Jul 23, 2012
Executives
John F. Brock - Chairman and CEO William W.
Douglas III - EVP and CFO Hubert Patricot -EVP and President, European Group Thor Erickson – VP, Investor Relations
Analysts
Caroline Levy - CLSA William Schmitz - Deutsche Bank Lauren Torres - HSBC Stephen Powers - Sanford C. Bernstein & Co Kaumil Gajrawala - UBS Warburg Judy Hong - Goldman Sachs Group, Inc.
Bryan Spillane – Bank of America/Merrill Lynch Mark Swartzberg - Stifel, Nicolaus & Company, Inc. John Faucher - J.P.
Morgan Securities Inc Priya Ohri-Gupta - Barclays Capital
Operator
Good day and welcome to the Coca Cola Enterprises Second Quarter 2012 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 today to discuss our second quarter 2012 results and our outlook for the remainder of 2012.
Before I begin, I’d like to remind you 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 will turn the call over to John Brock.
John F. Brock
Thank you, Thor and we thank each of you for joining us, particularly on a Monday rather than our traditional mid week day. We’re in London in conjunction with our Board of Directors meeting and the upcoming London Olympics.
I can tell you this is a city filled with excitement in anticipation of the London Olympic and Paralympic Games and we’re proud to have a significant role in the games. I will have more on this in a few moments.
Turning to our second quarter results, overall the quarter was very challenging as we work through a combination of bad weather, economic and market factors as well as comparisons to strong growth in the same quarter one-year ago. Regarding weather, while we’re always reluctant to cite it as a factor in our results, we faced extraordinary weather related second quarter pressures in all of our territories.
For example, this was the wettest second quarter in the United Kingdom in over 100 years and the wettest April in France in over 50 years. Reflecting these factors, our second quarter earnings per share totaled $0.73.
Operating income was down 2% and net sales were flat, both on a comparable and currency neutral basis. Our net sales figure also includes a 2% gain from the French excise tax increase.
Let me note that our long-term prospects for growth remained solid and the recent weather challenges are temporary. We are focused on the opportunities we see ahead, our business fundamentals remain solid and we’re committed to continuing to manage each aspect of our business to deliver long-term value building growth.
In fact, despite the difficulties in the second quarter, currency translation and ongoing weak macroeconomic conditions, the full-year guidance we’re providing today for both earnings per share and operating income is essentially the same as the guidance that we initially provided last December. We plan to deliver these results by managing the leverage of our business, including outstanding marketplace execution, customer service, cost control and our strong balance sheet.
Now let’s look more closely at our second quarter results and the factors that contributed to them. As you saw in our release this morning, volume declined 6%, primarily driven by overall unfavorable weathers throughout the quarter as well as the impact of the French tax increase and comparison to strong growth in the same quarter a year-ago.
Looking ahead we expect to return to volume growth as we have strong marketing plans and initiatives and importantly our brands continue to provide value and resonate with both our customers and our consumers. During the quarter, we continue to make important gains in the energy category, with our energy portfolio up more than 16% in the quarter.
Our multi-brand energy strategy continues to allow us to seize opportunities with fast growing Monster brands, while gaining additional presence with Burn, Nalu, and Relentless. The continued success of the Coke Zero brand was also evident during the quarter as the brand achieved low single-digit volume growth.
The brand grew in Continental Europe during the quarter and grew an encouraging mid single-digit in Great Britain. For the quarter our cost of sales per case increased 3%, while net pricing per case increased 4%, both excluding – that is excluding the impact of the French excise tax increase.
Operating expenses were essentially flat due to market initiatives, cost controls, volume declines and timing that Bill will discuss with you shortly. Of course we’re now near the start of the London Olympics.
For CCE, this represents a multi-year initiative. This planning and the dedication and skill of our employees will provide world class service to our customers, our consumers, and our Olympic guests.
We are also pleased with the significant steps we’ve taken to ensure that we do everything possible to make these games the cleanest greenest ever with excellent packaging, recycling initiatives, clean fuel vehicles and a solo warehouse that will serve the games with maximum energy efficiency. In fact, our hope is that our recycling leadership will translate into a broader sustained commitment to step change recycling rates for the London marketplace.
Everyone in CCE and particularly our team in Great Britain is exceptionally proud of the planning and the effort that we’ve put forth to support these games. We believe our role in these games will have lasting benefit to our business and ultimately our shareowners by increasing the consumer connection to our brands and enhancing our customer relationships.
Now let’s look at the full-year. We have more closely defined our estimate for earnings per share to a range of $2.18 to $2.24.
And that includes a negative currency impact of about 10%. We expect net sales growth in a mid single-digit range and mid single-digit growth in operating income.
Both net sales and operating income are comparable and currency neutral. Bill will provide more detail for you in a few minutes.
Continuing the return cash to our shareowners through our ongoing share repurchase program is also an important part of our full-year plan. Under our current plan, we repurchased $375 million worth of our stock during the first half of the year and that includes $225 million in the second quarter.
We now plan to repurchase at least $600 million of our shares in 2012 subject to the share limits of the plan. The share repurchase plan continues to demonstrate that we remain intently focused on finding ways to enhance shareowner value, our single most important goal.
In fact earlier this year, we increased our dividend more than 20% and we will continue to evaluate ways to drive shareowner value. In summary although we continue to face challenges, we believe we remain well positioned to manage each element of our business to generate substantial, consistent long-term growth and in turn continue to grow value for our shareowners.
Now I will turn the call over to Bill for more detail on our financial results as well as our full-year outlook.
William W. Douglas III
Thanks, John. And we appreciate each of you taking the time to be with us this morning as we review our second quarter results from our London office.
Looking at the results for the second quarter our diluted earnings per share were $0.73 on a comparable basis and $0.67 on a reported basis. Net sales totaled $2.2 billion, down 8.5% on a reported basis, flat on a currency neutral basis and down 2% after excluding the impact of the French excise tax increase.
Comparable operating income was $328 million, or $301 million on a reported basis. On a comparable and currency neutral basis, operating income declined 2%.
Currency neutral net pricing per case increased 4% for the quarter and cost of sales per case increased 3%, both excluding the impact of the French tax increase. Comparable current neutral operating expenses were flat as the impact of certain plant, market initiatives were offset by volume decline and ongoing expense control.
So overall while we’re disappointed with our volume results, we view the key factors behind these results particularly the weather to be temporary issues that do not reflect the long-term outlook of our business. As we look forward to the remainder of the year, as John mentioned, our guidance now calls for comparable earnings per diluted share in a range of $2.18 to $2.24, including a negative currency impact of approximately 10% for the full-year based on recent rates.
We now expect net sales growth in a mid single-digit range reflecting the business conditions that we have seen in the second quarter as well as early in the current quarter. However, we’re taking the necessary steps to manage margins, control costs and deliver on our bottom line objectives and importantly continue to expect operating income growth in a mid single-digit range.
Now let me add some color around the timing of our results. As we discussed with you during our first quarter call, we have continued to expect our growth to be weighted to the back half of the year.
More specifically, the majority of the operating income growth is expected to occur in the fourth quarter. This timing reflects several factors over the next two quarters, including the timing of operating expenses, promotional plans, cost of sales, as well as the benefit of one extra selling day in the fourth quarter.
For example, while we have benefited from our expense control initiatives in the first half of the year, we do expect an increase in third quarter operating expenses as we execute our Olympic programs. Given these factors, we expect mid single-digit comparable and currency neutral earnings per diluted share growth in the third quarter with an expected negative currency impact of approximately 12% for the third quarter at recent rates.
However, even as we work through challenging operating conditions, our earnings per share results will continue to benefit from our commitment to share repurchase. In the second quarter, we repurchased $225 million worth of shares bringing our total share repurchase for the year to $375 million.
We now expect to repurchase at least $600 million of our shares for the full-year 2012. As you may know, the Board authorization for our current and previous share repurchase program has a cumulative cap of 65 million shares.
Through June 30th of this year we have repurchased a cumulative total of 51.5 million shares. Based on the recent currency rates, we now expect 2012 free cash flow in a range of $475 million to $500 million, capital expenditures in a range of $375 million to $400 million.
We expect our weighted average cost of debt to be approximately 3% and an effective tax rate of the full-year in a range of 26% to 28%. Now before I move on from our guidance discussion, it is important to highlight a key point related to our current guidance.
As John mentioned, despite the challenges we have faced this year, our expectations for comparable and currency neutral operating income and earnings per share are essentially in line with what we first presented to you in December of 2011. While we clearly have had a very difficult operating environment in the first half of the year, it is important to note that we’re successfully managing the levers of our business including cost, sales, and our balance sheet to drive overall value.
We have solid operating plans in place, opportunities ahead and we look forward to sustaining the type of growth that will continue to drive increasing shareowner value. That concludes our prepared remarks.
Thanks for joining us today. And now John, Hubert, and I will be happy to open the call up for the questions.
Operator
(Operator Instructions). Our first question comes from Caroline Levy of CLSA.
Please go ahead.
Caroline Levy - CLSA
Good morning, everybody. 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’re 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 weather is a little stranger, does it go to CSD, does it go to non-COGS 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 whether the hit was worst and how it’s looking right now?
John F. Brock
Hi, 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, that July is broadly inline 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 is a normal weather pattern and that’s what we would like to see it return to.
And you were 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. In the last few days I think were demonstrative of that.
I don’t think candidly there is a huge difference in terms of weathers impact on our portfolio. We’ve got a broad portfolio, which plays across all kinds of consumer desires and honestly I think weather simply keeps people from traveling around 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 if that’s going to continue.
Hubert Patricot
Yes Caroline, what John said on the SSD, no difference between flavors, Cola, Diet. Fair to say that the water in general is less affected because you’re looking especially on the continuance of daily heavy consumer which are less sensitive to the weather as oppose to the soft drinks.
And 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’re facing. Regarding the Continent and GB, I mean, its pretty comparable even some – in some way worth on the Continent again, because you’re with some low per capita countries where when you’re facing bad weather, the light drinkers are not coming to the category that buy probably countries like France and Holland where more affected than GB.
Caroline Levy - CLSA
And – thank you so much. I’m wondering if you could help us understand the marketing and the expected impact, I think you’ve stressed that choosing the benefits of the Olympic are long-term equity building, may be even relationship building with the retailers.
But do you expect that volume would pick up anyway just because you’re going to have so much display activity and so much activation and television that we should see some benefits in the third quarter.
Hubert Patricot
I think as we shared with you, we are looking at the Olympic as a legacy for GB. So there are some short-term activity and yes, we’ll have what we call moment IV and moment V – moment V and VI 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’re expecting some traction, but it’s above that. I mean, we’re talking about three brands for this Olympic, MyCoke of course, POWERADE and we've a lot of activities behind POWERADE and Glasgow and we’re really thinking – seeing this year, a real traction behind Glasgow and I think the Olympics will accelerate that.
But on top of that and related for example to the torch relay which visited 66 GB cities, we’re pushing a lot, the icon glass bottle in the license trade the (indiscernible) and GB and here again we’re seeing some growth and this will be for the long-term. And on top of that as you mentioned we have three year plan with our customer.
We are changing the shelf displays with the big players like Tesco and Sainsbury putting the Cola first, putting brand blocks in the store. So this is about bidding for the near and long-term growth for our brands in GB.
John F. Brock
Let me ask Bill to add one further piece of perspective to that.
William W. Douglas III
Sure. I think if you look at the P&L implications, Caroline based on your question, we wouldn’t expect to bounce back in volume assuming normalized weather for the balance of the quarter versus what we experienced in Q2 and hopefully volume growth obviously.
As I mentioned in my prepared remarks, we would also expect some incremental cost 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 current 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
Thank you. So the last question is on the margins; you look like you did a good job on controlling cost of sales per case and obviously the draft here is affecting corn prices, but you largely buy sugars, is there any – what are you seeing on your major inputs as you look out six, twelve months?
John F. Brock
Bill, would you like to? Thank you.
William W. Douglas III
Yeah, I think I’ll comment on 2012. Generally we did cover our COGS if you exclude the French excise tax processing was four COGS per case were three.
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 not withstanding 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 in full-year benefit. As you mentioned we’re not really affected by corn in Europe.
Having said that, its 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 goods sold, going back to the sweetener element we are subject to the EU sugar regime and all of our markets with the exception of Norway and that’s a little bit of an anomaly outlier firm, its compared to some of the other recent commodity trends; i.e. it’s been going up.
Caroline Levy - CLSA
Thank you so much.
John F. Brock
Thank you.
Operator
Our next question comes from Bill Schmitz with Deutsche Bank. Please go ahead.
William Schmitz - Deutsche Bank
Hi, guys. Good afternoon.
John F. Brock
Hi.
William Schmitz - Deutsche Bank
Did you say what the coke volume was in the quarter, Trademark Coke?
John F. Brock
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
Okay. That sounds great.
And 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?
William W. Douglas III
Hubert?
Hubert Patricot
William Schmitz - Deutsche Bank
Hey, got you but …
William W. Douglas III
Bill, this Bill Douglas.
William Schmitz - Deutsche Bank
Yeah.
William W. Douglas III
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
Great, thanks. That’s really helpful.
And then what's the magic of the 65 million share authorization, is that just a Board decision and could that be opt if you guys had a Board meeting decided you want to buyback more stock because when I looked at it, you had 375 ml, I guess for the first-half of the year, so if your run rate that it’s like 750 ml, so is there any real magic to that 65 million share authorization?
William W. Douglas III
There was some logic to it Bill. When we did the original transaction we set a cap of 20% which we rounded at 65 million shares from that time for about a two-year period.
So that effectively takes us to October 1, 2012 but we’ve kind of rolled that 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.
William Schmitz - Deutsche Bank
Great. Thank you very much.
Operator
Our next question comes from Lauren Torres of HSBC. Please go ahead.
Lauren Torres - HSBC
Hi, everyone. I am not sure, did you mention for the quarter what for total company future versus immediate consumption trends were?
William W. Douglas III
No, we didn’t. We can make some broad comments upon that.
Hubert you want to talk a little bit about that?
Hubert Patricot
Yeah, the trend was slightly more negative for the single serve which we would characterize as Iced Tea. Clearly again driven by the weather but we’re having some good initiative in this area and I am pleased to report that we have achieved our record market share in immediate consumption in GB with the launch of the 375 ml, but overall the cans are single cans and the small PT were lagging behind the rest of the market.
So single serve were more negative than which is normal when you have, you don’t open [the authorized] new café and things like that.
John F. Brock
Just keep in mind Lauren, we’ve mentioned this before. One of the things that is, encouraging about the business model we have here in Europe is that, when swings like that do occur and in times of economic challenge or bad weather, people were not going out as much and on the go assumption tends to get impacted.
The fact is, from a profitability standpoint our business model is robust and that we make almost as much money and perhaps even as much money in future consumption as we do in immediate consumption and of course that’s not the case in certain other markets around the world.
Lauren Torres - HSBC
Okay. And I guess with that said, do you think there is less room for pricing?
It seems like there is a little bit of pushback on the consumer side, you’ve been able to cover your cost of pricing and if the consumers maybe getting a little directly softer, is there less room to take that price that you were planning?
Hubert Patricot
I think we strongly believe and we prove it with our category vision world, which shows that there is an additional potential for turnaround of $4.6 billion in all our European territory. So the potential for additional revenue is that.
Having said that tax in pricing, taxing tariff in our territory is always a tough negotiation with the trade. We have managed to have it in all our [BUs] in due time and we’re also sensible to the consumer demands.
So it’s a balancing act between the price increase and the promotional spending and that the way we’re really making trade-off with one single priority which is to deliver on our guidance on the OI level.
William W. Douglas III
Just to remind you Lauren about the timing of our pricing; we take pricing in GB and France in the early part of the year so that’s already been affected with our customers and then Benelux would be more in the early fall and that process is already underway. So for 2012 I think the concern is minimal, not to comment but I think the concern would be more in 2013, but I think we feel pretty confident that we’ll be able to – that we have or will be able to guarder the pricing that we need for 2012.
Lauren Torres - HSBC
Okay, all right. Thank you
William W. Douglas III
Thank you.
Operator
Our next question comes from Steve Powers of Bernstein. Please go ahead.
Stephen Powers - Sanford C. Bernstein & Co
Hi guys, thanks. And back to weather for a second, weather was undeniably poor in Q2, but how confident are you, it sounds like you’re pretty confident in the underlying demand situation.
How are you assessing that and has anything changed in what you’re tracking in recent months whether positive or negative as you look forward?
William W. Douglas III
I’ll make a couple of comments on that and say that frankly we think our business model still works. This weather we’ve been through over the last – really four months now, three and a half to four months has just been the worst, imagine well I am not sure if you’ve heard the same thing from everybody else in the business.
So we’ll see, it’s been so bad that honestly and we would say it’s meaningfully more than half the issue. It is hard having said that to dissect all the other components, I mean, clearly there are macroeconomic issues out there, the consumer fragility issues, but our sense is that, that basic value creation model we have remains in place and that with some normal weather and you add to it the kind of programs we have in place for the third and fourth quarter, we’re optimistic.
But we’ll see, with some normal weather we’re going to be in a much better position to be able to kind of decipher exactly what's going on with some of these other issues and frankly to see whether they’re really issues or not.
Stephen Powers - Sanford C. Bernstein & Co
That’s helpful. You also say that French sales tax as a headwind in the quarter.
Could you give us an update on how demand is trending in France and how retailers have been reacting to the tax since the last update you provided?
William W. Douglas III
Sure. Let me ask Hubert to do that.
Hubert Patricot
Yeah. As we said, of course France was also impacted by the bad weather.
As john said, difficult to dissect all the other factors in the decrease, but the excise tax is clearly a headwind and that negatively impacted we think our volume growth. As you remember we took out the tax related price increase as of January 1st, and we are adding that our own tariff increase.
Year-to-date we’ve seen the pricing increase on the sales in France as customers have strategically chosen to pass that increase to consumer, but they have done that on valid timelines and frankly it varies by channel; it varies by pack. And today it doesn’t reflect the full impact of the tax and our tariff combine.
But we still think that the elasticity of our product should in some way moderate the impact of the tariff increase. So it’s not fully impacted yet.
We need to wait for full quarter with the full impact in the tariff, it varies by customer. Overall, its 4% to 5% price increase for the moment.
So again, it’s not the full impact and we will see. But again the major factor also for France was the bad weather.
Stephen Powers - Sanford C. Bernstein & Co
Great. And do you expect that full quarter or full impact to be Q3, is it Q4, or is it not till next year?
Hubert Patricot
It’s difficult to say because clearly some customers are playing strategically as a way to position their self in this current environment, which is in more intense competition especially with the bad weather or clearly the category was not growing. So it maybe Q3, but I am not 100% assertive on that one.
Stephen Powers - Sanford C. Bernstein & Co
Okay. Then maybe just lastly, a question for Bill, obviously the environment is difficult, lack of visibility and you’ve had to take care your free cash flow forecast down.
How are you thinking about your capital structure in leverage of particular medium term, are you still comfortable levering the balance sheet up back up to the target range next year even if the macro environment doesn’t stabilize and what if anything would change that, if that stands?
William W. Douglas III
Sure. Well I just comment on the free cash flow and the other changes that we made.
The majority of that impact was currency. So the underlying business had marginal impact on that revised guidance.
It was principally currency. And then the second part of your question Steve is, we remain committed to utilizing our balance sheet and would think that we would be able to get within that targeted range by the end of 2013.
At a minimum we will have that planned and we’ll articulate hopefully on our outlook call in December of this year.
Stephen Powers - Sanford C. Bernstein & Co
Okay. Great, thank you.
William W. Douglas III
So overall, fundamentally our view and confidence in utilizing that balance sheet capacity has not changed.
Stephen Powers - Sanford C. Bernstein & Co
Thanks a lot.
William W. Douglas III
Thank you.
Operator
Our next question comes from Kaumil Gajrawala of UBS. Please go ahead.
Kaumil Gajrawala - UBS Warburg
Hey, guys – I guess for you guys, good afternoon. If I could also follow-up on the 65 billion share cap or maybe more importantly what comes after that, is there any change or adjustment in how you’re thinking about cash return to shareholders will still be large buyback or maybe would there be a shift over to with a little bit more focus on dividend versus buyback, any changes there?
William W. Douglas III
Hi, Kaumil, Bill here. We’re committed and remain committed as I just mentioned on the prior question to returning cash to shareowners.
The form and timing of that I think is to be decided and to be communicated and we’d envision doing that most likely in the December outlook call.
Kaumil Gajrawala - UBS Warburg
Okay, got it. And then from – if I could ask, and I know you’ve gotten plenty questions on weather, but you’re seeing quite confident that during periods of time where the weather is more favorable, your trends were bit stronger, is there any specific numbers or spread that you were able to see between what the quarter look like and what things look like when the weather was a little bit better?
John F. Brock
Candidly Kaumil, I think it’s just – it’s too difficult to tell, I mean frankly, we haven’t had that many periods of good weather to look at it, but we have had an isolated week here and there where things have been a bit better. But we’re not that scientific kind of which we were or we were not, and we’re – all we’re hoping for is a return to normal weather and if we get that, we’ll be fine.
Kaumil Gajrawala - UBS Warburg
Got it. And then last question on energy, it looks like from the first quarter there was pretty big sequential slowdown in the growth rate, however, obviously the comp is much more difficult, is there anything going on inside of that, that you wanted to highlight?
John F. Brock
Hubert?
Hubert Patricot
Again, energy, even if it’s still growing it’s not immune from the bad weather, there is still an impact, in fact as a category it’s normally more seasonal than the rest of the soft drinks, so it’s no surprise that it slowdown. But we’re selling – I think we’re continuously seeing the success of our multi-brand strategy with a lot of traction beyond the brand, and with the majority of the growth coming from Monster.
Kaumil Gajrawala - UBS Warburg
Okay, got it. Thank you.
William W. Douglas III
Thank you.
Operator
Our next question comes from Judy Hong of Goldman Sachs. Please go ahead.
Judy Hong - Goldman Sachs Group, Inc.
Thanks. Hi, it’s [Jude].
First, just in terms of the competitive environment I know the first part of the year your competitor was a lot more promotional, so maybe if you can just update on kind of what you’re seeing as you’ve a lot more activation now in the marketplace. And then do you envision any benefits from Britvic’s product recall issue in terms of either gaining some share in some of the products that you overlap or just in terms of their focus maybe now fixing that issue as supposed to other category that you’ve a broader overlap with?
William W. Douglas III
Judy, is your question GB specific?
Judy Hong - Goldman Sachs Group, Inc.
It’s GB – more so GB, but maybe just broadly about the – just the competitive and the promotional environment, that’s all.
William W. Douglas III
Well, let me got it on the second question and then I’ll ask Hubert to kind of on the first one…
Judy Hong - Goldman Sachs Group, Inc.
Sure.
William W. Douglas III
…and in terms of the recall, clearly we’ve got a platform, a portfolio of products, which appeal to a wide variety of consumers and you can assume that any time there is any kind of a dislocation in the marketplace, obviously we’d want to make sure that everybody knows our products are available and we’ll do what we can do to make sure the consumers get some of their choices still. Capri-Sun particularly is a nice product that kind of place in that same category, but I think other than that, just to say, our team is going to be out there pushing hard trying to make sure that our customers and our consumers have what they need.
On the competitive set, let me ask Hubert to comment on that.
Hubert Patricot
Yeah. In GB, like in other territory we see the category has been expandable and a value-creation category.
And regularly we see period of planned promotional activity and as you stated the first half of the year has been no different, it has been quite heavy in term of competitive activity, to say the truth especially with the end of the quarter. Possibly influenced by the weather our marketing calendar, which is now in full swing was more aided into the Olympics and more aided into July-August.
What we don’t expect for the second half of the year is a more rational pricing environment, we’ve taken our price increase has been stated in the beginning of the year and listening to our competitor Britvic in the earnings call they’ve mentioned that they’re planning to take price as of May and June. So, we think the pricing environment to be more rational – to be rational for the second half of the year and while we can have our Olympic program especially in action.
Judy Hong - Goldman Sachs Group, Inc.
Okay. And then just following up on energy, can you update us on just how POWERADE Energy is doing now that it’s been in the market for about a year?
And then, I know you were talking about Rehab gaining distribution this year, so just in terms of how that’s progressing as well?
Hubert Patricot
Yeah. POWERADE Energy is clearly an extension of the brand POWERADE.
This year, our focus is more about POWERADE as a sports drink. So we’re packing the launch with the shift of our focus probably more towards POWERADE as a sports drink.
If we look at the global portfolio for energy, as I said, really for the moment, Monster is leading our growth and we’ve some good reaction to the introduction of the new SKUs I mentioned, especially Rehab. So we’re really encouraged by the traction we’re seeing beyond our innovation, and as I said the energy was growing still 8% -- 16% and we expect more for this quarter.
Judy Hong - Goldman Sachs Group, Inc.
Okay, great. Thank you.
William W. Douglas III
Thank you.
Operator
Our next question comes from Bryan Spillane of Bank of America. Please go ahead.
Bryan Spillane – Bank of America/Merrill Lynch
Hi, good afternoon.
William W. Douglas III
Good afternoon.
Bryan Spillane – Bank of America/Merrill Lynch
Just a couple of questions, or follow-up questions I guess related to the outlook. Bill, the change in CapEx guidance, is that also just foreign exchange effects the translation of the CapEx?
William W. Douglas III
Vast majority of it, Bryan. Yes, yes.
Bryan Spillane – Bank of America/Merrill Lynch
Okay. And then, when we look at the operating income, the currency neutral operating profit income growth expectation for the year, you held it at mid single-digit, just how much of it was propped up by the reduction in your outlook for cost of goods per case versus any reductions you make for your full-year SG&A outlook?
Mostly the cost of goods – cost per – cost of goods per case is coming a little bit more favorably?
William W. Douglas III
Well, I think if you look at our ability to maintain the operating income growth given what we’ve experienced with the volume shortfall, we’ve managed SG&A very carefully in the first half of the year, as I mentioned in my remarks it’s going to be a little bit of a tick up in Q3. I think overall, our ability to maintain that operating income growth is probably directionally half and half SG&A cost control and then favorable cost of goods outlook as well.
Bryan Spillane – Bank of America/Merrill Lynch
Okay.
William W. Douglas III
So it’s both of those delivering against that target.
Bryan Spillane – Bank of America/Merrill Lynch
Okay. And then finally just on the operating income outlook, I guess given what you said about your expectations for currency in the third quarter, reported operating income is going to be done somewhere in the 6% or 7% range I guess, and then it implies that the fourth quarter reported operating income will actually be up and is that probably a function of where costs are going to fall 3Q versus 4Q and also an easier currency comparison, is that part of what goes into that thinking?
William W. Douglas III
I think all of those items are relevant plus we’ve the extra selling day in the fourth quarter and we’ve got the price COGS differential that we’re comparing Q4 ’12 versus Q4 ’11.
Bryan Spillane – Bank of America/Merrill Lynch
Okay. And then just finally just how volume dependant, that it just seems like you’ve had some flexibility in terms of managing cost components in the P&L, when you look into the second half of the year.
Is it just more volume dependant in terms of achieving the guidance or is there still some flexibility in terms of managing costs?
William W. Douglas III
I think there is some flexibility that as we get deeper into the year the ability, just the amount of runway that you’ve to manage your cost diminishes. So I’d say it could become more volume dependant if volume were to continue to be negative.
But right now, we feel comfortable that we’re going to be able to manage that within a normalized weather pattern.
Bryan Spillane – Bank of America/Merrill Lynch
Okay, thank you.
William W. Douglas III
Thank you.
Operator
Our next question comes from Mark Swartzberg of Stifel Nicolaus. Please go ahead.
Mark Swartzberg - Stifel, Nicolaus & Company, Inc.
Yeah. Thanks.
Good afternoon, guys. I guess I’ve a follow-up, Bill on Bryan’s question and then back over to France, but I’d think you can have a pretty high level of visibility on SG&A for the fourth quarter, sitting here today, can you just speak about how much that’s factoring into what seems to be a pretty strong double-digit operating income increase for the fourth quarter, currency …?
William W. Douglas III
It’s a meaningful contributor to it, absolutely.
Mark Swartzberg - Stifel, Nicolaus & Company, Inc.
And can you give us any color on either buckets or what’s going on in that thinking?
William W. Douglas III
There is nothing of significance that I’d highlight. Again, it’s the way that the full-year calendar played out, and it’s versus our comps in 2011 as well for Q4.
Mark Swartzberg - Stifel, Nicolaus & Company, Inc.
Got it.
William W. Douglas III
But nothing of a real individual item that stands out that I’d highlight as a big item to note.
Mark Swartzberg - Stifel, Nicolaus & Company, Inc.
Okay, fair enough. And then, on France, can we get a little more color on – I know it’s tough with the weather, but I’m trying to better understand your elasticity, how it’s playing out versus what you expected, I don’t know if it’s a matter of comparing those retailers where the pricing has been implemented versus those where it hasn’t, but do you’ve any sense of how your elasticity is playing out versus what’s your models etcetera that might play out?
Hubert Patricot
No, it’s really too early and it’s very difficult to read because basically the way the price has increased is more per channel than per customer. So you would see that it does increase less in the big hypermarkets, the costs will more clear than for example in the supermarkets and for the moment it’s really impossible I think to reach with that figures.
But we know by experience that again the elasticity in France was probably much lower than it used to be in other markets. So we need to wait for full quarter with the price increase if it materialize because I’m not excluding that one of the customer will not materialize to tell you keep the price increase before the end of the year.
We’ll see generally summer is a good timing for our customer to increase pricing. We had seen some acceleration in the price transition in the past two weeks.
We need to wait for that.
Mark Swartzberg - Stifel, Nicolaus & Company, Inc.
Okay. And a clarification if there, on the – you referenced 4% to 5% pricing in France, what was that a reference to?
Hubert Patricot
Its average pricing for CCE product in the market, which is not…
William W. Douglas III
Shelf price.
Hubert Patricot
…shelf price, yeah, which is not so different from the rest of the A brands in France. So, we’re all in the same range 4% to 5% for the moment year-to-date.
Mark Swartzberg - Stifel, Nicolaus & Company, Inc.
Okay, that’s your own pricing increase across all retailers…?
Hubert Patricot
No, that’s the pricing to the consumer. The retail sales pricing increased year-to-date versus previous year.
William W. Douglas III
On the shelf price.
Hubert Patricot
On the shelf price.
Mark Swartzberg - Stifel, Nicolaus & Company, Inc.
Okay, that is on the shelf price, which includes the retailers that have not taken pricing?
Hubert Patricot
Yes, absolutely.
Mark Swartzberg - Stifel, Nicolaus & Company, Inc.
Got it. Okay, great.
Thank you.
William W. Douglas III
Thank you.
Operator
Our next question comes from John Faucher of J. P.
Morgan. Please go ahead.
John Faucher - J.P. Morgan Securities Inc
Thanks. John, you talked a little bit about the difference in the business model in terms of the impact of immediate consumption and relative to the margins in terms of future consumption.
I think that highlights sort of the big structural improvement to your operating model as you spun off the North American assets and went to a distribution light model and non-DSD model as you moved into Europe. And I guess as we look into your consideration of the Germany business, when I think about some of the brutal de-levering quarters that I’ve seen in terms of the U.S.
business in terms of what happens when volumes go south with the big DSD model. And I think I guess the question becomes why deal with the aggravation of that if we’re going to end up with down quarters and why not just stay with the asset light model that you’ve currently in Western Europe, what’s the advantage of bringing on a DSD business like that?
John F. Brock
Yeah, thanks for the question, John. I don’t really want to make any specific comments around Germany other than to say that at least I think based on public information we’ve seen the DSD piece of the business there is something less than half.
So it’s not necessarily a surrogate for the U.S. model.
But I think you pointed out very well what we’re so excited about and have been all along since this transaction and that is the flexibility that we have in our business model and we reflect back some of this three to four years ago with some of the challenges we had in other markets, we obviously didn’t have that flexibility because volume – the volume short fall and the impact it has on your profitability in certain markets can be huge and so we’re not happy about the volume results we had here in the first half and we’re committed to get – to getting it back on track. But we’re pleased that we have the flexibility in our business model to tweak and turn the leverage in such a way to come up with the result which is frankly a heck of a lot better than it would have been maybe under other circumstances.
John Faucher - J.P. Morgan Securities Inc
Okay, great. Thanks.
John F. Brock
Thank you. Operator, this will be our last question.
Operator
Our final question comes from Priya Ohri-Gupta of Barclays. Please go ahead.
Priya Ohri-Gupta - Barclays Capital
Priya Ohri-Gupta. Thank you for taking my question.
As you move towards your leverage objective over the course of next year, how should we think about the market you plan to issue in? Is it still going to be primarily U.S.
or should we expect a greater percentage of that to come from euro or potentially even sterling?
William W. Douglas III
Good morning. Thanks for your question.
We have been very U.S. centric in our debt offerings to-date.
I think part of that was because of the state of the European debt markets and the fact that our all in cost of borrowing in the U.S. was meaningfully lower than it was in Europe.
Over the recent weeks and months that gap has close considerably and it’s almost on parity, I think if you look that it today. So, going forward we would be striving to be much more active in the European debt markets and bring more of a balance of euro issued versus U.S.
issued to our cumulative debt portfolio prospectively.
Priya Ohri-Gupta - Barclays Capital
Thank you. That’s very helpful.
John F. Brock
Okay. Well, thanks again to all of you for joining us today.
We are very excited again about being here in London. We appreciate you taking the time to join us and hope that all of you will enjoy the Olympics as much as we will.
Take care and have a great day.
Operator
Ladies and gentlemen this does conclude today’s conference. You may all disconnect and have a wonderful day.