Coca-Cola Enterprises Inc. (NYSE:CCE)
Consumer Analyst Group of Europe Conference
March 21, 2012 11:15 a.m. ET
John F. Brock – Chairman & Chief Executive Officer
William W. Douglas III – Executive Vice President & Chief Financial Officer
John F. Brock
Thank you, very much Ian and good afternoon everyone. I am pleased to be here today to tell you little bit about an overview of Coca-Cola Enterprises including our goals and objectives as well as to answer some questions.
As you just heard, joining me today are Bill and Thor. Bill will also talk about some of our financial highlights in a few minutes. Before we begin, I would like to remind you that today’s event will contain forward-looking comments that I’d ask you to consider in conjunction with the cautionary language in our most recent Annual Report on Form 10-K and the subsequent SEC filings and a copy is available on our website.
As you know, in October 2010, we completed a transaction with the Coca-Cola Company and it literally transformed Coca-Cola Enterprises into the company that we are today. We sold our North American operations and at the same time we acquired the Coca-Cola Company’s bottling operations in Norway and Sweden. This created a new CCE that today is the preeminent Western European Coca-Cola bottler and one of Coke’s largest bottling partners.
In the process, we unlocked significant shareholder value. We have established a company that is truly focused on driving growth and creating value. We will discuss how we will continue to accomplish these goals and how we will do so in a way that’s both most socially and environmentally responsible.
As we discuss the elements of our business, from building on our beverage portfolio to improving customer service and our overall business model, we are confident that you will see that we are focused on being successful in the marketplace in creating shareowner value.
So what does CCE look like today? We’re a company with 2011 revenue of $8.3 billion, annual volume of about 620 million physical cases, we serve some 170 million consumers who consume more than 30 billion servings of our products each year. And this is a total importantly that’s been reached through six consecutive years of growth.
We manufacture our products at 17 locations and they are each a component of our Pan-European supply chain. We have a total workforce of more than 13,000, including one of the largest sales forces of any consumer products goods companies in our territories.
But most importantly, CCE has proven that we have the size, the scope, the plans and the people to continue to be an effective competitor in an attractive category, and that is despite having to navigate a challenging macroeconomic environment.
As you’re going to see in a few minutes, our European territories have a proven track record of solid operating performance and continued growth. In 2011, revenue growth was 5.5%, operating income growth was 9%, both of those on a comparable and currency neutral basis.
And in addition, we had another really solid year in volume growth, which was up 3.5%.
These were positive results. They are near the high end of our long-term growth targets, and they were achieved even as we continue to face ongoing macroeconomic challenges.
In fact, the results from our first full calendar year of operating exclusively as a European bottler reinforced the confidence that we have in the long-term potential of today’s Coca-Cola Enterprises. We have a solid balance sheet, strong free cash flow, and a clear focus on creating value for each stakeholder.
We are optimistic about our ability to create sustained growth that’s either in line with or above our long-term growth objectives. Now, have to say much of the reason for this optimism is our track record and the balanced nature of our business. For the past six years, we focused on creating value for customers, consumers and shareowners, and we’re committed to continuing this in the future. We have managed and executed through dynamic and often challenging times to drive sustained and balanced operating income growth.
Our results and our actions clearly demonstrate our commitment to increasing shareowner value. We continue to create value and return cash to shareowners through increased dividends. In fact we instituted a 23% increase earlier this year.
In addition, we’ve already completed a $1 billion share repurchase program, which started in late 2010. And then in January we began a second $1 billion share repurchase program for the stated goal of at least $500 million in purchases by the end of this year.
These initiatives are made possible by our continuing strong cash flow, which we expect to be somewhere between $500 million and $525 million this year. Clearly, our primary focus is to drive sustainable, value building growth.
Now let’s discuss the strategies and the initiatives that are the heart of this growth. For more than five years our work has been guided by a global operating framework, which has created a clear vision, clear strategic priorities and very clear financial objectives.
Our plans and our actions are guided by three straightforward priorities. First, to be the number one or number two in every category in which we choose to compete. Second, to be our customers’ most valued supplier, third, to create a winning, inclusive culture that attracts, develops and retains a highly talented and diverse workforce.
For those of you who follow our company closely, these priorities are very familiar, yet they remain just as vital and relevant as they’ve always been. And they’re essential to our success as we continue to drive consistent, long-term profitable growth. This growth is attainable in part because the non-alcoholic ready to drink or NARTD category is in fact the largest fast moving consumer goods category in our territories. This category experienced value growth of 6.5% in our territories last year, and that’s despite the overall challenging economic environment which is a really impressive demonstration of the category potential.
The size, growth and role of NARTD in consumers’ daily lives make it a really important category for our customers. When we look at the total NARTD category from both a volume and a value perspective, it’s pretty clear that we operate in a highly competitive beverage market, yet we at CCE lead in both volume and value share with 20% of total NARTD volume and 29% of total NARTD value. Given the highly competitive nature of the NARTD category, we must continue to focus on meeting customer and consumer needs to sustain our success, and in turn to grow the category.
An important reason for our successful position within the category as well as our growth is that we focus on the high value segments. While NARTD volume is balanced between Water, Still and Sparkling, the value created in Sparkling is far greater. Sparkling is 87% of our sales volume and we have a value share of 56% in the Sparkling segment. And even as we work to grow the Sparkling segment and leverage our successful brands, we continue to work selectively to grow share in Still, with initiatives in juices, juice drinks, water and isotonics.
So in short, we have an expanding presence throughout the NARTD category and we’re focused on the areas that create the highest levels of value. Clearly, our Sparkling brands, including one of the world’s most recognized brands, Coca-Cola, remain integral to our success and will continue to drive a substantial amount of our growth.
We’ve also worked to opportunistically drive growth in other segments and we’ve extended our portfolio in Still, Energy and Water. In Still, we’re growing with Capri-Sun, Ocean Spray and Vitaminwater.
We also continued to develop our sports drink portfolio, building on a dual platform of both Aquarius and POWERADE. We’ve also continued to develop our sports drink portfolio, building on a dual platform with Aquarius and POWERADE. Monster, Nalu, Relentless, Burn and POWERADE Energy provide a solid presence in energy, and in water, we’re achieving growth with Chaudfontaine and Schweppes Abbey Well.
As consumer taste and preferences continue to evolve, improving and broadening our overall portfolio is essential as we work to maintain our steady growth. Over the past decade, we’ve successfully achieved this steadily increasing per capita consumption with the compound annual growth rate of 2%.
Innovation whether it’s a new brand, flavor extensions, new packaging or sweeteners, is a key factor in the success we’ve experienced and the continuing growth that we strive for. Even as we expand our portfolio, our product mix will remain weighted to sparkling beverages, which continue to drive a significantly higher portion of category value.
We remain number one in the [NARTD] category in both value and volume share. This is true for both Cola’s and flavored sparkling drinks and we’ll continue to work to grow these category segments. In addition, we continue to see opportunities across other segments and we’ll selectively participate as we made certain that we achieve profitable volume growth.
Now a primary element of our future success is our ability to continue to growth the Coca-Cola brand. And in fact in 2011 our core red, black, and silver portfolio grew more than 3%, generating two-thirds of our volume growth last year, continuing what has been a really excellent trend.
This is an exciting 2012 marketing calendar for Coca-Cola trademark brands that obviously includes the upcoming London Olympics and the Euro 2012 Soccer Championship. We are also going to have an additional package innovation with the new 375 milliliter package that will strengthen our cold immediate consumption sales starting here in GB.
A key element of the success of our Coca-Cola trademark brands is the ongoing growth of Coca-Cola Zero. This brand remains central through our overall growth plans and was up more than 15% last year as well as on a compounded basis over the past three years.
This is truly an outstanding brand, though we have an excellent opportunity to develop further. We have plans to extend our reach to core consumers and to expand the brand with increased availability of a caffeine free version in Belgium. By successfully executing these and other initiatives, we can continue the momentum of our zero calorie cola portfolio.
We also continue to develop our sparkling flavor and energy portfolio which combined contributed about 20% of our 2011 volume growth. Sparkling flavor growth was driven primarily by Fanta, Dr. Pepper and Sprite which are each established brands that have solid potential. And though a relatively small segment, energy is a dynamic part of the overall NARTD category with solid value and volume growth.
We grew energy volume more than 40% last year and realized a two point increase in both volume and value share.
Our portfolio includes established brands like, Burn, Relentless, Nalu, Monster along with POWERADE Energy which was introduced in Great Britain last year. There is significant innovation and activation planned for both of these segments this year, including new flavors, packaging and promotions.
While still represents a smaller portion of our total volume, this segment of our business continues to perform well with a compound annual growth rate of some 7% over the past three years. And in fact, Still brands were responsible for about 10% of our total volume growth last year, driven by Capri-Sun and Ocean Spray juice drinks, Chaudfontaine and Schweppes Abbey Well, Waters and POWERADE.
To maintain this momentum in 2012, we will continue to build on the success of our brands. We will activate POWERADE and Vitaminwater with our Olympic programming and will continue to innovate with new packaging, flavors and sweeteners.
Now let’s turn to the programs that will help drive our growth in 2012. We are really fortunate to have the opportunity to participate in the 2012 Olympics as well as the Para Olympic Games which are the second largest sporting event in the world.
The Olympics is a signature event. It has been part of our execution in the marketplace since late 2010, with multi-year customer plans. It will also allow us to highlight some key brands, again Red, Black and Silver portfolio, POWERADE and Vitaminwater.
Also, we are executing in conjunction with the Olympic Torch relay, which takes place over 70 days before the Olympics and goes within one hour of 95% of the total population of Great Britain. Additionally, we are going to have activation around the European soccer championships or Euro 2012, which is a highlight in each of our territories.
Now let’s take a look at some of the media that’s being used to support our marketplace efforts around Coca-Cola, Diet Coke, and Coca-Cola Zero. The first one is our French version, and the second two are both GB, although these commercials are showing across all of our markets. Let’s take a look.
Of course, being our customers’ most valued supplier and providing ever increasing levels of customer service is at the very heart of our ability to move our company forward.
We’ve made excellent progress here, and for the first time ever our customers now rate us as the number one fast moving consumer goods company in all of our legacy territories based on an independent survey.
And while Great Britain has enjoyed this distinction for many years, France achieved this number one rating for the first time last year. We will continue to enhance our customer relationships and our service in the years ahead, ultimately creating sustainable growth and value for our customers. And creating growth requires not only outstanding service and a successful brand portfolio, but a balanced approach to every aspect of our business.
This includes world-class selling and revenue management capabilities along with prudent investment in the latest technology for our best-in-class sales force. For example, through revenue growth management, we offer customers price and package options that maximize value for them while at the same time growing the category and our brands.
These elements combined with world-class execution allow us to profitably capture opportunities across all channels while diligently focusing on cost controls. Of course production of the brands and packages that customers what is really a key step in our business.
It’s a central element of our work to be number one with our customers and to create shareowner value through sustained profit growth. This means continuing to develop and leverage and scale and strength of our Pan European supply chain to improve the way that we bring our products to market and to efficiently and effectively improve our customer service.
At every level of our supply chain we are constantly working to be more customer focused with customer by customer approaches, enhanced route to market models and increasing levels of effectiveness and efficiency. We are also working to optimize operations more effectively, in some cases, developing Pan-European Solutions that further enhance our supply chain.
Driving success relies on our ability to serve our customers and in turn to provide outstanding marketplace execution. While we utilize both direct and indirect roots to market, most important is the flexibility that we build into our system to adapt to local market conditions and customer needs, which optimizes the distribution for our customers and for us. We have, and we’ll continue to use this flexibility to provide a high level of customer service and we see this as a very distinct competitive advantage.
We continue to optimize key functions, developing new ways to execute at the highest level. This is what we call the CCE way. Our commitment to service and to enhance effectiveness and efficiency is reflected in the decision we recently announced to step-change our route to market and our packaging profile in Norway.
Norway, despite having a relatively low population density, currently uses a direct store delivery model. Our Norwegian business also uses refillable packaging.
Now by modifying our route to market, changing the third-party and customer warehouse and by converting to recyclable and non-refillable packaging, we will improve customer service and drive additional value at the same time. There are several specific benefits that make this important for our business in Norway.
First, moving to customer warehouse and third-party delivery will create new efficiencies and provide an optimal route to market for our customers.
Second, moving to non-refillable bottles enables us to use innovative, recyclable materials such as PlantBottle. This allows us to provide additional packaging options and preferred ones for consumers. And third, the new packaging will help us reduce our carbon footprint in both our production and supply chain processes. This initiative is still in its early stages, but we’re confident that it will create significant benefit and it will drive value for customers, for consumers, for CCE and ultimately for our shareowners.
Now I’d like to ask Bill Douglas, our CFO, to come up and discuss our financial outlook for 2012 as well as our long-term objectives. Bill?
William W. Douglas III
Thanks, John. It’s a pleasure to be here today to share with you what we believe is a solid financial outlook for Coca-Cola Enterprises. We have a clear set of financial priorities that guide us in our financial decision-making process.
First, we want to deliver consistent earnings growth in line with, and occasionally above our long-term objectives. Second, we want to maximize free cash flow and maintain our financial flexibility, allowing us to be prepared for new opportunities. And third, we want to increase return on invested capital, which is essential in driving increasing shareowner returns over the long-term.
Ultimately, we have a clear goal for the future. Drive shareowner value through organic growth, value-creating investments and optimize capital structure, and by returning cash to shareowners through dividends as well as share repurchases. To achieve our goals, we must continue to meet and occasionally exceed the long-term growth objectives that we established with the creation of our new company in 2010, long-term growth objectives that exceed the standard of legacy CCE.
Long term, we expect revenue growth of 4% to 6%, operating income growth of 6% to 8% and high single-digit earnings per share growth. We also anticipate at least a 20 basis point annual improvement in ROIC.
We expect these results to be driven by a balance of both volume and price growth, as well as the benefits of disciplined operational efficiencies and cost containment. The objectives we created are challenging, yet we are optimistic about our ability to consistently achieve these levels of performance, given our track record of growth and the opportunities for growth that we see ahead.
Now let’s take a moment to review our outlook for 2012. Today, we are affirming our current guidance. This guidance is for approximately 10% growth in earnings per diluted common share with revenues up in a high single-digit range and operating income increasing in a mid single-digit range.
Included in this guidance is the impact of the recently enacted tax increase in France, and it’s comparable and currency neutral. These targets are in line with, or exceed our long-term objectives and we expect solid business results in share repurchases over the near term to drive EPS growth above our long-term objective.
A hallmark performance for CCE over the past several years has been and will continue to be strong and consistent free cash flow. We have a disciplined approach to using this free cash flow and our primary uses continue to be capital expenditures, returning cash to shareowners and potential acquisitions.
An important element of our future success is our ability to maintain financial flexibility. As you can see, we have achieved continued improvement in our net debt-to-EBITDA. At year-end 2011, net debt-to-EBITDA for CCE was approximately 1.7 times, well below our long-term target of 2.5 times to 3 times.
Over the longer-term, we do expect to operate within the 2.5 times to 3 times level that we previously provided. We will continue to update you with additional information as we move further along on our share repurchase program and any potential future acquisitions.
In addition to flexibility with our debt levels, going forward we have a balanced maturity ladder with repayment tranchés annually that are in line with or below free cash flow. We are also benefiting from lower interest rates with a current weighted average cost of debt of approximately 3%.
In 2011, we had a very solid return on invested capital of approximately 15%. We have a long-term target of improving ROIC by at least 20 basis points per year. Reaching this goal requires a combination of both growth as well as prudent investment. We must continue generating sustained operating growth and we will maintain a disciplined approach to managing our capital and invest in high return operating initiatives.
Even as we continue to deliver strong free cash flow, we will continue to invest in our business for future growth. Reinvestment is essential in developing new efficiencies and making certain we continue to operate at the highest levels.
Over the long-term, CapEx is expected to be approximately 5% of net sales revenue, with 2012 expenditures in a range of $400 million to $425 million. Of note, approximately, two-thirds of our capital expenditure support the growth of our business, while approximately a third are maintenance CapEx.
As we manage our cash flows, debt and capital expenditures, we will do so as we identify and evaluate high return investment opportunities, including potential acquisitions. Our primary focus is investing in our core business to ensure we are optimally equipped for growth. For any acquisition opportunities that may arise, we will carefully evaluate the acquisition, determine what strength CCE can bring to the business, and decide whether acquisition will create additional shareowner value.
Any opportunity will be evaluated against other alternatives, including return of cash to shareowners and as our recent actions demonstrate, we are committed to increasing shareowner returns both through share repurchase and increasing dividends.
In fact, last month we increased our dividend by 23% to $0.16 per share on a quarterly basis or $0.64 per share on an annualized basis. This has helped to more than double our dividend payoffs since 2009.
Since the close of the transaction creating the new CCE in October of 2010, we have clearly demonstrated a visible commitment to returning cash to shareowners. Through a combination of outstanding business performance and from the transaction with the Coca-Cola Company, over the past two years alone we have returned over $4.8 billion to shareowners. This is an exceptional number and includes a special cash distribution at the time of the close of the transaction.
Looking ahead, we initiated a new $1 billion share repurchase program in January of this year with a goal of at least $500 million in repurchases during 2012. We believe these actions are clear evidence of our commitment to returning cash.
In closing the financial discussion, let me summarize a few key thoughts. First, we do have a solid history of top and bottom line growth with outstanding brands and expanding portfolio and a talented skilled team that understands how to be successful and when in the marketplace.
Second, we have a very strong and flexible capital structure that provides significant opportunities with regard to acquisitions as well as returning cash to shareowners. Third, we have long-term objectives that are challenging yet achievable and represent levels of performance that we believe will drive increasing shareowner value. And finally, we have achievable 2012 targets in place that are inline with or exceed our long-term objectives.
Now I’d like to turn it back over to John to continue talking to you about corporate responsibility and sustainability and some closing thoughts.
John F. Brock
Thanks Bill. One of the most important guideposts for us is the integration of CRS into every area of our business. More than ever, customers, consumers and communities expect us to work toward world-class sustainability, and as a result, it is a pillar of our operating framework and part of every decision we make.
In September, we took the step on our journey, launching our new sustainability plan, which is “Deliver for today and Inspire for tomorrow.” Three key priorities, first deliver progress against commitments today. Second, lead the industry in energy and climate change, as well as sustainable packaging and recycling. These are the two areas where we can really make a difference. And third, to innovate for the future by finding opportunities for innovation, collaboration and partnership.
As you can see, we have a strong commitment to CRS, and importantly to be the CRS leader in our industry. And beyond being a leader, our journey has driven ongoing business benefits as well. We found new operating efficiencies, reduced waste, enhanced employee engagement and strengthened customer relationships. These are very tangible results that benefit our bottom line.
And these benefits, coupled with the value created by our reputation are a demonstration of why we place such an important value on CRS. For example, in 2011 our operations in France and GB were the most water efficient in the entire global Coca-Cola system.
We have invested in a wide variety of initiatives to reduce our carbon footprint. We have initiated the new joint venture recycling facility here in Great Britain. Our CRS efforts will be on total display for the world to see as we make the London Olympic Games the greenest in history. Our work will generate a zero carbon footprint and we’re committed to zero wastes. Using our new recycling plant, we will recycle all PET waste from the games and turn it into new PET bottles.
Our efforts to link CRS to every element of our business continues to receive recognition. We were recently invited to join the EU Corporate Leaders Group on climate change, which is elite group of 18 companies and beyond that we have been recognized as the number one in the global food and beverage industry in Newsweek’s Green Rankings for each of the past three years. We’re really proud of these accomplishments in a role that our employees have played in bringing CRS to life.
As you know, one of our strategic priorities focuses on people. We’re committed to maintaining a diverse and inclusive workforce and providing employees with the opportunities to build careers. We’ve instituted a CCE Academy, which takes a cross functional and cross geographical approach to teach our employees the breadth of our business. And all across our territories, our employees try to serve customers better everyday. This is in part the CCE way.
Service you can see, we have a positive optimistic view of the future and the ability of our company and our people to drive growth. And though we’re optimistic about our outlook, we’re realistic about risks. We know we operate in a challenging macroeconomic environment and we face volatility related to commodities.
We understand that the marketplace reflects increased focus on health and wellness and we’re continually innovating here. And we face the risks from increase taxes as governments seek new revenue sources to comp that increasing debt and deficits.
Now, well aware of this risk, I have to say we remain confident in the ability of our business to grow. We’re executing against our strategic priorities with record earnings in 2011 and building on our heritage of well balanced growth.
We have the most skilled and dedicated team of people in the industry with a strong success-oriented management team. We also have challenging yet achievable financial targets that are focused on creating the type of long-term growth that delivers value to shareowners. This is highlighted by our expectation that our 2012 outlook is in line with or exceeds long-term targets despite the challenging economic environment.
Thanks very much for your time and interest and now we’ll be happy to take a couple of questions.
John F. Brock
Well that’s a quite group, any questions? Yeah.
Can you give us a little bit more color on the uses of cash? You had also talked about acquisition, talked about returning cash to shareholders. Can you help us rank order those as you see the environment right now? Are there great M&A opportunities? Do you think it’s a better opportunity to give back dividend et cetera?
So just help us rank order that and in particular, if you were to double click also on M&A, are there any limitations you’re looking for, so what kind of metrics are you looking for, can it be dilutive from a margin perspective or other types of metrics just to guide us a little bit?
William W. Douglas III
Well, if you look at the priority uses of free cash flow, use number one will be reinvesting in the business. I guess use number two will be returning cash to shareowners because we have been doing that the past and will continue to do that. And then use number three would be acquisition opportunities.
Now, if a large acquisition were to be pursued, we could move up in the short-term to 2A. I don’t think that any acquisition would eliminate our ability to appropriately return cash to shareowners on a ongoing basis, but we could step back a little bit from the pace that we have been doing it. Again, as I mentioned in the presentation we are currently at net debt to EBITDA of 1.7 with the stated long-term range of 2.5 to 3 times.
John F. Brock
And regarding acquisitions, we and Coke have both said, we have this continuing window to talk about Germany, which we are doing. And whether it’s Germany or any other possible M&A activity, we have a very disciplined and logical approach to looking at any possible acquisition.
For us, we are very happy with the business we have today, but we would be very happy to look at any acquisition which would create shareowner value. And there is not simply one metric. EPS accretion or dilution is one measure, but there are lots of others that we would be very keen on making sure we fully understood.
So you can assume that if we were going to do any acquisition, whatever it might be, whether it were a piece of geographic footprint of Coca-Cola bottling, or frankly whether it was let’s just say some kind of brand acquisition maybe that we did in concert with the Coca-Cola company, it’s going to create value, or we won’t do it. Another question…
I think we’re probably going to bring it to a halt, because you see if you’re listening on the webcast I think there were some issues initially, a recording will be available later on the CCE website.
I’d like to thank John, Bill and [Phil], thank you very much indeed. There will be a breakout session next to follow. Thank you.