Coca-Cola (KO) Beats Q4 Earnings & Revenues; Down Y/Y
The Coca-Cola Company KO beat the Zacks Consensus Estimate for both earnings and sales in the fourth quarter of 2015. However, both the metrics declined year over year due to fewer selling days in the quarter and weak margins.
Concurrent with the fourth-quarter earnings release, the beverage giant announced that it will accelerate its North-American bottler refranchising efforts and agreed to refranchise its company-owned bottling operations in China to its existing partners.
Earnings Beat
Fourth-quarter 2015 adjusted earnings of the maker of Coke and Fanta were 38 cents per share which beat the Zacks Consensus Estimate of 37 cents by 2.7%.
Earnings declined 12% year over year as a strong dollar eroded the value of Coca-Cola’s overseas sales. Excluding the 10% negative Fx impact, earnings declined 2% due to six fewer selling days in the quarter and relatively weaker margins.
Nonetheless, the earnings decline was less than management’s expectations of a mid-to-high single-digit range.
Earnings have been adjusted mainly to incorporate charges related to the North American re-franchising initiative, asset impairment costs and costs associated with productivity program. Including these, reported earnings were 28 cents per share, a 62% year-over-year surge.
The Coca-Cola Company (KO) Street EPS & Surprise Percent - Last 5 Quarters | FindTheCompany
Organic Revenues Decline; Sales Beat
Net revenue declined 8% year over year to $10 billion due to currency headwinds.
Currency headwinds hurt sales by 7%. With more than half of its revenues coming from outside the U.S., Coca-Cola’s sales/profits were affected by the weakening of many emerging market currencies against the U.S. dollar.
Adjusting for the impact of currency, organic revenues declined 1% mainly due to six fewer selling days in the quarter. A strong performance in North America was offset by some softness in the international markets. Revenues, however, beat the Zacks Consensus Estimate of $9.86 billion by 1.4%.
Margins Weak
Adjusted consolidated gross margins contracted 120 basis points (bps) year over year to 60.7% as positive pricing and productivity gains were offset by currency headwinds. Gross margins were flat sequentially.
Adjusted selling, general and administrative (SG&A) expenses declined 3% on a currency-neutral basis to $3.95 billion.
Adjusted operating income, on a constant currency basis, was $2.0 billion, flat year over year. Adjusted operating margin was 20%, down 140 bps year over year as lower gross margins offset strong cost management and productivity gains. Operating margins declined 370 bps sequentially.
Profit-before-tax (PBT) declined 13% to $2.16 billion. Currency hurt PBT by 10%. Structural changes had a negative impact of 1% on PBT, less than 2% as expected. Excluding currency headwinds and structural changes, PBT decreased 2% due to lower organic revenues, lower equity income and interest income.
Volume and Pricing
Coca-Cola witnessed 3% volume growth in the fourth quarter, same as the previous quarter, as both still and sparkling beverages volumes remained steady.
Sparkling beverage volumes grew 2%, same as the third quarter. The Coca-Cola brand grew 1%, same as the prior quarter. Coke Zero climbed 7%, while Sprite grew 3%. Diet Coke, however, declined 5% as the diet drinks are bearing the brunt of increasing consumer concern regarding the use of artificial sweeteners.
Still beverages grew 6% in terms of volume, same as the previous quarter, supported by positive growth in teas, packaged water, juice and juice drinks and sports drinks.
In North America, volumes grew 3%, higher than 1% in the earlier quarter, driven by improved volumes of the sparkling sodas. In fact, according to management, the North America region delivered its strongest annual performance in three years.
Among other developed nations, volumes improved in Japan, while it softened slightly in Europe. European volumes rose 3%, less than 4% growth in the previous quarter. Japan volumes rose 3%, much better than 2% decline in the third quarter.
Among the developing countries, double-digit growth in India was offset by declines in Brazil and softened volumes in China. Volumes grew 1% in China, less than 5% last quarter.
Price/mix increased 2%, less than 3% in the previous quarter due to softer growth in North America and Latin America.
Latin America and North America continued to show growth, though the increase was lower than the third quarter. Price/mix declined in Asia Pacific but improved in Eurasia and Africa and Europe.
2015 Results
In 2015, Coca-Cola witnessed 4% decline in revenues to $44.29 billion. However, revenues were in line with the Zacks Consensus Estimate. Adjusting for the impact of currency and structural changes, constant currency revenues increased 3%.
Adjusted earnings were $2.00 per share which beat the Zacks Consensus Estimate of $1.99 by a penny. Earnings declined 2% from the prior-year figure. Excluding the impact of currency, earnings increased 6%, higher than the company’s expectation of 5%.
2016 Outlook
Organic revenues are expected to be up 4% to 5% in 2016, in line with the long-term target of a mid single-digit increase. Acquisitions and divestitures are expected to hurt revenues by 4–5%.
Excluding currency headwinds and structural changes, PBT is expected to increase in a 6–8% range, also in line with the long-term range.
In 2016, the adjusted constant currency earnings per share are expected to increase 4–6%, less than the long-term target of a high single-digit increase.
Foreign exchange is expected to hurt 2016 revenues by 4% and both PBT and EPS by 9%.
Structural changes are expected to have a 3–4% negative impact on both PBT and EPS, primarily due to accelerated re-franchising.
The company expects to buy back shares worth $2.0 billion to $2.5 billion in 2016. Adjusted effective tax rate is likely to be 22.5%.
Accelerated Re-franchising Plans
Coca-Cola declared that it will complete the remaining re-franchising of North American bottling operations by the end of 2017, much before 2020 as previously expected. The company also said it has signed non-binding letters of intent to refranchise company-owned bottling operations in China to its existing partners, namely China Foods Limited, part of COFCO Limited, and Swire Beverage Holdings Limited.
Coca-Cola is re-franchising the majority of its company-owned North American bottling territories to create a more efficient system. Over 40% of the U.S. territories have already been refranchised.
It has been divesting and merging many bottling operations since 2014 to revamp its bottling system and thereby improve margins and drive growth. Three of its European bottlers — Coca-Cola Enterprises, Inc. CCE, Coca-Cola Iberian Partners and Coca-Cola Erfrischungsgetränke AG (German operations of Coca-Cola) — will merge to form a new Western European bottler named Coca-Cola European Partners.
Also, Coca-Cola has entered into an agreement with beer and beverage company, SABMiller and partner Gutsche Family Investments, to merge their bottling operations in Southern and East Africa and form the largest Coca-Cola bottling entity in Africa. SABMiller, headquartered in London, is Coca-Cola’s largest bottler in South Africa. On the other hand, Gutsche Family Investments has a majority stake in Coca-Cola Sabco, another South African bottling company of Coca-Cola. While Coca-Cola will own 18% in Coca-Cola European Partners, it will have 11% stake in the new African bottler.
The refranchising efforts, though hurting sales/profits in the near term, will result in higher operating margins, lower capital spending and improved return on invested capital over the long term.
2015 – A Transition Year
2015 has been a “transition year” for Coca-Cola because of the changes implemented to create a new operating model. The company implemented aggressive cost-cutting measures and several initiatives to drive faster growth during the year. Other than aggressively cutting costs, the plan includes making disciplined brand and growth investments as well as aligning incentive plans. The resultant savings are being used to fund marketing programs and innovation to re-accelerate top-line growth, margin expansion and returns on capital.
In addition, Coca-Cola has made equity investments in smaller companies, like Keurig Green Mountain, Inc. GMCR and Monster Beverage Corporation MNST, to enhance growth in key categories.
Currently, Coca-Cola has a Zacks Rank #3 (Hold).
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