Coca-Cola Enterprises' CEO Discusses Q2 2011 Results - Earnings Call Transcript

|
 |  Includes: CCE
by: SA Transcripts

Coca-Cola Enterprises Inc. (NYSE:CCE)

Q2 2011 Earnings Call

July 28, 2011 9:00 AM ET

Executives

Thor Erickson – VP, IR

John Brock – Chairman and CEO

William Douglas – EVP and CFO

Hubert Patricot – President, European Group

Analysts

Christine Farkas – Bank of America Merrill Lynch

Stephen Powers – Bernstein

Kaumil Gajrawala – UBS

Lauren Torres – HSBC

Mark Swartzberg – Stifel Nicolaus

Caroline Levy – CLSA

Brett Cooper – Consumer Edge Research

Carlos Laboy – Credit Suisse

Judy Hong – Goldman Sachs

John Faucher– JPMorgan

Alex Patterson – RCM

Damian Witkowski – Gabelli & Company

Operator

Good day, and welcome to the Coca-Cola Enterprises’ Second 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 second quarter 2011 results and our outlook for 2011.

Before we begin, I’d like to remind you all 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 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 follow-up questions as time permits.

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

John Brock

Thank you, Thor, and we thank each of you for joining us today as we discuss our second quarter results and the earnings outlook for the remainder of this year.

As you can see from the news release this morning, we achieved solid revenue and operating income growth in the second quarter, with revenue up 8% and operating income up 6.5%, both on a comparable and currency neutral basis.

Comparable earnings per common say totaled $0.76 for quarter. This growth is encouraging and reflects both the benefit of our operating strategies and the skill and commitment of our employees. These two factors help drive positive quarterly operating results, including 4.5% volume growth and solid pricing growth of 3%. This combination of volume and pricing growth demonstrates excellent overall execution at every level of our business.

Cost of sales per case increased 4.5% during the quarter. While this increase created a 1.5 gap between the pricing per case growth and cost of goods per case growth, our operating income margin was flat compared to prior year.

Our commitment to maintain or expand margins over time remains unchanged. We will accomplish this through operating leverage and by maximizing the value of our brands. While recognizing the shifts in business conditions may create year-over-year fluctuations. Bill will discuss this and our outlook with you in more detail in just a minute.

Now, let’s look for closely at the factors that created our second quarter results. First, and most importantly, we continued to see growing consumer demand for our sparkling brands, including the core Coca-Cola trademark brands, sparkling flavors and energy.

Our core Coca-Cola trademark portfolio grew 4.5% in the quarter, with brand Coca-Cola up over 4% and Coca-Cola Zero up more than 15%. Sparkling flavors, including energy, grew 8% in the quarter. Fanta volume increased 7%. Sprite grew 5.5%, and Dr. Pepper increased more than 15%. We continue to make important end roads in the fast-growing, high margin, energy category, with our energy portfolio up more than 50% in the quarter.

This was achieved through growth of existing brands, including Monster, Nalu, Relentless and Burn, and with the instruction of Powerade Energy in Great Britain. Powerade Energy, which is characterized as the first dual energy beverage, providing fast energy and sustained performance, has excellent potential. It will be a solid addition to our portfolio.

Second, we realized significant benefits from execution and support of Coca-Cola’s 125th anniversary. This exceptionally successful initiative build volume and is fostering consumer loyalty for the Coca-Cola brand. I’m proud of the role our company and its people had in working with the Coca-Cola Company to make this anniversary a solid success throughout our territories. This demonstrates the effectiveness of our system and the ability to work together to build our brands and to create increasing value.

And, third, we realize additional benefit from the combination of a shift of the Easter holiday which fell entirely in the second quarter this year, and favorable weather early in the quarter.

Going forward, we have solid summer promotions already in place, with initiatives tied to music and a variety of summer activities. In addition, we are already working to maximize our sponsorship of the 2012 London Olympics, which continues to generate increasing levels of customer, media and consumer interest.

For example, we are currently determining the participants of the torch relay, engaging both customers and consumers. We also continue to work with our customers to create business plans that generate shared opportunities, and to fully launch our Olympic programs in all countries. In fact, the Olympics are a primary component of our main summer program in Great Britain and customer interest is increasing steadily as we get closer to the games now, only one year away.

We have clear goals for our work with the Olympic, including providing the highest possible levels of service. Most importantly, however, we will maximize the value of this investment, both for our customers and our share owners.

Success against these goals will require the highest levels of execution from our employees and I am confident in their ability to deliver. In fact, we recently received several outstanding customer service awards that recognize the high levels of service we provide. As an example, in Great Britain, we were named ‘Branded Supplier of the Year’ by the Grocer magazine and in Benelux won to sales team award from Sales Check magazine.

The most important takeaway from these awards is that they demonstrate the dedication and the skill of our people. It’s the same type of dedication that enabled our plans and friends to successfully begin production of 1.5 liter contour bottles this quarter, a package initiative that is showing early signs of success in the marketplace.

In many of our territories, we are introducing plant bottled packaging to our core brand Coca-Cola portfolio. Up to 50% of the PET in each plant bottle comes from a combination of plant material and recycled plastic. We will expand production to nearly all of our territories by the end of this year.

We also just published our latest corporate responsibility and sustainability report. This documents our commitment ‘2020’, which includes standards for water and energy conservation, recycling, community involvement, active healthy living, our workplace, and our portfolio. I would encourage you to take a look at this report, as CRS is an increasingly vital element of our company.

Now, let’s take a look at the full year. As I stated earlier, we are encouraged by our growth to date. We have confirmed our full year EPS guidance in a range of $2.10 to $2.15. This includes a $0.15 benefit from currency based on recent rates. Bill will discuss this outlook with you in more detail in a minute.

We also continue to return cash to our shareholders through our ongoing share repurchase program. During the second quarter we repurchased an additional $200 million of our shares and we remain on track to achieve repurchases of $1 billion of our shares by the end of the year or in early 2012. To date, we have repurchased $600 million in our shares since this program began in the fourth quarter of 2010. We expect to provide more details on capital structure and returning cash to share owners later this year.

We completed a meeting of our Board of Directors earlier this week in Stockholm, Sweden. I can assure you that we are intently focused in determining the most effective ways to continue to create increasing value. In addition, we continue to look for ways to better serve our shareholders.

In the second quarter we took a meaningful step through the listing of our shares on the NYSE Euronext in Paris. This additional listing increases our ability to reach European investors. The Euronext listing is a demonstration of our confidence in the ability of our company to create additional growth and enhanced value. Although we continue to face operating obstacle, including a soft macroeconomic environment and competitive marketplace and continued cost pressures, we believe we are well positioned to generate substantial, consistent, long-term growth.

A key element of our confidence comes as a result of this success of our global operating framework, which focuses our company on clear operating objectives. These objectives have helped create a proven record of growth and we will continue to execute against this framework. This focus will allow us to achieve consistent earnings growth in line with our long-term targets and enhance the value of our shareholders’ investment.

Before I close, I want to add a brief comment about the terrible tragedy in Norway. As a company, we’ve reached out in a number of ways to determine how we can best support official volunteer efforts and support our own employees. We believe it is imperative that we do what we can to help the local community in their recovery. Thankfully our employees are safe, and our business and facilities were not impacted, although the emotional impact to our associates in Norway has been substantial. Our thoughts are with the victim’s families and with everyone affected by this tragedy.

Now, I’ll turn the call over to Bill for more detail on our financial results, as well as our full year outlook.

William Douglas

Thank you, John. And we appreciate each of you taking the time to be with us this morning to review our second quarter results. Overall, we achieved solid growth in the quarter with volume, revenue and operating income growth in line with expectations. On a reported basis, our second quarter diluted earnings per share rose $0.74 on a comparable basis, earnings per share were $0.76.

We saw a good revenue growth during the quarter as revenue totaled 2.4 billion, up 8% on a currency neutral basis over prior year pro forma results. Comparable operating income was 368 million, up 6.5% on a comparable and currency neutral basis from prior year pro forma results. Net pricing per case increased 3%, while cost of sales per case increased 4.5%. Both of these per case amounts are comparable in currency neutral and are in line with our plan.

Now, let’s look briefly at the increase in our cost of goods sold. As expected we have seen increasing pressure in certain areas, particularly PET. Our second quarter increase in cost of goods sold per case reflects this pressure, as well as the timing of commodity hedges and prior year hurdles. For the full year, we are approximately 9% hedged for our key commodities, and continue to believe that cost of goods sold per case for the full year will be up approximately 3%. This is consistent with the guidance that we previously provided.

Our pricing and customer plans are in place, and we continue to expect margins to be essentially flat for the full year, despite the second quarter gap between our pricing and cost of goods sold per case. Looking ahead, we anticipate significant improvement in the fourth quarter versus the second and third quarters, and I will have more on this in just a moment.

These types of price and cost fluctuations will occur from time to time. However, as John stated, we remain committed to maintaining our expanding gross margins over time, as well as growing our operating income margins, and we have a solid track record of this in our European business.

We also continue to make excellent progress with our share repurchase program in the quarter completing purchases of 200 million. We have now purchased 600 million worth of shares since the fourth quarter of 2010. We will continue this program in keeping with our goal of a total of 1 billion in purchases by the end of the year for early 2012. The success of this program, coupled with the increase in our dividend earlier this year, demonstrates our commitment to increasing the return of cash to our share owners. Given that we will reach the end of the share repurchase program relatively soon, we are evaluating our next steps, and look forward to sharing these with you later in the year.

Turning to our outlook for 2011, we reaffirmed our guidance in our release this morning. This guidance includes results at or above our long-term financial objectives. We continue to expect comparable and currency neutral revenue growth in a mid-single digit range, in operating income growth in a mid to high single digit range.

Diluted earnings per common share are expected in a range of $2.10 to $2.15, and include a positive currency impact of approximately $0.15 at recent rates. These earnings reflect solid operating growth, even as we continue to face cost pressures in a challenging macroeconomic environment. We also continue to believe free cash flow will total approximately 475 to 500 million in 2011, with capital expenditures of approximately $400 million. For the full year, weighted average cost of debt is expected to be approximately 3%, which includes debt issuances, capital leases and the impact of currency swaps. As previously guided effective tax rate for the full year will be in the range of 26 to 28%.

Now, let me add a bit of clarity regarding the sequencing of our results for the remainder of the year, particularly with regard to currency and operating income. First, on currency, year-to-date, we have had a benefit of approximately $0.10 per share compared to prior year. We continue to expect a full year benefit of approximately $0.15 at recent rates.

Looking at operating income, our prior year hurdles for the fourth quarter are lower than that for the third quarter. Coupled with expected fourth quarter margin improvement that we have discussed previously, we will likely see high single digit operating income growth in the third quarter, with accelerated operating income growth in the fourth quarter. Both of these include the expected currency impact.

So to summarize, we achieved solid second quarter results and despite increasing cost pressures, we have again affirmed our full year guidance. We believe we have strong operating plans in place at every level from sales and customer service to operations that will enable us to make 2011 another year of solid growth.

Thanks again for joining us. Now, John, Hubert and I will be happy to open the lineup for questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And we’ll take our first question today from Christine Farkas with Bank of America Merrill Lynch.

Christine Farkas – Bank of America Merrill Lynch

Thank you very much. Good morning. I want to follow-up on the U.K. if I could. Specifically, the volume growth there bit lighter or quite a bit lighter than the continent. If you could talk little bit about the competitive environment maybe the weather and the sentiments or the consumer sentiment which appears to be getting quite a bit pressured. How do you see that market playing out in the second half? Thanks.

John Brock

Hi, Christine. Let me ask Hubert Patricot to address that.

Hubert Patricot

Hi, Christine. We had a solid growth in GB. We grew both value and the volume and we gained share both in value and volume. In the first half of the quarter, we benefited from like another business unit of 125th anniversary. And we got a lot of traction which was also supported by Easter and the excitement around the Royal Wedding, and in truth, very favorable weather in April and May. I think together with the launch of the new products power and energy which is off to a good start, we have been able to absorb what you describe with a bad weather in June.

So, overall, we were close to a volume growth of 2%. Looking forward into quarter three and the rest of the year, we remained confident in our ability to grow this market. And we have strong plans, which are now starting around the Olympics. Right now, it’s about the Torch Relay bureau and as of September it will be about ticket and we feel already the excitement of the British consumer. But it’s true that the economy climate remains challenging, but we have all the confidence in our plan to keep the positive arbitrage of the British consumer towards the soft drink category and toward our products.

Christine Farkas – Bank of America Merrill Lynch

And Hubert, can you comment on the pricing in GB versus the continent is pricing very competitive or are there other factors?

Hubert Patricot

On pricing, our pricing was up in GB this quarter in line with our expectation. You see as always, you’ll see some promise on peaks, but I don’t see a lot of differences with the continent. We see overall a pretty rational pricing and we are confident that we’ll benefit to the category as such. So, the category is growing in value, volume and value.

Christine Farkas – Bank of America Merrill Lynch

Great. Thank you very much.

John Brock

Thank you.

Operator

We’ll take our next question from Steve Powers of Bernstein.

Stephen Powers – Bernstein

Thanks, great. John and Bill, relative to consensus your revenues came in about – about a $100 million higher, that EPS was only about $0.02 higher, and it did effect some the gross margin pressure you saw in the quarter, we saw a bit more leverage on SG&A, but maybe not as much as could have – especially on a continental basis. Could you talk for a moment on SG&A spending trends year-over-year in the quarter, selling costs versus overhead versus transportation, et cetera. Maybe just more generally talk for a moment on how your SG&A – how we should view SG&A in terms of how much is “fixed” versus being more variable with sales quarter-to-quarter?

John Brock

Bill, can I ask you to comment on that one?

William Douglas

Sure. Well, I would say, Steve, if you look at the P&L and specifically the revenue number that you talked about you’ve got a lot of factors in that number and including currency. So if you look at the total quarter overall, I think we feel really good about it, and if you look at the SG&A line, it was up mid-single digits on a currency neutral basis; with volume, year-to-date being up 5% with the half point convention. Going to your question about fixed versus variable, I think the reality is a lot of our SG&A is head count.

So, given our business and the fact that we do have a growing business in Europe with volume growing in the last six years, that would be viewed as semi-fixed from an accountants perspective. We do have a lot of variable expenses and not as much transportation expense as you might think, because remember, in Europe we are circa 10% direct store delivery as compared to the U.S., very, very different there. So again overall, I think those are the comments I would make on the SG&A line.

Stephen Powers – Bernstein

There is some -I mean you are not paying direct transportation cost but I am assuming that there is some variability that indirectly you are filling transportation costs for your third party agreements. Is that fair?

William Douglas

That would be correct but of you look at what’s happened, the way we negotiated our contracts and how oil has been relatively high for the full year, there hasn’t been any untoward affects from that versus our plan.

Stephen Powers – Bernstein

Okay. Great. Maybe just a quick, albeit unrelated follow-up. John, you spoke about performance by brand and geography, but is there anything notable in terms of performance trends by channel performance, anything certain channel geography combinations that is the most put out?

William Douglas

Overall I think it is still the same trend. I think the grocery channel is generally performing better than the away from home. Our strength is that we are putting a lot of effort on the away from home channel with our new go-to-market strategy, focusing on the right outlet, focusing on the right look of success, but we have managed to grow in all our channel and with the right product offers, so we are quite pleased with the balance growth between challenges. And as you know, we make money in all the channels.

John Brock

Yes. I think a big difference, again, between this business and the one in some of the other businesses around the world, including the U.S., all channels here are profitable, so, even though we look at our business by channel, even when our consumers are not going out as often and perhaps are even doing more at home, take home consumption, we’ve got a business model which works very nicely across all channels, which is one of the things we are so excited about in this business.

Stephen Powers – Bernstein

I guess that’s what I was going to ask. So you did probably see stronger strength in the take-home versus consumer out channels.

William Douglas

Yes, slightly.

Stephen Powers – Bernstein

Okay. Great. Thank you.

Operator

We will move next to Kaumil Gajrawala with UBS.

Kaumil Gajrawala – UBS

Hi, everybody. A quick question on the Olympics. Could you help us understand a little bit the difference between the dynamics between incremental volume and incremental spending?

William Douglas

Let me ask Hubert, can you talk about that one?

Hubert Patricot

Let me step back a bit. The big events like the Olympic, we look at really on the long term, and not during the six to seven weeks of the event. We have basically we have started working at the event more than one year in advance. Again it started last month in GB and we have a faith approach, activating not only GB but activating all the CC countries, which is never seen before in the Coca-Cola system one year in advance, starting next month, offering torchbearer slots for our consumer on the continents as well as GB.

So the spending of course in terms of affect is more concentrated in the beginning quarter one and quarter two but the return is really build into all the quarters starting as of probably last June and this is where we see the return of this kind of event. And clearly the level of response from the customer today and from our consumer shows that this is a good investment.

William Douglas

Thank you.

Kaumil Gajrawala – UBS

Okay. Got it. And then on currency just for the numbers that you gave us, are the hedges in place where that’s effectively those are going to be the numbers, or is there some fluctuation there?

William Douglas

Kaumil, this is a reminder. We do not hedge translation. We hedge our transaction exposure across the currency commodity purchase principally. All of our transaction exposure has been hedged, so there is some possibility for slight currency volatility versus that full year guidance of $0.15. Granted we are almost through the month of July now. Q2 and Q3 is 60% of our operating income roughly, so, once we get through the third quarter, I think that guidance will be really, really tight.

As you have seen and we have all seen, there has been a tremendous amount of volatility in FX rates over the last three months. Coincidentally they are at a similar level today than when we did our call in April. And if you looked at spot rates as of the last couple of days, that number might be ever so slightly higher, but we think that is a pretty good full year guess at this juncture and we will update it in October.

Kaumil Gajrawala – UBS

Got it. And then last, the amount of energy you highlighted in the release Powerade Energy and the launch of that, how big was that? Was there a load-in factor or anything else that we should be thinking about as it relates to the energy number?

William Douglas

Hubert.

Hubert Patricot

Yes. The first thing is that the energy segment continues to grow in all our country. If you look at the quarter, all our energy portfolio is performing well. Powerade energy you mentioned it, it’s a launching phase. It is a little less than 50% of this growth, so all other brands are also performing quite well up to 20, 25%.

Kaumil Gajrawala – UBS

Got it. Thank you.

Operator

We will now move to Lauren Torres with HSBC.

Lauren Torres – HSBC

Good morning, everyone. My question relates to you are confidence and I guess your ability to take pricing in your markets. I guess I am thinking more about next year. It seems like your cost environment is manageable this year, but if trends continue the way they have been and costs get a bit tougher, just wondering how do you think about offsetting that? Is it on pricing? Are there other initiatives we should be thinking about? I know in the U.S. it is a bit difficulty market right now, your markets are a bit different, so just curious how do you think that will play out maybe over the next 12 month period?

William Douglas

Let me ask Hubert to talk about the pricing, algorithms that we have planned and then Bill can comment a little bit on cost of goods.

Hubert Patricot

Again, we will refine our pricing approach as we move forward into the end of the year. We are pleased to know, we are putting in place our headline price this year and we are putting already for the Benelux as of September our price increase for next year.

We consider we have in Western Europe an expendable and profitable category for both the trade and ourselves. We consider that with all the marketing activation and planning – strong plans we are bringing to the market, the consumer response to price increase will be favorable and we can continue to grow with the trends, the revenue of the category. So, I think we can now repeat the way we approach as a value category, as an expendable and again more to come as we move forward into 2012.

John Brock

Bill?

William Douglas

Lauren, just a little bit more color on the cost of goods. As I said in my prepared remarks, we are approximately 9% hedged on key commodities for 2011 and we have given the full year guidance cost of goods sold per case up approximately 3%.

As we look out to 2012, we are well under way with our planning process looking at our total plan, including the commodities environment, total cost of goods sold, inflation, as well developing our customer plans and our pricing plans. Clearly, it is still early before we finalize all the pricing plans and all markets, but, if you were to look at the outlook presently, we are continuing to layer on commodity hedges for next year. I will give specific comment on that later in the year. But if you were to take spot rates today, the impact on our total cost of goods environment would probably be slightly more inflationary 0’12 versus 0’11, than the 3% that we talked about for 2011.

Having said that, our brand strength in Europe gives us a high degree of confidence that we will be able to take appropriate pricing in the marketplace and I think from a commodities management and hedging strategy, I feel very confident that we will be competitive in the marketplace as well. So may it be another challenging year? Probably so, but we are very cognizant of that environment and committed to managing our way through it. Next year in a successful fashion similar to how we have navigated this year.

John Brock

Just to add one macro comment to that. We have a very clear plan which is, we have a commitment to ourselves and frankly to our share owners of maintaining or expanding margins and we say it clearly see no plan to deviate from that approach.

Lauren Torres – HSBC

I guess one of the last comments you made, bill, with respect to the consumer, I guess I was just curious when you think about taking pricing in most of your markets, the acceptance level of the European consumer on pricing, it seems like in other markets there may be volume share pushback, but in your markets I guess you feel comfortable that there is room and from a competitive standpoint there should still be room looking into next year?

William Douglas

Yes. That would be our approach for the markets and again as also demonstrated by this year again.

Lauren Torres – HSBC

Okay, great. Thank you.

Operator

We will now hear from Mark Swartzberg from Stifel Nicolaus.

Mark Swartzberg – Stifel Nicolaus

Yeah, thanks. Good morning, everyone. Bill, a few questions about some of the comments regarding third quarter and fourth quarter. It sounds like what you are saying regarding third quarter, if you back out currency is basically flattish operating income, does that sound about right – where we are?

William Douglas

I think I would just stay with the comment as I gave it in the remarks Mark.

Mark Swartzberg – Stifel Nicolaus

Okay. And then in terms of volume in the second half, given what can you speak to and really in the third quarter, can you speak to what you are seeing in July and how you feel that compared to what you might expect for the third quarter across regions?

William Douglas

I think the best way to answer that would be to say we know – we knew going into the third quarter that the comparables based on our business results last year, we’re going to be reasonably challenging and we know the comparables for the fourth quarter are frankly much easier. Having said that, we knew what the quarter was in terms of expectations and we remain confident for both the third quarter and fourth quarter.

Mark Swartzberg – Stifel Nicolaus

Okay. And in light of that, John, when you look at this cost comparison, the volume being what it is, how are you feeling about pricing in the third quarter compared to the second quarter or, how are you thinking about that?

John Brock

Well, we remain, again, confident on our plans. Our pricing as Hubert says, has already been layered in. We start our pricing in the fall with Benelux and then finish it off in most of the rest of our countries in the first quarter of the year. So, we’ve done all that. As we look at our plans and programs in the third quarter, we’re all set, locked and loaded, and think it will be what we expected to be.

Mark Swartzberg – Stifel Nicolaus

Okay. And then finally regarding the second half, Bill, on the corporate numbers, any thoughts, I mean, it has been consistently in this kind of 41-level the last two quarters. Any thoughts on what that number might look like the next two quarters?

John Brock

Sure. If you look at that number, our full year number, we would expect the full year number to be a little less than multiplying the first halftimes two. If you look at the comparability versus the prior year, remember the first three quarters are pro forma numbers. The fourth quarter of last year was an actual number. There was a little bit of timing noise year-over-year. So, I would expect our full year run rate to be up mid-single-digit year-over-year.

Mark Swartzberg – Stifel Nicolaus

Got it. Got it. Great. And then, I might have missed it at the beginning, there, either Hubert or John, but this process of signing three-year agreement with retailer partners, where are you in that process? Can you give us an update on that?

John Brock

Sure. Hubert?

Hubert Patricot

Yeah. This is probably one of the benefits of the Olympics, especially in GB. We don’t see the Olympics as a destination, it’s part of our journey and they start also with our index work to define what the growth potential of the category in each of our country, what we call category vision, and when we engage with our trade with customer to go after the joint value creation model.

We are now doing that with all our major customers in GB and also probably half of our customer on the continent. It doesn’t mean there won’t be price negotiation as part of that, but at least we have a joint strategy to put in place the right action being in supply chain, being with the customer, being with the picture, the shelf space allocation, new product development that will deliver on this value. And this is currently one of the benefits of our Olympics legacy.

Mark Swartzberg – Stifel Nicolaus

Great. And then...

John Brock

Marc, this is Bill. I want to go back to your first question again just to reiterate that a little bit more to make sure we’re on the same page. What I said in the opening remarks, that operating income for the third quarter was going to be high single-digit with currency. And then you can extrapolate the remaining currency exposure, the 15 versus the 10. That’s not be dramatically different quarter-by-quarter. So if you back all that in, you are looking at a currency-neutral OI growth somewhere in the mid-single-digit range.

Mark Swartzberg – Stifel Nicolaus

For the full – for the...

John Brock

You asked about the third quarter.

Mark Swartzberg – Stifel Nicolaus

Okay. All right. I will have to look at these exchange rates. Okay. Great. And then that’s helpful. Thank you, Bill. Then finally on commodities, just building on your exchange with Lauren, if commodities stay where they are, you said a little bit more pressure next year than the up three, can you give us some sense of what you mean by that? Are you talking an up five, or an up four? I don’t want to get too granular, but what kind of magnitude are we talking about?

John Brock

Marc, I was trying to get some color, commentary with my comment to Lauren, I think at this juncture given that we’re in the midst of layering in our hedging tragedy, I think anything more definitive than that would be misleading at this juncture.

Mark Swartzberg – Stifel Nicolaus

Fair enough. Okay. Thank you, guys.

John Brock

Thank you.

Operator

We’ll now hear from Caroline Levy with CLSA.

Caroline Levy – CLSA

Yeah. I’m sorry if I missed some of this, but I’m just – can you just clarify what you said about the third quarter ex-currency guidance?

John Brock

Sure, Mark asked a very detailed question about with and without currency.

Caroline Levy – CLSA

Yeah.

John Brock

In my remarks, I said the third quarter with currency would be up high single-digit, and I said currency-neutral, it would be mid-single-digit.

Caroline Levy – CLSA

Okay. And why would there be a slowdown in the third quarter growth rate relative to the fourth?

John Brock

I would say that it would be an acceleration in the fourth quarter versus the third, and a lot of that related to the comp that we had back in the fourth quarter of 2010, and the comp that we had in the third quarter of 2010. It’s really a year-over-year comp issue.

Caroline Levy – CLSA

But if you look at volume, for example, you just left 5.5% volume growth and did a 4.5. You are lapping 5% in the third. Is there something different that’s going to make the third quarter harder?

William Douglas

Well, for one thing, we had Easter in the second quarter of 2011. And we had a, as you said, a very strong Q3 2010, as well.

John Brock

We had a number of programs in the Q3 here, Caroline that really kicked in the second quarter. It really kicked in the beautiful way 125th anniversary was awesome. Easter was in this quarter and it wasn’t last year. It was in the second quarter this year. It was not last year. And we had for Europe, incredibly good weather in the first two months of this quarter. So, we agree, we had a strong second quarter, frankly. We are going to have a strong third quarter. It’s just that I think when you look at the kind of results we had and the programs we had in place, we think it’s – and we knew all along it’s going to be a bit more challenging.

The fourth quarter is going to, as Bill said, it’s going to be accelerating growth. I think you are going to see that both, from a volume standpoint and from a profit standpoint, and that’s true because of volume comps as well as because of cost of goods comps and our hedging strategy. When you put it all together, we’re going to have a very strong fourth quarter.

Caroline Levy – CLSA

Okay. And just to ask, again, what Mark asked, but was July a good start to quarter, or is that why you are getting more caution on the top line comp?

John Brock

I think we’ve said what we were going to say about that, which is so far the quarter is going as we expected. We knew it was going to be a more challenging quarter than the second quarter and it is in line with our expectations.

Caroline Levy – CLSA

Okay. Thanks. And then I wanted to just ask you, you mentioned that you will provide more details on capital structure later in the year. And I don’t – were you referring to potentially a further authorization for share repurchases? Were you referring to Germany, or was there something else that you are referring to there?

John Brock

I think the answer to that question would be a resounding yes.

Caroline Levy – CLSA

All three?

John Brock

Yeah. We will give an update on any and all of those as appropriate as we go forward with the third quarter. We’ve got two opportunities to communicate with people, we’ve an investor meeting that we’ve scheduled which I know you are aware of, and then we’ve a third quarter call in October as well.

Caroline Levy – CLSA

And can you tell us whether the listing in Paris has moved you toward the goal of increasing European ownership? Do you have any updates for us on that?

John Brock

A couple of updates. Firstly, I think the fume that is trading on the Paris exchange is light and that wasn’t our primary objective. What we were trying to do was continue to raise awareness of the company and the investment opportunity to shareowners in Europe.

We’ve ramped up our investment in European events, we’ve had our first European-based analyst issue coverage, which was one of our key objectives, and we are continuing to get more and more contact from European investors, but we don’t have any new data that’s fresh enough to say that our percentage of holdings from European investors has gone from X to Y yet. But I think over the course of the next couple of quarter, we will hope to be able to see that trend and report it back.

Caroline Levy – CLSA

Great. And then if I could just ask about your acquisition opportunities beyond Germany, can you update us on how you think about that and whether the U.S. is something you would consider over time? But and also whether there are other European opportunities?

John Brock

Well, I think Caroline, the way to talk about acquisitions is whether you are talking about Germany or any other market whether it’s in Western Europe or anywhere else in the world, we’ve made it very clear that expansion of our footprint is something we would like to seriously think about, but the only way we will seriously think about it is if it relates to value, and we’ve got a pretty robust base business model going forward. We understand it. We like it. We think our investors like it. And any kind of transaction that we would do, wherever it might be, would only be done if it was clear in our minds that it created value compared to that base business model.

We are not in a position today to talk about any potential acquisitions, but you can rest assured that when it’s appropriate to do so, if it’s appropriate to do so, we will do it at that time. But, we will have a very rigorous and serious and considered process that we will follow, which is clearly the way we look at acquisition possibilities.

Caroline Levy – CLSA

Thank you. Is accretion your one and important factor?

John Brock

No. There are whole host of financial factors and it’s got to be right strategically first, and then we have a whole host of financial metrics, not one single one of which would be controlling, we would want to look at all of them. I mean days world accretion, is pretty easy, so that’s not in and of itself by any means a defining parameter.

Caroline Levy – CLSA

Thank you so much.

Operator

We will now hear from Brett Cooper with Consumer Edge Research.

Brett Cooper – Consumer Edge Research

Good morning. Couple of questions regarding Norway and Sweden, can you just talk about trends were there and now that you’re I guess 10 months into it, what you guys have changed relative to I guess how Coke was operating the business previously?

John Brock

Sure. I believe, it’s like a macro economy which is – we’re very pleased with the transaction that resulted in Sweden and Norway becoming part of the CCE system, we had a very good idea, we thought of what we were getting and frankly we are very happy with what we’ve got. And they are – I think very happy to be part of the system. As I said, as part of my remarks, we just had our first ever CCE Board meeting in Stockholm over the past three days and it went exceptionally well. Our Directors were very pleased with what they saw in our Swedish team, I was very excited to have them there.

So, we’re pleased they are part of the family. Let me ask Hubert to comment a little bit more on the some of the things we are doing and particularly, how the CCE way of doing things is, I think yielding some results.

Hubert Patricot

The integration is going well in both countries. They are both showing good growth year-to-date. And as John said, we are implementing our CCE way, especially on supply chain and line utilization for example are progressing strongly, which is a good sign of better productivity and at that same time we are making progress in the market.

We are launching our portfolio in the energy drink with the launch of Monster in Sweden, the launch of Burn in Norway and probably one of the best illustration of what we can do in that country by applying our marketing knowhow to a new territory is that the fact that we have regained the number one cinema chain from competition in Norway, applying a good sales and marketing program. And this is the kind of thing the market will benefit from us.

Brett Cooper – Consumer Edge Research

Thank you.

Operator

We’ll now hear from Carlos Laboy with Credit Suisse.

Carlos Laboy – Credit Suisse

Good morning, everyone.

John Brock

Hi, Carlos.

Carlos Laboy – Credit Suisse

John, I have three related questions with Powerade. The first one goes to the brand, with Powerade stretching to stretching the brand into energy, what does this do for its credentials with European consumers as a sports beverage trademark? And then the second one relate to Monster. Is it losing its superior traction to you for going after energy? And lastly, also related, Coke FEMSA was asked to step up brands investments in Gatorade to very high levels. Are you also stepping it up hard, and what gives you comfort going into the Olympics supporting brand investment into the tool use concept is and not Zeroing in on the sports identity with absolute dedication is really optimal?

John Brock

Let me make one comment and I’ll ask Hubert to give you a little more color commentary. I mean, The U.K. and the GB market is very unique in the sense that there are competitive energy drinks on the market like Lucozade Energy that a rather unique. And So, Powerade Energy is really focused at a category and a type of category in the GB market, it doesn’t exist broadly speaking, the markets and it’s a phenomenal product on top of that.

So it’s a very logical extension of Powerade may – and the Coca-Cola company are very comfortable with. We researched it thoroughly and it’s going to be a big winner. And we also certainly have no loss of confidence in Monster at all. It is a huge success in all of our markets and it’s going to be continue to be such, but if you’d like to add a little color commentary, Hubert, go ahead.

Hubert Patricot

Yes. Carlos, if we step back a bit, I mean, the consumer need taste, which are drank by the energy category are probably among the broader in our portfolio, so we very strongly in a multi brand and multi portfolio strategy and basically, we have what we called the double energy brand like Monster, Burn or Relentless, which is about a pick up and then you have as stated by John, what we call sustained energy, which is daily long lasting energy, which is a big segment in GB. Probably not on the continent today, and that’s the reason that for the launch of Powerade Energy and we are really encouraged by the trade, the distribution we are getting and the first element of consumer response.

Having said that this is about going after a bigger opportunity, this is not in any way within something regarding the performance or Monster, which is delivering exactly the way we want, which is getting a lot of traction now in Sweden, for example. So there is a big mistake and the multi portfolio brand strategy for us is a right one. And in fact we are gaining value share in all our markets.

John Brock

The final comment on Powerade is we’re excited about Powerade is being one of the key brands are going to be focused on by Coca-Cola and us as part of the Olympics. So, I think you’re going to see some pretty exciting things coming about under the entire Powerade trademark, as it is one of the three key brands focused under the Summer Olympics.

Carlos Laboy – Credit Suisse

But does it erode the sports credentials as you also try to go after the sports drink category, or are you just favoring for the energy opportunity here?

John Brock

No. We want to deliver on both, and you will see like, for example, in September we will have a strong activity beyond Powerade, which is one of the three brands with Coke and Glasco we will especially activate for the Olympic. For example, of ticket for the 100-meter final with Powerade. So, we think the brand can be present in both segments. And again, we are really encouraged by the current level of performance in the energy side. But Powerade continue to be our main vehicle on the sport’s category.

Carlos Laboy – Credit Suisse

Thank you.

Operator

We will now hear from Judy Hong with Goldman Sachs.

Judy Hong – Goldman Sachs

Thanks. Good morning. I don’t want to get too hung up with the second half, but just kind of looking at your top line guidance of mid-single digit for the full year. I think you have done about 7.5% year-to-date. So, it seems to imply back half we are looking for top buying to be up kind of three percentish, which seem to supply mix volumes sort of flattish. I understand the comparison issue, but just in fact completely conservative number, number one, am I doing the math right? And number two, is that what is kind of embedded in your top line guidance?

John Brock

Judy, when we use the mid-single-digit range, it is a broad range. It is not a single number by definition. So, I would not agree with the math that you did.

Judy Hong – Goldman Sachs

Okay. So it is mid-single digit being a pretty wide range from your perspective?

John Brock

Correct.

Judy Hong – Goldman Sachs

Okay. And then, secondly, there is recently assorted rule on a potential strike in the U.K. with some of your warehousing employees. Is there an update that you can share with us at this point on the likelihood of that potential strike and what the contingency plans might be?

John Brock

Well, Judy, earlier this year we successfully completed our negotiation with NARTD and GB and the with vast majority of the GB employees. What you mentioned, is that recently as part of this regular negotiation, the trade-in announced their intent to balance industrial action. It concerned about 5% of our employees, about 200 employees in GB.

So it is limited. We are obviously very disappointed that had this group has over rated in favor of industry actions. It may be one or two days. We will activate and we are activated plan to insure that any actions minimize the disruption to the quality of our service. So, this time include collaboration with the trade and continuity of supply. So it should be very limited.

Judy Hong – Goldman Sachs

Okay. And then finally, John, I know I will get more color on Germany as the year progresses, but just broadly speaking, just given the volume strength that we have seen coming out of that market from Coke’s result, I guess, does that give you maybe more optimism in terms of the prospects of entering that market?

John Brock

I don’t think we are in a position to comment on that. I think, you know, we’ve said all along we will approach Germany just like any other transaction and we will be very diligent and thorough in our process. And beyond saying that and making sure that everyone understands that is the way we will tackle any potential transaction, there really isn’t a lot more to say about the specifics of Germany or for that matter any other potential transaction.

Judy Hong – Goldman Sachs

Understood. Okay. Thanks.

Operator

We will take our next question from John Faucher with JPMorgan.

John Faucher– JPMorgan

Thank you. You know, you talked a little bit in your discussion a sort of Norway and Sweden results, in terms, the ability to maybe bring retailer relationships to the table. And I guess as we look to assess potential acquisitions like Germany, et cetera, since the distribution methods are different than what we are used to here in the U.S. you know, what, is it you guys bring specifically to the table, you think on these acquisitions. Is it the marketing piece, is it the retailer relationship. You know there is probably less of a focus on cost cutting without the DSD? So you know, is that how we should look at it? What are the key things that you are bringing on M&A?

John Brock

Well, just to back-up a step, Norway is very much a impacted DSD market, and Sweden is at least partially DSD, so, just to make sure you understood that.

John Faucher– JPMorgan

Related to the retailer customers, where you talked about winning the cinema chain, et cetera. That is why I brought that one up?

John Brock

I think, John what, we bring to the party is in fact the CCE way, as Hubert indicated, across the entire patch. It is everything from the supply chain and how we manage our operations, our facilities. We do the plant tour with our board this week and frankly it was pretty clear that a number of activities in our facility there in Sweden are already taking place. Line utilization is going up significantly as a case in point.

Revenue growth management is an absolute hallmark characteristic of the way we manage our relationship with retailers. As Hubert has said, we view our categories as expandable. And one of the things we do is make sure the retailers know that we are the number one category for them and what we are going to do is work with them to drive the business. But as part of that, our revenue growth management approach is critically important.

And so, we are taking that kind of core competency very much to the table in both Sweden and Norway. Frankly, we had some challenges in Sweden as we put through our pricing strategy with a couple of retailers. And the good news is after a little bit of a hiccup, we were back on shelf and frankly, it was exactly the right thing to do. So that’s the way we’re going to manage the business going forward. So it’s retailer relationships, its supply chain, it’s the way we incentivize, motivate and grade our people; it’s the CCE way of doing everything.

John Faucher– JPMorgan

Got it. Thanks.

John Brock

I just remind – if I can just make a comment. One of the things that we viewed right at the top of list in importance here is how retailers view us. And you’ve heard us say this before, but I think it deserves repeating. I think it’s very simple, and that is we expect to be viewed by retailers in all of our countries as the number one supplier to them among everybody. Not just among food and beverage companies, but among some pretty first rate consumer package goods companies.

And generally speaking, we are number one or number two in every country in which we play, and we are number one in most of them. So that’s an example of just how important the retailers view what we bring to the party.

John Brock

Okay. Operator, next question please.

Operator

Alex Patterson with RCM has our next question.

Alex Patterson – RCM

Yeah, thanks. Hey Bill, probably for you. Just flushing out the gross margin outlook. One, was there any other impacts on the 4.5% increase in cost of goods per case that came from either cross currency factors or mix as you rolled out Powerade or anything else that you’d want to highlight?

William Douglas

There were obviously a lot of moving parts there, but the main impact clearly was the commodity environment. I think anything else pales in comparison to that.

Alex Patterson – RCM

Okay. And when you are talking about expanding or holding gross margin over time, are you speaking to a per case rate, a penny per case rate, or are you talking about a percentage of sales.

William Douglas

What we are really highlighting is gross margin percentage on the income statement. Even with our gross margin percentage slightly declining as it’s done, we are still growing our penny per case margin.

Alex Patterson – RCM

Okay. But there is a big difference between the two. So percentage is...

William Douglas

Correct. We are talking about gross margin percentage. And embedded in what’s happened with our income statement over the last year or so too, is we change our mix ever so slightly toward stills, generally the still category has a little bit lower margin than the sparkling category as well, so we have a mixed headwind on the gross margin line, as well.

Alex Patterson – RCM

That’s why I asked about it. So that wasn’t that much of a factor in the quarter?

William Douglas

Somewhat, but again, I would say everything pales in comparison to the commodities impact.

Alex Patterson – RCM

And Bill, to the degree you might have it, just want to make sure I’ve got the right pro formas or whatever for last year and third and fourth quarter, COGS per case comparable. What are we comping exactly? I just want to make sure I’ve got that right, if you have it.

William Douglas

I do. Last year third quarter COGS per case was flat and Q4 was up 2.5%. So that’s part of the reason that we gave that color commentary about Q3 and Q4 earlier to try remind people of that affect.

Alex Patterson – RCM

And would you say that’s more of the driver of the way Q3 and Q4 are playing out in your minds versus top line trends?

William Douglas

I would say that’s the principle factor, yes.

Alex Patterson – RCM

Okay. Great. Thank you very much.

William Douglas

Okay. Operator, we’ve got time for one more question. Thank you.

Operator

Thank you. We’ll take our last question today from Damian Witkowski with Gabelli & Company.

Damian Witkowski – Gabelli & Company

Hi. A couple of quick questions. When we – I just want to go back to your hedging for commodity costs. When we next talk in three months about Q3, what do you expect your percentage of commodities for 2012 will be hedged by that time?

John Brock

Damian, we normally build our portfolio of hedges as we go through the year. And clearly, once you get into the October timeframe, we would look to be meaningfully hedged going into the year, but the exact percentage varies year-over-year. And at this juncture, I would defer from giving a specific target at this point.

Damian Witkowski – Gabelli & Company

But what commodities are actually doing in terms of price affect, how much you hedge in the second half of this year?

John Brock

To some degrees for sure, we have a very sophisticated hedging policy of minimum cover, long-term contracts etcetera. But obviously if we think the market is favorable, we would tend to be slightly higher hedge within that range. And if we think that the future creates opportunities, we would be a little bit more cautious and overextending on hedges at unfavorable current rates.

Damian Witkowski – Gabelli & Company

Okay. And then on pricing, as you begin discussing price increases for next year and implementing it, is it actual price or are you also including a different package and sorts of raise the price per ounce, but not necessarily the price a customer pays for a bottle?

John Brock

When we talk about our pricing strategy in that conversation, we are talking about the price that we are taking up. Mix and package and all that is part of the total equation, but the commentary that we have been making about pricing is the headline pricing that we would be taking to our customers.

William Douglas

And it will vary by pack and by size, so it will – as it is today not be the same for the large PT, small PT and cans. But it is part of our energy and strategy and revenue growth management strategy.

Damian Witkowski – Gabelli & Company

And then on – what did Monster do in the second quarter? Did you actually say how much it was up?

John Brock

Monster grew very handsomely, along with our total energy portfolio. Everything we said, our total energy portfolio was up 15% and Monster did its part as part of that.

Damian Witkowski – Gabelli & Company

Okay.

John Brock

On that note, let me just say thanks to all of you for joining us today. We really appreciate it. We are out of time and we appreciate your interest. Have a great day.

Operator

Once again, ladies and gentlemen that does conclude our conference for today. We thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!