KO Coca Cola Company

Volume stalled in quarter, hit by weaker sales in China and developing markets

By Mike Esterl and Anne Steele 

Coca-Cola Co. lowered its 2016 revenue outlook Wednesday after second-quarter volumes stalled for the first time in more than a decade, hurt by falling sales in China and other developing markets.

The beverage giant also gave full-year guidance for comparable earnings per share below Wall Street expectations, saying it anticipates the metric to decline 4% to 7% from a year earlier, implying a range of $1.86 to $1.92. Analysts polled by Thomson Reuters had forecast $1.94.

Not all the news was bad. Coke said it increased prices 3% globally in the second quarter, partly by selling smaller items that cost more per ounce, as it increasingly focuses on revenue instead of volume for growth.

The Atlanta-based maker of Sprite, Minute Maid and Smartwater reported its operating margin rose 3.93 percentage points to 24.78%, lifted by bottling divestments and a $3 billion cost-cutting program.

"The macro headwinds are putting pressure on our top line, but they are cyclical in nature and we're taking the right actions," Chief Executive Muhtar Kent told analysts during an earnings call.

Still, the company now expects organic revenue, which strips out foreign-exchange swings and structural items, to increase just 3% this year. That is down from its earlier forecast of 4% to 5%.

The most recent quarter represented the first time that Coke's volumes didn't grow since 1999. Noncarbonated beverages rose 2% but soda dipped 1%, the first time soda volume declined since the first quarter of 2014.

Coke's share price was down 3.3% at $43.40 in late afternoon trading on the New York Stock Exchange.

Management singled out China, Argentina and Venezuela as the biggest drags on results, but sales also slumped in other big developing markets, including Russia, Turkey and Brazil.

Chief Operating Officer James Quincey said Coke expects its China unit, which posted a high-single-digit percentage decline in volume, to remain under pressure for the rest of the year as consumers rein in spending. Coke owns about a third of its bottling and distribution in China, more than in most other countries, exacerbating the impact of the downturn.

The company posted growth in several developed markets. Volumes rose 1% in North America and 4% in Japan, in addition to a mid-single-digit percentage increase in Mexico.

Volumes were flat in Europe, with the company citing poor weather and security concerns after recent terrorist attacks. "People respond to some of these tragic events by perhaps staying at home a little bit more, " Mr. Quincey told analysts.

Coke continues to make headway in refranchising its U.S. soda bottling and distribution by the end of 2017, part of a strategy to focus on its more profitable concentrate business.

The company announced new deals Wednesday to transfer territory in Washington state and North Carolina to two small bottling partners. It said it currently has divestment agreements for 65% of bottler volume and 43 of 51 cold-fill production facilities in the U.S.

Coca-Cola Femsa SAB, Coke's biggest Mexican bottler, also said Wednesday it had secured "preferential" rights to potentially buy Coke bottling assets in the U.S., Latin America and elsewhere.

In all for the quarter, Coke posted a profit of $3.45 billion, or 79 cents a share, up from $3.11 billion, or 71 cents a share, a year earlier. Excluding certain items, per-share earnings were 60 cents, topping the 58 cents that analysts had forecast. The company said weaker foreign currencies shaved 10 percentage points off its per-share earnings.

Revenue slipped 5.1% to $11.54 billion, below analysts' prediction for $11.64 billion.

Write to Mike Esterl at mike.esterl@wsj.com and Anne Steele at Anne.Steele@wsj.com

Corrections & Amplifications: Coke's soda volume declined in the latest quarter. An earlier version of this article incorrectly stated that it was flat. (July 27, 2016)

(END) Dow Jones Newswires

July 28, 2016 02:48 ET (06:48 GMT)

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