Coca-Cola Europacific Partners PLC
Q2 2007 Earnings Call Transcript

Published: 26 Jul 2007

[Operator:]

Hello and welcome to the Coca-Cola Enterprises second quarter 2007 earnings conference. At the request of the Coca-Cola Enterprises, this conference is being recorded for instant replay purposes. At this time, I would like to turn the conference over to Mr. Thor Erickson, Director of Investor Relations. Sir, you may begin.

[Thor Erickson:]

Thank you. And good morning, everybody. We appreciate you joining us this morning to discuss our second quarter 2007 results. Before we begin, I would like to remind you all of our cautionary statements. This call will contain forward-looking management comments and others statements reflecting our outlook for 2007 as well as future periods. These comments should be considered in conjunction with the cautionary language contained in this morning's earnings release, as well as the detailed cautionary statements found in our second quarter 10-Q. Our earnings release also contains a reconciliation of the non-GAAP comparable figures referenced during this call. A copy of this information 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 our North American Group, is also with us on this call this morning. Following the prepared remarks, we will open the call for your questions. Now, I'll turn the call over to John Brock.

[John Brock:]

Thanks, Thor. We're pleased to be with you today to discuss second quarter results that demonstrate progress in our work to achieve our long-term goals. In our news release this morning, we reported comparable second quarter earnings per share of $0.58 and comparable net income of $281 million, which is up 3% from the same quarter a year ago. This performance reflects the impact of a combination of factors. Importantly, it demonstrates solid execution of the business plans and the strategic initiatives that we have in place at every level in our Company. It also includes some benefit from foreign exchange. Even as we face important challenges in our business, such as the high cost in North America and a difficult market environment in Great Britain, we are making progress in reaching our goal of consistent, sustainable profit growth. Based on our results for the first half of the year, and coupled with our expectations for the remainder of 2007, we have raised our guidance for the year to a range of $1.27 to $1.32 per share on a comparable basis including currency benefits. We recognize that these results still remain below our long-term growth objectives and do not reflect the growth we believe our business will attain. However, we're seeing several positive developments in our business that give me and our leadership team even more confidence that we're on the right path in strengthening and developing CCE's business. Let me share with you a couple of examples and then I'll discuss our second quarter results in a little more detail. First of all, our restructuring efforts are on target. And ultimately, we'll accomplish our goals of creating enhanced effectiveness, improved efficiency and better customer service. Though we are still in the early days of this effort, our initial work is encouraging and we look forward to sharing results of these initiatives with you in future calls. Second, as I've traveled throughout our system in the past several weeks, I'm seeing an increased synergy at every level of the Company in executing our global operating framework and the three strategic objectives that are at the very core of that framework. In support of our first objective, which is to grow the value of our existing brands and to expand our product portfolio, we already have had significant activity this year. We have announced new opportunities including Fuze and Campbell's beverages and continue to build on other initiatives such as Coca-Cola Zero, Diet Coke Plus, Enviga and Capri Sun of course in Europe. In addition, we're continuing to work closely with the Coca-Cola Company regarding opportunities for CCE with the Glacéau acquisition. While these initiatives represent real progress in building our brand portfolio, we recognize that more work lies ahead to achieve our long-term growth targets. We are also executing against our second objective, transforming our go to market model and improving efficiency and effectiveness. And we're doing so by quickly moving forward with several key programs. As an example, customer centered excellence is an integrally important part of this effort and the initial work is going well. We're also continuing to refine the basics of our business such as scheduling, root development, warehousing and vending optimization to greater levels of efficiency. Our third objective is to attract, develop and retain a highly talented, diverse work force. Our work in this area spans a broad effort to maximize the opportunities for our employees with enhanced training, clear job responsibilities and an inclusive corporate culture. Our team of employees is unmatched in their skill in the marketplace and their dedication to winning and it is our responsibility to give them the opportunity to become even better. Throughout the company, our managers and employees are increasing their focus on these three objectives and integrating them into their operations. This focus is helping forge a companywide synergy that will make us even stronger in the market and create more opportunities for us to win. Now, let me quickly share another example of the increasing synergy within our company. A few weeks ago, we brought together more than 100 of our top managers in our first summit to address global corporate responsibility and sustainability for CRS. Our goal was to discuss just how CRS can strengthen and improve our overall business performance and how it relates to each aspect of our business. Recognizing the importance of CRS and acting accordingly is increasingly vital to any company's success today. Our managers and employees are working together to embed the concept of CRS in our business at every level. And already there's progress in areas as diverse as water stewardship, sustainable packaging, energy conservation and health and wellness. Over time, we're confident this effort will enable us to identify and manage a variety of risks and opportunities and to strengthen our ability to reach our most important goal, creating shareowner value. Now, let's turn to our second quarter results and examine some of the factors that contributed to our performance. Looking first at North America. As expected, we continued to face a high cost environment because of sharp increases in aluminum and sweetener, which resulted in a cost of goods per case increase of 9.5%. Net pricing per case grew 4.5% and our volume declined 3% during the quarter. As we face these difficult operating conditions, we continued to focus on operating expense initiatives that enabled us to reduce operating expenses by more than 1% on a comparable basis. To ensure we continue the improving trends of our operating income performance, it is essential that we remain focused on maximizing the value of our brand portfolio, particularly as we continue to face challenges in the sparkling category, which declined 4.5%. A key element of our efforts to support this category is our Red, Black and Silver strategy. This initiative enhances consumer awareness of our core Coca-Cola Classic, Diet Coke and Coca-Cola Zero brands and strengthens the market place presence of the Coca-Cola trademark. In addition, we're continuing to build on the success of Coca-Cola Zero, which achieved growth of more than 30% in the quarter and helped create positive share trends for our industry-leading cola portfolio. In addition, we're also growing in key areas, such as teas, which are up more than 40% in the quarter, through the benefit of both brand and packaging innovation. Growth in teas, coupled with high, single digit growth in Powerade created mid single digit volume growth for our overall still beverage portfolio. We are encouraged by these results and believe we have significant additional growth opportunities throughout our still beverage portfolio beyond teas and sports drinks. For example, though juices and juice drinks declined in the quarter, we anticipate improving trends in this category as we increasingly benefit from the introduction of both Fuze and Campbell's beverages. These brands combined with our Minute Maid brands, will create a truly powerful juice and juice drink portfolio. We also continue to achieve strong volume results in energy. Second quarter volume in this category grew more than 30%, as both Full Throttle and Rock Star made solid volume gains. Dasani also generated increased volume. And we're pleased with the overall direction of our water business. Though growth slowed to a low single digit number in the second quarter, as we lapped strong 24 strong pack promotional activity from a year ago, the pricing environment is more stable. In addition, we have strong market initiatives in place for the remainder of the year that we believe will drive improving growth trends. We'll also benefit from Dasani Plus, a new enhanced water that's contributing incremental volume with solid profit growth. Our immediate consumption water business remains highly profitable and we'll continue to use our future consumption business to build relevance with retailers and consumers and to create opportunities for growth in higher margin water products. As I said earlier, we're continuing to work closely with the Coca-Cola Company to finalize CCE's opportunities with the Glacéau brands. We look forward to making an important contribution to the development and the growth of these brands as we work to achieve our established long-term growth objectives. Now, let's discuss our second quarter results in Europe, which achieved 2% volume growth and flat net pricing per case. This performance reflects the continued strength of our business in continental Europe where volume increased 4%, as volume in Great Britain declined 0.5%. Despite continued volume softness, we believe there are some encouraging signs in Great Britain. Most notably, the performance of Coca-Cola Zero, which continues to grow while lapping introductory volume from a year ago. We believe this brand has even more growth potential and will provide an ongoing source of marketplace energy and activation. We also have several brand extensions and new products in the pipeline including new flavors for both Minute Maid and Fanta. This continued innovation, coupled with the successful expansion of our Boost Zone program in France and Great Britain, along with our effort to significantly increase cooler placements, will also strengthen European immediate consumption sales, which were up 1.5% in the quarter. Already, Great Britain has more than 30 Boost Zones in operation. France has expanded to over 100 Zones and we continue to be pleased with these results. Most importantly, however, our business in continental Europe continues to perform well and that's particularly true in France. We achieved volume growth on the continent of 4%, driven by growth in sparkling beverages along with juices and juice drinks. Sparkling growth reflects the tremendous strength of Coca-Cola Zero, which continues to exceed expectations since its launch late last year in Belgium and earlier this year in France and Holland. This brand represented more than 5% of our second quarter volume in continental Europe. In addition, Sprite grew in a low double digit range, in part due to the addition of the brand in cafes. Our results in Europe continue to be helped by the progress of our reorganization there as well. We remain committed to improving the effectiveness and the efficiency of our organization and we're actively exploring additional opportunities. One example here is the rationalization of our full-service vending program, which is proceeding on plan and is providing operating savings. So, to summarize, I believe our second quarter performance demonstrates good progress toward our ultimate goal, which is sustained, consistent, profitable growth. We've excellent brand and operating plans in place. We have significant opportunities to grow and we're working to take advantage of every opportunity to operate our business as effectively and as efficiently as possible. Thanks for listening and now I'll turn it over to Bill to give a bit more detail on our financial results, as well as our outlook for the remainder of this year.

[Bill Douglas:]

Thanks, John. In the second quarter, we achieved earnings per share of $0.58, excluding $0.02 for the net impact of items affecting comparability. The primary factors driving these results were a combination of North American pricing improvement, European volume growth, as well as overall operating expense management. Operating expenses grew 2% on a reported basis, however, declined 1% on a comparable currency neutral basis. There was a positive impact on second quarter results from currency of approximately $0.02 per share. For the quarter, on a comparable basis, consolidated operating income was essentially flat, reflecting a North American operating income decline of 4.5%, affectively flat operating income in Europe and reduced corporate expenses. Revenues for the quarter grew 4%, with strong revenue growth of 10% in Europe and North American revenue growth of 1%. European volume grew 2% with flat net pricing per case, while North American volume declined 3% and net pricing per case grew 4.5% in North America. We continue to expect North American pricing growth for the year in a mid single digit range with volume down and a low single digit range. With respect to Europe, we continued to expect low single digit volume and pricing growth for the full year. Second quarter cost of goods per case increased 9.5% in North America, as we continued to face strong increases for both aluminum and sweetener. We expect that pricing for each commodity will remain high for the remainder of the year, with North American cost of goods per case increasing approximately 9% for the full year. As John said, overall, we are encouraged by the progress demonstrated by our operating performance over the first half of 2007. Based on this progress, as well as our expectations for the remainder of 2007, building in currency benefit, we have increased our full year guidance for EPS. We now expect full year EPS in a range of $1.27 to $1.32, which does include a currency benefit of approximately $0.05 per share. This revision is supported by improving operating fundamentals and reflects confidence in our restructuring efforts based on results year-to-date. Already key initiatives, such as our segmented merchandising effort in North America and our vending optimization program in Europe are paying dividends. We look forward to sharing with you more specific details about these and other efforts in future conference calls. Estimates of total restructuring costs remain on track and we continue to believe we will recognize the majority of the approximately $300 million restructuring charge in 2007 and 2008. It is important to note that our full-year guidance includes the benefits from restructuring and benefit of new brands such as Fuze and Campbell's beverages. With regard to the Coca-Cola Company's Glacéau acquisition, as John touched on, we continue to work closely with the Coca-Cola Company to determine how CCE will work to help grow and develop these brands. We believe that benefits from these brands will begin in 2008, enhancing our ability to reach long-term previously stated growth objectives. Also of note, as a result of a 2007 tax rate change in the United Kingdom, we expect to record a deferred tax benefit of approximately $65 million during the third quarter of 2007, which will impact our deferred taxes. Ultimately, our long-term success relies on our ability to execute each day on behalf of each of our brands, old and new, and our ability to increase the effectiveness and efficiency of our operations. We have confidence that over the long-term, we will deliver annual revenue growth of 4% to 5%, operating income growth of 5% to 6% and high single digit earnings per share growth. In addition, a 30 point basis annual improvement in our return on invested capital. And we continue to expect to begin reaching these overall performance levels in 2008. We also expect continued improvement in our levels of free cash flow, which for 2007 will total approximately $650 million. In recent years, we have committed a large majority of the free cash flow to debt reduction. In addition, we implemented a 50% increase in our dividend early last year. As we continue to improve our levels of free cash flow, we will reevaluate our total capital structure and determine the best options for use of this free cash flow in the future and how we can improve our return to shareowners. So, to summarize, we are pleased with our quarter and believe we're making solid progress in our efforts to generate long-term sustainable profit growth. However, we recognize that we have a great deal of work to do, including maximizing the value of new brand initiatives such as Fuze and Campbell's. Generate improving trends for sparkling beverages and continuing to be successful managing every element of our cost structure. Thanks for joining the call. And operator, now we'll be happy to open it up for questions.

[Operator:]

(Operator Instructions) Our first question comes from Bill Pecoriello with Morgan Stanley.

[Bill Pecoriello:]

Good morning everybody. I have two questions. Number one, I understand that your Europe and Canadian franchise, its works, were extended by six months only and I know you're negotiating with Coke over changes in the terms and just want to know if you could point out what the terms that Coke is seek a change that you're not comfortable with?

[John Brock:]

Hi, Bill.

[Bill Pecoriello:]

Hi, John.

[John Brock:]

What I would say is that the Coca-Cola Company has taken a position that it wants to put in place a new form of agreement and I would say, we believe we're entitled to extensions of the existing agreements. We believe we're confident we can resolve these points of difference and frankly, we think our -- what I would call our interdependent relationship with Coca-Cola as well as the substantial cost and disruption that, would be caused by any kind of non-renewals, mean that these contractual issues, that are between us can be resolved. I don't think we're really at a point where it would be appropriate to discuss what those items are but we remain confident as do they that we'll resolve them.

[Bill Pecoriello:]

Great. My second question was when Coke mentioned, in terms of transferring Glacéau rights that bottlers would be asked in terms of reinvesting across the overall portfolio, is it too early to talk about any specific programs? Is Coke referring to new marketing programs that would be put in place that the bottlers would agree to and what kind of magnitude would we be looking at here?

[John Brock:]

I think it is too early to talk about specific programs. We're engaged in very comprehensive discussions with Coca-Cola about Glacéau. We're very interested in having the Glacéau brands in our system and our sense is certainly they are, also. And we've got to work out all of the details. I think one of the things that Glacéau, of course, will do, is give us significantly more comfort and confidence that we'll be able to achieve the long-term growth goals that we've been very clear in laying out for the markets. So, we think that as we've said all along, one of the reasons we were so keen on having our portfolio be a broader one, not so reliant on sparkling beverages is that with that kind of an approach, we would find ourselves in a very different position in terms of the kind of approach we would take with our sparkling beverage business and that would obviously be to our satisfaction and to that of the Coca-Cola Company also. So, that's a little glimpse as to where we're heading and talking but I think again, it is a bit early to talk about any specific details.

[Bill Pecoriello:]

Thank you.

[Operator:]

Thank you. We have a question from Lauren Torres from HSBC.

[Lauren Torres:]

Good morning. Could you talk a bit more about your progress with respect to your restructuring efforts? At this point it seems like maybe you're tracking ahead of your expectations so I was just wondering if you're realizing more of these benefits earlier than you were initially expecting or should we expect to see more savings to be realized more than you initially anticipated.

[John Brock:]

I would ask Bill to tackle that question, Lauren.

[Bill Douglas:]

Hi, Lauren. I think from a financial perspective, early days, you know, we're absolutely on track and yes, in fact, somewhat ahead of where we would have hoped we would be at this juncture. And I think that gives us a lot of confidence that the overall program will deliver at or maybe above what we had originally estimated. However, I think the big news is that very significant expansion in our portfolio with fuse and Campbell's already starting to roll into our portfolio and then the likelihood of Glacéau rolling into our portfolio in 2008, we had always said that we were going to be reinvesting some of the savings and what Terry and John and our teams are going to be doing, you know, principally over the next three months is reevaluating what reinvestments we need to make in 2008 to address this expanded portfolio. So, again, we have an absolutely more confidence today than we did three and six months ago about delivering our long-term growth objectives in '08 but to say that we're going to be banking a higher percentage of the overall restructuring savings to the bottom line in '08, I would not draw that conclusion today.

[Lauren Torres:]

Okay. Thanks. And if could ask one more question. There have been some is headlines with respect to strikes in the U.K. If you could address that at all and any potential impact that could have on your business?

[Bill Douglas:]

Yes, hi, Lauren. I'll address that one. It is a situation in the U.K. where we are negotiating in very good faith with our labor union partners and they are also with us. Yes, there have been some limited strikes, which we anticipated, but we have taken appropriate steps to ensure that our customer deliveries and our customer responses are unaffected and that continues to be the case. And we remain convinced, in fact, that we will not have any customer issues and we remain optimistic that we will negotiate again with unions in a satisfactory settlement in due course.

[Lauren Torres:]

Okay. Thank you.

[Operator:]

Thank you. We have a question from Judy Hong with Goldman Sachs.

[Judy Hong:]

Good morning, everyone. John, just following up on Bill's question regarding your negotiation with Coke, both the European contract as well as Glacéau, are those tied in any way or are you looking at those sort of jointly and thinking about it from a broader Company perspective where you're willing to give a little bit of concession on one to get more favorable terms than the other or are those negotiations just completely separate?

[John Franklin:]

Well, I guess at the end of the day, almost all of our discussions and negotiations in relationships with the Coca-Cola Company tend to be part of a holistic overall approach. But we also often end up solving for issues on an issue-by-issue basis and I think we're doing a pretty good job at that. When I compare where we are in our overall relationship with Coca-Cola today versus a year ago, it has been a very steady and meaningful improvement for the better. And you know, the kind of changes that we were so anxious to see developing in the portfolio front I think largely because of perhaps some of the leadership changes at the Coca-Cola Company haven't materialized and while they've admitted there's still more work to do. Most notably, I would say in the tea category, nevertheless, we're really encouraged about what we see happening there. We're encouraged by the degree to which we work together on the 2007 business plan that we're executing in both Europe and North America and which reflects the rather unique raw material cost situation we found ourselves in. And again, we and the Coca-Cola Company I think work effectively to deal with some tough situations there. So, as we looked at the future, again, we're feeling pretty good about the way things have gone and while there are always issues to be worked through between a franchiser and a bottler. We believe that one by one, we're tackling these issues. So, some of them may get solved individually and some may be solved more holistically.

[Judy Hong:]

Okay. Then for Bill, just a clarification on your new guidance. It looks like it is up 10 cents from the prior guidance. And I guess 5 cents of that is currency. Can you talk about the rest of the increase, what is driving it? Is it the restructuring efforts coming in a little bit better? Is the tax rate for the full year a little bit lower as well? Can you just talk about the guidance for the full year?

[Bill Douglas:]

Yes. If you -- assume that the net midpoint increase was about 10 cents, 5 cents of that would clearly be from currency. I think the other factors are roughly equal. I think the North American volume pricing algorithm has played out a little bit better than we may have expected it the beginning of the year. That would be one factor. Number two, holistically across the board, North America, Europe and corporate, we are doing a better job again holistically of managing operating expenses and that is a little bit more from our restructuring efforts but also just general benefits from a comprehensive focus on managing down operating expenses. And then lastly, there is a small, whether it’s a penny or two benefit from full year tax rate. That would round out a $0.10 variant.

[Judy Hong:]

Okay. So, the full year tax rate for the second half tax rate is basically same as the second quarter tax rate?

[Bill Douglas:]

We are estimating that the full year tax rate will be between 29% and 30% in that range.

[Judy Hong:]

Okay. Thank you.

[Operator:]

Thank you. We have a question from Brian Spillane with Banc of America Securities.

[Brian Spillane:]

Hi, good morning. Just a couple of questions related to the balance sheet and cash flow. First, Bill, it looks like the total assets on your balance sheet were restated somewhere between the end of 2006 and 2007? And it’s, I guess there is a line item on here that receivables from the Coke Company. Can you give us a little bit more color on what that is?

[Bill Douglas:]

Yes, Brian. That's just a grossing up of an item that we had previously reported on a net basis. So, as we were looking to improve our disclosure, we just broke out a previously net number. And we, do you want call back, we can give you details of that. But that's by in large what that number is.

[Brian Spillane:]

Okay. And then when you look at the free cash flow generation, if you go back prior to this year, the last, few years prior to this, you were averaging somewhere around $750 million of free cash flow annually. And, as you start to move into an environment where you started to move into your long-term growth algorithm, given the changes you've made in terms of efficiencies, would you expect that the free cash yield or the free cash generation off for this model should improve versus what it was previously?

[Bill Douglas:]

Modestly, but not significantly. But as we continue to grow the overall business, you know, clearly free cash flow and absolute dollars is going to increase.

[Brian Spillane:]

Okay. And then finally, just and maybe John, if you could talk a bit about, I know uses of free cash flow, you could reevaluate capital structure and in that thinking, where do acquisitions fall now relative to maybe, when you first started. And I guess, you think through the Coca-Cola now owning a bottler in the U.S. It seems like, at some point down the road, it would make sense that the efficiency sake, that would be better run by you. So, do acquisitions potentially play a bigger role in terms of thinking about uses of free cash flow now versus maybe what you were thinking a year ago?

[John Brock:]

Yes, our view on that is I think pretty simple, Brian. If there is an acquisition opportunity out there in the bottling world, that we believe would create value, we're in a bit of a better position to consider it than we would have been a year ago or two years ago and that's a good thing. Do we have any clear acquisition opportunities that are right on the Horizon that we can talk about and the answer is no. But would we remain willing and interested, again if it created value, absolutely, whether it was in the United States or elsewhere. But, and again, the good news is we've got the flexibility now to do it if it were there but again, it is not something that we're going out of our way to find. We only want to do it if it created value and again, we've got flexibility to do it if it does.

[Brian Spillane:]

Okay. Great, thanks guys.

[Operator:]

Thank you. We have a question from Mark Swartzberg with Stifel Nicolaus.

[Mark Swartzberg:]

Thanks operator. Good morning, everyone. Couple of questions. I guess ultimately relating to Europe. But first, Bill, anything you want to tell us about how we lay out the second half this year from a total company perspective and any impact Europe might have on performance quarter-by-quarter?

[Bill Douglas:]

I think generally, the way the market is perceiving our quarterly performance is fairly in line with our expectation. The thing that I would highlight is last year Q3 '06 in Europe, volume was up 5.5%. So we're cycling a pretty solid quarter in Europe last year. Also, as everybody has read, weather has not been great in Europe in July particularly in Great Britain. So, you need to factor that in. But, I think generally, I think that was the way people were looking at the back half of the year anyway.

[Mark Swartzberg:]

Great. And then really on that, anything unusual about Europe's profit trends in the third and fourth quarter of last year versus volume trends, meaning our volume trends are a pretty good indicator of how profits performed in that region last year?

[Bill Douglas:]

Yes. There’s always a few anomalies but nothing of huge significance to highlight.

[Mark Swartzberg:]

Great. Then lastly on this weather issue, particularly in GP, can you tell us what your volume in Europe was specifically in the month of June and specifically in the month of July to date?

[Bill Douglas:]

I will not give specific monthly volume but I can say, if you look at our overall European volume growth of 2% that number slowed down in the month of June as the weather deteriorated. April and may were performing at a rate higher than that. And then as you would expect, the performance in July has been similar to that in the month of June.

[Mark Swartzberg:]

Okay. Are we are we talking down? Or are we talking up in those periods?

[Bill Douglas:]

The volume would have been down year-over-year in those two months.

[Mark Swartzberg:]

And then what gives you comfort that, it’s not going to get worse in the month of August and September?

[Bill Douglas:]

Well, I think one would assume at some point you're going to return back to a more normal weather pattern. The weather was normal in August and September last year. And then the promotional activity that we have in place moving in to August and September as well.

[Mark Swartzberg:]

Okay. Fair enough. Thanks, Bill.

[Operator:]

(Operator Instructions) We have a question from John Faucher with J.P. Morgan.

[John Faucher:]

Yes, good morning, everyone. I apologize if I'm getting a little, parsing a little bit too much. But I want to talk a little bit about the Glacéau guidance here. In the press release and also in your commentary, you talk about contributing to the development and growth of these brands to achieve your established long-term growth objectives. And so I guess are we parsing this too much to say, it’s not going to be, significantly additive? Do you view this as a way to subsidize some of the other brands and bring your operations up to speed? I guess I don't want to over parse this in terms of what the impact is going to be. And then I guess it also leads to the question in terms of your long-term growth objectives off of what base? Do you make up for the fact that this year was down or this year was relatively flattish versus last year? So how should we look at Glacéau in the context of your long-term algorithm and what year you base that off of. And then also a little bit of color in terms of why we should look for the Glacéau impact to begin in 2008 as opposed to 2007. Is it just going to take longer to get everything settled? Thanks.

[John Brock:]

Yes. Let me comment on the first one. I'll ask Terry to comment on the second part of the question. Just in terms of our systems ability to deal with all of the various new brands and products we're dealing with. On the first one, I think the base is 2007. So, if that hasn't been clear, that should be. And going forward, again, our long-term growth objectives, we believe are very clear in terms of high single-digit earnings per share growth in '08, '09 and ' 10. We said '07 was a very unusual year because of the raw material cost. So, that is our long-term growth Al algorithm and that's what we expect to achieve. What we're seeing around Glacéau is frankly it is too early to say exactly how it’s going to layer in. But what it clearly will do for us is give us significantly increased confidence that we can meet those objectives and it will be obviously through a combination of Glacéau and our system, coupled with an ability to do some things that we might otherwise not be able to do to help our sparkling beverage business. With that, I'll ask Bill for a little further comment and then Terry can comment on our systems' ability to handle all of this.

[Bill Douglas:]

Hi, John. I completely agree with everything that John said. If you look at all the variables that we're going to be managing in 2008, an additional variable we haven't talked a lot about today with respect to 2008 is the cost of goods environment. Clearly, in 2007, we are facing unprecedented increases in cost of goods per case. Our current estimate is up approximately 9% in North America. In 2008, cost of goods is too early to predict exactly what's going to happen. We're out in the market attempting to layer on cover for both sweetener and aluminum as we speak and we'll have a lot better feel of where we're going to land after the third quarter call in October. But just to put a little bit of color around it, while we expect at this juncture in 2008 to be more in line with historical trends, we still expect the incremental increase in cost of goods per case, '08 versus '07 to be up higher than historical trends of circa 2%. I can't tell you exactly what the numbers are going to be, but I would expect '08 cogs to be up let's call it 3.5%, 4% at this juncture. Could get better, could get a little worse. So, that's another variable that we're going to be hurdling with Glacéau restructuring and everything else. But again, all of these factors baked in, we're standing by the long-term metrics for '08.

[Terry Marks:]

And then finally, John, with respect to the transition of the business and the impact in '07, we have a large group of people engaging in real time with Glacéau and Coca-Cola North America to work through all of the logistics related to the transition and it’s a very complex process because it’s happening within a very short timeframe of the launch of fuse and Campbell's. And these are all products that share similar characteristics. High SKU count and relatively low velocity per skew compared to our core business. But good velocity and very profitable. So, we're being very thoughtful about the timing of transition. We're looking at what's on the plate on a market-by-market basis. And then there's just, there's always some natural disruption anytime you go through a massive change like this. So, that's why I think we're really not expecting a material beneficial impact in '07 as a result of the transition.

[John Faucher:]

Okay, great. Thank you.

[John Brock:]

Okay, operator, I think we can take one more question.

[Operator:]

Your final question comes from Robert van Brugge, Sanford Bernstein.

[Robert van Brugge:]

Good morning. Quick follow-up question to Bill, your comment about cost of goods sold, inflation for '08. Would that include your expectation for concentrated price increases or is that just based on commodity price improvement?

[Bill Douglas:]

What I'm talking about is principally focused on commodity cost movement. And again it’s principally sweetener and aluminum.

[Robert van Brugge:]

Okay, great. And in terms of concentrate pricing, I assume you're in negotiations with the Coca-Cola Company at the moment but is their point of view that the base case is the list price for 2007? Or the list price net of the funding that you will receive this year?

[Bill Douglas:]

Well, we are in the middle of those conversations. But I think it is fair to say that the impact that we would be looking for in our P&L would be a rational increase on a net basis.

[Robert van Brugge:]

Great. Thanks.

[John Brock:]

Okay. Thanks, everyone for joining our conference call today. Hope you have a fine day yourselves and thank you very much. Good-bye.

[Operator:]

Thank you for joining the teleconference. You may disconnect at this time.