Coke to Step Up North American Restructuring

By Mike Esterl 

Coca-Cola Co. said Tuesday it will greatly accelerate the restructuring of its North American operations, refranchising distribution and divesting roughly 55 soda-bottling plants by the end of next year.

The Atlanta-based beverage giant also reported healthy U.S. sales growth in the fourth quarter but warned this year's earnings will take a hit from the asset sales. A weak global economy and foreign currencies also will drag down results in 2016.

The accelerated pace of its bottling restructuring will allow the company to focus more on marketing and its more profitable concentrate business.

It represents a giant unwinding of Coke's $12.3 billion acquisition of Coca-Cola Enterprises Inc.'s North American bottling and distribution assets in 2010. That deal gave Coke greater control over its business but hurt its domestic operating margin, which fell to 11.4% in 2014 from 20.7% in 2009.

Chief Executive Muhtar Kent said Tuesday that Coke needed to make the acquisition to fix U.S. operations but that the company will become more of a "brand business" after divestments. "That's what we're best at," he told reporters in an earnings call.

The company said in late 2014 it wasn't likely to get a return on the 2010 deal this decade. In an interview Tuesday, Chief Financial Officer Kathy Waller said she expected Coke eventually will recoup the investment but didn't say how long that could take. Under the divestment deals, bottlers will make payments to Coke based on gross profits.

The marketer of Coke, Minute Maid juices and Powerade sports drinks is trying to return to mid-single-digit revenue growth and high-single-digit earnings growth after falling short the last three years amid overseas turmoil and sluggish soda consumption.

Coke slashed more than 1,500 white-collar jobs last year, part of a plan to cut $3 billion in costs by 2019. It has also made several acquisitions in faster-growing beverage categories, including paying $2.15 billion last June for a 16.7% stake in energy drink maker Monster Beverage Corp.

The company promoted Europe chief James Quincey to the roles of president and chief operating officer last August, giving Mr. Kent a clear deputy for the first time. That has prompted speculation inside the company that Coke could announce CEO succession plans later this year or in 2017. Mr. Kent, 63, has been CEO since 2008 and hasn't signaled he plans to step down.

Coke reported that revenue fell 8% to $10 billion in the fourth quarter from $10.87 billion a year earlier, dragged down by weaker foreign currencies and six fewer selling days. Profit rose 61% to $1.24 billion from $770 million, after 2014 results were hurt by restructuring charges and a large Venezuelan write-down.

North American beverage volumes rose 3% in the fourth quarter, including a 2% increase in carbonated drinks. The company also has been raising prices and selling smaller packages that cost consumers more per ounce, helping fuel its best North American results in three years.

But Coke estimated weaker foreign currencies would have negative impacts of 4 percentage points on revenue and 9 percentage points on profit in 2016 as major markets including Brazil and Russia sink deeper into recession and China's economy slows.

"The global economy remains challenged," Mr. Quincey told analysts. "There's still much uncertainty."

Chelsey Dulaney contributed to this article.

Write to Mike Esterl at [e-mail]

(END) Dow Jones Newswires

February 09, 2016 17:16 ET (22:16 GMT)

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