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Coca-Cola Enterprises Inc. (NYSE:CCE)

Q3 2011 Earnings Call

October 27, 2011 10:00 AM ET

Executives

Thor Erickson – VP, IR

John Brock – CEO

Bill Douglas – CFO

Hubert Patricot – President, European Group

Analysts

Steve Powers – Sanford Bernstein

Mark Swartzberg – Stifel Nicolaus

Lauren Torres – HSBC

Kaumil Gajrawala – UBS

Caroline Levy – CLSA

Judy Hong – Goldman Sachs

John Faucher – JP Morgan

Brett Cooper – Consumer Edge Research

Operator

Good day, and welcome to the Coca-Cola Enterprises Third Quarter 2011 Earnings Conference Call.

At the request of Coca-Cola Enterprises, this conference is being recorded for instant replay purposes.

At this time, I’d 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 2011 results and our outlook for the remainder of 2011.

Before we begin, I’d 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 earnings 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 the call this morning. Following the prepared remarks, we will open up 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 the follow-up questions as time permits.

Now, I’ll turn the call over to John Brock.

John Brock

Thank you, Thor, and thanks to each of you for joining us today, as we discuss our third quarter results and our outlook for the remainder of 2011. As Thor said, we’re joined by Bill Douglas, our CFO; and Hubert Patricot, President of our European Group.

In our news release this morning, we reported comparable earnings of $0.72 per share as total revenue grew 3% on a currency neutral basis and comparable currency neutral operating income grew 3.5%. These results reflect our ability to work through difficult macroeconomic conditions and the impact of challenging weather early in the quarter. By continuing to focus on key operating strategies of outstanding execution, increasing effectiveness and cost control, we remain on track to deliver another successful year of growth. In fact, despite the challenges of the third quarter, we’ve increased our full-year earnings per share outlook to a range of $2.14 to $2.18.

Now, let’s take a look at the results for the quarter. Our volume growth of 1% reflects solid executive, offset by the impact of challenging July weather as well as prior year hurdles. We achieved pricing per case growth of 2% with the cost of sales per case increased up 4%. This reflects the cost pressures we’ve faced in our commodities and the lapping of favorable prior year costs. This expected gross margin decrease does not undermine our commitment to maintain or expand margins over time. However, as we’ve discussed, shifts in business conditions such as those we experienced in the third quarter can create margin fluctuations. Bill will have a bit more on this in just a few minutes.

Looking at the key factors in our third quarter results, perhaps the most important aspect of our quarterly results was our ability to execute in the marketplace at a very high level. This is a result of the outstanding work of our employees to maximize our presence across all channels and categories within ARTD share growth in both volume and value.

Another key element of our strategy remains outstanding customer service, with the goal of being our customer’s most valued supplier. Our success in this area is demonstrated by another recent significant recognition. For the first time, we are now rated the leading consumer goods company in each of our four legacy CCE territories as determined in an industry-wide independent survey of our customers. This survey ranks suppliers on a combination of factors, including category development, customer service and logistics. It’s important to note that this is the first time we’ve been ranked number one in France. Our team there has made exceptional progress and improvement, with a sharp in rankings from number five in 2008 to number two in 2010 and now number one in 2011. While this particular survey has not been used in neither Norway or Sweden, we’re working very hard to be our customer’s most valued supplier in these two territories also and to establish an appropriate and rigorous feedback process.

As we look at the performance of our brand portfolio, we again are encouraged by the results for our core Coca-Cola trademark brands, which grew 2.5% during the quarter. This was led by growth in Coca-Cola Zero, which grew more than 10%. Soft drink flavors including energy were essentially flat. Our energy category was up more than 35%, largely due to solid growth in Monster and the introduce of POWERADE Energy in Great Britain. This was offset by modest declines for sparkling flavors as we lapped strong growth hurdles from the prior year. Overall, sparkling drinks were up 2% for the quarter, while our still portfolio declined about 5%. This decline reflects challenges created by promotional timing, strong comparables to the same quarter a year-ago and soft demand across the still beverage segment, particularly juice drinks in Great Britain.

Going forward, we leave the depth that we’ve added to our still brand portfolio over the past few years remains an important asset and a potential source of significant growth. We’re confident of the strength of our plans in this category for the remainder of 2011 and for next year.

We look forward to highlighting our 2012 plans with you in December, when we will also discuss our work to maximize our sponsorship of the 2012 London Olympics. This work is underway and generating significant customer and consumer interest. In fact, we leveraged our Olympic involvement with targeted customer focus promotions in place with practically every major customer in Great Britain as well as customers in all of our territories. And as an example, so far, we have already activated more than 50,000 Olympic theme displays across Great Britain.

Now, let’s take a look at the full year. As I stated earlier, we’re encouraged by our growth to date and we have raised our full-year EPS guidance to a range of $2.14 to $2.18. This includes a $0.15 benefit from currency based on recent rates. Bill will discuss this outlook with you in more detail in a few minutes, but it reflects the success we had in achieving solid growth in 2011 and in our confidence in our ability to deliver a strong fourth quarter. Our confidence in the fourth quarter is due in part to the excellent marketing plans in place for the holidays. We will have more activation this Christmas than ever with expanded media, additional in-store displays and special packaging, all designed to maximize the benefit of our traditional Coca-Cola Christmas heritage.

Looking longer term, we remain well positioned to deliver sustained growth in line with our long-term objectives. This will allow us to achieve our primary goal, which is creating increasing value for our shareowners. As we announced in conjunction with our meeting with investors and analysts in September, we expect to complete our current $1 billion share repurchase program this year. We repurchased an additional $200 million in our shares during the third quarter. And in addition, we will begin a new $1 billion program in January 2012 with the target of at least $500 million in repurchases next year. These plans may change based on several factors, including financial results or acquisition opportunities, but we want to make clear our commitment to creating increasing value for our shareowners. This is the same commitment that we made just over a year-ago when we closed our transaction with the Coca-Cola Company to create today’s Coca-Cola Enterprises. In the year since, we have worked with a belief that creating value requires a strong consistent focus throughout our organization, coupled with individual employee skill and dedication. I believe that CCE is well positioned in both areas.

First, our operating framework provides clarity on the key elements of our business. And, second, our employees are extremely talented and dedicated and are committed to winning each day. I’ve spent significant time touring our markets most recently in Brussels, visiting production centers and meeting with employees at every level. I continue to be highly impressed by the skill and drive experienced on each visit.

Before closing, I want to share with you some important progress we’ve made toward becoming an increasingly socially responsible company. At the end of September, we launched our new sustainability plan, which is entitled, “Deliver for today / Inspire for tomorrow.” And this establishes a stronger set of targets for our CRS platform. Everyday CRS is more and more engrained in our working culture and we continue to make it a part of absolutely everything we do. This emphasis is creating positive results.

I’m proud to note that in Newsweek Magazine’s Annual Green Rankings which were recently released, CCE ranks number one in the entire food and beverage industry for the third consecutive year, and importantly higher than any other US consumer goods company. This is an outstanding accomplishment for our people and this is where we want to be as the sustainability leader in our industry. We believe there is a strong business case for our CRS work. We see benefits in several areas including efficiency and innovation, employee engagement and advocacy, customer service, and bolstering our place in our communities.

Thanks for your time and interest. And now, I’ll turn the call over to Bill, for more detail on our financial results and our outlook.

Bill Douglas

Thanks John. Looking at our news release this morning, we delivered a combination of volume, revenue and operating income growth in line with our expectations for the quarter.

Third quarter diluted earnings per commons share were $0.88 or $0.72 on a comparable basis. Revenue grew to a total of $2.1 billion, up 3% over prior year pro forma results on a currency neutral basis. Comparable operating income was $335 million, up 12% on a comparable basis and up 3.5% on a comparable and currency neutral basis.

Net pricing per case increased 2%, while cost of sales per case increased 4%. Both of these per case numbers are comparable and currency neutral, and are in line with our expectations for the third quarter. This increase in cost reflects the ongoing pressure that we’ve seen in certain areas such as PET, as well as comparisons to the more benign cost environment at the third quarter last year when cost were essentially flat.

Despite the downward gross margin pressure in the quarter, operating income margin increased slightly in part due to continued tight operating expense controls as well as the timing of certain expenses. I want to reiterate John’s message that we remain committed to margin enhancement over the long term. As we have mentioned before, fluctuations will occur as business conditions change, but we believe operating margin enhancement is essential to reaching our long-term financial objectives.

For the fourth quarter, we continue to expect year-over-year margin improvement and accelerated operating income growth. This improvement is due in part to our prior year hurdles for the fourth quarter being easier than for the third quarter. For the full year, we now believe that cost of goods sold per case will increase between a range of 3% to 3.5%. We have also refined our EPS outlook for the full year, increasing our guidance to a range of $2.14 to $2.18. Several factors contribute to this increase, including the modestly improved outlook for operating income as well as a nominal decrease in our expected effective tax rate.

This guidance includes a full-year currency benefit of approximately $0.15 at recent rates with $0.05 of benefit being recognized during the third quarter. We now expect comparable and currency neutral revenue growth in a mid single-digit range and operating income growth in a high single-digit range. Free cash flow will now be at least $500 million for 2011 with capital expenditures between a range of $375 million to $400 million. For the full year, weighted average cost of debt is expected to be approximately 3%, includes debt issuances, capital leases, as well as the impact of currency swaps. Our effective tax rate is now expected to be in a range of 26% to 27% for the year.

Looking ahead to 2012, it’s still too early for full-year guidance. However, I would like to provide some comments on a couple of key topics. First, looking at the commodity environment, we continue to layer in hedges for 2012 and expect cost of goods sold per case increase of no more than 5%. This increase does not include the impact of the potential excise tax in France. If this were to occur, next year we would likely see a corresponding increase in net revenues and cost of goods related to this topic, which would result in a one-time step down in our margin percents.

Continuing to discuss the tax situation in France, as macroeconomic trends continue to impact countries around the world, many are studying the implementation of austerity measures and tax increases. In France, there is currently a proposal to significantly increase the excise tax for beverages with added sugar or nonnutritive sweeteners. Clearly we are opposed to these concept discriminatory and regressive taxes. We do not believe that a tax that singles out one category of products is rational or effective. A tax increase of the magnitude proposed would result in a meaningful increase in the retail price of these commonly consumed products and would negatively impact the purchasing power of French consumers.

As far as CCE is concerned, the current proposal would impact virtually all of our French product portfolio and would result in an additional 8% to 9% price increase just to cover the tax alone. We are working with industry groups to insure the impact of this tax is clearly understood and we are also working with our customers to keep them informed of the dynamic situation and working internally to include appropriate scenarios in our business plans to address this issue. This proposal is one part of an overall package that will continue to be debated in the coming weeks and will be finalized and voted on by December the 22nd and implemented January 1, 2012. We will include an update as appropriate on our December Business Outlook Call with respect to this matter.

Now, let’s take a look at our progress in the year since new CCE came into being. Just over a year-ago we laid out ambitious long-term growth objectives and we are on track to meet or exceed those objectives this year. This level of performance achieved despite their challenges of the current macroeconomic environment demonstrates our ability to generate the sustained growth needed to create increasing value for our shareowners. Our share repurchase program is a good example of this progress. As John mentioned, we will complete our current $1 billion program by the end of this year and we will commence another $1 billion program in January of 2012, with a goal of no less than $500 million of repurchases during next year.

So to review the quarter, we continued to achieve solid growth despite challenging weather conditions in July and ongoing macroeconomic pressures. We remain on track to deliver our full-year results that are in line with or above our long-term growth objectives. Going forward, we remain fully committed to these objectives and we look forward to sharing with you our plans for 2012 in our customary December Outlook Call.

Thanks for joining us. And now, John, Hubert, and I, will be happy to open the line up for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Steve Powers of Sanford Bernstein.

Steve Powers – Sanford Bernstein

Hi, thanks for taking the question. Bill, is it fair to say just looking at the price realization in this quarter that the kind of the sequential net pricing per case decline that you experienced from 3% this quarter – or I guess the 2% this quarter from the 3% last quarter was mainly driven by mix as the still beverages slowed, or was there actually less rate pricing realized in Q3 versus Q2?

Bill Douglas

Steve, there were a lot of factors. I’m going to let Hubert comment on that. I would also mention before I turn it over to Hubert, it was something that we generally expected as we were heading into the quarter. And we do expect the rate realization to improve as we move into the fourth quarter for a number of reasons. One of them being that we’ve taken our annual price increase normally scheduled in the Benelux countries at the September-October timeframe. But Hubert, you want to add to that?

Hubert Patricot

Yes. Steve, it’s modestly less than what we expected. Part of it is driven as you said by still and also single sort of drinks being more affected by the adverse weather. There is also a play – a permissible timing in calendar. But, as Bill said, looking forward, we are very confident that we will [inaudible] cost of goods increase on the last quarter. Furthermore, as we see rational pricing in all of our market and especially in GB.

Steve Powers – Sanford Bernstein

Okay, great. And then as you do realize that pricing additionally in Q4, alongside that, is it your expectation that volume growth kind of rebounds especially in the flavored CSD segment and stills?

Hubert Patricot

Well, we had a very adverse again July weather, but August and September were already back in line with our expectation, and we expect this trend to continue till the end of the year.

Steve Powers – Sanford Bernstein

Okay. And then, lastly, it looks like just as you compare the full-year guidance this quarter with last quarter, modestly higher COGS inflation resulting in modestly lower kind of gross margin outlook, you had higher operating margins. Operationally, what’s driving the greater implied SG&A expense control?

Bill Douglas

Steve, if you look at what we’re doing, clearly we have an intense focus on SG&A via a program which we call Ownership Cost Management. That’s been in place, but it was intensified as we went into the third quarter, particularly given the July that we experienced. It’s something we’re ramping up for the entire organization as we go into 2012, knowing that we’re facing another challenging macroeconomic environment.

I think you’re also seeing – as we got into the third quarter, we had really kind of hit our stride with new CCE, all other transmission stuff was behind us, and we’re really working hard to do everything consistently in what we’d call the CCE Way across all of our countries, including Norway and Sweden. And I think some of that showed through in the SG&A management that we delivered for the third quarter.

Steve Powers – Sanford Bernstein

That’s great. Thank you very much.

Operator

Your next question comes from the line of Mark Swartzberg of Stifel Nicolaus.

Mark Swartzberg – Stifel Nicolaus

Yes, thanks. Good morning, everyone. I guess a question – as we think about a scenario with this excise tax increase in France, how would you characterize your elasticity analyses? What do they say in that 8% to 9% scenario? And then, how robust do you think those analyses are in terms of drawings not only from your own experience, but from the larger Coke’s experience?

John Brock

Hubert, you want to address that question?

Hubert Patricot

Yes. In general, the brand equity is very good in France and the price elasticity is relatively small. However, given the macroeconomic environment and the size of the increase you mentioned, we will ensure looking forward that the realism of our business assumption factor that into our business plan. As you know, the soft drink category is an important contributor to the business of retailer, we are committed to grow of the category in our brand, and we think that the category – the potential of the category remains extremely high in France with relatively low per capita. And when we compare the retail price, they are in the low end compared to the neighboring country. So again more to come probably on our December Outlook Call.

Mark Swartzberg – Stifel Nicolaus

Great. And those comments, Hubert, are you drawing on your experience within CCE, are you drawing on the larger Coca-Cola Company’s experience?

Hubert Patricot

Both. As well as A-brand product which mostly in the past driven by cost of goods increase face this kind of retail price increases.

Mark Swartzberg – Stifel Nicolaus

Great. And if I could follow, probably for you as well Hubert, on the – just if you – could you characterize, just give us an update on how you’re seeing consumers behave across Europe. Of course, today, we have some good news regarding Europe, but it seems like since we met in Paris, there has been some incremental concerns about recession in Europe. And what are you seeing behaviorally versus what you were seeing maybe six months ago?

Hubert Patricot

Well, I think we can continue – we continue to see a strong resilience of our category, despite the short-term environment and the issue we are facing from an economic standpoint. And I think it’s really exceptional to see that year-to-date our category is growing in all of country in value and we don’t see an inflection so far for the consumers. But it’s what we have shared – we have shared with you since the recession started in the fall of 2008.

We will continue to build our growth, which means that looking forward, we continue to bet and build on our extremely strong marketing calendar looking forward. And, frankly, having the Olympics, having the Euro next year, it’s a very good reason to continue to believe in our growth story and value creation story. And you start also with the last quarter, because we’re going to have the best and strongest ever Christmas plan in all our countries.

So again the environment remains unique, if anything is maybe even worse than last year same time, but we give ourselves and our retailer all the reasons to continue to grow and believe we can continue to win in our markets.

Mark Swartzberg – Stifel Nicolaus

Great, thanks Hubert.

Operator

Your next question comes from the line of Lauren Torres of HSBC.

Lauren Torres – HSBC

Good morning. My question relates to the importance of margin enhancement at the company, I guess just thinking over the next year with commodity pressures getting a bit tougher. Can you talk about the components of how you do that? I mean is there more pricing opportunities? You talked about OpEx control; do you think that’s really where the offset is and kind of how do you think about? And, I guess, this is more of a 2012 comment, if you could.

Bill Douglas

Hi Lauren, Bill here. I think if you look at 2012 and the COGS environment that we are facing and as well the French tax, for 2012 we’re going to be focused on protecting our gross margins with our pricing actions and working really hard in the supply chain area to negate some of the commodities inflation that we’re facing, which is similar to how we approached it in 2011 from a COGS perspective. Then, clearly, we’re going to be focused on SG&A management that will allow us to hopefully get some accretion in our operating income margins.

Going forward, as we go into 2013, then hopefully we would move to a more normalized commodities environment, where there maybe some opportunity to enhance the gross margins a little bit as well as grow operating income margins. But for ’12, it’s really going to be focused on protecting the gross margins and then getting some accretion in the operating income margin.

Lauren Torres – HSBC

I mean is there anything specific at this point on the SG&A line that you could talk about as far as where there is opportunity?

Bill Douglas

I think it’s across the board. Again, we’re one year into our new CCE. We have fully functionalized all of our global support functions as we call them, finance, HR, IT, et cetera. So we’re really driving through the One CCE Way of doing things in each and every market. So it’s across the board, it’s a lot of small initiatives that cumulatively are meaningful results. But there is no single area that I would say is the big rock that we are confident and optimistic that’s going to be the key for 2012.

Lauren Torres – HSBC

Okay. And lastly, your CapEx guidance, I gave – I guess, you gave more of a range this quarter versus last. Is there something that is pulling that number down or could pull that number down for the year?

Bill Douglas

I think it’s just across the board. We’ve been very diligent in our cash management and our CapEx management. There is a little bit of currency in there as well. So again, we had been using a big round number of approximately $400 million to this point and now we realize we’re going to come in a little bit below that, and it’s just in that corridor of $375 million to $400 million. And it’s general tight management of CapEx. There is nothing from a timing perspective that’s going to affect 2012 in a negative way. We would continue to target approximately 5% of spend for – or 5% CapEx spend as a percent of net revenue for 2012 as well.

Lauren Torres – HSBC

Okay, great. Thank you.

Operator

Your next question comes from the line of Kaumil Gajrawala of UBS.

Kaumil Gajrawala – UBS

Hi guys.

Bill Douglas

Hi.

Kaumil Gajrawala – UBS

If I could ask a little bit more on the French tax increase? You mentioned that prices would go up about 8% to 9% if you would pass it through. But typically in these situations we see everyone in the supply chain takes some additional pricing, so how much would you expect prices to really go up by the time it gets to the shop?

Hubert Patricot

The French tax is still a subject as Bill has said, to debate, and the final impact will be not known until late December. So it’s a bit premature to discuss any specific business projects on this front at this time. However, we are taking scenarios into consideration as part of our annual planning process and we will have the business plan and the customer plan to address the issues. And again, we will – should to continue our joint value creation with customers. And as John said, we have been named Best Supplier in France for the first time ever. And we will continue to win on these fundamental goals and a good cooperation with the customer to absorb and to deal with this tax situation in France.

Kaumil Gajrawala – UBS

Okay, got it. Congratulations on that. If I can move to energy, it looked like last quarter you were up 50%, but you were in a launch mode with POWERADE Energy. This quarter it looks like you’re up 35%. Are we seeing a sequential slowdown or does some of that have to do with the initial rollout of POWERADE?

Hubert Patricot

No, we continue to see a good growth of our energy portfolio, but I think energy was probably slightly impacted also by the weather as the rest of the market. But we have a healthy growth 39% this quarter. But we’re seeing the domestic brand portfolio is working. We are capturing both trial and retaining consumer. Monster continues a very solid growth as do local brands like Nalu in Belgium and Relentless in GB. And the response to the consumer to our innovation program is also very positive. As you mentioned, POWERADE Energy is also good stuff. So we are very confident first on the ability of this category to grow and in our ability to win in this category with the CCE portfolio.

Kaumil Gajrawala – UBS

Okay, got it. Thank you very much.

Operator

Your next question comes from the line of Caroline Levy of CLSA.

Caroline Levy – CLSA

I’d like to understand a little more if I might about the still business. I’m not sure if I could what’s the volume trends were. But if you could dig in a little bit as to what happened in juice and what the impact is on your margins of stills aren’t growing as much?

John Brock

Lubert, you want to talk a little bit more about the overall growth situation in the stills?

Hubert Patricot

Yes. The still volume was down 5% this quarter. This was primarily driven by promotional timing with 10% comparable from the same quarter last year and sub demand across the entire juice streams, which was not particular to CCE, particularly in GB. In terms of margin it varies by brand in this category. So we had some impact on the mix from the still. But looking forward, we are still very confident in the growth of our portfolio in juice drinks. Though it was more of a one-shot event in quarter three, looking at a potential for growth for Ocean Spray, Capri-Sun, we think we’re going to continue to grow starting with this quarter, quarter four.

Caroline Levy – CLSA

Thank you. And then on your repurchases, I think did you say you’ve really done $250 million quarter-to-date?

Bill Douglas

No. We didn’t make any comments about what we’ve done in Q4. But make no mistake, we’re going repurchase $200 million in Q4, which will round out the $1 billion program that we announced last year, and then we’ll continue with incremental share repurchases as we move into 2012 under the new program.

Caroline Levy – CLSA

Okay, thank you. And then can you talk about the competitive environment from both in CSDs and stills, particularly in France?

Hubert Patricot

The competitive environment did not shed so much this quarter. Again all the market was impacted by the weather conditions. We think we had a very good program in place. We got and we gained market share overall in Europe. In GB too, we had a very strong Olympic activation starting this quarter in GB. We’ll have also an activation program in all of our countries this month. So we are gaining share. We see relatively rational pricing in all of our markets and we had some good innovations which were introduced this year like POWERADE Energy and other Fanta flavor that have been successful. So we are pretty confident in our way to continue to grow and gain share.

Caroline Levy – CLSA

Thank you. And then just finally, the French tax outlook, I mean if it were to go through and I know you are fighting it aggressive, and in the US you’ve been very successfully at fighting, can you just say if you think – I mean seriously John and Bill, you do have a US perspective on this. Is it very different in Europe the way they look at things, because here I guess historically you’ve been able to prove the volume impact and the impact on the blue collar worker and so and so bad that why would you do it. Is it different there?

John Brock

Yes, you’re right – John. We’ve been very successful in the United States in defeating most of these tax proposals. And I think one of the reasons is we’ve had a very industry-wide approach which has been very consistent and very clear in communicating to various governmental authorities around in Washington as well as in state and local governments, the inappropriateness of regressive and unfair taxes focusing on one particular item that is not particularly a logical or effective way of raising revenues. And the good news is most of them have gotten that in the course of time.

I think the situation in France is one where we continue the need to work together with the Coca-Cola Company and with the industry to do everything we possibly can to help them understand, help the officials understand that again it is unjust, it’s unfair, and it’s not the best way to proceed, and we’re going to work hard to doing that. Again, I don’t think there are any huge differences other than the fact that maybe we had a – we have a series of trade associations in the US which were particularly effective. What you can assume is we’re working hard to make sure that our trade associations in Europe are going to be similarly effective going forward and that we have success in winning most if not all of these battles.

Caroline Levy – CLSA

Thank you so much.

Operator

Your next question comes from the line of Judy Hong of Goldman Sachs.

Judy Hong – Goldman Sachs

Thanks, hi. First, in terms of your volume performance in Norway and Sweden, I think you didn’t give us the number, but it sounds like those were somewhat weak markets in the quarter. Was that also weather driven, is there anything else going on in those markets? And then as we exited the quarter, you talked about the weather normalizing and the volume coming back, are there any markets that are coming back differently than maybe you would anticipate it?

John Brock

Hubert, you want to talk about Norway and Sweden?

Hubert Patricot

Yes. It’s true that the northern part of our territories were more affected by the weather in the summer, especially in July and probably more in Sweden. However, we are very confident in the performance of both Sweden and Norway this year. And just to highlight some achievements since we took over this territory, in Norway for example, we will have add by the end of this year a 20% share swing in a way from home channel, we have regained the top one cinema channel in Norway, we have regained the top one [inaudible] channel recently in Norway. So we are continuing to make progress on this market. And to your question about moving forward after summer, no variation so much by territory, again on track with our expectations so far.

Judy Hong – Goldman Sachs

And so how much was volume down in Norway and Sweden in 3Q?

Hubert Patricot

Sorry?

Judy Hong – Goldman Sachs

How much was volume down in the third quarter in Norway and Sweden?

John Brock

We didn't give that level of disclosure, Judy. It was down modestly.

Judy Hong – Goldman Sachs

Okay. And then just going back to the French soda tax situation, Hubert, I know you talked about the price elasticity and your brand strength being pretty strong in the French market. Can you also just help us dimensionalize that and may be compare it against the US market? And given your market share position in that market and the equity that you talked about, a more rational competitive situation, would the elasticity actually be better in France compared to like the US market?

Hubert Patricot

I mean the brand position, as you pointed out, is pretty different. Our market share is really different in this market. In terms of competition, it's a very different market. Coke is number one soft drink brand. Coke Zero is number two and Diet Coke, Coke Light is number three. So this is really the environment where the brand love, the brand equity is really huge. We have been driving the value of the category.

That's why we are looking at the facts seriously of course, but it's not decided yet the level of facts, and we will adapt our plans. But you're right the situation will be extremely different. And so far our experience is on pricing elasticity we're clearly lower than what you had been facing in the US. Having said that 8% to 9% would be a significant price increase, but it's true that the fundamentals of our business are really different both in the away from home and in the home channel.

Judy Hong – Goldman Sachs

Okay. And then, Bill, just on the tax rate, the fact that this year came down a bit. Does that apply to your long-term tax rate as well?

Bill Douglas

No, we would still be looking in that 26% to 28% range for the foreseeable future. We just had a few things that all fell the right way and it rounded to the bottom half of that range for 2011.

Judy Hong – Goldman Sachs

And then on the commodities – I'm sorry if you've talked about this already, but just in terms of how much coverage you have now for 2012 and then with 2011 moving up a little bit – I know you said 2012, it's still no more than 5%, but is 2012 now a little bit worse than you would have anticipated three months ago?

Bill Douglas

No. What we – what I have said over the course of last three or four months is, originally I’ve said that it could be – that 2012 commodities would be slightly higher than what we experienced in 2011 from an inflation perspective, and now we're saying it's no more than 5%. So I think you should interpret that as a range of somewhere between 3.5% and 5%.

And I would say from a coverage perspective, given all the volatility that we've had in the commodities markets over the last three, four months, that's been very helpful to us in addressing the coverage levels for 2012. And at this juncture, we are at a normal level of coverage at this point in time, and I would expect to get a little bit more granular on that in December on the Outlook Call.

Judy Hong – Goldman Sachs

Got it. Okay, thank you.

Operator

Your next question comes from the line of John Faucher of JPMorgan.

John Faucher – JPMorgan

Thanks. Bill, one point of clarification, which is on the excise tax. When you guys talked about your pricing plan for 2012, both in your September meeting and today, you talked about maintaining gross margin. I wasn't clear. Are you talking about maintaining gross margin with the excise tax increase as well or is that one that's going to be a – if it happens, a sequentially negative hit to the gross margin line?

Bill Douglas

Yes, let's think about it mathematically, John. Forget about the French excise tax for a moment. Our strategy for '12 is to get pricing that will allow us to protect our gross margins. With the French excise tax, we would be striving to take pricing that would negate that, so mathematically it would be somewhat dilutive to the overall margin.

John Faucher – JPMorgan

Got it.

Bill Douglas

We would not be taking a margin on the tax.

John Faucher – JP Morgan

That – okay, I just wanted – thanks I wanted to clarify that. And then, Hubert, can you talk about – again I realize it's early days, but since this is done on a value basis, can you talk at least theoretically given what you've said about pricing, where do you think your price gaps would end up going vis-à-vis the competition in this scenario assuming it sort of flow through in terms of particularly sort of where private label pricing would have to respond?

Hubert Patricot

Again, the debate is not closed, but then as you understand an excise tax, which is a fixed amount. So proportionally as a percentage of retail pricing, private label will increase more than a brand, and of course, generally, we are the most priced brands. So in percentage, our price increase would be on the tax, related increase would be lower for our products.

John Faucher – JP Morgan

Great, thanks. And then, finally one last question here which is, given the pricing expectations for next year and yet obviously you and Coke are going to be spending a lot of money sort of related to the Olympics and other factors and probably also to drive extra demand, how should we think about sort of total system marketing efforts in 2012 as we look at the Olympics and then also probably a little extra marketing push to sort of offset some of the pricing impact? Thanks.

Hubert Patricot

Well, we're going to be very ambitious for 2012, and again more to come in December. But as you said, with the Olympics and the Euro Cup – Football Euro Cup, we will probably work on the most powerful plan we had for many years, and this will be sustained by DMA, this will be sustained of course by in-store activities. So you can bet on a very strong plan for 2012 from this Coca-Cola system in Western Europe.

John Faucher – JP Morgan

Okay, thank you.

John Brock

Operator, we have time for one more question.

Operator

Our final question comes from the line of Brett Cooper of Consumer Edge Research.

Brett Cooper – Consumer Edge Research

Good morning, guys. If you can just talk about comparing – you started to talk about what you’re going to see for the holidays from yourself and Coke, I guess November and December. But can you talk about where that is relative what you've done in the past? And then on the Olympics for 2012, just what you guys are doing relative to, I guess, you explained the last one in terms of the Olympics in Canada?

Hubert Patricot

So regarding Christmas, we plan to have again the best Christmas ever in all our territories. So this will include more in-store activities. For example, we have in most of our countries Christmas trucks caravan and we will have much more stuffs in-store in communities than we had before. This will be supported by increased level of marketing spending midyear. And last but not least, this program will start two to three weeks earlier than what we did last year. So again, we have a commitment to make this Christmas a very strong ever.

Regarding the Olympics, as we already said, this has already started. We have a two-year plan regarding the Olympics. And again, we will give you more granularity about the plan for 2012. But in case of GB, it will be not only during the event in GB but we will also activate the 60 cities of the torch relay all around GB, so it will be a strong plan. But again, more to come when we meet – when we discuss together in December.

John Brock

And just one point to add to what Hubert just said. I'm sure you all know this but the Summer Olympics in general are substantially measurably bigger than the Winter Olympics. So when you start talking about activation between Vancouver specifically and London, I mean, frankly there will be no comparison. It's going to be a decidedly bigger event, not only in all of Great Britain but throughout all of our territories.

So with that, let me say thanks to all of you for joining our call today. Thanks for your questions. We always appreciate your interest and we hope you have a good day. Thank you.

Operator

Thank you again for participating in today's conference call. This does conclude today's call. You may now disconnect.

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