Company Overview: The Coca-Cola Company is a beverage company. The Company owns or licenses and markets non-alcoholic beverage brands, primarily sparkling beverages and a range of still beverages, such as waters, flavored waters and enhanced waters, juices and juice drinks, ready-to-drink teas and coffees, sports drinks, dairy and energy drinks. The Company's segments include Europe, Middle East and Africa; Latin America; North America; Asia Pacific; Bottling Investments, and Corporate. The Company owns and markets a range of non-alcoholic sparkling beverage brands, including Coca-Cola, Diet Coke, Fanta and Sprite. The Company owns or licenses and markets over 500 non-alcoholic beverage brands. The Company markets, manufactures and sells beverage concentrates, which are referred to as beverage bases, and syrups, including fountain syrups, and finished sparkling and still beverages.

 

KO Details

Coca-Cola Co (NYSE: KO), a well-known beverage leader, is under a multi-faceted transformation, and has been tracking well on evolution to build a more consumer-centric brand portfolio. The group has been reducing its sugar footprint, and is working on revenue growth strategies, and has signaled for adoption of a path to leveraging industry growth trends over next couple of years. The group also considers digitalization as a significant enabler for growth and its productivity.
 

Industry Retail Growth Trend (Source: Company Reports)
 
Strong Third Quarter FY 17 Financial Performance: Coca-Cola Co has reported the adjusted earnings per share of 50 cents on revenue of $9.08 billion in the third quarter of FY 17. The company’s organic core revenues grew by 4% during the period. However, the net revenue was affected due to 18-point headwind from the ongoing refranchising of bottling territories. On the other hand, the organic revenue was driven by price/mix growth of 3% and concentrate sales growth of 1%. The organic revenue also grew due to the growth in each of the operating segments. Further, the non-GAAP operating margin increased 400 basis points, due to the divestitures of lower- margin bottling businesses through refranchising and continued operating expense management associated with KO's ongoing productivity efforts. Nonetheless, KO’s year-to-date free cash flow (non- GAAP) fell 8% to $4.7 billion and this fall was primarily due to the ongoing refranchising of North America bottling territories, partially offset by lower capital expenditures.
 
Growth and shift in type of market share: Coca-Cola Co has gained value share in total nonalcoholic ready-to-drink (NARTD) beverages, and the value share growth has outpaced the volume share, which shows the company's continued shift in focus for better value. KO has gained or maintained value share in sparkling soft drinks, juices, sports drinks, and ready-to-drink (RTD) tea. The group is identifying and incubating high-growth brands. It is also leveraging the VEB model in the U.S., to develop similar structures and processes in other markets. In Central and Eastern Europe, the group launched a unit in partnership with their bottling partner, Coca-Cola Hellenic. In Great Britain, the group relaunched the storied Schweppes brand to offer mixers designed to pair even better with premium spirits. KO is building on a solid foundation in sophisticated flavors via brands like Blue Sky, Barrilitos Aguas Frescas in the U.S., and Appletiser and BOBO (09:27) in Europe.
 
Emerging markets’ performance: The group’s Mexican division performance was under pressure during the quarter with volumes falling in the quarter, impacted by cooler weather and natural disasters, higher rainfall and softer consumer environment. On the other hand, the group delivered a mid-single-digit organic revenue growth in Europe, Middle East and Africa group. In emerging markets, China witnessed another quarter of better performance, with volumes rising 2% driven by the group’s solid marketing campaigns across sparkling soft drinks, juice and premium water. KO also made a strategic decision to de-emphasize low-margin water in China. This led to a 3-point impact to China's volume growth during the quarter. However, India returned to growth during the quarter, with volumes rising 6%, boosted by solid performance across the portfolio. The business was successful despite the recent difficulties related to demonetization and the implementation of a Goods and Service Tax during the first half of the year.
 

Bolder Actions in 2017 (Source: Company Reports)
 
Strategic Approach on Product Changes: The group has reduced the amount of added sugar in many beverages around the world and is on track to reformulate more than 500 products this year. Moreover, Coca Cola has been battling America's anti-sugar kick all year, offering $1 million for sweetener innovations. The company has also revamped its Coke Zero product and is now re-marketing it as Coca-Cola Zero Sugar. Coca-Cola Zero Sugar continued to perform well and has grown unit case volume high single digits during the third quarter 2017. The new recipe was successfully introduced in the United States midway through the third quarter, which doubled its unit case volume growth rate compared to the prior quarter. By the first quarter of 2018, KO planned to introduce this innovation in all key markets around the world.
 
Portfolio Diversification: The group had acquired the Topo Chico premium sparkling mineral water brand in the United States in October. Topo Chico is a fast-growing brand in parts of the United States, especially Texas. Through the Venturing & Emerging Brands unit, KO has planned to expand U.S. distribution while preserving the heritage of the brand. In the U.S. RTD coffee category, KO has launched a line of Dunkin' Donuts branded iced coffee beverages earlier this year, and performance is exceeding expectations. McDonald's also announced a new RTD frappé coffee line in partnership with KO, which is expected to be available in the United States early next year. Moreover, in Europe, innocent juices and smoothies continued to grow across the continent. The brand, which is the number one chilled juice brand in Western Europe, is available in 15 markets across Europe and has grown net revenues double digits year-to-date. Additionally, KO has launched a Coca-Cola Coffee drink in Japanese vending machines as well as Australia. While the group has ventured into various healthy beverages’ segments; KO hasn't totally given up on soda and has added Georgia Peach to core soda brand, and will be adding two new flavors to its full-sugar core soda line, which are Georgia Peach and California Raspberry, in 2018.
 

Changing Landscape (Source: Company Reports)
 
Reshaping the global bottling network: Nearly 80% of Coca-Cola Refreshments' (CCR) U.S. volume has now been transitioned to new ownership. The group expects to finish the refranchising of CCR in the United States within the coming weeks. Moreover, in Africa, a major transition of bottling assets was completed in early October, leading the firm to obtain a majority interest in Coca-Cola Beverages Africa (CCBA). Additionally, KO would temporarily hold this controlling interest until CCBA is refranchised, which is expected to be completed in 2018. The company would account for CCBA as a discontinued operation.
 
Outlook: The group has reaffirmed the FY 17 outlook and reiterated its long-term target of mid-single-digit organic revenue growth on a non-GAAP basis. It expects a high single-digit comparable currency neutral earnings per share growth on a non-GAAP basis. KO is also targeting the comparable currency neutral operating income growth on a non-GAAP basis of 6 to 8%. In addition, KO has introduced a new long-term target of 95 to 100% for adjusted free cash flow conversion ratio on a non-GAAP basis. The group has also set a target for comparable currency neutral operating margin on a non-GAAP of at least 35% by 2020. Along with the above, KO provided projection for 2018 capital expenditures of $1.9 billion and a long-term expectation for capital expenditures of 4.5 to 5% of net revenues.
 
Change in Management: Coca-Cola Co has announced that J. Alexander "Sandy" Douglas Jr. would retire as President of Coca-Cola North America (CCNA). He will be succeeded by James L. "Jim" Dinkins, who currently serves as President of the Minute Maid business unit and Chief Retail Sales Officer for CCNA.
 
Stock Recommendation: The group’s comparable gross margin enhanced over 150 basis points during the quarter driven by the benefit from refranchising of bottling businesses and strong price/mix, which partially offset rising commodity costs and a slight currency impact. The group continues to invest in high growth brands and is aiming for a portfolio diversification in the coming years. The group generated $4.7 billion in free cash flow year to date and has returned $3.2 billion in the form of dividends year to date, which is a 6% rise in the dividend this year and $1.7 billion in net share repurchases. KO stock has risen 10.8% in last one year (as of November 22, 2017) and we believe there is more room for momentum given the new initiatives and strategies. We put a “Buy” on the stock at the current price of USD 45.84



KO Daily Chart (Source: Thomson Reuters)

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