Coca Cola: Reports Solid Operating Results in Q1-2019

Atlanta / GA. (ccc) The Coca-Cola Company reported a solid start to 2019, with continued momentum that included gaining global value share. Reported net revenues grew 5 percent in the first quarter, and organic revenues (non-GAAP) grew 6 percent, with positive performance across all operating groups, in addition to a benefit from timing. «We’re encouraged by our first quarter results as our disciplined growth strategies continue to deliver strong underlying performance,» said James Quincey, CEO of The Coca-Cola Company. «We remain confident in our full year guidance as we continue to make progress on our transformation as a consumer-centric total beverage company.»

Highlights

Quarterly Performance

Revenues: Net revenues grew 5 percent to USD 8.0 billion. Organic revenues (non-GAAP) grew 6 percent. An estimated 2 points of revenue growth was attributable to timing, primarily related to bottler inventory build in order to manage uncertainty related to Brexit. Additionally, the quarter included one less day, which resulted in an approximate 1-point headwind to revenue growth.
Margin: Operating margin for the quarter, which included items impacting comparability, was 29.1 percent versus 23.7 percent in the prior year. Comparable operating margin (non-GAAP) was 30.5 percent versus 30.7 percent in the prior year. Strong underlying margin (non-GAAP) expansion was offset by an approximate 260 basis point negative impact from currency headwinds and net acquisitions.
Earnings per share: EPS from continuing operations grew 24 percent to USD 0.38. Comparable EPS from continuing operations (non-GAAP) grew 2 percent to USD 0.48, despite an 11-point currency headwind. EPS included an estimated 2 cent benefit from timing, primarily from the bottler inventory build related to Brexit.
Market share: The company continued to gain value share in total non-alcoholic ready-to-drink (NARTD) beverages.
Cash flow: Cash from operations was USD 699 million, up 14 percent. Free cash flow (non-GAAP) was USD 335 million, down 1 percent as strong underlying cash generation was offset by currency headwinds along with an increase in capital expenditures and cash tax payments.
Share repurchases: Purchases of stock for treasury were USD 397 million. Net share repurchases (non-GAAP) totaled USD 243 million.

Company Updates

Chairman transition and an evolving growth culture: Following the company’s annual meeting on April 24, James Quincey will become the 14th chairman of The Coca-Cola Company, contingent upon his reelection as a director. Quincey succeeds Muhtar Kent, who is retiring after a Coca-Cola system career that started in 1978. Kent served as chairman and CEO from 2009 until 2017 and then as chairman after Quincey became CEO. Quincey intends to build on the strong foundation Kent has established within the system, including a focus on fostering a growth-oriented culture.
Pursuing the company’s World Without Waste goals: Supporting its commitment to the World Without Waste initiative and improved transparency, the company issued its annual progress report, which cited continued progress globally on design, collect and partner efforts. For example, the company, along with its bottling partners, now has 100 percent recycled PET bottles in multiple markets and will have them in more than a dozen markets by the end of 2019, driving successful circular solutions for packaging. Much of the system’s Latin America business is engaged in a multi-country project to significantly increase the use of refillable packaging, and markets globally are assessing ways to move toward more diverse business models for product delivery.
Broadening a consumer-centric portfolio: During the quarter, the company completed its acquisition of Costa Limited, which gives Coca-Cola a significant entry point into hot beverages and a global platform in coffee. In the second quarter, the company will begin to leverage Costa’s scalable platform across formats and channels with the introduction of Costa ready-to-drink products. Coca-Cola also closed its acquisition of CHI Limited, an innovative, fast-growing leader in expanding beverage categories in West Africa, including juices, value-added dairy and iced tea.
Driving profitable growth under the Leader, Challenger, Explorer framework: Strong innovation within Leader brands included double-digit growth for Coca-Cola Zero Sugar globally for the sixth consecutive quarter. Within the U.S., the company showed strong performance for Orange Vanilla Coke and Orange Vanilla Coke Zero Sugar, which helped drive 6 percent retail value growth for brand Coca-Cola. The company also launched Simply smoothies in the U.S., while innocent, the company’s leading juice brand in Europe, expanded into plant-based beverages. As a Challenger brand, smartwater continues to innovate through the successful rollout of smartwater antioxidant and smartwater alkaline in the U.S. Within Explorer brands, the company continued to capitalize on brands with edge, including Aquarius GlucoCharge, which has shown early signs of success in the fast-growing enhanced hydration category in India.
Aligned and engaged system investing for growth: The company has established a sustained platform for performance that is focused on disciplined portfolio growth through an aligned and engaged system. Across the bottling system, the company is seeing the right strategic investments in supply chain, cold-drink equipment and sales force capabilities to drive accelerated results. These investments are creating a winning strategy in the marketplace, centered around improved execution that is committed to increasing the availability of core products, in addition to expanding the total portfolio.

Operating Review – Three Months Ended March 29, 2019

Revenues and Volume
Percent Change	Concentrate Sales1	Price/Mix	Currency Impact	Acquisitions, Divestitures and Structural Items, Net	Reported Net Revenues	Organic Revenues2	Unit Case Volume
Consolidated	1	5	(6)	5	5	6	2
Europe, Middle East + Africa	4	10	(12)	3	5	14	2
Latin America	(3)	9	(16)	0	(10)	6	(1)
North America	(3)	4	0	0	1	1	(1)
Asia Pacific	6	(2)	(3)	(3)	(2)	4	7
Global Ventures3	(2)	3	(22)	222	201	1	1
Bottling Investments	6	3	(5)	(9)	(5)	9	16

Operating Income and EPS from Continuing Operations
Percent Change	Reported Operating Income	Items Impacting Comparability	Currency Impact	Comparable Currency Neutral2
Consolidated	29	24	(11)	16
Europe, Middle East + Africa	7	0	(15)	22
Latin America	(13)	0	(20)	7
North America	16	8	0	9
Asia Pacific	(4)	0	(3)	(1)
Global Ventures	128	0	(8)	136
Bottling Investments	-4	–	–	–
Percent Change	Reported EPS from Continuing Operations	Items Impacting Comparability	Currency Impact	Comparable Currency Neutral2
Consolidated	24	22	(11)	13

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 computed on a reported basis after considering the impact of structural changes.
(2) Organic revenues, comparable currency neutral operating income 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.
(3) Costa Limited is not included in concentrate sales, price/mix or unit case volume.
(4) Reported operating income for the three months ended March 29, 2019 was USD 1 million. Reported operating loss for the three months ended March 30, 2018 was USD 461 million.

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

Consolidated

Concentrate sales growth of 1 percent and price/mix growth of 5 percent were driven by consumer-centric innovation and solid revenue growth management initiatives in the marketplace, in addition to the 2-point benefit related to timing, primarily attributable to bottler inventory build related to Brexit. Additionally, concentrate sales growth of 1 percent was impacted by one less day in the quarter, which resulted in an approximate 1-point headwind.
Unit case volume grew 2 percent, driven by strong growth across key markets within Asia and Europe, partially offset by a decline in Argentina, the Middle East region and North America. The timing of Easter also negatively impacted volume growth in the quarter. Category cluster performance was as follows:
- Sparkling soft drinks grew 1 percent, driven by strong global performance in brand Coca-Cola through growth in original Coca-Cola and continued double-digit growth of Coca-Cola Zero Sugar.
- Juice, dairy and plant-based beverages volume was even as strong performance in the Del Valle brand in Mexico and the Maaza brand in India was offset by a decline in Rani, the leading juice brand in the Middle East.
- Water, enhanced water and sports drinks grew 6 percent, driven by strong growth across a number of key markets. Growth was driven by strong performance in smaller, immediate consumption packages, reflecting the company’s continued focus on value over volume.
- Tea and coffee volume was even as continued growth through innovation and new product launches, including Georgia Craftsman in Japan and Authentic Tea House in China, was offset by a decline in the doğadan tea business in Türkiye.
Operating income grew 29 percent, which included items impacting comparability. Comparable currency neutral operating income (non-GAAP) grew 16 percent, driven by strong organic revenue (non-GAAP) growth, a benefit from acquisitions and ongoing productivity initiatives.

Europe, Middle East + Africa

Price/mix grew 10 percent for the quarter due to strong pricing in the majority of key markets and the benefit from bottler inventory build related to Brexit, which contributed to positive geographic mix and also caused concentrate sales to grow ahead of unit case volume.
Unit case volume grew 2 percent, as growth across the majority of markets was partially offset by declines in Zimbabwe and the Middle East. Growth was led by sparkling soft drinks and the continued growth of Fuze Tea.
Operating income grew 7 percent, despite a 15-point currency headwind. Comparable currency neutral operating income (non-GAAP) grew 22 percent in the quarter, driven by double-digit organic revenue (non-GAAP) growth, ongoing productivity initiatives and the cycling of expenses in the prior year, including increased marketing investments from the January 2018 Fuze Tea launch.
The company gained value share in total NARTD beverages, led by solid share performance across Europe, in addition to the majority of category clusters. The value share gain in NARTD beverages was unfavorably impacted by a value share decline in sparkling soft drinks in Nigeria primarily due to local value brands.

Latin America

Price/mix grew 9 percent for the quarter, largely driven by strong performance in Brazil and pricing in Argentina. All business units achieved positive price/mix in the quarter.
Unit case volume declined 1 percent as growth in Brazil, Peru and Chile was more than offset by a double-digit decline in Argentina. Mexico volume declined 1 percent in the quarter, partially due to pricing and package initiatives executed in the market to optimize revenue.
Operating income declined 13 percent in the quarter, which included a 20-point currency headwind. Comparable currency neutral operating income (non-GAAP) grew 7 percent, largely driven by the benefit of strong pricing in the marketplace.
The company gained value share in total NARTD beverages, driven by solid share performance in Brazil, in addition to the majority of category clusters.

North America

Price/mix grew 4 percent for the quarter, driven by strong pricing and mix within the sparkling soft drink portfolio, in addition to a benefit from product mix.
Unit case volume declined 1 percent, largely due to the impact of pricing and package initiatives executed in the market, in addition to the timing of Easter. For the total portfolio, transactions outpaced volume performance, reflecting continued focus on value over volume.
Operating income grew 16 percent, which included items impacting comparability. Comparable currency neutral operating income (non-GAAP) grew 9 percent in the quarter, driven by ongoing productivity initiatives and the timing of expenses.
The company gained value share in total NARTD beverages led by strong performance in sparkling soft drinks, the water, enhanced water and sports drinks category cluster, and the juice, dairy and plant-based beverages category cluster.

Asia Pacific

Price/mix declined 2 percent for the quarter, largely driven by geographic mix due to growth in emerging and developing markets outpacing developed markets.
Unit case volume grew 7 percent due to positive performance across all key markets, with the exception of Australia. Volume growth was led by China, Southeast Asia and India.
Operating income declined 4 percent. Comparable currency neutral operating income (non-GAAP) declined 1 percent in the quarter, largely from a structural headwind related to intercompany profit elimination from acquiring bottling operations in the Philippines.
The company gained value share in total NARTD beverages, driven by strong performance within China, India and Southeast Asia.

Global Ventures

Reported revenue benefited from the closing of the Costa acquisition during the quarter. The company has completed a smooth transition of Costa and is working quickly to leverage the total coffee platform.
Price/mix grew 3 percent for the quarter, largely driven by product mix as a result of strong performance in the innocent business.
Unit case volume grew 1 percent as strong growth in innocent and the energy category was partially offset by a double-digit decline in the doğadan tea business in Türkiye.
Operating income growth in the quarter benefited from the impact of the Costa acquisition.

Bottling Investments

Price/mix grew 3 percent for the quarter, driven by strong price/mix performance in India.
Operating income was unfavorably impacted by comparability items related to refranchising in the prior year and was favorably impacted by the acquisition of bottling operations in the Philippines.

Outlook

The 2019 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 2019 projected organic revenues (non-GAAP) to full year 2019 projected reported net revenues, full year 2019 projected comparable currency neutral net revenues (non-GAAP) to full year 2019 projected reported net revenues, full year 2019 projected comparable currency neutral operating income (non-GAAP) to full year 2019 projected reported operating income, or full year 2019 projected comparable EPS from continuing operations (non-GAAP) to full year 2019 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; and the exact timing and amount of comparability items throughout 2019. The unavailable information could have a significant impact on full year 2019 GAAP financial results.

Full Year 2019 Revenues

Approximately 4 percent growth in organic revenues (non-GAAP) – No Change
12 percent to 13 percent growth in comparable currency neutral net revenues (non-GAAP), including an 8 percent to 9 percent tailwind from acquisitions, divestitures and structural items – No Change
Comparable net revenues (non-GAAP): 3 percent to 4 percent currency headwind based on the current rates and including the impact of hedged positions – No Change

Full Year 2019 Operating Income

10 percent to 11 percent growth in comparable currency neutral operating income (non-GAAP), including a low single-digit tailwind from acquisitions, divestitures and structural items – No Change
Comparable operating income (non-GAAP): 6 percent to 7 percent currency headwind based on the current rates and including the impact of hedged positions – No Change

Full Year 2019 EPS

-1 percent to 1 percent growth versus USD 2.08 in 2018 in comparable EPS from continuing operations (non-GAAP) – No Change

Full Year 2019 Other Items

Underlying effective tax rate (non-GAAP): Estimated to be 19.5 percent – No Change
Cash from operations: At least USD 8.0 billion – No Change
Capital expenditures (excluding discontinued operations): Approximately USD 2.0 billion – No Change
Net share repurchases (non-GAAP): Share repurchases to offset dilution from employee stock-based compensation plans – No Change

Second Quarter 2019 Considerations – New

Comparable net revenues (non-GAAP): 6 percent tailwind from acquisitions, divestitures and structural items; 4 percent to 5 percent currency headwind based on the current rates and including the impact of hedged positions
Comparable operating income (non-GAAP): 7 percent currency headwind based on the current rates and including the impact of hedged positions