Coca-Cola Profit Hurt By Big Charge, Rising Costs

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By BETSY MCKAY
July 18, 2008; Page B1

Soft drinks were long considered recession-proof. Not anymore.

Coca-Cola Co.'s 23% second-quarter profit decline highlighted the extent to which rising commodity costs and the deteriorating U.S. economy are digging into sales and profits, despite the benefits the global beverage company is deriving from a weak dollar.

Coke's results included a 40-cent-a-share charge, mostly from a $5.3 billion noncash charge taken by Coca-Cola Enterprises Inc., its biggest bottler. Coke derives income from its 35% stake in CCE.

At the same time, Coke's global volume growth, at 3%, marked the smallest increase the Atlanta-based company has posted since the first quarter of 2005.

Challenges are likely to grow for Coke in North America, where it posted flat volume and a 9% decline in operating income in the second quarter. To offset its rising costs, CCE said it will raise prices sharply on drinks after Labor Day, a move that could hurt Coke by further diminishing volume as consumers guard their wallets.

Coke's shares fell amid the concerns. In 4 p.m. composite trading on the New York Stock Exchange, Coke shares declined $2, or 3.8%, to $50.34. CCE shares fell one cent to $16.83.

In a conference call with analysts and investors, Muhtar Kent, who became Coca-Cola's chief executive officer at the beginning of this month, acknowledged that there is much work to be done. He said some of the sluggish volume growth was because of the slowing global economy. But he declined to quantify how much volume growth was damped by economic conditions versus "one-time events" he cited, including the earthquake and floods in China, unseasonably cold weather in Russia and labor strikes in Europe.

The world's biggest beverage company reported net income of $1.42 billion, or 61 cents a share, down from $1.85 billion, or 80 cents a share, a year earlier.

Mr. Kent cautioned that North America will remain "challenging" for the rest of this year. At the beginning of this month, Coke tightened hiring in its North American business unit for the year.

Mr. Kent also said he has accelerated cost-cutting initiatives, from which the company expects to generate $400 million to $500 million in savings by the end of 2011. Examples include a new global deal for marketing-research services, replacing several local agreements. The company still expects this year to meet or exceed its long-term targets of 3% to 4% volume growth and high-single-digit earnings growth.