Coca Cola (KO) Tops Q1 EPS by 7c, Revenues Beat; Since Start of April Seeing Volume Decline Globally of ~25%

Coca Cola (NYSE: KO) reported Q1 EPS of $0.51, $0.07 better than the analyst estimate of $0.44. Revenue for the quarter came in at $8.6 billion versus the consensus estimate of $8.29 billion.

In March, as the coronavirus pandemic spread globally, countries meaningfully increased social distancing and shelter-in-place mandates. In markets around the world, the company subsequently saw significant changes in consumer purchase patterns, notably substantial declines in away-from-home channels. In at-home channels, the company witnessed early pantry loading in certain markets, followed by more normalized demand levels, along with a sharp increase in e-commerce. Given that away-from-home channels represent approximately half of the company’s revenues, the company expects the net effect of these consumer purchase patterns to have a significant impact on second quarter results. For context, since the beginning of April, the company has experienced a volume decline globally of approximately 25%, with nearly all of that decline coming in away-from-home channels.

• Net Revenues Declined 1%; Organic Revenues (Non-GAAP) Were Even
• Operating Income Declined 2%; Comparable Currency Neutral Operating Income (Non-GAAP) Grew 11%
• Operating Margin Was 27.7% Versus 28.0% in the Prior Year; Comparable Operating Margin (Non-GAAP) Was 30.7% Versus 28.2% in the Prior Year
• EPS Grew 65% to $0.64; Comparable EPS (Non-GAAP) Grew 8% to $0.51

Quarterly Performance

• Revenues: Net revenues declined 1% to $8.6 billion. Organic revenues (non-GAAP) were even. Revenue performance included even concentrate sales and even price/mix. The quarter included one less day, which resulted in an approximate 1-point headwind to revenue growth.
• Margin: Operating margin, which included items impacting comparability, was 27.7% versus 28.0% in the prior year, while comparable operating margin (non-GAAP) was 30.7% versus 28.2% in the prior year. Solid underlying operating margin (non-GAAP) expansion was partially offset by currency headwinds.
• Earnings per share: EPS grew 65% to $0.64, and comparable EPS (non-GAAP) grew 8% to $0.51.
• Market share: The company continued to gain value share in total nonalcoholic ready-to-drink (NARTD) beverages.
• Cash flow: Cash from operations was $556 million, down 29%. Free cash flow (non-GAAP) was $229 million, down 43%, primarily driven by the impact of one less day in the quarter, currency headwinds and cycling the supplier payment term extensions in the prior year as part of ongoing working capital initiatives.

"We sincerely thank those who have been working to keep all of us safe through the crisis, particularly those on the front lines in the healthcare community. I also want to recognize our system associates, who are ensuring we can continue to supply beverages around the world," said James Quincey, chairman and CEO of The Coca-Cola Company. "Our approach to navigating the pandemic is grounded in our company’s purpose, which ensures that we continuously strive to make a difference for people in the communities we serve around the world. We’ve been through challenging times before as a company, and we believe we're well positioned to manage through and emerge stronger. The power of the Coca-Cola system is our greatest strength in times of crisis. The resilience of our people, the equity of our brands and the strength of our bottling partners continue to be competitive advantages in the market."

Business Environment Update Amid Coronavirus Pandemic

The company entered 2020 with solid momentum, coming off strong results in 2019. Through the end of February, the company was growing volume 3%, excluding China, and was on track to achieve its previously provided full year 2020 targets.

In March, as the coronavirus pandemic spread globally, countries meaningfully increased social distancing and shelter-in-place mandates. In markets around the world, the company subsequently saw significant changes in consumer purchase patterns, notably substantial declines in away-from-home channels. In at-home channels, the company witnessed early pantry loading in certain markets, followed by more normalized demand levels, along with a sharp increase in e-commerce. Given that away-from-home channels represent approximately half of the company’s revenues, the company expects the net effect of these consumer purchase patterns to have a significant impact on second quarter results. For context, since the beginning of April, the company has experienced a volume decline globally of approximately 25%, with nearly all of that decline coming in away-from-home channels.

The ultimate impact on the second quarter and full year 2020 is unknown at this time, as it will depend heavily on the duration of social distancing and shelter-in-place mandates, as well as the substance and pace of macroeconomic recovery. However, the impact to the second quarter will be material.

The company believes the pressure on the business is temporary and remains optimistic on seeing sequential improvement in the back half of 2020. The company, along with its bottling partners, is continuing to adapt quickly to the current environment, with a focus on mitigating the near-term impact while positioning for success coming out of the crisis.

Outlook

• Full Year 2020 Considerations
  • As the coronavirus pandemic continues to evolve, there is uncertainty around its ultimate impact; therefore, the company's full year financial and operating results cannot be reasonably estimated at this time.
  • For comparable net revenues (non-GAAP), the company expects a mid single-digit currency headwind based on the current rates and including the impact of hedged positions.
  • For comparable operating income (non-GAAP), the company expects a high single-digit currency headwind based on the current rates and including the impact of hedged positions.
  • The company’s underlying effective tax rate (non-GAAP) is estimated to be 19.5%.
• Second Quarter 2020 Considerations
  • Comparable net revenues (non-GAAP) are expected to include a 4% to 5% currency headwind based on the current rates and including the impact of hedged positions.
  • Comparable operating income (non-GAAP) is expected to include a 5% to 6% currency headwind based on the current rates and including the impact of hedged positions.

For earnings history and earnings-related data on Coca Cola (KO) click here.

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