Oct 23, 2008
Executives
Thor Erickson - Director, Investor Relations John F. Brock - Chief Executive Officer, President, Director William W.
Douglas - Chief Financial Officer, Senior Vice President Steve Cahillane - Executive Vice President and President, North American Group Hubert Patricot - Vice President and President, European Group
Analysts
Bill Pecoriello - Morgan Stanley Kaumil Gajrawala - UBS Warburg Lauren Torres - HSBC Judy Hong - Goldman Sachs John Faucher - J. P.
Morgan Mark Swartzberg - Stifel Nicolaus Bryan Spillane - Banc of America Analyst for Alton Stump - Longbow Research Mark Cowan - Merrill Lynch Carlos Laboy - Credit Suisse Damien Wykoskiw - Cabelli & Company
Operator
Good day, everyone. Thanks for holding and welcome to the Coca-Cola Enterprises third quarter 2008 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 Thor Erickson, Director of Investor Relations.
Please go ahead, sir.
Thor Erickson
Thank you and good morning, everybody. We appreciate you joining us this morning to discuss our third quarter 2008 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 earnings release, as well as the detailed cautionary statements found in our most recent annual reports on Form 10-K and subsequent SEC filings. 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.
Steve Cahillane, President of our North American Group, and Hubert Patricot, President of our European Group, are also with us on the call this morning. Following prepared remarks, we will open the call for your questions.
In order to give as many people as possible the opportunity to ask questions, please limit yourself to one question and we will take follow-up questions as time permits. Now, I will turn the call over to John Brock.
John F. Brock
Thank you, Thor and we thank each of you for joining us. In our news release this morning, we reported comparable earnings of $0.46 per share, as total revenue grew 6.5% and consolidated comparable operating income decline 2%.
Clearly these results are below our expectations, as our business continues to feel the effects of challenging economic conditions. Key North American business trends remain weak and we are actively monitoring the potential for changing conditions in Europe.
Our results demonstrate the urgency of our work to address key operating issues. As you know, in July we announced a thorough 120 day review of our business designed to address the marketplace operating challenges that have limited our performance.
This work remains essential to our long-term progress and has identified potential areas of improvement. Some of these areas are totally within our control -- others will require the cooperation of the Coca-Cola Company.
It remains a bit too early to discuss the value and timing of these opportunities in enabling us to reach our long-term growth objectives. It is important to note that as we work through this review, we continue to be guided by the global operating framework that has refocused our company on three key strategic priorities -- developing our brands, driving improved efficiency and effectiveness, and developing a winning, inclusive culture in our workforce.
This operating framework and its destination remain the right long-term vision for our company and provide a solid blueprint for our business review and our efforts to find new solutions in our business. I can share with you two specific examples of how we are already benefiting from this approach.
The first is our new distribution agreement with Hansen Natural Corporation for Monster Energy brands, the leading U.S. energy brand by volume.
This is a clear win for CCE and will create benefits in a majority of our territories, including significant portions of the U.S., all of Canada, and Western Europe. We look forward to adding the Monster brands to our portfolio next month and beginning the process of enhancing the value of these brands in the marketplace.
A second example here is our work to enhance the effectiveness of our business. Steve Cahillane, President of our North American business unit, has reorganized the North American management structure in a way that will enable us to further streamline and simplify our operations.
This reorganization reduces the number of U.S. business units from six to four, sharpens accountabilities, and allows us to better prioritize our work.
These new business units will report directly to Steve. Ultimately, this will allow our sales centers, which are really the heart of our organization, to operate even more effectively and enhance their focus on our customers and the marketplace.
In addition, we are moving forward with efforts to match our variable labor cost with demand. Since Labor Day, we have eliminated over 1,000 positions across our North American business.
This was the difficult decision but it was essential, given our current business conditions. While our North American reorganization and our Monster agreement represent progress, these are only two actions of many that we must take to strengthen and improve our business.
As I mentioned earlier, throughout CCE, we have teams working to develop new, fresh approaches to key operating and marketplace issues, including our complex system supply chain, customer service, price package architecture, and back office support functions. We look forward to updating you on our progress on these and others in December.
As we review our practices and develop new ideas, we continue to work with the Coca-Cola Company. We have a shared commitment to improve our North American business and we both believe there are significant opportunities ahead in North America.
Seizing these opportunities will definitely require courage and resolve from both companies but I am optimistic that this process will create renewed synergy between our two companies. As you know, we took a strategic, meaningful price increase in September, which was absolutely essential to cover costs, protect margins, and balance profitability across channels.
As a result of this move, the Coca-Cola Company has chosen to reduce funding by $35 million and institute a concentrate price increase that is in line with our price action. These are meaningful factors in the reduction of our earnings guidance for the fourth quarter and for the full year, which Bill will discuss with you in a bit more detail in a few minutes.
Now I would like to take a moment to examine our third quarter North American results, including our volume growth of 1.5%. This volume gain for the quarter includes the benefits of summer promotional activity that occurred in July and August, and it was planned prior to our decision to implement a post Labor Day price increase.
Third quarter volume also benefited from the addition of Glaceau, Fuse, and Campbell’s brands, and growth in key sparkling beverage brands, including Coca-Cola Classic, Coca-Cola Zero, and Sprite. Despite this growth, higher margin 20-ounce packages of sparkling beverages and water continued to decline in a high-single-digit range.
For the quarter, North America net pricing per case grew 3.5%, as cost of sales per case increased 7.5%, both impacted by the mix impact of increased sales of purchased finished goods. Our COGS growth also reflects higher commodity costs, which continue to increase above historical levels.
For the quarter, our comparable operating expenses grew 5%, with a majority of this increase attributable to increased cost of fuel and mark-to-market impact of fuel hedging. As we move through the fourth quarter, we will aggressively address costs, as demonstrated by our job reductions, which will help keep labor costs in line with demand.
Turning to Europe, we continue to perform at a high level, with results on plan for the quarter and for the year. Third quarter volume grew 5.5%, hurdling a prior year weather related decline of 3%.
Our strong execution, aided by a marketplace activation for the Summer Olympics, helped create this growth. In addition, we recovered from a second quarter 2008 labor disruption in France.
On the continent, volume grew 6%, driven by increases throughout our sparkling portfolio, with the strongest case growth in regular Coca-Cola and Coca-Cola Zero. Great Britain had volume growth of 5%, with high-single-digit growth in our red, black, and silver portfolio.
European third quarter net revenue per case increased 2.5% for the quarter and costs of good sold per case increased 2%, both in line with expectations. Although we remain optimistic about Europe’s outlook for the rest of the year, we continue to monitor the economic situation there closely and its potential impact on our business.
Bill will add more color around our full-year outlook for you in a few moments. So in closing, I want to emphasize our commitment to find ways to strengthen, to improve, and to grow our business.
Clearly these are difficult times and we are not immune to the impact of the economic downturn, nor are we immune to changing consumer purchasing patterns. However, we sell some of the world’s most popular brands and we sell these in dynamic markets, and we remain convinced that we can again achieve meaningful, sustained profit growth.
Thanks for joining us and now I’ll turn it over to Bill to give you more detail on our financial performance and our outlook.
William W. Douglas
Thank you, John. For the third quarter, we achieved earnings per diluted share of $0.46.
This excludes $0.02 for items affecting comparability, which are approximately $0.01 for restructuring charges and $0.01 for a one-time tax item. As John stated, these results are below our expectations and while we continue to make progress in certain areas of our business, we have been unable to overcome the economic headwinds and achieve the growth we had planned in North America.
In the third quarter, earnings were most affected by continued weakness for key 20-ounce packages in North America and higher SD&A as a result of increased fuel cost and the mark-to-market impact of fuel hedges. These factors were offset partially by ongoing solid performance in our European operations, which continued to achieve a balanced volume and price growth.
Currency translations added approximately $0.01 to quarterly EPS results. In the quarter, excluding currency, costs of sales per case increased 6%, as we continued to see commodity price increases above historical norms, though broadly in line with our outlook.
This includes the mix impact of increased purchases of finished goods as a result of the addition of Glaceau, Campbell’s, and Fuse to our portfolio of brands. Despite our continuing focus on operating expense initiatives, third quarter consolidated comparable operating expense grew 4%, with currency translation adding approximately one point of this growth.
In North America, operating expenses increased approximately 5%. This was principally a result of the impact of higher fuel costs and the costs associated with mark-to-market of our North American fuel hedges.
Europe operating expenses increased 2% on a comparable currency neutral basis. Without question, the current combination of consumer uncertainty about the economy, higher commodity costs, and oil price volatility are creating the most difficult operating environment we have encountered in our business in many years.
While we do view these conditions as temporary, the impacts of these trends will affect our business in North America for the remainder of 2008 and into 2009. Current marketplace factors, coupled with the impact of a high, single-digit North American concentrate increase on sparkling beverages, and the withdrawal of $35 million in North American funding from the Coca-Cola Company, have caused us to reduce our 2008 full-year outlook to a range of $1.25 to $1.29 EPS.
This outlook includes the impact of a more moderate operating expense growth as we benefit from renewed operating expense initiatives, including the impact from the reduction of our workforce in line with slowing demand. The outlook does not include potential fourth quarter impact from mark-to-market of fuel hedges.
We believe that based on the current outlook for exchange rates, currency will have a negative impact in the fourth quarter, giving us approximately a full year benefit of $0.01 to $0.02 of EPS. As we look to the full year in North America, we expect a volume decline of approximately 3% for the full year and an expected decline of approximately 10% in the fourth quarter.
This reflects our post Labor Day price increase, continued economic softness, and lapping the Glaceau introduction in the fourth quarter of 2007. For the full year, North America net revenues per case should increase in a mid-single-digit range.
Cost of goods sold per case will increase in a high-single-digit range. In Europe for the full year, we continue to expect low-single-digit increases in volume, net revenue per case, and cost of goods per case.
These figures are on a comparable and currency neutral basis. Turning to free cash flow, we now expect to achieve full-year 2008 free cash flow of approximately $600 million, which we will continue to direct towards debt reduction.
Now, as we look ahead to 2009 and beyond, we have seen some mildly positive trends in the operating factors at the heart of our ’09 outlook, including a slight improvement in commodity trends. In addition, we continue to work through the 120-day business review we began in the third quarter, seeking ways to drive improvement in all areas of our business.
We must evaluate the impact of these trends and opportunities to give a clearer view of 2009 and we look forward to providing an update about our 2009 outlook to you in December. Before I close, I would like to discuss our current situation with regard to our debt portfolio.
As you may know, we have term notes coming due in the amount of $600 million in November and EUR350 million in December. Presently we have over $900 million cash on our balance sheet.
This cash has been funded by operations, debts previously issued in August, and recent issuances of commercial paper. We plan to evaluate longer term financing in the public debt markets during the fourth quarter, subject to market conditions.
We have confidence that we can continue to manage our debt portfolio and access commercial paper as needed. Furthermore, just as a reminder, we do have a $2.5 billion credit facility, if needed.
So in conclusion, we continue to manage through a difficult operating environment and seek ways that will meaningfully improve our sales, our effectiveness, and our efficiency and ultimately improve our profitability. Thanks for joining us today and now we will be happy to take some questions.
Operator
(Operator Instructions) Bill Pecoriello at Morgan Stanley.
Bill Pecoriello - Morgan Stanley
Good morning, everybody. My question is how can you realize improved take-home profitability if Coke raises concentrate 8% and cuts your funding at the same time you are implementing price increases?
And if Coke isn’t on the same page as you on the pricing, how can we assume that Coke is on the same page with these cost-cutting initiatives as part of the 120-day review that you are undergoing?
John F. Brock
That’s a good question. Let me start by saying that the background of the whole situation was simply that we had a plan going into 2008 with the Coca-Cola Company which we were very up-front with you and others about, which called for the benefits, volume and profit wise of Glaceau being in our system.
And we agreed to take a fairly modest price increase on our sparkling brands in 2008 with a mutual desire to see if we could get those brands growing again after several years of decline. And we did that knowingly.
We went into the year actually not planning to cover cost increases in the commodity world, and then what actually happened is obviously we had an economic downturn, the pressure on our 20-ounce business was substantially greater than we expected, and the need for pricing on our -- particularly on our future consumption business became very obvious and was needed in an amount substantially greater than we had agreed as part of our plan with Coca-Cola. By the time we got to September, we thought it was absolutely the right thing to do, strategically important to take a price increase and we chose to do so.
And that was different, of course, then the plan that we had agreed at the beginning of the year. The Coca-Cola Company similarly chose to go outside the plan and do some things differently and to raise concentrate prices and to spend some $35 million of funding which we would have gotten in other ways.
So that was simply what happened. I think in terms of all of the other activities we are engaged in with Coca-Cola, we remain positive and convinced that we are making excellent progress on the 120-day study.
We will share results about that with you in December, as we’ve said before. We and KO are engaged on a variety of projects inside that study, and beyond that we have I think at this stage of the game a set of 2009 plans, both for Europe and North America, which are more in alignment with each other than we’ve had in years past.
So we continue to work with them effectively and positively and we will continue to do so as we go forward.
Bill Pecoriello - Morgan Stanley
And with Coke spending some of that funding back, you would still think the volume could be down 10% in the fourth quarter? Because you mentioned that some of that $35 million is going back in other ways.
John F. Brock
Let me say we are operating in an environment, Bill, which is uncharted territory, and we have historical pricing volume algorithms which we think are really good but aren’t necessarily applicable in the environment in which we find ourselves today. However, we don’t really have a lot more to -- you know, much other information to use, other than our historical algorithms and as we look at what is going on, our view is that something in the neighborhood of 10% is in fact likely where this fourth quarter is going to go, and that’s down.
We also of course have two months of Glaceau from last year that we are having to hurdle and let me just finally say we are doing everything we can, Steve and his team are, to beat that 10% and if we can do that, that would obviously be a good thing. But at least for our planning purposes right now, that’s where we are.
Bill Pecoriello - Morgan Stanley
Thank you.
Operator
Kaumil Gajrawala at UBS.
Kaumil Gajrawala - UBS Warburg
Thank you. I guess a little bit of a follow-up -- when you came out of the, as you came out of the Coca-Cola bottler meeting I guess a few weeks ago, can you talk about some of the things maybe you are working on together a little more specifically, and then some of the things maybe you [committed] in 2009 to try to turn around North America?
John F. Brock
Well, Coca-Cola had a top-to-top bottler meeting several weeks ago where a number of us were in attendance -- Hubert Patricot, Steve Cahillane and I were there, along with some 35 or 40 other bottlers from around the world. I would say that was more of a global Coca-Cola meeting at which we explored best practices, ideas, and talked about initiatives around the globe and how they might apply in our markets.
So I’m not sure if that’s what you were referring to but in terms of our ongoing relationship with the Coca-Cola Company and meetings we have regularly on this 120-day study, those are making progress. And I’ll ask Steve Cahillane to add a little more color commentary to this -- I would say, for example, one of the projects that we are looking at in a significant fashion is supply chain.
We have a very complex supply chain in North America and we have recognized that for some time and we are taking a good hard look at what could be done to dramatically simplify it, to streamline it, to standardize it, to bring significant synergy to the table, bring cost out and end up overall with a far more efficient and effective total North American supply chain than we currently have. It’s a challenging project, as you can imagine, but it is one which offers significant opportunity for efficiency and synergy improvements.
Let me ask Steve if he would comment, for example, on some of the other project areas that are part of the 120-day study.
Steve Cahillane
I am optimistic we are making good progress on the 120-day program with the Coca-Cola Company. Having said that, there’s things we can also do ourselves.
I’ll touch on one or two of those, but key to our success going forward is to drive increased recruitment into the franchise and obviously you all know that we have suffered from a real imbalance in terms of the economics between future consumption and immediate consumption, so we are taking an extensive look at our whole price package architecture in North America with a desire to drive increased recruitment in immediate consumption but also to drive increased value, recruitment in future consumption as well and we’ll be ready in December to talk in more detail about exactly what that means specifically but we are making progress in that regard. In terms of the complexity that has been added to our system as well, the Coca-Cola Company recognizes that with the introduction of Glaceau and Fuse and Campbell’s and other brands, you know, we’ve had a real SKU proliferation, which drives complexity and cost into our system, and part of what we have looked at throughout the course of the beginning of the 120 days is how do we really manage our SKUs and can we be a lot more disciplined in the tail of those SKUs, and we’ve made very good progress in actually reducing value destroying SKUs which clearly frees up resources for us to focus on the SKUs that really matter to us, as well as free up capacity as we go through this whole price package architecture work, to add SKUs to the system that will help drive value for us.
But there’s also things that we can do in our own backyard and part of what John touched on is our organizational design work, and we’ve done some very swift and quick work, I think, to drive both effectiveness but also efficiency in North America. And part of that is going from six business units down to four business units, putting our absolute best people against the business, but also simplifying the way we go to market.
So our organization has evolved over the course of the last several years and some of the things that we have done in the past around putting specific focus on on-premise, on revenue growth management and other things clearly led to great capability development within our system. Now that we have that capability, we can consolidate that into fewer departments and really go to market in a more streamlined fashion, giving very clear direction down to our market units and our sales centers, and really drive effectiveness and efficiency at the same time.
And the Coca-Cola Company has been very much engaged in that work and supportive of that as we go forward.
Kaumil Gajrawala - UBS Warburg
That’s helpful. Thank you.
Operator
Lauren Torres, HSBC.
Lauren Torres - HSBC
You reduced your North American operating income guidance once again and I was hoping you could just give us a little bit more color with respect to where this further weakness is coming from, be it by beverage category or by channel.
John F. Brock
Let me ask Steve to answer that question for you, Lauren.
Steve Cahillane
Clearly some of the high points are the reduction in funding that John mentioned. There’s also the increase in concentrate, and there’s also fuel and fuel hedging, which are significant impacts to our business.
In terms of the overall operating environment though, where we are is clearly uncharted territories in terms of the price increase we’ve taken and how that is going to impact our volume in the marketplace. And as Bill mentioned and John also mentioned, we are thinking about a circa 10% reduction in our overall volume in the fourth quarter, with every intention of doing our best to make that number better than that, to really beat the elasticity models that we are looking at.
Having said that, the 10% reduction in volume will not translate into a 10% reduction in gross profit. We’ll do better than that, obviously based on the price increase that we are taking in the marketplace.
But all in, we are seeing the same types of trends in immediate consumption and future consumption that we have seen throughout the course of the year. It’s not getting worse but it is not getting better yet.
You know, we are clearly looking at each and every day the type of environment we are in and how that will be impacted and you can think about the economy I think in two different ways. Clearly we have a real storm in the economy right now, which is not helpful to our business.
But it has led to much lower oil prices, which is leading to lower prices at the pump as well, which really leads to increased discretionary income for consumers. Will we see that have a positive impact on our immediate consumption business or a lessening pressure on immediate consumption business?
We haven’t seen it yet but we are very mindful that it could be there.
Lauren Torres - HSBC
Thank you.
Operator
Judy Hong at Goldman Sachs.
Judy Hong - Goldman Sachs
John, when you started your 120-day review in July, the commodity prices at that point were at elevated levels and since then, you have seen significant retreat in some of your key commodities, so I am just wondering how that sort of plays into your thinking over time, vis-à-vis your pricing strategy or what have you as you sort of are now in a different commodity environment today than you were maybe three, four months ago.
John F. Brock
Judy, let me make one kind of broad-stroke comment on pricing strategy, and then I’ll ask Bill to talk about the commodity situation as we see it today and add a little more color to what he has already commented on, particularly as we look to 2009. I would say from a pricing strategy, our view is pretty simple and pretty straightforward, and that is we have had a multi-year decline in gross profit margins because we have not sufficiently priced even honestly in lower cost commodity environments to fully keep up with the cost of goods increases, and that’s been exacerbated in the last couple of years.
That approach has ended and will never be followed again. It is very clear -- we have to have a pricing strategy which has as its foremost cornerstone the concept that we will always price to at least maintain margins and obviously where we can do so, grow them.
So from a strategic standpoint, that is the one critical change in our thinking around a pricing strategy going forward, from which we will not deviate. Let me ask Bill to make a few comments about the commodities environment.
William W. Douglas
Judy, as you know and everyone else knows, the commodities environment has been extraordinarily volatile over the last three months. Three months ago when we were on the call at the end of second quarter and we talked about commodities out into 2009, at that juncture in North America, I think I referenced a number that we may have been expecting commodities to increase circa 12% in ’09 versus ’08 and part of that is being impacted by the very good sweetener program we had in place and hedging strategy for ’08.
Sitting here today, again volatility continues to be the key word but we are seeing commodities softening in the neighborhood of a 10% increase year over year. That information is changing on a daily basis and I think it is not outside the realm of possibility that number could decline another point or so by the time we talk to you in December.
But right now, just under 10% is our current view for North America. However, I will say in Europe the environment is different and we expect a modest year-over-year price increase in core commodities, in line with historical norms that we would see in Europe.
John F. Brock
And an additional comment I would add to that, Judy, is because of the strategic meaningful and appropriate price increase that we just took, we find ourselves I think as we look to the environment in 2009 in a much better position than we would have been if we had taken a smaller price increase. And I think as a result, when you take into consideration what Bill just said and what looks like could be an even improving commodity cost environment in 2009, our current thinking is the kind of pricing moves that we will take in ’09 will be more moderate than they otherwise would have been, and that’s obviously good news for a volume standpoint.
Judy Hong - Goldman Sachs
And just to clarify, Bill, the 10% ballpark number now you are expecting year over year commodity price increases in ’09, that includes the 8% concentrate price increases from Coke that was -- that will go into effect in October?
William W. Douglas
Well, the numbers that I am quoting are a core commodity price excluding concentrate, so at this juncture, we are not articulating what the year-over-year concentrate price increase would be ’09. We are near the end of those conversations and we would expect to have a position on that in December.
Judy Hong - Goldman Sachs
Okay. Thank you.
Operator
John Faucher at J. P.
Morgan.
John Faucher - J. P. Morgan
I’ve been taking a look at your cash flow guidance -- you guys are talking about CapEx of about $1 billion at this point and looking at your market cap, which is south of $5 billion at this point, I think. You are spending 20% of your market cap, roughly, on CapEx and I guess that just seems like an incredibly high number to me for a business that really isn't growing that fast, if at all.
So as we look at that $1 billion in CapEx and a pretty attractive free cash flow yield for you guys, what is the right CapEx number going forward, given the new business model and what does the free cash flow growth look like going forward? It seems like it would have to be pretty aggressive growth from here on out.
Thanks.
John F. Brock
John, let me ask Bill to address that question.
William W. Douglas
John, as you know from following our industry and CCE over the last years, we have markedly reduced our CapEx spend as a percentage of net sales revenue and we are targeting a spend in ’08 of approximately 5% of net sales revenue. However, as we move into this new environment and we look at the growth algorithm and the need for reinvestment or lack of investment in incremental production capability and/or resizing our manufacturing and operating fleet, absolutely we are going to be taking a very hard look at what’s the right level of CapEx spend to optimize cash flow for 2009.
We are in the middle of that planning process for 2009. We are also trying to balance both the short-term issues and the ability to generate free cash flow along with some of the medium term strategic issues that Steve talked about in terms of recruiting new users into our category and maybe making some enhancements for immediate consumption packaging.
So a fair question. We are cognizant of that.
We are balancing both the short-term and the medium term and we’ll have a more thoughtful detailed response on that subject in December.
John Faucher - J. P. Morgan
Okay, thanks and just one quick follow-up on that -- so when you talk about the packaging, what you are basically saying is look, if we switch around immediate consumption, we go to smaller bottles, what have you, that just may -- that may just -- you may need some changeovers, things like that that could cause a little bit of incremental CapEx.
William W. Douglas
Exactly -- some changeover parts for certain of our lines, some incremental molds for new bottles, but it would be kind of a one-time investment in a [inaudible] that would give us that capability for years to come.
John Faucher - J. P. Morgan
Okay, thanks.
Operator
Mark Swartzberg at Stifel Nicolaus.
Mark Swartzberg - Stifel Nicolaus
Bill, on the headcount reduction in North America recently, I think you said a thousand folks, can you give us a little more detail there? One of the things I am hoping to learn here are any charge associated with that that I might have missed, where specifically or predominantly those folks who are not here any longer have come from or are going from, and then annualized savings value before you might, you know, before the reinvestment of the savings.
I am thinking something on the order of $75 million annually. Can you comment on those items?
William W. Douglas
Mark, if you look at what we have done today, we have taken some headcount reductions since Labor Day and that is about a thousand people. It’s across our North American operations and it’s basically adjusting our variable labor to the volume that we anticipate for the remainder of the year and into 2009.
There will be a modest charge that will be incurred in the fourth quarter. It is not a large number.
It is less than $10 million and it would be generating ongoing savings. It’s going to be self-funding, if you will, in the fourth quarter, the costs versus the benefit, and then we’ll have ongoing benefit as we look into 2009.
And again, we’ll give specific impact of all of our initiatives from a value perspective in December.
Mark Swartzberg - Stifel Nicolaus
Okay, great. Thank you.
Operator
Bryan Spillane from Banc of America.
Bryan Spillane - Banc of America
Just two questions, one a clarification, John or Bill, on concentrate pricing -- is there a chance that there would be another increase in January?
John F. Brock
Well, we are still in conversations with the Coca-Cola Company about our plan for 2009 but as I’ve already indicated, we feel positive at this stage of the game about what that plan is beginning to look like from a number of standpoints, including marketing initiatives and including the kind of concentrate pricing we will have as part of that, but we are not quite to the point yet of saying exactly what that is going to be, and I think we should hold fire and talk more about that in December.
Bryan Spillane - Banc of America
Okay, and then just one follow-up -- you know, as you’ve gone through this process of raising prices and you are also looking at your packaging architecture, how much have you involved retailers in these conversations? And I guess the question is carbonated soft drinks are I guess the third-largest product category in supermarkets, and with volumes down 10% and probably down again next year, what kind of feedback are you getting from retailers?
Is there concern on that end that this category is beginning to slip in terms of profitability for the retailer? And just what feedback are you getting in terms of what the dynamic is now?
John F. Brock
Let me ask Steve to address that question.
Steve Cahillane
It’s a great question and we have very much engaged our retailers in all of this work. A couple of points -- the category, as you know, is very large, very, very important for retailers, not only from a profit standpoint but also a traffic driving standpoint, so they have been very much engaged with us.
A number of things that we have already changed -- clearly we have taken to retailers and been in the process of selling it into them post development, and I can tell you that the feedback so far has been very positive. The retailers know that we are in unprecedented times in terms of cost of goods increase.
They have seen that through SMCG companies, so what we have been trying to do has been no surprise to them whatsoever, but we’ve been very cognizant of the fact that we need to continue to add value to the category, such that it’s an appropriate category for them to want to invest in, for them to rely on to drive traffic, and ultimately to create long-term value creation for them. You know, the goal is to get sparkling growing, to get our whole NARTD portfolio growing robustly but profitably.
John F. Brock
Thanks, Steve.
Bryan Spillane - Banc of America
Thank you.
Operator
Alton Stump with Longbow Research.
Analyst for Alton Stump - Longbow Research
This is [Maury Montoya] sitting in for Alton. Can you throw some volume numbers in regard to immediate consumption and future consumption?
And secondly, can you comment in regard to the distribution agreement with Hansen? When should we expect this brand to appear in Europe and impact both the top line and bottom line?
John F. Brock
Let me ask a question back on the immediate consumption and future consumption -- is your question around Europe, North America --
Analyst for Alton Stump - Longbow Research
North America and Europe, please.
John F. Brock
Both, and looking forward?
Analyst for Alton Stump - Longbow Research
Yes.
John F. Brock
Well, since you asked a question about Europe Monster, why don’t we ask Hubert to talk about first of all the outlook for immediate consumption and future consumption, as well as the outlook for Monster in Europe.
Hubert Patricot
Thank you, John. The outlook right now for future consumption in Europe is quite good.
We can see that despite the difficult economic environment, which is also the case in Europe, the growth is still there and we have a good momentum, which is quite driven by our core sparkling brands, such as Coca-Cola Classic and especially Coca-Cola Zero. In IC, it’s variable by channel -- the traditional channel like license NGB or coffee or restaurants and the [inaudible] are slightly down, whereas the snacking impulse takeaway business is [still quite firm].
If we look forward on your question about Hansen, first energy is a big, big opportunity for us in Europe. We are still not enough presence in this high-value, high-growth category and we will combine Monster with our current portfolio, which is the [inaudible] brand in GB, which has captured close to 7% of the market, and it will take place [immediately].
Basically in the next few weeks, we will be on the market with Monster in GB. And we will work on the [inaudible] too, first in France, to also leverage this brand, which has a huge potential in the market.
John F. Brock
Thanks, Hubert and let me add one other comment before I ask Steve to comment about FC and IC in North America, and that is in Europe, as Hubert said, there was a little pressure on IC but FC remains robust and our business model in Europe is significantly different in that we make money, significant money on everything we sell. It’s a very different and far more positive business model there than we have here, so even though immediate consumption is more profitable than FC in Europe, FC is also quite profitable and so our P&L, as long as FC remains strong and robust, our P&L remains equally strong and robust.
Steve, do you want to comment about IC and FC in North America?
Steve Cahillane
In the third quarter, we actually saw future consumption grow better than it has year-to-date, so circa 2.5% growth in future consumption. Immediate consumption stuck with its year-long trend of down about 0.5%, and I think if you looked at our overall third quarter results, the fact that future consumption grew better than year-to-date and didn’t translate as much as we would like into operating income growth just further reinforces the necessity to get a better balance in profitability and further reinforces the strategic imperative and the smart move that we made in taking price and future consumption and how important that was.
And I guess just on the Monster thing as well, we are very, very excited in North America, as you might imagine, to take Monster into the portfolio. It’s the number one brand in North America, as you know, and coupled with the number one distribution and customer service and selling system, we think there’s a lot of synergy for the rest of our portfolio but also a lot of growth to be had in the Monster business in the energy category.
Analyst for Alton Stump - Longbow Research
Okay, so I heard right, future consumption was up 2.5% and what was immediate, I’m sorry?
Steve Cahillane
It was down half-a-point.
Analyst for Alton Stump - Longbow Research
Down half-a-point, okay, perfect, guys. Thanks.
Steve Cahillane
Which includes the Glaceau business as well.
Operator
Mark [Cowan] with Merrill Lynch.
Mark Cowan - Merrill Lynch
To use Coke’s hospital ward analogy, I guess I would like to get a little bit of a better sense of whether you are contemplating major surgery here with significant up-front costs or some kind of out-patient treatment, because we have suffered through a lot of incrementalism with restructuring programs at CCE and it doesn’t seem to have grown EPS or created value, and yet you still, to go back to John’s question, you still plow a lot of capital into this business. So can you give us some perspective -- I know you can’t give us the details but give us some sort of perspective on what you really want to accomplish here when you are going to be talking to us in December.
Is this something that we have to see a major re-basing of earnings, a major up-front cost contemplating multi-year pay-backs? Or is this just about more incrementalism?
John F. Brock
Well, let me just comment by saying I think the restructuring program that we announced a couple of years ago and have continued to roll out is on track, is delivering the benefits, albeit in a very challenging economic environment, is delivering the benefits that we said we would achieve and it has a whole host of components ranging from HR optimization, finance optimization, IT optimization, and has applicability in both Europe and North America, and has broadly worked. In terms of where we are going to be on the 120-day study and what is going to come out of that, I think it is too early to say, which is why we have said it is really going to be December before we are going to be in a position to do that.
We have some components of that study which Steve has added some color commentary to, which I think we have some components which are totally in our control and which are not going to require significant restructuring or sums of money to achieve. We have others which are involving the Coca-Cola Company which are going to be requiring bold, courageous decisions and if we go off and do them properly, yeah, there could be some restructuring associated with it but that’s work in progress, and I think we will be in a better position to let you know what that is going to look like in December.
Mark Cowan - Merrill Lynch
[inaudible] resigns from your board and you put John Hunter there -- I mean, should we not read that departure of Gary as a significant sign that there is a difference of opinion about the outlook for the business, that really Coke doesn’t accept the fact that it doesn’t grow and you may actually be beginning to believe it doesn’t grow?
John F. Brock
No, that had nothing to do with Gary’s departure. He has been a very valuable member of our board for a number of years and we appreciate all that he has done and contributed to our company over those years.
The decision -- the request, really, on the part of the Coca-Cola Company was that they would like for Gary to be available to spend more time on various and sundry and very important programs that the Coca-Cola Company has ahead of it and of course, Muhtar is relatively new in his CEO role and he wants the CFO to be able to focus on a whole variety of Coca-Cola focused activities. And so it was really at the request of the Coca-Cola Company that we consider the appointment of John Hunter to replace Gary, which we did, and we are very excited about John’s appointment.
He brings a wealth of international and bottling expertise to our board. He was with us over the past two days of board meetings here in Dallas and is already a very contributing and positive member of our board.
So the simple answer to your question is no, there is no validity at all on anything that you should try to read into it, other than we made this change at the request of the Coca-Cola Company and are very pleased that it has worked out as well as it has.
Mark Cowan - Merrill Lynch
Thanks, John.
Operator
Carlos Laboy at Credit Suisse.
Carlos Laboy - Credit Suisse
John, did you really expect this concentrate increase and the support withdrawal to be Coke’s response to your price action? And why would the magnitude of this increase be a fair and reasonable response?
John F. Brock
Well, on the second part of the question, I think that is something you should address with the Coca-Cola Company. Our situation is as I explained it earlier.
We had a plan going into the year. We made a decision that we needed to take a meaningfully different approach to the plan because the business environment had changed.
The immediate consumption situation we were experiencing was dramatically different than what either we or Coca-Cola Company experienced and the commodity situation was very different. So we had ongoing discussions with them, as I am sure you would expect, and in the end we made the decision that we thought was absolutely the right one for us and then they made a corresponding decision that they thought was appropriate for them.
But I think if you want anymore perspective on it than that, you should talk to the Coca-Cola Company.
Carlos Laboy - Credit Suisse
I mean, you were pleased with the price action you took and with the net effect of it all when you consider the price increases, the concentrate increase?
John F. Brock
Well, the price increase we took was absolutely essential. As I said earlier, we’ve now got ourselves in a far better position for 2009 than we would have been and I think taking a lower price increase would have been categorically the wrong thing to do.
It would have been perhaps better if could have figured out a way to have had an agreement with Coca-Cola where this concentrate price increase and/or the marketing funding played itself out in a different fashion but that is simply not the way it worked.
Carlos Laboy - Credit Suisse
Thanks.
Thor Erickson
Operator, I think we have time for one more question.
Operator
[Damien Wykoskiw] at [Cabelli] & Company.
Damien Wykoskiw - Cabelli & Company
Just a two-part question -- first, going back to Hansen, will you be responsible for any of the contract cancellation fees that will occur in North America? And secondly, as you talk about simplifying how you go to market in the U.S., any specific examples that you can give us?
Thank you.
John F. Brock
Let me ask Bill Douglas to address the question, since he has been the one that has been so involved in the negotiations around the Hansen’s agreement. And if I could, I would also like Bill maybe to close with a comment, just to make sure we have it a bit clearer around some really preliminary thoughts on what 2009 looks like.
William W. Douglas
If you look at the Hansen distribution agreement, there are some termination fees with their existing distributors and in the normal course of these kind of arrangements, the distributor that is taking over the distribution rights is responsible for those termination fees. We did disclose that earlier and we don’t have a final number yet.
It’s going to be several months before we have the final numbers, but given the volume that we are picking up in the United States and Canada, we would estimate that to be in the range of $100 million to $125 million. There are no existing distribution arrangements in Europe so we will be taking those over in a greenfield scenario, so there are not any termination payments in Europe.
And that was all factored in when we looked at the overall relationship and did, even with those termination fees, had significant value creation for us, so that was part of the equation. The other item I would mention, just building on what John alluded to, when we were talking about not giving an outlook for 2009 or forecast or guidance but just acknowledging the state of the commodity costs back in July of 12%, we touched on that being a little bit lower today, circa 10, potentially less.
I would also say if you look at our outlook about year over year operating income performance in North America, clearly with the forecast for ’08 that we articulated today being lower than what we said in July, we would expect the year-over-year results to be different as well. Back in July, off of a higher base, we anticipated that operating income could be down mid- to high-single-digits in ’09 versus ’08.
Now with a lower base, while we still have a lot of work to do, we have to have a final commodity number, price packaging architecture, benefits from the 120 they plan. But if I look at the relativity of what we would expect off of this lower base, it would be more flattish at this juncture, as opposed to down mid- to high-single-digits off of a higher number back in July.
John F. Brock
Okay, thanks, Bill and thanks to all of your for joining our call this morning. We hope you all have a good day and goodbye.
Operator
Ladies and gentlemen, thank you again for joining us. That will conclude today’s conference call.
Again, have a good day.