Coca-Cola Profit Falls After Writedown at Bottler

Coca-Cola Co., the world's largest soft-drink maker, said second-quarter profit fell 23 percent after its largest bottler wrote down the value of North American assets because of a decline in soda and water sales.

Coca-Cola dropped the most in almost four years in New York Stock Exchange composite trading. Net income decreased to $1.42 billion, or 61 cents a share, from $1.85 billion, or 80 cents, a year earlier, because of Coca-Cola Enterprise Inc.'s costs, Coca-Cola said today in a statement.

Chief Executive Officer Muhtar Kent, who took over Atlanta- based Coca-Cola this month, said rising food and energy costs worldwide have made it more difficult to sell Diet Coke, Minute Maid juices and Dasani bottled water. The amount of Coca-Cola drinks sold worldwide rose 3 percent, less than the 4 percent increase some analysts estimated, an indication that slowing sales in North America may expand elsewhere.

``It's as if we have this massive virus giving us a lot of wheezing and coughing,'' said Tom Pirko, the president of Bevmark LLC, a consulting firm in Buellton, California. ``North America is just a tremendous problem.''

Revenue rose 17 percent to $9.05 billion from $7.73 billion in the three months ended June 27, Coca-Cola said.

Sales volume increased 5 percent overseas, and was little changed in North America. Bill Pecoriello, an analyst at Morgan Stanley, estimated a global gain of 4 percent.

``We clearly recognize that there are short-term challenges in the market place related to economic trends,'' Kent said during a conference call.

Shares Fall

Coca-Cola fell $2.02, or 3.9 percent, to $50.32 at 10:22 a.m., the biggest drop since September 2004. The shares declined 15 percent this year through yesterday. PepsiCo Inc., the world's second-largest soda maker, dropped 13 percent in 2008 before today, while the Standard & Poor's 500 Consumer Staples Index fell 6 percent.

Higher ingredient costs also led to a $5.3 billion writedown by Coca-Cola Enterprises to reflect the reduced value of franchise licenses and goodwill.

Excluding the writedown, Coca-Cola earned $1.01 a share. Thirteen analysts surveyed by Bloomberg estimated average profit of 96 cents a share. Ten predicted sales of $8.83 billion.

The writedown by Coca-Cola Enterprises lowered its profit by $7.06 a share. Coca-Cola, which owns 35 percent of the bottler, said its earnings were reduced by 40 cents.

Soft Drink Decline

Coca-Cola Enterprises Chief Executive Officer John Brock has been unable to halt the decline of Coca-Cola Classic or sell enough non-carbonated drinks such as Vitaminwater to make up for falling soda sales in North America, which accounts for 70 percent of its revenue.

More-profitable convenience-store sales of soda and water have dropped, making Coca-Cola Enterprises' right to distribute Coca-Cola products less valuable, the Atlanta-based bottler said.

The bottler will increase U.S. prices after Labor Day, Brock said.

Coca-Cola also said it would repurchase from $1.75 billion to $2 billion of its shares in 2008. Previously, it said it may buy as little as $1.5 billion in stock. The company has bought back $1 billion worth this year.

Sales have been rising in China, India, Russia, Brazil, Eastern Europe, Turkey and the Philippines, led by the company's flagship Coca-Cola, then-President Kent said during a conference call in April. Kent took over as chief executive officer July 1 for Neville Isdell, who remains chairman.

Profit Margins

The operating-profit margin in North America, the company's largest market, was 22 percent last year, which compares with 39 percent in the division that includes North Asia and the Middle East and 54 percent in Latin America. Each division accounts for almost a quarter of total operating profit.

Coca-Cola purchased Glaceau Vitaminwater-maker Energy Brands Inc. for $4.1 billion last year and a stake in Honest Tea Inc., the maker of low-calorie organic bottled tea, to boost North American revenue as health-conscious consumers seek alternatives.

Morgan Stanley's Pecoriello said last month that U.S. growth in sales of sports drinks, bottled water, vitamin- enhanced water and energy drinks has decelerated. Pecoriello, who spoke at a conference by Beverage Digest, is ranked by Institutional Investor magazine as the top U.S. beverage analyst. He recommends buying Coca-Cola shares.

Author:

Duane D. Stanford

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