Coca-Cola Edges Past Earnings Forecasts, Revenues Fall

Net revenues declined 7% Y-o-Y to $10.6 billion impacted by foreign currency headwinds

c1The Coca-Cola Co. (NYSE: KO) announced its Q3 FY16 financial results on October 26th, 2016.

The Atlanta, Georgia-based company is the world’s largest beverage maker, with more than 500 sparkling and still brands and more than 3,800 beverage choices. Led by Coca-Cola, one of the world’s most valuable brands, the company’s portfolio features 20 billion-dollar brands, 18 of which are available in reduced-, low- or no-calorie options. Coca-Cola’s billion-dollar brands include Diet Coke, Coca-Cola Zero, Fanta, Sprite, Dasani, vitaminwater, Powerade, Minute Maid, Simply, Del Valle, Georgia and Gold Peak.

Through the world’s largest beverage distribution system, Coca-Cola is the number 1 provider of both sparkling and still beverages, serving over 1.9 billion helpings of beverages to consumers in more than 200 countries each day. The Company’s segments include Eurasia and Africa, Europe, Latin America, North America, Asia/Pacific, Bottling Investments and Corporate. Read more about Coca-Cola’s financial results below.

Q3 FY16 financial highlights

During Q3 FY16, Coca-Cola’s net revenues fell 7% Y-o-Y to $10.6 billion, impacted by a foreign currency exchange headwind of 2% and a headwind from acquisitions, divestitures and structural items of 8%. Organic revenues grew 3%, evenly split between volume and price/mix growth. The company gained global volume and value share in total non-alcoholic ready-to-drink (NARTD) beverages; value share grew ahead of volume share due to revenue growth management strategies, including segmented market roles, during the reporting quarter.

c2During Q3 FY16, Coca-Cola’s sparkling beverage unit case volume remained flat, as growth in three of the four geographic operating segments was offset by a 2% decline in Latin America. Beverage unit case volume grew 3%, primarily driven by water and sports drinks. During the reporting quarter, operating margin expanded more than 50 basis points, which included items impacting comparability, the impact of changes in foreign currency exchange rates and structural impacts. Comparable currency neutral operating margin (non-GAAP) also expanded more than 50 basis points, driven by pricing initiatives, a favorable cost environment, continued productivity, and segment mix.

In all, Coca-Cola reported net income of $1.05 billion, or $0.24 per share, down from $1.4 billion, or $0.33 per share, during the year earlier period. Adjusted EPS came in higher at $0.49, nudging past estimates of $0.48, marking the seventh straight quarter that the company has surpassed expectations.

Segmental highlights

Europe, Middle East & Africa: In this segment, Q3 FY16 net operating revenues fell 4% to $1.85 billion, while operating income fell 2% to $914 million. On the brighter side, positive price/mix was primarily driven by favorable geographic and product mix. Acquisitions, divestitures, and structural items reflect the impact of bottling transactions in South Africa. Income before taxes fell 2% to $922 million due to the impact of changes in foreign currency exchange rates and structural impacts. Comparable currency neutral income before taxes (non-GAAP) included the unfavorable impact of bottling transactions in South Africa.

The company gained volume and value share in total NARTD beverages. Unit case volume growth of 2% included 1 point of growth from acquired brands, which were primarily brands in Africa. Sparkling beverage volume grew 1% and still beverage volume grew 4%.

Latin America: In this segment, Q3 FY16 net operating revenues fell 4% to $965 million, while operating income fell 2% to $435 million. Income before taxes fell 16% to $447 million. On the other hand, positive price/mix benefited from solid performance in Mexico and inflationary markets within our Latin Center and South Latin business units. Sparkling beverage volume declined 2% and still beverage volume declined 1%. Unit case volume performance was driven by a high single-digit decline in Latin Center business unit amidst continued macroeconomic challenges in Venezuela and a mid-single-digit decline in Brazil. These declines were offset by mid-single-digit growth in Mexico.

North America: In this segment, Q3 FY16 net operating revenues grew 3% to $2.66 billion, while operating income grew 14% to $666 million. Income before taxes grew 12% to $653 million. On the other hand, positive price/mix reflects the continued execution of disciplined occasion, brand, price, and package strategy. Sparkling beverage price/mix grew 3%. Comparable currency neutral income before taxes (non-GAAP) was favorably impacted by productivity initiatives and the ongoing refranchising in North America.

Coca-Cola gained value share in total NARTD beverages for the 26th consecutive quarter. Still beverage volume grew 2%, primarily driven by water and sports drinks. Volume in the dairy category grew double digits and vitaminwater grew high single digits.

Asia/Pacific: In this segment, Q3 FY16 net operating revenues grew 4% to $1.46 billion, while operating income grew 2% to $583 million. Income before taxes grew 2% to $589 million. On the other hand, negative price/mix was driven by unfavorable product and channel mix as well as the cycling of items from the prior year. The Company gained volume and value share in total NARTD beverages. Sparkling beverage volume growth was slightly positive, rounding to even. Still beverage volume grew 5%. Unit case volume growth included 4% growth in Japan and 2% growth in China, partially offset by a 4% decline in India.

Bottling Investments: In this segment, Q3 FY16 net operating revenues fell 19% to $4.84 billion, while operating income grew 46% to $124 million. Loss before taxes widened to $734 million from $547 million in the year-ago period. Price/mix results reflect strong performance across key bottling operations, particularly North America, and positive geographic mix. Acquisitions, divestitures, and structural items reflect the impact of the refranchised North America bottling territories and the deconsolidation of German and South African bottling operations.

Other highlights

Acquisition of SABMiller’s stake in CCBA: Coca-Cola announced on October 10th, 2016, that it would exercise a change-of-control clause, allowing it to buy SABMiller PLC’s stake in Africa’s biggest Coke drinks bottler, Coca-Cola Beverages Africa (CCBA). The announcement comes after Anheuser-Busch InBev’s (AB InBev) closed its much anticipated over $1 billion merger with SABMiller on October 10th, 2016. Coca-Cola wants to exercise its change-of-control clause amid industry speculations that AB InBev could eventually try to acquire it. AB InBev is also a major bottler of non-alcoholic drinks in Latin America for Coca-Cola’s long-time rival PepsiCo Inc. (NYSE: PEP). Coca-Cola will negotiate terms of the deal with AB InBev in the coming months and scout for potential partners to refranchise CCBA.

As of late August 2016, SABMiller held a 54% stake in CCBA, which distributes about 40% of Coke’s volumes in the continent. Coca-Cola normally keeps change-of-control clauses with its bottling partners globally, giving it the right to buy out a partner’s share if the partner is acquired by a third party. SABMiller’s equity stake in CCBA is valued at about $4 billion.

c3Partnership with Dunkin’ Donuts: After being hit with soda tax, Coca-Cola is looking to add to its products basket in another fast-growing category – bottled coffee. To this end, the Company announced on September 29th, 2016, that it has teamed up with Dunkin Brands Group Inc. (NASDAQ: DNKN) to launch bottled coffee drinks. The market of bottled iced coffee drinks has been growing steadily in the U.S., surging 8% in 2015, with an estimated value of $2.3 billion in sales. In 2016, this market is expected to grow by about 8%. To tap this market opportunity, Coca-Cola hopes that creating beverages with Dunkin’ coffee may prove to be key in helping both companies compete against their market rivals. Bottled coffee has become popular since 1996, when Starbucks Corporation (NASDAQ: SBUX) launched its first bottled Frappuccino, making it the leader in this market category.

Appointment of Chief Information Officer: Coca-Cola announced on October 27th, 2016, that it has promoted Barry Simpson, currently the company’s head of Global Business Unit IT Services, to Chief Information Officer, effective immediately. In his new role, Simpson will oversee all of the company’s global information technology strategy, services, and operations.

Refranchising update: Coca-Cola announced on October 27th, 2016, that it has sealed six new definitive agreements and completed four closings involving territory and production plants across the U.S. during Q3 FY16 and the start of Q4 FY16. Its North America refranchising plan remains on track for completion in 2017.

c4New product launch: Coca-Cola announced on September 1st, 2016, that it will launch Gold Peak ready-to-drink (RTD) tea lattes and cold brew coffees in 2017 in the U.S. The RTD tea latte segment is considered an emerging beverage category, while RTD coffees have enjoyed very strong growth over the past five years. Gold Peak’s RTD teas and coffees will feature real milk and sugar in an array of tasty flavors.

Productivity gains: Coca-Cola remains on track to deliver more than $600 million of productivity in 2016 by scaling initiatives and embedding zero-based work into daily routines. Coca-Cola continues to use productivity to prudently fund marketing while delivering operating margin expansion.

Guidance for full year FY16 and beyond

For the full year FY16, Coca-Cola forecasts organic revenue growth of 3% and 6% to 7% headwind from acquisitions, divestitures, and structural items. The company also forecasts 2% to 3% currency headwind based on the current spot rates and including the impact of hedged positions. Comparable EPS (non-GAAP) is expected to decline 4% to 7% versus $2.00 in 2015.

Stock Performance

c5Coca-Cola’s stock ended the day at $42.88, slightly gaining 0.99%, at the close on Tuesday, November 8th, 2016, having vacillated between an intraday high of $42.98 and a low of $42.37 during the session. The stock’s trading volume was at 12,015,850 for the day. The Company’s market cap was at $185.03 billion as of Tuesday’s close.

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