Coca-Cola Enterprises Inc. (NYSE:CCE)
Barclays Back-To-School Conference Call
September 06, 2012, 12:45 pm ET
John Brock - CEO
Bill Douglas - CFO
Okay good afternoon. We are very pleased to have with us John Brock, the CEO of Coca-Coal Enterprises; the Chief Financial Officer, Bill Douglas and Thor Erickson of Investor Relations. We hope to hear some news about the company’s progress with the transformational acquisition that they made with Coke some years ago and see exactly how the company has performed over the years. And certainly in more recent times have managed rather prudently, through very difficult times and poor weather. We look forward to hearing the read of the latest trends in Europe and their vision for the business going forward. With that, I will hand it over to Don.
Thank you very much and good afternoon everyone. We’re pleased to be with you today to provide an overview of Coca-Cola Enterprises, our long-term outlook and objectives and then to answer any questions you may have. Joining me today are Bill Douglas, our Chief Financial Officer who will discuss some of our financial highlights later and Thor Erickson, Vice President of Investor Relations.
Before we begin, I would like to ask you to take a look at the slide because our presentation will contain forward-looking comments that should be considered in conjunction with the cautionary language and our most recent annual report on Form 10-K and subsequent SEC filings and a copy of this information is available on our website. As you may know, Coca-Cola Enterprises is the pre-imminent Coca-Cola bottler in Western Europe and one of Coca-Cola’s largest global bottling partners.
Today, we’re building on a proven track record of success, a strong commitment to share owners in a clear operating framework that guides our company. We also are focused on capturing the growth opportunities before us and importantly doing so in the right way.
Since our transactions in 2010, almost exactly two years ago right now, we have unlocked significant share owner value and we've established a company that is clearly focused on driving growth and creating additional value for both our customers and our share owners. And let's take a quick look at the scope of CCE today.
We are company with 2011 net sales of $8.3 billion. We serve about 170 million consumers across seven countries and one principality who consume more than 30 billion servings of our products each year and importantly this total has been reached through six consecutive years of growth. We manufacture our products at 17 locations, each being a component of our pan-Europeans supply chain.
We have a total workforce of more than 13,000 people including one of the largest sales forces of any consumer packaged goods company in our markets. Most importantly CCE has proven that we have the size, the scope, the plans and the teams to continue to be an effective competitor in a very attractive category with the ability to navigate a challenging macroeconomic environment.
We are optimistic about our ability to create sustained long-term growth in line with our objectives. Much of the reason for this optimism is in fact our track record as well as the balanced nature of our business. For the past six years, we have focused on creating value for customers, consumers and share owners and we are clearly committed to doing this in the future.
We have managed and we have executed through dynamic and often challenging times to deliver sustained and balanced operating income growth. Over the past six years, we have achieved compound annual operating income growth of more than 8.5%. We have a solid and flexible balance sheet, strong free cash flow and a clear focus on creating value for each stakeholder of the company.
Our results and our actions clearly demonstrate our commitment to increasing share owner value. We continue to create value through increased dividends instituting a 23% increase earlier this year with a three-year compounded annual dividend growth of 22%. In addition, in 2011 we completed a $1 billion share repurchase program which started in late 2010 and this year, we then began a second $1 billion share repurchase program with a goal of at least $600 million in repurchases by the end of 2012.
Through these initiatives as well as the cash distribution from the 2010 transaction, we will have returned at least $5.5 billion to share owners by the end of 2012 which clearly demonstrates our focus on driving share owner value. At the core of this growth is a focused approach to our business. For more than five years, our work has been guided by a single global operating framework which creates a clear vision, clear priorities and clear financial objectives.
Our plans and our actions regarded by three strategic priorities, first to be a clear number one or a strong number two in very category where we chose to compete. Second to be customers' most valued supplier and third to create a winning inclusive culture that attracts, develops and retains a highly talented workforce.
For those of you who follow our company closely, these priorities are very familiar. Yet they are absolutely essential to our success as we continue to drive consistent long-term profitable growth. Clearly our primary focus is to drive sustainable value building growth. Now let's discuss the strategies and the initiatives that are at the very heart of that growth and that will enable us to continue to deliver value for stake owners.
Long-term value creation is attainable because of the size, the sustained growth and the strength of the non-alcoholic ready-to-drink category or what we call NARTD. The category is the largest source of grocery sector retail sales in all, but one of our territories and in that one is a close second.
In total this category represents some $25 billion in total annual retail sales across all our territories and importantly it continues to grow and expanding more than 2% in the first half of 2012 despite the difficult economic environment. Even with its size, the NARTD category offers significant future growth as well as it remains expandable. For example, the total NARTD category in our territories today is substantially less developed in the same category in the United States largely due to European tea and coffee consumption that is about double that in the United States.
So importantly for us, the European sparkling segment of the category is relatively underdeveloped as demonstrated by sparkling beverage per capita consumption that is approximately half of that in the US.
This chart demonstrates the opportunity across our markets to grow both the NARTD category and importantly the sparkling segment. Within the category, per capita consumption of our beverages varies widely across our territories, and even in Belgium, which is our most developed market. We continue to achieve increases overtime.
All markets such as the Netherlands and France have significant growth headwind. In fact, we’ve further demonstrated our ability to consistently increase per capita consumption overtime with a compound annual growth rate of about 2% per year over the past 11 years.
Importantly, we continue to see opportunities for continued growth in all of our markets. When we look at the total NARTD category from a volume and a value share perspective, it's clear, we operate in a highly competitive market.
Yet, we have a successful position in both volume and value share in each of our territories. Across all of our territories, we have 20% of total in NARTD volume share and 29% of total NARTD value share.
Given the highly competitive nature of this category and the challenging macro economic conditions that continue to exist it’s clear that we must continue to focus on meeting both customer and consumer needs to sustain our success and in turn to drive category growth.
Truly, our sparklingly brands including one of the world’s most recognized and iconic brands Coca-Cola remain integral to our success and we'll continue to drive a substantial amount of our growth.
In addition, sparklingly flavor brands such Fanta, Spirit, Dr Pepper and Schweppes add depth to our strong sparklingly portfolio.
We've also worked to drive growth in other segments and have improved our portfolio in stills, energy and water. Even as we broaden our portfolio, Coca-Cola trademark brand remain at a very core of our business. From 2008 through 2011, we grew Coca-Cola trademark brands at a compound annual rate of more than 4% with solid growth for Coca-Cola Zero and ongoing growth for brand Coca-Cola.
Coca-Cola Zero remains essential to our overall growth plans and was up more than 15% in 2011 as well as on a compounded basis over the past three years. An important element of this growth is consistent brand building marketing elements that have included the 2012 Olympics and Paralympics, Euro 2012 and traditional holiday activation.
In addition, we continue to provide package innovation and differentiation including the 250 ml and the 375 ml packages.
Now, while our overall volume mix and volume growth continues to be led by our trademark Coca-Cola, our ability to successfully compete in other segments demonstrates the value of our strategy to broaden our portfolio. With sparkling flavors for example, we are introducing new flavors, packaging and sweetener options including Sprite with Stevia which will enhance this important segment of our portfolio.
We also continue to build on our very successful multi-brand strategy in the energy category. With flavor and sweetener expansions for our Monster, Nalu, Burn and Relentless energy brands, we have consistently achieved significant volume and value share growth. And in fact in the first half of 2012, our energy brands grew more than 20% with more than a point of volume and value share growth.
Now while stills represent a smaller portion of our total volume mix, this segment of our business continues to perform well with a compounded annual growth rate of some 7% over the last three years.
To sustain these momentum we continue to innovate with brand extensions new flavors new sweeteners and new packaging that needed all of in consumer occasions.
Capri-Sun, Ocean Spray and vitaminwater, have been successful additions to our portfolio and we continue to develop our sports drink brands, building on a dual platform of both Aquarius and POWERade.
Additionally, we've re-launched our Nestea brand with the alternative low calorie all natural sweetener Stevia and in water we're building on the success of (Inaudible) and Schweppes Abbey Well.
Going forward, growing still beverages will remain an essential element of our overall portfolio strategy. Now as you know, we have been fortunate to have the rare opportunity to host support and participate in the London Olympic games and Paralympics games, for nearly two years, our Olympic partnership has provided a clear, mutually beneficial opportunity for engagement with both consumers and customers.
Today as these games come to an end we know we will benefit from our involvement in many ways for years to come. Our Olympic goals were clear increase brand equity, strengthen customer relationships, create a sustainable ecologically balanced foundation for our operations and to inspire our employees, customers and consumers.
We met these goals and we achieved our lasting legacy to create an enduring benefit for our business and our brands of course customer service being our customers most valued supplier is a key element of our strategic operating framework and at the very heart of our ability to move the company forward.
We've made excellent progress in this area as our consumers have rated us the number one fast moving consumer good supplier in all of our legacy territories based on a totally independent survey. We will continue to enhance our customer centric Pan European supply chain, leverage our flexible distribution system and driving increasing effectiveness and efficiency.
This work carries one clear goal. To strengthen our customer relationships and to improve our service, 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 including prudent technology investment, enhanced revenue management capabilities and efficiency and effectiveness initiatives.
For example, through revenue growth management, we offer our customers price and package options that maximize value for them while growing the category and our brands. We're also making substantial progress in the efficiency of our operations. We reduced the amount of cardboards used in our PEG packaging, thereby reducing overall cardboard use per case by some 10%. We've also driven substantial improvement and more than 7% in energy used per liter of our products produced.
These examples illustrate what we call the CCE way and demonstrate our commitment to drive efficiency and effectiveness and to support our goal to be the world's best beverage sales and customer service company. As you know one of our strategic priorities focuses on our people. We are committed to maintaining a diverse and inclusive work force and to providing our employees with opportunities to build their careers.
The result of this commitment is a highly skilled dedicated employee group that has delivered sixth consecutive years of meaningful value driving growth. To facilitate employee development we've instituted the CCE Academy, which takes a cross functional and cross geographical approach to invest in our people. As well as their technological capabilities and to drive employee engagement.
All across our territories our employees strive to serve customers better and to execute in the market flawlessly every day. It's important to note that all of our employees are working to grow our business in a responsible sustainable way. In fact in a recent employees survey our people listed corporate responsibility and sustainability as one of the top three key drivers in their engagement with our company.
More than ever our customers consumers and communities expect us to work toward world class sustainability in our operations. And as a results CRS is a filler of our operating framework and it is a part of every decision we make. Our sustainability plan which we call deliver for today and inspire for tomorrow is already creating results.
For example in 2011, we reduced water use per liter our product by nearly 3.5%, in addition we've made multiyear improvements in reducing our carbon footprint, which in 2011 was nearly 7% below, to previous year even with volume of 3.5%, during that same period.
CRS as with every part of our business is an element of our work toward our overarching goal to drive profitable long-term growth and in turn to create value for our shareowners. Despite the ongoing challenges we face through the first half of this year, we continue to adapt the current business conditions manage each of the elements of our business and deliver growth.
Also as we noted in this morning's release, my employment term has been extended through 2014 and can be renewed annually after that. I'm honored by this decision and look forward to continuing to lead CCE. I'm also pleased to announce that my senior leadership team has also agreed to extend their employment as well. We have a seasoned team with a proven track record and this is the right team to lead our company.
We believe our history and outlook demonstrate our commitment to driving growth as well as shareowner value by delivering on our long-term targets, optimizing our capital structure and prudently investing in high return opportunities.
Now I would like to ask Bill Douglas, our CFO to come up and discuss our financial outlook for the remainder of the year as well as our long-term objectives.
Thanks, John. Good afternoon. It's a pleasure to be here and discuss the financial outlook for Coco Cola enterprises we have a clear status financial priority that guide us in our financial decisions. It is essential that we deliver consistent earnings growth, in line with our long term objectives.
We also want to optimize our capital structure, while maintaining our financial flexibility allowing us to be prepared for new opportunities and we will increase return on invested capital and maximize free cash flow, both of which are essential in driving increasing share owner returns over the long term.
Ultimately, we have a clear goal for the future drive share honor value to organic growth value creating investments and optimize capital structure and ultimately returning cash to share owners to achieve our goals we must continue to meet the demanding growth objectives that we established with a creation of our company in 2010.
Long term we expect annual net sales growth of 4% to 6% operating income growth of 6% to 8% and high single digit earnings per share growth we also target at least a 20 basis points improvement in return of this capital annually. We expect these results to be driven by a balance of volume and price mix growth as well as the benefit of discipline operational efficiencies capital management and cost containment.
The objectives we created are challenging, yet we are optimistic about our ability to achieve these levels of performance given our track record, the opportunities we see ahead as well as our ability to adapt to ever changing marketplace dynamics.
Another important element of our future success is our ability to maintain financial flexibility. As you can see on the chart, we have achieved continued improvement in our net debt to EBITDA ratio which at year end 2011 was approximately 1.7 times. This is well below our long-term target of two and half to three times.
Over the longer term, we do expect to operate within the two and half to three times target. I'll speak more on this in just a minute. A hallmark of performance for CCE 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 we will generate ample cash to drive value for our shareholders in three key ways.
First, profitably growing organic basis with a disciplined approach to capital investment. Secondly, selectively pursuing higher return M&A opportunities and third optimizing our capital structure as well as managing working capital.
While our primary focus is investing in our core business to ensure we're optimally equipped for growth, we also will carefully evaluate other high return investment opportunities, including potential acquisitions. We will determine what strengths we can bring to the business and decide whether the acquisition will create additional value for share owners. Importantly, any M&A opportunity will be evaluated to get several alternatives including the return of cash to share owners.
Since the transaction creating the new CCE in October of 2010, we have clearly demonstrated our commitments to returning cash to share owners. By year-end 2012, we expect to have returned to at least $5.5 billion to share owners, double the amount that we return to share owners in the prior 23 year history of CCE. And of note that is well over half of our current market cap. We initiated a second $1 billion share repurchase program in January of this year and we have a goal of repurchasing at least $600 million under that program by the end of calendar year 2012.
In addition earlier this year we increased our dividend by 23% to $0.16 per share quarterly or $0.64 per share on an annual basis. This is a doubling of our dividend since 2009. Looking ahead, we expect continued and meaningful opportunities for free cash flow and balance sheet leverage to return cash to share owners.
In December, when we provide our 2013 outlook, we will communicate more about the opportunities in 2013 to further optimize our capital structure and utilize this financial flexibility. Whether we ultimately invest in value created in M&A, return cash to share owners or a combination of the two, the route we choose will be focused on driving maximum value for share owners.
Now let's take a moment to review our outlook for 2012. Our guidance continues to call for comparable earnings per diluted share in a range of $2.18 to $2.24 including the negative impact of currency translation as compared to 2011. We also continue to expect net sales in operating income growth in a mid single digit range, but these on a comparable and currency neutral basis.
While we clearly have had a very difficult operating environment in the first half of 2012, it is important to note that we continue to manage the levers of our business including sales cost and other balance sheet items to drive value.
In fact, operating income growth along with our guidance for full year EPS is essentially in line with what we first presented in December of 2011. Again note that our guidance is comparable and includes impact of the excise tax increase in France of January of this year.
So in closing the financial discussion let me summarize a few key thoughts. First, we have a solid history of top and bottom line growth with outstanding brands and expanding portfolio and a talented, skilled and dedicated team that understands how to win in the marketplace.
Second, we have 2012 earnings targets in place that are in line with our long-term goals and demonstrate our ability to successfully manage our business even in dynamic and difficult operating conditions.
And third, we have long-term objectives that are challenging yet achievable and represent levels of performance that we believe will continue driving shareowner value.
And last, we have a flexible capital structure that provide significant opportunities with regard to acquisitions, returning cash to shareowners and ultimately creating value for shareowners.
Thank you very much and now I will turn it back over to John for a few closing thoughts.
Thanks Bill. As you have heard today, we remain confident about our ability to drive value for our shareowners in 2012 and beyond but note that we are realistic and that there are risks that lie ahead for example, we continue to phase the ongoing impact of the dynamic and challenging marketplace macro economic environment. Commodity cost remained volatile as well. We face evolving consumer taste and preferences with an increasing focus on health and wellbeing and are continually working to meet these changing needs.
And of course as always, there is a potential for new taxes on our products and packages. While aware of these risks, we remain confident in the ability of our team to manage through these challenges and for our business to both thrive and grow.
We are executing against our strategic priorities and we are building on our history of solid balanced growth. Our financial priorities are to drive consistent long-term profitable growth that in turn will deliver increasing shareowner value. And while the current economic environment remains challenging, we are in a position to deliver our 2012 objectives which are in line with our long-term targets.
Thank you very much for your time and interest in our company today, and we would be glad to take a couple of questions.
A couple of questions for you. First, I was hoping perhaps you could give us some color on the competitive environment in your key markets particularly with the potential for some structural changes on that front?
And then second, if you could John, share your assessment in the state of consumer in some of your larger European markets and particularly with respect to channels, packaging, trading down and the like?
In terms of the competitive state of our markets, I would say in Great Britain as I think some of you heard us say that the first half of 2012 was characterized by greater than ideal promotional activity, which is not what we like to see. And as a result we've lost a little bit modestly in volume and value share.
I'm pleased to report that in the third quarter of the last eight weeks or so, the promotional activity has been far more rational, perhaps that has to do with the Olympics, and we gained back our volume and value share and I would say, remained guardedly optimistic in Great Britain and for the balance of the year.
I think the rest of our market, most notably France, Belgium, the Netherlands, Sweden, in Norway, I would say this year has been broadly characterized by reasonable and rational activity on the part of our competitors.
Obviously in France, it's been a year with some dislocations in the marketplace because of the French excise tax which went into place from our end to customers on January the first. As you have heard us say as the year has progressed, we've been a bit surprised that that tax hasn't been passed through fully on our brands and as we kind of expected it would be.
Retailers have used it in differing ways and have past it through in different speeds and even as we said here in early September, I can still say it's still hasn't been passed all the way through by all retailers. That doesn't cause us a huge concern because our history in France has been one of 10 years of consecutive growth and growth, which has been largely unaffected by our pricing, each year we've taken varying degrees of pricing. In the year - in the past 10 that we took read the highest price increase was actually the year you had the highest growth rate.
So I think we will have some challenging maybe more challenging than normal discussions with our retailers as we talk about pricing in 2013 and because they've undergone – some of them they have under gone some margin compression. So that's the competitive situation.
In terms of consumers, I think you all know we had a challenging second quarter, it was the wettest and coldest perhaps in history in Great Britain than it was about the same actually in the rest of our markets on the continent. We managed to put together, not such a terrible quarter considering the difficulties we had from a volume standpoint.
And I'd say we're pleased to see that the weather came back and has come back in the third quarter around the timing of the Olympics the last half of July the first half of August were better and that's a good things. Although I think it's fair to see even the third quarter as we will ultimately look at it historically is not going to end up being even quite in average whether quarter.
So we are spending a lot of time looking at the consumer trying to figure out what's going on. I think most of our challenges this year have been weather, not consumer or customer. I would -- this is John Brock qualitative kind of assessment I think the consumer fragility or the consumer psychological position in Europe and the countries where we play is not dramatically different than the state of the US consumer.
And so we believe, we operate in an expandable category half the per capita consumption of the U.S. one which is grown as you head me say consistently for the past six or eight years and we believe that going forward both from a customer and a consumer standpoint we will continue to expand it.
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