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Coca-Cola Enterprises

Q1 2009 Earnings Call

April 28, 2009, 10:00 a.m. ET

Executives

John Brock- Chairman and CEO

William Douglas III- Executive Vice President and CFO

Steven Cahillane- Executive Vice President and President North American Group

Hubert Patricot- Executive Vice President and President European Group

Thor Erickson- Director of Investor Relations

Analysts

Kaumil Gajrawala- UBS

Judy Hong- Goldman Sachs

Bill Pecoriello- Consumer Edge Research

Mark Greenberg- Deutsche Bank

Lauren Torres- HSBC

John Faucher- J.P. Morgan

Christine Farkas- Merrill Lynch

Mark Swarzberg- Stifel Nicolaus

Carlos Laboy- Credit Suisse

Mark [Duvid]- Bank of America

Damian Witkowski- Gabelli and Company

Celso Sanchez- Citi

Mike Sheridan- Cobalt Capital

Operator

Good day everyone and welcome to today’s Coca-Cola Enterprise’s First Quarter 2009 Earnings Conference [Operator Instructions]. At this time I would like to turn the call over to your host for today Mr. Thor Erickson, Director of Investor Relations; please go ahead sir.

Thor Erickson

Thank you and good morning everybody. We appreciate you joining us this morning to discuss our First Quarter 2009 Results and our 2009 Outlook. Before we begin I’d like to remind you all of our cautionary statement.

This call will contain forward-looking management comments and other statements reflecting our outlook for 2009 as well as future periods. These comments should be considered in conjunction with the cautionary language contained in this morning’s earnings release as well as the detailed cautionary statements found in our most recent annual report on Form 10K and subsequent SEC filings.

Our earnings release also contains a reconciliation of the non-GAAP comparable figures referenced during this call. A copy of this information is available on our website…Bill Douglas our CFO, Steven Cahillane, President of our North American Group and Hubert Partricot, President of our European Group are also with us on the call this morning.

Following prepared remarks we will open the call for your questions. In order to give as many people as possible the opportunity to ask questions please limit yourself to one question and we will take follow-up questions as time permits. Now I’ll turn the call over to John Brock.

John Brock

Thank you Thor and thanks to each of you for joining us today as we discuss our first quarter results and our revised outlook for the remainder of this year. Bill, Hubert, Thor and I are all joining you from Amsterdam where we’ve been meeting with our European team and spending time in the marketplace. We will discuss our European outlook with you in detail in a few minutes but I can tell you that we are encouraged by the work that’s being done here to move our business forward. As Thor mentioned, Steve is also on the call and is in our Atlanta office today.

Now, as you’ve seen in a news release we reported comparable earnings of $0.20 per share, total revenue grew 3% and that’s despite an 8% negative currency impact. Consolidated comparable operating income increased more than 47% primarily as a result of meaningfully improved operating trends in North America.

North American profit growth was driven by good balance between pricing and cost of sales. Volume declined 3% but that was significantly better than anticipated. Net revenue per case increased 10% while our cost of sales per case also increased 10% in part due to a higher mix impact from finished goods purchases.

Our overall results in North America demonstrate a second consecutive quarter of improved price and cost balance. We believe it’s essential to continue to price our products in a way that reflects the value and the strength of our brands in the market. In fact, a key element of our success this year will be our ability to maximize the value of our brands through strong implementation of our innovative price package architecture initiatives.

I’m encouraged that as we work with Coca-Cola North America in our day to day execution we are getting strong support for our efforts in this area.

As we look at volume the key drivers in North America were the strength of our red, black and silver portfolio, the addition on Powerade Zero, the addition of Monster Energy Brands and then gains that we achieved through our price package architecture initiatives.

Red, black and silver brands continued to perform well, in part due to the continued growth of Coca-Cola Zero, which grew more than 20%. Powerade grew more than 25% with Powerade Zero contributing approximately half of this growth.

North America’s results also reflect really strong execution. In future consumption both visual inventory and cases on display increased. In immediate consumption we benefited from excellent field level support for our cold drink packaging initiatives including our new single serve $0.99 packages.

Importantly, single serve trends improved during the quarter, however work remains in the important on-premise channel to overcome persistent weakness. We also look forward to the opportunities ahead with our red, black and silver portfolio and Vitamin Water Ten. The innovative extension of Vitamin Water Ten will broaden and further extend our entire Glaceau portfolio.

We continue to make progress in key operating areas as well. For example, we recently introduced Ownership Cost Management, what we call OCM in North America and this program is generating important operating expense savings. We continue to work well with the Coca-Cola Company as we move forward in several key operating projects that we developed last year. These efforts are already driving supply chain efficiency and improving field level synergy between bottle, can and fountain.

For example, Coca-Cola Supply or we call it CCS, which will consolidate common supply chain work and optimize product flow is already making significant progress. It’s enhancing operations through a unified transportation approach and it’s improving efficiencies in our network footprint as well as within our existing plants.

Also, our Fountain Harmony Program is making good progress. This initiative is all about unifying our sales approach, increasing the availability of our beverages while at the same time driving improved efficiency in sales to local foodservice customers in several key markets.

We look forward to sharing additional details about these and other joint initiatives in the future.

Now let’s turn to Europe; excluding the impact of currency and the extra selling days our European revenue grew about 7%. Volume was up 5.5% and that is successfully lapping strong growth of 7% in the same quarter one year ago. Net revenue per case growth of 2.5% exceeded cost of sales per case growth of 1%. European volume was driven by a combination of improvement in sparkling beverages, which were up 6% and still beverages, which grew 3%.

Our red, black and silver portfolio, which grew 8% was a big factor in sparkling beverage growth. In addition, we have successfully launched Monster Energy Drinks in our territories and though we are in the early days of this we are really looking forward to the growth that this brand offers us.

Still beverage growth was driven by Oasis, Capri Sun and low double-digit growth in water as we added the Abbey Well brand in Great Britain. A significant portion of Europe’s overall volume growth in fact came from Great Britain, which continues to achieve strong demand for core sparkling beverages including brand Coca-Cola and also benefited from solid promotional programs with key customers as well as improving trends in single server channels.

As I mentioned earlier, we’re speaking to you today from Amsterdam. One of the most important developments we’ve seen during this visit is the excellent progress our European team has made in implementing key transformational initiatives. It will create an even more efficient and effective business here.

Last year Europe introduced Ownership Cost Management, which continues to drive ongoing expense savings. There are also excellent gains in areas such as cooler services, full service vending, sales force optimization and back office functions. These efforts are vital as we navigate through a challenging European economy.

Clearly our success in both Europe and North America is encouraging and it demonstrates solid progress in our work to build the value of our brands, to improve service to our customers and to drive efficiency and effectiveness. Yet, we must keep these first quarter results in perspective.

It’s important to realize that we continue to operate in a difficult economic environment with ongoing challenges in both North America and Europe and while these conditions may improve we remain cautious about the impact of macroeconomic conditions on our full year results. Also, the first quarter’s our smallest and this year it included three extra selling days, which will in fact be offset by four fewer selling days in the fourth quarter.

Finally, though North American operating income totals were really solid their year over year impact is influenced by weak results one year ago. As you will recall, we experienced the beginnings of a sharp decline then in operating income.

After reviewing these and other factors we have revised our full year guidance and now expect comparable EPS in the range of $1.24 to $1.29. This guidance excluded items affecting comparability and it includes an expected negative impact of about $0.20 per share from currency based on year to date as well as current rates.

We have confidence in this outlook based on the success of our initiatives to strengthen efficiency and effectiveness, to control cost and to enhance the value of our brands. Bill will discuss this guidance with you in more detail in a few moments.

In closing, let me say we are encouraged by our progress in the first quarter. We realize, however, that our success for 2009 and beyond relies on our ability to respond rapidly to dynamic market conditions and to continue to improve the quality of our service, our execution and our operations. We are making substantial progress and in part because of a growing and stronger relationship with the Coca-Cola Company. We are guided by our operating framework to be the best beverage sales and customer service company.

We also continue to focus on our three strategic objectives; building our brand portfolio, enhancing efficiency and effectiveness and establishing a winning and inclusive culture. These elements will drive performance and as we continue to face a challenging economy they are absolutely essential to our success.

We remain focused on the value drivers designed to maintain or increase margins, manage value and volume growth, improve free cash flow and deliver on our long-term objectives. We have an outstanding team to build on these objectives and I look forward to sharing our results with you in the months ahead. Thanks again for your time and attention and I’ll now turn it over to Bill to give more detail on our financial results and our enhanced outlook for 2009.

William Douglas

Thanks John. In the first quarter we achieved reported earnings per share of $0.13. After adjusting for items affecting comparability earnings per share were $0.20. The items affecting comparability include $0.07 for restructuring, $0.01 for debt extinguishment and a $0.01 benefit of net favorable tax items. Comparable results also include a negative currency impact of approximately $0.04 for the quarter.

Total revenues grew 3% on a reported basis including a negative 8% impact from currency translation. Excluding currency and adjusting for the additional three selling days in the quarter revenue grew approximately 7%. Comparable consolidated operating expenses increased approximately 2.5% after adjusting for both currency and the extra selling days.

As John mentioned, these results clearly exceeded our expectations for the quarter and reflect a combination of positive factors including improved operating trends in North America and solid performance in Europe. North American profitability was driven by better than expected volume, which was helped in part by the strength of our red, black and silver portfolio and the addition of Monster Energy Drinks.

Pricing per case growth held strong for the second consecutive quarter and equal growth in cost of goods per case. We are also seeing excellent results from our Ownership Cost Management or OCM Program, which helped limit comparable operating expense growth in North America to a low single digit increase after adjusting for currency and the additional selling days. Savings from OCM initiatives will be an important component of our full year performance.

European profitability reflects continued strong results in Great Britain where volume increased 12.5% in the quarter. Again, red, black and silver brands were responsible for a majority of this growth, which was driven by a combination of effective execution as well as promotions.

We are encouraged by our first quarter performance but it is important that we maintain balance in our outlook for the remainder of the year. The first quarter is our smallest and it is essential to move deeper into the key summer selling season to gauge the full impact of current soft economic conditions on our full year results.

Given our first quarter results and our operating outlook we have revised our full year guidance upward to a range of $1.24 to $1.29 per share excluding items affecting comparability and including a negative currency impact of approximately $0.20, which is based on year to date and current exchange rates.

This reflects the beneficial impact of the strong first quarter and other positive factors including improving operating trends in North America, sustained growth in Europe and an improving commodity outlook. It also reflects the impact of potential risk that may arise during the year including further economic deterioration in all markets and weakness in the North American on premise channel.

In North America we expect both revenue and operating income to increase for the full year in a low to mid single-digit range. We continue to expect a decline in volume. We also expect a high single-digit increase in net revenue per case and cost of goods per case as we continue focusing on protecting and enhancing gross profit margins.

We continue to see commodity price improvement in North America and now expect a 3% to 4% increase for core commodities in the full year and we layer in coverage for the second half of 2009.

In Europe we expect a mid single-digit increase in revenue along with low single-digit growth in volume and cost of goods per case. Operating income is now expected to grow in a mid to high single-digit range.

Our 2009 outlook also includes expected free cash flow of approximately $600 million after an incremental pension contribution of $100 million. This amount is over and above the $185 million contribution we discussed on the call in February. Our outlook for capital expenditures remains at approximately $900 million for the year.

We will continue to use 2009 free cash flow primarily for debt reduction and remained focused on strengthening our balance sheet. We began the year with approximately $700 million in cash and in the first quarter we have refinanced debt maturities of approximately $775 million at interest rates below 4.5%.

Overall we have seen credit markets continue to improve in recent months and with cash on the balance sheet, ongoing cash from operations as well as the ability to access credit markets we remain confident we will be able to address our debt maturities at favorable interest rates. These maturities include a 175 million pound note during the second quarter and $675 million due in the third quarter.

So in closing we recognize the challenges we have ahead in reaching our revised financial goals for the year however, we have made a strong start to 2009 in the first quarter. We have excellent marketing and operating initiatives in place and we have a stronger relationship with the Coca-Cola Company. Both of us are committed to maximizing the value and power of our brands both in North America and Europe.

Thanks again for joining us and now John, Steve, Hubert and I will be happy to take questions, Operator.

Question-and-Answer Session

Operator

At this time we would like to take your questions [Operator Instructions].

William Douglas

Our first call is from Kaumil at UBS Operator please.

Operator

Your line is open.

Kaumil Gajrawala- UBS

Can you talk about how much some of the newer products such as Monster and the rollout of Powerade Zero contributed to volume growth?

John Brock

Steve, can I ask you to comment on that?

Steven Cahillane

We’re really delighted by these new entries. If you look at Monster and Vitamin Water Ten in particular very significant to the portfolio. They added about 1.5 points of growth and our entry level packages, the 14 and 16-ounce bottle predominantly sold at $0.99 throughout the United States really driving our recruitment initiative. They added about a half of point of growth to our total for the first quarter.

Kaumil Gajrawala- UBS

Steven, if I could follow-up; you’ve now been in North America for a period of time after being in Europe. What are you seeing in North America that perhaps some of what you had learned when you were running the European business you think might be interesting to transition?

Steven Cahillane

Some of the things that we’re doing right now in North America around Fountain Harmony, outlet service solutions, the work we’re doing with the Coca-Cola Company, which is really significant our ability to achieve higher levels of satisfaction with our customers and better customer service are really borrowing from the model that we have in Europe and in many parts of the world. So it’s more flexible, it’s customer focused and I believe it’s helping us drive a good result here in North America.

The other thing is more consumer focus at the immediate consumption level, which we were also borrowing from not only Europe but the rest of the world to drive better penetration of [inaudible] and better recruitment are things that we borrowed from around the world.

Kaumil Gajrawala- UBS

I see, like the boost zones you had talked about?

Steven Cahillane

Boost zones are a definite borrow from Europe. We are rolling out boost zones in many of our markets throughout the US and Canada. It’s early days but the results are very strong and we’ll continue to roll that out throughout the rest of the year and I know Hubert is continuing to roll out more boost zones in Europe because it’s something that works for us. It works for the customer and it drives better recruitment and penetration with our key consumers.

John Brock

The other thing I would add to that of course, Steve, as you’ve implemented an Ownership Cost Management as we’ve indicated, which has been so successful here in Europe now in its second year and we’re really counting on it. In fact, it’s already demonstrating its usefulness as we see some of the benefits coming through in North America.

Steven Cahillane

Yes John, that’s an excellent point and that, again, was born in Europe and continues to deliver good results for Hubert and is a key component for us not only in protecting and enhancing our bottom line but also in freeing up funds that we can invest in things like boost zones.

Operator

Up next we’ll go to Judy Hong of Goldman Sachs.

Judy Hong- Goldman Sachs

John, I was wondering if maybe you could talk about the progression of your volume trends during the quarter and into April maybe both in the US and Europe and whether there has been any notable difference on a month to month basis?

John Brock

Let me ask Hubert to talk about that from a European standpoint first and then Steve can give us some comments about that on North America.

Hubert Patricot

For Europe, we had a good quarter of 5.5. That was strongly driven by the take home channel and especially in Great Britain with a good combination of trade promotion and the launch of the Up and Happiness campaign. In truth, in the beginning of February we see the continuation of this trend, which is a good sign of the consumer franchise we are experiencing in Europe but it is [inaudible] to what’s our category we are seeing in the market.

John Brock

I think you can say simply in Europe this has been consistently excellent performance month by month; Steve, North America.

Steven Cahillane

North America we have a number of different moving parts that make it difficult to really compare it month by month. For example, in January our volume included Super Bowl this year where it predominantly fell in February last year. March of this year did not include Easter; that will be in April. So there’s a lot of moving parts but all in we’re off to a good start and I wouldn’t say that there’s anything substantially different from January, February or March that was at all unexpected.

The other thing is we’ve seen good sequential improvement throughout all the various channels. The only one that is not improving and John mentioned it in his opening remarks is the on premise channel, which continues to be very challenged. But other than that, by channel and by month we’re very encouraged by the type of start we’ve seen.

Judy Hong- Goldman Sachs

Steve, if I could just follow-up in the US. I think right now you’ve clearly focused on maximizing the value of the brands and improving the profitability here in the US. As you look out into maybe the second half of this year I was wondering if you can maybe talk about your pricing strategy especially with commodity cost moderating. Is that maybe a time where you can focus a little bit more on the volume front with less pricing or is there still an opportunity to improve the profitability and really still try to maximize the value of the brand?

Steven Cahillane

Judy, as you’ve seen we have achieved very good pricing, not only in the fourth quarter but continuing in the first quarter, which has really helped drive our result and it has also helped us drive better capability in the marketplace.

So one of the reasons we haven’t seen the type of drag against our volume that this type of pricing might otherwise show is we have been able to increase our cases on display. We’ve been able to increase our visual inventory. We’ve been able to afford to do terrific value-added programs with our customers so that we can move volume with all the different elements of the marketing mix and not just pricing.

So, we are absolutely committed to continuing that strategy and we see a rational pricing environment in the marketplace and we would hope that that rational environment continues.

Having said all that, we do expect commodities to continue favorable but we are committed to maximizing the value, which includes volume and price in the marketplace and finding that optimal level in a rational environment and continuing to really capture the value of having the great brands in our portfolio throughout the rest of the year.

Operator

Bill Pecoriello, Consumer Edge Research has our next question; please go ahead sir.

Bill Pecoriello- Consumer Edge Research

John, it seems like the Pepsi system is about to enjoy two key advantages. One is a savings pool that’s potentially much larger than the $150 million supply chain savings announced by CCE and Coke and the second is significant flexibility and speed in making route to market changes. Do you agree that the Pepsi system would have a competitive advantage on those changes and what can the Coke system do to respond and counter those potential advantages, whether it be accelerating supply chain savings or other route to market changes you guys can make, thanks?

John Brock

First of all, if you look at the way we are working together with the Coca-Cola Company over the last several months we’re moving rapidly to be able to achieve a lot of the same things that frankly could be achieved if you had a completely integrated company. In fact, we believe and you heard Muhtar Kent saying last week that we were both really committed to the future of the franchise system.

Frankly, I think if you look at both the progress we’ve made on these various initiatives coupled with our business results it’s a pretty solid endorsement of the way this system works.

We don’t believe that there will necessarily be any competitive advantages to this approach that our principal competitor is taking. But frankly, we’ll let them go do what they want to do and we’re going to go off and keep executing just like we did in the first quarter, keep working hand in hand with the Coca-Cola Company, keep working harder and frankly I think the projects we’ve talked about are all good first steps.

But there’s a lot more to be done, whether it’s Fountain Harmony, whether it’s Outlook Service Solutions, whether it’s supply chain integration that starts with the program we’ve put in place but frankly has all kinds of other things we can do down the road. We frankly think the system we have is the way to have our cake and eat it too, which is the benefit of the franchise system but working together more closely with Coca-Cola than we ever have before.

Bill Pecoriello- Consumer Edge Research

Thanks for your perspective.

Operator

Moving on we’ll go to Deutsche Bank’s Mark Greenberg.

Mark Greenberg- Deutsche Bank

There’s been a lot of pressure on gross margin for a number of years owing to inputs and it looks like we may finally be coming out of it. As we look past the currency and timing issues in the quarter I was wondering Bill or John if you are thinking internally about targeting a level of operating profit margin, say the 9% or 10% that we saw early in the decade if that’s possible and how should we think about the longer term profitability of CCE?

John Brock

Let me ask Bill to address that question Mark.

William Douglas

I think you can see that we did have some gross margin expansion in Q1 2009 versus Q1 2008 and with the pricing that we’ve got in the marketplace and with the outlook for commodities for the rest of the year you can count on us maintaining or enhancing our gross margin structure going forward for the remainder of 2009.

As we look out into 2010, 2011 and beyond that commitment to maintaining or enhancing gross margins will remain as well as our focus on operating expense focus. If you look at operating expenses as a percent of net revenue that number has gone down meaningfully over the past five years but it has been offset by the erosion in gross profit margin.

So as we continue to build that back and maintain a focus on operating expense it is going to allow us to expand our operating income margin as well. Having said that, we have not articulated a particular target over and above the other long-term targets that we have mentioned but I think directionally what you said earlier is not an unreasonable place for us to aspire to.

Mark Greenberg- Deutsche Bank

Bill, just to follow-up; the pension expense that you noted earlier in your comments that’s incremental I guess. Can you talk about where you guys think you are in terms of pension contributions, maybe talk a little bit about your funding levels and if you think we’re going to be seeing ongoing increases in pension expense over the next couple of years?

William Douglas

Just for clarification I did not refer to pension expense. What I mentioned was an incremental contribution to our pension plan of $100 million in April after our Q1 was closed. That’s over and above the $185 million contribution amount that we talked about in February. Our pension expense estimate for 2009 remains the same; that has not changed.

What we were trying to do was get ahead of the curve as our first quarter results were strong, put some incremental money in the pension plan to address the un-funded liability and mitigate any potential upsides on pension expense in 2010 and beyond. But we’ve still got a lot of the year left to see how the pension plan assets perform before we start talking about pension expense year over year 2010 versus 2009.

Operator

We’ll hear from Lauren Torres of HSBC; please go ahead.

Lauren Torres- HSBC

I was just hoping to get an update on your cost savings program, just a sense if you feel you’re on track to deliver the targets you gave us a few months back and also any update on the Coca-Cola Supply Company? Is this progressing as you expected or are you maybe uncovering more efficiencies than you originally thought?

John Brock

On the first one of those certainly our restructuring program is very much remaining right on track. Let me ask Bill to give a little bit more in the way of details on that.

William Douglas

We’re going to be filing our 10Q before the end of the week. But one comment I’ll make on North America; we achieved over $20 million of savings in the first quarter as a result of our OCM initiative and we are well on our way to meeting and exceeding the $75 million OCM target that Steve mentioned back in February.

Again, in Europe Hubert has commented on this before but our plans are in year two and proceeding on target as well so we feel well positioned with our operating expense initiatives at this juncture both in results to date Q1 and continued optimism in achieving or exceeding our targets for the full year.

John Brock

Thank you Bill and Coca-Cola Supply is definitely off to an excellent start. Steve, if you could just add a little more perspective on that please.

Steven Cahillane

As John said, we are off to a very good start with Coca-Cola Supply. We’ve got the organization populated with experienced professionals from Coca-Cola Enterprises and Coca-Cola North America; over 100 people now part of that initiative.

We’ve done things like implemented new rates by utilizing new carriers across the United States, leveraging our new found scale. We’re completing a manufacturing diagnostic of all of our plants by May the 15th and we continue to uncover new opportunities as we knew we would when we look at this more systemically and more holistically.

The net effect is we told you that we would have a $150 million savings run rate by 2011 and I am extremely confident that that number will be achieved at least by 2011.

Lauren Torres- HSBC

If I could just quickly ask in the quarter what was your immediate versus future consumption performance North America?

John Brock

Steve, would you like to tackle that one please.

Steven Cahillane

Our future consumption was a little bit softer, sort of down 3% to 4% and our immediate consumption we’re very pleased was nearly flat, just down a hair. So the 14-ounce and 16-ounce has really worked for us in terms of driving much better improvements in our immediate consumption business.

As I mentioned earlier our models would have forecasted a more severe decline in future consumption and obviously you have the Easter shift in there. But things like improved performance in cases on display in particular in visual inventory and very good programs and partnerships with our customers led to a more moderate decline.

Operator

Our next question today comes from John Faucher from J.P. Morgan.

John Faucher- J.P. Morgan

You’ve talked a lot about the impact of finished goods on the business. Can you walk us through how we should map out the impact on revenue per case and gross margin over the next couple of quarters? Is the finished goods business going to be growing as fast a rate relative to the rest of the business over the balance of the year?

John Brock

Let me ask Bill to comment on the first part of the question and then in terms of growth rate particularly in North America Steve can comment on that.

William Douglas

John, if you look at what’s happened with our business we are starting to get to a point where that year over year impact is going to be mitigated to some degree. We’re cycling the inclusion of Glaceau in our portfolio. The main addition we’ve got right now is with the Monster brands, which are obviously very significant from a revenue per case perspective.

But I think the trajectory of influence if you will is going to diminish as we go quarter by quarter and when we get into the fourth quarter that should be the last major impact as we brought Monster onboard kind of mid quarter in Q4 of 2008. We’ll be happy to maybe get a little bit more granular if you’ve got some more specific questions you can call for.

John Brock

Steve, do you want to comment on growth rates?

Steven Cahillane

The thing I’ll build on; I think Bill’s right in terms of growth rates and the way that the year is going to develop. We are seeing better growth rates as we have for many years now in the energy category in particular. We believe that will continue although we’re becoming more optimistic around sparkling beverages particularly red, black and silver.

The only other thing I’d add to that is just a reminder that it really is more of a rate story than a mix story so from our 10% improvement 7.5 points of that is a rate story and the balance 2.5 points is a mix story and we expect that that would continue throughout the balance of the year.

John Faucher- J.P. Morgan

Bill, one quick follow-up; any quantification of the impact of the finished goods business on the gross margin because it seems as though that the gross margin performance is strong and if that dissipates over the year that’s obviously going to help but is it a big negative impact or a modest one at this point?

William Douglas

It’s a modest negative impact John.

Operator

We’ll move on to Christine Farkas of Merrill Lynch.

Christine Farkas- Merrill Lynch

A follow-up if I could on a comment made earlier; if I heard correctly revenues rose 7% excluding the three extra days and foreign currency while operating expenses grew 2.5%. I just wanted to understand the underlying operating profit growth if we take out the days and the FX to make sure I’m doing the math correctly to understand your underlying leverage.

John Brock

Bill, did you totally understand the question?

William Douglas

I think so. I think, Christine, given the percentages it had an accretive impact but given the dramatic increase and the profitability of our business it’s still going to be very significant the underlying operating income growth even when you discount the two factors that you mentioned.

Christine Farkas- Merrill Lynch

That’s how I calculated it. I’m wondering if perhaps, Hubert, you can let us know how much Monster, Abbey Well and perhaps the introduction of Glaceau helped volumes in the quarter?

Hubert Patricot

First we have launched these two brands, one in the Energy category current quarter one and we are now listed with Abbey Well close to 40,000 outlets in GB leveraging clearly the strengths of our 150 boost zones.

But this is only the launch and the same for Monster, which was launched across the four countries. We are now listed in close to 20,000 outlets. I would say overall if you add Glaceau and I will come back on Glaceau it was probably [inaudible] the quarter so again more to come in the next quarter.

I will comment on Glaceau too. We are getting up the presence of Glaceau in GB starting with this quarter and basically we will have close to 10,000 outlets in quarter two.

William Douglas

Just to be quantified all in if you look at the 5.5% growth in Q1 for Europe the brands that you mentioned would attribute less than 1% of that growth.

Christine Farkas- Merrill Lynch

That’s helpful.

William Douglas

Four and a half excluding.

Christine Farkas- Merrill Lynch

Excluding. Finally John or Bill, regarding the Coca-Cola Supply Company it sounds like there’s progress being made on specific items. Did you actually see a benefit to your P&L in the first quarter from these initiatives?

William Douglas

It was modest but yes.

Christine Farkas- Merrill Lynch

Already starting to come through then.

William Douglas

Yes.

John Brock

Absolutely and it was on track with what we had expected.

William Douglas

The early stages in Q1 it was principally transportation savings.

Operator

We’ll hear from Mark Swartzberg of Stifel Nicolaus.

Mark Swarzberg- Stifel Nicolaus

Bill, I was hoping to probe a little bit more on your outlook for profits here in North America. If I’m doing my math right the dollar profit growth you achieved in the first quarter in North America alone represents about nine points of operating income growth on last year’s full year region profit. Again, if the math is right you’re sort of, well you are implying a decline in region profits over the balance of the year. So if that’s correct when do you think that decline is going to begin or in what particular quarters are we going to see a decline and what do you attribute that to particularly given some of the comments you made here regarding gross margin and continuing to get Op Ex leverage?

William Douglas

As you know, we don’t give quarterly guidance. I think if you think about some high level guidance you could think about the quarters being flattish and then you have to factor in the four less selling days in Q4 and then you also have the FX impact, which is going to be more dramatic on Europe but there is still some impact in our North American business with relationship to Canada.

John Brock

The other point I would just make on the whole balance of the year is I think it is fair to say we’re being guardedly optimistic. We’re dealing with economies which remain challenging and we recognize that. We’re hoping that there’s some turnaround’s there but we are obviously competing in challenging economies. Steve has already mentioned the on premise challenge we have in North America and we’re not into the summer selling season yet. We know from history, particularly in Europe what a huge impact the weather can have on summer selling as in 2003 when it was probably the best summer in 50 years.

Our view is that we’ve started the year off in a very solid fashion but we’re very cognizant of the issues that are out there that we’re going to have to deal with in the balance of the year.

Operator

We’ll go to Credit Suisse with Carlos Laboy.

Carlos Laboy- Credit Suisse

John, just to get very basic how is your model structurally superior or built for lower cost and faster top line growth than an integrated one-owner model in North America that can take so much cost out of and introduce so much simplicity to the equation?

John Brock

It’s all the things I’ve already indicated Carlos. I think if you look at the Coca-Cola system on a global basis I think the franchise system works pretty well and it has done so historically. We have admitted as has the Coca-Cola Company that we have some issues in North America, which present huge opportunities for us and we’re now off tackling those.

If a competitor wants to try to change the game dramatically they can do that. Frankly, they’ve been there once before and chose to follow our model. If they want to go back to where they were once upon a time then that’s certainly their choice.

I would say we will remain very aware of what’s going on in the marketplace. We’ll watch and see what they do but we think the franchise system itself particularly when you consider the agreement we have with the Coca-Cola Company to tackle some of the big areas of opportunity. We believe it not only is fully competitive but in fact could well be in the fullest of time a competitive advantageous place to be.

Operator

Mark [Duvid] with Bank of America has our next question.

Mark Duvid- Bank of America

I wanted to follow-up with some of your questions about access to the debt capital markets and interest rates. I think previously you had indicated that for the year you planned to reduce net debt. First of all, I was hoping you could address that and indicate whether or not that is still the plan?

William Douglas

Absolutely. The free cash flow that I alluded to earlier of approximately $600 million our intention is to use the vast majority of that to reduce our net debt. The only committed item we have to date other than reduction of net debt would be our dividend commitments of approximately $130 million.

Mark Duvid- Bank of America

That’s helpful. Secondly, with respect to the cash you have on the balance sheet and your free cash flow it seemed like you may not have to access the debt capital markets this year. Can you comment on that whether you plan to or if you’ll just take an opportunistic approach to the market?

William Douglas

I think you’re right in the assessment. Other than seasonality from a working capital perspective as we get to the peak summer selling season if you look at our full year cash flow and our remaining maturities we would have a sufficient amount of cash generated with what we’d have on the balance sheet to extinguish our remaining maturities.

But, given the debt markets we may choose to be opportunistic and do a small incremental offering before the end of the year.

Operator

We’ll go on to Damian Witkowski of Gabelli and Company.

Damian Witkowski- Gabelli and Company

Just a question; you talked about the channels, old channels in North America improving except for on premise. I’m just wondering if you could just give us more color on geographically in North America as well as Europe are you saying UK was stronger geographically, are certain regions getting better versus some others getting worse? I’m trying to get a sense of West Coast, Midwest and such.

John Brock

Steve, do you want to give a little perspective on geographies in North America?

Steven Cahillane

It’s as expected really and it’s a function of what’s happening with the overall economy. We still see some more challenges in Florida, certain pockets out west where the housing crisis has been more extreme so Arizona and Nevada, Las Vegas obviously and then parts of the Northeast.

On balance, though, I’ve picked pockets all over the United States. When you look at the thing in total it’s still a pretty good story and a stabilization that seems to be taking effect right now.

John Brock

Hubert will comment on Europe.

Hubert Patricot

In Europe the overall picture is that GB, Great Britain is performing better than the [inaudible] but you find also some similarities in the channel trend, which is what we call either the oracle, the café restaurants or the license trade in GB is declining. But on the other end you see vigorous growth in the supermarket channel, the [inaudible] of this world and people like that and it is coming all along Europe.

Overall it’s more per channel and with a good growth in GB, which is also driven by the new initiatives we were mentioning.

Operator

Celso Sanchez from Citi has our next question.

Celso Sanchez- Citi

I think I heard you talk about the fountain business more with respect to the service harmonization that you’re working towards with the Coca-Cola Company. But I’m not sure if I heard you talk about and if you could elaborate on a bit of the pricing architecture harmonization that might be in the works how far along in that process you might be in terms of gap management between bottle, can and the fountain side and how that’s progressing?

John Brock

We’re making excellent progress there. Steve, could I ask you to comment on that?

Steven Cahillane

We are making excellent progress and, Celso, the most important thing as we look towards fountain harmonization is getting the brand price package architecture correct. We’ve spent a lot of time and a lot of very sharp minds against that. Where we’ve rolled out Fountain Harmony in Denver as our first market it has really worked well and it has worked well because we’ve made sure that the brand price package architecture is correct.

Then we’ll use that model as we look towards the balance of the United States to make sure that we have the right harmonization between fountain and bottle can.

Celso Sanchez- Citi

Does that mean basically that the gap is being narrowed on a per ounce or per unit basis; is that one of the elements of the harmonization?

Steven Cahillane

I would say modestly you could say yes.

Celso Sanchez- Citi

And would you expect further improvement on that gap management or are there other elements of the equation that you’re more focused on?

Steven Cahillane

I think there are other elements of the equation and there’s a lot of moving parts. When you talk about the price package architecture particularly as we introduce new elements to it like the 14-ounce and 16-ounce bottle, which are at $0.99 and therefore more affordable but we do have to make sure that all packages work in harmony with one another.

So, a lot of moving parts but we’re learning a lot particularly as we roll out the new model in Denver and we’ll be able to apply that to the rest of the United States.

Celso Sanchez- Citi

And the 14-ounce and 16-ounce since you brought it up how are you segregating that; format specific, cost specific? How are you keeping the 14-ounce and 16-ounce from contaminating 20-ounce?

Steven Cahillane

It is 14-ounce or 16-ounce so I should be more specific about that and the majority of our markets are at a 16-ounce. So think about a 16-ounce in a convenience store or an on-premise account at $0.99. The 20-ounce, which is still the vast majority of the volume at say $1.39 so four price points away and then our one-liter there available as well so much more variability available to the consumer based on the types of consumption occasions they want to have.

So I wouldn’t use the word contaminate because what the $0.99 entry level pack has done for us and what we’ve tried to make it do for us is encourage the consumer to leave at say a gas station; leave the pump and go back into the shop based on very aggressive merchandising outside that calls out that there is a $0.99 affordable Coca-Cola package for them to try.

Then when they go in make sure that they have great sight and great availability of the 20-ounce preeminently but also the $0.99 entry level pack that caused them to go into the outlet in the first place. We found that this strategy is working very, very well for us. We’ve modeled out the type of cannibalization that’s acceptable for us and we’re achieving better than those results so all in a very good program for us.

Operator

We’ll go back to Mark Swarzberg of Stifel Nicolaus with a follow-up question; please go ahead.

Mark Swarzberg- Stifel Nicolaus

Bill, on the subject of overseas profits if we look at your K from last year unlike some of the multi-nationals in this space you have not, in two of the last three years you did not get a significant benefit from indefinitely deferring repatriation of earnings overseas. Putting aside anyone’s calculation on the political risk of any increase in taxation of those profits is it right to believe that you guys don’t normally have or don’t have a significant at risk benefit here or is there something about the last few years that’s not representative of the amount of risk you face?

William Douglas

We clearly do face the risk. I think it might not be as large as a pure global company like the Coca-Cola Company or P&G. But rest assured we have a keen interest in that legislation and if enacted where the deferment was abolished it would be detrimental to our tax position.

Mark Swarzberg- Stifel Nicolaus

Can you in any way handicap what kind of the steady state benefit might be or can you give us any thoughts there?

William Douglas

I’d have to look at that offline.

John Brock

Operator, I believe we have time for one more question.

Operator

That will come from Mike Sheridan of Cobalt Capital.

Mike Sheridan- Cobalt Capital

Did you provide an updated slide showing your hedges for the rest of the year and if you haven’t could you talk about commodity hedges?

William Douglas

We did not show any slides. We will be giving a little bit more disclosure of what our hedge position is in our 10Q filing later on this week. But I will say that we have hedged the majority of our aluminum and corn exposure for 2009.

John Brock

Thanks to all of you for joining us today. I hope that you all have a great day, thank you.

Operator

That concludes today’s conference and we thank you all for joining us.

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Source: Coca-Cola Enterprises Q1 2009 Earnings Call Transcript
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