The Coca-Cola Company (KO) delivered adjusted operating earnings of 89 cents per share in the first quarter of 2012, beating the Zacks Consensus Estimate by a penny. Earnings were also above the prior-year adjusted earnings of 86 cents per share driven by strong revenue and volume growth which made up for margin declines.

In the quarter, net revenues increased 6% year over year to $11.1 billion, benefiting from an increase in concentrate (syrups, powders, etc. used in finished beverages) sales and positive pricing. The results were above the Zacks Consensus Estimate of $10.8 billion. Currency had a negative impact of 1% in the quarter.

Quarter in Detail

The cola giant witnessed volume growth of 5% in the reported quarter with gains in all geographic regions as well as across all non-alcoholic ready-to-drink (NARTD) beverages, whether sparkling (NARTD with carbonation) or still (NARTD without carbonation). Sparkling beverages, like Coca Cola, Fanta and Sprite, recorded global volume expansion of 4% in the quarter, driven by strong brand investments and innovation. Specifically, the Coca Cola soft drink grew 4% in terms of volume driven by strong performances particularly in the fast growing emerging markets of Brazil, Russia, India and China.

Still beverages grew 9% in terms of volume, registering better volume growth than the popular soft drinks. The company’s packaged water, ready-to-drink tea and coffee, energy drinks and sports drinks all registered impressive growth in the quarter. Geographically, volume was up 6% in international markets while North America recorded a volume growth of only 2% as Coca Cola shifts focus to the fast-expanding emerging markets with the developed markets nearing saturation.

The company recorded adjusted consolidated gross margin of 60.7% in the first quarter of 2012 down from 62.5% in the prior-year quarter due to rising commodity costs. Adjusted operating margin was 23%, down from 23.8% recorded in the prior-year quarter due to gross margin declines and higher selling, general and administrative expenses.

Geographic Breakup

Geographically, the Eurasia & Africa division recorded revenues of $684 million, up 4% over the prior-year quarter as benefits from concentrate sales and positive price/mix were partially offset by currency headwinds. The segment witnessed volume growth of 9% year over year led by India, which surged 20%, followed by the Middle East and North Africa posting a year-over-year volume growth of 14% in the quarter. Adjusted operating income was up 19% in the quarter driven by revenue growth and operating expense leverage.

The Latin American segment recorded revenues of $1.18 billion, up 3% over the prior-year quarter as benefits from concentrate sales and positive price/mix were tempered by currency headwinds. Volumes increased 5% in the segment, driven by 9% in both South Latin Region and Central Latin region, 4% growth in Brazil and 3% growth in Mexico. Volume growth, however, lagged the 7% surge witnessed in the prior-year quarter. Adjusted operating income was up 11% in the quarter benefiting from volume growth and favorable pricing.

The North American segment recorded revenues of $4.9 billion, up 5% on the back of volume growth and positive price/mix. Volumes increased 2% in the segment with all NARTD beverages recording volume and value share gains. Adjusted operating income was however down 9% in the quarter due to strong comparisons in the prior-year quarter and one less selling day in the current quarter.

The Pacific Group recorded revenue of $1.4 billion, up 12% over the prior-year quarter benefiting from positive concentrate sales, price/mix and currency impacts. The Pacific Group’s volume climbed 8% in the quarter, with growth of 9% in China, 3% in Japan, 24% in Thailand and 6% in Philippines. Adjusted operating income was up 5% in the quarter.

Europe recorded revenues of $1.2 billion, down 2% over the prior-year quarter as benefits from price/mix were offset by declines in concrete sales and negative impact from currency. Volume in Europe grew 1% in the quarter as positive volume growth in Spain, Germany and Central and Southern Europe offset declines in Northwest Europe and Nordics. Adjusted operating income was nevertheless down 2% in the quarter.

Bottling Investments Group’s volume grew 11% in the quarter, reflecting growth in Germany, India and China and the Philippines.

Our Recommendation

We currently have a Neutral recommendation on The Coca Cola Company. The stock carries a Zacks #3 Rank (a short-term Hold rating).

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