Oct 28, 2009
Executives
Thor Erickson - Director, Investor Relations John F. Brock - Chief Executive Officer, President, Director William W.
Douglas - Chief Financial Officer, Senior Vice President Steven A. Cahillane - Executive Vice President and President, North American Group Hubert Patricot - Executive Vice President and President, European Group
Analysts
Judy Hong - Goldman Sachs Bill Pecoriello - Consumer Edge Research Mark Swartzberg - Stifel Nicolaus Lauren Torres - HSBC Caroline Levy - CLSA Christine Farkas - Banc of America Merrill Lynch Carlos Laboy - Credit Suisse Alec Patterson - RCM Capital Damian Witkowski - Gabelli & Co.
Operator
Good day and welcome to the Coca-Cola Enterprises third quarter 2009 earnings conference. 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, Vice President 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 2009 results and our 2009 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 2009, 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 report 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 the 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 as we review our third quarter performance, a quarter in which we continued to achieve consistent profit growth and deliver against our long-term financial objectives. As we discussed in our news release this morning, we achieved comparable earnings per share of $0.51 in the third quarter, up more than 10% from a year ago with net income of $254 million.
This is the third consecutive quarter of solid profit growth and as a result, we have raised our full year guidance to a range of $1.54 to $1.57 per share, including currency impact and excluding non-recurring items. By any standard, our results to date this year have been outstanding, driven by the marketplace operating strategies we have implemented over the past two years and with the skill and hard work of our employees.
Given today’s economic realities, high levels of success are difficult to achieve, yet the people of Coca-Cola Enterprises have responded to this challenge. Guided by our global operating framework, our team has not only delivered solid earnings but has also laid the foundation for our company to achieve the consistent growth that will deliver against our financial objectives and drive long-term shareowner value.
Challenges remain, of course. We continue to build on current strategies to improve our top line performance in North America and in Europe, we must continue to drive excellent results and expand our brand portfolio.
We are pleased with our progress thus far and believe our results this year demonstrate our ability to grow over the long-term. Now let’s look in more depth at the key operating factors in the third quarter.
Europe again achieves excellent operating results with a balanced combination of volume growth, pricing per case, and flat costs of goods sold per case. We also benefited from good summer weather.
For the third quarter, revenue grew about 8% while operating income grew more than 25%, both on a comparable and currency neutral basis. At the heart of these results is growth in our core sparkling brands, which were a significant factor in European volume growth of 4%.
In fact, volume for our red, black, and silver portfolio increased 5% with 4% growth for brand Coca-Cola, 15% growth for Coca-Cola Zero, and 3% growth for Diet Coke. Our water and energy portfolios also contributed more than one point of European volume growth.
Water grew 25% during the quarter on the strength of the Abbey Well acquisition in Great Britain and double-digit growth for [Chafontaine] on the continent. Energy was up more than 70% as we benefited from the introduction of Monster brands and from growth in existing brands such as Burn and Relentless.
We also continue to grow our brand portfolio in Europe. For example, Glaceau continues to gain traction.
We recently expanded Glaceau brands into Belgium. Starting in 2010, we’ll be expanding our juice portfolio with Ocean Spray brands in Great Britain and France.
In addition, we’ll expand distribution of both Dr. Pepper and Schweppes to The Netherlands next year.
Brand initiatives such as these, coupled with our ongoing success in enhancing the effectiveness of our European operations, create a solid platform for long-term growth there. Over the past three weeks I have spent considerable time in the Europe market, visiting with customer, reviewing our execution, and meeting with employees.
We have a highly talented team of motivated people and they are committed to even more improvement in our operations. This has reinforced my optimism about the high level of our performance, as well as future growth opportunities.
While we face ongoing marketplace and economic issues, we have confidence in our ability to sustain growth in Europe over the long-term. Now turning to North America, on a comparable and currency neutral basis, we achieved operating profit growth of 9%, in line with our expectations.
This was driven by the benefits of our price package architecture efforts, our initiatives to drive improving effectiveness and efficiency, and the benefits of moderating commodity costs. Revenue declined 3.5%, which was driven by a volume decline of about 10%.
Several key factors contributed to this volume decline. First was a difficult comparison to third quarter volume growth a year ago, which was driven by Olympic related promotions.
Second, the timing of the Fourth of July moved the holiday’s normal volume impact into the second quarter. Third, we continue to see sharp declines in case pack water as we refine our approach to that lower margin segment of the water category.
When combined, these elements represent about half of our total volume decline. In addition, we faced continued weakness in the economy and consumer sentiment, which dampened sales in key areas such as the on-premise channel.
Longer term, we recognize and understand the need to reverse these volume trends but in a profitable way. To accomplish this, we are moving ahead with several investments and initiatives to strengthen our execution and marketplace presence.
For example, we’ve made significant progress rolling out the two liter contour bottle in the Southeast and we will complete the national rollout of this package next year. This new bottle has generated positive volume and profit results in each new market and at the same time enhances brand value We’ve also initiated the rollout of boost zones in key markets here.
These zones create an enhanced marketplace focus on immediate consumption growth and help build brand awareness. By the end of the year, more than 50 zones will be in place in markets around the country with substantial expansion of the concept in 2010 and beyond.
We also continue to build on the success of the price package architecture initiatives to maximize the revenue captured by our brands. We are able to offer consumers a variety of can and PET configurations, including $0.99 single serve bottles, and we will soon introduce new 90 calorie slim cans, a package to meet changing consumer needs.
These initiatives exemplify our focused effort to restore gross margins in the sparkling category and to drive long-term profit growth. I am also pleased to note this marks the fourth consecutive quarter in which we have maintained or expanded North American margins.
Our third quarter margin expansion was created by a convergence of positive factors, including benefits from pricing actions and lower commodity costs. While we will not maintain this rate of increase, we remain committed to stable, or ideally increasing gross margins.
Over the long-term this will strengthen the NARTD category and benefit both our shareowners and our customers. Overall, to achieve our long-term vision of renewed balanced volume and pricing growth in North America, we must continue to make substantial progress in driving increasingly effective market place initiatives.
In addition, it’s essential that we continue to improve operating efficiency through established programs such as Fountain Harmony and our supply chain initiatives. These initiatives are improving sales efficiency, reducing transportation costs, and optimizing supply chain operations.
We are working on these opportunities and developing new ones in close alignment with the Coca-Cola Company. Together we are creating increased value throughout our system.
We share a deep dedication to fully maximizing the potential of our brands, the strength of our North American operations, and our world class customer service. While challenges remain, including the influence of an uncertain economy and a changing marketplace, we are taking actions that we believe will enable us to reach our goals in North America.
Today, the global operating framework that has created a shared vision and guided our success to date is perhaps more essential to our long-term success than ever before. Working closely with the Coca-Cola Company, we believe we will achieve consistent earnings growth in line with our long-term objectives that will enhance the value of our shareowners’ investment.
So in closing, we are pleased with the strong progress that we’ve made in key areas throughout our company this year. From solid profitability and free cash flow to our company’s strongest balance sheet ever, we’ve made important progress amidst a difficult economic backdrop.
This is a testament to the skill and dedication of our leaders and our employees. Now I will turn the call over to Bill for more detail on our financial results as well as our full-year outlook.
William W. Douglas
Thank you, John and we appreciate each of you being with us today. As you read this morning in our earnings release, we achieved a third consecutive quarter of strong profit growth.
On a reported basis, earnings were $0.50 a share while on a comparable basis, earnings per diluted share were $0.51. This excludes restructuring costs and the net impact of out-of-period mark-to-market accounting adjustments, and includes a negative currency impact of approximately $0.04 for the quarter.
The net mark-to-market adjustment represents the out-of-period impact of undesignated commodity hedges and added approximately $0.03 to our reported earnings in the quarter. Restructuring charges related to supply chain and business optimization initiatives negatively impacted reported quarterly earnings by $0.04.
Looking at the factors behind our third quarter results, profitability was driven by excellent European volume and profit growth, as well as solid operating income growth in North America. Revenues on a currency neutral basis were essentially flat with a reported revenue decline of 3%.
On a currency neutral basis, North American revenue declined 3.5% and revenue in Europe grew 8%. As John mentioned, North American revenue and volume were affected by the timing of the Fourth of July holiday, the de-emphasis of unprofitable case back water, as well as the volume growth hurdle created in the third quarter in 2008 by the Olympic promotional activity.
North American profitability was driven by the combined benefits of our price packaged architecture initiative and work to create improving efficiency and effectiveness throughout our operations. In addition, profitability also reflects moderating rates of increase in commodities with all prices creating year-over-year favorability in the quarter for PET and a slight year-over-year increase for aluminum.
Our European operations are delivering strong profit growth through a balance of volume, price, cost control, as well as benign commodities environment. Volume grew 4% while price per case was up 4.5%.
Cost of goods per case was flat in the quarter. Overall, core sparkling brands continued to perform very well and we are growing our total brand portfolio with the addition of brands such as Glaceau and Monster.
We also look forward to the addition of Dr. Pepper and Schweppes’ brands into our portfolio in The Netherlands in early 2010.
On a consolidated basis, these operating factors combined to enable us to achieve margin expansion in the quarter as pricing per case rose 7.5% and cost of goods per case increased 3.5%. As John discussed, this margin increase represents the fourth consecutive quarter of margin stability of growth, or growth.
We remain committed to maintaining or improving margins over the long-term and to driving revenue with balanced price and volume growth. Now let’s turn to our full-year outlook.
Given our positive results to date and our outlook for the rest of the year, we have increased our full year earnings per diluted share guidance to a range of $1.54 to $1.57. This range includes expected full-year negative currency impact of $0.16 and excludes items affecting comparability and includes the impact of four fewer selling days in the fourth quarter of 2009.
On a consolidated basis, we expect full-year revenue to be down slightly with currency neutral revenue growth in a low to mid-single-digit range. Consolidated operating income will grow at a high single digit rate and at a low double-digit rate on a currency neutral basis.
Also, we are raising our level of expected 2009 free cash flow to approximately $800 million, with capital expenditures remaining at approximately $900 million. To date in 2009, we have used free cash flow primarily for debt reduction, which has significantly strengthened our balance sheet.
Today, our current net debt is $7.8 billion, down from $9 billion a year ago. This reduction includes an increase in cash on hand, which is approximately $900 million at the end of the quarter.
We believe our recent approach to managing our balance sheet has been appropriate given overall macroeconomic conditions. As we look to 2010, we are actively evaluating the most effective means for deploying cash, including returning additional cash to our shareowners.
I would like to also note that we have recently communicated two important benefit changes to our non-bargained U.S. employees.
First, we will transition our pension plan from an average pay formula to a cash balance formula. Second, we have increased our 401K match.
These two combined represent approximately a $0.03 negative impact to our second half 2009 comparable EPS forecast but importantly will reduce long-term volatility associated with our employee retirement benefit plans. We have made excellent progress with our 2009 profit recovery, driven by the success of our operating and market place strategies throughout our system.
We also continue to benefit from the strength of our relationship with the Coca-Cola Company. Our two companies share a common vision and we are currently planning and executing the programs and initiatives that will make that vision a reality.
We also acknowledged that we continue to face a difficult economic environment. Our profitability has been exceptional but we cannot lose sight of the challenges that lie ahead.
In North America, we must continue to build a more balanced business platform that maximizes the strength of our brands and expands the number of consumers who choose and drink them. In Europe, our challenge is maintaining our positive operating momentum and reinforcing our established pattern of success.
Despite these challenges, we believe we have the people and the resources, including our global operating framework, combined with our relationship with the Coca-Cola Company, to create ongoing success and deliver against our stated long-term goals. We look forward to discussing our 2010 outlook with you in December.
Thank you very much for joining us today. Now John, Steve, Hubert and I will be happy to take your questions.
Operator
(Operator Instructions) We will take our first question from Judy Hong with Goldman Sachs.
Judy Hong - Goldman Sachs
In terms of the volume outlook in North America, clearly the third quarter you had a lot of factors that negatively impacted the volume trend in the quarter. But as we look out in the fourth quarter and beyond, you are starting to lap the sizable price increases last year.
Can you give us some perspective on how you think the volume behaves in North America?
John F. Brock
Let me ask Steve to answer that question.
Steven A. Cahillane
We are only now really starting to cycle the price increase from last year. Obviously it went in post Labor Day and it went in in a staged way, so it is still early.
Halloween week is happening right now and we are optimistic we are going to have a successful Halloween. Thanksgiving and Christmas are still in front of us.
It’s important to note we hope that the consumer sentiment picks up. It’s been a difficult environment here in North America, as everybody knows.
But just like we did in the third quarter, you know, rest assured we will control what we can control. We will strive for flawless execution in the marketplace.
We are going to continue our initiatives in driving cases on display and driving new outlet acquisitions in the on-premise and overall, a real strong focus on our marketplace execution. We are going to continue to manage our OpEx and our labor with great intensity so that regardless of what happens with fourth quarter volume, we are confident that we will still deliver a very strong result.
But wrapping that all up, obviously we said that this year in terms of volume would always be very lumpy, with the third quarter representing by far our biggest challenge. It was.
I think we managed through it very well and we are optimistic that the fourth quarter will certainly from a volume perspective be better but it is still pretty early in the day.
Judy Hong - Goldman Sachs
Okay, and Steve, just in terms of pricing environment in North America, have you followed the Pepsi system’s price increases post Labor Day? How would you characterize the promotional environment in North America?
Steven A. Cahillane
Well, we are always looking at pricing and the opportunity to take the right price in the marketplace. We’ve done that all year.
We’ve led a strong price increase that Pepsi is only now following and we are happy about that. We’ve seen basically a rational approach to pricing in the marketplace, with a couple of exceptions.
You know, part of the third quarter softness was driven by both case pack water, down significantly as price continues to erode. But also importantly some very, very aggressive promotional discounting in isotonics, which proved not always very rational as we looked at it.
But on balance, we see a rational pricing approach. We are continuing to evaluate every opportunity we have to take pricing, not only throughout the balance of the fourth quarter but importantly as we enter 2010.
Judy Hong - Goldman Sachs
Thank you.
Operator
Next we’ll hear from Bill Pecoriello with Consumer Edge Research.
Bill Pecoriello - Consumer Edge Research
As we look out to 2010, post Super Bowl pricing that you might take, I guess it’s too early to talk about the magnitude but what is your tolerance in ‘010 for volume declines, given you have a favorable cost outlook to help drive the profits and maybe 2010 is still going to be a different algorithm year versus the longer term top line goals you have in North America. So again, as you are looking at the rational pricing environment that you are talking about, what is the tolerance on these volume declines?
Thanks.
John F. Brock
Let me ask Steve to tackle that one also. I am assuming you are asking that question principally from a North American standpoint?
Bill Pecoriello - Consumer Edge Research
Yes.
Steven A. Cahillane
Well, you know, as we look at 2010, there is still a lot of uncertainty based on the macroeconomic environment. Unemployment continues to go up, consumer sentiment continues to be very, very challenging so we are operating with our eyes wide open in terms of what is in front of us.
Having said that, we aspire to get this business stabilized in terms of growth, in terms of volume, and then certainly to aspire towards growing the top line, both on a volume standpoint and a revenue standpoint. In 2010, we will be prepared for what the consumer macroeconomic environment deals us, just as we have in 2009, so we are very confident we will be able to deliver a result but we are going to continue to drive the things that are within our control, things I mentioned before like cases on display and marketplace execution.
And if the consumer starts to come back and some of the forecasts that are more on the optimistic side around employment and around consumer sentiment, then we can start to see some much better trends developing as early as 2010 but certainly as we look even longer term, we are pretty optimistic that the long-term algorithm of low-single-digit growth for this category can come back. But if I wrap it all up, in 2010 I think most people would probably expect the NARTD category to show modest declines.
John F. Brock
Let me just add a comment to that and then you can follow if you want. Just to say I think a big part of the issue here is what happens to the whole NARTD category, as we were just commenting.
If it returns to growth itself, I think we are in a really strong position to capitalize on that. If we continue to have a third year of overall declines of the category, I think again a reasonable person would assume we are going to gain share in the NARTD category just like we have this year but growing -- obviously the whole category is down is a big challenge.
What’s really driving our thinking and I think it is important to keep this in mind is we’ve got a clear -- we’ve been very clear with the market around what our financial metrics are by which we are going to measure the business and clearly the most important one of those is operating profit, although as Steve has said at the end of the day, we realize we’ve got to have a balance of volume and pricing growth to generate revenue growth which ultimately will give us the kind of profit growth we want. But as we look to 2010, you were asking a question about ’10, I think again you can assume we are going to manage through what we see as continuing troubled waters with the overall objective of delivering at the end of the day profit growth in line with our clear financial metrics, which we have been very clear to the market about what they are.
And I think you’ve got to keep in mind, our number one objective is operating profit growth underpinned obviously by solid volume pricing and mix growth but recognizing we’ve got to do the levers on the machine so that we come up with the right operating profit at the end of the day. Did you have a follow-on question there?
Bill Pecoriello - Consumer Edge Research
The follow-up question was just on as part of that ‘010, the visibility you had on the raw material outlook at this point in time.
John F. Brock
Let me ask Bill to tackle that one.
William W. Douglas
As you’ve seen the last 30 to 60 days, there’s been some increased volatility in the commodities environment in which we operate. We have continued to layer on some coverage for 2010; however, we are not -- we are not majority covered at this point in time.
We’ll give more of an update on that in December but even with the recent volatility, we still expect a benign overall commodity environment for 2010.
Bill Pecoriello - Consumer Edge Research
Thank you.
Operator
Next we’ll hear from Mark Swartzberg with Stifel Nicolaus.
Mark Swartzberg - Stifel Nicolaus
John, on Europe, clearly an area not only of strength in the quarter but for a series of quarters, really years. If you look at the underlying trend, it looks like volume is showing an underlying trend there of up 2% or 3%.
As you look at the near-term in the next year or two, what impediments if any do you think are out there to you sustaining that kind of growth in that region?
John F. Brock
Let me ask Hubert to tackle that because I think it would be useful to hear a little bit of color commentary both on what is driving the growth and then what some of the issues are out there that we are going to have to manage our way through but why we continue to believe it is going to be a growth engine. Hubert.
Hubert Patricot
We continue to achieve solid growth in Europe through a combination of volume growth and pricing while we contain our costs. First, the Coca-Cola trademark brand is performing strongly.
In this quarter, we were up 5%. We had good consumer response to our red, black, and silver execution both in GB and on the continent in the [on] channel.
But we also continue to successfully push for our [inaudible] volume through our [boost zone], and we have now 300 boost zones in Europe, which is up 90 versus previous year. And also, it’s fair to report that our new initiative, our new portfolio extension being Schweppe’s Abbey Well in the water category, being Monster in the energy category, have performed [inaudible].
So again, this quarter it’s a good combination between our core portfolio and portfolio extensions. And in addition to those factors, weather had a positive contribution at the back end of the third quarter Now looking forward first regarding quarter four, we will continue of course to do the right thing, leveraging our competitive advantages, both in field execution, [brand] marketing.
We will accelerate our availability program on the energy category and we are going to implement a strong micro Christmas program. Now we have to take into account that we are now, like in the U.S.A., fewer selling days this quarter to come and that our quarter three performance was enhanced by the weather I was just mentioning.
So we plan to continue to grow next quarter but probably not to the same level we reached in quarter three. But I guess you also asked about next year -- the economic situation is not very different in Europe and we are still in front of a lot of uncertainty.
Unemployment will probably peak either this quarter or first quarter next year. And we are not totally immune to this situation, with some channels losing traffic, especially in the [inaudible] market.
But we consider we have now the right portfolio with still clear upside potential again on the energy category with Monster, [inaudible]. On the juice range, about the new extension we mentioned, the distribution for Ocean Spray next year will help us, and also on water.
But we need absolutely to continue to perform on the core business and again, here we are going to take some initiative in terms of product launch. We are going to launch a caffeine free Zero product and we have the World Cup to help us, which will be a strong help to continue to capture the interest of the consumer towards our [inaudible] and towards My Coke in particular.
So cautiously optimistic looking at 2010.
Mark Swartzberg - Stifel Nicolaus
Could I simply ask on the boost zone, nice to see the effect they are having. What’s the opportunity for a given boost zone to get even stronger with the core brands and what is the opportunity to expand boost zones from the level, the number you have presently?
Hubert Patricot
We have not been -- it started as you know in France and it’s now probably at year five in France. And what you see is that there is phased growth in the boost zone strategy.
First you go in a boost zone, you build it, you go from 150 outlets to 200 and now in France on average we have 250, 270 outlets per boost zone, so it’s the highest coverage. And then in each outlet, you increase your range, you place the coolers, and you put in place combo offers.
And in all the boost zones being in GB, being in Belgium, being in Holland, we note a 15% to 20% increase of sales as soon as we can put the combo offer in the boost zone. And again, if you combine that with range extension being this year Monster Energy Drink, we feel the growth is still there to last for a few years again.
Mark Swartzberg - Stifel Nicolaus
Great. Thank you.
Operator
Next we’ll hear from Lauren Torres with HSBC.
Lauren Torres - HSBC
I just want to go back to some comments you made with respect to North America volume and pricing. I guess I’m just curious to hear some of your thoughts with respect to the relationship with Coke and as now it looks like you are getting more or you are striving to get more value rather than volume.
What is the read across or the discussions that are going on with the Coca-Cola Company, as I’m sure they would like to see better volume growth coming from you. Is this a point of contention or how do you work that through with them as they are really looking for one thing and you may be looking for something else?
John F. Brock
Let me make a couple of macro comments on the question and then I’ll ask Steve to give a little more commentary on it. I think our relationship with the Coca-Cola Company is as strong as it has ever been and we continue to work hand in hand on a whole variety of initiatives, which we announced really starting last December and which we have continued to progress, make really good progress against as the year has gone on, and that is everything from Coca-Cola supply to fountain harmony to outlet service to dilutions to a number of new initiatives now which you will be hearing more about as we move forward.
So I think again the broad relationship is excellent. We’ve worked very much hand in hand on a variety of industry issues.
You know, the whole concept of a potential beverage tax I think we and the Coca-Cola Company and the industry in general, for example, have worked exceptionally well on dealing with that particular issue and other industry issues and we are working hand in hand with Coca-Cola on taking a far more aggressive approach on the positive aspects of the sparkling business, in particular the brand Coca-Cola and how we want consumers in all constituencies to perceive it. So that’s the macro comment.
I think in terms of the volume in North America and the overall situation, we remain as concerned as they are about the volume situation, although certainly some of it has been intentional because we don’t have a particular interest in driving unprofitable case pack water. That just doesn’t make any sense and so we aren’t doing that.
And we don’t have any interest in -- you know, Steve talked about some of the pricing situations in isotonics -- again, we don’t have any particular -- any interest in driving unprofitable volume there. So I think broadly our relationship with Coke is as strong as it’s ever been.
Let me ask Steve to make a bit more of a specific set of comments around North America and what we are doing to get volume where we would like for it to be.
Steven A. Cahillane
I wouldn’t characterize it as Coca-Cola looking for volume and CCE looking for price. I think we both are striking a very important balance of trying to find the right mix of those two in the marketplace.
A couple of examples -- so if you go back a year ago, we were selling principally 20 ounce in immediate consumption for say $1.49. Together we looked and explored the consumer dynamics and realized that selling a package at $0.99 as an affordable entry level offering would be very, very important.
We aligned on that and we’ve driven it throughout the entire country. And if you look at a large pack, we are now launching 2-litre contour throughout the balance of the country and we will have filled in the whole country by 2010, which is obviously a 2-litre size.
So when you look at the things we are doing with immediate consumption and future consumption with different packages both at higher price points and lower price points, I think we are starting with the consumer and we are working through with a customer to find that right balance in the marketplace that will drive value for both parties. And as John said, neither of us have any interest in value-destroying volume.
It’s not good for brand equity, it’s not the right thing for customers, and at the end of the day it’s something that we are aligned that we are not going to do.
Lauren Torres - HSBC
And if I could ask a quick follow-up, just a quick one on your guidance -- it seems like your FX hit to EPS is a bit higher than you mentioned a few months ago and I was curious why that’s the case because I thought it may have been working for you in the other direction.
William W. Douglas
It’s just a $0.01 refinement, so it’s nothing major.
Lauren Torres - HSBC
So there’s nothing to read into that?
William W. Douglas
No, not at all.
Lauren Torres - HSBC
Okay. Thank you.
Operator
Next we’ll hear from Caroline Levy with CLSA.
Caroline Levy - CLSA
A couple of questions -- you are sitting on $900 million of cash, you are putting Dr. Pepper into The Netherlands, you knew this was coming -- just how do you view the fact that the Dr.
Pepper franchise seems to be somewhat in play with the purchase of the bottlers by Pepsi? Can you comment a little bit about that, whether you have an interest in those territories?
John F. Brock
Well, let me comment on the Dr. Pepper question specifically and then I will ask Bill to talk about the $900 million in cash we have and any thoughts that he might want to pass on around that.
On Dr. Pepper, we love the brand and it has performed exceptionally well for us and frankly I think if you talk to the Dr.
Pepper Snapple team, they would tell you that we have driven their brand performance very nicely, this year and historically. So it’s a phenomenal brand, Dr.
Pepper, Diet Dr. Pepper and some other brands of theirs that we have.
We have made it very clear to them and we have been very public in saying this -- we have always an interest in getting more Dr. Pepper business if it were available and I think it’s about that simple.
We are there if there is something to talk about. We would be very willing to talk about it.
It’s a terrific brand and we do well by it. Let me ask Bill to comment on the $900 million of cash.
William W. Douglas
We do have a significant amount of cash on our balance sheet and we did that intentionally as we were managing through the overall credit and liquidity crisis over the last 18 months. Now that we have successfully navigated those challenges, we would not expect to maintain that level of cash on our balance sheet going forward, so as we finalize our business plan for 2010, we look at potential strategic opportunities or acquisition opportunities within our current sphere of influence.
That will be one of the things that we are looking at but I think it’s fair to say that as we finalize our plans 2010, there will be an increased level of return of cash to shareowners in 2010. We just don’t have the specifics yet but hopefully we’ll have those ready to announce in our December call.
Caroline Levy - CLSA
May I add please could you give us a comment on how the Glaceau brand and the Monster brands are doing in North America?
John F. Brock
Let me ask Steve to address that one.
Steven A. Cahillane
The Monster -- two different categories, obviously. The Monster brands in the energy category continue to do very well and gain share.
And in fact, that has accelerated over the course of the last couple of months, so the Monster brands are doing quite well. The Glaceau brands, we are pleased overall with the Glaceau performance, particularly on a share basis.
However, that category like a lot of higher priced categories, has not maintained the same level of historical growth as consumers find that they have far less discretionary income, so the brand is -- the whole category has not performed at the same sort of three to five year CAGR that it’s enjoyed. The vitamin water 10 launch has been very successful in satisfying a consumer need and helping us mitigate the overall challenges in that category, so we are very pleased with the vitamin water 10 launch and with future innovations that will come from the Glaceau franchise help us remain very, very optimistic about that brand and the success that we will enjoy in that category.
Caroline Levy - CLSA
And is there any work on a 2-ounce energy shot?
Steven A. Cahillane
Well, we have a number of players in that segment right now, both from Monster, from Full Throttle and NOS, so we are playing in that category currently.
Caroline Levy - CLSA
Thank you.
Operator
Next we’ll hear from Christine Farkas with Banc of America Merrill Lynch.
Christine Farkas - Banc of America Merrill Lynch
A question on North America, if I could, to follow-up -- trying to understand a bit of the consumer behavior in the quarter. I’m wondering if you could give us a bit more granularity perhaps stripping out the water and I know the noise of the holiday is also difficult to talk around but looking at sparkling, energy, cold drink, and take-home, can you give us some granularity on how that looked in the quarter?
Steven A. Cahillane
It was mixed and if you look at it first by channel, multi-serve did a little bit worse than single serve did but when you look at inside single serve or cold drink, on-premise continues to be the most challenged portion of our business and it’s no surprise, given the consumer dynamics that are at work. When you talk about our whole portfolio, I mentioned just a little bit earlier that the higher priced segments were under a bit of pressure and that’s absolutely true and it’s benefited sparkling, so sparkling decline was less than our overall decline, down about 8% versus overall 10%.
So I would say there’s been no real changes to the consumer dynamic over the course of the last nine months, except to say it may be a little bit worse than it’s been based on the higher unemployment levels and they are keeping people -- people are doing more entertaining at home. People are staying at home and the biggest channel that has suffered from that has been the on-premise cold drink channel.
Christine Farkas - Banc of America Merrill Lynch
Okay, and looking -- and if we look at the second quarter performance, for example, cold drink was down about six and take home down about three. Adjusting for the holiday, it still looks like it came in a little bit softer on a consecutive basis.
Is that fair?
Steven A. Cahillane
Yeah, I think that’s fair.
Christine Farkas - Banc of America Merrill Lynch
Okay, and if I could just follow-up with a margin question, John or Bill, SD&A leverage was negative this quarter. I’m curious if the pension factor had a lot to do with that because your cost savings appear to be on track.
Can you just maybe comment on that trend?
William W. Douglas
Sure, fair question -- the cost savings initiatives are on track. The pension did have a little bit of impact to it but more importantly, if you look at the quarter versus quarter comparison, given the business performance that we had in the third quarter of 2008, we actually had a significant reduction in our accruals for incentive compensation, to be quite frank, during Q3 of 2008 and with our ongoing very strong performance in 2009, year-over-year that’s a fairly significant impact looking at the reversal of accruals related to variable compensation in ’08 versus continuing to accrue against our target for business performance in 2009.
That was the most significant impact on that line.
Christine Farkas - Banc of America Merrill Lynch
Okay. Would you say that the accruals you said were the largest impact -- would you say the pension was greater or smaller than your volume leverage impact?
William W. Douglas
Smaller.
Christine Farkas - Banc of America Merrill Lynch
Okay. Thanks so much for that.
William W. Douglas
It was fairly modest -- it was about $0.015.
Christine Farkas - Banc of America Merrill Lynch
Great.
Operator
Next we’ll hear from Carlos Laboy with Credit Suisse.
Carlos Laboy - Credit Suisse
John, I was hoping that you and Steve could expand on this concept of value destroying volume. How much value destroying volume do you think is still in your North American system?
And the right mix, another topic you’ve touched on, the right mix that you are pursuing, doesn’t it necessarily require some more downsizing and more immediate consumption? And why is it a bad thing that we could see negative volumes for a couple of years that represent good solid earnings growth?
John F. Brock
Let me ask Steve to comment on specifically the situation around North America and then I’ll give a little more commentary on the bigger, broader question you asked.
Steven A. Cahillane
Good question. I don’t think quite frankly there is really a lot of value destroying volume left in our business as we look towards the end of 2009.
Now, having said that, there is clearly some volume that is better than other volume and we have elected throughout the course of this year to really drive our mix and very consciously try and drive our mix. It’s to the benefit of us, it’s to the benefit of the Coca-Cola Company, and quite frankly it’s very much to the benefit of our customers who have historically driven 12-packs and other configurations of 12-ounce cans and not been as aggressive at growing IC in their retail establishments and doing that helps improve their overall margins that they enjoy in our category.
Case pack water, as I mentioned, is clearly an area where there is a lot of very, very -- a lot of downward pressure on pricing and we have elected not to participate where it destroys value, so if it is going to destroy value, we are not participating. So as I look to 2010 and we build out 2010, as we said the NARTD category will likely not see growth but we will be well-positioned to gain share within that category with volume that is accretive and that adds value, not that destroys value.
John F. Brock
I totally agree with what Steve said, and I would add to it on broader basis -- we are really pleased with the way that our team in total has managed 2009. You know, we went into this year and I think we were very clear to ourselves and to the market that we were not going to be giving volume guidance going forward, that we were going to talk about revenue growth, that we think revenue is a combination of volume, price, and mix, and that the right driver for our financial metrics and our financial success is revenue first and foremost, underpinned by all three of those levers, recognizing each one of the three has a critical role to play.
And frankly, you need a good balance on a long-term basis but in any given year, I think you have to play with the hand of cards you are dealt and that’s what we have done we think exceptionally well this year. Now as we look to next year, we’d like to think we are going to be playing on a somewhat better market environment.
We are pretty pleased with the commodities situation. We think that gives us a little playing room that will be good, and we’d like to think consumer confidence is going to come back and frankly, I don’t know about that.
I mean, it continues to be a bit mixed. But in an ideal world, we’d like a nice balance of those three and we’d like to get revenues very much in line with our long-term objectives of 4% to 5% and operating profit of 5% to 6%.
That drives our business results in a very beautiful way. That’s what we’d like to do but the point is we are going to manage through whatever we have to manage through.
We’ve done it in 2009 and we are going to do it next year and so to your point, should we all sort of hold hands and say that maybe we are going to have some volume declines for a couple of years? I hope not but frankly, if consumer confidence stays down in the ditch and if commodities were to run up again, I think what you can assume we are going to do is manage in whatever way we have to so that we can achieve our financial objectives.
We made that very clear and that is where we are going to go. So I hope we don’t have to do what you just said but you know, if we do, we will figure out how to manage within that construct.
Carlos Laboy - Credit Suisse
Thanks.
Operator
Next we’ll hear from Alec Patterson from RCM Capital.
Alec Patterson - RCM Capital
Bill, could you just do me a favor and do a breakout on the revenue and COGS per case between mix and average selling price by region?
William W. Douglas
Most of the impact was on rate. Mix did have a slight favorable impact I think overall but it was -- the vast majority of it was rate.
Alec Patterson - RCM Capital
Greater than 80% -- that much? I mean, not just 60-40 but materially, like 80%, 90% rate?
William W. Douglas
I think three quarters is probably a safe bet.
Alec Patterson - RCM Capital
Okay, and do you see that -- sorry.
William W. Douglas
I was just going to say if you want to follow-up with Thor, we can get into some details off the call but I think the vast majority was rate.
Alec Patterson - RCM Capital
Okay. Would the same breakdown apply to COGS per case?
William W. Douglas
Yes.
Alec Patterson - RCM Capital
Okay, and that seems like a good kind of going forward, given the earlier comment about the poor margin cases kind of having been whittled down, the case pack water having been whittled down, that sort of the mix impact of whittling out the lower margin business is not going to be as big a factor going forward. Is that a fair statement?
William W. Douglas
It is but the biggest impact on mix from a COGS perspective is with the finished beverages that we are running through our system with respect to Powerade, Glaceau. Heretofore it’s been Monster.
We’re hoping to do some in-house manufacturing for Monster going forward but that’s been the biggest impact, more so than those lower profitable cases, to be honest. But your point is still valid.
I think we’ve got all those products in our stable for 2009 and I think the year-over-year increase will not be as dramatic going forward because they were in our portfolio for the entirety of 2009.
Alec Patterson - RCM Capital
Great. Thanks, Bill.
William W. Douglas
Operator, I think we’ve got time for one more question, it’s almost 11.
Operator
Our final question will come from Damian Witkowski with Gabelli & Co.
Damian Witkowski - Gabelli & Co.
Just a clarification -- you said before that you thought 2010 would probably see volume declines continuing for the entire NARTD category. Any thoughts on which categories in particular?
John F. Brock
Well, we are talking NARTD category --
Damian Witkowski - Gabelli & Co.
Meaning segments.
John F. Brock
Steve, do you want to --
Steven A. Cahillane
I would look at 2009 as being very informative for 2010 in terms of the same types of trends continuing, so sparkling has actually benefited to the detriment of higher priced still categories. I would anticipate that would continue.
Energy drinks have recovered a bit from a hit they took maybe 9 months ago. I would expect that to continue, so broadly the trends that we are seeing right now, I would anticipate continuing into 2010.
As we’ve said a couple of times, if we get lucky and we get some improvement in unemployment and consumer sentiment and so forth, I would hope that the whole NARTD category would raise and I think some of the stickiness will accrue back to the sparkling category. I think people have rediscovered sparkling in this environment and we are working very, very hard to make sure that that becomes something that we can sustain going into 2010 and beyond.
Damian Witkowski - Gabelli & Co.
And private label, I mean, are you losing shelf space to private label currently?
Steven A. Cahillane
No, we are not losing shelf space to private label. Private label has enjoyed a little bit of a resurgence in this economy.
They have grown throughout the course of the year. If you look at the latest Nielsen figures, however, their growth rate has now slowed -- it’s about half of what it was prior to that, so I think my own prediction would be it’s about as high as it’s going to get.
We are not complacent. We are watching it.
We don’t want to lose share to private label but we are not losing any shelf space to private label.
Damian Witkowski - Gabelli & Co.
And if I could just quickly, you said that case water was probably a negative 5% volume impact during the quarter -- any way to quantify what the operating profit impact was?
Steven A. Cahillane
Well, to clarify, the case pack water in the quarter was down about 20% so --
Damian Witkowski - Gabelli & Co.
Yeah, but I mean on the overall volumes in North America, I think you said it’s about half of the 10% decline.
Steven A. Cahillane
I think what we said or what we meant to say anyway was if you look at July for the Summer Olympic program and case pack water, that would represent --
Damian Witkowski - Gabelli & Co.
Oh, in total, okay.
Steven A. Cahillane
-- half of the declines we saw in total, yeah. And in terms of from an operating income standpoint on case pack water, it’s fairly immaterial.
Damian Witkowski - Gabelli & Co.
Okay, perfect. Thank you.
John F. Brock
Okay, well, thank you. Thanks to all of you for joining us today.
We appreciate your time and hope you have a very good day. Goodbye.
Operator
This does conclude today’s conference call. Thank you for your participation.