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Coca-Cola - price hikes fuel sales growth

Coca-Cola's revenue grew 11% on an organic basis, reaching $12.0bn in the second quarter.

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Coca-Cola's revenue grew 11% on an organic basis, reaching $12.0bn in the second quarter. Growth was driven by a 10% rise in selling prices, as well as a 1% increase in concentrate sales.

Operating income came in at $2.4bn in the second quarter. Ignoring the effects of exchange rates and other items affecting comparability, there was a 15% increase in underlying operating profit. The associated margin grew by 1.47 percentage points to 32.1%, primarily driven by strong sales growth which was partially offset by increased marketing spend and higher operating costs.

Year-to-date free cash flow remained broadly flat at around $4.0bn. Net debt improved from $27.1 to $25.1bn.

The company raised its full-year organic revenue growth guidance from a range of 7%-8% to 8%-9%. That's driven an improvement in underlying earnings per share guidance, which is now expected to grow by 9%-11%, ignoring the impact of exchange rates and other items affecting comparability.

The shares were broadly flat in early trading.

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Our view

Coca-Cola's started the first half of the year with a bang. Organic revenue grew by double digits again this quarter, driven by higher average selling prices.

The important thing to note here is that while concentrate sales were up marginally, total case volumes were flat year-on-year, suggesting that consumers may be starting to get saturated by the continuous price hikes. Where volumes trend from here will be key.

A key thing differentiating Coca-Cola from most other drinks makers is its operating model. Rather than investing in big manufacturing plants, Coca-Cola partners with, and holds stakes in, local bottling companies in what's known as the Coca-Cola System. That allows the group to keep costs down and supports its industry leading gross margins, which hover around the 60% mark. Instead, Coke concentrates its efforts on selling the syrups themselves and marketing its brands directly to consumers.

Fundamentally, Coca-Cola is a marketing machine, and its attention is devoted to soft drinks. A continued rise in marketing spend suggests the group isn't sitting back on its laurels though. Coke is updating its strategy and brand portfolio to focus more on sharpening its proposition on a regional and local level, but it looks more like a refinement than a revolutionary change to us. Nonetheless, it's encouraging to see the group moving forward.

Coca-Cola's diversification has undoubtedly played a large part in its resilient sales too. The group owns other household favourites like Fanta, Sprite and Schweppes, and the acquisition of Costa Coffee put Coke in the hot beverages market for the first time. Adding BODYARMOR sports drinks to the mix has opened the group up to the growing global health drinks market. We see these as positive add-ons in segments of the drinks market that still have room to grow.

But for all their benefits, these acquisitions have put a slight strain on the company's balance sheet. Net debt has continued to creep in the right direction but it's still higher than we'd like to see. Free cash flow's turned positive again now, after a brief flutter in negative territory last quarter as a result of unhelpful timings of cash flows. And we expect it to remain well in positive territory over the second half.

Coca-Cola owns one of the strongest brands in the world, and there's a lot to be said for that in an uncertain environment. Though, expect to pay a slight premium for this benefit, as the group trades ahead of its long-term valuation on a price-to-earnings basis and remember there are no guarantees.

Coca-Cola key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Aarin Chiekrie
Aarin Chiekrie
Equity Analyst

Aarin is a member of the Equity Research team. Alongside our other analysts, he provides regular research and analysis on individual companies and wider sectors. Having a keen interest in global economics, he knows how macro-events can impact individual companies.

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Article history
Published: 26th July 2023