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Coca-Cola Enterprises Inc. (NYSE:CCE)

Business Update Conference

December 19, 2013 10:00 am ET

Executives

Thor Erickson

John Franklin Brock - Chairman, Chief Executive Officer, Member of Executive Committee and Member of Corporate Responsibility & Sustainability Committee

William W. Douglas - Executive Vice President of Supply Chain

Hubert Patricot - Executive Vice President and President of the European Group

Analysts

John A. Faucher - JP Morgan Chase & Co, Research Division

Nicolas Ceron - Societe Generale Cross Asset Research

Judy E. Hong - Goldman Sachs Group Inc., Research Division

Ian Shackleton - Nomura Securities Co. Ltd., Research Division

William Schmitz - Deutsche Bank AG, Research Division

Bryan D. Spillane - BofA Merrill Lynch, Research Division

Mark D. Swartzberg - Stifel, Nicolaus & Co., Inc., Research Division

Ali Dibadj - Sanford C. Bernstein & Co., LLC., Research Division

Damian Witkowski - G. Research, Inc.

Caroline S. Levy - CLSA Limited, Research Division

Operator

Good day, and welcome to the Coca-Cola Enterprises Business Update Conference Call. At the request of Coca-Cola Enterprises, this conference is being recorded for instant-replay purposes. At this time, I'd like to turn the conference over to Mr. Thor Erickson, Vice President of Investor Relations. Please go ahead, sir.

Thor Erickson

Thank you, and good morning, everybody. We appreciate you joining us today to discuss our outlook for full year 2013 and to provide our outlook for 2014.

Before we begin, I'd like to remind you of our cautionary statements. This call will contain forward-looking management comments and other statements reflecting our outlook for future periods. These comments should be considered in conjunction with the cautionary language contained in this morning's release as well as the detailed cautionary statements found in our most recent annual report on Form 10-K and subsequent SEC filings. A copy of this information is available on our website at www.cokecce.com.

This morning's prepared remarks will be made by John Brock, our CEO; and Bill Douglas, EVP, Head of our Supply Chain and recent CFO. Hubert Patricot, President of our European Group is also with us on the call this morning. Following prepared remarks, we'll 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'll take follow-up questions as time permits.

Now I'll turn the call over to John Brock.

John Franklin Brock

Thank you, Thor, and we welcome each of you to our business update today. As most of you know, Nik Jhangiani assumed the role of Chief Financial Officer November 1, and we had certain plans for this to be Nik's first call with you. Unfortunately, he will not be with us today as his mother passed away suddenly last night. Our thoughts and prayers are with Nik and his family. Bill Douglas will fill in for Nik today. Before we discuss our outlook for the remainder of 2013, as well as our expectations for 2014, I'd like to briefly look at our business and discuss a few key points.

As you know, we made it through an array of challenges this year, including sustained and difficult macroeconomic conditions. Some periods of poor weather and a complex competitive and customer environment. These conditions have been demanding and our people have responded with outstanding skill and dedication. Importantly, this work has been recognized with the results of the recent advantage group survey. This is a benchmark for consumer goods manufacturers based on the comments from key retail customers. The survey ranked CCE #1 in Belgium, Great Britain and the Netherlands and #2 in France. This is really a noteworthy accomplishment. And it helps demonstrate that we have the operating strategies necessary to meet the demands of our evolving marketplace. To seize the growth opportunities that are available, and ultimately to build the stronger foundation for future growth.

In fact, we remained fully committed to the delivering value for our shareholders, which is our most important objective and that's through the talent and dedication of our people by managing each element of our business to drive growth and by utilizing the advantages of our balance sheet.

Now as we review our outlook for full year 2013, we expect earnings per diluted share at the high-end of our range of $2.45 to $2.50. This reflects a currency translation benefit of about 2% based on recent rates. Including the impact of currency, we continue to expect net sales on operating income to grow in a low single-digit range on a comparable basis. While, we've recognized that our results this year reflect the challenging environment, we believe we've made good progress on our key initiatives. These include our Business Transformation Program as well as the reorganization in Norway, which will continue to enhance our ability to drive additional growth.

Now as we look to 2014, we expect earnings per diluted share to grow by approximately 10% on a comparable and currency neutral basis. Net sales are expected to grow in a low single-digit range and operating income is expected to grow in the mid single-digit range, both of these on a comparable and currency neutral basis. These objectives represent improvement from 2013, but they remain modestly below our long-term targets as we work through ongoing marketplace and macroeconomic challenges.

Our 2014 outlook reflects a balanced business plan that is focused on creating additional marketplace opportunities, maintaining our enhancing margins and strengthening our foundation for long-term growth.

Now let's look at key elements of our 2014 plan that will help drive these results. Our plans are centered on 3 key areas. First, building on the advantages of our core brands. Second, enhancing our focus on energy and Coke Zero. And third, investing in our future. To build on the advantages of our core brands, we will utilize a combination of marketing initiatives and packaging innovation.

Our marketing programs will focus on 2 key initiatives. First, we will build on the success of our Share-a-Coke campaign with a program beginning in this spring with more names and enhanced online interaction. And second, we're going to maximize the benefits of our relationship with the FIFA World Cup and we're really excited in England, France, Belgium and The Netherlands have all qualified for the finals in Brazil. Throughout the key summer selling season, we will support the World Cup with customer and country specific packaging and in market activation centered on Coca-Cola and Coke Zero.

We also will utilize our broad pack diversification strategy, bid into this new multi-service packages and multipacks in the Home Channel -- in the Home Channel. And in the Cold Channel, we will continue to expand penetration of our 250 ML cans.

The second key element of our 2014 plan, is building on our success with Coke Zero and in the energy segment. For Coke Zero, we will implement key initiatives centered on packaging, price and promotion and we look forward to sharing specific news with you early next year. In energy, we will build on our 4 brands, Monster, Relentless, Nalu and Burn. Each of these brands offer unique marketing and in-store opportunities. In combination, these 4 brands will be an important source of growth in 2014. The third element of our plan, investing for the future, is demonstrated by a key step, we're taking in Great Britain next year. We will move to a contour 1.75 liter bottle as the primary large PET package in the Home Channel, replacing non-contour 2-liter bottles. This new package creates a solid point of in-market differentiation for our brands and helps address the changing economics of the channel. Importantly, the 1.75 liter package has been well received by customers. And we look forward to updating you on the future on the progress of this initiative.

Investment for the future also requires a sustained focus on effectiveness and efficiency, as demonstrated by our successful ownership cost management initiative, which focuses on cost control. Our Business Transformation Program, which remains on track and the reorganization of our business in Norway. The Norway transition is a real success and is meeting or exceeding all of our expectations.

In total, this programs and initiatives are the foundation of our work to deliver the type of sustained operating growth that will drive continued increases in shareholder value. To achieve this goal it is essential that we maintain a focused financial approach to our business. Bill will provide more detail on our approach in a few minutes, but I would like to outline the 3 key steps in this process.

First, we'll continue to generate strong free cash flow from operations by driving core growth, maximizing asset utilization and investing prudently in the business. Second, we will continue to optimize our capital structure and operate within our long-term net debt to EBITDA target range. And finally, we will utilize our free cash flow to its highest and best use, by maintaining a disciplined approach to M&A and taking action, where there are significant opportunities to create value. Absent these opportunities, we will return cash to shareholders through share repurchase and a competitive dividend payout. We therefore plan to continue to repurchase our shares in 2014, with a goal of approximately $800 million in repurchases. As you know, we begin our $1.5 billion share repurchase program in January of 2013. Through that program, we will repurchase about $1 billion of our shares this year.

Importantly, our Board of Directors recently approved a new $1 billion share repurchase program, which is the fourth program since the 2010 transaction that created the new CCE.

Now let me conclude with a few key thoughts. First, despite the impact of prolonged macroeconomic weakness, we do remain well positioned to enhance growth in a dynamic marketplace. We have highly skill, motivated people. We have brands that are highly popular with our customers and consumers and we support those brands with effective marketplace initiatives. Second, we continue to excel on our efforts to maximize the effectiveness and efficiency of our operations. Each element of our supply chain operates at a world-class level, and the service we provide to our customers continues to be outstanding, even as we continually search the ways to improve. And third, we continue to have solid partnership with the Coca-Cola Company. We have a shared vision of the future for the Coca-Cola business in our territories and working together, we will achieve sustained value building growth. And finally, we continue to utilize each of these assets to deliver on our most important objective, which is creating shareholder value.

Now I'll turn the call over to Bill.

William W. Douglas

Thanks, John. I'd like to add my welcome to each of you joining our business update this morning. Also of note, on behalf of myself, as well as the entire CCE family wanted to wish Nik and his family the best as they're going through these difficult times.

First, let's take a look at our outlook for the remainder of 2013. As John reviewed, we have affirmed our guidance for diluted earnings per share at the high end of our previously stated range of $2.45 to $2.50. This includes a 2% positive currency impact at recent rates. We also continue to expect full-year comparable net sales and operating income to grow in a low single-digit range versus prior year, again including the impact of currency.

Our 2013 free cash flow will total approximately $500 million. This includes a year-over-year increase in cash restructuring expenses, estimated in the range of $100 million to $125 million. Full year 2013 capital expenditures continue to be expected in a range of $300 million to $325 million. Weighted average cost of debt is expected to be approximately 3% and the comparable effective tax rate for 2013 is in a range of 26% to 27%.

Let's now take a look at our expectations for next year. We believe, 2014 operating conditions will remain challenging with persistent soft macroeconomic trends, as well as a dynamic competitive environment. We expect this to result in modest category growth and in turn, limit our ability to achieve growth, that reaches all of our long-term objectives. However, we remain committed to managing the elements of our business efficiently and utilizing the strength of our balance sheet effectively, all with 1 clear overwriting goal, creating shareholder value. Given these operating factors, we expect earnings per diluted share to grow approximately 10% on a comparable and currency neutral basis. So it is extremely early, based on recent rates, currency translation would be expected to have a 3% to 4% positive impact on our full-year 2014 earnings per share. As you know, this currency impact will change as we move to 2014 and will update you on our quarterly calls.

Net sales were expected to grow in a low single-digit range and operating income is expected to grow in a mid single-digit range, both on a comparable and currency neutral basis. Cost of goods sold is expected to increase in a range of 2% to 2.5%. Our net sales and operating income growth next year will reflect a balanced approach with volume growth and pricing that will cover cost of goods sold increases. For 2014, net income growth is expected to be less than operating income growth as interest and taxes are expected to be up slightly in '14. We also expect to achieve free cash flow in a range of $600 million to $650 million, while capital expenditures are expected to approximate $350 million in '14.

Weighted average cost of debt is expected to be approximately 3% and the comparable effective tax rate for next year will be in a range of 26% to 28%.

Now before I move on, let me review our capital structure and our goals for next year. As background, we periodically review our capital structure, having recently completed a review, we remain committed to operating within our long-term capital target range of 2.5x to 3x net debt to EBITDA. We expect to end this year 2013 within that range. Further, next year, we expect to modestly increase our leverage and continue to operate within the 2.5x to 3x range. In the future, this leverage may be impacted by decisions we make as we continue to explore ways to best manage the optionality of our balance sheet.

In the event of merger and acquisition activity, we will be willing to go above our long-term target. In this scenario, we would alter our plans for use of free cash flow to include debt reduction until we return to our leverage ratio within our long-term range. However, absent merger or acquisition activity, we anticipate maintaining this leverage ratio and returning additional cash to shareowners through a combination of ongoing dividends and share repurchase. As John shared with you, we currently expect to continue share repurchases next year with the goal of approximately $800 million for the full year 2014. In all scenarios, our ultimate goal remains the same, to grow shareowner value. 3 steps are required to accomplish this. First, we must reignite core growth, drive cash from operations and invest prudently in the business, while maximizing the utilization of our existing asset base. Second, we must continue to optimize our capital structure and operate within our long-term range. And finally, we must maintain a disciplined approach to M&A and continue to return cash to shareowners through a competitive dividend payout, as well as share repurchases.

Importantly, though our outlook in 2014 is not achieving all our long-term targets, we remain focused on shareowner value. With our strong free cash flow and balance sheet, we expect to return approximately 10% of our market cap to shareowners next year. Let me assure each of you, that enhancing shareowner value remains our company's most important objective.

Now before we open up for Q&A, I would like to address 1 final item. We've all been asked the question, what would Nik do differently as the new CFO for Coca-Cola Enterprises. Rest assured our consistent focus on driving shareowner value is shared by all of us and we are committed to this approach. In fact, today's prepared remarks that I shared with you are Nick's, not mine. So thanks again for joining us and now John, Hubert and I will be happy to open the call up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from John Faucher of JPMorgan.

John A. Faucher - JP Morgan Chase & Co, Research Division

I want to talk a little bit about the markets individually if you could in terms of how much you're seeing the price competition heat up in GB and then also, if you look out at France over the next couple of quarters, what gives you the confidence that we're finally pass the excise tax increase and are you seeing the retailers come back to the category a little bit more?

John Franklin Brock

John, let me ask Hubert to talk a little bit about GB and also France.

Hubert Patricot

Yes, John, in GB, and throughout our territories, our focus remains on long-term profitable growth. And we see in GB like in France, the category as growing in value and expandable for both us and our customer. Regarding GB, we are building for the future as John said, and we're going to have a major initiative within production of the 175-liter contour bottle as our main package in the Home Channel. It will come with a new price point and it will give us more flexibility in our promotional activities. In the Cold Channel, we're expanding of penetration of our 250 ML can, giving again new price point to our customers and new size. We're in the promotional activity, as we shared the category always experienced failures of increased planned promotional activities. Last year, we saw the price gaps, price premium, this is our primary cola competitor increase. And as we previously said, for 2013, we have taken a more modest approach to pricing in GB. Looking ahead to 2014, our pricing plan will cover our custom good inflation, on the strength of our packaging initiative like the 1 I just mentioned, and strong customer program. And we expect that the pricing and customer environment will remain competitive, yet rational over the long-term. If we move to France, it's fair to say that the French business and environment are improving. You know that historically France has been our growth engine and we continue to be optimistic about the medium to long-term growth prospects. And we have seen gross return in the sub quarter and encouraged by the first month in this quarter. As you recall, there was a significant excise tax increase in 2012. It has challenged both the category, us and our customer. But to date, our customer relationship and more specifically, the category of both improved. In fact, we were recently ranked #2 supplier in the most recent Advantage Group survey, which comprise retailer ranking in many supplier. So again in France the environment remains dynamic, still evolving, but we are encouraged because that category and us are back to growth. And we believe, there is much more ahead of us.

John Franklin Brock

Thanks, Hubert.

John A. Faucher - JP Morgan Chase & Co, Research Division

So if I can ask 1 quick follow-up on that, which is the 1.75 is that going to be a little bit of a mix benefit, providing, maybe a little bit more profit growth and then is it just simply about getting in a lower price point relative to competition, which I'm assuming, we'll have the 2 liters at roughly the same price point?

Hubert Patricot

It's a combination of many aspects. First, it's a new size, new shape. We going to have to turn all the GB market in contour bottles, which would be new use and a strong differentiation in the market. And that as you point out, just we come with a more affordable price point on our major pack.

Operator

Our next question is from Nicolas Ceron of Societe Generale.

Nicolas Ceron - Societe Generale Cross Asset Research

Could you talk a bit about input cost for next year? Overall, and maybe if you could go through the different items that you got in PET would be very helpful.

John Franklin Brock

Bill would you do that one.

William W. Douglas

Sure, Nicolas. As we highlighted in my remarks, we expect our cost of goods sold to be up in the range of 2% to 2.5% for next year. And one thing you have to think about when you're comparing our year-over-year increases, that's what we're expecting to be realized hedged cost in 2014 versus our realized hedge cost in 2013. So looking at spot of respond, may or may not be indicative of what's going to be flowing through our P&L. Overall, we're having fairly modest outlook from a COGS perspective across the board. In '13 the highest contributor to our COGS inflation, quite frankly was sugar. In '14, that's going to be abating and the individual impact from any 1 commodity if not materially different from that overall average. And again, as discussed before, [ph] as we go through the gear with our quarterly calls, we'll update that COGS outlook as appropriate. I guess, the other thing I would highlight is sitting here today, going into January, we do have a good level of hedges in place, what would be indicative typical of this time of year or maybe even slightly better. So we feel pretty good about our position for 2014, albeit maybe not quite as low as some of you may have thought, but again that's factoring in hedge over hedge, '14 versus '13.

Nicolas Ceron - Societe Generale Cross Asset Research

Okay. Could you just give us a magnitude of the fall in the sugar price for the contract that you renegotiated in October?

William W. Douglas

I think, I'll just leave it, where I have said earlier as we get deeper into the year. That does have some competitive benefits or implications to us. We're not going to get specific commodity by commodity at this juncture.

Operator

Our next question is from Judy Hong of Goldman Sachs.

Judy E. Hong - Goldman Sachs Group Inc., Research Division

So first, just in terms of your comment about top line growth in 2014, a bit more balanced between volume and pricing. I was curious as to how you're thinking about particularly in the volume side, what kind of macro conditions you're assuming? You've got a lot of the investments behind the brands, you've got the World Cup. So just kind of thinking about where your volume expectations for 2014. It sounds like we are a little growth based on your low single-digit topline growth.

John Franklin Brock

Judy, I'll make a bit of a broad sort of comment and ask Hubert to add a little more color to it. I think, as we don't generally talk about volume per se. We talk about revenue because we think, it's important for us to be able to manage all of the components there of volume, price and mix and whatever is the most optimum and opportune way depending on what's going on in the market, whether it's macroeconomics, competitive pressure, consumer behavior, you name it. And so that really is how we're looking at our business. I think, in 2014, we do believe that we'll have volume growth and we're excited about that, we've had -- the third quarter of this year, we had volume growth. And as you've heard us saying we're anticipating volume growth in the fourth quarter in line with our expectations. So as you look ahead to '14, again, we expect some volume growth, we're not quite sure what's it's going to be. I think, the category in general is going to continue to be a little limited, and when you look at all of the conditions we've talked about, obviously, we expect to outperform in the category, we generally do take share. So within that, I'll ask Hubert to say a little bit more about it, that -- that's kind of how we're looking at. We think we will have volume growth, but we can't be very specific about what it's going to be.

Hubert Patricot

Yes, judy. As John said the macroeconomics we think remain challenging for both of us and our customer. Also we can anticipate some improvement in the GDP growth in most of our countries for next year. But we're seeing the unemployment level will remain pretty high especially in France and Benelux. And this will continue to affect away from Home Channel customers. But having said that, as you pointed out, we have a strong plan, a strong marketing plan for next year, combining the World Cup, Share-a-Coke, the new pack I mentioned for GB, and we continue to benefit from the strong consumer attraction behind Coke Zero. And for Coke Zero, we'll have new pack, new graphics and new campaign. So net, net we see growth coming, but we're cautiously optimistic.

Judy E. Hong - Goldman Sachs Group Inc., Research Division

And then just 1 question, Bill on free cash flow guidance. So $600 to $650 million for 2014, still implies there is a bit of a gap between your net income and free cash flow guidance. So can you just call out some of the delta as far as where the outflows will be in 2014? I think, there's probably some restructuring charges there. But just, if you can quantify some of those outflows.

William W. Douglas

Sure. I think, you highlighted the 1 that I would say is of material nature, and that's the ongoing cash restructuring charges that we anticipate in 2014. That number is circa $75 million. So if you were to exclude that or project into 2015, when we would have fulfilled all of our cash restructuring. I think, you would see those 2 being much closer together. Also the other item that less material is cash taxes. Our cash tax versus effective tax rate has turned from being a slight negative cash higher than effective last year to being ever since slightly positive in '14. And I think, that relationship will improve again in '15 with cash taxes being a little bit lower than effective tax rate. And I think that should reconcile that equation that you're looking at, free cash flow to net income.

Operator

Our next question is from Ian Shackleton of Nomura.

Ian Shackleton - Nomura Securities Co. Ltd., Research Division

I mean you're guiding for some operating margin momentum in FY '14. But it doesn't sound as there was lot of the gross margin level. Could you just talk a little bit about what's happening at the SG&A level, is this including some of the BTP benefits coming through?

William W. Douglas

Good Afternoon Ian, Bill here. I think you kind of answered the question before I would answer it. If you look at our gross margins, we are expecting those to be flattish with pricing, covering our COGS in '14, which we did not do importantly in '13. And then when you look at the SG&A line, given our normal leverage and having some modest volume growth that John alluded to earlier, as well as the continued benefits from our previously announced restructuring programs, we would expect some modest improvement in the operating income margin. So, I agree with what you said and just a little bit more color around that.

Ian Shackleton - Nomura Securities Co. Ltd., Research Division

And just a follow-up here on the tax rate, I mean you said that you've got a slightly higher tax rate in '14 versus '13. And that's despite the fact that we got the U.K. rates falling quite considerably. What's going on there, Bill?

William W. Douglas

Sure, well, we have said since the time of the current CCE back in 2010, that we expected it to operate within a 26% to 28% effective tax rate for the foreseeable future. What we typically have Ian are some yearly specific items that come in and come out, they can affect where we fall within that range of 26% to 28%, country mix is also another variable, FX rates can also influence the overall rate a little bit. You were right that we are continuing to benefit from slightly reduced GB rates. But overall, with that bit cocktail of variables in there, it's a beginning of the year, we would start out and feel comfortable and intellectually sincere with that 26% to 28% range and as we move through the year, is it going to be 26% to 27% or 27% to 28% quite frankly some of that's going to depend on those variables I just mentioned particularly any one offs that we may have within 2014 that could round that rate up or down.

Ian Shackleton - Nomura Securities Co. Ltd., Research Division

So even when we get to a 20% rate in U.K. when we're into 2015, that shouldn't change that total's 26% to 28% range.

William W. Douglas

It potentially could, it's also going to matter at what the overall country mix is, clearly GB is our single largest -- single largest market. But then also, it's in effect, if there are any other changes in any other countries. One other item, France did impose another corporate surcharge, which is going through the corporate tax rate. So that is one of the other variables that we're expecting in 2014.

Operator

Our next question is from Bill Schmitz of Deutsche Bank.

William Schmitz - Deutsche Bank AG, Research Division

You guys mind prioritizing M&A between buying brands versus entering new territories. Then I think I heard at the bever[ph] side just count of 5, conference that expanding in fact on the U.S. is less of a priority, just want to verify that?

John Franklin Brock

Yes, I think we've been pretty clear honestly since the beginning of new CCE that our #1 priority, well, frankly our #1 priority is to grow our existing business, which we continue to work hard on doing. But from an M&A standpoint, our #1 priority would be to expand our geographic foot print, most likely in areas that are contiguous to where we are. And so obviously, to do that, you got to have a willing seller and we would go through a very disciplined and methodical M&A process, which we've talked about before. I think, as a very strong second priority, building on our portfolio in the countries in which we currently operate, is right there. Almost in the same category and if we found the right opportunity, and it could be something we did in concert with The Coca-Cola Company or if for some reasons they weren't interested we can certainly consider it on our own. But those are our top 2 strategic priorities. On a broader basis, I mean, when we look at geographic footprint, expansion outside of Western Europe and I think being consistent with what I said at [indiscernible] the answer is sure on a case-by-case basis, we'll look at anything as long as it makes strategic sense. And it creates a value significantly down the list would be entertaining the thought of coming back into the United States, which again I think is pretty consistent with what we've said in the past.

William Schmitz - Deutsche Bank AG, Research Division

A follow-up you guys are kind of a trailblazer with TVF historically. Do you envision having a Rabax product in the market in 2014?

John Franklin Brock

Well, we're very happy with what's going on we've seen here with Sprite and Fanta. It's gone -- it's gone well and we're going to continue to work on that. We will look at the Schweppes here you mentioned, and frankly, we're looking at the whole diet category as 1 that we want to stay very abreast of what's going on. Since you brought up the subject of diet, soft drinks, let me just mention we are really excited about the results that came out this past week with the European Food Safety Association or EFSA when they confirmed what all of us had known for a long time, which is Aspartame is completely safe. It's perhaps the most widely tested ingredient in the history of on mankind. And it was really reassuring to us to see A, that they confirmed it safe and B, that the media coverage has been very much in line with that, which is not always the way it goes. So we're really encouraged by that and as I think, you know, you heard me say at [indiscernible] diet category in general is performing in line with our overall category, which is not the way it's doing in some markets, which again gives us encouragement. And we think, this recent development on Aspartame is a big boost for first of all, for regulators and government associations and I think overtime for consumers.

Operator

Our next question is from Bryan Spillane of Bank of America Merrill Lynch.

Bryan D. Spillane - BofA Merrill Lynch, Research Division

Just 2 follow-up questions. The first one, just related to pricing for 2014. Have you already implemented the pricing actions or the actions that you need to take in order to achieve your 2.5 -- to achieve your pricing objectives? Our do we have to wait and see whether or not the pricing sticks or whether the retailers will take it.

John Franklin Brock

Let me ask Hubert to address that one.

Hubert Patricot

So as we say for next year, we will plan to cover our cost of goods with pricing. The annual increase on pricing are never easy discussion. They are taking place in GB, France and Sweden on the first quarter. So we have not really started this discussions. But it is taking place in the third quarter in the Benelux and this has been achieved at the level we wanted to achieve. So we are, I think on the good track, but again, these are never easy discussion, but we think we have the right marketing plan, new packaging initiative to ensure we can deliver on this pricing goal.

Bryan D. Spillane - BofA Merrill Lynch, Research Division

And you should, by the end of the first quarter, you should know, you should pretty much know whether you've been successful in terms of achieving your objectives on pricing? Is that the way hear it?

Hubert Patricot

Throughout the year we've taken our indication and at the latest in early April we cannot be able to share it with you.

Bryan D. Spillane - BofA Merrill Lynch, Research Division

And then John, just a follow-up on your comments on Aspartame and maybe, just broadly, the consumer perceptions of the category. It's been a bit of a evolving issue, I guess over the last -- especially over the last 2 years. Can you talk a little bit about what you've learned and maybe, along with The Coca-Cola Company, what you've learned about how to address this with the media, with regulators, with consumers and, is there anything different in your tack, I guess, going into 2014 in terms of just how you articulate the sort of the issues or the concerns that get raised?

John Franklin Brock

Sure. I would just say that there's nothing revolutionary here, it's evolutionary. We continue to talk with and work with The Coca-Cola Company hand-in-hand on the whole issue of ingredient safety. We are absolutely committed to ensuring that all of our ingredients are thoroughly tested and are absolutely safe. We have been convinced of Aspartame's safety as well as frankly all the other ingredients including the other sweeteners we use. And so it has been frustrating because so many of our distracters in the United States and Europe and frankly in other places around the world are using data which is not fact based. And that's very frustrating to us. And so that's why we're so encouraged by this EFSA decision. It gives us the kind of I think fact-based information, based on a completely independent study that we can use in dealing with regulators, with NGOs, with customers and ultimately with consumers. And all I can say is we in The Coca-Cola Company and frankly the industry in general, are working hard to make sure that all of the key stakeholders out there have the right information. And it's challenging. Because again, we have a lot of people out there who just don't want to use good sign outs. But we've ramped up our efforts. We've worked hard to get UNESDA, which is the European Soft Drink Association. We worked hard to get it much more proactive, staffed in a far more professional fashion. And frankly, spending more money, so that we can make sure that government and NGOs know the truth. So it's a continuing evolutionary battle and frankly we think this gives us some new good end information and ammunition to press our case.

Bryan D. Spillane - BofA Merrill Lynch, Research Division

And does that extra ammunition also sort of address the concerns about calories and obesity again, just that's been also an evolving topic and just do you feel like that? Has that message changed it all the way you're approaching that?

John Franklin Brock

Well again, I think you can look into the marketplace and see what we and the Coca-Cola Company are doing together. We want to be part of the solution. We are investing a lot of money in ensuring that consumers have the necessary information ranging all the way from calorie content on principal display panels and in fact it's 40% of the products we offer are low and no calorie products. And we make sure that consumers understand what living a healthy, active lifestyle is all about. We're committed to working again with governments, with NGOs, with customers and consumers to be part of the solution. And I think, you're going to see us and the Coca-Cola Company continuing to push harder everyday to make sure that again, consumers know they have a choice and consumers are informed and regulators make good decisions.

Operator

Our next question is from Mark Swartzberg of Stifel Nicolas.

Mark D. Swartzberg - Stifel, Nicolaus & Co., Inc., Research Division

John or Hubert, I was hoping to understand a little bit better your thinking on the volume outlook and I appreciate that you're more focused on revenue. But could you speak a little bit to why you don't expect a volume slowdown, you're looking for a little bit more net revenue per case in '14. And then you're on track for here in '13. It sounds like it's more a function of your own initiatives and it is how you're thinking about the category any improvement in the category. Can you speak to that any of you?

John Franklin Brock

Hubert do you want to tackle that.

Hubert Patricot

Yes, again as we share, we don't see a major change in the global context being macroeconomics competitive field. So we think that to achieve our goal, we clearly need to leave the category into growth next year. And the focus we're putting on our on plan, and the right balance between the pricing realization and our volume growth equations for next year. And what makes us believe that, yes, we can achieve this volume growth next year,if again the type of initiative we mentioned, being on packaging, new pack, expansion of the small 250 ML can, major shift into the GB market and then, we have a very strong marketing calendar. Probably one of the strongest in the past years, with both the World Cup and the repeat -- and a second wave on Share-a-Coke in the IC sector. So that is what makes us think, that we going to lead the category growth next year.

Mark D. Swartzberg - Stifel, Nicolaus & Co., Inc., Research Division

And 1 technical question. The 2 liter can you remind us what that is as a portion of mix?

Hubert Patricot

It's about 1/4 of our business in GB in volume.

Operator

Our next question is from Ali Dibadj of Bernstein .

Ali Dibadj - Sanford C. Bernstein & Co., LLC., Research Division

I have 2 questions. 1 is around free cash flow for next year. So looks like, guidance is bit higher than it was this year $150 million or so, but the buybacks are roughly the same, just slightly lower. So I want to get a sense of why that's I'm kind of just thinking around there. And secondly, Want to get just a little more specific on some of the cost-cutting that you do include there will be some charges, the cash charges. Just want to get underneath that a little bit more, so you could give us more of a sense of specifically what type of cost cutting endeavors we should see in 2014.

William W. Douglas

Hi, Ali it's Bill here. I'll try and handle those. We do talk about the free cash flow conversion a little bit. But I'll just reprise it a little bit and I think, give the specific answer that you are looking for. Yes, our free cash flow is increasing '14 versus '13. And we can talk offline about some of those changes if you need that. And then, we are scheduled and planning on buying about $800 million of share back in '14 versus $1 billion in '13. I think, it's important to remember that, that $1 billion repurchase in '13 actually was also funded a lot by increasing our leverage ratio. And we expect to end the year at 2.5x, which is a 4 of that range. And we're using the free cash flow in some modest incremental balance sheet expansion in '14 to a lesser degree than we did in '13. So I think that's the reconciliation of why share repurchases are currently estimated to be a little lower in '14 than '13.

Ali Dibadj - Sanford C. Bernstein & Co., LLC., Research Division

And on the cost cutting?

William W. Douglas

On the cost-cutting, it is actually kind of harvesting all the initiatives that we had in place for the past couple of years. So incrementally, there is not a lot of new initiatives that are being completed during the course of -- that are being started in 2014. It's really reaping the full benefit of majority of the work that was completed during 2013. And that goes across the board and again, if you want to go see that list again we could probably do that off-line. But it's the same initiatives that we've talked about during the course of 2013, including our restructuring of the business in Norway, back off [indiscernible] and restructuring our field sales force particularly in Great Britain and France. I think are the highlights.

Operator

Our next question is from Damian Witkowski of Gabelli and Company.

Damian Witkowski - G. Research, Inc.

Just a question on gross margin. I just want to make sure I understand you're saying -- you're basically guiding to file gross margin on a year-over-year basis in constant currency. Is that correct?

John Franklin Brock

Yes.

Damian Witkowski - G. Research, Inc.

And then so we're probably going to head a low in terms of gross margin for in 2013? I mean, is this the new -- should we think of the gross margin sort of these levels going forward?

William W. Douglas

I think, so Damian, the other thing you got to take into account is our gross margin, particularly over the last couple of years has been structurally changed by both the excise tax in France as well as the change in the business model in Norway. So while that looks like it's eroded more than it really has organically, we track that internally and I think that we would be happy to share some of that directionally of how it would be on a steady-state underlying business. And quite frankly, it's been flattish. We got a little bit more pricing than COGS. In '12, we are a little less pricing than COGS in '13. So, I think, over that 3 year period, '12, '13, '14, you're looking at relatively cost on gross margins on a comparable basis, if you will.

Damian Witkowski - G. Research, Inc.

Okay. And then just lastly, in the U.S., as you will know we talked a lot of about the decline in diet and I think, you've touched on this. But in the U.S.the part of the blame has been on social media and such. Are you seeing -- you commented that you're not really seeing a difference in terms of growth or decline in diet versus your overall portfolio, but are you seeing any of those same pressures on the social media site whether they're right or wrong in the U.K. and other markets?

John Franklin Brock

I'd say, we're seeing the same kind of issues on the social media front that are happening around the world, including United States. But I think, the good news we get is, with this Aspartame decision, actually some of the social media has turned positive, which is great news. It's been picked up and passed around. So I think, we're seeing some of the same issues. And Aspartame particularly in France has been a challenge for some period of time because again we have a lot of people there in social media, who are not using fact-based information. But nevertheless, the category has remained, what I would say is good. And in line with the rest of our business. So we're pleased with that.

Damian Witkowski - G. Research, Inc.

And again I apologize if it was already answered, but do you expect to introduce any stable sweetened products in new markets in 2014?

John Franklin Brock

Well, we've already had success as I say with Fanta and Sprite. Hubert, you want to...

Damian Witkowski - G. Research, Inc.

Yes, I meant to have sorry for the cola sort of the -- what's going on with Argentina.

Hubert Patricot

Yes, we're looking at what is happening in Argentina, obviously with interest but we have nothing in our plan for next year.

John Franklin Brock

And. Operator, we have time for 1 more question.

Operator

Our last question is from Caroline Levy of CLSA.

Caroline S. Levy - CLSA Limited, Research Division

I was wondering apart from price if you talked about M&A, are you most attracted to something that would accelerate your revenue growth is simply a cost opportunity enough? And maybe, if you could just give us a sense of whether you see any shift in availability of franchises with the difficult economic periods the bottles have been facing in either Southern Europe, Eastern Europe. Just a little more color on your how likely something might be to become available. And then just finally on the brand side, I'm assuming it's sort of a juice or high-end water, but if you could elaborate?

John Franklin Brock

Yes, just to be candid, Caroline, there is not a lot I can say, beyond what I've already said, which is we would be very happy to talk about contiguous territories in Western Europe. It's kind of a first strategic priority. It's got to be strategic, it's got to create value and frankly, we got to have a willing seller. And so that's where we are on the those front. And I don't think I can make any comments about which territories would be in that category. That's something that we have to keep pretty close to ourselves. And in terms of product categories, we are not much into water, as you will know, the 2 waters we have are Schweppes Abbey Well in Great Britain, Chaudfontaine principally in Belgium. And they're both, very solid brands, very heavy and immediate consumption and are profitable for us. The water business in general in Europe is not a hugely attractive business. It's 1/3 of the entire NARTD category. But we don't get attracted by categories, just because of size. We're much more interested in value. And so were we to get into water business in a bigger way, we'd have to be very selective because of its profitability. And then juices and juice strings, it's kind of in between. It's 1/3 of the total business again in Europe. But it's also very much a private label important business, much more so than here in the United States. And therefore, profitability is lower. And there aren't any obvious European-wide brands. So again, we are very selective, very careful, very methodical as we look at expanding our portfolio and the good news is in the Sparkling category, we have 80% plus of our total business. And that is the high-margin area, and one we are very glad to be in. So I think that's probably about all I could say about M&A.

Thank you, Caroline and thanks to all of you for joining us today. We really appreciate you taking time out of your busy schedules to listen to what we have to say about our business. And we wish you all a very happiest of holiday seasons. Thank you.

Operator

Ladies and gentlemen, this concludes today's conference. Thanks for your participation. Have a wonderful day.

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