Coca-Cola Europacific Partners PLC
Q4 2007 Earnings Call Transcript

Published: 13 Feb 2008

[Operator:]

Welcome to the Coca-Cola Enterprises fourth quarter and full year 2007 earnings conference call. At the request of 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 Investor Relations. Sir, you may begin.

[Thor Erickson:]

Thank you and good morning, everybody. We appreciate you joining us this morning to discuss our fourth quarter and full year 2007 results and our 2008 outlook. Before we begin, I would like to remind you all of our cautionary statement. This call will contain forward-looking management comments and other statements reflecting our outlook for 2008 as well as future periods. These comments should be considered in conjunction with the cautionary language contained in this morning’s earning release as well as the detailed cautionary statements in our most recent 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 www.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 F. Brock:]

Thank you, Thor. Good morning, everyone and thanks for taking time to join us. We welcome the opportunity to discuss with you our results for 2007 and to reinforce our expectations for solid growth in 2008 as we continue to make important progress against our long-term strategic objectives. As you read this morning, we achieved comparable fourth quarter earnings per diluted share of $0.29; revenue growth of more than 10% versus a year ago, and comparable operating income growth of 17%. For the full year, comparable earnings per diluted share were $1.39. That’s up 7% from a year ago with revenue growth of 5.5% and operating income growth of 3.5%. In our release, we also confirmed the full year ‘08 guidance that we discussed with you in December, including ‘08 earnings per share in line with our long-term objective of high, single-digit growth. We believe that the success of our restructuring programs, our execution against our three strategic objectives, and our stronger, more focused relationship with the Coca Cola company altogether give our employees the tools to excel in the marketplace and to drive meaningful profitable growth. We recognize that economic trends have weakened in recent weeks and that is particularly so in North America, but we remain committed to our guidance. In a few minutes, Bill Douglas will discuss our guidance and our long-term objectives, along with some of the factors that will influence our 2008 results in a bit more detail. Now, as we look at 2007, we closed with a solid performance in the fourth quarter with earnings per share of $0.29 which reached the upper end of the revised guidance that we provided to you in December. A combination of top line growth and increasing levels of effectiveness and efficiency drove this level of performance. These results also reflect some benefit from foreign currency, as well as a favorable tax environment. One factor in our fourth quarter results was the successful North American introduction of Glaceau brands in early November. We effectively brought 35 SKUs into the market in a three-week period and we began laying the foundation for full development of these brands in 2008. The benefits of these brands, coupled with strong sparkling execution through our Red, Black and Silver initiative; solid growth from both DASANI and POWERADE, as well as volume from Fuze and Campbell’s enabled us to achieve fourth quarter volume growth of 1% in North America. That is our first quarter of volume growth in 12 months. We also achieved net pricing per case growth of 4.5%. We mentioned in the release that increased investment against sparkling brands will partially offset this increase. We expect operating income will increase the high end of the long-term target range of 5% to 6% in earnings per diluted share in line with our long-term objective of high single-digit growth. Just one minute. I think I have a page out of order here. My apologies, ladies and gentlemen; I just had page 5 instead of page 4, if you will excuse me. Let’s turn to Europe, which was intended to be my next subject. In Europe, our volume in 2007 fourth quarter grew 4.5%, driven by a combination of growth in Coca-Cola trademark beverages which were up 5% and still beverages which grew 10%. A key factor in our volume performance in Europe continues to be Coca-Cola Zero which continues to earn strong consumer acceptance and add balance to our sparkling portfolio. In addition, Great Britain achieved solid volume growth of 5.5% during the quarter, driven by consumer response to fourth quarter promotional activity. While we’re encouraged by Europe’s performance and the renewed growth in Great Britain, continued success demands that we address key issues and those include the sustainability of Great Britain’s fourth quarter promotions, developing a Great Britain water strategy and creating meaningful expansion for our still beverage portfolio. So, with these fourth quarter results we were able to close out 2007 with steadily improving performance and earnings above our initial expectations for the year. We overcame severe commodity cost pressures in North America, managed weather-related summer weakness in Europe, and continued to successfully restructure our company in ways that will make us increasingly efficient and effective and allow us to strengthen our customer service. These results provide important momentum as we enter 2008, which is a pivotal year in which we will begin to deliver improved levels of growth. The existence of this momentum is a testament not to just our operational strategies, but also to the abilities of our more than 70,000 employees who have embraced change, demonstrated strong leadership as well as a dedication to winning. Their efforts are creating the success of our restructuring, increasing our focus on customers, improving our ability to execute in the field day to day and enhancing the effectiveness of our operations. While 2007 has provided momentum, capitalizing on that momentum requires much hard work in the months ahead. It is vital that we continue to execute against our global operating framework which defines a common vision for our company and that is to be the best beverage sales and customer service company. Guiding our work to achieve this vision are three strategic priorities, each with a specific definition of success

[William W. Douglas:]

Thanks, John. In the fourth quarter we achieved earnings per share of $0.29 excluding $0.03 for the net impact of items affecting comparability. These earnings were driven by a combination of volume and pricing growth both in North America and Europe; the continued success of our operating expense initiatives; as well as the benefits from our restructuring efforts. They also included a $0.01 benefit from currency and approximately $0.01 benefit from the impact of a full year favorable tax rate. This tax favorability was primarily the result of timing as we were able to reduce taxes in the fourth quarter as our full year liability was finalized. The items affecting comparability included $0.05 for restructuring charges, $0.01 for debt extinguishment costs, and $0.09 for net favorable tax items. For the quarter, total revenues grew 10.5% with a revenue increase of 18.5% in Europe and 7.5% in North America. For the full year, total company revenue grew 5.5%. Fourth quarter cost of goods sold increased 8% on a comparable currency neutral basis with a 10.5% per case increase in North America due to higher sweetener and aluminum cost as well as the impact of increased purchases of finished goods related to the introduction of Glaceau. For the full year, North American cost of goods sold grew 9.5% on a per case basis. In the quarter, operating expenses grew 6.5% on both a reported and comparable basis. On a currency neutral comparable basis, operating expenses grew approximately 3%. For the full year, comparable operating expense increased 3%, in line with our expectations. On a comparable basis, fourth quarter operating income was up 17% as North American operating income grew 4% and Europe increased 38% with foreign currency contributing approximately 10% of this growth. As John discussed, North America returned to volume growth in the quarter with a comparable gain of 1%; in addition, pricing growth of 4.5% per case. This pricing level primarily reflects a combination of additional rate from our earlier pricing initiatives as well as the impact of additional volume from the sale of finished goods such as Glaceau, Campbell’s and Fuze somewhat offset by strong multi-pack water volume. Cost of goods sold increased 10.5% per case for the quarter, primarily driven by higher commodity costs and the mix impact of these new brands. In Europe, on a comparable basis volume grew 4.5% with solid net pricing per case growth of 2.5% and a cost of goods sold per case which was essentially flat for the quarter. Now as we look ahead to 2008, as John said, we remain committed that we expect to begin realizing results in line with our long-term objectives which are annual revenue growth of 4% to 5%, operating income growth of 5% to 6%, a 30 basis point or more annual improvement in our return on invested capital and high single-digit earnings per share growth. For 2008, we expect revenue growth in the high single-digit range because of the mix impact of Glaceau and other new brands that are primarily sold in single-serve packages. As we mentioned in the release, increased investment against sparkling brands will partially offset this. We expect operating income will be increasing at the high end of our long-term range of 5% to 6% for ‘08 and earnings per share will be in line with our long-term objective of high single-digit growth. As we look at the timing of our earnings, we see essentially flat year over year performance in the first quarter which is our smallest, principally due to the timing of pricing initiatives coupled with the modest softness early in the year in the immediate consumption channel. We believe our performance over the remainder of 2008 will allow us to achieve our EPS targets for the full year. Key factors in our North American outlook include a stable pricing environment and the marketplace benefits of the Glaceau, Fuze and Campbell brands. These new brands, coupled with the impact of sparkling initiatives such as our successful Red, Black and Silver focus on core Coca-Cola trademark brands will contribute to the volume growth in the low to mid single-digit range. Driven by change in mix, pricing per case will increase in a mid single-digit range while cost of goods per case will increase at a low double-digit rate. Excluding the mix impact from the new brands, pricing per case will be in a low single-digit range and cost of goods per case will increase in a mid single-digit range. Given current trends, we continued to believe core raw material costs will increase approximately 5% which is less than the 2007 increases but still above historical ranges. In Europe, we expect volume growth in a low to mid single-digit range with net pricing per case increasing at a low single-digit range. This reflects a low single-digit increase in cost of goods per case and our confidence in a continued moderate commodity cost environment in Europe. In addition, we expect continued benefits from our restructuring efforts which are driving stronger levels of effectiveness and efficiency and helping to keep operating expense growth at a minimum as we continue expanding our brand portfolio. In closing, let me note that we clearly recognize that we are not immune to changing macroeconomic conditions. We will closely monitor changes but we continue to believe that we have solid momentum as we begin 2008. For example, we have reduced our net debt to approximately $9.2 billion, our lowest level in ten years, which affords us additional financial flexibility. We also believe we have strong brand and operating plans in place that will enable us to capitalize on this momentum, deliver against our expectations for the year as well as enable us to take another step toward consistent, sustained growth in line with our long-term objectives. A demonstration of our improved outlook is our board’s recent decision to implement a 17% increase in our dividend. This action, coupled with our resumption of our share repurchase program later in the year, will enable us to return approximately 40% of this year’s free cash flow to shareowners. We believe this is a solid step forward as we strive to deliver a superior investment return to shareowners. We will follow up with additional details later on in the first half of this year. So thanks for taking the time to join us today and now, operator, we’ll be happy to open the line up for a few questions.

[Operator:]

(Operator Instructions) Lauren Torres, HSBC.

[Lauren Torres:]

Good morning. I was hoping you could be a bit more specific, Bill, with regard to your input costs this year. Since we last spoke just a few months ago, have any of these pressures become more of a concern for you? And then I guess just thinking if these costs continue to rise above your current expectations, what are you offsets? Will you be more reliant on price, and this is in North America, or are there other measures that you are looking to? Thank you.

[William W. Douglas:]

Thanks, Lauren. I’ll be happy to cover that in some detail. Firstly overall, the environment as we see it today has gone up and down a little bit since we spoke in December but broadly speaking, our outlook is pretty consistent with what we saw in December. Clearly from a year-over-year increase, the highest dollar increase in North America is going to be from HFCS. However, as of this point in time, we are approximately 65% covered for the full year, so as the exposure there is somewhat limited by our uncovered amount. The second biggest input risk would be aluminum. The price again has been a little bit up and down in the last 60 days but the good news on the aluminum side is we are 80% covered for 2008 at this juncture, so our exposure is fairly limited. So overall, that and the other input costs, PET and oil being clearly the biggest, we see that basket being approximately 5%, a couple of percent either side of that but as every day, week, month goes by, that corridor is shrinking and as and if the economy slows down, that should help negate some of the risk on the commodity side. If commodities do move higher than we are anticipating, we will continue focusing on our operating expense initiatives as well as potentially modest incremental pricing activity to cover that in North America. Completely different story in Europe. The commodity environment is fairly benign there. We have a different sugar system in Europe and cans are less part of our mix and cans are about 50% steel, 50% aluminum and we are actually fully covered on aluminum for 2008 in Europe.

[Operator:]

Bill Pecoriello, Morgan Stanley.

[Bill Pecoriello:]

Good morning, everybody. You mentioned the media consumption channel was slowing a bit year-to-date. I was wondering if you can dimension how much you think it’s slow versus the fourth quarter and how much risk this represents to your 6% operating profit growth forecast for ’08, what offsets that you might have in that channel? Thanks.

[John F. Brock:]

Terry will address that one.

[Terrance M. Marks:]

We saw some slowing or some softening in the cold channels early in the first quarter and it was more pronounced in some regions of the country than others but in the aggregate, it was -- it did represent some slowing. We’re confident in the full year plan though for a couple of reasons. The first and foremost, we’re already seeing a little bit of sequential improvement in certain parts of the country, particularly in the upper Midwest, and we attribute some of the soft performance in January, not all but some to the colder and wetter conditions than usual in the west coast, which has been a real engine of growth for us for the last couple of years. So that, combined with some of the steps that we are taking to drive horizontal growth, which is to say we’re adding over the course of 2007 several hundred business development managers and these BDMs are responsible for securing additional outlets, so principally on premise. And that will be a slow build as these people come on and they become more productive throughout the year, so if we see softness continue on a velocity per outlet basis, then we’re confident that the incremental outlets secured by these BDMs will help mitigate that over the course of the full year. So for those reasons, we remain confident in the full year plan.

[Operator:]

Marc Greenberg, Deutsche Bank.

[Marc Greenberg:]

Thank you. Good morning, guys. Just wanted to dig into the success of Coke Zero in a little more detail. John, you mentioned that you are getting some new drinkers in the cola category. I wonder what kind of detail you can offer in terms of how much is coming from your own brands, from competitors, new drinkers, and as you move into the fourth quarter, were the trends as strong at that 35% volume growth level as they have been all year? Thanks.

[John F. Brock:]

I’ll do a macro point of view on this, Mark, and then I’ll ask Terry to add a little more color around North America. I would just say Coke Zero continues to perform extremely well, both in North America and Europe, and the trends that we saw in 2007 were just as strong in the fourth quarter as they were in the first and second and third, so it continues and frankly, it’s continuing this year. So macro trends look extremely good in all of our markets and we are attracting a number of new drinkers. But let me ask Terry to add a bit more about North America.

[Terrance M. Marks:]

Yeah, Red-Black-Silver on a -- with just looking at brands, Coca-Cola Classic, Diet Coke without any of the extensions, and Coke Zero in the fourth quarter actually grew a point. And to John’s point specifically, Coke Zero continues to grow. In fact, the growth is accelerating as we being 2008. It’s an imprecise science for me to tell you exactly or to estimate exactly how much is coming from what brands in the portfolio because you’ve got a number of factors at play. As we cycle a lot of carbonated or sparkling beverage introductions from a year ago, you have brands that were on display fairly prominently during the introductory period that are no longer on display and in many cases, those are replaced by Coke Zero or other brands, so the data would suggest to us that the brand is actually increasing consumption in the category. It’s certainly increasing the consumption within our portfolio and the growth, as John said a minute ago, continues to accelerate even as we get into 2008. So again, I could speculate. There are a couple of line extensions that we are cycling currently that are down significantly. We have seen that in the past. They are not material components of the overall portfolio and it’s reasonable to expect that some of it is coming out of that, but net net, our total sparkling beverage portfolio, the performance of it is improving.

[Marc Greenberg:]

As just a quick follow-up there, how do you think having a strength in a brand like this allows or informs your pricing decisions in the category and what do you think about the potential for category growth out over the next 12 to 24 months, in light of the need to kind of price to recover higher inputs? Thanks.

[John F. Brock:]

As we talked about towards the end of 2007, we were going to take a more moderate approach to pricing in the sparkling category. We had a little bit more -- well, quite a bit more financial flexibility given the introduction of Glaceau and Fuse and -- and some of the other more profitable items that we brought to the market in 2007 and it was and it remains our strategy to use that to mitigate the rate of increase in the sparkling category. That said, we still expect to see pricing in the -- on our brands somewhere between 2% and 3% in 2008. The combination of that and a real focus on driving inventory on display we think will result in a better sparkling performance in ’08 than ’07. Now, does that mean growth in the aggregate? I’m not sure I’d want to go on record saying that quite yet but we are much more bullish about the performance of the category this year than we were last year and it’s really three reasons. It’s a more moderate rate of pricing increase, the momentum behind Coke Zero, and a focus that our organization has on the sparkling story and driving incremental inventory on display and we saw some early returns and some positive results of that in January. The category is huge and it’s very important to retailers and we are really focused on ensuring that that story is told clearly throughout 2008.

[Operator:]

Kaumil Gajrawala, UBS.

[Kaumil Gajrawala:]

Thank you. Good morning, everybody. Can you talk a little bit about your energy strategy? Clearly your competitor is spending quite a bit of money on it this year and if you could maybe talk about what you guys are doing on your end?

[John F. Brock:]

In Europe or in North America?

[Kaumil Gajrawala:]

In North America.

[John F. Brock:]

North America. Okay. Terry.

[Terrance M. Marks:]

We’ve been pretty clear. We have a portfolio strategy in the energy category and we think it’s been really successful in helping us secure more space than would otherwise be the case. This year, we’ve gone to market with small retailers -- when I say small retailers, I mean small store format retailers. One of the things that we’ve done is position the strength of the overall immediate consumption portfolio that we have now and so that would be not just the sparkling business but Glaceau, Fuse, Campbell’s, as well as our energy portfolio of brands. And the combination of those things are really, really powerful and we’ve met a great deal of success in selling in programs in 2008. We need to sell in a fair bit of space, given the breadth of our portfolio with Rockstar and Full Throttle and the extensions that have emerged off of those base brands. So we continue to be committed to a portfolio play. We think Rockstar and Full Throttle appeal to very different consumers and we feel very good about the momentum that we took through 2007 and we are confident that will continue in 2008. I do think you will see continued innovation in packaging. There seems to be no end to the size of energy drink packages that people are willing to pay a lot of money for and drink. So I think you’ll continue to see movement in that space in ’08.

[Kaumil Gajrawala:]

Okay. Could you maybe talk a little bit about coffee infused or the roasted products as well?

[Terrance M. Marks:]

Yeah, I guess the only thing I’d say is that they are performing very well. It’s kind of what we predicted. We’ve talked on these calls for quite a while now about a belief that a number of these categories are going to fuse, whether it’s tea and energy or coffee and energy, we think that there’s a real fusion play out there and I think what you are seeing in the case of roasted and other entrants into the category for [inaudible] is further evidence of that, that you’ve got base attributes of coffee that appeal to the energy need state and you’ve got the energy drink category, which by definition appeals to the energy need state, so I think that the fusing that we are seeing is logical and we’re really encouraged by the early results that that particular product, roasted, is doing quite well.

[Operator:]

Judy Hong, Goldman Sachs.

[Judy Hong:]

John, I was wondering if you could just talk about your confidence level in sustaining the improvement that we have seen in Europe going forward, particularly if we start to see consumer trends weakening in that market as well. And how critical is building your beverage portfolio in that market and sort of your growth algorithm? Or is it enough that because sparkling has shown such an improvement with Coke Zero that that’s enough to get your volume growth to continue to show improvement there?

[John F. Brock:]

You’ve got a couple of different pieces to the question you’re asking there. I think in terms of 2008, certainly we anticipate Europe being a growth business. Will it continue to grow at the same level it did in the final quarter of 2007? I think it’s a little early to project those kind of results. I mean, we really were encouraged by what we saw in the fourth quarter and particularly in Great Britain, where obviously we’ve had a number of quarters of really challenging business results. But as we look to ’08, again we are optimistic about what we see in Europe with our existing portfolio and we believe the combination of [inaudible] really driving immediate consumption in Great Britain and France, coupled with the fact that again we’ve got different dynamics in each country, but for example in France, where we continue to have fairly low per capita consumption in our sparkling business, which means we’ve got a huge upside and in Belgium where we actually do have a pretty good balanced portfolio, you put all that together and actually in The Netherlands where we are beginning to have some success with our packaging strategy, as well as getting out of what’s been a fairly brutal retail price war over the last several years. You put all that together and it’s a collection of different businesses but one which again we have confidence in in 2008, even without major M&A moves. Having said that, we have to have some significant M&A activity in Europe in the still beverage arena if we are going to achieve our long-term goals on a sustained basis year after year. And we and the Coca-Cola Company both know that. We’re working hard to try to figure out what that means and what kinds of moves we have to make. But I mean, the fact remains, we’ve got a portfolio which in the aggregate is 90% sparkling in Europe and a business which, a consumer category which is under 50% sparkling, so we are clearly out of step with reality an where the market place is and over time we’ve got to make some big moves, and as I already said in my comments, a water strategy in Great Britain is the first of those but it’s only the first. There’s a lot more that’s got to come in years to come.

[Judy Hong:]

And are you seeing any sign of a consumer slow down kind of early in the year in Europe?

[John F. Brock:]

Not yet. Not yet. I mean, I think your model’s not a bad one. I mean, if you look at what’s going on here in North America, I think you could predict some softness in the overall economies in Europe. At least in this stage of the game, things look reasonably resilient there.

[Judy Hong:]

Okay, and Bill, just a quick follow-up on your guidance -- is there any currency benefit there in terms of EPS?

[William W. Douglas:]

No, the current guidance is currency neutral and again, that’s volatile as well. We’ll be giving updates every quarter on how we see currency, both in the prior quarter and the prospectively. But at this juncture, I don’t see currency being a big play either way for ’08.

[Judy Hong:]

Okay. Thank you.

[Operator:]

John Faucher, J. P. Morgan.

[John Faucher:]

Thank you very much. A quick question following up on Europe -- as you look at the price mix number, I think currency neutral revenue per case was up 2.5%. The volume obviously held up very well and actually came in better than I think most people expected, particularly in Great Britain. So despite the fact that you said it’s coming from future consumption channels, can you talk a little bit about the strong price mix there and how you are able to drive the without any sort of negative revenue per case impact? Thanks.

[John F. Brock:]

John, are you talking principally about ’07 or are you talking about --

[John Faucher:]

Yeah, I was talking about ’07 and then if you have any thoughts in terms of whether that’s sustainable into ’08, that would be great, thanks. Particularly the fourth quarter, which I think both the pricing and the volume came in better in Europe.

[John F. Brock:]

It did and you’re right. I think the key question around the fourth quarter is we had some really good promotional activity in Great Britain, which drove volume. And we also had, as you said, pricing that ended up being a little bit better than we though. So you put it together and we had an exceptional quarter in Great Britain. As we look to ’08, again we’re guardedly optimistic about where things are going and maintaining the same kind of algorithm going forward but I think we want to take it in measured steps and see. I mean, we’ve had three years of real challenges in Great Britain and to see the kind of results we had in the fourth quarter, it’s encouraging but again I think we’re going to have take it a step at a time and just see how the whole pricing volume combination works in ’08.

[John Faucher:]

I guess, John, is there any color then in terms of why it was more successful in the fourth quarter? I mean, you talked about the great promotion -- usually the great promotion and the higher-than-expected pricing are mutually exclusive in this industry. So any color in terms of why this quarter in particular was different? What was it about the promotions that allows you to have them be effective without a big negative price hit or a mix hit from the channel?

[John F. Brock:]

I think it’s the continued success of our sparkling work on Red-Black-Silver. I mean, we’ve talked about how successful Coke Zero has been. I mean, it’s really working in concert with the other two legs on the stool and that threesome is powerful. I mean, the other thing is we had comps that were going against a quarter a year ago that was a bit soft and you put it all together, again I think it was a combination of everything working as opposed to any one single silver bullet that made it come out the way it came out.

[John Faucher:]

Okay, thanks.

[Operator:]

Justin Hott, Bear Sterns.

[Justin Hott:]

First, I apologize if this was clear, but can you tell us what sparkling was up in the fourth quarter? Did you say plus 1% in North America?

[William W. Douglas:]

I think what I said was that total Red-Black-Silver, those three brands in particular, were up 1% for the quarter. But if you look at the total sparkling for the quarter, all brands in, it was down a point.

[Justin Hott:]

Okay, down a point, thanks. A question on share repurchases and I guess the timing. Can you talk about the -- the outlook we’re hearing on the first quarter, I guess, what you just said in the last couple of weeks sounds negative and then you’re saying you’re repurchasing in the second -- we’ll hear more about in the second quarter of the year. Can you tell us a little bit more about the timing? And maybe about the 40% cash flow goal -- how high can we -- when you think about future cash flow growth or a return to shareholders, do you think this is a solid long-term target or could it go higher?

[William W. Douglas:]

First question on the timing of the share repurchase, we anticipate starting the share repurchase in the middle of the year so whether we do that in the second quarter or early third quarter, that specific timing is something that we’ll give an update on on the April call, but generally mid-year is when we anticipate starting the share repurchase program. With respect to outlook, I think we are targeting 40% this year and would hopefully increase that modestly in ’09, maybe something in the neighborhood of 50% going forward, so something in that range --

[Justin Hott:]

Bill --

[William W. Douglas:]

-- level would be sustainable.

[Justin Hott:]

Is there any reason behind the timing of the share repurchases?

[William W. Douglas:]

It’s principally just based on our working capital flow and some debt maturities that we have that we’re going to be refinancing, just get that behind us before we start actively repurchasing the shares.

[Justin Hott:]

And as far as sparkling being down 1%, a sustainable number for ’08?

[William W. Douglas:]

Well, I think what we’ve said for 2008 was that we would expect sparkling to be down somewhere very low single digits, so that would be consistent with that. We are always trying to do more than that but I think we’ll probably -- we’re comfortable with that.

[Justin Hott:]

Okay. Thank you.

[Operator:]

Bryan Spillane, Banc of America Securities.

[Bryan Spillane:]

Good morning. John, a question on your comments related to a better or a different water strategy in Europe. Would your expectation be that whatever brands come into the fold, assuming they come in through the Coca-Cola Company, that the terms that you’d see in terms of the economics would be similar to what you are seeing with vitamin water or would you envision that potentially CCE might have to partially fund acquiring some brands to beef up your still strategy in Europe?

[John F. Brock:]

We’re open to any kind of an arrangement with the Coca-Cola Company as long as it creates value and is an economically attractive proposition. We are certainly well aware of the various kinds of transactions around the globe that other bottlers have done with Coca-Cola and we are very open to those and Coca-Cola knows that. So the Glaceau and Fuse models that have been successfully used in the United States, I think those are totally acceptable models but others that have been successfully employed by other bottlers are also worthy of consideration. So we don’t have a mindset that says there is only one way to make this dog hunt. We’ll do whatever creates value and are very willing to consider creative alternatives.

[Bryan Spillane:]

Okay, great, and if I could follow-up, Bill, on free cash flow for 2008, it looked like in the fourth quarter working -- or for ’07, working capital may have been a bit of a drag and I’m assuming that’s the mix component to more finished goods. When you look at 2008, will working capital be a drag and what if any expectation do you have built into that for asset disposals?

[William W. Douglas:]

Okay, for ’07 working capital was a modest drag but I will say I am very pleased with the efforts that the organization put forward managing working capital because as we expanded our portfolio in the fourth quarter with Fuse, Glaceau, and Campbell, that was a natural increase in working capital, notwithstanding that energy continues to grow in a very high value product, so while it was a modest drag I am very pleased with the way the organization rallied around managing working capital. Going forward in ’08, as those ramps continue to be a bigger part of our portfolio, it will be a natural modest drag on working capital as well and that’s what’s baked into our projections.

[Bryan Spillane:]

Okay, great, and John, just congratulations on the on the new appointment.

[Operator:]

Carlos Laboy, Credit Suisse.

[Carlos Laboy:]

Good morning. I was hoping you could expand on Coke Zero a little further. John, are there any types of initiatives for 2008 that help you accelerate volumes that you can speak about? Are there any package or any channel holes that still offer opportunities for Zero in both Europe and North America? And as a follow-on, are there any insights from any other markets out there, like maybe Australia where Zero is an even higher proportion of the mix that give you hope that you can deliver those higher numbers?

[John F. Brock:]

Well, if Terry has anything specifically, he wants to comment about North America he can, but I’ll tell you from an overall standpoint on Zero, I think what we’ve got is a very successful of plans that we’ve worked through with the Coca-Cola Company both in North America and Europe. And the plans really are focused around again this Red-Black-Silver initiative. Coke Zero is one leg of again a three-legged stool and we are moving more and more down the road of recognizing with the Coca-Cola Company that there are clear target audiences for each of those three brands and that one of Coke Zero’s primary points of appeal is to those drinkers of regular Coca-Cola who want a diet soft drink and have never been too keen on the taste of Diet Coke, they love Coke Zero. And so a number of the marketing promotions and programs are aimed at specifically attracting that group of consumers. But in terms of anything that is particularly unique to Coke Zero, I mean, you probably saw yesterday, there’s the Daytona sponsorship, which the Coca-Cola Company has done, which will be very much a Coca-Cola Zero phenomenon and I think that’s a great example of the kind of creative and innovative marketing programs that we and Coca-Cola together are working through with Coke Zero. But it’s a pretty [integrated set] of activities that you know when you really look at the numbers behind Coke Zero, things are going so well, we are almost afraid to start going in and tinkering too much because obviously what we did in ’07 worked big time. What we’ve done so far in the first six weeks of ’08 is working even better, so we are not going to change a whole lot. Do you have anything more to add to that from a North American standpoint?

[Terrance M. Marks:]

I think that fairly well sums it up. It’s a pretty simple game right now with Coke Zero and it’s about driving trials, and if people try the product, they repeat and they begin consuming the product more frequently so our opportunity in North America is to continue to drive availability, particularly in on-premise where people often experience new brands for the first time and that’s what we are going to be focused on in 2008.

[Operator:]

Christine Farkas, Merrill Lynch.

[Christine Farkas:]

Thank you very much. A follow-up, Terry, for you in North America -- if I could, could you let us know what the impact was from Glaceau in the quarter? Your six or eight weeks of Glaceau and what that added to your quarterly volumes in North America?

[Terrance M. Marks:]

Christine, we were about flat without Glaceau in the fourth quarter, so the total business ex-Glaceau was about flat and the brand is plus/minus exactly where we thought it would be through Q4.

[Christine Farkas:]

Okay, and in terms of your execution and putting these new [inaudible] on the truck, is there anything that you had to give up in the quarter, pulling them out of the trucks or any surprises in terms of delivering this to the market?

[Terrance M. Marks:]

No, no surprises. I will tell you that in the fourth quarter, we were very careful and we reduced promotional pressure on Glaceau in the marketplace during the transition because the last thing that we wanted to do was have hot ad activity out there in the midst of a transition and then disappoint customers. So we pulled the throttle back a little bit during the transition. Our promotional pressure stepped up a little bit in January and the results were good. The learning, and it’s not really a learning but one of the things that we have to be very, very careful about with respect to Glaceau as we drive availability is in the on-premise channel. Many of those outlets are exclusive outlets by design. That’s just the way that part of the business has evolved -- not all in a bottled/can environment but many are. And in that environment, we have to make sure that we introduce Glaceau whenever possible with incremental equipment and not into our own coolers and therefore just wind up moving business from one part of our portfolio to the other. So we are being very careful and thoughtful about how we introduce Glaceau into on-premise. We’re doing it in a staged way to ensure maximum incrementality over the course of the year. So I think that’s the one thing that again, it’s not necessarily a new learning but we do recognize the importance of doing that.

[Christine Farkas:]

Okay, great and just finally on your CSDs, with respect to Sprite, I mean, your overall volumes, your sparkling volumes were down 1%. Should we read into that that Sprite actually improved its performance or no?

[Terrance M. Marks:]

Yeah, in the fourth quarter Sprite definitely improved in performance. Sprite was soft throughout 2007. I don’t think that’s news. And I think you’ll hear more directly from the Coca-Cola Company on plans to restore Sprite to growth in 2008 and beyond. But in 2007, the tail in the soft drink business was a combination of Sprite in addition to some line extensions that were sort of phased out over time. As we move from a focus on more and more extensions off base brands to drive the business too, a more laser like focus on the core Red-Black-Silver to drive the sparkling business. So a long-winded way of saying that yes, Sprite’s performance did improve in Q4 versus its trend throughout ’07.

[Christine Farkas:]

Okay, great and Bill, just finally, your guidance for ’08 does include your buy-back plans in the second half of the year?

[William W. Douglas:]

Correct.

[Christine Farkas:]

Thank you very much.

[Operator:]

Mark Swatzberg, Stifel Nicolaus.

[Mark Swatzberg:]

Thanks. Good morning, everyone. John, a quick question on Europe and a couple for you, Terry, on IC but John, Europe up 4.5 volumetrically. Any -- because it’s warehouse-based, do you have a sense of what take-away was? Was it pretty consistent with that 4.5 in the quarter?

[John F. Brock:]

Yeah, plus or minus a little bit. Nothing would suggest that anything was significantly different from that number.

[Mark Swatzberg:]

Okay, great. And then Terry, on IC, can you be more specific with us about the level of softness you’ve seen at the start of the year, either in an absolute sense or by comparison to the fourth quarter?

[Terrance M. Marks:]

I think that I would say that the quarter started off materially softer from an immediate consumption standpoint than we had thought. But again, as I said earlier, I think there are a number of factors that contributed to that -- everything, as I said, from weather in the west was a material factor, so we are not projecting that going forward. We are already seeing a little bit of improvement in certain regions of the country and so the performance of immediate consumption tends to be an early indicator of the economy and I know that we saw certain parts of the country soften before others as we got deep into 2007. January ’08 was soft as well, but again certain parts of the country are performing much better now as the quarter progresses, so we are still very optimistic about our full year forecast in IC, for those reasons as well as for the reason I spoke earlier of, which is the fact that we are -- as part of our plan in ’08, we are adding several hundred people whose sole responsibility is to go out and secure new outlet availability and that almost exclusively benefits our immediate consumption business.

[Mark Swatzberg:]

Great, and then if you think about it in terms of getting shelf space within an existing outlet, what do you put at the absolute top of the list here -- vitamin water, the Coke Zero? I mean, these are things that [inaudible] have the potential to add in their power, if you will, to get shelf space but do they belong on the top of the list? What else is there in your mind in ability to get shelf space?

[Terrance M. Marks:]

We really have approached this from the perspective of the Glaceau business, we have to drive incremental space with Glaceau. The last thing that we can do is take Glaceau and cannibalize our base space and our people know that, so option one is always an incremental piece of equipment with the specific trademark of Glaceau or Fuse or Campbell’s or whatever it is that’s most appropriate in that outlet, which is a key point because it’s -- you know, it’s not a broad brush. When you get into small outlets, outlet segmentation is more and more critical the smaller the outlet gets, because the space is that much more precious. So you know, we talk a lot about Glaceau and rightly so, but there are other outlets where we really need to make sure that we are focused on Fuse, we’re focused on Campbell’s, but net net, we are absolutely focused on driving incremental availability for Glaceau, Fuse, and Campbell’s without cannibalizing our existing sparkling space. And thus far, we’ve been really successful during the sell-in period, which began in early Q4 2007 and continued through January and we’re out now resetting a lot of stores to facilitate that.

[Mark Swatzberg:]

Great. Thanks, Terry.

[Operator:]

Todd Divek, Banc of America Securities.

[Analsyt for Todd Divek:]

This is actually Tom [Traczila] standing in for Todd. One really quick question and that’s -- I was wondering if you could provide the amount remaining on your current share repurchase authorization? And then secondly, recently you’ve been modestly paying down your debt levels and by doing some rough calculations with the guidance you provided today, after accounting for your CapEx, your increase in dividend, and the share repurchases, that gets you up to that 40% number, it doesn’t seem like there’s a whole lot of cash flow to continue to pay down debt. Could you just talk about your plans for whatever cash flow is left and if you do continue to pay down debt over time still?

[William W. Douglas:]

First question, we have approximately 30 million shares remaining on our previously board approved share buy-back program, so that will be enough to last several years, so we are just reinitiating a longstanding approved program. With respect to your question on free cash flow, round numbers, we would expect to have approximately $400 million of free cash flow available for reduction of net debt, something in that neighborhood. And going forward, a similar level, so we are using a balanced approach of return to shareowners and continued modest reduction in net debt.

[John F. Brock:]

Okay, thanks to all of you for joining us today. We appreciate you taking the time and hope that everyone has a great day. Thank you.