Coca-Cola Reports Strong Operating Results for Third Quarter 2018

Net Revenues Declined 9%, Due to Bottler Refranchising; Organic Revenues (Non-GAAP) Grew 6%

Operating Margin Expanded Approximately 600 Basis Points; Comparable Operating Margin (Non-GAAP) Expanded 575 Basis Points

EPS from Continuing Operations Grew 62% to $0.54; Comparable EPS from Continuing Operations (Non-GAAP) Grew 14% to $0.58, Impacted by an 8% Currency Headwind

ATLANTA--(BUSINESS WIRE)-- The Coca-Cola Company today reported continued momentum in its business for 2018, with strong financial results for the third quarter. While reported net revenues for the quarter declined due to refranchising, the company delivered broad-based organic revenue (non-GAAP) and volume growth across all operating groups, while gaining value share globally.

Strong organic revenue (non-GAAP) growth in the quarter was driven by continued innovation and revenue growth management initiatives within sparkling soft drinks, as evidenced by double-digit volume growth of Coca-Cola Zero Sugar across all groups. In addition to sparkling soft drinks, the company saw strong performance for brands like Fuze Tea and smartwater. Coca-Cola also announced several strategic actions, including a number of acquisitions and investments, and continued to lift, shift and scale brands around the world. The company's disciplined growth strategies and an ongoing focus on productivity led to double-digit profit growth for the quarter.

"We continue to be encouraged by our performance year-to-date as we accelerate our evolution as an even more consumer-centric, total beverage company," said James Quincey, President and CEO of The Coca-Cola Company. "The recent leadership appointments are intended to help accelerate the transformation of our company."

Highlights

Quarterly Performance

• Revenues: Net revenues declined 9% to $8.2 billion, impacted by a 13-point headwind from the refranchising of company-owned bottling operations. Organic revenues (non-GAAP) grew 6%, driven by concentrate sales growth of 4%, which benefited from the timing of shipments, and price/mix growth of 2%.
• Volume: Unit case volume grew 2%, led by Trademark Coca-Cola.
• Margin: Operating margin, which included items impacting comparability, expanded approximately 600 basis points. Comparable operating margin (non-GAAP) improved 575 basis points, driven by divestitures of lower-margin bottling operations and the company's ongoing productivity efforts. These drivers were partially offset by an approximate 130 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 $5.5 billion, down 7%. The decline was largely due to the impact of refranchising North American bottling territories and increased tax payments, partially offset by solid cash generation in the underlying business. Year-to-date free cash flow (non-GAAP) was $4.6 billion, down 2%.
• Share repurchases: Year-to-date purchases of stock for treasury were $1.6 billion. Year-to-date net share repurchases (non-GAAP) totaled $707 million.

Company Updates

• Announcement of key leadership appointments: The company recently announced several changes in top leadership, including the election of a new president and chief operating officer (COO) and a succession plan for the chief financial officer (CFO). Brian Smith will serve as president and COO, reporting to Quincey. The appointment will allow more time for Quincey to focus on the overall long-term strategic direction and success of the company. Smith is well-equipped to lead the company’s field operations and bring an accelerated focus on executing against key strategies. John Murphy, who currently serves as president of the company’s Asia Pacific group, will become senior vice president and deputy CFO on Jan. 1, 2019. He will be elevated to executive vice president and CFO on March 16, 2019, following the retirement of Kathy Waller. Waller will retire from the company after 32 years of service to Coca-Cola, where she built a career that was marked by significant impact and contributions. The company also announced that Nancy Quan has been elected senior vice president and appointed Chief Technical Officer, reporting to Quincey.
• Entering a $500 billion global market with hot beverages: During the quarter, the company announced the expected acquisition of Costa Limited, which will provide the capabilities to build a global coffee platform. Costa will also give the company strong expertise across the coffee supply chain, including sourcing, vending and distribution, which will complement and leverage existing capabilities within the Coca-Cola system. The acquisition is expected to close in the first half of 2019.
• Expanding and innovating with successful brands: The company continues to lift, shift and scale leading brands around the world, including the ongoing expansion of smartwater. With more than 20 markets launching in 2018, smartwater will be present in 32 countries by the end of this year. In its flagship U.S. market, smartwater announced two innovations – smartwater antioxidant and smartwater alkaline. These offerings will help meet the needs of U.S. consumers who continue to reach for more enhanced hydration options.
• Adding brands with an edge in the marketplace: During the quarter, the company announced a strategic relationship with BODYARMOR, one of the fastest-growing beverage trademarks in the United States. BODYARMOR distribution will complement the Coca-Cola system's growing hydration portfolio, including Powerade, vitaminwater, smartwater and Dasani. The company also announced the addition of other brands with an edge in the market, including MOJO in the fast-growing kombucha category in Australia and Tropico fruit-flavored beverages in France.

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

Consolidated

• Price/mix grew 2% for the quarter, led by solid performance in the core business. Concentrate sales grew 2 points ahead of unit case volume, largely due to the timing of shipments within Latin America.
• Unit case volume grew 2% in the quarter. Category cluster performance was as follows:
  • Sparkling soft drinks grew 2%, driven by Trademark Coca-Cola along with strong growth in the low- and no-calorie offerings of Sprite and Fanta.
  • Juice, dairy and plant-based beverages declined 3%, largely driven by a decline in the Middle East and North Africa due to a challenging macroeconomic environment and also by package downsizing in North America.
  • Water, enhanced water and sports drinks grew 5%, primarily due to strong growth of water in single-serve packaging in China and Mexico along with the premium offerings in North America.
  • Tea and coffee declined 2%, as growth of Fuze Tea and Gold Peak was more than offset by a decline in the company's local tea brand in Turkey, in addition to the impact of Nestea resulting from the dissolution of Beverage Partners Worldwide.
• Operating income grew 13% in the quarter, including the negative impact of currency and structural items related to refranchising. Comparable currency neutral operating income (adjusted for structural items and accounting changes) (non-GAAP) grew 20%, driven by organic revenue (non-GAAP) growth and the benefit from ongoing productivity initiatives.

Europe, Middle East & Africa

• Price/mix grew 9% for the quarter due to solid price/mix across all business units, in addition to positive geographic mix, as growth in developed markets outpaced emerging and developing markets.
• Unit case volume grew 2% in the quarter, as growth across Europe due to strong execution and good weather was partially offset by a decline in South Africa largely due to recent excise tax legislation, as well as a decline in the Middle East and North Africa primarily related to a challenging macroeconomic environment.
• The company maintained value share in total NARTD beverages and gained value share in the juice, dairy and plant-based beverages cluster.

Latin America

• Price/mix growth of 8% for the quarter was primarily driven by strong performance in Mexico and pricing in Argentina.
• Unit case volume grew 2% in the quarter, as growth in Mexico and Brazil supported by strong execution and innovation was partially offset by a decline in Argentina primarily due to the macroeconomic environment.
• Operating income growth exceeded revenue performance in the quarter, largely due to strong pricing in the marketplace and concentrate shipments running ahead of unit case volume, partially offset by currency headwinds. Accounting changes also contributed to operating income growth exceeding revenue performance in the quarter, resulting in a 10-point headwind to revenue and a low single-digit headwind to operating income.
• The company maintained value share in total NARTD beverages and gained value share in all category clusters with the exception of the juice, dairy and plant-based beverages cluster.

North America

• Price/mix for the quarter was slightly positive, marking a 3-point improvement from the second quarter as solid pricing in the marketplace, particularly within sparkling soft drinks, was offset by increased freight costs and business mix.
• Unit case volume grew 1% in the quarter. Volume performance was led by 1% growth in sparkling soft drinks due to double-digit growth in Coca-Cola Zero Sugar and solid performance for Sprite as well as strong performance across premium waters, including Topo Chico and smartwater, in addition to double-digit growth in Powerade Zero. This was partially offset by a decline in juice, largely due to package downsizing across the juice portfolio, and a decline in tea, which was impacted by deprioritizing low-margin tea products.
• Operating income growth trailed revenue growth in the quarter, largely due to the impact of accounting changes. Operating income growth exceeded organic revenue growth (non-GAAP) largely due to pricing, business mix and productivity.
• The company gained value share in total NARTD beverages along with sparkling soft drinks and maintained value share in the juice, dairy and plant-based beverages cluster.

Asia Pacific

• Price/mix was even for the quarter, as solid pricing in the marketplace was offset by negative geographic mix due to growth in emerging and developing markets outpacing developed markets.
• Unit case volume grew 3% in the quarter, as solid growth in China and India supported by strong execution and an improving consumer environment was partially offset by a decline in the Philippines, largely due to recent excise tax legislation, and a decline in Japan primarily due to weather.
• Operating income growth exceeded revenue performance in the quarter, largely due to the impact of accounting changes, which resulted in a 3-point headwind to revenue and a mid single-digit tailwind to operating income.
• The company gained value share in total NARTD beverages along with sparkling soft drinks and the juice, dairy and plant-based beverages cluster.

Bottling Investments

• Price/mix declined 3% for the quarter, as positive price/mix in the majority of international operations was more than offset by business mix in the Canadian bottling operations.
• The operating loss in the quarter was largely driven by items impacting comparability. Comparable currency neutral operating loss (non-GAAP) was impacted by the refranchising of North American bottling territories and the deconsolidation of bottling operations in Latin America.

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) – No Change
• At least 9% growth in comparable currency neutral operating income (adjusted for structural items and accounting changes) (non-GAAP) – No Change

Full Year 2018 Currency Impact:

• Comparable net revenues (non-GAAP): 1% headwind based on the current rates and including the impact of hedged positions – No Change
• Comparable operating income (non-GAAP): 4% headwind based on the current rates and including the impact of hedged positions – No Change

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

• Comparable net revenues (non-GAAP): 16% headwind from acquisitions, divestitures and structural items – Updated
• Comparable net revenues (non-GAAP): 2% tailwind from accounting changes – Updated
• Comparable operating income (non-GAAP): 3% structural headwind – Updated
• 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 20.3% – Updated
• Cash from operations: Approximately $8.0 billion – No Change
• Capital expenditures (excluding discontinued operations): Approximately $1.7 billion – No Change
• 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

Fourth Quarter 2018 Considerations – New:

• Comparable net revenues (non-GAAP): 7% headwind from acquisitions, divestitures and structural items; 4% to 5% currency headwind based on the current rates and including the impact of hedged positions; 2% tailwind from accounting changes.
• Comparable operating income (non-GAAP): 0% to 1% structural headwind; 10% to 11% currency headwind based on the current rates and including the impact of hedged positions; 1% 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 third quarter 2018 operating results today, Oct. 30, 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.

The Coca-Cola Company
Investors and Analysts:
Tim Leveridge, +1 404-676-7563
or
Media:
Scott Leith, +1 404-676-8768

Source: The Coca-Cola Company

Released October 30, 2018