The Coca-Cola Company (NYSE: KO)

The Coca-Cola Company's Q1 2025 financial performance reflects both currency headwinds and underlying business strength. Reported net revenues decreased 2% to $11.13 billion, significantly impacted by a 5% currency headwind. However, when excluding this currency impact, net revenues grew by 3% in constant currency terms.

Notably, organic revenue growth was strong at 6%, demonstrating the company's ability to drive growth through pricing and innovation, despite the challenging macroeconomic environment. The 3% gap between organic revenue growth (6%) and constant currency net revenue growth (3%) primarily reflects the impact of refranchising bottling operations in certain territories in India, Bangladesh, and the Philippines.

Operating income showed a substantial increase of 71% to $3.66 billion, but this figure was heavily influenced by prior year impairment charges related to BODYARMOR ($760 million) and other transaction-related items. Comparable operating income, which excludes these one-time items, increased 4% (10% in constant currency), reflecting improved business performance and productivity initiatives.

Gross margin remained stable at 62.6%, while comparable operating margin improved by 134 basis points to 33.8%, underscoring the company's ability to maintain pricing power and manage costs effectively. EPS grew 5% to $0.77 on a reported basis, while comparable EPS increased by 1% to $0.73. When excluding the significant currency impact, comparable currency neutral EPS grew 6%, better reflecting the underlying earnings growth.

The company's free cash flow was significantly impacted by the $6.07 billion fairlife contingent consideration payment made in March 2025, resulting in negative free cash flow of $5.51 billion for the quarter. However, excluding this one-time payment, free cash flow would have been $558 million, representing a healthy increase from $158 million in Q1 2024.

Latin America was the standout performer in terms of organic growth, delivering an impressive 13% increase despite a 3% decline in reported net revenues due to significant currency headwinds (-16%). This strong organic performance demonstrates the resilience of Coca-Cola's business in this region despite challenging macroeconomic conditions in several key markets.

Europe, Middle East & Africa (EMEA) and Asia Pacific both delivered robust organic growth of 7%, although reported revenues were significantly impacted by currency translation. EMEA showed modest reported revenue growth of 1% despite a 6% currency headwind, while Asia Pacific reported revenues declined by 4%, affected by both currency (-6%) and structural changes from refranchising operations in certain territories (-5%).

North America, the company's largest segment by revenue, delivered 3% growth in both reported and organic terms. The segment's operating income increased dramatically by 170%, but this was primarily due to the prior year impairment charge related to BODYARMOR. On a comparable basis, North America's operating income increased by a more modest 4%.

The Bottling Investments segment saw a 20% decline in reported revenues, largely due to refranchising activities (-18%). However, organic revenue growth was positive at 2%, indicating that the remaining bottling operations maintained momentum. Operating income for this segment decreased by 24%, reflecting both the structural changes and operational challenges.

In aggregate, all operating segments delivered positive organic growth, with a consolidated organic revenue growth rate of 6%. The divergence between organic growth and reported results underscores the significant impact of currency headwinds and structural changes on the company's reported financial performance in Q1 2025.

The Coca-Cola Company's financial reporting includes several non-GAAP financial measures that management believes provide investors with additional meaningful information to assess underlying business performance. Understanding these measures is important for a comprehensive analysis of the company's performance:

• Organic Revenue Growth (6%): Excludes the impact of currency fluctuations, acquisitions, divestitures, and structural changes. This measure best reflects the company's underlying revenue generation from its ongoing business activities.
• Comparable Operating Income ($3.79B, +4%): Excludes items that are not reflective of ongoing operations, such as asset impairments, transaction gains/losses, and restructuring costs. In Q1 2025, the major adjustments included transaction gains/losses of $47 million and other items totaling $70 million.
• Comparable Operating Margin (33.8%, +134 bps): Comparable operating income as a percentage of comparable net revenues, providing insight into the company's underlying profit margin performance.
• Comparable Currency Neutral EPS ($0.73, +6% currency neutral): Excludes items impacting comparability and the effect of foreign currency translation, providing a clearer view of underlying earnings performance.
• Free Cash Flow Excluding fairlife Contingent Consideration Payment ($558M): Represents net cash provided by operating activities less capital expenditures, adjusted for the $6.07 billion one-time payment related to fairlife.

In Q1 2025, there was a significant divergence between reported results and comparable measures due to several factors:

• Prior year comparison included significant impairment charges, particularly the $760 million BODYARMOR trademark impairment
• Current year included a $331 million gain from the sale of a portion of Coca-Cola's ownership interest in Coca-Cola Europacific Partners plc
• Substantial currency headwinds across most global markets
• fairlife contingent consideration payment of $6.07 billion significantly impacting cash flow metrics

These non-GAAP measures help investors understand the company's underlying performance by filtering out these non-recurring items and currency fluctuations that can otherwise distort period-to-period comparisons.

Coca-Cola's cash flow performance in Q1 2025 was significantly impacted by the $6.07 billion fairlife contingent consideration payment made in March 2025. This one-time payment resulted in negative reported net cash from operating activities of $5.20 billion, compared to positive $528 million in Q1 2024.

When excluding this one-time payment, the company's cash flow metrics show considerable improvement:

• Adjusted Operating Cash Flow: $867 million (excluding fairlife payment), up 64% from $528 million in Q1 2024
• Adjusted Free Cash Flow: $558 million (excluding fairlife payment), up 253% from $158 million in Q1 2024

The substantial improvement in adjusted free cash flow reflects the company's strong underlying cash generation capability, effective working capital management, and lower capital expenditures, which decreased by 16.5% to $309 million.

For the full year 2025, the company has maintained its cash flow guidance, projecting:

• Approximately $11.7 billion in cash flow from operations (excluding the fairlife payment)
• Approximately $2.2 billion in capital expenditures
• Approximately $9.5 billion in free cash flow (excluding the fairlife payment)

This strong projected free cash flow supports the company's commitment to shareholder returns through dividends and share repurchases, while also providing flexibility for strategic investments and debt management.

The company's interest expense remained relatively stable at $387 million, up just 1% year-over-year, indicating effective debt management despite the rising interest rate environment that prevailed through much of 2024 and into early 2025.

The Coca-Cola Company has maintained its full-year 2025 guidance following the Q1 results, demonstrating confidence in its ability to navigate ongoing macroeconomic challenges. The company continues to expect:

• Organic revenue growth of 6-7%, reflecting continued strength in pricing and mix along with modest volume growth
• Comparable EPS growth of 4-5%, including an estimated 4-5% currency headwind based on current rates
• Comparable currency neutral EPS growth of 8-9%, better reflecting the underlying earnings growth potential
• Free cash flow of approximately $9.5 billion (excluding the fairlife contingent consideration payment)

The company's strategic priorities remain focused on:

1. Revenue Growth Management: Continuing to leverage price, package, and channel mix to drive top-line growth while maintaining consumer affordability in different markets.

2. Geographic Expansion: Capitalizing on strong growth momentum in developing and emerging markets, particularly in Latin America, Africa, and parts of Asia, where organic growth rates significantly outpace developed markets.

3. Portfolio Optimization: Further refining the brand portfolio to focus on growth opportunities, including continued scaling of recently acquired brands and innovation in growing categories like coffee, sports drinks, and alcohol-ready-to-drink beverages.

4. Productivity Initiatives: Advancing productivity programs to offset inflationary pressures and support marketing investments, contributing to the projected operating margin expansion.

The unchanged guidance suggests that despite currency headwinds and some regional challenges, the company's overall business momentum remains on track with expectations set at the beginning of the fiscal year. The strong Q1 organic growth of 6% provides a solid foundation for achieving the full-year organic revenue growth target of 6-7%.