What Are The Key Takeaways From Coca-Cola’s Q1 2019 Results?

by Trefis Team
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Coca-Cola Company (NYSE: KO) released its Q1 2019 financial results on April 23, 2019, followed by a conference call with analysts. KO beat market expectations for revenue as well as earnings. The company reported revenue of $8.02 billion in Q1 2019, marking a growth of 5.2% over Q1 2018. Higher revenue was mainly a reflection of unit case volume growth of 2%, price/mix growth of 5%, and concentrate sales growth of 1%, driven by consumer-centric innovation and solid revenue growth management initiatives, partially offset by volume decline in Argentina, the Middle East region, and North America. Overall, there was healthy growth in the company’s sparkling soft drinks, juice and plant-based beverages, sports drinks, and tea and coffee products. The acquisition of Costa Limited in January 2019 also led to an increase in KO’s top line. Adjusted earnings came in at $0.48 per share in Q1 2019, marginally higher than $0.47 per share in the year-ago period. Higher earnings were driven by recent refranchising of low-margin bottling business and cost savings from ongoing productivity initiatives.

We have summarized the key announcements in our interactive dashboard – How did Coca-Cola fare in Q1 2019 and what is the outlook for the full year? In addition, here is more Consumer Staples data.

A] Segment Performance

EMEA

  • Revenue from EMEA increased in Q1 2019 due to volume growth of 2%, led by sparkling soft drinks and Fuze Tea, coupled with strong pricing in majority of the key markets.
  • KO gained value share in non-alcoholic ready-to-drink (NARTD) beverage, led by solid share performance across Europe, partially offset by lower share in sparkling soft drinks in Nigeria, primarily due to local value brands.
  • Operating margins improved in Q1 2019 due to growth in revenue, productivity plan, and lower marketing expenditure.

Latin America

  • In spite of favorable price/mix, revenue from the segment decreased in Q1 2019 due to double-digit decline in volume in Argentina and 1% volume decline in Mexico.
  • Operating margins declined 13% in Q1 2019 due to 20 percentage point adverse impact of currency headwinds.

North America

  • Revenues in North America remained stable in Q1 2019 compared to the previous year period, due to favorable pricing offset by volume decline.
  • Price/mix increased by 4% due to strong pricing and mix within sparkling soft drink portfolio.
  • Unit case volume declined 1%, largely due to the impact of pricing and package initiatives executed in the market, in addition to the timing of Easter.
  • Operating Margins increased by 16% due to productivity initiatives and pushing over of certain expenses.

Asia Pacific

  • Revenue for the segment decreased in Q1 2019, mainly due to 2% decline in price/mix, driven by geographic mix due to growth in emerging and developing markets outpacing developed markets.
  • Volume grew 7% due to positive performance across all key markets, led by China, Southeast Asia and India, with the exception of Australia.
  • Operating margin declined by 4%, largely from a structural headwind related to inter-company profit elimination from acquiring bottling operations in the Philippines.

Bottling Investments and Corporate

  • Revenue in Q1 2019 saw a marginal decline compared to Q1 2018.
  • However, with most of the refranchising already done, revenue increased sharply on a sequential basis, driven by 3% increase in price/mix, primarily led by India.

Global Ventures

  • The company reported revenue of $583 million from the segment, following the acquisition of Costa in January 2019, with plans to leverage its coffee platform.

B] Profitability

  • After decreasing over the previous three quarters, total expenses increased in Q1 2019 due to higher impairment charges.
  • However, compared to Q1 2018, total expenses witnessed a marginal increase in Q1 2019, mainly due to volume growth and acquisition-related costs.
  • In spite of rise in expenses in absolute terms, net income margin increased from 17.9% in Q1 2018 to 20.9% in Q1 2019, mainly due to much higher growth in revenues.
  • Additionally, per unit cost savings due to productivity initiatives and lower tax expense have led to an increase in profitability for the quarter.

Full Year Outlook

  • Revenue is expected to increase by 9.3% to $34.8 billion in 2019, driven by growth across almost all major segments, offset by slightly lower revenue from the bottling business. However, with most of the refranchising already completed, the revenue loss is not expected to be as significant this year as in 2018.
  • Revenue growth would also be driven by inorganic growth strategies of Coca-Cola, with the company announcing several key acquisitions in 2018, including Costa Limited (completed in Q1 2019) and a strategic partnership with BODYARMOR. Additionally, it also announced the acquisition of full ownership in Chi Ltd, which is a fast-growing leader in expanding beverage categories, including juices, value-added dairy, and iced tea in Nigeria.
  • We expect the net income margin to rise only marginally to about 21% in 2019, from 20.2% in 2018.
  • Margin growth would be driven by the ongoing refranchising of low-margin bottling operations and Coca-Cola’s new productivity plan which has been extended to 2019 to achieve incremental savings of about $800 million.
  • However, rising transportation costs and currency swings are expected to be potential drags on the company’s margins, thus limiting the upside on earnings.

Trefis has a price estimate of $50 per share for Coca-Cola’s stock. We believe that an expanding footprint in the emerging markets, new product offerings, strong organic sales growth, along with acquisition related growth, would support growth in KO’s stock price.

 

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