KO Coca Cola Company

Modest improvement reflects growth for noncarbonated drinks; profit declines 28%

By Mike Esterl 

Coca-Cola Co. sold more drinks in the third quarter after volumes stalled earlier this year, lifted by noncarbonated offerings and solid growth in the U.S., Japan and parts of Europe, despite weakness in less-developed markets.

The beverage giant also said Wednesday it would continue efforts to cut sugar from its products and diversify beyond soda as more countries weigh special taxes on high-calorie drinks to combat rising obesity and diabetes.

The maker of Coke, Minute Maid juices and Powerade sports drinks reported volumes rose 1% in the third quarter, an improvement from the second quarter, when volumes were flat for the first time since 1999. Revenue rose 3% in the most recent quarter after stripping out bottling divestments and foreign-exchange losses.

Highlighting shifting consumer habits, soda volumes were flat, including a 2% decline in Latin America. Noncarbonated volumes grew 3%, fueled mainly by bottled water and sports drinks.

North American revenue rose 3% as the company continues to roll out smaller package sizes, charging consumers more on a per-ounce basis. Noncarbonated volumes rose 2%, helped by a high-single-digit percentage increase in Vitaminwater. Soda volumes were even, with growth in Fanta and Sprite being offset by declines in Diet Coke as Americans avoid artificial zero-calorie sweeteners.

Developed markets in Japan and Western Europe also grew but emerging markets remain "a mixed bag" as economic and political uncertainty weigh on results, Chief Executive Muhtar Kent told analysts on an earnings call.

Management singled out the Latin American countries of Brazil, Argentina and Venezuela as particularly challenging, despite healthy growth in Mexico. Volumes also declined in India and conditions in Russia remain difficult, offsetting healthy growth in Nigeria and other parts of Africa.

Volumes rose 2% in China after declining the first six months of the year, helped partly by better weather. Still, James Quincey, Coke's chief operating officer, warned of "continued near-term volatility" in the world's biggest marketplace amid a spending slowdown. Coke has responded by launching smaller, cheaper package sizes and scaling back the use of returnable bottles as more people consume drinks in their homes instead of visiting restaurants.

Mr. Quincey said Coke also has more than 200 reformulation initiatives under way across the world to reduce added sugars in its beverages, including the use of stevia, a zero-calorie sweetener. The company recently rolled out a variation of Sprite with 30% fewer calories in the U.K., which plans to introduce a sugary drink tax in 2018.

"We're making progress but we have a lot more to do," Mr. Quincey told reporters on a conference call.

That also includes cutting Coke's reliance on soda, which represents about 70% of company volumes, down from more than 90% about 15 years ago. The portfolio mix has been shifting toward noncarbonated drinks at a rate of roughly 1% a year and would take another two decades to reach 50/50 at the current pace.

"I would certainly like to get there quicker than 20 years," said Mr. Quincey, who singled out dairy and plant-based beverages as two areas that could see more bolt-on acquisitions.

Coke reported that revenue fell 6.9% to $10.63 billion in the third quarter from $11.43 billion a year earlier. Structural items, including bottling and distribution divestments, had a negative impact of 8 percentage points. Weaker foreign currencies had a negative impact of 2 percentage points.

Net income fell 28% to $1.05 billion, or 24 cents a share, from $1.45 billion, or 33 cents a share, also weighed down by restructuring costs and foreign currencies.

Still, Coke's results were slightly better than Wall Street expectations and the company reiterated it expects pretax profit to rise by 6% to 8% in 2016 after adjusting for structural items and foreign-exchange losses.

Coke's share price was 0.1% lower at $42.49 in afternoon trade on the New York Stock Exchange.

Write to Mike Esterl at mike.esterl@wsj.com

(END) Dow Jones Newswires

October 27, 2016 02:48 ET (06:48 GMT)

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