Coca-Cola Enterprises' CEO Hosts a Business Update and 2013 Guidance Conference Call (Transcript)

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 |  About: Coca-Cola Enterprises Inc. (CCE)
by: SA Transcripts

Coca-Cola Enterprises Inc. (NYSE:CCE)

Business Update and 2013 Guidance

December 18, 2012 10:00 AM ET

Executives

John F. Brock - Chairman and CEO

William W. Douglas III - EVP and CFO

Hubert Patricot -EVP and President, European Group

Thor Erickson – VP, Investor Relations

Analysts

Steven Powers – Sanford C. Bernstein & Company, Inc.

Judy Hong – Goldman Sachs

Caroline Levy – CLSA Limited

Bryan Spillane – Bank of America Merill Lynch

Mark Swartzberg – Stifel Nicolaus

John Faucher – JP Morgan

Bill Schmitz – Deutsche Bank

Alec Patterson – RCM

Jonathan Fyfe – Mirabaud Securities Limited

Operator

Good day, and welcome to the Coca-Cola Enterprises 2013 Business Outlook conference call. At the request of Coca-Cola Enterprises, this conference is being recorded for instant-replay purposes. At this time, I would like to turn the conference over to Mr. Thor Erickson, 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 outlook for the remainder of 2012 and for 2013.

Before we begin, I would like to remind you of our cautionary statements. This call will contain forward-looking management comments and other statements reflecting our outlook for future periods. These comments should be considered in conjunction with the cautionary language contained in this morning’s release as well as the detailed cautionary statements found in our most recent annual report on Form 10-K and subsequent SEC filings. 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. Hubert Patricot, President of our European Group is also with us on this 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 welcome each of you to our business update as we discuss our expectations for full year 2012 and our outlook for 2013.

As you’ve seen throughout the year, we have faced challenging operating conditions. But despite these headwinds, we’re managing the leverage of our business to drive growth, create benefits for our stakeholders and most importantly, deliver value for our shareowners. We believe we have both the right marketplace opportunities and the right operating strategies to deliver on our goals over the long term.

Now as we review our outlook for full year 2012, we expect earnings per diluted share at the higher end of our range of $2.20 to $2.24. This includes a negative currency impact of about 7.5% to the full year EPS.

We continue to expect net sales and operating income to grow in the low to mid single digit range on a comparable and currency neutral basis and that includes the impact of the French excise tax increase. We now expect free cash flow of about $500 million and capital expenditures of approximately $375 million.

While we remain optimistic about our future, we also are realistic about the challenging marketplace conditions in which we operate. We face continuing price competition in Great Britain, the ongoing impact of the French excise tax increase and the effects of soft macroeconomic trends. Yet we remain confident about our future growth as a successful player in the NARTD category and have reaffirmed our long term targets which Bill will discuss in more detail.

Now as we begin the discussion of our 2013 guidance, it’s important to note that there are a range of scenarios for 2013, including return of cash to shareowners and potential merger and acquisition activity. As a result, our discussion today will provide color on the underlying business and a base case for how we plan to manage our capital structure.

While our primary focus is investing in our core business to ensure we’re optimally equipped for growth. We’ll also carefully highlight other high return investment opportunities, including potential acquisitions. We will determine what strengths we can bring to the business and decide whether the potential acquisition will create additional value for shareowners. Importantly, any M&A opportunity will be evaluated against several alternatives, including the return of cash to shareowners. Ultimately, our decisions relating to these scenarios may affect our guidance. We’ll update you on any decisions and their related impact as appropriate.

We expect 2013 earnings per diluted share growth of approximately 10%. This growth reflects mid single digit growth in both net sales and operating income and the ongoing benefits of share repurchase. These figures are comparable and currency neutral. Based on recent rates, currency translation is expected to have a slightly positive impact on 2013 EPS.

Let me note that this guidance also reflects expected net pricing per case growth at a lower rate than the expected increase in cost of sales per case growth. While we expect costs in 2013 to be above recent trends, we believe it’s prudent to take a cautious approach to pricing next year, particularly given macroeconomic weakness and overall marketplace conditions. Over time we remain fully committed to maintaining our gross margins and expanding our operating income margins.

We also expect solid free cash flow of about $450 million to $500 million net of cash restructuring expenses of approximately $125 million. Capital expenditures are expected to be approximately $350 million. Continued solid free cash flow is central to our ongoing focus on returning cash to shareowners. We’ve already completed our current share repurchase program with 27 million shares repurchased in 2012 for $780 million.

Recently our board authorized the new $1.5 billion program to begin in 2013 and we expect to repurchase at least $500 million of our shares next year. In addition, we also plan to increase our 2013 dividend payment to a range of 30% to 35% of our comparable and currency neutral earnings. This will be the sixth consecutive year of dividend increases and represents an expected annualized 2013 dividend increase of at least 15% above 2012. This increase, coupled with the success of our prior share repurchase programs and the start of a new larger program beginning next year, are favorite demonstrations of our commitment to creating value for our shareowners. Bill will provide more details on this outlook and our 2013 targets in just a minute.

Taking full advantage of the opportunities ahead and achieving sustained growth requires solid operating and marketing initiatives. Our 2013 plans are centered on maximizing the value and popularity of our world-class brand portfolio and enhancing our proven customer value creation model. In addition, we will drive increasing effectiveness in day to day execution. For example, as ongoing marketplace and macroeconomic challenges work to erode customer margins, we are building on initiatives to tailor our go-to market strategies channel by channel, customer by customer.

By utilizing enhanced shopper insights in matching product and package offerings to customer and consumer preferences, we can and will increase value by continuing to focus on our goal of being our customer’s most valued supplier. An important element of these customer service efforts is the business transformation program we discussed with you during our third quarter call. This work would improve alignment of our field sales organization resulting in a more effective and efficient customer service model.

This initiative would also improve the effectiveness and efficiency of our back office functions and better align our operating structure with the dynamic conditions we face in the marketplace. Although we are in the early days of this work, we have achieved good initial progress and the initiative is on track.

We’re also making excellent progress with the reorganization of our business in Norway. We have achieved significant success to date, including the introduction of non-returnable and fully recyclable small PET into the marketplace. We will add additional PET packaging options and transition from direct store delivery to central warehousing in the coming months.

As we work to increase the effectiveness of our operations, we’re also moving forward with excellent brand and marketing strategies for next year. Our plans will emphasize our Cola brands which are expected to generate a majority of our growth. Our efforts will include strong support for Coca-Cola Zero which continues to achieve solid growth and a new integrated campaign highlighting the 30th anniversary of Coke Light and Diet Coke.

We’ll also introduce targeted new packaging such as 1.75 liter bottles and brand extensions such as Coca-Cola Cherry Zero and will increase the use of natural sweeteners such as Stevia, with Sprite and Vitaminwater.

Now, let me leave you with a few key points. Each of our efforts and strategies is designed to enable us to reach our most important goal, creating enhanced value for our shareowners. To accomplish this, we continue to focus on our three strategic priorities which are centered on developing our brands, being our customers most valued supplier and developing our people. We also remain fully committed to sustainability.

There is a solid business case for our CRS work, particularly at a time when our category and our industry are under scrutiny. Most importantly, we continue to have confidence in our ability to deliver long term growth. This confidence is based on the value consumers demonstrate for our brands and products, the strength of our operating strategies, the skill and dedication of our employees and the resilience of the beverage category. These assets, coupled with a strong and flexible balance sheet, leave us well positioned to meet the changing demands of the future and to seize the opportunities ahead.

Thank you for joining us today and now I’ll turn it over to Bill who will provide a more detailed discussion of our financial outlook for both 2012 and 2013.

William W. Douglas III

Thanks, John and thanks to each of you for joining us this morning as we discuss our outlook for full year 2012 and our initial guidance for 2013.

As John reviewed, we expect full-year 2012 earnings per diluted share at the high end of our previously disclosed range of $2.20 to $2.24. This reflects our focus on managing the levers of the business in the midst of continued headwinds, notably in Great Britain and France. Our guidance reflects the ongoing benefit of our recently completed share repurchase program, modest improvement in the outlook for full-year taxes and a negative full-year currency impact of approximately 7.5%.

As we discussed in our third quarter call, we continue to expect comparable and currency neutral net sales growth and operating income growth in the low to mid single digit range for full-year 2012.

Weighted average cost of debt is expected to be approximately 3% and our effective tax rate is expected to be in the range of 26% to 27%.

We also expect to end the year with strong free cash flow of approximately $500 million and capital expenditures will be approximately $375 million.

Let me note that the challenges highlighted during our third quarter call have continued as we’ve moved into the fourth quarter. These challenges include persistent macroeconomic weakness, ongoing price competition in Great Britain and the marketplace impact of the increased French excise tax.

Additionally, though November was better than October, fourth quarter volume is expected to be further impacted in France from two factors. First, we are hurdling double digit growth from last December and second, we anticipate that our customers in France will be keeping soft drink inventories relatively low to take advantage opportunistically of current beer prices in advance of a very significant increase in the excise tax rate on beer effective January 1, 2013.

Given these factors, we expect overall fourth quarter volume to decline and this has been factored into our financial guidance. Despite these challenges, we continue to effectively manage the levers of our business, including price, cost, operating expenses and our balance sheet to continue driving value. We view these current initiatives as short term in nature and remain confident in our ability to return to volume growth in 2013 and sustain our earnings momentum.

Now let’s look forward to our outlook for next year. We expect comparable currency neutral diluted earnings per share growth of approximately 10% above 2012 results. Both net sales and operating income are expected to grow in a mid single digit range and again both are comparable and currency neutral.

Though too early to predict full year 2013 impact based on recent rates, currency translation would have a slightly positive impact to comparable diluted EPS growth. This guidance reflects an anticipated decline in gross margins with expected net pricing per case growth somewhat lower than on average above cost of sales per case growth for ’13. Additionally, overall gross margins will be negatively impacted next year as we transition from returnable packaging to recyclable packaging in Norway.

We also expect operating income margins to be down modestly. Net income margins are expected to decline driven by increased interest in tax expense. We remain committed to preserving or expanding margins over time. However, given the current sustained macroeconomic weakness and the challenging marketplace conditions, we are deciding to take a more modest approach to pricing next year.

Weighted average cost of debt is expected to be approximately 3% and the effective comparable tax rate for ’13 is expected to be in a range of 26% to 28%. Again outlook is comparable and currency neutral.

We expect 2013 free cash flow to be in a range of $450 million to $500 million with capital expenditures of approximately $350 million. This level of free cash flow as John mentioned is after expected cash restructuring costs of approximately $125 million.

We remain committed to creating value for our shareowners by continuing to return cash through a combination of dividend and share repurchase. Despite the ongoing economic headwinds, we are optimistic about our long term growth potential. As a result, we have affirmed our long term growth targets. These include net sales growth of 4% to 6%, operating income growth of 6% to 8% and high single digit EPS growth. We also expect an increase of at least 20 basis points annually for return on invested capital and again, all these targets are comparable and currency neutral.

I will mention we have made one revision to our long term guidelines. We now expect capital spending in a range of 4% to 4.5% of net sales. This is down from our prior target of approximately 5% reinvested in CapEx of net sales. This is the result of diligent capital management as well as the impact of the French excise tax increase, effectively increasing our net sales, which is the denominator for this equation.

We also have affirmed our long term capital structure targets, again a range of 2.5 to 3 times net debt to EBITDA. We expect to end 2012 with a net debt to EBITDA ratio of just over 2 times and expect to end 2013 with a ratio of no less than 2.5 times net debt to EBITDA. These levels may be impacted by decisions we make as we continue to explore ways to best manage the optionality of our balance sheet. In the event of M&A activity, we will be willing to allow these levels to rise modestly above the 3 times net debt to EBITDA and would subsequently use the free cash flow to reduce the debt level, returning into the range of 2.5 to 3 times.

Absent M&A activity, we do expect to operate within the 2.5 to 3 times range while maintaining some balance sheet flexibility. In this scenario, we will maintain this leverage ratio and return additional cash to shareowners through a combination of continued dividends and share repurchase.

As you saw in our release this morning, we continue to advance our plans to return cash to shareowners beginning next year. We have completed our latest repurchase program with $780 million in shares repurchased during 2012. This is in addition to the $1 billion program completed in 2011. To build on this progress, the Board has authorized a new $1.5 billion program that will begin in January. Our goal is to repurchase at least $500 million of shares during 2013.

In addition, we also plan to increase our dividend in the first quarter of 2013. We plan to increase the payout to approximately 30% to 35% 2013 comparable and currency neutral earnings per share. This would represent an increase of at least 15% above current annualized dividend levels and as John mentioned, is the sixth consecutive year of dividend increases.

These are significant commitments and they reflect our dedication and focus on managing our business to achieve sustained value for our shareowners.

In closing, let me note that this year and our expectations for 2013 have been challenging in many respects. However, with the sustained popularity of our brands, the high levels of execution generated by our people and the strength of our balance sheet, we continue to manage the various levers of our business to deliver sustained, value building growth.

Again, thanks for joining us today and now John, Hubert and I will be happy to open up the line and take your questions.

Question-and-Answer Session

Operator

(Operator instructions). Our first question is from Steven Powers of Bernstein. Your line is open.

Steven Powers – Sanford C. Bernstein & Company, Inc.

Good morning. Thanks guys. You’re looking for mid single digit top line growth next year. Can you maybe decompose that price versus volume for us, and maybe also a bit by geography?

John F. Brock

Hi Steve and good morning. I think it’s been pretty clear over the last several years as we give guidance, we don’t generally deconstruct revenue growth particularly. We’ve been very clear, our targets are 4 to 6 revenue, 6 to 8 operating income and high single digit earnings per share growth and we have reaffirmed those long term growth targets. And in terms of managing revenue, we think that is a job of balancing volume, price and mix and it’s something that we think we have to be in the position of adjusting and playing between those three areas based on what’s going on, based on macroeconomics, based on competitive pressures, based on relationships with customers and consumers and we think we’ve actually done a pretty good job of doing that. So I would say we do expect modest volume growth in 2013 as one of the components of revenue growth, but it’s not something that we’re going to be very explicit about because again, we think we need to be able to manage all three of those levers effectively which we think we can do.

Steven Powers – Sanford C. Bernstein & Company, Inc.

Okay, that helps. Maybe just, for the triangulated a little bit, or allow us to – Bill, the commodity and – the cost per case inflation that you're expecting next year, is 3.5% the right number to think about?

William W. Douglas III

That’s a reasonable expectation. It’s early on. We do have a significant part of our commodity exposure hedged, but there is some remaining variability. Typically it tends to be more in the energy sector and ultimately impacting our PET, but that’s not an unreasonable range.

Steven Powers – Sanford C. Bernstein & Company, Inc.

Okay. And then, of the three major headwinds that you cited in terms of the overall macro weakness, competition in the UK, and then pushback from French retailers on incremental pricing next year, is there a rank order there? Can you help us kind of quantify the headwinds in each case and/or how you expect them to trend into and through 2013?

John F. Brock

Yeah. I think Steve those are all issues, but I think frankly, us or anybody else trying to deconstruct those into independent vectors and what their impact on the marketplace or our business specifically would be is very, very difficult to do. And so we just don’t really have a way of doing that. I think those are the three key ones and I guess I would call them all pretty important. I don’t think we could say one’s more important than the other. We’re assuming they’re all going to continue which we think is the right way to plan for our business and we’ll move forward that way. But I don’t think there’s any way we really could prioritize them.

Steven Powers – Sanford C. Bernstein & Company, Inc.

Okay. I guess just changing gears, one last question, then I'll step aside. I was wondering if you had any thoughts on the recent deal structure announced between Coke and Femsa in the Philippines, and whether you consider something similar on Germany, i.e. something less than full ownership, especially if it allowed you to, for a period of time, not consolidate the results into your P&L.

John F. Brock

Well, we’re obviously aware of the Philippines transaction and I think it’s fair to say that we would continue as we have to evaluate and consider any and all options from an M&A standpoint and I would also like to emphasize again, our primary focus here has always been our core business, but we also carefully evaluate potential high return investment opportunities and Germany is in that category. So I think that’s about as much as we can say about the Philippines transaction. It’s obviously interesting, but from our standpoint our focus is on creating value for shareowners. Any M&A opportunity that we vote to pursue whether to Germany or anything else would go through our very careful and methodical due diligence process and ultimately would be evaluated against a variety of alternatives and one of those of course would be the return of cash to shareowners.

Steven Powers – Sanford C. Bernstein & Company, Inc.

Okay. Thank you very much.

Operator

Our next question comes from Bonnie Herzog of Wells Fargo. Your line is open.

John F. Brock

Bonnie, are you there?

Operator

Bonnie, if your line is on mute, could you please un-mute it? Our next question comes from Judy Hong of Goldman Sachs. Your line is open

Judy Hong – Goldman Sachs

Thanks. Good morning. A couple of questions from my end. So first, in terms of 2013 outlook, so Bill, I think you said you do expect volume to be up in 2013. So can you give us some perspective on is it really mostly lapping the poor weather in 2012? Or do you have confidence that maybe some of the programs that you have in place for next year will actually get some of the – it will allow you to see improvement in terms of the volume? And then secondly, just in terms of your negotiation now, conversation with the French retailers, I think that's just starting to take place now. So if you can give us any color as to your level of confidence that the retailers will refocus on growing the sparkling category again in 2013? So any color there would be great.

John F. Brock

Yeah. I’ll tackle the first one of those and I’ll ask Hubert to talk about the second one. Judy, in terms of volume, I think our business in 2013 we believe will be the result of a whole host of positive factors. We’ve got some really exciting marketing plans and programs that we’ve worked out with Coke. The whole Polar Bear Arctic program in the first quarter is really first rate. The 30th anniversary, 30th birthday of Diet Coke, Coke Light is terrific. We continue to have really good plans and programs with our customers. You mentioned the weather and yeah, the weather in Europe in the summer of 2012 was the wettest and coldest in maybe 100 years. So could that help the situation and the answer is sure. We don’t have the first year impact of the French excise tax and Hubert will comment here in a minute on the situation in France, but that’s obviously a positive. And again, I don’t think there’s any way to deconstruct all of those. I think when we put it all together, we think we’re going to be playing in a continuing challenging macroeconomic situation. But we think it’s more positive than the final situation as we retrospectively look at 2012. And so that’s why we’re willing to say that we would hope for and expect some modest volume growth. Hubert, you want to comment please on the French tax and customer situation?

Hubert Patricot

Judy, as you said, we are only starting a conversation for next year with the French retailers. These conversations in general are never easy. There was a new factor this year which was of course the tax increase which was quite significant for the category and it was not reflected yet totally in the pricing. About two thirds of that has now been reflected in our pricing. So some improvements lately in that form. That’s why I think it’s too early to talk about being optimistic or not, but I think the ration to the plan that John presented or mentioned in terms of marketing plan for next year, new products like Cherry Coke Zero for example, new pack like the 1 liter pack have been relatively good. And so we think that with the improvement on the retail selling price to consumers and the combination of their marketing calendar for next year, we have a good combination to put the category back on growth in France too for next year.

Judy Hong – Goldman Sachs

Okay. And then Bill, just on the buyback comments, so at least $500 million in 2013, is that a number that you would implement, regardless of what decision you make on an M&A front. And then, as we think about the timing of that buyback, is there any help you can give us? Is this going to be a little more front end loaded as the May timing comes up in terms of the right of first refusal on the Germany situation?

William W. Douglas III

Sure Judy. I guess firstly, the $500 million is a level that we are fairly confident that we’ll be able to execute, but there is always flexibility depend on all the variables we reserve the right. But I would say we’re fairly highly confident that we would complete the $500 million on virtually any scenario, but not all scenarios. And with respect to timing, I think we’ll reserve comment on judgment then give some clarity on that probably when we do our Q1 call at the end of April.

Judy Hong – Goldman Sachs

Got it. Okay, thank you.

Operator

Our next question comes from Caroline Levy of CLSA. Your line is open.

Caroline Levy – CLSA Limited

Good morning everybody. A couple of questions. On the cost outlook, I'm assuming you would have better visibility on the first half than the second. Can you talk about what sort of inflation you're expecting overall? I think we talked about 3.5%, but is that about the right number for the first half? And in that context, from the way you're talking about pricing, it doesn't feel like you’ll necessarily get more than 2% in the first half, given how much pricing you got in the first half of last year. Can you just help us understand if the margin outlook is more negative in the early part of the year than the late?

William W. Douglas III

Caroline, I’m not going to do a very good job of answering your question. What we said, what I said was that we expect the cost of goods inflation to be somewhat higher than what we’ve experienced in recent times. This year our current expectation is 2.5 to 3. I believe Steven said is 3.5 a reasonable number and I said that’s not an unreasonable number. So just to be clear. And with respect to timing, I think clearly we have a little bit more line of thought on the first half of the year with PET and the exposure with the greater on the back half of the year. But I think it’s a little early to get into quarterly phasing of cost and price realization again. Don’t see huge variance at this juncture, but it’s a little premature to get that granular. We would I would say however overall expect the level of operating income growth to be somewhat back half weighted as quite frankly has been the case the last couple of years as well.

Caroline Levy – CLSA Limited

Okay. And then if you could just help us with the restructuring which you announced a while back, but again how that’s flowing, what the major drivers of the cost savings are and which line it shows up in in the income statement.

William W. Douglas III

Sure. It’s early days, but it’s going well. The main impact that we’re going to see in 2013 is going to be from our field sales restructuring and that’s going to flow through the SG&A line. And again just to reprise what we said on the third quarter call, we are expecting a total restructuring charge of about $200 million. That charge is going to be a little front end loaded. The benefits are circa $100 million and will be accrued circa one third, one third, one third in ’13, ’14 and ’15 with a full $100 million run rate recognized. And again, this is all subject to finalizing our works counsel discussion which are underway but won’t be fully completed until the first quarter. We’ve also got some back office projects, one in particular in finance where we’re setting up a captive shared services center. We had that in the U.S business when we owned that and now we’re completing that exercise in Europe for finance. But again, most of the benefit is going to flow through SG&A in 2013.

Caroline Levy – CLSA Limited

Thank you. And then just lastly, just a structural question because there’s just so much press here, certainly on health and wellness and I think you’ve dealt with it there. But are you sensing any changes in consumer traction, retail behavior around sugared soft drinks?

John F. Brock

Let me just say that we and the Coca-Cola Company and the Coca-Cola system have this whole issue of health and wellness right at the top of our agenda. We recognize that we need to be a big part of the solution as opposed to being a part of the problem and I think it’s fair to say you’re going to see a lot more about this as we go down the road. We are tackling it both from a defensive and an offensive standpoint. Defensively, we want to make sure that we’ve got ourselves in a good position in Europe to respond to any issues that come up, whether they’re regulatory issues, whether they’re tax issues, ingredient issues or health and wellness allegations. And so we in the Coca-Cola Company have put together a far more significant program around those kinds of activities which for example involves UNESDA which is the European equivalent of the American Beverage Association.

We’re taking a much more strength in leadership role there and believe we’ll be better positioned to deal with issues as we go forward. From an offensive standpoint, again we’re excited about what we’re hearing from the Coca-Cola Company and I think you’re going to see a lot more of that in days to come about how we really can work together as a system to make sure that people around the world understand that there are a whole host of things that we’re doing and doing well. We’ve got a lot of great brands. We’ve got a terrific category and a great industry. We’re going to be working hard to make sure consumers understand all of those. To answer your question specifically, is there any new particular trends, I’d say no.

I think we recognize that there are issues out there. There are people who are detractors. There are people in the ingredients area who love to use bad science or no science at all and talk about some of our ingredients and we recognize that’s a fact of life and we’ve got to play with it. I don’t think it’s again getting any worse. I think it’s just – it’s an issue that’s out there that we’re going to have to deal with and as I said, we are going to be even more defensive and offensive as we go down the road and I think you’ll see us being a part of the solution here, not a part of the problem.

Caroline Levy – CLSA Limited

Thanks so much, John.

Operator

Our next question comes from Bryan Spillane of Bank of America. Your line is open.

Bryan Spillane – Bank of America Merill Lynch

Good morning. Just two follow up questions. The first one, just on Germany or the negotiation or the vetting you’re doing in Germany. When it was originally announced, if I remember this correctly, what you were analyzing or were speaking to Coke about was their stake of the German Bottler which is less than 100% ownership. So I just want a point of clarification. Are you looking at the potential to own 100% of it just Coke stake or is there a separate negotiation you have to do with the other owners as you’re looking at the German acquisition?

John F. Brock

Yeah. I don’t think there’s much to say about that particular issue other than any discussions that we would have around Germany will be with the Coca-Cola Company, full stop and that’s what we would expect to do and that’s what we will do. So the minority owners there from our standpoint are not part of the discussions.

Bryan Spillane – Bank of America Merill Lynch

So the minority owners then would have a separate negotiation with Coke. I guess my question is, your intention is to negotiate for 100%, not for a majority stake with minority owners.

John F. Brock

Yes. I think that’s a reasonable assumption and I don’t think we’re in a position to comment about honestly what the minority owners would do. But I think it’s not an unreasonable assumption that they would talk with Coke, not with us.

Bryan Spillane – Bank of America Merill Lynch

Okay, great. And then just one other follow up on the pricing expectations for next year. Is what little pricing you have or the modest pricing that you have embedded for next year, is that just a wraparound from pricing actions in 2012? Or are there some instances of actual like incremental pricing that you’ll be putting in certain markets or in certain places for next year?

John F. Brock

Let me ask Hubert to talk about that one.

Hubert Patricot

No. most of it will be driven by headline pricing increase taking place next year mostly in the first quarter in GB and France. But again this has to be negotiated with trade and of course part a;lso will be driven by some mix impact that we’ll have some price increase discussions going forward in 2013.

Bryan Spillane – Bank of America Merill Lynch

Okay. And that would be in GB and France and it’s still a little bit to be determined yet in terms of how that negotiation goes with the trade. Is that fair to say?

Hubert Patricot

As always at the time of the year most of it will be concluded for Q1 and the same early Q2 in Sweden. Yes, you’re right.

Bryan Spillane – Bank of America Merill Lynch

Okay, great. Thank you.

Operator

Our next question comes from Mark Swartzberg of Stifel Nicolaus. Your line is open.

Mark Swartzberg – Stifel Nicolaus

Yeah, thanks. Good morning gentlemen. Two part question, John, on the volume outlook as well here. Firstly, how happy are you with the level of spending behind your brands generally? And then secondly, I hear you’re talking about there’s many factors here in trying to get the volume being back in the positive territory next year, but if you have to put something or some set of factors at the top of the list, is it this France excise tax year-two effect? Something has to be giving you the confidence that you’re going to get out of this flat or negative territory to positive territory next year.

John F. Brock

Well, the first one, the answer is yes. We in the Coca-Cola Company have a continuing positive relationship and we are – I think the word would be very, very excited about what we see coming out. We gave you some headlines on some of the major marketing programs. I think we’ve got as good a marketing calendar as we’ve ever had and I think the level of spend is going to be very competitive and putting all of that together along with packaging and product innovation gives us confidence that we are operating from a position of strength. So are we happy on that front and the answer is yes, we’re happy. Obviously there are a lot of things we wish we could change, but those are generally things outside of our control like macroeconomics. But we’ve got a good program for 2013 and in terms of the volume, I don’t think it’s de-constructible. We don’t have a French excise tax on the table and it’s clear now in retrospect that that tax was not only quite significant, but it also brought about some challenges in the marketplace, particularly in terms of relationships with customers which were unfortunate.

But the good news is we don’t have that this year. Most of the tax is now reflected in the marketplace and while our pricing discussions with our customers will be challenging, particularly because of some of their margin compression, the fact is we don’t have the tax to deal with. So that’s a good thing. Weather, we’d like to think we had at least a normal summer. Almost anything would be better than last year. So that gives us confidence. So you put all those together and it’s all of those things. I would say I don’t think we think macroeconomics we’re going to be any better. So if you’re asking the question do we think overall economy is going to be driving consumption in 2013 versus ’12, I would say no.

Mark Swartzberg – Stifel Nicolaus

That’s great. And if I could, I may have missed it Bill or John, but just in the quarter, can you give us some sense, you said November better than October, can you give us some sense just by region. Was any region positive? Are we talking about less bad negatives in November?

John F. Brock

I think your comment less bad is accurate and I would say directionally that’s continuing as we head to the end of the year. I think we will reserve geography by geography report when we actually give our call in February.

Mark Swartzberg – Stifel Nicolaus

Okay, fair enough. Thank you.

Operator

Our next question comes from John Faucher of JP Morgan. Your line is open.

John Faucher – JP Morgan

Hi. Quick question for you. You’re talking about modest volume and modest pricing and then with the operating margin down you’re still going to do mid single digit revenue and mid single digit operating profit growth. So I guess the question is, that would seem to imply that any operating margin decline would be relatively small. Is that a fair statement?

John F. Brock

Yeah, that’s a fair statement, John.

John Faucher – JP Morgan

Okay. And then as you look this, the $500 million, can you give us two things on that which is at least $500 million? So what would cause that to move up from there I guess as we look towards what could be with $500 million at the low end. And then can you talk a little bit about, with the potential Germany decision coming down the pike, is that more of a first half type of thing or should we and then you’ll decide after Germany? I’m just thinking in terms of mapping out the buyback how much we build in for the first half versus the balance of the year at this point.

John F. Brock

Sure. If I’m tracking you, you had two ask. I’ll give you one. The $500 million, again we’re fairly confident that we’re going to complete that under virtually any scenario. I think the scenario that would say we’re going to do more is if we do not have eminent meaningful M&A activity coming down the pipeline during the course of 2013, then we would do more share repurchase and work to achieve a net debt to EBITDA level of at least 2.5 times by 12/31 2013. With respect to timing, again I think we’ll wait until April till we get more specificity on the timing of the share repurchase.

John Faucher – JP Morgan

Okay. But it seems as though that would indicate that the $500 million at least is relatively front half weighted pre-Germany decision?

John F. Brock

Well, I think we’ve obviously looked at our capital structure and feel comfortable with the level of $500 million under virtually any scenario. How we affect that from a timing perspective we’re going to wait until April to comment on.

John Faucher – JP Morgan

Okay, thank you.

Operator

Our next question comes from Bill Schmitz of Deutsche Bank. Your line is open.

Bill Schmitz – Deutsche Bank

Great. Thanks. Good morning guys or afternoon I should say. When we think about the competitor environment in the UK, has there been any change given the consolidation that’s happening with one of your competitive bottlers?

John F. Brock

Let me just comment on the transaction then I’ll ask Hubert to comment on what’s going on in GB. Both of those competitors are good, solid competitors and by combining they’ll be a solid competitor. Our view is that that’s simply a fact of life that we will need to deal with and we will and we’ll see where it all goes. Conceivably coming out of that could be some positive thinking and decisions in terms of how promotional planning and pricing in GB is handled. That would be a good thing we think from an industry standpoint if that happens. But obviously we’ll have to wait and see. But Hubert, you want to make any comments? Obviously the transaction hasn’t been consummated. So to talk about any impact of the transaction itself I think is premature. But just in general about what’s going on in GB Hubert can comment.

Hubert Patricot

Yeah. In GB, regular we see periods of planned promotional activity and 2012 was no different. If we look at this kind of data, over the past three months ending October 31st, the competitive price increase growth has been about half what the CCE has put in the market and although we lost a bit of pulling share, we maintained our value share. More recently and this may be in the Cola segment, the scanner data has negated a temporary more rationale pricing level in November and we have grown both volume and value share in November. But really too early to tell whether this is a trend there or not and we are cautious that next year promotional activity in GB for the moment. And we go into 2013 with a very strong plan, combining promotional activities, but also packaged differentiation, again with one single objective which is to continue our profitable growth in GB.

Bill Schmitz – Deutsche Bank

Got you. And then I’m trying to scratch the head on the inflation guidance or the implicit inflation guidance. Can you just talk about where you’re seeing the inflation? Because if you look at spot prices, except for sweeteners, I think everything else is sort of flat or down. So is this a timing in the hedge activity that’s playing out right here?

John F. Brock

Not really, Bill. I’ve talked or alluded to this on some previous calls. The vast majority of the inflation is being driven by the EU sugar pricing in 2013 and I wouldn’t think you guys would have much line of site to what that is, but that’s driving the vast majority of the inflation. It’s hard to track that on any indices because it is not world sugar. It’s the EU sugar regime is driving it. It’s not so much the timing of the hedges, although that does have potentially some impact, but that’s not really what’s driving the issue ’13 versus ’12. If you’re following world sugar prices, that’s not going to be of any help at all in trying to understand what’s going on with the EU sugar regime. So that’s something we’ve said before. But it is the biggest single driver of the cost impact that we just talked about.

Bill Schmitz – Deutsche Bank

Will there be some offset with some either moderation or pullback of some of the other commodities now?

John F. Brock

Absolutely, but that’s factored into the overall outlook that we are alluding to at this point and I probably would get a little bit more specifically on the call in February with the ’13 and some of the sub components. But suffice to say EU sugar is the vast majority in inflation.

Bill Schmitz – Deutsche Bank

And then just one last one if I could, when do we need to start worrying about the price gaps? Because it seems like if you look at it across the countries where you compete and of course I’m just using the Nielsen data, it seems like the price gaps continue to widen. Will there be a point in time where you have to take corrective action if your competitor doesn’t agree to follow some of these price increases?

John F. Brock

I’ll let Hubert answer that one. Sorry, we had a little confusion who was going to answer it.

Hubert Patricot

As noted and said by John and Bill, we’ll have a more modest approach to pricing moving into 2013 just to reflect of what he just said. We want to remain competitive, but it would be a combination of price increase, but also mix management that we are looking at that. But we think there is a way to continue to build value by taking pricing and finding the right balance between volume and pricing moving forward.

Bill Schmitz – Deutsche Bank

Great. Thank you guys. Have a nice holiday.

John F. Brock

Operator, we have time for two more questions.

Operator

Our next question comes from Alex Patterson of RCM. Your line is open.

Alec Patterson – RCM

Yes, thanks. Quick ones. Bill, just on the cash flow, deferred taxes has been something you’ve ramped up as a cash use and it’s supposed to reverse. Could you provide an update on that? And then secondly, just an OpEx question, the revenue per case outlook as you switch from returnables to one way packaging, is that going to impact the mix for the overall company?

John F. Brock

First question is that is expected to – the deferred tax cash S-curve as we call it internally, is expected to modestly turn in 2013. So while that had been a headwind for us, that should be neutral to maybe an ever so slight positive in ’13. Again we’ll give more specific outlook on that in February when we see exactly where we end the year with the tax situation. But directionally that’s where we’re heading. And you are correct in your second question particularly – related to Norway as we do that transition, the market dynamics, both of the packaging as well as the route to market going from DST which is provided by us to warehouse delivery where the customer is taking it on, changes the value stream from a revenue perspective being slightly dilutive on the gross margin line, but then that is neutralized to a large degree when you get to the operating income margin because we’re no longer having the delivery expense. It’s a fairly modest overall impact however when you look at the company in total given the size of the business in Norway relative to the total. But intellectually I think you’re thinking about it correctly. It would be slightly dilutive from a gross margin perspective.

Alex Patterson – RCM

Okay. Super. Thank you.

Operator

Our final question comes from Jonathan Fyfe of Mirabaud. Your line is open.

Jonathan Fyfe – Mirabaud Securities Limited

Hello guys. Just on Q4 and then in 2013. I think there’s an extra trading day in Q4. Just wondering if that was included in your volume guidance for the fourth quarter?

John F. Brock

Yes it is. It’s included and it does have a modest but noticeable impact in the quarter. On a full-year basis it’s fairly negligible, but yes, that is included.

Jonathan Fyfe – Mirabaud Securities Limited

Okay. Thank you.

John F. Brock

Okay. Well let me say thank you to all of you for joining us today. We appreciate your time and we wish all of you the happiest of holiday seasons and New Year celebrations. Have a great day.

Operator

Ladies and gentlemen, this concludes the conference for today. You may all disconnect and have a wonderful day.

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