Coca-Cola Enterprises Management Discusses Q1 2014 Results - Earnings Call Transcript

Apr.24.14 | About: Coca-Cola Enterprises (CCE)

Coca-Cola Enterprises (NYSE:CCE)

Q1 2014 Earnings Call

April 24, 2014 10:00 am ET

Executives

Thor Erickson

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

Manik H. Jhangiani - Chief Financial Officer and Senior Vice President

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

Analysts

Stephen Powers - UBS Investment Bank, Research Division

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

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

Nik Modi - RBC Capital Markets, LLC, Research Division

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

William Schmitz - Deutsche Bank AG, Research Division

Caroline S. Levy - CLSA Limited, Research Division

Mark D. Swartzberg - Stifel, Nicolaus & Company, Incorporated, Research Division

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

Bryan D. Spillane - BofA Merrill Lynch, Research Division

Operator

Good day, and welcome to the Coca-Cola Enterprises First Quarter 2014 Conference Call. At the request of Coca-Cola Enterprises, this conference call 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 first quarter 2014 results and our outlook for full year 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 Nik Jhangiani, our CFO. Hubert Patricot, President of our European Group, is also with us on this 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 Franklin Brock

Thank you, Thor, and thanks to each of you for joining us as we review our results for the first quarter of 2014 and discuss our outlook for the remainder of the year.

As you saw in our news release today, we affirmed our full year 2014 outlook for earnings per share, net sales and operating income. Though our first quarter's volume performance represents a slower-than-expected start to the year, we continue to believe that our operating strategies and marketplace initiatives will enable us to reach our full year financial goals.

Looking at our first quarter results, comparable earnings per diluted share totaled $0.46, including a currency benefit of $0.03 per share. Net sales declined 2.5%, and operating income grew 2%, both on a comparable and currency neutral basis. Volume declined 1.5%, with Great Britain down 9% and growth in continental Europe of 3.5%. In Great Britain, our results were affected by a particularly competitive environment, the transition in the home channel from 2-liter straight-wall bottles to contour 1.75-liter bottles and wet weather early in the quarter. I will provide more background on this transition in a few minutes. On the continent, our 3.5% volume growth was driven primarily by France, with solid growth for our sparkling brands, including our Coca-Cola trademark portfolio. These results in France are especially encouraging given the challenges since the excise tax increase in early 2012. Looking forward, we have the operating strategies and marketplace initiatives in place that we believe will enable us to grow volume for the full year and achieve our outlook.

Our key marketplace initiatives this year include the second year of our successful Share-a-Coke promotion, our support of the FIFA World Cup in Brazil, our year-long Coke with Meals campaign and enhanced activation per channel. With Share-a-Coke, we are working in partnership with The Coca-Cola Company to build on the success of the 2013 campaign. In 2013, we had 350 million social media impressions, and we expect an even greater impact this year. We are offering more names, increasing online presence and enhancing opportunities for consumers to interact with each other.

In addition to the Share-a-Coke campaign, we will benefit from our partnership with the FIFA World Cup. Consumers in our territories share an intense passion for football and the World Cup. And importantly, this year's competition includes teams from England, France, Belgium and The Netherlands. We have begun our activation plan supporting the World Cup Trophy Tour, which visited each of our business units in March. And we are implementing customer and country-specific packaging, all centered on Coca-Cola, Coca-Cola Zero, Diet Coke, and Coca-Cola Light.

Beyond the strong marketing calendar, we're also moving forward with imported new brand and packaging initiatives. To compete more effectively, it's increasingly important to expand our portfolio to seize growth opportunities and to execute a package innovation strategy that drives recruitment, boosts frequency and creates value.

One important brand innovation is the recent introduction of Finley in France. Finley is a low-calorie, fruit-based, nonalcoholic sparkling beverage designed to appeal to adult tastes. Our customers are responding positively, and while it's just launched, we believe it will receive excellent consumer response as well. As for packaging, we continue to execute a broad pack diversification strategy throughout our territories that includes new multi-serve packages in the home channel and single-serve options in the cold channel.

We've also begun a key initiative in Great Britain, where we are moving to a contour 1.75-liter bottle as the primary large PET package in the home channel. This package is replacing straight-wall 2-liter bottles for trademark Coca-Cola brands. The 1.75-liter package provides value for our customers, creates a visible point of end market differentiation from the competition and increases pricing flexibility. Importantly, it has been well-received by customers and consumers, and we believe this initiative will have important long-term benefits.

We also continue to enhance operating strategies, with an ongoing focus on service and efficiency while maintaining world-class standards of execution. To improve our effectiveness, we initiated a business transformation program in late 2012 that has restructured our sales and marketing organization, is streamlining our support structure and is enhancing our operating model to drive sustainable future growth. We're about halfway through this initiative, and as we discussed with you earlier this year, we expect the program to generate about $110 million in annualized benefits by the end of the year 2015.

Now the ultimate goal of each of these actions is clear, to enable us to generate the type of long-term sustainable growth and strong free cash flow necessary to drive increasing share on our value. Already in 2014, we increased our dividend by 25%, and we continue to move forward with our share repurchase program. In the first quarter, we repurchased almost $300 million in our shares. This is part of our plan to repurchase approximately $800 million worth of our shares in 2014. These are meaningful actions, and we remain committed to increasing shareowner returns for the long term.

Now in closing, let me share some key thoughts. First, we have a disciplined financial approach that enables us to maximize the effectiveness and efficiency of our operations and is focused on long-term profitable growth. Second, we have a proven track record of consistently delivering, increasing levels of shareowner value. And third, we have a solid strategic partnership with The Coca-Cola Company and a shared vision of the future of our business. Together, these factors enable us to deliver on our most important objective, creating shareowner value.

Thanks again for joining us. And now I'll turn it over to Nik.

Manik H. Jhangiani

Thank you, John, and we appreciate each of you taking the time to be with us. Today, I will discuss the results of the quarter in a bit more detail, as well as our outlook for the remainder of the year.

Looking at the quarter on a reported basis, first quarter diluted earnings per share were $0.44 and on a comparable basis were $0.46, up from $0.39 in the same quarter a year ago. Currency translation had a beneficial impact of $0.03 per share compared to prior year results. Net sales were $1.9 billion, down 2.5% on a currency neutral basis. This reflects an increase in price mix of 1%, a volume decline of 1.5%, as well as the impact of 1 fewer selling day. Please note that this volume figure includes an adjustment of 1.5% for that 1 fewer selling day this quarter. Our financials are not adjusted for this difference and will have no impact on our full year results as there is 1 additional selling day in the fourth quarter. As I indicated, net pricing per case was up 1% against a cost of sales per case being flat, as we continue to work towards full year pricing to cover cost of goods increases. I will talk a little more about our cost of goods outlook in a moment. For the quarter, comparable and currency neutral operating expenses declined 3.5%, reflecting volume declines, as well as ongoing cost control efforts. Comparable operating income was $194 million, up 2% on a currency neutral basis.

Now let's take a look at our 2014 full year guidance. We continue to see earnings per diluted share growth of approximately 10%, net sales growth in a low single-digit range and operating income growth in a mid single-digit range. This guidance is comparable and currency neutral. Based on recent rates, currency translation would benefit full year 2014 earnings per share by just over 5%. We continue to expect our capital expenditures to be approximately $350 million, our weighted average cost of debt is expected to be approximately 3% and the comparable effective tax rate for 2014 is expected to be in a range of 26% to 28%. We now expect 2014 free cash flow to be approximately $650 million, at the top end of our prior guidance of $600 million to $650 million.

Let me make a couple of further comments on our 2014 outlook. First, though early in the year, we have seen some mixed benefit and the commodities have continued to pull back somewhat. We now expect overall cost of sales per case to increase approximately 1.5%. While mix is benefiting cost of sales per case, it is negatively impacting our pricing, although, we continue to expect to cover our cost of sales per case.

Next, regarding 2014 sequencing, we expect comparable and currency neutral operating income growth to be back half-weighted. Several factors contribute to this outlook, including timing of our operating plans and an additional selling day in the fourth quarter. Further, expectations for second quarter comparable OI growth, including currency translation, is for growth in line with first quarter growth. While we are not yet where we want to be for the long term, we remain on track to deliver our full year guidance.

Our expected operating growth in 2014, combined with the strength of our balance sheet and our demonstrated ability to effectively manage each of the levers of our business, leaves us in an excellent position to continue to create shareowner value. We will accomplish this through a combination of core business growth and increased return of cash to shareowners.

As John mentioned, we raised our annual dividend by 25% earlier this year, and we're committed to share repurchases of approximately $800 million by the end of the year. This will enable us to return approximately $1 billion to shareowners through a combination of share repurchase and dividends.

In conclusion, let me make some important points. First, we remain realistic about the challenges of the marketplace and the overall economic environment. While we see some signs of improvement, overall conditions do remain difficult. Second, we have a solid history of and a commitment to managing each of the levers of our business to deliver growth. We have successful brands, solid operating plans and effectiveness initiatives, including our Business Transformation Program. We also have a proven world-class, customer-centric supply chain and a talented, skilled team that understands how to succeed in the marketplace. Finally, we have a flexible capital structure that continues to provide opportunities with regards to acquisitions, returning cash to shareowners and ultimately creating shareowner value, which is the focal point of our actions and decisions. We will continue to manage our company towards this objective. Despite current challenges, we believe in our long-term growth, and our core business outlook remains strong, with significant opportunities for growth in the years ahead.

Thanks for your time, and now John, Hubert and I will be happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Steve Powers of UBS.

Stephen Powers - UBS Investment Bank, Research Division

Maybe we start with GB. Obviously, a tough start for the year there, but how do you think things will progress as we get through the rest of the year? Hopefully, you're through the worst, but weather aside, how quickly do you expect things to fully normalize? Does it happen in Q2? Or is this more of a second half normalization story? And maybe either way, what assumptions are you making about the pricing and the competitive environment?

John Franklin Brock

Let me make a couple of general comments and then ask Hubert to give a little more specifics to that. We anticipate -- and you specifically raised the question about GB. But we're excited about the business situation going forward. I think the combination of the FIFA World Cup consumer and customer promotions that we have in place, the Share-a-Coke campaign, all combined to -- we believe give us the right kind of marketplace strategies that will enable us to have volume growth going forward. And we would anticipate that this will be out through the balance of the year. So -- and when you look at the second quarter, we're on track with kind of where we expected to be at this stage of the game. Let me ask Hubert to give a little more color commentary behind that, but that's the broad picture that we anticipate in GB.

Hubert Patricot

Okay. In Great Britain, our results were affected by a competitive environment, specifically, in multi-serve package. The transition, as mentioned by John, from the 2-liter straight-wall into the 1.75-liter bottle, and I will come back with more detail about this, it has impacted the stock of our customer, as well as our flexibility in term of promotional activity. But let me put the perspective behind this switch to the 1.75. It's part of our long-term strategy to broaden our PET bottles repertoire in GB. So in addition, we are also introducing, and this will take place this quarter, a 1-liter PET for imminent consumption with food and equipment [ph], as well as a 4-pack of 1.5-liter PET, and this will be the Hero pack of our World Cup activation in Q2. So with this French, which is now 1-liter or 1.25, 4-pack 1.5 and 1.75, we have the different price points, and we are covering as well a small basket [indiscernible] buyers [ph]. And all these packs will be strongly activated in Q2, as I mentioned, with World Cup. And in addition, we have a social club in the United States [ph] activation, and also for GB, the launch of a new product, which has already dropped. And with all that -- of this combined, we are really encouraged by the perspective in Q2 in GB.

Stephen Powers - UBS Investment Bank, Research Division

Okay. And on the promotional environment, specifically, I don't know -- I might have missed your commentary there. But are you expecting -- is it normal now? I mean, how much different is it than it was at the start of the year?

Hubert Patricot

Well, first, again, the long-term perspective for us is that our category remains growing in value and expandable, first of all, the customer and for us. In the first quarter, we clearly saw some promotional activity from our competitors. I think this is the kind of thing we see generally in the market. There were some highs and lows. And as we move into the second quarter, we think we are going to be more competitive, as I said, with these new pack offers and the activities behind World Cup.

Stephen Powers - UBS Investment Bank, Research Division

Okay. SG&A expense control, maybe this is for Nik, it was, again, outstanding in the quarter, especially given the negative volume surprise. As we look ahead, assuming volume growth does improve soon and ultimately turns positive, what's the expectation you have of maintaining this degree of cost levers through that improvement cycle? Clearly, the variable cost components associated with distribution and selling will rise with the better volume. But related to some of the more fixed cost components that you've been able to manage down in recent years, can those stay at current levels? Or alongside a better top line, would you instead take the opportunity to selectively reinvest where maybe you have the belt tightened more aggressively than you'd ideally like to in the long term?

Manik H. Jhangiani

Yes. Well, you've answered a lot of it yourself. But quite honestly, the first quarter was very favorable, and I think a lot of this was driven by lower volumes but also some of the timing of our promotional activities. Hubert and John both talked about Share-a-Coke and World Cup, which are coming in, in Q2. And obviously, Share-a-Coke will continue into Q3 as well. And then we did have 1 less selling day as well, which impacts our OpEx numbers. We would not expect that trend to continue. So I think looking ahead at the full year, we would expect OpEx to grow probably in the mid single-digit range, which also includes the benefits that we've talked about previously from our Business Transformation Program. So a lot of it was much more around timing and a little more control -- focus/control given our volume declines.

Stephen Powers - UBS Investment Bank, Research Division

Okay. And if I could just ask one more. It's more of a longer-term question. But the incidence-based pricing, the concentrate agreement you've got with Coke extends through next December 2015. When are negotiations likely to start up on that renewal? And how should investors be thinking about the potential risk of an incident rate increase, which has obviously been topical given what's going on with Hellenic, at least so far this year? So how are you thinking about that? And how would you guide us and investors to think about that over time?

Manik H. Jhangiani

Yes. I mean, as you rightfully said, our agreement was codified in 2010 as a part of the transaction with The Coca-Cola Company, and that has been in place and is in place up through the end of 2015. I think at this point, we continue to work with The Coca-Cola Company on that agreement -- on the basis of that agreement, and we have no indication of any planned changes on the basis of that agreement. It's an incidence price model that works well because it aligns the interest of both the company and us as the bottler. And we will, I'm sure, at some stage during the course of next year, initiate discussions just perhaps on, in our minds, an extension of that agreement.

Operator

Our next question is from John Faucher of JPMorgan.

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

Nik, I wondered if you could just talk a little bit more specifically in terms of what's driving the mix you talked about, which products, which packages, et cetera, just so we can get a better idea. And then looking at Q2, last year, down volumes, and then I think volumes were down sort of 2, 2.5. And that was cycling a down 6. So it seems as though, just from a simple math standpoint, that there should be some potential for some really nice volume growth in Q2. So is there something we're missing if we just simply look at the easy comps? Is there a structural component there where you're saying, "Look, it's not quite as easy to grow as much as maybe the numbers would tell us?"

Manik H. Jhangiani

John, I'll take the first one on mix. In relation to that, I would say the biggest change or driver there is around can volume, which obviously does have a favorable impact on our COGS but then doesn't necessarily have the same positive impact from a revenue and a pricing perspective. So that's really the main element. And then, obviously, overall, we continue to see some of the pressures on COGS abate. And as we get through the year, that becomes more favorable with some of our unhedged positions because we're able to get that at more favorable spot rates as those continue to improve. So that's the focus on the mix.

John Franklin Brock

The second part of your question, John, I would just simply say, as we've already indicated, we've got some very strong promotional programs that go into Q2 and Q3. And, yes, we had some -- we have some comps from last year that are easier sometimes -- easier than they sometimes are. So we are expecting volume growth on Q2, Q3 and Q4, as we've already indicated. So -- obviously, we were impacted last year by some particularly cold weather. And who knows yet what the weather is going to be in Q2. As we've indicated, it started off in line with our expectations, but we'll have to see. We're kind of assuming normal weather. And with normal weather, we would certainly kind of be expecting solid results.

Manik H. Jhangiani

From my perspective, John, I would just say to you, as I commented earlier, in terms of the OpEx focus and control, a lot of that in Q1 was driven by some of the timing on that promotional activity, and those really kick in, in Q2, both with Share-a-Coke, as well as the World Cup program. So our OpEx is going to be more skewed towards second quarter and the third quarter. So that has an impact just in terms of timing of the OI growth, but to John's point, the volume, yes, should be positive.

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

Okay. And, Nik, if I can just follow up on the can shift, is that related -- is that -- was that more focus in GB? And was it a consumer response to some of the packaging changes on the PET side? Or is that sort of separate? What do you think is driving that shift into cans?

Manik H. Jhangiani

I don't think it's specific to GB. I would say it has been across our markets, where we've seen more of the shift towards cans.

Hubert Patricot

Yes, John, it's a bit of a long-term trend we are seeing in most of our markets, and it's partially driven by the evolution of the household in our country, where you find more 1- or 2-person households than large families. So the trend is more positive on cans than large PET for quite a few years already.

Operator

Our next question is from Judy Hong of Goldman Sachs.

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

I just want to go back to the volume comment, particularly in GB, and just better understand maybe how the quarter progressed. And I know you've said the quarter is off to -- generally in line with your expectations. But if I look at some of the Nielsen numbers more recently, and, granted, we don't have the April numbers, but the March number still looks a little bit weak. So I know at CAGE you've talked about trends really started off the year very weak and got a little bit better as the year progressed. And so wondering if that is still the case that you're seeing in GB. And then staying on GB, just in terms of the performance between sparkling versus still beverages and how much of the sparkling weakness is really more the packaging differences versus the competitive activities and whether you're seeing similar issues in still with respect to the competitive behavior because it looks like maybe the still actually did a little bit better on your portfolio.

John Franklin Brock

Okay, Hubert?

Hubert Patricot

Yes. Regarding the performance in the first quarter, March was an important month for us because this was really the month where we transitioned from one pack to the other, and this was really messy for us. Remember, this is our largest pack in our largest market, and it went at the end quite smoothly from -- in term of execution. But it went probably faster than what we had anticipated in term of conversion. Of course, the right campaign to promote this new pack only started in April. So really, in March, we are putting the product in place on shelves, which we only communicated with the consumers in April. So I think now it's time to look at it. And remember, last year, we had Easter in March, and this year, it's in April. So too early, I think, to go on that one. Regarding the trend between the diverse category, you're right to say that, today, in GB, our still drinks are going faster than sparkling soft drinks. And that's why, again, we are investing with something like [indiscernible], which will be used in conjunction with water consumption. But we still believe that there is a growth potential for our core business. And especially in this quarter, for the future consumption, we have the strength of the World Cup. And for the immediate consumption, we have the strength of Share-a-Coke. So we are still shooting for growth in this context.

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

And, Hubert, did the first quarter have a particularly strong volume growth in some of your non-Coke brands? Because it looks like what Coke reported and what you've shown, there's a little bit of a difference.

Hubert Patricot

No, it's not -- the main difference with Coke results or report is more driven by their report in equivalent cases or unit cases. We report in physical cases. Obviously, there are more territories than our territory, and the non-care [ph] brand did not play a role in that variation.

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

Okay. And then, Nik, just on the -- on your cost and pricing comment, and I apologize if you've addressed this, but just what's driving the lower COGS outlook versus your prior guidance? And then what commodities are still inflationary as you look out for the balance of the year? And then as costs come in a little bit more favorably, does that impact kind of your decision to promote a little bit more aggressively, so sort of keeping pricing more in line with your COGS and not letting the COGS' favorability pass to the bottom line?

Manik H. Jhangiani

Yes. So the first thing in terms of what's driving that favorability, 2 factors, really, I would say. One is we're seeing a bit of a mix impact, which is benefiting our COGS outlook, and that's primarily as there's more of a shift into cans as we just talked about versus the large PET. So that has a positive impact on our COGS per case but also conversely doesn't necessarily have as positive an impact on our pricing and our revenue realization just in terms of where those are priced relative to our PET packs. The other piece, really, is around the fact that we did have some unhedged positions that we typically have going into the year. And as spot rates have continued to benefit us, we get the -- that benefit coming into our COGS line as well. If we look out for the year, I mean, that's essentially what's -- what will potentially drive that better, depending on where spot rates move for the unhedged portion, as well as for PET, which is the one element that we do not hedge as much or not able to hedge as much. In terms of your question in relation to pricing, I think we will continue to look at that dynamic shift between what our COGS environment looks like and, again, price appropriately to cover COGS but, at the same time, be sure that we are remaining competitive in the marketplace.

Operator

Our next question is from Nik Modi of RBC Capital Markets.

Nik Modi - RBC Capital Markets, LLC, Research Division

Two quick ones from me. Maybe if you can just help quantify how much Finley contributed to France's growth. And the second question was just -- was hoping you can give some perspective on your energy drink portfolio and how it performed during the quarter.

Hubert Patricot

Yes. We have just launched Finley in March in France. So I think it has limited impact on the growth we experienced in France, which is very encouraging for the French business. And we can activate the brand now in May with the campaign starting in May to promote the brand. So it has a limited impact in our Q1 results in France. Energy is a category which is still continuing to grow and is growing about 9% in [indiscernible] data, and we have outpaced the competition in this category. We are gaining share both in value and volume, again, this quarter, so very encouraging. But keep in mind that, for us, it's less than 3% of our volume.

Operator

Our next question is from Ali Dibadj of Bernstein.

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

Just a few things. One is starting off on Great Britain again. Can you try to help us quantify the magnitude of the impact between competition and the shift to 1.75 and the weather. I mean, is it 1/3, 1/3, 1/3? Just gut feel, your gut is probably better than mine, is it 50%, the shift? And in that context, I'm trying to understand [indiscernible] maybe -- why promote -- why start communicating with the consumer in April when you started transitioning in January? Is it that you need full distribution? And if so, is it fully distributed? So those two on Great Britain first, please.

Hubert Patricot

Yes, let me start by the end of the question. The conversion took place in March, in fact, and started basically first, second week in March, differing by customer. So it was completed by the end of the month and early April. So that's why we waited for the conversion. It didn't start in January. It started in March. And the first question was about...

Manik H. Jhangiani

Kind of breaking out some of the causes.

Hubert Patricot

The cause, it's difficult, frankly. It's not pure science. It's a combination of factors. And as you imagine, as we converted the 2-liter into the 1.75, we had less flexibility to promotional activities as opposed to our competitor who has the ability to promote. So some of the factors are related, so very difficult for me to give you a pure quantification of the different factors.

John Franklin Brock

Yes, Ali, we've tried really hard to split it apart and quantify them and we can't. There were so many different things happening in that first quarter. It's just impossible to be quantitative about them. They all contributed from the weather to the conversion, to promotional activity, a part of our competitors. So, again, we're far more optimistic about Q2 and going forward.

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

Okay. And so just to follow up a little bit on that and then another question. So it sounds like you are now fully distributed in all channels and all regions, that you want to go with this conversion in GB. Is that right?

John Franklin Brock

Yes.

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

Okay. And then if you look at the overall pricing, given the U.K. net price that one would expect or, kind of back of the envelope, come up to, what's the pricing in continental Europe right now? Is it down?

John Franklin Brock

Was the question what's the pricing situation in continental Europe?

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

Yes, I apologize. In continental Europe.

John Franklin Brock

Okay.

Hubert Patricot

We have finalized all our pricing negotiation this quarter, both in GB, and in France and Sweden, and it's on plan for the moment. So I will not give some more granularity to our countries, but we are realizing pricing outside GB.

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

So pricing is -- even in the quarter, the pricing was up, even though the U.K. price was so significantly higher?

Hubert Patricot

Well, first, you have to -- let me remind you that the data, which are tracked by Nielsen, don't cover the entire GB market. In fact, in term of volume, we are probably about 40% of the volume in GB. So -- then you have other channels in GB. And that's one of the things. Second, the pricing -- all of the pricing realization, those also were our customer and then shared with the customer. So the net pricing you read in the Nielsen data, first, is not what we got at the end, and second, it's in generally equivalent cases, not in physical cases. So it's difficult to do a total comparison between our figures and what you read in the Nielsen data.

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

Okay. That's actually really helpful. And then my last question is maybe for Nik on the -- the currency obviously has gone up going forward to above 5%, and you're pulling that out from a translation perspective. But is there a benefit incrementally you're getting from increased currencies on the transactional side that would help your margins?

Manik H. Jhangiani

Well, as we called out, you rightfully said it's circa -- approximately just over 5% right now, and that's obviously looking at recent rates as opposed to a current spot. From a perspective of the transaction piece, keep in mind, again, we do hedge that, all right? So, again, you have to look at -- it's not as easy as just looking at the current spot rates, it's about hedged costs year-over-year. And we continue to obviously have some elements open that we would get some benefits off, but there's really very little raw material cost from a transaction perspective that is open from a currency perspective.

Operator

Our next question is from Bill Schmitz from Deutsche Bank.

William Schmitz - Deutsche Bank AG, Research Division

[Audio Gap]

Say what the Diet Coke volume was in the quarter?

John Franklin Brock

Bill, I think we missed the first part of your question.

William Schmitz - Deutsche Bank AG, Research Division

Oh, I'm sorry. At first, I just said hello. But the second part was, did you say what the Coke -- the Diet Coke and Coke Zero volume was in the quarter?

John Franklin Brock

So the Diet volume?

William Schmitz - Deutsche Bank AG, Research Division

Yes.

John Franklin Brock

Okay.

Hubert Patricot

So we had a double-digit growth again on Coke Zero. We had a decline on Diet Coke and combined, I think our Diet portfolio was slightly in line with our decline -- 1.5% decline in the quarter.

William Schmitz - Deutsche Bank AG, Research Division

Are you still pretty confident that some of the issues that the U.S. is facing with aspartame are -- you're still largely immune to those?

John Franklin Brock

I wouldn't say we're immune to them, Bill, but I think we're in a better place. The EFSA ruling, the European Food Safety Authority ruling, back last fall, which said unequivocally aspartame is safe, has made us a meaningful difference, I think, both to NGOs, to governments and even to consumers. So while it is a continuing issue for us in Europe, we are -- again, I'd say we're guardedly optimistic about the future. Our Diet portfolio grew last year. Our Coke trademark Diet portfolio grew last year, and we think our Diet soft drink portfolio will grow this year.

Hubert Patricot

If you put apart GB, it has grown this quarter outside on the continent. So that portfolio is growing again.

William Schmitz - Deutsche Bank AG, Research Division

Okay. Great. And then can you just talk a little bit more about the M&A environment because, obviously, it's a critical component of your strategy? And then maybe if you would ever think about revisiting the whole German opportunity again.

John Franklin Brock

Yes, our position on the M&A has been the same. It's very consistent for the last several years, which is we are interested in growing our geographic footprint. We're also interested in growing our product portfolio. But we're also interested in doing so in a way that creates value. And so we remain open and, frankly, very interested in talking with anyone else who would like to talk about. And our first port of call, as we've always said, is would be to grow our geographic footprint in bottling in Western Europe; and second would be to broaden our portfolio; and third would be to look at geographic bottling footprint outside of Western Europe. And so, yes, we're ready and willing, interested in talking, but again, it would have to be under some sort of a situation where we could create value. We've got a very disciplined approach to doing this. And you can assume that, at some point, something might happen, but it takes two of us, a buyer and a seller, to make this work.

William Schmitz - Deutsche Bank AG, Research Division

And is that why we haven't seen anything so far? Obviously, it was a strategy from sort of day 1 post North American spend, and I think people probably expected you guys to do something before now. So is it mostly sort of a valuation discussion?

John Franklin Brock

Yes. You've got to keep in mind, valuation is a complex situation. And so there's not just 1 valuation parameter, as we've said before. But, yes, in a nutshell, it's -- we've got to be able to -- see a way to clearly create value with some sort of a transaction, otherwise, we're not going to do it.

Operator

Our next question is from Caroline Levy of CLSA.

Caroline S. Levy - CLSA Limited, Research Division

Just trying to understand, I think you're clearly guiding that the second quarter is a challenge from a marketing timing standpoint relative to the first quarter, but I think you -- I didn't know if I heard this correctly. Did you say that you thought that operating income growth would be in line with first quarter?

Manik H. Jhangiani

Yes. Caroline, this is Nik. What we're seeing is -- John didn't make comments around the fact that the volume piece, from an angle of what we're expecting, is positive. But I think if you look at the OI side, just given some of the promotional activity spend happening in Q2, as well as the comparable, I guess, with last year, where we have scaled back or controlled our OpEx overall and including our TME, given the weaker start in the first half of the year, that's driving our indications in terms of Q2. But what we're seeing is our expectations for the second quarter in terms of comparable OI growth, including the currency translation benefit, is for growth in line with what we saw in Q1.

Caroline S. Levy - CLSA Limited, Research Division

Okay. And is currency going to be about the same as Q1 for you?

Manik H. Jhangiani

At this point, I think, roughly, we're looking at the same kind of range.

Caroline S. Levy - CLSA Limited, Research Division

Right. And then what I'm wondering is what you're -- how much volume growth you're expecting and to the extent that it comes in better than that, that your programs -- I assume you're being very cautious because of what you've just experienced. But what is the leverage on that spending, if you actually get a nice lift and decent weather and things actually go right?

John Franklin Brock

Caroline, I think you know us well enough to know we generally don't talk about specific volume numbers. We talk about revenue growth, generally. And it's even a little unusual for us to sit here and say we're pretty confident that we'll have volume growth in the second quarter. We are for sure we're going to have revenue growth, which is a combination of volume price and mix. And we will have to look at those parameters as the quarter goes on. So I think it's a -- it'd be a little difficult to say what kind of volume growth we expect, but we are expecting volume growth in the second quarter and, frankly, for the balance of the year.

Caroline S. Levy - CLSA Limited, Research Division

Right. Okay. And then just lastly, if you could just comment on your energy portfolio and how your own brands did versus the Monster brand, if you can give us any color on that.

Hubert Patricot

Yes. Our portfolio grew this quarter, and all our brands grew this quarter, so including Monster [indiscernible].

Operator

Our next question is from Mark Swartzberg of Stifel, Nicolaus.

Mark D. Swartzberg - Stifel, Nicolaus & Company, Incorporated, Research Division

A couple of questions on GB. The comment, Nik or John or Hubert, I suppose, the pricing to cover COGS view that you have for the whole CCE, is that a view you hold for the GB market, particularly?

John Franklin Brock

That's a view that we hold, broadly speaking. And we've said all along, our objective is, on an ongoing basis, to have pricing which covers our COGS. And occasionally, we'd like to see the ability for it to be slightly greater than that. And so, no, there's nothing in there about GB specific.

Mark D. Swartzberg - Stifel, Nicolaus & Company, Incorporated, Research Division

,

So you're not commenting on GB in terms of the relationship between the two?

John Franklin Brock

We are not.

Mark D. Swartzberg - Stifel, Nicolaus & Company, Incorporated, Research Division

Got it. And then as you think about the cost outlook helpful on the mix and how that's improving your outlook on cost as bit, is there also an element here on the unhedged portion of your cost basket? Can you give us some sense of what's going on with the unhedged portion of your cost basket?

Manik H. Jhangiani

Yes. I mean, as I indicated, I think both those are having a favorable impact on what our current outlook is, which is now for a COGS per physical case increase of about 1.5%. So there's an element of mix which is, as I indicated, primarily more of a shift towards cans that we've seen, as well as some of the benefits from the unhedged portion on our overall commodities and then PET being the one that is probably the largest unhedged portion, just given that the market to hedge that is quite limited. So both of those are having a positive impact.

Mark D. Swartzberg - Stifel, Nicolaus & Company, Incorporated, Research Division

Okay. Great. And then also, Nik, you took up the free cash flow view for the year. You went to the upper end of what you had been saying. Can you give us a sense of what's driving that?

Manik H. Jhangiani

Well, I would say the main factor is a little bit of a tighter focus on working capital. And as we go through the year, we'll continue to -- focusing on that piece. And then the other element is really FX.

Mark D. Swartzberg - Stifel, Nicolaus & Company, Incorporated, Research Division

Great. And then I may have missed this, but Coke Zero, you've cited as a priority for the year. Obviously, the year started off disappointingly from a total portfolio perspective. But can you give us some update on how that particular priority is, how performance is and what the outlook is versus that priority?

Hubert Patricot

Yes. And it's really in line with our expectation. So Coke Zero is growing double-digit, and it's growing in all our countries, including GB. So the Just Add Zero campaign is delivering on our expectation, and we are continuing to invest beyond Coke Zero, which is clearly our growth engine this year and for the years to come.

Operator

Our next question is from Ian Shackleton of Nomura.

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

I wanted to go back on Q1 in GB from a channel perspective, because you've got quite a little negative publicity over here. I think from a convenience channel, it's about the move to 1.75. Was it a material part of the weakness in Q1? And, I suppose, is there an issue with convenience channel going forward into Q2 and Q3 as a result?

Hubert Patricot

No, Ian. And I'm a bit surprised by the comment because, in fact, we moved to 1.75 already in the convenience channel last year. So this, for me, is not relevant when we look at our performance this year. But moving ahead and looking at the performance and the plan for next -- this quarter to come, we have a very strong plan, including for the convenience channel, with price marked back, like the 500 ml at GBP 1. But we think we have the right plan to support also this channel. And I'm quite confident that the negative sentiment you mentioned will be erased in the months to come.

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

Perhaps if you will just follow up, because you have announced some management change in the GB operation. Perhaps you can just give us a bit of background of what that's about.

John Franklin Brock

Yes, we are very excited about our new leader of Great Britain, Leendert den Hollander, who is officially joining us on May 1. We're also excited that Simon Baldry, who has led our business there well over the past 5 years, is going to assume the role in helping to orchestrate our digital platform going forward. So Simon had been in place for some 5 years and led us very successfully through the Olympics activation, as well as a number of other key initiatives. And I think this is all part of our, what I would call, natural succession planning that we spent so much time getting involved in. As you've heard me say time and time again, we think our people are our key to winning, and having the right people in the right jobs is what that's all about. And having movement in some of our senior level positions is very natural. As you know, we had, last summer, a couple of other management changes when we appointed a new head, our French business, Ben Lambrecht, who have been running the Benelux business. And then we took our Head of Supply Chain, Stephen Moorhouse, who has done an outstanding job there and moved him into this new business unit we've created called Northern Europe. So this is all part of our ongoing evolutionary program.

Operator

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

Bryan D. Spillane - BofA Merrill Lynch, Research Division

So I guess the one question I had was, John, again, as this year started out, you've -- similar to the last few years, you've really managed to deliver shareholder returns and deliver on your bottom line results even with a pretty volatile and unpredictable top line. But generally, the last few years, sales growth and volume growth has been below plan, and I'd say the industry has probably been different than it was relative when you set that plan. So can you talk at all about just as you're looking forward in terms of capital allocation plans, in terms of maybe potential M&A? What point do we start to think about maybe the industry growth is lower or at least your sales growth aspirations maybe need to be recalibrated so that you don't have an imbalance, right, we're not driving a shareholder return with sort of the bottom of the P&L, the balance sheet, where it really is, dependent on the top line?

John Franklin Brock

Yes, let me just say, we have not changed our long-term financial targets, and it's been a very conscious decision that we haven't. We really do believe -- we continue to believe that the category we play in is a great category. It's an expandable category. It's one that we can win in and one that our customers can win in. And so when we look at our long-term financial targets, we remain confident that they, in fact, are the right ones and that, over time, they are ones we can achieve. I think you're absolutely right in noting that the last 2 years have been challenging around those targets, because we've had so many factors that would, I think, be appropriately -- cause headwinds. And in 2012, we had no tailwinds. Last year, we began to see some relief in the commodities area, and that's a good thing. We've had the aspartame ruling, which is a good thing. And I think when you begin to look to the future, again, with macroeconomics modestly improving, with commodity costs more in line with where we'd like to see them and, frankly, again, with the kind of marketing plans and programs we have in place, as I started the conversation, I think we have an expandable category which, in fact, will be capable of achieving the kind of targets we have. I think a final comment, in the last 2 years, we have negotiated pretty successfully through incredibly challenging conditions, from weather to macroeconomics, to issues around some of our ingredients. And I think that's all due to our team and their ability to manage through incredibly challenging situations and still, coupled with the use of our balance sheet, deliver very acceptable returns to our shareowners. So I think that's the way we would describe the future. And we remain confident in our long-term targets.

Thank you. And let me just close by saying thanks to all of you for joining us today. We appreciate your time and attention, and have a great day.

Operator

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

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