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CCE > SEC Filings for CCE > Form 10-Q on 26-Oct-2012All Recent SEC Filings

Show all filings for COCA-COLA ENTERPRISES, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for COCA-COLA ENTERPRISES, INC.


26-Oct-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Business and Basis of Presentation
Coca-Cola Enterprises, Inc. ("CCE," "we," "our," or "us") is a marketer, producer, and distributor of nonalcoholic beverages. We market, produce, and distribute our products to customers and consumers through licensed territory agreements in Belgium, continental France, Great Britain, Luxembourg, Monaco, the Netherlands, Norway, and Sweden. We operate in the highly competitive beverage industry and face strong competition from other general and specialty beverage companies. Our financial results are affected by a number of factors including, but not limited to, consumer preferences, cost to manufacture and distribute products, foreign currency exchange rates, general economic conditions, local and national laws and regulations, raw material availability, and weather patterns.
Sales of our products tend to be seasonal, with the second and third quarters accounting for higher unit sales of our products than the first and fourth quarters. In a typical year, we earn more than 60 percent of our annual operating income during the second and third quarters. The seasonality of our sales volume, combined with the accounting for fixed costs, such as depreciation, amortization, rent, and interest expense, impacts our results on a quarterly basis. Additionally, year-over-year shifts in holidays and selling days can impact our results on a quarterly basis. Accordingly, our results for the third quarter and first nine months of 2012 may not necessarily be indicative of the results that may be expected for the full year ending December 31, 2012.
For reporting convenience, our first three quarters close on the Friday closest to the end of the quarterly calendar period. Our fiscal year ends on December 31st. There were the same number of selling days in the first, second, and third quarters of 2012 versus the first, second, and third quarters of 2011, respectively (based upon a standard five-day selling week). There will be one additional selling day in the fourth quarter of 2012 versus the fourth quarter of 2011.
Relationship with The Coca-Cola Company (TCCC) We are a marketer, producer, and distributor principally of products of TCCC with greater than 90 percent of our sales volume consisting of sales of TCCC products. Our license arrangements with TCCC are governed by product licensing agreements. From time to time, the terms and conditions of programs with TCCC are modified. Our financial results are greatly impacted by our relationship with TCCC. For additional information about our transactions with TCCC, refer to Note 5 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q.
Financial Results
Our net income in the third quarter of 2012 was $263 million, or $0.89 per diluted share, compared to net income of $284 million, or $0.88 per diluted share, in the third quarter of 2011. The following items included in our reported results affect the comparability of our year-over-year financial results (the items listed below are based on defined terms and thresholds and represent all material items management considered for year-over-year comparability):
Third Quarter 2012
        Charges totaling $12 million ($8 million net of tax, or $0.03 per
         diluted common share) related to restructuring activities;


        Net mark-to-market gains totaling $12 million ($7 million net of tax, or
         $0.02 per diluted common share) related to non-designated commodity
         hedges associated with underlying transactions that relate to a
         different reporting period; and


        A deferred tax benefit of $50 million ($0.17 per diluted common share)
         due to the enactment of a United Kingdom tax rate change that reduced
         the corporate income tax rate by 2 percentage points, 1 percentage point
         retroactive to April 1, 2012 and 1 percentage point effective April 1,
         2013.


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                          COCA-COLA ENTERPRISES, INC.


Third Quarter 2011
 Charges totaling $1 million related to restructuring activities;


        Net mark-to-market losses totaling $4 million ($3 million net of tax)
         related to non-designated commodity hedges associated with underlying
         transactions that related to a different reporting period; and


        A deferred tax benefit of $53 million ($0.16 per diluted common share)
         due to the enactment of a United Kingdom tax rate change that reduced
         the corporate income tax rate by 2 percentage points, 1 percentage point
         retroactive to April 1, 2011 and 1 percentage point effective April 1,
         2012.

Financial Summary
Our financial performance during the third quarter of 2012 reflects the impact
of the following significant factors:
        Challenging operating conditions, including poor weather conditions
         early in the quarter, the impact of the French excise tax increase, and
         ongoing macroeconomic challenges;


        Modest volume growth driven primarily by increases in our still beverage
         portfolio;


        Higher cost of sales per case and net pricing per case (currency
         neutral) driven, in part, by the increased French excise tax
         (substantially all of the increased cost was borne by our customers in
         the form of higher prices);


        A currency neutral increase in operating expenses driven by our
         promotional activities surrounding the 2012 London Olympic Games, offset
         partially by our strong focus on expense control initiatives;


        Unfavorable currency exchange rate changes that decreased operating
         income in the third quarter of 2012 by 8.0 percent ($0.06 per diluted
         share); and


        The continuation of our share repurchase program, which increased
         diluted earnings per share in the third quarter of 2012 by approximately
         8.0 percent ($0.07 per diluted share) when compared to the third quarter
         of 2011.

Our operating and financial performance during the third quarter of 2012 continued to be impacted by a challenging operating environment, including poor weather conditions early in the quarter, the French excise tax increase, and ongoing macroeconomic challenges. Despite these factors, we achieved modest volume growth of 0.5 percent and continued to focus on the execution of our operating plans. Our bottle and can net price per case, excluding the impact of the French excise tax increase, grew 2.5 percent during the quarter reflecting moderate year-over-year rate increases.
Volume in our continental European territories (including Norway and Sweden) remained flat year-over-year, reflecting an increase in our still beverage portfolio, including strong introductory volume for our re-formulated stevia-based Nestea brand launched in 2012, offset by a decline in sparkling beverage sales. Our volume in Great Britain increased 0.5 percent for the quarter, driven by strong growth in our still beverage brands such as Capri-Sun and Schweppes Abbey Well. Both continental Europe and Great Britain saw moderate declines in sales of Coca-Cola Classic and Diet Coke/Coca-Cola light, while Coca-Cola Zero achieved double-digit volume growth. Our energy brand portfolio continued to experience volume gains across our territories, including Monster, Nalu, and Relentless.
Our bottle and can cost of sales per case excluding the French excise tax increase grew 2.0 percent during the third quarter. Despite some overall moderation, the cost environment remains volatile, and we continue to seek opportunities to mitigate our exposure to commodity price volatility through the use of supplier agreements and hedging instruments.
During the third quarter of 2012, we experienced a currency neutral increase in operating expenses resulting from our promotional initiatives surrounding the 2012 London Olympic Games. Despite these additional planned expenditures, we were able to limit our underlying operating expense growth by remaining diligent in our expense control initiatives and by target focused reductions across all discretionary cost categories.
Our financial results during the third quarter of 2012 were also impacted by unfavorable currency exchange rate changes, which resulted in an approximate $0.06 decrease in our earnings per diluted share. Offsetting the negative currency impact was the benefit of our share repurchases, which increased earnings per diluted share during the third quarter of 2012 by approximately $0.07 when compared to the third quarter of 2011. During the remainder of 2012, we intend to continue our share repurchase program in support of our ongoing commitment to increase shareowner value.


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                          COCA-COLA ENTERPRISES, INC.



Operations Review
The following table summarizes our Condensed Consolidated Statements of Income
as a percentage of net sales for the periods presented:

                                                 Third Quarter       First Nine Months
                                                2012      2011        2012        2011
Net sales                                      100.0 %   100.0 %     100.0 %    100.0  %
Cost of sales                                   62.6      62.2        63.6       63.0
Gross profit                                    37.4      37.8        36.4       37.0
Selling, delivery, and administrative expenses  22.6      22.4        23.7       23.7
Operating income                                14.8      15.4        12.7       13.3
Interest expense                                 1.1       1.1         1.1        0.9
Other nonoperating income (expense)                -         -           -       (0.1 )
Income before income taxes                      13.7      14.3        11.6       12.3
Income tax expense                               1.0       1.0         2.2        2.3
Net income                                      12.7 %    13.3 %       9.4 %     10.0  %

Operating Income
The following table summarizes our operating income by segment for the periods
presented (in millions; percentages rounded to the nearest 0.5 percent):

                            Third Quarter                               First Nine Months
                     2012                   2011                   2012                   2011
                         Percent                Percent                Percent                Percent
              Amount    of Total     Amount    of Total     Amount    of Total     Amount    of Total
Europe       $  322      105.0  %   $  364      110.5  %   $  879      113.0  %   $  972      114.0  %
Corporate       (16 )     (5.0 )       (34 )    (10.5 )      (101 )    (13.0 )      (119 )    (14.0 )
Consolidated $  306      100.0  %   $  330      100.0  %   $  778      100.0  %   $  853      100.0  %


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                          COCA-COLA ENTERPRISES, INC.


During the third quarter and first nine months of 2012, we had operating income
of $306 million and $778 million, respectively, compared to $330 million and
$853 million in the third quarter and first nine months of 2011, respectively.
The following table summarizes the significant components of the year-over-year
change in our operating income for the periods presented (in millions;
percentages rounded to the nearest 0.5 percent):

                                                    Third Quarter 2012         First Nine Months 2012
                                                                 Change                        Change
                                                                 Percent                      Percent
                                                   Amount       of Total       Amount         of Total
Changes in operating income:
Impact of bottle and can price-mix on gross
profit                                           $     84         25.5  %   $     320            37.5  %
Impact of bottle and can cost-mix on gross
profit                                                (66 )      (20.0 )         (229 )         (27.0 )
Impact of bottle and can volume on gross profit         2          0.5            (52 )          (6.0 )
Impact of post-mix, non-trade, and other on
gross profit                                           (2 )       (0.5 )          (13 )          (1.5 )
Net mark-to-market gains related to
non-designated commodity hedges                        16          5.0              5             0.5
Net impact of restructuring charges                   (11 )       (3.5 )          (18 )          (2.0 )
Impact of Tax Sharing Agreement indemnification
changes                                                 -            -              5             0.5
Other selling, delivery, and administrative
expenses                                              (20 )       (6.0 )          (25 )          (3.0 )
Currency exchange rate changes                        (26 )       (8.0 )          (68 )          (8.0 )
Other changes                                          (1 )       (0.5 )            -               -

Change in operating income $ (24 ) (7.5 )% $ (75 ) (9.0 )%

Net Sales
Net sales decreased 3.5 percent in the third quarter of 2012 to $2.1 billion, and decreased 4.0 percent in the first nine months of 2012 to $6.1 billion. These changes include increases of 2.0 percent for both the third quarter and first nine months of 2012 due to the increased French excise tax. These changes also include unfavorable currency exchange rate decreases of 8.0 percent and 7.0 percent for the third quarter and first nine months of 2012, respectively. Net sales per case decreased 3.5 percent in the third quarter of 2012 versus the third quarter of 2011, and decreased 1.5 percent in the first nine months of 2012 versus the first nine months of 2011. The following table summarizes the significant components of the year-over-year change in our net sales per case for the periods presented (rounded to the nearest 0.5 percent and based on wholesale physical case volume):

                                                                          First Nine Months
                                                    Third Quarter 2012           2012
Changes in net sales per case:
Bottle and can net price per case (excluding
French excise tax increase)                                  2.5  %                   3.0  %
French excise tax increase                                   2.0                      2.5
Bottle and can currency exchange rate changes               (7.5 )                   (7.0 )
Post-mix, non-trade, and other                              (0.5 )                      -

Change in net sales per case (3.5 )% (1.5 )%

During the third quarter of 2012, our bottle and can sales accounted for approximately 93 percent of our total net sales. Bottle and can net price per case is based on the invoice price charged to customers reduced by promotional allowances and is impacted by the price charged per package or brand, the volume generated by each package or brand, and the channels in which those packages or brands are sold. To the extent we are able to increase volume in higher-margin packages or brands that are sold through higher-margin channels, our bottle and can net pricing per case will increase without an actual increase in wholesale pricing. Our bottle and can net price per case grew 2.5 percent during the third quarter of 2012, reflecting moderate year-over-year rate increases. During the third quarter and first nine months of 2012, our net sales included approximately $40 million and $130 million, respectively, in incremental revenue as a result of the cost associated with the increased French excise tax on beverages with added sweetener (nutritive and non-nutritive), substantially all of which was borne by our customers in the form of higher prices. We estimate that the full year 2012 impact on our net sales will be approximately $170 million.


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COCA-COLA ENTERPRISES, INC.

Volume
The following table summarizes the year-over-year change in our bottle and can volume for the periods presented (selling days were the same in the third quarter and first nine months of 2012 and 2011; rounded to the nearest 0.5 percent):

Third Quarter 2012 First Nine Months 2012 Change in volume 0.5 % (2.5 )%

Brands
The following table summarizes our bottle and can volume results by major brand
category for the periods presented (selling days were the same in the third
quarter and first nine months of 2012 and 2011; change is versus same period
from prior year; rounded to the nearest 0.5 percent):

                                      Third Quarter                               First Nine Months
                                     2012 Percent    2011 Percent                  2012 Percent    2011 Percent
                         Change        of Total        of Total       Change         of Total        of Total
Coca-Cola trademark        (3.0 )%       66.0 %          68.0 %          (3.0 )%       68.0 %          68.5 %
Sparkling flavors and
energy                      2.0          18.5            18.5            (2.0 )        18.0            18.0
Juices, isotonics, and
other                      11.5          11.5            10.5            (1.0 )        10.5            10.5
Water                      21.0           4.0             3.0             6.5           3.5             3.0
Total                       0.5  %      100.0 %         100.0 %          (2.5 )%      100.0 %         100.0 %

Our volume performance during the third quarter of 2012 was impacted by poor weather conditions early in the quarter, the increased French excise tax, and the ongoing macroeconomic challenges. Despite these challenges, we continued to execute our operating plans in the marketplace, including our planned promotional initiatives around the 2012 London Olympic Games, and achieved modest volume growth of 0.5 percent versus the third quarter of 2011. Our volume performance during the third quarter of 2012 included a 13.5 percent increase in the sale of still beverages, offset partially by a decline in the sales of sparkling beverage brands of 2.0 percent. Volume in continental Europe (including our Norway and Sweden territories) remained flat year-over-year. Great Britain experienced an overall volume increase during the third quarter of 2012 of 0.5 percent. These results reflect the continued challenging operating environment and poor weather conditions early in the quarter, offset by solid marketplace execution and planned promotional activities, particularly those surrounding the 2012 London Olympic Games. We continued to experience increased sales of Coca-Cola Zero across our territories, as well as in our energy drink portfolio, with growth in brands such as Monster, Nalu, and Relentless. We also experienced increased volume resulting from the recent launch of several re-formulated products, including stevia-based Nestea.
Our Coca-Cola trademark sparkling brand volume declined 3.0 percent in the third quarter of 2012 as compared to the third quarter of 2011. This decrease was driven by a decline in the sales of Coca-Cola Classic and Diet Coke/Coca-Cola light, offset partially by the continued growth of Coca-Cola Zero. Sparkling flavors and energy volume increased 2.0 percent in the third quarter of 2012, reflecting volume increases in Dr Pepper and Sprite, as well as the strong performance of our energy drink portfolio, particularly Monster. Juices, isotonics, and other volume increased 11.5 percent in the third quarter of 2012, including a greater than 20.0 percent increase in the sale of Capri-Sun as we benefited from competitor product disruption, and a significant volume gain for our newly re-formulated stevia-based Nestea brand in continental Europe. Sales volume of our water brands increased 21.0 percent in the third quarter of 2012, reflecting a significant increase in the sale of Chaudfontaine in continental Europe and strong volume results for Schweppes Abbey Well, which was the official water of the 2012 London Olympic Games.


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                          COCA-COLA ENTERPRISES, INC.


Consumption
The following table summarizes our volume by consumption type for the periods
presented (selling days were the same in the third quarter and first nine months
of 2012 and 2011; change is versus same period from prior year; rounded to the
nearest 0.5 percent):

                                     Third Quarter                               First Nine Months
                                    2012 Percent    2011 Percent                  2012 Percent    2011 Percent
                         Change       of Total        of Total        Change        of Total        of Total
Multi-serve(A)              0.5 %       55.5 %          55.5 %          (2.5 )%       56.5 %          57.0 %
Single-serve(B)             0.5         44.5            44.5            (2.0 )        43.5            43.0
Total                       0.5 %      100.0 %         100.0 %          (2.5 )%      100.0 %         100.0 %


___________________________

(A) Multi-serve packages include containers that are typically greater than one liter, purchased by consumers in multi-packs in take-home channels at ambient temperatures, and are intended for consumption in the future.

(B) Single-serve packages include containers that are typically one liter or less, purchased by consumers as a single bottle or can in cold drink channels at chilled temperatures, and are intended for consumption shortly after purchase.

Packages
The following table summarizes our volume by package type for the periods
presented (selling days were the same in the third quarter and first nine months
of 2012 and 2011; change is versus same period from prior year; rounded to the
nearest 0.5 percent):

                                      Third Quarter                               First Nine Months
                                     2012 Percent    2011 Percent                  2012 Percent    2011 Percent
                        Change         of Total        of Total       Change         of Total        of Total
PET (plastic)              (1.0 )%       43.5 %          44.0 %          (3.5 )%       44.0 %          44.5 %
Cans                       (1.0 )        39.5            40.0            (2.0 )        40.0            40.0
Glass and other             7.0          17.0            16.0             0.5          16.0            15.5
Total                       0.5  %      100.0 %         100.0 %          (2.5 )%      100.0 %         100.0 %

Cost of Sales
Cost of sales decreased 3.0 percent in both the third quarter and first nine months of 2012 to $1.3 billion and $3.9 billion, respectively. These changes include increases of 3.0 percent and 3.5 percent for the third quarter and first nine months of 2012, respectively, due to the implementation of the additional French excise tax beginning January 1, 2012. These changes also include decreases of 8.0 percent and 7.0 percent during the third quarter and first nine months of 2012, respectively, due to currency exchange rate changes. The following table summarizes the significant components of the year-over-year change in our cost of sales per case for the periods presented (rounded to the nearest 0.5 percent and based on wholesale physical case volume):

                                                                          First Nine Months
                                                    Third Quarter 2012           2012
Changes in cost of sales per case:
Bottle and can ingredient and packaging costs
(excluding French excise tax increase)                       2.0  %                   2.5  %
French excise tax increase                                   3.5                      3.5
Bottle and can currency exchange rate changes               (8.0 )                   (7.0 )
Post mix, non-trade, and other                              (0.5 )                      -

Change in cost of sales per case (3.0 )% (1.0 )%

Despite some overall moderation, the cost environment remains volatile, and we continue to seek opportunities to mitigate our exposure to commodity price volatility through the use of supplier agreements and hedging instruments. During the third quarter and first nine months of 2012, our cost of sales included approximately $40 million and $130 million, respectively, in incremental costs as a result of the increased French excise tax on beverages with added sweetener (nutritive and non-nutritive). Substantially all of the increased cost was borne by our customers in the form of higher prices. We estimate that the full year 2012 impact on our cost of sales will be approximately $170 million.


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COCA-COLA ENTERPRISES, INC.

Selling, Delivery, and Administrative Expenses Selling, delivery, and administrative (SD&A) expenses decreased $9 million, or 2.0 percent, in the third quarter of 2012 to $469 million from $478 million in the third quarter of 2011, and decreased $50 million, or 3.5 percent, in the first nine months of 2012 to $1.5 billion. These changes include currency exchange rate decreases of 7.0 percent and 5.5 percent for the third quarter and first nine months of 2012, respectively. The following table summarizes the significant components of the year-over-year change in our SD&A expenses for the periods presented (in millions; percentages rounded to the nearest 0.5 percent):

                                                    Third Quarter 2012         First Nine Months 2012
                                                                  Change                       Change
                                                                 Percent                       Percent
                                                   Amount        of Total       Amount        of Total
Changes in SD&A expenses:
General and administrative expenses              $     15           3.0  %   $       6            0.5  %
Selling and marketing expenses                         (1 )           -             (2 )            -
Delivery and merchandising expenses                    (3 )        (0.5 )            2              -
Warehousing expenses                                    5           1.0             15            1.0
Depreciation and amortization expenses                  -             -              3              -
Net mark-to-market gains related to
non-designated commodity hedges                        (6 )        (1.5 )           (1 )            -
Net impact of restructuring charges                    11           2.5             18            1.0
. . .
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