Coca-Cola Enterprises Earnings Call INSIGHTS: Dark Cloud on Industry, Customer Ordering Patterns

On Monday, Coca-Cola Enterprises Inc (NYSE:CCE) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Dark Cloud on Industry

Caroline Levy – CLSA: Just given how severe the weather has been, you mentioned things are getting better. I was just looking at the London forecast and I hate to be so short term, but you are putting a lot of marketing behind Olympics. I’m wondering if you can, first of all give us a sense of how July looks, and secondly, walk us through what has happened in terms of what does consumer preference do when the weathers a little strange or does it go to CSDs, does it go to non-carbs, and give us a sense of the balance between how growth looked in the U.K., France and the Nordics in the quarter, so just an understanding of where the hit was worst and how it’s looking right now?

A Closer Look: Coca-Cola Enterprises Earnings Cheat Sheet>>

John F. Brock – Chairman and CEO: Caroline, let me make a couple of comments and if Hubert wants to add some commentary to that, he certainly can do so. I think it’s fair to say that July is broadly in line with our expectations, and that some of the recent weather here is a bit better and that’s great news and that’s true throughout all of the territories and as you said the forecast looks a bit better. All honestly we’ve assumed here for the third quarter as a normal weather pattern and that’s what we’d like to see it return to and you’re absolutely right that we have put in place some incredible activation programs and there is no doubt that they will be far more effective if we have some good weather, and the last few days I think are demonstrative of that. I don’t think candidly there is a huge difference in terms of weather’s impact on our portfolio. We’ve got a broad portfolio which plays across all kinds of consumer desires. Honestly, I think weather simply keeps people from traveling and it’s a bit psychological and what we’ve seen in the last few days is a very different kind of situation and we’re optimistic that that’s going to continue.

Hubert Patricot – EVP and President, European Group: Yes, Caroline, what John said here on the SSD no difference between flavors, color or diet. Fair to say that the water in general are less affected because you’re looking especially on the continent of daily every consumer which are less sensitive to the weather as opposed to the soft trends. Fair to say also that the energy drinks have continued to grow despite this bad weather, but overall all categories have been impacted and I think it’s an industry issue we are facing. Regarding the continents and GB, I mean it’s pretty comparable, in some way we’re from the continent again, because you’re with some low per capita counties where when you’re facing bad weather the light drinkers are not coming to the categories that’s why probably countries like France or Holland were more effective than GB.

Caroline Levy – CLSA: I’m wondering if you could help us understand the marketing and the expected impact. I think you’ve stressed that you think the benefits of Olympic are long term equity building maybe even relationship building with the retailers that do you expect that volume would pick up any way just because you’re going to have so much display activity and so much activation in television that we should see some benefits in the third quarter?

Hubert Patricot – EVP and President, European Group: I think as we shared with you, we are looking at the Olympic as a legacy for GB, so there’s some short-term activity and yes, we’ll have, what we call, Moment 4 and Moment 5 – Moment 5 and 6 in GB, which are around the Olympics. We’ll have more display than we had last year at the same time for sure and we are expecting some traction. But each above that, I mean, we are talking about three brands for this Olympic; My Coke, of course; Powerade, and we have a lot of activities behind Powerade; and glaceau. And we really think seeing this year a real traction behind glaceau and I think the Olympic will accelerate that. But on top of that and related, for example, to the Torch Relay which visited 66 GB cities, we are pushing a lot the icon glass bottle in a license trade the pubs in GB and here again, we are seeing some growth and this will be for the long-term. On top of that, as you mentioned, we have a three-year plan with our customer; we are changing the shelf displays with the big players like Tesco and Sainsbury (to take the call offers) within brand building blocks in the store. So, this is about building for the mid and long-term growth of our brands in GB.

John F. Brock – Chairman and CEO: Let me ask Bill to add one further piece of perspective to that.

William W. Douglas III – EVP and CFO: Sure. I think if you look at the P&L implications, Caroline, based on your question, we would expect a bounce back in volume assuming normalized weather for the balance of the quarter versus what we experienced then in Q2, and hopefully volume growth obviously. As I mentioned in my prepared remarks, we would also expect some incremental costs given that this is the quarter of the Olympic games and being the host bottler there are some costs associated with that and all of that would net together to give, again, what I shared in my prepared remarks, mid single-digit comparable and currency neutral EPS for the quarter, but factor in the negative currency impact which we currently see of approximately 12%; again, that’s recent rates; that’s not today’s spot rate; but directionally, that’s the currency headwind that we envision.

Caroline Levy – CLSA: The last question is on the margins. Looked like you did a good job on controlling cost of sales per case and obviously, the (drought year) is affecting current prices but you largely buy sugar. Is there any – what are you seeing on your major inputs as you look out 6 to 12 months?

William W. Douglas III – EVP and CFO: I think I’ll comment on 2012 generally. We did cover our COGS if you exclude the French excise tax. Pricing was for – COGS per case were ($3). We would feel confident about our ability to do that for the rest of the year. There has been some weakening in the commodity environment notwithstanding corn over the last 60 days which has taken some of the pressure. I think our current outlook for the full year for cost of goods sold per case is now in a range of 3% to 3.5%. When we spoke in April, that was more in the 3.5% to 4% range. So, we do see some full year benefit. As you mentioned, we’re not really affected by corn in Europe. Having said that, it’s a little too early to project into 2013. We would do that, as we normally would, in our December outlook call. But as you’re thinking about the puts and takes for 2013 cost of good sales going back to the sweetener element, we are subject to the EU sugar regime in all of our markets, with the exception of Norway and that’s a little bit of an anomaly outlier as compared to some of the other recent commodity trends, i.e. it’s been going up.

Customer Ordering Patterns

William Schmitz – Deutsche Bank: Did you say what the Coke volume was in the quarter, Trademark Coke?

John F. Brock – Chairman and CEO: We did not actually say that, Bill. Why don’t we get that information as a follow-up? Thor can talk with you after the call and go through that. We talked about Coke Zero. We didn’t actually talk about Trademark Coke, but Thor will be happy to give you a ring and follow up on that one specifically.

William Schmitz – Deutsche Bank: Then, have there been any changes in the customer ordering patterns? I mean is it really just sort of consumer takeaway or are your customers getting a little bit more conservative in terms of planning since your warehouse model?

John F. Brock – Chairman and CEO: Huber?

Hubert Patricot – EVP and President, European Group: What we are seeing is probably more treats, but with an average basket which is decreasing. This is not new news that is something which has been the case for at least 18 months to 2 years. We are responding to that with new promotional scheme on top of the six-pack and 1.5 will offer, dual pack, two bottles. We are also entering iced tea with a new format, a new package, the 375 which in GB would come on shelf at 89p as opposed to (GBP 1.08) for the 500. But, yeah, there is some shift in the consumption pattern of the consumers. But frankly, the main effect this quarter was really the weather.

William W. Douglas III – EVP and CFO: Bill, this is Bill Douglas. I double checked what Hubert was answering and Trademark Coke was down approximately 6% roughly in line with the overall volume trends.

William Schmitz – Deutsche Bank: Then what’s the magic of the 65 million share authorization. Is that just a Board decision and can that be up if you guys had a board meeting that says you want to buyback more stock because if you look at it you’re at 375 I guess for the first half of the year. So if you run rate that it’s like 750 million. So it’s real magic to that 65 million share authorization?

William W. Douglas III – EVP and CFO: There was some logic to it Bill. When we did the original transaction we set a cap of 20% which we rounded to 65 million shares from that time for about a two year period. So that effectively takes us to Q1 of – sorry October 1 of 2012, but we’ve kind of rolled out forward to the end of the year. So that’s where the origin of that 65 million share number comes from. But that would not be an inhibitor prospectively after that two year moratorium has passed.