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CCE > SEC Filings for CCE > Form 10-K on 7-Feb-2014All Recent SEC Filings

Show all filings for COCA-COLA ENTERPRISES, INC.

Form 10-K for COCA-COLA ENTERPRISES, INC.


7-Feb-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with the Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements contained in this report.

Overview

Business

We are a marketer, producer, and distributor of nonalcoholic beverages. We market, produce, and distribute our products to customers and consumers through licensed territory agreements in Belgium, continental France, Great Britain, Luxembourg, Monaco, the Netherlands, Norway, and Sweden. We operate in the highly competitive beverage industry and face strong competition from other general and specialty beverage companies. Our financial results are affected by a number of factors, including, but not limited to, consumer preferences, cost to manufacture and distribute products, foreign currency exchange rates, general economic conditions, local and national laws and regulations, raw material availability, and weather patterns.

Sales of our products tend to be seasonal, with the second and third quarters accounting for higher unit sales of our products than the first and fourth quarters. In a typical year, we earn more than 60 percent of our annual operating income during the second and third quarters. The seasonality of our sales volume, combined with the accounting for fixed costs such as depreciation, amortization, rent, and interest expense, impacts our results on a quarterly basis. Additionally, year-over-year shifts in holidays, selling days, and weather patterns can impact our results on an annual or quarterly basis.

Relationship with TCCC

We are a marketer, producer, and distributor principally of products of TCCC, with greater than 90 percent of our sales volume consisting of TCCC products. Our license arrangements with TCCC are governed by product licensing agreements. From time to time, the terms and conditions of programs with TCCC are modified. Our financial results are greatly impacted by our transactions with TCCC. Our collaborative efforts with TCCC are necessary to (1) develop new brands and packages; (2) market our products in the most effective manner possible; and
(3) find ways to maximize efficiency. For additional information about our transactions with TCCC, refer to Note 3 of the Notes to Consolidated Financial Statements.

Basis of Presentation

Our fiscal year ends on December 31. For interim quarterly reporting
convenience, our first three quarters close on the Friday closest to the end of
the quarterly calendar period. There were the same number of selling days in
2013 versus 2012, and there was one additional selling day in 2012 versus 2011
(based upon a standard five-day selling week).
The following table summarizes the number of selling days by quarter for the
years ended December 31, 2013, 2012, and 2011 (based on a standard five-day
selling week):
       First      Second       Third      Fourth      Full
     Quarter     Quarter     Quarter     Quarter     Year
2013        64          65          65          67      261
2012        65          65          65          66      261
2011        65          65          65          65      260

Executive Overview

Our primary objective is to deliver increasing value for our shareowners by driving consistent, long-term profitable growth. During 2013, we made progress toward this goal despite facing persistent challenges, including sustained macroeconomic pressures and a challenging marketplace. While our 2013 operating performance was below some of our stated long-term financial objectives, we remain committed to driving value and increasing total shareowner return.

Our long-term objectives include the delivery of:
Four to six percent annual revenue growth;

Six to eight percent annual operating income growth;

High single-digit annual diluted earnings per common share growth; and


Annual return on invested capital (ROIC) growth of at least 20 basis points.

2013 Review

During 2013, we created shareowner value through a continued focus on strengthening our operational efficiencies and optimizing our capital structure. This was achieved despite the continued marketplace challenges and macroeconomic headwinds facing our business. The following highlights our significant achievements in 2013:

Successfully executed our marketing campaigns, such as "Share a Coke," and implemented new packaging options reflecting a company-wide effort to innovate, drive profitable growth, and enhance our brands;

Continued being rated a leading consumer goods company by our customers, ranking number one in Belgium, Great Britain, and the Netherlands and number two in France by a survey of key retail customers;

Significantly advanced our business transformation program, which is designed to improve the efficiency and effectiveness of our back office functions and the alignment of our operating structure with the conditions we face in the marketplace;

Completed our Norway business optimization program, whereby we moved to recyclable, nonrefillable packaging and shifted our delivery system to a third-party model that works directly with our customers;

Repurchased $1.0 billion of shares under our share repurchase programs, bringing the total value of shares repurchased since October 2010 to approximately $2.8 billion; and

Increased our quarterly dividend from $0.16 per share to $0.20 per share, representing the sixth consecutive year of dividend increases.

Strategic Priorities

Our operating strategies and initiatives are designed to enable us to maximize the value of our brands, provide our customers high levels of service, and create enhanced value for our shareowners.

To accomplish this, we continue to focus on three strategic priorities:

1. Be number one or a strong number two in each category in which we compete;

2. Be our customers' most valued supplier; and

3. Build a winning and inclusive culture.

During 2014, we expect to realize further benefits of our 2013 restructuring initiatives, including those related to our business transformation program and Norway business optimization program. We believe these benefits, coupled with a balanced business plan, will enable us to deliver operating growth in 2014. We will continue to focus on creating additional marketplace opportunities, maintaining or enhancing margins, and strengthening our foundation for long-term growth. In addition, we will drive increasing effectiveness and efficiency in our field-level execution and continue to focus on cost control.

Our 2014 plans are centered on maximizing the value and popularity of our core brands, enhancing our focus on Coca-Cola Zero and energy, and innovating new packaging and products. For example, we have brand and marketing strategies in place for 2014 that emphasize our core brands of Coca-Cola, Diet Coke/Coca-Cola light, and Coca-Cola Zero. We will maximize the benefits of our relationship with the FIFA World Cup in Brazil with customer and country-specific packaging during the key summer selling season. We plan to build on the success of Coca-Cola Zero and our energy segment through focused support with new brand-specific initiatives.

We will also continue to improve our brand and packaging mix to better meet consumer wants and customer needs through brand packaging diversification and package innovation, including new multi-serve packages in the home channel. For example, we will enhance our package mix in Great Britain by replacing the straight-side 2-liter bottle with a smaller contour 1.75-liter bottle as the primary large PET package in the home channel. We believe this new package will create a visible point of in-market differentiation for our brands and help improve the value of the channel.

We will maintain a sustained focus on effectiveness and efficiency, as demonstrated by our successful ownership cost management initiative focusing on cost control. The successful implementation of our restructuring programs will also continue to drive further efficiencies and minimize costs in certain aspects of our operations. These programs and initiatives are the foundation of our work to deliver the type of sustained operating growth that will drive continued increases in shareowner value.


Our Commitment to Sustainability

A fundamental part of reaching our long-term objectives is our commitment to corporate responsibility and sustainability (CRS). We have embedded CRS in our business strategy as a key pillar of our operating framework, and we continue to invest across our territories to embed our CRS principles into our business. We face rising expectations to be a sustainable company from our customers, our consumers, and the communities where we operate.

We take this responsibility seriously, and our goal is to be the CRS leader within our industry. We want to meet and exceed these expectations, and achieve our sustainability plan: "Deliver for Today, Inspire for Tomorrow." This plan was developed in 2011 with input from key stakeholders, and contains stretching commitments in seven focus areas, including energy and climate change, sustainable packaging and recycling, water stewardship, product portfolio, active healthy living, community, and workplace. The commitments are supported by 37 targets, which we aim to achieve by the year 2020. We will continue to publish progress against this plan in an annual Corporate Responsibility and Sustainability report and on our corporate website, http://www.cokecce.com.

In 2013, we made significant progress toward our targets to drive carbon and water efficiencies across our operations. We reached our stated target of reducing our operational carbon footprint by 15 percent since 2007, and achieved our lowest ever water use ratio. We developed new collaborative partnerships to drive sustainability, such as our recycling joint venture in France, and held our first Innovation Summit exploring new business models for sustainable development. We partnered with key customers to encourage behavior change in recycling and invested nearly $4 million across our communities, including active and healthy living and youth development programs.

Financial Results

Our net income in 2013 was $667 million, or $2.44 per diluted share, compared to net income in 2012 of $677 million, or $2.25 per diluted share. The following items included in our reported results affect the comparability of our year-over-year financial results (the items listed below are based on defined terms and thresholds and represent all material items management considered for year-over-year comparability):

2013
Charges totaling $120 million ($83 million net of tax, or $0.30 per diluted share) related to restructuring activities;

Net mark-to-market losses totaling $7 million ($5 million net of tax, or $0.02 per diluted share) related to non-designated commodity hedges associated with underlying transactions that relate to a different reporting period;

Charges totaling $5 million ($3 million net of tax, or $0.01 per diluted share) related to post-Merger changes in certain underlying tax matters covered by our indemnification to TCCC for periods prior to the Merger; and

A net deferred tax benefit of $71 million ($0.26 per diluted share) due to the enactment of a corporate income tax rate reduction in the United Kingdom.

2012
Charges totaling $85 million ($61 million net of tax, or $0.21 per diluted share) related to restructuring activities;

Net mark-to-market losses totaling $4 million ($3 million net of tax, or $0.01 per diluted share) related to non-designated commodity hedges associated with underlying transactions that related to a different reporting period; and

A net deferred tax benefit of $62 million ($0.21 per diluted share) due to the enactment of a corporate income tax rate reductions in the United Kingdom and Sweden, partially offset by the impact of a corporate income tax law change in Belgium.

Financial Summary

Our financial performance during 2013 was impacted by and reflects the following significant factors:
Persistent operating challenges including sustained difficult macroeconomic conditions and a challenging marketplace;

Essentially flat volume performance driven by a decline in sales early in the year, offset by improving trends late in the year as sales of our sparkling beverage portfolio strengthened;

Year-over-year gross margin contraction reflecting our more modest approach to pricing in light of marketplace conditions, coupled with a moderate increase in our cost of sales;


Lower underlying operating expenses driven by continued operating expense control and the benefits of our restructuring initiatives;

Favorable currency exchange rate changes which increased operating income by approximately 2.0 percent ($0.04 per diluted share);

Continuation of our share repurchase programs, which increased diluted earnings per share in 2013 by approximately 9.0 percent ($0.22 per diluted share) compared to 2012.

Revenue and Volume

During 2013, our operating and financial performance was impacted by ongoing marketplace headwinds, including (1) macroeconomic weakness due to the prolonged economic slowdown and unemployment rates in most of our territories, and (2) challenges in our operating environment. These challenges included a dynamic customer environment, principally in Great Britain, and the residual impact of the French excise tax increase, particularly early in the year. Our volume performance reflects an increase in the sale of sparkling beverages within our trademark Coca-Cola portfolio, offset by volume decreases in certain still beverages, particularly Ocean Spray, Powerade, and our water brands, which benefited from strong activation during the 2012 London Olympic Games. Our bottle and can net price per case was essentially flat compared with the prior year reflecting a modest approach to pricing in light of marketplace challenges, and negative mix-shifts into multi-serve packages.

We expect the marketplace to remain challenging during 2014; however, we believe we have a balanced business plan focused on creating additional marketplace opportunities, maintaining or enhancing margins, and strengthening our foundation for long-term growth. This plan will build on the success of our core brands, enhance our focus on Coca-Cola Zero and energy, and drive investments in our future.

Cost of Sales

Our 2013 bottle and can ingredient and packaging costs per case grew 2.0 percent. While cost trends have moderated for many of our key commodities, the overall cost environment remains volatile. As such, we continue to seek and execute opportunities to mitigate our exposure to price volatility through the use of supplier agreements and hedging instruments.

Operating Expenses

Our operating expenses decreased 1.0 percent in 2013 when compared to 2012. This decrease was driven by the benefit of our ongoing expense control initiatives and our Norway business optimization program to enhance our go-to-market strategy, which drove a decrease in our delivery and warehousing expenses. These decreases were partially offset by an increase in restructuring expenses and the impact of currency exchange rate changes. During 2014, we will continue to focus on controlling our underlying operating expense growth and further leveraging the benefits of our restructuring initiatives.

Operations Review

The following table summarizes our Consolidated Statements of Income as a
percentage of net sales for the periods presented:

                                                 2013      2012      2011
Net sales                                      100.0  %   100.0 %   100.0 %
Cost of sales                                   65.1       64.0      63.4
Gross profit                                    34.9       36.0      36.6
Selling, delivery, and administrative expenses  23.7       24.5      24.1
Operating income                                11.2       11.5      12.5
Interest expense                                 1.3        1.1       1.1
Other nonoperating (expense) income             (0.1 )        -         -
Income before income taxes                       9.8       10.4      11.4
Income tax expense                               1.7        2.0       2.4
Net income                                       8.1  %     8.4 %     9.0 %


Operating Income

The following table summarizes our operating income by segment for the periods
presented (in millions; percentages rounded to the nearest 0.5 percent):

                     2013                    2012                    2011
                          Percent                 Percent                 Percent
              Amount     of Total     Amount     of Total     Amount     of Total
Europe       $ 1,063      116.5  %   $ 1,073      115.5  %   $ 1,195      115.5  %
Corporate       (149 )    (16.5 )       (145 )    (15.5 )       (162 )    (15.5 )
Consolidated $   914      100.0  %   $   928      100.0  %   $ 1,033      100.0  %

During 2013, our operating income decreased 1.5 percent to $914 million. The following table summarizes the significant components of the change in our operating income for the periods presented (in millions; percentages rounded to the nearest 0.5 percent):

                                                    2013 Versus 2012          2012 Versus 2011
                                                                Change                   Change
                                                                Percent                  Percent
                                                   Amount      of Total      Amount     of Total
Changes in operating income:
Impact of bottle and can price-mix on gross
profit(A)                                        $     15         1.5  %   $    434       42.0  %
Impact of bottle and can cost-mix on gross
profit(A)                                             (92 )     (10.0 )        (311 )    (30.0 )
Impact of bottle and can volume on gross profit         6         0.5           (91 )     (9.0 )
Impact of bottle and can selling day shift on
gross profit                                            2           -            11        1.0
Impact of post-mix, non-trade, and other on
gross profit                                            -           -           (15 )     (1.5 )
Other selling, delivery, and administrative
expenses                                               82         9.0            (4 )        -
Net mark-to-market gains on non-designated
commodity hedges                                       (3 )         -            (1 )        -
Restructuring charges                                 (35 )      (4.0 )         (66 )     (6.5 )
Tax Sharing Agreement indemnification changes          (5 )      (0.5 )           5        0.5
Currency exchange rate changes                         17         2.0           (69 )     (6.5 )
Other changes                                          (1 )         -             2          -

Change in operating income $ (14 ) (1.5 )% $ (105 ) (10.0 )%



(A) Our 2012 versus 2011 results include the impact of the increased French excise tax effective January 1, 2012.

Net Sales

Net sales increased 2.0 percent in 2013 to $8.2 billion from $8.1 billion in 2012. This change included a 1.5 percent increase due to favorable currency exchange rate changes. This change reflects essentially flat volume and bottle and can net pricing per case versus the prior year. Our net sales performance reflects ongoing operating challenges, including a dynamic customer environment, principally in Great Britain, and the residual impact of the French excise tax increase, particularly early in the year.

Net sales decreased 2.5 percent in 2012 to $8.1 billion from $8.3 billion in 2011. This change included a 2.0 percent increase due to the additional French excise tax beginning January 1, 2012, and a 5.5 percent decrease due to unfavorable currency exchange rate changes. Our revenues reflect the impact of a 3.0 percent volume decline, offset by bottle and can net pricing per case growth of 3.0 percent excluding the impact of the French tax increase. Challenging operating conditions, including the impact of the French excise tax increase, and ongoing macroeconomic weakness were the primary drivers of our 2012 volume performance.


The following table summarizes the significant components of the change in our net sales per case for the periods presented (rounded to the nearest 0.5 percent and based on wholesale physical case volume):

                                              2013 Versus 2012     2012 Versus 2011
Changes in net sales per case:
Bottle and can net price per case                        - %              3.0  %
French excise tax increase                               -                2.5
Bottle and can currency exchange rate changes          1.5               (5.5 )
Change in net sales per case                           1.5 %                -  %

Our bottle and can sales accounted for approximately 94 percent of our total net sales during 2013. Bottle and can net price per case is based on the invoice price charged to customers reduced by promotional allowances, and is impacted by the price charged per package or brand, the volume generated in each package or brand, and the channels in which those packages or brands are sold. To the extent we are able to increase volume in higher-margin packages or brands that are sold through higher-margin channels, our bottle and can net pricing per case will increase without an actual increase in wholesale pricing. During 2013, our bottle and can net price per case reflected a modest approach to pricing in light of marketplace challenges and continued negative mix-shifts into multi-serve packages. During 2012, our bottle and can net price per case reflected moderate rate increases and successful marketplace execution, offset by the impact of mix-shifts into multi-serve packages.

We participate in various programs and arrangements with customers designed to increase the sale of our products. The costs of these various programs, included as a reduction in net sales, totaled $1.1 billion in 2013 and $1.0 billion in 2012 and 2011. These amounts included net customer marketing accrual reductions related to estimates for prior year programs of $31 million, $34 million, and $21 million in 2013, 2012, and 2011, respectively.

French Excise Tax Increase

Effective January 1, 2012, France's Constitutional Council enacted an increased excise tax on beverages with added sweetener (both nutritive and non-nutritive) that equated to a 7.16 euro cents per liter increase from 0.54 euro cents per liter to 7.70 euro cents per liter in 2012. Because the rate is indexed, the excise tax will change annually, effective January of each year. This tax was part of a broader austerity package aimed at raising funds for the French government. The additional tax applied to virtually all of the beverage products we sell in France and increased both our net sales and our cost of sales by $170 million in 2012 versus 2011. Substantially all of the increased cost was borne by our customers in the form of higher prices, which resulted in a significant increase in retail prices for beverage products impacted by the tax.

Volume

The following table summarizes the change in our bottle and can volume for the
periods presented, as adjusted to reflect the impact of one additional selling
day in 2012 versus 2011 (selling days are the same in 2013 and 2012; rounded to
the nearest 0.5 percent):

                                                          2013 Versus 2012      2012 Versus 2011
Change in volume                                                  - %                 (2.5 )%
   Impact of selling day shift(A)                                 -                   (0.5 )
Change in volume, adjusted for selling day shift                  - %                 (3.0 )%


___________________________

(A) Represents the impact of changes in selling days between periods (based upon a standard five-day selling week).


Brands

The following table summarizes our bottle and can volume by major brand category
for the periods presented, as adjusted to reflect the impact of one additional
selling day in 2012 versus 2011 (selling days are the same in 2013 and 2012;
rounded to the nearest 0.5 percent):

                                                       2013                         2012
                                     2013 Versus      Percent     2012 Versus      Percent
                                     2012 Change     of Total     2011 Change     of Total
Coca-Cola trademark                        0.5  %        69.0 %        (3.5 )%        68.5 %
Sparkling flavors and energy               1.0           18.0          (3.5 )         17.5
Juices, isotonics, and other              (2.5 )         10.0          (1.5 )         10.5
Water                                     (3.0 )          3.0           4.0            3.5
Total                                        -  %       100.0 %        (3.0 )%       100.0 %

2013 Versus 2012

Our 2013 volume results were impacted by (1) the successful execution of our key marketing initiatives, including the "Share a Coke" campaign; (2) challenging operating conditions, particularly early in the year; and (3) the continued weak macroeconomic environment. During 2013, we experienced essentially flat volume performance when compared to 2012. This volume performance reflected an increase in sparkling beverage sales of 0.5 percent, offset by a decline in still beverage sales of 3.0 percent. The increase in our sparkling beverage sales primarily resulted from solid growth in our trademark Coca-Cola beverages. Our still beverage performance was reflective of strong prior year growth hurdles. In 2014, we plan to focus on brand and marketplace initiatives, such as continuing the "Share a Coke" campaign, and marketing strategies which emphasize our core brands. We will maximize the benefits of our relationship with the FIFA World Cup in Brazil with customer- and country-specific packaging during the key summer selling season. Coca-Cola Zero and our energy brands will receive dedicated support with new brand-specific initiatives that build on their 2013 momentum through unique marketing and in-store opportunities. Additionally, we will enhance our package mix in Great Britain by replacing the straight-side 2-liter bottle with a smaller contour 1.75-liter bottle as the primary large PET package in the home channel.

During 2013, our Coca-Cola trademark volume increased 0.5 percent. This growth was driven by volume gains in Coca-Cola Zero of 15.0 percent, partially offset by volume declines in Coca-Cola and Diet Coke/Coca-Cola light of 0.5 percent and . . .

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