Coca-Cola Hellenic Bottling Company S.A. Q3 2009 Earnings Call Transcript

Nov. 7.09 | About: Coca-Cola HBC (CCHBY)

Coca-Cola Hellenic Bottling Company S.A. (CCH) Q3 2009 Earnings Call Transcript November 5, 2009 9:00 AM ET

Executives

George Toulantas – Director, IR

Doros Constantinou – CEO

Robert Murray – CFO

Analysts

Lauren Torres – HSBC

John Stamatakos – Proton Bank

Jason DeRise – UBS

Ian Shackleton – Nomura

Nik Katsenos – Alpha Finance

David Tovar – Banc of America

Andrew Holland – Evolution

Costas Theodorou – CA Cheuvreux

Operator

Ladies and gentlemen, welcome to the Coca-Cola Hellenic Conference Call on the Third Quarter 2009 Financial Results. We have with us Mr. Doros Constantinou, Chief Executive Officer; Mr. Rob Murray, Chief Financial Officer; and Mr. George Toulantas, Investor Relations Director. At this time participants are in a listen-only mode. There will be a presentation followed by question and answer session. (Operator instructions). I must advise you that this conference is being recorded today, Thursday, November 5, 2009.

I now pass the floor to one of your speakers today, Mr. George Toulantas. Please go ahead, sir.

George Toulantas

Thank you, operator, and we appreciate each of you for joining us today to discuss our third quarter 2009 results.

Before we get started, I would like to remind everyone that this conference call contains forward-looking statements, including long-term volume and earnings projections. These should be considered in conjunction with the cautionary statements contained in our related news release and the Company's most recent filings, copies of which can be found on our Web site at cocacolahellenic.com.

With us on the call this morning are Doros Constantinou, our Chief Executive Officer, and Robert Murray, our Chief Financial Officer. Following their prepared remarks, we will then open the call for your questions.

Let me now turn the call over to Doros.

Doros Constantinou

Thank you, George, and thank you, everyone for joining us today. In the third quarter, we continued to witness the effects of the global recession on our business, resulting in volumes, excluding Socib declining by 7%.

As highlighted to you in early August, difficult economic conditions are continuing to weigh on consumer confidence and spending, particularly in our emerging markets segment. This was further compounded by the effect of reduced tourism, which adversely impacted the third quarter performance of some of our countries, including Greece, Italy, Bulgaria, Cyprus, and Croatia. Nevertheless, our established markets exhibited some resilience with volumes, excluding Socib, almost flat versus the prior year period.

I am pleased, however that we have once again been able to mitigate the impact of the contraction in the non-alcoholic ready-to-drink beverage category and significant adverse currency movements to deliver improved operating margins. This reflects both the discipline of our country management teams to deliver on planned productivity improvements and operating costs efficiencies, as well as the benefit of lower commodity costs.

In the quarter, we undertook further restructuring across parts of our operations that it remains essential for enhancing both our near-term and long-term competitiveness. This together with our earlier stated cost initiatives, gives us confidence that we will achieve our targeted full year cost savings of between EUR115 million and EUR120 million.

Rob will be providing you with some further details on this shortly.

Another key strategic focus for us this year has been to continue winning in the marketplace by leveraging the strength of our systems brands and extensive distribution reach. This will ensure we are well placed when the economic cycle enters a growth phase.

While the economic environment remains highly challenging, we are continuing to manage our business for the long-term and are outperforming the industry across many of our key categories and geographies.

We once again grew our non-alcoholic ready-to-drink share in a number of key markets, including Italy, Russia, Romania, Ukraine, Poland and Ireland. This is the result of a strong commitment to enhancing customer service through a high-quality in-store sales execution, investing in brand building programs, and creating strong value propositions for consumers.

In the quarter, we continued to support the core Coca-Cola trademark with the Open Happiness marketing campaign and activated modern trade channels with promotional displays and introduction of new packages.

While the immediate-consumption channel remains under pressure in the current environment, we expect positive, long-term trends to support margin expansion when economies recover.

We also continued to innovate across our water and (inaudible) portfolio to offer increased choice for consumers and to build long-term brand loyalty. For example, during the quarter, we launched Dobry lemonade in Russia, targeted to more value conscious consumers, lower mineralized water under the Kropla brand in Poland, and introduced new seasonal flavors under the Nestea trademark in Poland and Amita juice trademark in Italy.

At the beginning of the year, we set out a clear strategic priority to manage our business for increased cash flow during the uncertain economic period. I believe the health of our business today is clearly demonstrated by the strong cash generated year-to-date.

Our operating cash flow increased by 17% in the first nine months of 2009, primarily reflecting significant improvements in working capital. We are also managing a more prudent capital investment program, whilst continuing to invest diligently for the future.

Despite the current volatile economic conditions, the fundamentals of our business remain strong, giving us confidence that we will be able to meet our earlier free cash flow target of at least EUR1.2 billion over the next three years.

In September, we announced proposal for capital return of EUR1.50 per share, which was recently approved by shareholders at an extraordinary general meeting. Our expectation for solid cash flow generation over the medium-term and the health of our financial ratios leaves us well placed to pursue this transaction and return some additional value to our shareholders.

Further, given our ability to quickly deleverage our balance sheet, we do not expect the capital return to limit our ability to pursue attractive growth opportunities over the medium-term.

Turning to the performance of some of our key markets in the third quarter, it is evident that the impact of the global recession is being felt across our territories, but to varying degrees. In our established markets, organic volume declined only 1% in the third quarter, with growth achieved in Italy, Austria, and Switzerland.

In Italy, we continued to benefit from the successful integration of our acquired Socib business with a focus on commercial capability building and increased brand in all the distribution resulting in share gains. We are also driving improved efficiencies across the entire supply chain, which is supporting our profitability.

In Greece, volumes declined in the mid single digit, reflecting a poor tourism season, deteriorating economic environment, and strong discounting from competition.

In our developing and emerging market segments, we are seeing a mixed picture with volume growth in the third quarter in Poland, Nigeria, Slovakia, and Serbia. However, we are witnessing a (inaudible) consumer environment from more volatile economic conditions in markets such as Russia, Ukraine, Romania, Bulgaria, Czech Republic, Hungary, and the Baltics.

Across several of these markets, consumer sentiment has been eroded from rising levels of unemployment, declining disposable incomes, the introduction of new tax measures from governments, and the significant devaluation of local currencies against the euro. This has reduced consumer spending and the shift in consumer behavior towards increased consumption at home.

In Russia, volumes declined in the mid-teen in the quarter, reflecting the highly challenging economic environment as well as poor weather in August. While the recent increase in oil prices provide added support for the economy, this benefit is not yet apparent in the broad market, with consumers still being conservative in their spending behavior.

In fact, consumer confidence still remains at low levels, with around 50% of Russians believing that their personal welfare will not improve within the next six months.

While the timing of the recovery in Russia is difficult to predict, we are continuing to win in the marketplace, as evidenced by further market share gains during the quarter. We also continue to benefit from the depth of our product portfolio and our extensive distribution infrastructure in the country.

In summary, our Group results for the first nine months of the year demonstrate the resiliency of Coca-Cola Hellenic's business model amidst difficult market conditions.

We expect trading environment in central and Eastern Europe to remain challenging over the next few quarters, and at this stage, believe that the timing of these regions recovery will lag that of the established markets.

Despite the near-term trading volatility, our strategies continue to remain focused on strengthening our market positions and delivering increased cash flow. This will provide us with significant financial flexibility to capture opportunities and capitalize on the enormous potential that our geographic footprint offers over the long run.

With that, let me now turn the call over to Rob.

Robert Murray

Thank you, Doros, and hello to everyone. As I take you through our third quarter results, any reference I make to our volumes or financials will exclude the impact of last year's Socib acquisition in Italy.

As Doros indicated, our results in the third quarter reflect the continued deterioration of economic conditions across many of our key countries, which led to an accelerated volume decline versus the second quarter.

We achieved comparable earnings per share of EUR0.55 for the third quarter, EUR0.03 below the prior year period, which also includes a negative currency impact of EUR0.16.

Despite ongoing external challenges, we are making excellent progress against our key strategic priorities and are building a strong platform for future growth. Our cash flow generation remains strong as we continue to benefit from better management of working capital, driving significant reductions in inventory and receivables of approximately seven days and two days, respectively.

In addition, lower immediate capital expenditure requirements have also supported improved cash flow. While our investment in current economic cycle is below the level of recent years, our CapEx spend continues to be around 6% of revenue for the year-to-date, very much in line with industry levels, as we continue to invest for our future growth.

In the first nine months, we have almost doubled free cash flow to EUR519 million, giving us increased confidence that we can achieve our three-year cash flow guidance of at least EUR1.2 billion.

The accumulation of cash on our balance sheet and expectations for continued strong cash flow generation support our decision to return around EUR550 million to our shareholders. We are planning to finance around half of this transaction from existing cash reserves, but the remainder from new debt.

The capital return has not affected our credit rating, demonstrating the strength and flexibility of our balance sheet. The transaction is pending regulatory approval, and at this stage, we are expecting to pay the capital return by the end of this November.

In the quarter, net revenue per case declined 6%, which includes a 9% negative effect from currency translation. The benefit of our pricing actions continued to offset negative category and channel mix effects, resulting in the currency neutral revenue per case increasing by 4% both the third quarter and the first nine months of 2009.

For the quarter, comparable operating profit declined 7%, which includes a 22% negative impact from currency movements. At a segment level, solid operating results achieved in the established and developing markets are more than offset by a significant operating decline in our emerging markets.

Our profitability in emerging markets segment was negatively affected by sharp volume decline and adverse channel mix, as weak economic conditions across the region impacted consumer sentiment and spending. Our lower volumes in this segment also led to a negative operating leverage in the quarter. In our established market segment, higher pricing and operating cost efficiencies drove comparable operating profit growth of 23% in the quarter.

We continued to achieve good margin expansion in the third quarter with our gross margin and EBIT margins up 76 basis points and 87 basis points, respectively. We are pleased with this result, as it reflects the Group's commitment to delivering operating improvements in a difficult environment. Our margin expansion was again driven by increased pricing, lower commodity costs, and effective cost management.

In the quarter, our total operating expenses declined by 13%, helping to offset the impact of lower volumes. The effectiveness of our cost and productivity initiatives is illustrated by the significant deceleration in currency neutral OpEx per case from around positive 5% growth in the third quarter of 2008 to a 6% decline in the third quarter of 2009. This primarily reflects lower warehousing and distribution costs, improved marketing spending efficiency, and a significant reduction in headcount.

We have now realized almost all of our targeted cost savings of EUR115 million to EUR120 million for this year. In addition, we have identified some further productivity initiatives in a few countries and now expect a one-off pretax restructuring charge of about EUR35 million for the full year.

While these new initiatives are not expected to provide significant additional cost savings in 2009, they will provide incremental benefits in 2010. As a result, we now expect the annualized cost savings from our restructuring initiatives to be about EUR40 million from 2010 onwards, compared with an earlier expected benefit of EUR25 million to EUR30 million.

Our comparable operating profit in the first nine months included an adverse currency impact of EUR146 million. In the quarter, we witnessed continued currency volatility in a number of countries, with some further deterioration in Nigeria, Hungary, Poland, Romania, and Ukraine, in particular.

In the fourth quarter, we expect a small currency benefit of around EUR6 million as we cycle the significant currency devaluations witnessed in the early stages of the crisis back in November 2008. So, based on current spot rates, we now expect the full year negative impact from currency at our operating profit lines to be approximately EUR140 million.

For the fourth quarter, we expect top line pressure to persist, impacted by continued tough economic environment. We are also cycling solid volume growth of 6% from the comparable prior year quarter, and we will have four less selling days in December.

Looking to 2010, we remain cautious given the difficult economic outlook across a large part of our territory. Economic recovery is expected to be slow, particularly across some of the developing and emerging markets, as credit growth and foreign investment levels remain weak and unemployment continues to rise. In addition, with the possible introduction of new austerity measures from governments next year, disposable income is likely to remain under pressure.

We have demonstrated an ability to mitigate the effects of these tough economic conditions and deliver margin expansion through implementing our plan, productivity, and cost efficiency initiatives this year.

As we go through our three-year current business planning process, our country management teams remain committed to achieving even further operational improvements in 2010. As a system, we have a leading brand portfolio and extensive distribution system that provides us with unparalleled reach to outlets and consumers.

We are also taking further action to enhance our service offering to customers, and we'll be implementing the front-end commercial module of SAP in four more of our markets in the first quarter of 2010, Italy, Greece, Bulgaria, and Cyprus. This investment is expected to provide enduring benefits for both Coca-Cola Hellenic and our customers in the years to come.

In closing, our clear strategy and near-term priorities give us confidence that we will be able to continue winning in a highly challenging environment, while delivering sustainable growth for Coca-Cola Hellenic over the long-term.

Thank you, all for your attention, and operator, we would now like to open it up to questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Lauren Torres of HSBC. Please ask your question.

Lauren Torres – HSBC

Hi, everyone. My question is regarding the outlook for next year to the extent that you can talk about it. This year you've been successful with respect to managing your costs better and raising prices. I guess, Rob, you touched upon the costs that your ability to realize further cost savings next year. But curious to get your thoughts about where that is coming from, being that you were quite active doing that this year.

And then, on the pricing side, if you think the consumer environment should remain soft, do you think there is still some good room to take pricing? And if you do, do you think that will affect further consumer push back because of those price increases?

Doros Constantinou

Hi, Lauren, this is Doros. Well, we are going through our business planning process at this stage, and we expect volumes in 2010 to continue to be impacted by the challenging economic conditions and the weak consumer environment. We expect that a number of our developing and emerging countries will be impacted by further tough economic conditions in 2010, and the recovery will be coming at a slow pace. So our focus continues to remain on strengthening the market positions, winning at the point-of-sale. And I believe that this strategy has been effective for us so far.

Now, regarding the pricing, inflation is expected to moderate next year across the markets. We expect that weighted average will be somewhere in the range of 4%. And that is currency neutral. Pricing opportunities are not expected to be significant. However, we have the commodities, and at this stage we are not expecting again a significant change in the commodity costs versus the levels of 2009.

Rob Murray

Lauren, regarding cost savings, as I mentioned, we will have additional benefit from cost savings from our restructuring program on top of what we've achieved this year of about EUR20 million, at this stage. We do also expect through our business planning process that we will identify further opportunities.

And then I would say on the currency side, you guys may know as well as we do, but people are obviously projecting that there will be some return of GDP growth in our markets and that currencies will moderate favorably for us. But however, that's very difficult for us to pin down at this stage. So we'll have much better feedback on this, obviously when we announce our full year earnings.

Lauren Torres -- HSBC

And just to clarify, Doros, you said, on pricing, you do feel that you can price in line with inflation again? That's the impression?

Doros Constantinou

That has been what we've been doing in the past; we had pricing close to inflation.

Lauren Torres – HSBC

I was just curious, next year, if you feel being what you did this year, if you could take similar steps next year and still do it in line with inflation, or that will be more difficult to do?

Doros Constantinou

Well, Lauren, we are in the middle of our business planning process. So this is a country-by-country process, and we need to review the plans before we have an overall view of what the position will be in 2010.

Lauren Torres – HSBC

Okay. Thank you.

Operator

Your next question comes from John Stamatakos of Proton Bank. Please ask your question.

John Stamatakos -- Proton Bank

Hi, good afternoon. I have a couple of questions. The first one is regarding the cost savings that you have achieved for the nine months. Can you give us an approximate of how much you have already achieved from your FY target, I mean. And can you give us an update of your hedging positions for next year? I mean (inaudible) roll of that. And, lastly, regarding the capital return, you said that you feel flexible to make any acquisitions in the near-term. Do you have any plans or any discussions, or are we watching for water or juice acquisitions right now? Thank you. That's it.

Rob Murray

Hi, John. Obviously, Doros touched on it, but we see, in general that from a commodity point of view that we don't expect much impact on our business. However, there can be some impact across our segments. As you all know, world sugar prices are at pretty much record levels, so our emerging market segment will have a negative impact in this area. However, as you recall, we are expecting further savings in the EU area, which will pretty much offset that impact.

The other key input costs at this point we see as not having any negative impact on us. But those contracts and our forecasts on that area we're trying to nail that down. On the cost savings-- did you have any further questions on cost savings or was it just commodities?

John Stamatakos -- Proton Bank

Yes. How much do you have achieved from your FY target?

Rob Murray

Okay. Well, as I said, we've nearly reached the full target of the EUR115 million to EUR120 million savings. The majority of it has already been realized.

John Stamatakos -- Proton Bank

Okay.

Rob Murray

And then you got a question on acquisitions, I guess.

John Stamatakos -- Proton Bank

Yes. Doros?

Doros Constantinou

Yes. As I said during my comments, we don't expect that the return of capital will impact our ability to capture any potential opportunities in the marketplace.

John Stamatakos -- Proton Bank

Do you have any acquisition or any areas in mind that-- do you see any opportunity right now actually?

Doros Constantinou

Well, it's around the areas and the geographies we've always talked about, around primarily juices and to a certain extent, water, in central and eastern Europe, where we are not present in these categories. We're always out there looking for opportunities, but nowhere close to any discussions that we could call a deal.

John Stamatakos -- Proton Bank

Thank you very much.

Operator

Your next question comes from Jason DeRise of UBS.

Jason DeRise – UBS

Hi. One first clarification on the first question of the Q&A. When you're talking about pressures remaining in emerging markets, are you saying that you're expecting volumes to be down next year or below what your normal trends would be? And then I'll ask the actual questions I want to ask you.

Doros Constantinou

Hi, Jason, this is Doros. We don't give specific guidance this year or next year regarding volumes or other P&L lines with the exception of cash flow. It's a general comment about the expected conditions in these markets. They will continue to be challenging and volatile. There may be some further impact on volumes in some of the countries and some positive trends in other countries. At this stage, as I said before, we are half way in our business planning process, so it's too early to make comments about that.

Rob Murray

Jason, I would also say, remember, the definitely is correlations to how GDP is developing in markets. I think our tone is really regarding Q1. And when does the recovery take place? And it's going to come at different times across different markets. I think that's what's really difficult at this stage to predict.

Jason DeRise – UBS

Right. Okay. I understand. I just wanted to make sure I understood that it wasn't something worse than that. The questions that I wanted to ask first about the extra days, I mean, I think it's going to be at the end of the period. And then that's probably the more seasonal part of your volumes. So the impact is probably more than just taking 4 days out of 90 days for the quarter. Is that the right way to think about it? Can you quantify what percent impact we should be thinking about in the quarter that maybe a little more than 4%?

The next question I had on the slide presentation if I look at your OpEx expenses per case, marketing is down 40%. And I just wanted to get some color on what is driving that. And then, I guess lastly, if you can talk about, I know I ask this question a lot, but I think it is the key issue here. How much of the cost savings that you're generating now while volumes are weak need to be reinvested when eventually you do get back to your high growth, mid single-digit trend for the overall business?

Rob Murray

Okay. I guess the first one is probably the most challenging one, which is the days. It's always difficult to project exactly how much that will impact us. But, obviously it is during the holiday season at the end of the year. So I would say would have a slightly higher weighting than the four days we gained in the month of January. So I would look at it that way, for sure.

The DME basically, there's several things affecting DME positively for us, which is one, as you know, the cost of marketing spend rather has come down across most of our markets quite substantially. We had a major launch last year with Coke Zero that we're cycling, and that money was not invested, as well as we had the promotional support with a sponsor for the Euro football tournament in Europe last year. Those are the main drivers where the savings are coming from. And I think that also weighs into your next question really on how much money will be permanent savings. For us, we see that, that DME spending will be reinvested over time, depending on launches, and as we expect, obviously rates will increase again going in the future. So I wouldn't say that's a permanent savings. That's something that will come back. I just think it will take a couple years for that to come back up to the levels that we're at previously.

Then I would say the rest of the savings, the 40 million restructuring savings, those are, I would say, permanent savings. And then, if you take out from there, roughly about60 million left. A big part of that is also a reduction in headcount, as well as other initiatives that we have across the business. So I would say the majority of that would also be savings that we're going to benefit for going forward. The big one I would say that we would come back into our cost base is the DME.

Jason DeRise – UBS

Okay. Thank you.

Operator

Your next question comes from Ian Shackleton of Nomura. Please ask your question.

Ian Shackleton – Nomura

Good afternoon, Doros and Rob. Three questions. Firstly, Doros indicated the pack mix was negative in Q3 with immediate consumption to pressure. I wonder whether you could give a little bit more granularity on that. Secondly, currency for 2010,-sShould we as things stand assume that's going to be broadly neutral at the EBIT level? And, thirdly, Rob if you could give us some idea of where we should see the average coupon after the capital repayments made of the debt let me just to be clear.

Doros Constantinou

Hi, this is Doros. Regarding the pack mix, we have witnessed consumer confidence weakening across the countries. And as we've talked about it before that has resulted in decreasing spend in the more profitable, immediate consumption channel. It has particularly impacted our Horeca [ph] retail restaurants and cafeteria, the on-the-go channel, and the quick serve restaurant channel. At the same time, we see shift towards future consumption channels, but as we've talked about it before, these are not as profitable. And we have adjusted our marketing programs accordingly to increase promotional activity to offer high value to consumers, and make sure that we keep them in the franchise in general.

Ian Shackleton – Nomura

I'm just wondering, Doros, how material that has been, because I know in established markets, historically, you've talked about 50% of the business being immediate consumption. Has that moved materially?

Doros Constantinou

Ian, the breakdown, the mix between future consumption and immediate consumption in the different market segments hasn't changed significantly. It has been impacted almost the same across the three different segments.

Rob Murray

Ian, I guess, can you just repeat your question because I missed part of it? I'm sorry.

Ian Shackleton – Nomura

I was really just looking out to 2010, taking the account of FX both on the revenue line and what it might mean for the input costs. Should we think about FX as being broadly neutral now for 2010 as a whole?

Rob Murray

Okay. I guess, as I said before, most economists that we're looking at from this stage are showing that we should have some upside on this area next year. And as you can see, in Q4, we expect a slight improvement. What's difficult to project is will it be significant or not. But, in general, we expect this start to become a tailwind instead of a hurricane in our face.

Ian Shackleton – Nomura

And the final question was around average debt coupon once you've done the capital repayment.

Rob Murray

Okay. Well, one of the things we're looking at with the financing on this capital return is whether we go a little bit longer with this debt, because the rates are quite favorable right now, obviously. And I would say to you right now, if you might recall, those rates seem to be in the 4% to 5% range even at seven years for us. But, we haven't taken a final decision on that. I would say, if you recall, most of our debt is currently still floating, and we've locked in with caps about 55%, 60% of that, stepping it up over the period of time over the next five years. So we'll continue to enjoy the lower financing rates as long as they stay in place, and we have protection in case they go up. That's what I would say.

Ian Shackleton – Nomura

But it sounds like, for 2010, we should expect an element of fixing, which could push up slightly the overall group average.

Rob Murray

Slightly, I would say. Obviously, if we borrow EUR250 million to EUR300 million out of EUR2 billion debt, it won't have a big impact on that.

Ian Shackleton – Nomura

Thanks very much.

Operator

Your next question comes from Nik Katsenos of Capital Link [ph]. Please ask your question.

Nik Katsenos -- Alpha Finance

Good afternoon, gentlemen. It's Nik Katsenos from Alpha Finance, actually. Just a couple of questions. The first one, I'm not sure if that has been answered previously regarding the comparable OpEx per case. In the third quarter, the marketing expense was EUR0.08. We should expect that to be a floor in the next few quarters and a gradual increase of that?

Rob Murray

We did answer this question before. Basically, what we see is that we're going to start to see this number come back with an increase back in our operating costs over the next two years. And we'll go back to probably the levels that we were at prior to the crisis.

Nik Katsenos -- Alpha Finance

Another question, regarding the implementation of the SAP in the first quarter of the next year, we should expect any impact in these four countries in terms of volume?

Doros Constantinou

We are, Nik, building the conveniences and taking the measures after the learnings we got from the pilot in Czech last year, to make sure that we don't have an impact on our volumes in the business in general.

Nik Katsenos -- Alpha Finance

Okay. And a last question, if I may. Regarding the market share maintenance or gains in key countries, I wonder if these gains are at the expense of premium brands, value brands, or private label, if you could please elaborate on that.

Doros Constantinou

Well, I would say that, in most countries, the gains are at the expense of brands similar to ours, and we have a range of products. We have premium sparkling beverages; we have value brands, as well, in some markets, which we use tactically. So it's a mixed situation. It's an average. But, under the circumstances, one wouldn't expect that we are gaining market share with our premium brands versus the cheap value brands of local origin. So, in most of the cases, it's out of premium brands.

Nik Katsenos -- Alpha Finance

Thank you very much.

Operator

Your next question comes from David Tovar of Banc of America. Please ask your question.

David Tovar -- Banc of America

Yes, morning, guys. Just wanted to ask two questions. Firstly, again coming back to the marketing line is there any sort of special programs or any special step up in marketing one should expect around the World Cup activation next summer, in 2010? I know it's a little bit early. But any sort of data you could give on that, rather than just saying, over the next two years or three years, directionally it's going to be up?

And sort of secondly, I just wanted to get a little bit more with your free cash flow guidance. You're guiding to EUR1.2 billion over the next three years. You've done EUR519 million in the first nine months. Yet, given the fourth quarter is usually a positive one for working capital and cash flow, it's not inconceivable that you could be half way to your target after year one. Is there anything I'm missing there? Is there something that we need to bear in mind into next year that will reverse on the working capital on the cash flow side? Or are we just running well ahead of plan?

Rob Murray

Hi, David, thank you. I guess the first one on the World Cup; the Coke system is a sponsor again of that event. And it's definitely part of all of our plans for next year. So we're going to try to leverage that the best that we can. And obviously, what money we need to invest to optimize that we will do. So that's part of, I would say, some of the step up, but I don't expect it to be all of it.

On the free cash flow, obviously the results are quite strong for the first three quarters. Couple things to keep in mind for us right now. Q3 obviously is the biggest quarter of cash coming in for us, as we collect the receivables from the summer period and we take down our inventories even further off of the summer level of inventories. I would say also what's important to understand is our CapEx is not geared to our sales curve. So in relationship to the size of the quarter, we don't expect as much cash flow, obviously as we did in that Q3 to come through. So I don't expect a big jump in that in the fourth quarter. What I would say is regarding our guidance, we're in our business plan right now, and we will definitely give you guys an update on where we see that going at the beginning of February.

David Tovar -- Banc of America

Okay. Thank you.

Operator

Your next question comes from Andrew Holland of Evolution. Please ask your question.

Andrew Holland – Evolution

Hi. Just looking forward again to next year, you're obviously pretty cautious on the volume outcome next year. And your response to the weak volumes this year was to stay connects to the costs. Just thinking of the magnitude of the possible cost savings next year, you've obviously indicated that an element of those cost savings were lower marketing spend, which will go back up next year, potentially or start to go back up. Could we nonetheless take it that the size of possible cost savings would be around EUR100 million; i.e., the EUR120 million less the marketing saving, if you like?

Rob Murray

Hi, Andrew. I guess really on that question, it's too early. We're going to give you guys a complete answer on that in February after our business planning is finished.

Andrew Holland – Evolution

So, at this stage, you couldn't give us an indication whether it's going to be around the same amount, half the amount, or anything like that?

Rob Murray

No. What I can tell you is that we identified an additional EUR20 million, for sure from the restructuring programs, but that's all I'm willing to put out there right now until we see the business plan.

Andrew Holland – Evolution

Okay. Thank you.

Operator

Your next question comes from Costas Theodorou of CA Cheuvreux. Please ask your question.

Costas Theodorou – CA Cheuvreux

Thank you. Good afternoon. Two questions on the cost side; one, just to clarify on the cost inflation for next year on the comment on commodities. If the situation remains the same on volume and product mix, would you say that there will be no cost inflation for next year, just to understand that on sugar, aluminum, and PET, that's my first question on the costs. And the second is on the EUR40 million of restructuring. Could you be a little bit more specific on which line of the costs are going to benefit? That's my two questions on the cost. And just one question on the margin. You said in the first half results that the second half margin 2009 would look like the second half of '08. Is this still the case based on what you said on the last quarter? The final question is just a little bit more open regarding the market you lose, you see the market shrinking, would you say that this is across all product categories, or are there specific products more affected? That's a more open question. Thank you.

Doros Constantinou

Hi, Costas, this is Doros. I'll deal with the last part of your series of questions, which has to do with product categories. I will say that we see impact on all the categories, not at the same rate. I would say that juice and in specific markets, like Russia is being challenged more heavily than other categories. Water year-to-date is down single digits. And sparkling beverages, excluding Socib, they're down mid single digits.

Costas Theodorou – CA Cheuvreux

It's clear.

Doros Constantinou

So it's different rates of impact in these categories. Let me correct the last one, because the numbers and the ratios I'm giving you are all year-to-date for the nine months. So, sparkling beverages are down low single-digit.

Rob Murray

On the commodity costs, in general, we expect them to remain fairly stable in 2010. Sugar, in general, is going to have a negative effect on the emerging markets, but this will be offset by a reduction in costs in the EU countries. And regarding the rest of the commodities, in general, we don't see a major impact. Of course, PET is influenced by oil prices, so if anything changes dramatically there, then that could have a potential negative impact. Overall, we see inflation in our territory around 4%, which will have some impact on our operating expenses. But again we intend to manage that carefully.

And then, on the restructuring, I don't have an exact number for you how much is in the COGS line or the operating expense line. But a significant amount of this is also coming out to help our gross margin, as we had closed several production facilities. So, I would say it's coming out of both areas, probably half and half, roughly.

Costas Theodorou – CA Cheuvreux

Okay. And regarding the margin of the second half? Would you speak on what you said last quarter, or is it too early to say?

Rob Murray

I would say Q3 came in a bit better than we originally expected. On Q4, there's a lot of factors affecting this quarter. And we don't see it being far off of where we were last year. However, there is a considerable pressure on the volume side. So we will have some, I'd call it, “reduced operating leverage.” Regarding currencies, I mentioned earlier that we expect to have a slight improvement there. We're cycling now a lot of the cost savings that we had started already last year, so I expect less of a benefit on that side.

Costas Theodorou – CA Cheuvreux

Okay. Thank you very much.

Operator

You have no further questions at this time. I now pass the floor to the speakers for any closing remarks.

Doros Constantinou

Thank you, all, for joining us today, and we look forward to updating you further over the next few months. Thank you.

Operator

That does conclude our conference for today. For those of you wishing to review this conference, the replay facility can be accessed by dialing country code 44-1452-550000, or from within the UK, on free call number 0800-953-1533 or local dial-in number 0845-245-5205.

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