"Initial results of this effort are encouraging ... much hard work lies ahead ... Despite this progress, important challenges lie ahead."

Reviewing the quotes that Coca-Cola Enterprises (NYSE: CCE) CEO John Brock sprinkled across Tuesday's earnings release, I'm struck by the moderate-to-downbeat tone of the report. After all, if you read the major papers, Tuesday's news was all about how Coke "swung to a fourth-quarter profit" and how its "profit tops estimates." So what's with the half-smile from the CEO? Wasn't the quarter tremendous?

No, it wasn't
Put me in the CEO's camp on this one, folks. After reviewing the results, I agree -- there's still a lot of work to do.

Now, don't get me wrong. I love "earnings beats" as much as the next Fool. And I'm encouraged to see Brock sticking by CCE's "long-term objectives" of 4% to 5% revenue growth, 5% to 6% operating income growth, and "high single-digit earnings-per-share growth." But the news was anything but unqualifiedly good. To illustrate, look at the results for North America, where CCE generates about $7 out of every $10 in total sales. Volume dropped 2% in 2007, to which CCE replied by hiking prices 4.5%. Problem solved? Hardly. Rising prices for aluminum and sweetener pushed costs of goods sold (COGS) up 9.5%, erasing the sales-pricing benefits and pushing CCE's U.S. operating margin to 8.2%, down from 8.6% in 2006.

For comparison, CCE rivals Pepsi Bottling Group (NYSE: PBG) and PepsiAmericas (NYSE: PAS) pull down 7.9% and 9.9% operating margins, respectively. Cousin Coca-Cola Hellenic Bottling (NYSE: CCH) gets 11.1%, and Coca-Cola FEMSA S.A.B de CV (NYSE: KOF), 16.7%. The bottlers' parent companies, Coca-Cola (NYSE: KO) and PepsiCo (NYSE: PEP), earn 26% and 18.5% margins, respectively.

And while everyone in big-media land was jumping for joy over the earnings beat and return to profit under GAAP standards, I can't help but notice that on the cash flow statement, we find CCE booking just a 1.3% rise in free cash flow -- hardly what you'd expect to see with sales up 5.5% for the year.

A twist-off solution?
As I mentioned above, CCE predicts profits toward the upper end of its long-term guidance range, and that's great -- if it happens. You see, management aims to milk higher selling prices (relative to volume) on new product offerings glaceau, FUZE, and Campbell, arguing that because they are "sold primarily in single-serve packages," these products sell for more than "bulk" offerings. But here's the problem: Single-serve packages also consume more raw materials. Seems to me, CCE's COGS problem isn't going away any time soon.

Kinda makes Coca-Cola look smarter than ever for sticking with syrup and outsourcing its bottling activities, doesn't it? I wonder if that's why Motley Fool Inside Value recommended "KO" and not "CCE." Grab yourself a free trial and find out.

Fool contributor Rich Smith does not own shares of any company named above. The Motley Fool has a disclosure policy.