The Coca-Cola Company (KO) Q3 2013 Earnings Call October 15, 2013 9:30 AM ET
Jackson Kelly - Vice President and Investor Relations Officer
Muhtar Kent - Chairman, Chief Executive Officer
Gary P. Fayard - Chief Financial Officer, Executive Vice President
Ahmet Bozer - President, Coca-Cola International
Steve Cahillane - President, Coca-Cola Americas
Irial Finan - President, Bottling Investments Group
Dara Mohsenian - Morgan Stanley
Bill Pecoriello - Consumer Edge Research
Bryan Spillane - Bank of America
John Faucher - JPMC
Judy Hong - Goldman Sachs
Bill Schmitz - Deutsche Bank
Ali Dibadj - Sanford Bernstein
Wendy Nicholson - Citi Research
At this time, I would like to welcome everyone to The Coca-Cola Company's Third Quarter 2013 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 person 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 now would like to introduce Jackson Kelly, Vice President and Investor Relations Officer. Mr. Kelly, you may begin.
Thank you. Good morning and thank you for being with us today. I’m joined by Muhtar Kent, our Chairman and Chief Executive Officer; and Gary Fayard, our Chief Financial Officer. Following prepared remarks by Muhtar and Gary this morning, we’ll turn the call over for your questions. Ahmet Bozer, President of Coca-Cola International; Steve Cahillane, President of Coca-Cola Americas; and Irial Finan, President of our Bottling Investments Group will also be available for the Q&A session.
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 under the Financial Reports and Information tab in the Investors section of our company website at www.coca-colacompany.com. These schedules reconcile certain non-GAAP financial measures which may be referred to by our senior executives during this morning's discussion to our results as reported under Generally Accepted Accounting Principles. Please look on our website for this information.
Now, let me turn the call over to Muhtar.
Thank you, Jackson, and good morning, everyone. We delivered sequential volume growth in the third quarter while capturing global non-alcoholic ready-to-drink beverage value share for the 25th consecutive quarter. We gained volume and value share across core sparkling, juice and juice drinks, sports drinks and ready-to-drink teas. Importantly, we were able to do this in combination with a 2% increase in price mix.
Excluding the impact of structural items, we generated comparable currency neutral net revenue growth of 4% and strong operating income growth of 8%. Our broad diversified product portfolio, the disciplined approach to extracting and reinvesting savings and our global geographic reach are enabling us to effectively navigate a still uncertain macroeconomic environment. History has taught us that when we invest through difficult times, we emerge even stronger.
This quarter our system delivered the highest number of servings ever reported in the third quarter both for brand Coca-Cola and across our portfolio. In all, we delivered 181 billion servings thanks to global volume growth of 2% driven by 2% global growth in brand Coca-Cola. This record number of servings speaks not only to our systems worldwide strength, but also to the opportunities ahead of us as we engaged with the next-generation of global consumers. Our global still brands also delivered solid results, growing 3% and gaining global value share. These third quarter results bring our year-to-date volume growth to 2% cycling 5%.
In line with our expectations for the third quarter, we delivered sequential volume growth in many key markets including North America, China, India and regions across Europe. That said, clearly the global economy remains challenged as noted by the International Monetary Fund last week, which trimmed this forecast for global output for the sixth time since early last year.
And as we have all noted, emerging markets have become increasingly more volatile further exacerbating a challenging global landscape. Hence, disposable income and consumer spending have become challenged and consequently have impacted the overall growth of the non-alcoholic ready-to-drink industry.
Yet, despite these ongoing headwinds, our business remains healthy and we continue to invest in the strength of our brands. We are fully implementing our productivity and reinvestment plans and together with our global bottling partners we continue to advance our system. All of this leads us to remain confident in our ability to drive our volume growth trajectory back in line with our long-term growth model over time.
Looking first to our operations in North America, brand Coca-Cola grew an impressive 2% in the quarter, leading our total beverage portfolio to 2% growth on top of 2% growth in the prior quarter -- in the prior year quarter. Year-to-date volume growth in North America is even as we cycled 2%.
Sparkling beverages were even in the quarter with sparkling price mix increasing 1%. Year-to-date, sparkling price mix is up 2% as we remained committed to a rational pricing environment.
We also remained focused on consistent investments in packaging innovation, in immediate consumption growth and increased teen recruitment, all of which are yielding positive results.
Specifically, packages like the 1.25 liter and mini packs -- mini can packs have increased our household base by more than 1.8 million in the last year. In addition, Coca-Cola has generated over $19 million incremental immediate consumption transactions year-to-date and importantly, Coca-Cola remains the most preferred beverage brand amongst teens by 2 to 1 margin.
Still beverage volume grew a solid 5%, with volume and value share gains across the energy, juice and juice drinks, water and tea categories. In sports drinks we gained volume share while maintaining value share.
As these results indicate, our revenue growth management strategies are working and enabling our system to provide consumers the brand they love, the convenience that they crave and the value that they need, while also expanding our topline. We continue to outperform the industry, gaining volume and value share across both sparkling and still categories.
I’m also pleased to share that we are making progress on the evolution of our North America system as our North America team continues to advance discussions with existing and prospective partners who are eager to be part of this dynamic franchise system.
Turning now to Latin America, our volume growth was even in the third quarter, cycling 5% growth and coupled with a double-digit increase in price mix, due primarily to continued and disciplined focus on price and pack architecture enhancements, as well as inflationary environments in some markets. Across the region we gained non-alcoholic ready-to-drink volume share, making this the 25th consecutive quarter that we maintained or gained volume share.
Similar to what we have experienced in other markets, we are seeing a slowdown in economic growth in Mexico and Brazil. Falling GDP growth rates have led to slower growth rates in personal consumption and consequently in non-alcoholic ready-to-drink beverages.
As in other instances where we have witnessed economic slowdowns in recent years, we are expanding our marketing efforts, while actively working with our bottling partners to invest in these markets and to offer consumers attractive price pack combination. Examples include the expansion of returnable glass bottle distribution and initiatives to ensure affordability tied to magic price points. Outside of Mexico and Brazil, we experienced solid performance with volume growth of 4% in the quarter.
Moving on now to Europe, we again witnessed diverging results with 3% volume growth in Northern European countries, offset by a 5% volume decline in countries that make up Central and South Europe for a net decline of 1% in our European business in the third quarter. In spite of this challenging environment, we gained volume share in core sparkling across the entire continent while continuing to strengthen our competitive positions across the non alcoholic ready-to-drink beverage industry in our Central and Southern European business unit.
Price mix increased 8% in the quarter, including the impact of the consolidation of Innocent. Our Share a Coke campaign was extremely well received. We placed over 2.5 billion customized packages into the market to drive team recruitment and further bolster immediate consumption.
Lastly, our operations in Germany continued to perform well delivering 3% growth in the quarter cycling 3%. This performance was fuelled by high single digit growth in brand Coca-Cola and double-digit Coke Zero growth. Sprite and Fanta also contributed to growth in the quarter in Europe.
The Eurasia and Africa group grew 4%, cycling 11% as we maintained focus on broadening distribution, honing our marketing efforts and strengthening brand loyalty in the more than 80 countries that make up our business in this dynamic region. Volume growth grew 4% led by brand Coca-Cola which grew 3% and Sprite which grew 4%. Still beverage volume grew 3% in the quarter. The Eurasia and Africa group maintained volume share in nonalcoholic ready-to-drink beverages while growing volume share in sparkling beverages and juice and juice drinks.
Both the Middle East and North Africa business unit and the Central East and West Africa business unit maintained their strong first half volume performance in the third quarter. On a year-to-date basis, the Eurasia and Africa group is up high single digits, cycling 10% growth and has been an important contributor to our year-to-date performance. Our Pacific group delivered 5% growth in the quarter improving sequentially from the second quarter and cycling 4% from the prior year quarter. Sparkling beverages led with 5% growth as Brand Coca-Cola delivered 7% growth and Sprite grew 5%. Still beverage volume also grew 5% in the quarter, while cycling 7% growth.
As noted, our second -- as noted during our second quarter call, we anticipated a better second half of the year in China and I'm pleased to report that we were able to deliver 9% volume growth in the quarter, led by 8% growth in sparkling beverages. Earlier this year, we began to evolve our strategies in China to reflect the current economic and competitive environment and also to position ourselves for continued sustainable profit growth.
Our business in India delivered 6% growth in the quarter, cycling double digits. We achieved this growth while increasing prices across our juice brands to offset higher cost of goods. In addition, volume grew by strong double digits through September once the impact of the extended monsoon abated. Brand Coca-Cola again led the way with 22% growth in the quarter.
We are pleased with these results and with our solid volume and value share gains across sparkling and still beverages in India. Looking ahead, we have strong marketing programs planned for the fourth quarter of this year and into next year. I'm particularly excited about two iconic marketing programs that will ignite consumer passions across key markets. Specifically, the Olympic Torch relay recently started [ph] from Asian Olympia as it begins its relay journey across Russia. And the FIFA World Cup Trophy Tour is also underway with stops planned in 89 countries where passions for football run high.
Further, throughout our company's history we've always been at the forefront of cultural change in forming the conversation, inspiring our youth to act and bringing resources to our local communities all across the world. This legacy has sprained our thinking about forging effective and lasting partnerships, creating shared value, making a positive societal difference in areas that are of critical importance to our business specifically water, woman and wellbeing.
Returning to our global performance, we benefited from marked sequential improvement in several key markets. We achieved robust and widespread growth of our flagship brand and we delivered solid financial results.
Our efforts to enhance the health of our system are working as evidenced by our broad based growth improving execution and strong cash generation. At the same time, we also acknowledged that we have more work to do as we will no doubt face headwinds as we work towards our 2020 vision.
Nevertheless the non-alcoholic ready-to-drink beverage industry is a vibrant and rewarding business to compete in and our business has consistently grown. And I can assure you that underlying forces that shaped our 2020 vision just a few years ago remains very much intact today.
Together with our global system partners, our roadmap is enabling us to strategically invest both through good times and challenging times to deliver long-term sustainable performance.
I’ll now turn the call over to Gary.
Gary P. Fayard
Thanks Muhtar and good morning everyone. Our third quarter results underscore several key points. First, the global economy is still struggling to recover with increasing volatility across emerging markets.
Second, slowing economic growth clearly impacted consumer spending and overall non-alcoholic ready-to-drink industry growth in the quarter. And third, in spite of these macro trends, our strategies and solid execution enabled us to once again capture global value share and to deliver solid financial performance.
As Muhtar said we grew our global volume 2% in the quarter while at the same time delivering solid financial results. While we’re pleased with this sequential volume improvement, we remained focused on further advancing our volume growth trajectory over time.
Concentrate sales were slightly below unit case volume growth in the quarter but we’re in line with unit case sales year-to-date.
Moving onto our financial results, each of our geographic operating units contributed to comparable currency neutral operating income growth in the quarter. Comparable currency neutral net revenues were even both in the quarter and year-to-date, excluding the impact of structural items, this would primarily be the Philippines and Brazil bottler, net revenues increased 4% for the quarter and 3% year-to-date. We realized a healthy 2% global price mix for the quarter and 1% price mix year-to-date. Importantly, year-to-date price mix was positive across each of our geographies with the exception of the Pacific due to geographic mix.
Also as you know, we consolidated the Innocent brands in Europe which helped our price mix in the quarter but just to be clear our global price mix was 2% without the Innocent brands benefit.
As expected, our gross margins moderated somewhat this quarter due to geographic mix. We expect our full-year gross margins to be relatively in line with our year-to-date comparable gross margins. Excluding the impact of structural items, we achieved five points of favorable operating expense leverage for the quarter while we continued to support our brands through increased marketing investments.
Our operating expense leverage now stands at three points year-to-date and we expect low single digit leverage for the full year. As a reminder, we are cycling the reversal of expenses related to one of our long-term incentive plans in the fourth quarter of last year.
Our comparable currency neutral operating income was up 7% this quarter and 5% year-to-date, excluding the impact of the structural items, operating income grew 8% in the quarter and 6% year-to-date. Therefore we now expect our full-year operating income to be generally in line with our year-to-date performance.
On a comparable basis, the impact of currency was a 5% headwind on this quarter’s operating income results, a full point more than we expected due to the -- and this is due to the weakening of many of the emerging market currencies. We now anticipate continued currency headwinds will have an unfavourable impact on the operating income in the 5% to 6% range in the fourth quarter.
Comparable earnings per share grew 4% in the third quarter, despite currency headwinds of about 5%. Year-to-date comparable earnings per share also grew 4%, despite headwinds from currency of about 4%. We generated $7.7 billion in cash from operations year-to-date and have repurchased $2.7 billion of our shares in line with our plans to repurchase $3 billion to $3.5 billion this year. Equity income came in lower than in the prior year quarter due to the ongoing challenging macroeconomic conditions around the world. We expect equity income will continue to be impacted by these factors.
Let me now provide you just with a couple of reminders as we look through the balance of the year. Looking forward as mentioned in our second quarter earning call, we anticipate that bottling transactions, including the impact of the deconsolidation of our Brazilian bottling operations early in the third quarter, will have a 3% structural impact on our full year 2013 net revenues. Likewise, our full year operating income results should see a 1% negative structural impact.
In closing, we are strategically navigating through these challenging macroeconomic times, investing in our business to steadily strengthen our competitive position and to drive balanced growth and long term sustainable performance. Operator, we’re now ready for questions.
Earnings Call Part 2: