ATLANTA--(BUSINESS WIRE)--The Coca-Cola Company delivered strong fourth quarter operating results and achieved or exceeded the Company's full year guidance in 2017. While reported net revenues continued to be impacted primarily by ongoing refranchising initiatives, the Company delivered broad-based organic revenue (non-GAAP) growth across all operating segments, as well as profit growth.
"I am pleased with our accomplishments and results in 2017," said James Quincey, President and CEO of The Coca-Cola Company. "We achieved or exceeded our full year guidance while driving significant change as we continued to transform into a total beverage company. While there is still much work to do, I am encouraged by our momentum as we head into 2018."
Throughout 2017, the Company made progress in transforming the culture of the organization to be more nimble and entrepreneurial. The Company’s lean center initiative reshaped the corporate structure to support faster growth and empower field operations to act with more speed and independence. In the fourth quarter, the Company announced changes to its talent and compensation philosophy, placing a sharper focus on performance and future potential to drive long-term growth.
The Company also achieved major milestones in strengthening the system and returning to a capital-light organization, including a fully refranchised bottling system in the United States. Outside of the U.S., the Company refranchised previously owned bottling operations in China to local partners. The system's two largest bottlers in Japan merged, creating a single bottler covering the vast majority of volume in that key market. Additionally, the Company completed the ownership transition of bottling operations in Africa, temporarily acquiring majority ownership of Coca-Cola Beverages Africa until it is refranchised.
Highlights
Quarterly / Full Year Performance
- Revenues: Net revenues declined 20% to $7.5 billion for the quarter and declined 15% to $35.4 billion for the year, impacted by headwinds of 26% and 17%, respectively, from the ongoing refranchising of bottling territories. Organic revenues (non-GAAP) grew 6% for the quarter, driven by price/mix growth of 4% and concentrate sales growth of 1%. The quarter included one additional day, which equated to an approximate one point benefit to organic revenue (non-GAAP) growth. For the year, organic revenues (non-GAAP) grew 3%, driven by price/mix growth of 3%.
- Volume: Total unit case volume was even for the quarter and full year. Developing and emerging markets generated positive volume growth for the second consecutive quarter, including volume growth in Brazil. While volume growth in developed markets overall was even during the quarter, North America volume grew 1%.
- Margin: Operating margin, which included items impacting comparability, grew over 315 and 55 basis points for the quarter and full year, respectively. Comparable operating margin (non-GAAP) expanded more than 530 and 350 basis points for the quarter and full year, respectively. Margin expansion was driven by divestitures of lower-margin bottling businesses and the Company's ongoing productivity efforts.
- Market Share: The Company continued to gain value share in total nonalcoholic ready-to-drink ("NARTD") beverages for the quarter and full year. Value share growth outpaced volume share performance, reflecting the Company's continued shift in focus to value growth from volume growth.
- Cash Flow: Cash from operations for the full year was $7.0 billion, down 20%. Full year free cash flow (non-GAAP) was $5.3 billion, down 19%. The declines were primarily driven by comparability items related to the refranchising of North America bottling territories, including the establishment of third-party receivables and cash restructuring charges.
- Share Repurchases: Full year purchases of stock for treasury were $3.7 billion. Net share repurchases (non-GAAP) totaled $2.0 billion.
Company Updates
- Impact of U.S. Tax Cuts and Jobs Act: The Tax Cuts and Jobs Act ("Tax Reform Act") was signed into law on Dec. 22, 2017. The Company supports the Tax Reform Act as it enhances the ability of U.S.-headquartered companies to compete globally on more equal footing including facilitating the free flow of capital. As a result of the Tax Reform Act, the Company’s effective tax rate for 2018 is now estimated to be 21%, reduced from the previously provided estimate of 26%. However, under the Tax Reform Act, the Company is required to pay a tax on historical offshore earnings that have not been repatriated to the United States. The charge related to this tax is partially offset by the revaluation of the Company’s net deferred tax liability position at the new federal statutory tax rate of 21%. The impact of these items resulted in a one-time net charge of $3.6 billion during the quarter ended Dec. 31, 2017, consisting of a repatriation charge of $4.6 billion and a deferred tax benefit of $1.0 billion. Additionally, the Company plans to reduce its gross debt level by approximately $7 billion with cash currently held overseas while continuing to maintain a net debt leverage ratio (non-GAAP) that is within the Company's targeted range of 2.0 to 2.5 times net debt to earnings before interest, taxes, depreciation, and amortization.
- Expanding the appeal of diets and lights: In January 2018, the Company announced plans to rejuvenate Diet Coke in North America with an updated look, new packaging, and the debut of four new flavors. The Company is re-energizing and modernizing Diet Coke for a new generation of drinkers, while also offering millions of current fans a new experience with a brand they love, without changing its formula and great taste. The changes to Diet Coke reflect the Company’s continued focus on innovation within sparkling soft drinks.
- Accelerating a consumer-centric portfolio: In September 2017, the Company expanded its Venturing & Emerging Brands ("VEB") model to Central & Eastern Europe in partnership with Coca-Cola HBC AG. To date, the joint effort has shown early signs of success of the "lift and shift" approach through the launch of smartwater, ZICO coconut water, and Appletiser. This strategy, coupled with world-class innovation and bolt-on M&A, is expected to accelerate growth of the Company's expanding consumer-centric portfolio.
- Stronger focus on revenue growth: During the quarter, the Company continued to pursue Revenue Growth Management ("RGM") initiatives across key markets, including the South Latin and Central & Eastern Europe business units, which led to revenues and transactions growing ahead of volume. Throughout the year, the Company also continued to make disciplined decisions around profitable growth by deprioritizing low-margin water in major markets, including China, Japan, and Mexico.
- Re-energized system: The U.S. Coca-Cola system is now fully refranchised after the closing of two important territories during the quarter. Liberty Coca-Cola Beverages, a newly formed bottler, began operations in the former Tri-State Metro Operating Unit, and Reyes Coca-Cola Bottling took on new bottling territories in the former West Operating Unit. The refranchised system is working to reinvent the future of the business, especially in key areas such as portfolio diversification, packaging innovation, production, procurement, and technology.
- World Without Waste: In January 2018, the Company announced new sustainable packaging goals to lead the industry in addressing the issue of packaging waste. One of these goals is to help collect and recycle a bottle or can for every one it sells by 2030 – effectively bringing back the equivalent of 100% of its packaging. With the help of partners, the Company is focusing on collection and recycling. The Company is also continuing to focus on the design of its packages to ensure they are 100% recyclable.
Operating Review – Three Months Ended December 31, 2017
|
Revenues and Volume |
||||||||||||||
| Percent Change |
Concentrate |
Price/Mix |
Currency |
Acquisitions, |
Reported |
Organic |
Unit Case |
|||||||
| Consolidated | 1 | 4 | 0 | (26) | (20) | 6 | 0 | |||||||
| Europe, Middle East & Africa | 2 | 6 | 3 | (4) | 6 | 8 | 0 | |||||||
| Latin America | 2 | 11 | 1 | 0 | 14 | 13 | 0 | |||||||
| North America | 2 | 2 | 0 | 3 | 6 | 3 | 1 | |||||||
| Asia Pacific | 4 | (2) | (4) | 2 | (1) | 1 | 2 | |||||||
| Bottling Investments | (2) | 15 | 1 | (83) | (69) | 12 | (32) | |||||||
|
Income from Continuing Operations Before Income Taxes and EPS from Continuing Operations |
||||||||||||
| Percent Change |
Reported |
Items |
Currency |
Comparable |
Structural |
Comparable |
||||||
| Consolidated | 82 | 75 | 2 | 6 | (12) | 18 | ||||||
| Europe, Middle East & Africa | (6) | 0 | 0 | (7) | ||||||||
| Latin America | 21 | (1) | 0 | 22 | ||||||||
| North America | 2 | (13) | 0 | 15 | ||||||||
| Asia Pacific | (2) | (2) | (10) | 9 | ||||||||
| Bottling Investments | 40 | 35 | 9 | (4) | ||||||||
| Percent Change | Reported EPS |
Items |
Currency |
Comparable |
||||||||
| EPS from Continuing Operations | —3 | (630) | 2 | 5 | ||||||||
| Note: Certain rows may not add due to rounding. | |
|
1 |
For Bottling Investments, this represents the percent change in net revenues attributable to the increase (decrease) in unit case volume after considering the impact of structural changes. |
|
2 |
Organic revenues, comparable currency neutral income from continuing operations before income taxes, comparable currency neutral income from continuing operations before income taxes (structurally adjusted), and comparable currency neutral EPS from continuing operations are non-GAAP financial measures. Refer to the Reconciliation of GAAP and Non-GAAP Financial Measures section. |
|
3 |
Reported loss per share from continuing operations for the three months ended December 31, 2017 was $0.66. Reported earnings per share from continuing operations for the three months ended December 31, 2016 was $0.13. |
Operating Review – Year Ended December 31, 2017
|
Revenues and Volume |
||||||||||||||
| Percent Change |
Concentrate |
Price/Mix |
Currency |
Acquisitions, |
Reported |
Organic |
Unit Case |
|||||||
| Consolidated | 0 | 3 | (1) | (17) | (15) | 3 | 0 | |||||||
| Europe, Middle East & Africa | 2 | 3 | (2) | (2) | 1 | 5 | 1 | |||||||
| Latin America | (3) | 8 | 0 | 0 | 5 | 6 | (2) | |||||||
| North America | 0 | 3 | 0 | 2 | 4 | 3 | 0 | |||||||
| Asia Pacific | 1 | (1) | (4) | 0 | (2) | 1 | 1 | |||||||
| Bottling Investments | (3) | 4 | 0 | (48) | (47) | 1 | (41) | |||||||
|
Income from Continuing Operations Before Income Taxes and EPS from Continuing Operations |
||||||||||||
| Percent Change |
Reported |
Items |
Currency |
Comparable |
Structural |
Comparable |
||||||
| Consolidated | (17) | (18) | (1) | 2 | (7) | 9 | ||||||
| Europe, Middle East & Africa | (1) | 0 | (2) | 1 | ||||||||
| Latin America | 12 | 4 | 0 | 9 | ||||||||
| North America | (10) | (16) | (1) | 7 | ||||||||
| Asia Pacific | (3) | 0 | (6) | 4 | ||||||||
| Bottling Investments | (22) | (3) | 2 | (20) | ||||||||
| Percent Change | Reported EPS |
Items |
Currency |
Comparable |
||||||||
| EPS from Continuing Operations | (82) | (82) | (1) | 1 | ||||||||
| Note: Certain rows may not add due to rounding. | |
|
1 |
For Bottling Investments, this represents the percent change in net revenues attributable to the increase (decrease) in unit case volume after considering the impact of structural changes. |
|
2 |
Organic revenues, comparable currency neutral income from continuing operations before income taxes, comparable currency neutral income from continuing operations before income taxes (structurally adjusted), and comparable currency neutral EPS from continuing operations are non-GAAP financial measures. Refer to the Reconciliation of GAAP and Non-GAAP Financial Measures section. |
In addition to the data in the preceding tables, operating results included the following:
Consolidated
- Price/mix growth of 4% for the quarter was due to price/mix of 3% in the core business and a one point benefit of segment mix from Bottling Investments. Price/mix growth of 3% for the year was driven by balanced contributions from all operating segments, with the exception of Asia Pacific.
-
Unit case volume was even for the quarter and full year. Category
cluster performance for the quarter and full year, respectively, was
as follows:
- Sparkling soft drinks: 0%, -1%
- Juice, dairy, and plant-based beverages: -2%, 0%
- Water, enhanced water, and sports drinks: 2%, 1%
- Tea and coffee: 2%, 2%
- Growth in income from continuing operations before income taxes for the quarter and the decline for the full year were impacted by comparability items, which were predominantly charges associated with the refranchising of bottling territories in North America. Results were also impacted by structural items, primarily related to the refranchising of bottling territories. Growth for the quarter and full year in comparable currency neutral income from continuing operations before income taxes (structurally adjusted) (non-GAAP) was driven by organic revenue (non-GAAP) growth, the continued impact of productivity initiatives, and an increase in equity income. Growth for the full year was unfavorably impacted by higher interest expense.
Europe, Middle East & Africa
- Price/mix growth of 6% for the quarter was driven by strong price/pack initiatives across Europe and Southern Africa. Nearly all business units had positive price/mix for the quarter.
- Unit case volume for the quarter was even as solid volume growth across the Central & Eastern Europe business unit and Turkey was offset by declines across Africa and the Middle East, largely due to macroeconomic challenges and strategic pack downsizing initiatives.
- Income from continuing operations before income taxes for the quarter was unfavorably impacted by intercompany profit eliminations related to the transition of the majority ownership of Coca-Cola Beverages Africa to the Company.
- The Company gained value share in total NARTD beverages for the full year, including sparkling soft drinks and the juice, dairy, and plant-based beverages cluster.
Latin America
- Price/mix growth of 11% for the quarter was primarily driven by strong price/mix in Mexico and the South Latin business unit.
- Unit case volume was even for the quarter as volume growth in Brazil and the South Latin business unit was offset by a 1% decline in both Mexico and the Latin Center business unit. Brazil returned to growth in the quarter as the Company continued to execute its strategy around returnables and an adjusted price/pack architecture. The decline in Mexico was primarily attributable to a softening consumer environment and deprioritization of low-margin water.
- The Company gained value share in total NARTD beverages for the full year, including sparkling soft drinks and the juice, dairy, and plant-based beverages cluster.
North America
- Price/mix growth of 2% for the quarter, including sparkling price/mix growth of 3%, reflected the continued execution of the Company's disciplined occasion, brand, price, package, and channel strategy, as well as strong performance in the foodservice business. Acquisitions, divestitures, and structural items reflected the impact of the ongoing refranchising of bottling territories in North America.
- Unit case volume grew 1% for the quarter. Sparkling soft drinks volume growth was even. Juice, dairy, and plant-based beverages declined 1% as mid single-digit growth in Minute Maid and Simply was offset by a decline in Hi-C. Tea and coffee grew 8%, while water, enhanced water, and sports drinks accelerated to 3% growth.
- Income from continuing operations before income taxes for the quarter included items impacting comparability. Comparable currency neutral income from continuing operations before income taxes (non-GAAP) was favorably impacted by the ongoing refranchising of bottling territories in North America.
- The Company gained value share in total NARTD beverages for the full year, including sparkling soft drinks and the tea and coffee cluster.
Asia Pacific
- Price/mix declined 2% during the quarter, largely due to pressure from product mix within China and the ASEAN business unit.
- Unit case volume growth of 2% for the quarter was driven by high single-digit growth in the ASEAN business unit, partially offset by a 1% decline in both the Greater China & Korea business unit and Japan. The decline in China was largely due to timing of the Chinese New Year.
- Income from continuing operations before income taxes for the quarter included the impact of changes in foreign currency exchange rates. Comparable currency neutral income from continuing operations before income taxes (non-GAAP) was favorably impacted by the deconsolidation of previously held bottling operations in China.
- The Company gained or maintained value share in sparkling soft drinks and juice, dairy, and plant-based beverages for the full year.
Bottling Investments
- Price/mix growth of 15% for the quarter was largely driven by the timing of various bottler funding settlements and positive price/mix within the India bottling operations.
- Income from continuing operations before income taxes for the quarter was driven by items impacting comparability and the impact of changes in foreign currency exchange rates. Comparable currency neutral income from continuing operations before income taxes (non-GAAP) was unfavorably impacted by the refranchising of North America bottling territories.
Outlook
The 2018 outlook information provided below includes forward-looking non-GAAP financial measures, which management uses in measuring performance. The Company is not able to reconcile full year 2018 projected organic revenues (non-GAAP) to full year 2018 projected reported net revenues, full year 2018 projected comparable currency neutral operating income (structurally adjusted) (non-GAAP) to full year 2018 projected reported operating income or full year 2018 projected comparable EPS from continuing operations (non-GAAP) to full year 2018 projected reported EPS from continuing operations without unreasonable efforts because it is not possible to predict with a reasonable degree of certainty the actual impact of changes in foreign currency exchange rates; the exact timing and amount of acquisitions, divestitures and/or structural changes; and the exact timing and amount of comparability items throughout 2018. The unavailable information could have a significant impact on full year 2018 GAAP financial results.
Full Year 2018 Underlying Performance:
- Approximately 4% growth in organic revenues (non-GAAP)
- 8% to 9% growth in comparable currency neutral operating income (structurally adjusted) (non-GAAP)
Full Year 2018 Currency Impact:
- Comparable net revenues (non-GAAP): 1% tailwind based on the current rates and including the impact of hedged positions
- Comparable operating income (non-GAAP): 0% to 1% headwind based on the current rates and including the impact of hedged positions
Full Year 2018 Impact from Acquisitions, Divestitures, Structural Items, and Accounting Changes:
- Comparable net revenues (non-GAAP): 17% headwind from acquisitions, divestitures, and structural items
- Comparable net revenues (non-GAAP): 1% to 2% tailwind from Accounting Standards Update 2014-09
- Comparable operating income (non-GAAP): 2% structural headwind
- Comparable operating income (non-GAAP): 0% impact from Accounting Standards Update 2014-09
Full Year 2018 Other Items:
- Underlying effective tax rate (non-GAAP): Approximately 21%
- Cash from operations of at least $8.5 billion
- Capital expenditures (excluding discontinued operations): Approximately $1.9 billion
- Net share repurchases (non-GAAP): Approximately $1.0 billion
Full Year 2018 EPS:
- Comparable EPS from continuing operations (non-GAAP): 8% to 10% growth versus $1.91 in 2017
First Quarter 2018 Considerations:
- Comparable net revenues (non-GAAP): 26% headwind from acquisitions, divestitures, and structural items; 2% currency tailwind based on the current rates and including the impact of hedged positions; 1% tailwind from Accounting Standards Update 2014-09
- Comparable operating income (non-GAAP): 6% structural headwind; 1% currency tailwind based on the current rates and including the impact of hedged positions
- One less day compared to first quarter 2017
Notes
- All references to growth rate percentages and share compare the results of the period to those of the prior year comparable period.
- All references to volume and volume percentage changes indicate unit case volume, unless otherwise noted. All volume percentage changes are computed based on average daily sales for the fourth quarter, unless otherwise noted, and are computed on a reported basis for the full year. "Unit case" means a unit of measurement equal to 24 eight-ounce servings of finished beverage. "Unit case volume" means the number of unit cases (or unit case equivalents) of Company beverages directly or indirectly sold by the Company and its bottling partners to customers.
- "Core business" represents the combined performance from the Europe, Middle East & Africa; Latin America; North America; Asia Pacific; and Corporate operating segments offset by intersegment eliminations.
- "Concentrate sales" represents the amount of concentrates, syrups, beverage bases, source waters, and powders/minerals (in all instances expressed in equivalent unit cases) sold by, or used in finished beverages sold by, the Company to its bottling partners or other customers. In the reconciliation of reported net revenues, "concentrate sales" represents the percent change in net revenues attributable to the increase (decrease) in concentrate sales volume for the geographic operating segments (expressed in equivalent unit cases) after considering the impact of structural changes. For the Bottling Investments operating segment, this represents the percent change in net revenues attributable to the increase (decrease) in unit case volume after considering the impact of structural changes. The Bottling Investments operating segment reflects unit case volume growth for consolidated bottlers only.
- "Price/mix" represents the change in revenues caused by factors such as price changes, the mix of products and packages sold, and the mix of channels and geographic territories where the sales occurred.
- First quarter 2017 financial results were impacted by two fewer days, and fourth quarter 2017 financial results were impacted by one additional day as compared to the same periods in 2016. Unit case volume results for the quarters were not impacted by the variances in days due to the average daily sales computation referenced above.
Conference Call
The Company is hosting a conference call with investors and analysts to discuss fourth quarter and full year 2017 operating results today, Feb. 16, 2018, at 9 a.m. ET. The Company invites participants to listen to a live webcast of the conference call on the Company’s website, http://www.coca-colacompany.com, in the "Investors" section. An audio replay in downloadable digital format and a transcript of the call will be available on the website within 24 hours following the call. Further, the "Investors" section of the website includes a reconciliation of non-GAAP financial measures to the Company’s results as reported under GAAP, which may be used during the call when discussing financial results.
