Coca-Cola's global reach offset European weakness

(Reuters) - Coca-Cola Co reported a higher-than-expected second quarter profit on Tuesday as rising consumption of its drinks in emerging markets offset declines in Europe.

But the world's largest soft drink company, maker of Sprite, Minute Maid orange juice and vitaminwater, said tough economic conditions were taking a toll, dampening the enthusiasm of investors, who sent the shares up nearly 3 percent in morning trading.

"We recognize that consumers across the globe continue to feel the effects and impacts of prolonged uncertainty in Europe, the further cooling of the economy in China and the protracted recovery here in the United States," said Coke Chief Executive Muhtar Kent.

Coke shares were up $1.39, or 1.8 percent, at $77.87 in afternoon trading, after rising as high as $78.66 earlier in the session.

Kent told Reuters the connectedness of the modern world was contributing to the economic strife.

"We've always been used to crises coming and passing like a river, and then going, until the next one. But I think more and more, we're seeing that the world is a much more connected place," Kent said.

He added that, after years of astronomical growth in China, it was natural for the economy to slow a bit.

"When you get up higher, the oxygen gets thinner," he said.

Coke Chief Financial Officer Gary Fayard said the company's full-year gross margin would be smaller than in the second-quarter, due to currency fluctuations and more people buying larger, take-home bottles of soda instead of smaller, higher-margin drinks for immediate consumption.

When U.S. gasoline prices eased in May and June, Coke expected to see a boost in sales at convenience stores and gas stations, but that did not happen, he said.

Coke said it would face continued pressure on margins in the third quarter.

"While (third-quarter estimates) may need to come down, we think the quarter was better than feared," said JP Morgan analyst John Faucher.

PROFIT, VOLUME BEAT

Coke's second-quarter sales volume rose 4 percent, with North America growing 1 percent and international up 5 percent.

Volume jumped 12 percent in Eurasia and Africa, 8 percent in the Pacific region and 3 percent in Latin America. It fell 4 percent in Europe due to the economic slowdown and cold weather.

Still, the company gained market share on a global basis.

"It looks like they had a good quarter in spite of the European woes. They continue to grow," said Gary Bradshaw, portfolio manager at Hodges Capital Management in Dallas. "I'm still extremely optimistic."

Bradshaw said Coke is now the top holding of the relatively new Hodges Equity Income Fund, which is worth about $16 million.

Performance in Europe was worse than expected and there were slight slowdowns in China and Mexico, said Bernstein Research analyst Ali Dibadj. But, overall, it was better than expected.

"You have to consider the environment that we're in," Dibadj said. "This is a company that through all this macroeconomic stress, continues to grow fairly well with relatively little volatility."

Net income was $2.79 billion, down from $2.80 billion a year earlier. Net earnings per share rose to $1.21 from $1.20 because of fewer shares outstanding.

Excluding items, earnings were $1.22 per share, topping the analysts' average estimate of $1.19, according to Thomson Reuters I/B/E/S.

Revenue rose about 3 percent to $13.09 billion. Analysts had expected $12.98 billion.

The company said foreign exchange rates shaved 4 percentage points from net revenue. It forecast a hit of 8 percent to 9 percent on operating income for the third quarter and another dent at the high end of the mid-single-digit range for year.

Price increases helped to boost sales.

Costs rose 5 percent in the quarter, due to "moderately" higher commodity costs. Still, Coke lowered its commodity cost forecast to a rise of $300 million this year from its previous $350 million to $450 million increase.

Kent declined to comment on the recent spike in corn prices, which could raise the cost of high-fructose corn syrup used in many drinks.

(Editing by Lisa Von Ahn, Alden Bentley, Leslie Gevirtz and Andre Grenon)

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