Coca-Cola Enterprises Q3 2007 Earnings Call Transcript

Oct.24.07 | About: Coca-Cola Enterprises (CCE)

Coca-Cola Enterprises Inc. (NYSE:CCE)

Q3 2007 Earnings Call

October 24, 200710:00 am ET

Executives

Thor Erickson - Director, Investor Relations

John F. Brock - Chief Executive Officer, President, Director

William W. Douglas - Chief Financial Officer, Senior VicePresident

Terrance M. Marks - President, North American Business Unit

Steve Cahillane - President, European Group

Analysts

Judy Hong - Goldman Sachs

Kaumil Gajrawala - UBS Warburg

Lauren Torres - HSBC

Bill Pecoriello - Morgan Stanley

Christine Farkas - Merrill Lynch

Mark Swatzberg - Stifel Nicolaus

Robert van Brugge - Sanford Bernstein

Bryan Spillane - Banc of America

John Faucher - J. P. Morgan

Operator

Hello and welcome to the Coca-Cola Enterprises third quarter2007 earnings conference. At the request of Coca-Cola Enterprises, thisconference is being recorded for instant replay purposes. At this time, I wouldlike to turn the conference over to Mr. Thor Erickson, Director, InvestorRelations. Sir, you may begin.

Thor Erickson

Thank you and good morning, everybody. We appreciate youjoining us this morning to discuss our third quarter 2007 results. Before webegin, I would like to remind you all of our cautionary statement. This callwill contain forward-looking management comments and other statementsreflecting our outlook for 2007, as well as future periods.

These comments should be considered in conjunction with thecautionary language contained in this morning’s earnings release, as well asthe detailed cautionary statement found in our third quarter 10-Q.

Our earnings release also contains a reconciliation of thenon-GAAP comparable figures referenced during this call. A copy of thisinformation is available on our website at cokecce.com.

This morning’s prepared remarks will be made by John Brock,our CEO, and Bill Douglas, our CFO. Terry Marks. President of North AmericanGroup, and Steve Cahillane, President of our European Group, are also with uson the call this morning. Following the prepared remarks, we will open the callfor your questions.

Now, I will turn the call over to John.

John F. Brock

Thanks, Thor. We are pleased to be with you today to discussour third quarter performance, a quarter in which we continued to makeimportant progress against our long-term, strategic objectives, despite workingthrough a combination of operating challenges.

As you read this morning, we achieved comparable thirdquarter earnings per share of $0.44, comparable operating income of $458million, which was up 1% versus the year-ago, and comparable net income of $213million, which was down 1.5%.

We have raised our full-year guidance to a range of $1.31 to$1.36 per share, based on our results to date, as well as an encouragingoutlook for the fourth quarter, which includes renewed volume growth in Europeand the continued success of our brand and operating initiatives in NorthAmerica.

Now, as we look to the third quarter, we believe ourprogress against our long-term, strategic objectives comes in two areas. First,building our brand portfolio and second, driving higher levels of customerservice through improved efficiency and effectiveness.

From example, in North America, we began implementation ofsignificant improvements to our brand portfolio. We began distributing Fuse andCampbell’s beverages, and we reached agreement with the Coca-Cola Company todistribute glacéau brands in the majority of our territory. This progress givesus a very strong portfolio of still brands that can seize increasingopportunities in fast-growing beverage categories.

The glacéau brands, which include Vitamin Water, Smart Waterand Vitamin Energy, are powerful additions to our portfolio and we look forwardto the opportunity to enhance their success beginning in early November. Whilethere is still work to do to strengthen our portfolio, both in stills andsparkling beverages, these additions demonstrate significant progress towardsour goal of being number one, or a strong number two, in every category inwhich we choose to compete.

We are executing against our second objective, which isdriving improved customer service by transforming our go-to-market model andimproving efficiency and effectiveness, and we are doing this by quickly movingforward with several key programs in both North America and Europe.

For example, in North America, customer centered excellenceis driving both effectiveness and improved customer service, and we arecontinuing to focus on scheduling, route productivity, warehousing and vendingto achieve greater sales -- greater levels of efficiency.

In Europe, we are moving forward withinitiatives to restructure components of our operations across our territories,which includes integration of CCE’s European supply chain functions.

These brand and go-to-market improvements, coupled with ourcommitment to attract, develop, and retain a talented, diverse, workforce arethe central elements of our drive to improve operating fundamentals andstrengthen our ability to reach our long-term financial targets.

We continue to believe our business can generate revenuegrowth of 4% to 5%, operating income growth of 5% to 6%, and high single digitearnings per share growth. We look forward to sharing more details about ourprogress and our outlook for 2008 with you toward the end of this year.

One thing is certain -- reaching these targets consistentlyis essential to drive shareowner value, which is our single-most importantpriority.

Now let’s look at the results of the quarter and theshort-term challenges and achievements in each of our operating territories.

In North America, our cost of goods per case remained high,up some 8.5%, as prices for both sweetener and aluminum continued to affectcosts. As we have managed through these high cost increases, we have [made] areal serious ongoing focus on operating expense control.

These efforts have resulted in op-ex growth of 1% for thequarter and a decline of 1% for the first nine months, both on a comparable andcurrency-neutral basis, and including corporate expense.

Another key is our effort to manage net revenue per case andensure that we realize the full value of our brand. Net revenue per case grew6% in the quarter, as North American volume declined 2.5%. Our retail immediateconsumption business declined a 0.5% in the quarter.

These results reflect continued volume challenges to oursparkling portfolio, which declined in a mid-single digit range. Althoughsparkling beverages continue to face obstacles to growth, we have initiativesin place designed to maximize the power of our brand and product, including ourRed, Black and Silver execution program. Red, Black and Silver takes advantageof the Coca-Cola trademark and works to take full advantage of the strong consumeracceptance and interest in Coca-Cola Zero.

In fact, with the strength of Coca-Cola Zero, our DietCoca-Cola trademark brand achieved third quarter growth of 0.5%. Overall, theinitiative is performing better than planned and continues to create resultsthat outperform the category.

Our energy drink portfolio also continues to perform well,with the combination of our Full Throttle and Rockstar brands achieving solidgrowth of more than 25% in the third quarter, as well as the year to date.

North American still beverages grew 2.5% in the quarter,driven by growth in Powerade Sports Drink, Dasani, and teas. Stills alreadyrepresent about 20% of our North American volume and are continuing to grow.With the addition of the glacéau brand, we believe we are on track to developthe fastest-growing still beverage portfolio and to seize significantopportunities within this fast-growing segment.

Now, let’s turn to Europe, where volume declined 3%. Wehurdled strong performance in the same quarter a year ago that was driven byfavorable weather, as well as the introduction of Coke Zero in Great Britain and Belgium.This year, weak July sales heavily affected our third quarter results, as GreatBritain endured its wettest summer on record, with many parts of the countryexperiencing major flooding.

Net revenue per case was essentially flat as we implementedstrong promotional programs to mitigate soft volume conditions. Since July,we’ve seen improving trends and a return to more normal volume levels with essentiallyflat volume in August and low, single-digit growth in September.

Our outlook for the remainder of the year is positive and weanticipate a return to growth in the fourth quarter.

Today, I am pleased to note that we are hosting our callfrom London, where our Board of Directors at CCE has just completed its fallmeeting. Both the Board and I have spent time with our European leadership teamand in the marketplace. We are very pleased with what we’ve seen with theinitiatives in place and with execution at the street level. We now knowfirst-hand as a board that Europe remains strong with significant growthopportunities ahead.

Unquestionably, we are optimistic about the outlook forEurope, which remains profitable and has excellent opportunities for growth inboth bills and sparkling drinks. For example, Coca-Cola Zero has continued toperform well, most notably in France, where volume is well above plan since itsintroduction earlier this year.

As the brand has done in other markets, Coca-Cola Zero inFrance is attracting new consumers to sparkling beverages, achieving strongrepurchase rates and meeting our goals for low cannibalization of otherCoca-Cola brands.

In stills, Capri-Sun Juices have performed well since webegan distributing the brand earlier this year.

While in London, we’ve also seen excellent examples of ourBoost Zone program, which originated in France and was expanded to GreatBritain this year. Each boost zone helps create new opportunities for coolerplacements and driving cold drink sales. We are also encouraged by theexcellent progress in rationalizing our full service vending program, an effortthat ultimately will enhance profitability for both our customers andourselves.

As you can see, we are working very hard to build on oursuccess in Europe, with a number of strong initiatives underway that will leaveour business well-positioned for the future. For this positive direction, Iwant to thank Shaun Higgins, who has provided strong, effective leadership forthe European group for several years. Shaun is leaving CCE at the end of theyear and we will miss his passion for our business, his commitment, and hisleadership. Shaun has effectively guided our European business through manychallenges over the past few years and in the process, put together a strong,effective management team. We thank him for his efforts and wish him well inthe future.

Replacing Shaun will be Steve Cahillane, who joins us fromInBev, where he was Chief Commercial Officer. Steve has 20 years of globalexperience in the beverage industry, including time reporting to me when he wasPresident of InterBrew in the U.K. Having worked with Steve at InBev, I knowthat his experience, his leadership, and deep understanding for the uniquechallenges and opportunities of our European markets make him uniquelyqualified to lead our business in Europe. I look forward to working with Steveagain.

So in closing, let me review a couple of key points; first,I am very encouraged by the direction we’ve taken with regard to strengtheningour brand portfolio, most notably in North America, as well as the strongcommitment of the Coca-Cola Company to meaningfully expand our brand andpackage portfolio. The addition of glacéau brands first in the United Stateswith the potential for expansion into Europe, affords us the opportunity tocompete fully in a fast-growing category and it creates additional flexibilityin working to strengthen each of our brands.

Of course, there is much more work to be done, with needs includinga significantly stronger tea portfolio in North America and a water strategy inGreat Britain. But we have made good progress and I’m confident that together,we and the Coca-Cola Company are on the right path.

We look forward to continuing to work together in the yearsahead as we further enhance our brand portfolio.

The second point is I continue to be impressed by the skilland dedication of our people as we work to create the strong, consistentresults that will enable us to drive long-term shareowner value. We are workingthrough a difficult period in 2007, with short-term operating challenges suchas high North American costs, coupled with overall soft volume trends.

Yet despite these challenges, our team has moved forwardquickly to implement important changes in the way we work. We’ve implementedprograms such as customer centered excellence in North America and in Europe,we’ve restructured our full service vending program to improve service andenhance profitability.

These have not been easy steps and we’ve accomplished themthrough the skill and dedication of our employees. This work is impressive andI look forward to creating even more improvement in the months ahead.

Thank you for your time and attention, and now I’ll turn itover to Bill to give more details on our financial results and our outlook forthe remainder of 2007.

William W. Douglas

Thanks, John. In the third quarter, we achieved earnings pershare of $0.44, excluding $0.11 for the net impact of items affecting comparability.These items included a $0.04 charge for restructuring, land disposition gainsof $0.03, $0.02 of benefit related to termination of a distribution agreement,and $0.10 for net favorable tax items.

Our results for the quarter reflect the combination ofnecessary pricing actions in North America, challenging operating conditions inEurope, and the continued success of our operating expense initiative,including the initial benefit from our restructuring efforts.

Operating expenses grew 3% on a reported basis. On acomparable, currency-neutral basis, operating expenses grew 0.5% in the quarterand are flat year-to-date.

Currency contributed approximately $0.03 to third quarterearnings per share growth and approximately $0.06 year-to-date. On a comparablebasis, operating income was up 1% for the quarter, as North American operatingincome grew 4.5% while operating income in Europe declined 8% and corporateexpenses declined 8%.

Revenue for the quarter grew 3.5%, with a revenue increaseof 4.5% in Europe and 3.5% in North America. As John discussed, European volumedeclined 3% with flat, net pricing per case, while North American volumedeclined 2.5%. Net pricing per case in North America grew 6%, primarily due tohigher rates as increases from the sale of finished goods, such as Campbell’sand Fuse, were offset by multi-pack water volume growth.

With a stable and rational pricing environment in NorthAmerica, we continue to expect North American pricing growth for the year in amid-single digit range, with volume down in a low single digit range. InEurope, we believe we will return to volume growth in the fourth quarter, withlow single digit volume and pricing growth for the quarter and full year.

High North American pricing levels reflect the ongoingimpact of the cost of goods environment. Cost of goods per case increased 8.5%in North America, driven by strong increases for both aluminum and sweetener.As we have discussed with you over the past year, these cost levels havecreated a very difficult operating environment in North America, with higherthan normal pricing limiting our volume performance. Despite these challenges,we remain encouraged by our operating performance during the first nine monthsof this year.

Our operating expense controls are working and ourrestructuring initiatives are creating savings and enhancing service to ourcustomers. In addition, our relationship with the Coca-Cola Company is enablingus to make meaningful additions to our brand portfolio. For example, we are seeingthe benefits of our vending program in Europe, while in North America we arebecoming more efficient and improving service to our customers through ourcustomer centered excellence program.

In brands, we’re adding glacéau and building on the strengthof Coca-Cola Zero in all of our markets.

These and other efforts demonstrate positive momentum thatis reflected in our outlook for the fourth quarter, enabling us to raise ourcomparable EPS guidance for the full year to a range of $1.31 to $1.36. This includesa full year currency benefit of approximately $0.07 per share. This rangeexcludes restructuring costs, which we continue to believe will totalapproximately $300 million, with most of this cost recognized in 2007 and 2008.

We continue to expect strong free cash flow and our currentestimate is more than $675 million for 2007.

Over the past several years, we have used our free cash flowprimarily as a means to reduce debt, enabling us to bring our debt level below$10 billion at the end of the third quarter.

This success, coupled with our long-term outlook, leaves usin our best position in several years to increase cash returns to shareowners.We are currently developing plans to accomplish this and look forward tosharing more details with you in the near future.

Now I would like to look ahead to 2008. While it is tooearly to provide specific guidance for next year, we do know that we will havethe full year benefits of the addition of the glacéau, Campbell’s, and Fusebeverages. These products will have a significant impact, generating increasedrevenue while creating higher costs on a per case basis because of the mixbenefit, or mix impact; however, adding meaningfully more gross profit.

We plan to reinvest a portion of these profits in our corebusiness and in building our overall capabilities. This will strengthen ourability to reach our long-term growth targets beginning in 2008. As a reminder,these targets include annual revenue growth of 4% to 5%, operating incomegrowth of 5% to 6%, with high single digit EPS growth and a 30-basis pointimprovement in return on invested capital.

We do have confidence in our ability to reach these targets,given the success of our operating and brand initiatives and our overalllong-term directions. I look forward to sharing with you our 2008 outlook laterthis year and discussing the specific factors that will drive our performance.

So to summarize, we believe we have created positivemomentum in our business, despite a difficult year, and that we are poised toachieve levels of growth next year in lie with these long-term targets.

Thank you for joining us today and Operator, now we’ll behappy to open the line up for questions.

Question-and-AnswerSession

Operator

(Operator Instructions) Our first question comes from JudyHong of Goldman Sachs.

Judy Hong - GoldmanSachs

Good morning, everyone. My first question is just in termsof the pricing strategy in North America, looking out into 2008. I think lastyear you started to take prices up in the fourth quarter by about 3% to 4%. Areyou starting to do that this year? And given just the potential for better costoutlook next year, would you emphasize more volume at the expense of pricing?

John F. Brock

Judy, I would suggest that Terry Marks address thatquestion.

Terrance M. Marks

We’d said that as we took pricing last year in the fourthquarter, it was our intent to take enough pricing that we would be able to getthrough all of 2007 without taking another increase, and therefore would put uson an annual cycle where we would be moving in the first quarter. And we’vebeen successful in doing that, so like you’ll see our net pricing for 2007higher, as you did see it higher in the beginning of the year and it moderatesas the year goes on, and that’s because of the fact that we are cycling thisperiod now where we took it last year without an increase this year.

So we don’t anticipate taking any pricing at all in thefourth quarter and we do anticipate taking our 2008 increase midway through thesecond quarter.

Judy Hong - GoldmanSachs

Okay, and then Bill --

Terrance M. Marks

I’m sorry, Judy. First quarter.

Judy Hong - GoldmanSachs

Okay, and then Bill, just in terms of any preliminarycomment about the cost outlook for 2008? I mean, Coke talked about, as asystem, costs being flattish for next year. Can you just talk about more[specifics that you see] next year?

William W. Douglas

Yes, in some generalities, if you look at North America, ourcosts per case were up 8.5% in the quarter and we said previously that weexpect full year to be 9% or so. That’s still the case, driven principally byaluminum and sweetener. As we look to ’08, the big drivers are going tocontinue to be aluminum and sweetener; however, the year-on-year increase willnot be nearly as significant in ’08 as it was in ’07. However, I do think itwill be somewhat higher for our business than historical norms of 2% to 3%.

In Europe, the situation is a little bit different. Ourpackage mix is not as heavily skewed towards cans and we have a differentsweetener system, with the HSDF in North America and Europe. It’s beet sugar andthe overall cost environment in Europe would be a littlebit less than historical norms of circa 2% to 3%. So overall, that’s what wesee today and we have covered a part of our commodities for both corn andaluminum in 2008, so I think the variability of our forecast will be prettyaccurate once we get towards the end of December and early January.

Judy Hong - GoldmanSachs

Thank you.

Operator

Kaumil Gajrawala of UBS, you may ask your question.

Kaumil Gajrawala -UBS Warburg

Thank you. Can you -- you’re taking on a lot of incrementalvolume in the next few months. Can you talk about what incremental costs youmight -- particularly if there’s going to be any CapEx related, if glacéaukeeps putting up these growth rates?

John F. Brock

Again, I’ll ask Terry to comment on that one.

Terrance M. Marks

We don’t anticipate any incremental capital spending in 2007as a result of taking on these SKUs. We are very busy looking at alternativesfrom a supply chain standpoint more holistically as we move into 2008, andwe’ve actually already begun that work in earnest.

With the increase in SKUs that we are experiencing now thatare really coming to a head in the fourth quarter, it’s not a single event, asyou know. I think it’s something that we’re going to have to learn how tothrive in as a way of life, so we are dealing with that pretty aggressivelyfrom a supply chain standpoint. But that said, I don’t see any material impactto capital spending in 2007.

Kaumil Gajrawala -UBS Warburg

That’s useful, thank you. And then, if I could ask a littlebit, if you could provide a few more details on the boost zones and the rolloutof the boost zones in Great Britain, and what maybe you’ve learned at Francethat you can transition easily over?

John F. Brock

We’ve learned that they work, which is the most importantthing and we are very pleased with the IC business that is generated from thisapproach. And over the past year, we have walked the streets in Paris and othermarkets where we’ve had boost zones where typically one account manager willhave anywhere from 180 to 200 plus accounts, and really get to know them andbuild on them with everything from coolers and immediate consumption equipmentto other kinds of activities in that operation. And we’re finding that thebusiness benefits are very meaningful.

So we’ve taken that same concept, we’ve done it now thissummer. In Great Britain, we have 30 of them up and running and we have plansto put substantially more than that in Great Britain in 2008. So it’s anexcellent program which you’ll see us continuing to expand. In France, I shouldsay, we’ll continue to make them work harder and stronger. We’ve had a lot oflearning and what we are realizing is you move from year one into year two,there is still more ground that you can cover in terms of just exploiting themeven further.

So we are pretty excited about that.

Kaumil Gajrawala -UBS Warburg

Thanks, John.

Operator

Lauren Torres of HSBC, you may ask your question.

Lauren Torres - HSBC

Good morning. A few quick questions or clarifications on theU.S. in thequarter. You mentioned that your sparkling portfolio was down what, mid singledigits?

John F. Brock

Yes.

Lauren Torres - HSBC

Okay, and could you talk about too, immediate consumption? Ithink you touched upon that at retail, but what we saw in immediate versustake-home in the quarter?

John F. Brock

Immediate versus take-home for the quarter -- Terry, do youwant to -- I’m not sure I understand the question.

Lauren Torres - HSBC

As far as the performance of the, the volume performance ordecline. I think you said in the immediate consumption channel, we saw it down0.5% at retail -- that’s the number you gave us?

John F. Brock

Yes, well, full service was down meaningfully more than thatbecause again, the total sparkling categories, we said was down mid-singledigits.

Lauren Torres - HSBC

Right, but as far as looking at the future consumptionchannel, quarter over quarter, what are you seeing? Are the trends getting abit tougher, or any signs of improvement there?

John F. Brock

Terry will take that.

Terrance M. Marks

Yes, I’m happy to take that. As we said, immediateconsumption at retail was down about a half a point. We saw a significantlylarger decline in future consumption, but remember future consumption is a muchbigger part of the overall business, so it doesn’t have to be down much morethan the total number to influence the total number.

What we saw was -- it was principally early in the quarter.The year-over-year performance in the month of July was really very soft for usin large stores. I can tell you that that’s not a trend that we saw continuethrough the quarter. Our business through the quarter, both actually from animmediate and future consumption standpoint, improved materially into Augustand continued to improve in September.

The early part of the quarter was particularly difficult. Itwas particularly difficult from a future consumption, large store standpoint,and there were a myriad of reasons -- everything from weather patterns incertain key markets for us to simply year-over-year promotional activity thathad shifted out of the month and into other times of the year through a fairlylengthy list of a lot of other contributing factors.

But net net, the pattern did not play out through thebalance of the quarter at all.

Lauren Torres - HSBC

Also too, you made comments with respect to the fourthquarter, seeing an improvement in Europe. Once again you’re cycling a toughcomparison. Can you give us a sense so far in the fourth quarter what you areseeing that makes you a bit more comfortable that we’re going to see thatimprovement in the fourth quarter?

John F. Brock

First of all, the tough comparisons we had in Europe reallywere the third quarter, particularly because we had an excellent weather summerlast year and we had World Cup activation and we had the launch of Coke Zero,so we had some -- and then this year, we’ve had the wettest summer in GreatBritain in history.

The fourth quarter -- well, first of all, as we’ve movedinto the end of the third quarter, our business throughout Europe began to pickup, and as we’ve moved now into October, it’s continued to pick up. As we lookat the comparables for the fourth quarter, combined with our overall programs,we are confident that we are in a good position and that we will -- you knowthe fourth quarter should be much more like the first quarter.

Lauren Torres - HSBC

Thank you.

Operator

Bill Pecoriello of Morgan Stanley, you may ask yourquestion.

Bill Pecoriello -Morgan Stanley

Good morning, everybody. Bill, I just wanted to cycle backon the COGS outlook for ’08. On the last conference call, you were a little bitmore specific. You were saying above the two to three, you were looking in thethree-and-a-half to four range, excluding the mix impact on glacéau. Is thatthe kind of levels you are thinking about still for ’08? And then, recognizingthat you are still under negotiation with Coke on [inaudible] and concentrate,would you expect those negotiations to result in any material difference tothat kind of three-and-a-half to four overall range?

William W. Douglas

I would say at this juncture, 4%-ish for commodities,excluding the impact from glacéau, plus/minus. That’s still what we’re seeing.And with respect to concentrate, we are in the final stages of 2008 planning. Idon’t have a specific number yet but the concentrate price in both Europe andNorth America, we would expect to be below that number, roughly in line withinflation.

Bill Pecoriello -Morgan Stanley

And just on the revenue per case, as you are investing backagainst the portfolio, reinvesting some of those glacéau benefits you talkedabout, would you expect the revenue per case to lag those cost of goods soldincreases in ’08?

John F. Brock

I’ll let Terry comment on the pricing.

Terrance M. Marks

On a per case basis, specifically within the sparklingcategory, we would expect to see pricing up in the low single digit range,modestly trailing the increases that we are seeing on a per-case basis incommodities.

Bill Pecoriello -Morgan Stanley

Thank you.

Operator

Christine Farkas of Merrill Lynch, you may ask your question.

Christine Farkas -Merrill Lynch

Thanks very much. Good morning. Terry, I’m wondering if youcan follow-up a little bit on the pricing. You had some helpful comments onimmediate consumption versus take home. I’m wondering how the pricing playedout with respect to rate versus mix, as well as the immediate consumptionpricing versus the take home pricing?

Terrance M. Marks

The majority of the pricing increase that we’ve experiencedin the third quarter and for most of the year has been principally rate drivenmore than it’s been mix driven. And remember, we took pricing last year in thefourth quarter in October, so we -- as the year went on, we saw a higheryear-over-year rates of pricing increase. We’ll continue to see that moderateas the year goes on, now that we’re lapping it going into the fourth quarter.

But the pricing, although it varies slightly from region toregion within the country, and we plan it that way, it was relativelyconsistent in both future and immediate consumption.

Christine Farkas -Merrill Lynch

Okay, great. And you competitor talked about light trafficin C-stores. It doesn’t sound to me, based on your immediate consumptionvolume, that that was necessarily the case for you. Can you comment a littlebit about that channel performance?

Terrance M. Marks

I think in fairness, we experienced pretty significantlylight traffic in the convenience retail channel early in the third quarter. Ithink it was almost a tale of two quarters within the third quarter. The earlypart of the quarter was particularly difficult and we saw it most acutely inthe convenience retail channel. That really did moderate, though, as thequarter went on and we ended the quarter really with a fair bit of momentum,which appears to be carrying over.

Christine Farkas -Merrill Lynch

Okay, and last question on Europe, ifI might. There was a commentary about teas begin weaker this quarter year overyear. I just want to understand if there is an underlying trend there or we’rejust simply looking at tough comps from a year ago in that segment. Thanks.

John F. Brock

I don’t think there’s an underlying issue there. The teacategory, we’re just off a little bit relative to a year ago.

Christine Farkas -Merrill Lynch

All right. Thanks so much.

Operator

Mark Swatzberg of Stifel Nicolaus, you may ask yourquestion.

Mark Swatzberg -Stifel Nicolaus

Thanks. Good morning, guys. John, to what extent did theshift of this negotiation you had back in August in terms of shifting volume ofglacéau over to you guys, to what extent did that allow you to kind ofaccelerate the conversation you are having now with Coke regarding their rolein your performance next year -- the concentrate, marketing support -- do yougo into ’08 with a little more visibility at this point in the year than youhad because of that conversation?

John F. Brock

Well, it accelerated some of our conversations, yeah, itdid. But we are still in the process of finalizing the ’08 business plan, so wesat down and I think had a very healthy, productive set of discussions on whatmoving glacéau into our system would look like and signed an agreement andwe’re very pleased with the way it’s come out.

I think the way we would characterize that is we have acontinually improving relationship with the Coca-Cola Company in terms of thefact that they’ve made some major moves in the brand portfolio in North Americaand as a result, we’re working with them across a whole series of arenas. Wealso have some things that we are working on in the sparkling category that webelieve will be some helpful moves to our business in 2008.

So still a lot more work to be done, more planning to beworked out, but I would say that move did accelerate some of our discussions.

Mark Swatzberg -Stifel Nicolaus

And on that comment about sparkling, can you talk about CokeZero? There’s obviously been different views about the level of channelrepresentation you’ve gotten for that brand at this stage in its life. How muchopportunity do you see for that brand here in North America?

John F. Brock

I’ll ask Terry to give you a little more color commentary,but the fact is we think Coke Zero is a big, big part of our success. It is akey part of the Red, Black and Silver strategy and our availability plan withCoke Zero is everywhere that we sell Coke, Coke Classic, we expect to sell CokeZero. It’s really that simply and certainly as our theme throughout - well,actually throughout our entire business but I think you are specificallytalking about the U.S., we are very optimistic about the way it’s going andplan to have it in all channels.

Just to be clear, I’m speaking about this from a Coca-ColaEnterprise standpoint, not from a Coke system standpoint. I think there areprobably some places and bottlers in the U.S. where you might find it’s notquite as well represented as it is in our system. Terry, do you want to --

Terrance M. Marks

I think the only thing I would add to is that we are intoyear three now of Coke Zero in North America and thebusiness is stronger than its ever been. We’ve posted growth of 50% in the mostrecent quarter, and so it is an integral part of our plans and sparkling nowand in the future -- if anything, it’s gaining momentum.

From a channel representation standpoint, I think the biggap is probably in the whole area of food service and that’s really a questionfor the Coca-Cola Company. I mean, they have I think a very good strategy forwhat they do with their valves, but it’s just a very different game becauseyou’ve got a limited number of valves and so therefore, clearly Coke Zero isnot as ubiquitous in fountain as it is in bottle cans, but that’s to beexpected and I think that may change over time.

Mark Swatzberg -Stifel Nicolaus

Great, thank you, guys and quickly, Bill, on restructuring,target is still 3,500 interms of headcount reduction -- can you give us an update on where you are andwhen you get to that 3,500?

William W. Douglas

Yes, Mark, the overall objective is still a net reduction ofapproximately 3,500 associates. By the end of 2007, we expect to have achieveda net reduction of about 2,000, so well over halfway to the overall objective,with the vast majority of the ’07 reductions coming from North America, and afair amount of those are through attrition as well.

Mark Swatzberg -Stifel Nicolaus

Excellent. Thank you, gentlemen.

Operator

Robert van Brugge of Sanford Bernstein, you may ask yourquestion.

Robert van Brugge -Sanford Bernstein

Good morning. I have a question about the impact of glacéauon your 2008 business plan. How much cannibalization do you think there isgoing to be if you’re adjusting immediate consumption business as you roll outVitamin Water in more and more channels? What will be the impact on yourmargin? For example, are you better off or worse off if you sell a 20-ounceVitamin Water compared to a 20-ounce Coke?

John F. Brock

We’ll ask Terry to do both of those.

Terrance M. Marks

From a cannibalization standpoint, I can tell you that oneof the things that is occupying a great deal of the time of everybody atCoca-Cola Enterprises right now is providing very clear channel segmentationdirection to our field organization. It becomes more and more important as thescope of our portfolio continues to expand.

So we are taking very careful steps to give our organizationdirection on where and how to merchandise glacéau in such a manner that it doesnot create any operational cannibalization of sparkling soft drink. That’s fora variety of reasons. First and foremost, we believe that there is a role forsparkling soft drink. We believe that it is a big and vibrant category and animportant category for us. But there is also the very near-term economicimpact, which you’ve identified in your question, and the answer to that isyeah, it’s a transaction of a 20-ounce Coca-Cola Classic is significantly moreprofitable to us on a per unit basis than is a transaction of a bottle ofVitamin Water.

That said, they are both accretive to our total margin, butclearly sparkling soft drinks on a per case basis, the 20-ounce pack remainsour most profitable pack.

Robert van Brugge -Sanford Bernstein

Thanks.

Operator

Bryan Spillane of Banc of America, you may ask yourquestion.

Bryan Spillane - Bancof America

Good morning. Just two questions, one quick one, Bill, onyour debt balances -- did you pay down some commercial paper in the quarter?

William W. Douglas

Yeah, we did have a net reduction. We have issued anotherrefinancing of -- I think it was about $300 million in the quarter and we gotsome more that will probably be refinancing as well of our overall balance, butthe net debt definitely increased in the quarter and we expect it to in Q4 aswell.

Bryan Spillane - Bancof America

Okay, and so is the -- is the switch-out of commercialcoming at a higher interest rate or is it not having much of an impact at all?

William W. Douglas

It’s not having a significant impact. Our weighted averagecost of debt has crept up slightly year over year, I believe from 5.9% to 6.1%.Our current mix is about 81% fixed and 19% floating.

Bryan Spillane - Bancof America

Okay, and I know you’ll probably want to talk more aboutthis when you are ready to talk about ’08, but when we are thinking about yourinterest expense heading into ’08, assuming that maybe the rate of debtreduction may not be at the same pace as it’s been, there shouldn’t be anything-- is there anything in the mix of your current debt and maybe the change ofthat that might influence rates up a little bit?

William W. Douglas

I think our current thinking, and it’s obviously dependingon what the overall credit [rate] would do with our weighted average cost ofdebt creeping the level that it is at 6.1%, at this juncture, we don’t see asignificant change year over year in that weighted average cost of debt. Ithink the main difference in our interest expense year over year will be areduction in net debt balance. But we’ll give more guidance on specifics as wehead into ’09.

Bryan Spillane - Bancof America

Okay, great, and then one more, if I could, for Terry; Iguess it sounds like you are more than halfway through the restructuringprogram and I think, thinking back to when you first announced this, one of the-- I guess one of the questions that was raised was just, especially in terms ofhow it affected the way that you face the customer, was there a risk that theremight be some sort of lapse in execution or some sort of negative response fromcustomers, so if you could just talk a little bit about how much of therestructuring you’ve done so far has been at that frontline level. And if Irecall it correctly, it was moving more customers to [tell sell].

Second, as you are setting up for ’08, is that part of therestructuring effectively done and just how you feel about where the organizationis at this point.

Terrance M. Marks

It’s a massive initiative and it is something that -- wecall it customer centered excellence. It is about that 26 -- actually a littlebit more than that -- work streams that we’ve organized, again under this banner,customer centered excellence. And the focal point of the entire initiative isto remove waste from the business so that we can do two things concurrently;one, when waste is removed, customer service is improved, and so that bydefinition draws the top line. And when waste is removed, then costs are savedas well, and so that obviously contributes.

The combination of those two things creates or provides uswith a fuel for reinvestment in the business. That’s the premise. It’s not aunique premise but it’s really a fundamentally sound one, and we are abouthalfway through.

You’re absolutely right. The work that we are doing now isin our sales center, so it’s really all of our customer-facing people areinvolved in this work, and you may recall I’ve talked in the past about how westaged the work in such a way that it was sequential. We effectivelyreorganized the business down to that customer-facing level first, so that we’dhave the platform to go ahead and continue the work through to the customer,which is what we are doing now.

I guess the -- to make a long store short, we have some veryspecific metrics, both quantitative and qualitative. I mean, before we go intoa market unit and we have 41 market units across the U.S., the process is an11-week process per market unit for this transition of the changes we’reimplementing. We do a pretty detailed customer survey before and after, from aqualitative standpoint, and then we have a number of metrics where we measureour performance from a quantitative standpoint.

All of that said, we are about halfway through, almostexactly halfway through the work and the returns, both from a productivityimprovement standpoint, which have exceeded expectations modestly, and from acustomer service standpoint, have been terrific.

The customers have received it very well. The only time thatwe’ve had a hiccup is when we have had problems communicating the intent of theinitiative up front to a customer, and that’s simply a factor of the thousandsof customers we have and relying on a lot of people to communicate the message.Occasionally the message is garbled and we’ll have to go back a second or thirdtime.

But really, those are the exceptions, so net net, verysuccessful, both quantitatively and qualitatively, and about halfway through.

Bryan Spillane - Bancof America

And do you expect to have most of the rest of these marketsdone before the summer selling season next year?

Terrance M. Marks

Just about the beginning of the summer selling season, yeah,we expect to wrap up right around the end of the second quarter.

Bryan Spillane - Bancof America

Okay, great. Thanks, guys.

John F. Brock

Operator, let’s plan to take one more question.

Operator

Our last question comes from John Faucher of J. P. Morgan.

John Faucher - J. P.Morgan

Good morning, everyone. Quick question on your guidance for’08; if we take a look at the puts and takes you guys have talked about interms of the benefits from the other brands and potentially from returning somecash to shareholders, and then you throw in the restructuring, if I marry thatup with the comments about pricing being up less than COGS, it sounds as thoughyou guys are planning on your core operating profit on your North Americanbusiness to be down next year, but making up for it in some other ways. Is thatthe right way to read it? And do you think that gives you a competitiveadvantage as you head into ’08, where you don’t need to price as much as yourCOGS are going up?

John F. Brock

Just to make sure I understand your question, when you sayprofit down, are you talking about on our sparkling business?

John Faucher - J. P.Morgan

I guess that would be the case, yeah. I mean, if you look atyour discussion of the algorithm in terms of getting up to the target with allthese benefits you have, and then you look at the commentary on pricing beingup less than cost of goods sold per case, if we strip out the other products,if we strip out restructuring, it sounds like you guys are thinking you mighthave a little bit of a core operating profit decline. And I guess what are thecompetitive implications of that? Does that make sense?

John F. Brock

Well, it depends again on what you’re defining as core. Weclearly don’t plan to have an operating profit decline in North America in ourtotal beverage business. We expect to have a -- and we will provide you a lotmore info on this as we go forward, but if you are talking explicitly,specifically on sparkling, I think your premise is probably broadly right,yeah. But not on our total business --

John Faucher - J. P.Morgan

That’s fine.

John F. Brock

-- glacéau and the rest of the still piece, and it’s a verydifferent picture.

John Faucher - J. P.Morgan

Okay, that’s pretty much exactly what I’m looking for. Okay.Thanks.

John F. Brock

Okay, well, thanks to all of you for joining us today. Weare pleased that you took the time to listen to our conference call and wisheveryone a very good day. Thank you. Take care.

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