Coca-Cola (NYSE:KO) recently announced strong third-quarter earnings results that included the company's second straight upgrade to its 2019 growth outlook. The soda titan is finding new market niches to attack around the world, and its recent no-sugar brands are helping deliver stable growth in the U.S., too.
Following that earnings announcement, CEO James Quincey and his team held a conference call with Wall Street analysts to put the latest results into perspective while explaining the new 2019 outlook. Below are a few highlights from that chat.
Coke is still working to adjust its massive portfolio to the new consumer preferences for beverages with less sugar and fewer unnatural ingredients. There's evidence showing that this shift is working, though.
"While consumer behavior is rapidly evolving, we continue to find new ways to connect with consumers through our leader brands," according to Quincey.
The Coke Zero Sugar franchise has increased revenue 14% so far this year, executives said, which helped the broader Coca-Cola brand grow volume by 3%. Smaller serving sizes and new niche drinks like Coke Energy and Coke Plus Coffee also contributed to the 5% organic growth increase for the wider business compared to the 3% uptick PepsiCo (NASDAQ:PEP) recently posted.
"Our brands have been around for more than 130 years," Quincey said, "and we continually work to make Coke relevant [and] to recruit new generations of consumers."
Our healthy top line and effective cost management are translating into solid underlying operating margin expansion across all three areas of the business. And we're doing this while continuing to invest in our brands.
--CFO John Murphy
Coke reported a 4% decrease in operating income, but that slump was driven entirely by currency exchange moves and one-time charges. After these items are adjusted for, core gross profit margin jumped by 1.2 percentage points and operating margin held steady as the company spent more aggressively on growth initiatives like marketing.
Management was particularly happy with the cash flow metric, which is up 41% so far this year thanks to improvements in working capital and the tapering off of restructuring expenses. "Our progress has enabled us to grow ... earnings per share despite an 8 [percentage] point currency headwind," Murphy explained.
Sparkling finish to the year
With the momentum we see in the business, we're now guiding to organic revenue growth of at least 5%. This is translating into stronger underlying profit growth and an increase in our free cash flow guidance to at least $6.5 billion.
Coke executives noted a few challenges that they're attacking today, such as weak market share trends in the water category and soft volume growth overall. Sales gains are being driven almost entirely by higher prices and a shift toward high-margin products like single-serve beverages, too, and the company would like to see a more balanced contribution from volume and pricing as the rebound strategy progresses.
Yet there's no denying that operating trends are improving right now, and so Coke responded by lifting its sales outlook for the second straight quarter. The consumer staples giant now sees sales rising by "at least" 5% in 2019, compared to the 4% increase in initially targeted for the year. Core earnings per share should be flat, but that profitability decrease will likely quickly reverse itself next year as spending initiatives slow and as Coke squeezes more efficiency out of its growth rebound.