Coca-Cola Co KO
Q1 2010 Earnings Call Transcript

Operator: At this time, I would like to welcome everyone to the Coca-Cola Company’s First Quarter 2010 Earnings Results Conference Call. Today’s call is being recorded. If you have any objections, you may disconnect at this time. All participants will be in a listen-only mode until the formal question-and-answer portion of the call. (Operator Instructions).

Due to the interest in this call, we request a limit of one question per person. I would like to remind everyone that the purpose of this conference is to talk with investors, and therefore, questions from the media will not be addressed. Media participants should contact Coca-Cola’s Media Relations department if they have questions.

I would like to now introduce Jackson Kelly, Vice President and Director of Investor Relations. Mr. Kelly, you may begin.

Jackson Kelly - VP and IR Officer: Good morning and thank you for being with us again today. I’m joined by Muhtar Kent, our Chairman and Chief Executive Officer, and Gary Fayard, our Chief Financial Officer.

Following prepared remarks this morning, we will turn the call over for your questions. Before we begin, I would like to remind you that this conference call may contain forward-looking statements, including statements concerning long-term earnings objectives and should be considered in conjunction with cautionary statements contained in our earnings release and in the Company’s most recent periodic SEC report.

In addition, I would also like to note that we have posted schedules on our Company website at www.thecocacolacompany.com under the Reports and Financial Information tab and in the Investor section, which reconciles certain non-GAAP financial measures that may be referred to by our senior executives in our discussion this morning and from time to time in discussing our financial performance to our results as reported under generally accepted accounting principles. Please look on our website for this information.

With that, let me now turn the call over to Muhtar.

Muhtar Kent - Chairman and CEO: Thank you, Jackson, and good morning, everyone. Let me begin by saying that I’m very pleased with our first quarter results. We once again delivered consistent, profitable and sustainable growth inspired by our 2020 Vision, and also fueled by our innovation and global reach.

Despite ongoing challenges in global economic conditions, we continue to invest in our business and build our brands, while generating strong and also steady cash flow. We are competing and winning around the world as one Company with our global bottling partners, leveraging our unique scale as well as the increased presence of our brands.

As we announced earlier this quarter, we are taking decisive actions to strategically advance our North America business and further strengthen our franchise system in Europe. We remain confident in our ability to execute our 2020 Vision, thus laying the foundation for consistent long-term sustainable growth. As I’ve mentioned on numerous occasions, we see tremendous growth opportunities for our system and for the entire non-alcoholic ready-to-drink beverage industry over the next 10 years and beyond.

This past quarter, despite the lingering effects of the global recession, we delivered solid 9% operating income growth on a comparable currency neutral basis. Overall global economic unit case volume grew a strong 3% with a significant number of international markets fueling this growth. And our growth in countries with a per capita of less than 150 was an exceptional 10%.

Let me take a moment to share in more detail our performance across our international markets. In Eurasia and Africa we saw a broad based growth of 11%. This increase was led by India, up a strong 29%, and cycling 31% making this our seventh consecutive quarter of double digit growth in this fast growing nation.

And while sustaining this high growth rate in India, in the coming months will likely depend on weather patterns during the upcoming monsoon season, we are confident in our ability to deliver consistent double digit growth for the balance of this year.

We also saw double digit growth in Turkey, Northwest Africa, Southern Eurasia, and the Middle East. Notably, we are beginning to see sequential improvement in Russia which was down 1% led by the strong performance of brand Coca-Cola, which grew 12% and gained share this quarter in Russia.

Latin America maintained its steady and consistent performance up 4% overall driven by a strong 12% growth in Brazil. Our Latin Center unit was up double digits led by Columbia which grew 19%, while our South Latin unit was up mid-single digits.

Mexico impacted by unseasonably cold weather was down 2%. But as the weather has improved, this trend has reversed with our business generating positive growth in the month of March, and despite these weather challenges in the quarter, we continue to gain total non-alcoholic ready-to-drink beverage share in Mexico, driven by both our sparkling and our still beverages.

Our Pacific Group continued to expand, up 5% in total, and led by double digit growth across Korea, Indonesia, and several other markets.

Our volume performance in Japan was a sequential improvement on our performance in the last two quarters down 3%. Despite ongoing economic headwinds, we are experiencing steady improvement in the critical vending channel as well as strong result in the convenience stores channel. This led to better performance for our Georgia coffee business.

Our trademark Coca-Cola brands in Japan keep widening the gap against our primary competitor, led by Coca-Cola Zero, which was up 24% for the quarter. In fact, since 2005, we have grown trademark Coca-Cola incremental unit case volume in Japan five times more than our main competitor has grown its trademark brands over the same period, and I LOHAS, our fast-growing, eco-friendly natural mineral water brand launched last May is building on its market share leadership. In less than a year, it has become the number-one packaged water brand in Japan.

China unit case volume grew 6%, including double-digit growth in the latter half of the quarter. This performance comes on the heels of a strong fourth quarter and a great finish to 2009, which was led by growth across our portfolio, as well as new product launches.

Over the past six months, our volume grew at solid 16%, and while we may see volume swings from quarter-to-quarter, the 16% growth over the past six months was ahead of our primary international competitor.

For perspective, our China business has generated more than $100 million incremental unit cases this past six months and continues to be twice the size of our primary international competitor on an annual basis, and we are building momentum across our entire portfolio.

We are advancing our sparkling business in China, behind strong innovations, such as the launch of Sprite Tea, which taps into the combined popularity of Green Tea and Sprite. We are expanding our winning still beverage business through the ongoing growth of our industry-leading juice and juice drink beverages and our Minute Maid Pulpy Super Milky dairy brand. And we are kicking off an exciting new Yuan Ye led tea portfolio, launching Yuan Ye Jasmine tea. As we have shared before, we are just getting started in China and remain resolute in our commitment to invest for solid long-term growth.

Now, moving to Europe; despite the continuation of difficult economic conditions in Europe, our unit case volume growth was even for the quarter. This was an improvement over our 2009 full-year results with growth across France, Belgium, the Netherlands and North Central Europe.

Further, our Company-owned bottlers in Europe grew well ahead of the region with Germany up mid single-digits and Nordics up low single-digits, as we built towards refranchising both of these operations.

In the United Kingdom, we were pleased that our trademark Coca-Cola brands became the first to top the �1 billion mark in annual U.K. grocery retail sales.

We are excited about our recently announced increased investments in Innocent reflecting our belief in the long-term growth potential of the smoothie business.

Lastly, and in alignment with our 2020 Vision, we’ve recently reorganized our Europe business from 10 business units to four making it easier for us to do business with our bottlers, as well as partners as we gain significant scale, speed and simplicity.

In total, these international performance results are a testament to our seasoned operating team, which is executing our 2020 Vision quickly and also with great discipline.

I can assure you that our strategy and focus to build the long-term equity of our brands remains decisively clear. This focus is reflected in the volume and value share gains we continue to realize together with our bottling partners around the world. As a system, we are pulling together to communicate with our consumers, invest in our brands and build for a better tomorrow.

Now, let me briefly explain each of these actions. First, communicating with our consumers. Last quarter, I highlighted some of the important global platforms we are leveraging in 2010 to communicate and connect with consumers around the world.

We just concluded our successful Vancouver Olympics program, which helped improve trademark Coca-Cola brand equity scores with teens in Canada. And these improvements are flowing to the bottom line as we have grown dollar share for trademark Coca-Cola and system revenue in Canada to their highest levels in years.

Meanwhile, our FIFA World Cup Trophy Tour carries on with its journey all around the world. The tour has now traveled to 27 international markets, engaging thousands of consumers, and earning an average of $2 million of media value in each and every country visited.

In addition, we are finding new and innovative ways to leverage our FIFA World Cup platform to more effectively communicate with consumers. For example, we launched POWERADE’s first ever global marketing campaign, which includes an innovative online experience.

A series of digital films highlight the functional benefits of POWERADE and also showcase a never-ending football game played around the world. This campaign has already launched on YouTube in Brazil, Mexico, Italy, Spain, and 16 more countries.

We’re also teaming up with customers around the world to bring the passion and the excitement of the FIFA World Cup to life for our consumers. A great example is the marketing program we developed together with Wal-Mart, by using a jointly produced global toolkit; we will drive incremental sales for Wal-Mart and our Company while making the excitement of the World Cup more affordable and accessible for everyday fans.

Finally, as the global partner of the 2010 World Exposition in Shanghai, we expect to host over 100 million visitors from China and around the world at our Coca-Cola Happiness Factory Pavilion, engaging consumers, customers, and other key global stakeholders through an extensive marketing program that will be executed during this exciting 184 day event.

So these are just a few examples of how we are connecting directly with our consumers across many, many nations in a way that only our Company with our global footprint can do.

Secondly, we are relentlessly focused on investing in our brands. Let me start with sparkling beverages, where I have already highlighted some of the many countries where we experienced sparkling growth this quarter.

Brand Coca-Cola grew in line with our worldwide volume. Coca-Cola unit case volume grew over one million unit cases in 24 different countries. We were very proud to see Diet Coke for the first time since its introduction tie for the number two brand position amongst all sparkling brands in the United States, behind only Coca-Cola, as reported in Beverage Digest last month.

As for Coca-Cola Zero, it is still driving growth for us in every operating group, increasing double digits for the 16th consecutive quarter in North America, and 7% on a worldwide basis. Just like we shared in our recent investor event, we intend to keep growing trademark Coca-Cola, the epicenter of our business in 2010 and well beyond. And we’re building on our track record, successfully introducing cross category innovations by launching several new beverages including Sprite Tea in China, which I mentioned earlier, as well as (Fanta White), a new sparkling lactic drink which we’ll launch in Japan next week.

We are innovating and expanding our still beverages as well. We’re launching new brand extensions across multiple markets such as vitaminwater Zero in North America and Minute Maid Nimbu Fresh lemonade in India; both are gaining great momentum and traction.

We’re expanding our successful innovations across borders such as our pulpy juice drink innovation created under the Minute Maid trademark in the Pacific, and now also available under the Del Valle trademark in Latin America. Altogether, our pulpy brands are now present in 12 countries.

We also have plans in place to take Hugo, our juice and dairy innovation launched in Chile last year, into other markets in Latin America later this year. We’re leveraging best-in-class programs across borders as in the case of vitaminwater, where we are implementing a fully integrated 360 degree summer program in almost all of our international markets. We are leveraging best practices from Canada, Great Britain, Japan, and Mexico to ensure excellence, consistency, and impact for this great brand.

Thirdly, we’re building for a better tomorrow and are fully committed to growing in a sustainable and responsible way in partnership with our consumers, customers, and communities. To the benefit of all our consumers, we’re working in partnership with the First Lady of United States on our program to end childhood obesity in a generation. We have announced our Clear on Calories commitment in support of this special effort.

While I already highlighted an example of how we work in partnership with global customers. In the end, the proof is in the results. That is why we were particularly pleased to see our business with our top 10 global retail customers grow mid single digits in volume and double-digits in revenue in 2009 ahead of our total company growth.

Lastly, a great example of our efforts to support our communities is our launch of Odwalla's Haiti Hope Mango juice drink in the United States.

100% of the profits of this beverage will go to support the development of a sustainable fruit industry and thousands and thousands of families in Haiti. As we build these relationships for the future, stakeholders from around the world are recognizing our performance. In the past few weeks, we’ve been honored to receive several acknowledgements.

Fortune Magazine ranked us number-10 in their annual list of the World’s Most Admired Companies. Number-one, overall, in beverages and number-one across multiple beverage industry attributes including innovation, financial standards and social responsibility.

Harris Interactive ranked us number-8 on their annual list of Most Admired U.S Companies, as well as in the top-five in vision and leadership, as well as financial performance. Corporate Social Responsibility Magazine ranked their 100-best corporate citizens for 2010 and rated us at number-8 ahead of all other beverage companies. And just this week moved us up in their annual ranking of the World’s Most Innovative Companies positioning us as the most innovative consumer goods company in the world.

Our eco-friendly I LOHAS bottle was recognized by both the Asian Marketing Effectiveness festival, where we won their Platinum Award, and Japan’s Ministry of Environment, which awarded us with their grand price for global environment. And Wal-Mart named us their supplier of the year in China while 7-Eleven’s franchise system did the same in North America.

Staying in North America, our volume results declined 2% for the quarter consistent with our 2009 results. Our unit case volume for sparkling beverages declined 1% in the quarter in North America showing sequential improvement. Our still beverages were down 2% for the quarter, although we were able to still hold value share. Importantly, our newest $1 billion brand simply grew 26% in the quarter, while strong POWERADE activity driven by effective NCAA March Madness programs helped drive volume and value share gains in the Sports Drinks category.

Now let me turn to our biggest news of the quarter and update you on the great progress we’ve made since announcing our intention to acquire CCE’s North America business. As previously announced, we’ve appointed Brian Kelley to lead the integration of the Coca-Cola Company’s and CCE’s North American operations. Brian’s integration team announced internally last week, consist of leaders from both the Coca-Cola Company and CCE, whose operating credentials and knowledge of the North American market is second to none. I have the utmost confidence that this team will deliver on our integration goals.

Earlier today, we also announced our post-integration leadership team for North America. Steve Cahillane, currently President of the Northern American Business unit for CCE will assume the role of President and Chief Executive Officer of the new Coca-Cola Refreshments, once the Company’s acquisition of CCE North America has been successfully concluded. Sandy Douglas will continue as President of Coca-Cola North America. Both Steve and Sandy, who have executed very effectively and in concert with each other for the past two years, will report directly to me.

This will be the first time ever that our North American bottle and can, fountain and juice businesses will be produced, marketed and sold by an integrated 21stt century service organization. We’re truly excited by this prospect.

As I’ve said before, we’re taking decisive action in North America from a position of strength. I’m excited that both Steve and Sandy, who’ve been so instrumental in driving positive change in North America, have agreed to lead our efforts to capture the great opportunity that this important marketplace has to offer.

Let me reiterate my fundamental view about our business in North America. Growing here is not optional. It is essential to the health and future of our entire global system, and if you look at the external forces shaping our 2020 Vision, especially changing demographics, North America is at the heart of many of these trends.

The U.S. population is growing and will increase by over 30 million by 2020, outpacing the absolute population gains of fast growing countries like Brazil, Egypt and Indonesia. And with over 30 million teens in 2020, the teen population of the United States is projected to be greater than that of Brazil, Mexico, Egypt and Vietnam.

Clearly, there is great opportunity in our North America business, across our entire portfolio and particularly with trademark Coca-Cola. Today, our favorite brand scores are higher than they have been in over a decade. We believe innovative marketing, merchandizing, strong execution and clear communications will be the key to restoring trademark Coca-Cola growth in North America just like we were able to successfully bring back growth to Coke in Japan and the United Kingdom.

The acquisition of CCE’s North American business and the refranchising of our European operations are consistent with our 2020 Vision. This evolution in our business will give us the financial flexibility and marketing and distribution leadership required to accelerate our business in North America and Western Europe, while also strengthening the long-term health of our franchise system.

As we work to create the world’s premier low-cost and effective beverage manufacturing and distribution business, one with a fully empowered and centralized national sales organization. We are confident these actions will result in greater value for our shareholders.

Let me close by saying that it is clear that consumers are not yet out of this crisis and still remain confused due to the extended economic headwinds around the world. Therefore, given this environment, there still may be bumps along the way this year, and we may continue to experience some quarter-to-quarter volatility.

That said, we confidently stand behind our long-term growth targets and intend to keep winning together in 2010 growing volume, share, and profits. As we look ahead, we firmly believe that there is no better business to be in than the non-alcoholic ready-to-drink beverage industry, and we remain intently focused on creating shareholder value.

With that, let me now turn the call over to Gary.

Gary P. Fayard - CFO and EVP: Thanks, Muhtar. Good morning, everyone.

As Muhtar indicated, we’re off to a good start in 2010 delivering consistent, sustainable, and quality volume and profit growth in line with our long-term growth targets. Our first quarter results are a clear indication that we have the right leadership in place with the right strategic plans and capabilities to achieve these goals.

One quick reminder, and as highlighted during our last earnings call, our comparable results for this quarter reflect the impact of the deconsolidation of certain entities, primarily bottlers, due to changes in accounting guidance as per FASB requirements. To facilitate comparisons, we will post details of all of these adjustments by quarter on our Investor Relations website later this week.

As outlined in our release, we reported comparable earnings per share of $0.80, up 23% versus prior year. For the quarter, comparable currency neutral operating income was up 9%.

Further, our business delivered comparable net revenue growth of 7%, driven by 3% increase in concentrate sales, and a 6% positive currency impact, partially offset by geographic mix.

As anticipated, and as we indicated in our last earnings call, we continue to see many of our emerging markets recovering from the global recession at a quicker rate than our developed markets, resulting in continued pressure on our geographic or country mix at a consolidated level. This is a natural outcome for a company like ours with such an extensive global footprint.

At the same time, we effectively executed our revenue growth management initiatives to realize positive pricing. This enabled us to grow global value share for the 11th consecutive quarter, while maintaining global volume share for the quarter. These results reflect our continued effort, focus, and commitment to win in every market as we come out of this global crisis.

Our objectives remain steadfast, strengthened the health of our brands and drive share gains. We anticipate that our positive revenue strategies will be offset by geographic mix. Therefore, as we said in the last earnings call, we expect our price mix to be even for the full year. And as we also said in that call, we would expect to see a return to positive price mix over the long-term as global consumer sentiment steadily improves.

As for our cash flow from operations, this increased 52% in the quarter to $1.3 billion. This growth was primarily driven by our improved performance and the cycling of a pension funding of about $200 million in the prior year.

Now let me explain some of the factors impacting our quarterly results and full year trends. Our comparable currency neutral cost of goods was down 3% for the quarter as a result of shifts in mix. On a full year basis, we would expect our cost of goods to grow in a more normalized low single digit range. Comparable currency neutral SG&A expenses were down 1% in the quarter. This reflects the timing of marketing expenses and it also reflects the continued benefits of our productivity initiatives, which we have pursued on an ongoing basis for the past 2.5 years. We anticipate our full year operating expense leverage will come in, in the low single digits.

Next I want to call out two items related to North America. First, related to the CCE transaction. Our integration planning has progressed quickly, and in an orderly fashion under the leadership of Brian Kelley and his team.

As Muhtar mentioned before, we’re excited about the continued leadership both from Steve Cahillane and Sandy Douglas that they will bring to our North American business. As for the approval process for the transaction, we have not experienced any delays and still expect an early fourth quarter close.

Second, and as part of our ongoing work to strengthen our economic profits in North America, we’ve made a strategic decision to exit the low margin retail spring water segment of the water category.

Accordingly, we have eliminated the retail spring and customer brand water volume from our reported volume for both 2010 and 2009. This change did not have any impact on either the Company or North America’s reported volume results this quarter.

Now, let me take a moment to provide our outlook on some of the other key factors we see impacting this year. As expected, we benefited from currency in the first quarter. We still believe currencies will have a slightly positive impact on operating income for the full year with its benefit weighted towards the first half of the year. On productivity, we’re on track to deliver $500 million in annual savings from our initiatives by the end of 2011.

And lastly, with regard to share repurchase, let me reaffirm that while we are out of the market until we close the transaction with CCE, we are still committed to repurchasing at least $1.5 billion of the Company stock in 2010.

In conclusion, we are only just beginning to emerge from the global recession and expect the recovery to be moderate as consumer outlooks slowly improve. Our seasoned management team has clearly taken the right actions, executing the right strategies in this global environment to drive our business for the long term and build on our track record of success.

We remain confident and will continue gaining global share while enhancing the health of our brands in order to drive long-term profitable growth and value for our shareholders.

Operator, we’re now ready for questions.