Hi,
Fundamentals Look Solid. John Brock, CEO, and Bill Douglas, CFO, presented this morning at the CAGNY conference, providing an overview of CCE's compelling fundamental story and confirming '12 guidance of ~10% EPS growth (comparable, fx neutral). We came away from the presentation optimistic about CCE's LT prospects, but think the stock may be range bound at current levels until visibility of potential catalysts improves. Our est.'s are unchanged, and we maintain our Market Perform rating and $28-30 valuation range.
Guidance Confirmed. CCE's LT financial targets include: (1) 4-6% revenue growth, (2) 6-8% OI growth, (3) high single-digit EPS growth, and (4) ROIC improvement of at least 20 bps/yr. 2012 guidance includes the following, on a comparable constant currency basis: (1) high single-digit revenue growth, (2) 6-8% OI growth, (3) ~10% EPS growth, (4) $500-525M FCF, (5) at least $500M in share repurchases, and (6) $400-425M of capex.
Energy & Non-Carb Growth Opportunities. CCE's energy drink volume increased 40%+ in 2011, and considering the high margins and relative small size (~1.5% of CCE's total volume), energy should be a key growth driver over the next few years. Non-carbs remain another growth category for CCE. While volume growth slowed in 2011, comping large 2010 distribution gains, Powerade and Vitamin Water are among the key brands CCE will emphasize in its 2012 London Olympics activation.
2012 Growth Initiatives. CCE has two growth initiatives for 2012; the London Olympic Games and the Euro 2012 Soccer Championship. Importantly, CCE engaged in a 3-yr growth strategy ('11-'13) with retailers for the Olympics.
Focused On Increasing Shareholder Value. CCE is keeping its powder dry, with an under-levered balance sheet, currently at 1.7x net debt/EBITDA vs. a 2.5x-3.0x LT target. Management reiterated a commitment operating at it's LT leverage target and suggested this will be achieved with an acquisition or share repurchases. We think KO's recently announced agreement with FEMSA regarding the Philippines bottling operations may limit CCE's options on the margin, and potentially increases the odds that CCE acquires Germany - though we still think the decision will be in 2H 2012 or later.
Please call or email me with any questions.
Thanks!
Bonnie
Bonnie Herzog
Managing Director
Beverage, Tobacco & Consumer Research
Wells Fargo Securities, LLC
375 Park Ave
New York, NY 10152
Phone: (212) 214-5051
bonnie.herzog@wellsfargo.com
Additional information available upon request. This information is for your use only and may not be forwarded or distributed. The person transmitting this e-mail is a licensed person of Wells Fargo Securities, LLC. I certify that: (1) All views expressed in this research report accurately reflect my personal views about any and all of the subject securities or issuers discussed, and (2) No part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by me in this research report.
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C-Store News
Marketing Sales
Thursday, February 23, 2012
KO: CAGNY Thoughts - KO Continues To Execute Its Game Plan
Hi,
2020 Vision Is Delivering Results - KO Must Continue To Execute. CFO Gary Fayard presented this afternoon at the 2012 CAGNY conference, conveying a sense of early accomplishment and long-term conviction in KO's 2020 Vision. The most relevant takeaway from today's presentation is that Q1 EPS est.’s appear a little high, though FY 2012 est.'s look reasonable. We reduced our Q1E EPS by $0.02 to $0.89 and maintained our 2012E EPS of $4.07. We maintain our Outperform rating and $75-77 valuation range.
Marketing Strategy Unlikely To Change. For 2010 and 2011 KO made combined direct marketing investments of $11B, and system-wide investments totaled $17B after including bottling partners' investments. KO does not anticipate increasing marketing investments beyond the current 2012 plan in response to PEP's marketing step-up. KO's brands have already benefitted from healthy, consistent investment in recent years.
Bottling Investment Group An Intermediate Term Net Seller. KO's Bottling Investment Group segment is the third largest bottler in the KO system based on volume. Acquisitions will continue over the next few years, however KO probably will be a net seller. Additional details on KO's agreements with CCE regarding Germany and FEMSA regarding Philippines were not provided.
Economic Profit Is A Guiding Metric. Mr. Fayard discussed economic profit at length, which is a key determinant of management compensation. After adjusting for the CCE acquisition, KO's economic profit target is a 10%+ CAGR. KO's formula for economic profit growth is based on 70% profitable growth and 30% productivity & reinvestment. Specific factors and contributions to economic profit growth include: (1)volume growth (~40% EP growth), (2) share gains (~10% EP growth) (3) revenue realization (~20% EP growth), (4) P&L leverage (~15% EP growth), (5) capital efficiency (~15% EP growth).
Guidance Update Suggests Lower Q1 EPS. Mr. Fayard provided three updated points for 2012 guidance. (1) Q1 gross margins are expected to be in line with FY12 gross margins (prev. guidance projected FY12 gross margins in line with FY11). Commodity cost pressure was relatively modest in Q1 2011, consequently, the impact from higher commodity prices will hit Q1 2012. We adjusted our model, lowering Q1 2011 operating margins by 40 bps and EPS by $0.02 to $0.89. (2) KO contributed $900M to its pensions in Q1, which will reduce pension expense by ~$0.01-$0.02/shr. for FY 2012, spread evenly across the year. (3) Cap-ex is expected to be $3.0-3.2 billion.
Please call or email me with any questions.
Thanks!
Bonnie
Bonnie Herzog
Managing Director
Beverage, Tobacco & Consumer Research
Wells Fargo Securities, LLC
375 Park Ave
New York, NY 10152
Phone: (212) 214-5051
bonnie.herzog@wellsfargo.com
Additional information available upon request. This information is for your use only and may not be forwarded or distributed. The person transmitting this e-mail is a licensed person of Wells Fargo Securities, LLC. I certify that: (1) All views expressed in this research report accurately reflect my personal views about any and all of the subject securities or issuers discussed, and (2) No part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by me in this research report.
This email is subject to a disclaimer, please click on the following link or cut and paste the link into the address bar of your browser. https://www.wellsfargo.com/com/disclaimer/red2
2020 Vision Is Delivering Results - KO Must Continue To Execute. CFO Gary Fayard presented this afternoon at the 2012 CAGNY conference, conveying a sense of early accomplishment and long-term conviction in KO's 2020 Vision. The most relevant takeaway from today's presentation is that Q1 EPS est.’s appear a little high, though FY 2012 est.'s look reasonable. We reduced our Q1E EPS by $0.02 to $0.89 and maintained our 2012E EPS of $4.07. We maintain our Outperform rating and $75-77 valuation range.
Marketing Strategy Unlikely To Change. For 2010 and 2011 KO made combined direct marketing investments of $11B, and system-wide investments totaled $17B after including bottling partners' investments. KO does not anticipate increasing marketing investments beyond the current 2012 plan in response to PEP's marketing step-up. KO's brands have already benefitted from healthy, consistent investment in recent years.
Bottling Investment Group An Intermediate Term Net Seller. KO's Bottling Investment Group segment is the third largest bottler in the KO system based on volume. Acquisitions will continue over the next few years, however KO probably will be a net seller. Additional details on KO's agreements with CCE regarding Germany and FEMSA regarding Philippines were not provided.
Economic Profit Is A Guiding Metric. Mr. Fayard discussed economic profit at length, which is a key determinant of management compensation. After adjusting for the CCE acquisition, KO's economic profit target is a 10%+ CAGR. KO's formula for economic profit growth is based on 70% profitable growth and 30% productivity & reinvestment. Specific factors and contributions to economic profit growth include: (1)volume growth (~40% EP growth), (2) share gains (~10% EP growth) (3) revenue realization (~20% EP growth), (4) P&L leverage (~15% EP growth), (5) capital efficiency (~15% EP growth).
Guidance Update Suggests Lower Q1 EPS. Mr. Fayard provided three updated points for 2012 guidance. (1) Q1 gross margins are expected to be in line with FY12 gross margins (prev. guidance projected FY12 gross margins in line with FY11). Commodity cost pressure was relatively modest in Q1 2011, consequently, the impact from higher commodity prices will hit Q1 2012. We adjusted our model, lowering Q1 2011 operating margins by 40 bps and EPS by $0.02 to $0.89. (2) KO contributed $900M to its pensions in Q1, which will reduce pension expense by ~$0.01-$0.02/shr. for FY 2012, spread evenly across the year. (3) Cap-ex is expected to be $3.0-3.2 billion.
Please call or email me with any questions.
Thanks!
Bonnie
Bonnie Herzog
Managing Director
Beverage, Tobacco & Consumer Research
Wells Fargo Securities, LLC
375 Park Ave
New York, NY 10152
Phone: (212) 214-5051
bonnie.herzog@wellsfargo.com
Additional information available upon request. This information is for your use only and may not be forwarded or distributed. The person transmitting this e-mail is a licensed person of Wells Fargo Securities, LLC. I certify that: (1) All views expressed in this research report accurately reflect my personal views about any and all of the subject securities or issuers discussed, and (2) No part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by me in this research report.
This email is subject to a disclaimer, please click on the following link or cut and paste the link into the address bar of your browser. https://www.wellsfargo.com/com/disclaimer/red2
DPS: CAGNY Thoughts - Solid Execution Against LT Strategy
Hi,
· LT Strategy Remains On Track. Larry Young, CEO, and Martin Ellen, CFO, presented this afternoon at the CAGNY conference, providing a general overview of the company's strategy and an update on key initiatives. Coming out of today's presentation we continue to believe that management is executing well against a good strategy for growing a relatively mature business. However, given the lingering impact of higher commodity prices and lack of near-term catalysts we see limited opportunity for share price appreciation from the current level. We maintain our Market Perform rating and $36-38 valuation range.
· Shareholder Value Equation Is Still Intact - DPS's formula for long-term shareholder value includes: (1) 3-5% net sales growth, based on 0.5%-1.0% volume growth and ~2.0%+ price/mix benefit; (2) mid-single digit net income growth, benefitting from operating leverage (including RCI); (3) high-single digit EPS growth, benefitting from share repurchases; (4) net income to free cash flow conversion >100%. Again this is a long-term target, and we are modeling mid-single digit EPS growth in '12, with growth returning to high-single digits in '13.
· Three Key Priorities To Drive Profit Growth - Management reviewed three priorities to drive earnings growth: (1) build the brands, (2) grow per caps, and (3) RCI. Management reviewed some encouraging examples of how DPS is executing against these priorities. Marketing investments in brands has increased by $100M over the past 3 years, while innovations like the 10-calorie platform have reinforced key brands. We also liked the concept of a sales group exclusively focused on Hispanic consumers, which was mentioned today.
· RCI Payoff Requires Patience - No major updates on the RCI front, as management confirmed the 3-yr productivity savings target of at least $150M (~50% balance sheet) and ~$57M savings achieved in 10 months of 2011. We continue to appreciate the company's commitment to productivity improvements and believe that DPS's RCI strategy will increase shareholder value over the long-term. However, until the savings become more evident in the bottom line we think the impact DPS's share price will be limited.
· Commodity Cost Details - Management reviewed some details on the cost side. Packaging (~50%) and ingredients (~25%) comprise 75% of COGS. DPS covers exposure for 7 key commodities only to the extent that its cost structure remains competitive - management is not taking speculative positions.
Please call or email me with any questions.
Thanks!
Bonnie
Bonnie Herzog
Managing Director
Beverage, Tobacco & Consumer Research
Wells Fargo Securities, LLC
375 Park Ave
New York, NY 10152
Phone: (212) 214-5051
bonnie.herzog@wellsfargo.com
Additional information available upon request. This information is for your use only and may not be forwarded or distributed. The person transmitting this e-mail is a licensed person of Wells Fargo Securities, LLC. I certify that: (1) All views expressed in this research report accurately reflect my personal views about any and all of the subject securities or issuers discussed, and (2) No part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by me in this research report.
This email is subject to a disclaimer, please click on the following link or cut and paste the link into the address bar of your browser. https://www.wellsfargo.com/com/disclaimer/red2
PM: CAGNY Thoughts - Innovation Central To Continued Growth
Hi,
Innovation Should Continue to Drive Momentum - Novel, relevant product introductions and innovative line extensions should continue to drive PM's momentum, particularly in the Asian market. In Japan, PM views its 28.2% share in Q4 as its "base share" and has new product launches planned throughout 2012 to build on momentum in that market. Innovative Marlboro line extensions have also been an area of focus, esp. around menthol products in the growing Asian menthol segment. Also, PM noted the potential in key Asian markets; Indonesia, Philippines and Japan due to growing adult smoking populations and increased economic prospects. Furthermore, we are encouraged by Marlboro's new brand architecture which continues to drive volume.
Marlboro Important but Not the Whole Story - Although Marlboro's total (ex-China & US) market share has been increasing (9.2% in FY11), driven by innovative line extensions, other brands have gained traction as well. Luxury brand Parliament, with the highest margin, generated volume growth of 12.1% in FY11. Low-to-mid priced brand L&M is the second largest brand in the EU region where share has been growing since 2009 and reached 6.6% in 4Q11. We are impressed with PM's entire portfolio and the position of its different brand offerings within a number of growing segments.
Russia Poised for a Turnaround - Macroeconomic conditions in Russia have stabilized and consumer uptrading has resumed as premium/mid priced brands grew share in 2011. Relative price gaps have narrowed as excise tax changes have been focused on raising the minimum excise tax which benefits mid and premium brands. PM has plans to fix issues with Marlboro in Russia and accelerated consumer uptrading should provide a further tailwind to PM.
Southern EU Remains A Challenge - Certain markets in Southern Europe, esp. Spain and, to a lesser extent, Portugal and Greece, continue to be pressured and prospects are not expected to turn around in the near future. Unemployment esp. among young adults is high which clearly does not bode well for consumer sentiment.
Currency Basket a Natural Hedge - PM provided a breakdown of some of its costs by currency exposure, although noted that the largest impact of currency fluctuations is from translation and that the diversification benefits of its broad international presence provides a natural currency hedge.
Please call or email me with any questions.
Thanks!
Bonnie
Bonnie Herzog
Managing Director
Beverage, Tobacco & Consumer Research
Wells Fargo Securities, LLC
375 Park Ave
New York, NY 10152
Phone: (212) 214-5051
bonnie.herzog@wellsfargo.com
Additional information available upon request. This information is for your use only and may not be forwarded or distributed. The person transmitting this e-mail is a licensed person of Wells Fargo Securities, LLC. I certify that: (1) All views expressed in this research report accurately reflect my personal views about any and all of the subject securities or issuers discussed, and (2) No part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by me in this research report.
This email is subject to a disclaimer, please click on the following link or cut and paste the link into the address bar of your browser. https://www.wellsfargo.com/com/disclaimer/red2
Innovation Should Continue to Drive Momentum - Novel, relevant product introductions and innovative line extensions should continue to drive PM's momentum, particularly in the Asian market. In Japan, PM views its 28.2% share in Q4 as its "base share" and has new product launches planned throughout 2012 to build on momentum in that market. Innovative Marlboro line extensions have also been an area of focus, esp. around menthol products in the growing Asian menthol segment. Also, PM noted the potential in key Asian markets; Indonesia, Philippines and Japan due to growing adult smoking populations and increased economic prospects. Furthermore, we are encouraged by Marlboro's new brand architecture which continues to drive volume.
Marlboro Important but Not the Whole Story - Although Marlboro's total (ex-China & US) market share has been increasing (9.2% in FY11), driven by innovative line extensions, other brands have gained traction as well. Luxury brand Parliament, with the highest margin, generated volume growth of 12.1% in FY11. Low-to-mid priced brand L&M is the second largest brand in the EU region where share has been growing since 2009 and reached 6.6% in 4Q11. We are impressed with PM's entire portfolio and the position of its different brand offerings within a number of growing segments.
Russia Poised for a Turnaround - Macroeconomic conditions in Russia have stabilized and consumer uptrading has resumed as premium/mid priced brands grew share in 2011. Relative price gaps have narrowed as excise tax changes have been focused on raising the minimum excise tax which benefits mid and premium brands. PM has plans to fix issues with Marlboro in Russia and accelerated consumer uptrading should provide a further tailwind to PM.
Southern EU Remains A Challenge - Certain markets in Southern Europe, esp. Spain and, to a lesser extent, Portugal and Greece, continue to be pressured and prospects are not expected to turn around in the near future. Unemployment esp. among young adults is high which clearly does not bode well for consumer sentiment.
Currency Basket a Natural Hedge - PM provided a breakdown of some of its costs by currency exposure, although noted that the largest impact of currency fluctuations is from translation and that the diversification benefits of its broad international presence provides a natural currency hedge.
Please call or email me with any questions.
Thanks!
Bonnie
Bonnie Herzog
Managing Director
Beverage, Tobacco & Consumer Research
Wells Fargo Securities, LLC
375 Park Ave
New York, NY 10152
Phone: (212) 214-5051
bonnie.herzog@wellsfargo.com
Additional information available upon request. This information is for your use only and may not be forwarded or distributed. The person transmitting this e-mail is a licensed person of Wells Fargo Securities, LLC. I certify that: (1) All views expressed in this research report accurately reflect my personal views about any and all of the subject securities or issuers discussed, and (2) No part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by me in this research report.
This email is subject to a disclaimer, please click on the following link or cut and paste the link into the address bar of your browser. https://www.wellsfargo.com/com/disclaimer/red2
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