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Coca-Cola Enterprises (CCE - Analyst Report) posted second quarter 2012 adjusted earnings (excluding the impact of restructuring charges and mark-to-market commodity hedges) of 73 cents per share, in line with the Zacks Consensus Estimate.
Earnings were down 4% year over year, owing to a decline in revenue and volume. Currency translations had an unfavorable effect on earnings by 8 cents.
During the quarter, net sales decreased 8.5% year over year to $2.21 billion. Excluding the impact of currency and the French excise tax (FET) hike, organic revenues were down 2.0%. Sales lagged the Zacks Consensus Revenue Estimate of $2.29 billion.
From January 2012, French regulatory authorities introduced an increased excise tax on beverages with added sweetener, which is applicable to almost all drinks that the company sells in France. The company expects this increased tax to hurt its overall cost of sales by 4% in 2012 and expects to pass on these costs to consumers in the form of higher retail prices for its products.
Volumes (bottle and cans) were down 6% in the quarter due to increased retail prices resulting from the French excise tax increase, strong prior-year quarter comparisons and difficult weather, which acted as headwinds in the quarter.
While volumes in the continental European territories (including Norway and Sweden) declined 7%, they declined 4.5% in Great Britain. While Sparkling beverages (like Sprite and Fanta) continued to decline, the energy category grew 16%. Coca-Cola Zero grew 2.5%.
The company’s net pricing per case and cost of goods per case increased 6.5% each in the quarter, including FET. However, excluding the FET impact, net pricing per case increased 4%, and cost of goods per case also increased 3%.
Adjusted gross profit in the quarter decreased 9% year over year to $814 million due to a decline in volume. Adjusted operating income was down 11% to $328 million (down 2% excluding currency impacts) mainly due to currency headwinds.
Other Financial Update
During the reported quarter, Coca-Cola Enterprises repurchased $225 million shares under a new share repurchase program worth $1.0 billion, which was announced in January, 2012. The company expects to buyback at least $600 million worth of shares by the end of fiscal 2012.
Fiscal 2012 Guidance
The company expects earnings per diluted share to be within $2.18 to $2.24. The guidance includes the negative impact of currency translation and anticipates a decline in full-year earnings per diluted share by about 10% and 12%, respectively.
Net sales are expected to grow in a mid-single-digit range. Operating income is also expected to grow in a mid-single-digit range.
The company expects cash flow to be in the range of $475 million to $500 million in fiscal 2012. The capital expenditures are expected to be in the range of $375 million to $400 million. It expects the weighted average cost of debt to be 3% and the effective tax rate is expected to be in a range of 26% to 28% for fiscal 2012.
Currently, we have a Neutral recommendation on Coca-Cola Enterprises. The stock carries a Zacks #3 Rank (a short-term Hold rating).
We are encouraged by the company’s strong brand portfolio and solid cash position. However, the French excise tax increase and economic challenges in Europe create significant overhang. We thus prefer to remain on the sidelines.