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Coca-Cola eyes cost savings as it posts 'solid' results

Coke’s new productivity program is targeting annual savings of $350-million (U.S.) to $400-million by the end of 2015.

Georges Frey/Reuters/Georges Frey/Reuters

Coca-Cola Co. 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-per-cent increase in North American sales volume was better than the 1-per-cent 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," Mr. Pecoriello said.

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Rival PepsiCo Inc.'s chief executive officer Indra Nooyi is expected on Thursday to announce a large investment in that company's brands to try to narrow a gap with Coke in North America. Her expected plan comes after an in-depth review, and could include discounts at retail, analysts say, a strategy that can quickly spur sales.

"If Pepsi starts discounting to gain share, Coke will have to be able to respond to that," Edward Jones analyst Jack Russo said. "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.

Coke CEO Muhtar Kent declined to comment on the company's competition with Pepsi. On a conference call with analysts, Mr. Kent said he expects North American soda prices to increase, after gaining 4 per cent 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," Mr. Kent said. "There is no room in business for irrationality over the long term."

Coke's drink business has outperformed PepsiCo's in recent months in North America, where a weak economy and growing health consciousness curbed demand for sugary soft drinks. At the same time, the company has a much greater international footprint than PepsiCo, which has helped its overall results.

In addition to slack consumer spending, both companies have been facing higher costs for raw materials like corn sweetener and packaging. Analysts expect costs to be up in 2012 as well, but to a smaller degree than last year.

Coke's new productivity program is targeting annual savings of $350-million (U.S.) 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.

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Total costs associated with the integration will increase from $425-billion to about $800-million, the company said.

Together, these initiatives should generate $550-million to $650-million a year by the end of 2015.

Coke plans to reinvest those savings into "brand-building initiatives," which usually include marketing and advertising, and said they will help mitigate potential near-term commodity inflation.

Coke said global revenue rose 5 per cent in the fourth quarter to $11.04-billion as it gained market share in several drink categories. Analysts on average were expecting $10.99-billion.

Worldwide volume rose 3 per cent, growing 4 per cent in Latin America and Eurasia and Africa, 5 per cent in the Pacific and 1 per cent in Europe and North America.

Quarterly profit was $1.65-billion, or 72 cents a share, down from $5.77-billion, or $2.46 a share, a year earlier, when the company recorded a gain related to the acquisition of its North American bottling operations.

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

Also on Tuesday, bottler Coca-Cola Enterprises raised its quarterly dividend 23 per cent to 16 cents a share.

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