Coca-Cola Enterprises Cuts Sales Outlook; Issues 2016 View

Coca-Cola Enterprises, Inc. CCE, the Western European bottler of The Coca-Cola Company KO, recently lowered the sales outlook for 2015 amid the difficult operating environment.

2015 Sales Outlook Cut

While management maintained the previously issued profit guidance, comparable constant currency sales projection was tweaked again due to poor sales performance amid challenging consumer environment and category headwinds.

On a comparable and currency-neutral basis, sales growth is now expected to be slightly negative as against prior expectation of it being flat or slightly negative. This is the second time in less than six months that the company has lowered the sales guidance. Previously, during the third-quarter conference call, the sales growth expectation was lowered from slightly positive.

The company is geographically focused on Western Europe and thus exposed to the economic uncertainties of this region and the challenging consumer spending environment which continues to affect the broad consumer goods sector.

Ongoing economic softness and operating challenges in Europe, evolving consumer landscape and an increasingly competitive environment hurt Coca-Cola Enterprises' top line in 2014 as well as in 2015. These challenges are expected to persist through 2016, which, coupled with the increasingly strong currency headwinds, will limit revenue growth. With the euro deteriorating against the dollar, currency had a significant negative impact on 2015 sales and earnings.

Operating income growth is still expected to be slightly positive both on a comparable as well as currency-neutral basis.

2015 adjusted earnings growth is still expected to meet the upper end of the guidance range of 6% to 8%, on a comparable and currency-neutral basis. Currency translation is expected to hurt earnings by 18%.

Coca-Cola Enterprises expects free cash flow within $600 million to $650 million for 2015. Capital expenditures are projected to be approximately $325 million. The company expects the weighted average cost of debt to be around 3%. Effective tax rate is anticipated to be roughly 27%.

2016 Outlook

On a comparable and currency-neutral basis, sales growth in 2016 is expected to be slightly positive.

In the first quarter, comparable and currency-neutral operating income and diluted earnings per share growth are expected to be down slightly due to unfavorable timing of expenses and one less selling day. Currency translation is expected to hurt earnings by 5%.

Coca-Cola Enterprises expects free cash flow in the range of $500 million to $550 million for 2015. Capital expenditures are projected to be about $325 million. The company expects the weighted average cost of debt to be around 3%. Effective tax rate is anticipated to be within 26% to 28%.

Update on Merger

Separately, the company announced that the preliminary proxy statement/prospectus related to its proposed merger with two other European bottlers to form Western European bottler — Coca-Cola European Partners ("CCEP") — has been filed with the U.S. Securities and Exchange Commission. The filing was done by CCEP.

On Aug 6, Coca-Cola Enterprises announced the merger agreement with two Coca-Cola European bottlers — Coca-Cola Iberian Partners and Coca-Cola Erfrischungsgetränke AG — to form CCEP. Coca-Cola Enterprises will hold 48% stake in CCEP which will be the largest independent Coca-Cola bottler in terms of revenues. The transaction is expected to close by the end of second-quarter 2016.

Both Coca-Cola and Coca-Cola Enterprises carry a Zacks Rank #3 (Hold).

Coca-Cola has been divesting and merging many bottling operations since 2014 to revamp its bottling system and thereby improve margins and drive growth. Other than the European bottler merger, Coca-Cola has entered into an agreement with beer and beverage company, SABMiller, and partner Gutsche Family Investments, to merge their bottling operations in Southern and East Africa and form the largest Coca-Cola bottling entity in Africa.

Moreover, Coca-Cola has made equity investments in smaller companies, like Keurig Green Mountain, Inc. GMCR and Monster Beverage Corporation MNST, to enhance growth in key categories.

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