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Coca-Cola expects bottlers' Brexit-linked inventory shuffle to ding Q4 top line

Coca-Cola Co. expects that an inventory shake-up by its European bottlers tied to Brexit will impact its fourth-quarter revenue, executives said Oct. 18.

The global soda giant expects an estimated 1% hit on its topline growth in the fourth-quarter. This will be mainly driven by reduced inventory levels by European bottlers fretting over the U.K.'s exit from the EU, though offset the extra day in the quarter's calendar, Executive Vice President and CFO John Murphy said during a post-earnings call.

European bottlers worried about a potentially disruptive Brexit increased their concentrate shipments in the first quarter to pad their safety stocks, Murphy said. Now, with Parliament slated to vote this weekend on Prime Minister Boris Johnson's Brexit deal, Coca-Cola expects those same European bottlers will do the opposite in the fourth quarter.

"We currently expect this to fully reverse in quarter four, but of course, it's subject to the pending Brexit outcome," Murphy said of the bottlers increasing their safety stocks in the first quarter.

Brexit has had a broad impact on consumer sentiment, but it is unclear how it will continue to impact Coca-Cola, Chairman and CEO James Quincey said. What is clear is that Coca-Cola wants to normalize its inventory by the end of the year, Quincey said.

"We need to see what form the agreement does or doesn't take in the coming days," Quincey said. "Our preferred outcome is unwinding of that extra inventory, but there's no guarantee."

Coca-Cola reported third-quarter earnings Oct. 18 that met Street expectations for its comparable, or non-GAAP, diluted EPS and raised its 2019 outlook for comparable currency neutral, or non-GAAP, revenue and operating income.

Classic energy

The international rollout of Coca-Cola Energy to 25 markets provided Coca-Cola with lessons the company is keeping in mind for when it brings the product to the U.S. in 2020.

Feedback from the international markets fueled Coca-Cola's decision to bring the Coca-Cola Energy's formula closer to that of Coke Classic to lure new U.S. consumers rather than competing for current ones, Quincey said.

Another aspect of Coca-Cola's U.S. strategy as compared with overseas is for Coca-Cola Energy to push for greater shelf visibility, Quincey said. In markets where the energy category is underdeveloped, one or two distinct products are enough to make an impact, Quincey said. In more developed markets like the U.S., the companies need a greater presence, he said.

Shares of Coca-Cola rose 2.1% to $54.92 in afternoon trading Oct. 18.