KO Coca Cola Company

By Mike Esterl 

Coca-Cola Co.'s growth slowed in the first quarter as it was dragged down by its namesake cola, renewing questions of whether the beverage giant can return to promised revenue increases in the mid-single digits.

Soda volumes were flat after five straight quarters of increases as flagship Coke declined in every region but Asia, weighed down by a weakening global economy and rising health concerns over sugary drinks.

Coke's share price was down 4% at $44.72 in midafternoon trading Wednesday, wiping out nearly half of this year's 8.5% gain. The selloff came even as the company reported 7% volume growth in noncarbonated drinks and as it speeds up sales of less profitable bottling assets.

Management faced tough questions from Wall Street analysts on an earnings call, with Sanford Bernstein analyst Ali Dibadj noting "a lot of skepticism" among investors that Coke can reach its 2016 target of 4% to 5% organic revenue growth.

Chief Executive Muhtar Kent said Coke expects to reach its growth projection and believes that soda, which represents nearly three-quarters of company sales, will grow this year as a new cola marketing campaign kicks in and the global economic slowdown bottoms out.

"We feel confident that we will still achieve what we have said," Mr. Kent told analysts, adding that Coke anticipates "a certain degree of improvement" in hard-hit economies during the second half of the year.

Net profit fell 4.8% to $1.48 billion and revenue dropped 4% to $10.28 billion in the first quarter from a year earlier. Weakening foreign currencies had a negative impact of 12 percentage points on earnings. Restructuring charges tied to divestments also weighed on results.

Beverage volumes rose 2%, down from 3% growth in the second half of last year. Organic revenue also rose just 2%, half of the company's 2015 growth rate.

Coke said the numbers were affected by one fewer calendar day in the quarter and ongoing bottling divestments. It said the revenue growth rate was 4% in the first quarter after stripping out those factors and foreign-exchange losses.

The company posted another quarter of solid growth in North America, where still-beverage volumes rose 5%, including double-digit growth in its Smartwater and Gold Peak tea brands. Coke also has been steering consumers to smaller soda packages like 7.5-ounce cans, charging more per ounce. Overall, it raised prices by 3% in its home market in the most recent quarter, even as carbonated volumes were flat.

But management said it faces big economic challenges in several erstwhile growth markets, including Brazil, Russia and China, even as the company continues to swipe market share from beverage rivals.

There are also growing signs that consumers in many parts of the world are cutting back on soda in response to rising obesity and diabetes rates. The U.K. plans to implement a special tax on sugar-added drinks in 2018 and several other countries, including India and South Africa, are weighing similar measures.

Coke reiterated Wednesday it has high hopes for its new global marketing campaign, "Taste the Feeling." The campaign, launched in January, plays up the company's zero-calorie cola brands including Diet Coke and Coca-Cola Zero. Earlier this week it announced a global packaging overhaul in which the front of diet cola cans and bottles carry the phrase "Zero Sugar" or "No Calories."

Coke has stepped up its soda marketing as it redirects savings from its $3 billion cost-cutting program and hopes to benefit from this year's Olympics, which it sponsors. The company said it's on track to cut costs by $600 million this year.

But Coke also will "continue to look for bolt-on acquisitions to accelerate our growth" in noncarbonated beverages, Chief Operating Officer James Quincey told analysts.

Coke agreed in January to buy a 40% stake in Nigeria's largest juice maker, TGI Group's Chi Ltd., with an option to buy the rest in a deal that valued the company at a little less than $1 billion. Last year, Coke agreed to acquire China Culiangwang Beverages Holdings Ltd., which specializes in multigrain drinks, for about $400 million including debt.

The company also said Wednesday it had reached a new round of refranchising deals with four companies in the U.S. It announced in February it would sell its North American manufacturing and distribution assets by the end of 2017 to focus on its more profitable concentrate business. With the latest deals, Coke has agreed to refranchise nearly two-thirds of the U.S. territory it acquired in 2010, when it bought its biggest soda bottler.

Coke reiterated it expects earnings per share to rise 4% to 6% in 2016, but that's after stripping out a negative impact of 8 to 9 percentage points on profit from weaker foreign currencies.

Write to Mike Esterl at mike.esterl@wsj.com

(END) Dow Jones Newswires

April 20, 2016 15:28 ET (19:28 GMT)

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