CEO says some initial positive indicators show that Coca-Cola has the right strategies in place to accelerate growth and that 2015 should be a transition year.

April 25, 2015

10 Min Read
Coca-Cola's Q1 beats expectations

The Coca-Cola Co. reported first quarter 2015 operating results. Muhtar Kent, chairman and chief executive officer of The Coca-Cola Co. said, "We are pleased with our solid progress on the implementation and execution of our global strategic initiatives. Though we are still in the early stages, we see some initial positive indicators that we have the right strategies in place to accelerate growth. However, we continue to view 2015 as a transition year as the benefits from the announced initiatives will take time to fully materialize amidst an uncertain and volatile macroeconomic environment. We remain committed to leveraging our superior brand portfolio together with our unparalleled global distribution system to continue creating long-term shareowner value."

FIRST QUARTER 2015 OPERATING REVIEW

Total company

We gained global value share in nonalcoholic ready-to-drink (NARTD) beverages in the quarter. We continued to strengthen and diversify our brand portfolio across key markets and categories as we gained global value share in sparkling and still beverages, juice and juice drinks, ready-to-drink tea and packaged water.

Global sparkling beverage volume grew 1 percent with solid performance across most key brands, including 1 percent growth in brand Coca-Cola, 5 percent growth in Coke Zero, 4 percent growth in Sprite and 3 percent growth in Fanta. Growth in these brands was partially offset by a 6 percent decline in Diet Coke.

Global still beverage volume grew 1 percent reflecting growth in ready-to-drink tea, value-added dairy and packaged water. Volume growth in these categories was partially offset by a decline in juice and juice drinks attributable to price increases taken to cover higher input costs and continued industry softness in certain markets.

Organic revenue grew 8 percent driven by concentrate sales growth and 3 points of positive price/mix. Concentrate sales growth benefited from the impact of six additional days and the timing of the Easter holiday. The impact of the six additional days on organic revenue growth was partially offset by cycling favorable timing of concentrate shipments in the first quarter of 2014. We expect concentrate sales and unit case sales to be generally in line for the full year. The positive price/mix was driven by our continued rational approach to pricing and 3 commitment to striking the appropriate balance between volume growth and pricing across our geographic portfolio.

Comparable currency neutral income before taxes (structurally adjusted) outpaced organic revenue growth primarily due to cycling higher input costs at the beginning of 2014 and positive leverage between operating income and income before taxes. The benefit of these items was partially offset by increased marketing investments and the impact of the provision enacted in Venezuela in early 2014 that imposes a maximum threshold on profit margins.

The combined impact of structural items and the provision in Venezuela resulted in a 2 point headwind on net operating revenues and a 3 point headwind on income before taxes, which is consistent with the outlook we provided earlier this year.

The reported effective tax rate and the underlying annual effective tax rate were 20.9 percent and 22.5 percent, respectively. The variance between the reported rate and the underlying rate was due to the tax effect of various items impacting comparability, separately disclosed in the Reconciliation of GAAP and Non-GAAP Financial Measures schedule. The underlying effective tax rate does not reflect the impact of significant or unusual items and discrete events, which, if and when they occur, are separately recognized in the appropriate period.

Reported EPS was $0.35 and comparable EPS was $0.48. Items impacting comparability reduced reported EPS by a net $0.13 and were primarily related to the early extinguishment of certain long-term debt, costs associated with our previously announced productivity program, and charges related to our Venezuelan operations. For additional details on items impacting comparability, refer to the Reconciliation of GAAP and Non-GAAP Financial Measures schedule.

Fluctuations in foreign currency exchange rates resulted in an 8 point headwind on comparable operating income and a 6 point headwind on both comparable income before taxes and EPS. The currency impact on income before taxes was less than our original expectations due to slightly more than a $0.01 benefit related to foreign currency remeasurement gains associated with the euro-denominated debt issued during the first quarter.

Cash from operations was $1.6 billion, up 48 percent, primarily due to efficient management of working capital and the impact of six additional days, partially offset by an unfavorable impact from foreign currency exchange rates.

Net share repurchases totaled $386 million.

Eurasia and Africa

Organic revenue grew 7 percent driven by concentrate sales growth and 3 points of positive price/mix. The impact of the six additional days on organic revenue growth was partially offset by timing of concentrate shipments in our Central, East & West Africa business unit. We expect concentrate sales and unit case sales to be generally in line for the full year. The positive price/mix was primarily attributable to favorable product mix and positive pricing across most key markets.

Comparable currency neutral income before taxes trailed organic revenue growth due to higher input costs and increased marketing investments, partially offset by higher equity income associated with our joint ventures in the juice and juice drinks category in our Eurasia and Africa group.

We gained value and volume share in total NARTD beverages, sparkling beverages and still beverages. Sparkling beverage volume growth was driven by 4 percent growth in Trademark Coca-Cola. Still beverage volume growth was driven by 4 percent growth in juice and juice drinks and 8 percent growth in packaged water. Unit case volume growth was relatively balanced across the group with 9 percent growth in both our Southern Africa and Central, East & West Africa business units, and 4 percent growth in our Middle East & North Africa business unit. Volume growth in these markets was partially offset by a high single-digit decline in Russia.

Europe

Organic revenue grew 5 percent driven by concentrate sales growth including the impact of six additional days and the timing of the Easter holiday. Price/mix was even as the industry remains highly price sensitive in a deflationary environment. The impact of the six additional days on organic revenue growth was partially offset by cycling favorable timing of concentrate shipments in the first quarter of 2014. We expect concentrate sales and unit case sales to be generally in line for the full year.

Comparable currency neutral income before taxes trailed organic revenue growth primarily due to higher input costs and increased marketing investments.

We gained value and volume share in core sparkling and still beverages driven by strong marketing investments and the impact of new product launches in both categories. We continued to leverage innovation to strengthen and diversify our brand portfolio to capitalize on opportunities across our European markets. Trademark Coca-Cola grew 1 percent including the benefit of the continued rollout of Coca-Cola Life in select markets. Still beverage volume growth was driven by juice and juice drinks, including double-digit growth of the innocent brand.

Latin America

Organic revenue grew 11 percent driven by concentrate sales growth and 4 points of positive price/mix. Concentrate sales growth was primarily driven by the benefit of six additional days. The positive price/mix reflects an increase in pricing and favorable product mix in our Mexico, Brazil and South Latin business units. Comparable currency neutral income before taxes trailed organic revenue growth primarily due to higher input costs and increased marketing investments, partially offset by higher equity income from our value-added dairy joint ventures in Latin America.

Operating margins were unfavorably impacted by the provision enacted in Venezuela in early 2014 that imposes a maximum threshold on profit margins, which began to impact our operating results in the second quarter of 2014.

We gained value and volume share in total NARTD beverages, sparkling beverages and still beverages. Unit case volume reflected low single-digit growth in both Mexico and our South Latin business unit, as well as mid-single-digit growth in our Latin Center business unit, partially offset by a mid-single-digit volume decline in Brazil. Volume growth in still beverages was driven by value-added dairy and packaged water.

North America

Organic revenue grew 10 percent driven by concentrate sales growth and 2 points of positive price/mix. Growth in concentrate sales was driven by the benefit of six additional days and the timing of the Easter holiday. After adjusting for the additional days, growth in concentrate sales outpaced unit case sales primarily due to timing of shipments. We expect concentrate sales and unit case sales to be generally in line for the full year.

Comparable currency neutral income before taxes outpaced organic revenue growth primarily due to cycling higher input costs at the beginning of 2014, timing of operating expenses and the impact of our ongoing productivity initiatives, partially offset by increased marketing investments and the structural impact related to refranchised territories.

We gained value share in total NARTD beverages for the 20th consecutive quarter driven by an increase in both the quality and quantity of our marketing investments and our continued rational approach to pricing and disciplined price/pack strategies. We also gained value share in sparkling beverages, still beverages, juice and juice drinks, ready-to-drink tea and packaged water. Still beverage volume growth was driven by strong double-digit growth in Gold Peak tea and smartwater.

Asia Pacific

Organic revenue grew 6 percent driven by concentrate sales growth and 3 points of positive price/mix. The impact of the six additional days on organic revenue growth was partially offset by cycling favorable timing of concentrate shipments in the first quarter of the prior year. We expect concentrate sales and unit case sales to be generally in line for the full year. The positive price/mix was driven by favorable product mix.

Comparable currency neutral income before taxes trailed organic revenue growth primarily due to higher input costs and increased marketing investments, partially offset by the efficient management of operating expenses.

Unit case volume growth reflected double-digit growth in India and low single-digit growth in China, partially offset by a low single-digit decline in Japan. In China, sparkling beverage volume grew 5 percent with balanced growth across our sparkling brand portfolio, partially offset by a mid-single-digit decline in still beverages reflecting continued industry softness in the juice and juice drinks category. In Japan, the decline in unit case volume was primarily attributable to cycling 3 percent growth in the first quarter of 2014 ahead of the consumption tax increase that went into effect April 1, 2014. Despite the decline in unit case volume, we gained value and volume share in total NARTD beverages, ready-to-drink tea, ready-to-drink coffee and packaged water in Japan.

Bottling investments

Organic revenue grew 8 percent driven by reported volume growth, partially offset by 2 points of unfavorable price/mix. The reported volume growth reflects the benefit of six additional days. The unfavorable price/mix was primarily attributable to channel, package and geographic mix.

Comparable currency neutral income before taxes outpaced organic revenue growth primarily due to the continued strong performance by our Company-owned bottling operations in several markets including Germany, India and Vietnam.

2015 outlook

We estimate that the net impact of structural items on full-year 2015 results will be a slight headwind on net revenue growth, and we have no material changes to our prior guidance on income before taxes.

We expect fluctuations in foreign currency exchange rates to have an unfavorable impact on our reported results in 2015. Based on current spot rates, our existing hedge positions, and the cycling of our prior year rates, we estimate that currency will be an approximate 6 point headwind on net revenues, a 10 point headwind on operating income, and a 7 point headwind on income before taxes for the full year. For the second quarter of 2015, we estimate that currency will be an approximate 7 point headwind on net revenues, a 10 point headwind on operating income and a 5 to 6 point headwind on income before taxes.

The underlying effective annual tax rate on operations in 2015 is expected to be 22.5 percent.

We are targeting full-year 2015 net share repurchases of $2.0 to $3.0 billion.

Given the above, the Company expects full-year comparable currency neutral EPS growth to be mid-single digits, roughly in line with our growth rate in 2014.

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