After Coca-Cola (KO 1.27%) reported its second-quarter results late last month, senior leadership shared some important details of the progress its making on several fronts during its investor call.
Here are the biggest takeaways for long-term shareholders.
Diet Coke's new flavors are a big hit. Image source: Coca-Cola.
Share gains
Let me start by saying and underlining that we're winning in a dynamic and vibrant industry. The global beverage industry is growing faster than last year, driven by better results in the emerging and developing markets, and also the sparkling soft drink category. We're gaining value share as we execute on the strategies we laid out for you in early 2017, and importantly, our operating performance is accelerating as a result.
-- CEO James Quincey
Coca-Cola is taking market share from archrival Pepsi, with Coke Zero Sugar and Diet Coke enjoying solid sales gains in recent quarters. Diet Coke has experienced renewed growth, boosted by new flavors and a refreshed can design that have proven to be popular among millennials. Better still, Diet Coke's growth doesn't appear to be cannibalizing sales of Coke Zero Sugar, which saw double-digit volume gains in North America in the second quarter.
Emerging markets are driving growth
So, operationally, looking around the world, we delivered strong top-line growth in the first half of the year, driven by continued strength in our international markets. In Asia-Pacific, strong performance in key emerging markets like China, India, and Vietnam drove mid-single-digit organic revenue growth for this segment during the first half of the year.
-- Quincey
Massive international markets such as China and India represent important opportunities for continued expansion. Coca-Cola also saw 7% organic revenue growth in its Europe, Middle East, and Africa (EMEA) segment and "high single-digit" growth in Latin America. In all, Coca-Cola's emerging and developing markets have generated double-digit organic revenue growth through the first two quarters of 2018. And with much of Coca-Cola's future revenue and profit growth likely to be derived from these international markets, investors should watch for continued success in these increasingly vital areas.
Streamlining the portfolio
Of course, driving disciplined growth is not just about expanding our beverage portfolio, it's about shaping quality leadership for sustainable revenue profit and cash flow growth. Therefore, it is critical that we reduce complexity to ensure our system sales force is focused, our supply chain is efficient, and our innovation pipeline gains more space and visibility at the point of sale. To that end, we've been identifying and killing zombie brands and SKUs while focusing our teams on the work that matters most.
-- Quincey
Quincey went on to give some examples of "zombie brands" -- he mentioned that Coca-Cola had identified more than 125 underperforming products in its EMEA segment, went on to eliminate 60% of them, and plans to purge the rest from its portfolio by year end. Doing so will allow Coca-Cola to shift its resources to its higher-performing brands, which should improve the company's returns on invested capital.
Less is more
This taking a more disciplined approach to our portfolio is only one of the ways we're looking to reduce complexity in the business. We're also constantly focusing our teams on the work that matters most: Driving a productivity mindset in the business with the aim of both funding reinvestment and driving cash flow improvements.
-- Quincey
Since becoming CEO on May 1, 2017, Quincey has instilled a renewed focus on efficiency throughout Coca-Cola's operations. The company is reducing the number of strategic projects it pursues in order to focus on the ones most likely to generate the highest returns. In turn, Coca-Cola has been able to deliver 8% underlying operating income growth during the first half of 2018, even though its revenue is lower as a result of its refranchising efforts. Ultimately, though, profits -- not revenue -- matter most to investors, so it's refreshing to see Coca-Cola prioritize profitable growth, rather than the growth-at-all-costs attitude that is far too common in corporate America.
Investors can expect robust capital returns
[W]e will return our free cash flow to shareholders through dividends of approximately $6.7 billion and an expected $1 billion in net share repurchases.
-- CFO Kathy Waller
All told, Coca-Cola expects to generate approximately $8 billion in operating cash flow in 2018. The company plans to use $1.7 billion of this cash for growth investments. It also plans to use its remaining free cash flow plus some of its nearly $20 billion in cash reserves to pay out $7.7 billion to investors via dividends and stock buybacks, while also paying down approximately $7 billion in gross debt. Such is the luxury of strong cash-flow generating businesses: Coca-Cola can afford to reinvest in its business, strengthen its balance sheet, and still reward investors with bountiful capital returns. This gives the beverage titan many ways to create value for its shareholders in the years ahead.
