The Coca-Cola Company (NYSE:KO) delivered solid Q2 earnings helped by volume growth in emerging markets and strong pricing in the North American region. Total revenue for Q2 stood at $13.1 billion, up 3% on a y-o-y basis. Operating income jumped 4% helped by lower selling, general and administrative (SG&A) expenses as a percentage of revenues. Net income for the quarter remained flat at $2.79 billion.
The company witnessed some deterioration of gross margin which fell from 60.8% in the previous year quarter to 60.1% this quarter. The soft drink giant now expects the incremental cost of commodities to be around $300 million for 2012, helped by a stronger dollar, which is a downward revision from $350-$400 million it expected at the start of the year. Incremental cost of commodities exceeded $800 million in 2011. So, the erosion of gross margins could symbolize the company’s strategy on playing the volumes game in developing markets rather than focusing on the price.
We are in the process of revising our current price estimate of $76 for Coca-Cola to incorporate the Q2 earnings.
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Overseas Markets Gain Volume
Total volume grew 4% during the quarter led by Eurasia & Africa and Pacific regions which gained 11% and 8%, respectively. Within Eurasia & Africa, volume gains in India, South Africa and Russia were 20%, 10% and 9%, respectively. The volume gains made by Coca-Cola in India echo well with its decision to pour in additional $3 billion in the country by 2020. The Middle East and North Africa gained 20% (but 13% on an organic basis, excluding the impact of the Aujan acquisition). Sparkling beverages or carbonated soft drinks (CSDs) gained 11% while non-CSD (or still beverages) volumes jumped 18%. Still beverage volume gains were also helped by the introduction of Minute Maid in African countries of Tanzania, Kenya and Uganda in 2011.
In the Pacific region, volumes grew 7% in China and 24% in Thailand and 6% in Philippines. CSD volumes grew 6% whereas non-CSD volumes surged 18%. Latin America volumes gained 3%, but a negative impact of the currency limited revenue growth to 1% only.
However, Europe remained the weak spot as the region’s volumes declined 4% as a weak economy combined with unfavorable weather impacted the company negatively. Coca-Cola was the sponsor of the recently concluded Euro Cup and is the official sponsor of the upcoming Olympic games, so we could see some improvement in the next quarter.
Pricing was strong in the North American region as the revenues jumped 5% on a volume gain of 1%. As soft drink consumption is on the decline in the U.S., beverage companies have resorted to stronger pricing and smaller packaging. Price-mix for the region improved 3% over the previous year quarter. Sparkling beverages gained 8% helped by Powerade, which gained 13%. Notes: