Key Themes to Watch in Coca-Cola’s Upcoming Earnings

Service robot "GoCart" prototype in Coca-Cola's

Berlin office. Image source: Coca-Cola Instagram

account.

Coca-Cola reports Q1

2016 earnings on April 20th.

Here are five key themes to keep an eye on:⊡ Organic growth.⊡ Bottling refranchising

progress.⊡ Packaging dynamics.⊡ Volume in emerging

markets, versus price in developed markets.

⊡ Bolt-on acquisitions.

1) The Stakes Are Higher Than Usual For

Organic Growth In 2016.

Coca-Cola’s revenue has declined in each of the last three years:

⊡ Coke is aiming for 4% organic revenue growth in 2016.

⊡ But against this, it’s projecting a 4% revenue headwind from foreign currency translation.

⊡ Management also expects a 4%-5% revenue impact from the effects of acquisitions as well as divestment from the company’s bottling operations.

⊡ Coke is on the way to becoming a smaller but more profitable company as it exits the bottling business. But that makes hitting or exceeding its 4% organic revenue growth target in 2016 all the more important.

2) Bottling Refranchising Progress⊡ As mentioned in the previous slide, Coca-Cola is

refranchising, or selling, its interests in bottling operations, primarily to its partially-owned and joint-venture bottling partners.

⊡ Recently, CFO Kathy Waller indicated that the effect of refranchising could raise operating margins by 11 percentage points over the next few years – that’s substantial.

⊡ The company announced in February that it was accelerating the pace of bottling sales, with a goal to have 100% of North American bottling operations refranchised by the end of 2017.

⊡ Investors will look to see that these plans are on track when Q1 2016 earnings are released on Wednesday.

Image source: The Coca-Cola Company.

3) Packaging dynamicsCoca-Cola is seeing success in smaller packages, which propels more profitable consumption. It’s also experimenting with innovative packaging design, and novel materials, to bump up sales.

North American purchase transactions grew 3% last year. According to CEO Muhtar Kent, this was driven by 8oz “mini-cans,” small PET bottles, 8oz glass bottles, and the company’s premium aluminum bottles.

Image source: The Coca-Cola Company.

Last year Coca-Cola successfully employed a mixed “volume versus price” strategy. In developing markets like Asia Pacific, the focus is on gaining volume. Coke grew unit case volumes by 4% in Asia Pacific in 2015, in part by giving up 3% in price/mix. In developed markets like North America, the strategy gets flipped: Unit case volume increased by 1% last year, but the company gained 3% in price/mix. We’re likely to see this strategy employed vigorously again in 2016.

4) Volume in developing markets, price in developed markets

A look at the breakdown of case volume by geographical region. Image: The Coca-Cola Company.

5) Smaller, “bolt-on” acquisitions

Coke Is Acquiring While It Divests

⊡ Getting rid of bottling infrastructure frees up Coca-Cola to become more of a brand owner and marketer.

⊡ The company has been on an acquisition spree over the last two years, investing billions in companies like Keurig Green Mountain (since acquired by JAB Holding Company) and Monster Beverage Corp.

⊡ But it’s also engaged in snapping up promising smaller brands which it can then scale through its massive distribution system.

⊡ Look for updates from management on Coke’s acquisition strategy when earnings are released.

““In addition to internal innovation, we look externally for bolt-on opportunities to expand our still beverage portfolio and capabilities. Just last week we announced an investment in Chi Limited, Nigeria's leading value-added dairy and juice

Company. This adds to our other recent investments, including Monster, Suja, and Fairlife, expanding our presence

in the energy, juice, and value-added dairy categories.”

--Coke CEO Muhtar Kent, Q4 2015 Earnings Conference CallSource: Thomson Reuters Edited Transcript

Coca-Cola’s Full Year 2016 GuidanceA few numbers to keep in mind once we get a read on Q1 2016 this week:

As discussed earlier, in 2016, Coca-Cola projects 4% of organic revenue growth, diminished by 4% due to foreign currency translation, further reduced 4%-5% by net acquisitions and divestments activity.

The company also projects currency neutral income before income taxes of between 6%-8%.

Finally, management indicates full-year currency neutral earnings per share growth of 4%-6%.

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