Coca-Cola profits 'solid', eyes cost savings

Coca-Cola Co (KO.N) reported better-than-expected quarterly results and announced a new cost-savings program that it will use to boost its brands and mitigate higher commodity costs.

Coke’s results on Tuesday were “solid” given the weak global economy, said Consumer Edge Research analyst Bill Pecoriello. In particular, a 1 percent increase in North American sales volume was better than the 1 percent drop he expected.

“Key issues heading into 2012 include managing against continued tough global macroeconomic conditions, commodity inflation, foreign exchange headwinds and stepped-up competitive spending,” Pecoriello said.

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Rival PepsiCo Inc’s (PEP.N) CEO Indra Nooyi is expected to announce a large investment in that company’s North American brands when it reports earnings on Thursday, as a way to narrow the gap in sales performance with Coke.

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Her plan comes after an in-depth business review, and is likely to include more advertising but could also include discounts at retail, say analysts and other market observers.

“Great advertising and marketing can probably move the needle in a two- to three-year time frame,” said Beverage Digest publisher John Sicher. “The only thing that moves the needle quickly is pricing, and in a commodity environment we’re in now, using pricing to move the needle is very tricky.”

Like most food and beverage companies, Coke and Pepsi have been facing higher costs for raw materials like corn sweetener and packaging. That has turned up the need for price increases, which can hurt consumer demand, especially in a weak economy.

Coke said on Thursday that it expects higher costs for juices and sweeteners to contribute to a $350 million to $450 million increase in costs in 2012. That is down from an $800 million increase in 2011.

INVESTING IN GROWTH

Coke’s fourth-quarter net income was $1.65 billion, or 72 cents per share, down from $5.77 billion, or $2.46 per share, a year earlier, when the company recorded a gain related to the acquisition of its North American bottling operations.

Excluding items, earnings were 79 cents per share, beating the average estimate of 77 cents, as compiled by Thomson Reuters I/B/E/S.

Revenue rose 5 percent to $11.04 billion as Coke gained market share in several drink categories. Sales volume rose 3 percent, growing 4 percent in Latin America and Eurasia and Africa, 5 percent in the Pacific and 1 percent in Europe and North America, where weak economies and growing health consciousness has curbed demand.

Coke announced a new productivity program targeting annual savings of $350 million to $400 million by the end of 2015. The company also raised its target for savings from the integration of its North American bottling operations by $200 million to $250 million. Together, these initiatives should lead to savings of $550 million to $650 million a year by the end of 2015.

Coke said it will reinvest those savings into “brand building initiatives” and to help mitigate potential near-term commodity inflation.

“If Pepsi starts discounting to gain share, Coke will have to be able to respond to that,” said Edward Jones analyst Jack Russo. “I think that’s the reason they’re trying to get a lot of costs out of their system so they can reinvest if they have to,” he said, referring to Coke.

In an interview with Reuters, Coke CEO Muhtar Kent declined to comment on the company’s competition with Pepsi. On a conference call with analysts, Kent said he expects North American soda prices to increase, after gaining 4 percent in the fourth quarter.

“I think it will be right to assume that this kind of rational pricing would continue in terms of rates for 2012,” Kent said. “There is no room in business for irrationality over the long term.”

Coca-Cola shares were up 63 cents at $68.66 on the New York Stock Exchange.

Reuters