The Coca-Cola Company
Q3 2012 Earnings Call Transcript

Published: 16 Oct 2012

[Operator:]

At this time, I would like to welcome everyone to The Coca-Cola Company's Third Quarter 2012 Earnings Results Conference Call. Today's call is being recorded. If you have any objection, you may disconnect at this time. [Operator Instructions] I would like to remind everyone that the purpose of this conference is to talk with investors, and therefore, questions from the media will not be addressed. Media participants should contact Coca-Cola's Media Relations department if they have questions. I would now like to introduce Jackson Kelly, Vice President and Investor Relations Officer. Mr. Kelly, you may begin.

[Jackson Kelly:]

Good morning, and thank you for being with us today. I'm joined by Muhtar Kent, our Chairman and Chief Executive Officer; and Gary Fayard, our Chief Financial Officer. Following prepared remarks this morning, we will turn the call over for your questions. Before we begin, I would like to remind you that this conference call may contain forward-looking statements, including statements concerning long-term earnings objectives, and should be considered in conjunction with cautionary statements contained in our earnings release and in the company's most recent periodic SEC report. In addition, I would also like to note that we have posted schedules on our company website at www.thecoca-colacompany.com under the Reports and Financial Information tab in the Investors section, which reconcile certain non-GAAP financial measures that may be referred to by our senior executives in our discussions this morning, and from time to time in discussing our financial performance to our results as reported under Generally Accepted Accounting Principles. Please look on our website for this information. Now let me turn the call over to Muhtar.

[Muhtar Kent:]

Thank you, Jackson, and good morning, everyone. Let me begin by saying that we're pleased with our third quarter and year-to-date performance. We continue to deliver consistent quality results, with our business growing worldwide volume by 4% in the quarter and 5% year-to-date. Importantly, we realized positive growth across all 5 of our geographic operating groups this quarter despite facing a still uncertain global economy. Together with our global system, we are operating from a position of real strength. This past quarter, we built on this advantage by once again leading industry growth and extending our volume and value share gains globally in nonalcoholic ready-to-drink beverages. We gained global share in the sparkling beverage category, where our portfolio is up 3% in both the quarter and on a year-to-date basis. To put this in perspective, our global sparkling business has generated nearly 450 million incremental cases year-to-date or the equivalent of adding another Russia to our global business. And this growth has been consistently and reliably led by brand Coca-Cola, which has grown every quarter over the past 3.5 years and is up a healthy 3% year-to-date. We also gained global share in the still beverage category, where our portfolio grew a solid 10% in the quarter and 9% year-to-date. This quarter's still beverage results were well balanced, with high single-digit growth in juice and juice drinks and sports drinks, as well as double-digit growth in the water, energy and ready-to-drink tea categories. We are committed to striking a sound balance between the growth of our sparkling and still beverages. We see this balance as the key to growing our total business while sustainably enhancing our margins and profits, in line with our 2020 Vision. We're also committed to providing consumers more choice in brands, beverage types and calories or no calories, all of which contributes new growth to our business. The balance results that we have achieved across our portfolio demonstrate that we are delivering on this commitment. As we've shared during our prior earnings calls this year, we recognize that consumers across the globe are still feeling the effects of the prolonged uncertainty in Europe, the ongoing cooling of the economy in China and a mild recovery in the United States. We believe these global macroeconomic pressures will extend through 2012 and likely into 2013. Despite this, we are heartened by our ability to consistently deliver quality results, as well as by our global systems commitment to invest in the business for the long-term growth. We're also encouraged by how we have successfully and systematically adapted our business model these past few years to readily address the changing demands of the global marketplace. First, we better positioned our company to capture North America's long-term growth opportunity by acquiring CCE's North America business. Our North America business has delivered volume growth every quarter since we executed this important transaction. Second, we broadened the relevance of our Bottling Investments Group, evolving it further from its initial role of fixing challenging markets to a more significant role of spiriting our growth in select strategic markets, such as India and China. Constant renewal is in our DNA. Now with solid fundamentals and real momentum in our business, we are ready to take the next step towards our 2020 Vision. As announced last quarter, effective January 1, 2013, we're organizing our company around 3 major operating businesses

[Gary P. Fayard:]

Thanks, Muhtar, and good morning, everyone. We delivered another quarter of solid performance results, reflecting our global system's ability to consistently execute our strategic plans while managing through a still unpredictable macroeconomic environment. As you'll recall, I provided a commentary about the third quarter during our last earnings call because we knew there were several unique timing and cycling factors to consider when modeling the third quarter. Taking these factors into account, I'm pleased to say that our third quarter results were consistent with the commentary we provided in our last earnings call. And as such, we remain confident in our ability to deliver full year volume, revenue and operating income results in line with our long-term growth targets. So let me start our review with our third quarter results with our comparable earnings per share, which came in at $0.51 this quarter and at $1.56 on a year-to-date basis, up 2% year-to-date despite facing considerable currency headwinds throughout the year. Our comparable currency-neutral operating income was up 1% this quarter, in line with our expectations. And on a comparable basis, the impact of currency on this quarter's operating income results was a 7% headwind. On a year-to-date basis, our comparable currency-neutral operating income is up 4%, also in line with our expectations. As per my previous comment, we expect to deliver full year operating income results in line with our long-term growth targets, and we understand that this implies we will achieve double-digit comparable currency-neutral operating income growth in the fourth quarter. Comparable currency-neutral net revenues grew 6% in the quarter. The currency impact on this quarter's comparable net revenue results was a 5% headwind. On a year-to-date basis, comparable currency-neutral net revenue growth is also at 6%. As we discuss profit and revenue growth rates, let me take a moment to remind everyone that the profits and revenues generated by some of our more recent strategic partnerships, including Aujan and Innocent, among others, are accounted for under the equity method of accounting. So while unit cases related to these businesses are fully reflected in our volume growth, their associated concentrate sales or concentrate gallons-associated profits and revenues are not currently contributing to our operating income and revenue growth rates. Instead, these profits are consolidated into our equity income results. While this did not materially impact our third quarter results, I think it's important because there is an impact on growth rates. Returning now to a review of our third quarter results, our concentrate sales came in slightly ahead of unit case volume by approximately 0.5%. As a reminder, growth rates for concentrate sales and unit cases can vary from quarter-to-quarter. Having said that, concentrate sales are in line with unit cases year-to-date, and we expect our full year concentrate sales growth to be in line with unit case volume growth. As for our consolidated price mix, this came in slightly positive in the quarter, rounding to even, consistent with outlook we provided in our last quarter call. On a year-to-date basis, our consolidated price mix is up 2%. We continue to expect our full year 2012 consolidated price mix results to come in between 1% and 2%, in line with our long-term target range. Our third quarter comparable gross margins were in line with our second quarter comparable gross margins. This was a slight improvement over the estimate we provided during our last earnings call, as we successfully offset some of the currency and mix shift headwinds faced by our business. For the full year, we still expect our comparable gross margins to come in below our second and third quarter comparable gross margins. On comparable currency-neutral SG&A expenses, they were up 8% in the quarter and 6% year-to-date. These results include a mid-single-digit increase in our third quarter direct marketing expenses, as we continue to invest in the health and strength of our brands. Our third quarter SG&A also reflects an increase due to the timing of certain operating expenses, as well as the cost of adding incremental feet on the street, primarily in North America, in support of our growing business. And one point of both our quarter and year-to-date SG&A rate is related to the impact of structural items, primarily in our Bottling Investments Group and North American business. As we look to the rest of the year, we expect our full year SG&A to come in close to our current year-to-date rate. Our operating expense leverage was minus 4 points this quarter, right in line with the minus 3- to a minus 5-point range that we estimated during our last earnings call. As we've stated in our last call, we expect this trend to reverse in the fourth quarter, as we benefit from having 2 additional selling days. This should enable us to achieve slightly positive operating expense leverage on a full year basis. Our net interest came in at a positive $16 million in the third quarter, which is ahead of our initial expectations. This raised our year-to-date net interest income to $43 million. Looking ahead, we still expect our net interest to come in as an expense in the fourth quarter, primarily due to expected lower rates in some of our international locations, as well as ongoing currency headwinds. As a result, we're updating our full year net interest income outlook to a $30 million to $40 million range. Our underlying effective tax rate held steady at 24%, and we expect to carry this 24% tax rate into next year. And our cash flow from operations increased a very healthy and very strong 15% year-to-date. Our year-to-date share repurchases, net of employee stock option exercises, totaled $2.3 billion, placing us well on track to achieve the $2.5 billion to $3 billion range for full year 2012 that we communicated at the outset of this year. With regard to commodities, in our last call, we reduced the estimated full year incremental impact of our Big 4 commodity cost on our results to $300 million. Based on our latest forecast and hedge positions, we now expect our full year incremental cost of commodities will come in at approximately $225 million. As for currencies, we previously provided an outlook that we would have an 8% to 9% headwind on an operating income in the third quarter. Today, I can confirm that currency came in slightly better than our initial outlook, resulting in a 7% headwind on third quarter comparable operating income. Based on our hedge positions, current spot rates and the cycling of our prior year rates, we continue to expect currencies to be a mid-single-digit headwind on our operating income in both the fourth quarter and on a full year basis. In closing, and as Muhtar said earlier, we are strategically and successfully advancing our global momentum while navigating through a challenging global economy. Our system is focused on maximizing economic profit and long-term cash flow, which allows us to continue to reinvest in the business and anticipate changes in the marketplace and competitive dynamics. While we have made several important and strategic investments this year, our financial priorities remain the same. We'll reinvest in the core business. We still expect to spend around $3 billion in capital expenditures in 2012. We will strategically invest in acquisitions and partnerships, the strength in our bottling system, and to increase our position in key nonalcoholic ready-to-drink growth categories. We will continue to pay dividends. In 2012, we increased our quarterly dividend 8.5%, and we have returned $4.3 billion in dividends to shareholders in 2011. And further, we expect our Board of Directors to approve another quarterly dividend this week, which by the way will be paid in December of this year, as it has been every year since 1934. And we'll continue to repurchase shares with excess cash. In our current program, which we started in 2006, we've already repurchased 533 million shares at an average price of $31.17. Since our share repurchase program started in 1984, we have repurchased 2.9 billion shares at an average price of $12.55. As a result of our strong cash flow and that of our bottlers, I remain very confident that we can continue to invest and deliver our long-term growth targets on a sustainable basis to achieve our 2020 Vision and deliver value to our shareowners. Operator, we're now ready for questions.

[Operator:]

Our first question today comes from Bill Pecoriello from Consumer Edge Research.

[William Pecoriello:]

Gary, you talked about the double-digit operating profit growth expected for Q4 versus the 4% year-to-date, I think it's something like 14% you need to hit the 6% lower end of the long-term range for the full year. I know you have the 2 extra days in the fourth quarter. You mentioned commodities were easing. Anything else about the timing of expenses in the fourth quarter versus year-to-date, as well as what you're lapping in the fourth quarter that'll explain the strength? I know last year's fourth quarter was strange, you had some of the timing differences related to the CCE transaction. So I don't know if that's also coming into play in the lap there.

[Muhtar Kent:]

Bill, this is Muhtar. Let me just address a few of the things in your question, and then Gary will add some more commentary. First, I want to just ensure and stress that our business momentum continues in the midst of ongoing global economic challenges. Our system is very well aligned and on track to achieve our 2020 Vision. And the appetite for investment by our bottling partners is strong as it has ever been. And consumers' love for our brands is stronger than ever. And as such, we do remain confident in our ability to meet our long-term targets, while also delivering sustainable, profitable growth and value for our shareowners. With respect -- and so -- at the outset. With respect to your question on the fourth quarter, let me -- as Gary said, we -- based on what we know today, we feel very confident that we can dock our ship for 2012, in line with our long-term growth targets for both top line and bottom in terms of operating profit. And so as Gary mentioned, that will imply having a double-digit growth in our operating income for the fourth quarter. We feel confident that, that can be achieved based on what we know and based on current trends. And that is a host of reasons; cycling of marketing expenses, as you saw total marketing for the company was up quite significantly in the fourth quarter. We had spend related to -- a onetime spend related to the Olympics, to the UEFA Cup, spending on our brands in a healthy way. And I think it is important to note that you can find many companies today around the world, around -- in the United States, around the world that can generate their profit line from no growth in top line. That is not sustainable. We feel very confident that we're doing the right thing for our business, right thing for our brand and we will dock our ship in 2012, yet again, in line with our long-term growth target, despite having -- facing significant commodity headwinds in both 2011 and cycling also on top of that, headwinds in 2012, investing in our brands, growing our top line and also earning our price/mix. So I'd like to just emphasize that, and pass it over to Gary.

[Gary P. Fayard:]

Okay. Bill, a couple of things. As you mentioned, the 2 extra days helped significantly, most particularly in the finished products business, so both in North America and in BIG. And we saw the opposite impact of the 1 less day in the first quarter. So the 2 extra days helped significantly. There are quite a bit of cycling things. And you see a lot of that cycling in the third quarter, which made the third quarter so complex, and that's why we try to give a lot of extra guidance at the end of the second quarter because of the third. But a lot of that is what we've been saying all year, particularly about the North America business, how we would expect to see sequential improvement in the North America business. If you remember, just it went from minus 9 to even, now to plus 3, and you'll continue to see improvement in North America. The easing of commodities is -- obviously is helping some, although a lot of that commodity now has come through, the easing has come through into the standard costs, but that's helping. And currency will help as well, in that the headwinds of currency from the minus 7 in the third quarter to lower in the fourth quarter, not just on the translation of the results but the transactional impact, particularly inside of BIG where that currency owned -- the cost of their commodities or in their cost of goods, we do not pull out our currency-neutral calculation. So the impact of currency does hurt BIG results, and so that will improve as well in the fourth quarter. So I think everything we're seeing -- the brands are healthy. We've taken pricing across the world, we've seen much better elasticities than what we've ever had historically, which give -- has given us a lot of optimism as well.

[Operator:]

Our next question comes from Judy Hong from Goldman Sachs.

[Judy E. Hong:]

Just in terms of North America, so it's nice to see the profitability of slight positively in the quarter. If you could just maybe talk about as you look 2013, your ability to sort of sustain kind of a positive pricing mix. And also just color as it relates to some of the commentary on channel mix that you've alluded to in the last quarter where you continue to see that pressure in terms of shift towards take home versus immediate consumption and how that's kind of playing out so far.

[Muhtar Kent:]

Sure. Judy, let me address some of those. I'm very pleased with the performance of our United -- U.S. business. I think in terms of -- we've increased total beverage volume and value share in this past quarter once again, driven by the 2% overall volume growth, led by 7% growth in still beverages, while -- and also maintaining sparkling volume on a year-to-date basis. And this is, again, 10th quarter in a row of volume growth in our North America business. And I think we continue to build our occasion-based price, pack, channel strategy that provides increased consumer choice, along with preferred packages, preferred price points, which is very important in this economic environment. We see also some more positive trends in the channel mix compared to last quarter. I think the overall convenience retail channel in the third quarter was stronger. Industry grew almost -- certainly above 4%, almost 5%. And we have not only taken significant pricing, 3% price/mix, up again in the quarter and maintained it for the full year, but also we are focused very much on transactions getting pricing, maintaining share and growing transactions in the United States. That's the model. That's working. And specifically, we've got a great package in the 12.5 ounce, which is retailing for under $1 in that channel, for example. And then also, we continue to expand in our food service channel with our innovative Freestyle. We will pass, for the first time this year the 10,000 mark in terms of dispensers deployed in this coming quarter, in the quarter that we're in, the fourth quarter. The average incidence lift there is more than 6%, the volume lift is significant, as well as revenue lift for the customer. So that's another very important point of reference in our business in the United States. And again our growth is led by strong performance with Coke Zero, up almost double digits in this past quarter, coming back very strongly, strong performance across multiple categories, such as POWERADE continuing, Gold Peak growing strong double digits, Fuze growing, smartwater, glacéau, Minute Maid, all growing in a very significant manner. So we feel confident that our North America strategies are working. We are focused on execution. We can always improve and strive for more, we always do. And we're optimistic about our outlook, despite the challenging competitive and macroeconomic backdrop. But important channels, we see better light coming through in some of the really important critical channels in the third quarter. I hope that's helpful.

[Gary P. Fayard:]

Judy, it's Gary. On your -- the rest of your question, in 2013, we're going through business plans now. And on the year-end call, we'll give you an outlook on what we see, both for North America and rest of world, as well as -- because that will obviously encompass things like commodities, currencies, et cetera. So we'll go through that at the end of the year. And -- but we can't do it today.

[Muhtar Kent:]

And again, just to close the question, we feel confident about sequential improvement in this year and the fourth quarter in the U.S. business in terms of results. And again, we feel that the strategies that we've deployed are working in the United States. We have invested. Our total marketing, again, in the United States in the quarter, and this past quarter is up. And also I would say to you that we feel that specifically also that the packaging strategies are working really well for us.

[Operator:]

Our next question comes from Bryan Spillane from Bank of America.

[Bryan D. Spillane:]

Just have a question regarding productivity in the productivity and reinvestment program. I guess one is just, Gary, if you could give us some idea of how much productivity is contributing to this year and kind of where you stand in terms of the 2015 target. And then, Muhtar, I think in your comments you talked about the new reporting lines and how that would help enable leveraging synergies. And so I just wanted to see if you could tie that comment back to the productivity and reinvestment program. Does it -- do the new reporting -- does the new reporting structure accelerate it? Does it increase, enhance it in some way? Just trying to get a sense of kind of where we stand on productivity.

[Gary P. Fayard:]

Yes. Bryan, thanks. This is Gary. On the program just to remind everyone, what we announced earlier this year is a new productivity and reinvestment program from 2012 through 2015. And $550 million to $650 million composed of quite a few different focus areas. And we would take all of the productivity that we realize, and then take that and reinvest it back behind -- into the brands. We have started. We're well on the way. In fact, I can tell you that I have a sightline today to where we can achieve the entire target, so it's not an issue at all on achieving. Relative to the current year, I would say it's probably in the $40 million to $50 million range that's already been achieved and reflected in the results or will be in this year. So it's already flowing through. And we're doing, I think, really well. Just to remind everyone, the focus areas were around supply chain optimization, around marketing and innovation effectiveness, around operational excellence, which leads to OpEx leverage and around standardizing data and IT systems, where places where you can really get a lot of leverage, and then take that and reinvest it behind the brands. Muhtar?

[Muhtar Kent:]

Yes. And again, Bryan, in terms of the structure, I think we have a new leadership structure that is going to be leaner, more effective, more flexible structure; and that is going to drive a further, I believe, enhancement in our productivity initiatives. Gary and Ahmet Bozer and Irial and Steve and myself will be -- in terms of looking at these productivity initiatives, feel confident. And as Gary can see the -- have sight in the numbers and in the productivity being achieved, I think that we will certainly be looking at what we can do to enhance it even further. As you know, we came in, in the last productivity cycle for the past 3 years significantly over our targets, and we feel that we have again room to improve always. And also, as Gary said, importantly, while we deliver our results, this allows us to continue to invest successfully and making our brands even stronger. That is the key, and that's what you should always be looking for and that's what we always look for.

[Operator:]

Our next question comes from Bill Schmitz with Deutsche Bank.

[William Schmitz:]

Can you just sort of circle the square for me here? So you had great organic growth in both Latin America and Eurasia with terrific price and mix. But those are the 2 regions where you had the biggest margin compression. So is that really just sort of year-over-year comparisons and maybe some of the FX transaction here? Because you would have thought that with that kind of growth, perhaps the margins would have been a little bit better.

[Muhtar Kent:]

Just very quickly on that. I'll tell you, first, we had very significant marketing spend in our international operations and total company for the third quarter. Our total marketing was up double digits for our international operations. And I think that again, that is partly cycling from prior year, particularly in certain geographic areas. But also it was to do with the onetime spend related to the Olympics, related to brand building around the UEFA Cup, particularly for Europe, but also for Eurasia, as well as for Latin America. So I think you need to take it into that context, from the perspective of marketing spend, cycling and prior year comparisons. And I'll see if Gary wants to add anything to that.

[Gary P. Fayard:]

Yes, one thing I would add, and I don't know if this is directly responsive to your question, but when I made a few comments in the prepared remarks about volume and how we have different business models like the Innocent, Aujan, et cetera. So you've got some volume in Eurasia this quarter, for example. So if you look at the table in the release, if I remember correctly, it would show that Eurasia and Africa's volume, volumes up 11% and comparable currency-neutral operating income is up 11% as well. So you're not seeing a lot of leverage in that. If you -- but remember, there is no income in there related to Aujan. It's sitting down in equity income, but the volume is in that 11%. So if you adjust for that, Eurasia, Africa actually has some really nice operating leverage within their P&L. And so on operating margins, they're actually sitting in a really nice place for the quarter and year-to-date. So and then on Latin America, I don't think anything really unusual at all. I think they just continue to hum along as they have for the last number of years. And there's nothing other than we continue to invest in Latin America because it's such a great, great, strong market.

[Muhtar Kent:]

One other thing about Latin America, just want to add context is in the -- a couple of years ago, we had this discussion. And many were questioning Latin America's ability to continue grow. And I always said, "Latin America is just beginning its journey in still beverages." The key is to have balanced growth. Still beverages, though, growing, of course, from a very small base at a higher rate of growth than sparkling beverages. But I think there's -- Latin America is a great model for how we can continue to grow at even high per capita as for sparkling beverages entering into new categories. And I think that is adding tremendous value to our business and also tremendous strength to our bottom line as we continue to progress in Latin America. We're cycling a very strong quarter from Latin America last year and we still achieved 5% and generating very healthy returns.

[Gary P. Fayard:]

Yes. The only –I'd add one other thing as well. We're probably starting to give you too much detail. But within the quarter in Latin America -- in Brazil actually, they started making -- we started making our initial investments around the 2014 World Cup. That's in marketing. And while in absolute dollars it's not that big, it will continue. But in fact, it does have an impact of 1 point or 2 points on the leverage that you're seeing in Latin America. So I guess, all in, what we're saying is we are continuing to invest in the brands. We're investing well ahead of the curve. We're getting ready for 2014 World Cup. It's flowing through in the third quarter. And you'll see it flow-through next quarter as well because we're going to make sure that we do these things right.

[Operator:]

Our next question comes from John Faucher with JPMorgan.

[John A. Faucher:]

In taking a look at the price/mix number, obviously didn't come in as strongly as we've anticipated in Europe and the Pacific. Can you talk a little bit about what's driving those price/mix numbers and sort of how you see that playing out over the next couple of quarters?

[Gary P. Fayard:]

Yes. Thanks, John. Let's go to Europe first. And there, I think, price/mix was negative 4, and there are a couple of things going on there. But I'd say it's primarily actually the economic condition of Europe. And we've been seeing this flow through for some time now. So I think it's kind of the new normal until we start seeing some more favorable results. But what you're seeing is go to Madrid and what you -- and look at the cafes, and there aren't a lot of people sitting around drinking cokes or coffee or whatever. It is a shift in consumer spending in Europe from immediate consumption much more to future consumption. So while we grew our volume across the region or across each of the business units, there is a shift, and it's all about the macroeconomic environment that we're dealing with. So we feel very confident because people continue to love the brands. They continue to buy the brands. They are just buying them in more of a take home because they're not going out. So it's the macros that are impacting that. And additionally, if you look at the growth rates, there's negative geographic price/mix in Europe as well, just look at the growth rates. Europe and Central and Southern Europe grew faster than Spain and Northwest Europe. So that's some of it as well. And we're cycling through the tax increase in France. So it's all of those kinds of things together. Don't expect to see it get worse. I think we're kind of at the bottom now and should be okay. Relative to price/mix in the Pacific, I think your initial reaction would probably be, "Oh my God, it's minus 6." And your initial reaction is probably that it's all China. Well, it's not actually. A lot of it is actually because if you look at cases and gallons while, as I said in the prepared remarks, that gallons are slightly about 0.5 point ahead of cases in the quarter, in Japan, where Japan volume was up 2, gallons were actually down 2. And it's normal and it'll be fine at the end of the year. But that's 4-point swing in Japan, which as a very high profit per gallon market causes significant price/mix, negative price/mix, and that's a large part of what we're seeing in the Pacific. It's not a big deal. I think Japan was, I think, pretty much in line year-to-date and will be full year.

[John A. Faucher:]

Got it, that's great. And then if I can just ask a follow-up on the -- particularly on the Spain piece of this, which is are you guys running on a straight incidence pricing model then in Spain? Because that negative channel mix would probably -- I'm trying to figure out how that's impacting you so quickly unless you're providing either a, you're on a straight incidence, in which case the channel mix would hit you immediately? Or are you providing a little extra funding into the bottlers in terms of trying to help them get through this?

[Muhtar Kent:]

John, the primary reason, I'd say probably 70% -- this is Muhtar, 70% of the mix in Europe is geographic, related to the fact that lower price regions like Germany and Eastern Europe and Central Europe were growing faster than some of the other regions in Europe that have a higher pricing like France, like England, and that has really -- and like Spain. Spain has one of the highest prices in Europe. And so that has had the biggest contributing factor. One of the reasons for that was very unseasonable weather in Northern Europe during half of the quarter. It's never been wetter than -- in history than this – than the beginning of the quarter for 2.5 -- 2 months, 1.5 months, half of the quarter in Northern Europe. So that is coming back, and we feel that, that is one of the primary reasons. As we have more balanced growth in Europe, which we expect will happen, and as Gary said, we feel that it's not going to get any worse than it is and it may even -- and even in these conditions, we can generate growth and crack the calculus for growth, then we feel that, that will certainly be coming back quite significantly. Spain remains today, on a net revenue per unit case basis, the highest in Europe. So I just want to make sure that those -- that commentary gets through.

[Operator:]

Our next question comes from Caroline Levy from CLSA. Caroline S. Levy - Credit Agricole Securities (USA) Inc., Research Division Obviously, my concern is definitely around China. And just I'm just wondering how margins in the Pacific would not be impacted by what's happening in China. Can you just dig a little deeper? Was there -- did you have increased promotional activity in China during the quarter? Or should we expect that in the next period? Just as we know the competitive environment there has got more -- both more price competitive and there's more distribution for Pepsi brands there.

[Muhtar Kent:]

Well firstly, I mean I think, Caroline, on China, we are confident in our ability to continue growing in China, in this important market despite the changing, as you mentioned, competitive landscape and softness -- comparative softness in the macro conditions. And our transactions are up a healthy 7% in the past quarter. We have said it before in previous quarters that we're focused on transactions and that's the health of the business in China. And certainly, we're driving transactions in a very favorable way. Year-to-date, volume is a solid 6% and our brands are very strong. We have a clear leadership position in the sparkling category, and I have total confidence in both our bottling partners, COFCO and Swire beverages and Bottling Investment Group were to continue to deliver. You have noted from previous calls that on a total comparative basis, relative basis, China's contribution to profit is less than its contribution to volume in the Pacific Group for a number of reasons. One is because we've got much more developed countries that have much bigger margins for like, of course, Japan, but like also Australasia. And therefore, it is -- the impact -- even if we were to promote in China and not that, again, we feel it's a rational environment. But even if we were to promote, it would not have significant impact on the results of the Pacific Group, simply because of the size and scale of the profit pools that are generated out of markets like Japan and out of markets like Australasia. And again, given the size of our Japan profit pool in the Pacific Group, what Gary mentioned is the primary cause of that, which is an increase in volume, 2%, but a commensurate decrease at the same percent point in actually concentrate shipments.

[Operator:]

Our final question today comes from Mark Swartzberg with Stifel, Nicolaus.

[Mark Swartzberg:]

Muhtar, I was hoping we could talk a little bit more about North America c-stores, and I had 2 questions there. Firstly, on the sparkling part of your portfolio, can you give us a little more detail on what's going on with some of the smaller pack sizes? I think they were having some difficulty in the second quarter. What's happening there? And also within sparkling in c-stores competing products, with Mountain Dew spending a lot more, what's your strategy versus that particular brand with your portfolio? So that's on the sparkling side. And then can you just give us an update on the energy segment sequentially in c-stores?

[Muhtar Kent:]

Yes, I think in terms of -- firstly, the good news is that there is more positives to talk about the c-store channel in the quarter than in the first half of the year, we feel. And certainly, it is also important to note that we aggressively led the industry on competition and pricing in the channel. And also that the industry grew at around just under -- shy of 5% roughly in the channel. And we led the pricing. And we have, again, very healthy growth in transactions. And we held share in the channel and of course in total market. And in terms of packaging, our variety of packages starting with the entry pack of 12.5 ounce is really working well for us at the entry price of under $1. And then that puts us -- our 16 ounce significantly ahead of competition and pricing at $1.19 and so on and so forth. So I would say we are very confident and very pleased with the progress that we have in that channel as we have in the Foodservice channel where we see increased traffic coming through, particularly in the latter part of the quarter. And then in energy, you asked, we had double-digit volume growth. Our brands were up and gained volume and value share in the energy channel, in -- which is primarily the c-store, the convenient store channel. But also I'd say that our variety of packages, including the mini cans, 8.5 ounce mini cans and all the way through the 1.25 liter combined with the 2-liter, et cetera, are working really well for us in the future consumption channel as well.

[Mark Swartzberg:]

So it sounds like Mountain Dew -- of all the things competitively happening in c-stores, Mountain Dew is not, on the margin, a big impact on your business, at least for now?

[Muhtar Kent:]

I wouldn't want to comment on competition. I just would say that I think it's healthy for everyone. So thank you Gary and Jackson. And in closing, we had a strong third quarter, have again delivered quality year-to-date performance results. Our business continues to grow even in the midst of global economic challenges. Our system is clearly aligned, on track to achieve our 2020 Vision. The appetite for investment by our bottling partners is as strong as it's ever been. And together we, as a system, continue to invest in our brands on a global scale through world-class marketing and also through world-class commercial strategies. And as a result, consumers' love for our brands is stronger than ever. As always, we thank you for your interest and your investment in our company and for joining us this morning.

[Operator:]

This does conclude today's conference. Thank you so much for joining. You may disconnect at this time.