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Coca-Cola - strong top line growth fuels improved guidance

Revenue excluding the impact of acquisitions and exchange rates rose 16% to $11.3bn in the second quarter.

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Revenue excluding the impact of acquisitions and exchange rates rose 16% to $11.3bn in the second quarter. This was driven by price increases and an 8% volume increase, helped by the continued recovery in pubs and restaurants.

The cost of the BODYARMOR acquisition, rising operating costs and increased marketing spend weighed on profitability, bringing underlying operating margins down to 30.7% from 31.7%. Underlying operating profits still grew 15%, excluding the impact of exchange rates, to $2.3bn.

The group now expects full year organic revenue growth of 12-13%, up from 7-8%. This is seen feeding into underlying earnings-per-share growth of 14-15%.

Coca-Cola shares were broadly flat following the announcement.

View the latest Coca-Cola share price and how to deal

Our view

Beverage giant Coca-Cola is showing how and why it's such a global powerhouse. Despite the challenges of rising costs and a consumer feeling the pinch of a cost-of-living crisis, the group's been able to up its full-year expectations. That's testament to the brand power, which keeps the loyal customer base coming back for more despite price hikes.

It's also testament to the 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 reduces the amount of capital tied up in the business and gives the group flexibility it might otherwise lack.

Instead, Coke concentrates its efforts on selling the syrups themselves and marketing its brands directly to consumers. That's supported historically gross profit margins upwards of 60%. Inflationary headwinds meant that slipped to a still respectable 59% at the half year, but that's expected to climb back to normal levels by year-end. This in turn has backed over half a century of dividend growth. Whether this can be repeated going forward remains to be seen though. Ultimately all dividends are variable and not guaranteed.

Fundamentally, Coca-Cola is a marketing machine, and its attention is devoted to soft drinks. A 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.

The acquisition of Costa Coffee put Coke in the hot beverages market for the first time. And it also added BODYARMOR to its stable of brands, helping to increase sales in the growing global health drinks market.

For all their benefits, these acquisitions increased the strain on the company's balance sheet, Coca-Cola is carrying $25.9bn in net debt, which is slightly higher than ideal even for a business expected to generate over $10bn in free cash flow this year.

Over the long run shareholders have enjoyed some rich rewards, and trends look encouraging again now that restaurant and bar sales are back. Coca-Cola owns one of the best brands in the world, and there's a lot to be said for that in an uncertain environment. Though expect to pay a premium, with the group trading a decent way ahead of its long-term valuation.

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.

Second Quarter Trading Update (All figures quoted are underlying & currency neutral)

Sparkling soft drinks sales rose 8% with Coca-Cola sales up 7% and the Zero Sugar version up 12%. Both saw growth across all geographies. Nutrition juice, dairy and plant-based beverages grew 6% while hydration, sports, coffee and tea sales were up 7%.

Sales in Europe, Middle East & Africa grew 21% to $2.2bn, reflecting a weaker performance last year due to the pandemic and price increases in Turkey. Volumes were up 6%, led by growth in Western Europe, Turkey and Pakistan. This fed into a 26% increase in underlying operating profits to $1.3bn despite higher operating costs and marketing expenses.

Latin American saw revenue growth of 8% to $1.1bn, helped by a 12% increase in prices thanks to a favourable channel and package mix and rising prices in Argentina. Strong growth in Mexico, Brazil and Argentina helped volumes rise 9%. However higher operating costs and marketing spend offset these increases and operating profits were flat at $674m.

The return of restaurant and bar sales together with price increases and growth in premium drinks meant revenue in North America was 13% higher at $4.0bn. This more than offset higher operating costs and marketing investment, sending operating profits 19% higher to $840m.

Revenue in Asia Pacific rose 13% to $1.6bn. Volumes grew 11% thanks to a strong performance in the Philippines and India, though persistent covid restrictions in China weighed. Prices fell 3% due thanks to higher sales in lower-priced markets. Operating income rose 6% to $753m thanks to improved revenue growth.

Revenue in Global Ventures rose 10% to $695m as the group lapped easier comparisons following the prior year's Costa closures. Higher operating costs ate into profitability, bringing operating income down from $75m to $44m.

Bottling Investments saw revenue rise 28% to $2.1bn thanks to a 26% rise in volumes driven by growth in all markets. Price increases mostly offset the impact of higher sales in lower-priced markets. The revenue growth fed into an 86% increase in operating profits to $92m.

Free cash flow in the six months to July 1 was $4.1bn, down by $1bn thanks to higher incentives and unfavourable working capital movements. However lower debt obligations meant net debt fell to $25.9bn from $26.8bn.

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
Laura Hoy
Laura Hoy
ESG Analyst

Laura is part of HL's ESG analysis team, working to offer research and analysis to help with sustainable decision making. She also works with other parts of the business to help integrate ESG.

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Article history
Published: 26th July 2022