activation on the other hand. Beyond that, we have a whole host of programs. I mentioned Coke with Food, which will be all throughout the entire year, and a number of other activation programs that are already kicking in and that we're really excited about it. And we recognize we've got to lap the Olympics, but we also are going to have to lap the wettest and coldest summer in 100 years. So that's an additional point that gives us some confidence. So it's all of those things working together. If being our customers' most valued supplier is absolutely critical to what we're doing, we had some challenges in 2012 with a fringe excise tax that clearly got in the way of customer relationships. The good news is those are beginning to work themselves out. I think you've heard us say before, we've said it on our recent call, they're not completely done, but we're in the process of customer discussions in France and some of them are done, and others are in progress as we speak and we're guardedly optimistic about the way those are going to go. In Great Britain and Sweden, they're done. And that's a great place to be. And then of course, in Norway and in the Benelux, we'll come along and do them in late summer, early fall. So customer relationships, again, a critical part of what we're doing. Finally, is a recognition that we happen to have the world's most iconic brand, and it's got per capita consumption throughout our whole system, broadly half of what it has in the United States. And when we take Coke, Coke Zero, which continues to grow 12% to 15%, and add to it Coke Light, and you saw the kind of renewed excitement and vigor that we think we're going to be putting behind Coke Light, Diet Coke because of the 30th birthday, we think all of those together gives us confidence that you're going to see growth in our core Coke trademark brands in 2013.
John A. Faucher - JP Morgan Chase & Co, Research Division
With the pricing going into the market right now, you guys had some, probably some more favorable raw material hedges for 2012, and you've also got a slightly bigger-than-normal concentrate price increase. So can you talk about sort of your need for pricing relative to your competitors? And do you see competitors following at the same rate as you in terms of keeping the price gaps relatively consistent year-over-year?
John F. Brock
We've said that our pricing strategy in 2013 is going to be more modest. We and the Coca-Cola company are focused on a strategy in '13 which has more volume growth than it does price, and we think that's an appropriate step to take. We've also mentioned, and Bill can give you a little color on cost of goods, but we've actually said that we will not quite cover our cost of goods in 2013, because we think it's so important to take a more modest approach on pricing. That's what we plan to do. I think that's one of the reasons we've completed negotiations in Great Britain and in Sweden, and I think it's one of the reasons that we will ultimately get to where we want to be in France. That's the right way to tackle it this year. Now what our competition's going to do, we'll have to wait and see. I think it's fair to say that 2012 was a challenging year for us for a whole host of reasons, all of which you've heard us talk about before. But in Great Britain, particularly, we had, continuing what I would call promotional programs and pricing on the part of our principal competitor, which were not in the best interest of the overall category, and that's not the way we run our business. We run our business to achieve the right value share, not volume share. We weren't really happy with what happened in Great Britain in 2012. We are hopeful that there's going to be a more rational approach to pricing as we see 2013 unfold. Do you want to comment on cost of goods?
William W. Douglas
Yes. I talked on the call a couple of weeks ago that we see our COGS environment inflation of approximately 4%, which includes impact from the packaging conversion in Norway of about 70 basis points and that we are significantly hedged at this juncture with raw commodities hedged at a level of about 75% or so, and then that will increase as we get to the first part of the year. Most of the unhedged commodity is in the PET arena.
Judy, here, and then we'll come back.
Judy E. Hong - Goldman Sachs Group Inc., Research Division
John, can you talk a little bit about the channel mix situation? Because I think few years ago, you made a big push into immediate consumption with the Boost Zones. And it sounds like because the macro challenges, perhaps the mixed impact, has been a little bit more negative. And so I'm just curious, first, whether that focus on immediate consumption is less of a focus at this point. And then as you move into more the Hard Discount channel, is there more of a negative mix implication with that opportunity?
John F. Brock
The immediate consumption drive that we launched, really, 6 years ago, starting in France moving then across the whole of Europe, which some of you've heard us describe as Boost Zones, has continued to be a major activity, and in fact, what we've done is we're not opening new Boost Zones, and pretty much all of Europe where there needs to be a Boost Zone, which is a high-traffic area, Paris, London, Amsterdam and even medium-sized cities, where we need to have Boost Zones, we have them. And that's typically where we have an account rep who lives in an area with, say, 200 to 250 up-and-down-the-street accounts. And we have really transformed that business in all of our territories. It's a beautiful thing. If you visit any of the cities over there, just take a look, what you're going to see is a much more consistent price package architecture. You'll see the right products. You'll see them actually priced, even though we don't control the pricing, reasonably and consistently priced. And you will see products, our products in a lot of outlets, which were historically dry souvenir shops or others kinds of outlets, which wouldn't normally have soft drinks. So we started 6 years ago. We've evolved now, so we've actually gotten to the point where we categorize Boost Zones as platinum, gold and silver. We understand exactly which outlets are the really important ones and which ones aren't. And so our account representatives have a very different mentality today and approach that they did 5 years ago. So it continues to work. It continues to be an area of focus. There has been some continuing shift away from immediate consumption, broadly speaking, in our territories, and I think broadly speaking because of the economic challenges. That's not nearly as big a problem as it might be in some markets like this one. Because our approach to managing revenue growth management in big supermarkets has been very much one of, let's not get ridiculous in pricing, let's in fact, keep the price package architecture situation in place, so that if someone doesn't buy this product at a mom-and-pop, but instead buys a 12-pack of cans or 2 liters, then, in fact, the contribution we've received is broadly the same. And that is broadly the case. I mean, there's a slight difference, but when you put in place all of the total product activity cost, it's not dramatically different, which is why frankly, it's why in 2008 and 2009, and there was a major macroeconomic challenge in Europe, and there was a significant shift there away from on-the-go consumption to in-home consumption, we weathered the storm just fine. So that's where we are. It's not a huge difference, and so we are still focused on EYEsee. There's been a little bit of a shift, that has not dramatically affected our profitability. And in terms of Hard Discounters, we look at those very carefully and make sure that if we're going to go into those channels, we do it with very specific packages which are unique to those channels, so that we don't find those products and packages appearing in other channels. And we also make sure that they're very reasonable from a profitability standpoint. So we have not entered into Hard Discounters lightly. We've done it very carefully, very selectively, and it has not had a major impact on margins.
Can you just focus a little bit more on the Hard Discounter channel? Do they buy by country? Or is it sort of centralized in Germany with both Lidl and Aldi? You got to know what I'm sort of getting at.
John F. Brock
They buy by country. And that's why when you heard me describing our progress today, it's been 1 country at a time. Obviously, there's a good bit of input from headquarters, which generally are in Germany, but the decisions are made ultimately on a country-by-country basis, which again, is why our progress report is -- we just got into one of the major discounters in The Netherlands, and that's been a long time coming. Obviously, the success we have in 1 country has a major impact on what happens in the next country.
Got you. And then is this just coincidental? I probably should have noticed this before, but it seems like there's no debt maturity in 2018. So I don't know -- was that sort of intentional knowing that, that date was coming on the German bottler and that would be 5-year paper in 2018?
John F. Brock
It's completely coincidental.
All right. Other questions?
So revisiting some of these same topics, I guess. In the U.K., John, a couple of months ago, you'd alluded to with the Britvic-Barr merger that, that would be maybe an impetus for competitive pressure to ease. And with that now changing again, does that change your outlook in the U.K. at all? Then on the Hard Discounter question, how are your products getting to those Hard Discounters? Is that a DSD delivery mechanism or is it indirect? And how, if at all, does it differ from what CCE AG is doing in Germany with those same Hard Discounters?
John F. Brock
Our point of view in the U.K. doesn't really change on the Britvic-Barr situation. I mean, we're watching interestingly from the sidelines. So what's going on, and obviously, we, like you, know that the OFT has referred it to the Competition Commission, and it looks like that may take some period of time. So that's a fact. And we'll watch and see what happens. I think, in terms of what we're going to do, it's not going to be materially impacted. You did correctly state that I said that maybe there would be some more rational thinking on pricing coming out of that. We'd like to think maybe there'll be some more rational thinking on pricing even though it's not going to go through as they think about the future. So we'll see. On the Hard Discounters, no, it's not a DSD system. We, in countries like France, case in point, we don't have any DSD in France. So the unique packages and very limited number of SKUs in each one, but it's clearly not a direct store delivery system. Anything you want to add to that?
Bryan D. Spillane - BofA Merrill Lynch, Research Division
I guess I'll ask a couple of questions that you probably won't answer about Germany. Just the first, I guess the time frame that this negotiation or this process has gone on has been really long. There's been a lot of things that have changed in the course of the time from the time we started. The economy in Europe has changed, interest costs are a lot lower than they were, your stock price is at a different place today than it was, and I think, if I recall, when this started, you talked about balancing investments in M&A versus other uses of that cash. And I guess, maybe it would be helpful for us to know how you've -- as that time has gone on, how have you changed that process in terms of that evaluation and balancing all of those different variables that have moved around? Have they changed at all? Have any of those factors kind of affected your thinking the way that you think about it as a company, forgetting about whatever you're negotiating discussions may or may not be with Coke?
John F. Brock
I think the factors that you've mentioned are all factors that are real, and that would have to be things we took into consideration if we were looking at doing any kind of an M&A transaction. Does the macroeconomic issue in Europe have a profound impact on whether we would buy something or not? And I think that my simple answer there is probably not. But all the other things you mentioned are things that, for any potential transaction, we would want to take into consideration. But our overall view on the approach we would take to any acquisition, I would say, has not changed. We think we have a very methodical and deliberate approach. We've got a whole host of criteria that would need to be satisfied, and we would be weighing the alternative of any M&A transaction against our base business, including returning cash to shareowners. And I think we -- I don't think we've changed our point of view on that over the last 2.5 years. So that's where we continue to be. There's nothing to talk about around Germany, or for that matter, around any other potential transaction. We've got a very disciplined process. When we have something to say about Germany or about any other possible transaction, we'll be the first ones to say it.
All right. Thank you for that. And I think with that, we will move on to the breakout. So I want to thank CCE again for coming and making the presentation. And we're just going to move around the corner of the breakout room.
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