Coke's net income slips on costlier ingredients

Wednesday, July 18, 2012    

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NEW YORK - THE Coca-Cola Co says its net income slipped in the second quarter from a year ago, as rising costs for ingredients offset its expansion overseas.

The world's biggest beverage maker — which makes Minute Maid, Powerade and Dasani — says revenue growth was powered by higher prices in the US and expansion in emerging markets such as India, where volume rose 20 per cent.

But the company also paid more for ingredients and saw sales volume in Europe fall four per cent. Coca-Cola blamed economic uncertainty and bad weather in several regions for the drop.

Back in North America, the Atlanta-based company said sales volume rose one per cent, while a mix of higher prices and a variety of smaller bottles and cans helped lift revenue five per cent. However, volume for its flagship sparkling beverages — or sodas such as Coke and Sprite — fell two per cent.

Growth at home has been challenging at a time when consumers are losing their taste for sugary sodas and increasingly reaching for other options, such as sports drinks and bottled teas and waters.

As a result, Coca-Cola is looking beyond its namesake soda for growth. For example, sales volume of the company's still beverages, such as Powerade and Smartwater, rose eight per cent in the quarter. Its juice brands rose three per cent, driven by growth in its lower-calorie Minute Maid offerings.

Given the saturated US market, Coca-Cola is also increasingly pinning its fortunes on international markets where the ranks of middle-class consumers are multiplying at a rapid clip.

In the US, for example, Coca-Cola estimates that the per capita consumption of its drinks on average is more than one eight-ounce serving per day. By contrast, consumers in India drink an average of just 12 servings over the span of an entire year.

As a result, Coca-Cola is racing to establish an early dominance in foreign markets that could help determine its growth trajectory in the years to come. Last month, for example, the company said it would accelerate its investment in India to US$5 billion ($440 billion) over the next eight years. That's more than double the US$2 billion it invested since re-entering the country in 1993.

When taking into account all the drinks it offers locally, Coca-Cola now has a stable of more than 500 drinks.

Mark Swartzberg, a Stifel analyst, noted that Coca-Cola is investing in growth and that its revenue in the second quarter beat Wall Street expectations. He also noted that volumes could grow in the second half of the year, when Coca-Cola plans to ease its pricing.

Coca-Cola also expects its costs for ingredients to ease; the company said yesterday that it now expects costs to be US$300 million for the year, down from the previous forecast of US$350 million to US$450 million.

For the three months ended June 29, the company said it earned US$2.79 billion, or US$1.21 per share. That's down from US$2.8 billion, or US$1.20 per share, in the year-ago period, when there were more outstanding shares.

Not including one-time items, the company said it earned US$1.22 per share. Revenue rose three per cent to US$13.09 billion. Analysts polled by FactSet on average expected earnings of US$1.19 per share on revenue of US$12.89 billion.

Shares of Coca-Cola rose US$1.26, or 1.7 per cent, to US$77.74 in morning trading after rising as high as US$78.66 earlier in the session. They are nearing the high end of their 52-week range of US$63.34 to US$79.36.

Earlier this month, Coca-Cola shareholders approved a two-for-one stock split, the company's first in 16 years.



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