The Coca-Cola Company
Q2 2009 Earnings Call Transcript

Published: 21 Jul 2009

[Operator:]

Welcome everyone to The Coca-Cola Company second quarter 2009 earnings results conference call. (Operator Instructions) I would now like to introduce Jackson Kelly, Vice President and Director of Investor Relations.

[Jackson Kelly:]

Good morning and thank you for being with us today. I am joined by

[Muhtar Kent:]

Good morning everyone. I am pleased to report another excellent quarter of growth for the Coca-Cola Company despite difficult global market conditions. Today we are positioned better than ever to grow share and build value in the dramatically changing world. The fundamentals of our business remain strong. Our company is growing

[Gary P. Fayard:]

As Muhtar indicated, our company is growing in volume, revenue, profits, and share. The fundamentals of the business remain strong. Our further share gains and brand health improvements reflect our experienced management teams ability to utilize the assets of the Coca-Cola system to deliver tangible results and value for our shareholders. We delivered on our commitments, growing volume and profits in line with our long-term growth model for the first half of the year, even excluding the impact of the five additional selling days that we had in the first quarter. For the second quarter, we delivered solid results across a diverse geographic footprint with unit case volume growth at the top end of our expectations. This, of course, includes some benefit to our volume growth from the holiday shifts of Easter and the Fourth of July, and the cycling of 3% volume growth in the prior-year period. Reported operating income declined to 9%, primarily related to a 14% currency headwind. Comparable currency neutral operating income for the quarter came in better than we expected at 4%, cycling 9% from the second quarter of last year. For the first half of the year we exceeded our long-term currency neutral profit target, increasing operating income 9%. As outlined in our release, we reported earnings per share of $0.88 per share on a diluted basis for the second quarter of 2009. As expected, this included charges related to our restructuring and ongoing productivity initiatives at both the company and our equity invested bottlers. In total, we had a net charge of $0.04 per share. Therefore, our adjusted earnings per share was $0.92 per share, a decrease of 9% after considering items impacting comparability in both the current and prior year and again, significantly impacted by currency headwinds in the quarter. Additionally, $0.01 per share was related to the timing of expenses in corporate, which we expect to reverse in the second half of the year. Net revenue in the quarter decreased 9%, which included a 9% effect from currency headwinds and a 2% drag from structural changes primarily related to our divestment of bottlers. At the same time, net revenue was positively impacted by a 3% increase in concentrate sales. Price mix for the quarter was slightly negative, reflecting our current focus to drive greater affordability initiatives across many markets to ensure we continue building brand relevance and equity with consumers. Additionally, our Japan business was impacted by shifts away from the at-work vending channel, due to the economic environment. We believe this is temporary and will moderate as more manufacturing facilities in Japan come back on line. As a result, net revenues, excluding the structural changes, were up 2% for the quarter. Now let me address some of the factors that we see for the remainder of the year. First, our picture of success for 2009 remains the same

[Operator:]

(Operator Instructions) Your first question comes from John Faucher - J.P. Morgan.

[John Faucher:]

A question for Pancho. Can you talk a little bit about some of the regional differences in performance in Mexico. We had been hearing that the north was a little bit weaker, given concerns about swine flu and the U.S. economy, but looking at the overall numbers it seems that the south must be holding it's own. And secondly, we're that Big Cola may be expanding in Brazil, so any thoughts on that in terms of with the economy having softened a little bit whether you're seeing it a little more right from a B brand standpoint.

[José Octavio (Pancho) Reyes:]

Our performances in Mexico, they are pretty stable throughout the country. The north and the south have performed relatively in the same terms so the overall numbers that you are seeing are comfortable both in every geography in Mexico. B brands, yes, B brands are always a consideration, especially under tough economic situations like the one we're facing. But I have seen in the specific was the birthplace, if you will, of the B brands, back twenty years ago probably, so therefore it's not unusual for somebody else to come into that market. I would think that it is a crowded B brand market, by the way. And we welcome the competition come in from Big Cola if that would be the case. I think that we have a system that can deal with that threat and hopefully we will continue to prove it, as we go along in this environment.

[Operator:]

Your next question comes from Bill Pecoriello - Consumer Edge.

[Bill Pecoriello:]

If you could flush out a little bit more for us the price mix that was down around 1% in the quarter and you made comments about driving affordability. The underlying kind of concentrate revenue per unit, is that going up in line with the bottlers raising price around the world to recoup offsetting effects and commodity increases? And also, what exactly is happening in the price mix in the bottling division in markets like Germany, Philippines? How much is that a drag on the price mix? Should we expect that to continue into the second half?

[Muhtar Kent:]

I'll let Gary talk about this, but just in general, basically our price mix generally improved around the world with a couple of exceptions that somewhat relate to those deterrents with BIT certainly. But in general terms I think we are on track and on target with our price mix plan and we are actually progressing better than our plan in many of our geographies.

[Gary P. Fayard:]

A little detail, if you looked at price mix, it was about 1% negative in the quarter and flat year-to-date. Something like that, or plus 1% year-to-date, I guess. If you look at it, we have positive price mix in every operating group across the world except for two

[Bill Pecoriello:]

So maybe a little bit of improvement in the back half as Japan vending comes back a little bit?

[Gary P. Fayard:]

Yes, I would expect so. I think we will continue to see, probably a difficult situation in the Philippines. Probably in Germany as well. You've got a little negative just because kind of channel and all in Spain, because as you know, the Spanish unemployment is sky-high right now. So much related to the construction industry. So it's some specific markets.

[Operator:]

Your next question comes from Carlos Laboy - Credit Suisse.

[Carlos Laboy:]

Pancho, Muhtar referenced the strength of the brands in his comments in Latin America. But how critical is it to the performance of the region that Latin American is anchored by a bottler with a 10-year concentrate price model? In a core market in a 50/50 long term profits but for non-cores? But could you be hitting these numbers without this kind of clarity and profits with looking out over the long term. And on a related basis for Muhtar, as you go into the round of planning sessions with bottlers, why not embrace some of these multi-year incidence agreements?

[José Octavio (Pancho) Reyes:]

I cannot speculate on how important that is. I believe that our bottlers in Latin America, and I've said this time and time again, are perhaps the best bottlers in the world. I think we have a great system. I believe that we have a great brand. I believe we have a firm belief on the power and on the potential of brand core cola. And I believe that we have a system that knows what to do and how to do it and that is the important piece.

[Muhtar Kent:]

I think the key question, the key thing, in this business is how do you really ensure that you have constructive dialogue and constructive alignment and constructive tension in this business that moves the business forward in one direction continuously and that it operates as a single system, focused on generating consumer occasions and customer partnership. And I think incidence does that in many respects and I have always, as a bottler, worked very well under incidence and have instituted many incidence programs with our bottling partners. So I you ask me in terms of multi—and it has to be multi-year because the picture of success in this business, as I've outlined before, is you get into a room of bottlers and you actually agree on a picture of success, five, ten years down the road. Long-term planning is key. And continuing to invest in this business, always with a focus is key, with both innovation on our side, inspirational marketing on our side, equipment on the side of the bottlers, and new sales systems and socioeconomic segmentation that drives revenue in a proper way. And I think incidence does all of those in the best way. So you're talking to someone who believes it's a great way to align the system.

[Operator:]

Your next question comes from Judy Hong - Goldman Sachs & Company.

[Judy Hong:]

Muhtar, can you give us your assessment of the macro, the consumer environment, particularly markets like Russia or Eastern Europe where trends have been pretty weak. Are you seeing trends stabilizing and as you think about the 4% volume growth number in the fourth quarter and as you look out maybe 6 to 12 months out where GDP growth broadly should start to accelerate, are we at a point where now volume growth, even that 4% number, could start to show even better trend going forward?

[Muhtar Kent:]

Think of four different quadrants. That's how I like to think of the future that's going to be ahead of us. Think of four different quadrants as far as the consumer sentiment is concerned. On the top left quadrant, you've got Europe, you've got North America, and maybe a couple of other economies where we will probably be experiencing resets in terms of the consumer psyche where they will probably do things differently than they have done in the past. And mostly related to probably non-durable, you know, in terms of durable consumer consumption habits. But also in general, there'll be a reset in the mind. And then on the top right you've got markets like China, India, other parts, Brazil, where I think very strong, quick rebound. Then on the bottom left quadrant you've got a Japan, stagnation. And then you've got part of the question that you asked about Eastern Europe, Russia, Ukraine, on the bottom right quadrant, which is basically I call volatility. More zigs than zags. It could come back quickly and then it could go back down quickly. I think we're in for some few years of zigs and zags for Russia, Eastern Europe and so forth. So that's sort of a quadrant of, you know, tale of four different cities, I think in terms of how we are going to look at what's happening in the world.

[Judy Hong:]

Just a follow-up on the share repurchase question, Gary. Can you help us understand the $1.0 billion announcement today sort of in the context of obviously your balance sheet is still very healthy, generating a lot of cash. It seems like the billion could be read as a conservative number. In the past you've also talked about acquisition opportunity. Maybe help us flush out those issues.

[Gary P. Fayard:]

There are a couple of things there and you've heard me talk about it in the past. One of the real items that you've got to consider are credit ratings and those are important to the system of maintaining those. We are very comfortable that with up to $1.0 billion in share repurchase that we maintain the credit ratings and where we are relative to all of the rating agencies. And we are being somewhat conservative but in the environment in which we're operating I think it's prudent to be conservative, and we will continue to update you on our plans of where we are relative to that as we go through the year. I think you saw us start the year being very conservative with not being in share repurchase at all. We're through half the year, we've announced we'll do up to $1.0 billion and then I'll just continue to update you as we go forward.

[Muhtar Kent:]

Just on that, we said to you in the last call that we would be looking at it as we approached the summer and as per what Gary said, we have looked at it and we believe that it's right to reinstitute it. And I think you will always be seeing us look proactively for bolt-on acquisitions as we go around the world. And in this environment we see increasing opportunities in that area. Just like the Innocent announcement. But again, I reiterate, organic growth is the key to our success and the key to our business and I think that when you look at our volume results this past quarter, organic growth was strong. I mean, we had basically less than 0.5% of acquired volume in our numbers. And I'm pleased to see that as we go forward.

[Operator:]

Your next question comes from Kaumil Gajrawala – UBS.

[Kaumil Gajrawala:]

You spoke a bit about 2020 Vision. Can you talk about as you went through studying 2020, how the conclusions might have varied from the manifesto? And specifically, are there some strategic tweaks that you might be making that we need to be thinking about?

[Muhtar Kent:]

It's an evolution coming and it's important that all our bottlers, we develop the 2020 Vision together with our bottling partners, that's perhaps one of the major differences as to how we saw the manifesto from the previous years. And I think importantly, we've added a sixth "P", which is productivity. It's embedded into everything we do. It's part of our transformation exercise and what we continue to want to do to even deliver even more than what we've said. But I think it's a very sound 12-year vision with very specific strategic initiatives attached to it. It's a system document and we believe that we've put a stake in the ground in terms of where we want our system revenues to go from where they are today, from the base of around $90.0 billion today to where we want the system revenues to go to. And we believe that it's a real road map and we are very actively, today as we speak, double-clicking that document into each geography and applying it to different geographies with all our bottling partners across the world. All our senior leaders, as Pancho is doing in Latin America, is generating Vision 2020 for each of the geographies, each of our 39 business units around the world.

[Operator:]

Your next question comes from Lauren Torres – HSBC.

[Lauren Torres:]

In the quarter in North America we saw retail volume down 4% with food service up 7%. I was curious to get your thoughts of what was behind these numbers. I guess being somewhat surprised to see food service doing so well. I was hoping you could talk about trends, be it by channel or by product category, for seeing some changes here.

[Muhtar Kent:]

We held our food service at 4% versus Q1 2009 in the United States in the second quarter. I am very pleased with the dynamics of our food service business and our retail business. As I said, we held the 4% in our retail business versus Q1. And I think that we are seeing some very good results of very good strategies being applied in our food service business. But I'm also very pleased with the developments that are taking place in terms of our brand, price, pack, channel architecture and working very closely with our bottling partners in the United States and what we're doing in our retail business. And I think that what I'd like to say, I mentioned the ninety-nine cent single cold drink pack which is now in 90% of the United States generating incremental transactions every week. And that's proving very successful. But also the contourization of our 2-liter which is now in a quarter of the United States. Our pricing is generating significant value share gains for us in the retail business. That's very positive compared to previous quarters. So we're holding volume at where it was and we're generating revenue growth, both for us and our bottling partners. That program is, we believe, sustainable and is getting good customer traction across the United States. And I think looking forward, we basically see sequential improvement from here on in our retail bottling-can business in the United States.

[Lauren Torres:]

And with that said, we're seeing sparkling beverages do better here in the U.S. so just curious could you talk on that and what's really driving that, how sustainable that is. How should we think about those trends as we course through the second half of the year?

[Muhtar Kent:]

As I've said, you should think of it as sequential improvement. We are pleased with the results of all the actions that we're taking. New package initiatives, new brand initiatives. Coca-Cola Zero driving growth. And the strength of our brands, the metric of our brands, with how our consumers see our brands getting better in the United States, which leads us to believe, again, that you will see sequential improvement in retail and in sparkling.

[Operator:]

Your next question comes from Christine Farkas - BAS-ML.

[Christine Farkas:]

I have a global question, but just to clarify back on the North America top line, we saw net sales drop 3%, there was a negative point from currency, shipments were down 1%, which implies price mix was slightly negative. I just want to understand, given how strong the retail pricing environment was and your concentrate—incidence phase, concentrate model, was this a channel shift switch or with fountain being so much stronger than retail, is that what impacted the price mix part of the top line?

[Muhtar Kent:]

I'll let Gary also reflect on this, but I think generally speaking what we see is a shift, some shift from cold drink due to the economy. So there is a shift in retail more to the home market, so cold drinks continues to be under pressure in North America and there's more movement to quick service in North America, some movement to quick service from bottling can cold drinks. You're seeing some of that being reflected in that number. And also the shift in general, as we said in terms of the pressure on pricing in North America. So I think overall, though, we are confident that our activity, all the actions that we're taking to drive sparkling, to drive cold drink with new price points, will bear fruit as we go into the second half of the year.

[Christine Farkas:]

On the global question, you've noted certainly potential bumps along the way but your volume growth in the second quarter did pick up from the first quarter. When you look at the year here, is it fair to say that perhaps first quarter really was the bottom in terms of volumes or is there anything you can foresee that would suggest a hiccup like that in the second half of the year?

[Muhtar Kent:]

I can't say that with confidence, given where the economies are. All I can say is that all the programs that we have in place with our bottling partners are bearing fruit so what you've seen is improvements in key geographies compared to the second quarter of 2008, so you've got improvements in many geographies compared to the second quarter of last year. And certainly sequential improvement in many, many geographies versus the first quarter, if you look at Europe, if you look at many parts of the world, in Eurasia and Africa, in the Pacific. You know, the Pacific group went from 4% to 6%. China went from 10% to 14%. Japan went from flat to 2%. So you've got sequential improvements from Q1 2009 to Q2 2009. I think we are very pleased that we've been able to have a volume growth of 4% versus the 2% in the first quarter but certainly I think, and certainly we have comps of 5% in Q3 and 4% in Q4, so there are pretty significant comps as we go into the second half of the year, and we will continue to drive our business forward. Invest in our business and drive our business forward.

[Operator:]

Your next question comes from Damian Witkowski - Gabelli & Co.

[Damian Witkowski:]

On currencies, are you still actively hedging your Euro in the first half of 2009 even as the Euro was weak against the U.S. dollar? You mentioned you're proactively always looking for acquisitions. Is it more domestic or more international.

[Gary P. Fayard:]

On currency, on the hard currencies, we do use an option strategy so that we participate on any appreciation of the currency, but to protect us against downside. And we do continue to do that even in the environment in which we're in on Euro, yen, All-C dollar, sterling, etc.

[Muhtar Kent:]

On acquisitions it's absolutely not focused on a single geography. At any point in time we are always talking with our group presidents around the world, like Pancho here, and all our other group presidents, about opportunities on a very, very regular basis. And then if we see any opportunities then our M&A team gets involved and we'll look at it very rapidly. So it's not related to a focus in North America or international per se. It's across the globe.

[Operator:]

Your next question comes from Mark Swartzberg - Stifel Nicolaus & Company.

[Mark Swartzberg:]

A question on marketing spend per case globally. If we think about that number on a currency neutral basis, am I right in thinking that number was up in the quarter and can you tell us how much it was up, or at least tell us how it compared to rate of growth in the first quarter and in 2008?

[Muhtar Kent:]

Yes, I mean I think you see us continuing to drive efficiencies in our opex line and you see us continuing to invest. I've said before, there is no better time to invest in our brands than today. And we are trying to ensure that we manage this business on both a long-term basis and a short-term basis, on a quarterly basis. But one of the key drivers of what we're doing every day is to make sure that we come out of this crisis stronger. Stronger with our brands, stronger with our system, than when we went into this crisis. We are driving efficiencies in media. So when you look at our spend, which was about even for Q2 in marketing, in 17 of our top 21 countries in the world, we drove efficiencies in marketing. That means our GRP costs were down and therefore look at our marketing spend with a view that there's tremendous pressure on pricing in terms of advertising. So we're getting really good deals, in all markets. In Europe particularly, in Latin America Pancho has driven efficiencies together with Joe Tripoti, our chief marketing officer in media programs. So I think that's the way you should look at our media spend and our marketing spend.

[Mark Swartzberg:]

And what about impressions? What would you say rate of change on that is, given the efficiencies you are seeing.

[Muhtar Kent:]

I think our target is always to get more for our money and steadily build up our impressions.

[Mark Swartzberg:]

And is that happening?

[Muhtar Kent:]

Absolutely. And that's why you see our brand health improving around the world.

[Operator:]

Your final question comes from Ann Gurkin - Davenport & Co.

[Ann Gurkin:]

First of all, we've heard some comments that perhaps consumption of soft drinks in the on-premise channel in China is slowing, so if you could comment on that. And then secondly, switching back to the U.S., any comment on the prospect for a tax on soft drinks and what is Coke doing and the industry doing to combat that?

[Muhtar Kent:]

On China, we haven't seen that happening. I think what you see is in China not a shift in channels but a shift in geographies. We have traditionally, you know, the stronger parts of China for our business have been the coast, have been the export-driven areas of China, and I think some of that dynamism of growth has shifted to the inland, as most consumers have moved in fairly large numbers. Millions and millions, tens of millions of consumers have shifted and moved back into the country into their home towns. But now, with the very effect of stimulus plan of China, those consumers have more money to spend and I think we're seeing a shift from the coast into more central and western cities, but not shift in channels. I think what you referenced as a possible tax issue around non-alcoholic beverages, and I think we're certainly doing our fair share to impress upon all parties concerned that this would not be the right move and that we have never seen a move like that work and we don't believe it will work this time and I think that as far as the Congress bill is concerned, there is no evidence of it in the Congress bill and we are waiting to see what happens in the Senate bill.

[Muhtar Kent:]

So with that, I would like to thank you all, thank Gary and Pancho and Jackson, as part of our continued efforts to provide you with a deep exposure across our business. I hope that you found the information that we've shared with you today valuable. I would like to say also that Abmet Bozer, our group president of our Eurasia and Africa group will be speaking on behalf of the company at the upcoming bottlers conference in early September. As you can tell, all of us at the Coca-Cola company see tremendous opportunity and remain intently focused on our key strategic priorities to generate long-term sustainable growth. Our robust business model is built to withstand tough times. Great companies always plan with external trends in mind but do not over-react. While these trends help shape the future, the Coca-Cola system is creating its own future. And as we move through the halfway mark of 2009 we remain optimistic about our business and the future we are creating together with our system for long-term sustainable growth. Thanks for joining us this morning.

[Operator:]

This concludes today’s conference call.