Earnings Release Is Coca-Cola (KO) A Buy?

 

The Coca-Cola Company today reported first quarter 2021 results and provided an update on progress against its strategic initiatives. “We remain focused on emerging stronger and executing against our growth accelerators during the recovery phase. We are pleased with the progress we are making,” said James Quincey, Chairman and CEO of The Coca-Cola Company. “We are encouraged by improvements in our business, especially in markets where vaccine availability is increasing and economies are opening up, and we remain confident in our full year guidance.”

  • Revenues: Net revenues grew 5% to $9.0 billion, and organic revenues (non-GAAP) grew 6%. This was driven by 5% growth in concentrate sales, while price/mix grew 1%. The quarter included five additional days, which resulted in an approximate 6-point benefit to revenue growth.
  • Margin: Operating margin, which included items impacting comparability, was 30.2% versus 27.7% in the prior year, while comparable operating margin (non-GAAP) was 31.0% versus 30.7% in the prior year. Operating margin expansion was primarily driven by effective cost management, partially offset by currency headwinds.
  • Earnings per share: EPS declined 19% to $0.52, and comparable EPS (non-GAAP) grew 8% to $0.55. Comparable EPS (non-GAAP) growth included the impact of a 2-point currency headwind.
  • Market share: The company lost value share in total nonalcoholic ready-to-drink (NARTD) beverages as an underlying share gain in both at-home and away-from-home channels was more than offset by negative channel mix due to continued pressure in away-from-home channels, where the company has a strong share position.
  • Cash flow: Cash from operations was $1.6 billion, up $1.1 billion versus the prior year, driven by positive business performance, five additional days in the quarter and working capital initiatives. Free cash flow (non-GAAP) was $1.4 billion, up $1.2 billion versus the prior year, primarily driven by cash from operations along with lower capital expenditures versus the prior year.

Company Updates

  • Business environment update: Global unit case volume trends remain closely linked to consumer mobility, driven by vaccination rates in different markets and related improvements in away-from-home channels. Through the first quarter, volume trends steadily improved each month, driven by recovery in markets where coronavirus-related uncertainty has abated. The path to recovery, however, remains asynchronous around the world. March volume was back to 2019 levels, with growth in at-home channels being offset by pressure in away-from-home channels. Solid growth in Trademark Coca-Cola, sparkling flavors and the nutrition, juice, dairy and plant-based beverages category was offset by pressure in the hydration category during the quarter.
  • Driving consumer-centric innovation through scaled brands: The company launched new products across several categories, leveraging loved brands to drive scale and impact. In the United States, the company launched smartwater®+, a lineup of infused hydration options featuring unique ingredient pairings and flavor extracts tailored for specific wellness occasions. Three smartwater®+ variants – smartwater®+ clarity, smartwater®+ tranquility and smartwater®+ renew – deliver unique hydration experiences and will be supported by a 360-degree marketing campaign. This rollout is the latest addition to the company’s portfolio of premium beverages across key markets. After initial success in international markets, the company launched Coca-Cola® with Coffee and Coca-Cola® with Coffee Zero Sugar in the United States to give consumers a refreshing and reinvigorating reset to their daily routine. This innovation exemplifies the company’s lift-and-shift strategy to scale successful beverage innovations to new markets, with the United States becoming the 50th market to launch the product. Additionally, Topo Chico™ Hard Seltzer continued its expansion in Latin America and Europe and was recently launched in key markets in the United States under an agreement with Molson Coors Beverage Co.
  • Aligned bottling system investing for growth: The company continues to focus on strengthening bottling partnerships and bottler alignment as the system enters the recovery phase. Seamless system connectivity is helping the company maintain local relevance while benefiting from global scale. In line with its objective of focusing its resources on building consumer-loved brands and on innovation, the company announced in a separate Form 8-K filing with the Securities and Exchange Commission today that it plans to list Coca-Cola Beverages Africa (CCBA) as a publicly traded bottler and intends to sell a portion of its holdings in CCBA via an initial public offering. This demonstrates a commitment by the company for CCBA to remain Africa-focused and South Africa-headquartered. For more information, please refer to the press release section of the company’s website.
  • Progress against long-term sustainability goals and creating business value: Environmental, social and governance (ESG) goals remain core to the company’s business and are embedded in its operations. The company delivered on its decade-long drive to enable the economic empowerment of 5 million women entrepreneurs through the 5by20 initiative. The program has reached more than 6 million women entrepreneurs, providing business-skills training, financial services, peer networks, mentoring and other resources. In addition, building on its water stewardship leadership, the company recently announced a holistic strategy to achieve water security where the company operates by 2030. The strategic framework focuses on three priorities: reducing shared water challenges around the world; enhancing community water and sanitation access with a focus on women and girls; and improving the health of priority watersheds. A full update of the company’s ESG priorities will be published April 20 in the 2020 Business & ESG Report, reflecting a continued journey toward driving sustainable business practices.

Operating Review – Three Months Ended April 2, 2021

Revenues and Volume

Percent Change

Concentrate
Sales1

Price/Mix

Currency
Impact

Acquisitions,
Divestitures and
Structural
Changes, Net

Reported Net
Revenues

Organic
Revenues2

Unit Case
Volume

Consolidated

5

1

(1)

0

5

6

0

Europe, Middle East & Africa

(2)

(5)

1

0

(6)

(7)

(2)

Latin America

2

7

(10)

0

(2)

8

0

North America

0

4

0

(1)

3

4

(6)

Asia Pacific

20

(2)

6

0

24

18

9

Global Ventures3

3

(8)

5

0

(1)

(5)

(3)

Bottling Investments

11

5

(2)

0

14

17

5

Operating Income and EPS

Percent Change

Reported
Operating
Income

Items
Impacting
Comparability

Currency
Impact

Comparable
Currency
Neutral2

Consolidated

14

8

(1)

7

Europe, Middle East & Africa

(15)

(5)

1

(10)

Latin America

2

(2)

(11)

15

North America

105

80

0

24

Asia Pacific

34

(2)

8

29

Global Ventures

37

(17)

6

48

Bottling Investments

125

51

(17)

91

Percent Change

Reported EPS

Items
Impacting
Comparability

Currency
Impact

Comparable
Currency
Neutral2

Consolidated EPS

(19)

(27)

(2)

10

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 based on total sales (rather than average daily sales) in each of the corresponding periods after considering the impact of structural changes, if any.

2

Organic revenues, comparable currency neutral operating income and comparable currency neutral EPS are non-GAAP financial measures. Refer to the Reconciliation of GAAP and Non-GAAP Financial Measures section.

3

Due to the combination of multiple business models in the Global Ventures operating segment, the composition of concentrate sales and price/mix may fluctuate materially on a periodic basis. Therefore, the company places greater focus on revenue growth as the best indicator of underlying performance of the Global Ventures operating segment.

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

Consolidated

  • Unit case volume was even, as continued strength in at-home channels was offset by coronavirus-related pressure in away-from-home channels. Volume benefited from cycling the impact of the coronavirus pandemic in certain parts of the world last year. Strong growth in developing and emerging markets, led by China and India, was offset by pressure in developed markets, primarily the United States and Western Europe. Category performance was as follows:
    • Sparkling soft drinks grew 4% as solid growth in China, India and Latin America was partially offset by pressure in the fountain business in North America and away-from-home channels in Europe due to the coronavirus pandemic. Trademark Coca-Cola grew 4%, led by Asia Pacific and Latin America, along with solid growth in Coca-Cola® Zero Sugar, which grew 8%, driven by strong performance across all geographic operating segments. Sparkling flavors grew 2%, led by growth in Trademark Sprite in Asia Pacific.
    • Nutrition, juice, dairy and plant-based beverages grew 3% due to solid performance by Minute Maid® Pulpy in China and Maaza® in India. In North America, continued strong growth in Simply® and fairlife® was more than offset by a decline in Minute Maid®.
    • Hydration, sports, coffee and tea declined 11%. Hydration declined 12%, driven by a broad-based decline across all geographic operating segments. Sports drinks declined 1%, driven by a decline in Europe, Middle East & Africa, partially offset by continued strength in premium offerings and the zeros/lights portfolio in North America. Tea declined 6%, driven by declines in North America and Asia Pacific. Coffee declined 21%, driven by coronavirus-related pressure on Costa® retail stores.
  • Price/mix was 1%, primarily driven by pricing in North America and Latin America, partially offset by negative channel and package mix due to the impact of the coronavirus pandemic. Concentrate sales were 5 points ahead of unit case volume, primarily due to five additional days in the quarter (an approximate 6-point benefit) partially offset by the timing of concentrate shipments.
  • Operating income grew 14%, which included items impacting comparability in addition to currency headwinds. Comparable currency neutral operating income (non-GAAP) grew 7%, driven by solid organic revenue (non-GAAP) growth along with effective cost management across most geographic operating segments and Global Ventures.

Europe, Middle East & Africa

  • Unit case volume declined 2%, primarily due to coronavirus-related pressure in away-from-home channels in Europe, partially offset by solid growth in sparkling soft drinks in Pakistan, Nigeria and Turkey.
  • Price/mix declined 5%, driven by negative channel and package mix in Europe along with geographic mix pressure. Concentrate sales were in line with unit case volume as the benefit from five additional days in the quarter was offset by cycling the bottler inventory build in the prior year related to the uncertain environment.
  • Operating income declined 15%, impacted by comparability items. Comparable currency neutral operating income (non-GAAP) declined 10%, primarily driven by top-line pressure from negative channel and package mix in Europe.
  • The company gained value share in total NARTD beverages, primarily due to share gains in Europe and Eurasia & Middle East.

Latin America

  • Unit case volume was even, as growth in sparkling soft drinks led by Mexico, Brazil and Argentina was offset by a decline in the hydration category across most markets.
  • Price/mix grew 7%, driven by pricing in the marketplace including inflationary pricing in Argentina. Concentrate sales were 2 points ahead of unit case volume as the benefit from five additional days in the quarter was partially offset by cycling the bottler inventory build in the prior year related to the uncertain environment.
  • Operating income grew 2%, which included items impacting comparability and an 11-point currency headwind. Comparable currency neutral operating income (non-GAAP) grew 15%, driven by solid organic revenue (non-GAAP) growth along with effective cost management.
  • The company gained value share in total NARTD beverages as well as in most categories.

North America

  • Unit case volume declined 6%. North America had strong growth in sparkling soft drinks in at-home channels along with growth in fairlife®, Simply® and Topo Chico®. This was more than offset by continued coronavirus-related declines in the fountain business, along with a decline in the hydration category primarily due to cycling the consumer stocking in the prior year driven by coronavirus-related uncertainty.
  • Price/mix grew 4%, as solid growth in juice and dairy finished-goods brands, along with the category mix benefit from cycling strong sales in the hydration category last year, were partially offset by pressure in the fountain business and away-from-home channels. Concentrate sales were 6 points ahead of unit case volume, primarily driven by five additional days in the quarter.
  • Operating income grew 105%, which included a tailwind from items impacting comparability. Comparable currency neutral operating income (non-GAAP) grew 24%, driven by pricing and effective cost management.
  • The company lost value share in total NARTD beverages due to coronavirus-related restrictions in away-from-home channels, where the company has a strong share position.

Asia Pacific

  • Unit case volume grew 9%, as strong growth in China and India was partially offset by coronavirus-related pressure in Japan and Southeast Asia. Growth in China benefited from cycling the impact of coronavirus-related lockdowns last year.
  • Price/mix declined 2%, largely driven by geographic mix due to growth in emerging and developing markets outpacing developed markets. Concentrate sales were 11 points ahead of unit case volume, primarily due to five additional days in the quarter along with the timing of shipments in China.
  • Operating income grew 34%, which included an 8-point currency tailwind. Comparable currency neutral operating income (non-GAAP) grew 29%, driven by solid organic revenue (non-GAAP) growth along with effective cost management across most operating units.
  • The company lost value share in total NARTD beverages. This was driven by a share loss in Japan due to coronavirus-related restrictions in away-from-home channels, partially offset by share gains in China and Southeast Asia.

Global Ventures

  • Net revenues declined 1% in the quarter, which included a 5-point currency tailwind. Organic revenues (non-GAAP) declined 5%. The revenue declines were primarily driven by coronavirus-related pressure on Costa® retail stores, partially offset by strong performance in Costa Express® machines in the United Kingdom and the benefit from five additional days in the quarter.
  • Operating income and comparable currency neutral operating income (non-GAAP) grew 37% and 48%, respectively. This was primarily driven by effective cost management, partially offset by coronavirus-related pressure on Costa® retail stores.

Bottling Investments

  • Unit case volume grew 5%, primarily due to solid growth in sparkling soft drinks in India and South Africa.
  • Price/mix grew 5%, driven by pricing and trade promotion optimization in most markets along with a benefit from category and package mix.
  • Operating income growth of 125% included a tailwind from items impacting comparability and a headwind from currency. Comparable currency neutral operating income (non-GAAP) grew 91%, driven by solid pricing along with effective cost management.

Outlook

The 2021 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 2021 projected organic revenues (non-GAAP) to full year 2021 projected reported net revenues, full year 2021 projected comparable net revenues (non-GAAP) to full year 2021 projected reported net revenues, full year 2021 projected underlying effective tax rate (non-GAAP) to full year 2021 projected reported effective tax rate, or full year 2021 projected comparable EPS (non-GAAP) to full year 2021 projected reported EPS 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 2021. The unavailable information could have a significant impact on the company’s full year 2021 reported financial results.

Full Year 2021

The company expects to deliver organic revenue (non-GAAP) percentage growth of high single digits. – No Change

For comparable net revenues (non-GAAP), the company expects a 1% to 2% currency tailwind based on the current rates and including the impact of hedged positions. – Updated

The company’s underlying effective tax rate (non-GAAP) is estimated to be 19.1%. This does not include the impact, if the company were not to prevail, of the ongoing tax litigation with the U.S. Internal Revenue Service. – Updated

Given the above considerations, the company expects to deliver comparable EPS (non-GAAP) percentage growth of high single digits to low double digits versus $1.95 in 2020. – No Change

Comparable EPS (non-GAAP) percentage growth includes a 2% to 3% currency tailwind based on the current rates and including the impact of hedged positions. – Updated

The company expects to generate free cash flow (non-GAAP) of at least $8.5 billion through cash flow from operations of at least $10.0 billion and capital expenditures of approximately $1.5 billion. This does not include any potential payments related to the ongoing tax litigation with the U.S. Internal Revenue Service. – No Change

Second Quarter 2021 Considerations – New

Comparable net revenues (non-GAAP) are expected to include an approximate 3% to 4% currency tailwind based on the current rates and including the impact of hedged positions.

Comparable EPS (non-GAAP) is expected to include an approximate 5% to 6% currency tailwind based on the current rates and including the impact of hedged positions.

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 192 U.S. fluid ounces of finished beverage (24 eight-ounce servings), with the exception of unit case equivalents for Costa® non-ready-to-drink beverage products which are primarily measured in number of transactions. “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 or consumers.
  • “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. For Costa® non-ready-to-drink beverage products, “concentrate sales” represents the amount of coffee beans and finished beverages (in all instances expressed in equivalent unit cases) sold by the company to customers or consumers. 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 and the Global Ventures operating segment after considering the impact of structural changes, if any. For the Bottling Investments operating segment, this represents the percent change in net revenues attributable to the increase (decrease) in unit case volume computed based on total sales (rather than average daily sales) in each of the corresponding periods after considering the impact of structural changes, if any. 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 2021 financial results were impacted by five additional days as compared to first quarter 2020, and fourth quarter 2021 financial results will be impacted by six fewer days as compared to fourth quarter 2020. 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 first quarter 2021 operating results today, April 19, 2021, 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 certain supplemental information and 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.

 

Investors and Analysts: Tim Leveridge, koinvestorrelations@coca-cola.com

Media: Scott Leith, sleith@coca-cola.com

Source: The Coca-Cola Company

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