Market Overview

The Coca-Cola Company Reports Continued Strong Results in Second Quarter 2018

Share:

Net Revenues Declined 8%, Impacted by Bottler Refranchising; Organic
Revenues (Non-GAAP) Grew 5%, Driven by Balanced Volume and Price/Mix

Operating Margin Expanded More Than 950 Basis Points; Comparable
Operating Margin (Non-GAAP) Expanded More Than 300 Basis Points

Earnings Per Share from Continuing Operations Grew 68% to $0.53;
Comparable Earnings Per Share from Continuing Operations (Non-GAAP) Grew
3% to $0.61, Impacted by a 2% Currency Headwind

The Coca-Cola Company continued to execute on its key strategies in the
second quarter of 2018. While reported net revenues for the quarter
declined due to refranchising, the company delivered strong organic
revenue (non-GAAP) growth through balanced volume and price/mix, while
gaining value share globally.

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"We're encouraged with our performance year-to-date as we continue our
evolution as a consumer-centric, total beverage company," said James
Quincey, President and CEO of The Coca-Cola Company. "We have the right
strategies in place and remain focused on achieving our full year
guidance."

During the quarter, the company continued to accelerate its evolution as
a total beverage company, from testing new products locally to lifting
and shifting successful brands globally. The company is also driving an
acceleration in the sparkling soft drinks category through investment
and innovation, with 5% retail value growth in its sparkling portfolio
during the quarter. These efforts, balanced with disciplined growth,
have resulted in transaction growth of 4% year-to-date, outpacing unit
case volume growth of 3%.

Highlights

Quarterly Performance

  • Revenues: Net revenues declined 8% to $8.9 billion, impacted by
    a 15% headwind from the refranchising of company-owned bottling
    operations. Organic revenues (non-GAAP) grew 5%, driven by concentrate
    sales growth of more than 2% and price/mix growth of more than 2%.
  • Volume: Unit case volume grew 2%. Growth was led by Trademark
    Coca-Cola, including continued double-digit growth for Coca-Cola Zero
    Sugar, and also reflects the continued strong performance of Fuze Tea.
  • Margin: Operating margin, which included items impacting
    comparability, grew more than 950 basis points. Comparable operating
    margin (non-GAAP) expanded more than 300 basis points, driven by
    divestitures of lower-margin bottling operations and the company's
    ongoing productivity efforts, partially offset by an approximate 200
    basis point headwind from the adoption of the new revenue recognition
    accounting standard and the impact of currency.
  • Market share: The company continued to gain value share in
    total nonalcoholic ready-to-drink (NARTD) beverages.
  • Cash flow: Year-to-date cash from operations was $2.6 billion,
    down 22%. The decline was largely due to the impact of more than $600
    million from the year-over-year increase in tax payments in addition
    to the impact of the refranchising of North American bottling
    territories, partially offset by strong cash generation in the
    underlying business. Year-to-date free cash flow (non-GAAP) was $2.0
    billion, down 20%.
  • Share repurchases: Year-to-date purchases of stock for treasury
    were $1.3 billion. Year-to-date net share repurchases (non-GAAP)
    totaled $730 million.

Company Updates

  • Lifting, shifting and scaling brands around the world: The
    company expanded its footprint within the fast-growing, plant-based
    nourishment category with the launch of AdeZ in Europe by leveraging
    the brand edge of AdeS, a plant-based beverage originating in Latin
    America. Positioned as a premium offering, AdeZ will expand the
    company's presence beyond the beverage aisle into on-the-go snacking.
    AdeZ was launched in more than 10 European markets during the quarter
    and is on-track to be in 19 markets by the end of 2018. This rollout
    across a new continent, within a year after the acquisition of AdeS,
    illustrates the company's ability to act with speed and agility in a
    rapidly changing consumer landscape.
  • Reducing sugar while growing value: The company continued to
    execute on its strategy of delivering great-tasting sparkling
    beverages with less sugar. During the quarter, the company debuted
    Coca-Cola Stevia No Sugar in New Zealand, which is sweetened with 100%
    stevia. The company also expanded its Diet Coke brand re-stage into
    Great Britain, including the introduction of new flavors. Within North
    America, the company's no-sugar sparkling soft drink portfolio
    accelerated from the first quarter, resulting in 7% retail value
    growth, driven by Coca-Cola Zero Sugar and Diet Coke.
  • Digitizing the enterprise: The company continues to embrace the
    growth of e-commerce and rethink how products are sold and delivered,
    not only to consumers but to customers as well. In North America, the
    company expanded coverage of the digital MyCoke platform, which allows
    retail customers to replenish beverage inventories and schedule future
    orders online. The MyCoke platform has led to over a 5% increase in
    sales revenue versus orders placed through traditional call centers,
    while reducing costs and further driving the Coca-Cola system's
    competitive edge.
  • System commitment to drive shared opportunity: The system's
    ongoing commitment to investment in capabilities and products was
    demonstrated by three significant announcements during the quarter. In
    the United States, Coca-Cola Southwest Beverages (CCSWB) announced
    plans to build a new production and distribution facility to expand
    the portfolio and help drive improved execution. The CCSWB plant in
    Houston will be the first built in the U.S. in over a decade. In
    China, the company and its bottling partner, Swire Group, celebrated
    the opening of one of the country's largest plants. The facility
    received a gold certification of Leadership in Energy and
    Environmental Design (LEED). In Canada, fairlife LLC – one of the
    company's joint ventures in value-added dairy – announced plans to
    build a new production facility in Ontario and introduce fairlife
    products in the Canadian market.
  • Doing business the right way: The company has long been engaged
    in water conservation efforts throughout the world as part of its goal
    to replenish all of the water used in its beverages. The company
    accomplished this goal globally five years ahead of schedule and
    continues to invest in water replenishment programs. Earlier this
    year, the company announced its World Without Waste initiative, with
    goals that include collecting and recycling a bottle or can for every
    one the company sells by 2030. Each of the company's business units
    has developed local plans to address the pillars of the World Without
    Waste program. For example, in Mexico, the company's bottled water
    brand, Ciel, is now available in a 100% recycled PET bottle. The
    company plans to release its annual sustainability report in August.
 

Operating Review – Three Months Ended June 29, 2018

 

Revenues and Volume

               
Percent Change  

Concentrate
Sales1

  Price/Mix  

Currency
Impact

 

Acquisitions,
Divestitures and
Structural Items, Net

 

Accounting
Changes2

 

Reported
Net
Revenues

 

Organic
Revenues3

 

Unit
Case
Volume

Consolidated   2   2   1   (15)   2   (8)   5   2
Europe, Middle East & Africa 3 4 2 1 (3) 7 7 1
Latin America (1) 12 (6) 2 1 8 11 0
North America 2 (3) 0 (1) 10 7 (1) 1
Asia Pacific 6 0 2 0 (7) 1 6 5
Bottling Investments   10   1   0   (72)   3   (59)   11   (11)
 

Operating Income and EPS from Continuing
Operations

             
Percent Change  

Reported
Operating
Income

 

Items
Impacting
Comparability

 

Currency
Impact

 

Comparable
Currency
Neutral3

 

Structural
Items

 

Accounting
Changes2

 

Comparable
Currency Neutral
(Adjusted for
Structural
Items
and Accounting
Changes)3

Consolidated   34   33   (2)   3   (3)   (2)   8
                 
Europe, Middle East & Africa 2 (1) (1) 3
Latin America 6 0 (8) 14
North America (10) (3) 0 (7)
Asia Pacific (1) 0 1 (2)
Bottling Investments   91   137   (3)   (42)
             
Percent Change  

Reported
EPS from
Continuing
Operations

 

Items
Impacting
Comparability

 

Currency
Impact

 

Comparable
Currency
Neutral3

Consolidated   68   65   (2)   5
 
Note: Certain rows may not add due to rounding.
 

1

For Bottling Investments, this represents the percent change in
net revenues attributable to the increase (decrease) in unit case
volume after considering the impact of structural changes.

2

Represents the impact of adoption of new revenue recognition
accounting standard.

3

Organic revenues, comparable currency neutral operating income,
comparable currency neutral operating income (adjusted for
structural items and accounting changes) and comparable currency
neutral EPS from continuing operations are non-GAAP financial
measures. Refer to the Reconciliation of GAAP and Non-GAAP
Financial Measures section.

In addition to the data in the preceding tables, operating results
included the following:

Consolidated

  • Price/mix grew more than 2% for the quarter, driven by strong pricing
    and mix performance in the company's international operations.
  • Unit case volume grew 2% in the quarter. Category cluster performance
    was as follows:
    • Sparkling soft drinks: 2%
    • Juice, dairy and plant-based beverages: -2%
    • Water, enhanced water and sports drinks: 4%
    • Tea and coffee: -1%
  • Operating income was impacted by comparability items, predominantly
    charges associated with productivity and reinvestment initiatives, as
    well as structural items related to refranchising. Growth in
    comparable currency neutral operating income (adjusted for structural
    items and accounting changes) (non-GAAP) was driven by organic revenue
    (non-GAAP) growth and the benefit from ongoing productivity
    initiatives.

Europe, Middle East & Africa

  • Price/mix grew 4% for the quarter due to solid price/mix across all
    business units, partially offset by negative geographic mix as growth
    in emerging and developing markets outpaced developed markets.
  • Unit case volume grew 1% in the quarter, as growth across the majority
    of the group's markets was partially offset by declines in South
    Africa and Western Europe.
  • Operating income growth trailed revenue growth, largely due to the
    impact of currency and increased marketing investments related to key
    product launches. Product mix also impacted the quarter due to
    continued strong growth in innocent, a finished goods business.
  • The company maintained value share in the juice, dairy and plant-based
    beverages cluster.

Latin America

  • Price/mix growth of 12% for the quarter was primarily driven by strong
    price/mix in Mexico, Brazil and the South Latin business unit.
  • Unit case volume was even for the quarter, as growth in Mexico and
    Chile was offset by declines in Argentina and Brazil.
  • The company gained value share in total NARTD beverages and gained or
    maintained value share in all category clusters.

North America

  • Price/mix declined 3% for the quarter as low single-digit pricing in
    the marketplace was offset by 1 point from increased freight costs, 1
    point from the timing of deductions and approximately 2 points from
    business mix as performance in the concentrate business, notably
    sparkling soft drinks, outpaced the finished goods businesses,
    including juice and tea.
  • Unit case volume grew 1% in the quarter. Sparkling soft drinks growth
    of 1% included continued double-digit growth in Coca-Cola Zero Sugar.
    Juice, dairy and plant-based beverages declined 6%, as growth in dairy
    was offset by a decline in juice, largely due to package downsizing
    across the juice portfolio and deprioritizing lower-margin juice drink
    brands. Tea and coffee declined 1% as solid growth in coffee was
    offset by a decline in tea, primarily due to package downsizing in
    Gold Peak tea. Water, enhanced water and sports drinks grew 5%, led by
    strong growth in Powerade and across the total water portfolio.
    Transactions outpaced volume across each line of business as the
    company continued to focus on driving value over volume.
  • Operating income was unfavorably impacted by a 5-point headwind from
    cycling the benefit of intercompany profit elimination in the prior
    year related to the refranchising of North American bottling
    operations, as well as increased input and freight costs.
  • The company gained value share in total NARTD beverages along with
    sparkling soft drinks and the water, enhanced water and sports drinks
    cluster.

Asia Pacific

  • Price/mix was even for the quarter, as positive underlying pricing was
    offset by negative geographic mix due to growth in China and India
    outpacing developed markets, specifically Japan and Australia.
  • Unit case volume growth of 5% in the quarter was driven by strong
    performance in China and India. All business units grew volume in the
    quarter, with the exception of South Pacific.
  • The company maintained value share in total NARTD beverages and gained
    value share in sparkling soft drinks.

Bottling Investments

  • Price/mix grew 1% for the quarter, largely due to strong performance
    in India and benefiting from geographic mix.
  • The operating loss for the quarter was largely driven by items
    impacting comparability. Comparable currency neutral operating income
    (non-GAAP) was unfavorably impacted by the refranchising of North
    American bottling territories and the deconsolidation of previously
    held bottling operations in China in the prior year.
 

Operating Review – Six Months Ended June 29, 2018

               

Revenues and Volume

 
Percent Change  

Concentrate
Sales1

  Price/Mix  

Currency
Impact

 

Acquisitions,
Divestitures and
Structural Items, Net

 

Accounting
Changes2

 

Reported
Net
Revenues

 

Organic
Revenues3

 

Unit
Case
Volume

Consolidated   3   2   1   (21)   2   (12)   5   3
Europe, Middle East & Africa 5 2 4 1 (3) 9 7 3
Latin America 0 9 (3) 1 1 8 9 0
North America 2 (2) 0 (1) 11 9 0 2
Asia Pacific 5 (1) 3 (1) (6) 1 5 5
Bottling Investments   11   1   1   (82)   3   (67)   12   (23)
             

Operating Income and EPS from Continuing
Operations

 
Percent Change  

Reported
Operating
Income

 

Items
Impacting
Comparability

 

Currency
Impact

 

Comparable
Currency
Neutral3

 

Structural
Items

 

Accounting
Changes2

 

Comparable
Currency Neutral
(Adjusted for
Structural
Items
and Accounting
Changes)3

Consolidated   13   11   0   3   (5)   (1)   8
                 
Europe, Middle East & Africa 4 0 1 3
Latin America 10 0 (4) 14
North America (9) (2) 0 (6)
Asia Pacific 2 0 1 0
Bottling Investments   30   102   (3)   (68)
             
Percent Change  

Reported
EPS from
Continuing
Operations

 

Items
Impacting
Comparability

 

Currency
Impact

 

Comparable
Currency
Neutral3

Consolidated   43   37   0   6
 
Note: Certain rows may not add due to rounding.

1

 

For Bottling Investments, this represents the percent change in
net revenues attributable to the increase (decrease) in unit case
volume after considering the impact of structural changes.

2

Represents the impact of adoption of new revenue recognition
accounting standard.

3

Organic revenues, comparable currency neutral operating income,
comparable currency neutral operating income (adjusted for
structural items and accounting changes) and comparable currency
neutral EPS from continuing operations are non-GAAP financial
measures. Refer to the Reconciliation of GAAP and Non-GAAP
Financial Measures section.

Outlook

The 2018 outlook information provided below includes forward-looking
non-GAAP financial measures, which management uses in measuring
performance. The company is not able to reconcile full year 2018
projected organic revenues (non-GAAP) to full year 2018 projected
reported net revenues, full year 2018 projected comparable currency
neutral operating income (adjusted for structural items and accounting
changes) (non-GAAP) to full year 2018 projected reported operating
income, or full year 2018 projected comparable EPS from continuing
operations (non-GAAP) to full year 2018 projected reported EPS from
continuing operations without unreasonable efforts because it is not
possible to predict with a reasonable degree of certainty the actual
impact of changes in foreign currency exchange rates; the exact timing
and amount of acquisitions, divestitures and/or structural changes; the
exact timing and amount of comparability items throughout 2018; and the
actual impact of accounting changes. The unavailable information could
have a significant impact on full year 2018 GAAP financial results.

Full Year 2018 Underlying Performance:

  • At least 4% growth in organic revenues (non-GAAP) – Updated
  • At least 9% growth in comparable currency neutral operating income
    (adjusted for structural items and accounting changes) (non-GAAP) – Updated

Full Year 2018 Currency Impact:

  • Comparable net revenues (non-GAAP): 1% headwind based on the current
    rates and including the impact of hedged positions – Updated
  • Comparable operating income (non-GAAP): 4% headwind based on the
    current rates and including the impact of hedged positions – Updated

Full Year 2018 Impact from Acquisitions, Divestitures, Structural
Items and Accounting Changes:

  • Comparable net revenues (non-GAAP): 17% headwind from acquisitions,
    divestitures and structural items – No Change
  • Comparable net revenues (non-GAAP): 1% to 2% tailwind from accounting
    changes – No Change
  • Comparable operating income (non-GAAP): 2% structural headwind – No
    Change
  • Comparable operating income (non-GAAP): 0% impact from accounting
    changes – No Change

Full Year 2018 Other Items:

  • Underlying effective tax rate (non-GAAP): Estimated to be 21% – No
    Change
  • Cash from operations of approximately $8.0 billion – Updated
  • Capital expenditures (excluding discontinued operations):
    Approximately $1.7 billion – Updated
  • Net share repurchases (non-GAAP): Approximately $1.0 billion – No
    Change

Full Year 2018 EPS:

  • Comparable EPS from continuing operations (non-GAAP): 8% to 10% growth
    versus $1.91 in 2017 – No Change

Third Quarter 2018 ConsiderationsNew:

  • Comparable net revenues (non-GAAP): 13% headwind from acquisitions,
    divestitures and structural items; 3% currency headwind based on the
    current rates and including the impact of hedged positions; 2% to 3%
    tailwind from accounting changes.
  • Comparable operating income (non-GAAP): 2% structural headwind; 7%
    currency headwind based on the current rates and including the impact
    of hedged positions; 2% tailwind from accounting changes.

Notes

  • All references to growth rate percentages and share compare the
    results of the period to those of the prior year comparable period.
  • All references to volume and volume percentage changes indicate unit
    case volume, unless otherwise noted. All volume percentage changes are
    computed based on average daily sales, unless otherwise noted. "Unit
    case" means a unit of measurement equal to 24 eight-ounce servings of
    finished beverage. "Unit case volume" means the number of unit cases
    (or unit case equivalents) of company beverages directly or indirectly
    sold by the company and its bottling partners to customers.
  • "Core business" represents the combined performance from the Europe,
    Middle East & Africa; Latin America; North America; Asia Pacific; and
    Corporate operating segments offset by intersegment eliminations.
  • "Concentrate sales" represents the amount of concentrates, syrups,
    beverage bases, source waters, and powders/minerals (in all instances
    expressed in equivalent unit cases) sold by, or used in finished
    beverages sold by, the company to its bottling partners or other
    customers. In the reconciliation of reported net revenues,
    "concentrate sales" represents the percent change in net revenues
    attributable to the increase (decrease) in concentrate sales volume
    for the geographic operating segments (expressed in equivalent unit
    cases) after considering the impact of structural changes. For the
    Bottling Investments operating segment, this represents the percent
    change in net revenues attributable to the increase (decrease) in unit
    case volume after considering the impact of structural changes. The
    Bottling Investments operating segment reflects unit case volume
    growth for consolidated bottlers only.
  • "Price/mix" represents the change in net operating revenues caused by
    factors such as price changes, the mix of products and packages sold,
    and the mix of channels and geographic territories where the sales
    occurred.
  • First quarter 2018 financial results were impacted by one less day,
    and fourth quarter 2018 financial results will be impacted by one
    additional day as compared to the same periods in 2017. Unit case
    volume results for the quarters are not impacted by the variances in
    days due to the average daily sales computation referenced above.

Conference Call

The company is hosting a conference call with investors and analysts to
discuss second quarter 2018 operating results today, July 25, 2018, at
8:30 a.m. ET. The company invites participants to listen to a live
webcast of the conference call on the company's website, http://www.coca-colacompany.com,
in the "Investors" section. An audio replay in downloadable digital
format and a transcript of the call will be available on the website
within 24 hours following the call. Further, the "Investors" section of
the website includes a reconciliation of non-GAAP financial measures to
the company's results as reported under GAAP, which may be used during
the call when discussing financial results.

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