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Coca-Cola: Bottle Is Half Full

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By: Bob Cramer
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The Coca-Cola Company (KO), the world largest soft-drink maker, reported its third quarter (3Q) financial results for fiscal year 2013 (FY13) on October 16. The company’s revenues are typically the highest in the summer months – or the second and third quarters – when warm weather acts as a demand driver for soft drink sales.

Overall Results

In the latest quarter ended September 30, 2013, Coca-Cola reported an EPS of $0.54, an 8% Year-over-Year (YoY) increase from the same quarter last year. The EPS figure was in line with analysts’ estimates, signaling strong fiscal management, despite a YoY decline in overall revenues.

Total net revenues for the quarter came in at $12.03 billion, and missed analyst expectations of $12.05 billion by just 0.19%. Reported revenues declined 3% YoY, mainly due to restructuring charges in its Philippines and Brazil operations. After excluding restructuring costs, and accounting currency fluctuations, global revenues actually increased 4%.

Unit volume sales of Coca-Cola products increased 2% globally. On the other hand, operating income fell 12%, but just like in the case of revenues, restructuring and currency adjusted operating income actually grew 8% YoY. In addition, recent fluctuations in the currencies of developing countries have negatively impacted revenues by 2% and operating income by 5% in the latest quarter.

coca cola

*Actual EPS for 3Q came in at $0.54, while comparable EPS is $0.53. The 8% reported change from the same quarter last year is calculated using actual EPS.

Results by Geographical Regions

In the North American region, Coca-Cola’s unit volume sales rose 2%, while operating income fell 3%. Currency adjusted operating income increased 3% YoY, as the sales of healthier brands increased. The company’s bottled water products saw sales volumes increase 5%; sales of its Simply Juice brand were up 7%, while the volumes of Coca-Cola Zero volumes rose 5% YoY in the latest quarter.

In Europe, unit volume sales fell 1% due to a difficult macroeconomic environment, higher unemployment and flat GDP growth. Net revenues adjusted for currency increased 8%, primarily driven by increased pricing.

The company’s Eurasia & Africa segment saw volumes increase 4%, mainly as a result of favorable sales growth in the Middle East and North African countries, which were up 8%. While several countries experienced favorable growth, it was countered by currency headwinds of 7%.

Sales remained flat in Latin America where Coca-Cola sells the highest unit volume of its products. Brazil was the standout story, where volumes fell 1% due to difficult macroeconomic conditions in the country. Mexico, where the per capita consumption of Coca-Cola’s products is the highest in the world at 740oz per person per year, experienced a 2% YoY decline in sales volume in the quarter, brought about by the impact of devastating hurricanes in September. Currency fluctuations hampered net revenues by 9%, but they were countered with a 9% increase in pricing.  Operating income for the region was down 2% YoY.

The Pacific region saw volume growth of 5%, but net revenues fell 9% as a result of currency headwinds of 6%.  Major emerging markets like Thailand and India experienced high single-digit growth, while Vietnam saw sales volumes go up 21%. China had 9% volume growth in the quarter, enhancing the Pacific segment as the best performing region for Coca-Cola.

Worldwide Bottling Investments saw volumes grow 8%, but operating income for the segment declined 48% due to restructuring charges in Philippines and Brazil.

coca cola

Upcoming Catalysts and Conclusion

In order to capitalize on the 2014 FIFA World Cup next year, Coca-Cola has embarked on its largest ever soccer marketing campaign, which will cover more than 170 markets. The marketing initiative, called 2014 FIFA World Cup Trophy Tour will improve Coke’s brand reach globally, with a large potential in soccer-loving countries.

Coca-Cola did not give any guidance for the next quarter, and said that its overall strategy to grow in emerging markets while embracing the shift to healthier beverages remains unchanged. The company also mentioned that it has repurchased almost $2.8 billion worth of stock so far in 2013, and will buyback a further half a billion dollars’ worth of shares by the end of the year. Share repurchases in 2013 represent almost 2% of the company’s market cap.

The company has witnessed a slowdown in overall revenue growth in the last few quarters. This is mostly due to a shift in consumer choice from sparkling, carbonated beverages towards healthier, non-carbonated drinks, especially in developing countries. Currency conversion still presents a risk, given the fall in the US dollar in recent quarters. Despite this, the management is still confident about the company’s growth prospects in emerging markets, which have experienced steady increase in unit volume sales.

Emerging market growth has also witnessed a bit of a slowdown. Sales volume growth in the past three years has been averaging in the mid to high teens, but has recently dropped to the high single-digits. The prospects are still bright and the management believes that the latest quarter results are in line with its 2020 Vision to double system revenues, citing a growing global middle class, which is expected to add around one billion people by 2020.

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