Coca-Cola reports Q2 net earnings of US$2.7B, compared with year-ago earnings of US$2.8B, as revenue falls 3% to US$12.75B

Nevin Barich

ATLANTA , July 16, 2013 (press release) – 1% global volume growth in the second quarter; 3% growth year to date

Global volume and value share gains in total nonalcoholic ready-to-drink beverages as well as sparkling and still beverages

Global brand Coca-Cola volume growth of 1% in the second quarter; 2% growth year to date

Second Quarter and Year-to-Date 2013 Highlights

Second quarter volume grew 1% and year-to-date volume grew 3%. Coca-Cola Americas grew 1% and Coca-Cola International grew 2% in the quarter.

Solid global volume and value share gains achieved in the quarter in total nonalcoholic ready-to-drink (NARTD) beverages as well as global volume and value share gains in sparkling and still beverages.

Reported net revenues declined 3% in the second quarter and 2% year to date. Excluding the impact of structural changes, comparable currency neutral net revenues grew 2% in both the quarter and year to date.

Reported operating income declined 2% in the second quarter and 3% year to date. Excluding the impact of structural changes, comparable currency neutral operating income grew 4% in the quarter and 5% year to date.

Currency was a 2% headwind on comparable net revenues and a 3% headwind on comparable operating income in the quarter.

Second quarter reported EPS was $0.59, down 3% and comparable EPS was $0.63, up 4%, including an approximate 2% currency headwind. Year-to-date reported EPS was $0.98,
down 7% and comparable EPS was $1.09, up 4% despite two fewer selling days in the first half of 2013 and an approximate 4% currency headwind.

The Coca-Cola Company today reported second quarter and year-to-date 2013 results. Muhtar Kent, Chairman and Chief Executive Officer of The Coca-Cola Company said, Our second quarter volume results came in below our expectations, reflecting an ongoing challenging global macroeconomic environment and unusually poor weather conditions in the quarter. While we are not happy with our performance, we did gain global volume and value share in total nonalcoholic ready-to-drink beverages as well as in sparkling and still beverages in the quarter. Despite the headwinds in the quarter, we are committed to improving upon our results, with current dynamics leading us to believe that our performance will be better in the second half of the year. We remain confident in our 2020 Vision and our system's ability to execute with precision around the world. In this context, we remain firmly focused on investing alongside our global bottling partners to strengthen our system for the future, to deliver the brands and beverages that consumers love and to achieve our long-term performance goals.

PERFORMANCE HIGHLIGHTS

The Coca-Cola Company reported worldwide volume growth of 1% in the second quarter and 3% year to date, and grew global volume and value share in the quarter in total NARTD beverages as well as in both sparkling and still beverages. Volume growth in the quarter was below the Company's expectations due to a confluence of factors that collectively made for a challenging second quarter. Slow economies in Europe, Asia and Latin America, and historically wet and cold weather conditions across multiple regions impacted consumer spending and, consequently, overall NARTD beverage industry performance. Coca-Cola Americas grew volume 1% in the quarter and 2% year to date, with North America volume down 1% and Latin America volume up 2% in the quarter. Coca-Cola International grew volume 2% in the quarter and 4% year to date, with second quarter Eurasia and Africa volume up 9%, Pacific volume up 2% and Europe volume down 4%.

Worldwide sparkling beverage volume was even in the quarter and up 2% year to date. Despite unseasonably cold and wet weather and continued volatile macroeconomic conditions in many markets around the world, we grew global volume and value share in sparkling beverages in the quarter, led by marketing campaigns such as Share a Coke in Europe and Coca-Cola Open Summer in North America. Worldwide brand Coca-Cola volume grew 1% in the quarter and 2% year to date, with growth in the quarter across diverse markets, including Thailand (+24%), India (+18%), Nigeria (+15%), Russia (+11%), Argentina (+7%) and the Philippines (+7%). The Coca-Cola Company was recognized during the quarter with the 2013 Creative Marketer of the Year Award at the Cannes Lions International Festival of Creativity, widely considered to be the world's foremost celebration of creative excellence in brand communications.

Worldwide still beverage volume grew 6% in both the quarter and year to date, with solid volume and value share growth across beverage categories, including packaged water, juices and juice drinks and ready-to-drink tea. Excluding the impact of acquired volume, primarily the Aujan partnership in the Eurasia and Africa Group, still beverage volume grew 4% in the quarter. Ready-to-drink tea volume grew 10% in the quarter, with continued strong performance of key brands such as Gold Peak and Honest Tea in North America, Ayataka green tea in Japan and Fuze Tea across multiple markets worldwide. Packaged water volume grew 6% in the quarter, as we continue to focus on innovative and sustainable packaging and immediate consumption occasions that help drive value share growth ahead of volume share growth. Energy drinks volume grew 5% in the quarter driven by growth across our global portfolio of energy brands. Juices and juice drinks volume grew 4% in the quarter, with growth across all geographic operating groups.

OPERATING REVIEW

Eurasia & Africa

Our Eurasia and Africa Group's volume grew 9% in the quarter and 11% year to date (up 6% and 9%, respectively, excluding the benefit of acquired volume primarily from the Aujan partnership), cycling 10% growth in the prior year quarter. All business units in the group achieved volume growth in the quarter, led by Middle East and North Africa, up 17% (up 9% excluding the benefit of acquired volume); Central, East and West Africa, up 10%, and Russia, up 3%. Reported net revenues for the quarter increased 5%, reflecting a 7% increase in concentrate sales and positive price/mix of 4%, partially offset by a 6% currency headwind. Comparable currency neutral net revenues increased 11% in the quarter. After adjusting for unit case sales without concentrate sales equivalents, concentrate sales in the quarter slightly lagged unit case sales due to timing, but year to date they are in line. Reported operating income increased 12% in the quarter. Comparable currency neutral operating income increased 19% in the quarter, driven by volume, pricing and product mix, as well as efficient
expense management, partially offset by continued investments in the business.

During the quarter, Eurasia and Africa grew volume and value share in total NARTD beverages. Sparkling beverage volume grew 7% in the quarter, led by brand Coca-Cola, which also grew 7%. This growth was due to a continued focus on driving executional capabilities in the marketplace, greater consumer choice in package and price options, integrated marketing campaigns such as Coca-Cola Crazy for Good and Coke with Meals, as well as the expansion of the Coke Studio music competition. Sprite volume grew 6% in the quarter and Fanta volume grew 5% as new campaigns were launched across multiple markets. Still beverage volume grew 15% in the quarter, including the benefit of acquired brands which added eight points of volume growth to overall Eurasia and Africa still beverages. In Russia, key contributors to volume growth in the quarter were brand Coca-Cola, up 11%, Fanta Orange, up 9% and Schweppes, up 31%. We gained volume and value share in total NARTD beverages in Russia, with a strong marketing calendar tied to the 2014 Sochi Winter Olympics and supported in the quarter by our largest-ever consumer promotion in the country offering an under-the-cap points program to redeem for Winter Olympics-themed glassware.

Europe

Our Europe Group's volume declined 4% in the quarter and 2% year to date, cycling a 4% decline in the prior year quarter. Although we grew share, the quarter was marked by particularly poor weather across many countries, including severe flooding in parts of Germany and Central Europe, as well as ongoing weakness in consumer confidence and spending across the region, which have impacted the entire NARTD beverage industry. Reported net revenues declined 1% in the quarter, reflecting a 3% decline in concentrate sales and a 2% currency headwind, partially offset by positive price/mix of 4%. Price/mix includes the benefit of consolidating the innocent juice and smoothie business starting in May 2013. Comparable currency neutral net revenues increased 1% in the quarter. After adjusting for unit case sales without concentrate sales equivalents, concentrate sales in the quarter were in line with unit case sales. Reported operating income declined 7% in the quarter. Comparable currency neutral operating income declined 3% in the quarter, reflecting the decline in volume, partially offset by efficient expense management and the timing of operating expenses.

During the quarter, the Europe Group grew volume and value share in total NARTD beverages as well as in sparkling beverages, juices and juice drinks and energy drinks despite continued weak industry trends. In addition, we gained share in ready-to-drink tea. A key marketing campaign launched in markets throughout Europe late in the quarter, titled Share a Coke, placed the names of individual consumers on our iconic Coca-Cola bottles and cans. To date, the campaign has received positive consumer feedback and it has now been extended and expanded as a result. Although Germany and Northwest Europe and Nordics volume declined low single digits in the quarter, we gained volume and value share in total NARTD beverages as well as in sparkling beverages. The Iberia and Central and Southern Europe regions continue to manage through very tough macroeconomic conditions with ongoing brand-building programs and an occasion-based package, price and channel segmentation strategy.

Latin America

Our Latin America Group's volume grew 2% in the quarter and 3% year to date, cycling 3% growth in the prior year quarter. Volume growth in the quarter was led by Latin Center, up 7%, South Latin, up 5% and Mexico, up 1%. Brazil volume was even in the quarter, cycling 6% growth in the prior year quarter and reflecting some consumer uncertainty given the economic slowdown and protests late in the quarter. Reported net revenues for the quarter increased 6%, reflecting concentrate sales growth of 2% and positive price/mix of 9%, partially offset by a currency headwind of 5%. Comparable currency neutral net revenues increased 11% in the quarter. Reported operating income was up 6% in the quarter, with comparable currency neutral operating income up 13%, primarily reflecting volume, pricing and product mix, partially offset by increased investments in support of the 2013 FIFA Confederations Cup and upcoming 2014 FIFA World Cup.

During the quarter, the Latin America Group gained share in total NARTD and sparkling beverages as well as both volume and value share in still beverages. This performance was driven by continued activation of brand and category campaigns such as Crazy for Good and 140 Calories, previously launched in Brazil, Mexico and Colombia and now expanded to Central America, as well as investments in cold-drink equipment and continued segmentation across multiple price points and package sizes. In addition, late in the quarter we launched Coca-Cola Life in Argentina, our first low-calorie cola naturally sweetened with stevia leaf extract and sugar. In the quarter, brand Coca-Cola volume was up 1% and both Sprite and Fanta volumes were up 4%. Still beverage volume grew 8% in the quarter, driven by growth in ready-to-drink tea, juices and juice drinks, sports drinks and packaged water. We gained both volume and value share in total NARTD beverages across multiple markets, including Mexico, Argentina and Colombia.

North America

Our North America Group's volume declined 1% in the quarter and was even year to date, cycling 1% growth in the prior year quarter. Volume was under pressure due to unseasonably cold and wet weather and the timing of the Easter and July 4 th holiday periods as well as weakened consumer spending that has impacted the overall NARTD beverage industry in North America. Reported and comparable currency neutral net revenues for the quarter declined 1%, reflecting a 1% decline in as reported volume and even price/mix, including positive 1% price/mix for sparkling beverages. Second quarter reported operating income declined 3%. Comparable currency neutral operating income was even in the quarter, reflecting the volume performance and continued investment in our brands as well as the impact of structural changes, offset by efficient management of operating expenses.

During the quarter, North America maintained volume share and grew value share in total NARTD beverages as we continued to focus on our core strategies of building strong brands, creating value with customers and enhancing system capabilities. In addition, we gained volume and value share in both sparkling and still beverages, with volume and value share gains across every still beverage category except sports drinks. Sparkling beverage volume declined 4% in the quarter with sparkling beverage price/mix growth of 1% and value share growing ahead of volume share, as we remain committed to a rational pricing environment. Still beverage volume grew 5% in the quarter, led by strong performance across both the ready-to-drink tea and packaged water categories with brands such as Gold Peak, smartwater and Dasani leading the way. Further, our volume and value share gains in the juices and juice drinks category were driven by 4% volume growth for Simply and 3% growth for Minute Maid.

Pacific
Our Pacific Group's volume grew 2% in both the quarter and year to date, cycling 10% growth in the prior year quarter. Reported net revenues for the quarter declined 5%, reflecting 4% concentrate sales growth, offset by a 4% decline in price/mix and a 5% currency headwind. The unfavorable price/mix in the quarter was primarily a result of geographic mix, as we cycled product launches in Japan in the prior year, as well as shifts in product and package mix within individual markets. Comparable currency neutral net revenues were even.
Concentrate sales in the quarter were ahead of unit case sales due to timing, primarily in China. For the full year, we expect concentrate sales to be in line with unit case sales.
Reported operating income decreased 3% in the quarter, reflecting geographic mix and a 2% currency headwind. In addition, reported operating income reflects a benefit related to structural changes. Comparable currency neutral operating income was even in the quarter.

Volume growth in the quarter was wide ranging, with 28% growth in Vietnam, 22% growth in Indonesia, 17% growth in Thailand and 1% growth in both Japan and India. Volume performance was even in both China and the Philippines in the quarter. Sparkling beverage volume growth was even in the quarter, yet brand Coca-Cola grew 3% and Fanta grew 7%. Still beverages grew 4% in the quarter, with 7% growth in packaged water, 5% growth in ready-to-drink tea and 6% growth in sports drinks. Japan's sparkling beverage volume grew 1% in the quarter, supported by music-themed integrated marketing campaigns such as the Zero Limit campaign for Coca-Cola Zero, up 13%. India volume growth of 1% in the quarter was cycling 20% growth in the prior year quarter and reflects the impact of an earlier and heavier than normal monsoon season in 2013 and cycling a later than normal monsoon season in the prior year. Importantly we gained volume and value share in India in the quarter in total NARTD beverages as well as in both sparkling and still beverages. Our second quarter volume performance in China continued to be impacted by the economic slowdown, poor weather and competitive activity such as package upsizing. Despite this, still beverages grew 4% in the quarter, driven by juices and juice drinks and packaged water. As we look ahead to the remainder of 2013, we continue to expect the industry and our business to be impacted by China's economic slowdown. However, we are evolving our strategies in China and we anticipate a return to growth in our business in the second half of the year.

Bottling Investments

Our Bottling Investments Group's (BIG) volume grew 1% in the quarter and 2% year to date after adjusting for the net impact of structural changes, primarily the deconsolidation of the Philippine bottling operations in 2013. BIG volume including the impact of structural changes was down 16% in the quarter and 12% year to date. The growth in volume in the quarter after adjusting for the impact of structural changes was led by India, with strong volume and value share gains, as well as markets within BIG's Southeast Asian operations. Reported net revenues for the quarter declined 10%. This reflects the 1% volume growth and positive price/mix of 1%, offset by a currency headwind of 1% and an 11% net impact due to structural changes. Comparable currency neutral net revenues declined 10% in the quarter. Reported operating income in the quarter grew 38%. Comparable currency neutral operating income increased 12% in the quarter, reflecting positive pricing and product mix in certain markets, partially offset by continuing investments in our in-market capabilities.

FINANCIAL REVIEW

Second quarter reported net revenues declined 3%, with comparable net revenues also down 3%. This reflects a 1% increase in concentrate sales, offset by a 2% impact from structural changes and a 2% currency headwind. The structural changes in the quarter primarily reflect the deconsolidation of the Philippine bottling operations in 2013. We achieved solid pricing across key markets around the world leading to global NARTD value share growth for the 24 th consecutive quarter. Price/mix in the quarter was even, as the benefit of positive pricing was offset by geographic mix, and as we cycled positive 3% price/mix in the prior year quarter. Excluding the impact of structural changes, comparable currency neutral net revenues grew 2% in both the quarter and year to date. We anticipate that the Philippine bottling transaction, together with the bottling transaction in Brazil which closed earlier this month, will reduce our full-year 2013 net revenues by 3%.

Reported and comparable cost of goods sold decreased 5% in the quarter, reflecting a 1% increase in concentrate sales offset by the impact of structural changes, primarily the deconsolidation of the Philippine bottling operations in 2013. Currency reduced comparable cost of goods sold in the quarter by 2%. Excluding the impact of structural changes, comparable currency neutral cost of goods sold was even in the quarter. Items impacting comparability in the quarter primarily included net gains/losses on commodities hedging.

Reported SG&A expenses declined 3% in the quarter and comparable SG&A expenses declined 2%. Currency reduced comparable SG&A expenses by 1% in the quarter. Excluding the impact of structural changes, comparable currency neutral SG&A expenses grew 1% in the quarter, including a strong increase in direct marketing expenses, and we captured two points of operating expense leverage. The structural changes in the quarter primarily reflect the deconsolidation of the Philippine bottling operations in 2013. Operating expense leverage in the quarter was impacted by the reversal of certain expenses related to our long-term incentive plans. A portion of our stock-based compensation is based on multi-year performance periods and includes the impact of currency, which we now estimate will be a headwind of 4% on operating income for the full year versus our expectation at the end of the first quarter of a 2% headwind. We now expect to achieve low single-digit operating expense leverage for the full year after excluding the impact of structural changes.

Second quarter reported operating income decreased 2%. Excluding the impact of structural changes, primarily the deconsolidation of the Philippine bottling operations in 2013, comparable currency neutral operating income grew 4% in the quarter and 5% year to date. Items impacting comparability reduced second quarter 2013 operating income by $175 million and reduced second quarter 2012 operating income by $119 million. Currency reduced comparable operating income by 3% in the quarter. Including our hedge positions, current spot rates and the cycling of our prior year rates, we estimate currency will have a 4% unfavorable impact on comparable operating income for both the third quarter and the full year. Further, we anticipate that the Philippine bottling transaction, together with the bottling transaction in Brazil that closed earlier this month, will have a 1% structural impact on our full-year 2013 operating income, with this decline offset by a corresponding improvement in equity income.

Year-to-date net share repurchases totaled $2.0 billion. We are targeting net share repurchases of $3.0 to $3.5 billion for the full year.

Second quarter reported EPS was $0.59 and comparable EPS was $0.63. Items impacting comparability reduced second quarter 2013 reported EPS by a net $0.04 and had no net impact on second quarter 2012 reported EPS. In both periods, these items included restructuring charges, costs related to global productivity initiatives, transaction gains/losses, net gains/losses related to our economic hedges, primarily commodities, and certain tax matters. Items impacting comparability in second quarter 2012 also included charges related to changes in the structure of Beverage Partners Worldwide (BPW) and charges related to the supply of Brazilian orange juice.

Year-to-date cash from operations was $3,956 million, down 5% versus the prior year, primarily due to the impact of two fewer selling days in the period, an unfavorable impact from currency, and an increase in the use of working capital in preparation for the peak season of our growing global business.

Effective Tax Rate

As discussed in the first quarter 2013 earnings release, we had previously estimated that the underlying effective tax rate on operations would be 23.5% for 2013. We now anticipate that the underlying effective tax rate on operations for 2013 will be 23.0%. We expect this rate to remain unchanged through 2014. We are required to record income tax expense for the first six months of the year based on the estimated underlying effective tax rate for the full year. To bring the effective tax rate for the first six months of 2013 in line with the current estimated full year underlying effective tax rate, we recorded income tax expense at an underlying effective tax rate of 22.6% for the second quarter.

The reported effective tax rate for the quarter was 23.5%. The variance between the reported rate and the underlying rate was due to the tax effect of various items impacting comparability, separately disclosed in this document in the Reconciliation of GAAP and Non-GAAP Financial Measures schedule.

The underlying effective tax rate does not reflect the impact of significant or unusual items and discrete events, which, if and when they occur, are separately recognized in the
appropriate period.

Items Impacting Prior Year Results

First quarter 2012 results included a net gain of $0.01 per share due to gains related to equity investees, partially offset by restructuring charges, costs related to global productivity initiatives, charges related to changes in the structure of BPW and charges related to the supply of Brazilian orange juice.

Items impacting results had no net effect on second quarter 2012 reported EPS. These items included a transaction gain and certain tax matters, offset by restructuring charges, costs related to global productivity initiatives, charges related to changes in the structure of BPW and charges related to the supply of Brazilian orange juice.

NOTES

All references to growth rate percentages, share and cycling of growth rates compare the results of the period to those of the prior year comparable period.

Concentrate sales represents the amount of concentrates, syrups, beverage bases and powders sold by, or used in finished beverages sold by, the Company to its bottling partners or other customers.

Sparkling beverages means NARTD beverages with carbonation, including energy drinks and carbonated waters and flavored waters.

Still beverages means nonalcoholic beverages without carbonation, including noncarbonated waters, flavored waters and enhanced waters, juices and juice drinks, teas, coffees, sports drinks and noncarbonated energy drinks.

All references to volume and volume percentage changes indicate unit case volume, except for the reference to volume included in the explanation of net revenue growth for North America. All volume percentage changes, unless otherwise noted, are computed based on average daily sales. Unit case means a unit of measurement equal to 24 eight-ounce servings of finished beverage. Unit case volume means the number of unit cases (or unit case equivalents) of Company beverages directly or indirectly sold by the Company and its bottling partners to customers.

For both North America and Bottling Investments Group, net revenue growth attributable to volume reflects the percentage change in as reported volume, which is based on as reported sales rather than average daily sales and includes the impact of structural changes, where applicable. For North America, this volume represents Coca-Cola Refreshments' unit case sales (which are equivalent to concentrate sales) plus concentrate sales to non-Company-owned bottling operations.

Year-to-date 2013 financial results were impacted by two fewer selling days, and fourth quarter 2013 financial results will be impacted by one additional selling day. Unit case volume results for the quarters are not impacted by the variance in selling days due to the average daily sales computation referenced above.

In January 2012, the Company announced that Beverage Partners Worldwide (BPW), our joint venture with Nestlé in the ready-to-drink tea category, will focus its geographic scope primarily in Europe and Canada. The joint venture was phased out in all other territories by the end of 2012, and the Company's agreement to distribute products in the United States terminated at the end of 2012. We have eliminated the BPW and Nestlé licensed volume and associated concentrate sales for the year ended December 31, 2012 in those countries impacted by these structural changes.

As previously announced, effective January 1, 2013, the Company transferred our India and South West Asia business unit from the Eurasia and Africa operating segment to the Pacific operating segment. The countries included in our India and South West Asia business unit are Bangladesh, Bhutan, India, the Maldives, Nepal and Sri Lanka. This change in organizational structure did not impact the other geographic operating segments, Bottling Investments or Corporate. The reclassified historical operating segment data reflecting the change in organizational structure was disclosed in a Form 8-K filed with the U.S. Securities and Exchange Commission on March 21, 2013.

The Company reports its financial results in accordance with accounting principles generally accepted in the United States (GAAP). However, management believes that certain non-GAAP financial measures provide users with additional meaningful financial information that should be considered when assessing our ongoing performance. Management also uses these non-GAAP financial measures in making financial, operating and planning decisions and in evaluating the Company's performance. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, the Company's reported results prepared in accordance with GAAP. Our non-GAAP financial information does not represent a comprehensive basis of accounting.

CONFERENCE CALL

We are hosting a conference call with investors and analysts to discuss second quarter and year-to-date 2013 results today, July 16, 2013 at 9:30 a.m. EDT. We invite investors to listen to a live audiocast of the conference call at our website, http://www.coca-colacompany.com in the Investors section. A replay in downloadable MP3 format will also be available within 24 hours after the audiocast on our website. Further, the Investors section of our website includes a reconciliation of non-GAAP financial measures that may be used periodically by management when discussing our financial results with investors and analysts to our results as reported under GAAP.

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